CWS Market Review – May 1, 2015

“If being the biggest company was a guarantee of success, we’d all be
using IBM computers and driving GM cars.” – James Surowiecki

Our earnings streak came to an end this week. Our first nine Buy List stocks to report Q1 earnings all beat expectations, but this week, two of our stocks met expectations and another two missed expectations. Fortunately, the misses weren’t that bad, and our Buy List continues to lead the overall market.

So far, the major trend of this earnings season is this: the weak dollar did a lot of damage, but not as much as initially feared. Before earnings season started, analysts had been expecting earnings to fall by 5.8%. It looks like the decline will be 2.9%. I suspect that people have underestimated the improvements in productivity.

In this week’s CWS Market Review, we’ll take a closer look at the earnings parade. I’ll also preview the Buy List earnings coming next week. We also had a Fed meeting, plus a GDP report that was just ugly. The bright spot came on Thursday with the second-lowest number of initial jobless claims in the last 43 years. That may bode well for the April jobs report, which comes out next Friday. But first, let’s look at that GDP report and what it means for us.

The Economy Was Bad in Q1, but Will It Last?

On Wednesday, the government reported that the U.S. economy grew at a 0.2% annualized rate for the first three months of the year. That was well below expectations.

So what happened? Well, a number of factors. The strong dollar took its toll. Net exports fell by 7.2%. The bad weather most likely did some damage, as did the West Coast port strike. The plunge in oil prices also hurt the energy sector. Public-sector spending was also down.

If we dig a little deeper into the numbers, the details were still bad, but not quite so dire. Personal-consumption expenditures, which is the fancy term for consumer spending, grew at a 1.9% annualized rate.

The economy is probably rebounding this quarter. The dollar is beginning to stabilize, and the price of oil is firming up. On Thursday, we learned that real personal income rose by 0.3% in March. It appears that workers are finally getting a (small) wage increase. In the last year, the Employment Cost Index is up 2.6%.


Janet Yellen and her friends at the Federal Reserve are certainly paying attention to wage figures. Even though the unemployment rate has fallen, we haven’t seen much in the way of higher labor costs. The last jobs report was pretty weak, but there are hints the April jobs report will be a lot better. As I mentioned before, Thursday’s report for initial jobless claims was quite strong.

The Fed has held firm to the view that a rate hike is coming, and most likely this year, even though it’s hedged on exactly when. There’s now a slowly-emerging consensus that the Fed will raise rates in September. In fact, there’s now some daylight between the six-month and one-year Treasury yields, which suggests that rates will be rising sometime soon.

The Fed met again this week, and the policy statement confirmed their belief that the softness in Q1 was probably temporary. As a result, the Treasury climbed higher this week. For the first time in a month, the 10-year yield broke above 2%. Mirroring that move, many defensive stocks like utilities and healthcare lagged behind this week. CR Bard (BCR), for example, gapped up after its earnings beat, but it has gradually slid back since.

I think the Fed is getting ahead of itself. It’s hard to say for certain, but I don’t think the economy will need a rate hike for several more months. But once rates go higher, there will be less demand for stocks with solid dividends. With higher rates, growth stocks tend to be in greater demand.

Earnings from Ford, AFLAC, Express Scripts and Ball Corp.

On Tuesday, Ford Motor (F) reported Q1 earnings of 23 cents per share. Technically, that was an earnings miss since it was three cents below consensus, but truthfully, it was a decent report. Ford said that it got dinged for two cents due to a higher-than-expected tax rate.

Quarterly revenue fell 6% to $33.9 billion. The story is largely what we expected. North America is doing well, while Europe and South America are still weak. One bright spot is China, where Ford is gaining ground, but it’s far behind the competition.

Ford made it clear that they’re ramping up production to meet demand for their F-150 trucks. The automaker spent a lot of money (and time) retooling its plants to make the new aluminum-based trucks. That was a big gamble, and it’s starting to pay off. We’ll see more evidence as the year goes on. The F-Series has been the top-selling truck for 33 years in a row.

Traders apparently agreed that Ford’s Q1 wasn’t so bad because despite the earnings miss, the stock rose on Tuesday. Ford Motor remains a good buy up to $17 per share.

After the bell on Tuesday, AFLAC (AFL) reported Q1 operating earnings of $1.54 per share. That matched Wall Street’s forecast. The duck stock said that the weak yen knocked off 13 cents per share last quarter.

Again, there’s nothing really surprising in this report. The company reiterated that they aim to grow their operating earnings by 2% to 7% this year, on a currency-neutral basis. For Q2, AFLAC expects earnings to range between $1.46 and $1.57 per share. That assumes the yen averages between 120 and 125 to the dollar. The yen has actually gained a bit recently.

For the full year, AFLAC sees operating earnings coming in between $5.74 to $6.15 per share. Again, that assumes the yen stays between 120 and 125 to the dollar. The shares pulled back after the earnings report, but the damage wasn’t too bad. The stock is still going for a little over 10 times this year’s earnings. I’m keeping my Buy Below at $65 per share.

Express Scripts (ESRX) also met Wall Street’s forecast. The pharmacy-benefits manager earned $1.10 per share for Q1. Overall, it was a good quarter for Express Scripts.

“As our industry evolves, and plan sponsors have more business models to choose from, it is increasingly clear that Express Scripts is the best choice to manage America’s pharmacy benefits,” stated George Paz, Chairman and Chief Executive Officer. “At every turn, we add value to healthcare by combining a superior model of patient care with aggressive payer advocacy. Our unique combination of scale, client alignment and unmatched will, consistently creates greater value for patients and payers, while delivering solid results for our shareholders.”

Express Scripts also narrowed its full-year guidance by two cents per share at both ends. The old range was $5.35 to $5.49 per share. The new range is $5.37 to $5.47 per share, which translates to a growth rate of 10% to 12%. That’s not bad. For Q2, which ends on June 30, ESRX expects earnings of $1.39 to $1.43 per share. That’s better than the $1.37 Wall Street had been expecting.

The shares had an unusual ride this week. The stock initially gapped up after the earnings report. ESRX got as high as $88.99 on Wednesday morning before pulling back to $84.79 by the end of the day. Then after the closing bell on Wednesday, the company announced that it was accelerating its share-repurchase program. Express Scripts will get about 55.1 million shares in exchange for a payment of $5.5 billion. That helped the stock open strongly on Thursday.

Then news broke late Thursday that ESRX, among others, might be interested in buying Omnicare (OCR), a supplier of drugs to nursing homes. I won’t even begin to guess whether a deal will come about, but ESRX certainly has the financial muscle to make it happen. Frankly, they’re going to be named in any discussion of a buyout in this sector. Express Scripts is a solid buy up to $89 per share.

On Thursday, Ball Corp. (BLL), one of our new stocks this year, announced Q1 earnings of 69 cents per share. That was a big earnings miss—10 cents below consensus. But again, looking at the details, the results weren’t that bad. Revenues slightly beat consensus, and Ball lost 16 cents per share last quarter due to currency costs. The can maker also reiterated that it expects full-year free cash flow of $600 million.

John A Hayes, Ball’s CEO said, “First-quarter results were largely impacted by expected headwinds totaling 16 cents per diluted share from foreign currency translation, higher metal premiums in Europe and start-up costs related to growth capital investments. We continue to invest in our future with ongoing capital projects in North America, Europe and Southeast Asia that will fully ramp up in the second half of 2015 and the first half of 2016.”

Scott C. Morrison, the CFO, added, “Operationally, our first-quarter results were largely in line with our expectations. While metal premiums and start-up costs will persist in the second quarter, and currency translation will remain a headwind for the balance of the year, our business remains solid.” He also said that the company has begun several hedges in order to mitigate currency costs.

Traders seemed to agree that Ball’s quarter was just fine. The stock dropped 0.6% on Thursday, which was less than the 1% fall for the S&P 500. Ball Corp. remains a good buy anytime it’s below $75 per share.

I also want to add a quick word on Microsoft (MSFT). In last week’s CWS Market Review, I said I wanted to hold off on changing my Buy Below on Microsoft because I wanted to see how the market responded to the strong earnings report. Well, now we know. The market liked it. A lot!


Shares of MSFT soared more than 10% last Friday—and kept going. At one point on Thursday, Microsoft got as high as $49.54 per share. That’s not far from its 15-year high. Even with the price surge, the dividend still yields more than 2.5%. It’s about time this stock got some attention from the market. I’m raising my Buy Below on Microsoft to $51 per share.

Earnings Next Week from Cognizant and Fiserv

We have our final two earnings reports next week. Cognizant Technology Solutions reports on Monday, May 4. Fiserv follows on Tuesday, May 5.

Cognizant Technology Solutions (CTSH) has been our top-performing stock this year (+11.2%). Three months ago, the company reported very good Q4 results. Revenues rose 16.4% to $2.74 billion, and EPS beat expectations by two cents. Cognizant has been helped by its aggressive expansion into healthcare.

For Q1, Cognizant said they see earnings of at least 69 cents per share. I assume that means they expect 70 cents per share. They also see Q1 revenues of at least $2.88 billion. For all of 2014, Cognizant projects earnings of at least $2.91 per share on revenue of at least $12.21 billion. That means CTSH is going for about 20 times this year’s earnings. I’m not a pure-value investor, so I don’t mind paying a growth premium as long as the company is worth it, and CTSH surely is.

Last year was Fiserv’s (FISV) 29th year in a row of double-digit earnings growth. In February, the company said they expect internal revenue growth of 5% to 6% for this year. They also expect EPS to range between $3.73 and $3.83. That represents a growth rate of 11% to 14%, so the earnings streak should continue. Wall Street expects Q1 earnings of 86 cents per share. That sounds about right to me.

Moog (MOG-A) confirmed that their fiscal Q2 earnings report will come out later today. I’ll have details on the blog. Last quarter was weak due to the strong dollar. The company also cut full-year guidance to $3.85 per share (it could be $3.95 with buybacks). As with a lot of companies, I don’t think the damage from the dollar will be quite so bad.

That’s all for now. Still more earnings to come next week. On Wednesday, we’ll get the productivity report. Also, ADP will release its jobs report. Initial jobless claims follow on Thursday, and that leads us up to the big April jobs report on Friday morning. The March report was a dud, so it will be interesting to see if there’s a rebound. 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 May 1st, 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.