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Monthly Archives: April 2011
AAPL’s 2Q11: more records, another big positive earnings surprise
the results
After the market close on April 19th, AAPL announced earnings results for its 2Q11 (AAPL’s fiscal year ends in September). The company made $5.99 billion, or $6.40 per share, over the three months, on revenue of $24.7 billion. These figures were up 95% and 83% year on year, respectively. Wall Street analysts had expected eps of $5.37.
the details
AAPL sold an eye-popping 18.6 million iPhones, 113% more than in the comparable period of 2010.
It sold 3.76 million Macs during the quarter, up 28% year on year.
In a transition quarter, the company sold 4.7 million iPads. There’s no year-ago comparison, but sales were down by about a third from the December period’s 7.3 million.
The iPod, which in its heyday was around half the company, sold 9.0 million units, down 17% year on year. iPod now represents only 6.5% of APPL’s revenue. I see this as less a comment about MP3 players than one about how incredibly the rest of APPL has been growing.
Geographically, Asia-Pacific, up 151% year on year, was the star; Europe, “only” up 49%, was the caboose on the AAPL train.
items to note
Greater China (the mainland + Hong Kong and Taiwan) are now accounting for 10% of AAPL’s sales, up from less than 2% a few years ago.
AAPL is now guiding to a lower full-year tax rate, meaning it’s expectations for the share of revenues coming from lower-tax foreign areas have risen.
Of the 18.6 million iPhones sold, 1.7 million went to build telecom carriers’ inventories rather than into the hands of consumers. Part of this probably represents the rollout of the iPhone to VZ in the US. But I think it also likely indicates that carriers sense strong demand for AAPL phones and want extra insurance they won’t be out of stock. …more problems for Nokia?
Although AAPL made around 7 million iPad1s in 1Q11, it produced only two-thirds of that number of iPad1s + iPad2s during 2Q11. This comes despite AAPL’s assertions that it has had no supply problems from the earthquake/tsunamis in Japan, and its comments about “staggering” demand for iPad2 and the “mother of all” backlogs for the device. This may simply be the way that the inventory rundown of the older model and the rampup of the new are playing out. It may also be that AAPL isn’t able to get all the resins or components or other raw materials it needs company-wide and is allocating them to higher-margin smartphones. Or it may be that AAPL wants to cultivate an it’s-hard-to-get mentality to heighten interest in the device, since consumers have as yet no effective alternative. This isn’t a bad thing, just something to note–and watch.
the stock
Investors bid the stock up–but not by a lot–in trading on Wednesday and Thursday.
There may be a technical reason for the tepid response. Early this month, NASDAQ announced that it is rebalancing its NASDAQ 100 index. The weighting of AAPL, the largest index constituent, is being reduced from about 20% of the index to around 12%. This has generated short-term selling pressure from index-tracking investment pools.
Why do this? When NASDAQ 100 ETFs were launched a decade or so ago, these vehicles had difficulty meeting SEC-mandated rules on maintaining a diversified portfolio, since then-giants like MSFT or CSCO were so large a part of the index. In order to be sure of adhering to SEC guidelines, NASDAQ slashed the relative weights of MSFT et al and beefed up those of then-minnows like AAPL. Now it has the same problem again, only with different names. So it’s applying the same process to today’s titans.
Yes, AAPL is scarcely an undiscovered gem. And, yes, reversion to the mean does happen. But at 14x fiscal 2011 earnings, AAPL’s stock is trading at right around the market multiple. That looks way too low to me.
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INTC’s 1Q11: strong earnings, not enough (in my opinion) Wall Street reaction
the results
After the close of New York trading on Wednesday, INTC reported its highest-ever quarterly revenues, $12.8 billion, for 1Q11 and earnings per share of $.59, up 37% year on year. This compares with brokerage house analysts’ projections of up 7%.
The company suggested that 2Q11 will be a carbon copy of 1Q–which would mean a year on year earnings gain of 15% or so– and voiced its expectation that the second half would show its usual seasonal strength. INTC also reiterated its full-year 2011 guidance for revenues (and, in my opinion, earnings–though INTC didn’t say) of up 20%+. This would imply earnings per share of $2.40 or better for the twelve months (actually 53 weeks, because INTC is adjusting its financial reporting to the calendar year).
This contrasts sharply with analysts’ forecasts averaging $2.03–a mere 2% gain over 2010 actuals. In fact, analysts have been projecting that earnings comparisons for INTC will be turning negative right about now.
Yes, INTC’s shares did rally almost 8% in trading yesterday. That brings the stock just barely (+1.8%) into the plus column, year to date, compared with the S&P 500 gain of 5.8%.
The move also raises INTC’s price-earnings ratio from 8.3x 2011 earnings to 8.9x. The latter figure is about two-thirds of the multiple on the S&P 500, half that on the typical semiconductor stock and 40% of the multiple the market has awarded INTC in the recent past.
the details
Starting with one-time factors Wall Street was worried about:
–INTC appears to have suffered no damage to its production plants, and very little disruption to supplies, from the Japanese earthquake/tsunamis.
–You may recall that INTC found a glitch in the earliest runs of its new Sandy Bridge processor. The company estimated that 1Q11 revenues would be depressed by about $300 million because of the time needed to fix the problem, reramp production and replace defective chips. It turns out the company worked quickly enough that there was no negative revenue impact.
–the acquisitions of McAfee and Infineon’s former wireless division have closed.
Two areas are responsible for INTC’s strong performance:
1. Demand for servers is exceptionally strong:
a) The more important reason why is the rapid growth of devices that connect to the internet. They are sparking exceptionally strong demand for data centers to service them, including providing “cloud” applications and storage. These servers are virtually all standardized on and powered by high-end (read: high profit) INTC chips. This new market will likely end up being as big as the total traditional enterprise server market within a few years.
b) In the traditional corporate market for servers, INTC’s offerings are so much better/cheaper that replacing existing equipment pays for itself.
2. Well over half INTC’s business is now in emerging markets. Corporate demand for PCs in China, Latin America and Eastern Europe is booming. In addition, the combination in these areas of rising incomes and falling PC prices has made computers affordable for large portions of the population for the first time. So consumer demand for PCs–even desktops (!)–is strong there, too.
The only area of weakness for INTC is the consumer PC business in the US and the EU. Strong replacement buying through the recent recession, weak current economic growth, maturation of the netbook market and the appearance of tablets have all conspired to put the Western consumer on hold as far as buying PCs is concerned. The bad news is that these markets are at present declining gently. The good news is that they comprise only a third (my guess) of INTC’s business and the other two-thirds is performing going gangbusters.
where are the INTC smartphones and tablets?
This is Wall Street’s biggest worry. So far, there’s not much to write about, because processors made by ARM Holdings have a stranglehold on these markets. INTC’s offerings to date are thought of as too big, too power-hungry, too inflexible.
the stock
Many investors seem to believe what analysts’ numbers are showing–that the traditional PC market is in immediate, terminal decline, with personal computers being replaced in most uses by smartphones and tablets. From this premise, which I think is incorrect, they draw the conclusion reflected in analysts’ numbers–that INTC, too, is a company of the past.
Even after Wednesday’s sharp rise, INTC shares have underperformed the S&P 500 by more than 20 percentage points over the past year, despite stellar earnings performance.
The two issues:
1. Can the market for INTC’s x86 chips be as strong as the company says, while third-party technology consulting firms predict much slower growth for the industry?
This was the topic of more than one analyst’s questioning on the company conference call.
INTC had several points: the third parties have their best insight into the consumer markets of the EU and US, which is where all the weakness is. They have less visibility into the corporate market and almost none into the emerging economies that make up the bulk of INTC’s business and almost all of its growth. This is not the first time the third parties have been wrong. Last year they underestimated the market growth as well–and for the same reasons.
I’m willing to believe INTC.
2. Where are the smartphones…?
INTC has a new chip for tablets. It has shaken up its mobile business. It hints at great things from its “revolutionary” next generation of chips–details in early May.
But no one really knows whether INTC can be successful with mobile client devices. The company does point out, that tablets and smartphones are not so tightly wedded to a given processor as PCs are. So a potential switch from an ARM chip to an INTC one could be made in a given model relatively easily. So if INTC can manufacture an acceptable chip, it could gain design wins quickly. Let’s see one, though.
On the other hand, a lot of damage based on this worry has already been done as the PE of INTC’s stock has shrunk from from 21+ to 10-. At the risk of being too simplistic, if INTC’s consumer business in the US and EU were to vaporize tomorrow, what would remain would likely be a 12 multiple stock with 30% growth in prospect for a number of years–plus a big play on emerging markets. INTC would seem extremely cheap.
In other words, I don’t think there’s much downside in holding the stock (remember, I own it) and waiting either for Wall Street to work out that the company’s business is booming, or for some positive development on the smartphone/tablet front. The greatest near-term stumbling block I can see is that sell-side analysts, who appear to be very wrong about INTC current earnings prospects, are notorious for their unwillingness to admit their mistakes. And they’re the ones many investors turn to, if not for advice, at least for factual information and industry analysis.
WYNN: 1Q11, strong numbers (again!)
the results
WYNN reported 1Q11 financial results after the close in New York last night. Earnings per share were $1.38 vs. $.27 in the opening three months of 2010. The results substantially exceeded the Wall Street analysts’ consensus for the quarter of $.79.
The main factors behind the blowout earnings? …continuing superior performance in the fast-growing Macau market; and the gradual recovery of Las Vegas, where WYNN also had unusually good luck at its tables during the quarter.
WYNN announced an increase in the quarterly dividend from $.25 to $.50, as well.
the details
Macau
WYNN has had enormous success with its slot machines and its non-gaming attractions–hotels, restaurants, retail. Nevertheless the key to profits in this market is high-stakes baccarat. During the 4Q10 conference call, management indicated that, while customers were still coming through the doors in record numbers, its “win” (gross profit) for 1Q11 to that date was barely a third of normal. This is a fact of life in the high-roller market–and eventually straightens itself out. The comments suggested, however, that 1Q11 earnings from the SAR might be sub-par.
They weren’t. Wynn Macau seems to have had a run of good luck later in the quarter just as strong as the unfavorable streak disclosed in the January conference call. For the three months as a whole, win percentage for 1128 was 2.69%, just below the 2.7%-3.0% range WYNN considers normal.
Overall, Wynn Macau earned $190 million for the three months, up 70% year to year. Remember, though, that the 2011 figures include the Encore in Macau that opened during 2Q10. So future earnings comparisons won’t be quite so strong.
Las Vegas
WYNN earned about $36 million in Las Vegas during 1Q11, compared with a loss of around $54 million in 1Q10. Operations are clearly on the mend. Non-casino operations are doing especially well. However, WYNN had an exception run of good luck during the quarter at its tables in Nevada. The company thinks the normal range of table win is 21%-24% of the amount wagered. It achieved a 30.4% win rate during the opening three months of 2011, which added about $50 million above normal to the bottom line.
So, while 1Q11 shows tremendous improvement over the dark days of recession, it’s probably better to think of WYNN’s Las Vegas operations as being strongly cash-flow positive, but around profit breakeven and on a slow upward trajectory.
“fair share“
This is WYNN’s fundamental internal measure of the health of its gaming operations. It’s a company’s share of market revenue divided by its share of the market’s gambling equipment (or floor space) for slot play or table games. If, for example, you have 10% of the table games or slot machines in a market and do 10% of market revenue, you have a “fair share” of 1. If you have less than that, all of your marketing and promotion efforts to bring customers to your premises in effect subsidize your competitors. You act as a “dormitory” for them, as Steve Wynn puts it. If you have a “fair share” over 1, the others are subsidizing you.
How does WYNN fare on this measure? …extremely well.
The specifics:
–In Macau, the company has 10% of the table games and a 14% market share; it has 8% of the slots and a 22% market share.
–In Las Vegas, it has a “fair share” of 2.5 in table games and 1.0 in slots.
In a nutshell, that’s the WYNN story.
the stock
I think WYNN will continue to be a mild outperformer in the US market over the year ahead. To my mind, Macau is at least several years away from investors having to seriously consider whether the market is maturing. And the question of Las Vegas recovery has changed itself during 2010 from “if” to “how fast” –meaning that the worry of further weakness there has all but disappeared.
Valuation is the chief investment issue. 1128 is up 58% year to date and is nearly triple its IPO price of late 2009. It’s trading at 22x earnings for this year, assuming Macau market revenues stay at the 1Q11 level for the rest of the year. So it’s hard to say that the subsidiary’s superior operating model is still a secret, yet to be worked out by the Hong Kong market.
WYNN’s share of 1128 is worth about $13.5 billion currently, and represents almost 75% of the value of the parent company’s stock. That leaves $4.7 billion for the rest of the company (Las Vegas operations + royalties and management fees from 1128), suggesting that non-Macau is trading at a little over 10x cash flow.
I don’t think any of these figures are outrageously high. I don’t have any inclination to sell. ( I own both WYNN and 1128. I’ve trimmed the latter a bit recently and sold covered calls on a small part of the former, but that’s because my position sizes have become too big.) But I also don’t feel a strong need to buy either 1128 or WYNN at today’s prices.
S&P revises its outlook for T-bonds from stable to negative
The S&P announcement
Yesterday the rating agency issued a new “unsolicited” opinion (meaning it wasn’t hired by the US to do so) on US government debt. While retaining its current AAA rating for Treasuries, S&P has revised down its outlook for the country’s long-terms obligations from stable to negative.
What does this mean?
“Negative” means S&P thinks there’s at least a one in three chance of a credit downgrade within the next two years.
S&P’s reasoning?
The factors S&P considers most important are:
–deterioration of the US fiscal position over the past decade
–damage done by the financial crisis and ensuing recession
–inability of Washington to agree over the past two years on a plan to address these issues
–the “significant risk” that nothing will be done before the election in November 2012.
Although S&P (like everyone else) regards unfunded entitlement programs Social Security and Medicare/Medicaid as the main sources of budgetary woes, it points out that the country may also have to cough up another $685 billion to recapitalize Fannie Mae and Freddie Mac. S&P observes, as well, that much of the US sovereign debt is concentrated in the hands of a small number of foreign governments, raising the possibility that one or more might change their minds.
be careful what you wish for
It wasn’t that long ago that Congress was lambasting the rating agencies for not being proactive enough in downgrading the exotic credit instruments spewed out by Wall Street. Their collapse weakened the national finances and made the deficit a “today” issue rather than one that could be safely be put off.
I wonder how Washington likes proactivity now?
And the S&P raters whose integrity was questioned by Congress wouldn’t be human if they didn’t take a kind of satisfaction in calling attention to the fact that the UK–and even France (?!?)–are further along the path to fiscal responsibility than the US.
what happens next?
A lot depends. I don’t think there’s much anyone can say for sure.
For one thing, not everyone agrees that the S&P analysis is correct. For example, a comment popped into my inbox at about 6pm on Monday from Jim Paulsen, the chief economist for Wells Capital, arguing that the deficit is primarily cyclical.
It seems to me, though, that the S&P announcement puts additional pressure on elected officials to cooperate with one another. That pressure would increase if, say, Moodys, were to follow the S&P lead and say something similar. The debate on raising the federal debt ceiling will give an almost immediate indication of whether the Democrats and Republicans can work together.
No matter what, my guess is that the S&P announcement will turn out to be a significant turning point for US government finances. Despite the dollar being the world’s reserve currency, I think the days of Washington just willy-nilly issuing news bonds are coming to an end–sort of like maxing out an almost infinite credit line.
Also, if past form holds true (and I think it will), domestic borrowers–not foreigners–would be the first to desert the Treasury market in large numbers. This means that worry about Treasuries will express itself initially, and primarily, through higher interest rates, not a weaker currency. Only if the situation becomes really ugly will the dollar come under significant pressure.
From an overall economic perspective, I find the “hidden” loss of wealth through currency depreciation to have worse negative effects than adjustment through higher interest rates and a slower economy. From a stock market point of view, however, it’s much easier to devise a money-making strategy in a weak currency environment than in a high interest rate one.
Stay tuned.