Weekly Commentary & Outlook
McIntyre, Freedman & Flynn
By Tom McIntyre
April 25, 2011
Last week started with concern over the US government’s finances, but the holiday-shortened week ended positively as
earnings once again overwhelmed the negative macro headlines.
As the charts above illustrate the Dow Jones Industrial Average gained 1.33% while the NASDAQ Composite jumped by 2% led by our own shares of Biogen (see our comments below) which surged better than 20% for the week.
The Markets & Economy
Last week’s warning from Standard & Poor’s led to a poor Monday, but there was no follow through. Our own Congress was not in session and the members were scattered all over the world on one junket or another. The President was on a weeklong campaign and fund raising tour for his reelection which is eighteen months away and for which he will not have a serious primary challenge.
How could it be that these issues are so important and yet are treated with such lack of intensity? Frankly, I don’t want to answer my own question.
The financial markets, of course, shrugged off this circus and focused upon great corporate earnings and announcements of dividend hikes to back up the earnings reports. Thus it continues to amaze the typical onlooker as to how the financial markets could be performing this well while the real economy as evidenced by the high unemployment rate and enormous government deficits dominate the news. Unfortunately, this scenario does play well to the old rich versus poor argument, which President Obama has now fully embraced in his ongoing reelection campaign that has replaced his actual presidency.
What to Expect This Week
Another huge week for earnings reports. In addition, the Federal Reserve Board will engage in a two-day meeting on Tuesday and Wednesday. This meeting will culminate in the first ever press conference Wednesday afternoon by Chairman Bernanke.
The financial press is all a twitter about the prospects for a live press conference during market hours by a Fed Chairman. While this will be a first, I think that for this reason and others, very little news will be made on Wednesday.
- First of all, Bernanke and the other governors routinely shoot their mouths off to the press both in public and via leaks to their pets in the media. Accordingly, any market moving news would already be discovered in the pipeline.
- Secondly, later this week the GDP report for the first quarter will be announced. A growth rate below 2% is expected. Hence the notion that the FED will rattle the markets cage given this weak report is not warranted in economic terms and most certainly in political terms.
Unfortunately, this Federal Reserve Board is rightfully or wrongfully now considered in the breast pocket of the Obama Administration, which of course is seeking reelection. When all is said and done, there will be quite a bit of happy talk about the economy and the “temporary” nature of the inflation pressures Americans are all feeling as gasoline prices go above $4 per gallon.
As far as the economy is actually concerned, both consumer and investor confidence is lower, but both serve as a contrary indicator for the stock market. Our look at the weekly reading from the Economic Cycle Research Institute (shown below) shows the outlook for the next six months to still remain quite constructive. Thus this perplexing stock market rally is likely to continue, due to the benefit of low interest rates and strong profit growth, for longer than the perma-bears would like to either understand or admit.
Shares of Biogen Idec surged nearly 25 percent last week as the Company reported better than expected first quarter earnings results and released very positive data on its oral multiple sclerosis drug candidate BG-12. The Company reported that net income rose by 35 percent and revenues by 9 percent from the previous year. Both of these results were better than consensus estimates, but the reason for the large stock move was the positive findings concerning the BG-12 drug candidate.
Most analysts on Wall Street had extremely low expectations for Biogen’s multiple sclerosis division, and now the Company is finally getting the respect on Wall Street that they deserve. Sales of the Company’s current multiple sclerosis drugs, Tysabri and Avonex were strong during the quarter and management continues to successfully reduce the Company’s cost structure.
We believe the data concerning BG-12 places Biogen well ahead of its competitors and will give them a huge advantage growing their MS division. The Company claims that BG-12, which is an oral treatment, cut relapses in half after two years of treatment. The Company previewed this study a couple of weeks ago, although these results were much better than even the biggest bulls on the stock had expected.
Shares of Biogen Idec hit an all-time high on Thursday, and plenty of brokers are now scrambling to upgrade the shares. The shares of Biogen were trading at $45 per share a year ago, and with the price moving over to $100 last week, the stock is no longer cheap. We do believe the news from the Company will continue to be positive and are raising our price target to $120 per share.
Last week EMC reported better than expected first quarter earnings results, as demand for cloud computing products continued to accelerate. First quarter net-income rose by 28 percent from the previous year, which matched consensus estimates. Revenues rose 18 percent during the quarter, which beat Wall Street’s expectations. We believe the Company remains in the sweet spot of technology spending right now, and should experience robust growth for at least the next several quarters.
Management saw strength across all of its product lines, and its majority owned VMWare continues to exceed expectations. VMWare also reported revenue growth of more than 33 percent during the first quarter, and remains the prized asset at EMC. The Company experienced higher operating margins, and free cash flow rose to $857 million during the quarter. The Company also has $9.5 billion in cash on its balance sheet.
EMC remains our favorite large-cap technology company, as we feel the Company is positioned for much more growth over the next two years than Wall Street is expecting. There have been persistent rumors that EMC is a takeover target for larger technology companies like HP or Cisco, but we would be surprised if that were to happen. We believe the shares of EMC will reach $35 within the next 12 months.
Freeport McMorRan blew away Wall Street’s expectations last week when they announced their first quarter earnings report. Net income rose by 67 percent from the previous year, and revenues surged 31 percent to $5.71 billion. The Company is currently generating so much cash that they announced a special one-time dividend of $0.50 per share in addition to its regular quarterly dividend of $0.25. The special dividend will be paid on June 1st to shareholders of record as of May 15th.
The demand for copper has remained strong through this economic recovery, and surging copper prices helps the Company grow the bottom line. Copper’s price per pound rose to $4.31, up from $3.42 per pound last year at this time. During the same time the Company’s cost per pound to produce copper has fallen 3 cents per pound to $0.79 per pound. We believe that demand from overseas will keep prices for copper elevated and the Company will further its dominant position in the market.
Shares of Freeport traded up sharply following this report, although we believe the shares are still undervalued. They should be making new 52-week highs off the strength of this report, but currently trade 13 percent below the highs. We view Freeport as a core holding, and expect the shares to rise above $65 within the next 12 months.
(c) McIntyre, Freedman & Flynn