A calm market is usually a good market, and on Thursday, the S&P 500 closed at 2,307.87, yet another all-time high. Since the Friday before the election, the index has vaulted 10.7%. Since the bull market that began nearly eight years ago, the S&P 500 Total Return index has quadrupled. The rally is officially a four-bagger.
Overall, this has been a good earnings season. Interestingly, the WSJ noted that half of the earnings calls this season have mentioned President Trump. I’m happy to say that our Buy List continues to do well. This week, Fiserv rallied after its earnings report. Intercontinental Exchange raised its dividend by 18%. Cognizant Technology jumped 5% on Wednesday after the company beat earnings and initiated a dividend.
This week’s CWS Market Review will be all about earnings. I’ll go over our recent earnings news, plus I’ll also highlight next week’s earnings reports. Let’s get to it.
ICE Beats and Raises Dividend
We’re now in the back half of earnings season, but we still have a few more Buy List stocks left to report. On Tuesday of this week, Intercontinental Exchange (ICE) reported Q4 earnings of 71 cents per share. That was two cents better than estimates. Quarterly revenue rose 30.1% to $1.14 billion, which matched estimates.
The stock-exchange operator said:
“Amidst a volatile and dynamic environment, we delivered our eleventh consecutive year of record revenue.” ICE Chairman and CEO Jeffrey C. Sprecher continued: “Despite the challenges of market volatility driven by geopolitics, we achieved our objectives by working closely with our customers across trading, risk management and data to again deliver strong revenue growth, margin expansion and double-digit profit increases. We are excited about collaborating with our customers in 2017, given the range of ways we are working to serve their evolving trading, listing, data and risk-management needs.”
Scott A. Hill, ICE CFO, added: “In the first year of our integration of Interactive Data, we surpassed our synergy target and met our ambitious revenue-growth target while expanding margins. We also generated record operating cash flow of $2.1 billion in 2016, which enabled us to reduce our debt by approximately $1 billion, announce our third double-digit increase in our dividend, and increase our share repurchases for 2017. Our strategy, execution, and disciplined capital allocation have led to significant value creation and future growth opportunities.”
ICE’s full-year EPS rose from $2.51 to $2.78. This was their eleventh straight year of record revenues and earnings. I like this company a lot. ICE also raised their quarterly dividend from 17 to 20 cents per share. True, the stock hasn’t had much in the way of yield, but it’s nice to see the board reward shareholders. For 2017, the company sees revenues adjusted for currency rising by at least 6%.
One troubling item is that the SEC may sue ICE for the way it handled a trading glitch in 2015. The company is firm that it did not break the law, but the news rattled traders as the stock dropped 4.8% on Wednesday. I’m concerned but not overly worried. This week’s results clearly show us that ICE is a well-run enterprise. ICE remains a buy up to $61 per share.
Cognizant Heeds Activist’s Advice
On Wednesday, Cognizant Technology Solutions (CTSH) said they made 87 cents per share last quarter. That was one penny more than estimates. For the year, Cognizant made $2.55 per share.
The IT oursourcer offered Q1 guidance of 83 cents per share, and full-year guidance of $3.63 per share. Both were a bit below expectations, but not much.
But the most important news is that Cognizant said they reached an agreement with Elliott Management. Elliott is an activist investment group, which means they like to take a large position in a company and then advocate for changes to boost the stock.
In November, Elliott sent a letter to Cognizant outlining ways they could help their stock. At the time, I noted that many of Elliott’s criticisms were, to my ears, compliments. They claimed CTSH was too conservative; they have too much cash and too little debt. I remember reading the letter and thinking, “yes, exactly why I like them!”
Cognizant has now agreed to some of Elliott’s proposals. They’re going to add three new board members from Elliott. Cognizant also plans to return $3.4 billion to shareholders over the next two years. CTSH currently has a bank account of more than $2 billion. Next quarter, they plan to start a dividend of 15 cents per share.
Traders were happy, which is obviously what Elliott was going for. The stock jumped nearly 5% on Wednesday. Over the last five days, the shares have gained 12.2%. This week, I’m lifting my Buy Below on Cognizant to $61 per share.
Also on Wednesday, Axalta Coating Systems (AXTA) reported earnings of 28 cents per share. That was one penny below estimates. Quarterly revenues rose 2% to $1.03 billion, which was a little better than estimates. In constant currency, sales rose 5.6%.
Despite the miss, this was a decent quarter for Axalta.
“Axalta’s 2016 financial period ended on a strong note, with fourth-quarter net sales and operating performance slightly exceeding the expectations set in October, driven by volume and favorable product mix. For the full year, we also met our key objectives in terms of financial and operating performance, despite a somewhat greater foreign-currency headwind,” said Charles W. Shaver, Axalta’s Chairman and Chief Executive Officer. “We are proud of the progress we made this year, including achieving positive growth in a tough global economy, successfully executing on our M&A strategy, meeting our leverage target ahead of plan and improving productivity through our Axalta Way initiatives. Key milestones were also met in new product technology introduction, refinancing our capital structure and progressing our product-globalization and commercial-excellence objectives. We look forward to ongoing momentum in each of these areas in 2017.”
For 2016, Axalta made $1.10 per share. The company didn’t provide EPS guidance, but they laid out some expectations for 2017:
Adjusted EBITDA of $930 to $980 million
Free cash flow of $440 to $480 million
Diluted shares outstanding of 246 to 249 million
There’s really not a lot to say, except that Axalta continues to do well. The stock dropped a bit on the news but quickly made it back.
Fiserv Jumps on Optimistic Guidance
After the bell on Wednesday, Fiserv (FISV) reported Q4 earnings of $1.16 per share, which matched the Street’s consensus. For the year, the company made $4.43 per share.
The details were pretty. I was especially pleased to see an increase in operating margins.
Adjusted operating margin expanded 140 basis points to 32.1 percent in the fourth quarter and 50 basis points to 32.2 percent for the full year, compared to the prior-year periods.
Free cash flow increased 8 percent to $1.08 billion for the full year, compared to the prior year. Cash distributions from StoneRiver of $151 million in 2016 related to the sale of a business interest have been excluded from the company’s free cash-flow results.
Sales performance increased 22 percent in the fourth quarter and 21 percent for the full year compared to the prior-year periods.
Fiserv expects its internal revenue to grow between 4% and 5%, and EPS to range between $5.03 and $5.17. That would be a growth rate of 14% to 17%. Wall Street had been expecting $4.97 per share. The shares rallied on the news, and FISV is close to another all-time high.
Cerner Earns 61 Cents per Share
On Thursday afternoon, Cerner (CERN) reported Q4 earnings of 61 cents per share. That matched Wall Street’s consensus. A few weeks ago, the company told us to expect Q4 earnings between 60 and 62 cents per share. For the year, Cerner made $2.30 per share, which is up from $2.11 per share in 2015.
The company’s “systems sales” were down sharply but they made up for with strong numbers from their “support, maintenance and services.”
Now for guidance. For Q1, Cerner sees earnings between 57 and 59 cents per share. For the year, they expect earnings between $2.44 and $2.56 per share. That compares with Wall Street consensus of 59 cents and $2.56 per share. Frankly, I was hoping to see better numbers here. This week, I’m lowering my Buy Below on Cerner to $55 per share.
Three Buy List Earnings Reports Next Week
We have three Buy List earnings reports coming next week.
On Tuesday, Express Scripts (ESRX) is due to report. The pharmacy-benefits manager has been attacked recently by Andrew Left, a noted short-seller. I should caution you that Left isn’t known for subtlety. He compared Express to John Gotti. (Seriously.)
In any event. I think Left is off base. Express Scripts said they expect 2016’s earnings to come in between $6.36 to $6.42 per share. That means Q4 earnings should range between $1.84 to $1.90 per share. The Street expects $1.87 per share.
On Friday, Moody’s (MCO) will report. Three months ago, the credit-ratings agency reported an earnings increase of 21%. I was pleased to see the firm recently settle with the government regarding its behavior during the financial crisis. For Q4, Moody’s said they expect EPS to range between $1.03 and $1.13. I think they can make more than 4% per share for this year.
On Friday, we’ll also get a report from JM Smucker (SJM). It’s an early bird from the January reporting cycle. Smucker will actually report before some of the laggards from the December cycle like Wabtec (WAB) and Cinemark (CNK). The upcoming earnings report will be Smucker’s fiscal third. In November, the company easily beat estimates. SJM now sees full-year earnings (ending in April) coming in between $7.60 and $7.75 per share, “with a bias toward the middle to high end of the range.”
That’s all for now. Stay tuned for more earnings reports next week. On Wednesday, we’ll get the CPI report for January. Inflation continues to be tame, but I’m curious if we see any cost pressures. We’ll also get reports on retail sales and industrial production. The last IP report was very good. It was the best in two years. 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!