We like what we saw out of a few industrial names, including Honeywell, Danaher and Dover. We thought Taiwan Semi’s report was okay, and Philip Morris continues to navigate declining cigarette volumes. We include our thoughts on some of the mid-size banks.
By Brian Nelson, CFA
For those just catching up, please have a read of our introductory second-quarter earnings season piece here. We saw some nice reports from J&J (JNJ) and Abbott (ABT), and while we had some concerns about the core industrial economy in light of Fastenal’s (FAST) and CSX’s (CSX) reports, news from Honeywell (HON), Danaher (DHR), and Dover (DOV) suggest that industrial activity is more likely mixed than outright deteriorating.
Honeywell’s second-quarter results, released July 18, showed strength across the board. Its organic sales rose 5% thanks to strength in what it describes as its long-cycle businesses, namely US and international defense, general aviation and oil and gas. Honeywell said its long-cycle backlog was up a solid 10%, and pricing seems good, too, with segment margins expanding. The good news drove the executive team to increase its full-year earnings-per-share guidance to the range of $7.95-$8.15 and up its organic sales guidance to the range of 4%-6%.
Global science and tech innovator Danaher showcased a strong 5.5% core quarterly revenue growth rate when it reported second-quarter results July 18. Though there are a number of moving parts at Danaher these days, with the firm expecting to complete its acquisition of GE Biopharma and take its Dental business public under the name Envista, the Danaher Business System remains hard at work. For 2019, the company now expects non-GAAP earnings per share in the range of $4.75-$4.80 (was $4.72-$4.80).
Diversified global manufacturer Dover also had some good things to say when it reported second-quarter numbers July 18. Though currency posed a modest headwind, the company posted organic growth of 2.9% during the period with its Fluids segment (fueling & transport, pumps, and process solutions) leading the charge. Dover was optimistic about the back half of 2019, pointing to “solid backlogs and continued execution towards margin expansion targets.” The firm tightened its prior adjusted earnings per share guidance for 2019 to the range of $5.75-$5.85.
Taiwan Semiconductor (TSM) reported decent second-quarter results July 18, helping a volatile chip sector given ongoing developments between US-China trade relations. However, both net income and diluted earnings per share declined 7.6% in the period as management noted that its “business continued to be impacted by the soft overall global economic condition; customer inventory management, and high-end mobile product seasonality.” We continue to like TSM’s very healthy balance sheet, which aids its dividend growth prospects.
The tobacco industry has been under a cloud of uncertainty given new regulations, the coming of vaping, as well as greater legal acceptance of cannabis. The group did get some good news from Philip Morris (PM) July 18 when the company released second-quarter numbers, but the report still showed that cigarette and heated tobacco unit shipment volume was down 0.7% on a like-for-like basis. The operating line was buoyed by pricing strength, helping to drive some solid year-over-gains on a comparable basis, to the tune of 15.7%, adjusted for certain items and excluding currency. We are strongly looking at Philip Morris for addition to the High Yield Dividend Newsletter portfolio.
The broader financials sector is also having somewhat of a better-than-expected showing during the second quarter, despite the key themes of net interest margin compression and investment-banking and trading revenue weakness. Here are some key takeaways from our banking and financials contributor Matt Warren on recent results:
The smaller/mid banks are benefiting from not having, or having less of, the negative delta of investing banking and trading like the big banks.
Some of the regional banks are putting up strong loan/deposit growth, including U.S. Bancorp (USB) and BB&T (BBT). The loan growth could bite them later.
The good economy and consumer have generated benign credit for all banks to this point in the cycle. It remains to be seen when the cycle will start to work against them; hard to guess the exact timing of any cycle coming to an end. There are no indicators of worsening credit thus far that I have seen
The coming rate cuts will hit net interest margins (NIMs), so we expect some pressure there, as and when the rate cuts come through. (The ideal scenario for the banks is one “insurance” cut by the Fed, the US economy keeps on going strong, and the yield curve steepens).
Can the banks continue their efficiency drives? It would be harder and require more cutting closer to the bone if revenue growth slows or goes backwards.
Our favorite of the big banks is Bank of America (BAC). Our most recent write-up on the bank can be found here, and our $35 per-share fair value estimate stands considerably higher than where shares are trading at the time of this writing. Please also have a read of our latest take on Goldman Sachs (GS) here, and catch up on the earnings reports of the other big banks in our article archives. The Financials Select Sector SPDR (XLF) remains a holding in both newsletter portfolios, but we may consider swapping Bank of America in its place.
Banks & Money Centers: AXP, BAC, BBT, BK, C, DFS, FITB, GS, HBC, JPM, KEY, MS, NTRS, PNC, RF, STI, TCF, USB, WFC
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Brian Nelson does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum‘s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.