This blog is devoted to helping investors make informed decisions. It will be regularly updated and provide opinions on earnings results. It is not intended to give investment advice and should not be taken as such. Consult your investment advisor.
In the end, numbers are just numbers and while they are an
indispensable part of an investor's self-assessment, they do not always
reveal the full details. For example, my last month closed with a
negligible loss but the truth is, I started the month notably down after
two profit warnings on the last day of April. In retrospect, it was a
pleasing month and I think there are some useful conclusions to be drawn
from it.
For the record, I'm down 2% for the quarter but up nearly 34% on a yearly basis. Readers can access previous write-ups here.
April was a bad month for me, and much of that under-performance can be
traced to decisions made in February, of which the articles linked
below solely pertain.
Buy or sell when in doubt?
One of the hardest questions for any investor to deal with relates to
what to do when you see short-term earnings risk but long-term value in
a stock? If you sell out in anticipation the stock could easily fly
away from your estimate of 'fair value' if it delivers a decent set of
results. However, if it warns, you are delivered with a good buying
opportunity.
Moreover, if you do decide to hold over the results and the company
lowers and misses guidance, do you buy more or dump the stock? Frankly, I
think the answer to the last question depends on your view of why the
company missed.
For example, plenty of tech stocks missed in the last earnings season
and I've argued here this is could be a good chance to start picking
some up. The market is bidding up other sectors in anticipation of a
resumption to growth in the second half, so why won't technology take
part in this growth? Indeed, many of the statements of the leading tech
companies (IBM, Oracle, etc.)
specifically cite short-term hesitation (caused by sequestration fears)
by customers in closing deals but at the same time, growing pipelines.
The usual format below with links to the articles discussed. All of
them are from February and performance numbers are from the day they
were originally published on the Motley Fool.
It is a story of tech weakness and a conglomeration of the sort of factors that can gang up and assault the innocent investor. Intuit managed to report a weak tax return season and Regal Beloit
managed to lose a key customer and warn that the commercial
construction market wasn't as strong as it had previously expected. Ixia disclosed some accounting errors and then gave a (somewhat expected) disappointing earnings report. I bought some Fortinet after the warning, having been cautious over not holding too much tech going into the earnings season.
Those that warned
As ever, the key thing with investing is to hold your nerve and see what looks interesting. The first stock to consider is Citrix Systems(NASDAQ: CTXS),
which reported a mixed set of results. On one hand, its growing
application delivery controller Netscaler demonstrated that it was
probably growing market share against F5 Networks' rival solution. One
the other hand, Citrix's core virtualization solutions reported
disappointing results as customers seemed to hesitate in making
purchases, thanks to taking time to appraise the Q1 release of its
XenMobile solution. The result was that its full year EPS guidance of
$3.08-$3.11 fell short of analyst estimates of $3.14.
Frankly, I don't think this is a big deal and, if enterprise
technology spending bounces back, these estimates could prove
conservative. Citrix generates a lot of cash flow and its explanation
for the earnings miss is plausible.
The next interesting stock is Allergan(NYSE: AGN). Its mix of ophthalmic products and Botox gives it impressive defensive growth prospects. However, the stock has taken a near-term hit,
thanks to some disappointing clinical trial developments. It is
inevitable that some will sell out when these things happen, but
investors need to consider that the stock looks good value even if they
(conservatively) assume no contribution from DARPin (macular
degeneration) or Bimatoprost (scalp hair loss) in future.
Analysts have it on mid-teens earnings growth for the next few years
even without any contribution from these two programs. Given its near 5%
current free cash flow yield, I think it can 'do its earnings' in
returns from here. I bought some.
Those with momentum
I would argue that Sherwin-Williams(NYSE: SHW) and Colgate-Palmolive(NYSE: CL) are good examples of companies that have momentum behind them but are arguably on stretched evaluations right now.
The housing trade has been winning lately, and very few companies
have done better than paint company Sherwin-Williams over the last year.
Its correlation to the U.S. housing market is obvious and the company
should do well over the next year. The problem is that everyone else
seems to think so too and the stock's evaluation of around 30x current
earnings leaves little room for error. Even a cursory look at its
evaluation...
As for Colgate-Palmolive, I think the market has been keen to bid up
blue chip consumer staples and the company has certainly executed very
well in recent years. My question is, can it continue? It is in a highly
competitive industry and the likes of Procter & Gamble are responding in its core North American market.
Furthermore, Colgate is embarking on a four year growth and
efficiency program intended to drive growth in emerging markets. In
order to achieve this, it will need to continue to lead the field with
innovation. This creates pressure and given that it's on an evaluation
of nearly 24x earnings with only single-digit earnings growth priced in,
I don't think it is good value yet.
There is always value
I'm not the biggest fan of value investing, but it is notable how well NetApp(NASDAQ: NTAP)
performed in an otherwise difficult market for technology. Despite the
nice rise, NetApp still has around 35% of its market cap in net cash or
financial instruments. Furthermore, it has generated around $1.1 billion
in free cash flow (my calculations) over the last year. This equates to
around 13% of its enterprise value as I write. Moreover, analysts have
it on mid teens earnings growth for the next couple of years.
Quite clearly, the market is worried about something here and it is
likely to be a combination of its Government and European exposure in
the near to mid-term. As for the longer-term, the storage industry does
face some existential questions over how data will be stored in a cloud
computing age and will a smaller player like NetApp be a winner in such a
world? I do not know the answers to these questions, but those with a
stronger view may well be interested here
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