Archive for 2005

• What Consistent Performance Can Tell Us
  Eddy Elfenbein, September 23rd, 2005 at 2:03 pm

  Haywood Kelly at Morningstar has an interesting article on corporate consistency. He found that companies with high sales growth rates tend to revert to the mean fairly quickly. But companies that are able to maintain high returns-on-equity tend to maintain them. This makes sense since sales growth can simply be a part of luck, but ROE is a better measure of management. A skilled management is likely to stay skilled.

• Boring Insurance Stocks?
  Eddy Elfenbein, September 23rd, 2005 at 12:34 pm

  I often hear people say that insurance stocks are “boring.” That may be true, but it doesn’t mean that they’re not profitable. Despite the recent devastation from Hurricane Katrina, two of our insurance stocks (Brown & Brown and Progressive) are at new highs today.

• Oracle’s Earnings
  Eddy Elfenbein, September 23rd, 2005 at 11:54 am

  After yesterday’s close, Oracle reported earnings of 14 cents a share. That was in line with expectations, although sales were slightly below forecasts. The company expects to earn 80 cents a share for the next fiscal year, which means the stock is going for about 16 times next year’s earnings. Don’t be fooled, I still think Oracle is overpriced. When you get right down to it, the company’s core business is not growing.

  But the sluggish sales of Oracle’s flagship database systems, which had been a mainstay of the company’s growth, surprised analysts. Oracle reported $502 million in combined sales of its database software and “middleware,” additional software used to deliver Internet-based applications. That compared with $494 million in the year-earlier period.

  That translates to a growth rate of 1.6%. What does Larry have to say?

  Oracle Chief Executive Larry Ellison said he didn’t think “flattish” database results were “indicative of anything,” and primarily were the result of a tough comparison with last year’s results, when database sales grew 20%. “It’s going to be very, very difficult for us to sustain that the following year,” he said.

  I’m not sure if the earnings isn’t “indicative of anything.” It may not be indicative of future “flattish” growth. But it’s absolutely not indicative of future strong earnings growth.

  I’m also concerned about Oracle’s massive buying spree. The company is going to Seibel, plus it also bought PeopleSoft recently. Oracle has also bought Retek, ProfitLogic and I-Flex, plus several smaller firms. That’s a lot for a company to manage, and I’m generally not a big fan of mergers anyway (Morgan Stanly for more). I would stay away from Oracle until the company shows that it can grow its core business again.

• Aloca’s Cuts Its Profit Outlook
  Eddy Elfenbein, September 23rd, 2005 at 11:27 am

  The third-quarter earnings season will begin in a few weeks. Alcoa is usually one of the first, is not the first Dow component to report. As such, it becomes the “New Hampshire Primary” of earnings season. And like the Granite State, Alcoa is not a very good representation of the entire market.

  In July, Alcoa reported strong earnings and that was a positive—and accurate—indicator for the rest of the earnings season. Also, Alcoa’s seconcd-quarter earnings report came at a very good time, one day after the terrorist attack in London. The market clearly wanted to see some good news.

  But I remember being struck by Morgan Stanley’s comments. The firm was nearly alone in being unimpressed with Alcoa’s earnings, and it reiterated it “equal-weighting” rating. Now it seems they were on to something. Today, Alcoa cut its profit outlook for the third quarter.

  Alcoa said it expects earnings from continuing operations to be between 27 cents and 31 cents a share for the third quarter, well below the current Thomson First Call average estimate of 43 cents a share. A year earlier, the company earned 34 cents a share from continuing operations.
  Aluminum prices have rebounded 10% on the London Metal Exchange during the third quarter to about $1,858 a metric ton of aluminum, up from less than $1,700 a ton in early July. However, Lloyd O’Carroll, chief economist and metals analyst at BB&T Capital Markets in Richmond, Va., says part of the problem for Alcoa is the lag between when contracts were signed in the second quarter—when aluminum prices were lower—and when the sales were finalized in the third period.
  Indeed, the company said that while aluminum prices have strengthened recently, those improvements won’t fully be felt until the fourth quarter.
  The company said demand was weaker in Europe and also in the North American automotive market, which has seen auto production slow in recent months amid higher gas prices. Alcoa also said that its results could be affected by the recent hurricanes. The company has temporarily closed its alumina refinery in Point Comfort, Texas, as well as its anode plant in Lake Charles, La. “You would think one of them would get hit,” Mr. O’Carroll said. “They are at risk. How much damage and how big a deal this is, it’s too early to know.”

  That’s a pretty hefty cut in earnings. Again, I wouldn’t say that Alcoa is a good indicator for the rest of the economy, but it does tell me that there are some soft spots out there.

• WorldCom Investors to Get $6 billion and Bernie’s House
  Eddy Elfenbein, September 22nd, 2005 at 5:25 pm

  This is good. A judge has just approved a legal settlement for World Com investors.

  Under the settlement, Ebbers will give up many of his personal assets, including a multimillion-dollar home in Mississippi and his interests in a lumber company, a marina, a golf course, a hotel and several thousand acres of timberland. The Wall Street Journal estimated that the sale of Ebbers’s assets could generate up to $28m for the investors.

  Update: Ebbers couldn’t be reached for comment.
  

• Katrita
  Eddy Elfenbein, September 22nd, 2005 at 1:36 pm

  I think CNBC is slowly becoming the Weather Channel. Now we get updates on stocks, bond, futures and the latest movements of Hurricane Rita. The storm is now a Category 5 monster with 170 mile-per-hour winds. Thankfully, the local government officials seem to be on top of things this time. Houston has been evacuated, and many of these poor folks are already evacuees from New Orleans.
  According to the latest estimates, Rita will hit land somewhere in Texas sometime late Friday. The bad news for Wall Street is that it will have to wait over the weekend to access how bad the damage is. The good news is that Wall Street will have to wait over the weekend to access how bad the damage is.
  
  Update: CNBC’s noted meteorologist Bill Griffeth just said that Rita is now a Category 4 storm.

• Small Health Care Stocks
  Eddy Elfenbein, September 22nd, 2005 at 1:25 pm

  Barron’s has a good article on small health care companies. The article focuses on two stocks, Kyphon and IntraLase, however the entire sector has a lot going for it. The Centers for Medicare and Medicaid Services expect health care spending to climb 7.3% annually, through 2013. Also, Standard & Poor’s expects small-cap health stocks to see their earnings grow by 20% a year for the next five years, compared with 12% for large-cap health care stocks.

• The iPod Nano
  Eddy Elfenbein, September 22nd, 2005 at 1:13 pm

  From initial reviews, Apple’s new iPod Nano is another home run for Jobs & Co. The new device even got a big fat orange circle from Consumer Reports. And you know it’s a true sign of success when the BBC argues that the iPod’s design is really over 50 years old.

  The iPod Nano was released just in time for the Christmas shopping season. Given iPod’s initial success, there’s an important question that Wall Street had: How big is Apple’s profit margin? One research firm had an idea. They bought an iPod Nano, broke it open, and tried to figure out the cost:

  The verdict? It costs Apple $90.18 in materials to build the unit and $8 to assemble it, leaving a profit margin before marketing and distribution costs of about 50%. That’s consistent with the margins on earlier iPod versions and serves as a reminder of what a profit machine the iPod family of products has become for Apple since it was introduced in 2001.

  Fifty percent! Wow. I’m running out of adjectives to describe the success of the iPod. It now represents one-quarter of all Apple’s business. The company has sold 21 million iPods, most of them in the first nine months of this year.

  Now Apple’s competitors are desperately trying to catch up but Nokia says that its iPod phone won’t ship until 2006, after the important Christmas shopping season. Dell just launched its horribly named DJ Ditty.

  Apple reports its next earnings on October 11, which is at the very beginning of earnings season. The current estimate is for 35 cents a share. This will be Apple’s fiscal fourth quarter. For the next fiscal year, Wall Street expects earnings of $1.42 a share, which means that Apple is going for a pricey 36 times expected earnings.

• Think You Can Time the Market?
  Eddy Elfenbein, September 21st, 2005 at 4:01 pm

  Here’s a fact that ought to make you think twice before trying to “time” the stock market. Since 1950, the S&P 500 is up over 73-fold (excluding dividends). That’s a period of over 14,000 trading days. However, when you isolate the best 133 days, you get a combined total return of 74-fold. That means that the stock market is flat for 99.05% of the time. The market’s entire profit has been made in just one day in 105, or roughly one day every five months. To time the market profitably, an investor has to hit that bulls eye without ever missing a beat. That’s why the best strategy to buy and hold and never worry about missing that home run day.

• Hurricane Rita
  Eddy Elfenbein, September 21st, 2005 at 2:49 pm

  Wall Street is bracing for Hurricane Rita which is headed right for the Texas coast.

  Texas is home to the biggest concentration of U.S. refineries, accounting for 26 percent of the nation’s total capacity. BP Plc and Valero Energy Corp. are evacuating workers and slowing output at three Houston area refineries. Rita, a Category 4 storm, may hit the Texas coast on Sept. 24. Four refineries in Louisiana and Mississippi, representing 5 percent of U.S. capacity, remain shut because of Katrina.
  Gasoline for October delivery surged 8.34 cents, or 4.2 percent, to $2.06 a gallon at 1:30 p.m. on the New York Mercantile Exchange. Gasoline futures reached $2.92 a gallon on Aug. 31, the highest since trading began in 1984. Futures are 60 percent higher than a year ago.
  Crude oil for November delivery rose 92 cents, or 1.4 percent, to $67.15 a barrel in New York. Futures touched $68.27, the highest since Sept. 2. Oil has declined 5.2 percent since touching a record $70.85 a barrel on Aug. 30. Prices are 43 percent higher than a year ago.