By Larry Gellar
Analysts are starting off 2012 with a variety of downgrades. New trends are forcing Internet giants like Yahoo (YHOO) and Google (GOOG) to rethink their business. In fact, Verizon might also have to make some changes. Meanwhile, BlackRock has had to lay off some employees in an attempt to cut costs. Let’s see what specifically has been happening with these stocks:
Both Sterne Agee and Standpoint Research have downgraded BlackRock (BLK) from Buy to Neutral, and Sterne Agee noted that the stock no longer appears undervalued. In other news, BlackRock will be laying off 15 employees in the EMEA division of its iShares segment. iShares is the company’s set of exchange-traded funds, and laying off workers is crucial for these exchange-traded funds to retain their low costs. In fact, BlackRock is also releasing 59 employees from its San Francisco office. Here’s what a spokeswoman from BlackRock had to say:
We are focusing resources on key priorities while identifying ways to streamline processes and reduce expenses…This has included shifting some personnel, hiring select key talent and in some instances eliminating positions consistent with client needs.
Important competitors for BlackRock include Legg Mason (LM), State Street (STT), and UBS (UBS). Those stocks have lower price/earnings to growth and price to sales ratios, which is consistent with their lower operating margins. As for cash flows, $1.341 billion flowed out during 2010, and $384 million flowed out during the first 3 quarters of 2011. In fact, a big part of last year’s outflows were due to the company’s aggressive stock repurchase program. Dividend investors should note that this stock has a 3% dividend yield.
Benchmark downgraded Google (GOOG) from Buy to Hold since it appears that the company’s business in Europe is slowing down. Further details of that analyst report can be found here, and Google is particularly vulnerable because such a large part of its revenue comes from European advertising. Additionally, problems in Europe could trickle back to America. Many businesses here in the U.S. are starting the year off cautiously before they commit to purchasing a lot of advertising. Other issues Google may have to take care of are slowing growth for YouTube and a situation in which Ad Exchange takes steam away from Google’s main search engine. Also causing trouble for Google are European regulators who are looking into whether the company discriminates against its competitors in its search engine algorithms.
Besides Benchmark, it’s worth noting that Independent Research and Hamburger Sparkasse are two other firms to downgrade Google recently. Compared to Yahoo and AOL (AOL), Google has a very low price/earnings to growth ratio but a very high price to sales ratio. This is in line with most people’s expectations that Google still has a tremendous amount of growth ahead of it. Margins for Google are also very good – those numbers are 65.24% gross and 32.76% operating.
HSBC downgraded United Parcel (UPS) from Overweight to Neutral, noting uncertainty in regards to global growth. On the other hand, The New York Times is reporting that companies like UPS have benefitted greatly from the holiday season. In fact, UPS will continue to benefit as many consumers return their gifts using the company’s shipping service. Says Ken Burkeen, director of retail and consumer goods for UPS: “It doesn’t slow down much after the holidays, despite what some people may think.”
Because UPS deals so much with e-commerce, it hasn’t experienced the type of overall slowdown that other companies like CSX (CSX) are seeing. Indeed, CSX is reporting that a reduced amount of cargo at American ports has hurt the company. On the other hand, UPS has profited from all sorts of trends, including an increasing willingness on the part of online retailers to offer free shipping and returns. UPS’s biggest competitor continues to be FedEx (FDX), and that stock offers lower price to earnings, price/earnings to growth, and price to sales ratios. One reason FedEx is so inexpensive is because the company is only running at an operating margin of 6.95%, nearly half of UPS. Dividend investors should note that UPS is currently offering a 2.80% dividend yield.
Guggenheim is rating Verizon (VZ) at Neutral since growth in average revenue per smartphone user could start to slow down. Regardless, Verizon remains committed to helping out the communities it works in. Says Brendan Fallis, president of the Kansas/Missouri region for Verizon Wireless, “With today's economic climate, we know domestic violence agencies and shelters are hurting and Verizon has stepped up to meet the needs of families that they serve across the St. Louis region.” In fact, Verizon donated $72,750 to St. Louis nonprofit agencies in 2011.
Meanwhile, investors are carefully analyzing remarks from Verizon CFO Fran Shammo from a recent Citigroup conference. Shammo said that Verizon sold over 4.2 million Apple (AAPL) iPhones last quarter. That represents tremendous growth over the third quarter, but it is worth noting that smartphone sales do cut into the company’s margins a bit. Regardless, William Power from Robert W. Baird responded by confirmed his Outperform rating on the stock. Compared to fellow telecom giant AT&T (T), Verizon has lower price/earnings to growth and price to sales ratios. Verizon also boasts the better margins – those numbers are 61.14% gross and 22.35% operating. Finally, options investors may want to take a look at this article – it suggests that current conditions make now a perfect time for a collar position.
Jefferies downgraded Yahoo from Buy to Hold due to questions about the new CEO’s ability to turn around the company. (Here's one interesting article about Scott Thompson.) With Thompson focusing on getting to know the company’s VPs, it remains to be seen how Yahoo will handle the variety of issues it is confronted by. For example, many Yahoo shareholders are hoping that the company will sell its Asian assets. There’s also the question of a capital infusion from private equity firms. Meanwhile, here’s what one Yahoo VP had to say about Scott Thompson so far: “He’s not the game-changer, but he seems very competent. We’ll see.”
As former president of PayPal -- owned by eBay (EBAY) -- Thompson could be a breath of fresh air for Yahoo. For instance, Yahoo has a 40% stake in Alibaba, which owns AliPay – so if Thompson can improve AliPay, Yahoo’s stock price should benefit accordingly. Analysts are also speculating that Thompson can improve Yahoo’s Right Media segment, which focuses on online advertising. As for value metrics, Yahoo has a lower price to earnings ratio than both AOL and Google, partly because the company’s quarterly revenue growth is -24% year over year.