Category Archives: earnings conference calls

INTC’s 1Q12: encouraging signs

April 24, 2012 By in earnings conference calls, Industry Analysis, Stock ideas, Technology, Wireless Tags: , , , , , , , Leave a comment

the results

After the close of trading on April 17th, INTC reported 1Q11 results that were a bit better than the company had guided to three months earlier.  Revenues came in at $12.9 billion, net income at $2.7 billion and eps at $.56 ($.53 on a non-GAAP basis).  This compares with the Wall Street analysts’ consensus of $.50 and $.58 that the company posted in the year-ago quarter.

Quarter on quarter, results were down, as the company felt the full force of the supply disruptions caused by flooding of hard disk drive factories in Thailand.  Basically, INTC customers couldn’t get hard drives to make all the PCs they wanted.  They also didn’t know when production would return to normal.  So they cancelled orders for new microprocessors from INTC and ran down to the bone the microprocessor inventories they had on hand.

Year on year comparisons aren’t straightforward, either.  1Q11 contained 14 weeks, versus a “normal” quarter of 13, like 1Q12 was.  So the yoy revenue comparison, $12.9 billion in 1Q12 vs. $12.8 billion in 1Q11 is considerably better than it looks.  The biggest yoy difference in expense comes in R&D, where this year’s $2.4 billion is much higher than the $1.9 billion INTC laid out in 1Q11.  Had R&D spending been flat yoy, INTC’s net would also have been flat, and eps up slightly (on a lower share count) yoy.  Not bad for a component-constrained quarter that was one week shorter than 1Q11.

details

I reread my post on INTC’s 4Q11 before starting to write this.  I think you should read it, too.  I haven’t changed my thinking.  And otherwise, I’d just be repeating here what I said there.

Three factors are new, though:

–it looks like the hard disk drive shortage is over already, a couple of months earlier than INTC had initially thought.  The company expects 2Q12 sales to be in line with final demand, with inventory restocking by customers only happening in the second half.  My guess is the net result will be a slight uptick (maybe $.05) in full-year eps from my prior guess of $2.75 for 1012, rather than just a reshuffling of the quarters. (Remember, this includes $.15 a share that Thai flooding shifted out of 2011 and into this year.)

–INTC has dropped its tax rate guidance from 29% to 28%, which I take to mean the company is lowering its expectations for the US and raising them for emerging markets.

–INTC is starting to churn out 22nm chips in volume.  At the same time, TSMC is reported to be having trouble with its 28nm manufacturing process.  This should help extend INTC’s performance lead–or close its performance gap–versus competitors who use foundries (meaning just about everyone).

where to from here?

As I wrote three (and six) months ago, at $20 a share I think INTC was a buy simply on the notion that the company wouldn’t fade away within the next two or three years.

At close to $30, the decision is different.  I think you have to believe a lot more–at the very least, that ultrabooks will be a big success.  It would be better, of course, if INTC could make some inroads into ARMH’s franchise in tablets and smartphones, as well.  In both areas, signs are encouraging.

–There are already almost two dozen ultrabook models on the market, with another hundred or so on the way before yearend.  Some will be configured to use the touch features of Windows 8; some will be hybrid devices that can function as tablets as well as traditional PCs. Better still, to my mind, is the fact that ultrabooks are coming from Samsung, Asus and Acer–meaning they’ll be stylish and more reliable than, say, Dell.

Ultrabooks have also gotten a very favorable mention in computer guru (and Mac aficionado) Walter Mossberg’s Spring laptop buyers’ guide in the Wall Street Journal. 

–Rather than waiting for customers to come knocking at its door, INTC created a “reference design”–a detailed blueprint–for the ultrabook and presented it to computer manufacturers.  It’s taking a similar tack with cellphones.  It’s offering its reference smartphone design to carriers to use as their “house brand.”  It’s already signing up customers.

Who knows where this will lead?  But the fact that most carriers are selling iPhones to customers at $400 below their cost should be a powerful motivator to look for cheaper alternatives.

TIF’s 4Q11: supply your own adjective

March 23, 2012 By in earnings conference calls, Stock ideas Tags: , , , , , , , , Leave a comment

the results

Just before the open on Tuesday March 18th, TIF reported earnings results for fiscal 4Q11 (TIF’s accounting year ends in January of the following calendar year). Sales came in at $1.19 billion, up 8% year on year. Profits were $178 million, or $1.39 per share, a drop of 2% from 2010.

For the full year, sales were $3.64 billion, a yoy advance of 18%. Eps were $3.60, or + 23% yoy.

In a lackluster market, the stock was up more than 6% on the news.

details

Sales for 4Q in the Americas were up 5% yoy; in Asia-Pacific they were up 19%, up 13% in Japan and 3% in Europe.

In early January, TIF had warned that its business had slowed significantly from the torrid pace of the first three quarters of 2011 (see my post). Overall, the results TIF actually reported were slightly better than it signaled at that time. Thanks to a small rebound in January, sales in the Americas were 1 percentage point higher than TIF was figuring, and Europe—of all places—was 2% better.  No change in trend elsewhere.

It doesn’t make a whole lot of difference, but 4Q11 eps would probably have been at least flat with 4Q10 and maybe up a penny, were it not for a year-end upward adjustment of the company’s tax rate. Without going into all the details,  a greater proportion of TIF’s sales than anticipated came from high-tax areas like the US and EU. Put another way, the tax rate adjustment is a consequence of the fact that sales in Asia-Pacific fell off more in 4Q11 than the rest of the world did.

TIF also gave its initial guidance for fiscal 2012—sales growth of 10%, earnings per share growth of 10%-13%–resulting in eps of about $4 for the year. The company thinks the bulk of the advance will come in 4Q12.

During the first half of 1Q12, results are tracking in line with TIF’s expectations.

During the quarter TIF spent $35 million buying back stock, at an average price of $67.26. That’s about 30% less than TIF averaged over the first nine months of the year. To me, it looks like all the buying came before the company’s profit warning. If so, I certainly can’t be too critical since I had no enthusiasm for buying, either.

Arguably, continuing to buy below $60 at the same time the company knew its sales shortfall would mean a lot of money tied up in unsold inventory would be too risky. But it certainly implies to me that TIF is not shrugging off the current sales slowdown as something that will soon be behind it.

my thoughts

TIF’s 4Q11 has played out pretty much as I thought it would in January. The only new news from the company announcement is that the situation appears to be stabilizing at the lower rate of sales growth TIF experienced in 4Q11. All in all, I don’t get the market reaction of aggressively bidding up the stock on this information.

Contrary to what I would have expected, TIF shares have also recovered all they had lost vs.the S&P after their January swoon.  And that’s before this week’s earnings report.

The stock now trades at around 18x this year’s earnings. That’s not wildly expensive for a company like TIF. But it’s not cheap, either, especially with perhaps three quarters of lackluster earnings comparisons in prospect.

There’s certainly a risk that my incorrectly lukewarm attitude to the stock at $59 will color my opinion now. Nonetheless, I’m happier on the sidelines now than buying. And I’ve got to at least consider the idea of selling some of what I own into any strength.

AAPL’s dividend: implications

March 20, 2012 By in earnings conference calls, Recent Market Action, Stock ideas Tags: , , , , , , 3 Comments

the AAPL announcement

Yesterday morning, AAPL announced that it will initiate a $2.65/ share quarterly dividend, starting during the July accounting period.  The company says it will also repurchase $10 billion in stock over the coming three fiscal years.  Together, the two moves will absorb $45 billion in domestic cash.

my thoughts:

the stock buyback

The dividend is a more important signal about future earnings.  But the description of the stock buyback also says something important, and admirable, about the company’s management.

Most firms try to describe stock buybacks an altruistic move on their part, as “returning cash to shareholders.”  They argue that dividend payments create a tax liability for recipients while stock buybacks do not, and intimate that this is the main reason for their action.

The tax stuff is true. But the rest is, at best, nonsense.

Companies pay their employees, and particularly their executives, in two ways:  with cash; and with stock options.  The latter gradually transfer ownership of the firm from portfolio investors to employees.  In fact, many companies in the tech world have target percentages for this transfer in mind when they issue stock options.  The main–unspoken–purpose of stock repurchases is to keep the total number of shares outstanding stable, and thereby disguise the change in ownership that is taking place.

APPL is the first company I’ve seen that’s completely honest with shareholders.  AAPL says its share repurchases have “the primary objective of neutralizing the impact of dilution from future employee equity grants and employee stock purchase programs.”  The asset transfer effect, by the way, is a miniscule .5% or so per year in AAPL’s case.

the dividend

The initial payment level of $10.60/year implies to me that AAPL management thinks profits will be a lot better than the market now expects.  Here’s why:

Two basic rules about dividends are:

–they’re supposed to be paid out of profits, and

–they should be set at a level that’s easily sustainable, and that can rise.  Very little is worse for a company than having to cut, or eliminate, a dividend.  A prudent firm–and AAPL is one–would have already thought carefully about a pattern of future dividend increases when setting the initial payment amount.

AAPL’s situation

At the end of the December 2011 quarter, AAPL had 932 million shares outstanding.  Let’s say that rises to 940 million by the time it begins paying dividends.  $2.65/quarter x 4 quarters x 940 million shares = $9.96 billion in annual dividend payments.

AAPL will most likely have chosen the current dividend payment based solely on its estimate of  sustainable US earnings.  Why?  Dividend payments from a US corporation have to use US-domiciled cash.   Yes, AAPL has $33 billion in the bank in the US already–enough to pay the current dividend for over three years or supplement a payout that exceeds US-generated funds for far longer than that.  But what would AAPL do after the US cash runs out?  …cut the payout?  No way.  …repatriate funds from abroad, losing 35%  to federal taxes?  Probably not.

Therefore, it’s a reasonable assumption that AAPL considers a recurring $10.60 a share from the US each year as “in the bag.”  If it were me making the decision, I wouldn’t want to set the payout at 100% of US earnings.  I’d like a cushion.  Arguably, the US cash on the balance sheet is enough of a safety margin, but why take the risk?  I’m thinking the payout is being set at more like 75% of US earnings–which also leaves room for a dividend increase next year.

doing some arithmetic

Let’s try to use the $10.60 a year to calculate what AAPL must be thinking about its total earnings.

AAPL presently earns a little more than a third of its revenues in the US.  As Asia increases in importance to the company, the domestic percentage will likely fall. Assume that the US is 30% of the AAPL total for fiscal 2012 and 28% in fiscal 2013, with overall earnings growing, say, by 15%.

Case 1:  low-balling      AAPL has decided to pay out 100% of its current US earnings in dividends.

That would imply AAPL earns $35.33 this fiscal year and $43.50 next.

I think this is would be, in AAPL’s view, for all practical purposes the worst possible case.

Case 2: realistic     AAPL has decided to pay out 75% of its current US earnings.

That would mean $47 in eps for this fiscal year and $58 next.

This compares with the current analyst consensus eps of $43.14 for fiscal 2012 and $48.44 for fiscal 2013.

AAPL insiders more bullish than Wall Street?  I think so

Case 1 yields no useful information, since consensus estimates are already substantially higher.  Case 2, which I think is considerably more probable, would imply that AAPL’s board and management are both noticeably more bullish on company prospects than Wall Street.  AAPL insiders can be as wrong as anyone else.  In this case, however, they have a ton more pertinent information to work with than you and I do.

breakup at Wynn Resorts (WYNN): what happened last Saturday

February 22, 2012 By in Casinos, earnings conference calls, Entertainment, Industry Analysis, Stock ideas Tags: , , , , , Leave a comment

a little history

Steve Wynn is an iconic figure in the casino gaming industry.  Among other feats, he almost single-handedly re-glamorized the Las Vegas Strip while he was CEO of Mirage Resorts.  During the economic downturn of 2000, however, the board of that company accepted a takeover bid from MGM and showed Mr. Wynn the door.

Mr. Wynn then joined forces with Kazuo Okada, owner of a Japanese slot machine company, to develop a new upscale resort on nearby land.  Mr. Okada invested $380 million to obtain a 50% share of the venture.  Needing more money to advance his plans, Wynn Resorts went public in 2002.  So doing reduced Wynn’s and Okada’s ownership shares to 20% each.  Mr. Okada became the largest shareholder in WYNN when Mr. Wynn’s ex-wife received half of his stock in a divorce settlement.

the past year or so

The Compliance Committee of the WYNN board is led by board member Robert Miller, a former district attorney who served as governor of Nevada for ten years.  In February 2011, its investigation into the feasibility of opening a casino in the Philippines uncovered questions about possible violations of the Foreign Corrupt Practices Act (FCPA) by Mr. Okada in the Philippines while obtaining a casino license for himself there.

The board’s concern:  having a major shareholder and board member who could be deemed “unsuitable” to hold a casino license would put existing licenses in jeopardy.  As well, it would likely rule WYNN out as a candidate for new licenses (think:  Singapore, or permission to build a new casino in Macau).

In February 2011 the Compliance Committee opened an investigation of Mr. Okada.  Board worries were apparently heightened by Mr. Okada’s comments at board meetings, his unwillingness to participate in board FCPA training and his refusal to sign the company’s code of conduct.

(Reading between the lines, it also sounds like Mr. Okada continued to pressure the board to participate in his Philippine casino venture–something the board had ruled out–and had been intimating in the Philippines and elsewhere that he was secretly carrying out the board’s wishes.)

In September 2011, WYNN concluded there was a threat to WYNN’s business if Mr. Okada remained a board member/shareholder of WYNN and pursued his Philippine project.  The WYNN general counsel and compliance officer outlined the company position to Mr. Okada’s lawyers.  Mr. Okada said he didn’t see any conflict and declined to take any action.

WYNN then hired an outside law firm, run by a former head of the FBI, to conduct a detailed investigation.  According to Governor Miller, the inquiry turned up a pattern of violations of the FCPA by Mr. Okada and his companies.  Mr. Okada also told the investigators during a lengthy interview that he strongly believes he can continue to give valuable “gifts” to foreign officials, despite the fact this violates US anti-bribery laws.

last weekend

Last Saturday, after consulting with two sets of outside legal experts on gaming law, the WYNN board met.  It removed Mr. Okada as a director.  And it used the power given to it in the corporate charter to cancel Mr. Okada’s shares in WYNN.  It issued him a 10-year promissory note for $1.9 billion, bearing interest at 2% (payable in arrears), in compensation.

my thoughts

…just when you thought you’d seen everything!!

1.  I’m an investor, not a lawyer.  So I have to remind myself that I don’t have the specialized knowledge and training that may be needed to evaluate this situation correctly.

Still, given the array of prominent experts WYNN has assembled, I’d be shocked if the Nevada regulators don’t declare Mr. Okada to be “unsuitable” to hold a casino license in that state once it conducts its own investigation.  If so, I’d guess that undercuts possible legal action by Mr. Okada.

2.  WYNN’s charter apparently gives it the right to immediately revoke the shares of any owner the company finds to be “unsuitable,” which is a determination the board made about Mr. Okada on Saturday.

There’s no question of asking Mr. Okada to sell his holding; as of Saturday those shares no longer exist.

3.  The company charter apparently specifies the manner of compensation for cancelled shares.  Payment is supposed to be based on fair value and can be through a promissary note of at most ten-year maturity, paying an annual coupon of 2%.

Mr. Okada’s shares are “certificated,” meaning there’s either an electronic notation or a stamped notice, if they’re physical shares, saying that the stock has restrictions on sale.  WYNN didn’t say what the restrictions are, but they probably give WYNN the right to vet any potential buyer.  The certification would presumably bind any buyer, not just Mr. Okada.  It stands to reason that restricted shares aren’t as valuable as unrestricted ones.  …but by how much?

WYNN hired yet another expert firm, to determine “fair value” for the Okada holding.  Its conclusion:  fair value is a 30% discount to last Friday’s closing price.

4.  WYNN’s market capitalization was $14 billion last Friday.  So the market value of the Okada holding, were the shares unrestricted, would have been $2.8 billion.  In a sense, remaining shareholders make a gain of $900 million ($2.8 billion minus the $1.9 billion note), or about 8%, on their holdings through the share cancellation.

My guess is that the benefit to remaining shareholders is greater than that, if for no other reason than that the increasingly public tussle between Mr. Okada and the rest of the WYNN board was depressing the share price.  Because this situation is so unusual, however, I doubt Wall Street will assign even 8% extra to WYNN shares.

5.  Can Mr. Okada say he’s been harmed by the WYNN action?  Over the past decade, he’s received almost twice the value of his initial investment in dividends.  He’s now getting a note for 5x that amount.  My layman’s hunch is that his would be a hard case to make in court.

We’re in a wait-and-see situation now, in my opinion.  WYNN has asked the Wynn Macau board to remove Mr. Okada as a director, which I presume it will do.  It would be very interesting if the Macau authorities were to okay 1128′s pending new casino application once Mr. Okada is gone.  Another potential positive would be a speedy determination by Nevada regulators that Mr. Okada is indeed an “unsuitable” individual.

Las Vegas Sands: strong 4Q11…and beyond

February 8, 2012 By in Casinos, China, earnings conference calls, Entertainment, Hong Kong, Industry Analysis, Stock ideas Tags: , , , , , , , , Leave a comment

results

LVS reported 4Q11 and full-year 2011 results after the close of New York trading on Thursday February 1st.  Quarterly revenue for the company was $2.3 billion, up 26.3% year on year.  Net income was $460.9 million, or $.57 a share.  That was up 38% year on year.  EPS exceeded the average analyst estimate by about $.03.

For 2011 as a whole, LVS posted $9.4 billion in revenue, up by 37% from the %6.9 billion taken in in 2010.  EPS more than doubled to $2.02 vs. $.98 in the prior year.

details

Sands China in Macau took in $1.33 billion in revenue during 4Q11.  Ebitda (earnings before interest, taxes, depreciation and amortization) was $430.1 million.  These figures were up 22% and 29% year on year, respectively.  3Q11 ebitda was $388.3 million, meaning 4Q results were up 10.7% qonq.

Marina Sands in Singapore had revenues of $806.9 million for the quarter and ebitda of $426.9 million, aided by an unusually high win percentage at table games.  These were yoy increases of 44% and 40%.  3Q11 ebida was $413.9 million, so the qonq gain was 3%.

Las Vegas operations had revenues of $339.5 million and ebitda of $80.9 million.  Revenue was up 9% yoy, ebitda was about flat.  3Q11 ebitda was $94.3 million.  Qonq, 4Q ebitda was down 16%.

my thoughts

earnings

Let’s assume US operations will be flat year on year in 2012, ex management fees from Singapore and Macau.  I think there will be some small gains, but the main issue is not the economy.  It’s the severe overcapcacity of hotel rooms and gambling space in Las Vegas.  Dividends from Sands China will probably add close to $1 billion–covering the parent’s dividend payout.

HK: 1928 will soon be opening the first phase of its newest Macau casino, Macau Cotai Central, shortly.  In a market that will likely expand by 25% this year, 1928 will likely easily grow by 30%–probably considerably more.

I don’t know any good way to estimate growth for the MS Singapore.  The casino hasn’t been open that long, for one thing.  For another, after posting continuous increases in ebitda since opening, income seems to have flattened out in 4Q11.  Is this seasonal?  …or something else?   No one knows.  If we assume no organic growth but that the casino continues to generate revenue at the 4Q11 rate throughout 2012, ebitda would grow by 15% yoy.

Repayment and restructuring of debt at lower interest rates will chip in, as well.

Put all this together and I think the analysts’ consensus of $2.50 in eps for this year is a reasonable guess.  We’ll be able to tell more when the official year-end financials are published.

asset value

At today’s level, the market value of LVS is about $38 billion.

Its ownership interest in publicly traded Sands China (1928:HK) is worth around $21 billion.

If we assume that wholly-owned Marina Sands should be valued at 80% of 1928′s ebitda multiple–because of less clear near-term growth prospects–then MS is worth $24 billion.

If so, Macau and Singapore are together worth $7 billion more than the market cap of LVS–implying that, in the mind of Wall Street, the $424 million in annual US ebitda subtracts a ton of value.  That’s silly.  LVS would need to rise above $60 a share in order for the stock price to reflect no value for the US operations.

dividend

Both LVS and 1928 have declared initial dividends and signaled their intention to sustain them at at least the current level.  LVS will be paying $1 a share annually, meaning a yield of slightly below 2%.  1928 will be paying HK$1.16, a 4% yield.

Three implications:

–dividends are supposed to be paid from profits.  Both LVS and 1928 are saying they expect to remain at least as profitable as they are now.

–both companies believe they’ll be generating enough free cash flow to sustain the payout

–the companies’ lenders (LVS has about $10 billion in debt) are satisfied that they’ll be repaid and have okayed the dividends.

conclusions

LVS  isn’t the best casino operator in the world.  That’s WYNN, in my opinion.  But at the moment I think it’s the best casino stock.

Management is highly competent.  And the company is nearing the end of a very ambitious (read: risky) multi-year, multi-billion dollar Asian expansion.  The financial crisis came at the worst possible time for LVS.  Nevertheless, the company has completed its plans.  It’s now entering a period of potentially immense free cash flow generation that will transform the financial structure of the firm over the next two or three years.  I don’t think Wall Street has worked this out yet, as shown by the undervaluation of LVS on a sum-of-the-parts basis.


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