1/31/2015 0 Comments
Visa reported Q4 revenue of $3.382 above consensus $3.34 - $3.38. Visa's Q4 EPS was $2.53 above consensus $2.50 - $2.51. Visa's results were solid, with expanding margins and attractive returns. Visa is bullish on the Apple Pay business. Visa also mentioned there would be more token-based electronic payment services offered in 2015. Visa is trading at 23x forward earnings, which is not excessive relative to it's own historical pe and relative to Visa's long-term earnings growth potential of 16%. Apple appears more attractive at 11x though.
Another interesting part of Visa's conference call was about the drop in gas prices and it's impact on household spending. Visa said gas prices have dropped 30% since June. Each household saves an average of $60 per month due to this drop in the price of gas. Visa says that their surveys show 50% of the energy savings is being saved, 25% is being used to pay down debt, and 25% is being spent at grocery stores, clothing stores, and restaurants. Visa also mentioned that they expect an increase in spending related to the energy savings in the discretionary industries of home improvement, electronics, and travel & entertainment.
There are many reasons to worry about this market: Russia, Greece, oil volatility and bond market mis-pricing Fed hikes are a few of the macro risks. I do think that oil will ultimately be a net positive for the U.S. economy, but with increased volatility in the short-term. The two factors which I am worried about now are the mis-pricing of Fed hikes and stagnant earnings growth.
The mis-match between the Fed Fund futures market and the Fed's own hiking expectations is concerning. If the bond market has a violent selloff due to a re-pricing of the timing of Fed rate hikes, this will also cause a selloff in equities. Now I don't think the Fed will repeat a 1994-like tightening. But I do think 1994 is helpful to understand the risks of a bond market which is mis-priced relative to the Fed's own hiking intentions. The S&P was only down -1.6% in 1994, but the S&P did have a top to bottom sell-off of -9.7% from Jan 31 (ironically) to April 4.
The second issue on my mind is earnings. The Q4 earnings which have been reported and expectations for those not reported yet sums to $29.51 for the S&P. This is only up 4.5% from Q4 2013. But it gets worst. Q1 earnings expectations are $27.98, up 2.4% and Q2 $29.99 up 2.2%. Obviously, energy is a huge part of this. The earnings of the energy sector was down -13.1% in Q4. Energy earnings is also expected to be down another -54.3% in Q1 and 51.8% in Q2. Is energy the only area of weakness? The table below shows the quarterly earnings growth of the S&P and sectors on a year-over-year basis.
So there are obvious pockets of weak growth in energy, financials, telecom and utilities. Where is the strength coming from? Health Care and Tech. The health care sector is probably pretty insulated from the oil shock and other macro economic issues. Tech on the other hand has more risk due to the more cyclical nature of it's business.
I am also concerned that the pickup in earnings growth in the second half of 2015 is more wishful thinking than credible forecasting. So if earnings growth has shifted down into the low single digit range, should the market multiple also contract? So far this year we have seen an expansion of the market multiple because the market is down -3.1%, but forward earnings expectations are down more.
The S&P sold off to as low as 2000, only 12 points from yesterday's low. The airlines are the worst performing industry with oil up +1.8%. Consumer staples are the weakest sector. This sector trades at a high valuation and is vulnerable to a stronger USD. The USD is up vs the EUR and the GBP. Can't blame the market's weakness on oil today (although CVX did suspend it's buy-back). Macro data on the weak-side and geopolitical risks seem to be the drivers of the sell-off. S&P bounced off of 2000, -1%, and rallied to be down only -0.3%, 2014, by lunchtime. Telecom and Materials are the sectors leading the rally. But the S&P cannot hold steady. It's drifted back down to -0.8% just after 1pm. It appears that the majority of shorts covered yesterday and the market is searching for support. Industrials have joined staples to lead this afternoon leg down. Airlines are still getting hit hard, -2.4%, with oil up +2.3%. The S&P has rallied back to unchanged and is attempting to turn positive before the last hour of trade. Crude oil up 5%, airlines at the LOD. -3.1%. The S&P did turn positive up to +0.1%, but quickly fell back into the red, down -0.6% going into the last hour. Complete breakdown into the close!
1/30/2015 0 Comments
Abbvie ABBV reported a very messy Q4 report. There are many GAAP to non-GAAP adjustments for the Shire breakup fee and restructuring costs included in cogs, r&d and sg&a. If you make all these adjustments, the numbers don't look too bad. Reported revenue of $5.452B includes a one-time royalty payment 0f $81M resulting from a lawsuit settlement. Adjusted revenue of $5.371B was just within the consensus area of $5.37B - $5.42B. Cost also have to be adjust for several items. After all this, margins appear to have expanded. I don't see anything here that would change the long-term growth expectations for EPS to grow at 15%. The stock looks attractive at 16x forward eps. Conference call starting now. 2015 GAAP EPS guidance of $3.91 - $4.11 imply more margin expansion off of revenue consensus estimate of $23.3B.
Greece suffering from capital flight. At least the Greek stock market is up today. The FTSE/Greece is almost back down it's 2012 low.
How about Russia? Are they doing much better? Today the Russian Central Bank cut it's key interest rate by 2%, from 17% to 15%. Just last month the Russian Central Bank raised it's key rate to 17% from 10.5%. The Russian Central Bank must be getting pressured from Putin to ease. The fall in the ruble has been staggering.
It's no wonder S&P futures are down -0.5%. Oil is up today so far. That's one positive. Looks like today is back to geopolitically driven volatility. The S&P has had several 2+% intraday swings over the past month. This increased volatility is a bearish cue.
Biogin Idec (BIIB) reported Q4 revenues of $2.641B in-line with consensus, $2.644B. Biogen provided 2015 revenue growth guidance of 14% - 16%. Biogen is up +7.1% AH. Even though revenue guidance is below consensus, the stock is up because the non-GAAP EPS guidance is above consensus. Biogen guided non-GAAP EPS to $16.60 - $17.00 while the consensus is $16.38. This implies a significant expansion in margins led by a 200 bps drop in sg&a as a percent of revenue. So revenue guidance below, but eps above. The stock is 7.1%, so the market appears to overlook the weak revenue guidance in favor of the strong earnings guidance.
If the market can hold these gains through the close, I would take that as a short-term bullish sign. Utilities sector still leading. I would like to see that shift to discretionary or materials. The S&P bounced off of 1988/1989 twice so far this month. If it tests that level a third time, there will be no bounce. So far the bounce is holding. The last hour of trading will be a good tell to the underlying strength in the market.
Alexion (ALXN) reported Q4 revenue of $599M above consensus. Q4 non-GAAP EPS of $1.30 also beat consensus. Alexion gave 2015 revenue guidance below consensus blaming a headwind of -5% on USD strength. Alexion also guided 2015 cogs, r&d and sg&a below 2014 as a percent of revenue, implying a margin improvement. Finally, Alexion guided to a much lower tax rate of 13%. The market has taken all of this to be a net positive, and ALXN is up +5.6%. I like ALXN as a buy on weakness.
The S&P has put together a significant bounce off of the 1989 low. I am using 2008 as a pivot. If the market is able to close above this level, then I will cover hedges and potentially start to rebuild longs. I am a bit suspect of this bounce because it has been led by the utility sector. This points more toward a rotation, not a short term bottom. If one or more of the cyclical sectors can lead the market higher, that would be much more bullish sign. Oil is still down over -1%, so I am inclined to wait and see if this can hold above 2008 before thinking about getting involved on the buy-side of this dangerous market.
1/29/2015 0 Comments
Celgene reported revenue of $2.086B in Q4, in-line with consensus. EPS of $1.01 was also in-line. Celgene did lower 2015 product sale guidance by $100M citing a currency headwind. Margin guidance was good. I view this stock as a buy on weakness.
If the S&P breaks 1988 today, the technical traders will want to test the 200 dma which is 1969. On the earnings from, a weak outlook from Qualcomm has the stock down -10%. Qualcomm sited a shift toward higher end phones (this means Apple) away from long-end phone (Samsung) as the reason for lower their revenue guidance for the second half of 2015.
Apple alone cannot keep this market up here. Energy sector in -2.6%. The S&P sold off to 1988 earlier in Jan. That is another -1.8% from here. I think the market might go down to test that level again.
Valuation is not an issue while earnings are growing, (10.8% 2013, 7.9% 2014), but the problem is earnings are not growing anymore. At 16.7x forward eps the market is vulnerable to any number of negative effects. Earnings growth, or the lack thereof, is one potential catalyst for a selloff. With an above average valuation, the market has little room to absorb a falloff in earnings growth. So I see one of 3 things happening. First, analysts could raise their earnings estimates. We know the estimates are probably going down and not up, so this seems unlikely. Second, the market could selloff to a more reasonable valuation more in-line with stagnant earnings growth. Third, the market could stay up at this valuation despite earnings growth of 2%. This last one sounds more like wishful thinking than a likely scenario.
Weak report from Gentex (GNTX). Auto sector must be weakening up. Or it is possible these guys are losing share to new ADAS competitors. Q4 revenue of $350.4M is well below consensus of $369M. EPS of 24 cents missed consensus of 30 cents. The mid-point of 2015 revenue guidance, $1.47B - $1.54B, is below consensus of $1.54B. Also guiding margins lower.
Gentex provided this 2015 guidance:
If you plug all these forecasts into the income statement, this implies EPS of $0.94, below consensus of $1.06. Not much to be positive about in this report.
Boeing had a stellar quarter, beating revenue and eps and guiding 2015 revenue above consensus. Q4 revenue of $24.46B was above consensus of $23.96B. Q4 EPS of $2.31 was well above consensus of $2.13. Boeing 2015 outlook for revenue is in the $94.5B - $96.5B range well above consensus of $93.3B. Q4 margins expanded. Great report. So airlines and aerospace and Apple (and suppliers) are strong.
McCormick reported Q4 revenue slightly below consensus, $1.174B vs $1.209. EPS of $1.16 was in-line with consensus. Guidance is weak though. McCormick blames a 3% currency headwind to revenue in 2015. McCormick's outlook is for sales to grow 4% - 6% in local currency not including a 3% fx headwind. The net revenue growth outlook is 1% - 3%. Consensus is for sales to grow 3.7%. Adjusted EPS guidance of $3.51 - $3.58 is also below the $3.59 consensus. Another victim of the strong USD. McCormick plans to cut cost and raise prices to offset mid-single digit growth in COGS.
The Greek stock market is getting pounded today. Not even Apply (AAPL) can stop it. This selloff is being attributed to the appointment of the new Greek Cabinet. In particular, the new finance minister, Yanis Varoufakis, is causing waves with his defiant tweets about Greek negotiations with its European creditors, the ECB and IMF. Varoufakis has questioned the European Union sanctions against Russia and has called Greece's bailout a trap. The new Greek Prime Minister, Alexis Tsipras, isn't backing away from his pre-election pledge to renegotiate the terms of Greece's bailout. Today is the third day down in a row for Greek stocks. Greece halted the sale of state assets and increased the minimum wage. The political posturing has begun.
Microsoft (MSFT) blamed currency as a -4% headwind to sales. Apple (AAPL) said currency was a -1% headwind. What's the diff? Are Microsoft and Apple sales coming from such different currencies? Did Apple make 3% of revenue trading fx? I highly doubt it. Some of the difference may be due to hedge practices, but I think Microsoft is hiding some soft sales numbers in the fx effect. The currency blame game is all too common this earnings season. Many companies are blaming currency for weak sales, but could it also be that sales are just plain weak?
I have never seen a company make so much money as Apple (AAPL). Nobody has because Apple must be the most profitable company ever. Don't forget they also make great products unlike the software stock who was the previous most profitable company, who had mediocre software (except excel), not mentioning any names. I don't think there was anything negative about Apple's quarter. Oh one thing, iPad units and asp was down. ASP rose on iPhone and Mac. Other than that, this company is striking on all cylinders. The best thing about Apple is you can still buy it for 10x forward earnings ex-cash.
Apple provided the following guidance for Q2:
If you plug these numbers into their income statement, the EPS comes out to $2.01 per share which also happens to be the consensus EPS estimate.
The S&P is trading at 16.7x forward eps. If you take Apple out, and several other cheap mega-cap tech stocks, the remaining market will be even more over-valued. Historical average multiple to forward earnings is 13.8x. The high multiple was not so bad when earnings were growing. S&P earnings grew 10.8% in 2013 and 7.9% in 2014. Now what are we getting? EPS growth of 2%. Take energy out and EPS growth jumps to 3% - 4%. Hardly a growth rate deserving 16.7x multiple.
Apple cannot keep this market up on its own. The only stocks that have reported great numbers so far this quarter are airline stocks, Apple and companies that do business with Apple. Everyone else seems to be struggling. Apple is a buy, but the market is a sell.
S&P futures were already in trouble, down -0.9%, before the terribly weak Durable Goods Report. Last night Microsoft highlighted weakness in software sales over and above a -4% currency related headwind. Caterpillar (CAT), Procter & Gamble (PG) and Dupont (DD) all missed. So the earnings season is shaping up to be disappointing. If upcoming earnings reports don't disappoint, then the guidance probably will. Currency movements will be the excuse for poor results and/or poor guidance. So I don't see the earnings reports taking the market up unless the tone of the reports changes to become much more positive.
A marked increase in fighting in Ukraine is elevating the markets apprehension. After 3-4 months of relative calm, this resumption in hostilities is creating even greater uncertainty in a an already uncertain situation. I have read that Putin might be aiming for a frozen situation in Ukraine which means these headlines are not going away anytime soon.
The Durable Goods Report was a complete disappointment. Not only was the November revised down significantly, but December came in even weaker. Pretty much every industry was weak in the report except some signs of life in autos, communications, electrical equipment and fabricated metal. Case-Shiller came out in-line with expectations. Luckily the PMI Services, New Home Sales and Consumer Confidence reports all came out stronger than expected. So on the macro front, I guess today is a push. The Durable Good Report is a concern, but the other data is holding up.
The market has the headwind of weak earnings and guidance. Economic growth is slowing, but not at such an alarming rate to raise a red flag. GDP growth estimates will probably be revised lower. Currently consensus is looking for around 2.9% - 3.0% growth in 2015. The earnings reports are the key right now. Earnings have to improve or the market is going lower. The only way to justify this valuation is earnings growth, and right now we are not seeing any.
1/26/2015 0 Comments
Texas Instruments reported revenue and earnings for Q4 inline with consensus estimates. TI also provided revenue guidance inline with consensus estimates.
$3.26B - $3.30B consensus
$0.69 actual ($0.76 GAAP -5 cents R&D tax credit -2 cents gain on sale of assets)
$0.69 - $0.71 consensus
Revenue Guidance Q1
$3.07B - $3.33B
EPS Guidance Q1
$0.57 - $0.67
$0.62 - $0.63 consensus
TI hit the numbers on the button. Based on the guidance and color in the call I see Q1 coming in at $0.65 assuming revenue at the mid-point of consensus.
Microsoft gave revenue guidance on the conference call of $20.6B - $21.4B. I though I heard it wrong at first because the market consensus is for somewhere around $23.4B - $23.8B. Management blames currency pressure (-4%) as well as softness in Japan. Downgrades and negative revisions to earnings estimates are coming. Microsoft is only down -4% AH. This is an under-reaction in my opinion.
The market has had a muted response to the Greek election results. The S&P has traded between -0.5% to +0.2%. I have read some commentary this morning regarding little concern over EU exit contagion pointing to the rally in Spanish and Italian government bonds. I disagree with this assessment. The price response of these securities should not be viewed as a read on the market pricing of EU exit contagion, because the ECB just announced its new QE program last Thursday which included purchases of up to 33% of each sovereign's debt. The new Greek coalition government of left-wing and right-wing anti-austerity political parties leaves little doubt about the new government's intent on reversing austerity imposed by European leaders. This election opens a whole spectrum of risks the market was not focused on last week. This negotiation between Greece and it's European creditors is bound to be drawn out with brinksmanship from both sides. I view this as market negative.
This week is a busy earnings week with 140 S&P companies reporting. Apple (AAPL) on Tuesday will set the tone for the week. If earnings are good, then the market might be able overcome the geopolitical headline risks to eek out a gain this week. I view the geopolitical headline risk as a formidable impediment to the market pushing up to a new high. If earnings are strong, I see the market potentially rallying 1-2%, but I am skeptical a sustained rally will occur given the current geopolitical uncertainties, not only out of Greece, but also Ukraine and Russia. If earnings and guidance turn out to disappoint, the S&P might fall back below 2000, down 2-3%. I am looking to the earnings as my guide to the market's direction, but I view the upside to be more limited than downside at the current time.
The energy sector (up +1.4%) is leading today's rally. Oil is up +0.8% after opening down -1%. The S&P forward pe is up to 16.6x, due to downward revisions to energy sector earnings estimates. The energy sector now has a 22x forward pe. Growth in sales and revenue from the health care and tech sectors could be a positive catalyst. Without some positive earnings reports and positive guidance, I fear the market will gravitate lower given its full valuation and limited earnings growth. I see earnings expectations are for only 2% earnings growth in Q1 and Q2. Expectations are for a pick-up in earnings growth to 7% in the second half of 2015, but these estimates will likely be revised lower.
I liked the earnings reports from SWKS and ALK last week. Semiconductors and airlines have been 2 areas of strength, and I expect this to continue.
Disappointing market action on positive earnings reports from several companies today, makes me more bearish. The upside may be limited from here if the market cannot rally on good news. I thought the economic data was disappointing, but not weak enough to concern me that economic growth is slowing much below 3%.
The disappointments from McDonald's (MCD) and UPS were execution related and not a signal of economic weakness. Reports for GE, Skyworks (SWKS), Starbucks (SBUX) and Honeywell (HON) were all very strong. This is the most important data today. So why didn't the market react? Maybe it's just priced in all the good news. What will happen when we get a weak report? A lot more than a 0.5% selloff. Good news + weak market = sell.
It's good to see the market higher today on the news of ECB QE EUR60 per month through Sep 2016. Just as QE in the states took time, this too will take time for it's effect to take hold. I am glad the market is not down; avoided increased volatility for now.
Earnings have not been good this quarter. In particular, it seems to be weak guidance where the majority of the misses are. I like the market up here, and I think it could run up to a new high if we get some decent earnings reports. If the reports remain disappointing and the market shows some weakness, I'll be headed out the door. My main worry is that weak guidance is going to highlight estimates are too high. This could pressure equities until the revisions are complete. One thing that makes me feel a bit better this earnings growth y/y for the first 2 quarters of 2015 is only 3.5%.
Michael Grove, CFA