As of the writing of this letter (Friday, Dec. 7) the futures for Monday’s market open jumped measurably at the news of President Trump and President Xi’s agreement to postpone the imposition of additional tariffs on Chinese imports. While at some level this news is cause for encouragement, particularly for the speculative market participant, the investor, who is focused on a reasonable time horizon, will give little attention to this political saga.
Keeping in mind some media outlets will focus on the favorable factors to be considered given the current U.S. economy. Interest rates have increased and may continue to do so because the economy remains strong. Should the Federal Reserve achieve its goal of neutral rates, by historic standards, these rates will continue to be “accommodative”. Unemployment remains at levels not seen in decades. Inflation has shown some signs of modest increases. Real wages are also showing moderate increases (this should be good; remember how the lack of wage growth was of grave concern during the past 8 years of economic recovery?). Have you noticed the decline of energy prices over the past few weeks?
We all can agree the U.S. economy is strong. While there are areas of concern (there always are), there continues to be a reasonable expectation that companies will measurably grow their profits in the coming quarters. To that extent, we are steadfastly focused on companies we believe in the coming 18 to 36 months will demonstrate above average earnings growth. The stock prices of these respective companies will rise, rewarding investors.
Several of the companies in our portfolio have become very inexpensive given our expectations of earnings growth and the share price. During volatile times it is important to stay focused on the strengths of these businesses and the future earnings growth that rewards the patient investor.
We reported quarterly earnings results last month and wanted to briefly recap the investment case for two of the companies that had poor earnings comparisons the same period in 2017.
Gilead Sciences (GILD)
The current PE ratio is a modest 12 with a dividend yield of 3.2% and $36.7 billion in cash with free cashflow of around $8 billion annually. GILD management raised revenue guidance in October. The company is a major player in the HIV market worldwide and has received approval in the USA and pending approval in the EU for a new drug Truvada, which has few side effects — an important factor a patients age. This drug will drive growth for years to come. In addition, GILD is testing one of its HIV drug’s potential as an HIV prevention for healthy people which will have huge sales potential.
Camping World Holdings (CWH)
Camping World Holdings earnings report and update of their business last quarter reflected modest revenue growth and increased operating costs. However, they affirmed the 2018 guidance, and are showing good discipline and are on course to an improved earnings story. The costs of converting Gander Mountain stores to the new Camping World format (sporting goods, camper essentials and RV’s) seems reasonable and we continue to expect these locations to have a favorable impact to earnings in the second half of 2019. We find their business compelling with 50% of their revenues coming in the form of recurring sources- Good Sam’s., membership, service plans, and insurance.
DISCLAIMER: A complete list of the holdings in the equity portfolio from the last 12 months is available upon request from J.L. Bainbridge & Co. Inc. This information is for educational and informative purposes and shall not be considered a specific recommendation. The material being provided is thought to be accurate. However, the information is compiled from multiple resources and may become outdated or otherwise rendered incorrect by new research or corrections. Adjusted EPS estimates are sourced from the companies’ quarterly reports and conference calls. Comments on United Rentals sourced from the company’s quarterly calls and reports. The holdings listed may not be the holdings in your accounts. The holdings are in the equity growth model used by the firm. The firm will seek to have your account reflect what is held in the model. However, to get a more thorough understanding of the performance of your account please review your statements.
EPS Growth – Earnings Per Share Growth – A company’s profit divided by its number of common outstanding shares.
It should neither be assumed that future results will be as profitable or that a loss could not be incurred.