Paychex - solid near Christmas quarterly results update

We really are right near the end of the corporate results season among larger cap stocks.  Nike reports later but earlier today the outsourcing company Paychex gave their quarterly update. I last discussed the stock back in September (link here) including an extensive review of the stock's opportunity with a conclusion at a c. US$46-47 share price that:

So many thematic (regulation, outsourcing) positives. The question I have is more what you pay.  

I like the ungeared balance sheet (EV c. US$16bn) and if I extrapolate the below-noted profitability I could see prospectively a mid x13s EV/ebit...

...which actually is pretty reasonable especially for a company with no debt (and judging by the conference call no huge willingness to do a lot).  The 3.4% dividend yield is also nicely covered too.  

Overall I am pretty impressed, far more than I thought I would be.  I am looking for an opportunity to get involved.  Sub US$40 feels a double up level.

Since then the share has pushed up a little...

...and as I write the shares are slightly up on the day broadly inline with my observation on Twitter that I was...

Listening to the $PAYX conf call. Solid outsourcing name, just a question of buying it on pullbacks.

After all they did not change the forward guidance:

However it was not a flawless report...

$PAYX blurring later in yr nos due acquisition impacts & at margin trends. Came over touch poorly. Share -2.4%. Fwd <x14 EV/ebit <48 a level

However with a continued effectively debt free balance sheet, a 3%+ dividend yield (and higher inherent cash flow than this) plus a continued share buyback there is still plenty of positives.  The tone of the conference call remained opportunistic.  As noted above below US$48 a share is a level that I can make work.  Patience until then. 

3M: nibbles down FY15e, shares plunge. Why?

The last time I wrote up the US bellweather 3M was back in July when I noted:

I think the issue with 3M is just pure valuation.  Near x15s EV/ebit is a little full given the range of other good industrial-centric conglomerates out there...Something closer to the one year low is a bit more interesting for this nevertheless quality company. 

After today's outlook meeting...just maybe we are getting closer to this point:

Why so?  Well in an environment described as 'positive but soft' the company nibbled down their FY15 guidance...

...even if they hope that FY16e would see either side of a 10% EPS year-on-year progression...

...plus generally organic growth (albeit it low single digit - EMEA being a notable exception no doubt influenced by a still disadvantageous US dollar)...

...and continued hope of growing the dividend (which now is moving towards a 3% yield).

So fair dues for the biggest multi-year daily fall in the stock price?  Well such is the way it happens when - as noted above - a stock is firmly valued.  I have a flag below a share price of US$140.  

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.  

Dollar General: small box discount retailer earnings thoughts

It has been over a year since I last looked at the 'small box discount retailer' Dollar General...

...when I concluded that I was going to take some profits after a good trade (link here). I was rather surprised by the strength of the Dollar General shares in early 2015 but what is interesting is that after a big fall in recent months the shares are now around the level I sold them for:

So what to think now?  Well in the Q3 numbers disclosed today the company noted same-store sales rising 2.5% in Q3 as both traffic and average transaction basket increased.  The 9 month equivalent same store sales growth numbers rose 2.9%.  Operating profitability edged up around 5% year-on-year over both periods.  In terms of outlook akin trends were seen although note the comment that Christmas will see a 'shop closer to events'.  

'The Company's revised outlook for the 2015 fiscal year anticipates net sales to increase by approximately eight percent over the 2014 fiscal year, with same-store sales expected to increase 2.5 to 2.8 percent. It is still very early in the Company's fiscal quarter with a core customer that tends to shop closer to events'

The actual full year guidance was tweaked down slightly on an income tax related issue (which can be looked through). Elsewhere the plan to open over 700 new stores in 2015 followed by 900 in 2016 remains.  

In terms of comments on the conference call the company noted: 

‘returning cash to shareholders remains a priority’ - $1.6bn expected

‘our core consumer is still struggling…no real income growth’

‘phase 1 stores on track to achieve our sales expectations’

‘shrink improvement one of our great opportunities’

‘clear vision on where we want to buy and how we want to get there’

‘we see a real opportunity to save our consumers time and money each day’

I like the return to shareholders (7%+ of market cap) and note the continued store roll-out and what seems to currently be a continued solid same store sales profile.  Chat about the potential of re-modeled stores (open them up, increase cooler doors etc.) offers some further hope re the 2016 guidance but - of course - first we need to get through Christmas first.  

The company is not overleveraged (x1 net debt to ebitda) and cannibalisation has not yet kicked in at first glance.  The consumer backdrop is not easy but at x11 EV/ebit the share is not horribly expensive - as I noted back in mid 2014 the mid US$50s is rude for this share.  Below US$60 I would be comfortable buying this name.  At c. US$65 (with a positive reaction to the numbers today) I may just await a couple of bad days for the share/the general market.

However is this a share that inherently I like?  The answer is 'yes'.

A final trading thought - in the US discount-y retail space maybe you buy the share out of Dollar General and Wal-Mart (last write-up here) with the lower share price.  Currently that would be Wal-Mart...

John Deere: an agri sector behemoth reports

It has not been the easiest last few months for John Deere.  As I noted in my last write-up (link here) a combination of low crop prices and hence variable demand for agricultural machinery hit the company's profitability and pushed the shares down in August.  Whilst little has changed - and the perception towards both commodities and emerging markets has probably worsened since over the last three months - the stock is moving sideways. 

The company's year-on-year Q4 numbers remained shabby at face value...

 ...but underlying themes were not dis-similar than before with good pricing and control of costs and more exogenous factors impacting:

This is anticipated to continue into Deere's fiscal 2016 as the industry outlook remains flat to negative at a sales level across all geographies.  Nevertheless pricing is still anticipated to remain positive and the company was at pains to note that these were industry-wide estimates.  

Nevertheless there are some positives with the company noting on the conference call: 

'demand/supply balance even more compelling than a year ago despite a year of strong production'

inventories - 'much more favourable position than the competition' 

‘long-term fundamentals for the agricultural business in Brazil remain solid’

‘all-time record high for John Deere Financial’

‘leasing is becoming more popular for many of our customers’ 

And then there is valuation.  With a now 3%+ dividend yield and free cash flow of US$2.7bn being all applied to a share buyback (so equivalent to c. 10% of market cap) returns to investors are reasonable.  Cash flow generation will be less in FY16e as per the forecast below but at a historic FY15A x8 market cap:ebit multiple the metrics are not extended.  

Even though there was no mention of the longer-term thematic drivers (ex the quote above) Deere remains in a good place to benefit from such factors.  Trading is still not easy but I still see value - as I do with sector peer Agco (see my most recent write-up of this name here). I remain long both names and pleased to see positive reactions to clearly still mixed numbers reflecting the low sentiment towards the space currently.  

A few thoughts on Thomas Cook and Daily Mail & General Trust

Two of the bigger movers in the large cap UK stock market today are by Thomas Cook and DMGT (or the Daily Mail & General Trust).  So what to think?

I have been a fan - incorrectly - of Thomas Cook for a while and until today at least the share has had a shocking last few months due to some specific but mostly general issues:

Today's update - a return to profitability after tax - and the reduction in debt was rightly celebrated with the shares up 8%+ as I write.  

Looking through the numbers geopolitical factors such as Tunisia were a drag but insufficient to offset cost cutting initiatives even with negative FX and strategic OPEX added into the mix.  

Not every target was reached however.  The sales one is little problem given pricing should be prioritised but web penetration remains a disappointing KPI:

Still with good forward sales/pricing and further profit augmentation anticipated for the next 2-3 years as the turnaround plan continues...

...aligned with the clear possibilities of developing the Chinese angle:

Thoughts? x6s EV/ebit and the reinstatement of a dividend...there is clearly value here.  

As for DMGT, I kind of summarised it on Twitter:

#DailyMail Gp showing that is a changing world. #MailOnline still going great guns (ok I admit i do read it a bit)

some will like this but can get 3.5% yield elsewhere. x11s EV/ebit ok, key managing ongoing transition

My thoughts with the share down at multi-year lows (at 658p as I write the lowest since early 2013) is that I am getting more interested.  Clearly managing the aforementioned transition kind of difficult but not devoid of a range of ok media assets...

With the yield approaching 3%...kind of getting more interested here.  

Foot Looker - some thoughts after today's Q3 numbers

I was asked to take a look at the prospects for the footwear retailer Foot Locker who have a pretty broad range of interests across the performance to lifestyle spectrum.  

Third quarter numbers today looked pretty strong with high single digit comparable-store sales and higher margins... 

...and the share - after a bad recent run inline with a generally poor current retail performance backdrop - bounced up 7-8% as I write to north of US$65 again (postscript: stock more like US$63s now).

So a good reaction...and it is hard not to agree with Jim Cramer here who noted:

"When you carry Nikes(NKE) you win. Pretty simple formula."

Of course it is a little more complex than that. Nevertheless the tone of the conference call was pretty solid.  Notes I made during the call included: 

‘leadership position in lifestyle running’

‘strong sales and performance…our success has been remarkably consistent across multiple geographies’ (note the growth of internet sales for example): 

Footlocker Europe ‘outstanding’ (recall the company is under-penetrated in Europe as noted in the graphic below)

US$360m worth shares bought back this year (getting on for 4% of market cap nicely augmented by a 1.6% dividend yield)

‘very strong balance sheet…and well funded pension plan’ (with over US$800m of net cash you can see what they mean).  

Litigation couple hundred million, got £100m accrual (see here for some background on this issue.  I don't really see this as a big factor.  On the call management appeared confident it is unlikely to be an issue).  

One negative I did note however was that Apparel more patchy.  This accounts for around 20% of sales but management appear confident of the scope for new products.  

In terms of ebit progression historic progression has been pretty good...

...and even though the litigation expense attribution mucked up the numbers a little YTD...

...extrapolation (always a dangerous factor in the investment world of course) would suggest the below targets are do-able:

Retail always has plenty of challenges and predictive difficulties but a market performer/leader currently sitting on (litigation accrual cost included) of around x10 EV/ebit is no disaster - and frankly even half achievement here of the balance of the 2020 target opens up new 52 week highs.  

Today - particularly following the big bounce in the shares - I would chill but unless there is a major macro reason for getting cautious about the consumer space I like the look of Foot Looker at or below US$60 a share.

Company earnings thoughts today: Sainsbury's and Carlsberg

Busy day...but I have had my eyes on a few companies around the world.

Sainsbury's had a funny day as a chart of today's London trading session shows:

Headlines from the first half numbers today would probably highlight the double digit fall in profitability and (the already cited) 20% cut in the dividend:

And then there is the fall in like-for-like sales still...despite clear growth in the company's convenience and online divisions.  

And despite progress too in the banking division, cost cuts and cash flow generation the lease adjusted net debt ratio has become more burdensome.  

So with a reluctant supermarket consumer still (despite some continued good comments about competing with the discounters / much narrower gap etc.)  Still are profits going to go up materially shorter-term?  Caught between competition and price investments, not really.

So what price do you pay?  Around x10 EV/ebit and a 5%+ dividend yield.  That doesn't sound terrible absolute value.  

You just need a bit of confidence/positive sentiment.  For Sainsbury's that sub 250p zone reflects this.  Close to an interesting level after today's fall.  

Turning to Carlsberg. I noted back in August (link here) that:

'If you factor in the new 'organic operating profit' to decline slightly then Carlsberg will end the year generating around a DKK8bn operating profit (with probably over DKK5bn in free cash).  That puts the company's EV/ebit prospective rating around x14 with a free cash flow of around 4.2% (current dividend yield c. 1.7%).  That's not super cheap...but given the low sentiment towards emerging market and related companies currently it is getting there especially given Carlsberg's good brands.  

You know what I am going to conclude?  If you can buy (at least for a trade) Carlsberg shares below DKK500 you should - just as I noted a year ago'

The shares bounced today well above the DKK500 level...in fact briefly todayit touched the DKK600 level.  

Fast FT noted that:

Carlsberg shareholders have cheered the Danish brewer's move to slash 15 per cent of its workforce, pushing the shares up almost 8 per cent despite a heavy third quarter loss.

The company was whacked by a $1.1bn write-down, mainly on assets in Russia, where the economy has contracted, and China, where growth is slowing.

Progress was actually quite reasonable.  Not in volumes...but especially in price-mix and free cash flow generation (which has blasted through my earlier target): 

Even though Eastern Europe/Russia remained a difficult area to operate in:

And that DKK500 buy price level?  Put a prospective x12 EV/ebit rating on the stock and that suggests below a DKK550 level is of interest. 

Disney - content is still king.

Disney numbers after the close yesterday (Thursday) were interesting at a number of levels.  The headline numbers on both a quarter-and-quarter and year-on-year basis both showed progress (‘fifth consecutive year of record results’)...

...and perhaps even more interestingly were some of the divisional splits, especially the 'Media Networks' business given the controversies noted last quarter as I wrote up here especially with regard to ESPN.

The tone in yesterday's presentation was somewhat different however with comments such as:

‘ESPN: the brand is stronger than ever…last year seen the three biggest 

viewer numbers in cable history’

‘ESPN…very strong advertising market for sport’

Other comments of note included a general observation that ‘the demand for content is greater than ever’…but distribution matters more and more which clearly augers strategically positively for the group.  And then for selected divisions: 

Parks and Resorts:

Excited re launch of Shanghai Disney in Spring next year

"Guest spending growth was primarily due to higher average hotel room rates and ticket prices for sailings at Disney Cruise Line"

Capex US$800m higher in fiscal ’16 due to launch of Shanghai Disney

Studio Entertainment:

Star Wars – ‘already see the impact’ despite new film still 6 weeks away!

I also noted that the company described their share buyback undertaken below US$110/share as being at‘very attractive levels’. The company anticipates buying US$6-8 billion back in stock over the next year equivalent to about 3.5% of the market cap (and in addition to the current 1.3% yield). 

Such distribution is a little ahead of the underlying free cash flow generation but with net debt below x1 ebitda there is plenty of room to move:  

So thoughts on valuation.  I noted at the link above that below US$105 (as occurred in late August and late September) equated to value (< x12 prospective EV/ebit) and the progress noted above mechanistically pushes this level to US$107.  So a 'buy' below this level...and I think reasonable now to conclude a hold until at least US$120 and possibly beyond.  So at US$113 currently a hold...but impressive progress from Disney.  On a relatively bad day as noted above I could see myself buying this stock again given the notes and observations above.  Content is still king of course.