We are nothing if not patient, waiting weeks and months for the moment when the market mood turns explosively in our favor . . . and cashing dividends in the meantime. Value stocks surged early this year but have gone nowhere lately, with the Russell Value index taking four months to edge up 0.7% since May.
Is that really going to test our patience? This end of the market spent six months in full rally and needed a rest. Now, the Delta Variant is keeping investors on the sidelines around the “real” economy that dominates traditional value-oriented watch lists.
After all, many of the most battered stocks trading at the cheapest levels were at the center of the pandemic and its lockdowns: retail and other consumer companies, food, commodities, specialty manufacturers and the banks. Some were available for a deep discount for a good reason.
Now, however, with the economy on a rebounding trajectory, that pandemic discount applies less and less with every week of fresh vaccinations. The Fed and a reversion to normal interest rates also looms with every beat of the recovery . . . and that scenario doesn’t argue for growth stocks in the future.
I am reasonably optimistic we will see another rotation back to value stocks before year end. Despite the weaker than expected employment report on Friday, interest rates have been on the rise, with the yield on the 10-year Treasury approaching 1.4%.
And while COVID cases are not on a steep decline yet, the new variant already appears to be peaking. If the same pattern of infection holds around the world, this is nearly over.
Meanwhile, I like the look of our Buy List, with all our stocks still available at earnings multiples below what you’d have to pay if you bought the S&P 500 as a whole. Most have good prospects for earnings growth in 2022, which is a long way out from the artificially easy year-over-year pandemic comparisons that many investors are ignoring now.
And most also carry attractive dividends, which are important component of long-term returns. While we may need to demonstrate a little more patience than I thought, good things sometimes come slowly. We should be able to harvest some victories in the next few months.
Molson Coors: Better Earnings on TAP
Molson Coors Beverage (TAP) is the fifth-largest beer company in the world, with 42 breweries and sales approaching $10 billion. Its products are sold in approximately 100 countries around the world.
The company was formed through the 2005 merger of Coors of the United States with Molson of Canada, However, TAP did not take its current form until 2017, when it acquired the brands of Miller Brewing for $12 billion. The acquisition more than doubled the company’s size in terms of sales.
While most sales come from the legacy Miller, Molson and Coors brands, TAP has a total of 15 brands with sales of $100 million or more. Approximately 84% of revenue comes from North America.
TAP has been hurt in recent years by a global decline in beer sales relative to other alcoholic beverages and a loss of market share in the beer segment due to the increasing popularity of craft brews. Beer is now only 48% of the North American alcohol market, down 3 percentage points since 2015, and the company’s share of that market is down 4 percentage points from 26% in 2016. This is not limited to TAP: industry leader Ambev is also becoming less dominant in its home markets.
Nonetheless, annual sales fell $400 million (to $10.6 billion) between 2017 and 2019, while operating earnings per share dropped to $4.55 from $4.82. These are pre-pandemic numbers, obviously. Since the company traditionally derived 16% of sales from bars and restaurants, COVID took another 8.5% off the top line in 2020 and EPS fell to $3.92. Since then, management suspended the dividend and has worked hard to revitalize growth and expand production of non-beer products like hard cider and cannabis beverages.
Given the impact of COVID depressing results last year and easy comparisons this year, it is hard to judge the success of these initiatives. However, I see some encouraging signs. Overall sales in the second quarter were up 12% in constant currency, reaching 98% of their amount in the second quarter of 2019 despite continued pandemic impact and the elimination of many brands. The company’s two most important brands, Miller Lite and Coors Light, gained market share in the U.S. premium light market in the quarter.
While the top line may be starting to stabilize, supply chain issues and higher raw materials costs should limit gains this year. I would be pleasantly surprised if TAP earns more than $4.00 a share this year, just above last year’s pandemic-impacted results. However, I believe this represents a base the company can grow, with important brands stabilizing, new growth products coming to market and greater operating efficiencies emerging.
And needless to say, the stock is cheap at less than 12x this year’s EPS estimate. Buy Molson Coors below $50. My target is $57. TAP has also reinstated a $0.34 a share quarterly dividend, giving the stock an attractive 2.9% yield which will add to total returns.
Position Review
3M (MMM) has been lagging the market and the industrial sector in recent weeks, a reflection of difficult earnings comparisons the company faces over the next two quarters due to unusual strength in healthcare in 2020 and rising raw material costs. However, I believe management was overly conservative in their recent guidance, in which case EPS should be at least $10.10 and grow again to $10.90 next year. MMM remains a highly efficient cash generator that should command at least the broad market’s 21X multiple, which would take the stock even beyond my $210 target. 3M is a buy below $190.
Cognizant Technology Solutions (CTSH) shares remain well above the price they traded at prior to the latest earnings release. I am optimistic CTSH can prove it can sustain recent earnings growth and the stock will be rewarded with a P/E multiple more in line with the S&P 500. Buy CTSH under $70. My target is $85.
Dollar Tree (DLTR) shares have been trying to stabilize after decent second-quarter results: EPS of $1.23 vs. $1.10 on a 1% gain in sales was $0.21 better than expectations as COVID-related costs evaporated. However, management also lowered their earnings outlook for the year due tight shipping conditions and overall rising freight costs through 2023 at the earliest.
Despite these difficulties, I still like the stock. The company continues to roll out its Dollar Tree Plus format, which offer select items over $1.00, and the inclusion of higher price points will help alleviate some margin pressure. Dollar Tree Plus stores will number 240 by year-end, up from 112 from the start of the year. In addition, combination stores of the company’s Family Dollar and Dollar Store nameplates are doing very well, with comparable store sales on that side of the business up over 20%. Once freight costs ease, the company will have earnings power of over $7.00 a share and the stock should do very well. My new buy under price for DLTR is $95. My target is now $110.
Fulton Financial (FULT) has traded in a tight range over the past few weeks. However, I continue to believe that loan growth and strong credit results will drive EPS higher over the long-term and the stock is attractively valued at 12X next year’s EPS estimates. Buy FULT below $16.00. My target is $18.50. The 3.56% dividend yield will add to total returns.
General Mills (GIS) will report fiscal first-quarter earnings on September 22 before the market opens. Expectations are for EPS of $0.88 vs. $1.00 on a 2.3% decline in sales as the company faces another tough comparison . . . more dining out as the pandemic recedes. Food stocks have struggled recently, but I believe GIS will show relatively stable results this year despite the tough comparisons. In that scenario, the stock is very cheap at 16X this fiscal year’s EPS estimates of $3.70 with a healthy dividend yield of 3.5%. GIS is a buy below $59. My target is $65.
Ingredion (INGR) shares are near the high end of their recent trading range and I am hopeful investors are getting a taste of the significant lift declining corn prices can bring to earnings next year. At less than 13X estimates for 2022 (which do nor have the depressed price of corn built in), the stock is extremely cheap for a company with good cash flow generation and relatively consistent results. INGR is a buy under $90. My target is $105.
Investors Bancorp (ISBC) has been rangebound following the lead of its acquirer Citizens Financial (CFG). However, once we get a sustained rise in interest rates, both stocks can do well. ISBC still trades at a 1% discount to its acquisition price and its near 4% yield should give investors patience to wait for a turnaround. ISBC is a buy below $14. My target is $16.25.
While slightly off its recent highs in part due to going ex-dividend ($0.20 a share) last week, Juniper Networks (JNPR) continues to trade firmly. Component shortages are a near-term risk, but recent growth trends are encouraging and should take the stock in the right direction. JNPR is a buy below $28. My $32 target is 17X next year’s earnings estimates.
Kronos Worldwide (KRO) shares continue to be weighed down by disappointing second quarter results that reflected rising production costs. However, the price of titanium dioxide remains high and annual earnings should approach $1.00 per share as long as the global economy remains firm. KRO is a buy below $13. My target is $016. Investors who own the stock before September 1 will receive an $0.18 a share dividend on September 16.
Mueller Industries (MLI) is still off its best prices of the year, likely reflecting concerns that wide operating margins will narrow as copper prices stabilize. Either way, MLI will likely earn over $6.00 a share this year, but with the stock priced just above $40, the market is discounting the possibility of maintaining that level of cash flow for the long haul. However, provided demand remains strong for pipes and tubing, the company should be able to earn enough to make shareholders. MLI is now a buy under $42 and my new target is $48.
Newell Rubbermaid (NWL) has been trying to come back from its post-earnings slump but I believe it can navigate higher raw materials costs. In that scenario, EPS should be able to grow from $1.70 this year to $1.90 in 2022 thanks to streamlined operations and lower financial leverage. NWL is a buy below $26.50. My target is $31.
Safety Insurance (SAFT) has been trading in a tight range. However, I expected the shares to break out to the upside and perhaps challenge this year’s high of around $87. SAFT should be able to earn $6.75 to $7.00 a share on average in a post-COVID environment and consistently grow its book value while paying a healthy dividend that has the stock currently yielding 4.4%. Buy SAFT under $80. My $90 target is roughly 1.4X year-end book value of $65 a share.