2 Avoids And 1 Potential Buy

| About: The Coca-Cola (KO)


Coca-Cola has reported years of declining revenues.

Boeing pre-announced a $2 billion dollar charge a couple weeks ago, tied to the 787 and KC-46 programs.

Fastenal's business is growing, but not as fast as analysts were expecting.

We are getting into the meat of the second quarter's earning season and while the reports have been mixed, they haven't been as bad as I was expecting. It still appears that earnings and revenue will decline year over year... that decline appears likely to be more modest than the last two quarters. I expect the earnings recession to persist this quarter, but the wild card for later this year will be the earnings out of the oil/gas industry. The latest earnings reports from the companies below caught my eye, and I'd like to discuss them.

Coca-Cola (NYSE:KO)- Coke reported earnings this week that beat analysts expectations, but missed revenues as global sales came in flat. Shares were down about 3.5% following the report. It looks like 2016 will be the fourth consecutive year that Coca-Cola shows a year over year decline in revenue per share, despite the financial engineering of the company's massive stock buyback program. In 2015 the company's management bought in about $2.3 billion net dollars of stock. It appears management was trying to engineer favorable year over year comparisons, but the company's results have just been too mediocre. Recent results in the carbonated soda segment have been declining in most developed markets and international growth has been slowing. The still (non carbonated) segment has shown some growth, but it is also a much smaller business segment and unfortunately carries a much lower profit margin.

I owned shares of Coke from 2008 until I decided to sell earlier this month. The company gave investors a brief glimpse of growth in past quarters, but this latest quarter looks like the stagnation I feared is well entrenched. Coke's management has struggled to generate overall sales growth, which looks even worse because of foreign currency headwinds. (The stronger US dollar means that revenue generated overseas is worth less when translated back into US dollars.) At a lower price I would be interested in buying shares of Coca-Cola again, but the price would have to be much lower given the company's current valuation and growth prospects. A lower price would give me a lower overall valuation and a higher dividend yield. The current price-to-earnings ratio is a little below 27, which is far more than I am willing to pay for a company that has flat to modest growth. As shown in the Morningstar table below, many of Coca-Cola's metrics look expensive on a historical basis. I am also concerned that future dividend raises may be smaller than they have been in the past, as a result of the increased dividend payout ratio. The ratio currently stands around 80%, which suggests the company may be forced to limit future dividend increases if growth doesn't materialize.

Boeing (NYSE:BA) - Boeing is a household name because of the company's ubiquitous jets. The company also has an enormous military business. As a result of the recent news and earnings reports, I am concerned that there is trouble brewing at the company. Earlier this month, Boeing pre-announced a $2 billion charge as a result of slower sales in the 787 and KC-46 programs. For a company the size of Boeing, that wouldn't normally be a big deal. Boeing bought back about $13 billion worth of stock over the past two years and has about $7 billion dollars in cash on hand, so $2 billion by itself isn't a big deal. A few days ago however, Rockwell Collins (NYSE:COL) went public about the fact that Boeing was delinquent paying for tens of millions of dollars worth of equipment it had already delivered to Boeing. This revelation caused me to take notice. From my own business experience, I know that most companies go to great lengths to work out payment disputes with clients behind the scenes. Even though Boeing downplayed the disagreement, the dispute must be significant if Rockwell Collins was willing to risk losing Boeing's business. It caused me to wonder if Boeing's management isn't concerned about a cash crunch.

When Boeing reported this week, the earnings per share and revenues results were ahead of analysts expectations. The company lost money in the second quarter, but not as much as analysts had been expecting. The loss marked the first quarterly loss in seven years for Boeing, and the company also slashed its 2016 full year earnings guidance by 25%. If it pans out, that reduction in earnings will put the price to earnings ratio in the low 20s.

The aerospace industry has been doing well for the last few years, and I was surprised at the news surrounding Boeing over the last couple months. I am also wary of Boeing because of the bizarre accounting methodology it uses. It is one of the few companies I have seen that distributes the estimated capital expenditures for a particular aircraft program (think 727, 787, etc.) over the expected lifetime of that program. The result is that the company reports "smoother" quarters, but it also means that the company is prone to large charges when management's future estimates don't pan out. I would much rather have the company report capital expenditures when they actually occur, and have a truer picture of where the business stand at a given time. I don't own Boeing shares currently, and am glad I don't.

Fastenal (FAST) - I have owned shares of Fastenal for quite a while, and will continue to own them despite reporting a marginal quarter earlier this month. The company missed analyst expectations on the top and bottom line, because the growth rate wasn't as fast as the analysts were expecting. In reality, Fastenal's business is maturing and the company's growth rate will likely continue to slow in future quarters. Still, in this zero growth world, Fastenal is actually growing its business. Against the headwind of and oil/gas slowdown over the past two years, I have been fairly impressed with the company's results. I am continuing to hold this company, as any improvement in either Fastenal's oil/gas business or real estate construction business will substantially improve the company's earnings. The two business lines combine to make up over a third of Fastenal's revenues. I will add additional shares if Fastenal's shares trade down to the mid-$30s. At current levels the stock looks too expensive for me to be buying additional. The growing dividend has been nice over the years, and the current 2.8% dividend is nothing to complain about. One important thing to point out about Fastenal's historical valuation averages. In the past, investors were willing to pay a much higher valuation for the company's shares because the business was growing at a faster rate. Now that growth has been slowing, I don't expect that Fastenal will command multiples as high as it did in the past.

Disclosure: Long FAST. This article is for informational purposes only and should not be considered a recommendation for anyone to buy, sell, or hold any securities. I am not a financial professional, and suggest you consult one to help with your investment decisions. The information in this article is courtesy of Morningstar.com and Gurufocus.com.

Disclosure: I am/we are long FAST.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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