Weekly Commentary & Outlook
McIntyre, Freedman & Flynn
By Tom McIntyre
August 13, 2012
As the charts above illustrate the past week saw the Dow Jones Industrial Average gain .85% while the NASDAQ jumped by 1.8% led by Apple which now has an added attraction - speculation to split its stock in order to join the
Dow Jones Industrial Average index.
The Markets & Economy
August is typically a difficult month for stock prices, but so far this year it has been a rally month even as volume and interest in the stock market continues to fall off. It seems the fears stoked out there about the sovereign debt crisis and the economic slowdown globally has caused investors to go to cash and miss a reasonably powerful rally.
As you know from reading these updates, we are very concerned about the global economic problems and the inability or unwillingness of political leaders to address them, but we have carefully made the case that we are not in a meltdown, and especially at home our economy continues to keep its head above water.
I must admit to being very concerned that increasing taxes dramatically next year, which is the current law, would be harmful. Of course, politicians after the election would not fear the outcome of their policy choices. That is why the November elections are critical as always. This country must decide in which direction it wants to go via the electoral outcome and then live with the decision. Right now the market seems to be making a bet that the worst of the policies set to start next year, such as the higher income taxes for everyone and the additional taxes associated with Obamacare, will not take place. There will be many opportunities for the market to revisit these issues over the next few months.
As to the economy itself, we are clearly treading water. Two percent or less of real GDP growth is all that we can hope for. This even with an annual 1.4 TRILLION dollar deficit and zero interest rates. Clearly, more of this policy mix will not solve the problem of economic growth, and certainly redistribution of income is also a growth killer.
What to Expect This Week
This morning is very quiet and dull. Expect more of that as we hit the summer doldrums. We will get several economic reports this week including inflation data, industrial production, housing data, and a report on leading economic indicators. However, it is very unlikely that any or all of these combined will change the outlook for the economy and thus should not be a catalyst for an otherwise sleepy summer-trading background.
Last week’s report from the Economic Cycle Research Institute showed more stability (see chart below) but again nothing to indicate better times ahead.
Pioneer Energy Services reported second-quarter earnings results that essentially were in-line with Wall Street’s consensus estimates. The Company reported its first quarterly report since changing its name to Pioneer Energy Services from Pioneer Drilling.
Earnings per share more than doubled from last year to $0.15 per share. Revenues also grew by 34 percent from the prior year, but they did miss the higher-end estimates. This is the second consecutive solid quarterly earnings report from the Company, and we are encouraged by the ongoing transformation from more of an oil driller to a more comprehensive energy company.
These results help to warrant the name change at the Company as the Production Services Division continues to become a larger part of Pioneer. During the quarter the Production Services Division experienced a 71 percent increase in revenues compared to previous year, and now accounts for 48 percent of the Company’s total revenue. We look for this trend to accelerate in coming quarters, which should lead to significant earnings growth for the remainder of this year and beyond.
The Company will likely see some headwinds as natural gas prices remain depressed, although there are signs of an improving marketplace. Also, the expansion of the Production Services Division makes earnings numbers more predictable, compared to the Drilling Division, which should lead to a higher earnings multiple. The Company continues to implement its aggressive capital spending plans, and we believe these initiatives should lead to higher earnings per share in coming quarters.
The share price of Pioneer Energy Services had a somewhat muted response to this earnings report, but we believe that investors will start to see the benefits of shifting to a service based company. Even though energy prices are quite high, the sector’s stock performance has been subpar in general. We believe this trend will change, and look for the sector to be one of the top-performing sectors during the second half of this year. We look for the share price to appreciate at least 50 percent within the next 12 months and remain buyers of the Company.
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