P&G Maintained at Neutral

On May 28, we maintained a Neutral recommendation on The Procter & Gamble Company (PG), following mixed third-quarter fiscal 2013 results announced last month.

Why the Neutral Recommendation?

On Apr 24, P&G reported mixed fiscal third-quarter results beating earnings but missing out on sales. Earnings of 99 cents surpassed the Zacks Consensus Estimate of 96 cents by 3.1%. Earnings also beat management’s guidance and improved 5% from the prior-year level as strong cost savings and lower taxes made up for the sluggish revenues in the quarter.

Sales though grew year over year, were below management’s as well as Zacks’ expectations. Sales lagged despite higher innovation and marketing investments due to slower market growth and soft beauty sales. P&G’s fourth-quarter outlook was also quite subdued with earnings expected to decline from the year-ago results.

Following the less-than-impressive results in the quarter, estimates were mostly revised downwards. The Zacks Consensus Estimate for 2013 moved down by 0.5% over the last 60 days while that for 2014 declined 0.7% over the same time frame.

No doubt, P&G commands solid long-term fundamentals with strong brand recognition, diversified portfolio, rapid growth in developing nations, impressive product development capabilities and marketing prowess.

As part of its turnaround plans, P&G has laid out various strategies to improve results in the developed markets while maintaining momentum in the developing nations. The company is focusing its resources on the 40 largest and most profitable businesses, most of which are in the developed markets. These businesses account for about 50% of sales and 70% of operating profit.

The company is also focusing on driving its 20 biggest innovations like Tide Pods, Always Radiance, Bounty Trap & Lock and Bounty Unstoppables in more markets in fiscal 2013. Moreover, the company is concentrating on its 10 most important developing markets. In addition, P&G has implemented costs savings and productivity improvement initiatives in order to improve margins.

We would, however, remain on the sidelines until we witness some tangible progress from the turnaround efforts and also see some meaningful increase in organic sales. Moreover, though some signs of modest economic recovery and improving consumer confidence can be seen in the U.S., there is still great uncertainty.

U.S. consumers are burdened with higher gasoline prices, payroll tax increases and delayed tax refund checks. These external forces might restrict consumer discretionary spending in addition to slow job growth, high interest rates and tightened credit availability. The persistently sluggish European economic conditions also create an overhang.

P&G carries a Zacks Rank #3 (Hold).

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Looming Cash Crunch Could Cause This Retail Stock to Plummet 30%

There are many good reasons to look for stocks that the top hedge fund managers like. Activist managers such as Carl Icahn can shake a company up until shareholder value is unlocked. Warren Buffett’s best ideas often have great long-term potential. But some fund managers take steps simply to enrich themselves and can actually destroy value for other shareholders.

During the past half decade, fund manager and Sears Holdings (SHLD) CEO and Chairman Eddie Lampert has taken millions of dollars out of his investment in the lagging retail store, through a series of one-time payments to his investment firm, ESL Investments. And while Lampert was giving himself robust paydays, he’s virtually ignored the operational trends at Sears and Kmart, the company’s two major retail divisions. Those stores have fared so badly that Standard & Poor’s kicked Sears out of its S&P 500 index last year, where it had been a fixture since 1957.

You can see Lampert’s handiwork in one handy measure. Sears Holdings generated a free cash flow loss of $ 311 million in fiscal 2011, $ 707 million in fiscal 2012 and $ 681 million in fiscal 2013. For most companies that kind of performance would suggest that cash is fast disappearing and debt is quickly rising. Yet Lampert has managed to keep creditors at bay by selling off profitable divisions, and prized department store locations. In just the most recent fiscal year, Sears sold off $ 1.8 billion worth of assets — good ones — and the current cash balance still stands at only $ 471 million.

In Sears’ fiscal first quarter, the ill effects of a shrinking store base showed the damage that Lampert has wrought.

“While these closed stores cost Sears 4% of topline, they reduced profits by 36%, implying some of the best stores are being sold,” noted analysts at Credit Suisse.

Shares fell by more than 15% to around $ 50 upon the release of those earnings last week. And shares could have a lot further to fall before they find a bottom. Investors are scrambling to do the math, and in coming months you can expect to see fairly dim views about Sears’ long-term prognosis. By the end of this summer, Sears may be viewed as an eventual bankruptcy candidate.

So, let’s do the math.

Sears missed first-quarter estimates by a wide margin, losing $ 1.29 a share, compared to a forecasted loss of $ 0.60 a share. It’s bad enough that same-store sales fell 3.6% in the quarter (compared to a year ago) at a time when most other department store retailers are noting modest sales gains, but Sears’ total sales fell 9%.

In the world of retail, falling sales can be quite corrosive as there is less revenue to spread over high fixed costs. And the company’s lead buyers have a harder time securing the best pricing from suppliers if they aren’t generating sufficiently robust volumes. This kind of negative operating leverage is only starting to play out for Sears.

Looking back over the past nine quarters, Sears has turned a profit just once — in the fourth quarter of fiscal 2013, ended in January. During those nine quarters, the retailer has lost a cumulative $ 3.5 billion. How did Sears manage to post that lone quarterly profit?

“We generate a profit when we close stores and liquidate the merchandise. As such, the first quarter of last year benefited from the closed store activity as these are profitable events for us,” said Lampert on a call with analysts last week.

Sears’ response to yet another loss in the first quarter of fiscal 2014? Lampert announced last week that the company will likely need to sell its “extended protection” division. These protection plans tend to generate huge margins for Sears and losing this segment would actually deepen the operational losses in the core business. It’s kind of like selling off the roof to save the house, which only leaves the house prone to the elements.

As noted earlier, Sears sold off $ 1.8 billion worth of assets in fiscal 2012, yet still has just under $ 500 million in the bank today. Management noted that Sears has roughly $ 1.75 billion available on its credit line, but they neglected to mention lenders require certain levels of cash flow be maintained or those lenders have the option to shrink or close those credit lines. If Lampert is counting on simply borrowing his way out of this mess, when the company already has $ 3.7 billion in debt on its books, he’s mistaken.

In fact, those lenders that Lampert has come to increasingly rely upon are likely re-digesting Sears’ profit path for the years ahead after looking at just-released fiscal first quarter results. Credit Suisse’s Gary Balter now projects losses of $ 4.24 a share this year, $ 3.83 a share in fiscal 2015 and $ 3.77 a share in fiscal 2016, which works out to be more than $ 1.3 billion.

Balter now thinks this stock will fall to just $ 20, as “the volumes and productivity of the remaining stores point to margins staying weak or weakening.” I share his view — over the long term — though I expect shares to only start moving in that direction in the next three to four months.

This stock could move down to $ 35, a 30% decline from current prices, later this summer as major investors start to head for the exits in what appears to be a looming death spiral for this stock.

Recommended Trade Setup:

— Short SHLD at $ 45 or above
— Set stop-loss at $ 52
— Set initial price target at $ 35 for a potential 22% gain in four months

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Earnings News and Information on Yahoo! Finance

Looming Cash Crunch Could Cause This Retail Stock to Plummet 30%

There are many good reasons to look for stocks that the top hedge fund managers like. Activist managers such as Carl Icahn can shake a company up until shareholder value is unlocked. Warren Buffett’s best ideas often have great long-term potential. But some fund managers take steps simply to enrich themselves and can actually destroy value for other shareholders.

During the past half decade, fund manager and Sears Holdings (SHLD) CEO and Chairman Eddie Lampert has taken millions of dollars out of his investment in the lagging retail store, through a series of one-time payments to his investment firm, ESL Investments. And while Lampert was giving himself robust paydays, he’s virtually ignored the operational trends at Sears and Kmart, the company’s two major retail divisions. Those stores have fared so badly that Standard & Poor’s kicked Sears out of its S&P 500 index last year, where it had been a fixture since 1957.

You can see Lampert’s handiwork in one handy measure. Sears Holdings generated a free cash flow loss of $ 311 million in fiscal 2011, $ 707 million in fiscal 2012 and $ 681 million in fiscal 2013. For most companies that kind of performance would suggest that cash is fast disappearing and debt is quickly rising. Yet Lampert has managed to keep creditors at bay by selling off profitable divisions, and prized department store locations. In just the most recent fiscal year, Sears sold off $ 1.8 billion worth of assets — good ones — and the current cash balance still stands at only $ 471 million.

In Sears’ fiscal first quarter, the ill effects of a shrinking store base showed the damage that Lampert has wrought.

“While these closed stores cost Sears 4% of topline, they reduced profits by 36%, implying some of the best stores are being sold,” noted analysts at Credit Suisse.

Shares fell by more than 15% to around $ 50 upon the release of those earnings last week. And shares could have a lot further to fall before they find a bottom. Investors are scrambling to do the math, and in coming months you can expect to see fairly dim views about Sears’ long-term prognosis. By the end of this summer, Sears may be viewed as an eventual bankruptcy candidate.

So, let’s do the math.

Sears missed first-quarter estimates by a wide margin, losing $ 1.29 a share, compared to a forecasted loss of $ 0.60 a share. It’s bad enough that same-store sales fell 3.6% in the quarter (compared to a year ago) at a time when most other department store retailers are noting modest sales gains, but Sears’ total sales fell 9%.

In the world of retail, falling sales can be quite corrosive as there is less revenue to spread over high fixed costs. And the company’s lead buyers have a harder time securing the best pricing from suppliers if they aren’t generating sufficiently robust volumes. This kind of negative operating leverage is only starting to play out for Sears.

Looking back over the past nine quarters, Sears has turned a profit just once — in the fourth quarter of fiscal 2013, ended in January. During those nine quarters, the retailer has lost a cumulative $ 3.5 billion. How did Sears manage to post that lone quarterly profit?

“We generate a profit when we close stores and liquidate the merchandise. As such, the first quarter of last year benefited from the closed store activity as these are profitable events for us,” said Lampert on a call with analysts last week.

Sears’ response to yet another loss in the first quarter of fiscal 2014? Lampert announced last week that the company will likely need to sell its “extended protection” division. These protection plans tend to generate huge margins for Sears and losing this segment would actually deepen the operational losses in the core business. It’s kind of like selling off the roof to save the house, which only leaves the house prone to the elements.

As noted earlier, Sears sold off $ 1.8 billion worth of assets in fiscal 2012, yet still has just under $ 500 million in the bank today. Management noted that Sears has roughly $ 1.75 billion available on its credit line, but they neglected to mention lenders require certain levels of cash flow be maintained or those lenders have the option to shrink or close those credit lines. If Lampert is counting on simply borrowing his way out of this mess, when the company already has $ 3.7 billion in debt on its books, he’s mistaken.

In fact, those lenders that Lampert has come to increasingly rely upon are likely re-digesting Sears’ profit path for the years ahead after looking at just-released fiscal first quarter results. Credit Suisse’s Gary Balter now projects losses of $ 4.24 a share this year, $ 3.83 a share in fiscal 2015 and $ 3.77 a share in fiscal 2016, which works out to be more than $ 1.3 billion.

Balter now thinks this stock will fall to just $ 20, as “the volumes and productivity of the remaining stores point to margins staying weak or weakening.” I share his view — over the long term — though I expect shares to only start moving in that direction in the next three to four months.

This stock could move down to $ 35, a 30% decline from current prices, later this summer as major investors start to head for the exits in what appears to be a looming death spiral for this stock.

Recommended Trade Setup:

— Short SHLD at $ 45 or above
— Set stop-loss at $ 52
— Set initial price target at $ 35 for a potential 22% gain in four months

Related Articles

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Exxon Mobil Tops Earnings Estimates, Boosts Dividend

Exxon Mobil reported quarterly earnings and revenue that topped market expectations on Thursday, helping the company to distribute $ 7.6 billion worth of dividends and buybacks to shareholders.

The world’s most valuable company, as measured by market capitalization, saw oil production fall by 3.5 percent during the first quarter, amid volatile global oil markets. However, Exxon ramped up capital on exploration during the quarter, to $ 11.8 billion — up 33 percent from the comparable year-ago period.

After the earnings announcement, the company’s shares climbed slightly in pre-market trading. (Click here for the latest quotes: XOM)

The company posted first-quarter earnings excluding items of $ 2.12 per share, up from earnings of $ 2.00 a share in the year-earlier period.

Analysts expected Exxon Mobil to report earnings of $ 2.05 a share on revenue of $ 11.98 billion, according to estimates from Thomson Reuters.

Exxon’s chemical profits rose 62 percent during the quarter. Meanwhile, U.S. oil production accounted for the majority of the company’s product sales, reflecting the recent energy boom in the world’s largest economy.

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