Earnings Round Up

Thursday, 11 February 2010 23:45 Written by James Van de Voorde

CVS Caremark: CVS beat the Street with an 11% increase in earnings on a 7% rise in sales.  The company forecasts earnings of between $2.74 to $2.84 per share in 2010, equating to a forward PE of between 11-12 at current prices.  Drugstore competetior Walgreen's trades at a PE of 15, while pharmacy benefit manager (PBM) Medco Health Solutions trades at a PE north of 20.  CVS is a hybrid, part drugstore and part PBM, and trades at a significant discount to it pure play peers.  Should the company fix the issues troubling its Caremark PBM unit, the stock is headed materially higher.

NYSE Euronext: NYX topped consensus estimates with 12% YOY earnings growth and 9% sequential growth.  The big story here is that derivatives revenue growth rose 21% YOY and its market share of the U.S. options market rose to 24% in the 4th quarter.  With increased regulation of "dark pools" and derivatives combined with NYX's strategy to align its own interests with that of Wall Street's biggest firms, NYX earnings shold continue to surprise to the upside.  In the meantime, the shares trade at 10.8 times this year's consensus earnings estimate and offer a substantial 5% dividend yield.

Pepsico: PEP matched consensus earnings expectations on 4.5% revenue growth.  The company maintained guidance that earnings are on track for between 11% and 13% growth in 2010.  Pepsi further stated that they are on track to close the acquisition of its two largest bottlers and expects the transactions to reduce annual expenses by "hundreds of millions of dollars".  Pepsico will buy back $5 billion of stock in 2010. 

Diageo: While revenues continued to improve throughout its latest quarter, Diageo's earnings fell 10% for the first 6 months of its fiscal year from a year ago.  Diageo remains committed to prior guidance for the full year that profit growth will be in the low single digits.  A bright spot in the most current release is the 21% sales growth of Guinness beer in Southeast Asia.  Diago raised its dividend 5% and now offers a 4.7% yield.

In other news, United Technologies increased its quarterly dividend by 10.4% and 3M increased its dividend by 3%. 

What's up with the Market?

Saturday, 06 February 2010 00:16 Written by James Van de Voorde

After starting off the first two weeks much the way we left off 2009, the markets seemed to hit an air pocket and are now within earshot of a 10% correction.  Why?  

Here are the catalysts for the recent decline:

1) Sell the news.  Investors alreeady bought the "rumor" of higher corporate earnings and the possibility that Scott Brown might win in Massachusetts - this helps explain the lack of any meaningful correction at the end of last year and the very strong start to 2010.  The market's reaction in the wake of the actual good news indicates that earnings (74% of all companies have beat the consensus so far) and Scott Brown may have already been baked in the cake. 

2) Instead of moving to the middle after the Scott Brown election, President Obama doubled down on the populist rhetoric, vowing to move forward on health care reform, threatening a new bank tax and proposing the so-called Volcker Rule.

3) China,  The Chinese are putting on the brakes, curbing in bank lending in order to avert a potential bubble.   

4) Greece.  Bond default worries in Greece has spread to worries about Portugal, Spain and Eastern Europe.  While these nations are very small in the whole scheme of things, the Euro has weakened considerably, causing the relative value of the dollar to surge.  An unwinding of the so-called dollar carry trade has resulted.

5) Technicals.  The selling pressure tested previous support areas for the major market indices, forcing chart watchers to sell for purely technical reasons.

While I believe strongly that we are closer to the end of this correction than the beginning of something more dire, the news out of Europe serves as a wake-up call for the danger of vast deficits.