Housing Still Slumping; Sen. Dodd Takes On "Predatory" Lending
Three economists stated yesterday that the housing market has not yet bottomed and is unlikely to begin a recovery until the middle of this year. Senate Banking Committee Chairman Christopher Dodd also said yesterday that the growth of the "predatory" sub-prime lending market has victimized minority, immigrant and elderly homeowners. Sector weakness is forecast to encompass existing-home sales, new-home sales and housing starts as well as home prices, which are projected to show their first-ever full-year national decline. David Seiders, chief economist for the National Association of Home Builders, claims excess inventory is a persistent and serious problem. He points out, however, that "GDP growth, unemployment, the overall inflation situation and interest rates" have all been positive, indicating the economy is weathering the housing crisis well. Senator Dodd has taken the lending industry to task and charged the government with responsibility to tackle "irresponsible lending practices [that] are creating a crisis for millions of American homeowners." The Mortgage Bankers Association is resistant to any new underwriting standards that it claims could "stifle innovation and take good financing options out of the hands [of] homeowners." Rev. Jesse Jackson concurs with Dodd, calling predatory lending "targeted economic exploitation."
Sources: MarketWatch (I, II)
Commentary: Foreclosure Threat Ominous for Subprime Borrowers, A Look at Foreclosures per State, Homebuilder Sentiment and the Stock Market
ETFs to watch: iShares Cohen & Steers Realty Majors Sector Index Fund (ICF), iShares Dow Jones US Real Estate Index Fund (IYR), DJ Wilshire REIT ETF (RWR), Vanguard REIT ETF (VNQ), iShares Dow Jones US Home Construction (ITB), SPDR Homebuilders (XHB), PowerShares Dyn Building & Construction (PKB)
Toll Brothers Q1 Preliminaries: Revenues Down But Cancellations Abate
Toll Brothers, the #1 U.S. luxury homebuilder, offered preliminary results this morning for its Q1 2007 revenues, backlog, and contracts. FQ1 2007 revenues were down 19% to $1.09 billion from $1.34 in Q1 2006, missing the average analyst estimate of $1.12b. Net signed contracts were $749m, down 34%. Q1-end backlog was $4.15 billion, a decline of 30% from its record of $5.95 billion in 2006. Toll estimated Q1 writedowns at anywhere between $60 and $160 million. CEO But Toll noted that "the pace of cancellations is starting to abate." Q1 cancellations of 29.8% are down from 36.9% last quarter, but well above the company's historical average of 7%. Strong markets include Jersey City, Manhattan and Brooklyn, while Detroit, Chicago and parts of Florida have "not yet stabilized." He concluded: "We continue to believe that buyer confidence is the key to a turnaround in the new home market. It appears that the media's sentiment toward the housing market is becoming more balanced and their messages are making customers aware that, in the current climate of attractive interest rates, motivated sellers and a generally healthy economy, now is a good time to buy a home."
Sources: Press Release, Bloomberg, MarketWatch
Commentary: Existing-Home Sales Dismal, But Expected To Pick Up • Homebuilder Stocks: Is the Worst Over? • Why There's No Such Thing As a Housing Bubble
Stocks/ETFs to watch: Toll Brothers Inc. (TOL). Competitors: KB Home (KBH), D.R. Horton Inc. (DHI), Pulte Homes Inc. (PHM), Hovnanian Enterprises Inc. (HOV), Beazer Homes USA Inc. (BZH), Centex Corp. (CTX), Lennar Corp. (LEN). ETFs: streetTRACKS SPDR Homebuilders ETF (XHB), iShares Dow Jones U.S. Home Construction (ITB), PowerShares Dynamic Building & Construction (PKB)
Bidding War Between Blackstone and Vornado For EOP Finally Ends With Blackstone On Top
Like the decisive hand of hold 'em at the final table at the World Series of Poker, the bidding war between Blackstone and Vornado Realty Trust over Equity Office Properties finally came to an end with one side laying down its cards. After months of bidding and outbidding, bluffing, and a bit of 'trash talking' thrown in for good measure, Blackstone successfully acquired Equity Office, the U.S.' largest holder of office properties for $39 billion, or $55.50 a share as 92% of EOP's shareholders voted yesterday to approve Blackstone's all cash offer. The deal is expected to close on February 9. Vornado withdrew its offer just before the vote yesterday, after concluding that "the premium it would have to pay to top Blackstone's latest bid, protected by a twice-increased breakup fee, would not be in its shareholders' interest."
Sources: Wall Street Journal, Bloomberg, MarketWatch,
Commentary: Blackstone Ups Its Bid For Equity Office In Final Attempt To Freeze Vornado Out, Vornado, Blackstone Continue To Duke It Out In EOP Bidding War, Equity Office Properties: Sam Zell's Genius
Stocks/ETFs to watch: Equity Office Properties Trust (EOP), Vornado Realty Trust (VNO). Competitors: Boston Properties Inc. (BXP), Mack-Cali Realty Corp. (CLI). ETFs: iShares Cohen & Steers Realty Majors (ICF), Vanguard REIT Index ETF (VNQ), WisdomTree Dividend Top 100 (DTN), streetTRACKS DJ Wilshire REIT (RWR)
Electronic Data Systems Doubles Profit On Cost Cutting Measures
Electronic Data Systems reported 4Q06 earnings that included a doubling of profit as well as a nice increase in revenue on reduced costs and an increase in a contract to run the Navy's computer system. By the numbers, net income rose to $217 million, good for $0.42, up from $112 million (EPS of $0.21) in the year earlier period. Revenue rose 11%, to $5.7 billion. Excluding one-time items, earnings were actually $0.47 cents a share in the recent quarter. Consensus Bloomberg estimates were for EPS of $0.37 on sales of $5.53 billion. EDS is currently contracted to run the Navy's computer system for $9.9 billion; the company has also been cutting costs by shifting work to lower-cost countries, including India and China. According to Jefferies analyst Joseph A. Vafi, "A larger offshore presence has helped margins and brought costs down." Shares were higher by $1.10 (4.06%) to $28.18 in After hours action.
Sources: Electronic Data Systems Q4 2006 Earnings Call Transcript, Press Release, New York Times, TheStreet.com, MSN/FT.com
Commentary: EDS: An Untapped Play on Outsourcing, Accenture, EDS, Perot, Affiliated Computer: Stock Risk From Increased Outsourcing?, Cramer's Take on EDS
Stocks/ETFs to watch: Electronic Data Systems Corp. (EDS). Competitors: International Business Machines Corp. (IBM), Affiliated Computer Services (ACS), Computer Sciences Corporation (CSC), Perot Systems Corporation (PER)
Nortel Slashing Workforce by Another 9%
Nortel's shares rose more than they have in a year on the news that the company will cut its workforce an additional 9%. The company will eliminate 2,900 jobs and move about 1,000 more to lower-cost locations over the next two years. In combination with the sale of "excess real estate," the job cuts are intended to lower expenses by a hoped-for $400 million a year. The cuts are an initiative of CEO Mike Zafirovski, who has been trying to restructure the struggling company since taking the position in 2005. They were announced one day after the company notified the public that CFO Peter Currie is leaving; the timing might be an effort to reassure investors that the company's restructuring will not stumble in Currie's absence. Nortel provided guidance that Q4 sales should total about $3.26 billion, up 8% from a year ago. Analysts were expecting $3.21 billion. Gross margin is forecast to exceed 40% against 39.4% in Q3. About 75% of costs related to Zafirovski's reorganization -- $300 million for job cuts and $90 million for real-estate consolidation -- will be recorded in 2007.
Sources: MarketWatch, Wall Street Journal, Bloomberg
Commentary: Nortel Networks: Why Valuation Matters, Nortel to Undertake Dramatic Cost-Cutting Plan, Are The Troubles Over For Nortel Networks?
Stocks/ETFs to watch: Nortel Networks Corp. (NT). Competitors: Alcatel-Lucent (ALU), Cisco Systems, Inc. (CSCO), Siemens AG (SI). ETFs: iShares Goldman Sachs Networking (IGN), Broadband HOLDRs (BDH)
Warner Music Earnings Down, Misses Forecasts
Warner Music Group said FQ1 2007 profits fell 74% on an 11% drop in revenues. EPS was $0.12 ($18 million), down from $0.46 ($69m) in Q1 2006, missing analyst estimates of $0.24-0.26. Revenues were $928m, down from $945. Warner said it faced "unusually difficult" year-over-year comparisons. Digital revenues represented 12% of total revenues. Recorded music revenues were down 13%, music publishing revenues were up 2%, while digital revenues grew 45%.
Sources: Press Release, MarketWatch
Commentary: Warner Music Group Earnings Conference Call Transcript (later today) • Media Companies Slow to Bridge the Digital Divide • Warner Music Discusses its "Digital Milestone" and the Future of Physical
Stocks/ETFs to watch: Warner Music Group Corp. (WMG). Competitors: Digital Music Group (DMGI), Image Entertainment Inc. (OTC:DISK), Sony Corp. (SNE)
Tribune's Earnings Rise On Improved Revenues, Cost Cutting
Diverse U.S. media company Tribune Co. reported this morning that its Q4 2006 net income rose 78% on 5.4% higher revenue. EPS were $0.99 ($239 million) up from $0.43 ($134m) in Q4 2005. Net of one-time charges and gains, EPS was $0.65, beating consensus estimates of $0.61. Revenues were $1.47b, up from $1.39b and ahead of estimates of $1.43b. Key factors in the quarter included improved broadcasting revenues, strong interactive-revenue growth and improved expense control. According to Bloomberg, these results are likely to be the last before Tribune decides on a sale, after putting itself on the market for a buyout in September. Three offers are on the table: (1) Major shareholder the Chandler family who wants Tribune's eleven newspapers and would spin off its TV stations. (2) A leveraged recapitalization offer from Eli Broad and Ron Burkle. (3) The Carlyle Group private equity firm has expressed interest in its TV stations. The Chicago Tribune reported yesterday that Chicago real-estate investor Sam Zell has approached Tribune casually with a takeover proposal. Zell's Equity Office Properties (EOP) sale to Blackstone Group for $23 billion received shareholder approval yesterday. Tribune is the last of the major publishers to report. McClatchy took a loss after writing down the value of the Minneapolis Star Tribune, and NY Times reported its first loss in 10 years after writing down its Boston Globe unit by $814 million.
Sources: Press Release, Bloomberg, MarketWatch, Wall Street Journal
Commentary: Tribune Co. Earnings Conference Call Transcript (later today) • L.A. Times Editor Spells Out Its Troubles • Trying to Sort Out Tribune Bids After Sale Deadline Passes
Stocks/ETFs to watch: Tribune Company (TRB). Competitors: McClatchy Company (MNI), The New York Times Co. (NYT), Dow Jones & Company Inc. (DJ), Gannett Co. Inc. (GCI), Washington Post Co. (WPO), E.W. Scripps Co. (SSP), Lee Enterprises Inc. (LEE)
DirecTV: Strong Q4 Results Launch Stock to 52-wk High
DirecTV's Q4 results pleased the Street with EPS in-line with analysts' estimates, $0.29 vs. $0.29 (Bloomberg poll) and $0.30 (Thomson), as net income nearly tripled to $356 million, on 16% sales growth to $4.18b. DirecTV added 275,000 net subscribers (+38%) for its first growth in three quarters, increasing its total to nearly 16m. Monthly churn fell to 1.57% in the quarter compared to 1.7% in the year ago period, as DirecTV focused more on higher-end consumers, which also resulted in higher average monthly revenue per subscriber of $80.70, against $75.53 in Q4'05. Also, subscriber acquisition costs declined to $626, from $639 previously. It will raise prices again in March by 4%, following a hike by the same amount last March. Liberty Media is set to take control of DirecTV from News Corp in a deal reached last Dec., pending regulatory and shareholder approval. DirecTV shares gained 5.8% to $25.35 yesterday, hitting a new 52-week intra-day high of $26.09.
Sources: Press release, Bloomberg, BusinessWeek, Reuters
Commentary: Previewing DirecTV's 4Q Earnings • DirecTV: Our HDTV Plans Are OK, Despite Accident • Liberty to Acquire DirecTV and to Regain Sports Networks
Stocks/ETFs to watch: DirecTV (DTV), News Corp (NWS), Liberty Media Interactive (LINTA), Liberty Media Capital (LCAPA). Competitors: EchoStar Comm. (DISH), Comcast (CMCSA), Cablevision Systems (CVC), Shaw Comm. (SJR). ETFs: PowerShares Dynamic Media (PBS), PowerShares Aerospace & Defense (PPA)
DVD Demand Benefits Disney and News Corp.
Disney and News Corp. enjoyed higher profit and revenue in the quarter just ended on surging demand for hit movies on DVD. Disney's profit more than doubled to $1.7 billion ($0.79/share) from $734 million ($0.37) a year earlier. Profit excluding one-time items was $0.50/share, ahead of the Street's $0.40 forecast. Sales went up 9.8% to $9.73 billion on strong DVD sales against $8.85 billion last year. Excluding gains from the sale of interests in the E! Entertainment network and Us Weekly, Disney posted a rise in EPS to $0.50 from $0.35 a year earlier. News Corp.'s quarterly net income fell to $822 million ($0.26/share) from $1.08 billion ($0.33) a year ago, in line with forecasts. (Last year's net income reflected a gain from asset sales.) Revenues rose 9.8% to $9.73 billion in the quarter. News Corp.'s film unit saw a 57% rise to $470 million, beating a $385 million estimate. The MySpace website saw a tripling of revenue to $75 million and is expected to break even this year. Disney scored with big-budget family movies like "Pirates of the Caribbean" and "Cars," while News Corp. benefited from surprise-hit smaller-budget movies like "Borat."
Sources: Press release, Wall Street Journal, Bloomberg, MarketWatch. Conference call transcripts: Disney F1Q07 (Qtr End 12/30/06), News Corp. F2Q07 (Qtr End 12/31/06)
Commentary: Previewing Disney's 1Q Earnings, Hollywood Sweats the Peak of the DVD Format, News Corp.: Strong Film and Weak TV Earnings
Stocks/ETFs to watch: The Walt Disney Co. (DIS), News Corp. (NWS). Competitors: Time Warner Inc. (TWX). ETFs: Vanguard Consumer Discretionary ETF (VCR), PowerShares Dynamic Large Cap Growth (PWB)
ENERGY AND MATERIALS
Great Plains Energy, Black Hills Corp. To Acquire Aquila in Linked Deals
Great Plains Energy announced yesterday it will acquire utility Aquila for $1.7 billion. In a separate transaction, Aquila will sell certain of its assets to Black Hills Corp. for $940 million, debt included Great Plains Energy is paying a combined cash and share price of $4.54 per Aquila share; shares closed at $4.34 yesterday. The two transactions are predicated on each other's completion and both are expected to close in about a year.
Sources: Press Release, New York Times, Reuters
Commentary: Great Plains Energy Just Warming Up, Coal Cost Reduction Saves Big for Utilities
Stocks/ETFs to watch: Great Plains Energy (GXP), Aquila (ILA), Black Hills Corp. (BKH). ETFs: iShares Dow Jones U.S. Utilities Index (IDU), PowerShares Dynamic Utilities (PUI), Utilities Select Sector SPDR (XLU), Rydex S&P Equal Weight Utlities (RYU), Vanguard Utilities ETF (VPU)
Delinquencies in Sub-prime Mortgages Hit HSBC, Shares Trade Lower
HSBC's shares are trading lower in London by about 2% after closing down 2% in Hong Kong, following a warning the bank will have to raise its bad debt provisions by 20% to $10.56b for the year ended Dec. 2006. HSBC cites "accelerated delinquency trends across the US sub-prime mortgage market." It blames slowing housing price growth and says problems are developing "particularly in the more recent loans, as the absence of equity appreciation is reducing refinancing options." A London-based analyst points out how disturbing the warning is since it is recent loans that are troubling HSBC, and says the 'key issue was whether all the bad news was now out or if the delinquencies could spread.' Reuters reports JP Morgan downgraded HSBC to "underweight" from "neutral," advising clients to short the stock since it has further to drop. Also, Merrill Lynch reiterated its "sell" rating and said this is a "material negative surprise" noting it's the first time HSBC has pre-announced material information so close to an earnings release (scheduled Mar. 5).
Sources: Press release, MarketWatch, Reuters
Commentary: U.S. Housing Weakness Hits HSBC • HSBC Struggles Against Global I-banks • Barron's Euro Dogs of the Dow 2007
Stocks/ETFs to watch: HSBC (HBC). Competitors: Bank of America (BAC), Barclays (BCS), Citigroup (C), Lloyds TSB (LYG). ETFs: iShares S&P Global Financials (IXG), BLDRS Europe 100 ADR Index (ADRU), BLDRS Developed Markets 100 ADR Index (ADRD), streetTRACKS DJ Global Titans (DGT)
Have Wall Street Breakfast emailed to you every morning before the market opens.