One Page Annotated WSJ Summary, Thursday July 20th

by: David Jackson
David Jackson
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Bernanke Expects Slowing Economy To Tame Inflation and FOREIGN EXCHANGE: Dollar Slides Along With Expectation of Rate Increase and Bernanke Sends Stocks Skyward

  • Summary: The DJIA soared 212 points yesterday after Fed Chairman Ben Bernanke testified to the Senate Banking Committe that the economy would slow this year and next to its long term potential growth rate, limiting inflation. While acknowleging that inflation is too high, he predicted that slowing growth and stable energy prices would lead to lower inflation, without commenting on the Fed's interest rate policy. With the release of data at 8.30 am yesterday showing that the core consumer price index rose by 0.3% in June, higher than the Wall Street consensus of 0.2%, futures markets raised the probability of an interest rate hike from 65% to 90%. But with Mr Bernanke's comments later during the day, they fell back to 65%, stock prices rose, long term bond yields fell to 5.06% from 5.14%, and inflation protected bonds implied no higher future inflation. The dollar fell sharply, losing over a cent against the Euro and pound sterling and declining by half a yen. Stocks were helped by a fall in crude oil futures for the third consecutive day. However, the Commerce Department released data showing that housing starts fell 5.3% month-over-month in June and building permits fell 4.3%, worse than economists expected. Persistently rising rents are contributing to higher inflation via "imputed rent" for homeowners: the "shelter" constituent of inflation rose by 0.4% in June.
  • Comment on related stocks/ETFs: The lousy housing starts data was overwhelmed by the market reaction to Mr Bernanke's comments on inflation. Jeffrey Saut's assertion yesterday that the housing market is worse than people realize was correct.

Intel Profit Sinks 57%, Pinched by a Price War

  • Summary: Intel's Q2 results: Revenue down 13% to $8.01 billion, at the low end of the range Intel predicted in mid-April and below analysts' consensus of $8.26 billion. Net income fell to $885 million from $2.04 billion a year earlier. EPS of $0.15 beat the consensus of $0.13, and included costs of about four cents for stock-based compensation, and was down from $0.33 a year earlier. Gross profit margin was 52.1%, higher than Intel's mid-May prediction of 49% due to lower inventory write-downs. Guidance for Q3: Revenue of $8.3-8.9 billion, with a mid-point of $8.6 billion below the consensus estimate of $9.04 billion. Gross margin of 49%, depressed by price pressure and the ramp-up of new products.
  • Comment on related stocks/ETFs: Intel's (NASDAQ:INTC) Q2 results were far better than people feared despite the revenue miss due to the higher gross margin. But Intel's profits are massively leveraged to revenue, and if weak revenue persists, that translates into sharply lower profits. Attempts to pare the company's cost structure by laying off managers and selling less profitable businesses have only limited impact. Sure enough, Intel's guidance for Q3 is horrible (49% gross margin!), and that's what drove the stock down 1.5% in late trading. But once Intel has issued pessimistic guiance for next quarter, there's nothing to restrain it from pricing aggressively against AMD (NYSE:AMD). The message of these results is don't own Intel, don't own AMD until this price war abates for at least another quarter. Then, as we get closer to the rollout of Microsoft's Vista, look again at the stocks.

Intel-Based Macs Help Apple's Net Surge 48%

  • Summary: Apple's stock rose 8.4% in late trading after the company released Q2 results. Key points: Revenue rose 24% to $4.37 billion, within Apple's guidance range of $4.2-4.4 billion but missing the consensus of $4.44 billion. Net income rose 48% to $472 million. EPS of $0.54 beat Apple's guidance of $0.39-0.43 and the consensus of $0.44. Mac sales rose to 1.3 million units and $1.87 billion in revenue from 1.2 million units and $1.57 billion a year earlier. iPod sales rose to 8.1 million units and $1.5 billion in revenue, up from 6.2 million units and $1.1 billion a year earlier. Analysts interpreted Apple's Q3 guidance of moderate quarter-over-quarter revenue growth to $4.5-4.6 billion to imply that new iPod models won't be released during the quarter.
  • Comment on related stocks/ETFs: Apple (NASDAQ:AAPL) comfortably beat EPS estimates despite missing revenue estimates. In other words, the company's profit margins are far better than analysts realized, confirming that the Mac business has more leverage for Apple than the lower margin iPod business. What's interesting to note is that this isn't the long predicted "halo effect" of interest in Apple's iPods splling over into interest in Macs. Rather, this is the success of the switch to Intel chips. See Apple's press release, the entire conference call transcript, and key excerpts containing Apple's discussion of sales of iPods and iTunes, its retail strategy and the transition to Intel-based Macs. The press release stated that 75% of Macs sold during the quarter used Intel chips. Carl Howe's comments and preview of Apple's earnings yesterday on Seeking Alpha got this right. Intel (INTC) itself is hurting, but at some point the Apple win will translate into higher profits.

EBay Posts 14% Drop in Profit But Raises Full-Year Forecast

  • Summary: eBay's stock rose 6% in late trading after the company issued its Q2 results. Key points: Revenue of $1.41 billion up 30% year over year. Net income of $250 million down 14%; excluding $60 million of stock-based compensation, net income was $310 million, up 6% year over year. EPS of $0.24 matched analysts' consensus estimate. Revenue per auction listing declined 10% according to a Goldman Sachs estimate. CEO Meg Whitman said auction growth was unsatisfactory and that it was impacting the user experience and "has diluted the magic of eBay". eBay's store and fixed-price listings grew faster than its auction listings. In an attempt to promote auctions, eBay said it would raise the price on fixed-price listings. Guidance: 2006 EPS guidance raised to $0.69-0.72 from the prior range of $0.65-0.71, revenue unchanged at $1.36-1.43 billion.
  • Comment on related stocks/ETFs: eBay's stock (NASDAQ:EBAY) traded up probably because sentiment has been negative and expectations were overly pessimistic. The key issue now is the decline in eBay's auctions relative to its fixed-price sales, and the company's suggestion that it can deal with this by raising the fees it charges on fixed-price sales. eBay's press release [PDF] alludes to this as follows: "The company also announced marketing and pricing initiatives it expects will increase the velocity of trading on the eBay marketplace." There's more and better detail in the conference call transcript. eBay's strategy to deal with the slowing of its auction business is questionable. Perhaps many people prefer fixed-price sales to auctions. Given that eBay's competitive advantage is not in fixed-price sales -- particularly since the growth of search traffic and the roll-out of Google Checkout makes it easier for small online stores to attract customers without using eBay or Amazon -- the least sensible response for eBay is to raise the price on its own fixed-price service to force eBay sellers to adopt auctions. This is the second time that eBay has tried to deal with competition by manhandling its users instead of focusing on improving its products. The first was its banning of Google Checkout. It could drive them instead into the hands of Google (NASDAQ:GOOG).

Motorola Earnings Surge by 48% With Help From Razr Cellphones

  • Summary: Motorola's stock rose 8.5% in late trading after the company announced Q2 results. Key details: Revenue up 29% to $10.88 billion. Profit up 48% to $1.38 billion. EPS of $0.54 included 21 cents of one-time gains. Handset market share up four percentage points to 22%. 51.9 million phones sold during the quarter. Handset sales were driven by the Razr phone. Two-thirds of sales came from cell phones. Average selling prices down 1%, but operating margins of mobile device division rose to 11.2% versus under 10% before the Razr was introduced in late 2004. Operating earnings from the networks business (Motorola's infrastructure business) fell to $386 milion from $494 a year earlier.
  • Comment on related stocks/ETFs: The stock was up because Motorola (MOT) beat analyst estimates and raised its guideance above consensus. Revenue of $10.88 billion beat the consensus of $10.27 billion and EPS of $0.33 (excluding the one-time gains) beat consensus of $0.31. The WSJ article also didn't cover MOT's guidance: Q3 revenue of $$10.9-11.1 billion, up 20-23%, and above the consensus estimate of $10.5 billion. More details in the conference call transcript. A key question for Motorola is how much it benefited from the change in Samsung's new product roll-out schedule. If it did, that's only a temporary gain, as Samsung will soon release a slew of new products.

H-P Gains on Dell for Primacy In PCs as Market Growth Slows

  • Summary: Research firms IDC and Gartner released their estimates of PC shipments and market share in Q2. Key points: IDC said world-wide PC shipments rose 9.5% year over year, with European shipment growth of 7%, far less than IDC's forecast of 12%, adversely impacted by the World Cup. Gartner said world-wide shipments rose 11%. Both IDC and Gartner said US shipments rose 6% due to price reductions caused by Intel's release of its Conroe microprocessor and the resulting need to sell inventory of older models. Dell's US market share stayed flat at 32-34% according to both IDC and Gartner. That's an improvement over Q1, when Dell'slsot market share for the first time in a decade, according to IDC. HP's US market share rose -- to 18.9% from 17.4% according to Gartner, and to 20.2% from 18.6% according to IDC. HP's global market share rose to 15.9% from 15.4% according to IDC, and its shipments rose 13%.
  • Comment on related stocks/ETFs: If HP (NYSE:HPQ) gained a lot of share in Q2 but Dell (NASDAQ:DELL) didn't lose, who did? Probably Gateway (GTW), Sony (NYSE:SNE) or Toshiba. HP's market share gains are well publicised and probably priced-in to the stock. Dell's market share stabilization is probably incrementally positive for its stock. And if Gateway did indeed lose share, you don't want to own that stock (GTW) going into earnings. See also commentary from Andy Neff.

Abbott Labs Profit Falls 30%, Largely on Acquisition Charges

  • Summary: Abbott Laboratories (NYSE:ABT) reported a 30% decline in second-quarter profit, mainly on charges associated with its acquisition of Guidant Corp.'s vascular unit and the discontinuation of sales of three medications made by German drug maker Boehringer-Ingelheim. Net income fell to $612.2 million, or 40 cents a share, from $877.1 million, or 56 cents a share. Sales fell to $5.5 billion from $5.52 billion. Consensus estimates had been for 2Q06 revenue of $5.46B and
    EPS of $0.57. Abbott's biggest division, the pharmaceutical unit, posted a sales decline of 9.9% to $3.01 billion, reflecting the change in how Abbott records results from its distribution agreement with Boehringer. The company's medical-product unit posted an 18% gain in sales, helped partly by the Guidant acquisition. The company's best-selling drug, Humira, had second-quarter sales of $491 million, up 53% from a year earlier.
  • Comment on related stocks/ETFs: Abbott's 2nd quarter results look much worse than they were as today's Chicago Tribune reports. The Tribune writes, " Excluding costs from the acquisition, the company reported earnings of $946.7 million, or 62 cents per share, well above its own guidance of 56 cents to 58 cents." Which is why shares of ABT surged 3.5% in trading yesterday.

UnitedHealth Profit Rises 26%, Aided by Medicare Drug Plan

  • Summary: UnitedHealth Group (NYSE:UNH) reported a 26% increase in second-quarter profit, reflecting an acquisition and strong enrollment in its new Medicare drug-benefit plan. Net income rose to $974 million, or 70 cents a share, from $770 million, or 58 cents a share, a year earlier. Earnings growth was boosted by the recent acquisition of PacifiCare Health Systems Inc., and by the large number of people UnitedHealth has enrolled in its new Medicare drug-benefit plans. Revenue climbed 57% to $17.92 billion. Quarterly estimates had been for revenue of $17.92 billion but for EPS of only $0.68 -- meaning UNH came in above estimates. UNH also boosted projections for full-year per-share earnings to between $2.91 and $2.95, from its previous range of $2.88 to $2.92. Now the largest managed-care company in terms of revenue, UNH is the first to report during each earnings season and is typically seen as a harbinger for the rest of the industry. In addition to UNH shares gaining 5.2% in trading yesterday, other healthcare stocks also performed well with WellPoint Inc. (WLP) shares up 2.3%, Aetna Inc. (NYSE:AET) climbing 4.9% and Cigna Corp. (NYSE:CI) rising 3.7%. UnitedHealth executives insisted profits will continue to rise in the second half, in large part because of its 5.7 million enrollees in the Medicare drug benefit. However, in their conference call with analysts, UNH executives steered clear discussing the inquiries into past stock-option grants to top company executives.
  • Comment on related stocks/ETFs: Regular Seeking Alpha contributor Eddy Elfenbein already predicted UNH's upside in his piece UnitedHealth Bounces Back Ahead of Earnings , which appeared on July 12. To see which companies other than UNH are currently involved in options backdating scandals, see WSJ Options Scandal Scorecard.

General Dynamics Net Soars 84% Amid Strength at All of Its Units

  • Summary: Defense contractor General Dynamics Corp.'s (NYSE:GD) second-quarter profit increased 84%, with strong demand for armored vehicles in Middle East combat zones and Gulfstream corporate jets leading gains across all four of its business segments. Net income of $636 million, or $1.56 a share, compared with $345 million, or 85 cents a share, a year earlier. Revenue rose 16% to $5.93 billion. General Dynamics raised its forecast for full-year earnings from continuing operations to $4.15 a share from a previous projection of $3.90 to $3.93 a share. (Estimates for the quarter had been for revenue of $5.76B and EPS $1.00. The projection matched what many analysts were estimating, but raised some disappointment from investors hoping for a rosier forecast. As a result, General Dynamics shares fell 36 cents, or 0.5%, to $67.99 in NYSE composite trading. In terms of divisional sales, GD said sales from its combat-systems division increased 29% to $1.44 billion, while sales in its aerospace segment rose 29% to $1.07 billion. The company's marine-systems segment posted sales of $1.27 billion, up 7.5% from a year earlier, while its information systems and technology group saw sales rise 7.2% to $2.16 billion.
  • Comment on related stocks/ETFs: Regular Seeking Alpha contributor Yaser Anwar includes GD in his anti-terrorism portfolio, which is comprised of companies he feels should serve as a hedge against terrorist activities (which can often shake markets). For the full article, click here.

AMR, Southwest Profits Surge Even as Fuel Prices Stay High

  • Summary: American Airlines' AMR Corp. parent (AMR) and Southwest Airlines (NYSE:LUV) reported sharply increased profits for the second quarter, signaling a continuing rebound in the U.S. airline industry even as fuel prices remain high. The results underscore how aggressive airlines have been at slashing costs and running more-efficient operations. AMR spent nearly 30% more on jet fuel than it did in the year-earlier quarter -- $1.71 billion compared with $1.35 billion -- but cost containment in other areas such as maintenance and wages still enabled it to report a profit five times that of a year earlier. AMR reported second-quarter net income of $291 million, or $1.14 a share, compared with $58 million, or 30 cents a share, a year earlier -- the best second-quarter results for the company in eight years. Revenue rose 13% to $5.98 billion from $5.31 billion. Estimates for the quarter were for revenue of $5.93B and EPS of just $0.15. Southwest reported net income of $333 million, or 40 cents a share, compared with $144 million, or 18 cents a share, a year earlier. Revenue rose 26% to $2.45 billion from $1.94 billion. SouthWest's estimates had been for quarterly revenue of $2.30B and EPS of $0.26. The result on the Big Board was solid for all airline stocks: Southwest's shares rose $1.30, or 8.2%, to $17.24, while AMR's shares rose 26 cents to $24.62. Additionally, Continental's (NYSE:CAL) shares climbed 6.7%, while United Airlines (UAUA) rose 6.6% to $28.56.
  • Comment on related stocks/ETFs: Jack Miller predicted the success of the major airlines reported on in today's WSJ in his piece Airline Fares Increase More Than Fuel Costs on June 12. Miller's June 20 piece, Continental Airlines Should Continue to be a High Flyer, also turned out to have wings after yesterday's reports.

E*Trade Reports 54% Rise in Net

  • Summary: Profit rose 54% at E*Trade Financial Corp. (NYSE:ET) during the second quarter, as the online financial-services firm benefited from rising interest income and increased stock-trading activity. Projections were also raised for the full year to a range of $1.37 to $1.47 a share from a previous range of $1.30 to $1.45. E*Trade posted net income of $156.5 million, or 36 cents a share, up from $101.6 million, or 27 cents a share, in the year-earlier period. Results for the latest quarter included the operations of BrownCo and Harrisdirect, two online brokerage firms that were bought by E*Trade during the past year. Revenue advanced 58% to $611.4 million from $387.7 million, up about 71% from the previous year's second quarter.
  • Comment on related stocks/ETFs: For a more in-depth look at E*Trade's recent quarter, see the ET conference call transcript.

Yahoo Loses Ground to Rivals In Turning Ad Search Into Cash

  • Summary: Yahoo announced on its Q2 conference call that it was delaying the roll-out of its new search advertising system, called Panama, to Q4 from Q3. That gives Google a chance to take more market share. Google and Microsoft report earnings today, so it will become clear whether Yahoo's problems are company-specific or industry-wide.
  • Comment on related stocks/ETFs: Unusually for the WSJ, this article contains no new information and is entirely backwards looking. Yahoo's ad platform problems were priced in to the stock (NASDAQ:YHOO) yesterday when it fell 22%, and sell-side analysts like Tim Boyd and Brian Bolan sent notes to clients analysing the impact of the delay while the market was open yesterday. Even Jim Cramer said the 'hoo' was taken out of Yahoo!, and the stock now has a floor of $15. For more on this, see Yahoo's own comments from its conference call. The key issue for investors now is whether to buy Google's stock on Yahoo's competitive weakness going into earnings.

Flash Memory Puts Punch in Portable PCs

  • Summary: PC makers are starting to adopt flash memory in PCs. Flash offers faster data access than hard drives but retains data when the power is turned off unlike DRAM. Sony's latest Vaio hand-held computer released in Japan uses flash resulting in 13% longer battery life, 3-6x faster boot-up time and better resistance to shock. Samsung began selling a flash-based handheld and notebook PC last month in Korea. Adoption of flash into PCs has been aided by falling prices -- halving every 12 onths -- and improved manufacturing yeilds, particularly by Samsung and Toshiba which together account for over 70% of the market. IDC projects that the flash market will grow 88% to almost $20 billion in 2010 from last year. Hard drive manufacturers Samsung and Seagate are also developing hybrid flash-hard drives.
  • Comment on related stocks/ETFs: Bullish for Samsung and Toshiba, but neither trade in the US. Incrementally bearish for the hard drive vendors Seagate (NASDAQ:STX), Maxtor (MXO) and Western Digital (NYSE:WDC).

For-Sale Signs Multiply Across U.S. and Home Builders Turn to Discounts, Promotions

  • Summary: The WSJ's quarterly survey of the US housing market showed that while there is no sign of a collapse, house prices are falling in some areas, levelling off in others, and the number of homes for sale is rising accross the country. The state of local housing markets is strongly impacted by employment growth. "Metro areas showing large increases of homes for sale and relatively weak employment growth include Boston, Los Angeles, Philadelphia and New York. Among the strongest markets overall are Houston, Dallas-Fort Worth and Seattle. All three areas are benefiting from robust job markets, and modest home prices are drawing investors and new residents to Texas." Separately, home builders are using aggressive promotions to sell new homes. Lennar is giving away free homes in a raffle for new home buyers and slashing prices on others, while several builders including Technical Olympic USA Inc.'s Engle Homes and Lennar "offered "guaranteed pricing," where a home's price would be reduced if pricing has changed by the time the home closes". Hovnanian has been forced to cut prices in Florida and Centex in California.
  • Comment on related stocks/ETFs: Interesting to compare the results of this survey to yesterday's data for housing starts. See also Jeffrey Saut's comments on the housing market. More negative data points on the home builders Lennar (NYSE:LEN), Meritage Homes Corp. (NYSE:MTH), Hovnanian (NYSE:HOV), Technical Olympus USA (TOA) and Centex (CTX). Philip Frank outlines the short case on Centex.

HEARD ON THE STREET: Forget GM Buzz, and Kick The Tires of Suppliers

  • Summary: While speculation about a merger at GM has driven its stock price up recently, a clearer picture of investor sentiment for the U.S. auto industry can be had via the auto-parts makers who supply goods and services to GM and other big auto makers. While GM shares are up 40% since the beginning of the year, companies such as American Axle & Manufacturing (down 15%) and Lear (down 29%) are showing the 'real situation' in the industry. Bonds they issue have been hit as well, and default protection for Cooper Tire, Goodyear and ArvinMeritor has increased. With Ford reporting today, eyes will also be on the impact to these hard-hit suppliers. The slowing economy, high fuel prices, and ongoing market share loss to foreign automakers all contribute to the suppliers' problems. If things worsen, the larger vendors may begin to receive more orders, as GM and the other major automakers seek suppliers' stability and not only price. These larger vendors include Johnson Controls, BorgWarner and TRW Automotive Holdings.
  • Comment on related stocks/ETFs: Catablast recently laid out the challenges facing Goodyear, and a prescient analyst recently downgraded Johnson Controls -- see his track record.

AHEAD OF THE TAPE: Shelter Fallout

  • Summary: One sector that does not seem to be slowing is the railroad industry -- in the first half, trailer and container activity on the nation's rail lines was up 6.4% from last year. Commodity movement (grains, coal, metals) was stronger last year. Union Pacific, which reports today, has seen its stock jump 36% in the past 12 months, while CSX is up 47% in that period. But there are signs of a slowdown, and the stocks have begun to slump a bit. The housing sector's weakness means less lumber movement; it was already down 2.1% y/y in the second quarter, and 3% in June. While Union Pacific receives only 6% of its revenues from lumber transport, other less-diversified players may be hit particularly badly.
  • Comment on related stocks/ETFs: Some of the smaller railroad stocks that could be hit hard by a slowdown: Norfolk Southern (NYSE:NSC), Burlington Northern Santa Fe (BNI), Kansas City Southern (NYSE:KSU) and Florida East Coast Industries (FLA). Speaking of lumber, Ashish Kelkar thinks timber stocks should outperform in an inflationary market.

PERSONAL TECHNOLOGY: Not Yet the Holy Grail: Nokia's Tiny Computer Is Crisp, but So Slow

  • Summary: Nokia's new $360 pocket computer connects to the Internet using WiFi, not cellphone networks, and is mainly for web browsing. Great hardware design: it's thin, small, has low weight (8.1 ounces) and high screen resolution (800x480 pixels). But text appears too small, "the email program was so slow as to be essentially useless", "the user interface is confusing" and the memory card uses an odd standard and is too small.
  • Comment on related stocks/ETFs: Nokia's continuing failure to provide a great email device is a continuing boon to Research in Motion (RIMM).

Notable articles on Seeking Alpha today: Today's earnings schedule, including consensus estimates and last quarter's results versus estimates, and analyst ratings changes. Latest conference call transcripts from: Motorola, Amdocs, Citrix, Qualcomm, Juniper Networks, Intel, Novellus, E*Trade, Intersil, Apple, eBay, Wipro, Total Systems Services, and CDW Corp. Eddie Elfenbein says Steven Roach is at it again. Jack Miller spots a buying opportunity with impending war. Yehuda Fruchter picks a flat panel stock. Other long ideas: Mueller Water Products and Paivis. Debt insurance stocks look like shorts.

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