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  • Earnings Outlook Worst Since 2001
    , July 27th, 2012 at 2:21 pm

    From Reuters:

    U.S. companies are more negative in their earnings outlooks than they have been in 11 years, due to mounting worries about Europe and slower overseas demand.

    With pre-announcements in so far from 54 Standard & Poor’s 500 companies, the negative-to-positive ratio for the third quarter stands at 5 to 1, the most negative since the second quarter of 2001, according to Thomson Reuters data.

    That’s a big increase from the second quarter’s ratio of 3.3 to 1, which included guidance from 143 S&P 500 companies.

    “With all of the uncertainty around the global economy, Europe being at the top of the page, China being in the middle of the page and then the U.S. slowdown, it is completely understandable companies are issuing cautious remarks about future earnings,” said Leo Grohowski, who oversees more than $170 billion in client assets as chief investment officer at BNY Mellon Wealth Management in New York.

    The third-quarter pre-announcement ratio is the latest bit of data to point to a deteriorating picture for U.S. earnings.

    While the majority of companies who have reported results so far for the second quarter have beaten earnings expectations, just 40 percent have beaten revenue estimates, the lowest amount since the first quarter of 2009, Thomson Reuters data shows.

    The technology sector has led in negative earnings guidance.

    “Eighteen of the (40) negative ones were in tech, so almost half” came from that sector, said Greg Harrison, corporate earnings research analyst for Thomson Reuters. “But tech usually gives more guidance than other sectors.”

    Among the most notable was Apple’s negative guidance for the third quarter. Apple also surprised investors by missing analysts’ estimates on earnings and revenue on second-quarter results.

  • Q2 GDP = 1.5%
    , July 27th, 2012 at 9:56 am

    The government released its first estimate of second-quarter GDP growth today and it was a better-than-expected 1.5%. The government also revised all the GDP data going back to 2009. It turns out that the recession wasn’t as bad as we thought, but the recovery wasn’t as strong.

  • CWS Market Review – July 27, 2012
    , July 27th, 2012 at 6:34 am

    Now that the second-quarter earnings season is half over, we can say that the results aren’t so bad. Going into earnings season, we had many reasons to believe that it could have been far worse. Three such reasons were Europe, Europe and Europe. So far, 72% of the 255 companies in the S&P 500 that have reported earnings have topped estimates. But that’s against expectations. On a comparative basis, earnings are down 1.6% from a year ago. This the first quarterly earnings decline in three years.

    In this issue of CWS Market Review, we’ll take a look at the flurry of Buy List earnings reports we had this week. Some were good and some were not so good. I’ll sort through the noise for you and highlight the best bargains.

    I also want to discuss the market’s turn towards a defensive posture. This is a key point all investors need to understand. When the Street gets worried about the economy, sectors like Staples and Healthcare lead the way while Industrials and Energy stocks get left behind. Too many individual investors get blindsided by sector rotation. But first let’s look at why we already may be in the midst of an earnings recession.

    How to Survive an Earnings Recession

    The stock market has recovered quite well since early June, but there are a few ominous clouds on the horizon. For example, while nearly three-fourths of earnings reports have come in above expectations, only 43% have beaten their sales expectations. This suggests that companies are still relying on wider margins to grow their bottom lines. The problem with this strategy is that it can’t go on indefinitely.

    The other trouble spot is that analysts are now ratcheting back their earnings forecasts for Q3. At the start of the third quarter, Wall Street expected Q3 earnings to grow by 3.1%. Now they see earnings dropping by 0.1%. While the economy is still growing at a very low but positive rate, the corporate world is probably in an earnings recession.

    Wall Street is very sensitive to this shift and we’ve already seen a major sector rotation. Since February 3rd, the Morgan Stanley Cyclical Index (^CYC) is down by 12.2% while the S&P 500 is up by 1.1%. That’s a major divergence. The relative strength of the CYC just hit a three-year low. Key defensive sectors like Consumer Staples, Healthcare and Consumer Discretionaries have recently made all-time highs. The move away from cyclical stocks has held back some Buy List stocks like Ford ($F) and Moog ($MOG-A).

    This defensive turn is matched by the tremendous surge in the bond market. The yields for long-term U.S. Treasuries are at all-time lows. It has never been cheaper for Uncle Sam to borrow money—and he’s been borrowing a lot.

    Investors should stay far away from the ultra-low rates in the bond market. The 10-year Treasury gets you less than 1.5%, and the 20-year TIPs actually has a negative yield. There are plenty of stocks on our Buy List that yield more than that, and they have potential for growth.

    This is also a good time for investors to get rid of overpriced stocks in their portfolio. A few weeks ago, I put together a list of stocks to avoid. I also caution investors to not be tempted by the dollar’s surge against the euro. The best part of that currency move has already happened. Investors should continue to focus on high-quality stocks, particularly some of the beaten down financials like JPMorgan Chase ($JPM) and Nicholas Financial ($NICK).

    Dissecting Earnings from Ford, AFLAC and Others

    I’m going to touch on the six Buy List earnings reports we had this week. Before I do, let me stress that with our style of investing, we don’t have to worry so much about a company earning precisely this or that. The earnings guessing game just ain’t worth playing. All of our Buy List stocks are high-quality companies. Just to make it here, they gotta be very, very good. With our earnings reports, we just want to see if business is going well. Missing by a penny or two…well, that doesn’t bother me at all.

    Last Friday, Reynolds American ($RAI) reported earnings of 79 cents per share which was three cents more than estimates. I don’t care about that at all. The important news is that Reynolds reiterated its full-year forecast of $2.91 to $3.01 per share. They’re clearly on track to hit that. RAI yields 5.2%.

    On Wednesday, Ford Motor ($F) reported earnings that were frankly rather blah. The automaker made 30 cents per share which was two cents better than Wall Street’s estimate. I’m not wild about these results but I’m comforted that Ford’s problems were due to weakness in Europe. Business in North America is still going very well. On Thursday, the stock closed at $8.96 which is a very low price. This is a good example of a cyclical company that’s been punished by an unforgiving sector rotation. Ford may be the cheapest major stock on Wall Street.

    On Tuesday, AFLAC ($AFL) reported earnings of $1.61 per share which matched Wall Street’s estimate. Frankly, this earnings report was also disappointing, but just slightly. AFLAC has done a very good job of paring back on problematic investments in its portfolio. This seems to have caused Wall Street undue worry but I’m pleased with how the company has addressed the issue.

    AFLAC said that it expects third-quarter earnings to range between $1.64 and $1.69 per share. The Street had been expecting $1.63 per share. AFLAC also narrowed its full-year guidance from $6.46 – $6.65 per share to $6.45 – $6.52 per share (assuming an average exchange yen/dollar rate of 80).

    AFLAC is standing by its forecast that earnings growth will accelerate next year. That probably means that earnings will range somewhere between $6.80 and $7.00 per share. In other words, AFLAC is going for roughly six times next year’s profit. The shares pulled back this week, but my outlook hasn’t changed at all. AFLAC is a very good buy anytime the shares are below $50.

    On Thursday, CA Technologies ($CA), our #1 performer on the year, reported quarterly earnings of 63 cents per share which was two cents above Wall Street’s consensus. This was a good quarter for CA in a difficult environment. The company shaved three cents off the top-end of their full year forecast (the June quarter is their fiscal Q1). That’s not a big deal. Once again, currency was a drag. CA is one of the most stable stocks on our Buy List. The stock currently yields 3.8% and is a strong buy up to $30 per share.

    After the closing bell on Wednesday, CR Bard ($BCR) reported second-quarter earnings of $1.62 per share. The market wasn’t pleased as the stock dropped 4.7% on Thursday, but I think it’s a decent number. The company had given a range of $1.61 to $1.65 per share and Wall Street was expecting $1.64 per share, so Bard was in the ballpark. As with other companies this earnings season, Bard is running its business well. The problem is the economy in other parts of the world, especially Europe.

    On the earnings call, Bard says it sees Q3 earnings ranging between $1.60 and $1.64 per share. Wall Street had been expecting $1.68 and I thought it could have been as high as $1.70 per share. Bard had previously said that it sees earnings growing by 3% to 4% for this year, and they reiterated that forecast. That works out to a range of $6.59 to $6.66 per share for this year. CR Bard remains a solid buy whenever the stock is below $112 per share.

    Hold Hudson City

    One of the Buy List stocks that I’m really having reservations about is Hudson City Bancorp ($HCBK). The other is JoS. A. Bank ($JOSB). Make no mistake, Hudson City is a fundamentally good stock, but I didn’t appreciate how much the business got squeezed by the low-rate environment. The stock ran out to a big gain for us early in the year, but HCBK has since given all of it back. This week’s earnings report was decent (15 cents per share, one penny more than estimates).

    The best news is that Hudson City will keep its dividend at eight cents per share. If that payout holds for the following year, the shares will yield 5.4%. There’s no reason to sell HCBK, but I’m lowering it to a hold. I doubt Hudson City will be on next year’s Buy List.

    This coming week, we’ll have earnings from Fiserv ($FISV), Harris ($HRS), Wright Express ($WXS), DirecTV ($DTV) and Nicholas Financial ($NICK). You can see an earnings calendar here.

    Let me add a quick word about Wright Express. The stock got knocked down in May after the company guided lower for Q2. Yet Wright kept their full-year forecast the same. This shows you how short-sighted Wall Street can be. Less than a month after the earnings report, shares of Wright began a furious rally. Since early June, the stock is up more than 20% and it’s close to making a fresh 52-week high. Rational? No. But it’s not uncommon on Planet Wall Street.

    That’s all for now. More earnings reports are coming next week. Then on Friday, all eyes will be on the July jobs report. 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: July 27, 2012
    , July 27th, 2012 at 5:47 am

    Europe’s Brutal Game of Dominoes

    Bundesbank Maintains Opposition to ECB Bond Buying

    Spanish Unemployment Hits Fresh All-Time High

    Geithner Faces Senate on Rate-Rigging Scandal

    Wary Consumers To Weigh On Growth In Second Quarter

    For Food, It’s the Bad and the Ugly

    For Big Drug Companies, a Headache Looms

    Facebook Revenue Growth Skids, Shares Plunge

    Google Move Buoys Chicago Tech Hub

    Starbucks Loses a Bit of Steam

    Samsung Shares Surge on Buoyant Phone, TV Sales Forecasts

    Porsche Profit Jumps on 911 Demand as Volkswagen Purchase Nears

    Renault Profit Declines 37% in First Half

    Jeff Miller: Four Common Mistakes About the Fed

    Jeff Carter: Did The Tech Bubble Burst Again?

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  • From Two Months Ago
    , July 26th, 2012 at 5:31 pm

    Reuters on May 22:

    After pricing at $38, far more than the first estimate of $28 the company gave investors, shares have been sliding – at one point as much as 31 percent from the $45 peak hit shortly after it started trading Friday.

    “Facebook right now is going for far more than what it’s worth, it’s like buying $1 for $1.98, it just doesn’t make sense at this price,” said Eddy Elfenbein, widely followed blogger and editor at Crossing Wall Street.

    The stock is at $24.39 after hours.

  • CA Technologies Earns 63 Cents Per Share
    , July 26th, 2012 at 5:05 pm

    After the closing bell, CA Technologies ($CA) reported earnings of 63 cents per share. Those are good results. Wall Street’s consensus was for 61 cents per share.

    “Despite the headwinds to top-line growth we experienced during the first quarter, we remain committed to delivering the earnings per share and cash flow from operations growth we provided at the beginning of the fiscal year,” said Bill McCracken, chief executive officer, CA Technologies. “In addition to the benefits of a $35 million intellectual property transaction we closed during the quarter, we will drive increased profitability in our organic business and now expect to deliver further expansion of our GAAP operating margin to 31 percent and our non-GAAP operating margin to 36 percent for the full fiscal year.”

    Here’s a bit of odd news that’s probably happening at other firms. CA shaved three cents per share off the upper-end of their guidance. The company now expects full-year earnings of $2.45 to $2.50 per share. The odd thing is that they actually increased their constant currency growth range from 9% – 12% to 10% – 12%. The difference is that the strong euro is eating their bottom line.

    Business is good, but the currency environment is bad.

  • Raven Industries Splits 2-for-1
    , July 26th, 2012 at 10:39 am

    I’ve called Raven Industries ($RAVN) “the best stock you’ve never heard of.” Here’s a description from Hoovers:

    Quoth the Raven, “Balloons (and more) evermore!” Raven Industries’ Aerostar division does sell high-altitude, research balloons, as well as parachutes and protective wear used by US agencies. Its Engineered Films Division makes reinforced plastic sheeting for various applications. The Applied Technology Division manufactures high-tech agricultural aids, from global positioning system (GPS)-based steering devices and chemical spray equipment to field computers. The Electronic Systems Division offers electronic manufacturing services and supports the other divisions. Goodrich is a major customer.

    Not too sexy, is it? But consider that the stock is up more than 23,000% in the last 30 years (not including dividends) and that Raven is nearly completely ignored by Wall Street.

  • Morning News: July 26, 2012
    , July 26th, 2012 at 6:45 am

    Europe Needs A Bigger Crisis Firewall

    Europe’s Crisis Hits Profits

    Citigroup Sees 90% Chance That Greece Leaves Euro

    Santander Profit Plunges 93% on Property Provisions

    Nomura Holdings: CEO Watanabe To Step Down Effective July 31

    Philippines Cuts Rates as Korean Growth Slows on Europe

    Severe Drought Seen as Driving Cost of Food Up

    A Global Steel Giant Scales Back

    Weill, Father Of Too-Big-To-Fail, Disowns It

    Retailers’ Idea: Think Smaller in Urban Push

    The News Isn’t Good for Zynga, Maker of FarmVille

    Caterpillar Echoing Wall Street Rebuts Gross’s U.S. Pessimism

    Hyundai Q2 Net Up 10%  As European Sales Surge

    Siemens Cautions on Outlook as Earnings Fall Short

    Credit Writedowns: The Euro as the SDR of Europe

    Roger Nusbaum: Innovative Ideas For Portfolio Construction

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  • Highlights from AFLAC’s Earnings Call
    , July 25th, 2012 at 6:56 pm

    Seeking Alpha has the transcript for AFLAC’s earnings call. If you read the whole thing, you clearly get a sense that the company is doing well. Here are some highlights:

    As you know, we have made significant progress into proactively derisking our portfolio over the last 3 years to enhance the strength of our balance sheet. In the process, we’ve been reducing our exposure to riskier asset classes including perpetual [indiscernible] and financials especially in Europe. You’ve heard us say many times before that we expect to see volatility in Europe, and that’s exactly what we’ve seen in the second quarter. Our second quarter net after-tax realized investment losses were $272 million. These losses are primarily attributable to the decision to impair 2 Spanish holdings. In addition, we experienced further declines in the value of several securities we’ve previously impaired in the fourth quarter of 2011 related to the intent to sell.

    Although our total realized losses in the second quarter were higher than the first quarter of this year, they are significantly lower than the second quarter of last year. We still view Europe as an area of potential risk. And always, we closely monitor and reevaluate our portfolio with the eye for credit issues that may emerge. However, I believe our portfolio is better positioned now to accommodate market volatility.

    (…)

    We increased our cash dividend to shareholders in 2011 for the 29th consecutive year. Our objective is to grow the dividend at the rate in line with the earnings per share growth before the impact of the yen. I believe dividends are an important component for the value we provide investors. I am confident that the fourth quarter, we will extend the consecutive annual dividend increases to 30 years.

    (…)

    I want to affirm that even with the historically low interest rates, excluding currency, we expect to achieve our 2012 operating earnings per share of a 3% to 6% increase although toward the end of the low range. We believe it is reasonable.

    Looking ahead, I also want to reaffirm 2013 target we gave you at the analyst meeting. We expect operating per diluted share to increase 4% to 7% in 2013 on a currency-neutral basis.

  • CR Bard Earns $1.62 Per Share
    , July 25th, 2012 at 6:14 pm

    After the closing bell, CR Bard ($BCR) reported second-quarter earnings of $1.62 per share. The market isn’t pleased as the stock is down about 5% after hours, but I think it’s a decent number. The company had given a range of $1.61 to $1.65 per share and Wall Street was expecting $1.64 per share, so Bard was in the ballpark.

    As with other companies this earnings season, Bard is running its business well. The problem is the economy in other parts of the world, especially Europe. Bard’s CEO said:

    The economic climate remains challenging, especially in the United States and Europe. Navigating the short term while positioning for the long term is how we have remained strong and successful for over a century. As we have said, we believe the medical device companies who thrive in the future will provide clinically effective products at a value that benefits the entire healthcare system. Our teams are well positioned to identify unmet needs and provide successful solutions for our customers, and we see significant long-term opportunity as we continue to execute on our strategy.

    I didn’t see any change in the forecast for this year, or any guidance for Q3. The company had previously said that it sees earnings growing by 3% to 4% for this year. That works out to a range of $6.59 to $6.66 per share for this year. For the first half of the year, Bard has earned $3.23 per share so they’re basically on track to hit those numbers.