1/19/10 Midnight Report: Market Goes Down on Earnings, Did it Swallow Idea that the Economy is Improving?
The market sold off today as earnings were more mixed than Tiger Woods’ family tree, housing data continued to remind people that double dipping can cause more than just herpes, and investors were all liquidating their portfolios to get cash to buy those 50% off Amazon coupons at Living Social in order to get in on all of the good vibrations and buy two rabbits for the price of one.
With the market due for a correction more than Sarah Palin’s grammar or Janet Jackson’s boobs, it is not surprising that there was a bit of a sell off as the S&P has become more top heavy than the delightful and appropriately named (and NSFW) Lacey Banghard (and young Lacey having a last name like Banghard would only be eclipsed by either Paul Krugman or Monica Lewinsky changing their last names to Blowhard). So the question now is will investors come back tomorrow or is this the start of the end of the euphoria over QE2, billion dollar government incentive plans, and Justin and Jessica (and Timberlake, Money McBags is watching you so stay away from his binky)? Actually, that was a trick question since with the Fed’s new third mandate to lift stock prices (after their first two man dates with Ricky Martin and Neal Patrick Harris went terribly wrong after they refused to pick up the dropped soap), you all should just buy the fucking dip.
In macro news, housing starts dropped to an annual rate of 529k, which was their lowest rate in a year and down from November’s 553k, analyst guesses of 550k, and a healthy fucking market of ~1MM. With a glut of shadow inventory and foreclosured homes still available, it makes less sense for homebuilders to ramp up production than it makes sense for alliterative North Dakota Senator Kent Conrad to quit to better focus on reducing the debt (hey Kent, um far be it for Money McBags to tell you how to not do your job, but you do know that, 1. they’ll pay someone else your salary so quitting as a way to cut government dead weight won’t actually reduce the debt and 2. you realize if you are not a Senator, NO ONE WILL GIVE A FUCK ABOUT YOUR DEBT CUTTING IDEAS. Seriously Kent, the whole point of being a fucking senator is to have the power to fix shit that pisses you off (for instance if Money McBags were a senator, first he would make Gracie Glam‘s birthday a national holiday, second, he would steal the shit out of soaps from the Lincoln bedroom, and finally, he would try to figure out how to balance the budget while getting everyone health care because that is the shit that fucking matters in this country), so quitting to concentrate on the shit you should be concentrating on as a Senator makes as much sense as people who still use MySpace or anyone who wants to live in Camden.).
Anyway, the bright side of housing starts being down is that the cardboard box industry continues to rise with bigger models released daily for those who want room for a kitchen to warm up their rat chewed and half-eaten bagels. The only other data was that applications for home mortgages increased last week by 5%, however it was driven by a 7.7% increase in refi applications thanks to record low rates and people needing money to pay off their credit card bills.
But the real story was earnings as GS, AAPL, IBM, WFC, and Ashley Dupre all showed their bottom lines. Leading the way was AAPL who shit all over earnings as if earnings were a coprophiliac and AAPL had just eaten a Denny’s Grand Slam breakfast with an extra helping of e coli. The company reported eps of $6.43 which was up from $3.67 a share last year and assraped analyst guesses of $5.40 per share in a way that not only made Kobe Bryant jealous, but will leave guesses walking bowl-legged for the remainder of the year. Sales were up 71% to $26.74B and ahead of analyst guesses of $24.43B as AAPL simply sold the fuck out of some shit. They sold 7.3MM iPads, 19.5MM iPods, and 16.2MM iPhones, as their mobile products continue to sell faster than hot cakes (though to be fair, hot cakes don’t stream porn). With AAPL’s market cap now larger than the entire GDP of Greece or Portugal, investors can take solace in the fact that any slow down in sales will surely be followed by an EU bailout, so buy away.
In other tech news, IBM beat the Street as they earned $4.18 per share vs. guesses of $4.08 per share thanks to an increase in services contracts which gave investors hope that global businesses will continue to up their technology spend to make sure every worker can view spankwire in HD in the privacy of their own cubicles. The company also gave guidance for 2011 eps of “at least $12.56″ per share (up 9% from 2010) and reiterated their target of ~$20 eps by 2015 (of course part of that target involves the upcoming hyperinflation which will make the dollar more worthless than a blackberry in Indonesia (and note to self: cancel trip to Indonesia)).
The other big news of the day was that Goldman announced their Q and quarterly profits droped 53% as Neel Kashkari was not around to backdoor them some of that free government cheese. While their $3.76 eps slightly beat guesses, the story was that their revenue was weaker than the “tabasco sauce” excuse. Net revenue fell 10%, with FICC revenue down 48% (which was FICCing bad, though not worse than that pun) and investment revenue down 10% as GS may simply have run out of markets to manipulate. Earnings were saved by expense management as GS cut their worker comp pool to only $430k per employee which is a mere 10x the median household income in the US but certainly well deserved as it is horribly difficult for traders to push the right buttons on their keyboards (especially as the US government is there to back them should they develop any fat fingers). The comp number was down 13% which is bad not just for GS employees, but also for poor people as less wealth will trickle down to them since we all know that poor people are directly affected by rich people shopping at Tiffany’s, the Mercedes dealer, and Kristin Davis’ house.
GS wasn’t the only financial to report today as WFC put up an inline Q, the trust banks BK, NTRS, and STT (though why anyone would ever trust a bank is beyond MMB) put up mixed to bleh Qs, and AXP pre-announced a shitty Q which will be below analyst guesses. AXP did promise to fix things by laying off 550 employees in a giant circular clusterfuck (AXP needs consumer spend to make money, consumers need jobs to spend money, AXP cuts more jobs. Problem solved, only the opposite of solving the problem, and yes Money McBags knows 550 jobs don’t make a difference for AXP’s consumer spend, but there could be a ripple effect, as opposed to a nipple effect).
Finally, the FCC approved Comcast’s purchase of NBC Universal, so now a shitty cable company can own shitty content (seriously, the last time Money McBags watched anything on NBC, Jerry Seinfeld was considered cutting edge and Saturday Night Live was still a comedy show). The deal was approved with conditions that require the new company to offer its content to online video distributors at the same terms that would be available to competitors, to ensure it doesn’t use its Hulu ownership to wield control over the digital content space, and to get rid of that awful Jay Leno.
In small caps, momentum stock COOL cooled the fuck off after they once again announced a shitty Q but also gave below street guidance for $.06 to $.10 next year. Money McBags mentioned them as a short term momentum play last week as sales of their Zumba fitness for next Q were preannounced as titriffic. As Money McBags warned, COOL has always been a terrible company so buying them was just a trade. They may have another bounce tomorrow so get the fuck out if you haven’t already.
Also in small caps, as Money McBags mentioned yesterday DTLK preannounced a huge quarter and shot up 30%+ and remember Money McBags pointed them out on 10/25 as an interesting little company that was breaking out more than Cameron Diaz’s face. Well this Q they are going to keep up their huge growth by bringing in ~$90MM of revenue which is up from last Q’s guidance of ~$77MM and up 70% from Q4 2009 and we all know 70% growth in little companies that aren’t trading at ridiculous multiples is spanktastic.
Gross margins guidance was for 22% as they are going after bigger deals and trying to steal market share so they must be discounting as much as a used Yugo dealership, but a 200bp drop on 70% growth with solid operating cost management is good enough for Money McBags. So if we take the 22% gross margin and once again gross up their costs by 5% and then apply a 40% tax rate, we are at $.18 GAAP eps for Q4 and guidance is for $.21 to $.24 non-GAAP eps, so the operating cost assumptions seem reasonable. This puts DTLK at a $.72 GAAP run rate or a $.84 non-GAAP run rate (assuming no growth, which may be a conservative assumption, but you all know Money McBags is so conservative that he doesn’t actually kiss on the first date, though mainly because he hates the taste of chloroform) and the company is only trading at 8x to 9x that depending on which number you want to use, and remember, they have ~1/4 of their market cap in cash, so it is still a cheap fucking stock.
In their release, they said the key drivers of growth were closing several multi-million dollar sales at Fortune 100 companies during the quarter and success from their previous investments to expand market share around data center solutions. That sounds perfectly reasonable, but it’s not like the company has some huge competitive advantage. They are basically selling the same shit as everyone else so either they discounted the fuck out of it (which we saw in gross margins) or their sales force somehow became more efficient. That said, their backlog was only $47MM and while that is a record for them, it is only ~1/2 of this Q’s sales, so they are going to need to close a shitload more deals to keep this kind of revenue run rate. And that is why this company will never be a core holding of Money McBags as they simply rely on big deals every Q and eventually those dry up or one gets pushed in to the next Q or some dumb shit like that because that is how non-subscription based sales work.
So look, the company is cheaper than George Michael’s balls and traded up again today in a terrible tape after a 30% up day yesterday. Good things are happening here and there is still reasonable downside protection so this continues to be a good play. Hopefully we get more detail on the drivers of growth on their call next month (and this is a driver of Money McBags’ growth) but the technicals are good and the numbers are good, so enjoy the ride.
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