Best Ideas Portfolio
Earnings Roundup: McDonald’s, 3M, IBM
publication date: Jul 25, 2017
author/source: Brian Nelson, CFA
Let’s recap a few big earnings announcements.
By Brian Nelson, CFA
McDonald’s (MCD) Stock Has Been Super Sized
We expect to raise our fair value estimate of McDonald’s following second-quarter results, released July 25, that showed ongoing strength in comparable store sales and the operating income benefits of continued refranchising efforts. Incredibly, global comparable store sales at McDonald’s increased 6.6% in the second quarter, blowing by consensus estimates, and operating income advanced at a 24% clip on a year-over-year basis. Management noted that the second quarter marked the “strongest global comparable sales and guest count results in more than five years.” Nothing appears to be able to stop McDonald’s these days, and increased refranchising de-risks its business model from ongoing threats of commodity cost inflation and rising minimum wage. We’ll be taking a close look at our valuation model, but an upward bias to our fair value estimate should be expected. Shares are now trading at ~$160 each, well above the current high end of our fair value range.
See McDonald's stock page: https://www.valuentum.com/search2?searchtext=mcd&searchtype=symbol
3M’s (MMM) Shares Experience Profit Taking
The market continues to be enamored with 3M’s dividend growth potential, but shares are far from cheap. A 35% increase in 3M’s dividend in December 2013 followed by another 25% hike the subsequent year has been quite the attraction, but investors have been balking at the company’s share price tag of late, nearly 21 times expected 2018 consensus earnings ($9.57). 3M’s second quarter report, released July 25, wasn’t bad by any stretch, revealing organic local-currency top-line growth of 3.5% and GAAP earnings-per-share expansion of 24%. The company even raised the lower end of its 2017 full-year outlook for revenue growth, to 3-5% (was 2-5%), and GAAP earnings-per share, to $8.80-$9.05 (was $8.70-$9.05). Shares, however, aggressively sold off following the report, and many are pointing to an increasingly difficult pricing environment in its industrial and consumer operations, but profit taking is as good a reason as any for the sell-off. We value shares of 3M at ~$150 each, well below its ~$200 price tag.
See 3M's stock page: https://www.valuentum.com/search2?searchtext=mmm&searchtype=symbol
IBM’s (IBM) Shares Still Not That Cheap
IBM took its eye off the ball years ago with misaligned executive incentive plans focused on operating earnings per share targets, and it is still feeling the pain. Warren Buffett has recently soured on the company’s long-term promise, and we even use Big Blue as the poster child for our educational walk through of what constitutes poor earnings quality. The company’s top line shows no signs of turning for the better after more than 20 consecutive quarters of declines. The competitive environment at IBM is not getting any easier, and while the company remains a strong free-cash-flow generator, we’re not enthused by its revenue erosion at all. In its second quarter, results released July 18, total revenue fell 5%, as reported, and 3% after adjusting for currency. Management is targeting operating diluted earnings per share of at least $13.80 and GAAP earnings per share of at least $11.95, a far cry from previous $20 operating earnings per share targets set many years ago. We value shares of IBM at ~$160 each, though its current share price doesn’t offer a large enough margin of safety for us to become interested in shares.
See IBM's stock page: https://www.valuentum.com/search2?searchtext=ibm&searchtype=symbol