CWS Market Review – July 22, 2016

“Every generation laughs at the old fashions, but follows religiously the new.”
– Henry David Thoreau

For the last several weeks, the market has been distracted by a flurry of distracting events, ranging from Turkey and Brexit to the Federal Reserve and oil prices, not to mention a soap opera-like election campaign. But now we’re at earnings season. This is what really counts.

So far, things are going well for our Buy List. We’ve had impressive earnings beats from stocks like Biogen (BIIB), Microsoft (MSFT) and Alliance Data Systems (ADS). Biogen creamed estimates, gave an optimistic forecast and jumped more than 7% (see below). Microsoft is cleaning up with its cloud business, and the stock just hit a new 52-week high. We’ve also had some disappointments from stocks like Signature Bank (SBNY).

In this week’s CWS Market Review, I’ll recap our earnings reports from this past week, plus I’ll highlight the ones coming our way next week. We have a lot of earnings reports to cover, so let’s get right to it.

Decent Earnings for WFC, Very Good Earnings for MSFT

Last Friday, Wells Fargo (WFC) kicked off earnings season for our Buy List by reporting Q2 earnings of $1.01 per share. That exactly matched Wall Street’s forecast. In last week’s issue, I said that Wall Street’s consensus “sounds about right.”

Obviously, an environment where interest rates stay low for longer is a tough one for any bank. Still, Wells is getting by quite nicely despite the challenges. Wells is a bit different from its mega-bank competitors because it’s more focused on consumers instead of Wall Street. That means it’s more susceptible to shifts in interest rates. The bank’s total loans are up 7.7% from a year ago. WFC’s net interest margin came in at 2.86%. That’s been in a downtrend for several quarters.

Shares of WFC dropped immediately after the earnings report but have regained much of that lost ground since then. There’s not much more to say about Wells, except that it’s a good bank operating in a difficult time for banks. I’m keeping my Buy Below at $52 per share.

On Tuesday, Microsoft (MSFT) gave us a very good earnings report. For its fiscal Q4, the software giant earned 69 cents per share. That was 11 cents better than estimates. I really like the way this company has turned itself around. I think traders completely overreacted to the slight earnings miss three months ago. I should add that according to Microsoft’s CFO, roughly six cents of the earnings surprise was due to a lower-than-expected tax rate.

Once again, we’re seeing that Microsoft’s cloud business is doing quite well. After several missteps, Microsoft is determined not to be left behind in this business space. Although the profit margins aren’t as generous, there are greater opportunities for growth. In a point of contract, Microsoft’s phone revenue is down 71% from a year ago. Thank you, Steve Ballmer.

Overall, I’ve been impressed by the way Satya Nadella has turned the ship around. The job isn’t done yet, but Microsoft is clearly moving in the right direction. The shares jumped more than 5% on Wednesday’s trading and touched a new 52-week high. The stock is even within striking distance of its all-time high ($59.97), set on the second-to-last day of the previous millennium. This week, I’m raising my Buy Below on Microsoft to $59 per share.

Medallion Loans Weigh on SBNY

Our first big earnings disappointment came on Wednesday when Signature Bank (SBNY) reported Q2 earnings of $1.90 per share. That was seven cents below estimates.

For one, Signature is dealing with the tough environment facing all banks. The other issue for them is their taxi medallion business. Thanks to Uber and others, the price for a taxi medallion has basically been cut in half. Signature’s been in the business of financing loans to buy these medallions. During Q1, the bank wrote off $4.4 million in bad medallion loans.

I’ll sum it up as succinctly as possible: Signature is doing fine. The basics of their business continue to do well. The medallion issue is a problem. But what’s particularly difficult is that we can’t say whether this issue has passed us just yet. We don’t know what we don’t know. Last quarter, Signature added $24 million in loan-loss reserves. Last quarter, the medallion loans made up 2% of all their loans. That’s down from 3% in Q1.

Shares of SBNY dropped sharply at Wednesday’s open. At one point, SBNY was below $120 per share, but the stock recovered throughout the day. By the closing bell, it had lost 4.5%. I’m not giving up on SBNY. I believe in their management and continue to see a bright future for them. This week, I’m lowering my Buy Below to $133 per share.

Very Impressive Earnings from ADS and Biogen

We had three more Buy List earnings reports on Thursday morning. First off, Alliance Data Systems (ADS) reported earnings of $3.68 per share. That beat Wall Street’s consensus by nine cents per share.

For Q3, ADS said they see earnings coming in at $4.42 per share. That’s below Wall Street’s consensus of $4.58. But the good news is that ADS sees full-year earnings coming in at $16.85 per share. Wall Street had been expecting $16.78 per share.

The activist fund, ValueAct Capital, recently announced that it has a sizable stake in ADS, and they’ve floated the idea of breaking the company up. I think it’s very possible that the component parts of an un-allied Alliance Data Systems could trade more than the current company.

This has been a tough year for ADS, so it was nice to see the stock pop 6.4% on Thursday. I’m going to cautiously bump up my Buy Below price for Alliance Data Systems to $237 per share.

Biogen (BIIB) became the star of the earnings season! The biotech company reported Q2 earnings of $5.21 per share. That beat estimates by 54 cents per share. The stock jumped 7.6% on Thursday. Biogen’s quarterly revenue rose 12% to $2.89 billion.

The company also announced a $5 billion share buyback, which it hopes to finish up within three years. Biogen also said that its CEO, George Scangos, will be stepping down. Scangos has done a fine job for shareholders, but I think it’s time for new leadership.

I was also pleased to see Biogen offer optimistic guidance for the rest of this year. The company sees revenue coming in between $11.2 and $11.4 billion. They see earnings-per-share ranging between $19.70 and $20. Wall Street had been expecting $18.96 per share.

Biogen has had a difficult year, so I’m glad to see it bounce back. I’ve been pretty conservative with my Buy Below price. This week, I’m going to raise our Buy Below on Biogen to $290 per share.

Snap-on (SNA) reported decent numbers, but traders weren’t impressed. No matter. I think the company is doing just fine. For Q2, Snap-on earned $2.36 per share which beat estimates by 13 cents per share.

One weak spot is that the company’s revenues fell below expectations. For Q2, SNA’s topline was $872.3 million. Wall Street had been expecting $876.9. The stock dropped 3.4% in Thursday’s trading. I’m not sure what caused the selloff, but it’s sometimes hard to divine the market’s wisdom, especially in the short term. Snap-on remains a good buy up to $166 per share.

After the closing bell on Thursday, Stryker (SYK) reported Q2 earnings of $1.39 per share which was two cents better than estimates. That’s up from $1.20 per share of last year’s Q2. The stock has been a huge winner for us this year.

For Q3, the medical-device company said it expects earnings to range between $1.33 and $1.38 per share. That’s a bit of a disappointment, as the Street had been expecting $1.41 per share. For all of 2016, Stryker now expects earnings to range between $5.70 and $5.80 per share. The previous range had been $5.65 to $5.80 per share.

The stock traded lower in the after-hours market, but that’s no guarantee of where the stock will open on Friday. I never understand why the market reacts negatively to a lower-than-expected quarterly outlook when it’s twinned with an improved full-year outlook, yet it happens all the time.

Nevertheless, Stryker is doing quite well. I’m afraid the U.S. dollar will be a headwind for the next few quarters. I’m keeping our Buy Below on Stryker at $122 per share.

Six More Earnings Reports Next Week

We have six more Buy List earnings reports for next week. Express Scripts and Wabtec report on Monday, July 25. CR Bard is due to report on Tuesday, July 26. Then on Thursday, July 28, AFLAC, Stericycle and Ford Motor are due to report. (In last week’s issue, I incorrectly said that Wabtec was due to report this week. WAB is reporting on Monday.)

In April, Express Scripts (ESRX) said it expects Q2 earnings to be between $1.55 to $1.59 per share. The pharmacy-benefits manager also increased its full-year range to $6.31 to $6.43 per share. The shares have been trending upward for several weeks.

Wabtec (WAB) had a very good earnings report in April, and the stock popped to a new high. Since then, however, it has been kind of a dud. On Thursday, shares of WAB settled at $70.40, which is over 18% below its April high.

I’m expecting another good earnings report. Wall Street expects $1.08 per share. The company also recently raised its modest dividend by 25%. The good news for us is that Wabtec has reaffirmed its full-year earnings of $4.30 to $4.50 per share.

CR Bard (BCR) was the big star of last earnings season. They beat and raised guidance. For Q2, Bard sees earnings coming in between $2.43 and $2.47 per share. For the entire year, they expect earnings to range between $10.05 and $10.18 per share. Be careful not to chase this one.

AFLAC (AFL) has been doing well for us lately. I’ll be curious to see how much the surging yen helps AFLAC’s bottom line. I think the company can earn as much as $6.60 per share this year in operating earnings. Even without the currency effect, the duck stock is a solid company.

I don’t understand why Ford Motor (F) is so cheap, but the market doesn’t always make perfect sense. The automaker now yields over 4.3%. The earnings report for Q1 was outstanding. For Q2, Wall Street expects earnings of 60 cents per share.

Stericycle (SRCL) had a disappointing earnings report three months ago. The company gave us full-year guidance of $4.90 to $5.06 per share. For Q2, Wall Street is expecting $1.18 per share.

That’s all for now. Stay tuned for a lot more earnings reports next week. We also have a Fed meeting on Tuesday and Wednesday. The policy statement is due out on Wednesday afternoon. I’m not expecting any rate change, but the odds of at least one rate hike before the end of the year are growing. They’re still not high, but they are growing. We’ll also get our first look at the Q2 GDP report next Friday. 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 Eddy Elfenbein on July 22nd, 2016 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.