Earnings (CSCO / WMT)
The rally continues and the talk in financial circles related to some key points that David Tepper mentioned yesterday. Maybe the best way to sum up his analysis is to say; “The market will go up, by hook or by crook!” Temper’s view (correctly I might add) is that if the economic data is not strong enough (from the private sector) to drive the market higher, then the Fed will continue to flood the system with money and make bonds so unattractive that between the extra money and low rates, the market will go up. This is a very important distinction, because we must understand WHY the market is rallying and not just accept it on face value. That is certainly not to say that some companies do have strong fundamentals and are good value. Earnings could still be a driver in the market and two big earnings this morning may set the tone for the market.
As we head into the tail of earnings season, looking back we see short-term concerning stories. First, the majority of S&P reported companies have reported a decline in domestic top-line revenue and have guided lower. While this is not necessary bad news for companies that continue to see stronger growth from the emerging markets, it does reflect that the domestic economy’s growth is slowing again. Second, the margin beats driven by what seems to be some lower costs, is really driven by the Currency War with Japan. Remember Japan last November started on their campaign to send the Yen into a death spiral, which buoyed the US dollar and euro. That did help companies see margins rise, even on declining revenue. The bottom line beats (profits) have been largely based on managing costs and while that can be utilized effectively, there comes a limit when you reach a maximum productivity level before quantity and/or quality begins to suffer.
Courtesy of wikipedia
Yet not all companies have reported weak top-line revenue earnings. A few companies have been making serious headway into new technology and expanding their product lines. One such company is Cisco (CSCO). I have always had respect for their CEO, John Chambers and I think that he has remained the head of the company (through good times and bad times) because he never “sugar coats” anything. When it is bad, he tells you it will be and talks about how they will manage through the storm. His conservative and frank approach is what many more companies needs. We don’t need CEO’s spinning their results in some marketing campaign, we just want to hear a frank clear understanding of the results from last quarter and what expectations are for the next and John Chambers has always delivered that in spades.
Courtesy of wikipedia
CSCO beat Wall Street earnings expectations, EPS of $.51 per share vs. $.49 expectations. Top line revenue also beat expectations at $12.22b vs. $12.17b. Gross margins beat at 63% vs. expected 61.9%. The company also saw year-over-year revenue growth and profit growth. No matter how I slice and dice the numbers, I can’t find any negatives. The company just ramped up production, expanded into new product lines, and managed costs. From top to bottom they beat and CSCO is position to do better as the growth in Cloud Computing continues to expand.
Cisco is not just a networking company anymore, they have really found a roll in expanding their product line in the expanding Cloud Computer world, and they are now number 3 in Blade Server sales, expanded into data handling technology as well as storage. They unveiled their new IP Interoperability and Collaboration Systems (IPIS) solution to expand operations and dispatch centers for both government and enterprise industries. Their new ISR-AX routing technology raises security technology to a new level and their new single-box solution will help both core and branch offices monitor traffic and security protocols. Their next-generation CPAK transceiver is the most compact and power-efficient in the industry, by reducing space and power by more than 70%. They introduce huge innovations for cloud computing with their highest-density 40 gigabit fixed switching, which has set the bar for high-density switching.
While all this doesn’t cause the excitement as say a new Apple product, what IS important is that these are important innovations for companies offering client services in the expanding Cloud Computing world, companies from Netflix to Google use and will continue to buy Cisco equipment. Here is the best part; the company (unlike most technology companies) already pays a nice dividend (over 3%). CEO Chambers stated, we are no longer a hardware company, we are a solutions company. I think he is right – see my Market Preview on New Technology Boom. The stock is up 9% in the pre-market.
Courtesy of wikipedia
Wal-Mart’s earnings missed analyst expectations pretty much across the board. Sales, Profits, and Revenues were down. The world’s largest retailer said US domestic sales continues to suffer, blaming everything from the weather to pay-roll tax increases. The company earned $3.78b or $1.14 per share. While this didn’t meet analyst expectations, it was up on a year-over-year basis. However, when we peer into the numbers, the story becomes familiar; emerging markets sales continue to grow and domestic sales remain weak or decline. Same-store sales in the US fell 1.4% and visits to stores fell 1.8%.
The CEO was in full spin mode as he stated that Wal-Mart delivered “solid” earnings while facing considerable headwinds. That sounds more like an excuse to me, we already knew and know the the headwinds – so rather than trying to “sugar coat” what happened and trying to boost expectations for next quarter, just tell us like it is. Then after the excuse driven “sugar coating”, they lowered next quarter earnings from the estimated $1.29 per share to $1.22 to $1.27 per share.
The stock is down in the pre-market and I think that it remains a great company and had made some good expansions into food and pharmaceuticals, yet I believe there is some management changes warranted. Not because the company under preformed expectations, but the company continues to struggle with employees, costs, and even their “bribery investigation”. They should take a page from the COSTCO bible.
Beware of EPS
Overall we need to continue to pay attention to the following earnings data: Top Line Revenue, Top Line Sales, and Profit Margins. While many people focus on the Earnings Per Share (EPS) as THE MEASUREMENT of success, it can obfuscate the real story. There is a SERIOUS fundamental flaw with measuring companies with EPS and that is when a company “buys-back” shares they reduce the share float and thus INFLATE the EPS number. Think about that for a second; a company has $100 million in profit on a 100 million shares, which is a $1 EPS. But when the company buys back 20 million shares and next year reports a profit of $90 million, the EPS actually RISES to $1.125 per share. It would seem the company increased their profits, when in reality profits fell, but since there are only 80 million shares outstanding it SEEMS that profits rose.
Yet EPS still has a massive psychology reaction in the market as most people are blinded and believe in the headlines, they don’t have time for the details.
The market is looking to open flat this morning.
Support & Resistance
The Dow Jones is ticking higher and the Cisco earnings were certainly good and helping to keep the Dow Jones up. I would still set support at 15,000 for any possible pull-back as short-term support.
We finally broke out higher and got above that 3000 level, despite Apple’s recent pull-back again. There are some great stories in the tech sector, but not the tech sector as a whole. Computer and chip makers continue to struggle with lower margins and stiff competition. However, the new Cloud Computing based technologies from service side to hardware has some significant growth potential.
Is this the short-term support area? The VIX continues to hold up very well in the mid 12 – 13 range and that reflects that even with this rally, there is still some trepidation.
In the short-term I would look at 975 a daily support area. A break there could send the index down to 950. Yet flow still seems to be moving into equities at this point.
There are some great stories out there, from a fundamental standpoint, like Cisco’s expansion, innovation, and adapting to the new cloud based expansion. However, there remain some weak fundamentals stories, which mostly surround the domestic consumer spending. The Western/Develop world (Europe, US, and Japan) continue to have high unemployment, weak consumers, and large leveraged debt. I believe the debt is the single largest anchor around the consumer’s neck in the West.
The seemingly large consumption Middle Class continues to struggle and that remains a drag on the domestic economy.
While the market in its entirety is rallying, we must keep in mind that some companies can justify such a move based on their earnings and some can’t. The driver, as Temper and Buffet have recently pointed out is the Fed’s monetary policy which continues to fuel equities and keeps bonds unattractive.
If there is a pull back, could the baby (good companies) be tossed out with the bathwater? That is a possibility and I believe it is still wise to pay close attention to fundamentals, primarily top-line sales/revenue – more than anything else.