CWS Market Review – October 20, 2017

“Intelligent investment is more a matter of mental approach than it is of technique.”
– Ben Graham

This week’s issue will be all about Buy List earnings reports. We had four this week, and we have eight more coming next week. Busy times! I’ll run down them all in just a bit.

Before I get to that, though, I’ll briefly touch on some market news this week. On Tuesday, the Dow broke 23,000 for the first time ever. Then on Wednesday, it closed above 23,000. In the last 20 months, the Dow has added 7,000 points.

The recent industrial production report showed an increase of 0.3%. Some of that was impacted by the hurricanes, but we now have strong evidence that the hurricanes didn’t cause as much economic damage as initially feared.

Last Friday, we learned that consumer confidence rose to a 13-year high. Also, retail sales rose by 1.6%. That was the biggest jump in 2-1/2 years, but it was largely due to the hurricanes holding back the previous month’s report.

On Thursday, the initial jobless claims report fell to a 44-1/2-year low. Reuters quoted an economist as saying, “It doesn’t take one hundred Ph.D economists at the Fed to figure out that the labor market is on the tight side of normal.” The odds for a December rate hike are now up to 88%.

Now let’s look at our earnings.

Four Earnings Reports on Thursday

We had four Buy List earnings reports on Thursday morning, and all four beat Wall Street’s expectations.

Let’s start with the best news. Danaher (DHR), the diversified manufacturer, reported Q3 earnings of $1.00 per share. That topped Wall Street’s forecast by five cents per share. Previously, the company told us to expect Q3 earnings to range between 92 and 96 cents per share.

In July, Danaher raised its full-year guidance range to $3.85 to $3.95 per share. In last week’s issue I said, “there’s a decent chance they’ll revise that higher next week.” I was right. Danaher raised its full-year guidance to a range of $3.96 to $4.00. Working out the math, that means they expect $1.12 to $1.16 per share for Q4. I’m impressed by that guidance.

This was another solid quarter for Danaher. The shares gained more than 4.7% on Thursday. Danaher remains a buy up to $90 per share.

Three months ago, Alliance Data Systems (ADS) beat quarterly estimates but lowered its full-year guidance. Frankly, I was a little nervous about this week’s report. Fortunately, ADS reported Q3 earnings of $5.35 per share which easily beat Wall Street’s forecast of $5.04 per share.

The loyalty-reward folks posted revenue of $1.91 billion which was below Wall Street’s consensus of $1.97 billion. I was pleased to see ADS reiterate its guidance of $18.10 per share for this year and $21.50 per share for 2018.

In Thursday’s trading, shares of ADS dropped more than 5% at the open. As the day wore on, buyers came back and the stock closed up 1.9%. ADS remains a buy up to $252 per share.

In recent issues, I’ve said that Signature Bank (SBNY) is one of the better bargains on our Buy List. On Thursday, the bank reported Q3 earnings of $2.29 per share. That was 10 cents better than Wall Street’s consensus.

I think Wall Street is scared of the bath Signature took on its taxi-medallion loans. The truth is that it’s bad but manageable. For Q3, the increase in profits was helped by a big decrease in the provision for loan losses. A lot of that was due to Signature’s taxi-medallion business in Chicago. The medallion loans are painful, but SBNY is moving past them.

For Q3, Signature’s net interest margin was 3.05%. Total assets rose 9.4% to $41.33 billion. Business is clearly getting better for Signature, but it will take time. The shares gained a little over 1% on Thursday. I’m keeping my Buy Below on SBNY at $130 per share.

Wall Street wasn’t exactly thrilled with Snap-on’s (SNA) results for Q2, but Q3 was better. Snap-on made $2.45 per share for Q3 which was two cents better than estimates. There’s still some lingering weakness in their tool division. All told, organic sales rose 2.3%. Not much to say on this one. Business is good, but not great. Like ADS, Snap-on dropped in early trading on Thursday. At one point, SNA was down 3.2%. By the close of trading, it was up 1.74%. I’m keeping my Buy Below on Snap-on at $161 per share.

Eight More Reports Next Week

Next week is going to be a very busy week for Buy List earnings reports. We have two reports on Tuesday, another two on Wednesday and four more on Thursday.

Let’s look at what’s in store.

On Tuesday, Sherwin-Williams (SHW) is due to report Q3 earnings. The stock has quietly turned into a big winner for us. It’s up 44.2% YTD.

Even though the stock has been rallying, the last earnings report was not very good. Sherwin badly missed analysts’ estimates, but that’s due to the costs associated with their merger with Valspar.

For Q3, Sherwin said they see earnings coming in between $3.70 and $4.10 per share. But that includes $1.10 per share in costs related to the acquisition. Wall Street had been expecting $4.91 per share.

For all of 2017, Sherwin now expects earnings to range between $12.30 and $12.70 per share. That will include $2.50 in charges related to the acquisition. Wall Street had been expecting $14.76 per share.

In July, Wabtec (WAB) had a crummy earnings report. It was their fourth miss in the last five quarters. Wall Street had been expecting 94 cents per share but WAB made just 75 cents per share.

That was just a bad report all around. 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. Wall Street expects Q3 earnings of 84 cents per share.

So what went wrong? Basically, the environment for their business is pretty bad right now. Wabtec said there was $250 million in sales they had expected during Q2 that never showed up. Frankly, I’m not pleased with WAB’s performance this year. Over the summer, the shares were north of $93. Now, they’re near $75.

I hope to see some improvement in this report.

On Wednesday, AFLAC and Express Script are due to report. In July, AFLAC (AFL) said to expect Q3 earnings to range between $1.51 and $1.69 per share. That assumes the yen averages between 105 and 115. Just going by the chart, the yen seemed to average about 112 or so last quarter.

For all of 2017, AFLAC expects earnings of $6.40 to $6.65 per share. That’s based on a yen of 108.7. I was a little surprised that the company didn’t raise its forecast. Maybe we’ll get it this time. On Thursday, shares of AFL closed at a new all-time high.

Express Scripts (ESRX) has been a problem for us this year. Their topic client, Anthem, just announced that they’re going to take their pharmacy business in-house. I honestly didn’t think that was going to happen, but it was always a possibility. For their part, Express isn’t keeping still. They recently said they’re buying EviCore for $3.6 billion.

This is an important earnings report for them. For Q3, Express said they expect total adjusted claims of 340 million to 350 million, and earnings of $1.88 to $1.92 per share.

In July, Express raised its full-year earnings of $6.95 to $7.05 per share. That represents an increase of 10% over last year. Unfortunately, the shares took another hit after the latest Anthem report. As a result, on a strict valuation basis, Express is pretty cheap. It’s going for about eight times this year’s estimate. Still, I’d like to see better news from them.

We have four more earnings reports next Thursday. Axalta Coating Systems (AXTA) will be interesting to watch because they bombed their last report. Some of that was due to the mess in Venezuela.

Axalta doesn’t provide per-share guidance, but for 2017, they see adjusted EBITDA between $940 million and $970 million. They expect free cash between $440 million and $480 million. Since the last earnings report, the shares have mostly been stuck between $28 and $30 per share.

Cerner (CERN) has turned into a home run for us this year. Through Thursday, Cerner is up 53.7% on the year for us. For Q3, the healthcare IT firm 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. In July, Cerner narrowed its full-year EPS guidance from $2.44 – $2.56 to $2.46 – $2.54.

Microsoft (MSFT) also just closed at a new all-time high. The software giant has been banging out solid numbers in the last few quarters. For Q2, their Azure revenue rose by 97%, and Office 365 saw revenue increase by 43%. Although LinkedIn brought $1.07 billion in revenue, it had an operating loss of $361 million. The consensus on Wall Street is for Q2 earnings of 72 cents per share which is exactly what MSFT made for last year’s Q2.

On Wednesday, shares of Stryker (SYK) briefly touched $150. For Q3 earnings, the orthopedics company sees a range of $1.50 to $1.55 per share. For full-year EPS, they expect $6.45 to $6.55.

That’s all for now. The big story next week will be about earnings. There are, however, a few economic reports to look out for. On Wednesday, we’ll get the durable goods report along with the new-home sales report. But the biggest economic report will come on Friday when the government releases its first estimate for Q3 GDP growth. Most observers expect something around 2.5%. 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 October 20th, 2017 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.