Category Archives: earnings conference calls

DIS’s 4Q12: more earnings progress, but a stock price fall

November 13, 2012 By in earnings conference calls, Entertainment, Stock ideas Tags: , , , , , , 1 Comment

I’m still using my phone as an internet connection.  

Still no word from Comcast about when service will be restored.   But I’ve seen my bill.  No adjustment for half a month without service!  This behavior contrasts so sharply with that of every other company I’ve seen that I’ve got to believe there’ll be a lot of negative fallout when people realize what Comcast is doing.

DIS’s 4Q12

After the close last Thursday, DIS reported 4Q12 and full fiscal-year 2012 results.  The company earned $.68 per share during the three months ending September 29th, up 15% year on year, on revenues of $10.8 billion, up 3% yoy.  For the twelve months of fiscal 2012, DIS posted eps of $3.07 on revenues of $42.8 billion.  Earnings were up 21% yoy, on a revenue gain of 3%.

The stock dropped about 7% on the report.

Yes, 4Q12 eps growth was less than the rate of gain earlier in the year.  And, yes, Wall Street never likes such deceleration.  But I don’t think that was the main reason for the decline in DIS shares.  Rather, during its conference call management told analysts that 1Q13 eps will probably be no better than flat with 1Q12.  After that, comparisons will likely pick up   …but DIS didn’t say by how much.  The lack of guidance isn’t unusual.  It’s the way DIS operates, and it’s fine with me.  But in this instance, the uncertainty (temporary, I think) about fiscal 2013 eps growth caused the selloff in the aftermarket and on Friday.

On Friday, I rebought much of the stock I had sold a while ago at around $40 a share.

Why?

I’ve come to think that I’ve underestimated the growth that can come from the non-ESPN side of the business–the Disney side, meaning the theme parks, movie studios and consumer products divisions that together produce about a third of today’s total DIS operating profits.  I especially like the acquisition of Lucasfilm.

Also, I think the weak 1Q13 is more a function of accounting quirks than fundamental weakness. Specifically:

a flat 1Q13

The factors behind this are:

—Hurricane Sandy, although DIS says the superstorm hasn’t prevented any Jerseyites from getting to Disneyworld so far.  But certainly some stores and movie theaters were closed during the storm.  And some customers hurt by Sandy will have less discretionary income for a while.

Whatever the effect, it’s likely to be small, negative and transitory.

—ESPN.  The sports giant has signed major new contracts for sports content.  It will take a while for ESPN to pass higher programming costs on to customers.  Also, while the presidential election season is great for advertising in general, it’s not so good for ESPN.

—Disneyworld.  The Florida theme park is undergoing its first major overhaul in 40 years.  The parks are also in the middle of making a big upgrade to their computer systems.  Much of these costs are being recognized as expenses right now, rather than being stored up on the balance sheet and being shown as reductions in income over the life of the assets.  What DIS is doing is more conservative, which I approve of.  But that won’t change the fact that eps won’t look as good as they otherwise would.

—the week as the major accounting unit of time.  Readers of my prior DIS posts will be familiar with this issue.  Most companies keep their accounts on a month-by-month basis.  Hotels and retailers–and DIS–typically keep theirs on a week-by-week basis, which they believe gives them better control over operations.

The four 13-week units the latter companies use don’t match up exactly with the calendar year.  For DIS, this means that the bulk of the lucrative New Year holiday–and the $30 million in operating income this entails–will end up being in 2Q this fiscal year vs. 1Q last.

—movies  1Q12 benefitted from Cars 2 and the rerelease of Lion King.  There’s nothing comparable in the hopper for 1Q13, so DIS estimates a falloff of $150 million in operating income.

Except for the Studio Entertainment segment, all these are timing, or accounting presentation, issues rather than economic ones.  And in the case of movies, no one can manufacture hits each quarter, so this is just a function of the way the business operates–and why it gets a lower earnings multiple than more predictable ones.

my take

I think the recent selloff is a mistake.  My guess is that fiscal 2013 eps will come in at about $3.50, assuming Washington doesn’t drive us over the fiscal cliff.  To my mind, that prospect justifies a price in the low to mid $50 range.  But comparisons will likely be accelerating into fiscal 2014, creating the possibility of multiple expansion from the 15x I’m assuming.  Not necessarily a rocketship ride, but still probably meaningful market outperformance.

LVS’s 3Q12: a mixed bag

November 5, 2012 By in Casinos, earnings conference calls, Entertainment, Industry Analysis, Stock ideas Tags: , , , , , Leave a comment

Still no power at home.  Neither hide nor hair of the local utility–which had promised full power restoration by yesterday– spotted since the storm.  Some action, though.  It took down the web page where it made its pledge.

LVS’s results

After the New York close on November 1st, LVS announced its 3Q12 results.  The company reported worldwide revenue of $2.71 billion, up 12.5% from the $2.41 billion it posted during 3Q11.  Company EBITDA (Earnings Before Interest Taxes Depreciation and Amortization), however, was down 5.1% yoy to $925.1 million.  The short story:  lower hold percentage around the world + higher allowances for doubtful accounts in Singapore.

Net income was $382.2 million, $.46 per share, vs. $444.8 million, $.55/sh, in the year-ago quarter.

LVS also announced an increase in the quarterly dividend from $.35/share to $.45, effective in 1Q13–implying a prospective dividend yield, based on pre-market prices today, of 3.9%!

details

strong in Macau

Sands China’s 3Q12 revenues came in at $1.64 billion, up 36.7% yoy.   EBITDA was up 24.3% at $485.6 million.  Net income, however, increased only 17.4% to $326.7 million.

The Macau market was up only in single digits during 3Q12, so there’s really nothing to complain about in the Sands China report.

The huge revenue increase comes principally from increased gambling capacity–the opening during 2Q12 of SC’s new property in Cotai.  Cotai Central produced revenue of $295.9 million in its first full quarter of operation, despite suffering from an unusually low winning percentage.  SC also benefited from a rebound from a bad-luck 3Q11 at the Venetian casino.

On the other hand, Cotai Central continues to lose small amounts of money as it slowly ramps up in the current environment of slow gambling growth in Macau.  And to some degree, it is drawing customers who would otherwise be patronizing SC’s other casinos.

My bottom line:  if–as I believe–the Macau gambling market has passed its cyclical low point and is beginning to expand again, SC is in a very strong position to benefit.

so-so in the US

Bethlehem, PA continues to perk along, posting EBITDA of $32.1 million, up 27% from the $25.2 million it recorded in the comparable period of 2011.

Las Vegas was also up somewhat, with EBITDA of $98.2 million vs. $94.3 million.  Table games play increased by 8.5% yoy, thanks to influx of baccarat players.  But those players were unusually unlucky, leaving behind $30-$25 million more than we should be counting on them to do on average.

My bottom line:  The way I look at it, Wall Street values the US operations of LVS as less than zero.  As long as the company can pay its bills and generate free cash flow–as it’s doing–the quarterly variations in EBITDA during the current prolonged slump in Las Vegas aren’t that important to the stock.

weakness in the Lion City

On the surface, gambling results from the Marina Bay Sands in Singapore look pretty ugly.  That’s mostly because the year-ago quarter was such a blockbuster.  It doesn’t help matters that Marina Bay’s winning percentage from the high roller market it caters to was a third less in 3Q12 than in 3Q11.  Less important in dollar terms, but still worthy of mention, Marina Bay increased its reserves against non-payment of gambling debts by an extra $15 million.

EBITDA for the three months was $260.8 million vs. $413.9 million during what we now know was a cyclical high point this time a year ago.  Adjusting for the abnormally low winning percentage in the higher roller business, EBITDA was flat, quarter on quarter.

My bottom line:  Singapore is a fledgling gambling market.  We have very little past experience to generalize from.  To perhaps state the obvious, the market appears to be considerably more economically sensitive than I would have imagined.  That’s a negative.  If, however, a “bad” year means generating EBITDA of $1 billion and a “good” year means EBITDA of $2 billion–which would be my best guess at present–then Singapore is still a market that casino operators should be pounding down the door to get access to.

the stock

At current market prices, LVS’s ownership interest in Sands China is worth about $24 billion.  Its holding in Marina Bay is worth $18 billion, if we assume that it would trade at a 25% PE discount to Sands China and based on average annual EBITDA of $1.5 billion.  If so, the market is still valuing the US operations of LVS at around negative $5 billion.  This is way too cheap, in my view, especially given that the Macau operations, the largest single source of value for LVS, appear to be at or near the start of a cyclical upturn.

Wynn Resorts’ 3Q12: Macau (HK:1128) flat, Las Vegas picking up, big dividend

October 26, 2012 By in Casinos, earnings conference calls, Entertainment, Industry Analysis, Stock ideas Tags: , , , , , , Leave a comment

the 3Q12 earnings report

WYNN reported earnings for 3Q12 after the market close on October 24th.

Revenues came in at $1.2985 billion, flat with $1.2983 billion collected during 3Q11.  Net income was $149.2 million, 12.5% higher than the $132.6 million posted in the comparable period last year.  Due to a sharp reduction in share count from 125.9 million to 100.9 million, eps showed a much sharper 41% increase, at $1.48 vs $1.05. (The shrinkage in outstanding shares is due to the forced cancellation of 24.5 million shares formerly owned by Aruze USA.)

Results exceeded the Wall Street analysts’ consensus eps estimate of $1.34.

WYNN also announced a special dividend of $7.50 a share to accompany the regular 4Q payout of $.50.  In addition, in its conference call the company said it would increase the regular dividend to $1/share, starting in 1Q13.

details

Property EBITDA (Earnings Before Interest Taxes Depreciation and Amortization) for the quarter was $402.6 million, vs $381.1 million in 3Q11.  That breaks out into $292.2 million achieved in Macau and $110.4 million in Las Vegas.

Macau

If we subtract out from Macau results the portion owned by the investing public (including me) rather than Wynn Resorts, Macau accounts for about 2/3 of WYNN’s profits.  Over the past few years, Macau has also accounted for virtually all the earnings growth WYNN has achieved.

Wynn Macau earnings are now flattish, however, for several reasons:

–an economy-related slowdown in Chinese VIP gambling

–the opening of new casinos by competitors.  If nothing else, the novelty factor draws business to the newest venues, at least for a while

–Wynn Macau is at, or near, the capacity limits of its current physical plant.

Yes, the Macau government has given 1128 permission to build a new casino in Cotai, but that’s not scheduled to open until Chinese New Year in 2016.

In the meantime, we should expect no better than growth in line with the market for the Wynn properties in Macau.  But they will continue to generate huge free cash flow for shareholders and large management fees for the parent.

Las Vegas

EBITDA in Las Vegas is up by $25.2 million, or almost 30%, vs. 3Q11.

Most of the increase comes in casino operations.  About half the casino gain is from a return of the house “win” percentage to normal from last year’s unlucky lows.  The rest is genuine improvement in the amount of money wagered in the Wynn/Encore complex.  That’s a really good sign.

the dividend

As I mentioned yesterday, WYNN is in the unusual position of generating very high free cash flows, while having no current investment projects that need them.  WYNN is certainly not going to expand in Las Vegas, which is still plagued with substantial overcapacity.  The new Cotai project won’t need a lot of money soon, and it’s going to be financed mostly with debt, in any event.  Also, in today’s ultra-low interest rate environment, it makes little sense to repay cheap borrowings (arguably, one should be adding to debt, not subtracting).

So WYNN is electing to distribute much of its excess cash to shareholders.  1128 will likely soon follow suit.

buy or sell?

I hold both WYNN and 1128.   …LVS, too.  I think LVS is the cheapest of the three, and the only one I’d buy at today’s prices.

But I’m happy to hold the other two.  The Macau gambling market will likely be considerably better next year than this, although lack of capacity will be somewhat of a drag on 1128.  Las Vegas, where WYNN has considerably more operating leverage, will continue to make progress, I think.  And, as the cliché goes, with considerable dividend income I’m being paid to wait for earnings to accelerate.

Intel’s 3Q12: softness continues

October 17, 2012 By in earnings conference calls, Industry Analysis, internet, semiconductor manufacturing, Stock ideas, Technology, Wireless Tags: , , , , , , , , , Leave a comment

results

After the close of equity trading in New York yesterday, INTC reported its 3Q12 earnings results.

Revenues were flat, quarter on quarter, at $13.5 billion, during the typically seasonally stronger 3Q.  The same with operating expenses.

EPS came in at $.60 vs. $.57 for 2Q12, based largely on a lower than expected tax rate (implying to me that business was stronger than expected in emerging markets, weaker in the US and EU).

The numbers were considerably better than the downward revision to guidance that INTC announced in early September.  At that time INTC expected revenue of $13.2 billion and EPS (my estimate) of $.52-$.54 (see my post on the pre-announcement).

Year on year, results were down.  3Q11 revenues were $14.2 billion, EPS $.65.

The stock fell about 3% in the aftermarket Tuesday.  In the Wednesday premarket, it’s about the same, while S&P futures are flat.

details/guidance

details

Demand for PCs in the US, EU and China continues to be lackluster.  As a result, INTC’s customers, the machine manufacturers, continue to pare chip inventories.  This is typical behavior:  the buyer gets the sniffles, the component manufacturer gets pneumonia.   But INTC customers appear to be shrinking inventories to even lower levels than the company anticipated a month ago, implying their ability to read end-user buying intentions is especially low.

Business did pick up a bit in September in anticipation of Windows 8.

Demand for servers from corporations has also begun to slow down, as company cash flows flatten out due to the current deceleration in global economic growth.  This is a new element in the INTC story, although not a huge surprise.  No matter what anyone says–including the companies–corporations usually don’t borrow to fund capital expenditures.  Spending is a function of the cash flows that operations generate.

Cloud computing remains very strong.

guidance

Visibility is very low.

INTC appears to expect that 4Q12 will more or less mirror 3Q12.  The company normally keeps inventories of just over a month’s sales.  It now has 5%-10% too much.  It will slow down manufacturing a bit during 4Q12, as a result.  This won’t affect revenues.  But the company will shut some production lines and shift the machinery to new leading-edge uses.  This will mean lower capex during the quarter, as well as an unspecified amount of equipment writedowns.

During 1Q13, INTC will begin another of its bi-annual production upgrades–which will mean lower gross margins by a few percentage points for a quarter or two as the company gets the new lines up to speed.

earnings guesses

I’m pencilling in $.60 (excluding writedowns) for 4Q12, which would mean full-year EPS of $2.33.  I’m thinking that 2013 will bring a minimum of $2 a share, with $2.50+ likely if the global economy begins to reaccelerate.

the stock

Since the bottom for the S&P in June, the index is up about 14%.  Over the same time span, INTC is down by 14%.  Most of the damage has happened since mid-August, when the global slowdown became more apparent.

At $22 a share, INTC is trading at 9x trailing earnings and at, I think, at most 10x what it can earn in 2013. INTC shares now yield 4%, a full percentage point above the 30-year Treasury.

I’m surprised that the stock has performed as poorly as it has.  I’d thought INTC might give up some of its run to $29+, but I’d expected it to settle in around $25 or so.

That’s clearly been wrong.  And it’s always a danger signal when a stock doesn’t do what you expect.

As far as I can see, the current earnings weakness has revived all the old fears that INTC products have no place in a post-PC world dominated by tablets and smartphones.  And this, rather than business-cycle softness, is what’s causing the sharp underperformance of INTC shares.

It’s possible that the negative scenario will turn out to be true.  I continue to think, however, that INTC shares are now being priced as if that outcome were a certainty–that ultrabooks and INTC’s forays into tablets and smartphones won’t be successful.  So I’m continuing to take the contrary bet–noting, though, that there are risks in saying that everyone’s out of step but me.

Intel (INTC) preannounces weaker than expected 3Q12 results

September 11, 2012 By in Current Market Thoughts, earnings conference calls, Industry Analysis, semiconductor manufacturing, Stock ideas, Technology Tags: , , , , , , , , , , , Leave a comment

the INTC preannouncement

INTC intends to announce 3Q12 results on October 16th.  But it already knows that its earnings will fall below its previous guidance by a substantial amount.  So, while the company still has to dot the is and cross the ts, it issued a short press release stating this on September 7th.

INTC now expects 3Q12 revenue to be $13.2 billion rather than $14.3 billion, and for its gross margin (that is, its profit margin after subtracting all direct costs of making its products) to be 62% of sales rather than 63%.  Basically, all other costs remain the same.

By my back-of-the-envelope calculation, this means INTC will likely report 3Q12 eps of $.52-$.54, rather than the $.63-$65 or so it had been expecting when it issued its guidance two months ago.  3Q11 eps?  …$.69, on revenue of $14.3 billion.

what’s going on?

The unofficial (though pretty much binding, nonetheless) protocol for such announcements is to list the reasons for the earnings revision in order of importance, with the most important going first.  That would mean:

1.  customers worldwide are not fully replenishing their stock of INTC chips as they sell products containing them.  This is a standard response to weakening demand, especially if PC manufacturers believe they can quickly get supplies if needed.  Let INTC hold the inventories, not them.  Therefore, slower economic activity is resulting in lower sales.

A reasonable guess is that INTC’s 8% slide in sales vs. its prior expectations breaks out into 4% due to weaker end-user demand and 4% defensive behavior by PC makers.

Operating leverage is making the bottom line look considerably worse.

2.  one customer group sticks out:  corporations are slowing their replacement of employees’ aging PCs (but not their spending on servers or on the cloud).

This almost goes without saying.  Corporations rarely outspend their cash flow. If they sense cash flow contracting, they cut discretionary spending.

3.  one geographical area does, too:  slowing demand in emerging markets (which had been a pillar of strength earlier in the year).

Presumably the supply chain is longer in emerging markets than in developed ones, as well as harder to get good information about.  So the slowdown in end-user demand may have been going in somewhat longer in emerging markets than in developed.

To recap, my interpretation of the release is that global economic weakness is the main cause of the preanouncement.  Emerging market slowdown is a factor worthy of note, but the least important of the three elements cited.  Windows 8 isn’t really an issue, since INTC had already accounted for a pre-release buying pause in its previous guidance.

the stock is down almost 8%…

…since the INTC announcement.  As an owner of the stock, I’m not happy.  As an observer of the stock market, I think the selloff is overdone.  But it’s not entirely crazy, either.  I regard INTC as a “show me” stock in the high $20 range.  At, say, $27-$28, I think the “old” INTC business of selling mostly PCs is fully valued.

For the stock to break into $30-land, I think it has to demonstrate some success in penetrating the mobile market–smartphones and tablets.  If you think INTC has no shot–and I think that’s the consensus among Wall Street analysts and the media–the stock is mildly undervalued today, but that’s all.

On the other hand, if you think INTC has a reasonable chance (that’s my opinion) you get the possibility of some upside, a low-risk option on substantial upside if INTC’s newest chips crack the mobile market, plus a dividend yield above 3% while you wait.

Although it sounds odd at first, it’s also possible that the current slowdown is good for INTC, if it buys extra catchup time to get the company’s 14nm chips on the market.

a case of operating leverage

That’s my topic for tomorrow–how this situation presents a good analytic opportunity to see operating leverage analysis in action.