Stocks in the News — week of April 15, 2013 (April 19 update)

Goodfellow LLC’s “Stocks in the News”

seen on Townhall Finance, heard on Ransom Notes Radio

Google Steadily Gains in Global Ad Revenue  

Google Inc. (GOOG, $788.22) reported first quarter earnings of $11.58 per share, vs. consensus $10.68, propelled by increased ad dollars and a large tax credit.  “Google delivered 23% year-over-year core revenue growth, its 13th consecutive 20%+ quarter (excluding foreign exchange),” reports Morgan Stanley Research.  “Since 2009, Google has steadily gained 1 percentage point of global ad revenue share per year.”

The company is projected to increase earnings per share 15-17% per year over the next three years.  Watch for estimates to be revised upwards.  The PE is 17, and Google has $42 billion in cash-on-hand.

After a recent run-up to new highs, the stock is establishing a trading range in the $760 to $840 area.  Read our recent report on GOOG.  (04/19/13)

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McDonald’s Faces Economic Challenge

McDonald’s Corp. (MCD, $100.03) reported first quarter revenue and EPS in-line with Wall Street estimates.  Earnings per share were unexpectedly enhanced by lower expenses, and harmed by unfavorable U.S. sales trends.

U.S same-store-sales were down in February and March, Europe is weak, and Asian Pacific markets are strong.  Global sales across-the-board are expected to be down in April.  CEO Don Thompson says, “The challenging global environment and bottom-line pressures are expected to persist.”

With a very solid chart pattern behind it, the share price started reaching new highs last Friday.  The stock will likely trade between $98 and $104 in the very near-term.  Current shareholders should use stop-loss orders to protect profits, and new investors should  look for companies with strong earnings growth.  (04/19/13)

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Union Pacific: “The Best Total Package in the Rail Sector”  (Citi Research)

Rail freight company Union Pacific Corp. (UNP, $145.36) completed a bullish shakeout chart pattern yesterday, and is entering new high territory today, after reporting excellent first quarter results.  The company earned $2.03 per share vs. consensus $1.95 and last year’s $1.79.  Revenue was up 3.5%, a little slow, but offset by a lowered depreciation rate and extra land sales. 

Earnings are projected to increase 15% per year for the next two years.  The dividend yield is 1.9%.  Standard & Poor’s Research comments, “We expect UNP to benefit from growth in manufacturing in Mexico and an eventual coal recovery.”

Citi Research expects a strong year, and anticipates consensus estimates increasing.  Citi says UNP management’s projections are very conservative, and adds, “We believe Union Pacific is arguably the best total package in the rail sector.”  Read our report on UNP here.  (04/19/13)

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Greedy Traders Trash EBAY in Thursday Trading 

eBay Inc. (EBAY, $53.44) shares are down today because overly-bullish analysts have been reined in on eBay’s second quarter forecast.  First quarter numbers came in nicely, new accounts grew by 2.8 million, the Marketplaces division is doing better than expected, and the company’s full-year projections remain about the same.  Citi Research says, “This is the first time that the company did not exceed the high end of its revenue guide after 8 straight quarters of doing so.”

Earnings per share are expected to grow 16-18% per year for each of the next three years.  The PE is 19.3, in a five-year range of 5-27.  Morgan Stanley Research has a $62 price target on the stock.  Citi Research adds, “We’d be buyers of EBAY on a material dip from current levels.”

EBAY shares have been trading between $50 and $58 for five months.  Read our latest report on EBAY here.  (04/18/13)

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Morgan Stanley Trades Lower Despite Good Quarter

Morgan Stanley (MS, $20.59) beat Wall Street’s revenue and earnings estimates for the first quarter.  As with other large banks reporting this week, Morgan Stanley reported weak fixed income revenue and strong equity revenue.  Difficulties are industry-wide, including low interest rates, a tough regulatory environment, and a poor economy forcing cost-cutting efforts to meet earnings goals.

Institutional securities business revenue was up 30% from a year ago.  Wealth management revenues and margins were solid.  The company is aggressively reducing risky assets in its bond trading unit.

Earnings per share are expected to be strong this year, after a 2012 loss, and then grow another 22% and 16% in the next two years.  The PE is 9.9.  The stock is still falling from a recent high of $24.50, and has not yet established support.  While fundamentals appear attractive, we would wait for an improving chart pattern before jumping in.

Read our latest report on Morgan Stanley here.  (04/18/13)

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Global Leader PepsiCo Lags Domestically in First Quarter

Global food & beverage leader PepsiCo (PEP, $81.77) beat Wall Street’s estimates on revenue and earnings for the first quarter, helped by easing commodity prices and international growth; but hurt by falling North American revenues.  Standard & Poor’s Research called North American beverage results, “disappointing”, and management stated, “the cola category continues to be a challenge.”

Earnings per share are projected to grow 7-9% per year for each of the next three years.  The PE is 18.9.  The dividend yield is 2.59%.

The stock has been trading in the upper $70’s, and broke past long-term resistance at $80 today.  While the chart is bullish, earnings growth is moderate, and cola beverage revenue is a major concern.  Current shareholders should use stop-loss orders.  New investors should look for companies with stronger earnings growth, such as this international company with double the earnings growth, a lower PE and a 2% dividend yield.  (04/18/13)

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Target Misses the Mark in the First Quarter

Target Corp. (TGT, $68.51) has lowered first quarter sales and earnings guidance to Wall Street, while maintaining expectations on full-year numbers.  March weather was very unfavorable for Spring merchandise sales.  Same store sales are expected to be flat for the quarter, and up 2.4% for the year.

Morgan Stanley Research has a buy rating on the stock, and comments, “we expect the home category to perform well in 2013.“  On Feb. 27, we told investors to avoid Target Corp. after a poor 4^th quarter earnings report and very low earnings growth projections for 2013.  Longer-term, earnings are projected to resume robust growth.  The stock has a dividend yield of 2.09%.

The stock price is up against long-term resistance in the upper $60’s.  Current shareholders should use stop-loss orders to protect profits.  New investors should wait to jump in on a dip below $65.  (04/17/13)

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BofA First Quarter Disappoints Wall Street

“Bank of America Corp. [BAC, $11.57] reported first-quarter profit that missed analysts’ estimates as lower mortgage banking income and higher legal costs slowed the firm’s turnaround,” reports Bloomberg.  BofA reported 20 cents per share vs. an expected 23 cents.  Fixed income trading revenues were also lower than expected, while equity and investment banking revenue numbers came in favorably.

Citi Research commented, “progress has been made with divestitures and cost cuts. However, the focus is shifting to earnings power and we believe it will take time for some of the earnings drivers to materialize.”

CEO Brian Moynihan is making big gains at solving balance sheet problems at BofA, and earnings per share are projected to grow rapidly from here on in.  We discussed Moynihan’s strategic focus on April 3. Shareholders should be prepared for price resistance at $15 and use stop-loss orders to protect capital gains, as the share price swings on each news announcement, and price support is fragile.  (04/17/13)

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Cirrus Logic Reports Gross Margin Disappointment

Cirrus Logic Inc. (CRUS, $18.35), a developer of integrated circuit technology, preannounced unaudited fourth quarter revenue of $206.9 million.  Unexpectedly, Cirrus will record a net inventory reserve of $23.3 million, as a key customer shifted its focus to a new Cirrus product, negatively affecting gross margins.

The company expects gross margins to rebound in the next quarter.  Final fourth quarter results will be posted April 25, after the close.

Cirrus shares tripled in value in 2012, from $16 to $45, then began a freefall in September.  The stock has not yet formed a base, and has lost almost its entire 2012 gains.  We do not recommend owning this stock.  (04/17/13)

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U.S. Bancorp Reports First Quarter Earnings

U.S. Bancorp (USB, $32.65), reported a first quarter in-line with analysts’ expectations.  Morgan Stanley Research commented, “Lower fees were more than offset by lower expenses.” Expenses improved due to lower regulatory, litigation and insurance-related costs.

The company is expected to increase earnings per share between 7 and 9% over each of the next three years.  The PE is 10.9, and the dividend yield is 2.34%.

U.S. Bancorp’s chart is neutral, recently trading in a tight range between $33 and $34.50.  The stock has fallen below support today, and investors should be cautious.  Citi Research says “expectations are too high for this stock.”  (04/16/13)

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Citi Research Likes BlackRock’s First Quarter Earnings Report

BlackRock Inc. (BLK, $252.29), the world’s largest asset manager, reported first quarter earnings of $3.65 per share, compared with an estimate of $3.57.  Citi Research attributed the earnings beat to a lower tax rate, “slightly higher revenues and better margins led by strong expense control.”

Wall Street expects earnings per share to increase 16%, 13% and 15% over the next three years.  The PE is 16.0.  BlackRock increased the dividend to $1.68 per quarter, yielding 2.65%.

The stock broke past medium-term resistance at $240 in February.  Citi Research has a Buy rating on the stock, and a 12-month target price of $285.  We would buy the stock on any dip below $250.  (04/16/13)

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Goldman Produces First Quarter Earnings Beat

Global investment banker Goldman Sachs Group Inc. (GS, $143.74) reported “first-quarter adjusted earnings of $4.29 per share, compared with an estimated $3.87,” reports Bloomberg. A reduction in compensation accrual accounted for more than half the earnings beat.  Most revenues were higher than expected, but Morgan Stanley Research says, “weaker trading revenues were a disappointment.” Assets under management were down a worse-than-expected $4 billion.

Citi Research says that the quarterly comp ratio improvement “should not significantly impact our full year estimates.”  Earnings per share are expected to fall 1% this year.

Goldman shares are continuing to recover from the 2008 Financial Meltdown.  The stock broke out in early January, rose 30 dollars, and is now in a pullback phase.  Shareholders should watch to see if the stock holds support at $140.  The lack of earnings growth would keep us on the sidelines.  (04/16/13)

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Thermo Fisher in Agreement to Buy Life Technologies for $13.6 Billion

Thermo Fisher Scientific Inc. (TMO, $81.50) and Life Technologies Corp. (LIFE, $73.16), makers of laboratory equipment, have agreed to merge operations in early 2014.  The “move could enable the company to slash costs and reap gains from next-generation genetic-sequencing machines,” reports Dow Jones.

Thermo Fisher will pay $76 per share for Life Technologies.  Thermo Fisher is expected to grow earnings 10-11% per year for each of the next three years.

TMO has had a big run-up since it broke past long-term resistance at $65 in January.  Shareholders should use stop-loss orders to protect profits.

LIFE shares have risen enough that shareholders could make more money by selling, and investing in another growth opportunity, vs. holding the shares until the merger.

Investors who would like to be kept apprised of merger details and tax implications may sign up for the free Goodfellow LLC newsletter by emailing research@goodfellowllc.com.

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Dish Network Makes Informal Competing Bid for Sprint Nextel

“Satellite-TV provider Dish Network Corp. [DISH, $35.34] is making a $25.5 billion bid for Sprint Nextel Corp. [S, $7.03], an effort to derail the No. 3 U.S. wireless carrier’s acquisition by Softbank Corp. of Japan,” reports Dow Jones.”

“Dish is offering to pay $4.76 in cash and about $2.24 in Dish stock, based on Friday’s closing price, for every share of Sprint.  Dish argues that the deal represents a 13% premium to Softbank’s complicated proposal to buy 70% of Sprint for $20.1 billion.”

Sprint shares crashed with the 2008 Financial Meltdown, and have never recovered.  The company has been taking losses for years, and is projected to continue losing money for the next two years.  Shareholders should take advantage of the bidding war and sell shares in this struggling company while they have a best-case price scenario.

Dish Network is a highly-leveraged company.  We do not recommend companies with compromised balance sheets at Goodfellow LLC. The shares have been trading between $35-$38, and there’s long-term price resistance at $40.

Investors who would like to be kept apprised of merger details and tax implications may sign up for the free Goodfellow LLC newsletter by emailing research@goodfellowllc.com.

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Citigroup Beats Expectations with First Quarter Earnings Report

Citigroup Inc. (C, $45.88) reported first quarter earnings per share of $1.23, up 30% from a year ago, and beat the consensus estimate of $1.17.  Revenue was up 3%, helped by a release of loan loss reserves in the mortgage unit.  The report also featured better than expected numbers in fixed income, equities, mortgage origination volume and expenses ratios.

Citi is expected to grow earnings per share 19%, 13% and 16% in the next three years.  The PE is 10.  The share price is on an uptrend, and there’s price resistance at $51.

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