Donaldson Beats the Street
Posted by Eddy Elfenbein on February 22nd, 2007 at 5:30 pm

After the close, Donaldson (DCI) reported earnings of 38 cents a share, one penny better than estimates.

Donaldson Company, Inc. announced record second quarter diluted earnings per share of $.38, up from $.32 last year. Net income was $31.3 million, versus $26.9 million last year. Sales were a record $463.7 million, up from $392.9 million in fiscal 2006.
For the six month period, EPS was another record at $.81, up from $.69 last year. Net income increased 14 percent to $67.3 million compared to $59.1 million last year. Sales were a record $910.2 million, up 14 percent from $796.3 million in fiscal 2006.
“Sales growth was very strong during the quarter, supporting our outlook for another record year,” said Bill Cook, Chairman, President and CEO. “Our sales were especially good in Europe and Asia, where solid economic conditions and our well-developed market presence combined to deliver growth in excess of 25 percent in both regions. Our year-to-date operating margin of 10.6 percent compares favorably to 10.2 percent a year ago. Global economic conditions remain healthy for most of our businesses, giving us confidence in delivering our 18th consecutive year of record earnings.”

Here’s a look at the streak:
Year………….Sales……………..EPS
1990…………$422.9……………$0.19
1991…………$457.7……………$0.21
1992…………$482.1……………$0.23
1993…………$533.3……………$0.26
1994…………$593.5……………$0.30
1995…………$704.0……………$0.37
1996…………$758.6……………$0.42
1997…………$833.3……………$0.50
1998…………$940.4……………$0.57
1999…………$944.1……………$0.66
2000…………$1,092.3…………$0.76
2001…………$1,137.0…………$0.83
2002…………$1,126.0…………$0.95
2003…………$1,218.3…………$1.05
2004…………$1,415.0…………$1.18
2005…………$1,595.7…………$1.27
2006…………$1,694.3…………$1.55
2007…………$1,820.0…………$1.76 (est)
2008…………$1,940.0…………$1.95 (est)
The company expects this year’s earnings to be betweem $1.72 and $1.82 a share. For the first half of this fiscal year (ending in July), DCI’s EPS is up 17.3%. If that trend continues in the back half, Donaldson will net $1.82 a share.

Defending the Bull. Again.
Posted by Eddy Elfenbein on February 22nd, 2007 at 1:39 pm

I defended the bull market four months ago, and I’ll try to do it again today. This time, however, I want to take a look at some of the bearish arguments making the rounds. David Gaffen at Marketbeat outlines a few.
For example:

The VIX, commonly known as the “fear index,” is hovering around 10, a low point, suggesting a lot of carefree folks out there these days. This level is often a turning point, a calm before the storm, so to speak.

No! No! A thousand times No! A low VIX does not mean that investors are complacent. It means the exact opposite—investors are being cautious. Notice how all the other risk spreads are also low.

The current rally is now the third longest since 1900 without a 10% correction.

That’s true, but what’s so special about 10%? The S&P 500 had a 7.7% correction last spring, and it kept going. This bull hasn’t exactly been a roaring bull. In almost ten months, we’re up almost 10%. That’s less than both earnings growth and dividend growth. Look at some sentiment indicators. Value stocks are still leading growth. The Nasdaq is still less than one-fifth of the Dow. These aren’t the signs of an overheating market.

Margin debt has hit an all-time high, surpassing the heady days of the technology stock boom, as more people borrow money to buy stocks than ever before.

But what about equity growth? The proper way to look at margin debt is its relation to equity. Why isn’t margin growth a good thing, reflecting investor optimism? (Update: Bill Rempel makes several good points on this misleading stat.)

The Dow industrials, transports and utilities all closed at new highs on the same day last week — something that became a routine occurrence in just two years, 1929 and 1986, both preludes to big market falloffs.

The last two triple highs came in March 1998, and the Nasdaq promptly tripled. The time before that came in April 1993, and the market rallied for another nine months. Nearly anything can prelude a big market falloff.
Another bearish talking point is that the market hasn’t had a 2% down day in nearly four years. Once again, I don’t see what’s so bad about that. The market is in a period of low volatility. There’s nothing unusual or dangerous about it. Today’s volatility is roughly equal to other periods of low volatility. Was their anything dangerous about the market of the mid-1990s? There were just three 2% down days from November 1991 to July 1996, and we survived. Some of us even made money. Remember this was the market that led to Irrational Exuberance.
Also, what’s so special about 2%? Since the last 2% day, we’ve had over 60 1% falls, including a few 1.8%-ers and one 1.9%-er. Change the parameters slightly, and the talking point goes away. We’ve gone almost nine months since a 1% correction, and that’s far from the longest streak ever.

Chicks on the Street
Posted by Eddy Elfenbein on February 22nd, 2007 at 11:47 am

From an actual academic study:

We study the relation between gender and job performance among brokerage firm equity analysts. Women’s representation in analyst positions drops from 16% in 1995 to 13% in 2005. We find women cover roughly 9 stocks on average compared to 10 for men. Women’s earnings estimates tend to be less accurate. After controlling for forecast characteristics, the difference in accuracy is roughly equivalent to four years of experience. Despite reduced coverage and lower forecast accuracy, we find women are significantly more likely to be designated as All-Stars, which suggests they outperform at other aspects of the job such as client service.

(Pictured is Hetty Green.)

The Best Airline You’ve Never Heard Of
Posted by Eddy Elfenbein on February 22nd, 2007 at 9:48 am

Dublin-based Ryanair (RYAAY) is revolutionizing air travel in Europe. They’ve borrowed their business model from Southwest Airlines (LUV), and they’re having the same kind of success.
What’s their base rate for a round-trip flight from London to Pisa? One euro cent. Of course, there are some setbacks.

Not everyone is happy with Europeans’ unchecked mobility. People in countries newly served by budget airlines complain that British bachelor and bachelorette parties are taking over Eastern European cities such as Riga.
European Weekends, a Nottingham-based events coordinator, offers one package that features a “Soviet nurse banquet,” with prices starting at 55 pounds ($108) per person.
The cost covers five shots of vodka, five female entertainers, a “lesbian nurse show” and a meal.
“I know about guys who go to Prague for a weekend of cheap beer, prostitutes and fighting,” Vertovec says. “People there really complain about it — and that’s due to low-cost airlines.”

In the last nine years, the stock is up more than 15-fold.

Cyclicals Do It Again
Posted by Eddy Elfenbein on February 21st, 2007 at 4:02 pm

That’s eight straight days of beating the S&P 500.
This morning, it looked like the streak was done for, but the cyclicals did it again.

Damn It Feels Good to Be a Banker
Posted by Eddy Elfenbein on February 21st, 2007 at 1:55 pm

Goldman Sachs breaks down Blankfein’s pay:
TALLY SHEET
Components of 2006 Compensation, Benefits and Perquisites
Lloyd C. Blankfein
Cash Compensation
Base Salary $600,000
Cash Bonus (Includes $24,000 Qualified Money Purchase Pension Plan Contribution) $27,267,500
Equity-Based Compensation
Restricted Stock Units (RSUs) $ 15,679,500
RSUs — 77,776
Vested — 31,110
Unvested — 46,666
Stock Options $ 10,453,000
Shares Underlying Options — 209,228
Vested — 83,691
Unvested — 125,537
Exercise Price — $199.84
Total Compensation $ 54,000,000
Retirement and Welfare Benefits
Life Insurance Premiums $12,211
Firm Qualified Profit Sharing Plan Contribution $5,000
Medical/Dental Benefit Premiums $40,571
Long-Term Disability Insurance Premium $1,094
Other Benefits and Perquisites
Financial Planning Services $63,518
Car and Driver $198,388
Total Benefits and Perquisites $320,782
Dividend Equivalents on All Prior Years’ Restricted Stock Units $402,582
Total $54,723,364
Do you think “Car and Driver” means the magazine? Me neither.

Worthwhile Canadian Initiative
Posted by Eddy Elfenbein on February 21st, 2007 at 11:43 am

Telus to offer wireless adult content
We begin counting, now. One, two, thr…
Telus halts porn downloads

The AFLAC Duck Is Not Dead
Posted by Eddy Elfenbein on February 21st, 2007 at 11:02 am

Despite what Regis and Kelly said, and the New York Post, the AFLAC (AFL) duck is not going away.

“The company’s chief marketing officer tells adage.com he wants to focus less on the mascot and more on what Aflac does — supplemental insurance,” the CNN report stated. “He says many people recognize the duck’s squawk, but have no idea what product he’s selling.”
From there, the story was picked up by radio stations as far away as Los Angeles.
As the story spread, Herbert said he went from “from being annoyed to being concerned.”
About 2 p.m., the company issued the news release stating the duck was still alive.

Investing Factoid of the Day
Posted by Eddy Elfenbein on February 21st, 2007 at 10:25 am

The Dow falls an average of 18.7% from one year’s high to the following year’s low.
This is from Mark Hulbert’s article which takes a skeptical look at the idea that years ending in “seven” are bad for the market.

Cyclicals Are Soaring
Posted by Eddy Elfenbein on February 21st, 2007 at 8:52 am

Cyclical stocks have been red-hot lately. The Morgan Stanley Cyclical Index (^CYC) has beaten the S&P 500 for the last seven straight days, and 25 of the last 30. This may be a sign that the economy isn’t ready to throw in the towel just yet.
The cyclical rally is notable because the sell-off last May and June fell disproportionately on cyclicals. Still, cyclicals have been the uncrowned kings of this bull market. In less than four years, the CYC is up over 150%, which is nearly twice as much as the S&P 500.
I like to track the CYC/S&P ratio, which often gives us a better reading on the economy’s health than any government report. The ratio increases when cyclicals outperform, and decreases when cyclicals underperform. On May 10, the ratio got to 0.672, its highest point in 12 years. The correction brought it back below to 0.610, but now it’s closing in on the May high again. Yesterday, the ratio got to 0.665.
The ratio’s high mark of 0.677 came on March 23, 1994 (my records date back to 1978), so we’re in striking distance of a new high. During previous economic recoveries, the ratio has usually petered out around 0.65. Currently, the ratio is in the top 1% of all readings. In other words, we’re near outlier territory.
While cyclicals are surging now, history suggests that the end of the party may soon be near.