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Market Musings - November 13, 2017

We continue our blog series: Market Musings, Volume 1, Edition 8, giving our (hopefully not too random) thoughts on recent goings-on in the markets. Today, we present Earnings Odds and Ends.

Thankfully, Q3 earnings season is winding down a bit. Almost all of our large holdings have reported, with the exception of Viacom (which reports on Thursday, the 16th). Below we present thoughts on recent earnings news we have been keeping an eye on:

1. Energizer (ticker ENR) - the battery maker reported what looked to us like fairly strong earnings (link to PR here):

Net income of $0.55/share in the quarter (up 62% versus $0.34/share in the prior year quarter) on revenues of $465MM (up 7.6% versus $432MM in the prior year quarter). ENR looks interesting for several reasons:

First, competitor Duracell was sold by P&G to Berkshire Hathaway for $4.7B back in late 2014, indicating to us that pricing will likely be more rational (meaning less competitive) in the coming years (source here):

Second, as of a year ago on a combined basis, ENR and Duracell controlled approximately 75% of the consumer (alkaline) battery market (source here):

Because of the competitive dynamics in the consumer battery space (essentially a duopoly), we would expect both ENR and Duracell should be able to take price increases regularly, which should offset declining volume over time (for more on this decline, see here). As Buffett has said previously, the test of business quality is the degree to which an enterprise can raise prices (source here):

Note also that ENR is in the process of diversifying its business away from alkaline batteries, which (if done intelligently) should mitigate away some of the risk of a secular decline in personal battery use. Per page 6 of its Q4 FY2017 10-Q filing: "On July 1, 2016, Energizer expanded its portfolio of brands with the acquisition of HandStands Holding Corporation (the auto care acquisition), a leading designer and marketer of automotive fragrance and appearance products. With the auto care acquisition, the Company's brands now include Refresh Your Car!®, California Scents®, Driven®, Bahama & Co.®, LEXOL® and Eagle One®".

Finally, ENR trades at a enticing multiple of just 13.6X expected 2018 earnings of $3.23/share, representing an earnings yield of 7.3% (source here):

Below is the stock chart for ENR since its spin off from Edgewell Personal Care (see spinoff PR here) in mid-2015:

A discussion of the bear case on ENR can be found here.

2. Intrexon Corp (ticker XON) - this company, which to us looks like a publicly-traded venture capital (or VC) firm, reported Q3 2017 earnings a few days ago (link to PR here)...

...and saw its stock price get obliterated:

While things look grim from the above chart, generally speaking one should of course try to buy low (assuming one intends to buy at all). In other words, better to buy after the stock crashes than before, other things being equal. XON's stock price is now down over 80% from its July 2015 all-time high of over $65/share:

XON looks interesting (on the surface, at least) because of the involvement of its founder and largest shareholder, billionaire Randal Kirk. According to XON's 2017 Proxy Statement, Kirk owns over 62 million shares, or 52% of the outstanding stock. Thus, at the very least we can assume the CEO will be properly motivated to get the share price back up again. Below is a summary of the large and insider shareholders:

We also note that the breadth of XON's ambitions with respect to start-up investments and technologies is quite astounding (hence our description of them as basically a VC firm). Here is a brief summary of what they've got going on (from the company's 2016 10-K filing):

Finally, we note that a pretty stinging bear thesis came out about a year and a half ago (which has been prescient, at least with respect to the stock price), which any potential long should thoroughly absorb prior to buying XON shares (see full document here):

3. Warrior Met Coal (ticker HCC) - the hard coking coal (hence the ticker symbol) producer, which we first mentioned in Market Musings, Volume 1, Edition 1 (link here) reported what appeared to be favorable earnings late last week (link to PR here):

The real question for HCC is how long the current strong pricing environment for coking coal can be reasonably expected to last--Macquarie predicts favorable pricing to last into next year (source here). Below are the company's expectations for full-year 2017 operating performance:

There are currently no analysts covering the stock (according to Yahoo Finance). Finally, below is the stock chart for HCC since its IPO earlier this year:

DISCLOSURE: No positions in stocks mentioned, except long VIAB.

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