Down goes the Dow

While not knowing so much about the markets as some of you, I certainly know about business.

Although revenues may be a good indicator of market/share price performance, they are not all that for profitability.

The use of non-GAAP is disturbing, and is a scam, as Igy points out--but hey, as long as it is disclosed, then it's buyer beware. We are all adults.

Expenses have been all over the place, depending on industry sector. Look at fuel-heavy industries like airlines, their fuel costs are WAY down...but look at other costs that are universal, like health care, and you will see they are WAY up. Borrowing costs are still very low, so business structuring matters.

(As an aside, can somebody here compare 2015 airline performance to 2015 energy performance?)

Businesses have been not only doing scams like non-GAAP and buybacks, they have also been getting leaner, by trimming benefits, by sending employees to health care exchanges, by eliminating positions, and by switching to contractors rather than employees. Unfortunately they are also nickel-and-diming, and are being penny-wise and pound-foolish by not spending on things like infrastructure, R&D, and business capital (especially human capital).

So it's difficult to see where the truth lies, regarding profitability. The fact that revenues are down means nothing substantive in and of itself--for instance, it could be the result of a business shedding a less profitable, or a losing, division, line, or product.

Without getting into the internal operations and operational characteristics of any particular business, I think it is worthwhile to pay attention to obvious devices like non-GAAP and buybacks, as well as things like fuel requirements, basic product/service, and staffing requirements.

If you're looking at individual stocks, that is. BTW it is because I know a lot about business that I do not look at individual stocks!

Maserati,

agip pointed out I was picking out stocks that were representative of MY NARRATIVE. However, MCD and NOW are being cheered by Wall Street today and it is WALL STREET'S NARRATIVE. I wasn't picking on companies that have been punished by the market. I am not sure what information is available to average reader of this post, but I can pull up the 8-K filing for MCD and NOW that is submitted the US Security and Exchange Commission. In both cases a reading makes it clear that the Wall Street narrative is fantasy.

Igy

Aren't you part of Wall Street?

Maserati,

I am not a forensic accountant, but it is clear MCD revenue decreased by $372 million Q3 2015 quarter over Q3 2014 quarter. Weighted average share count decreased from 983.8 Q3 2014 to 934.8 Q3 2015. The effective tax rate was 30.3% in Q3 2015 versus 44.4% in Q3 2014. So my analysis of MCD earnings beat can largely be explained by lower share count and a more beneficial tax rate. There was no significant improvement in business operations. Yet Wall Street cheers, and the Muppets fall in line.

Igy

Sally V,

As you know, I was using Wall Street as a descriptive of a consensus view. I am one that challenges that view. I am far from alone.

Igy

Igy, yes, tax treatment is the one big thing I didn't mention.

But it doesn't matter much. The tax environment is just another environment in which business functions--tax, regulatory, competitive, commodity, financial, national, industry, etc. are all environments, all exerting forces, and offering opportunities, to business, which brings me to my point:

You cannot conclude on this scant evidence that "There was no significant improvement in business operations." Absolutely not.

The response of the company to possibly worsening environmental conditions may have in fact been excellent, and positive. I don't know, and I don't care to hazard a guess, because I don't know enough about their business operations. Reports are supposed to discuss exactly this sort of thing, to give investors an idea of what actually was going on.

It could easily be that MCD structured its operations to achieve that lower tax rate. That's good business, and a certain improvement in business operations, just the same as it would be for a utility to transition to a cheaper fuel.

I don't want to be a dick, but using your own term, your reasoning is every bit as Muppet as that of those whose interpretation you criticize.

Having said that, maybe you know a lot more about MCD than you're letting on! Well?

Maserati,

Fair enough on the surface. McDonald's Q3 2014 as compared to Q3 2015 for company owned restaurants down $313 million and revenues from franchised restaurants down $58 million. I find it hard why one would conclude otherwise. I use Muppet for anyone willing to accept the belief that there is never a time not to buy stocks.

Igy

Igy really. Come on.

Wall street looks forward. They don't look back. They try to predict what WILL happen, not HAS happened.

MCD US sales were positive. While they were down 3% last year.

Global same store sales were up 4%! that's a huge number.

Clearly investors believe that this could be the start of a turnaround after a few years of decline. So they buy the stock now.

agip,

OK, I can make widgets at $2.00 a piece and sell them at $1.75 to increase my sales. Truth is I am still losing money. Revenues were down, sorry to fog your rose colored glasses.

Igy

Ghost of Igloi wrote:

agip,

OK, I can make widgets at $2.00 a piece and sell them at $1.75 to increase my sales. Truth is I am still losing money. Revenues were down, sorry to fog your rose colored glasses.

Igy

again, again again:

Wall street looks forward. Forward. You keep citing backwards facing numbers. There were indications that things are turning around.

And I suspect a strong dollar had much to do with the revenue shortfall - that isn't mcd's fault. But that's just a guess.

So some on Wall Street have one view while others have another. What was your point again?

agip,

Yes, Wall Street looks forward, just like their $128 of estimated forward S&P earnings. Reality is peak Last Twelve Month S&P earnings Q3 2014 at $106.

From MCD 8-K: "McDonald's mitigates exposures, where practical, by purchasing goods and services in local currencies, financing in local currencies and hedging certain foreign-denominated cash flows."

Igy

SPX duration~47 yrs, 10Y Tbond~9 yrs, cash equiv~ 0. Good time for passive investors to rebalance avg portfolio duration w/ spending horizon

Snippets from MarketWatch today:

McDonald's stock heads toward its biggest-ever price gain

Dr. Pepper Snapple tops estimates, raises EPS outlook for the year

3M beats profit expectations

Under Armour shares rise as company beats profit and sales estimates

Dow Chemical's stock surges after profit beat

Southwest earnings up 83% on lower fuel prices

Eli Lilly raises 2015 forecast after earnings beat

Dunkin' Brands profit, sales come in ahead of expectations

Oclaro shares jump 20% on quarterly outlook

Las Vegas Sands shares gain on better-than-expected results

Texas Instruments' stock skyrockets following earnings beat

EBay's stock soars after profit beat expectations, outlook raised

Equifax shares rise after earnings beat

Kimberly-Clark tops profit estimates

Biogen beats third-quarter expectations

General Motors stock surges after big profit and revenue beat

Tupperware profit and sales beat estimates

To be sure, there was bad news too. But since the Chicken Littles here seem to ignore the good news, I decided to be selective also.

Oh, but what were the revenue numbers?

I have to say this is an unimpressive rally - small caps are actually flat on the day even as big caps are up more than a percent.

I think the odds are that this is not a lift-off sort of rally, unless tomorrow smaller stocks gain momentum

I will do whatever it takes to drive the Euro down and dollar up.

agip wrote:

I have to say this is an unimpressive rally - small caps are actually flat on the day even as big caps are up more than a percent.

I think the odds are that this is not a lift-off sort of rally, unless tomorrow smaller stocks gain momentum

Given that the S&P is up 9% in the last 18 trading sessions, and has retraced the entire decline, I would say that this is a highly unimpressive "bear market." And given what CNBC put on the web today (the Louise Yamada Dow 4000 call, which goes along with the 10 year bear market in 2012 call, the $5000 gold call and other evidence of total incompetence), I don't think I'm the only one finding much discussion here lately high humorous:

There was risk of something like a 1987 crash when the market fell 1000 DOW points in one day, and I doubled my family's short commodity positions for 4 trading days when there was risk of a shooting war in Korea, but a lot has changed since the end of August, and if you're wrong, you're wrong. And everything that has been claimed here by the bears has been proven wrong in the last week. Yes, there is revenue weakness, but large cap earnings are headed higher, not lower over the next 2-4 quarters, and rational investors see that:

coach d,

The market is accepting non-GAAP earnings of .67 instead of the GAAP earnings of .57 against expected GAAP earnings of .58. Rational investors understand the difference.

Igy