We’re just a little bit more than a week into earnings season and already some themes have started to emerge from the numbers.
Nothing definite. Call them “tendencies.” But I’m finding connections among the results—and the investor reaction to the results that will be worth investing in whenever anything is worth investing in. (For when that might be see my post http://jubakpicks.com/2010/07/12/the-fuel-is-there-but-where-and-when-is-the-match/ )
No big theoretical drum roll. No grand theory of everything. Just some exploitable trends as I see them that are emerging from the second quarter earnings numbers.
- Corporate technology customers are buying—if the new product that they’re purchasing is so much faster, more efficient, and cheaper to run than the gear that they last upgraded before the recession really hit two years ago or so. I think that’s the lesson from Intel’s (INTC) earnings report this quarter. Sales of server chips rose by 170% from the second quarter of 2009. The new servers are so much more powerful and use so much less electricity that the payback on the investment—even if economic growth doesn’t pick up—makes the buy a no brainer. I think investors will see the same pattern when EMC (EMC) reports its earnings on July 21 and Cisco Systems (CSCO) reports on August 11. I already own shares of both Intel and Cisco Systems in Jubak’s Picks. I’m planning on adding EMC when the time is right.
- The market doesn’t like the shares of companies that are spending money now to invest in the future of their business. Google (GOOG) got hammered when it released earnings on July 15 because costs climbed in the quarter. The higher costs came from hiring and capital spending on data centers, both keys to the company’s fight to win share in the smart phone battle against Apple (AAPL) and Research in Motion’s (RIMM) Blackberry, and to push the transition of software products and services to cloud computing. Other stocks that might feel investor wrath on costs are Apple itself, which reports on July 20, and oil service technology leader Schlumberger (SLB), which reports on July 23. I understand why investors worried about a slowdown in the economy might decide to punish a company where costs are climbing, but when the costs are actually smart investments in future business I think the selling is short-sighted. I’d look to pick up shares of companies with the smarts and confidence to invest in themselves precisely because it’s so hard to make that choice right now. These companies are trying to steal a march on more timid competitors and you’d like to be along for the ride.
- And speaking of rides, how about buying shares of companies that are exporting to China? These exporters come in two flavors. First, there are the companies positioned to take advantage of the Chinese government’s efforts to increase domestic consumer purchasing and recent increases in wages across China. You could see some of that effect in Yum! Brands (YUM) earnings report on July 13, although the positive effects of growth in China were hidden by flat sales in the United States. Among consumer companies still to report, I think the most likely to show a China effect is Coach (COH), which is due to report on August 3. Second, there are the companies that are exporting the machinery that China needs in its drive to build infrastructure and to upgrade its domestic manufacturing base. German companies have been a major beneficiary. In the year that ended in May German exports climbed by 29% and, as you might expect with the European Union struggling to climb out of a recession, exports outside the European Union were a main driver, growing by almost 40%. A German company to watch is Siemens (SI). This export story finds an echo in Japan. Construction machinery maker Komatsu (KMTUY.PK), for example, has found relief from slow growth in its domestic market and in the United States in sales to China. Komatsu plans to double production in 2010 from 2009 largely on the strength of sales of China and Indonesia.
And it’s also clear from the earnings results so far that the earnings results so far leave some questions still searching for answers.
- Can China drive earnings growth for commodity producers enough to make investors happy? Earnings from Alcoa (AA), the stock that kicked off earnings season on July 12, raised the question rather than answering it. Alcoa surprised Wall Street by an extra penny a share and raised its forecast for growth in aluminum demand in 2010 but the stock has settled back where it was before the earnings announcement. The next test case will be Freeport McMoRan Copper & Gold (FCX), which reports on July 21.Copper and copper stocks track growth in the global economy even more closely than aluminum and aluminum stocks do. Depending on which consensus figures you use, the company is expected by Wall Street analysts to report either a small increase—about 8% in earnings per share–from the June 2009 quarter or to show a slight drop in earnings of 7 cents a share to $1.31 a share from $1.38. I’ll be listening to hear what Freeport McMoRan says about demand for copper in 2010 and watching to see if anything the company says about future growth makes any lasting impression on investors.
- We also don’t know if anxious investors place any value—and if they do how much—on earnings consistency. We’ll see a test of that when we get earnings reports from consumer goods stalwarts PepsiCo (PEP) and Coca Cola (KO) on July 20 and July 21, respectively. Johnson & Johnson, another company that shows solid earnings growth quarter after quarter, reports on July 20.
And lastly we now have some feel for the relative unimportance of earnings and the relative importance of government policy decisions during an earnings season where every investor seems to be looking for reassurance.
- JPMorgan Chase’s (JPM) solid earnings surprise on the morning of July 15, for example, didn’t move that bank stock or the financial sector as a whole as much as the news later that day that the Senate had voted to approve the financial reform bill and had sent it on the White House for signature. In fact, shares of JPMorgan Chase were down for much of the day and only moved into the black to stay on the news from Congress.
- That same day another sector, natural gas, demonstrated the same power of government to move stocks in the current market. Speculation, although it seemed to be informed speculation, reported that Senate Majority Leader Harry Reid (Dem.-NV) was planning to introduce a scaled down energy bill that would concentrate on clean energy and measures that would move the country away from oil—but that would not include any explicit effort on global climate change such as a cap and trade system for controlling carbon emissions. Speculation further suggested that the bill would emphasize natural gas as major alternative to oil. That was enough to move the price of a share of Chesapeake Energy(CHK) up .14% and a share of Ultra Petroleum (UPL) up 0.68%. Those moves don’t seem like much but both moves beat the market. On the day the Dow Jones Industrial Average fell by 0.07% and the Standard & Poor’s 500 index gained 0.12%. Chesapeake, one of the most financial leveraged of domestic natural gas producers, reports earnings on August 3. Ultra Petroleum, one of the lowest cost producers in the industry, reports on July 30.
- Some stocks and some sectors, however, seem impervious to any speculation about government action. Shares of SunPower (SPWRA), a member of the solar sector that has been so relentlessly crushed this year, after being crushed in 2009, fell even on news of the Reid bill, dropping another 3.5% on the day. SunPower reports on July 20. I wonder if anything the company can say will move the stock up against the extreme negatives surrounding the entire sector.
Earnings season runs hot and heavy until early August. I personally count Cisco’s earnings, reported on August 11 for this quarter, as marking the end of the season.
In other words, we’ve got lots more earnings data ahead to shift through in search of patterns that might bring order out of this confusing market.