The stock market crept up again today as the equity markets and bond markets continue to decouple like Bristol and Levi, Mel Gibson and sanity, or Carrie Prejean and her top.  In terms of macro news, the ISM released their report on the services sector and it both beat analyst guesses of 53 by coming in at 54.8 and was above last month’s reading of 53.8 which Money McBags believes is the first time a piece of macro data has done both of those in the same month since crude inventories were up in May of 2007 as a result of the release of Andrew Dice Clay’s “Dice Undisputed” on DVD.  The ISM’s employment gauge rose from 49.7 to 50.9 and that rounding error is enough to give economists with shorter sight than Mr. Magoo a modicum of hope.

In other slightly positive relative macro news, ADP said employers added 42k jobs last month which should be a welcome sign for the 16MM to 20MM people who are still unemployed(and yes, that was sarcasm).   At this rate, the recession should officially be over sometime around the year 3MM (about when Xenu will come back to the planet Earth to set off some more volcanoes and elevate disciple Laura Prepon to sainthood) as long as the birth rate also slows down due to the increased number of headaches caused by not having any money.  Luckily, the number beat analyst guesses of 40k expected new jobs added according to Reuters, or 30k expected new jobs added according to Bloomberg, or a make believe number of new jobs added according to Money McBags.

Internationally, China seems to be getting a bit more concerned with their housing market as prices are rising faster than Sofia Vergara‘s son’s popularity on take your mom to school day.  Apparently the Chinese government wants regulators to give banks a new stress test where in the first part regulators will gauge the impact on bank balance sheets of 50% to 60% home price declines in some cities and in the second part, banks will have to run on a treadmill for 10 minutes while listening to Nancy Sinatra songs and having strobed pictures of Lady Gaga flashed at them.  With prices already beginning to moderate, Money McBags is glad that the Chinese government is being a bit proactive here, though it was their initial pro-activity by lending money to any Tom, Dick, or Harry Wang that started this whole mess.  The point is China has been bubbling for quite a while, but the global economy needs that growth right now more than a keynesian economist needs a deficit or Roger Ebert needs a jaw, so Money McBags is happy to look the other way for a minute or two while China tries to figure shit out.

In the market today, WFMI sold off like a carton of spoiled soy milk despite beating analyst guesses on revenues and having inline eps while maintaining full year guidance.  Revenue was up 13%, eps was up 50%, and same store sales growth was up 8.4%, all respectable fucking numbers, but apparently same store sales growth over the second two months of the quarter was worse than the first month and so far in Q3 it has been only 7.7% so investors are taking that as a sign of deceleration.  Well, that and the fact that they lowered the high end of their same store sales growth rates for the rest of the year and lowballed forecasts like forecasts were the ground and they were Abe Vigoda‘s nutsac.

WFMI’s preliminary guidance for 2011 is 4.5% to 6.5% same store sales growth, 10% to 13% overall topline growth, and $1.59 to $1.64 eps which is almost 20% growth on the high end.  Money McBags doesn’t follow this stock closely and he fully understands that people hate paying for expensive shit they can get cheaper, that competition is continuing to come in to the market, and that the “organic food” craze may be more full of shit than a constipated rhinoceros with elephantitis of the large intestine, but that said, WFMI is the market leader in the space and eating healthier and better is one way people can still feel like they are treating themselves when they can no longer afford to go on vacations.  The stock is now trading at ~22x-23x 2011 guidance which isn’t really cheap for an 11% top line grower but for a market leader in a still emerging market with brand equity and plenty of fucking yoga moms and tofu eaters who need their free range turkeys and chlorine free tampons, it’s not terribly expensive.  Money McBags would start doing more research here as the sell off could be a nice buying opportunity.

In other market news, Toyota earned a $2.2B profit thanks to strong sales in emerging markets, cost cutting, and people with short term memories (perhaps caused by receiving concussions from crashing their Toyotas when the brakes gave out).  Priceline shot up over 20% on a 72% increase in earnings as european travel came back much stronger than expected despite the volcano in Iceland having spread more ash around the continent than Keith Richards did during he Rolling Stones 1978 European tour.  The company guided to eps of $4.78 to $4.98 for this upcoming Q which was well above the $4.18 guessed at by analysts but just enough to win a room at an airport Hilton in Detroit and save enough money to have the scabies taken care of afterwards.  Money McBags has never understood Priceline as he likes actually picking the places he will stay, times he will fly, and service providers he will use, but if one views cleanliness, time, and comfort as a commodity, then Money McBags guesses PCLN is for you.

In small cap news, CRTX which Money McBags has written about several times as a name more speculative than Paris Hilton‘s vagina or Greece shot up 9% after it announced it has licensed worldwide rights to its nicotinic-receptor based patents to Targacept which could yield up to $75MM in payments over the next few years which will likely be enough for CRTX to actually buy a strategy.  CRTX has been acquiring respiratory type drugs over the past few years so it is a bit odd that they are now in the business of licensing their own portfolio, but Money McBags can only guess the rights they sold were seen as tertiary to their respiratory strategy and won’t choke off longterm growth.

In other small cap news, one of Money McBags’ favorite little companies which had just become too expensive, SMCI, put up another disappointing Q in what is beginning to be a worse trend than flannel shirts or full muffs.  Last Q, Money McBags thought they were about fairly priced but asked readers to “figure out is what the fuck is going to drive sales for SMCI next year” because everything pointed to them being at the end of their cycle with INTC having already launched nehalem.  Well this Q they once again missed earnings guesses by $.01 while putting up inline-ish revenue up 6.5% sequentially but 63% y/y.

The big issues with this company right now seem to be:

1.  Decling margins: Gross margins continue to tick down from the high-teens to the mid-teens and continuing to go to the lower teens would make R Kelly happy enough to pee himself (or someone else), but not investors.  About 85% of the Q&A on the call was around this issue and the answers weren’t just difficult to understand because the CEO’s english is worse than Amy Winehouse‘s hygiene but because they gave about 1000 different reasons for the drop.  From what Money McBags could understand, margins fell as a result of a mix shift, a shortage of components (perhaps caused by the components jumping into ice cold water), a shift in sales channels to more distributors and resellers, and a terrible case of vertigo.  The point is, management didn’t do a great job in giving guidance for where margins will go in the future so investors are left to speculate if 15% is the new 18%.

2.  Revenue is starting to slow down or flatten sequentially: Guidance is for flat to 5% up revenue for next Q when last year revenue grew 20% between fiscal Q4 and Q1 so one can’t blame the deceleration between Qs on seasonality (though one could blame it on Erin Andrews‘ red carpet appearances keeping buyers glued to their computer screens).  The company was no help with this guidance as they kept referring to their past 30%+ growth rates and those past growth rates are good enough to buy you a cup of soup and maybe some strawberry shortcake for dessert, but that is it.

So how do we value this company when we have no feel for revenues which seem to be decelerating at best and margins that have fallen for any one of about 17 different reasons?  Forecasting this company with what we currently know is a more difficult task than keeping ones pants on during a very NSFW european shark attack.

SMCI earned ~$720MM in revenue last fiscal year with the midpoint of guidance for ~$205MM in Q1 this year.  With sequential growth slowing and no new INTC chips coming out of which Money McBags is aware, we’ll call revenue ~ $820MM for this upcoming fiscal year, up ~14% which is way short of their historic growth rate, but the law of large numbers and the top of the cycle have to eventually catch up.  We’ll give them the benefit of the doubt that margins are at least stable and call gross margin 15.5%, push their operating expenses up ~8% to $80MM, tax them at 32%, and we get ~$30MM GAAP eps or ~$.76 per share.  Now there is typically a $.02 to $.03 quarterly discrepancy between GAAP and non-GAAP eps due to stock-based comp so adding that back gets us to ~$.85 eps for next year.  The company is now trading at ~12x that but has almost $2 in cash on the balance sheet.

So the point is, we can go through a mental masturbation exercise like we just did because we have no fucking idea how to forecast this company and say it looks reasonably priced based on guesses we pulled completely out of our ass (or what the sell side would call, detailed industry research), or we can wait for trends to get better and not worse.  Money McBags likes this company but it will always be a cyclical buy and we are on one of those down cycles now so you can afford to wait on this name unless you can figure out from where growth is going to come and how they are going to get margins back up.

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