Thursday, 24 April 2014
I actually hedged the position with a short in sector peer SKF (Swedish listed) which (in SEK terms) has actually fallen in price over the last four or five months. That's the ideal long-short combination!
As my earlier linked note above discussed, trying to work out the company's forward valuation is not easy given the underlying volatility of some of the markets the group is supplying (light vehicles being particularly difficult at the moment, by contrast other areas like aerospace were much better). Geographically this was shown by the contrast between the company's sales experiences in North America versus Europe/Asia...
...and from an earnings perspective any boost came more from on-going efficiency/cost control drives than anything else.
If you pull all of that together there were a few tweaks to Timken's full year guidance, two positive and one negative.
From a balance perspective some small sales/EPS uplifts are enough to counter the mild cash flow deterioration especially as the company has basically no industrial debt.
The debt side flexibility is going to be important come the spin-off / demerger. The forward combined valuation is going to be influenced on the respective balance sheets the bearings and steel side are given. Convention would suggest investors will favour the more international / growth centred bearings business but the combined entity today valued at around a x11 forward EV/ebit ratio is offering a good start. I note free cash flow generation is only equivalent to just over a 2% yield which is a bit skinny but the optionality of the spin-off counters this.
Putting it all together the spin-off catalyst should help keep the share firm over the next couple of months. It may be better to travel than arrive but even with the share close to the 1 year high point again of around US$64 there is enough to keep me invested. Now let's see the spin-off details and go from there.
The above has some interesting aspects especially the contrast between Caterpillar's experiences in its 'construction' and 'mining/resource' divisions with the former being revised up...and the latter being revised down.
In terms of materiality the construction side is now a third larger than Caterpillar's resource interests and profitability is almost four times as high (on an operating profit basis). In time the resource division offers optionality from these levels...but this is over time. As the company's comments above note, mining capex constraints are continuing to have an impact.
Also noteworthy was the operating profit evolution which was very cost control centric with dullness on the sales/price lines.
At first glance EPS guidance was good as:
'Altria reaffirms its 2014 full-year adjusted diluted EPS guidance to be in a range of $2.52 to $2.59, representing a growth rate of 6% to 9% from an adjusted diluted EPS base of $2.38 in 2013'.
And all the other attributes that Altria stands for such as a high dividend yield...
...and both market share...
...and margin gains in their core smokeable products (Marlboro etc) continued.
And then there is the global brewer SABMiller stake which has started to rise in value again as perception towards the emerging markets has improved - and it could be worth a lot more if ABInBev ever bids for it, as often mooted.
That's worth, at current market prices, a cool US$24bn. Now, any sales inevitably runs into taxation concerns and the like (although as the Vodafone/Verizon discussions have shown, much of this taxation overhang can apparently be legally avoided). Let's take a 20% discount on this value and take the resulting US$19bn off the Altria EV. That leaves us with US$69bn...and an underlying 'stub' value for Altria's tobacco business below x10 EV/ebit FY14e. That still seems light.
Well to be fair Lilly hit this level in early March and has been going sideways since. Even though I did top-slice the holding during late February/early March I have been waiting for the next set of quarterly results to make a call whether to exit the stock in full or not.
Today's results are not the only event to consider though. Additionally there is the big animal health purchase from global pharma sector peer Novartis which was announced on Monday (link here).
Everyone knew the Q1 numbers would be messy (with products like Cymbalta and Evista going off patent etc this was inevitable). As I talked about over the last four or five months, the Eli Lilly story was not about short-term earnings momentum.
As for guidance, it was mildly nibbled down. Nothing dramatic but slightly disappointing.
Pulling it all together the call of -2% pre-market feels about right pushing it closer to that US$58 first support level. A failure at this level and the share falls into that dangerous near the mid US$50s 'no man's land'. As noted back in my original notes (see the link above) I described Eli Lilly at the time of my original purchase as 'so dull it has to be good'. A good extent of that dullness has been priced out now it is getting harder to justify a position - both technically and fundamentally. More insights from the conference call.
Back in December I wrote up the first investor day in many years held by the French listed industrial gases concern Air Liquide (link here - a posting which includes a 100+ year share price chart!) and bought some stock in February in the low Euro90s on the generalised market weakness at the time. Judging by today's numbers, this story continues apace with impressive growth beyond underlying industrial markets.
By contrast, back in February, I described Heineken shares as 'I am not that excited'. They have pushed on a little with the market since then but have run out of steam in my view and there are far more interesting consumer plays I have been accessing in recent months.
Finally Michelin. Shares in the French tyre manufacturer have been strong over the last year but are under pressure today.
Why is this? Slightly cautious comments about Eastern European demand plus some negative trends in price-mix have overhung the stock today. I also note that the implied free cash flow yield is just over 3%. This pays the dividend...but is not in 'cash flow machine' territory.
Tyre stocks have been great investments over the last few years but not today. Have another look below Euro80.
Well...they never got back there and despite a small dip today are around the £26 level (for the London quote):
Unilever - unlike their great peer P&G (whose numbers I wrote up here earlier today) - does not quantify forward guidance. I am not sure if this is ideal...but it is the reality. So the below chart is what market watchers have to work with. The comments are fine...but so they should be at the current x19 prospective p/e rating. Clearly an attraction is the 3.9% dividend yield but, from a total return perspective, I would still prefer to wait for a price nearer the above mentioned £22 level.
After all...we live in a 'tough...muted...and volatile' world after all, don't we?
'with an EV/ebit ratio currently in the x14s it is not too bad versus some peers. Additionally 5-6% shareholder yield (via dividends and buybacks) is pretty attractive versus 10 year Treasuries at a sub 3% yield.
Procter & Gamble is not a cheap share but as an alternative to a bond, you could do worse. It certainly recently has traded like a bond...that US$76 level looks interesting'
Yesterday's guidance continued to show a low single digit earnings progression guidance (and implied sensibly positive pricing comparing 'all-in' sales growth with 'all-in' EPS growth). Not that exciting...but at least positive.
A little bit more positive was the returning value to shareholders which has now edged up to c. US$13bn and a firmer 6% yield
As for risks, FX matters still weigh heavily followed by unrest in the Middle East and Ukraine. A useful 'risk primer' for the world...and suggests that FX and emerging market matters weigh more heavily for the balance of 2014 than core demand levels.
So overall any need to stop waiting for a return to US$76 to add new money to any P&G holding? I don't think so. I like the slightly enhanced yield but that is not enough to induce me to pay up to buy the share right here, right now. Patience.