CWS Market Review – November 1, 2019

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

What an action-packed week this has been! Not only is it earnings season (we had six Buy List reports this week), but we also had the first report on third-quarter GDP, the October jobs report and a Federal Reserve meeting.

On top of that, on Wednesday, the S&P 500 closed at a new all-time high. Since the bull market began more than 10 years ago, there have been 25 breaks of 5% or more. Every single one has been turned back. Every. Single. One.

Our Buy List also hit a new high. I’m happy to see so many good earnings reports this week. In this week’s issue, I’ll go through them all. But first, I want to touch on the Fed’s news from earlier in the week.

What the Fed’s Rate Cut Means for Us

On Wednesday, the Federal Reserve decided to cut interest rates for the third time in three months. It wasn’t that long ago that the Fed was hiking rates. But what comes next?

Well, that’s not so easy to say, but the Fed gave us some clues. In its previous statement, the Fed said it “will act as appropriate” to keep the economy going. This time around, those words were missing. Instead, the Fed said it will “monitor the implications of incoming information for the economic outlook as it assesses the appropriate path.”

I happen to be fully fluent in the arcane and bizarre language of Fedspeak, so allow me to translate. The Fed said, “we’re going to chill out for a bit and watch what happens.” That makes sense. The central bank has already brought rates pretty low. In response, mortgage rates have fallen, and I think we’ll see a pick-up in housing and construction. In his post-meeting press conference, Fed Chair Jay Powell said, “We believe that monetary policy is in a good place.”

Overall, this is very good for the market and for us. Low real rates (meaning after inflation) are usually very good for stocks. Despite repeated predictions, there’s still no sign of broad-based inflation.

On Wednesday, ADP said the economy created 125,000 private-sector jobs last month. That was 5,000 more than expectations. The government’s jobs report for October will come out later today. Last month’s report had the unemployment rate at a 50-year low. Also on Wednesday, the government said that the economy grew at a 1.9% real annualized rate in the third quarter. That’s OK, but not great. It’s basically in line with the current expansion. Simply put, there’s no imminent threat of a recession.

Now let’s get to this week’s earnings reports. You can also see our earnings calendar.

Six Buy List Earnings Reports This Week

On Monday, Check Point Software (CHKP) said it made $1.44 per share for Q3. That was four cents better than estimates, Previously, the cyber-security firm had told us to expect Q3 earnings between $1.36 and $1.44 per share on revenue of $480 to $500 million. Total revenue was $491 million.

The business is going as expected. Gil Shwed, the CEO, said, “our security subscriptions continued to drive results, with 13% growth. This was underscored by expanded customer adoption of our cloud solutions.” I’m very pleased with these results.

For Q4, Check Point sees earnings ranging between $1.93 and $2.04, and revenue between $527 million and $557 million. The company reiterated its previous full-year guidance of earnings between $5.85 per share and $6.25 per share and revenue between $1.94 million and $2.04 billion. The shares jumped 3.8% on Tuesday and hit a three-month high. Check Point remains a buy up to $120 per share.

After the bell on Tuesday, Stryker (SYK) reported Q3 earnings of $1.91 per share. That beat by a penny. This was a good quarter for Stryker. Organic sales were up 8.6% to $3.6 billion.

Stryker said it now expects full-year results to be at the high end of its previous guidance. For Q4, Stryker sees earnings of $2.43 to $2.48 per share. For all of 2019, Stryker projects earnings between $8.20 and $8.25 per share. That’s an increase of five cents to the low end.

Shares of SYK rallied 3% on the news. This is one of the most dependable stocks on our Buy List. Stryker remains a buy up to $223 per share.

On Wednesday morning, Moody’s (MCO) said it made $2.15 per share for Q3. That was 15 cents more than expectations. The ratings agency has been a big winner for us this year (+57%). The key to Moody’s success is its Moody’s Analytics segment. Revenue there was up 13% last quarter.

The results were so good that Moody’s raised its full-year EPS guidance to $8.05 – $8.20. The previous guidance was $7.95 per share to $8.15 per share. The stock initially dropped on Wednesday, but it gradually made back much of the loss. This week, the stock came very close to hitting a new high. Moody’s is a very good buy up to $225 per share.

After the bell on Thursday, Cognizant Technology Solutions (CTSH) reported Q3 earnings of $1.08 per share. That was three cents more than estimates. Revenues rose 4.2% to $4.25 billion. In constant currency, that’s an increase of 5.1%, which is above Cognizant’s previous guidance of 3.8% to 4.8%.

Cognizant also said it plans to cut costs. I’m always skeptical of announcements of plans to cut costs. (Shouldn’t they always be doing that?)

“Over the past few months, we’ve sharpened Cognizant’s strategic posture and begun executing plans aimed at improving our competitive positioning,” said Brian Humphries, Chief Executive Officer. “Today we are announcing a simplification of our operating model and a cost-reduction program, which will allow us to fund investments in growth. Looking ahead, we see a clear path to unlock the organization’s full growth potential, win in our key digital battlegrounds, and return Cognizant to its historical position of being the bellwether of the IT services industry.”

For Q4, Cognizant sees revenue growth of 2.1% to 3.1% in constant currency. For the full year, CTSH sees earnings between $3.95 and $3.98 per share. That’s an increase of three cents per share to the low end. The guidance implies a Q4 range of $1.02 to $1.05 per share.

This is better news from CTSH, but remember this is after the company pared back guidance significantly earlier this year. Cognizant remains a buy up to $64 per share.

We had two earnings reports on Thursday. Let’s start with Intercontinental Exchange (ICE). The exchange owner earned $1.06 per share, which was 10 cents more than expectations. I really like this stock. For the quarter, ICE’s adjusted operating margin was 59%.

One sticking point is that the government is not pleased with the pricing power that exchanges have for their data services. That’s a big money maker for them. I don’t think this issue can be solved easily or quickly, and it will probably get settled by the courts. For Q4, ICE expects data revenue to be between $555 million and $560 million.

This week, I’m lifting our Buy Below on ICE to $100 per share.

Every earnings season, there’s a dud, and this time, that looks to be Church & Dwight (CHD). For Q3, the company made 66 cents per share. That was six cents more than the company’s own guidance. Despite the earnings beat, the shares lost 7.25% in Thursday trading.

What made traders sour on CHD? For one, the revenue figure wasn’t that good. Sales volume actually dropped a bit, but thanks to price increases, sales in dollars rose. The company expects sales growth of 5%, which is below consensus.

Church & Dwight also kept its full-year guidance at $2.47 per share. You’d think that they’d raise that after a six-cent beat. I’m lowering my Buy Below on Church & Dwight to $73 per share.

Next Week’s Buy List Earnings Reports

We have a few more earnings reports due next week.

Let’s start with Becton, Dickinson (BDX), which is due to report earnings on Tuesday, November 5. The medical-devices company gave us a scare in Ma, when it lowered its full-year guidance by 40 cents at each end to $11.65 – $11.75 per share.

Becton blamed currency exchanges plus “recent regulatory and market pressures related to paclitaxel-coated devices.” Fortunately, the last report was pretty good, and the company stood by the lower range. For next week, which is BDX’s fiscal Q4, Wall Street expects $3.30 per share. BDX should be able to beat that. Later this month, I expect Becton to raise its dividend for the 47th year in a row.

Three months ago, Broadridge Financial (BR) raised its full-year dividend from $1.94 to $2.16 per share. This was the eighth-straight year that BR has raised its dividend by double-digit percentages.

Broadridge’s fiscal year ended in June. For 2020, the company sees earnings growth of 8% to 12%. That implies a range of $5.03 to $5.22 per share. BR sees recurring-fee growth of 8% to 10% and operating margins around 18%. The earnings report is due out on Wednesday. For the fiscal first quarter, Wall Street expects 71 cents per share.

In August, Fiserv (FISV) completed its merger with First Data. In July, the company beat earnings by a penny per share. For 2019, Fiserv expects earnings to range between $3.39 and $3.52 per share. Earnings are also scheduled for Wednesday. Wall Street expects Q3 earnings of $1 per share.

Last is Disney (DIS), which is scheduled for Thursday. The company is having a great year. Not just at the box office, but on Wall Street as well. The Mouse House is about to become a giant in the world of streaming. The cord-cutting movement has morphed into the Streaming War. Disney+ will be a content powerhouse. The Street’s estimates for Q3 is 95 cents per share.

Continental Building Products (CBPX) hasn’t said yet when it’s going to report earnings. In previous years, the wallboard company has reported right about now. Just in case CBPX reports next week, Wall Street is looking for 41 cents per share.

That’s all for now. There aren’t many economic reports next week, but there will be a lot more earnings. The factory-orders report is due out on Monday. On Tuesday, the ISM non-manufacturing index is due out. Then on Wednesday, the productivity report comes out. On Thursday, the jobless-claims report comes out. The reports have come in at 250,000 or fewer for 108 straight weeks. 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

P.S. I was recently a guest on the Animal Spirits podcast.

Posted by on November 1st, 2019 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.