Earnings and Mergers

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We saw some intraday volatility yesterday as the market continues to push and test these resistance levels. No doubt the economic data as well as earnings is also playing a role in the volatility, of course we also have some international political volatility with some terror threats as well as the outbreaks in Kiev, which seems to be garnering more media attention. However, I would like to continue to point out that much of this is just the story on the surface and in many ways masks the fundamental fiscal issues that continue to be subsidized by the Federal Reserve.

Earnings and Mergers

Courtesy of wikipedia

The media has a love – hate relationship with Tesla (TSLA). On one hand Tesla and its found Elon Musk get kudos for taking on the big automotive company and introducing the first mass produced fully electric car. On the other hand, anything – ANYTHING – that goes wrong and the media is going to hold his feet to the fire. A car catches on fire and Tesla must be doing something wrong, not getting enough millage and the company comes under fire, the stock price too high and it is over-priced. Being in the spotlight means that when you do well you shine and anything that goes wrong and no one is your friend. It reminds me in some ways of Steve Jobs and Apple in those early days. Elon, much like Jobs, is an innovator and doesn’t really care what people think, when you tell them they are wrong or can’t do it – it just fuels their passion and fire even more.

In 2013 Tesla went from a novelty to proving that it is a real force and can mass produce electric cars. The stock rocketed and the spot-light was on. Anything wrong would bring the stock under pressure, and believe me it had a bumpy ride. However, is the business model and product a survivor? Sure it is, remember it is all about Supply and Demand – and there IS demand for electric cars and also a high-value electric car that doesn’t look like crap. Tesla has merged luxury and electric together – it is a success.

The company earned $46 million (33 cents a share). However, can we focus on the pass earnings or the growth in margins? We must remember this is a company that is growing and investing in manufacturing and production, so we SHOULD be focused on sales units and top-line revenue. So I am not hung-up on the bottom line and I don’t think we should – not at this early starting point. Elon said 2014 is going to be bigger and better, with another huge gain in sales numbers as well as margins to expand over 25% in 2014. The company is in demand and their biggest problem is keeping up with demand. They have hit their target deliverers and expect to ramp up to 35,000 Model S units in 2014, begin deliveries of the Model X, and also making a big move into China.

We can’t look at Tesla like other auto companies, because it is still in the growth phase. It is certainly competing in the auto market and must carve out a share of the market, but it also is the only mass producer of electronic vehicles.

The stock is up sharply in the pre-market (over 10%) up to the $215 range. The question we must ask, as per whether it is a good investment or not, is IF the stock value is pricing in this excellent growth? Is it pricing in forwarded earnings, is it over priced, is their too much hype in the stock? If we are to measure the company on a price to earnings ratio (P/E ratio) it is over 1000, which is ridiculous. However if forward growth projections fall and stock in this range, then that P/E ratio will fall to 200, 100, 50 over the next few years. The company is in a growth phase, people are betting on future growth and not concerned about current earnings or even the P/E ratio. That means we should expect BIG volatility in the stock and that it is a risky investment. I like Tesla, Elon Musk, the car, and what they are doing, however – unless you are willing to take risk – like Elon – this is not the best investment, it’s a bet. Buy this stock if you want to assume risk and ride this volatile story. Avoid it, if you are looking for investment that is based on fundamentals and earnings.

Courtesy of Wikipedia

Wal-Mart has been the safe stock in the Recession. It was the low-cost leader, shoppers at higher-end stores stepped down to Wal-Mart and it captured market share. Yet the company runs on rail thin margins to keep prices low. It is subject to significant currency and inflation risk, because the bulk of the products it sells are based on IMPORTS. If you want a bag of tube-socks for $3, then it must be made over-seas. If you want a $29.99 DVD player or a $199.99 LCD TV those too will have to be made over-seas. In some respects we live in a hypocritical nation in which we want to boost manufacturing and raise minimum wage, but at the same time we want our goods to be CHEAP and we shop at Wal-Mart, we can’t have it both ways.

The earnings were mixed and domestically disappointing. The global revenue grew at 1.4%, but domestically we saw declines across the board. Part of the hit to costs were margins, as inflation continues to be a real factor in imports, regardless of how low the PPI and CPI report. The company earned $1.60 per share, down from $1.67 a year ago. The company also announced they expect 2014 profits to be in the $5.10 – $5.45 per share for the year, in the low range of analyst expectations of $5.45.

The company will be here for a long time, but with margin compression and domestic consumer stagnation, it will have to rely on over-seas to continue to drive the top-line. The stock is down over 2% in the pre-market.

Courtesy of wikipedia

Facebook bought WhatsApp for $16 billion in what many analysts are saying is over-paying and a desperate move. Facebook is no doubt a dominate player in the social media market, its growth was driven by the tweeners. However, the tweener and tech-gen crowd are moving to the next big thing. Parents are using Facebook and it’s not “cool” anymore. They have started over-coming the mobile app marketing problems and also launched several marketing and ad services, but is the company facing an up-hill battle on their current business model to drive revenue and maintain (or attract) users? That is a good question, the PE ratio is over 75, the internet industry average is a high 45, technology sector is 27, and the S&P is 22. So the company is still priced based on FUTURE earnings growth and not based on current earnings. Is Facebook stealing a page from Google, in which Google took their new found money from their IPO to expand their product lines with mergers and acquisitions and expanding their R&D? It could be, but WhatsApp for $16 billion dwarfs the acquisition of Instagram for $1 billion. In my experience and reviewing history – many of these acquisitions turn out to be duds and companies write off billions in the future. Remember Google’s acquisition of Motorola, now they sell it for a massive loss. Those stories are far more frequent than the success stories. We just pay attention to the successful acquisitions and forget all the failures. Facebook has the cash and there is certainly something to be said for going for the land grab, cutting out competition, building a library of patents, and building a smorgasbord of synergies technologies – but one has to take into consideration the costs and how it will eventually pan out into the bottom line. Google has always been forward thinking, I am not so sure about Facebook. When any company goes public, it is about meeting MARKET expectations and measuring success and failure from quarter-to-quarter. Is Zuckerberg making knee jerk acquisitions, a sign of desperation? FB stock will probably take a hit from this acquisition and I think there is some concern about future revenue growth. They are running at a 75 P/E ratio, which means they need to grow considerably into that valuation.

Support & Resistance

INDU 16,000
I think we should still consider this as a short-term support, but one that I would NOT put all my eggs in. We made a good bounce, but I have a suspicion that the current economic data and mixed earnings could send this market back down to the recent lows for another test. The Fed is in the driver seat and expectations are that they will continue to print money.

NDX 3600
I think we should see this index fall back down to 3600 to find a little support. The tech sector remains a story of great growth and big companies trying to prove their growth valuations. I suspect some volatility to come sooner, rather than later.

SPX 1800
I think we could get back to the 1800 level before we see some support. The resistance level is going to be tough to break-through with weak economic data and also weaker revenue and earnings. The VIX is in the 15 level and that means the market is not totally buying into this rally yet.

RUT 1125
If we get a pull back, I would look at 1125 for support. The broad based market continues to be the best gauge for the market as a whole.

Jobless Claims and Inflation?

Jobless Claims, one of the few government economic data points that rely on ACTUAL data, rather than a phone survey, declined 3,000 to a “seasonal adjusted” 336,000 according to the Labor Department. Ironically, even with actual data, the government STILL feels they must “Seasonally Adjust” it. BTW – the Labor Department will NOT tell you their method of “seasonal adjustment”, we just have to trust them that they know best and know what they are doing. Of course they also stated the elevated levels are because of the snow storms, I wonder why it was elevated before the storms. The claims report also showed the number of people receive benefits under state programs increased 37,000 to 2.98 million, which is again “seasonal adjusted”. If we look at non-adjusted, we see that it is NOT 2.98 million, but rather 3.53 million. They adjusted out almost 14% or only 550,000 unemployed. What’s 500,000 unemployed here or there? Sorry for the sarcasm, it just gets tiring and old that the government can just explain away 500,000 people and call it “seasonal adjusted”. There only explanation (which includes NO math, NO models, NO how) – is just: “Seasonal adjustment is a statistical technique that attempts to measure and remove the influences of predictable seasonal patterns to reveal how employment and unemployment change from month to month. As a general rule, the monthly employment and unemployment numbers reported in the news are seasonally adjusted data. Seasonally adjusted data are useful when comparing several months of data. Annual average estimates are calculated from the not seasonally adjusted data series.” – that’s it!

They also released the CPI, Consumer Price Index, the government’s measure of inflation, which was up only .1%. Of course that is geometrically weighted, hedonically adjusted, and fully substituted. So we don’t have any inflation, even though national energy prices rose 1.8%, natural gas up 3.6%, heating fuel up 3.7%, and food prices up 2.9%. The government tells us, because of geometric weighting, all those price rises are off-set by the 1% fall in gasoline. Go fill the tank and don’t eat or heat your home and you too will not feel inflation. Silly…

I will await economists John Williams more detailed report to glimpse some reality.

Courtesy of Math is Hard for Liberals – TAC

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