Monday, September 3, 2012

Dow Jones Industrial Average Is Rallying Despite Cuts In Forward EPS Estimates

At the end of July we first looked at how 2Q earnings were impacting forward EPS estimates of companies in the Dow Jones Industrial Average (DIA) (here). Now that the earnings cycle is complete we are updating our analysis. Interestingly, since the beginning of 2Q 2012 earnings season there has been a divergence between the price action of the Dow Jones Industrial Average and the forward EPS estimates of companies in the index. The Dow Jones Industrial Average is up 2.5% since the release of Alcoa's (AA) 2Q results on July 9, but the median EPS estimate for the September quarter is down -3%. The EPS estimates for the following quarter and next year are also down over this period. The Dow Jones Industrial Average's ability to rally with a backdrop of bad news, in terms of EPS estimates, seems like a positive for the market. Stock prices seem to have already priced-in the expected EPS weakness and there are now other catalysts driving the market higher. In the article below we take a closer look at the forward EPS estimates as well as the valuations of the components in the Dow Jones Industrial Average.

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Wednesday, August 1, 2012

Goodyear's 2Q Earnings Beat And Operational Progress Amid Industry And European Headwinds

Goodyear Tire & Rubber Company's (GT) 2Q earnings results beat analyst estimates and led to a 10.4% gain in the stock. In 2Q Goodyear faced difficult industry conditions and its tire volumes declined. Its European business was especially challenged and may face continued pressure. Despite the challenges in North America, Goodyear continued to make progress with its strategy roadmap. Goodyear's stock price is down year-to-date and is trading near the bottom of a multi-year trading range. With continued headwinds from consumer demand, especially in Europe, Goodyear may have a challenging 2H 2012. However, at some point people need to replace their tires and Goodyear's business transformation will likely boost results when the cycle starts to tick up. In this article we give an overview of Goodyear's business, examine the 2Q 2012 results, look at the valuation and a comparable company analysis and present our conclusions for investing in the stock.

Tuesday, July 31, 2012

A Look At Changes In Forward EPS Estimates For The 22 Dow Jones Industrials Companies That Reported 2Q Results

Twenty two companies in the Dow Jones Industrials Average (DIA) reported 2Q 2012 earnings so far. Coming into earnings season many CEOs lowered their guidance and equity analysts reduced their estimates. This weakness showed up in the results as many companies reported revenue below (reduced) estimates, though often earnings were in-line or above (reduced) estimates.

We want to analyze how equity analysts are adjusting their 2H 2012 and FY 2013 estimates now that the 2Q results for most of the Dow components are out. In our analysis below we show that 2H 2012 earnings estimates are coming down, indicating that the news from 2Q may be worse than expected. FY 2013 estimates are declining as well and may be prone to more reductions. Recent reductions may have already been priced into stock prices, but we are interested in seeing how long earnings estimates continue to be cut and when the trend reverses.

Monday, July 23, 2012

Market Update: S&P 500 And Bonds At Cusp Of Bullish Moves, But Which Is Headed Higher?

[First appeared on Seeking Alpha on July 22, 2012]

The S&P 500 (SPY) ended the week near the key 1,360 level for the fourth week in a row. We view the zone above 1,360 as bullish and the S&P 500 could rally up to the year-to-date high of 1,422 if it stays above this level. However, as stocks seem positioned to rally, the 10 year US Treasury is nearing its record high and seems positioned for a further upside move as well. In fact, the S&P 500 and the bond market have been moving in lockstep since mid-May, which is an unusual situation. This week the market has focused on earnings, which have generally come in in-line with much reduced analyst estimates, tough the theme seems to be "revenue misses, but EPS beat expectations." Also, Ben Bernanke spoke before Congress and expectations for QE3 are rising. In this update we will look at the recent price movements in the S&P 500 and other major indices as well as bond prices, review the S&P 500's valuation and macro news, examine "Risk On / Risk Off" indicators and present a bull and bear case for the market going forward as well as our investment plan.

Buy Google As P/E Compression May Soon End; 2Q 2012 Earnings Good Enough For Investors

[First appeared on Seeking Alpha on July 22, 2012]

Google's (GOOG) 2Q earnings satisfied investors who had been cautious. However, the real story behind Google's stock price performance has been its P/E multiple compression. A we discuss below, this trend has mostly played out and Google's stock price may benefit going forward as the headwind from multiple compression abates. Regarding 2Q earnings, the key metrics for Google are Paid Clicks, up 42% YoY, and Cost Per Click ("CPC"), down -16% YoY. We think that as long as Google continues to show solid growth in its core business it should receive a premium valuation because of the optionality in its emerging businesses, including YouTube, Android and enterprise. In this update we will review the 2Q results using our six question earnings checklist (see also our analysis of other tech companies' 2Q earnings: IBM (IBM), Intel (INTC)). As well, we will look at the valuations of comparable companies and explain our basic thesis for owning Google's shares.

IBM's 10% Correction May Be A Buying Opportunity After 2Q EPS Beat And Guidance Raised

[First appeared on Seeking Alpha on July 19, 2012]

We were reminded of why we like IBM while we analyzed its 2Q 2012 earnings results and listened to its conference call. IBM has an attractive combination of growth potential, stellar execution, visibility, free cash flow, shareholder friendly capital policies and a low valuation. We admit that we sold our IBM position before the earnings season when we reduced risk across our portfolio and cut exposure in the technology and financials sectors.

Now that the company has announced its 2Q results, we are considering adding the stock back into our portfolio (we did the same with Intel Corporation (INTC); see our analysis on Intel here). In this update, we will analyze IBM's 2Q earnings results using our six-question checklist and discuss our strategy for IBM going forward.

Consider Buying Intel After 2Q 2012 Earnings

[First appeared on Seeking Alpha on July 18, 2012]

We had a long position in Intel (INTC), but sold it prior to earnings season as the macroeconomic environment deteriorated and Advanced Micro Devices (AMD) cut its guidance. On a long term basis we view Intel very favorably, but we wanted to reduce the risk in our portfolio in advance of an uncertain, and potentially disappointing, earnings season. In fact, Intel cut its guidance and seemed pessimistic about the macro environment in its 2Q 2012 earnings release and conference call. We are again considering adding Intel to our portfolio, but the question is whether to buy now or wait for a lower price, assuming that investors will turn away from the stock as a result of the guidance cut. In this update we will analyze Intel's 2Q results using our six question earnings checklist to better understand Intel's trends and the implications for the general economy. We will then discuss our strategy for investing in Intel going forward.