Buffett’s Berkshire Hathaway Weighed Down by Derivative Losses
November 7, 2011
Warren Buffett’s Berkshire Hathaway (BRK-B) reported third quarter results Friday that failed to impress. Net earnings attributable to Berkshire shareholders fell almost 24%. Insurance-underwriting and its non-insurance businesses performed well in the period (due primarily to a lower-earnings-quality reserve release, though), and insurance-investment income fell from the same period a year ago. However, a huge spike in derivative losses ($1.53 billion) sent the firm’s net earnings significantly lower. Berkshire suggests that the derivative losses in any given quarter or year are meaningless since they are driven by a long-term bet the firm made to sell put options on a number of global stock indices, which fell during the third-quarter. These European-style options don’t expire until June 2018, so Berkshire has
LinkedIn Valuation: Completely Absurd, Significantly Overvalued
November 4, 2011
A number of months ago, we wrote about Netflix (NFLX) and how we thought the shares were absurdly overvalued: Netflix Valuation: Completely Absurd, Significantly Overvalued. The stock was trading around $250 per share at that time, and now it’s trading for less than $100 per share. Today, we’re making a similar valuation call on LinkedIn (LNKD). LinkedIn posted third-quarter results Thursday after the close. When a company is growing as fast as LinkedIn, the year-over-year comparisons become relatively meaningless, and at the end of the day, we think earnings (and by extension cash flow) is what drives long-term equity prices. Our view is that the firm’s stock price will continue to hum along, until the Street grows impatient with the name (that
Starbucks Posts Fantastic Fiscal Fourth Quarter; 2012 and 2013 are Looking Even Better
November 4, 2011
Starbucks (SBUX) reported strong fiscal fourth-quarter results after the close Thursday that showed excellent same-store sales expansion and an improved business outlook, despite higher coffee costs. We’re sticking with our $32 per share fair value estimate, as we had expected the strong results. Total revenues, on a comparable 13-week basis, jumped about 15%, while earnings per share increased 16% to a record $0.37, excluding non-recurring items (above expectations). Global comps jumped 9% on a comparable 13-week basis thanks to a 6% jump in traffic and a 3% increase in ticket prices (US comps increased 10%, while international comps advanced 6%). Such growth accelerated from previous periods, as for the full fiscal year 2011, global comps increased 8% and came in
Best-Idea Astronics Posts Record Third-Quarter Revenue, Earnings, and Bookings
November 3, 2011
Best-idea Astronics (ATRO) posted excellent third-quarter results Thursday that showed both strong sales and earnings expansion. We are maintaining our above-market $47 fair value estimate, which represents about 15.6 times earnings if we annualize this quarter’s ($0.52 per share). We will be retaining our outsize position in our Best Ideas Newsletter. Astronics’ top line reached a record, advancing 13%, while diluted earnings per share jumped 41%. Commercial transport revenue jumped 23%, while sales from its business jet segment increased 20%. The firm’s gross margin ticked down about 0.5 percentage points, which directly impacted the operating line, as SG&A as a percentage of revenue held relatively steady at 11.3% of sales. The firm’s operating margin was 14% in the third quarter
Kellogg’s Cutbacks Coming Home to Roost; Posts Weak Third Quarter and Outlook
November 3, 2011
Kellogg (K) reported poor third-quarter results Thursday that showed significant operating-profit declines. We were disappointed by the quarter and even more with the firm’s outlook, but we think our fair value estimate adequately captures the downward revision. We are staying pat at a $48 per share fair value estimate. The firm’s revenue advanced 5%, with internal growth at 3% in the quarter. Sales in North America jumped 4% led by its frozen foods business (its cereal business was flat in the quarter). Kellogg’s international business also did quite well, expanding roughly 7% from the same quarter last year. The firm noted that Latin America is building momentum, with internal net sales growth in the region coming it at 9% during the
A Tale of Two Teen Retailers: Abercrombie & Fitch, Aeropostale
November 3, 2011
On Thursday, Abercrombie & Fitch (ANF) and Aeropostale (ARO) reported third-quarter sales. The resulting stock price performace from the two was completely opposite: Abercrombie fell sharply, while Aeropostale shot up significantly. We think Abercrombie now represents a bargain under $59 per share, but we are waiting for the technicals to firm before diving into the shares in the portfolio of our Best Ideas Newsletter. We think Aeropostale is fairly valued, even after the big move. Let’s dig into the reports of both of the companies. Abercrombie was weighed down by poor results in Europe, Japan and Canada, with the company noting negative comps for its flagship stores in the regions. Though by itself, such news wouldn’t cause the massive 20%+ price
Qualcomm Reports Strong Fiscal Fourth Quarter on Proliferation of Smartphones
November 3, 2011
On Wednesday, Qualcomm (QCOM) posted solid fiscal fourth-quarter results that showed record revenues, earnings, and MSM (Mobile Station Modem) chipset shipments. We are maintaining our $53 fair value estimate. The firm’s revenue performance was particularly impressive. Its top line jumped 39% on a year-over-year basis and 14% sequentially thanks to strong growth in CDMA-based (code division multiple access based) MSM shipments. Qualcomm continues to reap the benefits of sales of smartphones (like Apple’s iPhone and devices using Google’s Android software), which use its chips, and adoption of 3G technology, which depends on the firm’s patents for CDMA technology. Growth of 3G in emerging markets continues to be strong, and according to Wireless Intelligence, emerging-market 3G connections increased nearly 40% in
Kraft Shows Off Pricing Power in Third Quarter; Raises 2011 Outlook
November 3, 2011
Kraft (KFT) reported excellent third-quarter results Wednesday that showed significant pricing expansion. The firm raised its outlook for 2011, and we are maintaining our above-market fair value estimate. The firm’s top-line advanced 11.5% led almost exclusively by organic expansion, which was 8.4% in the quarter. We loved that 7 percentage points of the growth was pricing, which signals to us the strength of Kraft’s competitive advantages and pricing power. Volume and mix contributed the balance of the growth. The company noted that momentum is accelerating in North America, that operating results in Europe remain strong, and that it is seeing double-digit growth in developing markets—all positive news. Kraft’s adjusted operating income jumped over 12% thanks to pricing growth, productivity enhancements,
Excellent Third-Quarter Results from Eastman Chemical
November 2, 2011
Eastman Chemical (EMN) recently posted an impressive third quarter. Earnings per share was relatively flat, with net income down slightly. Revenue was up nearly 5%, but the high raw material costs prevented any margin expansion. Regardless, these numbers were higher than expected, and Eastman Chemical was able to navigate one of the most challenging macroeconomic quarters in recent memory effectively. The revenue mix is still slightly tilted in favor of North America; however, earnings are higher overseas and we expect the continued build outs in Korea and acetate tow demand in Asia to continue to be key business drivers, as they were in the third quarter. Eastman also continues to invest in the future via strategic acquisitions. In the third quarter, the firm acquired
Clorox Posts Fiscal First-Quarter Results; Reaffirms 2012 Outlook
November 2, 2011
Clorox (CLX) reported fiscal first-quarter results Wednesday that showed declining sales in its US categories and higher commodity costs. We weren’t that impressed with the performance, but we are maintaining our fair value estimate. The firm’s revenue expanded 3% on mostly volume growth thanks to product innovation. Revenue increased in three of its four reportable segments, with International (all countries outside of the US) revealing 9% sales expansion. Clorox continues to gain traction in its Argentina business and rolled out Glad in China. Its Lifestyle segment (dressings and sauces, water filtration, global natural personal care, etc.) experienced 6% volume growth during the quarter led by double-digit volume growth in its Burt’s Bees business. Clorox also noted strength in its new
