Archive for December, 2015

• Strong Guidance from Express Scripts
  Eddy Elfenbein, December 22nd, 2015 at 10:01 am

  Express Scripts (ESRX) said it sees earnings next year ranging between $6.08 and $6.29 per share. Wall Street had been expecting $6.04 per share.

  “Our focused model of alignment has positioned us uniquely in the healthcare services landscape to improve health outcomes and lower costs for our clients and patients,” said George Paz, CEO and chairman of Express Scripts. “No one matches our focus on serving clients and patients and we remain confident in our continued growth and returning exceptional results to our shareholders.”

  “The fundamentals of our business allow us to deliver solid financial results while making investments to continue our growth as a leading independent PBM and healthcare provider,” said Tim Wentworth, President. “We have an aligned book of business and a deep set of innovative solutions to help clients and patients. As we create value for our patients and clients, we create value for our shareholders.”

  Express also reiterated its guidance for 2015 for growth of 13% to 14%. That’s what they said with the last earnings report when they also gave a full-year range of $5.51 to $5.55 per share.

  The stock looked like it was going to gap higher today but is now down about 1%,

• Q3 GDP Revised down to 2.0% Growth
  Eddy Elfenbein, December 22nd, 2015 at 9:02 am

  The government revised lower its estimate for Q3 GDP growth. They now say that the economy grew at a real rate of 2.0% during the third quarter. Last month, they revised the initial report of 1.5% growth up to 2.1%.

  The July through September reading marks a sharp slowdown from the second quarter’s 3.9% rate of expansion, reflecting the drag from inventory drawdown and a deceleration in consumer and business spending.

  The reading suggests 2015 is on track to close out another year of steady if unspectacular growth, bolstered by a firming job market, strong home sales and pockets of wage increases. But headwinds remain: Despite low gasoline prices, consumer spending has been muted throughout the year. Weakness in overseas economies, a strong dollar and low oil prices have weighed on the manufacturing, mining and energy sectors at home, damping business investment and exports and causing thousands of layoffs.

  What I think is interesting is that real GDP has grown by a fairly constant rate over the last six years. The trend is slightly over 2%, and last quarter matched it almost perfectly.

• Morning News: December 22, 2015
  Eddy Elfenbein, December 22nd, 2015 at 7:08 am

  Qatar National Bank to Buy Turkey’s Finansbank for $3 Bilion

  Puerto Rico Deal Is Only a Small Fix for $70 Billion Debt Crisis

  High-Volume Online Shopping is Putting a Strain on Shipping Firms and Causing Delays

  Deutsche Bank Tally of Suspect Russia Trades at $10 Billion

  An In-Depth Analysis of Plans for an Amazon Airline

  2016 Will Be The Dawn of the Drone Age

  Yamana Gold – Brio Is Not So Shiny After All

  NetApp to Acquire SolidFire

  Staples-Office Depot Merger Dealt Another Setback

  Southwest Airlines Agrees to Penalty Over Jet-Fix Problems

  Caterpillar Ordered to Pay $73.6 Million for British Firm Design Theft

  The One Brazilian Scandal Almost No One Is Talking About

  A Little More Inflation Would Be Good for Everyone

  Roger Nusbaum: The FOMC Awakens

  Jeff Carter: Physical Versus Virtual

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• Some Context
  Eddy Elfenbein, December 21st, 2015 at 9:23 pm

  I wanted to put the Fed’s rate hike in a little context. Here’s the Fed funds rate along with the 10-year yield.

• Good Discussion on Credit Markets
  Eddy Elfenbein, December 21st, 2015 at 1:54 pm

• Microsoft on Barron’s
  Eddy Elfenbein, December 21st, 2015 at 11:55 am

  This weekend’s Barron’s had some kind words for Satya Nadella and his leadership of Microsoft (MSFT). The company’s turnaround has been impressive. I encourage you to read the whole thing but I wanted to highlight this section which argues that analysts maybe underestimating MSFT’s earnings potential:

  For the present, however, investors are still treating Microsoft like a traditional software company. The stock trades at 19.5 times fiscal 2016 earnings estimates, versus 80 for cloud-based Salesforce.com (CRM). And the forecasts are conservative. Analysts expect Microsoft’s sales and profits to be flat this year at $93 billion and $22 billion, respectively. Boosted by an aggressive buyback program, earnings per share could still grow 5%. Wall Street expects EPS to rise another 13% in fiscal 2017, to $3.13.

  Moerdler is far more bullish. He says that $3.84 is more likely in fiscal 2017 and that analysts are underestimating the growth of Azure and overlooking Microsoft’s Office transition.

  The Street’s more conservative numbers are an opening for stock gains. “It creates a big opportunity for Microsoft to ‘beat and raise,’ ” says Moerdler. Indeed, the stock jumped 10% in October after Microsoft reported September-quarter EPS of 67 cents, versus a 58-cent estimate. In April, Microsoft also gained 10%, on a better-than-expected quarter.

  Aside from Azure, analysts are also missing the boat on Office, the popular productivity software that includes Word, Excel, PowerPoint, and Outlook. Office has been moving to a subscription model called Office 365, which already has 18 million consumer subscribers. About a quarter of the company’s corporate users have transitioned to the program, too.

  (…)

  By some math—counting the subscription Office business, Skype, Xbox, and Azure—Microsoft is already the world’s largest cloud company, with annualized revenue close to $10 billion. Microsoft has said its “commercial cloud”—Azure plus commercial Office and other business applications—will be a $20 billion annual business by 2018.

  Bullish Microsoft investors, including Bonavico, think the opportunity is best viewed through the lens of free cash flow. Free cash accounts for the fact that, with subscriptions, the recognition of revenue trails the actual receipt of cash. David Pearl, co-chief investment officer at Epoch Investment Partners, thinks Microsoft will generate $3.49 in free cash flow in 2017 and $3.98 by 2018. At 18 times, he gets to a price of $72 in less than two years. And that’s without giving Microsoft any credit for the roughly $8 in net cash per share on its balance sheet. Epoch, which has $42 billion in assets, owns Microsoft stock worth $830 million.

  Microsoft’s fiscal year ends in June, but we can translate their earnings into calendar year figures. The company will probably earn about $2.60 per share for 2015 which is up from $2.48 per share last year. However, that can ramp up to $2.92 per share for calendar year 2016. Their earnings have basically flatlined for the past few years but now appear to be heading upward.

• Morning News: December 21, 2015
  Eddy Elfenbein, December 21st, 2015 at 5:29 am

  The Big Short Was Only One Reason 2015 Was The Year of the Bears

  Brent Oil Slides to 11-Year Low as Producers Seen Worsening Glut

  Yellen Says Economic Expansions Don’t Die of Old Age. Neither Do Bull Markets

  Toshiba Sees Record $4.5 Billion Loss, Plans More Job Cuts

  China Vanke Moves to End Potential Takeover Battle Within Weeks

  Pandora Sees 7.5% Drop Day After CRB-Driven Surge; Analysts Positive on New Rates

  ’Star Wars: The Force Awakens’ Shatters Box Office Records

  Regulations, Doubts and Concerns May Thwart Railway Mergers

  Indonesia, Already Squeezed, Braces for Higher Interest Rates

  Puerto Rico Deal Is Only a Small Fix for $70 Billion Debt Crisis

  Panasonic to Buy Refrigeration Firm Hussmann for Over $1.2 billion

  Martin Shkreli Says Drug Price Hikes Led to Arrest

  Howard Lindzon: Martin Shkreli…Just Another Putz.

  Jeff Miller: A Parade of Pontificating Pundits

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• CWS Market Review – December 18, 2015
  Eddy Elfenbein, December 18th, 2015 at 7:08 am

  “The expectation of an event creates a much deeper impression
  on the exchange than the event itself.” – Jose de la Vega, 1688

  Ladies and gentlemen, here’s the 2016 Crossing Wall Street Buy List.

  AFLAC (AFL)

  Alliance Data Systems (ADS)

  Bed Bath & Beyond (BBBY)

  Biogen (BIIB)

  Cerner (CERN)

  Cognizant Technology Solutions (CTSH)

  CR Bard (BCR)

  Express Scripts (ESRX)

  Fiserv (FISV)

  Ford (F)

  HEICO (HEI)

  Hormel Foods (HRL)

  Microsoft (MSFT)

  Ross Stores (ROST)

  Signature Bank (SBNY)

  Snap-on (SNA)

  Stericycle (SRCL)

  Stryker (SYK)

  Wabtec (WAB)

  Wells Fargo (WFC)

  The five new stocks are Alliance Data Systems, Biogen, Cerner, HEICO and Stericycle. I’ll have more to say about them next week. Don’t worry, I’ll go into full detail. I’ll also explain why I’m removing the deletions.

  The six deletions are Ball, eBay, Moog, Oracle, PayPal and Qualcomm. Remember that we have an extra stock leaving this year due to the PayPal spinoff.

  To recap, I assume the Buy List is equally weighted among the 20 stocks. The buy price for each stock will be the closing price as of December 31, 2015. The new Buy List goes into effect on January 4, 2016, the first day of trading of the new year.

  The Buy List is now locked and sealed, and I won’t be able to make any changes for the entire year. I’ll have a complete recap of 2015 at the end of the year. I’ll also have more to say about our new buys, and I’ll give you new Buy Below prices.

  As far as this year’s Buy List goes, there are only nine trading days left in 2015, and it appears that our Buy List will return to its market-beating ways. Through Thursday, our Buy List is up 4.09% while the S&P 500 is down 0.83% (not including dividends). This will be the eighth time in the last nine years that we’ve beaten the S&P 500.

  The Federal Reserve Raises Interest Rates

  This week, for the first time in nearly a decade, the Federal Reserve raised interest rates.

  (Dramatic pause.)

  To a still very, very low level. On Wednesday, the Fed did as we expected and raised the Fed funds’ target range to 0.25% – 0.50%. In my opinion, the Fed is probably a wee bit premature in doing this, but I can’t say it’s very damaging.

  On one hand, there’s no sign of inflation. In fact, the government just said that inflation was flat last month. On top of that, commodity prices are still crashing. On Monday, spot oil dropped below $35 per barrel. Natural gas is now down to $1.74 per million BTU, and gold is at a six-year low.

  But Janet Yellen said that the Fed wanted to move before there were signs of inflation. My opinion is that it’s impossible to get monetary policy exactly right. You’re bound to err on one side or the other. But I don’t think the Fed is being reckless in its policy. In fact, I think the central bank is right to convey the idea that it’s going to be guided by events.

  It raised rates by 0.25%. For every $100,000, that works out to about 68 cents per day. I just don’t think that’s going to wreck the economy.

  During the Fed’s last tightening cycle, it raised rates by 0.25% at 17 straight meetings. In retrospect, that was a big mistake. This time, the Fed has made it clear that there’s no predetermined path. I wouldn’t be surprised if the Fed only hikes rates once or twice all next year.

  The Fed also released the economic projections from the FOMC members. These are the “blue dots” you may have heard about. I think the current projections are far too hawkish. The median dot sees four hikes this year followed by another four next year. No way. I expect to see the blue dots sing a different tune as the year goes on (I think I’m mixing metaphors.)

  I’ll also credit the Fed for clearly communicating its actions to the public. The Fed said, “if X happens, we’ll do Y.” X happened. So they did Y. It’s really that simple. I have to address a common misconception. There’s a strong tendency to see the Fed as being much more powerful than it truly is. In reality, it’s reacting to the same forces we all are. I also don’t for a moment believe that the Fed’s actions are impacted by what goes on in China or the junk bond market or even the dollar. That’s just noise. The Fed pays attention to jobs and prices and that’s about it.

  

  The stock market initially rallied after the Fed’s statement came out on Wednesday, but it gave back much of that gain on Thursday. Yields at the short end of the yield curve moved higher which you would expect. The two-year yield broke 1% for the first time since 2010 (see above). But long-term yields didn’t move much. That tells me that the Fed news was a yawner.

  As a general rule of thumb, if your central bank isn’t making much news, then it probably has the right policy.

  The main driver of the economy in 2016 will be the housing market, and that’s in pretty good shape. The good news is that it’s not a soaring but a steadily growing one. Expect to see a moderately expanding economy next year with growing corporate profits and still-low short-term interest rates. This is a good environment for stock investors.

  Oracle Earns 63 Cents per Share

  We had one earnings report this week, and it was our final one for the calendar year. It’s also from Oracle (ORCL), a stock which will not be returning with us next year. Oracle reported fiscal Q2 earnings of 63 cents per share, which was three cents more than expectations. Revenue fell 6% to $9.0 billion, but adjusted for currency, it was flat.

  “We’re very pleased with our non-GAAP EPS of $0.63, beating the mid-point of guidance by 4 cents despite a stronger-than-expected currency headwind,” said Oracle CEO, Safra Catz. “We grew our SaaS and PaaS revenue 38% in constant dollars this past quarter, and we expect that revenue-growth rate to accelerate to nearly 50% in Q3 and close to 60% in Q4. This rapid increase in our cloud revenue will help drive our SaaS and PaaS cloud gross margins from 43% in Q2 to approaching 60% in Q4 and drive significant EPS growth in Q4.”

  “It was a very strong growth quarter for our cloud business, with SaaS and PaaS bookings up 75% in constant currency and billings up 68% in U.S. dollars,” said Oracle CEO, Mark Hurd. “We did 100 Fusion HCM deals and over 300 Fusion ERP deals in the quarter. We now have more than 1,500 ERP customers in the cloud — that’s at least ten times more ERP customers than Workday.”

  “We are still on target to sell and book more than $1.5 billion of new SaaS and PaaS business this fiscal year,” said Oracle Executive Chairman and CTO Larry Ellison. “That is considerably more SaaS and PaaS new business than any other cloud services provider, including salesforce.com.”

  It’s not easy for me to let Oracle go, but I’ve felt that I’ve given them enough time to turn the ship around. The company has continuously said that things will start to improve, and I hope they do, but I’m done waiting.

  On the conference call, Oracle gave fiscal Q3 guidance of 63 to 66 cents per share. For Q4, they gave guidance of 83 to 86 cents per share. The shares dropped 5.1% on Thursday to close at $36.93.

  That’s all for now. The stock market will close at 1 p.m. on Thursday, December 24, and it will be closed all day on Friday for Christmas. On Tuesday, the government will release the second update for Q3 GDP growth. Last month, they revised the initial report of 1.5% growth up to 2.1%. 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: December 18, 2015
  Eddy Elfenbein, December 18th, 2015 at 7:02 am

  Japan Earmarks Billions to Help Prod Its Companies

  Ukraine Defaults on $3 Billion Bond to Russia

  Nigerian Farmers Cleared to Sue Shell in Dutch Court

  I.M.F. Chief Faces Trial in Case Dating to Time as French Finance Minister

  Hedge-Fund Casualties Jump to 257 in Third Quarter Amid Rout

  Glaxo to Pay Bristol-Myers Up to $1.46 Billion for HIV Drugs

  China’s Qihoo 360 Strikes New Buyout Deal

  Apple to Launch Apple Pay in China, Take on Alibaba, Tencent

  Zurich Buys Wells Fargo Crop Insurer for Up to $1.05 Billion

  Dell’s Cybersecurity Unit SecureWorks Files to Go Public

  P&G’s Gillette Sues Dollar Shave Club

  LifeLock to Pay $113 Million to Settle FTC Charges

  Drug C.E.O. Martin Shkreli Arrested on Fraud Charges

  Cullen Roche: Yellen Fears the Boom, Part Deux

  Joshua Brown: (sighs)

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• Morning News: December 17, 2015
  Eddy Elfenbein, December 17th, 2015 at 7:05 am

  India Stocks Rise Most in Month as Fed Rate Increase Eases Worry

  Day 1 After Fed Liftoff Shows Move Catapults Money Market Rates

  Congressional Leaders Agree to Lift 40-Year Ban on Oil Exports

  How Democrats and Republicans Differ on Social Security

  General Mills Profit Rises, Helped by Cost Cuts

  Rite Aid Revenue, Same-Store Sales Rise

  AstraZeneca Buys Most of Acerta for $4 Billion to Add Cancer Drug

  Oracle Shift to Cloud Products Hasn’t Yet Spurred Growth

  Valeant Makes Distribution Deal With Walgreens

  Air France-KLM and BA Biggest Winners as EU Fines Thrown Out

  The $500 Million Battle Over Disney’s Princesses

  Shkreli, CEO Reviled for Drug Price Gouging, Arrested on Securities Fraud Charges

  Finma Bans Six Former UBS Employees Over FX Rigging

  Cullen Roche: Rate Hikes and Roulette Wheels

  Jeff Carter: You Are In It For The Equity (And To Build Value)

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