30 April, 2008

Federal Reserve on the Radar Screen again

Traders sent markets higher early Wednesday in anticipation of the latest Federal Reserve announcement. The majority thinking amongst The Street has been that the Fed will cut the key Interest Rate by another 25 basis points and signal a more assuring economic outlook.

While economic data currently released shows signs of consumer headwinds (latest GDP numbers in the US showed growth of only 0.6%), Investors are hoping for signs from the Fed that it will stop slashing rates after this based on a more certain future for the financial sector and economic credit situation.

Alas, could it be true, that the worst is over for the major financial firms? Well they've collectively written down more billions than Gates and Buffet, so I would certainly hope so. The sticking point is still the consumer in the US. The government has began its program of supplemental financial support (read: giving out cash to stimulate the economy), but will it be enough to stimulate already slowing spending, given the fact that a typical trip to the gas pump costs almost double what it did last year.

While traders seem to be positioning themselves on the Bullish side this morning, it is up to the real Market Makers to set sure this trend can and will continue.

24 April, 2008

Earnings season continues, Markets head higher Thursday

As the earnings numbers continued to be reported, several bell-weather names were in focus Thursday. The markets shrugged off early selling by turning into "mid-day rally mode" before closing the day with between .6% and 1% gains for the major indices.

North of the border, the selling in commodities and industrials was somewhat offset by a rally in the banking sector but the TSX found itself lower by 3 quarters of a percentage point.

Starbucks (SBUX) was slashed after-hours Wednesday after coming out and lowering full year profit expectations, the company lost over 10% as a weakening US economy is plaguing sales of its gourmet coffees.

Amazon (AMZN) reported another strong quarter, with over 30% earnings growth, but the stock was lower by 4%, as expectations for growth going forward were highly over-valued. The company sits with a 35 Forward P/E for 2009 earnings, at 51 Forward P/E for 2008 and an almost 70 trailing P/E ratio. The company is poised to deliver significant growth still, but Investors needed to for the moment, pause the momentum.

Biggest news of the trading day however, was Ford's (F) shocking profitable quarter. Automotive sales were strong worldwide, and the turnaround plans for the automotive giant seem to be going ahead of schedule. Analysts were expecting another quarterly loss, and as such Ford shares rose almost 12% on the posted $100Million profit.

Disclosure: Author owns SBUX

23 April, 2008

Apple rides Strong Mac Computer Sales to earnings beat

Mac, iPod and iPhone maker Apple (AAPL) reported a very strong quarter for the 3 months ended March. The sheer numbers were staggering: $1.16/share in profit on $7.5Billion in revenues. This compares with analyst expectations of $1.06/share profits on $6.9Billion in revenue.

Apple beat on both the top and bottom line but Investors aren't yet sure where to go given guidance and a wavering US economy. Apple showed its ability to grow in tougher economic times due to their innovative products, brand value and successful retail integration. A year ago Apple earned $0.87, which represents year-over-year 33% growth on an EPS basis.

The big deal here, over 50% growth in Mac sales to almost 2.3Million units in the quarter. The quarter also included flat iPod unit sales of 10.6Million and rather strong iPhone sales of 1.7Million units. Margins were good for the company, albeit lower year-over-year, as memory prices continued to hit lows. The company guided for earnings of $1.00/share for the next quarter amid reassurances component costs will continue to be favourable.

News on the iPhone front? All those shortages we've been hearing about that led to speculation of an upcoming 3G model sooner as opposed to later? Seemed to be just that, shortages, due to higher than expected demand. Of course unlocking is a big deal and while the company is using the unlocking argument to peg worldwide demand, the sheer percentage of iPhones being bought to be unlocked has to be very high. While no numbers are given by the company, some outside analysis and reports have pegged unlocked devices as high as 30% of units.

The focus for analysts for this quarter were Macs and iPhones, and according to the earnings report, growth rates for both revenue streams are very high. Mac sales of almost 2.3Million units is very strong, coming close to the record sales number posted by the company for the previous Holiday quarter. Sales growth rates in all regions are strong and once again sales of Macs in Apple's retail stores, 50% of the time, went to first time Mac buyers. That old faithful Halo Effect at work once again.

On the iPhone front, the company has added some complications to revenue going forward due to accounting issues. The company will not recognize any revenue from new iPhone sales from after the iPhone 2.0 Software upgrade announcement until the software is delivered. Essentially meaning next quarter numbers for the company will include ZERO dollars in new iPhone revenue since the company expects to release the software near the end of June. Revenue that is deferred from previous iPhones sales will be included (as of the latest quarter deferred revenue stood at $1.9Billion). This will put some pressure on margins and the top line numbers when doing comparisons, but will add an additional bump to the following several quarters. The company will recognize this gap window on an adjusted basis for the remaining 2 years as with normal iPhone purchases. The company reiterated its internal goal of selling 10Million units in 2008 and their strategy of being in Asia this year.

On the retail side, Apple continues to be the best revenue per square foot retailer in the world. The company plans to open several high profile stores in the remainder of the year, and its "Store within a Store" concept and increased presence at Best Buy (BBY) stores has grown to 400 locations, with plans to expand into 600 as the end of the summer.

When all is said and done, it is another fantastic quarter for the Electronics maker. Analysts and traders are still trying to figure out where to go from here considering Apple's stock has grown from $120 to $160 in the past few weeks. However, without a shadow of a doubt, this company is continuing to grow, and grow dramatically, has some very exciting events and products in the pipeline, and has the potential to significantly expand market share in the Computer and Cellphone business segments. All signs that can be used to justify further share price gains throughout the year.

Oh and the company added about $1Billion in sheer cash, putting its war chest at about $19.5Billion. Not too shabby a rainy day fund I'd say.

Disclosure: Author owns AAPL

Update: April 24, 2008

21 April, 2008

Markets Drift Monday as Bank Of America disappoints

Earnings at Bank Of America (BAC) were lower than expected but on the bright side the company said it plans no dividend cuts. A positive for investors who are looking at a 7% yield at this point, but the markets have heard this before (Link).

Net Income fell 77%, the company set aside $6Billion for loan losses, but nonetheless still made $1.2Billion during the quarter. That amounts to $0.23/share on revenue of over $17Billion. While the profit numbers were lower than the Street expected, there is some good news in the fact that the company isn't heavy in the red like some of its larger banking rivals.

The Dow Jones, Nasdaq and the S&P both finished relatively flat, with the Nasdaq being the only major index on the positive side of the close. Money flowed into Technology somewhat as Traders are coming into the big names expecting blowout quarterly numbers on the back of Google's (GOOG) stellar quarter. Apple (AAPL) was one of those names today, as the stock was set to multi-month highs of $168 (+4.5%) and reports quarterly earnings after the bell on Wednesday.

Disclosure: Author owns AAPL, GOOG

17 April, 2008

Google's Q1 Earnings blow past Estimates

Search giant and Internet bell-weather Google (GOOG) reported 1st quarter results after the closing bell Thursday and although Traders were confused and opinions varied wildly the company blew the doors off of another strong 3 months. These strong results came to $4.12/share in earnings versus an estimated $3.96/share. Excluding items Google earned $4.84/share vs an expected $4.55/share.

Profit this quarter rose to $1.3Billion from $1Billion on a year over year basis and perhaps even more impressively, climbed from $1.2Billion over the holiday quarter. With that also comes net cash additions of almost $1Billion into Google's coffers. At the top line, Revenue was also impressive as Google for the first time broke the $5Billion revenue mark for a quarter. Also, for the first time, International Revenue led US Revenue by a 51-49% margin.

So is there anything negative to be said about the quarter? Well, International growth has been very strong, and this is somewhat inflated by the weakening of the US dollar. A nit-pick point for some but Johnson & Johnson (JNJ) reported a majority of its quarterly growth was simply due to currency conversion. Traders weren't too impressed and sent JNJ lower. The response to Google's International growth and quarterly numbers? Overwhelmingly positive, with shares up in After-hours almost $75 to $524, after closing at $449 in regular trading.

Was DoubleClick a factor in the increased numbers? No, in fact management's statement relayed to Investors that DoubleClick's revenue was completely immaterial and income was dilutive to the general numbers. DoubleClick will become a factor in Google's earnings going forward but for the first quarter this part of the company was in the fold for only 20 days. Google is also being adamant about reducing headcount from DoubleClick due to overlap, which should lower DoubleClick's expense footprint going forward.

The margin question? Google maintained the same 30% margins that the company witnessed over the holiday quarter. The good news on this front is the fall of Traffic Acquisition Costs (TAC) to 29.2% from 30.3% in the holiday quarter. Maybe results were boosted by a low tax rate? Google's tax rate this quarter: 24%, comparing to the holiday quarter tax rate of 25%. Seemingly a non-issue when it comes to these quarterly results.

Google seems to be positioning itself to grow even more substantially internationally and as the slowdown in the US, especially in the Financial Sector, continues to put pressure on earnings and advertising Google seems poised to hold their own and continue to deliver top notch results. The recently completed test ad partnership with Yahoo (YHOO) was reported to be a success and Yahoo is reportedly trying to expand the partnership in order to shore up its own bottom-line. Just a testament to how efficient and ahead of the game Google's AdWords and AdSense programs really are.

Due to today's after-hours stock surge, Google will be once again in a P/E range bordering on expensive (trailing P/E of 37, forward P/E about 30) given the overall US economic picture, but when comparing it to its main Internet competitors such as Yahoo, the company is simply executing better and deserves its premium valuation. As CEO Eric Schmidt put it "It's clear to us that we're well positioned for 2008 and beyond, regardless of the business environment that we find ourselves surrounded by".

Google's Ad game is in full stride with AdSense and AdWords, the earnings and revenue speak for themselves, but now with the beginnings of monetization of YouTube and Video Advertising Google is looking beyond search ads towards next generation drivers of explosive growth. This same strategy applies to DoubleClick with banner/display advertising also. Becoming an all-encompassing Ad-Platform is clearly in Google's sights, as is their long term plan/goal of becoming a $100Billion Revenue company.

Google's dominance in search is well know and for yet another quarter, its ability to monetize and deliver outstanding growth has also been confirmed. With its main competitors in Search (Yahoo and Microsoft (MSFT)) dancing away and towards each other with Merger talks and other distractions, the core search advertising business is Google's for the taking.

Disclosure: Author owns GOOG

14 April, 2008

Wachovia posts Loss, brings down banking sector further

Wachovia (WB) joins the list of Financials that promise one thing and deliver another as it reports a quarterly loss and tries to raise more cash, $7Billion worth, with a further offering. The 4th largest bank in America gave Wall Street a loss of $0.20/share vs. an expected $0.40/share profit.

Revenue was also weak at $7.89Billion vs. $7.98 expected. The numbers do in fact speak for themselves and when you've got the CEO coming out and saying that he's very disappointed in the results it's not a good look for another Financial name. But wait! Wasn't this the same CEO that months prior promised that things would be better, promised that the dividend is safe, promised a turnaround? In fact it is! But good things aren't meant to last and Wachovia's $0.64/share dividend (a yield of almost 9% at current valuations) wasn't meant to last either.

With losses, come jobs cuts and dividend slashes. Much like it's bigger sibling in the banking world, Citigroup (C), Wachovia was forced, by this credit and mortgage mess, to cut its dividend by about 40% to $0.375/share. While still a respectable 5% yield, bringing it in-line with banking peers, the move comes as a blow to shareholders hoping for a turnaround in the near turn. Investors would hope in the best case that the high yield would correct itself based on a higher stock price, not on a dividend cut.

So what about the promises of the dividend being safe, made not too long ago? Can any Investor really know whether that was genuine or a 'buy some time' gesture? The fact remains that in the Financial Sector, throughout this Credit Crisis traders have seen many executives promise to hold the fort, then be unable to deliver. Most recently that was seen with Bear Stearns (BSC), where the executives relayed to Wall Street their 'solid as a rock' liquidity position, only to require a bailout days later by JP Morgan Chase (JPM) and the New York Federal Reserve.

Bright spots for Wachovia seem to be few and far between as the company took a further $2Billion in write-downs and set aside another $2.8Billion for future loan losses. One such bright spot, for the capital position of the bank is its new stock offering. While traders punished the company today, sending shares lower by almost 10%, selling almost $7Billion in stock (common and preferred) has to be seen as a longer term positive. Shoring up the balance sheet is priority number 1 for Wachovia, and once that's taken care of the bank can begin its rebound, its stock climb based on solid earnings, and it's return to higher dividend yields.

Disclosure: Author does not own any of the companies mentioned

07 April, 2008

Markets flat Monday, Traders waiting for Earnings

As the NCAA Basketball Championship loomed Monday Night for all college sports fans, markets in the US were mixed, but mostly flat as the April earnings season creeps up around the corner.

Markets started the day with a rally as the S&P paced gains of about 1%, but the afternoon led to a minor selling spree pulling the major indices towards the flat line. As the tent pole for the earnings season, aluminum maker Alcoa (AA) reported a 54% drop in profit on a year over year basis. Analysts expected $0.50/share but the company reported $0.37/share ($0.44/share excluding special items). Not a good quarter for the metal maker, but considering the economic stressed, things definitely could have been worse for Alcoa.

The earnings season will definitely pick up as the days fall off the calendar in April. Expect volatility and a slew of analyst upgrades and downgrades throughout the month as the profit picture for US companies becomes clearer.

Disclosure: Author does not own AA

02 April, 2008

Best Buy beats expectations, Outlook optimistic

Electronics retailer Best Buy (BBY) was in Wall Street's cross-hairs this morning and certainly had a tough act to follow. After the April Fools day 400 point rally in the Dow Jones, Best Buy was set to report its quarterly numbers and they turned out to be no joke indeed. In a start to the year pegged with Recession and Consumer Spending worries Best Buy reported profits of $1.71/share or $737Million.

That compared to last year's $1.55/share and $763Million. The big share repurchase program helped the numbers compare favourable year over year. Yes profit was down fractionally, but analysts were expecting even lower results with forecasts of $1.65/share earnings. Revenue came in above expectations also ($13.42Billion v $13.19Billion expected). Just goes to show that the consumer isn't dead just yet!

While 2008 may prove to be challenging in a tightening US economy, Best Buy provided some optimistic guidance numbers that pleases the analysts on Wall Street. The company gave a range of $3.25 to $3.40 per share in earnings on $43Billion to $44Billion in revenues. Analysts expected $3.31 on $43Billion in revenue. Not bad considering management basically came out and said that the year was as turbulent as any other they've ever seen. So anytime a company predicts a hard year but maintains almost 20% growth investors need to stand up and take notice. Especially when that company's shares currently price at a Forward P/E of just over 13. Meaning that the Price to Earnings Growth number stands at a tiny 0.66.

All those metrics point to Best Buy being a potential steal at these levels, and in fact Standard & Poors makes note that Best Buy is among the list of most undervalued growth names. However as all things in this marketplace, there's a downside. If the US economy declines further, devaluing the US dollar--in the face of quick-rising essential commodities, ala Oil--Best Buy, like most retailers will feel the shoppers cash-pinch. And with Best Buy essentially selling Non-Essentials, this type of economic outlook is management's worst fear.

At the end of the day though, if there's an electronics retailer to own it is the one that is wiping the floor with it's main competitor, namely Circuit City (CC), which has reported quarter after quarter of losses.

Disclosure: Author owns BBY