How confident are you in the stock market and where is it heading next? This is a question that I pose to myself every day as I turn on my computer. The first thing that I try to do is to sort out events from the previous day and from them try to derive some meaning that can possibly offer an investment or trading edge. Sometimes it works out perfectly, and other times -- well, it's a complete disaster.
But there's always an important lesson learned throughout the entire experience - one that often proves invaluable and transcends any market. On Thursday, the key point to ponder was just how resilient the stock market continues to be. I have to be honest and say that I did not think that the momentum will continue for as long as it had.
Wall Street just seems to keep pushing stocks higher and higher, as it appears that investors are placing large bets that company profits will continue to rise aided by an improving economy and jobless rate. I have to say, I think this is a pretty safe bet to make at this point, since the number of people receiving benefits under regular state programs fell 52,000 to 3.39 million in the week ended February 1, a bigger drop than economists had expected. This suggests to me that corporate hiring has returned and it's hard not to be optimistic. But I continue to grapple with the question, how high can the stock market truly go in the near term?
I wonder because it appears that the Dow is having a hard time holing 13,000. In order for it to hold, it's going to need more earnings from some of the giants on the market to inspire more confidence that value still remain. A few of these names have reported this week with "mixed" reactions.
The company reported Q4 earnings that drew little to no applause from Wall Street as it fell short of estimates. It seems that although the company did show considerably better numbers from its corporate business unit, that solid performance was offset by weakness in the division that caters to public businesses. Net income for the quarter fell 18%, to $764 million, or 43 cents a share, compared with $927 million, or 48 cents a share, in the year-ago period. Excluding one-time items, it earned 51 cents a share, 1 cent short of the 52 cents analysts were expecting. Revenue rose 2%, to $16 billion, in line with the average analyst estimate of $15.96 billion.
Dell's large-enterprise business held up well, increasing sales 5% in the quarter, to $4.9 billion, as corporations continued to upgrade aging hardware. Dell's gross margin rose to 21.1%, from 20% a year earlier. The company's CFO, Brian T. Gladden, said profit margins for the quarter were hurt by a combination of weakness in public spending in the United States, discounting of the leftover inventory of its previous generation phones and the lingering impact of the Thailand flood on its product mix - the same issue that impacted Microsoft (NASDAQ:MSFT) one month ago that prompted me to warn investors that Dell would also suffer as a result as well as its chief rival Hewlett Packard as a result of the flood.
As far as the stock is concerned, the company is trading at 9 times 2011 earnings. In addition, it is sitting on over $8 per share in cash. Since it generates pretty much as much capital as it needs, it is fair to say that its stock might just trade for less than 9 times earnings. This makes the stock a buy but with "considerable" amounts of patience.
On Wednesday, the company reported net income of $1.47 billion, or 73 cents per share, in the three months that ended January 31. This didn't compare too well with its net income of $2.6 billion or $1.17 per share in the year ago period. Adjusted for one-time items, the company earned 92 cents per share, above the 87 cents expected by analysts surveyed by FactSet. Revenue was $30 billion, down from $32.3 billion and slightly below expectations of $30.7 billion.
The revenue drop was even steeper, 8 percent, when taking out the effect of changes in currency exchange rates. It was the fastest revenue decline for the company since the recession hit 2009 results. As with Dell and Microsoft, HP blamed flooding in Thailand for more than half of its revenue drop. The floods last year disrupted manufacturing of storage drives, a key component in PCs. HP said it decided to divert resources to higher-margin products, but it didn't do as well as it expected due to ongoing operational problems.
I continue to remain bullish on the company and think that there is yet 20 percent upside to be had for value investors. The company is taking a new strategic direction - one that I think makes perfect sense. But investors must not make the mistake of expecting an immediate turnaround. This is going to take some time to realize. As bad as things once looked for this company with its indecision regarding its PCs and tablet initiatives, investors should be comfortable in its new leadership yet appreciate that the old HP might be coming back.
Wal-Mart Stores (NYSE:WMT)
Retail giant Wal-Mart reported Fourth quarter earnings on Wednesday for the period ending January 31. The company's numbers came in line with analysts' expectations on revenues. However it missed on the all important earnings per share. On a quarter-over-quarter basis, revenue increased and GAAP earnings per share dropped. Wal-Mart booked revenue of $122.29 billion. The 16 analysts polled by S&P Capital IQ predicted sales of $123.66 billion on the same basis. GAAP reported sales were 5.9% higher than the prior-year quarter's $116.36 billion.
For the quarter, gross margin was 24.8%, - 30 basis points lower on sequential basis. Operating margin was 6.8%, a decrease of 10 basis points sequentially while net margin arrive at 4.2%, 100 basis points worse than the prior-year quarter. Overall, it was a decent quarter I would say with all things considered. However, with the news that gas prices are on the rise, I suspect that the company will soon see more foot traffic in its stores to make up for the EPS miss in the following quarter.
Any time discretionary spending becomes a concern, it often bodes well for retailers that focus on consumer staples, such as Wal-Mart. The company stands to benefit even more so by being a one-stop-shop of sorts for consumers who want to shop for groceries, get their car serviced and possibly buy some well needed hardware or home furnishings. With any potential increase in gas prices, consumers will want to limit their driving and visit Wal-Mart for all of the services it is able to provide in one visit.
Home Depot (NYSE:HD)
The No. 1 home improvement chain Home Depot, reported earnings on Tuesday and Wall Street still has not stopped applauding. The retail giant has enjoyed double-digit EPS growth for nine straight quarters, helped by a renewed focus on customer service. In the recent quarter Home Depot earned 50 cents a share, up 39% on an annual basis and eight cents per share higher than Wall Street forecasts. Revenue rose 6% to $16.01 billion, also ahead of views. Same-store sales rose 5.7%, with a 6.1% gain in the U.S.
Despite Home Depot's successful quarter, and even though there are modest signs of recovery, housing is still in trouble. Housing prices still have not fully recovered in most parts of the U.S. and housing starts remain somewhat depressed. While Home Depot is clearly benefiting from existing home improvement, a strong housing market is a significant tailwind for the company - the same concerns that will impact its chief rival, Lowe's (NYSE:LOW).
Investors should continue to monitor both of these companies, as they are often excellent gauges of where consumer sentiment is regarding the housing market. As we led with earlier, consumer confidence will always play a significant role in the success of retailers like Home Depot and Wal-Mart. But as we have seen recently, there can't be much confidence on Wall Street without a lot of earnings. Evidently, for Home Depot, they are well stocked in that area.
Disclosure: I am long MSFT, WMT, HPQ.