Clay Carter and the Macrovue investment committee look at three high quality companies – each leaders in their respective fields - boasting a healthy mix of dividend yield and share price appreciation.
Microsoft (Nasdaq: MSFT)
Microsoft reported third quarter earnings on 25 October 2018 and they were impressive.
Revenue and earnings per share (EPS) were well above consensus. Microsoft reported total revenue of $29.1B (+19% on previous year), ahead of consensus of $27.9B. Pro-forma EPS of $1.14 exceeded the consensus estimate of $0.96. Of the outperformance, 4c was attribute to a lower tax rate and 4c due to higher other income, both relative to company guidance.
Microsoft’s revenue guidance is also ahead of consensus. Microsoft’s total imputed revenue guidance is $31.9-32.7B (+10% to +13% on previous year) vs. consensus of $32.2B (+11%).
Some takeaways: Microsoft is benefitting from a strong line up of five new Surface devices going into holiday season. The company also flagged strong gaming revenue growth of 45% with a robust monetisation runway. Operating income grew 28% and the company did not caution on the macroeconomic climate and instead stated that it expects solid bookings and “continued to benefit from favourable macroeconomic and spending trends.”
Microsoft returned +39.23% (AUD) in the year to 1 December 2018.
Pfizer (NYSE: PFE)
Pfizer reported a solid third quarter earnings result on 30 October 2018. Pfizer reported EPS of $0.78 (+$0.03 vs consensus) as other income and a lower-than-expected tax rate (~$0.03 benefit) offset a modest top-line miss ($13.3bn, -$202mm vs consensus).
While several core products were slightly below analysts’ estimates, there are a number of favourable longer-term trends. On top line, Prevnar sales ($1.7bn, +$130mm vs consensus) beat expectation while Ibrance sales were a bit light ($1.0bn, ‑$45mm vs consensus), Xeljanz ($432mm, $44 mm away from consensus) and Lyrica ($1.1bn, -$78mm vs consensus) were modestly below. Xeljanz Rx trends remain favourable and the product should benefit from its expanded label over time.
In terms of the bigger picture (and despite the choppy quarter), Pfizer appears increasingly confident in its organic growth potential as the company looks beyond its last major patent expiration in 2019 (Lyrica) based on the traction it has seen with its late-stage pipeline. In company meetings, Pfizer has flagged a number of these pipeline opportunities. These include new indication line extensions (Ibrance adjuvant and Xtandi early lines of therapy in Oncology, Xeljanz in Immunology) as well as several interesting new molecules (most notably tafamidis in rare disease, tanezumab in pain and emerging JAKs in Immunology), biosimilars and several earlier stage rare disease opportunities.
Note: As we are writing this, Pfizer and U.K. pharma giant GlaxoSmithKline PLC announced that they plan to combine their consumer health-care units and eventually spin off the joint venture, creating the world's largest seller of branded drugstore staples like Advil, Sensodyne toothpaste, as well as Nicorette, heartburn tablets Tums and Centrum multivitamins.
The deal, announced Wednesday 19 December 2018 is a long-anticipated conclusion to a planned process by Pfizer to shed its consumer business, so it can focus more on higher-margin prescription drugs. Glaxo will hold a 68% stake and Pfizer the remaining 32% in the new joint venture which generated combined sales of $12.7 billion last year and will be the world’s largest over-the-counter medicines business.
Pfizer returned +35.56% (AUD) in the year to 1 December 2018.
McDonalds (NYSE: MCD)
The biggest takeaway from MCD’s excellent third quarter earnings report on 23 October 2018 is that McDonalds strong system-wide same-store sales gains show no signs of slowing and will continue to pressure smaller quick-service competitors. System-wide comparisons beat expectations and rose 2.4% in the U.S., despite lapping strong 3Q17 results and having reduced operating weeks due to remodels.
McDonalds is moving aggressively to steal the quick-service restaurant market share in the U.S. and abroad. The company aims to use a new value menu, technology, discounts, simpler operations, delivery and menu changes to boost guest traffic in 2018/19. It has completed refranchising some 4,000 stores, and plans to work toward a goal of 95% of such locations, up from 85% in 4Q, by selling stores in mature markets including the U.S.
McDonald's delivery expansion, Experience of the Future (EOTF) store upgrades, fresh beef quarter pounders, $1 $2 $3 Menu and new breakfast items will likely fuel 4Q18 market-share gains. U.S. same-store sales outperformed the QSR Sandwich category by 70 bps in 3Q as delivery, kiosks and glazed chicken tenders boosted average checks. International results have been strong as guest counts rose in most overseas markets. Management said that China is a meaningful growth opportunity, with 2,000 new franchised stores expected to open in the next three years.
McDonalds returned +16.6% (AUD) in the year to 1 December 2018.
You can invest in these companies directly through Macrovue’s High Quality Vue.
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