The Week Ahead: Pains, games and automobiles
Posted
Jul 25 2008, 08:01 PM
by
Andrew Horowitz
Rating:
How about we play a game, shall we? It goes like this: I say a term and you tell me the first thing that comes to your mind. Ready?
What do you think of when you hear the word recession? Did you think slowdown or inflation? What comes to mind with the word write-offs? Did you think earnings growth? How about record commodity prices? Do you immediately think of increasing revenues and profits?
I bet you thought of several phrases and words associated with a general economic slowdown, but not those above. I asked because a curious situation is occurring within our markets. For example last week many of the companies reporting earnings showed an increase in year-over-year revenues and actually beat estimates. Of course this isn't the norm this quarter, but even so, it is a peculiar occurrence.
Of course there were also several companies that had their share of difficulty, but it was still odd to see so many results come in better than expected during a time of widespread economic problems. How does that happen? Studies have shown that analysts often overshoot estimates during bullish times and underestimate in bearish environments, but I am really referring to reported revenue, not the estimate. Does that mean companies are actually selling more and taking in more revenue?
If so, then that could be one reason we saw cheering on Wall Street last week. But don't be fooled -- especially with the financial stocks. These company’s problems have problems. As we have seen, this sector has been losing money at a mind-blowing rate. And while last week saw investors push these beleaguered shares higher, it is nothing more than a temporary aberration and the track towards failure will be restored again shortly. (LISTEN HERE to Michael Shedlock’s amazing insight on my weekly podcast )
On to the earnings highlights.
Monday, July 28
Internet-related companies from China have been on fire and then cold, on fire again and then cold again, for some time. Last week we saw a dramatic increase in the share price for Baidu and on tap for this week is the release of earnings by Sohu.com. Recently, shares took a beating as earnings from superstar Google clouded the outlook for several Internet-related content and search providers. But shares of Sohu quickly turned around as investors saw the recent sales growth trajectory along with earnings capability as stabilizing forces within this rocky market. Analysts are estimating a $.67 per share result, which is four times the per-share earnings from the year-ago period. Volume is up substantially and shares have recently broken through key levels as the 12% short interest rate has helped to push shares higher.
Mosaic is one of the hot fertilizer companies whose shares have been recently rolling over as investors are beginning to redeploy profits. Earnings growth is out of control and at a 48% annual rate, it’s no wonder that investors have been buying shares on every dip. Over the next few years, analyst expects revenues and earnings to continue at this blistering pace as the world’s colossal consumption of food continues unabated. The analysts following this firm are expecting a $1.64 profit per share for the quarter on $2.8 billion of revenue. While I could explain that the recent head and shoulders pattern and shares breaking through the 50 day moving average are rather bearish indicators for this stock, the underlying fundamentals speak to an upward trend that cannot be overlooked. While shares are down 25% from their June high, be sure to remember that expectations are very high coming into this announcement. Here are my two-cents: be careful, as today’s release will undoubtedly provide a great deal of volatility.
Tuesday, July 29
All eyes will be on General Motors as it reports this quarter’s horror story. It is no surprise to anyone that these shares have been obliterated during the past few years. The reasons vary and include the company’s inability to compete globally and the problem it has with providing the retirement benefits for its massive workforce. It seems that there are more employees retired than there are currently working. Without going into an entire rant of how to fixed the car industry, maybe it’s time that they simply looked deep into the basic structure of their operations to come up with a new platform that can deliver excellent customer service and a fine product which could ultimately yield profits. On second thought, I suppose that is way too much to ask domestic auto companies. Expect a loss of $2.47 per share on $44 billion of revenue. Also remember that just last week Ford had to explain to the world how they achieved the largest loss in the company’s history.
Several times in the last few months, Under Armour shares have attempted to move higher only to be met with significance resistance.While their shirts may be some of the most comfortable outerwear available, competition has been fierce and earnings have been declining regularly. If you were to look back at the past fundamentals, it is clear that things have changed over time and that reality is accurately reflected in the current share price. Analysts are predicting a profit of $.01 per share on $157 million of revenue.
Central European Distributing produces over 700 brands of alcoholic and non- alcoholic beverages throughout Poland. My kind of company! Recently, one of the screens that we use to provide alerts for investment opportunities has identified this company as a trading opportunity for a short position. Shares have been on the rise for over two years and while earnings have been stable and sales have been growing, it looks as though shares are starting to rollover after becoming fundamentally overvalued. Analysts are expecting a report of $.51 per share on $388 million of revenue. If shares break through the next support level, they may take a quick and sobering ride down toward $60. (Click Here for TDI Managed Growth Strategy/Alerts)
Wednesday, July 30
Hey Dad… Happy Birthday and how about a BIG Bronx cheer for Moody’s! Those guys did an unbelievable job of researching the capital and fixed income markets and they deserve exactly the losses they are getting. Shares are down over 50% during the last year and EPS is dropping faster than Newton’s Apple. Analysts are expecting to see $.47 per share for the quarter on $467 million of revenue. With all the problems in this sector, it would be rather amazing if they meet even those reduced numbers. Institutional shareholders are also confirming the negative outlook for this company as fewer are in the mood to own this position as compared to September 2007.
When was the last time you went to an Office Depot? It seems that whenever I go to a store, there are more employees wandering around than there are customers. Under most circumstances that would be fine except for the fact that the stores that I frequent have only 3-4 employees on the floor at any time. Think about that for a second. Don’t bother looking at the chart as it is abysmal. This is clearly a case where the consolidators have been beaten at their own game by the super consolidators. I suppose if you want to play with the sharks you will get eaten every so often. Analysts are still looking for a profit of $.04 per share on $3.5 billion of revenue. That’s a lot of revenue and pretty lousy results, so it would seem that management needs to get a lesson in, well, management.
Las Vegas Sands is well-positioned to make money from its Macau properties. Last week, Wynn Resorts reported results that topped analyst estimates with slightly lower revenues than anticipated. Shares of the two mega-casino companies have have the hot-hand over the last several weeks as anticipation of the earnings announcement is helped by some short-covering. As I mentioned in last week’s commentary, these companies are seeing brisk action in their Macau ventures. A reader commented that they felt there was no way this was possible as the other 125 casinos on the island were doing poorly. I replied that that was not because people weren’t gambling, but rather the fact that these two companies stole all of the their competitor's customers. Make sense? Revenue has been estimated to come in at $1.1 billion with quarterly earnings of $.12 per share.
Thursday, July 31
Does anybody know why every single week when I look through the earnings announcements Mesa Air is listed? Weird.
Here’s something to think about: what if Microsoft decided to embed virus and other security software into the next release of Windows? Better yet, what if Microsoft decided to move more of its office applications to the Web and somehow the need to use virus protection was significantly reduced? These are the questions that I have been asking as I watch McAfee fade from a high of $37 in March. Analysts expect $.45 per share on $368 million in revenue. Also, with all of the Apple computers selling recently, it is difficult to imagine how McAfee will remain profitable with its computer security software -- particularly the segment targeting individual consumers.
For a while, it seemed possible that ValueClick was a company that could be in play. Almost every other online advertising company that provided campaigns and programs to direct marketers had been gobbled up by one company or another and it left ValueClick as a prime takeover candidate. Now it appears that they are the ugly duckling of the crowd, left to die a lonesome death. This is especially true if they don’t figure out a way to compete with “you know whoogle.” Analyst are still expecting a profit of $.17 a share on $165 million revenue for the quarter - even after we saw the recent earnings from Google. Is this a time to jump in? I don’t care to answer… the water is way too cold.
Friday, August 1
There is plenty of activity today so I decided to have a little fun for a Friday. I threw a dart and it landed on CIGNA Corp., although I wish it hadn’t. Shares have been in a free fall since last September as the company has been caught with escalating expenses and a down trending market. A physician recently asked me why his company continually received increases on their health insurance renewal premiums while they also received decreases on reimbursement allowances. It would seem that someone has to be making money but apparently it’s not CIGNA. Will there ever come a time when the cost for health insurance will be affordable again?. Until then, it is looking more and more likely that someday we may have the whole plan socialized. Nevertheless, analysts expect to see $.97 per share profit on $4.7 billion of revenue. You just got to love those HMOs!
Related Reading
5 Biggest Losers in the Financial Crisis
The Week Ahead - Apple, Netflix and More
Under Armour Jumps the Shark
Related Listening:
The Disciplined Investor Podcasts
Jim Jubak on The Disciplined Investor (Sunday)
Related Viewing:
Mulally's Plan for Ford
Disclosure: Horowitz & Company clients may have short and/or long positions in securities mentioned as of the date of publish.
Andrew Horowitz is a money manager and the founder of Horowitz & Company. He is also the author of the bestselling book, The Disciplined Investor . Check out his latest investment idea or listen in as he hosts, The Disciplined Investor Podcast.
