Monday, October 15, 2012

Preview of Macro/Earnings for week of 10/15-10-19

As we get closer to the presidential election, we are seeing the broader markets begin to weaken a considerable amount, mainly led down by technology, and industrial sectors. Global growth continues to slow and equity markets are beginning to notice.

The week in review:
Dow -2.07%
S&P -2.21%
Nasdaq -2.3%

Apple (-3.51%)  once again ended lower for the week, extending its losing streak to now 3 weeks. This is the first time since last November Apple has been down 3 straight weeks, and is now in correction territory ( -10.6% off its all time high)

Above the broader markets for the week, as well as Apple.

Earnings reports from last week mainly all beat and surprised to the upside. Alcoa was the only one I was really concerned about, and though they beat on top and bottom line, looking internally at ther numbers, there are signs that aluminum demand is still not there.

Excluding one-time special items (a $175 million charge for the settlement of a civil lawsuit against Aluminum Bahrain), Alcoa earned $32 million or 3 cents a share in the quarter. Revenues decreased 9.1% year over year and to $5.83 million, but were ahead of consensus estimate of $5.56 million. Alcoa said that aluminum prices dropped 17% year over year in the third quarter. Investors reacted negatively to this news, sending Alcoa in the red for the week down 4.4%. As global PMI numbers continue to come in weaker than expected, we will continue to see Alcoa shares under perform the broader market.

YUM Brands which reported Tuesday as well beat expectations on both top and bottom line. They reported Q3 '12 earnings of 99 cents per share, ahead of the 97 cents consensus. Earnings jumped 19% year over year,  driven by strong performance at all of their divisions.

They reported a 9% yoy increase in total revenue to $3.56 billion from sales growth in China, Yum! Chinese sales were up 22%, Yum Restaurants International as well up 4% and the US sector up 1%.  The largest sales growth came from Yum Restaurants India which saw a considerable 29% increase.

Comps improved 6% in China, 2% in the International division and 6% in the U.S. division. There were comps increases of 7% at Taco Bell, 6% at Pizza Hut and 4% at KFC. Comps were also up in the India division gaining 5%.
YUM also did a share repurchase during the quarter; 6.5 million shares at $64.00 as well as raising full-year guidance on an EPS basis from 12% to 13%.

Investors reacted positively for this news, as YUM finished up 5.23% on the week.

Costco  reported earnings on Wednesday, beating EPS and Revenue consensus estimates as well. EPS came in at $1.39 per share compared with $1.08 reported last year, and revenue jumped nearly $4B from last year's reported revenue of $27.59B to $31.52B. Their fiscal Q4 net income jumped up 27% as both net sales and overall sales were up 14%.

Sales jumped to $32.22 billion as compared to $28.18 billion a year ago. Same-store sales for the quarter were up 5%, with a 6% jump in US sales and 2% increase worldwide.

Costco extended its gains to an all-time high on this news, but soon pulled back toward the end of the week as the broader market extended its downward streak. They finished the week down 4.17% but look to have the growth prospects to help them out for the next few years.

Looking ahead for this week, we have a considerable amount of macroeconomic data being released, which will be key factors for market direction as we near the fiscal cliff and the presidential election.

8:30 AM EST Retail Sales
Retail Sales Prev 0.9 % Consensus 0.7 % (range 0.4 % to 1.3 %)
Retail Sales less autos Prev 0.8 % Consensus 0.5 % (range 0.0 % to 1.1 %)
Less Autos & Gas Prev 0.1 % Consensus 0.5 % (range 0.3 % to 0.5 %)

8:30 AM EST Empire State Mfg. survey
Prev -10.41  Consensus -3.0  (range -6.5  to -1.0)

10:00 AM EST Business Inventories
Prev 0.8 % consensus 0.5 % (range 0.2 % to 0.6 %)

8:30 AM EST Consumer Price Index
Prev 0.6 % Consensus 0.5 % (range 0.3 % to 0.6 %)
Less food and energy Prev 0.1 % Consensus 0.2 % (range 0.1 % to 0.2 %)

9:15 AM EST Industrial Production
Production Prev -1.2 % consensus 0.2 % (range 0.0 % to 1.0 %)
Capacity Utilization Rate Prev 78.2 % Consensus 78.3 % (range 78.0 % to 79.2 %)
Manufacturing  Prev -0.7 % Consensus 0.1 % (range-0.3 % to 0.5 %)

10:00 AM EST Housing Market Index
Prev 40  consensus 41  (range 40  to 43)

8:30 AM EST Housing Starts
Starts Prev 0.750 M Consensus 0.765 M (range 0.745 M to 0.785 M)
Permits Prev 0.803 M Consensus 0.810 M (range 0.799 M to 0.843 M)

8:30 AM Jobless Claims
Prev 339 K Consensus 365 K (range 360 K to 385 K)
There was some talk last week about this big drop in claims, so this week's number will be key to see if the results are actually true.

10:00 AM EST Philadelphia Fed
Prev -1.9  Consensus 0.5  (range -2.0  to 5.8)

10:00 AM EST Leading Indicators
Prev -0.1 % Consensus 0.2 % (range 0.0 % to 0.5 %)

10:00 AM EST Existing Home sales
Prev 4.82M Consensus 4.750M (range 4.530M to 4.820M)

On the earnings calendar this week, I will be previewing:
Tue: Coca-Cola, CSX
Thur: Fifth Third Bancorp, Verizon

Coca-Cola, which reports Tuesday, is a consumer beverage company. They own or licenses and market more than 500 nonalcoholic beverage brands, primarily sparkling beverages but also a variety of still beverages, such as waters, enhanced waters, juices and juice drinks, ready-to-drink teas and coffees, and energy and sports drinks. It owns and markets a range of nonalcoholic sparkling beverage brands, which includes Coca-Cola, Diet Coke, Fanta and Sprite. (via google)

Analysts expect a slight decline in earnings this quarter, as higher ingredient costs hinder their profit margin. Looking forward, they are seeing 10% growth through 2013, so this appears to be a one-time event. With the US dollar weakening, I expect to see international sales, especially in Asia and India, do very well.

Comparing Coca-Cola to its main rival Pepsi, they have outperformed them YTD by 3.7%. Coca-Cola is up 9.3%, while Pepsi is up 5.6%. The past two quarters, their profit margin is up from 15% to 21.3% on strong Revenue growth. Net Income was up nearly 40% q/q from its last report. Compare this with Pepsi, who have seen revenue drop from 20 Billion in Q4 '11 to 16.45 Billion in their last report; though they were able to better control expenses, as net income was relatively unchanged. Coca-Cola, though having a lower dividend yield than Pepsi (2.67% v 3%) and higher p/e multiple (20 v 18) has better long-term guidance and growth prospects. They have a wider market share globally, with more products for consumers to choose from. 

Also reporting Tuesday is CSX. They are a transportation supplier that provides rail-based transportation services, including traditional rail service and the transport of intermodal containers and trailers. The current  consensus estimate for the third quarter is 44 cents per share, with annualized growth of 1.84%. In their last report on July 18, 2012, they reported EPS of 49 cents per share just beating the consensus of 47 cents per share. Earnings increased 7% year over year from 46 cents by higher revenues from coal exports, and automotive transportation. Revenue remained fairly flat year over year at 3.01 billion; operating income grew 2% year over year in the second quarter to $943 million, boosted by effective cost control and improving productivity.

I remain skeptical on CSX, as we have seen all of the names in the coal sector, hover near all time lows. With Obama's administration and clean energy policy, coal usage has been at all time lows, with prices to stay low as well for some time. CSX is the largest transporter of coal in the rail sector, and with Norfolk Southern dropping a bomb of an earnings report last month, rail transportation may be beginning to slow.

Thursday, one of my long-term holdings Fifth Third Bancorp reports earnings. They are expected to show 39 cents a share EPS, with a revenue number pretty much in line from last quarter. There have been no big surprises to the upside or downside for FITB, with steady revenue growth still persisting since '08. The only big news is they plan on raising their dividend again, announced late last month.  After receiving a TARP payment from the US gov't they had to keep their dividend for '09-'10. They soon increased it to 6 cents in '11 and now it is currently at 10 cents, yielding 2.62%. Shares are at 4 year highs, but well off their all-time high of  over $60.00. I expect them to grow, though slowly through the next few years as they unwind from their toxic assets and into safer investments.

Comparing FITB to the KBW index, and the S&P, they have outperformed the S&P by 7% but lagged the KBW by 7%. While boasting a higher dividend in the near future and continued revenue growth, this seems like a safe bet long term.

I will also be watching Verizon Thursday, as this is one of my favorite safe high-yielders who have increased their dividend every year for the past 4 years, up 20% in that time period. Telecom has been a hot sector this year as investors seek safety with a steady income stream, but these stocks are not overpriced.  I foresee Verizon having another good report, and possibly hitting $50.00 by year end.

As well as these earnings, I will be watching oil for our energy hedge fund, which you should follow on twitter, @simmenergyfund as well as myself @peter_eller10. Have a good week everyone. 

Monday, October 8, 2012

Previewing the 1st week of Q3 earnings

Wow, it has been a long time since my last post, but I have nothing to regret about what has happened in the past month. School has been busy, finally getting into my core classes along with getting the real-world experience I need for my future career. I took up an analyst position in the WTI sector of our energy hedge fund at the beginning of the school year, where I am constantly tracking oil markets , as well as coming up with potential trade ideas for being long.

Lets catch up from a month ago:

-S&P 500 and Dow have both had good gains up 1.6% and 2.3% respectively. The QE3 hopium has seemed to have fizzled out within the past couple weeks and consolidation is now taking place before we begin the wave of Q3 '12 earnings.

-Nasdaq is unchanged since I last posted, Apple has lagged the market in the past month and is down 7.5% off its all time high from two weeks ago. A couple of reasons:
-Via Bloomberg on Thursday night, Samsung Galaxy 3 sales beat expectations. This is the major                 competitor for the iPhone5

-The iPhone5 has gotten some negative reviews on its maps app due to lack of Google maps.    There are also very minimal changes from the iPhone 4s; in my opinion, people were expecting        more.

-Global PMI data released last Monday show that we are still in contraction, and US growth is still sluggish.

-Jobs numbers from Friday were fairly strong, but debatable as seen from Jack Welch's standpoint on how the BLS obtains their data. Nonetheless, politics aside, we are better off than '08 but still nowhere close to where we want to be. 

Above, Dow, S&P, Nasdaq and Apple

Most of the major macro data releases took place in the last two weeks, so we will look to cruise right into Q3 on minimal news unless something breaks midday.

Earnings on tap for this week:

Tuesday: Alcoa, YUM,

Wednesday: Costco

Friday: JP Morgan, Wells Fargo

Alcoa, one of the biggest laggers of the Dow for the past 4 years now, reports Tuesday. From back in July, I mentioned how they would continue to underperform the overall market, unless we see turn around in global manufacturing data. Alcoa is up only 4% in the past 3 months compared to the S&P up 7.5%.  Demand is not there for aluminum and I still continue to see a bleak future going into 2013 for this company. We will have to hear more from CEO Klaus Kleinfeld on the conference call Tuesday afternoon, but I am not expecting any surprising upward revisions. Analysts expect Alcoa's third-quarter results to show it broke even, down from a profit of 15 cents from last year, according to Thomson Reuters. With all of the negativity in China the past quarter, I would not be surprised if they reported a loss. 

Fundamental analysis of Alcoa show that the company is weak internally. They continue to fluctuate between net profit and net loss from quarter to quarter, mainly due to the costs. Revenue is stagnant and has been for the past 3 quarters (between 5.9B and 6B dollars) so revenue growth is an issue as well. They have also lost over 1.3B in retained earnings over the past year.

Technical Analysis shows a buy on a recent golden cross and MACD, but I wouldn't put much into this.
YUM Brands also reports Tuesday; looking at them YTD, they have outperformed main competitor and global franchise McDonald's by over 20%. In my opinion, one reason is more choice of food. McDonand's has just their burger line, but YUM has Pizza, tacos, and chicken which gives the consumer more of a choice. With 37,000 restaurants in 120 countries, they have a better chance to catch the consumer when they are not in the mood for a burger or other items on the McDonald's menu. Analysts are expecting a profit of 97 cents, up from 83 cents a year ago. Fiscal year earnings are projected $3.26 per share, while revenue is expected to be $3.64 billion for the quarter. This is about 11% higher than the previous year of $3.27 billion. Total revenue for the year is expected to come in at $13.9 billion. They have seen double digit revenue growth on a year over year basis as well.

Above, comparing YUM to McDonalds, we see that YUM is clearly the outperformer

Looking at YUM's fundamentals, their profit margin has had some wild swings in the past year, going from 7.5% to 17.5%. This may have a slight affect on the stock price, but until I see a drastic decline or negative growth in their monthly comps, then this is still a good place to put some money. It is also good to stay defensive in an uncertain economic environment, and a 2% dividend yield is a great way to make some cash while you wait.

On Wednesday, we get a look at Costco's earnings. This has been one monster of a stock to own this year, as well as Wal-Mart which are both up 21.5% and 26% respectively, outperforming the s&p 500, consumer staples sector and consumer discretionary sector. They have been doing well because of their ability to sell gas to consumers at cheaper prices than gas stations, from membership fees. Also, Americans like everything big, and with the ideology that bigger is better; it is also cheaper, especially when buying bulk.
Analysts are expecting a higher profit for Costco when they report  Q4 results. The consensus estimate is for profit of $1.30 a share,  which is up from $1.08 per share a year ago. Analysts are projecting earnings of $3.86 per share for the fiscal year. Revenue is expected to beat  the previous year's total of $28.18 billion by about 12%, ending at $31.59 billion for the quarter. For the year, revenue is projected to come in at $98.52 billion.

Net income has risen three straight quarters. The 19.1% yoy growth in net income in the most recent quarter came after the 13.2% growth in the second quarter and the 2.6% rise in the first quarter.

As seen from the chart below, Wal-Mart is the clear outperformer, but in my opinion Costco has stronger fundamentals and better growth prospects. Wal-Mart's has been bouncing all over the place in the past year. This in my opinion is due to Costco's strong presence in North America, whereas Wal-Mart's North American revenue is 60% of its total revenue (they have stores in 27 other countries).

I believe they will beat on both top and bottom line, but the shares may get hit as they have not had a decent correction down in quite some time.

On Friday, both of the big banks JP Morgan and Wells Fargo report earnings, JP Morgan at 7:00AM EST and Wells Fargo at 8:00AM EST. For Wells Fargo Q3, analysts are looking for earnings of $0.87 per share, with a high-low range of $0.80 to $0.94. Earnings have only missed once in the past three years. Revenues are projected to rise 9.10% yoy to $21.42 billion.

Credit Suisse expects the big banks to deliver solid third quarter earnings, including Wells Fargo. The firm cited loan growth and asset quality as drivers for the group.

For JP Morgan, they are expected to earn $1.22 per share range on revenue of $24.55 billion, a slight increase (0.70%) from the previous year. JP Morgan is now trading at 9.64x earnings well below the 5-yr average of 16.9x. The shares are also trading at a discount to book value of $48.70(as of the last report) Shares are up about 20% since disclosing a 2 billion dollar trading loss in its CIO unit on May 10th.
In recent news, they were sued over Bear Sterns  role in the 2008 financial crisis of misleading investors through the sale of MBS that had the high potential for default.

I have no positions in large banks, and do not plan on buying either here, the rough macro conditions and central banks keeping rates low till 2015 should tell you to stay away as well.

I will be watching oil markets this week and throughout the rest of the year as well. I tweeted out a screenshot of light sweet crude futures last week of a potential breakdown that we could see in the near term

You can follow me on twitter @peter_eller10 and our energy hedge fund, updated daily @SIMMenergyfund  have a good week all.