CWS Market Review – February 6, 2015

“When it comes to investing, my suggestion is to first understand your strengths and weaknesses, and then devise a simple strategy so that you can sleep at night.”
– Walter Schloss

Our Buy List is starting to respond well to earnings. On Wednesday, shares of Cognizant Technology Solutions ($CTSH) gapped up more than 5% after the company’s earnings report. Then on Thursday, Snap-on ($SNA) and Ball Corp. ($BLL) both surged higher. At one point, Ball was up more than 11% on the day.

Earlier in the week, AFLAC ($AFL) gained strength after its earnings report came out, as did Fiserv ($FISV) which broke out to a new 52-week high. For the first four days of this week, our Buy List gained 5.03%, outpacing the 3.38% from the S&P 500. We have a modest profit on the year, and we’re beating the market as well. As always, we don’t want to get too excited about short-term victories. Instead, we’re focused on the long-term.

In this week’s CWS Market Review, I want to run down our recent earnings reports. It’s been a busy week. But first, I want to discuss an important shift that’s happening in the economy.

Expect Flat Earnings Growth This Year

What’s happened lately with the economy is that consumers and businesses have basically switched places. From 2010 through 2013, corporate profits were very strong, but consumers were struggling. There seemed to be a big disconnect between Main Street and Wall Street as the stock market zoomed ahead while wages and job growth stagnated. I think that may have played a part in the emergence of the Occupy Wall Street movement.

Lately, however, consumers have woken up. The unemployment rate is below 6%, and last year was the best year for payroll employment growth since 1999. Mind you, I’m not saying all is well for the economy, but I am saying that some lines have finally started moving in the right direction.

For businesses, it’s been a different story. The last two reports on durable goods were negative. Industrial production and factory orders are down as well. The recent ISM was decent, but nothing great. But the biggest change has been the dramatic lowering of earnings expectations. Just a few weeks ago, Wall Street had been very optimistic for Q4 earnings. It’s like having a first and goal on the five-yard line with 1:06 to play. What’s the worst that could happen?

Well, the dollar—that’s what. The surging U.S. dollar and collapsing oil prices have dramatically changed the outlook for corporate earnings growth. Guidance from companies hasn’t been this poor since the depths of the Financial Crisis. At the end of the Q3, Wall Street had been expecting Q4 earnings of $32.24 (that’s the index-adjusted number). Now it looks like it will be about $27.64. That’s a big cut. At the end of Q3, the Street was expecting full-year earnings for 2015 of $136.07. That’s now down to $119.76. That’s a 12% cut in four months. Stock prices haven’t responded nearly as much.

The lion’s share of that cutting has been in energy stocks. Three months ago, Wall Street had been expecting ExxonMobil ($XOM) to earn $7.50 per share for 2015. That’s now down to $5.41 per share. People don’t exactly sympathize when Big Oil is struggling, but remember that Exxon’s woes will translate into lower capex spending which will eventually be felt across the broader economy.

The question now is, how much will corporate earnings suffer? I suspect that the benefits of lower oil will largely cancel out the costs of the rising greenback. For the next few quarters, I think overall corporate profit growth will be low but positive. Think 2% to 5%. Of course, some companies will manage themselves better than others during a flat environment. In fact, we’re starting to notice that with the results of our Buy List stocks. Having said that, let’s take a closer look at our recent earnings news.

Our Recent Buy List Earnings Reports

Last Friday, Moog ($MOG-A) reported fiscal Q1 earnings of 86 cents per share. It’s interesting how this earnings report was a microcosm of so much that’s been going on. Sales for the quarter dropped 2% compared with a year ago, but that was largely due to the dollar. Net earnings rose 10%, but earnings per share was up 23%. Why? Because Moog has been gobbling back its own shares at a rapid clip.

Last quarter’s earnings were basically fine. Moog missed consensus by a penny per share. It’s basically good execution, but in a poor environment. The bad news was their guidance. In October, Moog projected full-year earnings of $4.25 per share. Now they’re saying it will be $3.85 per share—$3.95 if you include buybacks. They earned $3.52 per share last year.

CEO John Scannell said, “On a positive note, earnings came in slightly ahead of our forecast, and cash was very strong. However, during the quarter we started to feel the impact of three macroeconomic headwinds, the strengthening of the U.S. dollar, the industrial malaise outside the U.S. and the sharp and sustained drop in the price of oil. As a result, we are introducing some caution in our forecast and revising our outlook for the remainder of fiscal ’15 downward. Despite these challenges, we are still forecasting fiscal ’15 to be another year of strong cash flow and record earnings per share.”

The stock got tripped up after the earnings report, but it’s since stabilized in the low $70’s. There’s nothing at all wrong with Moog, but I’m going to lower my Buy Below price to $76 per share. This is a good, conservative stock.

On Tuesday, Fiserv ($FISV) reported Q4 earnings of 89 cents per share, which hit expectations on the nose. I like this company a lot. For all of 2014, they earned $3.37 per share, to notch their 29th year in a row of double-digit adjusted EPS growth. That’s amazing.

In last week’s CWS Market Review, I said I was curious to hear any guidance for this year. This week, Fiserv said they expect internal revenue growth of 5% to 6% for 2015. They also expect earnings per share to range between $3.73 and $3.83. That represents a growth rate of 11% to 14%, so the earnings streak should continue. The shares gapped up more than 4% this week, and on Thursday, Fiserv hit a new all-time high. This week, I’m raising our Buy Below on Fiserv to $80 per share. This is a solid stock.

Also on Tuesday, AFLAC ($AFL) reported more of the same. On a nuts-and-bolts basis, the duck stock is doing just fine; the problem is the weak yen. For Q4, AFLAC reported operating earnings of $1.29 per share. For insurance companies, it’s better to look at operating earnings rather than net earnings. That result also matched Wall Street’s estimate. AFLAC said that the weak yen cost them eight cents per share quarter. That’s actually lower than I thought.

For all of 2014, AFLAC had operating earnings of $6.16 per share. The weak yen knocked off 26 cents per share. If we ignore currency, which is admittedly hard to do, AFLAC’s earnings were up 3.9% last year. Dan Amos, AFLAC’s CEO, said that their goal is to grow earnings by 2% to 7% on a currency-neutral basis. The problem, of course, is that currency will have an impact. Fortunately, AFLAC broke down their expectations. Here’s a chart of AFLAC’s expected operating earnings per share based on different yen/dollar exchange ratios.

Yen/Dollar Ratio EPS Range Yen Impact
100 $6.46 to $6.77 $0.18
100.46 $6.29 to $6.59
115 $6.01 to $6.31 ($0.28)
125 $5.77 to $6.07 ($0.52)
135 $5.56 to $5.86 ($0.73)

The stock rallied after the earnings report and closed at its highest level in a month. AFLAC remains a good buy up to $63 per share.

Going into earnings season, investors appeared to be a little skittish on Cognizant Technology Solutions ($CTSH), but the IT outsourcer delivered yet again. For Q4, Cognizant earned 67 cents per share which was two cents better than estimates. Quarterly revenues jumped 16.4% to $2.74 billion. The company has been helped by its aggressive expansion into healthcare.

Now for guidance. Cognizant said they see Q1 earnings of at least 69 cents per share. That was a penny below consensus (note they said “at least”). They also see Q1 revenues of at least $2.88 billion, which was just above consensus of $2.86 billion.

For all of 2014, Cognizant projects earnings of at least $2.91 per share. That’s five cents below consensus. They see revenues of at least $12.21 billion, which was higher than the consensus of $12.16 billion. The shares jumped 5% on Wednesday. This is already our top-performing stock this year, with a 9.45% YTD gain (Fiserv is #2). I’m raising my Buy Below on Cognizant to $60 per share.

Now for two of our newbies, Ball Corp. ($BLL) and Snap-on ($SNA). Both companies reported before the opening bell on Thursday. Ball had Q4 earnings of 84 cents per share, which was one penny below expectations. Revenues rose 1.8% to $2.03 billion, which was $50 million more than consensus. Even though Ball missed earnings, they wrapped up a very strong year. For all of 2014, the can maker earned $3.88 per share, which compares with $3.28 per share they made in 2013. The earnings growth was so good that Ball said they’ll have a tough time hitting their 10% to 15% long-term growth target for 2015.


But the really big news is that Ball confirmed they’re in talks to buy Rexam, an aluminum can-maker in Britain. The potential deal could be worth $6.5 billion. The deal would be two-thirds in cash and one-third in stock, and it would combine two of the largest beverage can makers in the world. I like to see deals done in cash as much as possible. Shares of Rexam soared 23% in London. In the U.S., the market loved the news. Shares of Ball rallied nearly 9% on the day. I’m raising my Buy Below on Ball by $3. Ball is a buy any time the shares are below $75.

Snap-On reported very good earnings for Q4. The diversified manufacturer made $1.97 per share last quarter. That topped expectations by 16 cents per share. For the year, Snap-on made $7.14 per share, which is a very nice increase over the $5.93 per share they made in 2014. On Thursday, shares of SNA rallied for a 6.3% gain. I’m raising my Buy Below on Snap-on to $145 per share.

Before I go, I wanted to give you an update on Ford Motor ($F). I’ve been telling investors not to worry too much about last quarter’s earnings and that the earnings from now on will be very important. What’s interesting is that the automaker shrugged off last week’s earnings report, which was mostly good. But the stock really responded to the monthly sales report which came out on Tuesday. Ford’s sales rose 15.3% in January. From the low last Thursday to yesterday’s high, Ford rallied more than 12%. It’s good to see some strength in Ford. Let’s not chase it. I’m keeping our Buy Below at $16 per share.

That’s all for now. Outside of more Q4 earnings reports, next week should be fairly quiet on Wall Street. None of our Buy List stocks are due to report. On Tuesday, we’ll get another update on crude inventories. Then on Thursday, the Census Bureau will release its report on retail sales for January. It will be interesting to see how busy shoppers have been. 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

Posted by on February 6th, 2015 at 7:08 am

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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