The market held onto its post-Christmas gains as reasonably good corporate earnings outweighed new evidence of a slowing global economy and continued uncertainty over trade policy. On the earnings front the blended (combines actual results for companies that have reported and estimated results for companies that have yet to report), year-over-year earnings growth rate for the fourth quarter is now 13.3% today, which is above the earnings growth rate of 12.0% last week. Positive earnings surprises reported companies in the Communication Services and Energy sectors were mainly responsible for the increase in the earnings growth rate during the week. Warning: Consensus estimates for First Quarter 2019 now indicate a decline in earnings for the S&P 500.
On Tuesday it was reported that Eurozone businesses started out 2019 with their weakest growth rate since mid-2013 as a slowdown that started in manufacturing spread to services, with demand weakening for the first time in more than four years. That global economic weakness has put a lid on interest rates, with the yield on the Ten-Year Treasury slipping 6 basis points to its lowest level of 2019, as well as put a bid under the dollar, which is now trading within 1% of its highest level in the past two years.
There was a sharp sell-off after President Trump said on Thursday that he would not meet this month with President Xi Jinping of China, raising new concerns that the United States will not be able to complete a trade deal with China before American tariffs increase on March 2. News flash: A trade deal before March 2 is unlikely, but the increase in tariffs will probably be postponed if constructive talks continue.
By the closing bell on Friday, the S&P 500 was able to eek out a 0.1% gain for the week. In a sign of strength, the market has now rallied in the last hour of trading for 7 straight days. The early birds might get the worm, but apparently, they are also too eager to sell. The same made be said for retail investors as well, as U.S. equity funds have experienced 10 consecutive weeks of outflows, according to EPFR Global data.
We enter the back half of earnings season, with 65 S&P 500 companies (including 2 Dow 30 components) scheduled to report results for the fourth quarter. The headlines will be dominated by politics, as a delegation of US officials will travel to China for the next round of trade negotiations. Meanwhile back in Washington the budget/border talks hopefully will come to a positive conclusion before the temporary budget agreement expires on February 15. A peaceful resolution would be a great Valentine’s day gift to 800,000 federal employees who were furloughed during the recent partial government shutdown, as well as to the American public in general.
Stocks on the Move:
Flexsteel Industries, Inc. (FLXS) -11.4%: Net sales were $118.4 million for the quarter compared to record net sales of $129.4 million in the prior year quarter, a decrease of 8.5%. A laundry list of one-time items resulted in net income of $1.6 million or $0.20 per share for the quarter ended December 31, 2018, compared to $6.2 million or $0.78 per share in the prior year quarter. The Company also indicated that it was experiencing higher than expected disruptions implementing the new business information system from SAP. Flexsteel Industries Inc is a United States-based company that manufactures, imports and markets residential and commercial upholstered wooden furniture products. The products offering include sofas, loveseats, chairs, rockers, desks, tables, convertible bedding units, and bedroom furniture. The company’s products are intended for use in home, office, hotel, healthcare, and other contract applications. A featured component in the company’s upholstered furniture is the durable Blue Steel Spring. FLXS is a 1.47% holding in the North Star Dividend Fund and a 2.62% holding in the North Star Micro Cap Fund.
Central Garden & Pet Co. (CENT) -21%: Total net sales increased 4.5% to $462.0 million compared to $442.0 million in the first quarter a year ago, driven by two recent acquisitions, Bell Nursery and General Pet. Total Company organic growth declined 1.7%, due in part to timing of orders from a large Garden customer in the quarter compared to the prior year’s first quarter. First quarter operating income decreased to $10.2 million from $22.5 million in the first quarter a year ago and operating margin decreased 290 basis points to 2.2% compared to 5.1%. The Company’s lower gross margin was a factor, as was higher warehousing and freight costs. EBITDA for the quarter was $22.5 million versus $33.7 million in the first quarter a year ago. “While challenged by the expected headwinds that we articulated last quarter, the results for our first quarter came in largely as we expected, excluding the key customer shipment timing. With a strong sales performance in January, we are comfortable where our businesses stand at his point in the year,” said George Roeth, President & CEO of Central Garden & Pet. “We continue to expect to end the year with healthy organic sales and profitability growth in both our Garden and Pet segments, primarily driven by new products, a more favorable mix of sales, and higher organic margins aided by pricing actions and continued cost savings. We, therefore, are reaffirming guidance for the year and are comfortable with the progress we are making.” Central Garden & Pet Co is a marketer and producer of branded products in the United States. The company makes branded products and acts as a third-party distributor to the pet and lawn and garden supply industries. The company is segmented into pet and garden. CENT is a 2.55% holding in the North Star Micro Cap Fund. CENT corporate bonds are a 2.72% holding in the North Star Bond Fund.
NAPCO Security Technologies, Inc. (NSSC) +7.9%: Net sales for the quarter increased 18% to a second quarter record $24.8 million as compared to $21.1 million for the same quarter last year. Net income for the quarter increased 133% to a second quarter record of $2.9 million from $1.2 million a year ago. Richard Soloway, Chairman and President commented, “This past quarter saw our Company reach record milestones in both sales and profits and we were particularly encouraged by our ability to continue to build upon and expand our stable of RSR (recurring service revenue) generating product offerings. Our strategic targeting of high-growth, professionally-installed, primarily commercial markets, such as wireless fire and intrusion alarm communicators, fire alarm control panels, school security products, IoT smart business/home solutions and access control locking products, has supplied us with the necessary fuel required for incremental future growth. NAPCO Security Technologies Inc manufactures security products, encompassing access control systems, door-locking products, intrusion and fire alarm systems and video surveillance products. Its products are used for various applications which includes alarm systems like automatic communicators, combination control panels/digital communicators and digital keypad systems, fire alarm control panel and area detectors mainly used for commercial, residential, institutional, industrial and governmental uses. NSSC is a 2.10% holding in the North Star Micro Cap Fund.
Orion Energy Systems, Inc. (OESX) +9.13%: Third quarter revenue declined 5.6% to $16.3M compared to $17.3M in Q3’18 but improved 23.4% compared to the second quarter. Gross margin continued to improve sequentially to 25.6% compared to 19.3% in the second due to higher revenue, improved mix and cost management efforts, and negative EBITDA narrowed to ($0.1M) from ($0.8M). Mike Altschaefl, Orion’s CEO and Board Chair, commented, “Orion’s sequential revenue improvement in Q3’19 was principally due to expected strength from large national account customers, a favorable trend we expect will continue in the fourth quarter and into fiscal 2020. Orion Energy Systems Inc is a developer, manufacturer, and seller of lighting and energy management systems. Its activities are carried out through three reportable segments: U.S. Markets (USM), Engineered Systems (OES), and Orion Distribution Services (ODS). OESX is a 0.55% holding in the North Star Micro Cap Fund.
NTN Buzztime, Inc. (NTN) -12%: The Company’s shares continue to yo-yo on no news, as investors wait with bated breath for the conclusion of the strategic alternatives process that was announced on December 7. NTN Buzztime Inc delivers interactive entertainment and innovative dining technology to bars and restaurants in North America. It licenses its customizable solution that offers guests trivia, card, sports and single player games, nationwide competitions, and by offering self-service dining features including dynamic menus, touchscreen ordering, and secure payment. NTN is a 0.48% holding in the North Star Micro Cap Fund.
Portfolio holdings are subject to change and should not be considered investment advice.
North Star Investment Management Corp. is the Advisor for the North Star Family Mutual Funds.