Spring Cleaning in the Portfolio, Ichor Gets A False Hit from Lam Research and more…
I spent quite a bit of time this weekend weeding through our portfolio. Without the distraction of an open stock market, I revisited all of our names, updated estimates, earnings trends, and valuations.
You have likely seen this morning that I’ve suggested selling Big Five Sporting Goods (NSDQ: BGFV), Mueller Water (NYSE: MWA) and Vulcan Materials (NYSE: VMC). I don’t expect an imminent decline in any of these names but have lost confidence that there is a near-term catalyst to get them moving higher.
The name Profit Catalyst Alert, of course, is a hint that I am eager to find stocks that will hopefully rise sooner than later. The timing is never perfect but I am always looking for stocks where a change in a company’s industry or a company-specific event will shift the stock into overdrive.
Much of my analysis focused on operating income growth. Right now there are a huge number of stocks showing huge earning per share jumps but a large portion of that is due to lower taxes. While I appreciate lower tax payments do indeed mathematically increase earnings per share, I don’t see this as a sustainable earnings grower so I needed to adjust my models for those numbers.
It’s unusual that you see three names sold from the portfolio at one time but call it spring cleaning. I’ve got many new ideas taking root and will be posting those soon.
On tap for earnings this week we have three companies reporting Thursday, April 26, all before the open: PRA Health Sciences (NSDQ: PRAH), Old Dominion Freight (NSDQ: ODFL) and SAIA Inc. (NSDQ: SAIA).
Around the Portfolio:
ANI Pharmaceuticals (NSDQ: ANIP) received FDA for Morphine Sulfate Oral Solution, indicated for the management of acute and chronic pain severe when alternative treatments are inadequate.
Current annual U.S. revenue for this product is approximately $17 million, according to Iqvia/IMS Health. The company expects to begin shipping product to its customers in the near future.
Big Lots (NYSE: BIG) stock was downgraded to Outperform from Strong Buy at Raymond James. Analyst Dan Wewer noted increased price competition from Walmart. My bear thesis on Big Lots, Walmart and Dollar General (NYSE: DG) revolves around these three discounters losing profits in the fight for a stretched customer.
In a separate note, Big Lots CEO David Campisi, who has been on medical leave since December, is retiring immediately. He was a good steward of the company’s turnaround but I believe investors had already factored in a possible departure last winter.
ICHOR Corporation (NSDQ: ICHR) announced the acquisition of a South Korean engineering company, which will be financed by cash on hand. The company, IAN Engineering, is projected to add approximately $20 million to revenue on an annual basis, starting in the second half of 2018, and is expected to be accretive to our non-GAAP adjusted diluted earnings per share for fiscal 2018.
However, investors chose to ignore this news and sold the stock off hard based on worries that Ichor’s largest customers, Lam Research (NSDQ: LRCX) and Applied Materials (NSDQ: AMAT) have hit a peak in the chip building cycle.
Lam Research reported a fabulous quarter last week but the stock dropped 10%. The only small crack in Lam’s numbers was guidance that shipments for the June quarter will be flat with the March quarter. This fear seems a bit out of balance to me as the company has a habit of beating revenue and earnings estimates each quarter. Remarks regarding end demand for 3D chips and the equipment required to manufacture them were quite bullish.
Ichor won’t report earnings until May 8th but the company has been quite successful at growing revenue and earnings faster than its customers.
Steven Madden (NSDQ: SHOO) beat revenue and earnings estimates last week. Earnings rose by $0.03. Revenue rose 6% and beat estimates by roughly $10 million. Guidance for the year is slightly lower than estimates. I am reviewing the company’s filings before making a clear call on the stock.
Werner Enterprises (NSDQ: WERN) reported a solid quarter last week but the stock didn’t cooperate. The revenue and earnings beat was in line with prior quarters and management was upbeat despite an ongoing shortage of truck drivers. The company did note its driver turnover is the lowest it has been in 20 years, a remarkable feat.
I still like the stock and the group but expect it might be bumpy as the market jolts up and down.
Stock Talk
Ajax
Hi Linda,
At a quick glance, ODFL had very good news, so I am trying to understand the rather large drop today on that news. I’m sure your review of their earnings is much more than a glance. Any insights?
Andrew
Ajax
If you’re planning on putting your thoughts in an official update, that’ll do. Don’t feel obligated to respond here!
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Linda McDonough
Hi Ajax,
Always feel free to ask about a stock movement. It’s been a busy day so I’m just getting my full analysis together tonight. Here are my thoughts:
Old Dominion reported what I think is a good quarter. It beat revenue and earnings estimates and guided that each month in the quarter was stronger than the prior one. Expenses were under control and the company is quite positive on its driver availability (see quote below).
The stock, and almost every other name in the group, got whacked on Thursday. I believe the truckers got hit by some bearish comments from the Knight Swift (NYSE: KNX) CEO on that company’s conference call.
He lamented that fast-growing orders for new trucks are negative for the industry, partly due to the tightness in the driver labor force and partly because the new supply will weigh on used truck prices.
Mind you, Knight is a different business than Old Dominion, SAIA and Werner. These three names I’ve chosen focus primarily on less-than-truckload (LTL) shipping, which is a part of the industry with more nimble rates and a slightly more desirable labor situation.
Knight is a full truckload shipper, which means longer routes for a truck filled with product from one or two customers. Tougher to find drivers for those routes and less flexibility with pricing. In addition, Knight and Swift are also digesting their gigantic merger from last fall, so are less in tune with the trends for the smaller shippers.
Old Dominion is a top-notch player in the LTL space and has been proactive in hiring drivers. See CFO Adam N. Satterfield’s commentary on driver availability, which has been an issue for the industry:
“So I think we’ve got our workforce in good shape right now with where we are, and our headcount was a little bit higher than our shipment growth, which those 2 numbers are more closely aligned. It’s the shipments, not necessarily the tonnage, that we’re basing things on, but the hiring decision comes down to the managers in the local markets, they know what growth they think they will be able to achieve, and so we monitor labor to revenue trends very closely, but we want to make sure that we’ve got people in place to be able to make pickups and deliveries to keep freight moving. So I think that we anticipated seeing the numbers, the growth in headcount more closely aligned with shipment counts this year.”
Safe to say, I still like the stock. I would be happier if it acted better, but my analysis of the results show good progress on all fronts by the company.
Best,
Linda
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Ajax
Thank you very much for your thoughtful response. It’s a funny thing; it looks like the steepest significant decline in the last 20 years for ODFL. And I think to myself, who reacts to news in this manner? For instance, I’m a shareholder, albeit a very small one, but I cannot imagine selling a stock based on a comment or tweet such as the one you mention. I certainly believe it happens – just strikes me as odd.
Linda McDonough
Ajax,
Investors are very nervous right now and don’t forget how much program trading skews and exacerbates moves. Often it’s not really a human pushing the sell button that moment but a computer is acting on an automatic portfolio readjustment.
Best,
Linda
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