CWS Market Review
April 27, 2018
“If you have trouble imagining a 20% loss in the stock market, you shouldn’t be in stocks.” – Jack Bogle
On Tuesday, the yield on the 10-year Treasury bond broke above 3% for the first time since 2014. Less than two years ago, the 10-year was going for a measly 1.37%. The increase isn’t surprising; the economy is getting better and the Federal Reserve has been raising interest rates.
But it does remind us that the investing climate is changing. For a long time, bond yields were so low that the financial markets were practically begging you to buy stocks. Investors responded. In less than nine years, the Dow quadrupled.
Now things are different. Bonds are much tougher competition. As a result, the stock market has become far more discerning. We’re currently in earnings season, and we can see how swiftly the market gods have rewarded or punished stocks. So far, every Buy List stock has beaten Wall Street’s earnings estimate. We’re 11-0. But not all of our stocks have performed well following their earnings.
In this week’s CWS Market Review, I’ll run down our earnings reports from this week. I’ll also preview seven more coming next week. It’s been a busy week and there’s a lot to get to, so let’s jump into this week’s earnings. Don’t forget, you can always see our complete Earnings Calendar.
This Week’s Buy List Earnings
On Tuesday, three of our stocks reported. Let’s start with Wabtec (WAB), the freight services company. Wabtec reported Q1 earnings of 92 cents per share which beat estimates by two cents per share.
The good news is that Wabtec reaffirmed their full-year guidance. They expect revenue of $4.1 billion and earnings of “about” $3.80 per share, excluding restructuring costs.
The CEO said:
Our first-quarter results exceeded our expectations slightly and represent a solid start to the year. With a record backlog and the positive indicators we’re seeing in our core markets, we are well positioned to meet our financial targets in 2018.
It’s now an open secret on Wall Street that GE may sell their transportation business to WAB. This would be a huge deal. Expect more details soon. Fortunately for us, the stock has been behaving much better recently. WAB gapped up 2.6% on Tuesday to touch a nine-month high. This was a good earnings report. This week, I’m lifting my Buy Below price on Wabtec to $93 per share.
Sherwin-Williams (SHW) also reported earnings on Tuesday, but their report is a bit complicated. The company had Q1 earnings of $3.57 per share, which beat expectations by 41 cents per share, but there are some accounting issues related to the Valspar acquisition.
The $3.57 figure includes 24 cents per share in transaction costs and 71 cents per share in “accounting impact” costs. On the plus side, Valspar added $1.08 per share in net income. The net debt charge from Valspar was 40 cents per share.
Thanks to that 40-cent charge, Sherwin reduced its full-year guidance by 40 cents per share. The company now expects full-year EPS of $18.35 to $18.95 (excluding any Valspar issues). Wall Street had been expecting $19.14 per share.
I apologize if this sounds confusing – I’ll try to summarize as briefly as I can. Sherwin’s business is going well. Very well, in fact. However, they’re having more trouble than expected with the Valspar merger. In the long run this deal should pay off for us, but for now, I’m dropping my Buy Below down to $400.
After the bell on Tuesday, Carriage Services (CSV) posted Q1 earnings of 59 cents per share. Only two analysts follow the stock, so it’s not completely accurate to call it a consensus. For my part, I was expecting something around 50 to 52 cents per share. The CEO, Mel Payne, said, “We got off to a good start in 2018 by setting numerous historical first quarter performance records.”
Revenue rose 7.7% to $73.4 million, and EBITDA was up 5.8%. The downside is that they’re lowering their guidance. They gave three reasons for the lower guidance: an acquisition that didn’t close in Q4 as expected, rising interest costs on their floating rate debt, and a higher share count related to convertible debt and recent increase in share price.
For the rolling four quarters ending in March 2019, Carriage expects revenue of $274 to $277 million and earnings of $1.80 to $1.85 per share. That’s a decrease of 20 cents per share at both ends. The decrease in the midpoint of the revenue range is just 2.5%. The stock pulled back after the report, but the current valuation is pretty low. Don’t let this glitch worry you. Carriage remains a buy up to $28 per share.
On Wednesday morning, Check Point Software (CHKP) had a decent earnings report, but the stock took a hit after they lowered guidance. The details aren’t quite as bad as the stock action suggests.
The issue is that Check Point has been shifting their business towards a greater reliance on subscription revenue. The problem is that these subscriptions boost results in higher deferred revenue. It’s also been taking CHKP a long time to close deals for their new Infinity Total Protection product.
Let’s dig into the numbers. For Q1, Check Point reported earnings of $1.30 per share. That was two cents better than estimates. Revenue rose 4% to $452 million, and cash flow from operations increased by 18% to $419 million. They had previously given Q1 guidance for earnings between $1.25 and $1.30 per share and revenues of $440 to $460 million.
Now we get to the disappointing news, which is the weak guidance. For Q2, Check Point expects revenue to range between $445 and $475 million. Wall Street had been expecting $477 million. For Q2 EPS, their range is $1.25 to $1.35. Wall Street had been expecting $1.35 per share.
Check Point also cut their full-year earnings range. The previous guidance was $5.50 to $5.90 per share. The new range is $5.45 to $5.75 per share. They also lowered their full-year revenue forecast from $1.9 billion – $2 billion to $1.85 billion – $1.93 billion.
In Wednesday’s trading, shares of CHKP fell 6.4%. Don’t give up on Check Point; this is a strong company. I’m cutting my Buy Below on CHKP to $105 per share.
Also on Wednesday, AFLAC (AFL) reported Q1 operating earnings of $1.05 per share. Favorable forex boosted that figure by three cents per share. Wall Street had been expecting 97 cents per share.
The duck stock is standing by its earnings forecast for full-year earnings of $3.72 to $3.88 per share (remember, the stock recently split 2 for 1). For Q2, AFLAC expects earnings to range between 91 cents and $1.05 per share. Wall Street had been expecting 99 cents per share. AFLAC’s guidance assumes the yen averages between ¥100 and ¥110 to the dollar. Lately, it’s been creeping up to about ¥109.
This is basically what I expected. On Thursday, the shares touched a new all-time high. I’m lifting our Buy Below to $50 per share.
Stryker (SYK) reported after the close on Thursday, and it was a good one. For Q1, they earned $1.68 per share which was eight cents above the Street. Previously, the company had given a forecast range of $1.57 to $1.62 per share.
CEO Kevin Lobo said, “We had an excellent start to 2018 with strong organic sales growth, operating margin and adjusted EPS in the first quarter.” For Q1, their quarterly operating margin was 25%. That’s very good.
Stryker also raised their full-year forecast. Their initial range was $7.07 to $7.17 per share. Now they see 2018 coming in between $7.18 and $7.25 per share. It seems they’re basically adjusting for the eight-cent beat. For Q2, Stryker expects $1.70 to $1.75 per share. Wall Street had been expecting $1.70 per share. This was a very good quarter for Stryker.
Moody’s (MCO) will be reporting later today. They’re looking for 2018 earnings of $7.65 to $7.85 per share. They made $6.07 per share in 2017. For Q1, Wall Street expects earnings of $1.80 per share.
Seven Earnings Reports Next Week
We have seven more Buy List earnings reports next week.
Fiserv (FISV) will kick things off on Tuesday, May 1. Last year was their 32nd year in a row of double-digit earnings growth. There’s a very good chance that 2018 will be year #33. Fiserv expects earnings this year of $6.05 to $6.30 per share. Wall Street expects Q1 earnings of 73 cents per share. I think Fiserv will beat that.
Cerner (CERN) has been a bit of a flop for us this year which is surprising. The company missed earnings for Q4. I’m not worried just yet but I want to see signs of improvement. The company is due to report on Wednesday, May 2. Cerner expects Q1 earnings of 57 to 59 cents per share and 2018 earnings of $2.57 to $2.73 per share.
We have a very busy day planned for next Thursday, May 3. Five of our Buy List stocks are due to report.
Becton, Dickinson (BDX) had a very good report for Q4, and the company continues to be optimistic about the CR Bard acquisition. This has been a great opportunity for us. For 2018, Becton is looking for earnings to range between $10.85 and $11.00 per share. That’s a very good range, and it’s surprisingly narrow for a full-year forecast. For Q1, Wall Street is looking for $2.63 per share.
Church & Dwight (CHD) has been pretty weak lately. The stock dipped last week after some big-name consumer staples posted disappointing results. This is puzzling to me. CHD’s CEO recently said “they’re hitting on all cylinders.” For 2018, they expect EPS to range between $2.24 and $2.28. That’s growth of 16% to 18%. For Q1, Church & Dwight expects earnings of 61 cents per share on organic sales growth of 2%.
On the surface, Continental Building Products (CBPX) is a boring wallboard company. Actually, they’re the same below the surface as well, but they’re a very good business. Continental offers guidance on several metrics except earnings, but I think they can hit $1.60 per share this year. The consensus for Q1 is for 36 cents per share. I think they can beat that.
Ingredion (INGR) is another Buy List stock that’s been off to a poor start this year. The plant-food company missed Q4 earnings by two cents per share. The stock is going for a good value here. For 2018, Ingredion said they see EPS ranging between $8.10 and $8.50. That means the stock is going for around 15 times earnings.
Lastly is Intercontinental Exchange (ICE). I like the stock-exchange operator a lot but for several weeks, the stock has been stuck in a range between $70 and $75. The company recently sealed a deal to buy the Chicago Stock Exchange. That was a good move. The consensus for Q1 is for 88 cents per share. I’m expecting a beat.
That’s all for now. Earnings season will continue to dominate the news next week. On Tuesday and Wednesday, the Federal Reserve meets again. Don’t expect any action from the Fed. The policy statement will come out at 2 pm on Wednesday. Then on Friday, the April jobs report comes out. 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
Syndication Partners
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3 Cloud Computing Companies Racing to Push Cloud Computing Aside
The technology research firm Forrester Research says that the Internet of Things – and the coming deluge of sensors and data – make a good bit of cloud computing passé. It will be more practical and efficient to process all of this data right on the spot where it is being collected.
In other words, data will be processed not in a centralized cloud, but at the edge of the network. Thus you get the term ‘edge computing’.
In October 2017, the IT research firm Gartner estimated that by 2022, half of all data generated by businesses will come from smart edge devices – IoT sensors as well as smartphones and PCs – rather than from the cloud or their own data centers.
This new reality in computing suggests to me the best way to invest in edge computing, while still keeping exposure to cloud computing, is through certain stocks.
3 High-Yield Energy Stocks to Buy as Crude Oil Continues to Climb
After two-and-a-half years of giving income investors false hopes of a recovery, the energy infrastructure sector is now ready to stage a sustained positive price trend. Investors are renewing interest in these sectors. Now is the time to buy into these companies for attractive current yields, dividend growth and price appreciation.
Energy infrastructure (also called energy midstream) companies provide the assets and services which move energy commodities (crude oil, natural gas, refined products and natural gas liquids, also referred to as NGLs) from the production areas to the end users. The assets in the sector include pipelines, storage facilities, processing facilities, and all kinds of terminals.
Prior to 2015, the master limited partnership (MLP) was the prevailing business structure for energy midstream companies. Now the sector is close to a balanced mix of MLPs and corporations. At the present time, the higher yields come from the MLPs. This means these companies have more upside price potential has yields between them and the corporate shares become similar for companies with comparable business results. Most MLPs report tax information on what’s called a Schedule K-1. For my Dividend Hunter subscribers, I search out Form 1099 reporting energy infrastructure investments.
Here are three midstream companies with high current yields, continuing dividend growth, and strong business prospects.
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