Tuesday, January 12, 2010

1/12/10 Midday Report: China trying to cool economy, hires Justin Timberlake to dole out stimulus funds

The big macro news today is that China raised the reserve ratio that banks need to hold aside as deposits, signalling that China's central bank is starting to become acutely aware of inflation concerns (whereas the world is starting to become acutely aware of Christina Hendricks' "concerns").  Given that China is going to spend roughly 4 trillion yuan in stimulus through 2010, inflationary worries are less surprising than learning that Mark McGwire used steroids, Bea Arthur was really a man, or Napoleon was a bit touchy about his height.

In US market news, the US trade deficit widened more than expected (though not as much as Nicole Eggert's waistline) as imports outpaced exports thanks largely to consumer goods, capital goods, and Malawain babies.  The good news is that this should start to reverse itself as the dollar continues to plummet like Lindsay Lohan's acting career, the bad news of course is that the dollar continues to plummet.  Also, the government is said to be getting all loan sharky on banks and demanding their TARP money back or they will start breaking deposit caps.  The rumor is that the government will somehow put an unenforcable tax on the banks to recoup the money they lent to them as part of the bail out.  It only took a year for the government to realize that lending money to failing banks may result in losses, so we'll call that progress.

Earnings season got underway today and has largely been a disappointment, like your first kiss or any Wes Anderson movie of the past ten years (And don't give me that Fantastic Mr. Fox crap, if I want to see an animated fox I'll break out an old VHS tape and watch Jessica Rabbit).  Alcoa kicked off earnings season by missing estimates as analysts were expecting AA to exhibit more leverage on the cost side while Electronic Arts lowered estimates as sales of their newest titles RockBand: Milli Vanilli, The Sims: Guantanamo Bay, and Paris Hilton's Great Herpes Adventure were all below expectations.

In small cap news CRUS pre-announced a ginormous quarter last night, easily beating analyst estimates as revenue is expected to soar 49% year over year with gross margin rising 200ish basis points to 54%.  New guidance for the March quarter is for a 58% revenue improvement.  CRUS makes ICs for the portable audio and the energy exploration markets.  A few quarters ago they won business to be one of the audio chips for the iPhone and being a chip supplier to the iPhone is like being the stylus provider to Palm Pilots in 1998, in other words, the technology g-spot.    Their revenue had been in decline as their energy exploration business sank like John Edwards' political career (except without getting anyone pregnant) but their audio business was up 67% in the September Q.  The pre-announcement last night said growth was mainly from new products but said they are seeing "increased demand from our customers for a broad mix of both our audio and energy products."  The key here is that if the energy business can rebound to say a $80MM a year revenue run rate (they had quarters in excess of $20MM in this business previously and were at $14MM last Q which was up sequentially), and the audio business can continue to grow, CRUS could exceed their current forecast.  Even taking their current forecast as inline, analysts have raised their estimates to around $.60 eps for fiscal 2011 and around $.40 eps for fiscal 2010.  While Money McBags does not know how much of an energy rebound those numbers include, he is guessing they undervalue the potential for growth in CRUS's smart grid products.  Either way, just say analysts are right and the company earns $.60 in fiscal 2011, CRUS is now trading at 13x that not including the $124MM of cash on the balance sheet.  Yes, the easy money has been made and the jump today could be on short covering (though I have no idea why anyone would have been short a stock this cheap, but then again I have no idea why anyone thinks Jay Leno is funny, so what do I know?), so Money McBags would hold off on buying today, but there is still probably $2-$4 of upside (15x FY 2011 $.60 estimates + $2ish in cash per share) and that is if the energy market does not have a big comeback.  It is worth tuning into their 1/28/10 call to see what they have to say, so put this on your watch list and be ready to buy the dip.

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