CWS Market Review – July 29, 2016

“If markets were rational, I’d be waiting tables for a living.” – Warren Buffett

Fortunately for us and for Warren, the market ain’t so rational. In fact, sometimes I think it’s defiantly anti-rational.

Consider that for the last 11 days, the stock market has closed up, down, up, down, up, down, up, down, up, down and up. I can almost sense a trend. This is one of the longest “alternating” streaks on record.

Not only that, but the market has reverted to its pre-Brexit somnolence. The daily spread between highs and lows has nearly vanished. Ryan Detrick notes that over the last 11 days, the S&P 500 has traded within a tiny range of just 0.92%. For 11 days, that’s one of the narrowest ranges in decades.

Most of the headlines this week have been dominated by the Democrats’ convention in Philadelphia, but it’s been an eventful one for Wall Street as well. We had six more Buy List earnings reports. I’ll go over all of them in a bit. We also had a Federal Reserve meeting. The central bank decided, again, to forego raising interest rates. I’ll also preview three more Buy List earnings reports for next week. But first, let’s look at this week’s batch of earnings.

Wabtec Guides Lower, Express Scripts Guides Higher

On Monday morning, Wabtec (WAB) reported Q3 earnings of $1.05 per share. That was three cents below Wall Street’s consensus. This was a tough quarter for the railroad-services company. Quarterly revenue came in at $723.6 million, which was below estimates of $806.48 million. WAB’s overall business is doing well, but their freight business is under some pressure.

Raymond T. Betler, Wabtec’s president and chief executive officer, said: “Our Transit business is performing well, with revenue growth, improved profitability and a strong backlog. Our Freight business, however, continues to be affected by overall rail-industry conditions and the sluggish global economy. In this environment we are focused on controlling what we can by aggressively reducing costs, generating cash and investing in our growth opportunities, including acquisitions. As demonstrated by our first-half operating margin of 18.4 percent and cash from operations at 14 percent of revenues, we are managing the business well in these market conditions.”

Wabtec lowered its full-year guidance range to $4 to $4.20 per share. The previous range was $4.30 to $4.50 per share. The stock dropped below $66 during Monday’s trading, but it has since gained back some lost ground. This is a disappointing report from Wabtec, but I’m not ready to throw in the towel. This is a solid company. This week, I’m lowering my Buy Below on Wabtec to $75 per share.

After the closing bell on Monday, Express Scripts (ESRX) reported Q2 earnings of $1.57 per share. That matched Wall Street’s consensus on the nose. It was also in the dead center of Express’s own range of $1.55 to $1.59 per share. The company didn’t have an update on its acrimonious lawsuit against Anthem.

I was pleased to see optimistic guidance from Express. For Q3, they expect earnings between $1.72 and $1.76 per share. Wall Street was at $1.72. Express also bumped up the low end of its full-year forecast by two pennies. True, it’s not much, but we’ll take it. 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 12 times this year’s earnings. That’s not a bad deal. I’m raising my Buy Below on Express Scripts to $81 per share.

CR Bard Raises Guidance but Ford Disappoints

CR Bard (BCR) gave us another very good earnings report. For Q2, the medical-devices company made $2.54 per share. That beat the Street by seven cents per share. They also topped their own guidance which was for $2.43 to $2.47 per share. Quarterly sales rose 8% to $931.5 million. Not including forex, sales were up 9%.

Timothy M. Ring, chairman and chief executive officer, commented, “We continue to see strong results as we prioritize product leadership across the globe. Our commitment to innovation and product differentiation, along with a focus on delivering economic benefits to the healthcare system, have driven global demand for our products, and our targeted investments in emerging markets continue to expand our presence internationally. We believe this investment approach positions us well to continue to provide attractive returns to our shareholders.”

Now for guidance. For Q3, Bard sees earnings between $2.51 and $2.55 per share. They see full-year earnings coming in between $10.10 and $10.20 per share. That’s an increase from the previous guidance of $10.05 to $10.18 per share. Bard is clearly moving in the right direction. I’m keeping my Buy Below on Bard at $231 per share.

On Thursday, we had a big disappointment from Ford Motor (F). For Q3, the company earned 52 cents per share which was eight cents below Wall Street’s forecast. The automaker also warned that the second half of this year might be weak.

To its credit, Ford is standing by its previous forecast, which is to beat last year’s pre-tax profit of $10.8 billion. To be fair, this quarter wasn’t so bad, but it was helped by generous incentives. That’s a useful short-term strategy, but it’s not a long-term fix.

“We’re committed to meeting our guidance, but it is at risk,” Chief Financial Officer Bob Shanks told reporters Thursday. The company now says it’s unlikely that U.S. vehicle sales will break last year’s record, and Shanks predicted further contraction in 2017. “We don’t see growth, at least in the near term.”

After a record streak of six-straight years of annual U.S. auto-sales growth, Ford is joining analysts who are skeptical that the record set in 2015 will be topped this year. Consumer demand has gone slack, forcing automakers to dial up deals to lure buyers to showrooms. For the first six months, industry-wide light-vehicle sales rose just 1.5 percent, while incentives jumped 13 percent, according to researcher Autodata Corp.

(…)

The U.S. auto market slowed sooner than Ford anticipated, Shanks said. The automaker now sees U.S. auto sales of 17.4 million to 17.9 million vehicles, down from an earlier forecast of about 18 million. Excluding medium and heavy trucks, the new projection translates to a light-vehicle market of 17.1 million to 17.6 million, compared with last year’s record 17.5 million.

“We do think the U.S. is coming down from what we expected,” Shanks said. “We saw higher U.S. incentives — that was for the industry and for us. The industry increased, and we increased in line with the industry.”

On Thursday, shares of Ford dropped 8.2% to close at $12.71. Frankly, this was a bad showing from Ford. I’m going to drop my Buy Below price on Ford down to $14. Don’t worry that the dividend is at risk. The stock currently yields 4.7%.

The Strong Yen Lifts AFLAC

I’m happy to see that AFLAC (AFL) had another strong quarter. For Q2, the duck stock earned $1.71 per share in operating earnings. (Remember, with insurance companies, it’s often better to look at operating earnings rather than net earnings.) That beat estimates by three cents per share.

Once again, the stronger yen helped AFLAC’s bottom line, which is a welcome change from what we’ve experienced the last few years. Last quarter, the strong yen added nine cents to AFLAC’s operating earnings. Not counting currency, operating EPS rose by 8% last quarter.

AFLAC stood by its full-year operating EPS guidance of $6.17 to $6.41, but that’s based on last year’s average yen, which was 120.99 to the dollar. The yen is now at 104! The company said that if the yen stays between 100 and 110, they see Q3 coming in between $1.58 and $1.86 per share. That’s a very large range.

AFLAC is usually a straight shooter (or quacker?) when it comes to their guidance, so maybe they’re as confused as the rest of the currency market. Either way, this is a good company. I’m lifting my Buy Below on AFLAC to $75 per share.

After the bell on Thursday, Stericycle (SRCL) reported Q2 earnings of $1.18 per share. The medical-waste company matched Wall Street’s estimate. Revenues came in light, and the stock took a dive in the after-hours market.

Frankly, I haven’t had enough time to scrutinize the earnings. Their press release doesn’t contain a lot of information, and I’d rather listen to the earnings call before I offer more specifics. But I’ll say that the numbers are largely what I expected from Stericycle. I promise to have more info on SRCL next week.

Three Buy List Earnings Reports Next Week

This year looks to be Fiserv’s (FISV) 30th-straight year of double-digit earnings growth. The company made $3.87 per share last year, and they see 2016 coming in between $4.32 and $4.44 per share. That works out to a growth rate of 11.6% to 14.7%. Fiserv reports after the close on Tuesday, August 2. Wall Street’s consensus is for $1.07 per share.

Cerner (CERN) didn’t start off as a strong performer for us this year, but it has rallied in the last few weeks. For Q2, the healthcare IT company said it expects earnings between 56 and 59 cents per share. For all of 2016, Cerner’s guidance is $2.30 to $2.40 per share. TheStreet said that Cerner might be an acquisition target for IBM. Cerner also reports on Tuesday afternoon. Wall Street expects 57 cents per share.

Cognizant Technology Solutions (CTSH) will be our final Buy List stock to report this earnings season. Q2 earnings are due out on Friday morning, August 5. Cognizant said they expect Q2 earnings of 80 to 82 cents per share. Wall Street expects 82 cents per share. For all of 2016, CTSH expects $3.32 to $3.44 per share.

That’s all for now. Our first look at Q2 GDP comes later today. Next week, earnings season for our Buy List wraps up. We’ll also get some of the key turn-of-the-month econ reports. The July ISM report comes out on Monday. Personal income and spending are on Tuesday. Then on Friday, we’ll get the jobs report for July. 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 July 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.