CWS Market Review – November 8, 2019

“Good investment advice is repetitive and boring. There is nothing exciting about it.”
– D. Muthukrishnan

Do you like cool market stats? I do.

Check this out. On Wednesday, the Dow Jones fell from 27,492.63 to 27,492.56. That’s a loss of 0.07 points or -0.00025%.

I believe that’s the smallest loss in the Dow’s history. It’s hard to explain just how minuscule -0.00025% is.

Let me give it a shot. Annualized that loss comes -0.06440%. If we “suffered” Wednesday’s loss every single day for 3,947 consecutive days (or about 15.5 years), then the compounded loss would still be less than 1%!

That’s how small it is.

The good news is that we had some more exciting action this week. On Thursday, the stock market closed at yet another all-time high. Since the recent low on October 2, the S&P 500 has jumped 6.8%. Thursday’s rally was enough to get a presidential tweet.

Stock Market up big today. A New Record. Enjoy!

— Donald J. Trump (@realDonaldTrump) November 7, 2019

Well, I wouldn’t say a gain of 0.27% is “up big,” but I’ll take it. A good part of this rally is due to hopes for a trade deal with China. With less than two months to go in 2019, this is shaping up to be a very good year for investors.

We’re also nearing the end of third-quarter earnings season. We had four more Buy List earnings reports this week. Fiserv gave us my favorite dance, the beat-and-raise shuffle. Disney also had strong numbers. I’ll also preview one more earnings report for next week.

The bond market is also starting to relax. It appears that the Fed has convinced Wall Street that it’s going to take a break on interest rates for a few months. I’ll explain it all in a bit, but first, let’s look at our latest Buy List earnings reports.

This Week’s Buy List Earnings Reports

On Tuesday, Becton, Dickinson (BDX) reported earnings of $3.31 per share for its fiscal Q4. That beat by one penny per share. For the year, Becton made $11.68 per share.

Becton now sees revenue growth for next year of 4% to 4.5%, which is 5% to 5.5% on a currency-neutral basis. Becton sees 2020 EPS ranging between $12.50 and $12.65. That’s below Wall Street’s forecast of $12.94.

Traders weren’t thrilled with this guidance. Shares of BDX dropped over 5% on Tuesday. I’m not too worried. I still like BDX for the long term. Later this month, I expect Becton to raise its dividend for the 47th year in a row. Becton, Dickinson remains a buy up to $260 per share.

Before the bell on Wednesday, Broadridge Financial Solutions (BR) reported earnings of 68 cents per share. That was three cents below estimates. This is for BR’s fiscal Q1. Sales fell 2% to $949 million, but recurring revenue rose by 8%.

For all of this fiscal year (which ends in September 2020), Broadridge reiterated its previous guidance. For 2020, Broadridge sees earnings growth of 8% to 12%. That works out to a range of $5.03 to $5.22 per share.

Frankly, this was a soft report, but nothing too troubling. The shares fell over 5% during the day on Wednesday but gained back some lost ground on Thursday. I’m dropping my Buy Below on Broadridge to $130 per share.

Also on Wednesday, Fiserv (FISV) earned $1.02 per share for Q3. That’s an increase of 17% over last year. It also beat Wall Street’s forecast by two cents per share.

This was a solid quarter for Fiserv. Revenue rose 5% to $3.62 billion. Internal revenue growth on a constant-currency basis was 6%. Operating margins increased to 29.8%. These are the first financial results since Fiserv merged with First Data.

“We delivered strong financial and sales results in the third quarter while focusing on providing differentiated value for clients across the new Fiserv,” said Jeffery Yabuki, Chairman and Chief Executive Officer of Fiserv. “Our primary market focus is to enhance the manner in which consumers and business engage in banking, commerce and financial services to produce meaningful value for all of our stakeholders.”

Free cash flow is up 13% so far this year to $2.3 billion. Fiserv has made $2.87 per share for the first nine months of this year. Solid numbers.

Now for the best news, Fiserv upped its guidance. The company now sees earnings of $3.98 to $4.02 per share. That implies Q4 earnings $1.11 to $1.15 per share. The previous guidance was $3.39 to $3.52 per share. That’s a big increase.

On Thursday, shares of Fiserv rallied 4.5% and hit a new all-time high. Fiserv remains a buy up to $113 per share.

Lastly is Disney (DIS). The really important day for Disney wasn’t this week’s earnings report. Instead, the really big day will come on Tuesday, November 12, when Disney+ finally goes live. This has the potential to be a huge winner for Disney.

But this week’s earnings report did not disappoint. After the close on Thursday, the Mouse House earned $1.07 per share for Q3, versus estimates of 95 cents per share. Quarterly revenue came in at $19.1 billion, which topped estimates of $19.04 billion. Here’s a good interview Bob Iger did with CNBC.

Disney is a gigantic business, so let’s break it down some. Last quarter, the media biz brought in $6.5 billion in revenue. The parks and resorts did $6.7 billion. The studios did $3.3 billion. Direct-to-consumer added another $3.4 billion. Actually, the park biz could have been better, but it looks like people are waiting for the new Star Wars rides to be finished. That should happen soon.

ESPN had been struggling, but that looks like it’s over. Bob Iger said that ESPN+ now has 3.5 million paid subscribers. Iger said that Disney+ will have 620 movies and 10,000 TV episodes by its fifth year. The company is aiming to have between 60 million and 90 million subscribers. Imagine all that recurring revenue!

This was a very good quarter for Disney. The shares remain a buy up to $148 per share.

Earnings Preview for Continental Building Products

Continental Building Products (CBPX) might be the hottest stock on our Buy List, but it was a slacker for a long time. In the CWS Market Review from August 2, I said of CBPX, “If you’re patient, this could be a worthwhile investment.” Since then, it’s up 38%.

The company is due to release Q3 results after the close on Tuesday, August 12. In recent quarters, the company has released (in my opinion) decent results. Yet the market has basically ignored them. That is, until August.

The problem for Continental hasn’t so much been them. Rather, it’s the state of the housing market. When construction struggles, wallboard just isn’t going to thrive. Now that mortgage rates are lower, the outlook looks much brighter for CBPX.

For Q3, Wall Street expects earnings of 41 cents per share. I’ll warn you now that the earnings may not be so hot since there’s a lag time between the Fed’s cutting interest rates and actual construction. But the overall climate looks very good for Continental Building.

The Fed May Pause on Rates for a Few Months

I wanted to briefly touch on the state of the markets and economy. Fed Chairman Jay Powell said that the recent rate cuts were “mid-cycle” adjustments. This is important, because some people thought the Fed was trying to hold off an imminent recession. Powell said that wasn’t the case, and it appears that the market now believes him.

According to the futures market, there’s a 93% chance that the Fed won’t change rates at its meeting next month. That’s probably about 6.9999% too low. In fact, the futures market doesn’t see the Fed making a move for quite some time. Going by the latest prices, there’s a 51% chance that rates won’t change by the meeting in December 2020.

That may not be literally correct, but it’s broadly true that the Fed wants to take a wait-and-see approach. The central bank wants to see how well the recent rate hikes have worked. Naturally, that takes some time.

For now, the stock market seems happy. Not only that, but cyclical stocks have done quite well. That’s what’s probably behind CBPX’s recent surge. The Homebuilder ETF (XHB) is well ahead of the market this year.

That’s all for now. The stock market will be open on Monday, but the bond market will be closed in honor of Veteran’s Day. Monday will the 101st year since the guns went silent and ended the Great War. On Wednesday, the government reports on consumer inflation for October. Then on Friday, we’ll get a look at the report on retail sales. This is often a good proxy for consumer spending. 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