Investors wouldn’t think news flow is that robust given that stock market volatility in recent months has been practically nil, but news is coming in fast. Let’s check up on the performance of the US dollar, the rate of GDP growth as well as key companies reporting fourth-quarter earnings. Intel’s quarterly report was fantastic, for one!
By Kris Rosemann
The US dollar (UUP, UDN, USDU) hit a three-year low against the euro, but US Treasury Secretary Steven Mnuchin suggests a weaker dollar may be good for the US, which is a change from traditional US policy, though he was sure to note that the government is not concerned about short-term fluctuations in the currency. Meanwhile, of course, the euro (FXE) is headed in the opposite direction, reaching its highest mark against the US dollar since December 2014 after the ECB left its benchmark interest rates unchanged in its January policy event January 25.
US GDP slowed in the final quarter of 2017 to 2.6%, missing estimates for 3.0%, though this is just the initial read on the data. We might expect an upward revision when all is said and done, as is customarily the case. Consumer spending climbed 3.8%, its strongest pace in nearly two years, but a decline in inventories and that imports increased at nearly double the pace of exports held the overall measure back in the quarter. The US dollar’s slide could help US exports, but President Trump’s comments at the World Economic Forum at Davos (that he’d like a strong dollar) conflicted with interpretations of Treasury Secretary Steven Mnuchin’s comments earlier in the week.
Let’s have a look at some key earnings reports. Dividend Growth Newsletter portfolio and Best Ideas Newsletter portfolio idea Intel (INTC) rallied considerably after an impressive earnings report after the close January 25 in which fourth quarter revenue hit a company record thanks in part to robust growth in its data center business. The company sees 2018 non-GAAP earnings per share growing to ~$3.55 from $3.46 in 2017, and free cash flow is expected to hit $13 billion. A 10% dividend hike accompanied Intel’s quarterly report, and we couldn’t be more pleased with the pace of growth in the payout. At last check, Intel registered a Dividend Cushion ratio of 2.8, and the upper bound of its fair value range is $58.
Caterpillar (CAT) exceeded consensus estimates on both the top and bottom lines in its fourth quarter report, results released before the open January 25, as 2017 marked a year of improvement in key markets for the heavy-equipment manufacturer after four challenging years. The company expects momentum to continue in 2018 as strong order rates, lean dealer inventories, and an increasing backlog are reasons for optimism in addition to expectations for positive economic indicators to persist in most of its end markets in 2018. Caterpillar expects adjusted profit per share in 2018 to be in a range of $8.25-$9.25. Its end markets will always be cyclical, and investors should be cautious.
Shares of Union Pacific (UNP) are falling after the company’s fourth-quarter report, results released before the open January 25, revealed it missed consensus earnings-per-share estimates by a penny. However, the railroad operator made progress in its operating ratio, which fell to 58.7 from 62.2 in the year-ago period, despite a 23% increase in average quarterly diesel fuel price. Weakness in automotive, agricultural products, and coal freight revenues was more than offset by strength in industrial products, chemicals, and intermodal freight revenues. Management expects 2018 to bring another year of volume growth, and inflation plus core pricing coupled with productivity initiatives should help boost margin performance in the year. We like the moaty aspects of the railroad business, but they are quite capital intensive.
Biopharma giants Celgene (CELG) and Biogen (BIIB) reported fourth-quarter results before the open January 25. Both companies reported solid top-line growth in the period, but charges related to the Tax Cuts and Jobs Act impacted bottom-line results. Top-line growth is expected to continue in 2018 for both firms, and Celgene is anticipating ongoing strength in key drug Revlimid, which it expects to account for ~65% of total 2018 revenue. Biogen issued 2018 GAAP diluted EPS guidance in a range of $22.20-$23.20 compared to $21.81 in 2017, and Celgene expects adjusted diluted earnings per share to increase ~18% over 2017 levels to a range of $8.70-$8.90.
AbbVie (ABBV) continues to plow ahead despite concerns over its patent protection of leading drug Humira, which saw its 2017 fourth quarter sales grow an impressive 14% on a reported basis. The company’s 2018 guidance suggests it expects the positive momentum to continue as it raised its adjusted EPS guidance to a range of $7.33-$7.43 from $6.37-$6.57, which is good for 32% growth over 2017 levels at the midpoint of the range. AbbVie is set to launch multiple products in the next 12 to 18 months that management believes will fuel meaningful growth in coming years.
Honeywell (HON) reported solid earnings growth in its fourth quarter report as the industrial bellwether continues its transformation to a software industrial leader. The company expects to spin-off its Homes and Global Distribution business and its Transportation Systems business in 2018 to further this transformation and position it for margin expansion. Management boosted its 2018 earnings per share guidance by 20 cents to a range of $7.75-$8.00 thanks to the US Tax Cuts and Jobs Act of 2017, and its Aerospace division continues to be a source of strength for Honeywell.
Raytheon (RTN) capped off 2017, a year marked by record sales levels, with a solid earnings report before the open January 25. The company expects 2018 earnings per share from continuing operations is expects to grow to a range of $9.55-$9.75 from $6.94 in 2017 as bookings strength–full-year book-to-bill ratio came in at 1.09x in 2017–has it well-positioned for the coming year. Peer Northrop Grumman (NOC) reported a similarly strong quarter before the open January 25, and the firm remains optmistic on the potential of its pending acquisition of Orbital ATK (OA). Northrop expects 2018 diluted earnings per share to come in a range of $15.00-$15.25, while free cash flow is projected to be $2-$2.3 billion, up from nearly $1.7 billion in 2017.
Though Raytheon and Northrop Grumman are on the move higher after their respective reports, L3-Communications (LLL) is feeling some selling pressure despite raising its 2018 guidance and turning in a book-to-bill ratio of 1.04x in the full-year 2017. Sales, operating income, and operating margin all declined on a year-over-year basis in the fourth quarter as organic sales to international and commercial customers fell by 12% in the period. Nevertheless, 2018 diluted earnings per share from continuing operations guidance was raised to a range of $9.30-$9.50 (was $8.60-$8.85) and free cash flow guidance was boosted to $900 million from $865 million. Since defense companies are dependent on the US government to a large degree, it is worth noting that they are susceptible to potential government budget changes, factors completely out of their control.
Shares of Starbucks (SBUX) faced selling pressure after its comparable store sales growth disappointed in the fourth quarter of 2017. The measure came in at 2%, well below consensus estimates of 3%. Pricing added two percentage points of growth, but transactions remained flat in the quarter. Nevertheless, the company’s outlook for 2018 looks solid after it raised its earnings per share guidance to a range of $2.48-$2.52 from $2.30-$2.38, and global comparable sales are expected to grow 3%-5%, though the lower end of that range may be more appropriate.
Perhaps unsurprisingly, drama continues in the Tesla (TSLA) story after the company denied a CNBC report that further delays and quality issues have plagued its Model 3 series. This isn’t the first we’ve heard of issues impacting Tesla’s production, and investors may be starting to take notice. Nevertheless, the exciting potential of the company that one day hopes to be a large-scale auto manufacturer keeps its market capitalization at nose bleed levels as it continues to burn through cash.
Department stores have faced some selling pressure, after S&P Global (SPGI) downgraded Sears Holdings’ (SHLD) credit rating further into junk territory with a rating of CC and a negative outlook. Homebuilders (XHB) are also facing pressure after new home sales in the month of December missed estimates. Though the measure fell from levels witnessed in November, it still marked a 14.1% increase from December 2016. Kroger (KR), the US’ largest supermarket chain, is reportedly exploring a partnership with Alibaba (BABA), which operates cashier-less supermarkets similar to the recent launch of Amazon Go (AMZN), after executives from Kroger and Alibaba met in China last month.
The S&P 500 SPDR (SPY) closed at $286.56 Friday, January 26, marking a robust 7% advance since the start of the year. Let the good times roll!