CWS Market Review
July 28, 2017
“99% of the troubles that threaten our civilization come from too optimistic accounting.”
– Charlie Munger
This was another big week for Buy List earnings reports. We also had a Federal Reserve meeting. As expected, the central bank decided against raising interest rates. The stock market seemed pleased as the major indexes rose to more all-time highs. At the same time, the Volatility Index dropped to its lowest levels in more than 20 years.
For the overall market, this is shaping up to be a very good earnings season. About 80% of companies in the S&P 500 have beaten their earnings expectations. The typical “beat rate” usually runs around 65%. Some of the results are being aided by the weak U.S. dollar.
In this week’s CWS Market Review, I’ll go over all our recent earnings news. Moody’s, Express Scripts and Stryker all beat and raised guidance. I love seeing that! At the other end, RPM International had a lousy report. They missed expectations by a mile. I’ll go into more details on that in a bit. I’ll also preview the final batch of Buy List earnings coming our way next week. First, though, let’s look at last week’s excellent earnings report from Moody’s.
Moody’s Beats, RPM Misses
Last Friday, shortly after I sent you last week’s newsletter, Moody’s (MCO) reported very good earnings, plus they raised guidance. For Q2, the ratings company earned $1.51 per share which is a 16% increase over last year. That beat expectations by 17 cents per share. Quarterly revenues were up 8% to $1 billion, and operating income rose 12% to $457.5 million. These are very good results.
More importantly, Moody’s raised their full-year guidance range to $5.35 to $5.50 per share. The previous range was $5.15 to $5.30 per share. Things are going very well for Moody’s. This week, I’m raising my Buy Below on Moody’s to $141 per share.
On Monday, RPM International (RPM) had a complete dud of an earnings report. The company made $1.02 per share for its fiscal Q4 which was 16 cents below Wall Street’s consensus. Quarterly net sales rose 4.6% to $1.49 billion.
The company’s explanation:
“We took additional cost reduction measures in the fourth quarter to position RPM to a return to double-digit earnings growth in fiscal 2018. We were pleased with solid organic growth in both our industrial and specialty segments during the fourth quarter, which we expect to continue as we enter into fiscal 2018. Organic growth across our consumer businesses was down 1.0%, principally due to lower results at our Kirker nail enamel business, the negative impact of a very rainy start to the spring season for home improvement sales and a difficult comparison to our prior-year quarter in which organic growth across RPM’s core consumer product lines increased 9.9%,” stated Frank C. Sullivan, RPM chairman and chief executive officer.
“The consolidated revenue increase, particularly in a growth-challenged economic environment, was mitigated somewhat on leverage to the bottom line as a result of higher raw material costs during the quarter, including shortages and availability issues in a couple of key product lines. Also, a significantly higher tax rate in the fourth quarter this year versus last year reduced earnings per share on a comparative basis by $0.12.
I’m always a little suspicious when companies blame the weather for their business woes. Now for guidance. RPM sees fiscal 2018 earnings ranging between $2.85 and $2.95 per share. For fiscal Q1, which ends in August, RPM projects earnings between 83 and 85 cents per share. Wall Street had been expecting $3 per share for the year and 89 cents per share for Q1.
In Monday’s trading, RPM dropped 7%. I’m not pleased with RPM’s progress so far. For now, I’m going to keep my Buy Below at $55 per share.
Express Beats and Raises Guidance
After the closing bell on Tuesday, Express Scripts (ESRX) reported Q2 earnings of $1.73 per share. That’s up 10% from last year’s Q2, and it topped Wall Street’s consensus by two cents per share. Earlier Express told us to expect Q2 results to range between $1.70 and $1.74 per share.
Here are some highlights:
-Adjusted claims of 350.0 million, flat
-GAAP net income of $801.8 million, up 11%
-GAAP earnings per diluted share of $1.37, up 21%
-EBITDA of $1,824.1 million, up 1%
-EBITDA per adjusted claim of $5.21, up 1%
-Adjusted net income of $1,011.6 million, up 1%
-Adjusted earnings per diluted share of $1.73, up 10%
-Net cash flow provided by operating activities of $1,081.2 million, up 146%
The best news is that Express raised its guidance. The company now sees full-year earnings of $6.95 to $7.05 per share. The earlier guidance was $6.90 to $7.04 per share. Wall Street had been expecting $6.97 per share. The new range represents growth of 10% over last year.
For Q3, Express expects total adjusted claims of 340 million to 350 million, and they see earnings of $1.88 to $1.92 per share. Wall Street had been expecting $1.89 per share.
Express didn’t have much more to say about the ongoing battle with Anthem. They did say that if they continued to do business with Anthem it would be on terms significantly less favorable for Express Scripts. I will say that I feel more confident about ESRX than I did a few weeks ago, but I want to see more improvement. Express Scripts is a buy up to $69 per share.
Earnings from AFLAC, Cerner, CR Bard and Stryker
There were four Buy List reports on Thursday, all of which came after the close. First up was AFLAC (AFL). For Q2, the duck stock’s operating earnings rose 10.9% to $1.83 per share. That easily beat the range they had given us of $1.55 to $1.70 per share. There are two notes to add. First, the exchange rate knocked off two cents per share. Also, the company also got a tax benefit of five cents per share during the quarter. For Q2, AFLAC’s annualized ROE was 13.6%.
Dan Amos, AFLAC’s CEO, stood by the company’s full-year range for operating earnings of $6.40 to $6.65 per share. That assumes that the yen averages 108.70. I’m a little surprised he didn’t raise that range. For Q3, Amos expects AFLAC to earn $1.51 to $1.69 if the yen averages between 105 and 115.
I like these numbers. AFLAC is a buy up to $80 per share.
Cerner (CERN) reported Q2 earnings of 61 cents per share which matched expectations. The healthcare IT company had previously announced an earnings range of 60 to 62 cents per share. Quarterly revenue rose 6% to $1.292 billion which exceeded Cerner’s guidance.
For Q2, operating cash flow was $292.2 million and free cash flow was $119.1 million. Days sales outstanding fell to 73 days from 74 days last year. Total backlog rose 11% to $16.648 billion.
For Q3, Cerner expects revenue between $1.265 billion and $1.325 billion, and EPS between 61 cents and 63 cents. For all of 2017, Cerner sees revenue between $5.15 billion and $5.25 billion. Cerner is narrowing its full-year EPS guidance from $2.44 – $2.56 to $2.46 – $2.54. Cerner remains a buy up to $68 per share.
CR Bard (BCR) reported Q2 earnings of $2.92 per share. That beat their forecast of $2.75 to $2.85 per share. Quarterly sales rose 5% to $979.7 million.
Timothy M. Ring, chairman and chief executive officer, commented, “We continue to see strong, balanced growth across our portfolio and geographies. Half-way through 2017, each of our businesses has performed at or above the top of our forecasted constant currency revenue growth ranges for the full year. In the second quarter we reached a new milestone, with revenue from emerging markets now representing 12 percent of total company revenues. We are pleased with the continued momentum of our global business as we prepare to merge with Becton, Dickinson and Company in the fourth quarter of 2017.”
Bard also raised the low end of their 2017 range by five cents per share. They now expect full-year earnings to range between $11.70 and $11.90 per share. I’m pleased to hear they expect to complete the merger with Becton, Dickinson (BDX) sometime in the fourth quarter.
Our last one is Stryker (SYK). For Q2, earnings rose 10.1% to $1.53 per share, two cents more than consensus. Quarterly net sales rose 6.1% to $3.0 billion. In constant currency, that’s an increase of 6.9%.
Kevin A. Lobo, Stryker’s CEO, said “Our growth momentum continued in the second quarter as we continue to drive share gains through new products and strong commercial execution.” Looking at Stryker’s three divisions, Orthopaedics sales rose by 5.5%, MedSurg’s sales increased by 6.2%, and the Neurotechnology and Spine unit saw a sales increase of 6.9%.
Stryker now expects organic sales growth for this year of 6.5% to 7%. For full-year EPS, they expect $6.45 to $6.55. That’s an increase of 10 cents per share at both ends. For Q3, Stryker sees a range of $1.50 to $1.55 per share. This is very good news. I’m raising my Buy Below on Stryker to $149 per share.
Several More Buy List Earnings Next Week
Next week will be another very busy week for earnings. On Tuesday, Fiserv and Ingredion are scheduled to report. Fiserv (FISV) just reached another all-time high. In April, Fiserv reiterated its full-year outlook for $5.03 to $5.17 per share. They didn’t give a range for Q2, but the consensus among analysts is for Q2 earnings of $1.23 per share.
Ingredion (INGR), the plant food people, had a very good report for Q1. They now see 2017 EPS ranging between $7.50 and $7.80. Wall Street is looking for $1.85 per share.
Next Thursday will be crowded with four earnings reports.
Axalta Coating Systems (AXTA) recently helped out another one of our Buy List stocks. Valspar needed to sell its North American Industrial Wood Coatings unit in order to complete its merger with Sherwin-Williams (SHW). Axalta bought it for $400 million in cash. Wall Street expects Q2 earnings of 39 cents per share.
Cognizant Technology Solutions (CTSH) has rebounded quite nicely over the past several months. For Q2, Cognizant expects revenue ranging between $3.63 billion and $3.68 billion and EPS of at least 89 cents per share. That’s quite good. For the full year, CTSH sees revenue between $14.56 billion and $14.84 billion and EPS of at least $3.64.
Continental Building Products (CBPX) has been sliding downward for the last several weeks. I think the wallboard maker is a good buy here. Wall Street expects earnings of 35 cents per share.
Intercontinental Exchange (ICE) is turning into a nice winner for us this year. ICE is up 17.2% for us YTD. The consensus is for Q2 earnings of 76 cents per share. ICE should beat that.
Cinemark (CNK) is due to report next Friday. The movie theater chain had a decent Q1 earnings report but the stock has pulled back. Cinemark theater chain now runs 525 theaters with 5,894 screens. Wall Street expects earnings of 45 cents per share. I expect Cinemark to beat that.
With the turn of the month, we’ll get some key economic reports next week. On Tuesday, we’ll get the latest ISM report. We’ll also get a look at personal income and spending. Wednesday is the ADP payroll report. Then on Friday is the big July jobs report. 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!