• DirecTV Earns $1.07 Per Share
    Posted by on May 8th, 2012 at 10:20 am

    DirecTV ($DTV) reported first-quarter earnings of $1.07 per share. That beat Wall Street’s consensus by either one or two cents, depending on the source. A year ago, DTV earned just 85 cents per share.

    DirecTV’s sales rose 12% to $7.05 billion which was $10 million more than consensus. The company has done well in North America, but they see their future lying in Latin America.

    Put it this way: DTV added 81,000 subscribers in the U.S. last quarter. In Latin America, they aded 593,000. Yet there are more than twice as many current subscribers in the U.S. as there are in Latin America.

    The problem is that it costs more to get a subscriber in Latin America, so that hurts DTV’s margins. This was a good quarter for DTV. The stock is off some because it wasn’t the kind of blowout quarter that we’ve seen.

    The company said that it plans to make $4 per share this year and $5 next year. I think they can surpass those marks with ease.

  • The Flash Crash Fairy Tale
    Posted by on May 8th, 2012 at 9:45 am

    Two years ago, the stock market crashed in a few minutes, and in almost the same amount of time, it recovered.

    The public wanted to know why; how could this have happened?

    So the government did what governments do: they filed a report. The official report blamed a securities firm, Waddell & Reed, for dumping too many futures at once and screwing things up.

    This is a nice story for the government to tell because it lays the fingers on a known entity. The bad boys at Waddell & Reed screwed up the market.

    The government’s story has one small problem — it’s not true. At least not according to Eric Scott Hunsader. Mark Buchanan writes:

    The actual crisis struck in the three minutes between 2:41 p.m. and 2:44 p.m., when the market fell another 5 percent to 6 percent. Hunsader’s analysis suggests this plunge was caused by high-frequency traders. They typically act as liquidity providers, standing ready to buy and sell at certain price levels. But the day’s volatility prompted them to dump their holdings to avoid losses. In a matter of minutes, they actively sold an accumulated stock of about 2,000 E-mini contracts. It was this selling, not Waddell & Reed’s passive orders, that caused liquidity to disappear.

    There is nothing blameworthy about what the high-frequency traders did. Market makers aren’t charities, and their algorithms were only saving their skins amidst extreme market turbulence. Their actions do, however, rather undermine the common argument that high-frequency traders bring wonderful benefits to the market through the liquidity they provide. That liquidity, as many have pointed out, has a rather ghostly quality and tends to vanish when needed most.

    The government’s story boils down to “some big meany came along and harmed our precious market.” They found a culprit and blamed it. That’s what governments do.

    The government couldn’t have told us the real reason. So why did the market crash?

    The answer is that there’s no answer. It’s just what markets do.

  • Morning News: May 8, 2012
    Posted by on May 8th, 2012 at 5:46 am

    Socialist Elephants Stampede for Jobs With Hollande

    Bankia’s Rato Steps Down as Spain May Offer Banks Rescue

    India Vows Cuts in Iranian-Oil Imports as Clinton Visits

    Consumer Credit in U.S. Increases by Most in 10 Years

    U.S. Could Make $15.1 Billion on AIG Bailout: GAO

    HSBC Profit Beats Analysts’ Estimates on Investment Bank

    KPN Jumps After America Movil Makes $3.4 Billion Offer

    Toshiba Forecasts 83% Profit Increase, Beating Estimates

    Electronic Arts Drops as Forecasts Misses Analysts’ Views

    MasterCard Heats Up Battle For ‘Mobile Wallet’

    Munich Re Returns to Profit as Disaster Claims Fall

    Statoil Profit Falls

    As Car Owners Downsize, the Market Is Strong for Their Used S.U.V.’s

    Amazon Leaps Into High End of the Fashion Pool

    Nigerians Outstrip Americans in London Fashion Spending

    Joshua Brown: Where Is Everybody?

    Cullen Roche: A New Way of Thinking About the Global Machine…

    Be sure to follow me on Twitter.

  • Cognizant Technology Solutions Plunges, But It’s Not a Buy Yet
    Posted by on May 7th, 2012 at 2:49 pm

    One of my favorite companies is Cognizant Technologies Solutions ($CTSH). Note that I didn’t say it’s one of my favorite “stocks.” Being a great company and a great stock aren’t necessarily the same thing.

    Cognizant has made its mark by running computer call centers in India. This has been a hugely profitable business for them. Check out this growth in EPS since 2005: 53 cents, 78 cents, $1.15, $1.44, $1.78, $2.37 to $2.85. That’s exactly what I like to see–big increases each year.

    We had the stock on our Buy List in 2009 and it made 151% for us. But at the end of the year, I thought the stock had become far too expensive at $45 and removed it from the Buy List. For comparison, the company had earned $1.78 per share that year.

    Even though I got out early, I didn’t complain. By the end of 2010, Cognizant had run up to $73. By April 2011, CTSH was over $83 per share, meaning it had nearly doubled from a price I thought was too expensive.

    This is always the trouble spot for investors. Momentum runs it higher, but anyone with a basic understanding of math can tell you the stock is in trouble. The only question is when. As long as there’s no bad news, the good times can last.

    That came to an end today. Cognizant announced that it’s lowering its full-year guidance…are you sitting down?

    About 2%.

    So the shares are down around 20%. In other words, all the air that had gone into inflating the stock is leaving despite the actual news not being that bad. To be more precise, Cognizant lowered its full-year estimates from $3.69 to $3.62 per share.

    The company failed to grow as fast as it had expected, especially in the financial services and pharmaceutical sectors, President Gordon Coburn told Reuters.

    The banking sector – which brings in a quarter of Cognizant’s revenue – was flat in the first quarter for the company, hurt by softness among top North American clients.

    “In North America … the incredible volatility many of our (banking) clients are seeing right now is causing them to pause,” CEO Francisco D’Souza said on a conference call.

    The company counts J.P. Morgan Chase & Co, Rabobank and UBS AG among its core banking clients.

    Cognizant said it expects its banking and pharmaceutical sectors to remain sluggish for the rest of the year.

    I wouldn’t jump in just yet, but if CTSH can prove that it’s still growing at a rapid clip, I think this could be a very good buy.

  • The Yen’s Impact on AFLAC’s Earnings
    Posted by on May 7th, 2012 at 1:11 pm

    I’ve been watching AFLAC‘s ($AFL) investor presentation. Since so much of AFLAC’s business is generated in Japan, the yen-to-dollar exchange rate can add or detract to the company’s bottom line.

    To their benefit, AFLAC prefers to gauge their performance before the impact of currencies. Here’s how it works: The stronger the yen, the more it helps AFLAC. Last quarter, the exchange rate added four cents to AFLAC’s earnings.

    The average exchange rate last year was 79.75. If that holds true for 2012, AFL sees full-year earnings between $6.46 and $6.65.

    If the exchange rate is 70, AFLAC estimates that will add 60 cents per share to 2012’s bottom line. If it’s 75, that will add 27 cents per share. At 80, it’s minus one penny. At 75, it’s minus 25 cents per share.

    The latest exchange rate is 79.9460. I don’t anticipate this being a major issue for AFLAC this year, but I wanted investors to know the dynamics because this can have a big impact on their business.

    On May 15th and 16th, the company will have more to say about guidance for 2013.

  • Sysco Earns 49 Cents Per Share
    Posted by on May 7th, 2012 at 9:10 am

    First-quarter earnings season will soon be coming to a close, but there are still a few key reports left. This morning, Sysco ($SYY) reported adjusted earnings-per-share of 49 cents. Although that was five cents better than Wall Street’s consensus, Sysco’s CEO said the earnings “fell short of our expectations.” It was a one-penny increase over last year.

    Let’s dig into the numbers a bit. Sales rose 7.6% to 10.5 billion which is a record for the company. The March quarter was Sysco’s fiscal third. For the first three quarters of the fiscal year, Sysco has earned $1.50 per share compared with $1.38 last year.

    Sysco said that food cost inflation is running at 5.5%. I think it’s interesting to note that commodity inflation tends to weigh heavily on low-income consumers. Sysco noted that inflation in meat and poultry is over 10%. The company also said that foreign currency exchange rates knocked 0.2% off their sales growth.

    Last November, Sysco raised the quarterly dividend by one penny to 27 cents per share. That was the 42nd-straight annual dividend increase. I don’t know if they’ll raise their dividend again this year. I’m assuming they will to keep the streak alive, but it will most likely be another one-penny increase.

    The important part is that Sysco is clearly able to cover their dividend. A dividend decrease is certainly not in the works. Going by Friday’s close, Sysco yields 3.87%.

  • Morning News: May 7, 2012
    Posted by on May 7th, 2012 at 5:57 am

    Greek Election Gridlock Raises Risk for Bailout, Euro Future

    Hollande Signals Return of France as Complicated Ally for West

    Swiss Stocks Fall After Elections; Roche, Swiss Re Drop

    European Elections Hit Asian Markets

    Spanish Banks Resist Idea of ‘Bad Bank’ Bailout

    Indonesia 1Q GDP Growth Slows; Central Bank May Be On Hold

    U.S. Treasury Sells $5 Billion of AIG Stock

    Stock Trading Is Still Falling After ’08 Crisis

    UBS Bets on Toxic Debt Demand After Fed’s Record Sale

    Buffett Says Berkshire Will Top $34 Billion Railroad Deal

    AT&T Making Big Investment in Home Monitoring

    Satellite Firm Spurns Bid for Takeover From Rival

    Global Bakery Giant CSM Jumps on Shift From Bakery Supplies

    Study Says Broker Rebates Cost Investors Billions

    Jeff Carter: Entrepreneurship is Merit Based

    Stone Street: Some Lingering Thoughts/Observations Economic and Otherwise

    Be sure to follow me on Twitter.

  • “Twelve Facts That May Surprise You About the Housing Bust”
    Posted by on May 4th, 2012 at 3:36 pm

    Nick Timiraos has a great post at the WSJ’s Real Estate blog which summarizes the findings of an academic paper. Here are 12 facts about the housing bust that may surprise you:

    Fact 1: Resets of adjustable-rate mortgages did not cause the foreclosure crisis.

    Fact 2: No mortgage was “designed to fail.” Instead, the products weren’t designed to sustain a drastic decline in home prices.

    Fact 3: There was little innovation in mortgage markets in the 2000s.

    Fact 4: Government policy toward the mortgage market did not change much from 1990 to 2005.

    Fact 5: The originate-to-distribute model was not new.

    Fact 6: MBS, CDOs, and other “complex financial products” had been widely used for decades.

    Fact 7: Mortgage investors had lots of information.

    Fact 8: Investors understood the risks.

    Fact 9: Investors were optimistic about house prices.

    Fact 10: Mortgage market insiders were the biggest losers.

    Fact 11: Mortgage market outsiders were the biggest winners.

    Fact 12: Top-rated bonds backed by mortgages did not turn out to be “toxic.” Top-rated bonds in collateralized debt obligations (CDOs) did.

    Here’s the paper.

  • NFP = +115,000
    Posted by on May 4th, 2012 at 8:44 am

    Another tepid jobs report. The economy created just 115,000 new jobs last month. The unemployment rate is down to 8.1%.

    Since February 2009, the economy has created 152,000 new jobs. Between January 2008 and February 2010, the economy lost 8.779 million jobs. We’ve made back 3.745 million (or 43%).

    The jobs market peaked 12 years ago when the unemployment rate hit 3.8%. Since then, the civilian non-institutional population has grown by 30.766 million while the labor force has grown by just 11.614 million. The number of employed is up by 4.595 million and the number of unemployed rose by 7.019 million.

    For us to have the same jobs-to-population ratio as 12 years ago, we’d need to have 15.324 million more jobs, or 23.669 million fewer people.

    The number of Americans either unemployed or not in the workforce now stands at a staggering 101 million. That’s an all-time record.

  • CWS Market Review – May 4, 2012
    Posted by on May 4th, 2012 at 5:43 am

    Vanessa: I said the market fluctuates. Remember?
    Jerry: Look, Vanessa, of course the market fluctuates. Everybody knows that. I just got fluctuated out of four thousand dollars!
    — Seinfeld

    In the CWS Market Review from five weeks ago, I told you to expect the stock market to enter a holding pattern, and that’s pretty much what’s happened. The S&P 500 has spent most of the last month bouncing between 1,375 and 1,405. The index has stuck its head outside that range a few times, but not by much.

    There are two reasons causing this trading range: uncertainty about jobs and uncertainty about earnings. The two, of course, are connected and becoming more so every day. In this week’s CWS Market Review, I want to focus on the market trends hiding just beneath the surface. Investors need to understand that in a seemingly quiet market, a lot is going on behind the scenes.

    I’ll also take a look at some of our recent Buy List earnings reports. We had some good reports from stocks Nicholas Financial ($NICK) and Fiserv ($FISV). We also got another dividend hike from Reynolds American ($RAI). The tobacco stock now yields more than 5.8%. This is exactly why we focus on high-quality stocks.

    Investors Are Getting Nervous About the Economy

    This has turned out to be a decent earnings season. Not a great one, but a decent one. It’s especially good considering how nervous analysts were going into April. For the most part, the corporate world has proved them wrong.

    The latest numbers show that 375 of the 500 companies in the S&P 500 have reported earnings. Of that, 258 have beaten expectations (68.8%), 79 have missed (21.1%) and 38 have matched (10.1%). Although the earnings “beat rate” is quite high by historical standards, it has quietly slid down over the past several days.

    The jobs outlook is still quite bleak. The government is due to report on the labor market on Friday morning. Wall Street doesn’t expect much good news, and that’s probably what they’ll get. The equation is simple: More jobs means more consumers which means more revenue. Companies have done a great job growing earnings by cutting costs, but now they need more customers.

    The big change that’s happened over the last three months is that cyclical stocks have trailed the market. These are the stocks that are most closely tied to the fortunes of the economy. Since February 3rd, the release day of the January jobs report, the S&P 500 has gained 3.5%, but the Morgan Stanley Cyclical Index (^CYC) has shed 3.4%. This tells me that investors have become more concerned about the health of the economy. The last few jobs reports have been disappointing, plus last week’s GDP report wasn’t much either. On Thursday, we learned that the ISM Services Sector index dropped to its lowest level since December.

    Don’t get me wrong: This doesn’t mean that the economy is about to spill over into a recession. We’re still a long way from that. But it does mean that the stock market may wind up spinning its wheels for a while more. Some conservative investors have already jumped ship; the 10-year Treasury just fell to its lowest yield since late February. The yield has now been below 2% for 15 days in a row.

    What’s happening is that the market is becoming much more judgmental. If a stock even hints that there might be bad news, it can take a beating. Just look at what happened to Green Mountain Coffee ($GMCR) this week. This also tells us why some of our stocks reacted poorly this week even after beating expectations.

    Our Buy List Earnings Reports

    Now let’s take a look at the recent earnings report for our Buy List. Our theme this week was “good results followed by a lower share price.” Let me assure you: It’s frustrating when this happens but it’s an important part of not following the crowd, and that’s a much safer strategy in the long run. I advise you not to get discouraged. Our stocks are poised to fare much better in the weeks ahead.

    Moog ($MOG-A) is a perfect example of a “good news/bad market” stock. Last Friday, the company reported very good earnings (77 cents versus an estimate of 75 cents). Moog also reiterated its full-year outlook for $3.31 per share. The stock, however, plunged below $37 at the open. The market then regained its sanity. Moog rallied strongly and came close to breaking $43 per share. That’s a one-day turnaround of more than 16%. Still, you can see that the market bears were ready to pounce—they didn’t even need those pesky “facts” to get in their way. I rate Moog a very good buy up to $50.

    Fiserv ($FISV) had the second-strangest response to earnings. Last week, I said that I was concerned that Wall Street’s earnings estimate for Fiserv might be too high. If so, the stock might pull back to a good entry point. I’m glad to say that I was wrong about the earnings, but the stock fell anyway. For the first quarter, Fiserv earned $1.20 per share which was five cents better than Wall Street’s estimate.

    Fiserv also reiterated its full-year guidance of $5.04 to $5.20 per share. Who can complain about that? Sure enough, the stock gapped lower on Wednesday morning after the announcement. The shares have since stabilized around $69 per share. Now that I’ve seen the earnings, I’m much more confident about Fiserv. The stock is an excellent buy anytime you see the shares below $75.

    Last week, I said that I don’t expect Ford ($F) to stay under $12 for much longer. The stock is now below $11. No matter; I still like the story here. The company had another good earnings report—its 11th-straight quarter of operating profits. For Q1, Ford earned 39 cents per share which was four cents more than estimates. This is a good example of the stock market turning against cyclical stocks. There’s no hint of a slowdown here. Ford said it expects profits in North America to be significantly higher than last year. I think Ford can finish this year above $15 per share.

    Harris ($HRS) had your classic good news/bad news week. On Tuesday, the company reported quarterly earnings of $1.39 per share which was six cents more than estimates. They also narrowed their full-year EPS guidance from a range between $5.10 and $5.30 to a new range between $5.15 and $5.25.

    That was the good news. The bad news was that Harris also lowered their 2012 revenue guidance from $6 billion to $5.45 billion. Harris offered initial EPS guidance for 2013 of $5.10 to $5.30. Honestly, that’s not very impressive. The stock took a beating and closed Thursday below $42 per share. The best news, however, is that Harris is finally selling their broadcast business which has been a major drag on earnings.

    As disappointed as I am in the lower revenue guidance and tepid earnings outlook, Harris is a remarkably inexpensive stock. The shares are going for roughly eight times earnings. Harris is a solid buy up to $45.

    Last week, I said that Wright Express ($WXS) is our “best candidate for an earnings beat.” The company reported earnings of 91 cents per share which was a penny better than estimates. But the stock got smacked around after Wright said that earnings for Q2 would range between 92 and 98 cents per share. The Street had been expecting $1.08 per share. On Thursday, Wright got as low as $58 per share.

    I think traders are missing the big picture with Wright. The company made a point that it’s sticking with its full-year guidance of $4.10 to $4.30 per share. The company also raised its revenue guidance for the year from $590 million – $610 million to a new range of $602 million – $617 million. Even if Wright hits the low end of its earnings forecast, the stock is going for a good price. Wright Express is a strong buy up to $65.

    My favorite micro-cap, Nicholas Financial ($NICK), reported fiscal Q4 earnings of 50 cents per share. That brings their fiscal year earnings to $1.85 per share. The stock had been acting a little nervous going into earnings but the good earnings should settle some nerves. The quarterly dividend is currently 10 cents per share and I’d like to see a big hike soon, perhaps to 15 cents per share. Nicholas Financial is a great buy below $15.

    Reynolds American Now Yields 5.82%

    Two weeks ago, I said that Reynolds American ($RAI) could raise its quarterly dividend from 56 cents to 60 cents per share. Well, I was close. The board just raised the dividend to 59 cents per share. I had said that I wasn’t too concerned about Reynolds beating or missing its earnings by a penny or two because the important aspect of the stock is the dividend. That’s why I’m pleased to see this dividend increase. Going by the new dividend, Reynolds now yields 5.82% which is close to double a 30-year Treasury bond.

    We’re almost done with earnings season, but we have three more Buy List stocks due to report next week. Sysco ($SYY) will report on Monday, May 7th. DirecTV ($DTV) follows on Tuesday. Then CA Technologies ($CA) will report on Thursday, May 10th.

    I’ll be especially interested to hear what CA Technologies has to say. The last earnings report crushed estimates and the company raised their full-year forecast. CA also increased its dividend by five-fold. For Thursday, Wall Street expects earnings of 52 cents per share.

    One quick note on Bed Bath & Beyond ($BBBY). The stock got nicked on Thursday due to some collateral damage from the plunge in Green Mountain. The coffee stock has a big presence inside of BBBY’s stores. But the falloff in GMCR is more about that stock being overpriced rather than any weakness in BBBY’s business.

    That’s all for now. Stay tuned for more earnings reports next week. 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