CWS Market Review – November 2, 2018

“It’s waiting that helps you as an investor, and a lot of people just can’t stand to wait.” – Charlie Munger

October has mercifully come to an end. The S&P 500 shed nearly 7% during the month, making it the worst month for stocks in seven years. The Nasdaq suffered even more. The tech-heavy index was down over 9% for the month.

The good news is that there’s been some relief lately. The S&P 500 has rallied more than 1% for the last three days. That hasn’t happened in more than two years, but don’t think the storm has passed. As long we’re below the 200-day moving average—and we are—then there’s a threat that we’ll move lower. The market loves to “test” its low once or twice before making its next move.

In this month’s issue we have several Buy List earnings reports to cover. Some were good (Church & Dwight), others were not (Carriage Services). I’ll sort it out for you. We also have two more earnings reports next week that will be our final reports for this season. Now let’s take a closer look at the broad market.

The End of Red October

October was a very bad month for stocks. The major event came on October 3, when Fed Chairman Jay Powell said that we’re a “long way” from neutral. The markets took the clue. Later this month, we learned that mortgage rates touched a seven-year high. After that, we got a bad housing report, which spooked the bulls even more.

I think the market has forgotten that housing can have a bad year. Not every slowdown means a global bust-up like we had ten years ago. But lately, just about any stock related to housing has felt the pain. With the general market wooziness, some tech stocks have been caught up in the selling, but most of the damage has been related to anything involved in construction. The S&P 500 Materials Sectors dropped 16% in a little over one month.

The market had a dramatic turnaround this week. From Monday’s low to Thursday’s close, the Dow gained more than 1,250 points. I tend to be wary of such strong “contra-trend” moves, especially when there’s so little to justify it. On Monday, the stock market had a pronounced reversal. A morning rallied was wiped out. The difference between Monday’s high and low was over 900 points. On Monday, the S&P 500 got as low as 2,603.54. That’s 11.5% below the intra-day high from September 21.

The key for investors is the 200-day moving average. Historically, volatility is much higher below the 200-DMA than above it. Even with this week’s nice bounce, the S&P 500 is still about 1% below its 200-DMA. But a short burst is not a convincing move. Expect to see the S&P 500 back below 2,650 soon. Until then, make sure you have a well-diversified portfolio of high-quality stocks. Now let’s take a look at a busy week of earnings reports.

Eight Buy List Earnings Reports

We had another big batch of earnings this week (here’s our earnings calendar). Let’s start with Moody’s (MCO), which reported last Friday. For Q3, the company earned $1.69 per share, which was an eight-cent miss. That’s unusual for Moody’s. The company said that non-financial corporate debt issuance slowed down last quarter.

Even though this was an earnings miss, Moody’s earnings were still up 11% from a year ago. The company lowered its full-year range to $7.50 to $7.65 per share. That implies a Q4 range of $1.74 to $1.89 per share. On Friday, shares of Moody’s dropped nearly 9%. Fortunately, the stock made up a lot of lost ground this week. MCO gained more than 3% on Wednesday, and then another 3% on Thursday. I’m dropping my Buy Below on Moody’s to $162 per share.

On Tuesday, we had two more reports. First up is Cognizant Technology Solutions (CTSH). For Q3, the IT outsourcer earned $1.19 per share. That beat estimates by six cents per share. The company had told us to expect earnings of at least $1.13 per share. Revenue rose 8.3% to $4.88 billion.

For Q4, Cognizant sees earnings of at least $1.05 per share, and full-year earnings of at least $4.50 per share. That’s a bit light. The Street had been expecting $1.14 for Q3 and $4.53 for the year. Cognizant sees Q4 revenue between $4.09 billion and $4.13 billion.

The stock fell close to 4% on Tuesday, but gained nearly all of it back on Wednesday. Cognizant is going just fine. This week, I’m lowering our Buy Below to $74 per share.

Also on Tuesday morning, Wabtec (WAB) said they made 95 cents per share for Q3, which matched estimates. This is a crucial time for WAB with the big merger coming. Frankly, any merger news probably outweighs earnings news at this point.

Wabtec said they now expect full-year 2018 earnings of $3.85 per share, which excludes merger costs. The company is aiming for a 13% operating margin and $200 million in cash flow. The CEO said he expects a strong Q4 and that the freight business continues to show strong growth. The merger with GE Transportation is expected to happen in early 2019. There will be a special shareholder meeting to vote on the deal on November 14.

I wasn’t as disappointed with this report as traders seemed to be. Shares of WAB dropped about 9% over Tuesday and Wednesday, but rallied some on Thursday. I still like this stock, but I’m dropping our Buy Below to $91 per share.

Earnings from ICE, Fiserv and Carriage

We had three earnings reports on Wednesday. Before the bell, Intercontinental Exchange (ICE) reported Q3 earnings of 85 cents per share. That was five cents ahead of expectations. Total revenue, excluding transaction-based expenses, rose 4.7% to $1.2 billion. Also, the board of directors authorized a new share-buyback program of $2 billion.

This was a good quarter for ICE. The company noted that it was the 22nd quarter in a row of year-over-year revenue growth. ICE didn’t offer any financial guidance. The company is also in the midst of a regulatory battle on the future of data fees. This is a very profitable business for ICE and the other exchanges, but the fight over regulations will probably wind up in the courts. The stock jumped 5.4% on Wednesday. ICE remains a solid buy up to $79 per share.

After the closing bell on Wednesday, Fiserv (FISV), “a leading global provider of financial-services technology solutions,” reported third-quarter earnings of 75 cents per share. That was two cents below estimates. In last week’s issue, I said I had been expecting an earnings beat from Fiserv.

Despite the earnings miss, Fiserv is having a generally good year. For the first nine months of this year, Fiserv has made $2.26 per share. Operating margin dipped to 31.6%, but that’s still quite good.

Fiserv also raised the lower end of its full-year guidance. The range had been $3.02 to $3.15 per share. Now it’s $3.10 to $3.15 per share. That represents growth over last year of 25% to 27%. That also translates to a Q4 range of 84 to 89 cents per share. Wall Street had been expecting 86 cents per share. This year looks to be Fiserv’s 33rd year in a row of double-digit earnings growth. The stock took a 5.5% bath on Thursday, but don’t let the earnings miss scare you. Fiserv is a buy up to $81 per share.

The report from Carriage Services (CSV) was a disaster. There’s no way to put a positive spin on this one. The stock plunged 21.5% on Thursday. When the weak Q2 report came out, management said the issues were temporary, and that we will experience “broadly higher performance during the latter part of the second half of the year.” That was wrong.

I took management’s word, and that was a big mistake. For Q3, Carriage earned 14 cents per share, which was far below consensus of 22 cents per share. That’s down from 25 cents per share one year ago. I’m dropping my Buy Below down to $14 per share. You’ll notice that I’m not much bothered by a small earnings miss from companies like Fiserv because I have faith in the company’s management. Not so with Carriage. I apologize for this one.

Church & Dwight and Ingredion

Church & Dwight (CHD) may be our star pupil this earning season. On Thursday, the consumer-brand powerhouse reported Q3 earnings of 58 cents per share. That beat estimates by four cents per share. Net sales rose 7.2% to $1.04 billion.

Consumer Domestic, which is CHD’s largest unit, saw net sales growth of 7.6%. Business growth was led by Arm & Hammer. I was pleased to see the company raise its estimate for full-year organic revenue growth from 3.5% to 4.0%.

For Q4, CHD expects earnings of 57 cents per share, which makes the full-year total $2.27 per share. The stock jumped over 9% on Thursday. Church & Dwight qualified as my only Buy Below price increase this week. I’m lifting our Buy Below on CHD to $70 per share.

Last week, Ingredion (INGR) warned that Q3 earnings would be about $1.70 per share, which was 26 cents less than what Wall Street had been expecting. The company also lowered its full-year guidance from a range of $7.50 to $7.80 per share to a new range of $6.80 to $7.05 per share. The company blamed weak currencies in developing markets plus power outages in North America. Ingredion said it will require more than one quarter to recover.

On Thursday, Ingredion confirmed that they did, in fact, make $1.70 per share last quarter. The company didn’t offer much more in specifics outside what we already know. The plan is to invest more in its specialties portfolio. I afraid I’m skeptical about Ingredion’s plans. I had been expecting to hear more concrete plans from them.

Two More Buy List Earnings Reports Next Week

We have our final two earnings reports next week. Becton, Dickinson (BDX) had a strange reaction to its last earnings report. The stock initially dropped, then regained its composure and proceeded to rally strong to a new high. The good times ended in October when the stock pulled back sharply. I actually don’t mind seeing BDX at a discounted price.

The next earnings report is scheduled to report on Tuesday, November 6. In August , BDX reported $2.19 per share for Q2. That beat the Street by three cents, and it was up 18.3% over last year. Becton also raised its revenue guidance for this year. Plus, they bumped up the low end of their full-year forecast. Becton now sees full-year EPS of $10.95 to $11.05 from a previous range of $10.90 to $11.05. For Q3, the consensus on Wall Street is for $2.93 per share.

Continental Building Materials (CBPX) is due to report on Thursday, November 8. Continental was our worst-performing stock last month. For October, CBPX shed more than one-quarter its value. At one point during the summer, we had nearly a 40% YTD gain in Continental. A few days ago, it was negative on the year for us. More remarkably, we didn’t hear anything from the company. As a wallboard stock, it’s certainly tied to the housing sector.

The last earnings report in August was quite good. CBPX made 59 cents per share, which was 14 cents more than estimates. Net sales were up 15.5%, while EBITDA rose more than 21%. Gross margins improved to 29.4% from 25.5%. It’s not just about price increases; wallboard sales volume rose from 647 million square feet last year to 722 million square feet this year. The consensus on Wall Street is for earnings of 48 cents per share.

That’s all for now. The big news next week will be the mid-term U.S. elections on Tuesday. There will also be another Federal Reserve meeting on Wednesday and Thursday. Don’t expect to see any move on interest rates. The policy statement will come out on Thursday at 2 pm ET. I’m also curious to see Monday’s ISM Non-Manufacturing Index. The last report was the highest since the index was created ten yeas ago. 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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