What To Buy? What Doesn’t Need Credit?
- Posted by ToddSullivan
- on January 23rd, 2009
As I look at the universe of stock I watch, one thing keeps coming to mind, who’s business does not rely on consumer or corporate credit?
Today GE (GE) reported:
Fourth-quarter 2008 earnings from continuing operations of $3.9 billion, or $.37 per share before preferred dividend, or $.36 per share attributable to common shareowners. Results included $1.5 billion of after-tax restructuring and other charges, including increased reserves in current environment, which are above the Company’s original plan and the restructuring will lower costs for 2009 and beyond.
Today GE (GE) reported:
For the year, revenue was $183 billion, up 6%, and earnings were $18.1 billion, down 19%. This was the third highest earnings year in GE history.
“In a very tough environment, we delivered fourth quarter business results in line with expectations we provided in December,” Chairman and CEO Jeff Immelt said. “We grew Infrastructure and Media by 3% in the quarter and 10% for the year. Energy Infrastructure led the way in the quarter with 11% segment profit growth driven by continued global demand. Technology Infrastructure grew earnings by 1%, led by 21% growth in Aviation. NBC Universal segment profits declined 6% in fourth quarter as strong cable earnings were offset by declines in the local stations.
“Capital Finance earned $1 billion in the quarter and $8.6 billion for the year,” Immelt said. “We had several negative impacts to earnings in the quarter including increased loss reserves, negative marks and impairments. These charges, along with global benefits, generated a tax credit that more than offset our pre-tax loss. We also originated $48 billion of new assets in the quarter at solid margins.
“We run the company to have a Triple-A credit rating, and we have significantly strengthened our liquidity position,” Immelt said. “We generated $16.7 billion of industrial cash flow from operations, up 5%. We ended the year with $48 billion in total cash, after paying down our commercial paper balance to $72 billion from $88 billion at the third quarter. We used $5.5 billion of our equity offering to meet our stated GE Capital debt-to-equity leverage goal of 7:1 by the end of 2008. Through today, we have been able to fund $29 billion of our $45 billion long-term debt needs for 2009.
Decreased revenue, net income and earnings per share for the fourth quarter of 2008 compared to the year-ago quarter. The Company said it plans lower motorcycle shipments in 2009 and made public its overall strategy to deal with the current economic environment.
“We have a strong core business anchored by a uniquely powerful brand, but we are certainly not immune to the current economic conditions,” said Jim Ziemer, Chief Executive Officer, Harley-Davidson Inc. “We have a clear strategy to not only deal with the economic conditions, but also strengthen our long-term operations and financial results. We are executing that strategy with confidence and conviction.”
Fourth-Quarter and Full-Year Results
Revenue for the quarter was $1.29 billion compared to $1.39 billion in the year-ago quarter, a 6.8 percent decrease. Net income for the quarter was $77.8 million compared to $186.1 million in the fourth quarter 2007, a decrease of 58.2 percent. Fourth quarter diluted earnings per share were $0.34, a 56.4 percent decrease compared to last year’s $0.78.
Revenue for the full year 2008 was $5.59 billion compared to $5.73 billion in 2007, a 2.3 percent decline. Full-year net income was $654.7 million, compared to $933.8 million in 2007. Diluted earnings per share were $2.79, a decrease of 25.4 percent compared to $3.74 in 2007. The full-year results are below the previously provided company guidance.
For the full year, wholesale shipments of Harley-Davidson® motorcycles were 303,479 units, an 8.2 percent decrease compared to 330,619 units in 2007.
2009 Shipment Plan, Gross Margins
In the first quarter of 2009, the Company plans to ship between 74,000 and 78,000 new Harley-Davidson motorcycles, a 3.0 percent to 8.5 percent increase versus the first quarter of 2008. However, for the full year 2009, the Company plans to ship between 264,000 and 273,000 new Harley-Davidson motorcycles, a 10 percent to 13 percent reduction from 2008.
“We reduced our production levels prudently in 2008, helping our dealers achieve lower inventory levels,” said Ziemer, “and we’re going to show similar discipline in 2009. That’s not only critical for the health of our business, but for our dealers’ businesses, as well.”
For the full year 2009, the Company expects gross margins to be between 30.5 percent and 31.5 percent, which compares to 34.5 percent for the full year 2008. The decrease is primarily due to an expected unfavorable shipment mix versus 2008, the allocation of fixed costs over fewer units, and expected unfavorable foreign currency exchange rates versus 2008. Given the volatility of the current economic environment, the Company also indicated it would not provide EPS guidance for 2009.
Strategy for the Current Economic Environment
The Company is executing a three-part strategy that includes a number of measures to deal with the impact of the recession and worldwide slowdown in consumer demand, with the intent of strengthening its operations and financial results going forward.
“Our strategy is focused on three critical areas: to invest in the Harley-Davidson brand, get our cost-structure right, and obtain funding for HDFS to help our dealers sell motorcycles and our retail customers to buy them,” said Ziemer.
They both run the gamut of customers, GE more corporate and HOG pure consumer. Both are great companies and both are struggling while still profitable. Long term both will be just fine. BUT, this year, I think significant downside is possible. Now, that only means a fantastic buying opportunity later, not the end of the world.
One of the best traders I follow sees GE hitting $7 or $8 in Q2. Here is UpsideTraders site. Should GE be forced to cut the dividend or lose its AAA rating, this is all but assured (that and Immelt is out of a job). As much as GE says it will not, they also said full year earnings were “in the bag” when they were not. Until they fix the credibility problem, anyone saying anything from Fairfield will be look at very skeptically.
That being said, even if they cut is 50% to $.62 annual, at $8 a share that is a nice 7% yield, still a screaming buy. I just cannot commit new money there now until I get some evidence to the contrary.
HOG is the consumer, simple. The consumer is not going to be bailed out this year. So, because of that, we should not expect HOG to be. BUT, should it continue to drift into single digits, not buying it for an IRA to tuck away would be very difficult. They still are the best at making a one of a kind item and have brand loyalty like to other (until I see the Apple (AAPL) logo tattooed on folks, HOG has them beat). That being said, once credit issues are resolved, one can expect good results to follow immediately.
So then, what? Stuff in the ground, oil (USO), (DBO), (DXO), gold (GLD), (UGL) and silver (SLV). We need all three, they do not need credit for their value (one could argue tighter credit is a positive here, miners cutting back due to lack of credit decreases supply, bullish for prices), and are necessary.
Yes, as the economic recession has slowed demand for all, BUT, supply is also being taken off the market almost as fast AND demand will resume well before the current production being taken off the market can catch up. That means a spike in prices.
For all three there is also the specter of corporate and government debt and possible worldwide defaults. Mish says that there is a crisis looming and that currencies will take the fall. Gregor McDonald says that when that happens, money will flow to currencies without borders or governments, gold, silver and (maybe) oil.
Either way, I think one has to think that something dramatic is coming….one way or another..
Disclosure (“none” means no position):Long GE, DXO, none
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Todd's investing strategy is essentially long with the rare short. He seeks to buy undervalued issues with an upcoming catalyst that will help them realized.... More »
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