One Page Annotated WSJ Summary, Wednesday July 19th

by: David Jackson
David Jackson
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J.P. Morgan's Net More Than Triples

  • Summary: J.P. Morgan Chase reported net income of $3.45 billion, or 99 cents/share, up from $994 million or 28 cents/share a year ago. Revenue was $15.72 billion, up 15% y/y. Both the revenue and income figures beat analyst estimates handily, and the stock is up nearly 4% in premarket trading. Breakdown of earnings: Investment banking up 37%; retail financial services down 11%; private equity gain of $340 million; litigation insurance recoveries of $161 million.
  • Comment on related stocks/ETFs: See press release; conference call is at 9 AM. This is on the heels of Merrill's beat yesterday -- looks like another strong quarter for the I-banks.

Yahoo Net Plummets Almost 80%; Ad-System Upgrade Is Delayed

  • Summary: Yahoo's stock fell almost 14% in late trading last night after the company announced Q2 results which missed analysts' consensus revenue estimate. Key Q2 stats: Gross revenue up 26% year over year to $1.58 billion; net revenue (excludes commissions paid to marketing partners, known as "traffic acquisition costs" or TAC) up 28% to $1.12 billion. EPS was $0.11 versus $0.51 a year earlier. Net income was $164 million versus $755 million a year earlier, when profit was boosted by the sale of Google stock. Net income was also reduced by the expensing of options. Advertising and listing-related revenue rose 27% and accounted for 88% of total revenue. Top 200 advertisers boosted spending by 35-40%. Yahoo's full year revenue projection was left unchanged at $4.6-4.85 billion.
  • Comment on related stocks/ETFs: Unusually for the WSJ, the article fails to explain why Yahoo's stock (NASDAQ:YHOO) took such a hit in late trading. There are five reasons: (1) Yahoo's EPS was in line with the consensus estimate, but analysts were expecting slightly higher revenues: $1.14 billion versus Yahoo's reported number of $1.12 billion. (2) Yahoo's failure to roll out its new search advertising system will impact its revenue, profits and competitive postition, and the company's explanations for the delay were lame. (3) Yahoo didn't raise guidance for the full year. (4) As John Hussman has pointed out, the market's tolerance for risk has fallen, and investors don't want to hold growth stocks that should be beating numbers and raising estimates when they're not doing so. Yahoo didn't beat and didn't raise. (5) Everyone knew it was coming, but now that stock options are being expensed, companies' earnings just don't look so great. For more on Yahoo's results, see the press release [PDF] and, more important, the conference call transcript.

IBM's Net Rises 11%, But Contract Signings Slip

  • Summary: International Business Machines Corp. (NYSE:IBM) reported net earnings of $2.2 billion, up 11% from the year earlier period. EPS came in at $1.30 -- 1 cent above estimates. Share prices responded positively to the news, increasing nearly three-quarters of a percent during trading before the announcement yesterday, then getting another 1.5% boost in after-hours trading. The increase in net earnings resulted mainly from an increase in software sales. IBM reported a revenue increase of 45% in their semiconductor division, largely on video game console chip sales. However, there was also cause for concern with contract signing falling significantly. Long-term deals faired the worst during this past quarter, coming in at just $4.6 billion -- only half of what they were a year ago. Since contract signings are one of the best predictors of future revenue, there is concern that IBM is gradually losing market share in this increasingly competitive market.
  • Comment on related stocks/ETFs: For more in-depth coverage of IBM's most recent quarter, see the company's conference call transcript now available at Seeking Alpha.

Global Growth, Weaker Dollar Unleash a Wave of U.S. Exports

  • Summary: There are signs that the U.S. trade-deficit is finally starting to narrow. In the first five months of this year, U.S. exports were up an inflation-adjusted 10% from the year earlier period. This rise was led by strong sales of capital goods abroad, items like heavy construction equipment and machine tools, whose exports were up even more sharply at 15%. During the same period, goods imports rose 6% in inflation adjusted terms. The Manufacturers Alliance, an organization that represents U.S. manufacturers, expects U.S. export growth to accelerate to 7.7% this year and 9.4% in 2007, up from 6.9% in 2005. Economists have pinned the growth in exports largely to a delayed impact from the weaker dollar, which has given U.S. producers a competitive edge in pricing. Since 2002, the dollar has lost 14% of its value. Combine this with strong growth in powerhouse economies like Europe and Japan, as well as continued emerging market growth in places like China and India and you get especially strong U.S. export numbers.
  • Comment on related stocks/ETFs: U.S. economists generally agree that among the advantages of a weaker dollar are an increase in exports, as countries on the lower end of the economic spectrum can begin to afford U.S. goods. Seeking Alpha contributor David Andrew Taylor believes that the dollar and U.S. trade deficit have a lot less pull on one another than many believe. For more on this contrarian view, see his piece A Contrarian Take on the Dollar: Why It Will Get Stronger.

Iraq Lifts Oil Output in South

  • Summary: Iraqi and U.S. engineers have significantly lifted oil output in Iraq's southern oil fields despite continued sectarian unrest. Though the country's oil industry continues to see major bottlenecks in production, the southern fields have been increasingly productive. With total output still nowhere near prewar levels of 2.5 million barrels a day, Iraqi South Oil Managing Director Jabbar el-Leaby said his nationally run company hopes to be producing 2.25 million alone by year's end. With an economically weakened Iraq still responsible for pumping out roughly 2% of the world's daily oil needs, any increases in production capacity would help stabilize rising crude prices, which could have positive reverberations on the global economy.
  • Comment on related stocks/ETFs: In related news, the Washington Post reported on July 12 that the U.S. military was ending its exclusive logistical services deal with Halliburton co. (NYSE:HAL). The company received $7 billion in payouts from the army in 2005 alone but has come under fire from the justice department for accounting irregularities. To read more on Halliburton's involvement in Iraq, check out their most recent conference call transcript from April available at Seeking Alpha.

Heat Wave Spurs Calls For Stronger Power Grid

  • Summary: With memories of the blackout of the summer of 2003 still fresh, there has been a chorus of calls from both government officials and the private sector demanding the U.S. have a more modern, more powerful grid system. Record temperatures over the last two days have stretched the current grid system -- actually made up of three grids -- to its limit. While rules were supposed to be put in place to assure that a repeat of 2003's blackout across the eastern half of the U.S. and Canada doesn't recur, Congress has been slow in implementing the laws in question. Though the cost of the last major blackout was extremely high -- costing the economy as much as $10 billion -- very little has been done to alter the reality on the ground. Yesterday, a power outage in Southern California caused LAX airport to close down for 90 minutes. Among the current system's greatest challenges are bottlenecks which prevent areas with surplus power to transfer it to regions with experiencing power deficits and a decrease in backup supplies due to rising energy costs and disruptions in energy markets. According to Craig Baker, senior vice president of American Electric Power Co. (NYSE:AEP) which operates the nation's largest private transmission system, it will ultimately be the consumer and private businesses that pick up the costs of overhauling the nation's power system.
  • Comment on related stocks/ETFs: For related articles on the current heat wave hitting the U.S. and its likely affect on the economy, see David Jackson's Heat Wave Raises Power Consumption -- Implications as well as Barry Gitart's Playing the Heatwave: Companies That Profit From Record Heat.

Ameritrade, Schwab Profits Rise

  • Summary: Schwab (NYSE:SCHW) Q2 results: Net revenue up 21%, net income up 35% to $251 million or $0.19 EPS. Ameritrade's (NASDAQ:AMTD) Q2 results: net revenue "more than doubled", net income up 67% to $139.8 million, or $0.23 EPS. Both firms benefited from higher interest rates resulting in increased net interest revenue. Schwab's largest sources of revenue were asset-management and administration fees, which rose 16% to $642 million. Ameritrade's numbers were boosted by the January acquisition of TD Waterhouse. Despite the strong Q2 results, both firms reported that client trades declined between May and June -- by 25% for Ameritrade and 17% for Schwab -- and said that trading has further slowed into July.
  • Comment on related stocks/ETFs: Ameritrade's EPS beat the consensus by a penny, Schwab's missed by a penny. For more details see Ameritrade's press release, presentation [PDF] and conference call transcript, and Schwab's press release [PDF]. The number of Schwab's active client accounts has stabilized at about 6.75 million (versus 7.2 million a year ago), probably due to the firm's well-publicised price cuts, though Schwab's fees are still higher than other online brokerages. TD Ameritrade ended the quarter with 3.26 million accounts with balances over $2,000, down 1% year over year. Despite its lower number of meaningful client accounts, TD Ameritrade booked 253,000 average trades per day versus 251,000 for Schwab. But TD Ameritrade is moving towards Schwab's model of increased focus on asset-based revenue rather than trading commission-based revenue, and stated that 59% of revenues were asset-based. That means that both firms' income should be less susceptible to a market decline, and a dramatic sell-off in the stocks would be a buying opportunity.

Disney's Studio to Cut 20% of Staff

  • Summary: As expected, Disney will cut back its studio division by 650 workers, but in a surprise move, the company announced the departure of studio production head Nina Jacobson after eight years at the post. Oren Aviv, Disney's head of marketing, will now fill the role. Disney studios is in the midst of a shift toward more general-market films, and cutting back its Touchstone-labeled movies to just 2 or so from the current 7-8. Disappointing earnings from 2005 films and the integration of Pixar Animation Studios, acquired by Disney, are behind the restructuring in the unit.
  • Comment on related stocks/ETFs: The recent box office success of Disney's 'Pirates of the Carribbean' sequel came too late for these cuts to be avoided.

Buyout of Hospital Firm HCA Unravels in Final Stages of Talks

  • Summary: A private-equity leveraged buyout of the nation's largest hospital operator, HCA, fell apart in its final stages, as the two sides failed to bridge a 10% gap in the deal price. HCA, with a market cap of $17.6 billion, is hampered by a debt load of $11 billion that made the financing and purchase of the hospital operator particularly difficult. 'The bidders were a group that included Bain Capital; Kohlberg Kravis Roberts & Co.; Merrill Lynch Private Equity and the family of Senate Majority Leader Bill Frist, whose father, Thomas Frist, and brother, Thomas Frist Jr., founded HCA.' HCA and other large hospital operators have been hurt recently by low admission numbers and growing debt due to non-insured and under-insured patients. HCA insiders, including Mr. Frist, have recently come under investigation for insider sales.
  • Comment on related stocks/ETFs: HCA stock has slid all year, and will likely slide again today on this news. Wall Street has been awaiting a private equity deal of this magnitude, but apparently this won't be it.

HEARD ON THE STREET: Sony's Big Hopes For PlayStation 3 May Fall Short

  • Summary: Sony has high expectations for its new game console, PlayStation 3, due to be released in November. But competitors Microsoft (XBox 360) and Nintendo (Wii) pose formidable challenges that Sony may not overcome. Nintendo's machine has won over the all-important videogame critic crowd, in part because of its well-designed remote 'wand', and should be priced around $250 vs. the PS3 pricetag of $499-$599. Microsoft's console is about $200 cheaper as well, though it lacks the PS3' next-generation DVD player. Another issue is the relatively slow arrival of software for the PS3 ahead of its rollout. With profit from its gaming unit expected to contribute 30% of Sony's income in upcoming years, its failure to meet the high expectations could impact the stock significantly -- it's up about 24% in the past 12 months. Sony's P/E ratio of 37 is far above competitors', in large part due to enthusiasm for the PS3. If PS3 fails to win over the mainstream, that would also impact the BluRay DVD format in its battle against the rival HD-DVD format.
  • Comment on related stocks/ETFs: Nintendo (OTCPK:NTDOY) already dominated first half gaming sales in Japan and Steven Towns thinks they'll rule the day on the next gen consoles, since the PS3 is more expensive than most Japanese citizens' rent. BluRay backers who could be impacted by weak PS3 sales: Matsushita Corp. (NYSE:MC), News Corp. (NASDAQ:NWS) and Walt Disney (NYSE:DIS).

INSIDE TRACK: Buy or Sell Sign? Why It's Hard To Tell at Cooper

  • Summary: Insiders at Cooper, a specialty medical supplies company, have sold almost $30 million of stock so far in 2006, while buying less than $700,000 worth. Which transactions are more important for investors to consider? The purchases, a sign of confidence in the company, have been more recent, while the sales may simply be compensation-related and executive moves to diversify holdings. The bulk of sales were from John Fruth, who received his shares when his company Ocular Sciences was sold to Cooper in January 2005. Eyes are also on the purchase by CEO Thomas Bender of more than $400,000 in Cooper shares, following his timely sale last year of $356,000 worth of shares before the stock dropped sharply in November from $70 to the current $43 level.
  • Comment on related stocks/ETFs: Cooper makes contact lenses and solutions -- the problems at Bausch & Lomb (BOL) over its ReNu contact lens solution don't seem to have aided Cooper's stock, which currently rests near its 52-week low following a remarkable 300% runup from 2003-2005.

TAX REPORT: Tax Hike Hits Home For Americans Abroad

  • Summary: A change in tax law will hurt American expatriates working in countries such as Russia, Hong Kong and Singapore, where income tax is relatively low and housing costs are high. The new law removes a housing exclusion/deduction for costs over $11,536 per year, and those who earn over $82,400 will now face much higher U.S. income tax. Workers in countries with higher taxes will be less affected, as foreign income tax outlays can be used to offset U.S. tax liability; many European countries fit this definition. While many individuals will feel the brunt of the change, many corporations that guarantee overseas employees tax-equalization benefits (ensure they pay no more tax than they would in the U.S.) will as well. Investment banks such as Merrill Lynch and Credit Suisse, equipment maker Caterpillar, and oil giants such as ExxonMobil and Chevron could see new liabilites as a result of the new law, which will be effective retroactively to Jan. 1, 2006.

SMALL STOCKS: Meritage Homes, Centene Drop; Geo Group and Alphatec Advance

  • Summary: Small stocks ended a four-session losing streak, but their gains were modest with the retail and housing sectors falling. The barometer Russell 2000 index of small-cap stocks gained 0.58% while the S&P's SmallCap 600 index added 0.41%. Still, retailers slid after large-cap Target (NYSE:TGT) reduced its July sales forecast, raising fears about a slowdown in consumer spending leading small cap Cost Plus (NASDAQ:CPWM) to shed 2.5% of its value. Housing small stocks also faired poorly after the National Association of Home Builders' index for sales of new, single-family homes fell to 39 in July from 42 in June, marking its lowest point since December 1991. As a result, Standard Pacific (SPF) dropped 2.8% while Meritage Homes (NYSE:MTH) slipped 3.5%. In terms of individual performers, Centene (NYSE:CNC) plunged 35% after lowering its 2006 forecasts -- the biggest percentage decliner on the NYSE. Molina Healthcare (NYSE:MOH), another Medicaid managed-care company, fell 14%. Other big losers included China Techfaith Wireless Communication Technology (NASDAQ:CNTF) which unloaded 14% of its value; and Spectrum Brands (SPC) which fell another 11% on top of an already steep 33% decline from the previous session. There were a few bright spots as well: SimpleTech (NASDAQ:STEC) climbed 17% after the Santa Ana-based memory-products company announced that it expects to exceed its second-quarter guidance because of stronger-than-expected demand; Geo Group (GGI) added 19% after they raised their second-quarter earnings forecast.

Notable articles on Seeking Alpha today: Today's earnings schedule and analyst upgrades and downgrades. Latest conference call transcripts, from Check Point Software, IBM, Yahoo, New York Times, Sify Ltd, Journal Communications, and TD Ameritrade. Steven Towns on Matsushita's 103" plasma TV.

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