Archive for 2011

  • Two-Year Close to All-Time Low Yield
    , June 24th, 2011 at 10:20 am

    Thanks to the madness in Europe, investors have flocked to U.S. Treasury debt. The yield on the two-year has dropped to 0.35% which is only four basis points above the all-time low from last November.

  • This Monday Marks the Beginning of the Traditional Summer Rally
    , June 24th, 2011 at 7:45 am

    We’re coming up on one of the best times of the year to buy stocks. Not only is the start of the year good for stocks, but so is the start of the second half of the year (as is the turn of the month).

    A few years ago, I calculated all of the Dow’s closings from 1896 to 2007 and found that July 1, July 3 and July 6 are all among the 25 best days for the Dow.

    Historically, the market has gained an average of 4.17% from June 27 to September 6. That’s more than half of the average annual gain even though it covers just ten weeks.

  • CWS Market Review – June 24, 2011
    , June 24th, 2011 at 7:03 am

    In our CWS Market Review issue from two weeks ago, I said that I was keeping a close eye on the S&P 500’s 200-day moving average. Apparently, I’m not alone; Mr. Market seems to be paying very close attention as well.

    Consider that last Thursday, June 16th, the S&P 500 performed a near-perfect intra-day bounce off its 200-DMA. It’s almost as if traders were following it oh-so-closely. That bounce prompted a nice four-day rally which fizzled out on Wednesday.

    So the S&P 500 repeated itself on Thursday by performing another near-perfect bounce off its 200-DMA. This time, we got a cool 1.63% rally going into Thursday’s close. According to Bespoke, that was our biggest intra-day climb following a 1% down move in nearly a year. That’s some bounce. That makes two tries so far to pierce the 200-DMA but we still haven’t closed below it. The last time we did was back on September 10th of last year.

    So what does this mean? Unfortunately, we shouldn’t draw too much from this. But I will say that the market often goes in for three “tests” of these support levels. If we pass all three, then the trend, whether up or down, has a habit of continuing onward. Historically, the data is unambiguous—the S&P 500 has performed much better when it’s above its 200-DMA compared with when it’s below it. The good news is that we’re still above it.

    But make no mistake: The problems in Europe have clearly rattled stock investors here. It got so bad that the yield on short-term Treasuries actually turned slightly negative on Thursday. That means that investors were willing to pay the government to borrow their own money. Now that’s fear!

    This week, I want to review some recent good news from our Buy List stocks. The best news came from Bed Bath & Beyond ($BBBY). The company gave us a great earnings report on Wednesday, plus it guided higher for the year. Few things please me more than the sweet sounds of the “beat-and-raise” choir.

    Let me give you the back story: A few months ago, BBBY told us to expect Q1 earnings to range between 58 cents and 61 cents per share. I knew that was a low-ball projection. I said in last week’s issue that I was expecting a “modest” earnings surprise, around 63 cents per share. Well, I was very pleased to see that the results came in at 72 cents per share. BBBY also said that it’s forecasting Q2 earnings of 77 cents to 82 cents per share. (I was expecting a little more, and honestly, I still think I’ll get it.)

    Let me reiterate that this was a very strong earnings report. BBBY’s sales typically slow down in the quarter following the holidays, but they’re still doing a brisk business. Earlier, BBBY told us to expect earnings to grow by 10% to 15% for this fiscal year which ends in April. Now, they’ve upped that range to 15% to 20%.

    Let’s do some math: For 2010, the company earned $3.07 per share which means the new range comes to $3.53 to $3.68 per share. Personally, I think $3.70 per share is very doable. Thanks to the good earnings news, the stock jumped by more than 5.3% on Thursday to close at $56.93. I’m raising my buy price on BBBY from $55 to $58.

    Now let’s move on to Oracle ($ORCL) which reported very good earnings after the close on Thursday. For their fiscal Q4, Oracle earned 75 cents per share which topped Wall Street’s consensus by four cents per share. I was very happy with ORCL’s numbers, but let me explain this in a little more detail because traders got spooked in the after-hours market and the shares dropped sharply. (I’m writing this before Friday’s open.)

    Early in the quarter, Oracle gave us a guidance range of 69 cents to 73 cents per share. The Street was only at 66 cents per share. What struck me was how early Oracle was willing to go public with this optimistic guidance. But the Street was still skeptical and their consensus rose only to 71 cents per share. Because Oracle’s guidance was so strong, I wasn’t expecting a big earnings surprise (I had said I was looking for about 73 cents per share.)

    In Thursday’s after-hours market, shares of Oracle traded about 7% lower which I think was completely nuts. I saw some grumbling about weakness in Oracle’s hardware business. It’s true, it is weak, but it’s only about 10% of Oracle’s overall revenue. On the conference call I heard what I really wanted to hear—guidance for Q1. Oracle said that it projects earnings between 45 and 48 cents per share for its first quarter. Yep, another low ball. My view is that if they’re saying that, they really mean “at least 50 cents per share.”

    I have to stress that Oracle’s business is a cash-flow machine. The company is sitting on close to $29 billion in cash. Oracle continues to be a great stock. Don’t let any short-term volatility scare you. I think it’s very likely that ORCL will be at $36 before the end of the year. I’m keeping my buy price at $34 per share.

    In February, I said to expect another dividend increase from Medtronic ($MDT) in June. Fortunately, the company proved me right on Thursday when they announced an 8% increase to their quarterly dividend. This is their 34th-straight yearly dividend increase. Not many stocks can say that.

    The new dividend is 24.25 cents per share so that comes to 97 cents for the year. Going by Thursday’s close that comes to a yield of 2.53%. Medtronic is coming off a tough year which included a slew of earnings downgrades. In retrospect, though, the earnings weren’t nearly as bad as the share price indicated.

    Medtronic recently gave us full-year earnings guidance of $3.43 to $3.50 per share. I think they got stung last year by having to lower their guidance more than once, and that’s why I think this latest guidance is on the low side. Even if we take the mid-point of this guidance, that means the shares are going for 11 times this year’s earnings. Plus we now have a dividend that yields nearly as much as a 10-year Treasury. This is a good company that hit a rough patch. I’m lowering my buy price for Medtronic to $45 per share.

    That’s all for now. Next week is the final week of Q2. It’s also the week before the three-day July 4th weekend, so I think Wall Street will be fairly quiet. All the big shots will be running off to their summer pads at the Hamptons or Martha’s Vineyard.

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

    – Eddy

  • Morning News: June 24, 2011
    , June 24th, 2011 at 6:27 am

    Draghi Appointed to Succeed Trichet as ECB President

    Banks, Officials Nearing Greek Bond Plan

    EU Vows to Rescue Greece in Exchange for Cuts

    As Greece Ponders Default, Lessons From Argentina

    Asian Nations Welcome Oil Reserves Release

    China Blocks Multi-billion Dollar Airbus Order

    China Accounting Scandals Put Big Four Auditors on Red

    What Now, Chairman Bernanke?

    Americans See Debt Threat, Reject Tax ‘Scare’

    Used Gas Sippers, Keeping That New-Car Value

    Buffett Closes ‘Backdoor’ to Berkshire

    Ford Drops in Quality Survey

    Apple Gets U.S. Antitrust Approval to Bid for Nortel Assets

    Why is there so much Bad Consumer Investment Advice?

    Joshua Brown: Nice Work…If You Can Get It.

    Howard Lindzon: Google and The Government…Google should have Drilled For Oil

    Be sure to follow me on Twitter.

  • Oracle’s Q1 Guidance
    , June 23rd, 2011 at 10:59 pm

    After today’s close, Oracle ($ORCL) held a conference call. For Q1, the company sees earnings ranging between 45 cents and 48 cents per share. Wall Street’s estimate was 46 cents per share.

    The stock dropped about 7% in the after-hours market. I strongly suspect this will fade at tomorrow’s open. Here’s what the company had to say:

    For the year, our operating income grew 27% and even with the Sun Hardware business included in our results for the full year, we delivered non-GAAP operating margins of only 2% — 2 points below our all-time high. The non-GAAP tax rate for the quarter was 23.3% due to several favorable nonrecurring items including agreements with worldwide taxing authorities. EPS grew 25% to $0.75 on a non-GAAP basis.

    The fact that we were able to put up these top line and bottom line results given our size, once again, demonstrates the strength of our diversified portfolio of enterprise products and the breadth and loyalty of our huge customer base and the strength of our operating model.

    We now have $29 billion in cash and marketable securities and operating cash flow increased to a record $11.2 billion. For the year, all free cash flow increased to $10.8 billion. As we’ve always said, we’re committed to returning value to our shareholders through technical innovation, strategic acquisition, stock repurchases, prudent use of debt and a dividend. In this quarter, we repurchased 12.5 million shares for a total of a $422 million. For the full year, we repurchased 40.4 million shares for a total of approximately $1.2 billion. And the board again declared a dividend of $0.06.

    Now the guidance. As you remember, we had a spectacular Q1 last year with New License up 25%, non-GAAP EPS up 38% and GAAP EPS up 20%. So assuming exchange rates remain at current levels, which is right now a positive 5% currency impact on license and revenue growth rates, our guidance for Q1 is as follows: New Software Licenses revenue growth is expected to range from 10% to 20%; Hardware Product revenue growth is expected to range from negative 5 to positive 5 and of course, that does not include the Hardware Support revenue; total revenue on a non-GAAP basis is expected to range from 9% to 12%; on a GAAP basis, we expect total revenue growth from 10% to 13%. Non-GAAP EPS is expected to be $0.45 to $0.48; GAAP EPS is expected to be $0.33 to $0.36. Now this guidance assumes a GAAP tax rate of 29% and non-GAAP tax rate of 28.5%, which is nearly 4 points higher than our tax rate in the previous year. Now, of course, this may end up being different.

    Oracle is a cash flow machine. It’s truly astounding how much money they generate. They’re now sitting on $29 billion in cash. For the last fiscal year, Oracle made $2.22 per share. Based on the most recent after-hours trade, the stock is going for just under 14 times trailing earnings.

  • Oracle Earns 75 Cents Per Share
    , June 23rd, 2011 at 4:07 pm

    Oracle ($ORCL) just reported earnings of 75 cents per share which beat the Street by four cents. Revenue came inline at $10.8 billion which Wall Street won’t like. The shares are down about 6% after-hours which probably won’t last until tomorrow’s open.

    Yes, hardware sales dropped by 6% but that makes up about one-tenth of Oracle’s overall business.

    Let’s remember that Wall Street was originally expecting 66 cents per share. Only after the company gave us guidance of 69 cents to 73 cents did the Street go up to 71 cents. And we learned today that the company delivered 75 cents per share. Folks, this was a good report.

    Oracle Corporation today announced fiscal 2011 Q4 GAAP total revenues were up 13% to $10.8 billion, while non-GAAP total revenues were up 12% to $10.8 billion. Both GAAP and non-GAAP new software license revenues were up 19% to $3.7 billion. Both GAAP and non-GAAP software license updates and product support revenues were up 15% to $4.0 billion. Both GAAP and non-GAAP hardware systems products revenues were down 6% to $1.2 billion. GAAP operating income was up 32% to $4.4 billion, and GAAP operating margin was 40%. Non-GAAP operating income was up 19% to $5.2 billion, and non-GAAP operating margin was 48%. GAAP net income was up 36% to $3.2 billion, while non-GAAP net income was up 27% to $3.9 billion. GAAP earnings per share were $0.62, up 34% compared to last year while non-GAAP earnings per share were up 25% to $0.75. GAAP operating cash flow on a trailing twelve-month basis was $11.2 billion.

    For fiscal year 2011, GAAP total revenues were up 33% to $35.6 billion, while non-GAAP total revenues were up 33% to $35.9 billion. Both GAAP and non-GAAP new software license revenues were up 23% to $9.2 billion. GAAP software license updates and product support revenues were up 13% to $14.8 billion, while non-GAAP software license updates and product support revenues were up 13% to $14.9 billion. Both GAAP and non-GAAP hardware systems products revenues were $4.4 billion. GAAP operating income was up 33% to $12.0 billion, and GAAP operating margin was 34%. Non-GAAP operating income was up 27% to $15.9 billion, and non-GAAP operating margin was 44%. GAAP net income was up 39% to $8.5 billion, while non-GAAP net income was up 34% to $11.4 billion. GAAP earnings per share were $1.67, up 38% compared to last year while non-GAAP earnings per share were up 33% to $2.22.

    “In Q4, we achieved a 19% new software license growth rate with almost no help from acquisitions,” said Oracle President and CFO, Safra Catz. “This strong organic growth combined with continuously improving operational efficiencies enabled us to deliver a 48% operating margin in the quarter. As our results reflect, we clearly exceeded even our own high expectations for Sun’s business.”

  • Medtronic Raises Dividend By 8%
    , June 23rd, 2011 at 12:56 pm

    For the 34th year in a row, Medtronic ($MDT) is raising its quarterly dividend. The company is increasing it from 22.5 cents per share to 24.25 cents. That’s an 8% increase. Annualized, the dividend rises from 90 cents per share to 97 cents per share.

    Going by the price as of 1 pm today, that comes to a yield of 2.56%.

    Last month, MDT told us to expect earnings for this year between $3.43 per share and $3.50 per share. Their fiscal year ends in April. This means the stock is going for 11 times the low-end of the company’s own forecast.

  • Google Still Goes Lower
    , June 23rd, 2011 at 11:57 am

    Last month, I asked the question, “How much is Google really worth?”

    So how much should Google be worth? That’s hard to say. Let’s take a very basic look. Wall Street currently expects Google to earn $33.90 per share this year.

    The S&P 500 is currently trading at 13.85 times this year’s earnings estimate. If Google were carrying that multiple, it would be about $470 per share.

    However, Google is projected to grow its earnings faster than the overall market. Wall Street currently expects Google to earn $39.49 per share in 2012. The S&P 500 is going for 12.2 times next year’s estimate. So if Google carried that multiple, it would be $481 per share.

    When I wrote that GOOG was at $535. Today it’s at $476.

    The earnings estimates are basically unchanged. For 2011, Wall Street expects earnings of $33.88 per share, and $39.47 for 2012.

    Google is now going for 14.1 times this year’s earnings and 12.1 times next year’s earnings. Compared with the S&P 500, this represents a value premium of 8.8% and 6.5%, respectively.

  • Double Bounce!
    , June 23rd, 2011 at 11:05 am

  • Bed Bath & Beyond’s Earnings Trend
    , June 23rd, 2011 at 10:15 am

    Shares of Bed Bath & Beyond ($BBBY) jumped as much as 5.4% this morning. Here’s a look at the company’s earnings trend along with their updated earnings forecast. Just by looking at the chart, you see that the upper-end of the forecast is still well within the recent trend.

    Year-over-year net profit margins have now increased for nine-straight quarters. For the last four quarters, net margins are running at 9.3% which is closing in on the company’s peak of 10% reached in 2005.

    Courtesy of Seeking Alpha, here’s part of yesterday’s earnings call where the company details its forecast for the rest of this year:

    The following are our major planning assumptions for the remainder of fiscal 2011.

    One, including the 12 stores open so far this year, we anticipate that the total number of new store openings will be approximately 40 to 45 stores across all of our concepts. Currently, we believe that fiscal 2011 store openings by concept will be substantially similar to fiscal 2010 with a slight shift to several more buybuy BABY stores and slightly fewer Bed Bath & Beyond stores. As the year progresses and we gain greater visibility, the total number of stores that we will open may be updated. We will continue to place Harmon Face Values health and beauty care offerings in stores across all of our concepts. As always, we remain flexible to take advantage of real estate opportunities that may arise.

    Two, we expect to continue our program of expanding, renovating and/or relocating a number of our stores in fiscal 2011.

    Three, we are modeling a 2 to 4 percentage increase in comparable store sales for the second quarter and full fiscal year.

    Four, based on these comparable store sales assumptions, we are modeling consolidated net sales to increase by 5% to 7% in the second quarter and full year of fiscal 2011.

    Five, assuming these sales levels, in addition to planning the continuation of the shift in the mix of merchandise sold to lower margin categories, we are modeling our operating profit to be in the range of flat to slightly leveraged for the fiscal second quarter and to be slightly leveraged for the full year.

    Six, interest income is expected to be relatively flat versus fiscal 2010.

    Seven, the second quarter and full year tax provision are estimated in the mid- to high-30s percent range with expected variability as taxable events occur.

    Eight, capital expenditures for fiscal 2011, principally for new stores, existing store refurbishments, information technology enhancements, including increased spending on our interactive platforms and other projects, continue to be planned at approximately $250 million, which of course, remains subject to the timing of projects.

    Nine, depreciation for fiscal 2011 is estimated to be approximately $190 million.

    Ten, we expect to generate positive operating cash flow in fiscal 2011 and continue to fund operations entirely from internally generated sources.

    Eleven, in the first quarter, we completed our $1 billion share repurchase program and, thereafter, began our $2 billion program authorized in December 2010, which we continue to model to be completed in approximately 2 years. Our share repurchase program may be influenced by several factors, including business and market conditions.

    Based on these and the other planning assumptions, we are modeling net earnings per diluted share to be in the range of approximately $0.77 to $0.82 for the fiscal second quarter of 2011. For all of fiscal 2011, we are modeling net earnings per diluted share to increase by approximately 15% to 20%.