Posts Tagged ‘afl’

• CWS Market Review – October 31, 2014
  Eddy Elfenbein, October 31st, 2014 at 7:08 am

  “Sometimes the hardest thing to do is to do nothing.” – David Tepper

  I’m happy to report that my favorite investment strategy, doing absolutely nothing, has been very successful of late. The S&P 500 has rallied on nine of the last 11 trading days. On Thursday, the index closed at 1,994.65, which is a dramatic turnaround from the intra-day low of 1,820.66 which we hit just two weeks ago.

  The stock market has regained nearly everything it lost during the mini-panic of early October. On Thursday afternoon, the S&P 500 came within 0.6 points of touching 2,000 for the first time in more than a month. Several of our Buy List stocks, like CR Bard, Stryker and Medtronic, recently broke out to new 52-week highs. The sudden reversal clearly upset a lot of market bears. I’m often surprised by how many people are disappointed that the world didn’t end.

  

  The big economic news this week was that the Federal Reserve announced that Quantitative Easing will finally come to an end. This has been a hugely misunderstood policy. I’ll tell you what this means for the market and our portfolios. We also had some very good Buy List earnings this week. AFLAC not only beat earnings, but it raised its dividend as well. Fiserv beat earnings, raised guidance and broke out to a new 52-week high. Later on, I’ll preview our remaining Buy List earnings reports. But first, let’s look at what Janet Yellen and her friends at the Fed had to say this week.

  QE Finally Comes to an End

  The Federal Reserve met earlier this week, and as expected, the central bank announced the end of Quantitative Easing. This was hardly a surprise since the Fed has been gradually tapering its asset purchases for nearly a year.

  Let’s take a step back and review what QE was all about. Since the economy was in such poor shape, the Fed responded to the financial crisis by lowering interest rates. The problem was that rates were already near 0%, and they couldn’t go any lower, yet the economy needed more help. Several models indicated that interest rates need to be negative by a few percentage points.

  The Fed then decided that the best way to simulate negative rates would be by buying bonds. Lots and lots of bonds. The Fed had tried bond-buying twice before but had exited both efforts. Then in September 2012, Ben Bernanke embarked on round three, but this one was different. The Fed said it would buy tons of bonds, and it wouldn’t stop until things got better. No timeline. That was a strong message the market needed to hear. The Fed’s plan was that each month, it would buy $45 billion worth of Treasuries and $40 billion worth of mortgage-backed securities.

  The goal of QE was to lower interest rates and thereby help the housing market. Economists are divided on the efficacy of all this bond-buying. Of course, economists are divided on nearly everything. Personally, I’m a pragmatist. I don’t know if QE helped, did nothing or even caused more pain, but I can’t help noticing that the stock market liked QE a lot. Any pro-QE announcement (or rumor) could send shares soaring, while any hint that it would end would cause a rash of sell orders. That’s all the evidence I need.

  In addition to helping the stock market, I think QE also gave a boost to riskier assets at the expense of more secure ones. Or at least, those that are perceived as being more secure. Gold, for example, has not done well over the third round of QE. The yellow metal rallied to over $1,920 per ounce three years ago, and it’s been a painful ride ever since. On Thursday, gold closed below $1,200 per ounce.

  We’re in an unusual situation for the market and the economy. For the last few years, the market has done well while the economy has experienced a very tepid recovery. Now it looks as if the economy is poised to do better, but the market probably won’t be able to repeat such stellar gains.

  On Thursday, the government announced that the economy grew by 3.5% in the third quarter. That’s a good number, but some of the details were pretty mediocre. Personal consumption only grew by 1.8%. Frankly, that’s kinda blah. Here’s what’s happening: At first, the economic recovery was held back by the dead weight of the housing market. Then it was held back by austerity by state and local governments. Fortunately, we’re now past both those hurdles, so I expect to see better economic growth in the months ahead.

  In fact, the economic growth rate of the last two quarters was the best for back-to-back quarters in more than a decade. It doesn’t end there. On Tuesday, we learned that Consumer Confidence jumped to a seven-year high. The initial jobless claims reports are still quite good. The only bump this week was a lousy report on Durable Goods.

  I’m even going to say something that might be blasphemous on Wall Street, and that’s that the monthly jobs reports aren’t so important anymore. (GASP!) Of course, they’re important in the sense that people are getting more jobs, and we can see that companies are expanding. But don’t expect to see any dramatic inflexion points soon. The jobs-growth trend has been established, and that’s what the Fed wants to see.

  The next question for the market and the Fed is, “When will the central bank finally raise interest rates?” That’s a tough one. So far, every forecast (mine included) has been far too premature. Initially, Janet Yellen said that the first rate hike would be about six months after the conclusion of QE. That was a rookie mistake, and she’s disavowed those comments ever since.

  The futures market currently sees the first rate hike coming in August 2015. I’m a doubter, but I can’t say I have a strong conviction either way. The problem is that the Strong Dollar Trade, which I’ve discussed in recent issues, has held back inflation and economic growth. That gives the Fed a little more breathing room. As a result, that could put off a rate increase for a few more months. I wouldn’t be surprised if the first rate hike doesn’t come until 2016.

  What does this all mean? The overall climate remains the same. As long as rates are low, stocks are the place to be. It’s just that simple. This earnings season has been a good one for the market. The latest numbers show that nearly 72% of the stocks in the S&P 500 have topped earnings expectations, while 53.7% have beaten on sales. I should add that these are reduced expectations compared with a few weeks ago. The earnings growth rate is currently tracking at 6.5%. That’s not great, but it sure beats anything you’d see in the bond market.

  Until interest rates become competitive with stocks, stocks are the best place to be. I encourage investors to keep focusing on high-quality stocks like you see on our Buy List. Now let’s turn to our recent earnings reports.

  Ford Motor Is Still a Buy

  First, though, let me mention Ford Motor ($F) which reported Q3 earnings shortly after I sent you last week’s CWS Market Review. The automaker reported earnings of 24 cents per share which topped estimates by five cents per share.

  Despite the earnings beat, Wall Street was not pleased with Ford. The company has been plagued by costly recalls and the impact of the strong greenback. For the first time since 2010, Ford had negative quarterly cash flow. The stock dropped 4.3% last Friday. Ford’s stock already got beat up a month ago when they said they wouldn’t meet their profit goals for this year.

  I feel bad for Ford because a lot of this isn’t their fault. The automaker has been squeezed by the strong dollar, higher operating costs and weaker economies overseas. I also think investors are nervous that former CEO Alan Mulally is no longer running things.

  Still, the big issue facing Ford is the new F-150 with an aluminum body. This is a ballsy move by Ford; the truck is their biggest moneymaker. To get ready for the new production, Ford had to convert some factories and that costs money. Right now, the success of the F-150 is a giant question mark that’s weighing on the shares. For its part, Ford has made it clear that they’re going ahead with their plans. In fact, they just started with mass production of the truck.

  I’m sticking with Ford. The shares currently yield over 3.5%. I admire companies that are trying to change things up.

  Strong Earnings from AFLAC, Fiserv and Express Scripts

  On Tuesday, AFLAC ($AFL) reported Q3 operating earnings of $1.51 per share. That was eight cents more than estimates. That was even better than the guidance they gave us three months ago, $1.38 to $1.47 per share. Operationally, AFLAC is doing well. The problem has been the weak yen. Fortunately, forex only cost them four cents per share last quarter.

  For Q4, AFLAC expects operating earnings to range between $1.28 and $1.37 per share. That assumes the yen stays between 105 and 110 to the dollar. It’s currently at 109.29. That brings the full-year earnings estimate to $6.14 to $6.23 per share. For 2015, AFLAC aims to increase their operating earnings by 2% to 7% on a currency-neutral basis.

  But the best news was that AFLAC’s board decided to raise the quarterly dividend from 37 to 39 cents per share (I had been expecting a one-cent increase). This is the 32nd year in a row that AFLAC has increased its dividend. On Thursday, the shares closed over $60 for the first time in more than seven weeks. AFLAC remains a solid buy up to $63 per share.

  Fiserv ($FISV) reported Q3 earnings of 86 cents per share, which was two cents better than expectations. The company also raised expectations. Fiserv now expects 2014 earnings per share between $3.34 and $3.38. The old range was $3.31 to $3.37. For 2013, Fiserv earned $2.99 per share. The new guidance implies Q4 earnings between 86 and 90 cents per share. The Street had been expecting 89 cents per share.

  The stock came close to breaking $70 on Wednesday. Fiserv has been on our Buy List all nine years. In the last three years, the stock is up 133%. This week, I’m raising my Buy Below on Fiserv to $72 per share.

  

  Express Scripts ($ESRX) posted earnings of $1.29 per share, which matched expectations. The pharmacy-benefits manager also narrowed their full-year range to $4.86 to $4.90 per share. The previous range was $4.84 to $4.92 per share. The new full-year guidance means that the guidance for Q4 is $1.36 to $1.40 per share. The Street had been expecting $1.38 per share. Basically, the company delivered what was expected, and I’m fine with that. Express Scripts is a buy up to $77 per share.

  Moog ($MOG-A) is due to report earnings later this morning. I’ll have details on the blog. The consensus on Wall Street is for earnings of $1.08 per share. The stock reached an all-time high on Wednesday.

  Earnings Next Week from Qualcomm, Cognizant and DirecTV

  Earnings season is almost over, but we have a few more to go. Next Wednesday, November 5, Cognizant Technology Solutions and Qualcomm are due to report.

  Cognizant ($CTSH) was our big dud last earnings season. The stock dropped more than 12% after its earnings report. As is often the case, the earnings were quite good: 66 cents per share versus estimates of 62 cents. No, what troubled traders was the guidance. In fact, it wasn’t even the earnings guidance, but rather the sales. Cognizant said they see Q3 earnings of at least 63 cents per share, and sales between $2.55 billion and $2.58 billion. Wall Street had been expecting sales of $2.66 billion. Basically, CTSH lowered their full-year sales growth from 16.5% to 14%. That’s still very strong growth. Cognizant isn’t one to worry about.

  Qualcomm ($QCOM) is in an unusual spot. Three months ago, the company crushed earnings. They beat by 22 cents per share. The problem was news out of China. The company is involved in a nasty anti-trust suit with the Chinese government, and they’re simply not going to win. Why is the PRC doing this? Because they can.

  The company wisely wants to put this dispute behind them, but it’s going to be costly. As a result, Qualcomm had rather weak guidance for the September quarter (their fiscal Q4). Qualcomm said it expects earnings between $1.20 and $1.35 per share. That’s less than I had been expecting. Time is on Qualcomm’s side, and the shares have perked up recently. Look for an earnings beat here.

  DirecTV ($DTV) is due to report on Thursday, November 6. The satellite-TV company has been doing just fine lately. The problem hasn’t been with them but with their merger partner, AT&T ($T). Shares of T recently fell below the lower bound of $34.90. That, in turns, lowers the merger price for DTV. Fortunately, shares of AT&T have rebounded and may soon go back into the safe range, which would once again value DTV at $95 per share. For the time being, these two stocks are joined at the hip.

  That’s all for now. The big news next week will be the mid-term elections. Control of the Senate may change hands. On Monday, the ISM report comes out. On Thursday, we’ll get a look at the productivity report for Q3. Then on Friday is the big jobs report for September. This is still the biggest economic report, but as I said before, its importance has greatly diminished. We also have many more earnings reports. 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

• CWS Market Review – September 12, 2014
  Eddy Elfenbein, September 12th, 2014 at 7:13 am

  “Fate laughs at probabilities.” – Edward Bulwer-Lytton

  The stock market is continuing with its subdued ways. This past Tuesday, the S&P 500 dropped 0.65%, for its worst day in five weeks. But the arresting part of that stat isn’t the drop; rather, it’s that the worst day in five weeks was a measly 0.65% loss. By historic standards, that’s barely a ripple, and going by what we saw a few years ago, it’s next to nothing. Tuesday’s plunge snapped the S&P 500’s streak of closing up or down by less than 0.5%. That was the longest such streak in 45 years. As I described it last week, this summer has been the Big Chill for Wall Street.

  As I expected, the stock market has been a little weak lately. The S&P 500 is down from its all-time high from last Friday. But the interesting action hasn’t been in the stock market. Instead, the currency markets have suddenly become very interesting. Over the past few weeks, the U.S. dollar has gotten a lot stronger against many currencies around the world (see the chart of the dollar index below). If you’re a traveler, you’ve probably noticed the effects. Investors need to understand that a strong currency has a large impact on the economy and on our Buy List stocks. In this week’s CWS Market Review, I’ll review what it all means.

  

  I’ll also take a look at the upcoming earnings report from Oracle ($ORCL). Their last report was a dud, but I’m expecting better news this time around. I also want to look at the recent weakness in eBay (EBAY), which is normally a solid stock. But first, let’s take a look at last week’s sluggish jobs report and what it means for the Federal Reserve’s interest-rate plans.

  Expect Higher Rates Next Year

  Last Friday, shortly after I sent out last week’s CWS Market Review, the government reported that the U.S. economy created only 142,000 jobs in August. This was well below Wall Street’s forecast, and it snapped the economy’s six-month streak of creating more than 200,000 jobs.

  The weak jobs report put a wrench into the plans of folks who have been expecting the Fed to raise rates this coming spring. As I’ve said, I continue to like the stock market as long as interest rates are near the floor (although I expect some minor sluggishness this month). But once the Fed starts to raise interest rates, the game changes.

  Think of it this way: It’s one thing to like Microsoft ($MSFT) when it’s yielding 2.4% and short-term rates are 0% (the one-month Treasury even went negative a few times this week), but it will be quite another if they’re both yielding 2%. As always, the game is about risk and reward.

  Lately we’ve been seeing some signs of dissension within the Fed, but that’s to be expected as I-Day approaches. (That’s my term for the date of the Fed’s first rate increase.) Janet Yellen has tried to make it clear that the Fed isn’t on a pre-set course, and that they’ll change as events change. The Fed meets again next week, and all of Wall Street will be watching. In addition to another $10 billion taper announcement, we’ll hear updated interest-rate projections. (I’ll warn you, the Fed’s track record on predicting the economy is terrible.)

  But rather than trying to parse various Fed statements for clues, I think it’s better to look at the Fed’s arch enemy, which is the bond market. Here I like to follow the one-year Treasury yield as it compares with the two- and three-year yields (see below). Think of this as the “Yellen Chart” because it’s mainly focused on the first rate increase. This is an interesting chart to follow because the one-year yield has been remarkably flat, but the two and three-year yields have climbed steadily higher. In fact, the yield on the three-year has tripled since April. Not only that, but the gap between the two- and three-years has widened as well. It’s as if the bond market were saying, “higher rates are on the way, but not just yet.”

  There are also futures contracts that trade on the Fed funds rate. The latest prices indicate that the market expects the Fed funds rate to be at 0.25% by May 2015 and at 0.50% by September. That strikes me as a bit too soon. Right now, I’d place I-Day around the middle of next year.

  What’s also interesting is that at the same time that the middle part of the yield curve has seen higher interest rates, the long yield of the yield curve has seen lower rates. The yield on the 30-year Treasury is down 69 basis points since the start of the year. Lately, however, long-term rates have started to edge higher, which is what I predicted four weeks ago.

  What the Strong Dollar Means for Investors

  In last week’s issue, I mentioned how the European Central Bank had decided to jump on the bond-buying bandwagon. The economy in Europe has been dreadful, and many euro bonds pay next-to-nothing yields. To quote myself, Mario Draghi is sending a loud message to currency traders: “Please, please, pleeezze bring the euro down!” They’re not alone. Japan has embarked on a similar strategy.

  As a result, the U.S. dollar has soared. It’s not that the greenback is strong in an absolute sense. It’s that the dollar is the cleanest of the dirty shirts. Since July, the dollar has rallied from 101 yen to 107 yen today. Meanwhile, the euro has dropped from $1.37 to $1.29.

  What’s the impact of the strong dollar? This can be confusing, since it seems normal to assume that the conjunction of the words “strong” and “dollar” can only yield positive results, but that’s not necessarily the case. Like many things economic, it involves tradeoffs. For example, a strong dollar tends to help imports but hurt our export market. Those of you who do a lot of international travel may have noticed that the stronger dollar helps your purchasing power abroad. The same forces are in play for companies. European stocks look cheaper for American companies, so we can expect to see more international buyouts (like Medtronic/Covidien).

  A stronger dollar also takes some of the pressure off the Fed to raise rates so quickly. That’s part of the reason I’m skeptical of the futures market on interest rates. People want to invest in the dollar because they see better growth ahead. Goldman Sachs just said that the U.S. economy grew by 4.7% last quarter. If the dollar were weaker, the Fed would have to raise rates to entice people to hold dollars. The dollar rally has taken that potential problem off the table.

  Now let’s consider the bad effects of the stronger dollar. The dollar’s rally against the yen has stung AFLAC ($AFL), which is one of my favorite Buy List stocks. The problem is that AFLAC does about 75% of its business in Japan. As a result, it has to convert that profit from yen into dollars. So a strong yen is good for AFL’s bottom line, but a weak one is bad. This is unfortunate, because as far as its business goes, AFLAC is doing quite well. Sadly, a lot of those gains are lost due to currency effects. It’s annoying, but to quote Hyman Roth, “this is the business we’ve chosen.”

  In July, AFLAC said they expect full-year operating earnings to range between $6.16 and $6.30 per share, but that forecast assumes a yen/dollar exchange rate between 100 and 105. Now it’s up to 107, which explains why shares of AFLAC recently slipped below $60.

  

  My view is that the currency effect is mostly transitory. Sometimes it helps you, sometimes it hurts. But if a company is well run, it will most likely stay that way. Unfortunately, AFLAC is getting the short end of this stick lately. I still like the stock a lot, and it’s an especially good buy below $60 per share.

  A strong dollar also helps keep the lid on inflation, and you can see that in the commodities market. The last few inflation reports have been quite subdued. Last week, I talked about the weakness in gold. This is a direct outcome of the dollar’s surge. Commodity prices are staying well behaved. AAA recently said that the average price for gasoline fell to a seven-month low. In turn, that has helped U.S. consumers (remember the strong earnings report from Ross Stores). A lot of energy stocks have not joined in the rally this year. Stocks like Apple, Microsoft and Facebook are all up over 25% this year, but ExxonMobil, one of the largest companies in the world, is down for the year.

  I think some of the dollar’s strength is due to Russia. In one sense, investors flock to a strong currency in times of stress. But also, any sanctions on Russia will probably hurt Europe as well. A strong dollar tends to correlate with large-cap stocks outperforming small-caps, but it’s not a very strong relationship.

  The odd part of a rising dollar is that it’s usually the result of good news. People are more optimistic about the domestic economy. The problem is that the good news can lead to bad news like weaker imports. Investors should continue to focus on high-quality companies with strong positions in their markets. Don’t try to second-guess the forex market. That’s a sucker’s game. The best companies know how to plan for their markets and they act accordingly. As always, time is on the side of the disciplined investor. Now let’s look at Oracle’s upcoming earnings report.

  Oracle Is a Buy up to $44 per Share

  Now that we’re in September, we have two Buy List stocks that have quarters ending in August. Bed Bath & Beyond ($BBBY) is due to report its earnings on September 23. Next Thursday, September 18, Oracle ($ORCL) is due to report their fiscal Q1 earnings.

  Three months ago, Oracle bombed their last earnings report. For Q4, the House of Ellison earned 92 cents per share, which was three cents below Wall Street’s consensus. The company had told us to expect earnings to range between 92 and 99 cents per share. It’s unusual to see Oracle hit the low part of their range.

  Looking at the numbers, Q4 was surprisingly weak. Quarterly revenue rose only 3.4%, to $11.32 billion, which was $160 million below expectations. One of the keys for Oracle‘s business is sales of new software licenses. For Q4, that came in at $3.77 billion, which was flat. Their hardware revenue, now finally growing, rose only 2%, to $1.5 billion. One bright spot was that Oracle’s cloud revenue jumped 23% to $327 million.

  Oracle has said they see Q1 earnings ranging between 62 and 66 cents per share. That’s not so bad. Wall Street had been expecting 64 cents per share. Oracle sees quarterly revenue growth between 4% and 6%. Breaking that down, they expect new software-license revenue to be up by 6% to 8%. Hardware will be between -1% and 3%, but cloud revenue is expected to be up by 25% to 35%. If their guidance is accurate, that tells us that last quarter’s weakness was temporary. Oracle remains a solid buy up to $44 per share.

  Updates on Other Buy List Stocks

  Be on the lookout for a dividend increase soon from Microsoft ($MSFT). The software giant isn’t normally thought of as a dividend stock, but they’ve been working to change that. In the last four years, Microsoft has increased its dividend by 115%. The quarterly payout is currently 28 cents per share. I think MSFT will raise it to 31 cents per share. The stock recently broke out to another 14-year high. Microsoft remains a buy up to $48 per share.

  In last week’s CWS Market Review, I highlighted McDonald’s ($MCD) as an especially good buy. Not good timing on my part. This past week, MCD announced their worst monthly sales in ten years. Same-store sales fell 3.7% in August. When it rains, it pours. The company also said that problems with suppliers in China will knock 15 to 20 cents off this quarter’s bottom line. The burger joint is also getting bullied in Russia by Colonel Putin’s government. A number of McDonald’s have been shut down in Russia due to “sanitary” concerns. (Yeah, right.) The stock briefly dropped below $91 per share, which is a very good price. I’m keeping my Buy Below at $101, but if you can pick up shares under $93, that’s a good longer-term investment.

  Shares of eBay ($EBAY) got beat up this week after Apple announced plans for Apple Pay, which will compete against eBay’s PayPal. PayPal is a big money-maker for eBay, and there’s been a lot of pressure on the company to sell the division. As I noted a few weeks ago, just a rumor of that news sent shares of eBay higher. Even though eBay has said they’re not interested in selling PayPal, I think the market’s evident interest will prevail. It usually does. I can’t say whether Apple Pay will crush PayPal, but I think it will add more pressure on eBay to move. The board also has “cover” to make an about-face. I’m lowering my Buy Below on eBay to $55 per share.

  That’s all for now. The Federal Reserve meets again next week, on Tuesday and Wednesday. The Fed will update its economic projections (the blue dots), and Chairwoman Yellen will hold a post-meeting press conference. I expect to hear another $10 billion taper announcement. That will bring their monthly bond purchases down to $15 billion starting in October. Next week, we’ll also get the Industrial Production report on Monday and the CPI report on Wednesday. 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

• Strong Earnings from Fiserv and AFLAC
  Eddy Elfenbein, July 30th, 2013 at 9:23 pm

  Thanks to a very good earnings report from Harris Corp. ($HRS), our Buy List had another market-beating day. Shares of HRS eventually closed at $56.97 which is a gain of 7.84% for the day. While the broader indexes are just shy of their all-time highs, the Nasdaq closed today at its highest level since September 29, 2000.

  The market was also excited that Facebook ($FB) climbed all the way back its IPO price. So IPO investors are back up to…nothing!

  After the closing bell, we had two more Buy List earnings reports; Fiserv ($FISV) and AFLAC ($AFL). For the second quarter, Fiserv earned $1.50 per share which was six cents better than Wall Street’s consensus. That’s a very good number. Quarterly revenues rose 11.8% to $1.14 billion which was a bit short of consensus.

  Fiserv said:

  Our strong second quarter results included revenue and earnings acceleration in-line with our full-year expectations,” said Jeffery Yabuki, President and Chief Executive Officer of Fiserv. “Performance was led by 7 percent adjusted internal revenue growth in our Payments segment, solid sales and excellent free cash flow.

  Fiserv reiterated its full-year guidance of earnings ranging between $5.84 and $6.03 per share. For the first six months of 2013, Fiserv had earned $2.83 per share so I think they’re well on their way to hitting that guidance. Earnings are up 16% so far this year, and cash flow is up 22%. This company is clearly doing well. The stock is up 3.55% in the after-hours market.

  AFLAC reported Q2 operating earnings of $1.62 per share which was 11 cents better than estimates. Three months ago, the company gave us a range of $1.41 to $1.56 per share, so business is going better-than-expected. Plus, we have to consider that the yen/dollar exchange rate knocked 22 cents off earnings. Without that, operating earnings rose by 14.3%.

  For Q3, AFLAC sees operating earnings ranging between $1.41 and $1.51 per share. That’s less than the $1.56 per share Wall Street had been expecting. For the full-year guidance, AFLAC lowered the low-end of their range. The previous range was $5.99 to $6.37 per share. Now it’s $5.83 to $6.37 per share.

  Dan Amos, the CEO, said:

  Our objective for 2013 is to increase operating earnings per diluted share 4% to 7%, excluding the impact of the yen. Although we are above that range for the first half of the year, we plan on increasing spending in the second half of 2013. In Japan, we will increase expenditures on advertising and promotion for our new product launch in August. In the United States, we anticipate increased costs associated with initiatives related to health care reform. As such, we expect operating earnings to increase approximately 5% for the full year, before the impact of foreign currency. We will face a difficult comparison in the third quarter due to the tax benefit of $.10 per diluted share recognized in the same period last year. If the yen averages 95 to 105 to the dollar for the third quarter, we would expect earnings in the third quarter to be approximately $1.41 to $1.51 per diluted share. Using that same exchange rate assumption, we would expect full-year reported operating earnings to be about $5.83 to $6.37 per diluted share.

• AFLAC Breaks $60
  Eddy Elfenbein, July 22nd, 2013 at 12:24 pm

  In early 2011, shares of AFLAC ($AFL) got above $59 but were never able to crack $60. Today, they finally did.

  

  AFLAC has been as high as $60.15 today. The last time the stock was over $60 was September 2008.

• Six Straight Up Months for the S&P 500
  Eddy Elfenbein, April 29th, 2013 at 11:36 am

  You’d never know this by reading a lot of financial commentary but the S&P 500 is about to close out its sixth-straight monthly gain. The latest numbers show that 273 of the 500 companies in the S&P 500 have reported earnings so far. Of those, 74% have beaten earnings expectations but 55% have missed sales expectations.

  The government reported that personal income rose 0.2% last month. Personal spending was also up 0.2% in March, but that’s down from the big 0.7% rise in February. The next big report will be Friday’s jobs report. Economists forecast that the U.S. economy created 153,000 jobs last month.

  The stock market is doing well this morning. The S&P 500 has been as high as 1,592 which is very close to an all-time high. I should also the note the impressive rally in bonds. On March 15th, the 10-year Treasury yielded 2% exactly. Today it’s down to 1.66%.

  Shares of AFLAC ($AFL) got as high as $53.95 today. The stock was last above $54 in February.

• The Yen Continues to Weigh on AFLAC
  Eddy Elfenbein, April 8th, 2013 at 1:58 pm

  AFLAC ($AFL) is back below $50 and the culprit isn’t hard to spot — the weaker yen. Since October, the yen has gotten hammered by the U.S. dollar.

  In March, the yen staged a quick relief rally, but that recently collapsed. It now takes 99 yen to buy one U.S. dollar. In October, it took just 78. I think we’re going to break 100 soon.

  The reason for the big change is that Japan’s new government is aggressively trying to weaken its currency in order to help their economy. The Nikkei Index has responded by shooting up from 9,000 to as high as 13,200. That’s a huge move for such a short time period.

  AFLAC said in their 10-K that if the yen averages 100 for this year, that will shave 87 cents off their operating earnings-per-share. At 100 yen to the dollar, AFLAC’s earnings range would be $5.99 to $6.19 per share for 2013.

  Exchange Rate	EPS Range	Growth Rate	Yen Impact
  79.81	$6.86 to $7.06	3.9% to 7.0%	$0.00
  85	$6.60 to $6.80	0% to 3%	-$0.26
  90	$6.37 to $6.57	(3.5%) to (0.5%)	-$0.49
  95	$6.17 to $6.37	(6.5%) to (3.5%)	-$0.69
  100	$5.99 to $6.19	(9.2%) to (6.2%)	-$0.87

• The Derisking Program at AFLAC
  Eddy Elfenbein, March 6th, 2013 at 1:44 pm

  One of key aspects in understanding AFLAC ($AFL) is that the company has greatly reduced its exposure to problem areas around the world. I don’t believe the market fully sees this. Kriss Cloninger, AFLAC’s CFO, recently discussed their investment portfolio at Citi’s 2013 U.S. Financial Services Conference.

  Now, let me discuss how we’ve substantially enhanced our investment portfolio over the last few years. From January 2008 to the end of 2012, we dramatically cut our holdings of sovereign and financial instruments in the PIGS countries. We’ve also lowered our investments in perpetual securities. And the successful derisking program that we completed in mid-2012 has enabled us to focus on enhancing portfolio quality.

  The U.S. corporate bond program we initiated in the third quarter of 2012 continues to be an effective means for enhancing our new money yields in the Japan portfolio. You’ll recall in the last half of 2012, our objective was to invest roughly two-thirds of our investment cash flow and U.S. dollar denominated publicly traded corporate bonds and then hedged the currency risk on principal back to yen.

  This successful investment program enabled us to surpass our budgeted new money yield for 2012. And it has also provided greater liquidity and enhanced the flexibility of our portfolio while increasing the opportunities to diversify our portfolio beyond JGBs.

  At December 31, this U.S. corporate bond program represented about 6.2% of our total portfolio. In light of the success of the corporate bond program last year and strong credit fundamentals of the investment grade corporate credits, we intend to continue this program in the first quarter of this year. Consistent with our asset allocation program, we’ll balance these investments with some JGBs for diversification and liquidity as well as other investment opportunities as they arise.

  Our ability to continue to implement new strategies is based on the evolving capabilities of the AFLAC global investment division. We’re going to continue to build this framework to support investments and newer asset classes and then move forward accordingly and we’ll update you on our progress with our analyst meeting in May.

  We’ve defined our investment objectives as maximizing risk adjusted performance subject to our liability profile and capital requirements. It’s important to note that all of our strategies have been back tested against our capital ratios and the ratios we’re trying to achieve.

• AFLAC “Is One of the Cheapest Stocks in the S&P 500 Right Now”
  Eddy Elfenbein, March 1st, 2013 at 11:23 am

  Teresa Rivas at Barron’s make the case for AFLAC ($AFL):

  The Aflac duck endures many misfortunes in the insurance company’s goofy advertisements, from scorched feet to a broken bill. Now the stock is taking a beating as well, following a drop in Japan’s currency, and this has created an opportunity for investors.

  (…)

  “This is one of the cheapest stocks in the S&P 500 right now, especially among companies that are going to report earnings, not losses,” says Bill Smead, portfolio manager of the Smead Value Fund. “This is a premier financial services and insurance company—a storm doesn’t come in and turn a company upside down. If you look at the 2011 tsunami, even though 75% of Aflac’s revenue comes from Japan, [the disaster] didn’t really have any impact.”

  (…)

  “It has low price-to-earnings and price-to-book [ratios], and yet the company is going to be turning in a fairly healthy return on equity in 2013, so there’s a disconnect between the price today and the returns the company is providing.”

  (…)

  Still, the stock price doesn’t reflect Aflac’s long-term potential. Its premium brand name is an asset in Japan, where it has long enjoyed a stellar reputation, and, thanks to the duck, it is well known in the U.S.

  “If you put 100 people in a room and give them the generic category of supplemental health insurance, I don’t think anyone would be able to say any name other than Aflac,” says Smead. “If savvy people can’t tell you who a company’s No. 2 competitor is, they’ve won the game before it starts.”

• CWS Market Review – February 8, 2013
  Eddy Elfenbein, February 8th, 2013 at 8:12 am

  That money talks I’ll not deny,
  I heard it once: It said, “Goodbye.”
  -Richard Armour

  Last Friday, the Dow pierced 14,000 for the first time in five years. But as I suspected, investors got a case of the jitters, and the Dow hasn’t been able to hold 14,000. We even had a small uptick in volatility as the S&P 500 had three straight moves of greater than 1%. One money manager said, “We’ve moved so far so fast that the market’s just looking for any kind of sign to take something off the table.” I think that’s exactly right.

  

  Wall Street is still focused on earnings. While fourth-quarter earnings season has been good (not great), I’m starting to have concerns that Wall Street’s earnings outlook is too optimistic. According to the Street, earnings growth will accelerate, meaning the pace of growth itself will increase, throughout 2013. That’s certainly possible, but I see that as a best-case scenario. More likely, earnings growth will flat-line or grow rather modestly.

  That’s not necessarily awful news. Corporate America has been raking it in lately. The companies in the S&P 500 will probably net a cool $1 trillion this year. But we have to face the fact that the easy money in this bull market has already been made. Stocks have more than doubled in less than four years. The next four years won’t be so fortunate.

  That’s why I urge all investors to focus on high-quality stocks for the long term like the stocks on our Buy List. We had more good news this week, including a 21% dividend increase from Ross Stores ($ROST), and JPMorgan ($JPM) reached yet another 52-week high. Now let’s look at some of our earnings reports this week.

  AFLAC Is a Buy up to $54 per Share

  After the close on Tuesday, AFLAC ($AFL) reported fourth-quarter earnings of $1.48 per share. Make no mistake: this was a solid quarter for the duck stock, and it was squarely in line with what they told us to expect. Three months ago, AFLAC said Q4 EPS should range between $1.46 and $1.51.

  But here’s the issue for us: Since most of AFLAC’s business comes from Japan, their bottom line can be adversely impacted (or helped) by fluctuations in the yen/dollar exchange rate. Lately, the government in Japan has aggressively stated its intention of pursuing a pro-inflation policy. That’s caused the yen to tank against the dollar. In response, the Nikkei Index has soared.

  As I said, AFLAC as a business is fine and dandy and as strong as it’s ever been. I want to make it clear that I’m not overly worried about the exchange rate, but I have to say that it’s an issue for investors. AFLAC said the falling yen cost dinged their Q4 by four cents per share. Not fun, but not a disaster either. Bear in mind that AFLAC’s full-year earnings for 2012 were actually helped by one penny per share, thanks to the exchange rate. So it works in both directions.

  For all of 2012, AFLAC made $6.60 per share in operating earnings. The company said it sees operating earnings growth of 4% to 7% for this year. On a currency-neutral basis, that means operating earnings of $6.86 to $7.06 per share.

  Now here’s the tricky part (warning: math ahead). Each move in the exchange rate of one yen from 78.5 will cost AFLAC 4.3 cents per share for the year. So if the exchange rate averages 90 for the entire year, that will cost AFLAC 49.45 cents per share (11.5 times 4.3). That stings, but it’s roughly 50 cents per share out of $7 of earnings. It’s not enough for me to change my opinion that AFLAC is a very solid stock to own. And of course, I have no idea what the exchange rate will do this year. However, I suspect that most of the damage to the yen has already been done.

  Shares of AFL pulled back after the earnings report, but the stock is basically where it was three months ago. AFLAC remains an excellent company. Due to the recent pullback, I’m going to lower my Buy Below to $54 per share.

  Good News from FISV and CTSH, Bad News from WXS

  Also on Tuesday, Fiserv ($FISV) reported Q4 earnings of $1.39 per share, which exactly matched Wall Street’s forecast. The company already told us that this was going to be a good quarter. Remarkably, this is Fiserv’s 27th-straight year of double-digit earnings growth. There aren’t many companies that can boost a record like that.

  For 2012, Fiserv earned $5.13 per share, which is a very nice increase over the $4.58 per share they made in 2011. Fiserv said that they expect growth of 15% to 18% for this year, and they specified an earnings range of $5.88 to $6.07 per share. If that’s correct, FISV is going for less than 14 times this year’s earnings. This is a solid stock. Fiserv is a buy up to $88 per share.

  We had a great earnings report from Cognizant Technology Solutions ($CTSH) on Thursday. The company reported Q4 earnings of 99 cents per share, which is up from 84 cents for Q4 of 2011. That’s eight cents more than the Street had been expecting. Quarterly revenue rose 17.1% to $1.95 billion. For all of 2012, revenue rose 20% to $7.35 billion, and earnings-per-share increased from $3.07 in 2011 to $3.70 for 2012. This is clearly a rapidly-growing outfit.

  Cognizant also offered very impressive guidance for Q1 and all of 2013. The company sees Q1 revenue rising by 20% to “at least” $2 billion and expects earnings-per-share to hit $1.01. Wall Street had been expecting 93 cents per share. For the whole year, CTSH sees revenue climbing to “at least” $8.6 billion. That’s an increase of 17%. Cognizant also sees earnings-per-share of at least $4.31. That’s a big increase over Wall Street’s expectation of $4.00 per share. CTSH is an excellent buy anytime you see it below $81.

  Our dud this week came from WEX Inc. ($WXS). The company reported fourth-quarter earnings of $1.07 per share, which was a penny below consensus. Quarterly revenue rose 20.9% to $169 million.

  But the earnings weren’t the bad part; it was the guidance. For Q1, WXS expects earnings to range between 89 cents and 96 cents per share. The Street had been expecting $1.08 per share. For all of 2013, WXS sees earnings between $4.30 and $4.50 per share. The Street was expecting $4.88 per share. For all of 2012, WXS made $4.06 per share which was a nice increase from $3.64 per share on 2011.

  Frankly, this guidance is very disappointing news. I’m not ready to toss in the towel with WXS; the stock has been a huge winner for us over the last eight months. But for now, I’m going to lower the Buy Below price to $72.

  Ross Stores Is a Buy up to $62

  Ross Stores ($ROST) gave us great news this week. The retailer reported blowout sales for January, and thanks to the rush of business, Ross sees Q4 earnings coming in at $1.06 to $1.07 per share, and $3.52 to $3.53 per share for the entire year. (Note that like a lot of retailers, Ross ends their fiscal year at the end of January.) The earnings report should be out in mid-March.

  But the best news is that Ross raised their quarterly dividend from 14 cents to 17 cents per share. That’s a 21% hike. Ross pays out a very small amount of their profits as dividends to shareholders (about 20%). Based on Thursday’s closing price, Ross yields 1.13%. That’s obviously not a very high yield, but the dividend increase and strong sales news are a good omen for Ross Stores. ROST remains a very good buy up to $62.

  Before I go, I want to highlight two Buy List stocks that look especially attractive. Again, Microsoft ($MSFT) looks very good here. The pullback in Harris ($HRS) seems about done. Shares of HRS got hit hard for a modest decrease in guidance.

  That’s all for now. Next week, we get important reports on retail sales and industrial production. Our final earnings report of this cycle will be from DirecTV ($DTV) on Wednesday, February 13th. Wall Street expects $1.13 per share. 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

• AFLAC’s 2013 Outlook
  Eddy Elfenbein, February 6th, 2013 at 1:31 pm

  From the earnings call, here’s AFLAC‘s ($AFL) outlook for this year (I think Seeking Alpha’s transcription is rather muffled, but you can follow what they’re saying):

  Lastly, let me comment on the earnings outlook for 2013. As you’ve heard Dan say, we’ve affirmed our guidance for 2013 of 4% to 7% increase in operating earnings per diluted share, excluding the impact of the yen. To understand the significant our 2013 EPS objective over 2012 actual results winning to this perspective for you.

  In 2012, we received tax benefit from our tax exempt for the years 2008 and 2009, and we’ve made a revision for the full year impact of tax effective tax rate. The unusual benefits received in 2012 totaled approximately $38 or $0.08 per share. We also recovered a previously written-off coupon as part of the sales transaction executed during the year that resulted in a one-time benefit to operating earnings of $23 million, or $0.05 per share. If you exclude the impact of these benefits from the 2012 operating earnings note, operating earnings per diluted share in sale would have been $6.47.

  This year we estimate that a one yen move on the average annual exchange rate will equal approximately $4.3 for diluted share. Considering the weakening of the yen in recent months, if we achieve our objective of 4% to 7% increase in operating earnings per diluted share for the year at yen averages 90 for the full year, we would expect operating EPS to be in the range of $6.37 to $6.57 per diluted share.

  The yen is currently at 93.345 to the dollar.