CWS Market Review – July 20, 2018
Posted by Eddy Elfenbein on July 20th, 2018 at 7:08 am

“Nothing so undermines your financial judgment as the sight of your neighbor getting rich.” – J.P. Morgan

Earnings season is underway, and the stock market is mostly in a pleasant mood. On Wednesday, the S&P 500 closed at its highest level in nearly six months. Then on Thursday, we got the lowest jobless-claims report since December 6, 1969. For context, that was the same day as Altamont. (Google it.)

Spoiler Alert: This week’s issue is all about earnings. We had five Buy List reports on Thursday, and it was mostly quite good. Snap-on beat earnings, and the stock jumped 10%. Danaher also rallied on a nice earnings beat, and they announced they’re going to spin off their dental business next year. Signature Bank said they’re initiating a dividend. I’ll go through all the details in a bit.

This is only the beginning. We’re going to have seven more Buy List earnings reports next week, then another nine in the week after that. Without further ado, let’s look at this week’s earnings.

Five Buy List Earnings Reports

Thursday was a very busy day for us with five Buy List stocks reporting results. Here’s a look at our updated Q2 Earnings Calendar:

Let’s start with our big winner. Shares of Snap-on (SNA) jumped nearly 10% on Thursday thanks to a very good earnings report. For Q2, earnings per share rose 20% to $3.11. That was well above Wall Street’s estimate of $2.95 per share. Net sales rose 3.6%, and organic sales increased 1.3%. I was especially pleased to see a 0.3% increase in operating margins. That’s often a good sign of fiscal health.

Snap-on was also our big winner during the Q1 earnings season, but it quickly gave back most of those gains. I’m still concerned by weakness in Snap-on’s tool division, but other areas are doing well. Overall, I’m pleased with this report. I suspect the sentiment for Snap-on is still pretty negative. That’s why an earnings beat translated into such a big gain for the stock. Our patience is paying off. This week, I’m lifting my Buy Below on Snap-on to $181 per share.

Our second-biggest winner was RPM International (RPM). Oddly enough, RPM looked like it was going to be a big loser. After the earnings report, the shares opened down 4%. This is why we eschew trading. It’s too irrational. Fortunately, the market came to its senses, and RPM closed higher by 5.3%. The difference between Thursday’s high and low prices was nearly 12%. (Dear day-traders: RPM isn’t that interesting!!!)

For fiscal Q4, RPM earned $1.05 per share which was 13 cents below Wall Street’s consensus. The company blamed “higher raw-material costs and extended winter weather.” Rust-Oleum had to shutter two manufacturing facilities. RPM’s consumer segment was especially weak while the industrial unit fared better.

As part of the deal with Elliott Management, RPM is going to unveil a comprehensive business plan later this year. I think that may involve major divestments. Because of this, the company will forgo any EPS guidance. Sales-wise, for 2019, RPM expects a mid-single-sales increase for its industrials unit. For the consumer unit, they see an increase of mid- to upper-single digits. I’m raising my Buy Below on RPM to $67 per share.

Danaher (DHR) not only beat earnings, but also said it’s going to spin off its dental business next year. For Q2, Danaher earned $1.15 per share. When the last earnings report came out, they told us to expect $1.07 to $1.10 per share. For the second time, Danaher raised its full-year guidance. The company now expects 2018 earnings to range between $4.43 and $4.50 per share.

The dental spinoff won’t happen until the second half of 2019. The business is currently responsible for about 20% of the company’s overall revenue, but growth has been tepid lately. According to The Wall Street Journal, “Danaher said it expects the dental spinoff to have an investment-grade credit rating and about 12,000 employees.” The spinoff will be tax-free.

Shares of DHR jumped to a new high on Thursday. I’m lifting my Buy Below on Danaher to $110 per share.

Alliance Data Systems (ADS) reported Q2 earnings of $5.01 per share. That beat estimates by 35 cents per share. Despite the impressive earnings beat, ADS gained about 0.5% on Thursday.

Ed Heffernan, the CEO, said, “The second quarter marked the beginning of the long-awaited acceleration in our business.” The company is standing by its full-year earnings forecast of $22.50 to $23 per share. That gives them a P/E Ratio of about 10.

On Monday, shares of ADS dropped 10% after a weak monthly business update. I didn’t think the numbers were that bad. Fortunately, the Q2 earnings report is reassuring. This report is basically what I had been expecting. The stock is still working through an impressive turnaround, but it’s not going to be in a straight line. Don’t give up on ADS. I’m dropping my Buy Below down to $245 per share.

Our only loser on Thursday was Signature Bank (SBNY), and even they beat the Street. For Q2, SBNY made $2.83 per share, three cents more than estimates.

But the biggest news is that Signature is initiating a dividend. That’s good to see. The New York bank will start paying a quarterly dividend of 56 cents per share. Based on Thursday’s close, that’s a yield of 1.89%. Not bad, and Signature can easily cover it. That’s a payout ratio of about 25%. The new dividend is payable on August 15 to shareholders of record on August 1.

Let’s look at some numbers for the quarter. Total deposits now stand at $34 billion. That’s an increase of 5.5% in the last year. Loans rose to $34.15 billion. That’s up 12.4% in the last year. Net interest margin, which is the key metric for banks, came in at 2.94%. Those are decent numbers.

Still, on Thursday, the shares lost more than 5%. At one point, the stock dropped to its lowest level in 10 months. The stock is lower than where it was 4 1/2 years ago. I’m puzzled by SBNY’s lackluster performance. Perhaps the narrowing yield curve is scaring investors off. In any event, I still like Signature. This week, I’m dropping my Buy Below to $131 per share.

Seven More Earnings Reports Next Week

Next week will be another busy week. Seven of our Buy List stocks are due to report. The parade starts on Tuesday, July 24, when Sherwin-Williams, Stryker and Wabtec are due to report.

Sherwin-Williams (SHW) started off the year poorly for us, but it’s gained ground since the spring. Business is going well for Sherwin, but they’ve had trouble digesting the Valspar acquisition. I was afraid that might happen.

Excluding any Valspar issues, Sherwin expects $18.35 to $18.95 per in earnings this year. For Q2, Wall Street expects $5.66 per share. They should be able to beat that.

In April, Stryker (SYK) topped estimates and raised its full-year forecast. SYK’s initial range was $7.07 to $7.17 per share. Now they see 2018 coming in between $7.18 and $7.25 per share. For Q2, Stryker expects $1.70 to $1.75 per share.

This is a good time to look at Stryker. The shares got clobbered in early May after news came out that Stryker made an offer to buy Boston Scientific. Since the deal fell apart, SYK has rallied some, but it’s still below its May high.

Who would have guessed that Wabtec (WAB) would have been a 29% winner by July? Not me, that’s for sure, and I’m a fan. Obviously, the big news for the freight-services company is the merger with GE’s rail business. This is a huge opportunity. I do have concerns similar to those with Sherwin-Williams and Valspar. Wabtec expects full-year revenues of $4.1 billion, and earnings of “about” $3.80 per share. Wall Street expects Q2 earnings of 93 cents per share.

On Wednesday, Check Point Software and Torchmark are due to report. Three months ago, shares of Check Point Software (CHKP) got dinged after their Q1 earnings report. The earnings were fine, but traders didn’t like guidance. For Q2, Check Point expects revenue to range between $445 and $475 million. Wall Street had been expecting $477 million. For Q2 EPS, their range is $1.25 to $1.35. Wall Street had been expecting $1.35 per share.

Check Point also cut its full-year earnings range. The previous guidance was $5.50 to $5.90 per share. The new range is $5.45 to $5.75 per share. The issue is that Check Point has been shifting its business towards a greater reliance on subscription revenue. The problem is that these subscriptions boost results in higher deferred revenue. The company shouldn’t have any major difficulties working these problems out. Since June 25, the shares are up over 15%.

Torchmark’s (TMK) earnings are about the steadiest you’ll find. The company gave 2018 guidance of $5.93 to $6.07 per share. That’s probably too low. I think TMK can hit $6.10 per share, but I won’t quibble with their guidance; we’re still early in the year. For Q2, Wall Street expects $1.49 per share.

AFLAC (AFL) reports on Thursday. The duck stock has been sliding lately, and the strong dollar is probably to blame. For Q2, AFLAC said they’re expecting earnings between 91 cents and $1.05 per share. That assumes the yen averages between ¥100 and ¥110 to the dollar. It’s currently at ¥112.57. AFLAC is standing by its earnings forecast for full-year earnings of $3.72 to $3.88 per share.

Moody’s (MCO) will report its Q2 earnings on Friday. The stock is up 23.5% for us this year, and it just reached another new high. Moody’s business seems to be moving along quite well. I also like their Moody’s Analytics business. The company reaffirmed its full-year earnings forecast of $7.65 to $7.85 per share. For Q1, Wall Street’s consensus is $1.90 per share.

Before I go, I wanted to mention that last Friday, Smucker (SJM) raised its dividend by 9%. The quarterly dividend will rise from 78 to 85 cents per share. The new dividend will be paid on Tuesday, September 4 to shareholders of record at the close of business on August 17. This is SJM’s 17th-straight annual dividend increase.

That’s all for now. There are more Buy List earnings reports next week, so expect some volatility. Next Friday, we’ll get our first look at Q2 GDP. This could be a big number. Maybe 4%. We’ll also get the existing-homes sales report on Monday. The new-homes sales report comes out on Wednesday. Then on Thursday, it’s the durable-goods report. 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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Morning News: July 20, 2018
Posted by Eddy Elfenbein on July 20th, 2018 at 7:05 am

China’s Rising Economic Pressure Prompts Talk of Policy Rethink

Google’s Loon Brings Internet-By-Balloon to Kenya

The $20 Billion Question for Guyana

Dollar Bulls Learn the Meaning of Complacency

Trump Says He’s ‘Ready To Go’ With $500 Billion in Tariffs on All China Imports

Trump Lays Into the Federal Reserve, Says He’s ‘Not Thrilled’ About Interest Rate Hikes

Microsoft Set for Record High Open as Cloud Sales Drive Earnings Blowout

GE Beats Profit Estimates as Aviation, Health Buoy Results

Amazon Reportedly Had a 300-Person Conference Call to Deal With the Prime Day Glitches

Merck to Lower Prices on Some Drugs, But Not Blockbusters

Domino’s Pizza Extends Its Growth Streak

Thieves Jump on Cobalt Craze With $10 Million Warehouse Heist

Blue Harbinger: What Do Winning Traders Have In Common?

Ben Carlson: Surrendering to the Charms of Magical Thinking

Joshua Brown: The Chart Heard ‘Round the World

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Trump Dings the Fed
Posted by Eddy Elfenbein on July 19th, 2018 at 1:50 pm

Earlier today, President Trump mildly criticized the Federal Reserve. I think this is the first time he’s done this as president.

The president said, “I’m not thrilled because we go up and every time you go up they want to raise rates again. I don’t really — I am not happy about it. But at the same time I’m letting them do what they feel is best. But I don’t like all of this work that goes into doing what we’re doing.”

Looking at gold and the dollar, I can’t say he’s completely wrong.

Morning News: July 19, 2018
Posted by Eddy Elfenbein on July 19th, 2018 at 7:30 am

Auto Industry Pushes White House to Back Off Tariffs

Fed Chairman Powell Says Cryptocurrencies Present Big Risks to Investors

Justice Department Wants to Speed Up Appeal of AT&T-Time Warner Deal

Trump’s Trade War Lands at Air Show as Airbus Masks China Buyers

Boeing Boosts Its Wide-Body Backlog With Freighter Sales

How IBM Cloud Is Superior To Amazon AWS & IBM: Not Enough Credit

AmEx Declines as Forecast Fails to Match Rosiest Predictions

Sinclair Tries to Appease F.C.C. But Its Tribune Bid Is Challenged

Bowing to Trump, Novartis Joins Pfizer in Freezing Drug Prices

Marriott Follows Starbucks In Dropping Plastic Straws

That Anti-Straw Movement? It’s All Based On One 9-year-old’s Suspect Statistic

MGM Resorts Suffers Backlash After Suing Shooting Victims

Michael Batnick: Pareto

Jeff Carter: Turning Down A Seed Deal

Joshua Brown: Young Investors: Here Are Your First Steps

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Five Earnings Reports Tomorrow
Posted by Eddy Elfenbein on July 18th, 2018 at 4:40 pm

Tomorrow will be a busy day for the Buy List. Five stocks will be reporting earnings. All of them will report before the opening bell.

Alliance Data Systems will have their conference call at 8:30 am ET.

Danaher’s call starts at 8:00 am ET.

Snap-on, Signature Bank and RPM International will have their calls at 10:00 am ET.

Buybacks for Berkshire?
Posted by Eddy Elfenbein on July 18th, 2018 at 1:24 pm

Shares of Berkshire Hathaway (BRKA) have been up as much as $15,500 today. Even for a $300K stock, that’s a big move. This could be Berkshire’s best day in years.

So what’s the news? It looks like Buffett may finally go through with a share buyback. From Myles Udland at Yahoo Finance:

Warren Buffett’s Berkshire Hathaway (BRK-A, BRK-B) has just set the table for a new stock buyback.

In a press release late Tuesday, the company said that it has amended its policy regarding share repurchases, now allowing for repurchases of Berkshire stock to be made at the discretion of Buffett and vice chairman Charlie Munger so long as both men “believe that the repurchase price is below Berkshire’s intrinsic value, conservatively determined.”

Following this news, shares of Berkshire were up as much as 4%, indicating investors sees the company’s decision to rework its share buyback plan as a sign that repurchases are likely to occur in the months ahead.

Previously the company had said it would not repurchase shares unless they traded at less than or equal to a 20% premium to the stock’s book value. As of Tuesday’s close the stock was trading at a roughly 40% premium to its book value.

Additionally, the company will not repurchase stock in excess of an amount that would reduce its cash and equivalent holdings to less than $20 billion. In its release Tuesday, Berkshire said no repurchases will be made under this new program until after its second quarter earnings are released after the market close on August 3

Morning News: July 18, 2018
Posted by Eddy Elfenbein on July 18th, 2018 at 6:00 am

China Says U.S.-Led Trade War Has Become Biggest ‘Confidence Killer’ for World Economy

Fed’s Powell Says A Long Trade War Could Hurt U.S. Economy

Bernanke, Geithner, Paulson Voice Some Concern About Next Crisis

Crude-Oil Caution: Volatility Ahead

How Does Netflix’s Sub Miss Impact Roku?

Alibaba Faces A Much Bigger Threat Than Trade War

Bank of America: Responsible Growth

Johnson & Johnson’s Pharma Business Fuels Sales Growth

The Next Company on Jeff Bezos’ Hit List May Shock You

Google to Be Fined Record $5 Billion by EU Over Android

Texas Instruments Chief Resigns; Conduct Violations Cited

Papa John’s Founder Will Not ‘Go Quietly’ as Company Tries to Push Him Away

Nick Maggiulli: The Most Important Asset

Roger Nusbaum: Common Sense In Investing & Life; It Can Be That Simple

Ben Carlson: Are SUVs Ruining Retirement Savings?

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Three Key Trends
Posted by Eddy Elfenbein on July 17th, 2018 at 1:39 pm

There are three key trends impacting the markets right now, and they’re all related.

1. The long-end of the yield curve is flattening.
2. The dollar is rising.
3. Gold is falling.

Now for some charts.

Here’s the spread between the seven- and 30-year Treasuries. The spread is now down to 14 basis points.

Gold is near its lowest point in the last year.

The dollar took a beating last year, but it’s been gaining ground this year.

Industrial Production Rebounds in June
Posted by Eddy Elfenbein on July 17th, 2018 at 1:26 pm

While Chairman Powell’s words seem to be soothing the market, we got a pretty good report on industrial production.

U.S. industrial production increased in June, boosted by a sharp rebound in manufacturing and further gains in mining output, the latest sign of robust economic growth in the second quarter.

The Federal Reserve said on Tuesday industrial production rose 0.6 percent last month after a downwardly revised 0.5 percent decline in May. Economists polled by Reuters had forecast industrial production rising 0.6 percent last month after a previously reported 0.1 percent dip in May.

Industrial production increased at a 6.0 percent annualized rate in the second quarter, faster than the 2.4 percent pace logged in the January-March period.

Manufacturing output surged 0.8 percent in June after decreasing 1.0 percent in May. A 7.8 percent jump in motor vehicle production buoyed manufacturing output last month. Motor vehicle production declined 8.6 percent in May after a fire at a parts supplier caused a sharp drop in the assembly of trucks.

Powell’s Testimony
Posted by Eddy Elfenbein on July 17th, 2018 at 10:06 am

Fed Chairman’s Jay Powell testified today before Congress. Here are some highlights:

Since I last testified here in February, the job market has continued to strengthen and inflation has moved up. In the most recent data, inflation was a little above 2 percent, the level that the Federal Open Market Committee, or FOMC, thinks will best achieve our price stability and employment objectives over the longer run. The latest figure was boosted by a significant increase in gasoline and other energy prices.

An average of 215,000 net new jobs were created each month in the first half of this year. That number is somewhat higher than the monthly average for 2017. It is also a good deal higher than the average number of people who enter the work force each month on net. The unemployment rate edged down 0.1 percentage point over the first half of the year to 4.0 percent in June, near the lowest level of the past two decades. In addition, the share of the population that either has a job or has looked for one in the past month–the labor force participation rate–has not changed much since late 2013. This development is another sign of labor market strength. Part of what has kept the participation rate stable is that more working-age people have started looking for a job, which has helped make up for the large number of baby boomers who are retiring and leaving the labor force.

Another piece of good news is that the robust conditions in the labor market are being felt by many different groups. For example, the unemployment rates for African Americans and Hispanics have fallen sharply over the past few years and are now near their lowest levels since the Bureau of Labor Statistics began reporting data for these groups in 1972. Groups with higher unemployment rates have tended to benefit the most as the job market has strengthened. But jobless rates for these groups are still higher than those for whites. And while three-fourths of whites responded in a recent Federal Reserve survey that they were doing at least okay financially in 2017, only two-thirds of African Americans and Hispanics responded that way.

Incoming data show that, alongside the strong job market, the U.S. economy has grown at a solid pace so far this year. The value of goods and services produced in the economy–or gross domestic product–rose at a moderate annual rate of 2 percent in the first quarter after adjusting for inflation. However, the latest data suggest that economic growth in the second quarter was considerably stronger than in the first. The solid pace of growth so far this year is based on several factors. Robust job gains, rising after-tax incomes, and optimism among households have lifted consumer spending in recent months. Investment by businesses has continued to grow at a healthy rate. Good economic performance in other countries has supported U.S. exports and manufacturing. And while housing construction has not increased this year, it is up noticeably from where it stood a few years ago.

I will turn now to inflation. After several years in which inflation ran below our 2 percent objective, the recent data are encouraging. The price index for personal consumption expenditures, which is an overall measure of prices paid by consumers, increased 2.3 percent over the 12 months ending in May. That number is up from 1.5 percent a year ago. Overall inflation increased partly because of higher oil prices, which caused a sharp rise in gasoline and other energy prices paid by consumers. Because energy prices move up and down a great deal, we also look at core inflation. Core inflation excludes energy and food prices and generally is a better indicator of future overall inflation. Core inflation was 2.0 percent for the 12 months ending in May, compared with 1.5 percent a year ago. We will continue to keep a close eye on inflation with the goal of keeping it near 2 percent.

Looking ahead, my colleagues on the FOMC and I expect that, with appropriate monetary policy, the job market will remain strong and inflation will stay near 2 percent over the next several years. This judgment reflects several factors. First, interest rates, and financial conditions more broadly, remain favorable to growth. Second, our financial system is much stronger than before the crisis and is in a good position to meet the credit needs of households and businesses. Third, federal tax and spending policies likely will continue to support the expansion. And, fourth, the outlook for economic growth abroad remains solid despite greater uncertainties in several parts of the world. What I have just described is what we see as the most likely path for the economy. Of course, the economic outcomes we experience often turn out to be a good deal stronger or weaker than our best forecast. For example, it is difficult to predict the ultimate outcome of current discussions over trade policy as well as the size and timing of the economic effects of the recent changes in fiscal policy. Overall, we see the risk of the economy unexpectedly weakening as roughly balanced with the possibility of the economy growing faster than we currently anticipate.