One Page Annotated WSJ Summary, Friday July 21st

by: David Jackson
David Jackson
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Breaking News: Dell Sees Results Missing Forecasts

  • Summary: Dell announced Friday morning that it expects Q2 revenue and EPS to fall short of consensus estimates. Dell was due to report August 17th, but announced today that revenue will be about $14 billion, below consensus of $14.23 billion, and EPS will be about $0.21-23, well below consensus of $0.32. IDC and Gartner released data for PC market share earlier this week, showing that Dell was holding its share steady, but that HP gained significantly, and Dell earlier announced that it would simplify its pricing.
  • Comment on related stocks/ETFs: Dell's stock is trading down $2.60 to $19.50 in pre-market trading. In retrospect, its announcement of clearer pricing was a clear signal of this -- Dell is starting to struggle for market share. But Intel's results also provided a clue, as did AMD's results last night. Dell looked cheap (I bought it into last quarter's earnings call but then sold soon after) and some think it still looks cheap, but it could now be "dead money" for at least a quarter. The bigger stock implication now that the news is out on Dell is for HP (NYSE:HPQ). HP's quarter will no doubt be strong, particularly on the back of its Q2 market share gains. But Dell has now prepared the Street for weak profits in Q2 and no doubt Q3 as well, and therefore has nothing to lose from an all out price war with HP in Q3 and Q4. The lesson from Intel's price war against AMD is: under no circumstances do you want to own stocks of companies engaged in a price war until it's over. And in this case, Dell has a lower cost structure than HP, and can price lower. Savvy investors will therefore sell HP into this quarter's strength.

As Emission Restrictions Loom, Texas Utility Bets Big on Coal

  • Summary: As utility companies reluctantly accept the contribution of coal-fired power plants to global warming, they await new federal regulations on CO2 emissions under discussion in Congress. Dallas-based TXU, however, is building 11 big Texas power plants that will use the most problematic of fuels: pulverized coal. Its $11 billion project is being rushed forward, critics contend, so as to be finished just before the new regulations come into effect on forthcoming plants. Other major utility companies, such as American Electric Power, Xcel Energy and Duke Energy, have proposed 'cleaner' plants that release less CO2 and allow greater control over emissions (one type is called 'gasification', but it's more expensive). Once TXU's new plants are running, the company's annual emissions will more than double (to 133 million tons), but it stands to grow earnings by more than $1 billion/year. The U.S. produces almost 25% of the world's CO2 emissions; power plants are 39% of the U.S. emissions, and 80% of that is from coal-burning energy plants. Some states have begun incentivizing energy producers to reduce emissions -- among the companies taking advantage of this are PG&E, Mirant and BP.
  • Comment on related stocks/ETFs: Will environmentalists, emboldened by Al Gore's new film, move to stop TXU's massive new construction? Power outages due to this summer's record heat, meanwhile, have illustrated the need for more electricity. Just three days ago, we noted that coal producers stood to benefit from the new demand, and listed a number of companies that are particularly well positioned, from miners to power plant contractors such as ABB Ltd. (NYSE:ABB)

Google's Earnings and Revenue Surge

  • Summary: Google's Q2 results: Net revenue (excludes traffic acquisition costs, or "TAC", paid to partners) up 77% year over year to $1.67 billion, beating the consensus estimate of $1.65 billion. Gross revenue was $2.46 billion. Net income more than doubled to $721 million. Adjusted EPS (which excludes stock based compensation) was $2.49, beating the consensus estimate of $2.22. The higher-than-expected profit came from revenue growth beating expectations but expenses being in-line with expectations. Total costs rose 86%. Capital expenditure was $699 million, including $319 million on real estate. Google's search market share in Q2 was 48% versus 31% for Yahoo and 14% for Microsoft, according to Majestic Research. CEO Eric Schmidt said that partnerships are important and that the partnership with Time Warner is on track.
  • Comment on related stocks/ETFs: Google's stock (NASDAQ:GOOG) rose just under 1% in late trading after the results were announced, in contrast to Yahoo's stock (NASDAQ:YHOO) which fell over 20% after it announced earnings. But Google's stock also pulled back after the Yahoo results, so despite the headlines today ("Google's Profit Soars!") the market's reaction wasn't exactly a massive round of applause. Google's revenue wasn't far above analyst estimates; the big news was Google's increased profitability. But ultimately revenue growth drives 'Net stocks, because there's a limit to how much a company can continue to raise its profit margin. Yahoo engineer Amr Awadallah argues that Google's 9% sequential revenue growth rate shows that the entire search industry is slowing, and that Google's year over year revenues have been boosted by the addition of extra ads into its search results rather than organic growth in searches. His article is a must-read for fund managers. Google's traffic acquisition costs [TAC] are widely watched, because they show Google's revenue split with its partners. Phil Davis argues that much of Google's outperformance was due to a low tax rate and raises other concerns, while George Gutowski says that Google's international growth was flat. TAC was flat with last quarter, and that's good news because it shows that Google didn't goose its profits at the expense of its partners. Resources: press release, full conference call transcript, and Google's comments about its challenges in China.

Microsoft Net Falls Amid Legal Costs

  • Summary: Microsoft's Q2 results were overshadowed by the announcement of a massive stock buy-back. Q2 results: revenue up 16% to $11.8 billion, beating analysts' consensus of $11.63 billion. Net profit of $2.83 billion. EPS of $0.28 per share included legal costs of $0.03, in line with analysts' consensus but lower than last year's $0.34 or, excluding one-time items, $0.30. Revenue from Servers & Tools rose 18%, driven by SQL Server, and generated a 53% increase in operating income. Guidance for fiscal 2007 (ends June 30th): Revenue of $49.7-50.7 billion, higher than the current consensus of $49.84 billion. EPS of $1.43-1.47, above current consensus of $1.40. CFO Chris Liddell said that the launch of Windows Vista in early 2007 will help Microsoft's Client Group revenue, and will entail $450 million of marketing spending and $450 million on sales expenses. Stock buyback: Microsoft will launch a $20 billion tender offer with a closing date of August 17th, using a Dutch auction. Microsoft will purchase up to 808 million shares, or 8.1% of its common stock, at a single price determined by shareholders offering stock within a price range of $22.50-24.75. Microsoft also authorized an additional $20 billion in additional buybacks through 2011.
  • Comment on related stocks/ETFs: Microsoft's stock (NASDAQ:MSFT) rose 5.5% in late trading after the results and stock buyback were announced. The big news wasn't the results. They were broadly in line with analysts' estimates, though you could argue that even that fact was a strong positive for the stock given investors' overly pessimistic sentiment about Microsoft. The real stock-mover is the buyback. Microsoft is sitting on $34 billion of cash, meaning that anyone who owns Microsoft's stock is partially holding a not-very-tax-efficient money market fund. The stock buyback also signals to the market that Microsoft believes the worst of its legal woes are behind it, despite the recent EU ruling and fine. In the short run, the buyback will affectively put a floor under Microsoft's stock price due to the announced price range for the tender. Overall, this is a victory for the value investors -- see comments by Whitney Tilson and Geoff Gannon. In contrast, the chartists look dumb and those who focus on technology trends got the stock wrong, at least for now. Resources: Microsoft's press release; full conference call transcript.

Nokia Net Rises 43% On Strong High-End Sales

  • Summary: Nokia's Q2 results: Revenue up 22% to 9.81 billion euros. Net profit up 43% to 1.14 billion euros (($1.44 billion). 78.4 million cellphones shipped during the quarter, up from 60.8 million a year earlier. Average selling prices declined to 102 euros from 105 due to a shift in mix to low end phones. China revenue up 58%, Asia-Pac up 79%, North America down 13%. Multimedia sales, including high-end phones, up 37% to 1.89 million euros, doubling sales in China and Asia-Pac. Profit margin in Nokia's infrastructure business fell to 7%, the lowest since 2003, due to price pressure in emerging markets.
  • Comment on related stocks/ETFs: Nokia's ADRs (NYSE:NOK) rose 2.9% in late trading last night after the results were announced. The results are now priced-in. Goldman Sachs lowered its EPS estimates for 2006 and 2007 due to the lower margins in the infrastructure business. But this is a long-term trend, as the largest growth opportunity is in emerging markets but competition there is tough, particularly from the Chinese vendors. On the handset side, Nokia needs to bring out a thin handset to compete with Motorola's Razr, but won't be able to at least until Q4. Resources: Nokia's press release, the full Nokia conference call transcript, for comparison -- Motorola's earnings results and conference call transcript, the latest on Samsung's cellphone business.

Price War Weighs on AMD's Results

  • Summary: AMD's Q2 results: Revenue up 53% to $1.22 billion, net income $88.8 million, up from $11.3 million a year earlier. EPS of $0.18 higher than EPS of $0.03 a year earlier, and included $18 million of stock-based compensation expense.
  • Comment on related stocks/ETFs: AMD's stock (NYSE:AMD) was down 3.7% in late trading after the results were announced. As I wrote in Intel's Message: Don't Own Intel, Don't Own AMD yesterday, "once Intel has issued pessimistic guiance for next quarter, there's nothing to restrain it from pricing aggressively against AMD (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." Sure enough, AMD's EPS of $0.18 missed the consensus estimate of $0.22, and it missed on the top line too. And CFO Bob Rivet said this on the conference call: "...we believe that because the environment we call challenging in the second quarter is going to continue in the third, and probably likely even into the fourth, that we are going to be facing the second-half where ASP projections are going to be challenging to make, due frankly to the uncertainty of what our competitor is going to do in the desktop space, where a lot of the challenge has been". Did you notice the word "challenging" anywhere? That's not good news for AMD, and not good news for Intel. AMD is clearly gaining share in server chips, however, and its comments in the conference call transcript are a must-read for Intel (NASDAQ:INTC) investors. Resources: AMD's press release, the full AMD conference call transcript.

SAP's Profit Rises 43% Despite Sluggish Sales

  • Summary: German software maker SAP posted a 43% gain in second-quarter profit helped by continuing sales growth and an unusually low tax rate due to a previous settlement with the German tax authorities. The German software company already pre-announced weak sales growth July 13th, and yesterday announced net income of €414 million ($521.6 million), or €1.35 a share, compared with €289 million, or 93 European cents a share, in the year-earlier period. SAP last week said that group sales rose 9% to €2.2 billion from €2.02 billion. Software license sales in the second quarter rose just 8% to €621 million -- far below analysts' expectations -- amid weakness in some European and Asian-Pacific countries and as competition with rivals Oracle (NASDAQ:ORCL) and Microsoft (MSFT) increases. SAP reiterated its guidance for the full-year including a rise in software revenue growth of between 15% and 17%, a pro forma operating margin increase of between half to one percentage point, and a pro forma 2006 EPS of between €5.80 and €6.
  • Comment on related stocks/ETFs: See the full SAP conference call transcript. William Trent compares SAP to Oracle, and it's not pretty.

Dow Jones Profit Surges on Increase In Ad Revenue

  • Summary: Dow Jones' Q2 results: Revenue up 5.9% to $481.2 million, below consensus of $489.4. Net income of $28.8 million EPS of $0.34 versus consensus of $0.35. Note however that net income and EPS includes a $9.9 million pre-tax charge relating to the outsourcing of 250 full-time positions in technology, circulation and administrative support, partially offset by a $3.1 million gain on an asset sale. The new WSJ Weekend Edition added to revenue but reduced profits. Ad revenue for the online business, consisting of WSJ Online, Barron's Online and MarketWatch, rose 23%. Guidance: technology and real estate advertising expected to weaken in Q3, leading to Q3 EPS "in the low teens", below the current consensus of $0.17.
  • Comment on related stocks/ETFs: Here's the long case for the newspaper stocks. Dow Jones probably has the best brand of them all -- the WSJ. Resources: Dow Jones' press release, full conference call transcript, and transcripts from other newspaper companies that recently reported: NY Times, McClatchy, Tribune, Gannett, and Journal Communications.

Amgen's Profit Decreases 99% Over Acquisition

  • Summary: Amgen Inc. (NASDAQ:AMGN) reported a 99% decline in earnings due to a $1.1 billion charge related to its acquisition of Abgenix Inc., but rising second-quarter sales led it to boost its full-year earnings forecast absent charges. Net income at the Cali biotechnology giant dropped to $14 million in the quarter, a dramatic decline from $1.03 billion a year earlier. However, aside from the acquisition charges, Amgen's profit rose 12% in the quarter. Revenue jumped 14% to $3.6 billion. Revenue estimate had been for $3.48 billion. Despite their increased sales, shares of the stock are down 20% since the beginning of this year.
  • Comment on related stocks/ETFs: For more on Amgen's quarter, see their most recent conference call transcript.

Ford Posts Net Loss of $123 Million and Toyota Won't Derail GM's Tie-Up Talks

  • Summary: Ford Motor Co. (NYSE:F) reported a surprise 2Q06 loss of $123 million yesterday, leading the company to promise to accelerate its downsizing process. The U.S.' 2nd largest automaker underestimated rising commodity costs for items like steel and plastic, and the rising costs of oil hurt sales of gas guzzling SUV models, according to the company. For the quarter, Ford posted a net loss of seven cents a share, against net income of $946 million, or 47 cents a share, recorded in the year-earlier period. Analysts' consensus was EPS of $0.12. Ford recorded total revenue of $41.97 billion. Shares reacted to Ford's worse-than-expected quarter by dropping 14 cents, or 2.2% -- just two cents shy of their 52-week low and down about 42% from a year earlier. The drop gives Ford, which last year posted $178 billion in sales, a market value of $11.5 billion, of which the Ford family owns 40%. Separately, Toyota had no plans to involve itself in alliance negotiations among GM, Nissan and Renault. Because Toyota has $30 billion in cash reserves, it could effectively veto a GM-Nissan-Renault deal by bidding for GM.
  • Comment on related stocks/ETFs: Ford's (F) results were much worse than the consensus expectation, but the hit to the stock was relatively muted because there's so much pessimism already priced-in to the US car manufacturers' stocks. Paradoxically, Ford's lousy results could help GM's stock (NYSE:GM) by providing more evidence that the manufacturers need to consolidate, pushing GM faster into an alliance with Nissan and Renault. And Toyota's acquiescence increases the chances the alliance will happen.

Brocade Ex-CEO, 2 Others Charged In Options Probe

  • Summary: Federal authorities issued civil and criminal securities-fraud charges yesterday against former CEO of Brocade Communications Systems (NASDAQ:BRCD), Gregory Reyes. The charges relate to backdating options he doled out to hundreds of employees and concealing millions of dollars of compensation expenses from shareholders. That not only Mr. Reyes, who made no profits from the accusations, was charged, but also a former chief financial officer and former vice president for human resources at the firm, shows how seriously SEC Chairman Christopher Cox is taking current backdating investigations, which extend to more than 80 companies. Despite the prevalence of backdating scandals in the media recently, the current case is the first time charges were brought against a company for backdating options.
  • Comment on related stocks/ETFs: Jack Ciesielski argues in his piece, The SEC Needs a Tougher Backdating Policy to Preempt Future Wrongdoing, that the current wave of options backdating scandals, like the current case involving Brocade Communications, is cause for the SEC to reevaluate its overall policy in this area and draft new guidelines.

Trying Retailing On for Size

  • Summary: VF Corp., the world's largest apparel maker with brands such as Wrangler, North Face and Nautica, is opening 400 stores worldwide in a major expansion of its retail effort. VF peers Jones Apparel and Liz Clairborne are making similar moves, largely in response to the flat market and department store consolidation -- they want to 'control their own destiny,' as one consultant describes it. Amidst fierce competition from the likes of Abercombie & Fitch and American Eagle Outfitters, VF is creating standout 'theme stores' such as nature/adventure for its Napapijri brand, and stores built like yachts for its Nautica brand. Federated Department Stores is fighting back by demanding labels it carries provide exclusive merchandise for its distribution.
  • Comment on related stocks/ETFs: Beyond Federated, the move appears to challenge other department store chains such as Saks (NYSE:SKS) and Nordstrom (NYSE:JWN), and if it moves further downmarket, JC Penney (NYSE:JCP), Kohl's (NYSE:KSS) and Target (NYSE:TGT). When Wal-mart begins going upstream, you know there's a more general general shakeup in retail going on.

AHEAD OF THE TAPE: The Caterpillar Indicator

  • Summary: Heavy-equipment leader Caterpillar reports earnings today, and investors are concerned that the 15% stock slide since its May peak will continue. The slumping homebuilders contribute to the challenges at Cat, but only 8% of the company's global sales is for home construction machinery. Commercial construction remains strong, as do energy, mining, and emerging markets sales. The concern is that those core business would be hit by a ripple effect caused by continued weakness in the U.S. housing market and the closely-related factor of American consumer spending. International Caterpillar customers may find that softer end markets for their goods mean they need less infrastructure investment, and Cat would be 'in a tough patch.'
  • Comment on related stocks/ETFs: Last quarter, Caterpillar beat income estimates by almost 25%, yet the stock dropped -- see this quarter's estimates. One way Caterpillar's bracing for the slowdown is by expanding its remanufacturing division. Chad Brand says despite these issues, CAT's aggressive growth plans are altogether achievable. Jim Cramer, a longtime CAT bull, says the company will benefit from the upcoming Highway Bill and shipment to BRIC countries.

HEARD ON THE STREET: Wal-Mart's Bid To Remake Itself Weighs on Sales

  • Summary: Wal-Mart, the nation's largest retailer by sales, has begun a massive makeover with the goal of luring more affluent customers to buy merchandise in its stores. Remodeling of almost half its stores, cutting back on inventory and reducing labor costs are key elements in the restructuring, which has caused some disruption in its operations and pressured sales. The stock is down about 9% so far in July, hampered further by a Merrill Lynch downgrade. Marketing based on 'always low prices' is out; branding as a 'lifestyle' retailer of hip apparel and housewares is in. It's possible that the makeover will cause the company (including its Sam's Club warehouses) to post its first same-store sales decline since 1995 within this quarter. Bullish investors are buying on the weakness, believing the reforms will reignite growth down the line. Budget retail competitors Target and Family Dollar Stores have also seen softness, but their same-store gains for June came in significantly better than Wal-Mart's.
  • Comment on related stocks/ETFs: Whitney Tilson is among the bulls on WMT -- his fund T2 Partners lists it among their five oversized positions, as it reminds him of McDonald's (NYSE:MCD) in early 2003. Meanwhile, Glenn Curtis of Investopedia Advisor is particularly troubled by Wal-Mart's acknowledgment that foot traffic is declining.

FUND TRACK: Not All Index ETFs Are What They Seem to Be

  • Summary: Some new Exchange Traded Funds in that burgeoning industry operate more like stock-picking mutual funds than the indexed or segment approach that has generally characterized ETFs. New offerings from PowerShares aim to find stocks 'that have the greatest potential for capital appreciation,' provoking criticism from traditional indexing advocates like Vanguard's John Bogle. Critics further allege that the new funds use the term 'index' merely to gain SEC approval: 'The SEC is hesitant to bless any ETFs identifying themselves as "actively managed" ETFs that don't track indexes, because they are concerned about transparency and trading issues, among other things.' The First Trust DB Strategic Value Index Fund (FDV) is an example: It follows a Deutsche Bank index/screen that searches for 40 stocks with low earnings-based valuation among the largest S&P 500 companies. The ETF firms have marketed the new funds based on 'back-tested' data, but a WSJ look a bit further back than the funds go indicates they haven't always performed as strongly against the traditional S&P 500 index as claimed.
  • Comment on related stocks/ETFs: The main criticism is that these ETFs have 'the goal of outperforming the market' like a money manager, but who says 'the market' should be defined as the S&P 500? Every index has its flaws; the key issue may be the commitment of the managers to objective criteria. Market Participant applauds the new First Trust ETF criticized in the WSJ article. Robert Arnott's fundamental indexes, tracking factors like sales, cash flow and dividends, are among the new funds' benchmarks --- we've had extensive coverage of this approach on our ETF site, including an article by Arnott himself and cogent criticism from Tom Coyne and the Accidental Consultant.

Notable articles on Seeking Alpha today: Today's earnings schedule and estimates. Warren Buffett's latest acquisitions. Eddie Elfenbein wonders if the US is going bankrupt. Most recent conference call transcripts: Amgen, Gilead Sciences, AMD, Broadcom, VeriSign, Compuware, Microchip Technology, Spansion, Freescale, Microsoft, Google, YUM! Brands, Dow Jones, and Travelzoo. Welcome to new Seeking Alpha contributor Steven Brachman. Earnings season commentary from Jim Cramer.

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