Archive for April, 2014

• Morning News: April 28, 2014
  Eddy Elfenbein, April 28th, 2014 at 6:50 am

  Strong Euro is a Powerful Deflationary Factor: ECB’s Christian Noyer

  Russian Billions Scattered Abroad Show Trail to Putin Circle

  France Says Could Block Alstom Deal as President Meets GE’s CEO Jeff Immelt

  International Monetary Fund Raises China growth Outlook

  Oil Climbs on Worries Over Ukraine Crisis

  Fannie-Freddie Fate Hangs on Senate Action This Week: Mortgages

  Pfizer Offering $100 Billion for AstraZeneca

  Gibson Brands Announces Agreement to Acquire Philips’ Audio and Home Entertainment Business

  Sweden’s Meda Rejects Sweetened Bid From Mylan

  Panasonic Expects 16% Profit Rise This Full Year

  Holcim Reports Lower Sales and Profits on Currency Movements

  Charter Reaches Deal With Comcast for Subscribers

  Toyota Restructures U.S. Marketing Arm; Voluntary Exits Offered

  Joshua Brown: “the most important thing going on in global markets”

  Jeff Miller: Weighing the Week Ahead: Time to Sell in May?

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• FT: 2,500 Years of Financial Crises
  Eddy Elfenbein, April 25th, 2014 at 9:35 am

• Moog Earned 82 Cents per Share
  Eddy Elfenbein, April 25th, 2014 at 8:04 am

  Moog ($MOG-A) just reported earnings of 82 cents per share which matched estimates.

  Moog Inc. today announced second quarter net earnings of $38 million and earnings per share of $.82, a 3% increase over last year. Total sales of $650 million were up 1% from a year ago.

  Total Aircraft Controls sales in the quarter were $275 million, up 6%. The Company’s commercial OEM sales were $99 million, 17% higher, including $58 million in sales to Boeing and $17 million in Airbus sales. Commercial aftermarket sales of $35 million were up 19% on initial provisioning spares for the 787 program.

  Military aircraft sales were down 3% to $141 million. F-35 Joint Strike Fighter production revenues were higher but offset by lower revenues for other fighter and helicopter programs including Light Combat Aircraft, Black Hawk and the V-22 tilt rotor aircraft. Military aftermarket sales were down 4% to $59 million.

  Space and Defense segment sales, at $95 million, were 10% lower than a year ago. Products sold for satellite and launch vehicles were $52 million, down 16%. Defense sector sales for ground vehicles were lower but were offset by stronger sales of security products, which increased 10%.

  The Company’s Industrial Systems segment had sales of $151 million, an increase of $7 million, or 5%. Sales of controls for industrial automation applications were $9 million higher, at $80 million. Sales of energy controls totaled $39 million and included a $3 million increase in sales of wind energy pitch controls. Simulation and test products, including motion bases for flight training simulators, were down $4 million as major simulation customers adjusted their inventories.

  Sales for the Components Group of $101 million were $2 million higher than last year’s second quarter. Sales of industrial products were stronger due to the Aspen Motion Control acquisition completed a year ago. Aerospace and defense sales were down 11% while medical and energy sales were unchanged.

  The Medical Devices segment had sales of $27 million, down $8 million year over year, the result of the June 2013 Ethox Buffalo sale as well as recent inventory adjustments for pumps and sets at a distribution partner.

  The Company’s twelve month backlog is $1.4 billion.

  The Company also updated its projections for 2014 to include sales for the year at $2.64 billion, net earnings of $169 million and earnings per share of $3.65.

  “This was a good news quarter with earnings coming in ahead of plan and healthy cash flow,” said John Scannell, Chairman and CEO. “We are anticipating margins will improve in the second half on slightly higher sales and an improving mix.”

• Ford Earns 24 Cents per Share
  Eddy Elfenbein, April 25th, 2014 at 7:49 am

  Ford just reported Q1 earnings of 24 cents per share.

  Ford Motor Co.’s worldwide sales rose in the first quarter, propelled by growing strength in Asia and Europe. But weakness in North America dragged down the company’s profit.

  Its earnings missed Wall Street’s expectations, while revenue beat. Its shares fell 3 percent in premarket trading.

  Ford’s first-quarter net income fell 39 percent to $989 million, or 24 cents per share, down from $1.64 billion, or 41 cents per share, in the January-March period a year ago.

  That was far short of Wall Street’s expectations. Analysts polled by FactSet forecast earnings of 31 cents per share.

  Revenue rose slightly to $35.9 billion, beating analysts’ expectations for $34.2 billion. Worldwide sales were up 6 percent to nearly 1.6 million.

  Ford’s U.S. sales fell 3 percent to 580,260 in the January-March period, the victim of bad weather and low buyer interest in smaller, fuel efficient cars like the Focus and C-Max hybrid. While the F-Series pickup continued to see gains, sales of other key vehicles like the Fusion sedan and Escape SUV were down.

  In China, first-quarter sales soared 45 percent to 271,321 vehicles, while European sales were up 11 percent to 326,000.

  Ford’s North American operations were hit with $100 million in weather-related charges during the brutal winter, including increased costs for parts shipments. The company also set aside $400 million for its warranty reserves for the repair of prior models.

  North American pretax profit fell 37 percent to $1.5 billion.

• CWS Market Review – April 25, 2014
  Eddy Elfenbein, April 25th, 2014 at 7:10 am

  “Forecasts may tell you a great deal about the forecaster;
  they tell you nothing about the future.” – Warren Buffett

  We’re now in the heart of first-quarter earnings season. For the overall market, the earnings reports have been pretty good, but we have to remember that companies are beating much-reduced expectations.

  Analysts currently project Q1 earnings growth of 0.7% and sales growth of 2.6%. Only a month ago, the consensus was for earnings growth of 1.9% and sales growth of 3%. So far, 40% of companies in the S&P 500 have reported earnings, and an impressive 76% of them have topped earnings expectations, while 53% have beaten sales expectations. That’s not bad, especially considering how much havoc was wreaked in Q1 by the ugly winter weather.

  

  The good news is that the outlook on Wall Street is clearly improving. Thanks to brighter earnings news, the stock market has recovered from its slump earlier this month. The recent six-day rally was the longest since September. On Thursday, the S&P 500 got within 0.7% of its all-time high, and Wall Street really took notice when Apple, the most valuable company in the world, announced strong earnings and an unusual 7-for-1 stock split. (I think they’re bucking to get in the Dow Jones.)

  In this week’s CWS Market Review, I’ll review the recent earnings reports from our Buy List stocks. Microsoft, Qualcomm and CR Bard beat expectations, but Stryker and McDonald’s came in below forecasts. I’ll discuss them in greater detail in a bit, and I have some new Buy Below prices for you. I’ll also highlight more Buy List earnings reports coming our way next week, which include favorites like AFLAC and eBay. But first, let’s take a look at some recent economic news. (Trust me, it’s good.)

  The U.S. Economy Is Slowly Improving

  The Federal Reserve meets again next week, and another taper decision is about as close as you can get to being a sure thing. While some traders may not like the idea of less bond-buying by the Fed, these taperings are a reflection of good economic news.

  Next Friday is a very big day. The Labor Department will release the April jobs report, and there’s a very good chance it will be a strong one. I think the April nonfarm payrolls will top 250,000 jobs which would make it one of best jobs reports in years.

  Why am I so confident? Let’s run down some of the good economic news:

  On Thursday, the Labor Department reported that initial jobless claims rose to 329,000 last week. Despite the rise, those numbers have been very low recently. The four-week moving average of new claims is down to 316,750, which is near the lowest levels of the past seven years. The jobs market is clearly picking up, and that means more consumers.

  Also on Thursday, the Commerce Department reported that orders for durable goods rose by 2.6% in March, and that comes after a 2.1% increase in February. Economists like to look at the demand for “core” capital goods, and that was up 2.2% last month. That was the biggest increase since November, and it’s more evidence that the economy is ramping up from the slow start at the beginning of the year. Excluding transportation, durable-goods orders rose by 2%. That’s the biggest increase in more than a year. This is important because these are “big ticket” items.

  Here’s an interesting economic indicator. Property tax collections are rising at their fastest clip in years. The real-estate bust hit a lot of local governments hard, but during the last three months of 2013, property taxes collected nationally rose to $182.8 billion, an all-time high. For all of 2013, property-tax collections increased by 3%, which was the fastest pace since 2009.

  On Wednesday, we learned that new-home sales plunged 14.5% last month. That probably reflects some lingering effects from the cold winter, but there are many positives impacting the housing market. The number of delinquent loans continues to decline. Also, there are fewer homes with negative equity, and distressed sales are down. These signs are important because housing often has a big impact on the direction of the economy.

  Since the recession, companies have done a good job of cutting costs. That’s good, and profit margins have grown, but you can’t do that forever. At some point, you need to get more shoppers in the doors. Companies have been stockpiling cash, and only now are they beginning to spend it. This week, we learned that Apple reduced its gigantic cash horde. I think 2014 will likely be the best year for economic growth since the recession. The IMF recently said in a report that the U.S. economy is poised to lead global growth this year and next. Now let’s look at some our recent Buy List earnings.

  McDonald’s Disappoints, but It’s a Work in Progress

  Before the opening bell on Tuesday, we got a disappointing earnings report from McDonald’s ($MCD). The fast-food joint earned $1.21 per share for Q1, which was three cents below estimates. Despite the miss, the stock was mostly unchanged. Perhaps that reflects that market’s sour mood for MCD.

  Frankly, McDonald’s is in a difficult position at the moment. The restaurant has made several missteps lately, and we can see that in this earnings report. Sales rose 1.4%, but not as fast as costs, which rose 2.3% (this was due to higher beef prices). Profits dropped 5.2%.

  The situation at McDonald’s is very similar to that at IBM. They’re both iconic brands who have slipped in recent years. The fundamental business is good, but they desperately need to revive themselves. This is what Ford did several years ago, and Microsoft did more recently.

  My take: The outlook for McDonald’s is brighter than at IBM because management realizes the task at hand. The issues at MCD can be resolved, and I think it can be done rather cheaply. Their business in Europe isn’t that bad; it’s in the U.S. that the problems are. Their menu is far too complicated. This will take time to fix. McDonald’s is a good buy up to $102 per share.

  CR Bard Beats by Seven Cents per Share

  After the closing bell on Tuesday, CR Bard ($BCR) reported Q1 earnings of $1.91 per share. That beat estimates by seven cents per share. Previously, Bard had told us to expect earnings between $1.83 and $1.87 per share, so this is an impressive beat. Sales rose 8% to $799.3 million.

  Timothy M. Ring, Bard’s CEO, said, “The financial results in the first quarter reflect a positive start to the year, as we exceeded our expectations for both sales and earnings per share. The organization is focused on executing our strategic investment plan with the objective of improving the long-term growth profile of the business.”

  On the conference call, Bard said to expect Q2 earnings to range between $1.98 and $2.02 per share. I think they’re low-balling us. That’s well below the Street’s consensus of $2.09 per share. On the plus side, Bard reiterated their full-year guidance of $8.20 to $8.30 per share.

  The shares got dinged for a 3.2% loss on Wednesday. Despite the lower guidance, I still like this stock. Bard has increased its dividend every year since 1972, and we can expect another increase in a few months. Due to the recent drop, I’m lowering my Buy Below on CR Bard to $145 per share.

  Qualcomm Beat and Raised Guidance

  Qualcomm ($QCOM) came through for us. On Wednesday, the chip maker said they earned $1.31 per share for their fiscal Q2, which was nine cents better than Wall Street’s consensus. Previously, the company had pegged Q1 earnings to a range of $1.15 to $1.25 per share, so they’re beating their own expectations. Qualcomm also raised their full-year guidance range to $5.05 to $5.25 per share. That’s an increase of five cents at both ends.

  Despite the good earnings, the revenue numbers were pretty weak. QCOM posted its smallest top line increase since 2010. Revenues rose 4% to $6.37 billion, which was $100 million below forecasts. What’s happening is that China Mobile is planning to launch a faster network with 4G, so that’s delaying QCOM’s revenue at the moment.

  Qualcomm also disclosed that it received a Wells notice from the SEC, which is not a formal investigation. The notice recommends that Qualcomm take enforcement action in relation to bribery charges. For its part, Qualcomm maintains that it what it did wasn’t a violation. No matter, the shares dropped 3.5% on Thursday. Don’t be scared, Qualcomm remains a very good buy, but I’m lowering my Buy Below to $83 per share.

  Stryker Missed but Stood by Their Full-Year Guidance

  On Wednesday afternoon, Stryker ($SYK) delivered a rare earnings miss. For Q1, the medical-device company earned $1.06 per share, which was two cents below estimates. Quarterly revenue rose 5.3% to $2.31 billion.

  More importantly, Stryker reiterated their full-year earnings guidance of $4.75 to $4.90 per share, which means it’s going for about 16 times this year’s earnings. That’s not a bad valuation. The stock initially gapped up on Thursday morning. At one point, SYK hit $80.78 per share, but the stock later pulled back and finished the day down by 0.5%. I like Stryker a lot, but I’m lowering my Buy Below to $85 per share.

  Remember, these Buy Below prices aren’t price targets. They’re guidance for current entry.

  Microsoft Beats by Five Cents per Share

  On Thursday, Microsoft ($MSFT) reported fiscal-Q3 earnings of 63 cents per share, which beat estimates by five cents. The software giant did surprisingly well in the cloud space. Microsoft’s CEO Satya Nadella said the earnings “demonstrate the strength of our business, as well as the opportunities we see in a mobile-first, cloud-first world.”

  The turnaround at Microsoft still has a ways to go, but they’re headed in the right direction. It’s odd for me to see Nadella get so much good press when Ballmer only got negative press.

  Today is an important milestone for Microsoft; they’ll complete their $7.2 billion acquisition of Nokia’s handset business. That should help Microsoft in the U.S. mobile market. On Thursday, the shares traded higher in the after-hours market, and the stock is close to hitting another 52-week high. For now, I’m keeping my Buy Below at $43 per share. Microsoft is clearly hitting its stride.

  I’m writing this report early Friday, and both Ford ($F) and Moog ($MOG-A) are due to report earnings later today. Be sure to check the blog for updates.

  Four Earnings Reports for Next Week

  Next week, we have four earnings report due on Tuesday, April 29: AFLAC, eBay, Express Scripts and Fiserv.

  AFLAC ($AFL) had a very good year business-wise in 2013. Unfortunately, the weak yen took a big bite out of their operating earnings. The good news is that the yen has largely stabilized in recent months between 100 and 105 to the dollar.

  AFLAC said that if the yen were to stay at 97.54 to the dollar (its average for last year), then its earnings should range between $6.31 and $6.49 per share for 2014. So the stock is going for less than 10 times this year’s estimate. Currently, Wall Street expects Q1 operating earnings of $1.58 per share, which is 11 cents less than what they earned in last year’s Q1. AFLAC remains a good buy up to $68 per share.

  eBay ($EBAY) finally ended its silly feud with Carl Icahn. The investing legend wanted them to eBay off PayPal, which they’re adamantly opposed to. The good thing about eBay is that the poor winter weather had little impact on their business. In fact, it probably helped them. The current earnings consensus is for 67 cents per share. That’s almost certainly too low. eBay remains a very good buy up to $62 per share.

  Express Scripts ($ESRX) started out the year great for us, but it’s pulled back over the last few weeks. The stock probably got lumped in during the growth-stock rotation. Nevertheless, their business outlook remains very good. For all of 2014, the pharmacy-benefits manager sees earnings ranging between $4.88 and $5 per share. Express Scripts said it is “targeting annual earnings per share growth of 10 per cent to 20 per cent for the next several years.” Not many companies can confidently say that. For Q1, Wall Street expects earnings of $1.01 per share. I’m keeping my Buy Below on ESRX at $83, which is a bit high.

  Fiserv ($FISV) is one of those rare stocks that churns out earnings consistently. Last year was their 28th year in a row of double-digit adjusted earnings growth. For 2014, Fiserv sees EPS ranging between $3.28 and $3.37. Wall Street expects Q1 earnings of 74 cents per share. Fiserv is a good buy up to $60 per share.

  That’s all for now. Next week will be a busy one. Not only do we have more earnings reports, but the Federal Reserve meets on Tuesday and Wednesday. Expect another taper. Also on Wednesday, we’ll get our first look at Q1 GDP. My take: it won’t be a good number, but Q2 will be much better. The April ISM comes out on Thursday, and on Friday, we’ll get the big jobs report. I think this report could be a really good one. 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: April 25, 2014
  Eddy Elfenbein, April 25th, 2014 at 6:58 am

  Iran to Increase Gasoline Prices, Testing Patience of Public Awaiting Economic Recovery

  R.B.S. to Drop Bonus Plan After British Agency Balks

  Low Treasury Yields Frustrate Bond Bears

  Ford Profit Falls 39%

  GM Earns $125 Million in 1Q, Down 85.5%

  Honda Forecast Trails Estimate as Benefits From Yen Fade

  Microsoft Earnings Beat Street Expectations

  Amazon’s Revenue Grew 23 Percent in First Quarter, Nearing $20 Billion

  Nokia Says Handset Business Sale to Microsoft Completed

  Qualcomm Reports Higher Revenue, Income in Latest Quarter

  Electrolux: European Demand Rebounds in First Quarter

  Starbucks UK Sales Fall After 16 Years of Growth

  Piketty: ‘Capital Is A Multi-Dimensional Concept’

  Jeff Carter: Do You Get Apple Pie When Apple Splits Its Stock?

  Roger Nusbaum: Einhorn Has It Wrong

  Be sure to follow me on Twitter.

• Wall Street’s Oligarchy
  Eddy Elfenbein, April 24th, 2014 at 12:37 pm

  An important aspect of the stock market that’s not often discussed is how much of Wall Street is an oligarchy. By that, I don’t mean economic inequality.

  Rather, I mean that with investing, Wall Street is comprised of a small number of stocks that are very, very large, and several thousand stocks that are tiny.

  Here are some rough numbers: The market cap of the S&P 100 makes up about 62% of the market cap of the S&P 500. So one-fifth of the number of stocks is worth more than three-fifths of the entire index. The smaller four-fifths comprise the remaining two-fifths.

  The S&P 500 makes up about 77% of the entire value of the Wilshire 5000. Despite its names, that index has 3,663 stocks. From that, we can say that the S&P 100 is about half of the Wilshire 5000. The remaining 3,563 make up the other half.

  Note that these numbers aren’t precise, but many companies own shares in others (think Berkshire Hathaway). Despite this, I think these are reasonable estimates of the effect large stocks have.

  The truth is that if you choose wisely, you can mimic the entire market with a surprising degree of accuracy by using only a few stocks.

• Apple to Split 7-for-1
  Eddy Elfenbein, April 24th, 2014 at 10:54 am

  Yesterday, Apple (AAPL) announced that it will split its shares 7-for-1. This means that investors will own seven times their current number of shares, and the share price will fall to one-seventh its current level.

  Obviously, a stock split doesn’t add any value so why do companies do them? You’ll often hear that a stock split adds liquidity to the stock, but a company like Apple trades so much that it’s hard to see how that matters.

  It also seems to be a sign that a growing company is one that splits its shares regularly. I can see why a company would split 3-for-1 every decade or so, but I don’t get the small increases. JetBlue (JBLU) split its stock 3-for-2 three times within three years even though the stock hadn’t done much. Beats me. I guess it sounds like something good to announce.

  For some reason, retail investors seem to have a strong aversion to higher-priced stocks. Anything above $100 per share scares them. Of course, one stock can be a bargain at $200 while another can be vastly overpriced at $7.

  In Apple’s case, they could be playing to get into the Dow Jones 30. Since the Dow is a price-weighted index, a $560 share price would have an outsized influence on the index. But an $80 value could be more reasonable in the eyes of the index keepers. Right now, Travelers (TRV) is the smallest company in the Dow. In fact, if its market cap were to double, it would still be the smallest company in the Dow. Apple is worth more than 15 times Travelers, so I think TRV is a top candidate to get the boot.

• S&P 500 Rises on Durable Goods
  Eddy Elfenbein, April 24th, 2014 at 10:39 am

  The stock market is up again today after yesterday’s sell-off snapped our six-day winning streak. More economic news.

  Orders for durable goods rose 2.6% last month. That comes after a 2.1% rise in February.

  The strength in March was widespread, led by a 4 percent increase in demand for transportation goods. Orders for commercial aircraft advanced 8.6 percent while demand for motor vehicles and parts rose a more modest 0.4 percent.

  Excluding transportation, orders rose a solid 2 percent, the best showing in this category in more than a year.

  Orders for primary metals such as steel rose 2 percent while demand for heavy machinery, computers and communications equipment all showed increases.

  This morning, the Labor Department said that initial unemployment claims rose to 329,000 last week. The last two reports were exceptionally strong although last week’s report was revised slightly higher. These have been encouraging numbers and it could portend a very positive jobs report next week.

• Morning News: April 24, 2014
  Eddy Elfenbein, April 24th, 2014 at 6:50 am

  Draghi Just Can’t Knock a Good Euro

  Euro-Zone Data Point to Recovery Even Amid Ukraine Crisis

  Spain Auctions Debt at Record Lows as Growth Accelerates

  ’Fast Money’ Recap: Getting to the Core of Apple

  Facebook Leaves Mobile Concerns in Dust With Sales Surge

  Alstom Shares Soar on GE Takeover Speculation

  Nokia Says India Plant Unlikely to Be Part of Microsoft Deal

  Strict Cost-Cutters Who Want to Spend $45 Billion on a Takeover

  Seeking to Grow, Chobani Secures $750 Million Loan

  Zimmer to Buy Biomet for $13.35 Billion

  UPS Profit Slides on Harsh Winter

  Goodbye Net Neutrality; Hello Net Discrimination

  Competition for McDonald’s, and for Ronald

  Cullen Roche: Why Do Americans Think Housing is Such a Good Investment?

  Howard Lindzon: David Einhorn is Short a ‘Basket of Bubble Stocks’ That 73 Percent of Americans Do Not Own!

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