Intel’s numbers say it all:
Geography also hurt with Europe down 26% and Asia-Pacific (the world’s fastest growth region) down 16%.
These numbers simply are awful. Intel holds an analyst meeting in New York next week. We will see if they bring anything new to the table.
Analysts and the press focused on JP Morgan’s weak fixed income results today. JP Morgan has been getting squashed by its competitors from Bear to Goldman to Lehman to Merrill on this front. However, Jamie Dimon has been saying consistently that he has been reorganizing the unit and sees little value in this market and will not expose the company’s balance sheet to this risk. But it’s competitors continue to plow along with incredibly strong results.
It is hard to imagine how the fixed income results for so many investment banks could be so good. Not since the 1980s and Bonfire of the Vanities with the iconoclastic Master of the Universe bond trader/investment banker Sherman McCoy or in the 1990s when the infallible John Meriwether and the Nobel prize-filled Long Term Capital, who took on risk-free positions with infinite leverage, have bond traders graced the headlines with such stardom and performance. Both the fictional McCoy and the not-so fictional Meriwether came back to earth. We will see if the outstanding fixed income results reverse and bring these big investment firms back to earth during the next few quarters.
Today’s call was a refreshing reminder of why the investment community likes Jamie Dimon. He reiterated his position that he will not risk the company’s balance sheet to chase the performance of the other major investment banks in fixed income. The bond bull market was very mature when Dimon took control of JP Morgan Chase and he is committed to not getting whipsawed. In addition, Dimon was pretty candid about the outlook on the consumer credit business which appears to be maturing in a number of different ways. Not only in terms of growth in balances but it also appears that as baby boomers age they are beginning to pay down their credit a lot quicker. My guess is this trend began to emerge in the middle of 2005.
To offset this weakness, JP Morgan Chase is going to focus on its branch network and appears to have a lead on the other money center banks in this regard. Growth in sales of mortgage origination, credit cards and other branch-related service were very strong. The company also announced it repurchased $1.6 billion of stock in the quarter and the board approved an $8.0 billion buyback going forward.
All told, JP Morgan’s results were pretty solid and this stock has to be owned by portfolio managers who are concerned about what a bear market in bonds will do to the results of the other investment firms. This is Dimon’s baby and he wants to prove he can do it on his own. It appears that he is taking a fundamentally sound approach.
Susan Decker, CFO for Yahoo, threw out financial metrics during yesterday’s conference call that are usually applied to value stocks. Is she nuts? On the surface, Yahoo trades at 60x 2006 GAAP EPS. How can one suggest 60x earnings falls into the value camp?
Investors should remember that Yahoo is down big from its peak price of $43.66 in January of this year, a 24% decline. This brought the market cap to about $49 billion. The company is expected to end 2007 with about $4.0 billion in cash on its balance sheet after adjusting for debt and owns a 34% stake in Yahoo! Japan worth about $12.4 billion. (Yahoo! Japan is doing very well against competitors in its market.) Take out another $1.4 billion for Yahoo’s stake in Alibaba, the Chinese portal, and this brings you down to an enterprise value of about $31 billion. Wow! that is not the bubble valuation that I remember.
Take that $31 billion and compare that to an EBITDA estimate of $2.6 billion and you get an enterprise value to EBITDA valuation of 12x 2007 estimate. That’s not too bad for a company growing its EBITDA 20% per year.
In the 1980s and 1990s that was the mid-valuation range for high-growth media companies such as wireless, cable and radio. Maybe CFO Decker was right to subtlely throw out some old-fashioned value-investor metrics.
Whether you want to classify Yahoo as a value stock or not, its operating performance for the quarter was solid. It is going to host an analyst day on May 7th at which time it is going to announce a new ad revenue model. It appears that Yahoo’s management feels comfortable enough with its business model to make such an important change. In addition, management mentioned it was confident it can keep Yahoo growing for the next few years. There appears to be plenty of substance behind today’s rally.
Level 3 announced the acquisition of ICG, which owns quality assets in Colorado and Ohio. This comes on the back of Progress Telecom which is focused in the southeast and the acquisition of Wiltel in 2005.
SBC acquired AT&T’s long distance business and Verizon has purchased MCI. Supply is becoming less and less as demand for capacity increases and increases.
Telecom reminds me of the housing industry in the 1990s. After the savings and loan crisis of the late 1980s, all the major home builders were on the verge of bankruptcy. Those who survived consolidated the industry during the next decade, making some 30x to 40x investor’s money by the middle part of this decade.
US Reports Another Trade Deficit: What A Waste Of A Stat
The US reported a $65.7 billion trade deficit for the month of February. For all of 2005, the deficit was $724 billion. Once again, the press jumped all over this number–implying we are exporting our way to extinction.
The reality is that since Reagan ignored the trade deficit and opened US boarders to competition, the US and global economies have boomed. With the growth of the trade deficit, inflation has crashed, unemployment dropped, stock markets surged, communism has been vanquished and democracy has flourished.
I recall a speech given in the earlier part of this decade in which a Wall Street strategist did an analysis of what US companies produced abroad. He found that the GDP of all US company’s foreign subsidiaries would be equivalent to the 3rd or 4th largest economy in the world. When someone compares this figure of $2 to $3 trillion of GDP produced by US-companies abroad each year, the 2005 trade deficit of $724 billion does not look big at all. It looks like the global market has evaluated the US trade deficit a lot better than talking heads and pontificating tenured professors.
WOW!!! What results! Who would have ever thought this from AMD.
The big plus in this semi upturn is that a lot of the growth is occurring in new markets that were not aware of AMD chip problems in the 1980s and 1990s and are willing to try them–sales strong in China, Russia and other Asian countries. In addition, enterprise, data center, blade servers are all doing well—all important high growth market segments.
Gross margin outlook OK and most likely being overly cautious but it appears serious pricing pressure at the high end is still not a concern for 2006. AMD management still believes it can get 30% market share.
With quarter after quarter of good results, large institutional portfolio managers will have to continue getting back into AMD.
Great results for such a large company, but everything is so ho-hum. Everything seems so stable and predictable. One could almost fall asleep during the call.
• For the first quarter, EPS up 19%, cash generation up 100%
• Global infrastructure business doing great
• Financial services continues to execute well
• $10 billion of free cash flow for 2006
• 13% to 17% EPS growth for the year for 2006
The investment community knows we are NOT in an environment of predictability and stability. We are in a period of globalization, creative destruction and boom and bust. While stability is often comforting, with listening to GE’s management, the complacency was discomforting and almost feels like the calm before the storm. The storm might be five years out, but you have a sense it is coming.
When speaking about new high growth business, the comments are so antiseptic. There is little passion associated with pure high growth businesses.
While the company does a great job managing a widely diverse group of businesses, one’s gut instinct says it is not sustainable for the long term. That is why the stock is doing little after great results. GE’s valuation has gone from a P/E of 30x at the market’s peak in 2000 and is now down to a P/E of 17x 2006 earnings. No matter how great the results are, this stock will not move. The “Invisible Hand” is telling us there is something wrong.
After posting the AES blog last Thursday, Citigroup issued a report on Monday upgrading the stock to a buy with a target price of $20. The reasoning behind Citigroup’s upgrade are the reasons listed in last week’s blog, the most important of which is the massive free cash flow generation potential in late 2007 and going into 2008.
AES held its year-end 2005 conference call this morning after releasing results on Tuesday. AES, once a high flyer during the 1990s and a major holding in virtually all growth portfolios, is receiving little attention from the investment community as it rebuilds its business and becomes a free cash flow machine.
AES crashed from $86 in 2000 to $1 in October of 2002 before new management was able to convince creditors of its restructuring plans and avoid the bankruptcy plunge. The huge 1990’s interest in the company was due to the great international growth prospects for electricity production as democracy and capitalism flourished around the world. Emerging markets needed electricity to participate in this era of prosperity and AES was the one to provide it. With its global reach and experience in the less developed areas of the world, this provided the company with a great competitive advantage to get a leg up on future competitors. Investors went crazy over the growth prospects for this company.
As the world’s currencies adjusted, overleveraged industries restructured and economies needed to correct their excesses, AES needed to do the same. After generating no free cash flow for investors during the 1990s, the company in 2003 began generating about $1.0 billion in free cash flow each year and was able to considerably lower its debt levels. In addition, despite a weak earnings outlook for 2006, the company expects to generate in excess of $2.0 billion in free cash per year beginning 2008.
The negative in today’s conference call was its earnings outlook for 2006. The company had an excellent 2005, but warned Wall Street of essentially flat earnings for the current year. This is unfortunate considering management has exceeded all the financial goals it set out in its meeting with the investment community in 2003. Management indicated that it will have to pick up some spending to meet environmental standards in the US this year. It is also our belief that management is laying the ground work for higher growth beginning at the end of 2007 and going into 2008. Management hinted that it would begin reviewing these projects in greater detail with the investment community in the fall of 2006.
After avoiding bankruptcy in 2002, AES stock ran up to $8 and hit a plateau until it began to hit its numbers. Today, the stock is around $17 and has moved little since January of 2005, essentially discounting 2006 results. The next big move in AES’s stock will be driven by an upsurge in earnings which will be dependent upon investments they are making in 2006. This is a company that is in the sweet spot of the global boom–emerging markets are filled with wireless phones and they all need to be recharged. The political pressures are too great for government not to have the necessary electricity to meet this demand. If AES management can execute in the next growth phase in the post-bubble environment, investors should be well rewarded. We should see evidence of their success or failure this fall.
The Information Age: Interesting Quote
In a speech this week, UK’s foreign secretary Jack Straw alluded to a report by leading Arab intellectuals living in the free world.
The report said that Hewlett Packard in one month signs as many patents as the whole Arab world has in the last twenty years.
Once again supporting the view that multi-ethnic societies based on freedom do best.
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