Q3 2009 Earnings Call

November 12, 2009; 1:00 pm ET

• H-P grabs 3Com, takes on Cisco. Hewlett-Packard (HPQ) agreed to acquire networking-equipment maker 3Com (COMS) for $2.7B, or $7.90/share - a 39% premium to Wednesday's close. With 3Com, H-P - the world's largest PC maker - gains a networking business that competes directly with Cisco's (CSCO) core business of routing and switching, and a strong foothold in China, which accounts for half of 3Com's revenue. Analysts were largely enthusiastic about the deal, saying 3Com was one of the biggest values in the networking space, second only to Cisco in the breadth of its enterprise portfolio. Cisco responded swiftly, saying on its blog that networking acquisitions "only validate the fact that networking is becoming the platform for all forms of communications and (information technology)." H-P also preannounced Q4 EPS of $1.14 vs. consensus of $1.12, and revenue of $30.8B vs. $29.8B. After hours, HPQ was -0.6%, and COMS was +35%.
• UTech buys GE Security for $1.8B. GE (GE) agreed to sell its fire alarm and security systems unit to United Technologies (UTX) for $1.82B in cash, as had been widely speculated. UTX said its customers "will see increased breadth and depth of product offerings" as a result of the deal. The unit includes Edwards Systems Technology, which GE bought for $1.4B from SPX Corp. (SPW) in 2005. The business offers building management systems that help control commercial structures during fires, earthquakes and other emergencies, and would take United "beyond just perimeter and access security," one analyst said.
• Benmosche stays put. AIG (AIG) CEO Robert Benmosche told employees Wednesday in an internal memo he remains "totally committed to leading AIG through its challenges" despite his frustrations with government curbs on compensation at the company. The reassurance came after reports Benmosche might bail after just three months at the helm, saying strict compensation rules made it almost impossible to retain talent. In the memo, he called the pay curbs a "barrier" that "stand in the way of restoring AIG's value" and repaying its debt.
• World banks prop up dollar. Central banks say they've been snapping up dollars this week in an effort to stem its slide and hold down the value of their currencies. While Geithner continues to pay lip service to maintaining a strong dollar, Washington has yet to take any concrete steps to stop the bleeding, which is beneficial to U.S. exports and tourism.
• TARP repayments reduce gov't borrowing. The U.S. will borrow "substantially less" than initially anticipated, with banks already repaying rescue funds and more "significant repayments" ahead, Treasury's Geithner says. Reduced borrowing, a narrowing of the current account deficit, and signs that Americans are saving more all contribute to global confidence that the U.S. can rein in its deficit, he said today in Singapore.
• High oil prices could derail recovery. The IEA revised its 2010 world oil demand forecast slightly higher, but warned that rising crude prices could smother the fragile economic recovery. IEA now expects global oil demand to rise to 86.2M barrels a day, up 140K from October. Rising stock markets, a weak U.S. dollar, and rebounding world economies have driven crude prices up almost 80% this year, despite a persistent overhang in oil inventory which now stands at 60 days of forward cover.
• Foreclosures fall, but for how long? Foreclosures slowed for a third straight month, but remain sharply higher than a year ago. The number of homeowners who received foreclosure notices fell 3% month-on-month to 333K, up 18.9% from the same month in 2008. Rick Sharga of RealtyTrac, which released the report, cautioned the improvement was likely temporary: “It’s good to see that foreclosures have slowed down marginally, but we don’t really think it’s a trend." The firm predicts 3.2-3.4M properties will go into foreclosure in 2009, up from 2.3M in 2008.
• Art auction smokes projections. A very positive art auction at Sotheby's (BID) has some thinking the art-market recession may be on the mend. Sotheby's brought in $134.4M at an auction of post-war and contemporary art Wednesday night in Manhattan, including a smoky sheet of dollar bills by Andy Warhol that went for $43.7M. Total proceeds blew away Sotheby's' internal estimate of $67.9-$97.7M, and also outdid its $125M sale of a year ago. 52 of the 54 works offered found buyers.
• Microsoft strikes back at modders. Microsoft (MSFT) booted as many as 1M players from its Xbox Live gaming service on suspicions they modified their consoles to play illegally downloaded games. The move comes amid this week's release of "Call of Duty: Modern Warfare 2" (ATVI), the most highly-anticipated Xbox game of the year. "All consumers should know that piracy is illegal and that modifying their Xbox 360 console to play pirated discs violates the Xbox Live terms of use, will void their warranty, and result in a ban from Xbox Live," Microsoft said in a statement. It's not clear how Microsoft detected the Xbox rigging.
• Turkeyless Thanksgiving for BofA? Bank of America (BAC) may miss its internal deadline of naming a new CEO by Thanksgiving, due in part to its inability to zero in on a clear frontrunner, and amid worries that the process must be approved by the Fed.
• Mortgage apps rise. Mortgage applications rose 3.2% from a week ago, led by a 11.3% gain in refinancing, which now accounts for 71.5% of all applications, up from 66% last week. MBA said the average 30-year mortgage rate fell to 4.9% from 4.97% in last week's survey. Freddie Mac's weekly survey of mortgage rates comes out at 10:00.

Earnings: Before Open

• AECOM Tech (ACM): FQ4 EPS of $0.48 beats by $0.02. Revenue of $1.63B (-0.2%) in-line. Sees 2010 EPS of $1.90-2.00 vs. $2.03. (PR)
• EnCana (ECA): Q3 EPS of $1.03 misses by $0.14. Revenue of $3.88B (-64.2%) vs. $3.08B. (PR)
• Kohl's (KSS): Q3 EPS of $0.63 beats by $0.02. Revenue of $4.05B (+6.5%) in-line. Sees Q4 EPS of $1.14-1.24 vs. $1.25. (PR)
• Urban Outfitters (URBN): Q3 EPS of $0.36 beats by $0.01. Revenue of $506M (+6%) in-line. Operating margin 19% vs. 17.1% in Q2. (PR)
• Wal-Mart (WMT): Q3 EPS of $0.84 beats by $0.03. Revenue of $98.66B vs. $99.88B. Sees Q4 EPS of $1.08-1.12 vs. $1.12 consensus. "The sales environment continued to be difficult this quarter, but customer traffic is up throughout the company." (PR)

Earnings: Wed. After Close

• Advance Auto Parts (AAP): Q3 EPS of $0.69 beats by $0.03. Revenue of $1.3B (+6%) in-line. Third-quarter same-store sales increased 4.7%. Shares -3.7% AH. (PR)
• Applied Materials (AMAT): FQ4 EPS of $0.13 beats by $0.10. Revenue of $1.5B (-25%) vs. $1.3B. Expects revenue growth of more than 30% in fiscal 2010. Reports "increased net sales and profitability in our semiconductor equipment business, with improved demand and financial performance in all of our segments." Shares +0.7% AH. (PR)
• Computer Sciences (CSC): FQ2 EPS of $1.40 beats by $0.05. Revenue of $4B (-5%) in-line. Shares -2.9% AH. (PR)
• Ctrip.com (CTRP): Q3 EPS of $0.44 (RMB3.03) beats by $0.12. Revenue of $80M (+47%) vs. $72M. Sees Q4 revenue of $100M-104M vs. $75M. Shares +10.5% AH. (PR)
• Green Mountain Coffee Roasters (GMCR): FQ4 EPS of $0.34 beats by $0.01. Revenue of $222M (+65%) vs. $217M. Shares -9.1% AH. (PR)

Today's Markets

Asia markets headed lower Thursday. Europe stocks are flat at midday, and futures are under some selling pressure.

Bullish Calls:

Goldman Sachs (GS): "I want to own Goldman… it is inexpensive… I think it goes ultimately higher, but not necessarily today."

S&A Resource Report editor Matt Badiali covers a broad expanse of ideas as well as geography in this exclusive interview with The Energy Report. He discusses the immense potential of Iraqi oil, and the smaller but surer resurrection of old oil fields in Illinois. In addition to sharing views about areas within the oil industry worthy of investors' attention, he talks about the promise—and problems—associated with major oil finds that have been making the news. These discoveries may postpone peak oil by a decade or two, but they will take a long time to bring to production, too. Matt also points out how data reporting metrics (BOE) manage to hide the extent of dwindling oil production.

The Energy Report: When we interviewed you six months ago, you were talking about some new oil finds in the Tupi field off the coast of Brazil. Since then another big oil field has been identified offshore of Sub-Saharan Africa. Can you speak to these finds and what they will mean to the oil sector?

By Brandon Clay

Gold may be taking off right now, but it’s not the only thing in an uptrend. Energy is also moving higher. Today we turn our energy-minded attention north to Canada. In addition to its political stability, a trait missing from many resource-rich nations, Canada’s proximity to the U.S. ensures a friendly market with a voracious energy appetite. In fact, Canada is the largest supplier of crude oil to the U.S., exporting over 2 million barrels of crude oil to the States every day.

The title of this article is of course borrowed from the brilliant book of the same name written in 1841 by Charles Mackay. The book deals with 3 “delusions”: "National Delusions", "Peculiar Follies", and "Philosophical Delusions". While dealing with The Crusades, alchemy, witch-hunts and other follies, the parts that interest us most today are the economic bubbles he discussed -- in 1841 -- and the national delusions he chronicled.

Mackay devoted a chapter each to the Dutch tulip mania of the early seventeenth century, the South Sea Company bubble of 1711–1720, and the Mississippi Company bubble of 1719–1720.

I have previously discussed the investment merits of what the World Bank calls “the soundest banking system in the world” and the gold (and golden agriculture) that flows from Canada. Now I’ll review the black gold that, atop the foundation set by the previous sectors, may prove to be the most profitable of all.

If there is to be a retrenchment over time in the value of the US Dollar, as there has steadily been for the past 100 years, I believe commodity resources in general (mining, agriculture, energy, and precious metals) will benefit. As the USD declines in value, nations abundant in those commodity resources will retain the value of their currencies far better, thus producing profits when repatriated into US Dollars in addition to the profits that accrue to well-managed companies anywhere.

Buy-recommended Encana (ECA)’s revived plan to split into an integrated oil sands producer, Synovus Energy, and a more concentrated natural gas producer, which keeps the Encana name, may ultimately generate more value. Investor interest in the split, originally proposed a year ago, was reignited on September 10, when the company announced it would go forward. The original plan was suspended when equity and debt markets became too tumultuous. It has been reinstated now that markets are moving up again.

Applying McDep analysis to the financial and operating disclosures, we see Net Present Value (NPV) of $62 a share divided into $26 for Synovus and $36 for the 94% pure play North American natural gas producer. With Synovus, our Canadian coverage will expand again after losing Petro-Canada to takeover. Therein lies a tale as any number of global oil buyers, from China especially, may be interested in acquiring Synovus, or other bite-size producers, judging from recent actions.

The S&P ADR Index, which tracks some of the largest foreign companies traded on U.S. markets, also includes many ordinary Canadian equities. The top nine Canadian energy companies are listed below. Energy trusts are excluded.

1. Cameco Corp. (CCJ)
Sector: Mining - Uranium
Earnings Growth (5 year): 10.21%

Under the proposed transaction, EnCana common shareholders will retain their EnCana shares and receive one Cenovus common share for each EnCana share held. The company expects to close this transaction by November 30, 2009.

The System Has Been Saved: Goldman Sachs (GS), Wells Fargo (WFC), Boeing (BA), UPS (UPS), FedEx (FDX)