Q3 2009 Earnings Call

October 29, 2009 08:00 AM ET

Dun & Bradstreet (DNB) is a provider of business information with a history dating back over 165 years. Today's company has 3 business segments. Risk Management, driving about 64% of sales, provides reports and other information products that allow companies to determine creditworthiness of potential customers. This unit may best be thought of as a Moody's (MCO) or S&P (MHP) rating agency for private companies... In fact Moody's was spun off from the "old" Dun & Bradstreet in 2000.

The second business unit is Supply, Sales, and Marketing (28% of sales), which provides information to help customers identify market segments, profile potential customers, build mailing lists, and evaluate current and potential suppliers. The third and final segment is Internet Solutions, consisting mainly of Hoover's, which has basic information on thousands of public and private companies, and AllBusiness.com, a resource and advice portal for business managers.

This is the second quarter 2009 edition of our ongoing hedge fund portfolio tracking series. Before reading this update, make sure you check out our series preface on hedge fund 13F filings.

It's been a week or two since we last checked in on 13F filings and our apologies for those of you anxiously awaiting the next installment. Unfortunately, there has been such a slew of 13D and 13G filings from various funds we track that we have been swamped. However, we are here again to cover a few more funds via 13F to give you an entire portfolio snapshot of their long U.S. equity positions. The last manager we covered in our 13F analysis was Bret Barakett and Tremblant Capital Group. This time around, we'll kick it back off with Chris Shumway's hedge fund, Shumway Capital Partners.

The second edition of Fitch Ratings’ annual ‘Credit Encyclo-Media‘ report makes for some grim reading.

As was the case last year, The Interpublic Group (IPG) is only rated issuer with a “Positive” outlook . All other companies are either Stable or Negative:

In recent weeks we have written several blogs (S&P 500 sector stock watch, Attractive stocks under $35, with potential investment opportunities, Solid S&P Value Companies, Cheapest Stocks In the S&P 500), discussing investment opportunities within the S&P 500. These stocks ideas all had favorable scores under The Applied Finance Group's (AFG’s) investment criteria, which includes economic performance, valuation, earnings quality and management’s ability to create shareholder wealth, among other criteria.

Another way that AFG identifies potentially attractive investments is through the use of its Value Expectations interface, which helps investors get a better understanding of the expectations embedded into stock prices. This interface allows us to understand the Sales Growth, EBITDA Margin, and Asset Turnover a company has to deliver in the future to justify its current trading price. In theory and in normal circumstances, if the imbedded future performance is very conservative relative to the company’s historical performance, the stock is regarded as undervalued. The table below displays the implied future Sales Growth (“Priced-in Sales Growth) of the companies we have recently recommended in our recent blogs, assuming their EBITDA Margins and Asset Turnovers stay at 5-year median levels.

Q2 2009 Earnings Call

July 31, 2009 10:00 am ET

• Bank bonus bonanza. The bonuses paid out to executives at nine banks that received government bailouts exceeded the net income of some of the banks, according to New York Attorney General Andrew Cuomo, substantially so at Goldman Sachs (GS), Morgan Stanley (MS) and JPMorgan Chase (JPM). Cuomo said employee pay "has become unmoored from the banks' financial performance," and that there is "no clear rhyme or reason to the way banks compensate and reward their employees." Even during what was arguably one of Wall Street's worst years in memory, nearly 5,000 bankers and traders received a bonus above $1M. (Read Cuomo's report (.pdf))
• Uncertain future for bank pay bill. Following the release of Cuomo's damning bonus report (see above), the House of Representatives will likely approve a bill requiring regulators to ban compensation practices that encourage 'inappropriate risks.' The Senate, however, and the White House are less enthusiastic about the measure, concerned it may give regulators too great a say on incentive pay.
• Cash for clunkers grinds to a halt. The government has suspended its 'cash for clunkers' program just six days after it started. Meant to encourage new car purchases, the $1B program turned out to be far more popular than expected and has already run through its entire budget, blowing away lawmakers' estimates that the funds would last until November. Lawmakers are pushing for additional funding to help meet the program's larger-than-expected demand.
• Ford stalls Volvo bidding. Ford has reportedly slowed down the bidding process for Volvo in an attempt to secure a better price for the unit. Ford apparently plans to wait until the sale of General Motors' Opel unit is complete, and will then invite the losing bidder to make a bid for Volvo, so nothing is likely to happen for another three to four weeks.
• Troubled banks protest. Regulators have escalated the number of banks put on probation with so-called memorandums of understanding. At least 285 banks have received memorandums so far this year, compared to 399 for all of last year. Some of the targeted banks are complaining that the regulators are being too harsh, since the memorandums of understanding can force banks to increase their capital, overhaul management or take other major steps, but regulators say a tougher stance now could prevent failure later on.
• Southwest wants to reach new frontiers. Southwest Airlines (LUV) unexpectedly bid $113.6M in a bankruptcy-court auction for smaller carrier Frontier Airline Holdings, potentially setting the stage for a bidding war with Republic Airways Holdings, a holding company for three regional airlines which bid $108.75M. If Southwest is successful, it will boost its presence in the highly-competitive Denver market and give the airline its first international destinations, but will also raise questions about Southwest's ability to stick to its low-cost business model.
• Pre, iPhone probe to focus on skipped markets. A probe into wireless phone contracts will focus on markets where Apple's (AAPL) iPhone and Palm's (PALM) Pre are unavailable, with Julius Genachowski, the chairman of the Federal Communications Commission, asking whether such lack of availability is "consistent with broad consumer interests." The FCC will also investigate whether competition is hindered by exclusive agreements between phone makers and service providers.
• No magic for Disney. Disney (DIS) failed to impress when it reported quarterly earnings yesterday (see details below), missing revenue expectations and narrowly beating earnings expectations on heavy cost-cutting. CEO Bob Iger told analysts that the company sees "signs of economic stabilization, but the pace and strength of the recovery remain uncertain." (Read Disney's earnings call transcript)
• Delphi set to exit Ch. 11. Delphi won court approval to sell its assets to lenders and General Motors. The auto-parts supplier is now set to exit bankruptcy protection after nearly four years.
• Jobless claims rise. Initial Jobless Claims came in at 584K, up 25K from a week ago (revised), and worse than the 575K consensus. Continuing claims fell 54K to 6.197M.

Earnings: Friday Before Open

• American Electric Power Company (AEP): Q2 EPS of $0.68 beats by $0.07. Revenue of $3.2B (-8.6%) vs. $3.63B. (PR)
• Anglo American (AAUK): H1 net profit of $2.97B (-30.6%), well outpacing consensus of $859M. Revenue of $11.13B vs. $17.92B a year ago. Says it "expects demand to remain soft in the near term until developed countries begin economic recovery." (DJ)
• AutoNation (AN): Q2 EPS of $0.29 beats by $0.05. Revenue of $2.61B (-28.8%) vs. $2.8B. "Having weathered the storm, AutoNation remains in an excellent position to capitalize on dealer consolidation and the gradual recovery in industry volumes." (PR)
• Calpine (CPN): Q2 EPS of -$0.16 vs. consensus of +$0.18. Revenue of $1.47B (-48%) vs. $1.72B. (PR)
• Constellation Energy Group (CEG): Q2 EPS of $1.08 beats by $0.32. Revenue of $3.86B (-18.8%) vs. $3.57B. Sees full-year EPS of $3.10-3.30 vs. $3.01 consensus. (PR)
• ITT Industries (ITT): Q2 EPS of $1.06 beats by $0.26. Revenue of $2.78B (-9.3%) in-line. Sees full-year EPS of $3.50-3.70 vs. $3.44 consensus. (PR)
• Snap-On (SNA): Q2 EPS of $0.65 beats by $0.07. Revenue of $590M (-23%) in-line. (PR)
• Total (TOT): Q2 net profit of €2.17B, less than half of €4.73B last year. Adjusted profit of €1.72B (-54%), in line with consensus. Sales of €31.43B (-35%). European refining margins narrowed 69% from a year ago. (DJ)

Earnings: Thursday After Close

• ARIAD Pharmaceuticals (ARIA): Q2 EPS of -$0.24 beats by $0.01. Licensing and collaboration revenue of $2.1M. (PR)
• Ariba (ARBA): FQ3 EPS of $0.17 beats by $0.01. Revenue of $84M (-1%) in-line. (PR)
• Arris Group (ARRS): Q2 EPS of $0.27 beats by $0.05. Revenue of $279M (-1%) vs. $281M. (PR)
• BioMarin Pharmaceutical (BMRN): Q2 EPS of $0.09 beats by $0.10. Revenue of $83M (+29%) vs. $78M. (PR)
• Camden Property Trust (CPT): Q2 FFO of $0.78 beats by $0.03. Revenue of $157M (+1%) vs. $141M. (PR)
• Community Health Systems (CYH): Q2 EPS of $0.66 beats by $0.06. Revenue of $3B (+13%) in-line. (PR)
• Disney (DIS): FQ3 EPS of $0.52 beats by $0.01. Revenue of $8.6B (-7%) vs. $8.8B. (PR)
• DryShips (DRYS): Q2 EPS of $0.25 beats by $0.04. Revenue of $210M (-30%) vs. $204M. (PR)
• DTE Energy Company (DTE): Q2 EPS of $0.56 beats by $0.41. Revenue of $1.7B (-25%) vs. $2B. (PR)
• Dun & Bradstreet (DNB): Q2 EPS of $1.21 in-line. Revenue of $417M (+1%) vs. $425M. Issues downside full-year EPS guidance, to up 1-5% from up 9-12%. Lowers full-year revenue guidance to -1% to +1%, from +2-5%. (PR)
• Evergreen Solar (ESLR): Q2 EPS of -$0.11 misses by $0.03. Revenue of $64M (+180%) vs. $63M. (PR)
• Exelixis (EXEL): Q2 EPS of -$0.42 misses by $0.01. Revenue of $27.4M (-10%) vs. $33.4M. (PR)
• First Solar (FSLR): Q2 EPS of $2.11 beats by $0.49. Revenue of $526M (+97%) vs. $459M. (PR)
• Genworth Financial (GNW): Q2 EPS of -$0.11 misses by $0.27. Revenue of $2.5B (+4%) vs. $2.6B. (PR)
• Geron (GERN): Q2 EPS of -$0.23 misses by $0.04. Revenue of $183,000 (-8%) vs. $800,000. (PR)
• Harmonic (HLIT): Q2 EPS of $0.03 in-line. Revenue of $81M (-9%) vs. $75M. (PR)
• HLTH Corp. (HLTH): Q2 EPS of $0.04 beats by $0.08. Revenue of $99M (+15%) in-line. (PR)
• Ingram Micro (IM): Q2 EPS of $0.15 misses by $0.05. Revenue of $6.6B (-25%) vs. $6.7B. (PR)
• Las Vegas Sands (LVS): Q2 EPS of $0.01 beats by $0.02. Revenue of $1.1B (-5%) in-line. (PR)
• McAfee (MFE): Q2 EPS of $0.60 beats by $0.03. Revenue of $469M (+18%) vs. $467M. (PR)
• MetLife (MET): Q2 EPS of $0.88 beats by $0.20. Revenue of $8.4B (+4%) vs. $11.7B. (PR)
• Mohawk Industries (MHK): Q2 EPS of $0.67 beats by $0.20. Revenue of $1.4B (-24%) in-line. Ex-restructuring charge EPS of $0.79. (PR)
• Monster Worldwide (MWW): Q2 EPS of $0.03 beats by $0.02. Revenue of $223M (-37%) vs. $225M. (PR)
• PDL BioPharma (PDLI): Q2 EPS of $0.47 beats by $0.04. Revenue of $126M (+18%) vs. $124M. Sees full-year revenue of $310M-325M vs. $331M. (PR)
• PerkinElmer (PKI): Q2 EPS of $0.28 beats by $0.01. Revenue of $435M (-14%) vs. $460M. Sees full-year EPS of $1.18-1.22 vs. $1.27. (PR)
• Pitney Bowes (PBI): Q2 EPS of $0.55 misses by $0.05. Revenue of $1.38B (-13%) vs. $1.43B. Sees full-year EPS of $2.15-2.35 vs. $2.46. (PR)
• Silver Wheaton (SLW): Q2 EPS of $0.06 misses by $0.01. Revenue of $41M (-17%) vs. $53M. (PR)
• Southwestern Energy Company (SWN): Q2 EPS of $0.35 in-line. Revenue of $478M (-21%) vs. $387M. Cuts full-year production view to 278-288 Bcfe from 289-292 Bcfe. (PR)
• Stone Energy (SGY): Q2 EPS of $0.65 beats by $0.48. Revenue of $263M (-35%) vs. $129M. (PR)
• Synaptics (SYNA): FQ4 EPS of $0.47 beats by $0.03. Revenue of $115M (+19%) vs. $112M. Announces retirement of CEO Francis Lee, succeeded by Thomas Tiernan. (PR)
• Varian Semiconductor Equipment Associates (VSEA): FQ3 EPS of -$0.20 beats by $0.05. Revenue of $73M (-60%) vs. $69M. (PR)
• Vistaprint (VPRT): FQ4 EPS of $0.43 beats by $0.04. Revenue of $135M (+22%) vs. $128M. Sees Q1 EPS of $0.32-0.35 vs. $0.40. (PR)
• Weingarten Realty Investors (WRI): Q2 FFO of $0.61 beats by $0.11. Revenue of $147M (-4%) vs. $144M. (PR)
• YRC Worldwide (YRCW): Q2 EPS of -$3.53 misses by $1.82. Revenue of $1.3B (-45%) vs. $1.6B. (PR)

Today's Markets

Asia markets were broadly higher Friday, Europe is mixed, and futures are up from yesterday's close.

On Monday we highlighted several companies from our buy/sell list that represented investment ideas for all types of investors, which included Small and Large Cap stocks as well as Growth and Value stocks. Since Value Expectations tends to provide Large Cap Value Stocks for potential Buy ideas, earlier this week we decided it would be helpful to also highlight some small cap stocks we like from the Russell 2000. Now, moving on to the Growth investor, we will focus on companies we classify as growth stocks and find attractive within the S&P 500 (excluding Financials). By definition, AFG classifies growth stocks as companies with a Market Value/Invested Capital (MV/IC) in the top half of their sector.

In the table below are 10 growth stocks that we find attractive based on AFG’s valuation model, and are ranked neutral or higher based on AFG’s default recommendation.

Traditional Discounted Cash Flow (DCF) models have been been underutilized in equity analysis over the years primarily because of the assumptions one has to sign off on. We will concentrate on just two of the major issues we have with traditional DCF models, the lack of ability to deal with competition and the perpetuity assumption embedded in a DCF model. These assumptions lead to irrational calculations of intrinsic value and force analysts to make compromising decisions in their model building efforts.

AFG uses a modified DCF model that accurately addresses the competitive nature of the business while also dealing with the perpetuity issue through our Economic Margin decay or competitive advantage period.

The Halloween Indicator in the stock market sometimes defined as “sell in May and go away” is a strategy that is based on the difference in the performance of the market during May to October vs. November to April. The strategy is to invest in the S&P 500 during “the best 6 months” and switch to bonds during “the worst 6 months” to avoid the summer doldrums of small to negative returns. Since January of 1950 the average returns for November to April (“good months”) is 7.9% compared to the 2.5% average return delivered from May to October ("bad months”).

Although there is a significant spread in returns between the good and bad months, does this mean you should convert to bonds and go on a vacation until September? There are several views for and against market timing but we feel it is too difficult to identify when to be out and when to be in the market. If you dig deeper into the market performance since 1950, you will find that 20 good and 20 bad months make up a significant part of the market performance. For more information read the following market timing strategy filled with pitfalls.

To identify potentially attractive investment ideas, Applied Finance Group (AFG) usually uses a combination of proprietary variables to develop a focused group of potential buy ideas that meet criteria based on valuation, economic performance, management quality, and earnings quality. In December of 2008, ValueExpectations.com released a list of companies narrowed only by the valuation properties of the company using AFG’s Value Score (defined below). Our valuation techniques have proven successful through time at identifying mispriced securities and helping our clients identify investment opportunities resulting in outperforming their chosen benchmark.

The ValueExpectations.com blog posted in December '08 (High Value Score Stocks - S&P 500) contained these high value score companies (DDS, S, NOV, MTW, SII, WFR, CHK) that had returned 40% above the S&P 500 as of our 3-26-09 performance update. A recent check of that performance on 5-5-09 was even better; currently these companies have returned an astounding 64.5% above the return of the S&P 500 during the same time period (12-29-08 to 5-5-09).

Q1 2009 Earnings Call

April 30, 2009 10:00 AM ET

If you want to try the stock trading technique called 'Buying Dividends,' which is the technique of buying stocks before the ex dividend date and selling the stock shortly after the ex date at about the same price, yet still being entitled to the dividend, there are 36 stocks to choose from during the first week of March. This technique generally works only in bull markets.

When you buy dividends, there are many stocks in many different sectors to choose from. In order to be entitled to the dividend, you have to buy the stock before the ex-dividend date, and you can't sell the stock until after the ex date. The actual dividend may not be paid for another few weeks.

2008 was the year that brought a ton of dividend cuts in the financial sector. Banks like Comerica (CMA), Bank of America (BAC), Citigroup (C), Regions Financial (RF) and Fifth Third Bank (FITB) cut dividends several times, which jeopardized the incomes of many retirees. 2009 so far brought a second round of dividend cuts from Bank of America and Comerica. Even pharmaceuticals giant Pfizer (PFE) had to cut its dividend in half after announcing its acquisition of rival Wyeth (WYE). Investors are constantly bombarded with news about dividend cuts including the fact that 4Q 2008 was the worst quarter for dividends since S&P began compiling the data in 1956. One would think that a tough credit environment, bank failures, and news of big corporations laying off thousands of employees every day most companies would conserve cash in preparation for the second round of the financial Armageddon that pundits forecast. Not all companies are cutting dividends however. Stocks like Wells Fargo (WFC) and General Electric (GE) have recently reaffirmed that they will maintain dividend payments. Even better, many companies are also raising payouts to shareholders.

Novartis (NVS) announced that its Board has approved a 25% increase in its annual dividend to 2.00 swiss franks or about $1.71. Novartis is an international dividend achiever, which has consistently increased its dividends since 1997. The stock currently yields 3.60%.

Dun & Bradstreet (DNB) reported some excellent numbers for 2008 (Call Transcript). This certainly makes sense as DNB sells products and solutions that help with financial due diligence. The company also announced an increase in its dividend from $0.30 @ share to $0.34 per share which represents a 13% increase. Is there cause for concern? Read this quote about the dividend from the company's press release:

D&B today announced that its Board of Directors has declared an increased quarterly cash dividend of $0.34 per share, up from D&B’s prior dividend payout of $0.30 per share. This quarterly cash dividend is payable on March 20, 2009, to shareholders of record at the close of business on March 6, 2009. This increase in D&B’s quarterly cash dividend is a reflection of the Company's confidence in its ability to generate continued strong free cash flow growth in 2009.

Q4 2008 Earnings Call Transcript

January 29, 2009 10:00 am ET

In life, the most attractive people are in shape and have good looks, just look at Hollywood. The same is true the majority of the time in investing. The most attractive stocks have healthy financial statements and look good from a valuation standpoint.

The Altman Z-score is a metric that gives insights into the likelihood of a firm going bankrupt in the next 2 years. The model was developed by Professor Edward I. Altman of the NYU’s Stern School of Business and first published in The Journal of FINANCE in September 1968. A common critique to this metric is that it was developed over 40 years ago and is no longer relevant.

This is the Third Quarter 2008 edition of our ongoing hedge fund portfolio tracking series. Before reading this update, make sure you check out the preface to the series we're doing on Hedge Fund 13F filings here.

The other funds we've already covered include: