Monday, February 25, 2013

The Key Earnings of The Week

Another key week of earnings kicks off in March. There are some interesting technology and retail companies this week. It’s also the week where the market will deal with the aftermath of the Italian election. Allow me a short digression on the subject, because it does matter.

I know most readers have had enough of hearing about European debt, and are happy that the financial markets are awarding the US with incredibly low yields, but it’s still worth taking the time to look at this chart of IMF World Economic Outlook projections:

Italy Government Debt data by YCharts

The US situation does not look good. Yes, it is ‘okay’ for now because the market is being generous, but what if another financial crisis comes?  Bankers’ incompetence may have caused the recession, but it was taxpayers’ money that saved them and the economy from depression.  If another crisis comes along, how will the US Government be able to deal with it? And what if the market demands higher yields from the US in future?

I’ll leave investors to ponder those issues and get back to earnings.


Anyone looking for a defensive stock could do a lot worse than check out Aqua America’s results, although I’ve no doubt that the most widely covered stock on Monday will be Lowe’s Companies. I like the company and last discussed it here. The key thing to look out for is how successful its management initiatives (mainly to simplify the product ranges) are working across its categories.

My highlight of the day is Autodesk (NASDAQ: ADSK). This is an interesting stock with many moving parts to it. There is an article here, and I will try and cover the upcoming earnings. Essentially Autodesk is dealing with resolving some execution issues (restructuring of the sales force,) the transition to a cloud and mobile based offering, with solutions being pushed from standalone flagship products towards being bundled in suites, and the challenging macro-economic environment. The stock looks cheap but it won’t if earnings disappoint again.


Autozone has been doing well recently and I’m not sure why! I can only think that it has been dragged up with the market. However, new car sales have been good and comparable same store sales growth across the industry has been slowing. These are not good signs for the company.

Verisk Analytics is well worth a look due to its pre-eminent position in detecting insurance fraud. I believe Warren Buffett holds a position, and he knows a thing or two about the insurance business.

Today’s highlight has to be Home Depot (NYSE: HD). I thought the stock had further to run in the winter, and I still think so now. One thing to look out for will be if Superstorm Sandy really did add up to around $360 million in sales. Last time around I got the impression that there was some linearity in its trading, and November was described as being ‘strong,’ which points to a good quarter for Home Depot, and in my opinion people often underestimate the length of housing cycles.  Look out to see if its more discretionary based items are selling well too. A good indicator for the economy.


Joy Global will give good color on China. The stock is being buoyed by takeover prospects right now but if you want to focus on the fundamentals the key things to look for are US natural gas prices and Chinese fixed asset investment. More analysis linked here.  Limited Brands is an interesting global retail play, and Target is always worth following closely to see how the US consumer is faring.

My two picks for today are in the retail sector. The dollar stores have been attractive companies for a while now but everybody knew it and when Dollar Tree (NASDAQ: DLTR) disappointed with its same store sales growth in the autumn, the market wasn’t slow to punish the sector. The dollar stores face an uncertain outlook this year. Yes, they have good upside from the ongoing trend of the mass consumer ‘trading down,’ but they are also all aggressively rolling out new stores. I think it is time to see them scaling back expansion plans. Dollar Tree has a lot of restructuring to do.

I also want to highlight TJX Companies (NYSE: TJX). Most people would avoid investing in a company actively looking to expand in Europe, but as discussed here,TJX is an off-price retailer. It should be expanding in new territories, and the economic malaise in Europe should not trouble TJX unduly. In addition, I like its expanding home ware division. Some worry that ‘off-price retailing’ doesn’t exactly have a large moat, but I suggest that the doubters try running a clothing outlet. It requires a lot of experience and TJX has that.


Deckers Outdoor owns the trademark for UGG boots, of which I am reliably informed are typically worn as slippers in Australia. How they became a winter boot is one of the great mysteries of fashion. It’s a pretty big day for technology today with giving numbers. Sonus Networks has seen Oracle buy its rival Acme Packet, so perhaps it’s time someone looked at it?

Today’s pick is Palo Alto Networks (NYSE: PANW). The last set of numbers were pretty good, and it appears to be taking market share from some of its rivals. Check Point is going through the cycle of a new product line which seems to be encouraging its customer to get the same performance with less money. Meanwhile, Cisco’s latest security numbers suggested that the only growth it was seeing (and anemic at that) was in data center security.  Last time around Palo Alto talked of some aggressive pricing competition in the quarter, but none of the other major security companies appeared to report this. I think the evaluation is rich and I’ve no interest in paying 127 times July 2014 forecast earnings for the stock, especially when there is a fair bit of takeover speculation around it.

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