November Housing Market Update

Housing market data from the U.S. Commerce Dept. and others show sales and production falling at a rapid rate.  The seasonally adjusted annualized rate (SAAR) of single-family housing starts and building permits has fallen for eight consecutive months by about 30%.  With housing construction still running high relative to the pace of starts, it seems likely that housing production will fall further in the months ahead.

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New Jersey Resources (NJR) 22Q4 Update

NJR reported 22Q4 GAAP net income of $0.56 per diluted share and net financial earnings (NFE), a non-GAAP measure, of $0.50 per basic share.  That compares with the 21Q4 GAAP loss of $0.01 per share and NFE per basic share (NFEPS) of $0.17.

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Mistras Group, Inc. (MG) 22Q3 Update

Mistras Group reported 22Q3 EPS of $0.14, above 21Q3’s $0.11 and my estimate of $0.23.  Revenues of $178.5 million were 2.2% above the year earlier period but also below my expectations.  My projections were in line with the company’s implied guidance.

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Bluegreen Vacations Holding Corp. (BVH) 22Q3 Update

22Q3 net income attributable to shareholders was $23.0 million or $1.19 per diluted share, compared with 21Q3’s $23.1 million or $01.06 per share.  Revenues grew 17.0% to $250.8 million, but operating expenses rose 19.8% to $152.9 million.  The increase in EPS was due to a 12.2% reduction in weighted average shares outstanding as a result of share buybacks completed this year.

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AlerisLife Inc. (ALR) 22Q3 Update

AlerisLife reported a 22Q3 net loss of $8.5 million or $0.27 per share, better than the 22Q2 loss of $8.8 million or $0.28 per share and the 21Q3 loss of $10.2 million or $0.32 per share.  I had estimated a loss of $7.5 million or $0.24 per share.

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Diversified Healthcare Trust (DHC) 22Q3 Update

22Q3 GAAP loss was $0.34 per share and normalized FFO was $0.06 per share, below my forecast of $0.23 and +$0.01, respectively.  The Office Portfolio met expectations, but Senior Housing Operating Portfolio (SHOP) results were disappointing as improved occupancy and higher rental rates were more than offset by significantly higher operating expenses.  Non-Segment results were also below expectations.

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Organon & Co. (OGN) 22Q3 Update

22Q3 revenues were $1.537 billion, down 3.9% year-over-year, but up 3% at constant currency.  GAAP diluted EPS was $0.92, below 21Q3’s $1.27, but above my estimate of $0.82.  Non-GAAP EPS of $1.36 was below last year’s $1.61, but also above my estimate of $1.08.

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Merck & Co (MRK) 22Q3 Update

22Q3 sales rose 13.7% to $15.0 billion with double-digit gains in KEYTRUDA and GARDASIL/GARDASIL 9.  GAAP diluted EPS fell 29.0% to $1.28; but non-GAAP diluted EPS rose 5.6% to $1.85.  The company recorded an $887 million ($0.27 per share) asset impairment charge related to ArQule, Inc., which was acquired in 2020.  It also recorded $690 million in upfront and option payments on three collaborations.  Merck’s revenues were 8.4% above my estimate of $13.8 billion. Its GAAP EPS was $0.07 below my estimate of $1.34; but non-GAAP EPS exceeded my $1.64 estimate by $0.21.

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American Water Works (AWK) 22Q3 Update

AWK reported 22Q3 EPS of $1.63, up 6.5% from $1.53 in 21Q3 and above my estimate of $1.52.  Operating revenues decreased 0.9% to $1.08 billion, as regulatory rate increases were more than offset by lost revenues from the sales of the Homeowner Services (HOS) and New York American Water (NYAM) businesses.

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Public Service Enterprise Group (PEG) 22Q3 Update

Public Service Enterprise Group (PEG) reported 22Q3 operating revenues of $2.27 billion, up 19.4% from 21Q3.  The increase in revenues was due mostly to higher gas supply sales to third parties at PEG Power and higher commodity revenues, including higher electric sales volumes and higher gas BGSS prices at PSE&G.  GAAP EPS was $0.22 vs. a loss of $3.10 a year ago.  Most of last year’s loss was due to an impairment charge associated with the sale of its fossil generating assets.  On a non-GAAP basis, operating earnings were $0.86, down from $0.98 in 21Q3.

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Bristol-Myers Squibb (BMY) 22Q3 Update

22Q3 revenue declined 3.5% to $11.2 billion, mostly because of a drop in Revlimid sales due to patent expiry.  GAAP EPS increased 8.5% to $0.75, but that was slightly below my estimate of $0.77, due mostly to a higher income tax provision.  Non-GAAP EPS of $1.99 was above 21Q3’s $1.93 and my estimate of $1.84, as more expense items were classified as specified and thus excluded in the calculation of Non-GAAP net income and EPS.

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General Electric (GE) 22Q3 Update

GE announced 22Q3 revenues of $19.5 billion, up 0.5% year-over-year, a GAAP loss per share of $0.14, compared with 21Q3’s $0.54 profit, and non-GAAP EPS of $0.35, below 21Q3’s $0.53.  I had anticipated a GAAP EPS of $0.44 per share and non-GAAP EPS of $0.75.

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Baker Hughes (BKR) 22Q3 Update

BKR reported a 22Q3 GAAP net loss of $0.02 per share vs. 21Q3’s profit of $0.01.  Non-GAAP adjusted EPS was $0.26 vs. $0.16.  I had anticipated 22Q3 GAAP EPS of $0.18 and Non-GAAP EPS of $0.30.  BKR’s 22Q3 non-GAAP EPS exceeded the consensus estimate by a penny.

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Initiating Coverage of New Jersey Resources Corp (NJR)

NJR reported 22Q3 GAAP net income of $0.14 per diluted share and a net financial loss (a non-GAAP measure) of $0.04.   That compares with the 21Q3 GAAP loss of $1.16, owing to an impairment charge on its investment in the proposed Penn East pipeline, and a net financial loss of $0.15.  The company increased its full year net financial earnings (NFE) guidance by $0.10 to $2.40-$2.50, the second such increase this year.

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September Housing Market Update

  • The average rate on the 30-year mortgage has risen above 6.00% in response to the latest hike in the Fed Funds target rate.  Freddie Mac’s Primary Mortgage Market Survey pegged the average rate at 6.29% this week.
  • The CME’s Fed Watch tool now shows a 73% probability of a 75 bp rate hike and a 27% probability of a 50 bp hike in November.  FOMC participants expect the Fed Funds target to rise to about 4.40% by year-end, which is a 125 bp increase from the current level.  That could be achieved with increases of 75 bp in November followed by 50 bp in December.  Incoming economic data will influence the Committee’s decisions.
  • After outperforming the broader market from early April to early August, homebuilding stocks have since underperformed.  Since the mid-August highs, my Index has fallen 17.5%, worse that the 13.7% decline in the S&P 500 and the 16.7% decline in the Russell 2000.  The Index is still holding at the “possible support” range, but just barely.  Like the broader market, homebuilding stocks have now fallen back to their June lows.  A break below this level could signal another consequential downward move.
  • In spite of the FOMC’s rate hike and the rise in mortgage rates, homebuilding stocks outperformed the broader market last week.  My Index declined 2.7%, less than the drops of 4.7% in the S&P 500 and 6.6% in the Russell 2000.  About half of the decrease in the Index was due to steeper drops in Beazer Homes USA (BZH) and Hovnanian Enterprises (HOV), both of which are more vulnerable to rising interest rates owing to their higher debt levels.  D.R. Horton (DHI) and Lennar Corp. (LEN) were up on the week.  NVR and PulteGroup (PHM) slipped about 0.5%.  This performance is encouraging but not definitive.
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Baker Hughes (BKR): Initiating Coverage

Five years after its merger with GE Oil & Gas, Baker Hughes Company (BKR) is adjusting to changes in its market environment, including the fallout from the war in Ukraine, supply chain disruptions, inflation and challenges and opportunities in the transition to a zero-carbon future.

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Campbell Soup (CPB) 22Q4 Update

Fiscal 22Q4 net sales of $2.0 billion increased 6.1% YOY.  GAAP diluted EPS was $0.32, below 21Q4’s $0.95.  Non-GAAP adjusted EPS of $0.56 exceeded 21Q4’s $0.52.  These results were generally in line with my expectations.

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Hewlett Packard Enterprise (HPE) 22Q3 Update

HPE’s 22Q3 GAAP diluted EPS was $0.31 vs. $0.29 in 21Q3 and better than my estimate of $0.26.  Non-GAAP EPS was $0.48, compared with $0.47 last year and my estimate of $0.46.  Net revenue of $6.95 billion exceeded 21Q3’s $6.90 billion, but was below my estimate.  Free cash flow of $587 million, was up 11.6% YOY and reversed 22Q2’s cash burn, but was also below my estimate.

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Nice Speech, Mr. Powell, But Please Pay Attention to Housing

The stock market fell 3.3% on Friday, following Fed Chairman Jay Powell’s speech on monetary policy at the Jackson Hole Fed meeting.  Mr. Powell affirmed the Federal Reserve’s commitment to bring inflation down, which will probably take some time and hurt lower-income people and businesses.

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Toll Brothers (TOL) 22Q3 Update

Toll Brothers’ 22Q3 EPS was $2.35, up 25.7% from 21Q3’s $1.87 and above my estimate of $2.22.  Revenues increased 10.6% to $2.49 billion, slightly below my projections.  Deliveries of 2,414 units fell 7.1%, more than expected, but the average sales price rose 8.7% to $934,700.  Adjusted gross margin of 27.9% was 90 bp above my estimate and management’s guidance.  The SG&A expense ratio of 10.3%, was down 20 bp from 21Q3 and 10 bp below expectations.

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22Q2 Housing Market Update

Despite an accelerating slide in housing sales and production following this year’s rise in mortgage rates, my homebuilder stock price index has performed in line with its benchmarks since April. At current prices, homebuilding stocks trade at less than four times projected 2022 earnings and less than five times projected 2023 earnings, which already discounts an expected significant decline in future profitability. Here are my other key takeaways on the latest developments in housing:

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Citius Pharmaceuticals (CTXR) 22Q3 Update

Citius Pharmaceuticals reported a third quarter loss of $8.9 million or $0.06 per share, compared with last year’s loss of $7.3 million or $0.05 per share.  As an early stage drug development company, Citius currently generates no revenues.  The loss was in line with expectations, reflecting the company’s expanding development efforts, including I/ONTAK, which was acquired last year.

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Diversified Healthcare Trust (DHC) 22Q2 Update

22Q2 GAAP loss was $0.46 per share and normalized FFO -$0.04 per share, below my forecast of -$0.42 and +$0.01, respectively.  The Office Portfolio disappointed again, raising concerns about declining occupancy.  Senior Housing Operating Portfolio (SHOP) results met expectations.

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AlerisLife (ALR) 22Q2 Update

AlerisLife reported a 22Q2 net loss of $8.8 million or $0.28 per share, better than the 22Q1 loss of $9.7 million or $0.31 per share and the 21Q2 loss of $12.3 million or $0.39 per share.  I had estimated a $0.28 loss.

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Bluegreen Vacations Holding (BVH) 22Q2 Update

2022 second quarter net income attributable to shareholders was $17.8 million or $0.87 per diluted share, compared with 21Q2’s $19.5 million or $0.93 per share.  The decline in EPS occurred despite a 21.8% increase in revenues to $235.6 million.

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Mistras Group (MG) 22Q2 Update

Mistras Group reported 22Q2 EPS of $0.15, below 21Q2’s $0.20 and my estimate of $0.18.  Revenues of $179.0 million were 0.8% above the year earlier period and also below my expectations.  While revenues were essentially flat, gross margin was lower and SG&A expense higher than the prior year.  Income from operations declined 5.4%.

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Organon & Co (OGN) 22Q2 Update

22Q2 revenues of $1.585 billion were flat year-over-year, but up 5% at constant currency.  GAAP EPS of $0.92, was below 21Q2’s $1.68 and also below my $1.11 estimate.  Non-GAAP EPS of $1.25 was below last year’s $1.72 and also below my $1.34 estimate.  In 21Q2, Organon was still part of Merck, so the year-over-year performance figures are not directly comparable.

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Public Service Enterprise Group (PEG) 22Q2 Update

Public Service Enterprise Group (PEG) reported 22Q2 operating revenues of $2.08 billion, up 10.8% from 21Q2.  GAAP EPS was $0.26 vs. a loss of $0.35 a year ago.  Most of last year’s loss was related to a net $457 million loss on write-down of its ISO fossil assets, which have been sold, offset partially by a gain on the sale of PEG’s solar assets.  Excluding that loss, and other gains or losses on derivatives and investments, the company posted non-GAAP operating earnings of $0.64, down from $0.70 in 21Q2.

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Merck & Co (MRK) 22Q2 Update

22Q2 sales increased 28% to $14.6 billion, with LAGEVRIO sales of $1.2 billion, a 26% increase in KEYTRUDA sales to $5.3 billion and a 36% increase in GARDASIL/GARDASIL 9 sales to $1.7 billion.  GAAP diluted EPS from continuing operations increased to $1.55, from $0.48 a year ago.  Non-GAAP diluted EPS increased to $1.87 from $1.31.

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American Water Works (AWK) 22Q2 Update

American Water Works Company (AWK) reported 22Q2 EPS of $1.20, up 5% from $1.14 in 21Q2.  Operating revenues decreased 6.2% to $937 million, mostly due to the sale of the Homeowner Services (HOS) and New York American Water (NYAM) businesses, offset partially by regulatory rate increases.  These same factors contributed to the 3.1% decline in operating income to $327 million.  However, interest earned on the senior note taken back on the HOS sale and an increase in other income more than offset the decline in operating income.

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Bristol-Myers Squibb (BMY) 22Q2 Update

22Q2 revenues were higher, GAAP earnings lower and non-GAAP earnings higher than anticipated.  Management reduced its 2022 revenue guidance by $1 million to $46 billion due to foreign currency headwinds.  It also lowered its GAAP EPS guidance, but left its non-GAAP EPS guidance unchanged.  The GAAP earnings change is due to higher expected specified items, either losses on equity investments or acquisition costs, which do not affect non-GAAP results.

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GE 22Q2 Update

General Electric Company (GE) announced 22Q2 revenues of $18.6 billion, up 2.4% year-over-year, a GAAP loss per share of $0.59, two cents worse than 21Q2’s $0.57 loss, and non-GAAP EPS of $0.78, above 21Q2’s $0.22.  I had anticipated a GAAP loss of $0.16 per share and non-GAAP EPS of $0.55.

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Hewlett Packard Enterprise Company (HPE) 22Q2 Update

Hewlett Packard Enterprise Company’s performance during the first half of fiscal 2022 was somewhat disappointing, due primarily to the residual disruptions from the pandemic and more recent developments, including the conflict between Russia and Ukraine.  Although its order book increased by 20% year-over-year in both 22Q1 and 22Q2, supply chain disruptions have delayed the delivery of products and services out of the backlog, which has restrained sales and profit margins.  In addition, HPE’s inventory has ballooned this year from 64 to 106 days outstanding.  The increase is due to the supply chain constraints, positioning to fulfill planned future shipments and strategic stockpiling.

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Bluegreen Vacations Holding Corp. (BVH) 22Q1 Update

2022 first quarter net income from continuing operations attributable to shareholders was $16.0 million or $0.76 per diluted share, compared with 21Q1’s $3.1 million or $0.16 per share.  Revenues improved to $195.1 million from $146.4 million.

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Citius Announces Its Intention to Spin-Off I/ONTAK

Earlier today, Citius Pharmaceuticals issued a press release announcing its intention to spin-off its late stage oncology candidate, I/ONTAK, to a new, standalone publicly-traded company. In making the announcement, the company said that it believed that the market has not adequately valued the potential of its I/ONTAK licensing agreement.

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DHC 22Q1 Update

22Q1 In Line with Expectations.  Maintaining Performance Rating and Price Target.

22Q1 GAAP earnings were $1.01 per share and normalized FFO $0.09 per share, in line with my expectations of $1.04 and $0.06.  Excluding a $327.8 million gain on the sale of JV interests, the performance of the Office Portfolio was moderately below expectations, but Senior Housing Operating Portfolio (SHOP) results were better than anticipated.

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AlerisLife (ALR) 22Q1 Update

22Q1 Loss of $0.30 in Line with Expectations; Katie Potter Steps Down as CEO; ALR Hires Alvarez & Marsal to Conduct a Comprehensive Operational Review

AlerisLife reported a 22Q1 net loss of $9.7 million or $0.31 per diluted share, slightly better than its 21Q4 loss of $10.6 million or $0.34 per share.  I had estimated a $0.28 loss.

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GE 22Q1 Update

Since reporting disappoint 22Q1 results on April 26, GE’s stock has fallen sharply. Year-to-date, GE’s stock is down 22.6%, worse than the S&P 500 Industrial sector’s 11.7% decline.

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Citius Pharma 22Q1 Update

Citius Pharmaceuticals (CXTR) is a specialty pharmaceutical company focused on the development of five potential products: (1) Mino-Lok, an antibiotic lock solution to treat and salvage infected central venous catheters (CVCs) in patients with catheter-related bloodstream infections (CRBSIs); (2) I/ONTAK, a late-stage oncology immunotherapy for the treatment for cutaneous T-cell lymphoma (CTCL), that was acquired from Dr. Reddy’s Laboratories SA in September 2021; (3) Halo-Lido, a topical formation of halobetasol propionate and lidocaine for the treatment of hemorrhoids; (4) Mino-Wrap, a liquefying, gel-based wrap for the reduction of infections associated with breast implants following breast reconstructive surgeries; and (5) a next generation iPSC mesenchymal stem cell (iMSC) mRNA therapy, which is in pre-clinical development, under license from Brooklyn Immunotherapeutics (BTX).

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Mistras Group, Inc. (MG) 21Q4 Update

21Q4 Results Below Expectations, Lowering 2022 Estimates, Reducing Rating and Price Target

Mistras Group reported 21Q4 EPS of $0.00, slightly worse than 20Q4’s $0.01 and below my estimate of $0.06.  Revenues of $171.2 million were 6.5% above the year earlier period and better than I expected.  Despite the higher revenues, income from operations declined by 50% compared with the prior year.  Against my projections, Mistras’s revenues were higher, but operating costs were much higher.

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Thoughts on the Outlook for Homebuilding Stocks

Homebuilding stocks have had a rough 2022. Year-to-date (through 4/12), my equal-weighted index of 11 publicly-traded U.S. homebuilders has fallen 34.8%. That compares with declines of 7.7% in the S&P 500 and 11.5% in the Russell 2000.

Following a three-fold surge in the index from the March 2020 lows to the May 2021 highs, homebuilding stocks were due for a correction anyway. This year’s 34% fall, though eye-catching, still qualifies as a normal correction from a technical point of view, according to Fibonacci retracement analysis.

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Going to Neutral on Big Pharma

The stocks of large pharmaceutical companies, including Bristol-Myers Squibb (BMY) and Merck & Co. (MRK), which I follow, have outperformed the market significantly so far this year. The pharmaceuticals sector, as measured by the NYSE Arca Pharmaceuticals Index ($DRG) shows a year-to-date gain of 5.2%, as of this post, much better than the S&P 500’s 6.5% decline.

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AlerisLife (ALR) 21Q4 Update

Lowering Estimates and Safety Rating, Withdrawing Performance Rating and Price Target

AlerisLife Inc. (ALR), formerly known as Five Star Senior Living, reported a fourth quarter net loss of $10.7 million or $0.34 per share, slightly worse than the third quarter’s loss of $10.2 million or $0.32 per share.  I had estimated a $0.15 loss.

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Toll Brothers (TOL) 22Q1 Update

Since my last report on December 9, 2021, Toll’s stock has fallen 26.3%, much more than the S&P Mid-Cap 400’s 2.6% decline.  As I noted back then, shares of Toll and other homebuilders were ripe for a correction following their three-fold advance off the early pandemic lows.  Yet, this correction has been more severe than I had anticipated, driven by persistent inflation, rising mortgage rates and most recently the uncertainty of the economic fallout from Ukraine.

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Merck & Co. (MRK) Update

Establishing 2022 and 2023 Estimates, Maintaining Outperform Rating, Setting $85 Price Target

Following the spin-off of Organon, Merck is focused on growing its pharmaceuticals business to offset the looming loss of exclusivity on its $5 billion Januvia/Janumet franchise and others that will follow as the decade progresses.  Investors’ concerns about the impact of LOE contributed to the stock’s underperformance in 21H2.  Some investors worry that Merck’s pipeline will not sustain its revenues and profits.  My estimates anticipate that both will decline slightly in 2023.

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DHC 21Q4 Update

Lowering Estimates for 2022 and Adding 2023, Lowering Price Target to $5.00

DHC reported 21Q4 normalized FFO of $0.09 per share, compared with 21Q3’s $0.05 and 20Q4’s +$0.09.  Although the Office portfolio posted another solid quarter and the Senior Housing Operating Portfolio (SHOP) occupancy improved by 120 bp, SHOP operating costs were high, due mostly to the tight labor market.  On a positive note, management says that its operators have been able to begin raising rental rates to help cover higher operating costs.

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Bristol-Myers Squibb Update

Raising 2022 Estimate and Adding 2023, Maintaining Outperform Rating and Price Target of $73

Bristol-Myers Squibb Company (BMS) achieved many operational milestones in 2021, advancing its development pipeline through clinical trials, new drug applications and regulatory approvals.  At its November Investor Event, management said that it would further advance these initiatives in 2022 and beyond, bolstering its early- and mid-stage pipeline through internal development, licensing agreements, partnerships and acquisitions.  Facing the headwinds from loss of exclusivity (LOE) for some of its key products, the company must generate significant revenues from new medicines and grow revenues of its existing brands through new indications and product extensions.

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The Drivers of Large Cap Stock Performance in 2021

Estimated Returns by Sectors, Industry Groups and Industries

Large cap stocks, as measured by the Lark Research Large Cap index (the “Index”) which currently mirrors the S&P 500, turned in another impressive performance in 2021.  The Index posted a price return of 26.8%, much better than 2020’s solid 16.9% return.

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DHC Announces Sales of Joint Venture Interests in Certain Office Properties

Sales Raise Over $1 Billion, Giving the Trust the Means to Retire the 9.75% Senior Notes due 2025 When They Become Callable in June 2022.

DHC announced on January 31 that it has entered into a joint venture with two institutional investors on 10 of its Office properties.  The joint venture is valued at $703 million and will have $456.3 million of secured debt.  The JV investors will pay $196.5 million for an 80% equity stake.  DHC will receive cash proceeds of $653 million and retain a 20% equity interest.  The 10 properties are valued at $657 per sq. ft.  The $703 million estimated value equates to a capitalization rate of 4.98%, based upon full year 2021 actual cash net operating income (NOI).

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Notes and Analysis from Campbell Soup’s Fiscal 2022 Investor Day

Since 2019, Campbell Soup Company has jettisoned several businesses to focus on its core Meals and Beverage (M&B) and Snacks segments.  It has also acquired new growth platforms in Pacific Foods and Snyder’s-Lance.  Its $1 billion enterprise cost savings program is now 83% complete.

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Mistras Group: Waiting for the Full Recovery

Mistras Group is a leading provider of non-destructive testing (NDT) and related asset protection services that monitor the condition of critical infrastructure and equipment to ensure safe and efficient operations and maximize uptime.  The company’s business has suffered during the pandemic from the decline in usage that temporarily reduced the frequency of maintenance and repair.  Although its revenue has rebounded well off the lows, its 21Q3 performance and 21Q4 guidance suggest at least a pause in its recovery.  Accordingly, investors may be concerned that its recovery will be incomplete.

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Toll Brothers (TOL) 21Q4 Update

Toll Brothers reported stronger-than anticipated fiscal 21Q4 results that once again exceeded my and the consensus estimates.  Its diluted earnings per share were $3.02, up 95% from $1.55 in 20Q4.  My estimate was $2.51 and the consensus estimate was $2.50.

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Organon 21Q3 Update

Organon reported 21Q3 GAAP EPS of $1.38 which exceeded my estimate of $1.31.  Revenues were in line with my estimates and operating costs were lower, except for a $25 million increase associated with the acquisition of in-process research & development.

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SJI 21Q3 Update

SJI reported a 21Q3 GAAP net loss of $25.8 million or $0.23 per share, wider than 20Q3’s net loss of $10.3 million or $0.10.  On an economic earnings basis, which adjusts for fluctuations in the fair market value of derivatives and other unusual or one-time costs, the 21Q3 net loss was $18.8 million or $0.17 per share, compared with 20Q3’s net loss of $6.0 million or $0.06 per share.  I had anticipated GAAP and economic earnings net losses of $0.16 per share.

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Notes and Analysis from HPE’s 2021 SAM

At its 2021 Securities Analyst Meeting (SAM), the management of Hewlett Packard Enterprise Company (HPE) said that the workplace changes advanced by the pandemic are proving the validity of its edge-to-cloud strategy.  HPE has experienced stronger than anticipated growth in revenues this year, as enterprises have enhanced their edge, cloud and data capabilities.  HPE continues to strengthen its portfolio in these areas, focusing especially on fast-growing niches through internal development and acquisitions.  The company forecasts that its mix of growth businesses will increase from 25% of total revenues today to 35% of revenues in fiscal 2024.

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DHC 21Q3 Results

Diversified Healthcare Trust (DHC) reported 21Q3 normalized FFO of $0.04 per share, compared with 21Q2’s $0.05.  The loss came despite a 40 bp improvement in SHOP occupancy.  Operating costs remain high and senior living operators are discounting resident rates more because of the slow improvement in occupancy industry-wide.  DHC’s Office portfolio’s 21Q3 performance met expectations.

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Five Star Senior Living 21Q3 Update

Again Lowering EPS Estimates; Reducing 6-12 Month PT and Maintaining Outperform Rating

Five Star reported a third quarter net loss of $10.2 million or $0.32 per share, less than the second quarter’s loss of $12.3 million or $0.39 per share.  I had estimated a loss of $0.18.

The $0.14 shortfall from my estimate was due mostly to a $3.3 million or $0.10 per share charge on the termination of three senior living community (SLC) leases.  The remaining $0.04 shortfall was from higher than projected losses on the core business, mostly from lower average revenue per occupied room (RevPOR) and a decline in expenses reimbursed by DHC.

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21Q3 Housing Market Update

The housing market has been quite strong since shortly after the onset of the pandemic, fueled by low interest rates, pent-up demand and a strong desire among urban apartment dwellers to escape the coronavirus.  New home sales from May 2020 until April 2021 were estimated at an average annual pace of 900,000 units, the highest since 2006.  Pending sales of existing homes have followed a similar pattern.  After the slowing of sales from an unsustainably high pace this past spring, there are tentative signs that sales are on the rise again, but there are also legitimate questions about the likely strength and durability of the rebound.

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Toll Brothers 21Q3 Update

Toll Brothers reported stronger-than anticipated fiscal 21Q3 results that once again exceeded my estimates.  Its diluted earnings per share were $1.86, up 71% from $0.59 in 20Q2.  My estimate was $1.48 and the consensus estimate was $1.53.

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PSEG’s 2021 Investor Day

Public Service Enterprise Group held its 2021 Investor Day on Sept. 27, 2021.  At the meeting, management offered the following guidance:

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So. Jersey Industries: High Dividend Yield With Moderate Upside Price Potential

SJI’s utility businesses – South Jersey Gas Company (SJG) and Elizabethtown Gas Company (ETG) – are its core growth engines.  Representing 70%-80% of consolidated profits, they have grown by pursuing regulatory-approved infrastructure investment programs and gaining customers from new construction and alternative heating conversions.  SJI also pursues growth its nonutility businesses; but its performance there has been mixed.

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Organon (OGN) 21Q2 Update

21Q2 Performance in Line with Expectations; Raising Performance Rating and Lowering Price Target

21Q2 GAAP EPS of $1.68 was lower than 20Q2’s $2.14.  Although sales increased 4.5% to $1.6 billion, costs were higher as a result of new tolling arrangements with Merck and certain costs associated with the spin-off and becoming a separate public company.  Still, the results were in line with my expectations.  Organon has initiated a quarterly dividend of $0.28.

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DHC 21Q2 Update

Progress on Strategic Repositioning; Performance in Line with Expectations; Upgrading Performance Rating; Maintaining Price Target of ~$7.50.

DHC reported 21Q2 normalized funds from operations (FFO) of $12.2 million or $0.05 per share, lower than 20Q2’s $0.25, due mostly to a 780 bp decline in senior housing operating portfolio (SHOP) occupancy.  Although SHOP occupancy was down vs. the prior year, it increased 140 bp sequentially, suggesting that a bottom is in.  Still, the pace of the rebound is uncertain due to the Delta variant, among other factors.  DHC’s office portfolio also reported a  drop in profits mostly due to previous asset sales and a 100 bp decline in occupancy.  However, strong lease-ups and the added contribution from redevelopment projects should improve its profitability going forward.

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Five Star Senior Living 21Q2 Update

Five Star reported a second quarter net loss of $12.3 million, reversing last year’s $3.0 million net profit.  On a per share basis, the loss was $0.39, compared to net income of $0.10 and below my estimate of a loss of $0.11.

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American Water Works 21Q2 Update

2021 Second Quarter Results in Line with Expectations. Maintaining Neutral Rating.

AWK reported 21Q2 EPS of $1.14, up 17.5% from 20Q2.  Operating revenues increased  7.3% to $999 million.  Operating income rose 5.4% to $330 million.  Operating margin eased 60 bp from 33.6% to 33.0%, due to a refund of excess accumulated deferred income tax.  That refund was offset by a comparable drop in income tax expense, as evidenced by the drop in the effective tax rate from 24.1% to 17.5%.  Thus, net income increased 17.6% to $207 million.

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Bristol-Myers Squibb: Initiating Coverage

Initiating Coverage with an Outperform Rating. Prospects Beyond 2022 are Favorable.

With the acquisitions of Celgene in 2019 and MyoKardia in 2020, BMS has substantially transformed its business and repositioned for growth.  Drugs added to the portfolio from the two acquisitions produced 40% of its total revenues in 2020.  The company has launched six new products since 2020, including two CAR-T immunotherapies, a class of treatments that has produced miraculous responses in fighting blood cancers.  It plans to launch two potential first-in-class treatments in 2022 that have good commercial potential.  BMS also has a broad early-to-mid stage pipeline with more than 50 new compounds in clinical development.

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PSEG: A Possible Rocky Transition to T&D

It has been a year since PSEG announced a strategic review to explore divesting its fossil fuel generating assets.  Since then, management has said that it is pleased with the interest shown by potential buyers in its 6,750+ MW portfolio of mostly natural gas-fired generating plants.  The move would complete PSEG’s transition to a regulated utility (with a fleet of carbon-free nuclear generating plants).

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Bluegreen Vacations Holding Corp. Stands to Gain as Domestic Travel Improves

On May 5, 2021, Bluegreen Vacations Holding Corporation (BVH), formerly known as BBX Capital Corporation, completed the acquisition of the 7% publicly-traded ownership stake of Bluegreen Vacations Corporation (BXG) that it did not already own through a statutory short-form merger under Florida law.  BXG shareholders received 0.51 shares of BVH’s Class A common shares in the merger.  On April 5, the day of the merger announcement, BXG shares rallied 18.8%.  BXG is now a wholly-owned subsidiary of BVH.

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HPE 21Q2 Results

The Company Reported Stronger Than Expected 21Q2 Results, But Its Upwardly Revised Guidance Was Somewhat Disappointing.

HPE reported fiscal 2021 second quarter GAAP earnings of $0.19 per share, well above its most recent guidance of $0.02-$0.08 per share and ahead of my estimate of $0.12.  Its Non-GAAP earnings of $0.46 also exceeded its guidance of $0.38-$0.44 and my estimate of $0.42.  Revenues of $6.7 billion were exactly in line with my projections.

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Update on Hewlett Packard Enterprise (HPE)

HPE has posted two consecutive quarters of stronger-than-expected results.  Although the quarterly figures still lag behind the prior year, the recent strength suggests that its business is rebounding strongly off the bottom.  As noted by management, HPE’s business portfolio, which sports beefed-up offerings in cloud services, edge networking and high performance computing (HPC), is well positioned coming out of the pandemic as organizations pursue greater flexibility in their IT operations to improve their ROI and seek a more permanent role for work from home.  HPE also appears to be benefiting from a catch up in customer IT spending after pandemic-related delays.

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Five Star Alters Strategy, Its Stock Gets Slammed

In early April, Five Star announced a change in its strategy whereby it will transition out of the management of 108 smaller senior living communities (SLCs) with 7,500 living units (with an average of 69.4 units per community), close and reposition 27 skilled nursing facilities (SNFs) with 1,500 units located within its continuum of care retirement communities (CCRCs) and close 37 Ageility inpatient rehabilitation clinics that are located within the exited SLCs. The transition is expected to be completed by the end of 2021.

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Assessing the Impact of the Organon Spin-Off on Merck

Merck is progressing toward the spin-off of its subsidiary, Organon & Co., which is expected to be completed by the end of the June.  Organon will include Merck’s women’s health products, biosimilars and certain established brands, most of which have lost patent protection.  (For a more complete analysis of Organon, see my primary report dated April 14, 2021.)

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Five Star and DHC Restructure Their Agreement

On April 9, Five Star and DHC announced a restructuring of their management agreement whereby DHC will transition the management of 108 smaller senior living communities (SLCs) with a total of 7,500 units to other operators by the end of 2021.  Five Star will reposition its senior living management business to focus on larger independent living (IL), assisted living (AL) and memory care communities, as well as stand-alone active adult and IL communities. It will also exit the skilled nursing facility (SNF) business.

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Merck Spin-Off of Organon Targeted for 21Q2

In recent weeks, Merck has been following through on its plan to spin-off its subsidiary, Organon & Co., to shareholders.  On March 17, it filed its Form 10 registration statement related to the transaction.  On March 24, it posted on its investor relations website a lender presentation related to planned debt to be issued by Organon.  On March 30, it announced that it had agreed to acquire Alydia Health on Organon’s behalf.  On April 8, it issued a press release announcing the pricing of three debt tranches in a private placement.  The debt offering is expected to close on April 22.

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Vaccinations Raise Visibility of a Bottom in Occupancy for DHC

Diversified Healthcare Trust reported 2020 fourth quarter normalized funds from operations (FFO) (my definition) of $15.1 million or $0.06 per share, slightly better than 20Q3, but well below 19Q4.  The results were modestly better than I anticipated with lower operating expenses, greater unrealized gains on its investment in Five Star Senior Living (FVE) and realized gains on property sales.  Even so, occupancy in its senior housing operating portfolio continued to fall at about the same pace as in 20Q2 and 20Q3.

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Citius Pharma Raises $71 million in Equity Unit Offering

Citius Pharmaceuticals (CXTR) is a specialty pharmaceutical company focused on the development of four potential products: (1) Mino-Lok, an antibiotic lock solution to treat and salvage infected central venous catheters (“CVCs”) in patients with catheter-related bloodstream infections (“CRBSIs”); Halo-Lido, a topical formation of halobetasol propionate and lidocaine for the treatment of hemorrhoids; Mino-Wrap, a liquefying, gel-based wrap for the reduction of infections associated with breast implants following breast reconstructive surgeries; and a next generation mesenchymal stem cell (MSC) mRNA therapy under license from Novellus Therapeutics Limited that is early in pre-clinical development.

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Five Star Senior Living (FVE) Update

Vaccination of 90% of Residents Raises Visibility on a Rebound in Occupancy

Five Star reported slightly stronger 20Q4 results than anticipated, due primarily to gains on investments held by its captive insurer.  Average occupancy across its owned and leased senior living communities (SLCs) declined by 320 basis points (bp) to 71.5% in the quarter, comparable to the decline reported for 20Q3.  Average occupancy at SLCs managed for Diversified Health Care Trust (DHC) declined 293 bp to 72.3% in 20Q4.  The decline in managed community average occupancy was 54 bp slower than that reported for 20Q3.  At year-end, the company said that “spot” occupancy was 70.7%.

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2021 Market Outlook – Part 2: S&P 500 Sector Analysis

2020 was of course dominated by the impact of the pandemic on the economy and specifically on the revenues and profits of each of the S&P 500 constituents.  There was a sharp stock market sell-off in March-April, followed by a quick recovery.  By mid-July, the S&P 500 had recovered all of its March-April losses.  By the end of the September, it was up 4.1% YTD.  With a quick resolution to the presidential election and the announcements of the vaccine rollouts, the Index rallied 11.7% in the fourth quarter, posting a 16.3% official return for the full year.

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2021 Market Outlook – Part 1

Despite Ongoing Uncertainties about the Pandemic, the Economic Recovery and Global Events, the Stock Market is Poised to Move Higher in 2021.

The financial markets turned in a stellar performance in 2020, the year of COVID-19, when real GDP probably fell about 3.7%.  Both stocks and bonds had a great year.  The S&P 500 was up 16.3% on price, 18.5% with dividends.  The Bloomberg Barclays U.S. Aggregate index, the broadest measure of U.S. fixed income securities performance, delivered a 7.5% total return.

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The Employment Situation and Outlook – December 2020

Yesterday, the Bureau of Labor Statistics estimated that nonfarm payroll employment declined by 140,000 in December.  The estimate for November was increased by 135,000.  The level of employment for December was therefore virtually unchanged from the November report.

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An Uncertain Outlook for Housing

2020 was a surprisingly solid year for housing in light of the pandemic and the havoc that it wreaked in other parts of the economy.  December data will not be reported until later this month.  I project that single-family housing starts will total 971,700 units in 2020, up 9.5% over 2019 and new residential sales will be 804,000, up 17.9%.  That is pretty remarkable, considering that single-family starts and sales were down double-digits in March and April.

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Colony Credit Real Estate 20Q3 Update

Shares of Colony Credit Real Estate (CLNC) have surged over the past six weeks, nearly doubling from a low of $4.37 on Oct. 29 to a high of $8.11 on Nov. 25.  Since then, CLNC’s share price has been trading in a range, closing most recently at $7.75 (on Dec. 8).

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Diversified Healthcare Trust (DHC): Weaker Than Anticipated 20Q3 Results

Diversified Healthcare Trust reported 2020 third quarter normalized funds from operations (FFO) (according to my definition) of $11.0 million or $0.05 per share, well below results for 19Q3 and 20Q2 and also below my projection of $27.8 million or $0.12 per share.  The decline reflects the impact of pandemic-related costs and occupancy declines on its senior housing operating portfolio (SHOP) business.

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GE: 2020 Third Quarter Earnings Review

General Electric reported a 2020 third quarter GAAP loss of $1.16 billion or $0.13 per share on revenues on revenues of $19.4 billion, down 17%.  In the 2019 third quarter, the company reported a comparable net loss of $1.3 billion of $0.15 per share.

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Wells Fargo: Still Under a Regulatory Cloud, Wading Through the Pandemic

Shares of Well Fargo have been under a regulatory cloud ever since the Federal Reserve placed a cap on its total assets in April 2018.  To lift the cap, the company must demonstrate that it has implemented an effective remediation plan that guards against a repeat of the abusive sales practices that led to the creation of millions of deposit and credit card accounts without customers’ consent.

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GE 20Q3 Earnings Preview and Outlook

Shares of GE have underperformed both the broader market and GE’s industrial peer group since the onset of the COVID-19 pandemic.  The weak performance reflects primarily the company’s exposure to the aviation business, which prior to the pandemic was GE’s most profitable by far.  With both the suspension of production of Boeing’s 737 Max aircraft and more recently the sharp drop in air travel due to the COVID-19 pandemic, GE Aviation’s profitability has collapsed.  At this point, the consensus view, as articulated by Boeing in its 20Q2 conference call, is that air traffic will not return to pre-pandemic levels for three years.  Some see a permanent reduction in air travel demand.

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Housing Market Update

Despite continuing elevated unemployment and dampened consumer confidence, the housing market has been surprisingly strong in the months following the onset of the COVID-19 pandemic.  According to the U.S. Commerce Dept., single-family housing starts for August were estimated at the seasonally-adjusted annual rate (SAAR) of 1.01 million units, up 4.1% from July and 12.1% from August 2019.  This represented the highest level for single-family starts since May 2007.  Similarly, new home sales for July were estimated to be 901,000 units, up 20% from June and 36.3% from July 2019, the highest level for new home sales since April 2007.

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Debt Refinancing Eliminates Risk of Default; But Diversified Healthcare Trust Will Need to Raise Equity Eventually

Diversified Healthcare Trust (DHC) reported 2020 second quarter normalized funds from operations (FFO) (according to my definition) of $52.8 million or $0.22 per share, down 33% from $81.1 million or $0.33 per share in the prior year quarter.  The decline was driven mostly by the 2019 restructuring of its lease agreements with its affiliate, Five Star Senior Living (FVE), and also by the impact of pandemic-related restrictions on its business.

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A Weak Second Quarter Should Mark the Bottom for Colony Capital, But Future Dilution is a Key Issue

Colony Capital reported a 2020 second quarter net loss of $2.04 billion or $4.33 per share, compared with a much smaller loss in the prior year quarter.  This year’s loss was driven by $2.0 billion of impairment charges taken across all of the company’s business segments, except digital and included a $515 million goodwill charge taken against its Other Investment Management (OIM) business.  It also recorded a $274.7 million other-than-temporary impairment charge against its 36.4% stake in Colony Credit Real Estate (CLNC).

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Five Star’s Strong Stock Performance Could Signal Quicker Turnaround

Five Star Senior Living continues to cope with the effects of the COVID-19 pandemic on its operations.  During the 2020 second quarter, it experienced a 3.8% decline in occupancy from 82.5% to 78.7% across its owned and managed senior living communities.  In addition, its average monthly revenue per available room (RevPAR) decreased 4.6% to $3,581.  The drop in occupancy equates to an average weekly decline of about 0.3%, which is better than the 0.40%-0.50% average weekly decline anticipated by Diversified Healthcare Trust (DHC), the owner of FVE’s managed properties.

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Colony Capital: The Big Pivot on Hold

In response to activist pressure precipitated by a deterioration in its financial performance and a steady decline in its stock price, Colony Capital announced in November 2019 a new strategy to focus on growing its Digital Realty and Investment Management business, divest over time its healthcare, hospitality and other equity and debt assets and sell substantially all of its investment management business to Colony Credit Real Estate (CLNC). 

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After the Quick Rebound, Investors Should Approach Homebuilding Stocks with Caution

Homebuilding stocks have been on a wild ride in 2020.  They boomed from the start of the year, rising 19.1% (according to my index of 11 publicly-traded builders) to February 21, handily beating the 3.0% gain on the S&P 500 and the flattish 0.6% return on the Russell 2000.  Then in just four weeks, with the onset of economy-busting measures taken to combat COVID-19, the sector plunged 60.6%, much worse than 30.9% drop in the S&P and 39.6% drop in the Russell.  Since the March 21 lows, however, the homebuilders have come roaring back, surging 117.4% to June 5, compared with the gains of 38.6% in the S&P and 48.7% in the Russell.

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After Completing Its Corporate Transition, Change Healthcare Copes With COVID-19

Change Healthcare Inc. (CHNG, Change Inc., Change or Inc.) is a new public company formed in 2016 as a joint venture between McKesson Corporation (MCK) and an investor group led by The Blackstone Group.  Over the past four years, the joint venture partners have combined their healthcare IT businesses and raised capital through an IPO and unit offering.  In March, McKesson completed the distribution of its interests in the joint venture.  With the onset of the COVID-19 pandemic, CHNG’s stock has fallen sharply and now trades at an even wider discount to its peer group.  As activity in the healthcare system returns to normal, the stock should have rebound potential to its pre-COVID levels of $15-$17.  If the company then demonstrates progress toward its revenue growth, operating cost and leverage goals, its stock should have upside beyond $17 per share, as it shrinks its discount to its peer group.

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DHC Cuts Distribution As It Copes with COVID-19 Fallout

DHC’s share price closed on Thursday (4/9) at $3.51, down 58.4% year-to-date, worse than the peer group average of down 24.7%, but the stock is up from its bottom of $2.00.  Most of the losses for DHC occurred during March. There is still considerable uncertainty about the near- to medium-term operating and financial performance for healthcare REITs, which could delay a full recovery of their shares. Even so, DHC’s share price has fallen to only 0.3 times book value, compared with the peer group average of 1.4 times. That gives the shares considerable upside potential, if DHC can cope successfully with COVID-19.

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Deep Dive on GE: Sum-of-the-Parts Valuation

As noted in a previous post, it is most appropriate to value GE as a single, stand-alone enterprise.  Several unifying investment themes support this view:

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Deep Dive on GE: GE Capital

In April 2015, partially in response to the regulatory restrictions that accompanied GE Capital’s designation as a systemically important financial institution by the Financial Stability Oversight Council, GE adopted the GE Capital Exit Plan, under which it planned to reduce the size and scope of its financial services operations through the sale of most of GE Capital’s assets and focus on growing its industrial businesses.  The plan was originally intended to be completed over two years.  GE intended to keep most of its vertical financing businesses, including GE Capital Aviation Services (GECAS), Energy Financial Services (EFS) and its Healthcare Equipment Finance business, which directly support its industrial businesses.

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Deep Dive on GE: Consolidated Enterprise Valuation

In my view, the most appropriate way to look at GE’s stock valuation is to consider the company as a single enterprise.  In this analysis, I compare its current valuation to peers.  My calculations for GE’S enterprise value-to-EBITDA multiple at 31-Dec-19 and 30-Mar-20 are given in the table below:   

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Deep Dive on GE: Projected 2020 Consolidated Results

Based upon management’s guidance given at General Electric’s 2020 Outlook meeting on March 4th, I project 2020 Industrial Leverage EBITDA of $11.6 billion, up roughly 3% from 2019.  Industrial Leverage EBITDA was given in the appendix to the company’s 2020 Outlook presentation slides and was meant to be used in the calculation of GE Industrial’s ratio of EBITDA-to-net debt.  The measure excludes non-operating pension benefit costs, which is the part of total pension costs that cover all items that relate primarily to the funding of GE’s pension plans, excluding the service cost.

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Deep Dive on GE: The 2020 Outlook for its Businesses

Given the complexity of its business mix and financial structure, valuing GE is not an easy exercise even under benign economic conditions.  The task is made even more difficult when there is considerable uncertainty about prospects for the global economy.

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Though It Might Be Delayed, GE’s BioPharma Sale is Set to Close

GE’s stock has been battered during this sell-off, falling much more than the broader market as a whole.  Since reaching an intra-day peak of $13.26 on February 12 (roughly one month ago), the stock has fallen 40.8% to its March 13 close of $7.85.  By comparison, the S&P 500 has fallen 19.8% over that same time frame.

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