Category Archives: earnings conference calls

“Great quarter, guys!”–the smarmy analyst refrain

September 4, 2012 By in earnings conference calls, Information for investors, Investment firms, Portfolio management, Securities regulation, Stock ideas Tags: , , , , Leave a comment

Bob

A few days ago, my friend Bob emailed me a link to a recent Wall Street Journal article commenting on the omega-dog behavior of brokerage house securities analysts on company conference calls.  The ultimate acknowledgment of this inferior status is the obsequious “Great quarter” comment.

A distant cousin is “Thank you for taking my question,”  which typically means “I know you control who gets to be heard on the call and I appreciate the status you’re granting me.”  It can also convey an undertone of irritation that the analyst has been denied this opportunity on previous calls, despite his obvious stature in the industry.  If so, the analyst is also implying (sometimes, to his regret) that management isn’t clever enough to pick this up.

my take on the sell side, and on earnings calls

Anyway, Bob’s email prompted me to write down these thoughts.

1.  The earnings release and conference call are, in the first instance, the straightforward way that publicly traded companies feel they meet disclosure requirements mandated by regulators.

At the same time, companies understand these are marketing opportunities as well.

Of course, management controls who gets to speak on the call–and it’s virtually always favorably inclined analysts who get the air time.  If you don’t believe this, read anything Mike Mayo has written about the securities industry.  For the better part of two decades he was blackballed by the major banks, not because he was an incompetent (he’s quite the opposite) but because he pointed out banks’ weaknesses and recommended selling their stocks.  Not only was he denied access to managements, but he was repeatedly fired from brokerage houses when firms he covered directed investment banking business elsewhere and when institutional investors who had large bank stock positions shifted their trading away.

No, being seen as the CEO’s boot-licking lapdog isn’t pretty.  Looking on the bright side, though, a lapdog has unparalleled access to his master–and that access is something institutional investors are willing to pay for.

2.  Securities analysts are deeply dependent on the managements of the companies they cover.  Investment banking business is only part of the story.  Will the CEO help an analyst burnish his reputation by attending a conference the analyst organizes or will he dispatch an IR person who will give a canned presentation that’s months old.  When the CEO or CFO travels to meet large institutional investors, will they let the analyst arrange the agenda and travel with them?  If the analyst has a question, will the CEO return his call?  How fast?  These are all factors an institutional investor considers in deciding how much he’s willing to pay an analyst for services.

Companies are also the primary source of industry information for almost every analyst.  Cutting off access to management is like taking away your internet connection.  That’s doubly true today when brokerage house research budgets have been pared to to bone and many laid-off analysts have been forced to open up shop on their own.

3.  The traditional communication system, of which many earnings conference calls are still a part, is broken.  When I was a rookie analyst, publicly listed firms would feed financial information to shareholders and interested investors through “tame” brokerage house securities analysts.  Many companies regarded analysts as quasi-employees whose job was to relay the info–untouched–to shareholders.  After all, everyone had to have a brokerage account.

Lots has changed since then:

–investors under the age of, say, 60 have spurned traditional brokers in favor of a do-it-yourself approach through discounters like Fidelity.  Two reasons:  much lower costs, and a fundamental distrust of the motives of traditional brokers.  Sell side analysts still have contact with institutions, but will almost no individual investors

–Regulation FH (Fair Disclosure, August 2000) has clearly specified that the practice of selective disclosure is illegal

–many of the analysts companies communicate with no longer work for brokers.  They’re in independent research boutiques that repackage the information they receive and sell it.  They talk to some institutions, but not all.  And they have no content whatsoever with individual investors.

The upshot of the traditional practice is that individual shareholders are cut out of the information loop altogether.  Ironically, CEOs can end up giving corporate information (which is the property of shareholders) for free to professional analysts, who are typically not shareholders, while denying it to owners.  To add insult to injury, these middlemen then sell the information to shareholders, who are forced to pay thousands of dollars a pop.

Yes, the “tame” analysts kowtow–but they’re laughing all the way to the bank.

The current system is so broken, I think it’s only a matter of time before there’s wholesale change.  That day can’t come too soon for me.

Tiffany’s 2Q12: interesting stock market reaction

August 30, 2012 By in earnings conference calls, Luxury goods, Retail, Stock ideas Tags: , , , , , , , , Leave a comment

the report

Prior to the New York open on August 27th, TIF announced its 2Q12 (ended July 31st) results.  Earnings were up by 2%, year on year, at $92 million.  Eps were $.72/share, also up 2% yoy.  Ex non-recurring items, which depressed 2Q11 eps by $.16, the yoy earnings comparison was negative–down 17%.

Quarterly sales came in at $887 million, also a 2% yoy advance.   Negative currency effects–a 2% decline of Asia-Pacific currencies against the dollar, and a 9% fall of European, reduced that figure from what would have been a 3% constant currency gain.

EPS were a penny below the Wall Street consensus of $.73.

Although TIF said its 2Q12 performance met its expectations, it lowered full-year guidance for the seond time in two quarters.  The new full-year eps range is $3.55-$3.70 vs. guidance of $3.70-$3.80 announced with 1Q12 results.

The stock?  It rose by 7%+ on this news.

the details

the Americas 

Same store sales were down 5% yoy, and minus 9% in the flagship store in NYC.  All the weakness came from domestic customers.  Sales to foreign tourists were flat, with a falloff in EU buying offset by increases in Asian visitor purchases.

Florida, Texas, and Guam were notable areas of strength.

Asia-Pacific

Same store sales were down by 7%, two of those percentage points due to currency weakness.  Slight price increases, lower unit volume.

Japan

12% same store sales growth in local currency, offset somewhat by 2% yen weakness vs. the US dollar.  Continuing recovery from Fukushima-related weakness.

Europe

2% same store sales growth was more than erased by 9% currency weakness.  Continental Europe was stronger than the UK.  Foreign tourist buying made the figures look better than they would have been from local customers alone.

the balance sheet

It’s not something I’ve commented on before.  But the yoy change is remarkable.

During 2Q12, TIF raised $250 million in long-term debt, $60 million of which went to retire maturing borrowings.

Total debt now stands at $940 million, cash at $367 million.  A year ago, the figures were $694 million and $565 million.  Put another way, the company has gone from net debt of $129 million to net debt of $573 million, a $444 million negative swing, over the past twelve months.

The figure means TIF invested close to half a billion dollars in excess of funds generated by operations in business expansion.  Most seems to me to have been used to build inventories, with a modest amount for expanding the store network.

market reaction has been positive…

…even though there’s evidence of a continuing slowdown in high-end jewelry buying in both the US and China.  Nevetheless, TIF shares appear to have bottomed around $50 in June.  They’ve been rising steadily–and outperforming the overall market–since.

my take

TIF shares are up over 20% during July and August, despite the weak business outlook.  I hadn’t expected this.  I’d thought the stock would likely languish until there were clear signs of a pickup among either Asian or US customers.

Yes, the company is very well-managed.  The newly raised debt gives it a larger cash cushion, in case its business remains in the doldrums for an extended period.  It seems clear to me that TIF has, prudently, shifted out of rapid expansion mode and into a more defensive cash generation stance.  If this turns out to be the last downward earnings revision, the stock was inexpensive at $50.

Still, I think it’s interesting that the market is willing to pay for an anticipated recovery in TIF’s business so far in advance.  It conveys to me the suggestion of an underlying bullishness among market participants that contrasts sharply with bearish media sentiment.

As for TIF shares themselves, I’d prefer to wait either for a price in the mid-$50s or the 3Q12 earnings announcement rather than buy here/now.

HP, Dell, Big Lots–what their results are saying about the US economy

August 24, 2012 By in Current Market Thoughts, earnings conference calls, Investment firms, Portfolio management, Retail, Securities regulation, Stock ideas, Technology Tags: , , , , , , , , , , Leave a comment

a qualifier

Actually, this post is more about how I interpret their results.

There’s always ambiguity in any assessment of how companies are doing, including management’s own statements.  There may be issues that managements are unaware of.  There will likely also be others that, especially in the case of a weaker firm, the top brass will tap dance around when speaking to investors.

It’s possible they may be in denial.  But no one is going to turn his earnings conference call into an advertisement for competitors by revealing that, say, “Lenovo has better products than we do, so they’re taking market share from us wherever we compete.”  That just speeds the customer exodus.

We are , however, in a slow-growth world today, where there’s simply not enough business for all market entrants.  During a boom, the top firms don’t have enough capacity to meet customers’ demands.  So buyers who need a product now have no choice but to purchase from second- or third-tier competitors.   In the current environment, in contrast, the number-ones have capacity.  And customers have more time to study competitive offerings before they choose.

the PC business:  Dell and HP

Both are icons of the PC business in the US.  But neither has kept up with the market. True, Windows Vista certainly didn’t help to enhance the reputation of either.  And both have lost market share to Apple.  Also, the market for Windows machines is being negatively affected at the moment by consumers’ reluctance to buy Windows 7 machines because Windows 8 is just around the corner. But as an ex-Dell user (now writing either on a Mac or an Asus machine), I know Dells weigh a ton, run hot and don’t last very long.  Customer service is awful.  HP isn’t much better.

Asian giants Lenovo, Acer and Asustek don’t yet have the support infrastructure in the US that they do  elsewhere.  But the performance of the US incumbents seems to be an open invitation to these firms to take a lot of market share from HP and Dell here–as they are already doing abroad.

Anyway, what I think we’re seeing in the HP and Dell results is the loss of share that weaker players experience in times like these–not evidence of overall economic malaise.

Big Lots

…another company with weak results.  I don’t think Big Lots’ poor performance is indicative of macroeconomic weakness, either.  On the contrary.  I see it as more evidence that consumers are trading up, because their personal economic fortunes are improving.

Trading up and down are complex phenomena.  In bad times, the Saks customer may shop at Target, the target customer at Wal-Mart, the Wal-Mart customer at the dollar stores.  The dollar store customer may just not consume or buy at venues that are below Wall Street’s radar screen.

(Of course, trading down among retailers isn’t the only effect of recession.  Overall, consumers buy less.  They also buy more plain-vanilla, less expensive items that they can use for a variety of purposes.)

In good times, the opposite occurs.

But in both situations, only the merchants at the bottom of the chain and at the top see unambiguous results.

I think two forces are at work in Big Lots’ sales:  rainy day customers are trading up; and, unlike the more progressive of the dollar stores, BIG hasn’t expanded its offerings enough to hang on to more affluent buyers.

my bottom line

I see the results for HP, Dell and Big Lots as simply what happens to weaker companies in a US growing at 2% a year.  The poor numbers aren’t reasons to run out and buy the S&P 500.  But, equally, they’re not a reason to sell, either.

DIS 3Q12 earnings–highest all-time profits

August 14, 2012 By in earnings conference calls, Entertainment, Industry Analysis, Lodging, Stock ideas Tags: , , , , , Leave a comment

the report

On August 7th, DIS released profit results for 3Q12 (the DIS fiscal year ends in September).  The company posted its highest quarterly profits ever–$1.83 billion.  At $11.1 billion, revenues were up 4% year on year for the period.  EPS were $1.01.  That was 29% from the $.78 posted for 3Q11.  It also compares favorably with the Wall Street consensus estimate of $.93/share.

The stock initially broke through the $50 barrier on the upside on the news.  It has since settled back a bit below that mark.

the details

media networks

This segment makes up 2/3 of DIS’s operating income.  It’s mostly cable; and of that, the lion’s share of profits come from ESPN.

Operating income was flat, yoy, at $2.13 billion.  But a change in contract terms with Comcast has shifted into 1Q and 2Q $139 million in payments normally recognized in 3Q.  There are other underlying complicating factors (the norm for this segment, and for DIS overall) as well.  On an apples-to-apples basis, op income for Media Networks is probably growing at 10%+.

parks and resorts

This segment represents a bit less than 20% of DIS’s op income.

Parks and Resorts were up 21% yoy during 3Q12, at $630 million.  The comparison is flattered, however, by higher yoy royalty payments from Tokyo Disneyland, based on a rebound in attendance from the earthquake/nuclear disaster-depressed 3Q11.  DIS also received in the current quarter an insurance settlement for business interruption at Tokyo Disneyland last year.

Business is recovering strongly at DIS’s domestic theme parks–thanks in part to the successful makeover of the California Adventure park at Disneyland.  The company has new cruise ships and bookings are perking up as well.

Normalized growth for Parks and Resorts is probably closer to 10%.

studio entertainment

Movie results were up over 6x to $313 billion, thanks to the Avengers film, which has taken close to $1.5 billion worldwide.  Even so, films now represent less than 10% of DIS’s overall operating income.  Of course, successful movies can also have positive rub-off effects on the theme parks.  They’re the foundation of much of DIS’s merchandise sales, as well.

consumer products

To some degree, Consumer Products earnings are affected by internal negotiations about revenue sharing among segments about sales of character-related merchandise.  That was a yoy positive in 3Q12, when this segment posted op income of $209 million on sales of $742 million.  Growing at maybe 10% yoy, Consumer Products represents considerably less than 10% of DIS.

interactive

DIS’s gaming and internet businesses continue to make losses.  The good news is that interactive is gradually approaching breakeven.  The segment lost $42 million in the current quarter, less than half the deficit in the year-ago period.

a shift in international strategy at ESPN

For the past couple of years, DIS has spoken enthusiastically about international expansion possibilities for ESPN.  Its initial foray was to be soccer broadcasting in the UK.  the company’s tone was somewhat less positive a quarter ago.

During Q&A after the 3Q12 earnings announcement (you can get transcripts for free from Seeking Alpha–a really very valuable service), DIS management said in effect that it is reining in its European expansion plans after losing in the bidding for Premier League broadcasting rights.  It has also ended its Asian jv with News Corp.  ESPN is now concentrating on expansion in Latin America.

It’s too simplistic to characterize the UK expansion attempt as a mistake.  Rather, incumbents there (correctly, in my view) recognized the threat that ESPN posed and were willing to take substantial near-term losses in order to deny a powerful new competitor a foothold in their market.  Not pleasant for them, but the correct strategic move.

As for ESPN, this removes the near-term possibility of large positive earnings surprise from a new profit source.  But the immense popularity of its sports programming in the US make it a steady grower at 15% or so for the foreseeable future.

theme park cap ex is peaking

Other than for its theme parks, DIS isn’t in very capital-intensive businesses.  Of its total segment capital expenditure of $2.5 billion so far in fiscal 2012, $2.3 billion is attributable to expansion at Disneyland and Disneyland Paris, as well as construction of Shanghai Disney.  With Disneyland expenditure finished, the company is beginning work on overhauling Fantasyland in Disney World.  Despite this expense, company cap ex will likely gradually decline from the current level, providing higher free cash flow for dividend increases and further stock buybacks.

buybacks continue

Year to date, DIS has repurchased 55 million shares of its stock at an average price of a bit over $38 each.  During 3Q12, the buyback pace slowed somewhat, with 8.6 million shares bought at an average price of $43.37.

In its earnings conference call, however, DIS made it very clear that it regards its intrinsic value as significantly higher than the current share price–and that, therefore, buybacks will continue.  It intends to devote about a third of its free cash flow to a combination of buybacks and dividend increases.

my take on the stock

Accounting quirks aside, DIS seems to me capable of delivering 15% annual earnings growth, with limited cyclicality.  The stock is trading at a slight premium to the S&P 500.  It has strong management and a collection of iconic brands, the most important of which is ESPN.  My guess is it will be a mild outperformer over the year ahead.

LVS’s 2Q12–plusses and minuses

July 30, 2012 By in Casinos, China, earnings conference calls, emerging markets, Entertainment, Hong Kong, Industry Analysis, Stock ideas Tags: , , , , , , Leave a comment

the report

After the New York close last Wednesday, LVS reported its 2Q12 results.  Revenue came in at $2.6 billion, up 10.1% from what the company took in during the year-ago quarter.  EBITDA (earnings before interest, taxes, depreciation and amortization) came in at $844.7 million.  That’s $56.9 million, or 6.3%, less than during 2Q11.

EPS were $.44 for the quarter, vs. $.54 in the comparable three months of 2011.  The figures were also considerably below the brokerage house analysts’ consensus of $.60 a share.

Wall Street didn’t like this news. The stock dropped more than 5%, breaking through support levels that had held over the past year, before recovering somewhat.  This is despite the fact that LVS had already lost almost 40% of its market value during the past several months on worries that Chinese gamblers would pull in their horns as the mainland economy slows.  It also didn’t matter that the entire earnings “miss” was the result of random or non-recurring factors.

There was one piece of bad news, coming out of Singapore.  Nevertheless, I think the stock weakness was a knee-jerk reaction to the headline numbers, not a result of analysis of the facts.

details

US

EBITDA was down about $22 million year on year for the quarter, at $91.3 million.  Bethlehem, PA chipped in an extra $5.9 million (the first time I think I’ve ever mentioned this casino in a post).  Otherwise, the business was flattish.  The biggest single reason for the yoy decline was that table games players were much “luckier” than average in Las Vegas.  They lost 16.5¢ of every dollar bet during 2Q12 vs. 20¢ during 2Q11–and a normal loss rate of 21%-24%.

Macau

Revenues for Sands China (HK: 1928) came in at $1.48 billion during 2Q12, up 22.3% from the $1.21 billion in revenue posted during 2Q11.  EBITDA rose by $41.0 million, or 10.7%, yoy, to $429 million.

That came despite pre-opening expenses that were $25.3 million higher than a year ago, mostly due to the debut of the new Cotai Central casino during the quarter.  In addition, high-roller patrons of the Venetian Macao, who were unusually unlucky this time last year, turned the tables during 2Q12 and took home more than their long-term average amount.  Factoring these two influences out, I think EBITDA would have been up by 20% or so.

One more complication:  during the quarter Sands wrote off $100.8 million it had spent on site preparation at yet another potential Cotai casino location–one the government there has denied Sands permission to develop.  The combination of the writeoff, pre-opening expenses and bad luck pushed net income down by 40% yoy to $160.5 million.

Still another quibble (a minor one, in my view, but apparently more than that to the markets):  LVS opened a significant new casino in Cotai during 2Q12, but its market share for the quarter didn’t expand as much as its increase in gambling capacity.  If the situation stays that way, it’s a problem.  I think it’s way too soon to judge, however.

A final point:  some commentators have criticized LVS for continuing a pell-mell expansion in Macau despite the current slowdown.  Quite the contrary.  Earlier this month, LVS announced it had requested government permission to push back completion of its current Cotai project by three years.

Singapore

Revenue for the Marina Bay Sands was down 5.8% yoy, at $694.8 million. during 2Q12.  EBITDA was down by 18.5% at $330.4 million.  Two reasons:

–high-roller gambling was off by about 6% and those who played were unusually lucky.  About half of the revenue effect–but none of the back luck–was offset by mass market gains.

–the provision Marina Bay Sands made for questionable receivables–which means gamling credit advances to high rollers that may not be paid back–amounted to $39.9 million in 2Q12 vs. $11.4 million in 2Q11.

If there’s a worry in the 50+ pages of the LVS’s quarterly earnings release, this is it.  I’m not particularly concerned.  The provision boosts the company’s bad credit reserve in Singapore to about a quarter of the $822 million in receivables outstanding.  It comes from specific identification of gamblers who have not been paying their bills on time.  It presumably also coincides with withdrawal of credit from these individuals.  So the issue will likely gradually fade away.  It bears watching, though.

overall

LVS estimates that eps would have been $.08 higher if its luck had been in line with long-term experience.  Another $.08 would have been tacked on, save for the writeoff in Macau.  Arguably, then, Wall Street hit LVS earnings right on the nose.

finances

Yes, EBITDA is not growing like it was a year ago.  But it appears to be at least steady at close to a $3.5 billion annual rate.

LVS now has $9.4 billion in debt outstanding (offset in part by $3.5 billion in cash), with borrowing costs of around 3%.  This implies annual net interest expense of a bit more than $350 million.  So pretax cash flow is in excess of $3 billion a year–meaning that the company could be completely debt-free in two years if it were to devote all its cash flow to repaying borrowings.  Quite a change from late 2008.

To my mind, it makes little sense to repay more than minimum requirements of very low-cost debt.  In fact, at 3% the company should be borrowing more.  LVS will have capital expenditures for the coming year of $1 billion.  It will also pay out $825 million in dividends.  But the point still remains that LVS is highly cash-generative.

valuation

LVS has a market capitalization of $30 billion.  Its interest in Sands China has a market value of about $18 billion.  If we award the same EBITDA multiple to 100%-owned Marina Bay Sands as Sands China receives in the Hong Kong market, the former has an asset value to LVS of $18 billion as well.  This leaves the US operations of LVS–Las Vegas, PA and royalty/management fees from Asia–with a value of minus $6 billion.

Of course, I have been making essentially the same argument for some time and that hasn’t stopped the stock price of LVS from plunging.  What’s happened is that the Hong Kong market is now pricing 1928 at $23 a share vs $32 in April.  However, the stock is now trading at about 12x cash flow and yielding 5%.  And that’s with cash flow at, or close to, what I think is a business cycle low.

That’s way too cheap. (Remember, I own LVS.  I’d own 1928, too, but I don’t want to buy on the pink sheets and a glitch in Fidelity’s software prevents Americans from buying the stock in Hong Kong).