The Daily Kill Sheet Picking Off Profits One Stock At A Time!

February 14, 2013

Daily Kill Sheet For February 14, 2013

Filed under: Uncategorized — Administrator @ 4:41 pm

Position Update – Occidental Petroleum (OXY)

As I anticipated in last week’s Sure Shot LetterOccidental Petroleum Corporation (OXY) announced today that its Board of Directors has increased the company’s dividend 18.5% to an annual rate of $2.56 a share, from its previous annual rate of $2.16. This increase brings OXY’s compound annual dividend growth rate over the last 11 years to 16%. Looking ahead, absent a large acquisition, I expect OXY will continue to raise its dividend at a low double-digit rate given its strong cash generating abilities and low pay out ratio. Occidental Petroleum shares remain a Buy up to $94 a share.

New Trading Idea

Take a look at Archer Daniels Midland Company (ADM, $31.40) on the short side. The company just reported second-quarter earnings of $0.60 a share, $0.09 above last year’s tally and $0.02 above the consensus estimate. Even so, earnings were of low quality. Indeed, the company had a number of restructuring charges during the quarter and had about a $40 million pretax gain on the sale of assets.

ADM benefitted from strong results by its oilseed crushing operations. While the record utilization helped to boost margins it’s unlikely the strength will last into the June quarter as inventories built up with the 2012 crop will begin to dry up and pressure margins. A slowdown at this segment will only exacerbate the margin pressure already present from the comapny’s ethanol operations. Over the past year high corn prices, coupled with a bumper sugar crop in Brazil has lead to severe pressure on ethanol margins. Both Poet and Valero, ethanol competitors, have idled plants in the hopes of lowering inventories, while ADM has only slowed their production. Even so, the industry remains oversupplied due to a surge in Brazilian imports due to the bumper sugar crop in that country. Lower corn prices in recent weeks have lowered input costs here in the States and Valero now has plans to bring at least one of its idled plants back on line. This will only add to the ethanol over supply and likely keep a lid on ethanol prices going forward. Thus, I expect ADM‘s margins to remain under pressure, rather than improve as the year progresses.

Looking ahead, last year’s drought will likely continue to have a negative impact on ADM‘s operations at least through the first half of the year. Water levels in the Mississippi river remain well below normal and is hampering barge traffic. The result has led to increased transportation costs and the potential for delayed deliveries.

While management was cautiously optimistic that drought conditions will improve as the year progresses and that crop yields will be higher, The Andersons, a competitor, said on their conference call that “they expect drought conditions to hurt earnings of both their grain and ethanol businesses through the first half of the year.  All said, I believe it is too early in the year to make any predictions about this year’s grain crops. ADM’s share price has moved up due to its better-than-expected quarter and optimism about this year’s corn and soy crops.

The stock has jumped about 10% since the company reported earnings on February 5th. After the stock’s recent run, two of my favorite technical indicators are signalling that the stock is near-term overbought here. The Williams %R ratio is well above oversold levels and has started to edge lower. Meanwhile the TRIX indicator is also showing signs of near-term buyer exhaustion and is also close to doing a bearish crossover. With that said, my near-term target is $28.75, near the mid point of a small recent gap in its chart, implying a 9.2% return to my target.

January 31, 2013

Daily Kill Sheet For January 31, 2013

Filed under: Uncategorized — Administrator @ 1:45 pm

Sometimes you win, sometimes you lose. That’s how I feel about our open short position in Caterpillar Inc. (CAT, $98.65). CAT reported 4th-quarter earnings of $1.91 a share, $0.19 better than the consensus estimate but $0.41 below last year’s tally. As I anticipated, the company gave earnings guidance for 2013 to a range of $7.00 – $9.00. The consensus stood at $8.62. While the guidance is above my estimate of $6.50 a share, the guidance is back-end loaded leaving a lot of room for the company to lower guidance again going forward. Management noted that the first quarter was going to be extremely weak and that production would be lowered to help clear dealer inventory.

Given the weak outlook for industrials in general and the fact that CAT’s earnings typically decline peak to trough at a greater rate than the 13.5% that the current consenus implies, I am going to stay short the shares here. Since CAT reported the sellside has cut their estimates about $0.55 a share for the year, but has raised their price targets. Now that most of the cheerleading by the sellside is over, I expect the shares to gradually move lower towards my $89 price target. I am going to institute a hard stop on the shares at $100 in case my assumptions prove incorrect. At this point, I am going to hold my 2013 estimate steady at $6.50 a share, one of the few published estimates that didn’t need revising after the company reported earnings. In my opinion, the Street estimates remain too high and will have to be adjusted lower again after the next quarterly release. Fair value for CAT, in my opinion, using my estimate is $81 a share.

Many industrials are looking toppy here on a technical basis and I’m looking to lay a few more out here to take advantage of their extended charts and the potential for further industrial earnings guidance cuts as earnings season progresses. To start, I am going to short Kennametal (KMT, $40.70) again. We shorted KMT last week into earnings for a quick 8.8% gain. Now that the stock has bounced a bit, we’re going to short it out again using our secondary $35 price target as our main target now. My reasoning is that while the company has lowered earnings guidance to $2.60 – $2.80 from $3.40 – $3.70, the guidance still remains too high. I continue to look for earnings of between $2.00 – $2.20 a share. The stock is still exhibiting a head and shoulders formation on a 2-year chart and a trip down to the neckline would take the stock to $31. My $35 target implies a return of 15.2%.

Keeping with the head and shoulders theme, I am also shorting Cummins Inc. (CMI, $115.04). Cummins is slated to report fourth-quarter earnings on February 6th. Although I expect earnings to be in line to slightly higher than expected for the quarter, I expect earnings guidance for 2013 to be lower than consensus given weak demand in the U.S. and Europe and the potential for a weaker than expected economy in the U.S. driven by the payroll tax increase. Similar to CAT and KMT, it’s possible that investors will look past the lower earnings guidance at first. Still, if the U.S. economy weakens more than expected it’s likely that guidance will have to be dropped even further.

My initial price target for CMI is $100 implying about a 15% return to my target. My secondary target is $94. My $100 target is essentially in line with the stock’s 200-day moving average. Two other technical indicators which point towards CMI being near a turning point are the Williams %R indicator, which has just broken below overbought territory (see chart) and the TRIX, which has begun to roll over and is close to breaking below zero. All said, the stock is likely to be volatile around its earnings release day and I am not opposed to taking a quick profit on the open if the stock were to drop in the premarket.

My third short idea is Standard Motor Products (SMP, $23.13). This is another stock that is trading very close to a 52-week high. Indeed, the chart is showing a classic double top formation here and the stock could be poised to take a breather here. The company has been benefitting from strong sales of aftermarket parts. Still a couple of things could halt the stock’s progress here. To start, about 250,000 cars were totalled in Hurricane Sandy across the East coast. This many cars coming off the market all at once could impact the demand for replacement parts. Indeed, prices for used cars have already gone up $500 – $1000 and many of those cars were likely replaced by new cars as well. While 250,000 vehicles is only a blip compared to the total amount of vehicles in the U.S., the sheer number of vehicles could have an impact on first-quarter guidance given the suddeness of the loss of that many vehicles all at once. The second key point here is that SMP is trading near 52-week highs at nearly the same time period that it did last year before the stock collapsed heading into the summer months. Indeed, SMP shares dropped from a high of $25.48 on February 21st to a low of $11.82 on June 12th. That’s a 53.6% drop in less than three and a half months. Given the low number of shares outstanding, the stock can be extremely volatile. Over the past two years the stock has experienced a number of double-digit drops followed by strong advances. With the stock showing a double-top technical formation while trading near a 52-week high, I don’t mind speculating on a near-term correction. With that said, my near-term target is $20, implying a 15.5% return to my target. If the company lowers earnings expectations when they report earnings, then its possible that the stock could hit $18 a share, implying a 28.5% return to my target.

January 25, 2013

Daily Kill Sheet For January 25, 2013

Filed under: Uncategorized — Administrator @ 12:52 pm

Take a look at Caterpillar Inc. (CAT, $95.07) on the short side for a trade into their earnings release on Monday. The company released December sales this morning and the results were less than spectacular. Worldwide sales for December declined 1% on a year-over-year basis and was down sequentially from +5% in November. By business segment, Machine sales declined 1% while Engine sales dropped 2%. On a geographical basis North America and Asia Pacific were the weakest regions with sales declining 6% and 7% respectively. Looking ahead, inventories remain high and it’s likely that CAT will have to take some downtime to get dealer inventories back in line.

At this juncture, I expect that CAT will be lowering its earnings guidance tomorrow and that, depending on the severity of the cut, we could see more share price weakness. The current consensus for next year is $8,55 a share. Over the past two peak to trough cycles, CAT’s earnings declined 75% (2008 – 2009) and 47%, (1997 – 2002) respectively.The $8.55 consensus estimate implies that the Street is looking for only a 6% earnings decline…an unrealistic assumption if past history is used as a guide. My estimate for 2013 is $6.50 a share, or a 28.5% decline year over year. To be conservative, my $6.50 estimate is likely the low on the Street at this juncture and it implies that a fair value for the shares fall closer to $81 a share than the current $95+ price.

On a technical basis, yesterday’s trading confirmed a bearish harami pattern that had appeared at Wednesday’s close. If the company does guide down tomorrow, then the weak fundamentals, coupled with the weak technical pattern, could see the shares retest the 50 05 200-day moving average at $89 or $88, respectively. My near-term target is $89 implying a 7.0% gain to my target.

January 24, 2013

Daily Kill Sheet For January 24, 2013

Filed under: Uncategorized — Administrator @ 9:36 am

As Steve Miller would say,”go on take the money and run”. Kennametal (KMT, $39.10) reported second-quarter earnings this morning of $0.52, $0.12 below the consensus estimate. The company guided full-year earnings to a range of $2.60 – $2.80, well below the $3.34 consensus estimate.

Operationally, results were weak across the board. The industrial segment saw sales drop 12% year over year, with organic sales declining 10% and a 2% impact from currency translation. On an organic basis, sales declined 15% in general engineering and 8% in transportation, while aerospace and defense sales grew 10%. 

Meanwhile, the infrastructure segment saw sales increase 17%, all of this came from the recent Stellite acquisition. Organic sales for the segment were down 8% and currency translation also hurt sales to the tune of 1%. On an organic basis, sales declined by 13% in energy and 6% in the earthworks markets. Earthworks sales declined from persistently weak coal mining activity in North America, where a number of mine closures further depressed sales. Energy sales fell globally due to reduced drilling activity in oil and gas. On a regional basis excluding the impact of Stellite, sales decreased approximately 12% in the Americas and 3% in Asia and remained flat in Europe.

Consolidated operating income decreased due to lower absorption of manufacturing costs related to reduced sales volume and an inventory reduction initiative, as well as an unfavorable sales mix. All said, the consolidated operating margin absent Stllite declined 400 basis points. 

Looking ahead, due to slower than expected demand in the company’s served markets, Kennametal adjusted its full-year outlook given lower sales volumes. The company notes that its order rates have remained steady over the past few months, which may reflect that bottoming has occurred.

The company now expects fiscal 2013 sales growth between negative 2 and negative 4%, with organic sales ranging from negative 7 to negative 9%. Previously, the company had forecast total sales growth ranging from 3% – 6% with organic sales growth of flat to negative 3%.
Based on the revision, the company has reduced its EPS guidance for fiscal 2013 to range from $2.60 – $2.80, versus its previous expectation of $3.40 – $3.70. Included in this outlook is the accretive contribution of the Stellite acquisition, which is now expected to range between $0.10 – $0.15 a share as compared to the previous range of $0.15 – $0.25 a share, net of integration costs. With that said, the company has cut its guidance by $0.80 – $0.90 a share in the matter of three months. Economic visibility is low across the world and guidance is still nowhere near a typical peak to trough pullback for the company. With that said, I’d expect at least another quarter of weakness and further cuts to full-year guidance as the year progresses. With that said, while I look to cover KMT shares here (39.10) to book the quick 8.8% trading gain, I would not be a buyer of the shares here without a drop below $32 a share. 

January 22, 2013

Daily Kill Sheet For January 22, 2013

Filed under: Uncategorized — Administrator @ 10:15 am

Take a look at Kennametal (KMT, $42.56) on the short side. Kennametal is a manufacturer of engineered tools for industrial metal working and rotary cutting tools. They also supply equipment into the aerospace and transportation markets. The company has hit a rough patch over the past six months as sales have slowed and margins have come under pressure. I expect this trend to continue this quarter as well, given the weakening in the global economy. JP Morgan recently upgraded the stock citing the potential for an improving economic environment in the second half of the year coupled with the consumable nature of many of the company’s products. While it’s true that the brunt of Kennametal’s products are consumable in nature, it hasn’t stopped earnings from declining strongly in the past, and I suspect the JP Morgan upgrade is premature.

Indeed, over the past three peak to trough cycles, KMT’s earnings have declined 71% (2008 – 2009), 70% (2001 – 2003) and 48.8% (1998 – 1999), respectively. Currently the consensus is signalling only an 11% – 13% drop in share net peak to trough for this cycle. The average decline over the past three cycles was a 63.3% decline. With that said, even if the company was to match the mildest decline seen over the last three cycles, earnings would still decline to a sub-$2.00 level. Bulls will point to the company’s recent acquisition of Stellite adding about $0.20 to the bottom line this year. While that may be so, it will not be enough to overcome the margin contraction from the main businesses. All said, I expect the company will either guide down earnings tomorrow when they report second-quarter earnings, or at a minimum give a guarded economic outlook.

On a technical basis, KMT shares are showing a classic head and shoulders formation outlined in the chart below. To test the neckline to this formation the stock would have to drop to $31 a share and eventually break through for this to be a true head & shoulders topping formation. My targets are much more conservative, however, so that we can be long gone in case the economy does accelerate from here. My near-term target is $38, implying a 12% gain from the current quote. My $38 price target is an area of multiple strong areas of support that were accompanied by strong volume. If the company was to guide earnings toward the $2.00 area, then it’s possible that my secondary target of $35 could come into play, which would imply a 21.6% gain from the current quote.

January 17, 2013

Daily Kill Sheet For January 17, 2013

Filed under: Uncategorized — Administrator @ 2:17 pm

I am taking profits on my 10/5 Trading Buy on Caterpillar Inc. (CAT, $96.06) with an 11.7% gain. We originally bought CAT when it was trading at 8.5x earnings after it guided down at MinExpo in September. Our thesis was that signs of an improving economy, coupled with low interest rates and investors rolling out their investment horizons to include 2013 and 2014 estimates would allow the stock to trade up towards 10x earnings. CAT shares are now trading at 10.5x EPS and thus it’s now time for us to take profits. Remember, the company guided down in late September and I would expect them to have a cautious tone in the upcoming earnings season. With that said, let’s take our short-term trading profit and run.

January 16, 2013

Daily Kill Sheet For January16, 2013

Filed under: Uncategorized — Administrator @ 12:31 pm

Happy New Year and welcome back to our first post in 2013. Today we are closing out our 9/14 Trading Buy in Agco Corp. (AGCO, $51.50) with a 12.3% gain. We initially bought the stock ahead of the fourth-quarter harvest to take advantage of its seasonal trading bias, coupled with the fact that farmers oftentimes order new equipment in the fourth quarter as payments for their crops come in. Last year’s drought lead to elevated prices for corn and wheat. Farmers who were not impacted harshly by the drought saw great pricing. Meanwhile, other farmers received crop insurance payments keeping them flush with cash. The high prices and low crop inventories are keeping agricultural commodity prices elevated thus, it’s a good time for farmers to get more efficient equipment. With that said, AGCO share are now trading closer to fair value and we will take our profits here.

December 11, 2012

Daily Kill Sheet For December 11, 2012

Filed under: Long,Retail,Specialty Retail,Uncategorized — Administrator @ 9:50 am

I am closing out my 10/4 trading call on Limited Brands (LTD, $51.64) with a 2.5% gain. Last night after the close, Limited announced a $3.00 a share special dividend payable on December 26th to shareholders of record on December 20th.

I batted a 1000 on this call. In early October I speculated that there was a good chance that both The Buckle and Limited would announce special dividends given their past history of announcing special dividends, and the fact that tax laws are set to change next year, raising the rate at which dividends were taxed. In late November BKE announced a $4.00 a share special dividend, and last night LTD announced their $3.00 a share special dividend. At this point, I’ll take the money and run and leave someone else to collect the dividend. We closed BKE with an 11% gain and now LTD with a 2.5% gain, thus we did pretty well with our special dividend calls.

November 26, 2012

Daily Kill Sheet For November 26, 2012

Filed under: Uncategorized — Administrator @ 9:14 am

I am closing out my 7/10 Trading Buy on Take Two Interactive (TTWO, $12.42) and my 10/4 Trading Call on The Buckle (BKE, $50.39) with gains of 34.1% and 11.0%, respectively.

For TTWO, we took advantage of the seasonal trading pattern for the stock and we’re closing out our position with a hefty gain. While there could be more upside to the stock, as companies report their Black Friday and Cyber Monday sales, I find it is better to take profits ahead of the news in case we see a case of buy the rumor sell the news.

For BKE, the company announced a $4 a hare special dividend as we speculated they might and we are selling the shares given they have achieved our catalyst.

November 12, 2012

Daily Kill Sheet For November 12, 2012

Filed under: Uncategorized — Administrator @ 9:41 am

I am taking profits on my 5/18 Trading Buy on Precision Castparts (PCP, $181.44) for a 9.0% gain. Friday after the close, the company announced the acquisition of Titanium Metals for $16.50 a share. Although the acquisition should be accretive to earnings to the tune of $0.50 – $1.00, the acquisition will likely add an added element of cyclicity to PCP’s earnings. Given the stock has now passed my near-term price target, I am taking profits here and looking for a better entry point.

« Newer PostsOlder Posts »

Powered by WordPress