As listed in the image to the right the companies selected for investment posted very impressive earnings. For the most part, the earnings are remarkable when compared to the more moderate earnings results for the S&P 500. The earnings per share percentage changes are 2018 results versus a year earlier.
(See EPS Growth in the image to the right)
Since our founding in 1981, we have never experienced evaluations for our portfolio anywhere near as low as today’s (November 2018) with an average PE ratio of 13.1 and 11.5 relative to projected earnings per share for 2018 and 2019 respectively. Today’s low prices are due to the stock market ignoring the above incredible earnings growth resulting in either no stock price change or in some instances price declines. For example, United Rental’s (URI) exceptional earnings gain was greeted by a price decline of 22% from its September 30th price. We believe the reason being a perception a recession maybe on the horizon and the current year’s earnings may mark a peak after several years of earnings growth. Our expectation is for an additional gain in earnings per share of at least 13% in both 2019 and 2020. URI is likely to generate $1.3 billion of excess cash flow annually and uses these funds to make cash acquisitions and buy back stock which increases earnings per share from 6% to 8%. Hence, to reach 13% growth the business only needs to increase earnings 5% to 7%. Based on reaching a moderate PE ratio of 12 by the end of 2019, we view the potential return over the next fourteen months is 94%.
While the last months decline was upsetting, our +5.4% 2018 return through the end of September helped to offset half of October’s decline. As a result, we have the potential to end the year with a positive return as well as achieve very strong results in 2019. Select Income Trust is merging with another REIT which we view as unfavorable, and we are liquidating our clients’ holdings. Our December update will review Camping World and Gilead.
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 However, the information is compiled from multiple resources and may become outdated or otherwise rendered incorrect by new research or corrections.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.