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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Recent Observations on Bed Bath & Beyond

The investor optimism that followed the October 2019 appointment of Mark J. Tritton as Bed Bath & Beyond’s CEO and continued after the company gave a preliminary upbeat assessment of its performance early in the Christmas selling season gave way to disappointment initially when it withdrew fiscal 2019 guidance in January and especially following the company’s update on its fiscal fourth quarter performance on Feb. 8.  Since reaching a peak of $17.79 on Dec. 18, the stock has fallen $8.30 or 52% to $9.49 on March 5.  Most of that decline occurred right after the fourth quarter update announcement. Most recently, the stock has been caught in the coronavirus market sell-off.

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