The Market Ticker - Earnings

Confessional Roundup Friday (3/12)

nospam@example.com (Karl Denninger) — Fri, 12 Mar 2010 13:15:00 -0500

We have two warnings on the board in financials.

First, Discover said it is boosting reserves and expects to loss 22 cents, which is a significant deterioration from the 9 cent profit previously expected.

Second, Charles Schwab warned that its first quarter profits will fall short as trading fell 14% despite the fact that it lowered fees significantly for its consumer accounts.

The brokerages will also get hit by their fee waivers on money market funds, which they have to maintain (absorbing the operating expenses) with our fantastic Fed holding rates at zero, providing them with no spread that they can take for their operating costs.

This is pretty significant, given that the estimates were for around 15 cents, yet the expected hit is around 4 of them - or about 25%.

That's a big decline.

This is worth watching as the confessions were notably absent last quarter.

Oh No... You Heard It Here First (Lucent Gastric Reflux)

nospam@example.com (Karl Denninger) — Wed, 03 Feb 2010 18:14:00 -0500

Oh please tell me this is BS:

NEW YORK (TheStreet) -- When Cisco last took the stage in November, CEO John Chambers predicted an uplift in business. He didn't mention at the time that the company would offer to lend a hand in the form of zero-percent financing.

Taking a page from the automakers' playbook circa 2002, Cisco introduced three-year, interest-free financing for its small and mid-sized business customers last week. The cheap loans are sure to help juice sales to cash-strapped customers far and wide.

Uh, no. That's not the playbook of automakers circa 2002.

It is the playbook of Lucent circa 1997.

Need I remind anyone how that story ended?

Lucent "sold" a metric boatload of hardware on capital financing at essentially zero interest terms to Winstar Communications - the firm that bought my Internet company - along with many others.

Winstar (and others) ultimately defaulted, unable to make their business goals turn into actual long-term cash flow.

Lawsuits flew and ultimately Winstar folded, all but destroying Lucent in the process, as they were stuck with an unbelievable amount of financed hardware that was not only generating no cash flow but which had depreciated (as all computer and network equipment does) to an insane degree the moment it was put into service.

Lucent - one of the most-storied technological companies ever to exist in the United States, the spun-off parent of Bell Labs that had years ago invented the transistor and slung us into the digital age and which held a solid majority of all telephone switch business in the United States, was later essentially forced to merge with Alcatel to avoid bankruptcy.

This is Ponzi-style financing and John Chambers knows better, having survived the 2000 tech crash in no small part because he didn't do the same thing that Lucent did and thus didn't get hammered by the defaults when the bust came.

The market has paid exactly zero attention to this "contribution" to CISCO's sales, and it won't in the immediate future either. You can count on it. I'm willing to bet there will not be one mainstream analyst who will point this out tomorrow morning in a research report and slap a big fat SELL on CISCO as a consequence. I sure didn't hear anyone on the Fast Money CNBS show bring it up.

The market loves a good bit of Ponzi Finance and typically rewards those firms that engage in it for quite some time - sometimes for as long as a year or two.

But each and every loan made below market price for the credit extended is impaired at origination. It cannot be otherwise as there is no such thing as a real zero or negative cost of capital, even if only on time value. "Spurring demand" by holding the risk on a product you sell looks good when you consider that after a year or two you could "eat it" and lose "just your gross margin", until you consider that you spent that margin on salaries and operational needs for the business in the interim.

That we are seeing this sort of crap again in the technology space just ten short years after it blew up last time, taking down one of the titans in the telecommunications space, is proof positive that there is no real economic recovery, there is no solid fundamental demand, and that it is financial trickery and games that are leading to these "excellent results."

I can't tell you when the collapse engendered from this round of BS will come, but I can tell you with all but absolute certainty that it will, just as I said it would last time when I saw this same game being played in this very same industry.

"This time it's different" - right John?

I look forward to FedExing a copy of this article to you in a year or two, with a big fat "I told you so" scrawed across the front of it in black sharpie marker.

Intel: Nice Performance, But....

nospam@example.com (Karl Denninger) — Thu, 14 Jan 2010 18:22:00 -0500

Intel reported this afternoon 40 cents on $10.6 billion.

The front-line read is that the results are very good. Note that estimates had been cut from 44 cents to 30, so the "beat" that everyone says is a "crush", well....

Gross margins were an incredible 65%. This is unlikely to hold and it's difficult to see how they can improve on it. If inventories go up margins will come down. Great this time, on a forward basis a bit more troubling.

ASP (selling price per unit) was up sequentially. That's good. The problem with ASP being up is that it means volumes aren't as up as the revenue numbers suggest.

Looking inside the report two of my key numbers are PC chipset and motherboard revs - they were up just 2% sequentially. On the data center side chipset and board revs were up 7.7%. Comments before the conference call were that strong business sales were not showing up, but that personal system sales had more-or-less "normalized." Given that Windows 7 shipped this last quarter I would have expected better than "normalized", but nonetheless the results in terms of revenue were solid.

It appears that Intel is attacking AMD in a severe way, and their conference call is noting a significant move toward 32nm architecture in their server processors. Assuming they continue to execute this will be very helpful; I have several Nehalem-based Xeon machines and the price-performance in the 55xx series is exceptional. The 32nm process should be even better, specifically due to lower power consumption allowing more cores in less space given heat and power management realities.

The conference call spoke to strong contribution from the initial "high end" introduction of 32nm processors. This will bleed downward (and the company is acknowledging that on the call) as they move the 32nm process into the mainstream and "value" markets which will drop ASP. Volume would be expected to be up but selling price-per will be down.

Overall there's nothing bad in this report at all and Intel turned in a solid performance. My concern is with valuation advances - 4Q is typically the best of the year due to the holidays, so if we give them $1.50 for the four sequential quarters ($1.10 for the next three sequentially) this would place their P/E at about 15 - quite reasonable and down a lot from the current ttm (prior to this quarter) of 52.

The stock traded up on the release but has fallen back substantially as you can see here. I suspect seasonal factors and concerns about both inventory and product mix forward will bring down ASPs and margins are unlikely to advance from here. Both of these would imply that the earnings expressed here are about as good as we're likely to get for a while, and that means the stock is reasonably-valued at the current price, as the mitigating factors should work on balance in a negative direction.

On balance the report shows solid execution by the company - but in terms of the stock price I wouldn't be expecting too much over the next 6-12 months. If I owned the stock coming into earnings I'd give serious consideration to taking my profits - they've been substantial from early 2009, with the stock having advanced from the $12s. Should it trade back down to $15 or so (and it might in the coming six months) I'd be inclined to accumulate it, assuming that there are no indications that they're stumbling moving the 32nm process into their more mainstream offerings.

Disclosure: No position

Commercial RE Detonates A&P Results (NYSE: GAP)

nospam@example.com (Karl Denninger) — Tue, 12 Jan 2010 09:06:18 -0500

Now that's one big fat "oops":

Sales for the third quarter were $2.0 billion versus $2.1 billion last year. Comparable store sales decreased 5.8%. For the third quarter, excluding non-operating items, adjusted EBITDA was $36 million versus $78 million last year. Adjusted loss from operations was $20.1 million versus adjusted income from operations of $17.4 million in last year’s third quarter. The non-operating items excluded from adjusted income from operations are listed on Schedule 3 of the press release and adjusted EBITDA is reconciled to net cash from operating activities on Schedule 4. For the third quarter, reported loss from continuing operations was $502.4 million which includes charges of $412.6 million for goodwill, trademark and long-lived asset impairment and $16 million for mark to market adjustments related to financial liabilities. Loss from continuing operations in the comparable period of the prior year totaled $3.8 million, and included income of $23 million for mark to market adjustments related to financial liabilities.

Comparable store sales down about 6%, but the real "gotcha" is found in the "embedded loss" issues. Good will, trademark and long-lived asset impairment?

Is that latter category a mark-to-market on the value of their real estate?

Christian Haub, Executive Chairman of the Board, said, “The US food retail market continues to face one of the most difficult and challenging environments in many years which analysts expect will extend through the first half of 2010. Unemployment, deflation and the resulting price competition combined with consumers’ drastic changes in spending behavior has severely impacted both our industry and our business.

DEFLATION?

You mean deflation of commercial and residential real estate, along with deflating wages, yes?

I think so.

Funny how during the boom there weren't any CEOs talking about how wonderful the inflation in commercial and residential real estate, nor were they pointing to the salutary impact this had on holding up wages against a flood of illegal immigrants and off-shoring our production!

Welcome to reality A&P; this morning finds the market deflating your stock price too, currently trading $11 even down from $12.88 at yesterday's close.

Disclosure: No position

Alcoa Coughs Up A Hairball

nospam@example.com (Karl Denninger) — Tue, 12 Jan 2010 09:01:00 -0500

The "cheerleading" behind Alcoa's (NYSE: AA) results is amusing this morning, given the market's reaction to the earnings announcement, hammering the stock by more than a buck and a quarter a share in the aftermarket.

Cash from operations in 4Q09 of $1.1 billion.
Free cash flow (FCF) of $761 million; FCF positive for first time since 2Q08.
Exceeded every operational cash sustainability target in 2009.
Loss from continuing operations of $266 million, or $0.27 per share.
Net charges for restructuring, special items and discrete tax items were $275 million, or $0.28 per share, in 4Q09.
Excluding these charges, Company had 2nd consecutive profitable quarter.
Revenues of $5.4 billion, up 18 percent from 3Q09.
Strong liquidity with $1.5 billion of cash on hand.
Debt-to-cap ratio down to 38.6 percent, 390 basis point improvement from year ago.
Total debt reduced by $759 million since end of 2008.
Finished 2009 with stronger portfolio, growth opportunities and operations.

Nice cheerleading Alcoa. Ignoring the elephant in the room, eh?

Ex-items the company posted a 0.01 EPS, far short of the expected 0.06.

On the positive side the firm cut debt by some $750 million dollars, which sounds impressive over the year - until you realize they have over $10 billion in debt outstanding. Reducing leverage by about 7%? That's not all that impressive after all, is it?

Cash from operations for the quarter was $1.1 billion, and the firm finished the quarter with $1.5 billion in cash on hand. Wait - they have no real "hoard" behind their book at all? That's not so good either.

CapEx is down 50% from 2008 on a run rate, which begs the question - was previous CapEx fat or was it lean muscle? If the former it's good, but if the latter then forward profitability will be in serious trouble.

Speaking of which, COGS (cost of goods sold) ramped hard to 91% .vs. 84.8% on a year-over-year basis. That's a problem, as is the drop in engineered product operating income drop to $57 million .vs. $75 million last quarter. Those products are the high-margin "pearls" in the firm's portfolio and largely go into aerospace and other high-dollar, high-precision markets. They're down big.

Primary metals also suffered a loss, mostly on the increased cost of energy inputs. Oh, you mean energy costs are bad news when you're a miner and smelter? No kidding eh? And don't look inside the report - produced tonnage is down 20% annualized over 2008 levels. (Editorial: I thought 2008 was a horrible year and comps would be easy?)

Flat rolled product (sheets of aluminum, basically) shipments were down 2%. Again, where's the recovery? If final demand is improving (even if only temporarily due to inventory restocking) why are we seeing decreased shipments?

I'm not impressed, and on the conference call the company noted expected continued weak market conditions for the forward quarter.

Those who were expecting blow-outs this quarter in the reports, and glowing forward looks need to go listen to that conference call and read Alcoa's report in detail.

That light at the end of the tunnel looks like an awful lot like an oncoming train.

Disclosure: No position