Stock Groups

We’re buying more of one club name and updating two others

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Jim Cramer

Scott Mlyn | CNBC

(This article was originally sent to Jim Cramer and members of CNBC Investing Club. Get the latest updates directly to your email subscribe here.)

We will purchase 50 shares after you have received this email Danaher(DHR), at approximately $302.66 The Charitable Trust will now own 350 shares Danaher after the trade. DHR will be able to increase its weight within the portfolio by purchasing 350 shares of Danaher.

A small number of shares in Charitable Trust were on the move Tuesday as management updated their outlook to the fourth quarter. Here, we break down the guidance updates and share our thoughts on the stocks.

Danaher gave an update about its fourth quarter outlook for 2021 ahead of the presentation at JPMorgan Healthcare Conference.

  • Danaher currently estimates that fourth-quarter revenue rose by the low teens to mid-twenties percent, and core revenue growth is in the high teens percent. Based on FactSet’s consensus estimate of fourth-quarter revenues, Danaher provided an update that was significantly better than the analysts had expected.
  • Rainer Blair, CEO of Rainer International Inc. noted this in his morning’s report press releaseThe strength of the portfolio was the source of the portfolio’s strength. Blair stated that Danaher had achieved higher-than-expected results in all three segments of reporting, with Life Sciences and Diagnostics being the top performers.
  • On top of the preannouncement, Danaher received a positive recommendation from Wall Street after Bernstein initiated coverage on the stock, naming it a top pick with an Outperform rating and $365 price target — over 20% higher than Monday’s $303 close.

The shares of Danaher were flat in trading at the time that this article was published, despite the analyst push and preannouncement. This muted response is simply wrong. We believe the stock price should rise with higher earnings. This is why we’re jumping at the chance to acquire more shares, and raise our average cost basis.

Before their presentation at ICR Conference American Eagle Outfitters(AEO) Management updated its 4th quarter 2021 outlook. They also revised their 2023 financial targets.

  • The fourth quarter saw record revenue. Management stated that there was strong demand for the product and positive pricing. Fourth quarter 2020 figures were lower. Although this seems like a positive result on paper it is not as good as the FactSet consensus revenue estimates, which were about 21%. This makes the update somewhat disappointing.
  • The company also stated that operating income will be between $90 million and $100 million. This is lower than the FactSet consensus estimate of $132 million.
  • Higher freight costs were an important headwind during the quarter, and they impacted operating income by $80 millions.

AEO takes the disappointment in fourth-quarter updates with a grain of salt, but it is still a positive step forward. There are two main reasons we believe.

  • First of all, the company believes that bad news has been already included in the stock price. American Eagle Outfitters shares have been a poor performer in the last months, falling 18% after reporting stronger-than expected results for its third quarter. This drop suggests that the market expected a disappointing outcome.
  • Second, while holiday sales are crucial, results must be considered with caution due to Covid-19 and supply chain issues that the entire industry faced over the last few months. American Eagle Outfitters’ future performance is what matters most today. The new targets for 2023 that the management presented to us today make it very interesting.
  • The management raised their 2023 revenue target from $550m to $5.8billion and the operating income target from $800 million to $550m, so they see 13.5% margins instead of 10%. Aerie and AE have achieved higher revenue and operating margins, which translates into more targets.
  • The management believes that there is a chance to achieve $1 billion in long-term operating income. This can be achieved through strong growth of AEO Logistics and revenue upside from AE. It will also provide opportunities for international growth.

American Eagle Outfitters, which is a company with a market capitalization of $4 billion, is presently undervalued. Management believes their model can generate $1 billion in operating revenue. We like the 3% dividend yield, which pays out while we wait for revenue growth and an improvement in operating margin.

Tuesday’s last guidance update was from Abbvie (ABBV).

  • In 2025, the company will confirm its previous revenue guidance. It is expected to generate more than $15 Billion in combined Skyrizi and Rinvoq risk-adjusted revenues. It isn’t usually news for companies to reiterate their guidance. However, this update was significant because AbbVie involved Rinovq, a drug that has been subjected to a lot of scrutiny in 2021.
  • Investors were concerned that there would be a reduction in this guidance due to uncertainties around Rinvoq’s FDA label update and the delaying approvals for a few indications. However, those worries have been proved to be exaggerated. We wrote about it a couple weeks ago. our Dec. 29 note.

For a better understanding of Skyrizi’s analyst forecasts, we took a look on FactSet at consensus 2025 estimates.

  • Analysts continue to underestimate Abbvie’s Immunology assets, which are two of its most important growth areas. Skyrizi estimates that Rinvoq will generate $7.081 billion in revenue by 2025. However, analysts expect Rinvoq to bring in $6 billion. This amounts to approximately $13 Billion. To be consistent with management’s comment, forward estimates will need to rise by around $2 billion.

We believe the market realized that a $15 billion cut was unlikely based upon the significant performance of the stock in the fourth quarter. The stock is cheap, and there will still be earnings and cashflow to sustain the excellent dividend of 4%.

CNBC Investing Club now serves as the official residence of my Charitable Trust. You can view every portfolio move and receive my market insights before everyone else. Action Alerts Plus is not affiliated in any way with the Charitable Trust or my writings.

 Subscribers to CNBC Investing Club will get a trade alert prior to Jim making a trade. Jim will wait 45 minutes to send a trade alert, before purchasing or selling stock from his charitable trust portfolio. Jim may wait 72 hours to execute a trade if he has discussed a stock with CNBC TV. See here for the investing disclaimer.

 Jim Cramer’s Charitable Trust has a long history of DHR, AEO, and ABBV.

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