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.  

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