One Page Annotated WSJ Summary, Monday June 19th

by: David Jackson
David Jackson
Seeking Alpha's flagship daily business news summary, gives you a rapid overview of the day's key financial news. It is published before 7:00 AM ET every market day and delivered to over 900,000 email subscribers.

Summary of selected articles from this morning's Wall Street Journal with comments on related stocks. Links are to the original WSJ article, which requires a paid subscription. Use this summary as a starting point for research; check the summary against the original before trading:

Nokia, Siemens Agree to Combine Equipment Units

  • Summary: Nokia and Siemens are combining their wireless infrastructure businesses, with combined assets worth over $30 billion. Synergies, mainly reduced R&D costs, could be as much as 1.25 billion Euros annually. Nokia's infrastructure business reported an operating profit of 855 million Euros last year. Siemens' telecommunications unit generated over a sixth of Siemen's total revenue in 2005 with a profit margin of only 3.5%, below the company's target margin of 8-11%. Note, however, that Siemens' telecom unit is dominated by wireline, not wireless sales. Consolidation among telecom operators has led to consolidation in the telecom equipment industry, most notably Lucent's merger with Alcatel. Western equipment vendors are also under pressure from low-cost Chinese vendors ZTE and Huawei.
  • Comment on related stocks/ETFs: Incrementally positive for Nokia (NYSE:NOK) and Siemens (SI); in the short-run decreases competition for Ericsson (ERICY) and Alcatel (ALA), but probably leads to stronger comptetion in the medium term. Consolidation among the equipment vendors enhances their market power vis a vis the carriers.

AT&T Readies Service Uniting Internet and TV

  • Summary: AT&T plans to launch a service called Homezone in July that will combine satellite TV from Echostar with downloadable movies at $3-5 each from the Internet movie service Moivielink and music from Yahoo's Launchcast web music service. The satellite TV service will be priced competitively with cable TV. However, Homezone will only be available to customers of AT&T's high-speed Internet service and will only offer movie content from AT&T partners. Users won't be able to surf the Web when the Homezone set top box is connected to the Internet, and movies must be downloaded in full before being watched. Separately, AT&T plans to upgrade connections to 19 million homes (out of its total of 49 million phone lines) by early 2008
  • Comment on related stocks/ETFs: Once the drawbacks of a hybrid satellite-Internet programming service become obvious, the perceived threat to the cable stocks will fall, benefitting Comcast (CMCSO) and Cox (COX), and the perception that the telcos can easily enter the TV business will recede, hitting AT&T (NYSE:T) and Verizon (NYSE:VZ). AT&T's entry to Internet TV increases the competitive pressure on Tivo (NASDAQ:TIVO). Its plans to upgrade its DSL network should benefit the equipment providers, particulalry Alcatel (ALA), but that's probably priced-in already. The "walled garden" approach to Internet content is a long-term loser, but in the short run the partnership should benefit Yahoo (NASDAQ:YHOO).

Review of Wireless Method Is Halted

  • Summary: The Institute of Electrical and Electronics Engineers [IEEE] dislosed that it has suspended standards work on technologies for faster cell-phone Internet access from Qualcomm and Kyocera. Intel engineers accused Qualcomm of packing the vote with paid consultants, including the chairman of the working group.
  • Comment on related stocks/ETFs: Incrementally negative for Qualcomm (NASDAQ:QCOM), positive for Intel (NASDAQ:INTC).

TDK, Nimble and Innovative, Typifies the Companies Driving Japan's Growth

  • Summary: Last week Japan's GDP growth was revised up from 1.9% to 3.1% and data was released showing that business capital spending grew by 27%. Growth is being driven by companies like TDK, the leading provider of hard disk drive heads. TDK manufactures over half its output in China and over 75% of its revenue comes from exports. Japanese companies like TDK have also benefitted from imbibing China's less formal business attitudes.
  • Comment on related stocks/ETFs: TDK trades as an ADS in the US (TKD).

As China's Economy Thrives, So Does Graft

  • Summary: A slew of recent corruption cases have recently come to light in China. "The editor [of one article about the issue] says corruption has become so problematic that the leadership has little choice but to act."
  • Comment on related stocks/ETFs: Many US investors in China are relatively oblivious to the risks of investing in a non-democratic, bureacry-run country. By reminding investors of those risks, articles like this are incrementally negative for Chinese stocks that trade in the US and the China ETFs from Powershares (NYSEARCA:PGJ) and Barclays (NYSEARCA:FXI).

Small Stocks Bear Brunt of Fall and HEARD IN ASIA: Small Stocks May Be Blooming Amid Japan's Market Drought

  • Summary: After dramatically outperforming large caps from 2003 to the end of last year, small caps have taken a beating in the recent downturn. Since May 9th, US and European small and mid cap stocks are down by double-digit percentages versus a 5.4% decline for the DJIA. Japanes small caps are down 43% so far this year, and "Declines in Japanese technology stocks heralded the global collapse in the technology investment bubble in 2000, and some strategists say the fall in Japanese small caps now signals the end of the smaller-company bull market." However, earnings and revenue growth for many small cap companies are strong, and analysts in Japan think small caps there have to over-penalized by corporate scandals and fears of US interest rate rises.
  • Comment on related stocks/ETFs: After years of outperformance, small caps may have become too expensive and are pulling back. Small cap ETFs include the iShares Russell 2000 Index ETF (NYSEARCA:IWM) and the iShares S&P Small Cap 600 ETF (NYSEARCA:IJR). There's a closed-end fund that invests in Japanese small caps -- the Japan Smaller Capitalization Fund Inc. (NYSE:JOF). Full disclosure: the author is short IWM and IJR at the time of writing.

AHEAD OF THE TAPE: Line in the Sand

  • Summary: In survey results published over the weekend, Duke and CFO Magazine found that half the 1,000 CFOs they sampled "had become more pessimistic about the business outlook" and "half of the CFOs surveyed said a federal-funds rate above 5.5% would cause net income to suffer."
  • Comment on related stocks/ETFs: WSJ articles have done a superb job of signalling sentiment before the market opens in recent days. Last week, an article arguing that the correction in emerging market stocks would not turn into a rout because fundamentals are so much stronger this time around preceded a strong rebound that day in the market and emerging market stocks in particular. This article suggests that sentiment is turning down again.

HEARD ON THE STREET: Pearson Shareholders Read Between Lines

  • Summary: After improving its financial performance in 2005, Pearson, the UK publisher of Penguin books and the Financial Times, has seen its stock rise 7%. But some fund managers feel that isn't enough, and are pressuring the company to sell underperforming businesses or even to break up the company. The stock is relatively expensive on a P/E basis, but cheap on a price to cash flow basis.
  • Comment on related stocks/ETFs: Pearson has an ADS that trades in the US (NYSE:PSO).

Demand for Ethanol Aggravates Pain at the Pump

  • Summary: Ethanol, used as an additive to gasoline in quantities up to 10%, now costs $4.50 a gallon versus $2.90 on average for gasoline. JP Morgan economist James Glassman estimates that gasoline would cost $2.30-2.40 a gallon if not for ethanol. But due to a Federal initiative, refiners must use at least four billion gallons of ethanol in 2006 and more in the following years. "Looking ahead, most analysts believe ethanol prices will eventually pull back from their current highs, perhaps when colder weather arrives this winter. But they say it could take much longer before supply and demand really stabilize -- a process that will also require refiners and energy companies to invest in facilities to produce and deliver ethanol."
  • Comment on related stocks/ETFs: The first negative article on ethanol? The sentiment is negative for ethanol stocks (see coverage here), but the numbers suggest that demand will outstrip supply for a while.

Can Boeing and Lockheed Work Together?

  • Summary: "Antitrust officials have prepared a draft agreement authorizing Boeing Co. and Lockheed Martin Corp. to combine their financially strapped government rocket businesses, but continuing friction between the companies threatens to hinder the planned venture."
  • Comment on related stocks/ETFs: Incrementally positive for both Boeing (NYSE:BA) and Lockheed (NYSE:LMT), but more so for Lockheed because Boeing's stock has been propelled by its recent commercial wins against Airbus.

Carnival Posts a 2% Decline in Profit

  • Summary: Cruise ship operator Carnival announced that revenue in its most recent quarter declined 2% and "extended its forecast of slow bookings in the Caribbean to the rest of this year". Carnival has been hit by rising fuel costs, but is now experimenting with fuel surcharges. The Board approved a $1 billion stock repurchase plan. "Net revenue yield, a measure of per-passenger revenue, rose just 1.6%, as weak Caribbean revenue offset strong increases elsewhere. Sales of European and Alaska cruises remain brisk, Carnival said."
  • Comment on related stocks/ETFs: Sentiment was already strongly negative; the company reported earnings after close, and the stock (NYSE:CCL) was up 5% in late trading. Note that competitor Royal Caribbean Cruises (NYSE:RCL) also announced a stock buy back June 13th; its stock also rebounded strongly. Full disclosure: the author is short CCL and RCL at the time of writing.

Bill Gates on … the Competition

  • Summary: Interview with Bill Gates by Walt Mossberg and Kara Swisher. On Vista's security functionality, Mr Gates says "[Based on] the man-hours that went into this product, security is the biggest area of work. Security is a huge part of it." On Internet search he says "Google has actually done less in the way of innovation than I would have expected a year ago. We have a lot of work to do to get the kind of credibility you need to be viewed as really strongly in the game. And we're very intent on that."
  • Comment on related stocks/ETFs: The security stocks like McAfee (MFE) and Symantec (NASDAQ:SYMC) are already pricing in Microsoft's entry to the security space and are trying to diversify into non-PC applications. Google's stock (NASDAQ:GOOG), however, seems impervious to Microsoft's statements about search.

Other notable articles on Seeking Alpha: Today's earnings calendar, and an overview of this week's IPOs. Latest conference call transcript: China Medical Technologies. The first India ETF launches, and a set of new Japan ETFs. Outstanding asset class analysis from J.D. Steinhilber.

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