Question:
I know you sold Procter & Gamble a while ago. It’s long-term holding for me, and while I didn’t sell, I significantly trimmed my shares. What is your current opinion on the company?
Answer:
We sold The Procter & Gamble Company (NYSE: PG) in mid-April 2012. While the company has a plethora of iconic brands, including Tide laundry detergent, Crest toothpaste, Charmin toilet paper and Gillette razors, it has struggled in its execution for some time now, both internally and externally. On June 20, 2012, the company warned its current quarter would disappoint, saying it expects sales to fell 1% to 2%, rather than the previous forecast of 1% to 2% growth.
Internally, CEO Bob McDonald had tried to accelerate the development of new products and package sizes, particularly during the recession, but his moves clashed with P&G’s famous reputation for conducting painstaking, deliberate consumer case studies and bureaucratic culture. Externally, P&G mistakenly tried to take the lead by increasing prices, but a weakened consumer and competitors’ failure to follow suit in raising prices forced the company to roll back the price increases.
For about 12 consecutive quarters, the company’s U.S. market has not grown, causing it to consistently lose market share. The company’s brand strength is unquestionable, but with so many recent missteps in its strategy and a stock price that is trading at about a 30% to 40% premium to the overall market, we do not recommend holding P&G at the moment. The company pays around $3.75 in dividend; however, without growth or expectations of growth the company is going to trade flat.
Question:
What should I do with my Grainger right now?
Answer:
W.W. Grainger, Inc. (NYSE: GWW) is a distributor of industrial items used in facilities and manufacturing plant maintenance. The company is expected to grow earnings by more than 13%, annually, over the next few years, and the market seems to believe they will. The price has been bid up to levels well above their average when you look at their price to earnings, price to book and price to sales. Therefore, we think the company looks expensive.
We do not recommend buying at the current level. As the company has been operationally sound, there is not a compelling reason to sell it. Depending on the size in your portfolio, this may be a good time to take some profit from this position.
Question:
I own Walgreen, and I’m not sure what to make of their announcement to buy Boots. Should I hold or dump Walgreen? If I sell it, what else could I buy in that space?
Answer:
In our opinion, Walgreen Company (NYSE: WAG) has a bigger problem in their fight with Express Scripts. Walgreen lost many customers and has yet to blink in the fight over pharmaceutical benefits—near double digits in loss of same-store sales. At stake is whether Walgreen should fill prescriptions at low negotiated prices or refuse and lose the revenue from this business. Walgreen has stated they would rather lose the revenue than fill prescriptions at unprofitable prices. Either way, the feud has driven down Walgreen stock price by 30%, since it began in mid-2011. Express Scripts is down 2.27%.
The next development was that Express Scripts bought Medco Health Solutions last month and Medco has a contract with Walgreen’s that is unlikely to be renewed given the company’s stance against Express Scripts.
As for the purchase of a large stake in Alliance Boots, Walgreen’s management believes this move will add between $0.23 and $0.27 per share to earnings within the first year after closure, or 8% to 10%. Boots has retail and wholesale operations in the United Kingdom, which are largely pharmacy-related.
To answer the question in short form, Walgreen looks too cheap to sell, but there are plenty of related fears that keep us from making a recommendation to buy. If you need a loss to offset some positive positions, sell Walgreen. In the same space, Express Scripts Holding Company (NASDAQ: ESRX) looks attractive.
Question:
I wanted to get your opinion on two stocks: Quest Diagnostics and Lincare Holdings.
Answer:
Lincare Holdings (NASDAQ: LNCR) is a leading provider of oxygen and respiratory services to home-based patients suffering from chronic obstructive pulmonary diseases, such as, emphysema, chronic bronchitis or asthma. The company is the largest player in this highly fragmented industry, garnering a market share just below 30%. Lincare’s earnings are expected to grow 15% to 20%, but that is largely the result of 15 acquisitions the company made in 2011.
As the population ages, customer demographics will begin to more heavily favor Lincare’s business; however, Medicare payments and reimbursement cuts have steadily eroded the company’s operating margins. Right now, we recommend avoiding the company without knowing about any Medicare funding cuts in the near term.
Quest Diagnostics Inc. (NYSE: DGX) provides diagnostic testing, information and services to patients, physicians, hospitals, insurers, employers and government agencies. The company started the year with first-quarter sales and earnings exceeding expectations. Strong growth in esoteric and advanced gene-based testing and strong volumes in routine testing helped fuel much of the company’s performance. As the economy seems to be limping along, consumers may cut back on doctor office visits and their overall health care expenditures.
However, there are reasons to like Quest. The stock trades roughly in line with the markets at 13.5 times earnings, but it is expected to grow its earnings over the long term by nearly 12%, annually. Additionally, Quest’s operating margins are steadily higher than 20%, and profit margins are consistently around the 10% mark. Finally, the return on capital and returns on equity are often at 11% and 18%, respectively. Of the two choices, we recommend Quest.
Question:
I’d like to know more about Siemens. My grandson just graduated from Tech and got a job there. Is it a good company as far as the financials go?
Answer:
Siemens AG ADR (NYSE: SI) meets the Henssler standard of high quality companies. German-based Siemens has grown earnings in spite of tough economic times in Europe. The company has a stable return on equity, healthy profit margins and their debt is not so large as to impede growth or raise any fears. Their debt service coverage is not in question.
The main fear with Siemens is that 50% of their revenue is derived from European operations. As already noted, the company has been able to grow earnings in the current environment, so this is not mission impossible. However, the stock market reflects the economic fear. We do not believe there is reason for employees to fear at this time.
From the point of view of an investor, if you have a stomach for some volatility, you may be rewarded by holding Siemens in the next few years. A dividend yield of more than 4% should help you wait out the storm.
At Henssler Financial we believe you should Live Ready. If you have questions regarding your investments, the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email at experts@henssler.com.
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
