CWS Market Review – November 8, 2013

“Wisely and slow; they stumble that run fast.” – Romeo and Juliet, Act II, Scene 3

Third-quarter earnings season is just about over, and it’s been a fairly good one for Wall Street. The latest numbers show that 442 of the S&P 500 companies have reported so far. Of those, 74% have beaten earnings estimates. It looks like the final numbers will show that earnings grew by 4.1% for Q3. Analysts currently expect to see 6.8% growth for Q4. This continues the earnings-acceleration trend we’ve seen this year.

For our Buy List, this has been an exceptionally strong earnings season. This past week, we saw excellent earnings reports from Cognizant Technology Solutions ($CTSH) and DirecTV ($DTV). CTSH not only beat earnings: they raised guidance, and the shares broke out to a new all-time high on Thursday (see chart below). DirecTV smashed earnings by 26 cents per share. Through Thursday, our Buy List is up 29.25% for the year, which is 6.75% more than the S&P 500. That’s our largest lead of the year. If our lead holds up for eight more weeks, it will be the seventh year in a row that we’ve beaten the market.

In this week’s CWS Market Review, I’ll cover our recent earnings reports. I also want to highlight Ford Motor ($F), which is going for a very attractive price. Later on, I’ll focus on some earnings reports due later this month. But first, let’s look at the great earnings report from Cognizant Technology.

Cognizant Technology Beats and Guides Higher

In last week’s CWS Market Review, I said that I expected Cognizant Technology ($CTSH) to beat Wall Street’s earnings estimate—and that’s exactly what happened. On Tuesday, the IT consulting firm reported Q3 earnings of $1.13 per share, which was four cents higher than Wall Street’s consensus. Quarterly revenues rose 21.9% to $2.31 billion, $50 million more than consensus.

This was a very good quarter. Cognizant’s president said, “Our performance during the quarter was stronger than anticipated due to a faster ramp up in demand for outsourcing services and strong discretionary spending on consulting and technology services.” Interestingly, Cognizant benefited from the rollout of the Affordable Care Act, often known as Obamacare. What happened is that a lot of companies and state governments spent money to improve their networks, and that’s very good news for CTSH. Their healthcare business grew by 11% last quarter, which was more than double the rate of their financial-services segment.

But the best news for us is that Cognizant raised their full-year guidance from $4.32 to $4.37 per share. Oh, how I love a beat-and-raise announcement! Full-year revenue is expected to be at least $8.84 billion, which is an increase of 20.3% over last year.

In the CWS Market Review from June 28, I wrote, “One stock on our Buy List that looks particularly attractive at the moment is Cognizant Technology Solutions.” We got that one right. CTSH is up more than 41% since then, and it hit a new all-time high on Thursday. This is still a good buy, although not a super buy like it was in June. This week, I’m raising my Buy Below on Cognizant to $94 per share.

DirecTV Smashes Estimates

Our other big winner this week was DirecTV ($DTV). DTV reported Q3 earnings of $1.28 per share, which was 26 cents more than consensus. Now that’s an earnings beat! In the U.S., DirecTV added 139,000 subscribers, which doubled expectations. Bear in mind that this is happening at the same time that Time Warner and Comcast are hemorrhaging subscribers.

To use the business jargon, DTV is benefiting from a low “churn rate,” which is a fancy way of saying that they’re not giving folks a good reason to cancel. I think a lot of that is due to their NFL Sunday Ticket package. They’ve also benefited from the mini-war between CBS and Time Warner. DTV’s churn rate is especially impressive considering that they’ve been able to raise their prices.

DirecTV’s quarterly revenue rose 6.3% percent to $7.88 billion, which barely topped expectations. I should add that their bottom line included some special items and a fee settlement, but even taking those into consideration, DirecTV handily beat expectations.

Latin America continues to be a strong growth area for DirecTV. They added 260,000 subscribers in that region, which is less than I was expecting. After the earnings report, the stock jumped, then plunged, but soon stabilized. Don’t let the short-term volatility scare you. This is a good stock. I’m raising my Buy Below on DirecTV to $67 per share.

Ford Is an Exceptionally Good Buy Here

Every so often I like to highlight stocks that are exceptionally good buys, as I did with Cognizant this summer. Right now, Ford Motor ($F) is one of the best bargains on our Buy List.

The stock has pulled back recently, and on Thursday Ford closed at $16.55 per share. That’s less than 10 times this year’s earnings estimate. I usually recommend a dose of skepticism when dealing with Wall Street estimates, but in this case, that estimate includes three quarters of results, so it’s not exactly a wild guess.

What’s interesting is that Ford has fallen back at the same time Microsoft ($MSFT) has rallied. In fact, Microsoft just touched a 12-year high. The two events are connected. For several weeks there’s been speculation that Ford’s CEO Alan Mulally would leave Ford to become the new CEO at Microsoft. A lot of traders have been riding the Mulally play (long MSFT, short F). I’ve downplayed these rumors, and I’m still a doubter, but an influential analyst said this week that it’s very likely. Nomura’s Rick Sherlund said that Mulally will be named MSFT’s CEO by December.

While losing Mulally would be a setback for Ford, I think it’s a mistake to think Ford would be cast adrift. Ford’s turnaround is already well established, and they’re spreading that strategy to Europe. Just two weeks ago, the automaker announced another strong earnings report, and they raised guidance. Also, Ford’s losses in Europe were much better than expected.

Ford has now delivered 17 straight profitable quarters in a row. I also expect the company will raise their quarterly dividend in January. The current dividend is 10 cents per share, and I think it can rise to 12 or 13 cents per share. At 13 cents, or 52 for the year, that gives Ford a yield of 3.1% based on Thursday’s close. My take: Ford is worth $22 per share. I currently rate Ford a buy up to $18 per share, but if you can get it below $16.60, that’s a very good deal.

Earnings Preview for Medtronic and Ross Stores

We’ve had all of our Buy List earnings reports for stocks that end their quarter in September. Now we have two coming soon for stocks with October quarters. Medtronic is scheduled to report earnings on Tuesday, November 19. Then on Thursday, November 21, Ross Stores is due to report.

Medtronic ($MDT) has quietly turned into one of our biggest winners this year. The shares are up nearly 40% for the year. The consensus on Wall Street is for earnings of 90 cents per share, which is very doable. The company has said it expects full-year earnings (ending in April) between $3.80 and $3.85 per share. In June, Medtronic raised its dividend for the 36th year in a row. Business is still going well here, and I think they can easily hit their full-year guidance. The CEO said Medtronic is looking to generate $25 billion in free cash flow over the next five years. Medtronic continues to be a good buy up to $57 per share. Be careful not to chase this one.

In August, Ross Stores ($ROST) said that it expects earnings to range between 75 and 78 cents per share, which I think is a conservative forecast. The Street expects 80 cents per share. Ross has been a very strong performer for us. Last week, I raised the Buy Below to $81 per share. Ross Stores remains a solid buy.

That’s all for now. Next week should be a fairly quiet week on Wall Street. Earnings season is just about over, and there are only a few economic reports scheduled. On Thursday, the Census Bureau will release the trade report. Then on Friday, the Fed will report on Industrial Production. 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 Eddy Elfenbein on November 8th, 2013 at 7:11 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.