CWS Market Review – October 25, 2019

“99% of the troubles that threaten our civilization come from too optimistic accounting.” – Charlie Munger

We’re at the high tide of earnings season. We had seven Buy List earnings reports this week, and there are another six coming our way next week. If that’s not enough, there’s a Federal Reserve meeting next week as well, plus a jobs report next Friday.

So far, Wall Street seems to like earnings season. On Thursday, the S&P 500 closed at 3,010.29. That’s the highest close in nearly three months, and we’re very close to a new all-time high. In fact, the S&P 500 Total Return Index, which includes dividends, finished Thursday just 0.02% from an all-time-high close.

In this week’s CWS Market Review, I’ll summarize all the earnings reports for you. So far, every one of our stocks has beaten earnings expectations. Stand-outs so far include Sherwin-Williams, which beat earnings, increased guidance and gapped up to a new high. The same for Raytheon. AFLAC beat and guided higher, but no new high. At least, not yet.

There’s so much earnings news that I won’t have time to discuss the Fed meeting, but you can expect the Fed to cut rates again. Now let’s take a look at this week’s Buy List earnings reports.

This Week’s Earnings Reports

Here’s an updated look at this season’s earnings calendar:

Company Symbol Date Estimate Results
Eagle Bancorp EGBN 16-Oct $1.07 $1.08
Signature Bank SBNY 17-Oct $2.70 $2.75
Sherwin-Williams SHW 22-Oct $6.48 $6.65
Globe Life GL 23-Oct $1.69 $1.73
AFLAC AFL 24-Oct $1.07 $1.16
Cerner CERN 24-Oct $0.66 $0.66
Danaher DHR 24-Oct $1.15 $1.16
Hershey HSY 24-Oct $1.60 $1.61
Raytheon RTN 24-Oct $2.86 $3.08
Check Point Software CHKP 28-Oct $1.40
Stryker SYK 29-Oct $1.90
Cognizant Technology Solutions CTSH 30-Oct $1.05
Moody’s MCO 30-Oct $2.00
Church & Dwight CHD 31-Oct $0.61
Intercontinental Exchange ICE 31-Oct $0.96
Becton, Dickinson BDX 5-Nov $3.30
Broadridge Financial BR 6-Nov $0.71
Fiserv FISV 6-Nov $0.99
Disney DIS 7-Nov $0.95
Continental Building Products CBPX TBA $0.40

On Tuesday, Sherwin-Williams (SHW) posted Q3 adjusted earnings of $6.65 per share. That beat Wall Street’s estimates of $6.48 per share. This was a very good quarter for the paint people. The CEO said:

“Sherwin-Williams delivered strong results in the quarter as adjusted earnings per share increased 17.1% year-over-year to $6.65. Our performance in the quarter was driven by continued strength in North American architectural paint markets, which offset choppiness in some industrial-end markets. U.S. and Canada same-store sales growth was 8.1% as our pro painting customers continued to report strong demand. As a result of this strong volume and operating efficiencies, consolidated gross margin expanded over 300 basis points to 45.7%. Adjusted EBITDA margin in the quarter improved 150 basis points to 18.9% compared to the prior year.

“For the second consecutive quarter, all three operating segments increased segment profit and margin compared to the same period last year. In The Americas Group, our North American paint stores generated strong growth in all regions and all customer-end markets, led by double-digit growth in residential repaint. With the strong volume, the team delivered incremental operating margin of approximately 37%, and we have opened 31 net new stores year to date.

Segment profit in The Americas Group increased $85.9 million to $663.7 million in the quarter and increased $122.1 million to $1.61 billion in nine months, due primarily to higher paint-sales volume and selling-price increases.

The best news is that Sherwin increased its full-year guidance range to $20.90 – $21.30 per share. The previous range was $20.40 to $21.40 per share. Since Sherwin has already made $16.83 per share for the first nine months of this year, the new range implies Q4 earnings of $4.07 to $4.47 per share.

Sherwin-Williams is now up 117.3% since we added it to the Buy List in 2017. This week, I’m lifting our Buy Below on SHW to $590 per share.

On Wednesday, Globe Life (GL) reported Q3 net operating income of $1.73 per share compared with $1.59 per share for the year-ago quarter. Wall Street had been expecting $1.69 per share. This was GL’s first earnings report under the new name. Here are some highlights from the quarter:

• Net income as an ROE was 12.0%. Net operating income as an ROE excluding net unrealized gains on fixed maturities was 14.7%.
• Life underwriting margins at Liberty National Exclusive Agency and American Income Exclusive Agency increased over the year-ago quarter by 12% and 9%, respectively.
• Health underwriting margin at Family Heritage Exclusive Agency increased over the year-ago quarter by 12%.
• Life premiums increased over the year-ago quarter by 7% at American Income Exclusive Agency, and health premiums increased over the year-ago quarter by 7% at both Family Heritage Exclusive Agency and American Income Exclusive Agency.
• Life net sales at Liberty National Exclusive Agency and American Income Exclusive Agency increased over the year-ago quarter by 12% and 9%, respectively.
• 932,946 shares of common stock were repurchased during the quarter.

The stock hit a new high on Thursday. Globe Life has quietly turned into a nice winner for us this year. I’m keeping the Buy Below at $100 per share.

Thursday was an especially busy day for us. We had five Buy List earnings reports.

Let’s start with Hershey (HSY). The chocolate folks reported earnings of $1.61 per share. That beat Wall Street by a penny per share.

It was a good quarter, but Hershey didn’t change its full-year guidance of $5.68 to $5.74 per share. That’s the same story as three months ago. With the Q2 earnings beat, I thought Hershey would raise guidance, but it didn’t. The company seems to be low-balling Q4.

The guidance implies Q4 earnings of $1.18 to $1.24 per share. Wall Street had been expecting $1.27 per share. On the bright side, Hershey increased full-year sales guidance by a tiny bit. Hershey remains a buy up to $162 per share.

Raytheon (RTN) had a great Q3. The defense company made $3.08 per share which was 22 cents better than estimates. Sales for the quarter rose by 9.4% to $7.45 billion. Raytheon also boosted its full-year range to $11.70 to $11.80. The previous range was $11.50 to $11.70.

The company said the earnings beat was driven by higher net sales in classified programs. (I’m afraid to ask.) For the quarter, Raytheon’s bookings grew by 8.4% to $9.44 billion. Their backlog was up 7% to $44.6 billion. The shares rallied nearly 4% on Thursday and made a new high.

Raytheon is planning to merge with United Technologies (UTX). The merger should happen sometime during the first half of next year. RTN shareholders will get 2.3348 shares of Raytheon Technologies. This week, I’m lifting my Buy Below on Raytheon to $220 per share.

Danaher (DHR) reported Q3 earnings of $1.16 per share. That was a penny better than estimates. For Q4, Danaher sees earnings ranging between $1.32 and $1.35 per share. The works out to full-year earnings of $4.74 to $4.77. That’s a little lower than the previous guidance of $4.75 to $4.80 per share.

There are two important notes to add. One is that Danaher is buying GE’s Biopharma business. The deal should close sometime in Q4. Also, Danaher recently IPO’d Envista (NVST), which was their dental business. Danaher still owns about 80% of the company.

For Q3, Cerner (CERN) made 66 cents per share, which was in the middle of their guidance of 65 to 67 cents per share.

For Q4, Cerner expects earnings between 73 and 75 cents per share on revenue of $1.41 billion to $1.46 billion. The healthcare-IT firm sees new-business booking ranging between $1.45 and $1.65 billion. The Q4 earnings guidance is effectively a narrowing of their previous full-year guidance. Previously, Cerner had expected 2019 earnings of $2.64 to $2.72 per share. With new Q4 guidance, that works out to $2.66 – $2.68 per share.

This report is basically what I had expected—maybe a tad light, but nothing to worry about. Earlier this year, Cerner reached an agreement with Starboard Value to start paying a dividend and increase its buyback authorization by $1.5 billion. Cerner remains a buy up to $71 per share.

For Q3, AFLAC (AFL) made $1.16 per share which beat the Street by nine cents per share. Forex added two cents per share to their bottom line.

The good news is that the duck stock raised its full-year guidance to a range of $4.35 to $4.45 per share. That’s a big increase over the old guidance of $4.10 to $4.30 per share. The range is based on the 2018 exchange rate of ¥110.39 yen to the dollar.

AFLAC said it’s aiming to buy back $1.3 to $1.7 billion worth of stock this year. AFLAC remains a buy up to $57 per share.

Six More Reports Next Week

Now let’s look ahead to next week which will be another busy week of earnings for us.

On Monday, Check Point Software (CHKP) is due to report. The stock has not done well for us this year. The earnings really haven’t been that bad. Wall Street, however, hasn’t liked the earnings guidance.

For Q3, Check Point told us to expect earnings to range between $1.36 and $1.44 per share on revenue of $480 to $500 million. That’s not bad. For the entire year, CHKP projected earnings between $5.85 and $6.25 per share and revenue between $1.94 and $2.04 billion.

Three months ago, Stryker (SYK) raised its guidance for 2019. The orthopedics company now expects full-year organic net sales to rise by 7.5% to 8.0%. Stryker expects earnings to range between $8.15 and $8.25 per share. The previous range was $8.05 to $8.20 per share.

For Q3, Stryker sees earnings between $1.87 and $1.92 per share. It should be able to top that. The earnings report is due out on Tuesday. The stock is up nearly 35% for us this year.

Cognizant Technology Solutions (CTSH) has not been a strong performer for us this year. I’ve been patient with CTSH, but we need to see signs that business is improving. After the May earnings report, CTSH lost 18% in two days. The last earnings report was somewhat of an improvement, but we need to see more.

Cognizant said it now expects full-year earnings between $3.92 and $3.98 per share. That’s an increase from the previous range which was $3.87 to $3.95 per share. However, that was a big cut from the initial guidance of at least $4.40 per share. For Q3, Cognizant expects revenue growth in the range of 3.8 to 4.8% in constant currency. The earnings report will come out on Wednesday. Wall Street expects earnings of $1.05 per share.

Moody’s (MCO) is scheduled to report earnings on Wednesday. This is our top-performing stock this year, with a YTD gain of 54%. The jewel in the crown is Moody’s Analytics which makes up about 40% of revenues. Three months ago, Moody’s beat earnings and raised guidance. For 2019, Moody’s expects earnings between $7.95 and $8.15 per share. Consensus is for $2 per share.

Church & Dwight (CHD) will report on Thursday. For Q3, CHD sees earnings of 60 cents per share, and $2.47 for the entire year. The company has grown organic sales by more than 4% for five quarters in a row. The stock took a sharp drop in early September after an investment firm came out with a negative piece on the consumer-products company. I won’t address the specifics of their allegations, but I’ll note that these things happen every so often. Wall Street expects 61 cents per share.

Last is Intercontinental Exchange (ICE). The exchange operator is also due to report on Thursday. ICE didn’t offer EPS guidance, but it did for a few other metrics. What stood out to me was the ranges for data revenue. ICE said Q3 data revenues are expected to be in a range of $550 million to $555 million. For all of 2019, ICE sees data revenues in a range of $2.19 billion to $2.24 billion. The analyst consensus is for 96 cents per share.

That’s all for now. Lots more earnings next week. The Federal Reserve meets on Tuesday and Wednesday. Expect a rate cut. The policy statement will be out on Wednesday at 2 p.m. ET. Also on Wednesday, we’ll get our first look at the Q3 GDP report. The October jobs report is due out on Friday morning. The last report showed the lowest unemployment rate in 50 years. 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 October 25th, 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.