Archive for October, 2015

• Let’s Talk Consumer Stocks
  Eddy Elfenbein, October 30th, 2015 at 5:16 pm

• Update on Moog
  Eddy Elfenbein, October 30th, 2015 at 11:58 am

  In today’s newsletter, I indicated that Moog (MOG-A) would be reporting earnings later today. That doesn’t appear to be the case.

  Moog hasn’t yet said when they’ll report, but it’s usually on a Friday near the end of the month. I’m assuming the report will come out next Friday. I’ll update you as I learn more.

• CWS Market Review – October 30, 2015
  Eddy Elfenbein, October 30th, 2015 at 7:08 am

  “The stock market is a giant distraction to the business of investing.” – Jack Bogle

  Earnings season rolls on. We had six more Buy List earnings reports this week, and five of them beat expectations. Both AFLAC and Fiserv jumped to new 52-week highs. Fiserv also raised its full-year guidance—the stock is now a 36% winner on the year for us. AFLAC gave us a 5.1% dividend increase. The duck stock has now raised its payout for 33 years in a row!

  I’ll run down our earnings reports in a bit. The market wasn’t pleased with them all (like Ford), but as we all know, Wall Street can be a bit of a drama queen. That’s why I have Mr. Bogle’s timeless quote for this week’s epigraph.

  We also had a Fed meeting this week. Janet Yellen & Co. decided to hold off raising interest rates this time, but they suggested a rate hike might be coming in December. I’ll break it down for you.

  

  It’s been nearly a month since our “All Clear” signal, and Wall Street continues to surge higher. On Thursday, the S&P 500 touched a two-month intra-day high. The S&P 500 is about to close out its best month in four years (see the chart above).

  We also have two more earnings reports coming our way next week. I’ll give you a preview, plus I have some new Buy Below prices. But first, let’s look at what the Federal Reserve had to say.

  The Fed Hints at a December Rate Hike

  After sending us several signals over the summer that interest rates were about to go higher, a flurry of soggy economic data gave the Fed cold feet. I understand and, frankly, doing nothing was exactly what needed to be done.

  It wasn’t that long ago that Wall Street assumed the Fed would have raised rates by now. Instead, here we sit with rates close to 0%. But this week’s Fed statement gave us something to consider. The Fed specifically laid out the conditions by which they would raise rates in December.

  In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress—both realized and expected—toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor-market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.

  As you know, I’m well versed in the arcane and inscrutable language of Fedspeak, so I’m happy to translate. The Fed is saying that a December rate hike is on the table, but they want to see better numbers from the jobs reports. There will be two jobs reports between now and the next Fed meeting. The first one comes next Friday.

  The last two jobs reports have been, to use the technical term, kinda blah. Make no mistake, the jobs issue is the key to a rate hike. Sure, the Fed also mentioned inflation, but that’s hardly been an issue in recent months. Commodity prices have gotten clobbered this year.

  The Fed also threw in that bit about a “wide range of information.” That’s a catch-all just in case something goes kablooey like the Chinese surprise devaluation did in late August when the S&P 500 lost 7% in two days (7.0009%, to be precise).

  Here’s my take: If the next two jobs reports average 180,000 or more net new jobs, then you can expect a rate increase later this year. The futures market currently thinks there’s a 46% chance of a rate hike in December. That’s far from a sure thing, but futures traders had the odds at 6% one month ago.

  On Wednesday, Wall Street initially dropped after the Fed’s policy statement came out. Then traders rethought things, and the market rallied to close over 2,090 for the first time since August 18. Interestingly, bank stocks were especially strong (SBNY gained 4.4% on Wednesday). We can’t say for sure whether rates will go up next month, but now we know that the jobs market holds the key. That helps a lot. Now let’s look at our recent earnings reports.

  Ford’s “Bizarre” Stock Drop

  I’m a big fan of Ford Motor (F), and I’m very pleased that the company is hitting its stride. From my point of view, this week’s earnings report was very good. The automaker doubled its profits from a year ago. What could be wrong with that? Well, Ford earned 45 cents per share, which missed Wall Street’s consensus by two cents per share.

  As a result, the stock dropped 5% on Tuesday. Even Ford’s CFO said the stock’s drop was “bizarre.” He’s right. There’s nothing in Ford’s earnings report that should upset investors. Sales of the F-150 rose by 8%. The truck had its third-best quarter in nine years. Ford also “blew through” its estimates for sales and cash flow (to again quote the CFO).

  The reason for the earnings miss had nothing to do with Ford’s business. Instead, it was Ford’s estimate for its tax rate. The company had expected a tax rate of 34%. Instead it was 33%. Wall Street expected 32%. Yes, that’s what the earnings miss was all about.

  Ford maintained its full-year earnings forecast. It also said it expects profit margins in North America to be at the top of their range. Don’t let the sell-off confuse you. Ford is doing very well. In fact, I’m raising my Buy Below on Ford to $16 per share.

  33 Straight Dividend Increases for AFLAC

  After the closing bell on Tuesday, we got three more earnings reports. First, AFLAC (AFL) reported Q3 operating earnings of $1.56 per share, eight cents better than estimates. Remember that with insurance companies, it’s better to look at operating earnings rather then net earnings.

  The weak yen continues to be an issue for AFLAC. Last quarter, the weak yen knocked off 13 cents per share from their operating profit. Quarterly revenue fell 12.1% to $5 billion. Compared with last year’s Q3, operating earnings fell from $685 million to $672 million. But thanks to share buybacks, operating earnings per share rose by 3.3%. Ignoring the yen, operating earnings per share increased by 11.9%. For the first nine months of the year, operating earnings came to $4.60 per share, but AFLAC lost 40 cents due to the yen. Excluding that, operating earnings were up 2.9%.

  The company has been gobbling shares at an impressive rate. So far this year, AFLAC has repurchased 17.4 million shares for $1.1 billion, and it still has 52.1 million shares left under the current buyback plan.

  The board approved raising the quarterly dividend from 39 to 41 cents per share. That comes to $1.64 per share for the year, or 2.5%, based on Thursday’s closing price. There aren’t many companies that have raised their dividend every year for one-third of a century.

  Now let’s look at the guidance. AFLAC said that if the yen stays between 120 and 125 on the dollar, then they expect Q4 operating earnings to range between $1.36 and $1.56 per share. That translates to a full-year range of $5.96 to $6.16 per share.

  My view is that AFLAC is an excellent company, but it’s operating in a very difficult environment. Yields are low and the yen is weak, but the business remains very healthy. I like this report. The stock is up 25% from its August low. This week, I’m raising our Buy Below on AFLAC to $67 per share.

  Fiserv Is a Buy up to $103 per Share

  Also on Tuesday, Fiserv (FISV) reported third-quarter earnings of $1.03 per share. That beat estimates by six cents per share, and it’s up from 86 cents per share one year ago. Fiserv is probably one of the most consistently superior stocks you’ll ever find. It’s been on our Buy List every year for the last ten years, and it’s been a home run for us. Check out this ten-year chart:

  

  For the first nine months of the year, Fiserv has made $2.86 per share. That’s up from $2.48 per share last year. Fiserv also raised its full-year guidance. The old range was $3.73 to $3.83 per share, and the new range is $3.84 to $3.87 per share. The new range implies Q4 earnings of 98 cents to $1.01 per share.

  On Wednesday, FISV jumped as high as $97.42. It’s now a 36.3% winner on the year for us. I’m raising our Buy Below on Fiserv to $103 per share.

  The other Tuesday report was from Express Scripts (ESRX). The company reported third-quarter earnings of $1.45 per share which was one penny better than estimates. The pharmacy-benefits manager also narrowed its full range. Previously, it was $5.46 to $5.54 per share. Now it’s $5.51 to $5.55 per share. Last year, ESRX made $4.88 per share.

  Since ESRX has already earned $3.97 per share for the first three quarters of this year (up from $3.50 per share last year), the new guidance implies Q4 earnings of $1.54 to $1.58 per share.

  Perhaps the bigger news for Express this week was that Walgreens (WBA) said it’s buying Rite Aid (RAD) for $17.2 billion (all cash). Shares of ESRX dipped because it wasn’t them. That’s probably more of a blessing than a curse. Express Scripts remains a buy up to $92 per share.

  Earnings from PayPal and Ball Corp.

  In last week’s issue, I told you I expected an earnings beat from PayPal (PYPL), and that’s exactly what we got. After the closing bell on Wednesday, PayPal reported Q3 earnings of 31 cents per share which was two cents better than estimates. This is their first report after detaching themselves from eBay (EBAY).

  For the full year, the payment-processing place said it expects earnings to range between $1.23 and $1.27 per share. That sounds pretty good to me. Wall Street had been expecting $1.25 per share.

  In the after-hours session, the shares went from being up 4% to down by 5%. This is a good reminder not to be overly concerned with after-hours moves (remember that Bogle quote). The shares closed down 1.7% on Thursday. I’m raising the Buy Below on PayPal to $38 per share.

  On Thursday morning, Ball Corp. (BLL) reported Q3 earnings of $1.10 per share. That topped estimates by 15 cents per share. That’s a hefty earnings beat. Revenues, however, fell 6.3% to $2.1 billion. It’s not just AFLAC; Ball got dinged by 11 cents per share thanks to currency.

  Importantly, Ball said the merger with Rexam is going as expected. They hope to close the deal in the first half of next year. I’m raising my Buy Below on Ball to $70 per share.

  Two More Buy List Reports Next Week

  We have our final two Buy List reports coming next week. Both Qualcomm (QCOM) and Cognizant Technology Solutions (CTSH) are due to report on Wednesday, November 4.

  Three months ago, Cognizant tore the roof off with its Q2 earnings report. The IT outsourcer beat its own earnings target by seven cents per share, and quarterly revenue rose by 22.6%.

  Cognizant also raised its full-year guidance from earnings of at least $2.93 per share to earnings of at least $3 per share. (CTSH is big fan of using “at least” with its forecasts.) For Q3, they expect earnings of at least 75 cents per share on revenue or at least $3.14 billion. Guess what? They’ll beat both numbers.

  I won’t mince words: Qualcomm has been a lousy stock for us this year. It’s our second-worst performer, with a 19.3% loss. For this earnings report, the chip maker said to expect earnings between 75 and 95 cents per share. Frankly, I’m not expecting much. Some activist shareholders have been pressing Qualcomm to split itself up. I think that’s a good idea. The only thing I can say in QCOM’s favor is that it’s not terribly expensive, and the shares have bounced recently.

  I also want to touch on Moog (MOG-A) which is due to report later today. I had been quite negative on the stock earlier this year, but I’m starting to reconsider. It’s true: Moog’s had a rough year, but I think that’s mostly behind them. We’ll get a better sense in this earnings report. I’m not going to change the Buy Below yet on Moog, but I probably will once I see the earnings report. This is one to watch.

  That’s all for now. We have a few more earnings reports next week. We’ll also get some of the key turn-of-the-month economic reports. The ISM Index comes out on Monday. The last few reports have been weak. Auto sales are on Tuesday. Ford has been putting out solid numbers here. The ADP jobs report is on Wednesday. Then on Friday is the big October jobs report. The recent Fed statement puts this report at center stage. 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

• Morning News: October 30, 2015
  Eddy Elfenbein, October 30th, 2015 at 7:03 am

  Russia Holds Benchmark Rate for Second Month on Inflation

  RBS Reports Drop in Third-Quarter Profit, Missing Estimates

  The Long Shadow of Europe’s Big Banks

  U.S. Avoids Debt Default as Congress Passes Fiscal Plan

  Are You About to Lose $50,000 in Future Social Security Benefits?

  Valeant Says It’s Cutting Ties With Troubled Pharmacy Philidor

  KeyCorp Agrees to Buy First Niagara in $4.1 Billion Deal

  Pfizer, Allergan Drug Merger Talks Raise Tax Hackles in U.S.

  Time Warner Cable and Charter Chiefs Expect Delay in Merger

  AB InBev Net Profit Hit by Currencies; Underlying Revenue Up

  China Signs $17 Billion Deal to Buy 130 Airbus Planes

  Baidu Profit Falls 27% as Costs Surge

  LinkedIn Beats Estimates And Raises Forecast; Shares Soar

  Joshua Brown: It’s What the Fed Didn’t Say That Counts

  Roger Nusbaum: Back to Bodie and the 10/90 Portfolio?

  Be sure to follow me on Twitter.

• Ball Corp Earned $1.10 per Share
  Eddy Elfenbein, October 29th, 2015 at 3:16 pm

  Before the opening bell, Ball Corp. (BLL) reported Q3 earnings of $1.10 per share. That topped estimates by 15 cents per share. Revenues, however, fell 6.3% to $2.1 billion.

  “Results from operations and global metal packaging volumes were in line with our expectations for the quarter. Foreign currency translation headwinds and project start-up costs both continued, the impact of which totaled 11 cents in the third quarter and 45 cents year-to-date, including net aluminum premium impacts and director retirement costs,” said John A. Hayes, chairman, president and chief executive officer.

  (…)

  “Our third quarter was largely consistent with our expectations given anticipated currency translation and start-up cost headwinds. The difficult year-over-year volume comparisons and aluminum premiums headwinds are behind us and existing growth capital projects will provide momentum as we move into 2016,” Hayes said.

  Importantly, Ball said the merger with Rexam is going as expected. They hope to close the deal in the first half of next year. The shares are down about 1% today.

• Q2 GDP = +1.5%
  Eddy Elfenbein, October 29th, 2015 at 1:44 pm

  This morning, the government reported on economic growth for the third quarter, and it was a mediocre 1.5%. That was slightly below expectations.

  Q2 had impressive GDP growth of 3.9%. I’ve mentioned before that we’ve had individual quarters that were good, but we haven’t been able to get a run of two or three good quarters in a row. So Q2’s good number was followed by a blah one for Q3. One bright spot is that personal consumption expenditures rose by 3.2%.

  Q3 was also the end of the government’s fiscal year. We now know that GDP for the fiscal year was $17.803 trillion (this will be revised again and again).

  We also have the budget numbers as a percentage of GDP. Last fiscal year, Uncle Sam’s outlays came to 20.71% of GDP. Revenues were 18.25% and the deficit was 2.47%. The deficit as a percentage of GDP is the lowest since 2007. Revenues are the highest since 2001. Spending rose last year after falling for five straight years.

  As of September 30, federal debt held by the public as a percentage of GDP fell to 72.76%. That number has basically stabilized since Q1 2013. After 2018, the debt and deficits are projected to start rising.

• Morning News: October 29, 2015
  Eddy Elfenbein, October 29th, 2015 at 7:11 am

  Li Floats New China Five-Year Growth Minimum of Around 6.5%

  Yen Strengthens as Hopes for BOJ Easing Dim

  America’s Merchandise Trade Gap Shrinks to Seven-Month Low

  Luxury Market Seen Heading for Weakest Year Since Lehman Crash

  Deutsche Bank to Shrink Workforce by About 26,000 in Revamp

  Sony Returns Profit in Second Quarter as Revival Takes Hold

  Low Oil Prices Take a Toll on Royal Dutch Shell

  Time Warner Cable Profit Tops Estimates on Internet Additions

  Walgreens Store Sales Seen as Hurdle for Rite Aid Deal Approval

  U.A.W. Leaders Approve Proposed G.M. Contract

  Alibaba Mirrors the Fits and Starts Rise of China’s New Economy

  Pfizer and Allergan Begin Merger Talks

  Nokia to Return $4.4 Billion to Shareholders

  Howard Lindzon: Alibaba and the Forty CNBC Talking Heads …and Self Regulation

  Cullen Roche: The Fed is Navigating Global Uncertainty Well (So Far)

  Be sure to follow me on Twitter.

• PayPal’s Q3 = 31 Cents per Share
  Eddy Elfenbein, October 28th, 2015 at 4:20 pm

  After the bell, PayPal (PYPL) reported Q3 earnings of 31 cents per share. This is the first report detached from eBay (EBAY).

  “PayPal is entirely focused on digital payments and transforming money for people around the world. This clear focus and our strong value proposition allowed us to deliver strong financial results in the third quarter,” said Dan Schulman, President and CEO of PayPal. “We are operating in a time when change is sweeping through the financial services industry driven by the rise of mobile technology and the acceleration of money becoming digital. These two massive trends play directly to our strengths and we are leveraging this transformation to extend and accelerate our lead.”

  For the full-year, PYPL expects earnings to range between $1.23 and $1.27 per share. Wall Street had been expecting $1.25 per share. In the after-hours session, the shares went from being +4% to -5%.

• Today’s Fed Statement
  Eddy Elfenbein, October 28th, 2015 at 2:40 pm

  As expected, the Fed didn’t raise interest rates. We’re still near 0%. The Fed noted, correctly, that the economy has been slightly weaker recently.

  But the big news from today’s statement is that the Fed addressed the topic for the next meeting, which is in December, and what would lead them to raise rates then.

  Basically, the Fed is saying that it’s ready to raise rates but it wants to see “some further improvement” in the jobs market. See the third paragraph below.

  We’ll get two more jobs reports before the Fed’s next meeting. The October jobs report is due out on November 6. The November report will be out at the beginning of December.

  The market is interpreting this as a hawkish statement so we’re seeing all the typical action one would expect. The dollar and bank stocks are up, commodities are down. Utility stocks and emerging markets are down as well.

  The S&P 500 had been as high as 2,084.52 just before the statement. We’re currently at 2,071. Here’s the Fed’s statement:

  Information received since the Federal Open Market Committee met in September suggests that economic activity has been expanding at a moderate pace. Household spending and business fixed investment have been increasing at solid rates in recent months, and the housing sector has improved further; however, net exports have been soft. The pace of job gains slowed and the unemployment rate held steady. Nonetheless, labor market indicators, on balance, show that underutilization of labor resources has diminished since early this year. Inflation has continued to run below the Committee’s longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation moved slightly lower; survey-based measures of longer-term inflation expectations have remained stable.

  Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring global economic and financial developments. Inflation is anticipated to remain near its recent low level in the near term but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.

  To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.

  The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

  When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

  Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams. Voting against the action was Jeffrey M. Lacker, who preferred to raise the target range for the federal funds rate by 25 basis points at this meeting.

• Fiserv Jumps to New High
  Eddy Elfenbein, October 28th, 2015 at 12:49 pm

  Fiserv (FISV) has been such a great performer for us for so long, I sometimes forget how much it’s helped us. Thanks to another great earnings report, the stock is at another new high. Fiserv has been on our Buy List all ten years.