A look back at an important day in recent financial history…
There were some bloody noses on Wall Street last week as stocks ended the third Wednesday of March lower following a spate of disappointing earnings from some of Mr. Market’s biggest names. Oracle Corporation (NASDAQ:ORCL), FedEx Corporation (NYSE:FDX), General Mills, Inc. (NYSE:GIS), Guess?, Inc. (NYSE:GES) and Lennar Corporation (NYSE:LEN) were among the companies reporting earnings on this date, but it was Oracle Corporation (NASDAQ:ORCL) and FedEx which had the most significant impact on the broader markets, dragging the Dow down by 90 points on March 20th, when most of this bottom line damage was reported.
Oracle Corporation (NASDAQ:ORCL) blew through technical supports like a tornado in a trailer park. The third largest software maker in the world announced earnings of $0.66 per share versus expectations of $0.53-0.65 per share. Total revenue was reported at $8.96 billion versus analysts’ estimates of $9.38 billion. The company blamed an inexperienced sales team, but others voiced concern about competition in cloud software from salesforce.com, inc. (NYSE:CRM) in particular. Salesforce.com ended the day slightly higher, and by comparison, Oracle Corporation (NASDAQ:ORCL) trades at a little over 3.0 times its book value, while Salesforce.com is at 10 times its own book value. It’s clear which tech player is the better value investment at the moment, and when it comes to cloud technology—where the two are facing off—analysts seem to agree that Oracle Corporation (NASDAQ:ORCL) has a slight advantage, following recent acquisitions of SelectMinds and RightNow.
It’s always important to track hedge fund sentiment, as our research has shown that their consensus small-cap picks can outperform the market by 18 percentage points a year. It’s worth noting that hedge fund activity around Oracle has been swirling of late, with Boykin Curry, Ken Fisher and Seth Klarman all holding fairly large positions.
FedEx shares, meanwhile dropped almost 4% in pre-market trading on that fateful Wednesday after the delivery services company reported a drop in Q3 net income to $361 million ($1.13 per share) versus $521 million ($1.65 per share) from a year earlier. Analysts were expecting earnings of $1.38 per share. The company attributed weakness in international markets combined with an increase in consumer demand for less expensive freight services for the disappointing results. Although FedEx ended the day close to 3% lower (competitor UPS fell 1.23% in sympathy), bearish trading is hardly a rejection of the FedEx model or its financial soundness.
Despite a variety of low-cost competitors, Fed Ex remains synonymous with overnight delivery. United Parcel Service, Inc. (NYSE:UPS) is most able to challenge FedEx for dominance in its overnight-focused wheelhouse, but the multiples unmistakably favor FedEx; the stock trades at 15 times earnings versus 101 times earnings for UPS. FedEx’s price-to-book, meanwhile is close to one-tenth of UPS’s, at 2.0x. We could go on and on, but the point is this: though investors might want to punish FedEx for disappointing earnings, they’ll love them again in the morning.
General Mills, Inc. (NYSE:GIS) closed higher last week on a bullish earnings report with 3Q net revenue up 8% to $4.43 billion ($0.60 per share). The company attributed the strong earnings to new cereal products and newly acquired businesses such as Yoki Alimentos and Canada’s Yoplait operations. But the news wasn’t all good as the company issued a warning for Q4 earnings that could be adversely impacted by higher supply and merchandising costs that could cause earnings to fall short of those reported for the same period last year. General Mills, Inc. (NYSE:GIS) is currently trading at a trailing 19 times earnings versus the industry’s average of 27 times earnings. Of its other competitors in the ready-to-eat cereal market, Kellogg Company (NYSE:K) is trading 23 times earnings and Post Holdings Inc (NYSE:POST) is at 32.0x.
Guess also reported Q4 earnings on the same day last week, and came in close to expectations with adjusted earnings of $0.95 per share compared to $1.05 per share for Q4 2011. Revenue was up 5% to $815 million. Although sales in Asia were higher for the Q4, sales in Europe and the US were flat to lower which pulled global revenue down 1%. The stock opened lower, and although it regained some lost ground midday, it ultimately closed last Wednesday off by more than 7%.
Most of the clothing sector ended the day lower, especially Abercrombie & Fitch Co. (NYSE:ANF) and American Eagle Outfitters (NYSE:AEO), but some of the weakness in the sector can also be attributed to the overall slump in the broader market. Guess is currently trading 2 times its book value and 12 times trailing earnings, and is a great value in comparison to its key peers. Abercrombie is trading 37 times earnings, while and American Eagle is valued at a 14.0x EPS multiple. While there is some trepidation among investors when it comes to the fickle teenage apparel market, Guess appears to be well positioned to absorb any temporary fluctuations in the whims inherent in the clothing industry.
Finally, there is homebuilder Lennar, which closed last Wednesday 2% lower after the prior day’s rally following a better than expected earnings report. Lennar reported 1Q net earnings of $57.5 million, or $0.26 per share, compared to $15.0 million, or $0.08 per share, for Q1 2011. Revenues were up 37% to $989.9 billion. The stock fell victim to profit-taking today after gaining nearly 6% following its earnings report, but the overall trend in the housing market should continue to push housing stocks higher. Lennar is currently trading at a paltry 2 times book value, about 9% below industry norms.
While many investors fear that losses like last Wednesday’s could put a damper on the recent rally in the Dow, there’s no question that the overall sentiment is that day’s losses are more about profit-taking that an actual shift in sentiment. While Oracle Corporation (NASDAQ:ORCL) clearly took the brunt of the selloff, the underlying fundamentals are still bullish. The housing market is improving, consumer spending is showing signs of life, and most stocks are priced consistent with their book values, and since this important day, the Dow is up nearly a full percentage point. We’ll keep an eye on the stocks mentioned above and you should too; each represents an interesting play, no matter how their latest earnings releases turned out.