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. 

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