Dell Inc (DELL) Has a Good Quarter on PC Demand

The leading maker of PCs in the United States, Dell Inc, put together one of their better quarters since the US economy began to sour but the stock remains expensive after a recent run-up. The stock of Dell has rallied over the past three months from $11.50 a share to over $16.00 as the outlook for technology companies worldwide has improved.

Second Quarter Earnings

This morning the company announced 2nd quarter earnings which beat expectations. On lower revenue they were able to post 28 cents a share of income well above expectations of 23 cents. Revenue is expected to decline 16% this year compare to last year and finally rebound 4.5% next year.

The company has reported stabilized demand from consumers and businesses for PCs but they feel business demand will not improve until 2010. Windows 7 is one of the catalysts that should increase PC demand among business owners as companies will want to take advantage of the upgraded operating system with better performing machines.

Long Term Trade

With a current price/earnings (P/E) ratio above 15, revenue decreasing, and earnings still falling, any investment in Dell needs to be long term. Next year earnings are expected to increase 18.6% compared to the current year which would allow for some slight appreciation in the stock price.

Markets rallied to close the week strong as Ben Bernanke made positive statements about the overall economy and home starts showed a very good improvement over past readings.

Ben Bernanke

Federal Reserve Chairman Ben Bernanke commented during a speech on Friday that the economy is near recovery. This news sent the indexes higher during a week that was a little volatile at the beginning but moved higher the final four days. The one area of contention is lending to consumers and business has not completely returned to normal. On Friday all the major averages advanced with the Dow Jones Industrial Average up 1.69% near the close of the day.

Home Sales

The National Association of Realtors reported that existing home sales rose 7.2% during July compared to a reading of 4.89% in June. This represented one of the best readings in 10 years. Government tax credits are partly responsible for the rapid sales in addition to pent up demand in housing. Similar to the Cash for Clunkers program, consumers waited to see how the economy was going to progress and then jumped in to secure government aid prior to tax credit programs ending.

Ultra S&P 500 Proshares (SSO)

On of my favorite ways to trade the macro economic trends is with the Ultra Proshares S&P500 exchange traded funds. There is the Ultra (SSO) which tracks double positive moves in the S&P 500 and there is the Ultra Short (SDS) which moves in the opposite direction to the SSO. Therefore depending on the current trend, holding a position in one or the other can provide nice returns with minimal volatility.

Video Rental Companies Suffer

Blockbuster (BBI) reported today that they had an operating loss during the second quarter and their shares fell 16% subsequently. The company lost $39.7 million as revenue fell 22% due to competition from Netflix (NFLX) and Redbox (CSTR). Blockbuster has tried to compete with Netflix by starting it’s own delivery service called Total Access. And some of the changes have been beneficial as the loss in revenue didn’t come from actual DVD rentals but from store closures and merchandise. The company is expected to loss 5 cents next quarter but profit for the year. The stock is currently very cheap and had risen from 60 cents a share to 85 cents a share before the drop today. Look for continued weakness as the company transitions from store fronts to less expensive delivery methods.

Netflix Delivering Profits

Netflix is positioned the best of the three DVD companies as their online program continues to grow. Revenue for the year is expanding 22% while profit is growing at a rate of 35%. The price to earnings ratio for the company is near 20 which represents a slight discount to earnings. The pullback today in sympathy with Blockbuster could present a buying opportunity but the over consumer is not healthy yet as the economy struggles to expand therefore consumer based names are a risk.

Redbox Getting Squeezed

Coinstar (CSTR) owner of Redbox came under fire today for a different reason, their inexpensive rentals are hurting the production companies which release movies to them. Therefore Warner Brothers is joining Universal and 20th Century Fox in delaying new movie releases to the kiosk operator. Coinstar fell 11% and could see analyst downgrades if the new release dates affect revenue in the future.

Cisco Systems (CSCO) No Longer a Growth Stock

Cisco used to be one of the great Internet/Technology growth stocks that was growing in the double digit range year after year. But that is no longer the case with revenue declining and earnings falling in the current quarter and projected to fall in the following quarters.

Cisco Reports

Cisco is set to report fourth quarter earnings after the bell today and could beat low expectations for the fifth time in a row. Analysts recently upgraded their expectations for the quarter from 28 cents a share to 29 cents a share. Yet this represents a drop of 28% from the same quarter last year.

Revenue

Revenue at Cisco is also declining compare to prior years with the current quarter falling 18% and the year looking to fall 9% overall. Cisco is considered a gauge of overall IT spending with it’s routers and switches fueling the growth of information sharing and the Internet itself. But these markets have matured while Cisco has tried to push into other areas with better growth.

Stock Rally and P/E

Cisco’s stock has rallied from a six month low of $13.62 a share to a recent high of $22.57. The stock could continue to move higher on expectations of a rebound in tech spending. But the numbers currently do not show growth and once the company’s price to earnings (P/E) ratio reaches an unsustainable level, the stock should return to levels closely inline with it’s growth rate.

GDP Beats but Revisions Are Rough

The market news today is mixed along with the action of the indexes. The GDP for the 2nd quarter of 2009 was better than expected but past quarters were worse than thought. I guess in the long run only the next quarter matters, the most recent is interesting, and the past are in the past.

GDO Revisions

The prior quarter’s revision from a poor –5.5% to an even worse –6.4% gives everyone pause but it really has no affect on the current situation and the markets are always looking to the future for buying inspiration. And that is what the -1.0% in the 2nd quarter should provide. The recession is ending after four quarters of negative growth in the 3rd quarter and some government policies are working like the Cash for Clunkers program.

Next Week Economic Numbers

Next week the market expects more mixed news with good numbers on Construction Spending, the ISM Index, Personal Spending, Pending Home Sales, Hourly Earnings, and Non-Farm Payrolls. But expectations are for worse than prior numbers for Personal Income, Factory Orders, and the Employment Rate.

I think the improved outlook for the US in the third quarter will outweigh all of the news next week with some volatility around better than expected numbers and worse than expected numbers.

Why I Purchased Goldman Sachs (GS) Friday

Last Friday I purchased Goldman Sachs Group (GS) as the markets quickly recovered from month lows and broke to the upside as earnings season got underway. This was after GS reported great earnings that beat expectations by 40% with analysts increasing their expectations for future quarters and the year.

Markets Jump

What a difference two weeks make? Prior to the start of earnings season the indexes were slowly falling to new month lows and signaling a sell. But a number of companies have beaten their expectations including Goldman Sachs (GS), Johnson & Johnson (JNJ), JPMorgan Chase (JPM), and International Business Machines (IBM) giving the bulls reason to buy.

Earnings Expectations

The case for Goldman Sachs is fairly strong. For the quarter ending September 2009 analyst have increased their expectations for the company’s earnings from $2.08 a share to $3.30 a share. This is an increase of 59%. The stock itself has moved from $125 to $165 a share which does represent an increase of 32% but not equal to the earnings increase.

The Trade

The trailing price to earnings ratio is currently 37 with the forward price to earnings at 10. Earnings increases could reach 82% for the current quarter and 183% for the next quarter. These increases would make the P/E conservative. Analysts have an average price target of 173.5 for the year. With the markets moving higher and Goldman Sachs being one of the strongest in it’s industry, holding GS until the end of the earnings season is a trade that I wanted to make.

CIT Group Inc (CIT), Another Bank Fails

Just when you thought it was safe to buy financials, another back falls into bankruptcy and their stock goes to zero. The common stock of CIT fell close to 75% today as it struggles to stay afloat and looks for a reported $2-3 billion in financing. Along with CIT, insurers and banks are taking a hit with Aflac, Genworth, Lincoln Financial, and Conseco falling on their perceived exposure to the large commercial bank.

Overall Market Direction

Prior to the news of the demise of CIT, the market had rallied from a selling point around 1745 on the Nasdaq to a buy position above 1850 on the index. Over the week, the Dow Jones Industrial gained over 5% as the earnings season kicked off and investors felt better about the economy and company results. But the CIT news and weak regional manufacturing caused a pause in the rally for today.

If you feel like gambling, the CIT options have seen a large spike in volume today at Call strikes of $1 and $2 in addition to Put strikes on $1 and $2 in the closest months. Otherwise staying on the sidelines until there is a clear direction in the overall market is not a bad ideal. The markets could rally for a couple more weeks as good earnings numbers are released by varying corporations. But the downward trend is likely to resume as the end of the reporting season nears.

Amgen (AMGN) Jumps Higher in Shaky Market

Amgen moved higher today, close to 14%, on news that a bone-related drug trial had a positive outcome. But the company isn’t currently growing and the overall market is looking weak going into earnings season. The Dow Jones Industrial Average, the Russell 2000, and the S&P 500 have recently turned negative with the Nasdaq Composite looking to move into a selling position soon.

Denosumab

Amgen’s osteoporosis drug Denosumab was able to prevent bone injuries for breast-cancer patients in recent trials. The drug could possibly be a blockbuster drug and allow revenue to begin increasing again which has been flat to down in recent quarters for the biotechnology company.

Short Opportunity

The company’s current quarter is estimated to show a small increase in earnings compared to last year while next quarter is expected to show a 5% drop year over year. Revenue is set to decline near 5% for the current quarter, the next quarter, and the full year compared to the same periods in 2008. With the companies price to earnings ratio at 15.35 the jump in share price looks like a near term opportunity to short the stock as the new drug will not benefit revenue or earnings soon.

Alcoa Inc (AA) Breaks Down before Earnings

Alcoa Inc. (AA) moved lower on Thursday as commodities across the board struggled and the overall market fell as jobs data lead many to disbelieve the 2nd quarter will represent a turnaround in the US economy. The stock fell 4.73% to break below an early lower for the past 30 days of $10 a share. The company is set to announce their earnings on July 8, Wednesday of this coming week.

Revenue and Earnings

Revenue and Earnings estimates for the company have been reduced over the past three months with 2nd quarter earnings now expected to be a loss of 34 cents. This represents a decline of 151% from the earnings of the same quarter a year ago. Revenue is also expected to show a decline with the current estimate at a reduction of 48% compared to last year’s 2nd quarter.

Beginning of Earnings Season

The company has missed it’s earnings estimates the past three quarters, missing by 2 cents in March. The Alcoa report represents the beginning of the 2nd quarter earnings season which should provide the markets with direction up or down going forward. If both Alcoa and Chevron (CVX) provide disappointing earnings this coming week, the markets could fall for the week giving investors a trade for the final 2 days.

Southwest (LUV) Flies into New York LaGuardia

Southwest Airlines begins to fly into New York this weekend as the company searches for business travelers to increase revenue in a field that it has not ventured in the past. Flying into crowded airports where turnaround times are slower and most travel is for business is something the company does not have much practice doing.

Stock Price and Earnings

The stock moved 5% higher today as the overall market jumped on the prospect of a better economic 2nd quarter than the 1st quarter in the US. But shares of Southwest have be beaten down in recent months from close to $9 a share 6 months ago to a little over $6.25 a share recently. Revenue is falling 9% for the current quarter compared to last year and earnings are also falling 50% for the quarter on a year to year comparison.

Price to Earnings

The forwarding looking price to earnings (P/E) ratio for LUV is currently 15.05 and with the earnings decreasing, it makes an assessment difficult. With rising gas prices though and the economy yet to recover makes the short term future for the airlines troubled. Analysts have reduced their expectations for the current quarter from 19 cents to 8 cents over the past three months. For the current year, similar decreases in earnings expectations show analysts disbelief in any turn around in the near term.