I wrote a piece titled...

"Cineworld's big American bet"

...which was uploaded just now to the ShareProphets website.  A link to the piece (free sign-up) is here.

I wrote a piece titled...

"Greene King - beer, fear and not dear"

...which was uploaded just now to the ShareProphets website.  A link to the piece (free sign-up) is here.

"Imperial Brands - I don't use the products but hello cash machine"

I wrote a piece titled...

"Imperial Brands - I don't use the 

products but hello cash machine"

...which was uploaded just now to the ShareProphets website.  A link to the piece (free sign-up) is here.

I wrote a piece titled...

"Is Whitbread roasted or worth a punt?"

...which was uploaded just now to the ShareProphets website.  A link to the piece (free sign-up) is here. 

I wrote a piece titled...

"Merlin Entertainment - losing the magic?"

...which was uploaded just now to the ShareProphets website.  A link to the piece (free sign-up) is here. 

I wrote a piece titled...

"Forget uncertainty, we insist you eat more pizza says Domino's, but buy the shares?"

...which was uploaded just now to the ShareProphets website.  A link to the piece (free sign-up) is here. 

I wrote a piece titled...

"Imperial Brands - time to light up..."

...which was uploaded just now to the ShareProphets website.  A link to the piece (free sign-up) is here. 

I wrote a piece titled...

"Who knocked over my pint? Greene King has a late summer shocker"

...which was uploaded just now to the ShareProphets website.  A link to the piece (free sign-up) is here.

"Dunelm - I want a 5% yield, not a 5 year share price low"

I wrote a piece titled...

"Dunelm - I want a 5% yield, 

not a 5 year share price low"

...which was uploaded just now to the ShareProphets website.  A link to the piece (free sign-up) is here.

"Dixons Carphone - anyone fancy a new phone?"

I wrote a piece titled...

"Dixons Carphone - anyone 

fancy a new phone?"

...which was uploaded just now to the ShareProphets website.  A link to the piece (free sign-up) is here.

I wrote a piece titled...

"Next remains cautious but the shares romp...and remain on sale"

...which was uploaded just now to the ShareProphets website.  A link to the piece (free sign-up) is here.

"The UK consumer is not in a complete stupor says Whitbread"

I wrote a piece titled "The UK consumer is not in a complete stupor says Whitbread" which was uploaded just now to the ShareProphets website.  A link to the piece (free sign-up) is here.

"It is not all about the referendum today: DS Smith’s mega numbers"

I wrote a piece titled "It is not all about the referendum today: DS Smith’s mega numbers" which was uploaded just now to the ShareProphets website.  A link to the piece (free sign-up) is here.

"Kingfisher – continued Gallic shrug after capital markets day yawn"

I wrote a piece titled "Kingfisher – continued Gallic shrug after capital markets day yawn" which was uploaded just now to the ShareProphets website.  You can find a link to the piece (free sign-up) here.

Impressive numbers from Carnival

The Carnival numbers were strong enough for the cruise ship operator to proudly claim on its conference call that 'we were able to beat the higher end of our full year guidance'.  I last looked at the company three months ago (link here) and noted back then that:

'The bulls would hold out hopes for US$3bn worth of operating profitability and therefore put this on around x16 EV/ebit which for a thematically positive company could perhaps be justifiable.  I think profitability is ultimately going there...but not immediately and hence why I still prefer more the mid US$40s level.  Meanwhile I do note that the free cash flow generation is now running around the 4% level telling you that the double up level is about US$40/share (or around a 5% yield)...So whilst the share price today suggests rough water actually the real tone of the company is all about the smooth water ahead.  Buy on any weakness to the level suggested above'

Well the company really delivered with a combination of better revenue yields and lower fuel costs.

As noted above however it is all about the future - or, at least, where the company is going.  Before we get to the EPS forecast for FY16 let's have a look at some of the building blocks.  

First I liked the observation that: 

'At this time, cumulative advance bookings for the first three quarters of 2016 are well ahead of the prior year at slightly higher constant currency prices'

That sounds like pricing power to me (and they also noted that they are 'really well protected' on oil prices up to c. US$80/boe).  On the conference call the company talked about a 3.5% capacity increase with the majority of this increase actually coming in the Asian market (as a new boat launched capacity will go up 60% year-on-year) where they still see structural growth opportunities (but did reiterate that currently it is only c. 5% of their business).  They also noted that their macro view on European improving a little was factored into forward guidance.

So perhaps no surprise then that the expected EPS growth is estimated at (mid-point of guidance) 20%:

'FY 2016 adjusted earnings per share (diluted) are expected to be in the range of $3.10 to $3.40, compared to $2.70 per share in FY2015'

Even better potentially for shareholders was the observation that they are going to be more aggressive in returning cash to shareholders with the observation that: 

'we expect to continue to return excess cash to shareholders as demonstrated by our recent 20 percent increase in quarterly dividends and more than $400 million in share repurchases'

I observed at the link above that the company was generating around about a 5% free cash flow yield and given the current c. 2.3% yield and with ND:ebitda ratios falling below x2 times flexibility clearly remains.  Funnily enough looking at that mooted US$3bn of operating profitability, the mid-point of guidance gets to around this number.  

So that makes today's forward EV/ebit multiple on the shares in the x15s EV/ebit.  Combined with the aforementioned c. 5% free cash flow yield that is no disaster.  Around a x14 EV/ebit multiple would suggest value to me and this is consistent with around a US$47.50 share price.  I think that is the price to buy with a double up / augmentation c. 10% below at around US$42.50. 

Earnings updates: Accenture and General Mills

It may be just over a week until Christmas...but those corporate results keep on rolling.  Today in the US larger cap zone it is the turn of Accenture and General Mills.

I have not actually formally reviewed the consulting and business process related company Accenture before on Financial Orbit.  This is probably because I am not that convinced by such a business influenced by my occasional interactions with such organisations where I have a constant prevailing feeling that too much is 'taken off the shelf'.

Anyway Accenture does appear in relative rude health with today's quarterly update making all the right noises in terms of expanding margins, raising revenue outlook and confirming the outlook for EPS.

On the conference call there was some talk about business process outsourcing being a particular strength along with the breadth (and hence cross-selling potential) of their offering.  I always want to look at their sector-level (i.e. their end clients) insights.  On this point communications, media, technology and financials were particular positive standouts...whilst resources (no surprises), health and public services were less compelling.  

Still - and despite slightly greater FX losses - Accenture feel comfortable enough to edge up revenue hopes.  But what I am struck by more are the operating margin and free cash flow comments:

These two statistics allow me to at least put Accenture into a valuation corridor.  A just sub x12 EV/ebit and a c. 5% free cash flow yield hardly sounds a disaster for a global leader in their line of business.  With a strong balance sheet (net cash) even I admit - given my sector thematic scepticism - a slide south of that law-of-round-numbers US$100 level is worthy of note.

Now onto General Mills who I have reviewed before.  Back in July I noted that 'around US$50 is the first time I will be looking at General Mills' stock as a potential long - and above US$60 as a potential short' 

And how has the stock traded since then?  Well pretty sideways in the middle of that range:

So what about the last quarter?  No surprises there has been a FX hit but the (negative) volume and (positive) price-mix is strikingly dull...

...and that was driven by the company's US retail segment which remains volume-based dull/poor: 

The contrast with the international division is marked.  Now - of course - there has been FX hits for this division but this is on an underlying basis impressive.

However the international division is not even a quarter of the size of profit generation compared to the US retail business.  

What this means is that the focus on cost savings remains absolute.  Clearly the capturing of such opportunities would potentially be very nicely accretive.  

But the reality is that corporate momentum remains mixed (and blurred of course by the divestiture of the Green Giant brand).  

 Net net it feels to me that retaining the aforementioned US$50-60 range - at a low teens EV/ebit multiple - remains the sensible range for investors to consider buying/shorting at.  As I noted in July the shares do have good shareholder remuneration capability but for my more balanced investor profile I want to see a c. US$50 share price before I get interested.

Two very differences but the same conclusion: specific levels matter.

Yum! Brands - investor day thoughts

I last wrote about Yum! Brands in October (link here) with the observation that:

'Buying Yum! Brands today in the mid US$60s with a target of US$80+ on a China turnaround/positive potential structuring of the business feels the right conclusion to me. Fortunately or unfortunately fast food and related remains a growth area with good cashflows attached to it'

Since then the company has pushed up a little although it remains 10%+ below my hoped-for US$80+ share price level...

...but usefully yesterday they held their annual investor event to discuss how their business is currently progressing including the splitting off of their China division.  Following a number of chart-heavy presentations what were the highlights?

Well first they reconfirmed their previous trading guidance...

...but talked also about the scope for a massive return of capital to investors as detailed below. (And just to put this into context, US$6.2bn is equal to 18% of the company's EV).  

 

So how can this come about...or even be financed?  At the heart of this is the split of the company by the end of 2016 into two: Yum! China and 'Yum! New': 

However these are going to be two very distinct models: a 15% EPS growth target company and a 15% shareholder returns target company...

...and two very different sources of return:

Of course you should expect differentiation.  After all Yum! China is about building on the company's already super strong position for its KFC and Pizza Hut brands...

...and taking advantage of the inherently low restaurant penetration in China:

Of course ironically the 15% growth profile has not been easy to achieve in the last couple of years due to various food hygiene and related scandals - and hence why the share is well off its highs as noted above:

The better news however is the trading reiteration as noted above plus a continued bounce/improvement in 'consumer trust' levels: 

A credible medium-term 15% EPS grower?  Well there is clear potential.  Before we move onto valuation however let's consider the 'returns business' which the company has dubbed "New Yum!".  

As noted above this evolves into much more of a franchise fee heavy business split as shown indicatively below: 

 

So no growth opportunities then?  Actually not at all...

But the key undoubtedly remains the stability/level of cash flow generation (already estimated to be an annualised US$1bn)...hence why the company has chosen to materially increase the level of net debt held by the business:

Again that made huge sense to me...despite the initial conclusion from one rating agency to push the corporate rating of the stock to 'junk':

The downgrade primarily reflects our expectation of the company’s meaningfully higher leverage as it executes on its newly communicated financial policy with a leverage ratio of about 5x, which results in our assessment of its financial risk profile as “highly leveraged”. We continue to view the company’s business risk profile as “strong”.

So what about valuation?  So looking at the current metrics I would put the China business - already self-financing - on a growth rating of x16 EV/ebit.  Given that ebit figure is impacted by the recent difficult trading I am giving the unit an indicative value of around US$11bn (x16 FY16e ebit of US$0.7bn) as the valuation will suitably compress over the next year or two.  

As for "New Yum!" I think you value it off cash flows.  US$1bn today at an indicative 5% free cash flow yield implies a US$20bn valuation but given there is also some growth here I am tempted to increase this to a base cashflow of US$1.2bn or a value of US$24bn.  Of course - additionally - there is some financial engineering going on here and despite the rating agency comments above I think the accretion is pretty material given the aforementioned 18% of current EV that the buyback equates to.  So I have inflated my final statistical value for the "New Yum!" by half this amount (for prudence) so 9% addition to US$24bn gives c. US$26bn.  

So add together US$26bn and US$11bn for Yum! China gives a value of US$37bn on a reasonable basis today - and frankly this is not aggressively discounting the future either.  Apply that today's share price and you get an equivalent level of US$80 a share.  

On that basis the stock remains a core buy AND has significant untapped potential.  

Whitbread: trading update thoughts

Back in October discussing the forward prospects for the UK listed hotels-to-coffee company Whitbread I noted:

'That would put prospective profitability nearer £700m and with an EV (non lease adjusted) of over £9bn there is a little bit of potential upside on a (say) x14 EV/ebit multiple.  

Of course this is on something like a perfect execution and of course the company has to deal with various challenges including the UK Living Wage (inducing the first coffee price rise for a few years at Costa). 

In short, today the opportunity for Whitbread investment initially lays sub £45 with a double up at £40 in my view.  I have noted down the levels'

Today's update at face value was 'inline' with the company noting that they were: 

On track to deliver full year results in line with market expectations

Sales update (% change vs. prior year)

	Sales 13 wks to 26 Nov 2015		Sales for the 39 weeks to 26 November 2015
	Like for like sales	Total sales	Like for like sales	Total sales
Premier Inn	4.7%	10.8%	4.9%	11.9%
Restaurants	1.7%	3.0%	0.6%	2.0%
Hotels and Restaurants	3.8%	8.5%	3.5%	8.8%
Costa	2.5%	13.8%	3.7%	15.3%
Total	3.5%	10.4%	3.6%	11.1%

Thoughts?  Well the conference call was quite illuminating as to current trading:

‘November has not seen the normal Christmas build’

‘structural tailwind behind our two main businesses has not changed’

‘had a soft August and it bounced back in September’

Blaming the weather: ‘it just takes two or three people out of hundred not to buy a warm jumper…or a hot cup of coffee’

And other thoughts on their two key assets?  Here are a few more notes I made from the conference call: 

Premier Inns -

‘maturity rate of new rooms is very rapid’

89% occupancy in London, 84% UK ex London

Noted on pricing aware.  YTD revpar up 4.2% (market 4.5%), Nov 1.5% (= to market)

Observation that YTD London revpar up 2.1%, why?  Opening a lot of space so balancing new space/value for money etc.

Now at a 10% premium to sector vs recent 20%?  Name-checked Travelodge a lot, their prices up 10-15% rather than increasing space.  ‘Gives us opportunities…sustainability of rates due to the quality of offering we have on the market’

Costa –

Re Costa – ‘don’t extrapolate the 4-5% lfls we have been generating over the last few years as your coffee shops become full’

Noted that Starbucks/Neros hiked prices recently

‘gives us some optionality’ as even cheaper not

‘not in any position to make any announcement about that’

Opening 200 stores not c. 20

Due to slightly fewer China stores (want to get ‘quality sites’) and slightly fewer stores in Esso outlets

Trialed higher prices?  ‘You don’t really test it…you either launch it or you don’t’.

So any update on 'today the opportunity for Whitbread investment initially lays sub £45 with a double up at £40 in my view.  I have noted down the levels' '?  My instinct is not really...clearly there are some transitory issues but ultimately the company is moving in the right direction.  Still buy (more) of any weakness at c. £40. 

Electrolux - a failing GE deal but don't ignore the shares

A little under five months ago writing about the Swedish capital goods company Electrolux I noted:

'I like some of the trends here (pricing positive, happy to keep pricing up at cost volume) but buying here clear hope on US deal not only occurring but also adding value for them.  So a ‘trust management’ call especially with the shares trading at a mid-teens EV/ebit multiple.  

I would prefer wait for the full set of Q2 numbers in a few weeks time and maybe the c. SEK225 level where support where the shares have exhibited some historic resistance/support' 

(my additional emphasis added)

The above became hugely relevant today as the Electrolux/GE deal broke apart as noted on Fast FT here:

Electrolux shares have been spun around in a washing machine this morning after the Swedish appliance maker had its $3.3bn deal for General Electric's appliances business scuppered by the US Department of Justice.

The shares have fallen 14.5 per cent to SKr204.6 this morning. Before today, they had climbed 50 per cent over the last two years.

Electrolux will now have to pay GE a termination fee of $175m.

As I write the shares are off the 14.5% reduction lows...but are still not looking that healthy on a last 24 hour perspective down at a new 52 week low:

Now we all know the rationale for the deal: beefing up the US exposure in the light of general competitive challenges but - in the absence of such a transaction - we go back to the Electrolux business today (or at least as shown by the recent Q3 numbers).  SEK6bn+  of ebit profitability...

...and generally positive trends underpining the business (price-mix, cost savings etc.)...

...implies there may be a price to get interested.  At current multiples a low teens EV/ebit valuation is getting more interesting, especially when combined with a 2.7% dividend yield and generally good cash flow generation (5-6% free cash flow yield). 

The shares have tracked back to where they were before the GE deal was announced which means...they look interesting to me here.  

A useful insight as I pull together my top stocks for 2016 list over the next couple of weeks. 

Big Lots - 'beginning of the beginnings' (apparently)

Yesterday I reviewed prospects at Dollar General (and indirectly Wal-Mart) following earnings.  Today I review opportunities post earnings at a name I have never published on before: Big Lots.

So - first - who are Big Lots?

Well the company describes themselves as a company which: 

'...offers brand-name closeouts and bargains that create a unique, exciting shopping experience for millions of customers. We offer a broad assortment of merchandise, including consumables, seasonal products, furniture, housewares, toys and gifts...Big Lots the nation's largest broadline closeout retailer with annual revenues approaching $5 billion. Big Lots operates more than 1,400 retail stores serving 48 states. Brand-name products from 3,000 manufacturers are supplied to stores through five regional distribution centers with more than 9 million square feet of distribution capacity'.

Yes we are back in the more bargain/austerity friendly part of the retail pool...

Before we dive into the numbers a touch of history as shown by the five year chart, note the big share price spikes down around the end of the year over the last few years reflecting poor Q4/Christmas trading.  It has almost become a trend...

...and hence investors are sceptical and I read about a big shorting base etc.

Despite apparently describing the numbers as 'solidly inline' and also citing a strong 'harvest and Halloween' sales period the Q3 numbers released earlier showed a small loss:

$0.01 per share...which compares to our guidance in the range of a loss of $0.04 per share to income of $0.01 per diluted share. This result compares to a loss from continuing operations of $0.06 per share for the third quarter of fiscal 2014. 

Thoughts on this?  Well the transitional nature of the back end of the Q3 period can be difficult for such a retailer...but clearly this is not the best.  However at least comparable sales were up:

'comparable-store sales gained 2.6% in Q3.The ownable and winnable merchandise categories showed "notable" strength in the quarter.The company's inventory level per store was level with last year's mark.Guidance: The company expects FY15 EPS of $2.95 to $3.00 vs. $2.96 consensus'

The latter point is an important one as there was a slight tightening of the bottom end of FY15 expectations.  Looking ahead the company noted that "our inventory levels were lean and on forecast to end Q3 and we are well-positioned by merchandise category for the all-important Q4 selling season...'encouraged by some of the sell-through on some of our higher margin categories"

This is all about the future.  There was a good discussion in the conference call about what was needed to get to a 6% margin (a 3-4% comparable sales hike) and how they were not there yet.

'embrace our online capabilities in the first half of 2016'.  Oh yes...they are currently running without an up-to-speed online presence (and 3 years until this initiative goes beyond break-even!!).  That reminds me of Bed, Bath & Beyond!  How did they do again this year?

Ah, yes.  Hmm. 

So some good comments and better metrics but the most insightful aspect was this comment from the CEO (since May 2013!) that 'i believe we are at the beginning of the beginnings...' . The stock is not headline expensive (indicative single digit EV/ebit around x9s) BUT you are taking such a pure punt on the Christmas trading period.  

For me I am going to wait.  When a stock is at 'the beginning of the beginnings' you can afford to miss the first x% as that uplift trend - if it occurs - is going to potentially be multi-year. If it happens...of course.