Check Point Software Earns $1.38 per Share
Posted by Eddy Elfenbein on October 24th, 2018 at 8:10 am

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

“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.

Here are some quarterly highlights:

Total Revenue: $471 million compared to $455 million in the third quarter of 2017, a 4 percent increase year over year. Revenues were above the midpoint of our guidance.

GAAP Operating Income: $226 million compared to $225 million in the third quarter of 2017, representing 48 percent and 49 percent of revenues in the third quarter of 2018 and 2017, respectively.

Non-GAAP Operating Income: $250 million compared to $251 million in the third quarter of 2017, representing 53 percent and 55 percent of revenues in the third quarter of 2018 and 2017, respectively.
GAAP Taxes on Income: $45 million compared to $44 million in the third quarter of 2017.

GAAP Net Income and Earnings per Diluted Share: GAAP net income was $198 million compared to $193 million in the third quarter of 2017. GAAP earnings per diluted share were $1.25 compared to $1.16 in the third quarter of 2017, a 7 percent increase year over year.

Non-GAAP Net Income and Earnings per Diluted Share: Non-GAAP net income was $219 million compared to $215 million in the third quarter of 2017. Non-GAAP earnings per diluted share were $1.38 compared to $1.30 in the third quarter of 2017, a 6 percent increase year over year.

Deferred Revenues: As of September 30, 2018, deferred revenues were $1,148 million compared to $1,036 million as of September 30, 2017, an 11 percent increase year over year.

Cash Flow: Cash flow from operations of $249 million compared to $260 million in the third quarter of 2017.

Cash Balances, Marketable Securities and Short Term Deposits: $4,072 million as of September 30, 2018, compared to $3,865 million as of September 30, 2017.

Share Repurchase Program: During the third quarter of 2018, we purchased approximately 2.6 million shares at a total cost of approximately $300 million.

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

On the earnings call, the company said they expect 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.

Previously, Check Point had given full-year guidance of $5.45 to $5.75 per share. Today’s guidance effectively narrows that range to $5.60 to $5.71 per share since CHKP has earned $4.04 per share for the first three quarters.

Morning News: October 24, 2018
Posted by Eddy Elfenbein on October 24th, 2018 at 7:05 am

E.U. Rejects Italy’s Budget, and Populists Dig In

Trump Threats, Demands Spark ‘Existential Crisis’ at WTO

Trump Says He ‘Maybe’ Regrets Picking Fed’s Powell

Trump Is Not Going to Cut Middle-Class Taxes This Year, Despite What He Says

Here’s How $260 Billion of Tariffs Are Biting Third-Quarter Profit

Mom and Pop Are Buying the Dip in Stocks While the Pros Stay Put

When Sears Flourished, So Did Workers. At Amazon, It’s More Complicated.

Tesla’s Third Quarter Earnings: The Brass Ring Is Within Grasp

GM’s Driverless Car Bet Faces Long Road Ahead

Dunkin’ Takes Shot at Starbucks With Less-Expensive Espresso

Ford Hires New China Chief to Tackle Daunting Turnaround Task

In A Bid to Fill Office Buildings, Landlords Offer Kegs and Nap Rooms

Nick Maggiulli: A Change in Perspective

Roger Nusbaum: Further Defensive Action Initiated

Jeff Carter: Seed Investing Is Human Investing

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Turnaround Tuesday
Posted by Eddy Elfenbein on October 23rd, 2018 at 11:39 pm

The Dow opened today 279 points lower. It then dropped another 270 points. The index reached a low during the 10 o’clock hour. Then the Dow rallied back 423 points to close down just 126 points.

The internals of the market were weak. In the S&P 500, there were three new highs and 85 new lows. The index fell as low at 2,691.43. That’s 8.5% below the intra-day peak from September 21.

Our Buy List trailed the market today: -0.62% for us compared with -0.55% for the S&P 500. Obviously, Ingredion (INGR) hurt us a lot. INGR finished the day down -7.6%. At one point, it was down more than 11%. Without Ingredion, our Buy List would have lost -0.42%. That one stock cost the whole portfolio 20 basis points.

Ingredion Down 9%
Posted by Eddy Elfenbein on October 23rd, 2018 at 9:14 am

Shares of Ingredion (INGR) are currently down about 9% today. The company 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.

From the press release:

During the third quarter, the Company experienced significant FX headwinds caused by weakening foreign currencies primarily in Argentina, Brazil and Pakistan, as well as the impact of Argentine peso devaluation with the adoption of hyperinflation accounting. In North America, the Company experienced several unplanned power outages at Argo, its largest sweetener plant, and these operating events resulted in unforeseen higher manufacturing and supply chain costs.

“Our performance this quarter was impacted in part by the rapid pace and magnitude of FX currency devaluations in Argentina and Pakistan. As a result we expect our business model will require more than a quarter to recover,” said Jim Gray, executive vice president and chief financial officer.

Jim Zallie, president and chief executive officer, said, “We are disappointed with the impact these unexpected circumstances had on our results during the latter half of the quarter, and remain focused on aggressively driving operational improvements and structurally reducing supply chain costs. We are making steady progress in addressing production and supply chain challenges while delivering on our customer experience commitments.”

Ingredion also announced that its Board of Directors has authorized the repurchase of up to an additional 8 million shares of the Company`s common stock from November 5, 2018 through December 31, 2023. Zallie said, “The Board`s increased share repurchase authorization reflects its confidence in the Company`s ability to generate strong cash flow from operations, support strategic investments, and fulfill its commitment to return capital to shareholders.”

Morning News: October 23, 2018
Posted by Eddy Elfenbein on October 23rd, 2018 at 7:07 am

Olympic Steel Is Overlooked And Undervalued

Saudi Sees Deals Worth $50 Billion at Investment Conference Despite Boycotts

Paul Volcker, at 91, Sees `a Hell of a Mess in Every Direction’

Stocks Deepen Losses as Investors Flock to Havens

Unemployment Looks Like 2000 Again. Wage Growth Doesn’t.

Trump’s Tax Push to Help Middle Class Could Help Top Earners Too

What Happens When Banks Smear Their Exiting Brokers

Apple Supplier AMS Plummets Most in a Decade

Judge Denies Monsanto’s Request to Scrap $250 Million Punishment — But There’s a Catch

Why Goldman Sachs’s Marriage Of Marcus And Investment Management Makes Sense

Johnson & Johnson Makes $2.1 Billion Offer to Buy Out Japan Cosmetics Firm Ci:z

The Trade War’s Latest Casualties: China’s Coddled Cats and Dogs

Lawrence Hamtil: Global Discounts By Region & Sector

Michael Batnick: Higher Highs and Lower Lows

Momentum Monday – Lower Prices Ahead

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Crumbling Materials
Posted by Eddy Elfenbein on October 22nd, 2018 at 3:39 pm

The Materials sector has lagged the S&P 500 for more than ten years. Lately, however, it’s really gotten hammered.

In the last year, the S&P 500 is up just over 7% while the Materials are down 10%.

Stocks Above their 50-DMA
Posted by Eddy Elfenbein on October 22nd, 2018 at 10:15 am

Here’s a chart that shows just how badly the market’s internals have deteriorated. This show the percentage of stocks in the S&P 500 that are trading below their 50-day moving averages.

On September 21, 73.2% of stocks in the index were trading above their 50-DMA. By October 11, that was down to 11%.

Hormel Looks to Meat Alternative
Posted by Eddy Elfenbein on October 22nd, 2018 at 9:18 am

From Bloomberg:

In yet another sign that the mass craving for meat alternatives isn’t a passing fad, natural and organic meat company Applegate Farms, a subsidiary of processed meat giant Hormel Foods Corp., is thinking about moving into the plant-based space as well.

“We’re a brand that is always looking for better solutions and how do we continue to make progress,” Applegate President John Ghingo said in an interview with Bloomberg. “We are definitely considering creating new products.”

Consumer concerns about meat and dairy—including those related to health, animal welfare and the environment—are driving a $3.7 billion plant-based market, according to recent Nielsen data. Applegate would join such Silicon Valley favorites as Beyond Meat, which has products widely available at grocery stores and some restaurants, and Impossible Foods, which recently unveiled a promotion tied to the ubiquitous White Castle slider.

Ghingo was clear, however, about the company’s continued commitment to its core product line. “We love selling meat; we love our portfolio,” he said. Applegate, acquired by Hormel in 2015, recently introduced a no-sugar bacon, available in both its organic and natural lines, as well as a line of cheeses.

“But,” Ghingo added, plant-based meat alternatives are a “really interesting space.” Applegate pins its image to a promise that all of its animals are raised without antibiotics or growth promoters. Translating that into the vegan sphere is an interesting question, Ghingo said.

“How do we, as a progressive meat and food company, think about moving forward?” he asked.

Morning News: October 22, 2018
Posted by Eddy Elfenbein on October 22nd, 2018 at 7:05 am

What It Takes to Understand China Right Now

New Trade Pact Leaves Most U.S. Industry at Mercy of Mexico’s Courts

Quants Now Trade Exotic Stuff. But Can They Handle Illiquidity?

Unemployment Looks Like 2000 Again. But Wage Growth Doesn’t.

Trump’s Pre-Election Tax-Cut Promise Leaves GOP Leaders Baffled

Foreigners Are Dumping Saudi Stocks Like Never Before

How Blackstone Landed $20 Billion From Saudis for New Fund

The World’s Fourth-Biggest Oil Producer Can’t Keep the Lights On

KKR-Backed Calsonic to Buy Fiat Chrysler’s Magneti Marelli Unit for $7.1 Billion

Richard Parsons Steps Down as Interim CEO of CBS

The Next Tech Talent Shortage: Quantum Computing Researchers

Inheriting an IRA? Here’s What You Need to Know

Jeff Miller: Major Market Misperceptions

Joshua Brown: How the Hidden Inflation Sausage Gets Made

Ben Carlson: A Lost Decade of Dollar Cost Averaging

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CWS Market Review – October 19, 2018
Posted by Eddy Elfenbein on October 19th, 2018 at 7:08 am

“I’m always fully invested. It’s a great feeling to be caught with your pants up.”
– Peter Lynch

The stock market has calmed down somewhat from its temper tantrum earlier this month. What’s striking about the recent unpleasantness wasn’t its degree; a drop of 5.2% in two days really isn’t that much in historical terms. Rather, it’s the jarring jump from a very placid market to a semi-violent one.

Goldman Sachs points out that we just experienced the fifth-largest rise in volatility on record. In our case, rising from very low to moderate. The other four times usually centered on major events like President Eisenhower’s heart attack in 1955. Consider that all five of the calmest quarters in the last 20 years have occurred since the start of 2017.

I have to warn you that the storm hasn’t passed. We’re due for some more turbulence soon. In five of the last six trading session, the S&P 500 has traded below its 200-day moving average. On Thursday, the index closed above its 200-DMA, but only by a teeny tiny fraction, just 0.03%.

The good news for us is that Q3 earnings season has arrived. This gives our Buy List stocks a chance to show their mettle. In this week’s CWS Market Review, I’ll cover our four earnings reports from this week. I’ll also preview seven more reports coming next week. This is a busy time for us, so let’s jump right into our Q3 earnings calendar.

Four Buy List Earnings Reports

Here’s a look at our calendar for this earnings season. Twenty of our 25 stocks are due to report over the next three weeks. I’ve listed each stock’s name, ticker, earnings date, Wall Street estimate and result.

Our first four earnings reports all came on Thursday morning before the opening bell. Let’s start with Danaher (DHR). The diversified manufacturer reported Q3 earnings of $1.10 per share. That’s a 10% increase over last year. Core revenues rose 6.5%. The company had told us to expect Q3 earnings to range between $1.05 and $1.08 per share.

For Q4, Danaher expects earnings between $1.25 and $1.28 per share. The company also increased its full-year guidance. The old range was $4.43 to $4.50 per share. The new range is $4.49 to $4.52 per share.

I was particularly pleased to see Danaher’s operating margins expand to 17.1% from 16.8% a year ago. Traders took down shares of DHR for a loss of 3.5% during the day on Thursday. I’m keeping our Buy Below at $110 per share.

Next up is Alliance Data Systems (ADS). The loyalty-rewards stock reported Q3 core earnings of $6.26 per share. That’s six cents above expectations. So far this year, core earnings are up 20% to $15.70 per share. That puts ADS on track to hit its full-year target of $22.50 to $23.00 per share.

The most interesting part of the earnings report isn’t the financial numbers; instead, it’s what the CEO Edward Heffernan had to say about the company’s future:

“Shifting to our strategic direction, we have spent the better part of this year reviewing the portfolio of businesses that constitute Alliance Data. We are nearing the end of this process and feel it’s appropriate to share our current thinking.”

Heffernan continued: “Stated simply, we firmly believe that our current stock price does not reflect the intrinsic value of our portfolio of businesses across the enterprise. We are evaluating which assets would likely thrive under a different steward, while also unlocking value for our stockholders. We know that the right answer could involve significant realignment of our businesses and we are actively evaluating that optimal strategy. We expect to crystallize a game plan of precisely − what and how − before year end, and will continue to communicate our path forward when appropriate.”

The company is looking to sell off its non-card business. ADS thinks that side of the business is depressing the share price, and they’re probably right. The stock is going for less than 10 times earnings. ADS hopes to make a big announcement soon. On the earnings call, Heffernan was very clear:

Regarding our upcoming announcement for non-cards, make no mistake, we will be moving very aggressively on this and that it will be significant in size. This is not going to be minor surgery. Our Board and management are in full agreement as to the needed actions, and frankly, we like what we’re seeing from a market demand perspective.

Look for more news from ADS soon. The market likes this move, and so do I. The shares gained 5.5% in Thursday’s trading. ADS remains a solid buy up to $245 per share.

Snap-On (SNA) was our big winner last earnings season, but it may be our big loser this time. For Q3, SNA’s sales fell from $903.8 million to $898.1 million. That was well below Wall Street’s estimates of $931 million. The reason isn’t hard to find: tariffs.

Snap-on says that costs have risen sharply. For example, steel costs are up 30%. For the most part, Snap-on has absorbed these price hikes. Despite its poor sales numbers, Snap-on’s earnings were above expectations. For Q3, Snap-on earned $2.88 per share which was two cents better than estimates.

Traders, however, were not pleased. Snap-on plunged for a 9.5% loss on Thursday. I’m lowering my Buy Below price on Snap-on to $167 per share.

Finally, Signature Bank (SBNY) reported Q3 earnings of $2.84 per share. That’s up from $2.29 per share from last year. It also beat Wall Street’s estimate by one penny per share. Let’s look at some numbers. Total deposits are up 7.2% so far this year to $36.09 billion. Loans are up 12.6% to $35.13 billion. For Q3, net interest margin was 2.88%.

Overall, this was a solid quarter for Signature. The shares gained 3.2% in Thursday’s trading. For now, I’m keeping my Buy Below at $131 per share.

Seven Buy List Earnings Reports Next Week

Next week will be another busy one for Buy List earnings reports. It kicks off with three reports on Wednesday.

During the summer, I had been concerned about AFLAC’s (AFL) poor stock performance. Fortunately, the duck stock’s Q2 report put my fears at ease.

For Q2, the company made $1.07 per share, which topped its range of 91 cents to $1.05 per share. AFLAC also increased its full-year guidance range to $3.90 to $4.08 per share. That assumes ¥112.16 to the dollar. The previous range was $3.72 to $3.88 per share. For Q3, AFLAC expects earnings of 87 cents to $1.02 per share. That assumes an exchange rate of ¥110 to ¥115 to the dollar.

Check Point Software (CHKP) did very well for us last earnings season. The cyber-security folks had been expecting $1.15 to $1.35 per share. They made $1.37. Check Point also doubled their share buyback from $1 billion to $2 billion.

For Q3, CHKP expects revenues between $454 million and $474 million and EPS in the range of $1.30 to $1.40. The full-year outlook is unchanged at $5.45 to $5.75 per share. In April, they lowered their full-year guidance, so it’s good to see that the concerns from earlier this year have passed.

Also next Wednesday. Torchmark (TMK) is slated to report its Q3 results. Don’t let these quiet stocks fool you. Torchmark is a very good company.

For Q2, TMK made $1.51 per share. That beat estimates by two cents per share. The company also raised guidance. Torchmark’s initial guidance for this year was $5.93 to $6.07 per share. At the time, I said I thought that was too low and that they could probably hit $6.10 per share in 2018. In July, they upped their full-year range to $6.02 to $6.12 per share. If that’s right, it means Torchmark is going for 14 times earnings. For Q3, Wall Street expects $1.53 per share.

We have three more earnings reports next Thursday. Let’s start with Cerner (CERN). Three months ago, Cerner reported earnings of 62 cents per share, which was a two-cent beat. Revenue for Q2 was up 6% to $1.368 billion. For Q3, Cerner expects revenue between $1.335 billion and $1.385 billion and earnings between 62 and 64 cents per share. Cerner’s current full-year EPS range is $2.45 to $2.55.

Starting in May, Sherwin-Williams (SHW) staged a nice rally for us, but it’s been down sharply over the past month. In fact, almost any stock related to construction or homebuilding has been feeling the heat.

In this summer’s Q2 report, Sherwin not only beat earnings but also raised full-year guidance. The current range is $19.05 to $19.35 per share. Fortunately, the Valspar merger seems to be going well. For Q3, Wall Street expects earnings of $5.76 per share.

Stryker (SYK) was uncharacteristically weak three months ago. The company beat earnings, but the stock dropped more than 10%. On the plus side, Stryker has raised its full-year guidance twice this year. For all of 2018, Stryker now expects earnings to range between $7.22 and $7.27 per share. For Q3, they’re looking for earnings between $1.65 and $1.70 per share.

Moody’s (MCO) is due to report next Friday. The credit-ratings agency had a very good report three months ago. Moody’s earned $2.04 per share which beat consensus by 15 cents per share. Overall, Q2 was a solid quarter for Moody’s. Quarterly revenue rose 17%, and I was impressed by the growth of the Moody’s Analytics business, plus Bureau van Dijk.

Still, shares of Moody have been weak since this summer. The stock is currently 13% below its September high. Frankly, I’m not worried about Moody’s. Most importantly, Moody’s recently reaffirmed their full-year EPS guidance of $7.65 to $7.85. For Q3, the consensus on Wall Street is for $1.78 per share.

That’s all for now. Next week will be dominated by earnings reports. In addition to earnings results, many companies will offer preliminary guidance for next year. The major economic report next week will be Friday’s GDP report. This will be our first look at growth for Q3. The report for Q2 was quite good, but we’ve had a hard time stringing together two or three decent reports in a row. Let’s hope we break this trend. 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

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