JNJ Earns $1.03 Per Share
Posted by Eddy Elfenbein on January 25th, 2011 at 10:20 am

Johnson & Johnson (JNJ) released earnings this morning and they were a very slight disappointment. The company earned $1.03 per share which was inline with expectations.

Technically, the company earned 70 cents per share, but the company’s net was dragged down by recall and litigation costs.

J&J’s McNeil Consumer Healthcare division has recalled more than 40 brands of over- the-counter medicines, including Tylenol and Rolaids, since late 2009, and the company removed orthopedic implants last year. J&J said the consumer recalls cut 2010 sales by about $900 million dollars, about $300 million more the company projected in July.

The recalls made 2010 a “difficult and disappointing” year, Chief Executive Officer William Weldon said on a conference call with analysts. J&J is in the midst of an “uncompromising effort” to improve quality and restore trust in its brands, he said.

“If those reviews reveal any further issues, we will not hesitate to take any action that is needed,” Weldon said.

Johnson & Johnson also released their earnings estimate for this year: $4.80 to $4.90 per share. Wall Street had been expecting $4.98 per share, so this was a bit below expectations.

The stock is down about $1 per share this morning. Today’s news is disappointing but not earthshaking. JNJ is the bluest of the blue chips so I see any pullback as a good opportunity to buy.

Morning News: January 25, 2011
Posted by Eddy Elfenbein on January 25th, 2011 at 8:37 am

Euro Reaches Two-Month High on Growth Signs, Confidence in Debt Resolution

I.M.F. Says European Debt Still a Threat to World Recovery

Fed Likely to Press On With QE Even as Business Lending Rises

A Hefty Price for Entry to Davos

DuPont Profit Drops Less Than Expected; 2011 Forecast Raised

Corning 4Q Profit Rises 41% As Demand Improves

BlackRock Profit Doubles as Stock Rally Lifts Assets

Regions Financial Swings To Surprise 4Q Profit On Higher Reveues

American Express 4Q Profit Increases

Harley-Davidson Loss Narrows on Financial Unit Gain

Coach Profit up 26% as U.S. and China Sales Soar

Joshua Brown: The New and Improved Barron’s Boost

Paul Kedrosky: The Re-Rise of Copper Thefts

Google’s Stock to $750?
Posted by Eddy Elfenbein on January 24th, 2011 at 1:26 pm

I’m often asked my opinion of Google’s (GOOG) stock so I wanted to share some thoughts with you.

Generally, I prefer to steer clear of highly popular stocks. The research is very clear that stocks with high betas are not strong performers. Also, with so many eyes following Google, I’d have a very hard time gaining an edge over the market. That’s why I like to hunt for bargains where other folks don’t go.

I have to give Google credit; their earnings have grown very impressively. Earnings are currently growing about 20% to 25% which is hard to match anywhere.

The problem I have is that I don’t know how to properly value a company whose earnings are growing so rapidly. With 20/20 hindsight, we can say that Google was a great buy at its IPO. The shares then ran up to $700 by late 2007. The peak close came at $741.79 on November 6, 2007.

Since then, Google has basically been a market performer — and the market has been a poor performer. Given its volatility, I’d say that owning Google hasn’t been worth the trouble over the last three years.

What Google has done is pretty interesting since the stock went from a very high valuation to a more reasonable one (though still high), while the stock has generally kept pace with the market. The E of the P/E Ratio has grown by enough to offset the overall decline in Google’s P/E Ratio.

Below is a look at Google’s stock in blue (left scale) and its earnings-per-share in gold (right scale). The red is Wall Street’s projection. I’ve scaled the two lines at a ratio of 20 to 1 so whenever the lines cross, the P/E Ratio is exactly 20.

A few things to note: Notice how much higher the stock was compared with its earnings in early 2008. The P/E Ratio was over 40.

See the slight slowing of Google’s earnings growth in 2009? The recession barely hit them but it is noticeable.

Finally, you can really see how modest Wall Street’s earnings projection is compared with the recent trend. Just by mentally extending the gold line, I can see earnings hitting $35 per share this year. My current estimate is for $35.61 per share.

The stock’s P/E Ratio has averaged 21 over the past few years. Given my earnings estimate, that translates to a price one year from now of $747.81 per share. Given the current price, Google is a good value.

Real GDP Plunged 0.00004% in 2008
Posted by Eddy Elfenbein on January 24th, 2011 at 10:49 am

Here’s an odd statistical note:

In 2007, GDP in chained millions of dollars came in at $13,228,853. In 2008, it dropped to $13,228,848.

That’s a drop of 0.00004%.

That means that 200-million plus consumers made countless economic decisions every day for a year and the total output for two consecutive years was almost perfectly identical.

Few things are as surprising as the past.

In 2009, real GDP fell by 2.6%. This Friday we’ll get the GDP for the fourth quarter of 2010. Real GDP probably grew around 2.8% to 3.0% last year.

FBR on AFLAC
Posted by Eddy Elfenbein on January 24th, 2011 at 9:54 am

Barron’s carries a report on AFLAC (AFL) from FBR. They upgraded the stock to Outperform. Here’s a sample:

Aflac (ticker: AFL) shares have lagged the group by 14% in the last three months, likely on increased European sovereign and financial credit concerns.

In both our base-case and stress-case credit-loss scenarios, we believe Aflac is adequately capitalized to earn its way through potential impairments related to Portugal, Ireland, Italy, Greece and Spain (PIIGS) exposure.

If credit losses materialize as we forecast in our base case, the company should be well positioned to deliver on the high end of buyback guidance, with the potential to upsize the buyback program.

Even in our stress case, we believe the company could deliver on its buyback guidance of six million to 12 million shares per year. Our 2011 estimates and 2012 earnings-per-share estimates assume 10 million and 12 million of share buybacks, respectively.

We have fine-tuned our 2011 EPS estimate to $6.25 from $6.31, as the yen has weakened recently, and introduce a 2012 EPS of $6.85.

We are raising our price target to $69 from $59, based upon a 10 times multiple of 2012 EPS. Over the last five years, Aflac’s forward price-to-earnings ratio has averaged 11.1 times.

This is a very positive report. Wall Street currently expects AFL to earn $6.17 per share so FBR is well above that. The stock got as high as $58.60 this morning which is another 52-week high.

Morning News: January 24, 2011
Posted by Eddy Elfenbein on January 24th, 2011 at 7:07 am

Euro’s Slide Meets Resistance as Analysts Draw Line at $1.30

Super-Cycle Leaves No Economy Behind Before Davos Summit

Global Price Fears Mount

U.S. Stock Futures Edge Higher Before Earnings Reports

New Push at Fed to Set an Official Inflation Goal

U.S. Treasury’s Toxic Asset Funds Gain 27%

Terrified Investors Sold Out Of Munis At Record Pace Last Week

Novartis Buys U.S. Cancer Lab for $470 Million

Sara Lee Said to Get Apollo Bid Above Market Value

Philips Looks East as Weak TV Sales Hit Profit

IQ and Stock Market Participation

Joshua Brown: Why Do Traders Retweet Each Other So Much?

Benford’s Law and the Stock Market
Posted by Eddy Elfenbein on January 22nd, 2011 at 9:22 am

Abnormal Returns spotted a fascinating article on finance and Bedford’s Law.

Take any naturally occurring set of numbers and keep a count of the first digit in the number. A newspaper is an ideal test bed. Most people reckon that each number from 1 to 9 will occur with equal frequency: after all, why would they not? Yet they don’t: the number 1 appears almost a third of the time and each subsequent number reduces in frequency. And this, frankly, is bizarre at first flush.

The article notes that Benford’s Law has been used to spot financial fraud. It turns out that it’s not so easy to appear being random.

I took all of the closing numbers for the Dow going back to June 8, 1931 which is an even 20,000 points of data. I then broke down all the starting digits and here’s what I got:

Since the Dow has never made it to 20,000, there are a lot of readings in the Ones row, but that’s the point of Benford’s Law. According to the law, the Ones should have 30.1% of the readings which is pretty close to what we see (36.31%).

I’m guessing the list is a bit skewed because there are so many readings in the Eights and Nines column. Perhaps if this same test is run in 30 years, we’ll see an even stronger relationship to Benford’s Law.

Sesame Street Martians
Posted by Eddy Elfenbein on January 21st, 2011 at 4:06 pm

It’s Friday. The trading week is over. It’s time to go home. Yep, yep, yep, yep, yep, yep….

Gold Vs. the S&P 500
Posted by Eddy Elfenbein on January 21st, 2011 at 12:24 pm

In 1980, gold was going for more than 7.5 times the S&P 500. To hit that level today, gold would need to be close to $10,000 per ounce.

By July 1999, the ratio had fallen to less than 0.18 which in today’s terms would place gold at $230 per ounce. The ratio then rebounded to 1.37 in March 2009. Since then, gold and the S&P 500 have followed each fairly closely. Since last May, gold has held the upper hand but now the two are starting to get much closer.

Is a crossing in the works?

Rosenberg’s Bullish Checklist
Posted by Eddy Elfenbein on January 21st, 2011 at 10:38 am

At Minyanville, Josh Lipton lists 10 things that David Rosenberg would need to see before turning bullish on the U.S.:

1) An energy policy that truly removes U.S. dependence on foreign oil.

2) A complete rewrite of the tax code that promotes savings, investment, and a revamp of the capital stock. Cut tax rates, eliminate loopholes and costly tax breaks. Tax consumption, promote savings and investment.

3) A credible plan that reverses the run-up in the debt to GDP ratio. This includes not just on-balance sheet items but new rules governing entitlements too. We need delineation of the future of Fannie and Freddie if there is any…We need a complete rewrite of social contracts and a reversal in sacred cows that have been created over the years that are completely unaffordable.

4) A massive mortgage write-down by the banks that provide much-needed equity to upside-down homeowners.

5) A creative strategy to put people to work instead of paying them to be idle — having nearly half of the unemployed ranks out of work for over 15 weeks and a 25% youth jobless rate is unacceptable at any level.

6) Tort reform. This is the only way to rationally bring down health care costs to more manageable levels.

7) And from six — use whatever proceeds they can save to enhance their education skills, especially in the sciences and mathematics where the U.S.A. is sliding down the global scale.

8. Financial sector regulatory reforms that actually have some teeth.

9) Change tax policy to free up the hundreds of billions of dollars of corporate cash sitting in reserve in overseas accounts — bring this money home!

10) Our Republican friends may not like this too much but in Canada, we understand the importance of immigration inflows and the U.S.A. should be doing more on this front to stimulate its long-run growth potential.

It’s an interesting list and I don’t have any problem with the issues he raises. I do have one concern, though: all of the things he criticizes were in place in March 2009 and that was the beginning of one of the great bull market rallies in history.

If he’s talking about being bullish about the economy, that’s one thing, but if he’s talking about being bullish about the stock market, then I think this is a fair criticism. The lesson for investors is to not confuse policy solutions with reasons to be bullish. The reason I highlight Rosenberg’s list isn’t because I don’t like it — I do. Rather, it’s the wrong way to think about investing.

Why was the stock market such a great buy in March 2009? What signal did we have? The answer is, “nothing.” Stocks simply got too cheap. The bears had overrun their thesis and stocks were a great bargain.

As stocks started to rise, we got more signs that the economy was improving. But at no point did anyone enact a policy proposal such as the ones Rosenberg suggests. Investors should focus on valuations and not on policy proposals.