- US markets close bang on the lows
- DOW down 236
- S&P 500 down 2.2%
- Russell down 3.2%
- S&P Financials down 2.9%
- Homebuilders down 4.2%
- VIX up 6% to 34
- Brazil ETF down 4%
Republic Airways is an airline holding company based in Indianapolis which owns a number of regional airlines, including; Chatauqua Air, Frontier, Lynx Aviation, Midwest Airlines, Republic Airlines, and Shuttle America. The company also operated fixed-fee flights operated under airline partners such as Delta Connection, United Express and US Air Express. Republic Airways operates in a number of cities which aren’t major airport hubs such as Columbus, Indianapolis, Philadelphia, Pittsburgh and St Louis.
Based on the current run-rate in earnings, the company will earn over $1 per share and could be set to rally back towards $8 (which is on the low end of many street price targets).
Employment Report Details:
No evidence we are in a recession
Whole Foods is a tremendous retail concept and the company is a pioneer in terms of promoting a healthier lifestyle. Whole Foods is also able to do this profitably, much more so than other retailers. It was historically unheard of for a food retailer to achieve a 35% gross margin. Whole Foods earns high margins (for a food retailer) while also growing very fast. The investment community is fully aware of this though (many analysts, the ones that do their own shopping anyway, likely shop at Whole Foods) and the stock has been bid up to a valuation that leaves little room for imperfection.
The current quarter was operationally pretty good. Identical store sales grew by 8.4% which represents the strongest rate of 2-year ident growth post the financial crisis. Gross margins were healthy and increased excluding the LIFO-charge swing, and operating profit grew by over 16%. Whole Foods has paid back all its debt and grew pre-tax profit by 25% as a result. The tax rate was down on the quarter though which along with relatively high general administrative and pre-opening expenses makes the quarter imperfect. Along with the imperfections in the current quarter, Whole Foods also left next year EPS guidance unchanged at a range of: $2.21-$2.26. Priced at over 31x earnings perfection in the current quarter and a guide higher for next year’s earnings were needed to drive the stock higher. Whole Foods shares are down almost 6% in the after-market.
The sell-off in the aftermarket simply reflects some of the premium or luster coming off Whole Foods shares. There will be bidders down below at certain multiples. For perspective, at this time last year, Whole Foods guided to EPS of $1.66-$1.71. The company ultimately earned $1.93 and beat their own guidance by 13%. Perhaps this should be factored in to a certain extent when thinking about what they will actually earn in the next fiscal year relative to the guidance of $2.26.
American Tower Corp (AMT) owns and operates wireless communication broadcast towers here in the United States. The towers service a number of industries including cellular, paging, and network services. American Tower has been a controversial stock with a high valuation – but enormous potential. The company is rather leveraged at 4.5x debt-to-ebitda so small swings in results can lead to very big swings in the stock price.
The company had very strong site leasing revenues and relatively balanced growth. AMT had strong revenues across carriers and conversion towards a REIT looks on trade for early 2012. There will be a shareholder vote on November 11th to approve the REIT status which will come with a large dividend in December 2011. The company has also been buying back shares aggressively. Given all the uncertainty around technology and carrier wars the tower operators provide exposure to the growth in cellular and smart phones while also providing financial leverage to growth in the industry. American Tower’s technicals are also quite good hitting a new high in a tough market.
Interpublic Group (IPG) is an integrated advertising agency that serves clients of many different type around the world. The company delivers customized advertising and marketing solutions for a variety of different types of advertising campaigns. The company released a very strong quarter and apparently many aspects of traditional media are not dead yet.
Inerpublic’s organic revenues were up 8.7% which was well above Wall Street estimates. One of the big drivers of sales growth was growth in the Asia-Pacific region which was up 15.3%. Margins were higher and the operating margin expanded to 10%. Interpublic was confident on their conference call which is a positive signal as the advertising markets are certainly geared to GDP growth around the world. This is an all-around positive signal for the economy. IPG’s stock price is up 10% today but is till 25% below recent highs earlier in the year.
Coach results were strong this morning coming in $0.03 ahead of the Wall Street consensus ($0.73 vs. $0.70 expectations). The drivers of the strong results are North American comp sales of +9.2% coupled with tremendous international growth. Coach is a global brand which is in the early stages of its growth cycle as distribution across Asia is hitting high gear. Over the past decade, Coach built a very strong business in Japan and has surpassed all the European luxury brands save Louis Vuitton (but this shouldn’t count as a brand in Japan it is really the Japanese women’s uniform).
Coach has one of the strongest business models in the world with 72% gross margins and very high operating margins (above 30%) as inexpensive handbags are made in China and sold around the world due to the tremendous brand equity in the “affordable luxury” space. Coach has no debt, and generates enough operating cash flows to self-fund all its own capital expenditure requirements, pay a dividend, buy back shares, and still generate excess cash for the balance sheet to boot. Coach’s growth is very high visibility as long as you believe that consumers in China, Asia Ex-Japan, Brazil, India, and Russia will want the product. The growth of the internet and global pop-culture is doing wonders for the growth rates of authentic global brands.
Coach is poised to earn well above Wall Street estimates this year. I forecast that the consensus $3.38 in earnings can easily exceed $3.50 and next year’s estimates of $3.89 are likely to be more like $4.10. Within 12 months time, if Coach can get back to its historical multiple range the shares have potential to trade to $75. Despite the recent rally from crisis lows, the shares look to have another 20% to go over the next year with a 1.5% dividend paid out along the way.
Ray Dalio rarely gives half hour interviews with the media. He discusses the state of his de-leveraging process thesis, potential fixes, and the corporate philosophy of how Bridgewater Associates is run. This is a must watch for finance aficionados like CJ:
Wynn Resorts (WYNN) reported results which missed expectations as earnings came in at $1.05 per share vs. street estimates of $1.19. Steve Wynn reported that the “hold” percentage was abnormally low which impacted gaming take by about $15M. When pressed on this he mentioned that Chinese gamblers had a good run at baccarat and had some good days of winning $5M, $6M, $7M (would have been fun to be part of that crew). Normalized hold rates would have amounted to another $0.12 in EPS or earnings of $1.17 which would have been essentially in-line. Nonetheless, Wynn has a high valuation and the stock is off over 5% in the after-hours from $130 to $123.
In terms of the read per current trends – it sounds like Vegas business is solid in October. Convention bookings are robust. ADR is improving by over 20%.
With regard to Macau, Steve was asked numerous time if credit is drying up or if business is slowing. He simply answered “No it isn’t”. Macau EBITDA year-to-date is up 46.7%. The Cotai property sounds like it will be grandiose and impactful.
When asked about the potential for US resort development in Massachusetts or Florida, Steve mentioned that both are looking promising. He proclaimed that he is: “feeling very positive in a preliminary way”. It appears Wynn may hold off on a special dividend this year in order to keep capital available for a new project if the politics work out. Last year WYNN paid an $8 special dividend.
Finally, no Wynn Resorts conference call would be the same without an excellent political tirade from Steve. Here is today’s – fast forward to the final question:
I expect a monster quarter out of Apple. I believe that Steve Job’s unfortunate death has led to a surge in support for Apple products. The beat is largely expected so the key will be do they beat by “enough” relative to Wall-Street consensus. Here are the past 8 quarters earnings beats relative to the Street:
Probably they need to beat by over 30% for the stock to march higher unabated.
Price targets generally range from $450-$550 for the stock
Intel (INTC) is at a juncture heading into earnings. The company has continually stated that they can be a growth company which will participate in the secular growth of emerging market technology adoption. Moreover at the corporate analyst day, a year and a half ago, Intel raised their longer term gross margin guidance from a range of 50-60% to 55-65%. In short, Wall Street still doesn’t believe Intel despite remaining on their plan for a number of quarters. The recent stock price multiple has drifted between about 8.5x-10.0x current year earnings for some time. Goldman Sachs semiconductor analysts, Jim Covello has had a sell rating on Intel for most of this year and is predicting a massive decline in gross margins next year. The company view is that despite heavy growth in CAPEX spendings gross margins will hang in at the middle part of the new (higher) range.
Heading into Q3, Intel shares have rallied to the high end of the recent trading range. We are getting closer and closer to 2012 guidance. If the bearish views on the street are to be correct, Intel will need to acknowledge a severe gross margin decline for next year. If Intel sticks to their view and current business trends persist next year, Wall Street earnings estimates are way too low and the stock poised for a breakout to $30.
Q4 guidance will be important
2012 the street is only expecting $2.44 which is 3% growth. If Intel continues the current business run-rate they could easily earn $2.60.