Danaher Is Selling Some Business Ahead of Biopharma Deal
Posted by Eddy Elfenbein on October 21st, 2019 at 1:13 pm

The following is a press release from Danaher (DHR) announcing that it’s selling some businesses ahead of its acquisition of GE’s Biopharma business. They expect the deal to close in Q1 of 2020.

Danaher Corporation (DHR) today announced that it has signed an agreement to sell its label-free biomolecular characterization, chromatography hardware and resins, and microcarriers and particle validation standards businesses to Sartorius AG for approximately $750 million. The combined revenue of the businesses, which are part of Danaher’s Life Sciences segment, was approximately $140 million in 2018.

Danaher entered into the agreement to sell these businesses as a step towards obtaining regulatory approval for its pending acquisition of the GE Biopharma business, and the closing of the Sartorius AG agreement is conditioned upon Danaher’s closing its acquisition of the GE Biopharma business. Danaher’s acquisition of the GE Biopharma business, the proposed regulatory remedies (the package of businesses being sold), the approval of Sartorius as the buyer in such remedies, and Sartorius’ acquisition described above all remain subject to approvals from various regulatory authorities.

Thomas P. Joyce, Jr., President and Chief Executive Officer, stated, “This represents a significant step in the regulatory process toward closing the GE Biopharma acquisition. While timing around meeting all closing conditions, including regulatory approvals, is still uncertain, we remain very encouraged by the progress to date and expect closing of the transaction in the first quarter of 2020.”

Morning News: October 21, 2019
Posted by Eddy Elfenbein on October 21st, 2019 at 7:31 am

These 20 Countries Will Dominate Global Growth in 2024

JPMorgan Warns U.S. Money-Market Stress Likely to Get Much Worse

How Exploding Private Sector Balance Sheets Have Changed Recessions As We Know Them

In a Strong Economy, Why Are So Many Workers on Strike?

Estate Taxes Are Easy to Flee, but They Still Help States

Boeing Expresses Regret Over Ex-Pilot’s 737 MAX Messages, Faults Simulator

Facebook Open to Currency-Pegged Stablecoins for Libra Project

G.M. Contract Terms May Be a Tougher Fit for Its Rivals

Online Influencers Tell You What to Buy, Advertisers Wonder Who’s Listening

Halliburton Profit Falls 32% on Weak North America Drilling

Behind Ken Fisher’s Ads, a Hardball Culture Reels in Billions

Goldman’s Unwelcome Streak: A String of Insider Trading Charges

Cullen Roche: Three Things I Think I Think – What if it All Comes Crashing Down?

Jeff Miller: Weighing the Week Ahead: Earnings Season Opportunity?

Joshua Brown: How Narrative Economics Shape Our World – Barry Talks with Robert Shiller

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CWS Market Review – October 18, 2019
Posted by Eddy Elfenbein on October 18th, 2019 at 7:08 am

“There is nothing more deceptive than an obvious fact.” – Sherlock Holmes

This week, our two Buy List bank stocks rallied after reporting better-than-expected earnings. Signature Bank gained 1.9%, and Eagle Bank rose 1.4%. At one point, Eagle was up more than 11% on the day.

I’m especially glad to see good news from Eagle after the stock got a super-atomic wedgie three months ago. Shares of EGBN are now up 16% off their low, yet the stock is still trading at less than 10 times this year’s earnings. I’ll have all the details in a bit.

On Thursday, the S&P 500 came close to finishing above 3,000 for the first time in a month, but it fell just shy. Over four scary trading days this summer, the index dropped 5.5%, and we’ve nearly made it all back.

In this week’s CWS Market Review, I’ll go over our two Buy List earnings reports for this week. I’ll also preview the reports we have coming next week. It’s going to be a busy week for us. We have seven Buy List stocks due to report, including five on Thursday. I’ll break it all down for you. But first, let’s look at look at our Q3 earnings calendar.

Q3 Earnings Calendar

Here’s a table of the 20 Buy List stocks that are reporting this earnings season (the other five don’t follow the March/June/September/December cycle). I’ve included each stock’s earnings date, Wall Street’s consensus and the actual results. Please note that not all the dates are out, and the earnings consensus may change.

Earnings from Eagle and Signature

Three months ago, shares of Eagle Bancorp (EGBN) plunged after the bank reported higher legal costs. Unfortunately, Eagle couldn’t say much because it’s an ongoing investigation. However, Eagle made it clear that it would have no impact on their operations.

On Wednesday, we learned that that appears to be correct. Eagle reported net income of $36.5 million for its third quarter. That’s down 6% from a year ago. That works out to $1.07 per share. Excluding two non-recurring items, Eagle made $1.08 per share. That beat Wall Street’s consensus by a penny.

Those aren’t bad numbers, especially considering the low interest rates and flat yield curve. Remember that a bank is basically the yield curve with incorporation papers. The key stat for any bank is net interest margin. For Q3, Eagle’s net interest margin was 3.72%.

Susan Riel, Eagle’s CEO, said, “We continue to see good lending opportunities and have worked to attract more deposits to fund those loans and to bring down the loan-to-deposit ratio at third quarter-end 2019 compared to second quarter-end 2019. Furthermore, by sustaining favorable operating leverage, we maintain strong profitability while rates remain very low, and we stay well positioned when interest rates begin moving back to more normalized levels, given the degree of variability in our asset pricing.”

Nonperforming loans are just 0.66% of total assets. Another key stat for any bank is the efficiency ratio. That’s the ratio of non-interest expense to total revenue. For Q3, Eagle’s efficiency ratio was 38.34%. That’s pretty good. Earlier this year, Eagle snapped its ten-year streak of quarterly earnings growth.

Now for the important concern, which is legal costs. For Q3, Eagle has legal bills of $3.6 million. That’s up from $2.1 million a year ago. Of course, that’s due to the investigation that the bank mentioned this summer. All Eagle could say is that they expect “elevated” levels of legal costs for the rest of this year.

Overall, Eagle Bancorp is making do in a difficult environment. The stock is going for just under 10 times this year’s earnings estimate. Eagle remains a buy up to $47 per share.

On Thursday, Signature Bank (SBNY) reported Q3 earnings of $2.75 per share. That was five cents better than expectations.

Total deposits now stand at $39.06 billion. That’s an increase of 8.2% over the last year. I like that non-accrual loans are just 0.09% of total loans, and if you exclude taxi-medallion loans, then it’s just 0.06%. Net interest margin on a tax-equivalent basis is just 2.68%.

During Q3, Signature bought back 630,000 shares of stock for $75 million. There’s still more than $300 million left in its current authorization.

Signature got off to a great start for us this year. It became a 30% winner in just six weeks. Since then, it’s been lagging, but SBNY has picked up some recently. On Thursday, shares of Signature gained 1.9% after the earnings report. Signature Bank remains a buy up to $130 per share.

Preview of Next Week’s Earnings

We have seven Buy List stocks due to report earnings next week. Let me run down what to expect.

Sherwin-Williams (SHW) has been an outstanding stock for us. It’s up 42% this year. Three months ago, Sherwin made $6.57 per share, which beat estimates by 20 cents per share. On Tuesday, Sherwin is due to report its Q3 earnings.

For this year, Sherwin expects earnings between $20.40 and $21.40 per share. That’s very doable. The company has already made $10.17 per share for the first half of the year. For Q3, Wall Street expects $6.48 per share.

On Thursday, the shares made another new high. Sherwin is currently trading above my $550 Buy Below price, so don’t chase it. I may raise our Buy Below next week, but I want to see the earnings numbers first.

On Wednesday, it’s Globe Life’s (GL) turn. This will be the first earnings report under its new name. Previously, the company was known as Torchmark. For Q2, GL earned $1.67 per share, which was two cents ahead of estimates.

For 2019, Globe Life sees net operating income per share between $6.67 and $6.77. The current price is around 14 times that. For Q3, Wall Street expects $1.69 per share.

Thursday will be a busy day. We have five Buy List earnings reports coming out.

Three months ago, AFLAC (AFL) said they made $1.14 per share for Q2. Forex knocked off a penny per share. The CEO said the duck stock aims to buy back $1.3 to $1.7 billion worth of stock this year.

AFLAC didn’t exactly raise guidance, but they said that earnings should come in at the higher end of their current range which is $4.10 to $4.30 per share. That’s based on an average exchange rate of 110.39 yen to the dollar. For Q3, the consensus on Wall Street is for earnings of $1.07 per share.

Cerner (CERN) has been somewhat weak since the summer, but that could change soon. The healthcare-IT firm said it expects Q3 earnings of 65 to 67 cents per share. I think they can beat that. For the full year, Cerner sees earnings between $2.64 and $2.72 per share.

For Q2, Cerner said that bookings came in at $1.432 billion, which was the high end of its range. Revenue rose 5% to $1.431 billion. Earlier this year, Cerner reached an agreement with Starboard Value to start paying a dividend and increase its buyback authorization by $1.5 billion. The current yield is a little bit over 1%.

Danaher (DHR) sees Q3 earnings ranging between $1.12 and $1.15 per share. For the full year, the company projects earnings between $4.75 and $4.80 per share.

Earlier this year, Danaher had been expecting 2019 earnings of $4.75 to $4.85 per share, but they lowered guidance due to share dilution for the GE Biopharma deal. That deal should close sometime in Q4. Last month, Danaher IPO’d Envista (NVST), which was their dental business. Danaher still holds a large stake in the company.

Shares of Hershey (HSY) had a quick downturn last month. The stock dropped seven times in eight sessions for a total loss of 8.3%. Fortunately, HSY has stabilized recently.

Hershey had a very good quarter for Q2, but guidance wasn’t as much as I hoped for. The chocolatier currently expects 2019 earnings of $5.68 to $5.74 per share. For Q2, Hershey beat the Street by 14 cents per share, yet it only raised the low-end of its guidance by five cents. I thought that was odd. For Q3, Wall Street expects earnings of $1.60 per share.

Raytheon (RTN) should be helped by the big defense-spending bill that was recently passed by Congress. For 2019, Raytheon expects sales of $28.6 billion to $29.1 billion and earnings between $11.50 and $11.70 per share. For Wednesday, the consensus is for $2.86 per share.

At some point, shareholders of RTN will get 2.3348 shares of Raytheon Technologies. That’s the name for the combined company with United Technologies (UTX). However, Raytheon Technologies will not include the spinoffs of Otis and Carrier. That’s led to a bit of confusion as to how much those 2.3348 shares are worth. The deal should close in the first half of next year.

That’s all for now. Expect a lot of earnings news next week. There’s also an election in Canada in Monday. On Tuesday, the report on existing-home sales is due out. On Wednesday, there’s a big OPEC meeting. Then on Thursday, the report on durable goods is due out, as is the report on sales of new homes. 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: October 18, 2019
Posted by Eddy Elfenbein on October 18th, 2019 at 7:03 am

China’s Economy Slows on Weak Investment, Testing Global Growth

China’s GDP Growth Grinds to Near 30-Year Low as Tariffs Hit Production

Russia’s Thawing Permafrost May Cost Economy $2.3 Billion a Year

After Hemorrhaging $100 Billion, Europe Stages a Comeback

How A Small Aluminum Maker Won U.S. Trade Protection

Defiant Zuckerberg Says Facebook Won’t Police Political Speech

Boeing C.E.O., Already Set for House Hearing, Is Likely to Face Senate, Too

GM Transforms Who Wins, Who Loses in the Future of Work

Credit Suisse to Start Charging Wealthy Clients for Cash Deposits

Juul Halts Online Sales of Some Flavored E-Cigarettes

Johnson & Johnson to Pay $117 Million Over Surgical Device Marketing

Coca-Cola Stock Jumps as Strong Sales of Coke Zero Sugar Continue to Drive Revenue Growth

Ben Carlson: A Eulogy for the 60/40 Portfolio

Michael Batnick: Trading Behavior

Roger Nusbaum: Is The 60/40 Portfolio Really Dead?

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Signature Bank Beat Estimates
Posted by Eddy Elfenbein on October 17th, 2019 at 11:57 am

This morning, Signature Bank (SBNY) reported Q3 earnings of $2.75 per share. Net interest margin on a tax-equivalent basis was 2.68%. Total deposits rose to $39.06 billion. Wall Street had been expecting $2.70 per share.

Here are some details from the press release:

Net Income for the 2019 Third Quarter Was $148.7 Million, or $2.75 Diluted Earnings Per Share, Versus $155.4 Million, or $2.84 Diluted Earnings Per Share, Reported in the 2018 Third Quarter.

The Bank Declared a Cash Dividend of $0.56 Per Share, Payable on or After November 15, 2019 to Common Stockholders of Record at the Close of Business on November 1, 2019.

During the 2019 Third Quarter, the Bank Repurchased 629,503 Shares of Common Stock For a Total of $75.0 Million. Thus Far, the Bank Has Repurchased $189.7 Million of Common Stock From Its $500 Million Authorization.

Total Deposits in the Third Quarter Grew $1.52 Billion to $39.06 Billion; Total Deposits Have Grown $2.97 Billion, or 8.2 Percent, Since the End of the 2018 Third Quarter. Average Deposits Increased a Record $1.75 Billion in the 2019 Third Quarter.

In Line with the Bank’s Strategy to Increase Floating Rate Assets and Reduce Its Commercial Real Estate Concentration, the Bank Decreased Commercial Real Estate Loans by $873.1 Million. Conversely, Commercial & Industrial Loans Grew by $885.4 Million During the Quarter. Therefore, For the 2019 Third Quarter, Loans Increased $4.9 Million to $37.94 Billion. Since the End of the 2018 Third Quarter, Loans Have Increased 8.0 Percent, or $2.81 Billion.

Non-Accrual Loans Were $32.5 Million, or 0.09 Percent of Total Loans, at September 30, 2019, Versus $41.3 Million, or 0.11 Percent, at the End of the 2019 Second Quarter and $134.2 Million, or 0.38 Percent, at the End of the 2018 Third Quarter. Excluding Taxi Medallion Loans, Non-Accrual Loans Were $22.9 Million, or Six Basis Points of Total Loans.

Net Interest Margin on a Tax-Equivalent Basis was 2.68 Percent, Compared with 2.74 Percent for the 2019 Second Quarter and 2.88 Percent for the 2018 Third Quarter. Core Net Interest Margin on a Tax-Equivalent Basis Excluding Loan Prepayment Penalty Income Decreased Five Basis Points to 2.66 Percent, Compared with 2.71 Percent for the 2019 Second Quarter. Excess Cash Balances From Significant Deposit Flows Lead to Four Basis Points of the Core Net Interest Margin Decline.

Tier 1 Leverage, Common Equity Tier 1 Risk-Based, Tier 1 Risk-Based, and Total Risk-Based Capital Ratios were 9.66 Percent, 11.91 Percent, 11.91 Percent, and 13.16 Percent, Respectively, at September 30, 2019. Signature Bank Remains Significantly Above FDIC “Well Capitalized” Standards. Tangible Common Equity Ratio was 9.51 Percent.

Morning News: October 17, 2019
Posted by Eddy Elfenbein on October 17th, 2019 at 7:03 am

EU and U.K. Reach Agreement to Put Brexit Within Boris Johnson’s Grasp

China Says it Hopes to Reach Phased Trade Pact with U.S. as Soon as Possible

G.M. and U.A.W. Reach Deal That Could End Strike

‘Stranger Things’ Helps Netflix Increase Subscribers

Drug Giants Close In on a $50 Billion Settlement of Opioid Cases

WeWork Owner Creates Committee to Decide on Financing Lifeline

Barneys Enters Deal to Sell Assets to Authentic Brands, B. Riley for $271 Million Cash

Nestle to Return $20 Billion to Investors

Ex-Credit Suisse Banker Says He Hid $45 Million in Bribes

Amazon Holiday Toy List Slots Can Cost Brands Up to $2 Million

IBM Reports Messy Results

Ken Fisher Client Exodus Nears $1 Billion as Boston Divests

Howard Lindzon: Don’t Cry For Me – Commission-Free Brokers & Vaping and The Vice Matrix

Joshua Brown: Barry and Michael on the Endowment Model Circa 2019 and Beyond

Michael Batnick: Passive Products and Active Users

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Vox Misleads on Share Buybacks
Posted by Eddy Elfenbein on October 16th, 2019 at 9:03 pm

There’s been a lot of criticism lately of share buybacks. Some politicians even want to ban them.

I think there’s some confusion as to what buybacks are and what they can do. Some folks think buybacks are sinister and that they’re responsible for all sorts of terrible things. This isn’t the case. Ultimately, buybacks act very much like dividends. Buybacks are an odd scapegoat.

Vox recently put out this video on share buybacks and there were a few misleading statements.

Let me run through them.

0:22. The video seems to suggest that share buybacks were started after the market crash in 1929. That’s not right. Share buybacks are as old at the NYSE. Jason Zweig gives the example of the Germantown & Reading Turnpike Road Co. In 1798, its charter specified share buybacks.

0:46. The video says of buybacks, “But with this, corporations had discovered a kind of magic trick. They could jack up their stock price without really doing anything.” The corporation had already done something. It had earned the profit to fund the buyback. It would be like saying a company could pay out a dividend without doing anything.

This one may be nitpicking but at 3:12, the video quotes Ronald Reagan saying, “government is not the solution to our problem; government is the problem.” The video leaves out the first four words, “In this present crisis.” Reagan was talking about inflation.

3:43. “For the first time since the 1930s, companies could buy back shares of their own stock from investors.” You’ll often hear people say that buybacks were illegal prior to 1982. Again, this is misleading.

Buybacks were legal but there were restrictions and the rules were somewhat vague. As a result, many companies avoided them, but not all. Teledyne, Crown, Cork and Seal and Dairy Queen all used share buybacks and were known to do so.

In his 1980 shareholder letter, Warren Buffett extolled the virtues of buybacks (although he later criticized companies paying too much for the shares.) In 1982, the SEC ditched the rules.

The video also blames share buybacks for the growth of inequality. That seems to be a stretch. I think the video confuses a tool with how it can be used.

Eagle Bancorp Earned $1.08 per Share for Q4
Posted by Eddy Elfenbein on October 16th, 2019 at 4:36 pm

EagleBank announced quarterly net income of $36.5 million for the three months ended September 30, 2019, a 6% decrease from $38.9 million net income for the three months ended September 30, 2018.

Net income per basic common share for the three months ended September 30, 2019 was $1.07 compared to $1.14 for the same period in 2018.

Net income per diluted common share for the three months ended September 30, 2019 was $1.07 compared to $1.13 for the same period in 2018.

Earnings in the third quarter of 2019 were impacted by two significant non-recurring expense items.

The Company recorded $2.0 million of accelerated shared based compensation expense due to the resignation of certain directors of the Company and Bank.

Secondly, as a result of the FDIC Deposit Insurance Fund exceeding 1.38% of insured deposits at June 30, 2019, EagleBank recognized a $1.1 million credit to its FDIC assessment expense in the third quarter of 2019.

Excluding these two non-recurring items, net income for the third quarter of 2019 would have been $37.1 million ($1.08 per diluted share).

Notwithstanding the negative impact that very low interest rates and a flat yield curve are having on our revenues and net interest margin, we are pleased to report a continued quarterly trend of both loan and deposit growth, together with solid asset quality and favorable operating leverage. Additionally, our capital base remains very strong, with ratios well in excess of the requirements for well capitalized status,” noted Susan G. Riel, President and Chief Executive Officer of Eagle Bancorp, Inc. Ms. Riel added that “period end loan growth in the quarter was 2.3%, and average loans were 13% higher in the third quarter 2019 as compared to the third quarter of 2018. For the third quarter of 2019, period end deposit growth was a very strong 6.5% and average deposits were 13% higher as compared to the same period in 2018. Total revenue for the third quarter of 2019 was $87.3 million compared to $86.9 million for the third quarter of 2018 and was 4% higher for the first nine months of 2019 over the same period in 2018.

Here’s the bit about legal expenses:

Legal, accounting and professional fees and expenses for the three months ended September 30, 2019 increased to $3.6 million from $2.1 million for the same period in 2018, a 70% increase. Legal, accounting and professional fees and expenses for the nine months ended September 30, 2019 increased to $8.1 million from $7.3 million for the same period in 2018, an 11% increase. The increased expenses for both the quarter to date and year to date 2019 periods were primarily associated with government agencies investigations previously disclosed in the second quarter 2019 earnings press release. The Company expects to incur elevated levels of legal and professional fees and expenses for at least the remainder of 2019 as it continues to cooperate with these investigations. Other than these increased costs, we do not believe at this time that the resolution of these investigations will be materially adverse to the Company. As a result of these ongoing investigations, there have been no regulatory restrictions placed on the Company’s ability to fully engage in its banking business as presently conducted. We are, however, unable to predict the duration, scope or outcome of these investigations.

Retail Sales Fell Last Month
Posted by Eddy Elfenbein on October 16th, 2019 at 12:35 pm

This morning’s retail sales report showed a surprising decline for September. This could indicate weakness in consumer spending. This was the first drop for retail sales in seven months,

For September, retail sales fell by 0.3%. Economists had been expecting a gain of 0.3%. On the bright side, the figure for August was revised up from 0.4% to 0.6%.

Auto sales fell 0.9% in September, the most in eight months, while receipts at service stations fell 0.7% in what likely reflects cheaper gasoline.

Withholding automobiles, gasoline, building materials and food services, retail sales were little changed in September after climbing 0.3% in August. The so-called core figure corresponds more closely to the consumer spending component of U.S. economic activity.

Last month’s drop and August’s unedited gain in core sales hint at a marked slowdown in consumer spending in the third quarter that economists had been anticipating after a surge in the prior quarter. Consumption, which comprises about 66% of the U.S. GDP activity, increased at a 4.6% annualized rate in the second quarter, the most in 1½ years.

At the end of October, we’ll get our first look at Q3 GDP.

Morning News: October 16, 2019
Posted by Eddy Elfenbein on October 16th, 2019 at 7:12 am

ECB Should Consider a Better Inflation Measure, S&P Says

Undercover Entrepreneurs: Fearful Mexican Tech Startups Shun Spotlight

Turkish Markets Sell Off After U.S. Charges Bank With Money Laundering

What’s Really in the Trade Deal Trump Announced With China

U.S. ‘Deeply Concerned’ About Untrackable China Ships Carrying Iran Oil

Citigroup Offers Rare Pound Bond as Brexit Deal Prospects Fade

Google, Reddit Defend Tech Legal Protections Ahead of Congress Hearing

Barneys Bidding Starts, and It’s a Bet on the Future of Shopping

Ad Giant Wins Over Disney With Big Data Pitch

MGM to Sell Bellagio, Circus Circus Resorts for About $5 Billion

Overrun by Tourists, American Cities Are Taking Aim at Hotels

Goldman Profit Drops 26% as Deals Slow, Tech-Stocks Struggle

Nick Maggiulli: Money Blinders

Michael Batnick: Look Away & Animal Spirits: The Undies Indicator

Roger Nusbaum: Another Crypto ETP…To Be Wary Of

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