CWS Market Review – April 26, 2019

“Every day, I assume every position I have is wrong.” – Paul Tudor Jones

Now that earnings season is in full swing, Wall Street is in its happy place. Truthfully, earnings really aren’t that great this season, but they’re better than they could have been. At least traders are happy. On Tuesday, the S&P 500 closed at a fresh all-time high. This means that we made back everything we lost in a nasty correction that lasted from late September to late December.

We had lots of Buy List earnings reports this week. Moody’s jumped 3% on a very good report. It’s now a 38% winner on the year for us. Hershey beat estimates and gapped 5% to a new high. Cerner raised guidance. Stryker beat and raised guidance. Raytheon creamed estimates, and AFLAC beat as well. Sherwin-Williams shook off a tepid earnings report. I’ll go over all our earnings reports from this week. I’ll also preview a slew of Buy List earnings reports headed our way next week.

Here’s our updated Earnings Calendar:

Twenty of our 25 Buy List stocks are reporting their Q1 earnings this cycle. Here’s a list of reporting dates, Wall Street’s consensus estimates and actual reported results.

Company Ticker Date Estimate Result
Eagle Bancorp EGBN 17-Apr $1.12 $1.11
Signature Bank SBNY 17-Apr $2.77 $2.65
Torchmark TMK 17-Apr $1.59 $1.64
Check Point Software CHKP 18-Apr $1.31 $1.32
Danaher DHR 18-Apr $1.01 $1.07
Sherwin-Williams SHW 23-Apr $3.69 $3.60
Stryker SYK 23-Apr $1.84 $1.88
Moody’s MCO 24-Apr $1.93 $2.07
AFLAC AFL 25-Apr $1.06 $1.13
Cerner CERN 25-Apr $0.61 $0.61
Hershey HSY 25-Apr $1.46 $1.59
Raytheon RTN 25-Apr $2.47 $2.77
Fiserv FISV 30-Apr $0.82
Church & Dwight CHD 2-May $0.66
Cognizant Technology Solutions CTSH 2-May $1.04
Continental Building Products CBPX 2-May $0.34
Intercontinental Exchange ICE 2-May $0.90
Broadridge Financial BR 7-May $1.50
Disney DIS 8-May $1.55
Becton, Dickinson BDX 9-May $2.58

There’s a lot to get to this week, so let’s jump right in.

Earnings from Stryker and Sherwin-Williams

We had two earnings reports on Tuesday. Before the opening bell, Sherwin-Williams (SHW) reported Q1 earnings of $3.60 per share. That was below estimates of $3.69 per share. Sales rose 1.9% to $4.04 billion.

Here’s the important fact for investors: The company didn’t alter its full-year outlook of $20.40 to $21.40 per share (that excludes acquisition costs). That compares with $18.53 per share a year ago. For Q2, Sherwin expects sales to rise by 2% to 5%. For the full year, they expect sales to rise by 4% to 7%. This isn’t terrible news.

Here’s what the CEO had to say:

Commenting on the first quarter, John G. Morikis, Chairman and Chief Executive Officer, said, “We made good progress on our pricing initiatives across all segments during the quarter and effectively managed SG&A spending, but volumes fell short of expectations due to a slower start to the architectural painting season in North America and continued challenging conditions in many end markets outside North America. Despite the volume shortfall and higher year-over-year raw material costs, consolidated Company adjusted gross margin, which excludes acquisition-related costs, improved sequentially and was flat year-over-year. We expect the positive trend in gross margin and operating expense control to continue as the year progresses, and volume growth should also improve over the balance of the year, particularly in the back half.

“Looking at our performance by segment, in The Americas Group, despite a strong backlog and project pipeline reported by many of our professional customers, volume growth in the quarter was slower than expected. We continued to invest by opening 15 net new store locations in The Americas Group during the quarter. In our Consumer Brands Group, most of the softness in demand in the quarter was in markets outside North America. Consumer Brands Group adjusted segment operating margin in the first quarter expanded sequentially and year-over-year, and we are very well positioned across all North American retail channels heading into the important spring selling season. Performance Coatings Group achieved modest sales growth and increased adjusted segment operating margin in the quarter against year-over-year raw material pressure.”

Sherwin is fundamentally sound. I think the weakness they had in Q4 is behind them. Reaffirming guidance is a key move. I’m lifting my Buy Below on Sherwin to $460 per share.

Last week, I told you Stryker (SYK) had a good shot at beating expectations, and I was right. The company reported Q1 earnings of $1.88 per share, which beat the Street by four cents per share. That’s an increase of 11.9% over last year. Net sales rose 8.5% to $3.5 billion, and organic net sales increased by 7.3%. For the quarter, Stryker’s adjusted operating margin was 25.1%.

Now for guidance. For Q2, Stryker expects earnings between $1.90 and $1.95 per share. Wall Street had been expecting $1.96 per share. For the full year, Stryker sees earnings between $8.05 and $8.20 per share. That’s an increase of five cents per share to the low end. Wall Street was at $8.13 per share.

This is a really good stock. Stryker remains a buy up to $192 per share.

Moody’s Is a Buy Up to $200 per Share

On Wednesday, Moody’s (MCO) released a very good earnings report. The credit-ratings agency reported Q1 earnings of $2.07 per share. That beat estimates by 14 cents per share. The stock gapped up 3% on Wednesday.

Revenue at Moody’s Analytics rose 16%. The company stood by its full-year forecast of $7.85 to $8.10 per share. Moody’s is our top-performing stock this year with a YTD gain of 38%. I’m lifting my Buy Below on Moody’s to $200 per share.

Earnings from AFLAC, Hershey, Cerner and Raytheon

On Thursday, we had four more Buy List earnings reports. Let’s start with AFLAC (AFL). The duck stock had another good quarter. For Q1, AFLAC had adjusted operating earnings, not including currency, of $1.13 per share. That beat estimates by seven cents per share.

The supplemental insurer expects to buy back between $1.3 billion and $1.7 billion in shares this year. AFLAC recently raised its dividend for the 36th year in a row. For 2019, AFLAC is standing by its previous guidance for earnings of $4.10 to $4.30 per share. That assumes the yen trades at ¥110.39 to the dollar.

This means AFLAC is currently going for about 12 times this year’s earnings. Buy up to $50 per share.

Last quarter, Cerner (CERN) did what I pretty much expected. The healthcare-IT folks earned 61 cents per share. That was in the center of their guidance. Sales rose 8% to $1.39 billion.

For Q1, Cerner had operating cash flow of $317.1 million and free cash flow of $123.5 million. For Q2, Cerner expects earnings of 63 to 65 cents per share on revenue of $1.41 to $1.46 billion.

For all of 2019, Cerner sees earnings of $2.64 to $2.72 per share. That’s up from the previous guidance of $2.57 to $2.67 per share. Cerner recently said it had reached an agreement with Starboard Value to start paying a dividend and increase its buyback authorization by $1.5 billion. Cerner is a solid stock. Buy up to $66 per share.

Hershey (HSY) rebounded well after the disappointment from Q4. For Q1, the chocolatier had adjusted Q1 earnings of $1.59 per share. That’s an increase of 12.8% over last year. It also beat Wall Street’s consensus by 13 cents per share.

Hershey reiterated its full-year guidance of $5.63 to $5.74 per share. The shares jumped 4.6% on Thursday and broke out to a new 52-week high. Notice how good companies always bounce back. I’m raising my Buy Below on Hershey to $126 per share.

Raytheon (RTN) shot a tomahawk missile at its earnings estimates. For Q1, the company made $2.77 per share which was 30 cents more than expectations. Wow! Raytheon made $2.20 per share for last year’s Q1.

The company is doing especially well with cyber-security and its intelligence and information unit. Despite the impressive earnings beat, Raytheon didn’t change its full-year earnings guidance of $11.40 to $11.60 per share and sales guidance of $28.6 billion to $29.1 billion. I think that disconcerted some traders, and the shares pulled back 4.4% on Thursday.

Last month, Raytheon hiked its dividend by 8.6%. That was its 15th annual dividend increase in a row. Raytheon remains a buy up to $190 per share.

Five Buy List Earnings Reports Next Week

We have five more Buy List earnings reports next week. Let’s start with Fiserv (FISV), which reports on April 30. Three months ago, the company had an uncharacteristically underwhelming earnings report. They missed the Street by two cents per share, and earnings came in at the low end of their guidance.

Am I worried? Not at all. Despite the earnings miss, Fiserv had Q4 earnings growth of 24%, and operating margin came in at 33.4%. For the year, Fiserv made $3.10 per share. This was their 33rd year in a row of double-digit earnings growth. On top of that, Fortune named Fiserv to their list of most-admired companies for the sixth year in a row.

For 2019, Fiserv expects earnings to range between $3.39 and $3.52 per share. They’ll need to get above $3.41 to extend their double-digit streak. Fiserv also said they expect the First Data deal to close in the second half of 2019. For Q1, Wall Street expects 82 cents per share.

We have four more earnings reports on May 2.

Three months ago, Church & Dwight (CHD) missed Q4 estimates by a penny per share. The stock got clobbered, but I wasn’t too worried. The CEO noted that they were hitting 2019 “with momentum,” and that they have price increases on the way. Wall Street expects Q1 earnings of 66 cents per share.

The big news at Cognizant Technology Solutions (CTSH) is that Brian Humphries has taken over as CEO on April 1 from Francisco D’Souza, who has been CEO since 2007. D’Souza has done a great job, and he’ll remain a member of the board.

For 2019, Cognizant sees earnings of at least $4.40 per share. Wall Street had been expecting $4.45 per share. The company didn’t provide EPS guidance for Q1, but they said sales growth should be between 7.5% and 8.5%. Wall Street expects $1.04 per share, which sounds about right.

Continental Building Products (CBPX) may be our most dramatic stock. In February, the wallboard company soared 8% after its Q4 earnings report matched expectations. Of course, that makes you wonder what expectations really were. I suspect Wall Street has been secretly expecting much worse.

Yet after the initial surge, Continental turned around and gave it all back. The company gives guidance on several metrics but not EPS. For 2019, Continental sees SG&A of $40 million to $42 million and capital expenditures of $28 million to $32 million. Cost-of-goods-sold inflation per unit compared with 2018 is expected to be 4.5% to 6.5%. For Q1, Wall Street expects 34 cents per share.

Last year was Intercontinental Exchange (ICE)’s 13th straight year of record revenues. I think they have a good chance of making this year number 14. For 2018, ICE made $3.59 per share. That’s up 21% over 2017. ICE’s operating margin was an impressive 58%. ICE provides guidance for several metrics except EPS. For Q1, Wall Street expects 90 cents per share, which should be beatable.

That’s all for now. Next week will have it all—more earnings, the April jobs report, the new ISM report, and if that’s not enough, there’s a Fed meeting as well. On Monday, we get personal income. The Federal Reserve meets on Tuesday and Wednesday. The policy statement will come out on Wednesday at 2 pm. Don’t expect any change on rates. Then on Friday, the government releases the April jobs report. 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 on April 26th, 2019 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.