Portfolio Highlights - December 2019
Quarterly Movers & Shakers
During the past three months, the S&P 500 Index rose 6.4% as the Fed cut interest rates and recession fears abated. The following high-quality stocks all generated solid 17% or better gains during the same period.
APPLE JUICY 61% RETURN ON EQUITY
For the full fiscal 2019 year, Apple’s (AAPL) revenues declined 2% to $260 billion with net earnings declining 7% to $55 billion and EPS dipping slightly to $11.89. Apple generated a juicy 61% return on shareholders’ equity. Free cash flow decreased 8% during the fiscal year to $59 billion with the company paying$14.1 billion in dividends and repurchasing $66.9 billion of its common shares. Apple ended the quarter with $206 billion of cash and marketable securities on its fruitful balance sheet and $92 billion in long-term debt. During the past quarter, Apple’s stock climbed 24%, contributing to the stocks 653% red delicious total return over the last nine years. Hold.
BIOGEN NEW ALZHEIMER’S DRUG?
In March, Biogen (BIIB) discontinued studies related to aducanumab, an Alzheimer's disease candidate. A new analysis of a larger data set is showing a statistically significant reduction in clinical decline versus placebo. The positive results of this new analysis were driven primarily by greater exposure to high dose aducanumab in the larger dataset. Following discussions with the FDA, Biogen plans to submit a regulatory filing in early 2020. If approved, aducanumab would become the first therapy to reduce clinical decline in Alzheimer’s disease.
In response to the news, Biogen’s stock rebounded a healthy 27% during the past quarter. Buy.
RAYTHEON MERGER WITH UTX APPROVED
Raytheon (RTN) reported better than expected results in the third quarter with record sales up 9% to $7.4 billion, net income rocketing 34% higher to $860 millionand EPS up 37% to $3.08. Strong bookings of $9.4 billion led to a record backlog of $44.6 billion at quarter end with a book to bill ratio of 1.27. Free cash flow more than doubled during the first nine months to $1 billion with the company paying $773 million in dividends and $800 million for share repurchases.
Raytheon’s merger with United Technologies was approved with the transaction expected to be completed in the first half of 2020. Raytheon’s stock also rocketed 21% higher during the past quarter. Hold.
UNITEDHEALTH GROUP HEALTHY GROWTH
UnitedHealth Group (UNH) reported strong and diversified performance in the third quarter with revenues up 7% to $60.4 billion as net income grew a healthy 11% to $3.5 billion with EPS up 13% to $3.67. Return on equity of 26.2% in the period continued to reflect the company’s efficient capital base and strong earnings profile.
Cash flows from operations were $3.2 billion in the quarter and $12.3 billion year-to-date or 1.2 times earnings, a sign of high- quality earnings. Through the first nine months, UnitedHealth Group paid $2.9 billion in dividends and repurchased 20.8 million shares for $5.1 billion at an average cost of $245.19 per share as part of its disciplined capital allocation process. Management increased its full year 2019 net EPS outlook to $14.15-$14.25. UnitedHealth Group provided a healthy 20% total return during the past quarter. Hold.
WALGREENS LBO CANDIDATE?
Walgreens Boots Alliance (WBA) reported fiscal 2019 revenues rose 4% to $136.9 billion with net income down 21% to $4 billion and EPS declining 15% to $4.31. Earnings for the year were adversely impacted by acquisition, impairment, restructuring and tax charges. Return on shareholders’ equity for the year was 16.5%. During fiscal 2019, Walgreens paid $1.6 billion in dividends and repurchased $4.2 billion of its common stock. For fiscal 2020, revenues are expected to increase 2%-3% with core operating income growth of around 5% and flat adjusted EPS growth. Walgreens’ stock rebounded a healthy 18% during the quarter on news that KKR may have submitted a formal bid to take the company private in a leveraged buyout (LBO) which would be the largest in history. Hold.
UNITED TECHNOLOGIES MERGER WITH RAYTHEON APPROVED
United Technologies (UTX) reported strong sales and operating profits in the third quarter with sales soaring 18% to $19.5 billion and operating profits ascending 35% to $2.5 billion. United Technologies delivered 5% organic sales growth and margin expansion across all four businesses. Free cash flow increased 45% during the first nine months to $2.0 billion with the company paying $611 million in dividends. With results coming in stronger than expected, management raised their adjusted EPS outlook to a range of $8.05-$8.15. Organic sales are expected to increase 4%- 5% for the full 2019 year with reported sales expected in the range of $76.0 billion-$76.5 billion. The merger with Raytheon (RTN) was approved and is scheduled to be completed in the first half of 2020. UnitedTechnologies has provided a jet- setting 434% total return over thelast 18 years. Hold.
Quarterly Rating Change From Buy To Hold
BANK OF HAWAII BUYING BACK SHARES
Bank of Hawaii (BOH) reported third quarter revenue increased 1% to $167 million with net income declining 9% to $52 million. During the third quarter, the company repurchased 400,000 shares at a total cost of $29.9 million or $83.07 per share. From October 1 through October 25, 2019, the company repurchased an additional 92,000 shares of common stock at an average cost of $84.46 per share. Since Bank of Hawaii’s share repurchase program was initiated in July 2001, the bank has repurchased 56.6 million shares and returned $2.3 billion to shareholders at an average cost of $40.09 per share. Remaining buyback authority under the share repurchase program was $57 million as of September 30, 2019. On the third quarter conference call, management stated that Bank of Hawaii stock remains an attractive vehicle for returning cash to shareholders. Hold.
T. ROWE PRICE $1 TRILLION AUM
T. Rowe Price (TROW) reported third quarter net revenues rose 2% to $1.4 billion with net operating income up 3% to $659 million. Average assets under management (AUM) increased 5% during the quarter with ending assets under management increasing 4% to $1.126 trillion. Long-term investment performance remains strong despite a choppy market environment in the third quarter with net client inflows of $2.5 billion. Net flows were primarily driven by multi-asset and fixed income, while equities experienced modest outflows. During the first nine months of 2019, the firm spent $566.7 million to repurchase 5.7 million shares, or 2.4% of its outstanding shares, at an average price of $99.57 per share. T. Rowe Price remains debt-free with ample liquidity including $5.6 billion in cash and investments. Hold.
ROSS STORES $1.275 BILLION BUYBACK
Ross Stores reported fiscal third quarter revenues rose 8% to $3.8 billion with net income up 10% to $370.9 million and EPS up 13% to $1.03.
Comparable store sales increased a strong 5% in the quarter driven by both traffic and average basket size. Growth was broad-based in all departments and geographies with the best growth coming from the children’s department and the Midwest region.
Results were better than management’s expectations with the 12.4% operating margin also above plan due to better than expected sales and merchandise margin.
Free cash flow declined 13% during the first nine months to $1.0 billion with the company paying $278 million in dividends and repurchasing $966 million of its common stock during the same time period. During the third quarter, the company repurchased three million shares for $326 million at an average price of $108.67 per share. For the full fiscal 2019 year, the company expects to repurchase $1.275 billion in common stock.
For the fourth quarter, comparable store sales are expected to increase 1% to 2% with EPS expected in a range of $1.20-$1.25.
A competitive retail landscape and ongoing uncertainty surrounding the macro and political environment will serve as headwinds. For the full fiscal year, Ross Stores expects earnings per share in a range of $4.52 to $4.57 up from $4.26 in fiscal 2018. Ross Stores expects to end the year with 89 new stores including 1,546 Ross Stores and 259 dd’s Discounts stores. Hold.
UPS FREE CASH FLOW TO TOP $4 BILLION UPS delivered a 5% increase in third quarter revenues to $18.3 billion with net earnings and EPS each increasing 16% to $1.75 billion and $2.01, respectively.
U.S. Domestic Package revenue increased nearly 10% to $11.5 billion, driven by a 24% jump in Next Day volume, a 17% increase in Deferred Air and a 7% increase in Ground volume. Growth came from B2C and B2B shippers, led by retail, healthcare and high-tech sectors. Adjusted U.S. Domestic Package operating margins increased 130 basis points and unit cost per package declined nearly 3%, powered by productivity gains and increased efficiencies in the company’s new automated facilities.
International revenues increased slightly to $3.5 billion. UPS continues to navigate through the dynamic Supply Chain and Freight business with revenues falling nearly 5% to $3.4 billion.
Year-to-date, UPS generated $5.7 billion in operating cash flow and $3.2 billion in free cash flow. Through the first nine months, UPS returned $3.3 billion to shareholders through share repurchases of $753 million at an average cost per share of $107.57 per share and dividends of $2.5 billion that were up 5.5% from last year.
Given the visible results from transformation initiatives designed to improve network efficiencies and create new solutions, management reaffirmed full-year adjusted 2019 EPS in the range of $7.45 to $7.75. Guidance assumes no further deterioration regarding global trade uncertainty or U.S. industrial weakness. Free cash flow for the year is projected to be over $4 billion. Hold.