CWS Market Review – January 27, 2017

CWS Market Review

January 27, 2017
“I can calculate the motion of heavenly bodies, but not the madness of people.”
– Isaac Newton

Don’t feel bad, Ike. I can’t do either. Talk about the madness of people. Consider that since Election Day, the U.S. stock market has added $1.9 trillion in market value.

Despite warnings that a Trump victory would plunge the world into chaos, this has been a great time for investors. On Wednesday, the venerable Dow Jones Industrial Average finally smashed through 20,000. Remember that less than eight years ago, the index was floundering below 6,500. Madness of people? On Thursday, the Volatility Index dropped to a two-year low.

Right now, we’re smack in the middle of earnings season, and the results for our Buy List have been quite good. On Thursday, Sherwin-Williams crushed estimates, and the shares jumped 7.6%. We also had good results from companies like Stryker, CR Bard and Microsoft.

We have a bunch more earnings coming our way next week, plus a Federal Reserve meeting, but this week’s CWS Market Review will be all about earnings. All I need to say about upcoming Fed meeting is that the Fed won’t do anything. In fact, the earliest they’ll hike rates will probably be June. In short, don’t worry about the Fed. This is the time to focus on earnings.

Stryker Beats the Street

On Tuesday, Stryker (SYK) kicked off a good week for us when they reported Q4 earnings of $1.78 per share. That beat the Street’s consensus by two cents per share. Digging through the numbers, this was a solid quarter for the orthopedics company. Net sales grew 16.2% to $3.2 billion. That’s 16.8% growth in constant currency.

For the year, Stryker earned $5.80 per share. They had previously given us a range of $5.75 to $5.80. Later they said they expected earnings at the top of that range. So it turns out, they were right! For 2016, net sales grew 13.9% to $11.3 billion. In constant currency, that’s growth of 14.3%. These are all very good numbers. The short version is that Baby Boomers are falling apart, which is very good news for Stryker. From hippies to hip replacements. From joints to new knee joints. (I’ll stop now.)

“I am pleased with our performance in both the fourth quarter and the full year 2016,” said Kevin A. Lobo, Chairman and Chief Executive Officer. “Fourth-quarter organic-sales growth of 6.7% versus a strong prior year is impressive and was balanced across Orthopaedics, MedSurg and Neurotechnology and Spine. In addition, we executed well on acquisitions and delivered leveraged adjusted-earnings gains. We enter 2017 with good momentum across our businesses and look forward to building on this success.”

Now let’s look at guidance. For Q1, Stryker expects earnings to range between $1.40 and $1.45 per share. According to my math, that’s about right. Wall Street had been expecting $1.43 per share. For all of 2017, Stryker sees earnings between $6.35 and $6.45 per share. Wall Street had been expecting $6.39 per share. I was actually a little surprised that Stryker was willing to go that high with the high end of their forecast. That’s good to see. Stryker added that if foreign exchange rates hold, then they expect to see earnings dinged by $0.03 to $0.04 in Q1, and $0.10 to $0.12 for the year.

The shares traded erratically on Wednesday and Thursday, jumping between $119 and $125 per share, before settling back near $121. Stryker remains a solid buy up to $128 per share. This is a good stock.

Four Earnings Reports on Thursday

Thursday was a busy day for us. We had four Buy List earnings reports.

Let’s start with the good news. Sherwin Williams (SHW) reported Q4 earnings of $2.34 per share, which blew past Wall Street’s consensus of $2.21 per share. As it turns out, last quarter was very good for paint.

SHW had quarterly revenue of $2.78 billion, which beat estimates of $2.69 billion. For all of 2016, Sherwin-Williams made $12.45 per share on revenue of $11.86 billion.

For Q1, SHW sees earnings ranging between $2.03 and $2.13 per share, and sales rising by mid-to-high single digits. Wall Street had been expecting $1.95 per share. For all of 2017, they see earnings between $13.60 and $13.80 per share, and sales rising by mid-single digits. Wall Street had been expecting $13.63 per share.

“We continue to generate significant cash from operations, allowing us to invest in the business and return a substantial portion to our shareholders. In 2016, we generated net operating cash flow of $1.31 billion. In 2016, we added 94 net new stores, finishing the year with 4,180 stores in operation. During the year, we increased our annual cash dividend 25% to $3.36 per common share. Our balance sheet remains flexible and is positioned well for the anticipated Valspar acquisition and other investments in our business.

“We now expect a divestiture will be required to gain approval from the FTC to complete the acquisition of Valspar. We are moving forward on a divestiture that we believe will allow us to gain approval from the FTC. The expected divestiture has revenues below the $650 million threshold, and we expect to negotiate the divestiture and complete the Valspar transaction at $113 per common share within 90 days.”

Excellent quarter. The stock jumped to $305 on Thursday. I’m lifting my Buy Below on Sherwin-Williams to $322 per share. As always, don’t be afraid of high-priced stocks. If you can only buy a few shares of a great stock, remember that you’ll be owning a great stock.

Alliance Data Systems (ADS) reported Q4 earnings of $4.67 per share, which was one penny above expectations. The downside is that revenues came in at $1.83 billion, which fell short of Wall Street’s estimate of $1.94 billion. For all of 2016, ADS made $16.92 per share, and revenue was $7.14 billion.

“Our biggest success in 2016 was the ability to grow core EPS double-digits despite a 12-point drag on growth from credit normalization. We remain on track for solid growth again in 2017, and expect to complete the credit normalization process towards the end of the year.”

Heffernan continued, “Consistent with our announcement in October 2016 of our intention to offer a balanced approach to return capital to shareholders through a combination of dividends and share repurchases, our board of directors today declared our second quarterly dividend of $0.52 with a record date of February 15.”

For 2017, ADS expects earnings of $18.50 per share on sales of $7.7 billion. That’s a little below the Street’s consensus of $18.68 per share and revenue of $7.95 billion.

Wall Street didn’t like the poor guidance, but the shares recovered some lost ground and closed down 2.45% on Thursday. There’s nothing wrong here. For now, I’m keeping my Buy Below on ADS at $250 per share.

After the closing bell on Thursday, Microsoft (MSFT) reported fiscal Q2 earnings of 83 cents per share. That was four cents more than Wall Street had been expecting. This is MSFT’s third impressive earnings season in a row. Quarterly revenue came in at $26.07 billion, which beat estimates of $25.28 billion.

The software giant had pretty good results across the board. Their revenue from Azure rose 93%. For a “stodgy” old tech company, they’ve really established their cloud business. I have to say that CEO Satya Nadella has been an impressive leader. His goal is to reach $20 billion in cloud revenue for the fiscal year ending June 2018. I think they can do it. This report was also the first time LinkedIn showed up on Microsoft’s book. Since December 8, LinkedIn brought in $228 million in revenue and had an operating loss of $201 million. That acquisition cost MSFT $26 billion.

Sales in Microsoft’s Productivity and Business Processes unit, which includes Office, rose by 10% to $7.4 billion. Office 365 now has almost 25 million subscribers. Their More Personal Computing group (Windows) saw revenue drop by 5% to $11.8 billion. The global PC market is still in rough shape, but it might be bottoming out.

I like this report, although the market had a muted reaction. Still, the stock has rallied 33% in the last seven months, so it may need time to breathe. This week, I’m raising my Buy Below on Microsoft to $67 per share.

Finally, CR Bard (BCR) reported Q4 earnings of $2.77 per share. That beat Wall Street’s estimate of $2.74 per share. Quarterly sales rose 11% to $967.1 million. For the full year, Bard earned $10.29 per share, which is a 13% increase over 2015’s bottom line.

To give you a good idea of how good this year was for Bard, last January, their forecast for 2016 was $9.90 to $10.05 per share. That was gradually lifted to $10.23 to $10.28 per share, which they still beat.

Timothy M. Ring, chairman and chief executive officer, commented, “Our strong performance in 2016 once again demonstrated the effectiveness of the execution of our strategic investment plan. We are seeing a broad contribution to growth across our portfolio, from each of our four businesses, both domestically and internationally. We remain in investment mode and continue to focus on providing shareholders with above-average revenue growth and attractive profitability.”

For 2017, Bard sees sales rising by 6% to 6.5% after adjusting for currency. The company sees full-year EPS ranging between $11.45 and $11.75 per share. That’s very good. Wall Street had been expecting $11.36 per share. This means the stock is going for about 19 to 20 times this year’s earnings estimate. That’s at the high side, but not unreasonable for a company like Bard. I’m keeping my Buy Below on CR Bard at $230 per share.

Four Earnings Reports Next Week

On Tuesday, January 31, AFLAC (AFL) and Danaher (DHR) are due to report earnings. In October, AFLAC said that if the yen averages 100 to 110 to the dollar for Q4, then they expect Q4 earnings between $1.53 and $1.82 per share. That would bring their full-year earnings to a range of $6.78 to $7.07 per share. During Q4, the yen gradually fell from 104 to 117 to the dollar. For context, the duck stock made $6.16 per share last year. The consensus on Wall Street is for Q4 earnings of $1.63 per share.

Danaher is a very solid company. Three months ago, they said their Q4 will range between $1.01 and $1.05 per share. They also raised their full-year guidance from $3.53 to $3.60 per share to $3.57 to $3.61 per share. I’m expecting to see a beat here.

On Thursday, February 2, Snap-on (SNA) and Ingredion (INGR) are due to report. In October, Snap-on had a very good earnings report. The company beat estimates by seven cents per share, and the stock jumped 6.6% the next day, then rallied another 13% from there. Wall Street expects $2.41 per share.

Ingredion had blowout earnings three months ago. The company earned $1.96 per share, which was 18 cents more than estimates. The ingredients company now expects full-year earnings to range between $6.95 and $7.10 per share. That works out to a Q4 range of $1.49 to $1.64 per share. Wall Street expects $1.63 per share.

That’s all for now. Earnings will again be the big story next week. Even though there’s a Federal Reserve meeting on Wednesday, don’t expect much to happen. On Friday, we’ll get the jobs report for January. Since we had two presidents during the month of January, I’m sure the political spin will be creative. 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

Named by CNN/Money as the best buy-and-hold blogger, Eddy Elfenbein is the editor of Crossing Wall Street. His free Buy List has beaten the S&P 500 eight times in the last ten years. This email was sent by Eddy Elfenbein through Crossing Wall Street.
2223 Ontario Road NW, Washington, DC 20009, USA


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