Archive for January, 2016

• The Final Chicago College All-Star Game
  Eddy Elfenbein, January 30th, 2016 at 10:25 pm

  Here’s a crazy video from the 1970s. For many decades, there was a preseason football game between a team of college all-stars and the previous year’s Super Bowl winner. At one point, the game was competitive and very popular, but over time, the pros began to dominate.

  The final game came in 1976 when the Pittsburgh Steelers were easily beating the college all-stars. Later in the third quarter, Soldier Field was hit with massive rain. It quickly escalated into something biblical. This is where the video truly gets crazy. The players leave the field and fans storm on. It’s absolute mayhem. The drenched fans are running and sliding on the field. They even tear down goalposts.

  The unfinished game was canceled and that was that—it was the final Chicago College All-Star Game.

• Best Stock of the Last 30 Years
  Eddy Elfenbein, January 29th, 2016 at 1:53 pm

  I often talk about how boring and overlooked stocks can be great investments. At the WSJ, Jason Zweig gives us the name of the best-performing stock of the last 30 years. Not surprisingly, it’s a fairly dull stock.

  The best-performing U.S. stock over the past 30 years isn’t a household name like Costco Wholesale Corp. or Johnson & Johnson. It’s Balchem Corp., up 107,099% since the end of 1985, according to FactSet Research Systems.

  You’d never heard of Balchem? Me either; stocks don’t come much more obscure than this. Based in Wawayanda, N.Y. (population 7,266), about 70 miles northwest of New York City, Balchem makes flavorings, fumigating gases and nutritional additives for animal feed. Its total stock market value is about $1.7 billion.

  Since the end of 1985, Balchem has gained an average of 26.2% annually, compared with 10.3% for the S&P 500 and 15.7% for Warren Buffett’s Berkshire Hathaway Inc.

  So you would think there would be tons of interest in Balchem. Not at all. Zweig notes that Balchem didn’t attract a single major institutional holder until 1999. That was after it returned an average of 21.3% for the previous decade.

• CWS Market Review – January 29, 2016
  Eddy Elfenbein, January 29th, 2016 at 7:08 am

  “The first principle is that you must not fool yourself,
  and
 you are the easiest person to fool.” – Richard Feynman

  We’re in the heart of Q4 earnings season. We had six Buy List earnings reports this week, and another four are due next week. In reality, this should be called “Judgment Season” because this is when the market renders its verdict, and the market gods can be quick and harsh.

  The good news is that all eight of our Buy List earnings reports so far have topped expectations. The bad news is that guidance hasn’t always been favorable.

  The worst news is that one of our new stocks, Alliance Data Systems (ADS), got crushed for a 19% loss on Thursday. I’ll have full details in a bit. But some of our stocks have done quite well. Biogen (BIIB) and Stryker (SYK) got nice boosts from their earnings. I’m also pleased to see that Microsoft (MSFT) had another solid quarter. Just a few years ago, many had written off the company.

  This Week’s Buy List Earnings Reports

  We also had a Federal Reserve meeting this week. As expected, Yellen & Co. held off on any rate increase, but the policy statement indicated that the Fed is still expecting more inflation and possibly more rate hikes to come. Wall Street is skeptical and so am I.

  It’s quite remarkable how much the outlook has changed in just a few weeks. Not that long ago, investors were expecting three or four rate increases from the Fed this year. Now that’s down to one, or maybe zero.

  The yield on the two-year Treasury is a good proxy for what the market thinks the Fed will do. The two-year yield is now down to 0.83% which is a drop of 26 basis points in one month. In other words, the market thinks the Fed is all talk.

  

  Frankly, it’s not hard to see why. Plunging oil and the strong dollar are holding back inflation. In short, they’re doing the Fed’s job for them. Some of the recent economic data, especially on manufacturing, has been sluggish. While earnings are mostly good, we’re still seeing the effect of the strong dollar on corporate profits. Like I said, the market’s verdict can be quick and harsh.

  In the near-term, I think the market will continue to be choppy. Further out, however, the outlook is still favorable for investors. As always, investors must be disciplined and focused on high-quality stocks.

  This week was a busy one for earnings. Let me run down the six Buy List earnings reports we had. On Tuesday, Stryker (SYK) reported Q4 earnings of $1.56 per share. That wasn’t much of a surprise. A few weeks ago, the company revised their guidance to a range of $1.53 to $1.56 per share. When a company gives a tight range like that after the quarter has ended, you can be pretty sure that they’ll hit the upper end.

  Like everybody else, Stryker was hurt by the strong dollar. Quarterly sales grew 3.7% to $2.7 billion, but it would have been 7.0% in constant currency. Sales for the year rose by 2.8% to $9.9 billion. Again, that’s 7.0% in constant currency.

  “With 2015 organic sales growth of 6.1%, bolstered by a strong fourth quarter increase of 6.4%, our top line results came in above our initial guidance,” said Kevin A. Lobo, Chairman and Chief Executive Officer. “This performance reflects the strength of our diversified revenue model, a commitment to innovation and the competitive advantage of our sales and marketing organizations. Our full year adjusted diluted EPS also exceeded our initial expectation, underscoring our commitment to delivering sales growth at the high end of med tech and leveraged earnings gains. With these results and the current momentum across our businesses, we feel well positioned heading into 2016.”

  For all of 2015, Stryker made $5.12 per share. That’s up from $4.73 per share last year. Just for the record, let’s remember Stryker’s guidance for this year. In January, the initial guidance was $4.90 to $5.10 per share. Then in April it went to $4.95 to $5.10 per share. In July, Stryker brought it up to between $5.06 and $5.12 per share. In October, they raised the low end by one penny per share. A few weeks ago, they raised the low end by another two pennies.

  Now for guidance.

  We expect 2016 constant currency sales growth in the range of 5.0% to 6.0% and adjusted net earnings per diluted share to be in the range of $1.17-$1.22 and $5.50-$5.70 for the first quarter and full year. If foreign currency exchange rates hold near current levels, we expect net sales in the first quarter and full year of 2016 to be negatively impacted by approximately 1.1% and 1.0% and adjusted net earnings per diluted share to be negatively impacted by approximately $0.02-$0.03 and $0.12-$0.13 in the first quarter and full year.

  That’s pretty good guidance, but the dollar will continue to be a factor. I urge investors not to be too concerned by transient factors like currency exchange. Sometimes currency exchange helps you, sometimes it hurts. The bottom line is that this was another solid year for Stryker. Here’s the annual EPS trend for Stryker: $2.95, $3.33, $3.72, $4.07, $4.23, $4.73, $5.12. And now the expectation is for $5.50 to $5.70 for 2016. That’s very impressive.

  The shares briefly topped our $101 Buy Below price before settling back down. For now, I’m going to keep our Buy Below at $101 per share.

  On Wednesday, Biogen (BIIB) reported Q4 earnings of $4.50 per share which beat Wall Street’s consensus by 42 cents per share. The stock soared and at one point, BIIB was up as much as 10%.

  This was a good report for a beaten-down stock. Sales rose 7.5% to $2.84 billion. For so much of last year, Biogen had to weather several terrible headlines. In October, the company said it was planning to lay off 11% of its workforce. The cost cutting, while painful, is clearly helping Biogen. For all of 2015, Biogen earned $17.01 per share which represents a 23% increase over 2014.

  Here’s something interesting: The company is now sitting on a mountain of cash. They appear to be stockpiling Benjamins so shareholders can expect either a major buyback announcement or possibly an acquisition deal. Stay tuned for more news about this.

  For 2016, Biogen said it expects earnings to range between $18.30 and $18.60 per share. Wall Street had been expecting $18.45 per share. I like the stock, but it might take some time to see gains here. It’s not so much the company but the broader environment for biotech. Either way, we know that Biogen is doing well. I’m dropping my Buy Below on Biogen to $290 per share.

  On Thursday, Ford Motor (F) reported Q4 earnings of 58 cents per share. That beat consensus by seven cents per share. Frankly, there wasn’t much in this report that was unexpected. For the year, Ford had a pre-tax profit of $10.8 billion. Revenues rose 12.1% to $37.9 billion which beat estimates by $36.27 billion. The automaker will pay out a profit-sharing bonus of $9.300 per employee. Not bad.

  Chief Financial Officer Bob Shanks maintained the Dearborn, Mich., auto maker’s forecast for equal or higher operating results in 2016, saying the company’s operations outside the U.S.—representing only a fraction of the auto maker’s profitability last year—are set to blossom.

  “This isn’t just a North America story,” Mr. Shanks said, referring to last year. “We really started to see the international markets come forward.”

  I think these are pretty good numbers but Wall Street wasn’t much impressed. The shares fell as low as $11.20 on Thursday before moving up before the closing bell. Some folks on Wall Street are convinced that the auto cycle has peaked and that Ford’s earnings and margins will suffer from here. They think the big special dividend was further proof of that.

  Ford remains optimistic. They said they expect to earn a pre-tax profit this year in the upper half of their previous range of $10 billion to $11 billion. I know Ford is exasperating to own, but the numbers are still good. Don’t give up on them; and the dividend is quite generous. I’m lowering my Buy Below on Ford to $13 per share.

  Now let’s look at this week’s troublemaker. For the record, Alliance Data Systems (ADS) beat earnings by two cents per share. Yet the stock fell by 4,780 cents per share or 19.4%. Ouch!

  My apologies if you own this one. I know it’s painful, but these are the risks of investing. Still, there’s a lot to like here and we’ve gone through many similar declines over the last ten years.

  Quarterly revenues rose 17.7% to $1.75 billion which was $40 million below estimates. For the whole year, ADS earned $15.05 per share, and that doesn’t include a 46-cent haircut due to currency. Wherever you look, you see the effect of the dollar.

  But the real damage was their estimate for Q1. ADS sees earnings of $3.83 per share for this quarter. Adjusted for currency, that would be $3.93 per share. Wall Street had been expecting $4.14 per share.

  But here’s the important fact: ADS stands behind its previous estimates of $17 per share for full-year 2016 earnings. There’s absolutely no change here at all. That means the stock is going for less than 12 times this year’s earnings. Let me caution you not to panic about ADS. A lot of the hot money ran for the exits but the long-term is on our side. To reflect the sell-off, I’m lowering my Buy Below on Alliance Data Systems to $225 per share.

  After the closing bell on Thursday, Microsoft (MSFT) reported another solid quarter. I’ve been very impressed with the job Satya Nadella has done here. For their fiscal second quarter, the software giant earned 78 cents per share compared with Wall Street’s estimates of 71 cents per share. Revenue rose to $25.69 billion, $440 million more than consensus.

  

  I don’t think people realize how much Microsoft has changed. As expected, the PC market was very weak, but that’s not where MSFT’s success has been.

  Microsoft’s cloud business encouraged investors. The company’s intelligent cloud group, which includes its Azure service, rose 5 percent to $6.3 billion. It now has 20.6 million consumer subscribers to Office 365, the cloud version of its productivity applications, up from 9.2 million a year earlier.

  I’m very happy with these numbers. For now, I’m keeping my Buy Below on Microsoft at $58 per share. Look for a new all-time high soon.

  Finally, CR Bard (BCR) reported earnings of $2.43 per share which beat estimates by two cents per share. Earlier the company had told us to expect earnings to range between $2.38 and $2.42 per share. Sales came in at $870.8 million which was basically flat from a year ago, but adjusting for currency, sales were up 3%.

  For the year, Bard made $9.08 per share. That’s a nice increase over the $8.40 per share they made in 2014. I’m going to keep my Buy Below for CR Bard at $204 per share, but I may adjust it soon, depending on the market’s reaction.

  Four Earnings Reports Due Next Week

  Next week will be another busy one for us. Let me preview next week’s earnings reports.

  On Monday, AFLAC (AFL) is due to report Q4 earnings. The story for the duck stock has been a familiar one. Business is going well, but the weak yen has chomped earnings. The company has also been giving back a lot of money to shareholders. Buybacks have reduced their share count. AFLAC also recently raised their dividend for the 33rd year in a row.

  In October, 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. The yen is currently at 119.

  On Tuesday, Fiserv (FISV) will report earnings. Three months ago, Fiserv raised their full-year guidance to $3.84 to $3.87 per share. That range implies Q4 earnings of 98 cents to $1.01 per share. This should be their 30th year in a row of double-digit earnings growth.

  A Snap-on (SNA) truck drove past me the other day. Maybe it’s a good sign. In any event, this is a very good company. Wall Street expects Q4 earnings of $2.18 per share which would be a 10% increase from the year before. I’ve highlighted the stock in the past few issues as being especially attractive. Don’t let these boring stocks fool you.

  Stericycle (SRCL) is another one of our new stocks this year. Similar to ADS, this one got crushed by 19% after the last earnings report. The company blamed—wait for it—the strong U.S. dollar. Management also blamed lower hazardous waste volumes. Stericycle said they expect earnings for this year to range between $5.28 and $5.35 per share.

  One final note. Shareholders at Hormel Foods (HRL) approved the company’s 2-for-1 stock split. The split will take effect on February 9. Don’t be alarmed when you see the lower share price because you’ll have twice as many shares. I’m raising the Buy Below to $82 per share, so after the split, the Buy Below will be $41 per share.

  That’s all for now. Stay tuned for more earnings reports next. We’ll also get some of the key turn-of-the-month economic reports. The ISM report is due out on Monday. The last few have been quite weak. On Wednesday, ADP will release its private payrolls report. That leads us up to Friday’s jobs report. The unemployment rate could dip below 5% for the first time in eight years. 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: January 29, 2016
  Eddy Elfenbein, January 29th, 2016 at 7:03 am

  Bank of Japan Stuns Markets With Surprise Move to Negative Interest Rates

  Euro-Area Inflation Accelerates in Breather for ECB’s Draghi

  Durable Goods Confirm Again The Slope

  2015 Spurred Billions in Bank Fines, But Not Enough for Warren

  Xerox to Split in Two; Carl Icahn to Get Three Board Seats

  Sky Says James Murdoch to Succeed Nicholas Ferguson as Chairman

  Visa Profit Tops Estimates as Customer Card Spending Rises

  James Bond, Adele Save Sony Profit Amid Global Smartphone Slump

  Amazon Sales Soared 22% in Holiday Quarter, but Profit Fell Short

  Toyota to Buy Out Rest of Daihatsu for $3 Billion Amid Push Into Compact Cars

  Honda’s Q3 Operating Profit Slides on Recall Costs

  Wells Fargo, BofA Look to Integrate Apple Pay Into ATMs

  Caterpillar Cheered For Hunkering Down as Machinery Outlook Dims

  Joshua Brown: The “Smart Money” Can’t Even Fake It Anymore

  Jeff Carter: Winner Take All-Monopoly Takes None

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• Earnings from Ford and ADS
  Eddy Elfenbein, January 28th, 2016 at 10:15 am

  We had two more Buy List earnings reports this morning. Both Ford and Alliance Data Systems beat estimates, but ADS is getting hammered on poor guidance.

  For Q4, Alliance Data Systems (ADS) earned $4.13 per share which beat estimates by two pennies. Revenues increased by 17.7% to $1.75 billion. That was just below the forecast of $1.79 billion. Currency dinged them for 12 cents last quarter. For the year, the company made $15.05 per share of which forex knocked off 46 cents.

  Ed Heffernan, president and chief executive officer of Alliance Data, commented, “It was an exceptional year for Alliance Data as we drove 20 percent growth in both revenue and core EPS despite substantial FX headwinds. Overall, the scorecard for all three segments is largely positive.

  The problem is guidance. For Q1, ADS sees earnings of $3.83 per share. That’s well below Wall Street’s estimate of $4.14 per share. The company sees revenue rising to $1.68 billion which was below Wall Street’s forecast of $1.78 billion. The strong dollar will still be an issue. In constant currency terms, ADS expects earnings of $3.93 and revenue of $1.72 billion.

  Still, Alliance Data is standing by its full-year forecast for earnings of $17 per share. The shares have been down as much as 13% today.

  This morning, Ford (F) reported Q4 earnings of 58 cents per share. That beat estimates by seven cents per share. For the year, the company had a pre-tax profit of $10.8 billion. Revenues rose 12.1% to $37.9 billion which beat estimates by $36.27 billion.

  Chief Financial Officer Bob Shanks maintained the Dearborn, Mich., auto maker’s forecast for equal or higher operating results in 2016, saying the company’s operations outside the U.S.—representing only a fraction of the auto maker’s profitability last year—are set to blossom.

  “This isn’t just a North America story,” Mr. Shanks said, referring to last year. “We really started to see the international markets come forward.”

  I think these are pretty good numbers but Wall Street is unimpressed. The stock is down today but some of that could be due to the special dividend and regular dividend being paid out yesterday. I think Wall Street is convinced that the auto cycle has peaked and Ford’s earnings and margins will suffer from here.

  For guidance, Ford said they expect to earn a pre-tax profit this year in the upper half of their previous range of $10 billion to $11 billion.

• Morning News: January 28, 2016
  Eddy Elfenbein, January 28th, 2016 at 7:08 am

  Japan’s Economy Minister Resigns Over Money Scandal, Denies Bribery

  Saudi Arabia Keeps Pumping Oil, Despite Financial and Political Risks

  Oil Producer Azerbaijan in Talks for International Aid

  How Will Higher Interest Rates Impact Your Finances?

  Deutsche Bank Loses Ground in Trading as Overhaul Tested

  EU Considering Probe of Google Tax Deal in UK

  Ford’s 2015 Profit Jumps on Stronger Sales

  Samsung Elec Warns of Difficult 2016 as Smartphone Troubles Spread

  Smarthphones’ Death Knell

  Facebook Reports Soaring Revenue, Buoyed by Mobile Ads

  Time Warner Cable’s Revenue, Profit Beat Estimates

  Bristol Myers Guidance Tops Estimates

  How a High-Flying Lawyer Botched His Big Case Against GM

  Joshua Brown: What Is Beijing Trying to Signal to Us?

  Roger Nusbaum: Crude Oil Is Not Going Out of Business

  Be sure to follow me on Twitter.

• Today’s Fed Statement
  Eddy Elfenbein, January 27th, 2016 at 2:01 pm

  No rate change as expected. Here’s today’s statement:

  Information received since the Federal Open Market Committee met in December suggests that labor market conditions improved further even as economic growth slowed late last year. Household spending and business fixed investment have been increasing at moderate rates in recent months, and the housing sector has improved further; however, net exports have been soft and inventory investment slowed. A range of recent labor market indicators, including strong job gains, points to some additional decline in underutilization of labor resources. Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation declined further; survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.

  Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will continue to strengthen. Inflation is expected to remain low in the near term, in part because of the further declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further. The Committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.

  Given the economic outlook, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.

  In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to 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. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

  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, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

  Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Esther L. George; Loretta J. Mester; Jerome H. Powell; Eric Rosengren; and Daniel K. Tarullo.

  Surprisingly short statement. The Fed is staying the course. They expect inflation to rise to 2%, but oil and the dollar have made that quite difficult.

• Biogen Soars
  Eddy Elfenbein, January 27th, 2016 at 1:25 pm

  Today is shaping up to be a very strong day for our Buy List. Shares of Biogen (BIIB) have been up nearly 10% today. Stryker (SYK) is also having a very good day thanks to its earnings report.

  

  I can’t be sure just yet but it looks like the Buy List is outperforming the S&P 500 by about 60 basis points. That’s very good. We still have the Fed announcement coming later this afternoon. There are also four more Buy List earnings reports tomorrow.

  One small news item. Late last year, Hormel Foods (HRL) announced plans for a 2-for-1 stock split. That was approved today by shareholders. The split is due for February 9.

• Biogen Earns $4.50 per Share
  Eddy Elfenbein, January 27th, 2016 at 8:07 am

  Biogen (BIIB) crushed their earnings estimates. For Q4, the biotech company earned $4.50 per share which was 42 cents better than estimates.

  Revenue increased 7.5% to $2.84 billion, above the $2.71 billion analysts had forecast. The company cited the solid performance from its multiple sclerosis drugs and the strong adoption of its hemophilia therapies.

  Tecfidera sales rose 8.4% to $992.8 million. Its revenue benefited from an increase in wholesale inventory.

  Sales of the drug have been pressured recently because fewer new patients were being prescribed the drug, in part because of doctors’ concerns about a rare side effect that was linked to a patient death last year.

  For 2016, Biogen forecast adjusted earnings of $18.30 and $18.60 a share, while analysts forecast $18.45 a share. The company said it expects revenue of $11.1 billion to $11.3 billion; analysts forecast $11.3 billion.

  The shares are up about 6% in pre-market trading.

• Morning News: January 27, 2016
  Eddy Elfenbein, January 27th, 2016 at 6:56 am

  China Shares End Lower, Taking 2016 Losses to $1.8 Trillion

  RBS Sees $5.2 Billion Asset Value Hit, Clouding Dividend

  Fed Faces a Messier Economic Picture Six Weeks After Rate Hike

  Subprime Reasoning on Housing

  Oil Resumes Decline Near $30 as U.S. Supplies Worsen Global Glut

  The Dollar Keeps Rising, for Good or Evil

  Toyota Stays Top-Selling Carmaker for Fourth Year as VW Retreats

  Fiat Finds $1 Billion in Savings From Unlocking Chrysler’s Cash

  The Problem With AT&T

  Ericsson Earnings Fall Short as U.S. Rebound Stays on Hold

  Chase Planning Rollout of Card-Free ATMs

  Mitsubishi Electric, Hitachi Get $150 Million EU Cartel Fine

  Sundance Roars For a Black Film, and Fox Searchlight Bids $17 Million

  Cullen Roche: Three Things I Think I Think: Scary Stories Edition

  Jeff Carter: Corporate Inversions: It’s Just Math

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