Friday, June 24, 2011

Take aways from Fedex's earnings

FedEx Corp.(FDX), the world's second-largest package delivery company painted a rather rosy economic picture on Wednesday as it reported a 33 percent increase in earnings for the quarter ended May 31 (its 4th quarter for the fiscal year 2011) in addition to a guidance of per-share earnings growth of 39 to 50 percent for the fiscal year 2012. The company expects the global economy to accelerate in the second half of the year as fuel prices retreat from three-year highs and the Japanese economy recovers. While much of the growth will be driven by China and other developing nations, FDX said the U.S. economy will improve as well.

The company serves as the barometer of the global economy as it transports a variety of goods. FDX expects the U.S. economy to grow 2.5 percent this year and 3 percent in 2012. The company expects U.S. industrial production to grow around 4.2 percent this year and another 4.3 percent next year.

However, as one digs deeper into the statement, FDX's good news may be more of its own growth story rather than a global economic growth story. FDX, after successfully squeezed its European competitor, DHL out of the US market, understandably should enjoy a signficant pricing power sharing a duopolistic market with UPS. FDX, in its last quarter, was able to raise revenue per package by 10%, including raising fuel surcharge. In other words, it was able to pass on higher costs to its customers.

If an increase in transportation cost is widespread , can this be good news to other companies and the economy?

Thursday, June 16, 2011

What happens to the economy this week? June 13, 2011


Stocks and the Economy: Manufacturing is in contraction: "Two important regional manufacturing indices this week reported contractions in manufacturing. For the first time since November 2010, Empi..."


Stocks and the Economy: CPI figures mean no more QE3?: "The consumer price index in May grew at a 0.2 percent rate. The core CPI, that excludes energy and food prices, jumped 0.3 percent. Both mea..."

Monday, June 13, 2011

Commercial real estates the next leg down?

With all the fuss about a slowing economy and increasing tighter capital market with QE2 winding down, one would probably start to find cracks in cyclical sectors, sectors that are most vulnerable should the economy slow.

Commercial real estates (CRE) have historically been one of the most sensitive to economic conditions and capital availability. With the Fed's two rounds of quantitative easing, recovering businesses and confidence among investors, CRE has been able to utilize leverage to significantly improve return on investment. Real-estate research firm Green Street Advisors reported that its index of Midtown Manhattan office-building values is up 88% since its mid-2009 nadir, back to within 15% of their 2007 peak. The index is tilted toward better quality buildings.

Stock market noted this sharp rise in valuation. Dow Jones Equity All REIT Index has almost tripled since the market's low on March 9, 2009. CRE big names like Vornado Realty Trust (VNO), Boston Property (BXP), Simon Property (SPG), has each almost quardupled its share value in March 2009. However, hints of caution have crept in these waves of euphoria. Big players may have started their way to take some chips off the table.

According to a recent article from Wall Street Journal, high-profile office buildings in large cities have been put on the sell block, including Willis Tower in Chicago, Constitution Center in Washington, the Seagram Building in New York, to name a few.

In April, the total value of new sales listings of U.S. office buildings was $8.7 billion, according to real-estate research firm Real Capital Analytics. That was the highest level since 2008. Preliminary data for May show $10 billion in new listings, which would be the highest monthly total since late 2007.......................................................................

The sharp rise in values has come over the past year, a relatively short time frame in the real-estate market. Recent deals include the sale of 750 Seventh Ave. in New York's Times Square by Hines Interests for a surprisingly high $485 million and Beacon Capital Partners' sale of Market Square in Washington for a record $905 a square foot........

Beacon also is considering bringing to market 1211 Ave. of the Americas in coming weeks, for which the company would look to retrieve well above the $1.5 billion that it paid in 2006, according to people familiar with the matter. The 45-story property houses the headquarters of News Corp., publisher of The Wall Street Journal.
This rush to sell is likely to result from worries that there will no longer be easy money, namely easy access to financing. Since April, rallies of high yield corporate bonds and commercial real estates debt came to a halt as yields rose, a sign that lenders now require higher risk premium before they provide the financing. In an article of Wall Street Journal,

Some of the selloff can be attributed to a heavy supply of these bonds, both from the Fed and from companies taking advantage of better market conditions since the crisis. Companies issued a record $114 billion worth of junk bonds through June 2, a 27% increase of the same period last year, according to Standard & Poor's Leveraged Commentary & Data.

"The timing couldn't be worse for the market," said Marina Tukhin, head of asset-backed securities trading at Gleacher Descap in New York, referring to the effect of the Fed's auctions on the mortgage market, which she calls "oversaturated" with troubled assets.

Meanwhile, other measures that gauge the ease of obtaining financing or risk attitude, such as TED spread (the difference between LIBOR and treasury securities yield) has remained quite subdued although its current level is much higher than the one in March. Fundamental wise, most REITs are showing growth in net operating income (NOI) and funds from operations (FFO) which measure strengths in CRE companies.

That said, for those who anticipate no more quantitative easing and a slowdown in the eocnomy, gradually building shorts position in REITs into the summer should provide fairly handsome risk/reward profiles.

Wednesday, June 8, 2011

Restaurants feel the cost pinch

Cost pinch is hard to ignore. Whether we are at an isle of supermarket, a clothing store, a gas pump, or sitting down at a restaurant table, trying to enjoy a meal after a day of hard work, signs of inflation are everywhere. Some of us may have noticed a few percent price hikes have been sneaking into restaurant menus here and there.

As discussed in my previous post, rising commodity prices not only have weighed heavily on  retailers, but also many other sectors such as restaurants and food manufacturers. Many low-mid end restaurants may find difficulty in throwing a few percentage into the menu without deterring customers. Meanwhile, rising price tags at the gas pump have kept some households eating at home.

Shares of Cracker Barrel Old Country Store (CBRL)have been on a downward trend since May on the company’s weaker-than-expected third-quarter profit, as an only meager improvement in sales could not offset higher commodity costs.

“We are disappointed in our results for the third quarter, as both restaurant and retail sales were below our forecast,” Cracker Barrel CEO Michael Woodhouse said in a statement. “Since many of our customers continue to feel the negative impact of economic conditions, we need to continue to focus our efforts on providing the great food, service, atmosphere and shopping experience that differentiates our brand.”
CRBL is not alone. Shares of fushion-concept restaurant chain, PF Chang (PFCB) shedded more than 10% on its earnings report in which the management warned about higher costs eating into its profits.
McDonald's(MCD) and Starbucks(SBUX) also said in March that rising commodity costs were eating into their bottom lines.

I expect more of these announcement to come in summer. Lower end restaurants and those that have less-than-spectacular brand names and sales will get hit the hardest. Off the top of my head, Dine Equity (DIN) that runs Applebees and IHOP will see its bottomline eroded due to IHOP's relatively low income customer demographic despite relatively strong results from Applebees. Brinker's (EAT) that runs Chilli's and Maggiono's should see itself being dragged down by Chilli's who may not be able to turnaround its brand strong enough to have loyal customers who do not mind paying a few more bucks.

For related posts on cost pinch, please see the following:
Retailers feeling the cost pinch
A shorts list of retailers
Retailers the next leg to fall

Disclosure: The author does not have any of the above mentioned positions as of June 9, 2011

Monday, June 6, 2011

Potential Increase in Coal Imports to China

Amidst big sell-offs of material stocks, the possibility of reduced tariffs and port charges may offer a reason to feel a little better about coal companies or even a good opportunity to accumulate coal stocks before Chinese announcement for ardent coal bulls.

From Investors' Business Daily,

Yanzhou Coal Mining (YZC) and L&L Energy (LLEN) led a sell-off among China-based coal producers. But some U.S. coal producers gained ground, led by Peabody Energy (BTU) and Consol Energy (CNX).

China's miners fell on reports that the country's National Development and Reform Commission is "studying adjustments of VAT (value-added tax) and port charges relating to coal imports.
 "The country's energy commodity imports have declined recently, despite coal shortages and a looming electricity shortfall heading into the high-demand summer season. Analysts say lower tariffs and port charges could encourage more imports, helping hold down prices in China's tight coal market..........................

Although China does import U.S. metallurgical coal for use in steel production, chances are slim that it will turn to North America for more thermal coal, according to analyst Meredith Bandy with BMO Capital Markets. China likelier will buy coal from Australia and other sources that otherwise would end up in Europe. The Europeans probably would make up the difference via purchases from the U.S. Peabody could profit via the Australian and U.S. channels. "Peabody is the U.S. stock that would most directly benefit," Bandy said. "About half their value comes from Australian operations."

On the metallurgical side of the business, miners like Walter Energy (WLT) also face a potential windfall.

On the side, some analysts are betting on labor strikes in Australia to boost shares of coal companies.

Australian miners voted Thursday to give their unions the right to strike. The unions are in negotiations with BHP Billiton (BHP)-Mitsubishi Alliance, the world's largest producer of seaborne met coal."If this strike occurs — and we don't know that it will, but if it does — these met coal guys will probably go crazy," Bandy said.
Disclosure: The author of this post does not own any positions of the above mentioned stocks as of June 7, 2011

Thursday, June 2, 2011

Same store sales in May mostly disappointed

It's the monthly round-up of same store sales (aka comparable-store sales) again. Same store sales is an important metric of the health of retail businesses. It compares the sales of a store open for at least a year with the figure a year ago. This metric thus excludes sales of new openings and closings.


Costco Wholesale Corp (COST) reported a 13% rise in its May comparable-store sales on Thursday. The retailer's net sales surged 17% to $7.14 billion, from $6.09 billion in the year-ago month. However, analysts expected same-store sales to rise 11.2% for the month. Its same-store sales increased 11% in the US and 21% internationally. Excluding higher gasoline prices and the positive effect of stronger foreign currencies against the US dollar, Costco's same-store sales climbed 7% for the month.

Target Corp (TGT) reported a 2.8% rise in its May same-store sales on Thursday. Analysts were expecting same-store sales to increase 3.5%. Its net sales for the four weeks ended May 28 surged 3.8% to $$4.8 billion.

Dillard's Inc (DDS ) reported a 2% increase in its May same-store sales on Thursday. Dillard's total sales for the four weeks ended May 28 surged 2% to $434.7 million. However, analysts were expecting same-store sales to increase 3.5%.

The Gap Inc (GPS) reported a 4% drop in its May same-store sales. Gap's net sales came in at $1.06 billion, versus $1.05 billion, in the year-ago quarter. Analysts were expecting a 1% fall in comparable sales. Gap North America's comparable sales dropped 4%, while its international same-store sales dipped 9%.
Ross Stores Inc (ROST) reported a 4% rise in its May same-store sales on Thursday. ROST's total sales for the four weeks ended May 28 climbed 8% to $661 million. However, analysts were expecting same-store sales to climb 3.8%.

Nordstrom Inc (JWN) reported a 7.4% rise in its May same-store sales on Thursday. Nordstrom's total retail sales for the four-week period ended May 28 climbed 13% to $796 million. Analysts were expecting same-store sales to increase 5.9%.

Stage Stores Inc (SSI) reported a 1.1% rise in its May same-store sales on Thursday. SSI's May same-store sales surged to $117 million. However, analysts were expecting a 3% rise in same-store sales.

Pier 1 Imports Inc (PIR ) reported a 10.2% surge in its comparable-store sales for the quarter. PIR's total sales climbed 9.5% to $335 million, from $306 million in the year-ago period. The retailer projects its FQ1 net income of $0.11 to $0.12 per share, up from $0.07 per share, in the year-ago quarter. However, analysts expected net income of $0.09 per share for the quarter ended May 29.

Limited Brands Inc (LTD) reported a 6% rise in its May same-store sales on Thursday. Analysts were expecting same-store sales to increase 7%.Its net sales for the four weeks ended May 28 surged to $717.4 million from $657.3 million.

The Buckle Inc (BKE) reported that same-store net sales for May 28 surged 8.8%. Net sales for the four-week fiscal month ended May 28, 2011 increased 12.7 percent to $68.1 million from net sales of $60.4 million for the prior year four-week fiscal month ended May 29, 2010.

The Wet Seal Inc (WTSLA) reported a 2.9% rise in its May comparable store sales.

Kohl's Corporation (KSS) reported a 0.8% rise in its May same-store sales. KSS reported that its total sales increased 2.5 percent for the four-week month ended May 28, 2011.

Rite Aid Corporation (RAD) reported a 1.3% rise in its May same-store sales. However, analysts expected a rise of 1.5%.

Fred's Inc (FRED) reported a 0.2% rise its comparable store sales for the four-week fiscal month of May, which ended May 28, 2011. Fred's total sales for the month increased 1% to $143.5 million from $141.5 million in May 2010.

Saks Incorporated (SKS) reported that owned sales totaled $208.2 million for the four weeks ended May 28, 2011 compared to $177.5 million for the four weeks ended May 29, 2010, a 17.3% increase. Comparable store sales increased 20.2% for the month.

The TJX Companies Inc (TJX) reported May 2011 sales at $1.7 billion, up 7% over the $1.6 billion achieved during the four-week period ended May 29, 2010. Its consolidated comparable store sales increased 2%.

The Bon-Ton Stores Inc (BONT) reported a 2.3% decline in its comparable store sales for the four weeks ended May 28, 2011. Total sales decreased 2.9% to $181.0 million for the four weeks compared with $186.5 million for the prior year period.

Why Are Education Stocks So Strong?

For-profit education stocks surged against a rather gloomy broader market. These companies claimed a victory on Gainful Employment Rules that are much more lenient than expected.

From Star Tribune

The stock of Corinthian College (COCO), which runs The Everest Institute, a chain of medical field for-profits with a location in Eagan, was up 30 percent by mid-day. The Apollo Group (APOL), parent company of the University of Phoenix, was up 10 percent.
Minneapolis-based Capella Education Company (CPLA) watched its stock climb nearly 4 percent. Capella enjoys a good reputation and has not been linked to any of the bad practices that sparked the gainful employment rules. After a long wait, the U.S. Department of Education has issued rules that require public and private colleges which offer career education to prove that they are preparing students for "gainful employment."
The regulations come in reaction to reports of high tuition charges, high pressure sales tactics, high dropout rates and job placements that don't pay enough for students to pay back federally insured loans if they do graduate and find work..................
If students default on government loans, taxpayers must pick up the tab..................................
What are outlined in Gainful Employment Rules?

To qualify for federal aid, the new rules require that "most for-profit programs and certificate programs at nonprofit and public institutions prepare students for gainful employment in a recognized occupation," the education department announced. "A program would be considered to lead to gainful employment if it meets at least one of the following three metrics: at least 35 percent of former students are repaying their loans; the estimated annual loan payment of a typical graduate does not exceed 30 percent of his or her discretionary income; or the estimated annual loan payment of a typical graduate does not exceed 12 percent of his or her total earnings."

Schools with programs that don't meet those criteria will have until 2015 to bring them into compliance or risk losing access to federal money to pay for students in the program.

Wednesday, June 1, 2011

Why are casino stocks relatively strong?

While Dow Jones Index dropped more than 2% today, casino stocks that have exposures to Macao held up quite nicely. MPEL was up 5%, LVS was up 1% while WYNN was down less than 1% . MGM, another casino operator that has much smaller shares in Macao than the other three dropped together with the rest of the market.

The source of strength was likely to have come from gaming revenue statistics released by the Gaming Inspection and Coordination Bureau of Macao. According to Wall Street Journal,

Gambling revenue in Macau rose 42% in May from a year earlier, government statistics issued Wednesday show, as the opening of a massive new casino resort last month helped revenue rise to a record high for the fourth month in a row.....................................

Gambling revenue in the Chinese territory rose to 24.31 billion patacas ($3 billion) last month, up from 17.08 billion patacas a year earlier, according to data from Macau's Gaming Inspection and Coordination Bureau. The May figure was 19% more than the last monthly record of 20.51 billion patacas set in April. In the year to May 31, Macau's gambling revenue was up 43%, following a 58% surge for the whole of last year.

Following the data, RBS analyst Philip Tulk said he will need to raise his current forecast for Macau's gambling revenue to grow 28% in 2011. CLSA analyst Huei Suen Ng noted Macau's May revenue alone was equal to almost half the house's $6.5 billion forecast for the Las Vegas Strip's gambling revenue for 2011. .......................................

Analyst Billy Ng said the strong growth was partly due to the May 15 opening of Galaxy Entertainment Group Ltd.'s new casino resort in Macau's Cotai area.

"We see Galaxy Macau driving traffic and injecting new VIP liquidity, with growth in both mass (market) and VIP for the rest of 2011," Mr. Ng wrote.