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Investor Clues in Latest Earnings
07/20/2010 9:40 am EST
Results show some themes for smart investors to monitor—and to be ready to move on when the time is right.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.
No big theoretical drumroll. No grand theory of everything. Just some exploitable trends that are emerging from the second quarter earnings numbers.
Corporate Technology Customers Are Buying
Companies are upgrading technology when new products are much faster, more efficient, and cheaper to run than the gear they'd purchased before the recession really hit. I think that's the lesson from Intel's (Nasdaq: INTC) earnings report this quarter. Sales of server chips rose 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 (NYSE: EMC) reports its earnings Wednesday and Cisco Systems (Nasdaq: CSCO) reports August 11. I already own shares of Intel and Cisco Systems in Jubak's Picks. I plan to add EMC when the time is right.
But the market doesn't like the shares of companies that are spending money now to invest in the future of their businesses. Google (Nasdaq: GOOG) got hammered when it released earnings July 15, because costs had 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 (Nasdaq: AAPL) and Research In Motion (Nasdaq: RIMM), the maker of the 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 Tuesday, and oil service technology leader Schlumberger (NYSE: SLB), which reports Friday. I understand why investors worried about a slowdown in the economy might decide to punish a company for which costs are climbing. But when the costs are actually smart investments in future business, the selling is shortsighted. 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' (NYSE: YUM) earnings report 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 (NYSE: COH), which is due to report 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. For the 12 months that ended in May, German exports climbed nearly 29%, and, as you might expect with the European Union struggling to climb out of a recession, exports outside the EU were a main driver, growing almost 40%. A German company to watch is Siemens (NYSE: SI).
This export story finds an echo in Japan. Construction machinery maker Komatsu (OTC: KMTUY), for example, has found relief from slow growth in its domestic market and the US in sales to China. Komatsu plans to double production in 2010 from 2009, largely on the strength of sales in China and Indonesia.
NEXT: Important Questions That Still Need Answers|pagebreak|
It's also clear from the earnings results so far that there are some questions still searching for answers.
Can China drive earnings growth for commodity producers enough to make investors happy? Earnings from Alcoa (NYSE: AA), the stock that kicked off earnings season July 12, didn't answer that question. 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 (NYSE: FCX), which reports Wednesday. 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, Wall Street analysts expect the company to report either a small increase—about 8% in earnings per share—from the April-June 2009 quarter or to show a slight (5%) drop in earnings of seven cents a share, to $1.31. I'll be listening to hear what Freeport McMoRan says about demand for copper in 2010 and watching to see whether 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 so, how much—on earnings consistency. We'll see a test of that when we get earnings reports from consumer-goods stalwarts PepsiCo (NYSE: (PEP) and Coca-Cola (NYSE: KO) on Tuesday and Wednesday, respectively. Johnson & Johnson (NYSE: JNJ), another company that shows solid earnings growth quarter after quarter, will report Tuesday.
Ask Not What Your Country Will Do for You . . .
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 in which every investor seems to be seeking reassurance.
JPMorgan Chase's (NYSE: 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 passed the financial reform bill and sent it on to the White House for signature. In fact, shares of JPMorgan Chase were down for much of the day and moved into the black to stay only 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, albeit seemingly informed speculation, reported that Senate Majority Leader Harry Reid, D-Nev., 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 a major alternative to oil.
That was enough to move the price of a share of Chesapeake Energy (NYSE: CHK) up 0.14% and shares of Ultra Petroleum (NYSE: 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 0.07%, and the Standard & Poor's 500 Index gained 0.12%. Chesapeake, one of the most financially leveraged of domestic natural gas producers, will report earnings August 3. Ultra Petroleum, one of the lowest-cost producers in the industry, will report July 30.
Some stocks and some sectors, however, seem impervious to any speculation about government action. Shares of SunPower (Nasdaq: SPWRA), a member of the solar sector that has been relentlessly crushed this year—after being crushed in 2009—fell even further on news of the Reid bill, dropping 3.5% on the day. SunPower will report earnings Tuesday. I wonder if anything the company can say will move up the stock against the extreme negatives surrounding the sector.
Earnings season runs hot and heavy until early August. I personally count Cisco's earnings, to be reported August 11, as marking the end of the season.
In other words, we've got lots more earnings data ahead to sift through in search of patterns that might bring order out of this confusing market.
At the time of publication, Jim Jubak's personal portfolio did not include shares of any company mentioned in this column.
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Jim Jubak has been writing "Jubak's Journal" and tracking the performance of his market-beating Jubak's Picks portfolio since 1997 on MSN Money. He is the author of a new book, The Jubak Picks, and he writes the Jubak Picks blog. He is also the senior markets editor at MoneyShow.com.
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