While the earnings crunch for this quarter is all but over, there is still plenty of action in the earnings arena this coming week. For instance, analysts surveyed by Thomson Financial are expecting America's Car Mart Inc. (NASDAQ: CRMT) and Campbell Soup Co. (NYSE: CPB) to be among this week's top earnings gainers.
Bentonville, Ark.-based America's Car Mart is expected to post net income of 38 cents per share (up 52.6% from the same period a year ago) on revenue of $73.8 million (up 25.8%). The used car dealer chain has tended in recent quarters toward positive surprises -- by 21 cents per share, or 73.5%, in the previous quarter. The long-term EPS growth forecast is 15%, about the same as the S&P 500. The consensus recommendation of analysts is to buy CRMT.
Campell is tentatively scheduled to report this week, and the world's biggest soup maker is expected to post net income of 25 cents per share (up 44.0% from a year ago) on revenue of $1.7 billion (up 7.5%). The Camden, N.J.-based company has just missed earnings estimates in the past three quarters. Its long-term EPS growth forecast is 7.5%, which is less than the industry average, but about the same as rivals Kraft Foods (NYSE: KFT) and Heinz (NYSE: HNZ). The analysts' consensus recommendation is currently to buy Campbell.
Here's a peek at what analysts surveyed by Thomson Financial are expecting from companies scheduled to report quarterly results in the first week of June, 2008.
The following companies are expected to post earnings growth, compared to the same period in the previous year:
Take-Two Interactive (NASDAQ: TTWO) up 136.6% (from a loss) to $1.12 per share, on $499.1 million in revenue
How did we get here anyway? Housing and construction companies have been crushed as the bubble burst and now investors have to make a critical decision. Do you stay and hope for a recovery or bag it and move to another position that has the potential to provide better returns?
The problem is simple to explain: Most investors hate taking a loss. In fact, most investors will look to get "even" before they sell and this attitude usually leads to greater losses, anxiety and poor decisions. The truth is that much of this can be avoided with proper risk management techniques. If any of this describes you, then consider developing a plan for risk management and a discipline that will help to protect your hard earned principal. Now, more than ever, investors need a plan. We all need a plan that includes well developed risk management disciplines, which is why I dedicate a full chapter to it in my book, The Disciplined Investor.
Monday, June 2
The week begins with the 10 am release of construction spending and the ISM Index. Construction spending is expected to continue to be weak as is the ISM.
Then we have a few housing-related earnings releases that should be of interest. Watch NCI Building Systems Inc. (NYSE: NCS). This company is engaged in manufacturing and marketing of metal products for the nonresidential construction industry. Terrific! This is a company that is suffering along with the entire construction sector...that is for sure. In fact, they company lowered the outlook for the remainder of the year back in March. It stands to reason that not much is better. The ace in the hole is the recent trend of lowering expectations and then coming out with an earnings beat. Even so, this has too much potential for problems and the sideline is a good vantage point to watch the earnings announcement, which is expected to come in with a PROFIT of 31 cents per share on $365 million of revenue. (Uh...That I would like to see.)
MOST NOTEWORTHY: Suntech Power, Premier Exhibitions and the Homebuilders Sector were today's noteworthy initiations:
Citigroup named Suntech Power Holding (NYSE: STP) their top pick for China solar due to its leading scale and technology roadmap for higher cell efficiency, initiating shares with a Buy rating and $55 target.
Merriman believes Premier Exhibitions (NASDAQ: PRXI) can move to the $14.50-$17.00 through the continued monetization of the company's current tours, the launching of additional tours and the value of the Titanic artifacts on hand. The firm started shares with a Buy rating.
Moody's is giving the rating of several home builders another haircut. The current downgrades include Hovnanian (NYSE: HOV), M/I Homes (NYSE: MHO), and Meritage Homes (NYSE: MTH).
Aside from what the ratings change will do to the shares of the companies, this raises, once again, the question of whether a large home builder could go into Chapter 11. Increasingly, the answer to that question looks like it may be "yes."
According to CNN Money, "Homebuilders keep lowering prices to meet flagging demand, crimping profit margins at a time when overall sales continue to deteriorate." At some point soon, many of these companies will need to raise money. It is not clear that they will be able to in the current credit market.
Shares in Meritage certainly trade as if investors believe that the company may have to restructure and that investors may get the short end of the stick. At the current share price of $8.41, the stock is down from a 52-week high of over $47.
Investors may be better off getting out of these stocks with losses. Otherwise they may ride the train to "zero."
Douglas A. McIntyre is an editor at 247wallst.com.
TheStreet.com's Jim Cramer says a year of living dangerously almost destroyed Merrill Lynch and Citigroup.
To me the customers made out this time, the dealers didn't.
When I look at the losses the dealers are taking, I keep wondering how the heck they all got caught. Think of it like this -- if this merchandise were equities, you would ask: How did Merrill (NYSE: MER) (Cramer's Take) and Citigroup (NYSE: C) (Cramer's Take) get caught owning so much stock?
That's why we have to be shocked at the losses at Citigroup and Merrill. It was like they were making a big bet on housing and just masking themselves as dealers.
Now it is true that they were merchandizing and got caught. Prince was such an idiot. I hectored this guy and the board for a year, but all they did was stand by and applaud him. He probably had no inventory controls because he never understood the instruments anyway. That's OK, they were hard to understand. But he was the CEO, for heaven's sake.
Home Depot, Inc (NYSE: HD) stock is falling this morning on news that the number of foreclosure filings surged 68% nationwide compared with the same month last year. Analysts also said that they are expecting another spike in foreclosures in early 2008. The news, combined with Hovnanian Enterprises (NYSE: HOV) report of a bad quarter, is weighing down the home improvement retailer. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on HD.
After hitting a one-year high of $42.01 in February, the stock hit a one-year low of $25.57 yesterday, which it may threaten today. This morning, HD opened at $26.43. So far today the stock has hit a low of $25.84 and a high of $26.43. As of 11:25, HD is trading at $26.07, down $0.40 (-1.5%). The chart for HD looks neutral and improving, while S&P gives the stock a positive 4 STARS (out of 5) buy rating.
For a bearish hedged play on this stock, I would consider a February bear-call credit spread above the $30 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 an 8.7% return in 2 months as long as HD is below $30 at February expiration. Home Depot would have to rise by more than 15% before we would start to lose money.
TheStreet.com's Jim Cramer says reckless homebuilders like this one, that keep recklessly pumping out product, are the problem.
The guts; the gall.
Forty percent cancellations; huge insider selling; gigantic writedown; quadrupling of losses; an omission of its preferred dividend. And what does the management of Hovnanian (NYSE: HOV) (Cramer's Take) say on its call? How about good cash flows for 2008? How about "pleased" with the performance because of cash generation? How about the prospects of Toll (NYSE: TOL) (Cramer's Take) buying them?
What? This company is barely alive. There is no reason in heck anyone should buy them. The whole housing market is exemplified by this company: still pumping out units, still having active selling communities, still trying to trim land inventories from the bloated 2006 level, still trying to negotiate with the banks by taking whittling debt, trashing the preferred folks.
The pain never stops at Hovnanian Enterprises Inc. (NYSE: HOV), the big home builder. The company delivered 3,969 homes during its fourth quarter, a decrease, excluding home deliveries from unconsolidated joint ventures in both periods, of 19% from the same quarter a year ago.
Cancellations for the fiscal 2007 fourth quarter were 40% of gross contracts, compared with the cancellation rate of 35% for both the third quarter of 2007 and the fourth quarter of 2006. The primary reason for the increase in the company's cancellation rate is the tightening of mortgage underwriting standards.
Hovnanian still faces the question that all of the public home builders face: Can it take a downturn that extends well into 2008 without major restructuring or debt defaults? The company's shares trade for just above $10. They have a 52-week high of almost $39.
If the first quarter is bad, the stock may not have found a bottom.
Douglas A. McIntyre is an editor at 247wallst.com.
Challenger, Gray & Christmas, which tracks monthly layoffs in the U.S., said that the picture got a bit better in September ... unless you work in the housing industry.
According toReuters, "announced layoffs totaled 71,739 in September, down 9.7% from 79,459 in August, when it hit a six-month high." A third of the jobs that disappeared were in the home-building and mortgage businesses. Cuts in these industries are now 17% of all layoffs this year. In 2006, the number was 2%.
What the firm does not say is what will happen next. But that is not hard to guess. Companies like Countrywide (NYSE: CFC) and Hovnanian (NYSE: HOV) will not be able to weather the mortgage and home price crisis at the rate that buyers are moving out of the market and sellers are moving in.
Home builder Lennar (NYSE: LEN) has over 12,000 employees, according to its recent public filings. That means that the five or six largest firms in the industry have over 100,000 workers. Countrywide has a staff of 60,000 and has begun cuts that should take out about 12,000 people.
There are tens of thousands of jobs in the housing and related industries that could still go away.
The market has turned since my last video update -- with the Fed's recent interest rate cut, now is the time to embrace your inner bull! I discuss buying strategies in this edition of StockWatch: Between the Bells.
Three stocks you should look into:
First Solar Inc. (NASDAQ: FSLR), a Phoenix manufacturer of silicon-free solar-power modules. FSLR is significantly undervalued, by as much as $40 if you believe Bank of America.
China Medical Technologies (NASDAQ: CMED), which develops cancer treatments in Beijing. CMED is expanding its operations into the rest of Asia, as well as into Russia and Europe.
After stalling a bit last month, Google (NASDAQ: GOOG) is pushing higher again, bound for $600.
Stay away from home builders like Hovnanian (NYSE: HOV) and Beazer Homes (NYSE: BZH) -- the ongoing mortgage meltdown is not over, and the housing market has yet to bottom out. Until then, also avoid home furnishings retailers, like Ethan Allen (NYSE: ETH).
Lastly, check out Baidu (NASDAQ: BIDU), China's leading search engine -- currently trading at $275 and soon to hit $300. Don't think that Google is considering a Baidu buyout? Think again.
MOST NOTEWORTHY: Toll Brothers (TOL), COTT Corp (COT), Tim Hortons (THI) and Linktone (LTON) were today's noteworthy downgrades:
Banc of America downgraded shares of Toll Brothers (NYSE: TOL) to Sell from Neutral, citing expected deterioration in luxury sales due to mortgage distress in the marketplace.
COTT Corp (NYSE: COT) was cut to Hold from Buy at Stifel, citing the difficult macro environment and continued profit declines.
Tim Hortons (NYSE: THI) was downgraded to Neutral from Buy at Goldman, citing valuation, and notes that fundamentals remain favorable.
Montgomery cut Linktone (NASDAQ: LTON) to Hold from Buy, citing the sudden decline in its wireless VAS revenues following Q2 results...
Home builders are in trouble. Wall Street just has to look at stock prices for Hovnanian (NYSE: HOV) and Beazer (NYSE: BZH) to see that they and their peers have lost half of their value in a year.
But, builder KB Home (NYSE: KBH) has a bit of a secret weapon. Its homes, designed in part by Martha Stewart, are still selling relatively well. The Stewart homes are only 5% of KB's sales, but as The Wall Street Journalpoints out [subscription required]: "From March through June 15, the two Martha Stewart developments alone drew 42% of the people who visited KB's 22 subdivisions in the Atlanta metro area."
Some buyers, it seems, want the homes because they believe that Stewart signifies "class". Others think the homes will have better resale values.
The venture may offer a bright spot of the entire industry. Nothing will get home sales back on track except a major upturn in the market. But, the idea of home builders selling new inventory in celebrity partnerships may have a future.
The Elvis Presley model may be on the market sooner than people think.
KB Home: The company reported a second quarter loss and sales hit three-year lows. The loss was partly due to land value-related charges that highlighted the continued decay of the U.S. housing market. The company also said it was unable to provide investors with a full-year earnings forecast and couldn't say when they thought conditions would improve.
Lennar: Reported a Q2 loss. The company said market conditions had eroded so much that it's not trying to limit its losses for the year.
Pulte Homes: In response to the "challenging operating environment that continues to exist in the U.S. homebuilding industry," the company announced a restructuring plan designed to reduce costs and improve operating efficiencies in May.
Get the picture? Here's one more:
Ryland Group: Reported a Q1 loss in April and said it wouldn't be able to provide new guidance due to the slump in the housing market.
See a pattern? Homebuilder after homebuilder, it's the same story -- company faces challenging housing market, company loses money, tries to regain profitability. You'd think Citigroup would have noticed.
Aside from the companies themselves, other firms and analysts have said their piece about the sector. March data showed sales of existing homes fell to a four-year low. In April, Census Bureau data showed there were 2.5 million vacant non-seasonal housing units for sale, way over many firms' predictions. Additionally, AG Edwards said on April 30th that "it is not a good time to buy shares yet." Standard & Poor's said in May that they believed over a third of all U.S. homebuilders were "vulnerable to rating downgrades" in the midst of a "three-year downturn."
While the earnings crunch for this quarter is all but over, there is still plenty of action in the earnings arena this coming week. For instance, analysts surveyed by Thomson Financial are expecting America's Car Mart Inc. (NASDAQ: CRMT) and Campbell Soup Co. (NYSE: CPB) to be among this week's top earnings gainers.
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TheStreet.com's Jim Cramer says a year of living dangerously almost destroyed Merrill Lynch and Citigroup.
The market has turned since 
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