CWS Market Review – October 30, 2020

“The best profits in the stock market are made by people who get long or short at extremes and stay for months or years before they take their profit.” – Charles Dow

This is certainly an eventful time on Wall Street. On Wednesday, the S&P 500 took its biggest plunge in four months. The drop that started in early September may not have gone away although we got a nice rebound on Thursday.

Right now, we’re right in the heart of earnings season. We had eight Buy List stocks report earnings this week, and the ninth will come later today. We’ve had some impressive results so far. Sherwin-Williams beat estimates by 54 cents per share. The paint folks also raised full-year expectations. (I love it when that happens.)

Moody’s absolutely crushed Wall Street’s forecast (as I predicted in last week’s issue) and raised guidance as well. Stryker, the bone people, also blew past earnings.

So far, all of our stocks except one have beaten expectations. The sole exception, Globe Life, merely met expectations. In this week’s issue, I’ll go over all of this week’s earnings reports. I’ll also highlight the five more we have coming next week.

Before I get to that, I want to briefly mention Thursday’s historic GDP report.

Strongest GDP Report on Record

On Thursday, the government said that the U.S. economy grew in the third quarter at an annualized rate of 33.1%. That’s not merely the best on record (the data goes back more than seven decades), but it’s twice as strong as the second-best quarter.

Of course, it’s not the case that the economy is buzzing along. Far from it. Rather, this is the economy snapping back from being shut down during the second quarter. For the second quarter, the economy shrank at an annualized rate of 31.4%.

So just as the stock market did in March and April, we’re bouncing off a sharp low. The good news is that we’ve gained back some lost ground. The bad news is that there’s still a long way to go.

We did get some good news on Thursday when the initial-jobless claims report came in at 751,000. That’s better than I had expected. Wall Street had been expecting 778,000. The trend of lower claims reports seemed to have stalled out, but that could be over. This week’s report is a good sign.

Eight Buy List Earnings Reports

Now let’s get to earnings because there are a lot. Here’s an updated look at our Earnings Calendar:

Stock Ticker Date Estimate Result
Eagle Bancorp EGBN 21-Oct $0.81 $1.28
Globe Life GL 21-Oct $1.75 $1.75
Silgan SLGN 21-Oct $0.95 $1.04
Stepan SCL 21-Oct $1.40 $1.56
Check Point Software CHKP 22-Oct $1.53 $1.64
Danaher DHR 22-Oct $1.36 $1.72
AFLAC AFL 27-Oct $1.13 $1.39
Fiserv FISV 27-Oct $1.16 $1.20
Sherwin-Williams SHW 27-Oct $7.75 $8.29
Cerner CERN 28-Oct $0.71 $0.72
Church & Dwight CHD 29-Oct $0.67 $0.70
Intercontinental Exchange ICE 29-Oct $0.99 $1.03
Moody’s MCO 29-Oct $2.10 $2.69
Stryker SYK 29-Oct $1.40 $2.14
Broadridge Financial Sol BR 30-Oct $0.63
Trex TREX 2-Nov $0.38
Ansys ANSS 4-Nov $1.26
Becton, Dickinson BDX 5-Nov $2.52
Middleby MIDD 5-Nov $1.04
Hershey HSY 6-Nov $1.71
Disney DIS 12-Nov -$0.68

On Monday, Sherwin-Williams (SHW) 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.

This is a classic example of a stock rallying strongly on anticipation of good news, then shrugging when the good news is finally announced. Sherwin-Williams is a good buy up to $720 per share.

After the bell on Tuesday, we got earnings reports from AFLAC and Fiserv.

In last week’s issue, I told you that AFLAC (AFL) should be able to beat Wall Street’s forecast, and I was right. For Q3, AFLAC’s earnings rose 19.8% to $1.39 per share. Wall Street had been expecting $1.13 per share. Interestingly, the yen/dollar exchange rate didn’t impact earnings.

The duck stock is managing itself well during a challenging time. AFLAC is usually pretty good at giving earnings guidance. For obvious reasons, they can’t now. The stock dropped after the earnings report, but I’m pleased with what I saw. Given the soggy stock, I’m dropping our Buy Below price to $37 per share. Don’t give up on the duck!

Fiserv (FISV) said it had Q3 earnings of $1.20 per share. That’s a 19% increase over last year. Wall Street had been expecting $1.16 per share.

For the quarter, free cash flow rose by 12%, and it’s up 13% for the year. Operating margin increased 3.1% to 32.9%. In terms of operations, Fiserv is having a good year, but the stock has been in a funk.

Fiserv now expects to see its earnings rise by 11% over last year. This will be their 35th year in a row of double-digit earnings growth. Let’s get mathy. Last year, Fiserv earned $4.00 per share, so an 11% earnings increase translates to full-year earnings of $4.44 per share.

For the first nine months of this year, the company made $3.12 per share. That implies Q4 guidance of $1.32 per share which matches Wall Street’s forecast. Fiserv remains a buy up to $107 per share.

After the closing bell on Wednesday, Cerner (CERN) reported Q3 earnings of 72 cents per share. Previously, Cerner said that it expected earnings of 70 to 74 cents per share, so they’re hitting that range.

Cerner had a good quarter. Operating cash flow was $382 million and free cash flow was $237 million. Total backlog now stands at $13.01 billion.

For Q4, Cerner expects revenue between $1.365 billion and $1.415 billion and earnings between 76 and 80 cents per share. That implies full-year earnings of $2.82 to $2.86 per share which is a narrowing of the previous forecast which was $2.80 to $2.88 per share. Wall Street had been expecting Q4 earnings of 78 cents per share. The bottom line is that Cerner is delivering as expected. Cerner is a buy up to $75 per share.

Thursday was another busy day with four Buy List earnings reports. Let’s start with 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 it 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.

The problem is that Church & Dwight beat earnings by more than the increase to guidance so that implies a softer Q4 than originally believed. I don’t think it will turn out that way, but the shares were soft in Thursday’s trading. Church & Dwight remains a buy up to $100 per share.

Intercontinental Exchange (ICE) has been doing great business lately. The exchange operator recently bought Ellie Mae, and the unit already added to the bottom line during Q3. For the quarter, ICE earned $1.03 which beat estimates by four cents per share.

Financial data revenue rose 6% to $589 million. That’s above their forecast of $575 million to $580 million. ICE’s operating margin runs at 57% which is amazing.

For guidance, the company covers lots of metrics except EPS. The key I like to watch is their forecast for data revenue. For Q4, ICE sees that as ranging between $590 million and $595 million. This is a good company. Intercontinental Exchange is a buy up to $110 per share.

In last week’s issue, I wrote “For Q3, Wall Street expects Moody’s to earn $2.10 per share. I think it will be a lot more.” I was right but even I was floored by Moody’s (MCO) quarter.

For Q3, the ratings agency earned $2.69 per share which creamed estimates by 59 cents per share. Wow. Moody’s Analytics, which is a key business for them, saw a revenue increase of 7% to $531 million.

Moody’s raised its full-year guidance range from $8.80 to $9.20 per share to $9.95 to $10.15 per share. I hope to have more details about Moody’s in upcoming issues. For now, I can say that all is well. Moody’s remains a buy up to $290 per share.

After the bell on Thursday, Stryker (SYK) reported very good numbers. For Q3, the orthopedics company earned $2.14 per share. That was up 12% over last year. Wall Street had been expecting earnings of $1.41 per share. That’s a very big earnings beat. Still, Stryker is down a bit on the year for us.

For the quarter, 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.

Due to the pandemic, Stryker can’t offer guidance for Q4. Stryker remains a buy up to $220 per share.

Broadridge Financial Solutions (BR) reports later today. For the new fiscal year, which began on June 30, Broadridge expects earnings growth of 4% to 10%. Since the company made $5.03 per share last year, that implies earnings this year between $5.23 and $5.53 per share.

Broadridge also recently hiked its dividend for the 14th year in a row.

Five Buy List Earnings Reports Next Week

Trex (TREX) is our #1 performer this year. Through Thursday, it’s up 59% this year for us. Trex also gave us a stock split a few weeks ago. The deck company is due to report earnings on Monday, November 2.

For Q3, Trex expects sales between $215 million and $225 million. The midpoint is a 13% increase over last year’s Q3. For earnings, Wall Street expects 38 cents per share.

Ansys (ANSS) id due to report on Wednesday, November 4. The company expects Q3 earnings of $1.10 to $1.34 per share on revenue between $347 million and $377 million. For the full year, Ansys sees earnings ranging between $5.75 and $6.35 per share on revenue of $1.570 billion to $1.645 billion. Ansys now has a backlog of $846 million. That’s up 18% from a year ago. We have a 20% gain this year with Ansys.

I haven’t been happy with Becton, Dickinson (BDX) this year. The company’s fiscal year ended in September so the coming earnings report is for their fiscal Q4. Becton will report on Thursday, November 5. A few weeks ago, Becton’s 15-minute coronavirus test got the green light in Europe.

Becton said it expects earnings for this year to come in between $9.80 and $10.00 per share. Since the company has already made $7.41 for the first nine months of this fiscal year, the guidance implies Q4 earnings of $2.39 to $2.59 per share.

Middleby (MIDD) had a terrible plunge earlier this year, but the stock is now up more than 140% from its low. After Middleby’s last earnings report, the stock jumped 16% on one day. The CEO said he saw more improvments in their business this summer. Interestingly, there’s strong demand from quick-serve and pizza restaurants. Such is the new world of Covid. Middleby also reports on Thursday. Wall Street expects $1.04 per share.

Tomorrow is Halloween which is a big time of year for Hershey (HSY). The chocolatier is due to report earnings next Friday. Three months ago, Hershey had a strong earnings report and the shares gapped higher.

The shares have been in an ugly mood lately. HSY has declined nine times in the last ten days. Thanks to the selloff, HSY yields over 2.5%. That beats a lot of fixed income. Wall Street expects Q3 earnings of $1.71 per share.

That’s all for now. The big news next week will obviously be the election. Don’t get too wrapped up in market movements based on the results. The talking heads are almost always wrong. The ISM report is due out on Monday. The ADP report comes out on Wednesday. Then on Friday, we’ll get the official October 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 October 30th, 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.