Archive for July, 2010

  • Full-Year Earnings Estimates
    , July 26th, 2010 at 3:04 pm

    Here’s a look at Wall Street’s earnings estimates for the S&P 500 and its sectors from the end of the first quarter, the end of the second quarter and last week.
    As you can see, the estimates for the S&P 500 have climbed higher.

    Sector 31-Mar-10 30-Jun-10 21-Jul-10
    S&P 500 $78.05 $81.82 $82.15
    Discretionary $15.21 $16.58 $16.59
    Staples $19.43 $19.22 $19.22
    Energy $33.26 $34.44 $34.54
    Financials $13.17 $15.00 $15.02
    Health Care $30.48 $29.68 $29.71
    Industrials $15.53 $16.63 $16.84
    Technology $23.75 $25.15 $25.40
    Materials $11.73 $12.34 $12.30
    Telecom $7.50 $7.94 $8.01
    Utilities $12.84 $12.77 $12.82

    At $82.15, that means the market is going for about 13.5 times this year’s earnings.

  • The Impact of Rude Behavior on a Business
    , July 26th, 2010 at 12:46 pm

    From Scientific American:

    Four separate studies published in the August issue of the Journal of Consumer Research provide some scientific evidence along these lines. Nearly 60 to 120 subjects were placed in various situations where they witnessed inter-employee rudeness as well as employee incompetence. And the researchers found that employee rudeness had a significantly greater impact on subjects’ overall opinion of the company than bad service.
    In one study an employee reprimands his colleague who is gossiping on the phone with this: “Get off the phone you idiot!” Even such customer-oriented salespeople were found to lose all respect from customers for having barked at a co-worker.
    The studies confirm that witnessing an uncivil argument between two employees leaves a bad taste that goes well beyond the individual incident. Customers tend to generalize their newfound negative opinion to the entire organization, its employees and any future interactions with it. So serve it with a smile, please, for those in front of the counter and behind it.

  • Early Gains for AFLAC
    , July 26th, 2010 at 10:35 am

    Thanks to Barron’s article, AFLAC (AFL) has been as high as $51.26 this morning. We’ll know a lot more after tomorrow’s close when the company reports Q2 earnings. Fiserv (FISV) and Wright Express (WXS) also report tomorrow.
    Fiserv, by the way, is a great example of a company that delivers consistently higher earnings. Here’s a look at their reported earnings in blue along with Wall Street’s projections in red.
    image962.png
    As an investor that’s exactly what I like to see. I like to take the guesswork out of investing. That’s why I often refer to the full-year earnings projections that a company provides. Many companies don’t do that.
    Fiserv has said to expect an EPS increase for this year of 8% to 11%. Last year, they made $3.66 per share so that works out to range of $3.96 to $4.07 for 2010.
    Nicholas Financial (NICK) is due to report its earnings on Thursday morning at 10am. I’m also very curious to see the government’s first report on second-quarter GDP which comes out on Friday. I’m afraid it won’t be very good.
    Lastly, let me add that I was pleased to see Amazon (AMZN) open down a lot on Friday. Well, I spoke too soon. The stock had one of the most impressive intra-day rallies I’ve ever seen. The shares opened at $115.93, down over $14, and closed just shy of $119.

  • AFLAC at $71?
    , July 25th, 2010 at 9:51 pm

    Over the weekend, Barron’s had a nice profile of AFLAC (AFL). Here’s a sample:

    With Wall Street focused on the company’s investment portfolio, little attention has been paid to estimates of 8% to 12% growth in 2011 in Aflac’s operating earnings, excluding currency translation. Shares trade for only eight times 2011 projected profits, when a multiple of 12 times earnings is more appropriate, says Scott Chapman, another Lateef manager. Based on the 2011 consensus earnings estimate of $5.96 a share, that multiple would result in a stock price of 71. (Woo hoo!)
    Aflac will report second-quarter earnings Tuesday. Analysts have penciled in $1.33 a share for the period, and $2.6 billion, or $5.45 a share, for the full year, on revenue of $20.4 billion. The company garners 73% of its premiums, and 78% of operating profit, from sales of supplemental policies in Japan; the remainder is generated in the U.S. Aflac is a market leader in Japan, but has had a tougher time domestically, particularly in recent years, as high unemployment has reduced the ranks of those who purchase policies through employers.
    Like all insurers, Aflac invests the money it collects from policyholders, and tries to generate more income from its investments than it will have to pay out in claims. Despite today’s low interest rates, the company has been able to turn a profit on its investment portfolio.

    I don’t have an estimate for AFLAC’s Q2 earnings. In April, they gave a range of $1.33 to $1.38 per share. The company will probably beat $1.33 per share but that’s not the reason why I like the stock. My case for AFLAC is that everyone else seems to think the company is in dire straits and they’re clearly not.
    If Tuesday’s earnings report comes in good, I think Wall Street will soon expect AFLAC to earn over $6 a share for 2011.

  • When Reading the Yahoo Message Boards
    , July 24th, 2010 at 12:02 pm

    You never know when the CEO will respond.

  • Twitter Feed
    , July 23rd, 2010 at 3:10 pm

    You can also follow my ramblings on Twitter.

  • Eaton Corp.
    , July 23rd, 2010 at 2:11 pm

    I’m often asked how I go about screening for stocks. The answer is, I don’t. I simply follow several very-high-quality stocks. If one dips down to a reasonable price, then I consider adding it to my Buy List.
    One very high-quality stock that’s been catching my eye lately is Eaton Corp. (ETN) of Cleveland, OH. Like a lot of good companies, Eaton is fairly dull. The company is a “power management” company. I know, SNORE. They have 70,000 employees and a market cap of $13 billion, yet they seem to be totally unknown to most individual investors.
    Investors should understand that Eaton is a cyclical stock. This means that its business is strongly correlated to the broader economy. When the economy does well, stocks like Eaton outperform. During recessions, they often fare much worse.
    That pretty much describes what happened last year after Eaton sales and profits had climbed for several years. Their year-over-year earnings peak in the third quarter of 2008, then declined for the next four quarters. Importantly, only one quarter saw a net loss (Q1 ’09). Since then earnings have been on the rise, and the last three quarters have seen huge earnings surprises.
    On Wednesday, Eaton posted outstanding results. They earned $1.36 a share which was 19 cents more than expectations. Eaton also gave very strong guidance:

    Eaton now expects third-quarter income per share of $1.25 to $1.35, with the Wall Street forecast $1.19. For the year, Eaton expects earnings of $4.75 to $4.95 per share, above the recent Wall Street forecast of $4.57.

    As impressive as that is, it’s probably a bit on the low side. I think Eaton can swing $5 a share this year. Maybe more.
    The company also raised its quarterly dividend from 50 cents a share to 58 cents a share which translates to a yield of 3%. This is a great company but at the current price, I wouldn’t call it a screaming buy. This is a good one to follow. If you ever seen it go into a downtrend, there might be a great opportunity at hand.

  • The Ford Boom
    , July 23rd, 2010 at 8:41 am

    Earlier this year, I called Ford (F) my Stock of the Decade.
    Am I being a bit early? Maybe. But check out the results:

    Ford Motor Co. reported second- quarter net income of $2.6 billion, completing its most profitable first half in more than a decade, as car buyers pay more for its new models.
    Ford earned $4.7 billion in the year’s first six months, its largest first-half profit since 1998 and its fifth straight profitable quarter. Excluding some items, profit was 68 cents a share, topping the 41-cent average estimate of 12 analysts compiled by Bloomberg. The second-largest U.S. automaker earned $2.26 billion a year earlier, helped by an accounting gain.
    Chief Executive Officer Alan Mulally overhauled Ford’s lineup, redesigning cars such as the Taurus and Fusion, and adding extras like heated leather seats and voice-activated electronics. He also boosted quality, which had customers paying 14 percent more for Ford vehicles in June than five years ago, according to Edmunds.com. Ford held 17.5 percent of its U.S. market in the first half, up from 16.1 percent last year.

  • A Reckoning?
    , July 23rd, 2010 at 8:29 am

    I’ve been a critic of the valuation of Amazon (AMZN) and Netflix (NFLX), and I’ve been wrong as these stocks have climbed higher and higher.
    Amazon, however, has finally disappointed the market. The company had another strong earnings report yesterday, but the earnings fell short of Wall Street’s expectations (45 cents per share versus 54-cent consensus). The stock was trading down over 10% in yesterday’s after-hours market.
    This is the problem with owning a richly valued stock. Despite getting the enormous growth potential of the company, you always have to impress analysts. You have zero room for error. If you make one small misstep, you’ll be punished harshly.
    Think of it this way. Amazon missed earnings by nine cents a share, yet the stock was down $15 a share. That’s the equivalent of a Price/Earnings Ratio of 166 for those marginal nine pennies. That’s obviously very high but that’s what you’re buying when you go after a hi-flier like Amazon.
    Interestingly, late last year Amazon finally surpassed its December 1999 peak of $113 per share. After 9/11, the stock got down as low as $5.51. This past April, Amazon reached a high of $151.
    Similarly, Netflix was hit hard yesterday due to slightly missing Wall Street’s revenue forecast. The WSJ even wonders if Netflix is the new Crocs. Ironically, Netflix is often mentioned as a potential acquisition candidate for Amazon.
    Via Eric Savitz, I see that analyst Todd Greenwald notes that Netflix “spent $75 million to get 1 million net new subs in the quarter, after spending a comparable amount to add 1.7 million subs in Q1.”
    Even after yesterday’s sell-off, Netflix is going for a 37 times this year’s earnings. That’s still way too high.

  • GM to Acquire AmeriCredit for $3.5 Billion
    , July 22nd, 2010 at 6:38 pm

    One of the big stories today is that GM announced that it’s buying AmeriCredit (ACF), an auto financing company, for $3.5 billion which is $24.50 a share. Shares of ACF jumped over 21% on today’s news.
    My interest is that AmeriCredit is a competitor of Nicholas Financial (NICK). The big difference, of course, is that AmeriCredit is about 30 times larger by market value.
    The two companies are far from mirror images. In fact, I’m not sure if NICK’s business model can work on a very large scale. Still, when one company in a sector is bought out, it often brings attention on its competitors. Let’s look at some of the numbers.
    GM is paying a 43% premium to ACF’s book value. If someone offered the equivalent for NICK, that would be an offer of $11.92 a share. If someone offered the same based on this calendar year’s forecast (this takes some guesswork), that would be the equivalent of $17.96 a share for NICK.
    Let me stress that I’m not predicting a buyout, but I want to highlight how inexpensive NICK is using reasonable valuation comparisons.