After the first week of earnings, developments at various companies have allowed us to compare our expectations for earnings for the year versus the results we got this past week. We have made updates to our long-term price targets and updates for the following companies: CA Inc. (NASDAQ:CA), Chipotle Mexican Grill (NYSE:CMG), F5 Networks (NASDAQ:FFIV), Hanes Brands (NYSE:HBI), Microsoft (NASDAQ:MSFT), NVR Inc. (NYSE:NVR), and VF Corp. (NYSE:VFC).
In summary, we have only decreased HBI from a Hold to Sell and CMG from a Hold to a Buy. All other companies maintained the same ratings with CA at a Buy, FFIV at Sell, MSFT at Buy, NVR at Buy, and VFC at Buy.
CA Inc. (CA) - Reiterate Buy, Up Price Target from $33 to $33.50
Analysis: The company reported better-than-expected earnings this past week with 0.55 EPS vs. 0.51 expected and larger revenue growth than expected with 9% at $1.16B. Both results were slightly better than we were expecting on our end. The company did announce that it is cutting 500 jobs, but these jobs should not affect growth rates in the company's core business of servers and IT infrastructure solutions. The company, additionally, repurchased $150M worth of shares as well as an increase of $25M in dividends. The company's repurchase of shares also means that equity value will be divided among a smaller number of shares now. The decrease in shares was small, but a continued increase in dividends and decrease in shares outstanding will continue to add value to share prices.
Chipotle Mexican Grill (CMG) - Increase Rating from Hold to Buy, Increase Price Target from $314 to $382
Analysis: Chipotle reported another round of fantastic growth that continues to outperform the rest of the industry, but we did see some weakness in the latest report as the company saw a drop in operating margins that was a bit higher than we expected. While higher legal costs are going to be short-lived, higher food costs are more likely to stay over a longer period of time and even increase further from current levels. The company has decent growth levels still in place, but the market seems to continually believe that this company can grow at much better rates than the rest of the industry. The market will pay a lot for residual growth in a low-growth environment. We have drastically increased our price target as we increased the residual growth rate from 5% to 5.5%, which lowered our discount rate. For the time being, companies that show strength in the market and "abnormal" growth will continue to greatly outperform the market.
F5 Networks (FFIV) - Reiterate Sell Rating, Increase Price Target from $85.50 to $86
Analysis: The company did as expected on the quarter, and we still see it as a significant Sell candidate. The company is heavily overvalued at the current price, and we increased our price target simply from an increase in cash and cash equivalents.
Hanes Brands (HBI) - Move from Hold to Sell Rating, Maintain Price Target at $26.50
Analysis: The company is starting to unveil the weaknesses that gave us our original assessment of them as overvalued. The company's recent quarter was slightly better than we expected, but the company warned that it is going to see decreasing sales, higher taxes, and higher costs of inputs. Our major worry is that Hanes Brands is going to see significant decreases in operating margins as cotton prices have continued to increase. Further, the increases in sales seem to not be sustainable as the company has offset higher costs with increasing prices. The increase in prices can only occur for so long as Hanes has a very small economic moat, and passing costs onto customers cannot continue.
Microsoft (MSFT) - Reiterate Buy Rating, Maintain Price Target at $41
Analysis: Microsoft's earnings were as we expected, and we continue to like this company. While Microsoft has been dead money for the past ten years, the company may be about ready to break out of its current sluggishness. The company continues to be undervalued at its current price and our analysis has not changed.
NVR Inc. (NVR) - Reiterate Buy Rating, Drop Price Target from $988 to $839
Analysis: NVR drastically underperformed our expectations in this latest quarter after seeing a significant pullback in growth levels. We originally, liked NVR due to the fact that the company had less exposure to residential housing and more exposure to apartments and rental construction. The company still is one of our Buys for the sector, but the lofty expectations we originally had are not as high. The company still has lots of value as it is actually buying back shares from a sub-6 million share float.
VF Corp. (VFC) - Reiterate Buy Rating, Drop Price Target from $156 to $150
Analysis: VF Corp.'s acquisition of Timberland has proven to be quite profitable for VFC, but we have reduced our expectations a bit despite the fact that the company is doing a bit better than we expected, due to rising debt levels. The company has not started to decrease debt levels at all, and it is sitting on nearly $1B in outstanding debt. That debt level actually increased from the prior quarter, which was not what we want to see from this company. It needs to start unloading that debt level as debt continues to weigh on the company's equity value. Even with debt levels where they are, the company is still a Buy.
Disclosure: I am long CA.