Thursday, April 23, 2009

The Stock Market is Yesterday's Leftovers with Mr. Softee the Latest Case in Point

Stock prices will indeed fluctuate, because that is how the financial community makes money.
Behind the worn facade of beating the Street by a penny or two, reality does exist in the form of historical quarterly reports by corporations.  Today, Microsoft fessed up to its maturity.  It has rapidly gone grey.

The December quarter for Mr. Softee represented a negative surprise, with earnings of $0.47.  The Value Line MSFT report of 2/20/09 indicated March quarterly sales of $14.00 B and earnings of $0.40/share.  Today we learned that sales were only $13.6 B, earnings excluding writedowns on assets (this is not limited to financial companies!) were $0.37, and guidance was withdrawn.  Operating margins were about 34% and have been eroding for 10 years, when they were 56%.  The company has about $17 B of net working capital and little other tangible book value.

Operating expenses are being cut.  Microsoft is not in "runoff" mode, but it is trading post-earnings release at 10X tangible book value and almost 3X sales.  It has lost almost all creativity; it has made no impact on the Internet.  Yours truly has no idea what the discounted present value of its future cash flows will be, and neither does any analyst.  

Consider however that earnings in the March quarter were $0.50, 0.47 and now about 0.37 per share in 2007-9.  

MSFT exemplifies much of what is wrong with American business.  It is too big to grow much more and in fact is shrinking for real ($60 B in sales); it is too strong and important to fail; its management is rich and entrenched; it is discounting its wares:  there is no pizzazz.  Yes, the stock was halved in a year and a half and may be ready to rebound, but the thrill is definitely gone.  

AmEx also reported this afternoon, projected ugly consumer default rates, missed earnings estimates that Value Line also published 2/20/09 (when it traded at $16/share).  In keeping with the times, naturally it traded up sharply after hours.  Earnings for AXP this quarter were about 1/3 less than in the same quarter 4 years ago.  Absent government action and conversion to bank holding company status, who knows what this company would be like by now?

Perhaps stock traders are relieved that these behemoths aren't going bankrupt!  

Seriously- when giant companies such as MSFT and AXP ruthlessly cut costs (meaning fire people) and show extreme cyclicality, yet trade well above book value and have uncompelling dividend yields, they are not on the true bargain counter.  And these are high quality, beaten down stocks.

The "laws" of cyclicality suggest that at some point there will be true bargains in some financial asset class, as stocks were in the late 1940s and early 1950s and bonds were in the 1980s.  It's hard to find any such assets now.  Patience continues to make sense.

Copyright (C) Long Lake LLC 2009 

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