F3Q10 Earnings Call

November 12, 2009 11:00 am ET

• H-P grabs 3Com, takes on Cisco. Hewlett-Packard (HPQ) agreed to acquire networking-equipment maker 3Com (COMS) for $2.7B, or $7.90/share - a 39% premium to Wednesday's close. With 3Com, H-P - the world's largest PC maker - gains a networking business that competes directly with Cisco's (CSCO) core business of routing and switching, and a strong foothold in China, which accounts for half of 3Com's revenue. Analysts were largely enthusiastic about the deal, saying 3Com was one of the biggest values in the networking space, second only to Cisco in the breadth of its enterprise portfolio. Cisco responded swiftly, saying on its blog that networking acquisitions "only validate the fact that networking is becoming the platform for all forms of communications and (information technology)." H-P also preannounced Q4 EPS of $1.14 vs. consensus of $1.12, and revenue of $30.8B vs. $29.8B. After hours, HPQ was -0.6%, and COMS was +35%.
• UTech buys GE Security for $1.8B. GE (GE) agreed to sell its fire alarm and security systems unit to United Technologies (UTX) for $1.82B in cash, as had been widely speculated. UTX said its customers "will see increased breadth and depth of product offerings" as a result of the deal. The unit includes Edwards Systems Technology, which GE bought for $1.4B from SPX Corp. (SPW) in 2005. The business offers building management systems that help control commercial structures during fires, earthquakes and other emergencies, and would take United "beyond just perimeter and access security," one analyst said.
• Benmosche stays put. AIG (AIG) CEO Robert Benmosche told employees Wednesday in an internal memo he remains "totally committed to leading AIG through its challenges" despite his frustrations with government curbs on compensation at the company. The reassurance came after reports Benmosche might bail after just three months at the helm, saying strict compensation rules made it almost impossible to retain talent. In the memo, he called the pay curbs a "barrier" that "stand in the way of restoring AIG's value" and repaying its debt.
• World banks prop up dollar. Central banks say they've been snapping up dollars this week in an effort to stem its slide and hold down the value of their currencies. While Geithner continues to pay lip service to maintaining a strong dollar, Washington has yet to take any concrete steps to stop the bleeding, which is beneficial to U.S. exports and tourism.
• TARP repayments reduce gov't borrowing. The U.S. will borrow "substantially less" than initially anticipated, with banks already repaying rescue funds and more "significant repayments" ahead, Treasury's Geithner says. Reduced borrowing, a narrowing of the current account deficit, and signs that Americans are saving more all contribute to global confidence that the U.S. can rein in its deficit, he said today in Singapore.
• High oil prices could derail recovery. The IEA revised its 2010 world oil demand forecast slightly higher, but warned that rising crude prices could smother the fragile economic recovery. IEA now expects global oil demand to rise to 86.2M barrels a day, up 140K from October. Rising stock markets, a weak U.S. dollar, and rebounding world economies have driven crude prices up almost 80% this year, despite a persistent overhang in oil inventory which now stands at 60 days of forward cover.
• Foreclosures fall, but for how long? Foreclosures slowed for a third straight month, but remain sharply higher than a year ago. The number of homeowners who received foreclosure notices fell 3% month-on-month to 333K, up 18.9% from the same month in 2008. Rick Sharga of RealtyTrac, which released the report, cautioned the improvement was likely temporary: “It’s good to see that foreclosures have slowed down marginally, but we don’t really think it’s a trend." The firm predicts 3.2-3.4M properties will go into foreclosure in 2009, up from 2.3M in 2008.
• Art auction smokes projections. A very positive art auction at Sotheby's (BID) has some thinking the art-market recession may be on the mend. Sotheby's brought in $134.4M at an auction of post-war and contemporary art Wednesday night in Manhattan, including a smoky sheet of dollar bills by Andy Warhol that went for $43.7M. Total proceeds blew away Sotheby's' internal estimate of $67.9-$97.7M, and also outdid its $125M sale of a year ago. 52 of the 54 works offered found buyers.
• Microsoft strikes back at modders. Microsoft (MSFT) booted as many as 1M players from its Xbox Live gaming service on suspicions they modified their consoles to play illegally downloaded games. The move comes amid this week's release of "Call of Duty: Modern Warfare 2" (ATVI), the most highly-anticipated Xbox game of the year. "All consumers should know that piracy is illegal and that modifying their Xbox 360 console to play pirated discs violates the Xbox Live terms of use, will void their warranty, and result in a ban from Xbox Live," Microsoft said in a statement. It's not clear how Microsoft detected the Xbox rigging.
• Turkeyless Thanksgiving for BofA? Bank of America (BAC) may miss its internal deadline of naming a new CEO by Thanksgiving, due in part to its inability to zero in on a clear frontrunner, and amid worries that the process must be approved by the Fed.
• Mortgage apps rise. Mortgage applications rose 3.2% from a week ago, led by a 11.3% gain in refinancing, which now accounts for 71.5% of all applications, up from 66% last week. MBA said the average 30-year mortgage rate fell to 4.9% from 4.97% in last week's survey. Freddie Mac's weekly survey of mortgage rates comes out at 10:00.

Earnings: Before Open

• AECOM Tech (ACM): FQ4 EPS of $0.48 beats by $0.02. Revenue of $1.63B (-0.2%) in-line. Sees 2010 EPS of $1.90-2.00 vs. $2.03. (PR)
• EnCana (ECA): Q3 EPS of $1.03 misses by $0.14. Revenue of $3.88B (-64.2%) vs. $3.08B. (PR)
• Kohl's (KSS): Q3 EPS of $0.63 beats by $0.02. Revenue of $4.05B (+6.5%) in-line. Sees Q4 EPS of $1.14-1.24 vs. $1.25. (PR)
• Urban Outfitters (URBN): Q3 EPS of $0.36 beats by $0.01. Revenue of $506M (+6%) in-line. Operating margin 19% vs. 17.1% in Q2. (PR)
• Wal-Mart (WMT): Q3 EPS of $0.84 beats by $0.03. Revenue of $98.66B vs. $99.88B. Sees Q4 EPS of $1.08-1.12 vs. $1.12 consensus. "The sales environment continued to be difficult this quarter, but customer traffic is up throughout the company." (PR)

Earnings: Wed. After Close

• Advance Auto Parts (AAP): Q3 EPS of $0.69 beats by $0.03. Revenue of $1.3B (+6%) in-line. Third-quarter same-store sales increased 4.7%. Shares -3.7% AH. (PR)
• Applied Materials (AMAT): FQ4 EPS of $0.13 beats by $0.10. Revenue of $1.5B (-25%) vs. $1.3B. Expects revenue growth of more than 30% in fiscal 2010. Reports "increased net sales and profitability in our semiconductor equipment business, with improved demand and financial performance in all of our segments." Shares +0.7% AH. (PR)
• Computer Sciences (CSC): FQ2 EPS of $1.40 beats by $0.05. Revenue of $4B (-5%) in-line. Shares -2.9% AH. (PR)
• Ctrip.com (CTRP): Q3 EPS of $0.44 (RMB3.03) beats by $0.12. Revenue of $80M (+47%) vs. $72M. Sees Q4 revenue of $100M-104M vs. $75M. Shares +10.5% AH. (PR)
• Green Mountain Coffee Roasters (GMCR): FQ4 EPS of $0.34 beats by $0.01. Revenue of $222M (+65%) vs. $217M. Shares -9.1% AH. (PR)

Today's Markets

Asia markets headed lower Thursday. Europe stocks are flat at midday, and futures are under some selling pressure.

Retailers saw a lot of options action Wednesday after Macy's (M) fell 8% after reporting quarterly results, and Wal-Mart (WMT) announced it expects a difficult holiday shopping season. The names with the action will all report earnings this week, including JC Penney (JCP), Wal-Mart and Nordstrom (JWN).

JC Penney's puts are active ahead of 11/13 earnings after Macy's shares got hit on earnings, a close competitor. At 11:46 am, 3,000 December $28 puts were bought and 3,000 December $27 puts were sold in an apparent bearish spread. But there was also a trade of 3,000 December $30 puts at $0.90, below the bid. Shares broek down intraday and the action looks bearish in the options pits. 4X average put volume has traded already.

Next Week's Game Plan: Clean Energy Fuels (CLNE) Fuel Systems Solutions (FSYS), Fluor (FLR), Vulcan Materials (VMC), Diana Shipping (DSX), Burlington Northern (BNI), Joy Global (JOYG), Ralcorp (RAH), Applied Materials (AMAT), Macy's (M), Kohl's (KSS), Wal-Mart (WMT), Urban Outfitters (URBN), Nordstrom (JWN), Walt Disney (DIS), Ancestry.com (ACOM)

General Electric (GE), Urban Outfitters (URBN), Skyworks Solutions (SWKS), Travelers (TRV)

What a crazy month we had!

The Dow began the month of October at 9,712 and finished the month of October at EXACTLY 9,712. Now I don’t want to say the market is manipulated but… No, I’ve got nothing, there are no buts - the market is totally manipulated! Either that or you believe that the random outcome of tens of millions of traders around the globe trading hundreds of billions of shares of stock would just so happen to begin and end the month within .50 after going as low as 9,378.77 (on the 5th) and as high as 10,157.94 (on the 21st). So that is literally a 1 out of the 779-point swing coincidence to hit that 9,712 nail on the head.

Yesterday, we looked at the best performing S&P 500 stocks since the index's all-time closing high on 10/9/07. This morning we highlight the 25 best performing stocks in the S&P 400 (mid cap) and S&P 600 (small cap) indices. As we saw yesterday with the S&P 500, sectors dominating both lists come from the Consumer Discretionary, Health Care, and Technology sectors. While the presence of tech stocks on these tables is not surprising, given the weak consumer and prospects for nationalized health care, it is surprising to see pockets of strength in the Consumer Discretionary and Health Care sectors.

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.

Oracle Corp. (ORCL) – Investor demand for December contract put options caught our eye this morning amid a 1% decrease in shares of the software company to the current price of $21.79. Perhaps some traders have decided to take cautiously bearish stances on the stock after news reports revealed that the completion of Oracle’s acquisition of Sun Microsystems (JAVA) could be delayed by the European Commission (EC). The commission’s deadline to rule on the deal is this Thursday. However, the EC could launch an investigation that may take as many as four months, according to some reports. Plain-vanilla put buying was employed at the December 21 strike price where about 5,000 lots were picked up for an average premium of 1.30 apiece. Volume at the lower December 20 strike surpassed 19,000 contracts as traders appeared to have purchased 15,000 married put options for an average premium of 95 cents each. The purchase of shares of the underlying stock in conjunction with protective put options suggests that some investors expect the stock to appreciate by expiration in December. The puts provide downside protection on the long position in case shares decline 12.5% and breach the breakeven price at $19.05. Option trades on ORCL indicate that investors are taking caution given the uncertainty over the EC’s ruling. Such uncertainty is reflected in the steady rise in option implied volatility throughout the week from Monday’s low of 29% to the current reading of 34.5%.

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.

Next up is David Stemerman's hedge fund Conatus Capital. This is just the third time we've covered Conatus' portfolio because this is literally only its third 13F filing. It is obviously a newer fund, but its manager and analysts certainly have quite the pedigree. Conatus raised $2.3 billion and began trading last year after David Stemerman left Lone Pine Capital to start his own hedge fund. Conatus is an interesting story to follow because, as we all know, Stemerman's old employer, Lone Pine Capital, is a prominent 'Tiger Cub' hedge fund. And now many years later, Lone Pine is seeing its own progeny spin off their own funds. Matt Iorio also left Lone Pine to start his own firm, White Elm Capital, which we will also track for the first time in the coming days. We find it appropriate to track these two gentlemen because they are well-versed in the successful bottom-up 'Tiger' investing style and have contributed to Lone Pine's solid track record.

North America retailers have reported a range of results over the past few DESLI U.S. Retailers weeks. The market did not have high expectations, so in many cases the results were not as bad as most investors had feared.

There were some exceptions, with Sears (SHLD) announcing an unexpected loss, due to a pension related write down. Urban Outfitters (URBN), a possible casualty of any CIT (CIT) failure, has seen its short base decline rapidly, almost halving during August. Other large declines in short base are evident in JC Penney (JCP), American Eagle Outfitters (AEO) and Big Lots (BIG). However, the large short bases in Saks (SKS), Buckle (BKE) and Children's Place Retail Stores (PLCE) continue to climb.

Buckle (BKE) announces earnings Wednesday. The short base is just below 14% and has been rising in the past week. Clothing retailers Abercrombie & Fitch (ANF), Urban Outfitters (URBN) and Zumiez (ZUMZ) have all seen their large short bases declining over recent weeks. They currently stand at 5.4%, 14% and 12% respectively.

The short interest (as measured by Percent Shares Outstanding On Loan) for Buckle Inc (BKE) increased 31.98% over the past week and now stands at 13.54%. This is up 42.2% from the 52 week low hit on February 6, 2009. When compared to other North America Specialty Retail companies, the short base is well above the average of 7.97% for the sector.

The last few days have brought a bunch of earnings reports from prominent retailers allowing us a window into consumer spending.

Last Thursday, the world’s largest retailer, Walmart (WMT), reported a surprising 1.5% drop in same store sales at U.S. Walmart stores. That is only the second drop (the other was -0.1%) I see in my data going back almost 10 years.

Urban Outfitters (URBN)

In a busy week for U.S. retail results, the results looked bad, but generally not as bad as the market's worst fears. A number of companies reported better than expected earnings, largely achieved through cost cutting. The optimists saw this as paving the way for rapid profit growth if and when retail sales come back to life. Retail sales were disappointing, but for the time being the market is giving retail stocks the benefit of the doubt.

Abercrombie & Fitch (ANF) is the classic barometer of youth spending, and like most retailers their sales were sharply down and they slipped into losses. Their short base is large, with 14% of shares outstanding on loan; other retail stocks with large positions are Macy's (M) and Urban Outfitters (URBN).

Having said that, it is often instructive to take a look at the changes made during Q2 to get a sense of what themes managers are focusing on. Of course, we cannot see their short portfolios so for many of these managers you really only get half the story. But on the long side, having the data from Q4 2008, Q1 2009 and Q2 2009 all together, it is sometimes possible to re-engineer a certain manager’s strategy.

Monsanto's (MON) Monopoly

4:12 PM, Aug 13, 2009 --

• NYSE up 65.19 (1%) to 6,604.06.
• DJIA up 35.9 (0.4%) to 9,398.
• S&P 500 up 6.9 (0.7%) to 1,013.
• Nasdaq up 10.6 (0.53%) to 2,009.

GLOBAL SENTIMENT