Thursday, October 22, 2009

Union Pacific Not So Bullish

I always keep track of the railroad earnings as I still think they are a pretty good primer for the rest of the economy. I know there are others, but this is just one that I follow. So, Union Pacific reported this morning. More of the same...Revenues still down double digits, profits helped by cost cutting (release). I've highlighted a couple key areas.

Union Pacific Corp. said Thursday its third-quarter profit fell 26 percent
as shipping demand remained weak and the overall economy stabilized.

The nation's largest railroad couldn't offset lower shipping volumes,
though it benefited from significantly lower fuel costs, improved productivity
and other cost-cutting measures. Union Pacific operates 32,400 miles of track in
23 states from the Midwest to the West and Gulf coasts.

The Omaha company said Thursday it earned $517 million, or $1.02 per share,
down from $703 million, or $1.38 per share, last year. Analysts surveyed by
Thomson Reuters, on average, expected a profit of $1 per share.

Revenue fell 24 percent, to $3.67 billion.

"Business volumes seem to have stabilized, but at very low
levels
for Union Pacific," said Jim Young, the company's chairman and
CEO.

Union Pacific's fuel costs plummeted 59 percent, to $466
million, as the average price per gallon of diesel dropped to $1.87 from last
year's $3.70 and the railroad burned 19 percent less fuel.

Union Pacific's compensation costs and headcount fell 11
percent
.

Union Pacific said it still had 4,100 employees furloughed, and it has
50,000 railcars and 1,700 locomotives stored. All those figures are down
slightly from July, suggesting that Union Pacific has started preparing for
higher shipping volumes, but Young said the economy hasn't shown much sign of
improvement.

"In 2010, we don't expect a quick rebound and have positioned
ourselves for a slow recovery
," he said.

Union Pacific said its freight revenue again fell across all six of its
main business segments, and the number of carloads it carried fell 15
percent.

The biggest drop in freight revenue came in the industrial-products sector,
which fell 39 percent, to $557 million. Automotive revenue fell 30 percent, to
$227 million, even as the government's Cash for Clunkers program increased
vehicle sales.

Agricultural-shipping revenue fell 23 percent, intermodal revenue fell 22
percent, energy revenue fell 21 percent and chemicals revenue fell 16
percent.

Fuel costs obviously helped and play a big role for them. They do however, see some increase in volume when fuel prices spike as they are sometimes an alternative to shipping via other method. Still though, this is a "reality indicator" that can't be overlooked. While the market roars to new highs, look at the numbers of industrial goods and raw materials. They are showing no sign of recovery.

I'm still quite concerned about employment numbers and what they mean for the economy looking out a few quarters. We're still riding the oversold bounce and I'm not saying it won't continue. Fund managers are chasing performance as they will find themselves out of a job if they don't catch this rally after last year's situation. So while the dips will be bought, the question is when will the realities of the broad economy balance out with the market. There's your million dollar question. I wish I knew the answer.

Disclosure: None

Diamond Offshore Reports Another Strong Quarter

Quick, name me a few companies that have grown revenue and net income year over year. Having trouble? Me too. Here's one. Diamond Offshore Drilling. I've written about them occasionally over the past few quarters. They operate in a very profitable industry, and to me are about the best in that industry. Here's a brief snippet from the release:

Contract driller Diamond Offshore Drilling Inc. on Thursday said third-quarter earnings rose 17 percent as rising crude prices drove up demand from oil companies for more drilling services. As the economy showed signs of recovery in the third quarter, crude oil prices stabilized, trading as high as $76 per barrel, well above a 2009 low of $46.73 per barrel in February. Diamond Offshore's quarterly earnings climbed to $364.1 million, or $2.62 per share, from $310.5 million, or $2.23 per share, during the same period last year. Analysts polled by Thomson Reuters estimated a profit of $2.30 per share, on average. Revenue rose nearly one percent to $908.4 million, up from $900.4 million in the prior-year period. Analysts forecast revenue of $874.2 million.

They operate a pretty shareholder-friendly operation as well as earnings are returned to shareholders via a regular and special dividend. This is one of those stocks you'd be alright owning a few years, which is more than I can say about a lot of stocks right now. Loews also owns about 50% of DO, and buying their stock may be a cheaper way into DO if you like the rest of their businesses (which I'll leave for another day).

Anyway, good stuff from DO. I'd be a buyer of their stock anytime it pulls back (hint: just watch the price of crude).

Disclosure: None
Besides higher sales, profit was aided by lower contract drilling costs, foreign currency gains and reduced taxes.

Tuesday, October 20, 2009

Pfizer Reports; Should I Sell My Shares?

Now that I own some Pfizer stock (due to the acquisition of Wyeth), I feel obligated to at least post on Pfizer's earnings. (marketwatch)

-The world's largest drug maker posted net income of $2.88 billion, or 43 cents a share, compared with $2.28 billion, or 34 cents a share, for the same quarter in 2008.

-Excluding various items, Pfizer would have reported adjusted earnings of 51 cents a share, versus 62 cents. This year's quarter was also impacted by a higher tax rate, due largely to its merger with Wyeth.

-Revenue in the period fell 3% to $11.62 billion, from $11.97 billion.

-Pfizer was expected to report lower year-over-year sales, with the loss of patent protection for such former blockbusters as Norvasc and Zyrtec weighing heavily on its top line.

-Still, Pfizer's sales results managed to top Wall Street's expectations. According to a recent poll of analysts by FactSet Research, Pfizer was pegged at posting earnings of 48 cents a share on revenue of $11.44 billion.

-On Oct. 15, Pfizer finally closed its $68 billion merger with Wyeth, which was scheduled to release its earnings Thursday. Pfizer halved its once-coveted dividend several months ago to help finance the takeover.

-Pfizer also updated its 2009 financial forecast to reflect the acquisition. The drug maker now sees revenue of $49 billion to $50 billion, up from its previous forecast of $45 billion to $46 billion. Earnings are seen between $1.45 and $1.50 a share, up from $1.30 to $1.45. Adjusted earnings should come in between $2.00 and $2.05 a share, up from $1.90 to $2.00.

I'm still making up my mind about this stock. As long as it continues to move higher, I'm not going to sell it. I don't typically like companies that make massive acquisitions as I fell there is a lot of waste and its difficult to manage that many different operations and still grow. But they have a pretty strong sales pipeline now as Wyeth was a great company (that's why I owned the stock). But Pfizer did have to cut their dividend to finance this deal, which is one of the reasons to like Pfizer in the first place. I haven't had time to do a ton of research on this yet, so like I said, I'm still up in the air on Pfizer.

Disclosure: Long PFE

Caterpillar Reports; Not Much New

Caterpillar reported quarterly results this morning. I like to keep an eye on companies like Cat due to their cyclical nature and I feel they can give us a tell on if the economy is improving. They beat estimates, which were laughable. Sales and profits are still substantially down, and they are selling the hope, just like many others. Here are some quotes from the Bloomberg article.

“We believe the third quarter marked the low point for Caterpillar sales and revenues in what has been the toughest recession since the 1930s,” Owens said in the statement. “We are seeing encouraging signs that indicate a recovery may be under way.”

The company narrowed its 2009 forecast range to $1.85 to $2.05 a share, from $1.15 to $2.25. The average estimate was $1.48 a share and the highest prediction was $1.75. The revenue forecast is now $32 billion to $33 billion, compared with its previous forecast of $32 billion to $36 billion.

“The world economy is still facing significant challenges,” Owens said in today’s statement. “There is uncertainty about the timing and strength of recovery.”

“We’ve already started planning for an upturn,” Owens said in the statement. “When it comes, it can come quickly, and we, our dealers and our suppliers will be prepared.”

In a preliminary forecast, Caterpillar today predicted 2010 sales would increase 10 percent to 25 percent from the midpoint of the 2009 forecast range, partly driven by the end of dealer inventory reductions.

As I've said before many times, and will continue to say, selling the hope is okay. The economy may have bottomed. But Wall Street has been buying the hope big time since late spring. Now stocks are just too expensive and have fully priced in a recovery which has yet to appear. That's why its dangerous to just "buy stocks", which is my term for just jumping back in. I still think there are deals out there, but large cap stocks have just been bid up too high in my opinion.

Onward...

Monday, October 19, 2009

Einhorn Speaks at Value Investing Congress

David Einhorn of Greenlight Capital is someone I'm always eagerly listening to. He is very intelligent and manages money for a living. As I've said many times, the people that are intelligent and have their own money on the line are the only ones I truly listen to. Believe me, there are very few of them. But Einhorn is one of them.

Here's the text of his speech today at the Value Investing Congress. I got this via Rolfe Winkler's blog at Reuters. There's a lot of great stuff in here.


Here's just one good quote, about gold:

I have seen many people debate whether gold is a bet on inflation or deflation. As I see it, it is neither. Gold does well when monetary and fiscal policies are poor and does poorly when they appear sensible. Gold did very well during the Great Depression when FDR debased the currency. It did well again in the money printing 1970s, but collapsed in response to Paul Volcker’s austerity. It ultimately made a bottom around 2001 when the excitement about our future budget surpluses peaked.

Saturday, October 17, 2009

A Late Friday Buy

I made a small purchase at the end of the day Friday. Its a small company called TII Network Technologies (TIII). They supply products in the DSL, surge protection, and VOIP arenas, amongst other things. Click here for a full profile.

I'm just looking strictly at value on this one. It trades at less than half of its current book value. They have nearly 11M in cash, and for a company with only 16M market cap, that is a pretty good safety net if the economy doesn't recover as quickly as some predict. Like most companies, revenues are down year over year, but operations are improving.

Now is the time to scoop up values in companies like these. I'm finding more opportunities in small cap names right now. The large cap stocks are followed so closely and bought by so many funds. I just can't find much value in large cap stocks right now. The key with these small cap names is make sure they are sitting in a good cash position and won't be reliant on credit to finance operations for an extended period of time, and you'll be ok.

Its a small position, and I may add to it, but it won't become too large for me. Its lightly traded and I'm not a fan of taking big positions in stocks like this. But I do think its worthy of getting a shot here. Here's a link to their latest quarterly report. (pdf)

I got this idea from Arohan's Investing Life Premium, which is a great service. Check it out, as he has many more great ideas as well.

Friday, October 16, 2009

Earnings Commentary

Well, earnings season has officially kicked off. Google and IBM reported after the close yesterday. Last quarter, these two were really the drivers that kicked the summer rally into high gear. They both reported solid numbers again, but its a little different story today. Google is trading higher, but it wasn't enough to lift stocks today. We also got results from lumbering giants Bank of America and GE, both of which weren't taken as great.

It will be interesting to see if investors continue to buy every dip, which has been the case lately. The next catalyst appears it will be economic data or just more investors gaining faith in this market as we climb the "wall of worry."

I have stocks out there I'd like to buy, but again feel many portions of this market have come too far, too fast. With earnings coming out daily, I'll be posting more frequently, and hopefully some posts will be talking about some trading activity on my part.

Have a great weekend!

Thursday, October 15, 2009

Pfizer/Wyeth Close Deal...Should I keep Pfizer Shares?

Pfizer completed its $68 billion dollar acquisition of Wyeth today. It amounts to $33/share in cash and 0.985 shares of PFE per share of WYE. As a holder of WYE for a couple of years, I have some mixed emotions about the deal. Wyeth is a good company and could continue to provide solid returns for years to come, so in that respect, I'm disappointed. So now I have to find another stock to provide those returns on the capital I had invested. Can Pfizer provide that? That is what I need to figure out at this point. I'm typically not a fan of companies that grow through massive acquisitions. I'd prefer companies to buy smaller companies that you may not have to pay full value for.

Wyeth shares cease trading at the bell today. I'll probably follow up on this more in the coming days/weeks. I won't immediately sell the PFE shares, but will do some more research to determine if there is a better option for this capital.

Disclosure: Long WYE

Monday, October 12, 2009

Soros on Board, But Can We Profit From Green Tech?

Alternative technology and specifically energy have been a big debate over the past few years. I've spend a fair amount of time researching and looking for potential investments. I've looked specifically at wind power, geothermal energy, and natural gas for transportation. There are many other sources out there and solar is still probably the most popular. I like solar energy, but just not as an investment right now. There are too many solar companies out there right now and prices are still too high for consumers to significantly invest in this technology. As a whole, green energy is still almost entirely dependant upon being subsidized by Washington. That is gradually changing, but it will take a long time before green opportunities are just what are there for the consumer as a logical choice.

I see today that billionaire investor George Soros says he's investing $1billion into green tech. He's a very smart investor, but he's always politically motivated as well, so we have to remember that. I'd rather not get into the whole political debate over climate change, but I will say this. What do we have to lose? If we become energy independent and create sustainable alternatives that can be better for the environment at a similar cost, its a no-brainer. Even if climate change ends up not being significant, we've made a good switch.

In my opinion this whole movement comes down to this: Right now, to buy green items mean you are putting the social and environmental factors at a higher priority than the economic factors, and its just too difficult of an economy for the majority of people to do that.

Its going to be a combination of various sources that will end up working for us. The leading companies for the next few decades in this movement may not have even been created yet, and that's what makes it difficult for investors. If you really want to invest in this, I'd stick to diversified ETF's to limit single-company exposure. I'd also look at larger companies that supply products tied to this movement. ABB is one example that I've talked about before, and there are others. I'll try to find some opportunities for us in this space, but overall, I'm still a little hesitant here.

Disclosure: Long ABB

Wednesday, October 7, 2009

Update/Go Twins-Vikes!

I apologize for the lack of posts in the past few days. I was in Minneapolis for the Monday night Vikings-Packers game, and am now back home. The market will give us plenty to keep an eye on with earnings season starting (it seems like it never ends). So I expect to be doing a lot more posting, and buying of stocks. It will depend a little on how earnings come in and especially how they do relative to exceptions, but I still expect the market to pull back a bit. Thanks for checking in, and I promise, there will be more to come.

Enjoying the big wins by my two favorite teams!

Here's me after the game on Monday.

Friday, October 2, 2009

Time to Pay Attention

I've been very slow to get bullish during the summer months, and readers of the blog can attest to that. I've probably put too much energy in looking at economic data, and not enough in spotting actual undervalued stocks, which is my main objective. I feel that the ISM and employment data that has recently come up should give a reality check on the economy side. I'm not a believer in stimulus as I feel we'd be better off allowing institutions and individuals to de-leverage as opposed to encourage them to take on more debt.

Has the market topped in the near-term? Its possible. There have been plenty of people ready to buy the dips though, and I wouldn't be surprised to see that happen again either.

But like I said, I'd rather time stocks than time the market. I may make a couple of smallish buys in the next few days, and you can't expect to see more activity post-wise. As a value guy, its more fun when the market goes down as its time to pay more attention to the action again.

Let's find some value, and make some money!