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GE and McDonald’s don’t relieve growth worries but I like both stocks here

posted on April 19, 2013 at 5:50 pm
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I wouldn’t make too much of today’s move to the upside in U.S. markets. It’s not unusual for the Friday of a down week to show a slight bounce.

And I certainly wouldn’t want to pin any move to the upside on better than expected earnings reports after the close in New York yesterday from Google (GOOG) and Microsoft (MSFT.) I think Google’s results continue a worrying trend of falling ad prices thanks to the growth of mobile traffic (with mobile’s lower ad prices) and Microsoft’s results are only better than expected because Wall Street had been aggressively cutting projections in the weeks before the company’s report.

Certainly today’s earnings results from market bellwethers McDonald’s (MCD) and General Electric (GE) won’t relieve market worries about revenue and earnings growth for U.S. companies.

McDonald’s reported earnings of $1.26 a share for the first quarter, exactly in line with the Wall Street consensus of $1.26. At $6.61 billion revenue came in ever-so-slightly above the $6.59 billion projected by analysts. That revenue number, however, represented year over year growth of just 0.9%. In the quarter global comparable store sales fell 1%. And in its conference call McDonald’s told Wall Street to expect slightly negative comparable store sales for April. (Wall Street was looking for 2% growth in comparables in April.)

General Electric reported earnings of 39 cents a share—4 cents a share better than expected—and revenue of $35.01 billion—better than the $34.57 billion of the Wall Street consensus. But, and it’s an important “but,” revenue fell 0.2% year over year. Sales from the company’s industrial business fell 6% from the first quarter of 2012.

General Electric did report a growing order book as the backlog of equipment and services orders at the end of the quarter climbed to $216 billion, the highest ever.

The big problem, as expected, was Europe, where General Electric said it had planned for  “challenging” conditions only to see the economy there weaken more than expected. The company wouldn’t say when conditions in Europe might improve. As if to buttress that point, data out of Europe today showed a continued deterioration in economies there. For example, new orders in Italy’s industrial sector fell 2.5% month over month. In Spain industrial new orders fell 5.6% year over year.

What do these results tell me about prospects for the two stocks?

In the quarter McDonald’s picked up market share. I think that stands a good chance to continue for the rest of 2013 as the company claws back sales from competitors. March is the turning point in tough year-to-year comparisons for McDonald’s. Guidance for a drop in comparables in April is something of a disappointment, but I think the going does indeed get easier for McDonald’s from here. Given the uncertainty in the markets, I hold onto these shares here. (The stock is as member of my Jubak’ Picks portfolio http://jubakpicks.com/the-jubak-picks/ )

For General Electric the big issue is how much of the cash that the company generated from its sale of the remaining 49% share of NBC Universal the company will return to shareholders and when. Management has targeted spending $18 billion, out of its total $90 billion in cash and cash equivalents at the end of the first quarter, in 2013 on share buybacks and dividends. That should provide significant support for the stock. (The stock is a member of my dividend income portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/ )

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , I liquidated all my individual stock holdings and put the money into the fund. The fund did not own positions in General Electric or McDonald’s as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

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  • organicbob on 19 April 2013

    I know Jim is not a options trader, but if he looked back at options expiration Fridays (3rd Friday of the month), he would notice an upward bias.

  • cjxland on 22 April 2013

    organicbob: And this tells us what? I am not an options trader either…

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