Stocks ended the week with broad-based gains on Friday. The Dow Jones Industrial Average (DJINDICES: ^DJI) and the S&P 500 (SNPINDEX: ^GSPC) both rose by well over 1%, surging in the last hour.
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Long-term interest rates fell, and rate-sensitive utility stocks led the market; the Utilities Select SPDR ETF (NYSEMKT: XLU) rose 2.6%.
As for individual stocks, General Mills (NYSE: GIS) announced its first move into pet food by acquiring Blue Buffalo Pet Products (NASDAQ: BUFF), and Hewlett Packard Enterprise (NYSE: HPE) reported strong quarterly results.
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General Mills jumps into the pet food category
General Mills announced it will be acquiring Blue Buffalo Pet Products in an $8 billion cash deal, causing Blue Buffalo shares to surge 17.2% and General Mills stock to slump 3.6%. Blue Buffalo also announced fourth-quarter sales were up 14.2% and adjusted earnings per share increased 51.4%, with both figures coming in above analysts' expectations.
General Mills is paying $40 per share for the leader in the "wholesome natural" pet food category, a 23% premium to Blue Buffalo's 60-day volume weighted average price. The purchase will be financed by a combination of debt, cash on hand, and approximately $1 billion in equity. The deal has been approved by both boards.
Blue Buffalo had $1.275 billion in sales in 2017, representing year-over-year growth of 10.9%. According to today's presentation, sales have had compounded annual growth of 12% in the last three years and adjusted EBITDA has grown 18%. General Mills expects to cut $50 million in annual expenses, and thinks the deal will be neutral to cash EPS in fiscal 2019 and accretive in fiscal 2020.
That price tag of 6.3 times sales certainly raised eyebrows and was probably the reason why General Mills shares slipped on the news. But the maker of Cheerios and Haagen-Dazs has been struggling with growth, along with much of the packaged food industry. The pet food industry is growing 3% to 4% annually, and Blue Buffalo is well-positioned in the fastest-growing and highest-margin segment, so this may turn out to be a very positive step in reshaping of the company's portfolio.
Hewlett Packard Enterprise reports big profit gain and huge dividend boost
The new CEO for Hewlett Packard Enterprise got off on the right foot with investors today, announcing expectation-beating fiscal Q1 results and a 50% hike in the dividend, sending shares soaring 10.5%. Antonio Neri, who replaced Meg Whitman at the beginning of this month, reported revenue increased 11.2% to $7.7 billion and non-GAAP earnings per share grew 21.4% to $0.34. Analysts were expecting EPS of $0.22 on revenue of $7.1 billion.
The company's growth was broad-based. HPE's largest segment, hybrid IT, grew revenue 10%. Within that division, compute increased 11%, storage surged 24%, and data center networking jumped 27%. Pointnext, the services and consulting arm, grew 2%. As for HPE's other two segments, Intelligent Edge, HPE's Aruba networking unit, grew 9%, and financial services revenue increased 8%.
Neri announced that as a result of tax reform, HPE will return $7 billion to shareholders by the end of fiscal 2019 in the form of share buybacks and a 50% increase in the dividend, starting in the third quarter of this year. It will also increase its matching contribution for employee retirement plans.
Looking forward, HPE raised its guidance for 2018 EPS to a range of $1.35 to $1.45, well above Wall Street expectations of $1.18 per share.
Hewlett Packard Enterprise stock languished for most of last year as the company trimmed down to reinvigorate growth. But the shares have picked up since the company's last quarterly report and big dividend raise. Investors appear to be concluding that the shareholder-friendly transformation is working.
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