Top Gun FP Client Note: No Top Line Growth

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NOTE: Every week I write a Client Note for my clients.  For a limited time, I am allowing non-clients to sign up and receive the Client Note.  You can sign up at the top right hand corner of the website.  Here is this week’s.


The confidence of buying when stocks are climbing remains the overriding investment mantra today.
– Doug Kass, “Slow Down, You Move Too Fast”,, July 22
Despite much commentary (and market action) to the contrary, I find no evidence of economic stabilization or recovery in the first batch of 2nd quarter earnings reports.  While many companies are beating extremely low analyst EPS estimates, the dramatic drop off in revenues is alarming.
Earnings season got off to a great start last Monday (7/13) ahead of an outstanding report from Goldman Sachs (GS).  The service side of the business (investment banking, brokerage, asset management) showed stabilization and trading and proprietary strategies outperformed.  However, much of this is a function of improvement in financial markets which don’t necessarily correspond to improvement in the real economy.  Goldman’s report was a good one but it says more about Goldman than it does about the overall economy.
“Intel’s second quarter results reflect improving conditions in the PC market segment… and a clear expectation for a seasonally stronger second half.”
– Intel CEO Paul Otellini, quoted in Intel’s 2nd quarter earnings release
The next important report came last Tuesday (7/14) after the close from Intel (INTC).  The report and reaction have been characteristic of the entire earnings season so far.  EPS of 18 cents beat analyst estimates of 8 cents but the top line was notably weak.  Revenue of $8.02 billion was down 15% from revenue of $9.47 billion in the year ago period.  Even though EPS beat analyst estimates, it was down from 28 cents a year ago.  Despite little evidence as far as I can tell, Intel talked about an improving PC market and forecast a strong second half. 
Intel shares have rallied 13.7% in the six sessions since the release of the report.  The stock is now trading for more than 25 times analysts estimates for 2009 EPS after backing out the net cash and investments on its balance sheet.  Is that a reasonable reaction to the substance of the report?  Not in my opinion.
A similar bizarre response occurred yesterday when Caterpillar (CAT) reported 2nd quarter earnings.  CAT beat analyst estimates for 22 cents a share with EPS of 72 cents.  However, revenues were off 42% including 43% in its core machinery and engines component.  To me, that’s just a shocking number reflecting a huge drop off in capital spending for construction equipment.  Nevertheless, shares surged 7.7% on huge volume though they did correct a bit today.
I want to make quick mention of two other bellwether earnings reports, this time from consumer discretionary companies, that caught my attention.  Last Thursday morning, motorcycle maker Harley Davidson (HOG) reported that they sold 83,568 Harleys in the 2nd quarter.  That’s down 30% from the 119,501 they sold in the year ago period resulting in a 27% drop in revenues.  Harley shares have rallied 15.4% in the five trading sessions since the release of the report and now trade for about 30 times analyst estimates for this year’s earnings.
Starbucks (SBUX) reported yesterday afternoon that same store sales at their US stores were down 6% from the year ago period.  Nevertheless, they earned 24 cents a share on heavy cost cutting which beat analysts estimates for 19 cents.  Shares soared 18% today on enormous volume and now trade for more than 20 times analysts estimates for this fiscal years earnings.
The picture that is emerging to me is one of a continually contracting economy to which corporations are reacting to by downsizing and cutting costs.  This is resulting in beating analyst earnings estimates but in no way indicates a stabilizing or recovering economy. 
A couple of housekeeping items:
(1) I mailed out 2nd quarter performance reports on Monday evening so you should be receiving those later this week.
(2) I calculated overall returns for the 2nd quarter and they were as follows:
S&P: +15.22%
Wilshire: +16.17%
Top Gun: +1.42%
Since inception returns (Jan 1 2007 – June 30 2009) are as follows:
S&P: -35.18%
Wilshire: -33.70%
Top Gun: +46.67%
A chart of Top Gun’s performance compared to the major benchmarks is attached [Blog Readers: E-mail me for the updated performance chart].
Weekly Returns (7/13-7/17)
S&P: +6.97%
Wilshire: +7.05%
Top Gun: -1.07%
YTD Returns (through 7/17)
S&P: +4.11%
Wilshire: +6.03%
Top Gun: +10.25%
Greg Feirman
Founder & CEO
Top Gun Financial (
A Registered Investment Advisor
9700 Village Center Drive #50H
Granite Bay CA 95746
(916) 224-0113

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