Morning News: November 5, 2015
Posted by Eddy Elfenbein on November 5th, 2015 at 7:08 am

In Pacific Trade Deal, Vietnam Agrees to U.S. Terms on Labor Rights

BOE Stays Cautious on Rate-Hike Timing as Inflation Outlook Cut

Bonds Tumble Around the Globe as Fed Rate Odds Climb Past 50%

Bitcoin Surges, Emerging From a Lull in Interest

Puerto Rico’s Debt Crisis and the 1975 Law Complicating Matters

Regulators Ramp Up Debt-Collection Crackdown

Toyota to Spend Record $6.6 Billion on Buybacks as Profit Climbs

Facebook Sales Top Estimates, Fueled by Mobile Advertising

Media Stocks Dip After Time Warner Cuts Profit Expectations

Kraft to Slash 2,600 More Jobs, Close Seven Plants

Sanofi, Hanmi Seal Diabetes License Deal For Up To $4.2 Billion

Denver-Based Molson Coors Nearing Deal for MillerCoors

Qualcomm Forecasts Show Struggle for License Deals in China

Cullen Roche: Private Sector Saving Is Not Saving Net of Investment

Roger Nusbaum: Does 60/40 Need to Evolve?

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Qualcomm Earns 91 Cents per Share
Posted by Eddy Elfenbein on November 4th, 2015 at 4:14 pm

After the closing bell, Qualcomm (QCOM) reported earnings of 91 cents per share. That was five cents more than estimates. This was for their fiscal fourth quarter.

For the full year, Qualcomm earned $4.66 per share which is a big drop from the $5.27 they made last year.

“Our fiscal fourth quarter revenues and EPS were at the high end of our expectations, with stronger-than expected MSM chipset shipments offsetting slower than expected progress concluding new license agreements in China. We executed a major increase in our capital return program in fiscal 2015, returning a record $14 billion of capital to stockholders,” said Steve Mollenkopf, CEO of Qualcomm Incorporated. “We are encouraged by customer reaction to our flagship Snapdragon 820, are on track to deliver on our fiscal 2016 cost reduction targets and expect to exit fiscal 2016 on an improving financial trajectory.”

For Q1, they sees earnings of 80 to 90 cents per share on revenue of $5.2 billion to $6.0 billion. That compares with earnings of $1.34 per share and revenue of $7.1 billion in last year’s Q1.

Value Stocks and Interest Rates
Posted by Eddy Elfenbein on November 4th, 2015 at 2:47 pm

Here’s an interesting chart I made at FRED. This shows the relative strength of value stocks (in blue) compared with the three-month Treasury yields (in red).

The blue line is the Russell 3000 Value Total Return Index divided by the Russell 3000 Total Return Index.

Cognizant Earns 76 Cents per Share
Posted by Eddy Elfenbein on November 4th, 2015 at 12:39 pm

I have to apologize for the lack of posting this week but I’ve had a number of projects to attend to. Nevertheless, earnings season rolls on.

This morning, Cognizant Technology Solutions (CTSH) reported Q3 earnings of 76 cents per share. That hit Wall Street’s forecast on the nose. Previously, the company had told us to expect earnings of “at least” 75 cents per share. Don’t be fooled. Matching expectations for CTSH is impressive. The company grew its revenues by 23.5% last quarter. I like this company a lot.

“Our balance sheet remains very healthy. Cognizant recorded another quarter of strong cash generation, resulting in an increase of almost $500 million in cash and short term investments,” said Karen McLoughlin, Chief Financial Officer. “Additionally, during the quarter, we repaid the $100 million balance of our revolving credit facility and repurchased over $156 million of shares under our existing stock repurchase program. Year-to-date, we have repurchased 5.3 million shares for $334 million, reflecting the confidence in our business, commitment to drive shareholder value and ability to generate strong cash flows.”

For Q4, Cognizant sees earnings of at least 77 cents per share. Wall Street had been expecting 77 cents per share. Cognizant also expects full-year earnings of at least $3.03 per share. That’s an increase from the previous guidance of at least $3 per share.

They also raised their revenue guidance to at least $12.41 billion. That would be a 21% increase over last year. Not too shabby. This is the third time CTSH has raised its revenue guidance this year.

The shares have pulled back today around 3%.

Morning News: November 4, 2015
Posted by Eddy Elfenbein on November 4th, 2015 at 7:10 am

Greece May Win 2 Billion-Euro Payout by Monday, EU Official Says

Saudi Wells Running Dry — of Water — Spell End of Desert Wheat

Japan Post Shares Surge on Debut After Year’s Biggest IPO

Oil Holds Above $50 on Brazil Worries

San Francisco Voters Reject ‘Airbnb Initiative’

U.S. Auto Industry Posts Best October Sales in Decade

Time Warner Inc Revenue, Profit Beat Estimates

Takata’s Survival in Doubt as Top Customer Deserts Air-Bag Maker

SoftBank’s Profit Gains as Son Bets on a Sprint Turnaround

High-Frequency Trader Convicted in First U.S. Spoofing Case

VW Sinks Deeper Into Woe as Scandal Spreads to More Cars

Michael Kors Sales, Profit Beat Estimates; Buyback Raised

’Bank’ Is Not a Four-Letter Word

Joshua Brown: Simon Lack on Non-Traded REITs

Jeff Carter: How Do You Segment a Market?

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Morning News: November 3, 2015
Posted by Eddy Elfenbein on November 3rd, 2015 at 7:02 am

Xi Says China Needs at Least 6.5% Growth in Next Five Years

China’s Money Exodus: How the Chinese Send Billions Abroad to Buy Homes

Here’s Why Activision Spent $5.9 Billion on the Creator of Candy Crush

TreeHouse Buys ConAgra’s Private-Label Unit for $2.7 Billion

Getting a Charge Out of Visa’s Big Deal

Amazon Is Opening An Actual, Real-Life Bookstore

Keystone XL’s Builder Faced Darkening Prospects

Shell Steams Ahead With BG Takeover With Promise of More Savings

BMW Sees `Fierce’ Competition Holding Back 2015 Profit Gains

Sprint Signs Deal to Offer Roaming Service in Cuba

Sprint Loss Deeper Than Expected

UBS Investment Bank Swings to Profit on Cuts, Fixed Income

Monster Beverage Corporation: The Heart-Thumping Growth Story

Roger Nusbaum: Markets Party Like It’s 2011

Cullen Roche: A Bull Market Built on Endless Financial Crisis Fears

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Morning News: November 2, 2015
Posted by Eddy Elfenbein on November 2nd, 2015 at 6:28 am

China Expands Cheap Loans to Policy Banks for Favored Projects

U.K. October Manufacturing Grows at Fastest Pace in More Than a Year

FBI Takes a Bullet in Banks’ $50 Billion Fee War With Retailers

Visa Agrees to Buy Visa Europe for as Much as $23.4 Billion

Nissan Raises Full-Year Profit Forecast as Demand Rises in U.S.

Meg Whitman Seeks Reinvention for HP as It Prepares for Split

HSBC Costs Drop Faster Than Revenue as Domicile Call Postponed

Sprint Says Aims to Slash Costs Up to $2.5 Billion, Layoffs Loom

The Corporate Tax Political Divide

Commerzbank CEO Blessing Won’t Extend His Contract Beyond

Shire Agrees to Buy Biotech Firm Dyax for at Least $5.9 Billion

Lionsgate Seeks to Build on Its Library of Film Properties With Theme Parks

General Motors Recalls 9,354 Opel Meriva-B Cars in Russia

Joshua Brown: a hands-on market

Jeff Carter: SEC Approves Crowdfunding for Everyone

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Let’s Talk Consumer Stocks
Posted by Eddy Elfenbein on October 30th, 2015 at 5:16 pm

Update on Moog
Posted by Eddy Elfenbein on October 30th, 2015 at 11:58 am

In today’s newsletter, I indicated that Moog (MOG-A) would be reporting earnings later today. That doesn’t appear to be the case.

Moog hasn’t yet said when they’ll report, but it’s usually on a Friday near the end of the month. I’m assuming the report will come out next Friday. I’ll update you as I learn more.

CWS Market Review – October 30, 2015
Posted by Eddy Elfenbein on October 30th, 2015 at 7:08 am

“The stock market is a giant distraction to the business of investing.” – Jack Bogle

Earnings season rolls on. We had six more Buy List earnings reports this week, and five of them beat expectations. Both AFLAC and Fiserv jumped to new 52-week highs. Fiserv also raised its full-year guidance—the stock is now a 36% winner on the year for us. AFLAC gave us a 5.1% dividend increase. The duck stock has now raised its payout for 33 years in a row!

I’ll run down our earnings reports in a bit. The market wasn’t pleased with them all (like Ford), but as we all know, Wall Street can be a bit of a drama queen. That’s why I have Mr. Bogle’s timeless quote for this week’s epigraph.

We also had a Fed meeting this week. Janet Yellen & Co. decided to hold off raising interest rates this time, but they suggested a rate hike might be coming in December. I’ll break it down for you.

It’s been nearly a month since our “All Clear” signal, and Wall Street continues to surge higher. On Thursday, the S&P 500 touched a two-month intra-day high. The S&P 500 is about to close out its best month in four years (see the chart above).

We also have two more earnings reports coming our way next week. I’ll give you a preview, plus I have some new Buy Below prices. But first, let’s look at what the Federal Reserve had to say.

The Fed Hints at a December Rate Hike

After sending us several signals over the summer that interest rates were about to go higher, a flurry of soggy economic data gave the Fed cold feet. I understand and, frankly, doing nothing was exactly what needed to be done.

It wasn’t that long ago that Wall Street assumed the Fed would have raised rates by now. Instead, here we sit with rates close to 0%. But this week’s Fed statement gave us something to consider. The Fed specifically laid out the conditions by which they would raise rates in December.

In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress—both realized and expected—toward its objectives of maximum employment and 2 percent inflation. 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. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.

As you know, I’m well versed in the arcane and inscrutable language of Fedspeak, so I’m happy to translate. The Fed is saying that a December rate hike is on the table, but they want to see better numbers from the jobs reports. There will be two jobs reports between now and the next Fed meeting. The first one comes next Friday.

The last two jobs reports have been, to use the technical term, kinda blah. Make no mistake, the jobs issue is the key to a rate hike. Sure, the Fed also mentioned inflation, but that’s hardly been an issue in recent months. Commodity prices have gotten clobbered this year.

The Fed also threw in that bit about a “wide range of information.” That’s a catch-all just in case something goes kablooey like the Chinese surprise devaluation did in late August when the S&P 500 lost 7% in two days (7.0009%, to be precise).

Here’s my take: If the next two jobs reports average 180,000 or more net new jobs, then you can expect a rate increase later this year. The futures market currently thinks there’s a 46% chance of a rate hike in December. That’s far from a sure thing, but futures traders had the odds at 6% one month ago.

On Wednesday, Wall Street initially dropped after the Fed’s policy statement came out. Then traders rethought things, and the market rallied to close over 2,090 for the first time since August 18. Interestingly, bank stocks were especially strong (SBNY gained 4.4% on Wednesday). We can’t say for sure whether rates will go up next month, but now we know that the jobs market holds the key. That helps a lot. Now let’s look at our recent earnings reports.

Ford’s “Bizarre” Stock Drop

I’m a big fan of Ford Motor (F), and I’m very pleased that the company is hitting its stride. From my point of view, this week’s earnings report was very good. The automaker doubled its profits from a year ago. What could be wrong with that? Well, Ford earned 45 cents per share, which missed Wall Street’s consensus by two cents per share.

As a result, the stock dropped 5% on Tuesday. Even Ford’s CFO said the stock’s drop was “bizarre.” He’s right. There’s nothing in Ford’s earnings report that should upset investors. Sales of the F-150 rose by 8%. The truck had its third-best quarter in nine years. Ford also “blew through” its estimates for sales and cash flow (to again quote the CFO).

The reason for the earnings miss had nothing to do with Ford’s business. Instead, it was Ford’s estimate for its tax rate. The company had expected a tax rate of 34%. Instead it was 33%. Wall Street expected 32%. Yes, that’s what the earnings miss was all about.

Ford maintained its full-year earnings forecast. It also said it expects profit margins in North America to be at the top of their range. Don’t let the sell-off confuse you. Ford is doing very well. In fact, I’m raising my Buy Below on Ford to $16 per share.

33 Straight Dividend Increases for AFLAC

After the closing bell on Tuesday, we got three more earnings reports. First, AFLAC (AFL) reported Q3 operating earnings of $1.56 per share, eight cents better than estimates. Remember that with insurance companies, it’s better to look at operating earnings rather then net earnings.

The weak yen continues to be an issue for AFLAC. Last quarter, the weak yen knocked off 13 cents per share from their operating profit. Quarterly revenue fell 12.1% to $5 billion. Compared with last year’s Q3, operating earnings fell from $685 million to $672 million. But thanks to share buybacks, operating earnings per share rose by 3.3%. Ignoring the yen, operating earnings per share increased by 11.9%. For the first nine months of the year, operating earnings came to $4.60 per share, but AFLAC lost 40 cents due to the yen. Excluding that, operating earnings were up 2.9%.

The company has been gobbling shares at an impressive rate. So far this year, AFLAC has repurchased 17.4 million shares for $1.1 billion, and it still has 52.1 million shares left under the current buyback plan.

The board approved raising the quarterly dividend from 39 to 41 cents per share. That comes to $1.64 per share for the year, or 2.5%, based on Thursday’s closing price. There aren’t many companies that have raised their dividend every year for one-third of a century.

Now let’s look at the guidance. AFLAC said that if the yen stays between 120 and 125 on the dollar, then they expect Q4 operating earnings to range between $1.36 and $1.56 per share. That translates to a full-year range of $5.96 to $6.16 per share.

My view is that AFLAC is an excellent company, but it’s operating in a very difficult environment. Yields are low and the yen is weak, but the business remains very healthy. I like this report. The stock is up 25% from its August low. This week, I’m raising our Buy Below on AFLAC to $67 per share.

Fiserv Is a Buy up to $103 per Share

Also on Tuesday, Fiserv (FISV) reported third-quarter earnings of $1.03 per share. That beat estimates by six cents per share, and it’s up from 86 cents per share one year ago. Fiserv is probably one of the most consistently superior stocks you’ll ever find. It’s been on our Buy List every year for the last ten years, and it’s been a home run for us. Check out this ten-year chart:

For the first nine months of the year, Fiserv has made $2.86 per share. That’s up from $2.48 per share last year. Fiserv also raised its full-year guidance. The old range was $3.73 to $3.83 per share, and the new range is $3.84 to $3.87 per share. The new range implies Q4 earnings of 98 cents to $1.01 per share.

On Wednesday, FISV jumped as high as $97.42. It’s now a 36.3% winner on the year for us. I’m raising our Buy Below on Fiserv to $103 per share.

The other Tuesday report was from Express Scripts (ESRX). The company reported third-quarter earnings of $1.45 per share which was one penny better than estimates. The pharmacy-benefits manager also narrowed its full range. Previously, it was $5.46 to $5.54 per share. Now it’s $5.51 to $5.55 per share. Last year, ESRX made $4.88 per share.

Since ESRX has already earned $3.97 per share for the first three quarters of this year (up from $3.50 per share last year), the new guidance implies Q4 earnings of $1.54 to $1.58 per share.

Perhaps the bigger news for Express this week was that Walgreens (WBA) said it’s buying Rite Aid (RAD) for $17.2 billion (all cash). Shares of ESRX dipped because it wasn’t them. That’s probably more of a blessing than a curse. Express Scripts remains a buy up to $92 per share.

Earnings from PayPal and Ball Corp.

In last week’s issue, I told you I expected an earnings beat from PayPal (PYPL), and that’s exactly what we got. After the closing bell on Wednesday, PayPal reported Q3 earnings of 31 cents per share which was two cents better than estimates. This is their first report after detaching themselves from eBay (EBAY).

For the full year, the payment-processing place said it expects earnings to range between $1.23 and $1.27 per share. That sounds pretty good to me. Wall Street had been expecting $1.25 per share.

In the after-hours session, the shares went from being up 4% to down by 5%. This is a good reminder not to be overly concerned with after-hours moves (remember that Bogle quote). The shares closed down 1.7% on Thursday. I’m raising the Buy Below on PayPal to $38 per share.

On Thursday morning, Ball Corp. (BLL) reported Q3 earnings of $1.10 per share. That topped estimates by 15 cents per share. That’s a hefty earnings beat. Revenues, however, fell 6.3% to $2.1 billion. It’s not just AFLAC; Ball got dinged by 11 cents per share thanks to currency.

Importantly, Ball said the merger with Rexam is going as expected. They hope to close the deal in the first half of next year. I’m raising my Buy Below on Ball to $70 per share.

Two More Buy List Reports Next Week

We have our final two Buy List reports coming next week. Both Qualcomm (QCOM) and Cognizant Technology Solutions (CTSH) are due to report on Wednesday, November 4.

Three months ago, Cognizant tore the roof off with its Q2 earnings report. The IT outsourcer beat its own earnings target by seven cents per share, and quarterly revenue rose by 22.6%.

Cognizant also raised its full-year guidance from earnings of at least $2.93 per share to earnings of at least $3 per share. (CTSH is big fan of using “at least” with its forecasts.) For Q3, they expect earnings of at least 75 cents per share on revenue or at least $3.14 billion. Guess what? They’ll beat both numbers.

I won’t mince words: Qualcomm has been a lousy stock for us this year. It’s our second-worst performer, with a 19.3% loss. For this earnings report, the chip maker said to expect earnings between 75 and 95 cents per share. Frankly, I’m not expecting much. Some activist shareholders have been pressing Qualcomm to split itself up. I think that’s a good idea. The only thing I can say in QCOM’s favor is that it’s not terribly expensive, and the shares have bounced recently.

I also want to touch on Moog (MOG-A) which is due to report later today. I had been quite negative on the stock earlier this year, but I’m starting to reconsider. It’s true: Moog’s had a rough year, but I think that’s mostly behind them. We’ll get a better sense in this earnings report. I’m not going to change the Buy Below yet on Moog, but I probably will once I see the earnings report. This is one to watch.

That’s all for now. We have a few more earnings reports next week. We’ll also get some of the key turn-of-the-month economic reports. The ISM Index comes out on Monday. The last few reports have been weak. Auto sales are on Tuesday. Ford has been putting out solid numbers here. The ADP jobs report is on Wednesday. Then on Friday is the big October jobs report. The recent Fed statement puts this report at center stage. 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