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Paylocity Update – Increasing Price Target

Paylocity (PCTY)
Rating: BUY
Current Price: $43.48
Price Target: $55

 
 


Paylocity (PCTY) announced expectation-beating earnings last week, and raised its fiscal 2016 revenue guidance significantly (from $199-203 million to $210-214 million).  As a result of the company’s faster than expected revenue and earnings growth, we are increasing our price target from $45 per share to $55 per share.  The $55 per share price reflects our same conservative 27.2% annual growth rate which is well below the company’s current growth rate of around 40%.

Paylocity continues to be a company that offers a highly compelling solution without the legacy baggage of its larger industry-leading competitor ADP.  Unlike ADP, Paylocity’s solutions are primarily cloud-based meeting a growing customer demand.  Additionally, Paylocity is a less costly solution as it does not require all the bells and whistles of ADP which many newer smaller companies don’t want anyway.

According to Steve Beauchamp (President and Chief Executive Officer of Paylocity):

"Fiscal 2016 is off to a very strong start, with first quarter total revenue growth of 45%. We continue to see strong demand for our unified payroll and HCM platform and are encouraged by the response to our ACA Enhanced product offering." (source: WSJ).

Overall, Paylocity continues to offer amazing growth opportunities, and if the company continues to grow ahead of expectations we will likely be increasing our price target again in the not-so-distant future.  This company has a lot of room to run, and it has the potential to eventually turn into an exceptional "cash cow" when it grows to a point where it can stop spending on growth and instead just rake in the profits.  Keep in mind this is a high-customer-retention business because customers are extremely hesitant to change service providers once they’ve gotten their payroll processing set up.  (You can read our original full Paylocity thesis and research report here).

ETF Update - Don't Forget Your Dividends

Our S&P 500 ETF holds large and mid-sized companies, and it outperformed our Russell 2000 small cap ETF during the week.  Both of these ETF’s are very low cost, and add important diversification to our Blue Harbinger 15 and to our Lazy Person Portfolio.

Important to note, the S&P 500 ETF pays dividends at the end of each January, April, July and October, which means its dividend payment will be showing up soon if it’s not already in your account.  If you don’t need this dividend for your own personal spending purposes, then it is important to reinvest the cash received so it doesn’t add up and drag down the returns of your account over the long term.

Ideally, we want zero cash in a long-term investment account, but generally speaking it is not the end of the world if you have 1% cash in your account.  But if you accumulate much more than 1% then you should really think about getting that invested as soon as possible.  As a reminder, most discount brokers (E-Trade, Scottrade, TD Ameritrade) offer automatic dividend reinvestment programs, and it’s a good idea to take advantage of these programs if you are a long-term investor and don’t need the cash right away.  However, if you do need the cash then it’s always especially nice to see those dividends come rolling in quarter after quarter.

You can read our complete Russell 2000 Small Cap ETF thesis and research report here, and you can view the same for our S&P 500 SPDR ETF (SPY) here.

Westar Energy (WR) Update - Sensitivity to Interest Rates

Our “Blue Harbinger 15” utilities stock, Westar Energy (WR), declined sharply this week immediately after the Fed came out with its more hawkish announcement on interest rates, but then gained back a significant portion of the losses by the end of the week.  We continue to believe in Westar going forward because the company sources its electricity from diversified sources including renewables (not just dirty coal like other utilities).  Also, it’s in a state that is more balanced in its views on the tradeoffs between economics and expensive regulations.  Additionally, it adds diversification to our overall Blue Harbinger 15 portfolio.  Lastly, its 3.6% dividend yield is attractive, and suggests the stock has some upside because 3.6% is historically high for the company.  You can read our complete Westar thesis and research report here.

Procter & Gamble Update - Strong Earnings Announcement

Good news from Procter & Gamble today.  The company announced earnings of $2.6 billion, or 91 cents per share, up from 69 cents per share a year earlier.  Earnings were above analyst expectations due to cost savings and wider profit margins.  And while overall sales declined in the third quarter, the company said it expects next quarter’s earnings to grow.  The stock was up 2.91% for the day.

Procter & Gamble has underperformed over the last year declining 7.5% versus a gain of 10.0% for the overall market as measured by the S&P 500.  This relative underperformance makes us like the company even more because we believe the company has sold off more than it should have.  The company has been hampered by foreign currency headwinds, and they’re also in the middle of a multi-year restructuring whereby they’re shedding some sub-optimal brands.  We believe the company has nearly 30% upside.  We also are attracted to the 3.44% dividend yield which is near the highest level it’s been in about 25 years.

You can view our previous P&G updates here, and you can view our full research report and thesis here.

Union Pacific (UNP) Update – Up 4% on Earnings

We received good news yesterday on railroad company and Blue Harbinger 15 holding, Union Pacific.  Specifically, the stock was up as the company announced earnings that exceeded analyst expectations.  The earnings “beat” was largely the result of improved operational efficiency.  Specifically, UNP improved its operating ratio to 60.3% which is a quarterly record.

However, Union Pacific has declined 14% over the last year while the S&P 500 is up 6%.  The underperformance is due to decreased revenues.  Specifically, coal freight revenue declined 18%, and industrial products and intermodal freight revenue fell 16% and 11%, respectively, versus a year ago.  Less demand from China is a big reason for the decline.  Additionally, the company is generating less revenue as fuel surcharges have also declined.

The silver lining of the revenue decline is that the company has dramatically increased its operating efficiency which will pay increased dividends when the company’s revenue slide turns around.  Union Pacific is at a low point in the market cycle, and we believe this will eventually turn around.  As contrarian investors, we believe Union Pacific has more upside potential over the coming years that the rest of the market.  You can read our earlier UNP updates here, and you can read our complete UNP research report and thesis here.

McDonald's (MCD) Update - Earnings Home Run

McDonald’s (a Blue Harbinger 15 stock) is a great example of how it pays to be a contrarian investor.  Despite a recent outpouring of negativity about the company in the media, McDonald’s gained over 8% yesterday after announcing its earnings beat Wall Street expectations on stronger than expected sales.  Over the last year we’ve heard the pundits crying things like “McDonald’s is too big,” “McDonald’s can’t compete with healthier alternatives,” “McDonald’s brand is dead.”  And despite the negativity, McDonald’s has outperformed the overall market (MCD is up 23% in the last year versus a gain of only 6% for the S&P 500).

We continue to believe in McDonald’s going forward as the company moves past some historical missteps, and it continues to be a cash generation machine with lots of growth opportunities.  Regarding missteps, McDonald’s had some supplier issues in China last year that caused a large drop in sales, but this has been corrected and the company continues to gain traction in China.  Additionally, new CEO Steve Easterbrook has made changes to simplify the menu and improve some ingredients which should also help profitability going forward.  Also, MCD’s introduction of all-day-breakfast in the US is expected to have a positive impact on the company’s future earnings announcements.

You can read our previous McDonald’s updates here, and our complete McDonald’s thesis and research report here.

McDonald’s (MCD) Update - Possible Real Estate Spinoff

According to the Wall Street Journal, McDonald’s board member Miles D. White said on Thursday that the company may soon make a decision on what to do with its vast real estate holdings.  There has been continued murmurings that the company should spinoff its real estate holdings into a REIT (Real Estate Investment Trust) vehicle because it could potentially unlock value for shareholders.  REITs often pay little or no taxes on earnings as long as they distribute most profits through dividends, and they typically receive a higher valuation multiple than retail companies like McDonald’s.  Some investors, such as Larry Robbins of Glenview Capital Management, believe a real estate spinoff could unlock $20 billion in shareholder value.  However, Morgan Stanley analyst John Glass says the possibility of forming a REIT is remote and doing so would not create as much value as one might think.

McDonald’s stock has underperformed the S&P 500 over the last 2 and 1/2 years, but has been outperforming so far this year as management works hard to end the slump.  Regardless the 2 and 1/2 year slump, McDonald’s remains hugely profitable, and we believe has the potential to outperform the market in the coming years.  You can read our complete McDonald’s research report here, and you can view our previous McDonald’s updates here.

Johnson & Johnson (JNJ) Update - Earnings, Currency and Buybacks

In Johnson & Johnson’s (JNJ) earnings release yesterday the company highlighted the impacts of foreign currency, raised its full-year earnings guidance, and announced a $10 billion share buyback program that will be funded with debt.  Overall, the company is in very good shape, and we believe it is a great blue chip stock to own.

Regarding the impacts of foreign currency, JNJ’s revenues declined 7.4% in the quarter versus the same quarter a year ago, but unfavorable currency rates were responsible for 8.2% of the decline.  Said differently, revenues were up 0.8% in constant currency terms.  For reference, about half of JNJ’s sales are overseas, which has had an unfavorable impact as the US dollar strengthened.  However, this is par for the course for JNJ (in future quarters foreign currency will work in their favor), and it is no reason for alarm.

Regarding full-year guidance, we are encouraged that they raised their earnings outlook to $6.15 to $6.20 a share, excluding certain items, up from an earlier range of $6.04 to $6.19.  Growing earnings is a sign of health and it is good for investors.

Finally, the company announced that it plans to buy back up to $10 billion of its own stock, or about 3.7% of the shares outstanding.  JNJ will issue debt to fund the buyback which causes concern to some people even though it should not.  Like most companies, JNJ uses some debt (leverage) to fund its operations because it can earn a higher rate of return on the money than it pays for interest on the debt.  And borrowing to repurchase shares is common, and the result is that it levers long-term returns for stock holders if the company is profitable, which it is.

Overall, we continue to believe in Johnson & Johnson as a great long-term investment.  Not only does it offer attractive returns opportunities, but it adds important diversity to our Blue Harbinger 15 portfolio.  You can view our full Johnson & Johnson thesis here.

Large Value ETF (IWD) Update – Great Time to Own Value

It was a great week for our large cap value ETF (IWD), as it gained 4.0%.  Value stocks (such as the ones in our ETF) have a long history of outperforming growth stocks over the long term (e.g. 10+ year periods).  And now is a great time to own value stocks given that they have been underperforming growth in recent years.  Said differently, now is a great time to buy low.

 
 

Growth stocks have performed well over the most recent market cycle because of the accommodative monetary policies in the US.  With the fed setting interest rates so low, it’s been easier for risky growth companies to borrow money to fuel cheap growth.  However, it will be bad news for growth stocks when the fed eventually starts to raise interest rates as they are widely expected to do within the next several months.  It’s unusual for growth stocks to outperform value for as long as they have (see the chart above) but when it does happen it usually ends badly for growth stocks.  For example, it ended very badly for growth stocks when the tech bubble burst in the early 2000’s.  As contrarian investors, we believe now is a great time to own value stocks such as the ones in our large cap value ETF (IWD).

Walt Disney (DIS) Update - New Films and ESPN Fears

Disney (DIS) stock continues present a great buying opportunity as it trades about 13% off its 52-week high.  The stock declined sharply after last quarter's earnings announcement where they missed earnings estimates and expressed fears that ESPN will lose more customers as young people continue to cut the (cable) cord.  However, there is a lot more to this amazing company than ESPN.  For example, the upcoming Star Wars movie should create a big boost for revenues.  Disney released its updated movie schedule this week, and you can view it below.  And to read our complete Disney research report, click here

  • June 16, 2017: “CARS 3”
  • Nov. 22, 2017: “Coco”
  • Dec. 22, 2017: “Untitled Disney Fair Tale – Live Action”
  • Feb. 16, 2018: “Black Panther”
  • March 9, 2018: “Gigantic”
  • June 15, 2018: “Toy Story 4”
  • July 6, 2018: “Ant-Man and the Wasp”
  • Nov. 2, 2018: “Untitled Disney Fairy Tale – Live Action”
  • March 8, 2019: “Captain Marvel”
  • March 29, 2019: “Untitled Disney Fairy Tale – Live Action”
  • April 12, 2019: “Untitled Disneytoon Studios”
  • June 21, 2019: “The Incredibles 2”
  • Nov. 8, 2019: “Untitled Disney Fairy Tale – Live Action”
  • March 13, 2020: “Untitled Pixar Animation”
  • May 1, 2020: “Untitled Marvel”
  • June 19, 2020: “Untitled Pixar Animation”
  • July 10, 2020: “Untitled Marvel”
  • Nov. 6, 2020: “Untitled Marvel”
  • Nov. 25, 2020: “Untitled Disney Animation”

release schedule source: Wall Street Journal

American Express Update - Sam's Club

It was announced this week that American Express cards will soon be accepted at Sam's Club (the eighth largest U.S. retailer and a leading membership warehouse club for small businesses and consumers).  We view this as an incremental positive for American Express (AXP), especially after losing their exclusivity deal with Costco earlier this year.

We consider now a great time to invest in American Express because the stock is trading at an attractive valuation.  The valuation is attractive because the market over-reacted to some negative news earlier this year (i.e. AXP has underperformed the broader market year-to-date due to the loss of Costco exclusivity as mentioned above, and due to a negative antitrust ruling).  However, AXP is still an extremely profitable company, with lots of room to grow, and an attractive dividend yield.  You can read our complete AXP thesis here.

P&G Update - Dividend Yield Highest in 25 Years

Now is a great time to initiate a position in Procter & Gamble (or increase an existing position).  As P&G’s stock price has declined over the last few weeks (along with declines in the overall stock market), the company’s dividend yield has increased to its highest level in almost 25 years (it’s been hovering around 3.7% to 3.8%).  P&G is a stalwart blue chip that generates around $11 billion in free cash flow every year, and the dividend is one of the safest in the world (i.e. this dividend is not going to be reduced). 

For some background, P&G’s stock price has been hammered over the last year by severe foreign currency headwinds (the US dollar has been strong) and a variety of (soon-to-be eliminated) sub-optimal market ventures.  However, knowing that the foreign currency headwinds are normalizing and P&G’s restructuring is progressing, now is a great time to buy.

Also worth noting, P&G’s CEO A.G. Lafley will be replaced on November 1st by David Taylor (David has been with P&G since 1980, and most recently was head of the company’s global beauty grooming and health-care division).  This was Lafley’s second go-round as CEO (they brought him out of retirement to lead the company’s recent restructuring), and Lafley will remain on as Chairman to help with the transition.  You can read our full report on P&G here.
 

Facebook (FB) Update - Oculus V.R.

Facebook purchased virtual reality company Oculus for $2 billion last year, and it seems they are about to begin monetizing that purchase.  Facebook and smart-phone giant Samsung will launch a $99 virtual reality headset in November called the Gear VR.  Facebook has struck deals with a variety of video game companies to create content, and the possibilities to grow and evolve the virtual reality headset business are vast.  We view this as an incremental positive for Facebook, and we continue to hold the stock and believe in the business going forward.  You can view our complete Facebook thesis here.

Accenture (ACN) - Update - Earnings

Accenture announced earnings this morning and exceeded market expectations for both top line revenue and bottom line net income.  And the results would have been even better had it not been for foreign currency headwinds.  The main driver of Accenture's continued growth is a surge in digital services revenue and cloud services business.

Also encouraging, Accenture announced they are increasing their dividend by 8% and adding $5 billion to its share repurchase program.  Both of these are good things because it is a return of cash to shareholders.  Even though Accenture is growing quickly it still generates more cash than it needs, and is able to return a lot of it to shareholders.

Accenture's stock price has declined slightly this morning mainly because the overall market is down slightly.  However, the company also gave guidance for next year's earnings in a range of $5.09 to $5.24 per share, slightly below street expectations of $5.22 per share.

Bottom line, this is a great business, that generates lots of cash and continues to grow.  You can check out our complete thesis on Accenture here.

US Bancorp (USB) Update: Preparing to Cut Cost

US Bancorp CEO, Richard Davis, said in a recent Wall Street Journal article that his bank is preparing for cost-cutting measures if interest rates don't rise soon.  USB's revenues are split between fee revenue and interest rate sensitive revenues, but the low interest rate environment is still putting significant strain on the company. Irrespective of interest rates, USB is a very well-run bank with a healthy dividend that is in no way in jeopardy.  We continue to hold the stock as we believe it trades below its intrinsic value.  And if interest rates do eventually rise, that will be an incremental positive for the bank.  You can read our complete thesis here.

Facebook (FB) Update - Monetizing Instagram

Facebook announced today they are opening up Instagram to more advertisers, and the stock price is up moderately.  Facebook has consistently stated they prioritize user experience ahead of short-term profit maximization, and this is why they continue to leave enormous amounts of monetization opportunity (advertising dollars) on the table.  As shareholders, we agree with Facebook’s priority because we believe it makes the company worth more in the long-run.


We view today’s announcement as a positive signal that Facebook is comfortable they can ramp up advertising to some extent without overly compromising user experience. The increased advertising dollars should pass through to the bottom-line.  We also believe that Facebook will find more ways to monetize the business in the future without significantly detracting from user experience.  We believe the stock (FB) has significantly more upside from here because significant monetization opportunities remain.  You can view our complete Facebook thesis here.
 

Union Pacific (UNP) Update

Union Pacific’s (UNP) stock price has continued to decline since our June 30th thesis, and the decline continues to be overdone.  The decline has been driven partially by a slowdown in business (for example, operating revenue was down 10 percent in the second quarter versus the second quarter of 2014).  However, a larger portion of the decline has been driven by a “global economic slowdown” narrative that is overdone.

Union Pacific continues to generate an enormous amount of free cash flow, and is working to “right size” the business.  According to UNP CEO, Lance Fritz, “Total volumes in the second quarter were down 6 percent, led by a sharp decline in coal.  Industrial products and agricultural products also posted significant volume decreases.  However, we made meaningful progress right sizing our resources to current volumes.”  Also worth noting, the company did experience growth in automotive and intermodal during the period.

Year-to-date, Union Pacific’s stock is down nearly 17% while the S&P 500 is down only 8%.  However, UNP still generated more cash from operations in the first six months of this year than it did for the first six months of 2014.  Additionally, UNP’s diversified rail businesses are resilient, and the organization continues to “right size” its operations for the current environment.  Fears of a dramatic global slowdown fueled by a China pullback are overdone.  Union Pacific stock is undervalued, and it represents an exceptional long-term investment opportunity.  To read our complete Union Pacific thesis, click here.

McDonald's (MCD) All Day Breakfast

McDonald's (MCD) announced yesterday that they'll begin serving all-day-breakfast on October 6th.  Breakfast has been McDonald's best selling daypart, and this is, of course, an effort to increase profitability for the fast-food giant.  The market likes the news so far, as the stock is up over 2% this morning (the market is only up ~1%).

Remember, even though MCD's earnings missed estimates and declined in 2014, Q1-15 and Q2-15, the firm still generates enormous cash flow, and we believe the stock is worth considerably more than its current market price suggests.  You can read our full McDonald's thesis here.

American Express (AXP) Update

 

American Express was up 6% near the market-close on Friday as information emerged that Value Act Capital Management may have acquired a nearly 5% stake in the firm.  According to American Express spokeswoman Marina Norville:

"ValueAct is a well-respected firm.  We have been speaking with them, as we do with other investors, and look forward to continuing a constructive dialogue."

It's good news if it turns out ValueAct has taken a position because it sends a signal to the market that some smart money believes the stock has upside.  Additionally, as an activist investor, ValueAct may pressure American Express management to make some changes to the company to help bring out the value.

If it turns out ValueAct has not taken the position then the stock will likely give back some (or all) of the gains.  Regardless, we at Blue Harbinger believe in American Express.  You can read our original thesis here.

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