Hewlett-Packard Posts 26% Profit Gain
Hewlett-Packard enjoyed a 26% jump in Q1 earnings on the back of strong holiday demand for PCs and printers. The company earned $1.55 billion ($0.55/share) for the quarter ended Jan. 31 versus $1.23 billion ($0.42/share) last year. Q1 revenue was $25.1 billion against $22.7 billion a year ago, an 11% gain. Excluding charges, the company earned $1.8 billion ($0.65/share), ahead of analyst forecasts of $0.62/share on $24.3 billion in revenue. Though earnings beat estimates, overall profit margin contracted to 7.3% from 7.7% in the previous quarter. H-P's price-cut strategy on PCs paid off, enabling the company to regain the number-one position in U.S. PC sales from Dell. CEO Mark Hurd plans several cost-cutting measures, including a freeze of the company's U.S. pension plan, a reduction in eligibility for a subsidized retiree medical program, and an early-retirement program. Q2 EPS is estimated at $0.63-0.64, in line with analyst expectations, on sales of $24.5 billion. The sales estimate implies a 2.5% seasonal decline, raising concerns that H-P will not be able to sustain its market share gains. Q2 sales are projected at $24.5 billion, 8.6% above a year earlier. For the full fiscal year, sales are forecast at $98-99 billion, a 6.9-8% increase.
Sources: HPQ F1Q07 Conference Call Transcript, Wall Street Journal, MarketWatch, Business Week, Bloomberg
Commentary: H-P's Earnings Beat Estimates But Concerns Remain • Hewlett-Packard: Estimates in for Strong Fourth Quarter • Consumer PCs Beyond Apple: HP and Gateway are Hot, Dell is Not
Stocks/ETFs to watch: Hewlett-Packard Co. (HPQ). Competitors: Dell Inc. (DELL), International Business Machines Corp. (IBM), Canon Inc. (CAJ). ETFs: Internet Architecture HOLDRs (IAH), iShares Dow Jones US Technology (IYW), PowerShares Dynamic Hardware & Consumer Electronics (PHW)
WSJ: CBS-YouTube Deal Falling Apart
TV networks are increasingly apprehensive about potential copyright infringements on YouTube even though the video-sharing site complies with requests to take down copyrighted content published without permission. The Wall Street Journal reports sources say CBS could be the latest deal to fall through for YouTube. It is unclear how concerns over copyrights will impact any CBS-YouTube deal since the WSJ mentions sources say negotiations stalled on issues such as how long the deal should be. Nonetheless, YouTube has faced setbacks recently as media companies (such as Viacom and NBC) it had been negotiating with changed course and even requested content be blocked and/or removed. A key question for Google is if it can be held liable even if YouTube removes unauthorized material. Media companies claim they want to avoid lawsuits. Some are creating their own video sites, but YouTube remains the undisputed king, driving monthly traffic now topping 30 million visitors.
Sources: The Wall Street Journal
Commentary: WSJ: Viacom Nears Online Video Deal With Joost.com • Google Comes Under Fire For Alleged Support Of Pirated Content • Media Giants to Form YouTube Rival
Stocks/ETFs to watch: CBS (CBS), Google (GOOG). Competitors: Viacom (VIA), General Electric (GE), Time Warner (TWX), News Corp (NWS), Disney (DIS). ETFs: PowerShares Dynamic Media (PBS), First Trust IPOX-100 Index (FPX), NASDAQ 100 Trust Shares (QQQQ)
Any EMI Offer Will Be in Cash -- Warner Music
Warner Music Group, the world's #4 record company, said Tuesday that if it does make an offer for EMI Group, it would likely be "solely" in cash, thus avoiding the need for shareholders to notify their interests in Warner Music under British takeover rules. It said it had approached EMI about a deal, and that it had the support of Impala -- a trade group representing independent music labels that has challenged industry consolidation in the past. Over the past seven years, both WMG and EMI have at times tried to buy each other out, while struggling with a loss of physical music sales to digital downloads. Past buyout attempts have been thwarted over concerns a tieup would be blocked by EU regulators. Impala's approval of the present deal "improves the prospects for regulatory approval of a combination of WMG and EMI," the company said, adding that its offer was still preliminary, and there can be no certainty that an official offer will be made. Analysts believe the bid for EMI will be for about 260p a share; shares closed at 240p.
Sources: Press Release I, II, Bloomberg, Reuters
Commentary: EMI Shares Jump on 'Approach' from Warner Music • Media Companies Slow to Bridge the Digital Divide • Warner Music Group F1Q07 Earnings Call Transcript
Stocks/ETFs to watch: Warner Music Group Corp. (WMG). ETFs: PowerShares Dynamic Media Portfolio ETF (PBS), PowerShares Dynamic Leisure & Entertainment (PEJ)
Kraft Foods Unveils New Growth Strategy, Buyback Plan
Kraft Foods' shares were off 3% yesterday on the company's below-forecast 2007 profit guidance. The company, which is being spun off from Altria Group next month, also announced a buyback of up to $5 billion in stock and a turnaround plan designed to boost sales and shrink costs. Kraft is projecting 2007 earnings at $1.75-1.80 per share, excluding $0.25 in restructuring costs, below Street expectations of $1.92. For 2008, Kraft is forecasting 3-4% organic revenue growth, with operating income exceeding revenue growth. By 2009, the company hopes to realize at least 4% organic net revenue growth and 7-9% EPS growth. The growth plan will involve greater spending on marketing and a shakeup of the company's product line. Kraft will also cut 6% of its workforce to save an annual $400 million. The company, which produces Oreo cookies and Maxwell House coffee, is prominently featured in all food segments (frozen, refrigerated and on-the-shelf). CEO Irene Rosenfeld plans to focus more on higher-margin ready-meal offerings and on brands that supply consumers' growing interest in healthier food. She also wants to take more market share from restaurants and shift away from dwindling products like processed cheese slices.
Sources: TheStreet.com, MoneyCentral, MarketWatch, Bloomberg
Commentary: Altria to Spin Off Kraft... What a Shock! • Altria Shareholders - Dump Your Kraft Shares • Kraft Spinoff Goes Up in Smoke
Stocks to watch: Kraft Foods Inc. (KFT). Competitors: PepsiCo, Inc. (PEP), ConAgra Foods Inc. (CAG), Sara Lee Corp. (SLE)
Supreme Court Overturns $79.5 Million Damages Verdict Against Philip Morris
The U.S. Supreme Court has thrown out a $79.5 million judgment against the Altria Group's Philip Morris unit on the grounds that defendants cannot be punished for harm caused to parties not involved in a lawsuit. The Court refrained, however, from putting a formula in place to limit damage awards. The case concerned one Jesse Williams, who died of lung cancer in 1997 after smoking Marlboros for 42 years. His wife was awarded both compensatory and punitive damages by Oregon juries, but the case will now be returned to the Oregon Supreme Court. The Supreme Court is instructing juries not to award damages simply by multiplying a dollar amount times the number of consumers of a product, since doing so denies the defendant due process (the company cannot defend itself against each individual claim). Juries will, however, be allowed to take into account whether the defendant's conduct risks harm to many people or only a few, since the former is judged to be more "reprehensible" than the latter. The decision poses an immediate benefit not only to Philip Morris but also to Merck, which faces 28,000 lawsuits over its withdrawn painkiller Vioxx; and Ford, which faces hundreds of lawsuits over its rollover-prone Explorer SUV.
Sources: Wall Street Journal, Bloomberg
Commentary: Tobacco Regulation Bill Reintroduced in Congress • Altria Group: Light Smokers Lose $10 Billion Judgement • Merck's Vioxx Lawsuits: Is the Street Pricing the Liability Correctly?
Stocks/ETFs to watch: Altria Group Inc. (MO), Merck & Co. (MRK), Ford Motor Co. (F). ETFs: First Trust Morningstar Dividend Leaders Index (FDL), DIAMONDS Trust, Series 1 (DIA), WisdomTree High-Yielding Equity (DHS)
TRANSPORT AND AEROSPACE
Renault CFO: 'We Want No Part in Chrysler'
In the clearest indication yet of the difficult time DaimlerChrysler may have selling off its struggling North American Chrysler unit, the Wall Street Journal is reporting that Renault's CFO, Thierry Moulonguet, told a group of investors that his company, which is in the process of a merger with Nissan, is not interested in acquiring Chrysler or becoming involved with the unit in any way. Nissan and Renault have sought an American partner to create a three-headed global carmaker; talks with GM on a possible alliance broke down last year. And in yet another indication of the difficulties parent DaimlerChrysler may have unloading its North American unit, a Feb. 19 report issued by Morgan Stanley analysts claimed that selling Chrysler for €5 billion would actually boost DaimlerChrysler's market value by about €12 billion, or about 20%.
Sources: Wall Street Journal, Reuters
Commentary: DaimlerChrysler Is Disclosing Chrysler's Financial Information to Suitors • Daimler-Chrysler: Does Divorce Really Loom? - Barron's • DaimlerChrysler AG Q4 2006 Earnings Call Transcript
Stocks/ETFs to watch: DaimlerChrysler (DCX), Nissan (OTCPK:NSANY). Competitors: General Motors (GM), Ford (F), Toyota (TM), Honda (HMC)
ENERGY AND MATERIALS
ExxonMobil Shelves Qatar Gas-to-Liquid Project in Favor of Natural Gas
ExxonMobil Corp. and Qatar Petroleum announced Tuesday they were abandoning their joint gas-to-liquids project that sought to produce clean diesel from natural gas, instead focusing on providing natural gas to Qatar. The new project, Barzan, will concentrate on a drilling setup in Qatar's rich Barzan field. While the details were vague, Exxon didn't deny that higher-than-expected costs were a factor in its decision. Jeanne Miller, Exxon spokeswoman: "This decision to not progress with G.T.L. is in line with our focus on maximizing the value of resources for both our host government as well as our shareholders." Qatar has attracted GTL investments because of its large NG reserves and friendly stance towards energy companies. Costs for oil and gas development are up 53% since 2004, causing producers to reprioritize many major projects. Royal Dutch Shell, which owns the #2 GTL project in Qatar, said Exxon's decision will not impact its plans; its Pearl plant is slated to produce 140,000 barrels/day of diesel and byproducts by 2009. GTL has been favored by energy producers because it can be transported and sold using existing equipment and stations, unlike other unconventional fuels.
Sources: Press Release, ExxonMobil Q4 2006 Earnings Conference Call, New York Times, BusinessWeek
Commentary: Sasol and the Liquid Coal Revolution • Syntroleum Corp: Tremendous Technology, Tremendous Risk
Stocks/ETFs to watch: ExxonMobil Corp. (XOM), Royal Dutch Shell (RDS.A). Gas/coal to liquid players: Syntroleum Corp. (SYNM), Rentech Inc. (RTK), Sasol Ltd. (SSL). ETFs: PowerShares WilderHill Clean Energy ETF (PBW), PowerShares WilderHill Progressive Energy ETF (PUW)
Related: In its Q4 2006 Earnings Conference Call on Feb. 1 2007, XOM VP Henry Hubble told investors regarding the Qatar GTL project: "There are cost pressures, no question about that... but we are still optimistic about it."
Arcelor Mittal Profit Falls, DoJ Orders Company To Sell Maryland Mill
In its first earnings reported as a combined company, Arcelor Mittal said profit for FY 2006 was lower by 3.5% mainly due to higher taxes; sales rose 10%. The earnings numbers, which were projected as if the companies had already been merged for a full year, showed net income fell slightly to $7.97 billion, good for EPS of $5.76, versus $8.26 billion (EPS of $5.97) in the year earlier period. The company, which produces 10% of the world's steel, announced plans to return nearly $2.4 billion to shareholders through share buybacks ($590 million) and dividend payments ($1.8 billion). Forward guidance for 1Q07 should be in-line with the current quarter's results according to management. In other news, yesterday the U.S. Department of Justice ordered the company to sell the Maryland-based Sparrows Point mill in order to settle antitrust issues. The mill employs 2,400 workers and is one of the largest blast furnaces in North America.
Sources: Bloomberg, Forbes, Business Week
Commentary: With Latest Acquisition, Arcelor-Mittal Becomes Mexico's Largest Steel Producer • Will Another Iron-ore Price Hike Stop Surging Steel Stocks? • ArcelorMittal - A Sustainable Global Steel Titan?
Stocks/ETFs to watch: Arcelor Mittal (MT). Competitors: United States Steel Corporation (X), Rio Tinto (RTP), Companhia Vale do Rio Doce (RIO), BHP Billiton (BHP). ETFs: Market Vectors Steel ETF (SLX)
Payday Lenders Opt to Regulate Themselves
Payday lenders are placing voluntary restrictions on their industry in a bid to fend off looming legislation. Payday lenders offer short-term loans that are payable on the day the borrower is paid. A borrower who takes out a two-week payday loan will pay about $15 on every $100, a 390% annual interest rate. The lenders say such rates are required to cover costs and protect them from defaults, but critics call them exorbitant and say the system is set up to trap low-income borrowers in a cycle of fees. The industry accounts for about $40 billion in loans annually, and demand is soaring. Payday lending has been barred from 13 states and over 50 bills have been introduced this year in state legislatures to cap interest rates on these loans. The Community Financial Services Association of America, the industry's trade group, has announced several actions designed to head off excessive regulation. The industry will prohibit advertising loans for purposes like gambling, and will offer extended payment plans [EPPs] to customers who cannot pay on time. An EPP can be used once a year and will give the borrower an extra two to four months to pay without incurring additional interest or fees.
Source: Wall Street Journal
Commentary: Barron's Stocks for a Wealthy America • Tom Brown's Financial Services Picks • I Love Payday Lenders (The Motley Fool)
Stocks to watch: Advance America, Cash Advance Centers (AEA), QC Holdings Inc. (QCCO), First Cash Financial Services (FCFS), Cash America (CSH), CompuCredit Corp. (CCRT)
Shire to Buy New River Pharmaceuticals for $2.6 Billion
Shire Pharmaceuticals will acquire New River Pharmaceuticals for $2.6 billion. This will give it control over Vyvanse, New River's pediatric ADHD [attention deficit hyperactivity disorder] drug, which is expected to receive FDA approval this week. The purchase is likely meant to hedge pending declines in sales for Adderall XR, Shire's existing ADHD drug, which will lose patent protection in 2009. Adderall, the most-prescribed ADHD drug in the U.S., accounts for 40% of Shire's profits. The ADHD market in the U.S. is $4 billion. Some analysts doubt the acquisition will adequately compensate Shire for the loss of patent protection on Adderall, since the drug's customer base is so loyal: many parents might be more inclined to seek out generic versions of Adderall than to try a new medication, even though Vyvanse is said to be less addictive. Shire's shares rose 4.5% to reach a 5-1/2 year high and New River shares rose 8.8% to $63.50 on the news. Shire will pay $64.00 a share for New River and finance the transaction with $2.3 billion of new debt and a new share placement. The deal is likely to enhance Shire's attractiveness as a takeover target, since it adds to its series of drug launches.
Sources: Bloomberg, Red Herring, Reuters, Smart Money, TheStreet.com
Commentary: Analysis of a Ten Bagger Stock: New River Pharmaceuticals• FDA Approvable Letters for New River Pharmaceuticals, Shire, Allergan and Perrigo • SAC Capital: Notable Portfolio Changes
Stocks/ETFs to watch: New River Pharmaceuticals, Inc. (NRPH), Shire plc [ADR] (SHPGY). Competitors: Novartis AG (NVS), Abbott Laboratories (ABT), Eli Lilly & Co. (LLY), Celgene Corp (CELG). ETFs: Biotech HOLDRs (BBH), iShares Nasdaq Biotechnology (IBB)
Edwards Lifesciences Receives FDA Warning
Heart device maker Edwards Lifesciences Corp. said yesterday it received a warning from the FDA about the quality-systems handling at its California facility. The warnings states that Edwards will cease to received FDA premarket approval for devices "reasonably related to those issues." CEO Michael A. Mussallem said the company is fully committed to resolving the issues promptly, and does not expect the matter to have a material impact on its 2007 financial guidance. Products on its horizon that require FDA approval include a new use for its "LifeStent" and a next-gen replacement valve for the heart's mitral position. EW stock was down $1.43 (2.7%) to $50.98 in yesterday's trading.
Sources: Press Release, Wall Street Journal
Commentary: Biotech Day in Review: 20/2/2007
Stocks/ETFs to watch: Edwards Lifesciences Corp. (EW)
BoJ Hikes to 0.5%; To Maintain 'Gradualist' Strategy, Yen Falls
The Bank of Japan voted 8-1 earlier today to raise its target for short-term interest rates to 0.5%, from 0.25%. This is the first change in monetary policy since it hiked to 0.25% last July, after five years of supporting its zero interest rate policy. The BoJ noted improvements in two key areas: consumer spending, which it claims had suffered from seasonal weakness, and less concern about the strength of important overseas economies. The Nikkei 225 initially traded lower on the news, but rallied back, while the broader TOPIX added 0.25% to close at a 15 year high. Traders sold the yen following the BoJ's decision and officials' comments -- it is now just under ¥121/$1. BoJ Governor Toshihiko Fukui said forex was not behind today's rate hike, although he recognizes the carry trade could hurt the economy. The BoJ's benchmark rate of 0.5% is 4.75% lower than the Federal Reserve's 5.25%, still a sizable gap which will likely keep downward pressure on the yen.
Sources: Bank of Japan decision [.pdf], Bloomberg, MarketWatch
Commentary: Bank of Japan's Policies are the Problem, Not the Solution • Will the Yen Bears Be Surprised? • The Yen Gains Strength -- What Should We Expect?
Stocks/ETFs to watch: Mitsubishi UFJ Fin. Grp. (MTU), Mizuho Fin. Grp. (MFG). ETFs: iShares MSCI Japan Index (EWJ), iShares S&P/TOPIX 150 (ITF), BLDRS Asia 50 ADR Index (ADRA), CurrencyShares Japanese Yen Trust (FXY)
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