Tuesday Earnings Highlights

My Monday thoughts were hit and miss; I was a little too bearish on BAC, but my thoughts on NFLX were pretty accurate. Just like flipping a coin...

Anyway, on Tuesday, more major corporations will report earnings.

McDonalds reports in the morning, and I think that they will likely report a solid quarter due to growth overseas and favorable exchange rates. Also, domestic restaurant statistics were good during months during the first quarter, so I am expecting a very good release from MCD. However, the stock has priced in a lot of good news, so I don't expect more than a 3 or 4 percent price increase, even if the earnings are great. However, I definitely think that MCD is a great company to own; with expansion into the developing world, mainly China, and attractive menu items like new coffees and dollar-menu items, MCD looks set to perform well for a while.

In the afternoon, two big tech names report: VMWare and Yahoo!

VMW disappointed the street last quarter, and the shares were sent to the chopping block - the stock fell more than $20 overnight. VMW's technologies may be attractive in this macroeconomic climate as they provide savings over buying more hardware, but the stock is still very expensive. VMW is only expected to earn $1.08 this year and $1.52 next year - with shares trading at $56, current P/E is over $50 and forward P/E is still about 37. Unless VMW dramatically upwardly revises future estimates, there could be more pain for VMW longs this quarter.

I think that YHOO earnings may be moot, considering that the merger process has stabilized share price since MSFT put its offer on the table. Maybe blockbuster earnings could fuel hope for a higher bid, but I think that a quarter that's fairly in-line with estimates won't do much to move the price. A bad miss, however, may spook investors, fearing that MSFT may be able to lower its bid price.


I'll hopefully publish some thoughts on Wed's morning's earnings before the end of the session Tuesday.

People Love Ignoring Valuations: BWLD vs. CMG

The events of last night and today, concerning two stocks, literally baffle me.

The two stocks are Buffalo Wild Wings (BWLD) and Chipotle Mexican Grill (CMG).

Both companies reported earnings last night.

CMG came into earnings trading at a 80 trailing P/E and a 50+ forward P/E. Perfection is clearly already priced in. BWLD, on the other hand, traded at a much more modest 40 trailing, high-20s-forward P/E. It wasn't cheap, but it was clearly cheapER.

Chipotle reported numbers that were in-line with estimates. They had a mixed future outlook; they plan to open new stores internationally, but at the same time, existing store sales are expected to fall from 12% this past quarter, to "high single digits" for all of 2007, to "low to mid-single digits" for 2008.

Though the new stores will be a source of growth, a company cannot expand infinitely. Don't you think investors might be shaken by the bleak outlook for future same-store sales growth?

At the same time, Buffalo Wild Wings reported revenue that met the street's expectations, with earnings that were just two pennies lower. They, however, reiterated their forecast for next year: 15% unit growth, 20% revenue growth, and 25% earnings growth. (They had the same goals this year, and have met them thus far). There are some minor challenges, like gambling licenses in Las Vegas and higher prices due to bigger wings. However, the overall outlook was very promising without any glaring problem.


So how did Wall Street react to these two different reports? Logically, you'd expect BWLD to be flat, or even up, while CMG seems like it should be flat or down.

However, rationality is apparently dead amongst investors.


Buffalo Wild Wings dropped almost 30% at one point. Currently, it's trading down 20%.
Chipotle is UP $5, or 4%.

To me, this is literally insane. How do investors see any value in a company with a 55 forward P/E? Yes, the company is growing quickly, but it can't grow as quickly forever, and mature companies DON'T have P/Es of 55.

McDonalds has a forward P/E of 19. Yum Brands (KFC, Pizza Hut, Taco bell, and more) has a forward P/E of 21.

Buffalo Wild Wings is now trading at that same valuation - a 21 forward P/E. The company is supposed to grow at 25% - much better than YUM's 17%.

Chipotle has grown very quickly over the past, but is only predicted to grow at about the same 25% next year.



As a value oriented investor, I'm buying BWLD. I actually purchased some after-hours yesterday (because I thought at 15% decline after the non-awful numbers was a little dramatic), and I picked up some more today after it dropped a few more points.


I have no position in CMG, but I wouldn't be long right now. Who knows, maybe hysteria will pump CMG to 160 while BWLD hangs around 30 for the next month or two. But as a long-term value investor, I see value in Buffalo Wild Wings, and nothing but hype in Chipotle.

9/13 Wrapup: BRLC, SOYO, and more

The Dow was pleasantly up 130 points today, along with an almost 1% gain in the S&P 500 and a more modest 1/3% gain for the NASDAQ. The Dow was lead by Countrywide Financial, the struggling mortgage company. Today they announced that they secured an additional 12 billion dollars in financing, allowing the company to basically keep its doors open.

McDonalds was also up very strongly, continuing a multiple-session rally. To be honest, I was thinking about buying them a week ago at 48, but felt like waiting because I thought they may be overvalued... now I am uncomfortable buying at the current level. However, they just raised their dividend by 50%, adding valuation to the shares.

In my portfolio, Sun Microsystems continued its rally to close up another 3%. Marathon Oil was also strong today because of higher energy prices. Electronic Arts was up a few percent, as was CIT, a financial company that has nothing to do with subprime lending that was hurt by the financial crash during the early subprime crisis.

Heelys declined, but that's a long term play, so I'm not worried. My tiny position in BRLC, arguably the worst short-term decision I've ever made, fell additionally in the open market today after being down 25% after-hours today. However, I went with my investing instincts and doubled my position today, lowering my cost. Once again, I think this stock is super risky, but for dumb reasons; it's a solid company, but day traders and short sellers really manipulate the price and make it trade irrationally. The earnings for this year were $.48/share; it's now less than a 10 P/E company... and for such a high-growth company, I'm willing to take the risk, because BRLC shouldn't stay at this valuation once it starts behaving rationally again.

Right now, I've got September calls in Harley Davidson (HOG) and Abercrombie (ANF). Abercrombie was up nicely today, and hopefully I'll be able to get out of those profitably (I bought the contracts a few weeks ago, and the stock was marginally down for the time in between the purchase and now). HOG is simply a play on the utter destruction of that stock over the past few sessions; they altered guidance, and shares fell almost 20%. I'm hoping the price stabilizes, and I can make a small short-term gain.

Edit: Almost forgot about my new interesting little company, The Soyo Group (SOYO.OB). Yes, it's traded over the counter, but its an established company; it used to focus on making motherboards for certain gaming computers, but now it makes the most popular LCD at the 24 inch size with a whopping 50% of market share; check out the article here.

They're making money, which is very impressive for such a little company. They have big plans for the future; they're supposed to start making huge-screen HD TV's under the brand name Honeywell for 2008.

I bought a tiny position for $.56 yesterday; it closed at $.71. I was surprised by the huge jump on no news, and I'm sure its going to give up its gains in the next few sessions. But this is going to be on my long-term radar; if they can continue to grow, while producing good product, this could be a great long-term play. Look past the penny-stock assumptions; it's a real, established company that's turning a profit, not some pump-and-dump scheme like other comparably-priced offerings.