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4/26/13 Week In Review

|Includes: The Boeing Company (BA), XOM

04/26/13 Week In Review

Welcome back to OakTree Investment Advisors' Week In Review. Earnings seasons is still going strong and we got two big names who reported earnings this week, and we'll also look at today's GDP report and what that means for our economy moving forward.

Exxon Mobil (NYSE:XOM) raises dividend, but misses the revenue mark

Exxon Mobil, well known as a great and stable energy investment, raised its dividend on Wednesday by $0.06 up to $0.63 a quarter. This was a 10.5% increase of the previous dividend and marks the 31st (!) consecutive year the company raised its dividend. No wonder why XOM was the second stock we featured on this blog, and one of only two of our recommendations that we've bought back after it's been called away. The company's commitment to returning value to shareholders by consistently increasing their dividend is why it makes it a great target for our Covered Call Strategy.

Any euphoria over the dividend increase was short lived though as the company reported earnings the next morning. While EPS beat by $0.07, revenue came in $11.03 billion shy, a miss of over 9%. This sent the stock tumbling from just shy of $89.50 on Wednesday's close, down about a buck-fifty for this week. This resulted from E&P earnings, oil and natural gas production, and refining and marketing earnings all driving downwards. Earnings were up, but due to margin increases mainly in the refining departments.

So this report expresses a trend we've been seeing in earnings this season, and raises an important question. The trend we've been seeing is that companies have been meeting or beating on EPS for Q1, but have been shy on revenue. What this is indicative of is that companies are doing well at becoming more efficient in their operations, but they aren't effectively growing. This is a bad sign for the economy, and could mean trouble for companies in general. They've been cutting fat for the past four years to keep their heads (and stock prices) above water, and eventually they're going to run out of things that can go on the chopping block. The question that arises is, "Should we be worried?". We don't think so. Exxon Mobil's revenues are highly tied to the price of gas, which over the past three weeks has declined by 9%. Now declining gas prices isn't the sole reason for XOM, our point is that gas prices tend to fluctuate. They'll be down for a couple of months, then they'll skyrocket for a couple of months. When you look at XOM, you have to look at the long term. Are the company's financials strong? Yes. Do they have potential for growth? Yes. Is their dividend or business model at risk? No. If oil prices continue to decline throughout the year, we won't see any of the energy majors like XOM beat the S&P's return. Then again, that's not why we're in XOM. We started a Covered Call Strategy for the stock to have a position that will give us income, stability, and exposure to the energy markets. Our strategy doesn't end till this July, and we believe a reversal in oil prices is possible by then. Regardless, if the stock stays under our $95 strike price, we'll be happy to sell another Call on the stock.

Boeing (NYSE:BA) reports earnings and Dreamliners get ready to return

Boeing reported earnings this Wednesday morning, with an EPS that beat by $0.26 while revenue missed by $0.3 billion. Like we mentioned above, the trend of missing on revenue also effected Boeing, but to a much smaller amount. Positive notes come from core operating earnings up 14% year-over-year, with core operating margins up 0.80%, while they reaffirmed their 2013 earnings targets.

What is more exciting is that late last week the FAA cleared Boeing to start installing the new upgraded lithium-ion batteries in their 787 Dreamliner line that has been grounded since the myriad of problems afflicting them in mid-January. Both the European Aviation Safety Agency and the Japanese Ministry of Transport have lifted the ban on the Dreamliners once the FAA officially issues its "airworthiness directive" which is expected later today. This bodes well for the company, though the stock doesn't seem to care too much about this little fact. That's because it didn't seem to care that the planes were grounded in the first place! Despite all the worries over the Dreamliner, the stock is up some 19% year-to-date, and is currently way above our January 2014 $80 strike price. Whether the sequester ends up affecting the company's defense-based revenue is yet to be seen, but with a backlog of $392 billions dollars worth of projects, we're sure BA will end up doing quite well for the year.

Q1 GDP shows accelerating growth, but misses forecasts

This morning we had the release of the GDP for the first quarter of the year. Gross domestic product expanded at a 2.5% annual rate, a massive increase from last quarter's 0.4% increases, yet still significantly under expectations of 3.0%. Part of the acceleration came from farmers increasing inventories; when that data is removed, the growth rate was a much less positive 1.5%. While the report showed the majority of the economy's areas supporting the growth we are witnessing, the government, trade, and business real estate investment did not - a repercussion of the sequester and companies still hesitant to hire and expand.

Nearly two-thirds of economic activity in the U.S. comes from consumer spending, which increased by 3.2% in the first quarter - the greatest increase since Q4 of 2010, but came at the expense of a 5.3% decrease in household saving rate down to 2.6%. This is the largest drop since Q3 of 2009, and the lowest rate since Q4 of 2007. This can leave American households ill-prepared for the economic headwinds to come, as all these economic signals suggest the economy will most likely decelerate from here into the second quarter. Especially since, historically, GDP data for the early quarters of recent recessions have all been revised downwards dramatically - meaning that the state of our economy could be worse than what even the numbers show.

This report could also give additional ammunition to the Federal Reserve to keep interest rates low and continue to purchase bonds at the current $85 billion a month. This will help support the stock markets, an important factor as consumers will need to tap into "wealth effects" like the strong stock and housing markets to get spending up in the second half of the year, which will be a requisite if we want our economy to improve.

Posted by OaktreeAdvisors at 4/26/2013 4:31 PM
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Disclosure: I am long XOM, BA.