• Who’s To Blame for Facebook?
    Posted by on May 22nd, 2012 at 10:32 am

    The New York Times has an interesting article this morning: “As Facebook’s Stock Struggles, Fingers Start Pointing.”

    Apparently, stocks are only allowed to go up, and if they don’t, it must be someone’s fault.

    Wall Street is playing the Facebook blame game.

    As shares of the social network tumbled in their second day of trading, bankers, investors and analysts wondered what had gone wrong with the initial public offering of Facebook, the most highly anticipated technology debut in years.

    Some fingers are pointing at Morgan Stanley, the lead banker on the I.P.O., while others criticize Nasdaq and even Facebook itself. In the aftermath, critics contend that Facebook’s offering price was too high and too many shares were sold to the public, hurting the stock’s performance out of the gate.

    So the media is asking if the blame should lie with the underwriter, the exchange or the company itself. My question is: What about the media?

  • Medtronic Earns 99 Cents Per Share
    Posted by on May 22nd, 2012 at 9:47 am

    Medtronic ($MDT) is keeping it real. For its fiscal Q4, the company reported earnings of 99 cents per share. That’s a penny ahead of expectations and a 10% increase from a year ago. In February, the medical equipment company told us to expect Q4 earnings between 97 cents and $1 per share. Quarterly revenues rose 4% to 4.3 billion.

    Demand for pacemakers and defibrillators, the company’s biggest product category, is starting to return, said Rick Wise, a Leerink Swann & Co. analyst in New York. U.S. approval of the Resolute Integrity stent in February to treat clogged heart arteries and the conclusion of a Justice Department investigation into the Infuse bone strengthening product should pave the way for faster growth next year, analysts said.

    Now let’s look at the full-year numbers because this was a good year for Medtronic. Earnings rose from $3.37 to $3.46 per share. A year ago, they gave us full-year guidance of $3.43 to $3.50 per share which was dead on target. In 2010, Medtronic cut their forecast several times, but this year they held firm throughout the year.

    For 2013, Medtronic sees earnings ranging between $3.62 and $3.70 per share. The Street was expecting $3.66 per share. Officially, that will be reported as “inline guidance” but I’m very pleased with it.

    Sometime next month, I expect Medtronic will raise its quarterly dividend. The current payout is 24.25 cents per share which works out to a yearly dividend of 97 cents per share (or 2.57%). If I had to guess, I think it will be a modest increase — to 25 or 26 cents per share. This will mark their 35th-straight dividend increase.

  • Walmart Nears 10-Year High
    Posted by on May 22nd, 2012 at 9:11 am

    Apparently there are other stocks on the market besides Facebook ($FB). One such company is called Walmart ($WMT), and unlike FB, it has been doing well lately. Facebook began with a checking account of $15,000 which is roughly the amount of revenue WMT generates every single second of every hour of every day. That adds up to $475 billion a year.

    What’s fascinating about WMT is that it’s been stuck in the Mother of All Trading Ranges for several years. For over a decade, WMT has rarely strayed far outside its $45 to $60 band.

    But thanks to its good earnings report the other day, the stock looks ready to break loose. On Monday, Walmart closed at $63.04 which is just 13 cents shy of its highest close in the last ten years.

    Wall Street expects earnings next year of $5.33 per share with a five-year growth rate of 8.3%. That makes the stock almost perfectly priced.

  • Morning News: May 22, 2012
    Posted by on May 22nd, 2012 at 7:05 am

    U.S. Stock Futures Little Changed As Facebook Slumps

    Yen Falls Most In A Month As Japan Is Downgraded By Fitch

    Morgan Stanley Cut Facebook’s Estimates, Then Increased the Offering

    Best Buy Profit Falls, Adj. Earns Tops Street View

    Is Yahoo! Taking the Right Steps?

    Germany Staunch in Opposition to Eurobonds

    Greek Banks to be Recapitalised by Friday – Banker

    Cracker Barrel 3rd-qtr Beats Street on Higher Traffic

    Eurozone Warned ‘Severe Recession’ Looming

  • “IPOs Are Scary Things”
    Posted by on May 21st, 2012 at 2:21 pm

    Roben Farzad at Bloomberg Businessweek:

    With a valuation of $104.8 billion at the May 18 close, Facebook was already worth more than three times the other 10 U.S. consumer Internet companies to have gone public in the past year; LinkedIn (LNKD), valued at $10.3 billion, is second.

    “IPOs are scary things,” says blogger and newsletter writer Eddy Elfenbein. “It’s hard to justify Facebook going for sixty times” next year’s estimated earnings, he adds, “in a market where Apple (AAPL) is going for less than 10 times next year’s estimate.”

    So what price can be justified? Elfenbein calculates that Facebook’s estimated 2013 earnings of $1 a share, combined with its projected 50 percent earnings growth rate for the next five years—and there’s no guarantee the company will meet those estimates—give it a fair value of $33 a share. Even so, he says buying the stock would be prudent only at closer to $23.

    You may get that chance. Another analyst, PrivCo’s Sam Hamadeh, points to concerns about Facebook’s fundamentals: declining first-quarter advertising revenue; the number of unique visitors to Facebook dropping in the U.S.; the company warning in its most recent S-1 filing that the shift to mobile access vs. desktop access could complicate its ad business. He also anticipates a wave of new stock hitting the market once insiders are free to unload their holdings, and predicts that others will sell to raise money to pay taxes on their gains.

  • Don’t Look Now But the Stock Market Is Actually Getting Cheap
    Posted by on May 21st, 2012 at 9:56 am

    On Friday, the S&P 500 closed below 1,300 for the first time since January. Looking at the numbers, the market is a pretty decent value. Wall Street currently expects 2012 earnings of $104.97, and earnings for 2013 of $118.92. That means the S&P 500 is going for just under 11 times next year’s earnings. Bear in mind that the yield on the 10-year Treasury is at 70-year lows.

    One big hitch is that Wall Street expects to see earnings growth reaccelerate later this year. Notice how the yellow earnings line bumps up this summer. This reacceleration is hardly a given and it depends on how quickly Europe can recover.

    Another plus in the market’s favor is the resurgence of dividends. The S&P 500 will probably pay out $29.74 this year. Going by Friday’s close, that’s a yield of 2.30%.

  • How Much is Facebook Worth?
    Posted by on May 21st, 2012 at 8:26 am

    So now that Facebook ($FB) is public, is the stock a good buy?

    The short answer is no. The longer answer is noooooooo.

    First we have to consider the fact that no company has ever gone public because they thought their share price was too low. That shouldn’t dismiss every initial public offering, but it’s an important consideration to keep in mind. As a general rule, IPOs are bad buys.

    The other fact is that it’s very difficult to evaluate the prospects of a young company in a new industry. I have a pretty good idea of how quickly Medtronic ($MDT) will grow its earnings over the next few years. I can’t say the same for Facebook. More than 12 years after its peak, Yahoo’s ($YHOO) share price is barely one-eighth its price. Things didn’t turn out as they were planned.

    We also know that FB’s underwriters spent enormous amounts of money trying to keep the stock price above $38 on Friday.

    Some market participants said that the underwriters had to absorb mountains of stock to defend the $38 level and keep the market from dipping below it.

    The firm did this by tapping into a 63 million share over-allotment option, or greenshoe, according to sources familiar with the deal.

    As an indication of the cost, had Morgan Stanley bought all of the shares traded around $38 in the final 20 minutes of the day, it would have spent nearly $2 billion. Underwriters are not obligated to prop up a stock on debut, but typically do.

    Morgan Stanley declined to comment.

    I don’t see why it’s so embarrassing for FB to drop below its offering price. Or at least why that embarrassment is worth more than $2 billion. As a side note, I’m also not bothered by the delay in starting trading in Facebook. That’s slightly embarrassing, but I’d rather that they get it right rather than get it on time. Big deal; traders can wait 20 minutes.

    Now let’s look at some of the projections about Facebook and we’ll use our World’s Simplest Stock Valuation Method. Wall Street currently thinks the company will earn 60 cents per share next year. Henry Blodget thinks that’s way too low and that FB can earn $1 per share in 2013. I think that’s a much more reasonable assumption.

    I haven’t seen any estimates of Facebook’s five-year growth rate so we’ll have to use some creativity here. We do know that Facebook’s growth rate is falling, but of course that’s from unsustainable levels to more realistic ones. One hint is that last quarter the company grew its revenue by 44%.

    To be safe, let’s use a 50% earnings growth rate for the next five year. That’s almost certainly too high, but again, we’re being safe.

    The World Simplest Stock Valuation Method is:

    Price/Earnings Ratio = Growth Rate/2 + 8

    So that works out to:

    33 = 50/2 + 8

    And with a $1 per share estimate for next year, that works out to a fair value of $33. So by using numbers very favorable to Facebook we can see that the stock is overpriced. On top of that, as a prudent investor, I wouldn’t be interested in Facebook unless it’s going for 30% below Fair Value. That’s about $23 per share.

    For now, I’m keeping my distance from Facebook.

  • Morning News: May 21, 2012
    Posted by on May 21st, 2012 at 6:16 am

    Schaeuble Seeks Crisis Resolution With France’s Moscovici

    European Markets Calm on Lukewarm G-8 Support for Euro

    German Bonds Fall on Bets European Crisis-Fighting Plan Closer

    Spanish Economy to Contract by Around 0.3% In Q2

    Copper Climbs for Second Day as China Pledges to Boost Growth

    Oil Rises First Time in Seven Days; Goldman Sees Tighter Supply

    U.S. Gasoline Falls to Three-Month Low, Lundberg Survey Shows

    Lockhart Says Fed Shouldn’t Rule Out New QE Amid European Risks

    Alibaba Buys Back 20% Stake From Yahoo for $7 Billion

    DaVita to Pay $4.42 Billion for HealthCare Partners

    Chinese Cinema Firm to Buy AMC In $2.6-Billion Deal

    Tech Flaws Didn’t Cause Facebook’s Stock Woes, Nasdaq Chief Says

    JPMorgan Risk Overseer Said to Have Trading Losses Record

    Clash of the Theme Parks

    Howard Lindzon: The Facebook ‘Share’ Tax ….No Free Lunch

    Epicurean Dealmaker: J.P. Morgan and the Marlboro Man

    Be sure to follow me on Twitter.

  • A Greek Reader Responds
    Posted by on May 20th, 2012 at 7:52 pm

    Here’s a take from a reader in Greece:

    I am a tactical reader of your very interesting postings. Your analysis about the EU and Greek problem is almost right.

    One observation(speculation) and objection : Next Greek elections will be won by the right-centre party of New Democracy(not by the left) and together with other minor pro-Euro parties will form a new government. Then the ball will be at Ms Merkel’s side in order to come with a more viable plan which looks into the future of Europe and not just an austerity plan which looks at the past and is a form of punishment(albeit a fair one) for reckless states like Greece. The problem in Europe is the Spanish banks and not the Greek state. The overall debt to GDP in Greece ( if you count the private debt) is much smaller than that of other EU countries and not only of Med countries. The problem is political and not financial , so the only solution is greater EU unification. Its very difficult to implement it, since most EU states are against it and the level of political leadership in EU is very low.

    So, being a speculator I would suggest to anticipate a rally (short-lived) close and (or) after the Greek elections. Long term the problems will remain.

  • No Doubt In the Studio
    Posted by on May 18th, 2012 at 6:25 pm