Goodfellow LLC’s “Stocks in the News”
Chinese Financial Group Fails on Promised AIG Deal
(AIG, $45.21, down $1.00 midday)
“A consortium of Chinese financial services firms missed a key deadline to pay a deposit in their deal to buy an aircraft-leasing business from American International Group, Inc.,” reports Dow Jones Newswire. The sale of International Lease Finance Corp. for over $4 billion was significant to AIG’s restructuring and was expected to close in the second quarter.
AIG has been struggling since the 2008 Financial Meltdown. There is no growth pattern in revenue, net income or stock price, and no dividend. Earnings per share are expected to be down 1% this year.
The stock is likely to trade between $44 and $50 near-term. Shareholders could easily reposition money into a financial growth stock with a dividend. (05/31/13)
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Palo Alto Networks Disappoints Insanely-Bullish Analysts and Investors
(PANW, $48.88, down $5.51 midday)
Network security system maker Palo Alto Networks Inc. disappointed exuberant investors with great third quarter revenue, market share gains, and gross margins; but issued a fourth quarter revenue forecast lower than analysts expected, sending the stock price down as much as 14% this morning. As revenue growth of this small-cap company decelerates, shareholders are faced with transitioning expectations from “hot stock performance” to “stable investment performance”.
Earnings are expected to grow 50% for the fiscal year ending in July, and another 110% next year. The PE is 236.
Palo Alto Networks’ stock has been in a sideways pattern since it fell through support last October, largely trading between $49 and $57. Shareholders should use stop loss orders on this overvalued but rapidly growing technology stock. (05/31/13)
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UnitedHealth Group Skeptical of Obamacare Opportunities
(UNH, $63.97, down 69 cents midday)
UnitedHealth Group Inc. plans to offer coverage in only a dozen of the new Obamacare insurance exchanges. The company expects the first round of individuals who purchase insurance after Oct. 1 to have a high concentration of costly health problems. Insurers are proceeding with caution at this potentially money-losing proposition, as they are banned from denying coverage to chronically ill patients.
UnitedHealth’s earnings per share are expected to grow 3% this year. The PE is 11.8 and the dividend yield is 1.32%.
Despite slow earnings growth, the stock appears immediately ready to break past its all-time high of $64 in 2005. Current shareholders should use stop-loss orders to protect profits. (05/31/13)
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Bidding War for Clearwire Heats Up
(CLWR, $4.50) (DISH, $39.52) (S, $7.34)
Satellite-TV provider Dish Network, and Sprint Nextel, continue a bidding war for Clearwire Corp. Dish Network raised its bid yesterday to $4.40 per share for Clearwire, up from Sprint’s latest $3.40 bid. Sprint currently owns over 50% of Clearwire shares.
Dish made a separate bid in April to purchase Sprint Nextel for $25.5 billion, in competition with a $20.1 billion bid from Softbank Corp. of Japan. Dish is offering to pay $4.76 in cash and about $2.24 in Dish stock for every share of Sprint.”
Clearwire shares could easily rise towards $5.00 with a counteroffer. Sprint shares are fully valued based on annual net losses, and current bids between Dish and Softbank. On April 15, we told shareholders to sell Sprint Nextel. Dish is a highly leveraged company with good earnings growth. Dish shares have long-term price resistance at $40.
Our recommendation is that shareholders hold Clearwire, hold Dish Network, and sell Sprint Nextel. (05/30/13)
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EMC Introduces Dividend and Boosts Repurchase Plan
IT infrastructure company EMC Corp. has increased its stock repurchase program from $1 billion to $6 billion, and initiated a ten-cent per share quarterly dividend. More than half of the stock repurchases will take place in the next twelve months.
Earnings per share are projected to grow 9, 11, and 13 percent in the next three years, and those numbers will rise as shares are repurchased. The PE is 13.4, and the new dividend yield is 1.6%.
EMC shares have been trading between $20 and $29 for two-and-a-half years. Expect the stock to trade between $23 and $26 near-term. (05/30/13)
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NV Energy Becomes Takeover Target
(NVE, $23.60, up $4.32 midday)
MidAmerican Energy Holdings Co. will pay $23.75 per share in cash, totalling $5.6 billion, for NV Energy Inc., Nevada’s biggest utility. Citi Research says, “…it is highly unlikely that another suitor will come in and outbid MidAmerican.”
NV Energy’s current share price is now at a ten-year high. The transaction will require approval of shareholders, the State of Nevada, the Department of Justice, and the Federal Energy Regulatory Commission. Shareholders should bypass the approval process, and sell on the news today, in order to reposition capital into stocks with higher dividends and earnings growth. (05/30/13)
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Shuanghui to Buy Largest U.S. Hog Producer to Feed Chinese
(SFD, $32.50 up $6.50 midday)
China’s Shuanghui International has agreed to purchase Smithfield Foods Inc. for $4.7 billion in cash in order to fill a demand for pork in China, amid continued food safety scandals abroad. Smithfield is the largest U.S. hog producer and pork processor. Shuanghui will pay $34 per share to Smithfield shareholders, and assume the company’s debt. The deal is subject to U.S. government approval.
We recommend that shareholders sell into the inflated share price and reposition their capital, rather than waiting for the deal to close. If the deal falls through, shareholders can repurchase the shares as they revert back to a $25 to $27 trading range. However, the company expects a big earnings drop this year, and we see no compelling reason to own Smithfield Foods shares. (05/29/13)
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News Corp. to Separate into Two Companies on June 28
(NWSA, $32.71, down 53 cents midday)
Rupert Murdoch’s News Corp. intends to separate into two companies on June 28. Shareholders will receive shares of entertainment company 21st Century Fox, and publishing company News Corp. The publishing company will have $2.6 billion in cash, no debt, a $500 million stock repurchase plan, and a dividend.
While the newspaper industry is dying in America, Rupert Murdoch points to his track record and adds, “there is opportunity everywhere.” The company plans to aggressively pursue growth strategies, including digital media, and M&A activity. S&P says, “We think the new entity will emerge as a force for industry consolidation.”
News Corp.’s stock price broke out on January 2 and is up 29% year-to-date. We’ll update our spin-off details today. Here’s our latest research piece on NWSA. (05/29/13)
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Michael Kors’ Fourth Quarter Far Exceeds Expectations
(KORS, $63.07, up $1.09 midday)
Upscale accessories maker Michael Kors Holdings Ltd. reported fourth quarter earnings of 50 cents per share, blowing away analysts’ estimates of 39 cents. Sales were up 97 percent in Europe, where the company will add 40 new stores. North American sales were up 52 percent. Gross margins for the quarter rose two full percentage points.
Wall Street expects earnings per share to grow 140% this year, although that number could be revised upward near-term. The PE is 34.
Michael Kors stock has had a two-steps-forward-one-step-back approach since going public in late 2011. Expect the stock to trade between $61 and $65 in the very near-term. (05/29/13)
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Valeant Pharmaceuticals in Agreement to Buy Bausch & Lomb
(VRX, $90.58, up $6.11 midday)
Valeant Pharmaceuticals International Inc., Canada’s largest drugmaker, has agreed to buy privately-held eye-care company Bausch & Lomb Holdings Inc. for $8.7 billion. The deal will be financed by the issuance of new equity and debt. Valeant’s long-term debt ratio was already high at 56%.
Valeant is a rapidly growing specialty drugmaker, in the areas of dermatology, neurology and ophthalmology. On April 29, we recommended to Ransom Notes listeners that they buy Valeant Pharmaceuticals, and the stock has since risen 21%. Despite projected earnings growth of 26% this year, and a PE of 16.2, we believe the company’s high debt levels warrant investor caution. (05/28/13)
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Tiffany Reports Strong Quarter
(TIF, $78.90, up $2.69 midday)
Luxury jewelry retailer Tiffany & Company reported first quarter earnings of 70 cents, blowing away Wall Street’s 53 cent estimate. Quarterly sales surged in all global markets, with additional improvements in gross profit, interest expense and taxes. Full-year earnings guidance from Tiffany remains very conservative.
The company expects earnings to grow 7% this year, but continued upside surprises could put that number closer to 12%. The dividend yield is 1.68% and the PE is 21.9.
The stock has been trading between $50 and $84 for two-and-a-half years. After climbing 41% year-to-date, watch for the stock to rest in the near-term while it trades in the $69 to $80 area. (05/28/13)
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Williams-Sonoma Beats Quarterly Profit Expectations
(WSM, $56.23, up 69 cents midday)
Home goods retailer Williams-Sonoma Inc., which also owns Pottery Barn and West Elm, reported a strong quarter, a new $750 million stock buyback program and a 41% dividend increase. The company is also promoting a division president to lead Williams-Sonoma as its new president.
First quarter earnings came in at $1.34 vs. the consensus estimate of $1.28. Full year earnings are expected to grow 7% this year, then increase to 14 and 16% in the next two years. The PE is 20.3. The new dividend yield is 2.2%.
The stock broke past long-term resistance last fall, and is currently trading in the low-to-mid $50’s. We wouldn’t chase the stock based on current fundamentals and chart. (05/28/13)
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