Posts Tagged ‘ESRX’

• 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 – February 21, 2014
  Eddy Elfenbein, February 21st, 2014 at 7:18 am

  “Someone will always be getting richer faster than you. This is not a tragedy.” – Charlie Munger

  Frankly, there wasn’t much important news on Wall Street this week. The markets were closed on Monday for Presidents’ Day, and earnings season is just about over.

  But there’s a lurking danger whenever there’s a dearth of news. Traders don’t like a news vacuum, and that creates an environment where routine events are greatly hyped beyond their true importance. Traders need something to trade on, and if someone doesn’t give it to them, they’ll invent it. It’s either that, or watch curling.

  

  What we saw this week was that everyone, it seemed, had an opinion on a series of mega-deals. Last week, Comcast said it’s hooking up with Time Warner Cable. Later we heard that Apple’s M&A people were talking with Tesla (dream on!). Then came the blockbuster deal: Facebook is buying WhatsApp for $16.4 billion (possibly as much as $19 billion if you include restricted stock).

  WhatsApp has a grand total of 55 employees, and last year they brought in $20 million in revenue (not profits—revenue). Five years ago, WhatsApp’s CEO, Jan Koum, applied for a job at Facebook. He was rejected. Now he’s a billionaire several times over.

  Is all this crazy? In my opinion, probably, but it’s added some mid-winter excitement, that’s for sure. After the deal was announced, Facebook’s stock opened lower, then rallied throughout the day, and ultimately closed higher by more than 2%.

  Now some professional scolders are saying that these crazy deals are the signs of a frothy bull market. While some of these deals are hard to justify, I don’t think the entire market can be judged a bubble.

  Sure, there are some trouble spots. The Q4 earnings season was decent, but it was hardly spectacular. The crummy weather has hurt a lot of retailers. Even Walmart, the big daddy of retailers, missed earnings by 25 cents per share. You don’t see that a lot. Plus, there are still troubles in many emerging markets. The news out of China is disappointing, and of course, the violence in Ukraine is heart-wrenching.

  In this week’s CWS Market Review, I want to cover some of the overlooked news. The minutes from January’s Fed meeting came out this week, and if you look past the talking heads, it’s clear they’re talking about ditching the Evans Rule. That’s a big deal, and I’ll explain what that means in a bit.

  We also had an outstanding earnings reports from DirecTV. The satellite-TV stock crushed estimates by 23 cents per share. The shares raced 3% higher on Thursday to hit a new all-time high. I have my new Buy Below for you (you can see our complete Buy List here. We also got good earnings reports from Medtronic and Express Scripts. I’ll also preview next week’s earnings report from Ross Stores. But first, let’s take a closer look at what’s on the Fed’s mind.

  The Debate Raging within the Federal Reserve

  There’s a debate raging within the Federal Reserve as to what to do about the “Evans Rule.” This was guidance adopted by the Fed, at the urging of Chicago Fed President Charles Evans, as to what specific metric would cause the Fed to raise short-term interest rates. The Fed said that it would use an unemployment rate of 6.5%. Previous Fed Chairman Ben Bernanke was careful to warn that this was a threshold and not a trigger.

  The problem is that unemployment has already declined to 6.6%, and no one’s even close to raising interest rates. Most FOMC members don’t see a rate increase happening until 2015 or 2016. There are even some folks who say that low rates are here to stay and the Fed’s use of Quantitative Easing will become its primary tool to fine-tune the economy. That’s probably too extreme, but it’s being talked about.

  The minutes released this week covered the Fed’s January meeting. Interestingly, the Fed`s members were surprised at the economy’s strength. That obviously contributed to the decision to gradually pare back their massive bond-buying program. But what’s interesting is that the central bank is showing no signs of backing away from taper plans, even though the last two jobs reports weren’t so hot.

  Strangely, the Fed is as undecided about when to raise short-term rates as it is stubborn about tapering. In fact, the Fed may even back away from using a specific number, like Evans had suggested, and fall back on using garbled econo-speak. The plus is that this doesn’t lead the markets to false expectations. Some FOMC members favor this direction but it adds a layer of opaqueness to the Fed’s deliberations.

  The Fed may elect to lower the threshold. Narayana Kocherlakota, the president of the Minneapolis Fed, wants to go down to 5.5%. I think some voting members want to get rid of a precise number altogether. As I said, markets will find something to fret about. Of course, all of this is complicated by the Fed`s having a new boss in Janet Yellen. The Fed’s next meeting, and the first one under Yellen, will be on March 18 and 19.

  What this means for investors: The Fed is still clearly on the side of investors. Quantitative Easing is with us, and will be for several more months. The pace of stimulus, however, will gradually decline. The curveball about QE is that it impacts the long end of the yield curve, while traditional Fed stimulus is at the short end. Higher long-term rates could impede sectors like housing, but I doubt we’ll see much impact, although we’ve seen mortgage financing take a hit. The simple fact is that housing inventory is lean, and the market needs more homes. Bad weather may delay that fact, but it won’t change it.

  This is good news for the economy and for the stock market in general. I think it’s very likely that 2014 will be one of the strongest years for economic growth in a long time. I won’t go so far as predicting a bond market sell-off, but I do think the long end of the curve is a bad place for investors. The yields are just too measly, and the math is squarely on the side of stock “longs.” Continue to focus your portfolio on high-quality stocks such as our Buy List. If the Evans Rule is altered or dropped, it could propel the market much higher. Now let’s look at some of our Buy List earnings from this week.

  Medtronic Is a Buy up to $61 per Share

  On Tuesday, Medtronic ($MDT) reported fiscal Q3 earnings of 91 cents per share, which matched expectations. In last week’s CWS Market Review, I said that was my estimate as well. Quarterly revenues rose by 3.4% to $4.16 billion, which was $10 million more than forecast. Medtronic is one of those stable-growth companies. It’s not blistering growth, but it’s steady.

  Medtronic also narrowed its full-year guidance from $3.80 – $3.85 per share to $3.81 – $3.83 per share. Note that their fiscal year ends in April. For the first three quarters of this fiscal year, MDT earned $2.70 per share, so that implies fiscal Q4 earnings of $1.11 – $1.13 per share. Wall Street had been expecting $1.12 per share.

  Overall, this was a good quarter for Medtronic. Sales of their diabetes products rose by 16%. The medical-devices company was particularly strong in emerging markets, where sales rose by 10%. MDT expects to do even better in EM in the coming quarters.

  Even though these results were almost exactly what I had expected, the stock dropped nearly 3% after the report came out, then rallied the rest of the week. By the closing bell on Thursday, the shares were 40 cents higher than they were before the report. Naturally, this makes no sense, but it’s what markets do (remember what I had said about Facebook earlier). In any event, Medtronic remains a high-quality buy up to $61 per share.

  DirecTV Smashes Wall Street’s Earnings Estimate

  In last week’s CWS Market Review, I said that Wall Street’s consensus was too low on DirecTV’s ($DTV) earnings. I was right about that. On Thursday, the satellite-TV company reported Q4 earnings of $1.53 per share, which was 23 cents better than expectations.

  This was an outstanding quarter for DTV. The shares gapped up 3% on Thursday to a new all-time high. Latin America continues to be a growth powerhouse. Last year, revenues there were up 10%, and they added 1.2 million net subscribers. This is especially good since the macro picture is, shall we say, less than clear in some parts of Latam. The company plans to add another one million new Latin American subscribers this year.

  

  The U.S. wasn’t so bad either. DTV added 93,000 new American subscribers. Analysts were expecting an increase of just 21,000. DirecTV also announced a buyback program of $3.5 billion. I’ve long been a critic of shareholder repurchases, but DTV is one of the few companies that do it right. They actually reduce their overall share count. Imagine that! Over the last seven years, DTV’s share count is down by 57%. Working out the math, a $3.5 billion buyback is roughly 9% of DTV’s market cap. I’m raising our Buy Below on DirecTV to $80 per share.

  Express Scripts Is a Buy up to $83 per Share

  On Thursday, Express Scripts ($ESRX) reported that it earned $1.12 per share for the fourth quarter. That also hit expectations on the nose. This really wasn’t a major surprise, since in October, the pharmacy-benefit manager told us to expect Q4 earnings to range between $1.09 and $1.13 per share.

  I was especially curious to hear what ESRX had to say in the way of guidance. For all of 2014, they see earnings ranging between $4.88 and $5 per share. Those are very good numbers, and it gives the stock a reasonable valuation. The Street’s consensus had been for $4.93 per share. In a press release, Express Scripts said it’s “targeting annual earnings per share growth of 10 per cent to 20 per cent for the next several years.”

  Previously, I said I wanted to see the earnings report before I decided to alter our Buy Below price. Now I see it, and I’m pleased with what I see. This week, I’m raising our Buy Below on ESRX to $83 per share.

  Preview of Ross Stores, and a Few New Buy Below Prices

  We have one earnings report due next week, from Ross Stores ($ROST). I like Ross a lot; it’s one of my favorite deep-discount retailers. That’s why I was so surprised when they gave a dour outlook for Q4 earnings. Ross said to expect fourth-quarter earnings (their Q4 covers November-December-January) to range between 97 cents and $1.01 per share. Wall Street had been expecting $1.09 per share.

  Wall Street didn’t like that at all. ROST dropped from a high of $82 just prior to Thanksgiving to less than $66 in early February. The question is, how much of this is due to Ross, and how much is due to a lousy environment for retail? Like I said, even Walmart is having trouble. It appears that lousy weather has hurt shopping across broad stretches of the country.

  Ross is due to report earnings next Thursday, February 27. I think investors are looking past the Q4 numbers and want to see any guidance for 2014. I’m inclined to think that ROST’s problems are sector-related and not specific to them. Ross Stores continues to be a good buy up to $74 per share.

  Before I go, I want to make a few Buy Below adjustments. Stryker ($SYK) continues to do very well for us. A few weeks ago, the company beat earnings and guided higher. The stock hit another 52-week high this week. Remember that after the earnings report, the stock fell, which should tell you all you need to know about the market’s short-term judgment. This week, I’m raising our Buy Below on Stryker to $87 per share.

  Two weeks ago, I lowered the Buy Below on Fiserv ($FISV) after the stock missed earnings by a penny. I’ve mulled this over, and I think I acted too rashly. FISV is a dependable stock, and it’s rallied for six of the last seven days. I’m lifting my Buy Below on Fiserv to $60 per share.

  I’m pleased to see CR Bard ($BCR) rebound so well. Since February 3, shares of Bard have rallied 12%, and the stock just hit a brand-new 52-week high. Look for another dividend increase this spring. I’m raising our Buy Below on BCR to $144 per share.

  Finally, I’m keeping our Buy Below for Cognizant Technology ($CTSH) at $104 per share, but remember that it’s going to split 2 for 1 in early March. Our Buy Below will split along with it. Until then, CTSH remains a very good buy up to $104 per share, and $52 per share post-split.

  That’s all for now. Next week is the final trading week of February. On Tuesday, the Consumer Confidence report comes out. Thursday is the Durable-Goods report, and after the bell, we’ll hear Q4 earnings results from Ross Stores. On Friday, the government will revise the Q4 GDP report. The initial report said the economy grew by 3.2% during the last three months of 2013. 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

• Looking at Express Scripts
  Eddy Elfenbein, March 12th, 2013 at 1:34 pm

  I wanted to do a quick post on Express Scripts ($ESRX). The reason I chose ESRX is that it neatly sums up almost everything I like about a stock. In fact, I’m not sure why I didn’t add it to this year’s Buy List.

  If you’re not familiar with ESRX, the company is a pharmacy benefits management company, and it’s been astoundingly successful for the past several years. In 1992, the stock was going for less than 20 cents per share. Last October, it got as high as $66.

  But if there’s any one factor you want to see, check out this chart of their earnings-per-share:

  

  This is exactly what you want to see — a nice rising trend. Their results were barely impacted by the recession. Note that the red bars are Wall Street’s estimates for this year and next. Normally, I’m not very trustful of analyst estimates beyond a few months. In this case, ESRX delivers earnings increases so regularly that I’m inclined to give them the benefit of the doubt. In fact, the estimates are on the conservative side.

  Of course, the question is whether ESRX will stay as profitable in an Obamacare world. I honestly don’t know. I’m also wary of their purchase last year of Medco. But as far as its recent past, that’s exactly the kind of stock investors should seek — one with steadily rising profits.