CWS Market Review – October 19, 2018

“I’m always fully invested. It’s a great feeling to be caught with your pants up.”
– Peter Lynch

The stock market has calmed down somewhat from its temper tantrum earlier this month. What’s striking about the recent unpleasantness wasn’t its degree; a drop of 5.2% in two days really isn’t that much in historical terms. Rather, it’s the jarring jump from a very placid market to a semi-violent one.

Goldman Sachs points out that we just experienced the fifth-largest rise in volatility on record. In our case, rising from very low to moderate. The other four times usually centered on major events like President Eisenhower’s heart attack in 1955. Consider that all five of the calmest quarters in the last 20 years have occurred since the start of 2017.

I have to warn you that the storm hasn’t passed. We’re due for some more turbulence soon. In five of the last six trading session, the S&P 500 has traded below its 200-day moving average. On Thursday, the index closed above its 200-DMA, but only by a teeny tiny fraction, just 0.03%.

The good news for us is that Q3 earnings season has arrived. This gives our Buy List stocks a chance to show their mettle. In this week’s CWS Market Review, I’ll cover our four earnings reports from this week. I’ll also preview seven more reports coming next week. This is a busy time for us, so let’s jump right into our Q3 earnings calendar.

Four Buy List Earnings Reports

Here’s a look at our calendar for this earnings season. Twenty of our 25 stocks are due to report over the next three weeks. I’ve listed each stock’s name, ticker, earnings date, Wall Street estimate and result.

Company Ticker Date Estimate Result
Alliance Data Systems ADS 18-Oct $6.20 $6.26
Danaher DHR 18-Oct $1.08 $1.10
Signature Bank SBNY 18-Oct $2.83 $2.84
Snap-On SNA 18-Oct $2.86 $2.88
AFLAC AFL 24-Oct $0.99
Check Point Software CHKP 24-Oct $1.36
Torchmark TMK 24-Oct $1.53
Cerner CERN 25-Oct $0.63
Sherwin-Williams SHW 25-Oct $5.76
Stryker SYK 25-Oct $1.68
Moody’s MCO 26-Oct $1.78
Cognizant Technology Solutions CTSH 30-Oct $1.13
Wabtec WAB 30-Oct $0.95
Fiserv FISV 31-Oct $0.77
Intercontinental Exchange ICE 31-Oct $0.80
Church & Dwight CHD 1-Nov $0.54
Ingredion INGR 1-Nov $1.97
Becton, Dickinson BDX 6-Nov $2.93
Continental Building Products CBPX 8-Nov $0.49
Carriage Services CSV TBA $0.22

Our first four earnings reports all came on Thursday morning before the opening bell. Let’s start with Danaher (DHR). The diversified manufacturer reported Q3 earnings of $1.10 per share. That’s a 10% increase over last year. Core revenues rose 6.5%. The company had told us to expect Q3 earnings to range between $1.05 and $1.08 per share.

For Q4, Danaher expects earnings between $1.25 and $1.28 per share. The company also increased its full-year guidance. The old range was $4.43 to $4.50 per share. The new range is $4.49 to $4.52 per share.

I was particularly pleased to see Danaher’s operating margins expand to 17.1% from 16.8% a year ago. Traders took down shares of DHR for a loss of 3.5% during the day on Thursday. I’m keeping our Buy Below at $110 per share.

Next up is Alliance Data Systems (ADS). The loyalty-rewards stock reported Q3 core earnings of $6.26 per share. That’s six cents above expectations. So far this year, core earnings are up 20% to $15.70 per share. That puts ADS on track to hit its full-year target of $22.50 to $23.00 per share.

The most interesting part of the earnings report isn’t the financial numbers; instead, it’s what the CEO Edward Heffernan had to say about the company’s future:

“Shifting to our strategic direction, we have spent the better part of this year reviewing the portfolio of businesses that constitute Alliance Data. We are nearing the end of this process and feel it’s appropriate to share our current thinking.”

Heffernan continued: “Stated simply, we firmly believe that our current stock price does not reflect the intrinsic value of our portfolio of businesses across the enterprise. We are evaluating which assets would likely thrive under a different steward, while also unlocking value for our stockholders. We know that the right answer could involve significant realignment of our businesses and we are actively evaluating that optimal strategy. We expect to crystallize a game plan of precisely − what and how − before year end, and will continue to communicate our path forward when appropriate.”

The company is looking to sell off its non-card business. ADS thinks that side of the business is depressing the share price, and they’re probably right. The stock is going for less than 10 times earnings. ADS hopes to make a big announcement soon. On the earnings call, Heffernan was very clear:

Regarding our upcoming announcement for non-cards, make no mistake, we will be moving very aggressively on this and that it will be significant in size. This is not going to be minor surgery. Our Board and management are in full agreement as to the needed actions, and frankly, we like what we’re seeing from a market demand perspective.

Look for more news from ADS soon. The market likes this move, and so do I. The shares gained 5.5% in Thursday’s trading. ADS remains a solid buy up to $245 per share.

Snap-On (SNA) was our big winner last earnings season, but it may be our big loser this time. For Q3, SNA’s sales fell from $903.8 million to $898.1 million. That was well below Wall Street’s estimates of $931 million. The reason isn’t hard to find: tariffs.

Snap-on says that costs have risen sharply. For example, steel costs are up 30%. For the most part, Snap-on has absorbed these price hikes. Despite its poor sales numbers, Snap-on’s earnings were above expectations. For Q3, Snap-on earned $2.88 per share which was two cents better than estimates.

Traders, however, were not pleased. Snap-on plunged for a 9.5% loss on Thursday. I’m lowering my Buy Below price on Snap-on to $167 per share.

Finally, Signature Bank (SBNY) reported Q3 earnings of $2.84 per share. That’s up from $2.29 per share from last year. It also beat Wall Street’s estimate by one penny per share. Let’s look at some numbers. Total deposits are up 7.2% so far this year to $36.09 billion. Loans are up 12.6% to $35.13 billion. For Q3, net interest margin was 2.88%.

Overall, this was a solid quarter for Signature. The shares gained 3.2% in Thursday’s trading. For now, I’m keeping my Buy Below at $131 per share.

Seven Buy List Earnings Reports Next Week

Next week will be another busy one for Buy List earnings reports. It kicks off with three reports on Wednesday.

During the summer, I had been concerned about AFLAC’s (AFL) poor stock performance. Fortunately, the duck stock’s Q2 report put my fears at ease.

For Q2, the company made $1.07 per share, which topped its range of 91 cents to $1.05 per share. AFLAC also increased its full-year guidance range to $3.90 to $4.08 per share. That assumes ¥112.16 to the dollar. The previous range was $3.72 to $3.88 per share. For Q3, AFLAC expects earnings of 87 cents to $1.02 per share. That assumes an exchange rate of ¥110 to ¥115 to the dollar.

Check Point Software (CHKP) did very well for us last earnings season. The cyber-security folks had been expecting $1.15 to $1.35 per share. They made $1.37. Check Point also doubled their share buyback from $1 billion to $2 billion.

For Q3, CHKP expects revenues between $454 million and $474 million and EPS in the range of $1.30 to $1.40. The full-year outlook is unchanged at $5.45 to $5.75 per share. In April, they lowered their full-year guidance, so it’s good to see that the concerns from earlier this year have passed.

Also next Wednesday. Torchmark (TMK) is slated to report its Q3 results. Don’t let these quiet stocks fool you. Torchmark is a very good company.

For Q2, TMK made $1.51 per share. That beat estimates by two cents per share. The company also raised guidance. Torchmark’s initial guidance for this year was $5.93 to $6.07 per share. At the time, I said I thought that was too low and that they could probably hit $6.10 per share in 2018. In July, they upped their full-year range to $6.02 to $6.12 per share. If that’s right, it means Torchmark is going for 14 times earnings. For Q3, Wall Street expects $1.53 per share.

We have three more earnings reports next Thursday. Let’s start with Cerner (CERN). Three months ago, Cerner reported earnings of 62 cents per share, which was a two-cent beat. Revenue for Q2 was up 6% to $1.368 billion. For Q3, Cerner expects revenue between $1.335 billion and $1.385 billion and earnings between 62 and 64 cents per share. Cerner’s current full-year EPS range is $2.45 to $2.55.

Starting in May, Sherwin-Williams (SHW) staged a nice rally for us, but it’s been down sharply over the past month. In fact, almost any stock related to construction or homebuilding has been feeling the heat.

In this summer’s Q2 report, Sherwin not only beat earnings but also raised full-year guidance. The current range is $19.05 to $19.35 per share. Fortunately, the Valspar merger seems to be going well. For Q3, Wall Street expects earnings of $5.76 per share.

Stryker (SYK) was uncharacteristically weak three months ago. The company beat earnings, but the stock dropped more than 10%. On the plus side, Stryker has raised its full-year guidance twice this year. For all of 2018, Stryker now expects earnings to range between $7.22 and $7.27 per share. For Q3, they’re looking for earnings between $1.65 and $1.70 per share.

Moody’s (MCO) is due to report next Friday. The credit-ratings agency had a very good report three months ago. Moody’s earned $2.04 per share which beat consensus by 15 cents per share. Overall, Q2 was a solid quarter for Moody’s. Quarterly revenue rose 17%, and I was impressed by the growth of the Moody’s Analytics business, plus Bureau van Dijk.

Still, shares of Moody have been weak since this summer. The stock is currently 13% below its September high. Frankly, I’m not worried about Moody’s. Most importantly, Moody’s recently reaffirmed their full-year EPS guidance of $7.65 to $7.85. For Q3, the consensus on Wall Street is for $1.78 per share.

That’s all for now. Next week will be dominated by earnings reports. In addition to earnings results, many companies will offer preliminary guidance for next year. The major economic report next week will be Friday’s GDP report. This will be our first look at growth for Q3. The report for Q2 was quite good, but we’ve had a hard time stringing together two or three decent reports in a row. Let’s hope we break this trend. 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

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