More US earnings reports

Wednesday saw a mixed bag of earnings results. There was enough good news to overshadow the bad news for the bulls. Earnings surprises continue and so do downward earnings revisions. Below is a sample of some the larger players that reported on Wednesday.


Motorola cuts 2Q07 guidance:
Motorola (MOT) cut its 2Q07 revenue guidance to a range of $8.6 - $8.7 billion from its previous estimate of $9.4 billion. The company said it expects a per-share loss from continuing operations of 2 - 4 cents, including 3 - 4 cents of charges related to work-force reductions and other items. Analysts were expecting revenue of $9.26 billion. Motorola plans to release 2Q07 results on July 19.


Infosys 1Q07 profit up 34.5% but strong rupee cutting into growth:
Infosys (INFY) announced 1Q07 profit growth of 34.5% but cut earnings guidance for the full year due to a stronger rupee against the dollar. Infosys shares fell 2.2% as FY07 guidance was downgraded to at least 78.20 rupees from its April forecast of at least 80.29 rupees.


Genentech 2Q07 earnings surge 41%:
Genentech Inc. (DNA) posted a 41% rise in 2Q07 profit and raised its profit forecast for the full-year. Excluding one-offs DNA made 78 cents per share, analysts had been expecting 72 cents. The company upgraded it's full year forecast range to $2.85 - $2.95 per share from $2.79 - $2.90. Analysts had been expecting $2.92 per share for the full year.


International operations boost Yum Brands 2Q07 earnings:
Yum Brands (YUM) posted an 11.5% rise in 2Q07 profit and raised it's full year earnings outlook. The company posted 39 cents a share for the second quarter, analysts had been expecting 36 cents a share. Whilst same store growth was flat in the US international same store growth was an impressive 11% . The comapny raised it's full-year forecast to $1.63 a share in line with analysts estimates.


Micron Tech to cut 5% of it's workforce:
Micron Technology Inc. (MU) has cut 1,100 jobs or 5% of it's workforce. For the quarter ending May 31st the company reported a lost -$225m or 29 cents a share.


Compuware tumbles 20% after lower earnings forecast:
Compuware (CPWR) announced it expects 1Q07 revenue of approximately $278 million, below analyst expectations $303 million. More importantly on a per share basis the company expects to post break even results.

More on RMBS and CDO downgrades

• In addtion to S&P's announced RMBS downgrades the agency said on Tuesday that more than 350 collateralized debt obligations (CDO's) are exposed to possible downgrades of subprime residential mortgage-backed securities, which equates to roughly 13.5% of all U.S. cash-flow and hybrid collateralized debt obligations (CDOs), or 218 deals, are exposed to the downgrades. Another 135 synthetic CDOs are exposed.

• Around 60% of the 399 subprime RMBS Moody's announced ratings cuts for and possibly another 32 were orignated by Fremont Investment & Loan, a division of Fremont General, Long Beach Mortgage Company, a unit of Washington Mutual (WM) WMC Mortgage Corp, part of General Electric (GE) and New Century, according to Moody's. The Wall Street Journal reported on Wednesday that GE could take a hit of $200m in 2Q07 for subprime losses to add to the $500m it took in 1Q07.
  

• Several other subprime-mortgage players were listed by S&P as well, including Merrill Lynch & Co. (MER) and its subsidiary First Franklin, NovaStar Financial Inc. (NFI), Bear Stearns Cos. (BSC) and Citigroup Inc. (C)

PBP announces upbeat FY08 profit guidance

Probiotec (PBP) announced today that it expects FY08 profit before tax growth of at least 30%. The market reacted to the news favourably sending the stock $0.09 higher to close at $1.30.

The forecast is not surprising since PBP has already indicated that they expect PBT of $6m for FY07 (pre the Phoscal litigation claim). Since PBP recorded PBT of $2.1m for 1H07 that means they expect 2H07 PBT of $3.9m. If we estimate FY08 PBT by simply doubling 2H07 we get $7.8m which wouldn't you know it is 30% higher than FY07.

That is of course assuming no growth after the second half of this year. Granted the recent debt funded acquisition will increase the company's interest expense. Even so given a full year impact of the recent acquisition and organic growth in the company's own branded products (as outlined in today's announcement) you would have be disappointed if the company didn't do better than 30%+ growth in pre-tax profit in FY08.

Rating Agency's take a reality check

Well it took a while but the rating agencies are now having to admit that the toxic waste market, I mean the RBMS (Residential Mortgage Backed Securities) market is in some serious trouble. Yesterday the two largest rating agencies S&P and Moody's announced that they are downgrading billions of dollars worth of mortgage backed securities.

To be exact Standard & Poor's said it may downgrade $12 billion of subprime residential mortgage-backed securities (RMBS), while Moody's downgraded 399 RMBS.


Credit ratings on 612 classes of residential mortgage-backed securities backed by U.S. subprime collateral have been put on CreditWatch with negative implications, S&P said. Beginning in the next few days, the agency said most of these classes will be downgraded.

The agency said it's also reviewing ratings of Collateralized Debt Obligations (CDOs) that invested in the RMBS that could be downgraded.

S&P also said it's changing the way it evaluates those securities, partly because of unprecedented levels of misrepresentation and fraud, combined with potentially shoddy initial loan data.


Really? Fancy that, giving people loans who don't need any proof that they can afford them turned out to be not such a good idea. We kind of knew that already but I guess S&P are just slow learners.

S&P said it was taking action because losses on the mortgages underlying these securities have risen more than expected and now exceed anything that happened before.

Losses will probably increase as the U.S. housing market especially parts financed with subprime loans continues to decline before it improves, S&P said. Property values will decline 8% on average between 2006 and 2008 and that will exacerbate losses on subprime RMBS, the agency explained.

The resetting of adjustable-rate subprime mortgages and the end of low teaser rates on fixed-rate home loans will also increase subprime RMBS losses, S&P added. Tighter underwriting standards imposed by lenders will leave fewer refinancing options for stretched borrowers, the agency also said.

"The ongoing weakness in both national and regional property markets will exacerbate losses with little prospect for improvement in the near term," the agency said. "Also, many of these transactions will likely encounter additional credit stress from upcoming interest rate and payment resets."


Doesn't sound good does it? Hank Paulson's 'we have reached the bottom of the cycle' claim is all but a sick joke now.

Moody's said it downgraded 399 residential mortgage-backed securities because of higher-than-expected delinquencies on the underlying home loans. The rating agency also said it put 32 other RMBS under review for possible downgrades for the same reason.

The moves affect $5.2 billion of securities. That represents 6.8% of the securities rated by Moody's last year that were backed by subprime first-lien home loans, the agency noted.

New data show that delinquencies and foreclosures continue to accumulate, S&P reported. Total aggregate losses on all subprime RMBS transactions since the final quarter of 2005 have reached 29 basis points, versus seven basis points in 2000. (A basis point is one hundredth of a percentage point).

S&P used 2000 as a comparison because, until now, that was the worse year for subprime losses in the past decade.


So the previous worst year for sub-prime losses has not just been eclipsed it has actually been quadrupled and with more mortgage resets to come this won't be getting better anytime soon.


Alleged misrepresentations on credit reports were up significantly in 2006 and overall mortgage fraud has exceeded previous highs, S&P also reported.

The agency said borrower and loan data it used to rate RMBS may not have been accurate. That means important factors it analyzed to judge the risk of these securities such as borrowers' credit scores, loan-to-value levels and ownership status are proving less helpful in predicting performance, it explained.


It's not shaping up as the best week for markets with profit downgrades, RMBS downgrades and lacklustre retail sales due out on Thursday from US retailers. Click here for the full article from marketwatch.com

So much for the Spring selling season

D.R. Horton reports 40% drop in quarterly orders

By Steve Goldstein

Last Update: 7:08 AM ET Jul 10, 2007

LONDON (MarketWatch) -- D.R. Horton Inc. (DHI) reported that orders for the third quarter ending June 30 dropped 40% to 8,559 homes, or down 47% to $2 billion by value. The cancellation rate at the Fort Worth, Tex.-based builder was 38%.

"Market conditions for new home sales declined in our June quarter as inventory levels of both new and existing homes remained high, and we expect the housing environment to remain challenging," said Chairman Donald R. Horton in a statement. It expects a profit before impairments, but a loss after including those impairments, during the June quarter.

Current earnings cycle on it's last legs

Whilst I don't believe in using P/E's as a valuation method for individual stocks it can be useful to look at market P/E ratios over time to get a feel for how much investors are willing to pay for stocks. This article from Hussman Funds compares current P/E's based on one year trailing earnings with average P/E's over the last ten years and raises some interesting points:

• Firstly the current earning earnings cycle is the third-longest cycle since 1950. The longest cycle took place during the mid to late 90's, lasting 5 ½ years. A cycle of 4 ¾ years ended in 1981. The current earnings cycle is just 3 months shorter than that record. The average cycle is just a little over 2 years.

• The cumulative earnings growth in this cycle is the largest on record.

• The difference between P/E's based on 1 year trailing earnings and P/E's based on a 10 year average is now at it's largest since 1950. 31.5 compared to 18.
  

• The P/E ratio adjusted for 5-year earnings growth is currently 24.5. When this ratio is above 25 the total return on the S&P 500 has led to negative 5 year returns.
  

Considering the longevity of the current earnings cycle and it's cumulative growth in comparison to historical levels you would have to say it's on it's last legs. Unless, as the article suggests, you assume that the profit cycle no longer exists.

S&P500 heavyweights join downgrade brigade

Home Depot Inc. (HD) reported that the housing market is having a deeper impact on their business than first thought lowering it's 2007 profit guidance to a drop of between 15 - 18% down from an earlier forecast of a fall of 15%.

After taking into account the $12bn in sales contributed by the recently sold Home Depot Supply division total retail sales are expected to dip between 1% and 2%.

Comparable store sales are expected to fall by mid-single digits and the company expects its operating margin to contract by between 1.2 and 1.5 percentage points due to negative same-store sales and its continued investment in its core retail operations.


Retailer Sears Holdings Corp. (SHLD) announced that same-store sales for the nine-weeks ended July 7 fell 3.9% at domestic Kmart stores, with declines across most categories. Sears domestic same-store sales, or sales at stores open at least one year, fell 4%, with declines across most categories partially offset by increases in women's apparel and footwear.

Sears said that if the sales trends experienced during the first nine weeks of the second quarter continue through the rest of the 2Q07, which ends Aug. 4, net income will be between $1.06 and $1.32 a share. Analysts, on average, expected it to earn $2.12 for 2Q07.

Sears also said its board approved the repurchase of up to an additional $1 billion of its common shares. This authorization is on top of the $121 million worth of shares that remain available for repurchase under the company's existing repurchase program.