Twitter Feed
Posted by Eddy Elfenbein on July 23rd, 2010 at 3:10 pm

You can also follow my ramblings on Twitter.

Eaton Corp.
Posted by Eddy Elfenbein on July 23rd, 2010 at 2:11 pm

I’m often asked how I go about screening for stocks. The answer is, I don’t. I simply follow several very-high-quality stocks. If one dips down to a reasonable price, then I consider adding it to my Buy List.
One very high-quality stock that’s been catching my eye lately is Eaton Corp. (ETN) of Cleveland, OH. Like a lot of good companies, Eaton is fairly dull. The company is a “power management” company. I know, SNORE. They have 70,000 employees and a market cap of $13 billion, yet they seem to be totally unknown to most individual investors.
Investors should understand that Eaton is a cyclical stock. This means that its business is strongly correlated to the broader economy. When the economy does well, stocks like Eaton outperform. During recessions, they often fare much worse.
That pretty much describes what happened last year after Eaton sales and profits had climbed for several years. Their year-over-year earnings peak in the third quarter of 2008, then declined for the next four quarters. Importantly, only one quarter saw a net loss (Q1 ’09). Since then earnings have been on the rise, and the last three quarters have seen huge earnings surprises.
On Wednesday, Eaton posted outstanding results. They earned $1.36 a share which was 19 cents more than expectations. Eaton also gave very strong guidance:

Eaton now expects third-quarter income per share of $1.25 to $1.35, with the Wall Street forecast $1.19. For the year, Eaton expects earnings of $4.75 to $4.95 per share, above the recent Wall Street forecast of $4.57.

As impressive as that is, it’s probably a bit on the low side. I think Eaton can swing $5 a share this year. Maybe more.
The company also raised its quarterly dividend from 50 cents a share to 58 cents a share which translates to a yield of 3%. This is a great company but at the current price, I wouldn’t call it a screaming buy. This is a good one to follow. If you ever seen it go into a downtrend, there might be a great opportunity at hand.

The Ford Boom
Posted by Eddy Elfenbein on July 23rd, 2010 at 8:41 am

Earlier this year, I called Ford (F) my Stock of the Decade.
Am I being a bit early? Maybe. But check out the results:

Ford Motor Co. reported second- quarter net income of $2.6 billion, completing its most profitable first half in more than a decade, as car buyers pay more for its new models.
Ford earned $4.7 billion in the year’s first six months, its largest first-half profit since 1998 and its fifth straight profitable quarter. Excluding some items, profit was 68 cents a share, topping the 41-cent average estimate of 12 analysts compiled by Bloomberg. The second-largest U.S. automaker earned $2.26 billion a year earlier, helped by an accounting gain.
Chief Executive Officer Alan Mulally overhauled Ford’s lineup, redesigning cars such as the Taurus and Fusion, and adding extras like heated leather seats and voice-activated electronics. He also boosted quality, which had customers paying 14 percent more for Ford vehicles in June than five years ago, according to Edmunds.com. Ford held 17.5 percent of its U.S. market in the first half, up from 16.1 percent last year.

A Reckoning?
Posted by Eddy Elfenbein on July 23rd, 2010 at 8:29 am

I’ve been a critic of the valuation of Amazon (AMZN) and Netflix (NFLX), and I’ve been wrong as these stocks have climbed higher and higher.
Amazon, however, has finally disappointed the market. The company had another strong earnings report yesterday, but the earnings fell short of Wall Street’s expectations (45 cents per share versus 54-cent consensus). The stock was trading down over 10% in yesterday’s after-hours market.
This is the problem with owning a richly valued stock. Despite getting the enormous growth potential of the company, you always have to impress analysts. You have zero room for error. If you make one small misstep, you’ll be punished harshly.
Think of it this way. Amazon missed earnings by nine cents a share, yet the stock was down $15 a share. That’s the equivalent of a Price/Earnings Ratio of 166 for those marginal nine pennies. That’s obviously very high but that’s what you’re buying when you go after a hi-flier like Amazon.
Interestingly, late last year Amazon finally surpassed its December 1999 peak of $113 per share. After 9/11, the stock got down as low as $5.51. This past April, Amazon reached a high of $151.
Similarly, Netflix was hit hard yesterday due to slightly missing Wall Street’s revenue forecast. The WSJ even wonders if Netflix is the new Crocs. Ironically, Netflix is often mentioned as a potential acquisition candidate for Amazon.
Via Eric Savitz, I see that analyst Todd Greenwald notes that Netflix “spent $75 million to get 1 million net new subs in the quarter, after spending a comparable amount to add 1.7 million subs in Q1.”
Even after yesterday’s sell-off, Netflix is going for a 37 times this year’s earnings. That’s still way too high.

GM to Acquire AmeriCredit for $3.5 Billion
Posted by Eddy Elfenbein on July 22nd, 2010 at 6:38 pm

One of the big stories today is that GM announced that it’s buying AmeriCredit (ACF), an auto financing company, for $3.5 billion which is $24.50 a share. Shares of ACF jumped over 21% on today’s news.
My interest is that AmeriCredit is a competitor of Nicholas Financial (NICK). The big difference, of course, is that AmeriCredit is about 30 times larger by market value.
The two companies are far from mirror images. In fact, I’m not sure if NICK’s business model can work on a very large scale. Still, when one company in a sector is bought out, it often brings attention on its competitors. Let’s look at some of the numbers.
GM is paying a 43% premium to ACF’s book value. If someone offered the equivalent for NICK, that would be an offer of $11.92 a share. If someone offered the same based on this calendar year’s forecast (this takes some guesswork), that would be the equivalent of $17.96 a share for NICK.
Let me stress that I’m not predicting a buyout, but I want to highlight how inexpensive NICK is using reasonable valuation comparisons.

The Buy List Strikes Back
Posted by Eddy Elfenbein on July 22nd, 2010 at 6:07 pm

Today was a great day for the stock market and our Buy List. The S&P 500 jumped 2.25% and our Buy List gained 3.08%. That certainly takes some of the sting off yesterday.
Let me run down some of the stocks on the Buy List. Perhaps the most mysterious is that Moog (MOG-A) soared over 9% today. I like this stock as much as anybody but I have no idea why it rallied so strongly today. The company will report earnings next Friday.
AFLAC (AFL), I’m happy to see, also had a very good day. The shares got as high as $49.92. AFL hasn’t been over $50 since early May. Earnings are coming out on Tuesday.
Leucadia National (LUK) was up about 7% today thanks to GM buying AmeriCredit (ACF).
Only two of our stocks were down today, Johnson & Johnson (JNJ) and SEI Investments (SEIC).
There were three earnings reports today. Perhaps the most impressive was Eli Lilly’s (LLY). The company reported earnings of $1.24 a share which was 14 cents better than consensus. The best part is that they raised their full-year adjusted EPS forecast to a range between $4.50 and $4.65. The stock currently yields 5.6%.
Baxter International (BAX), which is my worst performing stock this year, reported earnings of 93 cents a share which is a penny more than the Street’s consensus. For the third quarter, BAX sees earnings of 96 cents to 99 cents per share which is in line with forecasts. For the full year, they expect earnings to range between $3.93 and $3.98 per share. That’s not bad. The stock climbed 3.5% in today’s trading.
Finally, Reynolds American (RAI) reported earnings, after charges, of $1.32 per share which is two cents more than expectations. They also raised full-year guidance. Reynolds expects earnings, sans charges, to be $4.90 to $5.05 a share, up from its previous forecast of $4.80 to $5.00 per share. The shares hit a new 52-week high today. The higher guidance tells me that the dividend is safe. RAI now yields 6.4%.

SEI Investments Earns 28 Cents a Share
Posted by Eddy Elfenbein on July 21st, 2010 at 4:25 pm

Today was a pretty ugly day for our Buy List. The market was down 1.28% and our Buy List was off 2.39%. Stryker (SYK) was down much more than I was expecting although Gilead (GILD) mostly sidestepped the selling pressure.
Before the opening bell, SEI Investments (SEIC) reported Q2 earnings of 28 cents per share which was a penny ahead of the Street. Revenue dropped by 9.4% and assets under management fell as well.
The stock dropped by 5% which is far worse than the numbers indicate. Relative to earnings, SEIC is usually on the pricey side but that’s because the business has been so consistent over the years. The drop puzzles me but I think it only makes the stock more attractive. Today’s drop basically erases the gain since the beginning of the month. I don’t see any problems for shares of SEIC.
We’ll have three more earnings reports tomorrow.

Q2 Earnings from Gilead and Stryker
Posted by Eddy Elfenbein on July 20th, 2010 at 9:48 pm

Today was a good lesson on the benefits of diversity. Even though Johnson & Johnson (JNJ) was weighed down by a poor earnings report and lower guidance, the rest of the Buy List picked up the slack and we slightly beat the market today. The final score had our Buy List up 1.21% to the S&P 500’s 1.14%.
We had two more earnings reports after the closing bell. Gilead (GILD), which has been our big dud on the Buy List, posted disappointing earnings. For Q2, they earned 85 cents a share which was two cents less than Street estimates. Boy this stock has a way of annoying me. Revenues rose 17% but again fell short of expectations.
Gilead’s earnings report three months ago wasn’t so bad but the market punished the shares anyway. They had lowered their sales estimates due to Obamacare, which wasn’t unexpected, but the stock dropped nearly 10% the next day, which was unexpected, at least by me. The shares have continued to fall.
To give you an idea of how pessimistic the market is, Wall Street currently expects full-year EPS of $3.61 (which isn’t totally crazy since we’re half-way done) and the stock is going for about nine times that. Did I mention that sales grew 17%? The stock was down after-hours but seems to have recovered some. I’m not giving in just yet—Gilead is a good buy.
The other earnings report came from Stryker (SYK). I should mention that Stryker almost always reports in line or beats by a little. You never get big surprises from them which is why I like them. For Q2, they hit the Street’s consensus of 80 cents per share right on the nose. Revenue was a tiny bit below the Street but nothing to worry about.
The good news is that Stryker reaffirmed guidance for this year. They said that EPS for this year will range between $3.20 and $3.30. They already reaffirmed this guidance a few times this year so they must be serious. The Street currently expects $3.27 which sounds about right. Last year, they made $2.95 per share.
Stryker was down about 3.5% after-hours but I really don’t see anything in the earnings report that worries me. This is a solid company going for a decent, but not Gileadesque, price.

J&J Lowers Guidance
Posted by Eddy Elfenbein on July 20th, 2010 at 8:23 am

Disappointing news today from Johnson & Johnson (JNJ). The company reported Q2 earnings of $1.21 per share which was in line with estimates. For last year’s Q2, JNJ made $1.11 per share. Revenue rose just 0.6% which was below forecasts.
The big issue is that they lowered their full-year range from $4.80 to $4.90 per share down to $4.65 to $4.75 per share. That’s a decrease of 15 cents at both ends.

The Company’s guidance now reflects the impact of the voluntary recalls announced earlier this year of certain over-the-counter medicines and the suspension of manufacturing at the McNeil Consumer Healthcare facility in Fort Washington, Pa., as well as unfavorable changes in foreign currency exchange rates.

Frankly, this could have been a lot worse. The stock is lower ahead of the open. Gilead Sciences (GILD) and Stryker (SYK) are due to report their earnings later today.
Here are some other major earnings reports this morning:
Harley-Davidson 2Q income jumps, sales drop eases
PepsiCo’s 2Q net income slumps 3 pct on currency
UnitedHealth’s 2Q profit rises 31 percent
Goldman Sachs Profit Drops 82%, Missing Analysts’ Estimates
BNY Mellon Earnings Triple as Stock Rebound Boosts Fees
I’m impressed to see UNH raise full-year earnings guidance. The company expects full-year EPS to range between $3.40 and $3.60, which is 25 cents above the previous range of $3.15 and $3.35. The shares are just below $31.

Behavioral Finance Hedge Fund Can’t Cope With the Irony and Insults of the British
Posted by Eddy Elfenbein on July 19th, 2010 at 1:35 pm

The FT profiles MarketPsy Capital, a hedge fund that attempts to invest based on investor psychology. The fund scans newspaper articles, blogs and message boards in an effort to see how the crowd feels about a stock.
There is, however, one small snag:

But it is not perfect. For now, MarketPsy trades only US stocks, as its linguistic analysis cannot cope with the irony and insults on British message boards and blogs.