I suspect that many are aware that unlike most other market indexes, the Dow Jones Industrial Average is price-weighted, meaning that the highest-priced stocks like UnitedHealth Group (UNH), Goldman Sachs Group
GS
INTC
VZ
Believe it or not, the Dow is calculated by adding up the price of all 30 components and dividing by a divisor, which on August 8 was 0.15173. This means that a $1 move up or down in the price of a Dow component translates into a 6.6-point move in the index. Obviously, a big change in a stock with a triple-digit stock price will result in a sizable advance or decline in the Dow, and the index was buoyed last week when two of its largest members, construction equipment giant Caterpillar
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AMGN
BULLDOZING AHEAD
Caterpillar reported a banner Q2 financial report last week that trounced the Street consensus targets on both top and bottom lines. The maker of heavy machinery earned $5.67 per share (vs. 4.54 est.) on $16.5 billion of revenue that grew 22% year-over-year, a result of increased volume and favorable price realization of sales to end users and dealer restocking. CAT ended the second quarter with $7.4 billion of enterprise cash after spending $1.4 billion toward share repurchase and paying $0.6 billion of dividends.
Highlighting the improvement in CAT’s supply chain CEO Jim Umpleby said, “We’ve gone to six pages of shortages for a certain machine, it’s down to one page, that’s an improvement.”
But with work to do, he added, “You still have some shortages that you have to deal with, and it has not allowed us to operate our factories as lean as we have in the past, and as lean as I would like them…I do expect that as supply chain conditions ease in the future, we should be able to get back to running our factories with more just in time manufacturing, leaner, which should help us reduce — increase inventory returns, and reduce the amount of absolute inventory we hold based on a current level of sale. There’s still an opportunity, to answer your question.”
Mr. Umpleby concluded, “Based on our strong operating performance, due to the strong results that we achieved in the second quarter, we now believe that 2023 will be even better than we previously anticipated during our last earnings call. That includes higher full year expectations for adjusted operating profit margin and [Machinery, Equipment & Transportation] free cash flow, which again reflects that continuing healthy customer demand in our performance.”
Caterpillar has maintained its edge through the incorporation of technology and software into its products to improve both performance and total cost of customer ownership. I think CAT’s dominance in the U.S. continues, and runways for growth still exist in emerging economies. Global growth and a materially increased U.S. infrastructure spend should bolster demand for the next few years, with the Street projecting EPS topping $20 next year. A shift toward leaner operations and digital solutions continues to be evident in operational results. Despite reaching an all-time-high last week, the stock continue to look attractive to me with a forward P/E ratio of 14.
UNDESERVED PESSIMISM
Shares of Amgen are still down on the year even after the company reported Q2 financial results that were much better than investors were expecting. The biopharma leader turned in revenue of $6.99 billion, more than 4% above the consensus analyst estimate. Adjusted EPS came in at $5.00, versus the average Wall Street forecast of $4.48.
Sales growth was noteworthy in certain general medicine drugs, Evenity (up 47% year-over-year) and Repatha (up 30%), but also in oncology/hematology medicines Blincyto (up 48%) and Vectibix (up 20%. These offset modest sales growth for blockbuster drugs Enbrel (up 2%) and Otezla (up 1%). Amgen also announced that it generated $3.8 billion of free cash flow in the second quarter versus $1.7 billion in the year-ago period, driven by timing of tax payments, higher interest income and higher operating income.
“We had a very strong quarter, serving more patients across all geographies and therapeutic categories and delivering record revenues and non-GAAP earnings per share,” said CEO Robert A. Bradway. “Positive data being shared today illustrates the rapid progress we are making in advancing our pipeline of potential first-in-class medicines.”
Amgen expects the acquisition of Horizon Therapeutics to close by mid-December 2023. For the full year, excluding any contribution from Horizon, the company now looks for total revenue in the range of $26.6 billion to $27.4 billion. AMGN also sees adjusted EPS for the full year of $17.80 to $18.80, with capital expenditures of approximately $925 million and share repurchases not to exceed $500 million.
I continue to think there is quite a bit of upside in the Dow component and I am constructive on the company’s pipeline of therapeutics. Shares trade at less than 14 times NTM adjusted EPS projections and offer a dividend yield of 3.3%.
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