CWS Market Review – October 27, 2017

“Selling your winners and holding your losers is like cutting the flowers and watering the weeds.” – Peter Lynch

We’re now at the high tide of earnings season, and it’s been a good one for us. So far, we’ve had 13 Buy List earnings reports, and 12 have beaten Wall Street’s estimates.

This week, we had nine earnings reports. I’ll summarize them all in this week’s newsletter. I’ll also preview five more earnings reports coming next week. There’s a lot to get to, so let’s dive right in.

Sherwin-Williams Beat and Raised Guidance

Let’s start with Tuesday. We had two earnings reports on Tuesday morning. The earnings report from Sherwin-Williams (SHW) is a bit confusing, so I’ll try to clear it up. For Q3, the company earned $3.33 per share, but that figure includes $1.42 per share in acquisition costs. That means Sherwin made $4.75 per share from continuing operations, which beat Wall Street’s estimate of $4.67 per share. Sherwin’s EBITDA from continuing ops is up 9.6% this year to $1.70 billion.

Sherwin previously said to expect adjusted earnings between $4.80 and $5.20 per share. However, the company estimates that the hurricanes dinged last quarter’s sales by $50 million and EPS by 27 cents per share. Considering all that, this was a decent quarter.

Now for guidance. SHW sees Q4 ranging between $1.97 and $2.27 per share. Adding back 98 cents in acquisition costs, that comes to $2.95 to $3.25 per share.

For all of 2017, Sherwin expects earnings between $11.20 and $11.50 per share. Adding in costs, the range is $14.85 to $15.15 per share. That’s an increase of five cents per share at both ends from their previous guidance. Overall, this was a good quarter for Sherwin. The stock broke out to a new high on Thursday. This week, I’m raising my Buy Below on Sherwin-Williams to $417 per share.

For Q3, Wabtec (WAB) earned 88 cents per share. That beat Wall Street’s estimate of 84 cents per share. I said before that I wanted to see signs of improvement here, and it looks like we got them. Some stats:

Cash from operations was $40 million for the third quarter. For the first nine months of 2017, cash from operations decreased compared to the same period of 2016, mainly due to an increase in working capital.

At Sept. 30, the company had cash of $228 million and debt of $1.9 billion. Total debt was 6 percent lower than at the end of the second quarter.

Wabtec’s multi-year backlog rose 2% to a record $4.5 billion. Their 12-month backlog is up 5% to $2.2 billion, also a record.

Wabtec now expects full-year revenue of $3.8 billion and EPS between $3.45 and $3.50 per share. That’s a reduction from their previous guidance of $3.55 to $3.70 per share, but I believe the newer figure includes a charge of 18 cents per share.

Shares of WAB gapped up to $82 on Tuesday, but they pulled back to $76 later this week. I’m relieved by this report. The stock remains a buy up to $81 per share.

In last week’s issue, I said that Express Scripts (ESRX) was due to report on Wednesday. I got that wrong. Express Scripts reported after the close on Tuesday. My apologies for the error.

Obviously, the big issue with Express is the loss of Anthem as a client. Still, things are going well for Express. The pharmacy-benefits manager reported Q3 earnings of $1.90 per share which was three cents better than estimates.

Express also nudged up its 2017 range from $6.95 – $7.05 per share to $6.97 – $7.05 per share. The midpoint represents 10% growth over last year. For Q4, Express expects $2.03 to $2.11 per share. Express Scripts is doing well. I still like the stock but there are a lot of challenges ahead of them.

AFLAC Raised Its Dividend for the 35th Year in a Row

On Wednesday, AFLAC (AFL) beat earnings, raised guidance and increased its dividend for the 35th year in a row. Then on Thursday, the stock touched a new all-time high. Not bad.

The duck stock reported Q3 operating earnings of $1.70 per share. (Remember, with insurance stocks, we always want to look at operating earnings instead of net.) That number includes an after-tax benefit of four cents per share. Also, the yen/dollar exchange rate knocked off seven cents per share last quarter.

AFLAC raised its quarterly dividend by two cents to 45 cents per share. This is the 35th year in a row in which AFL has raised its dividend. Going by Thursday’s close, the new dividend yields 2.15%. AFLAC also raised full-year guidance to $6.75 to $6.95 per share. That’s a big increase over the previous range of $6.40 to $6.65 per share. Those numbers don’t include the impact of the yen.

The CEO said that if the yen averages between 110 and 115 to the dollar, then they expect Q4 earnings between $1.42 and $1.66 per share. On Thursday, AFL got to a new all-time high of $85.70 per share. For now, I’m keeping our Buy Below at $86 per share.

We had five more reports on Thursday. First up was Axalta Coating Systems (AXTA). The company earned 26 cents per share for Q3. That’s down from 33 cents per share last year, but it beat estimates by two cents per share. If you recall, a few weeks ago, the company pared back its Q3 guidance due to the hurricanes. To be fair, that’s not a reflection of Axalta’s business execution.

Axalta provided guidance on several metrics except EPS. For 2017, they see net sales growth of 6% to 7%, adjusted EBITDA of $870 million to $900 million and diluted shares outstanding of 246 million. Despite the difficulties Axalta faced, these are good numbers. I’m keeping our Buy Below price at $33 per share.

We got our first earnings miss this season, and it was from Cerner (CERN). The company earned 61 cents per share instead of the 62 cents expected by Wall Street. If a miss had to come from somebody, I guess it can be from our #1 stock this year.

So what happened? Cerner blamed it on several large contracts that were expected to be signed in Q3 but were pushed to Q4. I’m not at all worried about a miss of one penny. I’m writing this to you before the market opens on Friday, but shares of CERN got hit by 7% in Thursday’s after-hours market. Of course, that’s traders being traders. Don’t let the selling rattle you. Cerner is doing just fine.

For Q4, the company expects revenue between $1.3 billion and $1.35 billion and EPS between 60 and 62 cents. They also provided some preliminary numbers for 2018. Cerner sees 2018 sales between $5.5 and $5.7 billion. The midpoint is a 9% increase over this year. For EPS, Cerner sees $2.52 to $2.68. That midpoint would be an increase of 7% over this year. Wall Street had been expecting $2.78 per share.

Expect to see a short-term hit, but remember that Cerner has been a big winner for us this year. I still like this company a lot.

Microsoft Crushes Earnings Again

After the closing bell on Thursday, Microsoft (MSFT) reported fiscal Q1 earnings of 84 cents per share. That easily beat Wall Street’s estimate of 72 cents per share. This was a very good report; Mr. Nadella and his team continue to deliver outstanding results.

Let’s dig a little deeper. Total revenue came in at $24.5 billion, nearly $1 billion more than expected. Revenue from Microsoft’s intelligent cloud business rose 14% to $6.92 billion. The Street had been expecting $6.70 billion. Revenue from Azure rose 90%. Gross margins at Microsoft’s cloud business are running at 57%. That’s very good.

Two years ago, Nadella set a goal for the company of $20 billion in cloud revenue by 2018. They’re very close to hitting that now. At the time Nadella set the goal, Microsoft was doing a little over $6 billion in cloud revenue. This week, I’m raising our Buy Below on Microsoft to $85 per share.

Also on Thursday, Stryker (SYK) reported Q3 earnings of $1.52 per share, two cents better than estimates. That’s an increase of 9.4% over last year. For Q4, they expect $1.92 to $1.97 per share. Wall Street has been expecting $1.93 per share. Stryker sees full-year earnings in the range of $6.45 to $6.50 per share. Forex costs will be about 10 cents per share for the year. SYK was up nicely in Thursday’s after-hours trading.

Lastly, we also got an earnings report from CR Bard (BCR). I wasn’t sure if they were planning on reporting this season because the merger with BDX should happen soon.

This was another good report for Bard. For Q3, BCR earned $3.02 per share which was seven cents more than expectations. This is Bard’s last earnings report as an independent company. The company also raised its full-year range to $11.86 to $11.90 per share. That’s an increase of 15 cents to the low end.

Thanks to the rally in BDX, the buyout price for BCR is up to $329.47 per share (based on Thursday’s closing price). The original buyout price in April was $317.

Six Buy List Earnings Reports Next Week

On Tuesday, Halloween, Fiserv (FISV) is set to report. The company missed earnings last time, which is very rare for them. Their full-year 2017 guidance is still $5.03 to $5.17 per share, which is an increase of 14% to 17% over last year. Wall Street is looking for $1.31 per share for Q3.

On Wednesday, Cognizant Technology Solutions (CTSH) and Ingredion (INGR) are scheduled to report. This summer, Cognizant raised its guidance. For Q3, they see earnings of at least 94 cents per share, and full-year earnings of at least $3.67 per share. They should be able to reach both. The stock is up 33% YTD.

Last month, Ingredion gave us a 20% dividend increase. The company sees full-year earnings of $7.50 to $7.80 per share. Wall Street expects $2.02 per share for Q3. They should beat that.

Shares of Intercontinental Exchange (ICE) have drifted lower recently. This may come to an end on Thursday when ICE reports earnings. In their last report, ICE missed by a penny, but it was their 17th-straight quarter of revenue growth. The consensus on Wall Street is for Q3 earnings of 70 cents per share.

I’m also going to mention Becton, Dickinson (BDX) which reports on Thursday. This will be for the fourth quarter of their fiscal year. Three months ago, BDX said they expect quarterly earnings of $2.33 to $2.38 per share.

Full-year earnings should be between $9.42 and $9.47 per share. Not including currency, that would be $9.70 to $9.80 per share.

On Friday, Cinemark (CNK) and Moody’s (MCO) will report earnings. In August, one of Cinemark’s competitors bombed its earnings report, so traders feared the same for CNK. Instead, Cinemark missed by just a penny per share. I’ll note that concession revenue per person, which is the real moneymaker, rose by 8.9%. There have been a lot of stories about low sales at the box office for Hollywood. Wall Street expects 35 cents per share.

In July, Moody’s reported very good earnings, plus they raised guidance. For Q2, the ratings company earned $1.51 per share which was 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.

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. The consensus is for Q3 earnings of $1.37 per share.

That’s all for now. I’m going to be on the road next week. I hope to get the newsletter out at the regular time, but it may be delayed a day or two. I can’t say yet. Next week we will have more earnings news. There will also be a Fed meeting on Tuesday and Wednesday. Don’t expect any movement on interest rates. At least, not yet. Also, the big jobs report will be out next Friday. The unemployment rate is currently at a 16-year low. 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 27th, 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.