CWS Market Review – October 21, 2016

“There is a danger of expecting the results of the future to be predicted from the past.” – John Maynard Keynes

Before I get to today’s newsletter, I have an exciting announcement. Our Buy List ETF is now alive and trading! The official name of the ETF is the AdvisorShares Focused Equity ETF. The ticker symbol is CWS, for Crossing Wall Street! Thanks to everyone for your support. You can see more details in this video.

Now let’s get to this week’s market, which has been all about earnings. So far, we’ve had five Buy List stocks report earnings, and all five have beaten Wall Street’s estimates—some by quite a bit. On Thursday, shares of Snap-on jumped more than 6.6%. After the bell, Microsoft broke out to an all-time high, and Alliance Data Systems finally joined the Dividend Payers Club. ADS initiated a 52-cent quarterly dividend. In this week’s CWS Market Review, I’ll go over our Buy List earnings reports. I’ll also preview the nine (!) Buy List earnings reports we have next week.

79 Straight Days Near an All-Time High

Ryan Detrick highlighted a remarkable stat: The S&P 500 has now gone 79 days in a row of closing within 3% of its all-time high close. That’s amazing. For nearly four months, we’ve always been at or near a new all-time high. Yet, despite being so close to a new record, the index has only made it 10 times. In fact, the S&P 500 has now gone 46 days without making a new high. It’s as if the market is closely stalking its prey but always holding back before it strikes.

We’re still early in the earnings season, but it looks like the S&P 500 will show very slight earnings growth for Q3. Until recently, analysts had been forecasting yet another decline. This means the earnings recession is officially behind us. We’re on track for our first quarterly increase in sales and earnings since Q4 2014. Interestingly, trading volume has been quite low. The WSJ notes that “the past eight trading sessions have included the third and fourth lowest-volume days.”

Last Friday, Wells Fargo (WFC), our problem child, was the first Buy List stock to report Q3 earnings. This is such a frustrating story because the bank had been doing so well, and now we see how much bad behavior was going on behind the scenes.

I’m glad to see Tim Sloan take over as the new CEO, but he needs to do a lot of work to repair WFC’s reputation. At least the bank is still making a nice profit. On Friday, Wells reported earnings of $1.03 per share which was two cents more than estimates. On the earnings call, Sloan didn’t exactly impress analysts as he dodged important questions.

For Q3, total revenue came in at $22.328 billion, which was slightly higher than the expectations of $22.21 billion. Total average loans were up 7% to $957.5 billion. Total average deposits were up 5% to $1.3 trillion. In other words, Wells is a very, very big place.

For now, shares of WFC seem to have stabilized. I’m so frustrated with this bank. This week, I’m lowering my Buy Below on Wells Fargo to $47 per share.

Four Buy List Reports on Thursday

We had four more Buy List earnings reports on Thursday. Before the opening bell,
Alliance Data Systems (ADS) reported Q3 earnings of $4.74 per share which easily beat the company’s forecast of $4.42 per share. Wall Street had been expecting $4.44 per share. ADS’s quarterly revenue rose 19% to $1.9 billion.

For the rest of 2016, ADS sees revenue of $7.2 billion and core EPS of $16.90 per share. That translates to Q4 guidance of $1.9 billion in revenue and core EPS of $4.64. Wall Street had been expecting $4.93 per share.

Ed Heffernan, president and chief executive officer of Alliance Data, commented, “It was the largest quarter in our history, with $1.9 billion in revenue and $4.74 in core EPS. The over-performance to guidance was significant and was driven by both underlying strength in the business, which we have passed through to annual guidance, as well as timing, which will reverse in the fourth quarter.

The initial guidance for 2017 is for 10% growth in revenue and core EPS. ADS also initiated a dividend of 52 cents per share. That comes to a yield of about 1%. The disappointing guidance helped knock the shares down 4.7% in Thursday’s trading.

ADS has been a rough stock for us this year, but I still like what I see. This was a good earnings report even though traders sold the stock. I’m lowering my Buy Below on ADS to $214 per share.

In last week’s issue, I said that Signature Bank (SBNY) was going to report on Tuesday. That was incorrect. My apologies. SBNY released its earnings report on Thursday morning. For Q3, the bank reported earnings of $2.11 per share. That beat Wall Street’s estimate of $2.04 per share. SBNY’s net interest margin was 3.14%, which is down eight basis points from last year.

Signature had good news about its suffering medallion business:

“This quarter, Signature Bank effectively put the Chicago taxi medallion portfolio issues behind us, while growing deposits in excess of $1.8 billion. As we grow, we continue to expand our geographic outreach for securing deposits on a national basis across a number of industries. Our capabilities, service and trusted reputation for safety have always enabled the Bank to compete with major financial institutions throughout the New York metropolitan area. Now, these attributes afford us the opportunity to garner deposits in other regions of the country as well,” stated Joseph J. DePaolo, President and Chief Executive Officer.

Signature’s deposits rose 6.1% last quarter to $31.4 billion. Shares of SBNY fell 2.5% on Thursday. This one is starting to look cheap. I’m lowering my Buy Below price on Signature Bank to $125 per share.

Snap-on (SNA) made its bid to be the star of this earnings season. For Q3, the company said it made $2.22 per share. That beat expectations by seven cents per share. Quarterly revenue rose 1.5% to $834.1 million, which was below expectations. The stock gapped up over 6.6% on Thursday.

For their outlook, Snap-on said:

Snap-on expects to make continued progress during the balance of 2016 along its defined runways for coherent growth, leveraging capabilities already demonstrated in the automotive-repair arena and developing and expanding its professional customer base, not only in automotive repair, but also in adjacent markets, additional geographies and other areas, including in critical industries, where the cost and penalties for failure can be high. In pursuit of these initiatives, Snap-on now anticipates that capital expenditures in 2016 will approximate $80 million, of which $56.6 million was incurred through the end of the third quarter. Snap-on presently expects that its full-year 2016 effective income tax rate will be slightly below its full-year 2015 rate.

This was a good report. Snap-on remains a buy up to $166 per share.

After the bell on Thursday, Microsoft (MSFT) reported fiscal Q1 earnings of 76 cents per share. That beat estimates by eight cents per share. In after-hours trading, MSFT jumped to $60.68 per share. If that holds up in Friday’s trading, that will mark Microsoft’s first all-time high since December 30, 1999.

This was a very good quarter for Microsoft. Quarterly revenue rose 5% to $22.33 billion, which topped expectations of $21.7 billion. The bright spot for Microsoft continues to be its cloud business. Adjusted revenue rose by 10% for that sector, while revenue for Microsoft Office was up by 8%. Revenue growth for Windows was flat, while Microsoft’s gaming division saw its revenue drop by 5%.

CEO Satya Nadella said that Microsoft’s cloud business is on pace to generate annual sales of $13 billion, and to hit $20 billion for the next fiscal year. I’m lifting my Buy Below on Microsoft to $63 per share.

Nine Buy List Earnings Reports Next Week

Next week is a very big week for earnings. Three Buy List stocks report on Tuesday, followed by two more on Wednesday and another four on Thursday.

On Tuesday, CR Bard, Wabtec and Express Scripts are due to report. (In last week’s issue, I incorrectly said that WAB was going to report this week.) CR Bard (BCR) has had a very good year for us, although the shares are still below their July high. For Q3, Bard said they see earnings ranging between $2.51 and $2.55 per share. Bard sees full-year earnings coming in between $10.10 and $10.20 per share. Those are good numbers. Wall Street expects $2.56 per share.

Wabtec (WAB) has been having a difficult year, but I still like the company. The problem is its freight business which has been under pressure. WAB lowered its full-year earnings to a range of $4 to $4.20 per share. The previous range was $4.30 to $4.50 per share.

In July, Express Scripts (ESRX) told us they see Q3 earnings ranging between $1.72 and $1.76 per share. They also bumped up the low end of their full-year forecast by two pennies. The pharmacy-benefits manager now expects 2016 earnings to range between $6.33 and $6.43 per share. That means the stock is going for about 11 times this year’s earnings.

On Wednesday, Fiserv and Biogen are due to report. In August, Fiserv (FISV) raised its full-year range to $4.38 to $4.45 per share. For context, Fiserv earned $3.87 per share last year, which means that this should be Fiserv’s 30th straight year of double-digit earnings growth. For Q3, Wall Street expects $1.13 per share.

Three months ago, Biogen (BIIB) had a blow-out earnings report, and the stock soared. The biotech firm also offered optimistic guidance for the rest of this year. Biogen sees 2016 earnings ranging between $19.70 and $20 per share, which is more than Wall Street had been expecting.

On Thursday, AFLAC, Ford Motor, Stericycle and Stryker will report.

Three months ago, AFLAC (AFL) gave us a range for Q3 of $1.58 to $1.86 per share. That’s a huge range. Maybe they’re as confused by the currency market as everyone else. Still, it’s nice to have forex helping AFLAC’s bottom line.

Ford Motor (F) said it will be halting production of its F-150 for a week. That’s not highly unusual but it may suggest that demand isn’t as strong as they expected. Q3 was probably a slow one for Ford. Wall Street expects only 22 cents per share. The company has maintained an optimistic forecast.

Stericycle (SRCL) has been our worst performer this year. It’s down 38% YTD. I’m concerned that Stericycle’s management has grown overly reliant on smaller mergers and “rollups” in an attempt to mask slowing organic sales. As a result, the earnings quality has gradually deteriorated. Stericycle said that this year’s earnings will range between $4.68 and $4.75 per share. For Q3, Wall Street expects $1.17 per share.

In July, Stryker (SYK) said it expects Q3 earnings to range between $1.33 and $1.38 per share. That’s less than I was expecting. For all of 2016, Stryker expects earnings to range between $5.70 and $5.80 per share. The previous range had been $5.65 to $5.80 per share. Stryker is doing well, but I’m afraid the dollar will be a headwind for the next few quarters.

That’s all for now. Next week will be dominated by earnings reports. On Tuesday, we’ll get an update on consumer confidence. The last report was quite strong. On Thursday, we’ll get the durable-goods report for September. On Friday, the government will release its initial report on Q3 GDP. 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 October 21st, 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.