What Investors Might Have Missed in the Markets Last Week
Love him or hate him, believe his statements or prefer to disprove them, President Donald Trump sure seemed to push the markets higher as he pledged to move quickly on the "phenomenal" tax code changes. Stocks surged immediately following Trump's proclamation and continued the trend higher through Friday, with the S&P 500 (SNPINDEX: ^GSPC) and Dow Jones Industrial Average (DJINDICES: ^DJI) finishing 0.82% and 0.99% higher for the week, respectively.
But Donald Trump was far from the only big headline or big move made in the markets last week.
Show me the money!
Reckitt Benckiser Group agreed to acquire Mead Johnson Nutrition Company (NYSE: MJN) for $90 per share in cash, valuing Mead Johnson's equity at $16.6 billion, with the total transaction value reaching $17.9 billion, including the latter's net debt. It's a big move, though it's not necessarily a surprise since the U.K. based Reckitt Benckiser group had previously noted it was willing to pay a premium for the company -- and the speculation had previously sent Mead Johnson's stock up more than 20%. The all-cash offer of $90 represents a 29% premium to the price on February, 1, 2017.
Here's a look at how brands from both companies will fit together with a focus on health, hygiene, and home products.
Image source: Reckitt Benckiser Group's acquisition presentation.
Beyond bringing in brands that fit well alongside Reckitt's existing portfolio, it also helps the company expand into emerging markets. Mead Johnson generates roughly half of its sales in Asia and another 17% from Latin America. The acquisition is expected to be accretive to adjusted earnings per share in the first full year and double-digit accretive by the third year. Reckitt also expects to generate $250 million in cost synergies after three years.
Despite the premium, it seems like a pretty solid move that's going to help reignite top-line growth, buffer its existing portfolio of health and hygiene brands, and establish a more effective footprint across the globe.
Same ol' story
Shares of Michael Kors Holdings (NYSE: KORS) took quite a beating on Tuesday after the company announced its third-quarter earnings, trading more than 13% lower during intra-day trading before recovering some of that loss throughout last week.
Similar to many of the other apparel retail stories we've heard recently, Michael Kors suffered through a worse than anticipated holiday season and posted disappointing comparable-store sales. For the third quarter, comparable-store sales declined 6.9%, which was steeper than the 4.9% slide analysts anticipated.
Despite a worse than expected slide in comparable-store sales, Michael Kors' top and bottom lines didn't stray far from analysts' estimates. Its top line checked in with a 3.2% decline to $1.35 billion, only slightly below estimates calling for $1.36 billion. Its bottom line was a mixed bag due to a decline in net income yet a rise in earnings per share from $1.59 to $1.64. While the increase in earnings per share was largely due to aggressive share repurchases, the result did top analysts' estimates by a penny.
Again, similar to other retailer stories, arguably the biggest disappointment was the company's forward guidance. Management now projects revenue to check in between $1.035 billion and $1.055 billion for the current quarter, which was far below analysts' prediction of $1.11 billion. Management also expects earnings per share to check in between $0.68 to $0.72, which was much below analysts' call for $0.93 per share.
There are numerous apparel and handbag retailers trading at seemingly cheap valuations, but many face a difficult road ahead with dwindling foot traffic, over-expanded store counts, and a struggle to gain brand and sales traction online.
Short squeeze!
It's not hard to imagine surprised investors choking on their coffee and donut mid-bite Friday morning after seeing that shares of Sears Holding Corp (NASDAQ: SHLD) were set to open roughly 30% higher. After hearing for weeks that ratings agencies were expressing the belief that Sears was facing theimminent threat of bankruptcy, investors were quick to react to management saying it would be taking actions to cut costs by at least $1 billion, optimize its organizational structure, and continue to capitalize on its real estate portfolio. Sure, maybe some investors were anxious to jump on the Sears bandwagon hoping for a once-in-a-lifetime turnaround, but it's just as likely that with nearly 72% of Sears' float sold short, shorts were caught in a squeeze this morning.
To me, this seems to be a move that only delays the inevitable, and honestly, it might not even do much delaying. The only thing that's going to turn Sears' business around is by having stores people frequently visit filled with products people frequently buy -- and judging by the recent decline in comparable-store sales, that's not happening. Oh, and by the way, Sears' jump today barely salvaged the stock price a 2% gain over the past five days, so don't get too excited.
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Daniel Miller has no position in any stocks mentioned. The Motley Fool owns shares of Michael Kors Holdings. The Motley Fool has a disclosure policy.