Archive for 2011

• Morning News: October 24, 2011
  Eddy Elfenbein, October 24th, 2011 at 5:42 am

  Greek Bank Stocks Plunge 13% on Haircut Fears

  Sarkozy Yields on ECB Crisis Role, Pressure on Italy

  EU Ramps Up Pressure On Italy To Push Reform Agenda

  UBS, Deutsche Bank May Speed Cuts as Earnings Prospects Dim

  China Flash PMI Rebounds to Ease Hard-Landing Fears

  Currency Market Braces for Japanese Intervention: Japan’s Minister Promises ‘Action’

  Japanese Stocks Rise Most in Two Weeks as Commodity Traders Advance

  Swiss Banks Said Ready to Pay Billions to U.S.

  Rio Tinto: Fall in Iron Ore Prices Accelerating Shorter Pricing Methods

  Jobs Plan Stalled, Obama to Try New Economic Drive

  TomTom Shares Rally as Profits Surge

  Volkswagen May Beat Toyota to Top Spot

  Jim Beam Inviting $11 Billion Liquor Takeover

  2 Japanese Bankers at Heart of Olympus Fee Inquiry

  Marc Chandler: France Appears to Have Conceded to German-ECB Position on Bailout Fund

  Jeff Miller: Weighing the Week Ahead: Real Progress in Europe?

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• Reynolds American Earnings Preview
  Eddy Elfenbein, October 22nd, 2011 at 1:59 pm

  From the AP:

  Reynolds American Inc., the second-biggest U.S. cigarette company and the maker of Camel brand products, is expected to report rising profit despite lower revenue when it releases its third-quarter results before the stock markets open Thursday.

  Americans are continuing to buy fewer cigarettes as they face rising taxes and greater smoking bans, health concerns and social stigma.

  WHAT TO WATCH FOR: Investors will be looking for signs that growth in Reynolds American’s Pall Mall brand will continue.

  The company, based in Winston-Salem, N.C., has promoted Pall Mall as a longer-lasting and more affordable cigarette. It says half the people who try the brand continue using it as they weather the weak economy and high unemployment. Most tobacco companies have raised prices and cut costs to bolster profits as declining demand cuts into cigarette sales.

  Pall Mall’s second-quarter volume grew 15 percent, and its share of the U.S. market increased 1.5 percentage points to 8.5 percent. Camel volume fell 3 percent during the quarter, and its share of the cigarette market remained stable 7.8 percent. But the company’s other brands are dragging down overall volume, which fell 4.4 percent in the third quarter.

  Complicating cigarette shipments, the nation’s largest tobacco companies also cautioned last quarter that third-quarter cigarette volume comparisons will be hurt because wholesalers stocked up more than usual in that period last year.

  Reynolds American also sells Natural American Spirit cigarettes, and Kodiak and Grizzly smokeless tobacco.

  Analysts pay close attention to the company’s smokeless tobacco products — a segment of the tobacco industry that’s growing and becoming increasingly competitive as companies fight the decline in cigarette sales. Reynolds’ smokeless volumes grew 3.6 percent last quarter, and its market share grew 1.5 points to 31.3 percent of the U.S. market.

  WHY IT MATTERS: Reynolds American’s results will help reveal key tobacco industry trends in the U.S.

  Continued strength from Pall Mall could mean smokers are still switching to cheaper brands to save money, and those who tried the brand during the recession are remaining loyal. But if volumes of premium brands like Camel are rebounding, that could signal consumers are adjusting to higher prices on cigarettes following federal and state tax hikes.

  WHAT’S EXPECTED: Analysts expect Reynolds American to report earnings of 73 cents per share on revenue of $2.16 billion, according to FactSet.

  LAST YEAR’S QUARTER: Reynolds American reported earnings of 65 cents per share. Its revenue was $2.24 billion, excluding excise taxes.

• Wicked Cool
  Eddy Elfenbein, October 21st, 2011 at 7:02 pm

• S&P Upgrades Ford
  Eddy Elfenbein, October 21st, 2011 at 6:43 pm

  Thanks to the deal Ford recently reached with its unions, Standard & Poor’s raised their credit rating two notches. It’s now only one away from investment grade. The company’s debt has been in junk land since 2005.

  Standard & Poor’s Ratings Services raised Ford two levels to “BB+” from “BB-,” saying the agreement will allow its North American operations to remain profitable.

  Ford Motor Co. shares rose 48 cents, or 4 percent, to $12.19 in early afternoon trading.

  The agency said strong performance in North America has helped Ford generate global profits in the past two years. The new 4-year contract with the United Auto Workers “will allow for continued profitability and cash generation in North America,” it said.

  The union, which represents 41,000 Ford employees, approved the contract Wednesday. It includes signing bonuses but no annual pay increases, and it will let Ford hire more workers at lower wages.

  Ford executives said it will raise labor costs by less than 1 percent each year — $280 million this year and $80 million a year after that. Fitch Ratings upgraded Ford on Thursday, also to within one level of investment-grade status.

  Moody’s Investor Service has also said it’s reviewing its below-investment grade ratings for the automaker.

• Dollar Hits Record Low Against the Yen
  Eddy Elfenbein, October 21st, 2011 at 12:08 pm

  In 1971, one yen was worth a measly 0.3 cents. Since then, it’s done very well.

  By 1978, the yen got to half a penny. In 1987, it reached three-quarters of a cent. In 1994, we finally broke the penny mark.

  Today the yen got as high as 1.32 cents.

  

• CWS Market Review – October 21, 2011
  Eddy Elfenbein, October 21st, 2011 at 8:15 am

  The stock market continues to improve albeit in a hesitating manner. Last week, the S&P 500 broke above its 50-day moving average and this past Tuesday, the index closed at its highest level in two-and-a half months.

  So has the bear finally left us alone? Unfortunately, it’s too early to say. The market is stronger than it was but there are still plenty of hidden—and not-so-hidden—risks out there. The problems in Europe are still bad but at least the authorities finally realize that they can no longer drag their lederhosen. For now though, all eyes are on the third-quarter earnings season which is now in full swing.

  In this issue of CWS Market Review, we’ll take a closer look at earnings season. So far, all four of our Buy List stocks that have reported have topped expectations. I’m happy to report that our Buy List is leading the rebound. In the last 13 trading days, our Buy List has gained more than 11.3%. If this keeps up, 2011 will be our fifth-straight year of beating the overall market. As usual, prudence and patience have served us well.

  Now let’s look at the most exciting news this week which was the break-up announcement of Abbott Labs ($ABT). The company stunned Wall Street on Wednesday when they said that they’re breaking themselves into two separate companies: a drug business and a medical devices business. I’ve long been a fan of ABT. This company throws off tons of cash and has a solid balance sheet.

  The problem for Abbott (and what attracted me to it) is that the market is clearly wary of giving their drug business a decent valuation. Humira, Abbott’s blockbuster rheumatoid arthritis drug, will rack $6.5 billion in sales this year. But there are fears that competitors will move into that space and knock the legs out from under Humira.

  Due to these worries, the entire company’s valuation has suffered. But as I’ve noted before, Abbott is much more than Humira. They have a strong business in medical devices which hadn’t been getting the market love it deserves. So Abbott did the logical step and announced the break-up. Interestingly, it’s the medical devices business that will keep the Abbott name. That probably tells you where the priorities lie.

  The spin-off will happen sometime next year so it won’t impact this year’s Buy List. As a general rule I like spin-offs, especially when good companies do them. What often happens is that a highly profitable division feels that it has to “carry the weight” of a larger organization. Once the division is unmoored from its parent company, it’s able to be more flexible and find new areas of growth.

  Also on Wednesday, Abbott reported third-quarter earnings of $1.18 per share which was a penny more than estimates. Abbott narrowed their full-year guidance from $4.58 – $4.68 per share to $4.64 – $4.66 per share. That means the stock is going for 11.6 times this year’s earnings which is less than the overall market. The full-year range implies a Q4 range of $1.43 to $1.45 per share which is a nice jump over the $1.30 per share from last year’s Q4.

  Shares of Abbott responded positively to the break-up news and the stock currently yields a healthy 3.55%. For the year, Abbott is a 12.82% winner for us which is a lot better than the market’s loss of 3.36%. I congratulate Abbott on their bold move and I rate the stock a strong buy up to $58 per share.

  Two other healthcare companies of ours reported earnings this past week. On Tuesday, Johnson and Johnson ($JNJ) reported earnings of $1.24 per share. This beat Wall Street’s consensus by three cents per share but was a penny less than my forecast. The bottom line is that this was another solid quarter for J&J.

  In last week’s CWS Market Review, I said that JNJ could raise both ends of their full-year forecast by five cents per share. Well, I was half right. The company raised the low end of its forecast by a nickel per share. The new EPS range for 2011 is $4.95 – $5.00 per share which implies a Q4 range of $1.08 – $1.13.

  The share price dropped a bit on the news but not too badly. JNJ continues to do well. This is a very well-run firm; Johnson & Johnson is a good buy up to $67 per share.

  The other healthcare stock to report was Stryker ($SYK). After the close on Wednesday, the company reported earnings of 91 cents per share which was two cents better than estimates; plus Stryker raised their full-year guidance. The new guidance is $3.70 – $3.74 per share which is up from $3.65 – $3.73 per share. That implies a Q4 range of $1 – $1.04 per share.

  Last week, I wrote that I like Stryker but that it would be better at a cheaper price. Sure enough, the stock dropped on the good earnings report. Stryker closed Thursday at $48.28 which is a decent price (less than 13 times this year’s earnings). However, if you’re able to get Stryker below $45, you’ve gotten a very good deal.

  The upcoming week will be a very busy week for us; we have five Buy List stocks reporting earnings. On Tuesday, Reynolds American ($RAI) reports. Then on Wednesday, AFLAC ($AFL) and Ford ($F) are due to report. Finally on Thursday, Deluxe ($DLX) and Gilead Sciences ($GILD) will report.

  The one I’ll be watching most eagerly is AFLAC ($AFL). Simply put, the selling of AFLAC shares reached ridiculous levels over the last several weeks. At one point, the stock was trading at $31.25 though the company has told us repeatedly that it expects to earn between $6.09 and $6.34 per share in operating earnings this year.

  Well, Wednesday will be the time of reckoning. In the last earnings report, AFLAC said that it expects Q3 operating earnings to range between $1.54 and $1.60 per share. My numbers say that’s too low. I think AFLAC can easily make $1.64 per share. They may also have good things to say about next year as well. I’m going to raise my buy price for AFLAC to $43 per share.

  Three months ago, Reynolds upset Wall Street when it missed earnings by four cents per share (which I suspected would happen). That was pretty unusual for Reynolds but the stock has recovered very nicely. The current estimate for Q3 is for 73 cents per share which seems about right.

  The other earnings report to watch will be from Ford. The company is fundamentally very sound despite the stock’s poor performance this year. I’m also pleased to see that the latest union contract has been approved. Wall Street currently expects Ford’s third-quarter earnings to come in at 45 cents per share which is below the 48 cents per share from the year before. I think there’s a good chance here for a large earnings beat.

  That’s all for now. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

  – Eddy

• Morning News: October 21, 2011
  Eddy Elfenbein, October 21st, 2011 at 6:55 am

  EU Considers Wielding $1.3T to Break Debt Impasse

  German Bunds Fall Amid European Debt Summit Uncertainty; French Bonds Fall

  German Business Morale Falls for Fourth-straight Month

  ECB Deposits Rise as Banks More Reluctant to Lend to Each Other

  Japan Approves Reconstruction Package, Strong Yen Steps

  As Spain Faces a Possible Recession, Criticism of Its Central Bank Is Growing

  Chinese Trade Case Has Clear Targets, Not Obvious Goals

  Gold Rises In Asia Amid Cautious Trading

  Nordic Banks Offer ‘Best Place to Hide’ From Euro Crisis

  GE Profit Rises 18% in Third Quarter

  Microsoft Sales Exceed Estimates on Strong Corporate Demand

  Irate News Corp. Shareholders to Take Murdoch to the Woodshed

  Hedge Moves Hamper Southwest, Alaska Air

  Blackstone Posts $342 Million Loss Amid Tough Markets

  Wynn Shares Drop on Lack of Special Dividend Announcement

  Roger Nusbaum: Round Up All The ETFs

  Jeff Carter: Will The U.S. Be Different From Greece?

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• Multiple Contraction Is a Bitch
  Eddy Elfenbein, October 20th, 2011 at 11:27 am

  For all of 2011, it looks like earnings for the S&P 500 will come in at $97.62. Of course, that involves some future estimates but since it’s not too far into the future, it will probably be very close.

  Let’s compare this year’s earnings with 2007 when the S&P 500 earned $82.54. Yesterday, the S&P 500 closed at 1,209.88. Yet on the exact same data four years ago, the index was at 1,500.63. Higher earnings, lower prices.

  

  Normally, earnings multiples are inversely related to bond yields. But the 30-year Treasury has dropped from 4.69% four years ago to 3.17% today. The three-month Treasury bill has dropped from 3.74% to 0.02%.

• Earnings Season So Far
  Eddy Elfenbein, October 20th, 2011 at 10:34 am

  Wendy Soong of Bloomberg has a nice summary of third-quarter earnings season so far. Here are some details:

  Of the 500 companies in the S&P 500, 117 have reported so far.

  88 have reported higher earnings.

  24 have reported lower earnings.

  5 have been unchanged.

  85 have beaten earnings.

  21 have missed earnings.

  11 came inline.

  The share-weighted increase is 14.7%.

  Earnings are tracking at $24.45.

• Morning News: October 20, 2011
  Eddy Elfenbein, October 20th, 2011 at 5:53 am

  Merkel Risks Own Downfall to Save Greece

  France and Germany Split on Crisis Solution

  India’s Food Inflation Quickens to 10.6%

  EU Seeks Curbs on High-Frequency Trading

  Euro Zone Wrangling Hammers Stocks

  Crude Declines a Second Day on Europe Debt Outlook; Brent Premium Widens

  Investment Banking’s Uncertain Future at UBS

  Citigroup to Pay Millions to Close Fraud Complaint

  Abbott Labs to Split Into 2 Companies

  American Express 3Q Profit Jumps 13% As Borrowers Spend More

  Fuel Costs Contribute to Wider Loss at AMR

  Groupon Discounts IPO

  Ford Employees Ratify Contract, Despite Show of Displeasure

  U.S. Solar Panel Makers Say China Violated Trade Rules

  Nicholas Financial: Quality on Sale

  James Altucher: The Top 10 Lists of All Time

  Epicurean Dealmaker: The Land of the Free

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