Kraft Stares Down A Catch-22

The J. M. Smucker Company (NYSE: SJM) is trading to the upside in the early session today, following a third quarter earnings report that saw the consumer staple maker top views led by a strong surge in coffee sales.

It is common to find investors and writers talk about food companies like Kraft (NYSE:KFT) in the context of "people always have to eat." While that is true, it overlooks a fairly important point - nobody has to eat their food. There is a big difference between food companies like Kraft and Kellogg (NYSE:K) and the likes of ConAgra (NYSE:CAG) and investors should not just lump all food companies into the same basket. While Kraft certainly has a tough environment to navigate and may have indeed overpaid for Cadbury, this is a food company that merits more than casual attention.

The Quarter that Was

All in all, Kraft delivered a quarter that was a little complicated (due to charges and adjustments and the like), but pretty much consistent with expectations. Sales, though, were a bit higher than the analysts expected. On a reported basis, Kraft served up 5.7% organic revenue growth this quarter, or 4.7% if the effect of an extra week in the quarter is subtracted. The legacy business delivered growth of 5.3%, while Cadbury chipped in about 2.2% organic growth.

Looking at profitability, Kraft's story was like so many others this quarter - mixed. The company's gross margin fell by two points and that appears to be worse than most analysts expected, as the analyst community was apparently surprised by the extent of cost inflation in the market. On a more positive note, the company trimmed down operating expenses better than most expected (and the Cadbury integration is ahead of schedule) and recaptured some of that lost margin, as adjusted operating margin ticked up 20 basis points from the year-ago period. Continuing an oddly consistent trend (at least among the large corporations), Kraft reported lower-than-expected taxes and that helped the company meet the earnings-per-share target for the fourth quarter. 

The Road AheadWhile U.S. government officials may not be seeing inflation, Kraft is (remember, things like energy and food input prices apparently are not "real" inflation, so they don't count). To that end, the company lowered guidance for 2011 and talked about input price increases in the high single digits. Although all food companies are in this same boat to some extent, Kraft may have a few extra levers to pull in terms of trimming operating costs and that may help mitigate some of the squeeze. That said, the company is also facing the loss of Starbucks (Nasdaq: SBUX) and that will take some steam out of the results as well.

Kraft also has at least one other factor working in its favor - a broad global presence. In terms of sales, Kraft is near the top of the list of North American food companies that get a sizable percentage of sales from foreign markets. Better still, those markets are growing substantially faster than North America or Western Europe. Is it coincidence that companies like Unilever (NYSE:UL), Coca-Cola (NYSE:KO), Pepsico (NYSE:PEP) and Nestle (Nasdaq:NSRGY) all have solid emerging market exposure and better-than-average returns on capital and growth? Probably not ... and it is a solid argument that Kraft is hanging with the right crowd in that respect.

The Bottom Line

Did Kraft overpay for Cadbury and destroy shareholder value? Maybe so, but it is not readily apparent in the results right now. It may also prove to be the case that Cadbury was a synergistic merger that also expanded Kraft's opportunities in some significant non-U.S. markets. Time will tell.
In the meanwhile, Kraft is going to have to navigate a tricky maze of coping with higher input prices through both restrained price increases and improved internal operating efficiencies. If the company pulls this off, this looks to be one of the better food companies to own. Kraft may not get the benefit of the boom in agriculture (since high prices can actually hurt them more than help) and cost worries might keep a lid on the stock in the short run, but value-oriented investors may find more to like in Kraft shares than they expect.

Disclosure I am Long KFT, UL, PEP, and K shares.

Smucker's Profit Falls 2.6% (SJM); Shares Trade Higher

The J. M. Smucker Company (NYSE: SJM) is trading to the upside in the early session today, following a third quarter earnings report that saw the consumer staple maker top views led by a strong surge in coffee sales.

Smucker reported a net income decrease of 3%, from $135.48 million in Q310 to $132 million this quarter. EPS was $1.27 on an adjusted basis though, compared to $1.17 the preceding year.

Net revs in the quarter were up 9%, from $1.206 billion to $1.312 billion.

Overall, the consensus was looking for EPS of $1.26 and revs of $1.25 billion.

The U.S. retail coffee market led the way, with a 18% jump in sales from $471.5 milllion to $554.7 million. The segment benefited from a 13% price hike through their FY11, which offset a 2% volume decline.

Looking ahead, Smucker sees FY11 sales up 4% from FY10. The company also increased the low-end of its outlook from $4.55 - $4.65 to $4.60 - $4.65. The Street is currently looking for EPS of $4.64.

Shares of SJM are up 3.2% today.


Disclosure I am long SJM shares 

Illinois Tool's 4Q Falls Short of Expectations

Illinois Tool Works Inc. (ITW) reported results for the fourth quarter of 2010 with earnings per share from continuing operations of 79 cents, down 19% from 98 cents in the comparable quarter of 2009. The results were below the Zacks Consensus Estimate of 80 cents, but were within management’s guidance range of 74-82 cents.

For the fiscal year 2010, earnings per share were $3.03, below the Zacks Consensus Estimate of $3.08. The results were within the company's guidance range of $2.99-$3.07 and above $1.93 reported in the fiscal year 2009.

Revenue
Operating revenue in the fourth quarter increased 11.0% year over year to $4,169.3 million, compared with $3,757.4 million in the year-ago quarter and above the Zacks Consensus Estimate of $4,089.0 million.

Growth in operating revenue symbolized continued improvement in end market demand. The year-over-year increase was above the company's projected growth range of 7%-9%.

Of the total revenue, base revenue in the quarter grew 9.1% year over year, registering an 8.9% increase in North American and a 9.2% hike in international revenues. Acquisitions added 3.6% while currency translation had a negative impact of 1.4% to the total revenue growth.

For the fiscal year 2010, total revenue was $15,870.4 million, up 14.4% year over year. The growth rate was above the company's projected range of 13%-14% and above the Zacks Consensus Estimate of $15,785 million.

Revenue in the Power Systems and Electronics segment increased 22.8% year over year in the quarter, with base revenue increase of 21.4%, due to strong demand for welding (especially in North America) and electronics businesses.

Revenue in the Industrial Packaging segment rose 12.6% year over year, with base revenue increase of 12.6%, due to growing demand for consumable plastic and steel strapping products.
Revenue in All Other segment increased 14.0% year over year, with base revenue increase of 11.2%, due to strengthening test & measurement and finishing businesses.

Margins

Cost of goods sold increased 12.8% year over year and represented 65.7% of total revenue versus 64.6% in the year-ago quarter. Selling, administrative and R&D expenses, as a percentage of total revenue, declined to 19.1% in the quarter from 21.2% in the year-ago quarter due to benefits realized from the company’s restructuring activities in the past years.

Better end-market demands and benefits of restructuring activities fueled a 120 basis point increase in operating margin to 13.9% in the fourth quarter of 2010.

Balance Sheet

Exiting the fourth quarter, Illinois Tool Works' cash and cash equivalents decreased 27.8% sequentially to approximately $1,190.0 million compared with $1,649.1 million in the third quarter of 2010. Long-term debt, net of current portion plummeted to $2,511.9 million versus $2,737.4 million in the third quarter of 2010.

Cash Flow

Net cash flow from operating activities was $459.0 million, down from $506.3 million in the year-ago quarter. Capital expenditure increased to $90.6 million versus $72.7 million in the year-ago quarter. Lower operating cash flow and higher capital expenditures led to free cash flow of $368.4 million versus $433.6 million in the fourth quarter of 2009.

In the fiscal year, net cash flow from operating activities was $1,560.8 million, capital expenditure was $286.2 million and free cash flow was $1,274.6 million.

Outlook

For the first quarter of fiscal 2011, Illinois Tool Works expects EPS from continuing operations to be in a range of 81-87 cents. The guidance is based on total revenue growth expectations in the range of 12%–15%.

For full-year 2011, the company expects EPS from continuing operations to be within the $3.60-$3.84 range. Revenue growth for the year is expected to be within 11.5%-14.5%.

Illinois Tool Works, operating through 800 business units in 57 countries, is one of the leading manufacturers of industrial products and equipment. The company’s chief competitors include Cooper Industries plc (CBE), General Electric Co. (GE) and Manitowoc Co. Inc. (MTW).

Disclosure I am long GE and ITW shares,

Sysco Q2 misses Street on rising costs

Food distributor Sysco Corp (SYY - News) said higher costs that squeezed its margins in the second quarter could continue to eat into its profits and may lead to a choppy recovery. Higher raw material costs have pressured companies across sectors, and many of them, including Kellogg Co, the world's largest breakfast cereal company, raised prices to combat rising ingredient costs.
Sysco shares were down more than 6 percent on Monday afternoon on the New York Stock Exchange.

On a call with analysts, the company said a double digit price rise in meat, dairy and seafood -- categories that account for one-third of its sales -- created substantial margin pressures.

"It is unlikely that these pressures are going to subside near term," Morning Star analyst Erin Sherin said, "This is in stark contrast to the 3.5 percent deflation Sysco was experiencing in the year-ago quarter."

Food inflation is a mounting worry globally. A recent study on global food prices by a U.N. agency showed they hit their highest level on record in January, and are set to worsen after a massive snowstorm in the United States and floods in Australia.

Sysco CEO Bill DeLaney said, "Recovery and to some extent, (its) financial results may be somewhat choppy due to the economic challenges that consumers continue to face."

For the second quarter, the company reported a net income of $258.1 million, or 44 cents a share, while analysts were looking at earnings of 47 cents a share, according to Thomson Reuters I/B/E/S.
Shares of the company were down almost $2 at $28.01 on Monday, placing it among the top percentage losers on the New York Stock Exchange.

Disclosure I am Long SYY shares. 

Innophos Holdings beats by $0.03, misses on revs (IPHS)

Reports Q2 (Jun) earnings of $0.81 per share, $0.03 better than the First Call consensus of $0.78; revenues fell 36.8% year/year to $166.8 mln vs the $173.3 mln consensus. On a sequential basis, management currently expects that third quarter 2009 volumes, excluding GTSP fertilizer sales, could increase 5% to 10% from those experienced in the second quarter 2009. The Company expects its third quarter 2009 raw material cost structure on a constant volume and mix basis to be $5 to $7 million higher than the second quarter 2009 due to higher phosphate rock and phosphoric acid costs in Mexico and the mix of phosphoric acid supply in the United States and Canada. Approximately half of this increased cost will be offset by lower restructured fixed costs.

Innophos Holdings, Inc., together with its subsidiaries, produces specialty phosphates primarily in the North America. Its products include specialty salts, which are used in food, beverage, and pharmaceutical applications; specialty acids that are used in industrial applications, such as asphalt modification and petrochemical catalysis; technical grade sodium tripolyphosphate (STPP), which is used in detergent applications, including automatic dishwashing, commercial/industrial detergents, and home laundry detergents; and other products, such as phosphate fertilizers that are used as co-products of manufacturing purified phosphoric acid. Innophos Holdings also offers purified phosphoric acid (PPA) that is used as an input to specialty salts, specialty acids, and STPP, as well as in water and metal treatment applications. The company's customers include consumer goods manufacturers, distributors, and specialty chemical manufacturers in food, bakery, beverage, pharmaceutical, and cleaning product markets. Innophos Holdings was incorporated in 2004 and is headquartered in Cranbury, New Jersey.


Disclosure I am long IPHS shares.

Do Active ETFs Belong in Your Portfolio? Not In Mine!

Today, the bulk of ETF money is invested in funds that follow traditional indexes. Yet, a wave of new product filings with the Securities and Exchange Commission along with new ETF product launches are fighting for their share of investor’s assets. Do active ETFs belong inside your portfolio?

Of the 744 U.S. listed ETFs, just fifteen funds use full-blown active strategies attempting to beat the market.

This history of active ETFs has been abbreviated, literally. The very first actively managed ETF, the Bear Stearns Currency Yield Fund (YYY), was liquated within months after its March 2008 debut. It had around $50 million of assets but was never able to gain traction.

Let’s analyze three active ETFs and then we'll evaluate factors to consider before investing in these types of funds.

PowerShares Active Alpha Multi-Cap Fund (PQZ)
This active ETF rates the stocks of companies with more than $400 million market cap (about 3,000 stocks) that are traded in the United States. On a weekly basis the fund’s manager generates a master stock list that ranks these stocks, segmented by market cap, based on its proprietary stock-ranking methodology. Stocks are selected based on factors such as strong earnings growth, low valuations and positive money flow. The equity selection universe is defined as the 2,000 largest stocks of companies with varying capitalizations from their master list. The fund then generally selects and purchases approximately 50 stocks.

For the one-year period ending May 30th, PQZ has fallen 46.64 percent compared to a 32.39 percent decline in the Dow Jones US Total Stock Market (TMW).

PowerShares Active AlphaQ Fund (PQY)
PQY rates the stocks of companies with more than $400 million market cap (about 3,000 stocks) that are traded in the United States. On a weekly basis the fund’s manager devises a master stock list that ranks these stocks, segmented by market cap, based on its proprietary stock-ranking methodology. Stocks are selected based on factors such as strong earnings growth, low valuations and positive money flow. The equity selection universe is defined as the 100 largest Nasdaq-listed Global Market Securities from their master stock list. The fund then generally selects and purchases approximately 50 stocks.

For the one-year period ending May 30th, PQY has declined by 32.43 percent while the Nasdaq-100 (QQQQ) has fallen 29.01 percent.

Grail American Beacon Large Cap Value ETF (GVT) Grail Advisors, a San Francisco, CA-based money manager, is the brains behind this active ETF. GVT was launched in May and it holds 122 stocks with Microsoft, Royal Dutch Shell and Chevron among the top three holdings. GVT’s investment strategy is virtually identical to the Grail Large Cap Value Mutual Fund (AAGPX), which has established a respectable 10-year track record.

Brandywine Global Investment Management, Hotchkis and Wiley Capital Management and Metropolitan West Capital Management each share responsibilities in managing the fund. GVT’s annual expense ratio is currently 0.79%.

The Catch 22

Will active ETFs deliver performance returns that beat the market? This question is partially answered by evaluating the performance of mutual fund managers, who in many instances have greater financial freedom and flexibility in the selection of securities they own. Plus too, they aren’t handicapped by daily and weekly portfolio disclosures like active ETF managers.

Over the five-year period ending in 2008, Standard & Poor’s research discovered the majority of active funds in 8 of 9 major stock categories failed to beat corresponding S&P stock indexes. The S&P 500 (SPY) beat 71.9% of active managers while the S&P MidCap 400 (MDY) and S&P SmallCap 600 (IJR) outperformed 79.1% and 85.5% of managers in matching categories. Will putting active management in a different product shell (ETFs) suddenly make beating the major stock and benchmarks a cinch?

Most active ETFs are too new to have any substantial performance history behind them. Yet, active ETFs need money inside of them in order to survive, but without a track record, getting the money is a tough sell. It’s a Catch 22.

Other Considerations
The record of active managers is a wild card, even for money managers with a big name, lots of experience and a decent track record. Speaking about 2008 mutual fund performance, Bob Rodriguez, manager of the FPA Capital Fund (FPPTX) said, “We stunk.”

“The belief that bear markets favor active management is a myth,” stated analysts in the above mentioned S&P report. Careful analysis by S&P also revealed similar results of bear market underperformance by mutual fund managers during the last downturn from 2000 to 2002. Have active funds really earned the investing public’s trust?

Building on a Strong Foundation
To resolve the issue of whether you should own active ETFs or not, consider a very simple, but time-tested strategy that’s worked.

Before you invest any of your serious money in individual stocks, active ETFs or active mutual funds, first start with broadly diversified mix of low-cost index ETFs that follow traditional benchmarks. A well-balanced portfolio should have market exposure, not just to U.S. stocks and bonds, but to international stocks (EFA), emerging market stocks (VWO), foreign real estate (RWX) and commodities (GSG). The superiority of market returns is well-established in both real life results along with academic studies.

After you’ve built the foundation of your portfolio on index funds and index ETFs and you have additional money (play money) you don’t mind risking, consider owning active ETFs and whatever other crazy ideas come to mind. In other words, index your serious money to the market first and do everything else after.

Disclosure I am long, QQQQ,SPY,EFA,VWO, and RWX in my etf folios.

Double Hull Tankers(DHT) misses by $0.03, reports revs in-line Declares .25 Cent Dividend

Double Hull Tankers (DHT-Quote) Reports Q1 (Mar) earnings of $0.26 per share, excluding non-cash expenses, $0.03 worse than the First Call consensus of $0.29; revenues rose 19.8% year/year to $29.8 mln vs the $29.6 mln consensus.

The Board of Directors of DHT has decided to pay a dividend of $0.25 per share for the first quarter 2009. The dividend will be paid on June 16, 2009 to shareholders of record as of the close of business on June 3, 2009.

About DHT

On 18 October 2005, DHT Maritime, Inc. (formerly Double Hull Tankers, Inc.) (NYSE: DHT) commenced operations as an independent tanker company. The Company acquired seven double hull crude oil tankers from Overseas Shipholding Group, Inc. (OSG), a market leader in global energy transportation services with a fleet of more than 100 crude tankers and petroleum product carriers. In December 2007 and January 2008, DHT took delivery of two Suezmax tankers. DHT's modern fleet consists of three Very Large Crude Carriers (VLCCs), two Suezmax tankers and four Aframax tankers.

The seven vessels acquired from OSG in 2005 were chartered to OSG on October 18 2005 for periods ranging from five to six and one-half years. OSG has options to extend the charters for an additional five to eight years depending on vessel. In return, DHT receives a base charter hire and expects, through a profit sharing agreement, to benefit from earnings over and above the base charter hire rates. The vessels are operated in the largest commercial tanker pools in their segments: Tankers International and Aframax International, respectively. The vessels are technically operated (crewing, maintenance, repairs, drydockings etc.) by a subsidiary of OSG at fixed cost to DHT. The two Suezmax tankers are on seven and ten year bareboat charters to OSG.

On Janaury 4, 2008, DHT announced a dividend policy of a fixed quarterly dividend of $0.25 per common share. DHT intends to pursue a strategy of providing shareholders with a stable and visible distribution and also position the Company to use its incremental cash flow to fund future growth opportunities.

Disclosure I am long DHT shares, in my shipping Folio.

UPS 1Q profit plunges more than 55 pct

United Parcel Service(UPS) reported on Thursday a quarterly profit that missed analysts’ estimates and forecast no quick turnaround as the global economic downturn continued to take its toll on the world’s largest package-delivery company.

UPS’s quarterly operating profit fell by more than half over the year, dropping to $718m in the first quarter of 2009 from $1.49bn a year earlier.

UPS earnings fell more than 55 percent to $401 million as revenue dropped more than 13 percent, compared to profit of $906 million a year ago.

The results missed Wall Street expectations, and UPS provided an outlook for second-quarter earnings that was below analysts expectations.

The January-March profit was 40 cents a share, compared to year-ago earnings of 87 cents a share.

Revenue in the quarter was $10.94 billion, versus $12.68 billion a year ago.

Adjusted earnings were 52 cents a share. Analysts polled by Thomson Reuters, on average, expected UPS to earn 56 cents per share on revenue of $11.4 billion for the first quarter. Analysts generally exclude one-time items from their estimates.

For the three months ended March 31, consolidated average daily volume totaled 14.5 million packages, a 3.9 percent decline compared to a year ago. Average revenue per piece decreased 6.9 percent, reflecting changes in product mix, declining fuel surcharges and weight per package and the negative impact of currency.

The company's international segment was affected in the quarter as well, posting a 1 percent volume decline with some benefit from the timing of Easter. The 15.3 percent decline in revenue per piece reflected similar negative trends as in the U.S. small package operation as well as the negative impact of currency, UPS said.

UPS said that the second quarter will be difficult. The company expects earnings per share in a range of 45 cents to 55 cents. Analysts were expecting second-quarter earnings of 65 cents.

"Economic indicators tell us recovery in the U.S. might begin late this year, but more likely not until 2010," Chief Financial Office Kurt Kuehn said in a statement.

In premarket trading UPS shares fell 92 cents to $53.83.

Disclosure I am long UPS shares.

Eaton posts 1Q loss on recession impact, job costs Declares regular Quarterly dividend of $0.50 per share

Eaton Corp., (ETN) a global company which depends on industrial vitality for sales of its diverse products, posted its first quarterly loss since 1991, and its chief executive said Monday hard times are expected the rest of this year with more job cuts likely.

The Cleveland-based industrial parts and systems maker lost $50 million in the first quarter as sales skidded amid weak economic conditions worldwide and it absorbed costs for thousands of job cuts.

Even though Eaton's adjusted earnings beat Wall Street forecasts, shares fell $4.33, or 9.7 percent, to $40.42 Tuesday at the close of trading, part of a broad sell-off of stocks.

Eaton Chairman and CEO Alexander Cutler cautioned that an economic recovery in the U.S. and Western Europe is more likely to begin in early 2010 rather than late this year.

"It's terribly tough times, but we're trying to proactively manage our costs in a way to preserve employment for as many people as possible but recognizing that this is a real challenge," Cutler said in an interview.

Eaton's loss amounted to 30 cents per share in the three months ended March 31 versus a profit of $247 million, or $1.64 per share, a year ago.

Sales fell 20 percent to $2.8 billion from $3.5 billion a year ago.

Excluding acquisition integration charges, the operating loss amounted to 22 cents per share. Analysts surveyed by Thomson Reuters expected, on average, that Eaton would post a first-quarter loss of 25 cents per share on higher revenue of $3.1 billion. The estimates typically exclude one-time items.

Cutler said its markets for all of 2009 will decline between 15 and 16 percent as the recovery in the U.S. and Western European economies will be pushed out one quarter, with the recovery now more likely to begin in the first quarter of 2010.

Eaton said it expects net income per share for the second quarter to be about 15 cents and operating earnings per share of about 25 cents. Eaton lowered its full-year guidance to net income per share of between $2.10 and $2.60 and operating earnings per share of between $2.50 and $3.00. Analysts projected a full-year profit of $3.44 per share.

About 55 percent of Eaton's business is outside of the United States, and electrical, aerospace and hydraulics produce about 70 percent of earnings. Before shifting its business focus several years ago, Eaton was more dependent in heavy-duty truck and automotive markets.

Its automotive and truck business in the first quarter had the biggest downturn. Its biggest segment, electrical, was down but not as much and helped the overall result from being even worse.

Industrial markets analyst Eli Lustgarten, with Longbow Research, said Eaton's downtown is no surprise, given the tough economy in the United States and elsewhere.

"Basically you have had a shutdown in production activity, with a 15 percent decline in industrial production in this country and 22 percent in Europe," Lustgarten said. "If you don't produce, everybody suffers."

Also a factor is significant and widespread inventory reductions, Lustgarten said.

On the Net: http://www.eaton.com

Disclosure I do not own ETN Shares.

Snap-On beats by $0.02, misses on revs, EPS falls 38%

Snap-on Inc. (SNA) said Wednesday that first-quarter earnings of $0.60 per share, $0.02 better than the First Call consensus of $0.58; revenues fell 20.6% year/year to $572.6 mln vs the $648.4 mln consensus. Snap-on expects restructuring costs in the second quarter of 2009 to approximate $8 million to $10 million.

Snap-on is also continuing a number of its planned growth investments, including further expansion of its manufacturing capacity in China and in Eastern Europe. Capital expenditures for full-year 2009 are expected to be in a range of $60 million to $70 million, down from the previously communicated $75 million to $80 million.

“Continuing difficult economic conditions further weakened customer demand in the first quarter,” said Nick Pinchuk, Snap-on president and chief executive officer. “In light of these challenges we increased our focus on rapid continuous improvement, sourcing and other cost reduction initiatives. At the same time, we moved forward during the quarter with our strategic growth investments and with our most important value creation initiatives, such as product innovation. I thank our franchisees and associates worldwide for their continuing confidence and contributions during these challenging times.”

Disclosure I am long SNA shares.

Google Blows By streets Numbers Impressive 1st Quarter results

Search giant Google weighed in with impressive first-quarter earnings. The company reported adjusted earnings per share of $5.16 cents, solidly beating analyst estimates of $4.93 per share.

"It was a good quarter. Revenues were in line with the street consensus and EPS beat,” Jason Avilio, an analyst with Kaufman Bros., told Reuters. "Economically speaking, I think Q1 is the most challenging quarter, so the momentum should continue for the rest of the year."

It's official now: Even Google can't escape the recession. With its first-quarter results on Apr. 16, the leader in Web search revealed its first quarter-on-quarter decline in sales, reflecting cutbacks in online ad spending. Thanks to cost cutting, Google (GOOG) handily beat profit expectations, but it offered no assurance that overall business conditions would turn around anytime soon.

Google's revenue, almost all of which comes from advertisements placed next to related search results, rose 6% from a year earlier but slipped 3% from the fourth quarter. Sales, after subtracting commissions to Web site partners, were $4.07 billion. That's about what analysts, who have been reducing their estimates in recent weeks, had expected.

Investors initially liked what they saw, boosting the stock almost 6% in extended trading after the figures were released. After all, Google's slowdown looks good compared with the larger advertising market, which is expected to fall at least 5% this year. But as it became apparent that Google's underlying business was feeling the effects of the recession, shares reversed course and gained only a fraction of 1%. "The quarter confirms that Google is suffering from the economic slowdown," says Sandeep Aggarwal, analyst at financial-services firm Collins Stewart.

Disclosure I do not own goog shares at this time.