CWS Market Review – January 22, 2021

“Never buy at the bottom, and always sell too soon.” – Jesse Livermore

This week, we got a new president. Also, the stock market rallied to another new all-time high. Although I strongly doubt the former caused the latter. Instead, we’re in the midst of Q4 earnings season, and so far, the results have been pretty good.

All told, corporate earnings are expected to fall by 15% for 2020. But for this year, Wall Street expects earnings to rebound by 24%. As the Q4 reports come out, we’ll learn more about Corporate America’s outlook for this year.

None of our Buy List stocks has reported yet, but that will soon change. In this week’s issue, I’ll preview six Buy List stocks that are due to report earnings next week. I’m expecting good results. Later on, I’ll highlight HEICO, one of this year’s new additions. But first, let’s look at this season’s Earnings Calendar.

Six Buy List Earnings Reports Next Week

Here’s the Earnings Calendar for this season. Twenty-two of our 25 stocks will report earnings over the next few weeks. I’ve listed each stock’s earnings date and Wall Street’s earnings consensus.

Stock Ticker Date Estimate Result
Silgan SLGN 26-Jan $0.53
Abbott Labs ABT 27-Jan $1.35
Stryker SYK 27-Jan $2.55
Danaher DHR 28-Jan $1.87
Sherwin-Williams SHW 28-Jan $4.85
Church & Dwight CHD 29-Jan $0.52
Thermo Fisher TMO 1-Feb $6.50
Broadridge Financial Sol BR 2-Feb $0.70
AFLAC AFL 3-Feb $1.05
Check Point Software CHKP 3-Feb $2.11
Hershey HSY 4-Feb $1.43
Intercontinental Exchange ICE 4-Feb $1.09
Fiserv FISV 9-Feb $1.29
Cerner CERN 10-Feb $0.78
Disney DIS 11-Feb -$0.44
Moody’s MCO 12-Feb $1.94
Zoetis ZTS 16-Feb $0.86
Trex TREX 22-Feb $0.36
Ansys ANSS TBA $2.54
Middleby MIDD TBA $1.40
Miller Industries MLR TBA n/a
Stepan SCL TBA $1.08

Silgan Holdings (SLGN) kicks off the show after the close on Tuesday when it reports its Q4 earnings. The container company had a solid Q3. Silgan made $1.04 per share. That was up 37% over last year’s Q3. Wall Street had been expecting 95 cents per share.

The metal-containers business saw volume growth of 17% thanks to more folks eating at home. The closures business was helped by increased demand for household-cleaning products. Their plastic-containers business had volume growth of 14%.

Best of all, Silgan raised its full-year guidance range to $2.92 to $2.97 per share. The previous range was $2.70 to $2.85 per share. Last year, Silgan made $2.16 per share.

For Q4, Silgan now expects earnings of 47 to 52 cents per share. They made 38 cents per share for last year’s Q4.

CEO Tony Allott said, “While we are still completing our annual budget process for 2021, at this time we anticipate overall operating earnings for the Company remaining at these strong levels.”

We have two more reports on Wednesday. Stryker (SYK) can’t offer guidance for Q4, but I’m optimistic. Three months ago, the orthopedics company reported solid numbers for Q3. Stryker earned $2.14 per share. That was up 12% over last year. Wall Street had been expecting earnings of $1.41 per share. That was a huge beat.

For Q3, reported net sales rose by 4.2% to $3.7 billion. Orthopaedics sales rose 4.4% to $1.3 billion. MedSurg sales were up 3.2% to $1.6 billion. Neurotechnology and Spine sales increased 6% to $0.8 billion.

Stryker is currently above our $240 per share Buy Below price. I may raise it next week, but I want to see the earnings results first. Stryker is an excellent company.

The big change to Danaher (DHR) this year was the addition of Cytiva. That’s the new name for GE’s biopharma business, which Danaher bought last year. For Q4, Danaher expects revenue growth, excluding Cytiva, in the low-single digits.

Three months ago, Danaher’s CEO said, “We delivered outstanding third-quarter results, achieving double-digit revenue growth, over 60% adjusted EPS growth, and we more than doubled our free cash flow year-over-year.”

For Q3, Danaher earned $1.72 per share. That beat the Street by 36 cents per share. For Q4, Wall Street expects $1.87 per share. I’m expecting another earnings beat.

Abbott Labs (ABT) is one of our new stocks this year, and it’s due to report earnings on Thursday. In October, Abbott reported 98 cents per share for Q3, which topped the Street by seven cents per share.

I was also impressed to see ABT raise its quarterly dividend by 25%. This marked the company’s 49th annual dividend increase. Many times, stocks with long dividend streaks raise their payouts by a tiny amount just to keep the streak alive. That’s not the case with Abbott.

In fact, Q3 was so good for Abbott that it raised its full-year 2020 guidance to $3.55 per share. Since the company has already made $2.20 per share for the first three quarters, that implies Q4 earnings of $1.35 per share.

There was also more good COVID news.

Abbott Laboratories’ rapid COVID-19 antigen test is highly likely to correctly detect if people have ever contracted the virus and could help with earlier isolation, according to the U.S. Centers for Disease Control and Prevention.

Sherwin-Williams (SHW) is also scheduled for Thursday. Three months ago, Sherwin reported third-quarter earnings of $8.29 per share. That easily beat Wall Street’s forecast of $7.75 per share. Sales rose 5.2% to $5.12 billion.

CEO John G. Morikis said, “Continued and unprecedented strength in our DIY business, solid demand across our residential repaint and new residential segments and improving demand in our industrial coatings businesses and regions drove our strong third-quarter results.”

Let’s look at the breakdown by each business segment. Net sales in The Americas Group increased by 2.8% to $2.98 billion. Consumer Brands Group increased its sales by 23.5% to $838.1 million, and Performance Coatings Group’s net sales increased 1.2% to $1.31 billion. All in all, this was a solid quarter. Sherwin generated $2.56 billion so far this year. That’s up 54% over last year.

For Q4, Wall Street expects earnings of $4.85 per share.

Last is Church & Dwight (CHD). The household-products company reported Q3 earnings of 70 cents per share. That beat estimates by three cents per share. You really can’t go wrong with condoms and baking soda.

C&D’s results were pretty good considering the environment. Q3 net sales grew 13.9% to $1,241.0 million. COVID has actually helped some of C&D’s business.

The company was able to increase its full-year guidance. Before, they saw reported sales rising by 9% to 10%; now they see them up 11%. Not a big increase, but it’s good to see. Most importantly, C&D sees full-year earnings of $2.79 to $2.81 per share. That’s a slight increase over the previous guidance.

So far this year, Church & Dwight has earned $2.30 per share, so that implies Q4 earnings of 49 to 51 cents per share. C&D should easily beat that.

Profile of HEICO (HEI)

At the start of the year, I added five new stocks to our Buy List. Each week, I’ve taken some time to highlight one of our new stocks. I’ve already profiled Miller Industries and Thermo Fisher Scientific. This week, it’s time for HEICO (HEI) of Hollywood, FL.

If you’ve been with us for a while, you may recall that HEICO was on our Buy List in 2016 and 2017, before I unwisely decided to sell the stock. (Ugh, what was I thinking?) The stock promptly doubled over the next three years. Once again, I relearned the valuable lesson about buying good stocks and then doing nothing. Yes, even your humble editor is prone to such mistakes.

HEICO is the kind of niche business I love. With investing, the only thing better than a monopoly is a near-monopoly. (The full-on monopolies tend to get too much government attention.)

HEICO makes replacement parts for the airline industry. Sexy, right? Well, not exactly, but let’s consider a few things. If a commercial aircraft needs some obscure new part, the airline can’t run down to the local hardware store. Instead, it needs to special-order it. Moreover, there’s a great deal of cost pressure on the airlines to keep the older planes serviceable.

Also, the aircraft parts often need to meet strict regulatory guidelines. The part maker really has to know what it’s doing. That’s where HEICO comes in. The business is lean and well run.

HEICO is one of our three “off-cycle” stocks. The company’s fiscal year ended in October, so it reported its Q4 earnings last month. (That’s why it’s not listed in the earnings calendar.)

Last year, HEICO did $1.78 billion in business. The company would have probably cracked $2 billion this year if not for the economic lockdowns. HEICO’s long-term track record is very impressive—and the stock is still below its high from mid-2019:

I can’t tell the HEICO story without mentioning the Mendelson family. Larry Mendelson is the current chairman and CEO. In the 1950s, he took a finance class taught by David Dodd. Fans of value investing will recognize Dodd’s name. He was the co-author of Security Analysis with Ben Graham. Security Analysis is probably the foundational text of value investing.

Mendelson took those lessons to heart. He made a good deal of money in real estate and wanted to diversify his holdings. That led him to invest in an under-performing industrial company. He really didn’t care what he bought, as long as it was cheap and had potential to be retooled for future growth. He chose well.

HEICO was originally founded in 1957 by Dr. William Heinicke as Heinicke Electronics. By the 1980s, Mendelson controlled a sizeable share in the company and was able to make himself CEO. The still family owns a large chuck of the voting shares, and several family members hold key positions within the company.

(Important side note: HEICO trades with regular shares and with “A” shares. The A shares afford fewer voting rights for stockholders, which is why they have a lower price. That’s common with business that are controlled by a family. For our purposes, I’m discussing the regular shares.)

When airplane owners need a new part and go back to the original equipment manufacturer (OEM) to get replacements, they’re often charged a steep price. The profit margins can exceed 30%. That provides enormous opportunity for HEICO. Consider that many aircraft are over 20 years old.

The aviation industry is broadly diversified, and HEICO is also able to get sales from commercial and military customers. That means that if there’s a drop-off on one end of the business, the other side can pick up the slack. Wherever there’s a demand to cut costs, HEICO has the potential to do well.

In some respects, I see HEICO’s role as similar to that of a generic drugmaker. HEICO provides a low-cost copy of the original product, which is regulated by the Federal Aviation Administration. By the way, HEICO does more than aircraft parts. They also supply parts for satellites, rockets, missiles and even medical instruments.

HEICO is in an enviable position and nearly dominates its market. The company sells to 19 of the top 20 airlines in the world, and their customers love them. Like nearly everyone else, though, HEICO has felt the squeeze of the economy, and COVID was especially rough on the airline industry.

Still, Larry Mendelson managed HEICO well during a rough patch. For last year, HEICO’s operating margin was 21%, which is quite good, and the company’s cash flow exceeded $409 million. Historically, HEICO has used its cash flow to buy out smaller operators. HEICO currently pays a very small semi-annual dividend of eight cents per share.

Last year’s bear market was brutal on HEICO. In two weeks, the stock plunged 48%. The shares have come back a long way, but I still have some concerns about how quickly the airline industry will rebound. With so few planes flying, not as many will need repairs. I currently rate HEICO a buy up to $140 per share. The company’s fiscal Q1 earnings report will be out sometime in late February.

That’s all for now. The Federal Reserve gets together again next week, on Tuesday and Wednesday. I don’t expect any policy change, but it will be interesting to hear what the central bank has to say in its policy statement. On Thursday, the government will report its first estimate for Q4 GDP growth. I suspect that it will be worse than what Wall Street is expecting. 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 January 22nd, 2021 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.