Danaher Corp. (DHR, $69.77) announced Thursday afternoon that its subsidiary, Beckman Coulter, has received FDA clearance of its new Access AccuTnI+3 troponin I assay for use on the UniCel DxI series of immunoassay systems.Beckman, with expertise in cardiac disease management, was acquired by Danaher in 2011, after problems with its cardiac test,Troponin, led to a recall and financial problems.The FDA approval is a minor positive for Danaher stock, and closes the door on a difficult period in Beckman’s history.
Danaher is a science and technology company that manufactures diversified products, with locations in more than 50 countries. Its revenues are expected to grow 8 and 9% in 2013 and ’14 through internal growth via new and enhanced products, and through acquisitions.
Earnings are expected to grow 7-12% per year over the next three years, from expense control, and margin enhancement via the consolidation of recent acquisitions. The PE is 20.5, in a steady five-year range of 12-23.
The company has a solid balance sheet and strong cash flow, with intentions to repurchase 10 million shares, invest in R&D, and continue acquiring companies.
Danaher’s stock price is on a steady, long-term uptrend and appears immediately capable of continuing to climb.The valuation seems pricey, and I would instead concentrate new purchases on stocks with faster earnings growth.If I were enamored with Danaher and intent on owning shares, I’d wait, and hope for a pullback below $66.
Bloomberg is reporting that Wal-Mart Stores, Inc. (WMT, $74.65) is cutting orders with suppliers through the fiscal year-end in January, in order to remedy a recent problem with rising inventories. The inventory problem stems from tighter consumer spending, and a lack of manpower to keep shelves stocked.Wal-Mart has increased its number of stores by 13% over the last five years, while cutting its workers by 1.4%.S&P comments, “While we do think consumer spending remains choppy, we do not believe this report signals a negative inflection in trends.”
Wal-Mart missed analysts’ earnings projections in each of the last five quarters, as payroll taxes and poor global economies wreak havoc with customers’ spending patterns.To offset economic woes, Wal-Mart aims to double its sales of beer and liquor by 2016.Earnings per share growth projections have been falling all year, from 10% expected growth back in February to 4% today.The price-earnings ratio (PE) is 14.3, in a four-year range of 11-15.The dividend yield is 2.52%.
Wal-Mart’s share price peaked in May and has since trended slowly downward.Since there’s no catalyst on the horizon to cause the share price to rise, we think shareholders would likely achieve growth of capital more quickly by selling their Wal-Mart shares and purchasing stock in a company with double-digit earnings growth.It would also be wise to use stop-loss orders, in case the stock price falls below recent support around $72.Stock chart:
Second quarter earnings at Red Hat Inc. (RHT, $46.73) came in better than expected today, but the market is concerned with decelerating revenues, and the stock fell $6.20 in Tuesday trading.The core Linux business continues to slow down, while margins have bottomed and are improving.
Bookings growth has fallen from 30%+ in recent years, to 17% in fiscal 2013 (ended Feb. 28), and 11% expected in 2014.Reuters reported six Wall Street firms cutting target prices and ratings for Red Hat on Tuesday.
Red Hat provides commercial support for open source infrastructure software.Earnings per share (EPS) are expected to grow 10%, 17% and 16% in the next three years, although these numbers could be subject to revision after today’s future revenue disappointment.
The price-earnings ratio (PE) is 35.The stock is trading at a premium to its peers, which is unwarranted by the slowing revenue growth.As a general rule of thumb – which varies by industry – the fair value PE should be in-line with earnings growth.For example, if Red Hat had a PE of 18, the share price would be $24.
The stock peaked in April 2012 at $62.75, and the trading range has been ratcheting downward ever since, most recently trading between $45 - $56.While it’s somewhat unlikely that the stock will fall through support, it’s tremendously overvalued, and shareholders are gambling by holding on.
Shareholders should devise an exit strategy -- maybe selling now, maybe selling on a bounce to $49 – and reinvest their capital in a growth stock with a much lower PE, thereby minimizing overall risk.
J.C. Penney Co., Inc. (JCP, $12.36) is rumored to be in talks with Goldman Sachs (GS, $165.25) to raise more money to finance operations, possibly borrowing against real estate, or issuing new equity and/or debt.Goldman previously arranged a $2.25 billion loan for J.C. Penney this past spring, to help with falling inventories and rising accounts payable.
J.C. Penney has not been able to get on its feet after turning its back on loyal discount-oriented shoppers, and attempting to transform itself into a trendy shopping destination.The strategy failed, sales dropped precipitously, and a large fiscal ‘13 (year-end January) net loss is turning into large annual losses through at least 2016.21,000 employees have lost their jobs in the last 18 months.
After a loss of $3.49 per share in 2013 (before additional non-recurring charges), Wall Street expects Penney to lose $5.99 per share in 2014, with continued losses thereafter.
The share price is reaching13-year lows, and could easily fall further.“Worthless” is a conceivable scenario.
We told Ransom Notes Radio listeners to sell J.C. Penney shares repeatedly since February.Logically, an investor will make more money by selling today, and reinvesting in a profitable company with a bullish stock chart, than they will by holding J.C. Penney shares and praying for a miracle.
this week, similar in size to dividend and repurchase announcements in recent years.Shareholder activists would have been aiming for higher numbers, which would explain why this seemingly good news hasn’t boosted the share price at all.Morgan Stanley reports that Microsoft has $77 billion in cash; $70 billion of which is located offshore, and cannot be repatriated to the US without a tax penalty.
What does this mean to investors?We have a famous company, lacking a future CEO, struggling to eke out every possible percentage point of earnings growth in order to attract investors, because new share purchases help support the share price.The company is barely growing earnings through actual revenue or gross margin increases, so it’s relying on share repurchases to enhance the numbers.(The fewer shares outstanding, the higher the earnings per share for the remaining shares.)
Also,it’s a disturbing trend within American public companies that time and again, we see them allocating cash toward dividends and share buybacks in lieu of building new manufacturing plants or hiring more empoyees.Sure, actual investors are benefitting through dividends and capital gains, but the man on the street is walking toward the unemployment line.
Does that make companies like Microsoft and UPS evil or immoral?No.Their boards of directors have watched waves of onerous and expensive business legislation and taxes come down the pike from the Obama administration – a la Dodd-Frank, the EPA, and Obamacare -- and they’re battening down the hatches and waiting for the storm to blow over.
When corporate leadership sees the winds change, and Congress stops attacking corporate wallets, then boards of directors will feel that they can safely hire employees and expand business without the threat of another tax increase or plant closure.
What should investors do with Microsoft shares?
Earnings are projected to grow about 5-9% per year over the next three years at Microsoft.The PE is 11.9 and the new dividend yield is 3.34%.The low PE and large dividend should add support to the share price around $31, but earnings growth is too slow to give investors a compelling reason to buy the stock when they can buy companies like Verizon Communications (VZ), Dow Chemical (DOW), and Lorillard (LO) with a better combination of earnings growth & dividend yield.
It will take a while for Microsoft to absorb the 32,000 employees from the Nokia purchase, and turn the combination of a slow-growth company (Microsoft) and a barely-profitable company (Nokia) into a thriving enterprise.Current shareholders would likely grow their capital more quickly by trading out of Microsoft in the low $30’s and reinvesting in a growth stock.
Delta Air Lines Inc. (DAL, $23.15) rose 3 percent to $23.15 in Monday’s trading, as the Bloomberg U.S. Airlines Index rose 1.9 percent to the highest level since Aug. 2. Delta shares are being purchased by index funds since its stock was added to the S&P 500 index last week.
Delta’s earnings per share are expected to grow 48% in 2013. Earnings growth will then slow to approximately 6% and 12% in 2014 and ’15. The PE is 8.3, which seems low, but is fair in light of the rapidly slowing earnings growth. The company is focusing on debt reduction; and return of capital via increased dividends and a $500 million share repurchase program.
The share price is up 65% since we told Ransom Notes Radio listeners to buy at $14 earlier this year. The stock broke past short-term resistance at $22 last week, the day after we reiterated our buy recommendation on Delta. Delta Air Lines should appeal to growth, value, and momentum investors. We like both the fundamentals and the chart, and would continue to buy Delta.
Today, at 11:20 AM PT: Get the Market Movements in Advance: William's Edge Webinar for October 31st, 2014 | John Ransom
Today, at 11:20 AM PT: Get the Market Movements in Advance; Williams Edge Webinar for October 29th, 2014 | John Ransom