Archive for May, 2014

• Morning News: May 7, 2014
  Eddy Elfenbein, May 7th, 2014 at 6:36 am

  Repsol’s $1.26 Billion YPF Stake Sale Ends Argentine Entanglement

  SocGen Posts Surprise Profit Decline on Russia Writedown

  Treasuries Gain Amid Speculation Yellen Will Say Growth Gradual

  Yahoo’s Alibaba Windfall Means Firepower to Chase Google

  Japan’s SoftBank Says Won’t Sell Alibaba Shares in Listing

  Twitter Shares Plummet With Sell-Off

  Fiat Chrysler Reveals Plans to Grow Sales by 2018

  Park Your Tesla Shares Ahead of Earnings

  Jim Cramer: Here’s Why Apple Broke $600 A Share

  Walt Disney Co. Earnings Surge 27% on Strength of Film Studio

  HSBC Posts Fall in First-Quarter Profit

  Freeport-McMoRan Announces Agreement to Sell Eagle Ford Interests for $3.1 Billion

  Commerzbank Profit Misses Forecast as Battles to Turn Round

  Edward Harrison: Charts of the Day: Jobless Claims as a Real-Time Economic Indicator

  Jeff Carter: Innovation Does Create Jobs-Software Doesn’t Eat The World

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• Big Earnings Beat for DTV
  Eddy Elfenbein, May 6th, 2014 at 7:55 am

  DirecTV ($DTV) just reported Q1 earnings of $1.63 per share. That’s 15 cents per share better than expectations. Quarterly revenue rose 4% to $7.86 billion.

  “Our first quarter results continue to demonstrate the strong execution of our operations,” said Mike White, president and CEO of DIRECTV. “In the U.S., operating profit before depreciation and amortization margin expanded year-over-year for the third consecutive quarter, highlighting our commitment to profitably grow our businesses through significantly improving the customer service experience, disciplined expense management and productivity initiatives. In Latin America, despite challenging macroeconomic headwinds, we continue to profitably expand our share of the growing pay TV market while delivering adjusted OPBDA margin of 30%. In addition, by leveraging the achievements of both DIRECTV U.S. and DIRECTV Latin America with the strength and stability of our cash flow, we continue to return cash to shareholders through stock repurchases at an industry leading clip.”

• Morning News: May 6, 2014
  Eddy Elfenbein, May 6th, 2014 at 6:34 am

  French Services Activity Grows at Weaker Pace in April

  OECD Warns Government Against Harsh Budget

  GE Offer for Alstom Is Not Acceptable, Hollande Says

  UK’s Financial Research Group Markit Reveals Plans For US Float

  Feds Wrestle With ‘Too Big to Jail’

  UBS Profit Beats Forecasts as Unveils Restructuring

  Bayer to Pay $14.2 Billion for Merck’s Consumer Care Division

  Target’s Decision to Remove CEO Rattles Investors

  Tyson Profit Surges, But Hog Virus Mutes Guidance

  Google and Amazon Launch Same-Day Delivery in L.A. Area

  AIG Profit Falls 27%

  Coke Just Stopped Using A Chemical That’s Also A Flame Retardant — But That’s Not The Worst Thing That’s In Its Drinks

  Three Bankers Bolster Blankfein as Goldman Trading Sinks

  Howard Lindzon: The Pressure of This Boom….Revisited

  John Hempton: Just How Weak Are Bill Ackman’s Examples?

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• Sharp Turn Towards Energy Stocks
  Eddy Elfenbein, May 5th, 2014 at 5:20 pm

  For the first time in a long time, the energy sector has been popular. Since March 20, the Energy Sector ETF ($XLE) has been beating the S&P 500.

  

• Bonds Are Holding Up
  Eddy Elfenbein, May 5th, 2014 at 10:24 am

  The 10-year yield is down to a six-month low today. Here’s a look at the S&P 500 compared with the Long-Term Bond ETF ($TLT). After getting kicked around for a long time, bonds are in the lead this year. Interestingly, the yields for the 10-year and S&P 500 are pretty close.

  

• Stocks Are Down and TGT’s CEO Is Out
  Eddy Elfenbein, May 5th, 2014 at 10:08 am

  The stock market is down this morning. The S&P 500 is currently at 1,868 which is a pullback of about 0.7%.

  Interesting news out of Target ($TGT). CEO Gregg Steinhafel has resigned due to the data security breach issue. Even though the story broke five months ago, the fallout has continued.

  As a business, I like Target a lot and I think it could be a good buy. However, I’m not confident enough to say that it’s a flat-out buy. Earnings last year were terrible, especially for Q4. Just because a stock is down doesn’t mean it’s cheap; it’s only cheap relative to where it was.

  The current estimate for this year is $4.03 per share which would still be less than the profit from three years ago. Ideally, I’d like to see TGT trade a lot lower before I felt comfortable saying the price was favorable.

  Shares of Tyson Foods ($TSN) have been on fire this year, but the stock is down about 7% this morning after the country’s largest meat producer missed earnings by three cents per share. Earnings were actually very strong compared with one year ago (60 cents versus 36 cents). What’s interesting about TSN’s earnings report is that it topped sales estimates thanks to higher prices for beef and pork.

  From Bloomberg:

  The wholesale price of pork has jumped 35 percent this year after a piglet-killing virus curbed domestic supply. Beef is 14 higher percent as drought and high feed costs shrink the U.S. cattle herd.

  More than 5,000 cases of the virus have been reported with it spreading to at least 27 states, according to the National Animal Health Laboratory Network. U.S. production may drop the most in three decades this year, Rabobank International has estimated.

  Tyson said it sees full-year earnings of $2.78 per share, so the lower stock price is 14.3 times that.

• Morning News: May 5, 2014
  Eddy Elfenbein, May 5th, 2014 at 6:48 am

  EU Reduces Euro-Area Growth Forecast as Inflation Seen Slower

  Buoyed by Exports, Portugal Chooses Clean Exit From Bailout

  China Factory Activity Shrinks in April, New Export Orders Contract

  Cnooc Oil Rig Fuels Vietnam-China Tensions

  Indonesia’s Economy Stumbles in First Quarter

  U.S. Looks Into Wagers, Pro and Con, on Herbalife

  Ackman, Icahn Defend Activism as Munger Sees Harm to U.S.

  U.S. Firms With Irish Addresses Get Tax Breaks Derided as ‘Blarney’

  Nokia’s $100 Million Investment Suggests Its Next Focus May Be ‘Connecting Cars’

  Chevron’s Goal for Record Output Slips as Production Falters

  Dish or DirecTV Needs Deal Most in AT&T Love Triangle

  No Regrets for the Founder of Tumblr After Yahoo Sale

  Can’t Find Enough 30-Year Treasuries to Buy? Here’s Why

  Jeff Miller: Weighing the Week Ahead: Is the Ukraine Crisis a Market Crisis?

  The Epicurean Dealmaker: Ozymandias at the Art Gallery

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• The 10-Year Is Still Range Bound
  Eddy Elfenbein, May 2nd, 2014 at 10:17 am

  Yesterday, the 10-year Treasury ever so slightly stepped below its locked-in trading range of 2.6% to 2.8%. The yield has stayed within this tight range for more than three months. But thanks to today’s strong jobs report, the yield has jumped and we’re still in our range.

  

• April NFP +288,000
  Eddy Elfenbein, May 2nd, 2014 at 8:36 am

  The Labor Department just reported very strong job numbers for April. Nonfarm payrolls rose by 288,000. That’s the biggest gain since January 2012, and it was far more than expectations of 215,000. The unemployment rate fell to 6.3%.

  Private payrolls rose by 273,000 and we finally topped the pre-recession peak. The labor force dropped by 800,000 last month. The participation rate fell to 62.8% which is the lowest in 36 years.

  For the first time in 66 months, there’s less than 10 million unemployed. Nonfarm payrolls are now 113,000 below the peak from January 2008. If you were to take the jobs-to-population ratio from April 2000, then add 22.4 million people none of whom are working, you would have the jobs-to-pop ratio for April 2014.

  Here’s a look at the growth in NFP for the last 32 months along with its trend line.

  

• CWS Market Review – May 2, 2014
  Eddy Elfenbein, May 2nd, 2014 at 8:10 am

  “How poor are they that have not patience!” – Othello Act II, Scene 2

  What a busy week for us! First-quarter earnings reports are still coming in, the Federal Reserve announced another taper, plus we had several important economic reports like Q1 GDP and ISM. On top of that, news broke that AT&T is considering buying our favorite satellite-TV stock, DirecTV. I don’t know if any deal will come about, but shares of DTV jumped more than 4% yesterday to reach a new all-time high. I’ll have more on that in a bit.

  Overall, earnings season is going well. Of course, going into earnings season, a lot of companies skillfully lowered expectations just enough to exceed them. So far, 352 of the 500 companies in the S&P 500 have reported results. Of those, 75% have beaten earnings expectations, while 52% have beaten sales expectations.

  

  Before Thursday’s minor 0.01% drop in the S&P 500, the index rallied 10 times in 12 days. In fact, during the day on Thursday, the S&P 500 reached its highest level since April 4, which was the day the index hit its all-time intra-day high. At one point, we were less than 0.5% from reaching a new all-time high. On Wednesday, the Dow Jones 30 did close at an all-time high (thanks to $100+ stocks like Merck, Exxon, 3M and our own McDonald’s).

  In this week’s CWS Market Review, I’ll break down the latest goings-on for you. I’ll also preview next week’s Buy List earnings reports from DirecTV and Cognizant Technology. But first, let’s look at some recent economic news.

  Q1 Was Bad, but Q2 Should Be Better

  By now, the evidence is clear that the economy was lousy in Q1 thanks to the bitter winter weather. On Wednesday, the Commerce Department reported that real GDP rose by a grand total of 0.1% for the first three months of 2014. That’s pretty bad. The economy needs to grow, in real terms, around 2.5% just to absorb new folks entering the workforce. One of the positives in the report was that personal-consumption expenditures rose by 3%. Also, the big drag caused by austerity at the state and local level seems to have ended.

  We won’t know until the summer how well the economy did during Q2, but I suspect we’ll see some improvements. Some evidence for my optimism came on Thursday, when we learned that the ISM Manufacturing Index rose for the third-straight month. For April, the index climbed to 54.9. Any reading above 50 means that the manufacturing sector of the economy is expanding. The ISM dropped sharply in January, and we’ve made back most of what we lost.

  I’m writing this report early on Friday, ahead of the big April jobs report, which I think could be a big one (be sure to check the blog for updates). Economists expect an increase of 215,000 jobs. Earlier this week, ADP, the payroll firm, said that 220,000 private-sector jobs were created last month. I should warn you that the ADP report doesn’t have a great track record of predicting the government’s numbers. The recent initial jobless claims reports have been encouraging, although this past week’s report dropped off some. Slowly but surely, the economy and jobs market are getting better.

  It’s not just me saying that, but it’s the Federal Reserve as well. Here’s the opening sentence of the Fed’s latest policy statement: “Information received since the Federal Open Market Committee met in March indicates that growth in economic activity has picked up recently, after having slowed sharply during the winter, in part because of adverse weather conditions.” (Remember how the bears laughed at the weather excuse?)

  The Fed announced it will again taper its bond purchases. Starting in May, the Fed will buy $25 billion worth of Treasuries and $20 billion worth of mortgage-backed securities. Janet and her pals on the FOMC said, “The Committee will likely reduce the pace of asset purchases in further measured steps at future meetings.” At this rate, the Fed should be completely done with its Quantitative Easing by the end of the year. Interestingly, this week’s policy statement got a unanimous vote.

  On Thursday, the Commerce Department reported that consumer spending rose by 0.9% in March. That’s the biggest increase in nearly five years. Those numbers probably reflect the pent-up demand created by the frigid weather. Economists were expecting an increase of 0.6%. The evidence continues to suggest a slow- to moderate-paced recovery.

  Keeping in mind the issues surrounding Q1, let’s take a look at our recent earnings reports.

  Ford Misses by Seven Cents per Share

  I confidently predicted that Ford Motor (F) would easily beat its earnings estimates. Boy, was I wrong. The winter hit them harder than I expected. Last Friday, Ford said that it earned 24 cents per share for Q1, which was seven cents below Wall Street’s estimates.

  On the plus side, revenues came in at $35.9 billion, which was $1.7 billion more than expectations. Ford’s core business is truck sales in North America, and that was fairly sluggish, but Ford is seeing better numbers overseas. Sales in Europe were up 11%, and sales in China jumped 45%.

  I was pleased to hear the automaker stick by its full-year profit forecast of $7 billion to $8 billion. On Thursday, Ford said that sales in April fell by 1%, but their truck sales were up by 7%. The company also made official what everyone expected: COO Mark Fields will take over as CEO in July when Alan Mulally departs. We should give credit to Mulally. He did a great job at Ford. I’m keeping my Buy Below on Ford at $18 per share.

  Moog Is a Buy up to $69 per Share

  Moog (MOG-A) was our problem child last earnings season, so I was pleased to see better news this time. Last Friday, Moog reported earnings of 82 cents per share, which matched expectations. In January, the maker of flight-control systems beat earnings by a penny per share but lowered their full-year guidance to $3.65 per share (their fiscal year ends in September). The previous range was $3.95 to $4.10 per share.

  The good news is that Moog still stands by its $3.65 target for this fiscal year. The CEO said, “This was a good-news quarter, with earnings coming in ahead of plan and healthy cash flow.” I like these results. I’m raising my Buy Below on Moog to $69 per share.

  Four Buy List Earnings: AFL, EBAY, ESRX and FISV

  On Tuesday, we had four Buy List earnings reports. Here are summaries of each one.

  With AFLAC (AFL), it’s the same story that by now we know well. The supplemental-insurance company is doing very well businesswise, but the weak yen continues to gobble up their profits. For Q1, AFLAC had operating earnings of $1.69 per share, and that’s after the unfavorable exchange rate knocked off ten cents per share (which isn’t as bad as the results from some recent quarters). Excluding currency problems, operating earnings were up 5.9% from a year ago.

  What I really wanted to see was AFLAC’s guidance. For Q2, AFLAC sees earnings ranging between $1.54 and $1.68 per share. That’s pretty good. Wall Street had been expecting $1.58. The downside is that AFLAC lowered their full-year guidance. The original range was $6.31 to $6.49 per share. Now it’s $6.06 to $6.40 per share. Those estimates are based on a yen/dollar exchange rate between 100 and 105. The stock got a nice boost when the earnings report came out. I’m keeping our Buy Below at $68 per share. AFLAC is going for about 10 times this year’s estimate. Keep in mind Iago’s words from this week’s epigraph.

  Shares of eBay (EBAY) got hit hard this week, even though the online marketplace beat estimates. In last week’s CWS Market Review, I said that Wall Street’s consensus of 67 cents per share was almost certainly too low, and I was right. eBay reported Q1 adjusted earnings of 70 cents per share, which topped the Street by three cents per share. Officially, eBay lost $2.3 billion last quarter, going by net earnings, but that’s because they took a massive tax charge in order to repatriate $9 billion in foreign earnings. A lot of tech companies have been warehousing mountains of cash overseas because they don’t want to generate a fat tax bill, so it was a bit of a shock that eBay went through with it. Maybe others will follow.

  For Q2, eBay sees earnings of 67 to 69 cents per share, which was a tad below the Street’s consensus of 70 cents per share. Importantly, eBay reiterated their full-year guidance of $2.95 to $3.00 per share. Wall Street’s consensus was at $2.99 per share. Sales for Q1 rose 14% to $4.26 billion. These numbers are pretty much what I expected, but I think traders wanted something to get excited about. Who knows, but the stock dropped 5% on Wednesday, and I really can’t see why. I’m lowering my Buy Below on eBay to $58 to reflect the downturn, but I think the stock continues to be a very good buy.

  I found the earnings report at Express Scripts (ESRX) more troubling than the one at eBay. The pharmacy-benefit manager reported Q1 earnings of 99 cents per share, which was two cents below expectations. Express Scripts also lowered their full-year guidance by six cents per share at each end. The new range is $4.82 to $4.94 per share, but that still adds up to year-over-year growth of 17% to 20%. The company said it will lay off 1,890 workers nationwide. As if that weren’t enough, the company also said that it received subpoenas related to its relationships with drug makers. Traders did not like the bad news. ESRX got dinged for a 6.2% loss on Tuesday. I’m lowering my Buy Below to $71 per share.

  Fiserv (FISV) may be the big star of this earnings season. For Q1, they made 82 cents per share, which easily beat Wall Street’s estimates of 74 cents per share. Earnings were up 22% from a year ago, while quarterly revenue rose 7.1% to $1.23 billion (which also beat expectations). Fiserv reaffirmed full-year guidance of $3.28 to $3.37 per share, which represents growth of 10% to 13%. The stock jumped after the earnings news and continued to rally to a new 52-week high. I like this stock a lot. I’m raising our Buy Below on Fiserv to $64 per share.

  Earnings Next Week from DirecTV and Cognizant

  We have two Buy List earnings reports for next week. On Tuesday, May 6, DirecTV will report Q1 earnings. Then on Wednesday, May 7, Cognizant Technology Solutions is due to report.

  Three months ago, DirecTV (DTV) smashed Wall Street’s earnings forecast by 23 cents per share. The satellite-TV firm has been doing a great business lately, especially in Latin America. I also like that DirecTV uses its share buybacks to reduce share count. Too many companies merely buy back the same amount they’ve issued to senior execs.

  But the big news for DirecTV came on Thursday, when the Wall Street Journal reported that AT&T has been talking to them about a possible acquisition. This makes sense as a response to the Comcast/Time Warner Cable deal. DirecTV has a market cap of $41 billion. There aren’t many companies big enough to buy them, but AT&T is one. I can’t predict if a deal will happen, but I’ll note that it makes a lot of sense.

  

  On Thursday, shares of DTV jumped more than 4% to close at $80.76 per share. Analysts currently expect earnings of $1.50 per share for Q1. For now, I’m keeping my Buy Below price at $84 per share.

  Shares of Cognizant Technology Solutions (CTSH) have been pretty quiet lately, but I think that could change soon. Three months ago, Cognizant told us to expect Q1 earnings of 59 cents per share on revenue of $2.42 billion. Bear in mind that Cognizant earned 47 cents per share for last year’s Q1, so we’re talking about pretty strong growth.

  For all of 2014, Cognizant sees earnings of at least $2.51 per share and revenues of at least $10.3 billion. To add some context, CTSH earned $2.02 per share last year and $1.72 per share in 2012. Cognizant remains a good buy up to $52 per share.

  That’s all for now. More earnings reports are coming our way next week. We’ll also get reports on trade, consumer credit and productivity. 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