Saturday, January 28, 2017

TLH Market Review - 1/28/2016

This week certainly is rounding out a great start to the year, and continuing what's been an impressive rally since the election. The big news was the Dow hit 20,000 for the first time ever. That's great and it's hard to believe that less than 8 years ago the index was under 6,500.  That's a return of 207% for investors that bought during those seemingly difficult times. 

Advanced 4th quarter GDP estimates also came in this week showing growth of 1.9%.  That's not an entirely exciting number, but it continues to be par for the course in what's now one of the weakest recoveries in American history.  I understand a lot of people like Barack Obama, and yes as noted above the Dow has been up 207%, but under his watch this recovery will go down as one of the worst American's have endured. No wonder why so many people are frustrated and fed up right now.  It's nothing political. Just plain old economic facts. 

Just take a look at the percentage change in GDP since 1947. Notice the percentage increase is in a long term downtrend. 



We received a few earnings reports from 6 holdings this week - McCormick, IBM, Procter & Gamble, Praxair, PayPal, & Diageo. 

McCormick(MKC) reported results that I thought were spectacular. For example in constant currency the company actually grew sales by 6% for the year. That's pretty good results for a food company.  For 2016 the company saw total sales of $4.41 billion.  Coming up in 2017 the company is expecting sales to take a 2% hit from currency with an expected increase of 3-5%. In other words we can expect another $220 million in sales for 2017. EPS for 2016 came in at $3.69 and the company expects to earn between $4.02-$4.10 which is an increase of 9-11%. The reason for the differing percentages is the company is factoring in additional savings from it's CCI program, and a further reduction in share count from buybacks. No matter the times this is a solid pick as salt & pepper never go out of style. Well maybe if you were the group

IBM delivered what I thought was a good quarter. It's still difficult to see the hard time the company is having as it transitions into new technologies.  Navigating the changing landscape and pushing through it's Strategic Imperatives is something I don't think a lot of companies would have navigated successfully.  I noted earlier in the week the companies last 5 years worth of Sales, EPS, & Dividends.  Despite the company having declining sales and wild swings in EPS they have managed to stay a dividend machine. Let me make this clear - That's No Easy Feat!  This turnaround is making plenty of investors impatient, but I still like the pick as a dividend play.  The company didn't provide any guidance outside of EPS figures so for 2017 we can expect the company to earn $11.95 which is actually down from 2016's $12.39. I'm thinking they low balled us but you never know. 

Procter & Gamble(PG)  announced it's Q2 earnings with EPS coming in at $2.88. This quarter included a gain of $1.95 from the divestiture of it's Beauty Brands to Coty.  The company had sales of $16.8 billion which is down slightly YoY. The company has been having difficulty growing, but the stock has been a steady performer for us as it's up 13% the last year. The company remains in an extremely competitive and price sensitive sector for the most part.  Major competitor Colgate-Palmolive seems to be experiencing many of the same issues. 

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Praxair(PX) reported Q4 and 2016 FYE results with quarterly EPS of $1.41 on sales of $2.6 billion.  FYE results saw sales of $10.5 billion and EPS of $5.21.  What I like more is the company's continued efforts to focus on the food & beverage, healthcare, and aerospace industries.  Those are not traditionally cyclical sectors, and they generally carry good margins for investors.  The merger with Linde might be a bit of a distraction for 2017, but I think once that gets taken care we will see the company really start to fire on all cylinders. Especially if the global economy can get get through it's recent malaise. 

Diageo(DEO) reported it's half year results that might come as a shock to most people. Their business is picking up and sales increased 14.5% during the quarter. Organic volumes were up just 2% so you might be wondering why sales increased so much. Well Diageo is one of the companies out there that actually benefit from a strong dollar as 34%  of it's sales are in USD.  When translated back into a weaker GBP that's where we get the sales increase on paper.  You can expect the same impact from the BTI/RAI merger.   

PayPal(PYPL) - reported Q4 and FYE results with quarterly EPS of $0.32(up 7%) on revenues of $2.98 billion(up 17%). Full year EPS came in at $1.15(up 15%) on revenues of $10.84 billion(up 17%). While the company continues to grow in many segments I think what's disconcerting for investors is the slowdown in active user growth which came in at 10%. Upon closer inspection of the companies quarter I must say I'm not entirely pleased with a few things included the increased loan losses, lower TPV growth, and lower transaction growth.  By no means is the company crashing, but given their valuation it will be hard to argue for it if these metrics come down further than people anticipate. I think that was partially reflected in the companies guidance which is showing EPS growth of only 9.5% for the year to $1.26-$1.31.

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