CSX's ER

Today the market has a good run and it seems mainly due to the good earning reports from Intel, JP Morgan and CSX. These companies provided investors more hope of a good Q3 earnings in general. We all know Intel and JP Morgan. Who is CSX?

“CSX Corporation (CSX) is a transportation company. The Company’s rail and intermodal businesses provide rail-based transportation services including traditional rail service and the transport of intermodal containers and trailers. CSX’s principal operating company, CSX Transportation, Inc. (CSXT), provides an important link to the transportation supply chain through its approximately 21,000 route mile rail network, which serves major population centers in 23 states east of the Mississippi River, the District of Columbia, and the Canadian provinces of Ontario and Quebec. It serves over 70 ocean, river and lake ports along the Atlantic and Gulf Coasts, the Mississippi River, the Great Lakes and the St. Lawrence Seaway. In addition to CSXT, the rail segment includes non-railroad subsidiaries Total Distribution Services, Inc. (TDSI), Transflo Terminal Services, Inc. (Transflo), CSX Technology, Inc. (CSX Technology) and other subsidiaries.” From Google Finance

CSX is important because it ships all kinds of goods all over the place! If it has a good earning, revenue and outlook it’s just natural for investors to be optimistic about the numbers other firms will report. Here is one summary about CSX’s yesterday’s ER report: CSX (CSX) reported robust earnings late last evening, with earnings of $1.08 per share against a $1.04 analyst consensus, with sales rising more than $500 million to $2.7 billion for the quarter. CSX observed a rise in freight volumes in nearly all markets for the third quarter. CEO Michael Ward remarked that “as the economy continued to improve, CSX saw volume growth in nearly all markets”.

http://www.minyanville.com/businessmarkets/articles/burberry-earnings-intel-jp-morgan-vix/10/13/2010/id/30544

Alright, 4% pop on CSX stock price is a pretty decent move here. Was it justifiable? Again, I’ll go through the same drill as I did in Intel’s ER. First, what were the opinions of analysts?

Obviously, analysts were not very optimistic about the firm when only 30% analysts issued strong buy or similar ratings. And their estimate of future growth for the company is less than those of industry and sector. Keep in mind these opinions are for at least mid-term or long term view.

Then how has the company manage the EPS expectations? Pretty good---always beat for past few years at least as shown in next graph.

How the stock price vary after its ER? Next graph illustrate a short term (2, 5, 30 day) return if the stock were bought at the close of ER day. Not that you can use this figure to make money right away but it serves as a good reference. One easy thing to pick up is the ER day return: most of them are positive. when I look closer I found the mean is 3% with sigma of 5%. It seems to has better chance betting upside on ERs (a more obvious graph is shown also). 

Now let’s move on to my favorite analysis: ratio analysis. The following two graphs both tell me one story: profitability is good, which I believe is due to cost management. For example, SG&A stays at a low level of 27% while gross margin is the highest for the past 6 quarters. However, if you compare this quarter to previous quarter rather than the quarter a year ago you will find that almost everything stay the same. What that tell me? Well, yes, the economy is recovering but it also tells me that the slowed growth is confirmed. It will be interesting to watch the GDP number for Q3 and see if it can confirm my guess here. Last quarter GDP growth rate is 1.7% and my guess for Q3 would be less than that by just looking at CSX’s number very naively. We’ll see.

Just a side note: you might be wondering what the heck are the Z score and M score. Z score helps to identify bankruptcy risk and M score detects the possibility of account fraud. For CSX Z score is low but I assume it’s the nature of business as CSX has to have large fix asset and need a lot of debt to support it. It will be good to compare with peers to see if it’s the case. When I get a chance I’ll test that and update my results here.

In summary, CSX did have a good quarter but I believe what really move the stock and even the market has something to do with the company boosts spending for future (good confidence to have) and announced additional $646 million share buyback. Well I’ll watch CSX from now on since it’s kind of bellwether of the economy.

Intel's ER

Investors pay great attention to Intel (INTC)'s earnings to understand PC/tech industry and further try to feel the pulse of economy. Today its Q3 results beat in both EPS and revenue. I just picked one short summary online: " The chip giant's Q3 EPS jumped 58% to 52 cents, 2 cents over views, helped by corporate demand and emerging markets growth. Revenue rose 18% to $11.1 bil, above views for $10.99 bil. Revenue from the PC client group rose 14%. Gross margin leapt to 65.9% from 57.6%. Intel (INTC) sees Q4 revenue of $11 bil-$11.8 bil, the midpoint just above views for $11.3 bil. Shares rose."  the quoted info is from : http://www.investors.com/NewsAndAnalysis/Article/550210/201010121909/Intel-Beats-In-Q3-Guides-Q4-Up.aspx

Notice that most people compare the earning results across the same quarters, eg. Q3 here. However, I believe you have to be careful about it since Intel's 2009 financial performance is not at its normal range due to the financial crisis.  So the forementioned 58% increase on EPS might not mean much.

Now I'll post some of my analysis on Intel's ER data,  relevant market reaction, and financial ratio analysis.  First, let's take a look at what analysts have viewed Intel.

The data are extracted from Yahoo Finance and you should be able to tell that I'm a big visual person:). The data in Yahoo Finance are most in table format and scattered so I set up a dashboard in Excel to pull the data in and demonstrate most of the text/tables in graphs. Hope you find them easier to read as well.There are six components for this dashboard: Earning history (estimate and actual EPS), Analyst action (downgraded, upgraded, etc), EPS for current quarter (how analyst's estimate changes), analyst's recommendations (normally I only view Strong buy as a buy suggestion), Sales (actual and estimate for next two quarters), and future growth estimation for the firm, industry, sector, and market (S&P500). 

The takeaway for Intel's analyst corner information is that analysts are not very enthusiastic about the stock despite the earnings expectations are always met (mostly from better communication and expectation management of the IR dept, I think). And if you take a look at the future growth estimation part you won't like this industry much if you are trying to find a growth stock as the estimated growth rate is trending down.

Second, let's look at the past ER and market reaction for Intel. Again, Intel has beaten market expectation all the time as they  provide and revise guidance as ER gets closer when they see material difference.The Pre-ER run checks the return before the ER day, such as for past 2 days, 5 days, and 30 days. Similarly, Post-ER run checks the post ER market returns for next 2 days, 5 days, and 30 days. I also put the market price for the stock during the past three month together with the ER-market reaction session to just get a sense of price movement. Another good complementary graph would be S&P500's same period price curve.

Finally let's get to the key parts: how did Intel perform during the last quarter? The financial ratio analyses are listed below. 

Good thing about Intel here is really the profitability and steady growth of the sales despite the well recognized  slow-down growth of PCs. The gross margin is still high which is what investors like to see. Well, let's take a look at other ratios. 

what appears little bit concerning are some of the efficiency ratios and the working capital invested days. 

AR turnover (account receivable) and Inventory turnover are showing signs of slowing down which caused longer period for capital to be stuck with the operations. But is it bad? Not really, it's obviously still in the manageable range.So no need to worry but it's worthwhile keeping an eye on. 

In summary, Intel beats without surprise and keeps good operating results and maintain good financial health. However, even though they raise their guidance for next quarter I won't expect a big rally since investors just got what they expected and the stock is viewed as a mature and dividend stock. (After hour it traded over 2% but fell back to less than 1%)

Earning Release schedule for week 10/11~10/15/2010

I collected the Yahoo's earning release information using VBA in Excel and I made a pivot table to present them in the following graph. This is why I love Excel: collect what I need and present them with my way.:) To make the information more usable I also collected the industry, market cap, PE ratio and PEG ratio (growth adjusted PE ratio, the lower the better in general). Only the companies with greater or equal to a billion market cap is listed here.

Google will be worthwhile to take a look since investors were worrying about its expense increase and dumped the stock for a while. We'll see if the trend continues. JP Morgan is another interesting one as investors are still keen on the impact of the Finreg. Another ones I might take a look are Intel, AMD, Linear technology and Mattel. Semi sector has been downgraded pretty badly and Intel's guidance was also dismal. The three semi companies might give some confirmation on that. Mattel might shed some light on consumer spending. 

New ER season starts

Alcoa (AA) kicked off the new ER season by beating both EPS and revenue. After hours AA traded as high as 4%. It is sending a good signal on economy recovery in the sense of aluminum consumption getting higher. However, keep an close eye on tomorrow's jobs report.

EQIX

EQIX belongs to data center and cloud computing concept and was downgraded badly yesterday after the company released a new negative guidance for Q3. The stock plummeted over 30%. Looks like the investors/traders start to cool off on the cloud computing. It does seem to be an overreaction to me so I did a little research on its financial performance and past earning announcement market reactions. BTW, next ER for EQIX is on 10/26/2010.

Analyst certainly don't think the earnings will be too great comparing with previous year. Note here the analyst recommendation is from Yahoo finance's data which may not be immediately updated. What's interesting here is the earning reversal expectation for Q3. If confirmed during the earning release (ER), I assume the stock can have a good run since yesterday's lowered guidance had already destroyed most of good expectations.

If you look at the market reaction on/after ER, still the positive reactions are more often than negative ones.

 Despite the lowered guidance on revenue, sales are still increasing and I believe it's what matters for the company. I did look at the operating cash flow and it has been positive for past quarters which is somewhat assuring. Cloud computing may sounds too remote for most companies but it is a inevitable trend in my opinion as people get more and more attached with their mobile devices. Hardcore processing capability is no need to be on your tablet all you need is to send in your query and read the results:)

As far as where the stock will go I put my bet on the upside from now. (today the rebounce is around 6% at the moment)

Economic Events and Market Reactions

These tables are based on Yahoo weekly economic event calendar. Put/call ratios, S&P500 volatility chang%, and 10yr treasure bond yield change % and S&P500 are recorded as market reaction. There are of course other market indicators to watch but for now these are the ones I use to understand the market and how they digest the economic releases.

August, 2010

September, 2010

AK Steel Holding Corporation --- AKS

AK Steel Holding Corporation (AK Holding) is a producer of flat-rolled carbon, stainless and electrical steels, and tubular products through its wholly owned subsidiary, AK Steel Corporation (AK Steel). The 
Company’s operations consist of seven steelmaking and finishing plants located in Indiana, Kentucky, Ohio and Pennsylvania that produce flat-rolled carbon steels, including coated, cold-rolled and hot-rolled 
products, and specialty stainless and electrical steels that are sold in hot band, and sheet and strip form.


It would be interesting to check this stock's performance as we follow the slow recovery of economy. My analysis is based on financial ratio analysis model. 


AKS-----------Annual Financial Ratios


At first, the past four years' ratios are calculated as follows: 

Obviously, 2009 is the worst year for the company: lowered sales with decreased margins. And most of the efficiency ratios are low too. Good thing is the working capital (days) is still roughly in line with
previous years. In addition, the liquidity ratios such as current ratio, quick ratio are still in a healthy state.

When I look at the cash flows for the past four years, I found AKS has positive operating cash flow (OCF) although with a decreasing trend. The total CF are negative however it seems that the investing cash low is the key reason causing negative total cash flow. Therefore, the results are understandable onsidering the economic conditions during the past few years.

Well, so far no STOP light. The next questions I ask myself are how the company compares with peers and what's the performance of recent quarters.


AKS------------Comparisons with some peers

I selected a few US firms with an Latin ADR. TX for Latin is definitely doing better than all the US firms. Not surprising,right? US probably has the worse housing, auto, and maybe everything in 2009. And it seems the economic conditions will not get better soon.

There are a lot of information on the ratio comparison table. I'll just summarize a few takeaways:
1, TX's performance is the best among the group (i probably should also get a few chinese company to compare)
2, AKS is pretty good at margins compared to the rest of the group.And also pretty good at asset efficiencies.
3, AKS's leverage is highest one while the liquidity are fine. why? As I dig a little bit further I realized the pension liability is a very big chunk among the liabilities. Good or bad? In my opinion, it's not a big deal in short term. Not sure about long term.

Well, if you think US will still be the big place for projects (housing, auto,etc) needing steel products. AKS is the better choice among the group from above analysis. BTW, AKS' international sales is around less than 20%. And the litigation from Chinese steel makers will force US steel makers increase price which in turn reduces the competitiveness leading to sales slide. AKS just announced price increase yesterday in
the effort to compensate the increase of its raw materials' price. I expect the firm will see increased sales with further reduced margin in next quarter report.


AKS--------------Quarterly results

Gross margin is improving from  2009. The same goes with efficiency. Working capital efficiency is also improving. Other ratios also indicate the stability for AKS' performance.

AKS' future quarters will depend on the raw materials' price and demand. If 3rd quarter GDP still show growth and auto retail sales can pick up again, it might have a good run.

Again, pay attention to pension and stock options. It could be a stopper in the future.