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Earnings season continues to set BMR stocks on great glide paths. Last night we got two solid reports. This morning we'll digest three more . . . and then tonight we'll shift back to the High Yield zone to review a couple of yield stories.

 

Let's start with a look back at Exact Sciences (EXAS: $95, flat this week), which did everything it needed to do. We wanted $283 million in revenue to reflect the company's parabolic 98% growth curve. We got an extra $12 million, taking the growth rate well up into triple-digit territory. Factor out a $184 million tax credit on recent acquisitions and we're looking at a $0.31 per-share loss, $0.04 better than what we expected. So far, so good. We like faster than anticipated growth and narrower than anticipated burn rates.

 

But the real prize here was on guidance. Exact Sciences says it's going to book at least $1.61 billion in revenue this year. We would have been happy with $1.59 billion. In the grand scheme of things, this is only a small outlook lift, but it still means the company is expanding 2% faster than the models predicted. The needle is moving in the right direction. This is the kind of stock smart investors accumulate on weakness.

 

Akamai (AKAM: $96, flat) didn't need any help. Revenue of $772 million when we only wanted $749 million demonstrates that the business has successfully migrated to higher-growth solutions as well as richer margins. And those margins are swelling fast. We expected only $1.13 per share for 5% earnings growth. Akamai gave us $1.23, tripling that growth rate. Reading between the lines, it only takes a small revenue gain (management is confident they'll hit $3 billion this year) to keep that profit ramp steep. Our 2020 earnings target was at least 5% too low. We love it. No wonder the stock jumped 3% overnight. Our $100 Target is close.

 

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Earnings Preview: Annaly Capital Management (NLY: $9.99, flat)

Earnings Date: Wednesday, 5:00 p.m. ET

Expectations: 4Q19
Revenue: $1.0 billion

Net Profit: $368 million
EPS: $0.24

 

Year Ago Quarter Results
Revenue: $850 million

Net Profit: $385 million
EPS: $0.29

 

Implied Revenue Growth: 17%
Implied EPS Decline: 18%

 

Target: $11
Sell Price: $9
Date Added: December 12, 2019
BMR Performance: 9%

 

Key Things To Watch For in the Quarter

 

We cut Annaly loose last year when the yield curve inverted. While parts of the curve remain inverted and the rest is awfully flat, management has had three months to pivot their portfolio and lock in the best opportunities available. They borrowed at low rates and bought the best loans they could find that paid enough interest to cover financing costs and keep the cash flowing. And since that structure was designed to withstand the toughest credit market in over a decade, odds are good that we've seen the worst.

 

Nonetheless, 4Q19 was a challenging quarter and we're more interested in signs of resilience than an immediate recovery. For one thing, Annaly issued 124 million new shares over the past year to capture acquisition opportunities. While it's nice to see the company's footprint in the Real Estate lending industry expand, more stock also means diluted per-share comparisons, pulling down the earnings trend more than the operations alone would otherwise suggest. The overall profit pool is only down 5% from last year, which is remarkable given credit market conditions.

 

We're also impressed with the way Annaly finds ways to squeeze significant profit out of its portfolio. Admittedly, the margin narrowed as the yield curve flattened out, but the company still moves 37% of every dollar all the way to the bottom line. Quite a few of the giants on our radar would love even a fraction of that efficiency.

 

What would make us happy? Ultimately anything more than $360 million in profit will both feel good and qualify as a bona fide windfall. Annaly needs to make that much to maintain the $0.25 dividend. While the company is sitting on $1.8 billion in cash, funding obligations from operations is a great way to build for the future. And as long as the dividend is secure, we're looking at a 10.0% yield here. Not bad at all.

 

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Earnings Preview: Welltower (WELL: $85, up 1%)

Earnings Date: Wednesday, 5:00 p.m. ET

Expectations: 4Q19
Revenue: $1.25 billion
Net Profit: $142 million
EPS: $0.30
Funds From Operations: $1.05

 

Year Ago Quarter Results
Revenue: $1.20 billion

Net Profit: $102 million
EPS: $0.27
Funds From Operations: $1.01

 

Implied Revenue Growth: 4%
Implied EPS Growth: 11%
Implied FFO Growth: 4%

 

Target: $89
Sell Price: $72
Date Added: March 22, 2018
BMR Performance: 42%

 

Key Things To Watch For in the Quarter

 

Welltower is another yield story. We're just looking for at least $0.87 per share in Funds From Operations in order to pay the dividend and keep the 4.1% yield intact. As long as the business is anywhere near as robust as we suspect, management will achieve that objective. Everything else, from profit growth to strategic acquisitions, is extra.

 

With that in mind, we're interested in the flavor Welltower can provide around the Senior Housing end of the Real Estate sector. Last quarter the mood around these stocks turned cloudy when Ventas cut its guidance and warned about potential operator challenges. Despite all the evidence to the contrary, Wall Street assumed that the pain would spread across the industry and take Welltower and other companies with it. We have yet to see any hint of that contagious weakness, but if it exists, the conference call will reveal. Otherwise, we see good things ahead here.