M&A Market Took It on the Chin in Q3
Data provider Dealogic reported Thursday that LBO and M&A activity fell off sharply in Q3 during a global credit crunch, although mid-market deals held up relatively well. Deals valued in the $100 million-1 billion range totaled nearly $82 billion in the quarter, a 15% drop from a record Q2. Deals above $1 billion, however, tanked 57% from Q2, dropping to $214.3 billion from $495.3 billion. American LBOs sank from $67.2 billion in July to $7.1 billion in August and $11.4 billion so far in September. "The mega-deal markets are still locked up with this huge backlog of deals that didn't get done," said Michael Hogan, a managing director at middle market merger advisory firm Harris Williams. "But if you are in a size where the deals could be clubbed from a group of lenders...all those groups are still providing financing and the deals are getting done." Overall M&A volume in the U.S. was $308.7 billion in Q3 -- down from $606.5 billion in Q2, but up 13% from Q3 2006. For the first three quarters, U.S. M&A reached $1.34 trillion, up 27% over the year-ago quarter. Globally, the M&A market hit a record $3.85 trillion over the first three quarters. Global deal volume in Q3 fell 42% to $1 trillion from $1.74 trillion. Goldman Sachs is the top-ranked U.S. M&A advisor, followed by Morgan Stanley, Citigroup, Lehman Brothers, JPMorgan and Merrill Lynch.
Sources: Financial Times, Business Week, Reuters, Alphaville
Commentary: Three Reasons To Refrain From Buying Investment Banks • Goldman, KKR Abandon Harman Buyout • Opportunistic Short Opportunities In Financials
Stocks/ETFs to watch: GS, MS, C, LEH, JPM, MER. ETFs: IAI, XGC, FDL
Earnings call transcript: Goldman Sachs F3Q07, Morgan Stanley F3Q07, Citigroup Q2 2007, Lehman Brothers F3Q07, JPMorgan Chase Q2 2007, Merrill Lynch Q2 2007
New-Home Sales Plunge
The Commerce Department announced Thursday new-home sales decreased 8.3% in August, dropping the seasonally adjusted annual rate to 795,000, the lowest in seven years. Economists expected the annual rate to come in at 825,000 homes. "This is more evidence that it's going to be a long and -- for a lot of people -- a painful process," said Mike Schenk, economist at the Credit Union National Association. "The soft housing market will be with us for a long time, at least 18 months." The inventory of unsold homes fell 1.5% to 529,000, of which 180,000 are completed. Thirty four percent of all homes on the market are now completed, a new high for this cycle, which will likely put further pressure on homebuilders to cut prices and introduce even larger incentives. The median price for a new home decreased 7.5% to $225,700 compared to $243,900 a year ago, while the average price dropped 8% from $317,300 down to $292,000. KB Home reported Thursday it lost $478.6M during the last quarter, and said its average selling price dropped 7% (full story). Ian Shepherdson, chief U.S. economist for High Frequency Economics, called the numbers "hideous."
Sources: Press release, MarketWatch, Wall Street Journal
Commentary: KB Home Swings to Loss; 'No Sign of Housing Stabilizing' • Pre-Market Economic News Round-Up
Stocks/ETFs to watch: XHB, ITB
KB Home Swings to Loss; 'No Sign of Housing Stabilizing'
KB Home reported a fiscal Q3 net loss of $478.6 million, or -$6.19/share, compared to earnings of $129.3M, or $1.60/share last year. Revenues fell 32% to $1.54B from $2.28B last year. Unit deliveries declined 28% to 5,699, and KB's average selling price was off 7% to $267,700. KB Home said it took pre-tax noncash charges totalling $690.1M related to inventory and JV impairments and the abandonment of land option contracts. The company also had a goodwill impairment of $107.9M. "Our third quarter results reflect the seriously challenging market conditions that prevail for homebuilders across most of the nation. At this time, we see no signs that the housing market is stabilizing and believe it will be some time before a recovery begins," commented CEO Jeffrey Mezger (full earnings call transcript). Shares of KB Home gained 2.6% to $24.71, after losing 4% to $24.09 on Wednesday.
Sources: Press release, Bloomberg, MarketWatch
Commentary: Housing Bubble and Real Estate Market Tracker • Stocks With Highest, Lowest Short Interest • Jim Cramer's Take on KBH
Stocks/ETFs to watch: KBH. Competitors: DHI, LEN, PHM. ETFs: XHB, ITB
Accenture Higher on Q4 Beat, Guidance
Accenture reported fiscal Q4 net income fell 8.6% to $316.8 million, or $0.50/share, less than analyst forecasts of $0.48/share. EPS would have been $0.39 last year excluding a tax benefit. Revenues rose 27% to $5.57B, well ahead of estimates of $4.89B. Accenture projects fiscal 2008 EPS of $2.21 to $2.26, on revenue growth of 9% to 12%, or as much as $24B. Analysts had been forecasting EPS of $2.22 on sales of $21.4B. Fiscal Q1 revenues are seen in the range of $5.4B to $5.6B, also ahead of estimates of $5.24B. During the company's conference call, COO Steve Rohleder said, "The subprime market issue(s) has had no impact on our business to date, although we continue to monitor the situation" (see full transcript). CEO William Green called subprime an "isolated phenomenon." Green also explained the sustainability of Accenture's consulting business, saying the focus is on longer-term strategic issues of clients, instead of small discretionary projects. Consulting accounted for $3.1B (63%) of $4.9B in new bookings, while outsourcing totaled 37%. Accenture raised its quarterly dividend 20% to $0.42. CFO Pam Craig said Accenture, with $3.31B in cash, will probably focus on stock buybacks and acquisitions. Shares of Accenture rose 0.6% to $38.02 during normal trading Thursday and added 1.3% to $38.52 in extended activity.
Sources: Press release, Bloomberg, MarketWatch, TheStreet.com
Commentary: Which IT Outsourcing Stock is the Best? • Goldman Updates Favorite Tech Stocks Lists • Another Look at Accenture's Market Cap
Stocks/ETFs to watch: ACN. Competitors: EDS, IBM. ETFs: MTK
Jabil Circuit Swings to Q4 Profit
Contract electronics manufacturer Jabil Circuit Inc. reported a fiscal Q4 profit Thursday, reversing a year-ago loss, on growing revenues and a strong rise in operating margins. The company posted net profit for the quarter of $11.7 million ($0.06/share) versus a net loss of $45.6 million (-$0.22) last year. Excluding items, Jabil's Q4 EPS were $0.29 per share, down from last year's $0.36 but just ahead of analyst expectations of $0.28. Revenue was $3.13 billion, up 6% from $2.95 billion and ahead of a consensus forecast of $3.01 billion. Jabil is projecting adjusted EPS for fiscal Q1 of $0.33-0.37 on revenue of $3.3 billion, in line with Street expectations. For full-year 2007, Jabil earned $73.2 million ($0.35/share), down from $164.5 million ($0.77) in 2006. Revenue was up 20% to $12.29 billion from $10.27 billion. "Our sequential and year-over-year results for the quarter point to a strengthening business," said President and CEO Timothy L. Main (see full earnings call summary).
Sources: Reuters, Thomson Financial, AP, MarketWatch
Commentary: Jabil Circuit Looks Like Strong Buyout Candidate, But I'm Not Buying • Contract Electronics Manufacturing: Tough Place to Make Money
Stocks/ETFs to watch: JBL. Competitors: FLEX, SANM. ETFs: RYT
Alcatel-Lucent Jumps on Report of Restructuring Deadline
Shares of Acatel-Lucent rallied 4.5% in Paris on news CEO Patricia Russo has been given one month to deliver an emergency restructuring plan, according to a report by French newspaper Les Echos. Acatel-Lucent's Board of Directors expects Russo to present her plans at the company's next board meeting on Oct. 30. "As would be expected management reviews its plans with the board. The company takes seriously the need to improve the financial performance of the business and is taking necessary steps," said the company in a statement. Acatel-Lucent's share have dropped almost 40% year-to-date as the company has issued three profit warnings under Russo's leadership. A Dresdner Kleinwort analyst comments, "There is little doubt that the merger between Alcatel and Lucent has turned into a veritable fiasco." Acatel-Lucent's ADRs gained 3.4% to $9.57 on Thursday and are up 6.2% to $10.16 in thin pre-market activity.
Sources: FT.com, MarketWatch
Commentary: Alcatel-Lucent Cuts Outlook, Shares Drop • Alcatel-Lucent: Exercising The Power Of No • Still Time to Pull the Switch On Telecom Equipment?
Stocks/ETFs to watch: ALU. Competitors: ERIC, NT, CSCO. ETFs: BDH, IGN
Earnings call transcript: Alcatel-Lucent Q2 2007
Cognos: Strong Earnings, Weak Guidance
Canadian business-intelligence and performance-management software maker Cognos reported better-than-expected FQ2 earnings and revenue Thursday, but gave slightly disappointing Q3 guidance. GAAP net income was up 12% to $26.5 million ($0.31), compared with $23.8 million ($0.26) last year; excluding items earnings jumped 15% to $34.7 million ($0.40) vs. $30.0 million ($0.33) a year ago. Revenue rose 10% to $252 million. Analysts were looking for EPS of $0.38 after items on sales of $251 million. Cognos also announced it will buy back up to $200M in shares over the next year. For the coming quarter, the company expects revenue of $270-285 million and EPS of $0.45-0.53; Street forecasts had been for $0.52 on revenue of $271 million. CEO Rob Ashe said that aside from "isolated incidences," Cognos has not seen any signs of weakening demand from financial services customers (see full earnings call transcript). Ashe also said the company anticipates a significant hit to Q3 earnings due to the strengthening of the Canadian dollar. Shares dropped 4.8% to $42.45 in extended trading.
Sources: Press release, MarketWatch, Barron's
Commentary: Cognos' Missing Enterprise 3.0 Strategy • Cognos’ Company Cleanup
Stocks/ETFs to watch: COGN. Competitors: BOBJ, SAP, ORCL, MSFT
Google-Doubleclick Deal Faces Congressional Scrutiny
Google's proposed $3.1 billion acquisition of ad broker Doubleclick is attracting criticism from U.S. legislators concerned the combination will create unbreachable barriers of entry to the online advertising market. Senator Herb Kohl (D-WI) told a Senate antitrust hearing he feared the combined company would give Google a "stranglehold over Internet advertising." Google Chief Legal Officer David Drummond countered that Google and Doubleclick are "complementary" businesses, not rivals. Google sells ads; Doubleclick displays and tracks them. "DoubleClick is to Google what FedEx or UPS is to Amazon.com," he said. Microsoft and AT&T, for their part, vigorously oppose the transaction. "It will be bad for publishers, bad for advertisers, and most importantly, bad for consumers," said Microsoft General Counsel Brad Smith. "Google is already Amazon and is already FedEx. Now they're proposing to buy the post office." The deal is also prompting concern among privacy advocates who fear the consequences of Google's access to a "treasure trove" of consumer information. Thomas Lenard, senior fellow at the Progress and Freedom Foundation -- a free-market research group funded in part by Google, Microsoft and AT&T -- said the deal threatens neither competition or privacy. "We don't want to grab onto the belt of somebody who's in a race and say, 'Let's make him run a little bit slower, so everybody can catch up,'" he said.
Sources: Bloomberg, Wall Street Journal
Commentary: Microsoft Hires PR Firm to Battle Google-Doubleclick Merger - WSJ • Microsoft, AT&T Press for Review of Google-DoubleClick Deal • Lots of Moving Parts in the Google-DoubleClick Deal
Stocks/ETFs to watch: GOOG, MSFT, T. ETFs: SWH, IYW, PRFQ, FDN, FPX
Earnings call transcript: Google Q2 2007, Microsoft F4Q07
TRANSPORT AND AEROSPACE
GM-UAW Contract Introduces Two-Tier Pay
The new contract agreement between General Motors and the United Auto Workers is setting several historic precedents, including the creation of a new class of workers who will be paid half the current rate. The UAW had traditionally insisted that all its members be paid equally. The contract states that new employees will begin in "non-core" janitorial and maintenance roles at a rate of $28 per hour in salary and benefits. They will move to the higher, $51 per hour tier when they advance to assembly-line or other higher-rated work. The two-tier pay system ranks with the shifting of member healthcare benefits to a trust managed by the union itself as a turning point in the UAW's relationship with its Detroit employer. "This is a really big deal," said David Lipsky, Cornell professor of collective bargaining. "The UAW has always prided itself in being an egalitarian organization: 'We all hang together, with equal treatment for everyone.'" The changes will help GM narrow a $25-30 per hour cost gap with Toyota's U.S. workers. The agreement will not take effect until it is ratified by UAW's members, but ratification is expected. "The company likes [the contract] because it cuts compensation costs, and the union can swallow it because the people affected aren't going to vote because they don't exist yet," said Richard Block, a labor professor at Michigan State University.
Sources: Bloomberg, Wall Street Journal
Commentary: UAW / GM Reach Tentative Agreement; Strike Halted • Why the GM Strike Makes Sense • The General Motors-UAW Dance
Stocks/ETFs to watch: GM. Competitors: F, DAI, TM. ETFs: PRFG, RPV
Earnings call transcript: General Motors Q2 2007
Bear Stearns Bond Sale Oversubscribed
Bear Stearns raised about $1 billion Thursday afternoon with an enthusiastically received surprise sale of 10-year bonds. On Wednesday, Bear shares gained 8% on speculation the firm was in talks to sell a 20% chunk of itself to an outside investor (full story). Bear chose to capitalize on that momentum and put $1 billion worth of bonds up for sale, for which it received upward of $3 billion in orders. According to TheStreet.com, the bonds will be priced at 190 basis points over comparable 10-year Treasuries. Last week, Bear posted a 61% drop in Q3 earnings on steep retreats in the bond and structured finance markets (full story), and two of its hedge funds fell apart over the summer after making bad bets in the mortgage market (full story). Bear is now in money-raising mode, either through bond sales or through involvement of strategic partners. Despite the credit crunch, corporate bonds are proving extremely popular this month. "It's basically a food fight for anything that hits the market," said a money manager quoted by TheStreet.com. Bankers for Kohlberg Kravis Roberts have sold $9.4 billion of loans to be used for the $26 billion buyout of First Data Corp. -- "a significant event on the road back to normality," said Henderson Global Investors money manager John Pattullo, though the underwriters had to offer the loans at a 3-4% discount to spur demand.
Sources: TheStreet.com, Bloomberg
Commentary: Bear Stearns in Talks to Sell 20% Stake – NY Times • Three Reasons To Refrain From Buying Investment Banks • First Data's Loan Deal Oversubscribed - Reuters
Stocks/ETFs to watch: BSC, FDC. Competitors: GS, MER, LEH. ETFs: IAI
Earnings call transcript: Bear Stearns F3Q07
Sallie Mae Gets Boost from Renegotiation Possibilities
Sallie Mae shares jumped Thursday on new speculation the education lender will renegotiate the terms of its buyout deal with J.C. Flowers. On Wednesday, Flowers, whose investment groups include Bank of America and JP Morgan, informed Sallie Mae that it would not go through with the $25 billion deal it had originally agreed to (full story). But, instead of entirely backing out as some investors had feared, the group of buyers said in a statement late Wednesday, "We have told representatives of the Sallie Mae board that we are open to discussing a revision of the transaction that reflects this new environment." The statement left SLM with some "attractive options," noted Bear Stearns analysts. "It can fight the Flowers group in court ... and risk ending up with nothing if it loses, or with a $900 million break-up fee [worth only about $1.30 per share] if it wins," the analysts said. "Or it can agree to a lower price now." Investors seemed to think they will accept a lower buyout, as the shares of the company surged 9.1% o $49.12 on Thursday.
Sources: MarketWatch, Bloomberg
Commentary: Harman Buyout Shelved: Bleak Outlook for SLM Corp and First Data Deals • Prospective Buyers of Sallie Mae Want Discount -- NYT
Stocks/ETFs to watch: SLM. Competitors: STU, KEY. ETFs: PGF, IYF
Wider Losses and Dim Outlook at Rite Aid
Rite Aid announced Thursday its fiscal-second quarter loss was greater than expected, and lowered its guidance for the year. Net losses increased to $69.6 million (-$0.10/share) from last year's loss of $330,000 (-$0.02/share). Revenues were $6.8 billion, a healthy 54% increase over last year's $4.29 billion. Despite the increased margins and higher revenues, the company blamed weak earnings on higher costs for interest, integration, depreciation and amortization, and a one time financing charge of $12.9 million. Analysts predicted a loss of $0.06/share, not including the financing charge, and revenues of $6.8 billion. Same-store sales were up 1.1%. CEO Mary Sammons said, "The customer just generally speaking is a little more cautious in terms of purchasing with everything going on out there from an economy point of view" (see full earnings call transcript). With those ideas in mind, Rite Aid slashed its outlook. For the year, Rite Aid now expects to lose $78 million - $161 million, compared to earlier predictions of a loss of $47 million - $129 million. Same-store sales are now expected to rise 1.3 percent - 3.3 percent this year, down from a previous estimate of 3.7 percent - 5.8 percent. Rite Aid shares were down 4.5% in mid-afternoon trading Thursday.
Sources: Forbes, Bloomberg
Commentary: Is Rite Aid Heading in the Right Direction? • Drugstore Stocks: Walgreen and CVS Stand Above the Rest
Stocks/ETFs to watch: RAD. Competitors: WAG, CVS. ETFs: IHF, XLV
MUST-READS ON SEEKING ALPHA TODAY
- U.S. Market: Remarkable Earnings Growth Fueling This Market
- Housing: Understanding Contrarianism and Bubbles
- Currencies: Dollar Decline: The Phantom Menace
- Internet: Amazon Store No Threat to Apple's iTunes
- Hardware: Apple Inc: The Hype Must Go On
- Retail: Short Thesis on Starbucks Playing Out
- Transport: Aerovironment Poised to Fly Higher
- ETFs: Capture Chindia With the First Trust Index Fund
- Sound Money: Buy Recycled Furniture
- Jim Cramer: Latest stock picks
- Earnings Call Transcripts: Focus Media Q2 2007 • Accenture F4Q07 • Cognos F2Q08 • Jabil Circuit F4Q07 • Gaylord Entertainment Co. Q3 2007 • FactSet Research Systems Inc. F4Q07 • Paychex F1Q08 • Lennar Corporation Q3 2007 • KB Home F3Q07 • Rite Aid F2Q08 • Bed Bath & Beyond F2Q07
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