Google Inc. 3Q14 Earnings: Continued Growth Despite Earnings Miss

Google Inc. posted revenues of $16.53 B and non-GAAP EPS of 6.35 dollars per share for Q3 of 2014. Consensus was at $6.53 for EPS and $17.2B for revenue. Revenues were up 20% Y/Y and 4% Q/Q. Geographical growths were strong, with Y/Y revenues up 15% in the US, 17% in the UK, and 26% outside those areas.  

Paid clicks were up 17% Y/Y and 2% Q/Q, a slowdown from 25% in Q2, and cost per click was down 2% Y/Y and flat Q/Q. Sales chief Omid Kordestani attributes this to a normal fluctuation that happens from time to time and is actually the lowest CPC decline seen by Google in the last seven quarters. The cost per click metric is an indicator showing pressure from low smartphone ad prices is abating.

Google sites revenues were up 20% Y/Y, attributed to mobile search, and came in at $11.1 BB. Network revenues were up 9% Y/Y coming in at $3.4 B due to growth in the AdMob and the Ad Exchange business, but was lower than expected. Other revenue increased by 50%, fueled by Google Play and ad licensing, to $1.8B. Free cash flow is at an impressive $3.6 billion, up 28% Y/Y.

Heavy spending was the driver behind the lower than expected EPS with R&D spending up 46%, S&M up 28%, and G&A up 20%. CFO Patrick Pichette stated “it’s the time of year when we do equity refresh”, in regards to heavy opex growth and human resource spending. He says that this is a unique quarter because of this. Traffic acquisition costs (TAC), came in at $3.3 BB, representing 23% of ad revenues. The stock lowered in after-hours trading by 1.25% under the $520 range and dropped below $510 Friday, but has made a good gain in the next week back at $520.

Google’s core business growth has slowed across the board while profitability took a hit due to opex spending. A main factor is that international growth has not been up to par. However the investment seen this quarter should bode well for the future. The long term growth has been supported in areas such as robotics, Android, automation, and internet. There are some exciting upcoming technologies such as the Android One low-cost smartphones, a mobile messaging platform, and Google Fiber Optic. Shares didn't drop too much despite the miss; however the drop off over the month is a cause for concern. Shares dropped nearly 70 points in the past month for a wide array of reasons from competing products to legal battles. This is quite a fluctuation for Google, but a rebound should be in the works. Some investors may be panicking, especially with increased competition in mobile advertising and mobile phones, but the drop is overstated.


Solid growth and strong free cash flow are major contributors to the company’s positive outlook. However consistent estimate misses by Google has become an issue. There has been a growth in these misses over the last quarters. In the last 12 quarters, Google has missed nearly 92% of the time on the top or bottom line. Margins have also decreased, bringing the risk of the business flattening out. We expect margins to increase in the future as expenses drop. We still believe Google is undervalued with strong revenue growth around 20% each quarter and a strong investment into the future over the past months. Expenses should come back to normal levels, but a less than stellar quarter has us scale back our price target. We recommend a hold on the company with a price target around 670.

Double Down Position on Spirit Airlines (SAVE)

On October 14^th, we doubled down on our position with Spirit Airlines (SAVE). Spirit has recently taken a hit in their stock price due to concerns arising from the Ebola virus and capacity concerns. Spirit has airlines that fly to Africa and the worry over loss of business in that region has the street worried about whether this could cause significant impact. In regards to their capacity returns, Spirit recently extended its fleet by about 15 aircraft’s, causing an increase in the supply of seats. Since there has been an increase in supply so suddenly, the demand for the aircraft’s have not been met yet, but we believe this is only due to the fact they were recently added. Spirit’s position is still strong and their business model is intact, which leaves us to believe that this is a great time to double down on our investment.

Wolverine World Wide is up 3.2% on mixed 3rd quarter earnings

Wolverine World Wide is up 3.2% on the day since reporting earnings. This is despite earnings that showed mixed results. They have lowered their sales guidance for the year while also missing on sales estimates for the quarter. They now estimate sales to be $2.75 billion for FY 2014 which represents a 2% annual growth down from original expectations of $2.78 billion which would've been 3% annual growth. This revision is due to weakness in US retail as well as weakness in their lifestyle group.

However despite missing sales and lowering guidance they have reaffirmed their full-year earnings guidance and also beat earnings estimates of $.59 adjusted earnings a share reporting $.63 a share. This is the eighth straight quarter that they have beat analyst estimates for adjusted earnings. The primary reason Wolverine was able to beat earnings while coming up short on revenue was due to increased efficiency. They showed a 2.8% year over year decline in operating expenses. This caused operating expenses as a percentage of sales to fall 50 bps and improved operating margin for the quarter by 70 bps. While the investment thesis that the company will begin to grow their margins by cutting costs has proved effective, we need to look for further evidence that Wolverine can start to increase sales in their lifestyle group or we may need to look for an exit opportunity in the near future. 

Citigroup Posts Beat on Q3 2014 Earnings

Pre-market Citigroup posted a rise of 6.6% to EPS of $1.15, beating estimates by $.03, excluding one time charges.
Revenue rose 9.5%, to $19.6 billion.

The bank also reported it is exiting 11 poorly performing regions by selling its retail banking branches in: Costa Rica, El Salvador, Guatemala, Nicaragua, Panama, Peru, Guam, the Czech REpublic, Egypt, Hungary, and Japan.  Japan was the only surprising pick, but with the Abenomics form of QE keeping interest rates low in the foreseeable future, it makes sense for Citi to exit the region, inorder to keep their NIM high.
The banks Net Interest Margin to 2.9%
Fixed Income trading revenue rose 5% to $2.98 billion, which has been a soft spot for banks earnings the past year.
Citigroup did however have higher expenses, much in-line with the company's guidance that stress-tests preparation would rise costs. Operating expenses for the quarter rose 5.8%.
Investment banking revenue rose 32%, driven by broad-based strength in the IPO and debt underwriting businesses. Advisory revenue rose 90%.
Shares were up 2.5% in mid-day trading.

Union Pacific taking a hit

   Union Pacific was down 3.22% today to $98.08/share primarily due to the news of a possible merge between their competitors CSX and Canadian Railways.  UNP's share price has taken a hit due to that news and due to the market overreacting to geopolitical news and ignoring the economies steady macroeconomic improvement.  Certain indictors such as increasing job payrolls and a decreasing U.S trade deficit implies the U.S economy is improving. The market has been reacting to the unstable global growth and the Federal Reserve acknowledged that the U.S dollar has been increasing and may hurt exports.  Therefore they are taking that into consideration when deciding when they will increase interest rates in 2015.  All in all Union Pacific's fundamental analysis is still robust and they will be reporting earnings October 23rd.

Hal Sell Thesis

On Wednesday October 1st Hal fell below our stop loss price of $63. After further evaluation we agree that there has been a fundamental deterioration in both our investment thesis and in the sector as a whole. The oil field services industry has been down recently and Hal has declined near 10% in the month of September. We will continue to monitor Hal and look for a more favorable position to enter this later this year if macroeconomic conditions improve. While Hal still retains its core strengths and strong North American exposure, it simply cannot compensate for systemic issues in its industry at this time. 

Halliburton Pays $1.1 Billion

Halliburton reported on Tuesday that it has reached a settlement of $1.1 Billion in relation to the Macondo Well incident. The $1.1 Billion settlement is below the $1.3 Billion Hal had set aside to cover potential legal losses. The modest settlement was reflected with the stock price remaining relatively flat for the day. The Macondo accident spilled an estimated 4.9 million barrels of oil into the sea. In comparison to Halliburton's settlement, BP has paid out nearly $28 Billion and Transocean $1.4 Billion.

“It also allows Halliburton to put the oil spill — especially its litigation costs, uncertainty and adverse publicity — behind the company,” said Carl Tobias, a law professor at the University of Richmond-NYTimes