Wall Street Breakfast: Must-Know News

• Merrill misses, writedowns milder than expected. Merrill Lynch (MER) reported a Q1 loss of $2.20/share, $0.21 worse than consensus estimates of -$1.99. Revenue of $2.93B was way short of the $3.7B consensus. Merrill reported writedowns of $1.5B on CDOs, and credit valuation adjustments of -$3B. (Even so, $4.5B is less than the $6-8B batted around yesterday.) MER said it plans to reduce its headcount by 4,000 employees. "Despite this quarter's loss, Merrill Lynch's underlying businesses produced solid results in a difficult market environment," CEO John Thain said. "The firm's $82B billion excess liquidity pool has increased from year-end levels, and we remain well-capitalized."
• IBM defies slowdown. IBM's (IBM) Q1 EPS of $1.65 beat estimates by $0.20, and revenue of $24.5B was ahead the $23.7B consensus. Looking ahead, IBM sees full-year EPS of $8.50 (consensus of $8.25). IBM's revenue was helped by a weak dollar; revenue (+11%) would have risen just 4% net of currency fluctuations. Still, domestic revenue, which accounts for 35% of IBM's sales, grew 6%. Software revenue jumped 14%, while hardware revenue fell 7%, or 2% after accounting for the sale of its printing unit. We just had "a very powerful quarter here," CFO Mark Loughridge said on IBM's earnings call, "and I think we have some very optimistic signs as we go into the next quarter." Shares climbed 3% in AH trading after a 2.8% gain in regular hours.
• Nokia's market share shaved. Nokia reported Q1 EPS of €0.38, €0.02 better than consensus. Revenue of €12.66B (+28.4%) was in line, as were units shipped at 115.5M. Nokia expects industry-wide mobile device volume in Q2 to grow in line with Q2 growth in 2007, and reaffirmed 2008 growth expectations of 10%. Nokia said it expects mobile device dollar sales to decline somewhat in euro terms in 2008, due to an industry-wide decline ASP (average sales price). It continues to target an increase in its market share for 2008, though its device market share fell to 36% in Q1 from 40% in Q4. Shares are down 5.6% in early pre-market trading.
• Generic competition hurts Pfizer. Pfizer missed by $0.05 with Q1 EPS of $0.61, down 18% from a year ago. Revenue of $11.85B (+5%) was short of the $12.09B consensus. For 2008, PFE sees revenue of $47-49B (vs. $48.4B consensus). Pfizer said the loss of patents on former blockbusters Norvasc and Zyrtec hurt its sales.
• eBay beats, margins drop. eBay (EBAY) beat estimates by $0.03 with Q1 EPS of $0.42. Revenue was $2.19B (vs. $2.08B). Looking ahead, eBay sees Q2 EPS of $0.39-0.41 (consensus is $0.40). For 2008, eBay's EPS forecast of $1.70-1.75 is better than analyst views of $1.68. Growth at eBay's core marketplace business was soft; active eBay users increased just 1% to 83.9M, as Amazon.com (AMZN) continues to attract eBay's best buyers and sellers. Operating margin fell to 32% from 33.6%. Shares were flat in extended trading, but are up 20% since mid-March as new CEO John Donahoe pushes changes that tend to favor large, reliable sellers. Investors seem to like the move, but it prompted outrage among some of the smaller merchandisers.
• Airlines beat. Continental Airlines (CAL) reported Q1 EPS of -$0.86 vs. consensus of $0.93, and revenue of $3.57B, in line. Fuel costs were up 53% Y/Y, and CAL said it will reduce its U.S. capacity by 5%. Southwest Airlines (LUV) posted Q1 EPS of $0.06 vs. consensus of $0.01, and in-line revenue of $2.53B. LUV said Q2 bookings remain solid, and that it expects Y/Y revenue growth in Q2. It halved the number of 737-700 planes it plans to add in 2009 to 14. AMR Corp. (AMR) posted EPS of -$1.32 (vs. -$1.34) and revenue of $5.7B (in line).
• Bank of NY Mellon misses by a hair. Bank of New York Mellon (BK) said Q1 adjusted EPS was $0.72 (vs. consensus $0.73) on revenue of $3.75B (almost double last year's $1.9B, vs. $3.88B consensus). Net interest revenue jumped 39% to $773M.
• SLM cries for help. Student lender SLM Corp. (SLM) reported adjusted Q1 earnings of $0.34, falling $0.04 short of analyst expectations. More troublesome, SLM said tightened credit conditions have dramatically increased its cost of funds, making it impossible for the firm to make profitable loans. "Today's environment is the most difficult we have seen in our 35-year history of student lending," CEO Albert Lord said. "It has become obvious that we can only meet the enormous student credit demands we are seeing at Sallie Mae if there is a near-term, system-wide liquidity solution." Don't be surprised if there are fireworks on SLM's 8:00 AM conference call.
• Yahoo-Google partnership advances. Initial results of Yahoo's (YHOO) test of Google (GOOG) AdSense were positive, moving the two closer to a partnership and potentially bolstering Yahoo's defense against Microsoft's (MSFT) takeover bid. Analysts say a deal could increase Yahoo's cash flow by more than $1B a year. But the overlap between the two internet giants means a major deal would trigger heavy regulatory issues, leading some to think Yahoo's moves are just posturing.
• Cash hogs. Tech companies, which have always hoarded cash, are stuffing their war chests in order to pursue acquisitions and growth strategies in a "buyers market," and make sure they're well-stocked in case of emergency. Tech firms hold almost 25% of their assets in cash and equivalents, vs. 11% for the S&P 500 constituents, and 16.6% for health-care companies, the next highest sector. Standouts include EMC (EMC $4.5B in 2007 from $1.8B in 2006), eBay (EBAY $3.6B from $2.7B), and IBM (IBM $15B from $8B). Still, investors haven't rewarded them for their caution; Nasdaq is down 11% YTD vs. 7.1% for the S&P.

Today's Markets

• In Asia, markets were mainly higher Thursday. Nikkei +1.92% to 13,398. Hang Seng +1.59% to 24,259. Shanghai -2.09% to 3,223. BSE Sensex +1.46% to 16,481.
• In Europe, markets are mixed at midday. FTSE -0.24% to 6,032. CAC +0.5% to 4,879. DAX +0.28% to 6,721.
• U.S. futures are down at 7:35 AM. Dow -0.29% to 12,615. S&P -0.44% to 1,365. Nasdaq -0.28% to 1,857.

Get Wall Street Breakfast by email -- it's free and takes only seconds to sign up.

Comments

[sorgmot]

Today's "Must Know" news presents news appropriate to the moment.

1. MER got itself into a financial mess by ignoring the basics of the business cycle. The Federal Reserve Bank runs short-term interest rates on USA dollars up until they exceed long-term USA bond yields. This causes those who borrow short and lend long to loose money as the market value of long bonds falls due to higher interest rates. Once that happens, the short borrowings can not be repaid with the proceeds of long bond sales. A cash shortage results at MER. Losses on sales and on the present value on the unsold long bonds in inventory must be reported.

This situation is particularly bad in this cycle because foreign investors are pulling out of the dollar and selling their long USA bonds and short USA notes. No one wants to take their places because the USA dollar is falling against foreign currencies.

Nokia is in the same position as USA companies were in the past. As the Euro rises relative to other country currencies in which their products are sold, the financial revenues reported in Euros falls relative to costs of production also reported in Euros. And, non Euro competitors are happy to price cut against Nokia in Euro land keep their revenue in Euro and ride the currency up against thir own currency.

The cash hog situation is getting a lot of attention in US Congress lately. Why should corporate managers get big pay checks and etc for retirement packages voted to them by the board of directors they over pay and hand pick based on their willingness to channel company funds to the president that brought them on board.

Basic truth is that big cash balances are evidence that top managers is incompetent and should be fired fast. Cash should be paid to share holders so they can invest it, to buy companies with good products, and to support in house invention and product development and marketing

l

[sunrises]

Hi Eli:

Agree. Tech Industry as a whole does well as there cash balances are high. Most companies in this position have a very nice strength in our global market.

EMC with its high cash balance gives them the safety and ability in these uncertain times. The recent news of the company receiving an award for world leader in information infrastructure solutions gives them a greater strength. Wouldn’t this follow-through with an increase of share price back to $19-20?

[sunrises]

correction:

EMC possible 5 pt rise. Also, Goldman Sachs states it's well position and for "Fast Money"... recommened a buy.