Archive for March, 2013
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Morning News: March 25, 2013
Eddy Elfenbein, March 25th, 2013 at 6:42 amCyprus Salvaged After EU Deal Shuts Bank to Get $13 Billion
Spain’s Swelling Debt Seen Impeding Rajoy Deficit Battle
Norway Becomes Petro-State as Investors Balk at Hidden AAA Risks
Japan 10-Year Bond Yield Falls to 2003 Low on Easing Bets
Indonesia Vets Martowardojo for Central Bank in Reshuffle Bid
China To Resume Electric Car Subsidies – BYD Chairman
China Construction Bank Quarterly Net Rises 16% on Loans
SEC’s Walter Urges “Maximum” Reliance On Foreign Swaps Rules
Bankruptcies Are a Healthy Sign for the Solar Industry
Luring Young Web Warriors Is a U.S. Priority. It’s Also a Game.
2 Rivals Complicate Deal for Dell
Otelco Files For Bankruptcy After Losing Time Warner Cable Contract
Astrazeneca Settles Crestor Patent Row
Cullen Roche: US Treasuries Remain an Effective Portfolio Hedge
Jeff Miller: Weighing The Week Ahead: Can The Cyprus Fallout Be Contained?
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Cyprus to Vote Until They Get It Right
Eddy Elfenbein, March 22nd, 2013 at 10:45 amCypriot lawmakers are due to vote Friday on a raft of new measures they hope will qualify the country for a bailout package and avoid financial ruin next week. But officials in Brussels and Berlin gave no indication it would be enough.
Cyprus needs to find a way to raise the 5.8 billion euros to qualify for 10 billion euros in rescue loans from other eurozone countries and the International Monetary Fund.
The plan needs approval from eurozone and IMF and that remained elusive. Eurozone officials said they had not seen all the details and would have to discuss whatever final plan Cyprus presents.
“The next few hours will determine the future of this country,” said government spokesman Christos Stylianides.
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BBBY Hits $64
Eddy Elfenbein, March 22nd, 2013 at 10:28 amIn the CWS Market Review from February 15th, I wrote that Bed Bath & Beyond ($BBBY) finally looks cheap. Here’s what I wrote:
I want to focus on Bed, Bath & Beyond ($BBBY), which had been one of my favorite Buy List stocks, but a string of earnings warnings rocked the shares last year. While 2012 was unpleasant, I think the stock has now fallen back into being a very good buy at this price.
Let’s review what happened last year. In June 2012, Wall Street had been expecting fiscal year earnings (ending February 2013) of $4.63 per share, which represented 14% growth over the year before. But the company surprised investors by telling us to expect earnings growth somewhere between the single digits and the low double digits.
No biggie, right? Guess again. Traders gave BBBY a super-atomic wedgie as the stock got crushed for a 17% loss in one day. Now here’s the odd part: Here we are eight months later, and it looks like BBBY will earn about $4.54 per share for the year, give or take. In other words, that dreaded earnings warning turned out to be about 2% or so.
After the earnings report in September, BBBY got hammered for a 10% one-day loss when it reiterated the exact same full-year forecast. Then, for the December earnings report, BBBY only got nailed for 6.5% after it reiterated, you guessed it, the exact same full-year earnings forecast.
For Q4 (which covers the holidays so it’s the big dog of BBBY’s fiscal year), the company said earnings would range between $1.60 and $1.67 per share. The Street was expecting $1.75 per share. C’mon, this lower guidance isn’t that bad. But traders have lost confidence in BBBY. The shares have plunged from over $75 in June to as low as $55 in December, although it’s come up a bit since then.
Now let’s run some numbers: If Bed, Bath & Beyond can increase earnings by 10% for next fiscal year (which begins in two weeks), that should bring them to roughly $5 per share. That means we’re looking at a stock that’s going for less than 12 times earnings and growing at 10% per year. Furthermore, the recovering housing market should continue to aid them. While BBBY looks cheap, I suspect it will take a while before the stock comes back to life. The earnings warnings really spooked traders. The next earnings call isn’t until April 10. Bed, Bath & Beyond is a good buy up to $60 per share.
The stock has responded very well this month. BBBY briefly hit $64 this morning.
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CWS Market Review – March 22, 2013
Eddy Elfenbein, March 22nd, 2013 at 7:24 am“There are two kinds of people who lose money: those who know
nothing and those who know everything.” – Henry KaufmanWhat a long, strange week it’s been on Wall Street. Last Friday, the Dow’s amazing 10-day winning streak came to an end. Since then, the financial world’s attention has been focused on the little island nation of Cyprus, of all places. Despite all the attention, I doubt the problems in Cyprus will amount to a hill of beans for us.
From our perspective, the biggest news of the week came late Wednesday, when Buy List member Nicholas Financial ($NICK) reported that it had received an unsolicited buyout offer. The shares promptly vaulted 12.1% on Thursday on 12 times the normal trading volume. It’s about time the big boys noticed NICK. This is great news for those of us who have been in NICK for the long haul (check out the chart below). In this week’s CWS Market Review, I’ll give you my thoughts on the offer.
There was also news on the earnings front. Oracle ($ORCL) had an ugly report; the shares took a 9.7% hit on Thursday (I’ll have more on that in a bit). Plus, FactSet ($FDS) and Ross Stores ($ROST) reported earnings. But first, let’s look at what lies ahead for Nicholas Financial.
Nicholas Financial Gets Buyout Offer
After the closing bell on Wednesday, Nicholas Financial ($NICK) announced that it “received an unsolicited, non-binding indication of interest from a potential third-party acquirer.” In English, this means probably someone wrote down a price on a napkin, slid it to the board and said, “How’s this?” I have no idea who it is or how much they’re offering, but it’s serious enough for NICK to reveal that it happened. The firm has retained Janney Montgomery Scott to advise them in evaluating “strategic alternatives.”
Some of you may remember that the same thing happened to NICK in early 2011. At the time, the stock was at $10 and it soared 18% following the news. In the end, NICK shot down that offer. Again, I don’t know what the offer was, but I’m almost positive it was too low and NICK’s board did the right thing in walking away. It’s tough to turn down a buyout offer, but sometimes it’s the right thing to do. NICK’s stock is up about 50% since then, and that doesn’t include the big dividend we got in December.
This time around, I’m far more open to NICK being sold. The senior management is close to retirement age, so they may be looking for an exit as well. The difference between now and two years ago is that NICK has proved to the world that it navigated the financial crisis. Their portfolio is solid, and according to the Fed, short-term interest rates are going to stay low for a while more. This is a very good environment for NICK’s business. On Thursday, the stock got as high as $15.15. Obviously, I want as high a price as possible, but if I were a member of the board, I’d set $18 as a minimum.
Here’s the reality: In a world of zero interest rates, there’s a massive hunt going on for yield. This is one of the distortions that Bernanke and the Fed are worried about. Fund managers are looking anywhere and everywhere for higher rates without too much risk. Eventually, that led someone to NICK. Fortunately, we were there first.
Let me warn shareholders that these situations can become dramatic, and it’s largely out of our hands. If the deal is shot down or withdrawn, the shares will take a hit. But on the plus side, it’s possible that a bidding war will ensue, and the shares will be ratcheted higher. For now, I’m going to raise my Buy Below price to $16. Stay tuned for more news.
Oracle Plunges after Weak Earnings
While the news was good from NICK, the news from Oracle ($ORCL) wasn’t so fortunate. Three months ago, Oracle told us to expect fiscal Q3 earnings to range between 64 and 68 cents per share. As it turned out, they earned 65 cents per share, which was one penny below Wall Street’s consensus.
Frankly, this was a big disappointment. I thought Oracle was going to earn 70 cents per share or more, but the big miss wasn’t on the bottom line. It was on the top line. Quarterly sales rose to $8.97 billion, which was $40 million below Wall Street’s consensus. The problem isn’t hard to spot—Oracle is facing more competition from Internet-based cloud systems.
Some of these numbers are pretty ugly. Wall Street had been expecting an increase in new software sales of 8%. Instead, it fell by 1.8%. Hardware revenue has been dropping, but Oracle told us that that division is close to turning around. Apparently not. Hardware sales dropped 23% last quarter. Oracle’s stock took a big hit yesterday as it lost 9.7%. A bunch of previously bullish analysts piled on and cut their ratings.
For Q4, Oracle sees earnings ranging between 85 cents and 91 cents per share. Actually, that’s not so bad. Oracle sees quarterly revenue coming in between $10.8 billion and $11.4 billion, which, in my opinion, is pretty light. The company also said that new software license revenue will grow between 1% and 11% this quarter, and hardware revenue will drop by 13% to 23%. That’s not what I wanted to hear.
To be fair, Oracle was hurt last quarter by some of the mess in Europe. The CFO also said that some large contracts had been delayed last quarter, and those numbers will show up in this quarter’s earnings report. Bloomberg quoted an analyst at UBS as saying, “I’ve followed this company for a decade, and historically when they have a miss, it’s a great time to buy.” Oracle’s in my doghouse right now, but I’m not giving up on them. Oracle remains a good buy up to $37 per share.
Buy FactSet below $95 and Ross Stores below $62
On Tuesday, FactSet Research Systems ($FDS) reported second-quarter (ending February) adjusted earnings of $1.14 per share, which was three cents better than what Wall Street had been expecting. This is good news, and it was actually better than the forecast FactSet gave three months ago when they said earnings should range between $1.11 and $1.13 per share.
Interestingly, at the time of that guidance, Wall Street was disappointed because they had been expecting $1.13 per share. FactSet said they expected revenues to range between $212 and $215 million. On Tuesday, they reported that Q2 revenues rose 7% to $213.1 million.
The problem, if you can even call it that, is that banks have been working hard to cut costs. For Q3, FactSet sees revenues ranging between $213 and $216 million and earnings-per-share coming in between $1.14 and $1.16. Wall Street had been expecting revenues of $217 million and earnings of $1.13 per share.
Even though the numbers are pretty good, shares of FDS got hammered this past week. The stock broke below $90 per share on Thursday, but I’m not worried at all about FactSet. This company has increased its earnings every year for the last 16 years, and they’re going to do it again. I’m going to lower my Buy List to $95 to reflect the recent sell-off, but FDS remains a very good buy.
On Thursday, Ross Stores ($ROST) reported fiscal Q4 earnings of $1.07 per share, which is up from 85 cents per share last year. This was hardly a surprise, since their previous guidance was a range between $1.06 and $1.07 per share. When the range is like that, you can be pretty sure it’s not a guess. Q4 sales rose 15% to 2.761 billion. Comparable stores sales were up by 5%.
Business is going well for Ross, and they just wrapped up a very good year. For the fiscal year, Ross earned $3.53 per share, which was up from $2.86 per share last year. Sales rose 13% to $9.721 billion. Same-store sales were up by 6%. The stock rallied 3.4% on Thursday. ROST remains a very good buy up to $62 per share.
Don’t Let Fears over Cyprus Scare You
Over the weekend, we learned of a dramatic bailout plan for Cyprus which involved a one-time tax of bank deposits. Let’s just say that this idea didn’t go over well on the island; the plan failed to get a single vote in the Cypriot parliament. This was the first time a legislature stood up to the ECB.
Then there was talk of Cyprus striking a cash-for-gas deal with Russia, but that doesn’t seem to be going anywhere. Now the European Central Bank is running out of patience, and no one knows what will happen next. The ECB has set a Monday deadline for the island to agree to a deal. Paul Krugman wrote, “Cyprus has managed to combine in one place everything that has gone wrong elsewhere.”
I know Cyprus has been getting a lot of attention, and it’s a fascinating story from an economic perspective. But I don’t want investors to be overly concerned about Cyprus’s impacting our Buy List. Let’s take a step back and remember that Cyprus makes up just 0.2% of the eurozone’s economy.
The big fear is that once one country agrees to a tax on bank deposits, a new precedent will be set, and it could be done elsewhere. That fear would in turn lead to a run on banks in countries like Italy, Spain and Portugal. While I can’t rule a scenario like that out, it’s simply too far down the road for investors to worry about. Cyprus is such a small and unusual case that it may turn out to be a story that isn’t repeated elsewhere. I feel for the Cypriots, especially those who have their life savings at risk. But what happens on that island really doesn’t matter much to our Buy List stocks. I’m afraid that a tax on deposits may be the path of least resistance.
That’s all for now. Next week is the final week of the first quarter. We’ll get important reports on durable goods, new home sales and another look at Q4 GDP. 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
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Morning News: March 22, 2013
Eddy Elfenbein, March 22nd, 2013 at 7:20 amCrisis In Cyprus Threatens EU Role And Legitimacy
German Ifo Business Confidence Falls Unexpectedly
KBC, Santander Raise $1.5 Billion From Bank Zachodni Sale
China Forecast to Overtake US by 2016
Yuan Ends Up Slightly As PBOC Reinforces Stability
Europe’s Bonus Clampdown Hits Two-Thirds of Fund Managers
Europe Weighs iPhone Sale Deals With Carriers for Antitrust Abuse
Easy Fed Softens Fiscal Policy Punch On Economy
Initial Jobless Claims in U.S. Rise Less Than Forecast
Existing-Home Sales Hit 3-Year High, as Prices Rise
Renewed Tax Credit Buoys Wind-Power Projects
Micron Posts Loss, but Revenue Rises
BP To Return $8 Billion To Shareholders From TNK-BP Sale
Howard Lindzon: Stock Picking…Just Do It!
Joshua Brown: Tales from the “Fake Wealth Effect”
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Nicholas Financial Open at $14.75
Eddy Elfenbein, March 21st, 2013 at 9:31 amUp 11%.
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Ross Stores Earns $1.07 Per Share
Eddy Elfenbein, March 21st, 2013 at 8:45 amNot much of a surprise here. Ross Stores ($ROST) previously said that earnings would range between $1.06 and $1.07 per share. When the range is like that, you can be pretty sure it’s not a guess. For fiscal Q4, Ross earned $1.07 per share. That’s up from 85 cents per share last year. Q4 sales rose 15% to $2.761 billion. Comparable stores sales were up by 5%.
Overall, this was a very good year for Ross. For the year, Ross earned $3.53 per share which was up from $2.86 per share last year. Sales rose 13% to $9.721 billion. Same-store sales were up by 6%.
Michael Balmuth, Vice Chairman and Chief Executive Officer, commented, “We are pleased with the record sales and earnings we delivered in the fourth quarter and 2012 fiscal year, especially considering they were achieved on top of strong multi-year gains. Results for both periods benefited from our ongoing ability to deliver compelling bargains on a wide assortment of exciting name brand fashions for the family and the home to today’s value-focused consumers.”
Mr. Balmuth continued, “Earnings before interest and taxes for the 2012 fourth quarter grew to 13.7% of sales, up from 13.0% in the fourth quarter of 2011. For fiscal 2012, operating margin rose to a record 13.1%, a gain of 75 basis points on top of an 85 basis point increase in 2011. Profit margins for both the quarter and the full year mainly benefited from higher merchandise gross margin, leverage on operating expenses from the strong gains in same store sales and the impact of the 53rd week.”
Ross also said they’re not going to report monthly sales anymore.
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Morning News: March 21, 2013
Eddy Elfenbein, March 21st, 2013 at 6:14 amAs Bailout Deadline Approaches, Cyprus Scrambles to Find Funds
ECB to Cut Cypriot Bank Funding Next Week Unless Bailout
Even Greece Exports Rise in Europe’s 11% Jobless Recovery
Biggest Solar Collapse in China Imperils $1.28 Billion
Japan Exports Fall But Firms’ Mood Improves Amid Recovery Hopes
Gold Giants Shrink to Fit as Paulson Pushes Breakup
JPMorgan Clamps Down On Fees From Payday Lenders
Profit Down 31%, FedEx Cuts Outlook
Oracle Sales and Profit Miss Amid Cloud Competition
Yahoo Buys Jybe as Portal Adds Engineers Via Acquisitions
H&M Speeds Up Expansion As Q1 Pretax Falls
Financial Windfalls for Wall St. Executives Taking Government Jobs
Study of Men’s Falling Income Cites Single Parents
Edward Harrison: US Small And Medium-Sized Banks Hit By Interest Rates
Jeff Carter: Too Big To Fail Intensifies
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Nicholas Financial Gets Buyout Offer
Eddy Elfenbein, March 20th, 2013 at 5:20 pmInteresting news from Nicholas Financial ($NICK). The company got a buyout offer. I don’t know the details but NICK has retained Janney Montgomery Scott to help them look at the deal and other possible alternatives.
Long-time NICKers will remember that NICK got a similar offer two years ago but the price was too low. I was very happy NICK shot down that offer. The stock was at $10.08 when that offer was made (pre-dividend) so we were right, NICK would probably have sold itself too soon. Now I’d be more interested in a good price. Also, NICK’s senior management is at the age when most folks think it’s time to retire.
When NICK got the offer in January 2011, the shares jumped 18% the next day. In the current after-hours market, NICK is up to $14.50 which is a 9.5% gain.
Here’s the press release:
CLEARWATER, Fla., March 20, 2013 (GLOBE NEWSWIRE) — Nicholas Financial, Inc. (NICK) announced today that the Board of Directors of the Company has retained Janney Montgomery Scott LLC as its independent financial advisor to assist the Board of Directors in evaluating possible strategic alternatives for the Company, including, but not limited to, the possible sale of the Company or certain of its assets, potential acquisition and expansion opportunities, and/or a possible debt or equity financing.
The Company also announced today that it has received an unsolicited, non-binding indication of interest from a potential third-party acquirer. The Company cautions its shareholders and others considering trading in its securities that its Board of Directors only recently received the indication of interest, and that the process of considering this proposal as well as other possible strategic alternatives for the Company is only in its beginning stages. The Board of Directors will proceed in an orderly and timely manner to consider possible strategic alternatives for the Company and their implications. Accordingly, no assurances can be given as to whether any particular strategic alternative for the Company will be recommended or undertaken or, if so, upon what terms and conditions. The Company currently does not intend to make any further public announcements regarding its Board of Directors’ review of possible strategic alternatives until this evaluation process has been completed.
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Oracle Earns 65 Cents Per Share
Eddy Elfenbein, March 20th, 2013 at 4:21 pmFor Q3, Oracle ($ORCL) earned 65 cents per share which was one penny below expectations. Revenue came in at $8.96 billion which was well below consensus of $9.38 billion.
Oracle Corporation today announced that fiscal 2013 Q3 total revenues were down 1% to $9.0 billion. New software licenses and cloud software subscriptions revenues were down 2% to $2.3 billion. Software license updates and product support revenues were up 7% to $4.3 billion. Hardware systems products revenues were $671 million. GAAP operating income was up 1% to $3.3 billion, and GAAP operating margin was 37%. Non-GAAP operating income was down 1% to $4.2 billion, and non-GAAP operating margin was 47%. GAAP net income was unchanged at $2.5 billion, while non-GAAP net income was down 1% to $3.1 billion. GAAP earnings per share were $0.52, up 6% compared to last year while non-GAAP earnings per share were up 5% to $0.65. GAAP operating cash flow on a trailing twelve-month basis was $13.7 billion.
Without the impact of the US dollar strengthening compared to foreign currencies, Oracle’s reported Q3 GAAP earnings per share would have been $0.01 higher at $0.53, up 8%, and Q3 non-GAAP earnings per share would have been approximately $0.01 higher. Total revenues also would have been 1% higher and new software licenses and cloud software subscription revenues would have been 2% higher than reported.
“Our non-GAAP operating margin increased to a Q3 record of 47%, and we expect it to reach an all-time high for the fiscal year,” said Oracle President and CFO, Safra Catz. “Both operating cash flow and free cash flow were at record levels for a Q3, with operating cash flow of $13.7 billion over the last twelve months.”
“The Oracle Cloud is the most robust and comprehensive cloud platform available with services at the infrastructure (IaaS), platform (PaaS) and application (SaaS) level,” said Oracle President, Mark Hurd. “In Q3, our SaaS revenue alone grew well over 100% as lots of new customers adopted our Sales, Service, Marketing and Human Capital Management applications in the Cloud.”
“This month we will begin deliveries of servers based on our new SPARC T5 microprocessor: the fastest microprocessor in the world,” said Oracle CEO, Larry Ellison. “The new T5 servers can have up to eight microprocessors while our new M5 system can be configured with up to thirty-two microprocessors. The M5 runs the Oracle database 10 times faster than the M9000 it replaces.”
Frankly, I was expecting a lot more. The shares are down 6.6% in the after-hours market.
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