Cramer's Investing Club: We're Buying More of One Club Name and Updating Two Others

Scott Mlyn | CNBC

(This article was sent first to members of the CNBC Investing Club with Jim Cramer. To get the real-time updates in your inbox, subscribe here.)

After you receive this email, we will be buying 50 shares of Danaher (DHR) at roughly $302.66. Following the trade, the Charitable Trust will own 350 shares of Danaher. This buy will increase DHR's weight in the portfolio from about 2.15% to roughly 2.5%.

A handful of stocks in the Charitable Trust are on the move Tuesday after management updated their outlook for the fourth quarter and beyond. Here, we break down the guidance updates and share our thoughts on the stocks.

Danaher provided an update to its fourth-quarter 2021 outlook ahead of its presentation at the JPMorgan Healthcare Conference.

  • Danaher now estimates fourth-quarter revenue increased in the high-teens to low-twenties percent range, with core revenue growth in the high-teens percent range. The consensus fourth-quarter revenue estimate on FactSet implied 16% revenue growth, meaning Danaher's update this morning was much better than what analysts were anticipating.
  • As noted by CEO Rainer Blair in this morning's press release, the strength came from all across the portfolio. Blair said Danaher achieved better-than-expected results across all three of its reporting segments, but Life Sciences and Diagnostics were the leaders.
  • On top of the preannouncement, Danaher received a positive recommendation from Wall Street after Bernstein initiated coverage on the stock, naming it a top pick with an Outperform rating and $365 price target — over 20% higher than Monday's $303 close.

Despite the preannouncement and analyst push, Danaher shares were trading flat at the time this article was written. We think this muted reaction is plain wrong and the stock price should be higher with earnings moving up. That's why we are jumping on this opportunity to pick up more shares and improve our average cost basis.

Ahead of their presentation at the ICR Conference, American Eagle Outfitters (AEO) management updated its fourth quarter 2021 outlook and revised its 2023 financial targets.

  • Starting with the fourth quarter, management said strong demand and positive pricing fueled record fourth-quarter revenue with growth in the mid- to-high teens compared to fourth quarter 2020 numbers. While this looks like a good result on paper, the consensus estimates on FactSet implied revenue growth of about 21%, making the update a slight disappointment.
  • Additionally, the company said operating income is expected to be in the range of $90 million to $100 million, and that's below the $132 million FactSet consensus estimate.
  • Operating income growth were elevated freight costs, which were a significant headwind in the quarter and impacted operating income by $80 million.

Although the fourth-quarter update was a disappointment relative to the expectations, AEO is taking the news in stride today. We think there are two reasons why.

  • First, we think the bad news was already priced into the stock. American Eagle Outfitters has been an ugly performer over the past months with shares down roughly 18% since reporting a stronger than expected third-quarter result in November. Based on this drop, we think the market knew a disappointment was coming.
  • Second, the holiday numbers are important, but the results should be taken with a grain of salt due to the severe supply chain and Covid-19 related challenges the entire industry experienced in the past few months. How American Eagle Outfitters will perform in the future is the more important story today, and the new 2023 targets management offered today look very attractive.
  • Management raised its 2023 revenue target to $5.8 billion from $5.5 billion and operating income target to $800 million from $550 million, meaning they now see margins of 13.5% instead of 10%. And these higher targets are coming from improved revenue and operating margin results at AE and Aerie.
  • Longer-term, management sees an opportunity to deliver $1 billion in operating income through robust growth of AEO Logistics, revenue upside from AE, stronger margin performance, a better cost environment, and international growth opportunities.

American Eagle Outfitters is only a $4 billion in market cap company today, so if management thinks their model has to the potential to deliver $1 billion in operating income, then clearly this is an undervalued stock. Plus, we like how the 3% dividend yield pays us as we wait for the revenue growth and operating margin story to play out.

The last guidance update Tuesday came from Abbvie (ABBV).

  • The company confirmed its prior revenue guidance of greater than $15 billion in combined Rinvoq and Skyrizi risk-adjusted sales in 2025. Typically, it is not big news when a company reiterates guidance, but this was an important update for AbbVie because it involved a medicine (Rinvoq) that faced a ton of scrutiny in 2021.
  • You may recall that throughout last year, investors were worried that a cut to this guidance was in the cards due to uncertainty around the FDA's label update on Rinvoq as well as the delayed approvals in a handful of indications. But those fears have since been proven to be overblown, which is what we wrote about a couple of weeks ago in our Dec. 29 note.

We took a look at the consensus 2025 estimates on FactSet to get a sense of the analyst projections on Rinvoq and Skyrizi, and we found something pretty interesting.

  • Analysts are still underappreciating Abbvie's two growth assets in Immunology. For 2025, the consensus Skyrizi estimate is $7.081 billion in sales, while analysts are looking for about $6 billion for Rinvoq. This combines to roughly $13 billion, meaning forward estimates need to increase by about $2 billion just to be in line with management's commentary.

Again, we think the market knew a cut to the $15 billion number was not in the picture based on the stock's significant outperformance in the fourth quarter. But the additional clarity around 2025 numbers and the positive estimates that should follow means this is still a cheap stock and the earnings and cash flow will be there to support that excellent dividend of roughly 4%.

The CNBC Investing Club is now the official home to my Charitable Trust. It's the place where you can see every move we make for the portfolio and get my market insight before anyone else. The Charitable Trust and my writings are no longer affiliated with Action Alerts Plus in any way.

 As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. See here for the investing disclaimer.

 (Jim Cramer's Charitable Trust is long DHR, AEO and ABBV.)

Correction: This story previously misstated American Eagle Outfitters' prior 2023 revenue target. It has been updated to reflect that the previous revenue target was $5.5 billion.

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