CWS Market Review – April 12, 2019

“If markets were rational, I’d be waiting tables for a living.” – Warren Buffett

After a seemingly endless wait, first-quarter earnings season has finally arrived, fashionably late but as dramatic as ever. Over the next few weeks, Corporate America will tell us how things went during the first three months of the year.

This will be a key earnings season for Wall Street because we’re expecting a modest earnings decline. I should add that results have beaten expectations for the last 39 quarters in a row. (Come to think of it, shouldn’t that read: analysts have missed reality?) In any event, this will be the first time in ten years when revenues are higher but earnings are lower. In other words, margins are falling.

The market’s been quite happy this week. The S&P 500 has rallied nine times in the last ten days. On Monday, the index closed at another six-month high. We’re close to erasing everything lost during last year’s unpleasantness.

We have a few of our Buy List stocks due to report next week. In this week’s CWS Market Review, I’ll preview next week’s earnings reports. We also had great news from Cerner. Thanks to a major buyback announcement, the healthcare-IT stock jumped more than 10% for us on Tuesday. I’ll have all the details. But first, let’s see why the yield-curve hysteria has probably passed us by.

The Best Jobless-Claims Report in 50 Years

Last Friday, the government said the U.S. economy created 196,000 net new jobs in March. That’s a good number, and it’s a welcome relief after the lousy number from February. (By the way, the February was revised upward modestly.)

It seems that the sluggish start we had at the beginning of the year may have already passed. I suspect that a lot of companies will take advantage of the diminished expectations for this earnings season to pass off bum accounting issues. If Wall Street isn’t expecting much, then this is a good time to book a loss on that investment that went south. We may see a lot of that.

I think the government shutdown, combined with issues from China, put a damper on economic growth during Q1. However, that may have already passed, and we could be accelerating at this point. Let me highlight a few stats.

On Thursday, we got the lowest initial jobless-claims report since October 1969. This is interesting because this is one of the few data series that ticked higher during the shutdown. To me, this suggests that things have gotten better.

There are also signs of green shoots from China. The government there has done just about everything to get the economy back on its feet. In fact, the IMF recently bumped up its forecast for Chinese economic growth. Plus, the Chinese stock market has rallied impressively off its low. I never thought I’d see a Communist government cut taxes to spur growth, but here we are.

I’ve also noticed the recent uptick in energy prices which could presage positive signs for the global economy.

This is a bit of a U-turn in my thinking, but I try to follow the evidence. I recently talked about the flattening of the yield and its impact on the economy. I was surprised by the amount of bearish commentary I saw on the yield curve. Sure, an inverted curve isn’t ideal, but it’s hardly reason to panic.

It seems that the yield curve has already backed off some. The 10-year Treasury yield is back above the three-month yield. Also, the odds of a Fed rate cut later this year have diminished. Within the next five months, the futures market thinks there’s only a 30% chance of a rate cut. Even that seems high to me.

This week, we got the minutes from the last Fed meeting, and members are still open to raising rates. I think it’s a long shot, but it’s not unthinkable. I suspect that the Fed realizes the December hike was a mistake, and for now, they’re not going to move much in either direction.

The key variable continues to be the economy, and that’s why earnings season is so important. Now let’s look at what we can expect next week.

Next Week’s Earnings Reports

Here’s a preliminary calendar of this seasons earnings reports for our Buy List stocks. Twenty of our 25 stocks report on this cycle. Not every company has said when it’ll report, but I’ve tried to have the latest info.

Company Ticker Date Estimate
Eagle Bancorp EGBN 17-Apr $1.12
Torchmark TMK 17-Apr $1.59
Check Point Software CHKP 18-Apr $1.31
Danaher DHR 18-Apr $1.01
Sherwin-Williams SHW 23-Apr $3.70
Stryker SYK 23-Apr $1.84
Moody’s MOC 24-Apr $1.92
AFLAC AFL 25-Apr $1.06
Cerner CERN 25-Apr $0.61
Hershey HSY 25-Apr $1.46
Raytheon RTN 25-Apr $2.49
Church & Dwight CHD 2-May $0.66
Intercontinental Exchange ICE 2-May $0.90
Disney DIS 8-May $1.59
Becton, Dickinson BDX 9-May $2.58
Broadridge Financial BR TBA $1.50
Cognizant Technology Solutions CTSH TBA $1.04
Continental Building Products CBPX TBA $0.35
Fiserv FISV TBA $0.82
Signature Bank SBNY TBA $2.76

Eagle Bancorp (EGBN) is due to report on Wednesday, April 17. Three months ago, the bank released an impressive earnings report. The bank earned $1.17 per share, which was four cents better than estimates. Last year was a very good year for Eagle.

When looking at banks, there’s a key metric to watch which is called the “efficiency ratio.” It’s their overhead as a percent of revenue. Basically, the efficiency ratio tells us how well-run the bank is. The lower the number, the better. As a general rule, anything below 50% is considered good. For all of 2018, Eagle’s was 37.3%.
Despite the good results, shares of Eagle plunged more than 10% the day after the report came out.

This is where it gets weird. Eagle turned around and marched up to $60 per share in February, then plunged to $48 in March. EGBN is back up to $55, and I think it’s a good value here. The consensus is for earnings of $1.12 per share.

Also on Wednesday, Torchmark (TMK) is due to report. Their last earnings report matched expectation. For all of 2019, TMK sees earnings of $6.50 to $6.70 per share. For the Q1 report, Wall Street expects $1.59 per share, which sounds about right.

Check Point Software (CHKP) is due to report on Thursday, April 18. The stock looks to be a big winner for us this year. For Q1, Check Point sees revenues between $460 and $480 million and EPS between $1.28 and $1.34. For all of 2019, Check Point sees revenues ranging between $1.94 and $2.04 billion and earnings between $5.85 and $6.25 per share.

Danaher (DHR) is also due to report on Thursday. For Q1, DHR expects $1 to $1.03 per share. Wall Street had expected $1.03 per share. For all of 2019, the company sees earnings between $4.75 and $4.85 per share. The dental spin-off is expected to happen in the second half of this year.

Signature Bank (SBNY) hasn’t said yet when they’ll report, but going by recent history, April 18 is probably the best guess. SBNY has been a big winner for us this year (+28.5%). In January, the bank reported a knockout quarter. For Q4, SBNY’s net interest margin was 2.90% and its efficiency ratio was 34.94%. Those are pretty good numbers. Interestingly, the bank also launched Signet, a “new proprietary, blockchain-based digital-payments platform.” Wall Street expects earnings of $2.76 per share. Expect to see a beat.

Cerner Is a Buy up to $66 per Share

On Tuesday, Cerner (CERN) said it had reached an agreement with Starboard Value, an activist shop. That’s one of those firms that takes a position in a company, and then advocates for changes. We’ve done well in recent years thanks to the work of activists. After some back and forth, Cerner and Starboard reached an agreement to make some changes at Cerner.

Most of the details aren’t terribly important for our purposes (you can read them here), but I want to highlight two. One is that the healthcare-IT firm will initiate a dividend. The other is that Cerner’s buyback authorization has been increased by $1.2 billion. That’s a big chunk of change. The company now has approval to repurchase $1.5 billion worth of CERN stock.

The stock jumped 10% on Tuesday. The company will report earnings on April 25. For Q1, Cerner expects earnings between 60 and 62 cents per share on revenue of $1.365 billion to $1.415 billion. For all of 2019, the company is looking for earnings between $2.57 and $2.67 per share on revenue of $5.65 billion to $5.85 billion. This week, I’m raising my Buy Below on Cerner to $66 per share.

On Thursday, Disney (DIS) unveiled its new streaming service. The service will be called Disney+. It will be ad-free and will launch on November 12. The service will cost $7 per month or $70 annually. This is Disney’s plan to attack Netflix. The shares fell 56 cents on Thursday to close at $116.60. The next earnings report is due out May 8.

That’s all for now. Next week will be dominated by earnings news. There will be a few key economic reports as well. The industrial-production report is due out on Tuesday. On Wednesday, the beige-book report comes out. The retail-sales report comes out on Thursday. Then on Friday, we get the latest report on housing starts. 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