Earnings Season Thoughts on Google, MEMC, Akamai, Intuitive Surgical and Vertex

by: Travis Johnson

Wednesday was the biggest single day for me in earnings season -- several of my strongest performing stocks like MEMC Electronic Materials (WFR), Akamai (NASDAQ:AKAM), Intuitive Surgical (NASDAQ:ISRG), and Vertex Pharmaceuticals (NASDAQ:VRTX) released earnings after the close that day.

So this seemed an apt time to check up on the earnings releases that I haven't yet mentioned.

On Tuesday, Cemex (NYSE:CX) released their earnings -- and no one was particularly happy with them. The stock split recently, but that didn't have any real impact. The impact was actually from declining US sales. Cemex had great sales increases in every other major area, including Mexico and Spain, but US sales dipped significantly. I found this very surprising, given the continuing cement shortage in this country, but I expect commercial and infrastructure construction to continue growing over the long term here at home, and with the rest of their markets performing very well right now I'm not terribly worried about a blip in the US. In fact, the news out today that GM (NYSE:GM) was buoyed by its Latin American division gives me a bit of hope that consumption is increasing in that region, and any increase in automobile sales should help push demand for improved road infrastructure. That's a bit of a stretch, but at least it's a stretch on the positive side.

And Google (NASDAQ:GOOG), another of my larger positions that has already released earnings, surprised me a little bit as well -- not because they continued to beat estimates handily (beat by more than 12% this time), but because it brought in virtually none of the volatility we've come to expect from GOOG earnings.

Google's now trading at less than a 40PE on current year's earnings (reported and estimated) -- that's about as cheap as it's ever been, though it's certainly not cheap in relation to the rest of the market. I sold about 40% of my Google holdings earlier this year at close to a 100% gain and will be holding these, but I think investors are now so afraid of growth stocks and technology stocks that GOOG is getting attractive again Over the past two years they have steadily increased earnings, kept their noses clean, innovated with new products that may be monetized eventually, and, most importantly, continued to take market share from all of their competitors around the world.

And Gol Linhas Aereas Inteligentes (NYSE:GOL), another of my bigger holdings, is managing to maintain very solid margins and increase market share even while they grow their fleet considerably and grow earnings by about 50% -- they're subject to oil prices just like all the other airlines (though Brazilian prices are a lot friendlier than US for jet fuel, in general), but they are growing very quickly without sacrificing profitability. The ADRs have been subject to the strength of the Real, and more significantly the shares have been on a rollercoaster as Varig's restructuring has played out . But I don't see anything happening to Varig that will hurt GOL significantly, and I think the only thing that will bring trouble to the company is a recession in Brazil that curbs demand for tickets.

AKAM, ISRG, VRTX and WFR all reported on Wednesday.

WFR is a company I've written about quite a bit recently -- the collapse of their deal with Motech was disappointing, but the cessation of their supply agreement with Evergreen Solar (ESLR) was an indicator of the upward trend in their market, and the signing of a deal with Suntech Power (NYSE:STP) today to supply solar silicon wafers for ten years in exchange for an up-front payment and a warrant for STP shares came earlier than expected but is also a strong positive.

With regards to Vertex, their earnings don't mean much, because no one is buying this company for their current royalties on a few antiviral drugs that are in production now. No, people are buying Vertex for VX-950, their anti-hepatitis compound that has shown remarkable results in early clinical trials. Vertex has made some solid partnership agreements in the last few months and is very well financed to complete these trials, so unless there is news about VX-950 or VX-702 (and I don't believe there will be), I don't think we'll learn much from the earnings release.

AKAM is feeling the pain of growth stocks everywhere -- it has gone up so much that it is hard to consider it cheap even on forward earnings. Add in the fact that now many folks are getting worried about Limewire, which has replaced Bittorrent and Google as Akamai's boogeymen, and I expect that the folks who are sitting on huge returns in this one have itchy trigger fingers. Limewire is actually a real competitor, with a similar business plan to Akamai's, but AKAM is so entrenched with their customers and has such a strong portfolio of clients that I think fearing the upstart is a bit premature right now. Still, any disappointment on earnings release this evening -- any worsening of margins that might bring in the specter of price cutting due to competition, or anything less than a big uptick due to heavy World Cup traffic, could bring another wave of selling. With the demand for faster commercial delivery of audiovisual files continuing to increase dramatically, I still think Akamai is a good place to be in the long run ... even if they get some competition in the space they have owned since they acquired Speedera. But it's not a slam dunk, and the shares aren't cheap right now in my opinion.

Intuitive Surgical (ISRG) has been actually fairly quiet lately. In the last few months it has recovered from the beating it took when they lowballed their first quarter sales numbers (especially since they then beat those lowballed estimates handily), but folks will certainly be watching very closely to see how many of the new Da Vinci S machines they sell, and what kind of penetration they're getting into the prostatectomy field (where they're shooting for 35% of the market by the end of this year) and, perhaps more importantly, into hysterectomies, where they are trying to build a presence in a much larger market. I looked into those with some channel checks in the Spring, but haven't followed up yet in any detail since the last earnings release eased a lot of my concerns. This company has the potential to revolutionize all kinds of surgeries in the years to come, but with hospitals generally hurting I'd be happy to see them just keep up with the sales they had in the first quarter.In the long run, this will be a cash cow with lucrative instrument sales driving returns as more and more surgeries are performed, but in the short run the shares should bump up and down on the numbers of machines sold.