Today’s news:
• Dow Inc. (DOW) reports first-quarter results; moved from Hold to Buy.
• MKS Instruments (MKSI) reports first-quarter results; moves from Buy to Hold.
• Total SA (TOT) – I had the date wrong on the earnings release.
• Tyson Foods (TSN), Universal Electronics (UEIC) and Voya Financial (VOYA) all move from Hold to Buy recommendations.
• Outlook for the S&P 500 Index
• Portfolio Stock Price Action
The major theme that I’m noticing during this earnings season is that Wall Street analysts were low-balling their earnings and revenue estimates as they cautiously assessed the potential impact of the COVID-19 virus on business activity. While it’s nice that many companies are therefore reporting upside revenue and earnings surprises, keep in mind that estimates for the first quarter (and all of 2020) have come way down from pre-COVID levels. The pandemic is expected to impact the June quarter yet again.
Dow Inc. (DOW 36.66 – yield 7.6%) reported first-quarter 2020 results this morning. Revenue of $9.77 billion slightly surpassed the $9.7 billion analysts’ consensus estimate. Operating earnings of $0.59 per share beat the estimate by a penny. Business was harmed by the virus-caused lockdowns, and pricing was impacted in all business segments due to lower oil prices. Profits were enhanced by $30 million from stranded cost removal and by $259 million in recovered tax withholdings from the Canadian tax authority related to the 2019 judgment against Nova Chemicals (which I discussed months ago as the news unfolded).
Dow repurchased $125 million of stock during the quarter, and will now suspend share repurchases during this second quarter, which is likely to be the most-affected quarter of 2020 with regard to the virus’ impact on business. There is no indication that Dow will be unable or unwilling to continue paying their dividend at its current level.
Dow has $12 billion in cash and committed liquidity, and no substantive long-term debt due until the second half of 2023. The company plans to reduce capital expenditures and operating expenses in order to preserve liquidity during the current global economic slowdown. Read more in the press release.
Dow is a commodity chemicals company with manufacturing facilities in 31 countries. Results are impacted in tandem with rising and falling oil prices. Profits are expected to decline in 2020, then rise again in 2021. I’m moving DOW from Hold to a Buy recommendation. The share price has recovered approximately half of its February-March decline. The price chart indicates that the stock could continue its rebound quite soon, barring a downturn in the broader market. There’s short-term price resistance in the 42-45 range. Buy.
MKS Instruments (MKSI 104.39) reported very strong first-quarter results this week. Non-GAAP earnings per share of $1.54 beat the $1.24 consensus estimate. Revenue was $536 million when Wall Street expected $508.6 million.
CEO John TC Lee commented, “Our first-quarter outlook did not factor in any disruptions from the COVID-19 pandemic, and yet we were still able to deliver quarterly revenue at the high-end of our guidance range. This is a testament to our broad and differentiated portfolio, the diverse and essential markets we serve, and our world-class operational execution. Order rates remain strong in the second quarter; however, the impact of shelter-in-place directives at our facilities and those of our suppliers around the world are expected to impact our second quarter revenue. We remain excited about the long-term opportunity in the markets we serve, and our role as a critical technology enabler. Our balance sheet and liquidity position remain strong.” (Read more in the press release.)
Like many companies, MKS Instruments expects the second quarter to be impacted by the business lockdown, and for the situation to improve thereafter. The company will host their annual meeting of shareholders online on May 11.
MKSI is an undervalued, small-cap growth stock, appropriate for growth investors and traders. I’m moving MKSI from Buy to a Hold recommendation. The stock has risen about 45% since early April. MKSI could now trade anywhere between 95-120 in the near term. I’ll move MKSI back to a Buy when another profitable opportunity seems obvious. Hold.
Total SA (TOT 35.88 – yield 8.4%) – I apparently had the date wrong on Total’s first-quarter earnings release. The proper date is May 5. Hold.
Note that Total’s competitor Royal Dutch Shell (RDS/A 33.85 – yield 1.9%) reduced their dividend payout today from 47 cents to 16 cents per quarter. This is not a temporary reduction. I cannot say which of the other oil majors might follow suit. Clearly, the energy industry was greatly harmed by the global lockdown caused by the virus pandemic. Be cautious with energy stocks. Whether trading or investing, stick with the most profitable companies. There’s no reason to seek out extra risk by investing in companies with balance sheet problems. (That’s not an insinuation that Royal Dutch has a poor balance sheet. I’m not invested in that stock and did not closely read the results.)
OUTLOOK FOR THE S&P 500 INDEX
Investors have been writing to me, asking if the stock market will “retest its March lows.”
I have repeatedly stated that I believe the S&P 500 will be in a wide trading range all year. I cannot say whether the lows will be similar to the March lows, but I do believe we’ll see repeated up-and-down swings as poor economic news drives stock prices down, alternating with investors’ natural optimism that drives stocks back up.
Today’s unemployment report delivered numbers that rivaled those of The Great Depression. No surprise there. Unfortunately, the bad news has only just begun. Many families in the private sector who lost jobs, businesses and clients will not have been prepared to cover for their lost income with a savings cushion. That’s going to lead to less consumer spending, less government tax revenue, more personal and business debt, more bankruptcies, more foreclosures, and falling home prices. This bad news will slowly unfold throughout 2020 and 2021, repeatedly putting a damper on corporate results and stock market enthusiasm.
These dire predictions are just logic to me. You can’t take away people’s jobs and expect all of them to be able to resume their former jobs, find new jobs at comparable income levels, pay their bills and be able to remain in their houses. I hate to spell that out. People hate hearing that. But I don’t see any way around it.
I will continue taking advantage of stock market gyrations, selling near stocks’ recent highs, and buying low during market pullbacks.
PORTFOLIO STOCK PRICE ACTION
Adobe Systems (ADBE; Buy; resistance 380), Amazon.com (AMZN; Hold; new highs) and Apple (AAPL; Buy; resistance 325) all just began new run-ups. I’m not suggesting that investors buy AMZN right now. I’d prefer to wait for a price correction.
Tyson Foods (TSN), Universal Electronics (UEIC) and Voya Financial (VOYA) all move from Hold to Buy recommendations, based on their improving price charts. TSN and VOYA appear ready to begin new run-ups any day now. UEIC began rising, then promptly pulled back. I’m guessing that this is a shakeout chart pattern, and that the run-up will resume immediately. (A shakeout often takes just two days to run its course.)
If I suggested buying a stock, and you can see on the price chart that it immediately rose, feel free to ask me whether it’s still a Buy. Make sure to tell me whether you’re a trader or a long-term investor, and even better, what you’re hoping to accomplish with the stock (for example, “I want 10% profit in 3 weeks” or “I want long-term rising dividends,” etc.). Then I’ll be able to give you an answer on whether your goal is realistic. Be brief, please.