Reynolds American Earns 67 Cents Per Share
Posted by Eddy Elfenbein on July 22nd, 2011 at 10:15 am

In this week’s CWS Market Review, I said that Wall Street’s earnings estimate for Reynolds American ($RAI) was probably too high. The company just reported second-quarter earnings of 67 cents per share, four cents below estimates.

Cigarette maker Reynolds American says its second-quarter profit fell more than 10 percent on charges related to a legal case and costs related to plant closings.

Excluding those charges, the nation’s second-biggest tobacco company said its profit rose 2 percent as higher prices and smokeless tobacco gains offset cigarette volume declines.

The maker of Camel, Pall Mall and Natural American Spirit brand cigarettes says its net income fell to $304 million, or 52 cents per share, for the period ended June 30. That’s down from $341 million, or 58 cents per share, a year ago.

Adjusted earnings were 67 cents per share. Analysts expected 71 cents per share.

Revenue excluding excise taxes rose less than 1 percent to $2.27 billion, beating analyst estimates for the Winston-Salem, N.C., company.

The stock gapped down this morning which brought the yield close to 6%, but it’s starting to recover.

CWS Market Review – July 22, 2011
Posted by Eddy Elfenbein on July 22nd, 2011 at 8:03 am

Get ready! Earnings season is stepping into high gear and so far, Wall Street likes what it sees. Truthfully, this shouldn’t be much of a surprise but traders have been so overwhelmed by reasons to be fearful this summer.

The financial media bears much of the blame. Every day we’ve been bombarded with panicked headlines: “Debt Ceiling! Greece! Default! Spain! Ireland!” Meanwhile, I’ve been quietly counseling investors to focus on the most important word, “Earnings!” So far, the earnings have been quite good. It’s still early but earnings growth for this quarter is running at 17%, and 86% of the companies have topped Wall Street’s estimates. As I said in last week’s CWS Market Review, this earnings season may be an all-time record.

So much of successful investing is nothing more than tuning out the short-term noise and concentrating on fundamentals. Remember, it was only a month ago that Oracle ($ORCL), one of the stocks on our Buy List, dropped 4% on a good earnings report. Since then, the stock has rallied and is higher now than before the earnings report (as of Thursday’s close). Jos. A. Bank Clothiers ($JOSB) has also gained back much of what it lost after it missed Wall Street’s estimate by the frightening amount of one penny per share.

I’m very pleased to see renewed strength in the financial sector. On Thursday, the financials had their best day of the year. Since JPMorgan Chase ($JPM) reported earnings earlier this month, the stock is up nearly 7%. I’m also happy to see AFLAC ($AFL) showing a little life. Their earnings are due out this Wednesday and I’m expecting very good news. I’ll have more on that in a bit.

Between Tuesday and Thursday of this week, the S&P 500 rallied nearly 3%. We’re now within striking distance of our April 29th high of 1,363.61. If we were to break that, we would set a new three-year high for the stock market. The fact is that the metrics continue to lean heavily towards equities. Bloomberg noted that return-on-equity for the S&P 500 is running at 24% while borrowing costs are running at 3.61%. That’s stunning. This wide spread will probably lead to more M&A activity and you can be sure that that will help the small-stock and value sectors.

Let’s recap some of our recent earnings reports from our Buy List.

First up is Stryker ($SYK). After the close on Tuesday, the company reported earnings of 90 cents per share which matched Wall Street’s forecast. Stryker also reaffirmed its full-year forecast of $3.65 to $3.73 per share. Despite what I thought were good numbers, traders brought down the stock by 3.8%. The problem is that sales of orthopedics weren’t as strong as analysts predicted. This is to be expected since these are pricey procedures and the recession is still hurting many folks. However, I’m not at all concerned. Stryker continues to be a very compelling buy.

On Wednesday morning, Abbott Labs ($ABT) reported quarterly earnings of $1.12 per share. That makes for seven quarters in a row that Abbott has beaten Wall Street’s forecast by a penny per share. The best news is that the company raised its full-year earnings forecast. The previous EPS range was $4.54 to $4.64, and the new range is $4.58 to $4.68. True, it’s not a huge increase but it’s still good to see. The CEO said, “Abbott is well-positioned for a strong second half of the year as we remain on track for double-digit EPS growth in 2011.”

Shares of Abbott initially sold off on Wednesday morning, but they eventually gained much of it back. In fact, ABT isn’t too far from making a new 52-week high. Going by Thursday’s close, the stock yields 3.62%, which is pretty impressive considering that the dividend has grown by 128% over the past decade. This is another solid stock and I’m keeping my buy price at $54.

On Tuesday, Johnson & Johnson ($JNJ) reported Q2 earnings of $1.28 per share. Wall Street had been expecting $1.24 per share, and I thought it could have been as high as $1.30. The results were hampered somewhat by the sluggish economy and by generic rivals. JNJ also reiterated its full-year EPS forecast of $4.90 to $5. I would have liked to see the company raise guidance as ABT had. Even though they didn’t, I think they’ll have little trouble hitting their guidance. The shares have been pretty steady lately. Based on Thursday’s close, the stock yields 3.43%. JNJ is about as blue chip as you can get.

The coming week is going to be very busy for our Buy List. Reynolds American ($RAI) reports on Friday. Then on Tuesday, Ford ($F), Fiserv ($FSV) and Gilead Sciences ($GILD) report. AFLAC ($AFL) follows on Wednesday, and Deluxe ($DLX) reports on Thursday.

I’ll only make some brief comments here but you can check the blog for more details. Reynolds is expected to earn 71 cents per share which may be slightly too high. Still, they should show an earnings increase. The company has already said to expect full-year earnings between $2.60 and $2.70 per share and that seems very doable. Reynolds is already an 18% winner on the year for us. The stock currently yields 5.5% which makes it a very good buy.

Three months ago, AFLAC said to expect second-quarter operating earnings to range between $1.51 and $1.57 per share. Despite the problems in Japan and Europe, AFLAC should report very good numbers. My analysis shows earnings coming in between $1.60 and $1.65 per share. The company has been benefiting from favorable exchange rates. For the full-year year, the company sees earnings between $6.09 and $6.34 per share. That means AFLAC is currently going for less than eight times earnings. I don’t see why AFLAC isn’t at least $10 higher.

I’ll be very curious to see what Fiserv and Gilead have to say. Fiserv missed earnings last quarter, but they kept their full-year forecast unchanged. Gilead is an odd case because the last earnings report was a complete dud. The stock, however, has been doing very well lately and it just broke out to a new 52-week high. Even though Gilead’s earnings were poor, the stock was so cheap that it apparently limited our downside. Ford has had a lot of trouble this year, but the company seems to have righted itself. Wall Street currently expects Q2 earnings of 60 cents per share. My numbers say Ford can hit 70 cents per share.

That’s all for now. Be sure to keep visiting the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

Morning News: July 22, 2011
Posted by Eddy Elfenbein on July 22nd, 2011 at 7:30 am

Early Signs Show Positive Reaction to Greek Deal

Europe’s Biggest Banks Face $30 Billion Greek Writedown

After a Deal, Only More Challenges

Oil Tops $100 For First Time Since Early June

Frank Says Cutting Funds to Regulators Is ‘Worst of All Worlds’

Obama, Boehner Press for Broad Debt Deal

Venture Funding for Social Media Jumps in Q2

Antitrust Hurdles Seen for Merger of Drug Benefit Managers

Morgan Stanley Comes Up Golden

GE’s Earnings Rise 21%

Microsoft 4Q Profit Climbs, Windows Revenue Dips

Express Scripts, Medco Bankers May Receive $120 Million

TomTom Hit by Shrinking Demand

Stone Street: Robert Schiller: A Lot of What Happens in Markets is Driven by Pure Stupidity

James Altucher: Life Tastes Best When You Eat What You Kill

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Flowers Foods +20,000%
Posted by Eddy Elfenbein on July 21st, 2011 at 2:02 pm

I like to talk about little-known stocks that have done incredibly well for investors. Last June, I highlighted Flowers Foods ($FLO).

Now let’s look at some results. Thirty years ago, you could have picked up one share of FLO for about 17 cents (that’s adjusted for ten, yes ten, 3-for-2 splits). Today the stock is going for about $25 so that’s a gain of over 14,000% or more than 18% a year. That doesn’t include a dividend which usually yields between 2% and 4%.

Speaking of which, the company just raised its quarterly dividend by 14%, raising it from 17.5 cents a share to 20 cents a share. Going by the new dividend, the stock now yields about 3.2%.

In February, Flowers said that it expects 2010 EPS to increase by 10% to 15% over 2009’s total which came in at $1.38. That translates to a target of $1.52 to $1.59. They reaffirmed this guidance last month as well.

I don’t think Flowers is a take-it-to-the-bank buy right here, but I’d love to see it drop to around $20 a share. This is definitely one to watch.

What do I know? The stock never pulled back to $20, though in August it dipped below $23. From there, the stock surged. It split 3-for-2 last month and is currently at $23 again — meaning that’s a 50% gain in a little over a year. The stock also raised its dividend by another 13%. That brings the 14,000% that I mentioned last year to over 20,000% today.

Here’s a description of the company from Hoovers:

Look for Flowers Foods in your breadbox, not your garden. The company is one of the largest wholesale bakeries in the US. Flowers Foods produces, markets, and distributes fresh breads, buns, rolls, corn and flour tortillas, and sweet bakery goodies to retail food and foodservice customers in the western, southern, and northeastern US. The company’s brand names include BlueBird, Cobblestone Mill, and Nature’s Own. Flowers Foods makes snack cakes, pastries, donuts, and frozen bread products for retail, vending, and co-pack customers nationwide. It also rolls out hamburger buns for national fast-food chains. Building on its brand portfolio, Flowers Foods acquired Tastykake pastry maker Tasty Baking in mid-2011.

Larry Summers on Tech Valuations
Posted by Eddy Elfenbein on July 21st, 2011 at 11:39 am

Larry Summers can be called many things. Dumb ain’t one of them. This is what he says of tech valuations:

If you look at the price earnings ratio for technology companies relative to the price earnings ratios for all industrial companies, you take that ratio, PE technology divided by PE industrial, you can plot that ratio over the last 40 years, and it is at the lowest point that it’s ever been.

This is what he has to say of his portrayal in the movie, The Social Network:

One of the things you learn as a college president is that if an undergraduate is wearing a tie and jacket on Thursday afternoon at three o’clock, there are two possibilities. One is that they’re looking for a job and have an interview; the other is that they are an asshole.

(Via Arnold Kling)

Buy List Earnings Calendar
Posted by Eddy Elfenbein on July 21st, 2011 at 11:27 am

Here’s a look at some of the upcoming earnings reports for our Buy List stocks. I haven’t included Nicholas Financial ($NICK) or Leucadia National ($LUK) since they’re not currently followed on Wall Street.

Reynolds American Earnings Preview
Posted by Eddy Elfenbein on July 21st, 2011 at 9:46 am

From AP:

Reynolds American Inc., the second-biggest U.S. cigarette company and the maker of Camel brand products, is expected to report rising profit despite lower revenue when it releases its second-quarter results before the stock markets open Friday.

Americans are continuing to buy fewer cigarettes as they face rising taxes and greater smoking bans, health concerns and social stigma.

WHAT TO WATCH FOR: Investors will be looking for signs that growth in Reynolds American’s Pall Mall brand will continue. The company, based in Winston-Salem, N.C., has promoted Pall Mall as a longer-lasting and more affordable cigarette. It says half the people who try the brand continue using it as they weather the weak economy and high unemployment. Reynolds also sells Natural American Spirit cigarettes, and Kodiak and Grizzly smokeless tobacco.

Pall Mall’s first-quarter volume grew 16 percent, and its share of the U.S. market increased 2 points to 8.5 percent. Camel volumes were stable and its share of the cigarette market rose slightly to 7.8 percent. But the company’s other brands are dragging down overall volumes, which fell about 5 percent in the first quarter.

Analysts also will look at the company’s smokeless tobacco products — a segment of the tobacco industry that’s growing and becoming increasingly competitive as companies fight the decline in cigarette sales. Reynolds American’s smokeless volumes grew 13.2 percent last quarter, and its market share grew 1.3 points to 31.1 percent of the U.S. market.

Altria Group Inc., the largest U.S. tobacco company and parent of Marlboro maker Philip Morris USA, said Wednesday that, while cigarette sales fell slightly, it was getting higher prices. Altria’s top-selling Marlboro brand lost 0.2 points of market share to end up with 42.6 percent of the U.S. market, but it sold about 1 percent more of the brand.

WHY IT MATTERS: Reynolds American’s results will help reveal key tobacco industry trends in the U.S.

Continued strength from Pall Mall could mean smokers are still switching to cheaper brands to save money, and those who tried the brand during the recession are remaining loyal. But if volumes of premium brands like Camel are rebounding, that could signal consumers are adjusting to higher prices on cigarettes following federal and state tax hikes.

WHAT’S EXPECTED: Analysts expect Reynolds American to report adjusted earnings of 71 cents per share, which would be equivalent to $1.42 if not for a stock split the company conducted Nov. 16. Analysts expect Reynolds American to report revenue of $2.1 billion, according to FactSet.

LAST YEAR’S QUARTER: Reynolds American reported adjusted income of $1.32 per share. Its revenue was $2.24 billion, excluding excise taxes.

Icahn’s Bid for Clorox
Posted by Eddy Elfenbein on July 21st, 2011 at 8:53 am

I love me a good old-fashioned bidding war. That’s why I’ve become intrigued by Carl Icahn’s bid for Clorox ($CLX). For one, Clorox is one of those stable old-line consumer products companies that I like. You can project earnings pretty clearly—or at least more clearly than you can with other companies.

On Friday, Icahn bid $76.50 per share for the Clorox. The stock had closed on Thursday at $68.43 so Icahn was offering a very generous premium (11.8%).

What’s interesting is that Icahn isn’t even interested in buying the company. He already owns 9.4% and he’s more interested in getting a bidding war started between other consumer products companies. Icahn even suggested potential buyers. (Here’s his letter.)

On Friday, shares of $CLX closed at $74.55, which is short of Icahn’s offer. This means that investors are doubtful that a bidding war will start. In any event, Clorox’s board shot back saying that it had no interest in Icahn’s bid (“Our board has unanimously determined Mr. Icahn’s unsolicited proposal is neither credible nor adequate.”)

This is one of those tricky areas because the board is supposed to be working for the benefit of shareholders. As a result, the board’s position has to be that a nice premium (albeit hostile) for shareholders isn’t in their best interest. Theoretically, that can make sense. Still, it’s a lot of money to leave on the table.

Then Icahn responded with a higher bid, $80 per share (check out Carl’s letter; he goes into ALL-CAPS mode). Although it’s more than the original, I doubt that will be enough to get the board to change its mind. Perhaps it will convince them that Icahn is serious.

In my opinion, these bids over-value Clorox. Wall Street currently expects the company to earn $4.06 per share this fiscal year (which ends next June). That values CLX at nearly 20 times forward earnings. That’s just too rich.

I hate watching boards shoot down offers of over-payment. I doubt an offer like this will come again soon. I’m not sure any competing bids will come along, and Icahn may be forced to pull his offer. If I were a CLX shareholder, I’d get out of the stock right now.

Morning News: July 21, 2011
Posted by Eddy Elfenbein on July 21st, 2011 at 7:41 am

Euro Leaders Start Talks on Sovereign Debt Crisis

Chinese Manufacturing Set to Contract

Why The Debt-Ceiling Brawl Hasn’t Rattled Bonds, Yet

Polish Government’s Funding Costs Fall Below Spain’s in 10-Year Bond Sale

China Risks Inflation, Property Price Bubble: IMF

European Bank Bets Crush Returns for Managers

U.S. Consumers Denied Auto, Card Loans to Get Free Copies of Credit Scores

Travelers Swings to Loss on Record Catastrophe Costs

Nokia Posts Loss as Sales Drop

Whirlpool Swings To 2Q Loss On Charge, Lower North America Sales

PepsiCo Net Income Rises 18% on Snack Sales

Express Scripts To Buy Medco Health For $29.1B >ESRX

Roche Raises Full-Year Outlook; Sees Core Earnings Per Share Up About 10%

Howard Lindzon: Zillow…The Disruption Continues

Joshua Brown: “Is Gold Money?” No, It’s an ETF.

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A Look at Apple’s Blowout Earnings
Posted by Eddy Elfenbein on July 20th, 2011 at 9:41 am

All eyes on Wall Street seemed to be focused on Apple‘s ($AAPL) earnings report. Once again, the company did not disappoint. Apple earned an astounding $7.79 per share for the second quarter.

It’s almost difficult to put these numbers into context. Shares of Apple are up over 60-fold in a little over eight years. That means that the shares have doubled, on average, every 17 months.

If you had bought Apple 13 years ago, you’d now be making all of your money back every three months. That means the company made more money in the second quarter than the entire company was worth in 1998.

Here’s a look at Apple’s share price along with its trailing 12-month earnings-per-share. The blue line is Apple’s stock and it follows the left scale. The yellow line is earnings and it follows the right scale. The two lines are scaled at a ratio of 20-to-1, so whenever the lines cross that means Apple’s P/E Ratio is exactly 20.

There’s no deep reason why I chose a ratio of 20. It just seemed to provide the graph the best fit. The red line is Wall Street’s forecast. The problem is that yesterday’s earnings report was so strong that it made a joke of Wall Street’s forecast, so please don’t pay too much attention to the red line. I expect to see those projections increased dramatically.

I also think it’s interesting that Apple’s earnings growth was barely dented by the recession. Also, the stock’s valuation is hardly extreme, at least based on earnings. Just a month ago, Apple closed at $315 per share which was less than 13 times earnings.