Archive for July, 2018

• Stryker Earns $1.76 per Share for Q2
  Eddy Elfenbein, July 24th, 2018 at 4:26 pm

  Stryker (SYK) reported Q2 earnings of $1.76 per share. That’s above their guidance range of $1.70 to $1.75 per share. Net sales rose 10.3% to $3.3 billion.

  “We continue to execute on our strategy and delivered another strong quarter of organic sales growth, adjusted operating margin expansion and adjusted net earnings per diluted share,” said Kevin A. Lobo, Chairman and Chief Executive Officer. “Our diversified and decentralized business unit model combined with strong talent and culture continue to serve us well. We have raised our guidance to reflect the strong results and positive outlook for the remainder of the year.”

  For Q3, they’re looking for earnings between $1.65 and $1.70 per share. Wall Street had been expecting $1.69 per share.

  For all of 2018, Stryker now expects earnings to range between $7.22 and $7.27 per share. That’s the second increase. SYK’s initial range was $7.07 to $7.17 per share. Then it went to $7.18 to $7.25 per share.

  Business details:

  Consolidated net sales of $3.3 billion increased 11.0% in the quarter and 9.9% in constant currency. Organic net sales increased 7.9% in the quarter including 9.0% from increased unit volume partially offset by 1.1% from lower prices.

  Orthopaedics net sales of $1.2 billion increased 8.0% in the quarter and 6.6% in constant currency. Organic net sales increased 6.6% in the quarter including 8.9% from increased unit volume partially offset by 2.3% from lower prices.

  MedSurg net sales of $1.5 billion increased 10.0% in the quarter and 9.2% in constant currency. Organic net sales increased 7.3% in the quarter including 7.6% from increased unit volume partially offset by 0.3% from lower prices.

  Neurotechnology and Spine net sales of $0.6 billion increased 20.1% in the quarter and 18.5% in constant currency. Organic net sales increased 12.4% in the quarter including 13.3% from increased unit volume partially offset by 0.9% from lower prices.

  Earnings Analysis

  Reported net earnings of $452 million increased 15.6% in the quarter. Reported net earnings per diluted share of $1.19 increased 15.5% in the quarter. Reported net earnings include certain items, including charges for acquisition and integration-related activities, the amortization of purchased intangible assets, restructuring-related and other charges, compliance with European Medical Devices Regulation, Rejuvenate and other recall-related matters, regulatory and legal matters and tax matters. The effect of each of these matters on reported net earnings and net earnings per diluted share appear in the reconciliation of GAAP to non-GAAP financial measures. Excluding the aforementioned items increases gross profit margin from 65.9% to 66.1% in the quarter and increases operating income margin from 20.2% to 25.7%(1), including a 20 basis point favorable impact related to the adoption of the new revenue recognition standard(2). Excluding the impact of the items described above, adjusted net earnings(4) of $670 million increased 15.3% in the quarter. Adjusted net earnings per diluted share(3) of $1.76 increased 15.0% in the quarter.

• The Yen’s Impact on AFLAC
  Eddy Elfenbein, July 24th, 2018 at 3:05 pm

  Here’s an interesting chart I wanted to show you. It shows AFLAC divided by the S&P 500 (in red) along with the yen/dollar (in blue).

  

  The yen line is dollars per yen which is the inverse of how it’s normally discussed. I did this to show the correlation between the two.

  Speaking of the correlation, the chart shows that they’re kind of related, but it’s not a very strong relationship.

  In particular, the red line has dropped recently, meaning AFL has lagged. Some of this is probably due to the exchange rate, but I suspect that’s not all.

  We’ll know more when AFLAC reports this week. I think the negative impact of the yen won’t dampen a solid earnings report.

• Wabtec Earned 96 Cents per Share
  Eddy Elfenbein, July 24th, 2018 at 9:27 am

  The other earnings report this morning came from Wabtec (WAB). For Q2, the company made 96 cents per share. That beat estimates by three cents per share. They also increased full-year guidance.

  Raymond T. Betler, Wabtec’s president and chief executive officer, said: “Our second-quarter results were on target, and with a strong backlog and the positive indicators we see in our markets we’re comfortable increasing our guidance for the year. Our freight business demonstrated strong growth in revenues and income from operations, and we expect demand to continue to improve. In transit, as expected we are managing through some lower-margin contracts in the short term while making long-term improvements in the core business. Overall, we’re pleased with our year-to-date performance, excited about the opportunities we see from our combination with GE Transportation and confident we can deliver improved earnings, margins and cash flow in the future.”

  Wabtec increased its guidance for the year, with revenues now expected to be about $4.2 billion and EPS expected to be about $3.85 excluding estimated costs related to the proposed GE Transportation merger, expenses for restructuring and the effects of tax law changes. The company’s adjusted operating margin target for the full year is about 13.5 percent, and its effective tax rate for the full year is expected to be about 24 percent excluding the second quarter tax benefit.

• Sherwin-Williams Earns $5.73 per Share
  Eddy Elfenbein, July 24th, 2018 at 9:17 am

  The second-quarter earnings report from Sherwin-Williams (SHW) is out. The company made $5.73 per share for Q2. That beat estimates by seven cents per share. The company is also increasing its guidance range for this year to $19.05 to $19.35 per share.

  CEO John G. Morikis said, “The Company posted record results in net sales, gross profit, and profit before taxes in the second quarter, aided by the Valspar acquisition which continues to build momentum. Consolidated earnings per share expanded by 26.8% percent in the quarter, excluding acquisition-related costs and environmental expense provisions impacts in both years. Underlying demand remained solid across most of our end market segments during the quarter. At the same time, raw material costs continued to inflate during the quarter at a rate slightly higher than anticipated. We continue to focus on offsetting these escalating costs by controlling spending and implementing price increases.”

• Morning News: July 24, 2018
  Eddy Elfenbein, July 24th, 2018 at 5:07 am

  Portugal Dared to Cast Aside Austerity. It’s Having a Major Revival.

  Trump Trade War Overshadowing Other Potentially Harmful Global Battle

  Big Oil Is Raking In Cash and Investors Are Asking Now What?

  Home Sales Extend Slump Despite Economic Strength

  Trump Just Hijacked a Necessary Conversation About Amazon

  Alphabet Gains as Google Ad Machine Powers Past Record Fine

  Google Loses 2 More Cloud, AI Execs

  Sergio Marchionne’s Exit Jolts Ferrari

  Nike to Bump Up Pay for 7,400 Employees After Internal Review

  Las Vegas Shooting Victims Speak Out Against MGM Lawsuit Against Them

  GE Stock Sinks Again Despite Solid Results

  Whirlpool Sinks With Raw Material Costs Climbing Around the World

  Ben Carlson: How Hard is it to Become a 401(k) Millionaire?

  Michael Batnick: Pick One Stock

  Roger Nusbaum: Lifestyle, Investing and Gurus

  Be sure to follow me on Twitter.

• The Overrated Trade War
  Eddy Elfenbein, July 23rd, 2018 at 12:51 pm

  Goldman Sachs said that a full-blown trade war could shave 15% off the earnings for the S&P 500.

  That may be correct, but I have a few things to add. I would say that the odds of a full blown trade war are very low. The negative impact of anything that has a decent chance of happening are quite low.

  From Goldman:

  “We consider adverse scenarios in which tariffs are placed on all imports from China or globally. For all US industry, roughly 15% of cost of goods sold (COGS) is imported. We assume that S&P 500 companies, which are more global in nature and have more complex supply chains, import roughly 30% of COGS. This is consistent with the 29% of S&P 500 sales is generated outside the US. Imports from China comprise 18% of total US imports. Conservatively assuming no substitution to other suppliers or pass-through of costs, and no boost to domestic revenues or change in economic activity, a 10% tariff on all imports from China would lower our 2019 S&P 500 EPS estimate by 3% to $165. If tensions spread and a 10% tariff were implemented on all US imports (highest rate since 1940s) our EPS estimate would fall by 15% to $145.”

  Don’t get me wrong — a trade war is bad, but a minor skirmish won’t destroy us.

• Morning News: July 23, 2018
  Eddy Elfenbein, July 23rd, 2018 at 7:16 am

  Bank of Japan Offers Unlimited Bond Buying After Yields Jump

  Donald Trump’s Tweets on Stocks and His Approval Rating Hint Where the Trade War With China May Be Heading

  Imagine a World Without OPEC

  The Big Short Of 2018

  Alphabet Bulls Looking for Earnings Spark From FANG Laggard

  French IT Firm Expands in U.S. With $3.4 Billion Deal

  Microsoft: Letting This Bull Rampage On

  Sudden CEO Shift Jolts Fiat Chrysler

  China Tower Seeks to Raise Up to $8.7 Billion in Hong Kong IPO

  Ryanair Warns Labor Strife Is Starting to Bite as Profit Slides

  Tesla Asks Suppliers for Cash Back to Help Turn a Profit

  Papa John’s Board Votes to Adopt ‘Poison Pill’ Against Founder

  Howard Lindzon: Another Open Letter to Twitter

  Roger Nusbaum: What To Do If Sandinistas Ruin Your Retirement Plan

  Jeff Miller: Weighing the Week Ahead: A Delicate (and Temporary) Balance

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• CWS Market Review – July 20, 2018
  Eddy Elfenbein, July 20th, 2018 at 7:08 am

  “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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• Morning News: July 20, 2018
  Eddy Elfenbein, July 20th, 2018 at 7:05 am

  China’s Rising Economic Pressure Prompts Talk of Policy Rethink

  Google’s Loon Brings Internet-By-Balloon to Kenya

  The $20 Billion Question for Guyana

  Dollar Bulls Learn the Meaning of Complacency

  Trump Says He’s ‘Ready To Go’ With $500 Billion in Tariffs on All China Imports

  Trump Lays Into the Federal Reserve, Says He’s ‘Not Thrilled’ About Interest Rate Hikes

  Microsoft Set for Record High Open as Cloud Sales Drive Earnings Blowout

  GE Beats Profit Estimates as Aviation, Health Buoy Results

  Amazon Reportedly Had a 300-Person Conference Call to Deal With the Prime Day Glitches

  Merck to Lower Prices on Some Drugs, But Not Blockbusters

  Domino’s Pizza Extends Its Growth Streak

  Thieves Jump on Cobalt Craze With $10 Million Warehouse Heist

  Blue Harbinger: What Do Winning Traders Have In Common?

  Ben Carlson: Surrendering to the Charms of Magical Thinking

  Joshua Brown: The Chart Heard ‘Round the World

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• Trump Dings the Fed
  Eddy Elfenbein, July 19th, 2018 at 1:50 pm

  Earlier today, President Trump mildly criticized the Federal Reserve. I think this is the first time he’s done this as president.

  The president said, “I’m not thrilled because we go up and every time you go up they want to raise rates again. I don’t really — I am not happy about it. But at the same time I’m letting them do what they feel is best. But I don’t like all of this work that goes into doing what we’re doing.”

  Looking at gold and the dollar, I can’t say he’s completely wrong.