CWS Market Review – April 29, 2016

“The intelligent investor is a realist who sells to optimists and buys from pessimists.”
– Jason Zweig

This was a very good week for us. We had a slew of strong Buy List earnings reports. AFLAC beat Wall Street’s consensus by 10 cents per share, and the stock jumped to a new all-time high. Ford Motor creamed expectations by more than 40% and rallied strongly. CR Bard also crushed estimates; plus they raised their full-year guidance, and the stock jumped to a new high.

In this week’s CWS Market Review, I’ll run through all our earnings reports. I’ll also preview three more Buy List earnings reports coming our way next week. We also got a half-penny dividend increase from Wells Fargo. Don’t spend it all in one place.

There was also a Federal Reserve meeting this week. Janet and her pals on the FOMC decided to hold off raising rates, but they left the door open to a rate hike in June. I’ll have all the details in a bit. But first, let’s look at the Q1 GDP report.

Weakest GDP in Two Years

On Thursday, the government said that the economy expanded by just 0.5% during the first three months of the year. This was the weakest quarter in two years. Wall Street had been expecting 0.7%. There’s been a typical pattern for the last several years. The economy does poorly during Q1 but ramps up during the spring and summer.

The economy has been in a frustrating position. It’s not strong, but it’s consistently weakly positive. Digging into the details, we see that personal consumption expenditures grew by 1.9% in Q1. That’s not terrible. The weak overall number was due to inventories, government spending and trade. I expect those components to improve.

What’s odd is that even as growth has been sluggish, the labor market has improved. Last week, initial jobless claims hit another multi-decade low. Next Friday we’ll get a look at the jobs report for April, and there’s a very good chance that the unemployment rate will fall to an eight-year low.

Wage growth, however, has been weak. That leads us to this week’s Fed meeting. As expected, the central bank held off on raising interest rates. They did, however, leave open the possibility of a rate hike in June. The Fed noted that the jobs market is improving, and the external risks to the economy seem to have dissipated.

I think that’s right, but for now, I doubt they’ll hike in June. A rate increase could come later this year. Until then, interest rates are low and stocks remain the best game in town. Now let’s look at this week’s earnings.

This Week’s Buy List Earnings Reports

On Monday, Express Scripts (ESRX) kicked off this week’s earnings parade when they reported Q1 earnings of $1.22 per share. That matched Wall Street’s view, and it was at the top of the company’s own view. Earnings were 11% higher than last year’s Q1.

Express’s CEO, George Paz, who will be retiring in a few days after ten outstanding years on the job, said that he expects Express will keep Anthem as a customer. I admire his optimism, but the fight between the two companies seems pretty nasty. I hope the two companies can work something out.

For Q2, the pharmacy-benefits manager expects earnings to range between $1.55 and $1.59. Wall Street had been expecting $1.57 per share. That sounds about right. Express felt optimistic enough to raise its full-year forecast. Previously, they had been expecting this year’s earnings to range between $6.10 and $6.28 per share. Now they see 2016 earnings coming in between $6.31 and $6.43 per share. That’s good to see.

Unfortunately, Express has been a loser for us this year (-14.3% YTD), but it’s recovered a bit lately. The shares are going for less than 12 times this year’s estimate. I’m keeping our Buy Below at $76 per share. This is one for the long run.

On Tuesday morning, Wabtec (WAB) reported Q1 earnings of $1.05 per share, which was five cents better than Wall Street’s consensus. Quarterly revenues fell 5.7% to $772.03 million. That was below the consensus of $798.86 million. The company reaffirmed its 2016 guidance of $4.30 to $4.50 per share. Overall, this was a solid earnings report.

Raymond T. Betler, Wabtec’s president and chief executive officer, said: “We continue to expect another record earnings year, even as we face challenges in some of our key markets. We are responding to these challenges with aggressive cost- and efficiency-improvement programs, while continuing to invest in growth opportunities around the world. We remain optimistic about our long-term prospects and expect to continue to benefit from our diversified business model, balanced growth strategies and rigorous application of the Wabtec Performance System.”

Traders liked what they saw. In Tuesday’s trading, shares of WAB jumped 4.5%, followed by a 3.7% gain on Wednesday. Wabtec is now our second-best performing stock on the year, with a 17.6% YTD gain. (It’s always those wallflowers.) This week, I’m raising my Buy Below price on Wabtec to $87 per share.

After the closing bell on Tuesday, AFLAC (AFL) reported outstanding earnings. For the first quarter, the duck stock had operating earnings of $1.73 per share. That was 10 cents more than Wall Street had been expecting.

In recent years, we’ve gotten used to the weak dollar hurting AFLAC’s bottom line. Now that the yen is rallying, we’ve had something we haven’t seen in a long time—the exchange rate added a bit to earnings. The company said the impact came to three cents per share. Ignoring the impact of currency, AFLAC’s operating EPS grew by 10.4% last quarter. That’s quite good.

AFLAC is standing by its full-year forecast of $6.17 to $6.41 per share, but that’s based on the yen being at 120.99. Lately, it’s been much stronger than that. On Thursday, in fact, the yen had its biggest jump against the dollar in seven years. The exchange rate is very close to dropping below 108.

For Q2, AFLAC sees earnings ranging between $1.55 and $1.82 per share. That assumes the yen averages 105 to 115. Wall Street had been expecting $1.64 per share. Again, traders liked what they saw. The stock jumped over $69 per share and reached a new all-time high. I’m very happy with AFLAC’s progress, and I’m raising my Buy Below this week to $73 per share. The duck abides.

After Wednesday’s close, CR Bard (BCR) had a terrific earnings report. The company made $2.34 per share for the first three months of the year. That topped Wall Street’s consensus by 17 cents per share. Sales rose 7% to $873.5 million. Adjusting for currency, sales were up 8%

Timothy M. Ring, chairman and chief executive officer, commented, “Our strong results in the first quarter reflect continued momentum from the returns we have seen from our strategic investment plan. We continue to be in investment mode as we focus on shifting the mix of the portfolio to faster growth areas, including product and technology platforms, delivery platforms and increasing our presence in emerging markets.”

Bard also raised its full-year guidance for sales and earnings. They now see sales rising between 6% and 8%. Adjusting for currency, that’s an increase of 7% to 8.5%.

The old EPS range was $9.90 to $10.05. The new range is $10.05 to $10.18. That represents growth of 11% to 12% over last year. They see Q2 coming in between $2.43 and $2.47 per share.

This was another solid quarter for Bard. I’m very pleased with their execution. The stock rallied 2% on Thursday, and the shares touched a new high. I’m raising my Buy Below by $20 to $219 per share.

In last week’s CWS Market Review, I wrote, “The consensus on Wall Street is for Ford to report earnings of 46 cents per share. I think they’ll beat that.” Wow, did they ever! For Q1, Ford Motor (F) earned 68 cents per share. That was 20 cents per share higher than the final estimate of 48 cents per share.

The company is doing very well in nearly every aspect. Last quarter was a company record for Ford. In North America, the company’s operating margin is 12.7%. That’s well ahead of GM and Fiat Chrysler. Quarterly revenue rose 11% to $37.7 billion. Sales in the U.S. were up 8.4%.

Ford’s stock jumped 3.1% on Thursday. Even with the rally, Ford still yields 4.16%. We had to wait through a tough period last year, but now things are paying off for Ford. I’m raising our Buy Below on Ford to $15 per share.

After Thursday’s closing bell, Stericycle (SRCL) became our second earnings miss this season. For Q1, the company earned $1.11 per share, which was four cents below Wall Street’s forecast. Frankly, this was a disappointment.

Despite the miss, the waste-management company is growing at a pretty quick pace. Last quarter, sales rose 31.8% to $874.2 million. Adjusting for currency, sales were up 35.4%, and the company’s gross profit rose 31.2% to $369.2 million.

On the earnings call, Stericycle said they expect full-year earnings to range between $4.90 and $5.05 per share. This reflects the “unfavorable impact of the timing of the Shred-It synergies, softer industrial hazardous waste volume, and higher costs associated with our international operations.” Wall Street had been expecting 2016 earnings of $5.22 per share. Stericycle remains a buy up to $125 per share.

Three Buy List Reports Coming Next Week

We have three more Buy List earnings reports coming next week: Cerner, Fiserv and Cognizant Technology Solutions. They’re all due on Thursday, May 5.

Shares of Cerner (CERN) got smacked hard after the last earnings report. I didn’t think the punishment was entirely fair, but if you’re expecting fair results, Wall Street ain’t the place for you. Fortunately, the shares have made up some lost ground.

The healthcare IT firm said to expect Q1 earnings between 52 and 54 cents per share, and revenue between $1.2 billion and $1.5 billion. That sounds about right. The company has a full-year target of $2.30 to $2.40 per share.

Last year was Fiserv’s (FISV) 30th straight year of double-digit earnings growth. I think they can make this year #31. They’ve already forecast 2016 earnings of $4.32 to $4.44 per share, which would be an increase of 11.6% to 14.7% over last year. Wall Street expects Q1 earnings of $1.02 per share.

Cognizant Technology Solutions (CTSH) surprised me earlier this year. The IT outsourcer said they expected earnings for this year to range between $3.32 and $3.44 per share. That seemed light to me, but I can’t say I’m fully confident they’ll raise guidance. That’s why I’m curious for this earnings report. The company said they expect Q1 to range between 78 and 80 cents per share.

A few things before I go. Due to Microsoft’s (MSFT) dip after last week’s earnings report, I’m going to lower its Buy Below to $54 per share. I really like the stock here. Also, Investor’s Business Daily recently ran a good profile of HEICO (HEI). I’m glad to see this “undiscovered” stock get some positive coverage.

Last month, I said that Wells Fargo (WFC) could “easily” raise its quarterly dividend from 37.5 cents to 40 cents per share. Apparently, it wasn’t so easy. The big bank announced it’s raising its dividend by a half a penny to 38 cents per share. They’ve submitted their capital plan for this year. If it’s approved, I think Wells may increase their dividend again. Wells now yields 3.02%.

That’s all for now. Stay tuned for more earnings next week. With the first week of the month, we’ll get several key economic reports. The ISM report is on Monday. There’s been a good trend here. Auto sales are on Tuesday. The productivity report comes out on Wednesday, as does the ADP payroll report. That leads us up to the big jobs report on Friday. There’s a good chance the unemployment could fall to an eight-year low. 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 29th, 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.