Nevada and New Jersey Gamble With Online Gambling

Online gambling has been illegal in the United States since Congress barred it in 2006.  But opinions and attitudes are changing.  Last month the state of New Jersey, home to many well known Atlantic City casinos including Bally’s, Borgata, and Caesar’s, officially legalized online gambling in the state.  On Thursday, March 21 2013, 888 Holdings Plc (EIHDF.PK) announced plans to launch online gaming in the state of Nevada after receiving the first U.S. license to ever be awarded to an internet gambling firm.

As reported by Reuters, 888 could launch their initial offering as early as May.  888 has reportedly already finalized a deal with Treasure Island in Las Vegas to launch online poker under its own brand in the state.  Deals have also been reached with Caesars’ and WMS to create an internet spin-off of Caesars’ World Series of Poker and provide an internet presence for WMS’ slot machine operations.

While initial revenue from the Nevada operations is not likely to be substantial, and reportedly not expected to impact 888’s bottom line until at least 2015, the company sees this as an important first step towards a broader U.S. gaming market.

"This is an historic moment for 888. This is the first time a company uniquely providing online gaming has been licensed by any U.S. jurisdiction," Chief Executive Brian Mattingley said.

Many internet gaming companies like 888 and Bwin, the world’s largest internet gambling company, are well positioned to take advantage of the emerging U.S. market, with the infrastructure and experience already in place from years of operating in Europe.

Online gaming has a distinct advantage over traditional casinos.  People will no longer have to travel, sometimes great distances, in order to gamble.  Instead they will be able to enjoy doing so from the comfort of their own home, or anywhere else with an internet connection.

What does this mean to holders of casino and gaming stocks?  In the short-term we don’t expect any impact, as the market is still in its infancy.  In the long-term online gaming is sure to steal some of the market share from existing traditional casinos as more legislation is passed and online gaming becomes available to more people.  But don’t fold on your gaming stocks just yet.  Traditional casinos and gaming establishments are well aware of the potential to lose market share and are already looking at ways to adapt.  While Treasure Island, Caesar’s and WMS have already established partnerships with 888, we expect many other gaming firms to follow suit and it’s highly likely that many of them will establish their own online presence as an extension of their traditional businesses.  Bottom line, for investors in gaming stocks, this can only be a positive development and you might want to look into expanding your holdings to include some online gaming companies if you don’t already.

Is it Time to Sell Amazon?

Amazon (AMZN) is to internet commerce as Wal-Mart is to traditional retailing.  Both companies are the alpha dogs in their respective niches and are generally considered sound investments.  However, according to David White, there’s quite possibly a perfect storm of circumstances converging right now that should at least cause you to stop and evaluate your position in Amazon.

White explains, “Amazon has revenues of $21.27B in Q4 2012 alone. For FY2012 that figure was $61.09B. This was up 27% from FY2011, although Q4 revenue was up only 22% year over year. However, AMZN was far from the largest retailer in terms of profits. In 2012 AMZN's GAAP net income fell to $97 million for Q4 2012 (or +$0.21 per share) versus $177 million in Q4 2011. This figure is only 0.46% of revenue for Q4 2012. AMZN's net income for FY2012 was -$39 million. In other words it lost money.”

Additionally, the European Union’s recession is getting worse.  GDP fell by 0.9% in Q4 2012.  Cyprus is on the verge of default.  Italy is seeing 1000 businesses fail each day, over 300,000 businesses for the year.  Spain and Greece are experiencing unemployment rates of 26% or more.  Spain is still experiencing real estate and banking problems and saw a loss of 10.2% in retail sales for the 2012 Christmas season.  All of these factors will have a negative impact on Amazon’s future sales in Europe.

In the U.S., the picture doesn’t look any better.  As White explains, “The Q4 2012 GDP growth was only +0.1%. Subsequently the federal government hiked the payroll taxes by 2.9% of income for the average American. The government heaped further taxes on the rich for capital gains and dividends. It also added a 3.8% ObamaCare tax on the rich on their capital gains. Then at the beginning of March 2013, Obama signed the sequester into effect. All told economic experts think the decreased spending of the sequester coupled with the increased taxes of early January will lead to approximately -2% less GDP growth in 2013. If the Q4 GDP growth of +0.1% is a valid indication, this will mean a US recession in 2013. At the very least the average taxpayer will have 2.9% less income to spend at Amazon.com. If AMZN's margins weren't going to be negative already, the above US economic factors will likely push them into the red for the first three quarters of 2013.”  And the icing on the cake is the expectation that the U.S. congress will soon pass the Amazon Law, giving states the authority to collect taxes on sales made in their state.  This is likely to further erode Amazon’s sales and revenue, and consequently profits.

The combined effect of these issues is likely to force Amazon’s stock price to drop.  If you own Amazon stock, the question you need to ask yourself now is can you weather that potential storm or is it time to bail?  Only time will tell for sure.

The Truth About The U.S. Economy

On Wednesday the government announced that the gross domestic product (GDP), the total value of goods produced and services provided, fell at an annual rate of 0.1 percent during the fourth quarter of 2012.  That officially marks the worst performance of the economy since the end of the recession in 2009.  The announcement took analysts and economists by surprise since those polled by Reuters were reportedly expecting the economy to rise by 1.1 percent.

The Associated Press reported that the driving factors behind the contraction were, “the biggest cut in defense spending in 40 years, fewer exports and sluggish growth in company stockpiles.”  They pointed out that this could cause new fears with regards to the recent tax increases and planned government spending cuts but quickly postulated that, “the weakness may be because of one-time factors. Government spending cuts and slower inventory growth subtracted a total of 2.6 percentage points from growth.”  However, the fourth quarter saw a 2.2% increase in consumer spending and a large number of companies experiencing earnings growth for the quarter, driving their stock prices up.  These factors lead many to believe that this is an isolated incident

But let’s look at this a little closer.  First of all, fourth quarter includes the Christmas shopping season during which consumers traditionally spend more than normal.  The Social Security tax cut expired at the end of 2012, raising payroll taxes by 2%, or roughly $1,000 on households earning $50,000 a year.  That is sure to depress consumer spending.  Additionally, deeper government spending cuts are set to take effect in March unless Congress takes action, which is certain to have a negative effect on the economy as well.

Next is the issue of lower corporate inventories.  Caterpillar, Inc. reported a $2 billion reduction in inventory as well as a reduction in profits during the fourth quarter while Apple reported a 50% reduction in parts purchases.  There are two reasons why companies will reduce their inventories.  The first is if they found themselves with too much on hand the previous quarter.  The second is if they expect lower sales in the future.  Quite often an inventory surplus in the previous quarter can be attributed to slower than expected sales.  This can lead to lower sales forecasts and a consequential reduction in inventory stocks.  These factors ultimately will impact corporate earnings for the next quarter.

Finally, although there were a large number of companies reporting earnings growth for the quarter, it was below trend.  As Colin Lokey points out, “according to Goldman Sachs, the percentage of firms reporting positive earnings surprises at this point into earnings season has run at around 47% over the last 40 quarters, at around 40% over the last four quarters, at around 36% during last year's third quarter earnings season, and at just 34% during the current earnings season”.

While it’s impossible to foretell the future with any certainty, at this point it time it looks like this could possibly be the start of another recession.  Only time will tell.

PROCTER & GAMBLE STOCK RISES ON EARNINGS REPORT

Proctor & Gamble (PG) released their fiscal second quarter results today, reporting revenue and earnings that beat out analysts’ estimates.  The company reported second quarter revenue of $22.2 billion compared to forecasts of $21.91 billion and core earnings per share of $1.22, compared to analyst forecasts of $1.11 per share.  Revenue increased 6.95% from $20.74 billion in the previous quarter. Net income increased 44.28% from $2.81 billion in the previous quarter.  Trading opened at $71.75 and quickly set a new 52 week high of $73.25.  This is good news for the world’s largest consumer products manufacturer, maker of household products including Tide and Pampers. 

According to Wall Street Cheat Sheet, “Our second quarter results were at the high end of our expectations on the top-line and well ahead of forecast on operating profit, earnings per share and cash flow,” said Chairman, President, and Chief Executive Officer, Bob McDonald. “Global market share trends improved as we continued to implement our growth strategy and made very good progress against our productivity and cost savings goals. Our strong first half results have enabled us to raise our sales, earnings and share repurchase outlook for the fiscal year, while we strengthen investments in our innovation and marketing programs.”

Summary and Guidance from MarketWatch

• Organic sales increased three percent for the quarter, at the top end of the guidance range.
• Organic sales growth was broad-based, with all business segments increasing by two percent or more versus the prior year.
• Core net earnings per share increased by 12 percent to $1.22.
• Core gross margin increased 110 basis points due to the impact of higher pricing and manufacturing cost savings, partially offset by unfavorable geographic and product mix. Reported gross margin, including non-core restructuring charges, increased 80 basis points.
• Core and reported selling, general and administrative expenses (SG&A) as a percentage of net sales was unchanged, as enrollment reductions and productivity savings were offset by higher pension and employee benefit costs. Non-core charges in SG&A were in line with the prior year level.
• Core operating profit increased seven percent. Reported operating profit, including non-core charges, increased 68 percent.
• Operating cash flow was $3.8 billion for the quarter. The Company repurchased $1.4 billion of shares during the quarter and returned $1.6 billion of cash to shareholders as dividends. 

P&G is estimating net and organic sales growth in the range of three percent to four percent for the January - March quarter. Foreign exchange is expected to be neutral to sales growth. 

The Company expects March quarter core EPS in the range of $0.91 to $0.97, down three percent to up three percent compared to prior year core EPS of $0.94. On an all-in basis, P&G is forecasting earnings per share in the range of $0.90 to $0.96, an increase of 10 percent to 17 percent versus prior year diluted EPS of $0.82. Prior year all-in results included $0.13 of non-core costs, primarily related to restructuring charges. Current year all-in EPS guidance includes non-core restructuring charges of $0.01 per share.

APPLE - DOWN BUT NOT OUT

Apple Inc. (AAPL) stock dropped sharply Monday closing at $501.75, down $18.55.  Tuesday morning opening was $$498.30 and as of 11am EDT it is currently trading around $489 per share.  Shares hit a record high of $705.07 on September 19, 2012.

The Wall Street Journal reported Sunday evening that Apple had cut orders for iPhone 5 parts last month by roughly 50 percent, signaling a lower demand in the device than they had predicted.  This comes at a time when the company is facing increased competition from other smartphone makers who have eroded Apple’s market share.  In the last quarter of 2011 Apple held 23 percent of the worldwide smartphone market share.  During third quarter 2012 Apple’s market share had dropped to 14.6 percent.  Samsung Electronics has overtaken Apple as the dominant smartphone manufacturer with 31.3 percent market share in the third quarter 2012, up from 8.8 percent in 2010.

But hang onto those shares because as CNBC is reporting, Jefferies’ senior technology analyst Peter Misek puts the situation into perspective.  "We look at it as a little bit of a letdown obviously. It's not great that this happened. We thought this device would be the biggest seller of all time and in fact we think around 50 million units sold in Q4, which would make it the biggest selling electronics product of all time in a quarter," Misek said. "But there were hopes that it would be better than that. There were hopes that in Q1 that sales would be flat and instead what we're getting is a seasonally type decline in Q1." Misek expects first quarter iPhone builds to be between 35 million and 40 million.  Jefferies is expecting Apple’s stock to reach $800 per share, in part due to their substantial cash reserves. "If we look at the full year out, we think that the company can do somewhere around $50 of earnings, remember they have $100 per share of cash. By the end of next year they'll have somewhere around $150 per share of cash," Misek said. "So what you are doing is you are actually buying a stock that effectively is $400 and we think at $50 earnings for the year that it is a cheap valuation."  Apple also has new product launches planned for this year and may be making a deal with China’s largest cellular phone carrier, China Mobile.

What all of this shows us is that Apple simply overestimated demand for the iPhone 5 and is now adjusting their component purchases.  However they still reached a milestone sales number for fourth quarter 2012.  Therefore the drop in price is most likely due to skittish and uninformed investors dumping their shares at the slightest hint of trouble.  We do not believe that now the time to sell Apple stock; on the contrary it looks to be a good time to buy.

AIG BAILS ON BAILOUT SUIT

When the United States government rescued the world’s largest insurance conglomerate from bankruptcy in September 2008 to the tune of $182 billion in public taxpayer funds no one foresaw the possibility that anyone with a financial interest in American International Group (AIG) would consider it anything other than a blessing.  However as the saying goes, no good deed goes unpunished.

Former AIG Chairman and CEO Hank Greenburg whose Star International company owned roughly 12 percent of AIG prior to the bailout and now holds an approximately 9 percent stake has filed multiple lawsuits against the government alleging that the bailout was unfair to the company’s shareholders and that the 14 percent interest rate charged by the Federal Reserve was punitive and unfair.  Greenburg also alleges that the 2008 deal which furnished the government with a sizable percentage of ownership in the company equates to unlawful seizure without just compensation in violation of the constitution.  His lawsuit is seeking approximately $25 billion in damages.

Had the government sat back and watched AIG go bankrupt, it’s highly likely that their shareholders would have lost most or all of their financial interest in the company so it’s hard to see how the bailout was unfair to them.  A 14 percent interest rate can hardly be considered excessive or punitive when many American’s pay higher rates on their credit cards each month.  In addition, it is also very hard to conceive how $182 billion and avoidance of bankruptcy can be considered unjust compensation for the ownership stake the government received.  Lastly, it’s not like the government forced the company into this deal.  AIG was given the option and they accepted, plain and simple.   

In what has become a PR nightmare for AIG, Greenburg has been attempting to convince the company’s board of directors to join his lawsuit.  This idea has caused renewed outcries across traditional and social media outlets including everything from political cartoons satirizing the idea, comparing it to the possibility of a drowning victim suing the lifeguard who rescued him, to much more vulgar and personal attacks against current AIG CEO Robert Benmosche.  For AIG to accept the bailout and then turn around and sue their rescuer is the epitome of looking a gift horse in the mouth.

To AIG’s credit however they have reportedly declined Greenburg’s demands to join his lawsuits and they appear to be genuinely grateful for their continued existence as a result of the bailout.  On Wednesday January 9 2013, CEO Robert Benmosche stated that they had declined Greenburg’s demands but that the company had a legal and fiduciary duty to at least review the proposal.  The fact that they have declined to be a party to the suit and have refused to allow Greenburg to prosecute the claims on their behalf is an indication that the company may truly be on the right track.

When all was said and done, the United States Treasury ended up with a 92 percent stake in AIG, the last of which was sold in mid-December.  AIG now again rests completely in the hands of private investors.  AIG has completely paid back their debt to the government, with interest amounting to $22.7 billion in profits, and has been running television ads publicly thanking the American people for their trust and support.  AIG’s stock lost half of its value during 2011 but gained more than 50 percent during 2012.  On Wednesday AIG stock closed at $35.76