Archive for May, 2014

  • Very Bad Day for Dick’s Sporting Goods
    , May 20th, 2014 at 3:33 pm

    One of our Watch List stocks, Dick’s Sporting Goods ($DKS), is getting destroyed today. It’s down 18%. Youch!

    Dick’s earned 50 cents per share for Q1, two cents less than estimates. I guess people don’t like to golf in the cold.

    But the news gets worse. For Q2, they see earnings of 62 to 67 cents per share while consensus was at 82 cents. For the entire year, Dick’s sees earnings of $2.70 to $2.85 per share compared with consensus of $3.08 per share. That’s just ugly.

    I don’t have much to say on DKS’ valuation right now, but I’m disappointed to see this news. Until now, Dick’s had delivered fairly consistent earnings growth, which is a trait I very much like to see. If you use $2.81 per share as an estimate for this year, that works out to a forward P/E of 15.5.

    big.chart05202014

  • The Battle Over the Small-Cap Premium
    , May 20th, 2014 at 10:45 am

    Here’s an important but subtle point about the current market — the stock market has become increasingly divided along the lines of market cap. Each day’s market has the small-cap sector either leading or lagging the rest of the market by a considerable margin.

    There’s usually a gap between big- and small-caps, but not like what we’re seeing now. I want to be clear that I’m not saying that small-cap volatility is increasing; rather, the volatility of the small-cap premium has increased. That’s an important distinction.

    Here’s a chart showing the daily changes in the RUT/SPX Ratio. That’s the Russell 2000 divided by the S&P 500.

    image1405

    In any given market, there’s usually a fault — the sector or style that the market is battling over. Sometimes it’s risk, other times it’s cyclicals. Now it appears to be over cap size.

  • Medtronic Earns $1.12 per Share
    , May 20th, 2014 at 9:38 am

    This morning, Medtronic ($MDT) reported fiscal Q4 earnings of $1.12 per share which matched expectations, but I was expecting a little more. Revenue rose 2.4% to $4.57 billion. Overall, this isn’t bad.

    “In our fourth quarter, our overall organization once again delivered balanced growth, with strong performances in some areas more than offsetting challenges in other parts of our business,” said Omar Ishrak, Medtronic chairman and chief executive officer. “We remain focused on delivering consistent and dependable growth across all of our businesses through our three growth vectors: new therapies, emerging markets, and independent services and solutions.”

    Some good news is that the company finally settled its dispute with Edwards Lifesciences ($EW) over their CoreValve heart valve. Medtronic has agreed to pay EW $750 million plus royalty payments over the next eight years. As part of the settlement, both companies have agreed to stop suing the pants off each other. It’s time to move on.

    Now for guidance. For this fiscal year, Medtronic sees earnings ranging between $4 and $4.10 per share. The Street had been expecting $4.09 per share. They expect revenue growth of 3% to 5% on a constant currency basis. The stock is down a bit in pre-market trading, but this was a perfectly fine earnings report.

    Next month, I expect another dividend increase. I think they’ll raise their quarterly dividend from 28 cents to about 30 cents per share.

  • Morning News: May 20, 2014
    , May 20th, 2014 at 6:46 am

    EU Commission Charges HSBC, JPMorgan, Credit Agricole With Rigging

    Petrol Powers Jump in UK Inflation Rate to 1.8%

    China Confronts U.S. Envoy Over Cyber-Spying Accusations

    Obama to Discuss U.S. Investment with Corporate Executives

    Wheat Climbs Most in 2 Weeks as U.S. Conditions Decline

    Credit Suisse Fined $2.5 Billion After Pleading Guilty to U.S. Tax Charge

    Deutsche Bank Is Asking a Lot of People for Money

    Home Depot First-Quarter Sales Trail Estimates as Housing Cools

    Vodafone Sees 2015 Earnings Hit by Network Investment

    GoPro Going Public with $100 Million IPO Filing

    Facebook Strikes US $500 Million Advertising Deal With Publicis

    Pfizer’s Miss on AstraZeneca May Put Breakup Back in Play

    AT&T-DirecTV Deal Churns Regulatory Waters

    Cullen Roche: Green is the New Gold

    Howard Lindzon: State of The Stock Market – A Lot is Going Right…and The Right People Do Not Care

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  • Five Ways to Raise ROE
    , May 20th, 2014 at 12:28 am

    According to Warren Buffett, there are only five ways to increase a company’s ROE.

    1. Increase asset turnover (ratio between sales and assets).
    2. Widen operating margins.
    3. Pay lower taxes.
    4. Increase leverage.
    5. Use cheaper leverage.

    That’s from The Warren Buffett Way.

  • Long-Term Dividend Champs
    , May 19th, 2014 at 11:22 pm

    Dividend Growth Stocks lists 12 stocks that have increased their dividends for more than 50 years in a row.

    The 12 stocks are:

    Colgate-Palmolive ($CL), 51 years

    Johnson & Johnson ($JNJ), 52 years

    Coke ($KO), 52 years

    Cincinnati Financial ($CINF), 54 years

    Vectren ($VVC), 55 years

    Procter & Gamble ($PG), 56 years

    3M ($MMM), 56 years

    Emerson Electric ($EMR), 58 years

    Genuine Parts ($GPC), 58 years

    Northwest Natural Gas ($NWN), 59 years

    Diebold ($DBD), 60 years

    American States Water ($AWR), 61 years

    Of course, this isn’t proof of future success, but it’s darn impressive.

  • DirecTV is Down Today
    , May 19th, 2014 at 11:20 am

    In last night’s Flash Alert, I said to expect DirecTV ($DTV) to gap up close to $95 per share, which is AT&T’s price. Instead, DTV is lower this morning, and currently around $84.50 per share.

    What’s going on? It appears that the market sees the odds for this deal closing on time as far from a sure thing. Bear in mind that both boards approved the deal unanimously. Shares of AT&T are currently off 0.8% which still places it well within the deal’s “collar.”

    As usual, there are regulatory concerns and there are worries about DirecTV’s deal with the NFL for the Sunday Ticket. That shouldn’t be a problem. It’s a very lucrative contract for both sides. AT&T would be allowed to pull out of the deal if DTV and the NFL can’t reach a deal.

  • How Will the Fed Raise Rates?
    , May 19th, 2014 at 11:01 am

    Jon Hilsenrath has an interesting piece in today’s WSJ on what will happen when the Fed decides to raise interest rates. Traditionally, the Fed has adjusted their target for the Fed Funds rate, but as Richard Fisher, the top dog at the Dallas Fed recently said, “It is my opinion that the fed funds rate is not the right tool going forward.”

    The Fed now pays interest on the reserves kept at the Fed, so that could be the new all-important rate. The hitch is that there’s now a lot of money in short-term money market funds that are outside the banking system. Here’s Hilsenrath:

    To address that problem, the Fed is experimenting with another lever. It is conducting trades—called overnight reverse repurchase agreements—directly with nearly 100 money-market funds and other financial institutions. Through reverse repos the Fed pays interest to these nonbank entities.

    In theory, the reverse repo rate and interest rate paid to banks on reserves could become the Fed’s new benchmark interest rates. Ms. Yellen in congressional testimony this month said both rates were part of the Fed’s tool kit.

    She and others say they are confident that the Fed can tighten credit conditions when needed. But unresolved issues abound.
    One worry: As Fed officials move toward a new system, trading in the fed funds market could dry up and make the fed funds rate unstable. That could unsettle $12 trillion worth of derivatives contracts called interest rate swaps that are linked to the fed funds rate, posing problems for people and institutions using these instruments to hedge or trade.

    Another worry: If they make overnight reverse repo trades more appealing than bank reserves, they could drive activity in short-term lending markets away from banks and toward unregulated money funds.

    Cullen Roche doesn’t think this will be a problem. I think QE will be all wrapped up by January 1, and we’ll have another six months after that until interest rates rise.

    Market veterans like to laugh at the phrase “this time it’s different,” but truthfully, each time really is different.

  • Morning News: May 19, 2014
    , May 19th, 2014 at 6:36 am

    Thailand’s Unrest Wreaks Greater Damage Than Forecast

    Vietnam Bulls Unfazed by Riots as Foreigners See Bargains

    Deutsche Bank Gains Qatar as Shareholder in $11 Billion Sale

    Wall of Worry Rebuilt as Nasdaq Rout Sends Cash to High

    AT&T Makes Bet on Video With $48.5 Billion DirecTV Bid

    AstraZeneca Rejects New Pfizer Bid

    Johnson Controls to Spin Off Auto-Interiors Business

    Ryanair Profits Drop For the First Time in Five Years

    High-End Coffee Is About To Get More Expensive As A Fungus Decimates Latin America Crops

    Vodafone Buys South African Telecom Stake from India’s Tata

    Yahoo Japan Drops $3.2 Billion Plan to Buy eAccess From SoftBank

    What Thomas Piketty Doesn’t Say

    The Hero and the Wall St. Puppet

    Jeff Miller: Weighing the Week Ahead: What Does the Bond Rally Mean for Stocks?

    The Epicurean Dealmaker: Short Cuts

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  • CWS Market Review: Flash Alert – May 18, 2014
    , May 18th, 2014 at 8:47 pm

    AT&T Buys DirecTV for $95 per Share

    Great news! AT&T ($T) just announced that it’s buying DirecTV ($DTV) for $95 per share. The news broke Sunday afternoon and I wanted to send you this Flash Alert to let you know the good news.

    Here are the details from the press release.

    DIRECTV shareholders will receive $95.00 per share under the terms of the merger, comprised of $28.50 per share in cash and $66.50 per share in AT&T stock. The stock portion will be subject to a collar such that DIRECTV shareholders will receive 1.905 AT&T shares if AT&T stock price is below $34.90 at closing and 1.724 AT&T shares if AT&T stock price is above $38.58 at closing. If AT&T stock price at closing is between $34.90 and $38.58, DIRECTV shareholders will receive a number of shares between 1.724 and 1.905, equal to $66.50 in value.

    AT&T closed Friday at $36.74 per share. On Twitter, I guessed that the deal would be two shares of AT&T plus $20 in cash for each share of DTV, so I was pretty close.

    The collar is a smart move and I’m assuming it came from DTV. To make it easy for you, it’s plus or minus 5% from AT&T’s closing price on Friday. The problem with any deal transacted with stock is what happens if the acquiring company has its stock plunge. The acquired firm gets punished so some protection is a good idea. Still, I doubt the collar will go into effect.

    For track record purposes, the cash portion of the deal will be assumed to be used to buy AT&T stock at the same price the stock portion of the deal goes for. In other words, AT&T will replace DTV on the Buy List. We’ll still have 20 stocks on our Buy List.

    Here’s more from the press release

    This purchase price implies a total equity value of $48.5 billion and a total transaction value of $67.1 billion, including DIRECTV’s net debt. This transaction implies an adjusted enterprise value multiple of 7.7 times DIRECTV’s 2014 estimated EBITDA. Post-transaction, DIRECTV shareholders will own between 14.5% and 15.8% of AT&T shares on a fully-diluted basis based on the number of AT&T shares outstanding today.

    AT&T intends to finance the cash portion of the transaction through a combination of cash on hand, sale of non-core assets, committed financing facilities and opportunistic debt market transactions.

    To facilitate the regulatory approval process in Latin America, AT&T intends to divest its interest in América Móvil. This includes 73 million publicly listed L shares and all of its AA shares. AT&T’s designees to the América Móvil Board of Directors will tender their resignations immediately to avoid even the appearance of any conflict.

    Obviously, there are other issues ahead such as regulatory approval. Expect to see DTV gap up tomorrow, but not all the way to $95 per share. If you own DirecTV, there’s no reason to sell it now. I’m going to raise our Buy Below to $95 per share, but don’t expect to see any significant gains after tomorrow’s open. There’s no need to jump in and buy AT&T. I’ll have more to say about them once the deal is done.

    – Eddy