Category: Forex

Microsoft beats earnings expectations: Stock rises more than 10%

Previous post about Microsoft: https://www.outofwacc.com/microsoft-earnings-game-changer-product-hololens/

Earnings:

On April 23, 2015 (Thursday), Microsoft (NASDAQ: MSFT) reported its Earnings Release FY15 Q3 that exceeded analyst’ estimates for both revenue and earnings. Microsoft reported revenue of $21.73 billion for the quarter, up 6.5% year-over-year. Net income fell to $4.99 billion, or 61 cents per share, from $5.66 billion, or 68 cents, a year earlier (10% decline year-over-year).

Microsoft’s restructuring plan announced in July 2014 (job cuts) and the ongoing integration of the Nokia Devices and Services business, which Microsoft acquired for $7.2 billion last year, had $190 million, or a $0.01 per share negative impact.

Satya Nadella, CEO of Microsoft, has been changing strategy to focus more on cloud and mobile software, since demand for PCs are decreasing as new technologies are replacing the PCs. Cloud revenue is growing. Overseas sales have been hurt by a strong dollar and geopolitical concerns in Russia and China.

The currency fluctuations, including a  strong dollar had a significant impact on results. Excluding the effect of Forex market, revenue and gross margin would have grown 9% and 4%, respectively, and operating income and EPS would have declined 4% and 7%, respectively.

Source: https://www.microsoft.com/investor/EarningsAndFinancials/Earnings/PressReleaseAndWebcast/FY15/Q3/default.aspx
Source: https://www.microsoft.com/investor/EarningsAndFinancials/Earnings/PressReleaseAndWebcast/FY15/Q3/default.aspx

Cloud software sales increased, while demand for personal computer product decreased. Personal computer are dead-end. Commercial revenue grew 5% to $12.8 billion, led by commercial cloud which grew 106%. Cloud market is gaining traction and I believe Microsoft is doing the right thing by focusing more on the cloud market.

Microsoft 10 operating system is coming. Microsoft is offering free upgrades for some customers. Microsoft is hoping that their PC sales will increase after the launch of Windows 10.

Microsoft Build Developer Conference 2015

At Build Conference, Microsoft announced the Windows Holographic Platform for developers to develop apps for HoloLens. Developers would love to get their hands on HoloLens. Microsoft still hasn’t disclosed the price and when it will be released. I still believe HoloLens will be the next “Big Thing”.

Windows 10 could the first universal Operating System. We soon will find out.

Microsoft announced its replacement for Internet Explorer, Microsoft Edge. The question is “Will it be successful?”

Microsoft (NASDAQ: MSFT) Stock

Investors loved the earnings report. The stock rose more than 10%.

NASDAQ: MSFT - Daily Chart
NASDAQ: MSFT – Daily Chart

 

As stated in my previous post about MSFT ( https://www.outofwacc.com/microsoft-earnings-game-changer-product-hololens/ ), I said that the fall in the stock’s price was a good buying opportunity. If you took my suggestion, you now have more than 10% return. I still haven’t brought MSFT. I may have missed the opportunity. Though my experience in investing, I learned that you should not let your emotions effect your investment decisions. If you missed the opportunity, you missed one of many. There are many other opportunities. All you got to do is catch them.

I still may buy MSFT soon, even at its current price.

 

If you have any questions or comments, feel free to comment below and/or contact me by going to “Contact Me” page. Thank you.

GE’s slight positive earnings report and it’s about to change

Previous post about GE: https://www.outofwacc.com/ges-massive-makeover/

UPDATE:

On April 17, 2015, General Electric (NYSE:GE) reported Q1 2015 earnings results. GE reported $34.09 billion and $5.08 billion in segment revenue and profit, respectively, compared to Q1 2014 results of $35.06 billion and $5.21 billion in segment revenue and profit, respectively. In earnings per share (EPS) terms, GE reported EPS of $0.31 per share, which compares against $0.33 per share in the same quarter last year, down 6% year-over-year, but still managed to beat the consensus estimate of $0.30 per share.

Their earnings were impacted by Forex market and significant charges related to GE Capital exit activities. During the Q1 2015 conference call,  Mr. Jeffrey Bornstein, Senior Vice President (SVP) and Chief Financial Officer (CFO) for GE, highlighted a common issue felt by many international companies: “Foreign exchange was approximately $940 million drag on Industrial segment revenue and about $120 million impact on op profit.” Almost $1 billion currency market impact only effected 4% of industrial revenue. However, the management stated “Despite this headwind, industrial segment operating profit was up 9%.

 

GE Industrial Segment Revenue year-over-year
GE Industrial Segment Revenue year-over-year

 

As seen above, the picture shows Industrial Segment revenue year-over-year. There was not much of change. I believe it’s going to change since GE is taking a bold move.

Even though GE faced many headwinds, including from foreign exchange and low oil prices, they still managed to grow. Strong dollar and low energy prices are only temporary. It’s just a matter of time before the dollar depreciates and oil prices rebound. I have no doubt that GE will continue to succeed.

GE recorded a health margin improvement in the 1st quarter. Industrial segment gross margin increased 90 basis points (bps), or 0.9% to 26.2%, while operating profit margins increased by 120 bps, or 1.2% to 14.6%. The company is cutting costs and simplifying operations to lift margins, which is a positive sign.

Recently, GE announced to reduce the size of its financial arm, GE Capital, significantly. Last quarter, revenue from GE Capital fell 39%. This is because GE have already started reducing the size of GE Capital to become an industrially focused company, which I look it as positive in the longer term. A negative side of GE Capital reduction are taxes. GE will be losing out on significant tax breaks. GE Capital has helped GE lower its effective tax rate in the past. In 2014, GE’s effective tax rate was around 10%. Now, it moved up to about 23%. While this is a big difference, it should not be concern for investors, because it is in line with other industrial companies. Financial companies are the most vulnerable to shocks of the global financial markets. Thus, GE is taking the right move to spin off its financial unit. In a long-term, I believe more focused industrial company is positive for GE.

GE is known for its dividends. GE pays shareholders $0.92 annual dividend, or 3.43% yield, which is really impressive.

GE expects double-digit Industrial operating EPS growth to $1.20-$1.20 per share, 2%-5% industrial segment organic revenue growth, and increased margins. The company also expects high-value industrial to comprise more than 90% of GE earnings by 2018.

To conclude, I plan to hold my position (more details on previous post: https://www.outofwacc.com/ges-massive-makeover/). I will be adding more shares through dividend reinvestment, or Dividend Reinvestment Plan (DRIP) program. I also might buy additional shares. I strongly believe GE’s restructuring plan will lead to significant capital appreciation and I have no doubt GE will increase its dividend distribution.

 

General Electric (NYSE: GE) Hourly Chart
General Electric (NYSE: GE) Hourly Chart

 

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Ugly Jobs Report Is Just Temporary

Last Friday (April 3, 2015), March non-farm payrolls came out very negative. Non-farm payrolls slowed in March to a seasonally adjusted 126,000, slowest since December 2013. Unemployment rate held unchanged at 5.5%. The downturn in the jobs report could delay the Federal Reserve’s plan on raising the interest rates. Federal Open Market Committee (FOMC) have said in the past that continued improvement in labor would be a key factor on the timing of the rate-hike. I, now, believe there is a little chance of rate-hike in June.

What caused the downturn in the labor market? I believe it was because of the bad weather, plunging oil prices, and the strong dollar. The bad weather have caused businesses, especially in construction, to lose profits and to halt hiring. However, weather is a transitory factor. Plunging oil prices have left the oil industry in the dust. Oil companies are not being able to make revenue/profit. As a result, they had to layoff some of their employees. Strong Dollar is putting pressure on export-driven manufacturers, resulting in lower sales leading to layoffs. It’s also making it harder for U.S. businesses to sell goods aboard. I believe majority of U.S businesses’ revenue or earning per share (EPS) will less than expected, for the quarter.

Not only did we get to see March jobs report, but there were revisions to February and January jobs reports. January job creation was revised lower to 201,000 from 239,000 (-38,000). February job creation was revised lower to 264,000 from 295,000 (-31,000). I believe March jobs report will also be revised.

The labor-force participation rate was at 67.8%, lowest since February 1978. It shows that there’s less confidence in jobs market. Therefore, people have stopped looking for jobs. Average hourly earnings rose 7 cents or 0.3% to $24.86. The earnings can be a indicator for inflation. If it increases, inflation is more likely to increase too. Walmart and McDonald are increasing wages for majority of its employees, if not all of them.

Reactions to the report:

U.S Dollar (foreign exchange, or Forex) reacted negatively. U.S Equity markets were closed for Good Friday. We will get to see the reaction of equity market in the morning (Monday, April 7, 2015). I believe it will rise since negative jobs report could delay the rate-hike, since low interest-rate environment can very attractive to investors, including me.

 

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