Stocks Plunge 8% in China, Benchmarks Down 16% Since Wednesday
Bloomberg reports an editorial in the state-owned China Securities Journal mentioned "weak sentiment" behind volatile trading in "unsustainable" rallies, as stock price appreciation was "extremely unusual" and highlighted "structural bubbles." This, in addition to rumors of a possible hike in capital gains tax, sent Chinese stocks lower from the open, to close off by 8%. Chinese benchmarks have lost around 16% since last Wednesday -- losing $350 billion plus in market cap -- when the government increased the "stamp tax" on stock trading. A newspaper report said Beijing is set to announce an increase in the supply of land in order to slow real estate gains. Also, there was talk a 20% tax on savings deposit interest may be eliminated in order to limit outflow to stocks. The CSI 300 Index, which tracks A-share listings on both the Shanghai and Shenzhen Exchanges, fell 7.7% to 3,511.43. B-shares in Shanghai lost 7.8% vs. 6.6% in Shenzhen. The rest of Asia however, mostly traded to the upside, including the Hang Seng up 0.6% and H-shares up 0.4%, led by a 1.2% gain by the Seoul Composite.
Commentary: Anatomy of a Chinese Bubble: A Checklist For Spotting Bubble Tops • China ETF Safety Net: Protect Against Downside Risk • Morgan Stanley China Closed End Fund: NAV Up While Market Price Lags • Shanghai Drops 6.5% on Trading Tax Hike, Asia Trades Lower, But Stable
Stocks/ETFs to watch: Morgan Stanley China A Share (CAF), iShares FTSE/Xinhua China 25 Index (FXI), PowerShares Gld Drg Haltr USX China (PGJ), The China Fund (CHN), The Greater China Fund (GCH), JF China Region Fund (JFC), First Trust ISE ChIndia Index Fund (FNI)
Palm to Announce PE Investor at 9% Premium, New Board and $9 Dividend
The Wall Street Journal and New York Times report sources say Palm will announce today it is selling a 25% stake ($325 million) to Elevation Partners, a Silicon Valley-based private equity firm. In addition, two former Apple executives will join its board and the firm will issue a $9 special dividend. As part of its restructuring, Palm will reportedly pay $940m, or about $9/share to shareholders, financed with the Elevation investment and a combination of cash and $400m in new debt. Palm still expects to have more than $200m in cash after the payout. Excluding the dividend, Elevation is paying $8.50/share, or a 9% premium over Palm's close Friday, in which it lost 1.1% to $16.09. Two current board members will resign to make room for Jon Rubinstein and Fred Anderson, both formerly of Apple and current Elevation partners. Rubinstein was head of software and led development of the iPod before retiring in '05. Anderson was a CFO at Apple. The Times says Palm was in talks with rivals and other private equity groups about a takeover, but there was no interest in a 100% deal due to uncertainty over the firm's future.
Sources: The Wall Street Journal, The New York Times
Commentary: Palm Rolls Out Foleo, A 2.5 Pound Smartphone Sidekick • Palm Posts 61% Drop in Q3 Profit, Beating Expectations • Palm: Shareholders Eagerly Await Buyout News
Stocks/ETFs to watch: Palm Inc. (PALM). Competitors: Research In Motion Ltd. (RIMM), Motorola Inc. (MOT), Nokia (NOK), Apple Computer Inc. (AAPL). ETFs: Wireless HOLDRS (WMH)
Conference call transcripts: Palm F3Q07
Hitachi, Oracle to Sell Anti-Piracy IC Tags to China
A report in the Sunday edition of the Nikkei Shimbun said Hitachi and Oracle will jointly market wireless integrated circuit [IC] tags in China, in order to help prove the authenticity of goods, including tickets to the 2008 Beijing Olympics -- their first target. The IC tags are capable of storing product-related information such as the original manufacturer and location of production. Each tag will reportedly cost around 10 yen ($0.08). Reuters said no one was available for comment at either company. Tokyo-based Ubiquitous ID Center, an IC tag issuer and manager, will also promote the tags with Hitachi and Oracle. The Nikkei article noted demand for IC tags is expected to increase across a broad selection of products, including cash vouchers, luxury items and home appliances.
Sources: Forbes XFN newswire, Reuters
Commentary: China Irate Over U.S. Piracy Complaints to WTO • Microsoft Forecasts 20% China Sales Gain on Anti-Piracy Campaign • Piracy From China: How Microsoft, Ralph Lauren, Nike And Others Can Cope
Stocks/ETFs to watch: Hitachi (HIT), Oracle (ORCL)
Conference call transcripts: Oracle F3Q07
Cadence Design Negotiates With Buyout Firms -- NYT
Cadence Design Systems is negotiating with at least two buyout firms, the New York Times reports citing two people close to the matter. The company, which makes computer chip design software, has spoken with KKR and Blackstone, they said, but warned a deal may not be imminent due to private equity's reluctance to enter the arena of complex tech companies who require vast R&D spending, and because its relatively high $6.4 billion market cap makes it a rich risk. Cadence is regarded as one of the most innovative and aggressive companies in its field. Since 2004, it has acquired four companies, invested heavily in other Silicon Valley firms, and repurchased $1 billion of its shares. Cadence says it will introduce a new approach to chip design this year that lays wires diagonally, horizontally and vertically, making chips faster and more efficient. But Intel recently pulled support from Cadence in favor of Magma Design, which Intel says has a time-to-market advantage. Despite underwhelming revenue growth ($1.329 billion in 2005 vs. $1.484 billion in 2006), Cadence shares are up almost 100% YTD to $23, giving it a 4.1 sales multiple; competitor Synopsis trades for 3.3x, while Magma Design trades for 3.1x.
Sources: New York Times, 24/7 Wall Street
Commentary: Natural Disasters: Is Magma's Loss Cadence's Win? • Cadence Design Systems: Immune To the Semiconductor Inventory Glut • Synopsys F2Q07 (Qtr End 4/30/07) Earnings Call Transcript
Stocks/ETFs to watch: Cadence Design Systems (CDNS), Intel Corp. (INTC), Magma Design Automation Inc. (LAVA), Synopsys Inc. (SNPS)
Conference call transcript: Cadence Design Systems Q1 2007, Synopsys F2Q07
YouTube and Hearst-Argyle to Share Revenue
YouTube, Google's online video-sharing unit, announced Sunday it has reached a revenue-sharing deal with local TV station operator Hearst-Argyle TV. Hearst-Argyle, which owns 26 stations, will provide YouTube with news, weather and entertainment content as well as digital video clips of local interest, including high school football and basketball games and amateur entertainment. In exchange, YouTube will pay licensing fees to the originating local stations each time their clips are viewed on the site. This will be the first time YouTube has paid for video content from local TV. The fees will be paid from the ad revenue YouTube earns when users view Hearst-Argyle's clips. The percentage that will go to Hearst-Argyle was not disclosed. "We have great content, and they have great distribution," said Terry Mackin, Hearst-Argyle's executive VP. The announcement follows YouTube's agreement last week to enter into a video and music licensing agreement with EMI Group. That deal will allow users to play EMI videos and recordings on YouTube and also to incorporate them into their own video content. YouTube will track viewers' use of EMI content and pay its artists accordingly.
Sources: Wall Street Journal, Reuters, News.com
Commentary: Google's YouTube and Revenue Sharing • Four Broadcast TV Stocks to Watch -- Barron's • Google’s Video PlusBox: Most Disruptive Feature Ever?
Stocks/ETFs to watch: Hearst-Argyle Television, Inc. (HTV), Google Inc. (GOOG). Competitors: Microsoft Corp. (MSFT), Yahoo! Inc. (YHOO), Sinclair Broadcast Group Inc. (SBGI). ETFs: First Trust IPOX-100 Index (FPX), First Trust Dow Jones Internet Index (FDN), iShares S&P Global Technology (IXN)
Conference call transcripts: Google Q1 2007
Murdoch to Meet Bancrofts Monday
Rupert Murdoch will meet on Monday with members of the Bancroft family, who hold a controlling interest in Dow Jones, to discuss his $60 a share bid for the company. Though Murdoch has expressed willingness to agree to tougher editorial controls than he has in in the past, he is balking at the Bancrofts' insistence that they control the editorial-oversight board that would be created as part of the deal. "I can't put down $5 billion of my shareholders' money and not be able to run the business," Murdoch said in an interview Friday with the Wall Street Journal. He claims to have "no plans to change anything" at the Journal, considered the jewel in Dow Jones's crown, but the family and Journal management remain apprehensive. "No asset is more important to the Journal than its editorial independence, including the freedom to decide what and whom the Journal covers," said Journal managing editor Marcus Brauchli. In addition to the question of the editorial-oversight board, the family's desire to protect The Wall Street Journal brand could prove problematic. The family would like to maintain strict controls on the use of the Journal name, but Murdoch is believed to want to take advantage of the name's cachet.
Sources: Wall Street Journal, Reuters, Bloomberg
Commentary: The Bancrofts Soften On Selling Dow Jones: Journalistic Integrity Claims Are A Red Herring • Dow Jones: The End Is Near • Dow Jones' Bancroft Family Backtracks -- Says It Will Meet With News Corp.
Stocks/ETFs to watch: News Corp. (NWS), Dow Jones & Company, Inc. (DJ). ETFs: PowerShares Dynamic Media Portfolio ETF (PBS)
Conference call transcripts: Dow Jones Q1 2007, News Corporation F3Q07
Hilton Hotels Inks Three Deals to Expand Overseas
Hilton Hotels Corp. has stepped up its global expansion plans by signing deals with three real estate groups to build over 55 hotels in Russia, Britain and Central America. Total construction costs are estimated at $1.7 billion; the projects are expected to be completed by the end of 2012. The deals follow agreements Hilton made last year to construct up to 100 new hotels in India and China. In Russia, the company will be working with London & Regional Properties Ltd., which owns hotels in London and Frankfurt. They plan to build up to 25 hotels not only in Moscow and St. Petersburg but also in large regional centers. (Hilton currently has only one hotel in Moscow.) Hilton plans to construct up to 15 locations in Britain and Ireland together with partner Shiva Hotels Ltd. In the Caribbean and Central America, Hilton will work with the Caribbean Property Group on projects in major metropolitan areas in Puerto Rico, Costa Rica, Panama, the Dominican Republic and Trinidad.
Sources: Wall Street Journal, Times Online, Reuters
Commentary: Hilton's Hot and Here's Why • More Room For Hilton To Rise? • Consumer Slowdown? Retail Conference Calls Say Not Yet
Stocks/ETFs to watch: Hilton Hotels Corp. (HLT). Competitors: Marriott International Inc. (MAR), Intercontinental Hotels Group plc (IHG), Choice Hotels International Inc. (CHH). ETFs: Rydex S&P Equal Weight Consumer Discretionary (RCD), Vanguard Mid-Cap Growth ETF (VOT), PowerShares Dynamic Leisure & Entertainment (PEJ)
Conference call transcripts: Q1 2007
TRANSPORT AND AEROSPACE
Northrop Grumman Lands $2.4 Billion U.S. Navy Contract
Northrop Grumman announced Friday that it has been awarded a $2.4 billion contract from the U.S. Navy to build a next-generation amphibious assault ship called the LHA 6. The ship will be designed and constructed at Northrop's Pascagoula, Mississippi shipyard and is expected to be delivered in 2012. The replacement ship will improve on the LHD 8 ship, currently under construction at Northrop, by offering a bigger hangar deck, realigned and expanded maintenance facilities, a larger cargo magazine, and greater aviation fuel capacity. It will be capable of supporting a detachment of over 20 Joint Strike Fighters. Like the LHD 8, the LHA 6 will be able to act as flagship for an expeditionary strike group. Corporate VP Philip Teel and president of the company's Ship Systems unit: "This contract award reinforces the U.S. Navy's confidence that we have recovered from the effects of Hurricane Katrina and are capable of meeting the warfighters' needs in a timely and cost effective manner."
Sources: Press release, MarketWatch, Reuters, Forbes
Commentary: Northrop Grumman Shares Fall On Earnings Miss • Defense Stocks: P/E Isn't the Only Consideration • DoD's FY-08 Budget: The Largest in US History
Stocks/ETFs to watch: Northrop Grumman Corp. (NOC). Competitors: Boeing Co. (BA), General Dynamics Corp. (GD), Lockheed Martin Corp. (LMT). ETFs: iShares Dow Jones US Aerospace & Defense (ITA), PowerShares Aerospace & Defense (PPA), PowerShares Dynamic Industrials (PRN)
Health Care Property Investors Buys Slough Estates USA for $2.9 Billion
Health Care Property Investors said Monday it will buy Slough Estates USA, a real-estate business focused on the life-sciences industry, from the U.K.'s Segro plc for $2.9 billion, including the assumption of $1.2 billion in debt. Slough's 83 properties include the corporate campuses for Genentech and Amgen. Segro said that although Slough is "an excellent business in its own right," it failed to fit into its long-term strategy because its core business is in European office buildings. Slough also has a committed development pipeline of 500,000 square feet, 86% of which is preleased to investment grade tenants, and a future development pipeline of 3.3 million square feet that it will develop based on demand. Most of its properties are in the San Francisco Bay Area and San Diego County. HCP owns 730 properties in the U.S.; science parks (labs and research centers) are less than 4% of its total portfolio. HCP shares are down 12% YTD.
Sources: Press release, MarketWatch, Bloomberg
Commentary: REITs Trading At Big Premium To Book Value • Ten High-Yielding Health Care REITs •
Stocks/ETFs to watch: Health Care Property Investors Inc. (HCP). Competitors: Healthcare Realty Trust Inc. (HR), Sunrise Senior Living Inc. (SRZ), Ventas Inc. (VTR), Health Care REIT Inc. (HCN), Nationwide Health Properties Inc. (NHP), Senior Housing Properties Trust (SNH), Universal Health Realty Income Trust (UHT)
Qiagen to Buy Digene for $1.6 Billion
Qiagen, a Dutch manufacturer of genetic testing equipment, announced Sunday it will purchase Digene Corp. for $1.6 billion in cash and stock. Digene produces DNA and RNA screening tests for cervical cancer and other diseases affecting women. Holders of Digene shares will receive cash and shares of Qiagen valuing each Digene share at $61.25, 37% above their Friday close. Qiagen is projecting that Digene will add revenue of $58-60 million in Q4 and $260-270 million for full-year 2008. The combined company is forecast to post molecular diagnostics revenues of over $350 million and overall revenues of over $800 million next year. "The joint franchises link virology with oncology, thereby creating an exceptional platform to add next-generation and high-value molecular diagnostic products and strategically position the company for future growth," said Qiagen CEO Peer Schatz, who will retain his position. Excluding charges and costs, the purchase should dilute Qiagen's Q4 adjusted EPS by $0.03-0.04. The deal, which is expected to close in August or September, is forecast to increase Qiagen's full-year 2008 EPS by $0.02-0.04.
Sources: Press release, MarketWatch, Reuters, Forbes
Commentary: CIBC Sees Digene As A 'Solid Buy' In Light Of Roche Results • Cancer Stocks on the Go: Winners and Losers
Stocks/ETFs to watch: Qiagen N.V. (GQEN), Digene Corp. (DIGE). Competitors: Invitrogen Corp. (IVGN), Sigma-Aldrich Corp. (SIAL), CYTYC Corp. (CYTC). ETFs: iShares NASDAQ Biotechnology Index ETF (IBB), HOLDRS Biotech (BBH), PowerShares Dynamic Biotech & Genome (PBE)
Genentech's Herceptin: Heart Risk Stable Over Five Years
A new study has shown that heart failure risk does not increase over time among patients who take Genentech's breast cancer drug Herceptin, the company announced Sunday. Approximately 4.1% of 1,850 patients taking Herceptin and undergoing chemotherapy suffered heart failure after three years against 0.8% for patients on chemotherapy alone. After five years, 3.8% of patients undergoing the two therapies experienced heart failure. (The drug's inherent heart failure risk is already known and is addressed on its warning label.) Herceptin, which was approved in 1998, generated $1.2 billion in revenues for the company in 2006, a 65% increase over the previous year. It competes with Glaxosmithkline's recently approved Tykerb and is Genentech's third-best seller after Rituxan and Avastin. "While we need to continue monitoring patients closely for late cardiac effects, this is reassuring news for women taking this drug," said Dr. Priya Rastogi, the study's lead author. In related news, Genentech reported that a more potent version of Herceptin that transports toxic chemicals to cancer cells shrank breast cancer tumors in four out of 10 patients who did not respond to other therapies. This result could affect ImmunoGen, a biotech that provides linking technology for the experimental drug, and could enhance Herceptin's competitive position against Tykerb. The "armed" Herceptin will now progress to Phase II clinical trial. Analysts speculate that if approved, it could generate $1.5 billion in revenues.
Sources: Press release, Bloomberg (I, II), CNN.com
Commentary: Is Immunogen Helping to Build a 'Supercharged' Herceptin? • Genentech Beats Analyst Estimates On Strong Cancer Drug Sales • Cancer Stocks on the Go: Winners and Losers
Stocks/ETFs to watch: Genentech Inc. (DNA), ImmunoGen Inc. (IMGN). Competitors: Glaxosmithkline plc (GSK), Amgen Inc. (AMGN), Bristol-Myers Squibb Co. (BMY). ETFs: Biotech HOLDRs (BBH), PowerShares Dynamic Biotech & Genome (PBE), PowerShares Dynamic Pharmaceuticals (PJP)
Conference call transcripts: Q1 2007
ACTIONABLE BARRON'S CALLS
Barron's articles likely to move stocks today, culled from our Annotated Barron's Summaries
- General Electric (GE) shares have been stagnant since 2004 on concerns over its complexity and low P/E multiple. Investors may be underestimating its potential: Recent purchases show it's agile despite its size; global and emerging market growth are a boon for its infrastructure products; its engine units will benefit from a worldwide travel surge; CEO Jeff Immelt has the company slated for annual 10% profit growth and 18%+ margins within two years: "It is seared on my forehead and every forehead of every GE manager." Shares could be worth mid-50s within three years -- a 15% annual return.
- Shares of Abbott Laboratories (ABT) [$56.30] are up 50% over the past 18 months. Even accounting for an upcoming drug-coated cardiac stent, if it were to fetch an industry-average 16.6x on its 2007e pharma profits, and a medical-device average 23x multiple on its stents and other assets -- shares would still only be worth $51. There are also potential concerns over its #4-selling TriCor fat-reducing drug. The company says the concerns are non-consequential; considering the drug's 7% bottom-line contribution, shares could fall to $48 if they're wrong.
- Plugged In editor Mark Veverka says Apple (AAPL) is on a roll. In a recent speech, CEO Steve Jobs brushed off weak Apple TV sales, saying its just a "hobby." He hyped the company's successful Intel-based Mac rollout. He says other companies will try but fail to copy iPhone's software (and promises it will be the best wireless phone, combined with the best music player, the best keyboard, display and mobile internet in the business). Last week shares were up 3% on the relatively mundane news iTunes will begin selling some songs that will work on other players.
- Technical analyst Ralph Acampora says big-cap stocks are a buy based on what he calls a "smile" chart pattern (sharp decline, flatline, upturn). He likes Xerox Corp. (XRX), Schering-Plough Corp (SGP), Qwest Communications International Inc. (Q) and Verizon Communications Inc. (VZ). Conversely, Starbucks Corp. (SBUX) and Whole Foods Market Inc. (WFMI) are on the verge of becoming "frown" patterns. John Roque of Natexis Bleichroeder says gold's (GLD) bull move is only half done: "We're going into the eighth year in which gold has outperformed the Dow. There have been two prior cycles like this, and both have been 14 years in length." Jeff deGraaf of ISI warns against fighting the bull: "If you want to make one mistake consistently that will end your career, fight the trend."
- Despite Belo (BLC) having made half its projected annual revenues of $354 million and 70% of its $91m cash flow in Q1, newspaper revenues (-11%) took Q1 profits down to $0.15 from $0.16 in Q1'06. If Belo's TV and newsprint were to split, bulls see $30 shares: Belo's TV channels at an industry average of 13.4x 2007 cash denotes $20.60 shares, near its current $22. And 8x cash for its newspapers would add another $10. The controlling Decherd family doesn't want to sell, so hiking Belo's $0.50/share dividend (2.2% yield) to 5% would please shareholders.
- Funeral home operator Service Corp. International (SCI) shares are up 90% since August. Its bell may be tolling due to a rise in low-cost cremations, a high P/E multiple of 27 vs. 19 for competitors, debt which is 3.5x its assets (making a buyout unlikely), and baby boomers' lengthening life expectancy.
- Declining gas inventories and rising demand tip the scales heavily in favor of the energy investor. Frequent equipment failures should benefit Matrix Service Company (MTRX), which repairs oil refining equipment. Arena Resources Inc. (ARD) boosted oil production by 76% y/y, making it a play on waning supply. Natural gas supply is also declining, giving companies that help producers extract gas from unconventional sources the upper hand. They include: OMNI Energy Services Corp. (OMNI) [seismic], Pioneer Drilling Co. (PDC) [drilling], and Natural Gas Services Group Inc. (NGS) [compression]. Interoil Corp. (IOC) has nine million acres under license in New Guinea, making it a play on liquefied natural gas.
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