CWS Market Review

February 3, 2017
“Don’t gamble; take all your savings and buy some good stock and hold
it till it goes up, then sell it. If it don’t go up, don’t buy it.” – Will Rogers

The S&P 500 has now gone 78 days in a row without a 1% drop. That’s the longest such streak in a decade. While the market has been in a fairly calm mood, the earnings picture looks bright. So far, 73% of companies in the S&P 500 have beaten their earnings estimates this season.

We’ve closed the books on January, and it was a good month for the market. The S&P 500 gained 1.79% last month, which is a big improvement over last January’s loss of 5%. I tend to be skeptical of these Wall Street adages, but it’s true that January has often been a harbinger for the rest of the year. Since 1950, if stocks are up in January, the following 11 months have been positive 88% of the time.

In this week’s CWS Market Review, I’ll look at our four Buy List earnings reports from this week. Even though our stocks had good numbers, the latter didn’t always translate into gains for us. Plus, I’ll preview five more Buy List reports coming next week. But first, I want to touch on the Fed’s meeting and why the central won’t be doing much until this summer.

The Fed Holds off Raising Rates

For the last few weeks, I’ve been telling you that we have nothing to fear from the Federal Reserve. The central bankers got together again this week, and decided—I hope you’re sitting down—against raising interest rates.

True, this was hardly a surprise. Going into the meeting, the futures market put the odds of a rate increase at 4%. Still, traders wanted to see if they could get a glimpse of the Fed’s thinking for the rest of the year, or if President Trump has any plans to criticize the Fed. The Fed’s policy statement was almost an exact copy of the one from December.

Here’s my take: The Fed could become a concern for investors at some point, but we’re still a long way from that possibility. While it’s true that the yield on the two-year Treasury has more than doubled since the summer, it’s still only at 1.2%. That ain’t exactly stiff competition for stocks.

The Fed thinks it will have to hike rates three times this year. Let me put it this way—taking the “under” on that bet would be a wise move. At the earliest, the Fed may hike again in June. After that, the outlook gets very murky.

The truth is that the U.S. economy continues to waddle along. Not too fast, not too slow. The January jobs report is due out later today. The NFP number for December was a little light, just 156,000. Expectations for January are for 175,000. Personally, I’m more concerned to see the wage numbers. It would be a very good sign if we saw workers taking home larger paychecks.

Last Friday, the government said that Q4 GDP rose by 1.9%. As I said, waddling along. On Monday, the government said that in December, personal income rose by 0.3% and personal spending rose by a healthy 0.5%. I was particularly impressed with Wednesday’s report on ISM Manufacturing. The ISM for January came in at 56.0, which is the highest in more than two years. That’s also good news if U.S. factories are brimming with activity.

I want to reiterate my near-term bearishness. I think it’s likely that we’ll see pullback in share prices over the next few weeks. Nothing to get too scared about, especially if you’re focused on the long term. As always, investors should concentrate on high-quality stocks. Now let’s take a look at our recent Buy List earnings reports.

Danaher Is a Buy up to $87 per Share

When I previewed Danaher’s (DHR) earnings in last week’s issue, I said I was “expecting to see a beat here.” I was right. On Tuesday, Danaher reported Q4 earnings of $1.05 per share. That beat estimates by two cents per share. Quarterly revenue rose 6% to $4.6 billion, and their “core revenue” was up by 3.5%. For all of 2016, DHR earned $3.61 per share, which was up 21% over 2015.

Thomas P. Joyce, Jr., President and Chief Executive Officer, stated, “We are very pleased with our strong fourth-quarter results, capping off a transformative year for Danaher. In 2016, the team delivered double-digit earnings growth, meaningful margin expansion, and strong free cash flow. We also executed on a number of strategically significant acquisitions during the year, including Cepheid and Phenomenex.”

Joyce added, “We believe that the strength of our portfolio, combined with the power of DBS, provides the foundation for enhancing our growth trajectory and delivering long-term outperformance.”

For Q1, Danaher sees earnings between 82 and 85 cents per share. For all of 2017, they forecast earnings of $3.85 to $3.95 per share. Wall Street liked those numbers, and DHR gapped up 4% on Tuesday. This week, I’m raising my Buy Below on Danaher to $87 per share.

Also on Tuesday, AFLAC (AFL) reported soggy results for Q4. This was a surprise because the duck is usually very consistent. But last quarter, AFLAC had operating earnings of $1.46 per share. That was 17 cents below Wall Street’s estimate of $1.63 per share.

I have to discuss the important issue of the exchange rate because so much of AFLAC’s business is done in Japan. For the fourth quarter, the yen/dollar exchange rate averaged 109.1. That’s 11.4% stronger (meaning lower) than Q4 of 2015. The stronger exchange rate added eight cents per share to AFLAC’s Q4 bottom line. So after we adjust for currency, their EPS fell by 6.4%.

For the entire year, AFLAC had operating income of $6.79 per share. That’s up from $6.16 in 2015. However, the exchange rate added 34 cents per share. Adjusting for that, last year’s earnings were up by 4.7%. That’s pretty much what AFLAC told us to expect.

CEO Dan Amos said:

“As we look to 2017, our guidance remains unchanged since our December outlook call. Our objective is to produce stable operating earnings per diluted share of $6.40 to $6.65, assuming the average exchange rate in 2016 of 108.70 yen to the dollar. As always, we are working very hard to achieve our earnings-per-share objective while also ensuring we deliver on our promise to policyholders.”

I like Amos a lot, and he said that his outlook is “unchanged.” Wall Street, however, was not pleased with these numbers. The stock dropped 4% on Wednesday. Let me be clear: I’m not at all worried about AFLAC. This is a very well-run firm, and the stock is going for just over 10 times this year’s earnings estimate.

Both Snap-on and Ingredion Fall on Good Results

We had two more earnings reports on Thursday. Both stocks beat estimates, yet both stocks fell sharply.

For Q4, Snap-on (SNA) earned $2.47 per share. That was six cents better than Wall Street’s consensus. Revenues rose 4.5% to $889.8 million, which was also better than expectations. For all of 2016, Snap-on made $9.20 per share, compared with $8.10 per share in 2015.

Overall, this was a solid report. But one problem is that Snap-on’s tool group only saw revenue growth of 1.5%. Apparently that was enough to spook traders, as the shares dropped 7.4% on Thursday.

I’ll be honest that I find that reaction baffling, but short-term reactions are often more about emotion than sober analysis. After all, Snap-on has been rallying well for the last four months, so perhaps some folks headed for the exits. Still, the business looks sound, and I see no reason to worry.

Also on Thursday, Ingredion (INGR) said it made $1.67 per share last quarter, which was three cents better than estimates. For all of 2016, the ingredients company made $7.13 per share. That’s a nice increase from the $5.88 per share they made in 2015. Sales came in at $1.4 billion, which was flat compared with a year ago.

“We concluded 2016 with record earnings per share and operating income, and significant progress on our strategic blueprint. Sales of our higher-value specialty portfolio grew to 26 percent of net sales for the year, and our acquisitions of TIC Gums and Shandong Huanong Specialty Corn were completed in the fourth quarter,” said Ilene Gordon, chairman, president and chief executive officer.

For 2017, INGR sees 2017 earnings between $7.40 and $7.80 per share (they don’t give quarterly numbers). Wall Street had been expecting $7.54 per share. Still, the stock got taken down for a loss of 8.5% on Thursday. Again, I don’t see the need for such a dramatic reaction from traders, but traders are known to play by their own rules. I still like Ingredion, but to reflect the drop, this week, I’m lowering my Buy Below on INGR to $122 per share.

Five Buy List Earnings Reports Next Week

We have five Buy List earnings report coming next week. On Tuesday, February 7, Intercontinental Exchange (ICE) will report Q4 earnings. Wall Street expects 69 cents per share. I should add that the New York Stock Exchange landed the highly anticipated IPO for Snap Inc.

On Wednesday, February 8, Axalta Coating Systems (AXTA), Cognizant Technology Solutions (CTSH) and Fiserv (FISV) report.

Shares of Cognizant have been weak recently, which could be in response to President Trump’s immigration order. The shares have fallen for the last six sessions in a row, for a total loss of over 10%. For Q4, Cognizant sees revenues between $3.45 billion and $3.51 billion, and EPS ranging between 85 and 88 cents.

Fiserv said they expect Q4 EPS between $1.15 and $1.18. This stock is usually very consistent. The consensus on Wall Street is for 29 cents per share from Axalta.

Then on Thursday, February 9, Cerner (CERN) is scheduled to report. Three months ago, the healthcare IT missed estimates by a penny per share, and the stock fell hard. For Q4, Cerner expects 60 to 62 cents per share and revenue between $1.225 billion and $1.300 billion.

One final item. In last week’s issue, I told you about the great earnings report from CR Bard (BCR). Last Friday, the stock busted through my Buy Below price. It’s already a 5.76% winner this year. This week, I’m raising my Buy Below price on CR Bard to $251 per share.

That’s all for now. Next week will be pretty quiet for economic reports. Trade balance and job openings will be on Tuesday. Initial claims are on Thursday. Then on Friday, we’ll get reports on the budget and consumer sentiment. 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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