• Morning News: July 31, 2017
    Posted by on July 31st, 2017 at 6:58 am

    OPEC’s Existential Sucker Punch

    Inflation Hits Low Bar Draghi Set as Stimulus Debate Gets Closer

    Spain’s Long Economic Nightmare Is Finally Over

    The Biggest Worry for British Bankers Isn’t Brexit

    China July Factory Growth Cools But Construction Boom Fortifies Economy

    Alphabet Wants to Fix Renewable Energy’s Storage Problem — With Salt

    Model 3’s Buzz Belies U.S. Market Barely Getting a Lift From EVs

    HSBC to Buy Back Up to $2 Billion in Shares

    Discovery Communications To Acquire Scripps Networks Interactive For $14.6 Billion

    SoftBank Is Said to Plan Making Direct Offer for Charter

    Raytheon’s Troubled GPS III Ground Control Network Slips Again

    Uber’s Search for New C.E.O. Hampered by Deep Split on Board

    Jeff Carter: Decentralization Vs. Centralization

    Jeff Miller: Weighing the Week Ahead: A Congressional Vacation?

    Cullen Roche: Indexing Isn’t Just For Quitters and Three Things I Think I Think – Weekend Edition

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  • Update: Wabtec Misses Earnings and Guides Lower
    Posted by on July 29th, 2017 at 1:14 pm

    I neglected to update you on Wabtec (WAB) in Friday’s newsletter. My apologies for the delay.

    On Tuesday, the freight services company released a disappointing earnings report. For Q2, WAB earned 75 cents per share. That includes a charge of five cents per share due to “net effect of the restructuring and transaction expenses and the interest expense benefit.” Wall Street had been expecting Q2 earnings of 94 cents per share. Not good.

    Wabtec had quarterly revenue of $932.3 million, which was also below Wall Street’s estimate of $1 billion. For all of 2017, Wabtec now expects sales of $3.85 billion and EPS between $3.55 and $3.70. That’s a reduction from their April forecast of $3.95 to $4.15 per share.

    This is the fourth time in the last five earnings reports where Wabtec has missed Wall Street’s consensus. So what went wrong? Basically, the environment for their business is pretty bad right now. Wabtec said there was $250 million in sales, which they had expected during Q2, but it never showed. It’s important for us to distinguish what’s bad due to them from what’s bad for everyone in the sector. This is more of a lousy environment story.

    On the positive side, Wabtec said their backlog is up 10%. They also just completed the merger with Faiveley.

    This is Raymond T. Betler, the CEO, on the earnings call:

    The main reason for our shortfall in the second quarter and our reduction in full year guidance is that we’ve seen about $250 million of revenues, roughly 5% of our full year total pushed out due mainly to revised timing of sales and projects already in the backlog, and to the market conditions, which we’ve discussed previously rebounding slower than we anticipated.

    These factors are more than offsetting the expected ramp up of synergies from the Faiveley integration during the year. Some of the revenue slippage occurred in the second quarter, including projects for signal, design and construction work, locomotive overhauls, which both have — did not materialize, so we removed them from our 2017 forecast.

    Also, we are not yet seeing the expected recovery in the freight aftermarket spending, and the OEM freight markets remained sluggish. As a result, we revised our 2017 guidance as follows: Compared to the first 2 quarters of the year, we expect some modest improvement in our third quarter results due to seasonality, with the strong fourth quarter and an adjusted operating margin target in the fourth quarter of about 15%. With more of our revenues coming from Europe, the seasonality in the third quarter will be more of a factor than it’s been in the past.

    The shares dropped nearly 10% on Tuesday, plus another 6% on Wednesday. The stock eventually bottomed at an 11-month low on Thursday. The shares are now going for 20 to 21 times this year’s guidance range. That’s a rich valuation but it may be quite reasonable based on an expected pickup in 2018. We’ll have to see.

    I don’t like these numbers but I’m willing to give WAB more time to show us some improvement. For now, I’m lowering my Buy Below price on WAB to $81 per share.

  • These 5 Stocks Could See Big Moves
    Posted by on July 28th, 2017 at 6:43 pm

  • Buy Apple Ahead of Earnings?
    Posted by on July 28th, 2017 at 4:12 pm

  • Q2 GDP +2.6
    Posted by on July 28th, 2017 at 11:22 am

    The government gave its first report on second-quarter GDP this morning. The U.S. economy grew, in real annualized terms, by 2.6% during April, May and June.

    This is slightly above the trend of the expansion. The economy has grown roughly at a 2.1% to 2.2% rate over the last eight years. While the expansion has been long, it’s been unusually weak.

    The government will update this figure next month and again in September. In fact, the government will probably update these figures several years from now. This morning, they updated all the GDP figures over the past three years. The old is in blue, the new is in red (real annualized and in trillions).

  • CWS Market Review – July 28, 2017
    Posted by on July 28th, 2017 at 7:08 am

    “99% of the troubles that threaten our civilization come from too optimistic accounting.” – Charlie Munger

    This was another big week for Buy List earnings reports. We also had a Federal Reserve meeting. As expected, the central bank decided against raising interest rates. The stock market seemed pleased as the major indexes rose to more all-time highs. At the same time, the Volatility Index dropped to its lowest levels in more than 20 years.

    For the overall market, this is shaping up to be a very good earnings season. About 80% of companies in the S&P 500 have beaten their earnings expectations. The typical “beat rate” usually runs around 65%. Some of the results are being aided by the weak U.S. dollar.

    In this week’s CWS Market Review, I’ll go over all our recent earnings news. Moody’s, Express Scripts and Stryker all beat and raised guidance. I love seeing that! At the other end, RPM International had a lousy report. They missed expectations by a mile. I’ll go into more details on that in a bit. I’ll also preview the final batch of Buy List earnings coming our way next week. First, though, let’s look at last week’s excellent earnings report from Moody’s.

    Good Earnings from Moody’s, Bad Earnings from RPM

    Last Friday, shortly after I sent you last week’s newsletter, Moody’s (MCO) reported very good earnings, plus they raised guidance. For Q2, the ratings company earned $1.51 per share, which is a 16% increase over last year. That beat expectations by 17 cents per share. Quarterly revenues were up 8% to $1 billion, and operating income rose 12% to $457.5 million. These are very good results.

    More importantly, Moody’s raised its full-year guidance range to $5.35 to $5.50 per share. The previous range was $5.15 to $5.30 per share. Things are going very well for Moody’s. This week, I’m raising my Buy Below on Moody’s to $141 per share.

    On Monday, RPM International (RPM) had a complete dud of an earnings report. The company made $1.02 per share for its fiscal Q4 which was 16 cents below Wall Street’s consensus. Quarterly net sales rose 4.6% to $1.49 billion.

    The company’s explanation:

    “We took additional cost reduction measures in the fourth quarter to position RPM to a return to double-digit earnings growth in fiscal 2018. We were pleased with solid organic growth in both our industrial and specialty segments during the fourth quarter, which we expect to continue as we enter into fiscal 2018. Organic growth across our consumer businesses was down 1.0%, principally due to lower results at our Kirker nail enamel business, the negative impact of a very rainy start to the spring season for home improvement sales and a difficult comparison to our prior-year quarter in which organic growth across RPM’s core consumer product lines increased 9.9%,” stated Frank C. Sullivan, RPM chairman and chief executive officer.

    “The consolidated revenue increase, particularly in a growth-challenged economic environment, was mitigated somewhat on leverage to the bottom line as a result of higher raw material costs during the quarter, including shortages and availability issues in a couple of key product lines. Also, a significantly higher tax rate in the fourth quarter this year versus last year reduced earnings per share on a comparative basis by $0.12.

    I’m always a little suspicious when companies blame the weather for their business woes. Now for guidance. RPM sees fiscal 2018 earnings ranging between $2.85 and $2.95 per share. For fiscal Q1, which ends in August, RPM projects earnings between 83 and 85 cents per share. Wall Street had been expecting $3 per share for the year and 89 cents per share for Q1.

    In Monday’s trading, RPM dropped 7%. I’m not pleased with RPM’s progress so far. For now, I’m going to keep my Buy Below at $55 per share.

    Express Beats and Raises Guidance

    After the closing bell on Tuesday, Express Scripts (ESRX) reported Q2 earnings of $1.73 per share. That’s up 10% from last year’s Q2, and it topped Wall Street’s consensus by two cents per share. Earlier Express told us to expect Q2 results to range between $1.70 and $1.74 per share.

    Here are some highlights:

    -Adjusted claims of 350.0 million, flat
    -GAAP net income of $801.8 million, up 11%
    -GAAP earnings per diluted share of $1.37, up 21%
    -EBITDA of $1,824.1 million, up 1%
    -EBITDA per adjusted claim of $5.21, up 1%
    -Adjusted net income of $1,011.6 million, up 1%
    -Adjusted earnings per diluted share of $1.73, up 10%
    -Net cash flow provided by operating activities of $1,081.2 million, up 146%

    The best news is that Express raised its guidance. The company now sees full-year earnings of $6.95 to $7.05 per share. The earlier guidance was $6.90 to $7.04 per share. Wall Street had been expecting $6.97 per share. The new range represents growth of 10% over last year.

    For Q3, Express expects total adjusted claims of 340 million to 350 million, and they see earnings of $1.88 to $1.92 per share. Wall Street had been expecting $1.89 per share.

    Express didn’t have much more to say about the ongoing battle with Anthem. They did say that if they continued to do business with Anthem it would be on terms significantly less favorable for Express Scripts. I will say that I feel more confident about ESRX than I did a few weeks ago, but I want to see more improvement. Express Scripts is a buy up to $69 per share.

    Earnings from AFLAC, Cerner, CR Bard and Stryker

    There were four Buy List reports on Thursday, all of which came after the close. First up was AFLAC (AFL). For Q2, the duck stock’s operating earnings rose 10.9% to $1.83 per share. That easily beat the range they had given us of $1.55 to $1.70 per share. There are two notes to add. First, the exchange rate knocked off two cents per share. Also, the company got a tax benefit of five cents per share during the quarter. For Q2, AFLAC’s annualized ROE was 13.6%.

    Dan Amos, AFLAC’s CEO, stood by the company’s full-year range for operating earnings of $6.40 to $6.65 per share. That assumes that the yen averages 108.70. I’m a little surprised he didn’t raise that range. For Q3, Amos expects AFLAC to earn $1.51 to $1.69 if the yen averages between 105 and 115.

    I like these numbers. AFLAC is a buy up to $80 per share.

    Cerner (CERN) reported Q2 earnings of 61 cents per share which matched expectations. The healthcare IT company had previously announced an earnings range of 60 to 62 cents per share. Quarterly revenue rose 6% to $1.292 billion which exceeded Cerner’s guidance.

    For Q2, operating cash flow was $292.2 million and free cash flow was $119.1 million. Days sales outstanding fell to 73 days from 74 days last year. Total backlog rose 11% to $16.648 billion.

    For Q3, Cerner expects revenue between $1.265 billion and $1.325 billion, and EPS between 61 cents and 63 cents. For all of 2017, Cerner sees revenue between $5.15 billion and $5.25 billion. Cerner is narrowing its full-year EPS guidance from $2.44 to $2.56, to $2.46 to $2.54. Cerner remains a buy up to $68 per share.

    CR Bard (BCR) reported Q2 earnings of $2.92 per share. That beat their guidance of $2.75 to $2.85 per share. Quarterly sales rose 5% to $979.7 million.

    Timothy M. Ring, chairman and chief executive officer, commented, “We continue to see strong, balanced growth across our portfolio and geographies. Half-way through 2017, each of our businesses has performed at or above the top of our forecasted constant currency revenue growth ranges for the full year. In the second quarter we reached a new milestone, with revenue from emerging markets now representing 12 percent of total company revenues. We are pleased with the continued momentum of our global business as we prepare to merge with Becton, Dickinson and Company in the fourth quarter of 2017.”

    Bard also raised the low end of its 2017 range by five cents per share. They now expect full-year earnings to range between $11.70 and $11.90 per share. I’m pleased to hear they expect to complete the merger with Becton, Dickinson (BDX) sometime in the fourth quarter.

    Our final one this week is Stryker (SYK). For Q2, earnings rose 10.1% to $1.53 per share, two cents more than consensus. Quarterly net sales rose 6.1% to $3.0 billion. In constant currency, that’s an increase of 6.9%.

    Kevin A. Lobo, Stryker’s CEO, said “Our growth momentum continued in the second quarter as we continue to drive share gains through new products and strong commercial execution.” Looking at Stryker’s three divisions, Orthopaedics sales rose by 5.5%, MedSurg’s sales increased by 6.2%, and the Neurotechnology and Spine unit saw a sales increase of 6.9%.

    Stryker now expects organic sales growth for this year of 6.5% to 7%. For full-year EPS, they expect $6.45 to $6.55. That’s an increase of 10 cents per share at both ends. For Q3, Stryker sees a range of $1.50 to $1.55 per share. This is very good news. I’m raising my Buy Below on Stryker to $149 per share.

    Several More Buy List Earnings Next Week

    Next week will be another very busy week for earnings. On Tuesday, Fiserv and Ingredion are scheduled to report. Fiserv (FISV) just reached another all-time high. In April, Fiserv reiterated its full-year outlook for $5.03 to $5.17 per share. They didn’t give a range for Q2, but the consensus among analysts is for Q2 earnings of $1.23 per share.

    Ingredion (INGR), the plant food people, had a very good report for Q1. They now see 2017 EPS ranging between $7.50 and $7.80. Wall Street is looking for $1.85 per share.

    Next Thursday will be crowded with four earnings reports.

    Axalta Coating Systems (AXTA) recently helped out another one of our Buy List stocks. Valspar needed to sell its North American Industrial Wood Coatings unit in order to complete its merger with Sherwin-Williams (SHW). Axalta bought it for $400 million in cash. Wall Street expects Q2 earnings of 39 cents per share.

    Cognizant Technology Solutions (CTSH) has rebounded quite nicely over the past several months. For Q2, Cognizant expects revenue ranging between $3.63 billion and $3.68 billion and EPS of at least 89 cents per share. That’s quite good. For the full year, CTSH sees revenue between $14.56 billion and $14.84 billion and EPS of at least $3.64.

    Continental Building Products (CBPX) has been sliding downward for the last several weeks. I think the wallboard maker is a good buy here. Wall Street expects earnings of 35 cents per share.

    Intercontinental Exchange (ICE) is turning into a nice winner for us this year. ICE is up 17.2% for us YTD. The consensus is for Q2 earnings of 76 cents per share. ICE should beat that.

    Cinemark (CNK) is due to report next Friday. The movie theater chain had a decent Q1 earnings report but the stock has pulled back. Cinemark theater chain now runs 525 theaters with 5,894 screens. Wall Street expects earnings of 45 cents per share. I expect Cinemark to beat that.

    With the turn of the month, we’ll get some key economic reports next week. On Tuesday, we’ll get the latest ISM report. We’ll also get a look at personal income and spending. Wednesday is the ADP payroll report. Then on Friday is the big July jobs 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

  • Morning News: July 28, 2017
    Posted by on July 28th, 2017 at 7:04 am

    Oil Prices May Stay Low ‘Forever’

    Speaker Ryan Admits Defeat, Giving Up on Border Adjustment Tax

    Amazon Profits Fall Far Short of Expectations, But Investors Shrug

    Get Ready For The Less-Profitable Amazon That You Used to Know

    Starbucks Doubles Down On China, Targets 5,000 Stores By 2021

    Elon Musk Takes The Stage Tonight to Deliver the First Tesla Model 3s

    SpaceX Is Now One of the World’s Most Valuable Privately Held Companies

    Wisconsin and Foxconn Sign $3 Billion Assistance Agreement

    Twitter: Testing Investors’ Patience

    Barclays Reports ‘Pretty Good Progress,’ and a $1.8 Billion Loss

    R.I.P., Coke Zero: The Five Stages of Ice-Cold Grief

    Wells Fargo Broadsided Anew With an Auto Insurance Sales Scandal

    Jeff Miller: Stock Exchange: Reading Into Retail Moves

    Roger Nusbaum: There’s a Storm Comin’

    Michael Batnick: A Few Charts and a Few Thoughts

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  • Morning News: July 27, 2017
    Posted by on July 27th, 2017 at 7:10 am

    Libor to End in 2021 as FCA Says Bank Benchmark Is Untenable

    Bitcoin Exchange Was a Nexus of Crime, Indictment Says

    In Asia, the Fed Still Rules

    Foxconn Says It Plans to Build Factory in Wisconsin, Adding 3,000 Jobs

    Verizon Meets EPS, Narrowly Beats Revenue Expectations

    Coca-Cola to Replace Coke Zero in U.S.

    Facebook’s Profit & Revenue Surge, Despite Company Predictions of a Slowdown

    Boeing’s Cash Flow Surges to $4.5 Billion

    Key Metrics Solid at Southwest Airlines

    Pratt & Whitney in Hot Seat as Airbus Profits Fall

    Etihad Posts $1.87 Billion Loss in Worst Blow for Gulf Carriers

    Here Come the Tesla Model 3s… and a Few Surprises

    Ex-Fiat Chrysler Executive Accused of Siphoning Millions With Union Leader

    Howard Lindzon: Simple Markets and My Roomba Is Making me Rich!

    Ben Carlson: Bitcoin, Stocks & The Fear of Missing Out

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  • Today’s Fed Statement
    Posted by on July 26th, 2017 at 3:38 pm

    No rate increase:

    Information received since the Federal Open Market Committee met in June indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Job gains have been solid, on average, since the beginning of the year, and the unemployment rate has declined. Household spending and business fixed investment have continued to expand. On a 12-month basis, overall inflation and the measure excluding food and energy prices have declined and are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.

    Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further. Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.

    In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1 to 1-1/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.

    In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

    For the time being, the Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee expects to begin implementing its balance sheet normalization program relatively soon, provided that the economy evolves broadly as anticipated; this program is described in the June 2017 Addendum to the Committee’s Policy Normalization Principles and Plans.

    Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Patrick Harker; Robert S. Kaplan; Neel Kashkari; and Jerome H. Powell.

  • IBM Saves the Dow
    Posted by on July 26th, 2017 at 11:31 am

    The Dow Industrials is a price-weighted index. That means it’s calculated by adding up all 30 stocks in the index and dividing by a divisor. The divisor is carried each day in the Wall Street Journal.

    The current divisor is 0.14602128057775. To make it easier, every $1 in a Dow stock works out to about 6.848 Dow points.

    This morning, Boeing (BA), a Dow stock, is up about 8% which is around $16 per share. At the time I checked, BA was responsible for 115 points in today’s 117-point Dow rally. Boeing is now the highest-priced stock in the Dow which means it has the largest weighting.

    But Boeing is far from being the largest stock in the index by market cap. At last check, BA comes in 21st out of 30 in terms of market value. The Dow Industrials gets a lot of attention from the media, but it’s an anachronism. That’s why I prefer to follow the S&P 500.