Play Again, Mr. Redstone? [New York Times]
Summary: According to analysts that follow Midway Games -- the video game software company best known for hits like "Mortal Kombat" and "Gauntlet" -- its stock is overvalued trading at 5x sales and with its ROIC less than its cost of capital. Not to mention, its owner, media mogul Sumner Redstone (his family controls 88% of shares outstanding and owns Viacom) bought up shares last year and subsequently seems to have timed a large share sale to coincide with a multi-year peak at $22.41/share in December. Since then, Midway bottomed at $6.06 in June and now trades at $8.53. CEO David Zucker hopes to leverage Viacom by promoting games on MTV. It remains to be seen whether Midway can turn things around as the next generation of video game consoles just recently launched. The firm has announced its highest sales guidance since 1999 and a return to profitability after two years in the red.
Related links: Commentary: Video Game Stocks: Bear Stearns Cautious On Group • Gaming Sector Headed for Hot Holiday Season • GameStop Just Getting Started, Reports Strong Q3 • Electronic Arts Surprises Street, Scores Big with EA Sports.
Potentially impacted stocks and ETFs: Midway Games (MWY) • Competitors: Electronic Arts (ERTS), Activision (ATVI), Konami (KNM), Take Two (TTWO), THQ (THQI)
Summary: Despite announcing improved H1 results, Sanyo brought more bad news to its investors as it said a previously projected full-year profit of ¥20 billion ($172m) would instead be a loss of ¥50b ($430m) due to further restructuring costs. It cut its sales estimate by 8% to ¥2.2t ($19b). Sanyo also cited weakness in two of its four core businesses: digital cameras and mobile phones, but denied a report of a spin-off of the latter. This will be its third consecutive year in the red, with cumulative losses totaling $3.7b. After receiving a critical cash infusion of ¥300b ($2.6b) in Feb. from Goldman Sachs and two Japanese banks, its shares have tumbled 40%. The three received preferred shares convertible at ¥70/share and are seen stepping up pressure since they control a majority of board seats. Bloomberg reports Sanyo's shares have fallen 70% in the past five years, compared to a 57% gain for the Nikkei 225. Its ordinary shares dropped another 6% today to close at ¥170, a 31-year low.
Related links: Sanyo mid-term financial results. Media coverage: Bloomberg and WSJ. Commentary: Update on Sanyo's Forthcoming Delisting • Sony's Battery Production Capacity Strained, Sanyo to Benefit • Sanyo's Shareholders Approve $2.6b Cash Infusion.
Potentially impacted stocks and ETFs: Sanyo Electric Co ADR (OTC:SANYY), Goldman Sachs (GS)
Murdoch Makes Gains in Italian Media Market [New York Times]
Summary: Former Italian Prime Minister Silvio Berlusconi (pictured) is at risk of seeing his dominant position in Italian media ownership threatened. While Berlusconi's media company, Fininvest, continues to dominate the Italian media scene with holdings that include the three largest private television stations, newspapers, a publishing house and a film production company, a proposed new media law favors Rupert Murdoch's News Corp., owner of Sky Italia, Italy’s sole satellite TV provider. The law will put a 45% ceiling on advertising for any single broadcaster.
Potentially impacted stocks and ETFs: News Corp. (NWS).
Gap's Crucial Christmas [Wall Street Journal]
Summary: Two years into its turnaround, Gap Inc. is still struggling. YOY net income hasn't risen since 2Q05. Monthly same store sales have increased only three times in the last two years. Despite a new AIDS charity ad campaign and a high end shoe website, Gap's CEO Paul Pressler has yet to produce significant results for the company. Banana Republic is the one positive on the balance sheet; the store increased its same-store sales every month over the last quarter in addition to maintaining healthy profit margins. Analysts consider this a make-or-break holiday season for Gap and its CEO. An executive shake-up might be necessary if this turns out to be another lackluster Christmas. The company might also be a buyout candidate. Gap shares hit a 52-week high of $21.09 on Oct. 30. They closed on Friday at $19.30, a decrease of 8%.
Related links: Media coverage: Reuters . Commentary: LBO Fever • Gap's Employee Productivity Lags Behind Its Peers • Gap Sales Slide for 9th Straight Quarter. Conference call transcripts:Gap Q3 2006 .
Potentially impacted stocks and ETFs: Gap Inc. (GPS) • Competitors: Wal-Mart Stores Inc. (WMT), Hot Topic Inc. (HOTT), Abercrombie & Fitch Co. (ANF), American Eagle Outfitters Inc. (AEOS), Pacific Sunwear of California Inc. (PSUN) • ETFs: PowerShares Dynamic Retail (PMR), ST SPDR RETAIL ETF (XRT), iShares Dow Jones US Consumer Goods ETF (IYK)
Summary: U.S. consumers spent nearly 20% more during this Thanksgiving weekend than during last years, shelling out $360 a piece. Concerns remain about the heavy bargains many stores were offering and how they would affect overall margins during the holiday season. According to Seattle-based money manager Patricia Edwards, "It's almost this mentality of `Don't worry if you're losing money on every transaction, because you'll make it up on volume.'" Online spending increased 42% on Black Friday according to Comscore Networks; 18% of shoppers bought gift cards, also an increase over last year. Wal-Mart reported a 0.1% decline in November same-store sales, its worst performance in a decade. In addition, its website encountered intermittent problems throughout Black Friday due to an excess of traffic.
Related links: Media coverage: WSJ. Commentary: Retail By the Numbers • Will Consumer Woes Kill The Pre-Thanksgiving Rally? • Amazon Stats: iPod Continues To Dominate MP3 Sales.
Potentially impacted stocks and ETFs: Wal-Mart (WMT), Target (TGT), Federated Department Stores (FD), J.C. Penney (JCP), Saks Incorporated (SKS), Kohl's Corporation (KSS), Nordstrom, Inc. (JWN), Sears Holdings Corporation (SHLD), The TJX Companies, Inc. (TJX) • ETFs: Retail HOLDRS ETF (RTH)
Summary: Wal-Mart closed a deal with the Indian Bharti Enterprises Ltd. to open retail stores in India beginning in 2007, beating out the British Tesco Plc. Each company will invest $100 million at first; subsequent investments could reach $1.46 billion. The stores will be owned by Bharti Enterprises using the Wal-Mart franchise. The Indian retail market is currently valued at $300 billion. However, small local retailers account for 97% of the market. Analysts forecast market growth of $427 billion in 2010 and $637 billion in 2015. If foreign companies want to reach the Indian markets, government regulations require them to partner with a local business. Shares of Bharti Airtel Ltd., one of the company's subsidiaries, rose 2.6% after the deal was announced.
Related links: Media coverage: MarketWatch, Forbes, Times of India . Commentary: When Goliath Stumbles • Retail Discounters: Hope Their Exotic Investments Excel. Conference call transcripts: Wal-Mart F3Q07.
Potentially impacted stocks and ETFs: Wal-Mart (WMT). Competitors: Target (TGT), Walgreen (WAG), Costco (COST) • ETFs: Retail HOLDRs (RTH), Vanguard Consumer Staples ETF (VDC), Vanguard Dividend Appreciation ETF (VIG), Market 2000 HOLDRs (MKH)
Putnam May Get Impressive Price, Despite Troubles [Wall Street Journal]
Summary: Marsh & Mclennan expects high bids from companies interested in purchasing Putnam Investments, its mutual-fund and investment-management unit, in spite of recent difficulties. Last week, Amvescap PLC of the U.K., Unicredito Italiano SpA of Italy, and Power Corp. of Canada were expected to bid on Putnam, and the decision may require several weeks of deliberation. Putnam was investigated in 2003 for problematic trading, and in spite of the fact that the company has resolved most of the allegations, investors have been taking money out of the fund; assets under management, once $251 billion reached $187 billion this past October. However, Putnam may well bring in a premium of over 2%, the standard amount for asset managers. C. Meyrick Payne, senior partner with Management Practice Inc., predicts that Putnam may reach an "upper limit" of about 6%, while other analysts make more modest forecasts of around $4 billion.
Related links: Media coverage: Marketwatch • TheStreet.com • Marsh & Mclennan Financial Statements
Potentially impacted stocks and ETFs: Marsh & Mclennan (MMC) • Competitors: American International Group (AIG), Aon Corp. (AOC).
HEARD ON THE STREET: Coated Stents Deliver Heartburn [Wall Street Journal]
Summary: While many medical device manufacturers have recently invested heavily in a special kind of drug-coated stent that is supposed to keep diseased arteries from closing back up, many on Wall Street believed that it is the stent industry which is in greatest need of repair. According to medical-products analyst at KeyBanc Capital Markets Robert Goldman, "The growth prospects for drug-eluting stents are poor, certainly in the immediate and near term... [with] safety concerns are exacerbating the problems and making the prospects for the market all the worse." The magnitude of the market - $5.4 billion in annual sales - has led companies such as Johnson & Johnson, Boston Scientific and Abbott Laboratories to place big bets on drug-coated stents, thus far to uneven returns.
Related links: Commentary: Heartening Test Results May Pump ICD Makers • Boston Scientific Comes Clean on Stent Risk.
Potentially impacted stocks and ETFs: Johnson & Johnson (JNJ), Boston Scientific (BSX), Abbott Laboratories (ABT) • ETFs: iShares Dow Jones US Pharmaceutical Indx (IHE), iShares Dow Jones US Healthcare (IYH), Pharmaceutical HOLDRS (PPH)
Summary: In spite of reporting a 35% decline third quarter profit due to expenses incurred by the acquisition of Schering AG, Bayer managed to beat analysts' expectations and raised its forecast. The leading German drug company reported a net income of 320 million euros, or 42 cents a share which exceeded estimates of 195 million euro, but was 35% lower than the previous year, a decline attributed to the 17 billion euro takeover. Bayer purchased fellow German drugmaker to deal with healthcare reforms worldwide which involve cutting costs and promoting generic drugs. Bayer's most popular drugs include Betaferon for multiple sclerosis and Yasmin birth control pills, both Schering products, which contributed to Bayer's 26% sales increase. The company is promoting Nexavar, a cancer drug which cuts off a tumor's blood supply and which faces fierce competition from Pfizer's Sutent. Shares of Bayer were up 1 euro (2.6%) to 40 euros in Frankfurt this morning.
Related links: Media coverage: Associated Press
Potentially impacted stocks and ETFs: Bayer AP (BAY), Schering AG (SHR) • Competitors: Pfizer (PFE), BASF AG (BF), Dow Chemical (DOW), Johnson & Johnson (JNJ), Amgen (AMGN)
Summary: Economists at Goldman Sachs say Europe is leading Japan and the U.S. in trade with BRIC (Brazil, Russia, India and China) markets. Also, Merrill Lynch's monthly survey of institutional investors shows Europe has been the most popular investment target for the past six months. These findings however, contrast with a not insignificant portion of European labor and politicians' sentiment -- globalization is often viewed as a threat, inducing protectionist thinking. Still, European equities have outperformed U.S. and Japanese rivals with the Bloomberg European 500 index gaining 15% year-to-date, versus 12% for the S&P500 and -2% for the Nikkei 225. Amidst the global M&A boom, Europe has made up nearly 50% of the deals.
Related links: Commentary: Overbought/Oversold Global ETFs • Understanding Single-Country ETFs • Differences Between Fed and ECB Rate Approach.
Potentially impacted stocks and ETFs: Companies mentioned in the article: Carrefour, SAP (SAP), Siemens (SI), ThyssenKrupp, Nokia (NOK), Gucci, Mariella Burani Fashion Group, Alcatel (ALA) • ETFs: iShares S&P Europe 350 Index (IEV), Vanguard European Stock (VGK), BLDRS Europe 100 ADR Index (ADRU), streetTRACKS Dow Jones Euro STOXX 50 (FEZ), Europe 2001 HOLDRs (EKH), WisdomTree Europe High-Yielding Equity (DEW), WisdomTree Europe SmallCap Dividend (DFE), WisdomTree Europe Total Dividend (DEB) • CEF: European Equity Fund (EEA)
ACTIONABLE BARRON'S CALLS
- The medical community is puzzled by Wall Street's narrow focus on Vertex Pharmaceuticals Inc. (VRTX) in the race to bring improved hepatitis C treatments to the market. Even if its VX-950 is the first new treatment to get approval, it will be joined by the drugs of other companies such as Idenix Pharmaceuticals Inc. (IDIX), Achillion Pharmaceuticals Inc. (ACHN), InterMune Inc. (ITMN), ViroPharma Inc. (VPHM), and XTL Biopharmaceuticals Ltd. (XTLB) in what will likely become a "cocktail" of drugs which should float all boats higher. Barron's thinks VRTX shares, currently at $45 with a market cap of $5b are probably worth closer to $30.
- Barron's interviews Will Chester, Chief Portfolio Manager of the Westcore Select Fund, who's big on mid-caps, specifically: Constellation Brands Inc. (STZ), airlines Continental Airlines Corp. (CAL) and AMR Corp. (AMR), video games makers Electronic Arts Inc. (ERTS) and GameStop Corp. (GME), and healthcare stocks DaVita Inc. (DVA), Genesis Healthcare Corp. (GHCI) and Laboratory Corp. of America Holdings (LH), who stand to benefit from government policy changes. Chester's selling T. Rowe Price Group Inc. (TROW), seeing limited potential after its current run-up.
- Andrew Bary hypothesizes who comes next in the LBO binge. Pundits say a $50m buyout is possible, making all but the top 60 publicly-traded companies potential targets. Likely targets: Big companies Gap Inc. (GPS), Micron Technology Inc. (MU), Bed Bath & Beyond Inc. (BBBY), Nike Inc. (NKE), Liz Claiborne Inc. (LIZ), EMC Corp. (EMC) and Costco Wholesale Corp. (COST). Energy targets: Apache Corp. (APA), Valero Energy Corp. (VLO), Hess Corp. (HES), and Transocean Inc. (RIG). Consumer stocks: Avon Products Inc. (AVP), Kimberly-Clark Corp. (KMB) and Estee Lauder Companies Inc. (EL). Homebuilders: KB Home (KBH), DR Horton Inc. (DHI), Lennar Corp. (LEN), Toll Brothers Inc. (TOL), MDC Holdings Inc. (MDC) and Hovnanian Enterprises Inc. (HOV). Semi equipment makers: Linear Technology Corp. (LLTC), Maxim Integrated Products Inc. (MXIM), Analog Devices Inc. (ADI), Altera Corp. (ALTR) and Xilinx Inc. (XLNX).
- In a Follow-up column, Barron's backtracks on its bearishness on Bank of America Corp. (BAC), admitting it was wrong after BAC has outperformed the sector and the broader market. It likes BAC's recent U.S. Trust acquisition that strengthens its private banking efforts, and it's 4.10% yield "ought to keep shareholders happy as they wait for the latest purchase to pay off."
- Avon Products Inc. (AVP) shares have climbed 16% on buyout rumors despite mediocre numbers. Barron's finds it difficult to see how a buyer could earn an adequate return on investment since AVP already trades at 11.6x Ebitda, just below the 12x standard that has been set by other similar purchases. And proposed Federal Trade Commission rules that target multilevel marketers could hurt Avon's bottom line.
- New Snap-on Inc. (SNA) CEO Jack Michaels has aggressively boosted the company's bottom line, and shares are up 55% since he took over in April 2005. Its recent $500m acquisition of ProQuest Business Solutions, whose tracking software for car companies and dealers, fits well with Snap-on's diagnostic- and information-services group. Its high-margin business could add 10-20 cents to earnings. Margins (7.7%) still have plenty of upside before hitting Michael's 10% goal. "It's easy to envision the company earning north of $3 a share, and its stock climbing to the low- to mid-50s in the next year or so."
- Mellon Financial Corp. (MEL) is battling with ASM International (ASMI), the former demanding the latter spin-off its weak chip-making equipment operations, and the latter loathe to squander its efforts to bring its chip division to profitability. The two sides face off today in Holland. Regardless of the outcome, the main winners will be shareholders who will either benefit from the chip-equipment segment's newcome profitability (moving shares perhaps 10-15% over the next year), or from a buyout premium.
- The two players in China's massive wireless telecom industry are China Mobile Limited (CHL) and China Unicom Ltd. (CHU). CHL stands to make a killing from the entry of cell communications into rural areas, which CHU can't afford to go after due to its politically enforced burden of providing dual networks. CHU is a play on how its networks will be divvied up -- either a complete sellout to fixed-line companies China Telecom Corp. Ltd. (CHA) and China Netcom Group Corp. (CN), or selling one network and concentrating on developing the other. Barron's likes both plays: "The dominant provider is still a strong long-term prospect, though its weaker rival could be worth a side bet."
- Despite being wrongly bearish on Google Inc. (GOOG) at $360, at $500+ Barron's is more bearish than ever before. Earnings growth estimates of 33% for 2007 don't sound so great in comparison with 2006 growth of 81%, GOOG is losing search share to rivals Yahoo! Inc. (YHOO) and Ask.com (IACI), and ad prices are falling across the industry. With its massive expense increases (R&D +133%, sales and marketing +96%, admin +119%, capital expenditures +129%) Google must continue to grow rapidly. Sure it could have a great Q4, "but at some point investors will focus on the company's slowing growth rate and bloated expenses. And when that happens, look out below."
- Shares of Yum! Brands Inc. (YUM) are up 43% since August mainly on investors' love-affair with its success in China (22% growth there vs 10% worldwide and 5% in U.S.). But having already touted its China growth, and with its Pizza Hut turnaround still far off, Yum! may find itself lacking anything with which to wow the Street. Given the poor odds for a short-term surge to the upside, and how expensive YUM options are, GS strategist John Marshall suggests selling out-of-the-money calls against the stock to pad yield.
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Retail: Retail By the Numbers
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Gold: Brazil's CSN Attempting to Steal Corus from Tata Steel
Energy: Q-Cells Invests in CIGS Thin-Film Technology
Financial: Bank of America, Citibank Takeover Targets On Paper Only
Asia: Baidu: Raising Questions on Valuation and Search Ads
ETFs: 10-Year Compounded Return of Key Asset Categories
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