CWS Market Review – July 20, 2018

“Nothing so undermines your financial judgment as the sight of your neighbor getting rich.” – J.P. Morgan

Earnings season is underway, and the stock market is mostly in a pleasant mood. On Wednesday, the S&P 500 closed at its highest level in nearly six months. Then on Thursday, we got the lowest jobless-claims report since December 6, 1969. For context, that was the same day as Altamont. (Google it.)

Spoiler Alert: This week’s issue is all about earnings. We had five Buy List reports on Thursday, and it was mostly quite good. Snap-on beat earnings, and the stock jumped 10%. Danaher also rallied on a nice earnings beat, and they announced they’re going to spin off their dental business next year. Signature Bank said they’re initiating a dividend. I’ll go through all the details in a bit.

This is only the beginning. We’re going to have seven more Buy List earnings reports next week, then another nine in the week after that. Without further ado, let’s look at this week’s earnings.

Five Buy List Earnings Reports

Thursday was a very busy day for us with five Buy List stocks reporting results. Here’s a look at our updated Q2 Earnings Calendar:

Company Ticker Date Estimate Result
Alliance Data Systems ADS 19-Jul $4.66 $5.01
Danaher DHR 19-Jul $1.09 $1.15
RPM International RPM 19-Jul $1.18 $1.05
Signature Bank SBNY 19-Jul $2.80 $2.83
Snap-On SNA 19-Jul $2.95 $3.11
Sherwin-Williams SHW 24-Jul $5.66
Stryker SYK 24-Jul $1.73
Wabtec WAB 24-Jul $0.93
Check Point Software CHKP 25-Jul $1.30
Torchmark TMK 25-Jul $1.49
AFLAC AFL 26-Jul $0.99
Moody’s MCO 27-Jul $1.90
Carriage Services CSV 31-Jul $0.37
Fiserv FISV 31-Jul $0.74
Becton, Dickinson BDX 2-Aug $2.86
Cerner CERN 2-Aug $0.60
Church & Dwight CHD 2-Aug $0.47
Cognizant Technology Solutions CTSH 2-Aug $1.10
Continental Building Products CBPX 2-Aug $0.45
Ingredion INGR 2-Aug $1.65
Intercontinental Exchange ICE 2-Aug $0.89

Let’s start with our big winner. Shares of Snap-on (SNA) jumped nearly 10% on Thursday thanks to a very good earnings report. For Q2, earnings per share rose 20% to $3.11. That was well above Wall Street’s estimate of $2.95 per share. Net sales rose 3.6%, and organic sales increased 1.3%. I was especially pleased to see a 0.3% increase in operating margins. That’s often a good sign of fiscal health.

Snap-on was also our big winner during the Q1 earnings season, but it quickly gave back most of those gains. I’m still concerned by weakness in Snap-on’s tool division, but other areas are doing well. Overall, I’m pleased with this report. I suspect the sentiment for Snap-on is still pretty negative. That’s why an earnings beat translated into such a big gain for the stock. Our patience is paying off. This week, I’m lifting my Buy Below on Snap-on to $181 per share.

Our second-biggest winner was RPM International (RPM). Oddly enough, RPM looked like it was going to be a big loser. After the earnings report, the shares opened down 4%. This is why we eschew trading. It’s too irrational. Fortunately, the market came to its senses, and RPM closed higher by 5.3%. The difference between Thursday’s high and low prices was nearly 12%. (Dear day-traders: RPM isn’t that interesting!!!)

For fiscal Q4, RPM earned $1.05 per share which was 13 cents below Wall Street’s consensus. The company blamed “higher raw-material costs and extended winter weather.” Rust-Oleum had to shutter two manufacturing facilities. RPM’s consumer segment was especially weak while the industrial unit fared better.

As part of the deal with Elliott Management, RPM is going to unveil a comprehensive business plan later this year. I think that may involve major divestments. Because of this, the company will forgo any EPS guidance. Sales-wise, for 2019, RPM expects a mid-single-sales increase for its industrials unit. For the consumer unit, they see an increase of mid- to upper-single digits. I’m raising my Buy Below on RPM to $67 per share.

Danaher (DHR) not only beat earnings, but also said it’s going to spin off its dental business next year. For Q2, Danaher earned $1.15 per share. When the last earnings report came out, they told us to expect $1.07 to $1.10 per share. For the second time, Danaher raised its full-year guidance. The company now expects 2018 earnings to range between $4.43 and $4.50 per share.

The dental spinoff won’t happen until the second half of 2019. The business is currently responsible for about 20% of the company’s overall revenue, but growth has been tepid lately. According to The Wall Street Journal, “Danaher said it expects the dental spinoff to have an investment-grade credit rating and about 12,000 employees.” The spinoff will be tax-free.

Shares of DHR jumped to a new high on Thursday. I’m lifting my Buy Below on Danaher to $110 per share.

Alliance Data Systems (ADS) reported Q2 earnings of $5.01 per share. That beat estimates by 35 cents per share. Despite the impressive earnings beat, ADS gained about 0.5% on Thursday.

Ed Heffernan, the CEO, said, “The second quarter marked the beginning of the long-awaited acceleration in our business.” The company is standing by its full-year earnings forecast of $22.50 to $23 per share. That gives them a P/E Ratio of about 10.

On Monday, shares of ADS dropped 10% after a weak monthly business update. I didn’t think the numbers were that bad. Fortunately, the Q2 earnings report is reassuring. This report is basically what I had been expecting. The stock is still working through an impressive turnaround, but it’s not going to be in a straight line. Don’t give up on ADS. I’m dropping my Buy Below down to $245 per share.

Our only loser on Thursday was Signature Bank (SBNY), and even they beat the Street. For Q2, SBNY made $2.83 per share, three cents more than estimates.

But the biggest news is that Signature is initiating a dividend. That’s good to see. The New York bank will start paying a quarterly dividend of 56 cents per share. Based on Thursday’s close, that’s a yield of 1.89%. Not bad, and Signature can easily cover it. That’s a payout ratio of about 25%. The new dividend is payable on August 15 to shareholders of record on August 1.

Let’s look at some numbers for the quarter. Total deposits now stand at $34 billion. That’s an increase of 5.5% in the last year. Loans rose to $34.15 billion. That’s up 12.4% in the last year. Net interest margin, which is the key metric for banks, came in at 2.94%. Those are decent numbers.

Still, on Thursday, the shares lost more than 5%. At one point, the stock dropped to its lowest level in 10 months. The stock is lower than where it was 4 1/2 years ago. I’m puzzled by SBNY’s lackluster performance. Perhaps the narrowing yield curve is scaring investors off. In any event, I still like Signature. This week, I’m dropping my Buy Below to $131 per share.

Seven More Earnings Reports Next Week

Next week will be another busy week. Seven of our Buy List stocks are due to report. The parade starts on Tuesday, July 24, when Sherwin-Williams, Stryker and Wabtec are due to report.

Sherwin-Williams (SHW) started off the year poorly for us, but it’s gained ground since the spring. Business is going well for Sherwin, but they’ve had trouble digesting the Valspar acquisition. I was afraid that might happen.

Excluding any Valspar issues, Sherwin expects $18.35 to $18.95 per in earnings this year. For Q2, Wall Street expects $5.66 per share. They should be able to beat that.

In April, Stryker (SYK) topped estimates and raised its full-year forecast. SYK’s initial range was $7.07 to $7.17 per share. Now they see 2018 coming in between $7.18 and $7.25 per share. For Q2, Stryker expects $1.70 to $1.75 per share.

This is a good time to look at Stryker. The shares got clobbered in early May after news came out that Stryker made an offer to buy Boston Scientific. Since the deal fell apart, SYK has rallied some, but it’s still below its May high.

Who would have guessed that Wabtec (WAB) would have been a 29% winner by July? Not me, that’s for sure, and I’m a fan. Obviously, the big news for the freight-services company is the merger with GE’s rail business. This is a huge opportunity. I do have concerns similar to those with Sherwin-Williams and Valspar. Wabtec expects full-year revenues of $4.1 billion, and earnings of “about” $3.80 per share. Wall Street expects Q2 earnings of 93 cents per share.

On Wednesday, Check Point Software and Torchmark are due to report. Three months ago, shares of Check Point Software (CHKP) got dinged after their Q1 earnings report. The earnings were fine, but traders didn’t like guidance. For Q2, Check Point expects revenue to range between $445 and $475 million. Wall Street had been expecting $477 million. For Q2 EPS, their range is $1.25 to $1.35. Wall Street had been expecting $1.35 per share.

Check Point also cut its full-year earnings range. The previous guidance was $5.50 to $5.90 per share. The new range is $5.45 to $5.75 per share. The issue is that Check Point has been shifting its business towards a greater reliance on subscription revenue. The problem is that these subscriptions boost results in higher deferred revenue. The company shouldn’t have any major difficulties working these problems out. Since June 25, the shares are up over 15%.

Torchmark’s (TMK) earnings are about the steadiest you’ll find. The company gave 2018 guidance of $5.93 to $6.07 per share. That’s probably too low. I think TMK can hit $6.10 per share, but I won’t quibble with their guidance; we’re still early in the year. For Q2, Wall Street expects $1.49 per share.

AFLAC (AFL) reports on Thursday. The duck stock has been sliding lately, and the strong dollar is probably to blame. For Q2, AFLAC said they’re expecting earnings between 91 cents and $1.05 per share. That assumes the yen averages between ¥100 and ¥110 to the dollar. It’s currently at ¥112.57. AFLAC is standing by its earnings forecast for full-year earnings of $3.72 to $3.88 per share.

Moody’s (MCO) will report its Q2 earnings on Friday. The stock is up 23.5% for us this year, and it just reached another new high. Moody’s business seems to be moving along quite well. I also like their Moody’s Analytics business. The company reaffirmed its full-year earnings forecast of $7.65 to $7.85 per share. For Q1, Wall Street’s consensus is $1.90 per share.

Before I go, I wanted to mention that last Friday, Smucker (SJM) raised its dividend by 9%. The quarterly dividend will rise from 78 to 85 cents per share. The new dividend will be paid on Tuesday, September 4 to shareholders of record at the close of business on August 17. This is SJM’s 17th-straight annual dividend increase.

That’s all for now. There are more Buy List earnings reports next week, so expect some volatility. Next Friday, we’ll get our first look at Q2 GDP. This could be a big number. Maybe 4%. We’ll also get the existing-homes sales report on Monday. The new-homes sales report comes out on Wednesday. Then on Thursday, it’s the durable-goods 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

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