Valuentum Exclusive Analysis for the Discerning Investor

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Nov 11, 2020

Pfizer/BioNTech Vaccine Not a Catalyst for Portfolio Changes
Image: BioNTech. Next Generation Immunotherapy Presentation, October 2020. The world received great news this week that the days of this terrible COVID-19 pandemic may finally be numbered. On November 9, Pfizer and BioNTech announced that “their mRNA-based vaccine candidate, BNT162b2, against SARS-CoV-2 has demonstrated evidence of efficacy against COVID-19 in participants without prior evidence of SARS-CoV-2 infection.” Our thesis on the inevitable successful development of a vaccine for COVID-19 never centered on which pharma/biotech giant would be the first to develop one, but rather our thesis has always been focused on the large number of shots on goal (the large number of vaccine candidates in development, and the high probability that at least one would be effective). We’re sticking with some of the best companies out there in the newsletter portfolios, however, and we’re reiterating our fair value estimate range of 3,530-3,920 on the S&P 500 (established June 12), which we derive as 18-20x multiple on pre-pandemic 2021 earnings of $196. The S&P 500 stands within the range at ~3,560 today.

Nov 11, 2020

Realty Income Remains Resilient and Its Outlook is Improving
Image Shown: An overview of Realty Income Corporation’s asset base and historical financial performance. Image Source: Realty Income Corporation – Third Quarter of 2020 IR Earnings Presentation. On November 2, Realty Income Corp posted third quarter earnings for 2020 that saw the real estate investment trust’s (‘REIT’) funds from operations (‘FFO’) come in flat year-over-year at $0.82 per share, while its adjusted funds from operations (‘AFFO’) declined by 2% year-over-year, hitting $0.81 per share. Realty Income invests in single-tenant commercial properties, and its business has faced headwinds from the ongoing coronavirus (‘COVID-19’) pandemic. However, things are starting to improve, though there is ample room for additional improvement. We like the relative resilience of Realty Income’s financials and continue to include shares of O at a modest weighting in our Dividend Growth Newsletter portfolio. As of this writing, shares of Realty Income yield ~4.4% and for reference, the REIT pays out a monthly dividend.

Nov 10, 2020

McDonald’s: Holding Up Well During the Pandemic
McDonald’s is without a doubt a fantastic enterprise with a storied history and moaty characteristics. The firm is holding up quite well and has managed to drive innovation to overcome almost every obstacle it has faced in the past. Though there are long-term risks to the dividend payout based on the Dividend Cushion ratio, the company’s credit marks and free cash flow generation are enough for us to be confident in a growing payout for the foreseeable future. Shares are fairly valued at the moment, but dividend growth investors might want to take a hard look at this fast-food behemoth for their portfolios.

Nov 10, 2020

Public Storage Continues to Shine
Image Shown: Shares of Public Storage have recovered from the depths of the COVID-19 pandemic and have been on an upward climb over the past few months. On November 4, Public Storage reported earnings for the third quarter of 2020. As expected, headwinds created by the coronavirus (‘COVID-19’) pandemic weighed on its financial performance during this period; however, that did not stop the self-storage real estate investment trust (‘REIT’) from being very free cash flow positive. The long-term outlook for the self-storage industry in metropolitan areas in the US and elsewhere remains quite promising given the desire for households to maximize living space within their housing unit at a given budget. We include shares of Public Storage in our High Yield Dividend Newsletter portfolio and shares of PSA yield 3.5% as of this writing.

Nov 5, 2020

Cat or Deere or Neither?
Image: Deere equipment. Deere's stock has been a high-flyer during the past several months. Both Cat and Deere are facing some difficult times as COVID-19 continues to spread around the globe. From an operational standpoint, Deere is doing relatively better, but Caterpillar may have a more conservative balance sheet in light of its greater cyclical tendencies. We have a hard time defending its big share-price run in the face of definitively weaker performance across cyclical end markets, however. Unlike secular players, a falling discount rate won’t have as great of an impact on underlying intrinsic value. Caterpillar is more reasonably priced, in our view, but then again, the stock comes with a bit more operational risk. We have a difficult time pulling the trigger on either at the moment, especially in the context of so many other net cash rich, free cash flow generating powerhouses tied to secular tailwinds on the market today. Perhaps the answer is neither. We like our best ideas.

Nov 4, 2020

Our Thoughts on Magellan Midstream’s Latest Earnings
Image Shown: Keeping the many headwinds facing the energy infrastructure space in mind, Magellan Midstream Partners LP remains one of our favorite midstream master limited partnerships. Image Source: Magellan Midstream Partners LP – October 2020 IR Presentation. On October 30, Magellan Midstream Partners reported third quarter 2020 earnings that beat both top- and bottom-line consensus estimates. The midstream master limited partnership (‘MLP’) space has faced enormous headwinds due to the ongoing coronavirus (‘COVID-19’) pandemic, though the firm was still able to generate sizable free cash flows during the first nine months of 2020. Magellan Midstream is a modestly-weighted holding in the High Yield Dividend Newsletter portfolio, and as of this writing, units of MMP yield ~11.1%. Though that yield is quite high, given that the firm’s free cash flows should grow significantly going forward, we are optimistic the firm will be able to continue making good on its payout obligations for the time being.

Nov 4, 2020

We Expect to Raise Our Fair Value Estimate of Honeywell
Image: Honeywell’s Third Quarter 2020 Earnings Release Slide Deck. We may have been a bit too conservative with our latest fair value estimate change of Honeywell in light of our expectations of the impact of COVID-19 on its business. Heading into the COVID-19 crash, our fair value estimate for Honeywell had been north of $150, and we expect to revise it modestly higher than that mark upon the next update of our valuation model. In light of COVID-19, we plan to apply a wider fair value estimate range, too, and that should put shares as fairly valued. Honeywell is our favorite industrial idea, but it remains on the bench in favor of better-positioned net-cash-rich powerhouses currently in the newsletter portfolios.

Nov 4, 2020

Digital Realty’s Momentum Continues, Raises Outlook
Image Shown: An overview of Digital Realty Trust Inc’s asset base. Image Source: Digital Realty Trust Inc – Third Quarter of 2020 IR Earnings Presentation. On October 29, the data center real estate investment trust (‘REIT’) Digital Realty Trust reported third quarter 2020 earnings that beat consensus revenue estimates and consensus funds from operations (‘FFO’) estimates. Please note that while FFO is an imperfect metric, particularly because it does not incorporate the REIT in question’s need to refinance maturing debt and tap capital markets for funds for growth, it provides a useful snapshot of how well the REIT in question can maintain its dividend in the near-term. Digital Realty posted $1.54 per share in core FFO last quarter (an adjusted non-GAAP figure), down 8% year-over-year but flat sequentially. In this article, we will cover Digital Realty’s short-term headwinds and why we expect that the REIT’s financial performance will rebound. Shares of DLR yield ~3.1% as of this writing. Longer term, we use our adjusted Dividend Cushion ratio (includes funds raised via expected equity issuances over the next five full fiscal years) to gauge Digital Realty’s ability to keep making good on its dividend obligations. Digital Realty has an adjusted Dividend Cushion ratio of 1.1, earning the REIT a “GOOD” Dividend Safety rating. These metrics incorporate our expectations that the REIT will push through significant dividend increases over the coming years, and Digital Realty has an “EXCELLENT” Dividend Growth rating. We include shares of DLR as a holding in both our Dividend Growth Newsletter and High Yield Dividend Newsletter portfolios.

Nov 3, 2020

We’re Reiterating Our $200 Fair Value Estimate for PayPal
Image Shown: Short-term headwinds aside, PayPal’s latest earnings report reinforced our optimistic view on its long-term growth outlook which in turn is why we are maintaining our fair value estimate of $200 per share. We continue to be big fans of PayPal. The company has a pristine balance sheet, high quality cash flow profile, impressive growth outlook, and is trading well below its fair value estimate as of this writing. Though investors initially sold off shares of PYPL following its third-quarter report November 2 due to its expected growth trajectory slowing down in the near term, we're reiterating our fair value estimate of $200 per share as PayPal continues to deliver impressive fundamental performance. PayPal’s medium- and long-term growth outlooks remain stellar. Venmo could be a source of significant upside in the medium-term, and we are monitoring events closely.

Nov 2, 2020

Kraft Heinz Shows the Power of the VBI
Image: Years ago, shares of Kraft Heinz registered a rating of 1 on the Valuentum Buying Index (VBI) on two separate occasions, highlighting the company’s overpriced nature and weakening technicals. Rare and extreme ratings on the VBI, 1 = worst; 10 = best, tend to be the most informative and/or the most actionable for investors. There are just too many net cash rich, free cash flow generating powerhouses with tremendous competitively advantaged business models tied to secular growth tailwinds that taking a flier on an overleveraged turnaround such as Kraft Heinz almost feels irresponsible. That said, shares yield ~5.2% as of this writing, so income investors might find a decent risk reward at the right price. With a 27% stake, Buffett's Berkshire Hathaway seems to think so.