Good July for Ford
Eddy Elfenbein, August 4th, 2015 at 10:13 am
The company finally found some momentum in both production and demand. “As our inventories continue to improve, we are seeing sales follow,” Ford Vice President Mark LaNeve said on a conference call this morning. He added that Ford’s pickup workers are getting “very good at squeezing additional production now when we need it.”
It’s difficult to overstate how critical this truck is to Ford and the size of the shadow it casts on the auto business at large. It has been the best-selling vehicle in the U.S. for decades, and it is the closest thing this fickle industry has to a sure thing.
Morning News: August 4, 2015
Eddy Elfenbein, August 4th, 2015 at 7:20 am
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Earnings Beats Ain’t What They Used to Be
Eddy Elfenbein, August 3rd, 2015 at 2:09 pm
At CNBC, Alex Rosenberg notes that companies beating earnings aren’t getting the love they used to:
“One possibility is that this far in the cycle, investors understand company fundamentals well enough that surprises aren’t really surprising,” Convergex chief market strategist Nicholas Colas told CNBC.
In other words, investors don’t need to be convinced that a company is able to operate profitably, and the questions answered by a given earnings report are thus less consequential than they used to be.
A similar argument can be made about momentum stocks, according to Eddy Elfenbein, author of the “Crossing Wall Street” blog.
“One of the few areas that have been working consistently has been momentum stocks like biotech and online retail names,” Elfenbein wrote recently. “That’s the sign of an aging bull, and I think the reaction to earnings beliefs reflects the thought that the ceiling is close for momentum.”
So at the same time moderate growth is less noteworthy, fast growth isn’t quite as impressive as it used to be, either. Investors figure that it won’t last forever.
Morning News: August 3, 2015
Eddy Elfenbein, August 3rd, 2015 at 7:09 am
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Early Market Notes
Eddy Elfenbein, July 31st, 2015 at 10:17 am
Here are a few notes to pass along this morning.
The Employment Cost Index report this morning was a dud. Last quarter, workers got the smallest pay increase on record.
The 0.2 percent advance was the smallest since records began in 1982 and followed a 0.7 percent increase in the first quarter, the Labor Department said Friday. The agency’s employment cost index, which also includes benefits, also rose 0.2 percent in the second quarter from the prior three months.
The December rate hike odds are down today to 55.74% from 63.89% yesterday.
Chevron (CVX) and Exxon (XOM) both reported terrible earnings. Chevron’s profits dropped 90%. It was their worst profit in 13 years. Exxon cut their share repurchase program in half. Both stocks are in the Dow and that index has continued to lag the S&P 500.
Moog (MOG-A) has so far responded well to today’s earnings report. It’s been as high as $66.96 per share.
Moog Earns $1.05 per Share
Eddy Elfenbein, July 31st, 2015 at 8:17 am
Moog (MOG-A) just reported fiscal Q3 earnings of $1.05 per share which is 11 cents more than Wall Street’s forecast.
The Company updated its projections for fiscal 2015, ending October 3, 2015, to include sales of $2.53 billion, net earnings of $138 million and earnings per share of $3.50, reflecting additional restructuring costs.
That’s a decrease from the earlier guidance of $3.55 per share.
Last year, Moog earned $3.52 per share. They originally said they expected $4.25 per share for this year. That got lowered, first to $3.85, then to $3.55 and today to $3.50. But they see next year at $4.00 per share
The Company also provided its initial projections for fiscal 2016 with sales of $2.57 billion, net earnings of $148 million and earnings per share of $4.00, a 14% increase over fiscal 2015 guidance.
“Fiscal ’15 is turning out to be a year of multiple headwinds for our company,” said John Scannell, Chairman and CEO. “Despite this, our underlying businesses remain strong and we’re responding to the short term challenges to position our company for improvement in fiscal ’16 and beyond. Next year we’re forecasting a modest increase in sales, another year of strong cash flow and a 14% increase in earnings per share to $4.00.”
CWS Market Review – July 31, 2015
Eddy Elfenbein, July 31st, 2015 at 7:08 am
“Investment success does not require glamour stocks or bull markets.” – John Neff
Good news—the earnings recession may finally be over. Not all the numbers are in just yet, but Q2 earnings for the S&P 500 may have been slightly higher than they were one year ago. Earnings had declined for the previous two quarters, and this looked like it was going to be a third. In fact, as late as July 1, analysts had been expecting an earnings drop of 3%. But business hasn’t been suffering due to poor fundamentals. Rather, it’s been damage caused by the strong dollar that’s dinged earnings.
Fortunately, the stock market has mostly ignored the dollar’s impact, and stock prices haven’t declined. In fact, the incredible trading range of the last six months lives on. The S&P 500 closed Thursday at 2,108.63. Remarkably, that’s the eighth time since March that the index has closed with a 2,108 handle. Consider this stat: Since February 12, the S&P 500 has closed within 1% of today’s close 69% of the time. In other words, Wall Street has become a giant treadmill. Or rather, a giant $20 trillion treadmill that’s severely emotionally stunted.
This has been a very good earnings season for our Buy List. Through Thursday, 12 of the 14 Buy List earnings reports have exceeded expectations. This week, we had some solid reports. Ford Motor (F) beat consensus by 10 cents per share. Express Scripts (ESRX) beat earnings and raised its full-year guidance. (I love it when our stocks do that!)
In this week’s CWS Market Review, I’ll run down our latest earnings reports. We also had a Fed meeting this week. The central bank is strongly hinting that a rate hike is coming. I’ll have more on that in a bit. I also have several updates to our Buy Below prices. Plus, I’ll preview our final earnings report for this earnings season which comes out next week. But first, let’s look at the all-important one-word addition to this week’s Fed policy statement.
The Federal Reserve Adds One Word
Can one word move the market? The answer is, apparently, yes. This week, the Federal Reserve released its latest policy statement, and it contained a small but important change.
In the previous statement, the Fed said that it wanted to see “further improvement” in the jobs market before raising interest rates. This week, the Fed said it wants to see “some further improvement” in the labor market before raising rates.
In other words, the Fed sees a rate increase coming sooner than expected. Trust me: That “some” is some big deal. If you’ve read Fed transcripts as much as I have (don’t ask), you’ll know that they take every word seriously. The Fed members debate the precise meaning of every sentence, word and paragraph. You can tell the economists put a lot effort into this. That’s why they’re written so poorly.
The futures market now thinks there’s a 63% chance the Fed could raise rates at its December meeting. There’s even been talk of a rate increase coming as early as September. That’s probably a long shot, but it’s certainly being considered.
Investors need to understand that there are some understandable reactions to a higher-rate environment. For example, July is shaping up to be one of the worst months ever for commodities. The CRB Index is plunging (see above). Gold is near a five-year low. Copper is at a six-year low, and oil is down about 20% in the last month. Companies are feeling the squeeze. Chevron (CVX) and Royal Dutch Shell (RDS) just announced big job cuts. Linn Energy (LINN) just ditched its dividend. Commodity-dependent markets like Brazil (EWZ) have sold off sharply.
The beneficiaries of lower commodity prices will be retail and consumer-oriented sectors as less money goes toward filling up at the pump. Tech stocks should also do well. On our Buy List, stocks such as Ross Stores (ROST) and PayPal (PYPL) will continue to prosper off lower commodities. Now let’s look at some of last week’s earnings reports.
Ford Motor Beats by 10 Cents per Share
Investors were clearly nervous about Ford Motor (F) going into this earnings season. On Monday, the stock got as low as $14.23 per share, which is very inexpensive.
I’m happy to say that the doubters were wrong. Ford had very good results for Q2. The automaker earned 47 cents per share which topped estimates by 10 cents per share. The shares rallied above $15 for the first time in a month. Thanks to the revamped F-150, Ford posted record profits for North America. Their operating margin came in at a healthy 11.1%. The F-150s are selling for an average price of $44,100.
I was particularly glad to see Ford reiterate its full-year operating profit range of $8.5 billion to $9.5 billion. I can’t exactly translate that into a post-tax EPS figures, but it’s probably somewhere between $1.40 and $1.60. In other words, Ford is still going for less than 10 times earnings.
Shares of Ford rallied more than 4.5% on Tuesday and Wednesday. It’s about time. This is why we’ve stuck with this frustrating stock. This was a very good quarter for Ford. Ford Motor remains a good buy up to $17 per share.
Higher Guidance from AFLAC and Express Scripts
Also on Tuesday, AFLAC (AFL) reported Q2 operating earnings of $1.50 per share. That was two cents below expectations. That broke our unbeaten streak this earnings cycle (Ball Corp would also miss).
Despite the earnings miss, the details for AFLAC were pretty good. The weak yen knocked off 14 cents per share. AFLAC actually raised its full-year guidance. Previously, it had projected full-year currency-neutral profits to rise between 2% and 7%. The new range is 4% to 7%. That’s small, but I’ll take it.
AFLAC sees Q3 earnings ranging between $1.40 and $1.53 per share. That’s within Wall Street’s view of $1.48 per share. For the whole year, AFLAC now sees earnings coming in between $5.88 and $6.17 per share. Wall Street had been at $5.97 per share. These ranges assume the yen averages 120 to 125 per dollar.
I was also pleased to hear CEO Dan Amos effectively rule out any big acquisitions for AFLAC. To be specific, he said, “The prices of insurance companies are through the roof.” He’s a top-notch CEO. Wall Street liked AFLAC’s higher guidance. Shares of AFL rose 1.3% on Tuesday and another 3.5% on Wednesday. For now, I’m going to keep my Buy Below for AFLAC at $65 per share. This is a good company.
Express Scripts (ESRX) reported Q2 earnings of $1.44 per share. That beat estimates by four cents per share.
For Q3, Express sees earnings ranging between $1.41 and $1.45 per share. Wall Street had been expecting $1.43 per share. The pharmacy-benefits manager also raised its full-year guidance. The new range is $5.46 to $5.54 per share which represents growth of 12% to 14%. The previous guidance was $5.37 to $5.47 per share. Three months ago, they narrowed their guidance by two cents per share at both ends. Last year, the company made $4.88 per share.
The stock initially gapped up after the earnings report, but later it slid back. It’s nothing to worry about. As with AFLAC, I’m keeping a fairly tight Buy Below on this one. Express Scripts is a solid buy up to $92 per share.
Fiserv on Track for 30 Straight Double-Digit Years
On Wednesday, Fiserv (FISV) posted Q2 earnings of 95 cents per share. That was one penny better than expectations. It was also 17% above last year’s Q2.
I like this stock a lot. They’re pretty quiet. Fiserv simply delivers stellar earnings report after stellar earnings report. The company reiterated its full-year range of $3.73 to $3.83 per share. That’s an increase of 11% to 14% over last year’s profit of $3.37 per share. Their six-month profit is up to $1.83 from $1.63 per share last year. Fiserv is on track to grow earnings by double digits for the 30th year in a row.
I’ll warn you that Fiserv isn’t a value stock, but I think its growth and reliability deserve an extra multiple. This week, I’m raising my Buy Below on Fiserv by $11 to $93 per share.
Ball Corp. Is a Buy up to $75 per Share
Ball Corp. (BLL) became our second company to miss earnings this earnings season. For Q2, the can maker earned 89 cents per share which was five cents below expectations. Ball is a well-run outfit, but frankly, this has been a tough environment for them.
CEO John A. Hayes said, “As we have been discussing throughout this year, headwinds related to foreign-currency translation, higher metal premiums in Europe, deferred compensation costs associated with director retirements and project start-up costs related to growth capital investments persisted and totaled 23 cents and 39 cents, respectively, in the second quarter and first half of 2015. Numerous capital projects are underway in North America, Europe and Southeast Asia and will fully ramp up in late 2015 and the first half of 2016.”
Ball hasn’t changed their full-year outlook. They still expect free cash flow of $600 million (roughly $4.35 per share). In Europe, the company is getting some regulatory pushback with its Rexam deal. To be fair, a Ball-Rexam combo would be a powerhouse in the can biz. But I can’t say I would be heartbroken if the deal falls through. These big mergers are hard to pull off. The most likely outcome is that they’ll have to sell off some assets. Don’t let the earnings miss fool you: Ball is doing just fine. I’m keeping my Buy Below for Ball Corp. at $75 per share.
I’m writing this to you early on Friday. Moog’s (MOG-A) earnings report comes out later today. I’ll recap the report in next week’s CWS Market Review. But I don’t like to sugarcoat my mistakes. Moog has struggled this year. Wall Street expects earnings of 94 cents per share.
Upcoming Earnings from Cognizant Technology Solutions
Cognizant Technology Solutions (CTSH) is one of our top-performing stocks this year, but most of CTSH’s surge came at the beginning of the year. It hasn’t done much since.
Three months ago, Cognizant rallied after a very good earnings report. The shares, however, soon gave back those gains. For Q2, the IT outsourcer expects earnings of at least 72 cents per share on revenue of at least $3.01 billion. For the whole year, they see earnings of at least $2.92 per share on revenue of at least $12.24 billion. I’ve looked at the numbers and they should easily beat 72 cents per share.
Other Buy List Updates
Our Buy List has been doing quite well lately. Through Thursday, we’re up 6.68% on the year (not including dividends). Our lead against the S&P 500 has stretched to 4.24%.
In last week’s CWS Market Review, I told you about the strong earnings report from CR Bard (BCR). The company beat estimates by nine cents per share. Later, on the conference call, Bard raised its earnings guidance. The company expects Q3 to range between $2.21 and $2.25 per share. Ball raised full-year guidance by five cents at both ends. The new range is $9.00 to $9.05 per share. This week, I’m raising my Buy Below on CR Bard by $20 to $204 per share. I think that’s a CWS record.
I also want to cut back my Buy Belows on two of our stocks. This week, I’m lowering my Buy Below on Oracle (ORCL) to $42 per share, and on Bed Bath & Beyond (BBBY) to $70 per share. Both stocks have pulled back recently, and I wanted our Buy Belows to reflect that.
That’s all for now. Next week is the last big week for earnings this season. We’ll also get the important turn-of-the-month econ reports. Personal income, auto sales and ISM are on Monday. Friday is the big July jobs report. The unemployment rate is currently at a seven-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!
Morning News: July 31, 2015
Eddy Elfenbein, July 31st, 2015 at 7:02 am
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GDP Grew by 2.3% in Q2
Eddy Elfenbein, July 30th, 2015 at 11:02 am
The government reported that the US grew in real terms by 2.3% in the second quarter. I had been expecting more although the number for Q1 was revised up to 0.6%. This report is probably more ammo for a Fed rate hike coming up soon. The odds for a December rate hike are now over 65%.
The government also revised all the GDP numbers for the past few years. It turns out that the economic expansion had been a little weaker than originally thought.
Q2 Earnings Calendar
Eddy Elfenbein, July 30th, 2015 at 9:37 am
Sixteen of our 20 Buy List stocks are reporting Q2 earnings in the current reporting season. Here’s a list of reporting dates and Wall Street’s consensus estimates.