One Page Annotated WSJ Summary, Tuesday July 25th

by: David Jackson
David Jackson
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Talks for Global Trade Deal Collapse

  • Summary: The round of World Trade Organizatin talks aimed at reforming agricultural trade and helping developing countries collapsed. The talks were launched after September 11th, 2001 and named after their initial venue in Doha, Qatar. Observers ascribed the failure to US and European inablity to make workable the promises made at the launch of the talks, in particular the ending of agricultural export subsidies by 2013 and the ending of import duties on agriculatural products from developing countries. The US accused India and Brazil of wanting to keep almost all agricultural trade shielded from competition, while the EU blamed the US. The EU has said that it plans to end agricultural import duties from emerging countries in any case, while the US hasn't decided.
  • Comment on related stocks/ETFs: Negative for developing countries. But not really positive for anyone. Do we really want a situation where the wealth of industrialized countries is used to subsidise agriculture, leading to aggressive competition with far poorer countries in areas where they may have comparative advantage?

Behind $21 Billion Buyout of HCA Lies a High-Stakes Bet on Growth

  • Summary: Yesterday, HCA Inc. (NYSE:HCA), the nation's largest hospital chain, confirmed that it is pursuing a buyout. The $21 billion bid is being pursued out of "growth-management" concerns according to Steve Pagliuca, a managing director at Bain Capital, one of three firms putting up money in the buyout offer. Shares of HCA, meanwhile, rose $1.61 to $49.48 in composite NYSE trading yesterday -- short of the $51-a-share being offered in the buyout. Still, the price represented a 6.5% premium to HCA's Friday closing price of $47.87 and an 18% premium to its closing price last Tuesday. HCA will be assuming $11.7 billion in debt and is expected to add $10 billion to $15 billion more in new bonds and loans. As a result, HCA bonds plunged yesterday as investors worried that the risk of a default on debt would rise, as Moody's Investors Service, Standard & Poor's and Fitch Ratings said the deal could result in multiple-notch cuts to HCA's already-junk-status credit rating. S&P already noted in May that HCA's operating margin had declined for the past four quarters due to weak patient volume, growing numbers of uninsured patients and rising costs such as supplies and labor -- all reasons behind the company's decision to pursue the buyout bid in the first place.
  • Comment on related stocks/ETFs: From the outside, HCA seems like a heavily profitable company, with revenue of $24.5 billion and net of $1.42 billion during FY 2005, not to mention more than $3 billion in operating cash. For more on the reasons behind why HCS decided to pursue a buyout offer and the challenges being faced in healthcare and hospital management, see today's piece from entitled Frist, Buyout Firms Buy HCA as Hospital Use Declines.

Disney to Acquire India TV Channel Geared to Children

  • Summary: Disney will pay about $30 million to acquire Hungama, a popular cable TV channel in India geared to children that reaches some 30 million homes. Hungama is currently owned by United Home Entertainment, which is in turn owned by Indian media conglomerate UTV Software Communications. Disney International president Andy Bird sees India as a 'long-term strategic priority,' and hopes to use TV as an entry point to grow Disney's exposure to the emerging economy. In 2004-5 advertisers spent about $26 million on Indian children's TV, up 16% from the previous year. Disney already owned two other branded cable TV stations in India: Disney Channel and Toon Disney. Disney is still behind Time Warner in India, who has larger market share and first-mover advantage after building a strong Indian presence for a full decade.
  • Comment on related stocks/ETFs: Disney execs commented on the company's growing interest in India on the last conference call.

Texas Instruments Posts Earnings Jump On Chips for Handsets

  • Summary: Semiconductor giant Texas Instruments reported net income of $2.39 billion, or $1.50 a share, including $1.65 billion from discontinued operations (sales of its sensors and controls business). Excluding those discontinued operations, TI earnings rose 27% to $739 million, or 47 cents a share, from $584 million, or 35 cents a share in the year-ago period. Revenue was up 24% to $3.7 billion. TI's key communications chip business has 'a very strong backlog' of orders for 3Q, according to CFO Kevin March, who downplayed analyst concerns about handset demand weakening.
  • Comment on related stocks/ETFs: TXN traded up about 4% after hours, as the numbers met analyst estimates and guidance was reassuring. TI's strong earnings, on the heels of Motorola's (MOT) and Nokia's (NYSE:NOK) similar reports, clarify the current picture: wireless is seeing robust growth, and the leading companies (at least) are reaping the profits. Good news for Qualcomm (NASDAQ:QCOM), though they have separate issues to contend with. On the conference call, TI execs were upbeat on video and imaging products -- positive for Corning (NYSE:GLW) and the flat panel display supply chain.

Netflix's Revenue Surges, But Outlook Disappoints

  • Summary: Netflix Inc.'s stock (NASDAQ:NFLX) fell over 20% in late trading after the company reported Q2 results as follows: Revenue up 46% to $239.4 million. Net profit of $16.8 million. EPS of $0.24. Subscribers at end-June were 5.17 million, up 303,000 from end Q1. Guidance: Subscribers at end-quarter of 5.5-5.7 million. Net income of $5-10 mlillion on revenue of $249-254 million, versus current consensus of $258.3 million.
  • Comment on related stocks/ETFs: Netflix missed the consensus revenue estimates for Q2, reporting revenue of $239 million versus the consensus of $242 million, though it beat the consensus EPS estimate of $0.18 comfortably. Net new subscribers, at 303,000, were significantly lower than Q1's 687,000. Importantly, churn rose to 4.3% from 4.1% in Q1, though still lower than 4.7% a year earlier. And subscriber acquisition costs, known as SAC, rose to $43.95 per gross subscriber (ie. excluding loss of current subscribers) versus $38.47 in Q1 and $38.13 a year ago. Finally, projected revenue for 2006 was $980 million, below the consensus estimate of $1 billion. Of all these numbers, the most critical are the churn rate and customer acquisition costs, because Netflix will find it hard to grow profitably if it's expensive to attract new customers and a high proportion of its current customers cancel their subscriptions. CEO Reed Hastings discussed this in the conference call; see the full transcript, the specific discussion about churn and SAC, and his comments about competition from Blockbuster and the transition to Blu-Ray and HD-DVD. Netflix fan Davis Freeberg also provides his perspective on the results.

Big Vodafone Holders Seek Change

  • Summary: Vodafone Group PLC reported results for Q2 (its fiscal Q1), including an increase in subscribers of 4.5 million in the quarter, to 186.8 million. But the company has issued a pessimistic forecast for revenue growth, announced an asset impairment charge of about $53 billion, and exited the Japanese cellular market. Many investors are unhappy with CEO Aurn Sarin and plan to vote against his re-election at today's annual meeting.
  • Comment on related stocks/ETFs: Vodafone trades as an ADR in the US (NASDAQ:VOD). Daiwa Securities analyst James Enck comments on Vodafone's recent results here. Note that Vodafone's key performance indicators implied that Verizon Wireless added 1.8 million subscribers during Q1, considerably more than analyst estimates of about 1.2 million. Verizon Wireless is 44.4% owned by Vodafone, with the rest owned by Verizon (NYSE:VZ). Verizon releases results on Tuesday August 1st.

BellSouth's Profit Rises on Strength Of Web, Wireless

  • Summary: Bell South, which is in the process of being acquired by AT&T, reported Q2 results: Revenue up 1.2% to $5.21 billion, exlclusing its stake in Cingular Wireless. Net profit up 12% to $887 million, versus $795 million a year earlier. EPS of $0.43 included a one-time charge of six cents for Cingular's acquisition of AT&T Wireless. Revenue from DSL rose 39% to $400 million, with 128,000 new customers added in the quarter. Bell South said that 25% of its DSL customers now subscribe to higher-priced service tiers. Land lines decreased by 7% or 460,000 due to wireless substitution and the seasonal move of customers out of its territory.
  • Comment on related stocks/ETFs: Full Bell South conference call transcript here.

Merck, Schering-Plough Results Get Boost From Cholesterol Drugs

  • Summary: Merck (NYSE:MRK) reported net income yesterday of $1.5 billion, or 69 cents a share, from $720.6 million, or 33 cents a share, a year earlier. Revenue totaled $5.77 billion, up 5.6% from $5.47 billion. MRK-SGPIn addition, Merck raised its full-year earnings forecast to $2.40-$2.48 a share, up eight cents from the forecast it issued in April. Estimates had been for revenue of $5.46 billion and EPS of $0.65. As a result, shares of Merck rose $1.59, or 4.3%, to $38.95, a 52-week high, in composite trading yesterday. In related pharma news, Schering-Plough (SGP) reported net income of $259 million, or 16 cents a share yesterday, compared with a year-earlier net loss of $48 million, or five cents a share. Total sales rose 11% to $2.82 billion from $2.53 billion. Estimates had been for revenue of $2.65 billion and EPS of $0.17. Shares of SGP rose more than 5% yesterday. Both companies' results were buoyed by brisk sales of Zetia and Vytorin, two cholesterol drugs Merck markets together with Schering-Plough. Merck said sales of the products increased 92% to $973 million. Sales of Zocor, for which Merck lost exclusivity June 23, fell 14% to $990 million. The sales of Merck's former cash cow are expected to plummet in the third quarter, as pharmacy-benefit managers shift patients to generic versions of the drug, and as Merck cuts costs to compete with them.
  • Comment on related stocks/ETFs: Consensus earnings estimates for Merck's next quarter are for just $0.49 a share -- the result of their loss of exclusivity for Zocor, the world's most prescribed cholesterol drug. For more on how Merck's loss can become Generic pharma Teva's (NASDAQ:TEVA) gain, see Yaser Anwar's FDA Approves Generic Zocor---The Implications for Merck.

Falconbridge Net Surges as Prices For Metals Rise

  • Summary: Falconbridge (FAL) reported net income of US$728 million, or $1.91 a share, compared with net income of $202 million, or 61 cents a share, a year earlier. Revenue jumped 93% to US$3.95 billion from $2.05 billion a year ago, helped by higher metal prices and increased sales volumes for copper and zinc. The company said prices for copper and zinc more than doubled from the year-ago period, while nickel rose 18% and aluminum 39%. Estimates had been for revenue of $4.09 billion and EPS of $2.22. Shares fell $0.82, or 1.47% in composite trading yesterday. In other news, the company reaffirmed its support for a US$21.6 billion, cash-and-stock bid from rival company and fellow Canadians, Inco Ltd. (NYSE:N). Still, investors continued to bet that Xstrata's all-cash bid will prevail, sending share prices down to Xstrata bid levels yesterday.
  • Comment on related stocks/ETFs: For more on Copper's meteoric price rise, see Gary Dorsch's Copper Approaches All Time High. For more on the trans-Atlantic fight to take over Falconbridge, see William Trent's Not So Fast, Phelps! Proposed 3-Way Mining Merger Runs Into Bidding War with Swiss

UAL Expects Profit to Top Wall Street Expectations

  • Summary: UAL Corp., the holding company that owns United Airlines (UAUA), surprised Wall Street yesterday when it announced that it expects to post second-quarter net income of $119 million, its first profit since 2000, reflecting improving industry conditions and cost-control efforts. In the year-earlier quarter, UAL posted a net loss of $1.4 billion, or a $26 million loss excluding items related to its bankruptcy reorganization. This quarter's profits should work out to $0.93 cents a share based on 130 million shares outstanding. The expected profit is more than twice the estimate of analysts surveyed by Thomson Financial. Revenue rose 16% to $5.1 billion from a year earlier. Revenue from each mainline jet seat flown a mile (one unit) increased 12% despite an increase of 9% in cost per unit. In addition, UAL said it generated $500 million in cash since March 31, boosting its unrestricted cash balance to $4.2 billion, despite higher fuel expenses. Shares resulted by trading up $1.25, or 4.6%, to $28.20.
  • Comment on related stocks/ETFs: For a more in depth understanding of why this earnings season continues to be a profitable one for the Airlines, see Jack Miller's Someone's Going to Fly with Airline Stocks and Airline Fares Increase More Than Fuel Costs.

BP's Net Profit Rises 30% On Higher Oil, Natural-Gas Prices

  • Summary: BP (NYSE:BP) reported net income of $7.27 billion, or about 30 cents a share, up from $5.59 billion, or about 23 cents a share, during the year earlier period. Revenue rose 24% to $73.47 billion. Despite increased cost pressures from higher taxes and oil-field inflation, much higher oil prices have helped deliver another quarter of stellar returns for BP, the world's second-largest publicly traded oil company by market cap. That suggests a promising picture for other large, integrated oil companies that report their earnings this week such as world # 1, Exxon Mobil (NYSE:XOM), and # 3 Royal Dutch Shell (RDSA), who report quarterly results Thursday. In other news, BP Chief Executive John Browne said he would leave his current position at the end of 2008, ending speculation that he would stay beyond the normal age of retirement at the company.

HEARD ON THE STREET: Apartment REITs Go to Head of Class, For Now, but Tougher Tests Lie Ahead

  • Summary: Multifamily real-estate investment trusts (REITs) have performed particularly well recently, with rising rents amidst a slowdown in new home sales and a robust job market. Apartment REITs as a group reported strong operating income growth of 7.5% in the first quarter; stocks include Archstone-Smith and AvalonBay Communities. But the group is richly valuated -- 20 times 2007's funds from operations, as opposed to 16.6x for REITs overall -- in large part due to (1) expectations of aggressive M&A activity, and (2) high expectations for an ongoing bullish market that's by no means assured. There's growing concern that a number of factors will drive down earnings in the sector, among them: lower job growth, a cooling condo market, and oversupply of rental properties. Texas and Florida appear most vulnerable: publicly-traded Camden Property Trust, Mid-America Apartment Communities Inc. and United Dominion Realty Trust are heavily exposed there.
  • Comment on related stocks/ETFs: The M&A activity that's sweeping the commercial REIT market has appeared in this sector as well, but may not continue. Yet if the Fed raises rates again in August and pauses for an extended period, rentals may continue to thrive, giving this group another momentum push.

TRACKING THE NUMBERS: Do Countrywide's Loans Stack Up?

  • Summary: Countrywide Financial, the largest American home mortgage lender, has aggressively sold 'pay option adjustable-rate mortgages' for the past two years. These loans allow borrowers to pay minimal amounts (less than nominal interest) up front while ramping payments later. A new study by RBS Greenwich Capital indicates that Countrywide's option ARMs perform worse than those of competitors Washington Mutual, IndyMac Bancorp and Downey Financial, due to higher delinquency. Option ARMs were once seen only in California, where home prices soaring, but have now become nearly 10% of all residential mortgages by dollar volume. At Countrywide, 19% of mortages issued are option ARMs.
  • Comment on related stocks/ETFs: A Seeking Alpha contributor who combines fundamental and technical analysis explained why he shorted Countrywide in May. The stock hasn't moved much since then.

Notable articles on Seeking Alpha today: Today's earnings schedule and estimates. Simon Lewis on a weak quarter for plasma TVs. Rob Black's Tech Stock Report, Healthcare Stock Report and Energy Stock Report. Latest conference call transcripts from Atheros Communications, Texas Instruments, SanDisk, CNET Networks, Altera, Netflix, and Bell South. Jim Cramer's latest stock picks. Short ideas: Countrywide Financial and gold (!). This week's IPOs. TickerSense on the inverted yield curve. Barclay's new commodity ETFs start trading. Barry Gitarts on Allegheny Technologies and titanium demand. Phil Davis on American Express' earnings.

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