CWS Market Review – April 26, 2013
Posted by Eddy Elfenbein on April 26th, 2013 at 6:47 am

“In the corporate world, if you have analysts, due diligence, and
no horse sense, you’ve just described hell.” – Charlie Munger

This is it, folks. We’re right at the peak of earnings season. So far, the numbers for Q1 are a mixed bag. According to the latest data from Bloomberg, 74% of the companies in the S&P 500 have beaten earnings expectations while 55% have missed expectations for revenue.

This tells me that we’re seeing a continuation of the trend we know so well: companies growing profits by cutting costs, as in new jobs, instead of getting more customers in the door. This has been a frustrating trend as the labor market has taken its sweet time to get back on its feet. But next Friday will be a key day for investors. That’s when the government will release its April jobs report. If the number comes in strong (over 200,000 new jobs), the market has a very good chance of continuing its rally.

One troubling sign is that stock correlations are on the rise. This means that stocks are increasingly behaving like one another. I prefer to see a market where there are plenty of rogues and lone wolves. We generally see higher correlations when there’s greater economic uncertainty. In plainer terms, that means when investors treat all stocks like they’re one big stock called “the economy.” The research suggests that rising correlations are bad omens for the market, especially bank stocks, and it’s in bank stocks that we’re seeing the strongest correlations.

The good news is that investors are pleased with the earnings results. The stock market is snapping back after a brief case of the willies earlier this month. On April 18th, the S&P 500 dropped to a six-week low. Since then, the index has rallied for five days in a row, and on Thursday, we got within a whisker of a new all-time high.

Apple Gives $100 Billion to Shareholders

One of the big catalysts for the stock market this week was the dividend hike from Apple (AAPL). Although the legendary iStock isn’t on my Buy List this year, the company is so large that it can move the market all by itself.

Apple said that it’s raising its dividend by 15% to $3.05 per share. The company is also increasing its share-repurchase program by $10 billion to $60 billion. The combined total of the dividend and share repurchase comes to $100 billion that Apple is paying out to shareholders. To put that in context, the new dividend works out to $12.20 per share for the year. Ten years ago this week, the whole stock was going for $6.60 per share. Apple is now sitting on a bank account of $145 billion. That’s enough to buy every single team in the NFL, NHL, NBA and major-league baseball.

Interestingly, Apple is borrowing money for its dividend and buybacks. That may sound odd, but rates are so low—hey, why not? I think the Apple news clearly gave investors a big confidence boost. This was especially true after the AP’s Twitter account was hacked. The hackers sent out some bogus tweets, and within a few seconds, $160 billion in market value was erased. So yeah, that kind of stuff tends to put people on edge.

Another sign of a calmer market is that the yield spread between junk bonds and Treasury bonds has fallen to a two-year low. This is exactly what we want to see. Investors are willing to take on more risk with their money. That’s why these higher dividends are so important. They can lure money away from rock-bottom yields in the Treasury market.

I should add that our own Wells Fargo (WFC) also joined the higher-dividend club. This week, WFC raised their dividend by 20%. The Fed had already approved an increase of up to 20%, but the bank just made it official. WFC now pays out 30 cents per share each quarter.

In this week’s CWS Market Review, we’ll run down the recent earnings reports from our Buy List. In last week’s newsletter, I highlighted Microsoft’s (MSFT) good earnings report, and the stock has rallied 11% in just five days. MSFT just touched a new 52-week high, and it’s close to making a five-year high. Microsoft now has a larger market cap than Google (GOOG). I’ll also highlight the Buy List earnings reports for next week. But first, let’s look at the good news from our favorite duck stock.

Strong Earnings from AFLAC and Ford Motor

On Wednesday, AFLAC (AFL) reported first-quarter operating earnings of $1.69 per share, which was seven cents better than expectations. We know that, as a business, AFLAC has been doing well, and it continues to do well. The problem, however, is that most of their business comes from Japan, and the weaker yen is taking a big bite out of their earnings. According to the earnings report, the weak yen cost AFL 15 cents per share last quarter. That’s actually not as bad as I was expecting. If you ignore currency costs, AFLAC’s operating earnings grew 5.7% last quarter. I’m very pleased with that.

I was also happy to hear the company reiterate that its objectives for 2013 haven’t changed. They’re still looking to grow currency-neutral profits by 4% to 7% this year. If the yen averages 95 to 100 per dollar for this year, then AFL sees full-year earnings as ranging between $5.99 and $6.37 per share. For Q2, they gave a range of $1.41 to $1.56, which seems to me to be on the low side.

My advice for investors is to not look at AFLAC as a way to trade the yen/dollar ratio. That will come and go. Instead, look at AFLAC as an excellent company that continues to perform well. On Thursday, the shares got as high as $53. This is a great company trading with a bargain P/E Ratio. AFLAC remains an excellent buy up to $54 per share.

In last week’s CWS Market Review, I said that Ford Motor (F) has the best chance of giving us a big earnings surprise, and that’s exactly what happened. On Wednesday, the automaker said it made 41 cents per share, which was four cents better than Wall Street’s expectations. That’s up from 35 cents per share in the first quarter of 2012. Ford’s sales rose to $33.9 billion, which beat estimates by $400 million.

Ford continues to do very well in North America, and the Ford Fusion is a big reason why. The weak link is Europe, but that’s largely due to their crummy economy. For the quarter, Ford made $2.4 billion in North America but lost $462 million in Europe. That’s about three times what they lost one year ago. The company expects to lose $2 billion in Europe this year.

I was glad to see Ford give an ambitious production forecast for Q2: 800,000 vehicles in North America and 390,000 in Europe. Right now, Ford is trying to right itself in Europe the same way they turned themselves around in the U.S. The company is also making gains in China, where they’re a small player.

I think Ford can earn $1.50 per share this year, which means the stock is going for about nine times earnings. Plus, don’t forget that the company doubled its dividend at the start of this year. Ford remains an excellent buy up to $15 per share.

On Tuesday, CR Bard (BCR) reported Q1 earnings of $1.44 per share, which was two cents ahead of expectations. Sales rose 1% to $740.3 million, which was $12 million above expectations. In January, the company said that this year will be tough for them, but they expect extra growth next year to make up for the slack. While the company hasn’t given specific numbers for the year, Wall Street has lowered its 2013 EPS forecast from $6.84 three months ago to $6.29 today.

For Q2, Bard sees earnings coming in between $1.35 and $1.39 per share, which was a disappointment. Wall Street had been expecting $1.46 per share. Despite the guidance, the stock has been holding steady. Bard remains a good buy up to $102 per share.

On Wednesday, Stryker (SYK) reported Q1 earnings of $1.03 per share, which was two cents better than estimates. Most importantly, Stryker reiterated its full-year range of $4.25 to $4.40 per share. The stock had been one of the hottest on the Buy List, and it only started to break down in early mid-April. The positive earnings report seems to have reversed that. Stryker continues to be an excellent buy up to $66 per share.

Three Upcoming Buy List Earnings Reports

We have three earnings reports coming up next week (plus Moog, which reports later today). Fiserv and Harris Corp are due to report earnings on Tuesday, April 30th. Then WEX Inc. reports on Wednesday, May 1st.

Fiserv (FISV) has done very well lately, and the stock recently broke above my $88 Buy Below price and hit a new all-time high. Let me caution you not to chase FISV. I don’t want to change my Buy Below until I get a chance to see the earnings report. Wall Street currently expects earnings of $1.34 per share. Stay tuned.

Harris (HRS) recently lowered its earnings guidance due to the federal government’s sequester. The stock took a big hit but has come back some recently. I’m not too worried about problems outside a company’s control that may hurt their bottom line such as government dysfunction or currency fluctuations. As I said with AFLAC, those issues come and go. Well-run companies have a tendency to stay well-run. The sell-off in Harris also highlights why it’s good to focus on stocks with generous dividends. Dividends act as a floor for a sinking share price. Harris remains a good buy up to $45 per share.

WEX Inc. (WEX) had a decent earnings report for Q4, but their guidance for Q1 was terrible. WEX expects 89 to 96 cents per share. Wall Street had been expecting $1.08 per share. The stock took a hit, and I dropped my Buy Below to $75. I’m not pleased with WEX, but it’s still early in the year. Let’s see what the company has to say.

Cognizant Technology Solutions Is a Buy up to $70 per Share

Shares of Cognizant Technology Solutions (CTSH) have dropped sharply recently. The stock has fallen for ten days in a row. On Thursday, CTSH finished the day at $61.35, which is down 21% in two weeks.

So what’s going on? The company doesn’t report Q1 earnings until May 8th. The problem is that Infosys (INFY), a similar company, recently gave terrible guidance, so traders are convinced CTSH will do the same. The earnings miss from IBM (IBM) also raised eyebrows that CTSH is in for trouble.

There are also concerns that, in light of recent events, upcoming legislation may impact the status of foreign workers. How much will this impact CTSH? Right now, I can’t say. While these concerns are real, they don’t impact CTSH directly. We’ll know more once the earnings report comes out. For now, I’m lowering my Buy Below on Cognizant to $70 per share.

That’s all for now. We have lots more earnings to come next week. Plus, the important ISM report comes out on Wednesday. The ISM has printed at 49.9 or better for 45 months in a row. Let’s see if that streak continues. Then on Friday, it’s the big jobs report. In the past three years, the U.S. economy has created 5.7 million jobs, but we’re still nearly 3 million below the peak from five years ago. 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: April 26, 2013
Posted by Eddy Elfenbein on April 26th, 2013 at 6:27 am

Bank of Japan Sees Inflation Nearing Target in 2015

Bundesbank Slams ECB Bond-Buy Plan in Opinion for German Court

Southern Europe’s Recession Threatens to Spread North

Cyprus Will Get Debt Relief Because It Has Gas

Initial Jobless Claims in U.S. Fell Last Week to 339,000

The Seductive Simplicity of a New Banking Bill

CBOE Preaches to Vegas Choir as ‘Glitch’ Crashes Exchange

Amazon Beats Estimates as Digital Content Pays Off

Alcatel Loses Cash, Plans to Change

New York Times Moves Toward Netflix Model as Ads Tumble

United Continental, Southwest Tops View, But JetBlue Misses

Archer-Daniels-Midland Wins GrainCorp Board Approval for Bid

Microsoft Gets Upper Hand In First Google Patent Trial

Credit Writedowns: Some Thoughts on What’s Next for Italy

Phil Pearlman: One Point No One is Making About the Flash Crash

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Silver — The Poor Man’s Gold
Posted by Eddy Elfenbein on April 25th, 2013 at 8:02 am

Silver, which is often called “the poor man’s gold,” has failed to move up recently even though gold has regained a tiny bit of its luster. Last Tuesday, April 16th, spot silver got down to $22 per ounce. That was Ag’s lowest print since October 5th, 2010.

Gold now trades at 62 times silver. During the worst of the financial crisis in 2008, gold got to more than 80 times silver. The Gold/Silver ratio has been an important ratio through history. Way back in antiquity, Plato mentioned that the ratio was 12-to-1. In 1792, the U.S. Congress, at the advice of Alexander Hamilton, passed the Coinage Act of 1792. This was the government’s first attempt at price-fixing (and not the last). The act defined a U.S. dollar as 371.25 grams of silver or 24.75 grams of gold. In other words, Hamilton pegged the Gold/Silver ratio at 15. In 1834, Congress had to bump it up to 16. The all-time high for the Gold/Silver Ratio came during the first Gulf War. On February 22, 1991, gold was going for 102 times silver.

In 1979-80, there was an absolutely crazy rally in silver when two Texas brothers tried to buy all the silver in the world. What’s even crazier is that if it hadn’t been for those meddling exchanges, they would have gotten away with it.

When Nelson Bunker Hunt and Herbert Hunt started their plan, silver was around $6 per ounce. By early 1980, it got $50 per ounce. Time Magazine estimated they made between $2 billion and $4 billion in just nine months. To pull this off, they had to borrow zillions of dollars. At one point, it was estimated that they held one-third of the world’s silver. Tiffany (TIF) took out a full-page article to denounce them.

Since I’m probably the only person who knows this trivia, the Hunt brothers were the sons of the legendary oilman, Haroldson Lafayette “H.L” Hunt, Jr. Hunt the senior wrote a totally batshit-crazy novel based on his idea of a fascist utopia called “Alpaca.” It’s literally one of the worst books ever written. I remember one person calling it “1984, but Big Brother is the good guy.” I wish I were making this up.

Not all the Hunts were nuts. Lamar Hunt was one of the most influential people in the development of modern football. He was the one who came up with the name “Super Bowl.”

Anyway, back to silver. The Hunts were convinced that the Establishment was out to crush them and they were pretty much right. The exchange changed the margin requirement which forced the brothers to put up much more collateral. (By the way, one of my first jobs in this industry was making margin calls. That’s not a metaphor. I had to actually call people to tell them they had to sell or put up more money. Good times!)

On March 27, 1980, the bottom fell out of the silver market. This is now known as “Silver Thursday.” The Hunts had to put up more money, but they couldn’t reach their margin requirement. The government was worried (tell me if you’ve heard this one before) that Wall Street banks were so much in debt to the Hunts that if the Hunts went under, so would the banks. In fact, a silver panic could start a banking panic.

The Hunts had finally been broken and even today, silver is still far short of its peak in 1980. The Hunts eventually become the models for brothers Randolph and Mortimer Duke in the movie Trading Places.

Morning News: April 25, 2013
Posted by Eddy Elfenbein on April 25th, 2013 at 7:52 am

Britain Avoids Triple-Dip Recession

Spanish Unemployment Rate Hits 27.2%

Brown-Vitter Bill Seeks to End ‘Too Big to Fail’

Fed Debate Moves From Tapering to Extending Bond Buying

Possible Fed Successor Has Admirers and Foes

Manufacturing in U.S. Cools as Durables Orders Slump

Verizon Eyes $100 Billion Bid for Vodafone’s Wireless Stake

Qualcomm Forecasts Profit That May Miss Some Estimates

Deutsche Telekom Secures U.S. Position With MetroPCS Deal

Time Warner Cable Revenue Misses As Data Services Disappoint

Southwest Airlines 1Q Profit Falls, But Higher Fares Help It Beat Wall Street Expectations

Lower Output, Higher Won Hurt Hyundai

Hundreds Of Service Workers Strike In Chicago

Roger Nusbaum: And That’s All I Have to Say About That

Howard Lindzon: Who Really Caused the Flash Crash of 2013…Twitter? AP? Hackers?

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AFLAC Earns $1.69 per Share for Q1
Posted by Eddy Elfenbein on April 24th, 2013 at 4:48 pm

AFLAC‘s ($AFL) earnings results are out. The company earned $1.69 per share in operating earnings for the first three months of the year. The answer to the big question is yes, the yen took a bit out of their bottom line — 15 cents per share was lost due to currency. That’s actually not as much as I thought.

For Q1 last year, the company earned $1.74 per share in operating earnings. If we discount currency moves, AFLAC’s earnings rose by 5.7% last quarter. The company expects Q2 operating earnings to range between $1.41 and $1.56 per share. Assuming the yen averages 95 to 100 per dollar for the year, AFLAC expects full-year earnings between $5.99 and $6.37 per share.

Commenting on the company’s first quarter results, Chairman and Chief Executive Officer Daniel P. Amos stated: “Although the underlying strong results were masked by a significantly weaker yen, we are pleased with our overall results in the first quarter of 2013. Aflac Japan produced solid financial results that exceeded our expectations for the quarter. Aflac Japan’s overall sales were up due to the advanced purchases of products prior to a scheduled premium increase. Third sector sales on the other hand, were down for the first quarter as expected. However, we believe consumer response to our third sector products will be strong in the second half of 2013. As such, we continue to expect that Aflac Japan’s sales of third sector products will be flat to up 5% for the year.

“While Aflac U.S. sales declined in the quarter, we believe sales will be weighted more toward the latter half of the year. Therefore, we are retaining our objective of a flat to 5% sales increase for the year. The foundation of Aflac U.S. is strong and we are focused on expanding our reach to employees at companies of all sizes. We continue to look for opportunities to leverage our strong brand and relevant product portfolio in the evolving health care environment.

“Low investment yields, particularly in Japan, remain a significant challenge. As such, we continue to invest a significant portion of our cash flows in U.S. corporate bonds. This strategy provides greater liquidity, enhances flexibility for our portfolio and increases the opportunity to diversify the investment of our significant cash flows beyond Japanese Government Bonds, with the objective of producing higher returns. In light of 10-year JGB yields hitting historical lows, we want to be flexible in our asset allocation. Given significant changes impacting financial markets including Japanese interest rates and the yen/dollar exchange rate, our investment team is carefully monitoring Japan’s monetary and fiscal policies to evaluate investment options related to our JGB asset allocation.

“The strength of our regulatory capital ratios demonstrates our commitment to maintaining financial strength on behalf of our policyholders and bondholders. As we have communicated over the past several years, sustaining strong RBC and SMR ratios remains a priority for us. While we have not yet completed our statutory financial statements for the first quarter, we estimate our quarterly RBC ratio at March 31 was above our 2012 year-end ratio of 630%. We believe Aflac Japan’s SMR will also improve over its year-end 2012 level of 669%.

“We communicated last quarter our intention is to purchase $400 to $600 million of our shares this year. We purchased approximately $150 million of our shares in the first quarter of 2013. Given the strength of our capital ratios and parent company liquidity, we are even more comfortable with that range.

“Reflecting the underlying strength of the business, we still expect to have another good year for Aflac. I want to reiterate that our objective for 2013 has not changed: To increase operating earnings per diluted share 4% to 7%, or approximately $6.86 to $7.06 per share, on a currency neutral basis. Assuming we achieve our earnings objective and the yen averages 95 to 100 to the dollar for 2013, we would expect to report operating earnings of $5.99 to $6.37 per diluted share for the full year. Additionally, for the second quarter of 2013, using the same currency assumptions, we expect operating earnings will be in the range of $1.41 to $1.56 per diluted share.”

The Meltdown in Cognizant
Posted by Eddy Elfenbein on April 24th, 2013 at 3:50 pm

Shares of Cognizant Technology Solutions ($CTSH) have dropped sharply over the past few weeks. The stock closed at $77.66 on April 11th, and including today, it’s dropped for nine days in a row. Today’s low was $61.80.

So what’s going on? The company doesn’t report Q1 earnings until May 8th. The problem is that Infosys ($INFY), a similar company, recently gave terrible guidance, so traders are convinced CTSH will do the same. The earnings miss from IBM ($IBM) also dinged the sector.

There are also concerns that, in light of recent events, upcoming legislation may impact the status of foreign workers. I really can’t weigh any of these events at the moment because they don’t impact the company directly but are instead tangential concerns. I don’t mean to downplay them, but we can’t say yet if they will impact CTSH’s first-quarter results.

Ford Earns 41 Cents Per Share
Posted by Eddy Elfenbein on April 24th, 2013 at 12:29 pm

This morning, Ford Motor ($F) reported pretty good earnings for Q1. The automaker made 41 cents per share which was four cents more than Wall Street’s expectations. The company made 35 cents per share one year ago. Sales rose to $33.9 billion which beat estimates by $400 million.

As expected, Ford continues to do very well in North America but Europe still remains weak. The key driver of Ford’s results is the success of the Fusion. I was glad to see Ford given an ambitious production forecast for Q2; 800,000 vehicles in North America and 390,000 in Europe.

For the quarter, Ford made $2.4 billion in North America but lost $462 million in Europe. That’s about three times what they lost one year ago. The company expects to lose $2 billion in Europe this year. Right now, the company is trying to right itself in the same way they turned around in the U.S. In South America, Ford lost $218 million. They expected to lose $300 million.

Lousy Durable Goods Report
Posted by Eddy Elfenbein on April 24th, 2013 at 10:28 am

From Reuters:

Orders for long-lasting manufactured goods recorded their biggest drop in seven months in March and a gauge of planned business spending rose only modestly, signs of a slowdown in economic activity.

Durable goods orders slumped 5.7 percent as demand fell almost across the board, the Commerce Department said on Wednesday. The drop last month in orders for these goods, which range from toasters to aircraft, followed a 4.3 percent increase in February.

Economists polled by Reuters had expected orders to fall only 2.8 percent. Excluding transportation, orders declined 1.4 percent after falling 1.7 percent the prior month.

From transportation to primary metals and machinery, orders were weak, the latest indication of cooling in a sector that has played a pivotal role in the economy’s recovery from the 2007-09 recession.

“Overall, the weak tone of this report underscored the emerging narrative of a considerable slowing in economic growth momentum in March,” said Millan Mulraine, senior economist at TD Securities in New York.

This was the report for March. On Friday, the government will release its first estimate for Q1 GDP growth. The current consensus is for 3.2% but that may come down after today’s durable goods report.

Wells Fargo Raises Dividend 20%
Posted by Eddy Elfenbein on April 24th, 2013 at 10:06 am

Last month, the Federal Reserve approved a 30-cent dividend for Wells Fargo ($WFC). The bank just announced that it’s raising its dividend from 25 cents to 30 cents per share.

This is the second dividend hike this year. In January, WFC raised their dividend from 22 cents to 25 cents per share. Going by yesterday’s close and the new dividend, the stock yields 3.23%.

Morning News: April 24, 2013
Posted by Eddy Elfenbein on April 24th, 2013 at 7:42 am

German Business Sentiment Falls

India’s Jet Airways in $379 Million Stake Sale to Etihad

P&G Forecasts Profit Below Street View, Shares Fall

FedEx Wins $10.5 Billion Postal Contract as UPS Shut Out

Jon Corzine Sued By MF Global Bankruptcy Trustee

Ford Profit Tops Estimates as Fusion Boosts Record North America

Wealthiest Americans Only Winners in Recovery, Pew Says

Barclays Posts Bigger-Than-Estimated Investment Banking Profit

Daimler Lowers Profit Forecast After First-Quarter Drop

AT&T Misses Estimates as It Struggles to Keep Pace With Verizon

Barrick Profit Tops Estimates as Costs Rise Less Than Expected

WellPoint Earnings, Sales Rise, Lifts Outlook

Does Apple’s Dividend Make It Microsoft 2.0?

Joshua Brown: I Survived the Flash Crash of ’13

Jeff Carter: Hackers Do The Work That Used to Be Done By Wall Street

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