One Page Annotated WSJ Summary, Monday Sept. 11

by: SA Editors
SA Editors
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BREAKING: Dell to Delay Filing, Suspend Share Buyback

  • Summary: Dell announced this morning that due to the ongoing SEC investigation, it is delaying the filing of its 10-Q for the second quarter. It plans to file the 10-Q "as soon as possible." In addition to the SEC investigation, Dell said that financial documents have been subpoenaed by the U.S. Attorney for the Southern District of New York. Separately, Dell also announced that it was suspending its share buyback program, and that it is re-scheduling Wednesday's planned analyst meeting.
  • Comment on related stocks/ETFs: Dell's CEO Kevin Rollins previously said "We don't think it's material," regarding the accounting issues that were uncovered. Today's action puts those words in a different light. Despite trading at a significant discount, Bear Stearms believes that recent gains by HP (NYSE:HPQ) raise concerns about Dell's business model. See: Dell Q2 2007 Earnings Conference Call Transcript, Dell's previous comments on the SEC Investigation

H-P Chairman's Uncertain Fate Casts CEO Hurd Into Spotlight and H-P Probe Is Spurring Efforts To Tighten Phone Protections

  • Summary: The scandal involving Hewlett-Packard (HPQ) investigators' use of illegal means in their investigation of internal company leaks last year has shone a spotlight on CEO Mark Hurd (pictured). mark hurd Hurd has boosted profits at the Silicon Valley stalwart and presided over an 85% rise in its stock price. Now he faces tough questions about the methods used in an investigation of his own board that he didn't start -- but didn't stop either. Hurd has known about the investigation since March 2006 but chose to focus on its results rather than on the methods used to obtain them. Ironically, many experts feel that Hurd could escape the current scandal stronger than before if he emerges with the additional title of Chairman, which currently belongs to the heavily scrutinized Patricia Dunn. Dunn authorized the investigation, which centered on the illegal practice of 'pretexting,' or posing as another person to obtain private records. H-P's board was in an emergency meeting yesterday but has yet to determine the fate of executives Dunn and Hurd. One result of the H-P scandal -- an FCC proposal of rules that will require phone companies to strengthen security procedures to deny unauthorized access to private records. The agency sent a letter of inquiry to AT&T Inc. (NYSE:T), asking for information about records H-P investigators obtained in an investigation of boardroom leaks. The letter is part of a broader probe by the FCC into 'pretexting.' Says Jonathan Adelstein, a Democratic FCC commissioner, the H-P incident and the ease with which private investigators were able to obtain personal phone records 'demonstrates again how porous this personal information has become.'
  • Comment on related stocks/ETFs: Get more background on the H-P scandal with previous WSJ summaries.

The Immelt Era, Five Years Old, Transforms GE

  • Summary: Jeffrey Immelt (pictured) became Chairman and CEO of General Electric Co. (NYSE:GE) little more than five years ago, replacing one of corporate America's most renowned CEOs, Jack Welch. immelt Rather than live in Welch's shadow, Immelt has made an indelible mark on the company, sacking under-performing employees and unloading unprofitable businesses. Since taking office in the days before 9/11, Mr. Immelt has stabilized GE's financials and changed its profile. He sold the insurance business and some older industrial units, while expanding GE's presence in health care, financial services and entertainment (Spanish language TV). This year's projected revenue would be up 50% from $108 billion in 2001. None-the-less, GE's shares have fallen 14% since Mr. Immelt took over, prompting frustration among investors and employees. Mr. Immelt's style has been far more inclusive than his predecessor, digging deep into the ranks for advice and increasing his executive team to 41 members from Welch's 33. Still, many of Mr. Immelt's moves have drawn ire from GE executives. Case in point: Last December, he wouldn't ante up enough cash to buy DreamWorks SKG, saying it was too expensive, and Viacom Inc.'s (NYSE:VIA) Paramount Pictures ultimately prevailed. The decision is still being questioned among the ranks, with DreamWorks set to release a strong crop of films over the next year.
  • Comment on related stocks/ETFs: Despite the many improvements Jeffrey Immelt has brought to GE, Hilary Kramer believes GE's upside is limited. Miriam Metzinger clips GE's most recent conference call for a discussion of the tough times plaguing GE-owned NBC network.

Printing Firms Draw Complaints For Murky Billing

  • Summary: Did you know that after lawyer and banker fees, financial printing is often companies' highest IPO expense? The financial print market oligopoly, dominated by Merrill Corp. (in registration for IPO), Bowne & Co. (BNE) and R.R. Donnelley & Sons Co ((NASDAQ:RRD); currently in negotiations to be acquired by an LBO firm) is accused of murky practices ranging from deliberate confusion to fraud. According to John Wert, a former Bowne salesman who started a financial print auditing company: "Printers often try to purposely confuse issuers. They yank out precise numbers from their final bills." In this non-regulated industry characterized by a complete absence of transparency, audits are frequently met with resistance. One Bowne customer was told, for example, that "For the purposes of document integrity, efficient work flow and the logistics and space issues ... pages are not kept."
  • Comment on related stocks/ETFs: Merrill (MRL) provided an overview of the global business outsourcing industry in its S1 filing from June. A few weeks ago investors were reported to be walking away from RRD due to disagreements on price, however as the WSJ article notes, these companies have done a spectacular job avoiding the limelight.

Telecom Italia Plans to Sell Mobile-Phone Unit

  • Summary: Just under two years ago, Telecom Italia (NYSE:TI) paid €20 billion to acquire the 44% of Telecom Italia Mobile which it did not yet own. Today, Telecom Italia is expected to announce that it is looking for a buyer for its mobile unit, the country's largest mobile provider, while repositioning TI away from telecom services to becoming a media distributor. Chairman Tronchetti Provera reportedly met with News chairman Rupert Murdoch last week to discuss a content deal between the companies. TI stock has floundered of late: the company is burdened with €41 billion of net financial debt, making it particularly vulnerable to the telecom market's recent fluctuations. The company's stock price fell from €4 in 2001 to €2.26 on Friday. However, while reducing the debt and refocusing on media, TI will lose its most profitable business: TIM's preliminary revenue for the first half of the year was just under €5 billion and EBITDA was €2.5 billion; for the fixed line business, preliminary first-half revenue was almost €9 billion, and EBITDA was €3.9 billion.
  • Comment on related stocks/ETFs: Back in March, Telecom Italia cut its mobile projections. One of the company's more valuable assets is its holdings in Tim Participacoes, the second largest Brazilian carrier. For more on struggling European telcos, see Deutsche Telekom's (DT) recent troubling earnings call transcript. In the US, however, Andrew Schmitt believes that cablecos will need to acquire wireless assets in order to remain competitive.

Japan Revises Upward GDP-Growth Data For April-June Quarter

  • Summary: Japan's Apr.-Jun. quarterly GDP was upward revised by 0.2% to 1.0% on an annualized basis. Jan.-Mar. quarterly GDP was unchanged at 0.2%. The Cabinet Office credited higher materials inventories for the most recent quarter's revision. The data and thus main components of GDP confirm household consumption and corporate capital spending are driving Japan's growth at a continued moderate pace. Morgan Stanley economist Takehiro Saito comments, "Capex and inventory were not revised up or down as significantly as we had been looking for, so the overall picture looks rather favorable." Saito expects stronger economic momentum in Q3 but sees the BoJ increasingly rates gradually at around 6-month intervals.
  • Comment on related stocks/ETFs: Last Friday the BoJ voted unanimously to keep monetary policy unchanged with the overnight call rate at 0.25%. A weaker-than-expected CPI data report is believed to have been a factor in its decision, although the WSJ article mentions Barclays Capital chief Japan economist who said concerns over prices are secondary to those over the direction of the U.S. economy. The Nikkei 225 lost 1.78% in Monday trading to close under the psychologically important 16,000 level with 82% of Japan's largest-cap stocks declining. Selling was induced by July machinery orders data at -16.7% month-over-month, a huge downside surprise and the worst fall in almost 20 years versus a +8.5% reading for June and an expected +5.5% for July. It certainly looks like the yen's recent rally was hype.

Mining Companies' Bottom Lines Are Pressured by Labor Tensions

  • Summary: With mining companies reporting record profits due to high commodity prices, employees are starting to flex their muscles by demanding higher pay. Given the shortage of skilled mining workers, the companies are listening. BHP Billiton (NYSE:BHP) recently agreed to give its union workers a 5% raise plus sizable bonuses. BHP can afford this - their annual profit was up 63%, to $10.5 billion. Miners are also striking - a strike at a Canadian mine is costing Inco (NYSE:N) 6,000 metric tons of daily nickel-ore output. Analysts warn that if commodity prices come down, these increased labor costs will be a major issue for smaller mining companies.
  • Comment on related stocks/ETFs: BHP is a diversified mining company which should be able to ride out any price decline of on commodity (for example, copper). One tie-in to high-tech: All those batteries recalled by Dell (DELL) will have to be replaced. Mines produce the lithium, zinc and nickel used to manufacture batteries.

Ethanol Firms Set Public Plans Despite Rocky Debuts by Others

  • Summary: Two ethanol production companies, Hawkeye Holdings Inc. and US BioEnergy Corp. are planning to go public between now and year's end despite the poor faring of other ethanol IPOs this year. Hawkeye will be the third ethanol IPO to take a shot at the market this year, coming after months of lackluster performances by the first two. VeraSun Energy Corp. (VSE) went public in mid-June and quickly gained 30% but hasn't seen such prices since August while Aventine Renewable Energy Holdings Inc. (AVR) floated an IPO and immediately went into freefall. AVR has yet to recover its initial IPO price of $43. Investors have become more cautious, says Rob Wilder, chief executive of California-based WilderShares LLC, creator of the WilderHill Clean Energy Index ETF (NYSEARCA:PBW). Ethanol is expensive to transport, cars get lower mileage on it than from gasoline, and it isn't clear how difficult it will be to shift from the U.S.'s primary ethanol source of corn to alternative crops like switchgrass. "There are all these very real problems with ethanol," says Mr. Wilder, whose index tracks about 40 publicly traded companies that focus on alternative energy and energy efficiency. "The sector became too frothy, and the valuations were not realistic."
  • Comment on related stocks/ETFs: With all the buzz surrounding high energy prices, the "ethanol solution" has received high praise as well as criticism. The Stalwart believes Ethanol is all hype with very little real upside to be had. Market Participant is equally bearish on the ethanol market's prospects. Dan Carty is more bullish on Ethanol seeing an upside both for ethanol producers and for corn growers as ethanol demand surges.

Europeans' Appetite for Imports Benefits China at the Expense of the U.S.

  • Summary: Europe's spending revival looks helpful to the global economy but may not mean much to a slowing U.S. economy since many of the imports being bought are coming from China. The OECD forecasts a near doubling of economic growth in the euro zone at 2.7% this year. Imports over the first-half of the year are up 18.3% with more than 75% of the increase coming from demand for goods. Still, economic growth in the zone is expected to slow from next year to 2.1%, which is still higher than last year's 1.4%. China's exports to the zone surpassed those of the U.S. for the first time in July 2005. Five-months into 2006 China's exports were $1 billion ahead of the U.S. $68 billion of exports to the zone, for 26% y-o-y growth. Chinese manufacturers are clearly moving up the value chain putting increased pressure on both European and U.S. manufacturers. For instance, China's machinery exports to Europe are its most valuable, worth nearly half of all its exports to the region. Additionally, China is now the world's fourth largest manufacturer of machinery. Some European businesses are concerned about China's growing trade surplus with Europe, which is being attributed to currency market intervention and domestic subsidies to exporters.
  • Comment on related stocks/ETFs: Motorola (MOT) is mentioned as an example of where a U.S.-based company benefits from increased Chinese exports to Europe. For a list of publicly traded U.S. companies in China see the STOCKS IN THIS SECTOR section on the right-hand side of China on Seeking Alpha. Perhaps higher spending in Europe can help China sustain its own economic growth, especially as the U.S. economy cools. Regardless, it's worth considering the argument that China is living through one of the greatest historical bubbles. There are some positive developments taking place within China however, as it continues to open up its economy in-line with its WTO accession. China's retail sector and banking industry have been in the news recently.

AHEAD OF THE TAPE: Out of Energy and OPEC, Vexed by Price Drop, to Debate Response

  • Summary: Oil prices have dropped $10/barrel (13%) since the beginning of August; oil is now up $5.21 (8.5%) ytd. Analysts and OPEC ministers alike are scratching their heads trying to figure out whether the current slide is the result of excess supply, a subsiding fear-premium, or simply a technical pullback in a bull-market. Possible reasons for the price-drop: 1) Iran now seems to be willing to suspend its uranium enrichment program, curtailing fears of a disruption to their oil supply. (Iran is OPEC's second-largest producer.) 2) Despite production below OPEC's 28-million barrel/day ceiling, demand has been slack for months. 3) The Middle East conflict, which could potentially have involved Iran, seems to have resolved itself. 4) A seasonal lack of demand due to; warm temperatures, the end of the 'driving season' (post summer vacation), and refinery maintenance. 5) The weakening U.S. economy means less demand for energy domestically, and abroad for nations such as China who export to the U.S. 6) BP's (NYSE:BP) Alaska pipeline-corrosion issues have proven less disruptive than originally feared. 7) Hurricane season is almost over. 8) Forecasters say El Niño is on its way, bringing warmer temperatures and lighter hurricane seasons. OPEC's formal meeting begins today: Ministers say they don't expect a formal decision to lower its ceiling, but are prepared to let output fall informally if further reduction in demand is detected.
  • Comment on related stocks/ETFs: Jim Cramer says energy is in a "free fall zone," and that oil will drop to $62/barrel. He's short Oil Service HOLDRs ETF (NYSEARCA:OIH) with a minimum target of $125 (it closed Friday at $131.44). Options trader Phil Davis is long OIH puts. Do great minds think alike? One factor the article neglects to mention is the Chevron's (NYSE:CVX) recent discovery (announced Sept. 5) of a mammoth oil field deep beneath the Gulf of Mexico (under 7,000 feet of water and 20,000 of seabed), which has been called "the biggest find in a generation." Of course even a huge reserve isn't enough to turn world energy markets around—it's not even enough to bring the U.S. close to energy independence. Of greater significance is Chevron's demonstrating their ability to recover petroleum at extreme depths; this may indeed tip the balance of supply and demand in the long term. The OIH ETF invests in oil-service companies such as drillers, well-site managers, and various oil-industry services. United States Oil Fund ETF (NYSEARCA:USO) is a commodity pool that invests in crude oil futures, gasoline, and other petroleum-based fuels. Big energy stocks like ExxonMobil Corp. (NYSE:XOM), Occidental Petroleum Corp. (NYSE:OXY), and Schlumberger Ltd. (NYSE:SLB) have also been hit by the price-slide. The following chart shows that pure oil has been hit harder by the recent downturn than has the oil services sector:

Oil Service HOLDRs ETF (OIH) vs. United States Oil Fund ETF (USO)
vs. Chevron Corp. (CVX) 6-month Daily Chart

MARKET MOVERS: Buy Signs From the Top Ranks

  • Summary: SEC insider trading statistics track executives buys and sells of their company's shares. They are closely by analysts and traders, who figure insiders must have the best idea of when to buy and when to sell. Keep in mind: The vast majority of insider trading is selling, done automatically by brokers to help their executive clients diversify, and not sentiment based. Buying is usually based on sentiment, and is taken as a sign the insiders feel their stock is a worthwhile investment at current prices (although buying can also be sparked by the vesting-date of stock options in executive compensation packages). Recently the sell/buy ratio tightened to 11.4—meaning $11.40 in stock sold for every $1 bought. Analysts consider anything under 20 to be bullish, all the more so when general sentiment is mixed, the economy's health is questionable, and the future of interest rates is still up in the air. Broken down by sector: Large caps: 10.77. Mid caps: 31.26. Small caps: 21.48. Investors explore insider-trading data looking for bargains in individual stocks; some money managers give it up to 15% weight in their overall decision. Certain sectors are cited as having more credible insider know-how than others, such as financial services. Companies currently displaying the most bullish insider activity: Sovereign Bancorp Inc. (SOV), TD Ameritrade Holding Corp. (NASDAQ:AMTD), and Avid Technology Inc. (NASDAQ:AVID). Companies currently displaying the most bearish insider activity: Google Inc. (NASDAQ:GOOG), Inc. (NYSE:CRM), MKS Instruments Inc. (NASDAQ:MKSI).
  • Comment on related stocks/ETFs: In a recent interview, Michael Dell commented on his recently becoming an aggressive buyer of Dell Inc. (DELL) stock. However, to take even aggressive insider buying as a sure-fire buy signal can be hazardous; sometimes insiders deliberately inflate stock prices to squeeze shorts, using their own stock as collateral against bank loans! The Unknown Professor recently posted an article that analyzes the profitability of insider-trading research in mergers and takeovers. InsiderScore frequently posts buy and sell ideas based on insider-trading research.

HEARD ON THE STREET: Logistics Company Offers Long-Range Appeal

  • Summary: Shares of Expeditors International of Washington Inc. (NASDAQ:EXPD) may be off their June highs by nearly 30%, but many Wall Street analysts see the logistics company's stock as a long-term investor's treasure. Says Joe Fath of T. Rowe Price: "The stock has been volatile lately, and that's probably an indication of its owners and not the company's results." Adds Ed Han, manager of the $143.9 million Transamerica Premier Growth Opportunities Fund, in which Expeditors was the top holding on June 30, "The market has become very short-term focused, and it can create an opportunity here for long-term investors." Bulls admit that recent pressure on the stock is understandable. The company's enviable profit-growth track record has translated into a perennially high price/earnings ratio, and stocks with rich per-share multiples often are sold first when investors get antsy. Today, the company's shares trade at a little more than 30 times expected earnings for 2007, which is almost double the P/E ratio of the average stock in the S&P 500 index. Not unexpectedly, 11 of 13 analysts who track Expeditors have dropped their rating of its shares to "Hold."
  • Comment on related stocks/ETFs: See how EXPD stacks up against other shipping companies. Read more on comparative annual earnings growth of freight transportation stocks. Here's the bull case for EXPD as of six months ago.

TRACKING THE NUMBERS: Aether Tax-Loss Assets May Not Carry Forward

  • Summary: As a wireless-service provider, Aether (AETH) racked up almost $1 billion of losses. Since selling the wireless business in 2004, Aether has been looking to use its $130 million on-hand cash to acquire a highly profitable business, using the wireless tax losses to offset future taxes on the profitable entity. The company is acquiring Athlete's Foot for $51.5 million (plus a future payment of up to $8.5 million, based on performance). The question is, does this make sense from a tax-loss utilization perspective? After a 2004 bankruptcy reorganization, Athlete's Foot's 200 domestic stores (575 total) compete directly with giant Foot Locker (NYSE:FL). With current annual EBITDA estimated at about $10mm, it will take many years to use up the tax losses on the books.
  • Comment on related stocks/ETFs: Reaction to the Aether's acquisition has not been enthusiastic. Athlete's Foot has already gone bankrupt once, and remains a business with low margins and fierce competition. Aether intends to acquire another brand of active wear, with the intention of improving profitability by licensing its name-brands.

Notable articles on Seeking Alpha today: A hedge fund manager outlines the short case on Vonage (yes, still); Carl Howe says that Amazon's new movie service is no threat to Apple; the long case on BJ's Wholesale; David Phillips has no appetite for Frisch's Restaurants; the contrarian in David Neubert made him buy KB Homes; Pottery Barn weakness isn't reason enough to get bearish on Williams-Sonoma; Reuters' Marc Gerstein takes a look at REITs opportunities; Jim Cramer's latest stock picks.

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