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. 

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.

"Royal Mail: appealing portfolio stodge"

I wrote a piece titled "Royal Mail: appealing portfolio stodge" which was uploaded just now to the ShareProphets website.  You can find a link to the piece (free sign-up) here.

Some Thursday reporters: Adecco, Agrium, Celgene

Having already appraised Randgold Resources (link here) and Apache (link here) time to take a look at a few other companies that reported today (Thursday). 

Adecco - the Swiss listed recruitment company - induced me to comment on Twitter earlier: 

'2015 EBITA margin..strong at c. 5.2%..below target of >5.5%..organic revenue growth is steady but not accelerating'

You can see this deterioration in the chart below: 

I last wrote on Adecco here when I observed that a sub CHF70 share price offered trading opportunities (which last time I took).  And with the share below this level now...

...I am starting to think along similar lines. Around a x10 EV/ebita multiple and a 3%+ yield plus an emerging market opportunity it feels opportunistic to me...

 Talking about opportunities I have been quite vocal about commodity-centric opportunities and even noted that stocks like Mosaic (link here) are starting to outperform after big falls. Another sector peer Agrium reported today...and their shares have also started to recover.

Their presentation document was worthy of a look with this chart of particular note.  Some fundamental support for the potash and related markets?

Finally, Celegene:

Celgene at c$120 level so many times over last year. Ok nos but valuation needs more

The troubles is a x20s EV/ebit valuation always requires more. In the space I still prefer Gilead (link here).  

Paychex - outsourcing and regulation theme beneficiary

I have never looked at Paychex before but on a quiet day for US corporate reporting it caught my attention. Here is how they see themselves:

Paychex, Inc. is a recognized leader in the payroll, human resource, and benefits outsourcing industry, with a steadfast commitment to success and a record of achievement that continues a tradition of delivering excellence.

The company was founded in 1971 by B. Thomas Golisano with just $3,000 and a good idea – to make payroll outsourcing easy and affordable for small businesses. From those early days with just one employee, Paychex now has more than 12,000 employees serving more than half a million small- to medium-sized businesses nationwide.

Outsourcing is a powerful theme and certainly payroll, HR and related are products which pertain to this. Listening to the conference call I got the impression this was a management team who knew what they were doing - and you could not argue with the historic results...

(h/t @warrenofwallstreet)

...and the positive outlook:

I liked the general tone on the conference call too as I live tweeted: 

Impressed. On payroll side said 2-4% price rises sticking, bookings solid.

The comments around higher regulation helping their healthcare associated business also sounded a continuing positive - which is why the HR functions as noted above are growing faster than the more classic pay functions.  

Of course the more classic payroll operations are still the majority of operations on a revenue basis: 

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. 

Tyco: best thoughts from company management

The first time I wrote about Tyco was on the last day of July this year (link here) where I concluded:

'Cash flow is a little muted although they can cover the current 2.3% dividend yield and talk about moving back to 100% cash conversion by the end of the year again.  They also noted that they would be contributing just over US$300m+ to an asbestos fund - a longer-term liability / risk investors should be aware of (although I tend to find that the stock market is generally overly fearful of such exposures).  Additionally there is still the IRS tax settlement issue on inter-company debt (link here).  They have the balance sheet however to absorb such issues. 

With the shares kicking around a 52 week low the shares feel underloved.  Yes there are some different challenges (see asbestos above) to other low double digit EV/ebit industrial concerns (see my write-up here) but my perception is that the company is moving towards a perception inflexion point where potentially the profile of the company may change to (as management desire) a x1.5 GDP growth profile. I like the cost cutting and what appears an ok backlog.  For me one to consider at prevailing'

Since this write-up the shares are sideway-to-down a little: 

Tyco management spoke at a conference last Thursday (link here) and inevitably given the industrial services nature of the business thoughts on the current backdrop were suitably mixed.  For example talking about the North American business: 

'...the overall performance in North America has shown relatively flat, but there has been significant progress that has been made...we have actually began to see the benefit of the work we have done in the commercial security combined with the fire protection and now with the expansion within the – or the continued expansion within the non-resi space'

However...'there is a little bit of frustration relative to our ability to be able to convert the orders to revenue'.  

Looking more widely to the world ex-US operations and specifically Europe... 

'...in spite of the lack of growth in that market, we’ve been able to run those businesses extremely well continuing to improve fundamentals there getting margin raise to low mid teens...this year is played out maybe a little bit softer than what we originally thought, and some of that has been driven by the mix of our oil and gas and heavy industrial base in the UK'

...and then to the more 'rest of the world' portfolio: 

'I don’t see that at least in the near-term getting any better and that will create some headwinds for us in the early part of 2016'

However there are some remaining ongoing structural positives:

'...over the last 18 months with the focus on growth, we are in the middle of transforming company to outside in to getting much more intimate with our customer base, especially within the key verticals that we support'

Pulling all this together I still believe there are some value angles here but there feels no need to hugely rush (wait for another quarterly disclosure etc.) especially when I noted Timken earlier (link here) which is shorter cycle but also currently appears to have a stronger cash flow generation / dividend payment aspect.  

Big levels in logistics firms: FedEx / UPS

I was looking back through my previous reviews of FedEx numbers here on www.financialorbit.com and I noted that the last line of my December 2014 report titled 'FedEx - still waiting patiently for the 'right' share price level' pretty much summed it up well:

I guess I am waiting for a sub US$150 print

Well since then I have patiently waited and in the last few weeks...here we are.  

Today's Q1 update however was not flawless unfortunately as my notes from the conference call attest: 

• FedEx Co. updates FY16 guidance to $10.40-10.90 EPS.
• FY16 guide lowered to $10.40-$10.90 (vs $10.82 est) on weaker LTL industry demand, higher self-insurance reserves & op costs at FDX Ground
• "lower-than-anticipated volume at FedEx Freight."
• Market share – competitive environment on ground
• ‘essentially pleased…shift to e-commerce…but industrial forecasts…not a great signal for the commercial side of Ground.  Overall inline with our expectations’
• On margins – ‘business is changing radically’.  Think best positioned on e-commerce.  Think lots of one-time events but also higher expenses driven by network expansion etc.
• ‘pretty pleased with where we are and where we are heading’
• Said issues in Europe be solved with TNT Europe
• At/near peak capex as build out Freight division, cash flow improves markedly next year

With an EV of around US$46bn this would put the shares (at the lowered guidance) on a forward multiple of around x10 EV/ebit...which is no headline disaster.  Taking the comments at face value suggests to me that the 'miss' was half organic and half one-off - which is not great but no absolute disaster.  

I am not particularly enamoured by the TNT Europe deal as noted a few months ago (link here) but I was impressed by the value of the FedEx brand using the Brand Z data (link here)...although the proportion of its market cap covered back at that moment in time was lower than the proportion covered at FedEx's great peer UPS as you can see here. 

UPS is also at a big level, namely the law of round numbers level of US$100:

After the last set of UPS numbers in July I observed that: 

'First UPS the global logistical company which once again bounced off the c. US$95 level.  The last time I properly wrote the stock up (link here) I concluded that 'Global logistics stocks move around on hopes and fears for the global economy but there are some strong themes here.  In short, any material plunge below US$100 is an opportunity.  Worth keeping an eye on'. Following a higher range of the guidance range set of numbers this still feels correct'

That still feels the correct view.  I will be watching for a 'material plunge' (note the US$95 level above) below US$100 to get involved in the stock.  In the time there is a 3% dividend to play with. 

Bottom line both stocks are at interesting levels...which may turn into great levels.  Despite the patchy global trade backdrop an area to be keeping abreast of: an ever more complex, integrated, e-commerce world puts a premium on logistics systems.  

"FedEx-TNT Express: a clever deal or empire building?"

My latest post as a Yahoo Finance Contributor titled "FedEx-TNT Express: a clever deal or empire building?" can be found here.

Serco - outsourcing progress

Results from the UK-listed outsourcing company Serco were suitably mixed.  The reiteration of already lowered numbers was good but no-one likes to see such a sharp fall in profitability/EPS (and at the ‘net’ line an actual loss). 

 

The profit downdraft was not solely focused in the troubled UK businesses however (although it did represent the biggest proportion of suppressed profitability) with falling margins due to contract changes and increased bid costs afflicting the company in the Americas, Asian/Middle East operations as well as its Global Services division. 

Going forward there seems to me three key questions for Serco to answer.  First, is the balance sheet strong enough?  Second, is the shorter-term profitability declines over?  And third, what is the vision of the CEO Rupert Soames after his introductory tour around all of the company’s operations?

First, the balance sheet.  The headline is all about the reduction in net debt and the company trading well within its covenant limits which is great…

…I do note that the reduction in net debt was largely due to the placing net proceeds although at least inherently the dividend was covered:

In terms of shorter-term numbers the bias towards H2 profitability remains (phasing of two-thirds) although ‘revenue pressures are greater in H2’.  Cost savings are ongoing which is good. 

Meanwhile looking ahead (and pulling together the balance sheet and shorter-term trading comments) debt is anticipated to edge up, the covenant limit gets a little closer and the view for 2015 is coming ‘in due course’. 

 

I do also note for 2015 that a reasonable chunk of the order book is still reliant on rebidding/contract extension successes and new business wins…

 

So what does Rupert Soames make of it all?  Well his ‘early observations’ are akin to what I would have expected – plenty for bulls and bears alike here. 

So I guess Serco remains in deep turnaround mode.  Clearly there are risks but – as Rupert Soames puts it – ‘strong positions and deep capability in some large and growing markets’.  Absolutely…we know with fiscal austerity that the latter is true.

So some valuation thoughts.  £170m of full year underlying operating profitability is guided for this year...but the question is can Serco regain some element of previous history when (in the four years prior) the company generated £250m+ of operating profit?  Clearly the upcoming Strategy Review conclusions are going to be insightful (and for the share price influential) but to me the current EV of around £2.5bn indicates some element of hope that this will occur as also expressed by the flat-lining of the share over the last three months. There will be bumps along the road but Serco feels to me still an interesting value investment.  

A few more European earnings insights (Adidas, Amec, RSA Insurance)

A lot of numbers out today in Europe...here is a wrap-up of a few more numbers.

First...Adidas (or should that be 'adidas'?!)  I wrote at length on the stock last week post the profits pull-back (link here) and hoped that the more detailed Q2 statement would tell me more...unfortunately not particularly.  The three year chart below tells me this is one to keep an eye on.  I want it to come off the front of the business pages, slide down towards Euro50 and on a bad day (as I noted at the above link) an opportunity led by the underlying value of the company's brands may prevail...

Turning to a couple of UK listed companies, I have talked before about waiting for a 1000p share price in the industrial services company Amec and watching the share slide over recent weeks we are getting closer to that level.

So what to make of Amec's numbers today?  Well beyond observations of lumpy conditions in the resources markets that they service to me the key is where the company is going post the completion of their big Foster-Wheeler deal.  To this end the pro-forma guidance is kind of interesting.  £521m of pro-forma ebit implies a forward EV/ebit ratio in the high x8s.  A round number buy level of 1000p still feels about right. 

Finally the turnaround play that is RSA Insurance where management change - as nicely summarised by this graphic - is the big call:

 There is lots to do at RSA and Mr Hester and team have been busy in initially undertaking a money raising and, more recently, selling some non-core businesses.  There is also generally good underlying pricing power:

Nevertheless the outlook statement reflects the risks still out there:

This latter point is important.  Using the 30 June pro-forma (post sales) TNAV I think the share price today is implying a 14.7% return on tangible equity as the share is trading at c. x1.47 tangible book.  So at face value this implies a pretty flawless execution of the medium-term cost cutting / product focusing plan...except further disposals (as shown in today's quarterly report) can be value-adding to the tangible asset base.  That's what I mean it remains a management story: back them to add value and to re-start the dividend at the time of the full-year results (as indicated today) and a story can be made.  The share is also approaching the money raising late Q1 low too...feels like the time (especially in any generalised market weakness) to consider a higher risk add/buy.

Further great theme insights from Adecco on the world economy

One of the most surprisingly popular posts of the last year was this one titled 'Adecco - providing insights into employment macroeconomics'.  Today's Q2 presentation deck from the Swiss-listed recruitment company Adecco is also full of fascinating insights.

But before we get to them...a couple of words on Adecco's shares themselves.  Back in November at the link above I described the shares as 'a bit "jam tomorrow" to me in terms of valuation' since when they went up a bit...and are now lower:

This would still be my broad view of the share but with a 3% yield and relatively modest leverage it is not a disaster.  The real interest for me however rests with Adecco's insights into global trends.  Here's a few of my favourite charts:

If the recruitment industry is an insight into the health of the world then...it is all to play for.  It is clear to me that it is a stock picking world, theme specific world...

Another insight into the reality of the labour market: the rise in importance of temporary workers... 

Finally, are you a non-believer in the emerging market story over time?  At least in recruitment it is where the growth has been...that's why the rise and rise of the emerging market consumer remains clearly one of the biggest global themes out there:

You may not want to buy into Adecco's shares today...but some of the Adecco themes are eminently influential and investable in today's financial markets...