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Stock Analyst Update

The Week in Stocks: Dell Misses, Google Dominates

Plus, Yahoo disappoints, Intel revises its outlook, and Cat keeps on truckin'.

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Dell's Preannouncement in Context
Dell (DELL) announced this morning that its quarterly earnings would fall short of Wall Street's already-reduced expectations, amid soft sales and contracting operating margins. As analyst Mark Lanyon points out, Dell's slash-and-burn strategy for recapturing market share appears to have put a big dent in the bottom line. While Lanyon believes that other fleeting factors--such as seasonal demand and Dell's significant recent investment in its operating structure--could be pressuring margins, he thinks those issues pale in comparison to the bigger drivers of the Dell thesis. Namely, Lanyon is reconsidering Dell's wide-moat status in view of the industry shift to notebook computers, as that trend effectively blunts Dell's cost advantage related to desktop PCs.
 Full Analyst Report: Dell

Google Continues to Dominate
Analyst Rick Summer drills into Google's (GOOG) second-quarter earnings report, observing that while the strong results underscore the company's dominance in the paid-search market, they don't settle the question of whether Google's growth is sustainable. In particular, Summer points out that Google's revenue and earnings growth far outstripped the rate of growth in the number of overall searches. In other words, the company effectively stole market share while deriving higher sales-per-search thanks to more-frequent user ad-clicks. Summer doesn't believe either trend is sustainable year after year. Further, he doesn't see evidence that Google will be able to diversify beyond its core search business.
 Full Analyst Report: Google

Yahoo's Business Continues to Grow
The market recoiled at Yahoo's (YHOO) second-quarter earnings report, which showed that net revenue fell about $20 million shy of the consensus estimate. The company also announced that it was pushing back the launch of its upgraded search advertising platform by one quarter, prompting additional hand-wringing. Yet, Morningstar analyst Jonathan Schrader thinks its largely much ado about nothing, as the media giant remains on track to meet his 2006 revenue forecast despite this recent misstep. Further, Schrader points out that the delay in Yahoo's search ad platform could be a blessing in disguise if it results in higher long-term profits. All told, Schrader believes that Yahoo remains well-positioned to take market share from traditional media, which should confer it a tailwind for years to come.
 Full Analyst Report: Yahoo

AMD's Server Chip Sales Are Good; Intel Revises Its Outlook...Again
While Advanced Micro Device's (AMD) second-quarter earnings confirmed management's previous revenue warning, analyst Alex Ross observes a glimmer of hope: Server chip unit sales increased by double digits while server chip prices also ticked up slightly. This is in stark contrast to the bloodletting that's taken place in AMD's desktop chip business, where the company has been locking horns with chief rival Intel in a bruising price war. For its part, Intel (INTC) further reduced its revenue projections, reflecting continued price competition with AMD and softness in the PC market. Nevertheless, Ross thinks Intel's longer-term thesis remains intact and, thus, isn't changing his fair value estimate.
 Full Analyst Report: AMD
 Full Analyst Report: Intel

Microsoft Announces Tender Offer
Software giant Microsoft (MSFT) posted strong quarterly results, announced a new $20 billion tender offer for its stock, and slightly raised its 2007 earnings guidance. Morningstar analyst Toan Tran applauds the tender offer, which he views as another needed step in righting the company's capital structure, though he believes that there's still work to be done. And while Microsoft's higher fiscal 2007 earnings estimates are welcome, the increase is largely attributable to the tender offer. Tran is leaving his fair value estimate for the company unchanged.
 Full Analyst Report: Microsoft

Caterpillar Increases Full-Year Outlook
Heavy equipment manufacturer Caterpillar's (CAT) second-quarter results showed no signs of weakness. In fact, the company posted its best quarter ever amid gains in sales in nonresidential construction markets and continued strong global mining and infrastructure spending. The company also rectified issues with rising raw-material costs and production bottlenecks, boosting margins. Management raised its outlook for 2006, but Morningstar analyst Scott Burns is leaving his fair value estimate unchanged, as he'd already built in fairly aggressive assumptions for the current year.
 Full Analyst Report: Caterpillar

China TechFaith Warns on 2Q Results; Now Garners 5 Stars
Chinese mobile handset designer China TechFaith (CNTF) cut its second-quarter sales and earnings guidance, as it struggled with the platform transition program it began at the end of 2005. In addition, earnings were pinched by margin deterioration in the company's design business amid soft sales caused by lengthier approval and quality-control processes at its global customers. Yet, Morningstar analyst Lun Lu believes these short-term issues obscure the company's considerably brighter future, as China TechFaith's recognizable brand-name and design acumen should position it well to capitalize on strong global demand for mobile handsets. Thus, she is sticking to her fair value estimate.
 Full Analyst Report: China TechFaith

Temporary Day-Labor Provider Labor Ready Looks Like a Bargain
Morningstar analyst Kristen Rowland recently raised her fair value estimate for temporary day-labor provider Labor Ready (LRW). Rowland is impressed by the recent 11% jump in the company's same-branch sales, which she believes reflects management's success in driving sales per branch by utilizing improved incentives. And while the company's first-quarter operating margin was a paltry 5.4%, she expects margins to improve later in the year due to seasonal factors in the construction industry. Bigger picture, Rowland is enamored with the unique niche that the company fills in the temporary staffing market, as it concentrates its offices in smaller cities, serves small and medium-size businesses, and focuses on unskilled day labor. Consequently, it sees less competition from many of the large staffing firms and, thus, boasts superior margins.
 Full Analyst Report: Labor Ready

Fifth Third Under Review; J.P. Morgan Chase Posts Blowout 2Q Results
Fifth-Third Bancorp's (FITB) second-quarter results showed continued weakness. After adjusting for one-time items, earnings fell amid lower revenue and a 9% rise in operating expenses. The bank's net interest margin also contracted to 3%. Although Morningstar analyst Jim Callahan believes the shares are undervalued, he's reconsidering the bank's wide moat and below-average risk rating. By contrast, J.P. Morgan Chase's (JPM) second-quarter earnings blew past Wall Street's estimate and exceeded analyst Craig Woker's even-greater expectations, amid strong performance in virtually all of its business lines.
 Full Analyst Report: Fifth Third
 Full Analyst Report: J.P. Morgan

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