MORNING BID – Once Upon a Dream

Aug 5, 2014 12:47 UTC

Disney is expected to report third-quarter results after market close and is likely to beat average analyst estimates, according to StarMine. The media company’s results could get a boost from “Maleficent”, its revisionist take on “Sleeping Beauty” featuring Angelina Jolie, but the company’s prowess doesn’t end there, not with “Captain America: Winter Soldier” also a box-office champ in 2014 – which was also released during its most recent reporting period.

The studio budget for Maleficent was said to be somewhere around $180 million, so it’s not as if this was a cheap one, but consider that it posted worldwide grosses of $727 million, ranking it third for 2014, with the fourth-place film being Captain America (which cost $170 million), and also came through through Disney’s Buena Vista studios, per BoxOfficeMojo data.

The lion’s share of the top-grossing movies in 2014 count anywhere from 60 to 70 percent of their grosses from overseas (with Paramount’s unkillable Transformers franchise getting three-quarters of its dollars coming out of international markets), and just five movies this year have grossed more than $700 million total worldwide, with Disney responsible for two of them. Considering its ownership of the surefire-hit Star Wars coming in 2015 and whatever else the studio can squeeze out of the Marvel franchises (another Thor movie coming, another Avengers movie on the way) it makes some sense to see that the stock is trading at a level a bit outside of the rest of the market in terms of its relative valuation.

Intriguingly, looking at a Starmine screen of other media companies, the stock actually trades at a discount to its peers CBS, Time Warner and Twenty-First Century Fox when it comes to its price-to-forward 12-month earnings (on average, a discount of about 10 percent) and even more so when considering its price-to-forward cash flow levels as well (a discount of about 34 percent). That’s even as the stock has been the Dow’s best performer in terms of price change over the last five years with a 227 percent return, outdoing all of its rivals in the 30-stock average (it’s in the top 50 in the S&P 500, trailing the typical biotech and internet retailers as one might expect), and steadily increasing profit margins in the last decade from high-single digits to low-to-mid teens.

Investors – and companies – are increasingly trying to pay for content, hence the 21st Century Fox pursuit of Time Warner (really, Game of Thrones, let’s not mince words) and a Disney riding high on the success of the Marvel tentpole productions and about to double-down on the Star Wars franchise by getting the band back together along with a bunch of interesting new cast members has a lot of room to run (and we haven’t even mentioned whatever princess movie it’ll have on the way too, which includes a live-action Cinderella, along with a long-awaited Finding Nemo sequel). So, uh, Hakuna Matata?

MORNING BID – Minute by minutes

Jul 9, 2014 13:44 UTC

The bond market remains pretty much tethered to the 2.50 percent to 2.60 percent range that’s prevailed for the 10-year note for quite some time now, with the primary catalyst being today’s release of the Federal Reserve’s minutes from its most recent meeting. The relevant data that investors are probably paying most attention to – the jobs report last week, the JOLTS jobs survey, shows some more things that is meant to keep the Fed engaged rather than moving toward an imminent increase in rates. The quit rate – the rate at which people leave jobs for others – is still historically a bit on the low side, not at a level that would make the Fed more comfortable that the kind of labor-market dynamism needed for the Fed to shift to raising interest rates. Fact is, the central bank just isn’t there yet.

And with that in mind, that means those investors clamoring for higher rates are probably going to continue to see their expectations unmet for a longer period of time, and with sovereign buyers from Europe and Japan wandering outside those halls, there’s an ongoing bid in the market that continues to thwart short-sellers who are just waiting for that right moment to bet against the bond market. That’s been a lonely trade of late – or rather, a popular trade, just a big loser as trades go.

Players in the markets may also be looking to see whether the Fed discusses the other exit strategies it has — reverse repos and the like — making that another thing to watch for in the late release. Dealers have been divided on whether the Fed will raise rates merely to 25 basis points or direct to 50 — our most recent polls are split on this, but a move to 50 would probably assuage a few of those who think the Fed is getting behind the curve.

Earnings play a factor in this equation as well however. The decline in earnings estimates has actually been subdued in the second quarter, compared with the first quarter, according to Goldman Sachs, which suggests a pickup in activity after the weak first quarter. Earnings don’t really get going for another few days, but the signs of growth will be what investors worried about valuations are looking for. The current valuation situation, as Chuck Mikolajzcak wrote in a story yesterday, points to some measures that are worrisome – the Case Shiller PE figure, for instance – while a couple of others like operating P/E, suggest only slightly expensive levels. With more strategists starting to worry of a correction, earnings would go a long way toward supporting equities.

MORNING BID – Microsoft, up from the ashes

Apr 24, 2014 13:22 UTC

Microsoft heads into tonight’s earnings report coming in on a high, having recently breached the $40 threshold for the first time in forever (it’s all Frozen references this week, folks). The company pushed past $40 a share in early April for the first time in nearly 14 years, and spent most of that time ensconced in a tight range between about $22 and $35 a share, depending on what the overall market was doing. It tanked in 2008 with everything else, and then spent the 2010-2012 period putting together a cumulative 13 percent price loss in the midst of a raging bull market, if evidence of its sad-sack status couldn’t be more apparent.

This year, though, the company’s been the beneficiary (along with the other “horsemen,” Cisco, Intel and Oracle) of a shift away from overvalued momentum-driven stocks towards cyclical technology stories. These are the types of companies that produce steady revenues even if they’re not doing anything but collecting on consistent upgrades of stuff that everybody needs and doesn’t really like. And really, the company had a stranglehold over PC operating systems that it defended aggressively, let’s not kid ourselves.

For what seems like the better part of a decade, the company has also been talking about how it plans on getting ahead for the next technological leap happening around it. Personal computer sales are bound to be slack, because people aren’t buying those and they’re now buying tablets. But hope springs: CEO Satya Nadella plans on taking analyst questions on the conference call, which isn’t the usual thing for Microsoft.

Sometimes changes in strategic direction mean something for real, and even though analysts at times are overly obsequious and eager to please their corporate overlords (“Congrats on the quarter, guys”), they’re still the voice of someone outside the company and therefore aren’t as likely to be blowing smoke. The company’s planning on focusing more on mobile apps and cloud computing in coming years – probably the right choice, given the trend in computer technology at the moment – but the question is whether they can truly capitalize or not.

News from March showed the firm plans on debuting an Office version for the iPad. That put a charge into the stock and would be something of a game-changer; the stock is now the fourth-best in the Dow this year, up 6.8 percent. Starmine’s earnings quality score has been pretty darned high for the company for three years running.

Free cash flow is generally increasing, it’s been paying more and more dividends every year, and they even think the company’s being underestimated by the market, with the $40 or so price assuming a 4.4 percent annual growth rate over the next decade, whereas Starmine sees growth at 6.6 percent, in line with the five-year historical average – which should make it worth nearly $48 a share.

Again, though, that implies an avenue for growth. The Windows division isn’t it. This mega-division posted between $18.68 billion and $18.84 billion in revenue every year for four years running, falling from 30 percent of overall revenue to 24 percent (and that’ll keep shrinking). Again, something to be said for consistency here (for you dividend folk), but that isn’t “growth.” (It’s not “shrinking,” either, so there’s that, too.) Business solutions carries about 1/3 of revenue – and that’s been steady. But the gains may be more likely in the server/tools division, or entertainment/devices for any real traction to be gained. So look to the cloud, Microsoft.

MORNING BID: Running on Empty

Mar 25, 2014 12:44 UTC

The most interesting developing trend in the U.S. equity market has been the recent stumble in the biotech and momentum-oriented names, be it Gilead Sciences, Biogen, Netflix or a few others. The biotechs were a group often cited as having entered a “parabolic” stage, which in market parlance refers basically to “going up and up and up in a straight line.” The move wasn’t anything on the order of the homebuilders during the housing bubble of 2006 to 2007, or the tech giants during the latter stages of the tech run – a 300 percent gain versus 700 to 800 percent gains back in the other cases. That doesn’t mean we won’t see an ongoing breakdown, though some of the selling abated late in the Monday session.

But the Nasdaq Biotech Index has now dropped sharply through its 50-day moving average. More worryingly, the Nasdaq Composite sits just five points above its 50-day moving average of about 4221, and the Nasdaq 100 barely managed to close above that level as well on Monday. “Three consecutive down days have been a rare occurrences in this tape,” said Michael O’Rourke, chief market strategist at JonesTrading. “That makes the intraday lows registered today in both single stocks and the indices important support levels to watch. Violations of those levels should be problematic.”

The thing is, there aren’t a lot of catalysts to push those stocks – or those of 3-D printer stocks, like 3D Systems, which is down 38 percent year-to-date, or Xone Systems, down 42 percent for the year, and Voxeljet, down 35 percent on the year. Some of this reflects concerns about slowed economic growth, or perhaps that investors have had their fill of these types of stocks when the market is facing quite a bit of uncertainty. A number of strategists have pointed out how the Federal Reserve’s reversal of its bond-buying campaign hasn’t unduly affected the equity market. That’s true in the broadest sense, that major indexes like the S&P still track pretty close to record levels despite valuations that are a bit dear to many.

But one area where you see the reaction to less money flopping around is that it runs away from names that have had their way for a while.

Take 3D Systems, which StarMine sees as worth about $15.64 a share rather than the current $57 level that it’s bouncing around. Among the biotech names that have been running into the sun (running on…runnin’ on empty…), Biogen’s intrinsic value is about $183.90 per Starmine, not the $318.50 place it has been in. Alexion trades at $159 a share, rather than the $79 Starmine figures based on valuation of expected growth models over the next decade, and Acorda Therapeutics is a $13 stock rather than a $38 stock.

Robert Sluymer, technical analyst at RBC Capital, said “we expect many of the growth leadership names to back and fill well into Q2, possibly later before they are suitably oversold/timely from an intermediate-term” basis. He notes that the stocks are tracking the flattening in the Treasury yield curve that would seem to support a heavier lean on defensive names, at least in the near-term.

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