Valuentum Exclusive Analysis for the Discerning Investor

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Delta Delivers Most Profitable December Quarter in Its History
Image Source: Colin Brown. We liked Delta’s fourth quarter results and outlook for 2025, but we’re not interested in adding any airline to the newsletter portfolios. Airline economics are notoriously difficult to forecast, and their operating results are heavily levered to volatile jet fuel prices. Swings in the economic environment can also have a large impact on performance given the operating leverage inherent to their business models. Delta is currently riding an upswing in demand, but we remain cautious on shares given the volatility innate to an airline’s business model. We remain on the sidelines.

Dividend Increases/Decreases for the Week of January 10
Let's take a look at firms raising/lowering their dividends this week.

Dividend Aristocrat Caterpillar’s Dividend on Solid Ground
Image Source: Caterpillar. Though Caterpillar’s top line is under pressure “due to the impact of lower-than-expected sales to users in its Construction Industries segment and the timing of deliveries in its Resource Industries and Energy & Transportation segment,” Caterpillar’s lucrative services business and backlog remain healthy, and it covers its dividend nicely with ME&T free cash flow. Shares yield 1.6% at the time of this writing.

Lowe’s Experiences Softness in Bigger Ticket Discretionary Demand
Image: Lowe’s shares have rallied nicely since the beginning of 2023. Buoyed in part by anticipated modest storm-related demand in the fourth quarter, management expects total sales for the full year 2024 of $83.0-$83.5 billion (was $82.7-$83.2 billion)—consensus was $82.99 billion--and comparable sales to be between -3.0% to -3.5% (was -3.5% to -4.0%). Its adjusted operating margin for the year is now targeted in the range of 12.3%-12.4% (was 12.4%-12.5%), while adjusted diluted earnings per share is expected in the range of $11.80-$11.90 (was $11.70-$11.90), the midpoint above consensus of $11.81. Our fair value estimate of $242 for Lowe’s shares is roughly in-line with where the firm’s equity is trading, and while its recently raised guidance was well-received, we remain on the sidelines with respect to the company in the newsletter portfolios. Shares yield 1.9%.

HP Inc. Sets Q1'25 Expectations Below Consensus, Dividend Looks Healthy
Image Source: HP Inc. For fiscal 2025, HP Inc. expects non-GAAP diluted net earnings per share to be in the range of $3.45-$3.75, the midpoint in-line with the consensus forecast of $3.60. Free cash flow is targeted in the range of $3.2-$3.6 billion on the year, the midpoint up from $3.3 billion last fiscal year and well in excess of the company’s annual run-rate dividends of ~$1.1 billion. During fiscal 2024, the company returned $2.1 billion via share repurchases. HP ended the quarter with $3.3 billion in cash and cash equivalents and $9.7 billion in short-and long-term debt. HP is set to benefit from an AI PC refresh, and even though expectations weren’t set as high as what the market was looking for in the first quarter of fiscal 2025, HP Inc. remains a strong dividend payer. Shares yield 3.5% at the time of this writing.

Keeping the Horse Before the Cart: Valuentum’s Economic Castle™ Rating
Image shown: An examination of the problem that might arise by focusing exclusively on companies that have economic moats, or sustainable and durable competitive advantages.Without an economic castle, an economic moat doesn’t matter. Let's examine Valuentum's Economic Castle™ rating.

Dividend Increases/Decreases for the Week of January 3
Let's take a look at firms raising/lowering their dividends this week.

The Price-to-Earnings Ratio Demystified
Let's examine the price-to-earnings (P/E) ratio. The key takeaways are: 1) without using a discounted cash-flow model, the P/E ratio that should be applied to a company's future expected earnings stream can never be appropriately calculated, and by extension, 2) when investors assign an arbitrary price-to-earnings multiple to a company’s earnings (based on historical trends or industry peers or the market multiple), they are essentially making estimates for all of the drivers behind a discounted cash-flow model in one fell swoop (and sometimes hastily). As earnings for next year are often within sight and can be estimated with some confidence (though this certainly varies among firms), calculating the price-to-earnings ratio via a discounted cash-flow process, in our opinion, is of far greater importance than worrying about whether a firm will beat or miss earnings in its next fiscal year. Because the P/E ratio is a discounted cash-flow model that considers the long-term qualitative dynamics of a particular entity, cash-flow analysis remains the first and most important pillar of our Valuentum Buying Index. And finally, investors cannot ignore valuation analysis or the future. Valuation is an important driver behind stock prices, and it is based on future expectations that can only be estimated. This is just a fact of the markets.

How Does 37% Sound?
Image: The Schwab U.S. Large Cap Growth ETF (SCHG) is up more than 37% so far in 2024. So what’s the playbook for 2025? You can probably guess that I think large cap growth and big cap tech will continue to lead the markets to new heights. 2024 was a boring year, if a 37% return can be considered boring for large cap growth. Frankly, with the market focusing on macro data and the Fed during 2024, there wasn’t much material to write about. We all already know the story: Inflation is under control, the job market remains healthy, the Fed is cutting, and artificial intelligence will be the name of the game this decade.

Nike’s Revenue Under Considerable Pressure; Turnaround Will Take Time
Image: Nike’s shares have been under considerable pressure as sales results disappoint. Nike’s outlook for the near term doesn’t provide us with much confidence. As we have noted before, Nike has a storied brand that is unmatched by rivals, but it may take more than a new CEO to turn things around. Competition remains fierce and the promotional environment intense, while consumer discretionary spending remains a big wild card. We like Nike, but we continue to stay on the sidelines until we start to see some improvement on the top line, not just better than feared results.