Wall Street Breakfast

by: SA Editors
SA Editors
Seeking Alpha's flagship daily business news summary, gives you a rapid overview of the day's key financial news. It is published before 7:00 AM ET every market day and delivered to over 900,000 email subscribers.

MACRO AND HOUSING

Paulson: Housing Will Weigh On Economy For "Some Time Yet"

The housing slump will continue to affect the capital markets "for some time yet" and is "the most significant current risk to our economy," Treasury Secretary Henry Paulson said Tuesday at Georgetown University. "The ongoing housing correction is not ending as quickly as it might have appeared late last year," he said. "The problem today is not limited to subprime mortgages, as the number of homeowners having trouble making payments on prime mortgages is also increasing." Paulson said it is part of the government's responsibility to help homeowners avoid foreclosure, but added that any such actions should be weighed against the risk of moral hazard -- the rescue of investors from the consequences of their own bad decisions. "I have no interest in bailing out lenders or property speculators," he said. Paulson said the Senate ought to approve regulatory reforms to government-backed mortgage companies Fannie Mae and Freddie Mac, and advised regulators to devise "interim improvements" to the mortgage regulatory system while evaluating wider reform. Paulson did not indicate that any new federal initiatives were in the offing to directly combat problems in the credit and mortgage markets. He and other Treasury officials recently urged Citigroup, JPMorgan Chase and Bank of America to create an emergency fund to buy debt and avert a more severe credit crunch (full story).

Global Rescue Fund Seeks Participants - WSJ

More banks are coming on board the potential $80 billion investment pool spearheaded by Citigroup, J.P. Morgan and Bank of America (full story), whose goal is to acquire unwanted mortgages and shore up the credit markets, The Wall Street Journal reported Wednesday. People familiar with the matter say that on Tuesday Wachovia said it will chip in to the fund "at an appropriate level," while at the same time downplaying its own need for the pool. Other firms supporting the plan are Fidelity Investments and Federated Investors; both hold SIV debt that could benefit from the fund. Meanwhile Northern Trust CEO Rick Waddell told the Journal he has no interest in joining the pool, particularly since the company has no exposure to the investment vehicles in which it will invest. Waddell described the pool as, "J.P. Morgan and Bank of America helping out Citibank," since Citi is the most severely exposed to SIVs of any bank. A Citigroup spokesman called the characterization "nonsense." Investment banks Goldman, Merill, Lehman and Bear Stearns have all participated in talks, but haven't yet indicated they would sign on, a source said. European banks HSBC, Barclays, Deutsche Bank, UBS and Credit Suisse -- whose participation is considered more crucial than that of Wall Street I-Banks because of their "big balance sheets and track records in structured finance" -- are withholding, sources claim. Citi, J.P. Morgan and BofA will chip in less than half of the fund's principal, meaning that more banks will need to sign on, without which the pool is "unlikely to happen," a source said.

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TECHNOLOGY

Intel Rises on Strong Revenue Beat, Forecast

Intel announced third-quarter results late Tuesday, reporting a 43% increase in profits and beating analysts' estimates. Net income for the quarter was $1.9 billion ($0.31/share), up from $1.3 billion ($0.22/share) last year. Revenue increased 15% to $10.1 billion. Analysts' estimates for Intel were $0.30/share on revenue of $9.6 billion. Intel was able to win back orders from AMD by speeding up the production of new processors. "Intel are really finally starting to put it all together," said Graham Tanaka, president of Tanaka Capital Management. "They have totally revamped their product line and they will regain market share at higher margins." Intel said it expects sales to rise to $10.5 billion-$11.1 billion in the fourth-quarter, with margins being around 57%. Analysts had been predicting revenues of $10.4 billion and margins of 55%. Shares gained 5.3% to $26.83 in extended trading.

IBM Beats By a Penny; Gross Margins Dip Slightly

International Business Machines reported third-quarter net income growth of 6.3% to $2.36 billion, or $1.68/share, on 7% higher sales to $24.1B. Analysts were expecting EPS of $1.67 on sales of $24.07B, on average. Global Business Services revenues rose 16%, with pre-tax income climbing 29%, while Global Technology Services revenues increased 13% with pre-tax income increasing 26%. Revenue grew fastest in Europe/Middle East/Africa, up 11% to $8.1B, followed by Asia-Pacific up 9% to $4.9B and Americas 4% higher to $10.2B. IBM reported a positive forex impact of 4%. However, IBM's total gross profit margin dipped to 41.3% from 42.0% last year. In a statement, IBM CEO Samuel J. Palmisano commented, "Our outstanding services results this quarter enabled us to stay on track toward our objective of accelerated earnings-per-share growth through 2010, while we work through a transition in our hardware business" (earnings call transcript). Shares of IBM gained 1.3% to $119.61 during normal trading Tuesday, but fell 1.2% in extended trading.

Seagate Boosts Outlook After Stronger-Than-Forecast Q1

Seagate Technology late Tuesday said strong demand led to better-than-expected fiscal first quarter results, and raised its of outlook for the current quarter. Despite a price war with rivals Western Digital and Hitachi, the maker of disk drives said it earned $355M ($0.64/share) on revenue of $3.3B, up from $19M($0.03/share) on revenue of $2.8B a year ago. Excluding charges for its acquisitions of Maxtor and EVault and other items, earnings were $385M ($0.69/share), topping analysts' estimates for earnings of $0.64/share and revenue of $3.22B and its own revised expectations. In August, Seagate had raised its earnings view for the quarter to a range of $0.59-$0.61/share, or $0.62-$0.66/share excluding items, and forecast revenue of $3.15B-$3.25B. "Our strong performance in the quarter reflects favorable industry conditions as well as the competitive strength of Seagate's unique platform and commitment to innovation," said CEO Bill Watkins. Some 47M disk-drive units were shipped in the quarter. Seagate said it sees earnings of $0.66-$0.70/share, or $0.71-$0.75, excluding items, and revenue of $3.4B-$3.5B for the December quarter. Analysts had been forecasting earnings of $0.69/share and revenue of $3.39B, on average, for the fiscal second quarter, according to Reuters Estimates. Shares gained 1.4% in extened trading Tuesday.

INTERNET

Yahoo Beats Estimates, Shares Surge

Yahoo reported a drop in its third-quarter earnings after the bell Tuesday, as the company continues its major reorganization, but its shares jumped as the much-maligned internet giant beat analyst estimates by a healthy margin. Net profit decreased to $151 million ($0.11/share) from $159 million ($0.11/share) last year. Gross revenue increased 12% to $1.77 billion, and net sales, which exclude revenues passed on to advertising partners, were up 14% to $1.28 billion. Analysts forecasted earnings of $0.08/share and net sales of $1.24 billion. Looking ahead, CEO Jerry Yang said, "We are focused on three big, multi-year objectives: to become the starting point for the most consumers on the Internet: to be the 'must buy' for the most advertisers: and to deliver open, industry-leading platforms that attract the most developers." For the fourth-quarter, Yahoo said revenues will be in a range of $1.31 billion to $1.45 billion; analysts had been predicting $1.38 billion in sales. Yahoo shares were down 4.2% during Tuesday's session; they jumped 8.7% to $29 after the earnings announcement, as investors were reassured the company's reorganization was progressing smoothly.

ValueClick Dips on Lowered Sales Guidance

Shares of online-advertising company ValueClick traded lower Tuesday after it announced it expects sales to be on the lower-end of projections for the third-quarter, and cut its full-year sales outlook. The company sees revenues coming in between $156 million and $157 million, instead of the previously projected $155 million-$165 million. According to Thomson, analysts were looking for $159 million. ValueClick lowered its full-year sales guidance to $635 million-$640 million, compared to previous guidance of $645 million-$660 million. Analysts had been expecting yearly sales of $649.6 million. Over the last month, the company's stock has increased 40% on bullishness in the sector and speculation the company could be a takeover target. ValueClick blamed the poor guidance on the disappointing performance of its lead generation business. Sandeep Aggar, an analyst at Oppenheimer, said he does not think the current weakness will put off prospective buyers, and that the lead generation business has been an on-going problem. ValueClick shares were down 11.6% to $24.55 Tuesday.

Sources: TheStreet.com, AP, MarketWatch
Commentary: ValueClick Rises As Takeover Rumors PersistValueClick Projected Buyout Value
Stocks to watch: VCLK. Competitors: GOOG, YHOO. ETFs: HHH, FDN
Earnings call transcript: ValueClick Q2 2007

MySpace Adds Skype to Its Instant Messenger

EBay-owned VoIP service Skype agreed to join up with News Corp.-owned MySpace, linking its free internet 'telephone' services to the social networking site's built in instant messenger [IM]. Both companies believe the move will boost traffic and increase usership of their services, according to the Wall Street Journal, which broke the story. The companies have singed a revenue-sharing agreement, the terms of which are undisclosed. According to Skype interim CEO Michael van Swaaij, combining "the world’s largest voice network and the world’s largest video and social network [was] an obvious fit.” MySpace is expected to roll out its Skype-enabled IM in November.

MEDIA

Apple Cuts Prices on DRM-Free Tunes

Facing stiff competition to its iTunes mp3 download store from Amazon.com's new download service, Apple is slashing prices on digital rights protected [DRM]-free music tracks from $1.29 to to $0.99 a piece - the same price DRM-protected tracks currently sell for. Last month Amazon.com launched its own online download service, offering both DRM-protected and DRM-free tracks for between $0.89 and $0.99 (full summary). The iTunes price cuts will apply to all music under EMI's label, as well as several independent labels. Apple denied the cuts were a result of increased competition, saying only, "[DRM-free downloads have] been very popular with our customers and we're now making it available at an even more affordable price." In other Apple news, the company said Tuesday its Leopard operating system will go on sale on October 26, and will cost $129 for a single user and $199 for a family pack. The release follows a four-month delay.

65% Chance AT&T Buys EchoStar - Citigroup

In a research note titled "Expect AT&T to Acquire EchoStar," Citigroup analyst Jason Bazinet told investors Tuesday recent strength in EchoStar shares is likely due to the prospect of a tie-up between it and AT&T. Bazinet surmises EchoStar's recent announcement of a tax-free spinoff of some of its non-core assets was likely a ploy to force AT&T's hand, since the creation of a tax-free spinoff would likely preclude AT&T from acquiring the assets for two years. Press reports suggest EchoStar is asking for $65/share, which he says may be low: EchoStar's current subscriber base is likely worth $41/share. By selling to AT&T today and forfeiting the ability to merge with DirecTV, EchoStar is forfeiting synergies of about $27 per share, suggesting EchoStar should ask for about $68/share ($41 + $27). An EchoStar acquisition would give AT&T "a technical hedge against potential speed-bumps" related to its current fiber strategy, and would give AT&T "a national footprint to pursue a wireless triple-play" (DBS video, wireless voice and data). Bazinet gives the deal a 65% chance over the next 12 months. EchoStar shares are up 1.8% at $49.93; AT&T shares are up 0.5% to $42.37.

AT&T Hires Goldman to Advise on EchoStar Buyout - TheStreet

AT&T has engaged Goldman Sachs as an advisor to explore acquiring satellite TV broadcaster EchoStar, TheStreet.com reported on its website Tuesday. A source familiar with the companies says Goldman came on board about a month ago, just at the time EchoStar announced it was considering spinning off its TV broadcasting operations from its satellite transmission unit. Earlier Tuesday, a Citigroup analyst surmised the propsed spinoff was a ploy to get AT&T to move forward with merger talks, since a spinoff would likely preclude AT&T from acquiring the assets for two years (full story). "I think they want to get this deal done this year, I'd give it three to six weeks to put it together," one source said. An acquisition would give AT&T "a technical hedge against potential speed-bumps" related to its current fiber strategy, and would give it "a national footprint to pursue a wireless triple-play" (DBS video, wireless voice and data), Citi said. Observers say the push to move forward stems from concerns a Democratic administration, if elected in 2008, might be less deal-friendly than the current administration. EchoStar's $380 million deal to purchase TV-over-the-Internet device maker Slingbox last month (full story) might also be part of a future key service offering, a source says. EchoStar shares are up 3.3% to $50.68, while AT&T shares are down 0.6% to $41.96 in midday trading.

Cablevisions' Largest Shareholder Opposes Buyout -- WSJ

The Wall Street Journal reports sources say Cablevision Systems' largest shareholder, ClearBridge Advisors, is set to vote Oct. 24 against the Dolan family's $10.6 billion cash bid ($36.26/share) to take the company private. ClearBridge's Legg Mason Partners Aggressive Growth fund owns around 14% of Cablevision and a combined 20% with other shareholders who have publicly opposed the buyout, including Gamco Investors, T. Rowe Price and Marathon Asset Management. The Dolans, who also own around 20% of Cablevision, but in a separate non-voting class of shares, need at least 50% shareholder approval. Cablevision CEO James Dolan issued a statement late Tuesday saying his family "wants to state emphatically that there will be no modification of the family’s accepted offer to acquire Cablevision." In addition, Mr. Dolan said he is "completely prepared to continue to lead the company into the future as a public company if the transaction is not approved." Sanford C. Bernstein cable analyst Craig Moffett warns Cablevision shares may fall 10% to 20% if the bid is not approved, but said, "Any investor who has endured the pain of owning cable over the summer is going to be loath to sign up for another dose by voting this thing down." Shares of Cablevision lost 0.6% to $33.70 on Tuesday.

EW Scripps to Split, Separating Internet and TV Businesses

E.W. Scripps announced Tuesday it will split into two separate publicly traded companies, separating its cable TV and internet properties from slower growing sources of revenues. The new Scripps Networks Interactive will include HGTV, Shopzilla, the Food Network, and Fine Living Network. The other company will consist of Scripps' 17 newspapers, 10 broadcast television stations, and a character licensing and syndication business. "This way the Internet and cable-TV properties won't be dragged down by the legacy media properties, the TV and the newspapers," said Barry Lucas, an analyst at Gabelli. CEO Kenneth W. Lowe said the split would allow the new entities to operate "with a sharpened strategic focus that would foster continued growth, solid operating performance and a clear vision on how best to build on the specific strengths." Like most splits of this kind, investors were happy with the news; shares of Scripps were up 8.6% Tuesday to $45.93.

Sources: TheStreet.com, Bloomberg
Commentary: E. W. Scripps Company: Seeking Success OnlineScripps' Shopzilla Discovers Link Building
Stocks to watch: SSP. Competitors: GCI, HTV.ETFs: PBS
Earnings call transcript: E.W. Scripps Q2 2007

TRANSPORT AND AEROSPACE

Air France-KLM, Delta Team Up to Challenge British Airways

In a challenge to British Airways, Air France-KLM and Delta Air Lines announced Wednesday a joint venture that will take advantage of the upcoming Open Skies pact allowing them to partner on routes linking major U.S. cities to London's Heathrow airport. Air France told investors Monday it would use Heathrow slots to serve nine U.S. destinations under the deal; the conference was closed to media. Air France KLM CEO Jean-Cyril Spinetta says the deal with Delta will add "several dozens of million euros" in profits in 2008, and $1.5 billion in revenue, jumping to an $8 billion/year revenue boost in 2010, when "numerous flights" to all Europe/North America destinations will become part of the JV. Until now, U.S. access to Heathrow has been limited to two UK and two U.S. airlines, currently American and United, with British and Virgin Atlantic. Air France and Delta hope to eventually extend the venture to include Continental and Northwest, analysts say, by using the "sprawling U.S. networks" held by the carriers to link up to Heathrow. "This is a win for Delta, Air France, and for the loyal base of customers who fly our airlines..." said Delta CEO Richard Anderson. "As part of this new joint venture and the antitrust immunity we have enjoyed since 2002, we will have plenty of scope to coordinate our sales policies on our respective transatlantic networks, thanks to more comprehensive and integrated services and procedures. Together, we will be able to offer passengers more flight options and frequencies, better schedules, new opportunities to earn more miles to take advantage of an enlarged network with seamless booking."

Sources: Press release, Reuters
Commentary: The Business Air Travel Tipping Point
Stocks to watch: AKH, DAL, OTC:BAIRY, CAL, NWA

Toyota Loses Top Reliability Ranking

Results from Consumer Reports' annual Car Reliability Survey show Toyota fell two notches from the top and consequently will no longer receive automatic recommendations for its new and redesigned autos from the magazine. Despite Toyota's drop, Asian automakers control eight of the top-10 model rankings, led by Honda's Element, Acura's TSX and Scion's xA [Scion is a Toyota brand]. Porsche's Cayman took no. 9 and Buick's Lucerne V8 model took no. 10. Overall, the results show U.S. automakers are closing the gap with Asian rivals, especially at Ford, where 41 of 44 models achieved average or better scores in reliability. However, less than half of GM's autos were rated reliable. Toyota's struggles continue meanwhile, as the automaker has suffered three consecutive monthly sales declines and recently lost its U.S. chief, among other executives, who left for a position with Chrysler. This year marks the first time since the survey began in 1996 that the Camry was not "recommended." Toyota ranked third-overall in brand rankings behind Honda and Subaru. Ordinary shares of Toyota fell 2% ($107.53 ADR equiv. at ¥116.8/$1) to ¥6,280 Wednesday in Tokyo. Toyota's ADRs gained 0.7% to $108.90 on Tuesday. GM lost 4.1% to $39.41, Ford fell 2.3% to $8.78, DaimlerChrysler rose 0.1% to $106.10, Honda also gained 0.1% to $33.19 and Nissan lost 2.4% to $19.56.

FINANCIAL

Thornburg Mortgage Misses Q3 Estimates on Fire Sale Losses

Thornburg Mortgage swung to a Q3 loss late Tuesday, and suspended its dividend after the adjustable-rate jumbo and super-jumbo lender lost about $1.1 billion on the sale of mortgage-backed investments.Net loss was $1.08 billion ($8.83/share); last year Thornburg earned $75.3 million ($0.64/share). The loss exceeded the $7.98/share analysts were expecting. Thornburg was forced to sell $21.9 billion in adjustable-rate-mortgage assets over the quarter at an estimated loss of over $1.09 billion. The company said it expects "profitability and market conditions to improve in the fourth quarter and would consider resuming common-dividend payments at that time." In a telling quote, CEO Larry Gladstone explained the company's quarter to investors: "The unprecedented dislocation in the global mortgage finance and credit markets that began this summer presented severe challenges for the company in the third quarter. It is unfortunate that these events, especially as they relate to Thornburg Mortgage, reflected investor perception, not investment reality... The company took a series of decisive actions in the third quarter as a result of events in the mortgage finance and credit markets that were beyond management's control in order to preserve its assets and shareholder value. These actions included the sale of high quality ARM assets, a simultaneous reduction in the company's reliance on short-term borrowings... and a public offering of convertible preferred stock" (full story). Thornburg shares have lost 54.6% YTD.

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