CWS Market Review – August 3, 2012
Thanks to the actions of central bankers here and in Europe, the stock market got jolted around this past week. Last Friday, the S&P 500 reached its highest close since May 3rd, and it was a short jump from reaching its highest point in 50 months.
But the guardians of monetary policy had other ideas.
On Wednesday, the Federal Reserve disappointed Wall Street by not opening up the spigots for more stimulus despite dropping some hints beforehand. Then on Thursday, the European Central Bank did the same thing as the Fed: they did nothing despite some bold talk that they were prepared to act. Mr. Draghi’s willingness to take action was probably an important reason why Wall Street rallied last week. So the lack of action helped bring equity prices lower on Thursday.
Wall Street Continues to Play Defense
As usual, the reaction of the bond market truly tells the story. Late last week, the yield on the 10-year Treasury spiked from 1.4% to almost 1.6%. Matching that move, cyclical stocks led the surge in the stock market. But as hopes for more action from the Fed or the ECB faded, the 10-year yield dropped back to 1.475%, and cyclicals trailed the market badly on Thursday. Small-cap indexes, which tend to be weighted with manufacturing stocks, were especially hard-hit.
What’s been interesting to watch is how much the weak euro has impacted the bottom lines of U.S.-based companies. In the last 15 months, the euro has dropped more than 25 cents. Nowadays, a euro is worth $1.22. As I’ve discussed recently, the market’s new defensive posture has been a big help for the higher-yielding stocks on the Buy List. On Wednesday, for example, two of our high-yield defensive stocks, Reynolds American ($RAI) and Johnson & Johnson ($JNJ), both hit fresh 52-week highs. This is all part of the same phenomenon. In the chart below, you can see how the Long-Term Bond ETF has run past the S&P 500 ETF. I also think it’s interesting to see that some of the more speculative plays like Facebook ($FB) aren’t getting any relief from the bears.
While the economy had a rough go of it during the second quarter, there are some hopeful signs that the third quarter won’t be as bad. For example, the recent consumer confidence report was better than expected. Also, the ADP employment report came in much better than economists were expecting. Of course, the quarter is barely one-third over so we don’t know exactly how things will pan out. Right now I’d have to say that the Fed won’t do much of anything between now and Election Day.
We’re into the final stretch of the second-quarter earnings season and the general theme has been decent earnings followed by sluggish outlooks courtesy of the pathetic euro. We’ve seen this with a number of our Buy List stocks. The latest numbers show that 389 companies in the S&P 500 have reported earnings so far this year. Of that, 263 (or 67.6%) have beaten expectations while 42 (or 10.8%) have matched Wall Street and 84 (or 21.6%) have missed expectations. Earnings are currently tracking to show a modest decline of 0.6% from the same quarter one year ago. This is the first quarterly earnings decline in three years. Wall Street currently expects a modest pick-up in the fourth quarter but I’m not convinced. It may happen, but I want to see more evidence.
Our Buy List Earnings Summary
Now let’s run through some of the recent earnings reports for our Buy List stocks.
Last Friday, Moog ($MOG-A) reported earnings of 85 cents per share. Their earnings were a penny ahead of estimates. For comparison, Moog had earned 73 cents per share in the same quarter one year ago, so that’s decent growth. If you’re not familiar with Moog, they make flight control systems for commercial and military aircraft. It’s a solid, well-run outfit.
The bad side of the report was that Moog cut its 2012 revenue estimate just slightly from $2.47 billion to $2.45 billion. For 2013, they see full-year earnings ranging between $3.50 and $3.70. If Moog hits $3.70 per share, that would be a very strong number. That means the stock is going for just under 10 times forward earnings. Like Harris and Ford, Moog’s stock has been held back by the market’s rotation against cyclicals. That won’t last forever. Moog is a solid bargain anytime the shares are below $45.
Fiserv ($FISV) continues to be one of the more impressive stocks on our Buy List. Once again, they beat Wall Street’s earnings forecast. For the second quarter, Fiserv earned $1.28 per share which was two cents head of the Street.
As I expected, Fiserv raised the low end of its full-year forecast. The company now sees full-year earnings ranging between $5.08 and $5.20 per share. That’s an increase of four cents to the low end. Given the new guidance, Fiserv is going for about 13 times this year’s earnings. The stock is a good buy up to $75 per share.
On Tuesday, Harris ($HRS) reported quarterly earnings of $1.42 per share which was a penny more than estimates. This was Harris’ fiscal fourth quarter and they earned $5.20 per share for the entire year. I was pleased to see that Harris reiterated its guidance for the current fiscal year for earnings between $5.10 and $5.30 per share. The stock is currently going for roughly eight times this year’s earnings. Harris is a good buy up to $45.
By the way, you should notice how many stocks on our Buy List offer guidance. Companies aren’t required to do that and most don’t. I like to see companies that do, but I’m careful not to rely on the guidance too heavily.
DirecTV ($DTV) had a tough quarter. For Q2, DTV reported earned $1.09 per share which was four cents below Wall Street’s forecast. The company is still doing extremely well in Latin America, but its growth in the U.S. has stalled. The shares got dinged on Thursday for a loss of 2.6%. Don’t count DTV out just yet; they generate a sizable profit. The stock is a good buy up to $50.
Wright Express ($WXS) reported Q2 earnings of $1.00 per share which was two cents above estimates. Interestingly, investors were upset in May when Wright gave guidance for Q2 of 92 to 98 cents per share. Now we know that the company was probably being conservative.
The bad news, however, was poor guidance. For Q3, Wright sees earnings ranging between $1.08 and $1.15 per share. The Street had been expecting $1.18 per share. For the full year, Wright lowered its previous range of $4.10 – $4.30 per share to a new range of $4.10 – $4.15 per share.
In May, Wright had raised its revenue guidance for the year from $590 million – $610 million to a new range of $602 million – $617 million. Now Wright has lowered it back down to $591 million – $601 million.
The CFO said: “Our updated guidance for the full year of 2012 predominately reflects the impact of lower fuel prices, coupled with an adverse impact from foreign currency movements and slight dilution from the acquisition of CorporatePay. Given the economic environment, we are also anticipating softness in our same-store sales to persist.”
I should warn you that Wright can be very volatile. From early June to late July, WXS jumped 25%. The stock is a good buy whenever you see it below $65 per share.
Nicholas Financial Keeps the Profits Rolling
Let me say a few words about Nicholas Financial ($NICK) and its earnings report. On Thursday, NICK reported quarterly earnings of 44 cents per share. This is for the first quarter of their fiscal year. Honestly, I’m not too concerned about the exact per-share number of NICK’s earnings. They should continue to report earnings somewhere around the mid-40s. In my eyes, the most important thing is that NICK’s business continues to hum along, and it clearly is.
The numbers bear this out. Reserves for credit losses are extremely low. Since the company has paid down some of its debt, interest costs have dropped to a rounding error (less than $1.2 million). Last quarter, the pre-tax earnings yield was 12.88%. Anything above 10% is good. NICK seems to be stepping up its contract purchases. I’d like to see more of that.
In short, NICK’s business is almost like a bond that pays 7.5% or so interest. The stock is roughly where it was six years ago even though profits are much higher and the business outlook is far more secure. I expect NICK to earn somewhere between $1.80 and $1.90 per share for this fiscal year. Expect more quarters to look a lot like this one. I think Wall Street views NICK as some shaky subprime stock. If anything, the portfolio has grown more conservative.
I really don’t see why NICK can’t trade for 10 times earnings. That’s hardly extreme. Last August, the company announced that it would start paying a quarterly dividend of 10 cents per share. That’s barely a dent out of their quarterly profits. I wouldn’t mind seeing a hefty dividend increase. NICK’s dividend could go to 15 cents per share. Twenty cents would be great (and sustainable) although contract purchases would suffer. Still, there’s nothing wrong with owners getting their money.
Nicholas Financial is clearly one of the cheapest stocks on our Buy List. But bear in mind that it’s very small and lightly traded so any significant rise in volume can knock it around. Over the long haul, NICK should do very well.
That’s all for now. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!
– Eddy
Posted by Eddy Elfenbein on August 3rd, 2012 at 7:09 am
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.
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