CWS Market Review – August 3, 2021
Posted by Eddy Elfenbein on August 3rd, 2021 at 6:49 pm

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Best. Earnings. Season. Ever.

We’re in the midst of second-quarter earnings season and so far, it’s looking quite good for U.S. corporations. That’s not what was expected only a few months ago. At the beginning of the year, Wall Street was expecting pretty weak earnings growth for Q2.

How wrong they were.

We now have more than half the earnings reports from the S&P 500 and profits are on track to grow 90% over last year’s Q2. Of course, last year’s Q2 was a terrible time for the economy, so that’s growth coming off a very low base. Throughout this entire year, expectations have been consistently ratcheted higher and we’re still beating those higher forecasts.

A few weeks ago, Wall Street was expecting earnings growth of 65.4%. We’re beating that by about 25%. So far, 89% of reports have beaten Wall Street’s consensus. That’s the highest “beat rate” since they started tracking it more than 25 years ago.

I should explain that most of the time, companies are expected to beat expectations. The normal beat rate is around 60% to 65%. I find it darkly funny how often a stock will drop sharply after merely meeting expectations. Q2 earnings are currently coming in 16.6% above expectations. For context, the long-term average is about 4%.

Q2 will most probably mark the highpoint in earnings growth, but earnings are still expected to grow. For Q3, Wall Street currently expects earnings to grow by 29.6% over last year’s Q3. For Q4, the current estimate is for 21.2%. The broader trend is clear—slowly, things are getting back to normal, but we still have a long way to go.

Policymakers in Washington are coming upon a major turning point for the economy. On one hand, things have markedly improved over the past year. Still, there are lots of folks who have been left behind. Now we have a growing threat from new strains of the virus. Fortunately, the mortality rate is far lower than what it had been.

At the same time, the government is rolling back its massive aid to people who have been hurt during the pandemic. In March, President Biden signed a $1.9 trillion aid program. The White House has said that it doesn’t need more stimulus programs and that more lockdowns are off the table.

The Federal Reserve is most likely discussing when they’re going to pull back on their economic support. The Fed is currently buying $120 billion worth of bonds each month. I suspect that they’re going to gradually taper that back. In fact, the tapering could start before the end of the year. The Fed has its big Jackson Hole conference in a few weeks. In past years, the central bank has used Jackson Hole to announce major policies.

The key is jobs. By my rough estimate, I’d say that the economy is about seven to eight million jobs away from full employment. We’ll soon learn a lot more. This week is Jobs Week which means there are several key economic reports that lead up to Friday’s release of the official jobs report.

On Monday, the ISM Manufacturing Index was down to 59.5 but that’s still pretty good. Tomorrow we’ll get the ADP private payrolls report. I’ll caution you that it’s not always a good barometer for the government jobs report. The consensus is for a gain of 653,000 private sector jobs.

On Thursday, we’ll get another jobless-claims report. The data here tends to bounce around a lot. That’s why many economists follow the four-week average. Expectations are for 385,000. The pandemic low is 368,000.

On Friday morning, the government will release the official numbers for the July jobs report. Wall Street economists are expecting a massive gain of 835,000 new jobs and for the unemployment rate to drop to 5.7%. That’s a bold forecast and it would be very good news if it were correct. If we see a strong jobs report, that would be very good for the market and it could signal that the Fed will start to taper its monthly bond buying.

Moody’s Blowout Earnings Report

We’ve had some very strong earnings results from our Buy List stocks. For non-subscribers, I wanted to share one stock with you in particular. Moody’s (MCO), the credit-ratings people, knocked it out of the park for Q2. As I like to say, the only thing better than owning an outright monopoly is owning a pseudo monopoly, and that’s what Moody’s is.

For Q2, Moody’s earned $3.22 per share. That crushed Wall Street’s estimate of $2.74 per share. That’s a huge earnings beat. When any earnings report comes out, one stat I like to follow is a company’s operating profit margin, especially compared with its competitors. That’s usually a good sign of a healthy company. For Q2, Moody’s operating margin was over 55%. That’s quite good.

For the quarter, total revenue rose 8% to $1.6 billion. Moody’s business is divided into two units. There’s Moody’s Investors Service (MIS) and Moody’s Analytics (MA). For Q2, revenue at Moody’s Investors Service was up 4% to $980 million while Moody’s Analytics saw revenue jump 15% to $573 million. I’m particularly a fan of MIS. The operating margin in that division was over 64% last quarter. I also like the recurring revenue at MA. That’s now running at 93% of the division’s total revenue.

I also like that Moody’s is actually reducing its share count. Lots of companies buy back shares, then turn around and give shares to executives for their bonuses. That keeps the share count the same. Not so for Moody’s. During Q2, Moody’s bought back 1.1 million shares for a total cost of $371 million. The average price was $329.44 per share. At the same time, Moody’s issued 200,000 new shares.

The best news is that Moody’s first half was so strong that the company raised its full-year guidance. The company now sees full-year earnings between $11.55 and $11.85 per share. The old range was $11.00 to $11.30 per share. This is MCO’s second increase in guidance this year. The original range was $10.30 to $10.70 per share.

We now have a 30.6% gain this year in Moody’s. We first added Moody’s to our Buy List in 2017. Since then, the stock is up 302% for us, not including dividends.

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OK, now it’s time for me to get you to sign up for our premium service. I promise I won’t give you the hard sell, but we’re having lots of big winners on our Buy List. AFLAC (AFL) just reported very strong earnings and it’s up 25% for us this year. Thermo Fisher (TMO) recently hit another new high. Shares of Zoetis (ZTS) have been up big for us since March. Middleby (MIDD) just became a 50% winner for this year.

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Good News! Clorox Plunged 9.5%

One of the best ways to invest in stocks prudently is to follow good companies and wait until they drop. Sometimes the drop is warranted, but many times it’s not. Even if the lower share price is deserved, well-run companies move to fix whatever the problem is.

That’s why I was pleased to see shares of Clorox (CLX) get clobbered today. Shares of the bleach stock fell more than $19 to close at $164 per share. That’s a loss of more than 9%. At one point, it was down more than 12% on the day. This was Clorox’s worst day in 20 years. Actually, shares of Clorox have been weak for several months. Clorox hit its all-time peak a year ago this Thursday when CLX traded at $239.87.

Since then, it’s lost more than 30%. That gets my attention. First, let’s take a step back and look at how strong this stock has been over the long run. Since its low in October 1990, shares of CLX are up more than 4,500%, and that includes the stock’s recent downturn.

Last year, Clorox made $7.36 per share. That’s nearly double what it made in 2009. Clorox is an excellent example of a consumer staple stock. For investors, that means that its earnings tend to grow steadily higher each year. Contrast that with a cyclical like a homebuilder or an energy stock where its yearly profits can swing wildly depending on broad economic factors. But Clorox consistently churns out the earnings.

It’s not that defensive stocks are in any way better than cyclicals. It’s really a matter of understanding what you own and realizing where we are in the cycle. Lately, defensive stocks have been on the out and cyclicals stocks are in.

When investors get scared, they rush to defensive stocks like Clorox. When the pandemic broke last year, during a particularly scary stretch in February and March, shares of Clorox gained more than 20% while the S&P 500 lost 25%. During the pandemic, hand sanitizer was in heavy demand. Today, retailers can’t give it away.

In today’s earnings report, Clorox said it made 95 cents per share for its fiscal Q4. That was well below consensus of $1.36 per share. It gets worse. Clorox also said it expects to make between $5.40 and $5.70 per share for the current fiscal year (ending in June). Wall Street had been expecting $7.67 per share.

So what went wrong? Clorox blames higher costs. Hmmm.

I’m not about to jump on Clorox just yet, but it’s on my radar. If the price stays low and the company is able to overcome its cost problems, then Clorox could be a very attractive stock.

Let me also stress that I never try to buy at the bottom. Stocks can always go lower than you think. I’m find with not joining in until the first 10% or 20% move has passed. I’d rather be confident that the business has improved.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

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Morning News: August 3, 2021
Posted by Eddy Elfenbein on August 3rd, 2021 at 7:05 am

New Zealand to Further Limit Mortgages Amid Relentless Housing Boom

Britain Rethinks Letting China Enter Its Nuclear Power Industry

What if Highways Were Electric? Germany Is Testing the Idea.

When the Chips Are Down: Global Shortage to Keep Crimping Carmakers

Big Economic Challenges Await Biden and the Fed This Fall

A Hawkish Bullard Sees More Volatile Economic “Regime” Emerging in U.S.

U.S. Company Profits Even Bigger than Wall Street’s Lofty Targets

New SEC Boss Wants More Crypto Oversight

Apple Topples Saudi Aramco To Be The Most Profitable Fortune Global 500 Company In 2020

Tencent Weighs Kids Games Ban After ‘Spiritual Opium’ Rebuke

PepsiCo to Sell Tropicana, Other Juice Brands for $3.3 Billion

Sanofi Offers to Buy U.S. Biotech, mRNA Partner Translate Bio

Oil Giant BP Ups Dividend and Confirms Share Buybacks As It Posts Better-Than-Expected Quarterly Profit

Alibaba to Face Investors as Beijing’s Business Crackdown Grows

The App With the Unprintable Name That Wants to Give Power to Creators

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Trex Earned 53 Cents per Share
Posted by Eddy Elfenbein on August 2nd, 2021 at 4:26 pm

After the closing bell, Trex (TREX) reported fiscal Q2 earnings of 53 cents per share. That’s up 29% from last year and it matched Wall Street’s consensus.

Net sales rose 41% to $312 million. Trex had been expecting sales of $295 million to $305 million.

EBITDA rose 36% to $92 million. Trex’s Residential sales increased by 43% to $299 million. This includes a price increase that took effect on January 1.

“Our strong second quarter revenue growth was driven by sustained broad-based demand across all Trex Residential product lines and market share gains from wood. The completion of our $200 million capacity expansion program in May enabled Trex Residential to convert significant customer demand into an impressive 43% increase in sales. Additionally, we are pleased with the success of our tiered product strategy, which supports consumer decision-making by providing a range of product aesthetics, features and price points that have broad appeal and distinct competitive advantages over wood. With the largest part of our capacity expansion behind us, we will now pivot to cost reduction projects and continuous improvement opportunities. These efforts will be focused on automation, modernization, energy efficiency and raw material processing.

“As expected, higher raw material costs and logistic expenses pressured second quarter gross margin. Together with the start-up expenses related to our capacity expansion program, these additional costs reduced gross margin by approximately 400 basis points compared to second quarter 2020. This negative impact was partially offset by robust sales growth in the Residential segment, which resulted in EBITDA growth of 36%. The previously announced price increase that was effective August 1, along with the continued benefits of greater-than-projected productivity experienced in our new Virginia facility, will serve to manage a portion of the inflationary pressures that we have experienced in the first half of this year,” said Bryan Fairbanks, President and CEO.

For Q3, Trex expects sales to range between $320 million and $330 million. The midpoint is 40% growth over last year. Wall Street had been expecting $323.31 million.

The Stock Market Starts August on a Good Note
Posted by Eddy Elfenbein on August 2nd, 2021 at 10:46 am

It’s the first trading day of the month and that means the ISM Manufacturing report comes out. I like this report because it comes out quickly. Compare that with the GDP reports that come out weeks after the quarter ends.

The ISM report for July fell to 59.5. That’s down 1.1 from June. Any reading above 50 means the factory sector is expanding.

The stock market is up nicely so far this morning, but that comes after declines in three of the last four days. The S&P 500 was briefly above 4,420 this morning.

The S&P 500 gained 2.27% in July. With dividends, it was up 2.38%. For the year, it’s up 17.02% and with dividends, it’s up 17.99%.

We have one earnings report today. Trex (TREX) will report after the close today. The estimate is for 53 cents per share.

Morning News: August 2, 2021
Posted by Eddy Elfenbein on August 2nd, 2021 at 7:12 am

Chinese Stocks Jump as Beijing Signals More Economic Support

Xi Jinping’s Capitalist Smackdown Sparks a $1 Trillion Reckoning

Volatility Warnings Signal Virus May Bring Another Rough August

World’s Biggest Pension Fund Cuts U.S. Bond Weighting by Record

Home Prices Are Soaring. Is That the Fed’s Problem?

Can the Mad Rush to Deliver Your Groceries in 10 Minutes Be Profitable?

Payments App Square to Acquire Australian Company Afterpay

HSBC Doubles Profit, Hints At Share Buybacks As Bad Loan Fears Ease

Pfizer and Moderna Raise Prices for COVID-19 Vaccines in EU

Smart Buildings: Cohesion CEO on the Office of the Future

Half Full or Half Empty? Heineken Doubles Profit, Warns on Costs

Zoom Agrees to Settle Lawsuit Over ‘Zoombombing’

Sunken ‘Jungle Cruise’ Sales Reflect Hollywood’s Delta Variant Troubles

40% of Americans Fear Retirement More Than Death — Here’s Why

Priceless? Even Olympic Medals Can Be Had for the Right Price

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Earnings from Cerner and Church & Dwight
Posted by Eddy Elfenbein on July 30th, 2021 at 7:39 am

We had two more earnings reports this morning. For Q2, Cerner (CERN) said it made 80 cents per share. That was four cents more than Wall Street’s (and the company’s own) estimate. Q2 revenue rose 10% to $1.457 billion. Cerner’s adjusted operating margin increased to 20.6% and free cash flow rose 153% to $162 million.

“I am very pleased with Cerner’s top and bottom-line execution in the second quarter, with our results reflecting good progress on our transformation initiatives and a strengthening market presence,” said Brent Shafer, Chairman and CEO. “We delivered good revenue growth, expanded Adjusted Operating Margin and increased Adjusted Diluted EPS (non-GAAP) during the quarter while continuing to accelerate innovation and drive client value.”

“During the second quarter we took a series of actions which we believe will strengthen our business in the years ahead. Namely, as part of recently implemented productivity measures and a comprehensive review of our business, we performed a sizable reduction in force, took specific measures to shrink our physical (office space) footprint and made some important product rationalization decisions to improve the return on our nearly $800 million annual R&D investment,” said Mark Erceg, Executive Vice President and Chief Financial Officer. “We also spent $400 million on share repurchases, which brings our year-to-date purchases to $750 million, because we continue to believe that Cerner stock, at current trading levels, represents a good return on investment for our shareholders.”

Now let’s look at guidance. For Q3, Cerner expects revenue growth of 6%. For all of 2021, Cerner sees revenue growth “in the mid-single digits.” For earnings, Cerner expects Q3 growth of 12% to 15%. For last year’s Q3, Cerner made 72 cents per share, so the guidance translates to Q3 earnings of roughly 81 to 83 cents per share. Wall Street had been expecting 82 cents per share.

The best news is that Cerner increased its full-year earnings guidance. Before, they had expected earnings of at least $3.20 per share. Now they see earnings of at least $3.25 per share.

Our other earnings report came from Church & Dwight (CHD). For Q2, the consumer products company said it made 76 cents per share. That beat Wall Street’s estimate of 70 cents per share. For their part, C&D was expecting 69 cents per share. Net sales grew 6.4% to $1,271.1 million.

Matthew Farrell, Chief Executive Officer, commented, “Our brands once again drove strong consumption in Q2. Organic sales growth of 4.5% is on top of 8.4% organic growth in Q2 2020. In the U.S., we grew consumption in 13 of the 16 categories in which we compete. Our brands experienced double-digit consumption growth in 9 of those 16 categories, including gummy vitamins, cat litter, dry shampoo, and water flossers. Our personal care categories are benefitting from increased consumer mobility. Consumption is far outpacing shipments as supply chain disruptions continue and fill levels are below normal. Our International business, despite many countries still experiencing lockdowns, delivered broad-based organic sales growth of 10.4%. Global online sales grew 7.2% (on top of 77% growth in Q2 2020) and as a percentage of total sales has expanded to 14.2% in Q2.”

For Q3, Church & Dwight expects earnings of 70 cents per share on sales growth of 3%. Wall Street had been expecting 83 cents per share. The company said that it is “temporarily constrained by supply.”

For all of 2021, C&D now expects earnings to be at the “lower end” of its EPS growth range of 6% to 8%. That works out to about $2.99 to $3.05 per share. Wall Street had been expecting $3.03 per share.

Morning News: July 30, 2021
Posted by Eddy Elfenbein on July 30th, 2021 at 7:03 am

Chinese Stocks’ Crash Offers a Harsh Tutorial

Economy Recovers Pandemic Losses, but Faces New Test

Fed’s Powell Bets Economy Will Navigate New Coronavirus Surge

How Biden Got the Infrastructure Deal Trump Couldn’t

‘Buy Now, Pay Later’ Installment Plans Are Having a Moment Again

The Financial Revolution Will Be Tokenized: Exploring the Crypto Frontier

Big Tech Has Outgrown This Planet

U.S. Regulator Freezes Chinese Company IPOs Over Risk Disclosures

Robinhood’s Shares Fall 8.4% in Public Trading Debut

Robinhood Gets Cathie Wood’s Backing Despite Miserable First Day

Disney Knows Better Than to Battle a Superhero

Amazon Earnings Show a Sharp Slowdown in E-Commerce. The Stock Is Falling.

Nooses, Anger and No Answers: Inside the Uproar Over a Future Amazon Site

Procter & Gamble Names Jon Moeller As New CEO, Will Replace Current Chief David Taylor in November

Restaurant Brands Revenue Beats Estimates on Burger King Sales Boost

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GDP and Jobless Claims
Posted by Eddy Elfenbein on July 29th, 2021 at 1:20 pm

We had two more important economic reports this morning. The government said that real GDP grew at a 6.5% annualized rate during the second quarter. That’s a big number but it was still below expectations of 8.5%. This is the initial report. It will be updated two more times.

Gross private domestic investment fell 3.5% as declines in private inventory and residential investment held back gains. Rising imports and a 5% decline in the rate of federal government spending, despite the ballooning budget deficit, also were factors, the Bureau of Economic Analysis report said.

The overall increase came thanks to increasing personal expenditures, which rose 11.8% as consumers accounted for 69% of all activity. Nonresidential fixed investment, exports and state and local government spending also helped boost output.

Over the last year, real GDP is up by 12.2% and nominal GDP is up by 16.7%. In real terms, the U.S. is finally larger than it was during Q4 of 2019. Here’s real annualized GDP growth per capita by decade:

1950s: 2.53%
1960s: 3.06%
1970s: 2.19%
1980s: 2.14%
1990s: 2.10%
2000s: 0.83%
2010s: 1.58%
2020s: 0.13% (so far)

Here’s the growth of real GDP. I’m not sure what letter, if any, that looks like:

The other report was on jobless claims. That hit 400,000 on the nose. That’s down from 424,000 for last week. We’re still above the pandemic low of 368,000. We hit that level twice, two weeks ago and four weeks ago.

Continuing claims edged higher to 3.27 million, according to data that runs a week behind the headline number. The total of those receiving benefits rose by nearly 600,000 to 13.16 million, according to data through July 10.

Earnings from Hershey and ICE
Posted by Eddy Elfenbein on July 29th, 2021 at 10:28 am

We had two more earnings reports this morning. First up, Hershey (HSY) said it made $1.47 per share for Q2. That’s an increase of 12.2% over last year’s Q2. It beat Wall Street’s consensus by three cents per share. Consolidated net sales were up 16.5% to $1.9894 billion in Q2.

CEO Michele Buck said, “This strong consumer demand, coupled with our executional excellence, healthy balance sheet and relentless focus on delivering against our strategic initiatives in the quarter enabled us to support and expand our portfolio, invest in our people and deliver strong shareholder returns. As trends continue to fluctuate, we are confident in our ability to adapt with our consumers and retailers and continue meeting their needs in the future.”

Hershey raised its full-year sales growth forecast to a range of 6% to 8%. That’s up from the previous range of 4% to 6%. The problem is that a lot of that will be eaten up by higher supply chain costs. As a result, Hershey is reiterating its previous full-year earnings range of $6.79 to $6.92 per share. That’s an increase of 8% to 10% over 2020.

The shares are up about 0.7% this morning.

Also this morning, Intercontinental Exchange (ICE) reported Q2 earnings of $1.16 per share. That was one penny below expectations.

CFO Warren Gardiner said, “In the second quarter, we once again grew revenues, operating income, earnings and cash flow. Our performance is a testament to the power of our diverse business model, which, through an array of macroeconomic environments, continues to deliver consistent and compounding growth for our stockholders.”

Don’t let the earnings miss fool you – ICE is doing very well. Q2 revenues were up 22% to $1.7 billion. Adjusted operating margin is running at 56%. The Ellie Mae deal seems to be paying off quite nicely. In April, ICE sold its stake in Coinbase for more than $1.2 billion.

ICE provides financial guidance for just about everything except EPS:

ICE’s third quarter 2021 total recurring revenues are expected to be in a range of $870 million to $885 million.

ICE’s third quarter 2021 GAAP operating expenses are expected to be in a range of $930 million to $940 million and adjusted operating expenses are expected to be in a range of $770 million to $780 million and include $55 million related to Bakkt.

ICE’s full year 2021 GAAP operating expenses are expected to be in a range of $3.610 billion to $3.640 billion and adjusted operating expenses are expected to be in a range of $2.950 billion to $2.980 billion to include third quarter Bakkt expense of $55 million.

ICE’s third quarter 2021 GAAP non-operating expense is expected to be in the range of $110 million to $115 million and adjusted non-operating expense is expected to be in the range of $100 million to $105 million.

ICE’s full year 2021 capital expenditures are expected to be in a range of $430 million to $450 million.

ICE’s diluted share count for the third quarter is expected to be in the range of 563 million to 569 million weighted average shares outstanding.

Morning News: July 29, 2021
Posted by Eddy Elfenbein on July 29th, 2021 at 7:02 am

China Stocks Rally as Beijing Intensifies Effort to Calm Market

Money Rolls In For Europe Inc As Companies Banish Pandemic Blues

Once the World’s Busiest Port, London Aims to Revive Its River Trade Roots

Federal Reserve Keeps Rates Unchanged but Cites ‘Progress’ Toward Goals

How Biden Can Keep Jerome Powell and Make Progressives Happy

As Fed Tiptoes Around Tapering, Investors Look to Jackson Hole Meeting for Clarity

A Look at What the Bipartisan Infrastructure Deal Would Do

The Four Biggest Ways That Robinhood Changed Investing

Tencent Is World’s Worst Stock Bet With $170 Billion Wipeout

Why Turkey’s Regulators Became Such a Problem for Google

Retailers Revisit Mask Debate After New C.D.C. Guidelines

Didi Global Considers Going Private to Placate China and Compensate Investors

Ford Earnings Contained a Big Surprise — the Chip Shortage Is Easing

Facebook Earnings Call: Into the Metaverse, For Better or Worse

Credit Suisse Finds Incompetence But No Criminal Conduct in Archegos Debacle

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