Life Imitates The Onion
Posted by Eddy Elfenbein on October 23rd, 2012 at 12:53 pm

Five years ago, The Onion reported:

Even CEO Can’t Figure Out How RadioShack Still In Business

Despite having been on the job for nine months, RadioShack CEO Julian Day said Monday that he still has “no idea” how the home electronics store manages to stay open.

“There must be some sort of business model that enables this company to make money, but I’ll be damned if I know what it is,” Day said. “You wouldn’t think that people still buy enough strobe lights and extension cords to support an entire nationwide chain, but I guess they must, or I wouldn’t have this desk to sit behind all day.”

The retail outlet boasts more than 6,000 locations in the United States, and is known best for its wall-sized displays of obscure-looking analog electronics components and its notoriously desperate, high-pressure sales staff. Nevertheless, it ranks as a Fortune 500 company, with gross revenues of over $4.5 billion and fiscal quarter earnings averaging tens of millions of dollars.

“Have you even been inside of a RadioShack recently?” Day asked. “Just walking into the place makes you feel vaguely depressed and alienated. Maybe our customers are at the mall anyway and don’t feel like driving to Best Buy? I suppose that’s possible, but still, it’s just…weird.”

Reality is finally catching up to Radio Shack ($RSH). In December 1999, the stock was close to $80. This morning, it gapped down to $2. The company just reported another terrible quarter:

RadioShack reported a larger-than-expected loss for its third quarter as the electronics retailer’s revenue slipped.

The struggling company has seen its profits erode over the past two years and in September it announced the departure of CEO James Gooch. The chain’s troubles are partly due to wider problems in the brick-and-mortar electronics industry and add fuel to the notion that selling consumer electronics in brick-and-mortar stores is becoming less and less viable.

Interim CEO Dorvin Lively said that RadioShack had raised $175 million in new financing during the quarter and used those proceeds and some available cash to repay some debt.

After falling in premarket trading, RadioShack shares rose 10 cents, or 4.2 percent, to $2.49 in midday trading.

For the three months ended Sept. 30, RadioShack Corp. lost $47.1 million, or 47 cents per share. That compares with a net income of $300,000, or breakeven results, a year earlier.

I don’t see how the company can survive.

Chipotle Continues to Fall
Posted by Eddy Elfenbein on October 23rd, 2012 at 10:56 am

In May, I listed 13 stocks to avoid. Since then, most of the stocks have dropped. The biggest loser is Chipotle ($CMG) which is off over 41% since I first listed it.

The sell-off has brought the stock back closer to reality. In my opinion, a fair value for CMG is $195.

S&P 500 Down Again, Bernanke Out in 2014
Posted by Eddy Elfenbein on October 23rd, 2012 at 10:04 am

As I suspected, once the S&P 500 pierced its 50-DMA, the bears got much more confident. For the second time in the last three days, the stock market is getting hit hard. The S&P 500 is down to 1,414 which is its lowest level since September 6th.

Andrew Ross Sorkin reports in the New York Times this morning that Ben Bernanke may leave the Fed when his term expires in 14 months, no matter who wins the election.

But there is another wrinkle in the parlor game calculus: Ben Bernanke, the Federal Reserve chairman, is likely to need a successor, too. If Mitt Romney wins the presidency, he has already pledged he will replace Mr. Bernanke, whose term as chairman ends in January 2014, in just over 15 months. However, Mr. Bernanke has told close friends that even if Mr. Obama wins, he probably will not stand for re-election.

The good news for us is that our Buy List continues to do well. Reynolds American ($RAI) reported Q3 earnings this morning of 79 cents per share which matched Wall Street’s estimate. Revenues fell 3.8% to $2.12 billion which was $60 million below consensus.

To me, the most important news is that Reynolds reaffirmed its full-year forecast of $2.91 to $3.01 per share. For the first three quarters, Reynolds earned $2.21 per share so that means they see Q4 coming in between 70 and 80 cents per share. I don’t think they’ll have any trouble hitting that.

Later today, we’ll get earnings from AFLAC ($AFL) and CR Bard ($BCR).

Morning News: October 23, 2012
Posted by Eddy Elfenbein on October 23rd, 2012 at 6:55 am

Billionaire Ross Interested in Buying Spanish Bank Assets

A Tight Rope on China’s Currency

Iran Says May Stop Oil Sales If Sanctions Tighten

Pfizer in Deal to Acquire NextWave

Yahoo Rises as CEO Sees Growth in Technology, Small Deals

Walmart, Temp Agencies Sued For Minimum Wage, Overtime Violations

BP Will Switch Russian Partners Through a Deal With Rosneft

Netflix Needs Growth Surge for Goal of 7 Million New U.S. Users

Texas Instruments Forecasts Earnings MIssing Estimates

Nokia To Issue €750m Bond To Boost Cash

Permira Agrees to Buy Ancestry.com for About $1.6 Billion

What Hasbro Earnings Mean to Investors

I Like Coal: Peabody Ultra-Bullish On Coal As Natural Gas Prices Double

Roger Nusbaum: Buy and Hold is Not Entirely Dead

Howard Lindzon: Goldman Sachs…Whistleblowers… and Muppets

Be sure to follow me on Twitter.

The Future of Computers
Posted by Eddy Elfenbein on October 23rd, 2012 at 12:32 am

From 1976:

The Pressure on Margins
Posted by Eddy Elfenbein on October 22nd, 2012 at 2:22 pm

Here’s a look at a chart that shows one of the most important dynamics of this market. Namely, corporate profit margins have been stretched about as far as they can go.

The blue represents the trailing four-quarter earnings of the S&P 500 and it follows the right scale. The red line is the trailing four-quarter sales and it follows the left scale. The two lines are scaled at a ratio of 10-to-1. That means that if the lines cross, profit margins are exactly 10%.

You’ll notice that the blue line closes the gap later in the cycle which means that profit margins rose. In this cycle, profits have risen considerably but sales haven’t grown very much. You can’t cut costs indefinitely. At some point, companies need to see greater sales growth in order to boost earnings. We’re currently right at the spot which has historically been the upper limit of profit margins. That doesn’t mean we can’t go higher, but it would be unprecedented.

The Market Breaks Its Streak
Posted by Eddy Elfenbein on October 22nd, 2012 at 10:24 am

The stock market is currently up a little bit this morning. On Friday, the Dow plunged 205 points which made it the worst day for the index since June 25th. That broke a run of 81 straight days without a 1% decline. Bespoke Investment Group notes that that’s only the 19th time since 1900 that the Dow has gone 80 days without a 1% drop (via Steven Russolitto). Historically, the market hasn’t done well in the period after breaking a long streak like this. The S&P 500 also closed a hair below its 50-day moving average.

The good news for our Buy List this morning is that Wright Express ($WXS) was upgraded to neutral at JPMorgan. The stock is up over 3.3% today.

Here are some numbers on earnings season so far: According to Bloomberg, 69% of the S&P 500 companies that have reported so far have topped expectations. The average earnings beat is coming in at 4%. The sour note is that sales are only growing at 1.8%. The most surprising fact is that for the first time in 17 years, U.S. stocks are the top asset category.

I have a correction to the earnings dates I had in the last CWS Market Review. I had said that CR Bard ($BCR) reports today. My bad. The company will report earnings tomorrow along with AFLAC ($AFL) and Reynolds American ($RAI).

Morning News: October 22, 2012
Posted by Eddy Elfenbein on October 22nd, 2012 at 5:21 am

German Economy to Slow Significantly

EU Power Struggle Haunts Mersch as ECB Women Row Looms

EU To Propose Bank Resolution Agency In 2013

Greece Austerity Diet Risks 1930s-Style Depression

Intervention Can’t Stop Strong Hong Kong Dollar

Yen Declines on Japan Stimulus Bets as Euro, Commodities Advance

BP Near Deal to Sell Assets to Rosneft

Rupert Murdoch Looking To Buy LA Times, Chicago Tribune

Apache LNG Plan in Limbo

Disney, Struggling to Find Its Digital Footing, Overhauls Disney.com

Big Brewers Chase U.S. Cider Growth on Craft Beer Explosion

Buy Reviews on Yelp, Get Black Mark

NBC Finds Itself in Unfamiliar Territory: On Top

Credit Writedowns: Raghuram Rajan Is Right About The Perils Of Today’s Monetary Policy

Jeff Carter: Green Energy, Bankrupting the Taxpayer

Be sure to follow me on Twitter.

It’s Going to Be Close
Posted by Eddy Elfenbein on October 19th, 2012 at 2:36 pm

An hour and a half till the close. The current 50-day moving average is 1,433.44. We haven’t closed below the 50-DMA since June 28.

The Numbers Since 1987
Posted by Eddy Elfenbein on October 19th, 2012 at 12:10 pm

Since 1987, the Dow has gained 679.24% or 8.56% annualized. Including dividends, the Dow has gained 1,376.26% or 11.37%. Dividends have added 89.45% or 2.59% annualized.

Over the last 25 years, the Consumer Price Index has risen 101.76% or 2.85% annualized. That’s from September 1987 to September 2012, since we won’t get the October CPI until next month.

In real terms, the Dow has returned 631.70% since the crash, or 8.29% annualized.