Worst Housing Decline Since The Depression - Wells Fargo
"We have not seen a nationwide decline in housing like this since the Great Depression," declared Wells Fargo CEO John Stumpf at a Merrill Lynch banking conference in New York Thursday. Likening real estate to baseball, Mr. Stumpf commented, "I don't think we're in the ninth inning of unwinding this. If we are, it's an extra-inning game." Despite its self-proclaimed "minimal" exposure to subprime-related credit products, shares of Wells Fargo -- the second-largest U.S. mortgage lender and the fifth-largest U.S. bank -- fell 3.85% to $31.97 on Thursday, while the S&P Financials Index lost 3.1%, compared to a 1.3% loss for the S&P 500. Wells Fargo appears to be one of the best positioned banks, since the company never engaged in exotic mortgages, but Mr. Stump said the bank is "not immune" to the housing slowdown. A handful of banks have announced subprime-related writedowns of more than $1B (Wells Fargo wrote down $490M) and cumulatively exceeding $45B, where in an extreme case, Citigroup was compelled to drastically increase its writedowns from initially around $2B to an additional $8B to $11B (full story). Wells Fargo reported record Q3 net income, but also suffered its slowest profit growth in years due to higher delinquencies and defaults (full story). Mr. Stumpf blamed housing market woes on froth, unscrupulous lenders and overly greedy borrowers. Although Mr. Stumpf said this is one of the most severe declines ever in residential real estate and expects more industry-wide credit losses in 2008, he optimistically thinks there will be a sharp recovery once the bottom is reached.
Commentary: Housing Market Tracker - Subprime Review • Financials Short Interest: Bears Flock to WaMu, Bear, Lehman • Wells Fargo Reports 4% Increase in Profits, But Misses Targets
Stocks to watch: WFC, C, JPM, BAC, WM. ETFs: XLF, IYF, KBW, RKH
Earnings call transcript: Wells Fargo Q3 2007
Related: Merrill Lynch 2007 Banking & Financial Services Conference presentation [pdf] and audio webcast
Vonage Appeal Denied in Verizon Patent Infringement Case
The U.S. Court of Appeals for the Federal Circuit in Washington has denied Vonage’s request to appeal its patent infringement suit loss against Verizon. The decision means Vonage will have to pay Verizon the full $117.5 million the companies agreed to during a settlement last month, plus an additional $2.5 million to charity (full summary). Had Vonage won the appeal, it would have owed Verizon only $80 million. Vonage spokesman Charlie Sahner said the court’s decision was “disappointing” adding, “We are pleased to continue putting litigation behind us and keep focusing on our core business.” Vonage has already burned through roughly $300 million of the $491 million it raised through its June 2006 IPO. The company has set aside $146 million to pay for patent dispute settlements with Verizon and Sprint. As of June 30 of this year, the company had $197 million in cash, versus $253 million in debt. Financial blogger Larry Dignan wrote before the recent court decision: “The big question is whether Vonage will have enough cash to hold out if it loses those appeals.” Investors were clearly concerned, sending VG shares lower by 4.05% in regular trading Thursday following the ruling, and another 3.3% lower in after-hours action.
Commentary: Vonage Reports Jump in Revenue and Settlement • Vonage Surges 71% on Verizon Patent Settlement • Vonage Shares Jump, But Churn and Debt Challenging • Vonage Loses Another Patent Case, This Time To Sprint
Stocks to watch: VG, VZ. Competitors: T, S. ETFs: WMH, VOX
Intuit Posts Smaller Than Expected Loss
Software designer Intuit (INTU) posted a smaller-than-expected FQ1 loss Thursday, on strong sales of its accounting and tax preparation software. Intuit net loss of $20.8 million ($0.06/share) was narrower than last year's loss of $58.9 million ($0.17/share). Revenue jumped 27% to $444.9 million. Adjusted EPS of -$0.10, vs. -$0.12 a year ago, was stronger than the $0.12/share loss on revenue of $437.7 million analysts polled by Reuters expected. Looking ahead, Intuit expects 11-13% revenue growth in Q2 to $833-848 million, and EPS of $0.34-0.36. Analysts had been looking for EPS of $0.38 on revenue of $850 million. "With the launch of TurboTax for the 2007 tax year coming next week, we're looking forward to another great year for Intuit," CEO Steve Bennett said (press release, earnings call transcript). In a post-earnings note, Citi analyst Brent Thill told investors, "With potential for a challenging enterprise IT spending environment in ’08, we believe Intuit offers a relatively more insulated story with valuation support and high exposure to more stable consumer/small business spending. We believe Intuit will have limited negative surprises based on consistent track record, improvements in consumer tax strategy for ’08, and diversification of product lines for small businesses." Shares gained 1.5% in extended trading Thursday.
Salesforce.com Tops Estimates, Inks Major Citigroup Deal
Amid concerns enterprise software giants Oracle, SAP and Microsoft would cut into its profits, Salesforce.com reported an earnings beat Thursday after the closing bell and upped its full year outlook. Salesforce reported net income of $6.5 million, good for EPS of $0.05, versus net of $300,000 a year ago (EPS of $0.00). Sales rose 48% to $192.8 million, on the addition of 2,800 new customers. International sales growth was especially strong. Consensus analyst estimates were for EPS of $0.03 on revenue of $191 million. The company upped its FY EPS guidance to a range of $0.12 to $0.13; Analysts were expecting $0.10 on average. Responding to concerns Salesforce would face increasing pricing pressure as new, larger players enter the on-demand enterprise software market, CEO Marc Benioff told analysts on the earnings conference call, “A lot of our competitors, we think just aren't showing up.” Also on the call, Benioff announced that “Citigroup has chosen Salesforce.com to deliver their financial adviser desktop to 30,000 financial advisers around the globe. Benioff called the deal “the largest and most important CRM agreement of 2007, and our largest deal ever,” adding, in a direct swipe at Salesforce’s competitors, “After a lengthy evaluation process to assess functionality, availability, security and integration capabilities, Citibank has selected Salesforce.com over every other CRM solution, including Oracle, Microsoft and SAP,” (full CRM earnings call transcript). CRM shares fell 0.57% in after hours trading, as many investors felt the company would perform even better in its latest quarter. Goldman Sachs analyst Sasa Zorovic wrote clients that despite the beat and raise, "the stock's current valuation may limit its upward potential." Zorovic expressed disappointment the company signed up only 2,800 new customers in the quarter, saying he had anticipated 5,000 new additions.
Commentary: The Salesforce.com Bubble is Ready to Burst • SAP Challenges Salesforce.com With New On-Demand Business Suite • Salesforce.com Swings to Profit, Boosts Outlook
Stocks/ETFs to watch: CRM, C. Competitors: MSFT, ORCL, SAP.
Earnings call transcripts: Salesforce.com F3Q08 (Qtr End 10/31/07)
Autodesk Drops on Low Q4 Guidance
Autodesk Inc. on Thursday posted a 47% jump in Q3 profits, saying earnings surged on higher revenue from design products, emerging economies and new licenses, but forecast lower-than-expected Q4 earnings that sent shares 5.2% lower to $45 in after-hours trade. Net income increased to $85 million ($0.35/share), from $58 million ($0.24/share) a year earlier. Adjusted earnings, excluding stock-based compensation expense and the amortization of acquisition related intangibles, totaled $117.1 million ($0.49/share) compared with $86.3 million ($0.35/share) a year ago. Analysts had forecast Q3 EPS $0.47 on revenue of $536.1 million. Autodesk forecast Q4 earnings, excluding items, to range from $0.52-0.54, while analysts on average had been expecting fourth-quarter earnings, before items, of $0.54/share on revenue of $581.8 million. Known for its AutoCAD design software, Autodesk said revenue rose 18% to $538 million. The company also predicted 2009 EPS of $1.84-$1.90 and adjusted EPS of $2.20-$2.26. The company said it planned to buy Robobat, a privately held engineering software company based in Grenoble, France, that specializes in analysis, design, and steel and concrete detailing software for about $42.5 million (originally $33 million in September, 2006) in cash, subject to a working capital adjustment. The deal is expected to decrease targeted net EPS by $0.01 in both fiscal 2008 and fiscal 2009.
Commentary: Autodesk Jumps Post-Earnings: Is Bullish Outlook Confidence Or Folly? • Autodesk Chides Street For Faulty Channel Checks
Stocks to watch: ADSK Competitors: GM:APPL, ADBE, ORCL, SAP
Google Preparing Bid for Wireless Spectrum - WSJ
Google is preparing to bid at least $4.6 billion for wireless spectrum to be bought at the Federal Communications Commission's January auction, the Wall Street Journal reported Friday. The company is planning to bid without partners. According to the Journal, Google will finance the bid with its own cash and possibly some borrowed funds. The company is beta-testing a wireless network in preparation for running a full-scale national mobile carrier in the event that it wins the spectrum. The Journal writes that Google's expansion into wireless "could potentially expand the availability and decrease the cost of high-speed mobile Internet access to consumers." "Our goal is to make sure that American consumers have more choices in an open and competitive wireless world," a Google spokesman said. The move is risky, however: it could draw resources away from Google's areas of "core expertise" and turn telecom carriers into hostile competitors, some of whom have prior relationships with the company. At the auction, Google could find itself head-to-head with AT&T and Verizon Wireless, both of which are in the market for more spectrum to expand their broadband Internet offerings and services. Some observers believe Google does not sufficiently appreciate "the challenges of operating a network, providing customer service and gaining traction as a new entrant in a crowded wireless market." Others are more sanguine: "[B]ecause it's Google, because of the power of their brand and because they understand networks really well, it might work," said Stifel Nicolaus & Co. analyst Blair Levin.
Commentary: Google Dangles $4.6 Billion Bid For FCC Wireless Platform • FCC Spectrum Rules Favor New Entrants Over Incumbents -- Source • Is Google Serious About Bidding For Wireless?
Stocks to watch: GOOG. Competitors: T, VZ. ETFs: PTE, WMH, HHH, FDN
Earnings call transcript: Google Q3 2007
TheStreet.com Boosts Cash on Hand Through Late-Stage VC Stake
Financial website TheStreet.com (TSCM) announced Thursday investment firm Technology Crossover Ventures [TCV], which provides capital to late-stage private and public companies, will take a minority stake in the company, "in order to support its accelerated expansion strategy." Its $55 million investment gives it both preferred stock and warrants on common stock. The preferred stock converts into common stock at $14.26 a share. The five-year warrants permit TCV to buy about 1.1 million common shares of TheStreet.com at $15.69, or a premium of 10% (TSCM shares closed down 4.2% to $13.66, effectively boosting the premium). "Our alignment with TCV is a clear indicator of our intention to aggressively move forward with our expansion plans as a leading player in the online financial media sector," Street.com CEO Tom Clarke said. The company recently acquired financial social-networking site Stockpickr.com; BankingMyWay.com, which provides rates on CDs, savings accounts, interest checking, money markets, mortgage/home equity and auto loans; Rate-Watch.com, a provider of pricing solutions for banks and credit unions; and Promotions.com, a provider of interactive ad services. TheStreet.com also plans to launch a new pay site, Mainstreet.com, as well as relaunching its free sites. "Our confidence in TheStreet.com's growth strategy is based on an appreciation of its strong historical execution and an ability to intuitively navigate marketplace trends," TCV founding partner Jay Hoag said. TCV has in the past invested in Netflix (NFLX), RealNetworks (RNWK) and Expedia (EXPE) [TheStreet.com]. At the end of Q2, TheStreet.com had about $50 million in cash and equivalents and another $6.5M in receivables. It carries no long-term debt, but did owe about $20M in current liabilities (Yahoo Finance).
Starbucks Tumbles on Drop in U.S. Traffic
Starbucks (SBUX) shares tumbled 8.5% in extended trading Thursday after the company posted in-line earnings and revenue, but cut earnings estimates for the coming year after per-store transactions fell for the first time in three years. The coffee retailer posted Q4 net income of $158.5 million ($0.21/share), up from $117.3 million ($0.15/share) a year ago. Net revenue was $2.44 billion, up from $2 billion. Analyst consensus estimates were for EPS of $0.21 on revenue of $2.42 billion. For 2008, Starbucks projects full-year EPS of $1.02-1.05. For Q1 2008, it expects EPS of $0.28, impacted by dairy cost pressures and continuing softness in the U.S. economic environment. Analysts polled by Reuters had been forecasting full-year EPS of $1.05 on revenue of $11.14 billion; EPS of $0.31 in Q1 2008; and $0.25 in Q3 and Q4. "Given the current economic environment, and the commodity costs that are not expected to ease until the latter part of the year, we expect EPS expansion to be greater in the second half of fiscal 2008," CFO Pete Bocian commented (press release). U.S. store traffic fell by 1%, which CEO Jim Donald was quick to comment was not an indication the market was saturated. "We're seeing this pushback that other retailers have described," (earnings call transcript), adding that a July price increase of about $0.09/cup also hurt traffic. Starbucks did, however, reduce planned 2008 store openings by 100 to 1,600. "This frankly proves there are no sacred cows in the retail world right now," William Blair restaurant analyst Sharon Zackfia said(Reuters).
Kohl's Down on Earnings Slip
Kohl's Corp., a mid-priced retailer of apparel and home goods, and the fourth-largest U.S. department-store company, on Thursday reported a 14% drop in Q3 profit as sales fell short of analysts' estimates, and cut its earnings forecast for the holiday selling season and full-year. Kohl's shares were down 2.9% to $47.50 in extended trading from their $48.92 close. Net income fell to $194 million ($0.61/share), down from $224.5 million ($0.68/share) for third-quarter 2006, but just ahead of the $0.60/share analysts expected. Total sales rose about 5% to $3.8 billion, below analyst estimates of sales of $3.9 billion. Sales at stores open at least a year fell 2.6%. Kohl's said it now expects Q4 profit of $1.45-$1.51 per share, assuming same-store sales that are flat to down 2%. In August, the retailer had forecast Q4 EPS of $1.63-$1.69. Analysts expected EPS of $1.58 for Q4 and $3.64 for the year. President Kevin Mansell said on a conference call with analysts that the retailer was being "conservative" on its outlook for the quarter and the first part of next year (full transcript). "People are still struggling to find a bottom for these earnings," said Lauri Brunner, an analyst at Thrivent Investment Management. "We see a lot of unraveling in the fourth-quarter earnings."
Commentary: Kohl's Looks Most Attractive Among Discount Retailers • Macy's Pullback Means Opportunity
Stocks to watch: KSS. Competitors: M, JCP, SHLD
TRANSPORT AND AEROSPACE
Court Rules Against Bush's Fuel-Economy Standards
The 9th U.S. Circuit Court of Appeals in San Francisco has ruled new light-truck fuel economy standards are insufficient and ordered new standards be written as "expeditiously as possible" for a class of vehicles that includes sport utility vehicles, pickups and other light trucks. A panel of judges said the Transportation Department's National Highway Traffic Safety Administration [NHTSA] failed to account for the environmental impact of tailpipe emissions in a 2006 regulation. The NHTSA's standards require light-trucks to achieve at least 24 miles per gallon by 2011, which equals less than 2 mpg over 2007 models. The NHTSA said it had no comment and referred questions to the Justice Department, where a spokesman commenting on the decision said, "It's currently under review and we're considering our options." The case could be taken back to the appeals court or go to the Supreme Court. The Alliance of Automobile Manufacturers, the industry's leading trade association, was critical of the ruling, claiming the Bush administration's standards represented "the largest fuel economy increase in the history" of federal mileage standards. The Auto Alliance warned any changes to standards will result in delays to progress already made towards improving fuel economy, since automakers have already completed plans for 2011 models and are currently designing 2012 models. The Wall Street Journal reports the court's ruling is unlikely to affect vehicles sold before 2010 or 2011, since the government is required to give automakers lead time for changes to fuel-economy.
Commentary: Automakers: Electric Vehicle In Mirror May Be Closer Than It Appears • October Auto Sales: Ford Sags, Toyota Gains, Nissan Surges
Stocks to watch: GM, F, DAI, TM, HMC, OTCPK:NSANY
ENERGY AND MATERIALS
Rio Tinto Mulls Pac-Man Defense Against Billiton - WSJ
British mining giant Rio Tinto is considering a so-called Pac-Man defense as a means to fend off a hostile bid from BHP Billiton, the Wall Street Journal reported Friday. According to that strategy, the target company turns the tables and places a counterbid for the acquirer. Last week, Rio rejected Billiton's A$140 billion bid on the grounds that it "significantly undervalues Rio Tinto and its prospects." Rio's size makes a bidding war unlikely, so it has to come up with strategic options to fend off the bid. Though the Pac-Man defense has a checkered success rate, it can serve to highlight the value of the target company and possibly keep management in place if the purchase does eventually go through. Analysts consulted by Reuters view the Pac-Man defense as unlikely in this scenario, since Billiton might sweeten its bid and Rio might not be able to pull off an acquisition of its larger competitor. "At face value you'd say it's unlikely and high risk," said Peter Chilton of Constellation Capital Management. Rio has established a special board committee to construct a defense strategy, which could include asset sales among other options. The strategy will be disclosed at an investor meeting on November 26. If the companies do combine, they will have operations on six continents and lead the global market in iron ore, copper, aluminum and other natural resources. This week, BHP embarked on a global tour to convince shareholders to back the deal.
Commentary: BHP's Bid For Rio Tinto Moves Into Overdrive • UBS Anticipates Higher Offer From BHP Billiton For Rio Tinto • Rio Tinto Rebuffs BHP Buyout Bid
Stocks to watch: RTP, BHP. ETFs: SLX
Earnings call transcript: BHP Billiton Ltd. Annual Fiscal 2007
Crude Falls on Surprising Increase in Inventories
Crude futures fell Thursday after the Energy Department announced an unexpected increase in U.S. crude inventories. The inventories rose by 2.8 million barrels last week, while analysts were expecting a decrease of 700,000. The front month crude contract traded down $1.71 to $92.38 on the news. "Rather weak demand numbers are still showing up in the weekly data. That's reflective of the trend that we've seen," said Eric Wittenauer at AG Edwards. Oil prices are up 40% since mid-August, but have recently seen some weakness resulting from speculators taking profits and OPEC lowering its world demand forecast because of the economic slowdown anticipated in the U.S. Also at the Nymex, front month gas contracts fell $0.0389 to $2.3315/gallon after the Energy Department said gasoline supplies increased by 700,000 barrels last week, while distillate fuel stocks fell by 2 million barrels.
Commentary: What a Chinese Bubble Burst May Mean for Commodities • Even With Recent Declines, Almost All Commodities Overbought
ETFs: USO, DIG
Fannie Mae Masking High Losses With Accounting Tweak - Fortune
Shares of government-backed mortgage lender Fannie Mae declined 10% to close at $43.04 Thursday after Fortune reported that the company has changed the way it discloses bad loans in an apparent attempt to conceal higher-than-forecast losses. Contributing to the shares' drop was the release by the Office of Federal Housing Enterprise Oversight [OFHEO] of its 2007 Performance and Accountability Report, which said neither Fannie Mae nor Freddie Mac is fully in compliance with regulatory standards. Plans to ease limitations on the lenders' portfolio growth will not be put into effect until they are fully compliant, the regulator said. Fortune wrote that Fannie Mae has altered the way it calculates its credit loss ratio, which represents bad loans as a percentage of total loans. In August, Fannie Mae forecast a credit loss ratio of 4-6 basis points. In last week's earnings report, the company said it had changed its accounting methodology, resulting in an annualized credit loss ratio of 4 basis points for the first nine months of 2007. If Fannie Mae had made an apples-to-apples comparison, Fortune points out, it would have posted an annualized loss ratio of 7.5 basis points for the period, exceeding the high end of its forecast. Last year, Fannie Mae was penalized for overstating earnings, so the new accounting procedure will likely draw close scrutiny. Fannie Mae controller David Hisey defended the new practice, saying it makes the lender's loss figures "more transparent, not misleading." In related news, Freddie Mac is joining Fannie Mae in setting new fees on the mortgages they buy from lenders. The lender said it is taking the step "in response to continuing volatility and turmoil in the mortgage market, including the deteriorating performance of higher-risk mortgage products." Freddie Mac shares declined 5.3% to $41.86.
Commentary: Regulator Irate Over NY AG's Probe of Fannie and Freddie • Fannie, Freddie, WaMu Tumble on Expanded Probe • The Short Case on Fannie Mae • The Moral Hazard of Subprime Risk
Stocks to watch: FNM, FRE. ETFs: RPV, UYG
Earnings call transcripts: Fannie Mae Q4 2006, Freddie Mac Q2 2007
E*Trade to Customers: Your Money Is Safe
In an updated note to customers, much-maligned internet stock broker E*Trade (ETFC) told account holders their money was safe, and said the company has resolved to take "appropriate and decisive action" to get it through current turmoil (E*Trade).
The old adage "there is no such thing as bad publicity" does not apply to E*TRADE FINANCIAL this week. Seemingly by the stroke of a pen... or a few clicks from a keyboard... a Company with a core business that has generated impressive growth quarter after quarter has been bombarded by rumored reports of its imminent demise.Regarding client deposits, it noted:
Well, we want customers to know that the entire E*TRADE team has come together with resolve and commitment, taking appropriate and decisive action to manage through this issue and to ensure that E*TRADE FINANCIAL continues to deliver the best value in the marketplace for our customers... We haven't lost focus on our customers, our business or our future. The credit crunch has had a tremendous impact, but we are taking appropriate and decisive action to manage through it.
• FDIC insures all E*TRADE Bank accounts to at least $100,000 and Extended Insurance Sweep Deposit Accounts to $500,000.
• SIPC protects E*TRADE Securities customers up to $500,000 (including $100,000 for claims for cash).
• Additional E*TRADE Securities protection provides up to $150 million per brokerage account, underwritten by London insurers (aggregate $600 million).
• E*TRADE is well-capitalized by regulatory standards.
Bulging Economic Data Make China Rate Hike Likely
Chinese capital spending exceeded economist expectations in October, leading many to believe the PBOC (People's Bank of China) will raise interest rates for the sixth time this year, perhaps as early as Friday. Capital spending on fixed assets such as factories and power plants jumped 26.9% during the first three quarters of 2007, the fastest pace since Sept. 2006, and stronger than economist estimates of 26.3%. "That makes an interest rate rise more likely today. Everybody in the market is now expecting it," Qiu Gaoqing, an analyst with Bank of Communications in Shanghai, said. A 27 basis-point hike is seen as the most likely increment. "I'm pretty worried about this strong number because we think that the overcapacity issue is already a big problem, and this number is definitely making this more severe," Lehman analyst Mingchun Sun said. China's one-year lending rate currently stands at 7.29%. Also this week, China again posted a record trade surplus for October; saw the sharpest rise in retail sales since at least 1999; CPI climbed to a nearly 11-year high of 6.5%. All together, the world's number-four economy will likely grow more than 11% over 2007, a fifth straight year of double-digit growth (Reuters). ETFs FXI, GXC and PGJ all offer U.S. investors broad exposure to Chinese equity markets.
MUST-READS ON SEEKING ALPHA TODAY
Have Wall Street Breakfast emailed to you every morning before the market opens.