One of the biggest worries for investors is the anemic economic growth globally. This has made it extremely difficult to generate corporate earnings going forward. As investors, we are constantly looking for signs that a firm has the ability to increase corporate earnings substantially for the near future.
Ultimately, for corporate earnings to move upward, revenues need to increase as well. With the lack of economic growth internationally, this is becoming a serious problem.
As an example of the extent of weak economic growth internationally, McDonalds Corporation (NYSE/MCD) posted a drop of 0.6% for comparable same-store sales in April. (Source: “McDonald’s global comparable sales decreased 0.6% in April,” McDonalds Corporation web site, May 8 2013, accessed May 13, 2013.)
The company saw its comparable same-store sales in Europe decrease by 2.4%, and the Asia-Pacific, Middle East, and African (APMEA) regions reported a 2.9% drop in same-store sales. Most analysts were expecting a drop of only one percent in Europe and a 1.4% drop for the APMEA region.
A positive note showing the disparity in economic growth was that same-store sales for the U.S. increased 0.7%, versus expectations of a slight decline. As weak as the U.S. is regarding economic growth, much of the rest of the world is in worse shape.
One worry for investors looking at the potential for corporate earnings growth is that much of the sales push by McDonalds has been in lower-priced items. This means that, while revenues might be running at a similar pace, margins will drop.
The chart for McDonalds is featured below:
Chart courtesy of www.StockCharts.com
McDonalds’ stock has performed quite well over … Read More
When it comes to the recent pullback in the market, many people naturally wonder if this is the time to start accumulating certain companies, especially technology stocks. The answer, of course, is far more complicated. Obviously, each individual must assess their goals and risk profile before considering any investment.
My goal is to be on the lookout for companies that can continue to grow corporate earnings over a very long period of time. One area that has interested me for a long time because of this ability to grow corporate earnings is in technology stocks.
Recently, many technology stocks have not benefited from the surprisingly strong rally in the overall market. A major reason for this is that many investors are focusing on dividend yield rather than corporate earnings growth. Additionally, many technology stocks are not seeing exceptional corporate earnings growth, as the global economy is still somewhat weak.
Not all technology stocks are the same. There are vast differences between technology stocks, and an investor needs to dig deep when evaluating which firms can grow corporate earnings over a full decade.
One company that I have liked over the past few years has been eBay Inc. (NASDAQ/EBAY). While many people believe eBay is still primarily a place to sell your knick-knacks, they’re wrong. During the latest quarter, the company reported total revenues were up 14% year-over-year. (Source: “Q1 2013 financial highlights,” eBay Inc. web site, April 17, 2013.)
eBay is transitioning into a real powerhouse through its “Marketplace,” which is where retailers sell fixed-price online goods. The company is now looking at adding same-day delivery services for these goods, … Read More
One way to look for an investment opportunity, finding companies that will grow their corporate earnings over the long term, is to look for situations in which there is an unmet demand.
Recently, the Federal Deposit Insurance Corporation (FDIC) conducted a survey; the results were a shock to me. Approximately one in 12 U.S. households currently has no bank account—that’s roughly 17 million adults. A further 20% of U.S. households are currently under-banked, meaning they have a bank account, but they also use check cashing services and other alternatives. (Source: “Margin Calls: Life on the edges of America’s financial mainstream,” The Economist February 16, 2013.)
This is an investment opportunity for firms willing and able to service this market. Companies should be able to increase their corporate earnings by widening their clientele, since the traditional market is becoming quite saturated.
The initial thought would be to look at payday lending firms as an investment opportunity in this market. While it is true that the annual interest rate can exceed 400%, providing ample corporate earnings, the long-term investment opportunity might not be there for payday lenders. The reason is that lawmakers are enacting tougher restrictions and standards, with the possibility of the federal government beginning to regulate this industry.
Many might believe banks can provide this service, creating an investment opportunity for higher corporate earnings. However, the truth is that due to new regulations and rules on interest rate increases and fees for credit cards, banks are actually not generating corporate earnings from the lower-end market sector.
According to consulting agency Oliver Wyman, following the financial crisis and new rules from … Read More
It’s almost that time again, corporate earnings season. Starting next week, American firms begin reporting their corporate earnings for the first quarter of 2013. Considering how high the S&P 500 is, many analysts and investors will be closely watching the results.
According to estimates from Bloomberg, earnings for the S&P 500 firms are expected to drop by 1.9% for the first quarter. This represents the first decrease in corporate earnings since 2009. (Source: Rupp, L. and Gammeltoft, N., “U.S. Stocks Fall as Energy, Financials Tumble on Economy,” Bloomberg, April 3, 2013.)
We’ve seen a decrease in estimates for earnings just over the last couple of months. In January, according to Bloomberg, the average corporate earnings estimate by analysts for S&P 500 companies was a growth of 1.2% for the first quarter. This follows the fourth quarter of 2012, in which corporate earnings for these companies grew by eight percent.
According to FactSet Research Systems Inc., so far for the first quarter 2013, 86 S&P 500 firms have issued negative earnings guidance, while 24 have issued positive guidance. (Source: “Earnings Insight,” FactSet Research System, Inc. web site, March 28, 2013.)
With one-year forward earnings estimates at $114.08 for the S&P 500, this makes the forward price-to-earnings (P/E) ratio 13.7. This certainly doesn’t make the market expensive, but it’s not cheap either. To put this in context, historically, the trailing P/E ratio is usually in the range of 10 to 25, with certain periods both below and far above this range.
One sector to watch out for is technology, which according to FactSet is predicted to have corporate earnings drop by 3.7% … Read More
One of the most difficult things to do is to try and determine the future level of economic growth. There are so many variables that go into the level of economic growth that no model can accurately predict the exact level.
What we can do is look for signs of economic growth, or a lack thereof, and create an investment strategy based on these indications. Looking backward won’t help; we need to look forward.
One method that can help is to see what the professional investors are doing, as they are on the cutting edge when it comes to creating a profitable investment strategy.
Last week saw two distinctly different moves by professional traders. The first was that hedge funds made a massive trade against copper. With global inventories piling up, professionals have an investment strategy that will benefit from the price of copper if it drops.
Clearly, the professional traders don’t believe there will be enough economic growth to absorb such a high level of inventory, which is currently at a nine-year high globally. (Source: Richter, J., “Hedge Funds Most Bearish Ever on Copper, Favor Gold: Commodities,” Bloomberg, March 25, 2013.)
Hedge funds increased their short positions in copper by a massive 53% last week, according to the Commodity Futures Trading Commission. Copper is closely associated with economic growth, since so many industries use copper. As economic growth expands, the use of copper does as well.
The build-up in copper supply is worrisome, as this means that either builders are holding back on ordering more copper, unsure of how strong economic growth will be in the second half, or … Read More
One of the most often stated arguments for the current aggressive monetary stance by the Federal Reserve has been that if asset prices can begin to recover, this will help the overall economy.
With the spectacular rise in the stock market over the past couple of years, it would be natural to think that many Americans have seen an increase in their wealth, leading to an increase in corporate earnings for companies that cater to people who might be investors.
The jewelry market sector is a good indication of this sentiment for clients who might have seen their wealth increase through asset appreciation. However, corporate earnings in this market sector do not appear to follow this logic.
Tiffany & Co. (NYSE/TIF) recently came out with its corporate earnings, which revealed some interesting information regarding the jewelry market sector.
For the Americas, total sales rose only two percent, with its flagship New York store seeing a three percent drop in sales. The New York store for Tiffany makes up approximately eight percent of the company’s total business. Tiffany’s stores in Japan, another country that has seen a recent rise in the stock market due to an aggressive monetary policy stance, also witnessed sales declining by six percent. (Source: Warner, M. and Talley, K., “Tiffany Projects a Rough Start but a Brighter Finish for Its Year,” Wall Street Journal, March 24, 2013.)
While it is true that Tiffany’s Asia-Pacific division did well, as sales rose 13%, the real question is: if this recent rise in the stock market in America, which has been far larger than many had predicted, is failing to … Read More
As the S&P 500 continues marching higher, all eyes will be on corporate earnings for the next quarter and the rest of the fiscal year. While much of the move in the S&P 500 can be related to the Federal Reserve’s easy monetary stance, ultimately, corporate earnings need to rise to justify current price levels.
One company that is quite involved in not only the American economy but also the global economy is FedEx Corporation (NYSE/FDX). The latest corporate earnings report by FedEx indicates that perhaps the underlying economy is not as strong as many people believe.
FedEx reported a 31% decrease in corporate earnings for the third quarter. It is interesting to note that international export volume did increase during the quarter by four percent; however, a large number of shippers moved away from priority services to cheaper options. (Source: Morris, B. and Sechler, B., “FedEx Customers Like Slower and Cheaper,” Wall Street Journal, March 20, 2013.)
While revenues did increase, the hit to corporate earnings is an indication that other companies don’t see a large amount of end-user demand building up. The reason I say this is because if you were a business and had a large number of clients, you would be willing to pay for priority shipping to ensure the sale. However, with a growing number of businesses choosing the cheaper options, this tells me that demand is not as strong as many believe.
FedEx is a company that deals with many of the S&P 500 firms, and this could be an early sign that corporate earnings might be weaker than expected for the next quarter…. Read More
When it comes to making contrarian investments, going against market sentiment might be difficult at first. But the key is to focus on long-term fundamentals with the thesis that corporate earnings will move substantially higher as long as fundamentals strengthen.
One sector that has had quite a bit of negative market sentiment for the past couple of years has been uranium and nuclear power. Following the Fukushima disaster in Japan, nuclear power was put on halt for many nations around the world.
This negative market sentiment was reflected in lower uranium prices and significant hits to corporate earnings for companies in this sector.
However, recent information shows that nuclear power is once again gaining favor, and market sentiment could begin to shift earlier than many people believe, with corporate earnings benefiting from higher demand.
China is by far the leader in construction of nuclear power plants. In 2010, Chinese nuclear power plants had 10 gigawatts of capacity; it is now estimated that officials want this capacity increased to 130–140 gigawatts by 2030. (Source: The Economist, January 19, 2013, last accessed February 28, 2013.)
Following the Japanese disaster, China halted further nuclear construction. However, in October 2012, the Chinese State Council once again approved a number of projects. With over 25 nuclear reactors under construction, China’s nuclear power program is by far the largest in development by any nation.
Corporate earnings in the nuclear power sector have suffered due to the negative market sentiment following the Japanese disaster. The loss of life was truly tragic.
The current Chinese administration realizes that with the massive amount of pollution occurring in metropolitan areas, … Read More
When it comes to creating an investment strategy, the crucial variable is determining where one believes corporate earnings will be in the future. Trying to determine what the future landscape will be, and not necessarily the current level of corporate earnings, is the real goal.
One of the strongest sectors in the global economy has been the growth of smartphones. The latest data from Gartner, Inc. (NYSE/IT), a leading technology research company, show that during the fourth quarter of 2012, smartphone sales reached 207.7 million units, up a staggering 38.3% from the same time period in 2011. (Source: “Gartner Says Worldwide Mobile Phone Sales Declined 1.7 Percent in 2012,” Gartner, Inc. web site, February 13, 2013, last accessed February 19, 2013.)
Even while much of the world’s economies are not growing at extremely robust levels, a solid investment strategy continues to be focused on smartphone products that are driving corporate earnings in that sector.
Gartner estimates that for 2013, smartphone sales will total nearly one billion units. This clearly shows that corporate earnings will continue to grow in the smartphone category for the near future, which leads me to look for an investment strategy that can take advantage of this information.
While many focus on the hardware manufacturers, I think the big winner over the next five to 10 years will be Google Inc. (NASDAQ/GOOG). Because Google has been able to develop its “Android” platform software to work on both high- and low-end smartphones, this opens up the entire world as a potential marketplace.
I don’t believe many parts of the world will pay the high price for some of … Read More
While much of the text in American newspapers talks about the declining level of the middle class domestically, investors might be missing the greatest growth of wealth in history.
As investors, our goal is to determine which firms will report strong and growing corporate earnings. With much of the world increasing its wealth at a rapid rate, companies with international revenue and corporate earnings should do well over the next several decades.
According to the Boston Consulting Group, there will be approximately one billion middle-class consumers in China and India by 2020. While it took Britain 150 years during the Industrial Revolution to double income per capita (America took 30 years), China and India are moving at a much faster pace. (Source: “The Emerging-World Consumer Is King,” The Economist, January 5, 2013, last accessed February 15, 2013.)
This explosion in the global middle class will mean a massive increase in consumer spending for items that most North Americans take for granted. For companies that are able to serve this consumer spending demand over the next few decades, corporate earnings should rise substantially.
Some companies that immediately come to mind include Unilever PLC (NYSE/UL) and Kraft Foods Group’s international division, Mondelez International, Inc. (NASDAQ/MDLZ).
An increase in consumer spending by this growing middle class will drive corporate earnings for firms that can provide everyday items of better quality as well as snacks and foods that are beyond the basics needed for life to function. For life to exist, no one needs to drink a can of Coke or eat an “Oreo” cookie. And the hunger for sugary treats is not limited … Read More
March 1 is a very big day for many people. Unless Obama and the Republicans make a deal prior to that date, billions of dollars in spending cuts will be enacted.
Of all the areas that will be hit, I think the defense market sector will bear the brunt of the cutbacks and the future viability of corporate earnings in this sector is certainly in doubt.
At this point, Pentagon officials are now planning for $46.0 billion in cuts for the remainder of 2013. The total amount to be cut in the military market sector is $1.2 trillion over the next decade. (Source: Nissenbaum, D., “Pentagon Readies Budget Ax,” The Wall Street Journal, February 11, 2013.)
The U.S. Department of Defense has already laid off approximately 46,000 part-time workers. We could see additional layoffs, as well as furloughs. There are thousands of other workers employed at private firms in the defense market sector that will be affected, as budget cuts will crimp corporate earnings.
Clearly, for the defense market sector, the future is cloudy at best. Corporate earnings for most companies throughout the defense market sector will have difficulty growing. When total revenues are declining, higher corporate earnings are extremely rare.
Unfortunately, this pain is actually needed for the long-term fiscal health of the country. While corporate earnings will be reduced and jobs will be lost in the defense market sector, continuing to spend such a massive amount of public funds in this area is irresponsible and clearly not warranted at this time.
Looking at 2011 data, the U.S. military spending was 41% of the total for the entire world. … Read More
With the recent data over the past few months showing home prices continuing to rise, many investors might believe they’ve missed the boat. The homebuilder stocks have seen a substantial increase in corporate earnings, resulting from higher home prices and elevated production levels; this has led to a massive increase in their share prices.
The market is a forward-looking mechanism. Investors predicted the increase in home prices that we are now witnessing and the resulting rise in corporate earnings in these homebuilder stocks.
Yet another data point just came out, finding that 87.5% of single-family homes in 152 cities had an increase in home prices during fourth quarter 2012 compared to the same quarter in 2011. The number of residences exhibiting higher home prices is increasing, as only 79.0% of metropolitan areas showed an increase in home prices for the third quarter 2012. (Source: “Fourth Quarter Metro Area Home Prices Show Strongest Performance in Seven Years,” National Association of Realtors web site, February 11, 2013.)
While housing inventories are at 12-year lows and the interest rates of mortgages remain low, home prices are set to continue rising for the near future. Firms that are leveraged to higher home prices will see significant increases in corporate earnings.
However, there are still firms that can benefit from higher home prices and that are able to continue growing their corporate earnings over the next several years. But these companies might not be the ones that come to mind for investors when they think of the real estate investment industry.
One company that I have mentioned before when it was trading much lower is … Read More
One of the stronger commodities over the past couple of months has been oil. Oil prices have moved from $85.00 a barrel for West Texas Intermediate (WTI) in November to just under $100.00 per barrel currently.
There are many variables that go into oil prices. Naturally, the initial reaction is to blame geopolitical risks; however, we have not seen any real increase in hostilities, such as an attack on Iran by Israel, that would explain such a strong move in oil prices lately.
Two recent reports might shed some light on the strength in oil prices. The Chicago Institute for Supply Management recently released its Chicago Business Barometer data for January, which showed a sharp 5.6-point increase to 55.6 compared to the previous month. Its data are based on a three-month average, indicating an increase in business activity. (Source: “Chicago Business Barometer,” Institute for Supply Management Chicago web site, January 31, 2013, last accessed February 4, 2013.)
Following that release, the national report on manufacturing by the Institute of Supply Management, as opposed to the regional Chicago report, showed that the Purchasing Managers’ Index rose to 53.1%, a 2.9% jump from December. Thirteen of the 18 manufacturing industries surveyed showed growth in January, with four contracting and one remaining neutral. What’s also of interest is that the petrochemical and coal sector reported a high level of capital expenditure and investment that’s expected to continue in the first two quarters of 2013. (Source: “January 2013 Manufacturing ISM Report On Business,” Institute for Supply Management Chicago web site, February 1, 2013.)
Oil prices look set to continue at current levels, with the … Read More
As corporate earnings season continues for S&P 500 companies, it is becoming quite evident that revenue growth is lacking across many sectors of the economy. However, we are continuing to see growth in corporate earnings per share.
How is this possible? One method is through share buybacks. S&P 500 corporations, which are generating very high levels of cash, are buying back shares and reducing the number outstanding, which increases the corporate earnings-per-share level.
From April 2011 through October 2012, S&P 500 companies bought back and retired approximately eight billion shares, according to FactSet. This has been a significant driver for corporate earnings over the last two years. (Source: Cheng, J., “Investors See a Way Forward: Buybacks,” Wall Street Journal, January 21, 2013.)
If this level of share buybacks for S&P 500 corporations continues this year, we can expect to see corporate earnings increase by between five percent and 10%, without any organic growth in corporate earnings and flat revenues.
Another driver for S&P 500 share prices will be that the dividend yield will still remain very attractive when compared to U.S. Treasuries.
While revenue growth needs to begin to increase substantially at some point, I think 2013 will be another year in which the combination of a strong dividend yield and modest corporate earnings growth will result in the continuation of investment funds rotating out of the bonds and into equities.
Personally, I think a lot of buybacks are ill timed. While I like to see corporate earnings increase, the problem with many S&P 500 companies is that they tend to buy shares at the wrong time.
When the S&P … Read More
On January 1, 2000, the world breathed a collective sigh of relief that the over-hyped Y2K fiasco dissipated without even a whimper after years of ballyhoo.
Some things never change.
As expected, at the last moment, Democrats and Republicans came together in joyous union and resolved the so-called fiscal cliff. Nervous investors around the world joined together with rapturous optimism and jumped back into the markets.
On January 1, 2013, the House approved the new deal by a 257 to 167 margin. The bill increases the income tax rate from 35.0% to 39.6% for individuals earning more than $400,000 a year and couples taking home more than $450,000 combined. Everyone else will continue to see income tax cuts.
None of this should be a surprise to anyone, since Obama, in his bid for re-election, said he would increase the tax rates on the wealthy, though his definition of “wealthy” has changed, climbing from earnings of $200,000 for individuals and $250,000 for families.
While both sides are unhappy about what they didn’t get, they should be unhappy about how they treated the global population.
For almost a year, inept politicians in Washington sat around, worrying about their chances for re-election; ignoring the impact the unresolved fiscal cliff was having on the international investing community and global economy.
But why put your hard-earned time and effort into resolving the fiscal cliff when you might not be re-elected? Maybe because it’s part of your job? You’d be forgiven for thinking it was otherwise. After all, during the eternal run up to the Presidential elections, the fiscal cliff wasn’t even a major talking point. … Read More
The only people crying “Y2K” back in 1999 were information technology (IT) professionals looking for job security. Even without their help, disaster was averted, the rising sun greeted the world on January 1, 2000, and life was good.
Fast-forward to 2012, and the doomsayers are at it again. Except this time, it’s the members of the U.S. government wailing about an “economic Armageddon” if the fiscal cliff isn’t averted come January 1, 2013. Unlike Y2K, the fiscal cliff is a real issue that needs to be addressed; but the end result will be the same: at the last second, disaster will be averted.
Unfortunately, as we make our way to the end of the calendar year, indecisiveness and political jockeying are spooking the global investing community and wreaking havoc on the markets. At a time when the international community needs the U.S., the world’s largest economy, to show confidence, it’s the political infighting capturing the spotlight.
In spite of all the wailing and gnashing of teeth, the fiscal cliff will be avoided and life as we know it will continue. And that’s when the real problems begin. With the centric fiscal cliff stealing all the limelight, it’s been tough for investors to focus on the fact that America’s economic rebound is contingent on a financially strong international community. Domestic economic growth cannot be stimulated in isolation.
In January 2013, investors will see that the real underlying factor affecting the stock market is the global economy and its impact on corporate earnings.
On November 15, it was announced that the collective economies of the eurozone fell by 0.1% between July and … Read More
Many investors around the world are keeping a close eye on the Chinese economy. This is because a growing number of companies depend on the Chinese economy for their corporate earnings growth. One of the most important events in China is the transfer of power within the Communist Party that happens once a decade. The 18th National Congress starts on Thursday and ends next week.
Many are hoping that the new leaders for the Chinese economy are reform-minded, continuing to open markets and the possibilities for the corporate earnings growth of foreign firms. However, new sources are stating that a large number of conservative members will be making up the leadership of the Communist Party. (Source: “Conservatives dominate latest line-up for new Communist Party leadership,” South China Morning Post November 2, 2012.)
It appears that several reform-minded members have been opposed by conservative party elites, which will most likely eliminate them from senior posts. The greater the number of conservatives within the leadership structure, the less likely it is that any large reforms will be made. This will clearly impact the growth of international companies, especially many American firms, and their corporate earnings. From fast food services to carmakers, many American firms are generating a large number of corporate earnings from the Chinese economy and are expecting sustained levels of growth for a long period of time.
Banking is one area in which the foreign firms were looking at expanding their reach and corporate earnings growth. Some remain quite positive, such as the President of the American Chamber of Commerce in China, Christian Murch, who stated that while the near … Read More
When it comes to corporate earnings, people look to firms that can generate growth for many years. Long-term investing is about making inroads either in new markets or in new technologies that will take market share from competitors. When it comes to expanding in new markets, American restaurants have a tremendous potential in foreign countries.
The latest example of international expansion—as well as a recent rebound in the U.S. market—helping to drive corporate earnings is YUM! Brands, Inc. (NYSE/YUM). YUM! is the parent company of Kentucky Fried Chicken (KFC), Taco Bell, and Pizza Hut. The company recently posted corporate earnings growth of 23% for the quarter year-over-year. While some people are worried about higher costs, the company was able to actually increase its restaurant margin to 18.9%, up 1.9% from last year.
Interestingly, the company cited that, compared to last year, the U.S. market is having a rebound. Part of this, I believe, is due to its expanded menu and offering consumers an alternative choice to Chipotle Mexican Grill, Inc. (NYSE/CMG). YUM!’s Cantina Bell restaurant is showing strong signs of domestic growth, helping drive the stock’s corporate earnings. Taco Bell’s same-store sales in the U.S. rose six percent, compared to the year-ago period; obviously, demand is increasing domestically.
When it comes to long-term investing, corporations that can continually innovate with product offerings and can grow in new markets should be on one’s radar screen. YUM! has just over 4,900 stores in China and roughly 500 in India, as compared to approximately 18,000 American stores. Obviously, there is a significant growth potential for long-term investing in these emerging markets, which will … Read More
While many technology stocks for the past few years have done extremely well, the old-fashioned personal computer (PC) makers have struggled. As the marketplace has shifted—and corporate earnings with it—away from the traditional PC to tablets and smartphones, the old technology stocks that we used to remember fondly have been falling by the wayside.
Hewlett-Packard Company (NYSE/HPQ) is the latest in a line of PC makers to have struggled in growing corporate earnings. The latest news from the company is that its CEO, Margaret Whitman, met with analysts and gave them a disappointing forecast for the company.
While Whitman did state that she has been taking some initiatives to turn the company around, it appears Wall Street was not impressed, as shares plummeted. Two aspects of the company’s new focus will be a narrower product line and an increased focus on corporate customers. Whitman also stated that next year’s corporate earnings will be below current analyst estimates.
Since 2009, the shares have lost over $90.0 billion in market value, a stunning decrease for any technology stocks. She stated that the company was not properly aligned with the current marketplace, an apt observation. With its current focus on old-fashioned markets, such as the PC area, and not enough innovation in new areas, Hewlett-Packard (HP) has not been able to compete with the newer, younger, nimbler technology stocks of today.
While I certainly don’t think the PC market will go away anytime soon, it should be only one segment of a company’s product lineup. Technology stocks in this day and age need to have products across the entire scope of the technology … Read More
The latest corporate earnings results from Dell Inc. (NASDAQ/DELL) were quite shocking, as the firm dramatically cut its full-year forecast. Technology stocks have always been under heavy competition, but it appears that Dell is losing its touch at driving corporate earnings growth rates.
Dell is fighting against a whole new level of technology stocks. Competition is coming not just from other PC makers, but now tablet makers as well. We’ve all seen the massive surge in “iPads” purchased from Apple Inc. (NASDAQ/AAPL) and this landscape of technology stocks encroaching into each other’s territory will continue.
While Dell is having a hard time maintaining corporate earnings, technology stocks like Apple are increasing them. The reason is that product innovation is driving consumer tastes and, ultimately, corporate earnings.
With a forecast of decreasing revenue and a much-lowered corporate earnings level, the company needs to adjust its business structure. The company did cite that a possible reason for the slowdown was a lull in buying, as people await the new Microsoft Corporation (NASDAQ/MSFT) “Windows 8” operating system.
Part of the solution, according to Dell, is to cut costs. I think the firm needs a bolder strategy to compete against other technology stocks. Generating corporate earnings in this heavily competitive marketplace is not easy, and I don’t see how Dell will all of a sudden regain its old form.
Chart courtesy of www.StockCharts.com.
While some technology stocks like Apple are hitting new highs, Dell has languished near the bottom. Since the spring, any time the market has shown any life, sellers have dumped shares into the market. With the corporate earnings forecast now … Read More
Best Buy Co., Inc. (NYSE/BBY), one of the largest electronic retailers in the world, is at a crossroads. The latest quarterly corporate earnings results were shockingly bad, showing that the company’s current direction is not working. The company reported corporate earnings of $12.0 million, a drop of 91.0% from $128 million in the prior year period. The company also suspended any guidance for future corporate earnings estimates, which is usually met with an extremely negative investor sentiment.
The future is looking bleak, even as the founder has proposed a takeover of the company at $24.00–$26.00 per share. With the stock price trading below $18.00, it is obvious that investor sentiment is extremely negative on this stock, showing signs that investors don’t believe any such deal will occur.
With sales down 2.8% and gross margin continuing to decrease to 24.3% as compared to 25.4% in the prior year period, it is apparent that corporate earnings will continue to be under pressure. The business model of having smaller stores to compete is either not working or not being enacted fast enough. Investor sentiment will continue to weigh on the stock until there are signs that the massive decline in corporate earnings will soon come to an end. So far, I don’t see any improvement in the near future for corporate earnings growth and, as such, I continue to see investor sentiment keeping the stock price at depressed levels.
Large format retailers have had a difficult time in generating corporate earnings against online retailers. Consumers prefer to touch the product in the store and purchase the goods at home. Best Buy has been … Read More
Technology stocks are always in a state of flux due to the rapid levels of innovation. Technology stocks that can constantly be on the front-edge of the innovative spectrum will tend to gain an increasingly large market share, and the high levels of corporate earnings that go along with that position. One of the clear leaders among technology stocks is Apple Inc. (NASDAQ/AAPL).
While many people associate Apple with the “iPhone” and the “iPad,” both of which have been massive drivers of corporate earnings for the firm, if one thinks back over the years, the company has gone through numerous permutations. While some technology stocks have tended to stick with their bread-and-butter products, Apple has continually adapted and changed. This ability to not only take chances and encroach into other sectors where existing technology stocks are already in a developed market, but to be able to change the way consumers view the market category is Apple’s edge. This ability to create a niche product and develop almost a cult-like following allows the firm to operate at higher profit margins, and, thus, earn a large share of corporate earnings.
If we look at the iPod, the industry for MP3 players was not new, as many technology stocks made such devices. Apple did not invent the MP3 player; it revolutionized the way it looked and felt, and created a market where buying the product made one “cool.” If technology stocks can differentiate themselves in a crowded marketplace in such a manner, this will obviously drive corporate earnings, as this separation within the sector allows for higher margins.
There are now reports coming … Read More
Competition with technology stocks is going beyond product offerings and is now encroaching on delivery options. With reports that Amazon.com, Inc. (NASDAQ/AMZN) has been working on a same-day delivery option to help differentiate itself from the competition and ultimately drive corporate earnings, word has just been released from eBay Inc. (NASDAQ/EBAY) that it too is trying the same-day delivery option. eBay is initially trying a test run in San Francisco to determine if the service is worth the extra effort.
This type of competition between technology stocks is great for consumers, but it can be a headache for investors trying to determine future corporate earnings levels. Even though revenue can increase, corporate earnings can decline because of the costs associated with the establishment of distribution warehouses and logistical software; running a same-day operation is not a simple offering. Technology stocks that continue to innovate usually do come out on top, and it is nice to see eBay back on the offensive. Even as rumors kept popping up regarding Amazon.com’s delivery options, eBay actually began its trial run first.
Both of these technology stocks will only see a marginal increase, if any, in corporate earnings because of the delivery service itself. The thinking behind the strategy is that it will help drive traffic to their existing products, which have a higher profit margin, and the net effect will be a total rise in corporate earnings.
Amazon.com already has a delivery service called “Prime;” for $79.00 a year, members get free two-day delivery on many products. The firm doesn’t break out specific numbers for the service, but rumors are that it isn’t … Read More
The latest corporate earnings report from Zynga Inc. (NASDAQ/ZNGA) was a complete and utter disappointment. Frankly, I’m surprised that people thought little games like “FarmVille” would last forever. After all, how many virtual pigs does one really need?
Investor sentiment has clearly been waning the last few months since the initial public offering (IPO). From a high this year of $15.91, the stock has recently hit lows below $3.00. Obviously investors are not happy about the company’s corporate earnings release and guidance going forward.
Investor sentiment in a company like Zynga is going to be volatile since the business is based on fads. The company needs to be constantly creating hit games all of the time. Any slowdown in users and spending will crush corporate earnings and the stock, as we see now. The firm has reduced corporate earnings guidance from an earlier estimate of $0.23–$0.29 per share down to only $0.04–$0.09 per share.
That is a massive drop in corporate earnings in a very short period of time. This is a company that just went public a few months ago, and its corporate earnings are decreasing at a shocking rate. Another worrisome note is that insiders have been massive sellers of stock. It’s understandable that some insiders want to take some profits, but the level of selling was huge. This means insiders are far less concerned by what happens now. Zynga went public as its hit game FarmVille was at its peak, and people bought the hype, especially the retail public, as investor sentiment was at its peak.
There’s no denying that fads can be profitable. Remember “Cabbage Patch … Read More
With the recent corporate earnings release from Apple Inc. (NASDAQ/AAPL), many investors are unsure how best to trade the stock. Before we get to that, let’s take a closer look at the corporate earnings the firm posted. The common thread throughout the disappointing corporate earnings release from Apple is that it appears customers are postponing purchases, awaiting new products to be released in the fall. Frankly, this is to be expected; I’ve talked to plenty of people who are holding off buying an “iPhone” until the new one comes out.
Another reason for the disappointment in Apple’s corporate earnings was a weakening of the global economy, including China. While China negatively impacted corporate earnings this quarter, international growth will be a key driver for the next several years. Only a small number of Apple stores are outside of developed nations like America. This then provides a huge opportunity over the next decade to continue expanding in the retail space. However, the economic turbulence engulfing the world will have a significant impact on the company’s corporate earnings and margins over the short term.
Chart courtesy of www.StockCharts.com
While that’s a brief glance at Apple’s corporate earnings, from a technical analysis point of view, the stock is in a dangerous area. Following the corporate earnings release, many fund managers have stated that they are interested in buying shares; the proof is in the pudding, as the saying goes. Technical analysis will help us understand if money is actually being funneled into the stock. A break of the upward sloping line is a significant move, as the stock is now trading at … Read More
There are many interesting points that can be taken from a quarterly corporate earnings report. I find it’s quite interesting to read the corporate earnings release from United Parcel Service, Inc. (NYSE/UPS), because its business is spread among so many sectors and nations around the world that it’s a good gauge of where the global economy currently is and what the company’s economic forecast holds for the future. Unfortunately, the latest economic forecast from UPS’s corporate earnings release was quite scary.
Compared to most economists, UPS is expecting weaker global trade within a poor economic forecast. Because of this weak economic forecast, UPS is undergoing reductions in its business and lowering guidance. Within its corporate earnings release, UPS states that customers are increasingly worried about the economy. This is causing other firms to ratchet down their own economic forecast models for the remainder of the year. For the second quarter, UPS did miss on both topline and corporate earnings expectations as a result of weakening demand by clients. UPS has an economic forecast for the American economy of just one percent. That is far below the economic forecast for many economists, as most have a range of 1.5% to two percent.
Within the corporate earnings release, one bright spot was higher shipments from online retailers. But this increase was not enough to offset the decrease in freight shipping, which is the method large businesses use when ordering products. Obviously, someone buying one book from an online retailer can’t match the revenue and corporate earnings that UPS gains from a manufacturer shipping 1,000 units.
Asian growth is slowing as well, and … Read More
As we’re in the heart of corporate earnings season, the most striking thing to note is that many companies are posting weak revenue numbers. While they might be showing corporate earnings growth, this is coming on the back of cost cutting. While investor sentiment might be temporarily swayed by the appearance of strength through positive corporate earnings growth, one should look at the underlying situation to better extrapolate what is possible for future quarters.
Of the 119 S&P 500 companies that have reported corporate earnings, sales rose an average of 2.9% for the quarter. This is the weakest quarter since the third quarter of 2009. While 73.0% of reported companies have beaten corporate earnings estimates, only 42.0% have exceeded revenue guidance. Investor sentiment might pay attention to the corporate earnings, but I would suggest that at some point, this trend will end unless revenue also begins to increase. There are only so many ways to increase productivity before the options become exhausted.
This lack of revenue growth will feed into the economy with less spending on hiring and capital expenditures. Investor sentiment might be held off for a little while, but people would be foolish if they didn’t realize that, eventually, revenue needs to start growing again.
In addition to the global economic slowdown, part of the frustration is the lack of confidence in regards to the fiscal cliff. If companies knew that massive program cuts weren’t coming down the pipeline, they might be willing to start investing and spending again. This fear is also growing in investor sentiment, as we’re seeing firms that are sensitive to government contracts have … Read More
Following the corporate earnings release for NIKE, Inc. (NYSE/NKE), shares collapsed. During its corporate earnings call, the company’s management issued a statement indicating that they see further uncertainty in the world economy, raising specific issues in Europe and China among other emerging markets. NIKE CEO Mark Parker specifically stated that the company expects these areas to grow much more slowly than they have over the past several years.
While many are envious of the corporate earnings growth the company has been able to generate over the past few years in emerging markets, like China where the firm has over 7,000 stores, a slowdown is now negatively impacting corporate earnings. The worldwide slowdown is having an impact on estimates, and with such a global brand, one can only assume that other firms in the equities market will also voice similar caution in their corporate earnings releases.
There are some positive drivers for the firm that should have an impact on their corporate earnings over the next several quarters, including the Olympics and the new NFL contracts. But caution is warranted, and I would not buy shares at the current moment. I would prefer to wait until late 2012 or early 2013, when the corporate earnings will be positively impacted by these events.
NIKE’s corporate earnings are one more sign of a global slowdown, now affecting the equities market in several nations. Recently, some poor results were released by the Institute for Supply Management (ISM) survey, an important factor for the overall equities market. The results were extremely weak to say the least. The ISM U.S. Purchasing Managers Index (PMI) declined to … Read More
The U.S. equities market has staged a remarkably resilient performance this year in spite of worldwide economic troubles. With the corporate earnings season about to begin, I’m expecting that many firms will issue conservative and cautious guidance, which might weigh down the equities market. Already we have seen several companies issue corporate earnings guidance that has been less than what the market expected.
An example would be Nike, Inc. (NYSE/NKE), which, during its corporate earnings call, issued a statement indicating that it sees further uncertainty in the world economy, raising specific issues in Europe and China among other emerging markets. Nike CEO Mark Parker specifically stated that the company expects these areas to grow much more slowly than had been seen over the past several years.
Last week saw the release of the Institute for Supply Management (ISM) survey. The results were extremely weak to say the least. The ISM Purchasing Managers Index (PMI) declined to 49.7 for June. A reading below 50 indicates a contraction in the economy. The ISM Prices Index was another negative component, reported at 37, which marks a decline of 24 points over the last two months. Combining the prices components as well as the PMI index itself will weigh on the equities market, as investors fear this will translate into weaker corporate earnings.
Chart courtesy of www.StockCharts.com.
I think these signs indicate that we might see more negative sentiment from corporate earnings releases weighing down the equities market over the next few weeks. There were earlier thoughts that additional quantitative easing might help the equities market, but it seems the Federal Reserve continues to … Read More
As the year continues, we are hearing more discussion regarding the upcoming fiscal cliff. The fiscal cliff is the automatic cuts that will be enacted unless the politicians agree to fix the situation.
While we can talk about general themes, I think it’s instructive to look at a real world example of the market view for this serious issue. The CEO of Lockheed Martin Corporation (NYSE/LMT), Robert Stevens went to Washington to inform politicians of the gravity of the situation. If nothing is done, the spending cuts will be enacted at the beginning of 2013. Stevens predicts massive layoffs, a drop in corporate earnings, and an extreme disruption throughout the entire defense sector. If that’s not a negative market view, I don’t know what is. This is obviously impacting analysts as they generate estimates for corporate earnings over the next several years. This becomes increasingly difficult as much rests on political maneuvering.
The cost, though, is very real. Stevens estimates of the total $38.0 billion in government contracts Lockheed earns, $3.8 billion would be lost due to the upcoming government cuts. This will trigger not only job cuts within the firm, but also down the supply chain as Lockheed Martin deals with approximately 43,000 suppliers that then see less revenue and significantly lower corporate earnings.
Stevens raises an interesting issue. On top of the hit to corporate earnings, the savings are not going to be as significant as some people think. Because many of these contracts with suppliers are fixed, Lockheed will bring any losses associated with breaking the contracts or renegotiating them to the Pentagon. He estimates this will … Read More
Over the last decade, Internet shopping has changed the retail market sector forever. Whereas once large retail stocks such as Best Buy Co., Inc. (NYSE/BBY) dominated the landscape for electronics, new companies like Amazon.com, Inc. (NASDAQ/AMZN) are taking over with speed, ease of service, and reliability.
Another problem for large retail stocks is beyond the normal hassles for consumers, such as driving to the store with the higher cost of gasoline and increased traffic. But there are new problems that have been highlighted by a recent survey conducted by comScore, indicating that over 60% of consumers have visited an electronic retailer to examine the products in-store and then purchased the goods online. This is a new threat to retail stocks, as the market sector has never witnessed such a dramatic shift before.
This changing market sector must be addressed by retail stocks like Best Buy. Best Buy itself is under increasing pressure to survive as corporate earnings have continued to decline. The fact is that consumers want more in this market sector than simply buying a commodity when they visit the physical store of retail stocks. A company that tries to fill this need is lululemon athletica inc. (NASDAQ/LULU). This is one of a few retail stocks that have embraced the new realities of the market sector. One great example of being interactive is with clients is how lululemon offers clients in-store yoga lessons. This creates social connections and goes beyond just buying a yoga gear.
Best Buy has already initiated the closure of some 50 large-format, traditional stores and has instead opened smaller stores. Retail stocks are now realizing … Read More
The recent news that JPMorgan Chase & Co. (NYSE/JPM) announced massive billion-dollar losses will come as no surprise to many investors in big banks. Many big banks have, over the past decade, taken on riskier positions to increase their corporate earnings. These investments, using excess liquidity, are dangerous for investors in big banks; because they’re not apparent, you won’t find them on page one of a quarterly report.
Big banks have become accustomed to taking on riskier investments and, when they go wrong, the average investor pays the price. While executives at big banks make millions in bonuses, they never have to pay them back when corporate earnings take a hit on poor investments. This is the problem—no accountability! I always thought, you do the crime, you do the time. Make a mistake and you’re going to have to pay for it. Perhaps for all of society this is true, but evidently not for executives at big banks.
Not all banks are problematic; just the big banks. Some banks like U.S. Bancorp (NYSE/USB) are extremely well run and have sound, solid balance sheets. U.S. Bancorp for one has had an amazing run in its share price, as investors dump the big banks and move to safe, but boring stable firms. That’s what banking should consist of; generating stable corporate earnings by making sound loans and investments. Big banks got the idea that they should be quasi-hedge funds. The difference is that hedge funds are run by executives who have their own money in the firm. If the firm loses money, so do the executives. If big banks lose money, the … Read More