More of the Same
Posted by Eddy Elfenbein on May 22nd, 2006 at 11:11 am

The market is moving lower, and once again, the cyclical stocks are getting hit the hardest. In fact, the divergence between cyclicals and the rest of the market appears to be accelerating.
The Dow Oil & Gas Index (^DJUSEN) is down another 10 points today to 444. Remember, this index just recently tried to break 500 on three occasions. Materials stocks are also being punished. The rest of the market is only down slightly. The Brazilian iShares (EWZ) are down over 8% today.
The Buy List is again ahead of the broader market (meaning, not down as much). Lowe’s (LOW) had a good earnings report today. The company earned $1.06 a share, which was 12 cents higher than estimates. Shares of LOW are higher, and HD is lower.
The VIX (^VIX), the market’s volatility index, is much higher today. Believe it or not, they are people who “trade” volatility, and volatility bulls are very happy today. The VIX is up to 19. It was at 13 before last week’s CPI report.
Finally, I noticed these two articles in the British press:
‘Is this a crash like 1987? No chance!’
Markets ‘are like 1987 crash’

Weekend Reading
Posted by Eddy Elfenbein on May 21st, 2006 at 4:10 pm

For a quiet Sunday:
D-I-Y Hedge Funds
The Growth of Growth Theory
Currency Markets Mistook Indonesia for Turkey

Happy 200th Birthday John Stuart Mill
Posted by Eddy Elfenbein on May 20th, 2006 at 2:28 am

Richard Reeves on John Stuart Mill:

He wrote one of the definitive 19th-century works on political economy—and also worked tirelessly for Irish land reform. He produced a landmark argument for equal rights for women, and throughout his life pushed for legal and political reform on their behalf—Millicent Fawcett described him as the “principal originator” of the women’s movement. Mill made, in his famous On Liberty, a timeless case for freedom of speech and action that has inspired generation after generation around the world. But as an elderly MP he also led the successful campaign against Disraeli’s attempt to ban demonstrations in public parks, especially Hyde park—a corner of which remains a symbol of free speech to this day.

The Nasdaq Breaks Its Losing Streak
Posted by Eddy Elfenbein on May 19th, 2006 at 4:26 pm

Not a bad day today. The 10-year bond nearly fell below 5%, and the Nasdaq broke its eight-session losing streak. Helping matters was Dell (DELL), which added 62 cents a share, or about 2.6%. AMD (AMD) was up over 11%, and Intel (INTC) fell 1.5%. On our Buy List, we had a good day from Fiserv (FISV), which was up 2.6%. Also, Sysco (SYY) announced a record sales week.
While most of the Buy List was up today, we were hurt by two big losers. Expeditors (EXPD) dropped 4%, and UnitedHealth (UNH) lost 1.9%. Next week, Donaldson (DCI) reports on Wednesday. The current estimate is for 41 cents a share.
Bloomberg reported that commodities had their worst week in 25 years.

This week, copper plunged 10 percent, the most since October 1994, and gold tumbled 7.6 percent, the biggest drop in more than 15 years. The CRB Index dropped 19.46 this week to 342.29. It reached a record 365.45 six sessions ago.
Copper futures for July delivery slid 24.2 cents, or 6.5 percent, to $3.469 a pound on the Comex division of the New York Mercantile Exchange. Prices still have gained 70 percent this year, reaching a record $4.04 on May 11.
Gold futures for June dropped $23.40, or 3.4 percent, to $657.50 an ounce on the Comex. Prices tumbled 7.6 percent this week was most since August 1990. The metal still has gained 27 percent this year. Silver futures for July fell 13 percent this week after climbing for nine straight weeks.

Dell By The Numbers
Posted by Eddy Elfenbein on May 19th, 2006 at 8:20 am

Here are Dell’s quarterly sales, operating earnings and earnings-per-share for the last nine years:
Quarter…..Sales….Oper. Income…..EPS
1-97………$2,588………$198………..$0.0675
2-97………$2,814………$296………..$0.0725
3-97………$3,188………$346………..$0.085
4-97………$3,737………$397………..$0.10
1-98………$3,920………$429………..$0.11
2-98………$4,331………$483………..$0.12
3-98………$4,818………$539………..$0.14
4-98………$5,173………$595………..$0.15
1-99………$5,537………$600………..$0.16
2-99………$6,142………$694………..$0.19
3-99………$6,784………$650………..$0.18
4-99………$6,801………$513………..$0.16
1-00………$7,280………$625………..$0.19
2-00………$7,670………$736………..$0.22
3-00………$8,264………$818………..$0.25
4-00………$8,674………$589………..$0.18
1-01………$8,028………$588………..$0.17
2-01………$7,611………$545………..$0.16
3-01………$7,468………$544………..$0.16
4-01………$8,061………$594………..$0.17
1-02………$8,066………$590………..$0.17
2-02………$8,459………$677………..$0.19
3-02………$9,144………$758………..$0.21
4-02………$9,735………$809………..$0.23
1-03………$9,532………$811………..$0.23
2-03………$9,778………$840………..$0.24
3-03………$10,622…….$912………..$0.26
4-03………$11,512…….$981………..$0.29
1-04………$11,540…….$966………..$0.28
2-04………$11,706…….$1,006……..$0.31
3-04………$12,502…….$1,089……..$0.33
4-04………$13,457…….$1,187……..$0.37
1-05………$13,386…….$1,174……..$0.37
2-05………$13,428…….$1,173……..$0.38
3-05………$13,911…….$944………..$0.39
4-05………$15,183…….$1,246……..$0.43
1-06………$14,216…….$949………..$0.33
The numbers are in millions except for EPS. Also, since Dell ends its fiscal year at the end of January, this past quarter is technically the first quarter of FY2007. I changed it because it just seems…weird. Don’t ask me why they do it that way, I just own the shares.
Now let’s deconstruct this stock. To the spreadsheets!
Let’s start with operating profit margins:

Yup, this here’s the squeaky wheel. The tech blowout obviously took a big toll on margins (11% is crazy good for a commodity maker). From 2001-2004, Dell was steadily recovering. It was the last three quarters that have been totally off-the-mark.
Now let’s look at sales growth. Here’s the trailing four-quarter sales:

I used a logarithmic scale so the “arcing” pattern is due to the slowing rate of sales growth.
Now let’s look at the sales growth rate:

Wow! You can really see how much Dell’s topline growth rate has “decelerated” (i.e., lower rate of growth) since the glory days. Sales grew just 6.2% last quarter. Nominal economic growth was 6.7%.
If you’re new to investing, here’s an important point. Sales growth and profit margins are closely related. When Dell’s sales growth plunged in 2001–even turning negative for a bit–operating margins got squeezed. Imagine if you ran a business and suddenly everyone stopped buying your product. You’d cut prices which would lower your operating magin.
Notice how, from 2001 to 2004, Dell’s operating margins gradually increased even though its rate of sales growth was slowing down. Assuming you keep your variable costs under control, all a company needs to do to grow its margins is grow its sales faster than its fixed costs. Simple, right? But a commodity business is all about the margins, and Dell’s margins were too fat for its competitors to ignore.
Here’s a scatterplot of Dell’s quarterly sales growth (horizontal) and operating profit growth (vertical):

I didn’t include a trendline, but the slope is clearly greater than 1.0 (meaning the trend rises at greater than a 45° angle). Around 20% is the magic point. Above that, each 1% increase in sales brings in more than a 1% increase in profit.
Here’s Dell’s trailing four-quarter EPS:

That last little down mark is what all the fuss is about. Wall Street thinks it will continue. The Street now projects earnings for this year of $1.44 per share, and $1.70 per share for next.

CNBC’s “Guidelines for Appearances by Financial Professionals”
Posted by Eddy Elfenbein on May 19th, 2006 at 7:15 am

So it does exist! Here’s CNBC’s official “Guidelines for Appearances by Financial Professionals.”

Read more…

Gene Marcial on Medtronic
Posted by Eddy Elfenbein on May 19th, 2006 at 6:53 am

From Business Week:

Medical device giant Medtronic, the leader in defibrillators and pacemakers, has been a market laggard. The stock slumped from 60 in January to 49.19 on May 17. But some investors say it may beat analysts’ consensus forecast of 62 cents a share when it reports earnings for its fiscal fourth quarter on May 23. Among the few bulls: Investment firm Harris Nesbitt’s Joanne Wuensch, who continues to rate it “outperform,” with a 12-month target of 62. Still, some worry Medtronic may deliver bad news. Not only has growth slowed in the cardiology market, but rival St. Jude Medical (SJM )also missed its quarterly sales forecast. Wuensch counters that Medtronic is “more insulated from the implantable-device market sways than its brethren.” It generates 27% of revenues from them, vs. St. Jude’s 36%. Wuensch sees Medtronic earning $2.09 a share on sales of $11.3 billion this year, and $2.38 on $12.6 billion in 2007. David Sowerby, portfolio manager at investment firm Loomis Sayles, which owns shares, says the stock is “compelling” near its 10-year low, especially as he expects Medtronic to gain market share and show double-digit earnings growth in 2007.

Dell’s Conference Call
Posted by Eddy Elfenbein on May 18th, 2006 at 9:04 pm

Seeking Alpha has the transcript. After the Q&A, Michael Dell has this to say:

So I want to thank you all for joining us and reiterate the points that Kevin made about our competitive environment and what we are doing to enhance the value we bring to our customers. The competitive environment has changed. Some competitors have gotten stronger. There has been price compression in the high-volume consumer transactional segment, and that has eroded industry profitability. More than ever, customers are using service as a point of differentiation.
These dynamics occurred while we drove growth and higher margins. This stalled our growth and gave some competitors the opportunity to improve profitability off of very low levels, and in some cases, grow share.
We are focused on re-establishing the value proposition of our model, delivering great value to our customers, and we have definitive plans in place to improve customer experience, product quality, and technology leadership. We also have plenty of opportunity to improve our cost position and drive better productivity.
We will continue to do what it takes to capture more than our fair share of the growth in the global IT market. Our level of investment, and the adjustments we are making are not intended to deliver a short-term benefit. Their impact will take time to unfold. Kevin and I, as well as the rest of our leadership team, are convinced that we are making the right changes and we intend to stay the course. We know that when we focus and execute on the key tenants of our direct model, we consistently drive industry-leading growth, profitability, and the liquidity.

Dell Earned 33 Cents a Share
Posted by Eddy Elfenbein on May 18th, 2006 at 4:03 pm

$14.2 billion in revenue. The company said it won’t provide any quarterly guidance. Here’s the press release:

ROUND ROCK, Texas–(BUSINESS WIRE)–May 18, 2006–Dell’s expansion of business outside the United States and its sales of servers, storage and enhanced services drove revenue of $14.2 billion and earnings of 33 cents per share in the fiscal first-quarter 2007.
Enhanced services revenue grew 28 percent year-over-year in the first quarter. Storage revenues increased 12 percent year-over-year. Shipments of Dell products were led by a 36 percent year-over-year increase in mobility units. Revenue outside the United States grew 12 percent and was 44 percent of Dell’s overall revenue.
Dell had operating income of $949 million, or 6.7 percent of revenue, in the quarter, which reflected investments in customer experience as well as pricing decisions the company believes will drive future growth. Cash flow from operations was $1.0 billion for the quarter and Dell ended the quarter with $11.1 billion in cash and investments. During the quarter, Dell spent $1.7 billion to repurchase 58 million shares of common stock.

Also in the press release is this:

Dell will also introduce new AMD Opteron processors in our multi-processor servers by the end of the year offering a great new technology to our customers at the high-end of our server line.

The stock is up about 4% after-hours. AMD is up 12%, here’s their response.

The Afternoon Market
Posted by Eddy Elfenbein on May 18th, 2006 at 2:42 pm

The market is just a tad higher today. The good news is that bonds are much higher. The yield on the five-year Treasury is back below 5%. Interestingly, Wall Street is undecided on what will happen at the next Fed meeting. The futures indicate that there’s a roughly 50/50 shot of another rate hike in June. If the Fed holds off, it will break its streak of 16 straight 0.25% rate increases.
The Buy List is holding its own today. Dell (DELL) is showing some strength ahead of its earnings announcement, which will come after the bell. Sysco (SYY) is having another good day. Home Depot (HD) is also rallying.
If you’re looking for a good stock, you may want to consider Bed Bath & Beyond (BBBY). I’m a bit perplexed by this stock. The shares have been falling since a strong earnings report in early April.
Burger King (BKC) is doing well on its first day of trading. The stock is currently over $18 a share. Speaking of IPOs, we have Mastercard coming next week. We also have Vonage which is turning into a train wreck of an IPO. I’ll have more on that later.
Finally, if you’re concerned that your portfolio is trailing the rest of the market, don’t worry too much. Warren Buffett has trailed the market for over two years.