31 July, 2008

How much is Too Much? Exxon Mobil posts record Profit

A record profit for Exxon Mobil (XOM), but nonetheless an increase year-over-year that was smaller than expected by analysts. Smaller?!? The company made just shy of $11.7Billion in profit on $138Billion in Revenue. Both all-time highs, not only for Exxon but for any company in America's history!

And nonetheless the Street is not impressed. Granted the incredible spike in Oil Prices have driven most of the revenue upside, resulting in 40% year-over-year growth in the top line. Profit grew 14% ($2.22/share vs. $183/share last year) from the lasting effects of record high oil. Analysts were expecting $2.52/share for the quarter, however, to put things slightly in perspective; Exxon could buy Ford outright from this quarter's profit alone, or it could almost buy General Motors twice over. The sheer size of Exxon makes it an intriguing Investment, and one that shouldn't be unjustly punished by the market for breaking records.

Granted, a stock like this, with a market cap of $430Billion, isn't going to blow any doors off in terms of dramatic stock price growth, however, there isn't a more profitable company out there these days, and eventually all that cash is going to earn more in simple Interest than most companies through Operations. There are problems within Exxon, that's without a doubt, as most of the earnings increase came solely from the spike in Oil Prices (What happens when oil fully stabilizes?). The refining arm of the company saw dramatic margin degradation due to expansion in oil prices, but it is only natural when the upstream business expands, the downstream business will contract.

There's chances for money to be made here and Exxon in the low 80s is a comfortable buy. Oh and the company is also buying back a further $8Billion in stock, and it yields about 2%, and should be in a PE range of approximately 10-12 currently. Did I mention almost $12Billion in quarterly profit! No wonder a major election issue in the US is Taxing Big Oil.

Disclosure: Author holds no position in XOM

27 July, 2008

Weekend Market Notes 7/27

It's finally happened for Sirius (SIRI) and XM (XMSR)! The FCC has approved their merger to create a single unified Satellite Radio company. The two firms have to pay a $20Million fine for breaking their FCC promise of never merging, but that's small potatoes when you consider how much these two were paying for exclusive rights to various programming.

Those bidding wars can now end, cost cutting and synergy can begin. For Sirius, there will be share dilution but long term holders should stay positive on the company as this big hurdle has been finally climbed. For XM, holders should be looking at some short term gains as the price of Sirius determines the finaly buyout offer for its counterpart.

Amgen (AMGN) made headlines late friday after test results of an osteoporosis drug met its trial goals. The stock shot up 14% on the news after-hours. It'll be interesting to see if the company can extend its climb or will experience a profit-taking pullback as its earnings are also on tap.

In the Entertainment world, The Dark Knight keeps breaking records and playing to sold out showings in traditional cinemas and IMAX (IMAX) screens. After an estimated $75Million grossing weekend, Batman's haul stands at over $314Million domestically, putting it on tap to be a very profittable film for Time Warner (TWX). With a 10 day trek to reach $300Million some analysts are already eyeing the next $300Million, putting the film on pace to near Titanic's record domestic gross.

Disclosure: Author holds no position in the above mentioned companies

21 July, 2008

Apple plays the Conversative card, sets Record June Quarter, shares go on sale

Amongst the iPhone 3G euphoria surrounding Apple (AAPL) these days is the bread and butter Computer and iPod business lines. Today, those lesser hyped money-machines were in the spotlight as the Cupertino Computer underdog posted an impressive and record breaking quarter.

Results coming across the wires placed Apple with $1.19/share in profits from $7.46Billion in revenue. Considering the street was averaged in at $1.07/share and $7.36Billion across the top line, those numbers represent a dramatic earnings beat. On the sales side, the company sold a whisker-shy of 2.5Million Mac computers, over 11Million iPods and over 700Thousand iPhones. All figures above or right at Wall St. predicted levels.

The problem with Apple, as always, is the conservative guidance game the company plays with analysts and investors. The Street had earnings for next quarter pegged at $1.24 on Revenue over $8.3Billion, pretty ambitious but certainly achievable as the popular Back To School computer shopping season is in full force, as well as the successful launch of the iPhone 3G. Apple's story for next quarter was incredibly conservative with earnings of about $1.00 on revenue of $7.8Billion.

Considering 3 months ago at this time Apple was saying the just ended quarter would yield profits around $1.00, which they have now beat by 20%, one would think the analyst community would get used to the, as some have coined, "sand-bagging". Not so, Apple shares took an after hours tumble of $15/share after the results were posted.

With the company having such an extraordinary growth trajectory, why the conservative guidance? Well for one, reeling in expectations is a gigantic undertaking when dealing with a company of Apple's substance, style and mystique. The company shroud of secrecy with new products, product refreshes, and partnerships adds to that mystique and as the general public feels the excitement of new Apple products, or Apple success, so too does the Wall St. community.

From time to time, these expectations have to be brought back to reality. The current quarter saw Apple deliver 44% year over year revenue growth and 30% year over year profit growth.
Expectations for next quarter currently expect growth of about 35% revenue and 23% profit. By creating a situation where expectations curb themselves into the 30%-20% zone, Apple will be poised to once again play the old "under-promise and over-deliver" poker hand.

Given that it's the popular back-to-school shopping season, Apple has year after year went further and further with its iPod giveaways tied to new Mac purchases. This year was the biggest yet, as the company is including iPod Touch devices with the promotion. These giveaways aren't cheap and can put pressure on margins. However, last year at the time the company was also doing its "biggest back to school promotion ever" and somehow seemed to land on its feet and blow away analyst profit expectations.

The bottom line here is, that once again Investors have a chance to pick up Apple at a discount. Considering with this most recent report, the company has earned $5.12/share over the last 12 months and is looking ahead to growth rates of about 30%+ for the next 12 months. This sets a P/E at current after hours levels of 30. Perhaps that can be considered high but with a Price to Earnings Growth ratio under 1 and growth continuing in the Mac and iPhone segments of Apple's business the future does seem bright, even if current economic turbulences keep Apple from all time share price highs.

In the $150s, and looking out 1-to-2 years, it's a steal, plain and simple.

Disclosure: Author is long AAPL

16 July, 2008

Roller Coaster Market continues with Wells Fargo led Bullish Wednesday

The see-saw affair that is today's markets went there and back again earlier this week and Wednesday, based on some encouraging news from Wells Fargo (WFC), saw the scales tip towards the Bulls.

Wells Fargo, the financial holding and banking company, saw its earnings drop 20% year over year, but in fact raised its divided and shouted from the rooftops that business ain't all that bad. The stock's reaction? a 30% gain! Piggybacking off this new found Financial Sector optimism were the usual banking and brokerage suspects. Coupled with a drop in Oil prices, the banks were the leading story in the Dow's 270 point resurgence Wednesday.

Despite the 21% fall in profits, WFC showed much optimism for continued operational flexibility and earnings-power. The company reiterated it's keen eye for 'strategic acquisitions' in a broad plan to expand into an Eastern customer base, and with mortgage houses and local banks falling by the wayside left and right, the marketplace is ripe for consolidation.

This was the biggest collective buying push for the company's shares today. Not to be outdone however was the dividend bump. As yields continued to climb for the Financial sector, many on the Street anticipate further substantial dividend cuts from the major banks, so a 10% bump in Wells Fargo's payout was welcomed by Investors.

Numbers were refreshing across the board, $1.8Billion in profit ($0.53/share) on $11.5Billion in revenue, representing a 16% year over year rise for the top line. It was also confirmed by management that product performance is increasing throughout the company and its clients. In effect, the company is selling more products to each customer, on average.

The fact that WFC set aside $3Billion to cover potential future losses, was largely glossed over in reporting on the quarter, and a number of that size has to be taken into consideration. Loan losses are still very real in today's banking climate, however IF WFC is one of the many first steps to stabilization in an un-easy US economy, the loss provision will seem largely insignificant in the quarters that lie ahead. In today's environment that is still and IF, that for many traders is filled with uncertainty.

Disclosure: Author holds no position in WFC

10 July, 2008

Excitement begins to spread around the globe for Apple's 3G iPhone.

With customers in New Zealand, Australia and Japan being the first in the world to officially get their hands on Apple's (AAPL) anticipated 3G iPhone, the euphoria across the Internet is reaching another fever pitch. Customers waiting in the US and Europe for Friday morning launches of the device are patiently prying into Apple's worldwide websites to get a glimpse of the updated software for the device and to get a sneak peek of the heralded application store.

Even though the updated version of Apple's trendy and hot-selling iPhone contains faster mobile network browsing and GPS, the biggest business opportunity here will indeed be the development of applications for the iPhone platform. The "AppStore" as Apple calls it is the one stop shop for iPhone and iPod Touch users to download, or pay for, additional applications for their updated devices.

While time zone differences allowed Oceania to get their iPhone 3G's first, the US and Europe will have the biggest say in terms of the devices success. So far, it's looking very good! Telefonica, one of Apple's carrier partners in Europe announced that it has taken over 300,000 pre-orders in the U.K. and Spain. It could certainly be said that this represents a much better turn-out than the initial Edge-only iPhone was able to muster when it went on sale in Europe late last year. The updated device hits the shores of 22 Countries either today or tomorrow and if the North American launch follows the initial European interest it promises to be yet another iPhone-mania weekend for the not-so-little-anymore company out of Cupertino.

Apple still has a goal of selling 10Million units by the end of the year, and considering the company is officially still well short, the 3G iPhone will need to make up those numbers in a hurry. Apple's confident in reaching their targets, analysts are confident Apple will obliterate them with new subsidized pricing, and as such shareholders should be confident that even in turbulent markets the profit factory that Apple has of late become will continue to churn, and churn loudly!

While it sells unit after unit of this new generation iPhone, the company decision to open up the platform to developers was a terrific one. The subsequent SDK and new AppStore will provide Apple with close to as much recurring revenue on each unit as they were getting in the carrier subsidies for the first generation device. Add to this Apple's MobileMe platform for iPhone users which will wirelessly sync e-mail, calendars and contacts for personal users, an "Exchange for the rest of us" as they've called it, and you've got the makings of a potentially huge wirelessly connected user-base. While MobileMe is separate from the AppStore, it does play a role in the extended services new and existing Apple customers will buy.

Applications for sale and download from the store range from Free all the way to $69.99, however a vast majority fall within the $9.99 and lower price point, including several popular games. The previously showed off Super Monkey Ball game for the iPhone is $9.99 and it already has been downloaded almost 4,000 times. And the AppStore isn't even official yet in 90% of the world.

Some quick math. 4000 downloads x $10 = $40,000
Which gives $28,000 back to the developer (a 70% cut) and $12,000 to Apple (a 30% cut).

A brief glance through the AppStore reveals over 550 Applications with surely more on the way every day/week/month. At this rate, developers should soon be enjoying the same digital distribution successes that the music and movie businesses are seeing sooner rather than much later. iTunes has truly become the one place for all things digital, and at the backbone of the entire ecosystem is Apple.

The company virtually sold ZERO iPhones in the month/2 months prior to this launch, but it appears from initial indications that they will handily make it up now through 3G device volume. With an earnings report on the horizon, the Computer and iPod business will be center stage but in the remaining 5 months of the year iPhone and the AppStore will once again be squarely on the minds of analysts, management, and in turn shareholders. Expect another stellar quarter from Apple for June (as an analyst has pegged Mac sales at 2.5Million units), and as the worldwide iPhone roll-out continues to 70 Countries and beyond in the remainder of the year, the sales figures for the device will continue to climb.

And if they ever get that deal with China Mobile worked out and unleash the iPhone to 600Million more subscribers, watch out!

Disclosure: Author owns AAPL

08 July, 2008

Bernanke comments lead to rally in Financials

Comments by Ben Bernanke, Fed Chairman, today lifted markets, especially for those battered companies in the Financial sector. In what could be called a "relief" rally, the worst 3 to 6 month performers in the sector received today the biggest lift in months.

Bernanke's comments sought for the Fed to increase its oversight ability and its power/resources in order to prevent future financial turmoil. In essence Bernanke wants to Fed to have new regulatory responsibilities and supervisory oversight of the Financial markets and Financial companies.

In light of the commentary and an almost $6 drop in Oil Futures, The Financial sector posted a board of green.
Bank Of America (BAC) up 8%
Washington Mutual (WM) up 15%
Citigroup (C) up 5%
Wachovia (WB) up 10%
Lehman Brothers (LEH) up 4.5%
Goldman Sachs (GS) up 3%
JPMorgan Chase (JPM) up 4.5%

While today's rally definitely was a relief for longer term holders of these companies, the industry as a whole, is by no means out of the woods. The Financials will still feel the pressure of the lingering sub-prime and mortgage troubles, and it wont be till the losses and write-downs fully subside can it become business-as-usual for some of America's most recognized corporate names.

Disclosure: Author owns C, GS

07 July, 2008

Bright Nights for IMAX and The Dark Knight

While it's true the movie summer session has already produced incredible box office successes with Iron Man and Indiana Jones, the epitome of cinema-fare is yet to come, in the shape of the cape and cowl. By all early accounts Christopher Nolan's The Dark Knight (the sequel to the excellent Batman Begins film) is surpassing even its most lofty cinematic expectations.

Oscar talk for a comic book movie? This genre of film-dom typically rates from the very good (X-Men 2, Spider Man 2, Begins, Iron Man...) to the downright awful (Elektra, Daredevil, Spiderman 3...), but for a movie about a man dressed in a bat costume fighting a villain based on a playing card, to be compared with the greatest sequels in film history. That is something else, and for it to be spoken with realistic ambitions of a Best Picture Oscar nod is not only chilling, but deserves the general movie goer's full attention. From early reviews and viewings, Nolan created a masterpiece with this Batman film, and Heath Ledger's Joker portrayal will be talked about for a generation and then some. Sadly the actor will be unable to reap the praises bestowed upon him as his death months ago from an accidental overdose shocked the entertainment community.

Box Office predictions are enormous for this movie, even more so than Indiana Jones, and with the latter now crossing the $300Million mark domestically and nearing $800Million worldwide, The Dark Knight seems as sure of a thing as there is in this world for a bona-fide hit movie.

The trade here however, is not Time Warner (TWX), the parent of Warner Bros., the studio producing the movie. The trade is IMAX (IMAX). The company whose theater screens fill entire rooms and have sound systems that come as close as any to the ever-lustful "ultimate experience". IMAX is a much smaller company, compared to the giant TWX, $115Million in Revenue in 2007, and therefore can be pushed significantly higher by the success of a single movie.

And yes, studios have released movies on IMAX screens before, why is this different? What makes The Dark Knight bigger and better than any other blockbuster brought to IMAX?
First, it is different because IMAX has more screens now than ever before, and the company, after a rough patch, involving some restatements, seems to be back on track to profitability.
Secondly, The Dark Knight was the first major studio blockbuster to have entire sequences shot with IMAX cameras! Reviews and praise for the film thus far revolve around a few common threads. One, is the sheer film-making achievement that is delivered with this movie. Two, is the incredible performance of Ledger as The Joker. Three, You have to see this film in IMAX!

If that's not enough to drive additional incremental business to IMAX, I'm not sure what is. Shooting movies with IMAX cameras has thus far been reserved to documentary, or special nature-based ilk, as the film is a different size, costs more to use and can only be processed by a specialist laboratory. The final product however, is nothing short of spectacular.

Judging by initial critical praise and the overwhelming response to the IMAX version of the film, it is likely that Dark Knight in IMAX showings will be sold out for several weeks. Shooting a movie of this size, with such a public following in IMAX film with IMAX cameras is not simply an anomaly but is trailblazing and trend-setting. For IMAX shareholders, they can only hope that The Dark Knight's successes with the IMAX experience will foster movie studios to try the format in more feature films, driving an unheard of growth cycle for the company. For now though, it all hinges on Batman, and by all accounts his cape will shroud the entire domestic box office starting July 18th.

With markets sputtering, and catalysts few and far between, IMAX has an enormous catalyst, a beacon of hope for short term gains, as Batman's epic clash with The Joker unfolds on screen, within the IMAX experience.

Disclosure: Author owns IMAX

01 July, 2008

Starbucks Hit by Economy, Plans Hefty Store Closures

The global gourmet coffee giant, is and has been under tremendous pressure to come up with something, anything to regain Investor confidence, as a weakening US economy is having a dramatic effect on earnings. The company had previously announced a slow down in "planned store openings" and today after the market closed, dropped the other end of the hammer.

Starbucks (SBUX) announced 600 store closures and a further halving of 2009 expansion plans. Of course with that comes about 12000 job cuts and/or job shifts. If the company can deliver on promises to "find workers jobs at other cafes" the number of job cuts could be significantly lower than 12000, however the Street seems to be optimistic executives can wrangle up as much in cost savings going forward as possible. Starbucks jumped after hours about 5% to near $16.50/share, still a far cry from its 52-week high of $28 and just off lows of $15.

Economic factors have weighed heavily on this company, which does make its business on the backbone of the luxurious. When driving the work costs you twice to three times what it did a year ago, it certainly can be hard to justify an expensive coffee. The closure of stores for Starbucks signals a significant shift in short-term thinking. The coffee giant built itself through incredibly rapid expansion, and a turn here towards contraction is a far different course for management.

At least the executive branch got the first part right, closing what they claim to be the poorest performing stores and stores open less than three years. Perhaps those years of expansion are catching up to the company? Perhaps putting a Starbucks every couple blocks in Major centers was indeed overkill, but as the old overused adage goes: Strike while the iron's hot.

Investors aren't striking anything now with Starbucks, as declines of 15 and 26% in respective 3 and 6 month time frames are truly uninspiring performances. Could this move spark a turnaround? Unlikely, it'll take Macroeconomics to get customers back into stores in record numbers, or some truly innovative thinking and advertising.
-> More cost-effective menu items coupled with effective quality assurance advertising.
-> Hiking or tweaking pricing for services like Wi-Fi, or its niche Music Services.

Starbucks is a household name and it'll be back in the years to come, but over the short term, these stock price spikes post drastic events are just that, and will eventually give way to further deteriorating financial results. For the time being the stock should simply be held, if Investors already have the misfortune of owning it.

Disclosure: Author does not own SBUX