One Page Annotated WSJ Summary, Monday July 24th

by: David Jackson
David Jackson
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Breaking News: Schering-Plough Swings to Profit On 11% Increase in Revenue

  • Summary: Schering-Plough Corp. (SGP) reported net profits as sales rose 11%, driven by growth in prescription pharmaceuticals. The Kenilworth, N.J., company reported net income of $259 million, or 16 cents a share, compared with a loss of $48 million, or five cents a share, in the year-earlier period. Net sales rose 11% to $2.82 billion from $2.53 billion. Including an adjustment of an assumed 50% of global cholesterol joint-venture net sales, Schering-Plough's adjusted net sales would have risen 18% to $3.3 billion, compared to $2.8 billion on a similar adjusted basis. Estimates were for revenue of $2.65 billion and EPS of $0.17. The sales growth includes a 1% unfavorable impact from foreign exchange and was driven by growth in prescription pharmaceuticals, including higher sales of Remicade, Nasonex and Peg-Intron -- the company's top medicines.
  • Comment on related stocks/ETFs: For more on Schering-Plough, read Dr. Fred Cohen's Schering-Plough v. FTC and the Future of Out-of-Court Settlements of Patent Challenges.

Rice Makes Surprise Visit to Beirut and In Battle to Remove Hezbollah, Both Israel, Lebanon Pay Price and ABREAST OF THE MARKET: Mideast Stocks Hold Up Well Amid Conflict

  • Summary: U.S. Secretary of State Rice made a surprise stopoff in Lebanon on her way to Israel, attempting to jumpstart diplomatic efforts aimed at resolving the ongoing Israeli/Hezbollah conflict. Both the U.S. and Israel now must balance their commitment to disarm the terrorist Hezollah group with the growing toll the war is taking on Lebanon, Israel and President Bush's plans for regional reform. Hezbollah has now shot more than 2,000 missiles into Israel, disrupting much of the country's economy, while Israel's strikes at Hezbollah operatives and infrastructure have left officials there scrambling to provide services to citizens. Rice hopes to build Arab support to pressure Hezbollah to disarm, while strengthening the Lebanese government. Interestingly, while the warfare has pressured world markets, most Mideast markets have held up quite well: Israel's Tel Aviv 100 index is actually up about 1% since July 12, and investors in some Arab markets such as Dubai, Qatar, and Saudi Arabia have been enthused over higher oil prices. Egypt has fallen 7.2% and Morrocco is down 2.5% however.
  • Comment on related stocks/ETFs: Oil prices fell about .75% this morning on the hope for a diplomatic breakthrough and a statement from the Saudi oil minister that OPEC wants to avoid "raising prices in a way that might affect the global economy." Follow opinion and analysis of Israeli stocks traded in the U.S. in our Israel category. John Hussman, meanwhile, remains bearish on the overall US stock market.

More Flexibility By Europe's Labor Stokes a Recovery

  • Summary: Although labor laws have made European labor markets inflexible, companies in Germany are negotiating with workers to get greater productivity and lower labor costs. German domestic demand has been stagnant for years, and growth has come from exports, forcing companies to be globally competitive and boosting profitability. Increased global outsourcing has allowed German companies to negotiate better terms with local employees, including lower fixed bonuses, flexible work weeks, weekend shifts and lower overtime pay. As a result, the German Chambers of Industry & Commerce reports that 16% of companies will hire more staff this year, up from 10% last year, and 17% will cut staff, versus 28% last year. Unemployment dropped to 8.3% in May from 9.3% a year earlier.
  • Comment on related stocks/ETFs: Trends like this tend to be long lasting once they get going. There are two ways to play this: first, buy the iShares Germany Index Fund (NYSEARCA:EWG). Second, and more gutsy, bet that increased labor market flexibility will spread also to France and Italy, and buy the iShares France Index Fund (NYSEARCA:EWQ) and the iShares Italy Index Fund (NYSEARCA:EWI).

U.S. Plots Deal Over Yuan Valuation and Beijing Official Sees 'Reasonable' Trade Expansion

  • Summary: The Bush administration is using increased representation in the IMF as a carrot to get China to agree to a rise in the yen against the dollar. A year ago, on July 21st 2005, China revalued the yen appreciate against the dollar by 2.1% and said it would allow it to fluctuate against a basket of currencies according to market forces. But since then the yen has appreciated only 1.5% against the dollar, despite China's trade gap with the US. Meanwhile, the IMF is considering increasing the contribution, and the voting power that goes with it, from countries that are currently underrepresented releative to the size of their economies, hoping a change will be decided at the IMF's annual meeting in Singapore in September. The Bush administration has told the Chinese that Congress will only approve greater representation for China in the IMF if it allows its currency to appreciate further against the dollar. Separately, a Chinese governement official said the rate of growth of China's exports and imports was "reasonable". In the first half of this year, exports grew 25%m versus 33% a year earlier and imports grew 21% versus 14% a year earlier. China's trade surplus hit a record of $14.5 billion in June.
  • Comment on related stocks/ETFs: The most significant aspect of the IMF-China article isn't in the details, it's the broader assumption that the US wants the yuan to appreciate against the dollar. The tiny 1.5% appreciation since last July and China's growing trade surplus have increased the pent-up pressure for further appreciation. But it's not easy for US investors to bet directly on yuan appreciation, as there's no yuan ETF. You could buy the Chinese equity ETFs, the iShares FTSE/Xinhua China Equity ETF (NYSEARCA:FXI) and the PowerShares China Equity ETF (NYSEARCA:PGJ), but both contain some export-oriented stocks that may suffer from a yuan appreciation.

AMD to Buy ATI, A Grasp for an Edge Over Intel

  • Summary: Advanced Micro Devices (NYSE:AMD) has agreed to buy ATI Technologies for $5.4 billion, or about $20.47 per ATI share, roughly 24% above ATI's closing price on Friday. Of that sum, about $4.2 billion or $16.40 per share will be paid in cash and the rest in stock. Since AMD has only $2.5 billion in cash, it plans to use debt to finance the transaction. AMD's acquisition of ATI, which produces high end graphics chips and chip sets, allows it to better compete with Intel, which has been able to use its broad product range including chip sets and microprocessors to lower overall power usage, guarantee the timing of upgrades, and build graphics capabilities directly into chip sets. AMD's successful integration of ATI faces two challenges: ATI has recently fallen behind Nvidia in high-end graphics chips, and AMD is under pressure itself from aggressive price competition from Intel.
  • Comment on related stocks/ETFs: ATI's stock (ATYT) rose 5.3% on Friday and another 9% in late trading. Investors will focus on two issues. First: Will this acquisition succeed for AMD (AMD? It's upping its debt load and loosening its focus just as it comes under maximum pressure from Intel (NASDAQ:INTC). Second: what are the implications for graphics chip competitor Nvidia (NASDAQ:NVDA)? According to the article, "AMD still needs Nvidia's support in selling both chip sets and graphics chips. AMD is expected to give assurances that it will continue to give PC makers a choice among component suppliers and to set up procedures to handle technical information in ways that treat ATI and Nvidia on evenhandedly." But if the rationale for this acquisition is that the market wants integrated processors and chipsets and then multi-core chips containing processor, graphics and other functionality, Nvidia will be left in a weak position.

Bids for Chip Unit Of Philips Reach The Final Stage

  • Summary: Three groups of private equity firms are bidding over 8 billin euros ($10.2 billion) for Philips's semiconductor division, which employs over 36,000 people and produces chips for consumer goods including TVs, cars, telephones, washing machines and radios. Philips put the unit up for sale or a potential IPO last year. The deal is unusual in that private equity firms don't usually bet on highly cyclical businesses like semiconductor manufacturing.
  • Comment on related stocks/ETFs: Philips has an ADR that trades in the US (NYSE:PHG). Private equity firms seem to be doing extremely well; just look at the Hertz numbers. But the deals are getting larger and larger, and if the market goes into a prolonged downturn, the private equity firms will be left holding a lot of, well, private equity. In the meantime, this sort of deal helps put a floor beneath publicly-traded equity prices.

HCA Is in Talks On Buyout Offer Worth $21 Billion

  • Summary: Hospital operator HCA Inc. is close to a deal to sell itself to a group of private equity investors for approximately $21 billion, with investors taking on $10.6 billion in HCA debt, making this one of the largest LBOs in history. The buyers in the 'on-again-off-again' transaction are Bain Capital, Kohlberg, Kravis Roberts and Merrill Lynch, and are reportedly offering $51 a share, a slight premium to the current stock price of $47.87. The company's management and founding family, the Frists (current 4.4% owners) would also take part. It comes at a time when uninsured patients, Medicare restrictions and higher expenses pressure the industry in general, and HCA in particular. But an aging population and the concomitant rise in health-care spend, plus hope that the government will eventually assume more of the cost for the uninsured, give reason for hope for the new investors. Senate Majority Leader Bill Frist, member of the founding family, sold his HCA shares in mid-2005 as the stock hit a 52-week high - a sale that's under investigation by the SEC, but which Frist claims was done to avoid any appearance of conflict of interest. An HCA sale could spur further buyouts in the hospital industry.
  • Comment on related stocks/ETFs: It's altogether possible that HCA stock will continue to climb as competing offers come in from the likes of Blackstone or Goldman Sachs. Wall Street has been awaiting a private equity deal of this magnitude, and it could set the ball in motion for more. Keep your eyes on HCA peers Health Management (NYSE:HMA), Community Health (NYSE:CYH), Triad (NYSE:TRI), and Tenet (NYSE:THC).

Indian Outsourcing Firm Plans IPO

  • Summary: Mubai, India based outsourcing firm WNS is planning to float an IPO on the NYSE this Wednesday under the symbol 'WNS'. The company, which focuses on back-office services for the travel and financial services industries, hopes to sell up to $208 million in stock. Net income for WNS' last fiscal year was $18.3 million, compared with a net loss of $5.8 million the previous year. It joins other Indian outsourcers such as Infosys (NASDAQ:INFY) and Wipro (NYSE:WIT), but the whole sector is challenged now by rising Indian wages and increased competition; WNS's employee attrition rate is about 30%.
  • Comment on related stocks/ETFs: See more in WNS' S-1 excerpts. Infosys' recent report of strong earnings should give this deal a boost. See INFY's conference call transcript for more insight to the sector as it currently stands.

Cancer Drug Gleevec Is Shown to Carry Heart Risk

  • Summary: Novartis' (NYSE:NVS) highly successful leukemia drug, Gleevec, came under fire yesterday after a study published in the scientific journal Nature Medicine recommend patients taking the drug be monitored for heart-failure symptoms and that other similar drugs in development be tested in early stage trials for evidence of heart toxicity. Novartis denies the claims, saying only that the risk of heart disease from Gleevec is "extremely rare" and failing to provide specific statistics to bolster such a claim. If further tests confirm that Gleevec can indeed cause heart problems, it will be a setback for the drug and possibly for other targeted therapies, which are designed to attack only cancerous cells while avoiding tissue damage in the rest of the body. Such drugs are now proving to affect other areas of the body beyond the area they are meant to treat as is the case with breast cancer medication Herceptin. Still, with all of Gleevec's success in treating chronic myelogenous leukemia, it is not clear how much sales of the drug will actually suffer until further studies can be completed.
  • Comment on related stocks/ETFs: In April, Novartis became the first biotech company to be approved for the manufacture of a generic biotech drug. To read more, see The Stalwart's Biotech Going Generic - Threat To High-flying Companies?

Zale Interim CEO, 'Betsy' Burton, Is Permanent Pick

  • Summary: After a lengthy search, Jewelry retailer Zale Corp. (NYSE:ZLC) named interim Chief Executive Officer Mary "Betsy" Burton to the post permanently. Since taking over Zale in 2003, Burton has recast Zales Jewelers' marketing and promotions to focus on value rather than fashion while overhauling Zale's training and commission programs. Last fiscal year (through July 2005), the Irving, Texas company tallied $2.38 billion in sales. In Burton, Zale gets a CEO with extensive experience on the boards of retailers and in turning around struggling operations. In addition to Zale, she currently serves on the boards of teen retailer Aeropostale Inc., office-supplies retailer Staples Inc. and Rent-A-Center Inc. Now the company must fill the CFO position left open by Burton's rise to CEO.
  • Comment on related stocks/ETFs: To read about Zale Corp.'s past executive problems, see Gearge Gutowski's Zale Corporation: More Executive Casualites and Zale's Leadership Problems -- A Red Flag For Investors. For their recent conference call transcript, click here.

AHEAD OF THE TAPE: Long and Short

  • Summary: Over the last few years, investors have bid up the price of long-duration fixed-income assets, including long term bonds, timberland and toll roads. Last year France, Poland and the UK issued 50 year bonds. Some of the demand came from pension funds' need to match the duration of their assets with that of their liabilities. But the impact was to bid down long rates on these assets to little more than long term US Treasury rates. Now, rising short term interest rates could lead to declines in long term asset prices as long term rates rise or investors redeploy cash into higher interest bearing short term bonds.
  • Comment on related stocks/ETFs: This argument can be applied equally to stocks, as stocks are nothing more than ownership of a long term stream of future earnings. For that reason, the famed "Fed Model" compares US stock valuations (via the earnings yeild, or the inverse of the P/E ratio) to current interest rates. If the price of long-term debt will fall, as this article implies, so too should stock prices.

HEARD ON THE STREET: At 3M, Stock Slide Stirs Criticism

  • Summary: Following 3M's July 7 warning on 2Q earnings, the stock dropped by its largest one-day percentage in more than 8 years: 9% to $74.10. The large conglomerate known for its steady performance has continued its slide, and currently trades at $70.72. 3M reports earnings tomorrow (Tuesday), and analysts are increasingly concerned with management's lack of visibility. The main problem at 3M has been its high margin optical-films business, with products used by a flat panel display market that's currently troubled by rising inventory.
  • Comment on related stocks/ETFs: Catablast lays out five reasons why 3M's tumble makes it a buy; eyes are on Kodak (EK) and General Electric (NYSE:GE) to see if they're taking market share from 3M in the FPD market.

TRACKING THE NUMBERS: Bunge's Fiscal Reports Leave Some Puzzled

  • Summary: There have long been questions about global agribusiness and food company Bunge Ltd.'s (NYSE:BG) financial reporting. These reports often carry one-time items that benefit the bottom line, causing some analysts to question the sustainability of Bunge's earnings. Other causes for concern include Bunge's free cash flow which has been negative for three of the past four years, according to Fitch Ratings, despite solid earnings reports. Other causes for skepticism include the way Bunge reports the income it generates from lending money to Brazilian farmers, which last month the company warned would hurt second-quarter profits due to supply disruptions caused by some of those Brazilian farmers. The company's financial results are due this week. Despite concerns, a Citigroup report early this month said the downturn in Bunge's stock following its earnings warning presented a buying opportunity in light of the potential strength of global agriculture markets.

COMMODITIES REPORT: Ethanol Producers Are Drawn to Coal As a Power Source

  • Summary: An innovative use of excess heat from coal-fired energy plants to power ethanol facilities is lowering the costs of ethanol production in the Midwest. Blue Flint Ethanol, a joint venture of Great River Energy and Headwaters Inc., has pioneered the practice, and others are now following suit in the use of coal - as opposed to natural gas, the leading fuel - to power ethanol production. Further advantages of coal include low cost (prices can be locked in for 20 years), but environmentalists are concerned that the benefits of using ethanol would be offset by the CO2 emissions from the coal. The ethanol industry counters that 'clean coal' is not much more of a pollutant than natural gas. Legislation passed in Washington last year requires refiners to blend 7.5 billion gallons of ethanol or biodiesel annually into the U.S. gasoline supply by 2012.
  • Comment on related stocks/ETFs: One of the big questions challenging the emerging ethanol industry is how to build out the necessary infrastructure to bring overall costs down, since in an all-in cost basis, it's still cheaper for ExxonMobil (NYSE:XOM) to make ethanol than it is for the ethanol companies to brew it from corn. This may be part of the answer. Note also options are now trading on the alternative energy ETFs Powershares Wilderhill Clean Energy (NYSEARCA:PBW) and Powershares Water Resources Portfolio (NYSEARCA:PHO).

Notable articles on Seeking Alpha today: Which sectors performed best and worst last week. Today's earnings calendar and estimates. Jim Cramer's latest Mad Money stock picks. One page summary of this weekend's Barron's. Long ideas: NTN Buzztime, Insignia Systems and Bill Miller on Sprint. Short ideas: Mother's Work. What to look for in IPOs, parts one and two. Latest conference call transcripts from Satyam Computer, Sepracor, DST Systems, Halliburton, Infineon, Ericsson, First Data, and Amgen. Steven Towns on the Xbox 360 in Japan. Tim Mullaney says that 'Net stocks are in for more pain, Paul Kedrosky criticises Google's capex, and Faisal Laljee still likes Yahoo. William Trent on tech spending, Ant & Sons on why Dell's problems are permanent, Travis Johnson on the fallout from Intel and AMD, and the technical short case for Apple. And a tip for finding the lowest airfare.

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