Earnings Scout is a proprietary analysis of the rate of change (the delta) in earnings trend expectations. This analysis is differentiated as it identifies divergence of stock price from the rate of change future expectations. The rate of change is a leading indicator of a catalyst for potential price change not measured elsewhere. Contact info@roulstonresearch.com to learn more on how they can create tailored reports so you can maximize your risk-adjusted returns.

  • The homebuilding industry in the S&P 500 consists of three companies: D.R. Horton, Lennar, Pulte Group.
  • The industry accounts for 0.11% of the S&P 500 index.
  • In 2012, the homebuilding industry significantly outperformed the consumer discretionary sector (104.39% vs. 23.92%) and the S&P 500, which returned 16.00%.
  • In 2013, the industry is now significantly underperforming the consumer discretionary sector (-8.73% vs. 25.41%) and the S&P 500, which has a total YTD return of 19.61%.

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  • All of the homebuilder’s underperformance in 2013 has come after our repeated warning that the industry was grossly overvalued.
  • Let us take the time to review our prior earnings analysis on the homebuilders.
  • Back in March 2013, the industry was still outperforming.
  • We cautioned about the decelerating rate of change to the homebuilder’s positive earnings estimate revisions as prices kept moving higher.

Homebuilding Industry Earnings and Price Trends in March 2013

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  • Something had to give, either earnings estimates were going to have to eventually go up or prices fall.
  • Our qualitative analysis on the group determined it would be the latter, and we were right.
  • Here is the current updated graph on how the rates of change to homebuilding earnings estimates are moving off of expectations.

Current Homebuilding Industry Earnings and Price Trends

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In our opinion, Ben Bernanke & Co. will need three things in order before they can pull an exit stage left.

  1. Improved employment picture
  2. Healthy financial sector
  3. Solid housing market
  • If all three of the above factors are humming, the economic recovery would have an increased chance of being sustained without the need for additional Fed support.
  • As for #1, jobs have been improving; albeit slowly, but improving,
  • As for #2, financials (i.e. banks) rocked in 2Q13 earnings season. The Fed can check this box.
  • As for #3, housing is much healthier today than two years ago. But, it will be tough for the Fed to leave the party early as housing trends have become steadily less positive over the past year.
3Q 2013 Homebuilding Earnings Estimates
Company

2Q13 Report Date

3Q13 Estimate

3Q13 Est. (90 days ago)

90 Day Estimate Change

D.R. Horton

7/25/2013

$0.40

$0.39

2.56%

PulteGroup

7/25/2013

$0.37

$0.40

-7.50%

Lennar Corp

6/25/2013

$0.46

$0.52

-11.54%

Source: The Earnings Scout

 

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CAT is a weathervane for the global economy, though as Bob said, you don’t need one to know which way the wind is blowing.

Back in the spring, CAT’s revenue had unwound 20% – back to 2010 levels – as the global economy (driven by central bank QE and centrally planned fiscal policies) continued its inevitable decline as a result of those policies.

So, with earnings season, we don’t have much doubt about CAT’s situation. It’s a dog.

Its North American sales “improved” this time aruond from -16% to -10%. Asia, that “engine of growth”, saw CAT’s revenue decline from -14% to -21%.  Latin American sales plunged from 22% to 9%.  And, everywhere else went from -2% to -8%.

@VolSwinger says this dog presents short potential, because it:

  • Generates no free cashflow from operations
  • Employs dodgy revenue recognition criteria in its foreign subs, booking financing as revenue, regardless where or even whether the transaction is completed
  • Has no prospect of bumping the dividend
  • Employs aggressive economic forecasting to channel-stuff
  • Is weighted down by capital issues in the mining sector which need to play out over years
  • Is carrying some $9B in failed (including one fraudulent) acquisitions since 2010.

We could go on but the point is made.  There may be a dead-CAT bounce or two out there but the this economic growth indicator is having some serious problems with the economic growth it’s supposed to indicate.

Just like everyone else.

Stephen Maloney is a partner at Azuolas Risk Advisors with over 30 years experience in the US and EU modeling risk and valuation in energy, FX, and other commodities. Stephen has led energy M&A teams for Fortune 100 firms over 15 years. He also routinely advises executive and credit committees concerning high risk ventures and capital investments. His clients include companies, hedge funds, and financial institutions actively marketing or trading physical and financial commodities and derivatives. To learn more about Azuolas Risk Advisors please visit http://www.azuolasriskadvisors.com/.

Despite positive quarterly results from Apple and Samsung, it is clear that smartphone sales growth in developed economies is leveling off. The next wave of growth will come from emerging markets, which is why Apple, for example, is as focused on developing a high quality, but lower cost device for Asia and Latin/South America as it is on the next wow-factor phone for the U.S. and other developed countries. We are in a new, market segmentation mode for smartphones: devices for different price points, and screen size choices to meet form factor preferences. Please follow the link to Mark’s FierceWireless article to read his 8 thoughts on how to re-invigorate the handset market by focusing on the totality of the user experience at http://www.fiercewireless.com/story/lowensteins-view-smartphone-ennui-and-what-do-about-it/2013-07-25.

Mark Lowenstein, a leading industry analyst, consultant, and commentator, is Managing Director of Mobile Ecosystem. Click here to subscribe to his free Lens on Wireless monthly newsletter, or follow him on Twitter at @marklowenstein. If you would like to speak with Mark on a 1 on 1 basis about this or any other topic please contact info@roulstonresearch.com.

Earnings Scout is a proprietary analysis of the rate of change (the delta) in earnings trend expectations. This analysis is differentiated as it identifies divergence of stock price from the rate of change future expectations. The rate of change is a leading indicator of a catalyst for potential price change not measured elsewhere. Contact info@roulstonresearch.com to learn more on how they can create tailored reports so you can maximize your risk-adjusted returns.

  • The Diversified Metals & Mining industry in the S&P 500 consists of one company: Freeport- McMoRan Copper & Gold.
  • The industry accounts for 0.20% of the S&P 500 index.
  • In 2012, the diversified metals & mining industry underperformed the materials sector (-3.51% vs. 14.97%) and the S&P 500, which returned 16.00%.
  • In 2013, the industry is significantly underperforming the materials sector (-11.08% vs. 9.36%) and the S&P 500, which has a total YTD return of 19.57%.

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  • In our most recent reports, we have been very bullish on overall 2Q 2013 earnings season.
  • By no means do we mean that every industry is doing well.
  • We continue to reiterate sectors with more exposure to decelerating growth trends in emerging markets, and in particular China, are witnessing very negative rates of change to their earnings expectations.
  • No industry is more of a poster child of these negative earnings trends than the metals and miners.
  • Contrarians might be tempted to jump into the beaten down metals companies; our earnings analysis indicates it is still too early to do so.
  • As such, we continue to recommend avoiding the metals & miners until emerging market stocks start to perform better and most importantly until the industry’s underlying earnings trends begin to turn positive on a sustained basis.

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3Q 2013 Diversified Metals & Mining Earnings Estimates
Company

2Q13 Report Date

3Q13 Estimate

3Q13 Est. (90 days ago)

90 Day Estimate Change

Freeport-McMoRan

7/23/2013

$0.65

$0.95

-31.58%

Source: The Earnings Scout

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SunCoke Energy (NYSE: SXC, $15.87) was presented at our New York idea forum on July 24.  The presenter highlighted the company’s leading position in metallurgical coke production and the take-or-pay nature of its contracts with steel companies, which protects SXC from the commodity price risk.  SXC was created as a tax-free spinoff from Sunoco in January 2012 and itself spun off an MLP, SunCoke Energy Partners (SXCP) in January 2013.  SXC will start laying out its plans to drop down assets into the MLP in early 2014 when a two year moratorium on transactions to preserve tax-free status will expire.  SXCP is currently trading well below MLP sector valuations.  The presenter targets a 40% upside based on valuation arbitrage rising to 100% if the company renews a contract with ArcelorMittal for operating its Indiana Harbor facility.  The contract expires in September.

On July 25th, Roulston Research held a Restaurants Roundtable with Nelson Marchioli, Former CEO of Denny’s, Former CEO of El Pollo Loco, and Former Senior VP of International Operations & Sales at Burger King Corporation; and William Van Epps, Principal at Van Epps Consulting, Former President and COO at Papa John’s, Former President International at Yorkshire Global Restaurants, and Former President International at AFC Enterprises.  They sat down to talk about future trends in the restaurant industry, including how changing demographics and different strategies will affect future performance.

In recent years, restaurants have had to focus more on demographics and the economy than ever before.  Restaurant companies now depend on people’s disposable income.  When gas prices rise or the economy turns for the worse, people’s disposable income changes, and they will be likely to change where they go out to eat.  One of the ways that the restaurant industry has been able to capitalize on this new trend is through fast casual dining.  These restaurants have average median customer household incomes of about $72 thousand, and thus these customers’ disposable incomes are more resilient to fluctuating gas prices than the customers of the fast food industry.  Due to this, it would not be surprising to see more restaurants try to adopt this style of serving.  Another benefit to this style is that it saves on labor costs, as no servers are necessary.  This also helps improve customer satisfaction, since servers are often the focal point of complaints from customers.  In the future, the presenters believe that there is room for another dominant player in the Mexican fast casual industry with Chipotle, as well as a belief that a pizza chain with this business model will gain a dominant position.  Another recent trend in the restaurant industry is toward franchising more stores.  While this can be beneficial in reducing risk toward the franchisor as well as allowing more rapid growth for a company, it also has its dangers.  For instance, often this will create a disconnect between the franchisor and the stores, leading to slow reaction times in adjusting menus.  Companies like Papa Johns, where a large portion of its stores are company owned, are in better position to adjust to changing market climates, which in turn helps its franchised stores as well.  In theory, it should not matter whether a store is franchise or company owned, since if a franchise store is losing money, it will merely affect future sales of franchise stores, even if it does not hit company revenues directly.  Other topics discussed include breakfast foods, costs associated with the healthcare bill, real estate changes in the industry, and others.  If you would like to listen to the entire podcast, or engage in a 1 on 1 discussion with either Nelson or Bill, please email info@roulstonresearch.com.

Earnings Scout is a proprietary analysis of the rate of change (the delta) in earnings trend expectations. This analysis is differentiated as it identifies divergence of stock price from the rate of change future expectations. The rate of change is a leading indicator of a catalyst for potential price change not measured elsewhere. Contact info@roulstonresearch.com to learn more on how they can create tailored reports so you can maximize your risk-adjusted returns.

The Industrial Conglomerates industry in the S&P 500 consists of three companies: 3M, Danaher and General Electric.

• The industry accounts for 2.45% of the S&P 500 index.

• In 2012, the industrial conglomerates industry outperformed the industrials sector (19.76% vs. 15.35%) and the S&P 500, which returned 16.00%.

• In 2013, the industry is slightly outperforming the industrials sector (21.08% vs. 20.29%) and the S&P 500, which has a total YTD return of 19.91%.image002

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3Q 2013 Industrial Conglomerates Earnings Estimates
Company 2Q13 Report Date 3Q13 Estimate   3Q13 Est.(90 days ago) 90 Day Estimate Change 
General Electric

7/19/2013

$0.40 

$0.40 

0.00% 

3M

7/25/2013 

$1.78 

$1.80 

-1.11%

Danaher

7/18/2013

$0.84 

$0.85

-1.18% 

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