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2Q12 Earnings Review
Fortrend Securities
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General Advice
The advice has been prepared without taking
into account the clients objectives, financial
situation and needs. Clients should consider
the appropriateness of the advice by taking
into consideration your objectives, financial
situations and needs before acting on the
advice.
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Contents
• Market Overview and Movers
• Relative Value
• Earnings by sector
• Stock Selection
• Performance
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Market Performance • The S&P 500 rose 2.1%
• EE’13 were cut 1.5%
• P/E’13 rose to 12.1
• S&P yield is 2.4% vs. 10 Year Treasury fell to 1.56%
• The VIX dropped to 15
• The Fortrend portfolio rose 5.7% on strong moves from ITT and Thermo Fisher and Procter & Gamble.
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8.7
12.1
21.1
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Movements
• Telco stocks rose 10%
• Oil was up 5%
• Paper & Forest increased 4%.
• Although Hospitals fell 4.5%, Thermo surged.
• Transportation fell 4%
• Metals, dropped another 3% - dragged by coal
and iron ore company Cliff Resources, which
fell 15%
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2Q Earnings Results
• 408/500: 68% beat, 21% missing, 11% in line
• Last year 71% beat
• Earnings are $23.62, up 2.8% from 2Q11.
• Wall Street expects $102.97 for 2012 and $115.21
in 2013.
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Companies that surprised
• Spectacular results from Oil Field Services companies
Halliburton and Baker Hughes.
• Carnival earnings rebounded quickly.
• Manufacturers - ITT and Textron – performed very well.
• Consumer stocks - Mattel, Hershey and Procter &
Gamble all beat.
• In technology Western Digital and Microsoft did
extremely well.
• Wireless providers MetroPCS and Sprint soared.
• JP Morgan and Goldman Sachs beat the street.
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Spectacular Misses
• Drought: Archer-Daniels Midland and Navistar, Deer.
• United Continental and Delta: weaker demand and
higher oil.
• Nike spent too much on marketing.
• Energizer and Avon: lower demand in Europe and China
hurt the top line, so they will cut marketing expenses.
• Alcatel, RIMM and Netflix: crushed by obsolescence.
• AMD and Micron Tech: good insight into PC/HH market.
• Financial stocks were jockeying for position, while
leveraged companies Morgan Stanley and Bank of
America missed
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Raw Materials • In a megacycle: iron ore and coal markets are deflating as
China sources product from Africa to get supply up and
prices down.
• Cliff Resources down15%, est. down 21%.
• Barrick and Newmont estimates cut. Gold in down trend.
• Shale boom sent natural-gas prices to a 10-year low –now
oil markets. Apache, Marathon Oil and Devon Energy
blamed a glut of propane and related products for lower
profits in the second quarter.
• Halliburton and Baker Hughes bounced. Rigs are being
redeployed to oil fields. They look good investments.
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Industrial – Strong US, weak
International, FX headwind
• Dow Chemical sales fell 10% - Europe
• Celanese (acetate and vinyl) blamed Europe and China.
• Kimberly Clark strong Euro demand diapers/towels
Mead Westvaco, Weak Europe, FX headwind.
• Union Pacific, cars, chemicals & fracking up, up.
• United Parcel Service, international volumes are falling
• ITT and Honeywell were the best performing stocks
• We are overweight US manufacturing.
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• McDonald’s rare complaint about U.S.
consumers: lower prices not working. Overvalued.
• Ditto for Starbucks and Chipotle, these are going
down.
• Marriott – strange: demand for high end rooms in
U.S. & Asia are up.
• Starwood warned about European demand.
• Food – strong: Nestle, Kraft, Dr. Pepper, Pepsi
and Coke led the sector higher.
Consumer Non-Cyclical
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Media
• In Media there are the losers:
• Netflix and Sony, which detracts from the
general wellbeing.
• Even CBS and New York Times beat the
street.
• There is currently sector rotation into
advertising outlets.
• Not buying yet
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Avon disappointed
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Western Digital did not disappoint
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Honeywell • Added: $53.10 (8/2011)
• Last: $58.57 (11.7 X FY13E)
• Yield: 2.54%
• Unrealized Total Return: 13%
• 2Q12 Revenue $9.44b (+3.8%)
• 2Q12 Profit $902m (+11%), 114CPS vs. 111CPS estimated
• Overweight U.S. industrials, maintain BUY on valuation
discount to peers
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ITT Inc. • Added: $17.60 (7/2012)
• Last: $20.58 (11.1 X FY13E)
• Yield: 1.77%
• Unrealized Total Return: 17%
• 2Q12 Revenue $568m (+2.7%)
• 2Q12 Profit 50CPS (+8.7%) vs. 37CPS estimated
• Overweight U.S. industrials, maintain BUY on valuation
discount to peers
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SL Green Realty Group • Added: $50.24 (1/2010)
• Last: $80.80 (16.1 X FFO)
• Yield: 1.24%
• Unrealized Total Return: 64%
• 2Q12 Revenue $349m (+16%) vs. $306m estimated
• 2Q12 FFO 192CPS (+76%) vs. 107CPS estimated
• 2Q12 Profit 114CPS
Looking to exit at ~$85
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Dr. Pepper Snapple • Added: $36.87 (8/2010)
• Last: $45.23 (14.0 X FY13E)
• Yield: 3.01%
• Unrealized Total Return: 29%
• 2Q12 Revenue $1.62b (+2%)
• 2Q12 Profit $178m (+8%), 85CPS vs. 82CPS estimated
• Maintain BUY on margin expansion
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Procter & Gamble
• Quarterly profit beat analysts’ estimates:
$0.82 vs $0.77 per share estimated.
• Activist Investor, Bill Ackman
• Compelling Stock Valuation Relative to
Peers & $4 billion stock buy back plan.
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Thermo Fisher Scientific
• Revenues Rose 7.3% year over year
• EPS grew 23% to $1.22
• Lowered revenue guidance due to foreign
exchange headwinds.
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Microsoft
• Microsoft reported unearned revenue beating estimates on upgrades of
products
• Unearned revenue was $20.1 billion in the 3 months that ended June30
• Business buying helped compensate for diminishing demand from
consumers who are waiting the Oct 26 release of Windows 8.
• Revenue in the Windows division fell 13% due to consumers opting
for tablets instead of laptops, consumer PC demand was weaker than
corporate demand BUT sales in were up in the Business Division,
Server and Tools and in Entertainment and Devices.
• Profit was 67 cents a share
• Sales rose 4% to $18.1 billion
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Oracle
• Oracle reported profit in June that rose more than
analysts had predicted due to sales of new
software licenses
• Added $10 billion to its stock buyback program
• Profit rose 7% to $4.1 billion or 82cents a share
• Sales increased 1% to $10.9 billion
• Oracle said it sees first-quarter adjusted earnings
per share of 51-55 cents which will report in
September
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NVIDIA
• Announcements: Tegra3 Chips to be used in
Google Tablet and Microsoft Surface;
rumored to be utilized in the new Amazon
Kindle Fire.
• Consensus quarterly earnings per share
estimates of $0.15; up from $0.14 a month
ago.
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iShares Germany ETF
• June 4th: Sell July 21st EWG Puts, strike 19 for $1.50
• July 21st: Closed at $19.66
• Why has this trade worked? Both EWG and SPY
contain global companies selling to global markets.
The big difference we see in the Germany Index is
that the big companies are based in Europe and in the
SPY the big companies are based in the US however
the companies all operate and generate revenue
worldwide!
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Avon Products
• Poor quarterly results: 2nd quarter income
fell 70% on the stronger US Dollar and
lower demand globally
• Renewed takeover murmurs
• Confidence in CEO Sheri McCoy
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Western Digital
• Added: $40.74 (10/05/2012)
• Last: $41.75 (5.1 X FY13E)
• Yield: Nil
• 4Q12 Revenue $4.75b (+98%)
• 4Q12 Profit $872m, 335CPS vs. 245CPS estimated
• Maintain BUY on valuation and continued recovery in
hard drive demand
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Fortrend Portfolio
• Honeywell
• ITT
• SL Green
Dr Pepper Snapple
Procter & Gamble
Thermo Fisher Scientific
Microsoft
Oracle
nVIDIA
iShares Germany Index