Member Articles

Wal-Mart’s Third-Quarter Earnings Decline, But US Comps Reverse; Low-End Consumers Increase Spending

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Wal-Mart (WMT) announced mixed third-quarter fiscal 2012 results Tuesday that came in roughly in line with the mid-point of its previously-issued earnings guidance. Though we were disappointed by weak traffic trends in the quarter, we’re holding the line with our fair value estimate for Wal-Mart. Net sales increased 8.2% (6.8% constant currency) from the same period a year ago, as comparable sales in the US and Sam’s Club jumped 1.3% and 5.7%, respectively – the latter excluding fuel. This compares to a negative US comp and 2.4% for Sam’s Club in last year’s quarter. The major driver behind the positive reversal in US comps (they had been negative for the previous nine quarters) was an increase in the average ticket, … Read more

Lowe’s Posts Poor Third-Quarter Results; Turnaround Still Quarters Away

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Home-improvement retailer Lowe’s (LOW) reported poor third-quarter results that revealed over a 45% decline in net earnings, as the big-box retailer continues to be weighed down by store closings and discontinued projects. We’re sticking with our low $20s fair value estimate and are considering widening our margin of safety on the company’s shares given the longer-than-expected turnaround. The firm’s top line expanded 2.3%, while comps nudged up slightly (0.7%) and topped the aggregate performance through the first nine months of the year (-1%). Lowe’s expects this positive same-store-sales trend to continue into the fourth quarter, as management guided for meager expansion (flat to 1%) for the period. Investors should expect increased top-line growth rates in the fourth quarter for Lowes, … Read more

Disney’s Fiscal Fourth-Quarter Strong; Income Expands Across All Five Segments

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Walt Disney (DIS) reported solid fiscal fourth-quarter results that showed significant earnings expansion led by strength at its media networks and increased consumer spending at its parks and resorts. We’re sticking with our $36 fair value estimate and think the company remains fairly valued at these levels. Disney’s total revenue advanced 7% from the same period a year ago, led by strength in the firm’s media networks (up 9%) and parks and resorts (up 11%), and to a lesser extent, consumer products (up 12%) and interactive media (up 19%)—the latter two being relatively smaller divisions. Within its media networks, revenue from cable networks was the major driver behind the top-line expansion thanks to strong performance (higher advertising and affiliate revenue) from ESPN … Read more

Cisco Reports Fiscal First-Quarter Results; Restructuring Efforts Bearing Fruit

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Cisco (CSCO) reported fiscal first-quarter results after the close Wednesday that came in better than consensus expectations. We’re comfortable with our long-term projections for Cisco and are maintaining our above-market $22 fair value estimate. Cisco’s total revenue advanced 4.7% from the same period a year ago (slightly lower than the firm’s long-term expected pace), as both product and service sales expanded. Cisco’s widely-watched gross margin fell 160 basis points, to 61.2%, in the quarter, which was about in line with what we were expecting for the period. Though gross profit expanded and research and development investment slowed, the firm’s results were weighed down by over $200 million in restructuring and other charges during the period as Cisco tries to get its … Read more

Priceline.com Beats Expectations in Third Quarter; Best Airline Ticketing Growth in Seven Quarters

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Priceline.com (PCLN) reported solid third-quarter results after the close Monday. We are maintaining our $584 per share fair value estimate. The firm’s gross travel bookings increased an impressive 56.2% from the same period a year ago, while revenue jumped 45% led by international sales expansion (which increased almost 80% in the period). The company noted that its airline ticketing business experienced its strongest quarterly growth in the last seven quarters, with sales increasing 8%. Importantly, the firm was able to leverage this tremendous sales growth into an 83% increase in operating income, a very nice showing. Non-GAAP net income jumped almost 90% from the same period a year ago, and diluted earnings per share came in at $9.95, above consensus … Read more

Jefferies Cuts Europe Exposure; Why This Is More Than a Headline

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Investment-bank Jefferies (JEF) has come under scrutiny in the past few trading sessions following a downgrade of its credit rating by an independent rating firm, which cited large gross exposure to European debt, the focal point of the market’s nervousness in the past few months. In response, Jefferies pretty much opened its sovereign books to the public late last week (detailing both its long and short positions and its net exposure per country), and then announced today that it had reduced its gross exposure to Europe by half. We are quite impressed with this unprecedented transparency, but that’s not why we’re encouraged by this development. We’ve reproduced Jefferies’ press release that hit the wire this morning: Jefferies announced today that … Read more

Amgen Announces $5 Billion Buyback; Move Reinforces Our ‘Undervalued” Thesis

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Biotech-firm Amgen (AMGN) announced Monday that it would pursue a large $5 billion share buyback (under its $10 billion stock repurchase program) to scoop up its undervalued stock. We think this move is fantastic and reinforces our view that Amgen is significantly undervalued. We are maintaining our above-market $83 fair value estimate and are encouraged by management’s actions that clearly are in favor of shareholders (over bondholders). The company will lever up its balance sheet by issuing senior notes to fund the repurchase (at attractive yields). We’re not concerned about Amgen’s investment-grade balance sheet, given its robust cash-flow generation, and think this move is decidedly value-creative. The company will pay a price not greater than $60 nor less than $54, … Read more

Buffett’s Berkshire Hathaway Weighed Down by Derivative Losses

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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 … Read more

LinkedIn Valuation: Completely Absurd, Significantly Overvalued

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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 … Read more

Starbucks Posts Fantastic Fiscal Fourth Quarter; 2012 and 2013 are Looking Even Better

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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 … Read more