The luxury home builder's earnings show that the housing market may not be thawing as quickly as Wall Street hoped.
Toll Brothers announced what at first blush seemed like positive news all around for the company and the home building industry.
In the three months through April 30, the company reported profits of $0.35 a share, well above consensus estimates of around $0.26 a share and the $0.14 a share the company earned in the same quarter a year ago. Even better, those earnings resulted not simply from deft cost cutting, but from a meaningful jump in sales. The company reported revenues of $860 million in the quarter, which was a 67% increase from a year ago.
The news showed that the soft start to home sales earlier this year may well have been attributable to the brutal winter and that the market may be heating up again.
Or did it?
After climbing 4% immediately at Wednesday’s open, Toll Brothers shares gave back half of those gains as investors started to thumb through the details.
Here’s what they found:
* Demand may not be recovering meaningfully at all. While the number of deliveries (i.e., homes already built) grew 36%, Toll Brothers said that net signed contracts (for future construction jobs) were flat in terms of units during the recently ended quarter. And over the past six months, the number of net signed contracts actually fell 2%.
* To be sure, the overall dollar value of newly signed contracts has been climbing, a sign that the upper end of the housing market is probably fine. In the quarter, it was up 7%. But that’s only because home prices are rising as Toll Brothers is charging more. The average price of net signed contracts in the recent quarter was $729,000, the company said, versus $678,000 at this time a year ago. This might explain this somewhat lukewarm statement from Toll Brothers chief executive Douglas Yearly: “Demand over the past year has been solid, although relatively flat, compared to the strong growth we initially experienced beginning in 2011, coming off the bottom of this housing cycle.”
* What’s curious about this is that during this period from January through April, interest rates on the average 30-year fixed rate mortgage actually fell from around 4.5% to 4.3%, according to Freddie Mac. That’s because market rates in general fell unexpectedly.
Conventional wisdom said that the one thing holding back the housing market was rise in mortgage rates toward the end of last year. If that’s the case, why didn’t new contracts pick up in total volume? “Recent housing data helps to confirm that the worst of the weather-affected softness is behind us,” said Morningstar analyst James Krapfel. “However, it also indicates that there’s still a long way to go before housing market activity can be considered normal.”
So what does this mean for the stock market? Well, one thing’s for sure: Stock market bulls who are waiting for the wealth effect of rising home values to embolden the middle class to invest more may have to wait for a while. As Krapfel notes: “We continue to believe that the recovery to midcycle housing starts and new-home sales will be gradual rather than sharp…”
This is also seen in the fall in homebuilder confidence lately:
In explaining why homebuilder confidence was stuck in a holding pattern recently, David Crowe, chief economist at the National Association of Home Builders noted: “Once job growth becomes more consistent, consumers will return to the market in larger numbers and that will boost builder confidence.”
But for stock market watchers, the housing market is actually the egg that comes before the chicken. They want to see the housing market improve first, which will create jobs, which in turn will spur consumers to return to both the stock and housing market.
So far, this remains to be seen.
The economy and inflation have now risen to levels where the Fed has to start thinking about raising rates. The only excuse left: the weaker-than-expected housing market.
The pressure is mounting on the Federal Reserve to start raising interest rates — and Fed chair Janet Yellen is running out of excuses.
On Wednesday, the Fed announced that it would keep short-term interest rates near zero and would continue to gradually taper its stimulative bond-buying program as the economy improves. No surprise there.
But the chatter for the Fed to stop coddling the economy really heated up Wednesday morning.
That was when a new government report showed that, after hitting a speed bump in the snowy first quarter, the economy really sped up between April and June. Gross domestic product grew at an annual rate of 4.0% in the second quarter.
What’s more, the government went back and revised some of its estimates for prior quarters. Uncle Sam now believes the economy grew well above the normal 3% rate in three out of the past four quarters.
“With this morning’s GDP release,” says James Paulsen, chief investment strategist and economist at Wells Capital Management, the “is-the-Fed-behind-the-curve fears among investors are increasingly evident.”
The GDP report included preliminary measures of inflation that might not sit well with Wall Street’s inflation hawks.
In the second quarter, the so-called personal consumption expenditure index, which is the Fed’s preferred measure of inflation, grew 2.3%. If you strip out volatile food and energy costs, core PCE still rose 2%. UBS economist Maury Harris notes that this represents a big jump from the 1.2% pace of core inflation in the first quarter. Plus, 2% is the target that the Fed has openly set for inflation.
While the actual level of inflation today may not be so worrisome, the ability to fight inflation after the fact is, says Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott. “The challenge with inflation is that there’s a very long lag between policy and price pressures, so a Fed concerned with inflation 12 to 24 months down the road needs to start acting now to protect against the prospect.”
Three years ago, the Fed drew another line in the sand. The Fed back then said that it would not think about raising rates until the national unemployment rate fell to 6.5%. Back then, policy makers thought that this would not transpire until around 2015. However, the unemployment rate fell below this level in April and is threatening to fall below 6%.
In recent months, as the Fed has tried to explain why it won’t hike rates soon despite rising inflation and falling unemployment, Yellen introduced a new reason altogether: housing.
In mid July, in a monetary policy report delivered to Congress, Yellen said:
The housing sector has shown little recent progress. While it has recovered notably from its earlier trough, activity in the sector leveled off in the wake of last year’s increase in mortgage rates, and readings this year have, overall, continued to be disappointing.
Later on in the report, Yellen noted that the lack of traction in the housing sector is probably preventing the labor market from reaching its full potential:
Even after rising noticeably in 2012 and the first half of 2013, real residential investment remains 45 percent below its pre-recession peak. The lack of a rapid housing recovery has also affected the labor market: Employment in the construction sector is still more than 1.6 million lower than the average level in 2006.
In announcing its rate decision on Wednesday, the Fed’s Federal Open Market Committee reiterated that while economic growth in general appears to be returning, “the recovery in the housing sector remains slow.”
The irony is that the two things that are likely to get the housing market on track are low mortgage rates and an improving job market.
To achieve the latter, the Fed is keeping rates low. Yet to achieve the former, the Fed needs to show the bond market that it is serious about combatting inflation. And the worst way to do that is keep rates low.
There, in a nutshell, is Janet Yellen’s conundrum.
The social media company blew past expectations—using an unofficial measure of profits. Based on generally accepted accounting principles, Twitter is still in the red.
When you get used to receiving complicated messages in a short amount of space — in, say, 140 characters — you grow accustomed to overlooking key details.
That was evident late Tuesday, when investors reacted to Twitter’s earnings announcement by sending shares of the social media company soaring more than 30% in after-hours trading.
Investors pounced on some better-than-expected results found high up in Twitter’s earnings release. This included the fact that revenues in the second quarter jumped 124% to $312 million, and that the company earned $0.02 a share, slightly stronger than what analysts had been expecting.
Nevermind that those profits were based on an adjusted, alternative method of measuring earnings that critics have come to criticize. Using generally accepted accounting principles (GAAP), Twitter actually lost $145 million in the quarter, or $0.24 a share.
What’s more, Wall Street analysts tallied by Zacks.com still expect Twitter — based on GAAP standards — to lose $0.98 a share in 2014 and another $0.87 a share in 2015. So it’s probably premature to regard the second-quarter results as a breakthrough for the profitless company.
User Growth Rebounds
To be fair, there were promising developments in the second quarter. Twitter reported that so-called timeline views, which are the company’s equivalent of page views, hit a record 173 billion in the quarter.
This was an important point, as timeline views in the prior quarter fell short of the company’s peak performance in 2013, despite the fact that there are more Twitter users than ever.
In the second quarter, the Twitter’s so-called average monthly active users (MAUs) rose an impressive 24%. Active users who use mobile surged even more, by 29% in the past year to 211 million.
By comparison, timeline views grew a relatively modest 15%, which means the company still needs to work on converting Twitter account holders into truly active users.
This morning, three research firms changed their rating on Twitter stock in the wake of the company’s earnings results. Bank of America upgraded its recommendation on the stock to a “buy”. UBS upgraded its rating to a “neutral”. And Pivotal Research downgraded the shares to a “sell” as Thursday evening’s surge pushed the stock above analysts’ target price.
That pretty much sums up the still-cloudy picture at Twitter.
Investors lost patience last week, punishing companies like Amazon that aren't generating profits while rewarding those such as Facebook that are delivering on their promise.
The stock market has a reputation for looking ahead.
That’s why equity prices tend to predict shifts in the economy six to nine months before they happen. It’s also why investors recently punished shares of the credit card giant Visa after the company posted solid earnings but hinted that revenues later in the year would fall short of expectations.
Still, there are times when Wall Street adjusts its perspective and focuses on the here and now. And Friday was one of those occasions.
In what turned out to be a rather brutal end of the week, investors gave companies—including some of the market’s darlings of the past few years—an extremely short leash. Those that lived up to their promise came out relatively unscathed, but those that fell short got hammered.
Just ask Jeff Bezos and Mark Zuckerberg.
For years, Bezos’ Amazon.com soared as it posted robust sales growth while promising strong earnings were just around the corner. The e-commerce giant delivered the exact same message (and results) when it announced its quarterly earnings last week. This time, though, investors responded by erasing $16 billion of market value from the company in half the time it takes the company to deliver packages to its Prime membership customers.
Other examples of companies that couldn’t deliver on growth and earnings now were the streaming music service Pandora Media and Dunkin’ Brands , the parent company of the Dunkin’ Donuts chain, which is struggling to fight off Starbucks and McDonald’s in the coffee wars.
On the flip side, Zuckerberg’s Facebook not only blew past Wall Street’s revenue and earnings expectations in the recent quarter, it proved that it was making big strides in mobile advertising, the area the social network giant’s investors were most worried about in recent years.
Not surprisingly, shares of Facebook—and other companies firing on all cylinders, such as Starbucks —defied the market’s end-of-the-week sell-off and are at or near their all-time record highs.
Here’s a closer look at the week’s winners and losers:
Amazon.com and Pandora Media learn the hard way that potential profits just won't cut it anymore in this market. Take note, Twitter.
Updated 7/25/14 4:15 pm
Investors sent a loud message to e-commerce and social and streaming media companies on Friday: profit-less potential just won’t cut it anymore.
Nowhere was this clearer than at Amazon.com, which seems to be able to deliver everything these days — tablets, streaming video, even food — with the exception of earnings.
After the company announced a wider-than-expected loss Thursday, the stock fell nearly 10% Friday, helping push the entire market lower at the end of the week.
In what sounds like a broken record, the e-commerce giant reported another robust quarter of sales — up an impressive 23% versus the same period a year ago — yet still can’t seem to turn a profit.
As costs rose in the recently ended quarter — as the company invested in new areas such as its recently announced Fire smartphone and a new unlimited e-book rental service — Amazon reported a net loss of 27 cents per share. That was nearly twice the loss that Wall Street analysts had been bracing for.
Even worse, the e-tailer warned investors that the third quarter won’t be much better. Amazon officials forecast that net sales would likely grow between 15% and 26% in the current quarter but that the company would probably suffer an operating loss of between $410 million and $810 million.
For more than a decade, Amazon shares trounced the broad market, as company leaders managed to convince investors not to focus on short-term losses, but rather the long-term potential for this company to dominate retail and consumer electronics.
They tried to do the same on Thursday, pointing to the company’s entry into the smartphone market. “Customers all over the U.S. will begin receiving their new Fire phones — including Firefly, Dynamic Perspective, and one full year of Prime,” said CEO Jeff Bezos, in announcing his company’s results. “We can’t wait to get them in customers’ hands.”
Investors shot back: “We can’t wait until we start seeing some profits in shareholders’ hands.” By Friday afternoon, it was clear that investors have had it with Amazon’s just-you-wait attitude with earnings.
For the year, Amazon shares have lost nearly a fifth of their value.
Amazon wasn’t the only tech stock that got hit on Friday. Shares of Pandora Media fell more than 10% on Friday on news of another profitless quarter.
The streaming music company reported a loss of 6 cents, which was worse than the 4-cent a share loss that investors were expecting.
The company tried to spin the news in a positive light by stressing its relative success in mobile advertising, a hot topic in tech these days.
“Our better-than-expected second-quarter results demonstrate success and continued business acceleration as a result of our investments in mobile and local advertising,” Pandora’s chairman and CEO Brian McAndrews noted in the company’s press release. “Mobile advertising reached a record 76% of total ad revenue and local grew at 144% year-over-year.”
Wall Street would have none of it.
As second-quarter earnings season gets underway, the market’s stance should worry other profit-less tech companies that are set to report their results next week.
On deck for Tuesday is Twitter . The social media company, whose shares have already fallen 39% this year, is expected to report a loss of 29 cents a share when it announces its results next week.
McDonald's and Dunkin' Donuts' push into premium coffee was supposed to hurt Starbucks. Turns out, the two chains may be firing on one another, leaving Starbucks unscathed.
When Dunkin’ Donuts began selling lattés and other premium coffee drinks around a decade ago, it was viewed as a direct attack on Starbucks, the nation’s leading specialty coffee chain.
Then five years ago, another front broke out in the java wars when McDonald’s formally launched its McCafé line of premium coffee drinks. At the time, Mickey D’s entry into this brewing battle was called “a game changer” — and not in a good way for Starbucks.
The pincer moves were seen as a real threat to the Seattle-based java juggernaut, especially given the economics of the time. In 2009, the economy was still mired in a recession stemming from the global financial crisis. And with unemployment hovering near 10%, conventional wisdom said that cost-conscious consumers were likely to make a shift away from Starbuck’s pricey menu toward more cost-conscious offerings found at McDonalds or Dunkin’.
Research, in fact, showed that while coffee purchases were relatively recession proof — if you have to have your morning fix, you have to have your fix — the amount of money consumers were willing to spend per visit was likely to fall in economically troubled times. Hence, McDonald’s and Dunkin’, which both cater to working- and middle-class households, saw an opening.
Yet if the past five years have taught us anything, it’s that conventional wisdom was wrong.
As the chart below shows, over the past five years, Starbucks’ same-store sales — that is, revenues at locations that have been open for more than a year — accelerated and far outpaced those of Dunkin’ Brands, parent company of Dunkin’ Donuts.
This point was reinforced when Starbucks announced its latest quarterly results on Thursday, which showed better-than-expected profits, and an 11% jump in overall revenues versus the same period last year.
Well, class may indeed be playing a role in the coffee wars — but not in the way that you may have assumed. Earlier this year, Ted Cooper at The Motley Fool made an astute point:
McDonald’s may be able to sell coffee, but it will never come close to replicating Starbucks’ menu. McDonald’s best shot at becoming a coffee destination is to go after the price-conscious coffee crowd…
And who owns that crowd? Dunkin’ Donuts, of course, which despite its name generates nearly 60% of its revenues from coffee and beverage sales, not doughnuts.
The fact that Dunkin’s same-store sales growth pace has sunk precipitously ever since McCafés hit the market — even as the economy improved — is likely due to McDonald’s marketing push for bargain-seeking coffee drinkers. In many markets, in fact, McDonald’s is offering any size hot coffees for $1, which is more than half off what Dunkin’ charges for a hot regular cup of Joe.
Not surprisingly, investors have caught onto the fact that McDonald’s and Dunkin’ may be hurting one another — and not Starbucks — as evidenced by recent moves in Starbucks (SBUX), Dunkin’ (DNKN), and McDonald’s shares:
The Economy Strikes Back
Meanwhile, the premium status that Starbucks maintains is likely to work to its advantage as the economy improves.
For instance, Dunkin’ Donuts recently announced that it will have to raise its prices slightly to address skyrocketing coffee bean prices in the commodity market. It remains to be seen how those price hikes will affect its consumer’s purchasing habits.
At Starbucks, it’s already known how consumers will react. When the company announced a price hike in 2013, comp-store sales remained strong as consumers cherished the brand enough to pay up, even in a so-so economy. The company announced another price hike in June, which is likely to add to overall revenues going forward.
The Empire Strikes Back
Ironically, the difficulties that McDonald’s and Dunkin’ Donuts have run into in their attempts to strike at Starbucks has created an opening for Starbucks to attack those competitors where they live — in food sales.
Starbucks’ chief financial officer Troy Alstead noted that in the company’s recently ended quarter — when same store sales rose 6% globally and 7% in the U.S. — two percentage points of those comp sales growth was attributable to food sales.
Starbucks’ momentum in food has recently been driven by increased lunch offerings, but going forward, the full effects of the company’s 2012 purchase of La Boulange bakery should start showing their effects.
In a conference call with analysts Thursday, CEO Howard Schultz noted that La Boulange branded baked goods are now available in more than 1,000 Starbucks stores in California and the Pacific Northwest. By the end of this summer, that number should jump to more than 2,500 stores, he said, as La Boulange food items will be sold in stores in New York, Los Angeles, Chicago and Boston.
Facebook's stock doubled its IPO price by midday Thursday
Facebook suffered a cruel summer back in 2012. The social network raised its IPO price just before going public in May 2012, but technical glitches during early trading caused mass investor confusion. Nasdaq eventually paid a $10 million fine over the debacle, and Wall Street showed no mercy to the social network in the ensuing months. Facebook’s stock cratered, diving from $38 to below $18 before the following autumn.
Two years later, the sun’s shining bright on the tech giant. Facebook beat analysts’ expectations yet again in its latest quarterly earnings report, generating revenue of $2.9 billion and earnings per share of 42 cents. That sent the company’s stock soaring above $76 during midday trading Thursday, doubling its IPO price of $38. That’s also more than quadruple the social network’s all-time low close of $17.73.
Facebook’s massive turnaround has everything to do with mobile. When the company went public, its revenue was almost completely tied to desktop ads–exactly the kind of business investors in the mobile era don’t like. With more than half a billion people already accessing Facebook on mobile, the company had to prove that it could successfully transition its business. CEO Mark Zuckerberg set a laser-like focus on mobile strategy, and he forced his executive clique to do the same.
The dedication has paid off. Facebook now generates more than two-thirds of its total ad revenue on mobile and has more than a billion mobile monthly active users. Overall ad prices jumped 123 percent year-over-year, partially because mobile ads placed directly in users’ News Feeds are more valuable than ads on the right rail of the site served to desktop users.
But what really has Wall Street salivating is the fact that Facebook has plenty of mobile monetization moves left to make. New auto-playing video ads in users’ News Feeds could help the company lure marketers from television. Instagram introduced ads last year that are being positioned as an attractive option for brand marketers. The company is also likely to figure out ways to make money off its messaging goliaths Messenger and recently-acquired WhatsApp.
Overall, it’s clear that Facebook has solved its mobile conundrum, and Wall Street is rewarding it handsomely. With its share of the overall mobile advertising market quickly increasing, the company may soon to be able to challenge Google to be at the top of the totem pole of mobile.
A century-old market timing strategy known as Dow Theory views the rally in airline stocks as a bullish sign, but investors need to approach the transportation sector with skepticism.
High oil prices. Fee-weary passengers. A global economy that’s still not firing on all cylinders. And geopolitical crises forcing carriers to re-route their flights.
Given these recent developments, you’d think that airlines stocks would be struggling of late.
But you’d be wrong. Airline stocks have been among the best performing groups in the U.S. stock market recently, with the Dow Jones U.S. airline index up nearly 75% over the past 12 months.
In the short run, this trend is likely to continue, especially if airlines keep posting strong results. On Tuesday, Delta Airlines reported that revenue grew more than 9% in the recently ended quarter, versus the same period last year. The carrier also reported earnings per share of $1.04, versus consensus forecasts of around $1.02 a share.
But what of the long run?
One of the most enduring market-timing strategies on Wall Street would seem to point to blue skies ahead—and not just for airline and transportation stocks.
Dow Theory, the brainchild of Charles Dow, the founder of The Wall Street Journal, is one of the oldest technical indicators that’s still used by investors to gauge future stock market movements. Dow Theory has many technical layers, but in broad strokes the strategy seeks to verify trends in the Dow Jones Industrial Average by looking at the Dow Jones Transportation Average.
The idea is that stocks tend to rise when the economy is humming. And to tell if that’s the case, you need to see not only that factories are on the upswing (as measured by the Dow Industrials), but that transportation companies that are paid to move manufactured goods out of those factories are also on a roll. Hence the need to study the Dow Transports.
Recently, the airlines haven’t been the only transports rallying. Shares of railroads and trucking-related companies have also been on the rise:
This explains why both the Dow Industrials and Dow Transports are at or really close to their all-time highs:
Still, it’s important to understand that transport stocks have been soaring for more than five years now, as investors have been anticipating an improved economy ever since 2009.
The result is the bull market in transportation is getting long in the tooth. Meanwhile, valuations for many of these companies, including the airlines, are soaring.
As you can see below, while the broad market trades at a price/earnings ratio of around 17 or 18, many airline stocks — such as Southwest , United Continental , JetBlue , and Spirit — trade at significantly higher P/E ratios.
The bottom line: This may be a time when it makes more sense to look at the fundamentals of each individual company, rather than at the technical trends for the airlines or transports as a whole.
Rather than crow about its strong quarter, the streaming-video giant tempered expectations for the remainder of the year. That should tell you something.
At first blush, Netflix reported what seemed like blockbuster results.
On Monday, the streaming video giant said its earnings had more than doubled, to $71 million or $1.15 a share in the recently ended second quarter. Even better, Netflix gained 570,000 new streaming subscribers in the U.S., despite hiking costs by $1 a month in May, moving the company past the 50 million-subscriber mark.
Yet rather than spending much time crowing about these results, Netflix officials used its quarterly earnings report to try to temper investors’ expectations for the coming quarter. Why?
Either second-quarter results weren’t that great after all — or the rest of the year will be much more challenging than expected.
It’s the latter.
A few months ago, Morningstar analyst Peter Wahlstrom made this key point:
“The market is too optimistic about Netflix’s future sales growth and profitability potential. We remain skeptical about Netflix’s aggressive international push; we recognize the addressable market is large but sustainable and material profitability will be much harder than management currently anticipates and may drag on cash flow for the foreseeable future.”
He was right to be worried. On Monday, Netflix provided a clue as to how difficult it will be to sustain profitability while making an aggressive international push.
In a letter to shareholders, CEO Reed Hastings and chief financial officer David Wells warned that the company’s international video streaming operations, whose “contribution losses” had been gradually declining lately, would jump from $15 million in the second quarter to $42 million in the third quarter.
Meanwhile, they lowered expectations for third quarter earnings, forecasting that they would come in around 89 cents a share, down from $1.15 in the second quarter and considerably lower than the expected $1.02 a share, according to consensus forecasts by analysts tracked by Zacks.com.
Company leaders also used their earnings release to again reiterate their calls for so-called net neutrality, hinting at another area of potential vulnerability. Backers of net neutrality want Internet Service Providers (ISPs) such as Verizon, Comcast, and AT&T to treat all data equally, without giving preferential treatment — and speed — to preferred customers.
Without such a system, companies like Netflix have had to address speed issues by entering into individual agreements with ISPs to stream their content more quickly. The problem, though, as MONEY’s Taylor Tepper recently pointed out, is that such deals give “Internet service providers leverage to assess more such ‘tolls’ down the road.”
Yesterday, in after-hours trading, Netflix shares jumped immediately after the company announced its earnings.
But this morning, skeptical investors are starting to voice their concerns. So don’t be surprised if today, after digesting the actual details, the market reacts in a slightly different way.