White House Lowers 2007 Growth Forecast, Raises Inflation Outlook
In its twice-yearly economic forecast announcement, the White House said Wednesday it has lowered its 2007 GDP growth projection [see table] to 2.3% from 2.9%. The change is due primarily to the slowing of the economy to 0.6% in Q1, its worst rate in four years. The revised forecast reflects the effects of the housing slowdown; in 2006, the economy grew at a 3.1% rate. The White House reiterated its forecasts of 3.1% growth for both 2008 and 2009. The country's unemployment rate, which hit a six-year low of 4.6% last year, is now forecast to drop even further to 4.5% this year, a slight change from previous guidance of 4.6%. Economists say employment has stayed healthy even as the economy has slowed because the troubles have been confined primarily to the housing and automotive sectors. Because of rising prices of energy products, the White House has raised its CPI forecast to 3.2% from 2.6%. "Because of the robustness of the U.S. economy we've actually been able to survive high energy prices without a great deal of economic shock," said Edward Lazear, chairman of the White House's Council of Economic Advisers.
Sources: Press release, Wall Street Journal, MarketWatch, Bloomberg, Forbes
Commentary: Where is the US Economy Headed? • Return Without Risk? • What to Expect From US Investment Returns
Stocks/ETFs to watch: S&P 500 Index (SPY), Diamonds Trust Series 1 ETF (DIA), iShares Lehman Aggregate Bond (AGG)
NAR Revises Home Prices, Sales Forecast Down Again
The National Association of Realtors says annual median single family home prices should decline 1.3% to $219,800 in 2007, and not 1% as projected in May, which was a revision of January's predicted 1.2% gain. Despite earlier flat forecasts, the NAR expects a 2.3% decline in new home prices to $240,800 from May's $246,400 projection. Home sales are expected to decline 4.6% from 6.48 million units to 6.18 million, almost double May's -2.7% forecast. New home sales are likely to fall 18.2% to 860,000, revised from -17.8%, and another 18% y/y decline from 2005-2006. Only 1.43 million housing starts are expected, 370,000 less than 2006. Pending sales are down 3.2% in April, and 10% y/y. NAR chief economist Lawrence Yun calls the declines a "temporary distortion" and predicts a 3.7% rise in 2008 sales to 6.41 million units, with existing home sales bottoming in Q2 2007, and new home sales in Q4. Yun thinks existing home prices will rise 1.7% in 2008, preferably with "traditional mortgages" -- a reference to the subprime crisis that's intensifying the housing slump. Online brokerage ZipRealty says inventory is up 29% y/y, with a 6.5 month supply of new homes and an 8.4 month supply of existing homes -- the highest since 1992.
Sources: NAR Press Release, Wall St. Journal I,II, Bloomberg, Washington Post, USA Today
Commentary: Housing Prosperity Just Around Corner? I Don't Think So • The National Association of Realtors Predicts the First Drop in Home Prices Since 1968 • A Look At U.S. Home Price Performance in 20 Markets
Stocks/ETFs to watch: Pulte Homes (PHM), Toll Brothers (TOL), KB Home (KBH), Beazer Homes USA (BZH), Hovnanian Enterprises (HOV), Ryland Group (RYL), iShares Dow Jones U.S. Home Construction (ITB), PowerShares Dynamic Building & Construction (PKB), SPDR Homebuilders (XHB)
Activist Group Wants Vodafone To Unlock As Much As $76 Billion In Shareholder Value
Vodafone Group received a letter Wednesday from activist investment group Efficient Capital Structures asking it to submit to a vote four resolutions to shareholders during the company's annual shareholder meeting July 24. Vodafone acknowledged receiving the letter and said it was under review. Though it owns just 0.0004% of Vodafone common shares, Efficient Capital is invoking the company's by-laws in requesting the resolutions, involving a restructuring and possible break-up of the company, be put to a vote, with claims it has the backing of at least 100 shareholders (which according to the by-laws, enables it to make such requests). Efficient Capital has the backing of Beehive Capital. Glenn Cooper, Efficient's Chairman believes that "Vodafone's share price has underperformed the FTSE 100 over the past five years by 28 percent," due to its "inefficient capital structure." Efficient Capital believes its proposals can release as much as 38 billion pounds ($76 billion) in value to shareholders.
Sources: Press Release, Bloomberg, Wall Street Journal, Reuters, AFX News, Financial Times
Commentary: Vodafone's Shares Jump On Emerging Market Growth Forecast, Dividend Increase • Vodafone's New Data Plan Leaves Loopholes and Questions • Profiting From the Global Cellular Wireless Boom
Stocks/ETFs to watch: Vodafone Group Plc (VOD). Competitors: Verizon (VZ), AT&T (T), Telecom Italia S.p.A. (TI), NTT DoCoMo (DCM), Sprint Nextel (S), France Telecom (FTE), Deutsche Telekom (DT). ETFs: Wireless HOLDRS (WMH), iShares S&P Global Telecommunications (IXP)
Conference call transcripts: Vodafone Group FY 2006 Earnings Call Transcript
Related: Vodafone Annual General Meeting
Dell to Exit LCD TV Business -- reports
Bloomberg reports Dell will stop making LCD TVs and instead focus on its core PC business, according to people familiar with the matter. Coverage by Reuters cites a Taiwan media report, which said production will end this month. Dell entered the LCD TV market in late 2003, eight months before Michael Dell resigned as CEO (he has since returned). According to research firm DisplaySearch, Dell does not rank within the top-30 LCD TV vendors in the U.S. Dell reportedly will continue to sell TVs by other makers, including Sony. In a recent interview with the Financial Times, Michael Dell said the company plans to make acquisitions to expand its computer services division, which has been growing faster than its hardware business. Presently, only 10% of Dell's $60 billion in annual revenues are from services. A Dell spokesman declined to confirm the reports of exiting the LCD TV business. Shares of Dell gained 0.3% to $27.35 in normal trading.
Sources: Bloomberg, Reuters
Commentary: Dell Will Shift Focus to Services -- CEO • Goldman, Deutsche Bank Remain Bullish On Dell • Dell: Shares Jump on News of Job Cuts, Earnings Beat and Higher Sales
Stocks/ETFs to watch: Dell Inc. (DELL). Competitors: Sony Corp. (SNE), Sharp Corp. (OTCPK:SHCAY), Philips Electronics N.V. (PHG), Matsushita Electric Industrial Co. Ltd. (MC), Syntax-Brillian Corp. (BRLC), Toshiba Corp. (TOSF.PK), Corning Inc. (GLW), AU Optronics Corp. (AUO). ETFs: Internet Architecture HOLDRs (IAH), iShares Goldman Sachs Tech Indx (IGM)
Microsoft, LG Electronics Announce Patent Cross-License Agreement
Microsoft and LG Electronics [LGE] have entered into a patent cross-license agreement in order to further the development of current and future product lines. Financial details were not disclosed, but Microsoft said it will be making a net balancing payment to LGE. News of the agreement sent shares of LGE trading in Seoul up as much as 5%, to their highest levels in over a year. Coverage by Reuters says analysts see growing demand from Microsoft for data products and services, as well as home networking-related components. One analyst noted LGE has patents that can be applied to Microsoft's Xbox 360 video game console. LGE will be able to use Microsoft's patents in its products, including Linux-based embedded devices. In a press release, Microsoft said it has announced similar agreements over the past year with companies such as Fuji Xerox, NEC, Nortel, Novell, Samsung and Seiko Epson. Shares of Microsoft lost 0.95% to $30.29 in normal trading.
Sources: Press release, MarketWatch, Reuters
Commentary: Microsoft CEO: 'Advertising And Modern Consumer Electronics Key To Long Term Growth' • Surface Computing: Microsoft's Breakthrough? • Companies With The Most Analyst Attention & Affection
Stocks/ETFs to watch: Microsoft (MSFT), LG Electronics is not traded in the U.S., however it is a component -- 12th largest holding at 1.75% of net assets -- of iShares MSCI S. Korea (EWY)
Conference call transcripts: Microsoft F3Q07
ADC Reports Q2 Profit Rise; Revises Low End of Guidance Upward
Telecom equipment and software manufacturer ADC Telecommunications posted fiscal Q2 earnings well ahead of expectations Wednesday and upped the low end of its full-year profit guidance. The company's shares gained 3.24% to close at $17.85 in AH trading. ADC posted Q2 net income of $96.5 million ($0.73/share) against $25.1 million ($0.21) in the year-ago quarter. Net sales came in at $349.4 million versus $358.1 million a year ago. Analysts had forecast revenues of $333 million. EPS excluding items were $0.35, soundly beating analyst expectations of $0.23. The company is projecting full-year EPS from continuing operations of $1.06-1.11. Full-year EPS excluding items are forecast at $0.86-0.91, up from a $0.81-0.91 forecast offered by the company in March. Analysts had been calling for $0.87 EPS on $1.3 billion in full-year sales. The company expects H2 results to be "relatively flat to down modestly" from last year, but does "not expect that the quarterly pattern of results in fiscal 2007 will fluctuate as sharply as in fiscal 2006."
Sources: Press release, ADC Telecommunications F2Q07 Earnings Call Transcript, Forbes, TheStreet.com, RTT News
Commentary: ADC Telecom: JP Morgan Sees Stronger Outlook Than Expected • ADC Telecommunications Seeks China Entry via Acquisition
Stocks/ETFs to watch: ADC Telecommunications (ADCT). Competitors: ADTRAN Inc. (ADTN), Andrew Corp. (ANDW), Tyco International Ltd. (TYC). ETFs: iShares Goldman Sachs Network Index Fund (IGN), PowerShares Dynamic Networking (PXQ)
IBM Inks Purchase of Watchfire
IBM announced Wednesday it will buy security and compliance testing software company Watchfire Corp. The purchase price was not disclosed. Watchfire will be integrated into IBM's Rational software brand. A survey conducted by the FBI last year found that internal security attacks cost U.S. businesses an annual $400 billion. Watchfire's technology allows customers to identify and fix weak spots in their software while it is being developed rather than waiting until the products are on the market, thus reducing end-user vulnerability to malicious software attacks and spam. The technology is also designed to help customers ensure they are in compliance with legal and industry regulations. Watchfire's 800+ customers include financial services and technology companies around the world as well as governments. IBM Rational software general manager Danny Sabbah: "Watchfire is a recognized industry leader in the security and compliance market that will further strengthen our ability to help customers mitigate risk by integrating security, quality testing and compliance testing requirements early in the software development process -- before vulnerabilities are exposed." The deal is expected to close in Q3.
Sources: Press release, Reuters, New York Business, News.com
Commentary: IBM Expands Security Software Lineup With Watchfire Acquisition • IBM Forecasts Big Profit Jump by 2010 • IBM: Playing a Shell Game
Stocks/ETFs to watch: International Business Machines Corp. (IBM). Competitors: Microsoft Corp. (MSFT), Vignette Corp. (VIGN), Electronic Data Systems Corp. (EDS). ETFs: Internet Architecture HOLDRs (IAH), iShares S&P Global Technology (IXN), Ultra Dow30 ProShares (DDM)
Conference call transcripts: IBM Q1 2007
Related: Watchfire website
Philadelphia Inquirer's Tierney Mulls Dow Jones Bid -- WSJ
Brian Tierney, who bought the Philadelphia Inquirer and Philadelphia Daily News for $515 million last year together with a group of investors, is considering a bid for Dow Jones, according to the Wall Street Journal. Dow Jones already has a $5 billion offer on the table from Rupert Murdoch's News Corp. "We would be inclined to participate" in a formalized bidding process for the company, Tierney said. "I don't believe News Corp is overpaying. Dow Jones is one of the world's great journalistic enterprises." Some members of the company's controlling family, the Bancrofts, are concerned about the effect a Murdoch takeover might have on the editorial independence of The Wall Street Journal. Many Dow Jones employees are opposed to Murdoch as well. The Independent Association of Publishers' Employees union, which represents 2,000 Dow Jones workers, has made overtures to several billionaires in the hope of thwarting Murdoch's bid. Supermarket king Ron Burkle has agreed to assist the union in exploring alternatives. Tierney has had run-ins with unions at his Philadelphia papers, where he implemented staff cutbacks. His changes did, however, reverse a decline in circulation at the Inquirer. Neither Dow Jones nor the Bancrofts have commented on Tierney's expression of interest.
Sources: Bloomberg, Wall Street Journal, New York Times, CNN.com, Editor & Publisher
Commentary: WSJ Reporters Hoping Burkle Will Save Them • The Anybody-But-Murdoch-Candidate: Ron Burkle Bidding For WSJ • Ron Burkle to Work with Dow Jones Union on Alternatives to Murdoch Bid
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
TRANSPORT AND AEROSPACE
Spirit AeroSystems Looks at Airbus Plants -- Paper
U.S. aircraft fuselage maker Spirit AeroSystems has expressed interest in four of six plants up for sale by European airplane maker Airbus, the Financial Times Deutschland reported on Thursday. The newspaper cited Airbus sources. An Airbus spokeswoman declined to comment, saying, "This is just speculation." Spirit is a former Boeing unit. It supplies fuselage systems, propulsion systems and wing systems to Boeing, Hawker-Beechcraft and Airbus. It is the world's largest supplier of commercial airplane assemblies and components. In an April 3 note, Jeffries & Co. said Spirit "is uniquely positioned to take advantage of the continued growth in the civil aerospace market," and that it "is not shy about looking at buying other plants that serve the aerostructures market," but that it was "not going to take on someone's intractable problems." Shares are up 6.2% YTD and 22.6% since going public in November 2006.
Commentary: Spirit AeroSystems cools after analyst notes [MW] • Less Gung-Ho on Defense Stocks [Barron's]
Stocks/ETFs to watch: Spirit AeroSystems Holdings Inc. (SPR), Boeing Co. (BA). Competitors: Goodrich Corp. (GR), Northrop Grumman Corp. (NOC), Lockheed Martin Corp. (LMT), General Dynamics Corp. (GD). ETFs: iShares Dow Jones US Aerospace & Defense (ITA), PowerShares Aerospace & Defense (PPA)
Navistar Sues Ford, Again
Navistar International said Wednesday it filed yet another lawsuit against Ford Motor Co., seeking "at least hundreds of millions of dollars" in damages for copying a Navistar-designed engine. According to the lawsuit, Ford recently dusted off plans for a Navistar-designed diesel engine for its F-150 trucks, and plans to build its own 4.4-liter version of the engine by late 2009 or 2010 in violation of its contract with Navistar, which spent $11 million developing the next-generation diesel engine. The lawsuit is the latest tack in a dispute that began in January when Ford sued Navistar over warranty costs and engine prices related to the F-Series contract. Navistar briefly blocked diesel engine shipments to Ford, threatening to disrupt production of the Super Duty, one of Ford's most profitable vehicles. A judge eventually ordered Navistar to resume shipments while the case proceeds. In May, Navistar filed a $2-billion claim against Ford; it says the June 4 lawsuit is separate from previous litigation. A Ford spokeswoman said Navistar's claims are "entirely without merit" and that the company would fight them vigorously.
Sources: Navistar press release, Reuters, Crain's
Commentary: Are Domestic Auto Manufacturers Losing Consumer Interest? • Notable Quotables From May's Light Vehicle Sales Report • Death Pool in Detroit
Stocks/ETFs to watch: Ford Motor Co. (F), Navistar International Corp. (NAVZ.PK)
Conference call transcript: Ford Motor Q1 2007
SAIC Posts 25% Drop in Q1 Net
Shares of San Diego-based defense contractor SAIC Inc. shed 6% to $18.40 in AH trading Wednesday after the company posted a 25% decline in fiscal Q1 profit on lower interest income and a higher tax rate. The company reported earnings of $80 million ($0.19/share), down from $106 million ($0.31) in the year-ago period. Net income from continuing operations came in at $0.18/share, down from $0.27 a year ago. Revenue was up 5.8% to $2.07 billion from $1.95 billion. Analysts were expecting EPS of $0.20 on revenue of $2.08 billion. The company reiterated its full-year 2008 EPS estimate of $0.83-0.88 from continuing operations and revenue of $8.7-9 billion. SAIC went public in October after 37 years as a private company. Sensitive security work for the U.S. government constitutes approximately 90% of its revenue.
Sources: Press release, MarketWatch, Forbes
Commentary: Hidden Trends and the Sectors They Drive - Barron's Interviews Charles Hess • Mark Roberts: Three Shorts, Two Longs to Boost Your Portfolio • Defense Sector Bests the S&P 500 for a Seventh Consecutive Year
Stocks/ETFs to watch: SAIC, Inc. (SAI). Competitors: Computer Sciences Corp. (CSC), Lockheed Martin Corp. (LMT)
FDA Wants Black Box Warning on Glaxo's Avandia and Lilly's Actos
The FDA disclosed Wednesday during a Congressional hearing it has asked GlaxoSmithKline and Takeda Pharmaceutical to add a "black box" label warning about heart failure to their diabetes drugs, Avandia and Actos. The request was made on May 23, two days after a New England Journal of Medicine article authored by cardiologist Steven Nissen tied the drug to a potential risk of heart attacks. Both companies said they were discussing the warnings with the FDA. House Rep. Henry Waxman (Dem-CA) said the FDA "dropped the ball" in its oversight of Avandia: "FDA needs the will, the resources and the authority to be a more effective watchdog of drug safety." Dr. John Buse, incoming president of the American Diabetes Association, said that when he voiced his fears that Avandia might increase heart risk in 1999, he was threatened in phone calls from Glaxo. Other House Representatives were less convinced. Darrell Issa (Rep-CA) said the House committee was close to "politicizing science" and questioned Dr. Nissen. On Tuesday, Glaxo published an interim study that suggests its drug does not increase the risk of heart attack or death. The labels of both drugs already warn about heart failure, but not with black boxes. In a May 21 note, Bear Stearns said Avandia's headline risk could benefit Merck's Januvia and Eli Lilly's/Amylin Pharmaceuticals' Byetta. Novartis' Galvus and Bristol-Myers'/AstraZeneca's saxagliptin, which also compete, are due out in late-2008 or 2009. Glaxo shares dropped 0.8% Wednesday to $51.46; they are down 11% since May 19.
Sources: Glaxo statement, Wall Street Journal, New York Times, Seeking Alpha
Commentary: Glaxosmithkline: The Cheapest Large Cap Pharma Stock? • GlaxoSmithKline Defends Avandia Against Charges of Cardiovascular Risks • GlaxoSmithKline's Avandia: Trouble or Not?
Stocks/ETFs to watch: GlaxoSmithKline plc (GSK), Eli Lilly and Company (LLY) [co-manufacturer of Actos], Merck & Co. Inc. (MRK), Amylin Pharmaceuticals Inc. (AMLN), Bristol-Myers Squibb Co. (BMY), Novartis AG (NVS), AstraZeneca plc (AZN)
Have Wall Street Breakfast emailed to you every morning before the market opens.