CWS Market Review – May 8, 2020

“Fear is an emotion, not a stock indicator.” – Coreen T. Sol

I’m sending you this week’s newsletter early on Friday, a few hours ahead of the April jobs report. I don’t know exactly what the report will say except that it will be bad. I mean, historically bad.

Ever since the economy shut down, millions of Americans have lost their jobs—as have many millions across the world. We recently got the Q1 GDP report, and it showed a drop of 4.8%. That was the economy’s worst performance in years. As bad as that was, the Q2 report will be far worse.

On Wednesday, ADP, the private payroll company, said that the U.S. economy lost 20,236,000 private sector jobs last month. That’s 24 times the previous record. In other words, we nearly averaged the previous monthly record each day!

On Thursday, the jobless-claims report showed that another three million Americans applied for unemployment benefits. As bad as that is, it was actually the fifth weekly improvement in a row. The seven-week total is 33.5 million.

As unpleasant as the economic news has been, the market continues to hold up well. In fact, the Nasdaq Composite is up slightly for the year (very slightly). For some context, a few weeks ago, the index was down 23% for the year. It’s made it all back.

This will be another issue focused on earnings. We had seven more reports this week, plus another that will come out on Friday. Of the seven reports, five beat the street, one matched and one came in below (looking at you Mickey). We also had good news this week from FactSet. The company raised its dividend by 7%. This is its 15th consecutive annual dividend hike.

But first, let’s run through this week’s Buy List earnings reports.

Seven Buy List Earnings Reports

Here’s the updated earnings calendar:

Company Ticker Date Estimate Result
Stepan SCL 21-Apr $0.78 $1.04
Eagle Bancorp EGBN 22-Apr $0.92 $0.70
Globe Life GL 22-Apr $1.71 $1.73
Silgan Holdings SLGN 22-Apr $0.50 $0.57
Hershey HSY 23-Apr $1.71 $1.63
Check Point Software CHKP 27-Apr $1.38 $1.42
Cerner CERN 28-Apr $0.70 $0.71
AFLAC AFL 29-Apr $1.10 $1.21
Sherwin-Williams SHW 29-Apr $3.95 $4.08
Church & Dwight CHD 30-Apr $0.77 $0.83
Intercontinental Exchange ICE 30-Apr $1.24 $1.28
Moody’s MCO 30-Apr $2.22 $2.73
Stryker SYK 30-Apr $1.69 $1.84
Trex TREX 4-May $0.61 $0.73
Disney DIS 5-May $0.88 $0.60
ANSYS ANSS 6-May $0.80 $0.83
Danaher DHR 6-May $1.01 $1.05
Becton Dickinson BDX 7-May $2.36 $2.55
Fiserv FISV 7-May $0.99 $0.99
Middleby MIDD 7-May $1.36 $1.46
Broadridge Financial Solutions BR 8-May $1.72

Let’s start with Trex (TREX), which reported on Monday. For Q1, the deck-maker earned 73 cents per share. That easily beat Wall Street’s estimates of 63 cents per share.

Quarterly sales rose 12% to $200 million, and gross margin increased by 620 basis points to 44.8%. For last year’s Q1, Trex made 54 cents per share.

Trex said it expects Q2 sales between $180 million and $190 million, although the company withdrew its full-year guidance. They’ve also stopped share repurchases. I completely understand. Trex said it has “no significant sourcing issues,” and that it’s in good shape to ride out the lockdown. Sales for April were in line with their plans, but they expect a soft May.

This was a very good report, and the shares responded. The stock jumped 8.7% on Monday and another 9.3% on Tuesday. Trex is now our top-performing stock this year. Through Thursday, it’s up 22.75% for us. This week, I’m raising our Buy Below to $120 per share.

On Tuesday, Disney (DIS) reported Q1 earnings of 60 cents per share. That was well below expectations of 88 cents per share. I have to wonder what Wall Street really had been expecting, because the shares rallied a bit after the earnings “miss.”

Disney had a rough quarter. We all knew it was coming. Disney is almost perfectly designed to be hurt by the stay-at-home policies. The company is a combination of movies, parks and pro sports. The parks are shut. Pro sports are on lock down. If that’s not enough, Disney also has a cruise business.

Disney estimates that its parks division lost $1 billion in revenue last quarter. Company-wide, they pegged the damage at $1.4 billion. Operating income for parks and cruises dropped by 58%.

Disney decided to forgo its normal semi-annual dividend. The last dividend was for 88 cents per share, so that will save the company a nice chunk of change. Despite it all, I’m still a Disney fan. The company will prosper when the economy reopens. Disney remains a buy up to $107 per share.

We had two earnings reports on Wednesday. First up, Danaher (DHR) said it had Q1 earnings of $1.05 per share. That beat the Street by four cents per share.

The big news for Danaher last quarter is that it closed on its deal to buy GE’s biopharma business which is now called Cytiva. Danaher also said that Executive VP Rainer M. Blair will take over as CEO later this year when current CEO Thomas P. Joyce Jr. retires. Joyce has done a great job leading Danaher.

The shares dropped after the company said it will raise $2.5 billion in a share offering of common and convertible stock. There’s nothing to worry about. Danaher remains a great company. We have a 6.5% gain in DHR this year. I’m lifting my Buy Below on Danaher to $175 per share.

Also on Wednesday, Ansys (ANSS) reported Q1 earnings of 83 cents per share on revenue of $308.9 million. That was three cents more than estimates.

For Q2, Ansys expects earnings between $1.01 and $1.33 per share. For all of 2020, they see earnings between $5.61 and $6.23 per share. Wall Street had been expecting $1.43 for Q2 and $6.26 for the whole year.

Last quarter, Ansys had operating cash flow of $147.4 million and deferred revenue and backlog of $835 million. That’s up 24% from a year ago.

I’m lifting my Buy Below on Ansys to $275 per share.

We made three more earnings reports on Thursday. I was most pleased by Middleby’s (MIDD) report. The company said it made $1.46 per share which was ten cents better than expectations. This stock has been trashed this year.

It was a tough quarter for Middleby, but they’re hanging in there. The company makes equipment for the food service industry. Interestingly, the company said that restaurants are seeing week-over-week increases in business. I couldn’t help noticing this nugget in the earnings report: “Sales of certain food items, such as hot dogs and other meat products in our core equipment markets, have experienced recent increased demand.” Makes sense.

Middleby is a good example of people expecting the worst, and it didn’t come. It’s tough for them, but they’ll make it through. The shares gained 8% on Thursday. Middleby remains a buy up to $72 per share.

Becton, Dickinson (BDX) made $2.55 per share for Q1. That was 19 cents better than expectations. Quarterly revenue came in at $4.253 billion which topped the Street’s consensus of $4.13 billion. Their Life Sciences unit fared especially well last quarter.

Becton withdrew its 2020 guidance. The shares gapped up nearly 3% on Thursday but gradually lost ground as the day wore on. I’m keeping our Buy Below at $265 per share.

After the closing bell on Thursday, Fiserv (FISV) said it made 99 cents per share for Q1. That matched Wall Street’s estimate on the nose.

CEO Jeffery Yabuki said, “Fiserv delivered solid financial results despite a significant impact from the COVID-19 pandemic on our business late in the quarter.” Looking through the numbers, I see many reasons to be pleased. Fiserv’s adjusted revenue increased slightly to $3.48 billion. Free cash flow rose 3% to $760 million. Operating margin increased 10 basis points to 27.8%.

Fiserv has also withdrawn its guidance. The company said that Frank Bisignano will succeed Jeffery Yabuki as CEO on July 1. Yabuki has done a great job for shareholders. As I mentioned last week, Yabuki has taken a 100% pay cut to his base salary. Fiserv is a buy up to $107 per share.

We have one more earnings report this earnings season, and that’s from Broadridge Financial Solutions (BR). The company is due to report later today. I’ll have details in next week’s issue. Broadridge was our best-performing stock for April. It gained over 22% for us last month.

That’s it for this earnings season. We have two off-cycle reports coming up later this month. Ross Stores (ROSS) is due to report earnings on May 21. Hormel Foods (HRL) usually reports around the same time as Ross, but they haven’t said exactly when yet.

Buy List Updates

It wasn’t all earnings news this week. We had some good news from FactSet (FDS). The company has increased its quarterly dividend from 72 to 77 cents per share. This is the 15th consecutive year the company has raised its dividend.

The dividend will be paid on June 18 to shareholders of record on May 29. Six weeks ago, FactSet had a good earnings report and reassuring guidance.

RPM International (RPM) released a statement saying that sales for its fiscal Q4, which ends on May 31, should be within the range it previously gave us. That’s good to hear.

In early April, RPM said it expects sales to drop 10% to 15% for this quarter. The Q4 report will probably come out in mid-July. The shares are up 57.5% from their March low.

That’s all for now. Outside of earnings, there will be a few key economic reports coming next week. On Tuesday, we’ll see the inflation report for April. We saw actual deflation for March and we may see it again for April. Also on Tuesday, the Feds will also update the budget figures. We’re swimming in red ink. More jobless-claims numbers on Thursday. Then on Friday, we’ll get the retail-sales report along with the industrial-production report. 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 on May 8th, 2020 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.