No. 1 Walt Disney Co. Burbank 2017 Revenue: $55B NYSE: DIS Stock YTD: 3% Media giant plans to acquire assets from 21st Century Fox. Situation Walt Disney Co. finds itself in a bidding war with Comcast Corp. over the film and television assets of 21st Century Fox. The Burbank entertainment and media giant in December offered $52 billion in stock for the assets, which include Fox’s movie and television studios, cable channels and a controlling stake in streaming service Hulu. Comcast, in Philadelphia, came back last month with an all-cash counteroffer of $65 billion for the same assets. Disney, in turn, upped its offer to $71.3 billion in cash and stock. The U.S. Department of Justice has given its approval for the acquisition by Disney, which includes the sale of the Fox Sports Regional Networks within 90 days of the deal’s closing. Disney’s share price has fluctuated in the time since Comcast entered into the picture to go after the Fox assets. In the days after the Comcast offer, the stock price leapt by more than $4 before settling down in the following weeks. It rose again by $1 following Disney’s counteroffer. The share price closed at $110.69 on July 18. Since the beginning of the year, the share price has dropped less than 1 percent. The drama over the Fox acquisition has not been the only one that Disney has faced. First, there was the poor performance of “Solo: A Star Wars Story,” the latest installment in the “Star Wars” franchise. The film has grossed just more than $211 million domestically and a total global box office take of $380 million. The studio’s other Star Wars movies fared significantly better, with “The Last Jedi” making more than $220 million the weekend of its release in December and “Rogue One: A Star Wars Story” hitting $155 million when it came out the year prior. The first film in Disney’s new trilogy, “The Force Awakens,” topped them all at $248 million in December 2015. Other films from Disney bringing in the bucks this year have been “Black Panther” with a domestic gross of $700 million and “The Avengers: Infinity War” with a domestic box office take of $675 million. Four days after “Solo” hit theaters, Roseanne Barr, star of ABC’s highest-rated sitcom, was fired from her namesake show after sending out racially offensive tweets. Barr apologized for the tweets but it didn’t prevent her firing and the cancellation of the show by Disney. Company Position “With more than $1.3 billion in box office to date, ‘Black Panther’ makes a very loud statement about the importance of risk taking and the value of inclusion. We’re proud of this movie on so many levels. It speaks volumes about great innovative story-telling, the power of new perspectives and unbridled creativity.” – Chief Executive Robert Iger, May 8 conference call “Walt Disney Co. had an excellent first half this fiscal year, delivering a 59 percent increase in diluted (earnings per share), and we are pleased to be able to pay another strong dividend to shareholders.” – Chief Executive Robert Iger in June 26 press release Analysts & Observers “There is no such thing as a guaranteed success in the movie industry, but Disney has proven time and again that it knows how to deliver massive blockbusters.” – Andres Cardenal, Seeking Alpha “Disney’s results could suffer if the company cannot adapt to the changing media landscape. Basic pay-television service rates have continued to increase, which could cause consumers to cancel their subscriptions or reduce their level of service. The company’s ad-supported broadcast networks, along with the theme parks and consumer products, will suffer if the economy weakens.” – Neil Macker, Morningstar Inc. No. 4 Avery Dennison Corp. Avery Dennison Corp. Glendale 2017 Revenue: $6.6B NYSE: AVY Stock YTD: -9% For this label maker, all the numbers are up except its share price. Situation Label and packaging manufacturer Avery Dennison Corp. has experienced steady growth over the past year and a half, but analysts say the company’s profit margins may have reached their peak. Avery Dennison beat analysts’ earnings projections for the last six quarters as before-tax income grew 24 percent last year to $590 million. Net income dropped 12 percent to $282 million, however, due to a one-time tax increase stemming from last year’s federal tax reform. Total annual sales increased by 8.7 percent to $6.6 billion. In the first quarter of this year, net earnings rose 12 percent year-over-year to $125 million. According to market research firm IBIS World, strong consumer spending over the past five years has increased demand for packaged goods, driving the growth of the packaging and labeling industry as whole. In addition to the increased organic demand, Avery Dennison has made five acquisitions over the past 18 months that have also contributed to its stable growth. Recent purchases include adhesives manufacturer Yongle Tape Co., graphics companies Ink Mill and Mactac Europe and laminate supplier Hanita Coatings. It also acquired Irish health care materials manufacturer Finesse Medical last year. In an earnings report, the company said it plans to continue to increase its “level of investment for the future.” It also announced the restructuring of the European sector of its label and graphic materials division, its largest business segment, to gain a more competitive advantage in the region. In a note to investors, KeyBanc Capital Markets analyst Adam Josephson wrote that despite the company’s healthy balance sheet, its pre-tax earnings to revenue margin ratio of 10.7 percent represents peak growth based on industrywide expectations. Josephson pointed to a weakening global economy, rising oil prices and an increased cost of raw materials as potential investment risks. He gave the company a “Sector Weight” rating, meaning KeyBanc expects Avery Dennison’s stock to perform in line with the rest of the companies in Josephson’s coverage sector. Shares of Avery Dennison have declined 8.8 percent since the start of the year after reaching an all-time high of $123.67 on Jan. 31. Shares closed at $104.54 on July 18. The steady decline could represent investor sentiment that the company has little room left to grow. Company Position “2017 marked the company’s sixth consecutive year of strong top-line growth, margin expansion and double-digit adjusted EPS growth. Strong top-line performance in 2017 reflected a balance of contributions from acquisitions and organic growth.” – Chief Executive Mitch Butier in fourth quarter press release “In 2018, we expect to once again deliver a strong top-line and double-digit EPS growth. … We are off to a good start to the year, with adjusted EPS up 30 percent driven by a combination of solid operating results, currency translation tailwinds and a lower tax rate. Label and Graphic Materials (division) delivered solid organic growth and sustained its strong operating margin; Retail Branding and Information Solutions expanded its margin significantly, with solid organic growth driven by strength in radio frequency identification; and Industrial and Healthcare Materials results were in line with expectations, with revenue up nearly 50 percent, largely due to acquisitions, while operating margin declined.” – Chief Executive Mitch Butier in first quarter press release Analysts & Observers “Revenue for the packaging and labeling services industry generally fluctuates in line with consumer spending trends, as industry operators earn most of their revenue by packaging consumer goods. Accordingly, improved consumer spending over the five years to 2018 has supported industry growth. As U.S. consumption has risen, manufacturers have expanded production, thereby increasing the number of products that need to be packaged and thus increasing demand for industry services.” – “Packaging & Labeling Services – U.S. Market Research Report,” IBIS World “Avery Dennison posted its sixth consecutive beat in 1Q18 and increased its 2018 adjusted EPS guidance entirely on more favorable foreign exchange. AVY’s organic growth, return on assets and balance sheet are among the very best in our coverage universe, but we think its margins are at or near peak (its 2017 adjusted EBIT margin of 10.7 percent was almost at its 2021 target of 11 percent) and believe the premium multiple reflects many of these positives.” – Adam Josephson, KeyBanc Capital Markets AVY has lagged the market YTD … which isn’t particularly surprising to us given how substantial the stock’s multiple expansion was last year and given some concerns about where we are in the economic cycle (the company is more sensitive to global economic conditions than many of the other packaging companies we cover). The company’s organic growth and balance sheet are about as good as it gets in our sector, but valuation keeps us Sector Weight. – Adam Josephson, KeyBanc Capital Markets No. 7 ASGN Inc. Calabasas 2017 Revenue: $2.6B NYSE: ASGN Stock YTD: 30.9% Staffing industry surges as economy heats up. Situation Technology and health care staffing company Asgn Inc., formerly On Assignment Inc., has experienced strong growth over the past year thanks to an increased demand for IT contractors across industries. Shares of Asgn reached a 52-week high of $85.15 in mid-March, a 77 percent increase over the previous year. The peak came after the agency reported better-than-expected earnings of $169 million for the fourth quarter of last year, up 9.4 percent year-over-year. Total annual revenue increased 8 percent to $2.6 billion. For the first quarter of this year, the company reported adjusted earnings of $44 million. On July 18, Asgn’s stock closed at $84.10 on the New York Stock Exchange. Many businesses are turning to staffing agencies because it gives them more flexibility on projects and lowers overall costs. Employers can decide when to renew worker contracts and aren’t required to pay employee benefits. Last year, the U.S. staffing market grew 3 percent to reach nearly $141 billion in revenue, according to a report by Staffing Industry Analysts. SunTrust Robinson analyst Tobey Sommer told the Business Journal in March that recent reforms to the H-1B Visa program, which have made it more difficult to hire foreign workers, has contributed to industrywide growth. The increased demand for domestic workers has not only raised hourly wages for contractors but driven up the bill rates that staffing agencies charge clients. In a note to investors, Sommer wrote that SunTrust Robinson expects Asgn to sustain its upward trajectory and “generate better margins and cash generation over its peers in the IT staffing industry.” He currently gives the company a “buy” rating. Sommer pointed to the company’s recent $775 million acquisition of federal engineering contractor ECS Federal LLC as a source for future growth. “We believe the acquisition of ECS as strategically valuable, accretive and well-timed at the outset of a likely long-term improvement in federal IT spending growth,” he wrote. Investment risks for the company include the ability to continue recruiting and retaining top talent, expanding its current client base and potential increased costs caused by new regulations, according to the note. Company Position “We are pleased with our operating and financial performance for the fourth quarter and full year 2017. We continued to grow well above the stated growth rate for our industry, reflecting the continued deepening of customer relationships, the increasing rate of adoption of our delivery model and the successful expansion of our statement of work business. Over the past year we generated $172 million in free cash flow, which we used, among other things, to repurchase our common stock, pay down debt and fund the acquisition of Stratacuity. … We are well positioned going into 2018. Our previously announced acquisition of ECS will strengthen our position as one of the largest and fasting growing IT services firms in North America and increase our addressable end market to $279 billion by virtue of our entering the $129 billion government services space. – Chief Executive Peter Dameris in fourth quarter press release Analysts & Experts “The staffing industry affords flexibility for business and serves as a bridge to permanent employment for the unemployed and inactive workers. As international labor markets become increasingly complex, volatile and unpredictable, the industry is well placed to provide the vital support businesses need to grow and prosper.” – “Workforce Solutions Ecosystem” by Staffing Industry Analysts “We set our price target at $94 for ASGN based on a blend of P/E and EV/EBITDA multiples. The 10-year historical average P/E for ASGN is 16.3 while the stock currently trades at a 20.6 multiple to our 2018 adjusted EPS estimate of $4.06. Using our 2019 adjusted EPS estimate of $4.60 and assuming the current multiple stays relatively stable at 20.6 in the next 12 months, we arrive at a valuation of $95. “ASGN currently trades at 12.6 multiple to our 2018 adjusted EBITDA estimate of $390 million, and the historical average EV/EBITDA multiple (last 10 years) has been 9.8. We expect the multiple to be relatively stable at 12.6 in the next 12 months given the outlook of a more favorable regulatory environment. … Based on our 2019 adjusted EBITDA estimate and a 12.6 multiple, we arrive at a $94 share price. “Based on a blend of these metrics, we set our target price target at $94 as ASGN continues to generate better margins and cash generation over its peers in the IT staffing industry.” – Tobey Sommer, SunTrust Robinson No. 16 Marcus and Millchap Inc. Marcus & Millichap Inc. Calabasas 2017 Revenue: $720M NYSE: MMI Stock YTD: 24.7% Commercial brokerage rides the real estate market higher. Situation The commercial real estate brokerage, which historically specialized in selling small apartment buildings, has prospered along with the larger real estate market in recent years. The company’s initial public offering in 2013 set the stage by providing capital for a series of acquisitions that has expanded the company in addition to organic growth. On May 8, the firm announced that it had entered into a definitive agreement to acquire the assets of Cleveland, Ohio-based commercial real estate mortgage brokerage and finance firm Pinnacle Financial Group Inc. The company has also expanded in financing transactions. Last year it engaged in 1,707 capital market financings. Marcus & Millichap owns Institutional Property Advisors, a division that connects large investors with the properties in the $1 million to $10 million range constituting most of its deals. It has specialists in retail properties, student housing, multifamily, office, industrial, senior housing and medical office. Company Position “We began the year on a positive note. Our expanded client outreach and marketing initiatives over the past year along with investments in brokerage tools and infrastructure generated steady improvement in our results. These countermeasures to heighten market uncertainty and interest rate volatility culminated in total revenue growth of nearly 14 percent for the first quarter and 16 percent in brokerage revenue, with improvements across all market segment.” – Chief Executive Hessam Nadji, May 8 conference call “Our team, with over 75 years collective experience in the mortgage banking industry, has provided our clients with competitive terms, creative and innovative financial structures and reliable executions for over 28 years. We are excited for the opportunity to be involved in more transactions in a wider geographic area; this will allow us to better leverage our relationships with lenders and continue to expand our capital sources. Our philosophy and history of consistent execution dovetail well with that of Marcus & Millichap and we look forward to making a meaningful contribution.” – Jim Leonard, president of Pinnacle Financial, May 10 “Larger transactions for real estate brokerage, which are more variable, had outsized revenue growth of 32 percent in 2016 and experienced an 11 percent decline in 2017. We are encouraged by the results in the fourth quarter in a more challenging market environment and our ability to increase our private-client market share by an estimated 50 basis points for the year. Revenue from financing fees grew an impressive 22.6 percent to $15.5 million for the quarter. The increase was driven primarily by growth in financing purchase transactions. For the year, financing revenues grew a healthy 14.3 percent, to $49.7 million, or nearly 7 percent of total revenue.” – Chief Financial Officer Martin Louie, March 8 conference call Analysts & Observers “The private client market is highly fragmented with the top 10 U.S. brokerage firms having 24 percent combined market share. MMI is the market leader with 8 percent, almost twice the share of No. 2 player CBRE. In the highly competitive office segment, MMI ranked third in transactions in 2015 behind CBRE and Cushman & Wakefield. In the apartment and retail segments, MMI is the clear leader over CBRE.” – Chris Karlin, Seeking Alpha “Underlying fundamentals seem strong enough to weather the near-term volatility, while ramp of new agents and geographic expansion may act as positive catalysts for organic growth. Investor sentiment moving down, but Street numbers moving higher.” – Darspal Mann, Seeking Alpha No. 20 Tutor Perini Corp. Sylmar 2017 Revenue: $4.8B NYSE: TPC Stock YTD: -26.8% Despite big contract wins, construction stock takes a dive. Situation Construction management firm Tutor Perini Corp. saw project volume jump 56 percent year over year in 2017. The company closed out the year with $5.8 billion in new awards, including the $1.4 billion extension for Purple Line extension from the Los Angeles County Metropolitan Transportation Authority. Tutor Perini also won office projects in northern California totaling more than $370 million. Thanks to the addition of $2.2 billion in contracts during the first quarter of this year – led by a $1.4 billion terminal redesign project at Newark Liberty International Airport in New Jersey – the company had a record-high backlog of $8.5 billion at the end of the first quarter. Tutor Perini announced in mid-June that it won a $410 million contract for another portion of the Purple Line. “Our record backlog … together with the continued strength of our current market opportunities gives me the confidence for long-term growth and improved profitability,” Chief Executive Ron Tutor said May 9 during his quarterly conference call with investors. Yet despite its hefty roster of projects, return on shares of Tutor Perini have fallen 36 percent year over year, according to a report by Morningstar Inc. Its stock price has lost more than a third of its value since the start of the year, closing at a high of $27.50 on Jan. 12 compared to $18.55 on July 18. The company had a significant loss for the first quarter, coming in at -24 cents per diluted share, or roughly 27 cents lower than analysts’ expectations. The discrepancy was due to an “unexpected negative arbitration decision” over a dispute with a subcontractor in New York, according to the company. Still, the majority of analysts who follow the company recommend it as a “buy” or “strong buy,” according to Thomson Financial. Its average price target is $29.86. According to the Morningstar report, Tutor Perini is undervalued relative to other firms in its sector. However, some observers have expressed concerns about the firm’s accounting practices and management style, given that the company has a history of litigation with former clients both public and private. Company Position “I’m really looking at a series of very large jobs and profitability. And I’m telling you that I believe our backlog will continue to break records all the way to the end of the year. We’re on a roll.” – Chief Executive Ron Tutor, May 9 conference call “(We) do feel good about how things are progressing in both the claims of litigation front and other projects.” – Chief Financial Officer Gary Smalley, May 9 conference call Analysts & Observers “TPC remains well positioned to benefit from improving investment into U.S. infrastructure in a market where competition seems to be waning. However, for the intermediate term, we are lowering our 2018 estimates and lowering our price target from $36 to $28 and we maintain our (buy) rating.” – Alex Rygiel, B. Riley FBR Inc, in May 10 report “TPC appears to be in the early stages of a significant earnings ramp which should sustain through 2019. As execution ramps on new work and free cash flow further improves, we look for these shares to appreciate as investors gain more confidence in earnings leverage.” – Brent Thielman, D.A. Davidson & Co., in May 10 report “We view the ($410 million contract for the L.A. Metro Purple Line Extension Section 3 tunnels project) as an important positive in terms of the continued backlog momentum in TPC’s high margin civil segment.” – Tahira Afzal, KeyBank Capital Markets Inc. in June 14 note “Sluggish growth dependent on acquisitions and aggressive accounting practices renders the company much less valuable than it might appear at a glance.” – Edgar Torres, Seeking Alpha on June 28 No. 24 Limoneira Co. Santa Paula 2017 Revenue: $435M Nasdaq: LMNR Stock YTD: 13.9% Citrus producer goes global and diversifies into home development. Situation With assets of nearly $400 million, agricultural company is a juggernaut out of Ventura County – one of the largest growers and marketers of lemons in the country as well as the nation’s largest grower of avocados. Limoneira Co. owns 10,600 acres of agricultural land with significant water rights and operations in California, Arizona and Chile. To guarantee year-round product for its customers, the company has entered South America. On June 20, Limoneira signed a binding memorandum to acquire a ranch in La Serena, Chile, for $13 million. The San Pablo ranch consists of 3,317 total acres on two parcels, including 247 acres of lemon trees, 61 acres for orange production, an additional 120 acres that can be dedicated to lemon production, plus approximately 500 acres for avocado production. In April, the company formed Grupo Argentino, a cooperative with three fruit packers in Argentina. Higher lemon prices propelled Limoneira to higher net income and revenue during the company’s fiscal second quarter. The citrus packer reported net income of $6.47 million (44 cents a share) in the quarter ended April 30, compared to net income of $3.39 million (24 cents) in the same quarter the year prior. Revenue grew 17 percent to $43.1 million. The company sold about 1.16 million cartons of fresh lemons during the quarter at an average price of $23.42, compared to 958,000 cartons sold at a $21.50 during the second quarter last year. In addition to its citrus projects, Limoneira is working on a major housing development project in Ventura County. In late 2015, the company partnered with Upland-based developer Lewis Group to work on Harvest at Limoneira, a project in the works for more than a decade. Upon its completion in 2027, Harvest at Limoneira will include 1,500 homes and apartments, a school, a fire station, 100 assisted living units, commercial space, a sports park, amphitheater, agricultural preserve and hiking trails. The master planned community, to be erected along the 126 highway in eastern Ventura County, broke ground Nov. 8. Limoneira has invested $60 million into the joint venture, which will also spend about $225 million in roads, sewers, utilities and other infrastructure. Harvest, one of the largest housing projects in Ventura County’s history, has been hailed in some circles as a tonic to SOAR (Save Open Space and Agricultural Resources), a long-running series of general vote-dependent county initiatives which have been criticized for curtailing development and keeping area home inventory scarce. Company Position “Record lemon sales combined with strong orange sales and leverage from our packing house drove a 50 percent increase in operating income. As we enter the third quarter of fiscal 2018, we remain confident the key drivers of our agribusiness that drove our record first half performance will remain in place in the second half.” – Chief Executive Harold Edwards in June 11 press release “We’re optimistic that the sales will be strong, partially because of the scarcity of the inventory but also because of the quality of the housing.” – Lewis Group Executive Vice President Randall Lewis on April 2 Analysts & Observers “Limoneira is very well respected and housing is sorely needed. What I like about it is that the residents of the city of Santa Paula approved it.” – Matthew Fienup, Center for Economic Research and Forecasting at California Lutheran University, on April 2 “The voters who live near Harvest will let new neighbors in. That’s great. In the absence of SOAR, there would be many more of these and they would happen faster.” – Jared Barton, Martin V. Smith School of Business and Economics at California State University – Channel Islands, on April 2 “Fresh food is growing quickly, and within fruits and vegetables, avocado is one of the leaders.” – Chris Krueger, Lake Street Capital Markets on Feb. 2
