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  • CWS Market Review – April 24, 2020
    , April 24th, 2020 at 7:08 am

    “Praise by name, criticize by category.” – Warren Buffett

    This was the week they were giving away oil. I’m not exaggerating. Thanks to the pandemic, the demand for oil has plummeted. As a result, there’s a glut of the stuff and nowhere left to store it. That became a big deal in the trading pits on Monday when no one wanted to touch the futures contract for May West Texas Intermediate.

    And when I say no one, I really mean it. The price for a barrel of oil plunged into the pennies and then actually went negative. You were being paid to take it. If you hold the contract, then you take delivery and that’s that. At its high, meaning its low, folks were getting paid $37 per barrel just to take it off someone’s hands.

    Of course, this was more of a technical glitch, and the storage capacity issue will be remedied soon. But it’s another example of how the coronavirus has upended the economy. On Thursday we learned that the U.S. economy has now lost all the jobs it created since the last recession. What took 11 years to make only needed five weeks to destroy.

    This week’s issue is solely dedicated to earnings. We had a lot of them this time, and more are coming next week as well. So far, four of our five stocks beat the Street. Only Hershey missed expectations. Silgan Holdings not only beat the forecast, but it raised guidance and hit a new 52-week high. Not bad for a can-maker. (Sorry, a diversified consumer-goods packaging manufacturer.)

    There’s a lot to get to, so let’s jump into this week’s Buy List earnings reports.

    Five Buy List Earnings Reports this Week

    Stepan (SCL) kicked off earnings season for us on Tuesday when it reported Q1 earnings of $1.04 per share. That includes the impact of a power outage at their Millsdale plant. Excluding that, Stepan is doing quite well. The consensus of the three analysts who follow Stepan was for earnings of 78 cents per share.

    If you’re not familiar with Stepan, the company is a major manufacturer of specialty and intermediate chemicals that are used in a broad range of industries.

    Although Stepan is classified with other specialty-chemical companies, it’s unique in the industry. Stepan doesn’t have a competitor or competitors to precisely match its businesses because its products have a specific focus.

    Stepan makes surfactants, the key ingredients in consumer and industrial cleaning compounds. That includes things like detergents, fabric softeners, shampoos, and lotions. Surfactants make them clean and foam. In other words, Stepan makes a lot of stuff that should be flying off the shelves right now.

    Stepan has three operating divisions. For Q1, Surfactants had operating income of $36.2 million. Polymers was at $7.5 million, and Specialty Products did $4.0 million. The company is also in a strong position financially. Stepan currently has over $250 million more in cash than in debt. Plus, it has access to a credit line of $350 million if it needs it.

    The CEO said that excluding the Millsdale issue, Stepan had a solid start to the year. Last quarter, Stepan paid out $6.2 million in dividends and bought back 260,605 shares for $7.2 million. The company has increased its dividend every year for 52 years. This week, I’m lowering my Buy Below on Stepan to $100 per share.

    Without almost anyone noticing, Silgan Holdings (SLGN) became our top performer this year. It’s up over 8% for us in 2020. On Wednesday, the company reported Q1 earnings of 57 cents per share. That beat expectations by seven cents per share. Net sales rose 0.3% to $1.03 billion.

    For Q2, Silgan sees earnings between 55 and 70 cents per share. For the whole year, Silgan estimates earnings will range between $2.30 and $2.50 per share. That’s an increase from the previous range of $2.28 to $2.38 per share. Not many companies are raising guidance in this environment.

    CEO Tony Allott noted that Silgan has been declared “essential” by many government agencies. In February, the company raised its dividend by 9%. Silgan has raised its dividend every year for the last 16 years in a row. The shares just touched a new 52-week high. I’m lifting my Buy Below on Silgan to $36 per share.

    After the close on Wednesday, Globe Life (GL) reported net operating income for the quarter of $1.73 per share. That was two cents above expectations.

    For the quarter, GL’s return on equity was 14.1%. Globe Life sees full-year EPS ranging between $6.65 and $7.15. The earlier estimate was for $7.03 to $7.23 per share. Considering what’s happened to the economy, that downward adjustment isn’t that bad.

    I’m lowering GL’s Buy Below to $80 per share.

    Also on Wednesday, Eagle Bancorp (EGBN) reported Q1 earnings of $23.1 million. That works out to 70 cents per share. That’s below the estimate of 92 cents per share. However, the bank had legal fees of $4.6 million last quarter. That comes to about 14 cents per share. Eagle now has total assets of $10.01 billion. (Note: This paragraph has been updated to correct for an error in the emailed version of the newsletter.)

    For the quarter, Eagle had a net interest margin of 3.49%, and the efficiency ratio was 43.83%. Both are pretty good. I think our thesis holds that this is a good bank that’s been held back by legal fees and old issues involving people no longer with the bank. Once that matter clears up, EGBN should get a much better valuation. I’m lowering my Buy Below on Eagle to $34 per share.

    Here’s a major footnote to those results. The compensation to the former CEO was $6.2 million, or 13 cents per share. So excluding that, Eagle made a nice $1.11 per share last quarter. That’s a pretty bit of change the former CEO got.

    Our winning streak ended with Hershey (HSY). On Thursday, the candy company reported Q1 earnings of $1.63 per share. That was eight cents below estimates. Sales rose 1% to $2.04 billion. Constant-currency sales were up 0.5%.

    CEO Michele Buck said, “We had a solid start to the year with our business performing as expected prior to the impact of COVID-19.” Then came the coronavirus, and business started to suffer.

    In January, the chocolatier said it expected full-year earnings between $6.13 and $6.24 per share. On Thursday, Hershey withdrew that guidance, although the company said it stands by its long-run goal of growing EPS by 6% to 8%. The shares fell about 4% in Thursday’s trading.

    I’m lowering my Buy Below on HSY to $150 per share.

    Eight More Buy List Reports Next Week

    Here’s the updated Earnings Calendar.

    Company Ticker Date Estimate Result
    Stepan SCL 21-Apr $0.78 $1.04
    Eagle Bancorp EGBN 22-Apr $0.92 $0.70
    Globe Life GL 22-Apr $1.71 $1.73
    Silgan Holdings SLGN 22-Apr $0.50 $0.57
    Hershey HSY 23-Apr $1.71 $1.63
    Check Point Software CHKP 27-Apr $1.38
    Cerner CERN 28-Apr $0.70
    AFLAC AFL 29-Apr $1.10
    Sherwin-Williams SHW 29-Apr $3.94
    Church & Dwight CHD 30-Apr $0.77
    Intercontinental Exchange ICE 30-Apr $1.24
    Moody’s MCO 30-Apr $2.19
    Stryker SYK 30-Apr $1.83
    Trex TREX 4-May $0.61
    Disney DIS 5-May $0.88
    ANSYS ANSS 6-May $0.80
    Becton Dickinson BDX 7-May $2.37
    Danaher DHR 7-May $1.01
    Fiserv FISV 7-May $1.01
    Broadridge Financial Solutions BR 8-May $1.72
    Middleby MIDD TBA $1.36

    Next week will be another busy one for us. We have eight Buy List stocks scheduled to report.

    Let’s start with Check Point Software (CHKP). The company will report Q1 earnings on Monday, April 27. Three months ago, the cyber-security outfit reported Q4 earnings of $2.02 per share. That beat the Street by three cents per share.

    In the last earnings report, the company announced a big $2 billion extension to its share-buyback program. Check Point hasn’t provided any guidance for 2020. For Q1, Wall Street expects $1.38 per share.

    On Tuesday, it’s Cerner’s (CERN) turn. In February, Cerner said it sees Q1 earnings of 69 to 71 cents per share. For all of 2020, they forecast $3.09 to $3.19 per share. I haven’t seen any updates since then.

    The healthcare-IT company recently talked about the possibility of having 27,000 employees work from home. Wall Street expects Q1 earnings of 70 cents per share. The stock has gained 34% from its low one month ago.

    Two companies are due to report next Wednesday: AFLAC and Sherwin-Williams.

    Shares of AFLAC (AFL) got hit hard during the scary bear market. The stock lost half its value in 18 trading days. The good news is that it’s come back a lot. AFL is now up more than 50% from its low.

    I like the duck stock a lot, and I admire the firm’s management. For 2020, AFLAC said it’s looking for earnings of $4.32 to $4.52 per share. That assumes an exchange rate of 109.07 yen to the dollar (which was the average for 2019).

    Earlier this year, AFLAC raised its quarterly dividend from 27 cents to 28 cents per share. This was their 37th annual dividend increase in a row. For Q1, Wall Street expects $1.10 per share.

    Sherwin-Williams (SHW) had a weak Q4, so I’ll be curious to see how well the paint folks rebounded in Q1. The CEO noted “softness in certain industrial-end markets and choppiness in our international businesses.”

    Sherwin is another stock that recently gave us a nice dividend boost. Last month, Sherwin hiked its dividend by 19%. That was its 41st dividend increase in a row. For 2020, Sherwin-Williams expects earnings to range between $22.70 and $23.50 per share. For Q1, Wall Street expects earnings of $3.94 per share.

    Next Thursday, April 30 will be a busy day for us. We have four more Buy List earnings reports.

    Let’s start with Church & Dwight (CHD), which has been one of our better-performing stocks this year, meaning it’s actually up for the year. For Q4, they hit expectations on the nose.

    For Q1, C&D expects earnings of 73 cents per share. For all of 2020, the company is looking for earnings of $2.64 to $2.69 per share. That’s an increase of 7% to 9% over 2019. CHD hasn’t withdrawn that forecast, but it has taken out $825 million from a credit facility, so it has some short-term cash on hand.

    Earlier this year, before the news was taken over by the virus, Intercontinental Exchange (ICE) was reported to have made an offer to buy eBay. ICE later denied it had made an offer.

    I like to keep an eye on ICE’s data revenue. For Q4, that came in at $559 million which is about what I expected. After two people tested positive for COVID-19, the company closed the trading floor of the NYSE and only had electronic trading. For Q1, Wall Street expects $1.24 per share.

    Moody’s (MCO) got off to a great start for us this year before the shares got wrecked in March. Like many others, Moody’s has rallied back. Their Q4 earnings report was particularly good.

    The ratings agency initially came out with 2020 guidance of $9.10 to $9.30 per share. In March, they reiterated that range, although they said results would be at the lower end. For Q1, the consensus on Wall Street is for earnings of $2.19 per share.

    Last is Stryker (SYK). For Q1, Stryker expects earnings of $2.05 to $2.10 per share, and $9.00 to $9.20 per share for the whole year. Wall Street has pared its consensus for Q1 down to $1.83 per share.

    That’s all for now. The Federal Reserve meets again next week on Tuesday and Wednesday. I’ll be curious to hear what the central bank has to say. Also on Wednesday, we’ll get our first look at the Q1 GDP report which will only be partially affected by COVID-19. Weekly jobless claims will come out on Thursday, and the ISM Manufacturing Index is due out on Friday. 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

  • Morning News: April 24, 2020
    , April 24th, 2020 at 7:04 am

    Global Stocks Falter as Gilead Halts Trial of Potential Coronavirus Treatment

    The Growing Worry for Bondholders: Getting ‘Primed’

    The Oil Industry’s Glut Has a Bright Spot: Tanker Storage

    Frantic for Coronavirus Gear, Americans in Need Turn to China’s Elite

    Mnuchin Faces Tougher Tests After Praise For Opening Cash Spigot

    Here’s Where $881 Billion in U.S. Aid Went in Month of Spending

    Main Street’s Mainstays: How Some U.S. States Tapped Crisis Loans

    Jobless Numbers Are ‘Eye-Watering’ but Understate the Crisis

    Google Will Require Proof of Identity From All Advertisers

    Here’s Why You Can’t Find Frozen Fries, While U.S. Farmers are Sitting on Tons of Potatoes

    Cullen Roche: Letting States Default is Very Dangerous Thinking

    Jeff Miller: Should You Take the Money Or Not

    Michael Batnick: Why Aren’t Stocks Down More?

    Ben Carlson: What’s The Worst Case Scenario for Diversified Portfolios?

    Joshua Brown: Is the Fed Superman or the Antichrist? Gotta Hear Both Sides

    Be sure to follow me on Twitter.

  • Jobless Claims = 4.427 Million
    , April 23rd, 2020 at 8:31 am

    This morning’s jobless claims figure was 4.427 million. That’s about in line with expectations. Continuing claims rose to 15.98 million.

    Combined with the prior four jobless claims reports, the number of Americans who’ve filed for unemployment over the last five weeks is 26.45 million. That number exceeds the 22.442 million jobs added to payrolls since November 2009 when the U.S. economy began to add jobs back after the recession.

    Investors won’t receive the official look at the U.S. unemployment rate for the month of April until May 8. But the Labor Department’s latest nonfarm payrolls report for March showed droves of layoffs at restaurants and bars as some state governments force the closure of the majority of their businesses.

    The March nonfarm report showed payrolls plunged by 701,000 last month, marking the first decline since 2010 and the worst fall since March 2009. The unemployment rate jumped nearly a full percentage point to 4.4% from 3.5%.

    Stock futures are about flat for today’s open.

  • Hershey Misses Earnings
    , April 23rd, 2020 at 8:22 am

    This morning, Hershey (HSY) reported Q1 earnings of $1.63 per share. That was eight cents below estimates. Sales rose 1% to $2.04 billion. Constant currency sales were up 0.5%.

    CEO Michele Buck said, “We had a solid start to the year with our business performing as expected prior to the impact of COVID-19.” Then came the coronavirus and business started to suffer.

    In January, the chocolatier said it expected full-year earnings between $6.13 and $6.24 per share. Today Hershey withdrew that guidance although the company said it stands by its long-run goal of growing EPS by 6% to 8%.

    HSY looks to open lower this morning.

  • Morning News: April 23, 2020
    , April 23rd, 2020 at 7:06 am

    Will the Coronavirus Pandemic Doom North Sea Oil?

    Record U.S. Jobless Claims Wipe Out Post-Great Recession Employment Gains

    Trump Signs Order Suspending Immigration to Curb Job Competition

    U.S. House to Pass Nearly $500 Billion More In Coronavirus Relief

    Private Equity to Get Squeezed Out of Another Stimulus Program

    The $600 Unemployment Booster Shot, State by State

    Credit Cards Start Cutting Limits for People Facing Tough Times

    Bezos Takes Back the Wheel at Amazon

    Warren Buffett’s ‘Fortress’ Is Breached by Coronavirus-Related Shutdowns

    DealBook: Let’s Break a Deal

    Ben Carlson: Do We Need to Worry About Government Debt? & Animal Spirits: Free Oil

    Michael Batnick: Returning Cash to Shareholders is often Better than the Alternative

    Roger Nusbaum: Is There Hope For A One Fund Portfolio?

    Howard Lindzon: Panic With Friends – Oil Edition With Alan Shurr

    Joshua Brown: Relief Payments Are Working

    Be sure to follow me on Twitter.

  • Eagle Bancorp Earned 98 Cents per Share
    , April 22nd, 2020 at 4:55 pm

    After the bell, Eagle Bancorp (EGBN) reported Q1 earnings of $23.1 million. That works out to 98 cents per share which is a one-penny beat. Eagle now has total assets of $10.01 billion.

    Here’s a major footnote. The compensation to the former CEO was $6.2 million, or 13 cents per share. So excluding that, Eagle made a nice $1.11 per share last quarter.

    “For the first quarter of 2020, we are pleased to report continued growth in total loans and total deposits, continued superior operating leverage, and stable asset quality,” noted Susan G. Riel, President and Chief Executive Officer of the Company. Ms. Riel continued, “Capital levels remain strong and the Company’s assets ended the first quarter of 2020 at $10.01 billion, representing 19% growth over the first quarter of 2019, with total shareholders’ equity of $1.18 billion. Net income in the first quarter of 2020 resulted in an annualized return on average assets of 0.98% and an annualized return on average tangible common equity of 8.39%.”

    (…)

    The Company’s performance in the first quarter of 2020 as compared to the first quarter of 2019 was highlighted by growth in average total loans of 8.7%, growth in average total deposits of 10.0%, a net interest margin of 3.49%, and total revenue of $85.2 million. Ms. Riel noted that the Company focuses more on growth of average balances year over year since that measure relates more directly to income statement results. As compared to the fourth quarter of 2019, average loan growth in the first quarter 2020 was 1.6% and average deposits declined by 0.4%. Deposit growth tends to be seasonally lower in the first quarter of each year. The efficiency ratio, which measures the ratio of noninterest expense to total revenue, for the first quarter of 2020 was 43.83% as compared to 43.87% for the first quarter of 2019.”

    The company had legal fees of $4.6 million last quarter. I think our thesis holds that this is a good bank that’s held back by legal fees. Once that matter clears, EGBN should get a much better valuation.

  • Globe Life Earns $1.73 per Share
    , April 22nd, 2020 at 4:21 pm

    After the close, Globe Life (GL) reported that net operating income for the quarter was $1.73 per share compared with $1.64 per share one year ago. That was one penny above expectations.

    Some highlights:

    • Net income as an ROE was 9.6%. Net operating income as an ROE excluding net unrealized gains on fixed maturities was 14.1%.
    • Life underwriting margin at the American Income Life Division increased over the year-ago quarter by 7%. Health underwriting margin at the Family Heritage Division increased over the year-ago quarter by 11%.
    • Life premiums increased over the year-ago quarter by 7% at the American Income Life Division. Health premiums increased over the year-ago quarter by 8% at the Family Heritage Division.
    • Life net sales at the American Income Life Division increased over the year-ago quarter by 9%.
    • Total health net sales increased over the year-ago quarter by 9%.
    • 1.6 million shares of Globe Life Inc. common stock were repurchased during the quarter.

    Globe Life sees full-year EPS ranging between $6.65 and $7.15. The earlier estimate was for $7.03 to $7.23 per share.

  • Silgan Beats Earnings and Raises Guidance
    , April 22nd, 2020 at 8:48 am

    Silgan Holdings (SLGN) reported Q1 earnings of 57 cents per share this morning. Wall Street had been expecting 49 cents per share. Net sales rose 0.3% to $1.03 billion.

    For Q2, Silgan sees earnings between 55 and 70 cents per share. For the whole year, Silgan estimates earnings will range between $2.30 and $2.50 per share. That’s an increase from the previous range of $2.28 to $2.38 per share.

    CEO Tony Allott noted that Silgan has been declared “essential” by many government agencies.

    “Volumes grew at their strongest rate in March, as the coronavirus began impacting our Western markets. In our metal container business, volumes were up 8 percent in the quarter and, combined with strong operating results, drove record first quarter operating income. In our closures business, volumes grew by 5 percent, with a less favorable mix of products sold as growth in lower margin pumps for soaps and sanitizers were offset by declines in more complex sprayers and pumps for beauty products. Our plastic container business had another record performance with volume growth of 6 percent over the prior year quarter and continued strong operating results.

    In February, the company raised its dividend by 9%. Silgan has raised its dividend every year for the last 16 years in a row.

  • Morning News: April 22, 2020
    , April 22nd, 2020 at 7:11 am

    With Selective Coronavirus Coverage, China Builds a Culture of Hate

    Brent Oil Drops to 21-Year Low, Spreading Pain Across the Globe

    Why Oil at Negative $100 Isn’t a Crazy Bet Anymore

    ‘I’m Just Living a Nightmare’: Oil Industry Braces for Devastation

    Global CEOs See U-Shaped Recession Due to Coronavirus

    Fannie, Freddie May Soon Buy Home Loans in Forbearance to Help Mortgage Firms

    The Death of the Department Store: ‘Very Few Are Likely to Survive’

    Everyone You Know Just Signed Up For Netflix

    ‘A Disaster’: Roche CEO’s Verdict on Some COVID-19 Antibody Tests

    Facebook Invests $5.7 Billion in Indian Internet Giant Jio

    Nick Maggiulli: Who Feels Rich Really?

    Jeff Carter: Oil Crash Isn’t A Sign Markets Don’t Work

    Ben Carlson: The Collapse of the Energy Sector

    Michael Batnick: The Only Thing Working Right Now

    Joshua Brown: Stop Doing Stupid Stuff With Your Money & Why Credit Card Losses Could Explode: What Are Your Thoughts?

    Be sure to follow me on Twitter.

  • Stepan Earns $1.04 per Share
    , April 21st, 2020 at 11:17 am

    This morning, Stepan (SCL) reported adjusted Q1 earnings of $1.04 per share. That includes the impact of a power outage at their Millsdale plant. Excluding that, Stepan is doing quite well. The consensus of the three analysts who follow Stepan was for earnings of 78 cents per share.

    If you’re not familiar with Stepan, the company is a major manufacturer of specialty and intermediate chemicals that are used in a broad range of industries.

    Although Stepan is classified with other specialty chemical companies, it’s unique in the industry. Stepan doesn’t have a competitor or competitors to precisely match its businesses because its products have a specific focus.

    Stepan makes surfactants, the key ingredients in consumer and industrial cleaning compounds. That includes things like detergents, fabric softeners, shampoos, and lotions. Surfactants make them clean and foam.

    Stepan has three operating divisions. For Q1, Surfactants had operating income of $36.2 million. Polymers was at $7.5 million, and Specialty Products did $4.0 million.

    The company is also in a strong position financially. Stepan currently has more than $250 million more in cash than in debt. Plus, it has access to a credit line of $350 million.

    CEO F. Quinn Stepan, Jr. said:

    “Excluding the impact of the Millsdale power outage, the Company had a solid start to the year. Surfactant operating income, excluding the Millsdale incident, was up significantly. Global Surfactant sales volume declined 1% due to strong volumes in the global consumer product end markets driven by increased demand for cleaning and disinfection products, as a result of COVID-19, offset by lower demand within our Functional Product end markets.

    Mexican operations delivered strong year-over-year earnings growth. The Polymer business was down primarily due to the Millsdale power outage, impacting mostly our phthalic anhydride business. Rigid Polyol volume was flat as growth within North America and China was fully offset by lower demand in Europe as a result of COVID-19. Global Specialty Polyols results were up with all regions growing operating income year-over-year. Our Specialty Product business results were higher due to improved volume and margins within our MCTs product line due to pantry loading and higher demand in the infant nutrition market, as a result of the COVID-19 outbreak.”

    Compared with last year’s Q1, Surfactant sales were down 6%. Polymer was down 11%. Specialty Products was off by 15%. Last quarter, Stepan paid out $6.2 million in dividends and bought back 260,605 shares for $7.2 million. Stepan has increased its dividend every year for 52 years.

    The outlook from the CEO:

    “2020 is going to be a difficult year for the world, our country, our industry and Stepan Company. However, we believe that in the current environment our business is positioned better than most,” said F. Quinn Stepan, Jr., Chairman, President and Chief Executive Officer. “With empty store shelves around the world for disinfection and cleaning products, our surfactant volume in the Consumer Products end markets should remain relatively strong. Falling raw material prices may provide an opportunity for margin improvement. With dramatically lower oil prices, demand for surfactants within the oil field end-markets will be down. We anticipate our Agriculture business should approximate last year. Overall, we believe our Surfactant business should remain relatively recession resistant.

    Our Polymer business most likely will face a reduction in demand as people defer or cancel re-roofing and new construction projects. We also anticipate higher North American costs due to the Illinois River lock closure scheduled during the second half of 2020. The long term prospect of this business remains attractive as energy conservation efforts and more stringent building codes should increase demand.

    Our Specialty Product business should continue to benefit from higher MCT demand in the infant nutrition market as pantry loading and retail restocking occur. Our flavor and pharmaceutical product sales should be stable for the year.

    We have a strong Balance Sheet with significant cash on hand. We have a $350.0 million revolver which is essentially untapped. Our debt maturity in 2020 is only $23.6 million. Given our balance sheet and available liquidity, we are well positioned to operate in the challenging near-term environment. We have paid a dividend for 62 consecutive years and expect to do so in the future. Despite the difficult current environment, we remain optimistic about the future at Stepan Company and our ability to deliver value for our customers and shareholders.”

    The shares are basically unchanged today.