Morning News: February 10, 2014
Posted by Eddy Elfenbein on February 10th, 2014 at 6:27 am

EU Banks’ Risk-Free Debt Addiction Threatens ECB-Led Overhaul

Japan Current Account Surplus Smallest on Record

Turkish Industrial Production Rose in December

Eyes On Federal Reserve’s Janet Yellen After Poor Jobs Print For Dollar

Yellen’s Fed: A Champion of Main Street

European Shares Nudge HIgher as Nokia Gains on HTC Settlement

Deutsche Telekom to Pay $1.1 Billion in Czech Unit Buyout

Boeing Sees Asia-Pacific Fleet Nearly Tripling Over Next 20 Years

Toyota to End Australia Production

Nissan Becomes Least Profitable Japan Carmaker Amid Yen Boon

Icahn’s Proposal for $50 Billion Apple Buyback Opposed by ISS

Barclays 2013 Profit Declines 26%, Missing Analyst Estimates

AOL’s Armstrong Apologizes After 401(k) Gaffe Stirs Controversy

Jeff Miller: Weighing the Week Ahead: Will Yellen Signal a Policy Change?

Howard Lindzon: Living and Investing Low Frequency in a High Frequency World…and ‘Big Enough to Frontrun’

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JFK: “Life Is Un-Feah”
Posted by Eddy Elfenbein on February 7th, 2014 at 4:44 pm

January NFP +113,000
Posted by Eddy Elfenbein on February 7th, 2014 at 10:32 am

Another tepid jobs report. The economy created 113,000 net new jobs last month, well below the estimate of 181,000. The unemployment rate falls to 6.6%. One good spot is that the labor force participation rate ticked up to 63.0% from 62.8% in December.

Private employers added 142,000 positions to their payrolls in January, while government at all levels shed 29,000. Among individual sectors, manufacturing had a gain of 21,000 jobs, while employment in construction jumped by 48,000.

The employment-population ratio, which has been falling as more workers drop out of the job market, edged up 0.2 percentage points to 58.8 percent. In recent years, the exit of people from the work force has reduced the unemployment rate, but it is a sign that people are giving up hope of finding a job amid slack conditions, hardly the way policy makers would like to see joblessness come down.

Despite Friday’s report, another steady reduction in bond purchases is likely when Fed policy makers next meet in March. A disappointing showing in February’s report, however, might change that.

Wintry conditions that held back hiring were blamed for the weakness in December, a theory popular among more optimistic economists after those numbers came out in early January.

CWS Market Review – February 7, 2014
Posted by Eddy Elfenbein on February 7th, 2014 at 6:44 am

“The first principle is that you must not fool yourself, and
you are the easiest person to fool.” – Richard Feynman

The tumult that we saw last week continued into this week. Thanks to a soggy ISM report, the S&P 500 had its worst day on Monday in more than seven months. The index plunged to its lowest level since mid-October.

But the bears don’t have the upper hand just yet. I’m not a proponent of technical analysis, but I do keep an eye on the S&P 500’s 200-day moving average (that’s simply the average of the previous 200 trading days). We’re still above it, and that’s good news for bulls.

The ISM Index for January dropped to 51.3 from 56.5 for December, which is a big move for just one month. The ISM is a survey, and a number of respondents said they had been affected by adverse weather. Bad weather in the winter shouldn’t be a surprise, but it will be interesting to see if there’s a sharp rebound when the next report comes out.

A positive report on jobless claims on Thursday helped the market rebound, and we had our best day of 2014. There had been a slight bump up in jobless claims recently, so Thursday’s report was welcome news. The number of Americans filing first-time jobless claims fell by 20,000 to 331,000. That was better than what economists had been expecting.

I’m writing this to you ahead of Friday’s big jobs report, and that’s been on Wall Street’s mind all week. Here’s where we stand: Since the Fed has already started tapering its bond purchases, these jobs reports aren’t quite as important as they used to be. But the December report was weak, so that could change the narrative that the jobs market is “gradually improving.” Was December just weak due to weather, or could this mean the economy has downshifted?

I suspect, though I’m not certain, that the recent weakness was due to lousy weather around the country. Normally, I’m skeptical of that kind of thing, but we saw it confirmed in other reports like retail sales and car sales. Ford, for example, had a poor month in January, and we know that business is going well for them. The market usually doesn’t rise that much on a good jobless-claims report. So why was Thursday an exception? My guess is that it eased the fears of a broader macro downturn.

We had some mixed earnings for our Buy List this week. AFLAC had a solid report and reiterated its earnings for next year. Cognizant had very strong earnings last quarter and announced a 2-for-1 stock split, but CTSH merely met expectations. Meeting expectations, apparently, wasn’t expected. The stock sold off following the report. Should we ditch CTSH? Not at all. I’ll have more on that in a bit. Also, one of the biggest news stories this week was that Microsoft named their new CEO, and Bill Gates is stepping down as Chairman of the Board. I’ll give you my take. But first, let’s take a closer look at AFLAC’s earnings report.

AFLAC Is a Buy up to $68 per Share

On Tuesday, our favorite insurance stock, AFLAC ($AFL), reported that it quacked out a profit of $1.40 per share for the fourth quarter. That beat Wall Street’s forecast by one penny per share. But with a company like AFLAC, I honestly don’t care so much if they beat or miss earnings by a little bit. That’s not that important. This is a very well-run company, and it’s far more important to me to show what the general trend is.

As much as I like AFLAC, there’s a fundamental issue we need to consider when we look at its earnings. Since AFLAC does most of its work in Japan, its earnings can be greatly impacted by the yen/dollar exchange rate. Sometimes that works for them and sometimes it doesn’t; and lately, it hasn’t. The government in Japan has tried everything to get its economy moving, and the latest effort has been to weaken the yen. (It actually may be working.)

The downside for AFLAC is that the currency exchange ate up 18 cents per share in profit last quarter. That’s more than 11% of their bottom line. Despite the strong headwind, the company still managed to deliver a solid profit. Three months ago, AFLAC gave us a range for Q4 of $1.38 to $1.43 per share, so they’re right inside their own range.

Another problem AFLAC faces is that fixed-income yields are very low. That’s not good if you’re an insurance company. AFLAC has been working to revamp how it invests, and they’ve made it clear to investors that they’re going to try new areas. But the recent weakness we’ve seen in emerging markets could be weighing on AFL’s portfolio, though we don’t know yet exactly how much exposure they have to such markets.

The best news from AFLAC’s earnings report is that they reiterated their full-year guidance. A lot of investors downplay reiterations. Not me. It’s a good sign to hear from your company that all’s well. AFLAC sees operating earnings growing by 2% to 5% this year on a currency-neutral basis. The company said that if the yen were to remain at 97.54 to the dollar (its average for last year), then its earnings should range between $6.31 and $6.49 per share for 2014. So the stock is going for less than 10 times this year’s estimate.

Here’s an easier way to understand their forex exposure. Every move of one yen in the exchange rate translates to 3 to 3.25 cents per share in earnings for 2014. My take: There’s no need to worry about AFLAC. Business is going very well. I’m lowering my Buy Below on AFLAC to $68 per share.

Cognizant Technology Solutions to Split 2 for 1

I feel like I have to clear up some confusion about this week’s earnings report from Cognizant Technology Solutions ($CTSH). The shares fell after the report, and the behavior of traders should never surprise us. But this time, it was truly bizarre. The truth is that Cognizant had an excellent fourth quarter.

Let’s break down the math. For Q4, Cognizant earned $1.06 per share, which matched Wall Street’s forecast. Revenues rose 20.9% to $2.36 billion, which again matched the Street. Let’s be clear that both figures represent very strong growth.

For the first quarter, Cognizant sees earnings rising to $1.18 per share on revenue of $2.42 billion. Both numbers hit forecasts on the nose. Bear in mind that Cognizant earned 93 cents per share for last year’s Q1. So we’re talking about growth from 93 cents to $1.18. There’s nothing disappointing about that.

For all of 2014, CTSH forecasts earnings of at least $5.02 per share and revenues of at least $10.3 billion. This is where we have our “miss.” Wall Street had been expecting 2014 earnings of $5.08 per share on revenue of $10.39 billion. Technically that’s a miss if we downplay the “at least” part. Again, no one who follows Cognizant should be surprised or disappointed by these numbers. It’s pretty much what you would expect—more strong growth. To add some context, CTSH earned $4.38 per share last year and $3.74 per share in 2012. Yet the stock dropped 4.3% on Wednesday (though it gained back half that on Thursday).

The other news was that Cognizant announced a 2-for-1 stock split that will take effect next month. This will be their first split in more than six years. I’m not a strict value investor. I think there are times when it’s appropriate to pay a premium for growth, and Cognizant is just such an example. Right now, shares of CTSH are going for 19 times the company’s guidance for this year. Given their growth, that’s a good value. Cognizant Technology Solutions remains a buy up to $104 per share. The split is expected to happen in the first week of March. I’ll remind you as we get closer.

28 Straight Years of Double-Digit Growth at Fiserv

After the closing bell on Wednesday, Fiserv ($FISV) reported Q4 earnings of 79 cents per share, which was one penny below expectations. Quarterly revenues rose 10.3% to $1.26 billion, which matched forecasts. This was only our second earnings miss this season; Moog was the first (11 beats, two misses and one in-line so far).

Jeffery Yabuki, Fiserv’s CEO, said, “Our fourth-quarter performance capped off a strong year of delivering on our financial commitments, including our 28th consecutive year of double-digit adjusted-earnings-per-share growth.” That’s an astounding achievement.

In last week’s issue, I said that Wall Street’s estimate for 2014 for Fiserv might be too high. I’m happy to say I was wrong. Fiserv sees EPS this year ranging between $3.28 and $3.37 per share. Wall Street was at $3.34, so they’re within range.

For all of 2013, Fiserv made $2.99 per share, compared with $2.54 in 2012 (that’s adjusting for December’s split). Going by Thursday’s closing price, FISV is trading between 16.3 and 16.7 times this year’s earnings estimate. I’m going to drop our Buy Below down to $59 per share. Fiserv remains a very good buy.

Satya Nadella Takes Over at Microsoft

On Tuesday, Microsoft ($MSFT) announced that Satya Nadella will be its new CEO. There had been a lot of speculation on who would follow Steve Ballmer. There had even been some thoughts that Ford’s Alan Mulally would take the job. Fortunately for us, he’s staying at Ford.

Nadella is a very impressive candidate. He’s been at MSFT for 22 years, and he’s the former EVP of their Cloud and Enterprise Group. Interestingly, Bill Gates is stepping down as Chairman of the Board and will be taking on the role of “technology advisor.” John Thompson, an independent director, will take over as Chairman of the Board.

I can’t say yet whether this is good or bad news for Microsoft, but the market seems pleased that the speculation game is over. Shares of MSFT climbed after Nadella’s announcement. I like MSFT as an investment, but it’s clear that the company is shifting to a new phase. It’s no longer the high-growth company it was, and therefore, it shouldn’t command the high earnings multiples that it used to.

I think we’re seeing Microsoft gradually evolve into a service company that makes most of its money by working with corporate clients. This is a more stable path for them. We have to remember that Microsoft generates a very large cash flow. Fifteen years ago, it would have seemed bizarre to highlight MSFT’s generous dividend yield, but we can today. The shares currently yield 3.1%, which is well above average. Microsoft continues to be a good buy up to $40 per share.

That’s all for now. We don’t have any Buy List earnings reports next week, but DirecTV ($DTV) and Express Scripts ($ESRX) report the week after next. This Wednesday, we’ll get a report on the Federal Budget. The news on the deficit has been encouraging lately. Or more accurately, the bad news hasn’t been quite as severe. On Thursday, we’ll get a report on retail sales. This sector has been weak lately, and it looks to be an overreaction. Even traders are getting the hint. Shares of Ross Stores ($ROST) rallied strongly on Thursday, even though there was no news. Then on Friday, it’s Valentine’s Day, and we’ll get the report on Industrial Production. (There’s a sentence you don’t get to type very often.) Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

– Eddy

Morning News: February 7, 2014
Posted by Eddy Elfenbein on February 7th, 2014 at 6:20 am

German Court Warns There Are ‘Important Reasons to Assume’ ECB Bond-Buying is Illegal

Skating Close to the Edge, Again, on the Debt Ceiling

Ethanol Evangelist Shrugs Off Volatility to Build Powerhouse

Apple Repurchases $14 Billion of Own Shares In Two Weeks

Twitter Must Move Faster to Counter Fears of Plateau

After Selling His First Startup For $51 Million In 2012, Eduardo Vivas Sold His Second, Bright.com, To LinkedIn For $120 Million (LNKD)

GM Profit Misses Estimates on European Restructuring, Taxes

ArcelorMittal Sees 2014 Profit Rise as Europe Revives

Semiconductor Sales a Vital Part of IBM’s Strategy Realignment

Lehman Brothers Maybe Sold Warren Buffett a Rainbow

Sony CEO’s Big Battle: Turning Around TV Business

Legal Troubles Barely Subdue a Bitcoin Evangelist’s Sermons

Clinical Trial Data At Heart Of Landmark Wall Street Insider Trading Scandal

Jeff Carter: Why Matter Matters

John Hempton: Jerry Seinfeld on Jos. A. Bank and Men’s Wearhouse

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Light Posting Today
Posted by Eddy Elfenbein on February 6th, 2014 at 4:28 pm

My apologies for the lack of posting today. I spoke at the Motley Fool Investing Conference in Alexandria today. It was a lot of fun. I followed some person named Malcolm Gladwell (who??). I want to thank Morgan Housel and the team at the Motley Fool for their hospitality.

Morning News: February 6, 2014
Posted by Eddy Elfenbein on February 6th, 2014 at 6:45 am

Macro Horizons: Prospect of ECB Easing Buoys European Stocks

UK Interest Rates Remain on Hold

Canada, U.S. Reach Tax Deal

Currency Market Roiled by Trader Exits as Lawsky Probes Banks

Twitter Stock Dips on User Growth Worries

CVS Caremark, No. 2 Drugstore Chain, Will End All Tobacco Sales

Coca-Cola to Buy 10% Stake in Green Mountain for $1.25 Billion

Sony Forecasts $1.1 Billion Loss as Hirai Sells PC Unit

Credit Suisse Misses Profit Forecast After Legal Charges

Volvo to Double Job Cuts as Truck Markets Seen Unlikely to Grow

Daimler Targets Significant Profit Gain on Revamped C-Class

Sanofi Says Diabetes, Emerging Markets to Lift Profit

Franchises Boost Disney’s Quarterly Earnings

Cullen Roche: The “Fat Pitch” Myth

Marc Chandler: ECB Preview: SMP Sterilization Versus Reserve Requirement Changes

Epicurean Dealmaker: A Foolish Consistency

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Fiserv Misses By a Penny
Posted by Eddy Elfenbein on February 5th, 2014 at 6:57 pm

After the closing bell, Fiserv ($FISV) reported Q4 earnings of 79 cents per share which was one penny below expectations. Quarterly revenues rose 10.3% to $1.26 billion which matched forecasts.

Now on to the important stuff which is their guidance for 2014. Fiserv sees EPS this year ranging between $3.28 and $3.37 per share. That’s a pretty good range. I had thought it might be a little lower. The Street had been expecting $3.34. For all of 2013, Fiserv made $2.99 per share compared with $2.54 in 2012.

“Our fourth quarter performance capped off a strong year of delivering on our financial commitments including our 28th consecutive year of double digit adjusted earnings per share growth,” said Jeffery Yabuki, President and Chief Executive Officer of Fiserv. “We enter 2014 with important market momentum and a focus on driving exceptional client value.”

AFLAC’s Outlook
Posted by Eddy Elfenbein on February 5th, 2014 at 3:17 pm

I wanted to pass this along from AFLAC‘s ($AFL) earnings call:

Lastly, let me comment and reiterate some of the statements that Dan’s already made. We have reaffirmed our objective for 2014 in the 2% to 5% increase in operating earnings per diluted share excluding the impact of the yen. This year, we estimate that 1 yen move on the average annual exchange rate will equal approximately $0.03 to $0.0325 per diluted share.

Assuming the yen dollar exchange rate remains at the 2013 full year average rate of 97.54, we would then expect 2014 objective of a 2% to 5% growth to be in the range of $6.31 per diluted share to $6.49 per diluted share.

Cognizant Reports Inline
Posted by Eddy Elfenbein on February 5th, 2014 at 10:24 am

The good news is that Cognizant Technology Solutions ($CTSH) reported very good earnings for their fourth quarter of $1.06 per share. That met expectations. The bad news is that Wall Street expected them to beat their expectations, which rather confuses what the definition of expectations is.

Revenues for Q4 rose 20.9% to $2.36 billion which again hit expectations on the nose. For Q1, CTSH sees earnings of $1.18 per share on revenue of $2.42 billion. Both numbers matched expectations. They earned 93 cents per share in last year’s Q1.

For all of 2014, CTSH forecasts earnings of at least $5.02 per share and revenues of at least $10.3 billion. This is where we have our “miss.” Wall Street had been expecting 2014 earnings of $5.08 per share on revenue of $10.39 billion. CTSH earned $4.38 per share last year compared with $3.74 in 2012.

The company also announced a 2-for-1 stock split that will take effect next month. The shares are down about 4.5% but I’m not at all concerned.