Story Stocks from Briefing.com

12:45 pm Looking Ahead - September 29, 2016

Japan's economy has been stuck in a well-documented rut for a long time, pinned down by deflationary pressures that have held consumer spending in check.  With monetary and fiscal policy in Japan aimed at turning the economic tide, there is apt to be some notable interest in the latest retail sales report from the island nation.

Japan Retail Sales Report for August (Wednesday, September 28, 7:50 p.m. ET)

  • Why it's important
    • Market watchers are waiting anxiously for green shoots of optimism pertaining to a turnaround in Japan's economy.  This report has the ability to influence perceptions about Japan's economic prospects.
    • The market's view of this report has the ability to sway global markets vis-a-vis the related movement in the Japanese yen following the report.
    • Retail sales activity will be looked at as a marker of the progress -- or lack thereof -- of Japan's monetary and fiscal policies
    • Japan has one of the world's largest economies, trailing only the U.S., the European Union, and China in terms of its size.  Consumer spending activity in Japan, therefore, carries implications for the global economy and particularly the Asia-Pacific region.

  • Market watchers are waiting anxiously for green shoots of optimism pertaining to a turnaround in Japan's economy.  This report has the ability to influence perceptions about Japan's economic prospects.
  • The market's view of this report has the ability to sway global markets vis-a-vis the related movement in the Japanese yen following the report.
  • Retail sales activity will be looked at as a marker of the progress -- or lack thereof -- of Japan's monetary and fiscal policies
  • Japan has one of the world's largest economies, trailing only the U.S., the European Union, and China in terms of its size.  Consumer spending activity in Japan, therefore, carries implications for the global economy and particularly the Asia-Pacific region.

  • A closer look
    • Retail sales have declined year-over-year in each of the last five months and in nine of the last 12 months
  • Retail sales have declined year-over-year in each of the last five months and in nine of the last 12 months
  • What's in play?

    • Japan ETFs
      • iShares MSCI Japan (EWJ)
      • Japan Hedged Equity Fund (DXJ)
      • MSCI Japan Hedged Equity Fund (DBJP)
      • Currency Hedged MSCI Japan ETF (HEWJ)

    • Regional ETFs
      • iShares China Large-Cap (FXI)
      • iShares MSCI South Korea Capped ETF (EWY)
      • iShares MSCI Taiwan ETF (EWT)
      • MSCI Australia ETF (EWA)
      • iShares MSCI Singapore ETF (EWS)
      • MSCI All Country Asia ex Japan Index Fund (AAXJ)

    • Currencies
      • USD/JPY
      • EUR/JPY

    • Japanese Government Bonds

    • Treasuries

    • S&P futures
  • Japan ETFs
    • iShares MSCI Japan (EWJ)
    • Japan Hedged Equity Fund (DXJ)
    • MSCI Japan Hedged Equity Fund (DBJP)
    • Currency Hedged MSCI Japan ETF (HEWJ)

  • iShares MSCI Japan (EWJ)
  • Japan Hedged Equity Fund (DXJ)
  • MSCI Japan Hedged Equity Fund (DBJP)
  • Currency Hedged MSCI Japan ETF (HEWJ)

  • Regional ETFs
    • iShares China Large-Cap (FXI)
    • iShares MSCI South Korea Capped ETF (EWY)
    • iShares MSCI Taiwan ETF (EWT)
    • MSCI Australia ETF (EWA)
    • iShares MSCI Singapore ETF (EWS)
    • MSCI All Country Asia ex Japan Index Fund (AAXJ)

  • iShares China Large-Cap (FXI)
  • iShares MSCI South Korea Capped ETF (EWY)
  • iShares MSCI Taiwan ETF (EWT)
  • MSCI Australia ETF (EWA)
  • iShares MSCI Singapore ETF (EWS)
  • MSCI All Country Asia ex Japan Index Fund (AAXJ)

  • Currencies
    • USD/JPY
    • EUR/JPY

  • USD/JPY
  • EUR/JPY

  • Japanese Government Bonds

  • Treasuries

  • S&P futures

11:45 am Paychex [PAYX] weaker following FY17 guidance cut; Q1 largely in-line

Shares of payroll and human resource services company Paychex (PAYX 57.74, -2.53) trade -4.2% lower following the Q1 report and guidance update.

For a bit of background, PAYX is essentially a provider of human capital management solutions for payroll, human resources, retirement, and insurance services. The company reports revenues in Payroll Services and Human Resource Services.

Specifically, for Q1 PAYX reported earnings per share (EPS) of $0.60 on revenues which rose 8.6% versus last year to $785.5 million, both of which were modestly ahead of market expectations. Net income was up 4% to $217.4 million, impacted by changes in the effective income tax rate resulting from discrete tax items recognized in the first quarter and respective period last year.

Payroll service revenue was up 4% to $450.9 million, driven by growth in client base and revenue per check. Revenue per check improved as a result of price increases, net of discounts. Advance Partners contributed about 1% to the growth in payroll service revenue for Q1. 

Human Resource Services (HRS) revenue was up 15% to $322.6 million due to increases in the client base across all major HCM services, including: comprehensive human resource outsourcing services; retirement services; time and attendance; and human resource administration. The largest HRS revenue stream is Paychex HR Services, which includes our administrative services organization and our professional employer organization. Strong demand for these services resulted in double-digit growth in the number of client worksite employees served as of August 31, 2016 as compared last year. Retirement services revenue also benefited from an increase in asset fee revenue earned on the asset value of participants' funds. Insurance services revenue benefited from continued growth of our full-service Affordable Care Act product and health and benefit applicants, coupled with higher average premiums and increase in clients in our workers' compensation insurance product. Advance Partners contributed approximately 2% to the growth in HRS revenue for the first quarter. 

Lastly, interest on funds held for clients was up 11% to $12.0 million as higher average interest rates earned aided the results.

In terms of guidance, PAYX adjusted a few areas this morning. The company now sees FY17 Payroll services revenue growth in the range of 3-4%, versus the prior expectation for growth of 4%. Net income guidance was also lowered to growth of about 7%, down from expectations for net income growth of 8-9%, reflecting the impact of the discrete tax items recognized in the respective Q1 of 2017 and 2016. PAYX left the following guidance unchanged from prior levels: HRS revenue growth of 12-14%; total services revenue growth of 708% and interest on funds held for clients is expected to grow mid-single-digits.

In sum, the basis of the move lower can be pinpointed to the guidance adjustment. PAYX's guidance cut leaves industry peers lower as well ADP -1.74% NSP -1.00% INTU -0.20% as the broader market has lost some momentum from morning gains Dow Jones Industrial Average (-0.14%), S&P 500 (-0.27%), Nasdaq Composite (-0.32%). 

11:22 am Wells Fargo (WFC)

The Board of Directors of Wells Fargo (WFC) launched an independent investigation into the Company's retail banking sales practices and related matters.

The Board and CEO John Stumpf agreed that he forfeit all of his outstanding un-vested equity with a value of $41 million. He is also forgoing his salary while the investigation takes place and his bonus for 2016. Carrie Tolstedt, until recently Head of Community Banking, has left the Company, and the Independent Directors have determined that she will forfeit all of her outstanding unvested equity awards, valued at ~$19 million. She will also not receive a bonus for 2016 or any severance.

At this point, it seems as if John Stumpf won't be CEO of America's now second largest bank for much longer (JPM's current market cap $238 bln vs. $227 billion for WFC). The Board may not let him get away with a large severance, either -- reportedly up to as much as $200 million.

Note that Warren Buffet's Berkshire Hathaway (BRK.B) owns 10% of Wells Fargo. Many have been looking for the legendary investor to comment on the situation. He may have played a part in this latest development.

The stock is down ~10% (and has shed ~$26 bln in market cap) since the company announced a settlement with the Consumer Financial Protection Bureau (:CFPB) regarding allegations of retail bankers creating fake accounts to artificially increase sales on September 8.

Wells Fargo has long traded at a premium to its peers. It still but despite the multiple contraction over recent weeks.

  • WFC trades at 1.6x tangible book value vs. 1.3x for JPMorgan (JPM), 0.9x for Bank of America (BAC), and 0.7x for Citigroup (C).

Mr. Stumpf is testifying in front of Congress again tomorrow -- he got grilled by lawmakers last week.

9:55 am Cintas [CTAS] Climbs 2.9% After Beating Earnings Estimates

Cintas (CTAS 116.68, +3.25) has climbed 2.9% after beating earnings estimates for the first quarter and boosting its guidance for the fiscal year.

The uniform manufacturer reported above-consensus earnings of $1.26 per share on a 7.6% year-over-year increase in revenue to $1.29 billion, which was just ahead of expectations.

The company made changes to employee share-based payment accounting during the quarter, which resulted in a $0.14 per share benefit to first-quarter earnings. Income tax expense was reduced by $0.16, which was offset by $0.02 due to charges resulting from additional employee share-based compensation and a higher number of dilutive shares outstanding.

Operating income increased 11.6% year-over-year to $207 million while net income grew 30.0% to $138.10 million.

The solid first quarter prompted the company to boost its fiscal-year earnings and revenue guidance. The company now expects earnings for the full year will be between $4.55 and $4.63 per share while revenue is expected between $5.16 billion and $5.225 billion.

9:53 am Worthington [WOR] trades higher on a solid EPS beat for AugQ on rising steel prices

Worthington Industries (WOR) is trading 2% higher today after it reported 1Q17 (Aug) earnings this morning. In case you're not familiar, WOR is primarily what's known as a steel processor. They do not make steel, rather they purchase large 20-ton coils from steel producers like AKS, NUE, MT, STLD and X. They then process the steel coils further to the precise type, thickness, length, width, shape and surface quality required by customer specifications.

These products cannot typically be supplied as efficiently by steel mills to the end-users of these products. So steel processors like WOR fill this niche. The majority of revenue comes from its Steel Processing unit which accounted for 65% of revenue in FY16. About half of segment revenue comes from the automotive market. Other key end markets include agricultural, appliance, construction, hardware, HVAC, lawn and garden, office equipment etc.

Worthington also does what's known as toll processing for steel mills, large end-users, service centers and other processors. Toll processing is different from typical steel processing in that the mill retains title to the steel and has the responsibility for selling the end product.

In addition to steel processing, WOR also has a Pressure Cylinders operating segment which makes pressure cylinders, tanks and various accessories. Examples include propane cylinders for barbequing, hand held torches etc. Worthington also has an Engineered Cabs segment which makes enclosed cabs where crane operators or farmers sit to operate that equipment.

Turning to its AugQ results, non-GAAP EPS jumped 91% YoY to $1.03 when you back out a $0.01 restructuring charge. Revenue fell 2.7% year/year to $737.5 mln. EPS was well above market expectations but revenue was short of expectations. WOR said it had "great results" from its Steel Processing business segment and its joint venture ClarkDietrich.

The company benefitted from rising steel prices and strong demand in the automotive and construction markets while the agriculture and oil & gas markets remained weak. The decrease in revenue was expected as it was the result of lower volume in certain Pressure Cylinders businesses and Engineered Cabs, partially offset by contributions from recent acquisitions.

Breaking it down by segment, sales for its Steel Processing unit rose 3% YoY to $505.7 mln, driven by higher volume due to the consolidation of the WSP joint venture effective March 1, 2016. Operating margin for the segment improved on favorable spreads from inventory holding gains in the current quarter compared to inventory holding losses in the prior year quarter. The mix of direct versus toll tons processed was 52% to 48% in AugQ vs 60% to 40% in the prior year quarter. Sales for its Pressure Cylinders unit fell 9% YoY to $205.2 mln, driven by lower volume in the oil & gas equipment and industrial products businesses. Engineered Cabs' sales fell 34% YoY to $25.6 mln due to a decline in market demand.

In terms of its outlook, WOR does not typically provide specific guidance and that was the case this quarter as well. However, WOR did say that it believes most of its markets will remain steady as it finishes calendar year 2016 with normal seasonal slowdowns in automotive production. Also, its transformation efforts are gaining traction in Pressure Cylinders, new product design is advancing in consumer products and its industrial products business is expanding the professional wholesale market into Europe this quarter.

In sum, the stock has been making a strong move since mid-February, up more than 65%. WOR is seeing a nice benefit from rising steel prices.

9:21 am NIKE [NKE] Slips 0.8% as Light Margin and Futures Orders Overshadow Earnings Beat

Nike (NKE 54.90, -0.44) has given up 0.8% in pre-market action after disappointing futures orders and light gross margin overshadowed better than expected results for the first quarter.

The athletic apparel manufacturer topped first-quarter estimates, reporting earnings of $0.73 per share on a 7.7% increase in revenue to $9.06 billion.

Nike's bottom-line beat was fueled by solid revenue growth, operating overhead leverage, a lower tax rate, and a lower share count. This was partially offset by a weaker gross margin and higher ad spending during the Olympics.

Gross margin declined 200 basis points to 45.5%, which was below the company's guidance for 46.5%.

Worldwide futures orders increased 5.0%, which was shy of guidance for growth of 7.0-10.0%. Orders in Japan (+26.0%) and Greater China (+15.0%) led the way while orders in Central & Eastern Europe (+9.0%), Emerging Markets (+6.0%), Western Europe (+4.0%), and North America (+1.0%) increased at a slower rate.

Taking a look at the geographical revenue breakdown, sales in Japan spiked 37.0% to $245 million, Greater China sales grew 15.0% to $1.02 billion, and Central & Eastern Europe sales increased 10.0% to $440 million. Western Europe sales grew 7.0% to $1.76 billion and North America sales increased 6.0% to $4.03 billion while Emerging Market sales declined 2.0% to $945 million.

Inventories totaled $4.90 billion, which was up 11.0% year-over-year.

The company reaffirmed its full-year revenue growth guidance, expecting sales to grow in the high single digits.

8:15 am Tempur Sealy [TPX] Feels Bad Temper of Investors after Q3 and FY16 Warning

The stock of mattress company Tempur Sealy (TPX 74.45) is indicated to open 23% lower following a warning from the company that its third quarter sales will be below its prior expectations.  Additionally, Tempur Sealy tempered its adjusted EBITDA guidance range for the full year 2016.

The headlines in focus include a view that third quarter net sales will be down 1% to 3% from total net sales of $888.0 million in the same period a year ago and that adjusted EBITDA for 2016 will be in the range of $500 million to $525 million versus a prior view of $525 million to $550 million.  

This guidance came in front of the company's appearance at a Deutsche Bank conference, where further color on the downside guidance was provided.  Specifically, Tempur Sealy pinned its revised outlook on three factors:

  • Industry softness in the third quarter
  • Being less promotional than its competition, which hurt Tempur Sealy specifically; and
  • The acquisition of a large customer that is going through some transition, the effects of which were felt by Tempur Sealy (the customer is Mattress Firm, which was acquired by Steinhoff and accounted for roughly 25% of net sales in 2015)

Tempur Sealy clarified that the midpoint of the adjusted EBITDA range would be up approximately 12% from last year and that it implies approximately 20% growth in adjusted earnings per share versus 2015.

Investors are in a bad mood over the revised guidance, which points to an unexpected sales slowdown in the second half of the year.  That understanding, and the company's admission that industry conditions look soft in the third quarter, isn't generating confidence that there will be a quick turnaround.  On a related note, shares of competitor Select Comfort (SCSS 25.12) are indicated 8% lower.

Accordingly, with the stock down big in premarket trading, it appears as if plenty of ill-tempered investors are resigned to selling the stock and perhaps sticking the cash under their Tempur Sealy mattresses at home.