Category Archives: earnings conference calls

Wal-Mart (WMT)’s earnings miss: significance?

August 16, 2013 By in Current Market Thoughts, earnings conference calls, Industry Analysis, Retail, Stock ideas Tags: , , , , , , , , Leave a comment

the coview

Yesterday, WMT reported 2Q13 earnings results, which came in below company guidance.  WMT also revised down its expectations for the rest of the year.  That news followed a similarly disappointing result from Macy’s (M).

Media comment has interpreted these reports as signaling the domestic economic recovery is stalling out, that “pent-up demand” –catch-up buying resulting from purchases postponed during the Great Recession has finally been exhausted.  Now, the talking heads opine, the true “fragile” state of the US economy is finally being revealed.  This realization is why the stock market declined sharply yesterday.

why I think the consensus is wrong

This interpretation may turn out to be the correct one.  But it’s not the only way to look at things.  In fact, in this case, I think the media view is wrong.  Here’s why:

1.  Interest rates went up yesterday.  The 10-year Treasury reached a yield of 2.77% on Thursday; the 30-year, 3.81%.  Both are highs for the year.  In other words, the bond market isn’t seeing economic weakness.  It’s seeing strength that will eventually lead to the Fed raising interest rates.

2.  WMT’s main business is selling food and general merchandise for cheap in no-frills stores targeted at middle- and low-income households.

When Sam Walton started doing this some 40 years ago, WMT had the field to itself.  But success spawned imitators.  In particular, recently, and especially during the recession, the dollar stores have been taking market share away from WMT.  In a way, this a replay of the competition between mainline department stores and specialty retailers that emerged in the 1970s-1980s.

3.  During recessions, people change their buying patterns.  They put off buying big-ticket items.  And they trade down to cheaper alternatives for everyday necessities.  When recession ends, they normally trade back up.  For the affluent, that is already happening.  For average and lower-income Americans, as I read the results from manufacturers of staples, that hasn’t occurred yet.

4.  About 30% of WMT’s traditional customers are low-income Americans.  I read the WMT earnings report as saying that economic recovery hasn’t yet reached this part of the company’s customer base.

This, I think, is the real news in the WMT results.  I think the earnings miss is evidence in favor of the idea that high unemployment in the US is a structural phenomenon that low interest rates can’t cure.  Action by congress and the administration is needed, instead.  But suggesting this is opening a can of worms that talking heads–and the securities analysts who feed them information–would rather not touch.  Easier to say (counterfactually, in my view) that the overall economy is cooling off.

my bottom line:  as a citizen, I have a strong opinion on the structural/cyclical unemployment issue. I think WMT’s weakness is a company-specific issue, not a macroeconomic one.

As an investor, however, there’s no need to either have an opinion on this issue or to make your view a major feature of your portfolio.  Just avoid low-end general retail.

Look, instead, for niche retailers who are showing strong same store sales growth   …or avoid retail altogether.  There’s no rule that says you always have to have retail stocks in your holdings.

Intel’s 2Q13–the waiting game continues

July 19, 2013 By in earnings conference calls, Industry Analysis, semiconductor manufacturing, Stock ideas, Technology Tags: , , , , , , , , Leave a comment

2Q13 earnings

Intel (INTC) reported 2Q13 earnings results after the close on Wednesday. Revenue came in at $12.8 billion, down 5.1% year on year.  Earnings per share were $.39, flat quarter on quarter but off by 28% from INTC’s performance in 1Q12.  The figures were in line with the company’s previous guidance.

The company also lowered guidance for the second half, saying that this normally seasonally stronger period, while up vs. the first six months, won’t show its usual revenues gain.  INTC now sees full-year revenues for 2013 as flat–or about 2% lower than its previous view.

How so?

The cloud continues its explosive growth.  The server business is fine.  But the PC market is weaker than INTC expected.  For the first time INTC sees PCs as being as soft as consultants Gartner and IDC do.

During the quarter, INTC bought back 23 million shares of stock, paying an average of $23.91 each for them.

INTC shares were down almost 4% yesterday on the news.

the near-term investment case hasn’t changed much…

The big question is still whether the newest generating of INTC microprocessors, the first designed especially for mobile devices, will gain widespread acceptance.  A sub-plot, or maybe a necessary condition for this to happen, is the question of whether manufacturers of computer devices and operating systems are going to be able to deliver new “wow factor” products that people want to buy.

 

I’m content to hold INTC shares to see what happens, even though the tone of INTC’s comments suggests to me that we won’t see the new chips in full flower until early 2014.

..but INTC may be remaking itself in a more fundamental way

Yes, what I’m about to write may be making mountains out of molehills–but that’s what analysts do.

It looks to me that new CEO Brian Krzanich believes INTC is not in one, but rather in two, separate but complementary businesses.  One is researching and designing proprietary computer chips.  The other is manufacturing chips, either for itself or for others.

Although promoting foundry operations to equal status with making x86 chips is a simple and sensible change of viewpoint, it’s also potentially earthshaking for some INTC veterans.

I can imagine a lot of possible reasons (some of them mutually incompatible) for making this change of focus, but two consequences stand out to me.  Both derive from the fact that INTC is by far the most accomplished chip manufacturer in the world–one whose edge over the competition is increasing:

–to the extent that INTC picks and chooses the firms it makes chips for, it may be trying to turn the ARMH vs. INTC decision into an “eco-system” one.  A device maker can either have INTC parts + very fast, highly compatible chips from its partners or ARMH + a hodge-podge of less well-made, not so compatible parts from others.  Presumably this tilts the playing field considerably in INTC’s favor.

–investors like foundries better than chipmakers.  Look at the PE multiple on TSMC vs. INTC.    TSMC is 10% higher–even without considering the quirkiness of TSMC’s financials.

 

 

a promising 1Q13 for Tiffany (TIF)

May 29, 2013 By in China, Current Market Thoughts, earnings conference calls, economics, Industry Analysis, Luxury goods, Retail, Stock ideas Tags: , , , , , , , Leave a comment

my bottom line on the stock

I no longer hold TIF.  Great company, expensive stock (the current 22x fiscal 2013 eps is at the high end of the company’s historical PE range).  Also, thematically, I’d prefer to get Consumer Discretionary exposure through firms that cater to average Americans, the segment where I think spreading economic rebound will bring the best year-on-year earnings gains, rather than the affluent.

Nevertheless,

TIF is an important bellwether

for how the wealthy, foreign tourists and China are feeling. So the results are well worth monitoring.   All three  groups appear to be starting to come out of their recent spending funk.

April quarter results

Tiffany reported 1Q13 (ended April) results before the bell yesterday.  They were surprisingly good.  Worldwide sales were up by 9%, yoy.  Eps came in at $.70, also up 9% over the $.64 posted in the year-ago quarter.

The figures were massively better than the consensus estimate of Wall Street analysts, who had penciled in $.52 for the April period.  This is also the first quarter in the past five where yoy earnings gains have been significant.  And 1Q13 exceeded the previous high water mark for the first quarter of $.67 a share set in 2011.  Good news.

all regions looking up

Here are TIF’s yoy sales gains by region:

US          +6% in 1Q13   vs    +2% in 4Q12

Asia Pacific          +15%   vs     +13%

Japan          +2%    vs     -6%

Europe          +6%     vs      +3%

Total         +9%  in 1Q13     vs.     +4% in 4Q12

a dividend increase

Two weeks before the earnings report TIF’s board increased the quarterly per share dividend from $.32 to $.34.  On the one hand, the rise comes at the normal time of year for TIF.  And the bump up is smaller than 2012’s.  On the other, if we make the reasonable (to me, anyway) assumption that the board of directors is targeting a payout of 25% of cash flow and/or a third of profits, the dividend increase signals there’s still upside to the Wall Street consensus.

More important, the board is comfortable that business is improving.

a strong 1Q13 from Las Vegas Sands (LVS)

May 2, 2013 By in Casinos, earnings conference calls, Entertainment, Industry Analysis, Stock ideas Tags: , , , , , , 1 Comment

the report

After yesterday’s close, LVS reported 1Q13 earnings results.  Revenues came in at a record $3.3 billion, up 19.5% year-on-year.  Earnings per share were $.71, up a penny from the 1Q12 EPS, but $.04 higher than the Wall Street analysts’ consensus.

The results are actually much stronger than the raw numbers would suggest.  As regular readers will already know, casinos count as revenue only the amount that patrons lose when they gamble, not the amount they bet.  Over long periods of time, gamblers losses adhere to highly predictable patterns.  Over short periods, however, they can fluctuate a lot from the “house advantage,” based mostly on random “luck” factors.  To get a clear picture of how a casino company is doing, we have to adjust for this.

In LVS’s case, luck made 1Q12 revenue (and operating profit) look $177 million better than it should have; luck made 1Q13 revenue look $25 million worse.  Adjusted for these differences, income for LVS was up by about 30%.

why so good?

Macau

–Chinese gamblers elected to keep low profiles during the recently completed leadership change in Beijing.  Now they’re returning to the baccarat tables in Macau.

–better transportation and streamlined border controls mean more visitors can easily reach Macau

–unlike, say, WYNN, LVS has ample spare capacity to accommodate new customers, so it’s benefiting disproportionately from the market upturn.

Singapore

–mainland Chinese gamblers, whose patronage of the Marina Bay Sands has been more highly economically sensitive than their visits to Macau, are coming back

–so too, gamblers from Indonesia

US

–Las Vegas was flattish, with strength in non-casino operations

–Bethlehem, PA continues to perk along

Asian retail mall operations

In response to an analyst question about why LVS had not yet sold any of its Macau or Singapore retail operations as previously planned, management said the businesses were still growing much more quickly than anticipated.  The company thinks the Asian malls may ultimately be worth $8 billion – $10 billion, or around 20% of the company’s market cap.

For the first time, LVS is providing segment detail about these operations.   1Q13 operating profits were $68 million, up 23.4% yoy.

a special dividend?

Management also said it’s considering borrowing in the US, à la AAPL, to fund either a special dividend or a share buyback.

my take

LVS isn’t wart-free. It’s involved in a number of lawsuits.  And its long-time auditor has just parted ways.  Still, by my calculations, the Asian operations explain more than the entire market cap of LVS.  I don’t think either Hong Kong or Wall Street has appreciated the potential of the Asian retail malls.  LVS is the only way to get exposure to Marina Bay Sands and the easiest way to participate in Sands China.  I’m not in a great rush to buy more today but I’m very happy to hold.

AAPL’s 2Q13–some answers, still some questions

April 24, 2013 By in earnings conference calls, Industry Analysis, internet, Stock ideas, Technology, Wireless Tags: , , , , , Leave a comment

the report

After the New York close yesterday AAPL reported its 2Q13 earnings results (AAPL’s fiscal year ends in September).  Revenues were $43.6 billion, up 9% year-on-year.  EPS, however, were down 18% yoy, at $10.09.   The latter figure was slightly ahead of the Wall Street analyst consensus of $9.97, a number that been ratcheting down in recent weeks.

The company guided to flattish sales in 3Q13, with mild margin contraction.

It announced a 15% increase in the quarterly dividend to $3.05 a share, meaning a current dividend yield of just over 3%.

APPL also intends to buy back $60 billion in stock before the end of calendar 2015.  That would be 15% of the company at current prices.  AAPL now has $147 billion in cash, of which $104 billion is held outside the US.  It won’t touch the foreign holdings for the buyback.  Instead, it will issue bonds in the US to get the money it needs.

This piece of financial engineering will have two impacts.  It will boost the growth rate of EPS by at least an additional 5 percentage points per year.    And the financial leverage will increase AAPL’s return on equity from its already heady 25%+.

The stock was initially up about 5% on this news.  Then, during the conference call, AAPL management said it won’t have its next new product launch until fall.  The gains evaporated and were replaced by a slight loss.

what’s going on

Two factors:

margin erosion

1. smartphones

As I see it (remember, AAPL is pretty opaque), the emergence of Samsung as a competitor in the high end of the smartphone market,where AAPL makes its biggest profits, has caused that segment to mature faster than AAPL had expected.  Unit volume growth is now coming mainly from emerging markets, where the price of AAPL’s cutting-edge phones is too high.  The company is selling older models (iPhone4s) there, at discount prices–and therefore reduced margins.

2. tablets

A year ago, it looked to me like 2/3 of AAPL’s tablet volume was from its newest model iPads.  Today, unit volumes are much higher, but less than a quarter are the newest 10″ iPads.  The rest is a combination of iPad minis (a runaway success) and bulk sales of iPad2s to institutions.   Both of the latter are at lower margins.

My guess is that we’re at or near a gross margin low point now.

continuing PE multiple contraction

The maturing of the smartphone market has been actively discussed in the financial community for a couple of years.  In my view, worry about this possibility is the main reason that, despite booming sales and earnings, the price earnings multiple on AAPL’s stock had contracted from the high teens to around 12 by the second half of last year.  Relative to the market, the multiple went from a premium of 25% to a discount of 25% over the same time period.

Unpleasant for holders, maybe, but understandable.

Over the past 6-8 months, however, the multiple has contracted further, both in absolute terms (to under 10) and relative (to a discount of more than 40%).  In fact, yesterday’s Wall Street Journal had an article comparing AAPL with HWP and DELL.  That’s kind of like comparing night and day–the single thing I can see that ties AAPL to these two truly terrible companies is the similarity of their price earnings multiples.

Yes, when fast growers begin to slow down, the PE contracts, often violently.  And because a good portion of the contraction is an emotional thing, the multiple shrinkage is usually greater than one would expect.  But even seeing this process over and over, I didn’t imagine that a fundamentally sound company like AAPL could be trading at 9x in a market trading at 15x.

where to from here?

Note, first, that I’ve been wrong about the stock for a while.

I think the stock buyback makes economic sense, and it will probably at least stabilize the AAPL stock price.  I don’t think the addition of debt to the capital structure will have any effect.

It may be a big stretch, but to me the 15% dividend increase says that’s what AAPL’s board expects its earnings growth rate over the next few years to be, financial engineering aside.  I think that’s a reasonable assumption, and could be conservative.

AAPL management would do the most for its stock by being more forthright with investors about current business challenges and how it plans to deal with them.  That’s not likely, however, if the 2Q13 earnings call is any indication.

That leaves holders waiting for new product announcements–and subsequent earnings acceleration–at summer’s end.