Valuentum Exclusive Analysis for the Discerning Investor

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Lululemon Athletica Buys MIRROR
Image Source: Lululemon Athletica Inc – First Quarter Fiscal 2020 Quarterly Financial Supplements. On June 29, Lululemon Athletica announced it was acquiring home fitness company MIRROR for $500 million in cash. MIRROR sells ~$1,500 (before taxes and installation fees) screens that come with a camera and speaker system that allow users to participate in at-home workouts assisted by trainers/videos. That offering comes with a $39 per month digital subscription which allows the user (or users, up to six people per household) to access on-demand and live workout sessions, and additionally, personal training sessions cost up to $40 each.

Nike Doubles Down on Its Digital Strategy
Image Shown: Shares of Nike sold off moderately on June 26 after reporting its full-year earnings for fiscal 2020 (period ended May 31, 2020), though please note shares of NKE have rebounded sharply from their March 2020 lows. Over the past year shares of Nike are still up ~15% as of this writing, outpacing the 4% gain seen at the S&P 500 (SPY) before taking dividend considerations into account. Nike is performing well operationally as its digital strategy has helped mitigate some of the headwinds created by the ongoing pandemic. The retailer’s strong balance sheet provides ample support to ride out the storm while being able to maintain its current dividend policy. Shares of NKE yield ~1.1% as of this writing, and we give Nike an “EXCELLENT” Dividend Safety rating due to its rock-solid Dividend Cushion ratio of 3.4. Please note these forward-looking indicators factor in double-digit per share payout growth over the coming fiscal years. We give Nike an “EXCELLENT” Dividend Growth rating as well.

Update on Dell Technologies and VMware
Image Source: VMware Inc – First Quarter Fiscal 2021 IR Earnings Presentation. Dell Technologies and VMware Inc are back in the news as the WSJ recently reported the former is considering spinning off its enormous equity stake in the latter. Back in September 2016, Dell completed its ~$67 billion cash-and-stock acquisition of EMC which gave Dell a controlling equity stake in VMware (and a mountain of net debt in the process). As of January 31, 2020, Dell owned approximately 80.9% of VMware’s outstanding equity. Dell can spin off its equity stake in VMware tax-free after a five-year waiting period, though Dell would need to wait until September 2021 before that could occur (given when the EMC deal closed).

Broadcom’s Financials Are Stabilizing
Image Source: Broadcom Inc – June 2020 IR Presentation. On June 4, Broadcom posted second-quarter earnings for fiscal 2020 (period ended May 3, 2020). Shares of AVGO are trading in the upper bound of our fair value estimate range and appear reasonably priced as of this writing considering the relatively favorable forward-guidance management offered for the fiscal third quarter. Though the ongoing coronavirus (‘COVID-19’) pandemic is negatively impacting Broadcom’s operations with an eye towards “challenges” at the firm’s supply chain, the company’s growing ‘Infrastructure software’ segment appears to be helping stabilize its financial performance. We give Broadcom a Dividend Cushion ratio of 1.0, earning the firm a “GOOD” Dividend Safety rating (these metrics factor in expectations that the firm will push through meaningful per share dividend growth over the coming fiscal years). While Broadcom carries a hefty net debt load, its business model is light on capital expenditures which allows for the firm to generate meaningful free cash flows. Shares of AVGO yield ~4.2% as of this writing.

Steel Dynamics Bets Big on North America’s Industrial Economy
Image Source: Steel Dynamics Inc – June 2020 IR Presentation. Investor sentiment towards the steel industry is rebounding as the medium- and long-term outlook for global industrial activity has improved markedly since March 2020. The ongoing coronavirus (‘COVID-19’) pandemic has significantly hampered near-term industrial activity, though major fiscal stimulus packages (made feasible through major monetary stimulus programs) launched in various developed nations could provide some relief. Shares of Steel Dynamics have recovered meaningfully since their March 2020 lows and are trading a tad below our fair value estimate as of this writing. Shares of STLD yield ~3.6% on an annualized forward-looking basis as of this writing and we give the steel maker a Dividend Cushion ratio of 1.3x providing for a “GOOD” Dividend Safety rating. The company has made great strides in improving its financial position over the past several years. We will first provide some background on the fiscal stimulus measures that have either been approved and or proposed in key economies across the world, before digging deeper into Steel Dynamics.

Why We Like Apple and Microsoft in the Newsletter Portfolios
Image Shown: Shares of Apple Inc (blue line) and Microsoft Corporation (red line) are up significantly year-to-date as of the market close on June 19, and we see room for both shares of AAPL and MSFT to continue marching higher after recently revising our fair value estimates for both companies. On June 12, we added back shares of Apple and Microsoft Corp to both the Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio. We added Apple and Microsoft back to the newsletter portfolios using the cash position generated by removing the Vanguard Real Estate ETF and the SPDR S&P Aerospace and Defense ETF from the Best Ideas Newsletter portfolio and Cracker Barrel and Bank of America Corp from the Dividend Growth Newsletter portfolio on June 11. The Best Ideas Newsletter portfolio (link here) and Dividend Growth Newsletter portfolio (link here), as of June 15, 2020, can be viewed on our website. There are a lot of reasons to like Apple and Microsoft, especially during these turbulent times. Both firms have massive net cash positions, better positioning the tech giants to ride out the storm created by the ongoing coronavirus (‘COVID-19’) pandemic. Both companies are free cash flow cows and their growth trajectories are underpinned by secular growth tailwinds (particularly on the cloud computing and digitally-provided services side of things), further bolstering their cash flow profiles.

Warren: Four Ways to Play the Market at This Juncture
Image Source: Daniel Lobo. In this piece, we examine where the economy and stock markets have been recently, where we are now, and where we are going next. We also highlight four key ways to play this volatile market. We think this is a helpful way to think about overall portfolio construction, especially so that one does not overly expose themselves to a particular set of risks that could come to fruition—like an extended downturn in the economy or a rapid discovery of a vaccine for Covid-19 on the other hand.

Recent Events Concerning Johnson & Johnson
Image Source: Johnson & Johnson – First Quarter of 2020 IR Earnings Presentation. We include Johnson & Johnson as a top-weighted holding in the Dividend Growth Newsletter portfolio and as a medium-weighted holding in the Best Ideas Newsletter portfolio. The firm’s Dividend Cushion ratio sits at a solid 2.1 and please note that this forward-looking dividend coverage ratio factors in our expectations that Johnson & Johnson will grow its per share dividend by mid-single-digits annually over the coming years. Johnson & Johnson earns a “GOOD” Dividend Safety rating and an “EXCELLENT” Dividend Growth rating, with shares of JNJ yielding ~2.8% as of this writing. In our view, Johnson & Johnson’s strong balance sheet and high quality cash flow profile provide it with the financial strength to ride out the storm created by the ongoing coronavirus (‘COVID-19’) pandemic with its current dividend policy and financials intact.

Turbulent Fiscal Fourth Quarter Aside, Oracle Paints a Promising Outlook for Fiscal 2021
Image Source: Oracle Corporation – Oracle Database Update September 2019 Presentation. On June 16, Oracle Corp reported fourth quarter fiscal 2020 earnings (period ended May 31, 2020) that beat consensus bottom-line estimates and missed consensus top-line estimates, though there is some noise given the turbulence created by the ongoing coronavirus (‘COVID-19’) pandemic. Additionally, Oracle declared a $0.24 per share quarterly dividend that is slated to get paid out in July, which was flat on a sequential basis. Shares of ORCL yield ~1.8% as of this writing, and we continue to like the idea as a holding in the Dividend Growth Newsletter portfolio. While shares of ORCL sold off on June 17, management painted a more optimistic outlook for the firm’s fiscal 2021 performance than initial trading action suggests.

Exxon Mobil Puts on a Brave Face
Image Source: Exxon Mobil Corporation – November 2019 Guyana IR Presentation. Near-term oil prices and most importantly, the oil price futures curve, have improved materially since just a couple of months ago when it looked like the sky was falling. For the first time ever, WTI turned negative in April 2020 for physical deliveries due May 2020 of light sweet oil to Cushing, Oklahoma, as storage options were limited (and arguably, many speculators had jumped into the market not fully aware of the risks they were taking on). Exxon Mobil Corp has seen its share price recover considerably since the drop, though we caution that management’s commitment to the dividend will prove a hard task if things do not improve materially in the short-term. As of this writing, near-term futures for WTI and its international counterpart Brent are trading near $40 per barrel. In the face of COVID-19, low raw energy resource prices (Exxon Mobil’s upstream operations form its largest single business segment), and subdued demand for refined petroleum and petrochemical products (from gasoline to plastics) have significantly weakened Exxon Mobil’s cash flow profile. The ongoing coronavirus (‘COVID-19’) pandemic has shaken energy markets to their core in ways we have not seen ever before. Shares of XOM yield ~7.4% as of this writing. We give Exxon Mobil a Dividend Cushion ratio at 0.2, though its Dividend Safety rating is “GOOD” given the company’s ability to tap capital markets, especially debt markets as the oil giant carries high quality “A-rated” investment grade credit ratings. There is a limit to how much debt Exxon Mobil can take on to cover its dividend obligations, however, which we will cover in greater detail in this article.