American Home Mortgage Plummets on Bankruptcy Fears
Shares of American Home Mortgage Investment Corp., the country's 10th-largest mortgage lender, plunged 90% Tuesday to close at $1.04 on news that it cannot pay its debts. The company's banks cut off its credit lines, leaving it unable to fund $300 million in promised loans on Monday. "They can't function without access to capital," said Keefe Bruyette & Woods analyst Bose George. "They will either file for bankruptcy or do some sort of material restructuring that will leave equity investors with very little, and either way will leave almost nothing for the common shareholders." Unlike defunct lender New Century, which specialized in loans for less creditworthy borrowers, American Home offers adjustable-rate mortgages and Alt-A loans, which generally require little documentation of income. The company offered $35 billion in home loans during H1 2007. It is facing "very significant" margin calls because the assets backing those loans have dropped precipitously in value. The company has hired advisors to assist it in evaluating strategic options that could include "the orderly liquidation of its assets." Following American Home's announcement, which stopped a DJIA rally in its tracks, lenders Impac Mortgage Holdings and NovaStar Financial fell 13% and 25%, respectively. "We obviously have a major correction going on in the mortgage market; it started in subprime and now it's shifting to Alt-A," said mortgage consultant David Olson.
Sources: MarketWatch I, II, Bloomberg, Wall Street Journal
Commentary: American Home Mortgage: The Liquidity Crunch Claims Another Victim • American Home Mortgage Investment Hit with Margin Calls • American Home Mortgage: Continued Carnage from Mortgage Security Writedowns
Stocks/ETFs to watch: AHM. Competitors: IMH, NFI. ETFs: REM
Dow Jones Accepts News Corp. Offer
Late Tuesday afternoon News Corp.'s board agreed to proceed with its $5 billion buyout of Dow Jones, after earlier in the day Bancroft family members owning over 37% of the controlling vote signed off on the offer. A key family trust that had been holding out backed down, shifting 6% of its 9.1% voting stake in support of the deal. Family members controlling 37.4% of the vote now favor the move, more than half of its 64.2% voting stake. Added to the 23% of public shareholders' 29% vote expected to support the bid, it leaves News Corp. with a compfortable 60% majority. Possible snags include public shareholders holding out for more money, and the need for regulatory approval. Assuming the deal is approved, it could close by year-end. The Bancrofts wrangled over whether to accept Rupert Murdoch's News Corp.'s $60-per-share offer. A sore point was concern over the Wall Street Journal's editorial independence in the face of Murdoch ownership. Some family members who originally opposed the deal appear to have been swayed after they realized they would be left on the hook for $30 million in advisor fees if they voted the deal down. News Corp. will now assume the fees when it takes control, providing the Bancrofts a modest deal-sweetener of $1.31/share (3%). "After all the high-minded concerns about editorial interest and journalistic excellence, it gets down to who pays the legal fees for the Bancrofts," Benchmark & Co. analyst Ed Atorino said. "So much for principles." Dow Jones shares closed up 11.3% at $57.38. News Corp. shares fell 0.8% to $22.66.
Sources: Press release, Reuters, CNBC, New York Times, Wall Street Journal
Commentary: Murdoch Might Have Enough Bancroft Votes to Clinch • Bancrofts Continue to Wrangle on Murdoch Bid
Stocks/ETFs to watch: DJ, NWS. Competitors: NYT, RTRSY, TOC, GE
Earnings call transcript: Dow Jones Q2 2007, News Corporation F3Q07
Related: How They Voted [WSJ] • Publisher's Letter: A Report to Our Readers [WSJ] • Reactions to the deal [WSJ]
Time Warner Beats on Strong Cable Revenue, Initiates $5B Repurchase
Time Warner Inc. said Wednesday Q2 income rose 5.2% on a 59% revenue increase at its cable unit, beating Wall Street forecasts. The company reaffirmed its full year EPS outlook of $1.07, and initiated a new $5 billion stock repurchase. EPS from continuing operations of $0.25/share beat analyst estimates of $0.21. Revenue climbed 6% to $10.98B, short of the $11.13B analysts were looking for. TWX's cable unit made sales of $4B, up from $2.5B a year ago, while its America Online unit saw revenue fall 38% to $1.25B from $2B as subscriptions dropped 55%. Commenting on the share buyback, CEO Dick Parsons said the repurchase will complement a dividend increase announced last week, "supported by our strong balance sheet, robust generation of free cash flow and excellent growth prospects," in the company's drive to return value to shareholders. "At the same time, we will continue to invest in organic growth as well as in attractive strategic opportunities." In a July 16 note, Pali Research told clients that with an estimated $4B in free cash flow in 2007 and $5B in 2008, the company should be looking at repurchasing $14B in stock. Check for Time Warner's earnings call transcript later today. Shares have lost 11.6% YTD.
Sources: Press release, MarketWatch, Reuters
Commentary: Eight Top Movie Stocks Worth Viewing • Time Warner's Digital Media Strategy: Moving Into Ad Networks
Stocks/ETFs to watch: TWX. Competitors: NWS, VIA, DIS, CBS, GE. ETFs: HHH, PBS, XLY
Earnings call transcript: Time Warner Q1 2007
Apple Shares Drop on iPhone Cutback Rumor
Shares of Apple Inc. shed 6.84% to close at $131.76 Tuesday on an unauthenticated rumor the company is halving production of the iPhone. A trading note at Miller Tabak & Co. was cited as making the claim that Apple is reducing iPhone production from 9 million to 4.5 million. The note, which used as its source "talk among traders at Goldman Sachs," was itself allegedly written to explain why the shares were trading down without news. Peter Boockvar, equity strategist at Miller Tabak, told Tech Trader Daily the firm had not written a research report: it was merely "passing along what we’ve heard from other people." The market is jittery about the iPhone because last week's report by Apple that it sold 270,000 iPhones in its first 30 hours on the market fell far short of Wall Street's hopes, which went as high as 700,000. "People get emotionally involved in the product and start thinking it’s going to be a bigger number than it actually is,” said Piper Jaffray analyst Gene Munster. "The part we’re definitely guilty of is building an estimate from three people visiting three stores over a three-day period."
Sources: TheStreet.com , Barron's, Wall Street Journal
Commentary: Apple Rolls On Mutated Rumors • A Look At Apple Since The iPhone Launch • Apple Stumbles on iPhone Sales Miss
Stocks/ETFs to watch: AAPL, BRCM, TXN, MRVL, MU, SWKS. Competitors: MOT, RIMM, PALM. ETFs: QQQQ, PHW, IAH
Earnings call transcripts: Apple F3Q07
RealNetworks Posts In Line Earnings, Boosts View
RealNetworks raised its 2007 outlook amid expectations for a strong fourth quarter from its advertising and mobile services business. The maker of digital media services and software said it now expects earnings of $0.21-$0.24/share, or $0.22-$0.25/share excluding items, on revenue of $561M-$573M for the year. For the third quarter it sees a loss of $0.01-$0.03/share, or earnings of $0.02-$0.04/share excluding items, on revenue of $141M-$145M. Laying the foundation for future growth, according to the company, is the new version of its RealPlayer, which is still in test mode. "We are very bullish about it," CEO Rob Glaser told Reuters, but did not say when it would start to contribute to revenue (see full earnings call transcript). For the current quarter, the maker of digital media services and software reported earnings of $1.3M ($0.01/share), down from $38.9M. ($0.22/share) a year ago while revenue rose 52% to $136.2M. Excluding items, earnings were $8.9M ($0.05/share) vs. $5.1M ($0.03/share) last year. In the year-ago quarter, the company benefited from proceeds of a $57.9M litigation settlement against and commercial agreements with Microsoft. The average analyst forecast had been for earnings of $0.05/share and revenue of $133.9M. Music revenue rose 225% to $36.8M, games revenue was up 17% to $24.9M, Media Software and Services revenue fell 3% to $25.4M, while the Products and Solutions segment jumped 310% to $49.1M due to its WiderThan acquisition.
Sources: Press release, Reuters
Commentary: Why is RealNetworks Offering Yet Another New Player? • Is Sony's NetServices A Trojan Horse for RealNetworks?
Stocks/ETFs to watch: RNWK. Competitors: MSFT, AAPL, AMZN. ETFs: HHH, IIH
Whole Foods-Wild Oats Merger Goes Before Court
Shares of Whole Foods gained 8.59% to close at $40.22 in AH trading and Wild Oats gained nearly 4% to $16.10 in regular trading Tuesday as the companies took their case for a merger to federal court. Whole Foods also reported Q3 earnings Tuesday that slightly exceeded expectations, though revenue came in below forecasts. The FTC will present evidence to U.S. District Court that the proposed Whole Foods/Wild Oats merger is anti-competitive. That evidence includes an email Whole Foods CEO John Mackey sent to executives of the company stating the merger would help Whole Foods avoid "nasty" price wars and effectively bar competitors from entering the natural foods space. Whole Foods economist David Scheffman told the FTC that despite Mackey's comments, the deal would not thwart competition. If the court grants a preliminary injunction, the parties will likely drop the merger, but if it does not, the FTC might drop the case, according to antitrust lawyer Bruce McDonald. The decision is expected by mid-August. Whole Foods' fiscal Q3 profit fell to $49.1 million ($0.35/share) from $53.9 million ($0.37) a year ago, ahead of analyst expectations of $0.33. Sales were up to $1.51 billion from $1.34 billion, shy of Street forecasts of $1.54 billion. Same-store sales were up 7%.
Sources: Reuters, MarketWatch I, II, Dow Jones I, II
Commentary: FTC Case Strong Against Whole Foods/Wild Oats Merger -- Analyst • Whole Foods: Don't Let Controversy Cloud Judgement • FTC: Whole Foods-Wild Oats Merger Would Thwart Competition
Stocks/ETFs to watch: WFMI, OATS. Competitors: KR, SVU, SWY. ETFs: XLP, VDC, PSL
Earnings call transcripts: Whole Foods Market F3Q07
TRANSPORT AND AEROSPACE
Pentagon Awards Lockheed Martin $5B F-22 Contract
Lockheed Martin was awarded a $5 billion multi-year contract from the Defense Department for 60 of its top-of-the-line F-22 Raptor stealth fighter jets. The bulk deal was expected to generate substantial savings for U.S. taxpayers as the cost comes in $411M cheaper than three annual purchase lots of 20 planes each, the Pentagon has said. The planes, which cost $140M each, are expected to be the final such purchases by the Pentagon unless Congress approves further production in the future. It also warned of higher costs if the F-22 line closes after these purchases. "The F-22's fifth generation fighter production line is the only one of its kind in the world. Should production end with the final F-22s in this contract, normal manufacturing inefficiencies would increase costs in the last units," the Air Force said. The DoD also announced a $1.3B deal for engine maker United Technologies' Pratt & Whitney unit to supply its F-119 engines for the new jets. The plane order was expected to be completed in 2012 and the engine work by 2011. Lockheed also was awarded an initial $187M for long-lead tasks as part of a $1.1B contract to make 30 new Advanced Block 50 F-16 aircraft for Turkey.
Sources: Press release, Dow Jones, Reuters
Commentary: Citigroup: Bullish on Lockheed Despite Slightly Weak Quarter • The Long Case for United Technologies
Stocks/ETFs to watch: LMT, UTX. Competitors: BA, NOC, RTN. ETFs: PPA, ITA
Earnings call transcript: United Technologies Q2 2007
Another Bear Stearns Hedge Fund Hit with Margin Calls
Bear Stearns, already smarting from the blow-up of two hedge funds heavily exposed to the imploding subprime market, has stepped in to prevent investors from redeeming their investments in a third. The Bear Stearns Asset-Backed Securities Fund is facing margin calls and a surge in redemption demands. The Bear fund has about $850 million in mortgage investments, although unlike the two now-bankrupt funds, it borrowed no capital and made almost no bets on subprime mortgages. Though the prospect of markdowns of mortgages of higher quality could put the fund at serious risk, "[t]here are no plans to shut down the fund," according to Bear spokesman Russell Sherman. "We believe by suspending redemptions, we can ensure the best long-term results for our investors." "This shows you don't necessarily have to be a subprime fund now to be having problems,'' said portfolio manager Bryan Whalen. Rumors of problems at other hedge funds vulnerable to tremors in the mortgage security market, as well as a warning by American Home Mortgage that it might have to liquidate assets to make margin calls, sent a 140-point rally in the DJIA on Tuesday swinging in the opposite direction. The index closed down 146.32 points at 13211.99, a swing of over 2%. BSC shares dropped a combined 8% in regular and AH trading Tuesday.
Sources: Wall Street Journal, Bloomberg, TheStreet.com
Commentary: Bear Stearns Hedge Funds Nearly Worthless • Barclays Might Sue Bear Over Hedge Fund Losses -- WSJ • Credit Suisse/Tremont Index Implodes On Bear Stearns Hedge Fund Meltdown
Stocks/ETFs to watch: BSC. Competitors: GS, LEH, MER. ETFs: IAI, KCE
Citigroup Missing Legg Mason Sales Targets, Could Force Renegotiations
Citigroup may be forced to renegotiate terms of its deal to exchange its asset management business for Legg Mason's brokerage business after Citigroup brokers failed to meet their forecasts in selling Legg Mason mutual funds, the Financial Times reported. As part of the 18-month-old deal, in which Legg Mason swapped its brokerage and capital markets operations for most of the mutual fund and asset management business of Citigroup, Citigroup had agreed to sell Legg Mason funds through its Smith Barney unit, which is now the main distributor for the $150B of Legg retail mutual funds. It's believed the expected volume was not sold. The funds have been underperforming since the deal was struck, and had inflows of just $670M in the first half of 2007 compared to $2.6B in the comparable 2006 period. The two are reportedly cooperating to solve the problem.
Sources: Press release, Hoover's
Commentary: Legg Mason: Strong Earnings Distract From Dismal Outlook • Citgroup: Large Cap Stocks Will Continue to Be Attractive
Stocks/ETFs to watch: C, LM
Earnings call transcript: Legg Mason F1Q08 • Citigroup Q2 2007
MetLife Boosts Outlook After Better-Than-Expected Results
MetLife raised its 2007 outlook after second-quarter earnings came in ahead of Wall Street forecasts on strong investment income and growth across its business segments. The life insurer said it earned $1.1B ($1.48/share) on revenue of $13.22B compared with $617M ($0.80/share.) on revenue of $11.35B a year ago. Operating earnings, which exclude investments, were $1.72, up from $1.28 last year. Analysts had been expecting earnings of $1.33/share and revenue of $13.3B, on average. Earnings grew 15% to $521M in the company's institutional business, while the individual business jumped 27% to $449M, the auto and home division rose 9% $108M. and international earnings popped 83% to $117M. Premiums, fees and other revenue totaled $8.6B while total assets were a record $552.6B. Looking ahead, MetLife now expects earnings of $5.65-$5.80/share in 2007, up from the $5.05-$5.30 range it had forecast previously. Analysts, meanwhile said the good days may not last. "These results are at risk of being diminished when the money for private equity dries up," said Mayiz Habbal, managing director of the Securities and Investments Group at Celent LLC. Analysts had been forecasting 2007 earnings of $5.47/share. Shares were up 0.5% in after-hours trading.
Sources: Press release, Bloomberg, Reuters, AP
Commentary: MetLife Forecasts Disappointing 2007 Operating EPS • 1Q07 Insurance Earnings: What's Working, What's Not
Stocks/ETFs to watch: MET. Competitors: PRU, AIG. ETFs: IAK, KIE
Sanofi-Aventis's Earnings Hurt by Generic Competition
French drug manufacturer sanofi-aventis posted a decline in Q2 earnings Wednesday on generic competition, restructuring costs and currency effects from the strong euro. The company reported a 6.3% drop in net profit to €1.678 billion ($2.3 billion) from €1.79 billion in the year-ago quarter. Operating profit was down 5.1% to €2.329 billion. Net sales slid 2% to €6.939 billion from €7.08 billion. Analysts were expecting operating profit of €2.499 billion and sales of €7.038 billion. Sales of sleeping pill Ambien and cancer drug Eloxatin were hurt by new generic competition, with Ambien revenue dropping 42%. Sales of the blood thinner Plavix showed a recovery from a Q1 overhang of a generic that has since been pulled from the market. Plavix is marketed in the U.S. by Bristol-Myers Squibb. Sanofi affirmed its guidance of sales growth of around 9% this year and announced a buyback of up to €3 billion worth of shares by May 2008. "The share buyback is a good move," said Kepler Equities analyst Matthias Steger. "The stock is without a doubt undervalued.''
Sources: Dow Jones, Reuters, MarketWatch, Bloomberg
Commentary: Plavix Patent Upheld; Bristol-Myers Shares Rise on Renewed Buyout Chatter • Sanofi-Aventis and Bristol-Myers Squibb Victorious Over Apotex in Plavix Case • Investing in Cancer Treatment: Six Stock Ideas
Stocks/ETFs to watch: SNY, BMY. Competitors: MRK, PFE, LLY. ETFs: PPH, IHE
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