#31 Stock Watchlist 5/2024
5th edition of the Stock Watchlist in 2024
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Welcome to the fifth update of the Stock Watchlist for 2024! In this edition, I've updated the fair value for ten companies and added two new companies to the list. You can find all the details in the article below, along with links to my previously published articles that you might have missed. Additionally, the PDF version of the stock watchlist is available for free download!
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Updated valuations
Adidas AG
Adidas reported better-than-expected financial results for the first quarter of 2024. The company saw an 8% increase in sales, driven by strong performance in key markets. Despite macroeconomic challenges and geopolitical tensions, Adidas expects to see mid-single-digit growth in currency-neutral sales for 2024. The company plans to improve its profitability, targeting an operating profit of around €500 million for the year. This optimistic outlook is supported by major sporting events and a strong product lineup.
In 2023, Adidas experienced a net loss of €82 million but aims to return to profitability in 2024, with growth anticipated in the latter half of the year (Adidas Group Report). The company also maintained its dividend at €0.70 per share, reflecting a stable payout policy.
The last time I updated the valuation of Adidas stock was in March 2023, when the stock was trading between 140 and 150 EUR. At that time, I believed the stock was undervalued and estimated a fair value of around 178 EUR. Since then, the stock has risen to approximately 224 EUR, an increase of over 40%, significantly exceeding my previous estimation.
Despite the company's recovery from operational issues and the Yeezy scandal, with improving margins and revenue growth for the first time in five quarters, I now believe the stock is overvalued. Therefore, I estimate its current fair value to be around 196 EUR. I am not invested in Adidas, but in its competitors Nike and Lululemon.
Stryker Corp
Stryker has reported several significant financial developments recently. In 2023, the company surpassed $20 billion in annual sales for the first time in its history, achieving an 11.1% increase compared to 2022. This milestone reflects Stryker's strong market presence and the successful execution of its growth strategies.
For the first quarter of 2024, Stryker announced a notable 11.8% increase in net sales, reaching $5.82 billion. The company's operating income rose by 54.4% to $1.26 billion, demonstrating improved profitability. Net earnings for the quarter more than doubled, highlighting the company's effective cost management and operational efficiency.
Stryker has also made significant advancements in its product offerings. The company updated its Mako robotic-assisted surgery platform and introduced new joint replacement technologies, such as the myMako app and the Triathlon Hinge. These innovations aim to enhance surgical precision and patient outcomes, reflecting Stryker's commitment to leveraging technology for better healthcare solutions.
The last valuation of Stryker Corp was conducted in January 2023. At that time, the stock was trading at around 250 USD, and I considered it significantly overvalued with an estimated fair value of 159 USD per share. I have now increased my fair value estimation to 190 USD per share. Despite this adjustment, with the latest share price at 335 USD, I still view the stock as overpriced.
Stryker's stock consistently trades at high levels based on metrics like EV/EBIT. Currently, it is trading at 31.49x LTM EV/EBIT. Even looking at forward estimates, it trades at about 24x NTM EV/EBIT. In my view, this is very expensive and implies significant future growth. Although Stryker is expected to grow its EPS at a CAGR of about 11% from 2024 to 2026, I do not believe this justifies a NTM P/E of 27.25x. I am not invested.
L’Oréal S.A.
L'Oréal has reported strong financial performance in early 2024, continuing its trend of growth. For the first quarter of 2024, L'Oréal's sales reached €11.24 billion, representing an 8.3% increase in reported terms and a 9.4% increase like-for-like. This growth was driven by significant performances in the Dermatological Beauty and Consumer Products divisions, which saw increases of 19.6% and 9.2% respectively. Regional growth was particularly robust in Europe and North America, while North Asia experienced a slight decline.
In 2023, L'Oréal achieved record sales of €41.18 billion, up 7.6% reported and 11.0% like-for-like. Operating profit for the year grew by 9.2%, reaching €8.14 billion. This led to a 7.3% increase in earnings per share (EPS), underlining the company's operational efficiency and market positioning.
Additionally, L'Oréal announced a 10% increase in its dividend to €6.60 per share, reflecting its commitment to returning value to shareholders. This dividend growth is part of L'Oréal's broader strategy of maintaining strong financial health while investing in future growth through innovation and expansion, particularly in emerging markets and through technological advancements in Beauty Tech.
At the end of February 2023, I estimated a fair value per share for L’Oreal at approximately €313, indicating an overvaluation compared to its trading price of €375 at that time. Since then, L’Oreal’s stock has exhibited significant volatility, driven by market disappointment over earnings and outlook. Despite this, L’Oreal remains a high-quality stock with solid development.
Based on updated estimates of normalized earnings, free cash flow (FCF) conversion, growth, and cost of capital, I now assess the fair value per share at €370. While it’s tempting to think that since the stock was previously overvalued and has risen, it might be and was fairly valued. Given the forecasted compound annual growth rate (CAGR) of 7.2% for revenue and 8.3% for earnings per share (EPS) over the next two years, alongside a next twelve months (NTM) price-to-earnings (P/E) ratio of 33.7x, I believe the stock remains too expensive. Despite the stock being overvalued I am invested in L’Oréal.
Northrop Grumman Corporation
Northrop Grumman has seen several significant financial developments recently. In April 2024, the company released its first quarter financial results, reporting revenues of $10.13 billion, a year-over-year increase of 9%. The earnings per share (EPS) for the same period was $6.32, up from $5.50 the previous year. This growth reflects Northrop Grumman's robust performance across its various business segments.
Additionally, Northrop Grumman announced a 10% increase in its quarterly dividend to $2.06 per share, payable on June 12, 2024. This move underscores the company's commitment to returning value to shareholders.
Furthermore, in January 2024, Northrop Grumman priced a $2.5 billion debt offering, aimed at refinancing existing debt and supporting general corporate purposes. The company also entered into a $1 billion accelerated share repurchase agreement, signaling confidence in its financial stability and future prospects.
My estimated fair value for the stock, based on a discounted cash flow (DCF) valuation, has increased from $453 per share to $480 per share. Therefore, the stock appears to be fairly valued at its current price. I am currently invested in Northrop Grumman.
Caterpillar Inc.
Caterpillar has reported strong financial performance recently. In the first quarter of 2024, Cat Financial recorded revenues of $853 million, an 11% increase compared to the same period in 2023. This growth was primarily driven by higher average financing rates and improved portfolio performance.
For the full year of 2023, Caterpillar achieved sales and revenues of $67.1 billion, a 13% increase from $59.4 billion in 2022. This was attributed to favorable price realization and higher sales volumes. The company's operating profit margin improved significantly to 19.3%, up from 13.3% in the previous year. Adjusted profit per share also saw a substantial rise to $21.21, compared to $13.84 in 2022.
Caterpillar's robust financial health is further underscored by its strong operating cash flow of $12.9 billion in 2023. The company returned $7.5 billion to shareholders through share repurchases and dividends during the year.
The updated fair value estimation for Caterpillar is approximately $345 per share, which is very close to its current trading price of $348 per share. The projected compound annual growth rate (CAGR) for Caterpillar’s revenue over the next two years is relatively low, at about 1.7%. Currently, Caterpillar's next twelve months (NTM) enterprise value to earnings before interest and taxes (EV/EBIT) ratio is approximately 14.93x, slightly below its three-year average of 15.55x. I am currently invested in Caterpillar.
Air Liquide
Air Liquide has reported strong financial results and significant strategic developments recently. In 2023, the company's revenue totaled €27.6 billion, marking a 3.7% increase on a comparable basis compared to the previous year. The Gas & Services segment, which forms the bulk of its business, saw a revenue rise of 4.2% on a comparable basis, driven by strong performance in the Industrial Merchant and Healthcare sectors. The company also achieved an adjusted operating profit margin of 20.5%, up from 15.4% in 2022.
In terms of strategic initiatives, Air Liquide has made substantial investments to support its growth and sustainability goals. Notable projects include a €140 million investment in an Air Separation Unit in Quebec to support the electric vehicle battery sector, and the development of a large-scale CO2 capture unit in Rotterdam. Additionally, the company has launched several joint ventures and partnerships, such as "Hydrogen Airport" with Groupe ADP and TEAL Mobility with TotalEnergies, to develop hydrogen infrastructure.
Moreover, Air Liquide proposed a dividend of €3.20 per share for the fiscal year 2023, reflecting an 8.5% increase compared to the previous year. This dividend will be payable on May 22, 2024, with an ex-dividend date of May 20, 2024. The company also plans a free share attribution of one free share for every 10 shares held and a loyalty bonus to be applied in June 2024.
Last year, I estimated Air Liquide's fair value per share at €118. Based on my current assumptions, this valuation remains unchanged. Air Liquide is a high-quality business, but the stock is currently trading at a high price of €182 per share. This translates to a next twelve months (NTM) EV/EBIT ratio of approximately 19.64x, compared to its three-year average of 18.53x. My discounted cash flow (DCF) analysis indicates a significant overvaluation, and the multiple ratios also suggest overvaluation. However, given the company's high quality, I remain invested.
PepsiCo
PepsiCo reported strong financial performance for the first quarter of 2024, showing resilience and adaptability amidst challenging economic conditions. The company achieved net revenue growth of 10.2% year-over-year, reaching $21.8 billion. This growth was driven by a combination of volume improvements and effective pricing strategies. PepsiCo's core earnings per share (EPS) also saw a significant increase, reaching $1.96, up from $1.68 in the same period last year.
For the full year of 2023, PepsiCo's net revenue grew by 9.7% to $86.4 billion, reflecting robust performance across its global operations. The company maintained its commitment to shareholder returns, increasing its annual dividend to $5.42 per share, starting with the June 2024 payment, up from $5.06 per share.
PepsiCo's strategic focus on diversifying its product portfolio and enhancing its market presence has been evident through several initiatives. The company has continued to invest in its beverage and snack divisions, expanding its offerings in healthier and more sustainable product lines. Additionally, PepsiCo has made strides in digital transformation and sustainability efforts, aiming to reduce its environmental footprint and improve operational efficiencies.
My estimated fair value per share remains unchanged at approximately $142. From my perspective, the stock is overvalued. This is despite the NTM EV/EBIT ratio of 18.68x being below its three-year average of 20.82x. Given the assumption that EBIT growth is estimated at about a 6.9% CAGR over the next two years, I am convinced that this metric also indicates overvaluation. I am currently invested.
Booking Holdings
Booking Holdings has reported impressive financial results for the first quarter of 2024, reflecting robust growth and performance. The company achieved earnings per share (EPS) of $20.39, significantly exceeding the analyst estimate of $14.22. Revenue for the quarter was $4.42 billion, surpassing the expected $4.25 billion.
For the full year 2023, Booking Holdings reported gross travel bookings of $150.6 billion, marking a 24% increase from the previous year. Total revenues for the year were $21.4 billion, a 25% rise from 2022. Net income grew by 40% to $4.3 billion, highlighting the company's strong profitability and operational efficiency.
Booking Holdings continues to focus on expanding its market presence and enhancing its technological capabilities. The company's "connected trip" vision and AI-driven initiatives have been instrumental in attracting new and repeat travelers, contributing to its sustained growth. Additionally, Booking Holdings has been added to the European Union's list of companies under heightened digital scrutiny, which indicates the significant impact and reach of its digital operations.
Booking Holdings' stock performance has been absolutely incredible. In May 2023, I estimated a fair value of about $2,760 per share and concluded that the stock was slightly undervalued. Since then, the stock has soared to nearly $3,800, driven by strong operating performance and growth. However, I believe the stock has increased too much and is now overvalued. My new estimated fair value is approximately $3,300 per share. I am invested and will remain invested.
Expedia Group
Expedia Group has reported mixed financial results for the first quarter of 2024. The company posted a loss per share of $0.39, which was better than the expected loss of $0.96 per share. Revenue for the quarter came in at $2.89 billion, slightly exceeding the analyst estimate of $2.80 billion.
Despite these positive aspects, Expedia faced some challenges, particularly with softening air fares impacting their revenue forecast for 2024. This announcement led to a significant drop in their stock price by 18%, the largest single-day decline in nearly four years.
For the full year 2023, Expedia achieved substantial growth. Total revenues reached $12.84 billion, reflecting a 10% increase year-over-year. Lodging bookings, a major revenue driver, saw an 11% increase to $73.99 billion. The B2B segment also performed well, with a 33% increase in revenue.
Expedia continues to innovate and adapt to market trends. Their "Unpack '24" report highlights key travel trends for 2024, such as the rising importance of hotel "vibe," increasing popularity of unique travel occasions like "Puppymoons," and the growing use of generative AI tools for travel planning.
Compared to Booking Holdings, Expedia's results and performance appear relatively weak. However, unlike Booking Holdings, Expedia's stock seems to be slightly undervalued, with an estimated fair value per share of $128 compared to the current share price of $110. Despite this potential undervaluation, I am not convinced that Expedia represents a high-quality business, and therefore, I am not invested in it.
Since my last stock watchlist update, I have published the following articles:
Disclaimer: The information provided in this publication is for educational and informational purposes only and does not constitute financial advice. The content is solely reflective of my personal views and opinions based on my research and is not intended to be used as a basis for investment decisions. While every effort is made to ensure that the information is accurate and up-to-date, the writer makes no representations as to the accuracy, completeness, suitability, or validity of any information in this post and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use. All readers are advised to conduct their own independent research or consult a professional financial advisor before making any investment decisions.
Thank you for the watchlist! I'm currently looking at CAT and SYK done the last two months or so. Stryker always carry a premium on the multiple. I am a bit worried about the growth prospects for CAT. I will stay on the sideline on this one.