Archive for June, 2012

• Morning News: June 27, 2012
  Eddy Elfenbein, June 27th, 2012 at 7:29 am

  Europe’s Leaders at Odds Before Summit

  Before Talks With Lenders, Greece Appoints Finance Minister

  Draghi May Enter Twilight Zone Where Fed Fears to Tread

  Spanish Officials Hailed Banks as Crisis Built

  EU Court Cuts Microsoft Antitrust Fine By 4.3%

  Indebted Drydocks Sells Stake in Asia Operations

  U.S. Consumer Confidence Hits 5-Month Low

  Housing Exuberance Led by Shiller’s U.S. Glamorous Cities

  Breaking Up Big Banks Hard to Do as Market Forces Fail

  Apple Wins Preliminary Injunction Against Samsung Tablet

  Best Buy Founder Works With Credit Suisse On Options-Sources

  Shell Is Likely to Receive Permits for Oil Drilling Off Alaska

  Qatar Holding Seeks Higher Xstrata Price From Glencore

  Jeff Miller: A Closer Look at Current Survey Results

  Stone Street: They Will Shock, SHOCK You! Second Quarter Earnings Miss Excuse Survey Results

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• Cummins Is Going for a Deep Discount
  Eddy Elfenbein, June 26th, 2012 at 4:03 pm

  It’s hard not to be impressed by Cummins ($CMI). Here’s a company description from Hoovers:

  If it’s comin’ around the mountain, it could have a Cummins’ engine powering it. The company makes about half of its revenues from its Engine segment which makes diesel and natural gas powered engines for the heavy and mid-duty truck, RV, automotive, and industrial markets, along with marine, rail, mining, and construction. Its other complementary business segments include Components (filtration products and fuel systems); Power Generation (vehicle and residential generators); and Distribution (product distributors and servicing). Major customers include OEMs Chrysler, Daimler, Ford, Komatsu, PACCAR, and Volvo. About two-thirds of Cummins’ sales are from outside the US.

  The stock is currently at about $90 per share. Wall Street expects earnings of $10.55 per share for this year and $11.79 per share for 2013.

  In May, Cummins said they see sales rising by 10% this year with EBIT in the range of 14.5% to 15% of sales. They had $18 billion in sales last year, so a 10% rise comes to $19.8 billion, and EBIT works out to $2.87 billion to $2.97 billion. The current market value is just over $17 billion.

  The last six earnings report have beaten expectations, sometimes by a very hefty margin. My simple stock valuation method gives Cummins fair value of $157.

  As I’ve said before, I don’t view the valuation method as a precise tool, but it’s a good quick way to see how reasonably a stock is valued. Cummins looks to be very inexpensive.

• Ford CEO Alan Mulally on Bailouts
  Eddy Elfenbein, June 26th, 2012 at 10:56 am

• Earnings Pessimism
  Eddy Elfenbein, June 26th, 2012 at 9:19 am

  Some interesting earnings stats from Bloomberg:

  Europe’s debt crisis is putting pressure on corporate results. Analysts predict members of the S&P 500 will report a 1.1 percent average drop in second-quarter earnings, after estimating a gain as recently as last month, according to data compiled by Bloomberg. That would follow a 6.2 percent average increase in the first quarter.

  Earnings pessimism reached levels last seen during the financial crisis. Fifty-nine corporations issued profit projections that trailed analyst estimates during the 20 days through June 22, or 3.1 times the number of those that exceeded them. The ratio has been greater than 3 for eight straight days, the longest stretch in three years. It was at least that high the majority of the time between October 2008 and April 2009, climbing to 11.5 in December 2008, the data show.

• Spread Between Dow Yield and 10-Year Yield is at a High
  Eddy Elfenbein, June 26th, 2012 at 9:12 am

  From Bloomberg:

• Goldman Adds JPM to Conviction List
  Eddy Elfenbein, June 26th, 2012 at 8:27 am

  Shares of JPMorgan Chase ($JPM) still haven’t fully recovered from the news of the trading losses. Wall Street, however, is starting to realize what a bargain the stock is:

  Goldman Sachs added JPMorgan Chase & Co to its America’s conviction buy list, saying the U.S. bank’s capital position and earnings power can offset its recent hedging loss of at least $2 billion.

  Goldman downgraded Morgan Stanley to “neutral” from “buy,” and removed the stock from its conviction buy list, saying earnings could be hurt by muted capital markets activity.

  While Goldman sees value in Morgan Stanley’s shares at current depressed levels, it expects better returns at JPMorgan.

  The 15 percent decline in JPMorgan share price since the largest U.S. lender by assets announced trading losses at its chief investment office has been “drastic,” given the unit’s 5 percent average earnings per share contribution, Goldman said.

  JPMorgan, which has temporarily halted its $15 billion share repurchase program, may also resume buybacks this year, lending further support to the stock, Goldman analysts said.

  Goldman, however, cut its second-quarter earnings estimates for JPMorgan to 60 cents from 75 cents to reflect a quicker recognition of its trading losses.

  Second-quarter earnings of 60 cents per share is still below Wall Street’s consensus. The view on the Street is for JPM to earn 85 cents per share for the second quarter. Two months ago, the expectation was for $1.24 per share.

  Let’s look at the larger picture. Wall Street expects JPM to earn $5.32 per share for 2013. I’m a little hesitant to make forecasts that far out but you can see that Wall Street has high hopes for Dimon & Co. That means that JPM is going for 6.6 times next year’s estimate. The earnings yield works out to 16%.

  The figure of $5.32 would top what JPM earned in 2006 or 2007 when the stock was over $53 per share. Yesterday, it closed at $35.32.

• Morning News: June 26, 2012
  Eddy Elfenbein, June 26th, 2012 at 7:13 am

  Germany Pressed to Scrap Senior Status on Spain Rescue Loans

  Spain Pays Dearly For Short-Term Money

  Merkel Hardens Resistance to Euro-Area Debt Sharing

  China Sees Momentum for Trade Growth

  Cyprus Rescue Package May Equal Half Its Economy

  South Korea To Halt Iran Oil Imports As EU Ban Bites

  Wheeler to Lead N.Z. Central Bank as Kiwi Hits Exports

  Rising New Home Sales Point To A Strengthening Housing Market

  Microsoft’s Fight Nears End With European Antitrust Ruling

  Microsoft to Buy Yammer for $1.2 Billion

  Facebook’s Board Discovers Sheryl Sandberg. Why Now?

  News Corp Considering Splitting Into Two

  Coca-Cola plans to invest $5 billion in India by 2020

  Cullen Roche: Misunderstanding Banking is Helping Bankrupt an Entire Society

  Jeff Carter: How HFT Ruins Markets

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• Instead of a Bull and Bear….
  Eddy Elfenbein, June 25th, 2012 at 4:30 pm

  I say we start using a dachshund puppy and a crab:

  (Via: Radley Balko)

• Morgan Stanley’s Global Debate Playbook
  Eddy Elfenbein, June 25th, 2012 at 12:41 pm

  Here’s an interesting long research piece from Morgan Stanley.

• What If People Start to Leave the U.S.?
  Eddy Elfenbein, June 25th, 2012 at 11:31 am

  The United States, we’ve been warned, has piled up a dangerous amount of public debt. The fear is that at some point, the bond market will cut us off, yields will skyrocket and the government will no longer be able to finance its deficits.

  The problem with this idea is that we haven’t experienced anything close to it yet. Of course, I’m not saying it can’t or won’t happen. I’m merely pointing out that the more debt we pile on, the lower interest rates seem to go.

  So at what point, exactly, will trouble start? Instead of looking for an economic stat, I think we should instead worry about a social stat. More specifically, it will truly be time to worry when we see the beginnings of emigration—if there’s a noticeable movement of young people and more entrepreneurial-minded citizens leaving the United States.

  America is an exception to most countries in the world in that it has never experienced, to my knowledge, a large migration of people out of the country. When my ancestors left Ireland 170 years ago, that country was far larger than it is today. The idea of a shrinking population is nearly unthinkable to Americans. We’ve always gotten bigger. But could we one day see Americans pull up roots and move out? I’m not even speaking of a mass movement, but at least a noticeable one.

  The question boils down to asking, “What are the benefits of American citizenship?” Will some people believe that the idea has been so diluted that it’s not worth the bother? The total debt works out to roughly $50,000 per head. Surely some young family must wonder why they should stay here and have a child who will be born owing so much, especially when they feel they won’t see the benefits of it.

  Please understand, I’m not saying that I feel this way, nor am I advocating it. I’m just saying that at some point will enough Americans wonder what’s the point in holding American citizenship anyway? Not all of our fellow citizens are so warm-hearted. They must feel that the government does them little good by getting involved in foreign wars with ungrateful nations, wasting taxpayer money on foreign aid and welfare and allowing large-scale illegal immigration. What’s the benefit of being an American?

  The U.S. has experienced large waves of internal migration. Many Okies packed up and headed for California during the Dust Bowl. Large numbers of African Americans left the rural South for the urban North. These weren’t small movements so the participants must have understood the basic math involved—the benefits of where they were headed far outweighed the negatives if they stayed. So what are the factors in play today?