Growing Data Storage Business: Western Digital

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Leveraged balance sheet may deter some investors

Shares of Western Digital, $24 billion data storage manufacturer and provider, have been on a fluctuating ride and traded in the range of $75 to $90/share and now at $80.59 at the time of writing.

The company also recently reported its first half operations. Western Digital or WDC reported 9.5% rise in revenue and losses of $142 million compared to $131 losses a year earlier. WDC may have recorded a good amount of profits if it were not for its income tax expenses rose almost nine times to $1.6 billion in the recent period.

“We continued our strong financial performance in the December quarter, with nine percent year-over-year revenue growth, driven by each of our major end-market categories and solid execution by our team.

“We once again generated strong operating cash flow, reflecting continued healthy demand in our end markets, most notably for our capacity enterprise hard drives and flash-based products.

“I am very pleased with our technology and product development execution. The deployment of our 64-layer 3D flash technology continued across our product portfolio and we will be ramping our 96-layer technology later this calendar year. We continue to lead the industry with our high-capacity helium HDD platform in 10, 12 and 14 terabyte capacities and we remain on plan to sample our MAMR-based capacity enterprise drives in the second half of calendar 2018. I am also pleased that we resolved our negotiations with our JV partner Toshiba in December and ensured our long-term access to flash.”

Steve Milligan, chief executive officer

The company had $12 billion in debt (1.1x debt-equity) and a book value of $11.3 billion.
Meanwhile, WDC announced a tender offer for ~$3.5 billion of its debt in late January.

In the past three fiscal years, WDC raised $5.1 billion in financing activities and generated $5.9 billion in free cash flow.

Analysts have an average price target of $112.11/share vs. $80.63 at the time of writing. Conservative calculations indicated per share figure of $89.55.

Disclosure: No WDC shares.

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Grossly Undervalued? Allergan

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The company still expects losses in 2018 at GAAP basis

Share price of Allergan, $54 billion specialty pharmaceutical company, has been on a decline for the past year.

The Ireland-based pharmaceutical company just reported its fourth quarter and full year results.

Allergan reported 9% rise in revenue and a $4.4 billion loss compared to $14.7 billion profits a year earlier. Interestingly, Allergan could have more losses if not for the recent tax reform (~$3.9 billion more in estimation).

Allergan stated that losses arise from its impairment charges from its RESTASIS® drug ($3.2 billion) and ACZONE® ($646 million).

Allergan lost its RESTASIS® drug patent on October 2017. RESTASIS® delivered $1.4 billion in sales for Allergan in 2017. This is Allergan’s second-highest revenue generator.

Allergan also expects -$2.27 to -$1.52/share in earnings in 2018 in GAAP basis with 40% tax rate. On Non-GAAP basis with a tax rate of 14%, Allergan expects $15.25 – $16/share.

“2017 was a pivotal year for Allergan and we delivered solid results. We powered strong revenue growth of our top products and in each of our regions. We acquired, integrated and grew two new businesses and continued to advance our R&D pipeline. Allergan also continued to execute our capital deployment plan by completing a $15 billion share repurchase program, instituting a dividend and paying down debt in 2017.

“I believe that Allergan has a strong future and I am especially proud of our Allergan colleagues who continue to be Bold for Life by delivering treatments that make a difference for patients around the world.”

Brent Saunders, Chairman and CEO of Allergan

In 2017, Allergan ended up with $30 billion in debt (-$2.7 billion from 2016; 0.4x debt-equity), and $73.8 billion in book value (-$2.4 billion).

In the past three fiscal years, Allergan raised $3.4 billion in financing activities and generated $9.9 billion in free cash flow.

Analysts have an average price target of $224.10/share vs. $163.40 at the time of writing. Meanwhile, calculations indicated a per share figure of $610.

Disclosure: No shares in Allergan.

Impressive Pharmaceutical Business Growth: Merck

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Nearly trading at par with conservative calculated value

Merck is a $150 billion global healthcare company that recently traded at 53x its earnings and 4x its book value.

The New Jersey-based company recently reported its fourth quarter and full year 2017 results.

According to its press release, Merck reported 1% rise in revenue and a contrasting 34% drop in profits. The bottom line drop secondary to rise in tax costs, but income before tax showed a healthy 45% rise.

A couple of outstanding medicines that Merck sells achieved impressive growth: Keytruda (+172%; +$2.4 billion) and Zepatier (+199%, $1.1 billion).

“Our 2017 results reflect the underlying strength of our business and our ability to grow, despite significant headwinds.

“We enter 2018 with strong operating momentum, based on our key pillars of growth that will enable us to deliver on our mission of improving patients’ lives.”

Kenneth C. Frazier, chairman and chief executive officer, Merck

Merck also anticipates 2018 sales of $41.2 billion to $42.7 billion (vs. $40.1 billion in 2017), and GAAP earnings-per-share of $2.97 to $3.12 (vs. $0.93).

Balance sheet and cash flow statement not available at the time of writing.

As of September, Merck had $27 billion in debt (0.7x debt-equity) and $38 billion in book value.

In the past three fiscal years, Merck allocated $29 billion in financing activities and generated $25.4 billion in free cash flow.

Analysts have an average price target of $66.76 vs. $54.99 at the time of writing while conservative calculations provided a per share figure of $59.

Disclosure: No Merck shares.

 

Strong Growth Despite Some Falling Medicine Sales: Pfizer

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Trading at calculated fair value

Shares of Pfizer, $204 billion biopharmaceutical company, recently fell nearly 13%. The company recently reported its fourth quarter and full year results.

In 2017, Pfizer reported -1% revenue decline and nearly tripling of profits. A little more than $9 billion was added to Pfizer’s bottom line brought by recent tax reform. Nonetheless, income before taxes still rose a healthy 47% from 2016.

“Pfizer had a strong year in 2017, delivering solid financial results, advancing several significant pipeline programs and enhancing shareholder value with prudent capital allocation decisions. Regarding our revenue performance in 2017, Pfizer Innovative Health was driven by continued strength from several anchor brands, including Ibrance, Eliquis and Xeljanz — all of which currently have market-leading positions with many years of patent protection remaining. Pfizer Essential Health generated strong operational revenue growth in emerging markets and in our Biosimilars portfolio but was negatively impacted by the HIS divestiture, the expected impact of product losses of exclusivity and legacy Hospira product shortages in the U.S.

“In 2017, we received ten approvals from the FDA, significantly more than Pfizer has achieved in any year in the past decade. Building on these achievements, during 2018 we look forward to important regulatory decisions and clinical data readouts across our pipeline that will drive the next wave of innovation at Pfizer.

“I believe our capital allocation decisions in 2017 enhanced shareholder value. In addition to investing in our business, we also returned $12.7 billion directly to shareholders through a combination of dividends and share repurchases and we decided to explore potential strategic alternatives for our Consumer Healthcare business. We remain on track to make this decision, which could include everything from a full or partial separation to ultimately deciding to retain the business, during 2018.

“I believe our current management and business structure, the tireless dedication of our colleagues and the strong culture we have nurtured position Pfizer especially well for continued success.”

Ian Read, Chairman and Chief Executive Officer

Balance sheet and cash flow statements were not available at the time of writing.

Pfizer experienced decline in some of its products such as Viagra (-30%; $358 million), Prevnar (-2%; $117 million), Enbrel (-16%, $457 million), Lyrica (-31%; $248 million), Vfend (-29%; $169 million), Pristiq (-59%, $169 million), Zyvox, and Revatio.

Pfizer also sold its Hospira Infusion Systems for $900 million in 2016-2017 period.

Meanwhile, Pfizer had total debt of $44 billion (0.72x debt-equity) and $60.8 billion in book value as of September.

In the past three fiscal years excluding the recent, Pfizer allocated $29 billion in financing activities and generated $42 billion in free cash flow.

Analysts have an average price target of $40.55/share vs. $34.20 at the time of writing. Conservative calculations gave a per share figure of $33.60.

Disclosure: I have shares in Pfizer

One-Time Tax Charge Affected Bottomline: Johnson & Johnson

Growth in business still observable despite some declining pharmaceutical products

Shares of Johnson & Johnson or JNJ, $348 billion healthcare company, recently fell more than 12% from its all-time highs and now traded at $129.53/share.

JNJ recently reported its fourth quarter and full year results. JNJ reported 6.3% rise in revenue but a whopping 92% drop in profits. Most profit loss was related to a nearly $13 billion tax costs in relation to the tax reform. But prior to the tax costs, JNJ already had increase operating costs that gave it lower earnings in 2017.

“Johnson & Johnson delivered strong adjusted earnings per share growth of 8.5% and total shareholder return of greater than 24% in 2017, driven by the robust performance of our Pharmaceutical business, while continuing to make investments in acquisitions, innovation and strategic partnerships to accelerate growth in each of our businesses.

“As we enter 2018 and look beyond, we are experiencing an incredible pace of change in health care. Johnson & Johnson is uniquely positioned to lead during this dynamic era and deliver innovative solutions for patients and consumers that drive sustainable, long-term growth. We are pleased with the passage of recent legislation modernizing the U.S. tax system, which enables Johnson & Johnson to invest in innovation at higher levels to help address the most challenging unmet medical needs facing health care today.”

“I want to thank all of our talented colleagues for their commitment, passion and dedication to transforming the lives of patients and consumers worldwide.”

Alex Gorsky, Chairman and Chief Executive Officer

Most pharmaceutical products of JNJ’s exhibited steady growth except for reduction in world wide sales on Remicade (-9.3%; -$651 mil), Other infectious diseases (-21%; -$165 mil), Concerta (-8.3%; -$72 mil), Risperdal (-9.9%; -$88 mil), Other neuroscience (-13.9%; -$294 mil), Invokana (-21%; -$296 mil), Procrit (-12%; -$133 mil), and Diabetes care (-9.7%; -$174 mil).

Balance sheet figures were not available at the time of writing. Meanwhile, JNJ had $35.2 billion in debt (0.5x debt-equity) and a book value of $74 billion as of September 2017.

In the past three fiscal years, JNJ allocated $31.7 billion in financing activities and generated $46 billion in free cash flow.

Analysts have an average price target of $148.91/share vs. $129.53 at the time of writing. Conservative calculations gave a per share figure of $105/share.

Disclosure: I have shares in JNJ

Profit Surge: ExxonMobil

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Price correction in giant oil and gas firm

Shares of ExxonMobil, $321 billion energy business company, has fallen nearly 11% since the start of the year.

The oil and gas company recently reported its fourth quarter and full year results early this month.

ExxonMobil reported 17.4% rise in revenue and an impressive 151% increase in profits. Minus any gains from revaluation of deferred income tax brought by the recent tax reform, ExxonMobil would still have delivered a strong 76% rise in profits.

“The impact of tax reform on our earnings reflects the magnitude of our historic investment in the U.S. and strengthens our commitment to further grow our business here.

“We’re planning to invest over $50 billion in the U.S. over the next five years to increase production of profitable volumes and enhance our integrated portfolio, which is supported by the improved business climate created by tax reform.”

Darren W. Woods, chairman and chief executive officer

In 2017, ExxonMobil also had a book value of $187.7 billion (+$20 billion a year ago) and generated $10 billion in free cash flow while having provided 13 billion in dividends and share repurchases to shareholders. *Debt figures were not retrieved from recent report.

In the past three fiscal years excluding 2017, ExxonMobil allocated $34 billion in financing activities and accumulated $21.9 billion in free cash flow.

Analysts have an average price target of $86.30/share vs. $76.50 at the time of writing. Conservative calculations indicated a per share figure of $70.

Disclosure: I have shares in ExxonMobil.

Overvalued Snacks Company: Pepsi

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Leveraged balance sheet may also deter investors at first glance

Pepsi, $158 billion food and beverage company, reported is set to report its annual earnings in a matter of few days.

Meanwhile, the New York-based snacks company reported 1.7% rise in revenue and 13% increase in profits in its previous 36 weeks as of September 2017.

“Overall, our businesses performed well in the third quarter in what continues to be a challenging environment.

“Each of our operating sectors delivered results in line with or ahead of our expectations, with the exception of North America Beverages (NAB) where revenues declined following two consecutive years of very strong third-quarter growth. Despite the challenges in our NAB business, the PepsiCo portfolio overall generated revenue, operating profit and earnings per share growth. Although we have moderated our full-year organic revenue growth outlook, we are now on track to exceed the full-year earnings per share target we set at the beginning of the year.”

Chairman and CEO Indra Nooyi

In September, Pepsi’s debt rose by $2.2 billion to $39 billion (2.91x debt-equity) and book value of $13.5 billion. The company also generated $4.6 billion in free cash flow in the period.

In the past three fiscal years, Pepsi allocated $15 billion in financing activities and generated $22.8 billion in free cash flow.

Analysts have an average price target of $124.73/share vs. $111.79 at the time of writing. Conservative calculations gave a figure of $69/share. Falling nearly 9% from its all-time high, eager investors may have to wait a little more before purchasing Pepsi shares.

Disclosure: no shares in Pepsi.