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Qualcomm: Now that’s a surprise

posted on July 21, 2016 at 7:41 pm
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Update July 21. After the close of the market yesterday, July 20, Qualcomm (QCOM), the biggest maker of chips that run mobile phones, reported net income of 97 cent a share for the quarter that ended on June 26. That beat the 73 cents a share earned in June quarter of 2015. Excluding one time items earnings came to $1.16 a share. Wall Street analysts had forecast earnings, excluding items, of 97 cents.

Revenue climbed to $6.04 billion, up 3.6% year over year. Now that might not seem much of an increase, but this quarter marks the first time in a year that the company hasn’t reported a double-digit drop in revenue. Analysts were looking for revenue of $5.59 billion.

Sure a big surprise since growth has pretty much disappeared for the makers of higher end smart phones, the part of the market that Qualcomm dominates.But this quarter Qualcomm saw an increase in licensing revenue from Chinese makers of chip sets for phones.

But Qualcomm wasn’t done with the surprises. The company raised guidance for the September quarter to $5.4 billion to $6.2 billion in revenue. Profit before items will be $1.05 to $1.15 a share, the company now forecasts. Wall Street had been looking for revenue of $5.72 billion and earnings of $1.08 a share for the quarter.

Qualcomm has been one of the best performers in my Dividend Income portfolio, climbed 17.79% as of the close today, from my original purchase date of May 5, 2016. The shares were up 20% for 2016 to date as of today’s close.

That higher price per share unfortunately lowers the dividend yield but Qualcomm still yields 3.53%. The company raised its quarterly dividend from 48 cents a share to 53 cents share in April. The next dividend of 53 cents a share will be paid to shareholders of record as of August 31, 2016.

I like the trend in the company’s business and its ability to grow revenue, finally, during what isn’t the easiest market for smart phones. And I like the growth in the company’s dividend–to 53 cents a share now from a quarterly 42 cents a share in March 2015. I’m keeping Qualcomm in my Dividend Income portfolio.

Looking at the Microsoft earnings beat that wasn’t

posted on July 20, 2016 at 7:34 pm
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Shares of Microsoft (MSFT) closed up 5.31% today after the company announced earnings that beat Wall Street projections.

It’s always worth taking a look at what “beating Wall Street projections” actually means in any specific case. Lowering projections and then beating them is an old Wall Street game–and it seems that’s what we’re seeing here.

Earnings at Microsoft–excluding certain items–came to 69 cents a share. That certainly beat the average analyst forecast of 58 cents a share. But… analysts had cut their estimates from 67 cents a share in June to that 58 cents a share figure that prevailed as the company reported. So, yes, Microsoft jumped the most recent earnings hurdle by 11 cents a share, but it only hopped over the month earlier forecast by 2 cents a share. Further, if you care to go where the market doesn’t seem interested in treading, Microsoft got the benefit of a lower tax rate this quarter. Adjust for that lower rate and earnings would have been just 63 cents a share.

And then there’s the issue of those excluded items. If you include all those items–which came to $1.1 billion including further write downs of the disastrous purchase of Nokia’s cell phone assets–then net income was just 39 cents a share. Way short of 69 cents a share, 63 cents a share or even 58 cents a share.

If the size of an earnings beat seems a questionable metric for evaluating the quarter, what numbers would I pay attention to?

First, revenue growth from cloud computing was indeed impressive-especially in contrast to the continued struggles at IBM evidenced in the company’s earnings report on Monday, July 18. Microsoft reports cloud revenue in a “whacky” (I’m being kind here) format called annualized revenue, which takes revenue from the current quarter and then annualizes it for year as if future quarters were somehow predicted by the current quarter. (Reminds me of one of my favorite punning jokes. The punchline is “Don’t hatchet your counts before they chicken.” You can Google to find the body of the joke.) But, even so, cloud revenue growth was very, very positive at an annualized figure of $12.1 billion. Microsoft’s stated goal is to reach $20 billion in revenue from commercial cloud products by fiscal 2018 (which would end in June 2018) and on these figures that goal is a stretch but possible.

Second, while revenue from the company’s cash cow More Personal Computer division (Windows, etc.) continues to decline–dropping 3.7% year over year in the quarter–the drop is not very fast. It looks like Microsoft will have the time to make the transition to a cloud computing world.

Third, the continued charge against earnings from the Nokia acquisition should be a reminder that Microsoft has a checkered record when it comes to big, expensive acquisitions. In June Microsoft agreed to buy LinkedIn for $26.2 billion. I find it tough to figure out the logic of that purchase and its price.

And finally, moving from Microsoft in particular to a stock market trading at record highs–the Standard and Poor’s 500 stock index closed up 0.43% to 2173.02 today–one key takeaway from Microsoft’s earnings conference call was the lack of concern about the effects of a stronger dollar. From a companywide point of view Microsoft is projecting just a 1 percentage point drag on revenue in the first half of the next fiscal year that began on July 1 and no drag at all in the second half. The damage will be concentrated in the next quarter–that is the July through September quarter. The drag in that quarter will be 2 percentage points. I’ve got two observations on that forecast from Microsoft. If the company is right, then that’s good news for this stock market because it says that worries about a strong dollar are overblown¬†and stocks can move higher from here on hopes that earnings growth will turn positive in the September quarter for companies in the S&P 500.¬†If the company is wrong and if the market as a whole buys into this complacency on the effects of a strong dollar, then we’re looking at some nasty turbulence in the second half of 2016 and into 2017. (The dollar continued its recent rebound today with the Bloomberg Dollar Spot Index up 0.27% to its highest level since June 1.

Interesting times.

How bad will the effects of Brexit be? Pick your time frame

posted on July 19, 2016 at 8:27 pm
world bomb

German investor confidence fell in July on worries over the United Kingdom’s vote to leave the European Union. Released today the ZEW Indicator of Economic Sentiment for Germany, which looks six months ahead ( in other words into early 2017), fell to -6.8 from 19.2 in June. That’s the lowest level since November 2012.

On the other hand, the International Monetary Fund, looking only at 2016, doesn’t see much danger from Brexit–in that time frame–outside of the United Kingdom itself.

The IMF cut its April projection for global growth in 2016 to 3.1% from 3.2%. It also cut its forecast for 2017 growth to 3.4% from April’s 3.5%. Growth in the United Kingdom is projected at 1.7% in 2016, down from a forecast of 1.9% growth back in April. U.K. economic growth is then projected to decline to 1.3% in 2017. That’s down from a forecast of 2.2% growth for the U.K. economy in the IMF’s April report.

The IMF forecasts are based on some very positive assumptions–that officials from the European Union and and the United Kingdom will be able to negotiate new trade agreements that don’t impose big new barriers to trade. If the talks break down, however, the United Kingdom will slip into recession, the IMF said, as banks leave London and consumer spending falls. That scenario would see global economic growth fall to 2.8% in 2017.

The fund left its projections for U.S. economic growth unchanged at 2.2% in 2016 and raised its forecast for growth in China in 2016 to 6.6% from the earlier forecast of 6.5%.

The Japanese economy will grow by just 0.3% in 2016, down from a forecast of 0.5% growth in April.

The IMF sees recessions in 2016 for Brazil, Russia, and Nigeria.

The pound is down 1.3% today as of 3:40 p.m. New York time. The U.S. dollar is up and crude is down with U.S. benchmark West Texas Intermediate falling 1.41% to $44.60.

Remarkably given all the worrying events in the world in the last week, the CBOE volatility index, the VIX, which measures how much traders are willing to pay to hedge risk in the Standard & Poor’s 500 faded at 12.44, the same as at yesterday’s close. That’s down from 25.76 on June 24, right after the Brexit vote and is closing in on the 2015 low of 11.95 in July 2015. From that low the VIX soared to 40.74 by August 24. The 52-week range on the VIX is 10.88 to 53.29.

This earnings season it’s third quarter guidance that counts

posted on July 18, 2016 at 7:00 pm
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OK, everyone knows that second quarter earnings, the earnings that companies are reporting right now, are going to be dismal. Overall earnings for the S&P 500 stocks are expected to fall 4.5% year over year according to Thomson Reuters. Earnings for technology stocks are expected to be even worse with a year over year decline of 7.4% for stocks in that sector.

But that dismal forecast is by now old news. And a stock market that heads for new highs every day is clearly looking past second quarter earnings and looking forward to a recovery in the third quarter.

Which is why guidance for the third and fourth quarters, usually released in the conference call that goes with the report of current quarter earnings is so important. Because theres no guarantee that the third quarter will see positive earnings growth.

At the end of June, just before the June 23 Brexit vote, Wall Street analysts were projecting earnings growth of 2.4% for the third quarter. Not great, perhaps, but enough so investors could feel that earnings, after five straight quarters of declines, had turned the qwuarter.

Since then, however, the forecast on Wall Street for third quarter earnings has fallen to growth of just 1.5%. Granted that’s still positive but the trend is pointing in the wrong direction for the comfort of investors in a stock market that is trading at an all time high.

These are all just projections, of course, but projections are also expectations that drive stock prices higher or lower.

Netflix misses expectations for this quarter, disappoints on guidance for next quarter

posted on July 18, 2016 at 1:01 pm
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After the close of trading today, July 18, Netflix (NFLX) reported second quarter revenue and subscriber growth below Wall Street projections. In after hours trading Netflix shares fell 16.81%. Tomorrow’s season will show whether the results at Netflix affect expectations across the technology and Internet sectors as we move into the heart of earnings season for those sectors.

The dimensions of any effect beyond Netflix will also depend on whether traders and investors believe that the company’s disappointing guidance for the third quarter is a harbinger of things to come across these sectors. Netflix forecast slower than elected subscriber growth for the third quarter of 300,000 subscribers in the United States and 2 million subscribers in overseas markets. Wall Street had been expecting 774,000 new subscribers in the United States and 2.85 million in overseas markets.

In the second quarter Netflix added a net 1.68 million subscribers, well below the company’s own forecast in April of 2 million new subscribers overseas and 500,000 in the United States. Overseas the company added 1.52 million new subscribers; in the United States Netflix added 160,000 new subscribers.

Two disconcerting facets in the miss and the disappointment.

First, higher prices increased the churn among Netflix subscribers with more current subscribers canceling their service. This trend seemed especially powerful among older subscribers.

Second, Netflix seems in danger of falling in the “it’s always something” school for explaining disappointing growth. Last quarter, according to the company, it was due to problems with new chip-enabled credit cards. Next quarter, the company said today, Netflix will face competition from the Summer Olympics.

That’s not exactly what an investor wants to hear from a company with shares trading at 343 times trailing 12-month earnings. (Not that anyone cares about Netflix’s current earnings per share but they did increase to 9 cents a share in the second quarter, up from 6 cents a share in the second quarter of 2015.)



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