Should those who own shares of Kraft immediately put an order in to dump the stock? Well, shareholders know what is best for them and their specific situations, but if you want my opinion, I don't think Kraft is a sell.
For starters, that $1.88 per share figure represents an adjustment related to the sale of the Post cereal asset. It therefore doesn't bother me too much. And as for the 2009 estimate, Kraft's $2-per-share guidance includes a $0.03 charge for the Post-cereal exit and monies devoted to cost savings. Analyst estimates for the most part don't factor adjustments into their bottom-line figures. So, this guidance doesn't really frighten me.
What I think is more telling is the issue of margins. Consumer-products companies such as Hershey (NYSE: HSY), Procter & Gamble (NYSE: PG), Kellogg (NYSE: K) and PepsiCo (NYSE: PEP) all have margins on their corporate minds. From what I can tell, Kraft has been pretty successful at protecting itself from inflation by utilizing price increases.
After hitting a one-year high of $71.16 in October, the stock has hit a new one-year low of $50.42 today. This morning, KMB opened at $54.25. So far today the stock has hit a low of $50.42 and a high of $57.68. As of 12:50, KMB is trading at $55.87, down $2.93 (-5.0%). The chart for KMB looks neutral and slightly improving while S&P gives KMB a positive 4 STARS (out of 5) buy rating.
For a bearish hedged play on this stock, I would consider an October bear-call credit spread above the $60 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 14.9% return in three months as long as KMB is below $60 at October expiration. Kimberly-Clark would have to rise by more than 7% before we would start to lose money. Learn more about this type of trade here.
After hitting a one-year high of $57.34 in October, the stock hit a one-year low of $32.84 in January. TIF opened this morning at $45.91. So far today the stock has hit a low of $45.29 and a high of $48.95. As of 12:00, TIF is trading at $48.00, up 2.15 (4.7%). The chart for TIF looks bullish and steady, while S&P gives the stock its highest 5 Stars (out of 5) strong buy rating.
For a bullish hedged play on this stock, I would consider an August bull-put credit spread below the $35 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 4.2% return in just three months as long as TIF is above $35 at August expiration. Tiffany would have to fall by more than 27% before we would start to lose money. Learn more about this type of trade here.
TIF hasn't been below $35 except for a couple days in the past year and has shown support around $41 recently. This trade could be risky if the US economy tanks some more in the coming months, but even if that happens, that position could be protected by support the stock might find just around $36, where it bottomed out in March.
DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in TIF.
salesforce.com (NYSE: CRM) shares are rising strongly today, after the company announced Q4 earnings that beat estimates by 2 cents and predicted that it will earn between 6 and 7 cents per share on $233 million to $235 million in revenue in the first quarter, above Wall Street estimates of 6 cents per share on $228.5 million in revenue. CRM also expects fiscal 2008 earnings to come to 32 to 33 cents per share, in line with analyst estimates of 32 cents per share. If you think that the company won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on CRM.
After hitting a one-year low of $37.24 in August, the stock hit a one-year high of $65.52 in December. CRM opened this morning at $52.88. So far today the stock has hit a low of $57.54 and a high of $63.47. As of 10:45, CRM is trading at $61.87, up $9.25 (17.8%). The chart for CRM looks bearish and steady, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.
For a bullish hedged play on this stock, I would consider a May bull-put credit spread below the $40 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 5.3% return in just three months as long as CRM is above $40 at May expiration. salesforce.com would have to fall by more than 35% before we would start to lose money.
CRM hasn't been below $40 since August and has shown support around $53 recently. This trade could be risky if the company's earnings do not turn out to be as good as they seem at first glance today, but even if that happens, this position could be protected by the support the stock might find at its 200-day moving average, which is around $50 and rising.
Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in CRM.
Netflix, Inc. (NASDAQ: NFLX) shares are trading higher this morning after the company announced it expects 1st-quarter net income between 15 and 22 cents per share, up from a previously predicted profit of 13 to 21 cents per share. The change came after NFLX boosted its anticipated subscriber growth for the quarter to 8.16 to 8.26 million, up from 7.85 to 8.05 million. NFLX also upped its fiscal-2008 earnings estimate to $324 to $328 million, up from a range of $323 to $328 million. If you think that the company won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on NFLX.
After hitting a one-year low of $15.62 in July, the stock has hit a new one-year high today. NFLX opened this morning at $30.50 and has so far today hit a low of $30.00 and a high of $31.60. As of 10:35, NFLX is trading at $31.31, up $2.30 (7.9%). The chart for NFLX looks bullish and steady.
For a bullish hedged play on this stock, I would consider a June bull-put credit spread below the $20 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 4.2% return in just four months as long as NFLX is above $20 at June expiration. Netflix would have to fall by more than 36% before we would start to lose money.
Polo Ralph Lauren Corp. (NYSE: RL) shares are rising today afterthe apparel maker posted a fourth-quarter profit of $112.7 million, or $1.08 per share, helped by higher wholesale sales and a lower tax rate. Analysts had been expecting a profit of 77 cents per share. Wholesale sales rose 17% to $627 million. RL also raised its 2008 guidance this morning, a move that investors generally love. If you think that the company won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on RL.
After hitting a one-year high of $102.58 in July, the stock hit a one-year low of $50.55 last month. RL opened this morning at $60.94. So far today the stock has hit a low of $60.11 and a high of $62.89. As of 10:45, RL is trading at $62.72, up $5.26 (9.2%). The chart for RL looks neutral and improving slightly, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.
Williams-Sonoma, Inc. (NYSE: WSM), parent of the eponymous chain for discerning chefs and the Pottery Barn brand of home furnishings and domestics, roared to a 10% drop in Tuesday's session after reducing its fourth-quarter and full-year earnings outlooks.
It appears as though the malaise that washed over American consumers in the 2007 holiday shopping season had an impact on WSM as well. Same-store sales in the nine-week holiday shopping period ended December 30 were down 0.4%, with notable weakness in the home-furnishings area. The company now expects same-store sales in the fourth quarter to be flat to down 1.5%, down from an earlier expectation for an increase of 0.5% to 2.5%. Reuters reported that company CEO, Howard Lester admitted "...the macro environment did weaken and traffic slowed even further than we anticipated" in the fourth quarter.
Naturally, sales numbers have a profound impact on the bottom line, so these sinking figures trickled down to effect per-share earnings expectations. WSM reduced its projected range for the fourth quarter to $1.11 to $1.14 per share, on revenue of $1.36 billion to $1.39 billion. This is below earlier expectations for per-share earnings of $1.19 to $1.25 on revenue of $1.39 billion to $1.42 billion. Based on these previous targets, analysts were estimating per-share results of $1.20 per share on $1.39 billion in sales, according to Reuters.
The electronics manufacturing service provider reported growth of 50% for its first-quarter profit, which climbed up to $62 million or 30 cents per share. The quarter's results were helped by strong sales in the networking and storage markets.
Excluding special items, the company showed profit in line with the 36 cents analysts had forecast. The company posted a 5% jump in sales during the quarter and reported revenue of $3.37 billion, slightly above analysts' predictions of $3.3 billion.
Starbucks Corporation (NASDAQ: SBUX) hit the earnings confessional after the close, reporting fourth-quarter results of $158.5 million, or 21 cents per share, a 35% jump from year-ago results. As same-store sales rose 4%, revenue hit $2.44 billion, up 22% from last year's $2 billion take. Both headline numbers were on par with analysts' expectations. As I pointed out this morning, recent history indicated that SBUX had decent odds of coming in even with the Street's consensus view.
What the Street wasn't expecting, however, was the company's lowered guidance for the upcoming fiscal year, citing rising commodity costs, increased competitive pressures, and softer consumer spending. For its year that wraps up in September, SBUX expects to earn between $1.02 and $1.05 per share, representing year-over-year growth of 17% to 21% from fiscal 2007. SBUX had previously targeted earnings growth of 20% to 22%. Revenue is expected to rise 17% to 18%. Same-store sales are now expected to rise between 3% and 5%, narrowing an earlier range of 3% to 7%.
The company is also reducing its expansion goals, lowering the number of new-store openings planned to 2,500 from 2,600.
In after-hours trading, the shares have plunged nearly 9%. If this activity follows through into the regular session tomorrow, SBUX will be poised to hit a new 52-week low. Remember that potential technical support in the form of the 80-month moving average resides about 10% below the stock's closing levels.
BorgWarner (NYSE: BWA) to give business update at 10am.
Burger King (NYSE: BKC) to report Q1 earnings; conference call at 10am.
Tuesday, November 6
Merrill Lynch to host conference call discussing Focus Media's (NASDAQ: FMCN) secondary offering at 11am.
Yahoo (NASDAQ: YHOO) CEO Jerry Yang, Senior VP Michael Callahan & General Counsel to testify before the House Foreign Affairs Committee on how their company gave false information to Congress relating to their role in a human rights case in China which resulted in a journalist being sent to jail for 10 years.
Poor Netflix (NYSE: NFLX). It's waging a constant and ferocious battle for customers with Blockbuster (NYSE: BBI), and its earnings report has to compete with the biggest company out there right now. But its service has always been nothing short of outstanding for me, so I thought I'd throw the online DVD-rental giant a little love.
After the close, NFLX said its third-quarter profit jumped 23% from year-ago levels, hitting $15.7 million, or 23 cents per share. Revenue was also on the move, rising 15% to $294 million. These headline figures were above analysts' estimates for per-share results of 15 cents on revenue of $286.5 million. The numbers also topped Netflix's own predictions for earnings of 11 to 19 cents on $284 million in sales. The total number of subscribers to Netflix services moved up 24% during the reporting period to nearly 7 million, from 5.7 million last year. Adjust your Netflix-friend lists accordingly.
Palm Inc (NASDAQ: PALM) reported weak smartphone sales, weak average selling prices and weak gross margins last night. A triple whammy for the struggling device maker. Investors will need to see if new board members from Elevation Partners will have any impact on Palm.
Palm reported Q1 smartphone sell-through up 21% to 689K units; however, sell-through declined 8% versus the previous quarter, with average sales prices (ASPs) declining 7%.
Current guidance is for $370 to $380 million in revenue as the company cuts prices to remain competitive. Revenue estimate was for $414 million. As per the Palm-Sprint Nextel Corporation (NYSE: S) announcement last week, if Palm wants to hit the mass market, its ASPs are going to have to come down for quite a while. Gross margins came in at 36.3% versus estimates of 37%.
Also, Palm's next generation software will not be ready until the end of 2008.
All told, there is not much for investors to do here except wait. Any catalyst to drive this stock higher will have to come from the actions driven by Elevation Partners. The one positive for Palm is that it can produce some pretty high-quality products for relatively low cost, meaning it has some staying power. But this is one company that is in search of a product and a serious marketing strategy.
Looking back at recent company statements regarding earnings and guidance, there seems to be a big disparity in the type of companies reporting above average numbers to those reporting below average numbers.
If legendary mutual fund manager Peter Lynch's adage that higher stock prices follow higher earnings still holds true, then it is time to take a closer look at technology stocks.
ADC reported Q3 earnings per share of $0.37 versus consensus estimate of $0.23. Revenue came in at $346 million versus consensus $333 million. The company increased guidance for the year slightly to $1.31 billion versus consensus $1.29 billion. However, EPS is being hiked nicely to $1.11-$1.15 per share versus consensus $0.92.
"Even though several key customers have not yet returned to normal spending following their mergers, we had better than expected strength in our connectivity, wireless and services businesses, and have seen resumed sales growth outside the United States," said Robert E. Switz, the company's president and CEO, in a statement.
However, despite management optimism, analysts are keeping their neutral ratings on the equipment provider, with both Merrill and Jefferies citing elusive revenue growth. The stock took a nice jump in after hours trading, up over $1.00.
I wouldn't chase the stock following its after-hours rally, but would wait for a pull back and then consider buying. Margins and cash are improving along with the industry's spending pattern.
J. C. Penney Company, Inc (NYSE: JCP) opened at $71.20. So far today the stock has hit a low of $70.55 and a high of $71.60. As of 10:55, JCP is trading at 70.78, down 1.74 (-2.4%).
After hitting a one year high of 87.18 in February, the stock has stumbled recently, finding some support at the 70 line last month. Competitor Sears (NASDAQ: SHLD) lowered their earnings guidance this morning, dropping shares nearly 7% and dragging other retail stocks down with it. Recent technical indicators for JCP have been bearish and steady, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.
For a bearish hedged play on this stock, I would consider a November bear-call credit spread above the $90 range. JCP has never been above $90 and has shown resistance around $84 recently. This trade could be risky if the company's earnings (due out in late August) are a positive surprise, but even if that happens, this stock could have trouble getting over $85, where it has seen some serious resistance over the past 6 months.
DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in SHLD or JCP.
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