Yellen’s Testimony for Today
Posted by Eddy Elfenbein on February 14th, 2017 at 10:56 am
Chairman Crapo, Ranking Member Brown, and other members of the Committee, I am pleased to present the Federal Reserve’s semiannual Monetary Policy Report to the Congress. In my remarks today I will briefly discuss the current economic situation and outlook before turning to monetary policy.
Current Economic Situation and Outlook
Since my appearance before this Committee last June, the economy has continued to make progress toward our dual-mandate objectives of maximum employment and price stability. In the labor market, job gains averaged 190,000 per month over the second half of 2016, and the number of jobs rose an additional 227,000 in January. Those gains bring the total increase in employment since its trough in early 2010 to nearly 16 million. In addition, the unemployment rate, which stood at 4.8 percent in January, is more than 5 percentage points lower than where it stood at its peak in 2010 and is now in line with the median of the Federal Open Market Committee (FOMC) participants’ estimates of its longer-run normal level. A broader measure of labor underutilization, which includes those marginally attached to the labor force and people who are working part time but would like a full-time job, has also continued to improve over the past year. In addition, the pace of wage growth has picked up relative to its pace of a few years ago, a further indication that the job market is tightening. Importantly, improvements in the labor market in recent years have been widespread, with large declines in the unemployment rates for all major demographic groups, including African Americans and Hispanics. Even so, it is discouraging that jobless rates for those minorities remain significantly higher than the rate for the nation overall.
Ongoing gains in the labor market have been accompanied by a further moderate expansion in economic activity. U.S. real gross domestic product is estimated to have risen 1.9 percent last year, the same as in 2015. Consumer spending has continued to rise at a healthy pace, supported by steady income gains, increases in the value of households’ financial assets and homes, favorable levels of consumer sentiment, and low interest rates. Last year’s sales of automobiles and light trucks were the highest annual total on record. In contrast, business investment was relatively soft for much of last year, though it posted some larger gains toward the end of the year in part reflecting an apparent end to the sharp declines in spending on drilling and mining structures; moreover, business sentiment has noticeably improved in the past few months. In addition, weak foreign growth and the appreciation of the dollar over the past two years have restrained manufacturing output. Meanwhile, housing construction has continued to trend up at only a modest pace in recent quarters. And, while the lean stock of homes for sale and ongoing labor market gains should provide some support to housing construction going forward, the recent increases in mortgage rates may impart some restraint.
Inflation moved up over the past year, mainly because of the diminishing effects of the earlier declines in energy prices and import prices. Total consumer prices as measured by the personal consumption expenditures (PCE) index rose 1.6 percent in the 12 months ending in December, still below the FOMC’s 2 percent objective but up 1 percentage point from its pace in 2015. Core PCE inflation, which excludes the volatile energy and food prices, moved up to about 1-3/4 percent.
My colleagues on the FOMC and I expect the economy to continue to expand at a moderate pace, with the job market strengthening somewhat further and inflation gradually rising to 2 percent. This judgment reflects our view that U.S. monetary policy remains accommodative, and that the pace of global economic activity should pick up over time, supported by accommodative monetary policies abroad. Of course, our inflation outlook also depends importantly on our assessment that longer-run inflation expectations will remain reasonably well anchored. It is reassuring that while market-based measures of inflation compensation remain low, they have risen from the very low levels they reached during the latter part of 2015 and first half of 2016. Meanwhile, most survey measures of longer-term inflation expectations have changed little, on balance, in recent months.
As always, considerable uncertainty attends the economic outlook. Among the sources of uncertainty are possible changes in U.S. fiscal and other policies, the future path of productivity growth, and developments abroad.
Turning to monetary policy, the FOMC is committed to promoting maximum employment and price stability, as mandated by the Congress. Against the backdrop of headwinds weighing on the economy over the past year, including financial market stresses that emanated from developments abroad, the Committee maintained an unchanged target range for the federal funds rate for most of the year in order to support improvement in the labor market and an increase in inflation toward 2 percent. At its December meeting, the Committee raised the target range for the federal funds rate by 1/4 percentage point, to 1/2 to 3/4 percent. In doing so, the Committee recognized the considerable progress the economy had made toward the FOMC’s dual objectives. The Committee judged that even after this increase in the federal funds rate target, monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a return to 2 percent inflation.
At its meeting that concluded early this month, the Committee left the target range for the federal funds rate unchanged but reiterated that it expects the evolution of the economy to warrant further gradual increases in the federal funds rate to achieve and maintain its employment and inflation objectives. As I noted on previous occasions, waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession. Incoming data suggest that labor market conditions continue to strengthen and inflation is moving up to 2 percent, consistent with the Committee’s expectations. At our upcoming meetings, the Committee will evaluate whether employment and inflation are continuing to evolve in line with these expectations, in which case a further adjustment of the federal funds rate would likely be appropriate.
The Committee’s view that gradual increases in the federal funds rate will likely be appropriate reflects the expectation that the neutral federal funds rate–that is, the interest rate that is neither expansionary nor contractionary and that keeps the economy operating on an even keel–will rise somewhat over time. Current estimates of the neutral rate are well below pre-crisis levels–a phenomenon that may reflect slow productivity growth, subdued economic growth abroad, strong demand for safe longer-term assets, and other factors. The Committee anticipates that the depressing effect of these factors will diminish somewhat over time, raising the neutral funds rate, albeit to levels that are still low by historical standards.
That said, the economic outlook is uncertain, and monetary policy is not on a preset course. FOMC participants will adjust their assessments of the appropriate path for the federal funds rate in response to changes to the economic outlook and associated risks as informed by incoming data. Also, changes in fiscal policy or other economic policies could potentially affect the economic outlook. Of course, it is too early to know what policy changes will be put in place or how their economic effects will unfold. While it is not my intention to opine on specific tax or spending proposals, I would point to the importance of improving the pace of longer-run economic growth and raising American living standards with policies aimed at improving productivity. I would also hope that fiscal policy changes will be consistent with putting U.S. fiscal accounts on a sustainable trajectory. In any event, it is important to remember that fiscal policy is only one of the many factors that can influence the economic outlook and the appropriate course of monetary policy. Overall, the FOMC’s monetary policy decisions will be directed to the attainment of its congressionally mandated objectives of maximum employment and price stability.
Finally, the Committee has continued its policy of reinvesting proceeds from maturing Treasury securities and principal payments from agency debt and mortgage-backed securities. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, has helped maintain accommodative financial conditions.
Thank you. I would be pleased to take your questions.
Morning News: February 14, 2017
Posted by Eddy Elfenbein on February 14th, 2017 at 7:07 am
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The S&P 500 Breaks 2,325
Posted by Eddy Elfenbein on February 13th, 2017 at 10:09 am
The stock market is up again today. The S&P 500 dipped its head above 2,323 this morning.
Our Buy List is mostly doing well today. On Friday, shares of Cerner dropped more than 4.4% after its earnings report. The stock appears to have stabilized this morning.
Janet Yellen will be testifying before Capitol Hill today as part of her semi-annual Humphrey-Hawkins testimony. She goes before the Senate on Tuesday, then the House on Wednesday. Long-time readers may remember when I saw Bernanke testify. (I got the seat right behind him.)
Morning News: February 13, 2017
Posted by Eddy Elfenbein on February 13th, 2017 at 7:09 am
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Morningstar on Ingredion
Posted by Eddy Elfenbein on February 10th, 2017 at 7:11 pm
Ingredion (INGR) is benefiting from secular drivers of growth in ingredients, including health and wellness trends (removing salt, fat, sugar, and sodium and reducing calories and raw material costs); demographics (growing urban populations and more women working in developing markets); and more snacking and demand for processed and convenience foods in developed markets.
The investment case is built on specialty ingredients’ growing share (26% of sales) at the expense of low-value-added, or core, ingredients (74% of sales), which are barely growing and are much less profitable. We think the specialty segment has an operating margin of 30% and generates 47% of EBIT, while the core segment has an 11.5% margin and generates 53% of EBIT. By 2020, we expect specialty will generate 32% of sales and 54% of operating profit, accounting for three fourths of the increase in Ingredion’s operating profit over 2016-20. Because Ingredion’s acquisition strategy is focused on expanding the specialty segment, specialty’s share of sales and profit is likely to be higher than that achievable from organic growth alone.
CWS Market Review – February 10, 2017
Posted by Eddy Elfenbein on February 10th, 2017 at 7:06 am
“Do you know the only thing that gives me pleasure?
It’s to see my dividends coming in.” – John D. Rockefeller
Here are some stats to show you just how calm this market has been. The S&P 500 has now gone 83 days in a row without a 1% drop. We’ve gone 43 days without a 1% move of any kind. The distance between the daily high and low has been less than 1% for the last 38 days running. That’s longest such streak in more than 40 years.
A calm market is usually a good market, and on Thursday, the S&P 500 closed at 2,307.87, yet another all-time high. Since the Friday before the election, the index has vaulted 10.7%. Since the bull market that began nearly eight years ago, the S&P 500 Total Return index has quadrupled. The rally is officially a four-bagger.
Overall, this has been a good earnings season. Interestingly, the WSJ noted that half of the earnings calls this season have mentioned President Trump. I’m happy to say that our Buy List continues to do well. This week, Fiserv rallied after its earnings report. Intercontinental Exchange raised its dividend by 18%. Cognizant Technology jumped 5% on Wednesday after the company beat earnings and initiated a dividend.
This week’s CWS Market Review will be all about earnings. I’ll go over our recent earnings news, plus I’ll also highlight next week’s earnings reports. Let’s get to it.
ICE Beats and Raises Dividend
We’re now in the back half of earnings season, but we still have a few more Buy List stocks left to report. On Tuesday of this week, Intercontinental Exchange (ICE) reported Q4 earnings of 71 cents per share. That was two cents better than estimates. Quarterly revenue rose 30.1% to $1.14 billion, which matched estimates.
The stock-exchange operator said:
“Amidst a volatile and dynamic environment, we delivered our eleventh consecutive year of record revenue.” ICE Chairman and CEO Jeffrey C. Sprecher continued: “Despite the challenges of market volatility driven by geopolitics, we achieved our objectives by working closely with our customers across trading, risk management and data to again deliver strong revenue growth, margin expansion and double-digit profit increases. We are excited about collaborating with our customers in 2017, given the range of ways we are working to serve their evolving trading, listing, data and risk-management needs.”
Scott A. Hill, ICE CFO, added: “In the first year of our integration of Interactive Data, we surpassed our synergy target and met our ambitious revenue-growth target while expanding margins. We also generated record operating cash flow of $2.1 billion in 2016, which enabled us to reduce our debt by approximately $1 billion, announce our third double-digit increase in our dividend, and increase our share repurchases for 2017. Our strategy, execution, and disciplined capital allocation have led to significant value creation and future growth opportunities.”
ICE’s full-year EPS rose from $2.43 to $2.78. This was their eleventh straight year of record revenues and earnings. I like this company a lot. ICE also raised their quarterly dividend from 17 to 20 cents per share. True, the stock hasn’t had much in the way of yield, but it’s nice to see the board reward shareholders. For 2017, the company sees revenues adjusted for currency rising by at least 6%.
One troubling item is that the SEC may sue ICE for the way it handled a trading glitch in 2015. The company is firm that it did not break the law, but the news rattled traders as the stock dropped 4.8% on Wednesday. I’m concerned but not overly worried. This week’s results clearly show us that ICE is a well-run enterprise. ICE remains a buy up to $61 per share.
Cognizant Heeds Activist’s Advice
The IT outsourcer offered Q1 guidance of 83 cents per share, and full-year guidance of $3.63 per share. Both were a bit below expectations, but not much.
But the most important news is that Cognizant said they reached an agreement with Elliott Management. Elliott is an activist investment group, which means they like to take a large position in a company and then advocate for changes to boost the stock.
In November, Elliott sent a letter to Cognizant outlining ways they could help their stock. At the time, I noted that many of Elliott’s criticisms were, to my ears, compliments. They claimed CTSH was too conservative; they have too much cash and too little debt. I remember reading the letter and thinking, “yes, exactly why I like them!”
Cognizant has now agreed to some of Elliott’s proposals. They’re going to add three new board members from Elliott. Cognizant also plans to return $3.4 billion to shareholders over the next two years. CTSH currently has a bank account of more than $2 billion. Next quarter, they plan to start a dividend of 15 cents per share.
Traders were happy, which is obviously what Elliott was going for. The stock jumped nearly 5% on Wednesday. Over the last five days, the shares have gained 12.2%. This week, I’m lifting my Buy Below on Cognizant to $61 per share.
Also on Wednesday, Axalta Coating Systems (AXTA) reported earnings of 28 cents per share. That was one penny below estimates. Quarterly revenues rose 2% to $1.03 billion, which was a little better than estimates. In constant currency, sales rose 5.6%.
Despite the miss, this was a decent quarter for Axalta.
“Axalta’s 2016 financial period ended on a strong note, with fourth-quarter net sales and operating performance slightly exceeding the expectations set in October, driven by volume and favorable product mix. For the full year, we also met our key objectives in terms of financial and operating performance, despite a somewhat greater foreign-currency headwind,” said Charles W. Shaver, Axalta’s Chairman and Chief Executive Officer. “We are proud of the progress we made this year, including achieving positive growth in a tough global economy, successfully executing on our M&A strategy, meeting our leverage target ahead of plan and improving productivity through our Axalta Way initiatives. Key milestones were also met in new product technology introduction, refinancing our capital structure and progressing our product-globalization and commercial-excellence objectives. We look forward to ongoing momentum in each of these areas in 2017.”
For 2016, Axalta made $1.10 per share. The company didn’t provide EPS guidance, but they laid out some expectations for 2017:
Adjusted EBITDA of $930 to $980 million
Free cash flow of $440 to $480 million
Diluted shares outstanding of 246 to 249 million
There’s really not a lot to say, except that Axalta continues to do well. The stock dropped a bit on the news but quickly made it back.
Fiserv Jumps on Optimistic Guidance
The details were pretty good. I was especially pleased to see an increase in operating margins.
Adjusted operating margin expanded 140 basis points to 32.1 percent in the fourth quarter and 50 basis points to 32.2 percent for the full year, compared to the prior-year periods.
Free cash flow increased 8 percent to $1.08 billion for the full year, compared to the prior year. Cash distributions from StoneRiver of $151 million in 2016 related to the sale of a business interest have been excluded from the company’s free cash-flow results.
Sales performance increased 22 percent in the fourth quarter and 21 percent for the full year compared to the prior-year periods.
Fiserv expects its internal revenue to grow between 4% and 5%, and EPS to range between $5.03 and $5.17. That would be a growth rate of 14% to 17%. Wall Street had been expecting $4.97 per share. The shares rallied on the news, and FISV is close to another all-time high.
Cerner Earns 61 Cents per Share
On Thursday afternoon, Cerner (CERN) reported Q4 earnings of 61 cents per share. That matched Wall Street’s consensus. A few weeks ago, the company told us to expect Q4 earnings between 60 and 62 cents per share. For the year, Cerner made $2.30 per share, which is up from $2.11 per share in 2015.
The company’s “systems sales” were down sharply but they made up it for with strong numbers from their “support, maintenance and services.”
Now for guidance. For Q1, Cerner sees earnings between 57 and 59 cents per share. For the year, they expect earnings between $2.44 and $2.56 per share. That compares with Wall Street’s consensus of 59 cents and $2.56 per share. Frankly, I was hoping to see better numbers here. This week, I’m lowering my Buy Below on Cerner to $55 per share.
Three Buy List Earnings Reports Next Week
We have three Buy List earnings reports coming next week.
On Tuesday, Express Scripts (ESRX) is due to report. The pharmacy-benefits manager has been attacked recently by Andrew Left, a noted short-seller. I should caution you that Left isn’t known for subtlety. He compared Express to John Gotti. (Seriously.)
In any event. I think Left is off base. Express Scripts said they expect 2016’s earnings to come in between $6.36 to $6.42 per share. That means Q4 earnings should range between $1.84 to $1.90 per share. The Street expects $1.87 per share.
On Friday, Moody’s (MCO) will report. Three months ago, the credit-ratings agency reported an earnings increase of 21%. I was pleased to see the firm recently settle with the government regarding its behavior during the financial crisis. For Q4, Moody’s said they expect EPS to range between $1.03 and $1.13. I think they can make more than 4% per share for this year.
On Friday, we’ll also get a report from JM Smucker (SJM). It’s an early bird from the January reporting cycle. Smucker will actually report before some of the laggards from the December cycle like Wabtec (WAB) and Cinemark (CNK). The upcoming earnings report will be Smucker’s fiscal third. In November, the company easily beat estimates. SJM now sees full-year earnings (ending in April) coming in between $7.60 and $7.75 per share, “with a bias toward the middle to high end of the range.”
That’s all for now. Stay tuned for more earnings reports next week. On Wednesday, we’ll get the CPI report for January. Inflation continues to be tame, but I’m curious if we see any cost pressures. We’ll also get reports on retail sales and industrial production. The last IP report was very good. It was the best in two years. 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: February 10, 2017
Posted by Eddy Elfenbein on February 10th, 2017 at 7:01 am
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Morning News: February 9, 2017
Posted by Eddy Elfenbein on February 9th, 2017 at 6:54 am
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Fiserv Earns $1.16 per Share
Posted by Eddy Elfenbein on February 8th, 2017 at 4:12 pm
After the bell, Fiserv (FISV) reported Q4 earnings of $1.16 per share which matched the Street’s consensus. For the year, the company made $4.43 per share.
Adjusted operating margin expanded 140 basis points to 32.1 percent in the fourth quarter and 50 basis points to 32.2 percent for the full year compared to the prior year periods.
Free cash flow increased 8 percent to $1.08 billion for the full year compared to the prior year. Cash distributions from StoneRiver of $151 million in 2016 related to the sale of a business interest have been excluded from the company’s free cash flow results.
Sales performance increased 22 percent in the fourth quarter and 21 percent for the full year compared to the prior year periods.
The company repurchased 11.9 million shares of common stock for $1.20 billion in 2016, which included 2.6 million shares of common stock for $265 million in the fourth quarter. The company announced a new 15 million share repurchase authorization in the quarter and had 20.5 million remaining shares authorized for repurchase as of December 31, 2016.
Fiserv expects its internal revenue to grow between 4% and 5%, and EPS to range between $5.03 and $5.17. That would be a growth rate of 14% to 17%. Wall Street had been expecting $4.97 per share.
Earnings from Axalta and Cognizant
Posted by Eddy Elfenbein on February 8th, 2017 at 10:54 am
We had two more Buy List earnings reports this morning. Axalta Coating Systems (AXTA) reported earnings of 28 cents per share which was one penny below estimates. Quarterly revenues rose 2% to $1.03 billion, which was a little better than estimates. In constant currency, sales rose 5.6%.
Despite the miss, this was a decent quarter for Axalta.
“Axalta’s 2016 financial period ended on a strong note, with fourth quarter net sales and operating performance slightly exceeding the expectations set in October, driven by volume and favorable product mix. For the full year, we also met our key objectives in terms of financial and operating performance, despite a somewhat greater foreign currency headwind,” said Charles W. Shaver, Axalta’s Chairman and Chief Executive Officer. “We are proud of the progress we made this year, including achieving positive growth in a tough global economy, successfully executing on our M&A strategy, meeting our leverage target ahead of plan, and improving productivity through our Axalta Way initiatives. Key milestones were also met in new product technology introduction, refinancing our capital structure, and progressing our product globalization and commercial excellence objectives. We look forward to ongoing momentum in each of these areas in 2017.”
The company doesn’t provide EPS guidance, but here are the numbers they’re expecting for 2017:
• Net sales growth of 1-3% as-reported; 4-6% ex-FX, including acquisition contribution of 2-3%
• Adjusted EBITDA of $930-980 million
• Interest expense of ~$150 million
• Income tax rate, as adjusted, of 22-24%
• Free cash flow of $440-480 million
• Capital expenditures of ~$160 million
• Depreciation and amortization of ~$335 million
• Diluted shares outstanding of 246-249 million
The stock is currently down about 1.6%.
Cognizant Technology Solutions (CTSH) said it made 87 cents per share last quarter, which beat estimates by one penny. For the year, Cognizant made $2.55 per share.
They company offered Q1 guidance of 83 cents per share, and full-year guidance of $3.63 per share. That’s a bit below expectations.
But the more important news is that the company has reached an agreement with Elliott Management. They’re adding three new board members from Elliott. Cognizant also plans to return $3.4 billion to shareholders in the next two years. The company currently has a bank account of more than $2 billion. They also plan to start a dividend of 15 cents per share in Q2.
The stock is up about 4% today.
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