CWS Market Review – July 19, 2019

“Sometimes the hardest thing to do is to do nothing.” – David Tepper

Second-quarter earnings season has arrived. There’s been a blizzard of earnings reports this week, and even more are coming next week.

This week, three of our Buy List stocks reported Q2 earnings. We had good news from Signature Bank and Danaher, and we had very bad news from Eagle Bank. (Actually, I think the market dramatically over-reacted on Eagle. I’ll explain it all in a bit.)

We also have ten Buy List earnings reports coming next week. That may be a record. In this week’s issue, I’ll preview them all. There’s a lot to get to, so let’s jump into this week’s earnings.

Three Buy List Earnings Reports this Week

Let’s start with the bad news. On Thursday, Eagle Bancorp (EGBN) had a terrible, horrible, no good, very bad day. For the June quarter, the bank earned $1.08 per share. That was four cents below expectations.

However, the big news was the news that Eagle said that its legal bill jumped in the second quarter due to “investigations and related document requests and subpoenas from government agencies.” What’s this all about?

In their SEC report, Eagle specified “the Company’s identification, classification and disclosure of related party transactions; the retirement of certain former officers and directors; and the relationship of the Company and certain of its former officers and directors with a local public official.”

All this sounds fishy but the bank made it clear that this will not materially impact its results. Also, the bank isn’t under any regulatory restrictions. One problem is that due to the nature of the legal issues, Eagle can’t say very much. I suspect this is connected to local Washington, DC political scandals. The problem is that it’s combined with an earnings miss. Also, there were flimsy (in my opinion) allegations of impropriety a few years ago.

On Thursday, the stock got nailed for a 26.75% loss. Still, digging through the numbers, Eagle didn’t do that bad, especially considering the tough environment for interest rates.

Let’s run through some numbers. Eagle now has assets of $8.7 billion which is a 10% increase over last year. Average total loans grew by 11% and average deposits grew by 10%. For the quarter, net interest margin was 3.91%. That’s down 24 basis points from a year ago. I was pleased to see Eagle’s efficiency ratio improved to 38.04% compared with 38.55% a year ago.

This was a difficult quarter for Eagle but I’m not nearly as upset by this news as Wall Street is. What happened is that a four-cent earnings miss translated to a 1,430-cent share price reduction. This is a giant over-reaction.

Thanks to the selloff, shares of Eagle are now going for just over eight times next year’s earnings. That’s a good deal. The dividend yield is up to 2.25%. I’m not giving up on Eagle. This week, I’m lowering our Buy Below price on Eagle to $43 per share.

Now let’s look at some good news. On Thursday, Danaher (DHR) reported adjusted earnings of $1.19 per share. That’s an increase of 3.5% over last year. It was also above Danaher’s own range. The company told us to expect Q2 earnings of $1.13 to $1.16 per share. Quarterly revenues rose by 3.5% and non-GAAP core revenues rose by 5.5%. For the quarter, operating cash flow came in at $1.2 billion and non-GAAP free cash flow was $1.0 billion.

Let’s look at guidance. For Q3, Danaher sees earnings ranging between $1.12 and $1.15 per share. For the full year, the company now sees earnings between $4.75 and $4.80 per share. That’s an increase of three cents to the lower end.

Thomas P. Joyce, Jr., President and Chief Executive Officer, stated, “We are very pleased by our strong start to 2019, with our team’s execution driving another quarter of 5.5% core revenue growth. We believe that recent investments in innovation and commercial initiatives contributed to share gains in many of our businesses. Combined with solid operating margin expansion and cash flow generation, the strength of our results is a testament to our team and the power of the Danaher Business System.”

Joyce added, “We continue to make progress on our anticipated acquisition of GE Biopharma and the planned initial public offering of our Dental business, which will be called Envista. Both transactions remain on track relative to our previously indicated expectations. We are excited about the opportunities ahead, and we believe the combination of our differentiated portfolio and our team’s DBS-driven execution positions us well to continue our strong performance through 2019 and beyond.”

Three months ago, Danaher lowered its full-year range down from $4.75 to $4.85 per share. That was due to share dilution for the GE Biopharma deal. That deal should close sometime in Q4. This revised guidance nearly brings us back to the original forecast.

Sometime in the second half of this year, Danaher will IPO Envista Holdings, their dental business. The ticker symbol will be NVST. Shares of DHR hit a new 52-week high on Thursday. Danaher remains a buy up to $150 per share.

Also on Thursday, Signature Bank (SBNY) reported Q2 earnings of $2.72 per share. That was one penny more than expectations.

Signature seems to have a nasty habit of plunging after each earnings report so it’s nice to see the shares gain some ground after this report.

The details are pretty good. Total assets rose 8.1% to $48.88 billion. For the quarter, average assets are up 9.4% from a year ago. Deposits rose 7.3% to $37.54 billion. Net interest margin came in at 2.75%. That’s down 20 basis points from a year ago. That’s not great, but it’s certainly respectable for this environment.

I’m happy to say that Signature is almost done with its taxi medallion mess. The bank went into this in a big way, but then thanks to ride-sharing apps, the medallions plunged in price. That left the bank holding a bunch of bum loans. Last quarter, Signature sold off $46.4 million in medallion loans. That leaves them with $18.8 million in non-performing medallion loans plus $43.8 million in repo-ed medallions. It was a costly mistake, but the issue is basically behind them.

This week, I’m raising my Buy Below on Signature Bank to $130 per share. Now let’s look at all the earnings reports coming next week.

Ten Buy List Stocks Due to Report Next Week

Here’s the updated Earnings Calendar:

Company Ticker Date Estimate Result
Eagle Bancorp EGBN 17-Jul $1.12 $1.08
Danaher DHR 18-Jul $1.16 $1.19
Signature Bank SBNY 18-Jul $2.71 $2.72
RPM International RPM 22-Jul $1.14
Sherwin-Williams SHW 23-Jul $6.37
Torchmark TMK 24-Jul $1.65
Check Point Software CHKP 24-Jul $1.37
Cerner CERN 24-Jul $0.64
Stryker SYK 25-Jul $1.94
AFLAC AFL 25-Jul $1.07
Hershey HSY 25-Jul $1.17
Raytheon RTN 25-Jul $2.64
Fiserv FISV 25-Jul $0.81
Moody’s MCO 31-Jul $2.01
Church & Dwight CHD 31-Jul $0.52
Cognizant Technology Solutions CTSH 31-Jul $0.92
Continental Building Products CBPX 1-Aug $0.52
Intercontinental Exchange ICE 1-Aug $0.93
Disney DIS 6-Aug $1.76
Becton, Dickinson BDX 6-Aug $3.06
Broadridge Financial BR TBA $1.71

RPM International (RPM) will report its fiscal Q4 results before the market opens Monday, July 22. The company’s fourth quarter ended in May. The company owns a broad selection of well-known brands like Rust-Oleum.

RPM got off to a rough start for us this year, but things have improved lately. The April earnings report was very encouraging. (Incidentally, this is why we hold our positions for the entire year. Our strategy gives good stocks a chance to rebound.)

I am concerned about the currency issue. That’s a big one for RPM. For fiscal Q4, RPM sees earnings ranging between $1.12 and $1.16 per share. That sounds about right. RPM has increased its dividend every year for the last 45 years. I’m expecting #46 in October.

Earlier I mentioned the big drop in shares of Eagle Bank. That’s nothing compared to what happened to Sherwin-Williams (SHW) last fall. Shares of the paint company dropped 26% in just a few weeks. That was scary but we held on and the stock has rallied back impressively.

Sherwin’s last earnings report was a bit light but the key is that they didn’t alter their full-year forecast. The company still sees 2019 earnings ranging between $20.40 and $21.40 per share. For Q2, Wall Street expects $6.37 per share.

Sherwin also settled a 19-year legal battle over lead paint. I can’t speak to the merits of the claim, but the settlement was in Sherwin’s favor.

We have three earnings reports on Wednesday.

First up is Cerner (CERN) which is having an outstanding year for us. For Q2, Cerner expects earnings of 63 to 65 cents per share on revenue of $1.41 to $1.46 billion.

For all of 2019, Cerner sees earnings of $2.64 to $2.72 per share. That’s up from the previous guidance of $2.57 to $2.67 per share. Earlier this year, Cerner reached an agreement with Starboard Value to start paying a dividend and increase its buyback authorization by $1.5 billion.

For Q1, Check Point Software (CHKP) had a decent earnings report. The cyber-security firm earned $1.32 per share. That beat estimates by one penny per share. CEO Gil Shwed said, “We had good results in the first quarter with 13 percent growth in our security subscriptions including advanced solutions for Cloud and Mobile as well as SandBlast Zero day threat prevention.”

The problem was that guidance was light. Check Point said it sees Q2 revenues coming in between $474 million and $500 million. For earnings, CHKP sees EPS ranging between $1.32 and $1.40. Frankly, I had expected more. The stock has pulled back since the spring. I’ll be curious to hear what CHKP has to say.

Torchmark (TMK) is probably the most boring stock on our Buy List, and it’s having a very good year for us. The last earnings report was quite good. Net income as an ROE was 12.9%. Net operating income as an ROE, excluding net unrealized gains on fixed maturities, was 14.7%. For Q2, Wall Street expects $1.65 per share.

Thursday will be a very busy day for us. Five of our Buy List stocks are due to report.

Let’s start with AFLAC (AFL). The duck stock has been rallying well for us lately. For Q1, AFLAC earned $1.13 per share. That beat the Street by seven cents per share.

The supplemental insurer expects to buy back between $1.3 billion and $1.7 billion in shares this year. AFLAC recently raised its dividend for the 36th year in a row. For 2019, AFLAC is standing by its previous guidance for earnings of $4.10 to $4.30 per share. That assumes the yen trades at ¥110.39 to the dollar. For Q2, Wall Street expects $1.07 per share.

Last year was Fiserv’s (FISV) 33rd year in a row of double-digit earnings growth. I think they have a good shot at #34. The company made $3.10 per share last year so they need to hit $3.41 per share this year. For 2019, Fiserv has given us a range of $3.39 to $3.52 per share. I’ll be curious to see if they raise guidance next week.

Of course, the big news for Fiserv is the planned merger with First Data. This is a massive deal. Fiserv expects it to be completed later this year.

Jeffery Yabuki, Fiserv’s CEO, warned that Q2 “will be the low watermark for both internal revenue and adjusted EPS growth.” Wall Street expects earnings of 81 cents per share. The stock gapped up to a new high on Thursday.

Hershey (HSY) has been another strong stock for us lately. The Q4 earnings weren’t that good, but Q1 was a big improvement. For all of 2019, Hershey expects EPS of $5.63 to $5.74. The chocolate stock is up 37.6% for us this year. For Q2, Wall Street expects $1.17 per share.

In April, Raytheon (RTN) crushed estimates. The Tomahawk-maker earned $2.77 per share for Q1 which beat the Street by 30 cents per share.

Raytheon is doing especially well with cyber-security and its intelligence and information unit. For 2019, RTN sees earnings between $11.40 and $11.60 per share and sales of $28.6 billion to $29.1 billion. Earlier this year, Raytheon hiked its dividend by 8.6%. That was its 15th annual dividend increase in a row. For Q2, the consensus is for $2.64 per share.

For Q2, Stryker (SYK) expects earnings between $1.90 and $1.95 per share. For the full year, Stryker sees earnings between $8.05 and $8.20 per share. The shares are up 34.3% for us this year.

That’s all for now. There will be lots more reports next week. On Tuesday, the report on sales of existing homes will be released. Then on Wednesday, the report on sales of new homes comes out. Thursday is durable goods and jobless claims. Then on Friday, we’ll get our first look at Q2 GDP. The economy grew by 3.1% during the first three months of the year. It may have grown at half that rate for the second quarter. 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 July 19th, 2019 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.