CWS Market Review – October 28, 2016

“They say you never go broke taking profits. No, you don’t. But neither do
you grow rich taking a four-point profit in a bull market.” – Jesse Livermore

This week’s CWS Market Review will be all about earnings. Nine of our 20 Buy List stocks reported earnings this week. Most were pretty good, but not all. In this week’s issue, I’ll discuss all of them. Plus, I’ll preview one more Buy List earnings report coming this week.

I also have several new Buy Below prices for you. Please note that many of the new Buy Below prices are downward adjustments. That doesn’t mean I’m any less confident about the stocks. It simply reflects each stock’s most recent price action.

Despite all the earnings news this week, the stock market as a whole has been fairly tame (see above). We’ve now gone 12 straight days without a daily move of more than 0.62%. For 79 straight days, the S&P 500 has closed in the 2100s.

Earnings from Wabtec, Express Scripts and CR Bard

Before I get to this week’s earnings, I want to mention Microsoft (MSFT). Last week, the software giant reported very good earnings. On Friday, after the newsletter came out, the stock gapped up to $61 per share, which was an all-time high. This is a good example of a stock that was clearly a good buy, but the market wasn’t waking up to that fact. It takes time, but the market eventually sees the truth. Microsoft remains a buy up to $63 per share.

On Tuesday, three of our Buy List stocks reported earnings. Wabtec (WAB) was the first, and so far, only earnings miss. The rail-services company earned 94 cents per share, which was five cents below estimates.

Wabtec also lowered its full-year forecast again. The previous range was $4 to $4.20 per share. They now expect full-year earnings of $4 to $4.04 per share.

Raymond T. Betler, Wabtec’s president and chief executive officer, said: “Our transit business continues to perform well, while the freight markets remain challenging due to overall rail-industry conditions and the sluggish global economy. We have continued to focus on controlling what we can by aggressively reducing costs, generating cash and investing in our growth opportunities, including acquisitions. At the same time, we are progressing toward completion of the Faiveley Transport acquisition and remain excited by its growth and improvement opportunities.”

The company’s freight group is struggling, and that’s largely behind the disappointing numbers. Still, their cash flow numbers are decent. On Wednesday, the DOJ said that Wabtec will have to divest Faiveley Transport North America’s entire U.S. freight-car brakes business in order to complete its buyout of Faiveley. That shouldn’t be a problem. WAB is a good company in a tough time for its business. This week, I’m lowering my Buy Below on Wabtec to $82 per share.

After Tuesday’s closing bell, Express Scripts (ESRX) reported Q3 earnings of $1.74 per share. That matched Wall Street’s estimate on the nose. The company had previously given us a range of $1.72 to $1.76 per share.

Now for guidance. Express narrowed its full-year range from $6.33 to $6.43 per share to $6.36 to $6.42 per share. That translates to Q4 earnings of $1.84 to $1.90 per share. Wall Street had been expecting $1.85 per share. Overall, this was a good quarter for ESRX.

“The healthcare industry demands that we stay ahead of future trends and deliver solutions to emerging issues facing today’s market,” said Tim Wentworth, CEO and President. “Doing so deepens the trusted relationships we have built with our clients, resulting in another strong year in terms of client retention and new sales.”

Express also narrowed its expected retention rate for next year from 96% – 98% to 97% – 98%. It sounds minor, but it’s very good to see. The stock was largely unmoved by the earnings report.

For the most part, the company is doing well, but the stock has lagged this year. Express is also dealing with an unpleasant legal mess with Anthem. It’s too early to say how that will turn out, but I still like ESRX. I’m lowering our Buy Below on Express Scripts down to $74 per share.

I was on CNBC last week, and Brian Sullivan asked me what stock looked to beat earnings. I said I thought medical devices company CR Bard (BCR) was a top candidate to beat the Street. The company had given a range for Q3 of $2.51 to $2.55 per share. I said that was too low. I also said that Bard would guide higher for the rest of the year.

Bard reported on Tuesday, and it turns out, I was right. The company earned $2.64 per share for Q3. That’s up 16% from last year, and it easily topped Wall Street’s estimate of $2.56 per share.

Timothy M. Ring, chairman and chief executive officer, commented, “The results this quarter demonstrate the continued strength of the economic engine of our business. We continue to increase investments in geographies, products, platforms, and programs that we believe can drive revenue growth longer term. During this period of increased investment in 2016, we have also been able to deliver attractive bottom-line returns for shareholders. We have increased our full-year financial guidance every quarter this year, and we are doing so again today. We expect a strong finish to what has been a very strong year for us so far.”

Bard now expects full-year sales growth of 8% to 9%. Excluding currency, that’s 9% to 10%. I was also right on guidance. For earnings, Bard sees profits ranging between $10.23 and $10.28 per share. That’s an increase on the previous range of $10.10 to $10.20 per share. Wall Street had been expecting $10.17 per share.

Bard’s new range implies Q4 guidance of $2.70 to $2.75 per share. Wall Street had been expecting $2.74 per share. This was an excellent quarter for Bard.

With the stock action, I wasn’t quite so prescient. Bard did rise on Wednesday: at one point it was up 2.5%. But that didn’t last long. Soon enough, the shares drifted back to $210. I’m not worried at all about Bard, but I’m dropping my Buy Below to $217 per share.

Earnings from Fiserv and Biogen

On Wednesday, we got earnings from Biogen and Fiserv. I’m pleased to say that Biogen (BIIB) creamed estimates. The biotech stock reported Q3 earnings of $5.19 per share. That beat the Street’s consensus by 22 cents per share.

All across the board, Biogen had a very good quarter. Last quarter, their star drug, Tecfidera, had sales growth of 10% to just over $1 billion.

Chief Executive George Scangos announced in July he would be leaving, allowing a new chief to lead the company as it works to reignite growth. The biotechnology giant has also drawn takeover interest from drug companies such as Merck Co. and Allergan PLC, The Wall Street Journal reported in August.

Over all for the third quarter, Biogen reported a profit of $1.03 billion, or $4.71 a share, up from $965.6 million, or $4.15 a share, a year earlier. Excluding the restructuring charges, among other items, per-share earnings rose to $5.19 from $4.48.

Total revenue rose 6% to $2.96 billion. Analysts had projected adjusted earnings of $4.97 a share on sales of $2.91 billion, according to Thomson Reuters.

Remember that Biogen is planning to spin off its hemophilia business. The new company will be called Bioverative. (Yuck, who names these?) The spinoff will probably happen sometime early next year. I’m lowering my Buy Below on Biogen to $310 per share.

After the closing bell, Fiserv (FISV) reported Q3 earnings of $1.14 per share. That was one penny more than expectations. Fiserv is about as consistent as they get.

The financial-services company saw its revenue grow by 5%. Last quarter, earnings-per-share rose 11%, and they’re up 15% for the year. Operating margins dropped a bit to 32.8%. Free cash flow rose 12% to $747 million.

”Strong operating performance in the quarter drove double-digit adjusted earnings-per-share growth and excellent free cash flow,” said Jeffery Yabuki, President and Chief Executive Officer of Fiserv. “Outstanding sales results in the quarter should provide additional market momentum and growth.”

For all of 2016, Fiserv expects EPS between $4.43 and $4.46. That means Q4 EPS between $1.15 and $1.18. Wall Street had been expecting $1.16.

Yabuki said, “We continue to expect strong operating results despite a slight shortfall in revenue growth for the year. We anticipate revenue growth to accelerate in the fourth quarter and into 2017.”

The shares took a small hit after the earnings report, but I still like Fiserv a lot. I’m lowering my Buy Below to $105 per share.

Earnings from Ford Motor, AFLAC, Stryker and Stericycle

Now on to Thursday and four more Buy List earnings reports. Before the opening bell, Ford Motor (F) reported Q3 earnings of 26 cents per share. That was six cents more than consensus.

Ford’s earnings were down a lot from last year’s Q3, but investors had been expecting that, and the results a year ago were very strong. Ford’s quarterly revenues fell 6% and, more troubling, operating margins fell to 8.4%.

F-150 sales were pretty good, but a lot of those sales were to fleet buyers which tend to be less profitable. Frankly, this was a difficult quarter for Ford. The company spent a lot of time and money adjusting itself to much higher gas prices. Now that oil is still well below its high, consumers have gravitated to GM’s SUVs. I’m dropping my Buy Below on Ford to $13 per share.

After Thursday’s bell, AFLAC (AFL) said it earned $1.82 in operating earnings for Q3. That was eight cents more than estimates. The duck stock had given us a huge range of $1.58 to $1.86 per share. The stronger yen added 15 cents per share to AFL’s results. Adjusting for currency, AFLAC’s earnings were up 7.1% from last year.

AFLAC decided to raise its dividend from 41 to 43 cents per share. This is their 34th-consecutive dividend increase. The new payout gives the shares a yield of 2.45% based on Thursday’s close.

AFLAC said that if the yen averages 100 to 110 to the dollar for Q4, then they expect Q4 earnings between $1.53 and $1.82 per share. That would bring their full-year earnings to a range of $6.78 to $7.07 per share. AFLAC made $6.16 per share last year. AFLAC remains a solid buy up to $75 per share.

Stryker (SYK) said they earned $1.39 per share for Q3. That was two cents better than estimates. It was also better than the company’s own forecast of $1.33 to $1.38 per share. Quarterly revenues rose 17.1% to $2.83 billion, which also beat estimates.

This was a good quarter for Stryker. The orthopedics company felt confident enough to raise the low-end of its full-year guidance by five cents per share. They now expect 2016 earnings to range between $5.75 and $5.80 per share. That translates to Q4 results of $1.73 and $1.78 per share. The Street had been expecting $1.75 per share. I’m dropping my Buy Below price on Stryker down a tad to $119 per share.

Stericycle (SRCL) has been a terrible stock for us this year. I’ve grown concerned with management’s use of “rollups” to mask slowing organic sales growth. Some of my concerns were assuaged a little bit by the Q3 earnings report. The waste-management company earned $1.24 per share last quarter. That beat estimates by seven cents per share. Still, organic sales rose by just 0.3%.

“We were able to maintain consistent margin performance in the quarter despite revenue headwinds from previously discussed pricing pressure and softness in the manufacturing and industrial market,” said Charlie Alutto, President and Chief Executive Officer.

I’m lowering my Buy Below price on Stericycle to $80 per share.

We have one Buy List earnings report next week. On Tuesday, Cerner (CERN) is scheduled to report its results. For Q3, the health IT company sees earnings ranging between 59 and 61 cents per share.

Cerner’s stock has been a wild ride for us this year. By early March, it was down 17%. CERN then rallied 35% by early August. Since then, it’s slowly slid back.

Three months ago, Cerner reiterated its full-year guidance of $2.30 to $2.40 per share, but it lowered its full-year revenue guidance to $4.9 billion to $5.0 billion. The previous range was $4.9 billion to $5.1 billion.

That’s all for now. Lots more earnings next week. We’ll also get some of the key turn-of-the-month econ reports. Personal income and spending are on Monday. The ISM report is on Tuesday. Wednesday is ADP payroll. The Fed also meets on Wednesday. I strongly doubt they’ll do anything. That leads us up to Friday and the big 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

Posted by Eddy Elfenbein on October 28th, 2016 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.