Housing Slump Slows GDP to 2% Crawl
The U.S. economy expanded by a paltry 2% in Q3, weighed down by the worst decline in home construction since 1991. The GDP figure fell short of economists' expectations of 2.2% growth. Consumer spending grew 2.8% against forecasts of 2.9% while the personal consumption expenditures price index, another spending gauge, was flat with last month at 2.4% and down from Q2's 4%. The GDP price index rose at a 1.9% annual rate versus 1.8% in November and 3.3% in Q2. Last week, the Fed indicated that it has a relatively soft outlook for the economy but considers inflation to be a greater risk than slow growth. The price index for personal-consumption expenditures excluding food and energy, the Fed's preferred inflation gauge, rose 2.2% in Q3, down from 2.7% in Q2. The mid-Atlantic business activity index dropped to -4.3% in December from 5.1% in November, the third month in four it has been negative. Stock prices slipped on the indicators, with the DJIA dropping 42.62 points to end at 12,421.25 and the Nasdaq losing 11.76 to close at 2,415.85. Bond prices perked up in anticipation that a slower economy will mean lower interest rates.
• Sources: Bloomberg, Reuters, MarketWatch, Wall Street Journal (I, II)
• Related commentary: Interpreting Economic Data Points, Inflation Unleashed?, Fed Leaves Short-Term Rates at 5.25%
• Potentially impacted ETFs: Total Stock Market VIPERs (NYSEARCA:VTI), S&P 500 Index (NYSEARCA:SPY) • NASDAQ 100 Trust Shares ETF (QQQQ) • iShares Russell 2000 Index ETF (NYSEARCA:IWM) • iShares Lehman 1-3 Year Treasury Bond ETF (NYSEARCA:SHY) • iShares Lehman 7-10 Yr Treasury Bond ETF (NYSEARCA:IEF) • iShares Lehman 20+ Year Treasury Bond ETF (NYSEARCA:TLT)
TECHNOLOGY AND INTERNET
Research In Motion's Pearl Drives Earnings Upside; Stock Up 5.7%
Research In Motion announced third quarter earnings excluding options costs of $0.95 per share, beating the analyst consensus of $0.92. Revenue rose 49% to $835 million, beating the consensus of $808 million. Guidance for Q4 was for EPS of $0.92-0.99 and revenue of $900 million, ahead of the current consensus of $0.95 and $848 million respectively. The stock rose 5.8% in late trading after the announcement. RIM added 875,000 new subscriber accounts during the quarter, driving its subscriber base to about 7 million. RIM attributed the strength in its results to the introduction in September of a multimedia phone with a music player and camera aimed at consumers, the BlackBerry Pearl, which was adopted by Cingular, Rogers, T-Mobile and over 20 European carriers. On its conference call, RIM said it was "targeting new product introductions late in Q4". But competition for mobile email devices is intensifying: Samsung recently introduced the BlackJack in November and Nokia the E61 in April. Motorola acquired mobile email software developer Good Technology in November, Nokia acquired Intellisync in February, and Hewlett-Packard announced Wednesday that it will acquire mobile device software vendor Bitfone Corp. Nokia, Motorola and Samsung report earnings next month.
• Sources: Full Conference Call Transcript, RIM Press Release, Blooomberg, WSJ.
• Related commentary: Palm Earnings Drop on Treo Delay, Onslaught of Competition, Can the BlackBerry Crack Japan?
• Potentially impacted stocks and ETFs: Research In Motion (RIMM) Competitors: Palm (PALM), Nokia (NYSE:NOK), Motorola (MOT), Hewlett-Packard (NYSE:HPQ). ETFs: Technology Select Sector SPDR (NYSEARCA:XLK), iShares Goldman Sachs Technology Index (NYSEARCA:IGM), PowerShares Dynamic Telecomm and Wireless Portfolio (PTE).
Micron's Net Up 200%, Beats Street, Sales Miss, But DRAM Demand Strong
Micron turned in a strong fiscal Q1 (ending Nov. 30), with net income soaring 200% to $192m, or $0.25/share, beating analyst estimates surveyed by Thomson and Bloomberg by $0.05/share and $0.06/share, respectively. Revenue was up 16% on the quarter to $1.58b, led by high demand for DRAM chips, but missed analyst estimates of between $1.64b-$1.65b. Profit margins however, improved to 31%, from 24% in Q4 and 23% y/y, due to a 15% price increase of DRAM in the quarter. Management did not give guidance on the current quarter, but Micron's VP of Worldwide Sales commented in its post-earnings conference call that, "We are on the front edge of feeling the Vista impact and this will layer out throughout 2007." Micron's shares gained 0.15% yesterday closing at $13.49 and traded as high as $14.20 in extended trading on volume of about 1.7m shares. First Albany Capital upgraded Micron to "buy" from "neutral," raising its Q2 EPS to $0.11, from $0.04, while lowering its sales estimate to $1.60b, from $1.69b. First Albany likes Micron's valuation, saying H1'07 weakness was priced in, but a strong H2'07 is not.
• Sources: Press release and presentation [pdf], Bloomberg, Reuters, TheStreet.com
• Related commentary: Micron Up On Strong Earnings, Micron Facing A Tough Near Term Picture, Five Stocks For The Microsoft Vista Cycle, Intel and Micron to Expand NAND Flash JV to Singapore. Conference call transcripts: Micron Technology F4Q06 (Qtr End 8/31/06)
• Potentially impacted stocks and ETFs: Micron Technology (NASDAQ:MU). Competitors: OmniVision Technologies (NASDAQ:OVTI), Qimonda AG (QI), SanDisk (SNDK), Sony (NYSE:SNE), STMicroelectronics NV (NYSE:STM), Toshiba (OTCPK:TOSBF). ETFs: iShares Goldman Sachs Semiconductor (IGW), Semiconductor HOLDRs (NYSEARCA:SMH), SPDR Semiconductor (NYSEARCA:XSD)
Red Hat Beats Guidance, Estimates; Stock Up 13%
Red Hat stock jumped over 13% after hours following a strong 3Q earnings report: EPS excluding options expenses were $0.14/share ($29.6 million), beating analyst estimates of $0.12/share; revenues were $105.8 million, while analysts expected $104.2 million. Actual earnings for the Linux distributor were $14.6 million, down 37% y/y due to high options and tax expenses. Subscription revenue came in at $88.9 million, up 48% year over year, and the company added 12,000 new subscribers this quarter. CFO Charlie Peters gave Q4 guidance for "revenue in the range of $112 million to $113 million" and "non-GAAP adjusted earnings per share assuming a 5% cash tax rate of between $0.14 and $0.15 per share... Q4 GAAP earnings of approximately $0.07 to $0.08 per share." In the conference call, CEO Matthew Szulik suggested that the two recent competitive threats -- Oracle's entry to the Linux market and the Microsoft/Novell Linux partnership -- will actually help Red Hat: "we are optimistic that our long-term competitive positioning is being enhanced by the market participation of larger entrants... The continued loyalty shown by our customer base, particularly during a period of increased competitive activity, was resonant in Q3." Bookings by geography: 60% from Americas, 24% from EMEA, 16% from Asia-Pacific. Regarding the JBoss acquisition, Szulik said "We're beginning to see the synergies that we had hoped to see."
• Sources: Full Red Hat F3Q07 Conference Call Transcript, press release, Red Herring, CNET News, Associated Press, InfoWorld, Reuters
• Related commentary: Customer Backlash Against Oracle's Buggy Linux Product?, Survey Finds Red Hat Customers Willing To Stay With Company if it Cuts Prices, Oracle Taking On Red Hat in Linux Market, Novell: We Didn't Sell Our Soul To Microsoft, Red Hat Switching From Nasdaq Listing to NYSE
• Potentially impacted stocks and ETFs: Red Hat (NYSE:RHT) Competitors: Novell (NASDAQ:NOVL), Oracle (NASDAQ:ORCL), VA Software (LNUX)
ENERGY AND MATERIALS
Study: Washington's Oil Incentives Offer Little in Return
After repeated requests the Interior Department provided The New York Times with a copy of its study on the effects of governmental incentives to oil drillers; the study suggests the government is getting very little for its money. Current inducements could allow drilling companies in the Gulf of Mexico to dodge tens of billions of dollars in royalties for oil and gas produced in areas that belong to American taxpayers. Robert Speir, an energy analyst who worked on the report: “If they took that money, they could buy a whole lot more oil with it on the open market.” Analysts who compare worldwide oil policies said the U.S. was exceptionally generous, demanding a small share of revenues from companies that drill on public lands and in public waters, and has even sweetened some of its incentives in recent years, while many other countries demanded a bigger share of revenues. In principle companies are supposed to pay the full rate when oil prices climb above about $34 a barrel, but companies that signed leases in 1998 and 1999 enjoy an unintended loophole that entitles them to royalty-free oil and gas regardless of how high prices climb. Last week the Bush administration persuaded five companies to give up the loophole, but another 50-odd companies have thus far refused. Pedro Van Meurs, president of Van Meurs Associates: “The U.S. system worked fine when oil was $20 a barrel, but it wasn’t changed when prices went up." The report predicts that current incentives would lead to only 1.1% more reserves than without them. Analysts aren't surprised: The royalty incentives are small money when compared with the money at stake in changes of market prices. The cost to taxpayers? About $48 billion less in royalty payments from 2003-2042.
• Sources: New York Times
• Related commentary: Government Folds in Royalties Battle with Chevron, Division Among Oil Companies: Cling to Outdated Contracts or Share Profits?
• Potentially impacted stocks and ETFs: United States Oil Fund ETF (NYSEARCA:USO), Oil Service HOLDRs ETF (NYSEARCA:OIH), ExxonMobil Corp. (NYSE:XOM), ConocoPhillips (NYSE:COP), Chevron Corp. (NYSE:CVX), Hess Corp. (NYSE:HES), Marathon Oil Corp. (NYSE:MRO), Anadarko Petroleum Corp. (NYSE:APC), EnCana Corp. (NYSE:ECA), iShares Dow Jones US Oil & Gas Ex Index (NYSEARCA:IEO)
Sakhalin-2 Ownership Dilemma Resolved, Gazprom Takes Control
Russia's Gazprom and the three original Sakhalin-2 shareholders (Shell, Mitsui and Mitsubishi) have reached an agreement to make Gazprom the leading the shareholder with a 50% stake plus one share for $7.45b in cash, as the three each reduced their stake by 50% to 27.5%, 12.5% and 10%, respectively. Shares of Shell were initially up about 1% on the news, but went on to close down 0.06%. A Man Securities analyst commented, "It's slightly better than expected for Shell. Firstly, they're keeping 27.5 percent rather than the rumoured 25 percent. They seem to be receiving cash upfront which is positive and the purchase price is a little better than expected." What's more important now, is concern over Shell's reserve replacement ratios and production targets. Shell's CEO commented, "Of course there's a short term impact on the reserves, the reserve bookings themselves, but when I look at the future of the company, we have really good opportunities." All stakeholders said they are committed to exporting liquefied natural gas from Sakhalin-2 with the first shipment scheduled for summer '08. Gazprom also announced its half-year results yesterday, reporting a more than doubling of net profit to $12.23b and a 78% increase in revenue to $41.5b.
• Sources: Press release [I, II], Bloomberg, CBS/AP, Reuters, Gazprom earnings release
• Related commentary: Japan to Partially Cash Out of Sakhalin-2, Exxon's Sakhalin-1 Reaches Preliminary Deal with China Oil Giant, Royal Dutch Shell Resolves Environmental Snag at Sakhalin-2, Gazprom Ends Talks With West, Highlighting Rift
• Potentially impacted stocks and ETFs: Royal Dutch Shell (NYSE:RDS.A), Mitsui & Co (OTCPK:MITSY), Mitsubishi (Tokyo: 8058), Gazprom (OTCPK:OGZPY)
General Mills Posts 4% Profit Rise
General Mills, producer of Cheerios cereal, Green Giant frozen vegetables and Progresso soup, has posted a 4% rise in fiscal Q2 profit and has raised its fiscal full-year EPS forecast to $3.09-3.13 from $3.03-3.08.The solid showing was thanks to higher sales of Fruity Cheerios, snacks and reduced-sugar yogurt. Q2 net income rose to $385 million, or $1.08/share, from $370 million, or $0.97, a year earlier. The Street was expecting EPS of $1.03. Revenue grew 5.3% to $3.47 billion. Overseas revenue swelled 15%, ahead of domestic revenue, which rose 3%. The company has indicated that it expects sales in H2 to slow from H1's growth rate of 6%. Expenses will be higher because of rising commodity costs and marketing for new products.
• Sources: Wall Street Journal, Bloomberg
• Related commentary: General Mills, ConAgra Report Solid 2Qs (NYSE:AP)
• Potentially impacted stocks and ETFs: General Mills Inc. (NYSE:GIS) Competitors: Group Danone (DA), Kellogg Co. (NYSE:K), Kraft Foods Inc. (KFT) ETFs: iShares KLD Select Social Index (NYSEARCA:KLD), iShares Dow Jones US Consumer Goods Sector Index Fund (NYSEARCA:IYK)
ConAgra Shares Jump on Solid Beat and Raise Quarter
ConAgra Foods reported a beat and raise quarter before yesterday's market open, sending shares higher by $0.49, or 1.82%, to $27.34. Following the market close, shares gained another $0.56. After one-time profits, ConAgra reported earnings of $0.40/share vs. Thomson Financial consensus estimates of $0.33/share - good for a 44% profit increase over the year-earlier quarter. Revenue also came in above the consensus of $3.02 billion at a healthy $3.09 billion - a three percent increase over the previous year quarter. The company expects FY 2007 earnings to come in at between $1.28 and $1.33 per share; consensus was for between $1.22 (Bloomberg) and $1.25 (Thomson Financial). ConAgra's success was largely the result of a combination of effective cost cutting and an improved pricing structure.
• Sources: Press Release, Bloomberg, Reuters, Business Week, TheStreet
• Related commentary: ConAgra Looks Tasty For Profit-Hungry Investors, Tasty Reading in ConAgra's Late Summer Proxy
• Potentially impacted stocks and ETFs: ConAgra Foods (NYSE:CAG). Competitors: Hormel Foods Corporation (NYSE:HRL), Del Monte Foods Company (DLM), Kraft Foods (KFT), General Mills (GIS), Tyson Foods (NYSE:TSN). ETFs: PowerShares Dynamic Mid Cap Value (PWP)
Toyota To Become World's Largest Automaker in '07; Places Priority on Quality
Toyota announced a 4% production target increase in 2007 to 9.42m vehicles, leading many to believe it will topple General Motors to become the world's largest auto manufacturer within the next calendar year. It is estimated GM will make 9.2m autos this year. GM has not provided a 2007 target, but it has been curtailing production as part of broader cost-cutting measures. Toyota said it expects global sales to increase 6% next year to 9.34m units, led by overseas sales seen rising 8%, versus only 1% growth in its home market. Toyota's President Katsuaki Watanabe was modest about Toyota's growth commenting, "That's just what the results may be." Adding, "There will be no growth without quality." Toyota's stock continues to climb, trading at all-time high levels, gaining 1.56% in Tokyo to close at ¥7,800 ($131.76 ADR equiv. at ¥118.4/$1).
• Sources: Press release and year-end press conference video, Newsday-AP
• Related commentary: Ford's Internal Projections: Toyota Will Be #2 Within Months, Toyota: A Lesser Known Stock?, Toyota Versus GM/Ford: Classic Hedged Pair Trade, Japan Auto Exports Remain Robust
• Potentially impacted stocks and ETFs: Toyota (NYSE:TM). Competitors: General Motors (NYSE:GM), Ford (NYSE:F), DaimlerChrysler (DCX), Honda (NYSE:HMC), Nissan (OTCPK:NSANY). ETFs: iShares MSCI Japan Index (NYSEARCA:EWJ), iShares S&P/TOPIX 150 (ITF), BLDRS Asia 50 ADR Index (NASDAQ:ADRA), BLDRS Developed Markets 100 ADR Index (NASDAQ:ADRD)
AEROSPACE AND DEFENSE
War of Words Between Delta and US Airways Intensifies
Despite Delta's insistence that it will emerge from bankruptcy as a stand-alone company, US Airways continues to move forward with its hostile bid for the company, applying pressure in the form of conference calls, media sound bytes and appeals to Delta's creditors. On a conference call yesterday, US Airways CEO Doug Parker called Delta's self-valuation of as much as $12 billion "out of whack." Parker sites different accounting methods for the discrepancy in valuation - US Airways insists its rival is worth no more than $6.9 billion despite offering to pay $8.4 billion in a hostile takeover bid. Delta responded with a statement of its own: "Nothing we heard today explains away the fact that the US Airways proposal provides inferior value to our stand-alone plan, is structurally flawed, and raises overwhelming regulatory and labor issues that." US Airways continues to insist regulatory issues are manageable and adds its takeover can save Delta nearly $1.65 billion annually. Delta shares closed up 5.74% in trading yesterday.
• Sources: US Airways Conference Call on Delta Merger [audio - Jazz filler followed by conference call at 36:45 mark]. Reuters, AP/MSN, Wall Street Journal, TheStreet
• Related commentary: Delta Air Lines + Scripophily = $1.38 per share, Delta Will Go To $0, Merger Mania Grips the Airlines, Delta Tries to Trump US Airways Buyout Through Bankruptcy, US Airways Surprises Delta With Hostile Bid
• Potentially impacted stocks and ETFs: US Airways (LCC), Delta Air Lines (DALRQ.PK). Competitors: AMR Corp. (AMR), Continental Airlines Corp. (NYSE:CAL), Southwest Airlines Co. (NYSE:LUV), JetBlue Airways Corp. (NASDAQ:JBLU), UAL Corp. (UAUA), AirTran Holdings Inc. (AAI).
U.S. Markets: Paul Kasriel On the State of Consumer Debt and Savings
Internet: eBay Watch: Holiday Online Shopping Spending and More
Hardware: Micron Up On Strong Earnings
Software: Customer Backlash Against Oracle's Buggy Linux Product?
Media: Triple Crown Media Could Gain Traction In 2007
Retail: Will K-Swiss Experience a Turnaround?
Transport: FedEx May Not Be Out of Trouble Yet
Energy: Eye On Pennichuck Corp. Water Utility
Financial: Short and Longer Term Directions For American International Group
Asia: A Look at Japan and What I'm Buying
ETFs: Eye On Madison/Claymore Covered Call Fund
Small-Caps: Coastal Financial: Latest Discovered Financial Smallcap
IPO Analysis: Emergent BioSolutions: Investment Advice For the War on Terror
Sound Money Tips: Tips on Redeeming Reward Points
Jim Cramer: Latest stock picks
Earnings Conference Call Transcripts: Accenture F1Q07, Cognos F3Q07, Jabil Circuit F1Q07, 3Com F2Q07, Nike F2Q07, Rite Aid F3Q07, Red Hat F3Q07, Research In Motion F3Q07
Have Wall Street Breakfast emailed to you every morning before the market opens.