Sunday, October 22, 2017

TLH Market Review + Earnings From IBM, Phillip Morris, PayPal, & Procter & Gamble 10/22/17

It was just over a month ago the S&P 500 crossed the 2,500 mark for the first time.  Then this week the Dow Jones decided it would join the party too as it touched, then closed above the 23,000 mark for the first time ever too. It's only a matter of time before the Dow trades with a 25 handle at this point.  Yes it's an all in party and everyone is drinking the punch now.  Volatility has seen it's deathbed, literally, and the calls for a crash keep getting louder, but the market seems to just keep heading higher.

What does that all mean for the rest of us?

Not much really except enjoy the healthy returns. For most people with a diversified portfolio of stocks and bonds with a long term outlook it's time to stay the course. The economic numbers are still showing signs of strength overall too.

Industrial production keeps rising, albeit at a low 0.3% pace impacted by the hurricanes. Consumer Sentiment continues to come in higher and higher, despite the constant bashing of Trump and how bad he is for everyone.  In fact it rose to a 13 year high! People are way more confident now than they were at anytime under Obama, and for plenty of Bush's Presidency.  Hey just the numbers here folks.  Don't get mad at me for how people feel about the economy.  We are after all in this together.

Even jobless claims keep coming in at multi-decade lows.  It's as if the punch bowl is never going to run out.  But alas of course we all know one day it will.  There will be a nasty correction, people will claim the world is ending, and then after some healing the market will start heading higher, and before you know it values will be much higher.  Life will go on.

Portfolio Earnings 

IBM(IBM) reported Q3 2017 earnings with EPS of $2.92 on revenues of $19.2 billion. While that might sound good, it's still the 22nd quarter in a row of declining earnings and revenue for the company. Furthermore I'm becoming increasingly alarmed at the low effective tax rate the company which this quarter came in at 11%, but YTD the company is reporting its effective tax rate at 1.7%.  If you're bringing in net income of $6.8 billion YTD it doesn't quite make a lot of sense.  That's turning into a bigger red flag for me as I thought maybe the games would come to an end somewhat this year. That doesn't seem to be the case, and I'm heavily considering dropping the shares. Needless to say of course the stock popped $146 to $160+, or in other words a 10% move on the news.

The company is quite possibly turning into a trap.  They are growing their strategic imperatives by a good amount, up 10% ttm, but the company can't seem to stem the overall decline in revenues despite this.  Speaking of which  I'm still a believer in the Watson system going forward, but I'm not excited about the other pieces of the business. Since 2011 when the company had a high in revenues of $106.9 billion, and for 2017 I think we'll see it end up around $78-$79 billion 

IBM has bought back a lot of shares, which helps prop up EPS, and they still pay a good dividend, which at this point is one of the few caveats to own it. Here is the share count in 2010, and the current share count.

           Shares Outstanding                  EPS
2010 -   1.219 billion                         $11.52 
2017 -     931 million                         $11.95*

So overall that's a reduction of 23.6% since 2010. But Net Income in 2010 was $14.8 billion and this year is on pace for $11.38 billion. The company projects EPS of $11.95 for 2017.  So you can see how well share buybacks have helped mask the reduction in both revenues, and net income which itself has fallen a respective 22.9%.  I still think it's possible for shares to go up, but will I be missing out on better gains elsewhere as a result if I don't sell?

PayPal(PYPL) reported Q3 earnings with EPS of $0.31 on revenues of $3.2 billion.  The company processed 1.9 billion transactions, and saw TPV increase by 30% to $114 billion.  Underneath the hood the company's social payment platform, Venmo, saw TPV grow 106% to  $30 billion over the TTM.  During the quarter the company also announced a new payment partnership with Skype, and expanded its partnership with fellow portfolio member MasterCard(MA) in international markets. During the quarter the company also closed the acquisition of Swift Financial, and announced it's acquisition of TIO Networks.  I have to say I'm impressed at the company's growth, and the market cheered the news as shares jumped over 5% to hit a fresh all time high at $71.73.  Here is what management had to say:

"PayPal delivered one of its strongest quarters since becoming an independent company. Putting our customers first in everything we do, enhancing our suite of products and services, and partnering with some of the world's most popular brands are delivering tangible results," said Dan Schulman, President and CEO of PayPal. "In addition to our solid financial performance, we also reported record customer growth with the addition of 8.2 million net new actives. As the world rapidly accelerates to digital payments, we have a tremendous opportunity in front of us."

Philip Morris(PM) reported Q3 results with EPS of $1.27 on revenues of $7.5 billion. Net income for the period was $2.04 billion.  Volume was down by 4.1%, and the company is still looking aggressively to grow it's RRP's which contributed 12.7% to overall revenues for the quarter.  The company raised it's dividend during the quarter by 2.9% from $1.04 to $1.07. Additionally the company raised it's full year guidance to $4.75-$4.80. That compares to EPS of $4.46 in 2016, or in other words 6.5% growth. Not spectacular and that's a result of essentially zero buybacks from the company in recent years. Shares didn't respond well as they dropped from $112 to $108 on the announcement. I think tobacco shares are will continue to lag until they can get a better grip on e-cig growth, and find a way to stem traditional cigarette volume declines. The industry is in a precarious position as volumes continue to decelerate, while overall e-cig business is still comparatively small. That being said I'm considering dropping a tobacco name from the portfolio despite current portfolio member British American Tobacco(BTI) gobbling up former portfolio member Reynolds American.

Procter & Gamble(PG) reported their Q1 2018 earnings with EPS of $1.06, revenues of $16.6 billion, and net income of $2.8 billion.  The company has been struggling for awhile now to stimulate sales growth, and has suffered a somewhat similar fate as IBM. Of course if you look at recent data it appears sales have dropped significantly, but most of that is due to the big sale of brand names to Coty last year.  I like the dependability of the dividend, and realistically most of their products will continue to be household names for decades to come.  Still I think the recent battle with Nelson Peltz, which is still being contested, shows the company is really in need of some fresh air.  Needless to say PG is on my short list this year.  The company is expecting EPS of $4.03-$4.14. for 2018. Shares have been on the downtrend since the Peltz battle, and have settled in around $88. That's not a bargain, but it's not expensive either for a dependable consumer goods company.

We have plenty more earnings on tap next week.  So keep checking the blog and Twitter for updates!

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