One Page Annotated WSJ Summary, Thursday Sept. 14

by: SA Editors
SA Editors
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Lehman Net Is Buoyed By Bond Operations

  • Summary: Lehman Brothers Holdings Inc. reported $1.57 EPS Wednesday morning, beating the consensus estimate of $1.49. Revenue rose 8.5% year over year, but fell 5.3% versus the prior quarter. Lehman's results were helped by strength in bond trading.
  • Comment on related stocks/ETFs: Lehman's stock (LEH) had its biggest two-day gain in over three years due to these results, rising from its pre-results close of $65.30 September 11 to just over $70 at close last night. Key details from the quarter: Trading revenue was up 13%, asset management revenue up 18%, investment banking revenue down 11% (but the company said its investment banking backlog was at an all-time high). Compensation as a percentage of revenue fell to 49.3% from 49.5%. Bloomberg has a more thorough write-up of the results than the WSJ, but the details and tone are in the conference call transcript. Stock implications: Traders will now focus on whether the positive trends reported by Goldman Sachs (NYSE:GS) on September 11th (see Erik Dellith's analysis) and Lehman are priced-in to Bear Stearns (NYSE:BSC), which reports this morning, and Morgan Stanley (NYSE:MS), which reports September 20th. Morgan Stanley may have more upside because there's a recovery element to the story; but its revenue growth may be restrained by its Discover credit card unit. Analysis of their results is available via email (free, no spam) or by bookmarking Seeking Alpha's financial sector page. A nugget for our sell-side readers: Lehman's average employee compensation was $260,000 so far this year, versus $542,000 at Goldman Sachs.

Credit Suisse Strategy: Be UBS?

  • Summary: In what appears to be series of 'copycat' moves dating back nearly a decade, Zurich-based Credit Suisse Group (NYSE:CSR) always seems to be just a step behind crosstown rival UBS AG (NYSE:UBS). UBS bundled several smaller private banks into a separate wealth-management unit in February 2003 -- Credit Suisse plans to do the same next year. UBS shed its stake in an affiliated insurance firm in 1999 -- Credit Suisse sold its insurance firm this year, as well. Also, UBS said a few years ago it would concentrate its various businesses into an integrated banking model -- and surprise, surprise -- Credit Suisse has started doing just that with its three main divisions; wealth management for individuals, asset management for institutions and corporate-and-investment banking. There have been many other such copycat moves like Credit Suisse's decision to consolidate all its branches under a single name -- something UBS has already done. Both companies' shares trade for nearly the exact same price (71 and 70 Swiss francs, respectively) and both have outperformed the DJ Stoxx 600 banking-sector index in recent years increasing in value (by 60 and 63 percent, respectively). So is there any difference between the two? Yes, according to Wall Street analysts. Credit Suisse trades at 10-times expected 2006 earnings, less expensive than UBS shares, which trade at 13-times earnings. Credit Suisse's strategy is questionable according to Citigroup. Its investment bank has struggled to control costs, and some wonder how it will replace earnings once generated by insurance operations, which it sold in June, or how it is going to invest the proceeds from that sale. "All in all, it remains an act of faith for investors whether to believe in the financial targets for 2007-08," Citigroup said in a research note in August. Citigroup has a "hold" recommendation on Credit Suisse's stock, meaning it is risky. Merrill Lynch takes a more optimistic approach to the Swiss bank. "If we assume that Credit Suisse is probably where UBS was three years ago," then Credit Suisse's share price has room to grow, Merrill Lynch said in a research report last month that gave the stock a "buy" recommendation. In 2000, both UBS and Credit Suisse had stock-market values of about $52 billion each, according to Thomson Financial. But while Credit Suisse made strategic missteps, UBS expanded brilliantly. The result: UBS's market cap today is about $120 billion, compared with Credit Suisse's $70 billion.
  • Comment on related stocks/ETFs: Despite the glaring similarities between Credit Suisse and UBS, UBS is the far more heavily traded stock in the U.S. with an average daily volume nearly 6 times greater than Credit Suisse. For more in-depth coverage of UBS, Travis Johnson looks at the Swiss Bank's valuation, analyzing its positive EPS as well as the company's recent expansion into China.

Producers Move to Debunk Gloomy 'Peak Oil' Forecasts and COMMODITIES: Will Recent Decline in Crude Oil's Price Turn Into a Bear Market?

  • Summary: Executives from Exxon Mobil (NYSE:XOM) and Saudi state-owned Aramco have argued in recent speeches that the world's supply of oil is adequate for decades, thereby attacking the "peak oil" theory that oil supply has reached a plateau while demand continues to rise. Aramco CEO Abdallah S. Jum'ah claimed at an OPEC seminar yesterday that the earth's potential oil supply is 5.7 trillion barrels, of which only a trillion, or 18%, has so far been produced. That leaves over 140 years' supply at current output rates. In a separate speech, Exxon's Australia chief, Mark Nolan, cited a US Geological Survey estimate that the earth's capacity is over three trillion barrels of oil, of which one trillion have been produced. He argued that heavy and shale oil could add another trillion barrels to the supply, and a 10% increase in recoverability another 800 million barrels. The WSJ article notes, however, that both calculations are based on optimistic assumptions. 3.5 trillion of the 4.7 trillion available barrels that Mr. Jum'ah cited, for example, will depend on new technologies, and global demand is forecast to rise from today's 84.8 million barrels per day to to about 100 million in 2015.
  • Comment on related stocks/ETFs: The peak oil theory plus forecasts of rising demand from China and India have provided the intellectual justification for the sharp rise in oil prices over the last few years. But sentiment, rather than current supply and demand, arguably added a speculative boost to the oil price which is now unwinding. The most prominent investor to question the run-up in oil and other commodity prices earlier this year was Bill Miller (see his detailed argument). His views now look precient, though his timing resulted in short-term under-performance. The easiest way to play a pull-back in oil prices is with the US Oil ETF (NYSEARCA:USO), though David Fry says it's hard to borrow. For more discussion of peak oil and its implications, see views from UtiliPoint, Houston Geological Society Bulletin editor Arthur Berman, Prudent Investor and Paul Kedrosky. Separately, Morgan Stanley economist Steve Roach declared earlier this week that the "mega-run for commodities has run its course." The price of oil is down 18% since its August highs after BP said it would shut down the Prudhoe Bay oil field in Alaska. More from Steve Roach here.

Rhapsody Uses Sonos For a PC-Free Entry Into a Trove of Music

  • Summary: Walter Mossberg reviewed a new music system using Sonos hardware and Rhapsody's music collection designed for music lovers who want to have access to millions of songs but not be tied to a PC downloading or ripping from CDs. In fact, the Sonos/Rhapsody system need only connect to your Internet service and audio speakers and then you have access to stream Rhapsody's 2.5 million songs anywhere in your house. Simplicity comes at price however: $999 for the device and a $10 monthly charge to access the music. There is a cheaper setup, but it still costs around $750. Overall, Mossberg liked the system, calling it, "a very good digital-music alternative for people with a roomy budget and a yen for simplicity." Note that there isn't a search feature available yet, so be prepared to scroll a lot, and understand that a small percentage of songs can't be streamed even though they appear on Rhapsody's menu.
  • Comment on related stocks/ETFs: Rhapsody is a unit of RealNetworks (NASDAQ:RNWK). RealNetworks stock is probably unaffected by the influential Mossberg and by the Sonos/Rhapsody system itself. Mossberg says he's not a good candidate for the product since he uses an Apple (NASDAQ:AAPL) iPod and iTunes, along with his wife. Home-audio offerings by Sirius Satellite Radio (NASDAQ:SIRI) and XM Satellite Radio (XMSR) range from about $60-$300 for the device/component and the cheapest monthly subscription service costs about $12.95. See Bambi Francisco discuss RealNetworks' biggest acquisition to date, RealNetworks' Q2 conference call transcript, and a review of Apple's latest product announcements.

Daimler, U.S. Discuss a Deal To End Bribe Case

  • Summary: In March, DaimlerChrysler (DCX) -- the world's fifth-largest auto maker -- disclosed that it had dismissed or suspended several employees over "improper payments", otherwise known as bribes, that they had made in Africa, Asia and Eastern Europe. The company is now in talks with US authorities to close a two-year probe into the bribery scandal. The investigation stemmed from allegations brought by a former Chrysler accountant in a wrongful-dismissal suit that dozens of secret bank accounts were kept by the company's Mercedes unit. Though details have not yet been released, DaimlerChrysler's agreement with the Securities and Exchange Commission and the US Justice Department will require the company to pay a penalty and install an independent compliance monitor.
  • Comment on related stocks/ETFs: DaimlerChrysler's embarrassment could boost competitor Honda (NYSE:HMC), which managed in August to grab the number-two spot in US auto sales away from DaimlerChrysler for the first time. It remains to be seen, however, the extent to which the auto-buying public will be put off by the scandal. Jim Cramer continues to like the look of DCX's 3.5% yield.

H-P Investigator Has Contentious Past and California Attorney General Takes H-P Spotlight

  • Summary: A Massachusetts private investigator named Ronald DeLia has been connected to Hewlett-Packard's (NYSE:HPQ) probe of directors and journalists. DeLia is currently listed as managing director of Security Outsourcing Solutions Inc.; state records list his wife as president. DeLia has been engaged in other business ventures that were fraught with conflict: A real-estate deal he was involved in ended up in foreclosure by a Boston bank. bill lockyer A restaurant he opened ended up at the center of a long tax dispute between DeLia and his investors. Though it is unclear exactly what role DeLia and his firm played in the H-P investigations, California Attorney General Bill Lockyer has linked the firm to what he has calls a "complicated chain" of private investigators and contractors in multiple states that may have taken part in illegalities. Mr. DeLia was unavailable for comment. The H-P investigation has also concentrated attention on California's somewhat controversial Attorney General, Bill Lockyer (pictured).In the past, Lockyer has been accused of being overzealous in his pursuit of possible criminal charges. Tuesday, Lockyer said he had enough evidence to indict people inside and outside H-P on charges related to obtaining personal phone records without authorization. A spokesman for the attorney general said the first criminal charges could be filed within a week.
  • Comment on related stocks/ETFs: For full background into the scandal surrounding H-P's investigation techniques, see previous WSJ summaries dating back to September 6th.

Airbus Superjumbo Jet Could Be Delayed Further

  • Summary: It looks like yet another delay for Airbus' 380 superjumbo jetliner. The A380 was initially delayed last April, and an additional delay announced June 13th. Now, according to Mike Turner, CEO of 20% shareholder BAE Systems PLC, "all the ingredients are there" for further delays. Airbus' new CEO has said he will comment at the end of the month following an internal review. BAE Systems plans to bring a decision to its shareholders in early October regarding a sale of its stake to Airbus' main shareholder European Aeronautic Defence & Space Co. [EADS]. The current price tag for BAE's stake is €2.75 billion. According to industry analyst Scott Hamilton, the CEO of International Lease Finance Corp.--a large Airbus and Boeing customer--has said that he expects to see additional delays to the A380. EADS has said the delays will cost an additional $2.5 billion of operating profit over the next four years.
  • Comment on related stocks/ETFs: Hillary Kramer believed before this news was released that Boeing (NYSE:BA) is ready for takeoff. Investopedia Advisor suggests that a sell-off in Boeing stock after an in-line quarter was unwarranted. See Boeing's Q2 earnings call transcript for details on the company's quarter.

Apple Gets Vote of Confidence For iTunes From Antitrust Chief

  • Summary: The government's Antitrust Chief, Thomas O. Barnett, believes that Apple (AAPL), "provides a useful illustration of how an attack on intellectual-property rights can threaten dynamic innovation." During a speech yesterday at the George Mason University School of Law Symposium, Barnett made a clear distinction between competition, which is protected under antitrust law, and competitors, who are not. Barnett feels that by forcing companies to share their hard earned innovations with competitors whose technology and research spending lags, the innovators will cease innovating since they would stand to gain very little by doing so. Barnett also indicated that he has no plans to investigate Apple for antitrust violations, as some have urged, and as several European countries have threatened.
  • Comment on related stocks/ETFs: A few years back, Apple's Steve Jobs helped unleash a torrent of antitrust legal action against Microsoft (NASDAQ:MSFT). Now, according to Andrew Schmitt, the same forces are massing against Apple. And round goes the circle...

Google, Intuit Set Pact Aimed At Small Firms

  • Summary: Google (NASDAQ:GOOG) and Intuit (NASDAQ:INTU) announced a partnership that will enable Intuit’s QuickBooks users to directly place ads on Google. Using QuickBooks 2007 (Intuit’s accounting package), businesses will be able to sell products on Google Base, and list their businesses on Google Maps. While the new features will enhance Intuit’s flagship business product, there are benefits to Google as well. Google can now directly (and cheaply) sell internet advertising to the 3.7 million businesses that use QuickBooks.
  • Comment on related stocks/ETFs: Intuit can breathe a sigh of relief – with this deal Google probably will not expand their Apps for Your Domain to include a competing accounting application. The partnership follows Google’s recently announced deals with eBay (NASDAQ:EBAY) and News Corp’s (NASDAQ:NWS) MySpace. Related: 2006 Q2 earnings conference call transcripts for Google and Intuit

Vonage Seeks Post-IPO Payment From Customers Who Reneged

  • Summary: Vonage has apparently sent letters out to customers who had a change-of-heart in their decision to purchase company stock at the IPO. The company said last month that approximately one million shares were not yet paid for by customers. John Fitch of Cary, Ill., who said he planned to pay for his 100 share commitment but missed the deadline, got a letter from what appears to be Vonage counsel saying: "We hereby make demand that you remit $604... If we do not receive payment within 10 days we have been authorized to take further action against you." One consistent part to this story: nobody is commenting including the company, counsel, and investment banks.
  • Comment on related stocks/ETFs: There is no end to the ink spilled on the Vonage IPO disaster: this week, Mark Langner explained why no price is cheap enough for VG. The fiasco ranges from a nightmare to unsafe. One person seems to see opportunity here: founder Jeffrey Citron bought $1.3 million of stock in the company last month, bringing him to 33% ownership.

For a Workout, Just Sit Down...

  • Summary: One of the hottest fitness trends in Japan right now, believe it or not, is a horseback-simulation machine made by Matsushita Electric Industrial, called Joba, the Japanese word for horseback riding. Get ready, because the machines are making their way to the U.S. under Matsushita's Panasonic consumer brand and have been renamed to"core trainer." In Japan, the machine is attracting the elderly since it doesn't take much effort to sit and you can watch TV or even enjoy a drink of shochu, Japanese hard liquor, at the same time. Although you won't burn many calories, you will get 'toned muscles, improved posture, and increased metabolism' by using it three days a week for about 15 minutes each time according to studies conducted by Matsushita and some universities. A large sports club in Oregon is experiencing heavy usage of its core trainer after customers first laughed and mimicked cowboys.
  • Comment on related stocks/ETFs: Matsushita Electric Industrial (NYSE:MC) is traded in the U.S. and owns Panasonic, one of the world's most successful consumer electronics brands. The Joba originally cost $2,400 in Japan when first released in Oct. 2000. Taking years to catch on, they are now selling strong with more than 100,00 units sold so far this year compared to 55,000 sold in all of '05. A $700 compact version is being sold targeted at Japanese women. The "core trainer" costs $2,000 in the U.S. and is larger in size and has more options. It can be found for sale on Panasonic's web site, in catalogs such as Hammacher Schlemmer and some Sharper Image (SHRP) stores. It's anyone's guess what the profit margin for the Joba is, but Panasonic seems serious enough about marketing and selling it. Unfortunately for Panasonic there are already knockoffs as cheap as $250. Konami (NYSE:KNM) is another Japanese company that's shown interest in introducing alternative fitness equipment to the U.S.

TRACKING THE NUMBERS: Venture Firms are Doling Out Large Pay Deals

  • Summary: According to a study by Holt Private Equity Consultants and Dow Jones Private Equity Analyst, compensation packages are up 35% this year for venture capitalists. Not bad, especially considering that that for the year ending March 31, the average return for U.S. VC funds was just 2.1% higher that the S&P 500 (13.8% vs. 11.7%). On average, managing general partners are making about $2m, senior partners are making $1.5m, and the average employee can expect to earn $777,000. Even with the pay increases, venture capitalist pay packages are still significantly lower than those at hedge funds, where many successful fund managers earn more than $10m. The increased pay comes despite the fact that the acquisition of VC backed companies slowed in 2005 compared with 2004 ($15.4b vs. $14.4b). According to the study, "much of the increase may have been due to a few very profitable exits.” If the dollar level of deals is falling, why are pay packages rising? According to Dixon Doll, a partner at VC firm DCM, it’s simply supply & demand – the amount of money investors want to invest in VC funds exceeds the “supply” of available fund space
  • Comment on related stocks/ETFs: Supply and demand continues to drive up pay packages at VC funds, hedged funds and private equity funds. Related: SeekingAlpha's Venture Capital Blogs Resource Page

HEARD ON THE STREET: As Energy Prices Sink, Many Firms Are Buoyed

  • Summary: If oil and other commodity prices do continue to fall, which stocks will benefit? The Heard on the Street column lists the stocks that should benefit: Bianco Research LLC in Chicago claims that airline stocks such as AMR Corp (AMR) have the highest inverse correlation to the oil price. Other beneficiaries include retailers such as Wal-Mart (NYSE:WMT), Target (NYSE:TGT), Costco (NASDAQ:COST) and Home Depot (NYSE:HD), casual dining restaurants such as Applebee's International (APPB), car manufacturers such as (NYSE:GM) and Toyota (NYSE:TM), chemical companies such as DuPont (NYSE:DD), and paper producers such as International Paper (NYSE:IP).
  • Comment on related stocks/ETFs: Are these really the most leveraged plays on a falling oil price? Arguably not. First, you can simply short the US Oil ETF (USO), though David Fry says it's hard to borrow. Better (though risky), you could consider shorting the most speculative "peak oil" plays: the ethanol and oil sands stocks. Ethanol stocks include Andersons Inc. (NASDAQ:ANDE), Archers Daniels Midland Company (NYSE:ADM), Aventine Renewable Energy (AVR), Green Plains Renewable Energy (NASDAQ:GPRE), MGP Ingredients (NASDAQ:MGPI), Pacific Ethanol (NASDAQ:PEIX), Pendford (NASDAQ:PENX), SunOpta (NASDAQ:STKL), VeraSun (VSE), and Xethanol (XNL). The sector faces increasing supply of equity due to IPOs, yet the market has been increasingly unreceptive. And many of the individual stocks may be problematic. Pacific Ethanol, for example, was subject to insider selling and dilutive financing earlier this year. Detailed coverage of ethanol stocks is here. Oil sands stocks that trade on US exchanges include Canadian Natural Resources Ltd (NYSE:CNQ), Petro-Canada (PCZ), Nexen Inc. (NXY) and Suncor Energy Inc. (NYSE:SU). Oil extraction from oil sands is expensive, so these stocks should have dramatic downside leverage if the oil price falls signficantly.

HEARD IN ASIA: China's Growing Taste for Milk Lifts Mengniu, Other Dairy Firms

  • Summary: China's dairy sector is reportedly generating 60 billion yuan (US$7.5 billion) in annual sales and is expected to grow by 20%-25% this year. Dairy firms and their investors are clearly optimistic despite a historically lactose-intolerant nation. The largest player, China Mengniu Dairy, controls almost 1/3 of the market and twice as much as its largest two rivals, Inner Mongolia Yili Industrial Group and Bright Dairy & Food. Mengniu's H1 profits surged 39% to US$43.2 million, while its shares listed in Hong Kong have more than doubled. Mengniu is a master of marketing. It must be, since it contracts from about 3,000 milk suppliers, not owning any farms directly. The head of China research at BNP Paribas commented on Mengniu's consumer buzz generating capability in which, "... milk beverages [are (seen as)] a substitute for cola drinks, seen as something sexy and trendy." Mengniu is expanding both its scale and scope economies, now offering more premium milk beverages and introducing related products such as ice cream and milk tablets. Its biggest risk is its supply chain, followed by renewed interest in China among foreign companies such as Groupe Danone of France which has increased its stake in Bright Dairy to 11.55%.
  • Comment on related stocks/ETFs: Mengniu is listed on the Hong Kong exchange under code: 2319. It also has an extremely thinly traded listing on the OTC in the U.S. (OTCPK:CIADF) -- see also Pinksheets.com. Whenever trading low-volume stocks or when the bid/ask spread is wide, it is a good idea to use limit orders. Among other companies mentioned in the article, Danone (DA) trades in the U.S, and both Mongolia Yili and Bright Dairy are listed on the Shanghai exchange with Class A shares. BNP Paribas, Citigroup, and Merrill Lynch have a "buy" rating on Mengniu. A quick check of Morningstar.com shows that Mengniu is not a top-25 holding of any of the China funds traded in the U.S. The BNP Paribas analyst's comment calling milk essentially a substitute for cola may be a cause of concern for Coca-Cola (NYSE:KO) and Pepsi (NYSE:PEP). Per Coke's Q1 conference call in 2005, the company's China strategy is focused on three areas: carbonated soft drinks, non-carbonated beverages such as tea (think Nestea), and value-added hydration (think POWERade). For more information on Mengniu, visit its web site.

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Notable articles on Seeking Alpha today: Conference call transcript from Lehman Brothers Holdings Inc. (LEH); why Lifetime Brands Inc. (NASDAQ:LCUT) may be a tasty investment; Canadian software company Open Text Corp. (NASDAQ:OTEX) is under SEC review; speculation about who the latest online content buyout candidates may be; Jim Bethel's take on Fox's up-and-coming news channel; Jim Cramer's latest stock picks.

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