Abercrombie’s Earnings Surprise Doesn’t Tempt Us
November 14, 2012
Teen retailer Abercrombie & Fitch (click ticker for report: ) reported better than expected third-quarter earnings and issued a stronger outlook Wednesday morning. Sales grew 9% year-over-year to $1.17 billion thanks to the company’s international expansion, but it was still in line with expectations. Earnings grew 53% year-over-year to $0.87 per share, topping the consensus estimate by $0.28. Our fair value estimate, which considers not only short-term performance but also the long-term cash flow generation of the firm, remains unchanged. The only read we can really gain from Abercrombie’s results to extrapolate to the broader clothing retail space is that cotton costs have declined, which should benefit the group. Abercrombie’s gross margins were relatively strong during the period, increasing 240 basis points
Housing Market Strength Propels Home Depot
November 13, 2012
Thanks to strength in the US housing market, home improvement giant Home Depot (click ticker for report: ) posted terrific third quarter results this morning. Revenues grew 4.6% year-over-year to $18.1 billion, easily exceeding consensus estimates. Earnings, excluding the closing of some unproductive stores in China, increased 23% year-over-year to $0.74 per share. Increased productivity helped tremendously, as aggregate same-store sales grew 4.2% year-over-year, and US same-store sales increased 4.3% year-over-year, driven by higher average tickets and more transactions. Gross margins ticked up about 20 basis points year-over-year to 34.6%, reflecting the higher average ticket prices and better appliance sales. Appliance sales are a good indicator of consumer confidence in the housing market, in our view. Management noted that credit
Qualcomm Well Positioned for 2013
November 13, 2012
Chipmaker Qualcomm (click ticker for report: ) reported strong fourth quarter results last Wednesday afternoon. Revenue surged 18% year-over-year to $4.87 billion, easily exceeding consensus estimates. Non-GAAP earnings per share jumped 11% from last year’s quarter to $0.89, several cents better than consensus expectations. For the fiscal year, Qualcomm’s free cash flow jumped 8% to $5.2 billion, driven by revenue that grew 19% year-over-year to $19.1 billion. The company continues to be an excellent OEM-agnostic play on the growth of smartphones, as it shipped 141 million of its MSM chips during the fourth quarter. In addition to strong chip sales, the company continues to capitalize on its 3G and 4G patent profile via licensing agreements, with revenue from licensing growing 15% year-over-year
Windows Boss Steven Sinofsky Out at Microsoft
November 13, 2012
Late last night, news leaked that Microsoft (click ticker for report: ) veteran and Windows President Steven Sinofsky will leave the company. We’re shocked by this departure, especially considering Sinofsky’s list of accomplishments and that he was a potential successor to CEO Steve Ballmer. In addition to spearheading the revival at Windows in the wake of Vista, Sinofsky led Office for several years and was known as a “product guy.” Still, Microsoft’s shares look incredibly cheap at current levels, while providing investors with a fantastic dividend growth opportunity. We continue to hold the company in the portfolio of our Dividend Growth Newsletter. However, the wrap on Sinofsky is that he’s notoriously hard to work with, incredibly secretive, and he refused
JC Penney’s Strategy Change Was and Is Necessary
November 13, 2012
Department store chain JC Penney (click ticker for report: ) and its CEO Ron Johnson have been under tremendous scrutiny since Johnson took the reins in November of 2011. Johnson, independently wealthy from his days leading the retail push at Apple, came in looking to revamp the retailer and ignore the Street in the process. Sales declines have been staggering; same-store sales fell 26.1% during the third quarter and internet sales, in a secular uptrend, declined 37%, leading to a 26.6% decline in total sales. Earnings, on a non-GAAP basis, fell from $0.18 per share to a loss of $0.93 per share. The company also generated negative $389 million in free cash flow, though the majority was due to cash
Jamie Dimon Agrees; Housing Is Back
November 12, 2012
Since the turn of the year, the housing market has been on the mend (click here for when we spotted the recovery), and homebuilders have been posting excellent results as of late. At the end of July, we more definitively announced that we thought the US housing market was back, and subsequent results and commentary have strengthened our thesis. We plan to take a close look at our valuation models of a number of homebuilders today, but we don’t expect any companies’ share prices to fall outside of their updated fair value ranges, which we plan to release this afternoon. During the past several months, many US major banking institutions and mortgage originators have been posting fantastic results. Both JP Morgan Chase (click ticker
Disney Paints a Cloudy Picture for 2013
November 12, 2012
Media giant Disney (click ticker for report: ) reported solid fiscal year 2012 fourth quarter results Thursday afternoon. The company saw revenue jump 3% year-over-year to $10.8 billion, a tad below consensus expectations. Earnings were in-line with expectations, increasing 17% year-over-year to $0.68 per share. Free cash flow, one of our favorite metrics when evaluating a company, fell nearly in half during the period to $602 million, though the decline reflected accounting timing more than any broader weakness. Fiscal year 2012 free cash flow jumped 22% year-over-year to $4.2 billion—enough to pay for the Lucasfilm deal on its own. Despite the hiccup in the current period, we expect free cash flow trends to remain strong at the media giant. On
Best Idea Precision Castparts Buys Titanium Metals; We Like the Deal
November 10, 2012
On Friday, Precision Castparts (click ticker for report: ) announced that it has entered into an agreement to buy Titanium Metals (click ticker for report: ) for $16.50 per share in cash, roughly in line with our fair value estimate. We’re huge fans of this deal and expect Precision Castparts to extract significant synergies, similar to what it was able to accomplish when it bought Special Metals in 2006. Precision Castparts’ CEO Mark Donegan is perhaps the best aerospace executive when it comes to integrating acquisitions and delivering value to shareholders. The tie-up provides Precision Castparts with valuable titanium capacity, and we think the deal helps Precision optimize its supply chain by giving it greater control of input costs via
Groupon’s Results Miss the Mark; Liquidity Not a Concern…Yet
November 9, 2012
Once again, online deals retailer Groupon (GRPN) missed the mark when it reported third quarter results Thursday afternoon. Revenue fell slightly short of expectations, growing 32% year-over-year to $568.6 million. The firm’s loss shrank to $2.9 million, or break-even on a per share basis, which was short of consensus calling for a profit of $0.03. Roughly 80% revenue expansion in North America was overshadowed by weak 3% international growth. Further, third party and other revenue was flat year-over-year at $423.5 million. All of Groupon’s growth came from Groupon Goods, as Direct Revenue increased significantly year-over-year to $144.9 million and doubled quarter-over-quarter. However, we’re not too bullish on this dramatic shift. Gross margins in the Groupon Goods business totaled 12% compared
Kohl’s Should be Thanking JCP
November 9, 2012
Thursday morning, Wisconsin-based department store Kohl’s (click ticker for repot: ) reported mediocre third quarter results. The retailer grew sales 2.6% year-over-year to $4.5 billion driven by 1.1% same-store sales growth. Earnings grew 14% year-over-year to $0.91 per share, exceeding consensus estimate by a few pennies. While earnings were better than expected, the earnings per share growth was due to share buybacks and modest operating leverage rather expanding gross margins. Kohl’s shrunk its share count 11% since the same period in 2011. Gross margins dipped 44 basis points year-over-year to 38.1%, and management noted that the firm has been highly promotional, leading to lower earnings. We’re also skeptical about the company’s inventory build, which now stands at $4.8 billion, 17%
