CWS Market Review – July 31, 2020

“It is a capital mistake to theorize before one has data. Insensibly, one begins to twist facts to suit theories, instead of theories to suit facts.” – Arthur Conan Doyle

What a busy week this has been! We had several more Buy List earnings reports. So far, our stocks are doing very well. In fact, the Buy List has nearly made back everything it lost earlier this year. The last few weeks have been particularly good for us. Since July 13, our Buy List has gained 7.53% compared with 2.88% for the S&P 500. This earnings season, all of our stocks have beaten Wall Street’s estimates (so far).

On Thursday, the government said that the U.S. economy contracted at a 32.9% annualized rate during the third quarter (see chart below). That’s by far the worst on record. It’s three times worse than the previous record. We knew it was coming but it’s still jarring to see. Also on Thursday, we learned that jobless claims rose for the second-straight week. That’s after falling for 15 weeks in a row. I’m afraid that’s not a good sign.

We also had a Federal Reserve meeting this week. The central bank didn’t make any changes to interest rates, but Chairman Jerome Powell said that economic growth is “well below” where it was before the pandemic. The Fed has signaled that it will keep rates near 0% though 2022. It may even be longer.

But this week’s CWS Market Review is all about earnings. I’ll go over the seven earnings reports we got this week, and I’ll preview the batch coming next week. Let’s jump right in.

Our Latest Buy List Earnings Reports

Here’s our updated Earnings Calendar:

Company Ticker Date Estimate Result
Check Point Software CHKP 22-Jul $1.44 $1.58
Eagle Bancorp EGBN 22-Jul $0.74 $0.90
Globe Life GL 22-Jul $1.53 $1.65
Silgan SLGN 22-Jul $0.65 $0.85
Stepan SCL 22-Jul $1.20 $1.65
Danaher DHR 23-Jul $1.08 $1.44
Hershey HSY 23-Jul $1.13 $1.31
RPM International RPM 27-Jul $1.01 $1.13
AFLAC AFL 28-Jul $1.07 $1.28
Sherwin-Williams SHW 28-Jul $5.85 $7.10
Cerner CERN 29-Jul $0.61 $0.63
Intercontinental Exchange ICE 30-Jul $1.04 $1.07
Moody’s MCO 30-Jul $2.21 $2.81
Stryker SYK 30-Jul $0.55 $0.64
Church & Dwight CHD 31-Jul $0.63
Trex TREX 3-Aug $0.65
Disney DIS 4-Aug -$0.61
Ansys ANSS 5-Aug $1.16
Fiserv FISV 5-Aug $0.93
Middleby MIDD 5-Aug $0.41
Becton, Dickinson BDX 6-Aug $2.04
Broadridge Financial Solutions BR 11-Aug $2.09

Let’s start with RPM International (RPM). On Monday, RPM reported its fiscal Q4 earnings. This is for the quarter that ended on May 31. As I expected, due to Covid-19, the company had a tough quarter. Sales fell 8.9% but the breakdown was interesting. Sales were flat in the U.S. but down 25% internationally. While RPM withdrew its guidance, the company did say that it expected Q4 sales to fall 10% to 15%, so they beat that forecast.

Net income fell to 84 cents per share from $1.02 per share last year. However, once you exclude charges and investment losses, then quarterly income fell 8.9% to $1.13 per share. Even though results were down, it was still the second-best quarter in the company’s history. Wall Street had been expecting earnings of $1.01 per share.

RPM has a strong balance sheet and plenty of liquidity, so I’m hardly worried about their survival.

For the full year, RPM made $3.07 per share. That’s an increase of 13.3% over last year. Before the virus hit, RPM had been expecting full-year earnings to range between $3.30 and $3.42 per share.

For fiscal Q1, which ends next month, RPM expects net sales growth “in low single digits and adjusted EBIT growth of 20% or more.” RPM isn’t providing any full-year guidance yet.

After the earnings report, shares of RPM gapped up to a new 52-week high but pulled back later. I’m raising my Buy below on RPM to $90 per share. The company has raised its dividend every year since 1973.

On Tuesday, Sherwin-Williams (SHW) had a great earnings. For their fiscal Q2, the paint people earned $7.10 per share. That easily beat Wall Street’s estimate of $5.85 per share. Sales fell 5.6% to $4.60 billion.

For Q2, diluted net income increased to $6.48 per share. That’s up from $5.03 per share a year ago. However, there’s also 62 cents for “acquisition-related amortization expense.” That brings us up to $7.10 per share.

The best news is that Sherwin is increasing its full-year range to $19.21 to $20.71 per share which includes $2.54 per share in acquisition-related amortization expense. That previous range was $16.46 per share to $18.46 per share, including a $2.54 per share acquisition-related amortization expense. For Q3, the company sees net sales up or down in the low single digits.

This was an outstanding report. Sherwin also got to a new high this week. The stock has doubled since its March low. I’m raising our Buy Below to $700 per share.

Last week, I told you that AFLAC (AFL) should be able to beat earnings and the duck stock did just that. After the closing bell on Tuesday, AFLAC reported Q2 earnings of $1.28 per share. Total revenues were $5.4 billion which was down a bit from the $5.5 billion of one year ago.

Net income was $805 million or $1.12 per share. That’s up from $1.09 per share for last year’s Q2. With insurance companies, we always want to look at the adjusted earnings because investment gains and losses can have a big impact on net income. Adjusting for that brings us to $1.28 per share. Wall Street had been expecting $1.07 per share.

During Q2, the yen/dollar exchange rate averaged 107.65. That was 2.1% stronger than the average rate from last year’s Q2. That knocked off a penny per share in earnings so adjusted for currency, AFLAC’s earnings rose 12.4% to $1.27 per share.

AFLAC is usually pretty good at giving guidance, but they don’t have much to say this time, which is understandable. The CEO did say that AFLAC is committed to defending its dividend streak of 37 consecutive annual hikes. Clearly, the company is doing well. AFLAC remains a buy up to $37 per share.

On Wednesday, Cerner (CERN) reported fiscal Q2 earnings of 63 cents per share. The range Cerner had given was for earnings of 60 to 64 cents per share. Wall Street had been expecting 61 cents per share.

Overall, I’m pleased with these numbers. The healthcare-IT firm said that bookings were $1.34 billion, which was $100 million above the high-end of the company’s guidance. Quarterly revenue fell 7% to $1.43 billion. That was $10 billion below the company’s expected range.

For the quarter, Cerner had operating cash flow of $259 million and free cash flow of $64 million. Total backlog now stands at $13.66 billion.

Now for guidance. For Q3, Cerner expects revenue to range between $1.35 billion and $1.40 billion, and they expect full-year revenue between $5.45 billion and $5.55 billion. The latter range is a downgrade from their previous guidance.

For earnings, Cerner expects Q3 to range between 70 and 74 cents per share. For the whole year, they see earnings between $2.80 and $2.88 per share. The previous range was $2.78 to $2.90 per share. Wall Street had been expecting $2.83 per share.

At first, the shares dropped as much as 5.5% on Thursday, but the stock gained back some ground. I was pleased with these results even though the revenue forecast was a little light. I’m lifting our Buy Below on Cerner to $75 per share.

On Thursday, Intercontinental Exchange (ICE) reported Q2 earnings of $1.07 per share. That’s a 14% increase over last year. Revenues rose 8% to $1.4 billion. ICE’s operating margin is at 59%. Wall Street had been expecting earnings of $1.04 per share.

So far this year, ICE has bought back $1.1 billion of its stock and paid out $330 million in dividends. For Q3, ICE expects data revenues of $575 million to $580 million. ICE remains a buy up to $100 per share.

Stryker (SYK) had a tough quarter, but it still delivered an impressive profit. Quarterly sales fell 24%. Earnings fell 67.7% to 64 cents per share. Wall Street was looking for 55 cents per share.

Here’s the breakdown by Stryker’s three business segments. Orthopaedics had a net sales decline of 29.9%. MedSurg’s net sales dropped 17.3% and Neurotechnology and Spine dropped by 29.6%. It was bad all across the board.

Stryker is in a tough spot since the business environment is so poor for them. Still, it’s a solid and well-run outfit. I’m not worried about Stryker in the long term. Stryker remains a buy up to $200 per share.

Moody’s (MCO) had an outstanding quarter. The ratings agency earned $2.81 per share. That’s 60 cents per share more than what Wall Street had been expecting.

In fact, the results were so good that Moody’s significantly raised its earnings guidance. Moody’s now sees full-year earnings of $8.80 to $9.20 per share. That’s up from the previous forecast of $8.15 to $8.55 per share.

This was an outstanding quarter. Moody’s remains a buy up to $290 per share.

Six More Earnings Reports Next Week

Church & Dwight (CHD) reports later today. This has been a steady winner for us. Unfortunately, C&D withdrew its guidance, but Wall Street expects Q2 earnings of 63 cents per share. Church & Dwight actually benefited from the coronavirus outbreak, especially brands like Arm & Hammer and some hygiene products.

After that, we have six more earnings reports next week.

Trex (TREX) has been a huge winner for us this year. Through Thursday, it’s up 55.6% for us. In May, Trex blew past Wall Street’s forecast for Q1. The deck company made 73 cents per share, 12 cents more than the Street’s consensus estimate. Quarterly sales rose 12% to $200 million. Gross margin rose 620 basis points to 44.8%.

Trex has withdrawn its guidance but the company said it expects Q2 sales between $180 million and $190 million. Trex also halted all share repurchases. Their earnings report is due out on Monday. The Street consensus is for earnings of 65 cents per share.

If I went into a lab and designed a company to be impacted by the coronavirus, it would probably look a lot like Disney (DIS). The company is focused on movies, sports and travel. It even has a cruise line. All these businesses have suffered. Disney will bounce back, but it will take time. Disney reports on Tuesday. For Q2, Wall Street is looking for a loss of 61 cents per share.

Three more stocks are scheduled to report on Wednesday. Ansys (ANSS) had a solid report three months ago. The company made 83 cents per share which 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.

For Q2, Wall Street expects $1.16 per share.

Fiserv (FISV) is having a rare “off” year for us. So far, the stock is down 13% this year. The company only matched Wall Street’s earnings three months ago. The company has also withdrawn its guidance.

I did spot some encouraging signs in the last earnings report. For example, 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%.

Wall Street expects 93 cents per share for Q2. Only AFLAC and Fiserv have been on the Buy List for all 15 years.

In the CWS Market Review issue from May 15, I told you I like Middleby (MIDD) below $60 per share. Since then, the stock has rallied over 40%. If you’re betting on an economic recovery, Middleby is a good way to play it. At one point, Middleby was down 60% for us on the year. It’s also doubled off its low. The consensus is for earnings of 41 cents per share.

Becton, Dickinson (BDX) is due to report on Thursday. In May, Becton said it had earnings of $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.

Becton recently got a massive order for 177 million syringes and needles for COVID-19 vaccination programs. The company withdrew its 2020 guidance. For Q2, Wall Street expects $2.04 per share.

That’s all for now. Next week is the first week of the month and that’s when we get a lot of key economic reports. On Monday, the ISM Manufacturing Index comes out. Tuesday is factory orders. The ADP payroll report comes out on Wednesday. Thursday is another jobless-claims report. That leads us up to Friday and the July jobs 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 July 31st, 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.