April 30, 2012
April 30, 2012
by Shawn Narancich, CFA
Vice President of Research
Ferguson Wellman Capital Managment
Is Another Summer Swoon on the Way?
Meanwhile, economic data continues to weaken in the month of April as euro zone manufacturing activity declined andEnglandofficially entered recession while domestically, durable goods orders fell in March and 2.2 percent first quarter GDP growth undershot expectations. After the Fed meeting this week in which near-zero interest rate policy was maintained, investors took Bernanke’s post-meeting commentary to read that QE3 is a medicine approved for use if the recent soft patch of economic data metastasizes.
Perhaps the most attention-grabbing earnings headline of the week came from a company that is not yet publicly traded: Facebook. We noted with surprise that the social networking giant reported declining first quarter profits ahead of their planned IPO next month. Although revenues increased 45 percent from a year earlier, they dropped sequentially and earnings fell 12 percent year-over-year. Investor demand for this IPO will still be tremendous, but one has to question whether a rumored $100 billion valuation is appropriate for a business model with only $1 billion in profits that’s already experiencing growing pains.
Spoon Fed with a Fire Hose
Investors were bombarded by over 500 earnings reports across sectors this week, headlined by Apple which again blew away consensus expectations. After officially correcting, its stock rocketed 9 percent higher on a 92 percent surge in profits, adding the equivalent of Hewlett-Packard’s market cap in one day’s trading. While sales growth of the iPhone is slowing domestically, Apple’s phone sales in China are skyrocketing. Domestically, AT&T benefitted from reduced subsidy costs on fewer new iPhone customers, driving improved wireless profitability and better-than-expected earnings. Investors greeted the news enthusiastically, sending Ma Bell up 6 percent. Closing the loop on telecom, the news wasn’t so good for the cellular service providers offering less expensive pre-paid service, as Leap Wireless and MetroPCS Communications both missed estimates and saw their stocks plummet by 25 percent and 12 percent, respectively. The contrast in outcomes here can be attributed to two key factors—premium devices and superior networks—the combination of which AT&T and rival Verizon Wireless enjoy at the expense of smaller operators.
A Commodity of Contrasts
Integrated oil companies Exxon Mobil and Royal Dutch Shell demonstrated that all gas production is not created equal; while Royal Dutch reported earnings growth above expectations that was driven by international natural gas projects, Exxon Mobil undershot expectations, reporting earnings that fell 7 percent. Many moving parts explain the story, but one contributing factor to Exxon’s underperformance was low U.S. natural gas prices that dampened the profitability of its petroleum production. Past web logs have noted the distinction between domestic and international gas prices, but with the U.S. commodity languishing at prices of $2 per thousand cubic feet, how good must Royal Dutch feel to have a substantial portion of its gas production coming from Australia and Asia, where pricing for LNG cargoes is as high as $18/Mcf? We do not expect this price arbitrage to persist longer-term because markets will ultimately prevail in normalizing the differential, but for now, the contrast is striking.
Our Takeaway from the Week
– Strong earnings trumped weaker economic data as investors pushed stocks higher by nearly 2 percent