Intel and Altera will have to keep until tomorrow.
I’ve just updated my Keeping Score page for last month and the first quarter.
Category Archives: Recent Market Action
Tiffany (TIF) vs. Nike (NKE)–US multinationals in a strong dollar world
TIF and NKE are two iconic US retail names. Both have large international exposure. As a result, results of both have been dented by the fall in the US$ value of their foreign sales.
Both stock charts also look virtually identical …until the euro started falling in mid-2104. Since then, NKE has continued to motor ahead, while TIF has fallen by the wayside. From last June until now, NKE is up about 35%, while TIF has fallen by around 15%. The S&P 500 has risen by 7% over the same span.
Both reported overnight. As I’m writing this, NKE is up strongly, in a market that’s up; TIF is down.
Yes, I know the two brands stand for much different things, the products are very different and the business structures are, too.
Still, NKE shows that foreign currency exposure in a rising dollar world need not be lethal if the underlying business is growing fast enough.
I’ve also been thinking a lot lately about the possibility that relative currency values can’t continue to diverge at the current rate forever. More important, at some point–far ahead of the facts–Wall Street will have fully discounted likely potential changes in currency values. At that point, even though weak foreign currencies may still be carving a chunk out of corporate results the stocks will no longer react badly when the ugly earnings are announced.
To my mind, that’s when it will be safe to de-emphasize domestic-oriented firms and pick through bombed out multinationals.
We’re apparently not there yet.
But TIF may well be a good indicator to gauge when investors have fully played out their desire to sell foreign currency earners.
downward revision of 1Q15 revenue by Intel (INTC)
Yesterday INTC issued a press release revising downward the 1Q15 guidance it gave when announcing 4Q14 results on January 15th.
The company now expects 1Q15 revenue to be $12.8 billion vs $13.7 billion previously–a drop of about 6%.
What does this mean?
–My impression is that, like most publicly traded companies, INTC provides guidance that gives itself a margin of safety against having a negative surprise. That is, the guidance is a reasonable figure, given the data at hand, but a little on the low side. So the downward revision means INTC has used up all its wiggle room and then some.
–The reporting convention is to list the factors behind the revision in the order of their importance, with the most significant first. For INTC, these factors are:
—–weaker demand for business desktops, and
—–a resulting runoff in the number of INTC chips that wholesalers’ are willing to keep in inventory. This is magnifying the effect of the retail shortfall on INTC’s sales. (Think: instead of selling 10 chips and reordering 10, the wholesaler has sold, say, 9 and reordered 8.)
–The reasons behind weaker sales–again, most important first–are:
—-slowdown in the rate at which small and medium-sized businesses are replacing their outmoded Windows XP machines
—-economic weakness, especially in Europe
—-currency weakness, especially in Europe.
Operating margins remain unaffected, despite the revenue drop. That’s because higher selling prices are offsetting the negative effect of lower unit volumes (which would seem to imply that unit volumes are off by 6%).
my take
My guess would be that sales to end users are off by 4% vs. forecast and the other 2% is from reduction in wholesale inventories. I suspect that these are sales deferred rather than lost, so I’m not too concerned. This probably does signal, however, that the vast majority of the current corporate upgrade cycle is over.
I’m more interested in currency/volume effects in the EU. It’s less to figure out what’s happening with INTC than to to get advance warning about how other firms with European exposure may fare as they report results.
I’m guessing, based on their order in the INTC press release, that businesses clinging to XP are 60% of INTC’s problem, 40% is Europe.
If so, Europe accounts for a 2.5% falloff in sales. Let’s assume that the decline of the euro accounts for half of this, or 1.25% of $13.7 billion, which equals $170 million. The euro has fallen by 8% since January 15th. $170 billion/.08 = $2.1 billion, implying that European end users now make up only about 15% of INTC’s sales.
This strikes me as low, although in a quick look through the company’s 2013 10-K (the 2014 one isn’t out yet) the geographical breakout of operations that I found listed the location of INTC’s computer-building customers, not where the end users are.
Two conclusions, then:
more currency losses than expected for multinationals with European exposure in 1Q15, and
weaker than expected (I think) economic performance in Europe, as well. Not a disaster, but worse than companies thought two months ago.
dealing with a rising currency
As far as the stock market is concerned, there are two main strategies for dealing with a rising currency:
1. try to make currency work to your advantage
Profit growth will be highest for a company in a changing currency environment if it has its costs in weak currencies and its revenues in strong ones. In today’s world, this means having costs in, say, yen or euros and sales in the US.
The “good” stocks in weak currency countries gain in two ways: from stronger profit gains and from domestic portfolio managers rotating their holdings toward the “good” industries.
The obvious candidates are export-oriented firms with high labor content in weak currency countries. In these areas, firms with high strong-currency import content that sell finished products into the domestic market are the worst ones to hold.
In strong currency countries, in contrast, purely domestic stocks are the best bet. They benefit only from portfolio manager rotation, though. But they avoid currency induced weakness.
2. ignore currency and look for secular growth names whose expansion prospects outweigh possible currency losses
As a growth investor, this is my preferred strategy. Historically, the majority of such stocks have been in the US. In today’s world, however, the ideal investment would be in a hot EU tech company with exposure to the US.
Any ideas?
the February 2015 ADP employment report
Market commentators blamed the early decline in the S&P 500 yesterday on a “disappointing” ADP monthly employment report. I don;’t think this is right, in two respects:
–it doesn’t appear to me that, given horrible weather which can’t have been captured in any seasonal adjustment, the report was disappointing, and
–even if it were, I don’t think the report itself was a cause of yesterday’s market decline.
As to the report,
according to ADP the US economy added 212,000 new jobs last month. That’s not the explosive growth that the Bureau of Labor Statistics has been reporting recently. But 200,000+ is still way above what’s needed to absorb new market entrants. So it implies that unemployment is still being steadily whittled down. Also,
the ADP numbers have been coming in substantially below the BLS ones recently, so there’s no good reason to believe that they are predictors of the official government figures being released tomorrow. Even if they were, February would still be a continuation of the string of hefty job gains the economy has ben cranking out for over a year.
Yes, maybe there are computer-driven traders whose machine quickly scan important press releases and trade based on what they find. But I don’t think they’re enough to keep the market down.
About the market,
it seems to me that yesterday’s decline is purely technical. That is, traders believe that we’re at the upper bound of potential short-term upside (another way of saying that we’ve reached pretty close to the total gain investors believe the S&P 500 has in it for 2015). They see little potential for quick profit, so they shift to selling, for two reasons: they want to see how far they can push the market down before they meet resistance, and they want to establish more profit potential (say, +5%) before going long again.
Put another way, they’re trying to establish the boundaries of the trading range, or channel, they (me, too) think the market will be trading in until either better earnings news is in the offing or we understand more about what effect any Fed interest rate hikes will have on stocks.