Topic: Daily Advice

Wall Street Stock Forecaster Hotline – Friday, April 12, 2019

J.P. MORGAN CHASE & CO., $111.21, New York symbol JPM, is the largest banking firm in the U.S., with total assets of $2.74 trillion as of March 31, 2019.

In the three months ended March 31, 2019, Morgan earned $9.18 billion, up 5.4% from $8.71 billion a year earlier. Per-share earnings rose 11.8%, to $2.65 from $2.37 on fewer shares outstanding. That beat the consensus estimate of $2.35.

Revenue gained 4.4%, to $29.1 billion from $27.9 billion. That also exceeded the consensus forecast of $28.4 billion.

Despite higher interest rates, earnings from the bank’s consumer lending rose 19.2% on strong demand for new loans and credit cards. As well, earnings from Morgan’s commercial banking business improved 2.7%. Those gains offset weaker earnings for the bank’s corporate financing (down 18.2%) and wealth management (down 14.2%) businesses.

Morgan set aside $1.50 billion in the quarter to cover potentially bad loans. That’s up 28.3% from $1.17 billion a year earlier. The increase is mainly due to specific provisions for certain clients of the bank’s corporate financing division. The year-earlier provision also benefited as Morgan took back some of its previous loan reserves.

The bank will probably earn $9.69 a share in 2019, and the stock trades at a reasonable 11.5 times that forecast. The $3.20 dividend yields 2.9%.

OUR RECOMMENDATION: J.P. Morgan Chase is our #1 Income buy for 2019.

J.P. Morgan’s recent coverage

WELLS FARGO & CO., $46.49, New York symbol WFC, is the third-largest U.S. bank by assets ($1.90 trillion as of December 31, 2018), after J.P. Morgan (No. 1) and Bank of America (No. 2).

The bank will now sell its Institutional Retirement & Trust business to Principal Financial Group Inc. (New York symbol PFG). That business provides custodial and other administrative services to pension plans and institutional investors. As of December 31, 2018, that unit had $827 billion in assets under administration and served 3.9 million participants and pensioners.

Wells Fargo will receive $1.2 billion for the business when it completes the sale in the third quarter of 2019.

Meantime, the U.S. Federal Reserve recently ordered the bank to halt any activity that would increase its total assets. The Fed put the restriction in place because of the over 3.5 million unauthorized accounts that Wells Fargo employees opened in an effort to meet sales targets. In response to that activity, the bank fired 5,000 employees involved in the scandal and tightened up its oversight procedures.

In the three months ended March 31, 2019, Wells Fargo’s revenue fell 1.5%, to $21.6 billion from $21.9 billion a year earlier. That’s because the bank sold loans to comply with the asset cap. Even so, the latest revenue figure beat the consensus forecast of $20.9 billion.

Overall earnings gained 16.4%, to $5.51 billion from $4.73 billion a year earlier. That’s partly because the bank is earning higher interest income on its loans. Due to fewer shares outstanding earnings per share jumped 25.0%, to $1.20 from $0.96. That beat the consensus estimate of $1.11.

Wells Fargo set aside $845 million in the quarter to cover future bad loans. That’s a big jump from $191 million a year earlier. However, the year-earlier figure was unusually low as the bank reversed some earlier provisions.

The stock trades at an attractive 9.5 times the 2019 forecast earnings of $4.89 a share. The $1.80 dividend yields 3.9%.

OUR RECOMMENDATION: Wells Fargo is a buy.

Wells Fargo’s recent coverage

CONAGRA BRANDS INC., $29.75, New York symbol CAG, makes packaged foods, including Chef Boyardee canned pasta, Hunt’s tomato sauce, Peter Pan peanut butter, Orville Redenbacher popcorn and Reddi-wip whipped cream.

The stock jumped 5% this week after the company increased its savings target in the wake of last year’s acquisition of food maker Pinnacle Foods Inc. (New York symbol PF) It paid $8.03 billion (64% cash, 36% stock), but if you include Pinnacle’s debt, the price rises to $10.9 billion.

Pinnacle’s top brands include Duncan Hines (cake mixes), Vlasic (pickles), Wish-Bone (salad dressings) and Aunt Jemima (table syrups).

Conagra now expects that eliminating overlapping operations will let it cut $285 million from its annual costs, up from its initial target of $215 million. To put those amounts in context, it earned $250.5 million, or $0.51 a share, in its fiscal 2019 third quarter, ended February 24, 2019.

The company expects to realize 55% of those savings by the end of fiscal 2020 and 95% by the end of 2021.

Conagra still expects to earn between $2.03 and $2.08 a share for all of fiscal 2019. The stock trades at a moderate 14.5 times the midpoint of that range. As it realizes more savings from the Pinnacle acquisition, the company’s earnings will likely rise to between $2.70 and $2.80 a share in fiscal 2022.

OUR RECOMMENDATION: Conagra Brands is a buy

Conagra’s recent coverage

CHEVRON CORP., $119.76, New York symbol CVX, is the second-largest integrated oil producer in the U.S. by revenue, after ExxonMobil (New York symbol XOM).

The company will now buy Anadarko Petroleum Corp. (New York symbol APC). That firm produces oil and natural gas in several U.S. states (Texas, Colorado, Wyoming and Utah) and at offshore wells in the Gulf of Mexico. It also has offshore operations near Colombia, Guyana and Peru and is the largest foreign oil producer operating in Algeria.

Chevron will pay $33 billion (75% in stock, 25% in cash) for Anadarko. If you include that firm’s debt, the value of the deal rises to $50 billion. That’s equal to 22% of Chevron’s $227.6 billion market cap (the total value of all its outstanding shares).

The company expects to cut $2 billion from its annual costs by the end of the first year through the elimination of overlapping operations. In addition, to help fund the acquisition, it plans to sell $15 billion to $20 billion of assets between 2020 and 2022. Chevron will also use some of the proceeds to buy back between $4 billion and $5 billion of its shares each year following the transaction.

Assuming Anadarko shareholders and regulators approve, the company expects to complete the purchase in the second half of 2019.

OUR RECOMMENDATION: Chevron is a buy.

Chevron’s recent coverage

NEWMONT MINING CORP., $36.25, New York symbol NEM, is one of the world’s largest gold and copper producers. Its mines are in North America, South America, Australia and Africa.

This week, Newmont shareholders approved its acquisition of Vancouver-based Goldcorp Inc. (New York symbol GG) for roughly $10 billion in cash and shares. The merger deal should close in the second quarter of 2019.

The new company—called Newmont Goldcorp—will be the world’s largest gold mining company, producing between 6 million and 7 million ounces annually. Newmont investors will hold 65% of the combined company, with Goldcorp shareholders owning the remaining 35%.

As well, Newmont shareholders will receive a special dividend of $0.88 a share on May 1, 2019. Goldcorp investors are ineligible for the payment.

The cash for the special dividend will come from Newmont’s plan to fold its gold mines in Nevada into a new joint venture with Barrick Gold Corp. (New York symbol GOLD). Under the terms of that deal, Barrick will own 61.5% of the joint venture and operate it. Newmont will own the remaining 38.5%.

By eliminating duplicate processing and other operations, Barrick and Newmont expect to cut an average $500 million annually from their pre-tax costs within five years.

Separately, Newmont plans to sell between $1.0 billion and $1.5 billion of its less-important assets. It also expects the Goldcorp purchase to let it cut $365 million from its annual costs. It has yet to reveal how much time it will likely need to achieve that saving.

OUR RECOMMENDATION: Newmont is still a buy, but only for aggressive investors who want to own a gold stock.

Newmont’s recent coverage

Our next Hotline will go out on Thursday, April 18, 2019

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