Thursday, April 30, 2009

Bookkeeping: Selling Most of Mastercard (MA) on Visa News

Mastercard (MA) is up in sympathy with Visa (V) earnings [Visa Beats the Street] so I am going to cut back my position severely under the guise of "what could Mastercard say that would top Visa"? Visa is also stronger in debit than Mastercard is.

Right now I am cold as ice - really since last fall I've been on a big winning streak (about 6 months), able to sidestep this market and still find ways to make profit while the market went through 2 enormous bear markets interspersed with a bull run late in 2008. The past 4... err, 5 weeks on the other hand - have been a disaster. Not a -20% type of disaster or anything but for me, lagging this many weeks in a row is a disaster. I'm still up for the year to date and all that but I feel like a .180 hitter in MLB right now. Until I get my bearings back I need to play it safer or else I am going to be headed for a negative return year to date. I "get" what is going on in this market - momentum trading is the rage again and valuation means nothing. I'm the one who says every few weeks "It's all about sentiment" so of course ... it's about sentiment. By being conservative and looking at things like PE multiples I'm being shown to be a fool. I get it. Worse - everything you learn for many a year is basically moot right now so as I said last week, I am walking around blind - charts don't matter, fundamentals don't matter; just buy - anything, at any price... except Sequenom. Frankly I want to be all cash right now until I figure this "new and improved" market out, but I'm trying to keep to my script and 100% cash is not really part of the gig.

So for now I'm going to take my profits when they arise i.e. Mastercard - and try to figure out how to recapture the magic. The long winning streak spoiled me, because it usually is not possible to "beat the market" for that long of a period on a consistent basis, and now she is getting her revenge. The Sequenom thing, while not a major part of the portfolio or massive destroyer of value - is so out of left field, and really kicks you in the rear end. Then I see an old holding in A-Power Energy (APWR) rocket up week after week when it did nothing for months on end (but go down) when we owned it. Up til yesterday we were having a solid week, if not spectacular. At this point, solid would of been fine. Instead we continue to go backwards and I have another losing week on my hands - I want to kick the proverbial dog. Instead I kicked some Mastercard out.

Great video here from about 3 weeks ago - I think Mr. Najarian was talking about me in reference to the walking befuddled camp! :)

Long Mastercard, Sequenom in fund; no personal positions

First American (FAF) Beats by a Mile

Let me preface this by saying one of our favorite hedge fund managers Doug Kass has shorted the title insurer group as of yesterday... mixed results thus far. He was once short Allegiant Travel (ALGT) when I owned it - and it went down hard right after his call as I assume many people follow his trades. But as you can see by the chart, over time it surged and long term value was appreciated. So we were "both right" - he in the short run, me in the long run. But the stock market nowadays is all about the short run trade...

I believe the same here - no change to thesis but due to his charging into them as shorts I did cut back both positions we own... in fact both stocks were down yesterday in a good tape so I assume he made his call pretty early in the day. I don't know what time he posted his short but when certain people make calls, and others follow the trade - it matters. In fact it caused FNF to drop below the 50 day moving average... so due to chart alone I had to pullback. If FNF regains that key line I'll get back what I sold - his call might of just been for 24 hours or 5 weeks; who knows.

With that said, First American (FAF) reported last night and as expected - they had the same good data as Fidelity National Financial (FNF) but without the acquisition costs that clouded the positive numbers. [Fidelity National Financial Misses; Underlying Metrics the Real Story] FAF is more messy as it has multiple business lines - so in one you have more of a pure play but with a lot of acquisitions clouding the near term, and the other is a hybrid of multiple business lines.

First American beat analysts expectations by 12 cents; a look at their report
  • Total revenues for the first quarter of 2009 were $1.4 billion, a decrease of 17 percent relative to the first quarter of 2008. Net income was $36.0 million, or 38 cents per diluted share, compared with $29.3 million, or 32 cents per diluted share, in the first quarter of 2008.
  • All five business segments improved pretax earnings and margins relative to the fourth quarter of 2008
  • Corporate expenses were $27.4 million during the first quarter, a 26 percent decrease relative to the prior year (chop chop chop) Title Insurance and Services segment employee reduction of 365 during the quarter is expected to result in annualized savings of $21.4 million (the workerless future - productivity reigns; and this is in a BOOMING sector) Forty-one title insurance office closures are expected to yield $1.9 million of annualized savings
  • Increased order volumes across all mortgage-related businesses relative to the fourth quarter
  • Parker S. Kennedy, chairman and chief executive officer of The First American Corporation. "The company benefited from a surge in origination and default-related transaction activity, as well as continued expense reductions. Low mortgage rates and the effects of recent government actions should help to create a healthy operating environment in 2009."
  • Average daily open title orders increased 47 percent relative to the fourth quarter (massive)
Almost word for word with Fidelity National on this piece
  • "Our Title Insurance and Services segment experienced a substantial increase in open orders and we continued to improve operating efficiency," stated Dennis J. Gilmore, chief executive officer of the company's Financial Services Group. "Orders are taking longer to close as a result of the backlog in the mortgage lending industry, but we have a strong inventory of orders that are expected to close in the second quarter. We expect significant margin expansion in the second quarter."
There are 5 business segments but just under 60% is title insurance so we'll focus on that area; the other 4 businesses sort of offset each other this quarter.
  • During the first quarter of 2009, total revenues in the Title Insurance and Services segment were $792.4 million, a 26 percent decrease from the same quarter of 2008. Factors contributing to these results were a decline in the number of title orders closed, a decrease in the average revenue per order closed and the termination of certain agency relationships. The company's direct operations closed 369,200 title orders for the first quarter of 2009, a decrease of 5 percent, when compared with 389,600 title orders closed in the first quarter of 2008. Average revenue per direct title order was $1,248, a 15 percent decline relative to the first quarter of 2008.
  • Salary and other personnel costs were $269.3 million, a 23 percent decrease, compared with the first quarter of 2008, primarily due to employee reductions.
So an interesting story - this is a big company with 30,000 employees; so they really only cut 1% of workforce. Closing 41 offices helps with some savings as well. Due to seasonality it is hard to compare sequential quarters (Q1 2009 v Q4 2008) ... after all this is housing; and unlike the main stream cheerleaders I won't blow smoke by cheering a number that says March is better than December... March is ALWAYS better than December in the real estate market. Expectations were low; they beat them - and like Fidelity National they are seeing major order flow now and down the pike and cited the same backlog in the industry.

So rejoice America - just as we had in 2004-2006 an army of mortgage specialists shall lead us forward out of the unemployment black hole. Start training.

Long First American, Fidelity National Financial in fund; no personal position

Bookkeeping: Adding in Material Way to Capital One Financial (COF) Short

A week ago this blew up on our face, although we saved face Monday.

If at first you don't succeed, try try again.

Increasing short in the $18.20 range as the little green line has proven to be resistance - if I'm wrong and Capital One Financial (COF) jumps over, I'll cover. But seriously folks... $0.09 EPS in 2010. Sigh. Up to a 3% stake... will increase if the market rolls over.

For the market in general its an interesting spot - the playbook says to get long hot and heavy and get rid of your shorts as we break over S&P 875. I see many stocks who destroyed shorts this morning - multiple companies up 15, 20, 25%. Really who is left to short? Their arms and legs are strewn over the battle field. Which would be the time the market would drop. There are so many "air pockets" in so many charts now - even Visa; it's a vertical rise i.e. no support on any pullback. And Visa is nothing compared to many others.

We'll see - take it hour by hour around here nowadays. Every dip to the 20 day moving average on the S&P has been bought but that is now down below 850... so room to downside if pattern persists.

Short Capital One Financial in fund and personal account

Bookkeeping: Selling Half of Blackstone Group (BX)

Much like the S&P 500, every dip to the 20 day moving average in Blackstone Group (BX) has been a buy, but for now, with a gap up I am going to sell into today's froth and set a limit order to rebuy around the 20 day moving average (low $8s). Selling down to a 0.9% stake in the $9.50s. One of our few sub $10 stocks - the whole portfolio should be of this sort based on what is running the most.

Long Blackstone Group in fund; no personal position

First Quarter Labor Costs Rise Least on Record

I've been meaning to write a post about an avalanche of furloughs, wage reductions, benefit reductions I've been stockpiling as they've come through over the past 2-3 months but simply have not had the time to do it. This story via Bloomberg talks about the subject from a 40,000 point of view although I'd caution almost any report out of government is to be viewed with jaundiced eye. This set of data seems pretty hard to manipulate since wage data is straightforward so I'll make an exception and post government data which I try to avoid.
  • Employment expenses in the U.S. rose 0.3 percent in the first quarter, less than expected and the smallest gain on record, a sign the worst recession in at least half a century is restraining wages and benefits. The first-quarter gain was the smallest since records began in 1982.
  • The increase in the employment cost index compares with a 0.6 percent gain in the last three months of 2008, the Labor Department said today in Washington. In the last 12 months, costs were up 2.1 percent, after a 2.6 percent year-over-year gain in the previous quarter.
  • Labor costs, which account for about two-thirds of company expenses, are likely to stay contained as the global downturn forces businesses to trim workers and benefits.
  • Among private companies, total compensation costs increased 0.2 percent, the smallest gain since that measure began in June 1980, while for state and local government employees, compensation increased 0.8 percent. (now of course - this brings up another issue I've talked about repeatedly; the complete disassociation between public and private workers... even in the worst post World War 2 recession public worker costs are increasing at annualized 3.2% rate - even as their private counterparts are getting 1/3rd that. Mull for a moment how we are paying for that divergence. I don't think Americans are paying attention - and each time the states get in trouble I guess we can borrow from the Chinese - our ourselves via quantitative easing - and steal from future generations to pay public workers today. But some day there needs to be a rationalization ... tax rates need to skyrocket to pay for our promises to the public sector. )
Now as stock market participants we must clap and cheer at the "discipline" of our corporations at making sure costs are contained. Or as Alan Greenspan called it "the productivity miracle" is once again here again.

This ties into one of our "very long term" views about the pressure on US wage earners that I believe (unlike 99% out there) is a secular change not cyclical. Median wages have stagnated the past decade and many Americans turned to their home (or credit cards) to make up for it. Hence you had a zero and indeed NEGATIVE savings rate nationally for parts of the 2000s. Further we are moving to a more transitory, "temporary" type of workforce - and this is why so many companies have beaten (very low) expectations this quarter. So many heads have been chopped so quickly - that the expense lines have improved. [Apr 2, 2008: The Underemployment Rate is Rising] So we have a SECULAR (in my belief) class of underemployed in the country

I've been struggling to think of a term for all these people who are struggling with part time work, working 2 jobs, or in contractor jobs where they get hired/fired on a daily whim ( I call them "nomad workers") This is a systematic and secular situation - nothing to do with 1 month's report or another. It is part and parcel with the erosion of living standards - and why so many in the middle and lower economic strata turn to home equity, credit cards, etc to just get by.

So this brings up the great disassociation - what is good for the stock market (and companies) is not really quite so lovely for the workers. Again, I have a dark view on this as a permanent change in America... but the stock market only worries about the next day or week. So as long as you "beat the number" everything is good, and green shoots abound. My personal belief is many Americans, via increasing instability over the past decade are seeing the situation in a very slow creep around them - but it is so incremental as to not be easily visible. If you've never read the piece I suggest going to [Dec 8, 2007: Do the Bottom 80% of Americans Stand a Chance?] to get my long term views on what really has been happening in the country.

Now what we see in Bloomberg is a very low level of wage increase - 0.3% in a quarter annualizes to 1.2%... that degree of degradation is due to recession. You can simply pick up the local newspaper (if you still have one in your area) and read about the cost cutting measures from small businesses cutting health care, to larger businesses cutting 401k contribution, to wage freezes, to wage reductions, et al. But my contention has been inflation has been understated by the government versus reality - and with the amount of profits going to small slivers of society (at levels not seen since the 1920s) the "median" humanoid in America has been falling slowly behind year after year. I had never seen before what IBM proposed about a month ago to some of its workers - you are free to keep your job you have if you move abroad.... and (kicker) accept the local wage. Canary in coal mine? If so, my thesis is playing out in its next stage.

But, as stock market speculators all we care about is the nirvana of the "workerless" economy and the lower the wages, the lower the benefits, the lower the costs. And all that matters are lower costs = more profits. What you need to ask a generation or two out is at what point do wages get to the point where the median worker can no longer enjoy the median middle class lifestyle. Or are we going to need to wait that long to find out? Even BEFORE the Great Recession I've been reading studies where parents are beginning to believe their kids won't be able to maintain the same lifestyle they did. Not parents in the upper 15-20%; parents in 30th, 40th, 50th percentile. After all this ability to increase living standard is the great carrot in our society and why we allow such divergence from top to bottom versus "those damn socialists" overseas.

Now the counter arguments are familiar: (a) as the Baby Boomers retire a much smaller workforce remains to take their place hence less people fighting for same amount of jobs = higher wages and (b) we are the technical innovators of the world so new jobs are around every corner. I'd argue in an increasingly flat world, why do jobs that don't require hand to hand contact (i.e. nurses) need to remain here at all? As Baby Boomers retire the job can be outsourced (p.s. can Baby Boomers afford to retire?) And we've had technological innovations here for years - where has the job growth been the past decade? Government and healthcare.... oh yes financial innovation (worked out great) and that innovative industry called "building houses".

Anyhow we don't talk about these issues here because its a stock blog and the time frame in the stock market is hours, days, or (nowadays in rare cases) a month. Just keep your eye out on what is going on out there - think of how 2 workers (mother and father) now bring in income to be able to replicate similar lifestyle to what 1 worker did 2 generations ago. (and yes the living standard is higher now but that's not the point - what sacrifices are necessary to maintain that now higher standard?) Or how many are stuck working 2 service jobs to make ends meet versus how one would do 25 years ago. Most of those folks I speak about don't have time to read this blog, nor any income to invest - but they are a growing class of America. I will say again - if Ben B gets his way and he is able to reflate a new bubble (and avoid deflation), this version of stagflation could make the 70s look like a cake walk - worker "power" back in the 70s was far greater, and the ability to move jobs overseas was far weaker. But at least the "ownership" class will be giggling to self in their new found asset appreciation. And that's the main concern. (err, I'm sorry Main Street = Wall Street is what I really meant to say)

But as always I could simply have Michigan bias, and be completely wrong.

EDIT 12:05 PM - so as an investing site let's take the 'other side of this commentary' - as I said; this is "great news" for companies. See below
  • Corporate earnings worldwide haven’t been the disaster analysts predicted as companies from Ford Motor Co. to Siemens AG beat earnings estimates through job cuts, factory consolidations and a dose of lowered expectations.
  • One reason is the low hurdle the companies set earlier this year by reducing forecasts, rather than any recovery from the deepest U.S. recession in a half-century, investors and analysts said. At the start of April, equity analysts estimated earnings among S&P 500 companies fell 37 percent in the first quarter. Six months earlier they had been calling for a 22 percent gain. (that's a 59% divergence - the bar was set very low. Ironically we were mocking Q3 and Q4 2008 estimates in early 2008 when the talk was of "2nd half recovery" - I didn't realize how low estimates has been slashed in Q1 2009)
  • Far from being a buy signal, sometimes earnings that beat estimates should be a “major red flag for investors” because they were achieved by cutting costs that may restrict growth, said David MacGregor, a Longbow Research analyst in Independence, Ohio. “The assets they are closing or rationalizing today, a year ago they would have said they needed for the recovery phase,” MacGregor said. “Recovery is not imminent, and is far enough into the future that they are re-sizing the business to a much lower level.”
The rest of the story is just a litany of companies that slashed heads in massive waves. But they "beat" - time to cheer. With the recovery "in 6 months" I guess they can begin rehiring now.

Visa (V) Beats the Street

The chart for Visa (V) shows how stocks can explode once they peek their head over the 200 day moving average; of course solid earnings last night did not hurt one bit. The question with this type of company is as credit card spending slows, are (a) debit cards offsetting it and (b) how are international regions doing as that is where the true secular growth is (moving from cash based societies to plastic) At this time, the answers to the latter two questions are good enough as the low expectation game continues to march onward. Visa is now at levels last seen before the fall crash.

This is one of the few subsectors I'd actually be ok with investing in and coming back in a decade since there is such a strangehold by so few players, along with the business model. If you are new to the blog or the sector, remember we like this are because there is zero credit risk - these are purely transactional companies - each time a purchase is made they take their pound of flesh. Rinse. Wash. Repeat. There is a lot of insight on the global economy to be had from reading through the earnings report and seeing the commentary. Full report here.

Again we're now talking 25x forward earnings at today's prices, but valuations have been thrown out the window as people chase anything at any price. I guess 30-35x forward earnings will indeed be ok in the paper printing prosperity era that jacks up the value of every asset class.... including stocks.

A quick round up of earnings - via Reuters
  • Visa Inc (V) posted better-than-expected quarterly earnings on Wednesday as the world's largest credit card network increased prices, slashed expenses and consumers used debit cards more. Net income rose 70 percent to $536 million, or 71 cents per diluted class A share, for the second quarter ended March 31, compared with a profit of $314 million, or 39 cents per diluted share, a year earlier. On an reflecting a normalized tax rate, restructuring and purchase amortizations, quarterly net incomeadjusted basis, rose 38 percent to $553 million, or 73 cents per diluted class A common share. On that basis, analysts expected earnings of 64 cents per share, according to Reuters Estimates.
  • Adjusted operating expenses fell 5 percent to $745 million, as the company cut personnel, advertising and marketing, as well as consulting fees, and administrative costs.
  • "What caught my attention most was the expense control they had. For instance, advertising falling from $210 million to $196 million. Their ability to cut costs in this environment is surprising," said Ken Crawford, senior portfolio manager at Argent Capital Management. "It speaks of the flexibility and profitability of card processor companies."
  • Net operating revenue rose 13 percent to $1.6 billion, while total processed transactions -- which represent transactions processed by VisaNet -- increased 6 percent to 9.4 billion. Visa said payments volume fell 1 percent for the quarter ended Dec. 31, which translates to revenue in the following quarter.
  • Visa forecast further pressure on its revenue in the second half of its 2009 fiscal year, which ends in September, hurt by foreign exchange headwinds as the U.S. dollar strengthened in recent months and lower cross-border transactions given the global economic recession. But the company anticipated a recovery from October helped by more favorable year-over-year gas prices and foreign exchange rates, if the global economy shows signs of improvement.
  • Visa increased its forecast for its annual adjusted operating margin to the low 50 percent range from a range of the high 40 percent to the low 50 percent range. (big positive)
  • The company affirmed its forecast of an annual net revenue growth of high single digits in 2009 and at the lower end of the 11 to 15 percent range in 2010. Visa also reiterated its annual adjusted diluted class A common stock earnings per share will grow over 20 percent.

Now for the more macro views
  • However, the company has seen a slowdown in the growth of revenue and transaction volumes as battered consumers used their credit cards less. Still, debt-burdened consumers have been increasing the use of their debit cards.
  • "The continued strength of debit is attributable in part to that product's strong correlation with non-discretionary spend categories, which are holding up relatively well in the face of a tough economy," Chief Financial Officer Byron Pollitt said in a conference call with analysts.
  • "In fact, in the quarter ending December, for the first time in Visa's history, U.S. debit payment volumes eclipsed that of credit," Pollitt added. (this speaks to how advanced the US is in moving away from cash and to plastic - many other emerging markets are only in the infant stage of this switch)
  • Payments volume fell 7 percent in credit in the United States to $203 billion, while debit volumes grew 5.5 percent to $206 billion.
  • In addition, Visa said debit grew in the first four months of 2009, while credit shrank. (this squares with the reduction in credit we are seeing from the credit card issuers as they retrench)
[Mar 30, 2009: Barron's - The Pleasure of Plastic: Mastercard (MA) and Visa (V)]
[Jan 16, 2009: Mastercard, Visa Weak as Democrats Look to Move Up New Regulations]
[Jul 30, 2008: Visa Rings Up Very Good Earnings - Should Bode Well for Mastercard]
[Jun 9, 2008: Mastercard, Visa see Gold in PrePaid]
[Feb 4, 2008: Visa IPO Seeks Mastercard Riches]

No position

S&P 500 Breaks Out of Triangle

Week 8 of rally +32.5% of a gain in the S&P 500. And still the buyers rush in. There might have been a rally of this nature that I've experienced in the past but I can't recall anything this strong in such a short amount of time with no relent. Maybe in 1999 on the NASDAQ.

We said there would be a rubber band (snap back), reversion to mean effect in early March as the S&P was a historic 40% away from the 200 day moving average. Never did I imagine this quick and almost without a break. We have not had 3 consecutive down days in the entire rally, now 2 months long.

Looking at the chart we've said S&P 875 was the key level, and now we've broken above that level. The OBVIOUS situation here is to buy and pile in. But is it too obvious? I don't know right now - this market has escaped the rationale I am using as my basis. The "gut feel" is to throw in the towel on the short side, which was the exact same feeling one felt on the long side 2 months ago. Just as you could wake up every morning and short the market and win 90% of the time in January and February, now the opposite is true. I just worry about the extremes here - and how long in the tooth this rally is; but I've been saying that incorrectly for 3 weeks.

The next real resistance other than the "big round number" of 900 is the high of 2009 around S&P 930. The 200 day moving average is up near S&P 980 and falling by the day. So those would be upside targets. The technicals say keep buying, and right now any argument against that has been a wretched outcome. I would expect a lot of shorts to throw in the towel here, and just about the time every short takes their ball and go home is when we'd have some correction. But for now respect the trend until it changes and short is wrong.

One caveat - volume is weakening this week compared to the last few - one would think that is a "distribution" effect. But prices skyrocketing on lower volume still destroy short positions. It just signals some caution.

Bookkeeping: Closing Short on Sequenom (SQNM)

Uhhh... obviously in the $3s I think most of the downside is in, unless it goes to zero. Unfortunately as I stated last night I covered most of my short early this week, so these are the last 50 shares. Having a hedge at this point is useless.

I am not a speculator of the highest order, but of course if you have spare money to toss around you can buy on the long side. Per James Altucher Ridgeback Capital (a hedge fund) had 92% of their portfolio in Sequenom so you can say goodbye to that fund. And RA Capital (another fund) has 50% of their portfolio in the stock.

One interesting play is as these funds liquidate their other positions will (could) fall under pressure - for example RA Capital's other top positions include Pharmasset (VRUS), Ardea Biosciences (RDEA), AMAG Pharma (AMAG) and Vertex Pharma (VRTX).

I won't average down because it's not my thing to speculate on casino chips, but selling the 1000 shares I have is useless here; the stock is basically like a call option - it's worth less than $4000; if there is any truth to the story - then by late in the year or early next the stock should recover. However, this management is toast in my opinion and the avalanche of lawsuits will overwhelm. I might change my mind and just dump it in the coming weeks, but the fact that multiple employees and not just one was involved makes the picture darker.

The irony here is I avoid small and mid cap biotechs for these adverse reactions. The idea here was this was not a drug company, where the FDA could snap its back in a moment. This was a test instead... but the same neck snapping happened. Yes, indeed ironic.

Long Sequenom in fund; no personal position

O'Reilly Automotive (ORLY) Solid Results; Making Progress on CSK Acquisition

I just have to start laughing to myself - here I have a solid company O'Reilly Automotive (ORLY); it beats by a whopping 7 cents ($0.47 v $0.40) with upside guidance for the year (granted, they only increased it by the amount of this quarter's beat) and the stock does nothing after hours - after being down 3% on the day in an up market. Meanwhile I watch the crumbs of the Earth jumping 10-20-30% on disaster earnings but with magic words of "stabilization" from the CEO (imagined or otherwise). All about expectations - it's buy the flea market junk era.

Much like Fidelity National Financial (FNF) this is not an organic story as a large acquisition is being absorbed so the year over year numbers are not apples to apples. The key story here is a good managment @ ORLY taking over stores from CSK and bringing them up to same efficiency + profitability over the next year or so. So far it seems like the path is excellent. But if one executes in an empty forest I guess it does not matter nowadays. Once more if the consumer was "back" we should not be seeing such great strength in this type of company - they should be fleeing back to the new car lots with their newly furnished house ATM. [Apr 1: Automotive Replacement & Accessories Continues to be a Winning Theme] [Jan 15, 2009: Thesis - Automotive Replacement and Accessories]

With EPS guidance in the $1.92 to $1.96 range the stock is no longer cheap but at 19x forward estimates (with some upside to those full year numbers I bet) its cheaper than many crummy retailers who are shrinking and same store sales falling off a cliff. Contrasted to O'Reilly's +5.7% SSS. A look at results
  • Sales for the three months ended March 31, 2009, totaled $1.16 billion, up 80% from $0.65 billion for the same period a year ago. (again not organic growth)
  • Gross profit for the first quarter of 2009 increased to $0.54 billion (or 46.6% of sales) from $0.29 billion (or 44.6% of sales) for the first quarter of 2008, representing an increase of 88%. (key here is gross margin expansion of 2% - that's quite impressive)
  • Selling, General and Administrative expenses increased to $0.43 billion (or 36.9% of sales) for the first quarter of 2009 from $0.21 billion (or 33.2% of sales) for the first quarter of 2008, representing an increase of 100%. (this is a negative because SGA increased nearly 4% - more cost cutting to do)
  • Net income for the first quarter ended March 31, 2009, totaled $63 million, up 36% from $46 million for the same period in 2008. Diluted earnings per common share for the first quarter of 2009 increased 15.0% to $0.46 on 136.2 million shares compared to $0.40 for the first quarter of 2008 on 116.3 million shares. Adjusted diluted earnings per share, excluding the impact of the acquisition related charge, increased 17.5% to $0.47 from the same period one year ago.
  • Greg Henslee, CEO and Co-President stated, ``We are very pleased with our performance in the first quarter, highlighted by consolidated comparable store sales growth of 5.7% and a 200 basis point improvement in our gross profit as a percent of sales. Our O'Reilly branded stores performed exceptionally well throughout the quarter, finishing with comparable store sales of 8.2%.
  • We are excited to report our second consecutive quarter of positive comparable store sales growth in the recently acquired CSK branded stores as well. (if they can get these stores even in the 5% SSS range - should be a boon) Comparable store sales for CSK branded stores open at least one year increased 1.5% for the first quarter ended March 31, 2009. (lots of opportunity in the CSK stores)
  • ``With the opening of 52 net new stores during the quarter, our total store count at March 31 grew to 3,337 stores,'' Ted Wise, COO and Co-President stated. ``Our dedicated store conversion Team Members converted 93 CSK branded stores to the O'Reilly brand over the quarter and in mid-April, we successfully converted CSK's existing Detroit distribution center to the O'Reilly system.
  • The Company estimates diluted earnings per share for the second quarter of 2009 to range from $0.50 to $0.54 and estimates diluted earnings per share for the year ended December 31, 2009, to range from $1.89 to $1.93. Excluding the expected impact of acquisition charges related to CSK of $0.01 per diluted share, adjusted earnings per share is expected to range from $0.51 to $0.55 for second quarter of 2009. Excluding the expected impact of acquisition charges for trade names and trademarks related to CSK of $0.03 for the year ended December 31, 2009, adjusted earnings per share is expected to range from $1.92 to $1.96.
They provided very conservative guidance for same store sales with 3-5% for O'Reilly and 1-3% for CSK in Q2, and 3-5% for the year for O'Reilly with 2-4% for CSK on the year.

O'Reilly Automotive, Inc. is one of the largest specialty retailers of automotive aftermarket parts, tools, supplies, equipment and accessories in the United States, serving both the do-it-yourself and professional installer markets. Founded in 1957 by the O'Reilly family, the Company operated 3,337 stores in 38 states as of March 31, 2009.

[Mar 3, 2009: Autozone (AZO) Surges 10% on Weakening Consumers Sticking to Fixing What they Have]

Long O'Reilly Automotive in fund; no personal position

Wednesday, April 29, 2009

Sequenom (SQNM) Bombshell

I am saying "wow" a lot of late - Sequenom (SQNM) is out with something after hours I've never seen in all the years I've been doing stocks; a delay in their Down Syndrome test due to employee mishandling of data. The stock is down 50% after hours. Worse - this was our only long position I actually have a hedge against, but I covered it into the weakness early this week (and patted myself on the back after it bounced from below $14). Basically we have 50 shares short as a holding position. On the long side we only have a 1.4% stake since the stock chart has been awful but looks like that will be 0.7% by tomorrow. Not good - it's one thing to be hit by an earnings situation but this is out of left field. Here I thought this was my personal Dendreon (DNDN) - something I'd stick with in the long run, waiting for the magical day to arrive it goes up 200% in a session. So much for practicing patience...

Well, we will see what happens tomorrow after management talks with analysts and some clarification - we had a similar drop once in Thoratec (THOR) after hours on a product recall but by the next morning it was down 10% instead of 50%. Since the whole concept of Sequenom is based on the veracity of the test results; this throws a lot of issues on the table. Sequenom reported earnings as well tonight but it's a non issue for this type of company.

Here is the news and YET again, "the stock" (via chart) seems to know before the rest of us... I wonder how that always seems to be the case. Rhetorical comment. I think other than Morgan Stanley (MS) this was the only other long position we held with such a bad condition... I was thinking we finally formed a nice double bottom with early April lows - thankfully I did not pile in. Still going to sting - market gods not kind of late.

Per Sequenom
  • ....the expected launch of its SEQureDx™ Down syndrome test is delayed, due to the discovery by company officials of employee mishandling of R&D test data and results. Accordingly the company is no longer relying on the previously announced R&D test data and results.
  • SEQUENOM has not changed its plans to develop in parallel its RNA- and DNA-based methods for the Down syndrome test and will endeavor to have a validated test in the fourth quarter of 2009.
  • Under the circumstances, and as supported by key clinical opinion leaders, the company now intends to launch the Down syndrome test upon publication in a peer-reviewed journal of the results from the on-going large, independent clinical studies, which are designed to be practice-changing for Down syndrome testing.
  • The company’s board of directors has formed a special committee of independent directors to oversee an independent investigation of the employees’ activity related to the test data and results. The committee has engaged independent counsel to assist the committee in the conduct of the investigation.
  • Although the company is not aware of any potentially inappropriate activity related to the reported results of its other tests under development, the company is currently reviewing the data for all tests. As a result of this ongoing review the Rhesus D, Cystic Fibrosis and Fetalxy tests are now anticipated to begin launching in the third quarter of this year.
  • The company believes that its Down syndrome program has suffered a temporary setback but that the SEQureDx technology is scientifically and technically sound. The company intends to take every possible action to make up lost ground.
  • Today’s announcement regarding the company’s SEQureDx Down syndrome R&D test data and results supersedes all previous announcements about such data and test, including its press releases dated June 4, 2008, September 23, 2008, December 1, 2008, January 28, 2009 and February 3, 2009.
Should be a whopper of a conference call...
  • SEQUENOM has scheduled a conference call for 2:00 p.m. Pacific time today at which Harry Stylli, PhD, SEQUENOM President and Chief Executive Officer, will discuss this announcement and along with other company officials will present information on the company’s operating results for the first quarter of fiscal 2009.
EDIT 5:05 PM : Down 60% after hours.

EDIT 5:10 PM: There appears to be an analyst who initiated the stock with a buy this morning. Ouch.

Long/Short Sequenom in fund - long Thoratec in fund; no personal position

Median Home Prices in Las Vegas Fall to Lowest Since 2000

Wow - this is some serious price contraction. And just think we are still spending hundreds upon hundreds of billions (down the drain) from stopping the market from working. [Mar 5, 2009: WSJ - Mortgage Bailout to Aid 1 in 9 Homeowners] [Dec 8, 2008: More than Half of Homeowners with Modified Loans are Back in Trouble] So in the end, the market will work despite government trying to stop it from doing so; and we'll have saddled generations of children with debt. What is so sad is all these mortgage "saves" (both first and NOW second mortgage per this week's latest "government initiative" which I did not even bother to post due to "bailout fatigue") done at 105% of value of home will be at 120-130% of value in a year from now. Just a waste of money...

Las Vegas home prices are down to levels not seen since 2000 - so the whole speculative fever and THEN SOME has been erased... and 3/4ths of all home sales in the past month were recent foreclosures. It's now been a year since that trend starting appearing and it will only grow from here [Mar 25, 2008: WSJ - Wave of Foreclosures Drives Prices Lower, Lures Buyers] So our framework is playing out perfectly - we will see a surge in transactions (see title insurers) but the prices will be atrocious. This "should" be bad to new home builders as it pressures their prices but in this market, everything is traded in lockstep so what's good for home transactions will be seen as good for home builders... no need to apply logic. Bulls will apply some circular logic about how this will drive down inventories, not realizing to be competitive new home builders are going to destroy their profit margins to keep pace with these rock bottom prices created by a tsunami of foreclosures. Wait... the home builders don't have profit margins to destroy anymore. Carry on - buy home stocks.

Don't even ask what the EXISTING home owners must be thinking right now - almost anyone who bought this decade is now underwater in Vegas. And trapped unless they have cash to bring to the table to "get out of jail". And we're still not going down in price unless you believe March was the bottom. [Dec 8, 2007: Analysis - What Should Housing Prices Be Today?] [Feb 13, 2009: US Home Prices Fall to 2003 Levels]

Via Bloomberg
  • The median home price in the Las Vegas area fell to $144,000 last month, the lowest since 2000, as a rise in foreclosures lowered the value of single-family houses and condominiums, MDA DataQuick said today.
  • March’s median in the Las Vegas metropolitan region was down 4 percent from the previous month and down 42 percent from a year earlier, the San Diego-based real estate research company said in a statement. The median was last lower in December 2000, when it was $143,000.
  • Almost 74 percent of all previously owned homes that sold in the Las Vegas area last month had been foreclosed upon in the prior 12 months, MDA DataQuick said. Almost 2,800 foreclosed properties sold in the area last month, said the company.
  • The decline in prices in the Las Vegas area helped boost sales. (economics 101 still works) A total of 4,268 new and existing single-family houses and condominium units sold in the area last month, up 29 percent from February and up 35 percent from a year earlier, MDA DataQuick said. [Mar 28, 2009: Some Real Estate Markets Warming Up]
As I said in 2007, and as I said in 2008... this will be a GOOD THING for Americans in the future... even if its a painful one time adjustment. Having to spend only 25, 30, 35% of income on housing will be much better for everyone than having speculators with easy money run prices up to the point many families who just want a place to live have to pay 40, 45, indeed 50% of their income just for shelter. [Sep 26, 2008 : 15% of Americans Spend 50%+ of Income for House Payments] Government does not agree with me, and is fighting this reality tool and nail. As a homeowner, trust me - it stinks; but if you take a step back it's fantastic for future homeowners.

Look for a new wave of walk aways in latter 2009 and 2010 as people look around incensed they are living in houses with mortgages 1.5-3.0x time the size of their new neighbors. My prediction for 1 in 4 Americans being underwater by the time this is all said and done might of been conservative.... [Mar 9, 2009: One in Five Houses Underwater] Not to mention all the foreclosures coming from job losses in the next 18 months. All those losses goes to bank balance sheets and Fannie/Freddie (and then the Federal Reserve balance sheet)... green shoots everyone. No mind numbing losses to be seen here - move along.

[Apr 23, 2009: As More Homes Fall Underwater Trapped Americans Cannot Migrate]
Apr 8, 2009: Recession Causes Relatives to Move in Together & Sharp Drop Off in Divorces. Housing Bubble 2.0? (Not)]
[Dec 24, 2008: Median Home Prices Fall Most Since Great Depression]
[Jul 10, 2008: Foreclosure Activity Map]

Starent Networks (STAR) 3G Player with 4G Potential

It really has been a struggle to find new opportunities that have real growth potential to them; it seems much of the lauded U.S. "industry creation" must be happening in the private side as finding solid public companies, that can sustain growth at 25%+ has been difficult for a long while. I've been interested in the tech space here for a few weeks, but most of the names blasting off are names coming out of cyclical troughs - as I've said most of the technology space is an over hyped "industrial" theme, but covered in silicon to make it sexy. Most of the real growth is centered in just a few larger names that everyone knows...

One idea I've been sitting on for a few weeks is Starent Networks (STAR) - the chart has been doing well for many months - before the rest of the market came to life in fact. You can see throughout February 2009 as the market fell off a cliff, the stock held its range and never broke any key support areas. Those generally are leaders of the next move up. With the latest earnings report the stock has taken off the stratosphere. I am sure without looking this is the type of stock at the top of every Investor's Business Daily chart so I don't want to chase it - even though chasing extended stocks has been the order of the day to make large wins in the market lately. But I like the space it is in, and the longer term potential so I thought I'd take some time to do a longer piece even as we are in the middle of a flood of earnings.

I'm a big believer in the mobile, wired world - there are some very obvious large cap names that everyone knows and loves. The danger with smaller or mid cap names in the space (tech) is larger competition sees nice margins in a space and stomps in bye bye profits. I've had this happen to me many a time over the years. Perhaps Starent Networks will face the same fate... but thus far it looks promising. Essentially the company provides "guts" for the 3G Network in which it is a dominant force, and hence will prosper (although with much more competition) in 4G.

Some articles from give a good plain English overview - here and here

  • Starent has enjoyed its dominance as a supplier of hardware and software to help telcos better manage resources and deliver media and advanced services to smartphones. Stated in English, they help make the Internet happen on smartphones.
Obviously we see how smartphones are taking share from "normal" phones even in the Great Recession
  • The Tewksbury, Mass.-based company has two telco customers in the U.S., Sprint (S Quote) and Verizon, which make up 90% of the company's total revenue.
So much like a Ciena (CIEN) they provide technology to major telco companies and are heavily skewed in terms of revenue to only a handful of customers. Which is another major risk - you wake up one morning, see a lost contract (or new competitor) and your stock is down 40%. (been there, done that)

Which is exactly the issue here to some degree - while Starent is dominant in 3G, these juicy profit margins are attracting competitors (of much larger scale) to the space for 4G.
  • Alcatel-Lucent named Verizon Wireless as a customer for its packet core technology as the No. 1 telco plans its 4G network construction strategy, according to an announcement Wednesday at the CTIA wireless show in Las Vegas. "Now it appears clear that Starent's sole-sourced position at Verizon, where it derives close to 80% of its revenue, post the Alltel acquisition, does not survive into the next generation of technology," JPMorgan analyst Ehud Gelblum writes in a research note Wednesday.
  • With nearly a lock on the market, Starent managed to sustain plump 78% gross margins last year. Gelblum estimates that Starent's current 3G gear sales will not be affected, but he says Starent will face a stiff challenge in the upcoming 4G, long term evolution (LTE ) build-up.
  • Verizon's 4G or long-term evolution (LTE) network upgrade with core packet gear is "a three-horse race," William Blair analyst Anil Doradla wrote Monday. These horses include Starent, Alcatel-Lucent and Ericsson (ERIC Quote). And while Starent has been dominant in 3G at Verizon and Sprint (S Quote), the opportunity to supply 4G gear to AT&T (T Quote) seems nil, Doradla
And then there is the matter of tech stock "rumors" of buyouts - which are all the rage today... take any $5, $10, $15 stock - load up on it, start buying some calls which alert every service which looks for "unusual option activity" and boom - your work as a hedge fund manager is done as lemmings pile in and you sell out. (not that this would ever happen with a sheriff like the SEC watching) Starnet was also the beneficiary to some degree.
  • Perhaps of more concern for investors are the dashed hopes of a buyout. Starent's stock had more than doubled since November largely because of anticipation that some larger player would acquire the company to gain a piece of the 4G spending. "The biggest near-term negative impact for Starent could be a reduced takeover potential as Alcatel-Lucent," Gelblum writes, has now joined Ericsson and Nokia Siemens Networks in having its own internally developed 4G packet core solution."
Starent Networks, after this recent surge is now a $1.4 Billion market cap, with about 800 employees - again compared to an Ericsson, Huawei Technologies, or Alcatel-Lucent, a tiny fish. Website here; product page here, and investor page here. 70M shares outstanding with about 41M floating.

We'll look at some metrics from their last earnings report and than an Investors Business Daily story from February is at the bottom of the post. Full earnings report here - some snippets below; via Reuters
  • Starent Networks (STAR), which helps mobile operators deliver multimedia services to subscribers, posted a 32 percent rise in quarterly profit and lifted its earnings outlook for the year, driving its shares up almost 13 percent.
  • For the first quarter, the company earned $12.8 million, or 17 cents per share, up from $9.7 million, or 13 cents per share, a year ago. Excluding items, it earned 22 cents. Total revenue jumped 30 percent to $73.2 million. Product revenue, which accounted for more than three fourth of the total revenue, grew 29 percent, while services revenue rose 38 percent.
  • Analysts expected earnings of 16 cents a share, before items, on revenue of $72.1 million, according to Reuters Estimates.
  • Starent, which counts Sprint-Nextel (S) and Verizon (VZ) Wireless among its biggest customers, said on a conference call that it expects a profit of 71 cents to 74 cents a share in 2009. The company, whose infrastructure equipment is used by wireless carriers to offer video, multimedia messaging and voice-over-IP services, had previously projected earnings of 65 cents to 68 cents a share for the year.
  • Cantor Fitzgerald analyst Edward Jackson said the solid first-quarter results demonstrated that the company continues to benefit from the robust growth of wireless data services. "As long as the robust rates of data services continue, they'll perform well," Jackson said, adding wireless data was the fastest growing area of communication services.
For tech companies, and indeed all companies I always love to keep an eye on gross margins - usually first hints of weakness (competition) lie there. This Q was a staggering 80.4% versus a year ago 76.9%. No problem there as 3G continues to be the theme. No major long term debt so no balance sheet issues either. As for valuation, nothing is cheap in this market - even at 75 cents for 2009 we are already talking a 27x FORWARD multiple on 2009 estimates. Rich - but only I appear to care about valuations anymore. Growth is very scarce in this market, and there is a gap there at $17 - the history of late has been for gaps not to fill for a while in companies that report a good quarter, so I am not sure if it will fill anytime soon. We'll see; I just have a hard time justifying 30x forward earnings but that said - people are now bidding up shrinking companies in consumer discretionary over and above that... no price is too expensive for the hordes of speculators.

From Investors Business Daily February 2009
  • Smart phones are getting smarter. More and more customers want more messaging, video and other data delivered to their handhelds. That means cell phone infrastructure systems need dramatically more bandwidth.
  • The Tewksbury, Mass.-based company ended 2008 with record sales and revenue, and a growing base of cellular systems around the globe as customers. It's guiding for double-digit revenue growth again in 2009.
  • "They've done a good job of going out and getting very large, well-funded carriers as customers. That's why they have this kind of visibility in this kind of market," said Deutsche Bank analyst Brian Modoff.
  • The company's biggest customer, Verizon Wireless, is the largest cell company in the U.S. It also serves top and second-tier cell companies in places such as China, India and Europe.
  • Analysts say Starent's more scalable and flexible systems give it an edge over competitors. When someone makes a cell call, a radio signal reaches out to the nearest cell tower. That tower then routes the data to Starent hardware, which breaks the data up into packets and moves it on to the Internet. As those packets travel, Starent's network tracks who the customer is and which services he or she is using to facilitate billing and customer management.
  • Starent's systems are already compatible with earlier cellular technologies still in use, as well as the now high-end third generation, or 3G systems. The company says simple software upgrades, rather than full-scale equipment replacements, will make its systems compatible with the coming 4G networks as well.
  • Its top five customers accounted for 93% of revenue in the fourth quarter. Verizon alone made up 60%. But that large customer reliance used to be worse, analysts say. "The trend is going in the right direction," Modoff said. "But the risk in the name is that one of these companies, particularly Verizon, doesn't spend as much in a quarter."
  • The company lists China Unicom (NYSE:CHU - News), that nation's second-largest cell carrier, as a customer. And analysts think the largest, China Telecom (NYSE:CHA - News), is onboard as well. Those are potentially important customers as China switches over to 3G systems. The company expects China to spend more than $40 billion over the next two years in system upgrades.
  • About 37% of the phones Verizon sold in the fourth quarter were smart phones, up from 30% the quarter before. It expects higher average revenue per user, thanks to the data plans customers buy with them.
(Click to enlarge)

No position

Guns: One of America's Last Growth Industries - Sturm Ruger & Co (RGR) Beats; Huge Backlog Growth

I was trying to figure out why Smith & Wesson (SWHC) was surging 10% today outside of general "glee"; I didn't realize that peer Sturm, Ruger & Co (RGR) reported last night. Well folks, we might be shrinking most of our industry especially of the manufacturing sort - it was either guns or butter - we still have massive defense contractors and guns. They will never take that away from us. RGR beat estimates of $0.24 handily ... with $0.30. Go team USA. I need to add to my SWHC position... wow look at these metrics. This stock is below 15x forward earnings for massive growth while people are bidding up shrinking companies at 30x forward earnings. Just love the stock market.
  • Sturm, Ruger & Company, Inc. (NYSE: RGR - News), announced today that for the first quarter of 2009, the Company reported net sales of $63.5 million and earnings per share of $0.30, compared with sales of $42.5 million and earnings per share of $.07 in the first quarter of 2008.
Wow that is 50% revenue growth. Guns and masses of unemployed... a magic combination to look forward to in the year ahead.
  • The level of demand for our products during the first quarter of 2009 has been unusually high, with more than 500,000 units ordered.
  • Our firearms sales grew 55.5% from the first quarter of 2008 and 8.7% from the fourth quarter of 2008.
  • Our backlog grew to 458,900 units and $136.3 million at the end of the first quarter of 2009, from 175,900 units and $47.8 million at the end of 2008. (wow! 160% unit growth and 183% dollar growth)
Sturm, Ruger was founded in 1949 and is one of the nation’s leading manufacturers of high-quality firearms for the commercial sporting market.

[Apr 12: 60 Minutes - the Way of the Gun]
[Apr 9: Some Link Economy with Spate of Killings]
[Apr 6: Starting Smith & Wesson Position]

Long Smith & Wesson in fund; no personal position

Bookkeeping: Closing Morgan Stanley (MS)

Someone emailed me if I had a list of stocks in any sectors I would not buy due to their sector (i.e. cigarettes or defense stocks or other "sin" stocks) - the short answer is no. However, I am adding a list of stocks for individual reasons I won't buy as a small protest ... Chesapeake Energy (CHK) is a new one for the egregious handout they just gave their CEO - a new story yesterday in Wall Street Journal to add to what I've already put on the site... I'll post it later... Unfortunately, using egregious compensation as a limiting factor might cut down my options in the stock market by about 80%, but what CHK is doing now is beyond the pale. Government Sachs (GS) is the other. While the whole "if you are unhappy just sell your stock and management will get the message" logic is a complete joke in our current system, I still don't want to touch these things.

The reason I bring this up is I bought Morgan Stanley (MS) a few months ago instead of Goldman as a proxy for the financials... Goldman has outperformed (shocker) but when you have a direct line to the government, I suppose that helps positioning your trades. The fact they now are doing 20% of all trades in the market is beyond suspicious as well... this magical "underlying bid" is coming from somewhere, and I think it is pretty clear where. Hold on, I hear a black helicopter coming...

Anyhow, since I added Morgan (which at the time was the only financial I had), I've added other names in the sector. So I now have exposure to the space and don't necessarily need MS. I was quite underwhelmed by MS's quarter and while these two (GS and MS) have eliminated most of their competition this past 18 months - that's more of a long term theme. For now the stock action in Morgan Stanley is uninspiring. So I am going to sell my long position - I've had both a long and short on for a few months, trading from both sides.... instead now, I can play the sector through various other positions long, and still use Morgan as a short from time to time. No that you'd ever want to short anything in the paper printing prosperity era where all assets will be inflated over and above "natural prices".

I'm exiting this last 0.5% stake of Morgan Stanley around $22.20 - taking a 6% loss on this last batch but we've had quite a few good trades for profit since we started the position. There are too many stocks behaving well to have capital wasting away here.

EDIT 11:15 AM - just saw this:
  • Morgan Stanley has had “an exodus of some of our key people,” Chief Executive Officer John Mack said. Some of the employees left for non-U.S. companies, Mack said at the firm’s annual meeting today in Purchase, New York. Mack was responding to a question regarding the effect of compensation restrictions on the firm’s ability to retain workers.
And this backs up our whole thesis on the boutique firms [Apr 8: Bookkeeping: Starting Greenhill & Co]

Short Morgan Stanley in fund; no personal position

Buffalo Wild Wings (BWLD) Results Excellent; Panera Bread (PNRA) Decent

As I proposed in the Monday-Tuesday Earnings Preview

Buffalo Wild Wings (BWLD) - their results last quarter set off 90 days of victory; frankly at this point the casual dining group is so overheated we should start seeing "sell the news reactions" - imperative word being "should".

And in yesterday's update [Bookkeeping: Some Selective Purchases]

Traders continue to pile into restaurants as if they are internet stocks circa 99... Buffalo Wild Wings (BWLD) surging ahead of earnings tonight. Again, we are almost at the point where we will soon see "sell the news" reaction as expectations are beginning to get out of hand in casual dining - not sure how many times the same old stocks can rally on the same "surprise". [Apr 23: America's Hottest Sector - Casual Dining]

We are indeed getting "sell the news" reactions in a sector traders have run up relentlessly. As always Wall Street is a game of expectations - we are seeing many "beats" across the universe as the bar was set extremely low; so pundits in TV land are cheering horrific year over year results that are "beating" analysts. But as a flurry of reports "beat", expectations ratchet up... and by the time you get later into this earnings season the bar is not quite so low... hence my reasoning "sell the news" is going to be an appropriate reaction. Even on a strong day for the market... remember -6.1% GDP is a good thing; green shoots throughout.

Last night both Buffalo Wild Wings (BWLD) and Panera Bread (PNRA) reported; even the former with an excellent result was down 10% after hours as "momo" traders piled in; but this morning is only down 6%... Panera likewise is down 7%. My concern with these guys, is as with many stocks in the market after this big run - valuation. I appear to be the only one as people continue to pile into stocks no matter the price. Buffalo Wild Wings at 26x FORWARD estimates and Panera Bread at 24x FORWARD estimates - thats not out one quarter, but out 3 full quarters on year end 2009. I just can't dig that as much - even with companies executing. The only case for bulls at this point is a massive consumer rebound in Q3, Q4 this year which causes earnings estimates to jump 10-30%... I can't get behind that thought process with unemployment ramping; no matter how cheap Uncle Ben makes money.

But let's take a gander at results from each - again BWLD being the favored son in my eyes (and former fund holding) - I much prefer the younger, high growth story [Feb 23, 2009: Buffalo Wild Wings with Saucy Report] [Aug 11, 2008: Starting Buffalo Wild Wings Position]

BWLD results via AP here and here
  • Bar and chicken wing chain Buffalo Wild Wings Inc. said Wednesday its first-quarter profit jumped 30 percent on strong sales at established locations to top Wall Street expectations. For the quarter ended March 29, net income climbed to $8.5 million, or 47 cents per share, from $6.5 million, or 36 cents per share, a year ago. Revenue jumped 35 percent to $131.6 million from $97.3 million
  • Analysts polled by Thomson Reuters expected profit of 46 cents per share on revenue of $129.1 million.
  • The company said its revenue was helped by the addition of 33 more restaurants than in the prior year's first quarter. Buffalo Wild Wings is one of the few restaurant chains still opening new locations. The slowdown in sales plaguing most chains has led many to drastically cut back on new restaurant openings.
  • Same-store sales, or sales at locations open at least a year, rose 6.4 percent at company-owned restaurants and 6 percent at franchise-owned locations. (that's the key; to have that level of SSS in this environment is frankly - awesome)
  • The company reiterated its profit growth target, which implies earnings of $1.63 to $1.70 per share, up from $1.36 per share in 2008. Analysts polled by Thomson Reuters expect profit of $1.68 per share for the year, slightly above the midpoint of the company's guidance.
But one bad sign... Q2 thus far is trending not quite as well as Q1
  • Buffalo Wild Wings said its second-quarter same-store sales, or sales at locations open at least a year, are up about 1.8 percent at company-owned restaurants and 3.6 percent at franchised restaurants so far in the quarter. The company said a shift in the Easter calendar into April had hurt same-store sales by about 2.5 percent. (I can't buy that Easter sales hurt THAT much - do people really go to a chicken joint for Easter?)
  • "We will, however, have additional expense in the second quarter as a result of this accelerated opening schedule and a shift in stock-based compensation," Chief Executive Sally Smith said in a statement.
So with this valuation, and with a "shift in stock based compensation" if the stock keeps running into next quarter, I could see one of the "results did not meet expectations" type moments in 90 days which gives you that nice 25% haircuts overnight. But between now and late July I expect people to buy dips. Just hard to chase it at this valuation. (for me, but not for the hordes) Full report here. If indeed we get a dip in summer, this will be a good buy for the upcoming football season and strong Q3, Q4 results. Even in the Great Recession people gots to have their football.

Buffalo Wild Wings, Inc., founded in 1982 and headquartered in Minneapolis, Minnesota, is a growing owner, operator and franchisor of restaurants featuring a variety of boldly-flavored, made-to-order menu items including Buffalo-style chicken wings spun in one of 14 signature sauces

On to Panera Bread ... via AP here and here
  • Bakery-cafe chain Panera Bread Co. said Tuesday its first-quarter profit jumped 41 percent to meet Wall Street expectations, helped by rising sales. For the quarter ended March 31, net income rose to $17.4 million, or 57 cents per share, from $12.4 million, or 41 cents per share, a year ago. The result matched the expectations of Wall Street analysts, according to a poll by Thomson Reuters. Revenue climbed 5 percent to $320.7 million from $305 million, topping analysts' average estimate of $317.7 million.
  • Same-store sales, or sales at locations open at least a year, rose 0.7 percent systemwide. (remember, many peers which are flying up 20-30-40% shocking short sellers are reporting same store sales of -5, -6% - so this is still relatively a good result)
  • The company said a promotion in January helped drive breakfast sales during the quarter and offset weakness in its catering division.
  • Panera also reaffirmed its 2009 guidance for profit between $2.55 and $2.71 per share, the midpoint of which matches Wall Street's $2.63 per share average estimate. The company said it expects to earn between 62 cents and 66 cents per share for the quarter versus 52 cents per share in the second quarter last year. Panera also said it expects same-store sales, or sales at locations open at least a year, to be flat to down 1 percent in the period.
Some analyst views via Reuters and AP
  • The company also said Panera restaurants experienced "essentially flat" same-restaurant sales for the first several weeks of the current second quarter.
  • "While 1Q results demonstrate the company's ability to drive predictable earnings growth with multiple levers...., we believe the results are not enough to drive the stock higher in the near term," Thomas Weisel analyst Fitzhugh Taylor said in a Tuesday research note. "As with most restaurant companies, we believe sales and traffic trends at Panera remain the major uncertainty with regard to upside and 2Q will be a challenge."
  • Stifel Nicolaus analyst Steve West said the share decline was likely due to Panera's results being "'just in line' versus a home run ... though I'd say up 40 percent is a home run."
  • Deutsche Bank analyst Jason West said Panera's first-quarter results and outlook met Wall Street's general expectations. "However," he added, "given the recent run-up in the stock, we believe the market was looking for a beat."
  • Jefferies & Co. analyst Jeff Farmer also said that investors expected Panera to beat earnings expectations in the first quarter, after booking a strong performance in 2008. "We think this takes some of the lustre off of the (Panera) story," he said.
This was one interesting take away, although judging by the stocks in commercial real estate you'd be hard pressed to believe anything is wrong...
  • The company added that the weak commercial real estate market had "disrupted several planned openings for fiscal 2009 and placed others at risk." As a result, Panera said it now expects to be at or below the low end of its prior target of 80 to 90 new unit openings in fiscal 2009.
Full report here.
  • In the first quarter of fiscal 2009, the Company generated operating margin improvement of approximately 200 basis points compared to the first quarter of fiscal 2008. This was primarily a result of the year-over-year benefits in wheat costs and franchise dough price increases implemented in fiscal 2008, the Company's continuing category management initiatives, and favorable comparisons against one-time charges in the first quarter of fiscal 2008.
So one must hope food costs which spiked in latter 2007, early 2008 (hence easy comparisons) don't start ramping up again due to money printing throughout the Western world.

Panera Bread Company owns and franchises 1,264 bakery-cafes under the Panera Bread® and Saint Louis Bread Co.® names as of March 31, 2009.

No positions

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