CWS Market Review – July 27, 2018

“As time goes on, I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes.” – John Maynard Keynes

This week, the stock market inched closer to a new all-time high. In fact, we got so close that the dividend-adjusted index actually did touch a new high. The reason for the happy mood is good earnings. The earnings “beat rate” is currently running at 84%. That’s very good. Historically, the beat rate runs at about 67%.

(Note that I’m leaving out Facebook. On Thursday, traders gave the Zuck a super-atomic wedgie thanks to Facebook’s lousy earnings report. The stock lost an amazing $120 billion in market value. For some context, that’s equivalent to about $15 for every person in the world.)

Our Buy List had a very good week. Six of our stocks reported earnings, and all six beat expectations. All but one raised full-year guidance. The only one that didn’t, Check Point Software, was our best performer. CHKP beat earnings and doubled its share buyback, and the stock jumped more than 5%. There’s a lot of earnings news to get to, so let’s jump right in.

This Week’s Buy List Earnings Reports

Here’s an updated look at our Q2 Buy List Earnings Calendar:

Company Ticker Date Estimate Result
Alliance Data Systems ADS 19-Jul $4.64 $5.01
Danaher DHR 19-Jul $1.09 $1.15
RPM International RPM 19-Jul $1.18 $1.05
Signature Bank SBNY 19-Jul $2.80 $2.83
Snap-On SNA 19-Jul $2.95 $3.11
Sherwin-Williams SHW 24-Jul $5.66 $5.73
Stryker SYK 24-Jul $1.73 $1.76
Wabtec WAB 24-Jul $0.93 $0.96
Check Point Software CHKP 25-Jul $1.30 $1.37
Torchmark TMK 25-Jul $1.49 $1.51
AFLAC AFL 26-Jul $0.99 $1.07
Moody’s MCO 27-Jul $1.89
Carriage Services CSV 31-Jul $0.37
Fiserv FISV 31-Jul $0.74
Becton, Dickinson BDX 2-Aug $2.86
Cerner CERN 2-Aug $0.60
Church & Dwight CHD 2-Aug $0.47
Cognizant Technology Solutions CTSH 2-Aug $1.10
Continental Building Products CBPX 2-Aug $0.45
Ingredion INGR 2-Aug $1.65
Intercontinental Exchange ICE 2-Aug $0.89

On Tuesday morning, three of our Buy List stocks reported earnings. First up is Sherwin-Williams (SHW). Going into the report, I had been concerned about some of the issues surrounding the Valspar merger. Fortunately, those issues look to be resolved.

Wall Street had been expecting earnings of $5.66 per share. In last week’s issue of CWS Market Review, I said, “they should be able to beat that.” Turns out, I was right. For Q2, Sherwin made $5.73 per share, a seven-cent beat. Sherwin also bumped up its full-year guidance range to $19.05 – $19.35 per share.

CEO John G. Morikis said, “The Company posted record results in net sales, gross profit and profit before taxes in the second quarter, aided by the Valspar acquisition, which continues to build momentum (yay!! – Eddy). Consolidated earnings per share expanded by 26.8% percent in the quarter, excluding acquisition-related costs and environmental-expense-provisions impacts in both years. Underlying demand remained solid across most of our end market segments during the quarter. At the same time, raw-material costs continued to inflate during the quarter at a rate slightly higher than anticipated. We continue to focus on offsetting these escalating costs by controlling spending and implementing price increases.”

This was a good report. Shares of SHW rallied after the news, and kept going. On Thursday, SHW got very close to breaking $450 per share. This year, this stock basically went from being a 10% loser to being a 10% winner. This is precisely why we use the strategy we do. This week, I’m raising my Buy Below on Sherwin to $460 per share.

Wabtec (WAB), our freight-services stock, said they made 96 cents per share for Q2, which beat estimates by three cents per share.

Raymond T. Betler, Wabtec’s president and chief executive officer, said: “Our second-quarter results were on target, and with a strong backlog and the positive indicators we see in our markets, we’re comfortable increasing our guidance for the year. Our freight business demonstrated strong growth in revenues and income from operations, and we expect demand to continue to improve. In transit, as expected we are managing through some lower-margin contracts in the short term while making long-term improvements in the core business. Overall, we’re pleased with our year-to-date performance, excited about the opportunities we see from our combination with GE Transportation and confident we can deliver improved earnings, margins and cash flow in the future.”

Wabtec also increased its full-year guidance. They expect revenues to be about $4.2 billion, and EPS to be about $3.85. That doesn’t include costs related to the GE deal. WAB’s operating margin target for the full year is about 13.5%, and its effective tax rate for the full year is expected to be about 24%, excluding the second-quarter tax benefit. I like these numbers.

WAB broke out to yet another new high this week. The stock is now a 33.7% winner for us this year. I’m lifting our Buy Below to $111 per share.

Stryker (SYK) was our only dud, and even that wasn’t much of a dud. The orthopedic company reported Q2 earnings of $1.76 per share. That’s above its guidance range of $1.70 to $1.75 per share. Net sales rose 10.3% to $3.3 billion.

For Q3, they’re looking for earnings between $1.65 and $1.70 per share. Wall Street had been expecting $1.69 per share. I think we dodged a bullet when the Boston Scientific deal fell through.

For all of 2018, Stryker now expects earnings to range between $7.22 and $7.27 per share. That’s their second increase this year. SYK’s initial range was $7.07 to $7.17 per share. Then it went to $7.18 to $7.25 per share. This basically means the company is baking the Q2 earnings beat into the full-year guidance. They’re not lifting second-half expectations.

The stock dropped after the earnings report, but not by much. Stryker is still a 10.7% winner for us this year. SYK is a buy up to $181 per share.

We had two more reports on Wednesday. Torchmark (TMK) reported after the bell, but it popped 3.5% on Thursday thanks to another good earnings report. Don’t let these quiet stocks fool you. This is a very good company.

For Q2, TMK made $1.51 per share. That beat estimates by two cents per share. The company also raised guidance. Torchmark’s initial guidance for this year was $5.93 to $6.07 per share. I said I thought that was too low and that they could probably hit $6.10 per share in 2018. Well, they upped their guidance range to $6.02 to $6.12 per share.

There’s not much more to say about TMK. The stock is still going for a decent valuation. TMK remains a good buy up to $91 per share.

Check Point Software (CHKP) might be our star this earnings season. On Wednesday morning, Check Point said it earned $1.37 per share for Q2. Their guidance had been for between $1.25 and 1.35 per share. The company is also doubling its share buyback from $1 billion to $2 billion.

For Q3, they expect revenues between $454 million and $474 million and EPS in the range of $1.30 to $1.40. The full-year outlook is unchanged at $5.45 to $5.75 per share. If you recall, in April, they lowered their full-year guidance. It’s good to see that the concerns from earlier this year have passed.

This is another case where our buy-and-hold strategy paid off. Shares of CHKP jumped 5.2% on Wednesday, and the stock is up more than 10% for us this year. I’m lifting our Buy Below on Check Point to $120 per share.

After the bell on Thursday, AFLAC (AFL) had a reassuring earnings report. The duck stock hasn’t been so hot lately, and I suspect that some of that was due to the yen, but the good news is that for Q2, AFLAC earned $1.07 per share. That’s quite good.

For some context, AFL previously told us they had been expecting Q2 earnings to range between 91 cents and $1.05 per share. That assumed the yen averaged between ¥100 and ¥110 to the dollar. For Q2, the exchange rate knocked off one penny per share.

The numbers were pretty solid for AFLAC. The company is bumping up its guidance for this year. The previous range was $3.72 to $3.88 per share. The new range is $3.90 to $4.06 per share. That assumes ¥112.16 yen to the dollar. You’ll notice that the increase is larger than the Q2 earnings beat, so they’re raising expectations for the second half. Going by the new guidance, it means AFLAC is going for about 11 times earnings.

For Q2, AFLAC expects earnings of 87 cents to $1.02 per share. That assumes an exchange rate of ¥110 to ¥115 to the dollar. Wall Street had been expecting 98 cents per share. AFLAC is a steady ship. I’m keeping my Buy Below on AFL at $50 per share.

Nine More Buy List Earnings Next Week

We have nine more earnings reports coming next week. There’s also Moody’s (MCO), which reports later today. For Q1, Wall Street expects $1.89 per share. (Later today, we’re also getting the initial Q2 GDP report. This could be a big story.)

On Tuesday, Carriage Services (CSV) and Fiserv are scheduled to report. In April, Carriage Services had a good earnings report. The bad news is that they lowered their guidance. The funeral-home company now expects forward fourth-quarter earnings of $1.80 to $1.85 per share. That was a decrease of 20 cents per share at both ends. The consensus for Q2 is for 37 cents per share, but that’s the average of just two analysts.

Fiserv (FISV) is having another good year. The company reiterated its full EPS forecast of $3.02 to $3.15 per share. That’s an increase of 22% to 27% over last year. The company also expects internal revenue growth of at least 4.5% this year. For Q2, Wall Street expects 74 cents per share. That sounds about right.

Next Thursday will be a very busy day for us. We have seven Buy List stocks scheduled to report.

Becton, Dickinson (BDX) is turning into a nice winner for us this year. The company sees 2018 earnings coming in between $10.90 and $11.05 per share. The analyst consensus is for $2.86 per share.

Cerner (CERN) got clocked after its last earnings report. They met expectations and lowered guidance. At one point, the stock was down 10%, but it quickly rallied back, as strong stocks tend to do.

Cerner now expects 2018 earnings of $2.45 to $2.55 per share. They blamed the lower guidance on “the delay of a large contract and a less predictable end market.” For Q2, the healthcare-IT firm sees earnings coming in between 59 and 61 cents per share.

Like Sherwin-Williams, Church & Dwight (CHD) went from being a 10% loser this year to a 10% winner. For Q2, CHD expects earnings of 46 cents per share. They should top that. For the year, they’re looking for $2.24 to $2.28 per share.

Cognizant Technology (CTSH) expects Q2 earnings of at least $1.09 per share and revenues between $4 and $4.04 billion. In May, the company lowered its full-year forecast. Originally, CTSH was expecting earnings of at least $4.53 per share. Now they expect at least $4.47 per share. It’s not big, but Wall Street didn’t like it.

Continental Building Products (CBPX) missed earnings last time. It was only by a penny, but I had been expecting a beat. Business is still going well. Weather may have a played a role, but importantly, gross margins increased. Continental had announced a price increase for January 1. As a result, a lot of customers bought before that, so results in Q1 reflected the aftermath. I think it’s important that they haven’t changed their 2018 outlook.

Ingredion (INGR) is this year’s problem-child stock. There’s always one. They lowered guidance in May. Then, two weeks ago, the company warned that its Q2 results will be between $1.63 and $1.68 per share. Wall Street had been expecting $1.92 per share.

Ingredion also lowered its full-year guidance from $7.90 to $8.20 per share down to $7.50 to $7.80 per share. That’s the second time they’ve lowered guidance this year. Ingredion also announced an aggressive cost-cutting program. That usually makes me suspicious. A good company should always be looking to cut costs. I want to hear more details on their plans for this year.

Intercontinental Exchange (ICE) recently broke out its trading range. The stock seemed to be stuck between $70 and $75. Lately, however, it’s started to move. On Thursday, ICE closed at $77.05 per share, which is a new all-time high. Analysts are looking for Q2 earnings of 89 cents per share.

That’s all for now. More earnings to come next week. There will also be a Fed meeting on Tuesday and Wednesday. The policy statement is due out Wednesday afternoon at 2 pm ET. Don’t expect any rate hikes this meeting. Also on Wednesday, we’ll get the latest ISM report. Then on Friday is the July jobs report. The unemployment rate could hit a multi-decade low. 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

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