Q3 2009 Earnings Call

November 05, 2009 11:30 am ET

• Fed stays put. The Fed Open Market Committee left target rates unchanged at 0-0.25% by unanimous vote, saying conditions are still "likely to warrant exceptionally low levels of the federal funds rate for an extended period." The Fed acknowledged an ongoing pickup in economic activity, but warned things are likely to remain weak for a while. It noted "substantial" resource slack will continue to dampen cost pressures, and it continues to believe "inflation will remain subdued for some time." It also pared its expectations for buying agency debt and agency MBS to $175B compared to a former maximum of $200B, to wrap up by the end of Q1. Here's a side-by-side comparison of Wednesday's statement with the previous one. Stocks surged after the statement, but a late-day selloff sent major indexes back to breakeven.
Attention Wall Street Breakfast readers: We're looking for a freelance financial journalist to produce WSB and help with our Market Currents blog in Rachael's absence. More details here.
• Dodd's drastic detour on bank regulation. Senate Banking Committee Chairman Christopher Dodd is reportedly readying legislation that would strip the Fed and FDIC of almost all their bank-supervision powers, creating in their place a new agency in charge of supervising all banks and bank-holding companies. Dodd's proposal would also create a council of regulators, overseen by the White House, to monitor systemic risks to the financial system. The suggestion is in stark contrast to approaches taken by the House and favored by the Obama administration, which have pushed to expand the Fed's powers. Dodd's model is likely to face heavy resistance, particularly from the banking industry, which is ironic since Dodd has been criticized for being too cozy with Wall Street bankers.
• Skype deal almost done. The private-equity investors that agreed to buy 65% of Skype from eBay (EBAY) for about $2.1B are on the verge of settling their dispute with Skype's founders in a deal that will give them 10% of Skype and a presence on its board, in exchange for giving up rights to the peer-to-peer technology they control and a significant amount of cash. An official announcement could come as soon as this morning.
• Senate shuffles taxes. The Senate passed legislation Wednesday that would give tax breaks to big companies impacted by the recession; increase taxes on multinational firms; extend and expand the homebuyers tax credit; and lengthen unemployment benefits. The proposed tax increases are aimed at offsetting the cost of the breaks, which business leaders worry may be a harbinger of more tax increases to come.
• Chambers sounds all clear. Cisco's (CSCO) net profit dropped 19% on lower sales (see data below), but CEO John Chambers gave an optimistic outlook on the economy and said businesses were ready to resume spending on technology. On Cisco's Q3 earnings call, Chambers told analysts the recovery "is well underway" and that economic improvements were "gaining momentum" worldwide. He also predicted Cisco's revenue would grow in Q4 after a year of contraction.
• Junk default rate hits post-Depression high. The global speculative-grade default rate rose to 12.4% in October, surpassing the record set in 1991 for the highest proportion of defaults since the Great Depression, Moody's said in a report this morning. Moody's believes the default rate may peak in November at 12.5%, noting the total number of defaults declined to eight in October, the lowest count this year.
• Big bonuses are back. Wall Street incentive pay is set to rise by about 40% according to a closely-watched survey to be released today, as stronger markets collide with the backlash over bonuses. Johnson Associates predicts incentive-based payouts will surge by as much as 60% from 2008, led by employees in rebounding businesses like fixed income and equities. In contrast, the firm predicts declines of 15-30% at hedge funds, private-equity firms and prime-brokerage operations which have seen a marked drop in AUM.
• Consumer bankruptcy strikes new high. Consumer bankruptcy filings hit 135,913 in October, an 8.9% jump from September, and 27.9% higher than a year ago, according to a study by the American Bankruptcy Institute. "The debt overhang from literally a decade or more of really high consumer spending and low savings rates has put families in a particularly vulnerable spot," ABI's Samuel Gerdano said. The rise outpaced a 7% month-on-month increase in business filings.
• Downgrade dominance declines. S&P said it downgraded only one more nonfinancial firm in October than it upgraded (24-23), a marked improvement considering the downgrade/upgrade ratio from Sept. 2008 to Aug. 2009 was 835-115. S&P said the large drop "supports our belief that aggregate credit quality, although weak, is stabilizing," and noted that the number of companies with a negative ratings outlook or on watch for downgrade has declined steadily. Meanwhile, more than $4B in new corporate bonds were offered Wednesday, including a $2B sale by DuPont (DD).
• BOE boosts bond buying: The Bank of England kept its target bank rate at 0.5%, as expected, but raised its bond buying program to £200B from £175B, which it expects to complete in about three months. "Banks’ funding conditions have improved, though financial conditions remain fragile," the Bank said, and noted "a number of indicators of spending and confidence, however, suggest that a pickup in economic activity may soon be evident."
• Private-sector jobs still sliding. ADP's October employment report showed private U.S. payrolls declined by 203,000, while revising September's loss to 227K from 254K - the seventh straight month of declining job losses. ADP's report comes two days before the government's official nonfarm payroll data, and has been reasonably well correlated with NFP data in recent months. Consensus estimates suggest 150–175K job losses in October and an unemployment rate of 9.9%.
• Online job seeking rises slowly. Monster's index of online job advertising inched up to 120, vs. 119 in Sept and 150 a year ago. Healthcare and public administration demonstrated solid growth, but retail and hospitality hiring retracted. "The rise in the October Index, along with an improvement in the annual rate, indicate a mild expansion in the underlying employer demand for workers," Monster said. "While the decline in consumer confidence has likely contributed to reduced job demand in the retail and hospitality sectors, employers are actively recruiting in the healthcare and public sectors, resulting in stability of the overall Index."

Earnings: Thur. Before Open

• Allied Capital (ALD): Q3 EPS of $0.02 misses by $0.05. Revenue of $M in-line. Shares -1.3% premarket. (PR)
• Biovail (BVF): Q3 EPS of $0.44 beats by $0.04. Revenue of $212M in-line. (PR)
• Cardinal Health (CAH): FQ1 EPS of $0.54 beats by $0.11. Revenue of $24.8B (+5.9%) vs. $24B. (PR)
• Canadian Natural Resource (CNQ): Q3 EPS of C$1.21 misses by C$0.04. Revenue of C$2.82B (+2.7%) vs. C$2.99B. (PR)
• CenturyTel (CTL): Q3 EPS of $0.90 beats by $0.09. Revenue of $1.87B (+188.3%) in-line. (PR)
• CIGNA (CI): Q3 EPS of $1.13 beats by $0.10. Revenue of $4.52B (-6.9%) in-line. (PR)
• CVS Caremark (CVS): Q3 EPS of $0.65 beats by $0.01. Revenue of $24.6B (+17.7%) in-line. Shares +1% premarket. (PR)
• Delta Petroleum (DPTR): Q3 EPS of -$0.35 misses by $0.24. Revenue of $23.9M (-66.8%) vs. $21.9M. "We are extremely disappointed with the results of the Gray well, but exploration drilling carries with it significant risks." Shares -12.8% premarket. (PR)
• DirecTV Group (DTV): Q3 EPS of $0.37 misses by $0.02. Revenue of $5.47B in-line. (PR)
• Dr Pepper Snapple (DPN): Q3 EPS of $0.54 beats by $0.05. Revenue of $1.43B (-4%) in-line. Sees full-year EPS of $1.92-1.96 vs. $1.97. ""While the economy is showing some signs of recovery, it's still too early to see this translate into higher beverage sales. For the quarter, liquid refreshment beverage trends remained negative." Shares +0.7% premarket. (PR)
• Dynegy (DYN): Q3 EPS of -$0.10 misses by $0.13. Revenue of $673M (-61.7%) vs. $877M. (PR)
• Frontier Oil (FTO): Q3 EPS of -$0.26 misses by $0.11. Revenue of $1.1B (-45.4%) in-line. (PR)
• King Pharmaceuticals (KG): Q3 EPS of $0.29 beats by $0.02. Revenue of $463M (+19.3%) vs. $445M. (PR)
• Lamar Advertising (LAMR): Q3 EPS of -$0.05 beats by $0.11. Revenue of $167M (-13%) vs. $164M. (PR)
• Macerich (MAC): Q3 FFO of $0.97 beats by $0.05. Revenue of $201M (+49.8%) in-line. (PR)
• Manulife Financial (MFC): Q3 EPS of C-$0.12 misses by C$0.32. Revenue of C$13.75B. (PR)
• MGM Mirage (MGM): Q3 EPS of $0.02 beats by $0.10. Revenue of $1.71B (-12.7%) vs. $1.47B. Las Vegas Strip RevPAR fell 21%. Amends credit facility to refinance existing debt and provide more debt of up to $1B. Shares +5.7% premarket. (PR)
• MetroPCS Communications (PCS): Q3 EPS of $0.21 beats by $0.12. Revenue of $895M (+30.4%) vs. $869M. (PR)
• MF Global (MF): FQ2 EPS of $0.01 misses by $0.03. Revenue of $493M (-40.9%) vs. $273M. (PR)
• Nasdaq (NDAQ): Q3 EPS of $0.42 in-line. Revenue of $691M (+3.3%) vs. $355M. (PR)
• Petrohawk Energy (HK): Q3 EPS of $0.14 beats by $0.02. Revenue of $238M (-22%) vs. $305M. (PR)
• Plains Exploration & Production (PXP): Q3 EPS of $0.30 misses by $0.23. Revenue of $313M (-56.5%) vs. $376M. Shares -0.6% premarket. (PR)
• Sara Lee (SLE): FQ1 EPS of $0.24 beats by $0.08. Revenue of $2.59B (-7.4%) vs. $3.16B. Shares +0.2% premarket. (PR)
• Sirius XM Radio (SIRI): Q3 EPS of $0.00 beats by $0.02. Revenue of $630M (+2.8%) vs. $609M. Ends quarter with 18,515,730 subscribers, +102,295 from Q2. Shares +3.9% premarket. (PR)
• Spectra Energy (SE): Q3 EPS of $0.30 beats by $0.04. Revenue of $933M (-13.6%) vs. $986M. (PR)
• Teradata (TDC): Q3 EPS of $0.38 beats by $0.09. Revenue of $425M (-3.2%) in-line. (PR)
• Thomson Reuters (TRI): Q3 EPS of $0.43 beats by $0.03. Revenue of $3.21B (-3.6%) in-line. "While the weak year-to-date net sales experienced in recent quarters are now flowing through into revenues, we expect this dip to be shallow and limited to the next few quarters." (PR)
• Time Warner Cable (TWC): Q3 EPS of $0.76 beats by $0.01. Revenue of $4.5B (+3.6%) in-line. (PR)
• Watson Wyatt (WW): FQ1 EPS of $0.84 beats by $0.12. Revenue of $401M (-5.8%) vs. $394M. Sees FQ2 EPS of $0.81-0.86 vs. $0.89 (PR)
• Wendy's Arby's Group (WEN): Q3 EPS of $0.06 in-line. Revenue of $903M vs. $916M. Shares +3.8% premarket. (PR)

Earnings: Wed. After Close

• Allstate (ALL): Q3 EPS of $0.99 misses by $0.02. Revenue of $7.6B (+4%) vs. $8.5B. Shares -2.1% AH. (8-K)
• Amdocs (DOX): FQ4 EPS of $0.53 beats by $0.04. Revenue of $707M (-14%) vs. $679M. Sees Q1 EPS of $0.51-0.55 vs. $0.50, on revenue of $705M-725M vs. $676M. Shares +6.2% AH. (PR)
• Cisco Systems (CSCO): Q3 EPS of $0.36 beats by $0.05. Revenue of $9B (-13%) vs. $8.7B. Shares +2.8% AH. (PR)
• Corrections Corp. of America (CXW): Q3 EPS of $0.39 beats by $0.07. Revenue of $426M (+6%) vs. $423M. Shares -2.7% AH. (PR)
• Eagle Bulk Shipping (EGLE): Q3 EPS of $0.06 beats by $0.03. Revenue of $42M (-19%) in-line. Shares -5.7% AH. (PR)
• Evergreen Solar (ESLR): Q3 EPS of -$0.40 misses by $0.32. Revenue of $78M (+251%) vs. $74M. Shares +2.1% AH. (PR)
• Goldcorp (GG): Q3 EPS of $0.19 beats by $0.03. Revenue of $692M (+25%) vs. $614M. Shares +2.1% AH. (PR)
• Goodrich Petroleum (GDP): Q3 EPS of -$0.87 misses by $0.70. Revenue of $24M (-61%) vs. $52M. Shares -7% AH. (PR)
• Health Care REIT (HCN): Q3 FFO (normalized) of $0.77 in-line. Revenue of $145M (+4%) vs. $143M. Sees full-year EPS of $3.10-3.12 vs. $3.13. Shares +1.6% AH. (PR)
• ION Geophysical (IO): Q3 EPS of -$0.06 misses by $0.03. Revenue of $102.4M (-53%) vs. $102.6M. Shares -8.4% AH. (PR)
• Microchip Technology (MCHP): FQ2 EPS of $0.29 beats by $0.08. Revenue of $227M (-16%) vs. $218M. Sees FQ3 EPS of $0.33-0.35 vs. $0.24, on revenue of $236M-245M vs. $224M. Shares +1.6% AH. (PR)
• Murphy Oil (MUR): Q3 EPS of $0.98 misses by $0.01. Revenue of $5.2B (-37%) vs. $4.4B. Sees Q4 EPS of $0.75-0.90 vs. $1.18. Shares -2% AH. (PR)
• News Corp. (NWS): FQ1 EPS of $0.22 beats by $0.04. Revenue of $7.2B (-4%) in-line. Shares +3% AH. (PR)
• ON Semiconductor (ONNN): Q3 EPS of $0.16 beats by $0.06. Revenue of $473M (-19%) vs. $455M. Shares +4% AH. (PR)
• Prudential Financial (PRU): Q3 EPS of $1.59 beats by $0.26. Revenue of $6.6B (+4%) vs. $6.65B. Shares +0.4% AH. (PR)
• Qualcomm (QCOM): FQ4 EPS of $0.48 misses by $0.04. Revenue of $2.7B (-19%) vs. $2.8B. Sees Q1 revenue of $2.55B-2.75B vs. $2.84B. Shares +1% AH. (PR)
• Sunstone Hotel Investors (SHO): Q3 FFO of $0.14 in-line. Revenue of $176M (-20%) vs. $180M. Shares +2% AH. (PR)
• THQ (THQI): FQ2 EPS of -$0.08 beats by $0.40. Revenue of $101M (-39%) vs. $92M. Shares +11.5% AH. (PR)
• Whole Foods Market (WFMI): FQ4 EPS of $0.20 beats by $0.02. Revenue of $1.8B (-2%) in-line. Same-store sales down 0.9%. Shares -7.7% AH. (PR)

Today's Markets

Asian markets were mixed Thursday. Europe is lower at midday, and futures are flat.

It seems it has been some time since I updated the performance of Standard & Poor's Dividend Aristocrats. Year to date through November 4, 2009, the Aristocrats have generated a better return than the Dow Jones Industrial Index, 12.2% versus 11.7%, respectively. However, the Aristocrats performance has trailed the return on the S & P 500 Index's return of 15.9%.

In the below table, I have shaded the rows for those companies that have cut their dividend this year.

Adding a degree of risk to your income portfolio can not only keep things interesting, but potentially boost your returns. Obviously, this needs to be kept in check because many (most?) risky investments never pan out. So instead of a boost in return, the risky investments end up being a drag on your portfolio’s return.

I am a firm believer in keeping things simple. However, you can simplify things to the point they no longer have value. In my opinion, a lot of the commonly used financial metrics can be very misleading unless you understand what is behind them. I would put EBIT, EBITDA and Dividend Payout in this category. As an investor in dividend stocks, I see Dividend Payout used a lot, so let’s take a closer look at it.

Most companies use debt for a variety of reasons in their operations. It could be either short term or long-term obligations. If there’s anything the 2007-2009 financial crisis has taught us, it is that excessively leveraged companies could easily blow up after a chain of negative events. Thus it pays to know what the debt situation for a particular company you are investing in actually is.

Some investors typically focus on debt to total assets to gain a perspective on the amount of the leverage the company has. While this method is widely accepted by some investors, I believe that it has some shortcomings, which might prevent investors from seeing the bigger picture. Most importantly comparing debt to total assets does not tell whether a company could service its debt obligations or not.

Excerpt from Raymond James strategist Jeffrey Saut's latest essay, published Monday October 5th):

By Hao Jin

One of the most popular ways for investors to select stocks is to focus on companies with long track records of increasing dividends. On Feb 27, 2009, General Electric (GE), once the most prominent dividend aristocrat, cut its dividend 68%, the first time since 1938.

One of the most popular ways for investors to select stocks is to focus on companies with long track records of increasing dividends. On Feb 27, 2009, General Electric (GE), once the most prominent dividend aristocrat, cut its dividend 68%, the first time since 1938. Who might be next?

I examined four types of high dividend stocks. Please note all these companies have great balance sheets, greater than 3.5% yield, low P/Es, and low short ratios.

It is not unusual after I publish a list of stocks to get a comment or two asking why those stocks and not these stocks. Often the real thrust of the question is why buy those low yield stocks when you can buy these high yield stocks. The answer involves risk and its management.

The actual private object of most skilled investment today is to ‘beat the gun.’ As Americans so well express it, to outwit the crowd and to pass the bad, or depreciating halfcrown, to the other. For it is, so to speak, a game of Snap, of Old Maid, of Musical Chairs – a pastime in which he is the victor who plays ‘snap’ neither too soon nor too late, who passes the old maid to his neighbor before the game is over, who secures a chair for himself when the music stops. Or to change the metaphor slightly, professional investment may be likened to those newspaper competitors in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors, as a whole; so that each competitor has to pick not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. We have reached the third degree where we devote our intelligences to anticipating what the average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.

Bet it surprises you that the aforementioned quote is from John Maynard Keynes’ legendary book “The General Theory of Employment, Interest, and Money,” written back in 1935. Read it a couple of times away from the maddening crowd, and reflect on it, because certain phrases will grab you with their wisdom. Bet you it also brings back memories of last year’s market machinations, and a wish that – if I had only “beat the gun,” or passed the “old maid” in time to avoid the final “snap.”

Bullish Calls:

Tenet Healthcare (TNH): "I think the hospitals are in the sweet spot they are the winners under Obama. They are a protected class."

As summer turns to fall and the heat begins to moderate, winter and its freezing temperatures are just around the corner. However, some companies have been frozen in place for the last year; more specifically, their dividends have been frozen at the same rate for more than a year.

In the southern U.S. where I live, there has been some controversy over harvesting forests of hardwoods and reseeding them with pines. Valuable hardwood trees such as white and red oaks, cherry, ash, yellow poplar and black walnut require decades to reach financial maturity. The southern pine reaches financial maturity in a fraction of the time, but will not yield the same price as hardwoods. Growing hardwoods is very similar to investing in dividend stocks.

September is just another month

September has come and the end of the world (or the end of the market rally, which to our readership would probably be one and the same) seems a little tardy. Alternatively, it has already started, and the sell-side just hasn’t paid attention as they continue to worry less about the end of the current market rally and more about how their kids settled in on the first day of school.

There is a ton of good information in this quarterly report (link to PDF here, or in full at the bottom of this post). Goldman looks at 687 funds with $500 billion in long stock positions. Similar to a lot of what we do on AlphaClone.

They examine a few strategies that historically outperform the S&P 500. The first is a strategy of buying the 20 most concentrated stocks (defined as hedge funds owning X% of the company). This has beaten the market by 14% a year since 2001. The 20 current stocks are:

The one hundred components of the Dow Jones U.S. Select Dividend Index are “selected to the index by dividend yield, subject to screens for dividend-per-share growth rate, dividend payout ratio and average daily dollar trading volume. Components are weighted by indicated annual dividend.” As of July 31, 2009 the total return for the index was -4.03% and the yield is 4.39%. Utilities account for one fourth of the index. The following is a brief overview of the top ten stocks from this index:

1. CenturyTel Inc (CTL) is a telecom provider with operations in rural and mid-size markets in 25 states. The majority of its business are in Missouri, Wisconsin, Alabama, Arkansas and Washington. The current dividend yield is 9.02% and the market cap is $9.2B. Last year the company had $2.6B in revenues.

Excerpt from Raymond James strategist Jeffrey Saut's latest essay, published Monday (August 10th):

...[F]or months we have opined that if a Dow Theory “Buy Signal” was eventually registered that so much energy would have been expended in achieving it the major market averages would likely be a “sell” on the event. And here we are, a Dow Theory “Buy Signal” has finally been registered and by our pencil so much energy has indeed been used to accomplish it we think the equity markets are a short-term “sell.”

Q2 2009 Earnings Call

August 6, 2009 11:30 am ET