Wall Street Breakfast

by: SA Editors
SA Editors
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Seeking Alpha's one-page summary of this morning's key market-moving and stock-moving stories. Headlines link to the original article. Use Wall Street Breakfast as your starting point, and make sure to check the original before trading.

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Price-Earnings Ratios on U.S. Stocks Drop, Aiding Bull Market [Bloomberg]

Summary: U.S. stocks are less expensive relative to earnings than they were at the beginning of the bull market four years ago. The S&P 500 is valued at about 17x its members' EPS, down from 26x in October 2002 -- the first time the index's P/E has declined in a bull market since at least 1960. The 17x P/E is half that of the Russell 2000, an index of smaller companies, suggesting that investors are undervaluing larger-cap companies on a relative basis. The S&P 500 has risen 76% since 2002; last month, the index reached its highest level since November 2000 as earnings exceeded analyst expectations. Though earnings have grown for a dozen straight quarters, some expect the pace to slow in 2007 as economic expansion slackens and GDP shrinks. Consumer confidence indices are falling, and Wal-Mart's recent forecast that its November same-store sales will be flat is considered by many a harbinger of things to come.
Related links: Earnings Season So Far: S&P 500 Beat Quarters Up, Guidance Raisers DownS&P500 Reaches 75 Days Without a 1% Decline - Longest Such Streak Since 1995U.S. Large Caps Trending Positively
Potentially impacted ETFs: Standard & Poor's 500 Index Depository Receipts (NYSEARCA:SPY) • iShares S&P 500 ETF (NYSEARCA:IVV)


Powerset Gets $12.5m at Whopper Valuation, To Go After Search Holy Grail [VentureBeat]

Summary: Powerset, the natural-language would-be "Google-killer," announced it raised $12.5M in a first-round of venture capital. Powerset says it can improve on Google's search engine by understanding context between words. An example: "Who did Dick Cheney shoot?" -- Both will give you references to Harry Whittington, who Cheney accidentally shot. But type in, "Who shot Dick Cheney?" and Powerset will give you no results. Google gives similar results for both. If you search, "Who acquired IBM?" Google will give results about companies that IBM acquired, even though that's not what you asked -- because Google can't understand the difference between an object and subject. Powerset will give results of the various companies that acquired IBM units, including Lenovo, and AT&T. Significantly, Powerset raised its $12.5M at a "sky-high" valuation, giving itself a pre-investment value of more than $30M -- and it's $2.5M more than the $10M they were originally seeking. The money came from Foundation Capital ($7M), The Founders Fund ($3M), and several angel investors ($2.5M combined). To satisfy its considerable data storage needs, Powerset has struck a partnership with Amazon’s new Elastic Computer Cloud program that gives Powerset access to an Amazon network of computers and storage at a cost of $0.10 a CPU hour — letting Powerset focus on its core search. Google has said it will take many years before computers can understand exactly what people are searching for. Co-founder Barney Pell: “It is not a long way away. This is not a change of some technology out on the periphery -- we’re changing the core of the engine.”
Related links: More on Powerset, the secretive search engine [VentureBeat] • Danny Sullivan's scathing critique of Powerset ambitions • Co-founder Lorenzo Thione's Blog • Angel investors press release
Potentially impacted stocks and ETFs: Google Inc. (NASDAQ:GOOG), Amazon.com Inc. (NASDAQ:AMZN)

Hypercom Releases the Industry's First Universal Contactless PIN Pad [Business Wire]

Summary: Global payment technology leader Hypercom Corporation announced the release of its new P4100 PIN Pad, allowing a variety of payment verification methods to vendors including contactless, EMV smart card or magnetic stripe payments, a touchscreen display, and a vendor-agnostic architecture enabling integration with Hypercom, VeriFone or Ingenico card payment terminals as well as leading electronic cash register systems. The company is also offering a WiFi option for use with wireless and IP-enabled payment terminals. The system meets security standards recently established by Visa International, MasterCard Worldwide and JCB International to ensure secure PIN entry and privacy while offering multi-application capabilities. According to Hypercom Senior VP Neil P. Hudd, "this device provides maximum sales opportunities because of the variety of needs it serves as well as the ability to support both Hypercom and non-Hypercom hardware. No other vendor offers a comparable product, so we have the market to ourselves.”
Related links: MasterCard and Visa Crack Down on SecurityHypercom sales slide 14 percent [Phoenix Business Journal]
Potentially impacted stocks and ETFs: Hypercom Corp. (NYSE:HYC), Mastercard (NYSE:MA), American Express (NYSE:AXP)

Jeff Bezos' Risky Bet [Business Week]

Summary: This August, Amazon.com launched the test version of a new venture called Elastic Compute Cloud [EC2]. Hundreds of free sample versions of the service, which provides cheap, raw computing power that could be tapped on demand over the Internet just like electricity, were snapped up in a matter hours by web programmers and content managers eager to launch the next MySpace or YouTube. The goal, according to Amazon Founder and CEO Jeffrey Bezos is to become to the web what Microsoft became to the software industry: the standard-bearer upon whose platforms nearly every computer-based business runs. In addition to EC2, Amazon is renting out server space, data storage services and even physical warehouse space to potential competitors to its own $10.5 billion-a-year online retail portal. But while such moves seem logical to Bezos, Wall Street analysts covering the company feel the new services being offered by the company are nothing more than a distraction to its core business, and blame Bezos' lack of focus for Amazon's shrinking profit margins.
Related links: Google would-be slayer Powerset is using EC2 to provide CPU power and storage space for its natural language technology • Amazon.com Q3 2006 Earnings Call TranscriptAmazon's High Multiple Isn't SustainableAnalysts Still Hate AmazonAmazon Bulls, Calm DownThe Most Important Quote From Google's Conference Call
Potentially impacted stocks and ETFs: Amazon.com (AMZN), Google (GOOG) • First Tr DJ Internet Index FD (NYSEARCA:FDN), Internet HOLDRS (NYSE:HHH)

Microsoft marketing to small Japan firms [Business Week]

Summary: Microsoft CEO Steve Ballmer announced today in Tokyo his firm will invest "tens of millions of dollars" to promote its software to small and medium-sized Japanese enterprises. Microsoft will also increase the number of its stores in Japan by four to total 11 by the end of 2007. Regarding the delay in its Vista operating system release, CEO Ballmer said, "We will never have a five-year gap between releases again."
Related links: Microsoft F1Q07 Earnings Call TranscriptMicrosoft Beats the Street with 11% Earnings GainIn Recognition of New "Mixed" Software Environment, Microsoft To Work With Novell's LinuxGoldman Sachs' Microsoft Analyst Rick Sherlund Leaves. Here's Why.Red Hat: Unlikely to Recover From ORCL/MSFT One-Two Punch -- Barron's
Potentially impacted stocks and ETFs: Microsoft (NASDAQ:MSFT), IBM (NYSE:IBM), Oracle (NASDAQ:ORCL), SAP AG (NYSE:SAP) • ETFs: iShares S&P Global Technology (NYSEARCA:IXN), Software HOLDRs (NYSE:SWH), Technology Select Sector SPDR (NYSEARCA:XLK), Vanguard Information Technology ETF (NYSEARCA:VGT)


HEARD ON THE STREET: Why Some Think Repsol Stock May Be Too Rich [Wall Street Journal]

Summary: Despite weak profitability and dwindling oil and gas reserves, the stock of Spanish-Argentine oil company Repsol YPF has risen 16% in eight weeks. The reason: many investors believe it is about to be bought. Repsol's shares now trade at about 10.3x estimated 2007 earnings, making its stock more expensive than its peer group at a 10.1 average ratio. The likelihood of a takeover has receded, though, with the recent purchase by Spanish builder Sacyr Vallehermoso SA of a 6% stake in the company. Sacyr has stated that it plans to acquire at least 20%. Savings bank La Caixa already holds 14% of the company, so the core shareholder stake could ultimately reach a proportion that could prevent a hostile takeover. As the probability of a takeover diminishes, so do the stock's prospects: Analysts at Citigroup, Merrill Lynch, Société Général and Cheuvreux have become bearish on the stock. BP PLC, Royal Dutch Shell PLC and ENI SpA have all recently denied that they are interested in acquiring the company. Repsol ADRs closed at $33.87, up $0.31, on Friday.
Related links: Repsol YPF denies comment on 'market rumour' it's seeking core shareholders [Forbes] • Sacyr says it will raise its stake in Repsol-YPF to 20 pct [Forbes] • La Caixa reiterates Repsol YPF stake 'strategic', no plans to sell [Forbes]
Potentially impacted stocks and ETFs: Repsol YPF SA (REP) • Europe 2001 HOLDRs (NASDAQ:EKH)

On a Roller Coaster, One Energy Firm Tries Hedging Bets [Wall Street Journal]

Summary: Chesapeake Energy is on a roll. So far in 2006, it has made $2.53 billion worth of gas sales and a profit of $1.53 billion. The secret of CHK's success? The financial hedge. Chesapeake sells gas futures contracts as a way of protecting its revenue stream from the volatility of the energy market, in general, and the natural gas market in particular. Chesapeake reaped $833 million from its gas hedging operations during the first 9 months of this year. The gas futures contract obligates the company to sell its natural gas product at a specific price or within a certain price range. So far, these bets have paid off for them. The hedging strategy has helped Aubrey McClendon, the company's CEO, pull the company chk chartout of the red since 1999, when the company had big losses due large investments in Louisiana gas wells that turned out to be duds. Since then, CHK stock has quadrupled in price. Other energy companies are not convinced of the hedging strategy- they find it too risky due to the many unpredictable influences on markets. Flush with cash, Chesapeake has been on the prowl, looking to acquire both smaller gas producers and more acreage of potential gas wells. Last year, Chesapeake acquired Columbia Natural Resources LLC, an energy firm based in Appalachia, for $2.2 billion. Last month it bought Dale Resources for $200 million. Analysts are cautious about highly acquisitive energy firms. If a company make the wrong bets, such firms could be left with worthless gas fields and debt, as had happened to Chesapeake in Louisiana.
Related links: Natural Gas is Running Out of Steam Chesapeake is a Natural Pick in Natural Gas • Trading Markets: Chesapeake Q3 Profit Soars
Potentially impacted stocks and ETFs: Stocks: Chesapeake (NYSE:CHK), BP plc (NYSE:BP), ExxonMobil (NYSE:XOM), Andarko Petroleum (NYSE:APC), ConocoPhillips (NYSE:COP) • ETFs: iShares Dow Jones US Oil & Gas Ex Index (NYSEARCA:IEO), PowerShares Dynamic Oil & Gas (NYSEARCA:PXJ), SPDR Oil & Gas Exploration & Production (NYSEARCA:XOP)


Luxury Vehicle Demand Seen Slowing [Reuters]

Summary: Sales of luxury vehicles, which have grown 20 percent since 2000, have fallen 4% this year, and many analysts associate this decline with the housing slowdown. AutoNation, the largest auto dealership in the country, saw a 37% drop in last quarter's earnings. Car dealers in California have been unable to sell cars over $50,000, including the BMW 7 Series and the Audi A8. "When California has a hiccup, the premium luxury segment does get hurt, " says Art Spinella, president of CNW Marketing Research. Sales of Cadillac DTS, BMW 5 Series, Merecedes-Benz E Class and Lexus GS 430, have fallen 12 percent thus far in 2006. Although Lexus and Mercedes reported an increase in total sales since last year, top executives admit that they are paying attention to the housing trend.
Related links: AutoNation to reduce orders [Detroit Free Press] • Group 1 sees need to cut Big Three orders [Reuters] • Car Dealer Earnings Roundup: Group 1, Sonic Automotive Beat Estimates, Adesa Guides To Low End of Range
Potentially impacted stocks and ETFs: Toyota (NYSE:TM), General Motors (NYSE:GM), Bayerische Motoren Werke AG (BMW), Autonation (NYSE:AN), Group 1 (NYSE:GPI)


Four Seasons Gets Bid [TheStreet.com]

Summary: Four Seasons Hotel Inc. received a $3B buyout bid from a group that includes controlling shareholder Isadore Sharp, Bill Gates, and Saudi Prince Alwaleed. The group proposes to pay $82/share, a 28% premium to Friday's closing price. CEO Sharp's holding company Triples would retain a 10% holding through a separate class of special voting shares; the other 90% would be split equally between Alwaleed's Kingdom Hotels and Gates' Cascade Investments. Sharp would remain as CEO and chairman. Sharp: "I am delighted, together with these exceptional investors, to have found what I believe is the best way to Four Seasons Chart 6 11 06preserve and expand the long-term strategy, vision and core values of Four Seasons. Having given this proposal very careful consideration, this transaction, with these investors, is the only one I am prepared to pursue."
Related links: Forbes is reporting that shares of Intercontinental Hotels Group plc are trading higher on the news.
Potentially impacted stocks and ETFs: Four Seasons Hotel Inc. (FS), Intercontinental Hotels Group plc (NYSE:IHG), Marriott International Inc. (NYSE:MAR), Starwood Hotels & Resorts Worldwide (NYSE:HOT), Orient-Express Hotels Ltd. (OEH)


Vertex May Beat Roche, Merck on Drug for Hepatitis C [Bloomberg]

Summary: Vertex may win the race with other major drug companies to produce the first treatment developed in ten years to treat Hepatitis C, the leading cause of liver cancer. A potent compound called telaprevir, which caused the Cambridge, Massachusetts-based company's stock to rise 18% after it was unveiled at a conference, is currently being tested on patients and Vertex is expected to seek approval from the FDA in 2008. If telaprevir is approved, it may be used with other competing drugs in a so-called "cocktail" of medicines, similar to the way AIDS is treated, and may generate $2 billion in sales by 2011. Discovered only 17 years ago, Hepatitis C affects 200 million people worldwide and is responsible for 10,000 deaths a year in the U.S. Telaprevir is expected to cut current treatment time in half. Other drug companies such as Roche, Novartis, Pfizer, Merck and Schering-Plough are also developing treatments for Hepatitis C.
Related links: Drug Discovery in Jeopardy?InterMune Plays "Let's Make a Deal" [Motley Fool] • Vertex Pharmaceuticals Q3 2006 Earnings Call Transcript
Potentially impacted stocks and ETFs: Vertex (NASDAQ:VRTX) • Competitors: Merck (NYSE:MRK), Pfizer (NYSE:PFE), Novartis (NYSE:NVS), Schering-Plough (SGP), Wyeth (WYE), ViroPharma Inc.(VPHM), Abbott Laboratories (NYSE:ABT), Idenix Pharmaceuticals Inc.(NASDAQ:IDIX), Bristol-Myers Squibb (NYSE:BMY), Gilead Sciences (NASDAQ:GILD)


Google's New Frontier: Print Ads [Business Week]

Summary: Internet search leader Google will soon launch an ambitious print advertising initiative, allowing advertisers to place bids on quarter-page ads in upwards of 50 major newspapers across the U.S. Called "Google Print Ads," the initiative pairs up the company's vast advertising base with the U.S.'s top newspapers, among them The New York Times, The Chicago Tribune, The Washington Post and The Boston Globe, effectively taking the place of the traditional ad agencies they worked with until now. The program has also attracted upwards of 100 advertisers. While Google will not profit at all off this trial print run, once Google Print Ads is released in full, the company begin earning profits off each ad it places. One reason advertisers are excited about Google Print Ads is Google's unique ability to provide ad measurement metrics. Traditional ad agencies can't provide customers with nearly the same sense of the effectiveness and return-on-investment they are getting from their ads as Google boasts it can. Asked why it chose to partner with Google, a potentially dangerous competitor, Denise Warren, chief advertising officer for The New York Times Media Group, cited Google's existing relationships with hundreds of thousands of advertisers as a major draw saying, "There is a scale you can tap into with this kind of system. That is very attractive."
Related links: Google to broker print ads in U.S. newspapers [Reuters] • Online Ad Growth Continues To Outpace Other Ad MediumsWhy Google Didn't Buy the New York TimesDeclining Print Ad Revenues Take Toll on Newspaper Earnings
Potentially impacted stocks and ETFs: Google (GOOG), New York Times (NYSE:NYT), Tribune Company (TRB), The Washington Post Co. (WPO), The McClatchy Company (NYSE:MNI), Gannett Co. (NYSE:GCI)


In Japan, Banks And Consumers Turn to Plastic [Wall Street Journal]

Summary: Japanese banks are aggressively marketing credit cards as their traditional corporate lending businesses slow. Japan is predominately a cash-based society, and revolving credit is viewed differently in Japan -- most consumers pay off balances quickly, meaning they pay little or no interest (typically balances paid within two months do not incur interest charges). Still, in the year ended March 31, consumers charged 24.3 trillion yen (~$206b), or +14% y-o-y, compared to 10% and 6.4% increases in the past two years. American Express says its Japanese business grew 20-25% last year. Mitsubishi UFJ Financial Group however, reports its consumer-finance business, which credit cards are a part of, only accounted for 7.8% of profits, compared to 17% at Bank of America. Mizuho Bank says although its number of cardholders is rising, profitability remains low. So, it's up to Japanese banks and U.S. credit card companies to entice more people to not only carry cards, but also to carry a balance. The popularity of online shopping is attributed to some of the increased use of credit in Japan.
Related links: Mitsubishi UFJ Ups H1 GuidanceMastercard's Net Income Increases 82%American Express Beats Estimates but Reports Lower EarningsMerrill Lynch Comments on Business in Japan and ChinaMitsubishi UFJ's Strategy Signals Larger Shift Underway in JapanBigger Dividend Payout on the Horizon at Mitsubishi UFJJapanese Mega-Banks Diversify Revenue Sources
Potentially impacted stocks and ETFs: Mitsubishi UFJ Financial Group (NYSE:MTU), Mastercard (MA), American Express (AXP), Citigroup (NYSE:C) • ETF: BLDRS Asia 50 ADR Index (NASDAQ:ADRA) -- Mitsubishi UFJ is the second largest holding at 11.11% as of 08/31

HEARD IN ASIA: A 'Buy' or 'Shrinking Violet'? [Wall Street Journal]

Summary: Shares of Nasdaq listed Chinese advertising company Focus Media Holding have been struggling of late, compared to the steady gains made by the Nasdaq Composite Index. Selling pressure is blamed on a planned 22.5% stake sell by CEO Jason Jiang. Another negative implication for Focus shares is Wal-Mart's recent announcement to acquire the largest hypermarket in China, Trust-Mart (a Focus client). FMCN-1yr-chart-110306 But some see an opportunity to buy on weakness ahead of its Q3 earnings release when it expects to announce revenue of $58-$60m and non-GAAP net income of $26-$27m. Both a Citi and Goldman Sachs analyst have published optimistic reports on Focus recently, the former rating it a "buy", and the latter giving it a target share price of $75. In its Q2 earnings release, it reported a 53% q-o-q jump in revenue to $50.6m, but a majority of the growth was from acquisitions, whereas its core business registered a 22% increase.
Related links: Focus Media Q2 2006 Earnings Conference Call Transcript • IRG: Focus Media subsidiary to jointly build China's first mobile phone B2B platformTargeting China’s Consumers: Focus Media and the Advertising Game • Focus Media: Focus Media CEO Enters Agreement to Pledge 2 Million ADSs, Focus Media Announces Secondary Offering of 2,459,345 ADSs, Focus Media Announces Follow-On Offering of 6,700,000 ADSs • Editor's note: Focus Media announces Q3 earnings November 20th.
Potentially impacted stocks and ETFs: Focus Media Holding (NASDAQ:FMCN), TOM Online (NASDAQ:TOMO)


Barron's articles likely to move stocks today, excerpted from Seeking Alpha's Barron's One-Page Summary

  • Barron's cover story discusses its semi-annual poll of institutional investors. Top sectors: Energy, financials, consumer cyclicals. Weak sectors: Defense, healthcare, consumer staples, tech. Favored stocks: General Electric Co. (NYSE:GE); also: Dell Inc. (NASDAQ:DELL), Genentech Inc. (Private:DNA), Johnson & Johnson (NYSE:JNJ). Most overvalued: Google Inc. (GOOG); also: General Motors Corp. (GM), Ford Motor Co. (NYSE:F)
  • Since 2002 A.S.V. Inc. (ASVI) has been riding the housing and construction boom with booming sales of its rubber-tracked mini-loaders. Now the cooling market is taking its toll; Tuesday it reported a 34% drop in earnings and lowered guidance. Shares have fallen from $30+ to $14.50. Rising inventories have hurt ASV: they jumped over 50% in 2005 and are still climbing. The company feels negative housing news is impacting dealer psychology. Barron's says the company's problems seem to go beyond a sluggish housing market, and some investors say $10 would be a true reflection of its prospects.
  • Oracle Corp. (ORCL) announced it was acquiring yet another software company -- Stellent Inc. (NASDAQ:STEL) for $440M. Their product: content-management software. The acquisition helps Oracle keep pace with International Business Machines Corp. (IBM). Oracle shares are up 45% this year -- due to its successful acquisition of Siebel Systems, PeopleSoft and J.D. Edwards -- leaving analysts positive about its most-recent venture despite its price tag.
  • Red Hat Inc. (RHAT) got the one-two blow after Oracle Corp. (ORCL) announced it was going after its maintenance business and Microsoft Corp. (MSFT) announced it was partnering with Novell in building an "intellectual property bridge" between Windows software and Linux. Red Hat shares are already down 15%. "The best case scenario might be that revenue doesn't deteriorate as quickly as some pessimists would expect..."
  • Potash Corp. of Saskatchewan Inc. (NYSE:POT) is the world's largest fertilizer company, producing 17% of the world's potash, and controlling 75% of worldwide excess capacity. It's up 65% this year on soaring agricultural commodity prices. New contracts with China, a shortage in Russia, increased Asian meat consumption, and the use of grains for fuel should continue to increase potash demand. Barron's calls Potash's prospects "peerless" given its monopoly over the world's potash production, and says that while "the shares could bounce around over short stretches... they're likely to top bullish price targets of 145 and keep climbing for the rest of the decade."
  • Evercore Partners Inc. (NYSE:EVR) has carved out a niche among "boutique" banks by focusing on M&A advisory to large corporations. It ranks #11 in U.S. advisory work despite having only 240 employees. But at $35 it's trading at 35x projected 2006 profits and 12x book value, astronomically beyond its competitors. 85% of its revenues are from M&A advisory, making it acutely exposed to a downturn in the current M&A bull cycle. Its share could easily fall into the 20s if the boom subsides, or the firm loses market share.

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U.S. Markets: Barron's Semi-Annual Big Money Survey
Long Idea: NovaDel Pharma: Promising New Technology Makes It a Buy
Short Idea: The Short Case On Frontline
Internet: AOL's Miller Surprised That Plan Is Working
Telecom: Selloff in Canada's BCE May Provide Opportunity
Hardware: Gaming Sector Headed for Hot Holiday Season, PCs Headed for Disappointment
Software: Red Hat: Unlikely to Recover From ORCL/MSFT One-Two Punch -- Barron's
Healthcare: Drug Discovery in Jeopardy?
Retail: Coldwater Creek Bucks The Weak Retail Trend
Consumer Electronics: Motorola's Home Media Hub Challenges TiVo
Biotech: NovaDel Pharma: Promising New Technology Makes It a Buy
Gold: NovaDel Pharma: Promising New Technology Makes It a Buy
Financial: Goldman Sachs' Microsoft Analyst Rick Sherlund Leaves. Here's Why.
Asia: Chinese Internet Stocks: NetEase at the 'Low Barbell' P/E End
ETFs: Most ETF Managers Aren't ETF Investors Themselves
Sound Money Tips: Weekend Round-Up: From Ballot Box to Heating Bill
Jim Cramer: Latest stock picks
Earnings Conference Call Transcripts: PDL BioPharmaRegent CommunicationsTHQTELUS

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