Barron's says buy Vodafone, are they correct?

On August 6, 2020, Barron's magazine published an article on Vodafone (NASDAQ:VOD) stating that the shares have bottomed based on the following reasons:

• The company has put together €1 billion cost cutting plan.
• Potential upside from introduction of 5G.
• Assets that they have marked for disposal could generate cash and dispose of under performing assets.
  
• The demand for data is exploding due to the lock down caused by the COVID-19 pandemic.

The company saw lower churn rates partly because of the pandemic driven lock downs. The company is also reaffirming its guidance and estimates that it will generate €5 billion in free cash flow. Germany is Vodafone's largest and most important market. It accounts for 34% of the company's EBITDA. Given that Germany has the virus under control, that market has been resilient through this global crisis. 

Exhibit: Vodafone's Most Important Market is Germany

(Source: SeekingAlpha)

Looking at the charts, the shares have been range bound ever since it peaked at around $18.18 on June 8, 2020. Barron's may have a point. The stock may have indeed bottomed. The Bollinger Bands are tightening, which may indicate a sharp price move, but we do not know in which direction. If Barron's is right, that sharp move may be an uptrend. Ideally, I would be a buyer when the price is hugging or closer to the lower band. Currently the price is in the middle of the band. The Moving Average Convergence Divergence (MACD) is flashing a slight buy signal. 

 

Exhibit: MACD flashing a moderate buy signal

 (Source: Tradingview)

I have placed a new buy limit order for Vodafone on $15.31. There's very less probability that I will get it at that price, but if I do I will report back on its performance when I sell.    

(Disclosure: I own VOD)         

Why I bought Charles Schwab at $33.14 on Aug 7, 2020

Entry Price: $33.14

Trade Date: Aug 7, 2020

Potential Exit Points: Near the top of the Bollinger Bands at around 35.70 or wait until after the next earnings (October 19, 2020) and exit after collecting the dividend.  

Charles Schwab (NYSE: SCHW) is one of the largest brokerage firms in the country. A wave of consolidation across the industry is putting Schwab at a dominant position. In the near-term, Schwab faces pressure on its revenues due to the zero interest rate policy (ZIRP) of the Federal Reserve. The ZIRP is impacting Schwab's net interest margin, but it is having a positive impact on the number of trades executed. People everywhere are hungry for yield. Charles Schwab has also been successful in growing its asset base at a long-term growth rate of 6% due with its deft use of acquisitions to bolster assets.  The companies with the largest asset bases will survive and Schwab with $4 Trillion in assets will be one of those survivors. 

Exhibit: Schwab Growing New New Assets at around 6%

(Source: SeekingAlpha)

The consolidation in the industry will leave very few large players dominating the industry. Schwab recently acquired TD Ameritrade and Morgan Stanley acquired E*Trade. I am hoping to hold on to Schwab until after the next quarterly earnings and the dividend payment, which I anticipate would be a good one. 

From a technical analysis point of view, I am not fully convinced this is the perfect trade. The Simple Moving Averages are screaming a sell while some of the oscillators are signalling a buy. Overall the technical indicators are flashing a sell signal.  

Exhibit: Charles Schwab Technical Indicators - August 8, 2020 

(Source: Tradingview) 

The stock was trading near the lower price range of its Bollinger Bands and had a double bottom. That, along with the fundamentals, is what prompted me to buy the shares. 

Exhibit: Charles Schwab's Double Bottom

(Source: Tradingview) 

(Disclosure: I own Charles Schwab)

       

Western Digital Had Good Earnings. But Gross Margins Could Improve

Western Digital (WDC) Saw its revenue increase by 18% YoY. It had another record quarter for its flash storage business. Two out of its three business segments did very well. How many companies in today's economy can actually say that it's growing revenue at a double-digit pace?  If you look at the Dow Jones Industrial Average (DJIA) 20 out of 30 companies in that index saw YoY EPS decline. 

Exhibit: WDC showed good revenue growth in Q4 FY 2020

(Source: SeekingAlpha)

Its Data Center business continue growing and its revenue increased 32% YoY. Its Client Devices business grew revenue by 19% YoY. But due to the closure of retail stores because of the pandemic, its Client Solutions business suffered.

(Source: SeekingAlpha)

The company has made it a priority to pay down debt. Its gross margins have shown improvement but it could improve further. Gross margin percentage has gone from 24.2% in Q4 FY 2019 to 28.9% in Q4 FY 20.

(Source: SeekingAlpha)

(Source: SeekingAlpha)

For example, the company's non-gaap gross margins were at 43% in Q2 of FY 2018.  So, it's possible for Western Digital to improve its gross margins substantially. 

Exhibit: In Q2 FY 2018 WDC had Good Gross Margins. It's possible for WDC to get to this level again. 

(Source: SeekingAlpha)

I see there could be two drivers for gross margin improvement in the second-half of the year.

• The release of new video game consoles from Playstation and Xbox should drive demand for storage demand and lift the average selling price (ASP)
  
• The company's 16-TB and 18-TB hard drives based on HAMR technology should see good demand in the cloud space. 
  

I had recently done an article on SeekingAlpha and I had covered both Micron (MU) and Western Digital as part of that.      

(Disclosure: I own both MU and WDC)          

Disastrous Earnings at Dow Jones Industrial Average for the Latest Quarter

As of June 30, 2020, most of the companies in the Dow Jones Industrial Average (DJIA) have already reported quarterly earnings . The pandemic induced recession and the oil price war waged by Saudi Arabia and Russia have ravaged the earnings of the companies in the index. The first quartile EPS growth rate for the DJIA was a negative 68%.  The third quartile EPS growth was just 5%.

Exhibit: Latest Quarter EPS Growth Rate for Companies in the DJIA

(Source: SECURFII)

    

Exhibit: Gains from 52-Week Low for Companies in the DJIA

(Source: SECURFII)

Given this earnings back drop the stocks have done remarkably well. The first quartile gain for stocks in the DJIA from their 52-week low was 35%. The third quartile gain was 62%.

Exxon Mobil had the biggest drop in EPS going from $0.53 in the previous quarter to a negative $0.7 in the latest quarter that ended June 2020. 

In fact 20 out of their 30 companies in the DJIA recorded negative EPS growth rates.

 

Exhibit: Earnings of some of the companies in the DJIA

(Source: SECURFII)

 

(Disclosure: I own XOM, CVX, DOW, and others in the DJIA) 

Ford's New CEO Faces a Tough Road Ahead

On August 4, 2020 Ford (NYSE: F) announced that they are replacing Jim Hackett - the current CEO - with Jim Farley.  Farley was serving as the Chief Operating Officer at the company. Ford is getting ready to launch the new model for its iconic F-150. The F-150 is the best selling vehicle in the U.S. 

Exhibit: Ford is Launching a New Model of its Most Important Vehicle - The Ford F-150

(Source: SeekingAlpha)

Ford is also reviving its iconic Bronco brand in 2021. The new Bronco, I must admit looks absolutely stunning. 

Exhibit: The New Ford Bronco Line-up

(Source: Ford Website)

Ford is also making a huge commitment to electric vehicles. The company will have 15 electrified vehicle models available by end of the year. The competition in the electric vehicle market is heating up substantially with General Motors releasing a whole slew of vehicles and many other auto makers doing the same.

Exhibit: Ford is Launching New Electric Vehicles

(Source: SeekingAlpha)

Even before this pandemic induced economic crisis, Ford was not generating enough cash flow. It had a meager $0.5 billion in adjusted free cash flow in Q4 2019.

The challenge for Ford is that they were late to the electric car market and their upcoming models may not be differentiated enough. For example, their Escape plug-in hybrid model is advertised as having a 490 mile range. That would be a good range for a plug-in hybrid but there are many vehicle with that range. Given the upcoming competition in the the electric vehicle market will a model such as Escape plug-in hybrid stand out. 

They may have to do what Mary Barra at General Motors (GM) did years ago. She exited unprofitable markets such as Europe and India. Ford may have to exit unprofitable markets and bring their manufacturing capacity in-line with their sales and ensure they can stay profitable in a recession such as the one we are in now. 

Ford has a tough road ahead and in the interim the stock is going to continue under-performing.           

(Disclosure: I do not own Ford stock)

 

What is wrong with 3M?

I am going to break the suspense and answer the question in the title: "There's nothing wrong with 3M!" Its earnings for the quarter that ended June 2020 was exception given the tough circumstances under which every company in the world has been operating this year. Its GAAP EPS was $2.22 for Q2 2020 against an estimate of $1.80. Its revenue of $7.18 billion missed estimates by just $110 million. Complete industries in this era of the pandemic are in a free-fall and here we are punishing an essential, iconic American company for missing revenue by an amount, which would be 1.5% of the $7.18 billion.

Exhibit: 3M Q2 2020 Sales Declined by 13.1%

(Source: SeekingAlpha)

Yes, there was broad weakness in sales across all their business segments. But the company has been aggressive in reducing costs and was able to improve adjusted EBITDA margin by 110 basis points to 26.5%. Their operating cash flow increased 15% year-over-year to $1.9 billion. The management even paid down debt by $1.7 billion since the March 31, 2020 quarter.

The stock has been punished after the earnings. It has dropped from about $163 and trades a little over $151 as of August 4th. 

Exhibit: 3M Technical Indicators are Flashing a Strong Sell on August 4, 2020.

(Source: Tradingview)

Currently, the technical indicators are all flashing a strong sell signal. The market seems to be giving-up on 3M. But the Bollinger Bands are tightening and this raises the possibility of a sharp price move in either direction. Given that the other technical signals are flashing sell, tightening Bollinger Bands could indicate a drop from this level.

Exhibit: 3M Bollinger Bands are Tightening.

(Source: Tradingview)

(Disclosure: I do not own 3M)

 

            

Caterpillar May be a Buy at around $131

Caterpillar (CAT) may be signalling a buy at around $131. This could be short term trade and the exit could be around $140, where the stock could face resistance. Bollinger Bands indicate that the stock is relatively cheap at around $131. There was a 30% upside on reported earnings compared to Wall Street estimates. EPS on Jul 31, 2020 was $0.84 compared to estimate of $0.64.  The earning beat indicate that the stock can go higher in the short-term. 

Exhibit: CAT's SMA is mostly bullish and Bollinger Bands indicate relative low prices.

(Source: Tradingview)

(Disclosure: I own CAT)   

Boeing has broken below a key support level

Boeing missed earnings targets by a huge margin on June 29, 2020. One Wall Street analyst called it a "planewreck"! The company reported a loss of $4.20 when the Wall Street estimate was for a loss of $2.55. This huge miss is driving the stock even lower. I have done a brief technical analysis of Boeing's 3-month chart and it does not paint a pretty picture.  The stock dropped below key support level of around $169. Today's small rally in the stock that brought it to $162 may be a false one and Boeing may continue dropping. 

(Source: TradingView)

(Disclosure: I own Boeing)

Caterpillar May be Set to Weaken Further.

Caterpillar recently announced that it may face a prolonged sales decline. The stock lost considerable ground on the day of this news. Looking at the Caterpillar's chart, it seems like weakness is set to continue. Caterpillar's sales have declined by 30% in Q2 2020. That's a very substantial decline. Given that the company sells very high-priced capital equipment that last a long time, demand for this equipment may recover slowly.

Exhibit: Caterpillar's Sales Were Down 30% Compared To Q2 2019.

(Source: SeekingAlpha)

I have also done a trend analysis on TradingView that seem to indicate further weakness to come in the stock.  

Exhibit: Caterpillar's chart is reflecting its weak fundamental. 

(Source: Author's chart on TradingView)  

Morningstar's analyst report on July 31 2020 makes a couple of interesting points:

• Many end markets served by the company are not directly affected. 
  
• Given the rally in gold, that may spur more mining.
  

All this may not be enough to save the company from a prolonged downturn.