Excellent Earnings, Tough Audience

 | Apr 16, 2014 | 4:29 PM EDT
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Don't blame the companies! Sometimes I get so doggone frustrated that I have to let some of the aggression out, and today, a day when the averages scorched higher, I am going to blow off some steam.

Let's get right to my beef: I am sick and tired of hearing that earnings for companies are tepid and that sales aren't so hot. This earnings season got started with Alcoa (AA), which told you that things are improving for trucks, cars, aerospace and non-residential housing.

Think back to when it reported. What was the commentary? I heard people say, "The revenues were weak." Actually, that's a joke, revenue was very strong. The company just shut down a lot of excess capacity that was actually losing money. If you wanted Alcoa to garner more sales with unprofitable foundries, pardon me, but you are an idiot, and you have never run a business. That's why the stock hasn't skipped a beat and is now up 70% from its low of nine months ago. It does bug me that no one even seems to recognize that this was the best Alcoa quarter in years, on the top and bottom lines.

Yes, we did get a particularly horrible quarter from JPMorgan (JPM). Actually, mind-bogglingly terrible. I can't help but think that business got away from the company because of the regulatory pressure. There's really no other way to say it, and I am deeply disappointed in the company.

But Wells Fargo (WFC) reported what can only be described as a fantastic quarter with amazing growth, superb and eye-opening. The largest bank in the country and the best run, it had double-digit everything, and that says, frankly, that domestically we are doing so well in this country. Remember that Wells Fargo is truly America's bank, given that it doesn't even pretend to be an investment and trading bank. It's a lender, and lending is going gangbusters.

Citigroup (C) is taking a day off from rallying, but can we stipulate that this is one of those breakout quarters that shows you that if Citi were to get its regulatory house in order, you would see its stock back in the $50s. It has a ton of capital, it has slimmed down nicely, and all of the black holes are disappearing. I know it's not there yet, but this quarter was sharply better than expected on both the bottom and top lines.

Yesterday, we saw two of the most picture-perfect quarters that I have come across from two big Dow Jones industrials: Coca-Coca (KO) and Johnson & Johnson (JNJ). The former was supposed to do poorly, because everyone knows that carbonated sodas have gone out of fashion in this country, both diet and regular. But Coca-Cola management knows that the emerging markets still are keen on soda, and it put its considerable marketing muscle behind those markets. It worked. Made me feel that the pipsqueak activist who has been harassing the company for paying its execs too much owes management an apology. That won't happen. But it's nice to think that when the complainer gets older, he will look back and be happy that I was the only one who criticized him, even as he knows he was wrong.

As with Coca-Cola, people were betting that Johnson & Johnson would screw it up. On the previous quarter's conference call, the company intimated that things might be slowing. But when we saw the quarter yesterday morning, it was pretty breathtaking. And it wasn't all bottom line. The company gave you 10% pharmaceutical growth, 12% if you back out the currency, and that's a terrific performance. No wonder the stock took off, and I don't think it's done either. Yes, that's how strong the business is. I would use this profit-taking wave to buy the stock.

Then last night we got two quarters that were shockingly good, again bottom and top line -- Intel (INTC) and Yahoo! (YHOO). First, Intel, after disappointing over and over again, spending way too much with so little to show for it, actually delivered a quarter that showed the leverage of the investments. With just a little bit of revenue gain, you saw a very positive return compared with expectations.

Sometimes I think people just don't listen to the conference calls, because if they did, they would have heard that Intel is now the low-cost producer and is giving you chips that use much less battery power and chips that are ideal for big data storage. What's not to like? And the gross margins were guided higher, because the company no longer needs to spend as much, as the next-gen build-out is complete. Why didn't the stock jump? I think that's in part because people simply don't believe, as with Alcoa, that it was all that good or sustainable. I think it's the opposite, and the stock, with a 3.3% yield, is now in the classic growth camp.

Yahoo! is bugging me, because people think the only thing going right is Alibaba. I have to admit, this minority stake that Yahoo! holds in Alibaba is probably going to be worth the whole of the company, maybe more. I say maybe more because I believe that people are valuing Yahoo! by valuing the company away from Alibaba as worth less than zero. I am not kidding, especially if Alibaba comes public with a valuation of $250 billion, certainly a possibility, because with 66% revenue growth, an unanticipated acceleration in revenue from the previous quarter, it's the fastest-growing large-capitalization company on earth.

That 24% stake in a $250 billion company is worth a heck of a lot more than the $36 billion market cap of Yahoo!, even after taxes, and that is why I say that people are valuing the company as a dead-weight negative. But that's ridiculous, as this was a quarter that showed stabilization and even growth across many metrics, and I think it was obvious from this quarter that Marissa Mayer has given you a unique opportunity here. If Yahoo! monetizes its stake in Alibaba, it can shrink its float dramatically so that even a little bit of revenue growth will cause a gigantic amount of earnings per share to flow to the bottom line. I believe the stock is headed to the mid-$40s.

Now I know that today seems problematic, in that both Bank of America and CSX (CSX) are reacting poorly to earnings. But I believe those reactions are short-sighted. Bank of America had a very positive acceleration in lending, one that would be much bigger for the bottom line if stubbornly low interest rates would just go higher. On the CSX call, we heard that 83% of its markets have favorable conditions and that the other markets are stable, including the all-important coal market. Pricing is weaker, and that's a true negative, but far be it from me to say that a company with heavy coal traffic shouldn't do better next quarter, given that coal was, in the words heard on the call, "a lot stronger" than the company anticipated. The CFO pointed out that he feels good about the top line, and added, "I would think that based on what you've seen here over the last few weeks where volumes are up double digits" that the next quarter is going to be better.

You can say that the sample is too small. You could conclude that we haven't even heard from whole sectors of the economy. But can we also stipulate that by this time last quarter, we were crying in our beer because both revenue and earnings were less than we anticipated? If the only stinker was JPMorgan, and I reiterate that that was the only one that truly delivered subpar top and bottom lines, then perhaps we need to recognize and even celebrate a positive change when we see one. 



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