CWS Market Review – April 22, 2016

“Don’t look for the needle in the haystack. Just buy the haystack!” – John C. Bogle

We’re in the thick of earnings season, and the market gods are happy. At least, for now. We know they’re a fickle bunch. On Wednesday, the S&P 500 broke above 2,111 for the first time in more than five months. The index isn’t that far from its all-time high set last May. In fact, the S&P 500 Total Return Index (below), which includes dividends, already made a new all-time high.

Right now, the market is obsessed with earnings, earnings and more earnings. Even next week’s Federal Reserve meeting will get second billing to Q1 earnings. We had six Buy List earnings reports this week, and I’m happy to say, five of the six topped Wall Street’s consensus. Our only miss was Microsoft, and it was close. Including last week’s report from Wells Fargo, we’re now six for seven this earnings season.

Looking at some highlights, Signature Bank reported its 26th record quarter in a row. Stryker not only beat expectations but raised its full-year guidance. (I love it when that happens.) Biogen, our favorite biotech stock, topped Wall Street’s forecast by 32 cents per share and jumped 5%. Unfortunately, we had a dud with Alliance Data System. Even though ADS beat earnings, their guidance was soggy. I’ll have all the details, plus I’ll have some updated Buy Below prices for you. Now let’s run down this week’s earnings reports.

This Week’s Buy List Earnings Reports

On Wednesday, Signature Bank (SBNY) reported Q1 earnings of $1.97 per share. That beat Wall Street’s estimate by two cents per share. This was Signature’s 26th consecutive record quarter. Not many banks can say that. Signature made $1.64 per share in last year’s Q1.

I tend to think of SBNY as a smaller bank, but that’s not so true anymore. Total deposits are now up to $28.11 billion. For any bank, the key metric to watch is net interest margin. For Q1, Signature’s net interest margin was 3.22%. That’s quite good.

Signature is a well-run ship, but one trouble spot has been their taxi-medallion loan business. Uber and ride-sharing companies have radically altered the economics of this business. As a result, the price for taxi medallions has dropped by half over the last three years.

Bear in mind that SBNY doesn’t own the medallions outright. Instead, they’ve financed the buyers, and many of those loans have gone kablooey. For Q1, Signature wrote off $4.4 million in medallion loans. Unfortunately, that’s not going to get better soon. Still, I want to put the medallion issue in proper context. It’s bad, but it’s only a small part of Signature’s overall business. Let’s remember that the bank made a cool $104 million last quarter. I have full confidence they can manage the medallion losses.

The shares pulled back after the earnings report, but I’m not concerned at all. Signature is a solid bank, and we’re in this one for the long run. I’m keeping our Buy Below on SBNY at $144 per share.

After Wednesday’s closing bell, Stryker (SYK) reported Q1 earnings of $1.24 per share. That beat consensus by four cents per share. Earlier this year, the orthopedic company had given Q1 guidance of $1.17 to $1.22 per share, so they’ve beaten their own numbers.

I like Stryker, but like a lot companies, they’ve been dinged by the strong dollar. I’m glad to see that’s abated somewhat. For Q1, net sales rose by 4.9% to $2.5 billion. In constant currency, that’s an increase of 6.1%. In places like China and Brazil, Stryker’s business has been weak, but that’s more due to economic weakness in those countries.

The good news is that Stryker already feels confident enough to raise its full-year guidance. The company now sees full-year organic sales growing between 5.5% and 6.5%. The previous range was 5% to 6%.

For earnings, Stryker sees full-year EPS ranging between $5.65 and $5.80. The previous range was $5.57 to $5.77. For Q2, they see earnings coming in between $1.33 and $1.38 per share. Wall Street had been expecting $1.34 per share.

SYK has been a big hit for us this year (see chart above). It’s our #1 performer on the Buy List with a YTD gain of 17.6%. I’ve been holding off raising the Buy Below until I saw the earnings report. Well, I like what I saw. This week, I’m raising our Buy Below on Stryker to $114 per share.

In recent issues of CWS Market Review, I’ve touted Biogen (BIIB) as an attractive buy, and I’m glad I did. On Thursday, the biotech firm reported Q1 earnings of $4.79 per share. That’s a 25% increase over last year, and it easily beat Wall Street’s consensus of $4.47 per share. Quarterly revenue rose 6.7% to $2.73 billion, which was a tad below consensus.

The earnings were led by a 15% increase in sales of Tecfidera, their multiple-sclerosis drug. The drug was a big hit for Biogen, but it got shaken up last year when the FDA warned that it was associated with a rare brain infection.

In the last month, shares of Biogen are up 13.5%, and that includes a nice 5.1% rally after Thursday’s earnings report. This was a solid report. I’m keeping our Buy Below on Biogen at $290 per share.

Alliance Data Systems (ADS), the loyalty-rewards people, reported Q1 earnings of $3.84 per share. That beat Wall Street’s estimates by two cents per share.

The problem is that ADS had weak guidance for Q2. The company sees earnings of $3.58 per share for this quarter, which is 20 cents below Wall Street’s forecast. Traders did not like that. On the plus side, ADS reiterated its full-year guidance of $16.75 in core EPS.

So what went wrong? From the company:

“Entering 2016, the two biggest concerns raised by stockholders focused on the likelihood of higher loss rates at Card Services and worsening economic conditions in Canada. Ironically, both were favorable during the first quarter as loss rates came in slightly better than expected (5.2 percent actual vs. 5.3 percent guidance), and Canada produced its strongest results in quite some time (4 percent revenue growth, 11 percent adjusted EBITDA growth – both in constant currency – on 5 percent issuance growth). Conversely, these positives were offset by softer-than-expected results in the agency business at Epsilon and gross-yield compression in Card Services as early-stage delinquencies improved.”

The stock got a 7% haircut on Thursday, but ADS said they expect sales and earnings growth to accelerate later this year. I’m keeping our Buy Below at $225 per share.

Snap-on (SNA) had a very good quarter. For Q1, the company earned $2.16 per share, which was nine cents better than Wall Street’s consensus. That’s an increase of 15.5% over last year’s Q1. Sales growth was basically flat, but again, they were hurt by the strong dollar.

The results were mostly positive across their different sectors. I’m still targeting $9 per share in earnings for this year. This week, I’m lifting our Buy Below on Snap-on to $166 per share.

After Thursday’s close, Microsoft (MSFT) became our first earnings miss this season. The software giant reported fiscal Q3 earnings of 62 cents per share. That was two cents below expectations. This was a tough quarter for them; adjusted revenue rose by just 1.6%.

The earnings miss was a shocker, since the company has been executing so well lately. The shares were even sneaking up on their all-time high set in 1999.

Sales for their Productivity and Business Processes division, which includes Microsoft Office, rose by 1%, but profits fell by 6.6%. Revenue at their cloud business rose by 3.3%, but profits for that division fell by 14%. One bright spot was Surface revenue, which jumped by 61%.

Shares of MSFT fell more than 4% in Thursday’s after-hours market. Don’t worry too much about this one. Things are still working in Microsoft’s favor. I’m keeping our Buy Below for Microsoft at $58 per share.

Six More Buy List Earnings Reports Next Week

Now let’s take a look at the Buy List earnings reports for next week. On Monday, April 25, Express Scripts (ESRX) is scheduled to report their Q1 earnings. In February, they told us to expect Q1 earnings to range between $1.18 and $1.22 per share. That’s almost certainly too low. Wall Street expects $1.23 per share.

By the way, this week, Express finally struck back at Anthem and countersued. This fight is really making the lawyers rich. Express is claiming that Anthem hasn’t negotiated in good faith and that they’re looking to rewrite the terms of their contracts. They’re right.

On Tuesday, AFLAC (AFL) is due to report. The stock has been doing very well for us lately. This week, the duck stock broke $68 per share. I think some of this is due to the stronger Japanese yen, which got close to an 18-month high against the greenback. Wall Street expects earnings of $1.63 per share. The company has forecast 2016 earnings of $6.17 to $6.41, but that’s based on a yen at 120.99. It’s now under 110.

Wabtec (WAB) will also report on Tuesday. The shares have rallied impressively over the last two months. I was impressed by their EPS guidance for 2016 ($4.30 to $4.50). Wall Street expects Q1 earnings of $1.00 per share.

CR Bard (BCR) is set to report on Wednesday, April 27. This is another stock that’s done well for us this year (+9.3%). Wall Street expects earnings of $2.17 per share. Bard said they expect 2016 earnings to range between $9.90 and $10.05 per share. That’s growth of 9% to 11%.

I’m looking forward to Ford Motor’s (F) earnings report, which is scheduled for Thursday, April 28. Wall Street didn’t like their last earnings report, but I did. It seems that many investors think the auto cycle has peaked. I’m not so sure about that. GM has already reported decent earnings for Q1. The consensus on Wall Street is for Ford to report earnings of 46 cents per share. I think they’ll beat that.

Stericycle (SRCL) is also due to report on Thursday. This is a very good company that doesn’t make a lot of news. Last year, the medical-waste-management company earned $4.40 per share. For 2016, they said they expect $5.28 to $5.35 per share. Wall Street expects Q1 earnings of $1.16 per share. My numbers say that’s about right. Here’s the recent earnings trend from CNBC:

One last thing before I go. Shares of Hormel Foods (HRL) have backed off over the last month. I’m going to drop our Buy Below to $41 per share. Hormel is still a very good stock.

That’s all for now. We have a bunch more earnings coming our way next week. There are also some key economic reports, plus a Fed meeting. On Tuesday, the durable-goods report for March comes out on Tuesday. On Wednesday afternoon, the Fed will release its latest policy statement. Don’t expect any rate increase. On Thursday, the government will release its first estimates for Q1 GDP growth. Wall Street isn’t expecting much, and they’re probably right. 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 April 22nd, 2016 at 7:08 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.