• Stryker to Buy Wright Medical Group
    Posted by on November 4th, 2019 at 9:16 am

    Big news this morning. Stryker (SYK) has agreed to buy Wright Medical Group (WMGI) for $4 billion. Stryker is offering $30.75 for each share of WMGI. That’s nearly a 50% premium to Friday’s closing price.

    The deal is expected to close in the second half of next year. Stryker expects the deal to have no impact on its earnings. Stryker looks to open a little lower this morning while Wright looks to open much, much higher.

    Here’s the press release:

    Stryker (SYK) announced today a definitive agreement to acquire all of the issued and outstanding ordinary shares of Wright Medical Group N.V. (WMGI) for $30.75 per share, or a total equity value of approximately $4.0 billion and a total enterprise value of approximately $5.4 billion (including convertible notes). Wright Medical, which was founded in 1950, is a global medical device company focused on extremities and biologics.

    Wright Medical brings a highly complementary product portfolio and customer base to Stryker’s trauma and extremities business. With global sales approaching $1 billion, Wright Medical is a recognized leader in the upper extremities (shoulder, elbow, wrist and hand), lower extremities (foot and ankle) and biologics markets, which are among the fastest growing segments in orthopaedics.

    Wright Medical’s leading upper extremity portfolio and advanced preoperative planning technology will significantly add to Stryker’s offering. Additionally, Wright Medical’s lower extremity and biologics will complement Stryker’s portfolio and strengthen the company’s position in this high-growth segment.

    “This acquisition enhances our global market position in trauma & extremities, providing significant opportunities to advance innovation, improve outcomes and reach more patients,” said Kevin Lobo, Chairman and Chief Executive Officer, Stryker. “Wright Medical has built a successful business, and we look forward to welcoming their team to Stryker.”

    “We believe this transaction will provide truly unique opportunities and will create significant value for our shareholders, customers and employees,” said Robert Palmisano, Executive Director, Chief Executive Officer and President of Wright Medical. “By merging our complementary strengths and collective resources, we will be able to advance our broad platform of extremities and biologics technologies with one of the world’s leading medical technology companies that shares our vision of delivering breakthrough and innovative solutions to improve patient outcomes.”

    Under the terms of the agreement, Stryker will commence a tender offer for all outstanding ordinary shares of Wright Medical for $30.75 per share, in cash. The boards of directors of both Stryker and Wright Medical have approved the transaction. The closing of the transaction is subject to receipt of applicable regulatory approvals, the adoption of certain resolutions relating to the transaction at an extraordinary general meeting of Wright Medical shareholders, completion of the tender offer and other customary closing conditions.

    The acquisition of Wright Medical is expected to close in the second half of 2020 and is expected to have no impact to Stryker’s net earnings per diluted share and adjusted net earnings per diluted share in 2019. There is no change to Stryker’s previously announced expected adjusted net earnings per diluted share for the full year, which is a range of $8.20 – $8.25. Assuming a September 30, 2020 closing, the transaction is expected to have no impact to Stryker’s adjusted net earnings per share in 2020, $(0.10) dilution in 2021 and will be accretive thereafter.

  • Morning News: November 4, 2019
    Posted by on November 4th, 2019 at 6:42 am

    Flood of Oil Is Coming, Complicating Efforts to Fight Global Warming

    Asia-Wide Trade Pact on Course Despite India, Thailand Says

    Equity Trading to Only Get Bloodier in Europe After Macquarie Exit

    We Just Wanted to Talk E.U. Farm Policy. Why Was Someone Always Looking Over Our Shoulders?

    Aramco Starts IPO With Prince’s Economic Vision at Stake

    An Energy Breakthrough Could Store Solar Power for Decades

    Morgan Stanley Sees Market Returns Tumbling Over Next 10 Years

    Teens Love TikTok. Silicon Valley Is Trying to Stage an Intervention.

    Apple Pledges $2.5 Billion to Fight California Housing Crisis

    McDonald’s Fires CEO Steve Easterbrook Over Relationship With Employee

    Under Armour Plunges After Disclosing U.S. Accounting Probe

    Jeff Miller: Weighing the Week Ahead: A Time for Investors to Act

    Roger Nusbaum: Confronting Unexpected Circumstances

    Michael Batnick: Guru Grades

    Ben Carlson: Will We Ever See Another Great Depression? & Refinancing Gains in Real Estate

    Be sure to follow me on Twitter.

  • October NFP = +128,000
    Posted by on November 1st, 2019 at 8:42 am

    The October jobs report is out.

    The U.S. economy created 128,000 jobs last month. This is despite the GM strike.

    There was also 95,000 in upward revisions (51,000 in August and 44,000 in September).

    Drilling down some, the private sector added 131,000 jobs in October.

    Average hourly earnings rose six cents in October to $28.18. That’s a 0.2% increase for the month and a 3% increase for the year.

    The unemployment rate ticked up to 3.6%. The U-6 rate rose to 7.0%.

    The labor force participation rate is 63.3%. That’s the highest since August 2013. It’s also higher than every month from 1948 until 1978.

    The jobs-to-population ratio is up to 61.00%. That’s the highest since November 2008.

  • CWS Market Review – November 1, 2019
    Posted by on November 1st, 2019 at 7:08 am

    ”Time is on your side when you own shares of superior companies.” – Peter Lynch

    What an action-packed week this has been! Not only is it earnings season (we had six Buy List reports this week), but we also had the first report on third-quarter GDP, the October jobs report and a Federal Reserve meeting.

    On top of that, on Wednesday, the S&P 500 closed at a new all-time high. Since the bull market began more than 10 years ago, there have been 25 breaks of 5% or more. Every single one has been turned back. Every. Single. One.

    Our Buy List also hit a new high. I’m happy to see so many good earnings reports this week. In this week’s issue, I’ll go through them all. But first, I want to touch on the Fed’s news from earlier in the week.

    What the Fed’s Rate Cut Means for Us

    On Wednesday, the Federal Reserve decided to cut interest rates for the third time in three months. It wasn’t that long ago that the Fed was hiking rates. But what comes next?

    Well, that’s not so easy to say, but the Fed gave us some clues. In its previous statement, the Fed said it “will act as appropriate” to keep the economy going. This time around, those words were missing. Instead, the Fed said it will “monitor the implications of incoming information for the economic outlook as it assesses the appropriate path.”

    I happen to be fully fluent in the arcane and bizarre language of Fedspeak, so allow me to translate. The Fed said, “we’re going to chill out for a bit and watch what happens.” That makes sense. The central bank has already brought rates pretty low. In response, mortgage rates have fallen, and I think we’ll see a pick-up in housing and construction. In his post-meeting press conference, Fed Chair Jay Powell said, “We believe that monetary policy is in a good place.”

    Overall, this is very good for the market and for us. Low real rates (meaning after inflation) are usually very good for stocks. Despite repeated predictions, there’s still no sign of broad-based inflation.

    On Wednesday, ADP said the economy created 125,000 private-sector jobs last month. That was 5,000 more than expectations. The government’s jobs report for October will come out later today. Last month’s report had the unemployment rate at a 50-year low. Also on Wednesday, the government said that the economy grew at a 1.9% real annualized rate in the third quarter. That’s OK, but not great. It’s basically in line with the current expansion. Simply put, there’s no imminent threat of a recession.

    Now let’s get to this week’s earnings reports. You can also see our earnings calendar.

    Six Buy List Earnings Reports This Week

    On Monday, Check Point Software (CHKP) said it made $1.44 per share for Q3. That was four cents better than estimates, Previously, the cyber-security firm had told us to expect Q3 earnings between $1.36 and $1.44 per share on revenue of $480 to $500 million. Total revenue was $491 million.

    The business is going as expected. Gil Shwed, the CEO, said, “our security subscriptions continued to drive results, with 13% growth. This was underscored by expanded customer adoption of our cloud solutions.” I’m very pleased with these results.

    For Q4, Check Point sees earnings ranging between $1.93 and $2.04, and revenue between $527 million and $557 million. The company reiterated its previous full-year guidance of earnings between $5.85 per share and $6.25 per share and revenue between $1.94 million and $2.04 billion. The shares jumped 3.8% on Tuesday and hit a three-month high. Check Point remains a buy up to $120 per share.

    After the bell on Tuesday, Stryker (SYK) reported Q3 earnings of $1.91 per share. That beat by a penny. This was a good quarter for Stryker. Organic sales were up 8.6% to $3.6 billion.

    Stryker said it now expects full-year results to be at the high end of its previous guidance. For Q4, Stryker sees earnings of $2.43 to $2.48 per share. For all of 2019, Stryker projects earnings between $8.20 and $8.25 per share. That’s an increase of five cents to the low end.

    Shares of SYK rallied 3% on the news. This is one of the most dependable stocks on our Buy List. Stryker remains a buy up to $223 per share.

    On Wednesday morning, Moody’s (MCO) said it made $2.15 per share for Q3. That was 15 cents more than expectations. The ratings agency has been a big winner for us this year (+57%). The key to Moody’s success is its Moody’s Analytics segment. Revenue there was up 13% last quarter.

    The results were so good that Moody’s raised its full-year EPS guidance to $8.05 – $8.20. The previous guidance was $7.95 per share to $8.15 per share. The stock initially dropped on Wednesday, but it gradually made back much of the loss. This week, the stock came very close to hitting a new high. Moody’s is a very good buy up to $225 per share.

    After the bell on Thursday, Cognizant Technology Solutions (CTSH) reported Q3 earnings of $1.08 per share. That was three cents more than estimates. Revenues rose 4.2% to $4.25 billion. In constant currency, that’s an increase of 5.1%, which is above Cognizant’s previous guidance of 3.8% to 4.8%.

    Cognizant also said it plans to cut costs. I’m always skeptical of announcements of plans to cut costs. (Shouldn’t they always be doing that?)

    “Over the past few months, we’ve sharpened Cognizant’s strategic posture and begun executing plans aimed at improving our competitive positioning,” said Brian Humphries, Chief Executive Officer. “Today we are announcing a simplification of our operating model and a cost-reduction program, which will allow us to fund investments in growth. Looking ahead, we see a clear path to unlock the organization’s full growth potential, win in our key digital battlegrounds, and return Cognizant to its historical position of being the bellwether of the IT services industry.”

    For Q4, Cognizant sees revenue growth of 2.1% to 3.1% in constant currency. For the full year, CTSH sees earnings between $3.95 and $3.98 per share. That’s an increase of three cents per share to the low end. The guidance implies a Q4 range of $1.02 to $1.05 per share.

    This is better news from CTSH, but remember this is after the company pared back guidance significantly earlier this year. Cognizant remains a buy up to $64 per share.

    We had two earnings reports on Thursday. Let’s start with Intercontinental Exchange (ICE). The exchange owner earned $1.06 per share, which was 10 cents more than expectations. I really like this stock. For the quarter, ICE’s adjusted operating margin was 59%.

    One sticking point is that the government is not pleased with the pricing power that exchanges have for their data services. That’s a big money maker for them. I don’t think this issue can be solved easily or quickly, and it will probably get settled by the courts. For Q4, ICE expects data revenue to be between $555 million and $560 million.

    This week, I’m lifting our Buy Below on ICE to $100 per share.

    Every earnings season, there’s a dud, and this time, that looks to be Church & Dwight (CHD). For Q3, the company made 66 cents per share. That was six cents more than the company’s own guidance. Despite the earnings beat, the shares lost 7.25% in Thursday trading.

    What made traders sour on CHD? For one, the revenue figure wasn’t that good. Sales volume actually dropped a bit, but thanks to price increases, sales in dollars rose. The company expects sales growth of 5%, which is below consensus.

    Church & Dwight also kept its full-year guidance at $2.47 per share. You’d think that they’d raise that after a six-cent beat. I’m lowering my Buy Below on Church & Dwight to $73 per share.

    Next Week’s Buy List Earnings Reports

    We have a few more earnings reports due next week.

    Let’s start with Becton, Dickinson (BDX), which is due to report earnings on Tuesday, November 5. The medical-devices company gave us a scare in Ma, when it lowered its full-year guidance by 40 cents at each end to $11.65 – $11.75 per share.

    Becton blamed currency exchanges plus “recent regulatory and market pressures related to paclitaxel-coated devices.” Fortunately, the last report was pretty good, and the company stood by the lower range. For next week, which is BDX’s fiscal Q4, Wall Street expects $3.30 per share. BDX should be able to beat that. Later this month, I expect Becton to raise its dividend for the 47th year in a row.

    Three months ago, Broadridge Financial (BR) raised its full-year dividend from $1.94 to $2.16 per share. This was the eighth-straight year that BR has raised its dividend by double-digit percentages.

    Broadridge’s fiscal year ended in June. For 2020, the company sees earnings growth of 8% to 12%. That implies a range of $5.03 to $5.22 per share. BR sees recurring-fee growth of 8% to 10% and operating margins around 18%. The earnings report is due out on Wednesday. For the fiscal first quarter, Wall Street expects 71 cents per share.

    In August, Fiserv (FISV) completed its merger with First Data. In July, the company beat earnings by a penny per share. For 2019, Fiserv expects earnings to range between $3.39 and $3.52 per share. Earnings are also scheduled for Wednesday. Wall Street expects Q3 earnings of $1 per share.

    Last is Disney (DIS), which is scheduled for Thursday. The company is having a great year. Not just at the box office, but on Wall Street as well. The Mouse House is about to become a giant in the world of streaming. The cord-cutting movement has morphed into the Streaming War. Disney+ will be a content powerhouse. The Street’s estimates for Q3 is 95 cents per share.

    Continental Building Products (CBPX) hasn’t said yet when it’s going to report earnings. In previous years, the wallboard company has reported right about now. Just in case CBPX reports next week, Wall Street is looking for 41 cents per share.

    That’s all for now. There aren’t many economic reports next week, but there will be a lot more earnings. The factory-orders report is due out on Monday. On Tuesday, the ISM non-manufacturing index is due out. Then on Wednesday, the productivity report comes out. On Thursday, the jobless-claims report comes out. The reports have come in at 250,000 or fewer for 108 straight weeks. 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

    P.S. I was recently a guest on the Animal Spirits podcast.

  • Morning News: November 1, 2019
    Posted by on November 1st, 2019 at 7:04 am

    Don’t Call It Stagflation, But China Assets Flash Economic Worry

    Trump Administration Scaling Back Rules Meant to Stop Corporate Inversions

    The Fed’s View on Inflation Is Quietly Shifting. Here’s Why.

    U.S. Jobs Report Expected to Show Weaker Hiring, Strike Impact

    Warren Buffett’s Worst Year Since 2009 Splits Investors

    General Motors Strike Looms Over U.S. October Job Growth

    How Deadspin Imploded

    The World’s Most Profitable Company Pays Surprisingly Little

    Procter & Gamble, Rivals Take Refills Into Beauty Aisle

    Analysts Slam Shell Over Buyback Delay Warning

    The 7-Year Car Loan: Watch Your Wallet

    Apple’s Figured Out a Way You Can Buy All the New, Shiny, Expensive Things – Debt

    Ben Carlson: Useless Career Advice

    Michael Batnick: Animal Spirits: CEO Departures

    Howard Lindzon: Bears In Turmoil & Google Maps for Money and Investing

    Be sure to follow me on Twitter.

  • The Case for Eagle Bancorp
    Posted by on October 31st, 2019 at 1:27 pm

    There’s a good write-up on Eagle Bancorp (EGBN) at Seeking Alpha. Here’s a sample.

    Eagle Bancorp (NASDAQ:EGBN) was smacked hard in July on news of an investigation tied to potential related party transactions involving former CEO Ron Paul, but it seems like the market has calmed down about that issue and instead refocused on what is a pretty high-quality Washington, D.C. area growth story underpinned by healthy loan growth. Although spread compression remains an ongoing risk, the shares are up about 15% from my last article and have recovered about a third of the investigation-driven decline.

    I believe Eagle shares are still undervalued, and I’m more comfortable about the possible risk from the investigation, as management has pointed to comprehensive insurance coverage for just such events. While I don’t want to underplay the risk of weaker loan demand, tighter spreads, and a deteriorating credit cycle, those are more industry risks than company-specific risks, and I believe Eagle is still looking at a healthy long-term core earnings growth despite a likely low point in 2020.

  • Earnings from ICE and Church & Dwight
    Posted by on October 31st, 2019 at 1:17 pm

    Two more earnings reports this morning. Intercontinental Exchange (ICE) earned $1.06 per share which was 10 cents more than expectations. I really like this stock. For the quarter, ICE’s adjusted operating margin was 59%.

    Jeffrey C. Sprecher, ICE Chairman & Chief Executive Officer, said, “In the third quarter we generated record revenues and double-digit earnings-per-share growth. The combined strength of our futures business with compounding growth in our subscription-based Data & Listings business reflects our long-standing strategy of bringing transparency to global markets and enhancing customer workflows. As we look to 2020 and beyond, ICE’s diverse platform is well positioned to continue to serve our customers, generate growth and create value for our stockholders.”

    ICE provides guidance for several metrics except EPS:

    • ICE’s fourth quarter 2019 GAAP operating expenses are expected to be in a range of $637 million to $647 million and adjusted operating expenses are expected to be in a range of $562 million to $572 million.
    • ICE’s fourth quarter 2019 data revenues are expected to be in a range of $555 million to $560 million.
    • ICE’s interest expense is expected to be $71 million in the fourth quarter.
    • ICE’s fourth quarter effective tax rate is expected to be in the range of 21.5% to 23.5%.
    • ICE’s diluted share count for the fourth quarter is expected to be in the range of 557 million to 563 million weighted average shares outstanding.

    The shares are currently up about 1% in today’s trading.

    Church & Dwight (CHD) is another story. For Q3, the company made 66 cents per share.

    Matthew Farrell, Chief Executive Officer, commented, “Q3 was another outstanding quarter with sales growth of 5.0%. Organic sales grew 3.6%, exceeding our 3.0% outlook. Our categories continue to grow and our market shares are healthy. 12 of our 15 domestic categories grew during the quarter and more than half have grown at least 8 consecutive quarters. In the domestic business, 9 out of 12 power brands met or exceeded category growth in the third quarter. The international business continues to perform strongly with reported sales growth of 7.1% and organic sales growth of 8.7%.”

    Despite the earnings beat, CHD maintained its full-year guidance of $2.47 per share. The stock is down about 6% today.

  • Morning News: October 31, 2019
    Posted by on October 31st, 2019 at 7:28 am

    The Global Fertility Crash

    China Doubts Long-Term Trade Deal Possible With Trump

    The World’s Largest Nuclear Power Producer Is Melting Down

    Lots of Job Hunting, but No Job, Despite Low Unemployment

    Trump Delivering Only A Fraction Of The 6% Economic Growth He Promised

    Here’s What the Federal Reserve Chair Really Thinks About the Economy

    Hank Paulson on the Shocks of the New Economy

    It Will Take More Than Lower Mortgage Rates for a Housing Rally

    Fiat Chrysler and Peugeot Plan to Create World’s No.4 Carmaker

    In Record Deal, U.S. to Recover $1 Billion from Malaysian Fugitive Jho Low

    Twitter Will Ban All Political Ads, C.E.O. Jack Dorsey Says

    China’s Auto Market Could Shrink About 8% This Year

    Lawrence Hamtil: Valuable Lessons from Tom Russo about Investing Abroad

    Roger Nusbaum: Addition by Subtraction

    Joshua Brown: Why the Street Fears Elizabeth Warren as a Frontrunner & Asset Allocation for People in Their Twenties

    Be sure to follow me on Twitter.

  • Cognizant Earns $1.08 per Share
    Posted by on October 30th, 2019 at 4:41 pm

    After the bell, Cognizant Technology Solutions (CTSH) reported Q3 earnings of $1.08 per share. That was three cents more than estimates. Revenues rose 4.2% to $4.25 billion. In constant currency, that’s an increase of 5.1%.

    “Over the past few months, we’ve sharpened Cognizant’s strategic posture and begun executing plans aimed at improving our competitive positioning,” said Brian Humphries, Chief Executive Officer. “Today we are announcing a simplification of our operating model and a cost reduction program, which will allow us to fund investments in growth. Looking ahead, we see a clear path to unlock the organization’s full growth potential, win in our key digital battlegrounds, and return Cognizant to its historical position of being the bellwether of the IT services industry.”

    For Q4, Cognizant sees revenue growth of 2.1% to 3.1% in constant currency. For the full year, CTSH sees earnings between $3.95 and $3.98 per share. That’s an increase of three cents per share to the low end. The guidance implies a Q4 range of $1.02 to $1.05 per share.

  • The Fed’s Policy Statement
    Posted by on October 30th, 2019 at 2:02 pm

    As expected, the Federal Reserve just cut interest rates by 0.25%. The range for Fed funds is now 1.50% to 1.75%.

    Here’s the policy statement:

    Information received since the Federal Open Market Committee met in September indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending has been rising at a strong pace, business fixed investment and exports remain weak. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed.

    Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 1-1/2 to 1-3/4 percent. This action supports the Committee’s view that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain. (The following sentence is the big change from the last statement – Eddy) The Committee will continue to monitor the implications of incoming information for the economic outlook as it assesses the appropriate path of the target range for the federal funds rate.

    In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

    Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; James Bullard; Richard H. Clarida; Charles L. Evans; and Randal K. Quarles. Voting against this action were: Esther L. George and Eric S. Rosengren, who preferred at this meeting to maintain the target range at 1-3/4 percent to 2 percent.

    The part I highlighted above is being interpreted that the Fed is going to take a break on rate cuts for the time being. It looks like Powell will take the next six months or so to see how well the recent cuts have worked.