Existing-Home Sales Dismal, But Expected To Pick Up
Existing-home sales plummeted 8.4% in 2006, their fastest pace in 17 years. The National Association of Realtors [NAR] announced yesterday that sales dropped 0.8% in December to an annual rate of 6.22 million, their first decline in three months. The number of homes on the market also declined, however, for the second month in a row -- to 3.508 million from 3.81 million -- suggesting that more buyers are being lured by low prices and affordable mortgage rates. Still, the inventory of unsold existing homes is 23.3% above the year-ago period. The median price of an existing home last month was $222,000, up from $217,000 in November. A total of 6.42 million previously owned homes are forecast to be sold this year, down from 6.48 million last year. Sales in 2006 were the third-highest on record according to the NAR, but there was also a 42% jump in foreclosures. The S&P Supercomposite Homebuilding Index dropped 3.6% after the report and is down 1.4% on the month. The Fed maintains that housing demand has likely stabilized and the economy should be able to expand moderately even as the housing slowdown continues.
• Sources: Wall Street Journal, Reuters, Bloomberg
• Related commentary: Existing Home Sales are Fantastic, According to the National Association of Realtors Anyway, Homebuilder Stocks: Is the Worst Over?, Housing Bubble and Real Estate Market Tracker
• Potentially impacted stocks and ETFs: Pulte Homes Inc. (PHM), Beazer Homes USA Inc. (BZH), Hovnanian Enterprises Inc. (HOV), Toll Brothers Inc. (TOL), M.D.C. Holdings Inc. (MDC), The Ryland Group Inc. (RYL), American Standard Companies Inc. (ASD), Centex Corp. (CTX), Lennar Corp. (LEN), KB Home (KBH). ETFs: iShares Dow Jones US Home Construction (ITB), SPDR Homebuilders (XHB), PowerShares Dynamic Building & Construction Portfolio (PKB)
Blackstone Back at the Table; Raises Equity Office Bid to $38.3 Billion
Blackstone has topped Vornado's $52 per share bid for the Equity Office REIT, the largest owner-operator of office properties in the U.S., with an offer of $54 per share. If it goes through, the deal will be the biggest LBO in history. Blackstone's offer is all-cash while Vornado's is 60% cash and 40% Vornado shares. Vornado had begun due diligence with Equity Office ahead of the formalization of their offer on January 31, but Blackstone's new bid beat that date by a week. The Vornado offer is worth $37.6 billion including debt and Blackstone's $38.3 billion. The Equity Office board of trustees continues to recommend that shareholders accept Blackstone at their February 5 vote. The Equity Office bidding war reflects the ongoing consolidation of the real estate market: Global real estate mergers hit a record $414.3 billion in 2006, up 66% from the year before. Equity Office shares rose 3.9% to $54.77 late yesterday afternoon.
• Sources: Bloomberg, MarketWatch, Reuters
• Related commentary: Vornado Group Outflanks Blackstone in New Bid for Equity Office REIT, Blackstone Group's 'Zell Buyout' Is Questionable At Best, Blackstone Acquiring Equity Office in Largest Private-Equity Deal Ever
• Potentially impacted stocks and ETFs: Equity Office Properties Trust (EOP), Vornado Realty Trust (VNO). Competitors: Boston Properties Inc. (BXP), Mack-Cali Realty Corp. (CLI), Vornado Realty Trust (VNO). ETFs: iShares Cohen & Steers Realty Majors (ICF), Vanguard REIT Index ETF (VNQ), WisdomTree Dividend Top 100 (DTN), streetTRACKS DJ Wilshire REIT (RWR)
Latest Options Backdating Probe: KB Home
KB Home, the fifth-largest U.S. homebuilder, is the latest subject of an official SEC probe into the company's backdating of stock-option grants. The company disclosed in a SEC filing this morning that, "In August 2006, the Company announced that it had received an informal inquiry from the Securities and Exchange Commission relating to its stock option granting practices. On January 19, 2007, the Company was informed that the SEC is now conducting a formal investigation in this matter. The Company has cooperated with the SEC regarding this matter and intends to continue to do so." KB Home started reviewing options granted to former chief executive Bruce Karatz in 1999 this August; Karatz resigned as CEO in November, and agreed to repay $13 million to cover ill-received gains.
• Sources: SEC 8k Filing, MarketWatch, Bloomberg
• Related commentary: Options Backdating News: KB Home and Home Depot, Homebuilder CEOs Talking Down The Markets, Wall Street Journal's Options Scandal Scorecard (Jan. 20)
• Potentially impacted stocks and ETFs: KB Home (KBH)
Microsoft's Profit Drops 28%; Raises Forecasts; Shares Gain 2% After Hours
Microsoft posted a fiscal Q2 earnings decline less severe than analysts had expected yesterday on sales of video games and database programs. The company has raised guidance for full-year profit to a range of $1.45-1.47 from $1.43-1.46. Net income fell 28% to $2.63 billion, or $0.26 cents/share, from $3.65 billion, or $0.34, a year earlier, because of delays in the release of the Vista OS and a required revenue deferral. Analysts were expecting EPS of $0.24. Revenue rose 6% to $12.5 billion. The deferral shaved $1.64 billion from Q2 revenue and $1.13 billion, or $0.11/share, from profits. Without it, quarterly revenue would have jumped 20%. The postponed revenue was substantially compensated for by sales of databases, Xbox machines and games like "Gears of War.'' Sales are projected at $50.2-50.7 billion, up from the previous forecast of $50-50.9 billion. Profit for the current quarter is projected at $0.45-0.46 on sales of $13.7-14 billion, in line with expectations. Xbox sales surged 76% to $2.96 billion in the quarter, ahead of expectations, but the company is trimming its Xbox sales forecasts to 12 million by June 30 instead of 13-15 million. Revenue from SQL database software and Windows for server computers rose ahead of forecasts by 17% to $2.85 billion. Vista was released to businesses in November and goes on broad release January 30.
• Sources: Bloomberg, Forbes, Wall Street Journal. Conference call transcripts: F2Q07 (Qtr End 12/31/06)
• Related commentary: A Close Look At Microsoft's Earnings, Microsoft: Pru Boosts Price Target Ahead Of Earnings Today, Xbox Sales: Potential Upside For Microsoft, Vista Sales Beat Forecasts, MSFT Shares Climb
• Potentially impacted stocks and ETFs: Microsoft Corp. (MSFT). Competitors: Sony Corp. (SNE), Nintendo Co., Ltd. [ADR] (OTCPK:NTDOY), Google Inc. (GOOG), International Business Machines Corp. (IBM), Oracle Corp. (ORCL). ETFs: iShares Goldman Sachs Technology Indx (IGM), iShares Goldman Sachs Software Index (IGV), streetTRACKS DJ Wilshire Lg Cap Growth (ELG), streetTRACKS DJ Global Titans (DGT)
Advantest's Earnings Drop, Lowers Guidance for Current FY, But Expects Recovery from April
Advantest reported a sharp drop in Q3 earnings and warned full fiscal year (ending Mar. 2007) earnings would be lower than previously forecast. The firm's CFO is optimistic however, saying, "Next fiscal year's results will be much better (with) double-digit (sales and profit) growth." Advantest, the world's largest manufacturer of memory chip testing equipment, once again blamed a slowing of capex and orders from microprocessor and non-memory chip makers. It did not breakdown quarterly results but Bloomberg calculates Q3 net income fell 51% to ¥5.6b ($46m) on a 24% drop in sales to 57.9b ($477m). Operating profit was down 56% to ¥7.9b ($65m). Advantest says its expects full FY net income of ¥41b ($337m), versus its prior downward revised forecast of ¥43b ($354m), which is about 1% lower than the ¥41.4b earned in 2005. Its ordinary shares lost 1% in Tokyo to ¥6,030 ($49.63 ADR equiv. at ¥121.5/$1) ahead of its earnings announcement.
• Sources: Earnings release [pdf], Bloomberg, Forbes-Newswire
• Related commentary: Advantest's H1 Profit Up 52%, But Lowers Full Year Guidance, Semi Equipment Orders Continue To Rise, Semiconductor Equipment Companies Suffer Push Out Worries
• Potentially impacted stocks and ETFs: Advantest (ATE)
AT&T Blames Microsoft Software For IPTV Delays
AT&T is blaming delays in the successful rollout of its IPTV service on glitches in the Microsoft software on which it operates. AT&T's in-home TV service was supposed to be available in 15 markets by the end of 2006; it has instead only been rolled out in 11, and in limited form. As a result, the Wall Street Journal reports that AT&T CFO Rick Lindner has decided against heavily marketing the service so as not to increase demand until the problems are solved. But AT&T stopped short of losing hope in its partnership with Microsoft or in the effectiveness of its software. AT&T CEO Edward Whitacre told analysts during the company's conference call yesterday his company was staying the course stating, "It works and it's the right thing financially." Executives on the conference call made sure to point out that delays in the IPTV service had been caused by software issues and did not reflect any problems with the network architecture. AT&T hopes to have IPTV in eight million homes by year's end. AT&T shares rose $0.16 to $36.79 yesterday after reporting earnings before the market opened.
• Sources: AT&T Q4 2006 Earnings Call Transcript, Wall Street Journal, cnet news
• Related commentary: AT&T Boosts Earnings, Revenue On Strong Cingular Growth, Cingular Triples Profits On Addition of 2.4 Million New Subscribers, Cramer's Take on T
• Potentially impacted stocks and ETFs: AT&T (T), Microsoft (MSFT). Competitors: Verizon Communications Inc. (VZ), Comcast (CMCSA), Time Warner Inc. (TWX), DIRECTV Group (DTV), EchoStar Communications (DISH), Cablevision Systems (CVC), Sprint Nextel Corp. (S), Vodafone (VOD), Qwest Communications International Inc. (Q). ETFs: iShares S&P Global Telecom ETF (IXP), iShares Dow Jones U.S. Telecom Sector Index ETF (IYZ), PowerShares Dynamic Telecom & Wireless ETF (PTE), PowerShares FTSE RAFI Telecommunications & Technology Portfolio (PRFQ), Vanguard Telecom Services ETF (VOX), Telecom HOLDRS ETF (TTH)
Chandler Family Threatens Tribune With Proxy Fight
The Wall Street Journal reports that yet another complication has surfaced in the battle for control over Tribune Co.'s newspaper and TV empire: its biggest shareholder, the Chandler family, could mount a proxy fight for additional Board seats. The family currently holds three seats on tribunes 11 member board; a proxy contest could net them another two, leaving them short of full control, but in a powerful position. While the family would prefer to avoid such a battle, it's likely to happen if Tribune's board doesn't accept its acquisition proposal, or pursue a transaction that suits the family, sources say. The Chandler family is concerned with what it perceives as the Board's over-involvement in the auction process; they have been forbidden to approach private equity firms that signed confidentiality agreements with Tribune but never submitted bids. The family believes it could bid higher were allowed to pursue additional funding. The Board is dissatisfied with the Chandler's bid, which would have Tribune spin off its TV stations, while the Chandlers buy the newspapers for $4.7 billion. The Chandlers are also unhappy with a bid proposal from tycoons Ron Burkle and Eli Broad which calls for Tribune to borrow and pay a big debit dividends to shareholders; the family feels such an agreement would saddle the company with too much debt.
• Sources: Wall Street Journal
• Related commentary: Trying to Sort Out Tribune Bids After Sale Deadline Passes, Tribune Co.'s Second Largest Shareholder Hires Outside Adviser in Possible Break With Management, Tribune Could Be Bought Out By Two LA Billionaires
• Potentially impacted stocks and ETFs: Tribune Company (TRB), The New York Times Co. (NYT), Washington Post Company (WPO), Gannett Co. Inc. (GCI), McClatchy Company (MNI)
ENERGY AND MATERIALS
FTC OK's Sale of Kinder Morgan, With Caveats
The FTC yesterday agreed to grant pipeline company Kinder Morgan conditional antitrust clearance to pursue its $22 billion sale to an investor group of which CEO Richard Kinder is a member. Kinder Morgan stockholders will receive $107.50 in cash per share, and the deal includes the assumption of $7 billion in debt. The FTC had questioned the involvement of investment firms Carlyle Group and Riverstone Holdings LLC on the grounds that they hold stakes in Magellan Midstream, a major competitor to Kinder Morgan in gasoline storage. It is requiring the two groups to cede control of Magellan to a third investor and remove their representatives from the company's board. The FTC's object is to prevent M&A activity among energy firms from artificially elevating gas prices for consumers. Kinder Morgan is aiming for a Q1 closing of the acquisition, but it might be delayed into Q2 on scheduling issues with the California Public Utilities Commission.
• Sources: Wall Street Journal, Reuters, MarketWatch, Press release
• Related commentary: Investors Watching Management-Led Buyouts, Kinder Morgan: The Path Not Taken By Enron, LBOs Making Executives Very, Very Rich
• Potentially impacted stocks and ETFs: Kinder Morgan Inc. (KMI). Competitors: TEPPCO Partners LP (TPP), Williams Companies Inc. (WMB). ETFs: Vanguard Mid-Cap Value ETF (VOE)
TRANSPORT AND AEROSPACE
GM To Delay 4Q06 Earnings, Restate Past Earnings Yet Again
General Motors just can't seems to get its accounting in order. The world's largest automaker announced yesterday it was delaying its 4Q06 earnings report, scheduled for Tuesday January 30, indefinitely. CFO Fritz Henderson said GM can't say for sure when it will release the delayed results. GM is blaming a delay in reporting from its formerly owned finance arm, GMAC, which it sold mid-quarter, for the delay in its earnings reporting. When it does report, GM claims to show greatly improved revenue and profit versus the prior-year period as well as a better liquidity position with $26.4 billion in cash and equivalents. GM also announced it will again restate its financials for 2002 through the third quarter of 2006, due to deferred tax liabilities that were overstated; only one quarter in the past eight hasn't been restated or adjusted. During regular trading GM shares rose $0.40, or 1.22%, to $33.14 before falling $0.24 to $32.90 in after hours trading.
• Sources: TheStreet.com, Bloomberg, MarketWatch, NY Times
• Related commentary: Has GM Missed Its Moment?, Throwing More Money At Fickle U.S. Consumers Won't Fix Ford's (or GM's) Problems, GM To Increase CapEx In Bid To Appeal To New Customers. Conference call transcripts: General Motors Q3 2006 Earnings Call Transcript
• Potentially impacted stocks and ETFs: General Motors (GM). Competitors: Ford (F), DaimlerChrysler (DCX), Toyota (TM), Honda (HMC), Nissan (OTCPK:NSANY). ETFs: WisdomTree Dividend Top 100 Fund
Cardinal Health to Sell Its Drugmaking Unit for a Surprising $3.3 Billion
Cardinal Health Inc., the second-biggest U.S. drug distributor, announced yesterday it is selling its drug manufacturing and packaging division to the private equity firm Blackstone Group for $3.3 billion. The unit contracts with pharmaceutical companies to manufacture prescription and over-the-counter drugs, aiming to be a one-stop outsourcing shop for drugmakers. The sale of the unit is a result of the company's disappointment with its performance, and the desire of Cardinal's new CEO R. Kerry Clark to refocus the company on its core business. U.S. drug distribution is dominated by the so-called "Big Three" - Cardial, McKesson Corp. and AmerisourceBergen Corp. In the 90s, the three launched into acquisition and expansion based growth, but have since turned back the clock and are making efforts to return to their roots. Cardinal announced it plans to sell its drug manufacturing unit in November, and it was slated to be put up for auction, but Blackstone stepped in, offering $3.3 billion -- far higher estimated price tag of $2.1-$3 billion. In an interview Blackstone rep Chinh Chu said Cardinal is a great health-care play because of high organic growth and its market leadership position. In a conference call, Clarke called the sale, "a very good deal." Separately Cardinal announced it will buy SpecialtyScripts pharmacy of Massachusetts for an undisclosed amount. Shares were up 3.4% to $72.42 in trading yesterday.
• Sources: Wall Street Journal, Bloomberg (I, II)
• Related commentary: Cardinal Health: Waiting for an Entry Point, Multiple Symptoms of Excessive Pay at Cardinal Health, Jim Cramer's Take on CAH
• Potentially impacted stocks and ETFs: Cardinal Health Inc. (CAH), McKesson Corp. (MCK), AmerisourceBergen Corp. (ABC). 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)
Amgen: Higher Net Misses Street, Reports Negative Clinical Studies, Stock Falls
Amgen's Q4 adjusted net income grew 14% to $1.06 billion, or $0.90/share, missing the $0.93 average analyst estimate surveyed by Bloomberg. Thomson said analysts expected $0.95/share on revenue of $3.77b, the latter figure which Amgen beat, as revenue increased 17% to $3.84b. Based on GAAP, EPS grew 8% to $0.71, with net income up 1% to $833m. Wall Street however, seemed more concerned about competition in anemia drugs and negative results from clinical tests of anemia drug Aranesp and colon-cancer drug Vectibix. A Sanford Bernstein analyst comments, "A lot of things were surprising: they missed on earnings per share, they had surging R&D expenses, and there were a lot of setbacks in the pipeline." Amgen expects '07 adjusted EPS of $4.30 to $4.50 on revenue of $15.4b to $16b, versus Street consensus estimates of $4.43/share and $15.73b -- against earnings of $3.90 (+22% y-o-y) in '06 on sales of $14.3b (+15%). Note GAAP EPS was down 15% in '06 to $2.48. Amgen's shares lost 2.85% to $72.72 in extended trading on volume just over 2m shares, after closing down 0.4% to $74.85 in normal trading.
• Sources: Amgen Q4'06 Earnings Call Transcript, Earnings press release, Bloomberg, MarketWatch, WSJ
• Related commentary: Amgen Disappoints After The Bell, Searching for Value Investments in the Drug Stock Universe, Amgen Acquires Option On Experimental Cytokinetics Heart Drug
• Potentially impacted stocks and ETFs: Amgen (AMGN). ETFs: Biotech HOLDRs (BBH), iShares Nasdaq Biotechnology (IBB), iShares Dow Jones US Healthcare (IYH), PowerShares Dynamic Biotech & Genome (PBE), Vanguard Health Care (VHT), Health Care Select Sector SPDR (XLV)
China: GDP Growth Accelerates in '06, Inflation Concerns Growing Too
China's economy grew 10.4% in Q4 and 10.7% to 20.94 trillion yuan ($2.68t) in 2006 (vs. 10.4% in '05), its fastest clip in 11 years. CPI hit a two year high at 2.8% in December. Now it looks like China's central bank might have to consider raising rates (currently 6.12% for lending) again after it last did so in August. Efforts to reduce liquidity have not exactly worked as Beijing continues to worry about over-investment. Foreign reserves meanwhile, topped $1 trillion last year as China's trade surplus grew 74% y-o-y to $177.5b. Note quarterly GDP actually declined compared to revised figures of 10.6% in Q3 and 11.5% in Q2. The yuan is now up around 6.4% against the US$ since its peg ended in July '05. Another hot topic in China is domestic consumption, which lags investment and fell to 51.9% in '05, the lowest level since free-market reforms began in 1978, according to Bloomberg. The commissioner of China's National Bureau of Statistics comments, "Problems still exist with the irrational relationship between investment and consumption, and the imbalance of payments and excess liquidity in the banking system."
• Sources: Bloomberg, China Daily
• Related commentary: China's Commerce Minister: Reducing Trade Surplus is a Top Priority, Despite Incredible Growth, China's Markets Account For Small Percent of GDP, China's Central Bank Still Trying to Tame the Dragon
• Potentially impacted stocks and ETFs: Currency ETFs: PowerShares DB G10 Currency Harvest Fund (DBV), Euro Currency Trust (FXE). Bond ETFs: iShares Lehman Aggregate Bond (AGG), iShares Lehman 1-3 Year Treasury Bond (SHY), iShares Lehman 7-10 Year Treasury (IEF), iShares Lehman 20+ Year Treas Bond (TLT), iShares Lehman TIPS Bond (TIP). China ETFs: China Fund (CHN), Greater China Fund (GCH), iShares FTSE/Xinhua China 25 Index Fund (FXI), JF China Region Fund (JFC), PowerShares Golden Dragon Halter USX China (PGJ)
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