A Trio of Buyback Bets

09/10/2019 5:00 am EST

Focus: STRATEGIES

David Fried

Editor, The Buyback Letter

Buyback stocks outperform the market year after year, so why not just follow buyback announcements and invest yourself? Unfortunately, it’s not that simple, cautions David Fried, a specialist in stocks undergoing buyback or stock repurchase programs and the editor of The Buyback Letter.

I carefully analyze each buyback stock, each buyback company, separating rhetoric from reality. Our team pores over announcements, scrutinize quarterly and annual reports, and talk to company officials, lawyers and competitors. Here's a look at 3 of our recent recommendations:

NRG Energy (NRG)

New Jersey-based energy company NRG Energy has more than 3 million residential, industrial and commercial customers under the NRG, Reliant, and other names.

In 2017 the company began a 3-year revamp, to reduce costs, slim down the business and reduce debt. It is expected to hit its reset goals, and when complete it will be basically 2 businesses — one will be a competitive energy company selling power directly to end customers, with a heavy focus on Texas.

The other will be an independent power producer that sells electricity to utilities. Company leaders hope the two sides will create a steady revenue and earnings stream.

Q2 delivered earnings of 70 cents per share from continuing operations. Revenues of $2.465 billion increased 0.2% from the year-ago quarter’s figure.

Through Aug 7, 2019, the company completed share repurchases of $1.25 billion that includes the $1 billion share repurchase program announced in the fourth quarter of 2018. The board authorized a share repurchase program of $250 million, expected to be executed in 2019. Shares outstanding have been reduced by 15.159% in the last 12 months.

Textron Inc. (TXT)

Aerospace company Textron has a network of aircraft, defense, industrial and finance businesses, and many recognizable brands — Bell, Cessna, Beechcraft, Hawker, Jacobsen, Kautex, Lycoming, E-Z-GO, Arctic Cat, Textron Systems, and TRU Simulation + Training.

Founded in 1923, it has a network of powerful businesses with total revenues of $14.2 billion, 35,000 employees, facilities and a presence in 25 countries. HQ is in Rhode Island. It is ranked 208th on the Fortune 500 list of largest U.S. companies.

Q2 had some disappointing results last month, and the company has been dealing with operational hiccups in key units. However, the company should get a leg up if Cessna's new Citation Longitude midsized business jet gets certified, as expected in the current quarter.

This will give the company a refreshed product to sell into an expected business jet market recovery. And Cessna’s 19-seat SkyCourier turboprop has already landed FedEx as a launch customer.

Analysts like Textron as a financially sound company with a good track record of performance, trading at a discount. In the last 12 months, management has reduced shares outstanding by 7.362%.

Waters Corp. (WAT)

The world’s leading specialty measurement company, Waters Corp. sells and services analytical instruments like chromatography, mass spectrometry and thermal analysis for the life science, materials and food sciences industries for more than 60 years.

It has some 7,200 employees worldwide, and operates directly in 35 countries, including 15 manufacturing facilities. Its products are available in more than 100 countries. It is based in Massachusetts, and is a member of the S&P 500.   

Waters Corp. had Q2 non-GAAP earnings of $2.14 per share, beating the estimate by 3 cents. The figure improved 10% on a year-over-year basis and 33.7% sequentially. Net sales were $599.2 million, up 0.5% from the year-ago quarter and 16.6% from the previous quarter. Improved performance in the pharmaceutical market contributed to the results. Q3 sales growth of 2%-4% is expected.

The company has a good long-term record. Over the last 10 years, the stock has climbed nearly 400%. Over the last five years, revenue has grown 7+%.

The return on equity of 41+% and return on assets of 16+% are outperforming more than 3/4 of the companies in the Medical Diagnostics and Research industry. In the last 12 months, management has reduced shares outstanding by 11.319%.

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