We are investing in optimistic times. News -- good or bad -- seems to magically morph into an opportunity to move markets higher. In the past week, even more than usual, weak economic news was accompanied by commentary along the lines of, "it could have been worse," and other euphoric sentiments.
It is difficult to determine whether this is another short-covering bear market bounce or a real rally. But next week will bring us new information that will start to indicate where the answer lies. For now, investors are looking at the glass as half-full. Cash on the sidelines is moving in to equities, partly because there are very few other alternatives. Yields are low, commodities are risky and real estate is taboo.
Next week begins with the celebration of Cinco de Mayo, yet the markets were way ahead -- it has shifted into party mode on its own during the past few weeks. Here is a summary of key events to watch during the week ahead:
Monday, May 5
First off, the market gets a chance to react to news of Microsoft withdrawing its bid for Yahoo. It will be interesting to see how far Yahoo's stock price sinks as well as what all the market watchers think Yahoo (NASDAQ: YHOO) and Microsoft (NASDAQ: MSFT) will do next.
Hewitt Associates (NYSE: HEW) the HR firm that has been showing amazing strength is set to report. First Call is looking for quarterly earnings of $.38 as compared to a year ago of $.23. There may be opportunity for this firm as we go into harder economic times where companies are looking for an easy solution to labor concerns.
Also reporting is Nam Tai Electronics (NYSE: NTE). It could have a good quarter since the need for computer parts is on the rise. Intel and Apple did well to show that international demand is still hot for electronics and this is one of the parts manufacturers. Through its electronics manufacturing services operations, Nam Tai makes electronic components and sub-assemblies, including liquid crystal display (LCD) panels, LCD modules, flexible printed circuit sub-assemblies and image sensors modules and printed circuit board assembly for Bluetooth headsets. First Call estimates are for $.19 as compared to year ago of $.19 per share on $163 million of revenue.
Avon (NYSE: AVP) delivered not a bag of cosmetics to Wall Street, but a batch of growing earnings. Total revenues for the first quarter were up beautifully, rising 14% to $2.5 billion. Earnings per diluted share likewise did the double-digit-increase dance, rocketing 26% to $0.43.
Now, I would have liked the report a lot more if the company had indicated in its cash flow statement that everything was positive -- unfortunately, that was not to be, as operational cash flow was, in fact, negative. Avon needed to use $41 million for its operating activities during the quarter. Well, one thing I can say is that it's a lot less than the cash needed to fund last year's operations -- Avon burned through over $160 million in the comparable period. A check of the latest 10K shows that, while operational cash flow has been decreasing over the last few years, it has remained positive, so since this is the first quarter of the new fiscal year, we can wait to see how cash flow shapes up as the quarters go by.
Avon competes with companies like Procter & Gamble (NYSE: PG), Revlon (NYSE: REV) and Estee Lauder (NYSE: EL). As I've stated in the past, Procter & Gamble is more my kind of consumer-products business, but I'll give Avon its due since it does have a good product portfolio backing its brand and a devoted base of users. The stock is not too far off from its 52-week high as of this writing, and so long as it can keep sales growing and fight inflationary pressures, it should be a decent long-term bet.
Disclosure: I don't own shares in any of the companies mentioned; positions can change at any time.
Revlon (NYSE: REV) issued a press release concerning its plans for a reverse split as well as some preliminary quarterly results. The reverse split will be based on a 1-for-10 ratio. Well, the company may increase the share price via this method, but it won't make much of a difference in terms of Revlon's potential as an investment.
The stock closed on Friday at $0.99 per share. Let me repeat this -- the stock closed on Friday at $0.99. We are thus talking about a highly speculative equity. Interestingly, if you take a look at the preliminary results, you might believe that Revlon is on the right path. Revlon's management expects a slight dip in terms of net revenues -- the top line will see about $320 million in the quarter versus nearly $329 million in the year-ago period. There will be a net loss of about $5 million this time around versus a net loss of over $35 million last year. Doesn't sound so bad, I suppose, especially when you consider that operating income should come in at $30 million -- that's ten times better than 2007's first quarter. So, would I buy Revlon?
No. I actually owned Revlon stock a few years ago, and I think I essentially broke even when I decided to get the heck out. Revlon has a long way to go before proving to me that it's got a handle on all its problems and that it can get its brand equity back on track. And this reverse stock split means nothing to me, as it doesn't alter the underlying fundamentals. Revlon faces tough competition from other brands, such as Avon (NYSE: AVP), Estee Lauder (NYSE: EL), and products from Procter & Gamble (NYSE: PG), so the company has its work cut out for it.
Disclosure: I don't own shares in any of the companies mentioned here; positions can change at any time.
This post is one of several on business heirs apparent. Let us know in the comments whether you think Aerin Lauder Zinterhofer should take up the reigns of Estee Lauder, and be sure to check out the other heir apparent posts.
A cosmetics empire might seem the ultimate in puffery, the very materialization of vanity. But the venerable empire built by Estee Lauder and her powerhouse son, Leonard, has turned makeup into a very real financial juggernaut. And Aerin Lauder Zinterhofer, Leonard's niece, is not only the public face of the company but also the considerable creative brain of its marketing soul.
As granddaughter of the company's founder, Aerin is surely far-removed from the hardscrabble life that was The Estee Lauder Companies Inc (NYSE: EL) beginnings. She is a child of great wealth and, as such, is the inheritor not just of money and corporate responsibility but also of appearances. Aerin is not just the face of the company, but of a certain sense of style; her choices, from her cutlery to the clothing her two boys wear to (of course) her lip gloss, are signals to a certain subset of the fashion world. Aerin is not just the harbinger of styles, she is a style.
Can one go from being the face of a company to its head? If anyone is positioned to do so, it's Aerin. She didn't just grow up in the center of the fashion world, but in the center of the "old American money" world; her best friends are Lauren duPont and Renee Rockefeller, and they've been teaching her the ways of the powerful since she was a child.
MOST NOTEWORTHY: Thornburg Mortgage, Expedia and Perot Systems were today's noteworthy upgrades:
Jefferies upgraded shares of Thornburg Mortgage Inc Corp (NYSE: TMA) to Buy from Hold as they believe the stock is at an inflection point, characterized by accelerated earnings and dividend growth.
Expedia Inc (NASDAQ: EXPE) was upgraded to Outperform from Neutral at Credit Suisse, as they believe the company is well-positioned to benefit from global e-travel and media opportunities, strong free cash flow, and attractive valuation.
Perot Systems Corporation (NYSE: PER) was upgraded to Sector Perform from Underperform at RBC Capital following its Q4 report.
MOST NOTEWORTHY: GPC Biotech, Akamai, Qwest, Shutterfly and LDK Solar were today's noteworthy downgrades:
GPC Biotech (NASDAQ: GPCB) was downgraded to Sell from Neutral at Goldman, to Sell from Hold at Deutsche Bank and to Underweight from Overweight at Lehman after the company's phase III trial of satraplatin to treat prostate cancer did not meet its primary endpoint.
Deutsche Bank downgraded shares of Akamai Technologies (NASDAQ: AKAM) to Hold from Buy on valuation following the recent rally as they believe concerns around slowing growth, margins and capital efficiency will limit upside.
Qwest Communications (NYSE: Q) was downgraded to Sector Performer from Outperformer at CIBC and to Neutral from Overweight at JP Morgan following the company's disappointing Q3 results.
Jefferies downgraded shares of Shutterfly (NASDAQ: SFLY) following the better-than-expected Q3 results due to valuation.
Piper downgraded shares of LDK Solar (NYSE: LDK) to Market Perform from Outperform, as they expect higher blended poly cost for the company due to tightening scrap poly supply and increased competition.
OTHER DOWNGRADES:
Maxwell Technologies (NASDAQ: MXWL) was downgraded to Underperform from Market Perform at JMP Securities.
UBS downgraded Estee Lauder (NYSE: EL) to Sell from Neutral.
Merrill downgraded CommScope (NYSE: CTV) to Neutral from Buy.
Under Armour (NYSE: UA) was downgraded to Underperform from Market Perform at Raymond James.
RBC Capital downgraded Beckman Coulter (NYSE: BEC) to Sector Perform from Outperform.
Estee Lauder Companies Inc. (NYSE: EL) this morning reported Q1 profit that dropped to $0.20 per share compared to $0.27 in the same quarter a year ago, but the company doubled analysts' expectations of just $0.10 per share. If you think that the company won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on EL.
After hitting a one-year high of $52.31 in April, the stock fell to a 52-week low of $38.41 in August. EL opened this morning at $45.00. So far today the stock has hit a low of $44.95 and a high of $47.05. As of 10:40, EL is trading at $45.64, up $2.32 (5.4%). The chart for EL looks bullish and steady, while S&P gives the stock a positive 4 STARS (out of 5) buy rating.
For a bullish hedged play on this stock, I would consider a January bull-put credit spread below the $40 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 6.4% return in just 3 months as long as EL is above $40 at January expiration. Estee Lauder would have to fall by more than 12% before we would start to lose money. Learn more about this type of trade here.
MOST NOTEWORTHY: The Personal Care, Household Products and Cosmetics industry, Horsehead Holdings and China Sunergy were today's noteworthy initiations:
CIBC started shares of Horsehead Holdings (NASDAQ: ZINC) with a Sector Outperformer rating and $30 target, as they believe the valuation discount to other North American zinc producers will narrow as investors become more aware of the name.
Jefferies would avoid shares of China Sunergy Co Ltd(NASDAQ: CSUN) in the near-term as the company resolves issues regarding its access to polysilicon. The firm initiated shares with a Hold rating and $8 target.
OTHER INITIATIONS:
Goldman reinstated LSI Corporation (NYSE: LSI) with a Neutral rating and $8 target.
The Estee Lauder Companies Inc. (NYSE: EL) made the Wall Street Journal (subscription required) on Tuesday as the company that had a rise in stock price but the largest outflow of money. Perhaps now that the company's IRS problems are behind it and all sectors are showing profits, insiders want to take their share of the profits. The news from the company's 4Q and FY 2007 report is very positive. All product categories in all regions increased sales, though the increases in the U.S. were the smallest. FY sales topped out at over $7 billion, FY net earnings from continuing operations rose $124 million to $448.7 million, and FY diluted EPS increased 45% to $2.16. Numbers for just 4Q 2007 were as good. EPS of $0.45 was double that of 4Q 2006 when the company was embroiled in tax problems.
Whether organized by geographic region or product category, sales and earnings are headed in the right direction. Estee Lauder is increasing its sales channels to include a larger internet presence, more products in European pharmacies, as well as moving into direct-response television advertising. This sales reorganization comes at the cost of $30 million for discontinuing slow selling and lower profit margin items, as well as reconfiguring an international distribution network. The strategy seems to be working as makeup, fragrance, and hair care sales are up 11% in Asia, 10% in Europe and the Middle East, and 3% in the U.S.
Operating cash flow declined significantly, due primarily to stock repurchases. CEO William Lauder forecasts that 1Q 2008 sales will grow 5-7%, and FY 2008 sales growth will be 7%-9%. Diluted EPS will be $2.28-2.40 with hair care products being the biggest seller. The stock currently trades right around $40.00.
e-card pwn -- I don't even open e-cards anymore since the spammers adopted them as a way of invading my PC, but someecards.com has caused me to change my mind. Instead of the usual meaningless phrases like 'Thinking of you', someecards carry relevant messages, such as
Courtesy hello -- I really enjoyed awkwardly waving at you
Graduation -- Congratulations on getting through the easiest part of your life
Business – Just getting on your radar because I may need something from you soon
Robot spy blimp – According to Lewis Page of The Register, the U.S. Army's $11 million order with Telford Aviation could be for the company's 30,000 cubic foot unmanned blimp, the Skybus 30K. I presume the spy blimp will be used to monitor football games and other sporting events for terrorists. You suppose the Army will offer naming rights to Goodyear (NYSE: GT)? Spiderpig hoax – Those millions of you that have seen Fox's (News Corp, NYSE: NWS) The Simpsons Movie will remember Homer's pet, Spiderpig. Today we learn from Offbeat Enough that Oli Young, who had promised to name his second child Spiderpig if 100,000 people joined his Facebook group, has reneged on this promise. Apparently, his wife is not even pregnant, and I'm pretty sure she wasn't consulted beforehand. Spiderpig is about the only name that doesn't appear in any of the baby name books I've seen.
Fishy Spas --Thanks to Boingboing.net for a story about an ancient middle-Eastern skin treatment that has become popular in China. There, those with skin ailments are immersing themselves in pools filled with Doctor Fish, a minnow-sized fish that feeds on the affected and dead skin, in essence nibbling the patient to health. Those with really serious cases might toss in a couple of piranhas to speed the process. How long before this becomes an American fad? Are you listening, Estee Lauder (NYSE: EL)? Johnson & Johnson (NYSE: JNJ)?
MOST NOTEWORTHY: American Capital (ACAS), Doral Financial (DRL), E-Trade Financial (ETFC) and Family Dollar (FDO) were today's noteworthy downgrade:
Jefferies downgraded shares of American Capital (NASDAQ: ACAS) to Hold from Buy citing the slowing M&A market and risk characteristics of the company.
Soleil downgraded Doral Financial (NYSE: DRL) to Sell from Hold, on the belief that the recent reverse stock split will increase short-selling activity and discourage speculative buying.
E-Trade Financial (NASDAQ: ETFC) was cut to Neutral from Buy at UBS, citing deteriorating trends in the credit/mortgage markets, lack of near-term catalysts; the firm does not see an M&A deal occurring near-term.
Goldman downgraded Family Dollar (NYSE: FDO) to Neutral from Buy, citing weakness in the low-end consumer and increased pressure from Wal-Mart (WMT)...
OTHER DOWNGRADES:
Wachovia downgraded Tween Brands (NYSE: TWB) to Market Perform from Outperform.
Estee Lauder (NYSE: EL) was downgraded to Neutral from Outperform at Credit Suisse.
Deutsche Bank cut Pearson (NYSE: PSO) to Hold from Buy.
Revlon Inc (NYSE: REV) is going to be releasing its first quarter numbers tomorrow morning. Analysts are expecting to see the cosmetic maker post a small loss for the quarter of -$0.07 (edited, originally posted stating est. was -0.01) per share when the numbers are released.
Last week we saw two of Revlon's competitors put up good earnings, so hopefully this is a good indicator that this could be the quarter for Revlon to break out of its recent tough times. On Thursday both Elizabeth Arden (NASDAQ: RDEN) and Lauder (Estee) Co (NYSE: EL) were able to see a nice move up in the market following their recent quarterly numbers.
If Revlon can follow the lead of ARDN and EL, the stock may finally be able to see some upside. REV is currently trading at $1.30 and has been stuck right around this level for the last nine months. The last three quarters Revlon has posted losses and the company could definitely use a dose of positive news to help it break out from its current range.
Last month Revlon added a couple of high-profile celebrities to its list of brand representatives. On April 20th the company announced that it had signed actress Beau Garrett, and then on the 23rd announced that it had added one of the hottest names in Hollywood, Jessica Alba, to the Revlon family. Garrett and Alba join a roster of elite celebrities that includes names such as Halle Berry, Sheryl Crow, and Eva Mendes.
The company will announce its earnings before the market opens tomorrow and will host a conference call starting at 9:30 AM EDT to discuss its quarterly results. We will be liveblogging tomorrow's conference call in its entirety, so join us tomorrow morning for complete coverage of the call.
Michael Fowlkes has worked as a stock trader for seven years and spent the last two years working as an analyst for the online investment advisory service Investor's Observer.
MOST NOTEWORTHY: Schering-Plough Corp (SGP), Jones Soda Co (JSDA), RealNetworks, Inc (RNWK), Westwood One, Inc (WON), and Darden Restaurants, Inc (DRI) were today's noteworthy upgrades:
Prudential raised shares of Schering-Plough Corp (NYSE: SGP) to Overweight from Neutral to reflect management's activity on the deal front and recent data on the drug TRA.
ThinkEquity upgraded shares of Jones Soda Co (NASDAQ: JSDA) to Accumulate from Source of Funds after disappointing Q1 results. The firm believes results will get better in FY07 as the canned soda roll-out continues and high fructose corn syrup inventory is depleted.
RealNetworks Inc (NASDAQ: RNWK) was upgraded to Market Perform from Underperform at JP Morgan, citing valuation.
Bear Stearns upgraded shares of Westwood One Inc (NYSE: WON) following reports the company hired UBS AG (UBS) to help find potential buyers.
KeyBanc Capital markets raised Darden Restaurants (NYSE: DRI) to Buy from Hold based on accelerating same-store sales at Olive Garden.
OTHER UPGRADES:
Bear Stearns raised Plantronics, Inc (NYSE: PLT) to Peer Perform from Underperform.
Chindia is a new buzzword among advisor, used to highlight the cross-over of both China and India as future growth market. Keith Fitz-Gerald -- who has spent many years working in Asia -- is an expert on the region and was one of the few to forewarn of the recent volatility in Asian markets.
Meanwhile, in line with his long-term bullishness on China and India (and his short-term concern for these markets), the editor of The Skeptical Investor suggests that investors focus their investments in the region to income-producing ideas.
His top current income idea is Diana Shipping (NYSE: DSX), a dry bulk shipper with a yield of 9.6% .He explains, "Diana leverages the emerging market theme surrounding Chindia. It operates 11 ships and charters them to commodity producers."
He notes that Diana is specifically targeting Chinese and Indian demand for coal, iron ore, cement, grain, fertilizer, sugar and other commodities.
The firm , he notes, has a a "ship-shape balance sheet, is practically debt-free and has a management team comprised of some pretty salty captains."
We are investing in optimistic times. News -- good or bad -- seems to magically morph into an opportunity to move markets higher. In the past week, even more than usual, weak economic news was accompanied by commentary along the lines of, "it could have been worse," and other euphoric sentiments.
A cosmetics empire might seem the ultimate in puffery, the very materialization of vanity. But the venerable empire built by Estee Lauder and her powerhouse son, Leonard, has turned makeup into a very real financial juggernaut. And Aerin Lauder Zinterhofer, Leonard's niece, is not only the public face of the company but also the considerable creative brain of its marketing soul.
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e-card pwn -- I don't even open e-cards anymore since the spammers adopted them as a way of invading my PC, but 
Revlon Inc
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