CWS Market Review – October 18, 2019

“There is nothing more deceptive than an obvious fact.” – Sherlock Holmes

This week, our two Buy List bank stocks rallied after reporting better-than-expected earnings. Signature Bank gained 1.9%, and Eagle Bank rose 1.4%. At one point, Eagle was up more than 11% on the day.

I’m especially glad to see good news from Eagle after the stock got a super-atomic wedgie three months ago. Shares of EGBN are now up 16% off their low, yet the stock is still trading at less than 10 times this year’s earnings. I’ll have all the details in a bit.

On Thursday, the S&P 500 came close to finishing above 3,000 for the first time in a month, but it fell just shy. Over four scary trading days this summer, the index dropped 5.5%, and we’ve nearly made it all back.

In this week’s CWS Market Review, I’ll go over our two Buy List earnings reports for this week. I’ll also preview the reports we have coming next week. It’s going to be a busy week for us. We have seven Buy List stocks due to report, including five on Thursday. I’ll break it all down for you. But first, let’s look at look at our Q3 earnings calendar.

Q3 Earnings Calendar

Here’s a table of the 20 Buy List stocks that are reporting this earnings season (the other five don’t follow the March/June/September/December cycle). I’ve included each stock’s earnings date, Wall Street’s consensus and the actual results. Please note that not all the dates are out, and the earnings consensus may change.

Company Symbol Date Estimate Results
Eagle Bancorp EGBN 16-Oct $1.07 $1.08
Signature Bank SBNY 17-Oct $2.70 $2.75
Sherwin-Williams SHW 22-Oct $6.48
Globe Life GL 23-Oct $1.69
AFLAC AFL 24-Oct $1.07
Cerner CERN 24-Oct $0.66
Danaher DHR 24-Oct $1.15
Hershey HSY 24-Oct $1.60
Raytheon RTN 24-Oct $2.86
Check Point Software CHKP 28-Oct $1.40
Stryker SYK 29-Oct $1.90
Cognizant Technology Solutions CTSH 30-Oct $1.05
Moody’s MCO 30-Oct $1.99
Church & Dwight CHD 31-Oct $0.61
Intercontinental Exchange ICE 31-Oct $0.94
Becton, Dickinson BDX 5-Nov $3.31
Fiserv FISV 6-Nov $0.97
Disney DIS 7-Nov $0.95
Broadridge Financial BR TBA $0.72
Continental Building Products CBPX TBA $0.39

Earnings from Eagle and Signature

Three months ago, shares of Eagle Bancorp (EGBN) plunged after the bank reported higher legal costs. Unfortunately, Eagle couldn’t say much because it’s an ongoing investigation. However, Eagle made it clear that it would have no impact on their operations.

On Wednesday, we learned that that appears to be correct. Eagle reported net income of $36.5 million for its third quarter. That’s down 6% from a year ago. That works out to $1.07 per share. Excluding two non-recurring items, Eagle made $1.08 per share. That beat Wall Street’s consensus by a penny.

Those aren’t bad numbers, especially considering the low interest rates and flat yield curve. Remember that a bank is basically the yield curve with incorporation papers. The key stat for any bank is net interest margin. For Q3, Eagle’s net interest margin was 3.72%.

Susan Riel, Eagle’s CEO, said, “We continue to see good lending opportunities and have worked to attract more deposits to fund those loans and to bring down the loan-to-deposit ratio at third quarter-end 2019 compared to second quarter-end 2019. Furthermore, by sustaining favorable operating leverage, we maintain strong profitability while rates remain very low, and we stay well positioned when interest rates begin moving back to more normalized levels, given the degree of variability in our asset pricing.”

Nonperforming loans are just 0.66% of total assets. Another key stat for any bank is the efficiency ratio. That’s the ratio of non-interest expense to total revenue. For Q3, Eagle’s efficiency ratio was 38.34%. That’s pretty good. Earlier this year, Eagle snapped its ten-year streak of quarterly earnings growth.

Now for the important concern, which is legal costs. For Q3, Eagle has legal bills of $3.6 million. That’s up from $2.1 million a year ago. Of course, that’s due to the investigation that the bank mentioned this summer. All Eagle could say is that they expect “elevated” levels of legal costs for the rest of this year.

Overall, Eagle Bancorp is making do in a difficult environment. The stock is going for just under 10 times this year’s earnings estimate. Eagle remains a buy up to $47 per share.

On Thursday, Signature Bank (SBNY) reported Q3 earnings of $2.75 per share. That was five cents better than expectations.

Total deposits now stand at $39.06 billion. That’s an increase of 8.2% over the last year. I like that non-accrual loans are just 0.09% of total loans, and if you exclude taxi-medallion loans, then it’s just 0.06%. Net interest margin on a tax-equivalent basis is just 2.68%.

During Q3, Signature bought back 630,000 shares of stock for $75 million. There’s still more than $300 million left in its current authorization.

Signature got off to a great start for us this year. It became a 30% winner in just six weeks. Since then, it’s been lagging, but SBNY has picked up some recently. On Thursday, shares of Signature gained 1.9% after the earnings report. Signature Bank remains a buy up to $130 per share.

Preview of Next Week’s Earnings

We have seven Buy List stocks due to report earnings next week. Let me run down what to expect.

Sherwin-Williams (SHW) has been an outstanding stock for us. It’s up 42% this year. Three months ago, Sherwin made $6.57 per share, which beat estimates by 20 cents per share. On Tuesday, Sherwin is due to report its Q3 earnings.

For this year, Sherwin expects earnings between $20.40 and $21.40 per share. That’s very doable. The company has already made $10.17 per share for the first half of the year. For Q3, Wall Street expects $6.48 per share.

On Thursday, the shares made another new high. Sherwin is currently trading above my $550 Buy Below price, so don’t chase it. I may raise our Buy Below next week, but I want to see the earnings numbers first.

On Wednesday, it’s Globe Life’s (GL) turn. This will be the first earnings report under its new name. Previously, the company was known as Torchmark. For Q2, GL earned $1.67 per share, which was two cents ahead of estimates.

For 2019, Globe Life sees net operating income per share between $6.67 and $6.77. The current price is around 14 times that. For Q3, Wall Street expects $1.69 per share.

Thursday will be a busy day. We have five Buy List earnings reports coming out.

Three months ago, AFLAC (AFL) said they made $1.14 per share for Q2. Forex knocked off a penny per share. The CEO said the duck stock aims to buy back $1.3 to $1.7 billion worth of stock this year.

AFLAC didn’t exactly raise guidance, but they said that earnings should come in at the higher end of their current range which is $4.10 to $4.30 per share. That’s based on an average exchange rate of 110.39 yen to the dollar. For Q3, the consensus on Wall Street is for earnings of $1.07 per share.

Cerner (CERN) has been somewhat weak since the summer, but that could change soon. The healthcare-IT firm said it expects Q3 earnings of 65 to 67 cents per share. I think they can beat that. For the full year, Cerner sees earnings between $2.64 and $2.72 per share.

For Q2, Cerner said that bookings came in at $1.432 billion, which was the high end of its range. Revenue rose 5% to $1.431 billion. Earlier this year, Cerner reached an agreement with Starboard Value to start paying a dividend and increase its buyback authorization by $1.5 billion. The current yield is a little bit over 1%.

Danaher (DHR) sees Q3 earnings ranging between $1.12 and $1.15 per share. For the full year, the company projects earnings between $4.75 and $4.80 per share.

Earlier this year, Danaher had been expecting 2019 earnings of $4.75 to $4.85 per share, but they lowered guidance due to share dilution for the GE Biopharma deal. That deal should close sometime in Q4. Last month, Danaher IPO’d Envista (NVST), which was their dental business. Danaher still holds a large stake in the company.

Shares of Hershey (HSY) had a quick downturn last month. The stock dropped seven times in eight sessions for a total loss of 8.3%. Fortunately, HSY has stabilized recently.

Hershey had a very good quarter for Q2, but guidance wasn’t as much as I hoped for. The chocolatier currently expects 2019 earnings of $5.68 to $5.74 per share. For Q2, Hershey beat the Street by 14 cents per share, yet it only raised the low-end of its guidance by five cents. I thought that was odd. For Q3, Wall Street expects earnings of $1.60 per share.

Raytheon (RTN) should be helped by the big defense-spending bill that was recently passed by Congress. For 2019, Raytheon expects sales of $28.6 billion to $29.1 billion and earnings between $11.50 and $11.70 per share. For Wednesday, the consensus is for $2.86 per share.

At some point, shareholders of RTN will get 2.3348 shares of Raytheon Technologies. That’s the name for the combined company with United Technologies (UTX). However, Raytheon Technologies will not include the spinoffs of Otis and Carrier. That’s led to a bit of confusion as to how much those 2.3348 shares are worth. The deal should close in the first half of next year.

That’s all for now. Expect a lot of earnings news next week. There’s also an election in Canada in Monday. On Tuesday, the report on existing-home sales is due out. On Wednesday, there’s a big OPEC meeting. Then on Thursday, the report on durable goods is due out, as is the report on sales of new homes. 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 October 18th, 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.