GE, GOOGLE, IBM earnings

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The market is seeing a generally solid rebound; however it is the RUT that continues to be a lager. If the broader based index can’t get off the mat, I think this could be nothing more than a “dead cat” bounce. Some big names in earnings could set the short-term trend.

GE, GOOGLE, IBM earnings

It’s earning season and we are starting to see how the first quarter of 2014 panned out. So far it has been a mixed picture if we look at economic data, commodity prices, global vs. domestic sales, jobs, and the geopolitical landscape. There are certainly some bright spots, but the cloud continues to be the West and mainly the weak domestic consumer. I believe this story may also been seen in the earnings of the large multi-national companies. Both Coke and Johnson & Johnson told the story of strong emerging markets vs. weak western markets.

Courtesy of wikipedia

General Electric (GE) has traditionally been a strong industry giant in the US and the rest of the world. Over the last couple of decades it started to become a bloated company, it owned a TV and media company, it was in banking and it was in mortgage lending. It just became a giant octopus involved in too many things and I think lost sight of its core businesses. The company, under CEO Jeffery Immelt, has made some big changes. It has sold off the NBC media company and has scaled back their banking business and now it is turning back to its roots in industry. The company has also manage to navigate the political waters as it has paid almost no taxes as well as manage to secure through lobbying Congress some big and controversial contracts with China. The CEO, Immelt, has even become one of President Obama’s chief business advisers, which has certainly helped removed political criticism from the company. So how have these changes played out in their earnings?

GE posted lower 1st quarter income on a year-over-year basis; however a big part of that was the loss of income from NBC Universal which they sold off. Top line revenue came in $34.18 billion, down from $34.94 billion, a 2% drop. However, their bottom line fell from $3.5 billion to $3 billion, a 14% drop. On an earnings per share basis, it fell 15% on a year-over-year basis to 30 cents a share.

There is some good news, their heavy industry business has been growing in the emerging markets and the US markets picked up slightly. The next step is spinning off their GE Capital credit card division in a public offering next year. It was GE Capital which was one of the major thorns in this company during the credit crisis and even received government bailout money (TARP).

GE stock is up in the pre-market and I see strength up to the 27-28 level. The stock looks to have some support in the 24.50 – 25 range. As the company continues to focus on big industry and cleans up the balance sheet and spins off non-core related business, I think we could see a strong long-term future.

Courtesy of wikipedia

Few tech companies take advantage of new found cash after an IPO. Many companies look at an IPO as an exit strategy and a giant treasure chest. Google (GOOG) looked at their new found money as source of funding new inventions, innovation, and new product lines. The once search engine has turned into an internet-media-software conglomerate. This has paid off for the company, created new vertical markets, and continued to drive the growth higher. This has translated into strong earnings and strong market growth. However, some are starting to ask the question if Google is subject to the law of diminishing returns?

The company saw an increase in earnings per share from $6 dollars per share to $6.27 (GAAP basis the company earned $5.04 per share, up from $4.97). Revenue increased 19% to $15.42 billion. All of this is good and any company in the world would love to see almost 20% annual revenue growth, but 20% is not good enough or not what analyst expected. They expected more revenue growth and also considerably more bottom line growth on a per-share basis.

Their “paid click” advertising increased by 26% on a year-over-year basis, but the average “cost per click” dropped 9% over the same period. Seems like online “paid click” advertising is just becoming more competitive with Facebook and Twitter expanding into the market.

The concern cited by analyst is the missing their growth expectations and the drop in revenue on the paid-click advertising, which continues to be a core revenue driver. The stock took a hit in the after-market, but that could just be some short-term profit taking after the stock has climbed 40% in the last year.

The recent “Google Glass” has come with mixed revues; some wonder if there is a broad appeal for the device, so far it has had limited release. The company also purchased a solar-powered drone company, with thoughts of expanding internet coverage (wireless access) to more remote locations. Additionally, there are some rumors about a camera contact lens (based on a patent that was filed).

A P/E ratio of 30 is certainly high and the company did miss the growth expectations, the big question is can we continue to see 20% revenue growth. Again, I am always looking at the top-line and so far Google continues to drive in huge revenue. If there new products can continue to drive new revenue, I think the pay-click advertising revenue contraction becomes less of a concern. You must ask yourself, is a 20% revenue growth sustainable and does it warrant a 30 P/E ratio? I think an argument could be made either way.

The stock took a massive hit after the close (down over 30 points), but bounced and regain over 20 points of the loss in per-market trading. I think many realized that even though they missed expectations, the numbers are still impressive. The stock is down about 1.5% in the pre-market.

Courtesy of wikipedia

IBM which was one of the first to shed their core technology PC business and embrace the consulting business has had a very good run. The margins expanded as soon as they dumped the high-cost and thin-margin PC business. However, many other companies are taking on a similar model and bring more competition; SAP, Oracle, DELL, HP, Google, and even Amazon are all moving into cloud computing, big data, specialize hardware, and consulting. This has made it hard for IBM to remain in the lead and has certainly taken a huge bite out of their pie.

The company still had very impressive revenue at $22.48 billion, but looking at it closer the problems reveal themselves. Hardware saw a massive plunge in revenue of 23%. Revenue in the US fell 4% and the competition in the emerging markets with other companies has taken a huge bite out of their revenue of 11%. It is important that we don’t see this revenue drop in the emerging markets as a general slow-down in the emerging markets. Looking at other top-line revenue from competitors, it seems that a large chunk of this decline is from stiff competition.

IBM has been missing expectations for several quarters now and the company has stated that it transforming part of their business units to focus on a more aggressive strategy in the cloud, big data, and other service areas. However, it seems to me that IBM has become the “old dog” in a highly competitive environment. IBM will certainly be here in the long-run, but I think the top-line growth is going to be difficult. I would look at 170 -175 range as short-term support and I would NOT be adding IBM to my portfolio any-time soon.

Common Theme

There are several other big earnings to watch, but I think so far we are seeing a common theme. Top-line revenue remains weak and companies are beating on the bottom line. There are few exceptions and in almost all cases, regardless of what sector, it is the emerging markets that continue to be the long-term growth for sales and revenue. While growth continues to be the strongest in the emerging markets, we have seen a slowdown in the once parabolic growth to a more steady growth. It is this emerging market growth slowdown that could hurt forward top-line revenue projections, as the West continues to be the land of stagnation and debt.

Support & Resistance

INDU 16,000 – 16,500
This seems to be the broad based trading range for this index. I am not sure the earnings will be a strong optimistic story to help send this market in a break-out rally. Of course the Fed could ride to the rescue, which could send a jolt into the market. At 16,400-16,500 I would expect some resistance and selling pressure.

NDX 3450
The tech heavy index has been under pressure for the last month. We have seen several IPOs, but there is a common core issue and that is top-line revenue growth that continues to be a concern. Part of this is stiff competition and the other is the continual weakness in the West. One must be more selective in the tech sector and I think we can continue to see high volatility.

SPX 1840 – 1880
The S&P 500 seems to be in a steady range with a couple of break-outs/fake-outs both higher and lower. We saw a pop up to 1890 fade quickly and we saw the recent drop to 1820 see a strong turn around. This matches the uncertainty we are seeing in the VIX, which has not been too high or too low. The VIX priced in 14 (+/- 1) has been pricing that it too is unsure if we should rally or sell off. So don’t look for the VIX for any answers, the market just doesn’t know how to price risk at this point.

RUT 1100
The one index we should be follow for getting a pulse of underlying order flow is the Russell. We have seen this index sell off, much like the NDX to a the Feb low of 1100. It also hasn’t bounced strongly like the Dow or SPX, which shows me that there is far more trepidation in this market. If this index can’t hold the 1100 level, then I suspect we could see some more drastic volatile drops in the Dow and SPX.

General Advice?

Because the market has been driven more by an intervening government and Federal Reserve monetary policy it is hard to state that one is Bullish or Bearish on any stock or sector based on the fundamentals and earnings. We could have strong fundamentals and earnings, but if the Fed takes a Hawkish aggressive monetary policy (ending QE and raising rates) we could see the market selloff. Just as easily, we could see weak earnings and weak fundamentals, but if the Fed takes a more Dovish monetary policy (increase QE and keep rates at zero or even negative) we could see the market rally.

As you can see the broader market response has more to do with the Fed and less to do with any fundamentals. That being said, I remain Bullish on companies that have managed to take a strong foothold in the emerging market. I remain Bullish on Africa manufacturing and growth. I remain Bullish on new technology development and expansion (Cloud, Big Data, and media).

If I was to give general advice to an investor it would be this.

Hedge long positions: This will lock-in unrealized gains and protect against any major drops in the market. You can hedge individual positions or your portfolio. The VIX is pricing a fair value at this point and the premium is NOT too expensive (yet).

Got to OWN IT List: Create a list of strong companies (top-line revenue growth, top-line sales growth, low debt, strong cash, and strong pipeline). Track their P/E ratio, look at their Book and Cash value, and come up with your own STRONG BUY price and set alerts. If we have a sell-off these are going to be great buy opportunities.

Gold/Silver:Buy gold and silver and physically hold it (not GLD or Futures). You should do this monthly or quarterly. Buy only 1/10th, ¼, ½, or 1 oz rounds. Do NOT worry about price – just buy as much QUANTITY as you can base on the monthly/quarterly money you set aside. Do NOT think about this as an investment, it is NOT. Think about this as an ALTERNATIVE savings account. The BEST case scenario is that gold and silver does NOT rise and that you are able to give these coins to your children or grandchildren for their future. If it does rise and we see strong inflation or hopefully not hyper-inflation, you will be far better off.

Be INFORMED! Read and become informed. Study history objectively (read both points of view). Come to terms that MATH will trump all. Understand that our government, even with the best of intentions, is not always right and can do economic damage unintentionally. Don’t forget the past can and will repeat itself, what can we do to not only protect ourselves in the future, but also see these events as opportunities. Don’t let your political bias blind you to the math and reality on the ground. Do NOT accept headlines as fact and do the math and research yourself. Never stop asking WHY!

It is ok to be optimistic, but we also must look for opportunities and also hedge our positions. It is also wise to stock some gold/silver away as savings and do NOT hold it in dollars (all your assets are in dollars already: stocks, bonds, cash, CDs, etc.) – that is why I suggest building your own gold/silver savings account (with real physical coins).

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