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Saturday, July 24, 2010

More Favorable Earnings Reports, including EBAY; One Exception: PetMed Express (PETS) on Company Specific Risks

Earnings reports over the past week seem to support our view that fundamentals across multiple sectors are stable to improving, as discussed in our post last weekend, Psychology Remains Fickle as The Big Bad Wolf Ignores Fundamentals.

In that post, we shared points from a conversation with a friend and former colleague regarding the current market environment. He liked our post, but commented:
  • "One more thing to think about is how street expectations for 2011 have been ratcheted up....for the S&P 500, the number is $90....This is not possible if you do a sector by sector evaluation of earnings......The question one must ask is if stocks can move higher in the wake of negative revisions over next three quarters.....Comparisons are getting much tougher and foreign exchange are also much more of a headwind...."
Fair point from an overall market perspective, but one that we don't have time to address today. For those interested, here's a 1960-2009 S&P Earnings History table from NYU and S&P index data can be found here.

For now, we keep things simple: even if growth is slowing, we're still growing and, ergo, things are getting better. To illustrate, we include another snapshot of headlines from the WSJ on Saturday 7/24 (click to enlarge):

As with the news we shared last Saturday, the reports are mostly positive. Even Amazon (AMZN) -- a negative headline above -- continues to post incredibly rapid growth, with trailing twelve month revenue up 38% Y/Y on an FX neutral basis (from the company's 2Q earnings deck):
Still, Amazon missed rosy Wall Street bottom-line expectations and the high-multiple stock temporarily retreated -- the perils of a high valuation, which we've discussed previously. Netflix (NFLX), also a great franchise, suffered a similar fate.

In other earnings news around our own holdings, eBay (EBAY) delivered the goods. Our view that eBay Remains a Powerhouse stands. Here's a revenue snapshot:

Free cash flow:

AND ROIC:

Some Wall Street analysts and other investors continue to question the franchise, but we think they miss the forest through the trees: eBay is a household name that addresses multiple large markets and should nicely compound earnings over the medium to long term, all offered at a reasonable multiple (11 times trailing earnings). PayPal is the growth engine while the Marketplaces segment is the cash cow that isn't going anywhere anytime soon (and, hopefully, will deliver improved growth). Even if shares take a pause, the stock had a solid run over the past year. All the while, cash should keep piling up on the balance sheet and allow for reinvestment, acquisitions, debt reduction (*no debt at present), share buyback, or a dividend. As with our shipping companies, we sleep well owning eBay and would buy more at current levels.

Meanwhile, PetMed Express (PETS) posted poor results and brought us to rethink our positive stance as a competitive marketplace clouds the outlook. For the time being, we move to the sidelines and are recoiling our positive thesis as risk factors raise questions as to whether -- in Charlie Munger style (per our initial post one year ago) -- we can sit back, relax and watch net asset value per share grow. We'll explain our caution in an upcoming post.

Happy investing,

Jeffrey Walkenhorst
CommonStock$ense

Disclosure: long EBAY.

© 2010 Jeffrey Walkenhorst
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