Author Archive

• Buffett Is Buying
  Eddy Elfenbein, November 7th, 2011 at 10:36 am

  From Bloomberg:

  Warren Buffett’s Berkshire Hathaway Inc. (BRK/A) invested $23.9 billion in the third-quarter, the most in at least 15 years, as he accelerated stock purchases and broadened the portfolio beyond consumer and financial-company holdings.

  Berkshire bought almost $7 billion of equity securities in the three months ended Sept. 30, compared with $3.62 billion in the second quarter and $834 million in the first, the Omaha, Nebraska-based company said Nov. 4 in a filing. Stockholdings labeled “commercial, industrial and other” soared 62 percent in the three months to $17.4 billion on a cost basis, surpassing equity investments in financial and consumer-product firms.

  “He sees something, and it’s big,” said Thomas Russo, a partner at Berkshire investor Gardner Russo & Gardner.

  Buffett, 81, drew down Berkshire’s cash as Europe’s debt crisis and Standard & Poor’s downgrade of the U.S. pushed stocks to their worst quarterly performance since 2008. The investments disclosed Nov. 4 include $6.9 billion of equities, $5 billion for preferred shares and warrants in Bank of America Corp. and the acquisition of Lubrizol Corp. for about $9 billion.

  Buffett is expanding a portfolio that for more than 20 years has included equity stakes in Coca-Cola Co. (KO), the world’s largest soft-drink maker, and Wells Fargo & Co. (WFC), now the No. 1 U.S. home lender. The chairman and chief executive officer acquired a power company in 2000 and railroad Burlington Northern Santa Fe last year.
  “Historically he has preferred consumer products and banking to industrial companies,” said James Armstrong, president of Berkshire shareholder Henry H. Armstrong Associates. “But the market changes, so the names he comes up with changes.”

  (Via: The Reformed Broker)

• Sysco Earns 55 Cents Per Share
  Eddy Elfenbein, November 7th, 2011 at 9:58 am

  Sysco ($SYY) just reported earnings for its fiscal first quarter of 55 cents per share which was three cents better than estimates. Quarterly revenue rose 8.6% to $10.59 billion which was $140 million over consensus.

  First Quarter Fiscal 2012 Highlights

  * Sales were $10.6 billion, an increase of 8.6% from $9.8 billion in the first quarter of fiscal 2011.

  * Operating income was $509 million, an increase of 0.6%, compared to $506 million in last year’s first quarter, and Sysco’s highest first quarter on record.

  * Adjusted1 operating income increased 6.1%, excluding gross business transformation expenses and the impact of corporate-owned life insurance (COLI).

  * Diluted earnings per share (EPS) were $0.51, which included a $0.04 negative impact from gross business transformation expenses. Last year’s first quarter EPS was also $0.51, but included a $0.02 benefit from COLI and a $0.02 negative impact from gross business transformation expenses.

  * Adjusted diluted EPS was $0.55, an increase of 7.8%, excluding gross business transformation expenses and the impact of COLI.

  “I am encouraged by our underlying business performance during the quarter as softening consumer sentiment contributed to ongoing challenges for the foodservice industry,” said Bill DeLaney, Sysco’s president and chief executive officer. “Our associates remain committed to supporting our customers by meeting and exceeding their expectations each and every day.”

  First Quarter Fiscal 2012 Summary

  Sales for the first quarter were $10.6 billion, an increase of 8.6% compared to sales in the same period last year. Food cost inflation, as measured by the estimated change in Sysco’s product costs, was 7.3%. Inflation continued to be broad-based, but was impacted most significantly by increased prices for dairy, meat and canned/dry products. This compares to inflation of 3.3% in the prior year period, and 5.9% in the fourth quarter of fiscal 2011. In addition, sales from acquisitions (within the last 12 months) increased sales by 0.7%, and the impact of changes in foreign exchange rates for the first quarter increased sales by 0.7%. Case volume for the company’s Broadline and SYGMA operations combined grew nearly 2% during the quarter including acquisitions, and more than 1% excluding acquisitions.

  Gross profit for the first quarter was $1.9 billion, an increase of 5.5%, compared to the prior year. Operating expenses in the first quarter increased $98 million, or 7.3%, compared to operating expenses in the prior year period. This was due mainly to a $40 million increase in payroll expense, a $16 million increase in gross business transformation expenses, a $14 million increase in fuel expense and a $13 million lower benefit from COLI, partially offset by a $7 million decline in expenses for the corporate-sponsored pension plan. Excluding gross business transformation expenses and the impact of COLI, adjusted operating expenses increased 5.3%. Management believes that excluding these items better represents the company’s underlying business performance.

  Operating income was $509 million in the first quarter, increasing $3 million, or 0.6% compared to operating income in the prior year. Excluding gross business transformation expenses and the impact of COLI, adjusted operating income increased 6.1%.

  Net earnings for the first quarter were $303 million, an increase of $4 million, or 1.2%, compared to net earnings in the prior year. Diluted EPS in the first quarter of fiscal 2012 was $0.51, which included a $0.04 negative impact from gross business transformation expenses. Last year’s first quarter EPS was also $0.51, but included a $0.02 benefit from COLI and a $0.02 negative impact from gross business transformation expenses.Excluding gross business transformation expenses and the impact of COLI, first quarter fiscal 2012 adjusted EPS was $0.55, an increase of 7.8% compared to the prior year.

  Cash Flow and Capital Spending

  Cash flow from operations was $255 million for the first quarter of fiscal 2012. Capital expenditures totaled $227 million for the first quarter, including $45 million related to the company’s business transformation project. The primary areas for investment included facility replacements and expansions, replacements to Sysco’s fleet, and technology.

  

• Morning News: November 7, 2011
  Eddy Elfenbein, November 7th, 2011 at 5:02 am

  Papandreou to Step Down in Accord on Unity Government

  World Economy Dodges Slump With China-U.S. Buoy

  Stocks Decline, Euro Weakens on Italian Vote Concern; Swiss Franc Slides

  Danish Firms Pleading With Banks for Credit

  China Swaps Drop Most Since ‘08

  Thailand Flooding Cripples Hard-Drive Suppliers

  Futures Signal Weaker Start for Equities

  CME, ICE Cut Margin Needs to Limit MF Global Fallout

  Carphone Sells U.S. Stake to Best Buy

  Ryanair Boosts Profit Forecast 10% on Fares

  Buffett Broadens Portfolio by Spending $23.9 Billion

  Cnooc Purchase of BP’s $7.1 Billion Argentine Unit Scrapped

  Vodacom Earnings Miss Estimates on Network Spending, Prices

  Disney and YouTube Make a Video Deal

  Stone Street: How I Learned to Stop Worrying and Love Italy’s Finances

  Epicurean Dealmaker: Known Unknowns

  Howard Lindzon: Investing and Trading….Just Words.

  Be sure to follow me on Twitter.

• The New York Times on Place-Kicking
  Eddy Elfenbein, November 6th, 2011 at 3:33 pm

  The New York Times has a fascinating article on the rise in kicking accuracy in the NFL.

  Gee, it’s almost as if I read that somewhere before!

  Here’s the NYT:

  The only pure kicker in the Pro Football Hall of Fame, Jan Stenerud, made only 17 of 64 field-goals attempts of 50 yards or more in his 19-year career. He made the most — converting 3 of 4 — in 1984.

  This season, the most successful long-distance kickers, Oakland’s Sebastian Janikowski and Jacksonville’s Josh Scobee, have already made five each. Stenerud’s career field goal percentage was 66.8. Were he kicking this season, that would place Stenerud next to last in success rate, one-tenth of a point ahead of Jay Feely, the Arizona kicker who is having an unusually bad season at 66.7 (his career average is 81.8). Overall field goal percentage this season is 85.9, up from 82.3 last season.

  Here’s me:

  This high-octane accuracy is completely new to football. In 1974, the first year when the uprights were placed at the back of the end zone, kickers made just four of 30 field goals from 50 or more yards. Jan Stenerud, the only pure placekicker in the Hall of Fame, made 66.8% of his career field goal attempts. Today that’s good enough for 105th place in career accuracy. Nearly every player in the top 30 for career accuracy is currently active.

  Two entries on the same topic, using the same stats and even using the same obscure reference points — mine being posted a few days before. This could be a highly unusual coincidence, however, I’m very suspicious.

  Update: The writer from the Times contacted me and claims she was unaware of my post. I’ve edited some of the language of this post to be less accusatory. You can read both and determine for yourself. I remain very suspicious.

• Income Tax Poll Results
  Eddy Elfenbein, November 5th, 2011 at 3:31 pm

  I want to thank everyone who participated in my recent (and highly unscientific) poll on the proper tax rate on $10 million. We had a total of 624 votes.

  The answers were widely distributed but I calculated an estimated median tax rate of 33.53%.

  Tax Rate	Votes	Percentage
  0%	21	3.27%
  1% to 5%	4	0.62%
  5% to 10%	9	1.40%
  10% to 15%	18	2.80%
  15% to 20%	47	7.32%
  20% to 25%	77	11.99%
  25% to 30%	78	12.15%
  30% to 35%	95	14.80%
  35% to 40%	102	15.89%
  40% to 45%	65	10.12%
  45% to 50%	47	7.32%
  50% to 55%	34	5.30%
  55% to 60%	5	0.78%
  60% to 65%	11	1.71%
  65% to 70%	4	0.62%
  70% or more	25	3.89%

  I’ve previously done similar polls for $25,000, $40,000, $100,000, $250,000 and $1 million.

  Here are the results by estimated median vote:
  $25,000: 2.66%
  $40,000: 8.31%
  $100,000: 16.33%
  $250,000: 22.69%
  $1,000,000: 28.23%
  $10,000,000: 33.53%

  Breaking out a little math, we can make a three-bracket tax code that links the data above. It looks like this:

  The first $21,245 is tax-free.
  $21,245 to $74,275 is taxed at 17.73%.
  $74,275 to $671,715 is taxed at 26.93%.
  Over $671,715 is taxed at 34.12%.

  There are lots of ways to connect the data. We could add one more bracket at 10% and create a little more realistic code:

  The first $18,350 is tax-free.
  $18,350 to $28,410 is taxed at 10%.
  $28,410 to $85,628 is taxed at 20%.
  $85,628 to $85,628 is taxed at 27%.
  Over $676,779 is taxed at 34.1%.

• Triumph Visits Occupy Wall Street
  Eddy Elfenbein, November 4th, 2011 at 2:18 pm

• The October Jobs Report
  Eddy Elfenbein, November 4th, 2011 at 8:32 am

  The economy created 80,000 jobs last month compared with Wall Street’s estimate of 100,000. Private sector jobs increased by 104,000.

  The revision for September was plus 102,000.

  The unemployment rate dropped 0.1% to 9%. The long-term unemployment number fell by 366,000 to 5.9 million.

  Since the recession officially ended 28 months ago, the unemployment rate has dropped from 9.5% to 9%.

  

• Moog Earns 83 Cents Per Share
  Eddy Elfenbein, November 4th, 2011 at 7:01 am

  Moog ($MOG-A) just reported earnings for its fiscal fourth quarter of 83 cents per share, ten cents more than Wall Street’s forecast.

  For all of 2011, Moog earned $2.95 per share. For 2012, the company sees sales increasing by 8% to $2.52 billion and EPS rising 12% to $3.31. Wall Street had been expecting $3.25 per share.

  Moog Inc. announced today fiscal year 2011 sales of $2.33 billion, up 10%. Net earnings were $136 million and earnings per share of $2.95 were up 26% and 25%, respectively compared to last year.

  For the fourth quarter, sales of $619 million were up 8% from last year. Net earnings were $38 million, up 18%, and earnings per share of $.83 were 17% higher than last year.

  Aircraft sales for the year were $851 million, up 12% from the year previous, driven by very strong military and commercial aftermarket sales. Military sales were $498 million with sales on the F-35 Joint Strike Fighter, V-22 tilt rotor and the Blackhawk helicopter mostly unchanged. Military aftermarket sales were $204 million, a Company record. Commercial aircraft sales for the year of $314 million were 20% higher on stronger sales to Boeing and Airbus. Sales to business jet manufacturers were $33 million, a 24% improvement. Commercial aftermarket revenues of $100 million were 21% higher than a year ago. The Company’s navigation aids product line had sales of $38 million.

  In the fourth quarter, Aircraft sales of $228 million were up 13% from the same quarter last year. Military aircraft sales were up 13%, once again the result of higher sales in the aftermarket. Commercial aircraft revenues in the quarter of $81 million were 10% higher. Boeing Commercial revenues were flat while revenues for products sold to business jet manufacturers were slightly higher. Sales to Airbus increased 36% as production increased on existing Airbus programs.

  The Space and Defense segment had another strong year. Sales of $356 million were up 9%. Sales of controls on tactical missiles, at $66 million, were up 39% and offset lower sales on satellites. Deliveries for the Driver’s Vision Enhancer (DVE) system were about equal to last year. Security and surveillance product sales were up $21 million, helped by the 2010 Pieper acquisition. Sales to NASA on the Space Launch System and Crew Launch Vehicle development programs were up $10 million to a total of $28 million.

  Space and Defense fourth quarter sales were up only slightly from a year ago at $93 million. The growth was mainly driven by NASA programs and security and surveillance products.

  Sales for the year in the Industrial Systems segment were $629 million, a 15% increase. Capital equipment market sales were higher, reflecting strong demand for plastics machine controls, metal forming press controls and specialized test equipment. Sales of simulator motion systems were $69 million, up 43%. Wind energy sales, at $132 million, were lower than last year reflecting reduced demand from turbine manufacturers in China.

  Industrial sales in the fourth quarter of $173 million were up 8%. Capital equipment sales were up 28% to $52 million and wind energy sales were $39 million.

  Components Group sales for the year of $353 million, and for the fourth quarter of $89 million, were slightly lower than last year. Growth in marine, medical and industrial markets offset the weaker military aircraft and space and defense markets. Animatics, a third quarter 2011 acquisition, added $5 million in sales to the year.

  The Medical Devices segment generated sales of $142 million, up 12% from last year. The segment showed significantly improved sales in the second half of the year. For the quarter, sales in Medical Devices of $37 million were up 18% from a year ago.

  Year-end backlog of $1.3 billion was up $144 million, or 12%, from a year ago.

  The Company updated its guidance for fiscal 2012. The current forecast has sales increasing 8% to $2.52 billion, net earnings of $152 million and earnings per share of $3.31, a 12% increase over fiscal 2011.

  “Fiscal 2011 was another great year for our company,” said R.T. Brady, Chairman and CEO. “Strong sales growth produced even stronger earnings growth. Many good things are happening. Airplanes that we’ve worked on for years are moving into production. NASA now has a plan. The recovery in our industrial markets continues and our medical business is back on track. We look forward to an even stronger 2012.”

• CWS Market Review – November 4, 2011
  Eddy Elfenbein, November 4th, 2011 at 6:23 am

  Even though October was the eighth-best month for the S&P 500 of the last 70 years, the market has taken back some of those gains thanks to the recent political chaos in Greece. Here’s what happened: George Papandreou, the Greek Prime Minister, surprised everyone on Monday by putting the euro zone bailout plan up for a referendum. Simply put, that freaked out everyone—and I mean everyone.

  For a few hours it looked like Greece was really honestly going to default. Monsieur Sarkozy said that the Greeks wouldn’t get a single cent in aid if they didn’t adhere to the original terms of the bailout. It got so bad that the European bailout fund had to cancel a bond offering. Yields on two-year notes in Greece jumped to 112%.

  Yes, 112%.

  The ECB, under its new head Mario Draghi, stepped in and cut rates by 0.25% which seemed to calm folks down. At least for a little while. Only after his party revolted against the idea did Papandreou decide to ditch the referendum. That’s what traders wanted to hear. On Thursday, the S&P 500 jumped 1.88%, and the index is now up barely for the year.

  So we dodged a bullet for the time being, but we’re not yet out of the woods. I think it’s obvious that Greece will get the aid although the details are still unclear. My fear is that this latest cure only addresses the symptoms and not the underlying problem.

  The issue isn’t that Greece mismanaged its finances (which it did) but rather that the euro zone as currently constructed is inherently unworkable. As it now stands, the countries on the periphery of Europe have to run massive trade deficits with the heart of Europe (Germany, mostly), and without the ability to downgrade their currencies, they’re forced to run large public-sector deficits.

  The equation boils down to this: The euro zone needs fiscal union or the euro dies. Perhaps a smaller euro zone could make it. If the EU was just a trading club for the rich nations of Western Europe, fine—that might work. But what’s happening now, I fear, is just delaying a problem that can’t be avoided.

  The problems in Europe are having an unusual side effect on the stock market here. What we’re seeing is an unusually high correlation among stocks. In other words, nearly every stock is moving in the same direction, whether it’s up or down. It’s important for investors to understand this. The last time correlation was this high was in October 1987 when the market crashed.

  Bespoke Investment Group, one of my favorite sites, tracks what it calls “all or nothing days” which is when the advance/decline line for the S&P 500 exceeds plus or minus 400. Since the start of August, more than half of the trading days have been “all or nothing days” which is a rate far greater than seen in previous years. The current market divide has energy, industrial, material and most importantly, financial stocks, soaring on up days, while volatility, gold and bonds rally on down days. The market is behaving like a legislature that has only extremists and no moderates.

  I don’t believe the high correlation portends any ugliness for the U.S. market. Instead, I think it reflects the dominance of geo-political events over the market. Though one important side effect is that when everyone moves the same way, it becomes much harder for hedge fund managers to stand out from the crowd. That’s why we’ve seen crazy action in stocks like Amazon.com ($AMZN) and Netflix ($NFLX).

  As depressing as the news is from Europe, there’s been more cause for optimism here in the U.S. While the economy is far from strong, it appears that the threat of a Double Dip recession in the near-term has fizzled. Last week, we learned that the economy grew by 2.5% for the third quarter. Job growth, of course, has been distressingly poor.

  I’m writing this early Friday morning ahead of the big jobs report. Economists expect that the jobless rate will remain unchanged at 9.1% and that 100,000 new jobs were created last month. Even if we hit that expectation, that’s still pretty poor.

  The good news is that this has been a decent earnings season for the market and especially for our Buy List. The S&P 500 is on track to post record quarterly earnings. The latest numbers show that of the 415 S&P 500 stocks that have reported so far, 288 have beaten expectations, 89 have missed and 38 were in line with estimates. Outside the S&P 500, 64.5% of companies have beaten estimates and that’s better than the previous two quarters. Our Buy List has done even better. Of the 12 Buy List stocks that have reported so far, ten have beaten earnings estimates, one missed and one was inline.

  On Tuesday, Fiserv ($FISV) reported third-quarter earnings of $1.16 per share which was two cents better than estimates. The company also raised its full-year guidance (man, I love typing those words) from $4.42 – $4.54 per share to $4.54 – $4.60 per share. Shortly before the earnings report, Fiserv’s stock gapped up to over $61 but then pulled back after the earnings report came out. Fiserv is a good buy up to $62 per share.

  Our star for the week and perhaps for the entire earnings season was Wright Express ($WXS). The stock soared 12% on Wednesday after its blowout earnings report. The company, which helps firms track their expenses for their vehicle fleets, reported third-quarter earnings of 99 cents per share which was six cents better than Wall Street’s consensus. That’s a 38% jump over last year. The company also said that it expects between 88 cents and 94 cents per share for the fourth quarter (the Street was expecting 94 cents per share). I was happy to see Wright extend its gain on Thursday as well. I rate Wright Express a buy up to $53.

  The big disappointment this week came from Becton, Dickinson ($BDX). For their fiscal fourth quarter, Becton reported earnings of $1.39 per share which was inline with Wall Street’s estimate. The problem was their guidance for the coming year. Becton said that they expect earnings to range between $5.75 and $5.85 per share. That’s far below Wall Street’s forecast of $6.19 per share. I’m disappointed by this news but Becton is still a solid company. Sometime later this month the company will likely raise its dividend for the 39th year in a row. Investors shouldn’t chase this one but if the shares pull back below $65, I think Becton will be a good buy.

  I also need to explain what happened to Leucadia National ($LUK) this week. A ratings company downgraded Jefferies ($JEF) in the wake of the immolation of MF Global. Leucadia owns about one-quarter of Jefferies so that impacted their stock as well. However, it’s not clear that Jefferies’s health is anywhere as dire as MF Global’s. Actually, the facts indicate that it’s almost certainly not.

  At one point on Thursday, shares of Jefferies were off by more than 20% but cooler heads prevailed and the stock finished the session down by just 2.1%. Leucadia took advantage of the panic and picked up one million shares of JEF. At the end of the day, Leucadia’s stock managed to close six cents higher. The stock remains an excellent buy. By the way, this a good lesson on why you should be careful with stop-losses. Panic can set in and bust you out of good trades.

  That’s all for now. In addition to tomorrow’s big jobs report, Moog ($MOG-A) is due to report earnings. Then on Monday, Sysco ($SYY) is scheduled to 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 – November 4, 2011
  Eddy Elfenbein, November 4th, 2011 at 5:12 am

  Papandreou Struggles to Hold on To Power

  European Stocks Rise as Greece Abandons Referendum; Hermes Gains

  Greek ‘Shocker’ Stiffens Irish, Portuguese Resolve

  ECB’s Mario Draghi Offers Hope He Can Do What Europe Needs for Euro

  Japan Starts Bailout of Tepco After Fukushima Causes More Losses

  French Banking Giant BNP Paribas Writes Down Greek Debt as Earnings Slump

  Royal Bank of Scotland Quarterly Profit Falls 63% on EU Crisis

  Don’t Bet on the BRICs

  Oil Rises to Three-Month High as Greece Backs Down on Referendum

  Jobless Claims in U.S. Fell to a One-Month Low Last Week

  As Regulators Pressed Changes, Corzine Pushed Back, and Won

  In an I.P.O., a Clamor for Groupon’s Deal

  Commerzbank Q3, 2012 Target Hit by Greece Impairment

  Starbucks Fourth-Quarter Profit Rises 29% as U.S. Sales Gain

  TPG Capital Enters the Fray for Yahoo

  Roger Nusbaum: Replacement Rate; Hokum and Hooey

  Jeff Miller: Who Gets the Jobs Story Wrong? Everyone!

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