CWS Market Review – September 20, 2013
Posted by Eddy Elfenbein on September 20th, 2013 at 7:06 am

“Doubt is not a pleasant condition, but certainty is absurd.” – Voltaire

Pretty sneaky, Ben. You fooled us all. On Wednesday, the Federal Reserve announced that it’s not going to start tapering its asset purchases. At least, not yet. Wall Street celebrated as the S&P 500 and Dow both rocketed to new all-time highs.

By the closing bell on Thursday, the S&P 500 stood at 1,722.34, which is a 20.8% gain on the year. It also marks a 10.4% gain since the market’s June low. Wall Street’s about-face is staggering. The S&P 500 rallied for 11 of the first 12 days in September. I’m happy to report that our Buy List has done even better this year. We’re now sitting on a 25.8% year-to-date gain, and eight of our stocks are up 30% or more.

In this week’s CWS Market Review, I’ll break down what the Fed news means for us. We also got positive Buy List earnings reports from Oracle ($ORCL) and FactSet Research ($FDS). I’ll also discuss Microsoft’s ($MSFT) huge 22% dividend increase and $40-billion share buyback. Plus, I’ll give you a sneak peak at the upcoming Q3 earnings season. This could be the best earnings season in two years. But first, let’s look at what the Fed’s decision means for Wall Street and for us.

The Fed Says No to Tapering—For Now

On Sunday night, Larry Summers announced that he had withdrawn his name from consideration to be the next Fed chairman. Apparently, there was just too much Congressional opposition to his nomination. This almost certainly clears the way for President Obama to nominate Janet Yellen to succeed Ben Bernanke. Paul Krugman wrote that at this point, not picking Yellen “would look like spite.”

In a very simplified view, Wall Street viewed Summers as standing for less stimulus and Yellen for more. The Street, of course, is resolutely for more stimulus. With Summers out of the picture, stock prices jumped on Monday (see the chart above). That was merely a preview for what we saw on Wednesday.

On Wednesday afternoon, the Fed’s policy statement included this key line: “the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.” That’s all it took. Within minutes, the S&P 500 vaulted 20 points. Most of Wall Street was convinced that at least some tapering was coming. After all, the Fed had spent weeks trying to prepare investors.

I had said that I thought tapering was a mistake, so I’m glad to see the Fed keep its powder dry. But I’m not pleased with the convoluted messaging coming from the central bank. In June, the Fed said that QE could be wound down by the middle of next year. Now I don’t think that will happen. There’s plenty of debate on the effectiveness of Quantitative Easing (I’m not a firm believer myself). But one thing is clear: the stock market loves QE, so that gives us one reason to be a fan.

At his press conference, Bernanke said that it’s possible the Fed will start tapering before the end of the year, but he stressed that there’s no fixed calendar schedule. The bottom line is that inflation is low and the jobs market is weak, so there’s no need to rush things. Bernanke said that the Fed funds rate will stay low as long as unemployment is above 6.5%. We’re currently at 7.3%. Most FOMC members don’t see rates going up until 2015. I wouldn’t be surprised to see some members join the 2016 camp. The Fed also lowered its growth forecasts for this year and next.

The message to investors is that the Fed isn’t going anywhere. One analyst said, “The FOMC is giving us an invitation to take on risk. There is no reason for investors not to accept the gift.” The Fed has helped the market gain 150% in four and a half years, and they still have their foot on the pedal.

Now let’s look at our recent Buy List earnings reports.

FactSet Is a Buy up to $117 per Share

On Tuesday, FactSet Research Systems ($FDS) reported fiscal fourth-quarter earnings of $1.20 per share. Technically, that counts as a one-penny-per-share miss, since the Street was at $1.21, but FactSet’s guidance was $1.18 to $1.21 per share, so the company is hitting its own targets. The shares initially pulled back after the report, but they quickly regained most of what they had lost. Quarterly revenues rose 6% to $219.3 million, and net income was $51 million. For the year, FDS earned $4.60 per share, which is a nice increase from $4.12 last year.

The big metric for FactSet is ASV or annual subscription value. For the quarter, ASV rose by 6% to $888 million. That’s a good number, and it points towards strong revenue over the next year.

For fiscal Q1, which ends in November, FactSet expects revenues between $222 and $225 million. They see earnings coming in between $1.21 and $1.24 per share. Wall Street had been expecting $1.23 per share. The bottom line is that business continues to go well for FactSet. Their earnings-trend line is about as steady as they get (see above). I’m raising my Buy Below on FactSet to $117 per share.

Oracle Earns 59 Cents per Share

On Wednesday, Oracle ($ORCL) reported fiscal Q3 earnings of 59 cents per share, which beats estimates by three cents per share. Total revenue rose 2% to $8.37 billion, which was $10 million below the Street’s view. Overall, I was pleased by these results. In June, the company had given us an earnings range of 56 to 59 cents per share, which was probably a bit of low-balling. Actually, the earnings would have been even better this time if it weren’t for those meddling currency effects. Not counting the strong dollar, earnings were up 14% last quarter.

I called this a make-or-break earnings report for Oracle, and I’m glad to see that they did well. The financial details are pretty impressive. Oracle had free cash flow of $6 billion, and half of that went to share buybacks.

For fiscal Q2, which ends in November, Oracle sees earnings coming in between 64 and 69 cents per share. Frankly, that’s on the light side. The consensus on Wall Street was for 69 cents per share. I suspect the company is being extra-conservative these days with guidance.

For Q2, Oracle said that sales of new software and subscriptions would be between -4% and +6%. By contrast, their estimates for Q1 were between 0% and 8% (the actual results came in at 4%, the dead center of the range). The problem for Oracle is that they’ve been squeezed by a tough environment for tech and a new product cycle. I think they will come of out this strong, but it will take more time.

The shares initially gapped up in the after-hours market, then they dropped sharply on the tepid guidance. By the end of the day on Thursday, ORCL finished higher by two cents to reach its highest close in three months. I should note that Larry Ellison couldn’t make the conference call because he was at an America’s Cup race in San Francisco. That’s not reassuring to me. Still, Oracle remains a very good buy up to $35 per share.

Third-Quarter Earnings Preview

The third quarter is almost over, and soon the third-quarter earnings season will be upon us. This is a crucial time. Between mid-October and early November, 15 of our Buy List stocks are due to report their results.

This is also a big earnings season for Wall Street. Earnings growth was rather sluggish for the first half of the year, but most analysts expected that. For months we’ve been hearing that growth will ramp up later this year. Well, later this year is now, and investors want to see hard evidence.

Fifteen months ago, analysts on Wall Street were projecting that the S&P 500 would earn $30 per share (that’s the index-adjusted figure; $1 equals about $9 billion). That forecast has been cut down almost continuously, and it now stands at $27. Some folks have noted the incongruity of rising stock prices and falling estimates. This has led to lots of renewed bubble talk. Personally, I think the bubble talk is itself a bubble.

My take: We’re not seeing a bubble in stocks right now. In fact, it’s the opposite. The reason stocks have rallied with lower estimates is that the tremendous fear bubble from last summer has gradually been deflated. If you recall, we heard constant worries that what was happening in Greece, or Portugal, or Spain, or Italy was about to sink the U.S. market. The euro was toast, and so were we. It didn’t happen, and investors returned to their senses. That’s really been the story of the latest phase of the rally.

Currently, Wall Street expects Q3 earnings to rise 12.4% over last year’s Q3. That would be the best growth rate in two years. They see another 25.4% coming for Q4. The S&P 500 is on track to earn $108.12 this year, and $122.34 for 2014. I’m wary of estimates that go too far into the future, but if the forecast for next year is accurate, the market is currently going for a little more than 14 times next year’s earnings. That’s hardly a bubble.

We have one more Buy List earnings report left for September. Bed Bath & Beyond ($BBBY) reports on Wednesday, September 25th. Three months ago, they gave us a range of $1.11 to $1.16 per share. BBBY is a solid buy up to $79 per share.

Microsoft Raises Its Dividend by 22%

In last week’s CWS Market Review, I made an optimistic forecast. I said I was expecting Microsoft ($MSFT) to raise its quarterly dividend from 23 cents to 26 cents per share. Funny, I thought I was being bold, but it turns out that I wasn’t optimistic enough.

On Tuesday, Microsoft announced that it’s raising its quarterly dividend by five cents to 28 cents per share. That’s a 22% increase. The dividend is payable on December 12th to shareholders of record on November 21st. The software giant also announced a $40-billion buyback program which is equal to 15% of their market cap. The new buyback program will replace another $40-billion program that’s due to expire at the end of September. The new program doesn’t have an expiration date.

Microsoft’s new dividend translates to $1.12 per share for the year. Going by Thursday’s closing price, MSFT yields 3.33%, which is more than a 10-year Treasury. This week, I’m raising my Buy Below on Microsoft to $35 per share.

One quick note on JPMorgan Chase ($JPM). The company has admitted wrong-doing on its London Whale Trade fiasco and agreed to pay fines of $920 million. JPM is a good stock, but it would be a lot better without Jamie Dimon. JPM is still a buy up to $56 per share.

That’s all for now. Next week is the last full week of the third quarter. On Thursday, the government will offer its final revision to Q2 GDP. In August, you may recall that Q2 GDP was revised substantially higher from the initial report, from 1.7% to 2.5%. It will be interesting to see if that’s revised any higher. We also have the earnings report from Bed Bath & Beyond on Wednesday. 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: September 20, 2013
Posted by Eddy Elfenbein on September 20th, 2013 at 6:37 am

India Surprises With Rate Hike, Trims Rupee Support Steps

Japan Economy Expected to Withstand Sales Tax Hike

EU, Singapore Finalize Details of Far-Reaching Trade Deal

Yellen Price Goal Shows Anti-Inflation Stance Belying Dove Image

No Quick Fix When Stimulus Ends

Buffett Says Federal Reserve Is Greatest Hedge Fund in History

Administration Presses Ahead With Limits on Emissions From Power Plants

U.S. Textile plants Return, With Floors Largely Empty of People

Inside Nasdaq’s Succession Planning Process

JP Morgan Fined $920 Million Over ‘London Whale’ Scandal

Microsoft CEO Says Working to Keep PC ‘Device of Choice’

Pinterest Takes New Tack With Advertising Launch

Apple’s New IPhone Poised for Record Debut as Sales Begin

Joshua Brown: Apple’s Market Share vs. Usage Stats

Credit Writedowns: Dollar Broadly Weaker as Fed Keeps Punch Bowl in Place

Be sure to follow me on Twitter.

Buffett: Stocks are More or Less Fairly Priced
Posted by Eddy Elfenbein on September 19th, 2013 at 7:20 pm

Oracle’s Q2 Guidance
Posted by Eddy Elfenbein on September 19th, 2013 at 10:46 am

While Oracle‘s ($ORCL) earnings were pretty good, their guidance for this quarter was a bit mushy. They see Q2 earnings ranging between 64 and 69 cents per share. The Street was expecting 69 cents per share. I suspect the company is being extra-conservative these days so I’m not terribly concerned about that guidance.

In the after-hours market yesterday, the stock took back its nice gain and soon fell significantly lower. Today, however, cooler heads have prevailed and Oracle is only down a bit this morning. This is from yesterday’s earnings call:

Now, to the guidance, and I want to remind you that last Q2, new license in cloud revenue increased 18% in constant currency. So this will be a very, very tough comparison. And though our pipelines and potential transactions for the quarter look really very exciting, our sales leaders remain very careful about what they are forecasting to us.

So new software license and cloud subscription revenue growth is expected to range from negative 4 to positive 6 in constant currency and negative 6 to positive 4 in reported dollars. Hardware product revenue is expected to range from negative 9% to positive 1% in constant dollars and negative 11% to negative 1% in reported dollars. As a result, total revenue growth on both GAAP and non-GAAP basis is expected to range from 1% to 4% in constant dollars and negative 1 to positive 2 in U.S. dollars.

Non-GAAP EPS is expected to be somewhere between $0.65 and $0.70 in constant dollars, $0.64 to $0.69 in reported dollars. GAAP EPS is expected to be $0.51 to $0.56 in constant dollars, and $0.50 to $0.55 in reported dollars. I want to remind you that last year, we had the benefit of a $145 million acquisition-related benefit for the Pillar earnout. So excluding that benefit, GAAP EPS last year would have been $0.51. This guidance assumes a tax rate of 23.5% and a non-GAAP tax rate of 24%. Of course, it may end up being very different.

Morning News: September 19, 2013
Posted by Eddy Elfenbein on September 19th, 2013 at 6:13 am

Asian Stocks Surge Most in a Year as Fed Keeps Stimulus

Merkel Budget Zeal Erodes Byways as Infrastructure Rusts

Japan Land Prices Fall At Slowest Pace In Five Years As Deflation Eases

After Fed’s Announcement, Confusion and Relief on Wall Street

Stock Investors Are Left Wondering When on Fed’s Taper

Top CEOs Downgrade Outlook as Washington Threats Loom

S.E.C. Proposes Greater Disclosure on Pay for C.E.O.s

Activision’s $8.2 Billion Deal With Vivendi Delayed by Court

Billabong Drops Altamont-Blackstone in Favor of Centerbridge-Oaktree

Wells Fargo Cutting 1,800 More Jobs in Mortgage Business

See Inside The $350 Million Mobile Ad Company Twitter Bought Right Before Its IPO

Tech Titans Form Biotechnology Company

Jeff Carter: Skipping Your Series a Round

Jeff Miller: After the FOMC: Three Things Investors Need to Know

Be sure to follow me on Twitter.

Yale Economist Irving Fisher in 1929
Posted by Eddy Elfenbein on September 19th, 2013 at 12:40 am

Oracle Earns 59 Cents Per Share
Posted by Eddy Elfenbein on September 18th, 2013 at 4:04 pm

Oracle ($ORCL) earned 59 cents per share, three cents more than consensus.

Oracle Corporation today announced that both fiscal 2014 Q1 GAAP and non-GAAP total revenues were up 2% to $8.4 billion. GAAP new software licenses and cloud software subscriptions revenues were up 5% to $1.7 billion while non-GAAP new software licenses and cloud software subscriptions revenues were up 4% to $1.7 billion. Both GAAP and non-GAAP software license updates and product support revenues were up 7% to $4.4 billion. Hardware systems products revenues were $669 million. GAAP operating income was flat at $2.9 billion, and GAAP operating margin was 34%. Non-GAAP operating income was up 4% to $3.7 billion, and non-GAAP operating margin was 45%. GAAP net income was up 8% to $2.2 billion, while non-GAAP net income was up 6% to $2.8 billion. GAAP earnings per share were up 14% to $0.47, while non-GAAP earnings per share were up 12% to $0.59. GAAP operating cash flow on a trailing twelve-month basis was $14.8 billion.

Without the impact of the US dollar strengthening compared to foreign currencies, Oracle’s reported Q1 GAAP earnings per share would have been up 17% and non-GAAP earnings per share would have been up 14%. GAAP and non-GAAP total revenues also would have been up 4%; GAAP new software licenses and cloud software subscriptions revenues would have been up 7% while non-GAAP new software licenses and cloud software subscriptions revenues would have been up 6%.

“Non-GAAP earnings per share increased 12% to $0.59, the best ever result for the first quarter of our fiscal year,” said Oracle President and CFO, Safra Catz. “Those record level earnings were enabled by an operating margin of 45% for the quarter. We also set a free cash flow record of over $6 billion in Q1, and then we returned half of that to our stockholders by repurchasing $3 billion of our shares in the quarter.”

“Engineered systems had its best ever Q1 in terms of unit sales, growing over 60% compared with the same quarter last year,” said Oracle President Mark Hurd. “New software license results were especially strong in the Americas, which saw 15% growth in constant currency.”

“Next week at Oracle OpenWorld, we will announce the In-Memory Option for the Oracle database,” said Oracle CEO, Larry Ellison. “Virtually every existing application that runs on top of the Oracle database will run dramatically faster by simply turning on the new In-Memory feature. Our customers don’t have to make any changes to their applications whatsoever; they simply flip on the in-memory switch, and the Oracle database immediately starts scanning data at a rate of billions or tens of billions of rows per second.”

The Board of Directors declared a quarterly cash dividend of $0.12 per share of outstanding common stock. This dividend will be paid to stockholders of record as of the close of business on October 8, 2013, with a payment date of October 29, 2013.

OMG! No Taper!!
Posted by Eddy Elfenbein on September 18th, 2013 at 2:03 pm

The Fed makes the right call and does nothing. The markets are rallying. Here’s today’s statement:

Information received since the Federal Open Market Committee met in July suggests that economic activity has been expanding at a moderate pace. Some indicators of labor market conditions have shown further improvement in recent months, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has been strengthening, but mortgage rates have risen further and fiscal policy is restraining economic growth. Apart from fluctuations due to changes in energy prices, inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall, but the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.

Taking into account the extent of federal fiscal retrenchment, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases. Accordingly, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.

The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. In judging when to moderate the pace of asset purchases, the Committee will, at its coming meetings, assess whether incoming information continues to support the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective. Asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s economic outlook as well as its assessment of the likely efficacy and costs of such purchases.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Charles L. Evans; Jerome H. Powell; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.

Fed Day Is Here
Posted by Eddy Elfenbein on September 18th, 2013 at 11:13 am

Today is Fed Day! We can expect an announcement from the central bank at 2 pm today. Despite all the anticipation, the markets are fairly quiet today. The indexes are down but not by much. Of the S&P 100 stocks, only a few are up or down by more than 1%.

The same goes for our Buy List. One exception is Cognizant Technology Solutions ($CTSH) which is up 1.86%. Barclays raised its rating on CTSH to Overweight from Equal Weight.

Also, Oracle ($ORCL) is set to report later today.

100 Years Ago Today – The Federal Reserve Act Passes the House
Posted by Eddy Elfenbein on September 18th, 2013 at 11:02 am

Exactly 100 years ago today, the House of Representatives passed the Federal Reserve Act by a vote of 287 to 85 with five voting present. It would take three more months for the Senate to pass it in a much tougher fight.