Friday, April 29, 2011

Investopedia: Rail Traffic Suggests A Slower Pace

It's easy to overreact to month-by-month economic data, so any sort of spot analysis has to be taken with a grain of salt. That said, the pace of rail traffic seems to be resetting to a slower but still positive level. That, in turn, suggests that the recovery may have entered a phase where growth will be less impressive but perhaps enough to strike a favorable balance between the market's need for growth and the fears of an overheating economy. (For background reading, see A Primer On The Railroad Sector.)

The Numbers for March 
According to the Association of American Railroads' (AAR) Rail Time Indicators report, U.S. carload traffic in March 2011 rose 3.4% over 2010 and 2% from February 2011. That shows decent growth, but readers should also remember that bad weather earlier in the year curtailed some traffic at that time. Accordingly, it seems like growth is slowing as the year-over-year comps get increasingly difficult.

The numbers for Canada are different (up 0.9% in March 2011 from last year and up 3.7% from February 2011), but close enough to suggest that more or less the same trends are at work.

Intermodal results were a little different; for the U.S. there was 8.5% annual growth from March 2010 to March 2011 and 0.5% sequential growth since February 2011, while in Canada the respective numbers were 2% and -2.1% over the same time periods. (For more on rail stocks, check out Rail Stocks Chugging Right Along.)

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Note: Please note, due to an error in the editing process, publication of this piece was delayed about two weeks. 

Investopedia: Total Takes A Shine To SunPower

Admittedly, it does not take a lot to get conspiracy theorists fired up, but the deal announced Thursday night between Total SA (NYSE:TOT) and SunPower (Nasdaq: SPWRA) should have some of them foaming at the mouth. 

Many energy companies bought solar power companies in the 1970s and 1980s, only to find that the technology was far from a point where it was commercially viable (conspiracy theorists choose to believe that the energy companies deliberately "killed" solar power to maintain the hegemony of fossil fuel). Now the picture may be different. While solar still requires sizable subsidies to make economic sense in many places, the technology has gotten much better and solar assets may prove invaluable to energy companies looking to diversify and stay relevant for the long term. (For more, see Spotlight On Solar Stocks.)

The Terms of the Deal
While SunPower is characterizing the deal with Total as a "strategic partnership," the reality is that Total will be acquiring 60% of the company's shares and will effectively control the company's board. For this, the company is paying $23.25 per share (nearly $1.4 billion in total), a 45% premium to Thursday's close.

Total is also extending $1 billion in credit support to help accelerate the growth of the company (and this has been a chronically capital-hungry industry). 

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Investopedia: Small Gold Miners Could Produce Big Returns

Gold is still the hot trade. While it's not that hard to remember when gold was an afterthought, squeezed between a quick summary of bonds and commodities during financial programming, it is now a leading investment class. Whether an investor's interest in gold is fueled by fears of inflation, economic and political turbulence, technicals, or even just a "greater fool" theory, the reality is that it has been a winning trade.

By now any investor with even a passing interest in gold knows a little something about the myriad of investment choices. People can choose to own actual bullion or numismatic gold, resource mutual funds, specialized ETFs like SPDR Gold Shares (NYSE:GLD), or mining stocks - and those are just the most popular options. (For more, see Is There A Right Way To Invest In Gold?)

Given that mining companies are the only entry on the list that can actually grow from internal strategic decisions, they are worth a serious look. This time, it is time to consider some of the smaller miners. Small miners can offer substantially more bang for the buck than larger miners like AngloGold Ashanti (NYSE:AU) and Kinross (NYSE:KGC) or highly diversified mining giants like Rio Tinto (NYSE:RIO).
A Quick View From Above 
What is interesting about mining companies is that they don't necessarily track gold prices, and that is particularly true for smaller miners. For small miners, performance is often significantly influenced by the company's efforts to bring mines into operation and increase gold production. Investors should also note that many (if not most) analysts expect gold prices to peak in the next year or two and then decline. Those analysts could be wrong, but the possibility is worth considering all the same. (For more, see Does It Still Pay To Invest In Gold?)

Minefinders (AMEX:MFN
Minefinders is perhaps the riskiest name on this list, as the company has only one producing asset at present - the Dolores mine in Mexico. Dolores has very attractive production costs right now and good expansion potential; the company is due any day now to provide an updated reserve number for this property. Minefinders also considered its options with the La Bolsa asset and putting this into production could allow for a sizable jump in production within three years.

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Investopedia: The Return Of The Norsemen?

Like its fellow Nordic tech brother Nokia (NYSE:NOK), Ericsson (Nasdaq:ERIC) can only look back fondly on the days when it was a favorite of the tech crowd. Not only did the excessive build-out of the late '90s poison the well, but Ericsson has had to deal with the rise of Chinese competitors like Huawei and aggressive marketing and pricing moves from rivals like Alcatel-Lucent (NYSE:ALU) just trying to stay in business.

A Surprisingly Strong First Quarter
Even though Ericsson is not a widely loved stock in the analyst community, the business has been staging a comeback, and the first quarter was surprisingly strong. Revenue rose 17% as reported, and although this was a 16% sequential decline, it was better than analysts had expected. It is also worth noting that on a constant-currency basis year-over-year growth was actually on the order of 25% - a pretty respectable quarter by any standards.

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Investopedia: Can Smaller Miners Become Big Winners In The Gold Rush?

Gold is still the hot trade. While it's not that hard to remember when gold was an afterthought, squeezed between a quick summary of bonds and commodities during financial programming, it is now a leading investment class. Whether an investor's interest in gold is fueled by fears of inflation, economic and political turbulence, technicals, or even just a "greater fool" theory, the reality is that it has been a winning trade.

By now any investor with even a passing interest in gold knows a little something about the myriad of choices for investment. People can choose to own actual bullion or numismatic gold, resource mutual funds, specialized ETFs like SPDR Gold Shares (NYSE:GLD), or mining stocks ... and those are just the most popular options. (For more, see What To Do About Gold Now.)

Given that mining companies are the only entry on the list that can actually grow from internal strategic decisions, they are worth a serious look. Here, we'll consider some of the smaller miners, which can offer substantially more bang for the buck than major miners like Barrick (NYSE:ABX) and Newmont Mining (NYSE:NEM).

A Quick View From Above 
What is interesting about mining companies is that they don't necessarily track gold prices, and that is particularly true for smaller miners. For small miners, performance is often significantly influenced by the company's efforts to bring mines into operation and increase gold production. Investors should also note that many (if not most) analysts expect gold prices to peak in the next year or two and then decline - that does not preclude successful investments in small miners and those analysts could certainly be wrong, but it is a detail to consider all the same. 

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Investopedia: Whiting Petroleum - Right Place, Right Time, Right Type

Everybody watches, talks about and makes predictions about oil prices. And like the weather, the reality of what actually happens often puzzles if not outright embarrasses the experts and their elaborate models. Whiting Petroleum (NYSE:WLL) offers a relatively simple equation for investors - if investors think oil prices will rise, or at least stay consistently high, this is a good stock to own for its production growth and undeveloped resource base. 

A Disappointing First Quarter
Investors may get a chance to buy Whiting shares a little cheaper now after the first quarter, as the Street seems relatively unimpressed with the results. Revenue growth was solid at 23%, but the company's price realizations, production details and exploration costs delivered a below-expectation bottom line result.

Production was mixed in the first quarter, up 10% (on a barrels per day basis) from last year, but down 3% sequentially. Bad weather in North Dakota hurt production, while a higher percentage of natural gas liquids (NGL) impacted the overall price realizations in an unfavorable way. (For more, see Oil And Gas Industry Primer.)

Costs were also higher this time around. Whiting engages in some relatively sophisticated operations with service providers like Baker Hughes (NYSE:BHI) and those technologies don't come for free. Per-barrel cash costs rose about 13%, though depreciation and depletion (DDA) costs were relatively flat on the same basis. 

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Investopedia: Illumina Lights Up Again

The go-to stock for genomics just keeps going. It's likely that a fair number of the institutions that love Illumina (Nasdaq:ILMN) would stammer to explain exactly what their machines do, but they certainly know the stock is doing well. 

Another Strong Quarter in the Books
Snarkiness aside, Illumina continues to deliver the sort of high-growth/low-competition story that growth investors dream about and so rarely find. Revenue rose another 47% this quarter, with sequencing sales leading the way at nearly 90% growth and sequencing consumables revenue growing about 70%. Arrays were weaker at 12% growth, but expectations were modest here anyway.

What may surprise some investors is how small Illumina still is. While this is clearly a legitimate growth stock star, the company booked about $283 million in revenue this quarter - on par with F5 (Nasdaq:FFIV) (another growth darling), but far smaller than software companies like VMware (NYSE:VMW) or (NYSE:CRM). Even within its own home market of life sciences, Illumina looks somewhat small when compared to names like Life Technologies (Nasdaq:LIFE), Waters (NYSE:WAT) or Thermo Fisher (NYSE:TMO). (For more, see A Fistful Of Life Sciences.)

The full piece can be found here:

Investopedia: Old Dominion's Great Growth Story

Old Dominion (Nasdaq:ODFL) seems to be one of the exceptions. Old Dominion has long been a great growth story within a cyclical industry, and this quarter is another example of how not all trucking companies are alike. Although this is not an easy company to value, Old Dominion is gaining share and building a business that is getting increasingly attractive. 

There are some pretty sharp divisions among the transport stocks these days. Railroads have enjoyed a great run and air transport companies have seen a solid pickup in business, while ocean-going carriers have been struggling. With trucking it's a more complicated picture - the volume has been there, but pricing has been soft and many major haulers are struggling.

Solid Start to the Year 
Old Dominion has opened the year with 33% top line growth. Tonnage climbed over 20%, while a modest give-and-take between haul length (up 0.7%) and weight per shipment (down 0.6%). Pricing was rather strong as well; up over 11% as reported, and up more than 6% when stripping out the company's fuel surcharges.

Old Dominion has stood out in the past for its operating efficiency and that was true again this quarter. The company showed operating income growth of 132% and the company's operating ratio improved by nearly four full points from the year-ago level to 91. That stands in significant contrast to major carriers like Arkansas Best (Nasdaq:ABFS) and YRC Worldwide (Nasdaq:YRCW). One of the advantages to the Old Dominion model is its lower labor costs, and that held true this quarter - though these costs climbed nearly 23%, they were about 52% of revenue or more than 10% less than the share of revenue paid out by Arkansas Best. (For related reading, see Bad Times For Arkansas Best.)

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Investopedia: Fear And Uncertainty Still Keeping A Lid On WellPoint

It seems as though investors have made their peace with health insurance reform to some extent, as WellPoint (NYSE:WLP) shares have more than doubled off of their bottom in late 2008/early 2009. That said, major health insurance names like WellPoint, Unitedhealth (NYSE:UNH), Aetna (NYSE:AET) and Coventry (NYSE:CVH) still seem to be trading below their inherent earning power as investors try to digest the impact of upcoming regulation on their medical costs and membership expansion potential. 

A Surprisingly Strong First Quarter 
WellPoint's first quarter once again highlights the difference between absolute and relative performance. On an absolute basis, it would seem that revenue contraction of over 1% would be something of a disappointment. In this case, though, analysts were expecting a bigger decline and WLP's top line and profit performance were surprisingly strong.

While WellPoint did see a small increase in administrative fees, premium revenue dropped more than 1% (and that's more than 85% of the revenue base). Membership did grow over 1%, though, with strong performance in national and senior categories. (For more, see 5 Health Insurance Considerations.)

Looking at the profit picture, WellPoint saw operating profits rise almost 5% despite a small uptick in the medical loss ratio (up to 82.1). Especially noteworthy was the better than 5% year-on-year decline in general and administrative expenses, and it is impressive to consider that the company is still finding that amount of cost savings in the system. 

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Thursday, April 28, 2011

Investopedia: 5 Stocks To Get In On The Gold Rush

Gold is still the hot trade. While it's not that hard to remember when gold was an afterthought, squeezed between a quick summary of bonds and commodities during financial programming, it is now a leading investment class. Whether an investor's interest in gold is fueled by fears of inflation, economic and political turbulence, its technicals, or even just a "greater fool" theory, the reality is that it has been a winning trade.

By now any investor with even a passing interest in gold knows a little something about the myriad of choices for getting in on this investment. People can choose to own actual bullion or numismatic gold, resource mutual funds, specialized ETFs like SPDR Gold Shares (NYSE:GLD), or mining stocks ... and those are just the most popular options.

Given that mining companies are the only entry on the list that can actually grow from internal strategic decisions, it is worth a look at some of the major mining companies.
A Quick View From Above 
What is interesting about mining companies is that they don't necessarily track gold prices. True, they follow the same general path, but there can be notable breakouts above (and below) the price of gold as investors react to news about production, operating costs, new discoveries, and so on.

Another interesting detail is that, despite the inflationary pressures popping up around the world, most analysts still expect gold prices to peak in 2011/2012 and then decline. That could put a premium on production growth, resource growth and operating costs and there are wide discrepancies between the major miners in those variables. All things being equal, it can be more effective to own miners with high cost structures during periods of rising prices (and vice versa), although production growth is almost always welcome.

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MSNBC? Go Figure...

Looks like a piece I did for Financial Edge a little while ago has been reposted to MSNBC.

Investopedia: JNJ And Synthes - A Good Deal With Some Questions

In many respects Wednesday's announcement that Johnson & Johnson (NYSE:JNJ) was acquiring Synthes was not much of a surprise. Many analysts have gone in print with the prediction that JNJ would do deals to improve its growth prospects, and deflect attention away from management's failures, and Synthes was a very logical candidate.

In true modern JNJ fashion, though, even this straight-forward and logical deal has some lingering questions to it. The deal structure is a bit puzzling, and leads to at least two major questions: is JNJ done, and can it maintain the quality of the company it is buying?

The Terms of the Deal
Although the movements of JNJ shares and currency could alter the final deal value, at the time of announcement, JNJ's acquisition of Synthes was a $21.3 billion deal, with a net value of $19.3 billion after stripping out Synthes' cash. At this price, JNJ is paying a bit more than four times trailing revenue (enterprise value to sales), which is arguably a slight bargain for a company of Synthes' quality and market position.

The deal terms call for JNJ to pay a total of 159CHF per share, with approximately one-third of that in cash and the remainder in JNJ stock. The stock component will be collared, though, between 1.71 and 1.97 shares. This structure does leave some risk for Synthes shareholders as JNJ's stock could slide or currency could move against them. (For more, see Mergers And Acquisitions: Understanding Takeovers.)

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Investopedia: What Becton Dickinson Lacks In Flash, It Makes Up For In Quailty

There is a relatively small list of companies like Becton Dickinson (NYSE:BDX) - companies that will leave investors fuming when they miss the relatively few opportunities they give investors to buy on the cheap. Becton Dickinson is not going to impress anybody with stunning growth, but the quality is there and this global medical technology player is a great cornerstone holding for investors that prefer the long-term buy-and-hold approach. 

An Okay Fiscal Q2
BDX's quality notwithstanding, the fiscal second quarter was okay. Revenue rose almost 5% on a constant currency basis, with diagnostics (up 6.5%) and medical (4.9%) providing the growth and biosciences (up 0.4%) struggling to hold its own. The company appeared to do well with its diabetes and pharmaceutical systems businesses, and strong sales of diagnostic systems are an encouraging sign (they will require future consumables to operate). Even the biosciences performance wasn't so bad once the headwinds from Japan and tough comps created by the year-ago flu outbreak and stimulus spending are considered. (For more, see A Checklist For Successful Medical Technology Investment.)

Profitability performance was likewise decent. Gross margin was slightly disappointing, as it improved just 10 basis points from last year. Adjusted operating income grew about 6%, and the margin shrunk very slightly, largely as the company upped its R&D spending. All in all, while the company reported an 8-cent beat relative to the average analyst estimate, 5 cents of that seems to have come from taxes and sharecount reduction, so it was more or less an in-line quarter.

Business Should Be Looking Up
Healthcare has been in the doldrums for some time now as job losses, co-payments and general anxieties have kept people away from the doctor's office. Investors can see the impact across the sector - whether it's Hologic (Nasdaq:HOLX), Johnson & Johnson (NYSE:JNJ), Abbott (NYSE:ABT) or any other patient-facing company, procedure volumes are down.

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Investopedia: Illinois Tool Works Keeps Working

A quick look at the earnings of industrial conglomerate Illinois Tool Works (NYSE:ITW) really does bring out just how broad the economic recovery is right now. What's more, with an appealing mix of early/mid/late cycle businesses and a relatively undemanding valuation, there may yet be an opportunity for investors to use this name as a general play on the improving economy. 

Not Many Flaws in the First Quarter
There is not much that jumps out as problematic about the first quarter at Illinois Tool Works. Revenue rose more than 17% as reported and nearly 12% on an organic basis. Growth was led by diverse segments like packaging, transport and welding, while even the "laggards" showed reasonable growth - food equipment grew more than 6% on an organic basis and the construction business grew more than 8% despite no real discernible improvement in building activity. (For more, see Conglomerates: Cash Cows Or Corporate Chaos?)

Looking at the profits, the company clearly saw some pressure from rising input costs, but it was not insurmountable. The company held the line on gross margin while growing operating income by 26%. Not only did the company beat the average estimate, but it also exceeded its own guidance (though that is not all that unusual for this company, as it tends to be conservative with guidance). 

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Investopedia: A Good Opportunity In Broadcom

For all the lamenting I do about stocks that are just not cheap enough, Broadcom (Nasdaq:BRCM) is a welcome antidote. While this leading wireless chip company has lost none of its edge or appeal, a short-term burp in guidance has some investors selling the shares. Unless people believe that the move to smartphones and greater connectivity is suddenly over, this is a serious candidate to buy for a rebound. 

Q1 Results - So-So ... But So What? 
Broadcom did not deliver great results for the first quarter, but there was no particular expectation that it would. Revenue did fall 7% from the fourth quarter (although up 24% from the year-ago period), as broadband (down 15% sequentially) really fell off and mobile/wireless dropped almost 6%. Though there are many moving parts to consider, it looks like weakness in the cellular baseband business, largely a problem with Nokia (NYSE:NOK), was part of the sales decline. (For more, see The Rest Of The Earnings Story.)

There is a lot of operating leverage in Broadcom's business model, but that cuts both ways. GAAP gross margin slid about 20 basis points from the fourth quarter and close to two full points from the year-ago level. Operating income fell about 16% sequentially - and rose 16% from the year-ago level - while the operating margin contracted.

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Investopedia: Cummins Finds Another Gear

It looks like truck engine maker Cummins (NYSE:CMI) is back to its old ways by posting eye-popping growth and handily surpassing estimates. As the global truck market continues to grow, it looks like Cummins should have plenty of opportunities to continue to grow its already impressive business.

Better Results Down the Line at Cummins
Cummins seems to be one of the relatively few industrial companies not seeing any real margin pressures in the final results. Sales jumped 56% from last year's first quarter (though declined 7% sequentially), led by 68% growth in the engines business. Growth was strong across the board, though, as power generating was up 54%, components were up 47% and distribution sales rose 35%. (For more, see Truck-Makers Still Hauling In Profits.)

As mentioned, margins were not problematic. Gross margin rose 50 basis points from the year-ago quarter, while operating income doubled and those margins grew more than three full basis points. Also encouraging is that those margins grew sequentially - gross margin rose a full point on that basis, while operating margin grew about 70 basis points. (For more, see The Bottom Line On Margins.)

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Wednesday, April 27, 2011

FinancialEdge: Why You Should Care About Chinese Inflation

Back in the day, a snooty professor might have responded to an irrelevant or impertinent question by asking "What's that got to do with the price of tea in China?" As it turns out, the price of things in China is hardly irrelevant anymore and Chinese inflation is increasingly looming as a threat to economic stability and growth. (For background on inflation, see Inflation: The Inside Story.)

With so much to worry about at home, to say nothing of the ongoing debt crises in Europe, is there really a need to worry about one more thing? Given the size of China's economy, it's role as a major exporter of goods (and importer of materials), and its role as a financier of other countries' deficits, the answer would seem to be a definite "yes."

Inflation on a Long March in China
According to the official numbers, inflation hit a rate of 5.4% in China in March, the highest level in about 3 years. While that is far off the record high level of nearly 28% back in 1994, it's still a level that has investors, businessmen and officials worried.

More worrisome still is the probability that, like in the U.S., Chinese official inflation rates are understating matters by a significant amount. Wages have been rising by high single-digit percentages and property values are soaring. In fact, housing prices in some areas of China are reaching a level of 25 times median incomes - a level more than double the peak bubble ratios in many U.S. markets. (Learn more about why some government numbers may be less than credible in 5 Government Statistics You Can't Trust.)

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Investopedia: PNC Financial On Track And Underpriced

Many of the major banks are following basically the same trajectory in their recovery, and PNC Financial (NYSE:PNC) is no exception. Similar to U.S. Bancorp (NYSE:USB) and Wells Fargo (NYSE:WFC), PNC is seeing ongoing credit improvement and some stabilization in the loan portfolio, while not seeing too much momentum yet in net interest income. And like other large banks, PNC Financial shares still seem to value the company too cheaply based on reasonable recovery prospects. 

A Noisy Quarter That Nets Out OK 
Where to start with the PNC first quarter report? Like every large bank's earnings these days, PNC's report is a mess of charges, gains, "core," "non-core" and so on. But here are some of the numbers to really follow.

First, operating revenue was down about 3% on a sequential basis. Net interest income was also down about 1% from the fourth quarter, though "core" net interest income was positive. Net interest margin was basically flat. Loan balances were stable, while commercial loans showed some growth. Fee income was weak on a sequential basis, but expenses were down from an elevated level in the fourth quarter. 

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Investopedia: Berkley Looking Unloved

Insurance companies have largely missed out on a lot of the recent stock market rally. True, reinsurance companies like Arch Capital (Nasdaq:ACGL) and RenRe (NYSE:RNR) have done well as these markets have started to harden and company-specific risk and capital models have shown their quality. But in the P&C and specialty insurance markets, times have been tougher and that has kept a lid on W.R. Berkley's (NYSE:WRB) stock.

There is nothing in the numbers from Berkley's first quarter to promise an immediate turnaround, but patient investors should give this name a long look. This is not Berkshire Hathaway (NYSE:BRK.A), but insurance companies that consistently earn better than their cost of capital are valuable wealth-building enterprises, and Berkley has a very good track record on that score. (For more, see Intro To Insurance: Property And Casulty Insurance.)

First Quarter Results a Mixed Bag
Top line results should offer some encouragement. Net premiums grew about 10% this quarter, and the company reported that pricing improved by about 1%, while renewal retention rose to about 80%. There was a fair bit of turbulence on the individual unit level, but four of the five units showed net premium growth. The alternative markets unit was the lone decliner (down almost 5%), while specialty grew almost 19% and international jumped almost 38%.

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Investopedia: Wait For A Better Chance On Plum Creek

Timber is a great investment class, and Plum Creek Timber (NYSE:PCL) is one of the biggest and best operators in the field. So that's it then, right? Just buy Plum Creek shares and hang on for the long haul.

Actually, for some investors that may not be bad advice. Timber is a renewable resource but the long-term demand outlook is very solid and the available land base is shrinking. Still, for investors who cannot stomach the thought of 20% short-term losses, timing is more important and there are factors beyond the long-term timber demand outlook to consider. (For more, see Timber Investments Cut Down Portfolio Risk.)

Still a Rough Market in the First Quarter  
As Plum Creek's results show, the tough times are not over yet in the timber market. Revenue dropped 13% from last year, led by a 37% decline in real estate sales. In the timber business, the company did benefit from better pricing in the Northern segment, which resulted from the Chinese demand. Business is still tough in the South, though, and overall, timber revenue fell 7%. 

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Tuesday, April 26, 2011

FinancialEdge: What It Really Takes To Succeed In Business

Read the right edition of a major magazine like Forbes or U.S. News and an interesting detail pops out - climbing the ladder all the way to the top is not the automatic byproduct of going to the right school. If people take a more comprehensive view of how Fortune 500 CEOs build their careers, they may realize that there are a number of worthwhile skills and experiences that can be had far away from ivy-covered walls. We look at what it actually takes to get to the top in business. (These 10 entrepreneurs' names will live on long into the future. Check out The 10 Greatest Entrepreneurs.)

Ivy Only Goes So Far
At an undergraduate level, less than 20% of Fortune 500 CEOs get their degrees from Ivy League schools (including Ivy League-caliber schools like Stanford). While those numbers go up when graduate degrees are added into the mix (roughly 12% of CEOs have some degree from Harvard alone), the reality is that the University of Wisconsin produces just as many CEOs at the undergraduate level as Harvard.

Of course these comparisons are crude; Wisconsin is far larger than Harvard. The point, though, is that quality can rise to the top in places other than the most highly-regarded universities in the United States. What's more, the Ivy League graduates more than 10,000 people each year, and clearly the vast majority of them will not go on to lead a Fortune 500 company. So it's not just the degree that leads to the executive suite, there is more that goes into the making of a CEO.

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Investopedia: Is Dover Worth The Trouble?

Multi-line industrial conglomerates like Dover (NYSE:DOV) often trade at a discount to their underlying cash-flow generating capabilities. To some extent this is a byproduct of straddling many different industry groups - they are harder to track and forecast, and many analysts and institutions decide they do not need the hassle. This is old hat for investors in names like Illinois Tool Works (NYSE:ITW), Danaher (NYSE:DHR) and so on, though sometimes these conglomerates do come into favor as a sector play. 

In the case of Dover in particular, the company does not exactly make it easy for investors - the company's press release does not even often include an income statement or balance sheet. True, the company does offer a good amount of information, but it requires some effort. The real question for investors, then, is whether the stock is worth the work and the hassle.

A Solid Quarter Across the Board
Business is going well at Dover. Overall revenue growth of 24% was underlined by 19% organic growth (made up completely of volume growth). Growth was also relatively balanced - the company's Engineered Systems segment was the laggard with 16% revenue growth (if that can be called lagging), while Industrial Products, Fluid Management and Electronic Technologies grew 21%, 34% and 28% respectively. (For more, see Conglomerates: Cash Cows Or Corporate Chaos?)

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Investopedia: Bad Times For Arkansas Best

While it is true that the industrial sector relies upon the transports to get their products to market, and that a recovery in the economy should be good for transports, that story has not played out so well in the trucking space. Although railroads like Union Pacific (NYSE:UNP) and Canadian National (NYSE:CNI) have shot up, many of the truckers are still down on a multi-year basis.

With very disappointing first quarter earnings, leading less-than-truckload (LTL) carrier Arkansas Best (Nasdaq:ABFS) is offering some evidence as to why that is. While demand for transport is definitely getting better, there is not much pricing power in the market and rising costs are becoming a larger problem. Of course, those investors with a contrarian streak might see this as an opportunity to pick up shares of a company that has generally been one of the better operators within its group. (For more, see Transport Stocks Ready To Roll.)
Q1 Was Supposed to Be Bad, but Not This Bad 
It says something about the operating environment in the trucking space that Arkansas Best missed what were already pretty uninspiring estimates. Oddly enough, the company did fine on the revenue line - revenue jumped almost 21% from last year and surpassed the average estimate. Even here, though, are signs of some of the challenges in the business - tonnage per day was up over 17% and there was a nearly 16% jump in shipments, but weight per shipment increased just 3% and revenue per hundredweight was up just a bit over 2%.

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Investopedia: Johnson Controls Seeing Multiple Recoveries

Passenger vehicles and non-residential building are two sectors that have seen some pretty ugly conditions in recent memory, and that certainly showed up in a 25% revenue decline for Johnson Controls (NYSE:JCI) in 2009. Economic conditions have turned around, though, and the company has seen a strong rebound in its results. Now with signs of life in the building efficiency segment, could even better results be on the way for shareholders? 

A Mixed Fiscal Second Quarter 
Like so many other companies this quarter, Johnson Controls gave investors a mix of good news and some disappointment in its fiscal second quarter results. Revenue jumped 22% and was comfortably above even the high end of the range, as all units posted solid progress. The auto business led with over 25% growth, but even the building efficiency segment saw better than 18% improvement from last year. (For more, see Johnson Controls Sitting Well.)

Margins were more problematic, though. Gross margin ticked down 20 basis points, due largely to commodity inflation and product mix. Segment income did improve by over 30% and all segments did show year-on-year improvements in their operating margins. Unfortunately, analysts had expected even better improvement, particularly in the building segment. So while patient shareholders may not be too bothered or disappointed with 30% segment income growth, the short-term trading tenor may be negative. 

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Investopedia: Teva's Rocky Road

It's usually a great idea to buy proven long-term winners when the Street goes momentarily sour on a company's ability to stay in the game for the long-term. Companies as different and varied as Coca-Cola (NYSE:KO), McDonalds (NYSE:MCD) and Stryker (NYSE:SYK) have rewarded contrarian thinking, and it is an established investment philosophy. 

The question now is whether Teva Pharmaceuticals (Nasdaq:TEVA) is just such a play. Not only has the company had to deal with recent FDA violations in its facilities, but there is now widespread concern about the company's ability to maintain its lucrative multiple sclerosis franchise. What's more, there is another potential risk on the horizon - the end of a major run of patent expirations that have fueled generic growth across the industry. (For more, see 6 Drug Companies With Expiring Patents In 2011.)
Trouble in a Lucrative Franchise 
Biogen Idec (Nasdaq:BIIB) recently released favorable trial results on its oral multiple sclerosis drug candidate BG-12. This drug showed more than double the rate of two-year relapse reduction (49%) of Teva's drug and a similar reduction in disease progression (38%). Like Teva's laquinimod, BG-12 is an oral drug, and also like Teva Biogen has an established MS business in place (selling drugs like Avonex and co-marketing Tysabri with Elan (NYSE:ELN).

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Monday, April 25, 2011

Investopedia: Despite The Noise, Abbott Still A Value

Sometimes investors have to hold their noses a bit to take advantage of mispricings in the market. Abbott Labs (NYSE:ABT) is a good case in point; the company has changed its reporting by classifying its businesses into three meaningless categories, it makes rampant use of "one-time" charges, and the growth profile is heavily overweight to a small number of products. 

Still, cash flow is cash flow, and Abbott produces quite a lot of it, even though the Street does not seem all too willing to value it as highly as the cash flow from other medical technology names. (For more, see 5 Stocks With Solid Cash Flow.)

After Some Digging, a Solid Quarter
Abbott's first quarter results require a little digging and reinterpretation, but the numbers ultimately look pretty good. Reported revenue was up more than 17%, while organic revenue growth was more on the order of 5% to 6%. Growth was led again by the pharmaceutical business, which grew 24% this quarter. Vascular posted a decent result as well (up 13%), while diagnostics and nutrition both contributed high single-digit growth.

Likewise, the profitability side of the ledger was a bit murky, but the underlying results are solid. Gross profit improved more than a point from a year ago and would have been even better if not for the impact of foreign currency on the results. Moving along, Abbott continued its roughly eight-year tradition of "one time" items in the income statement, but operating income still grew around 13%. Stripping everything out and looking at a decidedly "home brew" organic EPS, Abbott's bottom line profitability increased at about the same rate as its organic sales - that is, mid-single-digits. 

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Investopedia: Chipotle Still Smokin'

Like the smoked jalapeno it's named after, Chipotle Mexican Grill (NYSE:CMG) offers more than just heat. Chipotle continues to post eye-popping traffic growth and strong margins, and there still looks to be plenty of expansion potential. It is also worth noting, though, that Chipotle sports a valuation that may be too spicy for even the boldest growth investors.

Another Great Quarter
Chipotle once again delivered impressive growth, exceeding the high end of the analyst range with 24% overall growth and nearly $510 million in revenue. While new store openings continue to be an important part of the story, the existing outlets are doing exceptionally well too - same-store sales growth was 12.4% for the first quarter, with higher pricing chipping in less than 1%. (For more, see Should Investors Ignore Monthly Sales?)

Profitability was a little more mixed, but still good news for the most part. Store-level margins contracted almost a full point, but still stand at an impressive 25.2%. Similarly, operating margin contracted a bit (from 15% to 14.7%), but operating income growth was still 22%. Growth was restrained a bit by promotional expenses tied to a buy-one-get-one-free offer, as well as higher food costs. 

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Investopedia: Signings A Small Thorn In IBM's Paw

Old-tech hasn't been getting much love lately, but this earnings cycle may help bring investors back to many of these old-school tech names. For although weak signings in the service business may send some investors to the sidelines, IBM (NYSE:IBM) reported an otherwise solid quarter and Big Blue remains a respectable less-risk play on technology. 

A Mostly Solid First Quarter
IBM reported top-line growth of 8%, adjusted down to 5% on a constant currency basis. Growth was led by the Systems and Technology business (hardware, mostly), which posted 19% growth with strong mainframe and UNIX business. Software grew 6% this time around, while the services business rose by a like amount.

IBM also delivered solid operating leverage for the first quarter, though readers should realize that there are a lot of adjustments and moving parts here and the numbers will vary from investor to investor depending upon what charges they choose to add back. Nevertheless, gross margin ticked up almost a full point, while operating margin expanded nicely as adjusted operating profits grew more than 20%.

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Investopedia: F5 - Is This The End Of The Beginning Or The Beginning Of The End?

If premarket indications are accurate, folks who bought shares of application delivery company F5 Networks (Nasdaq:FFIV) thinking that the mid-$90s would be a floor are going to see a decent return for stepping up to buy. That said, bears seem poised to portray this as more of a "less bad than feared" quarter, as opposed to real outperformance.

What's more, with weak sequential growth becoming more of a trend now, it is fair to wonder if the hot growth phase is over for F5. Clearly there is plenty of business yet to be won and the story is by no means over, but a shift to a less frenzied pace of growth will likely mean new multiples for this stock and perhaps a different shareholder base than before.

Fiscal Second Quarter Brings Growth and Relief
F5's growth in its fiscal second quarter was either great or just okay, on the basis of which numbers an investor uses. Compared to last year, revenue jumped almost 35%. Sequential growth, though, was more on the order of 3% - suggesting that F5 has basically caught up with the IT capital equipment under-spend of the recession. Within the total revenue figure, product growth was 34% on an annual basis, while just a bit over 1% on a sequential comparison.

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Investopedia: VMware Singes The Shorts ... Again

Like it or not, "early" and "wrong" can mean the same thing in investing. It is hard to argue that VMware's (NYSE:VMW) valuation makes much sense or will be sustainable, but shorting this name has been a tricky proposition over the past couple of years. So even if the skeptics are right that VMware is apt to hit a wall in terms of growth and market penetration, this could still be a case where Wall Street's ability to remain irrational outlasts an individual investor's ability to stay short and remain solvent. 

Another Strong Quarter
Beating estimates is nothing new here, and VMware once again outpaced even the high end of its revenue estimate range. Reported revenue jumped 33% this quarter, with license revenue growing 34% (to roughly half the total). Billings were also quite strong (up 44%), and the company has roughly $2 billion in deferred revenue on the books. Of the company's bookings, 22% were enterprise license agreements (ELAs) and that percentage continues to improve.

There was also strong momentum on the profitability side of the business. Operating income (on a non-GAAP basis) jumped 44% and operating margin rose more than two full points. What's important here is that VMware is not delivering this growth by stinting on its future - R&D spending rose 23% this quarter (again on an adjusted basis), while general and administrative expenses have stayed under control. 

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Investopedia: Can St. Jude Live Up To Newfound Expectations?

Investors run hot and cold on stocks all the time, but in all my time following St. Jude Medical (NYSE:STJ) I don't remember too many stretches where St. Jude was a favored name in the device space. That has all changed, though, and relatively quickly, as the company has managed to really sell Wall Street on the prospects for its deep pipeline. (For more on medical companies, check out Investing In Medical Equipment Companies.)

The company clearly has Wall Street's attention. Now the question is whether it can deliver on those promises. St. Jude does indeed have a deep pipeline and a good chance of being one of the most dynamic med-tech companies in the next few years (at least in terms of product launches). With so little underlying growth in many of its core markets, though, the company definitely has some work cut out for itself.  

Q1 Results: Not As Good As They Seem  
St. Jude reported $1.38 billion in first quarter sales, and that was spot-on with analyst expectations. The company's stated growth rate of 9% looks pretty good (as does the currency-neutral rate of 7.7%), but the organic growth picture isn't so impressive. Organic growth for the first quarter was more on the order of 2%, or a bit more than 4% if the some year-ago CRM business is netted out. Now, low-single-digit organic growth is not that out of line with the rest of the medical device sector, but "matching the market" is not the expectations out there for this name. 

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Investopedia: Eaton Shows Broad Recovery Continues

Conglomerates like Eaton (NYSE:ETN), Dover (NYSE:DOV) and Illinois Tool Works (NYSE:ITW) can be a pain for investors to follow with all of their moving parts. On the flip side, they can also give you a quick look at a wide range of industries and how they're performing at any point in time. To that end, while a weak aerospace industry is still a drag on Eaton, overall there continues to be a strong recovery across many industry segments. (To read more on conglomerates, check out Conglomerates: Risky Proposition?)

Good On Top, Not So Good in the Middle
Eaton seemed to have no problem booking sales in the first quarter. Overall revenue rose nearly 23% and surpassed the high end of the analyst range by about $100 million. Within the overall revenue number, the electrical business was a standpoint performer with 21% growth, and that's clearly a good thing as the electrical business is nearly 45% of the total. The hydraulic, automotive and truck segments all showed very strong growth as well, while the aerospace business was a laggard at just over 3% growth.

Top-line performance was clearly strong for Eaton, but profitability was a bit more problematic. Gross margin did increase slightly and the company did deliver over 61% growth in operating income but expectations were broadly higher than this - particularly problematic since the company surpassed revenue estimates so handily. Aerospace and automotive were relative laggards (segment operating profit margins declined), while the other units simply failed to improve as much as hoped. Still, overall segment profit growth of 46% is hardly a bad outcome. (To learn more about this type of analysis, See Fundamental Analysis For Traders.)

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Friday, April 22, 2011

FinancialEdge: The Least Accessbile Markets To Investors

There's evidence aplenty that investing in overseas markets is a very good way to improve the returns from a portfolio while actually reducing overall risk. What's more, evidence indicates that individual stock selection can outperform mutual funds and exchange traded funds (ETFs). It stands to reason, then, that investing in individual foreign equities could be a great way to boost returns and lower overall portfolio risk. If only it were that easy.

While there are indeed many good reasons to invest overseas, it is not nearly so easy as it sounds. In fact, investors face rather limited choices unless they are willing to take on larger risks and a longer investment timeframe. Let us consider, then, some of the least-accessible markets to U.S. investors.

Starting from Scratch
In terms of nominal GDP, Poland and the Czech Republic are the 20th and 45th largest economies, respectively, and both have been tapped many times in the past as attractive emerging markets within Europe. Yet, American investors have exactly zero choice when it comes to listed ADRs. That's right. There are zero listed ADRs hailing from Poland or the Czech Republic on U.S. exchanges. (For background on ADRs, see What Are Depositary Receipts?)

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Thursday, April 21, 2011

Investopedia: Does Stryker Need Further Reconstruction?

Stryker (NYSE:SYK) has been relatively active of late in recrafting its business, but the first quarter's results suggest that management's work may not be done yet. Stryker remains a good core holding for GARP-oriented investors, but management is going to need to deliver better results on the "guh" side of GARP to get the Street excited again. 

An Okay (but Not Great) Quarter
Stryker did not disappoint, per se. But analysts are not going to be thrilled with the company's numbers nevertheless. Revenue grew more than 12% on a reported basis, with core constant currency organic revenue growth of 4%. That continues a rather unfortunate trend of unimpressive growth that stretches back a few years now.

While that revenue growth met expectations, the composition is the tricky bit. The orthopedics business was flat, while the MedSurg unit was up more than 12%, with double-digit growth in instruments and endoscopy. Even though companies like Johnson & Johnson (NYSE:JNJ) and Covidien (NYSE:COV) have long done well in endoscopy and its a good repeat business, other aspects of MedSurg are more tied to hospital capital budgets - that, and the margins, are largely why analysts don't love that unit so much.

Speaking of profitability, Stryker saw better gross margin on an adjusted basis. Adjusted operating income rose 10%, but margins still contracted all the same. So, the company met its numbers but not in a way that is going to have anybody pounding the table.

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FinancialEdge: The World's Richest Royals

On April 29, Kate Middleton will cease to be a commoner and will marry into one of the oldest and wealthiest royal families still in existence. While the royal family fulfills only a ceremonial role in U.K. politics (and fodder for those keen on fashion or gossip) and Miss Middleton will be assuming no rulership or political power, there is no question that her lifestyle and living conditions are about to change dramatically. (For related reading, also take a look at America's Richest Sports Team Owners.)

With the upcoming nuptials in mind, it is worth a look a look at the those surviving royal families that still command significant resources and/or power. Unlike entrepreneurs, these are individuals who owe their wealth to circumstances of birth and the privileges of their position, not to actual talent or effort. Nevertheless, many of them command resources that cannot be ignored.

Thailand Takes the Top Spot 
Thailand's King Bhumibol holds the top spot on top important lists. Not only is Bhumibol the longest-reigning monarch alive today, but he is also the wealthiest. According to Forbes, Bhumibol's fortune is estimated to be worth upwards of $30 billion, much of that built through investments in native Thai businesses like Siam Cement and Siam Commercial Bank. Although King Bhumibol has relatively little power as a constitutional monarch, he has intervened in Thai politics many times to help resolve crises and stories of his poor health have led to sell-offs on the Thai Stock Exchange.

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Investopedia: Intuitive And The Price Of Scarcity

There is a definite lack of exciting growth stories in medical devices these days, and that is certainly part of the attraction of surgical robot maker Intuitive Surgical (Nasdaq:ISRG). Of course, a monopoly position in a potentially huge market and demonstrated improvements in patient outcomes does not hurt either. 

The question is, though, will investors continue to willingly pay such a premium for the shares with current growth rates?
A Quarter that Isn't as Strong as It Looks 
Intuitive once again surpassed the average revenue estimate, and 18% overall growth is not bad. What's more, instrument revenue growth of 28% was quite good and procedure growth of 30% clearly shows that the daVinci system is gaining share in its targeted procedure base.

On the other hand, system revenue rose less than 8% and the company booked 88 net new placements this quarter - continuing a fairly unimpressive recent trend of net placements. What's more, ASPs fell again - dropping 5% from last year and about 2% from the fourth quarter. Ironically, analysts used to fret when system growth was strong and instrument/procedure growth was not so impressive - now they have it the other way around and are still complaining. (For more, see Med-Tech Choice Is Simply Intuitive.

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Wednesday, April 20, 2011

Investopedia: The Difference Between Finance And Economics

Although they are often taught and presented as very separate disciplines, economics and finance are interrelated and inform and influence each other. Investors care about these studies because they also influence the markets to a great degree. Here we take a look at finance and economics, what they can teach investors and how they differ. (For background reading, see Is finance an art or a science?)

What is it?
Without falling back on dry academic definitions, economics is a social science that studies the production, consumption and distribution of goods and services, with an aim of explaining how economies work and how their agents interact. Although labeled a “social science” and often treated as one of the liberal arts, modern economics is in fact often very quantitative and heavily math-oriented in practice.

How is economics useful?
When economists succeed in their aims to understand how consumers and producers react to changing conditions, economics can provide powerful guidance and influence to policy-making at the national level. Said differently, there are very real consequences to how a nation approaches taxation, regulation, and government spending; economics can offer advice and analysis regarding these decisions.

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Investopedia: Play Steel Dynamics For The Next Materials Story

Every commodity and resource boom is a little different, but it is not uncommon to see divergent trends between materials. Materials like copper and iron ore can have their runs only to be followed later by the likes of steel and aluminum. With steel prices starting to firm up, and industrial conditions staying strong, now might be a good time to consider the likes of Steel Dynamics (Nasdaq:STLD).

A Solid Open to the Year
Due in part to strong pricing, Steel Dynamics surpassed the average revenue estimate for the quarter. Investors should note, though, that there was a very wide range of published estimates ($1.1 billion to $2.2 billion). In any case, revenue rose nearly 30% from last year and almost 32% sequentially. Average selling prices rose 21% from the year-ago level, and more than 18% sequentially, while shipments rose about 10% on a sequential basis. (For more, see Steel Cycle Looks Good.)

The company's cost and profit performance was also stronger this time around. Scrap costs were higher, but operating efficiency handily surpassed that increase. Gross margin jumped more than a full point from last year, and nearly six full points from the fourth quarter. Operating margin improved even more - up more than 160 basis points from last year and more than tripling from the fourth quarter.

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U.S. Bancorp Worth Checking Out

The banking sector is still a big hot mess. Banks are still going under every Friday and good news usually consists of things getting less-bad. In this sort of environment, banks that were not very well run going into the crisis are looking better than the best-run banks ... mostly just because that recovery from "bad to less-bad" is much more pronounced for them. 

With that in mind, I would not expect any huzzahs and handsprings over the results posted by U.S. Bancorp (NYSE:USB) on Tuesday morning. Yes, USB is still one of the best-run large banks in the country and its conservative lending policies and diverse income streams will serve it well as loan demand rebounds. But all of that is already known by the market and the quarter-to-quarter improvements from bank companies like USB just do not look as impressive when stacked up against the likes of Zions Bancorp (Nasdaq: ZION), Popular (Nasdaq: BPOP) or TCF Financial (NYSE:TCB).

A Good Quarter All the Same 
U.S. Bancorp's first quarter may not meet the standards for "great," but it was no worse than good enough. On an operating basis, the company did beat expectations, though not by much. Revenue slipped almost 4% from the fourth quarter, largely because of a sizable drop in fee income. Net interest income performance was alright - net interest margin fell (due to deposit growth), but earning assets grew and loan growth was up a bit as well.

USB saw much lower provisioning this quarter, falling 17% from the fourth quarter and more than 40% from the year-ago level. Within the balance sheet, NPLs were basically flat, though total non-performing assets (minus covered loans) did increase about 4% on a sequential basis. Expense control was also solid, as expenses fell about 7% on a sequential basis.

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Investopedia: Lilly Will Pay Investors For Patience

By no means is it easy to be a large-cap pharmaceutical company these days. The cost of developing new drugs has skyrocketed, patent expirations have gutted revenue growth and troubles with regulators and advocacy groups have weighed on shares. All of that said, pessimism seems to be at too high a level. Investors may want to consider the virtues of clipping coupons and waiting for companies like Lilly (NYSE:LLY) to come out from under the current cloud. 

Q1 - Okay, But Not Great
Large cap companies often move with the agility of supertankers, so quarter-to-quarter financial changes tend to be slow and modest. Lilly reported 6% revenue growth this time around, with 5% growth in volume and flat pricing. Lilly gets a bit less than half of its revenue from overseas, and this was the growth driver this quarter - foreign sales jumped 13%, while U.S. sales rose just 1%. (For more, see Measuring The Medicine Makers.)

Of total pharmaceutical sales growth of 5%, major drugs like Zyprexa, Cymbalta and Alimta were significant contributors (growing 6%, 13% and 10% respectively). Unfortunately, that also serves to highlight the risk from generic competition that is soon coming for Zyprexa and then coming three years later for Cymbalta. 

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