Valuentum Exclusive Analysis for the Discerning Investor

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Jul 8, 2022

Industrial Bellwethers A Mixed Bag: GE, BA, CAT, DE, UNP
Image Source: Caterpillar Inc – May 2022 Caterpillar Investor Day Presentation. In this article, we cover the industrial landscape by digging into the recent financial and operational performance of General Electric Company, Boeing Co, Caterpillar Inc, Deere & Company, and Union Pacific Corporation. Common themes include robust demand for their offerings, healthy order backlogs, and meaningful pricing power, though headwinds include substantial inflationary pressures, supply chain hurdles, and in certain instances, geopolitical tensions. General Electric will soon separate into three different publicly traded companies, and on a consolidated basis the firm is doing much better than years past. In 2022 and on a non-GAAP basis, General Electric is guiding for a 150+ basis point expansion in its adjusted organic operating margin and high-single-digit organic revenue growth, along with $2.80-$3.50 in adjusted EPS and $5.5-$6.5 billion in free cash flow (as defined by the company). Boeing’s financials continue to be in bad shape, and its operations continue to be plagued by missteps. The aerospace giant exited March 2022 with a massive net debt load of ~$45.5 billion (inclusive of short-term debt) after generating negative free cash flows in each year from 2019-2021. The company also generated negative free cash flows during the first quarter of 2022. Large working capital builds due to its inability to deliver certain aircraft, a product of its lackluster operational execution and regulatory intervention, is largely why Boeing has had difficulties generating positive free cash flows in recent years. Caterpillar’s first-quarter 2022 results were plagued by margin issues. In the period, the earth moving equipment maker’s GAAP revenues grew 14% year-over-year, but its manufacturing segment only posted a 3% year-over-year increase in operating income as higher costs weighed negatively on its profitability, offsetting pricing increases and increasing economies of scale. Caterpillar’s GAAP operating margin fell by ~140 basis points year-over-year in the first quarter, declining to 13.9%. During the first half of fiscal 2022, Deere’s GAAP revenues grew by 8% though its GAAP operating profit declined by 4% year-over-year, but the company’s performance in the fiscal second quarter indicates recent pricing actions have started to have a positive impact on its bottom-line performance. Deere raised its full-year earnings guidance in conjunction with its fiscal second quarter earnings update and now expects it will post $7.0-$7.4 billion in earnings this fiscal year. Union Pacific noted that its business volumes are measured by total revenue carloads increased by 4% year-over-year in the first quarter with strong growth seen at its agricultural and industrial freight volumes. The railroad company’s ‘operating income’ rose 19% year-over-year as its business continued to benefit from ongoing optimization efforts in the first quarter of 2022. The railroad operator remains very shareholder friendly and intends to payout roughly 45% of its earnings to investors as dividends.

Jul 4, 2022

Nelson: I Have Been Wrong About the Prospect of Near-Term Inflationary-Driven Earnings Tailwinds
"Though I have been clearly wrong on my near-term thesis for inflation-driven earnings expansion, we still did great sorting through investment idea considerations. Through late June, for example, the simulated Best Ideas Newsletter portfolio has generated 4-5 percentage points of alpha relative to the S&P 500, as measured by the SPY. The simulated Dividend Growth Newsletter portfolio is down only modestly this year, also performing better than traditional benchmarks. The simulated High Yield Dividend Newsletter is generating “alpha” against comparable benchmarks, and the Exclusive publication continues to deliver, with both capital appreciation ideas and short idea considerations generating fantastic success rates. ESG and options-idea generation have also been great. With all this being said, in the long run, I believe nominal earnings will expand rapidly from 2021 levels, which is why I remain bullish on stocks. I believe markets tend to overestimate earnings in the near term and underestimate them in the long run. The intelligent investor knows, too, that the most money is made during recessions and bear markets, where steady reinvestment and dollar cost averaging help to better position portfolios for higher returns over the longer run. The newsletter portfolios are well-positioned for continued “outperformance,” in our view, and while we may make a few tweaks to them, we’re not making any material changes at this time."

Jun 29, 2022

We're Considering FedEx for the Dividend Growth Newsletter Portfolio
Image Source: Valuentum. During the past several weeks, we've grown increasingly concerned about the health of consumer-tied entities across the consumer staples and consumer discretionary spaces. Many consumer staples entities, while raising prices, aren't raising them fast enough to drive operating-income and bottom-line expansion, while many consumer discretionary companies may be facing higher freight and logistics costs and weaker performance in Greater China, as that exposed in Nike's most recently-reported quarter, where inventory advanced 23%. The tell-tale sign about the health of the consumer may be Amazon Prime Day, which is coming up on July 12-13, but based on many of the reports we've monitored this past earnings season, consumers may be willing to spend a bit more to help business revenue, but businesses are having a difficult time leveraging the price increases into operating income and earnings-per-share expansion. Perhaps we were somewhat in denial that pressure on S&P 500 earnings growth might materialize when Walmart and Target disappointed a number of weeks ago, but the Nike earnings report, released June 27, all but sealed the deal that the probability of a recession in the U.S. is material. When we look at Walmart and Target, the story was similar. Top-line growth ensued but consolidated gross margins faced pressure, and operating income tumbled. Full-year earnings per share at Walmart is now expected to be down about 1%, as the company's top-line growth just isn't enough to keep earnings moving in the right direction. For Target, the company originally guided its second-quarter operating income margin rate well below consensus estimates at the time, to 5.3%, due to pressure on gross margins from higher freight and transportation costs and measures to reduce inventory. However, just a few weeks later, Target reduced that second-quarter operating margin target again to just 2% as it is being forced to work through excess inventory with aggressive markdowns.  What does all this mean for FedEx's trajectory? Well, it all depends. Clearly, consumer-tied businesses, whether consumer staples or discretionary, are facing tremendous cost pressures, but some of those cost pressures are freight and logistics expenses, which might play into the hands of FedEx and rival UPS. For example, for its fiscal 2023 (ends May 2023), FedEx issued guidance for diluted earnings per share to the range of $22.45-$24.45, which when issued June 24, was above the consensus estimate of $22.40 at the time. FedEx was able to drive its fiscal fourth-quarter 2022 operating income higher due to a "favorable net impact of fuel," but it did note that it experienced "lower shipment demand due to slower economic growth and supply chain disruptions." We think FedEx is better positioned to pass along costs than many of the retailers, and for that reason, we think it will hold up better should the U.S. enter a recession. The same rings true for rival UPS, which reported first-quarter 2022 results on April 26. In UPS' first quarter, consolidated revenues jumped 6.4% from the same period last year, while it grew consolidated operating profit 17.6% (12.1% on an adjusted basis). We think transportation stocks such as FedEx and UPS, which are able to pass along price increases in the form of surcharges for higher fuel costs are much better positioned than the broader retailer landscape, which may face continued earnings pressure as they deal with higher input costs and larger inventory balances. We value FedEx at $295 per share, well above where shares are trading at the moment (~$240), and while the company is not immune to recessionary characteristics, its flexible pricing surcharges mean it can handle cost adversity better than most S&P 500 entities, in our view. Shares of FedEx yield ~1.9% at the moment, and while the company's Dividend Cushion ratio could be stronger, we give it high marks for both dividend strength and dividend growth potential.

Jun 17, 2022

Dividend Increases/Decreases for the Week of June 17
Let's take a look at firms raising/lowering their dividends this week.

Jun 14, 2022

Prologis Buying Duke Realty as Logistical Real Estate Market Consolidates Further
Image Shown: Prologis Inc is merging with Duke Realty Corporation through an all-stock acquisition that will see Prologis cement itself as a logistical real estate powerhouse in the US and worldwide. Image Source: Duke Realty Corporation / Prologis Inc – June 2022 IR Presentation announcing the acquisition of Duke Realty by Prologis. On June 13, Prologis Inc announced it was buying Duke Realty Corporation through an all-stock transaction worth ~$26 billion when including the assumption of debt. In the wake of severe capital market volatility, some major deals in the real estate investment trust (‘REIT’) space are still getting done. Back in May 2022, Duke Realty rejected Prologis’ previous offer worth ~$24 billion as being “insufficient” which prompted Prologis to sweeten the pot to get a deal done.

May 24, 2022

Dividend Growth Idea Honeywell Capitalizing on Recovering Aerospace Industry
Image Shown: Dividend growth idea Honeywell International Inc increased its full-year guidance for 2022 during its first quarter earnings update. We continue to be big fans of the name as the aerospace industry steadily rebounds. Image Source: Honeywell International Inc – First Quarter of 2022 IR Earnings Presentation. On April 29, Honeywell International reported first quarter 2022 earnings that beat both consensus top- and bottom-line estimates as its business continues to rebound from the worst of the coronavirus (‘COVID-19’) pandemic. Due to its strong performance, management raised the company’s full-year sales and earnings guidance for 2022 in conjunction with its latest earnings update. We continue to like Honeywell as an idea in the Dividend Growth Newsletter portfolio to gain exposure to the recovering aerospace industry and exposure to the nascent quantum computing industry. Shares of HON yield ~2.1% as of this writing.

Jan 22, 2022

Don’t Throw the Baby Out with the Bathwater
Image: Erica Nicol. Junk tech should continue to collapse, but the stylistic area of large cap growth and big cap tech should remain resilient. Moderately elevated levels of inflation coupled with interest rates hovering at all-time lows isn’t a terrible combination. In fact, it’s not bad at all. The markets are digesting the huge gains of the past few years so far in 2022, and the excesses in ARKK funds, crypto, SPACs, and meme stocks are being rid from the system. Our best ideas are “outperforming” the very benchmarks that are outperforming everyone else. The BIN portfolio is down 6.4% and the DGN portfolio is down 3.2% year to date. The SPY is down 7.8%, while the average investor may be doing much worse. Our timing to exit some very speculative ideas in the Exclusive publication has been impeccable. Beware of “best-fitted” backtest data regarding sequence of return risks. Research is to help you navigate the future, not the past. We remain bullish on stocks for the long haul and grow more and more excited as our simulated newsletter portfolios continue to hold up very well. Don’t throw the baby out with the bath water. Stick with the largest, strongest growth names. We still like large cap growth and big cap tech, though we are tactical overweight in the largest energy stocks (e.g. XOM, CVX, XLE). The latest short idea in the Exclusive publication has collapsed aggressively since highlight January 9, and we remain encouraged by the resilience of ideas in the High Yield Dividend Newsletter portfolio and ESG Newsletter portfolio. Our options idea generation remains ongoing.

Dec 26, 2021

VIDEO/TRANSCRIPT: 2021 Valuentum Exclusive Call: Inflation Is Good
Valuentum's President Brian Michael Nelson, CFA, explains why investors should not fear inflation, why government agencies such as the Fed and Treasury are prioritizing something other than price discovery, why the 10-year Treasury rate is a must-watch metric, and why Valuentum prefers the moaty constituents in large cap growth due to their net cash rich balance sheets, tremendous free cash flow generating potential, and secular growth tailwinds.

Dec 19, 2021

FedEx Beats Estimates, Raises Guidance
Image Source: FedEx Corporation – Second Quarter of Fiscal 2022 Earnings Infographic. On December 16, the logistics giant FedEx Corp reported second-quarter earnings for fiscal 2022 (period ended November 30, 2021) that beat both consensus top- and bottom-line estimates. The firm also moderately raised its earnings guidance for fiscal 2022 in conjunction with its earnings update after previously reducing its full fiscal year guidance when reporting its fiscal first quarter earnings update. FedEx noted in its fiscal second quarter earnings press release that “higher revenue per shipment at all transportation segments” positively benefited its operating income performance and helped offset headwinds from labor shortages and related supply chain constraints. The company also recently announced a new $5.0 billion share buyback program that includes a $1.5 billion accelerated share repurchase program component.

Nov 16, 2021

The Valuentum Weekly Is a Hit! Only Delivered By Email!
The Valuentum Weekly is a brand-new weekly market commentary from Valuentum Securities, released each weekend in digital form. The Valuentum Weekly offers members a weekly synopsis of the markets and major events. It will be straight and to-the-point. Our goal is to deliver to you the latest information and insights. We welcome your feedback on how we can make the Valuentum Weekly as useful and as relevant for you as ever!