New Century Halts New Loans; Einhorn Resigns
Shares of subprime mortgage lender New Century Financial fell 4.4% to $3.70 in AH trading after the company announced it will no longer accept loan applications because some of its backers are refusing to provide funding. The shares had already nosedived 25% during regular trading to close at $3.87. The stock is down more than 73% since last Friday's close. New Century has breached one of the covenants, or minimum financial targets, on which its agreements with warehouse lenders are based, and has not succeeded in securing waivers from five of its lenders. The bank has been obliged to repurchase some bad loans by one of its lenders, but has received $265 million in financing from another; Citigroup is rumored to be the former and Morgan Stanley the latter. New Century is also the subject of a federal investigation into its accounting practices. In related news, David Einhorn, manager of the Greenlight Capital hedge fund, resigned his position as a director of New Century. Greenlight owns 6.3% of New Century's shares. The value of that stake has gone from over $160 million in mid-2006 to about $14 million.
Sources: MarketWatch (I, II), Wall Street Journal
Commentary: New Century Leads Subprime Lender Selloff as its Shares Plummet 70% ・Asset-Backed Insecurities: Containing the Subprime Mortgage Collapse ・Subprime Trade Nailed (With a Little Help From Napoleon and Trump)
Stocks/ETFs to watch: New Century Financial Corp. (NEW). Competitors: Countrywide Financial Corp. (CFC), Pacific Premier Bancorp Inc. (PPBI), Novastar Financial Inc. (NFI), Fremont General Corp. (FMT)
Hovnanian Swings to Q1 Loss
U.S. homebuilder Hovnanian Enterprises reported yesterday that it swung to a Q1 loss of $57.3 million (-$0.91/share) versus a profit of $81.43 million ($1.25/share) a year ago, its second quarterly loss in a row after nine years of gains. The result is worse than analyst expectations of a $0.65 EPS loss. Hovnanian warned last week that it would post a Q1 loss and one-time write-offs related to Florida cancellations, as well as $8 million in write-offs in other markets. The Florida write-offs came in at $93 million. Q1 revenue was $1.17 billion, down 8.8% from $1.28 billion in the year-ago period. Without the write-offs, Hovnanian would have earned EPS of $0.20. The company is forecasting a net loss in Q2 of -$0.05-0.20 per share. Florida homebuyers canceled 36% of their contracts with Hovnanian in the quarter; elsewhere in the country, the company's cancellation rate was 29%. Most of our markets have begun to show signs of stabilization," said president and CEO Ara K. Hovnanian, "but we are not yet confident that we have found the bottom of this housing slowdown...Once the housing market bottoms out, we are not expecting a rapid recovery."
Sources: New York Times, Bloomberg, Newsday
Commentary: Hovnanian Enterprises: One to Hold For the Housing Sector Rebound ・Hovnanian Enterprises Suffers Gruesome Fourth Quarter ・Wachovia: Homebuilder Sales Trends Erratic
Stocks/ETFs to watch: Hovnanian Enterprises Inc. (HOV). Competitors: DR Horton Inc. (DHI), Lennar Corp. (LEN), Pulte Homes Inc. (PHM). ETFs: Rydex S&P Midcap 400 Pure Growth (RFG), streetTRACKS SPDR Homebuilders ETF (XHB), iShares Lehman 1-3 Year Treasury Bond Fund (SHY)
Philips Plans to Sell Remaining Stake in TSMC
Philips Electronics and Taiwan Semiconductor Manufacturing have agreed to a multi-phased plan for Philips to sell its remaining 16.2% stake in TSMC valued at US$8.5 billion. Philips' CFO says it is a "logical consequence" following its exit from the semiconductor business. TSMC's VP and CFO says the firm "intends to make good use of our cash while reiterating our commitment to maintain our current annual cash dividend per share." Philips plans to sell US$1.75b of TSMC shares to long-term investors in Taiwan through the Taiwan Stock Exchange. In addition, US$2.5b will be sold in the form of American Depositary Shares in a public offering, expected to happen on the NYSE. Both parties have agreed not to conduct further ADS offerings. Furthermore, TSMC will buyback US$1.5b of its shares on the Taiwan Stock Exchange, in which Philips will participate, with future buybacks planned in 2008 and 2010. Philips says it will no longer have a board position at TSMC.
Sources: Press release, Forbes-AFX Newswire
Commentary: Taiwan Semi's Founder Predicts Gloom and Doom For the Chip Industry ・Philips' Q4 Profit Doubles, Beats Estimates, Despite Drop in Sales
Stocks/ETFs to watch: Philips Electronics (PHG), Taiwan Semiconductor Mfg. (TSM). ETFs: BLDRS Emerging Markets 50 ADR Index (ADRE), iShares MSCI Emerging Markets Index (EEM), BLDRS Asia 50 ADR Index (ADRA)
National Semi Beats Despite Lower Q3 Earnings, Stock Gains on Outlook
National Semiconductor's Q3 net income fell 45% to $71.5 million, or $0.22/share, hurt by a 22% drop in revenue to $431m. Analysts expected net income of $0.20/share on sales of $433.6m. Its shares gained 3.3% to $25.28 in normal trading and added 1.2% to $26.52 in after-hours activity on volume of nearly 1.3 million. National Semi cited excess inventory and seasonality in wireless handsets for the drop in revenues. CEO Brian Halla told Reuters, "Almost everybody I talk to sees the same kind of regaining of health of the industry, and most everybody agrees the trough was early in the first quarter." He also commented that "this industry is anything but maturing." National Semi said it expects Q4 revenue to increase 3% - 6% sequentially. It also announced an additional share buyback of $500 million, in addition to the $141m it repurchased in Q3 and its remaining $50m earmarked for buybacks.
Sources: National Semiconductor F3Q07 Earnings Call Transcript, Press release, Reuters, SmartMoney.com
Commentary: National Semi: A Glimpse at the Chip Sector, Today ・Earnings Preview: Four Companies That Could Surprise This Week ・National Semi Revises Outlook to Reflect Less Shipments
Stocks/ETFs to watch: National Semiconductor (NSM). Competitors: Analog Devices (ADI), Texas Instruments (TXN). ETFs: Semiconductor HOLDRs (SMH), PowerShares Dynamic Semiconductors (PSI)
Vonage Ordered to Pay Verizon $58 Million for Patent Infringement
Voice-over Internet provider Vonage was ordered by a jury yesterday to pay Verizon Communications $58 million plus a 5.5% royalty on future sales for the infringement of three patents. The jury held that Vonage's act was not "willful," meaning Verizon is not entitled to the triple damages awarded in such cases of patent infringement. Verizon, which had sued Vonage for the infringement of a total of five patents, followed the verdict with a request that Vonage be permanently barred from using Verizon's technology -- a ruling that would cripple Vonage. A hearing to decide that question will be held March 23. Vonage plans to appeal the patent verdict as well as the injunction, should it be imposed. Vonage, which has over 2 million customers, lost $286 million on revenue of $607 million last year. Verizon earned $6.2 billion on revenue of $88.14 billion. Vonage shares fell more than 4% to close at $4.84 on the news -- their lowest close since their May IPO at $17 -- and then shed another 4% in AH trading. Verizon shares gained 2.2% to close at $36.48. In related news, Sprint Nextel Corp. is seeking compensation and a court order to bar Vonage from using disputed technology.
Sources: Bloomberg, Reuters, Mercury News
Commentary: Vonage Holdings: Unsafe at Any Price ・Vonage Holdings: Time to Hang Up The Phone ・Is Vonage Hopeless?. Conference call transcript: Verizon Q4 2006
Stocks to watch: Vonage Holdings Corp. (VG), Verizon Communications Inc. (VZ), Sprint Nextel Corp. (S). Competitors: Qwest Communications International Inc. (Q), AT&T Inc. (T)
Catalina Marketing To Be Taken Private By its Largest Shareholder, ValueAct Capital
Advertising group Catalina Marketing has agreed to be taken private by its largest shareholder, hedge fund ValueAct Capital Partners, for $32.10 a share in cash. Catalina's shares immediately gained 5.5% to $31.50 on the news.Other bidders have 45 days to outbid ValueAct; if none come forward, the deal is expected to close in the next few months. ValueAct already owns 16% of the direct- to-consumer marketing company. Catalina had rejected ValueAct's last offer, which valued it at $0.10 less a share; its shares are up 27% over the last 12 months.
Sources: Press Release, Bloomberg, TheStreet.com, Reuters
Commentary: Catalina Marketing: ValueAct Capital Offers Buyout
Stocks/ETFs to watch: Catalina Marketing Corporation (POS). Competitors: Omnicom Group (OMC), WPP Group (WPPGY), Interpublic Group of Companies, (IPG), Valassis Communications (VCI)
Play Ball! DirecTV and Major League Baseball Ink Non-Exclusive Broadcast Deal
With growing political pressure from the likes of John Kerry and others, DirecTV Group and Major League Baseball announced a seven-year deal, for a reported $700 million for broadcast rights to its 'Extra-Innings' package which shows 60 games a week. The concern had been that MLB would sign an exclusive deal with DirecTV, shutting out other cable and satellite TV providers. But MLB relented, in what commissioner Bud Selig is calling "a cause for celebration for baseball and its fans," and the ability to negotiate to carry 'Extra Innings' has been made available to all the cable providers who currently carry it including Time Warner Cable, Comcast and Cox Communications, as well as DirecTV's rival in satellite TV, the Dish Network, who will have a month to negotiate with MLB for the rights. Had DirecTV been given exclusive rights, it would have meant only its 16 million subscribers would have had access to Extra Innings instead of the 75 million who had access this past season. DirecTV also agreed to start carrying MLB's Baseball Channel on its basic tier starting in 2009.
Sources: Press Release, Bloomberg, TheStreet.com, AP
Commentary: Liberty to Acquire DirecTV and to Regain Sports Networks ・Satellite TV: EchoStar No Cheaper than DirecTV ・DirecTV: Higher CapEx Pushing Out FCF Ramp
Stocks/ETFs to watch: DirecTV Group (DTV). Competitors: EchoStar Comm. (DISH), Comcast (CMCSA), Time Warner Cable (TWC), Cablevision Systems (CVC). ETFs: PowerShares Dynamic Media (PBS)
Coke, Pepsi Losing Market Share
Beverage marketers Coca-Cola and PepsiCo experienced a 0.6% drop in soft-drink volume in 2006, significantly steeper than a 0.2% slip in 2005, on waning consumer interest in core brands Coca-Cola Classic and Pepsi-Cola. On the plus side, volume for caffeinated "energy" drinks soared. The $70 billion annual beverage market in the U.S. is now crowded with offerings well beyond traditional soft drinks, including sports beverages, bottled water and premium coffees. Coke's soft-drink market share slid to 42.9% from 43.1% in 2005, while PepsiCo's fell to 31.2% from 31.4%. The share of British rival Cadbury Schweppes, which markets Dr. Pepper and 7Up, gained 0.3 percentage point to 14.9%. While Coke and Pepsi's namesake brands lost volume, their smaller brands did well: Pepsi's Diet Mountain Dew gained 8.5% and Coke's Fanta brand gained 7%. Several new products fell flat in the marketplace, like Pepsi Vanilla and Vanilla Coke. The two companies responded to the second consecutive annual volume decline by reiterating their strategy to roll out a wide array of noncarbonated products. According to consultancy Beverage Marketing, the fastest-growing nonalcoholic beverage brands were Coke's Dasani water and PepsiCo's Aquafina, Gatorade and Tropicana.
Sources: Wall Street Journal
Commentary: Questioning Sell-Side Consensus On Coca-Cola ・Super Fizzy Soda Stocks ・New President Envisions a "Winning Culture" for Coke. Conference call transcripts: PepsiCo Q4 2006, Coca-Cola Q4 2006
Stocks/ETFs to watch: The Coca-Cola Company (KO), PepsiCo, Inc. (PEP). Competitors: Cadbury Schweppes plc (CSG), Kraft Foods Inc. (KFT). ETFs: Vanguard Consumer Staples ETF (VDC), Vanguard Dividend Appreciation ETF (VIG), PowerShares Dynamic Food & Beverage (PBJ)
Second Nikko Shareholder Says Citi's Bid Too Low, Shares Trade Higher
Nikko Cordial gained 3.1% to ¥1,410 today in Tokyo and now trades nearly 4.5% higher than Citigroup's bid of ¥1,350/share (totaling $10.8 billion). Southeastern Asset Management, Nikko's second largest shareholder with a 6.6% stake, claims Nikko is worth more than ¥2,000/share. This follows a similar statement by Harris Associates, Nikko's largest investor with a 7.5% stake. Citigroup, a 4.9% shareholder, is set to initiate its tender by next Tuesday and has a right to cancel its offer if it cannot gain majority control. Unconfirmed sources say Nikko has asked Mizuho Financial Group, which owns 4.8% of Nikko, to sell its stake to Citi. Mizuho however, appears to be holding out for a possible tie-up with Citi. Reuters notes Nikko, Japan's third largest brokerage, is valued at 1.6x book value, compared to 2.3x for Nomura (#1) and 2.6x for Daiwa Securities (#2). Nikko faces a possible delisting by the Tokyo Stock Exchange related to an accounting scandal.
Sources: Bloomberg, Reuters
Commentary: Nikko Cordial's Largest Shareholder Says Citi's Bid Too Cheap ・Nikko Cordial: What Should Shareholders Do Now? ・Citigroup Bids $10.8 Billion for Nikko Cordial
Stocks/ETFs to watch: Citigroup (C), Nikko Cordial (OTC:NIKOY), Mizuho Financial Group (MFG). Competitors: Mitsubishi UFJ Financial Group (MTU), ABN Amro Holding N.V. (ABN), Nomura Holdings (NMR). ETFs: iShares S&P Global Financial Index Fund (IXG), iShares Dow Jones US Financial Services (IYG), Financial Select Sector SPDR (XLF)
CVS Sweetens Caremark Bid Yet Again to Top Express Scripts
CVS has made its "best and final offer" for employee-benefits manager Caremark RX less than a day after Express Scripts upped its hostile bid. CVS boosted its bid by 2.5% to $26.9 billion, matching the Express offer. The Caremark board has accepted CVS's revised bid. CVS increased the dividend it is offering Caremark shareholders by $1.50, raising the total offer to $61.62 per share in cash and stock. It also plans to buy back 150 million of its own shares for $35 each after the transaction is final. Express said yesterday it would pay an extra half cent a day for each Caremark share starting April 1, which could bring its offer to as much as $62.50 a share. Express has not commented on the new CVS bid. Caremark shareholders will vote on the CVS offer on March 16 and CVS investors on March 15. A motion to delay the Caremark vote was denied yesterday by a Delaware judge. CVS shares gained $1.09 to $32.41 on the news, Caremark shares rose $0.86 to $62.16, and Express Scripts shares rose $1.23 to $76.00.
Sources: Bloomberg, MarketWatch, Reuters
Commentary: Express Scripts Ups Its Caremark Bid ・Don't Expect Express Scripts to Bow Out of Caremark Rx Bidding ・Is CVS' Bid the Fix Caremark Investors Need?
Stocks/ETFs to watch: Caremark Rx, Inc. (CMX), Express Scripts, Inc. (ESRX), CVS Corp. (CVS). Competitors: Medco Health Solutions Inc. (MHS), Wal-Mart Stores, Inc. (WMT), Unitedhealth Group, Inc. (UNH). ETFs: iShares Dow Jones US Healthcare Provider (IHF), Rydex S&P 500 Pure Growth (RPG), Retail HOLDRs (RTH)
Have Wall Street Breakfast emailed to you every morning before the market opens.