Archive for October, 2017

  • Express Scripts Earns $1.90 per Share
    , October 24th, 2017 at 4:07 pm

    After the closing bell, Express Scripts (ESRX) reported Q3 earnings of $1.90 per share. That was three cents better than expectations.

    “We have taken significant steps forward this year to build upon our heritage of industry leadership, client alignment and quality patient care, all of which positions us for growth,” said Tim Wentworth, President and CEO of Express Scripts. “We are transforming Express Scripts to win for the long term through significant investments in technology, launches of novel solutions that address the country’s biggest healthcare challenges, and expanding our role and reach in the broader healthcare market with our agreement to acquire eviCore. Payers and patients want affordable, quality care and access to medicine. No one is better positioned than Express Scripts to put medicine within reach.

    Here are some details for the last quarter:

    Adjusted claims of 343.6 million, down 1%

    GAAP net income of $841.7 million, up 16%

    GAAP earnings per diluted share of $1.46, up 27%

    Adjusted EBITDA of $1,947.4 million, flat from 2016 EBITDA

    Adjusted EBITDA per adjusted claim of $5.67, up 1% from 2016 EBITDA per adjusted claim

    Adjusted net income of $1,093.6 million, flat from 2016 adjusted net income

    Adjusted earnings per diluted share of $1.90, up 9%

    Net cash flow provided by operating activities of $1,899.9 million, up 28%

    Now for guidance. Express raised its 2017 range from $6.95 – $7.05 per share to $6.97 – $7.05 per share. The midpoint represents 10% growth over last year. For Q4, Express expects $2.03 to $2.11 per share.

  • The Stock Market is Very Noisy
    , October 24th, 2017 at 1:30 pm

    One of the difficult points to convey about the stock market is how indiscriminate it is.

    I’ll try to make this point with some math.

    I looked at the numbers going back to 1955. The S&P 500 gains, on average, about 1/37th of 1% each trading day. In other words, if the market was represented by one $37 stock, it would gain, on average, one penny each day. (Bear in mind that I’m discussing long averages.)

    The average standard deviation is almost exactly 1%. That means the stock price swings, on average, 37 times the stock’s value. That’s just the average; it can be a lot more than that. So each day, 36/37th of the market is complete noise.

    (Side note: Financial markets are not log-normal but that’s not a big deal for the point I’m trying to make.)

    That noise part of trading decreases very slowly. After one month (21 trading days), the market gains an average of 0.57% while the standard deviation rises to 4.49%. There’s still a lot of noise.

    At one year (253 days), the average gain is 7.03% with a standard deviation of 15.6%. That means it’s a hardly a big deal to see a market loss in one year.

    At four years, the average gain and standard deviation finally become equal at just over 31.2%.

    At one decade, the market’s return is about twice its standard deviation (95% to 49%).

    Keep this mind the next time you hear someone predict what the market will do over the next few weeks.

  • Earnings from Wabtec and Sherwin-Williams
    , October 24th, 2017 at 11:22 am

    We had two earnings reports this morning, Wabtec and Sherwin-Williams. Express Scripts will report after the close (I incorrectly said ESRX reports on Wednesday in the last newsletter. My apologies.)

    The earnings report from Sherwin-Williams (SHW) is a bit confusing, so I’ll try to clear it up. For Q3, the company earned $3.33 per share, but that figure includes $1.42 per share in acquisition costs. That means Sherwin made $4.75 per share from continuing operations. That beat Wall Street’s estimate of $4.67 per share. Sherwin’s EBITDA from continuing ops is up 9.6% this year to $1.70 billion.

    Sherwin previously said to expect adjusted earnings between $4.80 and $5.20 per share. The company estimates that the hurricanes dinged sales by $50 million and EPS by 27 cents per share. Considering all that, this was a decent quarter.

    Now for guidance. SHW sees Q4 ranging between $1.97 and $2.27 per share. Adding back 98 cents in acquisition costs, that comes to $2.95 to $3.25 per share.

    For all of 2017, Sherwin expects earnings between $11.20 and $11.50 per share. Adding in costs, the range is $14.85 to $15.15 per share. That’s an increase of five cents per share at both ends from their previous guidance.

    The shares are up about 0.30% this morning.

    For Q3, Wabtec (WAB) earned 88 cents per share. That beat Wall Street’s estimate of 84 cents per share. Some stats:

    Cash from operations was $40 million for the third quarter. For the first nine months of 2017, cash from operations decreased compared to the same period of 2016 mainly due to an increase in working capital.

    At Sept. 30, the company had cash of $228 million and debt of $1.9 billion. Total debt was 6 percent lower than at the end of the second quarter.

    Wabtec’s multi-year backlog rose 2% to a record $4.5 billion. Their 12-month backlog is up 5% to $2.2 billion, also a record.

    Wabtec now expects full-year revenue of $3.8 billion, and EPS between $3.45 and $3.50 per share. That’s a reduction from their previous guidance of $3.55 to $3.70 per share, but I believe the newer figure includes a charge of 18 cents per share.

    The stock is currently up about 4.7% today.

  • Morning News: October 24, 2017
    , October 24th, 2017 at 6:59 am

    Cutting Taxes Is Hard. Trump Is Making It Harder.

    Taylor’s Walk on Supply Side May Leave Him More Dove Than Yellen

    Treasury Faults Arbitration Rule Aimed at Protecting Consumers

    In Washington Clash of Industries, King Corn Trounces Big Oil

    Hundreds of Thousands of Snap Spectacles Are Reportedly Sitting in Warehouses Unsold

    General Electric: The Time Is Now

    Amazon Rivals Turn to Legal Fine Print to Stem Whole Foods Strategy

    Tesla Is Setting Itself Up to Be the Apple of China’s Electric Car Market

    Saudi Billionaire Prince Alwaleed Predicts Bitcoin Will ‘Implode’ Like Enron

    Nike’s $50 Billion Bluster Looks Dead Just Two Years Later

    Microsoft to Drop Lawsuit After Government Revises Data Request Rules

    Courts Reverse Johnson’s Baby Powder Judgments for Nearly $500 Million

    Cullen Roche: Is a Taylor Tantrum on the Horizon?

    Jeff Carter: Dividing the Equity Pie

    Roger Nusbaum: Dow 23,000 Hats For Everyone!

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  • Boring Markets Are the Best
    , October 23rd, 2017 at 9:18 pm

    I looked at all the daily returns for the S&P 500 since 1957. If you take all the days when the S&P 500 moved more than 1.14% in a day, up or down, the combined return comes out to zero. They completely balance each other out.

    The entire return, more than 55-fold over 60 years, comes on the low-volatility days (up or down less than 1.14%).

    The high-volatility days happen 16.5% of the time, or roughly one day in six. (I’m just looking at capital gain and not dividends.)

    Historically, it’s been to your advantage to stick with a boring, low-vol market.

  • BDX’s Buyout Offer for BCR Is Up to $330
    , October 23rd, 2017 at 2:26 pm

    Exactly six months ago, Becton, Dickinson (BDX) offered to buy CR Bard (BCR) for $317 per share.

    The deal called for BCR shareholders to get $222.93 in cash plus 0.0577 shares of BDX for each share of BCR they owned.

    It’s easier for an acquiring company to offer shares to make a purchase. This is especially true if their shares are overpriced. The firm being bought, however, prefers more cash since the shares of a buying firm can go down. You always want some protection from a crash.

    With this deal, it was about 70% cash and 30% stock. The $317 offer was a 25.3% premium to BCR’s previous closing price.

    Shares of BCR shot up, but not to $317 per share. For one thing, shares of BDX fell a little bit. That’s natural for the stock doing the buying. Also, the market valued BCR slightly below the value of the deal because you never know if the deal will fall though. Things like this have happened before.

    Just after the deal was announced, BCR was valued about 3% below BDX’s offer. Over the last six months, that discount has gradually melted away. It now seems certain the deal will happen sometime in Q4. On Friday, the discount was just 0.1%.

    The good news for BCR shareholders is that BDX has rallied recently. That means the buyout price is higher. Going by Thursday’s close, the buyout price for Bard is $330.48 per share. This turned out to be a very good deal for us.

    Here’s a chart of BCR (blue) along with the deal’s price (red). Note that the blue line is closing the gap even as the red line goes higher.

    One minor update on BCR/BDX. The European Commission approved the deal contingent upon Becton divesting its soft tissue core needle biopsy product line. That’s no problem. Here’s the press release.

    “We continue to make good progress on the Bard acquisition and the conditional clearance from the European Commission is a positive step forward,” said Vincent A. Forlenza, chairman and CEO of BD. “As expected, we have committed to divesting certain assets associated with our soft tissue core needle biopsy product line, which we acquired with CareFusion, to satisfy the conditions to closing requested by the European Commission. We continue to expect that the BD and Bard transaction will close in the fourth calendar quarter of 2017, subject to customary closing conditions and additional regulatory approvals, including the U.S. Federal Trade Commission and other regulatory bodies.”

  • Snap-on to $190?
    , October 23rd, 2017 at 1:48 pm

    So says Barrington Research via Barron’s:

    We are raising our rating on Snap-On to Outperform from Market Perform based on valuation, our belief in a gradual rebound in the Tools Group results in 2018 and the company’s positive long-term outlook driven by secular trends for vehicle repair. Our price target range is $180-$190.

    Based on better-than-expected third-quarter results, we raised our 2017 earnings-per-share estimate on Snap-On (ticker: SNA) to $10.09 (from $10.06) and maintained our 2018 EPS estimate at $11.00.

    Snap-On’s third-quarter sales of $903.8 million increased 8.4% including an organic sales increase of 2.3% and $44.3 million of acquisition-related sales. EPS for the quarter, excluding a pretax charge of $15 million, totaled $2.45, representing a 10.2% year-over-year increase. Our estimates for the third quarter called for net sales of $867 million and EPS of $2.39. The First Call consensus estimates called for net sales and EPS of $891 million and $2.43, respectively.

    Positives in the quarter included strong performances from both the Repair Systems & Information (RS&I) and Commercial & Industrial (C&I) Groups, while the Tools Group continues to exhibit sluggishness due in large part to U.S. franchise operations that registered a mid-single-digit sales decline.

    RS&I Group sales of $333.5 million increased 16.6% with an 8.2% organic sales increase, $21.6 million of acquisition-related sales and $2.1 million of favorable exchange rates. Organic sales growth in the quarter was driven by high-single-digit sales gains in diagnostics and repair information products to independent repair shops, mid-single-digit growth in sales to original equipment manufacturer (OEM) dealerships and low-single-digit sales gains in undercar equipment. Operating earnings increased 16.2% to $83.4 million.

    C&I Group sales increased 8.7% to $314.6 million reflecting organic growth of 0.2%, $22.7 million of acquisition-related sales and $2 million of favorable exchange rates. C&I experienced high- single-digit sales gains to customers in critical industries with mid-single-digit sales growth in the European hand tools business, offset by declines in power tool sales and Asia-Pacific operations. Operating earnings increased 14.6% to $50.1 million.

    Tools Group sales of $392.7 million decreased 1.1% reflecting an organic sales decline of 1.6% driven by a mid-single-digit decline in U.S. franchise operations that was partially offset by a double-digit sales increase in European operations. Hurricanes in the U.S. during the quarter negatively impacted sales by $8 million. Operating earnings declined by 12.8% to $56.3 million.

    Financial Services operating earnings increased 10.7% to $56 million on revenue growth of 10.3% to $79 million. Originations of $271.8 million increased by $2 million year-over-year.

  • General Electric Faces Reality
    , October 23rd, 2017 at 12:07 pm

    General Electric is not doing well. Their last quarter was a disaster. The company earned 29 cents per share. Wall Street had been expecting 49 cents. At the beginning of the year, shares of GE were around $32. Now they’re at $22.50. In 2000, GE was over $60 per share.

    Frankly, I don’t have a strong opinion on GE. (I said recently on CNBC that it could be worth adding if it falls below $20 per share.) But what I find interesting is that Wall Street is thinking that GE will finally lower its quarterly dividend. A few analysts have already said to expect this.

    The reason this is so important is…well, that it’s GE! This is the bluest of the blue chips. GE has been a member of the Dow for 121 years. This was the set-and-forget stock. Buying GE was for people who didn’t want to speculate in stocks. Just put your money in good ol’ GE. It’s better than a bank!

    Well, now we know how safe the banks were!

    To me, it has appeared that GE has been doing all it could to repel lowering its dividend. Now, they have to face reality. The current dividend is 24 cents per share. That works out to a yield of 4.2%. Of course, that assumes the dividend stays at 24 cents.

    GE will make about $1.20 per share this year. So the dividend eats up a lot of money that could be reinvested in the business. For comparison, the average S&P 500 company pays out about one-third of their profits as dividends.

    There’s an unstated rule about dividends. Once you set a dividend, you’re committed to raising it, or at least, maintaining it. Dividend cuts look very bad. There’s no law which says you must maintain your dividend, but it’s expected — and so much of Wall Street revolves around expectations.

    The company did slash its dividend during the financial crisis, but so did tons of other companies. This is different. This a nice reminder than no one is safe. A growing economy, a bull market, low interest rates and a blue chip name still aren’t good enough.

    There’s a reason why value investing had such a good track record — people are terrified of going near a troubled name.

  • The Most Chill Rally Ever
    , October 23rd, 2017 at 11:39 am

    Today is the 242nd-straight day in which the S&P 500 has not had a drawdown of more than 3%. Since the election, an investor in the S&P 500 has never seen a loss of at least 3%.

    Not only is this one of the most hated rallies in history, but it’s also one of the most chill rallies.

    Chart via Charlie Bilello.

  • Morning News: October 23, 2017
    , October 23rd, 2017 at 6:59 am

    Seen From Space, China’s Oil Demand Looks Stronger Than Expected

    The Wolf of Wall Street Thinks Some ICOs Are ‘The Biggest Scam Ever’

    This Tax Strategy Failed Last Year, but Should You Do It Again Anyway?

    Tesla Plant in China May Be a First

    Tech Giants Are Paying Huge Salaries For Scarce A.I. Talent

    Noble Group Warns of Loss Topping $1 Billion

    How Intuitive Surgical Turned Medical Sci-Fi Into Reality

    GM Jettisons Dinosaur Image as Investors Buy Into Its Mobility Bets

    Kaspersky Lab Says It Will Submit Software For Independent Review

    The Finger-Pointing at the Finance Firm TIAA

    Merrill Lynch Fined $45 Million by U.K. for Failing to Report Transactions

    Wall Street May Have Its Own Harvey Weinstein Problem

    Jeff Miller: Where Is The Fear?

    Ben Carlson: What The Charts Don’t Tell You

    Howard Lindzon: The Other Side of This Bull Market – Momentum Monday

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