Sunday, December 16, 2012

Earnings Preview 12/17-12/21

Wow, I cannot believe it has been two months since I have last posed, what a busy semester this has been, but I would not take it back for all that I have learned. Working with our school energy hedge fund this year and doing trades has given me first-hand experience of what it truly means to be in the market. Watching news releases come out, then writing up reports and ideas to enter and exit positions based on the bullishness or bearishness of the release. While doing this, I have not been able to update my blog weekly.

From my last update, the markets have been under some pressure, especially after Obama's re-election earlier last month.  The S&P and Dow are both down 2% and NASDAQ down over 3%, but all are still up 12.5%, 7.5% and 14% year to date respectively. 

Above, a 2 month chart of Dow, S&P, Nasdaq

Apple has been putting downward pressure on the Nasdaq for nearly the past three months, approaching levels that are nearly $200 off of its all-time high. With slower revenue growth forecasted and margin compression from Samsung's line of phones, Apple investors are getting a bit nervous to close out the year. At its high in mid-September, it was up over 72%, it has now given back more than half of that gain, and currently sits 25% above its close at the end of last year, which is still a sizable gain. I expect there will continue to be an unwind of Apple shares as we close out the year, I would anticipate they will have a YTD gain of just around 20% which still is not too shabby.

It was reported on Friday that Wal-Mart has put various Apple products on sale, including the iPhone 5, marked down to $127. This would be a whopping $72 discount to where it has been selling and mind you, these have only been out on the market for a few months. Are there some red flags being raised here about their sales of the iPhone5? Maybe their share price is telling the story. 

Above is a Year-to-Date chart of Apple.

I mentioned CSX would be an under performer this year, especially after its report in October. Since then, its share price has taken an 8% dive. Its earnings report showed net income was 10% lower than its previous quarter ($455M v $512M) which is its lowest profit reading in nearly two years. Because they are so heavily involved in the coal sector, and with Obama being re-elected, this company will struggle for the next few years. Union Pacific is definitely a stronger rail play with hardly any coal exposure, transporting consumer and everyday needed essentials along with cyclical items, and growing profit margins for the past 5 quarters.

Looking at the week ahead as far as macro data:


8:30 AM EST Empire State Manufacturing Survey
prev -5.22  Concensus 0.0  (Range -7.0  to 8.5)


10:00 AM EST Housing Market Index
prev 46  Consensus 47   (Range 45  to 49)


8:30 AM EST Housing Starts
Starts   prev 0.894 M     Consensus 0.865 M     (Range 0.840 M to 0.940 M)
Permits  prev 0.866 M    Consensus 0.875 M    (Range 0.845 M to 0.914 M)


Real GDP             prev 2.7 %  Consensus 2.8 %  (Range 2.6 % to 3.0 %)
GDP price index   prev 2.7 %  Consensus  2.7 % (Range 2.7 % to 2.8 %)

8:30 AM EST Jobless Claims
Prev 343 K  Consensus 359 K  (Range 345 K to 395 K)

10:00 AM EST Existing Home Sales
Prev 4.79 M   Consensus 4.900 M  (Range 4.600 M to 4.960 M)

10:00 AM EST Philadelphia Fed
Prev -10.7  Consensus -2.0  (Range -12.4  to 15.0)


8:30 AM EST Durable Goods
New Orders  Prev 0.0 %        Consensus 0.5 %  (Range -1.5 % to 2.2 %)
Ex-transportation  Prev 1.5 % Consensus 0.2 % (Range -1.0 % to 0.7 %)

8:30 AM EST Personal Income and Outlays
Personal Income Prev 0.0 % Consensus 0.3 % (Range -0.1 % to 0.8 %)
Consumer Spending  Prev -0.2 %  Consensus 0.4 %  (Range 0.2 % to 0.7 %)
PCE Price Index  Prev 0.1 % Consensus -0.2 % (Range -0.3 % to 0.2 %)
Core PCE price index Prev 0.1 % Consensus 0.1 % (Range 0.0 % to 0.2 %)

10:00 AM EST University of Michigan Consumer Sentiment
prev 74.5  Consensus 75.0  (Range 64.9  to 82.0)

Major earnings for the week ahead:

Tuesday: Oracle
Wednesday: Bed Bath & Beyond, Fedex, General Mills, Paychex
Thursday: ConAgra Foods, Darden Restaurants, Discover Financial, KB Home, Micron, Nike, Red Hat, Research in Motion
Friday: Walgreens

I will be looking at: General Mills, Discover Financial and Walgreens

(via Google) General Mills is a manufacturer and marketer of branded consumer foods sold through retail stores. The Company is also a supplier of branded and unbranded food products to the foodservice and commercial baking industries. The Company manufactures its products in 15 countries and markets them in more than 100 countries. The Company's joint ventures manufacture and market products in more than 130 countries and republics worldwide. General Mills operates in three segments: U.S. Retail, International, and Bakeries and Foodservice. In addition, the Company sells ready-to-eat cereals through its Cereal Partners Worldwide (CPW) joint venture.

Looking at General Mills past five reports, there is nothing that seems to be alarming. I believe that the company will continue to perform well through 2013 as a consumer staple. They are expected to report FY 2013 second-quarter EPS of 79 cents on revenue of $4.88 billion, compared with a profit of 67 cents per share on revenue of $4.62 billion in the year-ago period. They are up nearly 2% YTD and trading close to all-time highs as of close Friday. They underperform the XLP Consumer Staples Sector Spider and Kellogg, which are both up over 10% YTD. 

Above, Recent income statement of General Mills and General Mills compared to Kellogg and XLP ETF

(via Google) Discover Financial  is a direct banking and payment services company. The Company operates as a bank holding company and a financial holding company. The Company operates the Discover Network, its credit card payments network; the PULSE network (PULSE), its automated teller machine (ATM), debit and electronic funds transfer network, and Diners Club International (Diners Club), its global payments network. It operates in two segments: Direct Banking and Payment Services. Its Direct Banking segment includes Discover card-branded credit cards issued to individuals and small businesses on the Discover Network and other consumer banking products and services, including personal loans, student loans, prepaid cards and other consumer lending and deposit products offered through its Discover Bank subsidiary.

Discover has been on an absolute tear this year, up 65% YTD but I believe there is more room to run for this name. With a current P/E of 9.9, well below Visa at 23, American Express at 13 and MasterCard at 23.7, it is very cheap fundamentally. They are expected to report FY2012 fourth-quarter EPS of $1.11 on revenue of $1.96 billion, compared with a profit of 95 cents a share on revenue of $1.81 billion in the year-ago period. The story here is consumers using plastic for payment instead of paper. The way I see it is plastic is the way of the future, more people will be using credit/debit cards and these card companies will scoop up all of the revenue from this. The high-end consumer is and has been back, we have seen this from the past Black Friday reports, as well as luxury retail performing very well.

If you have been in this name for a while, do not be greedy as it has had a phenomenal year. Take profits if you are uncertain, there is no harm in doing so. The way I'm seeing it is that DFS is trading at cheaper valuations, and has outperformed all of the other card companies this year, it is hard to say where I think it will go.

Above, a year to date performance of Discover Financial, comparing it to American Express, Visa, and MasterCard.

Last, Walgreens which together with its subsidiaries, operates the drugstore chain in the United States. The Company provides its customers with access to consumer goods and services, pharmacy, and health and wellness services in communities across America. The Company offers its products and services through drugstores, as well as through mails, by telephone and online. The Company sells prescription and non-prescription drugs, as well as general merchandises, including household items, convenience and fresh foods, photofinishing and candy.

They have been an under performer to the overall market this year, but are on my radar to be a top performer for 2013. Comparing them to CVS and the Healthcare Sector Spider XLV, they are under performing both by 10% and 7% respectively. Walgreens net income has nearly been cut in half since last August due to a decline in revenue. Comparing them to CVS, their net income has grown 20% since that time. The P/E ratio of both companies are relatively the same.

I believe the healthcare sector as a whole will continue to outperform the overall market in 2013, with Walgreens to rebound. I am looking for a strong report and shares to move higher toward $40 into 2013.

That is all for this week, Follow me on twitter @Peter_Eller10 as well as our school energy hedge fund @SIMMenergyfund.