Wednesday, July 21, 2010

7/21/10 Midevening Report: Market "unusually certain" that it should go down

The market was chugging right along today like a Kennedy at a sorority mixer after Apple titillated the market with sales stronger than the breath of either of the world's foremost cunning linguists, the great Vladmir Nabokov and the greater Janine Lindemulder, until Ben Bernanke got up and threw his figurative Baby Ruth into the market's pool causing investors to run for safety.  Bennie B. got his best gangsta lean on and told the Senate Banking Committee, who never met a bubble they couldn't regulate after it had already deflated itself, that the recovery remains "unusually uncertain and shit" before repeatedly rhetorically axing "you know what I mean?"  His befuddling remarks caused the market to fall faster than Andrew Johnson's reputation in the Republican party after suceeding (or more appropriately, failing) Lincoln and thus negated a rare day where earnings were mostly positive.

While it's not entirely clear what "unusually uncertain" means, especially since Money McBags finds all uncertainties a bit unusual, he believes the term is Fed-bonics for "We have less of a fucking clue about what is happening than we usually do."  Bernanke did say the Fed is ready to step in as needed and while he didn't say what those steps may be, one can assume they include keeping rates low (for an extended period like a metrorrhagia sufferer), manipulating the Fed's balance sheet, and the Charleston.

Prior to Bennie B. unleashing his pimp hand and treating the market like his bottom bitch, President Obama signed the financial legislation bill which after two years of debate has been watered down more than a virgin bloody mary without the tomato juice or tobasco (though he signed it "Alan Smithee", so it's not clear if the bill will hold).  The most worrisome part of the bill is that many of the details are more open ended than Alexis Texas right before filming Buttwoman which leaves regulators plenty of wiggle room to fuck more shit up.  As far as Money McBags is concerned the bill didn't go far enough in regulating the use of derivatives, in limiting the size of banks, or in raising reserve requirements and making banks responsible for their greed which led to credit scoring models to be less frequently used than MySpace (does anyone remember that piece of crap?).

In macro news, mortgage applications jumped last week for the first time in five weeks in what surely is a fictitious number, or a typo.  What is more believable is that refi applications were at 14 month highs as record low mortgage rates of 4.59% have led homeowners to lower their interest payments faster than the Stoughton, MA police department lowered the boom on one of their officers who was just doing a little (and Money McBags stresses "little") due diligence

The real story of the day (other than Bennie B.'s uncertain uncertainty) was Apple's Q in which they sold what is known in the retail space as "a fuckload of shit" and put up a huge earnings number.  Apple's net income rose by 78% by selling 3.3MM iPads, 8.4MM iPhones despite people waiting until the end of the Q for the iPhone 4 launch in order to be able to make use of the front facing camera while masturbating for strangers on chatroulette from work bathroom stalls everywhere, and a whopping and quarterly high 3.5MM Macintosh computers making everyone loudly say "Apple sells computers?"  Revenue was up 60% to $15.7B, beating analyst guesses by $1B, and putting the company only $4B away from world domination.  Steve Jobs also defended the iPhone antenna problem by simply saying "deal with it.  And if you don't like it, go by one of those Blackberries and make sure it matches your 8-track player and Jams."  That said, Lenovo is set to launch a challenger to the iPad using GOOG's Android system and they are referring to it as "LePad" because apparently "LeThingThatIsn'tGoingToSell" was already taken.

In other strong earnings news, MS put up a ginormous Q, harkening back to the pre-2006 days when investment banks ruled the markets like Jessica Simpson ruled the short bus in her elementary school days.  Revenue grew 53% to $7.95B and beat analyst guesses of $7.93B driven by MS' trading business which earned $4.1B in operating profits after trading their souls for three more months of manipulating the markets and a good night kiss from Rose Huntington Whiteley.  Also, KO put up a good quarter on the heels of PEP's outperformance yesteray once again reinforcing the demand inelasticity of sugar and water.  KO earned $1.06 per share, beating analyst guesses of $1.03 per share, and saw 5% growth worldwide led by international growth ex. Europe of 6%.  Money McBags is a longterm owner of KO because it is a cheap aspirational brand that appeals to emerging markets that will continue to grow as the US slogs its way towards mediocrity (though mediocrity would be a good thing).  Finally, YHOO dropped 8% on a disappointing earnings report as revenue growth remains more challenging than Sudoku for a dyslexia sufferer.

In small cap news, Money McBags mentioned CRUS yesterday but he was in such a time rush that he missed their quarterly earnings release from earlier in the day which turned out to be more positive than Robin Williams' herpes test.  The company earned $.29 per share in the quarter on 118% y/y revenue growth and margins going to 57% from 52% last year and 56% last Q.  Most surprisingly, their energy business jumped up to $28MM from $22MM as a result of the both the power meter business and their energy exploration business.  On the call, they talked about this business but gave fewer useful details as to what is driving it than a republican strategist gives details about their plan to fix the economy.

That said, it's really CRUS' consumer audio business that has investors drooling over this company as if it were Hayley Atwell as they provide an audio chip for the iPhone and that segment absolutely killed it.  Revenue was up 32% sequentially in that segment with Apple moving to 35% of their overall revenues.  Company guidance was also stellar with next Q predicted to have at the midpoints $102MM in revenues, 57% gross margins, and $27MM non-Gaap op ex. and while Money McBags is no maffematecian (he only counts to two when told to turn his head and cough), those number should get them to ~$.44 eps as they still have more NOLs than Money McBags has broken dreams.

The hard part is forecasting this company since they are obviously a play on the iPhone and AAPL could find a new suplier or put more pricing pressure on them at any time.  Now look, Money McBags doesn't think that will happen anytime soon as their chip is supposed to provide the best audio quality and they are continually investing in R&D, but it is something of which investors should be aware.  Money McBags' previous estimate for fiscal year EPS was $1.20 but with CRUS earning $.29 per share  in Q1 and guiding for $.44 per share in Q2, $1.20 seems like it is lower than Andy Rooney's balls.  So Money McBags is going to get a bit conservative here and estimate that the energy business falls to ~$24MM quarterly run rate, the non-AAPL consumer business stays flat, and the AAPL business only grows 10% sequentially.

Doing that (and using 55% margins which may be on the low end and $110MM op ex), Money McBags gets an estimate of $1.47 which is about double what they should earn in the first half of the fiscal year.  Of course, those are very low end estimates as the AAPL business has been growing 30%+ sequentially and gross margins have been above 55%, so at the hgh end we could be looking at closer to $1.70 EPS for the fiscal year.

Either way, the stock is now trading at ~$19 which is ~13x Money McBags' low end estimate and the company has ~$2.50 in cash on the balance sheet and 13x for a company growing this fast is just way too fucking cheap.  If you want, throw a 20x on $1.47 and get to ~$30 for a target price.  As long as Apple doesn't pull the rug out from under these guys, there is plenty of room to move up even though it has already had a better run than a roidal Ben Johnson.

No comments: