Tuesday, 4 August 2015

The continuing earnings frenzy: views from Coach, Kellogg's and ADM

Three stocks I have talked about before came out with earnings today.

First Coach which I described here as a value opportunity 'associated with their fashion relaunch, growing Asian exposure and continuing success in male fashion'.  The last year saw a rally...and then a further dump with a dividend yield now 4.4%.  

Seeking Alpha noted that operating margins 'fell to 12.6% from 20.4% in FQ4 as higher SG&A expenses factored in. North American sales fell 20% Y/Y to $556M off weak results at department stores...International sales -5% to $392M. Sales in China were up 5%...Guidance: Coach expects low-single digit revenue growth on a constant currency basis for FY16. A gross margin rate of ~70% is expected. Operating margin rate is seen in the mid-to-high teens' 

Something for everyone there...on the positive side better operating margins anticipated, rising revenue growth and still an expansion in China.  The dividend was also maintained.  Less good were still falling sales both in the US and internationally (led by HK/Macau to the downside although FX played a role here).  Also the -20% North American sales obviously still striking! 

With a current EV of around US$7.5bn the company - excluding restructuring charges which undoubtedly are essential - is trading just under x10 EV/ebit but it is still not easy.  Management took over an hour to explain their vision on the conference call which feels way too long and maybe reflects their almost desperation to turn the company around.  Fashion-wise (and clearly I am no expect) I am seeing net positive reviews for their new launches.  

So at the moment deep value.  I still like the company but I am investing with my eyes open.  

Now Kellogg's.  I previously have described the company as:

'...a valuation of x13s EV/ebit with a 3% yield is no disaster...but I am not excited even if they are a 45% cereals/45% snacks company nowadays.  Maybe a cover below US$60 but given all the above I cannot see the shares running away'. 

They have pushed up a little and are having a reasonable day today.  Any real reason for this?

Looking at the presentation I really don't think so.  Yes, numbers were reiterated but even if there was growth in the emerging markets at an aggregate level they are hardly mega...

...however there was some residual hope around the development of the laggard region North America.  Interestingly it was not in snacks but 'morning foods' (the new name for cereals) with innovation/relaunches of Special K being cited.  

This is fair enough but it still strikes me that Kellogg's is working very hard to stand still.  My view: still one for the experts and I am passing (although I like their cereals).  

Finally ADM (or Archer Daniels Midland).  As I have already noted with their peer Bunge (link here) even if they are seeing positive ROCE-WACC as Bunge was and ADM are: 

So good progress there but some volatility in divisions such as agricultural services and oil seeds.  My view chimes very much with last time I looked at the company:

'For choice with ADM I have put a US$44 flag price on the stock just because this was an historic resistance/support level.  I do note that capital return (dividend plus buyback) is good'.  

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