CWS Market Review
February 24, 2017
“90% of the people in the stock market, professionals and amateurs alike,
simply haven’t done enough homework.” – William J. O’Neil
You can’t keep a good market down! The Dow has now risen for 10 days in a row, which is the longest winning streak in 30 years. Not only that, but the bull continues to be unusually calm. The S&P 500 has now gone 91 days in a row without a 1% down day.
Can the market sustain this pace? The answer is no, but it’s a tough game predicting exactly when the bull needs to take a rest. Our strategy continues to be: focus on high-quality stocks, and don’t get scared out of them. I’m pleased to see that our Buy List is already up 6% for the year. Thanks to a strong earnings report, Moody’s just became our first 20% winner on the year.
In this week’s CWS Market Review, I’ll go over our recent earnings reports. We had some good ones like Moody’s, but also some disappointing ones like Hormel and Wabtec. I’ll go over them all in a just a bit. I’ll also bring you up to speed on the latest economic news. There’s a decent chance the Federal Reserve will raise rates again sometime soon. We also got dividend increases from Danaher and Cinemark. But first, let’s spend a few seconds on this week’s Fed minutes.
The Federal Reserve May Strike Soon
The Federal Reserve had a two-day meeting on January 31 and February 1. At the time, I told you not to expect them to make any moves on interest rates. I was right, and the Fed left rates unchanged.
This week, however, the Fed released the minutes from that meeting, and they indicated that some members want to see rates go up soon. This is important because higher rates can kill any rally, even one as durable as the current bull.
Like many things economic, the minutes aren’t very clearly written. All we know is that “many” members want to see rates go up “fairly soon.” How many is “many” and how soon is “fairly”? That I’m afraid that’s left shrouded in the mystery that only economists can penetrate.
For us who live in the real world, we can make some reasonable guesses and assume it comes down to the Fed’s next two meetings. The central bankers get together again on March 14-15, and then again on May 2-3. The futures market now thinks there’s a 38% chance of a rate hike in March, and a 63% chance of a hike in May. That latter figure is up from 49% at the start of this month.
The Fed always says they want to be flexible and focused on the data. While the Fed raised rates in December, the latest inflation data suggests that the rise in consumer prices completely negated the rate increase. So it may be time for another. Plus, there are now clear signs that the economy is getting better. This week, we learned that existing home sales rose to a 10-year high. Also, the four-week moving average on initial jobless claims dropped to a 43-year low.
What does this mean for investors? I continue to believe that investors should be defensive over the next several weeks. I don’t expect the market to crash, but Wall Street’s calmness won’t last forever. Interestingly, the S&P 500 Tech Sector Index just snapped a 15-day winning streak. Like other record streaks, it had never happened before. Then it ended.
Now let’s look at our recent Buy List earnings reports.
Six Buy List Earnings Reports
We had two earnings reports last Friday. First up, JM Smucker (SJM) reported fiscal Q3 earnings of $2 per share. That’s down from $2.05 per share a year ago, but it matched Wall Street’s forecast on the nose. Quarterly sales fell 5%.
Smucker said they’ve been working hard to control costs, so the sales shortfall didn’t hurt the bottom line. The bad news is that Smucker lowered the high end of their full-year EPS forecast by a nickel per share. The company now sees 2017 earnings ranging between $7.60 to $7.70 per share. This is for the fiscal year that ends in April.
Here’s what’s interesting. The stock dropped at Friday’s open to about $130 per share from $138 at last Thursday’s close. SJM then rallied during the day on Friday to $136 by the closing bell. The shares then gapped up to $143 on Monday, probably due to Kraft Heinz backing out of its mega-merger deal with Unilever. That has to put Smucker in play. I’m raising my Buy Below on Smucker to $146 per share.
Also on Friday, Moody’s (MCO) said that it earned $1.23 per share for Q4. That was nine cents better than expectations. Quarterly revenues rose 8.8% to $942.1 million, which also beat expectations. The earnings, I should add, are adjusted for a big check the company had to send the Justice Department to settle its legal problems. I’d glad that’s now behind them.
For 2017, Moody’s said they expect earnings between $5 and $5.15 per share, which doesn’t include a 15-cent per share accounting benefit. Wall Street had been expecting $5.07 per share. That’s pretty good growth. For 2016, Moody’s made $4.81 per share.
The stock is already a 20% winner for us this year. This week, I’m lifting my Buy Below on Moody’s to $119 per share.
Big Earnings Miss from Wabtec
Wabtec (WAB) gave us disappointing news on Tuesday. The rail-service company said they made 81 cents per share for Q4, which was 13 cents below estimates. This is their second soggy earnings report in a row.
Even the CEO said the earnings were “disappointing.” The problem is that the freight-rail sector continues to be soft. Also, it’s been more difficult for WAB to close the deal for Faiveley Transport than they expected. For the year, WAB earned $3.34 per share, which was below the company’s forecast of $3.45 to $3.50 per share.
Earnings, likewise, missed the mark, coming in at $3.34 per share, which was below its guidance of $3.45 to $3.50 per share. Despite the rough year in 2016, Wabtec sees things getting better this year. They expect full-year earnings to range between $3.95 and $4.15 per share.
The shares have now shed 11% since Monday’s close. I’m lowering my Buy Below on Wabtec to $84 per share.
Three More Earnings Reports on Thursday
On Thursday, we had three more earnings reports. Hormel Foods (HRL) posted fiscal Q1 earnings of 44 cents per share, which was one penny shy of estimates. The Spam stock also lowered its full-year guidance to $1.65 to $1.71 per share. That’s a decrease of three cents to both ends of the range. Hormel cited “challenging market conditions in the turkey industry.”
For Q1, Jennie-O Turkey sales rose 13%, but segment profits fell 25%. Overall sales fell 0.5% to $2.28 billion. Despite the earnings miss, this was Hormel’s 15th record quarter in a row.
“We are tempering our full-year outlook for the Jennie-O Turkey Store segment given the shortfalls in the first quarter and the expected continuation of pricing pressure due to low commodity turkey prices. Improvements in our other segments are expected to offset some of the earnings headwinds from Jennie-O Turkey Store,” Snee said.
Shares of Hormel lost 5.4% on Thursday. These results are disappointing, but I’m not too concerned about a minor drop in outlook from a company like Hormel. They’ll be fine. Hormel is a buy up to $37 per share.
Also on Thursday, Cinemark (CNK) reported Q4 earnings of 66 cents per share, which demolished Wall Street’s estimates of 44 cents per share. Quarterly revenues slipped a bit to $700.9 million.
“It was a banner year for the North American industry box office, achieving its 4th all-time high in the past 5 years,” stated Mark Zoradi, Cinemark’s Chief Executive Officer. “Cinemark’s domestic operations outperformed the North American industry box office by 100 basis points, and globally we set numerous records, including total revenues of nearly $3 billion, net income of $255 million and Adjusted EBITDA of more than $706 million. Furthermore, our ability to increase our dividend, while continuing to actively invest in growth initiatives, is indicative of the consistent strength of our balance sheet, as well as our confidence in Cinemark.”
For the year, CNK’s revenues increased 2.3% to $2.92 billion. Earnings per share came in at $2.19 compared to $1.87 for 2015. They also have ambitious plans for this future: CNK wants to open eight new theaters this year.
Cinemark also raised its quarterly dividend from 27 to 29 cents per share. The new dividend will be paid on March 20 to stockholders of record on March 8. I’m raising my Buy Below on Cinemark to $46 per share.
Our final earnings report for this season came from Continental Building Products (CBPX). The company earned 31 cents per share last quarter, which was four cents more than Wall Street had been expecting. Quarterly revenue rose 7.1% to $118.2 million, which also topped estimates.
Looking through the numbers, Continental had a solid year in 2016. Of course, what matters to us is 2017 and beyond. The company provided guidance on several performance metrics, but not on EPS. The company earned $1.08 per share last year. I think the company can earn as much as $1.35 per share this year. The stock could turn out to be one of our big winners this year.
Two Buy List Reports Next Week
Just two more Buy List earnings reports next week, but these are for companies with quarters that ended in January. After them, I promise we won’t have much in the way of earnings for several weeks.
Ross Stores (ROST) is due to report fiscal Q4 earnings on Tuesday, February 28. This will be for the key holiday-shopping season. In November, Ross had a very good earnings report for Q3. However, they offered somewhat tepid guidance for Q4. I know Ross likes to set expectations low. That always makes the earnings “beats” look that much more impressive.
For Q4, Ross sees comparable-store sales growth of just 1% to 2%, and earnings per share ranging between 72 and 75 cents per share. Since Ross has already made $2.06 per share for the first three quarters, that works out to full-year earnings of $2.78 to $2.81 per share. That would be an increase of 11% to 12% over last year’s profit of $2.51 per share.
Also on Tuesday, HEICO (HEI) is due to report. The company had a great year in 2016, and it was our top-performing stock. For 2017, HEICO sees net sales growth of 5% to 7% and net income growth of 7% to 10%. That works out to an EPS range of $2.45 to $2.52. Wall Street expects quarterly earnings of 54 cents per share.
Before I go, I wanted to mention that Danaher (DHR) raised its quarterly dividend from 12.5 cents to 14 cents per share. The new dividend is payable on April 28 to holders of record on March 31. DHR is a buy up to $87 per share.
That’s all for now. Next week will be a busy one for economic reports. The durable-goods report comes out on Monday. On Tuesday, the government will revise its report on Q4 GDP. Then on Wednesday, we’ll get reports on consumer income and spending, plus the ISM Index. 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!