Saturday, July 29, 2017

TLH Market Review & Earnings From Facebook, Altria, Procter & Gamble, MasterCard, Boston Beer, & Praxair

This post will second as my weekly TLH Market Review, and earnings recap for a busy week in our portfolio.

The Federal Reserve had a two day meeting that went pretty much as expected. Interest rates were kept in the 100-125 bps range while the Fed kept it's options open for another rate hike this year.  The market didn't completely buy it. After the meeting participants decided the next meeting with the highest probability of a rate hike switched from December 2017 to March 2018 with 47.5% odds.  That doesn't mean the market is oblivious to it happening this year. Participants are saying there is still a 46.8% chance of a hike before 2017 is in the books.

I'd say that's a close enough for a photo finish in Fedland. Yes that's a new term and you read it here first!

Moreover the Fed's massive $4.5 trillion balance sheet has been getting a lot of attention.  I think we'll see them start shedding assets this year at a slow pace.  This will be a contractionary counterweight to economy, which is why so many people are concerned. I won't put out a guess at any numbers or time schedule.  Only the Fed knows what they are thinking.

Earnings rolled in and we had some great reports for most of our picks as they generally did pretty well after reporting. However Altria did get blasted despite putting out a decent report which I'll address below.Let's get to the heavy hitter that everyone talks about: Facebook

Facebook(FB) reported Q2 EPS of $1.32(up 69%) on revenues of $9.1 billion(up 47%).  The company now not only has 2 billion users, but also over 20k employees!  Assuming headcount and revenues stay stagnant the next four quarters equates to each employee "generating" over $1.8 million.  That's extremely productive.  Facebook has stressed it may have reached a limit for the amount of advertising they fit onto peoples screens.  That didn't seem to scare off investors as the stock hit a new all-time high, although the stock is getting smaller percentage gains on successive earnings day than previously.  While a valid concern, I think it will be transient in nature as the company figures out how to better monetize their other platforms.  Personally I think the stock could really use a pullback as it's outperformed all year.  Here is what CEO Mark Zuckerberg had to say:

"We had a good second quarter and first half of the year," said Mark Zuckerberg, Facebook founder and CEO. “Our community is now two billion people and we’re focusing on bringing the world closer together.”

Altria(MO) reported Q2 results with EPS of $1.03 on revenues of $5.9 billion. The company saw a 4.5% decrease in volumes. It was about what I expected for the quarter, and the company re-affirmed guidance for 2017. But then the big whopper came on Friday with an announcement from the FDA they would be looking to reduce the nicotine content in cigarettes to non-addictive levels. That sent sharesin Altria reeling as it's focused almost entirely in the US. Shares of all tobacco manufacturers were hit including BTI which just recently concluded their RAI acquisition. I'll have to do some portfolio updating on that one too.  But Altria really took it hard. Shares were down over 10% on massive volume. That doesn't bode well for the stock. I think the remainder of the year will be tough sledding, and likely into 2018.  All of that has overshadowed the earnings pop and $1 billion increased buyback program. This will have an effect for sure, but if anything it will push the company faster into alternative products.   Here is what the CEO had to say:

Based on strong tobacco operating company performance, Altria delivered solid results in the second quarter and first half of 2017," said Marty Barrington, Altria's Chairman, Chief Executive Officer and President. "The smokeable products segment generated strong income growth despite a large cigarette excise tax increase in California, and the smokeless products segment has largely rebounded from its first-quarter voluntary product recall."

"We continued to focus on rewarding shareholders, paying out nearly $2.4 billion in dividends and repurchasing $1.6 billion in shares in the first half of 2017. Today we also are announcing a $1 billion expansion of that program."

Procter & Gamble(PG) reported Q4 and fiscal year 2017 results with EPS of $0.82 on revenues of $16.1 billion. For the year the company had EPS of $5.59 on revenues of $65.1 billion. The company had a big increase in EPS this year from it's divestitures to Coty.  Next year the company is guiding for revenues to be up 2-3%, but expects EPS to be in the range of $4.03-$4.14. Shares popped 1.5% on the news. Not bad for a consumer staple brand struggling to ignite meaningful revenue growth. Here is what management had to say:

“We met or exceeded each of our going-in objectives for fiscal year 2017 in a challenging macro and competitive environment,” said David Taylor, Chairman, President and Chief Executive Officer. “We made significant progress on our key priorities: accelerating organic sales growth, continuing to drive strong productivity improvement and cost savings, strengthening our organization and culture and completing moves to simplify and strengthen our product portfolio. Looking forward, we will continue to drive productivity improvement and cost savings to provide the fuel for investments needed to accelerate and sustain faster top-line growth while expanding operating profit margin. Our long-term objective is to deliver results at levels that support our goal of balanced growth and value creation and operating total shareholder return in the top third of our competitive peer group.

MasterCard(MA) reported record Q2 results with EPS of $1.10 on revenues up 13% to $3.1 billion. For what was a record quarter there was actually little to report on as far as cool news.  Initially shares popped to a new all time high above $132, but have since slid back about 5 points. That's fine as the stock has been on a tear this year as it's up 24.8% so far.   Here is what management had to say.

“Our momentum continued as we delivered record revenues and earnings per share this quarter,” said Ajay Banga, Mastercard president and CEO. “This growth is driven by our focus on providing products and solutions that help our issuers, merchants and partners gain real value beyond the transaction. Our investments in Fast ACH, B2B payments and advanced security technologies increasingly position us as the one-stop shop for our partners’ electronic payment needs.” 

 Boston Beer(SAM) reported Q2 results with EPS of $2.35 on revenues of $247 million.  The Samuel Adams company is actually one of  our smaller picks on revenues and market cap.  The company is still figuring out how to compete against the onslaught of craft brewers entering the market. Considering the number of new breweries in my hometown the last few years I'd say they are actually doing quite a good job at dealing with the competition.  I also like how the company has a relatively small amount of debt on it's balance sheet. Investors poured a cold one to this report as shares soared over 13% Friday to close at $154, and at one point hit $165. That's the highest they've been since March.  Here is what management had to say:

"Jim Koch, Chairman and Founder of the Company, commented, "We are happy that our total Company depletion trends have significantly improved from earlier in the year, but we remain challenged by the general softening of the craft beer and cider categories and a more competitive retail environment with a lot of options for our drinkers. We are working hard to return to growth through improving our messaging and innovation behind Samuel Adams and Angry Orchard..."

Praxair(PX)  reported Q2 EPS of $1.41 on revenues of $2.8 billion. The company is continuing to work on it's merger with Linde. Also they continue to do a great job at increasing cash generation as FCF was up 8% to $376 million for the quarter while paying $225 million in dividends. The company was somewhat downbeat on it's outlook for the global economy and new projects.  Shares have traded down a couple bucks to $132 on the news. Here is what management had to say:

“...Looking ahead, we are taking a more measured view as we do not anticipate significant underlying economic improvement in the second half of the year. In the U.S., aggregate customer demand has yet to match recent economic expectations and South America, specifically Brazil, continues to face political challenges that undermine the economy. Conversely, we expect Europe to remain stable, Asia to moderately grow and new project start-ups to contribute towards the latter part of the year. However, regardless of the economy, Praxair’s relentless focus on operational excellence and financial discipline will continue to deliver strong cash flow and earnings per share for our shareholders.”

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