Posts filed under “Corporate Management”
Is Q2 the quarter where earnings disappointments impact the markets? After 14 quarters of double digit year-over-year earnings growth, is this the Q that blindsides investors? Its too early to tell, but there are quite a few warning signs to consider.
In particular, I am watching these 5 elements this earning season:
• Bellwether Misses: 3M, EMC, Alcoa, Lucent — each of these firms Q issues has been spun as "specific to the company" and not a sector-wide or market issue. If these numbers rise, it becomes harder to believe the company specific mantra;
• Compare the Numbers: Corporate management is keenly aware of the big 3 issues investors watch: Revenue shortfalls, profit disappointments, weak guidance. Keep on eye on how this Q compares to prior Qs in terms of these 3 data points — especially how they compare with the past few recent Qs.
• Options Options Options: Between the option backdating scandals, and more recently, "spring-loaded options," we haven’t even discussed the expensing of options. (Options expensing are a large part of the reason tech stocks have gone nowhere). Options, in all their myriad forms, are weighing on equity prices.
• Earnings Management: Between Sarbanes Oxeley and execs going to jail, there’s no doubt the quality of accounting is significantly higher than it was. But what of the overall SPX earnings management? There has been a disproportionate impact of share buybacks as a form of earnings management; Trimtabs notes nearly half a trillion dollars worth of stock repurchases were made in 2005. Measuring operating earnings in dollar terms (not per-share net basis) shows year over year gains of less than 8% — not the 12-15% widely reported.
Today’s WSJ has an article detailing how companies are increasingly issuing debt to pay for share buybacks. As Merrill Lynch’s David Rosenberg describes it, there’s a good deal less to the corporate bottom line than meets eye.
• Leadership: What sectors are putting up the strongest overall numbers? Is it finance technology and consumer discretionary? Or, are materials, energy and utilities leading? The sectors providing the most disproportionate bang for the earnings buck are quite revealing as to what is going on in the economy.
These five elements will determine whether this earnings season is a pleasant surprise or a disappointment.
Note that Wall Street tends to be poor at forecasting these changes at turning points; At a forward SPX P/E of 15-16, the market is certainly not terribly expensive — but its hardly cheap, either. I would call it fairly valued.
Keep in mind that forward earnings projections are merely opinions; If they turn out to be too optimistic — and we have already seen some hints that perhaps they are — then the market can suddenly become more expensive in a hurry.
That means the risks to the downside are increasing . . .
File this one under “you’ve got to be kidding me.” > Some people are all excited that Dell Chairman Michael Dell, (who presumably knows his business better than anyone else), finally bought some shares recently. Specifically, Dell bought $70 million worth of stock at $23.99. Remarkably, this was Michael Dell’s first ever purchase of his…Read More
I frequently discuss Microsoft, and for many many reasons: They are a tech bellwether, a huge part of the S&P and Nasdaq 100 (and a smaller part of the Dow). They have also been a thorn in the side of new technology development and innovation, but now that so much of it has moved to the web, its gotten away from them.
This is a good thing.
One of the commenters said some time ago that I was "irrational in my hatred for Microsoft." That’s hardly the case; Microsoft has put a lot of cash in my pocket, so at worst, I should be grateful to them for the windfall.
However, I am still an objective observer, and I believe that Mister Softee is not what most investors think it is: They are hardly innovators; rather, they copy other people’s work relentlessly, until by default they own the standard. Their products are kludgy, bloated and anti-instinctive; They are hardly the elegant, easy to use software first dreampt up by science fiction writers decades ago.
From an investing standpoint, their fastest growth days are behind
them, yet they are hardly a value stock — yet. (Cody and I have disagreed about this for some time). The leaders of the last bull Market are rarely the leaders of the next. Despite this, Wall Street still loves
them, with 28 of
are widely owned by active mutual fund managers and closet Indexers.
Many people think of them as this well run money machine; In reality, they are very poorly managed by a group of techno-nerds with very little in the way of management skills. Even their vaunted money making abilities are profoundly misunderstood: Its primarily their monopolies in Operating Systems (Windows) and Productivity Software (Office) that generates the vast majority of their revenue and profits. Their Server software and SQL Database make money, but hardly the big bucks of Windows or Office. MSN is a loser, MSNBC is a dud, their Windows CE is hardly a barn burner — even X-Box has cost them billions more than it is likely to generate in profits over the next 5 years.
Lest you think its just me who thinks this way, consider no less an authority than Robert X. Cringely. He is the author of the best-selling book Accidental Empires (How the Boys of Silicon Valley Make Their Millions, Battle Foreign Competition, and Still Can’t Get a Date). He has starred in several PBS specials, including Triumph of the Nerds: A history of the PC industry.
After Gates resignation, Cringely wrote this:
"Microsoft is in crisis, and crises sometimes demand bold action. The company is demoralized, and most assuredly HAS seen its best days in terms of market
dominance. In short, being Microsoft isn’t fun anymore, which probably means that being Bill Gates isn’t fun anymore, either. But that, alone, is not reason enough for Gates to leave. Whether he instigated the change or someone else did, Gates had no choice but to take this action to support the value of his own Microsoft shares.
Let me explain through an illustration. Here’s how Jeff Angus described Microsoft in an earlier age in his brilliant business book, Managing by Baseball:
"When I worked for a few years at Microsoft Corporation in the early ’80s, the company had no decision-making rules whatsoever. Almost none of its managers had management training, and few had even a shred of management aptitude. When it came to what looked like less important decisions, most just guessed. When it came to the more important ones, they typically tried to model their choices on powerful people above them in the hierarchy. Almost nothing operational was written down…The tragedy wasn’t that so many poor decisions got made — as a functional monopoly, Microsoft had the cash flow to insulate itself from the most severe consequences — but that no one cared to track and codify past failures as a way to help managers create guidelines of paths to follow and avoid."
Fine, you say, but that was Microsoft more than 20 years ago. How about today?
Nothing has changed except that the company is 10 times bigger, which means it is 10 times more screwed-up.