Posts Tagged ‘CA’
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CWS Market Review – January 18, 2013
Eddy Elfenbein, January 18th, 2013 at 8:18 am“Good investing is boring.” – George Soros
Last week, I told you how fear was slowly melting away from this market. That trend continued into this week. Major stock indexes hit five-year highs. The small- and mid-cap indexes made all-time highs. Volatility dropped to a five-year low. So did initial unemployment claims. Poor home construction and industrial production; they only made four-and-a-half year highs.
Here’s what investors need to understand: The denouement of the Fed’s Quantitative Easing policy is the market’s embracing of riskier assets. That’s helped our Buy List tremendously, and it’s precisely why I wrote in the CWS Market Review from five weeks ago, “(t)he risk right now is finding yourself getting left behind.” Our Buy List is already up 5.1% on the year, and we’re barely halfway through January.
Of course, as patient investors, we know that the stock market can quickly take back what’s it’s given us, so that’s why we’re focused on the long-term. I urge all investors to pay close attention to our Buy Below prices. Too often, a bull market makes investors lazy. Mr. Soros is right: “good investing is boring.”
In this week’s CWS Market Review, I want to focus on the strong earnings report from JPMorgan Chase ($JPM). Last week, I told you to expect an earnings beat, and that’s exactly what happened. We also had record earnings from Wells Fargo ($WFC) last Friday. Next week, we have three earnings reports on tap: CA Technologies ($CA), Stryker ($SYK) and Microsoft ($MSFT). I’ll get to those in a bit. But first, let’s look at what’s happening at the legendary House of Morgan.
Buy JPMorgan Chase up to $50
I wish I could take massive amounts of credit for predicting JPMorgan’s ($JPM) earnings beat earlier this week, but honestly, it wasn’t hard to see. Anyone paying attention could see how their business was improving.
For the fourth quarter, JPM earned $1.39 per share, which was up from 90 cents per share in the fourth quarter of 2011. It was also well above Wall Street’s consensus of $1.20 per share. This was a strong quarter across the board. CEO Jamie Dimon said, “The firm’s results reflected strong underlying performance across virtually all our businesses for the fourth quarter and the full year, with strong lending and deposit growth,”
Breaking down the numbers, quarterly revenue jumped 10% to $21.5 billion. For the year, JPM made a profit of $21.3 billion from revenue of $97 billion. This bank is absolutely enormous. It’s more than 1,000 times larger than our beloved Nicholas Financial ($NICK). I’m showing you these numbers because much of the true story about JPMorgan gets lost in the headlines.
Let me explain. Earlier this year, the bank took a $6 billion bath thanks to bone-headed trading out of its London office from the infamous “London Whale.” Yes, that was a terrible, terrible episode, and heads should roll. The point I tried to make last year is that even a gigantic loss like that is still manageable for a titan like JPM.
But when the London Whale news broke, investors panicked and rushed for the exits. In just five weeks, the shares plunged from $44 to $31 (see the chart above). Bear in mind that this was only a few weeks after the company quintupled its dividend. Fortunately, we held on and JPM has been a big winner for us. As well as it’s done for us, I still think the stock is a bargain.
Digging deeper in the earnings report, I was particularly impressed by JPM’s strength in the mortgage sector. Fees from their mortgage business climbed from $723 billion in Q4 of 2011 to just over $2 billion in Q4 of 2012. Bernanke and Co. are clearly making a difference. JPM set aside a smaller amount for mortgage loan losses than Wall Street had expected. This line in the income statement always seems to drive some folks batty, but making provisions for loan losses is what banks do. They can either do too much or too little. They’re never going to be exactly right. I’m going to give a bank that didn’t report a single quarterly loss during the financial crisis the benefit of the doubt.
I also noticed that in JPM’s credit-card business, loans delinquent over 30 days fell from 2.81% a year ago to 2.1% now. That’s a very good sign. On the negative side, the bank took a big $700 million charge in Q4 for the mortgage-abuse settlement that was announced recently.
Here’s how I see JPMorgan. It’s a solid bank. The stock is cheap. Business is doing well, and profits are growing. The problem is that the bank has a poor reputation, and not all of that is unfair. Jamie Dimon is a talented leader, but he’s a loudmouth. He was a good leader during a crisis, but now I think Jamie should depart so JPM can work on rebuilding its image. He can still be on the board, but the bank needs a new public face. Preferably one that’s a little boring.
On Thursday, shares of JPM got as high as $46.87, which is the highest level since April 13, 2011. Due to this strong earnings report, I’m raising my Buy Below on JPM to $50. This is an excellent stock. One more thing: Expect to see a dividend increase in a few weeks.
Fiserv Raises Full-Year Earnings Guidance
There was some rather bizarre news surrounding Fiserv ($FISV) this week. The company announced that it was buying Open Solutions for $850 million. That’s not the odd part. The same day, Fiserv was downgraded by an analyst due to the Open Solutions deal, although an analyst at Oppenheimer upped his price target to $89.
In the very same press release announcing the Open Solutions deal, Fiserv guided higher for all of 2013. Specifically, the company sees 12% earnings growth for 2012, and another 15% to 18% growth for 2013. Since Fiserv earned $4.58 per share in 2011, their guidance translates to earnings of $5.13 per share for 2012, and $5.90 to $6.05 per share for 2013. The Street had been expecting $5.78 for 2013.
The 2012 forecast works out to $1.38 per share for Q4 (which is the only missing piece), and this is four cents below the Street. That, combined with the analyst downgrade, was enough to cause a 3% drop in Fiserv’s stock on Tuesday. Yet the company raised guidance! That’s just silly. Fiserv remains an excellent buy any time you see it below $88 per share.
Three Buy List Earnings Reports Next Week
Next week, three of our Buy List stocks are reporting earnings. The most important will be Microsoft ($MSFT), which Wall Street has turned against recently. MSFT’s last earnings report was a complete dud, and the stock took another hit in November, when the head of Windows abruptly left.
For the upcoming earnings report, Wall Street expects 75 cents per share, which would be a decrease of three cents from one year ago. Unlike the situation with JPM, I can’t so easily say that MSFT will beat earnings. The lower share value, however, has taken a lot of the risk out of owning the stock. Microsoft below $28 has the potential to be a big winner for us, but it’s not in the bag just yet. Let’s be conservative here and rate it a good buy up to $30 per share.
The other reports next week are from Stryker ($SYK) and CA Technologies ($CA). Interestingly, Stryker is our #1 performer for 2013, with a 10.6% gain. If you recall, the company recently raised the low end of its 2012 guidance by a penny per share, and reiterated its full-year forecast of $4.25 to $4.40 per share. I like this stock a lot. Stryker remains a good buy up to $62.
CA Technologies is our second-best performer for 2013, +10.2%. After a horrible slide late last year, CA has impressively recovered lost ground. Wall Street currently expects earnings of 57 cents per share. I think CA should be able to beat that. I’m raising my Buy Below on CA Technologies to $27.
In addition to raising JPM to $50 and CA to $27, I’m also bumping up Cognizant Technology (CTSH) to $81 and Medtronic ($MDT) to $48.
That’s all for now. Remember that the stock market will be closed on Monday in honor of Dr. Martin Luther King’s birthday. We’ll also have a few more earnings reports next week. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!
– Eddy
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CA Technologies Earns 63 Cents Per Share
Eddy Elfenbein, July 26th, 2012 at 5:05 pmAfter the closing bell, CA Technologies ($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 $2.50 per share. The odd thing is that they actually increased their constant currency growth range from 9% – 12% to 10% – 12%. The difference is that the strong euro is eating their bottom line.
Business is good, but the currency environment is bad.
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CWS Market Review – May 11, 2012
Eddy Elfenbein, May 11th, 2012 at 7:40 amThe stock market finally broke out of its trading range this week. Unfortunately, it was to the downside. More troubles from Europe, including shake-up elections in France and Greece, helped the S&P 500 close Wednesday at its lowest level in nine weeks. However, the initial jobless claims report on Thursday helped us make up a little lost ground.
In this week’s CWS Market Review, I’ll explain why everyone’s so freaked out (again) by events in Europe. I’ll also talk about the latest revelations from JPMorgan Chase ($JPM). The bank just told investors that it lost $2 effing billion on effing derivatives trades gone effing bad. I’ll have more to say on that in a bit. We also had more strong earnings reports from our Buy List stocks DirecTV ($DTV) and CA Technologies ($CA), and shares of CR Bard ($BCR) just hit a 10-month high.
Greece Is Bad but the Real Story Is Spain
But first, let’s get to Greece. Here’s the 411: The bailout deals reached by Greece required them to get their fiscal house in order. The problem is that no one asked the voters. Now they’ve been asked and the voters don’t like it at all. Actually, I understated that—they’re royally PO’d.
Greece is massively in debt. They owe the equivalent of Switzerland’s entire GDP. Politically, everything has been upended. In Greece, there are two dominant political parties and both got creamed in the recent election. Seventy percent of Greeks voted for parties opposed to the bailouts. Mind you, the supposed beneficiaries of the bailout are the ones most opposed to them.
Since there was no clear-cut winner in the election, folks are scrambling to build a governing coalition. This won’t be easy. Whatever they do come up with probably won’t last long and they’ll need new elections. As investors, we fortunately don’t need to worry about the minutia of Greek politics. The important aspect for us is that the Greek public wants to ditch the austerity measures into the Aegean, but that means giving up all that euro cash that was promised them.
My take is that the bigwigs in Greece will do their best to stay in the euro but try to get the bailout terms renegotiated. That puts the ball in Europe’s court, and by Europe, I mean Germany. Too many people have invested too much to see the European project go down in flames. I think the Europeans will ultimately make some concessions in order to keep the euro going. If one country leaves the euro, it sets a precedent for others to leave—and that could start a flood.
As bad of a shape as Greece is in, they’re small potatoes (olives?). The real story is what’s happening in Spain. For the fourth time, the country is trying to convince investors that its screwed-up banks aren’t screwed-up. The problem is that Spanish banks are loaded down with toxic real estate debt.
The Spanish government is trying to prop up the banks, but it may delay the problem rather than solve it. It just took control of Bankia which itself was formed when the government forced some smaller banks together in an effort to save them. What’s most troubling about the problems in Spain is that the future is so cloudy. I really can’t say what will happen. Nouriel Roubini said that Spain will need an external bailout. If so, that may lead to a replay of what we’re seeing in Greece, except it would be much, much larger.
The immediate impact of the nervousness from Europe is that it spooked our markets. On May 1st, the Dow got to its highest point since 2007. The index then fell for six straight days which was its longest losing streak since August. But here’s the key: not all stocks are falling in the same manner.
Investors have been rushing away from cyclical sectors and towards defensive sectors. For example, the Utilities Sector ETF ($XLU) closed slightly higher on Thursday than it did on May 1st. Low-risk bonds are also doing well. Two months ago, the 30-year Treasury nearly broke above 3.5%. This past week, it dipped below 3%. On Thursday, Uncle Sam auctioned off $16 billion in 30-year bonds and it drew the heaviest bidding in months.
The trend towards defensive stocks is holding back some of our favorite cyclical stocks like Ford ($F), Moog ($MOG-A) and AFLAC ($AFL). Let me assure investors that these stocks are very good buys right now and I expect them to rally once the skies clear up.
JPMorgan Chase Reveals Huge Trading Losses
Now let’s turn to some recent news about our Buy List stocks. The big news came after Thursday’s closing bell when JPMorgan Chase ($JPM) announced a special conference call. CEO Jamie Dimon told investors that the bank took $2 billion in trading losses in derivatives and that it could take another $1 billion this quarter. Jamie, WTF?
For his part, Dimon was clear that the bank messed up. This is very embarrassing for JPM and frankly, I don’t expect this type of mismanagement from them. The stock will take a big hit from this news, but it doesn’t change my positive outlook for the bank. (Matt Levine at Dealbreaker has the best explanation of the losses: “This was not driven by the market moving against them (though it seems to have); it was driven by them getting the math wrong”).
As ugly as this is, it’s not a reflection of JPM’s core business operations. Sure, it’s terrible risk-management. But as far as banking goes, JPM is in good shape. Don’t be concerned that JPM faces a similar fate as the banks in Spain. They don’t. In fact, most banks in the U.S. are pretty safe right now. Warren Buffett recently contrasted U.S. banks with European banks when he said that our banks have “liquidity coming out of their ears.” He’s right. JPMorgan Chase remains a very good buy up to $50 per share.
Bed Bath & Beyond ($BBBY) surprised us this week by buying Cost Plus ($CPWM) for a half billion dollars. The deal is all-cash which is what I like to hear. The best option for any company is to pay for an acquisition without incurring new debt.
BBBY said they expect the deal to be slightly accretive. That means that BBBY is “buying” CPWM’s earnings at a price less than the going rate for BBBY’s earnings. As a result, the deal will show a net increase to BBBY’s bottom line for this year. The press release also said: “Bed Bath & Beyond Inc. continues to model a high single digit to a low double digit percentage increase in net earnings per diluted share in fiscal 2012.” I’m keeping my buy price at $75.
Now let’s look at some earnings. On Monday, Sysco ($SYY) had a decent earnings report although the CEO said the results “fell short of our expectations.” Sysco is a perfect example of a defensive stock since the food service industry isn’t adversely impacted by a downturn in the business cycle. The key with investing in Sysco is the rich dividend. The company has increased their payout for 42 years in a row, and I think we’ll get #43 later this year, although it will be a small increase. Going by Thursday’s close, Sysco yields 3.87%. Sysco is a good buy up to $30.
DirecTV ($DTV) reported Q1 earnings of $1.07 per share. That’s a nice jump over the 85 cents per share they earned a year ago. DirecTV’s sales rose 12% to $7.05 billion which was $10 million more than consensus. The company has done well in North America, but they see their future lying in Latin America. DTV added 81,000 subscribers in the U.S. last quarter. In Latin America, they added 593,000. Yet there are more than twice as many current subscribers in the U.S. as there are in Latin America. Last year, revenue from Latin America revenue grew by 42%.
DirecTV has projected earnings of $4 per share for this year and $5 for 2013. This earnings report tells me they should have little trouble hitting those goals. The shares are currently going for less than 11 times this year’s earnings estimate. They’re buying back stock at the rate of $100 million per week. DirecTV is a solid buy below $48 per share.
On Thursday, CA Technologies ($CA) reported fiscal Q4 earnings of 56 cents per share. That’s a good result and it was four cents better than Wall Street’s estimates. For the year, CA made $2.27 per share which is a nice increase over the $1.92 from last year. For fiscal 2013, CA sees revenues ranging between $4.85 billion and $4.95 billion and earnings-per-share ranging between $2.45 and $2.53. I’m impressed with that forecast, but Wall Street had been expecting revenues of $5 billion and earnings of $2.50 per share. The stock was down in the after-hours market on Thursday, but I don’t expect any weakness to last. CA is going for less than 11 times the low-end of their forecast.
A quick note on Oracle ($ORCL): The stock took a hit this week on the news of Cisco’s ($CSCO) lousy outlook. Oracle is also in the middle of a complicated intellectual property trial with Google ($GOOG). I doubt the trial will go Oracle’s way, but the dollar amounts involved are pretty small compared with the size of these two firms. On Thursday, Oracle fell below $27 for the first time since January. That’s a very good price. The stock is a good buy up to $32.
That’s all for now. Wall Street will be focused on Facebook’s massive IPO scheduled for next Friday. The stock might fetch 99 times earnings. I’m steering clear of this one. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!
– Eddy
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Dividends Are Making a Comeback
Eddy Elfenbein, April 3rd, 2012 at 11:04 amNow that the first quarter is over, we have some stats on dividends. The S&P 500 paid out 7.09 in dividends (that’s the number adjusted for the index) which is a 15.06% increase over the first quarter of 2011.
I think this will be a very good year for dividends, especially with the dividend news from Apple ($AAPL). The market also responded very well to the five-fold dividend increase from CA Technologies ($CA), plus the recent increase at JPMorgan ($JPM). So far this year, there have been 122 dividend increases in the S&P 500, plus seven new dividend payers. Only three companies have lowered their payouts.
Looking at dividends has been a surprisingly good way of valuing the market over the past few years. You can never be quite sure about a company’s earnings or cash flow since accounting rules allow for enormous latitude. But if a company is willing to send shareholders a check, you can be pretty certain those numbers are legit (though not always).
Dividends also tend to be very stable. Once a company raises its quarterly dividend, there’s an implicit understanding that that’s the new level. Shareholders will put up with a lot, but they do not like cuts in dividends, and woe be unto the company that lowers their payout. The recent recession, however, saw an unusually higher number of cut dividends or suspended payouts altogether. In 2009, annual dividends dropped by 21%. Contrast this with 2001 when the stock market crash led to dividends falling by just 3%.
The lower dividends this time around have been largely concentrated in the financial sector. Part of this is due to rules around receiving TARP payments. I don’t have the exact numbers for the financial sector but the quarterly dividends for the Financial Sector ETF ($XLF) fell about 70%. The Financial Sector currently makes up 15% of the S&P 500.
The good news is that higher profits are leading to higher dividends. Dividends are on pace to hit a new record this year. On top of that, the dividend payout ratio—the percent of profits paid out as dividends—is still below 30% which is far below normal.
Here’s a look at the S&P 500 in the black line along with its dividends in the blue line. The black line follows the left scale and the blue line follows the right. The two lines are scaled at a ratio of 50-to-1 which means that the S&P 500 yields exactly 2% whenever the lines cross.
I think the chart shows some interesting facts. For example, you can see how different the market crashes of 2000-01 and 2008-09 were. In the first, prices soared above fundamentals. In the latter, fundamentals crumbled beneath the price. From 2003 to 2007, stock prices generally followed the trend in dividends. We can also see how much investors panicked during the financial crisis. In March 2009, the S&P 500’s dividend yield eventually reached 4%.
I asked Howard Silverblatt, the head stat guy at S&P, to tell me the dividend estimate for this year. He said it’s $29.70. To equal a dividend yield of 2%, the S&P 500 needs to get to 1,485 which is a 4.6% jump by the end of the year.
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Good Day for Us!
Eddy Elfenbein, January 25th, 2012 at 2:16 pmThe S&P 500 just broke 1,322 which is another six-month high.
Thanks to big moves from Stryker ($SYK) and Hudson City ($HCBK), this is a huge day for our Buy List. Of course, the best gain of all comes from CA Technologies ($CA) which has been up as much as 14.76% today. Hudson City got as high as $7.46 and Stryker got up to $55.17.
As of 2 pm, the S&P 500 is up 0.51% and our Buy List is up 1.21%.
For the year, we’re up 7.59% while the S&P 500 is up 5.00%.
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CA Technologies Posts Huge Earnings, Quintuples Dividend
Eddy Elfenbein, January 24th, 2012 at 6:00 pmWow, CA Technologies ($CA) knocked the cover off the ball. The stock is up 17% in the after-hours market, and that’s on top of rising 1.69% today.
For fiscal Q3, CA earned 65 cents per share, 11 cents more than Wall Street’s estimate. The company is also raising its annual dividend five-fold. Quarterly revenue came in at $1.263 billion compared with Wall Street’s estimate of $1.21 billion.
CA also raised its 2012 EPS guidance. The company now sees 2012 earnings (ending March 31st) ranging between $2.21 and $2.25 per share. The old range was $2.13 to $2.18 per share. Wall Street had been expecting $2.15 per share.
Income from continuing operations rose 34 percent to $263 million, or 54 cents a share, from $196 million, or 38 cents a year earlier, the company, which operates as CA Technologies, said today in a statement. Excluding some items, profit was 65 cents, beating the 54-cent average estimate of analysts surveyed by Bloomberg.
Revenue rose 10 percent to $1.26 billion, exceeding analysts’ $1.21 billion estimate. Chief Executive Officer Bill McCracken has spent about $1.8 billion on acquisitions in recent years as he seeks to lessen the Islandia, New York-based company’s dependence on mainframe products and expand in technology security and management, including cloud software.
For the fiscal year ending March 31, CA said sales will rise 6 percent, the high end of its prior range. The company raised its forecast for adjusted earnings to $2.21 to $2.25 from $2.13 to $2.18.
CA Technologies will return $2.5 billion to shareholders by March 31, 2014, by increasing its annual dividend to $1 from 20 cents, and repurchasing $1.5 billion of stock, including about $230 million remaining under its existing authorization.
CA is hiking its annual dividend from 20 cents per share to $1.00 per share.
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