Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Earnings

Earnings are also known as profits. At the most basic level, a company’s earnings consist of what’s left over after all costs are taken out from the revenue generated. Earnings are also the basis for corporate taxes. Many corporations report EBITDA, or earnings before interest, taxes, depreciation and amortization. The most important thing to watch for when researching a company is where earnings are forecasted to move. Investors want to see that the future expectations are for the earnings to grow over time.

These Poor 3Q Earnings Reports Foretell 2015’s Economy

By for Profit Confidential

Poor 3Q Earnings Reports Foretell 2015’s EconomyAccording to research by UC Berkeley, in 2012, the top one percent of income earners in the U.S. earned 22.5% of all the income. The bottom 90%, on the other hand, earned less than 50% of all the income. (Source: Pew Research Center, January 7, 2014.) Income inequality in the U.S. economy is the highest it has been since 1928. The rich are getting richer, and the poor are seeing their share of income decline.

And according to the United States Department of Agriculture, in 2013, 17.5 million households in the U.S. economy were “food insecure.” This means that at some point during the year, they had difficulty putting food on the table for all their family members due to a lack of resources. This number, 17.5 million food insecure households, was unchanged from 2012. (Source: U.S. Department of Agriculture, September 2014.)

As I have said many times in these pages, economic growth will occur in the U.S. economy only once the average American Joe sees his standard of living improve. This isn’t happening. In fact, the standard of living is deteriorating despite the Federal Reserve having printed and pumped trillions of new dollars into the financial system.

The problem with income inequality in the U.S. escalated after the Great Recession of 2008. According to the Russell Sage Foundation, at the end of 2013, median family wealth in the U.S. economy was $56,335—a decline of more than 43% from $98,872 in 2007. (Source: “Wealth Levels, Wealth Inequality and the Great Recession,” Russell Sage Foundation, June 2014.)

Dear reader, the fact is the U.S. economy isn’t going through a period of … Read More

How the Markets Will Close Out 2014

By for Profit Confidential

Markets Will Close Out 2014Credit card companies are some of the best indicators in the global economy. Visa Inc. (V) just reported a pretty decent quarter. While earnings were down comparatively due to a one-time charge, adjusted earnings handily beat consensus.

The company’s fiscal fourth quarter came in solid, with growth of 10% on a constant dollar basis to $3.2 billion compared to the same quarter last year.

Recently, the company increased its quarterly dividend 20%, and a new $5.0-billion share repurchase program has now been authorized.

Management estimates that its upcoming fiscal 2015 will produce revenue growth in the low double-digits and diluted earnings-per-share (EPS) growth in the mid-teens, which is very solid.

Visa’s share price really hasn’t done anything for the last 12 months. But this is on the back of tremendous capital appreciation in 2012 and 2013.

This stock market certainly seems trendless as of late. Investors are taking in corporate earnings news, but not doing too much with it.

The earnings numbers from many large-caps and conglomerates are pretty solid. But this market is tired out and the near-term action seems muted.

September and October are often difficult months for stocks and it’s unclear as to why. But going by the earnings results we’re getting and the forecasts that corporations are providing, I think it’s reasonable to expect a good fourth quarter—barring any shocks.

The marketplace knows that the Federal Reserve is going to initiate a new upward cycle in interest rates. It also knows that the central bank has proven to be highly accommodative to equities in recent history and deflationary indicators will increase the duration of when rates … Read More

Two Companies in the “Buy Zone” on Weaker Oil?

By for Profit Confidential

How Spot Prices Could Affect Your Oil PicksIt really is quite amazing the amount that spot oil prices have dropped. Naturally, in a lot of areas, the price of gasoline has not dropped the same percentage.

Lower oil prices help a lot of industries. The railroads and airlines, for instance, should show a material gain in earnings in the fourth quarter due to the drop in fuel costs.

It’s not a game-changer for oil producers just yet, but The Goldman Sachs Group, Inc. (GS), which is pretty good with its views on commodities, is now forecasting $75.00 West Texas Intermediate (WTI) oil for most of 2015—with oil prices maybe even hitting $70.00 a barrel. And all because of supply.

Anything to do with resources is higher-risk. And the higher investment risk is shared both by the capital (investors) and the explorers/producers whose business model changes with spot prices and derivative hedges.

But along with the higher risk comes the potential for higher rewards when prices are rosy.

A lot of junior energy producers, many of which were excellent wealth creators, got expensively priced on the stock market. And part of the reason why is that double-digit growth is such a difficult thing to come by these days. Therefore, when institutional investors find it, they bid it.

Volatility in commodity prices is a direct catalyst in resource stocks and this will never change. Even pipelines sold off with oil prices, even though many of them have long-term contracts that are not related to spot prices.

But in capital markets, swift price corrections often open the door to attractive opportunities. In many cases, really strong domestic oil producers just … Read More

3Q14 Earnings Results Suggest Strength into 2015?

By for Profit Confidential

3Q14 Earnings Results Suggest Strength into 2015Corporate earnings are flooding in, and while there are always disappointments—typically in not meeting Wall Street expectations—the numbers are pretty good.

The stock market was relieved when conglomerates started reporting. 3M Company (MMM) saw its share price pop almost five percent higher after beating estimates and reporting a solid improvement in U.S. market demand.

I continue to like this position for long-term, income-seeking investors. (See “Off-the-Radar Company Delivering Attractive Earnings.”)

The company reported record third-quarter sales growing a modest 2.8% comparatively to $8.1 billion, with local currency sales growing 3.9% and acquisitions adding 0.1% to sales.

Currency translation, which is a big issue for any company with international operations, reduced third-quarter revenues by about 1.2%, according to the company.

Net income came to $1.3 billion, or $1.98 per share, representing an 11% gain over the same quarter last year with operating margins exceeding 22% in all of the company’s operating subsidiaries.

It was a very good quarter for 3M Company. It’s important to remember that this is a mature conglomerate, so nobody is expecting double-digit top-line growth in this environment.

Still, the bottom line was impressive along with management tightening its 2014 earnings range to between $7.40 and $7.50 per share from the previous $7.30 to $7.55 per share.

Also jumping on the stock market after announcing its financial results was Alaska Air Group, Inc. (ALK). The company is up almost seven percent after reporting a record third quarter.

This airline has been a very hot stock over the last five years. Passenger revenues in the third quarter grew a solid seven percent over last year. Excluding some one-time items, … Read More

Crushed Oil Sector a Profitable Opportunity?

By for Profit Confidential

Crushed Oil Sector

The big news so far this earnings season isn’t corporate financial results but the price of oil, which continues to be under pressure.

Domestic production has finally caught up to spot prices and combined with reduced expectations for the global economy, oil prices continue to be vulnerable.

Resource investing is inherently volatile; risk related to commodity-based investing is always higher. But as oil prices have given oil stocks a well-deserved buzz-cut, value is appearing, which is not a common trait in today’s stock market.

There are countless growth stories in domestic oil and gas production. The smaller-cap growth stories have been expensively priced for a considerable period of time. They just got a big haircut as well, and all of a sudden, they are much more fairly priced.

For quite some time, oil prices held firm just over the $100.00-per-barrel level, which makes the recent drop all the more momentous. Conspiracy theories abound.

Some of the best opportunities when oil bottoms, I believe, will be in the large-cap space, but it’s important to consider that the price of oil is currently in “turmoil”—it can’t, in a sense, be counted on near-term.

One company that’s a standout in the current environment is Kinder Morgan, Inc. (KMI), which is going through a major corporate reorganization. Acquiring its related master limited partnership (MLP) entities, it is now the fourth-largest domestic oil company by market capitalization.

This corporate reorganization is a rejection of the MLP business model, but also an opportunity for management to shed non-core assets. (See “This Company’s $70.0-Billion Acquisition a Boon for Investors.”)

What I like about Kinder Morgan is that … Read More

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