Monthly Archives: October 2011

Interpublic Group (IPG) – Advertising Spend Growing

October 28, 2011

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.

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Volatility Collapse

October 27, 2011
  • The VIX peaked in early August at 47.
  • For three months the VIX has been range bound between 30-47.
  • With yesterday’s announcements in from Europe, the volatility index is down 15% to 25.5.
  • The market is back to the higher-end of what was “normal” all through September 2010 – July 2011.
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Coach’s Lew Frankfort: “No Hard Landing In China”

October 25, 2011

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.

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Confidence – A long-term trend lower

October 25, 2011
  • One can’t help but notice the continual disappointments in all of the consumer confidence prints
  • The disappointment du jour was from the conference board which came in at 39.8 vs. and expectation of 46.
  • Fortunately this data doesn’t correlate or generally matter with regard to actual economic activity, GDP growth, and corporate earnings.
  • Aside from the economic impact, it is interesting that consumer confidence continues to trend lower over time. An interesting philosophical question about why we are simply less confident in the future here in the US?

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Charlie Rose Interview with Ray Dalio of Bridgewater Associates

October 23, 2011

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:

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Chipotle (CMG) – Best Restaurant Growth Stock

October 21, 2011



  • Chipotle beat the earnings consensus by $0.05 posting $1.90 vs. consensus of $1.85
  • Chipotle (CMG) is worth keeping an eye on because it is the fastest growth and highest valuation restaurant stock in the world.
  • Same store sales were 11.3% which is a tremendous result. Chipotle has been adept at continuing to move the lines in the stores quicker.
  • Chipotle likes its restaurant base so much it owns all of them – which is a very different model relative to McDonald’s and Yum Brands. Owning the restaurants requires more capital but enables Chipotle to capture all the profit from each unit and leverage corporate expenses easily when sales are robust.
  • Chipotle is accelerating their new restaurant openings. Growth still has a long runway in the US and has only begun in Europe and around the world
  • Next year earnings will likely be between $10-$12 per share
  • 2013 earnings will like be $14-$15 per share
  • While the valuation of the stock is very high, investors really believe in the growth of the CMG restaurant base so that every dip gets bought quickly.
  • The stock price is $330 but appears sustainable with the potential to move higher as overseas results demonstrate more growth avenues.
  • The Chipotle market capitalization is now above $10B.
  • The short interest is 10.5% of the float
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Wynn Resorts (WYNN) – Chinese Gamblers Have a Good Run at Baccarat

October 19, 2011

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:

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Apple (AAPL) – Quarterly Earnings Preview

October 18, 2011

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:

  • Q3 11 (last quarter):   33%
  • Q2 11:   18%
  • Q1 11:   19%
  • Q4 10:   13%
  • Q3 10:   13%
  • Q2 10:   35%
  • Q1 10:   77%
  • Q4 09:   28%

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

  • Sales consensus is $29.6B
  • EPS consensus is $7.31
  • EPS estimate range is:  $6.50 to highs of $7.80 or so

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Intel (INTC) Q3 Earnings Preview

October 18, 2011

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.

Into Q3:

  • Company Sales Guidance $14.1B (+/- $500M)
  • Street consensus ($13.87B)
  • Gross Margin company guidance (63% GAAP, and 64% non-GAAP) +/- 2%
  • Street Gross Margin estimates generally range from 63%-64.3%
  • EPS consensus is for $0.61
  • Street range is generally $0.60-$0.62

Q4 guidance will be important

  • Normal sequential sales seasonality is for 6% growth in Q4
  • Wall Street consensus is for +2.5% growth
  • EPS for Q4 are estimates at $0.65

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.


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Parker Hannifin (PH) – Super Solid Q3

October 18, 2011

Parker Hannifin is one of the world’s leading diversified industrial companies. Parker Hannifin (PH) has large businesses in motion control, aerospace, fluid power systems, electromechanical controls, air conditioning, industrial refrigeration and thermal products. Parker reported record third quarter earnings which grew about 20% vs. a year ago. Organic sales growth was +10% which contained 3% from FX and 1% from acquisitions. Parker Hannifin not only had strong sales but grew operating margins to new records of 16.1% with particular strength in the American industrial segment and aerospace.

Parker Hannifin raised earnings guidance from a range of $6.70-$7.50 last quarter up to a new range of $7.25-$7.85 after today’s release. This is above the Wall Street consensus which was still sub $7 going into today. Guidance was raised by 6.3% and is significantly above wall street estimates ($6.96) so this has led to a 3% rally in the shares despite some strength heading into the quarter and a tough tape.

The conference call has just started. I will listen and post some quick thoughts a little later today.

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