Alcatel-Lucent's Shares Tank on Disappointing Preliminary Q4 Earnings
Euronext Paris traded shares of Alcatel-Lucent are down nearly 11% in mid-day trading and have fallen by a similar amount in pre-market U.S. trading on thin volume. The selling is in reaction to the firm's expected adjusted pro-forma breakeven operating profit, compared to a €570 million gain last Q4, on a 16% decline in sales to €4.42b. CEO Patricia Russo cited the impact of M&A activity resulting in short-term uncertainty for customers. MarketWatch reports Goldman Sachs estimates Lucent's Q4 sales were about €1.1b, or 40% below expectations and Alcatel's were 16% short at €3.3b. Alcatel-Lucent said it expects full year 2007 growth "at least at the carrier market growth rate which today we see in the mid single digits." Cost savings for full year '07 are now expected to total €600m, or €200m higher than forecast. Its quarterly earnings release and conference call will take place Feb. 9 before the market opens.
• Sources: Press release, MarketWatch, Reuters
• Related commentary: Jim Cramer's Take - Lightning Round Jan. 4, Goldman: Alcatel-Lucent Shares Have 27% Potential Upside, The Marriage of Alcatel-Lucent: One Step Closer to a Telecommunications Monopoly
• Potentially impacted stocks and ETFs: Alcatel-Lucent (ALU). Competitors: Cisco (CSCO), Ericsson (ERIC), Nokia (NOK), Nortel (NT), Siemens (SI). ETFs: Broadband HOLDRS (BDH), iShares Goldman Sachs Networking (IGN)
Tax Credit Boosts Texas Instruments' Earnings by 2%
Cellphone chip giant Texas Instruments saw a 2% Q4 profit gain on a tax credit amid diminished demand for high-end handsets. Net income rose to $668 million, or $0.45/share, from $655 million, or $0.40, a year ago. Revenue grew 4.2% to $3.46 billion on demand for semiconductor and calculator products, slightly ahead of analyst expectations of $3.42 billion. Excluding the tax credit, EPS came in at $0.39, a hair above the Street's $0.38 forecast and at the high end of its $0.37-0.40 guidance. DSP chip sales fell 11% sequentially this quarter because of shrinking wireless demand, while analog chip sales were also down 4% sequentially. The company plans to lower costs by $200 million this year by cutting 500 jobs and closing a factory in Dallas. For Q1 2007, TI is projecting a sales range of $3.01-3.28 billion with $0.28-0.34 EPS, softer than current analyst forecasts of $3.30 billion in sales with $0.35 EPS. CEO Rich Templeton said, "Challenges continue in the first quarter as we operate in an environment where customers want lower levels of inventory and where growth in the wireless market is skewed to low-priced, basic featured cell phones, instead of higher-priced full-featured phones."
• Sources: Bloomberg, Wall Street Journal, MarketWatch, TheStreet.com. Conference call transcripts: Q4 2006
• Related commentary: Texas Instruments: Today's Conference Call Should Be Ugly, Wishful Thinking: TI Predicts 20% Handset Unit Growth in 2007, Problems With Texas Instruments' Locosto?
• Potentially impacted stocks and ETFs: Texas Instruments Inc. (TXN). Competitors: QualComm Inc. (QCOM), Analog Devices Inc. (ADI), National Semiconductor Corp. (NSM), STMicroelectronics NV (STM). ETFs: Semiconductor HOLDRs (SMH), PowerShares Dynamic Semiconductors (PSI), iShares Goldman Sachs Semiconductor (IGW)
ENERGY AND MATERIALS
DuPont Earnings Soar on Strong Sales
E.I. DuPont de Nemours (DD), the third-largest chemical producer in the U.S. said this morning that Q4 profits soared to $0.94/share ($871m), compared to $0.16 ($154m) in Q4 2005. Excluding tax benefits and other one-time items, profits were $0.45/share, in line with analyst estimates and slightly higher than the $0.42 CEO Charles O. Holliday Jr. foretold in November. Sales revenues were up 8% to $6.28 billion, helping its profit boost, along with flat fixed costs, improved results in its agriculture & nutrition and performance-materials divisions, and recovery from hurricanes Katrina and Rita. Holliday said he plans to cut 3,000 and close some car-paint and pesticide factories in an effort to trim $1b in costs. DD reaffirmed its 2007 guidance of $3.15/share.
• Sources: Bloomberg, MarketWatch
• Related commentary: Dow Components Comparative Performance, DuPont Cuts Jobs to Invest in Seeds Business, DuPont: Modifications Will Spur Growth
• Potentially impacted stocks and ETFs: E.I. DuPont de Nemours (DD). Competitors: Dow Chemical Company (DOW), ExxonMobil Corp. (XOM), Monsanto Company (MON), Eastman Chemical Company (EMN), BASF Ag (BF). ETFs: iShares Dow Jones US Basic Materials (IYM), Vanguard Materials VIPERs (VAW), Materials Select Sector SPDR (XLB)
Gap CEO Calls It Quits
After four years of trying to engineer a turnaround at Gap Inc, Paul Pressler resigned as CEO yesterday. Chairman of the Board Robert Fisher will become the interim CEO. Despite much experimentation with store layouts and fashion trends, including a holiday season back-to-basics strategy that yielded an 8% sales drop, the company has not succeeded in making a financial comeback. Gap is now consulting with Goldman Sachs about a new strategic direction for the company, which could include a possible sale. The company is valued at $16 billion and a sale could potentially bring in more than $18 billion. Analysts expected Pressler's departure. Same-store sales have fallen in five of the last seven years. Gap shares are currently 62% below their all-time high of $52.88 in February 2000. The shares rose $0.50 to $20.40 (2.5%) in yesterday's trading. After the announcement, the stock rose 3.3% to $20.55 in after-hours trading.
• Sources: NYTimes, Bloomberg, MarketWatch.com, WSJ
• Related commentary: Gap: The Short Case, Is Gap a Private Equity Takeover Target?, Can Goldman Sachs Help With a Gap Turnaround? Conference call transcripts: Gap Q3 2006 Earnings
• Potentially impacted stocks and ETFs: The Gap, Inc. (GPS). Competitors: Abercrombie & Fitch Co. (ANF), American Eagle Outfitters Inc. (AEOS), J. Crew Group, Inc. (JCG), AnnTaylor Stores Corp. (ANN), Limited Brands Inc. (LTD), Urban Outfitters Inc. (URBN), Target Corp. (TGT), Kohl's Corp. (KSS). ETFs: : SPDR Retail (XRT)
TRANSPORT AND AEROSPACE
Delta Faces Congressional Scrutiny and Impatient Debtors
After months of hostile bidding from competitor US Airways Group, merger proposals from fellow bankrupt airline Northwest Airlines, and its own proposals to make it as a stand-alone company, Delta Airlines is no closer to reaching any certainty on what its future will be. The possible acquisition of Delta by US Airways, whose upped bid of more than $10 billion for Delta expires February 1, will soon be reviewed by Congressional lawmakers who are concerned a merger will likely hurt consumers by reducing service and increasing fares, especially if it is followed by other deals within the airline industry. Congress is also sensitive to more industry job losses and pension cuts if the merger goes forward. In the meantime, Delta's plan to exit Chapter 11 protection in April of this year is coming under criticism by the company's creditors. In several behind-the-scenes meetings over the past week, representatives from the creditors' committee and Delta have been trying to iron out a variety of including how an Delta board will be selected, to what degree senior management will receive compensation for senior management, and how to compensate nonunion front-line Delta employees.
• Sources: Wall Street Journal, Reuters, Reuters II
• Related commentary: US Airways Ups Ante for Delta to $10.2 Billion, War of Words Between Delta and US Airways Intensifies, Northwest and Delta Flirt with Merger
• Potentially impacted stocks and ETFs: Delta Air Lines, Inc. (DALRQ.PK), US Airways Group Inc. (LCC), Northwest Airlines Corp. (NWACQ.PK). Competitors: AMR Corporation (AMR), Southwest Airlines Co. (LUV), UAL Corp. (UAUA), Continental (CAL), JetBlue (JBLU)
UAW Might Take on Responsibility for Some Retiree Benefits
Detroit's auto giants and the United Auto Workers are considering a plan to shift responsibility for retiree health-care liabilities to the union. A stumbling block to the revolutionary plan is the difficulty GM and Ford, both of which have speculative credit ratings, will have raising the cash to fund the handover. It is also not clear whether UAW will be prepared to cut benefits if necessary. The proposal appeals to the UAW insofar as their retiree fund will be protected in the event one of the auto makers goes bankrupt. GM has $55 billion in retiree health-care liabilities on its balance sheet, Ford has $22 billion, and the Chrysler Group has $15.6 billion, and the cost of those benefits adds about $1,500 to the price of every Big Three car. The UAW has been encouraging the federal government to overhaul the healthcare system, and the automakers, while more subdued in their language, agree that the government needs to get involved. The parties are examining a strike-ending agreement this month between Goodyear Tire and the United Steelworkers according to which Goodyear will transfer its $1.2 billion health-care liability to a fund managed by the union. Goodyear will put $1 billion into the fund.
• Sources: Wall Street Journal
• Related commentary: Wagoner: GM Won't Go Down Without a Fight, Ford Lowers the Axe, Bad Blood Remains After Goodyear Strike
• Potentially impacted stocks and ETFs: General Motors Corp. (GM), Ford Motor Co. (F). Competitors: DaimlerChrysler AG (DCX), Toyota Motor Corp. (TM). ETFs: WisdomTree Dividend Top 100 (DTN), PowerShares FTSE RAFI US 1000 (PRF), Rydex S&P 500 Pure Value (RPV)
Boeing Shares Fall on Wachovia Downgrade
Boeing shares tumbled 3.4% to close at $85.60 yesterday, their biggest drop in six months, on news that Wachovia has downgraded the company from outperform to market perform. The analyst, Joe San Pietro, maintained his price range and EPS estimates but changed his rating on concerns over a peaking of Boeing's order cycle and delays in its 787 program. Boeing says it expects to meet its May 2008 first delivery date for the 787 Dreamliner, but San Pietro claims some Asia Pacific airlines have already been notified their orders will be delayed. A record 70% of the plane's parts come from outside suppliers, and two of those suppliers are running late. Boeing is providing extra funding and teams of engineers to assist them. Last year, Boeing had a company record of 1,044 orders, just behind rival Airbus -- an order level San Pietro believes is a peak. In related news, GE Commercial Aviation Services has ordered 39 Boeing jets for a total cost of approximately $5.34 billion. Deliveries will run from 2008 through 2010. Boeing will announce earnings on January 31.
• Sources: Bloomberg, MarketWatch, Business Week, MoneyCentral
• Related commentary: Boeing Sets New Order Records in '06, Defense Stocks Should Continue to Outperform in 2007 -- NY Times, Boeing Is Flying High
• Potentially impacted stocks and ETFs: The Boeing Company (BA). Competitors: Lockheed Martin Corp. (LMT), Northrop Grumman Corp. (NOC). ETFs: DIAMONDS Trust, Series 1 (DIA), iShares Dow Jones US Aerospace & Defense (ITA), Vanguard Industrials ETF (VIS), Industrial Select Sector SPDR (XLI)
Wachovia Profits Up, Helped By Golden West Acquisition
Wachovia Corp., the fourth-biggest U.S. bank, said Q4 profits were up to $1.20/share ($2.3 billion) from $1.09 ($1.7b) in Q4 2005, bringing its yearly profit to $7.8 billion, up 17%, and slightly beating analyst estimates of $1.18. Revenues were up 31% to $8.6b, beating estimates of $7.9b and affirming CEO Kennedy Thompson's promise of "better results going forward." Retail profits were up 73%. Return on equity was down to 13.09% from 14.06%. The company said its $24.2b purchase of Golden West Financial, completed in October, helped boost its revenues from mortgage loans. Shares have dropped 5.3% since the deal's announcement in May on concerns it may be heavily dependent on home mortgages in a weak housing market.
• Sources: Bloomberg, MarketWatch
• Related commentary: Wachovia Acquires One of Europe's Largest Fixed-Income Credit Funds, Jim Cramer's Take on WB
• Potentially impacted stocks and ETFs: Wachovia Corp. (WB). Competitors: Wells Fargo Cap IX (WFC), Bank of America Corp. (BAC), JPMorgan & Chase Co. (JPM), Citigroup Inc. (C), SunTrust Banks Inc. (STI). ETFs: Powershares Dynamic Banking (PJB), streetTRACKS KBW Bank (KBE)
Citigroup Ousts Its Head of Global Wealth Management
In a game of corporate musical chairs, Citigroup announced yesterday it was firing the head of its global wealth management division, Todd Thomson. His replacement, Sallie Krawcheck, is currently Citigroup's CFO, and will take over Thomson's job only after a replacement CFO can be found, leaving Chief Operating Officer Robert Druskin (appointed last month) to oversee the global wealth management unit on an interim basis. Krawcheck will be returning to her original position at Citigroup. Thomson was let go by CEO Charles Prince III under growing pressure to lead a successful turnaround at the U.S.'s largest bank by market cap. Prince had apparently lost confidence in Thomson's decision making abilities; there are also reports Thomson flew CNBC journalist Maria Bartiromo to Asia on the company's corporate jet without the proper authorization. In other news, Citigroup recently announced it was expanding its mortgage services unit with the purchase of ABN Amro's mortgage services division.
• Sources: New York Times, Bloomberg, USA Today, Wall Street Journal
• Related commentary: The Meaning Of Sally Krawcheck's Move At Citi, Citigroup Acquires ABN Amro Mortgage Group For Undisclosed Sum, Citigroup Still Intact: Revamping its Image by Changing its Name? Conference call transcripts: Citigroup Q4 2006 Earnings Call Transcript
• Potentially impacted stocks and ETFs: Citigroup Inc. (C), ABN Amro (ABN). Competitors: Bank of America Corporation (BAC), JPMorgan Chase (JPM), Wachovia Corporation (WB). ETFs: streetTRACKS KBW Bank (KBE), Regional Bank HOLDRS (RKH), Vanguard Financials ETF (VFH)
American Express Reports 24% Profit Gain
American Express saw a 24% rise in net income in Q4 thanks to holiday shopping and a decline in write-offs, but results still missed expectations as high expenses cut gains. Revenue grew 13% to $7.21 billion, but expenses reached $6 billion, 10% above last year's figure. Analysts were expecting revenue of $7.33 billion. Net income was $922 million, or $0.75/share, versus $745 million, or $0.59/share, a year ago. Excluding a $68 million one-time gain and a tax benefit, the company made EPS of $0.69, shy of Street expectations of $0.76. The company's main competitors, JPMorgan Chase, Citigroup, Capital One, and Morgan Stanley, also reported stronger profits in their card divisions in Q4, due in part to new, more stringent bankruptcy laws that drove write-offs well below their year-ago level. AmEx's expenses included $1.3 billion for human resources and $1.7 billion for marketing, well beyond forecasts. CFO Gary Crittenden said last night that the company plans to implement tighter controls on discretionary spending in H1 2007. He also noted that the interest rate environment will become more difficult for AmEx this quarter as several hedges reached their conclusion at the end of 2006.
• Sources: Bloomberg, Wall Street Journal, MoneyCentral, MarketWatch
• Related commentary: A Hedge Fund Clone Portfolio For 2007, Risk Versus Reward In Financial Institution Stock Valuations, Sharpest Drop in Consumer Credit in 15 Years
• Potentially impacted stocks and ETFs: American Express Company (AXP). Competitors: Mastercard, Inc. (MA), JPMorgan Chase (JPM), Citigroup Inc. (C), Capital One Financial Corp. (COF), Morgan Stanley Inc. (MS). ETFs: iShares KLD Select Social Index (KLD), Financial Select Sector SPDR (XLF), Vanguard Financials ETF (VFH)
Pfizer Resorts to More Cost Cutting
After reporting a 12% decline in Q4 adjusted EPS on flat sales, Pfizer met with analysts and investors to explain its "immediate priorities." Pfizer's first priority is to maximize both short and long term revenues. Its second priority is to cut costs and have a more flexible cost base. It announced a 10% reduction (10,000 employees) of its global work force, which includes a 20% cut of its European sales force and a similar cut to its U.S. sales force announced in late Nov. In addition, Pfizer will close plants and research centers worldwide, reducing the number of factories it plans to be operating by the end of next year to 48, from 93 in 2003. Its third priority is to simplify R&D and reorganize its pharmaceutical business into four units. Overall, recent cost savings plans implemented by the former and current CEOs will save Pfizer $4.5b to $5b by the end of next year, of which $3b will be reinvested in new products. Its last two priorities include collaborating more with stakeholders and making Pfizer a "great place to work" by cutting bureaucracy and reducing management layers. Separately, the non-profit AIDS Healthcare Foundation filed a lawsuit against Pfizer, claiming its Viagra ads encourage its use as a party drug, resulting in the spread of HIV and other STDs.
• Sources: Press release, Bloomberg, NY Times, Washington Post-AP, WSJ
• Related commentary: Pfizer Beats Street Estimates; All Eyes on CEO Kindler's Cost Cutting Plans, Pfizer's Sales Force Cut: Like 'The End of an Arms Race', Pfizer Trading Well Below Its Intrinsic Value
• Potentially impacted stocks and ETFs: Pfizer (PFE). ETFs: iShares Dow Jones US Pharmaceuticals (IHE), iShares Dow Jones US Healthcare (IYH), Pharmaceutical HOLDRs (PPH), Vanguard Health Care (VHT), Health Care Select SPDR (XLV), First Trust Morningstar Dividend Leaders (FDL)
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