Patterson Lowers Guidance
Posted by Eddy Elfenbein on February 24th, 2006 at 10:06 am

One of my favorite “watch list” stocks reported earnings yesterday. Patterson Companies (PDCO) earned 39 cents a share, which was inline with Wall Street’s estimates. Last year, Patterson earned 36 cents a share.
If you’re not familiar with Patterson, it’s a dental, pet and rehabilitation supply distributor. Don’t laugh, it has one of the best records for long-term growth. For several years, Patterson consistently delivered 20% earnings growth quarter after quarter.
But year last, that streak abruptly came to a halt. For two straight quarters, Patterson increased its EPS by just one penny. I find that pretty unnerving since I place a lot of emphasis on a company’s consistency (just look at our Buy List).
Companies aren’t like athletes that hit slumps. They also don’t turn things around so easily. It does happen, but it’s much less frequent than most people imagine. High-quality companies usually stay high quality, and low-quality ones stay low quality. The reason I like to focus on numbers like return-on-equity is that it tends to be a fairly consistent metric for a company.
For whatever reason, Patterson has lost its mojo. The company just lowered its guidance for this year to $1.42 to $1.44 a share, from its earlier forecast of $1.44 to $1.46 a share. That may seem small, but it shows us that the company is not moving in the right direction. It also means that shares of PDCO are going for about 25 times next year’s earnings. I can find better growth for less elsewhere.

Oil Prices Soar
Posted by Eddy Elfenbein on February 24th, 2006 at 9:23 am

From the AP:

Crude-oil futures soared nearly $2 a barrel Friday after a Saudi official reported an explosion at a major oil refinery in eastern Saudi Arabia.
Light, sweet crude for April delivery rose $1.97 to $62.51 a barrel in electronic trading on the New York Mercantile Exchange by afternoon in Europe. Brent crude futures for April initially jumped $1.96 to $62.50 on London’s ICE Futures exchange.
Nymex gasoline advanced more than 3 cents to $1.550 a gallon, while heating oil gained 4 cents to $1.7066 a gallon. Natural gas futures fell 12 cents to $7.335 per 1,000 cubic feet.
The pan-Arab satellite channel Al-Arabiya TV reported the authorities foiled an attempt to bomb the refinery with two vehicles packed with explosives. The channel did not give a source for the report.
Earlier Al-Arabiya quoted its reporter in the kingdom as saying shots and an explosion were heard, and they may have been part of an attempt to attack the refinery.
The oil official, who spoke on condition of anonymity, said he did not know the cause of the explosion.

Fiserv to Buy Back 5.6% of Its Stock
Posted by Eddy Elfenbein on February 23rd, 2006 at 5:47 pm

Sloppy day today. The cyclicals were particularly weak. The Consumer Index (^CMR) actually closed slightly higher, and our Buy List beat the S&P 500 for the second day in a row. The metals got punished today, which I like to see.
Home Depot (HD) announced today that it’s increasing its share buyback program by $1 billion. As I’ve mentioned before, I not a big fan of share repurchases. I’d rather just get a dividend.
Fiserv (FISV) said that it will repurchase up to 10 million shares. Considering the size of the company ($8 billion market cap), that’s huge. It works out to 5.6% of the company’s stock.
What I find so interesting about Fiserv is the way the stock’s P/E ratio has collapsed in recent years. It’s always tricky predicting where a stock’s P/E ratio ought to be, but let’s look at the facts. Fiserv’s earnings multiple has been dropping like a stone, and it’s lower now than it was during much of the 1990’s (see below). Also, Fiserv’s earnings have increased pretty consistently for the past few years.

Consumer Prices Rise 0.7%
Posted by Eddy Elfenbein on February 23rd, 2006 at 11:30 am

I usually don’t go too much into macroeconomics, but I wanted to say a few words about inflation. Yesterday, the government reported that consumer prices rose 0.7% last month. This has some people worried that inflation is coming back, or perhaps it’s already here. Call me a doubter. Of course, if you’ve been anywhere near a gas pump, you know we have inflation there. But so far, it doesn’t seem to be many other places.
Mind you, inflation is bad news, especially for stocks. The problem with inflation is that it builds upon itself, and it can easily get out of control. For more details, feel free to ask Jimmy Carter what he’s up to these days.
Personally, I think the inflation that we’re seeing is fairly tepid. Some in the inflationophobic camp point to low interest rates and the rising prices of commodities, especially gold. That’s certainly an issue, but major price increases have not been passed on to consumers. At least, not yet. I also believe that gold’s ability to predict inflation is vastly overrated (this is heresy to some).
When we look at consumer inflation it’s also important to look at what economists call the “core rate.” This is the regular inflation rate except for food and energy prices. This often gives us a better picture of what inflation is really up to because prices for food and energy can be very volatile.
Over the last 15 years, the core rate has been a slowly descending line. Or in the case of my chart below, a slowly descending red line. The core rate even got down to one single percent two years ago. What’s striking about the progress of core inflation is the steadiness of the trend. For the last ten years, there hasn’t been a single alarming bump in the overall trend. Even the jump from 1% to 2% has lost its oomph.
Despite looking at the core rate, people do in fact spend money on food and energy. On my chart, the regular rate of consumer inflation is represented by the black line. That trend has been far more erratic, and the overall rate of consumer inflation is on the rise. However, it doesn’t appear to be much outside the band of the last 15 years. You can see that overall inflation jumped in the late-90s, but it was still well under control. Even if inflation is coming back, the evidence we have so far is quite modest.

The Market Is Closing in on a New High
Posted by Eddy Elfenbein on February 22nd, 2006 at 1:22 pm

The market is looking good today. If the S&P 500 closes above 1294.18, it will be our highest close in 57 months. Right now, we’ve very close.
Over the past few years, small stock indexes have done much better than the S&P. In fact, they’ve hit all-time highs in recent weeks, however, small stocks have underperformed the market since the beginning of the year.
One of the important lessons of investing in the stock market is that stocks don’t move rationally. At least, not in the short-term. We have all these hi-tech toys that are used to analyze things that really don’t make much sense on closer inspection.
Trends are often much stronger and longer-lived than you think. For example, Home Depot (HD) had a good earnings report and the stock basically ignored it. Medtronic (MDT) also had a good report, and the stock is weaker today.
As long as the earnings are good, I’m not concerned about those stocks. Their time will come. Remember, if the Dow were to accurately reflect its underlying value, it would move about four or five points each day.
Expeditors (EXPD), Danaher (DHR) and Donaldson (DCI) are all at new highs today. As much as I like Expeditors (which is a lot), I have to admit that its shares are fairly pricey. Yet, the stock keeps going up. Who am I to say stop?
On the other hand, we have Bed Bath & Beyond (BBBY) which is very cheap, and its shares seem to be going nowhere. It’s time will also come. I don’t know when, but I’m holding on.
Dell (DELL) postponed an analyst meeting. I don’t think it’s anything to worry about. I noticed this factoid from the article: “Concerns about growth have held back Dell’s shares, which trade at about 15 times estimated fiscal earnings per share for the coming year, the same as No. 2 PC maker Hewlett-Packard Co. That is a discount, since Dell’s estimated long-term growth rate is about twice that of HP, according to Sanford C. Bernstein analyst Toni Sacconaghi.”
Twice the long-term growth rate, yet it trades with the same P/E ratio. Like I said, this isn’t always rational.
For the year, our Buy List is up 2.98% versus 3.57% for the S&P 500.

America Movil
Posted by Eddy Elfenbein on February 22nd, 2006 at 12:17 pm

Here’s an interesting article on America Movil (AMX). The company is the largest cellphone company is Latin America. Carlos Slim, who’s the fourth-richest man in the world, bought TelMex from the Mexican government in the early 90s. A few years later, he spun-off America Movil. The company now has over 90 million subscribers, including six million in the U.S.
The company is hugely profitable in Mexico and it’s used its success there to move into other Latin American markets. In the last three years, shares of AMX are up 650%.

Medtronic Reports Inline Earnings
Posted by Eddy Elfenbein on February 21st, 2006 at 4:20 pm

After the bell, Medtronic (MDT) reported earnings of 55 cents a share, matching Wall Street’s forecast:

Medtronic, Inc. today announced record revenue for the quarter ended January 27, 2006, of $2.770 billion, a 9 percent increase over the $2.531 billion recorded in the third quarter of fiscal year 2005. On a constant currency basis, growth was 12 percent with a negative currency translation impact of $72 million or 3 percent.
As reported, third quarter net earnings were $670 million or $0.55 per diluted share, an increase of 23 percent and 22 percent respectively over the prior year third quarter. Excluding the litigation charge included in the prior year third quarter, net earnings and earnings per share increased 20 percent.
“Solid overall growth was again led by our two largest product lines, implantable defibrillators and spinal products. These two product lines accounted for about 45 percent of the corporation’s revenue and, on a constant currency basis, they collectively grew 22 percent compared to the prior year third quarter,” said Art Collins, chairman and chief executive officer of Medtronic. “This year’s growth reflects the impact of ongoing investments; for example, during this quarter R&D expenditures increased 16 percent to $280 million.”

TheStreet.com Initiates Dividend
Posted by Eddy Elfenbein on February 21st, 2006 at 12:04 pm

Good news! TheStreet.com (TSCM) has announced its first-ever quarterly dividend! The company is going to pay out 2.5 cents a share. Booyah! That works out to $2.5 million a year.
Hold up! Where exactly will this money come from? Aren’t dividends supposed to be from profits?
Well, the company isn’t exactly profitless. After several years of gushing money, TheStreet finally registered a profit in 2005. A whopping $246,000. Or a penny a share (slightly less actually). That’s about what a 7-11 makes.
Due to discontinued operations, that EPS number jumps to 23 cents, but it’s still hardly comforting. First, they’re discontinuing operations. They shuttered their brokerage and research businesses last year. Now they’re focusing on subscriptions for revenue, and that rose by 3% last year.
The company still has over $30 million in cash so they can pay dividends for a while. But I hope they don’t think they’re fooling anyone.

Radio Shack’s CEO resigns
Posted by Eddy Elfenbein on February 21st, 2006 at 10:58 am

As we celebrate George Washington’s birthday, we should remain that our nation’s first chief executive didn’t go to college. Likewise, David J. Edmondson, Radio Shack’s chief executive, also didn’t earn a college degree.
Unlike Edmonston, Washington didn’t lie about it. The good news is that Edmonston will get a $1.5 million severance package.

Home Depot Tops Earnings
Posted by Eddy Elfenbein on February 21st, 2006 at 10:03 am

The stock is up this morning on a good earnings report. The company beat the Street’s forecast by four cents a share:

Home Depot Inc., the world’s largest home-improvement retailer, said fourth-quarter profit rose on sales of major appliances and cabinets.
Net income climbed to $1.29 billion, or 60 cents a share, from $1.04 billion, or 47 cents, a year earlier. Sales in the period ended Jan. 29 increased to $19.5 billion from $16.8 billion, the Atlanta-based retailer said today in a statement sent by PR Newswire.
Profit was helped as U.S. consumers spent more on refrigerators, cabinetry and faucets to remodel their kitchens and bathrooms. Chief Executive Robert Nardelli is also seeking to boost sales to professional contractors with last month’s $3.19 billion acquisition of Hughes Supply Inc.
Home Depot is “going after the larger contactors and infrastructure-related businesses,” said Peter Jankovskis, director of research at Oakbrook Investments LLC, which has $1 billion under management, including about 760,000 Home Depot shares. “It’s given them greater exposure to large homebuilders and municipalities as well and that’s a much more steady source of income.”
Shares of Home Depot were unchanged at $41.86 on Feb. 17 in New York Stock Exchange composite trading. They fell 5.3 percent last year, while rival Lowe Cos.’s gained 16 percent.
Home Depot made more than a dozen acquisitions in the past year to build its supply business into a unit with $12 billion in revenue. The company, which has more than 2,000 stores, is increasing sales to professionals and expanding in Mexico, Canada and China to keep pace with the faster growth at Lowe’s.
Forecast
Piper Jaffray & Co. analyst Michael Cox expected Home Depot to earn 56 cents a share in the quarter, the same as the average estimate of 22 analysts surveyed by Thomson Financial. Minneapolis-based Cox is the top-ranked analyst for Home Depot by StarMine Inc. Thomson declined to disclose the parameters for the estimates in its average.
Last month, Home Depot affirmed its fiscal 2005 earnings forecast of $2.64 to $2.67 per share. The average estimate of 21 analysts surveyed by Thomson is $2.67. The company projected an 11 percent sales gain for last year.
Analysts are estimating Home Depot will earn $3.03 this year, one cent below Cox’s estimate.
Nardelli, 57, said last month that he will slow the company’s retail expansion. Home Depot will open as many as 500 stores through 2010, about 75 less than in recent years.
‘Growth Company’
“While the looming saturation of home-improvement retail boxes in this country is bringing a natural slowdown in the rate of new store growth, Home Depot remains a growth company,” Cox wrote in a research note on Jan. 20.
U.S. spending on home remodeling increased 4.3 percent both in the fourth quarter and for all of 2005, according to the Harvard Joint Center for Housing Studies.
The company said on Jan. 19 annual sales will grow as much as 17 percent over the next five years and earnings per share will rise as much as 14 percent.
Home Depot’s sales have gained an average of 11 percent a year over the past three years. Revenue for Lowe’s, which has about 1,200 stores, increased an average of 16 percent over the same period.
Lowe’s reports fourth-quarter earnings on Feb. 27.
Home Depot met or exceeded analysts’ estimates in the four prior quarters. Of the 24 Home Depot analysts tracked by Bloomberg, 16 recommend buying the shares, eight suggest holding them and one has a “sell” rating.