News and Research for Dividend Select Portfolio Holdings
Comcast's Fourth-Quarter Results Won't Turn Heads, but the Stock Remains Undervalued
by Michael Hodel, CFA | Morningstar Research Services LLC | 1-26-23
Comcast's fourth-quarter results won't change the negative narrative around the firm. Broadband customer growth remains anemic, which isn't a surprise. Peacock took a step forward with customers, adding 5 million paying accounts over the last three months of 2022, taking the total to 20 million. But Peacock losses hit nearly $1 billion during the quarter and $2.5 billion for the year, crushing margins at NBC Universal. We still believe that Comcast is well positioned to limit broadband share losses to competitors in the coming years while enjoying solid pricing power. NBCU is more challenged, but we like the effort to expand the theme park business to build around and support key content franchises. Our fair value estimate remains $60, and we believe the stock is significantly undervalued.
The broadband business lost net customers for the first time (26,000), which management telegraphed last quarter that the impact of Hurricane Ian would turn a small gain into a small loss. Average revenue per broadband customer increased 3.5% year over year as competition remains rational. AT&T, which we view as the biggest long-term source of incremental broadband competition, reported a 9% increase in fiber broadband ARPU, nearly closing the gap between it and Comcast. Total cable revenue increased only 1.4%, pressured by the decline of the television business. The cable segment EBITDA margin was roughly flat versus a year ago but would have expanded to a record 45.3% absent higher severance costs.
Consolidated free cash flow took a hit, dropping to $12.6 billion in 2022 from $17.1 billion the year before, primarily on working capital needs tied to the rebound in content production and higher cash taxes. Both items should cease to be headwinds in 2023. Comcast's solid balance sheet has allowed it to aggressively repurchase shares, spending $13 billion to reduce shares outstanding about 7% during 2022, while paying out nearly $5 billion in dividends.
A Fair Value Increase for Genuine Parts
by Zain Akbari | Morningstar Research Services LLC | 1-22-23
We are lifting our valuation of Genuine Parts to $148 per share from $141, incorporating solid third-quarter earnings (including 13% comparable growth and a roughly 45 basis point segment margin pickup, to 9.7%). Our valuation implies forward fiscal 2023 enterprise value/adjusted EBITDA of 11 times and adjusted forward P/E of 17, incorporating mid-single-digit percentage organic revenue growth and an 8% operating margin, on average, over the next decade.
The automotive segment should remain resilient despite economic turmoil, posting high-single-digit growth in fiscal 2022. Longer-term conditions are sound, with rising vehicle age and benefits to come from larger, post-financial-crisis sales cohorts aging into retailers' sweet spot. We expect mid-single-digit percentage average organic segment sales growth long term, outpacing low-single-digit industry expansion as scaled sellers assert their advantages. Focus on more profitable DIY customers as well as rising cost leverage should lead segment margins to 10% long term from 8.6% in 2021.
Johnson & Johnson Posts Solid Fourth-Quarter Results With Broad Support From All Divisions
by Damien Conover, CFA | Morningstar Research Services LLC | 1-24-23
Johnson & Johnson reported solid fourth-quarter results that were slightly above our expectations, but we don't expect any major changes to our fair value estimate based on the minor outperformance. J&J issued 2023 guidance in line with our expectations, further supporting our fair value estimate, which is slightly below the current stock price. The results show the firm's ability to offset generic and branded competition with new innovative products, reinforcing its wide moat.
In the quarter, total operational sales increased 5% (excluding COVID-19 vaccine sales), a trend that is likely to slow slightly over the next three years. In contrast to the previous several years, the drug group posted the slowest growth—at 4%—as generic pressures (immunology drug Remicade and cancer drug Zytiga) and some branded pressure (cancer drug Imbruvica) weighed on performance. We expect an increase in biosimilar pressure as immunology drug Stelara loses patent protection in late 2023. We believe J&J has enough strength in recently launched drugs and pipeline drugs to post positive annual pharmaceutical growth over the next three years, but we remain slightly below the firm's 2025 drug sales guidance of $60 billion.
The remaining divisions -- devices (up 5%) and consumer (up 6%) -- posted solid growth, but one-time gains helped the results. We believe rebounding demand due to a receding pandemic helped procedure volume in most device markets outside China. However, the recent acquisition of fast-growing cardiovascular device company Abiomed should help the division's long-term growth. Also, a strong cold/flu season helped buoy consumer over-the-counter drug sales. J&J remains on track to spin off the consumer group, Kenvue, later in the year. With little synergy between the consumer group and the remaining company, we believe the separation will help the strategic focus of both.
Lockheed Martin's Growing Backlog Enables Strong Revenue Visibility Despite a Few Headwinds
by Nicolas Owens | Morningstar Research Services LLC | 1-25-23
Wide-moat-rated Lockheed Martin reported solid fourth-quarter results as the company continues to navigate through supply chain headwinds and rising demand amid geopolitical turmoil. Lockheed Martin reported $66 billion in 2022 sales (down 2% year over year) and generated a business segment operating margin of 10.9% (down 10 basis points year over year). Management offered 2023 guidance, implying flat sales and modestly lower segment operating margin due to ongoing production bottlenecks and changes in portfolio mix. Nonetheless, geopolitical turmoil stoked an increase in backlog during the year, providing strong order visibility as management expects to return to top-line growth in 2024. We do not anticipate materially changing our $437 per share fair value estimate, though we'll revisit our modeling assumptions after Lockheed Martin's 10-K is filed.
Sales in the aeronautics segment increased 1% to nearly $27 billion for the full year. Regarding the F-35 program, Lockheed posted full-year deliveries of 141, below the company's target of 148. An engine mishap in December caused a temporary suspension of deliveries. Management expressed optimism regarding the company's ability to meet growing demand and deliver 156 F-35s per year by 2025. Lockheed Martin and the Joint Program Office finalized agreement for the delivery of 398 aircraft (lots 15 and 16) worth $30 billion, with an option for lot 17 production. We are encouraged by the F-35 program due to its continued entrenchment into both domestic and international fleets.
Despite a decline in full-year sales, Lockheed Martin's total backlog increased by 11% in 2022 to $150 billion, with each operating segment contributing to the increase. Due to the long-term nature of the industry, we note that current demand typically takes time before percolating through to financial performance.
Texas Instruments Foresees Slowdown in Demand As Chip Shortage Winds Down; Lifting FVE to $168
by Brian Colello, CPA | Morningstar Research Services LLC | 1-25-23
Wide-moat Texas Instruments reported fourth-quarter results and provided investors with a first-quarter forecast that points to a slowdown in chip demand in almost all end markets (with automotive as the lone exception), which we attribute to macroeconomic headwinds. The company is seeing more order cancellations and pushouts, a far cry from business conditions a year ago when all types of customers were trying to buy every chip they could find. Nonetheless, TI has outlasted these types of cyclical downturns before, and we remain confident that the secular drivers of rising chip content in cars, industrial equipment, and many other types of electronics are still intact. We raise our fair value estimate to $168 from $158, almost entirely due to the time value of money as we roll our valuation model, and we would still wait for a wider margin of safety before investing.
Revenue in the December quarter was $4.67 billion, down 11% sequentially, down 3% year over year, but above the midpoint of guidance of $4.40 billion-$4.80 billion. Automotive still fared the best, up about 5% sequentially, with strength across most product lines as car customers are toward the tail end of trying to alleviate the global automotive chip shortage. Industrial revenue was down about 10% sequentially and is the biggest near-term disappointment, in our view, as the slowdown in demand is hitting heavy equipment, which was an area where TI was prospering just a few quarters ago. Not surprisingly, personal electronics equipment revenue was down about 15%, as PC demand is especially weak today. Lower sales levels caused gross margin to fall 290 basis points sequentially to 66.1%, while operating margin fell 450 basis points sequentially to 46.6%.
TI expects March quarter revenue to be $4.35 billion at the midpoint, which would represent declines of 7% sequentially and 11% year over year. TI again foresees weakness across all end markets except auto.
Verizon Again Delivers Underwhelming Growth, but Its Stock Remains Undervalued
by Michael Hodel, CFA | Morningstar Research Services LLC | 1-24-23
Verizon's fourth-quarter results and 2023 outlook fell modestly short of our expectations. We've trimmed our revenue and margin forecasts, moving our fair value estimate down to $57 from $59. We continue to believe the shares are very attractive, trading at around 10 times our 2023 free cash flow expectation. We expect the firm can move margins and cash flow higher beyond this year as network projects are completed and the promotional environment eases somewhat.
Verizon reported 217,000 net postpaid phone customer additions during the quarter, the best result of 2022, though this figure excludes the loss of 392,000 customers stemming from the 3G network shutdown. Verizon maintained momentum with its Welcome Unlimited plans, at least relative to T-Mobile, which announced preliminary results earlier this month. While the Welcome plans generate interest, an increasing percentage of customers are on premium unlimited plans -- 45% of consumer lines, up from about one third at the end of 2021. Premium uptake and the targeted price increases taken over the summer lifted average revenue per consumer postpaid account 3% year over year. The increase in customer defections seen last quarter following the price increases has waned, as churn declined sequentially, bucking the normal seasonal trend.
Excluding an accounting change, Verizon expects wireless service revenue to grow about 1.5% in 2023, down from about 3.5% during the fourth quarter, excluding the benefit of the Tracfone acquisition. Most of the expected deceleration appears tied to the amortization of promotional credits, as the cash impact of phone discounts borne in 2022 is recognized. Management expressed its belief that current phone incentives aren't maintainable for the industry and that it won't chase volume, a posture that is consistent with our view that the firm is best served accepting modest share losses.
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