Tuesday, July 25, 2017

BANK OF AMERICA: We may have just witnessed the 'first step' toward the end of the bull market

BANK OF AMERICA: We may have just witnessed the 'first step' toward the end of the bull market

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You'd be hard-pressed to find an equity strategist at a major Wall Street firm who has called the end of the 8-year-old bull market.
But they may have just done that as a collective, according to Bank of America Merrill Lynch.
The bank has a sell-side indicator of stocks, based on its survey of Wall Street strategists' asset allocation recommendations on the last day of every month. As of June 30, the indicator is at its highest level since 2011.
"The recent inflection from skepticism to optimism could be the first step toward the market euphoria that we typically see at the end of bull markets and that has been glaringly absent so far in the cycle," said Savita Subramanian, the head of equity and quant strategy at BAML.
"We have found that Wall Street's consensus equity allocation has been a reliable contrary indicator," Subramanian added. "In other words, it has historically been a bullish signal when Wall Street was extremely bearish, and vice versa."
7 3 17 sell side consensus COTDThe sell-side indicator, at a six-year high, could be the first step toward euphoria.Bank of America Merrill Lynch
For proof that the stock market still has room to run, some strategists cite the turnaround in earnings growth during the first quarter after back-to-back declines since the third quarter of 2015.
"Stocks proved resilient in the first half of 2017 on improved corporate earnings notwithstanding some softness in economic data," John Stoltzfus, the chief investment strategist at Oppenheimer, said in a note on Monday. The S&P 500 gained 8.2% in the first half of 2017.
This earnings growth is expected to have carried through into the second quarter. According to FactSet, analysts made the smallest cuts to Q2 earnings-per-share estimates in three years ahead of the reporting season that's due to begin in earnest with PepsiCo on July 11.
Fundstrat's Tom Lee, whose year-end S&P 500 target of 2,275 is the lowest among major strategists, said earnings would need to pick up at a faster pace to match various gauges of valuation that are stretched, such as the median price-to-earnings ratio.
"It's an uncomfortable call, to be honest," Lee said about his forecast that the market would end the year lower. "Our clients don't like the idea that a market being so strong actually has downside risk."

Alphabet rakes in a $26 billion quarter, but the stock is sliding

Alphabet rakes in a $26 billion quarter, but the stock is sliding

Sundar PichaiGoogle CEO Sundar Pichai.Justin Sullivan/Getty Images
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Google's parent company Alphabet beat expectations for its second-quarter earnings on the top and bottom lines, but investors who have bid up the stock nearly 30% this year wanted more and the shares in the company slid after the announcement.
"I think people were hoping for a bigger beat on the top line, and we didn't get that," Ben Schachter, an analyst at Macquarie told Business Insider.
The rising numbers of searches from smartphones in particular, which require Google to share ad revenue with partners, appear to be eating into Google's revenue and crimping its growth. 
Alphabet's stock fell about 3% in after-hours trading Monday.
Here are the results compared to Wall Street's expectations:
Revenue: $26.01 billion, up 21% year-over-year, and above the $25.64 billion expected
EPS (GAAP):  $5.01 vs. $4.46 expected
"We've been talking about our bigger investment areas within Google and you can see the momentum here reflecting contributions from our newer revenue streams," CFO Ruth Porat said during a conference call with investors on Monday.

Concerns about "net revenue"

Alphabet's overall revenue topped expectations thanks in part to growth in the "other revenues," the division of Google which includes segments like the hardware and cloud businesses.  Other revenues were $3.09 billion in Q2, up from $2.17 billion in the year-ago quarter.
Porat cited strength in Google's cloud business, as well as sales of its new Home smart speaker and wifi products.
But revenue growth in Google's core online search advertising business decelerated during the quarter, as the company pays larger amounts of money to partners that deliver traffic to Google's search engine, including Apple's iPhone. 
Net revenue for Google's ad business, which excludes the fees paid to partners, was up 16% during the second quarter, a slowdown from the roughly 20% net revenue growth that Google logged in the year ago period. 
Macquarie analyst Schachter pointed to the Q2 net revenue as a "meaningful deceleration." It's not the end of the world, Schachter said, but it illustrates the changes to Google's business model as more and more of its search traffic now comes from mobile devices like iPhones that require Google to share some of the revenue.
Here are some of the key numbers from Q2:
Net income: $3.5 billion (including the impact of a $2.7 billion European Comission fine), down from $4.9 billion in the year ago period
Cash and short term securities: $94.7 billion
Headcount: 75,606, up from 66,575 in year ago period
The cost-per-click on Google ads was down 26% from the year-ago quarter. Paid clicks were up 61% over last year.

Other bets

Revenues for Other Bets, which include the other companies under Alphabet like Waymo, Nest, and Verily, were $248 million for the quarter. Other Bets lost $772 million.
Alphabet's stock has been in good shape this year, and is flirting closer and closer to $1,000, as shares have surged roughly 27% so far this year. Despite a record-breaking $2.7 billion fine from the EU last month, analysts remain bullish on the future of Alphabet. Alphabet's Q2 results included the fine.
In addition to earnings, Alphabet had some other big news earlier Monday. Google CEO Sundar Pichai was named to the company's board as its 13th member. Pichai has been a Google employee since 2004.
Get the latest Google stock price here.
More: Alphabet Google

Monday, July 24, 2017

A mystery trader made a massive bet that the stock market will go crazy by October

A mystery trader made a massive bet that the stock market will go crazy by October

bane the dark knight risesSometimes things have to get a little crazy for traders to make money.Facebook / Warner Bros.
50 Cent has some competition.
That's right, there's another volatility vigilante making bets on increased stock-market price swings, and he's going bigger than the recently unmasked 50 Cent ever has.
The mystery trader is making a massive bet that the CBOE Volatility Index — or VIX — will surge from its near-record lows. If successful, it would yield a $262 million payout, according to a person familiar with the trade.
It's a risky wager. The so-called S&P 500 fear gauge has made a habit of rebuffing bullish VIX traders in 2017, falling 24% in the year to date and staying locked near its lowest levels on record.
Let's unpack the trade:
  • To fund it, the investor sold 262,000 VIX puts expiring in October, with a strike price of 12.
  • The trader then used those proceeds to buy a VIX 1x2 call spread, which involves buying 262,000 October contracts with a strike price of 15 and selling 524,000 October contracts with a strike price of 25.
  • For reference, bullish call spreads are used when a moderate rise in the underlying asset is expected. Traders buy call options at a specific strike price while selling the same number of calls of the same asset and expiration date at a higher strike.
  • In a perfect scenario, where the VIX hits but doesn't exceed 25 before October expiration, the trader would see a whopping $262 million payout.
  • It is possible for the VIX to spike too much. If it increased beyond 35.2, the investor would start to lose money since they used a call spread, even though they got the direction of the trade correct.
  • For context, VIX October futures are trading at 13.6, while the spot index closed at 9.62 on Thursday.
  • All data is from Bloomberg and was reviewed by a person familiar with the trade.
There are a couple of potential explanations for the trade. The first is that the trader decided the prolonged low-volatility environment would end in the next three months. While it seems like it could stretch on forever, even the longest stretches of subdued price swings have eventually given way to fluctuations.
It's also possible the investor is betting on volatility around some key upcoming events. The trade's October expiration will capture two Federal Reserve meetings, as well as the deadline for the government's debt-ceiling decision. The central bank is expected to start unwinding its massive balance sheet by year-end.
The wager flies in the face of one of the market's most popular — and crowded — trades: shorting volatility. Even a slight increase in the VIX could cause those investors holding volatility short to close their positions, which could push the gauge further in the mystery trader's favor.
Still, while hedge fund managers have bemoaned the risk the short-volatility trade presents to the market, especially since so many investors are using leveraged products, there's no denying it's been a good way to profit in an essentially motionless market.
Only time will tell if the trader is correct. And regardless of what happens, you have to respect the person's willingness to shell out big bucks.
Eat your heart out, 50 Cent.

Friday, July 21, 2017

Microsoft Keeps Performing Very Well - But Don't Get Fooled


Microsoft Keeps Performing Very Well - But Don't Get Fooled

 | About: Microsoft Corporation (MSFT)

Summary

Microsoft keeps executing on its mobile and cloud-first strategy.
The big earnings surprise was based on another item though.
Microsoft remains attractive; shares are not too expensive yet.
Microsoft (MSFT) continues to exceed expectations, but its big earnings beat was not only based on strong execution, but also on an unexpected tax item. The outlook for the company and its shareholder returns make Microsoft's shares pretty attractive nevertheless.
Microsoft's fourth quarter results, which the company reported on Thursday evening, started with a big beat on the bottom line:
Instead of a forecasted $0.71 per share, the company earned a very impressive $0.98 per share, whilst its revenues grew by almost double digits.
Let's take a closer look at those results:
When we look at the company's results, we see that the company's GAAP revenues and non-GAAP revenues differ by about $1.4 billion, which is unusual, as most companies only adjust their bottom line.
In Microsoft's case, there is a good reason for that adjustment though: The company's Windows 10 revenues are, under GAAP, not recognized at the time the license is sold, but ratable as the license is used. Since it is a sure thing that Microsoft will earn those revenues (in the accounting sense of the word) in the near future, it makes sense to include those revenues in Microsoft's results. The company will adopt a new revenue standard starting this quarter, which will lead to those revenues being recognized at the time of billing; thus, those adjustments likely won't be needed in the future any longer.
In the image above, we also see that Microsoft's fourth quarter net earnings were higher than its operating earnings, both on a GAAP basis as well as on an adjusted basis: This is partially due to the impact of Microsoft's high cash holdings, which generate some return, but the most relevant factor here are the taxes the company has to pay:
We see that Microsoft paid no income taxes during the most recent quarter, the actually hot almost $1 billion back on a net basis - this lifted the company's net income substantially, which was the reason for Microsoft's very big earnings beat - the company earned about 30% more than expected in the most recent quarter.
When we adjust Microsoft's net income with a tax rate of 15% (Microsoft's effective tax rate over the last year), we get to GAAP net earnings of $4.7 billion, which is equal to $0.60 per share.
Since we already recognized that the adjustments Microsoft makes make sense, we can also calculate what Microsoft's non-GAAP earnings would have looked like with a 15% tax rate: The result is still pretty good; the company would have earned $0.76 per share if the tax rate would have been fifteen percent. Since analysts forecasted $0.71 in non-GAAP earnings per share, Microsoft would have handily beaten estimates even without a big tax benefit.
Microsoft is not only attractive due to its strong growth and high profitability, but also due to its big cash hoard and strong cash generation: During the most recent quarter, the company produced operating cash flows of $11 billion, which lead to a quarterly free cash flow of $8.7 billion (after subtracting $2.3 billion in capex).
With huge cash flows like that, Microsoft can easily finance an attractive dividend and substantial buybacks at the same time:
ChartMSFT Stock Buybacks (TTM) data by YCharts
Microsoft has been buying back shares for billions of dollars each year for a while now, but has slowed down its pace a bit over the last quarters. During the most recent quarter, Microsoft only spent $1.7 billion on buybacks, which could be based on either of two things:
- The company's shares have performed very well over the last years, and maybe the company's management sees them as somewhat less attractive than in the past, thus spends less on buybacks.
- The company waits for a tax holiday so it can repatriate its cash hoard to finance buybacks, and until this happens, the company only uses the cash that is available in the US for shareholder returns.
Due to the stock buyback pace having slowed down somewhat, its impact is smaller than it was a couple of years ago, but the company's share count keeps shrinking at a substantial pace, which allows for additional EPS growth.
When we look at Microsoft's business, we see that Azure, its main cloud product, once again was a very strong performer: Revenues increased by a whopping 97%, far outpacing the cloud growth rates at peers such as Amazon (AMZN) or IBM (IBM). LinkedIn contributed $1.1 billion to Microsoft's revenues, about 4.5% of the total - when we look at the price Microsoft paid for LinkedIn ($26 billion) versus the company's market cap ($565 billion), we get almost exactly the same ratio. It thus looks like Microsoft neither overpaid nor underpaid for its acquisition of LinkedIn.
Phone sales continue to drop, which is not a negative, as Microsoft's focus on software and services allows for higher margins with less capital commitment: Earnings growth outpaces revenue growth, and at the same time, capex requirements drop, which allows for even better cash flows for the company (and ultimately, its owners).
ChartMSFT Price to Free Cash Flow (TTM) data by YCharts
At 20.5 times free cash flows, and 19.6 times forward earnings, Microsoft is not trading at a cheap valuation, but the company's shares are not overly expensive either: This looks like a fair to attractive valuation for a high class company that keeps growing, has a big moat, attractive shareholder returns and probably the best balance sheet in the world.

Takeaway

Microsoft's latest quarter was another success; the company's cloud and mobile focus is paying off in a big way. We nevertheless should look at the fact that the big earnings beat was a product of a one-time tax item, adjusted for that, the earnings numbers still look pretty good, but less outstanding.
With strong growth, strong margins, high shareholder returns and a valuation that is not too high, Microsoft still looks attractive, I believe.
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Visa raises its full-year earnings forecast

Visa raises its full-year earnings forecast

FILE PHOTO - Visa CEO Charles Scharf (2nd R) and company executives ring the opening bell at the New York Stock Exchange, March 19, 2013.  REUTERS/Brendan McDermid Charles Scharf and company executives ring the opening bell at the New York Stock ExchangeThomson Reuters
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(Reuters) - Visa Inc, the world's largest payments network operator, on Thursday reported a better-than-expected quarterly profit and raised its full-year earnings forecast, as more people made payments using its network.
Visa, which generates revenue by facilitating credit- and debit-card transactions, has benefited from a strengthening U.S. economy as well as results from Visa Europe, which it bought last June.
Consumer spending has been on the rise in the United States, supported by a tightening labor market and rising wages.
Visa's payment volumes in the country rose 12.1 percent on a constant dollar basis to $840 billion in the third quarter ended June 30. More than half of the company's total volume of transactions comes from the United States.
Visa Europe raked in $371 billion in payment volumes.
Total payments volume rose 38.4 percent to $1.860 trillion on a constant dollar basis.
Visa also raised its forecast for full-year profit.
The company said it now expects annual adjusted earnings per share to grow about 20 percent. It earlier expected earnings per share to grow in the mid-teen percentage digits.
Net income rose to $2.06 billion, or 86 cents per Class A share in the third quarter, from $412 million, or 17 cents per Class A share.
Analysts on an average had expected earnings of 81 cents, according to Thomson Reuters I/B/E/S.
Visa's results in the prior-year quarter included expenses of nearly $1.9 billion related to its acquisition of Visa Europe.
Total operating revenue rose 26 percent to $4.57 billion in the third quarter, edging past analysts' estimates of $4.36 billion.
Shares of San Francisco-based Visa were up 0.8 percent at $98.89 in trading after the bell. (Reporting by Nikhil Subba in Bengaluru; Editing by Sai Sachin Ravikumar)
Read the original article on Reuters. Copyright 2017. Follow Reuters on Twitter.
More: Visa Earnings

Microsoft reports a big beat on earnings, stock edges up

Microsoft reports a big beat on earnings, stock edges up

microsoft ceo satya nadellaMicrosoft CEO Satya NadellaGetty Images/Drew Angerer
MSFT Microsoft
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Microsoft’s cloud business drove 13% revenue growth in the fourth quarter of its 2017 fiscal year, while the company’s earnings topped Wall Street targets thanks in large part to a hefty tax writeoff from its mostly-shuttered phone business.
Shares of Microsoft were up over 1% at about $75 per share in after hours trading on Thursday.
Microsoft reported:
  • Earnings per share of $0.98 adjusted versus $0.71 expected
  • Revenue of $24.7 billion adjusted, versus $24.3 billion expected
Notably, a full $0.23 of EPS came from a tax writeoff related the gradual wind-down of its smartphone business. That helps explain the much higher earnings than Wall Street had originally forecasted.
Revenue from Microsoft's all-important cloud computing businesses were $7.43 billion, an 11% increase over the same period in 2016. With Wall Street looking for strong cloud growth, that's a positive sign. The Microsoft Azure cloud computing platform and Windows Server software are key parts of this cloud business, dubbed Intelligent Cloud by Microsoft. 
Microsoft's Office productivity software, which is encompassed under the Productivty and Business Processes umbrella, also saw a big uptick of 21% to $8.4 billion over the same period. That includes traditional boxed Office software, as well as the Office 365 cloud productivity suite. There are now 27 million Office 365 subscribers.
Finally, the More Personal Computing segment, which includes Windows, Xbox, Surface, and Microsoft's struggling phone business, shrunk 2% to $8.8 billion. Microsoft attributes the dip to the continued drag from its smartphone business.
Also of note is that Surface revenue dropped 2% on its own from the year-ago period, which Microsoft attributes to the transition from the Surface Pro 4 to the newer, numberless Surface Pro, and the introduction of the new Surface Laptop.
This story is updating. Refresh your browser or click here for the latest updates.
Get the latest Microsoft stock price here.

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