Perhaps one of the more interesting lessons of the recession and this sluggish recovery has been the deconstruction of the idea of "safe" industries where investors can take refuge in bad times. Food companies have been squeezed by input-cost inflation, healthcare companies have seen patients disappear, and the environmental sector, too, has seen business deteriorate more than many would have guessed.
Now that the post-IPO quiet period is over, a number of firms have initiated coverage on headphone maker Skullcandy (Nasdaq:SKUL). Does it really surprise anyone that the six banks initiating coverage on the stock were the six banks on the cover of the IPO? Likewise, does it surprise anybody that the coverage was universally positive? More and more, it seems like that "Chinese wall" between research and banking is creeping back to something more like the perforated Saran Wrap of the pre-tech bubble days.
Whatever the conflicts of interest may, or may not, be, does Skullcandy deserve the love on its own merits? More to the point, can this company find a way to make a real business and real profits out of what has traditionally been a market bifurcated between throw-away, low-performance junk and super-high-end and very expensive gear for audio nerds?
Since emerging from its bankruptcy of 2005, Winn-Dixie (Nasdaq:WINN) has struggled to really work as a stock or as a food retailing concept. Not really a value-focused player like Wal-Mart (NYSE:WMT) or Aldi, nor a top service provider like Publix or Ruddick's (NYSE:RDK) Harris Teeter, Winn-Dixie seems to be foundering a bit as it tries to rebuild its business and its market cap. With fiscal fourth quarter earnings and 2012 guidance in hand, it is hard to see where this stock really fits.
Packaging is scarcely ever noticed, but it is everywhere. A quick trip to the supermarket or pharmacy will show not only the ubiquity of packaging products, but the wide scope of form and function that is available to food, beverage, personal care and healthcare companies. There is certainly a cyclical aspect to the packaging industry and input costs are always significant, but investors may want to give this industry more than just a passing thought. There are certainly some interesting companies out there today and some of these stocks could be interesting at current values.
Ball Corp (NYSE:BLL) Ball Corp is quite simply the world's largest metal beverage container manufacturer, with about 40% share (rivals Crown Holdings (NYSE:CCK) and Rexam have roughly 20% share each). Ball's customer list is largely a roster of who's who in the beverage industry - soft drink makers like Coca-Cola (NYSE:KO) and PepsiCo (NYSE:PEP), as well as brewers like Anheuser-Busch InBev (NYSE:BUD). Ball Corp certainly has some vulnerability to higher metal prices, but the company's market position is such that it can pass on at least some of this to its customers. The bigger threat to Ball Corp may be substitution, as plastic containers make further inroads into the beverage sector.
It is true that people will continue to buy food and other necessities of life through good times and bad, but there can be some pretty significant shifts in how and where they do that buying. When times are good and there's room in the budget, places like Whole Foods (NYSE:WFM) and Fresh Market (NYSE:TFM) can draw in the traffic. Tough times, though, lead to tough decisions and can lead shoppers to consider trading down to the likes of Wal-Mart (NYSE:WMT) and the deep discount retailers collectively known as "dollar stores."
While that does indeed seem to be happening for Dollar General (NYSE:DG), the question is whether investors are already too far ahead of the story. Dollar General is indeed bringing people into the stores and management deserves credit for maintaining solid margins, but it looks like the valuation already presupposes a lot of that performance.
A Surprisingly Strong Second Quarter
One of the recent themes for retailers has been the push/pull between preserving margins (by raising prices) and preserving market share as input costs keep rising. Wal-Mart and Target (NYSE: TGT), for instance, have generally chosen to preserve margins and the result has been unimpressive same-store sales. Dollar General has generally been going the other way.
It doesn't seem so long ago that investing in anything related to the automotive sector seemed to be an invitation for a capital loss. Companies struggled with excess capacity, high debt and nonviable cost structures, and more than a few companies at least flirted with bankruptcy (and some made the commitment to it).
Now, though, is seems like a new industry. Many companies have worked to strip costs out of their operating structure and emerging markets have become a major growth opportunity. Though investors should not assume that this industry has shaken off its traditional cyclicality, opportunities could still be available in the sector.
Auto part companies do not get much credit (or valuation) for technological innovation, but that seems a little unfair in the case of BorgWarner. Diesel turbochargers and dual clutch technology are both significant growth opportunities, particularly if diesel passenger vehicles become as popular in the United States as they are in Europe. BorgWarner used to pay a dividend and that could resume again as the company shores up its balance sheet. Investors should also note that BorgWarner has less exposure to U.S. automakers than many names on this list.
The trouble with good times is that in the market they always come to an end sooner or later. Like many other industrial and vehicle suppliers, Donaldson (NYSE:DCI) has had a very solid run as the economy has recovered from its worst levels. With a lot of OEM orders already in the history books, though, it looks like the pace of growth is due to slow, and it's anybody's guess as to whether shareholders will remain as loyal to the stock if growth finds a lower gear.
A Solid Cap to a Good Year Donaldson did well for its fiscal fourth quarter. Revenue rose 21% as reported, or about 13% on a constant currency basis. Admittedly that pales a bit when compared to the results of Caterpillar (NYSE:CAT), BorgWarner (NYSE:BWA), or Cummins (NYSE:CMI), but it was a good result and it compares well with other filtration players like Pall (NYSE:PLL) and Clarcor (NYSE:CLC).
On the surface it may not seem like there would be much growth left in the U.S. pay TV market. Penetration rates are already north of 90% and most Americans consider cable (or satellite) TV service to be just as much a necessity as electricity or gas. Moreover, with the decline of dial-up, pay TV carriers also provide the entryway to Internet access for most people in this country.
And yet, that doesn't mean that there isn't growth potential or vibrant competition. Satellite providers, cable TV providers and phone companies are stepping up their battle to offer more or less the same services to the same customer base. What's more, alternate online options are reducing some of the distribution power of this sector, while more and more distributors also see themselves as content providers. Oh, and there's this tech company called Apple (Nasdaq:AAPL) that may have some ideas of its own about how TV service should look in the future.
The chemicals industry is one of the most economically-sensitive industries around, and many of the major chemical companies are very nearly proxies for global GDP growth. Specialty chemicals, though, is a subsector with some notable differences. It is certainly not fair to say that these companies are neither cyclical nor invulnerable to global growth trends, but many of these companies offer products or serve niches that tend to be a little more stable.
There are ample worries about growth in the market today. If the economy is truly headed into a double-dip recession, these companies are not going to be notable outperformers. On the other hand, many of these stocks have been hit on growth worries and investors may find that these companies have either been sold too far, or at least merit spots on watchlists for the recovery in growth expectations.
Air Products (NYSE:APD)
If you want hydrogen or helium, there's a good chance you'll do business with Air Products. APD is a global leader in atmospheric and process gasses. These are critical inputs in many industrial and manufacturing processes and there are substantial advantages to scale and scope. That said, APD has about 20% exposure to the electronics industry (good in most periods, but arguably a negative today) and the company's profitability goals for 2015 are starting to look a little too ambitious. That said, the stock looks undervalued today and a 3% dividend yield is not a bad sweetener.
I have been a fan of shoe retailer Brown Shoe (NYSE:BWS) for some time, having profitably owned it many years ago, but perhaps it's time to reevaluate that position. While many retailers are struggling in a difficult consumer spending environment, there are more worrisome issues between the lines. Brown Shoe is making mistakes that it should not be making and offering up fairly thin excuses in place of execution. Brown Shoe's problems are not unsolvable and the valuation is compelling, but shareholders have every right to demand more from this management team.
Another Poor Performance
This fiscal second quarter marks the company's third consecutive major miss with respect to analyst expectations. Revenue rose more than 7% in the quarter, but still came in slightly shy of the average analyst guess. The company's largest segment, Famous Footwear, saw sales drop almost 1%, while the wholesale business was up more than 24% and the small specialty segment rose about 1%.
With college costs on a seemingly endless upward march, but salaries and job openings disturbingly flat, there is much talk these days of whether higher education is a bubble due to pop. "Bubble" is arguably an overused word these days and it is debatable whether there's a "greater fool" theory at work in higher education, but clearly something disturbing is happening. Absent some creative thinking and careful planning, college education may once become the domain of the wealthy and create inflexible strata within society. (Bubbles are deceptive and unpredictable, but by studying their history we can prepare to our best ability. See 5 Steps Of A Bubble.)
The Best Game in Town?
It is difficult to assess the profitability of private schools, but there is no question that colleges, both public and private, have scarcely been shy in putting up prices over the past few decades. Depending upon the source and the time period in question, college tuition has been rising somewhere in the neighborhood of 8% a year for several decades, with room, board and other associated costs basically going along for the ride.
How much more needs to be said about the state of enterprise IT spending? Companies like Cisco (Nasdaq:CSCO), Riverbed (Nasdaq:RVBD), F5 (Nasdaq:FFIV) and Juniper (Nasdaq:JNPR) have all had their challenges and setbacks, leading many investors to reevaluate the health of the tech sector and reset valuations much lower. What seems to be evident in Aruba Networks' (Nasdaq:ARUN) earnings, though, is that there is still money out there for IT - perhaps not as much as a year ago, but enough that companies will still spend on the products they see as important to their operations.
A Solid Close to the Fiscal Year Aruba announced that fiscal fourth quarter revenue rose 47% compared to last year and almost 8% compared to the fiscal third quarter. Management did not give a lot of specificity regarding where revenue came from, other than to say that U.S. results were stronger than in Europe (not a surprise) and that the strongest markets were "general enterprise" and education (a minor surprise). In response to a question on the conference call, management indicated no particular weakness in the financial sector - a surprise perhaps given NetApp's (Nasdaq:NTAP) recent comments.
Anyone who drives is well aware of the general trajectory of oil prices over the past decade; and likewise, anyone who uses natural gas to heat their home has some sense of the volatility in that market. Oil and natural gas are vital to the global economy. Simply put, without energy there is much less commerce, and oil and natural gas represent some of the most portable energy-dense options available today.
When it comes to big-time oil and gas, investors must consider a lot of trade-offs. Some companies see themselves almost as trusts - focusing on paying out large dividends and keeping risky development investment to a minimum. Others try to find more balance in the growth/income equation. At the bottom line, though, major oil and gas companies offer investors an opportunity to ride along for further gains in energy prices, without some of the risk of smaller names.
Apple (Nasdaq:AAPL) shareholders had been dealing with rumors and uncertainty regarding the end of Steve Jobs' tenure as CEO for quite some time. Perhaps that explains why the reaction to the official announcement of Steve Jobs' resignation was calm and relatively moderate. Jobs' successor, Tim Cook, is already well-known to investors, analysts, and Apple employees, as he has been Apple's Chief Operating Officer for quite some time and filled in for Jobs as interim CEO during prior medical leaves of absence.
This calm reaction notwithstanding, CEO transitions can be major transformative events for corporations. Not only do new chief executives feel the burden of making their own mark on the company, but they live under the legacy (good or bad) of their predecessor and must deal with a company built to execute someone else's vision. With that in mind, investors may want to consider some of the more significant leadership transitions of the past years.
Sometimes where there's smoke there's fire. Imaging chip developer OmniVision Technologies (Nasdaq:OVTI) has been an uncommonly controversial stock for most of its history, with recent worries focusing on whether the company was facing share loss to Sony (NYSE:SNE) and Toshiba at Apple (Nasdaq:AAPL). Now that the company has given very disappointing guidance for the next quarter, those worries have ratcheted up to a fever pitch. OmniVision shares are almost certain to be punished too far, but it will take a patient and aggressive investor to step up and fight the tide. A Few Blurry Spots in First Quarter Results
Although OmniVision met expectations for the first quarter (and earnings actually beat by a bit), it wasn't a uniformly clean quarter. Revenue did jump 43% from last year's level, with sequential growth coming in at 7%. Shipments climbed about 1% sequentially, with ASPs up about 5%. Given that laptop/notebook computer shipments haven't been all that strong, it seems fair to assume that OmniVision's growth is coming from other product categories like phones, tablets and gaming devices.
Normally, booze is a great business. When times are good, people drink to celebrate. When times are bad, people drink to commiserate or forget. Better still, alcohol is expensive, easy to make and requires precious little research and development (though plenty of brand-building and marketing support). And yet, that idyllic reputation isn't working out so well right now. As consumers find their budgets increasingly stressed, they seem to be drinking less and turning to cheaper brands.
That makes Diageo (NYSE:DEO) unusual. While several major alcohol companies have recently disappointed the Street and worried investors with disappointing results and guidance, Diageo seems to be doing relatively well. With good growth in emerging markets, it looks like Diageo can wait out the turbulence in North America and Europe and perhaps add a few more good brands to its world-leading stable. Think of it like Coca-Cola (NYSE:KO) or PepsiCo (NYSE:PEP) for the adult crowd.
There's a lot more to Hormel (NYSE:HRL) than Spam, but it takes a long time for common perceptions to change. Hormel is really not a commodity meat company like Tyson (NYSE:TSN) or Smithfield (NYSE:SFD); it has returns on capital much closer to branded packaged goods companies like Kellogg (NYSE:K) or Heinz (NYSE:HNZ). Hormel's processed foods may not be the epitome of healthy or organic eating, but if the company continues to develop popular brands and follow-on products, this could be a much more dynamic company than investors think.
Third Quarter Results on Target Hormel did more or less as analysts expected it to do for this quarter. Sales rose 10% on flat volume, basically matching the average analyst guess. Sales growth matched that company-wide average in the refrigerated segment, while the grocery business lagged noticeably (up 4%) and Jennie-O and specialty slightly surpassed it.
One of the frustrating parts about following semiconductor and semiconductor equipment stocks is that no two cycles are exactly alike. Right now, Applied Materials (Nasdaq:AMAT) is in a place where the industry is still trying to find the bottom in orders, and companies like ASML (Nasdaq:ASML) have started to suggest that orders will bottom out to maintenance levels late this year or early next year. Applied Materials looks cheap, but it did a quarter ago and the quarter before that, and investors may want to wait for signs of stabilization in orders before taking the plunge. A Solid Third Quarter ... Sort Of
Applied Materials has been in a weird place for a little while now, lowering order guidance and yet still managing to do a little better than it leads investors to expect. So, too, again this time. Revenue fell 3% on a sequential basis (and rose 11% year over year), enough to beat the average estimate by $100 million and the high end of the range by $50 million. Business was relatively balanced, with the large Silicon Systems category down about 4% sequentially.
What a difference a sell-off can make. Avago Technologies (Nasdaq:AVGO) has been an interesting chip company for a while now from a business perspective, but not quite so appealing as an investment candidate. With a broad sell-off in the markets in general and chips in particular, now may be one of those relatively rare opportunities to buy up some shares in a quality growth candidate.
A Good Third Quarter Chip stocks like Analog Devices (NYSE:ADI) and Microchip Technology (Nasdaq:MCHP) have not been impressing the Street much lately, but Avago stood up and delivered a solid fiscal third quarter performance. Revenue exceeded the top end of the analyst range on 8% sequential growth (and 10% annual growth). Growth was led by wireless (up 10% sequentially), but wired, industrial, and auto all did fairly well and there was no obvious weak point.
Wednesday evening's announcement from Apple (Nasdaq:AAPL) that CEO Steve Jobs was resigning could hardly be called a surprise, but it will certainly accelerate a transition process that has been ongoing in fits and starts for a number of years. Apple has tapped a solid manager to replace Jobs, but competition in Apple's core markets is heating up and investors may be right to wonder whether the company can maintain its over-the-horizon vision and ultra-confident operating strategy without such a rare visionary leading the show.
News That Really Isn't New That health issues would eventually force Steve Jobs to step down from his CEO position was really more of a "when, not if" situation, and really not much of a surprise. Jobs was treated for pancreatic cancer back in 2004 and received a liver transplant in 2009. What's more, while it is arguably unfair to speculate on his current condition (and Jobs has been fairly private about these details), the information that has been made available in the past would suggest he is most likely not feeling especially well anymore (fatigue and lethargy are common symptoms).
Back in June, I was cautiously optimistic on the shares of Toll Brothers (NYSE:TOL), provided that "the economy does not slide back into recession". Nowadays, that concern is looking more ominous, and uncertainties seem to be weighing on consumer sentiment. Toll Brothers is still the best property on the homebuilding block, but these days that may be like asking investors to choose between a haunted house designed by Disney and one designed by Lovecraft. Sure, there's a difference but they're both still haunted houses.
Not a Lot of Good News in the Third Quarter Toll Brothers reported revenue of $394 million for the third quarter, down about 13% in dollar terms from the year-ago level. Undercut by a 14% drop in units, Toll Brothers actually missed the average analyst guess, but investors should note that there was a pretty wide spread for revenue estimates, which certainly befits the uncertain state of housing.
Foreign exchange, or forex, trading is an increasingly popular market for investors and speculators. The markets are huge and liquid, trading occurs on a 24-hour basis, and there is enormous leverage available to even a small individual trader. Moreover, it is opportunity to trade on the relative fortunes of countries and economies as opposed to the idiosyncrasies of companies. (For related reading, see The New World Of Emerging Market Currencies.)
Despite many attractive characteristics, the foreign exchange market is vast, complicated and ruthlessly competitive. Major banks, trading houses and funds dominate the market and quickly incorporate any new information into the prices. In fact, just 10 firms control about 75% of foreign exchange volume, and it is all but impossible for a currency trader to know who they are trading with at any particular moment.
There is plenty of discussion these days about whether leading video game retailer GameStop (NYSE:GME) is doomed to follow a Blockbuster-like path to irrelevance and/or whether would-be rivals like Netflix (Nasdaq:NFLX) and Coinstar (Nasdaq:CSTR) can get into its kitchen. Unfortunately for GameStop bulls, there are some real reasons for concern. (For other companies that are threatened by strong competition and a changing market, check out Companies Playing Catch-Up With The Competition.)
Digital Isn't Everything A recent article on TheStreet.com tried to point toward growing digital sales as a sign that GameStop is adapting with the times and capable of staying competitive. To be fair, online revenue is growing nicely - up 69% in the recently-announced second quarter - while overall revenue dropped 3%. Unfortunately, there's more to the GameStop story than that.
In the last decade or so, a common theme has emerged from U.S. boardrooms - when the going gets tough, companies start buying their stock. There are plenty of valid reasons for companies to repurchase their own stock, particularly when markets sell off and valuations drop. On the other hand, buybacks are not a terribly productive use of cash, and investors may be right to worry whether a spate of repurchase announcements in the face of a worsening economic environment is going to make things worse in the long run.
Who's Doing The Buying?
The past few weeks have seen several large share repurchase announcements. Lockheed Martin (NYSE:LMT) and Lowe's (NYSE:LOW) take the cake with announcements of $1 billion and $5 billion plans, respectively. Maxim Integrated (Nasdaq:MXIM) is in for $750 million, Celgene (Nasdaq:CELG) added $2 billion to its plans, Marsh & McLennan (NYSE:MMC) is looking to buy back $1 billion, and Covidien (NYSE:COV) has a $2 billion plan in place.
Sometimes one person's disaster is another's opportunity. Bank of Montreal (NYSE:BMO), one of Canada's "Big Six", had best hope that proves true in regards to its U.S. expansion efforts. While the CEOs of major U.S. banks like U.S. Bancorp (NYSE:USB), Wells Fargo (NYSE:WFC) and Bank of America (NYSE:BAC) hunker down and talk about a sluggish multi-year recovery, several Canadian banks are looking at expansion into the U.S. as a cornerstone of their growth strategies.
A Solid Third Quarter Whenever there are worries about macro-level growth, bank investors get nervous. Bank of Montreal's fiscal third quarter results may add a little calm to the sector, though, as they were a bit better than analysts expected.
Higher-end retailer Williams-Sonoma (NYSE:WSM) has a problem. It's not a merchandise quality problem or an in-store experience problem. It's not a substitution problem; people still cook and use furniture. No, the problem for Williams-Sonoma is more of a consumer disposable income problem - there is nothing in a Williams-Sonoma store that people cannot live without, and as surveys from the National Retail Federation continue to show, people are trying to stretch their income further by shopping more at places like Wal-Mart (NYSE:WMT) and Bed Bath & Beyond (Nasdaq:BBBY) and less at places like Williams-Sonoma.
Cracks Showing in Q2? Although Williams-Sonoma management decided to issue an earnings press release talking about "strong" earnings in the title, investors can be forgiven if they don't see it as such a strong release. Revenue came in at the lower end of analyst expectations, with reported growth of just a bit more than 5%. While in-store retail growth was pretty anemic (less than 1%), direct-to-consumer sales were up 13% and internet sales (part of DTC) was up nearly 19%.
There are certain things you expect living in North Carolina.
Oppressive heat and humidity, large insects, the occasional hurricane, and rabid college basketball fans. All of that sort of goes with the territory.
What you *don't* expect is an earthquake.
It wasn't really a big deal (I've been through worse in Japan) and there was no damage around here, but after the first few seconds of shaking (it lasted maybe 10-15 seconds in total), it did get a little unnerving.
Guess that's what I get for lamenting a boring Tuesday afternoon!
In the space of a week, two of Apple's (Nasdaq:AAPL) biggest potential competitors largely packed up their tents and conceded that they could not compete on their own in markets like smartphones and tablet computers. While the circumstances are indeed quite different - Hewlett-Packard (NYSE:HPQ) is basically exiting the consumer PC and portable electronics business, while Motorola Mobility (NYSE:MMI) accepted a buyout from Google (Nasdaq:GOOG) - the fact remains that precious few companies have taken Apple's best shot and come out swinging for the next round.
What makes Apple special? And perhaps more to the point, does Apple's way of doing business give it an enduring advantage on its current and would-be rivals?
The Squishy Bits
Words like "culture" are thrown around too readily sometimes, but there is at least some kernel of truth in the idea that a distinct operating philosophy can make a real difference at the bottom line. In the case of Apple, this is a company that largely trusts its own vision(s) and does not feel the need to endlessly consult with focus groups to take a committee approach to design. What's more, there are plenty of accounts that Steve Jobs has established a demanding culture at Apple where high expectations are the norm.
With word coming out this weekend that the rebel forces had begun to enter Libya's capital of Tripoli, it looks as though the Arab Spring may be winding down. Although investors should never fully discount the risk of further turbulence - citizens are getting restless in Egypt, Syria is still spasming with protests and crackdowns and further troubles could always emerge in nations like Iran or Iraq - it looks like many Western names may be soon getting back to the business of exploiting sizable untapped foreign reserves. (Dividend capture strategies provide an alternative investment approach to income seeking investors. See How To Use The Dividend Capture Strategy.)
Back to Business as Usual? With a few exceptions here and there, major international oil companies pulled their employees out of Libya when armed insurrection against Qaddafi's regime began earlier this year. Now that it appears that the rebels are closing in on victory, it may be time to reconsider some of the names that had sizable partnerships with the Libyan government in developing oil and gas reserves that had gone largely underutilized during Libya's long period of isolation.
Across the country, a traditional rite of fall has either begun or is soon coming - the resumption of school. With the return to school goes an annual pilgrimage to the malls and shopping centers to equip the little tykes with the clothing, electronics and other supplies that they need to start the school year. For many retailers, this is the second-biggest shopping event of the year (after Christmas), but ongoing economic malaise may make this a tougher test this year. (If you have to do back-to-school shopping, check out Best Back-To-School Deals.)
Another Sluggish Season?
According to surveys from the National Retail Federation, this is not looking like an especially robust year. More specifically, it looks like per-family spending may dip slightly from last year (by about half a percent) to about $604. While this is certainly better than the 2009 malaise of $549 per family, it marks another year where retailers cannot rely on fatter wallets to boost their own profits.
Absent more money sloshing around the market in general, retailers will have to pull out the stops to lure shoppers into their stores. Going back to the NRF survey, customers are saying that they will rely more on discount stores, online shopping and sales, but they will not necessarily abandon the name brands and up-market products altogether.
This has been a tough year for biotechs. Compounding a lull in clinical news, the FDA continues to play a "catch me if you can" game of changing standards for approval. On top of that, pharmaceutical companies like Pfizer (NYSE:PFE) and Merck (NYSE:MRK) have shown relatively little interest in making major acquisitions without approved products in hand. In addition, independents like Dendreon (Nasdaq:DNDN) have shown that FDA approval is only one battle in the larger war.
With all of that in mind, then, how excited should investors be over word last last week that the FDA has approved Seattle Genetics' (Nasdaq:SGEN) Adcetris? Clearly this is good news (far better than a rejection, at least), and the FDA was rather lenient with the labeling. Still, investors should be cautious as post-approval can be a challenging time to own biotechnology stocks.
The FDA Roars, but Ultimately Says Yes
The FDA gave a thorough work-over to Seattle Genetics during the company's panel meeting, seeming to make it abundantly clear that the agency had issues with the company's application to sell Adcetris for relapsed/refractory Hodgkin's lymphoma, let alone another indication for anaplastic large cell lymphoma.
The markets are in no mood these days for any shortfall in expectations. Couple that with an eye-popping valuation, and Salesforce.com (NYSE:CRM) is performing a high-wire act these days. Although the company's top-line growth seems to be good enough to pacify a twitchy Street, long-term investors may want to take note of the high cost of this software company's growth before paying such a steep entry fee.
Fiscal Second Quarter Results Answer, and Ask Questions Wall Street has been quick to punish tech companies like F5 (Nasdaq:FFIV) or NetApp (Nasdaq:NTAP) on any sign of revenue trouble. Luckily, this was not an issue for Salesforce.com - the company posted 38% annual revenue growth (and 8% sequential growth) and once again topped out the high end of its expectations. Billings were up a like amount, and quite strong relative to the likes of Taleo (Nasdaq:TLEO) and SucessFactors (Nasdaq:SFSF), and the company booked several large-value deals.
Weak federal government spending has been a problem for a lot of companies recently, including Cisco (Nasdaq:CSCO) and NetApp (Nasdaq:NTAP). With major worries about the unsustainability of recent budget deficits and political pressure to cut spending, it wouldn't seem like a good time to invest in companies that largely rely on federal business for their revenue. Still, with IT products and services that help government agencies modernize and cut costs, CACI International (NYSE:CACI) may be able to capture a bigger piece of smaller budgets. (To help further identify company success, read 3 Secrets Of Successful Companies.)
A Stronger Fourth Quarter Than Expected CACI managed to log better than 13% growth in the fiscal fourth quarter, slightly beating the average analyst guess. Organic growth was strong as well, at better than 11%. As usual, business from the Department of Defense was the driver this quarter - up more than 17% and making up 81% of sales. Revenue from federal civilian agencies, the company's second largest category, was down more than 2%.
A lot of analysts look at Fridays as slower-paced days where they can tie up loose ends, get out early, and work on their golf game. Hewlett-Packard (NYSE:HPQ) pretty much trashed that idea for tech investors, though, with an avalanche of information and major transformational changes. While Hewlett-Packard has given people a lot to chew on, a few basic ideas emerge - the company is taking a new strategic direction that makes sense (but will take time to realize), current performance is not very good at all, and investors are going to have to be patient to get value out of this name.
Earnings Looking Pretty Sad
Hewlett-Packard announced that reported revenue rose 1%, while currency-neutral revenue fell 2%. These are admittedly not great days for big tech (and Dell's (Nasdaq:DELL) revenue growth was similar), but those results are fairly pathetic when compared to IBM (NYSE:IBM), EMC (NYSE:EMC), or Cisco (Nasdaq:CSCO).
Software was pretty strong (up 20%) and financial services (arguably a non-core business) revenue was up 22%). Enterprise servers, storage and networking (ESSN) did alright with 7% growth, while services grew 4%. Personal systems (PCs, mostly) dropped 3% and the imaging and printing group saw revenue fall 1% for the quarter.
There are plenty of reasons not to like China Mobile (NYSE:CHL). Not only is China's largest cell phone operator closer to the Chinese government than many investors will find comfortable, but the company is also likely well past the point of exciting top-line growth. All of that said, though, this is a company with major market share, hand-over-fist cash flow generation, and a very solid business. Given how turbulent the markets are and the spasms that go with even modest disappointment, China Mobile looks like a dividend growth idea where investors can lay low for a while.
Second Quarter Results - Solid, But Not Scintillating China Mobile's results probably won't impress casual observers, but they were better than many analysts had expected. First half revenue rose almost 9%, while second quarter revenue rose a half-point more. Second quarter EBITDA rose more than 7% (and margins compressed about 80 basis points), and net profit was up 7%. (For more on EBITDA, see A Clear Look At EBITDA.)
Data storage is one of the best growth areas of technology today, but that does not mean that growth is going to follow a smooth and uninterrupted upward line. NetApp (Nasdaq:NTAP) has plenty of growth potential and could be on its way to being a legitimate numer two behind EMC (NYSE:EMC), but a major sales shortfall in July has investors bringing out the sharp knives. NetApp is going to get sent to the penalty box for a time, but investors who have some patience and appetite for risk should look at this as an opportunity to add shares.
An Iffy Start to the Fiscal Year
NetApp's revenue for the fiscal first quarter missed the average analyst estimate and only just met the low end of its prior range. That is a big change for a company that generally beats expectations and the culprit was a surprising reversal of business in July. Still, revenue for the quarter rose 26% on a year-over-year basis and about 2% on a sequential basis.
Results were clearly hurt by declines in orders from government and financial customers - NetApp reported that revenue from government customers was up just 3% in the quarter (and down 27% sequentially).
As in many other industries, semiconductor investors have a choice to make - go with the exciting secular growth stories, or stick by the proven winners. The first option is where the multi-baggers are found, while the second is arguably less risky. Although there is arguably no such thing as a safe semiconductor stock, investors may want to consider Analog Devices (NYSE:ADI) as a middle road between recovery and recession scenarios. (Dividend capture strategies provide an alternative investment approach to income seeking investors. See How To Use The Dividend Capture Strategy.)
A Tough Fiscal Third Quarter
While Analog had an unusually strong fiscal second quarter, the company gave some of that back this time around. Revenue was up 5% from last year, but down 4% from the prior quarter and a little below the bottom end of the company's guidance range. Results were hurt most by weakness in the communications business, but industrial and auto sales were weak as well. Consumer sales were stronger (up 5% sequentially), but this represents less than one-fifth of total revenue.
You would think that a company with a global revenue base, diverse industry exposure and solid returns on capital would get the benefit of the doubt. But in the case of Agilent (NYSE:A), you would seem to be wrong. Agilent may not command as much respect for technology leadership as a company like Illumina (Nasdaq:ILMN), but Agilent's diverse and growing business deserves more respect and investors should consider using this market pullback as a chance to buy some shares in this high-quality company.
Third Quarter Results Better than Feared
Even though there was not much sign of it in the published analyst estimates, sentiment had definitely been souring on Agilent going into this earnings cycle. Nevertheless, Agilent reported that sales grew more than 22% in the fiscal third quarter, with 19% organic revenue growth. Growth was led by the electronic measurement segment (up almost 24%), where growth in the communications business was especially strong. Life sciences delivered solid 21% growth (18% organic), and chemical analysis was the "laggard" with 16% reported and 11% organic revenue growth.
I have often written that value really does not matter in technology investing. This is a sector driven by growth, not valuation, and it is all too rare for cash flow-based analysis to carry the day. That makes Dell (Nasdaq:DELL) a very difficult stock to evaluate. If the company can deliver anything close to its projected free cash flow, the stock is shockingly cheap. But with revenue growth so low - and likely to remain sluggish - it may be hard to attract any investors who care.
A Complicated Second Quarter
Dell is trying to transition from being largely a consumer-driven PC company into a fully-integrated enterprise IT provider. So far, the results continue to be mixed. Revenue grew just 1% over last year's level, but 4% from the first quarter - a result that nevertheless missed analyst expectations.
Enterprise demand was respectable and helped offset ongoing difficulties in the PC and notebook business, where Dell continues to struggle to maintain momentum against rival PC-makers like Hewlett-Packard (NYSE:HPQ) and Acer and PC alternatives like Apple's (Nasdaq:AAPL) iPad. Server and networking revenue was pretty strong (up 9% year on year and 4% sequentially), software revenue was flat and service revenue was also positive. Storage was the laggard on a reported basis, as the company transitions away from EMC (NYSE:EMC), but Dell-owned storage technology revenue was up 15%.
Lately, one of the concerns around offshore drilling specialist Transocean (NYSE:RIG) was what it was going to do with its balance sheet. Institutional investors don't generally appreciate under-exploited opportunities and there seemed to be a general sense that Transocean management needed to get a little more active. With Monday's announcement, those concerns seem to have abated for the time being.
The Deal Transocean announced that it had reached a deal to acquire Norway's Aker Drilling for $1.43 billion in cash. Transocean valued Aker at NOK 26.50, a 62% premium to the prior close. Aker also has debt on its balance sheet, so the actual deal value is more in the neighborhood of $2.23 billion (net debt of $0.80 billion).
The summer of 2011 has not been one of the nicer summers in recent memories. Crushing heat across much of the country is bad enough in its own right, but it is paired up with ongoing financial trouble in Europe, an unprecedented sovereign downgrade for the United States, economic worries all around and a weak stock market. Yet, even against this dour backdrop, there are still areas of the strength in corporate America.
For purposes of this article, strength refers to the momentum in corporate sales and earnings, as well as the trajectory of analyst expectations. Curiously, there are numerous divergences between those industries showing fundamental strength and stock market strength, and these may well prove to be trading opportunities for investors.
The auto parts industry best highlights that dichotomy between financial and stock market strength. With strong results from companies ranging from American Axle (NYSE:AXL) to Dana (NYSE:DAN) to Tenneco (NYSE:TEN), the auto parts industry has shown very healthy revenue and profit momentum as car sales have risen more than 10% year-to-date. Curiously, this is also one of the weakest sectors year-to-date, as stocks in this group have fallen almost 20%. Perhaps investors have been spooked by the recent slowdown in passenger vehicle sales and have decided to take profits in names that, in many cases, have appreciated several times over since the worst of the recession. (For related reading, see 2011 Cars With The Highest Resale Value.)
During times of economic uncertainty, many investors look far and wide for data to help make sense of it all. Unfortunately, rail traffic data is not a big help today. Much like that classic Monopoly illustration of a man with his palms out and seeming to shrug, it is hard to get much useful information on the economy these days from the traditional measurements and statistics. Perhaps that is just how things are today; there are certainly signs that recovery continues to crawl along, but there are plenty "danger" signs flashing along the way.
Another Dip Down The strong recovery trend in rail traffic is definitely over and done with for now, as July's results showed another decline (the second in four months). Rail traffic in July fell 1% from last year's level, while it did climb 0.7% on a sequential basis. Canadian traffic was quite a bit stronger, up 3.7% from last year, and intermodal was strong both in the U.S. and Canada.
Apparently, it is not enough to control the software and allow others to design the box. That would seem to be one easy conclusion to reach from Google's (Nasdaq:GOOG) announcement on Monday that it had reached an agreement to acquire Motorola Mobility (NYSE:MMI) for $12.5 billion in cash. With this deal, Google is now clearly a player in the hardware space, but it is uncertain the extent to which this is a threat to the likes of Apple (Nasdaq:AAPL) or an opportunity for the likes of Microsoft (Nasdaq:MSFT).
A Whopper of a Deal There has been much speculation of what Google might do with its $30 billion-plus cash hoard, and now we know that a big chunk of it is going towards a large risky acquisition. Google will be paying $12.5 billion in cash for Motorola Mobility, though that price drops closer to $7 billion after subtracting net cash, investments and deferred tax assets. At the announced value of $12.5 billion, the $40 per share price represents a 63% premium to Motorola's prior close. On an adjusted basis, Google is still paying well more than 20 times trailing EBITDA but a little more than half of trailing revenue.
Individual investors see a steady stream of paeans to Wall Street, praising not only the substantial resources of professional investors, but also suggesting (sometimes subtly, sometimes not) that these professionals are smarter and more capable than the average investor. While there are certainly plenty of columns out there decrying the mistakes of professional investors and pointing out that disciplined individuals can do just as well, the fact remains that the financial media overwhelmingly tilts towards the idea that Wall Street is smarter than you or me.
But is it really? The word "smart" has plenty of definitions, but Wall Street has such a peculiar inability to learn from certain mistakes that it seems worthwhile to question just how smart the Street really is.
They Can't Stay Away From the Bubbles Nothing of any real size can happen in the investment world without the involvement of institutional investors. So while retail investors are often dismissed as the "dumb" money, it is the professionals who ultimately add the most air to investment bubbles.
For the most part, the average investor should approach Tyson Foods (NYSE:TSN) with skepticism. It is the top player in America in its respective markets, but that has never translated into a sustained attractive margin structure or free cash flow record. On the other hand, savvy investors don't turn away from profit-making opportunities, and Tyson's stock may be very close to a point where there is real money to be made.
Familiar Themes Dominate the Third Quarter Investors who have been following agribusiness are not going to see too many surprises in Tyson's fiscal third quarter results. Revenue was not too bad, as Tyson reported 11% sales growth on a combination of better-than 12% higher pricing and slightly worse than a 1% decline in volume. Sales growth was fairly balanced - all of the major categories had significant sales growth, with beef leading the way at 13.5% price increase. The relatively small prepared food business was the laggard at 9% growth.
Having decided that the difference between AAA and AA+ has given me a headache, I think I'm going to take the rest of the week off. There are a few pieces in the queue with my editors, so there will be a few updates. But I've decided that I'm going to spend the rest of this week rediscovering the world that cares not one whit about S&P.
Oh, and I hope to have that refurbished idea list up soon, too...
There is ample evidence out there that these are not good times for health care companies, so it makes sense for investors to play defense. That makes CareFusion (NYSE:CFN) an interesting opportunity in today's environment. As the company continues to find its way after spinning out from Cardinal Health (NYSE:CAH), CareFusion offers investors a chance to buy into not only a modest topline growth story, but an improving margin story as well - and all at a very reasonable price.
A Decent End to the Fiscal Year To be sure, CareFusion is not going to excite the growth crowd. Top-line growth for the fourth fiscal quarter was just 3.7%, and only about 2% on a constant currency basis. Growth was helped by better than 7% growth in the critical care business (where infusion grew by double-digits) and offset by an 8% contraction in med tech/services where 14% growth in ChloraPrep was overpowered by divestitures. On a like-for-like basis, this segment would have grown about 5% this quarter.
For Dendreon (Nasdaq:DNDN) bulls, the sky was going to be the limit. Provenge, a high-priced cancer vaccine shown to be effective in serious prostate cancer cases, was going to be a multi-billion dollar blockbuster, and Dendreon was going to ride it on the way to becoming the next Amgen (Nasdaq:AMGN), Biogen Idec (Nasdaq:BIIB), Centocor or Genentech.
And then came the second quarter results.
A Startling Turn of Events
Dendreon skeptics were certainly out there before August 3. The incredible rise in Dendreon's stock price on the back of a very expensive drug, which offered limited additional survival benefit and was the first ever of its kind, had shorts licking their chops. Even the analyst community (which is often quite bullish and positive as a general rule) had it skeptics. Analysts like Lucy Lu at Citigroup and Lee Lalowski at Credit Suisse, for instance, publicly wondered whether expectations were too high given the cost of Provenge and issues of doctor comfort with the therapy.
These are strange days in the economy and the financial markets, so perhaps it is fitting that the Transatlantic Holdings (NYSE:TRH) merger saga just got a little stranger. After all, it was odd enough that Transatlantic was the subject of competing bids that both undervalued this rare U.S.-domiciled reinsurance company. Now, Berkshire Hathaway (NYSE:BRK.A) is stepping in with a proposal when the company normally has preferred to act much more subtly in its acquisitions.
The Latest Bid
Berkshire Hathaway, famously led by Warren Buffett, does not traditionally do hostile deals nor engage in public auctions. Typically Buffett's deal terms are "here's our deal, we expect a quick response and discretion". In this case, however, Berkshire's bid for Transatlantic does not seem to be the normal sort of arrangement where the deal is signed, sealed and delivered before the public even gets wind of it.
Unemployment is universally recognized as a bad thing. While economists and academics make convincing arguments that there is a certain natural level of unemployment that cannot be erased, elevated unemployment imposes significant costs on the individual, the society and the country. Worse yet, most of the costs are of the dead loss variety where there are no offsetting gains to the costs that everyone must bear. (Depending on how it's measured, the unemployment rate is open to interpretation. Learn how to find the real rate. Check out The Unemployment Rate: Get Real.)
The Costs to the Individual
The costs of unemployment to the individual are not hard to imagine. When a person loses his or her job, there is often an immediate impact to that person's standard of living. Prior to the Great Recession, the average savings rate in the U.S. had been drifting down towards zero (and sometimes below), and there are anecdotal reports that the average person is only a few weeks away from serious financial trouble without a paying job.
As food companies go, Kraft Foods (NYSE:KFT) has done alright over the past couple of years. Despite the controversy over the company's aggressive move to bring Cadbury into the fold, Kraft has basically matched the market, done better than rival Kellogg (NYSE:K), and kept pace with the likes of ConAgra (NYSE:CAG) and Unilever (NYSE:UL). The question now is whether a dramatic restructuring of the business is going to significantly improve growth and shareholder value, or whether it's simply a distraction to buy time for a management team that doesn't appear to earn its cost of capital.
Q2 Not as Strong as It Seems Wall Street seemed oddly pleased with Kraft's second quarter earnings. True, the company did beat the average estimate by a healthy margin and surpassed even the high end of the range. What's more, reported growth of over 13% and organic growth of over 7% is quite good for a huge food company (Kraft is second-largest in the world behind Nestle (Nasdaq:NSRGY). Still, volume growth was less than 2% and the better-than 5% boost to price and mix was helped by a calendar artifact.
It stands to reason that in an industry still struggling with weak end-user demand, the companies that are executing well are not especially cheap. That could apply to Intuitive Surgical (Nasdaq:ISRG) or St. Jude (NYSE:STJ), and it certainly seems to be true of Becton Dickinson (or BD) (NYSE:BDX). This remains a fine company, one of the best in health care, but that quality is already largely in the stock price. (To learn more about this sector, check out Investing In The Health Care Sector.)
An On-Target Second Quarter
BD didn't shock anybody with its second quarter earnings, but "good enough" is definitely good enough these days in health care. Overall reported revenue rose 10% from last year's level, while currency-adjusted revenue was up more on the order of 5%.