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Breaking News: Producer Prices Jump on Energy; Core Number Meets Expectations

  • Summary: Producer prices for finished goods rose by 0.5% in June, higher than economists expectations of 0.3% and the 0.2% rise in May. The "core" rate was up 0.2%, matching expectations. In the 12 months to June, wholesale prices rose by 4.9%, with the core rate up 1.9%.

Breaking News: Merrill Posts Record Revenue Despite Up-and-Down Markets

  • Summary: Merrill Lynch Q2 results: Revenue up 29% to $8.16 billion, net income up 44% to $1.63 billion. EPS of $1.63 beat the analyst consensus of $1.52. Global markets and investment banking revenue rose 33% to $4.58 billion. Brokerage revenue rose 19% to $3.05 billion.

Heat Blast Tests U.S. Power System

  • Summary: A heat wave in the US is causing record power consumption and blackouts. Power usage exceeded previous records in California, Texas, New York, the mid-Atlantic region and the Midwest. New construction of power plants slowed in the past few years due to deregulation of utilities and the collapse of Enron. In an attempt to incentivize deregulated utilities to build more plants, Texas is raising the price cap for wholesale electricity from $1,000 per megawatt hour currently to $2,000 next March and $3,000 by March 2009, making it the highest price cap in the US. After the August 2003 blackouts, energy regulators were granted more authority to solve inter-state power line disputes. The California Independent System Operator [ISO] estimates that California "needs at least $1.8 billion of additional transmission investments".
  • Comment on related stocks/ETFs: Three areas of stock impact: (1) From the article: "High energy demand this week will likely translate into big profits for some generators, especially those that use lower-cost coal or nuclear fuel to make electricity." The easiest way to play this is with the Select Sector Utilities ETF (NYSEARCA:XLU) or the Utilities HOLDRs ETF (NYSEARCA:UTH). Utilities that use coal include Duke Energy (NYSE:DUK) and American Electric Power (NYSE:AEP). High energy usage will also raise demand for coal, benefitting Peabody Energy Corp. (NYSE:BTU), Massey Energy (NYSE:MEE), Arch Coal (NYSE:ACI), Consol Energy (NYSE:CNX), Foundation Coal Holdings (NYSE:FCL) and Alliance Resource Partners (NASDAQ:ARLP). (2) Increased construction of power plants will benefit power plant construction companies. Jim Cramer's top pick in this area: ABB Ltd. (NYSE:ABB). (3) Higher energy prices disproportionately hit lower-income families, futher increasing the pressure on discount retailers versus those that cater to wealthier customers.

Target Lowers Its July Same-Store Sales Forecast

  • Summary: Target's stock (NYSE:TGT) fell 3.2% in late trading yesterday after the company cut its forecast for July same store sales. It now expects growth of 3-4%, below its previous forecast of 4-6% and last year's 5%. Until now Target has avoided the impcat on consumer spending of higher fuel prices and interest rates due to its more affluent clientele. Wal-Mart expects July same store sales to rise 1-3%, versus 1.2% in June, and claims that customers are making fewer shopping trips to reduce their spending on fuel and are purchasing fewer discretionary items.
  • Comment on related stocks/ETFs: Target's reduced guidance for July sales is an important data point for the economy, and will be taken as evidence of slowing earnings by many investors. Although the Retail HOLDRs ETF (NYSEARCA:RTH) is one of the most oversold ETFs according to TickerSense, Target's guidance reduction should hit the retail stocks -- and thus the ETF -- today. Target's guidance also brings it closer to Wal-Mart's performance, as the WSJ article states. As well as higher gas prices and rising interest rates, a key factor favoring higher-end retailers is the dramatic rise in income inequality in the US. The data and this brief discussion are must-read material for anyone investing in the retail sector. The question for Target is whether it is genuinely immune to these factors. After all, it's not Coach (NYSE:COH), Sacks Fifth Avenue (NYSE:SKS) or Tiffany (NYSE:TIF).

U.S. Industrial Output Jumps, Amid Strong Business Investment

  • Summary: U.S. industrial production - output from factories, mines and utilities - rose strongly by a seasonally-adjusted 0.8% last month, up 4.5% from last year. 'Economists said last month's gains, which followed a soft performance in May, reflected strong demand for productivity-enhancing equipment, rising U.S. exports and inventory building by businesses.' The strong number suggests that factory expansions will be necessary to keep pace with ongoing brisk demand for U.S. manufactured products in the coming months.
  • Comment on related stocks/ETFs: Should be good news for industrial infrastructure companies such as Masco Corp. (NYSE:MAS), Parker-Hannifin (NYSE:PH) and Shaw Group (SGR), as well as Walter Industries (NYSE:WLT) and its recently spun-off IPO Mueller Water Products (NYSE:MWA). Note, though, that Masco is heavily exposed to the weak homebuilding sector.

China's Economy Soars 11.3%; More Fiscal Restraint Expected

  • Summary: The Chinese economy expanded by 11.3% in the second quarter, despite efforts on Beijing's part to cool off the growth. The first quarter saw 10.3% growth. Chinese leaders fear that an overheated economy could lead to industrial overcapacity, falling profits and a potential crash due to a rash of bankruptcies. Authorities now expect an interest rate hike for the second time this year, and stronger instructions to banks to reduce lending. But rising interest rates may backfire, as investors rush in and add liquidity on speculation that the yuan would eventually appreciate. China's large trade surplus is another factor contributing to high domestic lending. Notably, inflation remains relatively low but is climbing -- the CPI was up 1.5% from the year-ago period, after rising 1.4% last month. Most believe that despite American pressure, the government will refrain from allowing the yuan to appreciate faster.
  • Comment on related stocks/ETFs: Enzio von Pfeil disputes the claim that China's government can prevent overheating. One way to play the remarkable growth in China is through the ETFs from iShares (NYSEARCA:FXI) and PowerShares (NYSEARCA:PGJ). Also from our China sector -- an upgrade of internet stock Baidu (NASDAQ:BIDU) from Piper Jaffaray analyst, who says the 'Google threat has failed to appear.'

Coca-Cola's Net Income Rises 6.6%

  • Summary: Coca-Cola's Q2 results: Revenue up 2.6% to $6.48 billion, net income up 6.6% to $1.84 billion. EPS of $0.78, or $0.74 excluding a four cent gain from the IPO of Coca-Cola's Turkish bottling unit. Adjusted EPS beat the analyst consensus of $0.72. Unit case volume grew 4%, 3% in carbonated beverages and 5% in noncarbonated. Coke's CEO said growth in Brazil, China, Russia, and other emerging markets contributed to profits.
  • Comment on related stocks/ETFs: Full press release here.

McDonald's Reports Strong Sales, Expects 60% Per-Share Profit Rise

  • Summary: McDonald's guidance for Q2 results: Overall sales up 6.6% in Q2 and 8.1% in June. Same-store sales up 5.5% in Q2, due to breakfasts and kids' meals in the US and strength in Europe, Japan and Australia. Same-store sales in the US up 4.2%, in Asia-Pac up 8.8%, driven by Japan and Australia. EPS of $0.67 includes $0.10 from sales of stake in Chipotle Mexican Grill in the IPO and two cents of one-time chartes; without those, EPS would have been $0.59, higher than analysts' consensus of $0.56.
  • Comment on related stocks/ETFs: McDonald's results contrast with Target's disappointing guidance for July same store sales issued last night. McDonald's is clearly benefiting from expansion into higher growth overseas markets and improvements in its US menu. But why isn't it being hit by the same factors (higher gas prices, rising interest rates, widening income inequality) impacting Wal-Mart? One intriguing possiblity: McDonald's meals are so cheap that its sale might actually rise as its customers' incomes get squeezed. (In economic terms: McDonald's meals are an "inferior" good.

Mattel Rebounds to Post Profit, Aided by Movie-Themed Toys

  • Summary: Toy-maker Mattel Inc.'s stock rose 11% yesterday after the company announced Q2 EPS of $0.10 versus a net-loss a year earlier. Sales rose 8% to $957.7 million, up 5% in the US and 12% abroad. Worldwide sales by brand: Barbie down 1%, Girls and Boys up 8%, Fisher-Price up 8%, American Girl up 5%, Hot Wheels down 7%. Sales were boosted by toys based on the movies "Cars" and "Superman Returns". Operating margins rose due to price increases, brand consolidation and supply-chain improvements, despite rising commodity and oil prices.
  • Comment on related stocks/ETFs: Mattel's stock (NASDAQ:MAT) is highly levered to its international sales, where most of the growth is coming from. The question is how much international growth and good execution can offset the weaking retail sales environment in the US.

Has GM Finally Hit the Brakes On Sales Slide? and GM Board Is Mum On Ghosn Talks, But Union Worries

  • Summary: Though GM sales are down 12% from last years' promotion-driven levels, its new 'everyday low pricing' model seems to be working, according to GM's top North American sales and marketing executive. GM's eight brands have stabilized market share at about 24%, after falling from 28.9% in 2000. Some analysts note, however, that GM's already reached its peak of new model launches, so share gain in the next year is unlikely. So far in 2006, GM vehicles have sold for an average of $27,915, $1,360 higher than a year ago. That has raised resale values as well, a key consideration for carbuyers. New models to hit the streets in the next 6-9 months include 8-passenger 'crossover' vehicles that have SUVs' capacity, but are more fuel efficient and smoother-riding. These are going to GM's smaller divisions -- Saturn, GMC and Buick (not Chevrolet) -- a controversial move amidst criticism that GM should cut back from its current eight brands. Separately, CEO Rick Wagoner briefed the GM board on his discussions with Renault/Nissan chief executive Carlos Ghosn. Kirk Kerkorian stayed silent, suggesting he may allow Wagoner to proceed on Wagoner's own terms.
  • Comment on related stocks/ETFs: If you follow General Motors, be sure to subscribe to all of our GM content by email

Despite Options Probes, UnitedHealth Has Fans

  • Summary: Many institutional investors are now pouring money back into shares of UnitedHealth Group (NYSE:UNH). Currently under investigation for an options scandal that reaches all the way to CEO Dr. William McGuire, shares of UNH are down 25%, from a 52-week high of $64, to their current price of under $48. While the scandal has led to a widespread sell-off in shares of UNH, the stock still has many fans who believe shares are now on offer at a highly discounted price. Glenn Greenberg, managing director of Chieftain Capital Management Inc., which now owns more than 14 million UnitedHealth shares, has channeled 15% of its assets into the stock since it dropped below $50 in April -- buying a total of 1% of UnitedHealth's stock. Other institutional investors are equally bullish on UNH with Citigroup analyst Charles Boorady leading the pack and setting a target price of $81 a share. Shares have hovered around their current price because of uncertainty surrounding CEO McGuire's future at UNH. Many investors attribute McGuire with UNH's rise from troubled, mid-size healthcare provider to the "HMO powerhouse" status it currently holds.
  • Comment on related stocks/ETFs: With UNH expected to report earnings tomorrow, the institutional analysts who are so bullish on UNH should have an immediate litmus test. Regular Seeking Alpha contributor Eddy Elfenbein wrote on July 12 that, "The scandal is serious but it will have little impact on [UNH's] business." If it turns out he's correct and UNH's underlying business is sound, then expect an upside in the near future.

AHEAD OF THE TAPE: Pare, Repair

  • Summary: Ford Motor slashed its quarterly dividend in half last week, prompting a selloff in its stock from $6.83 to the current $6.40 as small investors headed for larger yields in other stocks and asset classes. But Thompson Financial has found that S&P 500 companies that cut dividends by at least 10% during 1990-2004 ended up beating the overall market after a short (3 month) downdraft. This may be due to increased investment in the core business, or restructuring that involved a dividend cut.
  • Comment on related stocks/ETFs: The article notes one particular standout in this field -- Allegheny Technologies (NYSE:ATI) cut its dividend in November 2002 and its stock has since risen 900% -- it's the top-performing S&P 500 stock so far this year. Ford's dividend was slashed from 10 cents/share to 5 cents/share -- the annualized dividend yield is now less than 3%. GM (NYSE:GM) also cut its dividend this year.

HEARD ON THE STREET: Deal or No Deal? That's the Issue For a Magazine and DVD Powerhouse

  • Summary: Source Interlink Cos. (SORC), the largest US distributor of magazines and a major distributor of CDs and DVDs, could be acquired for 20% more than its current stock price by private equity funds. Its operating profit margins have slipped in recent quarters from 5-7% to less then 4% after a spate of acquisitions, but a small increase in profitability due to cost cutting could make a big impact on the bottom line given that the company's revenue will be almost $2 billion this year. Interlink distributes CDs and DVDs to offline retailers and the majority of online retailers, including Amazon. Bookstores Barnes & Noble and Borders accounted for over 50% of 2005 revenue. CEO Leslie Flegel has stated that he expects margins to improve due to cost cutting. Each added half point in operating margin adds $0.12 in EPS. The stock trades at 12x 2007 estimated EPS versus an average of 19 over the last five years. Interlink announced in March that it had hired Deutsche Bank to look at "strategic alternatives". Analysts think the company could be sold for $13.50-18 per share over the next couple of months. Over 40% of the stock is sold short.

TRACKING THE NUMBERS: Up for Overhaul: Lease Accounting

  • Summary: A joint effort by the Financial Accounting Standards Board in the U.S. and the International Accounting Standards Board in London should soon demand that companies recognize certain types of leases on balance sheets as expenses. Currently, if leases for capital equipment and real estate are structured in-line with certain criteria, they do not need to be recognized as liabilities. One report finds that S&P companies currently avoid reporting about $400 billion in debt, or more than 90% of leases, in this manner. The move comes as the SEC pushes for changes in the rules following scandals such as Enron's. The current rules stipulate that if the present value of minimum lease payments is less than 90% of an asset's value, the lease can stay off the balance sheet. The Equipment Leasing Association has responded with a paper stating that the current rules are fair and don't require change.
  • Comment on related stocks/ETFs: If the new rules take effect, corporate equipment leasing companies (everything from autos to copiers) and leasing financiers could be hit. Among them: GE Capital (NYSE:GE) and Wells Fargo (NYSE:WFC)

IPOs: Nymex Plans to Conduct IPO That Could Raise $250 Million

  • Summary: The New York Mercantile Exchange has filed for an IPO that could raise as much as $250 million. This comes on the heels of other exchanges that have successfully floated public offerings, such as the Chicago Mercantile Exchange, Chicago's CBOT Holdings, IntercontinentalExchange Inc., and the NYSE. Nymex hasn't indicated what percentage it is taking public, but seat-holder sales indicate a private valuation of about $3.2 billion. That would mean about 35x last year's earnings, in-line with other exchanges' valuations. Nymex has maintained its 'open-outcry' trading system amidst the general movement toward computer-executed trading, though it does now offer simultaneous electronic-platform trading via Globex. In its prospectus, Nymex noted that the side-by-side platforms are expensive to operate and may cause customers to flee to a competing exchange (such as Intercontinental). Number of shares and price range for the IPO have not been set.
  • Comment on related stocks/ETFs: Nymex Holdings' proposed ticker is NMX -- here's the S-1 for the IPO. Click on tickers for more on: the NYSE IPO (NYSE:NYX) , the Chicago Mercantile Exchange IPO (NASDAQ:CME), and IntercontinentalExchange (NYSE:ICE). Mark Mahorney explains why he's bullish on the exchanges.

SMALL STOCKS: P.F. Chang's China Bistro, Mothers Work Gain

  • Summary: Small stocks were hit hard in trading yesterday with restaurant stocks a notable exception. Both small stock indexes fell yesterday with the Russell 2000 index of small-cap stocks losing 0.52%, to 677.69 and the S&P SmallCap 600 index shedding 0.86%. In the restaurant group, small stocks climbed after large-cap McDonald's (NYSE:MCD) said second-quarter earnings would exceed expectations. Gainers included P.F. Chang's China Bistro (NASDAQ:PFCB), up 3%, and Lone Star Steakhouse & Saloon (NYSE:STAR), which climbed 2.2%. Energy exploration and production stocks declined after crude-oil futures pulled back from last week's highs on speculation the fighting in the Middle East would soon end. Among small energy-related stocks, Penn Virginia (NYSE:PVA) slid 3.4% while Comstock Resources (NYSE:CRK) declined 3%. In terms of individual performers, Spectrum Brands (SPC) had the distinction of being the NYSE's top decliner, plunging 33% after reducing its fiscal-2006 earnings guidance, partly because of weak battery sales in Europe; Threshold Pharmaceuticals (NASDAQ:THLD) fell 51% after plans to discontinue development of its TH-070 compound intended to treat men with enlarged prostates had to be discontinued because of disappointing results from clinical studies; IMA Exploration (IMR), a Vancouver precious-metals exploration company, tumbled 80% after a legal decision required the company's Argentinian silver mines be transferred to Canada's Aquiline Resources. Individual gainers included Magic Software Enterprises (NASDAQ:MGIC), which jumped 65% after the Israeli technology company said it signed a three-year global distribution and manufacturing agreement with large-cap IBM. Ituran Location & Control (NASDAQ:ITRN) climbed 6.7%; Mothers Work (MWRK) rose 3.8%; Wheeling-Pittsburgh (WPSC) gained 7.8%; PokerTek (NASDAQ:PTEK), a marketer of electronic poker tables, gained 9% after the Charlotte, N.C. company announced a three-year contract to provide its PokerPro electronic-poker tables to large-cap Carnival's (NYSE:CCL) cruise ships.
  • Comment on related stocks/ETFs: Spectrum Brand's (SPC) 33% decline yesterday comes on-the-heels of equally steep declines in April '06 and August '05. According to regular Seeking Alpha contributor David Phillips, many of the reasons for those earlier declines, such as a management "more interested in egocentric than shareholder concerns" and pricing pressure resulting from rising commodity expenses, especially for zinc, are ever-present. For more on SPC's last big fall, check out Seeking Alpha's SPC archive.

Notable articles on Seeking Alpha today: Today's earnings schedule and analyst upgrades and downgrades. David Fry on gold and the dollar. Eddy Elfenbein on the WSJ's "Pseudo Options Scandal". The long case for Cascade Bancorp. Barclay's new exchange-traded note for oil, and how it differs from the ETF. Most recent conference call transcripts: Philips Electronics, GE, EMC, McClatchy. New IPO filing from Cadence Pharmaceuticals.

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Source: One Page Annotated WSJ Summary, Tuesday July 18th