As we fast approach the end of another year, investors are digesting the results provided by companies for their previous fiscal quarter. In addition to monthly and quarterly portfolio reviews, I think it is important to use quarterly earnings to evaluate existing holdings. When companies report a big surprise on earnings (either positive or negative), this can sometimes trigger a buying spree or sell-off that should prompt investors to make sure the new realities still reflect the original investment thesis.
My goal in this series (which I intend to do every other quarter, or twice a year) is to perform just that exercise with each of my holdings, ensuring that the results and forward guidance (if provided) of each company I invest in reaffirm my decision to hold their shares. In addition to reviewing the results, I'll also provide a BUY, HOLD, or SELL (hopefully not too many of these!) rating.
Today I'll be looking at four of my holdings that straddle several sectors including tech, industrial, and discretionary: Magna International (MGA), General Motors (GM), Southwest Airlines (LUV), and Qualcomm (QCOM).
Current Investment: 38.5716 shares (6.40% of portfolio, 4.16% of income)
Current Yield (as of 12/14/17): 1.99%, Yield on Cost: 2.68%
Investment Thesis: Magna International is a value play on the international market of automobile supply and manufacture, the industry's largest and most diversified company. Though it has a strong relationship with the Detroit Big 3 (GM, Ford (F), and Fiat-Chrysler (FCAU)), it supplies parts to nearly every major car manufacturer in the world. Even when the industry as a whole reaches a peak in the cycle, Magna's diversification and shareholder-friendly dividend and buyback policies make it a solid investment choice regardless of business environment.
Quarterly Results: On November 9, Magna announced positive beats on top and bottom lines, disclosing EPS of $1.36 vs. $1.32 expected and revenue of $9.5B vs. $9.24B expected. This revenue number also represented a 7.3% increase from the same period last year.
Magna's global sales allow it to stay ahead of diverging trends on different continents. For example, the company's record third quarter was boosted by an 8% increase in European light vehicle production, while light vehicle production in North America was down 7% in the same period. EBIT sales for Asia and the Rest of the World were also higher compared to the same period of 2016.
One of the hallmarks of Magna's success is share buybacks, and the company repurchased over $400 million worth of shares during Q3 2017. Magna expects to repurchase around 36 million additional shares over the course of the next year.
My Reaction: Despite the generally positive results, the market didn't take kindly at first to the negative effects on Magna's sales due to the slowing production cycle in North America. While North American vehicle production accounts for slightly less than half of Magna's overall sales, accelerating growth in Europe and Asia bodes well for continued growth into the new year and should not be ignored despite the challenging North American environment.
Since then, Magna's price has recovered and sits only about 3% off its 52-week high. Nevertheless, Magna's share price has remained relatively depressed in recent months and still represents decent value when compared to the broader market. Investors can look forward to another dividend increase in the near future which should hopefully approach last year's mark of 10%. With its global mix and continued focus on innovation, Magna is worth strong consideration. I continue to rate it a BUY.
Current Investment: 52.6294 shares (6.72% of portfolio, 7.85% of income)
Current Yield (as of 12/14/17): 3.72%, Yield on Cost: 4.99%
Investment Thesis: GM is a highly profitable, extremely undervalued automobile manufacturer with a generous yield, strong fundamentals and solid strategy to adapt to changing industry conditions. Though the share price has remained relatively flat in recent years, share buybacks and higher sales have continued to fuel shareholder-friendly policies.
Quarterly Results: On October 24, GM reported positive results with top- and bottom-line beats. EPS of $1.32 came in well above $1.13 expected and revenue of $33.62B topped the expected $32.67B. It is worth noting that despite the fact GM reported its first profitable quarter in all segments in nearly three years, this revenue number was down over 13%, or about $5.3B, from the same period last year (Investor Presentation, Slide 4).
Much as was the case above with Magna, diverging trends on different continents affected GM's business. Sales volumes were down in North America as the company adjusted operations to match demand, while volume growth in emerging markets like South America (17.2%) and China was impressive (Investor Presentation, Slide 5). This quarter also saw the digestion of the company's decision to sell its European operating segments Opel and Vauxhall to PSA Group (OTCPK:PEUGF).
My Reaction: GM is transforming right before investors' eyes from an automobile manufacturer into a technological innovator. As traditional vehicle sales in North America, the company's largest sales region, have stalled, GM is using its stockpiled cash effectively to undertake new initiatives, such as aggressively pursuing electric vehicle production and partnering with ride-sharing service Lyft (LYFT) to explore autonomous driving technology.
Coupled with its established market share and opportunities for growth in emerging markets, a more streamlined company could well be poised for a strong run up in price in the coming months and years. Mr. Market has a long memory, and GM's troubled history will always leave some wary, but management has proven its commitment to adapting the company to new realities and pursue policies that are innovative, business savvy, and shareholder-friendly. I continue to see GM as undervalued and would rate it a BUY.
Current Investment: 36.2231 shares (6.52% of portfolio, 1.78% of income)
Current Yield (as of 12/14/17): 0.78%, Yield on Cost: 1.17%
Investment Thesis: Southwest Airlines is an airline industry giant with steadily increasing profits, and a pure play on strong trends in domestic airline travel with limited international exposure. Offering clear growth through capital appreciation is an acceptable trade-off for well below-average dividend yield with investors who plan to hold for an extended period of time.
Quarterly Results: On October 26, Southwest Airlines reported mixed results on earnings, with EPS of $0.88 coming in just ahead of the expected $0.87 and revenue of $5.27B falling short of the expected $5.31B. Despite the miss, Southwest saw a revenue increase of 2.5% on a YoY basis.
Southwest's results were affected by a challenging quarter with multiple major hurricanes, and a unit revenue decrease of 0.5% reflected that reality. Fuel costs were also significantly higher than last year (15.8%), due in part much stronger oil prices this year as compared to last.
My Reaction: Despite a somewhat challenging quarter, Southwest affirmed its guidance for more positive numbers ahead in Q4 and has even since raised that guidance again. Southwest also made waves by announcing it soon plans to launch service from the West Coast to Hawaii, drawing on a lucrative tourist destination to boost revenue even further.
As Seeking Alpha Contributor Jonathan Cooper pointed out in an article after earnings, Southwest currently has far higher fuel costs than most of its peers due to hedging, which should transition from a headwind to a tailwind as the company looks ahead to 2018.
Combining these factors together, boosted guidance, new revenue opportunities, and lower fuel costs look to propel Southwest to another great year in 2018. Since the earnings report the share price has rallied to the tune of over 15%, meaning that the value piece is less present than it was about a month ago. Therefore, I would wait for another pullback before starting a new position, but keep Southwest high on your radar for a potential addition. In the meantime, LUV is a HOLD.
Current Investment: 10.3069 shares (2.03% of portfolio, 2.31% of income)
Current Yield (as of 12/14/17): 3.52%, Yield on Cost: 4.30%
Investment Thesis: Qualcomm is well-poised for future growth in key technology markets including drones, IoT, and autonomous automobiles, as it transitions from a pure smartphone market play to a more diversified semiconductor supplier through its pending acquisition of NXP Semiconductors (NXPI). Though the ongoing legal disputes, most notably with Apple (AAPL), continue to siphon attention away from the company's bright future, patient investors can be rewarded through the company's 4+% generous dividend yield.
Quarterly Results: On November 1, Qualcomm disclosed positive earnings results on both top and bottom lines. EPS of $0.92 came in ahead of the expected $0.81 and revenue of $5.9B edged estimates of $5.8B. On a YoY basis, however, revenue dipped 4.4%.
The company's results either met or beat expectations across several key metrics, including MSM chip shipments (220M vs. 205M-225M) and QTL revenues ($1.2B vs. $1.0B-$1.3B). Overall, MSM chip shipments appear on track to be essentially flat compared to the previous calendar year, while 3G/4G device shipment continues to see high single-digit growth (Investor Presentation, Slides 4, 6-7).
My Reaction: It is increasingly challenging to evaluate Qualcomm's performance based solely on earnings, as the company is embroiled in numerous other dealings that could have a significant impact. First, the ongoing royalty dispute with Apple has left huge sums entirely out of Qualcomm's financial statements, as money is not being paid while the dispute is taken to court. Then there is also Qualcomm's pending takeover of NXP Semiconductors, which has languished for months, only drawing further attention to the fact that NXP is possibly worth more than Qualcomm has offered to pay. And on top of all that, Broadcom (AVGO) has entered the fray by announcing an unsolicited bid to take over the company, sending its share price skyrocketing.
When there's a lot of news around a company and it's not all decidedly good or decidedly bad, sometimes the best virtue is simply patience. When I jumped into Qualcomm several months ago, I knew I was taking a risk and that I should expect turbulence ahead, which is why the position I took was so small. With so many moving parts to keep track of, it is more difficult to accurately assess Qualcomm's business and derive a fair value that encompasses all possible outcomes. Until resolution is reached in at least one of these three major outstanding issues, there is little clarity for which way Qualcomm's stock price is headed. Though it can be frustrating to watch the swings back and forth and the uncertainty ahead, I find this an excellent example of a situation where doing nothing is better than doing something. That being said, keep track of developments on each front and watch for opportunities to see the future more clearly. For now, Qualcomm is a definite HOLD.
Quarterly earnings provide a nice opportunity to review one's holdings. Going through this exercise, I'm able to review a company's results and forward guidance against my original investment thesis to ensure the holding is still a good fit for my portfolio. In the four cases above, generally positive earnings results indicate positions with relatively solid footing in my portfolio, and I saw no red flags that would cause me to consider exiting a position at this time. MGA and GM remain strong value plays despite the headwinds in the North American automobile market, while LUV's valuation looks stretched and QCOM's news circus leaves a great deal of uncertainty about the company's direction.
I hope you have found this article interesting, and if you'd like to share your own opinions on these stocks please feel free to leave a comment!
Disclosure: I am/we are long MGA, GM, LUV, QCOM. 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.