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

White House Announces Subprime Plan Amid Criticism

The Bush administration announced Thursday a plan to help struggling borrowers keep their homes. The White House and the Treasury negotiated with members of the private finance sector to craft an agreement that is expected to help 1.2 million homeowners avoid foreclosure, according to Treasury Secretary Hank Paulson. The plan includes a five-year rate freeze for certain subprime loans, many of which are expected to reset in the coming months. Also, borrowers will be able to refinance an existing loan into a new private mortgage or be moved to a loan from the Federal Housing Administration. "It is in everyone's interest -- homeowner, servicer, investor -- to develop a market-based approach to avoid foreclosures that are preventable," Paulson said. Wells Fargo (NYSE:WFC) Home Mortgage Co-President Michael Heid said it would only take a couple days for borrowers to work out new terms for a loan and servicers are modifying "today." Consumers must begin the process by reaching out to lending banks or non-profit credit counseling agencies. Before the announcement, the Mortgage Bankers Association announced the number of homes in foreclosure increased to record levels in the third quarter. In 2008 and 2009, about 1.8 million subprime mortgages will be reset. Some groups, including certain Democrats and The Center for American Progress, said the plan does not do enough. For instance, it fails to help borrowers whose rates were already reset. Also, Standard & Poor's warned that by fixing rates at lower levels, the plan will devalue securities backed by mortgages. Still, many felt the move is a step in the right direction as it could stymie a significant amount of foreclosures and allow many financial institutions to weather the current housing environment.

WSB Sponsor

Junk Bond Default Rate to Quadruple - Moody's

Global defaults by speculative-grade (junk-rated) companies, now at a 26-year low of 1.1%, are forecast to quadruple to 4.2% next year, Moody's Investors Service said in a report released Thursday. The forecast is viewed by some analysts as a formal indicator that the era of easy credit is now at an end. The outlook is based on an expectation that the U.S. economy will continue to slow but will not fall into recession. If a recession does take place, defaults could hit "double-digit levels," wrote Moody's default analyst Kenneth Emery. "We're certainly looking for an economic slowdown next year and a pick-up in default rates," said ABN Amro macro credit strategist Simon Ballard. "Any default rate above 3.5% would require a very bearish outlook on the U.S. economy." In 2002, the global junk bond default rate reached 8.2% as 133 junk-rated borrowers defaulted on $143.2 billion of bond and loan debt. NYU finance professor Edward Altman attributes the expected surge in defaults to the high proportion of poor-quality issues in the high-yield market. About half of new high-yield bond issues in 2007 were rated B-minus or lower, and the newly tightened credit environment has made it much harder for distressed firms to refinance.

Toll Brothers Posts First Loss Ever, But Beats Estimates

Toll Brothers (NYSE:TOL) reported its first quarterly loss in 21 years as a publicly traded company, but its adjusted $0.72/share loss came in better than analyst expectations of a $0.77/share loss. CEO Robert Toll commented, "By many measures, fiscal 2007 was the most challenging of the 40 years Toll Brothers has been in business (earnings call transcript). Toll's Q4 loss totaled $81.8M, compared to earnings of $173.8M last year. Pre-tax writedowns jumped to $314.9M, or $1.22/share, versus $0.42/share last year. Revenues fell 35% to $1.17B, in-line with estimates. CFO Joel Rassman said the company will not offer guidance for 2008, but warned revenues will be lower. Toll Brothers gained 13% to $23.42 on the beat. ETFs ITBand XHBoffer investors direct exposure to homebuilder stocks; both funds have lost more than 50% year-to-date (vs. Toll -36%), but are closely watched for signs of a bottom.

TECHNOLOGY

Palm Guides to Q2 Loss; Shares Plunge After Hours

Palm, Inc. (PALM) shares plunged 18.8% to $5.35 in extended trading Thursday after the company said it expects to swing to a loss in fiscal Q2 on a sales shortfall. The manufacturer of the Treo smartphone said it expects an adjusted net loss per share of $0.08-0.10 and cut its Q2 revenue guidance to $345-350 million from an already lowered $370-380 million. Analysts had been forecasting a profit of $0.04 per share for the quarter on revenue of $378.2 million. The company attributes the disappointing sales estimate to unspecified product delays and "an unforeseen increase in warranty repair expenses." "We are disappointed that we did not get a key product certified for delivery in the quarter, but we are focused on realizing the long-term benefits and opportunities," said CEO Ed Colligan. Palm's Treo has been overtaken in the market by smartphones from Apple (NASDAQ:AAPL), Nokia (NYSE:NOK) and Research in Motion (RIMM). "There have been market share losses for Palm and this increases the concerns," said Oppenheimer analyst Lawrence Harris. "We do need to see replacements for the traditional Treo line." This is the company's second consecutive loss since LBO firm Elevation Partners took a 25% stake in June. Palm will report fiscal Q2 results on December 18.

Motorola Affirms Q4 Outlook; Shares Rise

Shares of Motorola, Inc. rose 3.6% to $16.31 Thursday after the company affirmed its Q4 earnings guidance. CEO Ed Zander resigned last Friday, raising apprehensions among investors that the quarter might disappoint (full story). CFO Tom Meredith, speaking at an investor conference, said he expects both profit and sales to continue their upward momentum from Q3. "What we failed to take into account, frankly, is that you would have great angst over the fact we made that [CEO] announcement and didn't confirm" Q4 guidance simultaneously, he said. He affirmed prior guidance of earnings from continuing operations of $0.12-0.14 per share, and said the company's mobile device unit should show sequential revenue and bottom-line improvements. "It was very helpful for the company to make this statement today," said Oppenheimer analyst Lawrence Harris. On January 1, President and COO Greg Brown will succeed Zander.

MacWorld Rumors: Superthin Laptop; 3G iPhone

One month ahead of the MacWorld Expo, rumors are building that Apple (AAPL) plans to announce both an ultraportable laptop and a 3G iPhone. Last week, AT&T CEO Randall Stephenson said a 3G iPod will be released in 2008 (full story), but analysts differ on exactly when that will occur. Most were expecting an H2 release, but some are now advancing their target date to May or June. Regarding the ultraportable, an unidentified source "with good connections to Apple's Asian manufacturing partners" told CNBC's Jim Goldman that the new laptop will be 50% thinner and lighter than the MacBook Pro. The laptop will use flash memory instead of a hard drive and is expected to retail for about $1,500, the same price as Apple's 13.3-inch black MacBook. NAND memory chip manufacturers responded well to the news, with Sandisk (SNDK) rising 3.8% to $39.39 and Micron (NASDAQ:MU) up 3.5% to $9.26. In related news, Apple is reported to be boosting production of the iPod Touch to 5.1 million units for the holiday quarter in response to high demand. Piper Jaffray had estimated Apple would sell about 3.7 million units during the period.

National Semi Beats, But Lower on Soft Revenue Guidance

National Semiconductor (NYSE:NSM) gave up most of its earlier 2.5% gain in extended trading Thursday following its fiscal Q2 earnings release, which beat estimates despite a slight decline in net income, but disappointed in terms of Q3 revenue guidance. National's shares fell 2% to $23.05 (and by as much as 4.1%) after closing at $23.51. The company projected current quarter revenues will decline 1% to 5% (total sales between $474M to $494M), against analyst expectations of sales at or just above the high-end of National's outlook. Q2 net income slipped 1% to $90.6M or $0.33/share, topping Street estimates of $0.31/share. Revenues were off by about half a percent to $499M, compared to analysts' average forecast of $498.4M. A ThinkEquity analyst believes a seasonal slowdown in demand may be exacerbated by cautious resellers of National's chips, who began working on reducing inventory in recent months. National CEO Brian Halla commented in a conference call, "Business just isn't that bad," citing normal seasonal declines, but warned "there is that uncertain but possible effect of the subprime debacle." National is a more than 4% component of the actively traded Semiconductor HOLDRs (NYSEARCA:SMH), and is a 5%, top-5 holding of the semiconductor ETFs PSI and XSD.

MEDIA

Macrovision to Buy Gemstar-TV Guide for $2.8B

Gemstar-TV Guide International (GMST) agreed Friday to be acquired by Macrovision Corp. (MVSN) for $2.8 billion in cash and shares. Gemstar shareholder can elect to receive $6.35/share, a 6.8% premium to Gemstar's Thursday close, or 0.2548 share, an 11% premium based on Thursday's price. Rupert Murdoch's News Corp. (NASDAQ:NWS), which has a 41% stake in Gemstar, had called for the company to sell itself (full story). Macrovision arranged a $650M loan to help finance the deal. Gemstar publishes TV Guide Magazine, and furnishes onscreen listings to cable-TV operators. Macrovision's digital content management products, such as cable scramblers, prevent unauthorized copying and viewing of video and music, and unauthorized broadcasts on pay-per-view cable and satellite networks. The merger "will enable extensive libraries of commercial and personal protected content to be accessible on numerous devices through simple and intuitive guides," the companies said. "For example, consumers will be able to pull up a guide on their TV and receive personalized content and information regarding their favorite TV shows, read movie reviews before purchasing or renting a film, view personal photos, or tap into their music library." JPMorgan (NYSE:JPM) and UBS (NYSE:UBS) served as advisors.

Management Shakeup Begins at Dow Jones

Dow Jones & Co. (DJ) announced Thursday that CEO Richard Zannino will depart following the completion of the company's purchase by Rupert Murdoch's News Corp. (NWS), which is expected to be approved by shareholders next Thursday. Though a successor to Zannino has not officially been named, Les Hinton is expected to succeed him. Hinton, an old hand at News Corp., is currently executive chairman of its News International division. Times of London Editor Robert Thomson, who is credited with converting that paper from broadsheet to tabloid format, and lobbied on Murdoch's behalf during the Dow Jones negotiations, is expected to replace L. Gordon Crovitz as publisher of the Wall Street Journal. Zannino had been CEO since 2006 and shepherded the company toward its acquisition. "It was only a matter of time -- if you spend $5 billion buying something, you want to put your own man in to run the thing," said Steven Yount, president of the Dow Jones union. "I certainly hope that there is an unshakeable commitment to the excellence and quality of journalism that the Journal's been known for for hundreds of years." In related news, Rupert Murdoch's 34-year-old son James, currently CEO of BSkyB (BSY), is expected to be put in charge of all News Corp.'s media operations in Europe and Asia -- a position that puts him in line to succeed his father. James will take Rupert's place as non-executive chairman of BSkyB.

RETAIL

November Same-Store Sales Roundup: Mixed Bag

Retailers reported November same-store sales Thursday. Results were mixed, following two straight months of unusually weak sales growth and estimate misses. More seasonal temperatures and an extra-week of post-Thanksgiving shopping help prop up results for some firms. Conversely, high gas prices continued to plague shoppers, making shopping trips more expensive and eroding consumer confidence. Estimate-missers said economic concerns also hurt sales. More than half of retailers missed analyst estimates, but strong beats by Costco (NASDAQ:COST), Macy's (NYSE:M), Kohl's (NYSE:KSS), Saks (NYSE:SKS), Jos A. Bank (NASDAQ:JOSB) and Buckle (NYSE:BKE) allowed the group to post a collective 2.4% beat. Collective net sales gained a strong 10.4% over the month. In October comps fell 0.2% and net sales gained 4.8%. An S&P survey released Thursday said analysts are "cautiously optimistic" that consumer spending by Americans will grow this holiday season despite an economic downturn. A majority of the 1,100 respondents said they do not plan to reduce holiday spending from last year, and only 18% said they expect their financial position to deteriorate over the next six months (full story). Full article and comprehensive table.

Target Drops as November Sales Fall Short

Shares of Target (TGT) were under pressure Thursday after the discount retailer reported less than expected November sales results and warned that sales would have to "meaningfully improve" to achieve the targets the company previously set. Adjusted for the calendar shift, November same store sales increased 1.1%, missing the expected 3.0% gain according to Reuters Estimates. Sales were weak in toys, seasonal holiday goods, and jewelry. Before today's announcement, the company had been expecting an increase of 3%-5% in December sales. "Apart from Black Friday, this month has been a continuation of mediocre results," said Eric Beder, a retail analyst at Brean Murray Carret, about the retail sector as a whole. "In December we're going to see this game of chicken where consumers wait for the last minute to try to get the biggest discounts." "Sales results largely met expectations through the two-day post-Thanksgiving event, but softness in the final week of November caused the month overall to fall short of company guidance," Citigroup analysts wrote Thursday. "This late-month sales shortfall was concentrated in key seasonal categories including toys and holiday trim, but other home and apparel categories fell short of expectations as well. This was surprising to us as most retailers saw strength in the last week of the month based on more seasonally correct temperatures... For December, Target expects comps to increase in therange of 3-5%, however, a continuation of recent soft sales would cause December comps to fall well below this guidance." Shares of Target closed down 7.6% to $55.57.

Yum! to Reduce Restaurants Owned, Sees 10% EPS Growth

Shares of Yum! Brands (NYSE:YUM) jumped 5.1% to $39.05 on Thursday, but there was a muted reaction in thin late trading (+0.3% to $39.15), after the company's announcement of 2008 financial expectations and plans for expanded refranchising. Yum! projected EPS to grow at least 10% in 2008, in-line with its long-term target, but stakeholders have to wait until next week's investor meeting to learn how further refranchising will impact financials. Based on the 10% EPS growth estimate, EPS of around $1.83 is two cents short of analysts' average forecast. Yum! said it plans to reduce the number of fast-food restaurants it owns to under 10% by 2010, from approximately 20% at present. U.S. revenues are seen flat in 2008, partially a result of the refranchising, which in the longer-term is more profitable for Yum! because of lower operating costs. Analysts were expecting revenue growth of 2.5%. U.S. comparable store sales are expected to rise 2% to 3% in 2008. Growth in China remains robust, with operating profits forecast to increase at least 20%. Yum! is a 5% component of the PowerShares Dynamic Food and Beverage ETF PBJ.

Shares of Krispy Kreme Surge on Narrower Loss

Shares of Krispy Kreme Doughnuts (KKD) spiked more than 25% Thursday after the company posted a narrower loss than expected on lower interest expenses. The company's Q3 net loss shrank to $798,000 ($0.01) compared to a loss of $7.2 million ($0.12/share) last year. Revenue fell 11.7% to $103.4 million. Analysts were expecting a loss of $0.02/share on $107 million in revenue. Interest expenses fell to $2.3 million from $5.2 million last year. Commenting on the future of Krispy Kreme, CEO Daryl Brewster said, "We continue to focus on improving the company shop performance, driving the hub and spoke model, growing our international franchise business, refranchising certain domestic markets and reducing costs to help offset rising commodity price." The donut chain said a number of franchisees had been struggling, and it expects them to close a significant amount of stores in the future. Investors saw this as a sign the company would continue to cut costs and weed out unprofitable shops. "It's just very cheap, and someone is willing to make a bet that it has bottomed and that it can be fixed," said Malcolm Knapp, a New York-based restaurant consultant, about the company. "When you eliminate a lot of stuff, you're going to cut costs." Shares closed up 27.1% to $3.24.

Wal-Mart's November Sales Top Expectations

Shares of Wal-Mart (NYSE:WMT) gained 0.8% Thursday after the company said November same-store-sales grew 1.5%, which beat analyst estimates of 1.2%. Wal-Mart had forecast sales to be flat to 2%. Total monthly sales increased 8.4% to $31.72 billion. Wal-Mart said sales at its namesake Wal-Mart stores -- comparable +1.0%, total +4.8% to $20.17B -- were driven by grocery and pharmacy, with Black Friday sales strong across the board. Sam's Club warehouse comparable sales rose +4.3%, with total sales growth of 8.7% to $3.62B. Wal-Mart International recorded 18.6% higher sales to $7.93B. CFO Tom Schoewe said the company expects December comparable sales to rise 1% to 3%.

ENERGY AND MATERIALS

New ETF Tracks Oil-Prices Across 12 Months

Victoria Bay Asset Management said Thursday it has launched a new ETF that will reflect changes in the price of light sweet crude oil. The ETF, which will trade under the symbol USL, will track changes in percentage terms of the price of light sweet crude delivered to Cushing, Oklahoma, using changes in the average of the prices of twelve crude oil futures contracts -- namely the lead month and the following eleven months, with each month receiving equal weight. "Having the portfolio consist of a number of contracts in the same commodity, but spread out across a year, is expected to produce different results for investors than if all the contracts were in the same month," John Hyland, the fund's director said. "This new approach would be impacted differently by the prices of the futures market and the effect of contango and backwardation." Current oil-price ETFs include Claymore MACROshares Oil Up Tradeable ETF (UCR), PowerShares DB Oil Fund ETF (NYSEARCA:DBO), and United States Oil Fund ETF (NYSEARCA:USO).

Sources: Press release
Additional Reading: Seeking Alpha's ETF Selector

HEALTHCARE/BIOTECH

Eli Lilly's 2008 Forecast Beats Expectations

Shares of Eli Lilly (LLY) were up early Thursday after the company forecasted earnings for 2008 that were above analysts' estimates, and said it plans to have at least six new drugs in the next few years to offset future revenue losses from generic competition. Lilly sees 2008 earnings coming in between $3.85-$4.00/share, beating its projections for 2007 of $3.50-$3.55/share, and Wall Street's estimates of $3.82/share for next year. Between 2011 and 2014, Lilly will lose patents on the drugs Zyprexa, Cymbalta, and Evista; those three products accounted for $6.8 billion of revenue last year, which was 43% of the drugmaker's sales. "There's no question we will face the biggest challenge of our history at the beginning of the next decade, but we're confident we can meet that challenge based on new products being launched before and during that period, " Lilly's COO John Lechleiter said. The company said it hopes to begin selling its anti-blood clot drug Prasugrel in late 2008 or early 2009. Beginning in 2011, the company will aim to offer two new drugs per year, and then increase to three drugs in 2014. Lechleiter also added that Lilly has the financial strength to license or buy more drugs. Shares of Eli Lilly gained 0.8% to $53.93 Thursday.

MUST-READS ON SEEKING ALPHA TODAY

Have Wall Street Breakfast emailed to you every morning before the market opens.