The Weekly Summary
China leapt back onto Wall Street’s radar last week after stop-and-start trade negotiations hit another presidential road block. With tariffs back on the table, the S&P 500 dropped 2%, taking all but roughly a dozen of our recommendations with it. We find the timing less than convincing and lay out our thoughts in The Big Picture.
Nonetheless, the BMR universe is still up a healthy 23% YTD despite this speed bump and earnings season has been good enough for us (and the market as a whole) that this downswing looks like it will be fleeting. The fundamentals looked like they’d hit a short-term wall three months ago, but the S&P 500 rallied to break last year’s records after all.
And we’re now three months closer to the return of the earnings growth that ultimately sustains record-breaking rallies. Day by day, markets discount the past and anticipate the future. The only quarter of zero growth in nearly three years is behind us. It’s time to look toward the time when we see how much money Corporate America is making now.
The 1Q19 numbers were strong enough to make us suspect that our own targets for 2Q19 are a little too low. In that scenario, growth will be back on the market’s side by July. If not, we’ll be three months closer to our next shot at real fundamental progress. Even if it takes until the end of the year to see significant year-over-year earnings improvement, that’s not so distant as far as the market is concerned.
Of course a season can feel like an eternity when Wall Street benchmarks are spinning and every channel is blaring meaningless chatter. Eight months ago, the S&P 500 embarked on a rollercoaster that started by crushing a lot of unrealistic expectations and more recently took stocks all the way back from the brink of bear market territory. Investor assumptions were tested and in some cases broke under the pressure.
But here’s the thing: If you tuned out the noise and held onto our recommendations throughout that wild ride, you’d be up 6.5% in those eight months. That’s not a thrilling annualized return by our standards, but it’s well above the S&P 500’s performance, which is flat at best. Some stocks will always be stronger than others. We’re in the strong spots, where growth never faltered and there’s plenty of upside left to capture.
There’s always a bull market here at The Bull Market Report! Much of our discussion this week revolves around the BMR stocks that led the way down: Alteryx, Nutanix, Twitter, Expedia and mighty Apple. The defensive Microsoft held up well. We also need to check in on CBRE Group, which was castigated despite one of the best earnings reports to hit Wall Street all season.
The Big Picture challenges Wall Street’s logic in punishing strong companies as well as weak ones, while The High Yield Investor continues the theme with additional looks at Annaly Capital Management and Apollo Commercial Real Estate. Then, if you need one more shot of confidence, Gary Jefferson debunks the notion that this is the kind of May investors want to sell and go away.
Key Market Measures (Friday’s Close)
BMR Companies and Commentary
The Big Picture: No China Crisis Here At Home
While last week was allegedly all about trade tension, we couldn’t help but notice that stocks moved in patterns that didn’t match that narrative. For one thing, Chinese and U.S. markets lurched in different directions more often than not, defying the theory that commercial relationships on both sides of the Pacific are facing complete and permanent disruption.
Then there’s the fact that stocks that do a lot of business in China dropped in line with those that are completely insulated from that country, its economy and its trade policy. Let’s start with Netflix (NFLX: $361, down 6%), which has yet to enter China in any meaningful way, and Twitter (TWTR: $48, down 6%), which is banned there.
These two companies have zero skin in this game so the notion of a setback in tariff negotiations triggering their retreat doesn’t compute. But on the other side of the argument, if Netflix and Twitter lost ground, can we really blame the trade talks? We just don’t find the logic convincing, especially when stocks that are closely associated with China like Caterpillar, soybean exporter Bunge and our own Apple (AAPL: $197, down 7%) aren’t in appreciably worse shape.
You can’t have it both ways. Either this is about trade and China-driven stocks would be at the center of the selling, or stocks are simply getting sold across the board and Wall Street can’t find anything better to blame. With all the data points supporting the latter scenario, we suspect that nothing is going on beyond a slightly overextended market catching its breath as a solid 1Q19 earnings cycle winds up.
Cutting through the noise, we know Pacific trade won’t go over an immediate cliff. Since this is the fear factor of the moment, let’s quantify how important China actually is to our stocks and the market as a whole.
First, there’s a huge distinction between “trade” and China. Sure, they’re our biggest international partner but most U.S. companies that depend on foreign markets are actually focused elsewhere. All of Asia put together accounted for 8% of S&P 500 revenue last time we checked and only a handful of big stocks are heavily involved with China in particular, as opposed to India or Japan.
While we’ve steered clear of most of those “China Syndrome” companies, you couldn’t really tell from last week’s synchronized slide. Semiconductor makers like Skyworks Solutions (SWKS) should be ground zero in any trade war, with a staggering 85% of all revenue coming from Greater China. And yet they didn’t drop any farther last week than Twitter, which once again doesn’t officially operate in the country at all. Some actually held their ground better than stocks with zero Chinese presence.
Then there’s Apple, which used to depend on this market for a $13 billion slice of its $61 billion 1Q revenue and has seen ebbing demand for high-end iPhones take $3 billion of that revenue away. Admittedly, those phones are made in China anyway so import tariffs cast a shadow on future U.S. sales, but we’re not overly concerned.
All it takes to circumvent a price shock is to route those phones through a country like Canada where trade barriers remain low. Even if it’s a little more complicated, you know Tim Cook will find a way to juggle the rules and get the best possible outcome. And since the phones were already priced at the most luxurious end of the Chinese market, we’re unlikely to see a lot of erosion there either way.
Here’s the thrilling part: When you factor out companies that do most of their business overseas, earnings for domestically focused stocks are a whole lot better than most investors think. These companies still have 6% growth in 1Q19 to crow about. That’s a whole lot better than the flat quarter the S&P 500 as a whole is tracking.
Granted, the global exporters are huge and heavily weighted, but their struggle to sustain last year’s tax cut boom is more a matter of absolute scale than geopolitical tension. When they talk about China, they highlight slowing economic activity there feeding back into their business. Tariffs aren’t on their radar except in a general climate of rising costs.
And “global” business is a lot more than China. The biggest exporters leading the 1Q19 drag are actually companies like Exxon Mobil (XOM), where earnings per share last quarter got cut in half from $1.10 to $0.55. They sell to Europe and Canada. General Electric (GE) is big in Africa and Europe, which is where weak demand has hurt its overall performance. DowDuPont (DWDP) is Africa. International Business Machines (IBM) is Japan. Ford Motor (F) is the United Kingdom.
If you’re worried about a global slowdown, that’s your prerogative. But don’t blame China and don’t flinch at every twist in the trade talks. Wall Street loves it when people flinch. What we know is that there’s zero recession for U.S. companies like Twitter (and Microsoft, Amazon, Johnson & Johnson and on and on) where the home market remains the center of gravity. Stick to those stocks and the growth is still on your side.
Alteryx (AYX: $89, down 10% -- all returns are for the week)
A tough week for the market led to a rare drop here. The stock is still up 47% YTD and has tripled over the last 12 months, as more and more businesses are recognizing the value in an out-of-the-box software solution that increases employee efficiency and therefore reduces overall costs.
The company has nearly doubled its enterprise client base in the last year, which saw revenue also nearly double to $250 million. The prior year’s revenue growth was 50%, so Alteryx accelerated its revenue growth rate by close to 100% last year as well. Absolutely phenomenal.
The company is targeting new industries, such as Accounting, Healthcare, Manufacturing and Academics. Its core products which provide low or no code software turn ordinary people (without IT backgrounds) into what the company calls ‘citizen scientists.’ And with the recent $20 million ClearStory acquisition, the company captured some valuable IP which it can monetize for additional revenue streams.
BMR Take: Alteryx was bound to hit a snag eventually, but the story is too compelling here for us to think about selling. There is so much growth potential for this $5.5 billion company in what amounts to a $50 billion total addressable market. We’re expecting continued surging revenue growth throughout the year, and the stock should continue to surge in tandem.
Our Target has been $85 and we are confident enough to raise this to $105. We thus raise our Sell Price from $68 to $78
Nutanix (NTNX: $37, down 6%)
Nutanix hasn’t had the kind of year that Alteryx has. The stock fell off a cliff in February after the 4Q18 earnings call, and has been recovering ever since. At the start of this week, we were up 30% from the bottom - making a solid comeback. Unfortunately, after a tough week, we're back to just 10% above the February bottom.
The problem for Nutanix is that the company steered its Sales and Marketing dollars away from profitable lead generation and into other areas. This was a mistake, which management now acknowledges. They had such extreme success with their lead generation tactics (115% revenue growth from 2016 to 2018) that they banked on the revenue growth continuing apace as they shifted dollars away from lead gen. The company is now shifting back into lead gen, and there’s every reason to believe revenue growth will pick back up – it may take a few months.
That said, we believe in Nutanix. The company has identified the problem (mismanagement in its lead generation spend), which is what triggered the downside guidance for the second half of this year. It would have been far worse had the company not been forthright with the market and simply tried to right the ship without guiding downward. Management’s honesty speaks volumes about the company’s long-term growth potential, and its ability to turn things around over the coming quarter or two.
BMR Take: Things had been going extremely well for the stock, until this latest hiccup which came thanks to broader market woes. There’s no reason to think the stock is suddenly worth 8% less than it was last week. At 17%, revenue growth last quarter was actually 3% higher than the previous one, and the company is transitioning away from hardware sales into more profitable software. That will have a powerful impact on the bottom line. We don’t see much downward risk beyond that low-30s floor we experienced in February, so if you can hang onto Nutanix throughout the year, we believe you’ll be rewarded with price appreciation above and beyond the February high of $54.
Twitter (TWTR: $38, down 6%)
Given how world-famous the platform is, it’s hard to believe the company is only worth $30 billion. It would be easy to assume Twitter is a large-cap Tech Blue Chip, but that’s simply not the case. This is a growth-oriented large-cap, and the stock’s volatility reflects that reality.
The good news for investors is that the stock is up 35% YTD, and that’s including the 5% dip this past week. We’re not at all concerned that market volatility will take us into the red here, given that the stock spent the majority of 2018 above $30, and even touched new highs (since 2015) in the upper-$40s. Given Twitter’s growth potential, it’s far more likely we reach the highs than the lows. In fact, the stock has been very strong lately relative to the rest of the market.
Twitter is a platform that is finding its niche as a provider of up-to-the-second news. As the President tweets something headline-making (which is often, these days) Twitter gets millions of dollars worth of free publicity. The company is moving through the ongoing data privacy debate relatively unscathed, given that the very nature of the platform is that user information is made public. This is a clear distinction from rival Facebook, where users have deep concerns over how the data from their personal profiles is being accessed across the web.
BMR Take: As concern over data privacy picks up across the globe (Europe is leading the charge here, but the U.S. isn’t far behind), we expect Facebook to take some serious public relations hits. That will trickle down into the user base, and Twitter will benefit as more global users flock to its platform. We’re looking for the 25% revenue growth from last year to accelerate further, and for the stock to do the same.
Expedia (EXPE: $119, down 6%)
Continuing with the theme of addressing this week’s impact, we were up a stellar 13% here prior to the selloff, and now stand at a still-respectable 6% price appreciation. It’s only May, and a 6% increase in four months for a Blue Chip online travel agency (OTA) is nothing to scoff at.
With brand names like Orbitz, Hotels.com and Hotwire under the Expedia banner, the flagship company dominates the OTA market. Compound annual revenue growth has been 14% over the last decade, leading to an 11% gain last year (revenue growth tends to decelerate a bit as companies grow in size). The company has also been spending big on acquisitions - $6 billion over the last several years, to be exact. HomeAway and Pillow.com are prime examples, both of which compete with Airbnb in the residential rental market. And despite the acquisitions binge, the company maintains a strong cash-to-debt ratio, with $4.2 billion of the former against $4.3 billion of the latter.
The company has consistently converted 10% of its revenue into free cash flow over the last two years, so there’s no liquidity risk here.
Management also keeps a close eye on buyback opportunities, purchasing $900 million worth over the last 12 months. Outstanding shares have decreased by 5% over the last decade, which has returned even more value back to shareholders.
BMR Take: Expedia disrupted the travel industry with its innovative OTA platform. The company is now expanding into Airbnb’s territory via strategic acquisition, and it has plenty of muscle to flex as it captures more market share. The stock is at the midpoint of its 52-week range. We’re looking to get back to the highs by year-end. This dip is a buying opportunity.
Apple (AAPL: $197, down 7%)
With a $900 billion market cap, the giant of Cupertino needs a 10% boost to get back to $1 trillion. Does anyone really think it won’t make it there again?
Sure, the days when iPhone sales blew the market away may be in the rearview mirror, but in case you haven’t heard, the company is diversifying into so much more than a smart-device maker. Strong growth in Apple’s Services sector (led by the App Store), along with recently-announced pushes into Gaming, Credit Cards, News, and TV, will all drastically diversify the revenue streams and transform Apple from a hardware/software maker into a multi-platform Tech behemoth.
That’s not to say the core business is going anywhere. iPhone revenue was $31 billion last quarter, in-line with consensus estimates, which is a nice bounce back from the dreadful 4Q18. The iPad also brought in $4.2 billion, or 16% more than what Wall Street was expecting. So the underlying business is sturdy, even though Apple had a rough quarter for iPhone sales. And when 5G and foldable phones become a thing, expect sales to move higher once again.
BMR Take: Apple is well on its way to transforming into a one-stop-shop for digital media and entertainment. As the top hardware maker, any software they develop (think Gaming, News+ or the Apple Card) will leverage an installed user base of 1.5 billion devices. Investors know this, which is why the stock is up 27% YTD despite last year’s flagging iPhone sales. No one genuinely thinks that will be the new normal. iPhones will pick up again, and by that time Apple will have diversified into other promising business lines. The return to $1 trillion is only a matter of time, as long as the overall market remains steady to higher of course.
Microsoft (MSFT: $127, down 1%)
We only took only a slight hit this week, and the stock is still up an impressive 24% YTD. We’ve been calling Microsoft a Blue Chip that acts like a growth company for a long time now, and that’s exactly why the company crossed $1 trillion recently, and now stands 5% below that lofty metric.
It’s no secret that the company is making a strong push into Cloud computing, which grew revenue 40% YoY last quarter, thanks to strong Azure and 365 sales. The company has so many strong product lines (Office, LinkedIn, Xbox) it can be tough to keep track. So let’s look at the big picture: Revenue last quarter was just over $30 billion, a 15% jump from last year. It’s not often you see a $950 billion company grow revenue by 15%.
The company has also been improving margins, as gross profit margin and net profit margin came in at 67% and 28%, respectively. Compare that with Google, which posted 56% gross and 18% net. Though Google brought in $20 billion more in revenue over the last 12 months ($142 billion for Google vs. $122 billion for Microsoft), Microsoft wins out on an earnings basis, thanks to its stellar margin growth.
BMR Take: Microsoft is the envy of nearly every Tech company; a seemingly-limitless line of innovative businesses, fabulous revenue and margin growth, and a staggering mountain of cash ($130 billion, to be exact). The company can purchase its way into any industry it can’t organically expand into. Oh by the way, we haven’t mentioned the winner-take-all $10 billion Department of Defense JEDI contract, which will land with either Microsoft or Amazon. Both are in our BMR portfolio, so we’re going to benefit either way, but given Microsoft’s recent DoD contract announcements, don’t be surprised if they get the nod. Buy the dip on Microsoft and get ready to reach $1 trillion again.
A Word From Gary Jefferson
Jefferson Financial Group
First Vice-President, Investments
UBS Financial Services, Inc.
Last week’s selloff was blamed on the sudden turn from a settlement to an escalation of tariffs. Ironically enough, many experts are theorizing that the strong April employment report emboldened the Trump Administration to consider new tariffs. The report was good, but we doubt that was a one-shot motive.
Corporate earnings forecasts for the next several quarters have stabilized partly as a consequence of the prospects for continued growth in the U.S. As we all know, the overall economy is doing extremely well and we’ve seen a slew of other favorable data, such as some of the best productivity statistics since the financial crisis. All of this theoretically enhances the U.S. position in trying to get the Chinese to actually compromise so that both countries can say they have a win. That's what it will all be about in the end, and it really is that simple.
We believe China has already compromised to some degree – one report showed that the average tariff rate on all goods that country imports dropped from 9.5% to 7.5% over the past year. This is already substantial progress. Realistically, we are still effectively where we've been for years. If the U.S. and China can put aside their differences, a deal would almost assuredly stimulate the global economy in a manner akin to that for the rewriting of the corporate and individual tax code in 2018.
Meantime, the market was up nearly 18% since January before giving back 2% of that rally last week. This is not a big retreat. If a full-fledged trade war had erupted it would cause all kinds of risk reassessments, but this is simply not a move that should invoke angst.
From a technical viewpoint, most hedge funds woefully trail their benchmark YTD. With stocks struggling, some managers may assess the dip as a fortuitous opportunity to close their vast performance gap. Others may be selling to raise cash. Hence, our technicians anticipate that "a grinding bid will again materialize once shares regain their footing and the prevailing volatility dissipates." This is what is commonly called "buying the dip" and we expect that is what would occur on any pullback because the underlying fundamentals of the economy are so strong.
Finally, we have all heard the Wall Street adage "Sell in May, come back Labor Day.” For years, investment returns were simply too low during the summer months to justify the risk of something going wrong in the market while the most powerful money managers were distracted in the Hamptons or some other vacation spot.
Now, however, they can keep up with news and make their market moves from the beach. Summer has become just another season, especially when you factor in the amount of activity that computerized programs generate every day. Robots never go on vacation. As a result, while the human beings who run them and profit from their programming may be a little distracted over the next few months, the old summer volatility spikes have receded into the market’s overall pulse.
What we’re left with is the fundamentals. Maybe a more modern approach would be to say that “If earnings are expected to grow in May (and on through Labor Day), long-term investing is still the way.” Earnings for the market as a whole didn’t grow this season, but the next cycle starts in July. From what we’ve seen, 2Q19 is where the growth starts again, and that’s no time to be on the sidelines letting the robots have all the fun.
Earnings Review: CBRE Group ($49, down 6%)
Like many of our stocks, CBRE fell last week through no intrinsic fault of its own. Greater China actually got a shout out in the recent conference call as a particularly strong region compared to countries like Australia, Singapore and, closer to home, Canada. Weak local currencies are the challenge here, not trade policy.
Either way, this company is expanding too fast for exchange rates to be more than a minor inconvenience. All the numbers moved in the right direction, with revenue of $5.1 billion coming in 10% above last year when translated into U.S. dollar terms . . . and that’s a year in which the greenback itself got 6% stronger.
That’s roughly what we expected to see. Most of it comes from the outsourced Property Management business in which CBRE runs an office building or entire headquarters complex for the company that actually occupies the space. At 60% of the revenue footprint, 12% dollar growth here ensures that this side of the overall operation is becoming even more important than ever, eclipsing the old Real Estate Brokerage and Mortgage Underwriting activities that built the company in the first place.
These are good things. While the Mortgage business remains robust, Real Estate sales are sluggish across the world. Property Management, on the other hand, runs on a recurring contract basis. Once you’re running a building, you’ll go on cashing monthly checks until something dramatic changes.
All these factors feed into stronger margins than even we expected. CBRE turned that $5.1 billion into nearly $270 million in profit ($0.79 per share), up 44% from last year. As a bonus, the company bought and retired almost 3 million shares, boosting the per-share comparisons by 2%.
While it would have been nice to get fresh guidance, we have to appreciate management’s argument for letting their previous targets ride another few months. The first quarter is the slow season as far as they’re concerned. With that in mind, one way or another, we’re looking for even better days ahead. Our $60 Target remains in force.
The High Yield Investor
By John Freund
VP of High Yield
The Bull Market Report
The big news in the High Yield universe this week was Annaly’s (NLY: $9.62, down 1%, Yield = 11.9% (soon to be 10.4%)) announcement of a planned dividend cut. The current dividend of $0.30 will be slashed down to $0.25. On the current stock price, that still equates to a strong 10.4% yield, which is far better than most high yield equities can deliver. That said, a dividend cut is a dividend cut, and it’s worth taking a deeper look at the fundamentals to see if there’s anything to be concerned about.
Annaly is a $14 billion Mortgage REIT with over $125 billion in Assets spread across four business lines. Just to give you a sense of the company’s size, its market cap is 13 times as big as the average Mortgage REIT’s. Annaly is able to leverage this scale for greater operational efficiency. With a 1.8% operating expense, Annaly is twice as efficient as the average Mortgage REIT, and 30-times as efficient as the S&P 500.
By far the largest sector of Annaly’s portfolio is its Agency Mortgage Backed Securities (MBS) division. Annaly holds $120 billion of Agency MBS, which are mortgages backed by the federal government through Fannie Mae, Freddie Mac and Ginnie Mae. Annaly is far and away the largest holder of Agency MBS in the country, and this business segment produces levered returns on the order of 10-12% per annum. The other three business lines – Residential Credit, Commercial Real Estate and Middle Market Lending – are all multi-billion dollar businesses of their own. Annaly ranks in the top-10 for REITs in each of those segments, despite the fact that management’s core focus is on Agency MBS. The reason Annaly entered these business lines in the first place was to diversify away from pure Agency MBS, and to gain exposure to other areas of the marketplace. That’s becoming more and more beneficial, as areas such as middle market lending grow in prominence.
Due to its sheer size, Annaly has long been considered a barometer for the entire Mortgage REIT industry. In 1Q19, the company pulled in $0.29 per share in core earnings. That’s both $0.01 below its dividend payout, and last year’s first quarter core earnings. So Annaly is trending in the wrong direction (albeit very slightly). That said, a $0.01 difference between core earnings and dividend – although eyebrow-raising – is nothing to sound the alarm over. The company can and did easily cover that with its $900 million in cash.
Yet management wants to get ahead of the curve here, and decided to slash the dividend by 17% to $0.25 per share. The reason for this is the flattened yield curve. We explained the flattened (at the time inverted) yield curve in a previous newsletter, but as a brief reminder: A flattened yield curve implies that the difference (or ‘spread’) between short term and long term interest rates is relatively low, or even non-existent. Such is the case today, where the difference between the 10-year Treasury Bond’s interest rate (2.45%) and the 2-year Treasury’s rate (2.25%) is a paltry 20 basis points.
Annaly makes its money by borrowing short and issuing longer term debt on its portfolio of investments. If the yield curve flattens, Annaly’s income shrinks. That’s the real reason management elected to slash the dividend – not because there are any fundamental problems with the business, but rather because management has elected to lower its leverage and is being conservative when playing the ‘what if’ game. What if the yield curve remains flat for several quarters? Annaly’s core earnings would shrink, and it might face some serious financial straits down the road. The likelihood is that the yield curve normalizes, but there’s no telling for sure. Annaly is hedging its investment strategy by lowering the dividend now, when it isn’t in a desperate financial position.
No one likes a dividend cut, but there’s some good news – and even better news – here. First the good news: Annaly is still offering a double-digit dividend. If we had never heard of the company before and you told us the largest Mortgage REIT in the world is offering a 10% yield, we’d be very interested. Clearly, 12% is better, but what’s done is done, and shouldn’t affect how we value Annaly going forward. 10% is still an amazing fixed income, and far better than you’ll receive with any bond that isn’t junk status.
Now for the even better news – Annaly’s stock has bottomed out. With the exception of two brief periods in 2015, we’re currently trading at a five-year low. So the stock has nowhere to go but up. That’s great news, because it implies that an investment in Annaly will lock in 10% per year going forward – and produce a higher return if the stock appreciates. And let’s be clear, management only slashed the dividend to get ahead of the flattening yield curve. Should the yield curve widen, it’s highly likely we’ll see a dividend hike back up to $0.30. And that will send the stock higher as well.
Prior to this rate cute, Annaly hadn’t slashed its dividend since 2013. There are no fundamental concerns here (the opposite is true, as the business model is being diversified). Management is just being conservative with regard to the yield curve, which we can’t entirely blame them for. The bottom line is this: The stock has nowhere to go but up, and the likelihood is that the dividend will as well.
Apollo Commercial Real Estate (ARI: $18.63, down 2%, Yield = 10%) also hit a snag this week, for a very different reason. The company announced a public offering of 15 million shares in order to raise capital. The stock dropped 5% on the news, then quickly recovered most of that ground. Even though we’re down this week, we’re still up 12% YTD, and that’s not including the 9.8% yield.
A majority of Apollo’s portfolio (35%) is based in Manhattan, with the rest spread fairly evenly across the U.S. and the United Kingdom. One quarter of the portfolio is made up of the Hotel industry, with a nice cross-section of industries representing the remaining 75%. There is nice portfolio diversification across both geographic region and industry type.
Like Annaly, Apollo’s management has their finger in the air to measure which way the winds are blowing. The company is hedging its investments by originating 100% floating rate loans during 4Q18, in order to take advantage of the potential for rising interest rates. Apollo actually benefits from rising rates as it is then able to issue higher rates as a lender, and capture greater net interest income. A full 93% of Apollo’s $5 billion loan portfolio is made up of floating rate loans.
Net interest income (NII) increased 30% YoY to $83 million. That’s important, given that Apollo hasn’t had the best dividend coverage in the past (yet still paid out its hefty dividend). Now that the NII is increasing, Apollo will have no problem covering the dividend for the foreseeable future. NII per share was up 12% YoY to $0.43, and operating earnings per share was up 15% to $0.50. All signs of a more profitable and efficient company.
Given how well things are going, it’s worth asking why management felt the need to raise capital at this time. That type of speculation is what sank the stock – yet the rapid decline proved a buying opportunity, as the stock quickly rebounded. Management said they plan to reduce borrowings, put money towards working capital and acquire or originate target assets. That could signal a game-changing announcement in the near future, or (more likely) operational improvements. Time will tell.
We’re not concerned at all about the capital raise, and in fact we generally always love it when a company raises funds. Yes there is dilution but if management is good, they will be able to use the new funds to increase cash flow and profits in the future. Management is good here at Apollo. Their fundamentals are rock solid, the company is riding strong industry tailwinds, and the dividend is on safer ground than it was last year. For all of these reasons, we like Apollo going forward.
Todd Shaver, Founder and CEO
The Bull Market Report