CWS Market Review – October 16, 2020

“The best time to invest is when you have money.” – John Templeton

It’s the time of year for witches, tricks, black magic, hexes and sorcery. That’s right, it’s Q3 earnings season.

Over the next weeks, most of Corporate America will report how well it did during July, August and September. Or perhaps, how well it didn’t do.

We’ve already gotten our first look at some earnings reports. The big banks usually go first, and the results look pretty good. Goldman Sachs, for example, beat Wall Street’s consensus by more than 70%. For the moment, the big banks aren’t allowed to raise their dividends or buy back stock. I think that regulation may be lifted early next year. (Eagle is a small fry, so that’s why it was able to resume its buybacks.)

The stock market had a strong day on Monday but lost ground on Tuesday, Wednesday and Thursday. The folks in Washington seem hopelessly deadlocked on any stimulus deal. It looks like whatever happens, it will come after the election. There are also some concerns of a coronavirus spike in Europe.

I’m pleased to see that our Buy List is holding up well. Since the market peaked on September 2, the S&P 500 has fallen 2.72%, while our Buy List is down just 0.20%. That tells me the high-quality stocks are serving as a safe harbor for nervous investors.

In this week’s issue, I’ll preview the first six of our Buy List stocks that are due to report earnings next week. I’m expecting good results. Last earnings season, every single Buy List stock beat earnings except one, and they reported inline.

Later on, I’ll discuss the big reorganization announcement from Disney. The Mouse House is apparently following after Netflix. I’ll tell you what it all means. But first let’s take a look at our updated Earnings Calendar.

Updated Buy List Earnings Calendar

Here’s a look at our upcoming Q3 earnings. I’ve listed each stock, its earnings date and Wall Street’s consensus. I’m still waiting to hear when Middleby and Broadridge will report. Both will probably report sometime in early November.

Stock Ticker Date Estimate Result
Globe Life GL 21-Oct $1.75
Silgan SLGN 21-Oct $0.95
Stepan SCL 21-Oct $1.40
Check Point Software CHKP 22-Oct $1.53
Danaher DHR 22-Oct $1.36
Eagle Bancorp EGBN 22-Oct $0.81
AFLAC AFL 27-Oct $1.13
Fiserv FISV 27-Oct $1.16
Sherwin-Williams SHW 27-Oct $7.75
Cerner CERN 28-Oct $0.71
Church & Dwight CHD 29-Oct $0.67
Intercontinental Exchange ICE 29-Oct $0.99
Moody’s MCO 29-Oct $2.10
Stryker SYK 29-Oct $1.40
Trex TREX 2-Nov $0.37
Ansys ANSS 4-Nov $1.26
Becton, Dickinson BDX 5-Nov $2.52
Hershey HSY 6-Nov $1.70
Disney DIS 12-Nov -$0.71
Broadridge Financial Sol BR TBA $0.63
Middleby MIDD TBA $1.02

Six Buy List Earnings Previews

We have six Buy List stocks due to report next week: three on Wednesday and three more on Thursday.

In July, Globe Life (GL) reported fiscal-Q2 operating earnings of $1.65 per share. That beat expectations of $1.53 per share. The company also narrowed its operating income guidance for this year. The previous range was $6.65 to $7.25 per share. Now Globe Life sees earnings ranging from $6.80 to $7.04 per share.

If Globe Life’s outlook is correct, that means the shares are going for less than 12 times earnings. This tends to be one of the most stable stocks in our portfolio. GL is currently down 21% for us this year. It’s been dragged down with most of the financial sector. For Q3, Wall Street expects $1.75 per share.

Silgan (SLGN) has been an impressive stock for us this year. I’m almost always surprised when I see which stocks are our big winners each year.

For Q2, the metal-container folks earned 85 cents per share. That beat expectations by 20 cents per share. This was the strongest quarter in the company’s history. Net sales were up by 7.6% to $1.18 billion. The stock popped on the news (see July in the chart below).

Silgan also did something very rare for 2020. The company increased guidance. Silgan now sees full-year earnings of $2.70 to $2.85 per share. Silgan also increased its free-cash-flow estimate for this year from $275 million to $330 million. For Q3, Wall Street expects Silgan to report earnings of 95 cents per share.

Stepan (SCL), our favorite chemical company, had a blow-out earnings report for Q2. The company raked in $1.65 per share. That beat estimates by 45 cents per share. The consensus for next week’s report is for $1.40 per share. Shares of Stepan are within 4% of a new 52-week high. The company has increased its dividend for the last 52 years in a row.

Check Point Software (CHKP) is due to report next Thursday. Three months ago, the Israeli cyber-security company reported Q2 earnings of $1.58 per share. That beat expectations by 14 cents per share.

The numbers were pretty good. Quarterly revenue rose 4% to $506 million. Wall Street had been expecting $488 million. Cash flow from operations increased by 8% to $252 million. During Q2, Check Point bought back 3.1 million shares for a total cost of $325 million. The company continues to have a solid balance sheet, which is something I like to see.

Interestingly, Check Point said that cyber-attacks have increased during the pandemic. In May, the company documented 192,000 coronavirus-related cyber-attacks a week.

On Thursday, Check Point snapped a six-day winning streak. For next week, Wall Street expects earnings of $1.53 per share.

Danaher (DHR) has become a very big winner for us this year. The stock hit a new 52-week high earlier this week. At Thursday’s close, DHR is up 47% for us this year. On our Buy List, that’s second only to Trex (TREX), which is up 74% this year.

Three months ago, Danaher said that Q2 earnings increased 32% to $1.44 per share. Wall Street had been expecting $1.09 per share. Revenue increased 19% to $5.3 billion.

For Q3, Danaher sees revenue growth “in the mid- to high-single digit range.” CEO Thomas P. Joyce, Jr., said, “We are very pleased with our second-quarter results—especially in such a challenging environment. Our solid revenue growth, strong cash-flow generation and more than 30% adjusted EPS growth are a testament to our team’s commitment to the Danaher Business System and the outstanding portfolio of businesses that comprise Danaher today.”

Shares of Danaher have drifted above our $212 Buy Below. I’ll probably adjust it next week, but I want to see the earnings report first.

Eagle Bancorp (EGBN) is also set to report next Thursday. We’ve been very patient with this one, and it looks like the story is finally turning in our favor. To recap, as a bank Eagle is a well-run outfit. The problem is that possible scandals by previous management have inflated its lawyer bills and depressed the stock.

The stock is currently going for about nine times this year’s earnings, and that’s after a nice rally. In one eleven-day stretch, Eagle rallied over 21%. The bank recently said it’s reinstating its share-buyback program. During Q1, the bank halted all share buybacks. Eagle wasn’t alone. A lot of companies did this at the start of the pandemic.

Through the end of this year, management has been authorized to buy as much as 5% of Eagle’s outstanding shares. As of Jun 30, Eagle had 460,000 shares remaining under the buyback authority.

Only five analysts have estimates for Q3. The consensus is for Eagle to report earnings of 81 cents per share. At its current share price, Eagle yields just under 3%.

What to Make of Disney’s Reorg

Last week, Dan Loeb called on Disney (DIS) to suspend its dividend. Loeb is a well-known activist investor. Currently, Disney pays a semi-annual dividend of 88 cents per share each July and December. The company skipped its dividend this summer.

An annual dividend of $1.76 per share works out to over $3 billion per year. Loeb wants Disney to put that cash into its streaming service.

But through it all, Disney’s streaming business has been a notable success story. After making its debut last November, Disney+ had 60.5 million subscribers worldwide by August—well ahead of analysts’ and Disney’s own forecasts. Its other offerings are Hulu, with 36 million, and ESPN+, with 9 million. Next year, Disney is also planning to add an international streaming service similar to Hulu, to be called Star.

Barron’s pointed out that this is the opposite of what activist investors usually do. They’re known for pursuing short-term profits at the expense of long-term financial health. This time, Loeb is looking at the long term.

I understand Loeb’s thinking, but I think he’s premature. In my view, it all comes down to Covid-19. If a vaccine comes out tomorrow, then Disney’s troubles go away. Disney is a company almost perfectly made to be impacted by the coronavirus.

Relatedly, I floated the idea on Twitter recently of Disneyland leaving California. Most Twitterers responded by saying this was a farfetched idea. Probably so. Still, the mess of Covid has allowed people to rethink what their businesses are about, and unthinkable options are now thinkable.

Disney is in the hot seat after announcing that it’s laying off 28,000 workers. Senator Elizabeth Warren, for example, criticized Disney for laying off employees while protecting executive salaries. To be fair, Disney has continued healthcare benefits to furloughed employees.

The big news this week is that Disney announced a major reorganization. The company is “centralizing its media businesses into a single organization that will be responsible for content distribution, ad sales and Disney+.” In my opinion, this is a reflection of the importance of streaming to Disney’s business. The company, in many ways, is shifting towards a business model of a company like Netflix. Kareem Daniel will be in charge of the new media and entertainment distribution group.

The announcement worked. Shares of Disney popped 3.7% on the news. I think investors like the idea of owning the “next Netflix,” and Disney getting an earnings multiple like Netflix. Still, this doesn’t solve Disney’s major near-term headache of being overly reliant on travel and sports—in other words, the things most impacted by Covid. The reorg is a provocative move, but don’t let it mislead you as to where Disney’s major concerns are.

Disney is due to report Q3 earnings on November 12, and investor day is on December 10.

That’s all for now. Next week will be dominated by earnings. On Monday, we’ll get the NAHB homebuilder’s index. Then on Tuesday, housing starts and building permits are reported. On Thursday, the existing-home sales report comes out. Also on Thursday, we’ll get another jobless-claims report. The last one came in at 898,000. 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 16th, 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.