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Fair Warning

THE FAIR WARNING REPORT – 02/17/2018

AAR Corporation
In 2015 the company unload some assets, selling Telair Cargo Group Precision Systems Manufacturing. I thought that was a mistake at the time. Turns out, it was the right thing to do. The company was becoming debt heavy. But selling off Telair and Precision allowed the company to reduce it’s debt by 76%. Management has been smart and allowing very little new debt. This has allowed the company to do what it does best, which is to provide maintenance and repair services to aircraft. That is reflected in the FY 2017 numbers with the company ending the year with 936% increase in y-o-y free cash flow, an 18% increase in y-o-y earnings, against a y-o-y increase in debt of 6%. Not a bad take-off from a prior crummy landing.

AAR Corporation (NYSE: AIR) – FYE 05/2017 – OVER VALUED – The stock is trading at levels above my most recent fair value estimate – Please See Linked Worksheet


McCormick and Company, Inc.
It troubled me that I didn’t come up with a higher valuation for the stock. Then I looked at five year averages and found the return on a five year hold for the stock was 61%, roughly 12% per year. After that I looked at a few y-o-y numbers and found that sales had grown 10%, earnings had grown 9%, and free cash flow had grown 16%. Then I compared those growth numbers to the 247% growth in debt and finally I felt better about my fair value number for the stock. But what I felt the best about was that I had no plans to buy the stock. So sprinkle some of THAT!!…on your pancakes Waldo.

McCormick and Company, Inc. (NYSE: MCK) – FYE 11/2017 – OVER VALUED – The stock is trading at levels above my most recent fair value estimate – Please See Linked Worksheet


Intuitive Surgical, Inc.
I don’t own this stock. I wish I did. They have no competition, not really. The return on investment for this stock over the prior five years was 125%, 25% per year. As I said, I don’t own any of this stock. But then I don’t own Apple, or Amazon, or Google either. [Long Sigh]. Figures.

Intuitive Surgical, Inc. (Nasdaq: ISRG) – FYE 12/2017 – OVER VALUED – The stock is currently trading at levels above my most recent fair value estimate – Please See Linked Worksheet


Regeneron Pharmaceuticals, Inc.
I called my friend, a microbiologist, and asked him to explain to me what Familial Cold Autoinflammatory Syndrome (FCAS) and Muckle-Wells Syndrome (MWS) was. I still have no clue. Regeneron makes ARCALYST which treats whatever that is. They also make DUPIXENT which treats moderate-to-severe atopic dermatitis, EYELEA, which treats Neovascular (Wet) Age-related Macular Degeneration and which doesn’t seem to offer much benefit, at least from three of the colleagues I know whose spouses get monthly injections, KEVZARA, which treats moderately to severely active rheumatoid arthritis (RA), and PRALUENT, which treats high LDL cholesterol which I stopped taking because I had perpetual prostatitis until I did. I’m not saying the products that the company makes don’t indeed offer all sorts of relief for the folks that take them, certainly they do or physicians wouldn’t prescribe them. What I’m saying is, overpaying for a stock is not any different than taking medicines whose efficacy seems to be marginal. Eventually like the medicines, it just stops working, leaving the stockholder with itchy skin, poor eyesight, and joints that don’t move. Sign me up.

Regeneron Pharmaceuticals, Inc. (Nasdaq: REGN) – FYE 12/2017 – OVER VALUED – The stock is currently trading at levels above my most recent fair value estimate – Please See Linked Worksheet


THE FAIR WARNING REPORT – 02/09/2018

Hormel Foods Corporation
Over the course of the last two years, the company has spent $800m on acquisitions. These management moves have served to decrease y-o-y revenues by 4% and net income after taxes by 3%. On a more positive note, y-o-y dividends did increase by 17%. Personally I think dividends increased in the hopes that investors would fail to notice that -y-o-y goodwill increased by 16%, intangibles increased by 14%, and free cash flow fell by almost 2.5%. Maybe investors should start thinking about a management change here, bring someone in that can actually run the show, instead of just overpaying for acquisitions and hoping they work out.

Hormel Foods Corporation (NYSE: HRL) – FYE 10/2017 – SELL HALF – The stock is trading at levels above my current $23 fair value estimate, but below my $37 close target – Please See Linked Worksheet

Sanderson Farms, Inc.
You know it’s one helluva note when all you want to do is be in the chicken business, that you have to continually defend yourself in the courthouse. During 2016 and 2017, the company has become a party to numerous lawsuits, alleging all manner of price fixing and to conspiring to keep payouts farmers at low levels. My point is, pay attention. Lawsuits have a funny way of costing everyone but the lawyers lots of money. On a more positive note, y-o-y earnings grew at a 48% annual clip, y-o-y free cash flow grew at a 187% annual clip, while sales increased 19%. To add to these great financial numbers, the company’s long-term debt remained at $0 for the second consecutive year. This is probably going to change for FY 2018 as the company moves forward with new facilities in Texas.

Sanderson Farms, Inc. (Nasdaq: SAFM) – FYE 10/2017 – FAIRLY VALUED – The stock is trading at levels in line with my current $207 fair value estimate – Please See Linked Worksheet

Deere and Company
Investors have thanked the company for managing the business with an entrepreneurial spirit, the purchase of Blue River Technology this FY is an example, by biding up the stock price to current levels. Year over year earnings growth of 23%, and y-o-y free cash flow growth of 22% will certainly help maintaining current pricing levels. I would have preferred to see a net reduction in debt instead of the y-o-y increase of 12%, but investors seemed to shrug that increase off as just the cost of doing business, pointing to the increase in y-o-y revenues of 12% as well as the y-o-y price increase of 34%. As long as investors remember that perfection, which is where this stock is priced, increases risk, things should be good, because by the time you see them running like a Deere, it really is to late to join the herd.

Deere and Company (NYSE: DE) – FYE 10/2017 – FAIRLY VALUED – The stock is trading at levels in line with my current $173 fair value estimate – Please See Linked Worksheet

The Toro Company
I don’t know, I see these companies that spend money on acquisitions and on stock buy backs and it just makes me wonder. I mean I would be pissed to know I spent $24m buying a company only to see my y-o-y sales increase by 5% and my y-o-y cost of sales increase by 4%. Sure net earnings increased by 18%, but when you back out the 12% of earnings increases derived from income unrelated to their core business, maybe spending $24m buying an irrigation company in Germany wasn’t the best use of company dollars. Couple that bit of management wizardry with a $159m in stock repurchases, a 45% y-o-y increase, and to me it all just adds up to a stock that is going to be hard pressed to beat any sort of estimates over the next several years. I guess in this case the grass really is greener somewhere else.

The Toro Company (NYSE: TTC) – FYE 10/2017 – OVER VALUED – The stock is trading at levels above my current $37 fair value estimate – Please See Linked Worksheet

Have a great week!

Wax