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OPINION

Tech Jihad versus Great Numbers

The opinions expressed by columnists are their own and do not necessarily represent the views of Townhall.com.
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Last year, when the stock market was on autopilot and bad news was dismissed for a variety of rationales, I wrote that there would come a time when good news would be equally dismissed, and stocks would tumble on good news. This earnings season is providing a great test of this theory, except there is a wildcard aspect to the action, particularly over the past month. There are very open and vocal attempts to crush the market, beyond that which is being done by the typical fear-mongers and book-hustlers.

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Now, the pros are pushing hard to crack the stock market, often with the flimsiest of arguments, and often against great news and developments.


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However, listening to experts pick apart the earnings from Facebook (FB) and Apple (AAPL) after the bell was the most awkward example of unvarnished bias. Especially from people that would otherwise promote themselves as agenda-less similar to the way Russian judges stick it to an American ice skater.

Apple’s Results

Great News (or not)

  • Revenue $45.6 billion
  • Earnings per Share $11.62 (consensus $10.17)
  • Gross Margin 39.3 from 37.5 year-ago
  • iPhone 43,719,000 units for $26.1 billion (50% buyers first time)
  • Capital Return Program expanded $130 billion
  • Buyback $90.0 billion from $60.0 billion
  • Dividend (quarterly) $3.29 +8%
  • Dividend (annual) $11.0 billion
  • Revenues up in all geographic regions except “rest of Asia”
  • BRIC sales reached an all-time record driven by China Mobile
  • 800 million iTunes accounts could be the launching pad for payment services

Bad News

  • iPad sales 16,340,000 units for $7.6 billion (2/3 first time buyers, higher prices hurt inventory)

The stock split was seen as a gimmick or attempt to mask problems elsewhere – those dastardly executives. For some, the iPad miss was the biggest disaster since the Hindenburg, and a sure reason to sell the stock. I will say, I would rather that Apple put its money to work buying hot companies and increasing cap-ex, but the fact is that Carl Icahn forced Tim Cook to pull the trigger. Yes, the New Pharaohs strike and win again! Still, management pointed out its 24 acquisitions over the past 18-months, and said it’s “on the prowl” for targets with great products and talent.

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Facebook (FB) faced even more scrutiny; on the surface, their earnings looked like a dream quarter. Revenue of $2.50 billion beat consensus, while earnings of $0.34 crushed the consensus estimate of $0.24, although I heard someone on TV say that they were looking for a bigger beat. I hear you, but I do not get it. So, all the analysts that follow the company were being too conservative, even though going backwards the last four quarters saw earnings 15% beat, 32% beat, 36% beat, and a year ago,- an 8% miss. Last night the company’s earnings beat the Street by 42%.

Still, the stock struggled in afterhours trading. Daily Average Users of 802 million is simply mind-boggling; plus mobile was 59% of revenue, from 23% a year ago, as ad revenue climbed 82%.

There will be a time when good news will be greeted with a collective yawn and market weakness, but that is usually when everyone agrees that the news is good. When a large swathe of professional observers come in with a chip on their shoulder, it’s hard to honestly judge yawns these days. Cheers have been muffled or suppressed, as everyone yields the floor to the smart guys finding fault, when things actually look damn good.

Nevertheless, I will stick with the numbers, the facts, and the trends, in order to keep a level head in the face of manufactured outrage and fear.

For the most part, numbers out after the bell in tech land were better than expected, with mixed results that were greeted with harsh reactions. Heck, if amazing numbers are dismissed out of hand and missed earnings results in a blindfold, a cigarette, and a word with a priest, then things are way off track.

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Lessons on Reinvention and Redemption

Tuesday after the market closed, a number of companies reported their quarterly earnings, including Gilead (GILD) and AT&T (T), and while both beat consensus estimates, their earnings result was nothing short of amazing. Sketchers (SXK) posted revenue results of $546.5 million, which was up 21% from a year earlier and well above consensus; $508.8 million and earnings of $0.61 that beat the street by $0.48-simply beyond belief. Not only did the company post its best quarter ever, they did it in only a couple years after paying out a giant settlement for false advertising.

Robert Greenberg was a former hairdresser and wig salesman who began selling shoelaces at Venice Beach, California.

In 1979, Greenberg started a company called LA Gear to reflect the hip culture of the city. With an aggressive marketing campaign aimed at large upscale department stores, the company took off. His company went public in 1986, and its shares doubled on the first day of trading.

Its marketing was an eclectic blend, which featured Belinda Carlisle and Joe Montana, but the company made a giant splash with a record contract for Michael Jackson to serve as its spokesperson. However, the decidedly un- cool hip grunge movement and greater competition replaced cool hipness.

Greenberg hit the finish line, and was out by 1991.

If you ain't cheating, you ain't trying

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Act II for Greenberg began in 1992, when he joined forces with his son, Michael, and distributor for Doc Marten to sell boots and skate shoes for a company they named “Sketchers”.

Doc Marten sued the company right out of the gate for importing knockoffs of its boots.

In 2010, the company took a page from TOMS, began selling BOBS, and gave to charity each time a pair of shoes was sold. Their version never took off, as many felt management was disingenuous.

The company continued to morph until it became a real player in the sneaker wars with a product, which worked out your legs, even as you were simply standing still. The "Shape-Ups" were a hit- who would not want to have toned legs just from standing? Well, as it turns out, the marketing for the shoe was just a little too enthusiastic. How enthusiastic you might ask?

In 2012, the company was ordered by the FTC to pay a civil fine of $40 million dollars. However, here we are the week after the company's newest spokesperson, Meb Keflezighi, won the Boston Marathon, looking at mind-boggling results. Concern was that the quarter did not include Easter, and had to deal with the polar vortex, which isn’t unlike any other retail play, and thus was expected to miss this earnings period. Management might actually be ahead of the curve this time. It was focused on minimalist runners and men's relax fit. The former for people inclined to run barefoot, but needing some protection, and the latter for the old dudes appreciated that their feet felt slimmer in the shoes.

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Some things have not changed, including an eclectic roster of endorsers.

  • Brooke Burke
  • Mark Cuban
  • Danielle Bradbery
  • Tommy Lasorda
  • Joe Montana (who worked wonders for LA Gear)

Talk about reinvention. Now management is bragging about demand around the world. If you have made miscues in your life and think all hope is gone, check out the former hairdresser and the salesman son.

Today’s Session

Save for a couple of misses (MMM and UPS), earnings out this morning have been mostly impressive. The haters are piling on like crazy as each company posts results better than expected, and that’s got equity futures in a holding pattern. Be that as it may, the best number of the morning might have come from the Census Department’s update on durable goods. The headline increase of 2.6% beat consensus, but it was the nondefense capital goods excluding aircraft that’s the most hopeful.

A sign of businesses willingness to invest in their own growth, the 2.2% increase hints at greater confidence in the economy. As many subscribers know, my biggest bul- theme is based on businesses spending more on growth through cap-ex and acquisitions.

By the way, for two years I’ve written and discussed how the street is rewarding companies that put money to work to build for the future, and the latest example is this morning’s deal with Zimmer (ZMH) to purchase Biomet.

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As for earnings, perhaps the most important is Caterpillar (CAT) which terminated 4,395 workers in America and 4,855 outside the US, and reduced its cap ex spending to deal with the long-depression in mining but still had one shining bright-spot.

Another one of my investment themes of 2014 is rebuilding in America. Construction of new homes and improving cities is going to be crucial. (This isn’t about government schemes that are really excuses for more taxes.) On that note, last quarter construction revenues in the United States helped Caterpillar offset declines and slower growth in formerly hot markets.

CAT - Construction 1Q14

Revenue

Year to Year Change

North America

$2.1 billion

+36%

EAME

$1.1 billion

+20%

Asia-Pacific

$1.2 billion

+10%

Latin America

$586 million

-2%

Caterpillar has been an open position for us for a long time, and we have asked subscribers to be overweight industrials even before the tech high flyers sold off.

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