- Posted by Eddy Elfenbein on October 24th, 2014 at 9:12 am
Ford’ earnings were down but they beat expectations. Consensus was for 19 cents per share and Ford earned 24 cents per share.
Ford had pretax operating income of $1.41 billion in North America in the third quarter, down from $2.3 billion a year earlier. That was good for a 7.1 percent margin, down from 10.9 percent in 2013. Ford’s U.S. sales fell 0.5 percent this year through September to 1.88 million cars and light trucks, according to researcher Autodata Corp. Its U.S. market share declined to 15.1 percent from 16 percent a year earlier, according to Autodata, based in Woodcliff Lake, New Jersey.
“We did have some challenges,” Bob Shanks, Ford’s chief financial officer, told reporters today of the automaker’s third quarter. Those included $630 million in recall costs and a $166 million negative effect from a strong dollar. Costs to bring new models to market caused Ford to consume $700 million in cash in the third quarter, its first negative cash-flow period since the first quarter of 2010, Shanks said.
CWS Market Review – October 24, 2014
Posted by Eddy Elfenbein on October 24th, 2014 at 7:12 am
“Buy not on optimism, but on arithmetic.” Benjamin Graham
In last week’s CWS Market Review, I said I thought the market’s panic had reached a peak last Wednesday, and so far, that seems to be the case. The S&P 500 has now rallied for five of the past six days. The only downer was the day of the awful shooting in Ottawa. On Tuesday, the S&P 500 had its best day in more than a year, and the index rose back above its 200-day moving average. By the end of the day on Thursday, the S&P 500 stood 130 points above last Wednesday’s low. That’s quite a turnaround.
Probably a better gauge of the change of sentiment is the Volatility Index ($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 $50 per share.
Four Buy List Earnings Reports Next Week
We have four more earnings reports coming our way next week; three of them are on Tuesday. Here’s an Earnings Calendar of our Buy List stocks for this earnings season.
On Tuesday, AFLAC ($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!
Morning News: October 24, 2014
Posted by Eddy Elfenbein on October 24th, 2014 at 6:47 am
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Q3 Earnings Season Calendar
Posted by Eddy Elfenbein on October 23rd, 2014 at 4:35 pm
We’re now in third quarter earnings season. Sixteen of our 20 Buy List stocks have quarters that ended in September. Here’s a list of each stock’s projected earnings date along with Wall Street’s current estimates and the earnings results. Please note that some of these dates may change.
Stock Symbol Date Estimate Result Wells Fargo WFC 14-Oct $1.02 $1.02 eBay EBAY 15-Oct $0.67 $0.68 Stryker SYK 16-Oct $1.14 $1.15 International Business Machines IBM 20-Oct $4.32 $3.68 McDonald’s MCD 21-Oct $1.37 $1.51 CA Technologies CA 22-Oct $0.62 $0.65 CR Bard BCR 22-Oct $2.10 $2.15 Microsoft MSFT 23-Oct $0.49 $0.54 Ford Motor Company F 24-Oct $0.19 $0.24 AFLAC AFL 28-Oct $1.44 Fiserv FISV 28-Oct $0.83 Express Scripts ESRX 28-Oct $1.29 Moog MOG-A 31-Oct $1.08 Qualcomm QCOM 5-Nov $1.31 Cognizant Technology Solutions CTSH 5-Nov $0.58 DirecTV DTV 6-Nov $1.30
Microsoft Earns 54 Cents per Share
Posted by Eddy Elfenbein on October 23rd, 2014 at 4:33 pm
The results included the impact of restructuring related to deep cuts announced in July at its Nokia division.
Shares of Microsoft closed at $45.02 in regular trading Thursday, up about 1.4%. After hours, shares were trading up about 3% a $46.50.
“We delivered a strong start to the year, with continued cloud momentum and meaningful progress across our device businesses,” said Microsoft Chief Financial Officer Amy Hood, in a press release.
The consumer division, which includes, devices saw revenue growth of 47% to $10.96 billion, Microsoft said. Among highlights, Office 365 Home and Personal totaled more than 7 million, up more than 25% over the 4th quarter of 2014.
Commercial revenue grew 10% to $12.28 billion from a year ago.
The shares are up about 4% in the after-hours market.
AT&T Breaks Below DTV Merger Band
Posted by Eddy Elfenbein on October 23rd, 2014 at 11:06 am
To recap, the merger deal calls for:
DIRECTV shareholders will receive $95.00 per share under the terms of the merger, comprised of $28.50 per share in cash and $66.50 per share in AT&T stock. The stock portion will be subject to a collar such that DIRECTV shareholders will receive 1.905 AT&T shares if AT&T stock price is below $34.90 at closing and 1.724 AT&T shares if AT&T stock price is above $38.58 at closing. If AT&T stock price at closing is between $34.90 and $38.58, DIRECTV shareholders will receive a number of shares between 1.724 and 1.905, equal to $66.50 in value.
At this point, it basically means that DTV is worth $28.50 plus 1.905 shares of AT&T. With today’s drop, that makes the deal worth $92.51 for DTV.
Morning News: October 23, 2014
Posted by Eddy Elfenbein on October 23rd, 2014 at 6:58 am
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C.R. Bard Earns $2.15 per Share
Posted by Eddy Elfenbein on October 22nd, 2014 at 4:29 pm
C. R. Bard, Inc. today reported 2014 third quarter financial results. Third quarter 2014 net sales were $830.0 million, an increase of 9 percent over the prior-year period on both an as reported and constant currency basis.
For the third quarter 2014, net sales in the U.S. were $565.4 million, an increase of 13 percent over the prior-year period. Net sales outside the U.S. were $264.6 million, an increase of 3 percent over the prior-year period on a reported basis. Excluding the impact of foreign exchange, third quarter 2014 net sales outside the U.S. increased 1 percent over the prior-year period.
For the third quarter 2014, net income was $131.3 million and diluted earnings per share were $1.69, an increase of 41 percent and 47 percent, respectively, as compared to third quarter 2013 results. Adjusting for items that affect comparability of results between periods as detailed in the tables below, third quarter 2014 net income was $149.2 million and diluted earnings per share, after adjusting for certain items that affect comparability between periods and excluding amortization of intangibles, were $2.15, an increase of 22 percent and 28 percent, respectively, as compared to third quarter 2013 results.
Timothy M. Ring, chairman and chief executive officer, commented, “We are pleased this quarter with the continued execution of our strategic investment plan that we announced at the beginning of 2013. We said at the time that we expected the investments to begin generating returns in the back half of 2014, and that is happening. We continue to focus on executing our plan with the objective of improving revenue growth and profitability.”
CA Technologies Earns 65 Cents per Share
Posted by Eddy Elfenbein on October 22nd, 2014 at 4:12 pm
Mike Gregoire, CA Technologies Chief Executive Officer, made the following comments:
“We are starting to see traction in the market as a result of our efforts. Enterprise Solutions new sales were up for the second consecutive quarter. We continued to see solid performance in connection with renewals and we maintained financial discipline across the business. Although we are pleased with this progress, we remain focused on the work needed to drive sustained revenue growth.
“The Application Economy is transforming business, creating new opportunity and enormous complexity for our customers. CA provides the software solutions businesses need to accelerate innovation, secure applications and manage their rapidly growing IT portfolios across multiple platforms. We are uniquely positioned to help our customers build the new capabilities they need to grow and reduce the complexity they need to manage, and have focused our business on solving these problems.”
Non-GAAP EPS in the second quarter of fiscal 2015 was negatively affected by $0.15 from an increase in the Company’s non-GAAP effective tax rate. The Company recognized a net discrete tax benefit of approximately $181 million in the first quarter of fiscal 2014, which impacted the non-GAAP effective tax rate for the second quarter of fiscal 2014. This net discrete tax benefit was primarily as a result of the resolution of uncertain tax positions relating to U.S. and non-U.S. jurisdictions.
-Cash, cash equivalents and investments at September 30, 2014 were $3.193 billion.
-With $1.763 billion in total debt outstanding and $139 million in notional pooling, the Company’s net cash, cash equivalents and investments position was $1.291 billion.
-The Company is currently authorized to purchase $950 million of its common stock under its current stock repurchase program.
-The Company distributed $111 million in dividends to shareholders.
-The Company’s outstanding share count at September 30, 2014 was 440 million.
OUTLOOK FOR FISCAL YEAR 2015
The Company updated its fiscal year 2015 outlook, which represents “forward-looking statements” (as defined below).
The Company expects the following:
Total revenue to decrease in a range of minus 2 percent to minus 1 percent in constant currency, unchanged from previous guidance. At September 30, 2014 exchange rates, this translates to reported revenue of $4.27 billion to $4.33 billion.
GAAP diluted earnings per share from continuing operations to decrease in a range of minus 12 percent to minus 8 percent in constant currency, unchanged from previous guidance. At September 30, 2014 exchange rates, this translates to reported GAAP diluted earnings per share of $1.73 to $1.80.
Non-GAAP diluted earnings per share from continuing operations to decrease in a range of minus 20 percent to minus 18 percent in constant currency. Previous guidance was minus 21 to minus 19 percent in constant currency. At September 30, 2014 exchange rates, this translates to reported non-GAAP diluted earnings per share of $2.40 to $2.47.
Cash flow from continuing operations to increase in a range of 5 percent to 12 percent in constant currency, unchanged from previous guidance. At September 30, 2014 exchange rates, this translates to reported cash flow from continuing operations of $1.01 billion to $1.08 billion.
This outlook assumes no material acquisitions and a partial currency hedge of operating income. The Company expects a full-year GAAP operating margin of 27 percent, a decrease of one point from previous guidance, and non-GAAP operating margin of 37 percent, unchanged from previous guidance. The Company also expects to return to a normalized full-year GAAP and non-GAAP effective tax rate of approximately 30 percent, which would have a negative impact on GAAP and non-GAAP diluted earnings per share from continuing operations of approximately $0.43 and $0.59, respectively.
The Company anticipates approximately 436 million shares outstanding at fiscal 2015 year-end and weighted average diluted shares outstanding of approximately 440 million for the fiscal year.
Monthly Core CPI
Posted by Eddy Elfenbein on October 22nd, 2014 at 10:33 am
Here’s the annualized monthly core CPI. Today’s inflation report said that consumer prices rose 0.1% last month, and core prices were also up 0.1%.
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