Engineering Earnings

SafeHaven.com ^ | August 7, 2003 | Chad Hudson

[Starwind]

August 7, 2003

Engineering Earnings
- by Chad Hudson

This week's economic data continued to depict an economy gaining strength. However, the stock market has not been impressed as the S&P 500 closed at a two-month low on Tuesday. The bond market has been where the action is and it is amazing how contained the stock market has been given the historic increase in long-term interest rates. Corporate earnings have been in the spotlight for the past month. While corporate earnings managed to beat analyst's estimates, results were not as high quality as was priced into the market. Investors realized that second quarter earnings growth was more a function of cost cutting and favorable currency gains than quality earnings growth.

Monday's release of the ISM non-manufacturing survey revealed that the service sector continued to expand. The survey of service sector business activity jumped 4.5 points to 65.1; this was the highest level since the index was created in July 1997. Strength was led by new orders, which soared 9.4 points to 66.9, which was also a record. Employment registered the second consecutive month over 50 since the first two months of 2001 when the component was trending down. Economic strength has started seeping into the manufacturing sector. Last week, the manufacturing ISM showed expansion in July for the first time since February. New orders jumped 4.4 points to 56.6, a level not seen since January.

Vehicle sales in July jumped 5% from June to a 17.3 million annual rate. Not only was this higher than economists expected, but the highest rate of the year. The Big Three lost 2.2% market share in July from last year. Every month this year, the Big Three have lost market share on a year-over-year basis. Market share has continued to fall even as the Big Three have piled on the incentives. General Motors still offers the largest average incentive, $3,994, but Ford and Chrysler are catching up. Ford's average incentive jumped 7.4% in the last month to $3,986 and Chrysler's soared 12% to $3,958. Even the Japanese automakers have increased their incentives, but still remain substantially below the US manufacturers. Toyota's average incentive increased 15% to $1,132, while Honda's jumped 44% to $805. Nissan only increased its incentive by 6% to $1,492.

Most retailers will report July sales on Thursday, but a few have already reported. While it is an extremely limited sample, so far it appears retail activity in July mirrored auto sales, which indicates the consumer has yet to slow down. Even sales at Costco, which has seen its stock decline over 20% this week, said July same store sales increased 8.0%. Bank of Tokyo-Mitsubishi estimates that July same store sales will be 3% ahead of last July.

With earnings season nearing completion, Ryan wanted to analyze how the weaker dollar helped revenue growth. He also dug into the quality of Cisco's earnings, so without further ado:

We started with the 30 Dow Jones Industrials and looked for the effect of currency gains on top-line growth. Out of the 30 Dow companies only eleven separated revenue growth and currency-adjusted revenue growth. Understandably, this is not a statistically significant sample, but it still proves useful in witnessing how a weak dollar benefits the multinational companies. The results are difficult to ignore. A remarkable 4.8% of the 7.6% (63%) average revenue growth of the eleven companies that reported revenue growth was due to currency gains. Joe Basset of Banc One Investment Advisors summed up the current business climate, "A lot of the top-line growth is still anemic, especially if you consider foreign exchange."

"What components were the biggest beneficiaries of the dollar decline?" one might reasonably ask. IBM achieved 70% of its 10% revenue growth due to currency gains from a weaker dollar. Eastman Kodak would have shown second quarter revenue growth of negative 5% instead of the 1% it did show had currency not been an issue. And of the double digit revenue increase (10%) from McDonald's in the most recent quarter, a full 60% of that was due to foreign currency gains.

Dow Jones: Currency Impact on Q2 Revenue
Component Name	Q2 Revenue with Currency Gain	Q2 Revenue without Currency Gain	Difference
3M	11.0%	5.4%	5.6%
Altria	-1.3%	-5.7%	4.4%
American Express	6.9%	4.9%	2.0%
Caterpillar	12.1%	7.9%	4.2%
Du Pont	10.0%	5.0%	5.0%
Eastman Kodak	0.5%	-5.5%	6.0%
Honeywell	2.0%	-2.0%	4.0%
IBM	10.0%	3.0%	7.0%
Johnson & Johnson	13.9%	8.9%	5.0%
McDonald's	10.0%	4.0%	6.0%
Procter & Gamble	8.0%	4.0%	4.0%
AVERAGE	7.6%	2.7%	4.8%

Since many firms hedge their foreign exchange exposure and the accounting data does not require division by division results in home currencies, it is difficult to analyze how currency translation affects the bottom line. Revenue data is all that we have to analyze, at least until 10-Qs and 10-Ks are filed. The results show that companies benefited from outside forces during the second quarter. In order for investors to maintain comfort with second half earnings estimates, companies will have to do a better job at growing revenues.

Last night after the market close, networking solutions provider Cisco Systems released their fourth quarter and fiscal year 2003 financial results. Investors were duly unimpressed, as the stock has declined 6% since yesterday's close. Cisco reported that it had no fiscal year revenue growth and fourth quarter revenue fell by 2.6%. Note these growth numbers are inclusive of currency gains and the incremental revenue from the Linksys acquisition. Revenue guidance for the tech bellweather was equally benign, as CEO John Chambers said that revenues are expected to increase roughly 2% in the first quarter of fiscal 2004.

Cisco's fourth quarter income statement was filled with examples of one-time tricks that are often only lesson in text books. There were several line items that helped boost net income during the fourth quarter that cannot be relied upon for continued growth. Differences in amortization of purchased intangible assets accounted for $178 million of the increase, a decline in research and development accounted for $27 million. Furthermore, allowance for doubtful accounts declined substantially (45%) from $335 million in Q4 2002 to $183 million in Q4 2003 despite accounts receivables jumped by $246 million. Adding all these factors together Cisco's pre-tax income actually declined by 11.1% instead of the 25.2% growth Cisco reported. Furthermore, the repurchase of shares added a cent to Cisco's net income per share.

Cisco Systems
Q4 2003 and 2002 Comparisons in $ millions
		Q4 2003
Income before tax		$     1,373
	less: difference in amortization of
	purchased intangible assets	$      (178)
	less: difference in process
	research and development	$        (27)
	less: difference in interest income	$         62
	less: difference in other income	$        (81)
	less: difference in allowance
	for doubtful accounts	$      (174)
Revised Income before tax		$       975
	Change over Q4 2002	-11.1%

Cisco currently trades at 30 times trailing earnings. This is a company that had declining quarterly year-over-year revenue and used earnings management to achieve Wall Street estimates.

Mid-Week Analysis
PrudentBear.com

[Starwind]

Also check out Sales Lag Profit Gains; Wall St. Wants To See More Top-Line Growth in Investors Business Daily:

In the first quarter, earnings advanced 11.7%, sales 9.9%.

Now dig a little deeper. In the first quarter, energy companies' revenue grew 46%. Strip out energy, and S&P sales growth was just 6.8%. In the second quarter, energy firms' sales rose 20%. Strip out energy again, and Q2 sales have gained just 5.3%.

That's not all. The weaker dollar boosted sales for scads of companies. The consensus says it's boosted S&P 500 sales by 1.5% to 2.5%.

[Starwind]

Fyi...

[RaceBannon]

Well...just in time for unemployment to run out...

[RLK]

business activity jumped ..

--------------------

Business activity, a vague term. What does that mean, passing foreign manufactured goods back and forth amongh ourselves and calling it productivity?

[null and void]

Well...just in time for unemployment to run out...

Friday was my last day of eligibility...

[RaceBannon]

Well, just quit your whining and re-train...or move...or start up a business!!

I wish I had a dollar for each time I . . .

[arete]

I have never trusted John Chambers. If or when they are forced to expense all those stock options, CSCO will evaporate with nothing left but the residue of hype.

Richard W.

[null and void]

Well, just quit your whining and re-train...or move...or start up a business!!

Retrain? OK, lets see, I'm 50, what career path would you recomend? I'm pretty beat up, intense physical labor is out, I'd like something that isn't going to end up being done in India, China, or Elbonia next year.

move. Not without my kids. Ex will NOT move from liberal Kalifornia. In eight years, when my youngest reaches majority, OK. Now, no.

start a business. Great idea. I've been in several startups and pre startups. Hey! Check out what happened to Transparent Networks a couple months ago. Proven founder, started many businesses in my field in the last quarter century or so. The venture capitalists came in one day and demanded all their money back. Now!

On the bright side I've signed a contract engineering agreement to work as an temporary part time engineer. The project I was selected for has evaporated, but I'm hopefull I will get some work on other projects before "cost savings" and regulations kill this biomed/pharmaceutical field leader's ability to develop anything new...

Sooooo, what do you do, where you can't see your job being replaced by off shoring or illegal immigrants?

[RaceBannon]

LOL!

You havent been following these posts very closely, have you?

http://www.freerepublic.com/focus/f-news/959787/posts
Lawmaker predicts defeat for 'Buy American' language (Defense Department procurement update)
"But, in general, the protective system of our day is conservative, while the free trade system is destructive. It breaks up old nationalities and pushes the antagonism of the proletariat and the bourgeoisie to the extreme point. In a word, the free trade system hastens the social revolution. It is in this revolutionary sense alone, gentlemen, that I vote in favor of free trade." ~ Karl Marx, On the Question of Free Trade, January 9, 1848
http://www.marxists.org/archive/marx/works/1848/01/09ft.htm#marx


"Communists and socialists feel sure that setting up international “free” trade systems which impose regulations chuck full of intrigues, redistribution plans, arbitrary law, and interdependence schemes, will win out against the conservative interests of every free nation. What could be better than to use “free” trade to reverse the advantage of the relatively free, moral, prosperous, and strong nations of the Earth, so that the tyrannical, amoral, poor, and weak nations of the socialist bloc might get the upper hand? What could be a more cunning approach than to market the idea that those who oppose “free” trade are enemies of freedom?"
http://www.newsmax.com/commentarchive.shtmla=2000/6/27/105655

http://www.freerepublic.com/focus/news/957315/posts

http://www.freerepublic.com/focus/news/957315/posts

http://www.freerepublic.com/focus/f-news/956435/posts

http://www.freerepublic.com/focus/f-news/956924/posts

http://www.freerepublic.com/focus/f-chat/956820/posts

http://www.freerepublic.com/focus/f-news/955929/posts

http://www.freerepublic.com/focus/f-news/956686/posts

http://www.freerepublic.com/focus/f-news/956628/posts

http://www.freerepublic.com/focus/f-news/956517/posts

http://www.freerepublic.com/focus/f-news/955929/posts

http://www.freerepublic.com/focus/news/954156/posts

http://www.freerepublic.com/focus/f-news/956435/posts

http://www.freerepublic.com/focus/f-news/956461/posts

http://www.freerepublic.com/focus/news/957331/posts

http://www.freerepublic.com/focus/f-news/957635/posts

http://www.freerepublic.com/focus/f-news/957588/posts

http://www.freerepublic.com/focus/f-news/960206/posts

http://www.freerepublic.com/focus/f-news/959227/posts

http://www.freerepublic.com/focus/f-news/960501/posts

http://www.freerepublic.com/focus/f-news/959757/posts

http://www.freerepublic.com/focus/f-news/960979/posts

http://www.freerepublic.com/focus/f-news/960888/posts

http://www.freerepublic.com/focus/f-news/961212/posts

http://www.freerepublic.com/focus/f-news/961400/posts

http://www.freerepublic.com/focus/f-news/961386/posts

http://www.freerepublic.com/focus/f-news/961476/posts

[RaceBannon]

Especially this one!!

http://www.freerepublic.com/focus/news/954156/posts

[null and void]

LOL! You can't answer a smple question can you?

Again:

Sooooo, what do you do, where you can't see your job being replaced by off shoring or illegal immigrants?

[RaceBannon]

Keep up with your posts, youll see the answer soon! :)


http://www.freerepublic.com/focus/news/954156/posts

[Glenn]

Vehicle sales in July jumped 5% from June to a 17.3 million annual rate. Not only was this higher than economists expected, but the highest rate of the year. The Big Three lost 2.2% market share in July from last year.

And this is the good news?

But, please...go out and buy another Honda.

[null and void]

Perhaps I'm asking the wrong question.

In 100,000 work or less, what to you do for a living, that gives the the warm secure feeeeelling that your job is immune to offshoring or being done by underground ecconomy illegal aliens?

Please limit your answer to less that 10,000 linked threads.

Aer you perhaps retired? A bureaucrat? Military? (extra credit if it's US military).

In other words it's a simple question a normal person could answer in one to a dozen words.

What do you do for a living?

Please fill in the blank: "I'm a(n) ______."

[RaceBannon]

I posted the link separately twice so far, and once in the collection of links above.

If you are so obtuse as to not want to read in detail what I do and what I think on this, then I should not be surprised you are so intentionally unwilling to not see the humor in my first comment to you.

Have a nice day.

[null and void]

Have a nice day.

You too.

[skinkinthegrass]

I am an Associate Degreed Engineer, specializing in Machine Design. I know 5 CAD languages, and have also taken courses in 4 programming languages...

I think I know what you mean...I have have experience on 2 CADD systems (CADD operator, MicroStation & AutoCAD)...No Job...GOOD LUCK :/

[null and void]

Thanks!

That 10,642 word essay was RaceBannon's answer to the question: "What do you do for a living?" He thinks overwhelming verbage makes his job secure.

He's wrong.

Me? I'm a process engineer, 30 years wafer fab experience, 20 of which is in MEMS (Micro-Electro-Mechanical Systems).

I design (AutoCAD) products, develop the processes to build them, write the specs, travelers and produce the prototypes. I hold four patents, with four more pending.

I've built a wide varity of parts like blood pressure sensors, airbag deployment accelerometers, optical cross connect switches, oil exploration geophones, micro valves, nozzels, mechanical fixtures, scanning mirrors, and much more.

I've worked as an operator, technician, tech writer (unlike Race's screeds, people can actually read my documents in less than a week each), engineer, safety officer, customer interface and supervisor.

My skill set includes mask design, photolithography, wet etching, dry etching, vacuum deposition (chemical and physical), process equipment repair and modification, etc.

Shoulda learned Hindi...

[RaceBannon]

Hey, Moron! (not skinkinthegrass)

You posted my short essay on why I know my job is never going to come back, and then you try to say I posted a 10,000 WORD ESSAY ON WHY IT IS SAFE?

Do you realize, this is the 5th post on this thread now connected to your question, where you completely ignored what the post was trying to tell you?

For a 50 YEAR OLD PROCESS ENGINEER you don't have very good reading skills.

Now, Go back and actually read what I wrote.

Me and you are in the same boat.

Jerk.

http://www.freerepublic.com/focus/news/954156/posts

Try reading it this time.