Author Archive

  • Morning News: February 9, 2012
    , February 9th, 2012 at 6:25 am

    Greece Talks Stall as Venizelos Heads to Brussels

    China Inflation Spike Pricks Policy Easing Expectations

    Chinese Policy Banks Looking to Make Yuan Loans in Latin America

    Holiday Hits China Auto Sales in January

    Indonesia Unexpectedly Cuts Interest Rate to Support Growth

    Obama Advisers Offer Rosier Jobs Outlook

    Fed Delays Vote on Capital One Deal for ING Direct

    States Negotiate $26 Billion Deal for Homeowners

    Goldman Wins New York Fed Auction for A.I.G. Assets

    Groupon Posts Loss of $9.8 Million

    Credit Suisse Posts First Loss in Three Years

    Daimler Profit Rises on Record Mercedes Demand

    Caesars Surges 71% in Debut After Slashing IPO From 2010 Try

    ING Feels Impact of Euro Crisis

    Alibaba Seeks to Buy Back Yahoo Stake

    Joshua Brown: The Economy’s Improving, Have a Cupcake

    Jeff Miller: Navigating Silly Season: An Investor Guide to the Political Landscape

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  • The Reversal Market of 2012
    , February 8th, 2012 at 8:06 pm

    One of the interesting facts of this year’s market is how much it’s the complete opposite of last year’s market. Bank of America ($BAC), for example, was one of the worst stocks to own last year and it’s been one of the best this year (+46%).

    Here’s a look at how the different S&P sectors performed last year and this year so far. Notice how (except for telecom which probably shouldn’t be its own sector) the rank ordering is almost completely inverted from 2011 to 2012.

    Sector 2011 2012
    Financials -18.41% 13.42%
    Materials -11.64% 12.59%
    Tech 1.33% 11.47%
    Industrials -2.92% 9.84%
    Discretionary 4.41% 8.75%
    S&P 500 0.00% 7.34%
    Energy 2.77% 5.42%
    Healthcare 10.18% 3.84%
    Staples 10.53% -0.26%
    Telecom 0.84% -2.11%
    Utilities 14.83% -3.11%

  • Strange Response to Wright’s Earnings
    , February 8th, 2012 at 2:12 pm

    On the news each evening, the anchors report that the market did X due to Y. In reality, the market did X while Y happened as well. The market has a mind of its own, and we can’t always say why it did what it did.

    This morning, I pointed out what I thought were good earnings from Wright Express ($WXS). Yet the shares dropped 5% early today. Wright then rallied to a 5% gain. That’s a 10% turnaround in 90 minutes.

    Why?

    Honestly, I have no idea, and you can’t say why traders act they way they do. Wright held their earnings call at 10 am, but there was nothing there that should have altered anyone’s perception of the stock. This is another reason why I avoid trading and focus on the fundamentals. A stock can fool the market for a while, but eventually, the true value will shine through.

  • It’s All Been Apple
    , February 8th, 2012 at 11:11 am

    Jonathan Golub of UBS claims that Apple‘s ($AAPL) earnings have distorted the entire earnings picture. He says that if you take away Apple’s results, earnings for the S&P 500 are up just 1.6%.

    Apple’s report “obfuscates the fact that the underlying earnings trend is really weak,” Golub said. “It’s a terrific company, but it’s also important you get a sense of how the average stock, the average company is doing. You want to make sure you don’t distort that view.”

    Analysts project income for S&P 500 companies climbed 4.9 percent in the fourth quarter, according to data compiled by Bloomberg. Out of 280 companies that have reported since Jan. 9, 68 percent have exceeded analysts’ estimates by an average 2.9 percent, while profit has gained 3.5 percent.

  • Reynolds American Earns 72 Cents Per Share
    , February 8th, 2012 at 10:40 am

    Our tobacco stock, Reynolds American ($RAI), released strong fourth-quarter earnings today of 72 cents per share which was four cents better than Wall Street’s estimates. That’s a 12.5% increase over the fourth quarter of 2010. For the full year, Reynolds earned $2.81 per share. One year ago, Reynolds issued guidance for 2011 of $2.60 to $2.70 per share.

    Reynolds also offered earnings guidance for this year of $2.91 to $3.01 per share. Now let’s focus on the most important part of owning Reynolds: the dividend. According to company policy, they aim to pay 75% to 80% of their earnings to shareholders as dividends. So if Reynolds were to pay 80% of $3 per share, that would be a quarterly dividend of 60 cents per share. The dividend is currently 56 cents per share (it was raised twice last year).

    Here are some details from Market Watch:

    R.J. Reynolds Tobacco, the company’s cigarette unit, saw its revenue slip 0.4% to $1.76 billion as domestic volume fell 7.2%. Accounting for the elimination of private-label brands, volume dropped 7.1%. Total market share, excluding private label brands, fell 1.1 percentage points to 27%. Meanwhile, growth brands–which include Camel and Pall Mall–gained 0.3 percentage points of market share to hold 16.5% of the market.

    At American Snuff, the smokeless tobacco unit that makes Grizzly and Kodiak moist snuff, total volume increased 6.1%, though revenue declined 14%.

    Larger rival Altria last month reported its fourth-quarter earnings slid 9% due to several charges, though the tobacco company’s revenue rose 3.4% on strong volume growth for smokeless products and a modest increase in volume for cigarettes.

    Going by yesterday’s close, Reynolds yields 5.58%. That’s a good deal. Reynolds benefitted last year as investors rushed to buy high-yield stocks as bond yields evaporated. The stock probably won’t see a capital gains surge this year like it did in 2011.

  • Wright Express Beats the Street Again
    , February 8th, 2012 at 8:37 am

    In last week’s CWS Market Review, I said to watch for good news from Wright Express’ ($WXS) earnings report. The stock has beaten earnings expectations handily for the past few quarters. Wright did it again today.

    Three months ago, Wright said that Q4 EPS would range between 88 cents and 94 cents. Instead, they earned 98 cents per share. Wall Street’s consensus had been for 92 cents per share. That’s earnings growth of 32%. For the quarter, revenue rose 22% to $139.8 million.

    Michael Dubyak, Chairman, President and Chief Executive Officer, commented, “2011 was another great year for Wright Express as we experienced continued strength across our business and considerably surpassed our expectations. These results demonstrate further progression against our multi-pronged strategy to grow our North American fleet business, diversify our revenue streams and build out our international presence. The fourth quarter was no exception as we experienced robust performance in our other payments solutions with our corporate charge card product, and steady growth in our core fleet business.”

    Mr. Dubyak continued, “As we enter 2012 and think about the year ahead, our strategy remains the same. We are committed to maintaining our investments in the business to accelerate the development of our new products, while also supporting sustainable future growth both domestically and internationally.”

    Fourth Quarter 2011 Performance Metrics

    • Average number of vehicles serviced worldwide was approximately 6.6 million, an increase of 14% from the fourth quarter of 2010.

    • Total fuel transactions processed increased 8% from the fourth quarter of 2010 to 80.0 million. Payment processing transactions increased 3% to 60.6 million; transaction processing transactions increased 31% to 19.4 million.

    • Average expenditure per domestic payment processing transaction increased 20% from the fourth quarter of 2010 to $70.10.

    • Domestic retail fuel price increased 19% to $3.53 per gallon from $2.96 per gallon in the fourth quarter of 2010.

    • Total corporate card purchase volume grew 66% to $2.0 billion, from $1.2 billion for the fourth quarter of 2010.

    Next comes the guidance. For Q1, Wright said it expects earnings between 87 and 93 cents per share and revenue between $134 and $139 million. For the year, the company expects earnings to range between $4.10 and $4.30 per share on revenue between $590 million and $610 million. It’s too early for me to get a feel for whether or not these projections are too conservative. Wright’s estimates are based on a few assumptions:

    First quarter 2012 guidance is based on an assumed average U.S.
    retail fuel price of $3.56 per gallon, and approximately 39 million shares outstanding. Full-year 2012 guidance is based on an assumed average U.S. retail fuel price of $3.59 per gallon and approximately 39 million shares outstanding. In addition, the fuel prices referenced above are based on the applicable NYMEX futures price. We are assuming the exchange rate of the Australian dollar will remain at a premium to the US dollar. The Company’s guidance also assumes that 2012 domestic credit loss for the first quarter and the full year will range between 13 and 18 basis points.

  • Morning News: February 8, 2012
    , February 8th, 2012 at 6:09 am

    Greek Premier Seeks Bailout Consensus Amid Political Quarrels

    Greece Puts Off Decision on Austerity Moves Amid a Strike Protesting Them

    A Contrarian Bets Ireland and Hungary Will Rebound

    As Growth Slows, India Awakens to Need for Foreign Investment

    Bernanke-Led Economy Proves Critics Clueless About Fed Policies

    Yahoo’s Shakeup as Bostock Departs Adds Pressure for Sale of Asian Assets

    Disney Profit Rises 12% on Growth at ESPN, Domestic Theme Parks

    Glencore to Buy Full Control of Xstrata for $41 Billion

    Illumina’s Board Rejects Roche’s $5.7 Billion Offer

    Nissan Sees Annual Profits Beating Toyota, Honda

    Sony Credit Rating Cut by S&P on Concerns About Earnings

    Walmart to Label Healthy Foods

    Airbus A380 Fleet Requires Wider Inspections

    Caesars Gets $1.13 Billion Market Value on IPO Pricing

    Roger Nusbaum: How and When to Sell

    Cullen Roche: Why I Don’t Believe the Eurozone Crisis is Over

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  • Comments on Sysco and AFLAC
    , February 7th, 2012 at 5:32 pm

    I expressed surprise and confusion at the market’s poor reception of Sysco‘s ($SYY) earnings. One reader provided some valuable insight:

    Looking at the current quarter:

    1. The gross margin (-76 basis points) was much weaker than expected. Company now chasing volume with lower pricing. A company not being able to raise prices in line with inflation always a bad sign.

    2. 7.1% SG&A growth was too high, especially since Business Transformation costs were lower than expected.

    Looking to the future:

    1. Lowered business transformation cost estimates (but still increasing) for 2012 are not a true savings because it appears they are essentially just being pushed out to 2013.

    2. Here is the biggie: Likely stagnant EPS for both 2012 and 2013 around $1.90-$2.00 per share. This is a 15 P/E for a company in a low-growth industry (future organic case volume growth likely in 1% to 2% range). Contrast that with numerous companies with P/Es in 10 area and with reasonably predictable growth potential in the 12-15% range.

    I’m afraid the last point is probably correct. Outside of its dividend, Sysco doesn’t have much to offer investors right now. In fact, the dividend is probably what’s keeping a floor on the stock.

    One day after I criticized Seeking Alpha for running little more than stock screens in words as its articles on AFLAC ($AFL), there appeared a thoughtful piece on it. Here’s a sample:

    Aflac’s outsized portfolio of European financial hybrid securities is oddly a function of its exposure to the Japanese market. Given the absence of much Japanese government debt beyond the ten-year maturity, there is a limited long duration corporate bond market in Japan. Given the long duration liability profile of its Japanese business, and Aflac’s desire to match the duration of its assets and liabilities to immunize the portfolio against interest rate risk, Aflac flocked to yen-denominated perpetual preferred stock placed by financial institutions around the world. By hoping to reduce its risk profile through better asset-liability matching, Aflac unwittingly exposed itself to a potentially debilitating amount of credit risk.

    This exposure to European financials led Aflac to recently bring in Eric Kirsch from Goldman Sachs Asset Management to lead its investment process, functionally demoting former head Jerry Jeffery to head of fixed income. The insurer has also continued to pare down its European financial exposures as markets have come off their autumn lows, and indicated on its recent earnings call that it would continue to try and work through issues in its investment portfolio.

    While Aflac may prove to be cheap on the basis of its continued strong operating earnings, its low valuation relative to its book value or dividend stream, the dispersion of outcomes on the stock is too wide to know if the price is currently discounting this risk correctly. Aflac relies on dividends from its Japanese operating subsidiary to pay those shareholder dividends. Whether the Japanese regulators allow Aflac to continue to upstream capital from its Japanese operating company to the holding company will depend on the performance of its European financial hybrids.

    If you are concerned about the European situation, Aflac is not the investment for you, and despite its continued efforts to right-size these exposures, this will be an ongoing process and will lower future earnings as Aflac is forced to reinvest the proceeds in a low rate environment. If you think we are at an inflection point in the Eurozone crisis, and see markets stabilizing, then Aflac is likely to see its equity rebound. Just know that in an odd twist of fate, the European credit markets will be the central driver of AFL’s equity performance in 2012.

  • Is an Earnings Peak Coming?
    , February 7th, 2012 at 5:00 pm

    This earnings season is shaping up to be a disappointment. The “beat rate” will most likely be one of the worst of the past decade. Overall, the earnings outlook is still decent. The S&P 500 is on track to earn 96.67 for 2011.

    For 2012, however, I think earnings may not be as strong as some people expect. The chart below shows that earnings for the S&P 500 are expected to rise throughout this year.

    What concerns me is that large jump expected in the fourth quarter. Trailing fourth-quarter earnings are expect to rise from $101.08 to $105.37 during the final three months of the year. I just don’t see what could cause a jump like that.

    I think it’s more realistic to expected a rounded earnings top. Beginning the third quarter of this year, I expect earnings to range between $100 and $105 for a few quarters. The problem is that earnings already represent a large portion of GDP. That’s probably not going to grow much from here. Instead of rising profit margins, earnings will have to rely on economic growth — and that will be harder to come by in 2012 and 2013.

  • Remembrance of Buy List Stocks Past
    , February 7th, 2012 at 4:31 pm

    I’ve often cautioned investors not to worry over what happens to a stock after you’ve sold it. Just because it continues to rise doesn’t necessarily mean you made the wrong the decision. Our goal is be good investors, not perfect investors.

    Having said that, I’m going to break that rule (hey, it’s my blog) and take a quick peek at how the five stocks we ditched at the beginning of the year are doing. Technically, I should say that I didn’t (and don’t) regard them as Sells. Instead, I thought the new additions were better buys.

    As it turns out, the five stocks that got cut from the Buy List are doing very well.

    The leader so far is Gilead Sciences ($GILD) which is up over 34% for the year. As I’ve said, I’m not a fan of the Pharmasset acquisition. It’s far too expensive for what they’re getting. Gilead also badly missed earnings the other day. The stock, however, jumped 11% in thanks to promising news of its Hep C treatment.

    The second-best performer is Leucadia National ($LUK) which is up 29% in 2012. Much of Leucadia’s success is undoubtedly due to its holding of Jefferies ($JEF). While I believe that Jefferies had become undervalued, I think it’s fairly valued at $16 give or take. Now that it’s there, I don’t see much room for dramatic upside.

    Deluxe ($DLX) continues to chug along. The stock is already up 14% for the year. Deluxe is almost a pure value play. I liked it last year because it was cheap and it paid a very nice dividend. We did OK with the stock but I had hopes for more.

    Pulling up the rear are Becton Dickinson ($BDX) and Abbott Labs ($ABT). Becton is up 3.8% for the year while Abbott is down 1.4%. Becton had been doing well, but investors soured on today’s lowered guidance.