Author Archive

• Boring Stocks: Chubb Edition
  Eddy Elfenbein, December 23rd, 2015 at 1:03 pm

  One of my themes with this blog is that boring stocks often make for great investments. I think many investors refuse to believe this can be true. It’s amazing how many dull stocks, ones that are rarely discussed on financial TV, do very well in the market.

  This time, I’m going to highlight Chubb (CB), the insurance company. My apologies to people who find insurance incredibly exciting. Here’s how Chubb describes itself.

  Since 1882, members of the Chubb Group of Insurance Companies have provided property and casualty insurance products to customers around the globe. These products are offered through a worldwide network of independent agents and brokers. The Chubb Group of Insurance Companies is known for financial strength, underwriting and loss-control expertise, tailoring products for the needs of high-net-worth individuals and commercial customers in niche markets and select industry segments, and outstanding claim service.

  Sexy, huh?

  The stock us up more than 30% YTD. It’s at another 52-week high today. Since 1978, shares of CB are up 72-fold compared with 21-fold for the S&P 500. That doesn’t include dividends. Chubb has increased its dividend every year since 1966.

  

  Update: I neglected to mention that Chubb is merging with ACE Limited. The deal should close in Q1 2016.

• Bed Bath & Beyond Lowers Guidance
  Eddy Elfenbein, December 23rd, 2015 at 12:22 pm

  After yesterday’s close, Bed Bath & Beyond (BBBY) issued a press release that said that fiscal Q3, which ended in November, will come in below their previous guidance. The official earnings report doesn’t come out until January 7, but they wanted to give us a heads-up.

  Bed Bath & Beyond now expects Q3 revenues to rise to $3.0 billion. That’s an increase of just 0.3%. They had previously expected sales to rise between 1.8% and 4.0%. They also expect same-store sales to fall by 0.4%. The previous guidance was for an increase between 1% and 3%.

  Now for earnings. BBBY sees Q3 earnings ranging between $1.07 and $1.10 per share. The previous range was $1.14 to $1.21 per share. Note that a miss on the top line is inevitably a larger percentage miss on the bottom line.

  “Our performance in the third quarter reflects the recent trends we have been experiencing,” stated Steven H. Temares, Chief Executive Officer and Member of the Board of Directors of Bed Bath & Beyond Inc. “On the one hand we experienced softer in-store transaction counts, and on the other hand sales from our customer-facing digital channels demonstrated strong growth, in excess of 25%. These mixed results were also impacted by the overall softness reported in the macro-retail environment during the quarter. As the retail environment continues to evolve, we remain focused on positioning our Company for long-term success.”

  This isn’t good news. The stock has been down as much as 6.5% today, and it touched a new 52-week low below $48 per share. However, I’m more concerned on a slow-down during their crucial fiscal Q4 (December, January, February). This news suggests that Q4 won’t be good but we can’t confirm how much.

  Q4 accounts for close to 35% of their annual profit. Bed Bath & Beyond gave us a small hint when they said they expect same-store sales to rise by 1% from the beginning of December through Christmas.

  I decided to keep Bed Bath & Beyond on next year’s Buy List, and this news doesn’t alter that.

• Morning News: December 23, 2015
  Eddy Elfenbein, December 23rd, 2015 at 7:03 am

  Zimbabwe’s Curious Plan to Adopt China’s Currency

  Meet 5 of China’s Disappearing Executives

  OPEC Sees Demand for Its Crude Oil Falling for Rest of Decade

  Calgary Woes Spread as Oil Patch Spending Cuts Deepen in 2016

  Mitch McConnell and the Coal Industry’s Last Stand

  Consumer, Business Spending Support U.S. Third-Quarter Growth

  FAA Fines Boeing $12M for Fuel Tank, Other Violations

  An Aging Society Changes the Story on Poverty for Retirees

  ConAgra’s Sales Fall, Supporting Plan to Revive Food Brands

  Storage Tech Company Nutanix Files For IPO

  How Nike Escaped the Apparel Armageddon

  Ban on Microbeads Proves Easy to Pass Through Pipeline

  Turing Pharma Seeks CEO to Replace Shkreli, Plans Job Cuts

  Cullen Roche: Control What You Can Control

  Joshua Brown: On Pace For a Record-Breaking Year of ETF Inflows

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• Strong Guidance from Express Scripts
  Eddy Elfenbein, December 22nd, 2015 at 10:01 am

  Express Scripts (ESRX) said it sees earnings next year ranging between $6.08 and $6.29 per share. Wall Street had been expecting $6.04 per share.

  “Our focused model of alignment has positioned us uniquely in the healthcare services landscape to improve health outcomes and lower costs for our clients and patients,” said George Paz, CEO and chairman of Express Scripts. “No one matches our focus on serving clients and patients and we remain confident in our continued growth and returning exceptional results to our shareholders.”

  “The fundamentals of our business allow us to deliver solid financial results while making investments to continue our growth as a leading independent PBM and healthcare provider,” said Tim Wentworth, President. “We have an aligned book of business and a deep set of innovative solutions to help clients and patients. As we create value for our patients and clients, we create value for our shareholders.”

  Express also reiterated its guidance for 2015 for growth of 13% to 14%. That’s what they said with the last earnings report when they also gave a full-year range of $5.51 to $5.55 per share.

  The stock looked like it was going to gap higher today but is now down about 1%,

• Q3 GDP Revised down to 2.0% Growth
  Eddy Elfenbein, December 22nd, 2015 at 9:02 am

  The government revised lower its estimate for Q3 GDP growth. They now say that the economy grew at a real rate of 2.0% during the third quarter. Last month, they revised the initial report of 1.5% growth up to 2.1%.

  The July through September reading marks a sharp slowdown from the second quarter’s 3.9% rate of expansion, reflecting the drag from inventory drawdown and a deceleration in consumer and business spending.

  The reading suggests 2015 is on track to close out another year of steady if unspectacular growth, bolstered by a firming job market, strong home sales and pockets of wage increases. But headwinds remain: Despite low gasoline prices, consumer spending has been muted throughout the year. Weakness in overseas economies, a strong dollar and low oil prices have weighed on the manufacturing, mining and energy sectors at home, damping business investment and exports and causing thousands of layoffs.

  What I think is interesting is that real GDP has grown by a fairly constant rate over the last six years. The trend is slightly over 2%, and last quarter matched it almost perfectly.

• Morning News: December 22, 2015
  Eddy Elfenbein, December 22nd, 2015 at 7:08 am

  Qatar National Bank to Buy Turkey’s Finansbank for $3 Bilion

  Puerto Rico Deal Is Only a Small Fix for $70 Billion Debt Crisis

  High-Volume Online Shopping is Putting a Strain on Shipping Firms and Causing Delays

  Deutsche Bank Tally of Suspect Russia Trades at $10 Billion

  An In-Depth Analysis of Plans for an Amazon Airline

  2016 Will Be The Dawn of the Drone Age

  Yamana Gold – Brio Is Not So Shiny After All

  NetApp to Acquire SolidFire

  Staples-Office Depot Merger Dealt Another Setback

  Southwest Airlines Agrees to Penalty Over Jet-Fix Problems

  Caterpillar Ordered to Pay $73.6 Million for British Firm Design Theft

  The One Brazilian Scandal Almost No One Is Talking About

  A Little More Inflation Would Be Good for Everyone

  Roger Nusbaum: The FOMC Awakens

  Jeff Carter: Physical Versus Virtual

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• Some Context
  Eddy Elfenbein, December 21st, 2015 at 9:23 pm

  I wanted to put the Fed’s rate hike in a little context. Here’s the Fed funds rate along with the 10-year yield.

• Good Discussion on Credit Markets
  Eddy Elfenbein, December 21st, 2015 at 1:54 pm

• Microsoft on Barron’s
  Eddy Elfenbein, December 21st, 2015 at 11:55 am

  This weekend’s Barron’s had some kind words for Satya Nadella and his leadership of Microsoft (MSFT). The company’s turnaround has been impressive. I encourage you to read the whole thing but I wanted to highlight this section which argues that analysts maybe underestimating MSFT’s earnings potential:

  For the present, however, investors are still treating Microsoft like a traditional software company. The stock trades at 19.5 times fiscal 2016 earnings estimates, versus 80 for cloud-based Salesforce.com (CRM). And the forecasts are conservative. Analysts expect Microsoft’s sales and profits to be flat this year at $93 billion and $22 billion, respectively. Boosted by an aggressive buyback program, earnings per share could still grow 5%. Wall Street expects EPS to rise another 13% in fiscal 2017, to $3.13.

  Moerdler is far more bullish. He says that $3.84 is more likely in fiscal 2017 and that analysts are underestimating the growth of Azure and overlooking Microsoft’s Office transition.

  The Street’s more conservative numbers are an opening for stock gains. “It creates a big opportunity for Microsoft to ‘beat and raise,’ ” says Moerdler. Indeed, the stock jumped 10% in October after Microsoft reported September-quarter EPS of 67 cents, versus a 58-cent estimate. In April, Microsoft also gained 10%, on a better-than-expected quarter.

  Aside from Azure, analysts are also missing the boat on Office, the popular productivity software that includes Word, Excel, PowerPoint, and Outlook. Office has been moving to a subscription model called Office 365, which already has 18 million consumer subscribers. About a quarter of the company’s corporate users have transitioned to the program, too.

  (…)

  By some math—counting the subscription Office business, Skype, Xbox, and Azure—Microsoft is already the world’s largest cloud company, with annualized revenue close to $10 billion. Microsoft has said its “commercial cloud”—Azure plus commercial Office and other business applications—will be a $20 billion annual business by 2018.

  Bullish Microsoft investors, including Bonavico, think the opportunity is best viewed through the lens of free cash flow. Free cash accounts for the fact that, with subscriptions, the recognition of revenue trails the actual receipt of cash. David Pearl, co-chief investment officer at Epoch Investment Partners, thinks Microsoft will generate $3.49 in free cash flow in 2017 and $3.98 by 2018. At 18 times, he gets to a price of $72 in less than two years. And that’s without giving Microsoft any credit for the roughly $8 in net cash per share on its balance sheet. Epoch, which has $42 billion in assets, owns Microsoft stock worth $830 million.

  Microsoft’s fiscal year ends in June, but we can translate their earnings into calendar year figures. The company will probably earn about $2.60 per share for 2015 which is up from $2.48 per share last year. However, that can ramp up to $2.92 per share for calendar year 2016. Their earnings have basically flatlined for the past few years but now appear to be heading upward.

• Morning News: December 21, 2015
  Eddy Elfenbein, December 21st, 2015 at 5:29 am

  The Big Short Was Only One Reason 2015 Was The Year of the Bears

  Brent Oil Slides to 11-Year Low as Producers Seen Worsening Glut

  Yellen Says Economic Expansions Don’t Die of Old Age. Neither Do Bull Markets

  Toshiba Sees Record $4.5 Billion Loss, Plans More Job Cuts

  China Vanke Moves to End Potential Takeover Battle Within Weeks

  Pandora Sees 7.5% Drop Day After CRB-Driven Surge; Analysts Positive on New Rates

  ’Star Wars: The Force Awakens’ Shatters Box Office Records

  Regulations, Doubts and Concerns May Thwart Railway Mergers

  Indonesia, Already Squeezed, Braces for Higher Interest Rates

  Puerto Rico Deal Is Only a Small Fix for $70 Billion Debt Crisis

  Panasonic to Buy Refrigeration Firm Hussmann for Over $1.2 billion

  Martin Shkreli Says Drug Price Hikes Led to Arrest

  Howard Lindzon: Martin Shkreli…Just Another Putz.

  Jeff Miller: A Parade of Pontificating Pundits

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