Wall Street Breakfast

by: SA Editors
SA Editors
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RETAIL

Wal-Mart Earnings "Not What We Expect of Ourselves"

Wal-Mart said Tuesday its FQ2 2008 net income jumped 49% on an 8.9% gain in revenue, but shares fell in pre-market trading after reduced its full-year earnings guidance. Net income at the world's number-one retailer rose to $3.11 billion ($0.76/share) on revenue of $93.01 billion, from $2.08 billion ($0.50/share) on revenue of $85.43 billion a year ago. The numbers were in line with analyst expectations of $0.76/share on revenue of $92.68 billion. Same-store sales were up 1.9% on the quarter. Wal-Mart dropped its full-year EPS estimates to between WMT 14 08 2007 EarningsChart$3.05 and $3.13; it had previously forecast between $3.15 and $3.23. For Q3, Wal-Mart expects EPS of between $0.62 and $0.65. According to Reuters, analysts were expecting EPS of $0.68 in third quarter and $3.16 for fiscal 2008. "Although some people will report that Wal-Mart has had record sales and earnings, our underlying operating performance this quarter is not what we expect of ourselves, and not what our shareholders expect of us," said CEO Lee Scott (see full earnings call transcript later today). Until the company can boost same-store sales, one analyst told Bloomberg, "the stock won't get rewarded." On Aug. 9, the company said price cuts have hurt its profit margin, triggering a series of downgrades by analysts who follow the company. Shares are flat on the year, vs. an 11% gain by number-two discount chain Target Corp. In pre-market trading, shares have shed another 2.5% to $45.
Sources: Press release, MarketWatch, Bloomberg
Commentary: Wal-Mart's Six-Month Results: Number Of Shoppers RisingWal-Mart Investors Jumping the GunWal-Mart: Going For Quality
Stocks/ETFs to watch: WMT. Competitors: TGT, COST. ETFs: VDC, UCC, PRFS, XLP
Earnings call transcript: Wal-Mart F1Q08

Home Depot Q2 Net Down 15%, Beating Estimates

Home Depot reported Q2 earnings declined 15% to $1.59 billion, or $0.81/share, with adjusted EPS totaling $0.77, compared to analysts' average estimate of $0.72/share. Sales fell 1.8% to $22.18 billion, but still topped expectations of $22.02B. HD-EarningsChart-8-14-2007 Same-store-sales on the quarter were down 5.2%, in its first profit and revenue decline in four years. Home Depot said the housing market continues to be "challenging," and said it believes "the housing and home improvement markets will remain soft into 2008." Earnings per share were helped by a 5% reduction in the number of shares outstanding to 1.97B. Home Depot referred to its press release from last Thursday, saying the $10.325B sale price of its HD Supply unit to private equity could be reduced, which could impact its $22.5B share buyback recapitalization strategy. Home Depot reiterated full-year guidance for a 15% - 18% drop in EPS, not including the impact of the HD Supply sale and recapitalization. Home Depot's earnings call is at 9 a.m. Check for its earnings call transcript later today. Shares of Home Depot lost 1.9% to $35.24 on Monday.
Sources: Press release, Bloomberg, MarketWatch
Commentary: Is Home Depot's Share Buyback At Risk? My Question AnsweredHome Depot Falls Most In Four Years, Likely To Cut Sales Price of Supply UnitHome Depot Lowers 2007 Earnings Guidance
Stocks/ETFs to watch: HD. Competitors: LOW. ETFs: RTH, XLY

Jamba Posts Drop in Q2 Same-Store Sales

Juice and smoothie manufacturer Jamba Inc. reported Monday that Q2 same-store sales fell 3.3%, below forecasts, on a drop in customer traffic in California. Sales, however, came in ahead of expectations. Total revenue was up 14.1% to $89.6 JMBA 14 08 2007 Chartmillion from $78.5 million in the year-ago quarter. Analysts were expecting $85.8 million. The company, which has 645 stores, is cutting its planned franchise openings to 30 from 50 for 2007. Jamba opened 27 stores during Q2 in markets across the country, including Oregon, Florida and Las Vegas. The company launched the Functional Smoothie product line during the quarter, which is "designed to provide health and lifestyle benefits such as a healthier heart, increased immunity, and weight management." It is also testing a breakfast line intended for a 2008 launch. Quarterly earnings will be posted on August 30.
Sources: Press release, Forbes, Reuters, MarketWatch
Commentary: Jamba Growth, Sweet Revenues and ProfitsHow to Invest Like Blue Ridge Capital's John Griffin
Stocks/ETFs to watch: JMBA

MACRO AND HOUSING

Banks Tighten Lending Standards in Wake of Subcrime Crisis -- Fed Survey

More than half of the banks surveyed by the Federal Reserve raised their standards in subprime lending in recent months, as U.S. institutions rein in requirements for many loan products in an attempt to limit their exposure to the subprime crisis. A Federal Reserve survey released Monday indicated that the banks tightened credit on U.S. subprime and non-traditional mortgages, while also taking a more cautious stance regarding prime Tightening Loan Standards 14 8 07mortgages, syndicated loans and commercial real estate loans (see chart). Fifty-six percent raised standards in their sub-prime lending, according to the quarterly survey of senior loan officers conducted in July, while 14% tightened standards on prime residential mortgages. Some 25% of banks raised standards for getting a commercial real estate loan, although there were no changes to standards for commercial loans and consumer loans. Terms for business loans eased as competition increased with some 33% of the banks saying they had also cut their margin between the loan rate and cost of funds. Generally, the banks said they had only limited exposure to syndicated loans and leveraged lending; foreign banks operating in U.S. generally had greater exposure than domestic banks. Both domestic and foreign banks expected a tightening of credit standards and terms in the syndicated loan market in the coming months. Because the poll was taken in the second half of July, however, some feared that it may not reflect a heightened sense of risk-aversion given market volatility over the past couple weeks.
Sources: Fed survey, Thomson Financial, MarketWatch, Reuters, Financial Times,
Commentary: The Week Ahead: The Fed Treats The SymptomsChange In Credit Spreads By SectorLessons From A Chaotic Market
Stocks/ETFs to watch: DIA, SPY, AGG, KBE, PJB

TECHNOLOGY

Opening Premium Expected After VMware IPO Prices at $29

Shares of VMware Inc. were expected to open at a substantial premium when they start trading Tuesday in what is being called the hottest technology IPO since Google. The highly sought after spin-off from storage giant EMC Corp. priced its initial public offering of 33 million Cl. A shares priced at $29 each -- the top of the $27-$29 range anticipated by the company last week when it raised its expectations from the original $23-$25 range. "Demand is astronomical," said Scott Sweet of IPOBoutique, with MorningNotes saying the deal was oversubscribed by as much as 25 times the number of shares available. One analyst called the share "a steal up to $35," saying they were fully valued somewhere in the mid-$40s. The underwriters' over-allotment option for another 4.95M shares is certain to be exercised. Shares will trade on the NYSE under the symbol VMW. The offering was led by Citi, JPMorgan and Lehman Brothers. EMC will continue to own nearly 90% of VMware.
Sources: Press release, TheStreet.com, MarketWatch
Commentary: VMware Ups Its IPO Price RangeIPO Analysis: VMware, A Virtualization PioneerOptions Ideas for This Volatile Market: EMC and Private Equity Players
Stocks/ETFs to watch: VMW, EMC, C, JPM, LEH. Competitors: MSFT

Nokia Issues Warning on 46M Batteries

Nokia Tuesday issued a warning advisory saying up to 46 million of its batteries may have a fault that could lead to overheating. There have been approximately 100 incidents and no injuries or product damage, Nokia said. The advisory applies to the BL-5C battery, made by Matsushita NOK 14 08 2007 ChartBattery Industrial Co., a unit of Matsushita, between Dec. 2005 and Nov. 2006. Nokia didn't estimate the financial cost of the recall, or how costs might be shared with Matsushita. In very rare cases, the company said, the batteries could potentially experience overheating initiated by a short circuit while charging, causing the battery to dislodge. Concerned consumers can request a replacement for any BL-5C battery subject to this product advisory.
Sources: Press release, MarketWatch
Commentary: Goodbye Moto, Hello NokiaNokia's Restructuring: Nobody Loves A Value-Chain Hog
Stocks/ETFs to watch: NOK, MC
Earnings call transcript: Nokia Q2 2007

INTERNET

Yahoo Tops Google in Customer Satisfaction

A study released Tuesday showed that for the first time, Yahoo edged past Google in customer satisfaction. The University of Michigan American Consumer Satisfaction Index indicated that Yahoo gained 3.9% from last year YHOO 14 08 2007 Chartto score 79 while Google slipped 3.7% to 78. This marks the first time Google has scored below 80 since 2002, when it was added to the survey. Google remains the leader in search (it posted a 52.7% share of searches in June versus Yahoo's 20.2%), but Yahoo's site network, email and social networking features enjoy stronger approval. Yahoo is "dominant in communities and sub-functions of the portal," according to Larry Freed, CEO of ForeSee Results, which sponsored the report. "What you see with Google is what you saw three years ago." Google also has e-mail, desktop and chat applications, but "needs to figure out a way to take advantage" of them -- "not necessarily through advertising, but better marketing." IAC/InterActiveCorp.'s Ask.com gained 5.6% to 75 points on improved search technology and an advertising blitz, while TimeWarner's AOL lost 9.5% to 67 points -- a score only slightly higher than that of the IRS. In related news, Dell's customer satisfaction fell 5% to 74 points in the same survey, indicating that its effort to improve service has yet to bear fruit. Apple remains the top-ranked computer maker in terms of satisfaction, but its score dropped 4.8% to 79 from last year's 83.
Sources: Bloomberg, Reuters, LA Times, News.com, Investor's Business Daily
Commentary: Why Google is More than Just a Search EngineTwo Logical Paths To Targeted Marketing: Google And YahooCitigroup Recommends Buying Dell on Current Weakness
Stocks/ETFs to watch: DELL, AAPL, YHOO, GOOG, IACI, TWX. ETFs: FPX, FDN, HHH
Earnings call transcripts: Yahoo! Q2 2007, Google Q2 2007, Apple F3Q07

ENERGY AND MATERIALS

InterOil Surges on Well's Test Results

Shares of InterOil Corp. logged their biggest gain in more than a month Monday after the refiner and oil and natural-gas explorer in Papua New Guinea, said enough gas was found in an appraisal well to justify the first stage of a project to liquify the fuel. "We are now confident thatIOC 14 08 2007 Chart the Elk structure contains sufficient gas to underpin the first train of an LNG plant which will be built by Liquid Niugini Gas Ltd., adjacent to our refinery, and sufficient oil shows to justify sidetracking to confirm an oil leg," said CEO Phil Mulacek. The stock surged 23% to $40.75 and is now up 44% since August 9 when the company said hedge-fund manager T. Boone Pickens increased his stake in the company to 9.9% from 1.2% through his investment company, BP Capital Management. According to an SEC filing, Pickens, who has been an investor in the InterOil since at least mid-2006, is not looking to acquire control of the company. InterOil has exploration leases for about 9 million acres in Papua New Guinea. It has no proven reserves to date.
Sources: Press release, AP, Bloomberg
Commentary: Interoil: Shares Skyrocket as Boone Pickens InvestsInteroil Reverses Share Downslide
Stocks/ETFs to watch: IOC. Competitors: WOPEY.PK

FINANCIAL

RBS Consortium Adds to ABN Amro Stake

The Royal Bank of Scotland-led consortium that is challenging Barclays for control of ABN Amro purchased more than 3% of the Dutch bank over the past two trading days. The consortium bought the stake -- 40.76 million shares, bought at an average price of €33.81 -- between last Friday, when the shares were trading as low as €31.20, and Monday. ABN's shares skidded 11% Friday on fears that the turbulent market might prompt the consortium to pull its offer. They closed up 1.86% at €34.48 Monday. The consortium's offer is worth about €38 a share, or €71 billion ($96.6 billion). The other members of the consortium, the Spanish bank Santander and the Belgo-Dutch group Fortis, have both received approval from their shareholders to proceed with the bid. The Dutch finance ministry, meanwhile, has granted Barclays a declaration of no objection, or DNO, enabling it to proceed with its offer provided it submits a "detailed integration plan" within two months of the transaction's completion. The DNO represented the last regulatory hurdle facing Barclays' proposed friendly takeover. "The DNO instructions are in line with our existing plans, and we anticipate no difficulty in complying with these requirements," said Barclays CEO John Varley.
Sources: Financial Times, MarketWatch, Dow Jones
Commentary: ABN Amro Plunges on Rumors Buyout May Fall ThroughABN AMRO: Subtle Valuations In Takeover BattleABN Amro Takes Neutral Position Toward Bidders
Stocks/ETFs to watch: ABN, RBSPY.PK, BCS, FORSY. Competitors: HBC, DB, UBS. ETFs: RKH, MOT, MOT
Earnings call transcripts: ABN Amro Q2 2007

UBS Beats, Warns H2 Profits Could Fall

Swiss financial services company UBS posted a 78% jump in Q2 net income and a 73% rise in income from continuing operations on solid commission revenue and the sale of a 20.7% stake in Julius Baer Holding AG, but warned that H2 profit will likely fall from the year-ago period on continuing losses from shuttered in-house hedge fund Dillon Read Capital Management. UBS 14 08 2007 ChartQ2 net group profit came in at 5.62 billion Swiss francs ($4.67 billion) against 3.25 billion in Q2 2006. Analysts were expecting 4.65 billion francs. However, the Dillon Read fund, which closed in May, knocked 230 million francs off Q2 earnings. Its trading losses, triggered by a downturn in the U.S. subprime mortgage market, resulted in a 31% drop in revenue at the bank's overall fixed-income division. "If the current turbulent conditions prevail throughout the quarter," the bank said in a release, "UBS will probably see a very weak trading result in the Investment Bank, offset by predictable earnings from wealth and asset management. This makes it likely that profits in the second half of 2007 will be lower than in the second half of last year." Last month, UBS replaced CEO Peter Wuffli with wealth-management head Marcel Rohner.
Sources: Press release, Bloomberg, Wall Street Journal, Reuters, MarketWatch
Commentary: Hedge Funds Build Stake in UBS, Sparking Split-up Speculation -- London TimesUBS Accused of 'Running Hedge Fund Hotel' After Offering Half-Priced SnacksUBS Ousts CEO Wuffli; Replaces Him with Rohner
Stocks/ETFs to watch: UBS. Competitors: DB, CS, HBC. ETFs: EKH, VEU, EWL

Citigroup Names Most-At-Risk Life Insurers

Life insurers' investment portfolios, overall, appear to be in good shape despite increasing concerns about credit quality in the U.S. housing market, Citigroup told clients this week, but stressed that certain companies' portfolios do warrant monitoring. "Although we do not PRU 14 08 2007 Chartexpect investment quality will emerge as a material financial issue for life insurers, that does not mean investors should not keep an eye on outliers when it comes to their exposure to either high-risk assets or structured securities," analyst Colin Devine said. "As history has a way of repeating itself, we have found that those companies with investment quality issues in the past generally bear watching for signs of deterioration when credit markets once again weaken." Possessing the riskiest portfolio, Devine said, is Prudential Financial, which has the greatest exposure to high-risk assets at 13.8%. "While it is premature to speculate on the level of potential industry losses that may emerge, the one company that stands out with its exposure was Prudential," he said. Close behind Prudential, at 13.6% , is MetLife, while Ameriprise had the highest level of structured facilities at 33.7% followed by Protective Life at 30%. Genworth, with $3.8B of its $69.6B investment portfolio being mortgage-backed holdings collateralized by subprime/Alternative A loans, also requires monitoring, Devine said.

Commentary: Insurance Sector: 5 Trends To WatchThree Portfolios: Bonds, Broad Market and Insurance
Stocks/ETFs to watch: PRU, MET, GNW, AMP, PL

Accredited Home Sues Lone Star

Accredited Home Lenders, which plunged 35% to close at $5.82 Monday on news that private equity firm Lone Star Funds is backing away from its $400 million buyout of the company, is suing Lone Star to force it to honor its commitment. Lone Star submitted a LEND 14 08 2007 Chartregulatory filing Friday stating that because of "the drastic deterioration in the financial and operational condition" of Accredited, it "does not expect to be accepting shares tendered." The move is viewed by some analysts as a gambit to knock down the purchase price. "It's a little bit of a game of chicken," said analyst Scott Valentin of Friedman, Billings, Ramsey (an advisor to Accredited). "The value of [Accredited's] assets have come down a lot since the deal was announced. What does Lone Star have to lose?" Lone Star agreed in June to buy Accredited for $15.10 a share, but the value of lenders with significant subprime exposure has plummeted since then. The transaction was approved by state regulators on Friday, hours before Lone Star pulled out. Accredited, which maintains that it has satisfied all conditions for the deal, said "industry conditions and the condition of the capital markets do not provide a basis for Lone Star to walk away from its obligations." Auditors have warned that if the deal is not completed, Accredited could collapse. The tender offer expires Tuesday night.
Sources: MarketWatch, Forbes, Bloomberg, TheStreet.com
Commentary: Accredited Home Lenders Gets Regulatory Approval for Sale to Loan StarAccredited Home Lenders: Buyout Gets ScrappedSpeculation Continues to Plague the Accredited Home Lenders and Lone Star Merger
Stocks/ETFs to watch: LEND. Competitors: FNM, FRE

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