Impact of Debt Ceiling Deal, Technology Earnings Preview
John is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As of this writing heading into the MLK holiday weekend, the Republican Party has agreed to a three month deal on the debt ceiling. I feel the implications of this news should not be underestimated, as the announcement will have a positive effect on money flows from the opening bell on Tuesday, Jan. 22. We saw a significant amount of insurance buying in the past week to protect against a February sell-off in the market, and given the near-term deal, these buyers of volatility may find themselves with unneeded protection going into the second month of the year.
Overall, I expect the news of the short-term three month deal to have an upward effect on market indices going into February. I would not be surprised to see the S&P 500 close higher on the week, and insurance premiums lower, given the news.
With the wind at the backs of investors for the short-term, here are three earnings reports I’m watching for Tuesday, January 22.
Advanced Micro Devices (NYSE: AMD)
Tuesday, Jan. 22 after market close; Consensus $5.25 EPS / Revenue $29.09B
Shares of AMD fell more than 10% on Friday after larger competitor Intel Corporation disappointed Wall Street with fourth quarter earnings. Intel beat expectations on earnings and revenue, but the company stated it planned to increase capital spending by nearly 20% in 2013 amid a broader slowdown in PC sales. Intel holds roughly 80% share of the PC market. The company is approximately 60 times larger than AMD, with a market capitalization greater than $105 billion. Advanced Micro Devices has a market cap of only $1.75 billion.
On January 8, Standard & Poor's lowered its corporate credit and senior unsecured ratings on AMD to ‘B’ from ‘BB-’. S&P credit analyst John Moore stated, “The downgrade reflects our expectation for continued revenue and earnings declines resulting in leverage exceeding 7x over the coming year because of weak PC industry demand prospects and intense competition from industry peers, including Intel.” Revenue at AMD has declined nearly 9% in the last year, while Intel has outperformed with only a 1.22% decline in revenue.
The writing was on the wall for disappointment when International Data Corporation trimmed its 2013 outlook for the semiconductor industry before Intel’s earnings call. The market intelligence firm expects 2013 semiconductor revenue to reach $319 billion, a 4.9% increase over 2012. IDC expects industry revenue to reach $368 billion by 2016.
AMD CFO Devinder Kumar stated on December 11 at the Raymond James Technology & Supply Chain Conference that he expects AMD’s corporate restructuring to be completed within the first half of 2013. The company has seen at least 26 executives leave the company in recent weeks, most recently a 25-year AMD veteran who left in December to join South Korean technology giant Samsung. Barclays also downgraded AMD to Underweight from Equal Weight on January 3, maintaining its $2 price target.
Google (NASDAQ: GOOG)
Tuesday, Jan. 22 after market close; Consensus $10.54 EPS / Revenue $12.27B
On January 3, the U.S. Federal Trade Commission announced it was closing its investigation of Google which began nearly two years prior. The FTC, whose primary goal is to prevent anticompetitive business practices, went as far to say that Google’s search results actually benefit the consumer despite concerns of self-dealing within the Google product suite. Google manages to dismiss itself largely unscatched, with little financial impact or strategic implications from the deal.
For further reading, I recommend Google shareholders reference a New York Times piece titled A Victory for Google as F.T.C. Takes No Formal Steps. The New York Times also confirms that Google worked hard behind closed doors to reach a deal with FTC. Microsoft, which operates the competing Bing search engine, has called the government ruling “troubling” and “unusual.” Online review website Yelp called the ruling a “missed opportunity” stating FTC failed to “protect innovation in the Internet economy.”
For the current quarter, analysts at SunTrust raised their price target on Google to $835 from $800, specifically citing the positive FTC ruling and on the belief that negotiations with European regulators may also go in the company’s favor. Google has an even larger market share in western Europe than here in the United States.
The Financial Times disagrees with SunTrust’s assessment that Google could reach a similar outcome with European regulators. In a January 10 article (free registration required), the FT cites EU competition chief Joaquin Almunia as stating he believed Google is diverting traffic from rivals, providing hints that EU may be taking a different posture than their American counterparts.
In addition to government regulatory action, analysts continue to debate the significance of Facebook’s Knowledge Graph Search as a threat to Google’s search business. I personally believe Facebook is a non-threat to Google, and even Yelp, as it will take millions of consumer usage hours for Facebook search to develop and commercially mature. A great article which elucidates this thought comes from entrepreneur and blog writer Steve Chaney, who states that Facebook search will be “basically useless.” Chaney asserts that search results will be negatively affected the number of “Likes,” and consumers’ Facebook activity is often motivated by winning prizes.
At the current time, it appears there are a greater number of ‘soft’ qualitative aspects that investors need to consider versus ‘hard’ qualitative concerns going into Tuesday’s earning release. Aside from Google’s core search business, the company has the potential to surprise with strong mobile results from Android. Hardware offerings such as Chromebook also continue to gain preference among consumers. Shares of Google have risen slightly over the past 3 months despite an 8% slide following third quarter earnings on October 18. The market is currently pricing in a 4% movement in Google following Tuesday’s earnings announcement.
International Business Machines (NYSE: IBM)
Tuesday, Jan. 22 after market close; Consensus $5.25 EPS / Revenue $29.09B
International Business Machines reached an all-time high of $211.79 in October, however shares have retreated lower by approximately 8% since this time. Big Blue retained its position as most-awarded patent company during 2012, with a record 6,478 patents awarded and its 20th consecutive year with the title.
On Monday, January 14, JPMorgan downgraded IBM to Neutral from Overweight and lowered its price target on the technology giant to $197 from $215. The analysts believe IBM’s limited revenue growth potential will put a ceiling on the share price. During the last twelve months, earnings have grown approximately 9% at IBM, while revenues declined slightly more than 1%. The market expects shares of IBM to move 3% higher or lower following Tuesday’s earnings release.
Economic Data for Tuesday, Jan. 22
On the economic front, the National Association of Realtors releases existing home sales for December on Tuesday at 10:00 a.m. Also known as home resales, existing homes rose to a 5.04 million annual rate during the month of November, an increase of 14.5 percent on a year-over-year basis. Existing home sales reached an all-time high in mid-2005 of 7.072 million units. The run rate is expected to reach 5.1 million with Tuesday’s release, an increase of 1 percent from the prior month.
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johnmacris has no position in any stocks mentioned. The Motley Fool recommends Google. The Motley Fool owns shares of Google and International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!