Earnings season and economic news got you feeling flipped upside down? NASDAQ’s website shows 108 companies reported earnings on 1/29/25 and another 119 on 1/30/25. Throw in the latest GDP data and the Fed’s newly cautious approach to rate cuts moving forward, and it’s enough datapoints to make your head spin.
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With its long track record of profit growth, healthy balance sheet, top-tier profitability, and leadership position, this stock is positioned to grow profits for years into the future.
Better yet, this stock is really cheap. The current valuation implies the company’s profits will never grow again, thereby creating a large margin of safety and quality risk/reward.
Our process for picking stocks is about as rigorous as it gets, and we’re proud to show our work. We’re not giving you the ticker for this pick, but we are happy to share large excerpts from the report.
The following is from the recent a report, available to Pro and Institutional members. And, you can buy the full report a la carte here.
This stock offers favorable Risk/Reward based on the company’s:
- market share leadership,
- diversified offerings,
- top-tier profitability, and
- cheap stock valuation.
Profits Remain Strong
This company has grown revenue and net operating profit after-tax (NOPAT) by 16% and 21% compounded annually, respectively, since fiscal 2014. The company’s NOPAT margin improved from 8% in fiscal 2014 to 12% in the trailing-twelve-months (TTM), while invested capital turns increased from 1.1 to 1.4 over the same time. Rising NOPAT margins and invested capital turns drive the company’s ROIC from 9% in fiscal 2014 to 17% in the TTM. See Figure 3. Even though NOPAT has fallen after a record 2022, the company’s TTM NOPAT is still higher than any annual period in company history outside of fiscal 2022-2024.
Figure 3: Revenue and NOPAT: Fiscal 2014 – TTM
Sources: New Constructs, LLC and company filings
Attractive Dividend and Repurchase Yield
Since fiscal 2018, this company has paid $2.1 billion (5% of market cap) in cumulative dividends and has increased its quarterly dividends from $0.13/share in February 2018 to $0.40/share in February 2025. The company’s current dividend, when annualized, provides a 1.1% yield.
While the company has consistently increased its dividend, the bulk of capital returned to shareholders comes through share repurchases. From fiscal 2018 through fiscal 1Q25, the company repurchased $7.0 billion (15% of market cap) worth of shares. It would appear management believes the stock is cheap at current levels, as $5.2 billion of these repurchases have occurred since fiscal 2022. In fiscal 1Q25, the company repurchased $1.1 billion, which is up from $377 million in fiscal 1Q24. On the 1Q25 earnings call, management noted that “as our stock price declined during the quarter, we accelerated some of our planned share repurchases.”
In July 2024, the company’s Board of Directors authorized a $4 billion share repurchase program with no expiration date. As of December 2024, there are $2.5 billion remaining under the current authorization. Management noted on the 1Q25 earnings call that it expects to repurchase $2.6 and $2.8 billion in 2025. Netting out the $1.1 billion repurchased in 1Q25, this statement implies the company will repurchase and additional $1.6 billion (based on the midpoint repurchase estimate) in 2025. A $1.6 billion repurchase is 3.5% of the current market cap, and when combined with the dividend yield, could provide investors a 4.6% yield on shares.
Strong Cash Flow Generation
Best of all, the company’s free cash flow (FCF) easily exceeds its regular dividend payments. From fiscal 2018 through fiscal 1Q25, the company generated $9.4 billion in FCF while paying $2.1 billion in dividends. Combined, the company has repurchased shares and paid dividends worth $9.1 billion over the same time.
The company has generated a cumulative $9.4 billion in free cash flow (FCF), which equals 21% of its enterprise value. The company’s large and rising FCF shows the company’s ability to grow while running one of the most profitable businesses in the industry even when margins are being pressured.
Figure 4: Cumulative FCF: Fiscal 2018 – Fiscal 1Q25
Sources: New Constructs, LLC and company filings
….there’s much more in the full report. You can buy the report a la carte here.
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