Second Quarter Earnings: Marching Toward a Strong Recover by Frank Holmes

July 25, 2014

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

It’s earnings season once again, and though only a quarter of the Russell 1000 has reported so far, the news is just north of positive. All signs indicate that the market has dusted itself off and is back to its cheerful self after a ho-hum first quarter, which was negatively affected by harsh winter weather.

In the chart below, you can see that 73 percent of the companies that have reported as of this writing exceed their earnings per share (EPS) beat rate. The beat rate, as you might know, is the rate at which companies surpass market analysts’ published estimates. The revenue beat rate, meanwhile, sits at 67 percent, a positive surprise above the long-term median of 63 percent.

Second Quarter Earnings
click to enlarge

Included in these figures are a few of the top-performing companies that we own in our U.S. Global Investors All American Equity Fund (MUTF:GBTFX) and U.S. Global Investors Holmes MacroTrends (MUTF:MEGAX), such as Facebook Inc (NASDAQ:FB), Apple Inc. (NASDAQ:AAPL) and Biogen Idec Inc (NASDAQ:BIIB). We’ll discuss these companies later.

So to what do we attribute these welcome tidings?

Two notable indicators are the significant drop in initial unemployment claims and the jump in U.S. and global consumer confidence.

Americans are heading back to work.

According to last week’s data reports, initial unemployment claims fell to their lowest level since 2006, before the Great Recession brought the country to its knees.

Second Quarter Earnings
click to enlarge

Couple this news with the constructive U.S. jobs report, and we’re looking at a return to pre-recession labor-market strength. The U.S. Bureau of Labor Statistics reported that 288,000 nonfarm payroll positions were added in June alone, bringing the country’s unemployment rate to a five-year low of 6.1 percent. Data for July is expected next Friday.

Feeling good about letting go of their dough.

Another sign that the economy promises a strong continued recovery is the modest boost in domestic and global consumer confidence levels.

Information and insights company Nielsen announced that its global confidence index has inched up an overall 1 point to close at 97, the highest it’s been since 2007. A 100 mark indicates exceptionally strong consumer optimism.

According to Nielsen, the U.S. jumped 4 points from the previous year to close at 104 points, making it come in at 8th place worldwide. India leads all other nations at 128 points, possibly attributable to the recent election of its new prime minister, Narendra Modi. At 48 points, Portugal trails the pack.
As you can see in the chart below, there’s a 17 percent increase from the same time a year ago in American respondents who feel that now is a good time to spend their money on necessary and discretionary goods and services.

Second Quarter Earnings
click to enlarge

The results of the Michigan Consumer Sentiment Index echo the buoyancy of the domestic economy. At 81.3, the index is finally stabilizing at pre-recession levels.

Second Quarter Earnings
click to enlarge

Facebook

Facebook Inc (NASDAQ:FB) had a robust second quarter, reporting revenue of $2.91 billion, an increase of 61 percent from the same time last year. More than $2.6 billion was derived from advertising alone. Mobile advertising specifically represented about 62 percent of advertising revenue, indicating that an increasingly greater number of users are moving away from traditional portals such as desktops and laptops.

The second quarter, in fact, has seen a 7.3 percent increase from the first quarter of mobile daily Facebook users, from 609 million to 654 million.

“We had a good second quarter,” founder and CEO Mark Zuckerberg said. “Our community has continued to grow, and we see a lot of opportunity ahead as we connect the rest of the world.”

Apple

The tech giant reported that its quarterly profits rose 12 percent to $7.75 billion, bolstered by its iPhone and Mac sales. Anticipation of an improved, next-generation iPhone, expected to arrive in late September, as well as the tentatively-named iTime smart watch, have also excited consumers both domestically and internationally.

In China, the world’s largest mobile market, Apple Inc. (NASDAQ:AAPL) products unexpectedly outperformed Samsung, the popular South Korean smartphone maker.

“China, honestly, was surprising to us,” Apple CEO Tim Cook said. “We thought it would be strong, but it went well past what we thought. The unit growth was really off the charts across the board.”

Apple’s exceptional performance contrasts dramatically with retail leader Amazon’s reports. Its soon-to-be-released Fire Phone, a competitor to the iPhone, has cost the company a staggering pile of money to design and produce, and yet it has received lukewarm reviews from tech experts and bloggers.

Second Quarter Earnings

Partially as a result of the Fire Phone’s ill receipt, Amazon has posted its most disappointing quarterly loss since 2012. The company, in fact, forecast that its operating losses this quarter will fall within the $410 to $810 million range.

Biogen

The Cambridge, Massachusetts-based biotechnology company Biogen Idec Inc (NASDAQ:BIIB), a leader in developing treatments for neurological and autoimmune disorders such as multiple sclerosis (MS), reported revenue of $2.4 billion, a 40 percent increase from this time a year ago.

Second Quarter Earnings
click to enlarge

Its blockbuster medication Tecifidera, used to defend against relapsing MS, has generated a jaw-dropping $700 million in 2014 alone—$585 million domestically, $115 overseas. Other runaway Biogen products include Avonex and Tysabri.

Looking forward to a stronger third quarter.

Good news such as this has been a long time coming.

Although many economic experts and pundits hesitate to admit that the U.S. economy has recovered to pre-recession levels, the second quarter has presented the most convincing signals thus far that we’re closer than ever. A greater number of Americans are finding quality employment. Initial unemployment claims are tapering off. Consumer confidence is growing year after year. And with powerful American companies such as Facebook, Apple and Biogen leading the charge, the U.S. has a bright future in store.

Second Quarter Earnings

Index Summary

  • Major market indices finished mixed this week.  The Dow Jones Industrial Average fell 0.82 percent. The S&P 500 Stock Index edged ahead 0.01 percent, while the Nasdaq Composite gained 0.39 percent. The Russell 2000 small capitalization index fell 0.60 percent this week.
  • The Hang Seng Composite rose 3.17 percent; Taiwan fell 0.47 percent and the KOSPI advanced 0.71 percent.
  • The 10-year Treasury bond yield fell one basis point to 2.47 percent.

Second Quarter Earnings

Domestic Equity Market

The S&P 500 Index finished virtually flat for the week, with surprisingly muted volatility during a big earnings week. Energy stocks led the way with technology and health care not far behind, while consumer discretion, industrials and traditionally interest rate sensitive areas underperformed.

Second Quarter Earnings
click to enlarge

Strengths

  • The energy sector rose by more than 80 basis points as the oil service names posted strong earnings results and pushed the group higher. Cameron International Corporation (NYSE:CAM), FMC Technologies, Inc. (NYSE:FTI) and Halliburton Company (NYSE:HAL) were among the leaders this week. All three companies reported earnings that were well received by the market.
  • The technology sector was strong with Facebook Inc (NASDAQ:FB) the most high profile winner, rising nearly 10 percent as mobile monetization continues to gain traction. Verisign, Inc. (NASDAQ:VRSN), Yahoo! Inc. (NASDAQ:YHOO) and Apple Inc. (NASDAQ:AAPL) were also among the best performers for the week.
  • Intuitive Surgical was the best performer in the S&P 500 this week, rising by 21.37 percent. While earnings results for the quarter were favorable, investors appear to believe the company is hitting an inflection point and moving past some of the issues that had slowed sales and earnings in recent quarters as total procedure growth of 9 percent on a year-over-year basis was very encouraging.

Weaknesses

  • The consumer discretion sector was the worst performer this week. Housing-related stocks were under pressure after a very weak new homes sales report. D.R. Horton, Inc. (NYSE:DHI) fell by more than 9 percent and PulteGroup, Inc. (NYSE:PHM) fell by nearly four percent. Amazon.com, Inc. (NASDAQ:AMZN) was the worst performer in the sector, falling 10 percent, as the company’s financial results significantly disappointed the market as the company spent aggressively to grow the business and is likely to continue to do so as the company posted a loss for the quarter and is expected to break even next quarter.
  • The industrials sector also underperformed this week. Numerous defense and aerospace companies were among the worst performers, including Precision Castparts Corp. (NYSE:PCP), Rockwell Collins, Inc. (NYSE:COL) and The Boeing Company (NYSE:BA). All three companies
1, 2345  - View Full Page