Posts Tagged ‘ibm’

• Happy 125th Birthday, Dow Jones Industrial Average!
  Eddy Elfenbein, May 26th, 2021 at 9:01 am

  The Dow Jones Industrial Average (DJIA) was born 125 years ago on May 26, 1896. To give you an idea of how long the Dow has been around, its birth is closer to the Declaration of Independence than it is to today.

  The index was the brainchild of Charles Dow, who was the editor of the Wall Street Journal. When the index started, it only had 12 stocks. The list grew to 20 stocks in 1916, and it reached its present total of 30 stocks in 1928.

  The index has only changed 55 times over the last 124 years. In fact, the Dow has had two separate streaks of going 17 years without a single change — once from 1939 to 1956, and again from 1959 to 1976.

  Until recently, General Electric (GE) was the only one of the original 12 from 1896 left in the index, but GE was removed two years ago. A few stocks have been long-time members. ExxonMobil or Standard Oil of NJ (XOM) has been a member since 1928. Procter & Gamble (PG) joined in 1932. A few other stocks like Coca-Cola (KO) and International Business Machines (IBM) were taken out only to be put back in.

  The Dow’s history with IBM is a good investing lesson. The keepers of the index decided to kick out IBM in 1939 only to change their minds 40 years later and bring it back. Over those 40 years, shares of IBM soared 22,000%.

  Oops.

  If IBM had been in the index, the Dow would have broken 1,000 in 1961 instead of 1972. By my rough estimate, the index would be over 4,000 points higher today. If that wasn’t bad enough, the Dow was subsequently punished by IBM’s addition in 1979 as that marked a period of slow growth for the company.

  I can’t hide my feelings. I think the Dow is a lousy index. I rarely refer to it here on the blog. The reason is that it’s just 30 stocks and the index is weighted by price instead of by market value. Perhaps that made sense 80 years ago, but it’s not needed today. The only reason the Dow is still in the news is because the index is owned by the Wall Street Journal.

  Still, I have to give credit for Charles Dow for starting the index. Anything that’s still quoted 125 years later deserves a tip of my cap.

  Here’s to 125 more!

• CWS Market Review – October 24, 2014
  Eddy Elfenbein, October 24th, 2014 at 7:12 am

  “Buy not on optimism, but on arithmetic.” – Benjamin Graham

  In last week’s CWS Market Review, I said I thought the market’s panic had reached a peak last Wednesday, and so far, that seems to be the case. The S&P 500 has now rallied for five of the past six days. The only downer was the day of the awful shooting in Ottawa. On Tuesday, the S&P 500 had its best day in more than a year, and the index rose back above its 200-day moving average. By the end of the day on Thursday, the S&P 500 stood 130 points above last Wednesday’s low. That’s quite a turnaround.

  Probably a better gauge of the change of sentiment is the Volatility Index ($VIX). The VIX basically doubled in a week, then was halved the following week. I thought it was interesting that stocks fell briefly late Thursday on the news of a possible Ebola case in New York City. The case has since been confirmed. I can’t prove this, but I think that same story would have caused far more damage to the market if it had occurred sometime last week.

  

  Let me caution you that I don’t think we’re out of the woods just yet. The new Ebola case certainly won’t help, but the worst of the market’s nervousness is probably behind us. The market likes to “retest” its lower bound after it goes through a stretch of turbulence. I think there’s a good chance that could happen again.

  For now, investors should be focused on third-quarter earnings. The early numbers are quite good. So far, 79% of companies in the S&P 500 have beaten their earnings expectations, while 60% have beaten their revenue estimates. For our Buy List, we had a mixed bag this week. We had good earnings from Microsoft and CR Bard, but poor earnings from IBM. I’ll run down the results in a bit. I’ll also focus on more Buy List earnings for next week. Plus, I’ll update you on Ross Stores and DirecTV. But first, let’s look at the disappointing news from IBM.

  Buy List Earnings: Some Good, Some Not So Good

  On Sunday evening, IBM ($IBM) had a surprise announcement. The company said it was releasing its Q3 earnings on Monday morning instead of after the bell, as originally planned. Mysteriously, the company also said they had a major business announcement.

  The business announcement turned out to be that they’re paying Globalfoundries Inc. $1.5 billion to take their money-losing chip-making business off their hands. Sorry IBM, but that’s not so major.

  Then came the earnings report, which was very poor. For Q3, Big Blue earned $3.68 per share, which was 63 cents below expectations. Ugh! IBM also ditched their 2015 earnings target of $20 per share. That goal had been set five years ago by the previous CEO. There was no way they were going to make it.

  I don’t know a better way to phrase it, but last quarter was ugly. This was IBM’s tenth-straight quarter showing a decline in revenues. Quarterly revenues came in at $22.4 billion, which was nearly $1 billion below expectations.

  The stock dropped 7% on Monday. The plunge cost Warren Buffett nearly $1 billion. I’m very disappointed with IBM, and I doubt they’ll be back on next year’s Buy List. I didn’t realize the problems ran so deep. I’m lowering my Buy Below on IBM to $177 per share.

  Unimpressive Results from McDonald’s

  IBM wasn’t the only bad earnings report. McDonald’s ($MCD) had a dud, too. On Tuesday, Mickey D’s said that quarterly earnings plunged 30%. Revenue fell 5% to $6.99 billion, which was $20 million below expectations.

  Excluding a bunch of charges, the burger giant earned $1.51 per share, which was 14 cents better than expectations. That’s about the only sliver of good news, but the details of MCD’s report aren’t good. Same-store sales fell by 3.3%, which was more than expected. Compare that to Chipotle ($CMG), where same-store sales grew by 19.8%.

  In Europe, McDonald’s same-store sales were down 1.4%, and in China, they dropped by 22.7%. There was a scandal in China involving a supplier changing expiration dates (when it rains, it pours…).

  McDonald’s realizes they’re in trouble and need to turn themselves around. Their situation isn’t quite as dire as IBM’s, but they need to change course quickly. The stock didn’t get punished too badly, since it was already down so much. The big dividend helps. MCD now yields 3.7%. I’m lowering my Buy Below on MCD to $96 per share.

  Good Earnings from CA Technologies, CR Bard and Microsoft

  CA Technologies ($CA) reported fiscal Q2 earnings of 65 cents per share. That was three cents better than estimates. Technically, the company raised its earnings guidance, but the currency adjustment nullified that. CA now sees full-year earnings ranging between $2.40 and $2.47 per share. The previous range was $2.42 to $2.49 per share

  CA has been a disappointment this year, but the company is still basically hitting its goals. They expect cash flow from continuing operations to rise by 5% to 12%. That’s not bad. I also like the rich dividend yield. CA Technologies is a buy up to $30 per share.

  CR Bard ($BCR) had another strong quarter and raised guidance. The medical-equipment company told us to expect Q3 earnings between $2.07 and $2.11 per share. In July, I said they “shouldn’t have trouble hitting that.” It turns out they earned $2.15 per share, and net sales rose 9% to $830 million. Wall Street had been expecting earnings of $2.10 per share and revenue of $818 million.

  

  For Q4, Bard sees earnings ranging between $2.22 and $2.26 per share. Previously Bard said to expect full-year earnings between $8.25 and $8.35 per share. Now they say earnings will range between $8.34 and $8.38 per share, and that includes 10 cents per share lost to forex. The shares gapped up 4.2% on Thursday and hit a fresh 52-week high. CR Bard remains a solid buy up to $160 per share.

  After the bell on Thursday, Microsoft ($MSFT) reported fiscal Q1 earnings of 54 cents per share. That topped expectations of 49 cents per share. Revenue came in at $23.2 billion, which was over $1 billion more than expectations.

  The results are pretty impressive. Microsoft is doing well across the board. Their cloud business is going especially well (revenues +128%). Shares jumped more than 3% in the after-hours market. I’m raising my Buy Below on Microsoft to $50 per share.

  We also have Ford Motor ($F) reporting later today. I’ll have details on the blog.

  Four Buy List Earnings Reports Next Week

  We have four more earnings reports coming our way next week; three of them are on Tuesday. Here’s an Earnings Calendar of our Buy List stocks for this earnings season.

  On Tuesday, AFLAC ($AFL) is due to report third-quarter earnings. The duck stock has been in a difficult position this year because their operations are humming along just fine. AFLAC is hitting its targets and making a steady profit. The problem has been the weak yen. AFLAC does a ton of business in Japan, and the government there has been trying to bring down its currency relative to the U.S. dollar. That means that AFLAC’s profits get stung when the money is translated from yen into dollars.

  Last quarter, AFLAC only lost three cents per share due to forex—that’s a lot less than they lost in previous quarters. For Q3, the CEO said he expects operating earnings of $1.38 to $1.47 per share, assuming the yen is between 100 and 105. The exchange rate stayed close to 102 from February to August but gapped as high as 110 a few weeks ago. AFLAC currently expects full-year earnings to range between $6.16 and $6.30 per share, which means the stock is going for less than 10 times this year’s earnings.

  One more point: AFLAC has increased its dividend for the last 31 years in a row. You can see why I’m such a fan. Last year, they announced their dividend increase along with their third-quarter earnings report. I doubt AFL will forego a dividend increase this year, but it may be very modest, as in one penny per share. AFLAC currently pays a 37-cent quarterly dividend, which now yields 2.5%.

  Express Scripts ($ESRX) was our big winner last earnings season. The pharmacy-benefits manager beat earnings by a penny per share and narrowed their full-year guidance. That was enough to spark a two-day gain of more than 7%. I think some traders had been expecting much worse results, so it was a classic relief rally. Analysts expect Q3 earnings of $1.20 per share. My numbers say it will be a bit higher.

  Fiserv ($FISV) is one of my favorite long-term holdings. The company consistently churns out steady profits. In July, Fiserv said they expect full-year earnings to range between $3.31 and $3.37 per share. That’s a nice increase from $2.99 per share last year. Wall Street expects 84 cents per share for Q3. That sounds about right.

  Moog ($MOG-A) usually reports its earnings on Friday just after I send you the newsletter, but I don’t want you to feel I’m neglecting this stock. Shares of Moog have been especially hot lately, and they’re not far from hitting a new all-time high. This next report will be for their fiscal Q4. The company said they expect full-year earnings of $3.65 per share. Since Moog already made $2.59 per share for the first three quarters, that means they expect $1.06 per share for Q4. Moog expects earnings growth of another 16% for the current fiscal year. There aren’t many stocks doing that.

  Updates on DirecTV and Ross Stores

  AT&T ($T) had a poor earnings report and lower guidance, which knocked the stock down. Unfortunately, that also impacts DirecTV ($DTV). According to the merger deal, AT&T will pay $95 per share for each share of DTV. The deal is for cash and AT&T stock, but there’s a collar in place to protect both parties.

  Here’s how it works: If AT&T is below $34.90 per share when the deal closes—and we still don’t know when that will be but I assume it will be sometime in 2015—then DTV shareholders get $28.50 in cash plus 1.905 shares of AT&T. With the lower AT&T share price share, that comes to $92.62, going by Thursday’s close.

  That’s the problem with using stock in a buyout; you’re tied to the fortunes of the other guy. I won’t venture to guess how low AT&T can fall, but I’ll note that at this lower price, the stock yields nearly 5.5%.

  Don’t worry about DirecTV. It’s still doing well. I’m lowering our Buy Below to $90 per share to better reflect the current market. DTV reports earnings on November 6.

  Remember all the trouble we had with Ross Stores ($ROST) earlier this year? In July, the stock got as low as $61.83 per share. Fortunately, the earnings report in August was very good, and the deep discounter raised guidance. The shares have been doing very well ever since, and this week, ROST broke above $81 per share. This is why we follow the fundamentals instead of panicking at every blip. This week, I’m raising my Buy Below on Ross Stores to $83 per share. Fiscal Q4 earnings are due in another month.

  That’s all for now. The Federal Reserve meets again next week, and they’ll very likely announce the end of QE. Stay turned. The Fed’s decision will come on Wednesday at 2 p.m. On Thursday, we’ll get the initial report of Q3 GDP growth. There’s another durable-goods report on Tuesday, plus many more earnings reports. 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

• CWS Market Review – April 11, 2014
  Eddy Elfenbein, April 11th, 2014 at 7:42 am

  “Individuals who cannot master their emotions are ill-suited
  to profit from the investment process.” – Benjamin Graham

  That’s so true. I’ve always thought that if things didn’t work out for Mr. Spock at Starfleet, he would have made a killer value investor. Once again, emotions boiled to the surface on Wall Street this week. Most specifically, the emotion of fear. On Thursday, the S&P 500 lost 2.1%, and the Nasdaq Composite dropped 3.1% for its worst day since 2011. Those two got off easy compared with the Nasdaq Biotech Index, which plunged 5.6%.

  Having heard those numbers, you´d probably think the economic news on Thursday was terrible. Not at all. The Department of Labor reported that initial claims for unemployment insurance dropped to their lowest level in seven years. In other words, the jobs market is getting better. On Tuesday, we learned that jobs openings climbed to a six-year high. So why are traders so upset?

  In this issue of CWS Market Review, I’ll walk you through Wall Street’s latest panic attack, and more importantly, I’ll tell you what to do about it. I’ll also cover the disappointing earnings guidance from Bed Bath & Beyond, and I’ll preview IBM’s earnings report for next week. This is a crucial time for the market; U.S. corporations are sitting on $1.64 trillion in cash, the Federal Reserve is winding down an unprecedented experiment on the economy and earnings season is upon us. But first, let’s see why Value is beating the stuffing out of Growth.

  The Current Sell-Off Is about Valuation, Not the Economy

  If it feels like it was less than a week ago that the S&P 500 touched an all-time intra-day high, that’s because it was. From the big-picture perspective, the drop in the past week hasn’t been that much—just under 3%. But what makes it interesting is that the pain hasn’t been evenly distributed.

  Here’s what investors need to understand: The current sell-off has been focused on valuation, not on economically-sensitive areas. This is important. Many of the richly valued, raging-bull stocks have been clobbered, while their more reasonably-priced cousins have barely been touched. Stocks like Gilead and Amazon are more than 20% below their 52-week highs.

  Some observers have said that that the tech sector has been hit hard, but that’s not quite right. It’s been the big-name and richly-valued tech stocks like Facebook, Twitter and Tesla that have been taken down. But more sensibly valued names like Apple or Buy List favorite IBM have done just fine. Some of our favorite tech stocks like Oracle, Microsoft and Qualcomm have outpaced the Nasdaq over the last several sessions.

  We can also see the effect by looking at the environment for Initial Public Offerings. That’s probably the most emotion-based part of the market. Not too long ago, investors were eager to snatch up whatever IPO Wall Street was throwing their way. Not anymore. La Quinta, the hotel franchise, was recently priced below expectations. Ally Financial flopped on its first day of trading, and King Digital, the Candy Crush people, was another disappointment.

  We have to remember that the stock market has rallied for five straight years, so naturally investors grow complacent. As the bull market rages, we typically see shares in companies long on promises and short on results grab most of the gains. Now we’re witnessing a swift reaction.

  What’s been happening is that the market is shifting from favoring Growth stocks to favoring Value stocks. (One effect of this shift is that large-cap is beating small-cap, but that’s the tail, not the dog.) This shift didn’t surprise me, but its pace and magnitude did. As a proxy for Growth and Value, I like to look at the ETFs run by Vanguard. Since February 25, the Growth ETF ($VUG) has lost 3.8%, while the Value ETF ($VTV) has gained 1.2%. That may sound small, but it’s a dramatic turn for such a short period of time and for such broad categories. Here’s a look at the VTV divided by the VUG. Notice how sharp the spike has been.

  

  Now investors have been flocking to areas of safety (dividends, earnings, strong brands). For example, the S&P 500 Utilities Sector ($XLU) has been one of the top-performing market sectors. This is a direct reaction to the Fed’s policies because folks want to lock in those rich yields before rates go up.

  Speaking of which, probably most surprising to many market watchers has been the strength in the bond market, especially at the long end. The yield on the 20- and 30-year Treasuries recently dropped to their lowest levels since July. The Long-Term Treasury ETF ($TLT) has been beating up the stock market this year. The long-term yields were already low, and they’ve gotten lower. The TLT is up 7.8% this year, while the S&P 500 is in the red.

  A stronger shift from Growth to Value doesn’t worry me. On balance, it’s good for our Buy List. I would be much more concerned if I saw a rapid deterioration in many cyclical sectors. For example, the Homebuilders ($XHB) have been down, but nowhere near as severely so as the biotechs. The S&P 500 Industrials ($XLI) are also down, but largely in line with the rest of the market. That’s important because the market doesn’t see a broad industrial decline (at least, not yet). Some cyclicals, like our very own Ford, have actually led the market in recent days.

  Overall, I think this newfound skepticism is healthy for investors. They’re questioning some of these rich valuations. Later on, I’ll talk about the news from Bed Bath & Beyond, but let’s put this in its proper context. BBBY’s bad news is that their earnings would be as high as we expected. Still, they have no debt, lots of cash and a strong cash flow. Compare that with Twitter, which is expected to make a total profit this year of one penny per share. Twitter´s profit margin for Q4 was -210%. In other words, they spent three times what they took in. So you can understand why investors might have second thoughts about that valuation. As Mr. Spock might say, “it’s only logical.” Now let’s look at some opportunities for bargain hunting in this market.

  What to Do Now

  Obviously, the first thing investors should do is not panic. For disciplined investors, times like this are your friends. This is also a good time for investors to focus on fundamentals. Not only are dividends in demand, but I think they’re going to be more demand as the year goes on.

  We have several stocks on our Buy List with strong dividends, and prospects for even higher dividends. Let’s start with Ford Motor ($F), which increased its dividend by 25% earlier this year. The sales report for March was quite good. The earnings report for Q1 might not be so good, but that’s due to environment, not Ford. The company is improving its operations in Europe. Plus, General Motors has had some high-profile issues of late. The stock is going for eight times next year’s earnings. Ford currently yields 3.2%, and I rate it a very good buy up to $18 per share.

  Another solid dividend Buy Lister is Microsoft ($MSFT). Thanks to their new CEO, for the fist time in a generation, Microsoft is hip. The last two earnings reports were quite good, and I’m looking for another one later this month. Last September, Microsoft increased its dividend by 22%. We should see another healthy increase later this year. The stock currently yields 2.8%. Microsoft remains a solid buy up to $43 per share.

  I’m writing this to you on Friday morning, ahead of the first-quarter earnings report from Wells Fargo ($WFC). The bank just won approval to raise its dividend by 16.7%. They have plenty of room to raise the dividend even more next year. Wells currently yields 2.9%. WFC is an excellent buy up to $54 per share.

  McDonald’s ($MCD) was one of the few stocks that rallied yesterday. That probably has a lot to do with its rich dividend. MCD currently yields 3.3%, which is a good deal in this market; that’s more than a 20-year Treasury. The fast-food chain is working hard to revamp itself. Look for a good earnings report the week after next. MCD is a good buy up to $102 per share.

  Bed Bath & Beyond Is a Buy up to $71 per Share

  On Wednesday, Bed Bath & Beyond ($BBBY) reported fiscal Q4 earnings of $1.60 per share. The home-furnishings store had said that earnings should come in between $1.57 and $1.61 per share. Clearly, this was a weak quarter for them. BBBY estimates that the lousy weather took six to seven cents per share off their bottom line.

  The details weren’t encouraging. Quarterly sales dropped 5.8% to $3.203 billion. Comparable-store sales, which is the key metric for retailers, rose 1.7%. For the full year, BBBY made $4.79 per share, which is up from $4.56 in the year before.

  As I’ve mentioned before, the poor Q4 numbers were expected, but I was curious to hear what they had to offer for guidance. For Q1, BBBY expects earnings to range between 92 and 96 cents per share. The consensus on Wall Street was for $1.03 per share. For the year, they expect earnings to rise by “mid-single digits.” If we take that to mean 4% to 6%, then their guidance works out to a range of $4.98 to $5.08 per share. Wall Street had been expecting $5.27 per share.

  I’m not pleased with this guidance. The shares took a 6% cut on Thursday. Still, we should focus on some positives; BBBY is a well-run outfit, and they’ve been in tough spots before. The balance sheet is very strong, and they’ve been buying back tons of shares (though at higher prices). I’ll repeat what I said last week: don’t count these guys out. Bed Bath & Beyond remains a good buy up to $71 per share.

  Expect Good Earnings from IBM

  IBM ($IBM) is slated to report earnings after the closing bell on Wednesday, April 16. In January, Big Blue beat consensus by 14 cents per share, but a lot of that was driven by cost-cutting. Quarterly revenues fell 5.5% to $27.7 billion. That was $600 million below forecast, and it was the seventh-straight quarter of falling sales.

  Here’s how I see it: IBM is at a crossroads right now. Much of the world is shifting to cloud-based networks, and a lot of people think IBM is being left behind. But IBM isn’t sitting still. The company is moving towards the cloud, and they’re getting rid of their lower-margin businesses. For example, they recently sold their server business to Lenovo for $2.3 billion. This may surprise a lot of people, but IBM’s cloud revenue rose by 69% last quarter.

  For 2013, IBM earned $16.28 per share. They made a bold prediction saying that they expected to earn at least $18 per share this year. Still, Wall Street seems dubious. The consensus for 2014 earnings has slid from $18 per share a few months ago to $17.85 per share today.

  

  For the first time in a long time, the stock is doing well (see above). On Thursday, IBM came close to trading over $200 per share for the first time in nine months. For Q1, Wall Street had set the bar low. Very low. The current consensus is for earnings of $2.54 per share, which is a decline of 15% from last year’s Q1. My numbers say IBM should beat that. I also expect IBM to raise its dividend later this month. The current dividend is 95 cents per share, and I think Big Blue could bump it up to $1.05 per share. The stock is going for about 11 times their own estimate for this year’s earnings. IBM remains a good buy up to $197 per share.

  That’s all for now. Next week we’ll get important reports on inflation and industrial production, plus the Fed’s Beige Book (by the way, that’s a great resource for looking at the economy). The stock market will be closed next Friday for Good Friday. This is usually the one day of the year when the market is closed but most government offices are open. 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

• CWS Market Review – January 24, 2014
  Eddy Elfenbein, January 24th, 2014 at 9:21 am

  “Successful investing is anticipating the anticipations of others.” – JM Keynes

  The stock market has been getting bumped around lately, and it hasn’t had much direction at all. Since December 23rd, the S&P 500 has closed every day but one between 1,826 and 1,849. That’s a fairly narrow range, although we are starting to see some behind-the-scenes rotations. For example, healthcare stocks are outperforming as consumer discretionary issues are lagging. The bond market has quietly improved, and the 10-year yield just hit a six-week low.

  

  Of course, the major focus this week has been earnings, earnings and more earnings. The theme so far is that not even good earnings are enough. Investors want to see big earnings beats plus higher guidance. If you don’t have both, you’re in trouble.

  We’re still fairly early in the Q4 earnings season. Some 109 of the 500 stocks in the S&P 500 have reported so far. Of those, 74% have beaten their earnings estimates, while 67% have beaten their sales estimates. Unfortunately, those numbers sound better than they are when we consider that going into earnings, many companies had rolled back expectations. Essentially, they lowered the bar to the ground and now expect applause from investors for stepping over it. Well, that hasn’t been happening.

  Fortunately, our Buy List stocks have reported very good earnings results so far. Again, it’s early, but all six stocks have beaten expectations. A few beat them by a lot. However, the stocks haven’t been richly rewarded by the market. It’s not just our stocks; no one’s getting any earnings love, and this really shows the market’s ornery temperament.

  Make no mistake: I still like the environment for stocks, but we have to come to terms with the reality that the market’s easy gains have already been made. This year won’t be as easy and stress-free as last year was. We’ll still see gains, but we need to be patient and have some humility.

  In this week’s CWS Market Review, I’ll run through our Buy List earnings reports. We had especially strong results from CA Technologies and Microsoft. The report from IBM, however, was rather weak, though I wasn’t expecting much.

  Later on, I’ll highlight our earnings reports for the coming week. Also, our friends at the Federal Reserve meet on Tuesday and Wednesday. It will be Mr. Bernanke’s swan song, and I expect to see another taper announcement. But first, let’s look at why everyone hates IBM (but me).

  IBM Beats Earnings but Falls

  On Tuesday, International Business Machines ($IBM) reported Q4 earnings of $6.13 per share. That was 14 cents more than Wall Street’s consensus. That’s the good news. The bad news is that much of that earnings beat was driven by cost-cutting. IBM’s top line numbers were pretty weak. Quarterly revenues fell 5.5% to $27.7 billion. That was $600 million below forecast, and it was the seventh-straight quarter of falling sales.

  We know that much of the tech world is shifting to cloud-based networks, but Big Blue isn’t exactly sitting still. The company is aggressively moving toward cloud services, and they’re ditching their lower-margin businesses. They just sold their server business to Lenovo for $2.3 billion. The company also realizes the situation it’s in; the entire senior team has foregone bonuses. On the positive end, I was impressed to hear IBM say that it sees earnings for 2014 of at least $18 per share. They also reiterated their earnings target of $20 per share for 2015.

  Simply put, IBM isn’t popular on Wall Street at the moment. The stock got clipped by more than 3% on Wednesday, the day after the earnings report came out. I’m not saying that IBM doesn’t face a difficult environment. It does. Its systems and tech revenue fell 26% last quarter. But IBM has transformed itself many times in its history. Remember that their cloud revenue rose by 69% in Q4 to $4.4 billion.

  I think IBM is in a position similar to where Microsoft was one year ago. Bears have been having a field day beating them up, but the stock is cheap now. It’s going for about 10 times earnings, which is far less than the rest of the market. My take: IBM will require some patience, but it’s a solid stock. I rate IBM a buy up to $195 per share.

  CA Technologies Is a Buy up to $36 per Share

  Also on Tuesday, CA Technologies ($CA) reported earnings of 84 cents per share, which easily beat Wall Street’s forecast of 71 cents per share. Last week, I said the Street’s consensus was “a wee bit too low.” Shows you what I know! Interestingly, this was the third time in the last four quarters that CA has beaten earnings by 13 cents per share.

  CA also guided Wall Street higher for the rest of the year. The December quarter is the third quarter of its fiscal year. So for 2014, CA now sees earnings ranging between $3.05 and $3.12 per share, compared with Wall Street’s estimate of $3.02 per share. The company also sees full-year revenues ranging between $4.52 and $4.57 billion, versus the consensus of $4.50 billion. This is what we like to see: beat and raise.

  CEO Mike Gregoire said, “Based on our results so far this year, we expect our fiscal year 2015 revenue growth rate and non-GAAP operating margin to be similar to fiscal year 2014.” That sounds good to me. So what did the market do with this good news? On Wednesday, shares of CA rallied by…four cents! Then on Thursday, they dropped by 65 cents. No, it doesn’t make any sense, but you can never argue with traders. Instead, we look at the facts. Going by Thursday’s closing price, CA’s dividend yields 3%. This week, I’m raising our Buy Below on CA to $36 per share. This is one of the good ones.

  Both Stryker and eBay Beat by a Penny per Share

  On Wednesday, both Stryker and eBay reported earnings that beat expectations by one penny per share. Let’s break down the results.

  For Q4, Stryker ($SYK) earned $1.23 per share, compared with Wall Street’s consensus of $1.22 per share. Honestly, I wasn’t too concerned with Stryker’s earnings report. They usually come very close to expectations. But I wanted to hear what the orthopedic outfit had to say about 2014.

  For this year, Stryker said they see organic revenue growth of 4.5% to 6%, and earnings ranging between $4.75 and $4.90 per share. That’s a very good number, and it’s well above where the Street was at $4.63 per share. For all of 2013, Stryker earned $4.23 per share.

  So with all this good news, what did the stock do on Thursday? It dropped 1%. I don’t get this one either. Stryker remains an excellent buy. I’m raising our Buy Below on Stryker to $81 per share.

  eBay ($EBAY), one of our new stocks this year, turned out to be the most newsworthy company this week. For Q4, the online-auction house reported earnings of 81 cents per share, one penny more than consensus. The company also authorized another $5 billion for its share-buyback program.

  But the big news came when multi-gazillionaire Carl Ichan said that he wanted to see eBay spin off its PayPal business. Icahn said that he’s going to nominate two of his people for the eBay board. Spinning off PayPal isn’t a new idea, but this is the first time someone so prominent has endorsed it. The board doesn’t like the idea, and they told Icahn so. But the market seems favorable for a spin off. On Wednesday afternoon, shares of eBay were trading up 8% in the after-hours market. On Thursday, however, eBay rallied for a 1% gain.

  Frankly, I doubt we’ll see a PayPal spin-off. It’s too integrated into eBay’s business. But I like seeing Carl Icahn advocate on behalf of shareholders. He didn’t get to where he is by being a shrinking violet. eBay had a solid quarter, and it continues to be a very good buy up to $58 per share.

  A Tough Quarter at McDonald’s, but Give Them Time

  On Thursday morning, McDonald’s ($MCD) reported Q4 earnings of $1.40 per share. That made the company our third earnings report in a row that beat estimates by one penny per share. Sales at the hamburger giant rose by 2% to $7.09 billion. But the details were pretty ugly. Comparable-store sales dropped by 0.1%, and in the U.S., comparable-store sales fell by 1.4%. Ouch.

  McDonald’s faces a number of challenges. The new CEO, Donald Thompson, hasn’t been as effective as I would have hoped. They’ve played around with the menu, but nothing has really taken off. The menu has probably grown too complicated and could use some paring down.

  The situation at McDonald’s is somewhat similar to that at IBM. The current environment is rough, but the stock is going for a good value. Ultimately, I think the problems are very fixable, but it will take a little time and effort. McDonald’s made about the same profit as one year ago, but thanks to share buybacks, there are fewer shares outstanding, so EPS rose by two cents. The dividend currently yields us 3.4%, which is a nice buffer for us. MCD is a buy up to $102 per share.

  Impressive Earnings Beat from Microsoft

  After the bell on Thursday, Microsoft ($MSFT) had a very strong earnings report. It turns out that Xbox had a great holiday season. The software giant had a net income of $6.56 billion, or 78 cents per share. That was a full dime more than Wall Street’s forecast. At the top line, revenue rose 14% to $24.52 billion. The Street had been expecting sales of $23.68 billion. The best news is that Surface revenue more than doubled to $893 million.

  While Xbox continues to be a great profit center for Microsoft, the Surface is still small potatoes. One big piece of missing news is that Microsoft still hasn’t yet announced who its next CEO will be. Ballmer is out soon. If you recall, there was some speculation that Ford’s Alan Mulally would jump ship and take over at Microsoft. Fortunately, that won’t happen.

  Microsoft jumped up more than 3% in Thursday’s after-hours market, but we’ll have to see how it trades from here. Microsoft was a great buy for us last year when it was under $27 per share. MSFT isn’t a screaming buy like it was a few months ago, but it’s still a good value. We also had a very nice dividend increase recently. Microsoft is a good buy up to $40 per share.

  Upcoming Buy List Earnings

  Still more earnings come in next week. Ford is due to report on Tuesday, January 28. Qualcomm follows on Wednesday, January 29, and CR Bard on Thursday, January 30. These dates may change, so please check our website for the latest. Also, Moog ($MOG-A) is due to report later today.

  I’m most looking forward to Ford’s ($F) earnings report. The automaker recently threw a damper on expectations for 2014. The short version of the story is that North America is doing well, but Europe is not. Ford has made it clear they’re playing the long game, so we probably won’t see a turnaround in Europe until 2015 or 2016. Wall Street currently expects Q4 earnings of 29 cents per share, which is down two cents from a year ago. That would be disappointing, but Ford is clearly moving in the right direction. The 25% dividend boost was a great vote of confidence.

  Qualcomm ($QCOM), another new stock on our Buy List, will be an interesting earnings report to see. The last report was a dud, and the stock’s subdued performance last year led me to add it to this year’s Buy List. The sentiment is beginning to shift here. If Qualcomm beats and offers impressive guidance, the shares could break out.

  Three months ago, CR Bard ($BCR) told us to expect Q4 earnings to range between $1.34 and $1.39 per share. That would put full-year 2013 earnings between $5.70 and $5.75 per share. They should hit that range without much difficulty. Bard is a buy up to $142 per share.

  That’s all for now. Next week will be the final trading week for January. The Federal Reserve meets on Tuesday and Wednesday. This will be Ben Bernanke’s final meeting as Fed chair. I expect to see another round of tapering. We have a few more Buy List earnings reports coming our way. On Thursday, we’ll also get our first look at Q4 GDP. The last three GDP reports have all seen increased growth rates, meaning economic acceleration. Let’s see if that continues. 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

• CWS Market Review – January 17, 2014
  Eddy Elfenbein, January 17th, 2014 at 7:12 am

  “It is not the crook in modern business that we fear, but the honest
  man who doesn’t know what he is doing.” – Owen D. Young

  Earnings season is finally here. We’ve already had one good earnings report from Wells Fargo ($WFC). The big bank beat earnings by two cents per share, and after a delayed reaction, the shares broke out to a new 52-week high. This week, I’m raising my buy below on WFC (more on that in a bit).

  Things are about to get very busy for our Buy List. Next week, we’re due to have six earnings reports including heavyweights like IBM, McDonald’s and Microsoft. In this week’s CWS Market Review, I’ll preview our upcoming earnings, and I’ll break down the results from Wells Fargo.

  Looking at this earnings season, the consensus on Wall Street is that earnings rose 4.9% last quarter. That’s kind of blah, but going into this earnings season, there were some serious concerns. Before earnings season even started, there were 95 earnings warnings in the S&P 500, compared with just 15 good-news surprises. But most of those warnings have been about rather minor adjustments. Actually, the market seems unusually sedate. A few times this week, the Volatility Index ($VIX) dropped below 12, which brought the “Fear Index” to some of its lowest levels in the past seven years. Fortunately, the stock market continues to hold up well, and the S&P 500 reached an all-time high close on Wednesday. We edged out the previous high close of December 31 by 0.00108%.

  

  The economic news continues to be mostly positive, with a few bumps. This week, the Federal Reserve released its Beige Book report, which looks at regional economies across the country. The reports were mostly good, and I think we can expect more tapering when the Fed meets again at the end of this month. Janet Yellen officially becomes the new Fed Chairman on February 1.

  This past Tuesday, the Census Bureau released the December retail-sales report, which showed an increase of 0.2%. December is obviously a huge month for retail. While the report wasn’t outstanding, economists were expecting a gain of 0.1%. Also, the big increase for November was revised downward from 0.7% growth to 0.4%.

  These are important numbers because consumers drive most of the economy. Also, retail stocks have been hit hard this year. I still like our Buy List retailers, Ross Stores ($ROST) and Bed Bath & Beyond ($BBBY). However, their most recent quarterly reports included sales through November, and not the holiday season. Once the dust settles in the retail sector, I expect our stocks to flourish.

  Of course, it’s still very early, but our Buy List is already slightly ahead of the S&P 500 this year. We’ve done that despite a horrible start for Bed Bath & Beyond, which is now down over 16% for the year. Ouch! The lesson here is that diversification works. I should also note that you’ll often see the worst stock in your portfolio dropping more than the gain from your best stock. Stock performance tends to be asymmetrical. In plain English, the bad ones are worse than the best are good. That’s a key insight, and ultimately, it’s what makes value investing so effective. Now let’s look at Wells Fargo.

  Wells Fargo Is a Buy up to $50 per Share

  On Tuesday, Wells Fargo ($WFC) reported fourth-quarter earnings of $1 per share. That beat Wall Street’s consensus by two cents per share. Strangely, the shares initially dropped after the earnings report (yep, we know how melodramatic traders can be). Then on Wednesday, it was as if rationality and math suddenly dawned on everyone, and the nervous traders got squeezed out. Before the closing bell, WFC had rallied to a new 52-week high.

  Lesson: Don’t trust the market’s first reaction. Actually, keep a wary eye on the second and third ones as well.

  Now that I’ve had a chance to look at the earnings from Wells, I can say that I’m impressed. Net income for Q4 rose 10% over last year’s Q4. For the entire year, Wells’s net income rose 16% to $21.9 billion. This was their fifth-straight record year. Last year, Wells made more money than JPMorgan Chase (sorry, Jamie).

  I was particularly impressed with the efforts of CEO John Stumpf and his team to trim overhead. (Notice how good companies don’t wait to cut costs; they’re always looking for excess fat they can cut.) Quarterly revenue dropped 6% to $20.7 billion. For banks, you want to see where their “efficiency ratio” is. That’s a good measure of how well they’re managing their operations. For Wells, their efficiency ratio actually ticked up a bit last quarter. That’s not bad, coming in the wake of lower revenue.

  Wells’s mortgage-originations business got shellacked last quarter, but there wasn’t much they could do about that. In that sector, you’re at the mercy of the Mortgage Rate Gods. On the plus side, Wells’s wealth and brokerage business did very well. One big benefit for Wells is that they don’t have the legal bills that many of the other big banks have.

  I like Wells Fargo a lot. The bank is going for less than 11 times this year’s earnings estimate. I expect another dividend increase this spring. This week, I’m raising my Buy Below on WFC to $50 per share.

  Next Week’s Buy List Earnings Reports

  Next Tuesday, two of our big tech stocks, IBM and CA Technologies, report earnings. I want to warn you ahead of time that IBM ($IBM) may fall below expectations. The Street expects $5.99 per share, which could be just a bit too high. I’ll tell you ahead of time not to worry about a slight earnings miss. New additions to our Buy List are often dented merchandise, and Wall Street bears have been out to get IBM. They may not be done just yet. Either way, IBM is a solid value at this price. My take: IBM is a good buy anytime you see it below $195 per share.

  Three months ago, CA Technologies ($CA), the shy kid, blew the doors off its earnings report. CA netted 86 cents per share for Q3, which was 13 cents more than estimates. Wall Street expects 71 cents for Q4, which is probably a wee bit too low. There’s also a chance that CA might sweeten its quarterly dividend. CA Technologies remains a solid buy up to $35 per share. I have much love for CA.

  Wednesday: Earnings from Stryker and eBay

  On Wednesday, we get earnings reports from Stryker and eBay. If you recall, Stryker ($SYK) raised its dividend by 15% last month. The company missed earnings by two cents in its last report. That was mostly due to currency effects, and I said not to worry about SYK. Indeed, the stock just hit another 52-week high. This time around, Wall Street expects $1.22 per share in earnings, but I’m more interested in what they’ll have to say about 2014. Wall Street currently expects full-year earnings of $4.56 per share for 2014. Stryker remains a very good buy up to $79 per share.

  eBay ($EBAY)’s earnings tend to be very consistent. So far this year, their earnings are up 14%. If we apply a 14% increase over the Q4 earnings from 2012 (70 cents per share), that gives us 80 cents per share, which is, not surprisingly, exactly what Wall Street expects. eBay is a very good buy up to $58 per share.

  Thursday: Earnings from McDonald’s and Microsoft

  On Thursday, we get two more blue-chip earnings reports: McDonald’s and Microsoft.

  Three months ago, Microsoft ($MSFT) surprised a lot of folks on Wall Street with an outstanding earnings report. The software giant earned 62 cents per share, which was eight cents more than estimates. Sales rose 16% to $18.5 billion. Microsoft generated sales that were $700 million more than expectations. I think people forget that MSFT is a very profitable company, especially with its business clientele. For the December quarter, the expectation is for MSFT to earn 68 cents per share, which is down from 76 cents the year before. That sounds about right. We should remember that in September, MSFT raised its dividend by 22%. Microsoft is very attractive below $40 per share.

  Like IBM, McDonald’s ($MCD) has been rather sluggish lately. This one may take some time before we see solid results. The consensus on the Street is for earnings of $1.39, which is only one penny more than last year’s Q4. The burger giant is coming off a lackluster year, but you should never count Ronald and his friends out. McDonald’s is a good buy up to $102 per share.

  That’s all for now. The stock market will be closed on Monday in honor of Dr. Martin Luther King’s 85th Birthday. Next week will be all about earnings. In fact, there’s not much in the way of economic reports. An important note: With these earnings reports, we want to pay attention to forward guidance as much as to the actual results. I think a lot of traders are nervous about this year, especially with the Fed’s tapering plans, so any optimism from companies will go a long way. 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

• World’s Simplest Stock Valuation Measure
  Eddy Elfenbein, May 10th, 2012 at 10:51 am

  Here’s the world simplest stock valuation measure:

  Growth Rate/2 + 8 = PE Ratio

  Let me emphasize that this is simply a quick-and-dirty valuation tool and it shouldn’t be used as a precise measure of a stock’s value. But when I’m first looking at a stock and want to see roughly how it’s priced, this is what I’ll use.

  For example, let’s look at Pfizer ($PFE). Wall Street expects the company to earn $2.34 per share next year. They also see the company’s 5-year growth rate at 2.79%. If we take half the growth rate and add 8, that gives us a fair value P/E Ratio of 9.40. Multiplying that by the $2.34 estimate gives us a fair price for Pfizer of $21.98. The current price for Pfizer is $22.98, so it’s about fairly priced.

  Let’s look at IBM ($IBM) which has a higher growth rate. Wall Street sees IBM earning $16.61 next year. They peg the five-year growth rate at 10.58%. Our formula gives us a fair value multiple of 13.29, and that multiplied by $16.61 works out to a value of $220.75. IBM is currently at $201.71.

  I like to find stocks that are going for more than 30% below our fair value. As I said, that’s just one tool I use to find bargain stocks.

• IBM Vs. Microsoft
  Eddy Elfenbein, April 16th, 2012 at 11:17 am

  Here’s a look at IBM’s ($IBM) stock compared with Microsoft’s ($MSFT). This is a race that hasn’t gone the way many people would have thought.

  If you had asked most experts on December 31, 1999, which is a better buy—IBM or Microsoft, I’m pretty sure the majority would have sided with Microsoft. Instead, IBM has won the contest hands down with an 88% gain compared with a 47% loss for Microsoft.

  If we were to measure from Microsoft’s IPO in March 1986 until the end of the century, that’s a very different story. Microsoft would have won with a 600-fold gain to IBM’s triple. Over most of the last ten years, Microsoft’s stock has been flat. IBM has been an especially strong stock in the last three years.

  The lesson here is that companies left for dead can turn themselves around, while companies that have seemingly won the race can quickly lose their edge.

  

• More Troubles From Europe
  Eddy Elfenbein, November 14th, 2011 at 10:13 am

  The stock market is down slightly this morning on more concerns from Europe that Mario Monti, the interim Prime Minister of Italy, is trying to form a government. The government held a bond auction today that didn’t go very well. When you’re in the bond market’s doghouse, there’s not much you can do. The auction of a billion euros’ worth of five-year notes went off at a yield of 6.29%.

  The other news this morning is that Berkshire Hathaway ($BRKA) has bought a $5.5 billion stake in IBM ($IBM). Warren Buffett also said that he strayed from his usual method of selecting stocks:

  Buffett, in a CNBC interview, said he bought about 64 million shares of IBM, which cost around $10.7 billion. Berkshire started buying the shares in March with a goal to build a $10 billion position, he said.

  Buffett also said IBM did not know that he was building a stake, and that the company was finding out about his investment for the first time as he said it on CNBC.

  The legendary investor said he has always looked at IBM’s annual report — his preferred method of identifying companies to invest in — but this year, “I read it through a different lens.”

  Buffett said follow-on conversations with various technology executives throughout the Berkshire conglomerate convinced him to start building the stake.

  Last month I pointed out that IBM has grown 18-fold over the last 18 years which is nearly 18% annualized.

• IBM’s Misguided Share Repurchase
  Eddy Elfenbein, October 26th, 2011 at 1:54 pm

  I think these things are specifically done to annoy me.

  IBM ($IBM) has been doing very well lately. The stock recently made an all-time high. The company just reported earnings that beat expectations by six cents per share. They also announced another 75-cent dividend.

  So what’s the problem?

  Technology company International Business Machines Corp. said Tuesday that its board authorized an additional $7 billion for the company’s stock repurchase program.

  That’s on top of about $5.2 billion remaining in a prior buyback program at the end of September.

  IBM plans to ask its board for additional repurchase authorization at a board meeting in April.

  I loathe share buybacks and this is an excellent example of why. IBM’s program comes to $12.2 billion which is more than $10 per share. Of course, that’s just what’s announced. We don’t know what will be implemented.

  My view is simple: just give that money to shareholders! It’s theirs!

  I think most shareholders would much rather have $10 in hand than have the hope that company purchases will push the shares up by $10. Plus, shareholders are watching their money buy a stock that’s already near an all-time high.

  Just give them the money as a dividend and if they want to buy more stock, they can. The current dividend comes to $3 per year which is only 22% of this year’s estimated earnings.

  A better idea would be for the board to ditch the buybacks and chose a target, say 30% of full-year earnings to pay out as dividends. For next year that would be a dividend of $1.10 per share.

  I should add that I’d like to see the U.S. tax laws changed so it doesn’t make a difference how shareholders get their own money.