CWS Market Review – November 1, 2013

“Time is on your side when you own shares of superior companies.” – Peter Lynch

After rising on 13 out of 15 days, the stock market has taken a small breather the last two days. This has been quite an impressive run for the market, so a little relief is understandable. This year is shaping up to be the best for the S&P 500 in a decade. The index has been positive for the entire year, with an amazing 33 record highs so far.

We’re heading into the back end of earnings season. So far, the results for Q3 have been decent. Companies are topping estimates, but those estimates have been steadily pared back for the last 18 months.

The latest numbers show that 364 of the 500 members of the S&P 500 have reported earnings so far. Of those, 75% have beaten earnings estimates, while 53% have beaten sales estimates. When the final numbers are in, analysts see the index posting 3.7% earnings growth for Q3. Remember that overall earnings fell in Q1 and Q2 of this year, so this is a nice turnaround. In fact, analysts forecast that earnings growth will continue to accelerate. For Q4 (which is now one-third over) analysts see earnings growth rising to 7.5% and climbing another 8.3% for Q1 of 2014.

In this week’s CWS Market Review, I want to cover some of the great Buy List earnings reports from this week. Fiserv beat earnings and raised guidance. Harris jumped nearly 6% on a nice earnings beat. WEX Inc. also beat and raised guidance. The stock spiked nearly 7% in two days.

Not all the earnings news was good. Frankly, the earnings reports from Nicholas Financial and AFLAC were a bit disappointing, but nothing too severe. The best news was that AFLAC raised its dividend for the 31st year in a row. Not many stocks can say that.

I’ll also take a look at our remaining earnings reports. In particular, I’m expecting good news from Cognizant Technology. But first, let’s look at the great earnings report from Harris.

Harris Is a Buy up to $65 per Share

In last week’s CWS Market Review, I said “it’s very likely” Harris ($HRS) would beat earnings. I was right. On Tuesday, the communications-equipment company reported earnings for their fiscal Q1 of $1.18 per share, which was five cents better than Wall Street’s consensus. The shares jumped nearly 6% on Tuesday to reach a new five-year high. The rally in this little stock has been amazing. Harris is now up over 50% in a little over six months.

I was pleased to see Harris reaffirm its full-year guidance of $4.65 to $4.85 per share. This is for the fiscal year that ends in June. The Street had been expecting $4.74 per share. The details of this report were very impressive. I’m raising my Buy Below on Harris to $65 per share.

Fiserv Beat Earnings and Raised Guidance

After the closing bell on Tuesday, Fiserv ($FISV) reported Q3 earnings of $1.56 per share, which was also five cents better than the Street’s view. Earnings were up 24% for the quarter and 18% for the first three quarters. Fiserv’s CEO said, “We remain on track to achieve our 2013 financial objectives and have meaningful momentum as we head into 2014.”

That’s certainly true. Fiserv now sees 2013 earnings ranging between $5.94 and $6.02 per share. That’s an increase of 10 cents per share on the low end. It also implies a growth rate of 17% to 19%, which is very good for this environment. Fiserv remains an excellent buy up to $108 per share.

WEX Is a Buy up to $99 per Share

On Wednesday, WEX Inc. ($WEX) reported earnings of $1.29 per share, which was a full ten cents per share above expectations. Business is obviously going better than the company anticipated. Three months ago, WEX said that earnings for Q3 would be between $1.16 and $1.23 per share.

WEX put up some impressive numbers. Quarterly revenue jumped 19% to $191.5 million. The CEO said, “For the quarter, revenue increased 19% year over year and was towards the high end of our guidance, while adjusted net income, increasing 20%, exceeded our expectations.”

WEX also raised its full-year guidance range to $4.37 – $4.44 per share. The earlier range was $4.27 – $4.37 per share. That’s a nice increase. For Q4, WEX sees earnings coming in between $1.04 and $1.12 per share. Wall Street had been expecting $1.11 per share.

Thanks to the earnings report, the stock rallied 4.3% on Wednesday and another 2.3% on Thursday. The shares crossed $94 and hit a new all-time high. I’m raising my Buy Below on WEX to $99 per share.

Disappointing Earnings from AFLAC and NICK

Not all the earnings news was positive this week. On Tuesday, AFLAC ($AFL) reported Q3 earnings of $1.47 per share, which was a penny below expectations. I want to emphasize that this was only slightly disappointing, and my overall view on AFLAC hasn’t changed at all. The company is still matching its own numbers. In July, they gave us a range for Q3 of $1.41 to $1.51 per share.

The enemy of AFLAC’s bottom line is quite obvious. The yen/dollar exchange rate gobbled up 21 cents per share last quarter. I tend to look past currency exchange because it’s a transient issue. Sometimes it helps you; sometimes it doesn’t. Over the last few months, it’s hurt AFLAC. We shouldn’t complain too much since the weaker yen probably helps the Japanese economy, which is where AFLAC does most of its business.

AFLAC’s based its forward guidance on a yen/dollar rate of 95 to 100. For Q4, they see earnings ranging between $1.38 and $1.43 per share. That works out to full-year earnings of $6.16 to $6.21 per share. The previous range was $5.83 to $6.37 per share.

For 2014, AFLAC sees earnings coming in between $6.28 and $6.52 per share. AFLAC has said that its goal for this year is to grow its currency-neutral operating earnings by 4% to 7%. Next year, due to a number of business headwinds, that growth rate will drop to 2% to 5%. The company said that those headwinds should pass by the end of next year.

I have to stress that this is all in earnings per share because AFLAC plans to buy back a whole lot of shares. The company plans to buy $800 million worth of shares this year and another $800 million to $1 billion next year.

AFLAC also raised its dividend by 5.7%. The quarterly payout rises from 35 to 37 cents per share. This is the 31st year in a row that AFLAC has raised its dividend. The stock dropped 3% after the earnings report, but I’m not at all worried. This is a fine company that’s navigating a difficult environment. As Peter Lynch said, “Time is on your side when you own shares of superior companies.” AFLAC remains a very good buy up to $70 per share.

The other disappointing report came from Nicholas Financial ($NICK), which reported quarterly earnings of 35 cents per share. I had been expecting earnings closer to 45 cents per share.

I still need to dig into the numbers, but it appears that NICK had a large increase in operating costs. There was also a 22% increase in their provision for credit losses. I’m not sure what drove these increases, but they account for the entire earnings shortfall. NICK tends to be pretty conservative with its business, so these results were rather unexpected.

Again, I’m still a fan of the company. I’m just a little curious as to what exactly happened last quarter. On Thursday, the stock dropped 5%, which places it back where it was a few weeks ago. I hope to see a dividend increase from the board before the end of the year. NICK continues to be a good buy up to $18 per share.

Earnings Next Week from DirecTV and Cognizant Technology

Next Tuesday we get our final two earnings reports for this season as DirecTV ($DTV) and Cognizant Technology ($CTSH) report. DTV is a hard stock to predict. For Q1, the company had a massive earnings beat. Then for Q2 they missed badly. The difficulty is that a major growth area for DTV is Latin America, but the economy has been rough in that region lately. Wall Street currently expects Q3 earnings of $1.02 per share. DirecTV is a buy up to $64 per share.

In the CWS Market Review from August 30, I said that Cognizant “may be the best bargain right now on our Buy List.” The stock’s up more than 17% since then, and I think it’s still a good value. Three months ago, they beat earnings and guided higher. For Q3, CTSH said to expect earnings of $1.09 per share. I think they can beat that. Cognizant is a very good buy up to $90 per share.

Two items before I go. Ross Stores ($ROST) has been very strong lately. The retailer reports in three weeks, but I want to raise my Buy Below to $81 before it gets away from us. This is a very good stock.

Also, Moog ($MOG-A), our #1 performer this year, is due to report on Friday. The earnings report may be out by the time you’re reading this. Wall Street expects earnings of 96 cents per share. Moog is a solid buy up to $61 per share.

That’s all for now. We have still more earnings reports to come next week. Cognizant and DirecTV both report on Tuesday. We’re also going to get some important economic reports. On Thursday, we’ll get our first look at third-quarter GDP growth. Then on Friday, the Labor Department will release the October jobs report. If we see any pickup in hiring, that could lead to the Fed finally getting its tapering act together. I’m beginning to think we won’t see any taper until next year. 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 November 1st, 2013 at 7:07 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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