Time to go bargain hunting in shares of two companies that have been crushed by recent headlines but have an outstanding business and a bright future.
Stocks Dropped from Watch List:
Active Watch List Stocks:
DIS - Disney
Updated play recommendation.
JCI - Johnson Controls
Play remains unopened.
New Watch List Entry:
CSC - Computer Sciences Corp - Company Profile
CSC is an information technology and professional services Fortune 500 firm that provides solutions in North America, Europe, Asia and Australia. They reported earnings last week of 71 cents that beat estimates for 69 cents. However, revenue declined -10.2% to $1.75 billion and missed estimates for $1.859 billion. The stock was crushed for a nearly -20% loss from $31 to $24 on the news. Shares recovered to trade just over $27 for the last week.
During the quarter they spun off their public sector business and merged it with SRA International and the merged company began trading on the NYSE under the symbol CSRA. This was responsible for a portion of the revenue decline.
However, the Global Business Service (GBS) segment saw revenues decline -8.2% due to a decline in consulting revenues. Overall the segment produced $1.6 billion in revenues for the quarter, which were up +35%.
Global Infrastructure Services (GIS) revenues declined -12.2% to $854 million. This was due to a continued decline in their legacy business, which is being replaced by their new cloud offerings. New business awards rose +4% to $1 billion.
Total company bookings rose +21% to $2.7 billion. Operating income rose +9.2% to $190 million.
CSC ended the quarter with $1.83 billion in cash and long-term debt at $2.67 billion.
On February 11th the Supreme Court of Victoria, Australia, approved the acquisition of WXC Limited for (AU)$427.6 million. CSC believes the acquisition of UXC will strengthen their global commercial business by adding the UXC platform to the CSC cloud, cyber and big data offerings. Back in August CSC acquired two other companies, Fruition Partners, a service-management technology provider and London-based Fixnetix, a provider of front-office managed trading software for capital markets.
They are also acquiring Xchanging, a UK company that provides software and outsourcing services for the insurance industry for $697 million. That deal is currently going through the regulatory approval process.
The point here is that CSC is a leading provider of information technology and they are growing rapidly through acquisitions. They are moving towards a mix of cloud based higher margin products that will be beneficial over the long term. They are also buying back stock with a new authorization in January. They paid a special dividend of $10.50 when they spun off the public sector business in Q4. That accounts for the $10 drop in the stock price at the end of November.
The big drop in the stock last week came from lowered guidance. The company guided for earnings in the range of $2.40-$2.60 because of their acquisition expenses, reduced revenue after the spinoff and delays in the government order renewal process and constricted federal spending.
They have plenty of business as evidenced by the $2.7 billion in new bookings and 16% earnings growth.
I believe the selloff it overdone and long-term the value will return to CSC shares. The options are cheap and the stock does not have to rebound far to put us into the money. This is purely a value play on an oversold stock that should move higher in a positive market.
I do not want to enter the position until that rebound appears so I am putting a $28.50 entry trigger on the position.
With a CSC trade at $28.50
Buy Jan $30 LEAP call, currently $2.05. no initial stop loss.
TRN - Trinity Industries - Company Profile
Trinity Industries manufacturers rail cars, highway guard rails and steel beams for infrastructure projects, structural towers for wind turbines and electrical distribution grids, oil and chemical storage tanks, barges to transport grain, coal, aggregates, tank barges to transport oil, chemicals and petroleum products. The company was founded in 1933.
Shares crashed last week after they reported earnings that beat the street but guidance that disappointed. Earnings of $1.30 easily beat estimates for $1.07 but revenue of $1.55 billion missed estimates for $1.61 billion. They had full year earnings of $5.08 per share.
They guided for 2016 to earnings of $2.00 to $2.40 per share. The challenge is the slowdown in orders for railroad tank cars and barges to transport oil. With oil prices crashing the producers and refiners are cutting back on capex spending until prices recover. Trinity said revenue in 2016 could decline -32%. Shares declined -35% over two days on the news.
They are also divesting their galvanizing business, think galvanized highway guardrails, and are slowing production in the highway products division and aggregate business.
The key here is that Trinity is now trading at a PE of 3. Yes 3.47 to be exact. With earnings in the middle of their range at $2.20 and a PE of 10 that would equate to a $22 stock price.
Here is the good news. The company has $2.12 billion in cash and undrawn credit. They are not in financial trouble. They authorized a $250 million share buyback starting January 1st. They have an order backlog of $5.4 billion in orders for 48,885 railcars. They received orders for 2,455 cars in Q4 and their backlog stretches out to 2020. The barge division received orders for $190.1 million in Q4 and had a backlog of $416 million as of December 31st. The structural tower segment has $371.3 million in order backlogs.
They recognize that tankcar and barge orders are going to remain slow until oil prices recover, which should happen later this year.
This stock is extremely oversold and should recover as the shock of the post earnings drop wears off and oil prices begin to rise. Note on the chart that the stock price began to decline at the same time the price of oil began to crash in August 2014. I view this as a remarkable opportunity for long-term investors.
I am recommending the $23 2018 LEAP to get us well past the recovery in oil prices and any further weakness in the sector. Remember, Trinity produces a lot of railcars for carrying all types of products other than oil. That demand is not going to disappear and they already have order backlogs stretching into 2020.
I understand that buying a 2018 LEAP is a stretch of the imagination for some investors. However, at $2 you will not have much at risk and it becomes a buy and forget investment. If Trinity returns to the 2015 highs at $35 that LEAP would be worth $12 and a 500% return. With a PE of 3.47 there is very little risk.
At their current valuation they could also be an acquisition candidate. This is a great business that has been overly punished by the oil crash.
I am still going to put an entry trigger on this position. Since the post earnings drop is only one day old we do not know if it will continue. I would love to buy this stock as cheap as possible but I also do not want it to run away from us. If it continues lower, I will change the strike price and entry to keep pace.
With a TRN trade at $17.75
Buy 2018 $23 LEAP Call, currently $2.45, no initial stop loss.
Active Watch List Play Descriptions:
DIS - Disney - Company Profile
Disney reported strong earnings but was punished again as shares fell to $86 despite the record earnings. Earnings of $1.73 compared to estimates for $1.45 and revenue of $15.2 billion compared to $14.75 billion. Earnings rose +36% and revenue +14%. They reaffirmed strong guidance and the stock was still knocked for a -5% loss. Once the smoke cleared and calmer heads prevailed the stop rallied back to pre announcement levels at $96.
There is nothing wrong with Disney. The CEO said they even saw a rise in ESPN subscriptions in January and they were expecting big gains as they offered their sports package in various other bundles. The worry over Disney's revenue growth has become so pervasive that everyone is afraid to buy the stock.
However, this is only going to be a temporary situation. Disney released a teaser for Star Wars episode VIII last week so the hype is already beginning. Episode VIII Teaser The current Star Wars movie has grossed over $2 billion and still going strong.
I am reactivating the recommendation for Disney with an entry trigger at $97.50. If the market goes lower I will lower the strike and the entry in the weeks to come.
Original Trade Description: February 1st:
Disney has been pummeled since its $120 high in November. The problem for Disney was comments that ESPN subscribers are declining. This was attributed to cord cutting from the cable companies as consumers move to sites like Netflix and Amazon for streaming downloads. This is not the case although I am sure there are some losses for that reason.
However, Disney said there was a lack of a large number of major sporting events in 2015 that would keep ESPN subscribers happy. Disney said the 2016 Olympics would help bring those subscribers back. ESPN is only one of dozens of Disney networks and the rest are doing just fine.
In case you missed it Star Wars: The Force Awakens has earned over $2 billion worldwide and still going strong. This compares to only $572 million for Episode VI the Return of the Jedi that was the most popular movie in the prior seven movies. Merchandise sales are approaching $1 billion. This is a cash printing machine and it is only going to get better from here.
Remember, Disney now has Marvel, Pixar and Star Wars (Lucasfilm) all under the same roof.
Disney Movie Schedule
Jan 29th, 2016 - "The Finest Hours"
Mar 4th, 2016 - "Zootopia"
April 15th, 2016 - "The Jungle Book"
May 6th, 2016 - "Captain America: Civil War"
May 27th, 2016 - "Alice: Through the Looking Glass"
June 17, 2016 - "Finding Dory"
July 1st, 2016 - "The BFG"
Aug 12th, 2016 - "Pete's Dragon"
Nov 4th, 2016 - "Doctor Strange"
Nov 23rd, 2016 - "Moana"
Dec. 16, 2016 - "Star Wars Anthology: Rogue One"
Mar 17th, 2017 - "Beauty and the Beast"
April 14th, 2017 - "Ghost in the Shell"
May 4th, 2017 - "Guardians of the Galaxy II"
May 26, 2017 - "Star Wars: Episode VIII"
June 16, 2017 - "Toy Story 4"
Mid 2017 - "The Incredibles 2"
July 17th, 2017 - "Pirates of the Caribbean"
Late 2017 - "Thor: Ragnarok"
Early 2018 - "Frozen 2"
May 4, 2018 - "Avengers: Infinity War - Part I"
2018 - "Untitled Star Wars Anthology Project"
May 3, 2019 - "Avengers: Infinity War - Part II"
2019 - "Star Wars: Episode IX"
We should not overlook their theme parks, which are also doing great. Disney said they are considering a tiered pricing for tickets with high volume attenfance dates costing more. The three levels for the season pass holders would be gold, silver and bronze. Gold passes could be used any day at any time and would obviously be the most expensive. Silver would only be good for off peak days and not valid for holidays. Bronze would be the cheapest and would only be valid on certain off peak periods. Currently discounted tickets for those customers spending multiple days and with children under the age of ten begin around $100.
Shanghai Disney will open on June 16th and they expect 40-60 million people in the first year. At $100 or more per ticket the revenue is astromonical. The park is located within 4 hours drive time of 330 million people.
Don't forget their theme cruises. Disney is not having any problems filling up their cruise ships and prices have remained strong.
The only real challenge to Disney today would be a slowdown in consumer spending. The company said they are not seeing any decline despite the drop in retail sales numbers over the last several months. Consumers are just spending their money on diffrent things like cable movies, theme parks and iPhones.
Disney has earnings on February 9th. Normally I would not recommend a stock ahead of earnings but this could be a blowout given the unbelievable cash flow from Star Wars. Even if they disappoint there is decent support at $90 and profits are only going to rise in subsequent quarters from the items mentioned above.
Shares have found support in the $92-$93 range despite the recent market volatility. I expect shares to rise as we approach earnings. I am putting an entry trigger just slightly above $96 just to make sure we have upward movement after Friday's big gain. If shares decline again I would be thrilled to enter the position at $92.
With a DIS trade at $97.50
Buy 2017 $105 LEAP Call, currently $4.75, no initial stop loss.
JCI - Johnson Controls - Company Profile
JCI was rebounding strongly until news broke that the JCI executive that was to be president of the merged company Adient had resigned. There was no news about what triggered the abrupt departure and the stock fell -$2 on the news. Beda Bolzenius, current VP and president of Automotive Experience will leave the company at the end of March. He has entered into a transition agreement but that is all we know. His 2015 compensation was $6.5 million, a decline of -21.7% from 2014.
I considered dropping the play but decided to give it another week. The combination of JCI and Tyco (TYC) is a great deal and once this executive exit is digested we should see the stock begin an upward trend. No change in recommendation.
Original Trade Description: February 8th
JCI is a diversified technology and industrial company worldwide. They design, produce and market building efficiency systems including heating, air conditioning, security, controls and mechanical equipment. They also have a division that manufacturers interior products, control systems, instrument panels, seating and passenger systems for cars and trucks. Their Power Solutions division makes batteries for normal cars and trucks as well as hybrid and all electric vehicles.
What makes JCI important to us today is their recently announced merger with Tyco (TYC). Tyco manufacturers fire and security systems and is headquartered in Ireland. After the merger JCI shareholders will own 56% of the combined entity to be called Johnson Controls Plc. Once the merger is completed the company will spin off the automotive segment to be called Adient leaving Johnson controls with a pure play on the HVAC, controls, fire, security products marketplace plus the Power Solutions division that will produce batteries for electric vehicles. Current JCI shareholders will own 56% of Adient.
The Johnson Controls company will have about $32 billion in revenue and Adient around $17 billion in revenue. The synergies to the merger include $150 million in tax savings because of the Ireland domicile. Another $500 million will come from eliminating corporate redundancies and from operational synergies. There will also be additional revenue synergies which has not been quantified. Both Tyco and JCI existing customers will immediately have a new range of products available to them. This should result in a significant sales boost in the first three years.
Normally when a merger is announced one of the companies sees their stock decline. That did not happen in this case. Tyco shares spiked 10% and are continuing to move higher while JCI shares moved sideways for the last two weeks but made a four-week high on Thursday. Friday's market crash knocked some of the wind out of JCI shares but they only declined -66 cents.
The actual merger has a long way to go since it was just announced on January 25th. With Tyco shares rising and JCI shares having put in a solid base at $34 I expect JCI shares to return to growth mode in the coming weeks.
This is a good deal for both companies. It will not only create a powerhouse in the building systems market but throw off the automotive business into another entity where it can be acquired by one of the larger players.
Earnings are April 28th.
With a JCI trade at $36.75
Buy Jan $40 LEAP Call, currently $2.30, no initial stop loss.