Wednesday, 28 October 2015

Today's US earnings wrap: Gilead, Agco, Mondelez, Hershey

Far too many numbers out to easily keep abreast of...but here are a few names which caught my attention.

Gilead is a stock I have written at length about before (link here) and last time established a top of the range US$125 price target.  Biotechnology can be a divisive area and certainly there have been significant bouts of rotation against the space over the last few months.  Nevertheless Gilead shares have remained relatively resilient:

Tuesday's after hours results continued the solid story progress...although unlike in previous quarters the only guidance edging up occurred at the net product sales line: 

No doubt this disappointed some investors but the investment story outlined above remains very much on-track be it for the HCV (below) or the HIV franchise:

Gilead only guided for full-year product revenues of US$30.5bn which would imply Q4 revenues of only US$6.8bn which does not appear realistic given the US$8bn+ of revenues in Q3.  Low-balling?  Quite possibly.  

The c. US$90-125 range still works for me even if the company was pretty coy about wider corporate initiatives (raising of monies via bond issuance etc.)  At the upper end of this range that is still equivalent to only a low teens prospective EV/ebit level.  

Turning to today inevitably I reviewed events at my old friend Agco (last written up here).  I found the tone of the Q3 update slightly better than expected and it resulted in a tweak up in EPS hopes (US$3.20 versus US$3.10!) and a maintenance of the free cash flow expectations (a handy 7% free cash flow yield at the prevailing share price) even if sales and capex were both cut back: 

Yes, conditions remain tough especially in South America but inventory management is apparently solid ('better than the industry average') and pricing is still positive (a trait noted by Deere too).  Clearly still not the easiest conditions but the stock is pushing in the right direction - and with a 1% dividend yield, ongoing share buyback and net debt around x1 ebitda this should continue.  

I am still only looking to review my holding in the stock c. 10% higher than prevailing when the company starts to trade more clearly in the double digit EV/ebit valuation space.  

Finally Mondelez which I described last month as having 'warmed up to' as 2015 progressed.  No surprises to regular readers that their continuing excellent pricing power was an influence here:
The above focus actually took the edge off their revenue/market share performance (with the exception of gum/candy - more of that later) but in a choice between price and volume nine times out of ten I will choose price, so I am not too worried about this. 

Otherwise - fearful of potential activist pressure no doubt - shareholder remuneration (mostly buyback but also including a 1.4% dividend) is currently running nicely over a 5% free cash flow yield and margin enhancement targets for 2016 were reiterated.  Blighted by FX negatives the shares are not classically cheap (EV/ebit >x20s) but that is why as noted last month you get aggressive at the c. US$40 share price mark.  Thematically the company are in the right products (premium/pricing power) with a very international sales base. 

A final company: Hershey.  I wrote up a couple of extensive pieces on the stock earlier in the year (link here) concluding that a sub US$85 was ideal to buy the stock.  We did not get there during the early Autumn (despite sometimes being close) but it appears that currently we may be building into another opportunity: 

So what did they say?  Well essentially earnings are to be at the low end of the +3-5% hopes as:

'U.S. net sales were below expectations due to lower than expected candy, mint and gum (CMG) retail takeaway in the third quarter. This softness also impacted broader mainstream snacks, where consumption trends during the quarter were less than the June year-to-date increase. It appears that CMG and broader snacks marketplace performance in the quarter was pressured by lower consumer trips and a decline of in-store merchandising and programming at some retailers'.

Funny how Mondelez above did better in their gum and candy division...clearly they took share. 

China was also not firing on all cylinders for the company but innovation, new launches and a hugely important seasonal period is just about to get underway and - as with Mondelez - at least Hershey is not trading off on price:

'Price realization, primarily in the U.S., was a 5.8 point benefit. Volume was off 4.3 points due primarily to elasticity related to the previously announced price increase and lower sales in China'.

Around the US$85 level remains an ideal entry level for me.  One to keep a particularly close eye on. 

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