Portfolio Highlights - June 2019

Quarterly Movers & Shakers

During the past three months, the S&P 500 Index rose 2.6% despite renewed concerns over a trade war. The following high-quality stocks all generated double-digit gains during the same period.

FACTSET INCREASED DIVIDEND 12.5%
FactSet Research Systems (FDS) announced that its Board of Directors approved a 12.5% increase in the regular quarterly cash dividend from $0.64 per share to $0.72 per share. The $0.08 per share increase marks the 14th consecutive year the firm has increased the dividend, demonstrating its continued commitment to return value to shareholders. Over the past five years, it is a fact that FactSet has created value with the stock delivering a hefty 179% total return. Hold.

FACEBOOK $45 BILLION IN CASH
Facebook (FB) reported first quarter revenue increased 26% to $14.9 billion with net earnings falling 51% to $2.4 billion. Total expenses increased an unfriendly 80% to $11.8 billion, which includes a $3 billion accrual taken in connection with the FTC’s inquiry into Facebook’s data practices. This unresolved matter is estimated to result in fines of between $3 billion and $5 billion. During the quarter, the company generated $5.3 billion in free cash flow, ending the quarter with about $45.2 billion in cash on its debt-free balance sheet. Facebook’s daily active users reached 1.56 billion, up 8% from last year. Monthly active users grew by 179 million to 2.38 billion as of March 31, an increase of 8%. Management estimates that every day over 2.1 billion people now use Facebook, Instagram, WhatsApp or Messenger. Despite regulatory challenges, Facebook’s stock rebounded 14% during the past quarter. Buy.

MICROSOFT DOUBLE-DIGIT GROWTH
Microsoft (MSFT) reported fiscal third quarter revenue increased 14% to $30.6 billion with net income increasing 19% to $8.8 billion and EPS increasing 20% to $1.14. Free cash flow of $11 billion increased 19%, reflecting the timing of lower cash payments for property, plant and equipment. Microsoft returned $7.4 billion to shareholders during the quarter through share repurchases of $3.9 billion and dividends of $3.5 billion. Year-to-date, Microsoft returned $25.2 billion to shareholders, up 41% from last year, boosted by a 78% increase in share buybacks and a 9% dividend increase. Microsoft ended the quarter with $131.6 billion in cash and $66.6 billion in long-term debt on its sturdy balance sheet. In fiscal 2020, management sees tremendous opportunity to drive sustained long-term growth through its investments in Cloud, Business and Microsoft 365, resulting in double-digit revenue and operating income growth in 2020. Microsoft’s stock has more than quadrupled over the last twelve years. Hold.

PAYCHEX INCREASED DIVIDEND 11%
Paychex (PAYX) announced an 11% increase in its quarterly dividend from $.56 per share to $.62 per share. “This dividend increase demonstrates our strong commitment to providing ongoing, outstanding shareholder value,” said Martin Mucci, Paychex president and CEO. “Through the combination of our financial strength and investment in strategic growth opportunities, we are able to expand the returns we deliver to our shareholders.” Paychex’s stock has more than tripled over the last eight years. Hold.

MASTERCARD FREE CASH FLOW UP 29%
Mastercard (MA) reported first quarter revenue increased 9%, or 13% on a foreign currency neutral basis, to $3.9 billion. Net income charged ahead 25% to $1.9 billion. During the quarter, Mastercard generated $1.2 billion in free cash flow, up 29% from last year. Mastercard returned more than $2.1 billion to shareholders through dividends of $340 million, that were up 29% from last year, and share repurchases of $1.8 billion. Over the past five years, Mastercard has provided a 243% total return. Buy.

CISCO SYSTEMS FREE CASH FLOW UP 25%
Cisco Systems (CSCO) reported fiscal third quarter revenues increased 4% to $13 billion with net income up 13% to $3 billion thanks to expanding margins. Free cash flow increased 25% during the first three quarters to $11.2 billion with the company paying $4.5 billion in dividends and repurchasing $16 billion of its common stock. Cisco Systems has routed up a 991% total return over the last twenty-two years. Hold.

PEPSICO 5% ORGANIC SALES GROWTH
PepsiCo (PEP) reported first quarter revenues rose 3% to $12.9 billion with net income up 5.2% to $1.4 billion. The company’s underlying organic growth accelerated to more than 5% in the quarter, the best organic growth in three years. FritoLay North America and each of the international divisions delivered strong operating performance.PepsiCo expects to generate free cash flow of $5 billion during 2019 and pay dividends of about $5 billion and repurchase approximately $3 billion of its shares. In the past year, PepsiCo’s stock has popped 18% higher. Hold.


Quarterly Rating Change From Buy To Hold

ABBVIE RAISED 2019 EPS OUTLOOK
AbbVie (ABBV) reported first quarter revenues dipped 1% to $7.8 billion with EPS declining 5% to $1.65. In the U.S., HUMIRA net revenues of $3.2 billion grew by 7.1%. Internationally HUMIRA net revenues of $1.2 billion decreased nearly 28% due to biosimilar competition, especially from Biogen and Amgen. The adjusted EPS guidance range for 2019 was raised from $8.65- $8.75 to $8.73-$8.83, representing growth of 11% at the mid-point. Hold.

ROSS STORES NEW $2.55 BILLION BUYBACK
Ross Stores’ full year revenues increased 6% to $15 billion with net income up 17% to $1.6 billion. Return on shareholders’ equity was a dressy 48% during the year. Free cash flow increased 26% to $1.6 billion during the year with the company paying $337 million in dividends and repurchasing $1.1 billion of its common shares. The Board of Directors authorized a new program to repurchase $2.55 billion of its common stock over the next two years which equates to about 8% of the total market value. Hold.

WALGREENS $3.8 BILLION BUYBACK
Walgreens Boots Alliance (WBA) reported disappointing second quarter results with revenues up 4.6% to $34.5 billion and net income down 14% to $1.1 billion. Market challenges and weak macro trends accelerated during the quarter with management not responding as rapidly as needed to keep up with the changing market conditions. While operating cash flow is expected to be pressured in fiscal 2019, the firm expects cash flow to normalize in subsequent years in the $5.5 to $6.0 billion range. Share buybacks are expected to approach $3.8 billion in fiscal 2019. Hold.


Quarterly Rating Change From Hold To Buy

F5 NETWORKS $670 MILLION ACQUISITION
F5 Networks (FFIV) reported second fiscal quarter revenue of $544.9 million, up 2% from last year, driven by software solutions revenue growth. Net income increased 6% to $116 million. F5 Networks announced the acquisition of privately held NGINX for a total enterprise value of approximately $670 million.With the acquisition, F5 hopes to bridge the divide between NetOps and DevOps with consistent application services across an enterprise’s multi-cloud environment. F5 ended the quarter with more than $1.6 billion in cash and investments on its debt-free balance sheet. In the third quarter of fiscal 2019, management expects sales in the range of $550 million to $560 million, flat with last year at the midpoint, and non-GAAP EPS in the range of $2.54 to $2.57, up 5% at the mid-point. Buy

GENTEX CASH-RICH, DEBT-FREE
Despite a 7% decline in global light vehicle production, Gentex (GNTX) reported first quarter revenues increased 1% to $468.6 million with earnings per share flat with last year at $.40, thanks to the 7% reduction in shares outstanding. 
 
During the quarter, Gentex repurchased 4.7 million shares at an average price of $20.37 per share, for a total of $96.3 million.As of March 31, 2019, about 29.1 million shares remain available for repurchase. Gentex ended the quarter with more than $528 million in cash, short-term investments and long-term investments on its debt free balance sheet.Gentex expects total global light vehicle production to decline by 4% during the second quarter with vehicle production rebounding during the second half of the year. Buy.  

GENUINE PARTS 3% DIVIDEND YIELD
Genuine Parts (GPC) reported first quarter sales increased 3.3% to $4.7 billion with positive comparable sales growth in all business segments. Net income and EPS declined 9% to $160 million and $1.09, respectively. Earnings were impacted by realized currency losses and transaction and other costs related to the sale of the Grupo Auto Todo business in Mexico. The company paid $105 million in dividends to shareholders during the period. Genuine Parts’ dividend yields approximately 3% currently. Management reaffirmed full year 2019 sales guidance and continues to expect sales to increase 3% to 4%. Earnings per share are expected to range from $5.56 to $5.71 down from previous guidance of $5.75 to $5.90 due to the divestiture of the business unit in Mexico. Buy.

MAXIMUS DOUBLE-DIGIT GROWTH
Maximus (MMS) reported second fiscal quarter revenue increased 20% to $736.5 million with net income up 12% to $61.9 million and EPS up 14% to $0.96.  
Year-to-date signed contract awards at 3/31/19 totaled $1.0 billion and contracts pending (awarded but unsigned) were $725 million.  
 
Free cash flow for the first half of fiscal 2019 increased 5% to $108.7 million. During the same period, Maximus repurchased $46.1 million of its common stock and paid $32 million in dividends.
 
Management narrowed full fiscal 2019 revenue guidance to $2.925 billion to $2.95 billion and its EPS outlook to a range of $3.65 to $3.75. Free cash flow expectations remain unchanged in the range of $235 million to $285 million. Buy.