Most weeks, I’ll use the weekly review to dig into the global stocks and indices that had big moves during the week. But during earnings season, there's so much going on that I feel it’s better to focus on the important global earnings stories and companies in the portfolio that have reported results.
Here’s my take on the results from Precision Drilling (NYSE: PDS), and two earnings stories that could have implications for the Orange Portfolio down the road.
Still going strong
Precision Drilling is easily the most economically sensitive company in the Orange Portfolio, but it’s also very attractively valued, with a 3.5 times operation cash flow multiple.
With such a low multiple, I believe that the consensus opinion is that this is a short-term peak for this cyclical company, and that the next year or two could be much more difficult. I don’t disagree with that assessment, but I do think the shares are too cheap given Precision’s long-term contracts on new rig builds, and because its first debt maturity isn’t until 2019.
Precision’s second quarter earnings aren’t all that meaningful, because it's a seasonally slow period of the year for the company in Canada. So while sales were up 10.6%, the big stories were the five new confirmed rig orders with long-term contracts, and the $99.4 million cut in planned capex spending for 2012. If investors were concerned that Precision was growing too quickly, the more balanced capital spending should allay those fears.
The near-term outlook is still soft, because of what the tough global economic backdrop could mean for oil and gas demand, which ultimately comes back to drilling demand. But, on the whole, I believe Precision Drilling remains on track, and I would consider adding to the position at a discount to my initial purchase.
The Apple conundrum
In Apple (Nasdaq: AAPL), I have to confront the same conundrum that many fund managers face. I’m measuring the Orange Portfolio against the iShares MSCI ACWI Index, because it’s a global all cap index, and I’m managing the Orange Portfolio as a global portfolio without market cap or country constraints, and Apple is the biggest component in the index.
If Apple does well, and I don’t hold the shares, I’ve already put myself in a hole. Of course, if Apple underperforms, I’ve done myself a favor by avoiding it. Apple’s business is unquestionably strong, and I don’t think this quarter’s results are significant. Yes, the company missed just about every estimate the street publishes, but it's between product cycles on the iPhone, and getting there with the iPad. Taking that into account, and the impressive results from ARM Holdings (Nasdaq: ARMH), I believe the smart phone and tablet market remain quite healthy -- and Apple’s prospects are, too.
For now, I’m content to not own the shares, and search for outperformance elsewhere, mostly because I’m not a big fan of investing in megacap companies with yields below 3%. But if Apple’s shares continue to drift lower, they’ll definitely get my attention.
Unilever’s amazing results
The results among consumer goods companies have been very mixed. Some are struggling badly with higher raw material costs and competition, while others are gaining momentum. With 11.5% sales growth in the first half of the year, you can place Unilever (NYSE: UL) firmly in the second group. Operating profit wasn’t as impressive, with just a 4% gain, but the company spent heavily on advertising and promotions to build its brands, so I’m willing to give it a pass.
Unilever’s growth was driven by a strong performance in emerging markets, and it helps that the company gets 55% of its sales from emerging markets. Faster growing emerging markets are showing signs of economic weakness, too, but I’m inclined to believe Unilever will continue to execute. As much as I’d like a better valuation, I'm considering taking a small position in Unilever and its 3.5% dividend yield.
As a reminder, you can follow along with all my real-money Orange Portfolio trades and updates here.
