CWS Market Review
April 28, 2017
“It is remarkable how much long-term advantage people like us have gotten by trying to
be consistently not stupid, instead of trying to be very intelligent.” – Charlie Munger
What a dramatic week this has been for us! It started on Sunday evening when Becton, Dickinson, a former Buy List stock, said it’s buying out CR Bard for $24 billion! On Monday, shares of Bard jumped nearly 20%. It’s now our biggest gainer of the year.
Then on Monday afternoon, Express Scripts reported good earnings but said they’re losing their largest customer in Anthem. On Tuesday, shares of ESRX dropped 10.7%. But then Anthem said, “hold on, we haven’t made a final decision!”
And that’s not all. We got good earnings from stocks like Microsoft, Stryker and AFLAC. Wabtec beat earnings, and the shares rallied 6% in three days. Fiserv easily topped earnings, and the stock touched another all-time high.
This week, the Nasdaq Composite broke 6,000 for the first time ever, and the S&P 500 came very close to making a fresh all-time high. Thanks to CR Bard (and Becton!), our Buy List is now up nearly 9% for the year.
Get ready, because this is going to be an earnings-packed issue of CWS Market Review. I’ll cover the nine reports we had this week, and I’ll preview our final six reports for this earnings season. Let’s start with the great news from CR Bard.
Becton, Dickinson Buys CR Bard for $24 Billion
As soon as I learned the news that Becton, Dickinson (BDX) was buying out CR Bard (BCR), I sent you a brief alert on Sunday evening. Here are the details of the merger: BCR shareholders will get $222.93 per share in cash plus 0.5077 shares of BDX.
The deal has been approved unanimously by the boards of both companies. It’s expected to close in the fall of this year. I think it’s good that a large part of the deal is in cash. That means shares of BCR won’t be hurt so much by what happens to BDX between now when the exchange is made. Obviously, regulators have to sign off on the deal as well, but I don’t expect any major delays.
Bard also released its earnings report on Sunday evening. They had previously said they expected Q1 EPS between $2.60 and $2.66, and full-year EPS between $11.45 and $11.75. It turns out for Q1, they made $2.87 per share. They now expect full-year EPS between $11.65 and $11.90. For Q2, they’re expecting $2.75 to $2.85 per share. Wall Street had been expecting $2.87. You can see why BDX likes them!
What to do now? Nothing. Just keep holding on to BCR. I’m lifting my Buy Below to $330 per share. As of Thursday’s close, shares of Bard are going for 3.2% below the buyout price. That’s not unusual, since there’s always a possibility the deal could fall apart. It’s low but not zero.
For Buy List track record purposes, when the deal is completed, shares of BDX will replace the BCR position. Also, the cash portion will be assumed to buy shares of BDX at whatever price the shares are then going for. In other words, BDX will entirely replace BCR. This is how we’ve done previous mergers in the Buy List.
This is great news for us. Bard is one of those quiet stocks that keeps churning out great gains. Ironically, it was in last week’s CWS Market Review where I point out that we first added the stock to the Buy List in 2012 at $85.50 per share. Congratulations to all long-term holders of BCR!
The Soap Opera Between Express Scripts and Anthem
After the closing bell on Monday, Express Scripts (ESRX) released very good earnings. But that got lost in the bigger news. First, though, let’s look at the numbers. For Q1, Express earned $1.33 per share, a penny more than expectations.
Express also raised its full-year guidance. The previous range was $6.82 to $7.02 per share. The new range is $6.90 to $7.04 per share. For Q2, they’re looking for $1.70 to $1.74 per share. Wall Street was at $1.68 per share.
So…nothing to complain about? Not so fast.
In the earnings report, Express said they’re basically done with Anthem, their largest customer. Anthem has claimed that Express has been overcharging them, which Express has flatly denied. They’ve been trying to reach a deal, and I’ve assumed they would. There’s too much money at stake. But this week, Express told Anthem not to bother making them an offer. Dude! On Tuesday, ESRX dropped 10.7%.
Let me point out that we’re talking about what will happen in December 2019 when the deal between the two finally ends. It’s not like Express stormed out of the deal. On Wednesday, Anthem’s CEO surprised everyone when he said that no final decision has been reached. ESRX rallied 2% that day. I don’t know if Anthem is playing hardball, but it seems like an unusual way to get a deal.
For now, let’s watch what happens. I think there’s more drama to be had, but Express is fundamentally a sound company. This week, I’m lowering our Buy Below to $62 per share.
Tuesday: Stryker and Wabtec Beat Estimates
On Tuesday afternoon, Stryker (SYK) reported Q1 earnings of $1.48 per share. Previously, the orthopedics firm had told us to expect a range between $1.40 and $1.45 per share. Wall Street had been expecting $1.43 per share. This was a solid report.
“Our positive momentum continued in the first quarter, as we demonstrated our ongoing commitment to deliver organic sales growth at the high end of med-tech and leveraged earnings gains,” said Kevin A. Lobo, Chairman and Chief Executive Officer. “Our results were well balanced across business segments and geographies, and position us well for another strong year in 2017.”
For Q2, Stryker expects EPS between $1.48 and $1.52. Wall Street had been expecting $1.51 per share. Stryker also maintained its full-year forecast of $6.35 to $6.45 per share. I’m raising our Buy Below on Stryker to $140 per share.
Also on Tuesday, Wabtec (WAB) reported Q1 earnings of 84 cents per share. That beat Wall Street’s estimates by two cents per share. This was a nice rebound from the awful quarter they had for Q4. I should add that during the quarter, Wabtec completed its acquisition of Faiveley.
The freight-services company reiterated its full-year guidance numbers. They expect revenue of about $4.1 billion, and EPS between $3.95 and $4.15.
Raymond T. Betler, Wabtec’s president and chief executive officer, said: “Our first-quarter adjusted earnings were in line with expectations, and we expect improvement during the year. As we work to integrate Faiveley and our other recent acquisitions, we are managing our costs aggressively based on market conditions. We continue to invest in our balanced-growth strategies and expect to benefit from our diversified business model and rigorous application of the Wabtec Excellence Program.”
Shares of WAB got a nice lift from the earnings report, and the stock is now positive for the year. This is a good example of sticking with a well-run outfit that’s going through a rough patch. I’m raising my Buy Below price on Wabtec to $87 per share.
Wednesday Earnings from Axalta and Fiserv
On Wednesday, Axalta Coating Systems (AXTA) said they made 26 cents per share for Q1, which was two cents more than estimates. Revenues rose 5.5% to $1.01 billion, $20 million more than estimates. Axalta also reaffirmed full-year guidance for EBITDA of $930 to $980 million. Not much to add here; it was another good quarter. AXTA remains a buy up to $35 per share.
Also on Wednesday, Fiserv (FISV) reported Q1 earnings of $1.25 per share, six cents more than Wall Street’s consensus.
GAAP operating margin was 26.2 percent in the first quarter, increasing 70 basis points compared to the first quarter of 2016.
Net cash provided by operating activities was $463 million in the first quarter of 2017, compared with $509 million in the prior-year period, a decrease of 9 percent. Net cash provided by operating activities included cash distributions from StoneRiver of $31 million and $140 million in the first quarters of 2017 and 2016, respectively.
“We are off to a good start to the year, producing strong financial results across the company,” said Jeffery Yabuki, President and Chief Executive Officer of Fiserv. “Our business model continues to deliver revenue acceleration, strong sales growth and excellent free cash flow.”
Fiserv reiterated its full-year outlook for $5.03 to $5.17 per share. That represents a growth rate of 14% to 17% over last year. The stock gapped up to yet another all-time high. Fiserv remains a buy up to $122 per share.
Thursday’s Reports from AFL, CERN and MSFT
We had three more earnings reports after the bell on Thursday. AFLAC (AFL) reported Q1 operating earnings of $1.67 per share. The duck stock topped the Street’s consensus by five cents per share. The dollar/yen exchange rate added one penny per share to AFLAC’s bottom line.
Dan Amos, the CEO, said, “We are pleased with the company’s overall performance for the quarter. Our results for the first quarter are consistent with what we communicated on our December outlook call. Despite the persistent low-interest-rate environment, Aflac Japan, our largest earnings contributor, generated solid financial results. In yen terms, results on an operating basis were in line with our expectations for the quarter. Additionally, our operation in Japan produced better-than-expected third-sector sales results. As we’ve communicated, we continue to believe the long-term compound annual growth rate for third-sector product sales will be in the range of 4% to 6%.”
Now for some guidance. Amos said that if the exchange rate averages ¥108.70 for this year, which was last year’s average, then AFLAC is on pace to net between $6.40 and $6.65 per share in operating earnings for this year. If the yen averages 105 to 115 for Q2, then he sees AFLAC earning between $1.55 and $1.70 per share. Wall Street had been looking for $1.62 per share.
AFL broke out to a new all-time high this week. The shares remain a buy up to $75.
Cerner (CERN) has made an impressive U-turn for us this year. On Thursday, the healthcare-IT folks said they earned 59 cents per share for Q1. They had previously given is a range between 57 and 59 cents per share, while Wall Street’s consensus was at 57 cents.
But I wanted to dig down to the details, and they look pretty good. Total backlog is up 10% from last year. Q1 operating cash flow was $303.6 million. For Q2, Cerner expects earnings between 60 and 62 cents per share. For the entire year, they’re looking for a range between $2.44 and $2.56 per share. I think both are very doable. It’s nice to hear some good news from Cerner. I’m lifting my Buy Below on Cerner to $66 per share.
That brings us to the big earnings report from Microsoft (MSFT). The software giant earned 73 cents per share, three cents more than estimates. That’s up from 63 cents per share one year ago. This was a good quarter, but the revenue number was a bit light.
For the quarter, Microsoft had adjusted revenue of $23.56 billion. That’s up 6% from last year. But Wall Street had been expecting $23.65 billion. The company blamed the shortfall on weak Surface Pro sales. It’s not a huge miss, but it was enough to hurt the shares in the after-hours market. Don’t worry about it at all. Microsoft is doing very well. Revenue for their “Intelligent Cloud” business was up 11% to $6.8 billion. I’m raising my Buy Below on Microsoft to $70 per share.
Six More Earnings Reports Next Week
Next week, we’ll have our final six Buy List earnings reports for this earnings season. We’ll get three earnings reports on Wednesday: Cinemark, Intercontinental Exchange, and Ingredion. Then Continental Building Products reports on Thursday, May 4. Finally, on Friday, May 5, we get reports from Cognizant Technology Solutions and Moody’s.
In February, Cinemark (CNK) had a blow-earnings report. The movie theater chain earned 66 cents per share, which was 50% more than Wall Street had been expecting. Estimates for Q1 have been climbing higher and higher and are now at 58 cents per share. Here’s a number I love—gross margins on their concession business run about 85%. In the theater business, that’s where all the real money is.
Intercontinental Exchange (ICE) is coming off a good year for 2016. I think the stock exchange people can make $3 per share this year. Wall Street’s expects Q1 earnings of 70 cents per share. I’m expecting a small beat.
In February, Ingredion (INGR) reported decent numbers for Q4. They beat by three cents per share, but the stock got punished for a 9% loss that day. I’m really not sure what ticked traders off so much. The company said full-year earnings should range between $7.40 and $7.80 per share. That’s not bad. Wall Street is looking for Q1 earnings of $1.76 per share.
I like Continental Building Products (CBPX) a lot, and the company provides lots of guidance for several different financial metrics. Except EPS. My numbers say that CBPX can make $1.35 per share this year. For Q1, analysts are expecting 27 cents per share. That sounds about right.
In February, Cognizant Technology Solutions (CTSH) said they see Q1 earnings of 83 cents per share, and full-year guidance of $3.63 per share. The big news for Cognizant this year is that they reached an agreement with Elliott Management, an activist investment group. As part of the agreement, Cognizant now plans to return $3.4 billion to shareholders over the next two years. They also plan to initiate a dividend of 15 cents per share.
Moody’s (MCO) is our third-biggest winner this year, with a gain of 26.7%. The shares reached another new high on Thursday. 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. For Q1, Wall Street forecasts earnings of $1.21 per share.
That’s all for now. We get our last batch of Buy List earnings next week. With the beginning of May, we’ll also get some key economic reports. The ISM report comes out on Monday. The Federal Reserve meets on Tuesday and Wednesday, but don’t expect anything to happen. The policy statement will come out at 2 p.m. on Wednesday. Then the big April jobs report comes on out Friday, May 5. 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!