Morning News: October 29, 2018
Posted by Eddy Elfenbein on October 29th, 2018 at 7:03 am

Australia Is the Latest Country Whose Banks are Planning to Abandon London as Brexit Looms

China Regulator Proposes 50% Cut to Car Purchase Tax

Many U.S. Firms in China Eyeing Relocation as Trade War Bites

IBM and Red Hat Are Much Better Together

Walmart’s Warehouse Chain Tries to Get High-Tech With Test Store

Another Crisis At GE?

Chinese Liquor Maker’s Earnings Make Investors Queasy

Guess What? Everyone Was Wrong About Tesla

Sunrun Gives Tesla a Fight in the Home Solar Business

To Make More Ram Trucks, Fiat Chrysler Reconsiders Mexico

China’s OnePlus, Backed by Qualcomm and T-Mobile, Launches Smartphone in U.S.

The Selfish Social Security Decision You Shouldn’t Make

Ben Carlson: The Psychology of Sitting in Cash, Part Deux

Jeff Miller: What do the Mid-Term Elections Mean for Financial Markets?

Howard Lindzon: Mood Matters, Cloud Wars and Overshoots

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Bloomberg Appearance
Posted by Eddy Elfenbein on October 26th, 2018 at 7:33 pm

Q3 GDP Growth = 3.5%
Posted by Eddy Elfenbein on October 26th, 2018 at 10:18 am

The first estimate of third-quarter GDP growth is out this morning. The government estimates that the economy grew, in real terms, at an annualized rate of 3.5%.

The U.S. economy grew at a faster-than-expected rate in the third quarter as inflation was kept in check and consumer spending surged, according to data released by the Commerce Department on Friday.

Gross domestic product expanded by a 3.5 percent annual rate. Economists polled by Dow Jones expected the economy to expand by a 3.4 percent annual rate.

The department said the PCE price index, a key measure of inflation, increased by 1.6 percent last quarter, much less than the 2.2 percent increase expected by economists polled by StreetAccount.

This is only the second time in the last 13 years that we’ve had back-to-back quarters of at least 3.5% growth.

Moody’s Earned $1.69 for Q3
Posted by Eddy Elfenbein on October 26th, 2018 at 8:11 am

3Q18 revenue of $1.1 billion up 2% from 3Q17
3Q18 operating income up 4% from 3Q17; adjusted operating income up 3.1%
3Q18 diluted EPS of $1.59 down 2% from 3Q17; adjusted diluted EPS of $1.69, up 11%
FY 2018 diluted EPS guidance range is now $6.95 to $7.10, which includes a $30 million to $40 million restructuring charge expected to be recorded in 4Q18
FY 2018 adjusted diluted EPS guidance range is now $7.50 to $7.65

Moody’s Corporation (MCO) today announced results for the third quarter of 2018, as well as provided its current outlook for full year 2018.

“Moody’s third quarter performance reflected strong growth from Moody’s Analytics, partially offset by a decline at Moody’s Investors Service, as non-financial corporate debt issuance slowed versus the record level in the prior-year period,” said Raymond McDaniel, President and Chief Executive Officer of Moody’s. “We are reducing our outlook for full year diluted EPS to a range of $6.95 to $7.10 and adjusted diluted EPS to a range of $7.50 to $7.65, primarily reflecting our expectation for continued lighter debt issuance into the fourth quarter. In response, we intend to undertake cost management activities, which will result in a fourth quarter restructuring charge of $30 to $40 million and an aggregate charge through the first half of 2019 of $45 to $60 million. We expect this to result in incremental annualized savings of $30 to $40 million going forward.”

THIRD QUARTER HIGHLIGHTS

Moody’s Corporation reported revenue of $1.1 billion for the three months ended September 30, 2018, up 2% from the third quarter of 2017.

Operating expenses totaled $614.0 million, approximately flat to the prior-year period. Operating income was $466.8 million, up 4% from the third quarter of 2017. Adjusted operating income, which excludes depreciation and amortization, as well as non-recurring acquisition and integration expenses associated with the Bureau van Dijk acquisition (“Acquisition-Related Expenses”), was $514.2 million, up 3% from the prior-year period. Operating margin for the third quarter was 43.2% and the adjusted operating margin was 47.6%.

Diluted EPS of $1.59 was down 2% from the third quarter of 2017. Adjusted diluted EPS of $1.69 was up 11%. Third quarter 2018 adjusted diluted EPS excluded $0.10 per share related to the amortization of acquired intangible assets. Third quarter 2017 adjusted diluted EPS primarily excluded a $0.23 per share gain on a foreign currency hedge associated with the Bureau van Dijk acquisition (“Purchase Price Hedge Gain”). Neither third quarter 2018 diluted EPS nor adjusted diluted EPS were impacted by the adoption of accounting standard update ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting,” compared to a $0.04 per share tax benefit in the third quarter of 2017.

CWS Market Review – October 26, 2018
Posted by Eddy Elfenbein on October 26th, 2018 at 7:08 am

“The best time to invest is when you have money.” – John Templeton

In last week’s issue, I warned you: “the storm hasn’t passed. We’re due for some more turbulence soon.” And indeed, more turbulence came. On Wednesday, the S&P 500 fell more than 3%, and the Nasdaq plunged 4.4% for its worst day in seven years.

Wall Street is still on pins and needles. Moreover, we’re right in the middle of third-quarter earnings season. This was a very busy week for our Buy List earnings reports; we had seven reports this week. Most of our reports are beating expectations, but we had an earnings miss from Sherwin-Williams plus an earnings warning from Ingredion. I’ll fill you in on the details in just a bit.

This will be a packed issue. First, I’ll summarize what’s been freaking out Wall Street. I’ll then cover all of our Buy List earnings reports, and I’ll preview next week’s reports (another seven!). There’s a lot to cover, so let’s dive right in.

Riding Out the October Storm

The recent market sell-off has many different causes, but the most important is higher interest rates from the Federal Reserve. From that, there are several ripples that are impacting the markets.

The most prominent effect has been on the housing market. Mortgage rates recently touched a seven-year high. As a result, marginal buyers are pushed out of the market. This week’s new-homes sales report was a total dud. The number for September was lousy, and on top of that, the previous three months were all revised lower. Some of that can be blamed on the hurricanes, but not all of it. In the last year, new-home sales are down 13%.

We can see the impact on the stock market by looking at housing-related stocks. (Later on, I’ll discuss the earnings miss from Sherwin-Williams.) The Housing ETF (XHB) has been in free fall. Also, the S&P 500 Materials Sector (XLB) has been dropping like a stone. Remember that housing touches many different industries like flooring, construction, paint, home security, wire, tools, some retail and mortgages.

Closely related to the drop in housing has been the weakness in REITs and regional banks. The Regional Bank ETF (KRE) has been lagging badly. The local real-estate market tends to weigh heavily on regional banks. What’s interesting is that we’re watching a near mirror-image of the Trump Rally after the 2016 election. All the sectors that soared after the election are doing poorly, while the ones that were left behind are now doing better (or less badly). As a group, stocks with high volatility have been getting crushed, while more stable stocks are leading. The recent divide between High Beta and Low Vol may be the most outstanding feature of the market this month.

By the way, some commentators have been discussing the Tech sector as if it’s been thrown out the window. Eh…not really. Tech, as a whole, has been holding up better than many other areas.

The damage to the market this month has been impressive. Until Thursday, the S&P 500 fell 13 times in 15 sessions. The index went 74 days in a row without a 1% change in either direction. In the last 12 days, it’s happened seven times. I’ll warn you that Thursday was a classic “contra-trend” move. That’s when the market makes a big move in either direction and sprinkled in are a few days that are the complete opposite of what’s been happening. The days tend to be dramatic and misleading as the current trend reasserts itself. Eventually, however, all trends come to an end.

Let me add some words of caution. I’m not a believer that the housing cycle is over. I’m more inclined to believe this is just a rough few months and that we’re still on the way up. I suspect that fears of a housing bust have an outsized hold on Wall Street’s mind. Given the events of ten years ago, I certainly understand, but we’re not anywhere close to a situation like that.

For the near term, we’re not yet in the clear. Don’t expect the Fed to alter its course. The key to watch is the 200-day moving average. Once we clear that for a few days, then I expect things to settle down. This may take a few weeks to sort out, but our stocks will continue to be an oasis. On Wednesday’s big down day, our Buy List outpaced the S&P 500 by more than 1%. When investors get scared, they flock to quality. Now let’s look at some earnings news.

Six Earnings Reports This Week

We had three Buy List earnings reports on Wednesday. Before the bell, Check Point Software (CHKP) reported Q3 earnings of $1.38 per share. That was two cents above Wall Street’s estimates. Revenues were $471 million. The company had told us to expect Q3 earnings between $1.30 and $1.40 per share and revenue between $454 million and $474 million.

Check Point also said it bought Dome9 in order to boost its position in cloud security.

“Third quarter results reached the top end of our projections, with better than anticipated strength coming from the US and Europe,” said Gil Shwed, Founder and CEO of Check Point Software Technologies. “Today we announced the acquisition of Dome9. This new addition to Check Point’s Infinity architecture delivers enhanced Cloud Security with advanced active policy enforcement and multi-cloud protection capabilities. The combination of Dome9 and Infinity CloudGuard product family further differentiates Check Point in the rapidly evolving Cyber Security environment,” Shwed concluded.

On the earnings call, the company said it expects Q4 earnings of $1.56 to $1.67 per share on revenue of $500 million to $528 million. Wall Street had been expecting $1.65 per share on revenue of $515.29 million. Check Point remains a buy up to $120 per share.

After the close on Wednesday, AFLAC (AFL) reported Q3 earnings of $1.03 per share which was four cents better than estimates. The yen averaged ¥111.48 during the quarter, so thankfully the exchange rate didn’t have a big impact on their numbers.

For Q3, AFLAC had been expecting earnings of 87 cents to $1.02 per share (a wide range), which assumed an exchange rate of ¥110 to ¥115 to the dollar. So far this year, AFLAC has made $3.11 per share. That’s a 19.6% increase over last year.

Now for guidance. AFLAC sees itself coming in at the “high end” of its previous guidance, which was $3.90 to $4.06 per share. That assumes an exchange rate of ¥112.16 to the dollar.

If by “high end” AFLAC means $3.98 to $4.06 per share, then that means they see Q4 coming in between 87 cents and 95 cents per share. Wall Street had been expecting 96 cents per share. I think the Street expected them to raise guidance. I’m dropping AFLAC’s Buy Below to $47 per share.

Also after Wednesday’s close, Torchmark (TMK) reported Q3 operating earnings of $1.59 per share. That beat Wall Street’s forecast of $1.53 per share. That’s up from $1.23 one year ago.

Now for guidance. Torchmark sees 2018 earnings between $6.08 and $6.14 per share. That implies Q4 earnings of $1.51 to $1.57 per share. Wall Street had been expecting $1.56 per share.

Torchmark also gave initial guidance for next year. Torchmark sees 2019 ranging between $6.45 and $6.75 per share. The consensus on Wall Street was for $6.56 per share. Torchmark is a buy up to $91 per share.

Thursday morning, we got our first earnings miss. Sherwin-Williams (SHW) said it made $5.68 per share for Q3. That was seven cents below Wall Street’s estimate. Sales rose 5% to $4.73 billion.

Here’s what the CEO had to say:

Revenue growth slowed from the pace set in the second quarter, due primarily to slower growth in some North American architectural businesses, a sequential slow-down in some of our industrial businesses in China and Europe and unfavorable currency translation rate changes. The price increases implemented over the past 12 months have largely kept pace with accelerating raw material inflation on a consolidated basis, but some of our Performance Coatings businesses continue to lag in that effort. During the quarter, our Global Supply Chain team incurred incremental costs in an effort to keep pace with load-in demand during what is traditionally our peak sales volume quarter.

Business is still doing well for Sherwin. EBITDA from continuing operations is up 16.9% so far this year. Sherwin also lowered the upper end of its full-year guidance range to $19.05 to $19.20. The previous range was $19.05 to $19.35 per share. I’m lowering our Buy Below to $400 per share.

After the bell on Thursday, Cerner (CERN) reported Q3 earnings of 63 cents per share which matched Wall Street’s consensus. Q3 revenue rose 5% to $1.34 billion.

For Q4, Cerner expects revenue between $1.37 billion to $1.42 billion. The midpoint of that range is 6% growth. For Q4 earnings, Cerner expects 62 to 64 cents per share. That’s a little weaker than I had been expecting. Wall Street was at 67 cents per share. Cerner’s outlook puts its full-year forecast at $2.45 to $2.47 per share. Cerner is a buy up to $67 per share.

Stryker (SYK) reported Q3 earnings of $1.69 per share which was at the top of its previous range of $1.65 to $1.70 per share. Organic sales rose 7.9%. Impressively, Stryker increased its operating margin to nearly 25%.

For Q4, Stryker expects $2.13 to $2.18 per share. For all of 2018, Stryker sees earnings between $7.25 and $7.30 per share. That’s an increase of three cents to both ends of their previous guidance. I like this stock a lot. Stryker remains a buy up to $181 per share.

The last Buy List earnings report this week is from Moody’s (MCO). The company is due to report later this morning. The credit-rating agency had a very good report three months ago. Moody’s recently reaffirmed its full-year EPS guidance of $7.65 to $7.85. For Q3, the consensus on Wall Street is for $1.78 per share. I’ll cover the report on the blog.

Seven More Buy List Reports Next Week

On Tuesday, two of our Buy List stocks are due to report. After its last earnings report, shares of Cognizant Technology Solutions (CTSH) got punished by the market. In July, CTSH was over $82 per share, and recently it’s been near $70 per share, yet business has been good.

For Q3, CTSH expects earnings of at least $1.13 per share, and for all of this year, it expects at least $4.50 per share. Earlier this year, CTSH lowered its full-year EPS guidance from $4.53 to $4.47. So they’ve reclaimed some of that lost ground.

Shares of Wabtec (WAB) have been sagging lately. The stock got dinged last month after JP Morgan questioned some of the assumptions behind the GE deal. The company responded with a press release stating that the merger deal “continues to make progress,” and that they expect it to be complete by early 2019.

Wabtec then amended their proxy, noting that they expect to see a minor adjustment in revenue and EBIT for next year. They’re still standing by their financial estimates for the deal. Wall Street expects Q3 earnings of 95 cents per share.

Then on Wednesday, we’ll get three more reports. Frankly, Carriage Services (CSV) has been a disappointment this year. The last earnings report wasn’t that good. Their current outlook, however, is fairly optimistic. I want to see better results from them soon. For Q3, Wall Street expects 22 cents per share.

This summer, Fiserv (FISV) reiterated its full-year range of $3.02 to $3.15 on internal revenue growth of at least 4.5%. Since Fiserv has already made $1.51 per share for the first half, the guidance means they expect $1.51 to $1.64 per share for the second half. In September, the board authorized a buyback of 30 million shares of stock. That’s about 7.5% of their outstanding shares. It’s our top stock this year. For Q3, Wall Street expects 77 cents per share. I’m expecting a beat.

Intercontinental Exchange (ICE) is a very good company, and they had a good earnings report three months ago. ICE doesn’t offer EPS guidance, but they said they expect Q3 data revenue between $530 million and $532 million. For Q4, it’s expected to be between $538 million and $542 million. One item impacting the business has been the recent battle over market data fees. I’ll have more on that next week. For Q3, Wall Street expects earnings of 80 cents per share.

On Thursday, there are two Buy List reports. Church & Dwight (CHD) had a good Q2 earnings report over the summer. For Q3, CHD expects 53 cents per share and $2.26 to $2.28 for the year. Not only has CHD been stable in this market, but the shares made a new high last week.

On Monday, Ingredion (INGR) warned that Q3 earnings will be about $1.70 per share. Wall Street had been expecting $1.96 per share. Previously, Ingredion had stood by its full-year guidance of $7.50 to $7.80 per share. Now INGR expects $6.80 to $7.05 per share. On Monday, the stock dropped 7.6%.

Ingredion blamed weak currencies in developing markets plus power outages in North America. The company said it will require more than one quarter to recover. I’m not pleased with this stock.

Before I go, I wanted to make two adjustments to our buy prices of stocks that reported last week. I’m lowering the Buy Below for Alliance Data Systems (ADS) to $221 per share. I’m also dropping Signature Bank (SBNY) to $118 per share.

That’s all for now. More earnings to come next week. We’ll also get several key economic reports. Personal income and spending comes out on Monday. Tuesday is consumer confidence and Case-Shiller. Wednesday is the ADP payroll report. On Thursday, we get the ISM report, plus construction spending. Then on Friday is the big one—the October jobs report. The report for September showed the lowest unemployment rate in nearly 50 years. 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

P.S. I’ll be on talking markets on Bloomberg later today. The segment runs from 3:50 pm to 4:10 pm ET.

Morning News: October 26, 2018
Posted by Eddy Elfenbein on October 26th, 2018 at 7:04 am

Pause Interest-Rate Hikes to Help the Labor Force Grow

Weak Soybean Exports Seen Slowing U.S. Third Quarter Growth

Trump Creates Task Force to Free Up More Wireless Spectrum

Peak Embarrassment in War on Oil

Amazon.com Earnings: Strong Results, Modest Guidance

Twitter Earnings: Momentum Continues

Snap Continues to Struggle to Gain Users

Chipotle CEO: Don’t Underestimate the Power of Digital to Boost Sales

Sears Directors Tap Evercore to Examine Former CEO Lampert’s Deals

American Airlines Is Hurt by Jet-Fuel Costs

Intel Raises Forecast Amid Robust Chip Sales

The U.S. Secretly Halted JPMorgan’s Growth for Years

Cullen Roche: Why Does the Stock Market Rise and Fall?

Howard Lindzon: Stocktoberfest 9 or 10…Let The Opinions Begin!

Jeff Carter: Are Micro VCs A Worthwhile Investment?

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Sherwin-Williams Earns $5.68 per Share
Posted by Eddy Elfenbein on October 25th, 2018 at 7:36 am

Sherwin-Williams (SHW) made $5.68 per share for Q3. That’s seven cents below Wall Street’s estimate.

Consolidated net sales increased 5.0% in the quarter to $4.73 billion.

Net sales from stores in U.S. and Canada open more than twelve calendar months increased 5.2% in the quarter.

Diluted net income per share increased 11.7% to $3.72 per share in the quarter compared to $3.33 per share in the third quarter of 2017. Third quarter 2018 included a charge for the California public nuisance litigation and acquisition-related costs of $1.09 and $0.87 per share, respectively, and third quarter 2017 diluted net income per share included acquisition-related costs of $1.42 per share.

Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) from continuing operations increased 16.9% in the nine months to $1.99 billion.

Narrowing FY18 adjusted EPS guidance to $19.05 to $19.20 per share, excluding acquisition-related costs, the charge for the California litigation and environmental provisions, compared to $15.07 per share on a comparable basis in FY17.

Commenting on the third quarter, John G. Morikis, Chairman, President and Chief Executive Officer, said, “We continue to make great progress on the integration of Sherwin-Williams and Valspar into a faster growing, more profitable enterprise, but our results in the third quarter don’t fully reflect that progress. Revenue growth slowed from the pace set in the second quarter, due primarily to slower growth in some North American architectural businesses, a sequential slow-down in some of our industrial businesses in China and Europe and unfavorable currency translation rate changes. The price increases implemented over the past 12 months have largely kept pace with accelerating raw material inflation on a consolidated basis, but some of our Performance Coatings businesses continue to lag in that effort. During the quarter, our Global Supply Chain team incurred incremental costs in an effort to keep pace with load-in demand during what is traditionally our peak sales volume quarter. These unfavorable impacts were mostly offset by a lower than anticipated effective tax rate on both a reported and adjusted basis. Our effective tax rates on reported net income and adjusted net income were 14.9 percent and 18.5 percent, respectively. While our results in the quarter fell short of our initial expectations, we remain confident in, and excited about, the long term value created by the combination of these two great companies.

“For the fourth quarter, we anticipate our consolidated net sales will increase a mid-single digit percentage compared to last year’s fourth quarter. For the full year 2018, we expect our consolidated net sales will increase by a high teen percentage, including incremental Valspar sales of $1.85 billion for the first five months of 2018, compared to the full year 2017. With annual sales at this level, we are updating our full year 2018 diluted net income per share to be in the range of $13.85 to $14.00 per share, including charges of $3.86 per share for acquisition-related costs, $1.09 per share for the California litigation, and $.25 per share for environmental expense provisions. Diluted net income per share in 2017 was $18.67 per share, including a one-time benefit of $7.04 per share from deferred income tax reductions, a one-time charge of $.44 per share for discontinued operations and a charge of $3.00 per share for acquisition-related costs. The incremental supply chain costs incurred in the third quarter make it unlikely we will reach the higher end of the full year adjusted diluted net income per share range provided last quarter. We are therefore narrowing our full year 2018 adjusted diluted net income per share to be in the range of $19.05 to $19.20 per share, excluding acquisition costs, the charge for the California litigation, and environmental expense provisions, compared to $15.07 per share on a comparable basis in 2017. We now expect our 2018 effective tax rate to be approximately nineteen to twenty percent.”

Morning News: October 25, 2018
Posted by Eddy Elfenbein on October 25th, 2018 at 7:01 am

Europe Stocks Climb With U.S. Futures Ahead of ECB

U.S. Dairy Farmers Get Little Help From Canada Trade Deal

How Trump’s Attacks on Powell Are Helping the Fed

Comcast Beats Profit Estimates as Broadband Growth Accelerates

Tesla Profit Blowout Reverses Much of Musk’s Damage to Stock

Ford Motor Company Profit Slips 37% on China Woes

AB InBev Plunges as Brewer Cuts Dividend Payout in Half

Apple’s Radical Approach to News: Humans Over Machines

Twitter Monthly Usage Drops, Company Warns It Will Fall Again

UBS Targets American Wealth for Growth as Investment Bank Shines

Microsoft Rides Cloud to Impressive Earnings Beat; Markets Focus on Amazon Q3

AT&T Stumbles in Its First Quarter With Time Warner

Michael Batnick: Seven Minute Charts

Ben Carlson: Can the Stock Market Predict The Next Recession? & The Next Subprime

Blue Harbinger: Will You Adjust Your Strategy, Or Go Down With The Ship?

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Torchmark Earned $1.59 per Share for Q3
Posted by Eddy Elfenbein on October 24th, 2018 at 4:18 pm

After the close, Torchmark (TMK) reported Q3 operating earnings of $1.59 per share. That beat Wall Street’s forecast of $1.53 per share. That’s up from $1.23 one year ago.

Here are some highlights from the quarter:

Net income as an ROE was 12.4%. Net operating income as an ROE excluding net unrealized gains on fixed maturities was 14.7%.

Life underwriting margins increased over the year-ago quarter by 10% and health underwriting margins increased over the year-ago quarter by 8%.

Life premiums increased over the year-ago quarter by 8% at American Income and health premiums increased over the year-ago quarter by 8% at Family Heritage.

Net health sales increased over the year-ago quarter by 15%.

Average producing agent count increased over the year-ago quarter by 6% at Family Heritage.

Approximately 877,000 shares of common stock were repurchased during the quarter.

Now for guidance. Torchmark sees 2018 earnings between $6.08 and $6.14 per share. That implies Q4 earnings of $1.51 to $1.57 per share. Wall Street had been expecting $1.56 per share.

Torchmark also gave initial guidance for next year. Torchmark sees 2019 ranging between $6.45 and $6.75 per share. The consensus on Wall Street was for $6.56 per share.

AFLAC Earns $1.03 per Share
Posted by Eddy Elfenbein on October 24th, 2018 at 4:13 pm

AFLAC (AFL) just released its Q3 earnings report. For the quarter, the duck stock made $1.03 per share which was four cents better than estimates. The yen averaged 111.48 during the quarter, so thankfully, the exchange rate didn’t have a big impact on their numbers.

For Q3, AFLAC had been expecting earnings of 87 cents to $1.02 per share (a wide range), which assumed an exchange rate of ¥110 to ¥115 to the dollar. So far this year, AFLAC has made $3.11 per share. That’s a 19.6% increase over last year.

Now for guidance. AFLAC sees itself coming in at the “high end” of its previous guidance which was $3.90 to $4.06 per share. That assumes an exchange rate of ¥112.16 to the dollar.

If by “high end” AFLAC means $3.98 to $4.06 per share, then that means they see Q4 coming in between 87 cents and 95 cents per share. Wall Street had been expecting 96 cents per share. I think the Street expected them to raise guidance. The shares lost 3.5% today.