A one-page summary of this morning's key market- and stock-moving stories. Headlines link to the original article. Use Wall Street Breakfast as a starting point, and check the original before trading.
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TECHNOLOGY AND INTERNET
Profit Doubles at Google as It Continues to Expand [New York Times]
Summary: Leaving Yahoo's recent disappointing earnings report in the dust, the world's largest internet search engine announced a beat quarter, impressive on nearly every front. Whereas Yahoo reported a 38% decline in net on Tuesday, California-based Google said third-quarter profit nearly doubled and revenue soared 70%, with accelerating international operations and Google's own sites boosting online-advertising sales. The news sent the company's shares up more than $33 in after hours trading, a gain of 7.5%. In terms of numbers, Google earned $733 million, or $2.36 a share, up 92 percent from $381 million, or $1.32 a share in the year-ago period. Excluding charges related to stock-based compensation, the company pulled down $2.62 a share, well above the consensus Street estimate of $2.42. Additionally, Google revenue climbed 70% to $2.69 billion. Google R&D spending was up 76% from the year-ago period, while Cap-Ex. came in at $492 million, mainly for computers and networking systems. That was perhaps the only downside for the company as it stated that Cap-Ex. growth would continue to increase at a faster rate than revenue growth. Yesterday, the company outlined an aggressive program of future expansion, which it should have no problem implementing with the more than $10 billion in cash it holds. Over the last quarter, Google secured several important new outlets for displaying ads, including deals with Adobe, eBay, News Corp. (which owns MySpace), Intuit and Viacom.
Related links: Google Q3 2006 Earnings Call Transcript • Google/YouTube Acquisition Conference Call Transcript • Yahoo! Q3 2006 Earnings Call Transcript • Third Quarter Score: Google 49, Yahoo 0 • ComScore: Google, Ask Gain Search Share; Yahoo, Microsoft Lose Ground • Google Reports Blowout Quarter • Google Changes Terms of Service for Advertisers • YouTube vs. MySpace Growth: No Contest • Yahoo's Fundamentals Are Deteriorating • Google's Soaring Profits Stoke Stock [AP - Newsday.com] • Google Net Soars, Propelled By Overseas Growth [WSJ] • Video: Paul Kedrosky On Google's Recent Quarter [CNBC "On the Money"]
Potentially impacted stocks and ETFs: Google (GOOG) • Competitors: Yahoo (YHOO), Adobe (ADBE), eBay (EBAY), News. Corp. (NWS), Viacom (VIA), Intuit (INTU) • ETFs: First Tr DJ Internet Index Fd (FDN), iShares Goldman Sachs Technology (IGM), iShares Dow Jones US Technology (IYW)
SanDisk 3Q profit Slips on Expenses [Business Week]
Summary: Flash-memory maker SanDisk Corp. said surging operating expenses are responsible for its 4% drop in Q3 profits. Income came in at $0.51/share ($103M) down from $0.55 last year. Still, after factoring out acquisition and stock-compensation expenses, earnings were actually $0.61. Demand for mobile products continued to be strong, and the company gained market share in the U.S. retail market. The company looks forward to a seasonally strong Q4. Shares were down in after hours trading as low as $53.30 (-$8.43, -13.6%); investors, it seems, were focused on the 60% drop in average selling prices, a rate of decline that CEO Eli Harari said was faster than anybody expected. Some analysts are also concerned that the flash-memory market is at risk of an inventory glut as chip makers aggressively boost manufacturing capacity in the face of uncertain demand.
Related links: Q306 Earnings Call Transcript • Eric Savitz: SanDisk Down Sharply on Falling NAND Memory Pricing • Apple Discusses Flash Memory Pricing • SanDisk: Hambrecht Sees a Big Beat This Thursday • Why Marvell and Sandisk are Potential Acquisition Targets • Price Woes Punch SanDisk [The Street.com]
Potentially impacted stocks and ETFs: SanDisk Corp. (SNDK) • Competitors: M Systems Flash Disk Pioneers Ltd. (FLSH), Micron Technology Inc. (MU), Toshiba Corp. (OTCPK:TOSBF)
Freescale Semiconductor 3Q Profit Rises [Houston Chronicle]
Summary: Freescale Semiconductor Inc., which makes microchips for mobile phones, posted 57% gains in earnings through increased sales and higher margins. Profits came in at $0.61/share ($257M), up from $0.38 last year, and $0.09 higher than the Street's estimates. Freescale has agreed to sell itself to a group of private equity firms for $17.6B, one of the biggest-ever tech LBOs; Freescale said Thursday that it will hold a special stockholder meeting to approve the sale for $40 per share. Operating profits and revenues grew in all three of the company's segments; standard products, networking, and computing systems.
Related links: Q306 Earnings Call Transcript • The Semiconductor Industry Desperately Needs to Go Private • Freescale To Be Bought Out For $40 Per Share • Semiconductor Slowdown? Not for Freescale • Moody's May Download Freescale but Who Really Cares? • Profit Flows at Freescale [TheStreet.com]
Potentially impacted stocks and ETFs: Freescale Semiconductor Inc. (FSL) • Competitors: STMicroelectronics NV (STM), Texas Instruments Inc. (TXN), Infineon Technologies AG (IFX) • ETFs: First Trust IPOX-100 Index (FPX)
Broadcom Sales Jump [TheStreet.com]
Summary: Broadcom shares were up 3% yesterday after the company weighed-in with strong Q3 sales, despite publishing only a partial financial report due to a stock-options backdating review. Sales ($903M) were down $40M on the quarter, but up over $200M from a year ago. Broadcom is reviewing its books; last month it said it discovered about $1.5B of option grant irregularities, and will need to restate some past reports. The company makes 20 different chips for TVs, wireless products, and high-speed modems. This is the second straight quarter that Broadcom has not reported net income.
Related links: Q306 Earnings Call Transcript • Updated WSJ Options Scandal Scorecard • Why Broadcom is a Scary Competitor • Chips for TV Devices Boost Broadcom Sales [LA Times]
Potentially impacted stocks and ETFs: Broadcom Corp. (BRCM), Agere Systems Inc. (AGR), Texas Instruments Inc. (TXN), Intel Corp. (INTC) • ETFs: iShares Goldman Sachs Networking (IGN), Broadband HOLDRs (BDH), PowerShares Dynamic Networking (PXQ) all have >5% holdings in BRCM
Summary: OPEC, alarmed by a three-month slide from July's record-high oil price, has agreed to reduce output by 1.2 million barrels a day, slightly more than anticipated. Oil prices are rebounding now that Saudi Arabia, OPEC's biggest producer, has agreed to participate in the cutback. Oil futures are off 25% from their high to $58.86 a barrel, primarily in response to rising U.S. inventories, a peaceful storm season and a diminishment of tensions over Iran's nuclear program. OPEC, which has been enjoying an extended rally (oil prices have tripled since November 2001), was prompted by the three-month skid to defend the price of oil. The cartel is apprehensive about "worrisome" U.S. crude inventories, which swelled by 5.02 million barrels to 335.6 million last week, the biggest increase in six months. Despite OPEC's move, Wall Street remains skeptical that OPEC will slash production sufficiently to reduce excess supply.
Related links: OPEC Calls for Emergency Meeting -- Can Members Agree How to Cut Output? • OPEC Waffles on Production Cut • OPEC Production Cut Looks Inevitable • OPEC Denies it will Cut Output • OPEC's Dilemma: When and How to Cut Production
Potentially impacted ETFs: United States Oil Fund LP (USO), Oil Service HOLDRs Trust Oil Service HOLDRs Trust (OIH), Energy Select Sector SPDR (XLE)
TRANSPORTATION AND AEROSPACE
Chrysler Enlists Mercedes Officials In Bid to Cut Manufacturing Costs [Wall Street Journal]
Summary: DaimlerChrysler is bringing in a German efficiency expert from the Mercedes segment of its business, Chief Operating Officer Rainer Schmückle, to Detroit to help trim as much as $1,000 per auto unit Chrysler produces. In recent years past, Mercedes had been struggling to turn a profit while Daimler's Chrysler division ran off 12 straight profitable quarters. However, while Mercedes has turned things around during the last 12 months, in part by laying off 8.5% of its blue collar workforce, Chrysler has struggled with rising U.S. gas prices and inefficiency at production plants. Mr. Schmückle will also consider closing the company's SUV plant in Newark, Del. as a result of plummeting sales of the oversized vehicles. The plant, which hires 1,900 workers, only runs one production shift a day; auto plants typically have to operate at least two to make money. Additionally, Chrysler has three other truck plants, none operating at full capacity, that possibly could handle Durango and Aspen SUV assembly, if Newark were closed. Competitors GM and Ford also have closed or plan to close SUV plants as part of industry-wide cost cutting and restructuring.
Related links: Chrysler Forecasts 1% Market Share Gain • Detroit Gets it Right This Time • Jerry Flint Believes Detroit's Luck Has Run Out • Auto Industry Points to Mixed Signals for U.S. Consumers • US Auto Market Stats: The Numbers Don't Lie • DaimlerChrysler's New Marketing Strategy: The Beginning of the End for Car Dealerships?
Potentially impacted stocks and ETFs: DaimlerChrysler (DCX), General Motors (GM), Ford (F) • iShares MSCI Germany Index Fund (EWG)
AHEAD OF THE TAPE: Cat on Hot Tin Roof [Wall Street Journal]
Summary: Although CAT has been an major market mover over the past six years, and analysts expect the company to report a 15% increase in revenue, there is concern that the company might be adversely affected by the housing slowdown and emissions regulations. With projections that the construction equipment company will reveal an over 40% increase in earnings per share, comes the concern that Catepillar might not be able to recoup losses in residential building through commercial projects. In addition, EPA regulations requiring all trucks to have clean-running engines by 2007 has caused a rush of orders that will soon peak and drop off by the deadline. The trucker Con-Way lowered its sales forecast for the remainder of 2006, indicating a slowing down in the industry. However, Catepillar might be protected from some of these challenges, since half of its business is overseas.
Related links: Foolish Forecast: Caterpillar's Claws [Motley Fool] • Why The Pundits Are Wrong On Caterpillar
Potentially impacted stocks and ETFs: Catepillar (CAT) • Competitors: CNH Global NV (CNH), Volvo AB (VOLV)
Summary: McDonald's Corp. posted a 15% Q3 profit increase yesterday, extending their 3 1/2-year string of progressively stronger results. Premium coffee sales, more 24-hour restaurants, and strong European growth were among the key areas. CEO Jim Skinner said the company will continue to expand at a modest pace with new U.S. drive-thrus and new Happy Meal entrees and beverages that meet nutritional guidelines. He also committed 20% of its children's marketing budget to promote youth physical-activity. Net income was $0.63/share ($843M), up from $0.58/share a year ago. Same-store sales improved in every international and domestic region. Its shares have gained 30% in the last year, closing at $40.77, down $0.70. Citigroup analyst Glen Petraglia said promoting health and nutrition is a strong-suit for McDonald's, calling its menu the healthiest of the hamburger-restaurant operators. "As consumers become increasingly focused on health and wellness in the coming years, McDonald's menu has the concept well-positioned to sustain and potentially increase its market-share dominance over other hamburger chains."
Related links: Earnings call transcript • McDonald's comments on its China drive-thru strategy • McDonald's Discusses Chinese Car Ownership and Drive-Thrus • McDonald's China Shows the Sexy Side of Beef • McDonald's Corp. To Beat Estimates; But Why? • Fast Food Stocks in a Slowing Economy • Restaurant Stocks: Gross & Operating Margins • Bill Ackman Raising Funds to Take $2B Bite Out of MacDonald's
Potentially impacted stocks and ETFs: McDonald's Corp. (MCD) • Competitors: Burger King Corp. (BKC), Jack in the Box Inc. (JBX), CKE Restaurants Inc. (CKR), Wendy's International Inc. (WEN), Good Times Restaurants Inc. (GTIM), Back Yard Burgers Inc. (BYBI) • ETFs: PowerShares Dynamic Food & Beverage (PBJ), PowerShares Dyn Leisure & Entertainment ETF (PEJ), Consumer Discretionary SPDR ETF (XLY)
One U.S. Chain's Unlikely Goal: Pitching Chinese Food in China [Wall Street Journal]
Summary: Yum! Brands is promoting a new type of fast food restaurant in China, diverting from its KFC and Pizza Hut-brands. Instead, with its East Dawning restaurant, it is attempting to localize by offering specialized Chinese dishes and decorating with a Chinese theme, while offering typical Yum! service such as speed and cleanliness. The president of Yum! China comments, "I think we are as close as can be at being local." Yum! already operates about 2,000 KFC and Pizza Hut restaurants in close to 400 Chinese cities, which is nearly 3x McDonald's presence, and says it aims for East Dawning to become the nation's largest Chinese fast food chain. China is becoming an increasingly important driver of Yum!'s earnings, accounting for about 16% of profits last year. The outlook for overall fast food restaurant sales growth in China is robust according to a Chicago-based consulting firm, with growth projected in the double-digits through at least 2010. Some challenges East Dawning faces include: difficulty in finding new shop locations, pricing, its menu restricts some popular dishes due to emphasis on speed, and growing competition.
Related links: Conference call transcripts: Yum! Brands F3Q06 and McDonald's Q3 2006 • Are Yum!'s China Margins Sustainable? • Yum!'s Quarterly Call Focuses on KFC, Pizza Hut & New Businesses in China • Yum! to Follow SBUX, No More Monthly Same-Store Sales Reports • McDonald's on its China Drive-Thru Strategy • McDonald's China Shows the Sexy Side of Beef (Article discusses McDonald's different approach to China and its attempt to differentiate from Yum! Brands.)
Potentially impacted stocks and ETFs: Yum! Brands (YUM), McDonald's (MCD), PowerShares Dynamic Food & Beverage ETF (PBJ), PowerShares Dynamic Leisure & Entertainment ETF (PEJ)
Summary: Coca-Cola beat Wall Street estimates and reported a 14% increase in third quarter sales, which were bolstered in Europe by the company's World Cup campaign, and in emerging markets such as China, South America and the Middle East. In spite of these gains, management expressed dissatisfaction with U.S. and Japanese sales as well as the lackluster performance of its non-carbonated beverages. Reported earnings for the quarter were $1.46 billion, or 62 cents a share, bettering last year's profit of $1.28 billion, or 54 cents and exceeded Thomson Financial's projection of 59 cents a share. At the close, the stock increased 2.1% to $44.88. Coca-Cola will promote its Dasani water brand in the U.S. and Cherry and Diet Coke in Japan to improve sales for the fourth quarter in those countries.
Potentially impacted stocks and ETFs: Coca-Cola (KO) • Competitors: Pepsi (PEP), Cadbury-Schweppes (CSG)
Pfizer and Other Drug Makers Report Higher Profits [New York Times]
Summary: Pharmaceutical companies Pfizer, Eli Lilly, Novartis and Wyeth all reported profit gains yesterday, driven in part by a rise in prescriptions written in the U.S. as a result of the new Medicare Part D drug insurance program. Pfizer did caution, however, that it expects flat revenues for the next two years as patents expire on Zoloft, a popular antidepressant, and Norvasc, a high blood pressure drug. Pfizer is also delaying distribution of Exubera, its highly touted, FDA-approved inhaled insulin, until January over concerns about its effect on the lungs. Still, Pfizer expects EPS to grow 7-9% in both 2007 and 2008 through cost-cutting and share buybacks. Novartis AG reported a 12% Q3 net profit rise and Eli Lilly a 10% jump.
Related links: With Pfizer Bigger is Better • Merck Wins FDA Approval for New Type-2 Diabetes Drug • Drug Companies Report Solid 3Q Results [Newsday]
Potentially impacted stocks and ETFs: Pfizer Inc. (PFE), Merck & Co. (MRK), Eli Lilly & Co. (LLY), Novartis AG (NVS), Wyeth (WYE) • First Trust Morningstar Dividend Leaders Index Fund (FDL), iShares Dow Jones U.S. Pharmaceuticals Index Fund (IHE), WisdomTree Trust WisdomTree HighYielding Equity (DHS)
Summary: Citigroup suffered a 23% fall in Q3 net income to $5.51 billion, or $1.10/share, due to a one-off gain last year, and its revenue missed analysts' estimates, hurt by weakness in its capital market business. Citi's operating income still grew 6% to $5.3 billion, and earnings from continuing operations actually grew 6% to $1.06/share -- compared to $0.97 last year -- beating analysts' estimate of $1.03/share. CEO Charles Prince commented, "Our third-quarter results were driven by strength in several businesses, including international revenues, up 11 percent. (However,) results from our capital markets related businesses fell short of my expectations, and I expect improved results from these businesses going forward." Its shares lost 0.64% to close at $49.87. Meanwhile, Bank of America reported a 41% rise in Q3 earnings on a 32% increase in revenue (comparative results for Q305 do not include MBNA), but its shares still faced selling pressure, closing down 1% at $53.26. Net income was $5.42 billion or $1.18/share and would have been $1.22/share excluding merger and restructuring costs, versus $0.95 last year. Both figures beat analysts' estimates of $1.15 polled by Thomson Financial. CEO Ken Lewis commented, "While margins continue to be under pressure due to the continuing flat yield curve and intense competition, we are benefiting from our ability to provide unmatched convenience and innovative financial solutions to our customers and clients." The WSJ reports BofA could surpass Citigroup in stock-market value with about $5.5 billion currently separating them in the number one ($246.6b) and two positions. J.P. Morgan Chase is third at $162.7 billion.
Related links: Citigroup Q3 2006 Earnings Call Transcript • Bank of America: Good, Bad and Ugly on Earnings • Jim Cramer was bearish on BofA on yesterday's Real Money Radio show; earlier this month he had bullish comments on Citigroup • BofA Free Online Trade Announcement Crushes Online Brokerage Stocks • Reaction to BofA's free online trade commissions announcement: [1, 2, 3, 4, 5, 6] • Banking on Bank of America
Potentially impacted stocks and ETFs: Bank of America (BAC), Citigroup (C) • ETFs: iShares Dow Jones US Financial Svcs (IYG), iShares Dow Jones US Financial Sector (IYF), iShares Morningstar Large Value Index (JKF), streetTRACKS KBW Bank ETF (KBE), Financial Select Sector SPDR (XLF), Vanguard Financials ETF (VFH), First Trust Morningstar Div Leaders Idx (FDL), WisdomTree High-Yielding Equity (DHS)
Ad Woes Worsen at Big Newspapers [Wall Street Journal]
Summary: The long-feared decline in revenues from print advertisements at big newspapers has finally materialized after a long period of low growth -- a serious problem that compounds the papers' woes over dropping circulation. Tribune, the New York Times and Belo Corp. all reported drops in ad revenue. The problem appears to be pervasive, as every major ad category showed weak results (autos, real estate and employment). Tribune reported a 2% drop in publishing ad revenue, The New York Times reported a 4.2% drop, and Belo, which publishes the Dallas Morning News and the Providence Journal, reported a 5.5% slide. The Times and the Tribune are now exploring asset sales as a means to recoup. The Times plans to sell its broadcasting division, ramp up its Internet-related businesses and consolidate its New York printing operations.
Related links: New York Times Q3 2006 Earnings Call Transcript • Tribune Q3 2006 Earnings Call Transcript • Newspapers: Another Slide Coming? • Dow Jones: WSJ's Print Ad Revenue Sluggish, But Profits Beat Estimates • NY Times Earns Fall on Weak Ads, Charges [Newsday]
Potentially impacted stocks and ETFs: New York Times Co. (NYT), Tribune Co. (TRB), Belo Corp. (BLC)
Summary: Industrial & Commercial Bank of China, usually referred to as ICBC, raised an IPO record $19.1 billion with orders equaling $500 billion, or twice Citigroup's market value. ICBC is the first simultaneous offering in Hong Kong and Shanghai, and will begin trading on October 27th, at which time it could surpass Japan's Mitsubishi UFJ -- valued at $135 billion -- to become the world's 5th largest bank. ICBC said it will use the share sale to strengthen its capital base for expansion. China's Ministry of Finance and a state holding company each own 36.2% of ICBC, with a Goldman Sachs-led investor group owning 7.4%, and the IPO representing a 14.8% share. ICBC has the largest retail banking customer-base in China, servicing 153 million, compared to Russia's entire population of 143 million, as the Bloomberg journalist mentions. Shares of rival Bank of China, the second largest bank in China, have risen 15% since it completed an $11.2 billion IPO in May that was also heavily oversubscribed.
Related links: Goldman's Huge Paper Profits in China's ICBC IPO • Morgan Stanley Acquires Small Commercial Bank in China • China's Banking Sector Looks Better with New Corporate Bankruptcy Law • An Interesting Play on China's Banking Sector: Bank of East Asia • Developments in China's Banking Sector • Highlights from Bank of China's Mega-IPO
Potentially impacted stocks and ETFs: Goldman Sachs (GS) • iShares FTSE/Xinhua China 25 Index ETF (FXI) [Offers exposure to Bank of China, Bank of Communications and China Construction Bank, for a combined ~20% of assets.]
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Notable articles on Seeking Alpha today: Google: The Most Important Quote From Google's Conference Call • Third Quarter Score: Google 49, Yahoo 0 (GOOG, YHOO) • Google Reports Blowout Quarter (GOOG) • Macro: The Market's Achilles Heel: Perpetual Growth • David Fry's Daily Market Outlook • Confusion From the Current Market • Don't Let the Housing Spinmeisters Mislead You • 52 Years in the Market: Stock Returns, GDP Growth, Term Premium, Earnings • Long Ideas: Precision Castparts: Exceptional Defense Company • Looking Beyond the Scandal at Tyco • First Data Corp. Undervalued? • Short Ideas: Home Solutions of America: Story Gone From Bad to Worse • Teva/Wal-Mart: Teva Pharma Should Profit From Wal-Mart's New Program • With Teva's CEO Departure, There's No Need for Panic • Walgreen's Response to Wal-Mart's Drug Assault • New ETF: New Classes Covered by ETFs: International Real Estate • SAP: SAP: We Had An 85% Win Rate Against Oracle • More earnings conference call transcripts: Molex F1Q07 • Synaptics F1Q07 • Hyperion Solutions F1Q07 • VeriSign Q306 • Stamps.com Q306 • Xilinx F2Q07 • LM Ericsson Q306 • New York Times Q306 • Citigroup Q306 • SAP AG Q306 • The McGraw-Hill Companies Q306 • Check Point Software Technologies Q306 • Nokia Q306 • Logitech F2Q06 • EarthLink Q306 • Jim Cramer's latest stock picks.
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