Brian Nelson

Revenue Upside at Defense Contractors May Now Be Capped

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On Thursday, defense contractors Lockheed Martin (click ticker for report: ) and Raytheon (click ticker for report: ) reported mixed fourth-quarter results. Though both ended the year with strong backlogs, we think cautious commentary regarding sequestration risk may put a cap on future revenue upside (relative to expectations). Lockheed Martin’s bottom-line missed the mark during the fourth quarter, but revenue came in slightly better than expected. The defense contractor issued 2013 guidance of $44.5-$46 billion in sales and $8.80-$9.10 in earnings per share, both ranges higher than consensus estimates. The firm ended 2012 with a record backlog of $82.3 billion (implying a book-to-bill ratio of 1.03 for the year), representing roughly 1.75 times expected 2013 revenue (Image Source: LMT 4Q Earnings … Read more

Netflix Surges on Strong Subscriber Growth

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Wednesday afternoon, DVD rental and video streaming service Netflix (click ticker for report: ) reported much better than anticipated fourth-quarter results. Revenue increased 13% year-over-year to $945 million, easily exceeding consensus expectations. Earnings surprised materially to the upside, coming in at a positive $0.13 per share compared to a projected loss of $0.12. The big shock during the quarter was the sequential acceleration in the streaming business, both internationally and domestically. Domestic subscriber additions during the quarter jumped 77% sequentially, to 2.05 million. Given the breadth and depth of its TV lineup, this shouldn’t be the surprise that it turned out to be. Netflix is quickly becoming a relatively strong substitute for cable due to its incredible amount of content, … Read more

Apple’s Fiscal First-Quarter Weekly Revenue Up 27%; Bottom-Line Earnings Beat; Street Is Off Its Rocker

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Legendary investor Warren Buffett was taught by his mentor Benjamin Graham about the mood swings of Mr. Market. Buffett expanded this idea, famously characterizing Mr. Market as schizophrenic. It appears the latest bout of irrationality has been extended to Apple (click ticker for report: ). Apple is the most valuable company in the world, the most widely held, and the most watched. It has possibly more metrics to “meet” than almost any other firm. During its fiscal first quarter, Apple easily exceeded consensus bottom-line estimates with earnings of $13.81 per share, though that number was down compared to a year ago due to calendar timing (the most recently-reported quarter of 2013 was 13 weeks while last year’s quarter was 14 … Read more

United Technologies Looks to a Strong 2013 After a Transformative 2012

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United Technologies (click ticker for report: ) posted mixed fourth-quarter results as it ended what we’d describe as a transformational year. The company scooped up aerospace supplier Goodrich and a larger stake in International Aero Engines (IAE) during 2012, two moves we applaud as both increase the firm’s exposure to a burgeoning commercial aerospace delivery advance in coming years. Sales during the quarter jumped 14% from the prior-year period, though organic expansion was flat. The company’s adjusted segment operating margin came in at 13.3%, roughly 200 basis points lower than last year’s quarterly mark. Earnings per share in the quarter dropped 27% from the same period a year ago, but after adjusting for restructuring items, profits fell just 9%. Free cash flow, … Read more

McDonald’s Beats Estimates

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Fast-food goliath McDonald’s (click ticker for report: ) announced slightly better-than-expected fourth quarter results Wednesday morning. Revenue grew 2% year-over-year to $7 billion, a touch better than consensus expectations. Earnings, which have seen estimates slashed during the past several months, were a few pennies better than anticipated, growing 4% year-over-year to $1.38 per share. We’re not too fixated on the “beat,” but rather the weakness we are seeing at the core business. Global same-store sales increased just 0.1% during the quarter—McDonald’s worst in years! Same-store sales in the US jumped 0.3% year-over-year in the fourth quarter with flat operating income—the top-line was better than the rest of the company, but certainly is not a strong figure. McDonald’s continues to focus on … Read more

IBM Reports Solid Fourth Quarter; Remains on Track to Reach Earnings Goals

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On Tuesday, IBM (click ticker for report: ) reported strong fourth-quarter results that showed flat revenue growth but solid non-GAAP operating earnings-per share expansion (up 14%) and GAAP earnings-per-share expansion (up 11%). Software sales advanced 4%, while services revenue fell 1%, both measures adjusted for currency. The firm’s systems and technology revenue fell 1%, but z mainframe revenue jumped an impressive 56%. Non-GAAP gross margin reached 52.3% of sales, up 2.1 percentage points from the year-ago quarter. Free cash flow increased $0.6 billion to $9.5 billion (an impressive 32.4% of sales in the period). Importantly, services backlog advanced roughly $1 billion, to $140 billion, after adjusting for currency. For all of 2012, IBM achieved record profit, earnings per share, and … Read more

Best Ideas Portfolio Holding Intuitive Surgical Is Surging Today

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After reports from short sellers claimed growth was slowing at Intuitive Surgical (click ticker for report: ), the company’s fourth quarter performance provided evidence to the contrary. Revenue advanced 23% year-over-year to $609 million, handily exceeding consensus expectations. Earnings were also better than anticipated, growing 13% year-over-year to $4.25 per share. Earnings trailed revenue growth due to a substantial increase in the firm’s tax rate. Gross margins fell during the quarter, down approximately 110 basis points year-over-year and 60 basis points quarter-over-quarter to 71.9%, but it’s hard to complain about the decline when gross margins are so strong. Some of the margin compression resulted in a revenue shift to lower-margin services (a benign mix shift), as well as older da … Read more

Best Ideas Newsletter Portfolio Holding Google Rebounds with a Strong Fourth Quarter

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Search giant and Best Ideas Newsletter portfolio holding Google (click ticker for report: ) reported better than expected fourth quarter results Tuesday afternoon. Revenue, excluding traffic acquisition costs (TAC), grew 39% year-over-year to $11.3 billion, a tad short of expectations. Earnings, adjusted for extraordinary items, were up 12% year-over-year to $10.65 per share, exceeding consensus estimates. We still like the company’s current valuation. Google’s core business continued its strong performance during the fourth quarter. Total revenue at the core business soared 22% year-over-year to $12.9 billion. Google-owned sites and Google network sites experienced strong growth of 18% and 19%, respectively. Traffic acquisition costs grew a little faster than revenue, up 25% year-over-year, a trend we will continue to monitor closely, … Read more

Agriculture Stands Out During DuPont’s Fourth Quarter

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Industrial bellwether DuPont (click ticker for report: ) reported somewhat weak fourth-quarter results Tuesday morning, but the firm’s previously announced strong outlook trumped the report. Revenue during the quarter was flat year-over-year at $7.3 billion, roughly as the consensus anticipated, though full-year revenue grew 3% to $34.8 billion. Earnings from continuing operations were slightly better than expected, down 58% compared to a year ago at $0.11 per share. DuPont’s agricultural segment posted improved results, with revenue jumping 18% year-over-year to $1.5 billion. Although the fourth quarter generally includes losses in the segment, performance continues to improve, as shown below (Image Source: Q4 2012 DD Earnings Presentation). The strength in agriculture doesn’t surprise us, as the demand for food continues to grow … Read more

Johnson & Johnson’s Long-term Tailwinds Are Intact

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Diversified medical and consumer products firm Johnson & Johnson (click ticker for report: ) reported solid fourth-quarter results Tuesday morning. Sales jumped 8% year-over-year to $17.6 billion, roughly in-line with consensus expectations. Earnings were slightly better than anticipated, growing 5.3% year-over-year to $1.19 per share—after adjusting for several special items. Johnson & Johnson’s international expansion outpaced its domestic growth, with international sales jumping 8.9% on a reported basis (11.2% excluding currency) while its domestic business grew 6.8%. The acquisition of Synthes was the big needle-mover in the period, as it was responsible for 5.6 percentage points of the total sales increase. For the year, the growth rate of the firm’s Medical Devices and Diagnostics’ segment exceeded that of other segments, though pharmaceutical results … Read more