Financial Review

Seven Straight

Sinclair Noe — July 18, 2016

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DOW + 16 = 18,533
SPX + 5 = 2166
NAS + 26 – 5055
10 Y – .02 = 1.58%
OIL – .73 = 45.22
GOLD- 8.60 = 1329.50

The Dow is on a seven-session winning streak, capped by another record close. The S&P 500 is on a record setting streak as well. This tells us two things: first, the markets are strong, and second, the markets are overbought and due for a breather. Just because a market is overbought, it does not mean it can’t continue to climb higher. The markets can be irrational longer than you can be solvent.

Financial markets have shown resilience after Friday’s failed coup attempt in Turkey, although Turkey’s Borsa Istanbul 100 Index sank 7.1% and Turkish bonds sold off, pushing yields up about 7%. Still, the Turkish lira rallied 3% today. Despite the complacency and thousands of arrests, the turmoil is far from finished.

More than 90 of the biggest U.S. companies will report results this week, giving a clearer picture of an earnings recession. Based on analysts’ forecasts for companies in the S&P 500 index, Thomson Reuters predicts adjusted earnings per share for the second quarter will be down 4.7% from a year earlier, following a 5% drop in Q1.

Bank of America said its quarterly profit fell to $4.2 billion, down from $5.1 billion. Revenue also fell, but results beat expectations; which seems to be a recurring trend with the financial stocks’ earnings reports this season.

Hasbro posted second-quarter earnings per share of 41 cents, up from 33 cents in the same period a year earlier. The results beat estimates of 39 cents. But Hasbro shares dropped 7% today. Hasbro sales are closely tied to movies, such as Frozen and Star Wars, and sales results show Star Wars toys may have peaked.

After the close, Netflix reported sales grew to $2.1 billion, up 28 percent more than a year ago. Netflix reported EPS of 9 cents a share, a gain from 6 cents a year ago. But Netflix earnings reports are all about subscriber growth and that proved a disappointment. The company added 1.52 million new customers overseas, compared with an April projection of 2 million. Netflix also added 160,000 in the U.S., bringing the company total to 83.2 million. The company had predicted about 500,000 new domestic customers. Shares dropped 17% in after-hours trade.

Yahoo’s quarterly revenue exceeded analysts’ estimates, even as it declined. Profit missed estimates. The company is expected to stop taking bids and make a decision about a potential sale of the company. Suitors so far have included Verizon, AT&T and private equity firms; and earlier offers have ranged in price from about $3.75 billion to $6 billion, depending on what assets are part of the bid.

The National Association of Home Builders’ index fell to 59. Any reading over 50 signals improvement. All three of the index’s sub-gauges slipped. The index of current conditions eased one point to 63, while the gauge for the upcoming six months fell three points to 66. Buyer traffic was down one point to 45. Builder confidence hit a ten-year high last fall but fell back after that. Builders continue to report trouble finding lots and labor.

Japanese telecommunications company Softbank has agreed to purchase ARM Holdings for $32 billion. The proposed acquisition represents a 43 percent premium over the company’s closing share price last week. If you own a smartphone, you almost certainly own a product designed by ARM Holdings.  It has designed the chips for more than 95% of the world’s smartphones. The Cambridge, England-based firm is strictly a designer and not a manufacturer. The 4,000-employee outfit draws up the blueprint for microprocessors for smartphones and other devices and then charges partners such as Qualcomm for using those schematics. ARM was founded in 1990, a spinoff of a collaboration between Apple and Acorn Computer. ARM focused on designing chips that consumed the least energy.

The deal is believed to be the largest acquisition ever of a European tech company. The deal is the first major cross-border transaction in Britain since the Brexit vote. Worries over the British economy have weakened the value of the pound sterling and made it cheaper for foreign companies like SoftBank to hunt for deals there. Compared with this same time in 2015, for example, pound-denominated assets are 30 percent cheaper for buyers holding yen. The deal is seen as a bet on the “internet of things,” a new stage in the evolution of network technology, when cars, buildings and household items may be connected through embedded electronics.

ExxonMobil is getting into a bidding war. ExxonMobil Corp has made a bid worth at least $2.2 billion for InterOil Corp and its stake in a rich Papua New Guinea gasfield, winning the support of its target and topping an offer from Australia’s Oil Search Ltd. Exxon is a partner with Oil Search in the country’s only liquefied natural gas terminal, PNG LNG. Oil Search is also a partner, along with InterOil and Total, in another proposed gas export project, Papua LNG.

When Oil Search made its $2.2 billion offer for InterOil in May in conjunction with Total, it did so with the idea that it could save money and increase returns by integrating the two projects. Having Exxon take InterOil’s place in Papua LNG would accomplish the same goal at none of the cost. Exxon’s bid values InterOil at $2.5 billion.

Berkshire Hathaway agreed to buy Medical Liability Mutual Insurance. The target company is the largest underwriter of medical professional liability insurance in New York and will convert from a policyholder-owned to a stock business. Terms were not disclosed.

Due to a Hawaiian regulatory order dismissing the companies’ merger application, NextEra Energy and Hawaiian Electric have announced the termination of their plans to combine. Under the merger agreement’s conditions, NextEra will pay Hawaiian Electric a $90 million break-up fee and up to $5 million for reimbursement of expenses associated with the transaction.

Volkswagen executives in the U.S. have pledged to compensate 650 American franchise dealers who have been dented by the carmaker’s emissions crisis. The decision, which came at a meeting on Friday, marked the first time VW acknowledged that dealers would get compensation for the economic damage they suffered from the scandal.

Fiat Chrysler Automobiles is under investigation by the U.S. Justice Department for fraud, according to Bloomberg news. Prosecutors are scrutinizing whether the car-maker violated U.S. securities laws, although details of the investigation are still sketchy at this time. A civil lawsuit against Fiat Chrysler may provide clues about what prosecutors are looking at.

A Chicago-area dealer alleges the company inflated its U.S. car sales by paying dealers to report selling more vehicles than they actually did. Fiat Chrysler is also fighting investor claims that the auto maker played down the economic impact of manufacturing problems that led to expensive recalls. A lawsuit, filed in September in federal court in Manhattan by a group of investors, alleges the company made false and misleading statements about flaws in its manufacturing process and quality control that led to at least 11 million vehicles being recalled.

Financial Review

Jump Into Earnings

Sinclair Noe — April 21, 2015

 

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DOW – 85 = 17,949
SPX – 3 = 2097
NAS + 19 = 5014
10 YR YLD + .02 = 1.92%
OIL – 1.12 = 56.26
GOLD + 9.40 = 1,203.10
SILV + .119 = 16.008

This is one of the busiest weeks for earnings reports, so let’s jump in with both feet.

IBM delivered its 12^th straight quarter of declining revenue, but they beat earnings expectations because they proved that even if they aren’t the masters of technology, they are masters of financial engineering; one way to boost earnings per share – reduce the shares outstanding with stock buybacks. At some point the strategy has a flaw, but that is for another day.

We’ve known that a stronger dollar would hurt US companies doing business overseas, but we rarely think about reversing that equation. The weaker euro boosted revenue at German business software maker SAP in the first three months of the year and drove operating profit up 15 percent. First-quarter revenue rose 22 percent to 4.5 billion euros, at the top of market forecasts. At constant exchange rates sales rose 10 percent.  First-quarter operating profit, excluding special items, rose to 1.06 billion euros ($1.13 billion), matching estimates. Excluding the effect of currencies, SAP’s operating profit dropped 2 percent.

Chip designer ARM Holdings supplies Apple’s iPhone. Arm said first quarter profits rose 24%, beating forecasts. Chief executive Simon Segars said: “As the world becomes more digital and more connected, we continue to see an increase in the demand for Arm’s smart and energy-efficient technology, which is driving both our licensing and royalty revenues.” Another way to look at this is a sidebar play on Apple.

DuPont, the chemical company, posted fiscal first quarter adjusted earnings of $1.34 per share, down from $1.58 a share in the year-earlier period. Revenue fell to $9.2 billion from $10.1 billion a year ago. Earnings were a little better than estimates, revenue was a little lower than estimates. DuPont earnings were hit hard by a stronger dollar, but the company responded with aggressive cost cutting.

United Technologies reported first-quarter 2015 net income of $1.4 billion or $1.58 per share, up from $1.2 billion or $1.32 in the year-ago quarter. The increase in earnings was driven by rise in aerospace sales and lower operating costs. Total revenue for the first quarter decreased 1.0% year over year to $14.5 billion. CEO Gregory Hayes said: “We had a good start to the year, despite headwinds from a stronger U.S. dollar. The fundamentals of all of our businesses remained solid, continuing to drive strong organic sales growth and allowing us to increase EPS by 13 percent on a constant currency basis, excluding the impact of gains and restructuring. … Although commercial aerospace aftermarket growth was slower in the quarter than we anticipate for the year, the commercial building business in the U.S. is looking better and I’m encouraged by the signs of growth that we’re seeing in Europe.”

Verizon reported earnings per share of $1.02, beating estimates of 95 cents. Revenue of $32 billion rose 3.8%, from last year, falling just short of expectations of $32.3 billion. Wireless revenues rose 7% to $22.3 billion, with 565,000 net new subscribers added. That brings Verizon’s total wireless retail subscribers to 108.6 million. The wireless industry is embroiled in a price war. While great for smartphone users, it’s not great for companies selling wireless connectivity. The average revenue per user across the industry fell 4 percent in the fourth quarter of last year. Verizon reported that it had lost 138,000 cell phone customers in the last three months. CFO Francis Shammo said: “If the customer who is just price-sensitive and does not care about the quality of the network—or is sufficient with just paying a lower price—that’s probably the customer we’re not going to be able to keep.” Which sounds a lot like good riddance; not exactly the most customer friendly approach. I’m reminded of an old saying: “Even when money is no object, price is always a consideration.”

The outgoing Credit Suisse CEO delivered his last set of earnings this morning. Net income in the first quarter rose 23 percent as increased trading activity boosted the securities unit but the stock is having its worst day since January after the bank said a key measure of financial strength dropped, raising concerns the bank may have to boost capital.

Lockheed Martin, the world’s biggest defense contractor, reported Q1 sales amounted to only $10.1 billion, down 5% year over year and about 1% below estimates. Operating profits dropped a similar 5%, and net earnings for the company were down 6% at $878 million. Lockheed ended the March quarter with a $77 billion backlog, down 4.4% from Dec. 31, but it left its full-year order and sales guidance unchanged. Sales were down, earnings were down, but earnings per share did not reflect the profits because Lockheed spent more than $600 million during the quarter, buying back 3 million of its own shares.

Chipotle Mexican Grill delivered a mixed report after the closing bell. Earnings topped estimates but revenue fell just shy of forecasts as did a key restaurant industry sales metric. Chipotle stock dropped 5 percent after the report. Net income rose to $122 million, or $3.88 per share, from $83 million, or $2.64 per share in the year-ago period. Revenue increased to $1.09 billion from $904 million a year ago. Comparable restaurant sales, a key industry metric, rose 10.4 percent during the quarter, missing estimates.

Yum Brands reported first-quarter earnings of 80 cents per share on revenue of $2.62 billion. Yum Brands same-store sales were forecast to tick 0.4 percent lower system wide. Its Taco Bell unit was expected to perform the best, with projections calling for a 5.4 percent jump.

Yahoo also reported after the close; first quarter results missed expectations on both lines. Yahoo posted adjusted earnings of 18 cents a share, missing estimates by three cents. Meanwhile, sales, excluding traffic acquisition costs, of $1.04 billion also came in short of expectations of $1.06 billion. Yahoo is supposed to be a turnaround story, but so far it isn’t turning.

So, what have we learned about earnings at this point in the reporting season? Well, Americans love Mexican food. Also, the strong dollar is hurting sales and companies compensate with stock buybacks and other tricks. Almost 73 percent of the S&P 500 components that have reported so far have beat profit expectations, but just 42 percent beat expectations for revenue. FactSet expects first-quarter earnings for the S&P 500 to decline 4 per cent and revenues to drop 3 per cent. But it expects both earnings and revenues to be down 10 per cent for companies that generate less than half their sales in the US. A mitigating factor for dollar-related pain is that the negative expectations have already been baked into the cake. The next consideration is whether earnings have peaked for the year.

Moving on. Teva Pharmaceuticals is offering to buy Mylan for $82 a share in cash and stock in a deal valued at $40 billion. Mylan, based in the Netherlands, already had an offer in for Perrigo, an Irish drug maker. Perrigo rejected that offer today. In the red hot market for pharmaceutical deal-making it’s either eat or be eaten.

General Electric is in early-stage talks with Wells Fargo about selling its entire $74 billion U.S. commercial lending and leasing portfolio as part of its plans to continue dismantling its banking business. GE is also in talks with other bidders. Wells, along with Blackstone was the buyer of nearly $30 billion of real estate-related assets from GE eleven days ago.

The global economic environment is still the same. Chinese real estate development companies are going into default and the Chinese government is trying to stimulate the economy. Greece is broke. Time and money is running dry and Greek government bonds have been falling off a cliff. The yield on the 3-year note climbed above 29% this morning for the first time since 2012. The European Central Bank says the beatings will continue until morale improves. The IMF says the beatings will continue until they get paid.

The situation in the Middle East remains a mess, although Saudi Arabia announced a cease fire in Yemen; which doesn’t mean the fighting has stopped; more like a pause to assess the impact of dropping bombs, and then…, reload. The US Navy has positioned an aircraft carrier off the coast of Yemen to protect the free flow of commerce in the Gulf of Aden and the Red Sea, while also keeping an eye on a flotilla of Iranian boats that Iran says is delivering humanitarian aid to Yemen, but one man’s humanitarian aid is another man’s gun. Meanwhile, the collateral damage from Syria, Libya, and Sudan continue to wash up on the shores of Malta and Rhodes. While we try to tend to earnings reports and economic data, we are often reminded of the truly perilous.
 
Remember years ago, when we talked about the future, the dream was that one day we would all be driving around in flying cars? It never happened. Instead we have flying trains. Central Japan Railway Co. set a new world speed record of 603 kilometers per hour (375 miles) on a test run just outside of Tokyo. The next-gen train technology relies on magnetic power to float the cars above ground, eliminating the friction of steel tracks. The trains start off running on wheels until they’re going fast enough for the magnets to kick in and create lift. In theory, maglev train technology could redefine city-to-city travel in dramatic ways. The 4,200-kilometer journey from New York to San Francisco, with no stops, could be covered in seven hours at this speed. This new train technology is expensive. Japan has plans to build its high-speed maglev line from Tokyo to Nagoya and Osaka at a cost of more than $120 billion. California is struggling to lay tracks for an $86 billion high-speed line after Congress cut off funds for such projects.