Thu, 25 Oct 2012
This is not the kind of earnings season investors have gotten used to, but some companies are faring better than others.
Jason Stipp: I'm Jason Stipp for Morningstar, and welcome to The Friday Five.
We had a week of ups and downs in corporate America, so who is soaring and who is sinking?
Here to offer the details is Morningstar markets editor Jeremy Glaser.
Jeremy, thanks for being here.
Jeremy Glaser: Jason, always a pleasure.
Stipp: What you have for The Friday Five this week?
Glaser: It was a certainly a busy week, but we are going to talk about DuPont, Facebook, Procter & Gamble, Boeing, and finally Bank of America.
Stipp: We've had a lot of disappointing earnings so far this earnings season. DuPont was one that sticks out for a number of reasons. What's your take on some of the reasons why earnings have let us down this time around?
Glaser: You are absolutely right. This is not the blockbuster earnings quarter that we've gotten used to throughout this recovery. I think DuPont really is a clear example of that.
They saw their revenue drop about 9%, much worse than analysts had expected, and a lot of the blame was put on foreign markets, particularly in Asia and in China. DuPont's management says that China's economy is stalling, that manufacturers there are really in an inventory destocking mode. They are not building up even more stockpiles of whatever chemicals they might need for their manufacturing processes, and that's really hurting DuPont's top line.
And certainly, even though we are seeing OK growth out of China's GDP, according to the official statistics, that's just not what they're seeing on the ground. They're really seeing a lot of weakness there.
This echoes the comments we've heard from a lot of management teams that revenues just aren't meeting their expectations and weren't meeting analyst expectations. A lot of that is coming from foreign currency exchange, which is certainly a big headwind. A lot of that is from Europe, which is certainly a headwind with the recession they are having there. But it's a big turnaround from [firms] just continually beating on revenue that we've seen in the past. It's a trend we started to see a little bit last quarter, now really accelerating into this quarter.
Generally, expenses, either because they are denominated in those local currencies or because management teams are still laser-focused on costs, have kept earnings themselves from really falling off the cliff, but it's hard to see that if those revenues continue to decline, that earnings are going to be able to stay at those levels forever, and I think this is a story that could play out for quite a long time.
Stipp: In a spot of positive news, Facebook got a boost after it reported earnings and got some traction in the mobile space.
This stock has had a rocky road since its IPO. Is this result, though, a sign of good things to come for that company?
Glaser: I think it certainly shows the potential that Facebook has. Our analyst Rick Summer looked at it, and said he thinks that Facebook could … over the next four quarters, come out with a billion of mobile revenue. And this is coming from a base of almost nothing.
If you remember during the IPO one of the big concerns was, will Facebook be able to monetize its mobile audience? As people move into consuming Facebook more on tablets and smartphones, can they sell ads to those users? What do those ads look like? Are they able to make that work? And it seems like the answer is so far, yes. Certainly, it's not a game-changer yet, but during a quarter where rivals like Google showed some weakness in ad sales, Facebook was really able to show some strength.
The stock rallied pretty strongly. It's still a ways away from its IPO price, but I think it shows that those strong competitive advantages that we've talked about before, that network effect, are still very much in place, and it's just a matter of figuring out the best way to take those very engaged users and monetize them, and Facebook seems to be at least taking those tentative steps toward getting there.
Stipp: I wouldn't say that P&G is exactly soaring after its earnings report, but investors do seem to recognize some progress that the consumer giant has made. The question is, will that progress stick for the firm?
Glaser: They're definitely finally starting to move in the right direction.
P&G has been stagnating for quite some time now. They've been facing a lot of headwinds really in a bunch of different areas, but really at its core, we think one of the biggest problems has been that they haven't been innovative, they haven't really been pushing the product categories, or really investing behind their brands like they had in the past in order to ensure their success.
In this quarter, things looked a little bit better. They had a 2% revenue growth excluding foreign currency and acquisitions and dispositions and lot of other special items, but that core organic growth started to tick up, which certainly is a good sign. They were able to control costs and see margin expand a little bit.
But the question is not can they do this for a quarter, but then continue to do that over the long term? Do they have the management expertise? Do they have the ability to invest in those brands, the willingness to invest in the brands, to bring back more robust revenue growth, to bring back larger margin growth, to take share in emerging markets, and continue to grow there?
Our analyst Erin Lash is somewhat skeptical they are going to be able to do this right away, but I think that investors need to be honed in on exactly how they are able to unlock that value [over time], not so much on just one quarter that looks a little bit better than expected.
Stipp: In aerospace, bellwether Boeing had a good quarter; they raised their guidance. How is it that this company is avoiding some of those headwinds we might expect to see in industrials?
Glaser: It really does seem like Boeing is kind of defying gravity. We talked about some other industrial companies that are really facing a lot of pressures, and Boeing is doing pretty well, both on the defense side of the business and also on the commercial aerospace side of the business.
They raised their guidance after better-than-expected quarterly results. This is in stark contrast to a lot of other companies that are either cutting their guidance or just keeping their guidance in place. I think it just speaks to the strength of the aerospace market right now. You have a lot of countries that are still looking to spend on defense, and they are spending that money with Boeing. And also with the expansion of commercial air service in emerging markets, there is just a huge demand and huge backlog for both the wide-body planes, the 787s that are now rolling off the assembly line and into customers' hands, and also for their narrow-body fleet.
Now, if they will be able to keep this up over the very long term, I think is more of a question. There are a lot of new competitors. The Chinese are coming out with a narrow-body plane they hope to be a big seller. Some other players like Bombardier that are moving from the regional jet space into the larger jet space are certainly going to provide some pressure. You can't forget about Airbus. They are still a huge player. They are still taking a lot of share in that narrow-body market in particular, but Boeing is doing very well right now, and it doesn't really see any big signs of slowing down.
Stipp: Even as many banks are putting the mortgage mess in the rearview mirror, Bank of America this week was slapped with a lawsuit related to mortgages. How long is the mortgage mess going to keep Bank of America basically shackled to the ground?
Glaser: Countrywide really is the gift that keeps on giving for Bank of America. It's an acquisition that at the time Bank of America trumpeted that it was really going to help solidify their position in the mortgage market, and really it's been almost nothing but an albatross since then.
And this week we saw the federal attorneys saying that Countrywide at the height of the crisis defrauded the GSEs, Freddie Mac and Fannie Mae, for over $1 billion with a system called "The Hustle," in which they tried to take mortgages that maybe were not quite up to prime standards and just get them through their system incredibly quickly, move them off their books and into the government's hands, and they were able to get those origination fees. And they are asking for pretty big damages, treble damages on that, potentially other penalties as well.
This is on top of just any number of major issues that Bank of America has faced in the mortgage market. And you asked, when is this going to end? And I think we just really don't know. As other banks have mostly put this behind [themselves]--occasionally there's a lawsuit here, there's a lawsuit there, but it's manageable--the liabilities for Bank of America continue to keep growing.
Our analyst Jim Sinegal certainly thinks they have the capital to pay any of these fines. This is not a situation in which Bank of America's future is at stake, but certainly its future earnings are, and I think for investors that might be looking at some of these banks, they are probably better served looking at something like Wells Fargo, looking at something like J.P. Morgan, or even Citigroup as being less exposed to some of these tail risk that Bank of America keeps getting itself into.
Stipp: Jeremy, always soaring commentary and insights on The Friday Five. Thanks for joining me.
Glaser: You're welcome Jason.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.