Latest Stock Buy or Sell? Make More Informed Decisions!
Today, Stockchase Insights and Jim Cramer - Mad Money commented about whether LULU-Q, ON-Q, LUMN-N, LYB-N, XOM-N, APLD-Q, BLK-N, MODG-N, NKE-N, ZGN-N, DEO-N, BF.B-N, HD-N, DOW-N, F-N, AVGO-Q, ADBE-Q, M-N, GME-N, OLLI-Q, AZO-N, AI-N, TOL-N, MDB-Q, ORCL-N, MEQ-T, TW-Q, DHR-N are stocks to buy or sell.
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We think TW looks like a strong investment. The stock is up 50% year-to-date and has seen trading volumes steadily rise this year. Fundamentals are very attractive where it is a high margin business that has demonstrated top line growth of nearly 30% over the last-twelve-months. It generates high cash flows and has a strong balance sheet with $1.1B in net cash. The company has previously been acquisitive, and with all the cash they have, this could be a future catalyst. Granted it is expensive at 42x forward earnings but we think it is a strong name backed by fundamentals with potential to do well in the long-term.
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EPS of $12.18 beat estimates of $2.4 and sales of $66.9M missed estimates of $69.27M. It raised its dividend by 45% to $0.04 per share, and net operating income rose 24% in the quarter. Rental revenue from operations rose 20%, and the vacancy rate fell to 3.4% from 4.3% last year. While the results were strong, and growth remains at high levels, there was an analyst downgrade due to its lofty valuations (24X forward earnings). Its valuation has mostly remained flat over the past couple of years, but the company has executed well on growth and profitability. Given its continued execution, we would be comfortable with an entry point around $195 to $200.
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Companies that can operate efficiently without equity capital and the case study of many great businesses:
The reason for a negative book value is that the company has consistently raised dividends and repurchased shares over the years, and the amount of capital being returned to shareholders is more than the equity capital initially issued in the first place years ago. This is just an accounting record, which becomes less important as the company has grown significantly over the years.
In fact, very great businesses with superb Returns On Equity (ROEs) can run their businesses with negative equity capital without any difficulty in liquidity issues. These companies are few and far between in the public market and usually trade at a premium valuation and the commonalities between these companies include:
- The underlying business has a very healthy cash flow generation, and it made sense for these companies to return all of the cash they have generated and sometimes borrow some (conservatively) to increase dividends or share repurchases to investors.
- These companies have a very favourable cash flow cycle, where they tend to receive cash in advance and pay suppliers much later.
- These businesses tend to have very stable, predictable business volumes, possess pricing power over time and some kind of sustainable competitive advantage.
- These businesses have limited needs for capital expenditures and tend to be considered by the investment community as cash cows.
All these companies consisting of Domino Pizza (DPZ), Lowe (LOW), McDonald’s (MCD), Home Depot (HD), and Dollarama (DOL) have run a negative book value for years. They have been through a tough financial environment like 2008 or the pandemic but still managed to compound capital for shareholders at attractive rates. We don’t think the negative working capital should be a concern for these companies as long as the leverage level (in terms of net debt/EBITDA) is manageable. In addition, ROEs may not be an appropriate metric to evaluate these companies; we think Return on Invested Capital (debt + equity) is a better one for investors to use. Great businesses are the ones that do not need equity capital and can still grow.
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In recent years, DHR has been in the process of transforming itself from an industrial conglomerate into a pure life science and biotech player with a high degree of recurring revenues by divesting legacy industry assets. The company now possesses a solid profile of highly recurring revenue and strong margins, basically a “software-like” business model.
However, weak organic growth has caused the company’s shares to trade largely sideways in recent years. DHR also repurchased shares aggressively in the recent quarter, which the company did not implement for a long time, indicating that management believes shares are undervalued. That being said, DHR is trading at 28.4x Forward P/E with low single-digit revenue growth, which is certainly not that attractive. However, this is not the company’s issue but rather an industry-wide challenge, as similar headwinds also exist with other players like TMO.
Consensus estimates expect DHR to grow its topline by 7% on average over the next few years. We think now could be a good time to average into the position, but maybe not be too aggressively. We would be comfortable starting a position but only adding more when revenue returns to a solid growth trajectory.
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