Wall Street Breakfast: Must-Know News

Today's Markets

• Asian markets tumbled Wednesday. Nikkei: -4.7%. Hang Seng: -5.4%. Shanghai was closed.
• In Europe, markets were slightly higher in morning trading: FTSE: +0.1%. CAC: +0.6%. DAX: +0.6%.
• U.S. futures were marginally higher in pre-market trading. Dow: +0.1%. S&P: +0.2%. Nasdaq: +0.2%.

Must Know News

• Consumer courage collapses. U.S. consumer confidence fell to a 14-year low according to the ABC News/Washington Post Consumer Comfort Index. 59% of Americans think the economy is already in a recession. The index fell 13 points over the last month, similar to its reaction prior to the 1990-91 and 2001 recessions.
• So that's why they call it junk. 4.64% of high-yield bonds will default in 2008, vs. just 0.51% in 2007. Tight credit markets may push underperforming companies into restructuring -- and could force some into insolvency.
• Lacker gives dim outlook. Federal Reserve governor Jeffrey Lacker says he sees "the possibility of a mild recession," and that current interest rate levels may not yet be low enough to jump start the economy.
• At risk: commercial real estate. Defaults on commercial property loans could jump as investors struggle to refinance short-term mortgages, a prospect that could create further pressure on property values.
• Bad services. The ISM's services index for January plummeted to 41.9 from 54.4, way below a forecast 52.5, sending U.S. markets reeling. The index hasn't been below 50 (economic contraction) since 2003. It didn't help that the report was released an hour early after a late-Monday information leak. Some economists say the drop still needs to be corroborated by measures in other sectors.
• Media companies defy economy. Disney's (DIS) Q1 EPS of $0.63 beat estimates of $0.52. Revenue of $10.45B vs. consensus of $10.04B. Time Warner hit targets with Q4 EPS after charges of $0.29 on revenue of $12.64B. TWX's 2008 outlook of $1.07-1.11 was at the low end of $1.11 consensus estimates. Watch the earnings call (full transcript later) for any comments about a rival bid for Yahoo (YHOO).
• Boosted bid likely. Analysts say it's likely Microsoft (MSFT) will raise its $46.1B bid for Yahoo (YHOO); some have raised price targets on the shares above MSFT's $31 offer.
• Google bringing free music to China. Google (GOOG), together with a Chinese parter, is about to reveal a market-changing service that will offer free, licensed music downloads in China. The move is a direct challenge to Baidu's (BIDU) music search domination, which has helped it keep Google at bay. Analysts say 90% of China's 162 million internet surfers use pirated music from their computers at least once a day.
• Housing woes take a toll on TOL. Toll Bros. (TOL) warned Q1 revenue fell 22% to $843M. TOL expects Q1 writedowns of $150-300M. Backlog fell 42% to $2.4B. Gross contracts signed fell 46%. CEO Robert Toll said he has yet to see the proverbial light at the end of the tunnel.
• Snow sinks solar stocks. LDK Solar (LDK) said Tuesday bad weather in China has impacted its operations. LDK sees Q1 EPS of $0.39-0.44, vs. consensus estimates of $0.39; Q1 revenue of $195M-$210M vs. consensus of $221.79M; full-year revenue of $960M-$1B vs. consensus of $1.05B; and 2008 wafer shipments of 510MW-530MW. Shares were down 7% in late-afternoon trading. Other solar stocks hit included ESLR (-9.5%), SOLF (-11.8%) and STP (-9.4%).
• Cnet beats; outlook comes up short. Cnet's (CNET) Q4 EPS of $1.33 beat consensus estimates of $1.29. Revenue of $125.5M was better than the $122.55M expected. CNET sees 2008 EPS of $0.06 to $0.08, well below consensus estimates of $0.13. Free cash flow improved to $14.2M from $11.4M. Shares were flat in AH trading.
• BHP ups bid for Rio; net income drops unexpectedly. BHP Billiton (BHP) raised its offer for Rio Tinto (RTP) to $147 billion. Shares fell 4.6% in Sydney after BHP reported an unexpected 2.4% drop in first-half net income to $6B on high production costs and lower metal prices. Today was BHP's final day to formalize its bid. Meanwhile Chinalco (ACH) may be preparing a counterbid. Japan’s aggressive anti-trust watchdog is said to be working with its European counterparts in an effort to stop the deal.
• Creative bookkeeping. Lennar (LEN) will score an $800M tax refund after sort of selling a value-deflated land parcel. Due to some fancy accounting, Lennar retains the rights to repurchase the land, yet was still able to write off the loss. If allowed by the IRS, the move could be a boost to other homebuilders.
• 1-800-give-us-your-money. Wachovia (WB) is being accused of trying to win and retain business from companies it knew were committing telemarketing fraud.
• Mortgage applications rose 3% last week
• CDO Market Grinds to a Virtual Halt, Traders at JPMorgan, Merrill Report
• UPDATE: Cigna 4Q net up 13% on membership gains
• Coke to Take Stake in Honest Tea

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Comments

[David White]

LDK did not lower its FY2008 earnings or revenue forecast. It kept the revenue forecast unchanged. Its forecast may be below the market forecast. It did lower its Q1 2008 revenue forecast. However, overall it raised its Q1 2008 EPS range. The $.39 is (and was) the analysts' estimate. The range given by LDK yesterday was $.39 to $.44. Actually the picture for LDK got rosier. Because the Q1 2008 revenue forecast is lower (but the EPS estimate is not) LDK has effectively said it is going to beat the analysts' estimate for margin in Q1. Since LDK last quarter got downgraded when its margin was lower than the analysts' estimate, you might expect LDK to go up on this news. LDK left there total 2008 revenue estimate unchanged. They are obviously seeing no problem in catching up on the missed production as the year goes on. This leads one to believe that the production estimate for the year is seriously underestimated. This should again be good news for LDK. LDK further reiterated that there polysilicone plant construction is still on schedule. Currently LDK earnings predictions are for $1.75 (avg.) in FY2008 and $3.76 for FY2009 (range for 2009 is $1.52 to $7.30). If LDK can come close to executing on their polysilicone plant construction, they will triple or more in 2009. The PEG listed on Yahoo is only 0.24. They don't get much better.

[David White]

I should add that the LDK earnings figure for FY2008 was calculated based on the same margin figure that the Q1 estimates were. This means that the FY2008 EPS should be significantly higher than the current estimate, if LDK can maintain this higher than expected margin throughout the year. It would seem likely that they can. The FY2008 production has already been sold at fixed prices. Most of the FY2008 polysilicone has already been contracted for at fixed prices. This snowstorm of "bad news" about LDK is just that a "snowstorm". You are not seeing what is really there because of the snow (and ice). You'll see better when the weather clears.

[SA EditorEli Hoffmann]

Thanks David,

I adjusted LDK.