Yesterday I spent some time on a pitch for a “Diamond in the Rough” stock from Jim Woods and promised to follow up… so that’s the plan this afternoon.
The bigger theme of the ad was that Woods has a list of five “Guardian Angel” stocks that will help you survive pandemics and recessions… and that still sounds pretty appealing to a lot of folks, even with markets soaring to crazier new highs almost every week these days, so today I’m moving on to the next couple of those “Angel” stocks — ready?
The first one is about guns…
“This year, the Department of Defense is receiving more than $900 billion to keep our country strong.
“For investor’s, that’s money in the bank.
“Because whatever money the military gets, they spend.
“And when it’s a totally new weapon system – not yet deployed, but soon to be…
“Supplied by one company – Jim’s #2 pick…
“It’s a sure bet that, if you get in early, you could become mega-rich.”
What’s that all about? This is a high-volume weapon being pitched, but it’s not one of the sexy mega-billions contracts like the next tank, aircraft carrier or fighter jet… it’s a bit smaller:
“The M16/M4 is done, finished. It’s being retired.
“The Pentagon intends to arm our soldiers with an entirely new and far more lethal assault rifle.
“It’s estimated that the initial contract to manufacture the weapon will be valued at $1.5 billion.”
OK, even as I loll about in my solid-gold bathtub, I must confess that $1.5 billion is nothing to sneeze at… what else, pray tell, can you tell us, sir?
“… Of all the companies bidding on the contract, three finalists were chosen to begin rigorous field trials – none of which is Colt.
“At the conclusion of the field trials, the Pentagon will choose one company to manufacture the military’s next generation assault rifle.
“Two Companies Are Producing Similar Style, Somewhat Traditional Looking Rifles…
“On Page 7 of Jim’s Special Report, he details why the two companies fielding the two rifles above have a slim to none chance of winning the Pentagon’s contract.
“Which brings us to Rifle #3.
“A ‘Made in America’ rifle, which Jim believes our soldiers will carry into combat for decades to come.
“The company producing it is one of the five largest defense contractors in the U.S.”
Wait a minute, you ask, if it’s one of the five largest defense contractors in the U.S. … wouldn’t $1.5 billion a year be just the “bribes and hookers” slush fund?
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I would never say such a thing, of course, but you’re probably not so far off, that’s not a huge amount of money for those gigantic companies. Lockheed Martin (LMT), for example, had $64 billion in sales just last year, and defense contracts for new weapons (like this new rifle) tend not to be one-year contracts. But still, let’s proceed…
“America’s 21st Century Assault Rifle….
“In military lingo, it’s a called a Bullpup.
“Unlike traditional rifles, the fire control system and the magazine of a Bullpup is located behind the trigger.
“The primary benefit of the Bullpup design is that it holds a longer barrel, which increases range and accuracy – all the while reducing the overall size and weight of the rifle.
“Best of all… it shoots farther and penetrates thick armor.
“This represents a quantum leap beyond traditional rifle design and a quantum-sized opportunity for you to cash in.”
OK, so that narrows it down quite a bit… and then one final hint:
“And the icing on the cake… the company pays a dividend yielding 3.18%.
“Note: The company has grown its dividend for 22 consecutive years, increasing its dividend by an average of 10.29% each year.”
Thinkolator sez this General Dynamics (GD), which is one of the big defense contractors and has indeed been raising its dividend every year for a very long time… right now, the shares are up a little bit so the yield is about 2.9%, but they’re due for their next annual dividend increase announcement in early March so that should go up slightly (the last increase was about 8%).
And that weapon? It’s General Dynamics’ entry in the competition to replace the standard infantry rifle, what they call the Next Generation Squad Weapon (NGSW) — and yes, their candidate is indeed a “Bullpup” design, with the barrel extended to near the stock and the magazine behind the trigger (which gives a longer barrel, all else being equal, and therefore better accuracy and range — I know almost nothing about military weapons, but it certainly looks different).
We have no idea whether or not this weapon will win the competition, I guess they’re slated to decide sometime this year, but even if they do, as you might have guessed, it’s not going to be the driving force behind GD revenues — this is a large company with a lot of huge contracts for weapons systems, they have a market cap of $45 billion and trailing revenue of nearly $40 billion, so a couple billion dollars over a few years for a new rifle program would be material… but not “double your earnings” material.
GD is fairly defensive, as befits a defense stock — it’s not currently growing, but has a pretty steady business and it doesn’t seem like the world is going to spend less on weapons in the near future. Right now they’re trading at about 14X earnings, with a roughly 3% dividend yield — which used to be kind of normal, but sounds awfully cheap in this environment. Analysts think that earnings will rise slightly over the next couple years after a dip in 2020, but there don’t tend to be shocking “beat and raise” quarters for these kinds of companies that are going to make you dance in your pajamas when you see the tickers popping across the screen on CNBC.
Perhaps that’s a reason to buy, just know what you’re getting yourself into. low-single-digit revenue and earnings growth probably means that the kind of return we should count on here is probably in the 5-10% range — the 3% dividend, plus a share price that will probably be driven gradually higher by gradual earnings growth, which should be able to fuel dividend growth in the 3-6% neighborhood. Maybe they’ll do better than that, depending on which big programs might be approved or not approved in the years to come, and depending on what the Defense Department budget is over the next decade and how that’s allocated, but it’s best to keep expectations fairly low — they could do worse, too, you never know when you’re going to lose a big contract competition.
So…. reasonably priced, probably a reasonable return coming, and that new rifle program would help to maybe goose returns by a little bit, if they win the contract, but isn’t going to create a magical profit surge (an extra $1 billion in revenue, if it came all in one year, would be a 3% upside surprise in revenue, to be clear, leading to maybe 5% in extra earnings growth — we’re dealing with large numbers and usually fairly slow change in this sector).
Just for some context, here’s their 2020 outlook for revenue — you can see that even a fairly high-profile weapons program like the NGSW, which other folks have concurred is likely to have a total contract value of more than $1.5 billion (that’s total, not in a single year), would move the needle… but maybe not very much.
About a quarter of the business comes from aerospace, which includes a lot of civilian work (GD makes the Gulfstream line of corporate jets), so that has helped to depress things a bit during down years for the economy… but generally speaking, it’s been a pretty stable company. Like many teaser pitch stories, promises of a shocking gain from secret news… but the likelihood of something much more tepid — not a terrible idea as an investment, in my book, but you can take your time to think it over, there’s no big rush.
And one more…
“You may have heard of Intuitive Surgical, manufacturer of ‘da Vinci,’ the first ever FDA approved surgery robot.
“It launched in 1999, and quickly dominated the global surgical robot market with sales of over $3 billion annually.
“In 2019, it conducted over one million surgeries worldwide.
“But its weaknesses are glaring.
“Another Goliath Meets Its David”
That has been the knock on Intuitive Surgical (ISRG) for years now, of course, that it’s too expensive and the patents are running out and competitors have better technology — though, we should note, no real full scale competitors have been able to take a bite out of the business yet, and it’s notable that almost every surgeon trained in the past 20 years in a growing number of surgical specialties is used to and expects to have access to a da Vinci. But that’s not the point, just had that on my mind since I was putting together some notes on Intuitive’s quarterly update for the Irregulars (I own the stock).
So what’s the David to ISRG’s Goliath this time? Here are our hints:
“… it nearly doubled Intuitive’s stock gain last year….
“Reason #1: Its robot is FDA-approved to conduct surgeries not only on soft tissue, but also on bones and joints.
“Reason #2: It’s the first robot approved to conduct knee, back and brain surgeries.
“Reason #3: Its patented imaging technology provides x-ray-based 3D modeling of a patient’s anatomy. Other robotic systems use MRI or CT scans, which increases costs for insurance companies and radiation exposure for patients.”
So what he’s talking up here is the ROSA surgery system from Zimmmer Biomet (ZBH), which is one of several robotic assist systems, mostly for specialty surgeries — there’s a ROSA for knee and hip surgeries, competing with the Stryker (SYK) Mako system, as well as one for neurosurgery. Those aren’t the only ones out there, of course, most of the smaller robotics startups have been bought by larger companies so there’s also the Mazor robotic system for spinal surgery, now owned by Medtronic (MDT) (which is also hoping to apply for approval for a general surgery machine, called Hugo, in the next year or two, a similar timeline to Johnson & Johnson’s (JNJ) Verb Surgical effort.
They may well all have a promising future, it seems pretty clear that surgical assistance helps with precision and better outcomes in a lot of different kinds of surgeries… though, as we saw with Intuitive Surgical early on, it helps to have strong results in a particular high-volume specialty (prostatectomies, in their case) that you can use for heavy marketing to patients, which pushes hospitals to buy the machine or lose surgeries to other locations. Really, so much of da Vinci’s success is based on their ability to get a fast installed base because they were able to convince men that they were less likely to lose sexual function or have to wear a diaper if they chose a da Vinci prostatectomy — the market is vastly larger than that now, but a marketing edge clearly helps to get the door open.
The big push for ROSA is not to take on da Vinci, really, it’s to take on Mako, both Zimmer and Stryker make most of their money from knee and hip replacements, and they’re both trying to take a surgical edge (if you use a ROSA machine, that means you’re also going to be predisposed to use the Zimmer implants that work best with it, I assume).
As with most of the medical device companies whose results were crushed in 2020 by the delays and cancellations of elective surgery through the pandemic (and might still not be bouncing back for a few months now, at least in states places where COVID remains a rising problem), the general expectation is that Zimmer will bounce back to “slightly better than 2019” numbers here in 2021, and get their regular 10%-ish earnings growth back on track. When Woods says that ZBH did twice as well as ISRG last year, he means 2019, when it rose 40% or so to ISRG’s 20% gain — in 2020 that was flipped, with roughly 30% for ISRG and 9% for ZBH.
The current share price makes ZBH, at least at first glance, a pretty rational buy at about 20X forward earnings — that’s not necessarily cheap, but it’s cheaper than the broader market and they are well positioned when it comes to demographics (lots of knee and hip replacements coming up, probably mine included one of these days, and their ROSA machine is the new and shiny thing in the market so it might get extra attention).
I can’t say that I’m an expert on who’s got the better positioning in the robotic surgery market when it comes to orthopedics, ROSA vs. Mako might be a knock-down, drag-out fight for years and that could hurt margins, but we’re also getting to the point where those two companies have near duopoly control in orthopedics, and that’s probably good for pricing power. We’ll see how it works out… again, not an idea that’s going to surge because ROSA beats da Vinci anytime soon, there’s almost no overlap between the two systems in terms of what kinds of surgeries they’re used for or approved for, but it’s a rationally valued company that’s probably pretty well suited for a “return to normal” market in healthcare.
And that’s all I’ve got for you today, dear friends, two more “David v. Goliath” stocks being teased, either of which is reasonable but neither of which is likely to make you think you’ve got a tiger by the tail… which kind of sounds like a bit of a relief, actually. And, of course, that’s just my quick thought after looking into these companies for a few minutes today — if you’ve got some insight into General Dynamics or Zimmer Biomet, or other stocks you think are better in those sectors, well, feel free to share your thoughts with a comment below. Thanks for reading!
Disclosure: of the stocks mentioned above, I own shares of Intuitive Surgical (ISRG). I will not trade in any covered stock for at least three days, per Stock Gumshoe’s trading rules.