RIP: John C. Bogle
Posted by Eddy Elfenbein on January 16th, 2019 at 9:46 pm

From the WSJ:

Born in Montclair, N.J., on May 8, 1929, Mr. Bogle and his twin brother David arrived five months before the Great Crash that began that October wiped out much of their family’s wealth. Mr. Bogle delivered papers and worked as a waiter growing up.

At Blair Academy and Princeton University, Mr. Bogle said he initially struggled with the subject of economics. An article about the mutual-fund industry in the December 1949 issue of Fortune magazine inspired his 1951 senior thesis, titled “The Economic Role of the Investment Company.” He graduated from Princeton magna cum laude in economics.

Mr. Bogle’s first job in the investment world was as a clerk to Walter L. Morgan, who founded the first-ever balanced mutual fund at Wellington Management.

Despite his eventual advocacy for index funds, Mr. Bogle was contemptuous early in his career of the idea that trying to beat the market was a waste of money.

In 1960, under the pen name John B. Armstrong, he wrote a lengthy article for the Financial Analysts Journal in which he ridiculed the very idea “that the mutual fund itself should buy the market average,” or settle for a return no better than that of a benchmark like the Dow Jones Industrial Average or the S&P 500 index. In 1973, he gave a speech insisting that “the average individual is getting ‘above-index’ results in mutual funds” and that “neither compensation of salesmen, nor profitability of broker-dealers and underwriters, is excessive.”

Only after he was fired as Wellington’s president in 1974 by his partners and launched Vanguard as an independent company the following year did Mr. Bogle challenge the industry’s prevailing orthodoxy that price was a signal of quality and embrace low-cost investing.

Mr. Bogle chose to organize Vanguard as a mutual company, an idea he said he had unsuccessfully pitched to his Wellington colleagues years earlier. Along the lines of a consumer cooperative, the firm would be—and still is—owned not by private shareholders who seek to maximize their own profits but rather by its fund investors, who earn higher returns as Vanguard drives costs lower. In 1977, Vanguard also went “no-load,” eliminating the sales commissions and all middlemen on its funds.

Mr. Bogle’s insistence on integrity, which often struck many of his competitors as sanctimonious, steered Vanguard clear of the scandals that periodically swept through the mutual-fund industry. Still, when it came to corporate governance, Mr. Bogle became a greater proponent of index and other funds harnessing their power on shareholder votes after his tenure at Vanguard than he was during it.

At Vanguard, Mr. Bogle paid himself well but not lavishly, though he and other firm executives have never publicly disclosed those figures. Mr. Bogle frowned on ostentation, driving a Volvo station wagon, vacationing in Lake Placid, N.Y., flying economy class and haggling for discounts at hotels.

Vanguard continues to take a similarly thrifty approach to its business at its Malvern campus, whose plain brick buildings bear the names of warships. Mr. Bogle, a fan of British Adm. Horatio Nelson, named the firm Vanguard after Adm. Nelson’s ship in the 1798 Battle of the Nile and referred to employees as “crew.”

Despite Mr. Bogle’s age and lengthy career, he had chronic coronary failure and suffered at least seven heart attacks—the first at age 31. He endured a malfunctioning pacemaker before finally receiving a heart transplant in 1996.

“I didn’t think about [dying],” he told an interviewer in 2007. “I just got on with what needed to be done.”

Eagle Bancorp Earns $1.17 per Share
Posted by Eddy Elfenbein on January 16th, 2019 at 4:23 pm

Our first Buy List earnings report is out! Eagle Bancorp (EGBN) reported Q4 earnings of $1.17 per share. That beat estimates by three cents per share. For the year, Eagle made $4.42 per share. That’s up from $3.35 per share in 2018.

Long discussion from the CEO:

“We are very pleased to report a continued trend of balanced and consistently strong financial performance,” noted Ronald D. Paul, Chairman and Chief Executive Officer of Eagle Bancorp, Inc. “Our net income in the fourth quarter represents ten years of quarterly increases in operating earnings dating back to the first quarter of 2009, a record of consistency rarely seen in public company financial performance. Our strong financial performance has resulted from a combination of steady average balance sheet growth, revenue growth, and very favorable operating leverage. Additionally, we have maintained solid asset quality over an extended period through disciplined risk management practices. These factors have combined to achieve a return on average assets of 1.90% for the fourth quarter of 2018, a return on average common equity of 14.82%, and a return on average tangible common equity ratio of 16.43%, while sustaining very strong capital levels.”

Mr. Paul added, “For the fourth quarter of 2018, we experienced very strong average deposit growth which was invested at lower market interest rates, resulting in above average liquidity. This liquidity, which was invested at short term market rates, contributed to a decline in the net interest margin to 3.97% for the fourth quarter from 4.14% in the third quarter of 2018. Average deposit balances increased 7.2% for the fourth quarter 2018 over the third quarter 2018. We attribute the significant average increase to seasonality, market conditions and our well developed customer relationships leading to success in gathering core deposits. Steady growth in loan balances continued, increasing 3.8% on average for the fourth quarter of 2018 over the third quarter of 2018. Period end to period end, loan balances increased 2.1%, for the fourth quarter 2018 while deposit balances increased a very strong 9.4%. The higher liquidity position in the fourth quarter resulted in an average loan to deposit ratio of 99% as compared to 102% for both the third quarter of 2018 and the fourth quarter of 2017.” Mr. Paul added, “We consider average balances more indicative of our growth performance, since maintaining favorable averages translates to improved revenue. Growth in our average balance sheet combined with a continuing favorable net interest margin contributed to revenue growth increases of 3.5% in the fourth quarter 2018 over the fourth quarter of 2017 and by 1.0% over the third quarter of 2018. Also contributing to the decreased net interest margin for the fourth quarter was a 9 basis point decline in the yield on the loan portfolio to 5.60% versus 5.69% for the third quarter, as the quarter saw substantial payoffs of higher yielding loans. Fourth quarter loan payoffs were the highest of any quarter in 2018, and were due substantially to above average sales of condominium units financed by the bank. These are projects that are performing well resulting in more rapid pay-downs of construction loans. Notwithstanding the payoff of higher yielding loans, the Company’s loan portfolio yield continues to benefit from both higher general market interest rates and disciplined loan pricing and we believe that the yield on our loan portfolio continues to be superior to peer bank returns. Importantly, our credit quality remained very strong in the fourth quarter as the level of nonperforming assets was just 0.21% of total assets at December 31, 2018 and the annualized level of net credit losses to average loans was 0.05%.” Mr. Paul added, “The Company’s operating efficiency, another key driver of our financial performance, remained favorable.” For the fourth quarter in 2018, the efficiency ratio was 36.1%, as compared to 36.4% in the third quarter of 2018, and was 37.3% for the full year 2018.

For the full year 2018 over 2017, average deposit growth was 11%, average loan growth was 12%, revenue growth was 8.4% and noninterest expense growth was 6.9%. The net interest margin for 2018 was 4.10% as compared to 4.15% for the year 2017, well above peer banking companies. Period end to period end, loan growth in 2018 was 9% and deposit growth was 19%.

Comparing asset yields and cost of funds for the full year of 2018 to the full year 2017, loan yields were up 37 basis points (from 5.17% to 5.54%), yields on earning assets were up 36 basis points (from 4.73% to 5.09%) and the composite cost of funds was up 41 basis points (from 0.58% to 0.99%). Importantly, our funding costs, while up in 2018 over 2017, continue to benefit from the substantial level of average noninterest deposits as a percentage of average total deposits of 33.4% in 2018. Additionally, the significant portion of the loan portfolio being variable and adjustable rate in a rising rate environment tends to mitigate the effects of higher cost of funds. Mr. Paul added, “Given the more competitive interest rate environment in 2018 for both loan rates and funding costs, coupled with a flatter yield curve and the Federal Open Market Committee’s (“FOMC”) four short term rate increases, the Company believes management of the net interest margin has been disciplined and effective.

Huge Deal: Fiserv Is Buying First Data
Posted by Eddy Elfenbein on January 16th, 2019 at 9:16 am

Fiserv (FISV) said it’s buying First Data (FDC) for $22 billion in an all-stock deal.

Folks who own First Data will get 0.303 shares of Fiserv for each share of FDC they own. That values FDC at $22.74. This is a 22% premium to First Data’s closing price.

Fiserv shareholders will own 57.5 percent of the combined company and First Data shareholders will own 42.5 percent. Fiserv offered 0.303 of its shares for each First Data share.

Fiserv Chief Executive Officer Jeffery Yabuki will become CEO and chairman of the combined company.

After the deal closes in the second half of 2019, the combined company’s adjusted earnings per share is expected increase by more than 20 percent in the first full year, the companies said.

Fiserv looks to open down 6% today. From the WSJ:

Fiserv, based outside of Milwaukee, sells systems to banks, credit unions and other financial institutions, including those related to electronic payment transactions. Atlanta-based First Data’s offerings include point-of-sale products for retailers, like credit-card machines and point-of-sales devices.

The combined company plans to invest $500 million over five years, targeting risk management, merchant solutions and payment technologies. It would also generate significant incremental revenue, related to adding new value to bank merchant services, credit processing and other products, the companies said.

The combined company would be able to trim $900 million in expenses over five years, driven by the elimination of duplicative corporate structures, streamlining technology infrastructure, operational efficiencies and other changes, Fiserv and First Data said.

Fiserv also said they expect to report Q4 earnings on February 7. They look to report earnings of 84 to 85 cents per share. For the entire year, that’s earnings of $3.10 to $3.11 per share. For 2019, Fiserv expects to earn between $3.39 and $3.52 per share.

Morning News: January 16, 2019
Posted by Eddy Elfenbein on January 16th, 2019 at 7:15 am

The Supreme Court Just Handed a Big, Unanimous Victory to Workers. Wait, What?

Bigger Gold Companies Still Aren’t Glitterati

Goldman Says Rich People Will Drag Down the U.S. Economy by Spending Less

Netflix Raises Prices on All of Its Subscription Plans

What Wall Street Didn’t Like About Wells Fargo’s Earnings

BofA Beats Profit Estimates on Higher Interest Income, Loan Growth

Walmart Could Leave CVS Caremark Pharmacy Networks Amid Dispute

Microsoft and Walgreens Team Up to Fight a Common Rival: Amazon

Sears Chairman Prevails in Bankruptcy Auction for Retailer With $5.2 Billion Bid

Snap Finance Chief Joins Executive Exodus

Expecting a Huge Payout, Investment Banker Loses His New Job Instead

How to Make Money Trading: Hack Into SEC, Peek at 157 Secret Earnings Reports

Ben Carlson: Diversification is (Almost) Undefeated

Nick Maggiulli: Beware the Gatekeeper

Roger Nusbaum: If You Haven’t Done These 75 Things By 5am, You’re Not Doing It Right

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Sherwin-Williams Warns on Q4
Posted by Eddy Elfenbein on January 15th, 2019 at 9:37 am

We got a Buy List earnings warning this morning. Sherwin-Williams (SHW) said their Q4 earnings won’t be so hot. They had been expecting a sales increase in the mid-single digits. Now they say it will be 2%.

Sherwin now expects full-year earnings of $18.53 per share (that excludes merger-related costs). That’s below their previous guidance of $19.05 to $19.20 per share.

Commenting on the preliminary results, Chairman, President and Chief Executive Officer John G. Morikis said, “Our performance in the fourth quarter was disappointing across the board relative to our outlook back in October. Consolidated revenue growth for the fourth quarter fell well short of our previous expectation, due in large part to weak sales growth by our North American stores in October and November. Store sales rebounded somewhat in December, but not enough to bring in the quarter. Sales for our Consumer Brands and Performance Coatings Groups also fell short of expectations. The revenue shortfall was the primary driver of the significant earnings per share miss in the quarter. Given the lower preliminary results for our fourth quarter, our full year preliminary adjusted net income per share is $18.53 per share, or about 3% below the midpoint of our previous guidance range. This full year 2018 adjusted earnings per share is an increase of approximately 23% over full year 2017 on a comparable basis.”

At a quarterly rate, Sherwin now expects Q4 EPS of $3.55 which is down from the earlier forecast of $4.07 to $4.22. Shares of SHW are down about 5% this morning.

Earnings are due out on January 31.

Morning News: January 15, 2019
Posted by Eddy Elfenbein on January 15th, 2019 at 7:11 am

China Is Losing The Trade War In Nearly Every Way

German Growth Is Weakest in Five Years, in Latest Sign of Global Slowdown

May Faces Worst Government Defeat in 95 Years in Brexit Vote

German Court Throws Out Qualcomm’s Latest Patent Case Against Apple

U.S. Steel Companies Face Downturn Despite Trump Claims of Revival

U.S. Now Says All Online Gambling Illegal, Not Just Sports Bets

Volkswagen, Ford to Announce Automotive Alliance

How Fiat Chrysler Sped From Laggard to Leader in Detroit

Is General Motors Ready to Take on Tesla?

Market Turmoil Hurt Citi’s Revenue as ’18 Ended, Signaling Possible Trouble

JPMorgan Misses Profit Estimates as Bond Trading Slumps

PG&E Bankruptcy Tests Who Will Pay for California Wildfires

In a Month You’ll Wish the Shutdown Were Only as Bad as Today

Joshua Brown: What Are Your Thoughts: 45% in Twelve Days?

Michael Batnick: These Are the Goods

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GuruFocus on Raytheon
Posted by Eddy Elfenbein on January 14th, 2019 at 3:26 pm

Here’s a sample:

Global defense spending is forecasted to grow 3.2% per annum over the next four years. Raytheon is expanding its international presence and is aiming to increase the portion of total sales generated in international markets from its 2017 level of 35%. It is seeking to develop international sales opportunities for its Patriot missile defense franchise, with Sweden recently becoming the 16th country to use the system. Poland and Romania are also expected to place additional orders over the next several years.

The company continues to invest in its cybersecurity segment. It was recently awarded a multiyear contract with a new customer in the Middle East and North Africa region to provide cybersecurity solutions and operational support. The company is building a significant cybersecurity portfolio through continued investments in an industry that is projected to grow 10.2% annually over the next five years.

Read the whole thing.

Beware the Mega-Merger
Posted by Eddy Elfenbein on January 14th, 2019 at 11:35 am

The big news today is that Newmont and Goldcorp are getting hitched in a $10 billion deal. This is a biggie.

This deal comes after Barrick and Randgold got together in a $5.4 billion deal. Make no mistake, today’s deal is a direct response to the former deal.

As a very general rule of thumb, when the price of a commodity falls, that sparks consolidation in the industry. In other words, everyone starts to merge — and that’s exactly what’s happening.

Beware of mega mergers. This is especially true for defensive ones. They’re doing these deals not because they want to but because they have to.

People think M&A is some elevated science. It’s not. More often, the story goes something like this: Why did A buy B? Well, they really didn’t want to but they thought, if they didn’t, C was going to move in and buy B. So, A struck first, not realizing C probably felt the same way.

Morning News: January 14, 2019
Posted by Eddy Elfenbein on January 14th, 2019 at 7:17 am

Stocks Fall, Bonds Climb as China Data Disappoints

Saudis Set for $11 Billion Asset-Sale Blitz After Slow Start

Fintech Firms Want to Shake Up Banking, and That Worries the Fed

Malaysia Blames Goldman Sachs for Stolen Billions

Newmont to Buy Goldcorp in $10 Billion Mega Gold-Mining Deal

The Next American Car Recession Has Already Started

Electric Vehicles Are in the Spotlight at Detroit’s 2019 Auto Show

Cadillac Takes Aim at Tesla With SUV Priced Below Model X

PG&E Plans Bankruptcy Filing, CEO to Exit as Fire Costs Rise

Gin’s Journey in Britain, From ‘Mother’s Ruin’ to a Hipster Drink

Hedge-Fund-Backed Media Group Makes Bid for Gannett

ACWA Plans to Make Solar Panels as Part of SoftBank and Saudi Fund’s $200 Billion Project

Ben Carlson: Are Market Moves Happening Faster?

Jeff Miller: Will Corporate Earnings Results Change the Message of the Markets?

Howard Lindzon: Open Source Software – An Undeniable Megatrend

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Another Tame CPI Report
Posted by Eddy Elfenbein on January 11th, 2019 at 11:19 am

This morning, the government said that consumer prices fell 0.1% in December. That’s the first drop in nine months. Over the course of 2018, inflation rose by 1.9%.

The “core rate,” which excludes food and energy, rose by 0.2% last month. Over all of 2018, core inflation rose by 2.2%. The data confirms what the market has been saying — inflation is not a problem. Gasoline prices fell 7.5% last month after dropping 4.2% in November.

December’s inflation readings were in line with economists’ expectations. The Federal Reserve, which has a 2 percent inflation target, tracks a different measure, the core personal consumption expenditures (PCE) price index, for monetary policy.

The core PCE increased 1.9 percent year-on-year in November after rising 1.8 percent in October. It hit 2 percent in March for the first time since April 2012.

A sharp decline in oil prices amid an oversupply and slowing global economic growth is keeping overall inflation in check. Lower oil prices are also filtering through to core inflation via cheaper airline tickets.

While the Fed has forecast two rate hikes this year, moderate inflation pressures likely support recent statements by several policymakers, including Chairman Jerome Powell, for caution about raising interest rates this year.

Here’s a look at the real Fed funds rate, based off core inflation.