Cracks in the Economy
Posted by Eddy Elfenbein on July 25th, 2018 at 2:09 pm

I want to be careful how I word this. From my view, the U.S. economy looks very good at the moment. On Friday, we’ll get our first look at Q2 GDP, and it could be a very good report. Expect to see some POTUS tweets if the report is strong.

Forecasting the economy is hard, but there are a few early warning signs. None are perfect. One of the best is the yield curve, and that’s gotten much flatter lately. Still, there have been times when the economy has jogged along for more than two years after the curve has gone negative.

Another warning sign is oil. Prices tend to spike before recessions. Or rather, the spikes may help cause the recessions. West Texas crude is down to $68 per barrel, but it was over $74 recently. That’s a big jump from last June when crude was at $42 per barrel. That eats into consumer spending.

Another concern is real estate. Today’s new-homes sales report was below expectations. It was the weakest in eight months. On top of that, the previous three months were all revised lower. We’ve also seen weak housing data from certain areas. Southern California, in particular, has been quite weak.

The housing market could rebound, but I am concerned that economic growth may be peaking out right now.

Check Point Earns $1.37 per Share
Posted by Eddy Elfenbein on July 25th, 2018 at 9:50 am

More good earnings news. This morning, Check Point Software (CHKP) said they earned $1.37 per share for Q2. The company is also doubling its share buyback program from $1 billion to $2 billion. Here are some highlights from the quarter.

Financial Highlights for the Second Quarter of 2018:

Total Revenue: $468 million compared to $459 million in the second quarter of 2017, a 2 percent increase year over year.

GAAP Operating Income: $224 million compared to $222 million in the second quarter of 2017, representing 48 percent of revenues in the second quarter of 2018 and 2017.

Non-GAAP Operating Income: $247 million compared to $248 million in the second quarter of 2017, representing 53 percent and 54 percent of revenues in the second quarter of 2018 and 2017, respectively.
GAAP Taxes on Income: $43 million compared to $45 million in the second quarter of 2017.

GAAP Net Income and Earnings per Diluted Share: GAAP net income was $198 million compared to $188 million in the second quarter of 2017. GAAP earnings per diluted share were $1.24 compared to $1.12 in the second quarter of 2017, a 10 percent increase year over year.

Non-GAAP Net Income and Earnings per Diluted Share: Non-GAAP net income was $218 million compared to $212 million in the second quarter of 2017. Non-GAAP earnings per diluted share were $1.37 compared to $1.26 in the second quarter of 2017, an 8 percent increase year over year.

Deferred Revenues: As of June 30, 2018, deferred revenues were $1,158 million compared to $1,065 million as of June 30, 2017, a 9 percent increase year over year.

Cash Flow: Cash flow from operations of $213 million compared to $226 million in the second quarter of 2017. Year over year, currency-hedging transactions had a $25 million effect on our cash flow from operations with minimal impact on our financial income as intended. This quarter includes excess payments related to our currency hedging transactions in an amount of $14 million compared to $11 million of income in the second quarter of 2017.

Cash Balances, Marketable Securities and Short Term Deposits: $4,042 million as of June 30, 2018, compared to $3,806 million as of June 30, 2017.

Share Repurchase Program: During the second quarter of 2018 we purchased approximately 2.5 million shares at a total cost of approximately $250 million.

100% Increase in the Share Repurchase Program: Today, we announced a 100 percent increase to the share repurchase program. Under the updated plan, $2 billion is allocated for share repurchase, compared to $1 billion in the previous program, with purchases of up to $325 million a quarter, compared to $250 million in the previous program.

For Q2, they expect revenues between $454 million and $474 million and non-GAAP EPS in the range of $1.30 to $1.40. There’s no change to their full-year outlook.

Morning News: July 25, 2018
Posted by Eddy Elfenbein on July 25th, 2018 at 7:07 am

The Oil Route That Could Be Behind the Escalating Trump-Iran Threats, Explained

Trump Wants the Fed to Roll Back the U.S. Economy

New Hampshire Fights Supreme Court Sales-Tax Ruling

Pay TV Sees Mass Exodus As Cord-Cutters Jump More Than 30% In 2018

Facebook Gains Status in China, at Least for a Moment

Tesla’s ‘Alarming’ Request for Refunds Sparks Questions about Profitability

Whirlpool Loved Trump’s Tariffs. Now It’s Struggling.

Ford Follows GM’s Cruise Move With Self-Driving Spinoff

MoviePass’ Parent Company is Doing a Massive Reverse Stock Split in Order to Stay Listed on the Nasdaq (HMNY)

Deutsche Bank’s Sewing Dares to Talk Growth Again After Cuts

Giving In to China, U.S. Airlines Drop Taiwan (in Name at Least)

A Workaholic Saved Chrysler

Nick Maggiulli: The Right Place, The Right Time

Lawrence Hamtil: S&P 500: Why Sector Divergences from the Index Should Not Concern You

Howard Lindzon: Google…$900 Billion and Counting

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Stryker Earns $1.76 per Share for Q2
Posted by Eddy Elfenbein on July 24th, 2018 at 4:26 pm

Stryker (SYK) reported Q2 earnings of $1.76 per share. That’s above their guidance range of $1.70 to $1.75 per share. Net sales rose 10.3% to $3.3 billion.

“We continue to execute on our strategy and delivered another strong quarter of organic sales growth, adjusted operating margin expansion and adjusted net earnings per diluted share,” said Kevin A. Lobo, Chairman and Chief Executive Officer. “Our diversified and decentralized business unit model combined with strong talent and culture continue to serve us well. We have raised our guidance to reflect the strong results and positive outlook for the remainder of the year.”

For Q3, they’re looking for earnings between $1.65 and $1.70 per share. Wall Street had been expecting $1.69 per share.

For all of 2018, Stryker now expects earnings to range between $7.22 and $7.27 per share. That’s the second increase. SYK’s initial range was $7.07 to $7.17 per share. Then it went to $7.18 to $7.25 per share.

Business details:

Consolidated net sales of $3.3 billion increased 11.0% in the quarter and 9.9% in constant currency. Organic net sales increased 7.9% in the quarter including 9.0% from increased unit volume partially offset by 1.1% from lower prices.

Orthopaedics net sales of $1.2 billion increased 8.0% in the quarter and 6.6% in constant currency. Organic net sales increased 6.6% in the quarter including 8.9% from increased unit volume partially offset by 2.3% from lower prices.

MedSurg net sales of $1.5 billion increased 10.0% in the quarter and 9.2% in constant currency. Organic net sales increased 7.3% in the quarter including 7.6% from increased unit volume partially offset by 0.3% from lower prices.

Neurotechnology and Spine net sales of $0.6 billion increased 20.1% in the quarter and 18.5% in constant currency. Organic net sales increased 12.4% in the quarter including 13.3% from increased unit volume partially offset by 0.9% from lower prices.

Earnings Analysis

Reported net earnings of $452 million increased 15.6% in the quarter. Reported net earnings per diluted share of $1.19 increased 15.5% in the quarter. Reported net earnings include certain items, including charges for acquisition and integration-related activities, the amortization of purchased intangible assets, restructuring-related and other charges, compliance with European Medical Devices Regulation, Rejuvenate and other recall-related matters, regulatory and legal matters and tax matters. The effect of each of these matters on reported net earnings and net earnings per diluted share appear in the reconciliation of GAAP to non-GAAP financial measures. Excluding the aforementioned items increases gross profit margin from 65.9% to 66.1% in the quarter and increases operating income margin from 20.2% to 25.7%(1), including a 20 basis point favorable impact related to the adoption of the new revenue recognition standard(2). Excluding the impact of the items described above, adjusted net earnings(4) of $670 million increased 15.3% in the quarter. Adjusted net earnings per diluted share(3) of $1.76 increased 15.0% in the quarter.

The Yen’s Impact on AFLAC
Posted by Eddy Elfenbein on July 24th, 2018 at 3:05 pm

Here’s an interesting chart I wanted to show you. It shows AFLAC divided by the S&P 500 (in red) along with the yen/dollar (in blue).

The yen line is dollars per yen which is the inverse of how it’s normally discussed. I did this to show the correlation between the two.

Speaking of the correlation, the chart shows that they’re kind of related, but it’s not a very strong relationship.

In particular, the red line has dropped recently, meaning AFL has lagged. Some of this is probably due to the exchange rate, but I suspect that’s not all.

We’ll know more when AFLAC reports this week. I think the negative impact of the yen won’t dampen a solid earnings report.

Wabtec Earned 96 Cents per Share
Posted by Eddy Elfenbein on July 24th, 2018 at 9:27 am

The other earnings report this morning came from Wabtec (WAB). For Q2, the company made 96 cents per share. That beat estimates by three cents per share. They also increased full-year guidance.

Raymond T. Betler, Wabtec’s president and chief executive officer, said: “Our second-quarter results were on target, and with a strong backlog and the positive indicators we see in our markets we’re comfortable increasing our guidance for the year. Our freight business demonstrated strong growth in revenues and income from operations, and we expect demand to continue to improve. In transit, as expected we are managing through some lower-margin contracts in the short term while making long-term improvements in the core business. Overall, we’re pleased with our year-to-date performance, excited about the opportunities we see from our combination with GE Transportation and confident we can deliver improved earnings, margins and cash flow in the future.”

Wabtec increased its guidance for the year, with revenues now expected to be about $4.2 billion and EPS expected to be about $3.85 excluding estimated costs related to the proposed GE Transportation merger, expenses for restructuring and the effects of tax law changes. The company’s adjusted operating margin target for the full year is about 13.5 percent, and its effective tax rate for the full year is expected to be about 24 percent excluding the second quarter tax benefit.

Sherwin-Williams Earns $5.73 per Share
Posted by Eddy Elfenbein on July 24th, 2018 at 9:17 am

The second-quarter earnings report from Sherwin-Williams (SHW) is out. The company made $5.73 per share for Q2. That beat estimates by seven cents per share. The company is also increasing its guidance range for this year to $19.05 to $19.35 per share.

CEO John G. Morikis said, “The Company posted record results in net sales, gross profit, and profit before taxes in the second quarter, aided by the Valspar acquisition which continues to build momentum. Consolidated earnings per share expanded by 26.8% percent in the quarter, excluding acquisition-related costs and environmental expense provisions impacts in both years. Underlying demand remained solid across most of our end market segments during the quarter. At the same time, raw material costs continued to inflate during the quarter at a rate slightly higher than anticipated. We continue to focus on offsetting these escalating costs by controlling spending and implementing price increases.”

Morning News: July 24, 2018
Posted by Eddy Elfenbein on July 24th, 2018 at 5:07 am

Portugal Dared to Cast Aside Austerity. It’s Having a Major Revival.

Trump Trade War Overshadowing Other Potentially Harmful Global Battle

Big Oil Is Raking In Cash and Investors Are Asking Now What?

Home Sales Extend Slump Despite Economic Strength

Trump Just Hijacked a Necessary Conversation About Amazon

Alphabet Gains as Google Ad Machine Powers Past Record Fine

Google Loses 2 More Cloud, AI Execs

Sergio Marchionne’s Exit Jolts Ferrari

Nike to Bump Up Pay for 7,400 Employees After Internal Review

Las Vegas Shooting Victims Speak Out Against MGM Lawsuit Against Them

GE Stock Sinks Again Despite Solid Results

Whirlpool Sinks With Raw Material Costs Climbing Around the World

Ben Carlson: How Hard is it to Become a 401(k) Millionaire?

Michael Batnick: Pick One Stock

Roger Nusbaum: Lifestyle, Investing and Gurus

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The Overrated Trade War
Posted by Eddy Elfenbein on July 23rd, 2018 at 12:51 pm

Goldman Sachs said that a full-blown trade war could shave 15% off the earnings for the S&P 500.

That may be correct, but I have a few things to add. I would say that the odds of a full blown trade war are very low. The negative impact of anything that has a decent chance of happening are quite low.

From Goldman:

“We consider adverse scenarios in which tariffs are placed on all imports from China or globally. For all US industry, roughly 15% of cost of goods sold (COGS) is imported. We assume that S&P 500 companies, which are more global in nature and have more complex supply chains, import roughly 30% of COGS. This is consistent with the 29% of S&P 500 sales is generated outside the US. Imports from China comprise 18% of total US imports. Conservatively assuming no substitution to other suppliers or pass-through of costs, and no boost to domestic revenues or change in economic activity, a 10% tariff on all imports from China would lower our 2019 S&P 500 EPS estimate by 3% to $165. If tensions spread and a 10% tariff were implemented on all US imports (highest rate since 1940s) our EPS estimate would fall by 15% to $145.”

Don’t get me wrong — a trade war is bad, but a minor skirmish won’t destroy us.

Morning News: July 23, 2018
Posted by Eddy Elfenbein on July 23rd, 2018 at 7:16 am

Bank of Japan Offers Unlimited Bond Buying After Yields Jump

Donald Trump’s Tweets on Stocks and His Approval Rating Hint Where the Trade War With China May Be Heading

Imagine a World Without OPEC

The Big Short Of 2018

Alphabet Bulls Looking for Earnings Spark From FANG Laggard

French IT Firm Expands in U.S. With $3.4 Billion Deal

Microsoft: Letting This Bull Rampage On

Sudden CEO Shift Jolts Fiat Chrysler

China Tower Seeks to Raise Up to $8.7 Billion in Hong Kong IPO

Ryanair Warns Labor Strife Is Starting to Bite as Profit Slides

Tesla Asks Suppliers for Cash Back to Help Turn a Profit

Papa John’s Board Votes to Adopt ‘Poison Pill’ Against Founder

Howard Lindzon: Another Open Letter to Twitter

Roger Nusbaum: What To Do If Sandinistas Ruin Your Retirement Plan

Jeff Miller: Weighing the Week Ahead: A Delicate (and Temporary) Balance

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