Archive for August, 2017

  • CWS Market Review – August 4, 2017
    , August 4th, 2017 at 7:08 am

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

    This is the final week of second-quarter earnings season for our Buy List. We had six more earnings reports come out this week, plus Cinemark is due out later today. Overall, this has been a disappointing earnings season for us. We’ve had several good reports, but we’ve also had a few big misses. Fortunately, the damage to our Buy List has been rather mild. That’s because we’re nothing if not well diversified. This is an important lesson. A diversified portfolio helps minimize the dings and bruises to our portfolios.

    I should also point out that since we focus on holding high-quality stocks for the long term, the quarterly earnings game isn’t as important for us. For example, in May, HEICO (HEI) came out with an earnings report that looked fine to me. Traders, however, held a different opinion and the shares fell. Then about five weeks later—seemingly out of nowhere—HEICO started to rally. I have no idea why. There was no new news. But the important point is that we were in place to profit from it.

    The overall earnings environment is pretty good. Right now, the S&P 500 is tracking 9.2% earnings growth for Q2. Wall Street now expects 11.2% growth for Q3. The S&P 500 is now going for 18 times next year’s earnings. That’s pricey. The average multiple usually runs around 14. Still, I wouldn’t say that we’re recklessly overvalued.

    This week, we saw good earnings from Ingredion and Cognizant Technology Solutions. The latter raised guidance. We also had a rare miss from Fiserv and a lousy report from Axalta. I’ll run down all the details. Let’s start with the folks at Ingredion.

    Earnings from Ingredion and Fiserv

    Ingredion (INGR) led off this week’s earnings parade on Tuesday when they reported Q2 earnings of $1.89 per share. Wall Street had been expecting $1.85 per share. For last year’s Q2, the plant-food folks earned $1.73 per share.

    Looking at the details. Ingredion noted that business in North America is quite good, but they’ve had some “headwinds” in South America. I was pleased to see the company reiterate its full-year guidance of $7.50 to $7.80 per share. They’ve already made $3.77 per share for the first half, so that guidance seems very doable.

    Here’s where things get dramatic. The shares dropped sharply at the open on Tuesday. (Traders!) But then they rallied back. In fact, by early Thursday, Ingredion’s stock was higher than it was on Monday’s close. In other words, our strategy of doing nothing worked just fine. This week, I’m raising my Buy Below on Ingredion to $128 per share.

    Also on Tuesday, Fiserv (FISV) reported earnings of $1.19 per share. That was four cents below Wall Street’s estimate. This caught me by surprise because Fiserv rarely misses earnings.

    There’s nothing to worry about. Fiserv didn’t give guidance for Q2, but their full-year 2017 guidance is unchanged at $5.03 to $5.17 per share.

    Let’s look at some key facts. Earnings for the year are up 14% over last year. Free cash flow is up 26% to $555 million. Fiserv also increased its operating margin by 40 basis points to 32.3%. Based on its 2017 guidance range, Fiserv sees earnings rising by 14% to 17% this year.

    Fiserv has already bought back nearly six million shares this year, and they have authorization to buy another 14.6 million shares. The stock dropped 4% during Tuesday’s trading, but remember that it’s still up 16.6% this year. I’m keeping my Buy Below price for Fiserv at $131 per share.

    Four Earnings Reports on Thursday

    We had four more earnings reports on Thursday. In the morning, Intercontinental Exchange (ICE) reported Q2 earnings of 75 cents per share. That’s an increase of 9% over last year. Although this was one penny below estimates, it was ICE’s 17th-straight quarter of revenue growth.

    Shares of ICE lost 2.8% on Thursday. Again, I’m not at all worried. ICE should be able to earn about $3 per share this year. Intercontinental Exchange remains a buy up to $66 per share.

    Cognizant Technology Solutions (CTSH) earned 93 cents per share for Q2. That was two cents above the Street’s consensus. Previously, the company said to expect Q2 earnings of at least 89 cents per share. Quarterly revenue rose 8.9% to $3.67 billion. Cognizant had said to expect revenue between $3.63 and $3.68 billion.

    Now for the good news. Cognizant raised its sales and earnings guidance for this year. The company expects Q3 earnings of at least 94 cents per share. They also upped their full-year guidance by three cents. They now see 2017 earnings of at least $3.67 per share.

    CTSH expects Q3 revenue between $3.73 billion and $3.78 billion, and full-year revenue between $14.70 billion and $14.84 billion. The old range was $14.56 billion to $14.84 billion.

    Interestingly, traders got nervous on Wednesday and CTSH took a dip. The solid earnings report apparently assuaged their fears. CTSH gained a little over 2% on Thursday. We’re up nearly 25% in CTSH this year. I’m lifting my Buy Below on Cognizant to $74 per share.

    Axalta Coating Systems (AXTA) became our latest earnings dud. For Q2, they reported adjusted earnings of 31 cents per share which was eight cents below the Street’s consensus. Net sales rose 2.3% to $1.09 billion. Part of the reason for the miss was a drop in paint prices, but it was also due to the mess in Venezuela.

    The deconsolidation of our Venezuelan operations came as a result of a lack of exchangeability between the Venezuelan bolivar and the U.S. dollar coupled with our financial outlook for the foreseeable future. This lack of exchangeability restricted our Venezuelan subsidiary’s ability to pay dividends or settle intercompany obligations, which limited our ability to realize the benefits of our Venezuelan operations. In accordance with the applicable accounting guidance, we have deconsolidated our Venezuela operations and will account for our investment at cost going forward. Our cost investment is now valued at $0 at June 30, 2017 which has resulted in a pre-tax charge of $70.9 million for the three months ended June 30, 2017. We will no longer report the consolidated results of our Venezuelan operations.

    Axalta also updated their guidance figures for 2017. They now see adjusted EBITDA between $940 million and $970 million. The previous range was $930 million to $980 million. Axalta’s expected free cash remains the same at $440 million to $480 million.

    AXTA got hammered for a 7.9% loss on Thursday. I’m lowering my Buy Below to $33 per share.

    After the closing bell on Thursday, Continental Building Products (CBPX), the wallboard people, said they made 32 cents per share during Q2. That’s a three-cent miss.

    Net sales rose 3% to $120.6 million. Product costs have been rising, but Continental hasn’t been able to pass that along to their customers. Last quarter’s profit margin got squeezed a bit as a result. The good news is that CBPX benefited from lower interest costs.

    I’m not a big fan of share buybacks, but CPBX has been gobbling up stock at a furious rate. During Q2, they bought back 2.3% of all their outstanding shares.

    Update on Wabtec

    I neglected to update you on Wabtec (WAB) in last week’s newsletter. My apologies for the oversight.

    Last Tuesday, the freight-services company released a disappointing earnings report. For Q2, WAB earned 75 cents per share, but that included a charge of five cents per share due to “net effect of the restructuring and transaction expenses and the interest expense benefit.” Wall Street had been expecting Q2 earnings of 94 cents per share. Not good.

    Wabtec had quarterly revenue of $932.3 million, which was also below Wall Street’s estimate of $1 billion. For all of 2017, Wabtec now expects sales of $3.85 billion and EPS between $3.55 and $3.70. That’s a reduction from their April forecast of $3.95 to $4.15 per share.

    This is the fourth time in the last five earnings reports that Wabtec has missed Wall Street’s consensus. So what went wrong? Basically, the environment for their business is pretty bad right now. Wabtec said there was $250 million in sales that they had expected during Q2 that never showed up. It’s important for us to distinguish between what’s bad due to them and what’s bad for everyone in the sector. This is more of a lousy-environment story.

    On the positive side, Wabtec said their backlog is up 10%. They also just completed their big merger with Faiveley.

    This is Raymond T. Betler, the CEO, on the earnings call:

    The main reason for our shortfall in the second quarter and our reduction in full year guidance is that we’ve seen about $250 million of revenues, roughly 5% of our full year total pushed out due mainly to revised timing of sales and projects already in the backlog, and to the market conditions, which we’ve discussed previously rebounding slower than we anticipated.

    These factors are more than offsetting the expected ramp up of synergies from the Faiveley integration during the year. Some of the revenue slippage occurred in the second quarter, including projects for signal, design and construction work, locomotive overhauls, which both have — did not materialize, so we removed them from our 2017 forecast.

    Also, we are not yet seeing the expected recovery in the freight aftermarket spending, and the OEM freight markets remained sluggish. As a result, we revised our 2017 guidance as follows: Compared to the first 2 quarters of the year, we expect some modest improvement in our third quarter results due to seasonality, with the strong fourth quarter and an adjusted operating margin target in the fourth quarter of about 15%. With more of our revenues coming from Europe, the seasonality in the third quarter will be more of a factor than it’s been in the past.

    The shares dropped nearly 10% last Tuesday plus another 6% the following Wednesday. The shares are now going for 20 to 21 times this year’s guidance range. That’s a rich valuation, but it may be quite reasonable based on an expected pickup in 2018.

    I don’t like these numbers, but I’m willing to give WAB more time to show us some improvement. For now, I’m lowering my Buy Below price on Wabtec to $81 per share.

    That’s all for now. Next week will be a fairly quiet week for economic news. We’ll get the productivity and costs report on Wednesday. Real output is basically where it was 10 years ago. On Thursday, we’ll get an update on the Treasury budget. Then on Friday, the latest inflation numbers come out. Janet Yellen has said the Fed expects inflation to gradually tick higher, but there’s been no evidence for that yet. 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: August 4, 2017
    , August 4th, 2017 at 7:04 am

    Global Refiners Brace Themselves as China Cements Its Oil Market Dominance

    As Brexit Nears, ‘Discounters’ Gain Ground in U.K. Supermarket Wars

    Toyota and Mazda Link Up To Build $1.6 Billion U.S. Plant, Develop Electric Cars

    Toyota Is Lost Without a Map

    GrubHub Buys Yelp’s Eat24 for $288 Million

    Pharma Giant Teva’s Stock Is Imploding As Generic Drugs Get Cheaper

    Activision Blizzard’s Revenue and Profit Forecasts Surge Due to ‘Overwatch’

    Kraft’s Sales to Grocery Stores Sputter While Growth Stays Elusive

    Wyndham Will Spin Off Its Hotel Unit Into a New Publicly Traded Company

    San Francisco’s Anchor Brewing Acquired by Sapporo

    Avon Chief Executive to Resign in Latest Win for Activist Investors

    Paul Singer Says Passive Investing Is ‘Devouring Capitalism’

    Joshua Brown: The Invention of Air: My Reaction

    Ben Carlson: Time Scarcity and the Allure of More

    Howard Lindzon: This Bull Market is Making Me Nervous!

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  • The Decline in Daily Volatility
    , August 3rd, 2017 at 12:53 pm

    It’s hard to show what what a decline in the market’s volatility looks like. Here’s a chart showing the S&P 500’s daily changes over the last two years. You can see how the number of big moves (over 2%, up or down) has really dropped off.

  • Three More Earnings Reports this Morning
    , August 3rd, 2017 at 11:16 am

    This morning Intercontinental Exchange (ICE) reported Q2 earnings of 75 cents per share. Although this was one penny below estimates, it was ICE’s 17th-straight quarter of revenue growth. EPS was up 9% over last year.

    The company offered Q3 guidance, but not for EPS:

    • ICE’s third quarter 2017 GAAP operating expenses are expected to be in a range of $545 million to $555 million and adjusted operating expenses are expected to be in a range of $480 million to $490 million.
    • ICE’s interest expense is expected to be $47 million in the third quarter and $49 million in the fourth quarter, including the effect of refinancing ICE’s October bond maturity.
    • ICE’s adjusted effective tax rate is expected to be approximately 31% for the third quarter.
    • ICE’s diluted share count for the third quarter is expected to be in the range of 590 million to 595 million weighted average shares outstanding.

    The shares are currently down about 3% this morning.

    Cognizant Technology Solutions (CTSH) earned $0.93 for Q2. That was two cents above the Street’s consensus. Previously, the company said to expect earnings of at least 89 cents per share. Quarterly revenue rose 8.9% to $3.67 billion. Cognizant had said to expect revenue between $3.63 and $3.68 billion.

    “Cognizant delivered strong second-quarter results, which reflect our continued progress in helping clients achieve the value of digitizing their entire enterprises, or what we call being digital at scale,” said Francisco D’Souza, Chief Executive Officer. “We remain dedicated to accelerating our shift to digital services and solutions as we continue to invest in our core business and execute our margin improvement and capital return programs.”

    Cognizant also raised their sales and earnings guidance for this year. The company expects Q3 earnings of at least 94 cents per share. They also upped their full-year guidance by three cents. They now see 2017 earnings of at least $3.67 per share.

    CTSH expects Q3 revenue between $3.73 billion and $3.78 billion and full-year revenue between $14.70 billion and $14.84 billion. Previously, Cognizant expected 2017 revenue to range between $14.56 billion and $14.84 billion.

    “Our second quarter results and improved full year outlook demonstrate solid execution in our plan to drive sustainable revenue growth while increasing margins,” said Karen McLoughlin, Chief Financial Officer. “Our strong balance sheet and cash flows continue to support both our capital return program and our investments in the business to drive future growth.”

    Axalta Coating Systems (AXTA) reported adjusted Q2 earnings of 31 cents per share which was below the Street’s view of 39 cents per share. Net sales rose 2.3% to $1.09 billion. Part of the reason for the miss was a drop in paint prices.

    The miss also seems to have been caused by the mess in Venezuela.

    The deconsolidation of our Venezuelan operations came as a result of a lack of exchangeability between the Venezuelan bolivar and the U.S. dollar coupled with our financial outlook for the foreseeable future. This lack of exchangeability restricted our Venezuelan subsidiary’s ability to pay dividends or settle intercompany obligations, which limited our ability to realize the benefits of our Venezuelan operations. In accordance with the applicable accounting guidance, we have deconsolidated our Venezuela operations and will account for our investment at cost going forward. Our cost investment is now valued at $0 at June 30, 2017 which has resulted in a pre-tax charge of $70.9 million for the three months ended June 30, 2017. We will no longer report the consolidated results of our Venezuelan operations.

    For 2017, Axalta now expects:

    • Net sales growth of 7-8% as-reported; 8-9% ex-FX, including acquisition contribution of 6-7%
    • Adjusted EBITDA of $940-970 million
    • Interest expense of ~$150 million
    • Income tax rate, as adjusted, of 22-24%
    • Free cash flow of $440-480 million
    • Capital expenditures of ~$130 million
    • Depreciation and amortization of ~$350 million
    • Diluted shares outstanding of 246-249 million

    Continental Building Products (CBPX) will report after the close.

  • Morning News: August 3, 2017
    , August 3rd, 2017 at 7:10 am

    What’s Behind the Dow’s Stunning Rise to 22,000

    Global Shares Fall as Apple’s Glossy Earnings Effect Fades

    BOE Cuts Growth, Wage Forecasts as Key Rate Kept at Record Low

    As Venezuela Spirals, U.S. Oil Confronts a $10 Billion Threat

    Elon Musk Reassures Investors as Tesla Ramps Up Model 3 Output

    Germany to Take on Tesla With Gigafactory Rival

    Fitbit Tops Sales Estimates on Renewed Demand for Fitness Bands

    Snack Giant Modelez, Facing Changing Tastes, Names a New C.E.O.

    Oclaro Surges 7%: FYQ4 Beats, Redeems Optical Despite China Woes

    Dish Misses Profit Expectations But Limits Subscriber Losses

    For Krispy Kreme, the Reese’s Peanut Butter Doughnut Tastes Like Money

    Wells Fargo Insurance Scandal Draws New York Subpoenas

    Racially Charged Nissan Vote Is a Test for U.A.W. in the South

    Jeff Miller: Ben Carlson Wins Silver Bullet: Great Article on Market Leaders

    Michael Batnick: A Millennial’s Rebuttal

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  • Cinemark Falls After AMC Bombs
    , August 2nd, 2017 at 10:47 am

    Shares of Cinemark (CNK) are down sharply today but it’s not because of anything they did. It was AMC, a competitor, who bombed their earnings report.

    Technically, it was a preview of the earnings report but the details are downright ugly. Still, I don’t see why AMC’s troubles will spillover to Cinemark. Wall Street likes to think that if one ball-bearing company has a problem, all ball-bearing companies must have the same problem. Cinemark reports earnings on Friday. Wall Street expects 45 cents per share.

    This morning’s ADP report said the economy created 178,000 payroll jobs last month. That was a tiny bit below expectations. The government’s jobs report will come out Friday morning.

    The Dow cracked 22,000 this morning thanks to an impressive earnings report from Apple. Last week on CNBC, I said that Apple would beat earnings expectations. I was right, but I was more cautious on the stock.

    I thought investors should steer clear of Apple until there’s a better understanding of the impact of the new iPhone. I realize this runs the chance of missing out on big profits if the iPhone is a hit, but I think it’s the safer move.

    Apple has been as high as $159.75 per share this morning. That gives them a market cap of $832 billion. The market value will crack $1 trillion when the stock gets near $192 per share.

    Apple now has more than $261 billion in cash. Of course, much of this rests outside the United States. Yesterday, I tweeted a fact to put it in perspective, and it seems to have caught on.

  • Morning News: August 2, 2017
    , August 2nd, 2017 at 6:59 am

    Counterfacting the Future

    India Cuts Rates as RBI Sees `Urgent Need’ to Boost Investment

    The Dow and the Dollar Diverge, and Investors Are Exuberant

    U.S. May Buy 747s Once Set for Russia to Cut Air Force One Costs

    Apple Shares Sail to Record High on Healthy iPhone Sales

    Joining Apple, Amazon’s China Cloud Service Bows to Censors

    Auto Sales Contract as Demand Stalls for Trucks and SUVs

    Why It Seems Like Open Season on Car Companies: QuickTake Q&A

    Bitcoin ‘Mining’ Goes From Enthusiasts to Giant Enterprises As Digital Currencies Surge

    SoftBank Said to Have $65 Billion in Funds for Charter Deal

    Under Armour Suffers From Market Forces, Lack of Focus, Analysts Say

    How the World’s Biggest Buyout Deal Crashed and Burned

    Why the Hatchet Men of 3G Spent $10 Million on a Better Oscar Mayer Weiner

    Jeff Carter: This Law Is Going to Change

    Cullen Roche: The Best Investment Writing

    Roger Nusbaum: VIX Below 9?

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  • Fiserv Earned $1.19 per Share for Q2
    , August 1st, 2017 at 4:08 pm

    For Q2, Fiserv (FISV) reported earnings of $1.19 per share. That was four cents below Wall Street’s estimate. The company didn’t give guidance for Q2, but their full-year guidance is unchanged at $5.03 to $5.17 per share. Quarterly revenue rose 2% to $1.39 billion.

    “We delivered solid financial results in the quarter consistent with our expectations,” said Jeffery Yabuki, President and Chief Executive Officer of Fiserv. “Our focus on client success continues to drive market momentum.”

    More details:

    Adjusted earnings per share increased 10 percent in the second quarter to $1.19 and increased 14 percent in the first six months of 2017 to $2.43 compared to the prior year periods.

    Adjusted operating margin increased 10 basis points to 32.0 percent in the second quarter and expanded 40 basis points to 32.3 percent in the first six months of 2017 compared to the prior year periods.

    Free cash flow increased 26 percent to $555 million in the first six months of 2017 compared to the prior year period. A cash distribution from StoneRiver of $31 million related to the sale of a business has been excluded from the company’s free cash flow results for the first six months of 2017.

    The company repurchased 2.5 million shares of common stock for $295 million in the second quarter and 5.9 million shares of common stock for $684 million in the first six months of 2017. As of June 30, 2017, the company had 14.6 million remaining shares authorized for repurchase.

    In June 2017, the company made a recommended cash offer to acquire Monitise plc for approximately £70 million ($89 million). The transaction is subject to certain conditions including Monitise shareholder approval (full details of the offer can be found on our website, Fiserv.com).

    Fiserv reiterated their 2017 guidance of $5.03 to $5.17 per share. That’s an increase of 14% to 17% over last year’s total of $4.43.

    “We remain on-track to achieve our full-year financial objectives which anticipate stronger results in the second half of the year,” said Yabuki.

    This is a rare earnings miss for Fiserv, but the important thing is that their guidance is the same.

  • Mixed Economic News this Morning
    , August 1st, 2017 at 11:40 am

    We had some key economic reports this morning.

    The government said that consumer spending rose 0.1% in June. They also revised the number for May up to 0.2%. Personal income in June was unchanged. Here’s how the two series have grown over the last 20 years.

    The ISM Manufacturing index for July was 56.3. That’s a pretty good number. Any number above 50 means the factor sector is expanding.

    The weak spot this morning was that construction spending fell 1.3% in June. Wall Street had been expecting growth of 0.4%.

    The big report this week will be Friday’s July jobs report. What’s interesting is that long-term bond yields have gradually worked their way lower all year.

  • Ingredion Earns $1.89 per Share
    , August 1st, 2017 at 8:38 am

    This morning, Ingredion (INGR) reported Q2 earnings of $1.89 per share. Wall Street had been expecting $1.85 per share. They earned $1.73 per share in last year’s Q2.

    “We continue to deliver shareholder value with another strong quarter, including solid operating income and earnings per share growth. Good operating efficiency, the impact of acquisitions, and higher specialty volumes more than offset headwinds in South America,” said Ilene Gordon, chairman, president and chief executive officer. “Operating income in North America reached record levels, but was lower in South America due to macroeconomic headwinds and the temporary interruption of manufacturing activities in Argentina associated with the implementation of a new labor agreement.”

    “As in the past, our growth strategy and continuous improvement programs drove margin expansion. The integrations of TIC Gums, Shandong Huanong Specialty Corn, and the Sun Flour Industry rice business are progressing as planned. We have completed an important organizational restructuring of our Argentina business and we will continue our disciplined approach to cost management. As we continue to execute our strategy, we expect another strong year and reiterate our anticipated 2017 adjusted EPS guidance in the range of $7.50 to $7.80,” Gordon added.

    Ingredion reiterated their full-year guidance of $7.50 to $7.80 per share. For the first half of this year, the company has made $3.77 per share. The shares gapped down at the open but are now down about 2%.