Wall Street Breakfast

by: SA Editors
SA Editors
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American Home Mortgage Investment Hit with Margin Calls

In a sign that the subprime meltdown is no longer contained, mortgage lender American Home Mortgage Investment -- whose clients generally have prime or near-prime credit histories -- is delaying dividend payments and might also delay payments on its preferred shares. The lender is taking this course because it has been hit with margin calls following a steep write-down of the value of its loan and security portfolios. In a press release, the company said the delays are necessary "in order to preserve liquidity until it obtains a better AHM 30 07 2007 Chartunderstanding of the impact that current market conditions in the mortgage industry and the broader credit market will have on the Company's balance sheet and overall liquidity." American Home Mortgage has $4.01 billion in debt outstanding under its warehouse lines of credit, total liabilities of $19.3 billion, and assets worth $20.6 billion. Earlier in July, the lender's shares took a 20% hit on a rumor, later denied, that a bank had pulled one of its credit facilities. At the end of June, the company warned it will probably report a Q2 loss and retracted its earnings guidance for 2007. Its shares closed down 1.5% at $10.47 Friday, their lowest point since April 2003.
Sources: Press release, Financial Times, Reuters
Commentary: American Home Mortgage Gets Expensive FinancingOptimism Takes a Hit as Real Estate Continues to Slump"Unexpected Weakness In Home Sales"
Stocks/ETFs to watch: AHM, CFC, HBC, LEND. ETFs: REM


Cisco Buys $150M Stake in EMC's VMware

Cisco Systems is taking a $150 million stake in EMC's VMware, it said Friday. VMware said it will consider appointing a Cisco executive to its board. The deal will give Cisco 1.6% ownership of VMware, and less than 1% of its voting power. Recently, Intel took a 2.5% EMC 27 07 2007 32 Chartstake in the venture for $218 million, which it receives post VMware's upcoming IPO (expected completion by end of summer) in which it will sell about 10% of its shares to the public for $23-25/share. The so-called virtualization software company was bought in 2004 by EMC for about $625 million. Its software allows multiple operating systems to run simultaneously on the same computer. In 2006, it saw sales jump 83% to a record $709 million. Intel, Goldman Sachs, SAP and several other companies also own a stake in VMware rival VirtualIron, which touts itself in web-ads as "The VMware Alternative"; its software is downloadable at no charge. In a July 17 note, Baird said that due to the "consistently strong demand and uptake of VMware, we continue to believe the forthcoming VMware IPO (for 10% of VMware; likely completed by late summer) will successfully unlock value for EMC shareholders."
Sources: Dow Jones, Seeking Alpha, 24/7 Wall Street
Commentary: EMC Corp. Cashing in On VMware Just As Competition Heats UpVMware : The Start Of Something Big In Virtualization?
Stocks/ETFs to watch: EMC, CSCO, INTC, GS, SAP


Google Challenger Wikia Acquires Grub Web Crawler

Wikipedia founder Jimmy Wales announced Friday that Wikia, the open-source Internet search service he is setting up to rival Google and Yahoo, has acquired the Web crawler Grub from LookSmart Ltd. Terms of the deal were not disclosed. "If we can get good quality search results, I think it will really change the balance of power from the search companies back to the publishers." Wales said. "I could be wrong about this, but it seems like a likely outcome." He is planning to launch the search engine at the end of 2007. The Wikia search service will use algorithms and human editors to deliver its results, which will be generated through Lucerne, another open-source software product. Unlike previous challengers to search giants Google and Yahoo, Wikia is already affiliated with a site with a massive audience: Wikipedia is the ninth-most visited website in the U.S. and had 47 million unique visitors in June.
Sources: Reuters, 24/7 Wall Street, TechWhack.com
Commentary: Google Tanks on Unexpected Margin Drop10 Stock Picks For a Kid InvestorGoogle Still a Buy, Despite 'Disappointing' Earnings
Stocks/ETFs to watch: GOOG, LOOK. Competitors: YHOO, MSFT. ETFs: FPX, FDN
Earnings call transcripts: Google Q2 2007, Yahoo! Q2 2007
Related: Grub's Distributed Web Crawling Project


Liberty Looks at Virgin Media Bid

U.S. cable pioneer John Malone's Liberty Global is considering joining the bidding party for UK cable giant Virgin Media, the Wall Street Journal and Financial Times reported. Malone told the FT Liberty was "doing our homework." Virgin put itself up for sale after receiving an an unsolicited offer valuing the company at $8B-$10B from Carlyle Group, and has set an August 8 deadline for expressions of interest. It already has received indications from more than 10 private equity firms and cable firms, although the Journal said people familiar with the LBTYA 30 07 2007 Chart VMED 30 07 2007 Chartmatter believe the upheaval in debt markets could slow a private-equity deal. Liberty CEO Michael Fries told the Journal that the company would consider a joint venture with a private equity fund. He said Liberty was exploring Virgin even though it typically prefers markets with more growth potential than the UK. "We owe it to our shareholders to look at this type of company given its size, scale and unique financial attributes, including its tax position," he said, referring to accumulated losses that could be used to offset taxes. Malone said: "We have to look at it, not in a traditional way but in a quite exceptional way, perhaps with partners, perhaps in ways we'd not regard a normal cable company." He did, however, worry about the competitive prospects of facing British Sky Broadcasting. "The concentration of market power that's been created means you have to scratch your head and say 'can anything compete?'" Virgin couldn't be reached for comment.
Sources: Wall Street Journal, Financial Times
Commentary: Virgin Media : Good News All AroundVirgin Media and Sky: Report From The BattlefieldVirgin Media and Sky: Report From The Battlefield
Stocks/ETFs to watch: LBTYA, VMED, LCAPA

Bancrofts Continue to Wrangle on Murdoch Bid

The fate of Rupert Murdoch's $5 billion bid for Dow Jones remains obscure as turmoil continues to rage within the Bancroft family, which controls 64% of the company's voting power, even as time is running out. Lawyers spent Friday trying to DJ 30 07 2007 Chartalter the voting structure of the family's largest trust to dilute the power of trustee Christopher Bancroft, who opposes the takeover. A family trust in Denver, however, which holds 9.1% of the vote and was considered a swing vote, is now expected to oppose the bid in the hope of extracting a higher price. Family member Crawford Hill sent a letter to the Bancrofts supportive of the sale: "Murdoch, like it or not, has what it takes to help the business flourish. ...He will not have naked bodies in the WSJ -- he is not a moron." His sister Leslie, meanwhile, wrote her own letter imploring the family not to "throw in the towel." Cousin Elisabeth Goth Chelberg, who has long held that the Bancrofts should be more involved in the company, wrote that they may now be reaping the consequences of their inactivity, and asked if the family has the "stomach for risk" a rejection of the bid would entail. "The family ownership/trust structure, the dividend policy and our lack of requiring management's accountability have put us in the position we're now in with Dow Jones," she wrote. "There is no going back, pre-News Corp.'s bid, to the way things were." Michael Elefante, a board member and chief trustee of the Bancroft family's shares, has asked the family to decide by the end of Monday whether or not they support Murdoch's bid, a source told Reuters on Sunday.
Sources: Wall Street Journal, Reuters I, II, Variety
Commentary: Bancroft Decision on Murdoch Bid Too Close to CallBrad Greenspan Takes Case to Dow Jones ShareholdersDow Jones Board Approves Murdoch Bid; Bancrofts to Decide
Stocks/ETFs to watch: DJ, NWS. Competitors: RTRSY. ETFs: PBS
Earnings call transcripts: Dow Jones Q2 2007, News Corporation F3Q07


RadioShack Beats Street; Sales Drop on Store Closures, Wireless Weakness

RadioShack announced a 2Q net profit of $47 million ($0.34/share), easily beating analysts' average estimate of $0.25/share. Sales fell 15% to $934.8m, missing analysts' forecast of $982.5m. Comparable store sales declined by 8.9%. RSH-EarningsChart-7-30-2007RadioShack said the post-paid wireless business continued to negatively impact both the comparable store and total sales results. It also closed 481 stores last year. In a press release, CFO Jim Gooch commented, "Against the background of a smaller, but more profitable, sales base our financial performance this quarter marked a continuation in trend. Our continued disciplined management of expenses and working capital allowed us to drive improved profit and produce increased levels of cash on the balance sheet." Gross profit margin increased by over 3% y/y to 50.5%, while operating profit margin improved to 6.9% from less than 0.25% last year. Shares of RadioShack gained 0.4% to $28.80 on Friday.
Sources: Press release, MarketWatch
Commentary: RadioShack Should Rally Into Earnings - JeffriesThe Lessons I Learned From Passing on RadioShack and M & F WorldwideS&P 500 Stocks With Largest Trailing 12-Month P/E Contractions/Expansions
Stocks/ETFs to watch: RSH. Competitors: BBY, CC. ETFs: RTH, XRT, PMR


Boeing's 787 Dreamliner Faces Hurdles -- Business Week

Boeing has delayed the first test flight of its new 787 Dreamliner one month to the end of September, BusinessWeek reported, but the aerospace giant is determined that the new jet will enter service on time and has boosted investment in the aircraft to overcome last-minute problems. BA 30 07 2007 Chart"We are spending more than originally planned to ensure we make our commitments," CEO James McNerney, said last week. "We are facing some challenges." The first 787 delivery is scheduled for May 2008 to All Nippon Airways. The main problem, typical of new aircraft, relates to integrating software systems with the hardware, although McNerney said the company has "no reason to believe we'll face a major issue there." Other problems relate to supporting major suppliers and trying to reduce the overall aircraft weight, which is about 2% heavier than it should be. Engineers are redesigning parts of the wing and window frames to meet its weight targets, but McNerney said even a slightly heavier aircraft would still meet performance obligations. Last week, Boeing topped Wall Street forecasts, posting its largest profit in nearly four years, and shares climbed to a new 52-week high. To meet the tight timetable, Boeing has raised its R&D expenses for the year to $3.7B from $3.2B. "It's the scramble at the end of the program," McNerney said. "Increasing R&D is the right thing to do to keep our successful airplane programs on track."
Sources: Business Week
Commentary: Boeing: A 787 Delay [24/7 Wall St.] • Boeing: Technically Problematic, Fundamentally SoundBoeing Taken Apart By The Little Parts
Stocks/ETFs to watch: BA
Earnings call transcript: Boeing Q2 2007


Iran Dashes Hopes of OPEC Output Hike

With crude prices approaching $80/barrel and widespread anticipation of heightened energy demand, Iran, the second largest OPEC producer, says it doesn't expect an increase in output levels to be on the table at OPEC's September meeting in Vienna. "Crude oil price fluctuations are related to geopolitical issues and a shortage of gasoline in America, and I do not imagine that, at its next regular annual meeting, OPEC would put the issue of changing its output level on the agenda," oil minister Kazem Vaziri-Hamaneh was quoted as saying Sunday by the Iranian oil ministry's Web site Shana. "There is a long time until then, but if the market situation remains as now Iran will not have the view to increase production," Vaziri-Hamaneh said, adding that he did not expect an emergency meeting to be held prior to the scheduled gathering because reserves and production were high. OPEC has said it would monitor the situation. Reserves, Vaziri-Hamaneh noted, are "very well on top of the five-year average," and he blamed the problem on a downstream issue, "some problem with the stock level of some refined products in some parts of the world." Crude futures closed at $76.98/barrel on Friday, the second-highest on record. Last week, OPEC President Mohamed al-Hamli told Reuters the organization was concerned about the high prices because it did not "want to go through a recession." Because there is no "demand response" and economic growth remains strong, Global Insight's Simon Wardell expects things to remain status quo. "So long as the price isn't damaging economic prospects, OPEC is relatively happy with where it is," he said.
Sources: Reuters, Dow Jones
Commentary: How High Can Crude Oil Fly?Why Oil Is Actually Cheap At $75Goldman Sachs Warns Oil to $95 by End of Year
Stocks/ETFs to watch: USO, OIL, OIH


HSBC's Net Jumps 25%; Shares Gain In London

London-based HSBC Holdings released its F1H07 interim report Monday, showing after-tax profits rose 25% to $10.9 billion on a 23% gain in operating income to $42.09 billion. The gains came despite a 63% jump in loan-loss impairments, to approximately $6.4 billion.HBC 30 07 2007 Chart The company reported a pre-tax profit of $14.2 billion, a 13% increase y/y. Post-tax profits were given an especially big lift by a low 18.7% tax rate. Reuters consensus estimates were expecting $13.27 billion in pre-tax profits. HSBC reported strong performances in corporate, investment banking, commercial banking and Asian operations. The company also reported a $1 billion gain on Chinese holdings in the first half. Shares were higher by 2.4% in London trading. Meanwhile, HSBC Chairman Stephen Green told reporters: "I don't believe there's a case for breaking up the bank," during a press conference Monday. There had been speculation the company would divest some of its operations.
Sources: HSBC Interim Results - Highlights, HSBC Interim Report (large .pdf), Wall Street Journal, Bloomberg, Reuters, MarketWatch I, II
Commentary: HSBC: Shake It Up, But Don't Break It Up - Barron'sBeijing Ends HSBC's China Expansion Plans Via Bank of Communications -- FTHSBC Posts Record Annual Profit Despite Subprime Woes
Stocks/ETFs to watch: HBC. Competitors: BCS, C, LYG. ETFs: ADRU, NYC, DGT

ABN Amro Takes Neutral Position Toward Bidders

The supervisory and management boards of ABN Amro met over the weekend to deliberate on two rival takeover bids and are recommending neither. The contenders are Barclays, whose offer was accepted in April, and a ABN 30 07 2007 Chartthree-bank consortium led by the Royal Bank of Scotland that submitted a hostile bid soon thereafter. The Barclays bid, revised last Monday, remains €2 per share lower than that of the consortium's €71.1 billion ($97.2 billion) offer. The consortium's bid also consists of 93% cash, unlike the Barclays bid, which is only 37% cash. The consortium's bid could face regulatory scrutiny, however, and shareholders of one of the partners -- Fortis -- might vote the bid down at their August 6 meeting. (The third party to the consortium, Santander, approved the transaction Friday.) Hedge funds opposed to the consortium's bid are building stakes in Fortis in order to swing the vote, and some are said to have approached Barclays, encouraging it to do the same. Barclays declined. In related news, the China Development Bank and Temasek of Singapore took stakes in Barclays last week and will each have the right to nominate a non-executive director to the Barclays-ABN board if Barclays wins the duel. ABN will report Q2 results on Monday.
Sources: Wall Street Journal, TheStreet.com, Reuters, Financial Times
Commentary: ABN Amro: Subtle Valuations In Takeover BattleBarclays Raises Bid for ABN AmroABN Amro to Meet with Barclays and RBS Consortium
Stocks/ETFs to watch: ABN, RBSPY.PK, BCS, FORSY. Competitors: HBC, DB, UBS. ETFs: EWN, KBE, RKH


Humana Beats and Raises; Medicare Payments May Be Problematic

Health benefits provider Humana Inc. beat consensus estimates handily in its recently-ended quarter, the company announced Monday before the open, while projecting full-year earnings well ahead of analyst predictions. hum Q2 net income more than doubled to $217 million, good for EPS of $1.28, versus EPS of just $0.53 a year earlier. Revenue climbed 19% to $6.43 billion. Consensus analysts estimates were for EPS of $1.17. Humana credited efficiency gains in administration and increased payments from and enrollment in Medicare Advantage, from which Humana will derive more than 50% of its revenue in 2007. Medicare will pay Humana $76 billion in 2007, causing California Democrat Pete Stark to accuse the company of making "huge profits at taxpayers' expense." According to UBS' Justin Lake, "It is likely inevitable Congress will be forced to act, given the competing priorities and long-term solvency issues facing Medicare," something which could have negative implications on Humana's long-term outlook. Still, Humana is expecting full year EPS in a range of $4.40-$4.50; analysts had been calling for $4.34 a share.
Sources: Press Release, Bloomberg, Reuters, AP, MarketWatch
Commentary: Cramer's Take on HUMWellPoint Is a Healthy Opportunity - Barron's
Stocks/ETFs to watch: HUM. Competitors: UNH, AET, CI, CVH, WLP. ETFs: IHF


Barron's articles likely to move stocks today, culled from our Annotated Barron's Summaries

  • With Amazon (NASDAQ:AMZN) shares up 17% last week and 216% over the past year, Barron's says it's time to book substantial profits. Its 56x 2008e earnings multiple on assumed 41% earnings growth is rich compared to rival eBay's (NASDAQ:EBAY) 21x. Some analysts see shares falling as much as 50%. (Full summary)
  • $667 million Internap (NASDAQ:INAP) is emerging as a serious rival to Akamai Technologies Inc. (NASDAQ:AKAM) and Limelight Networks Inc. (NASDAQ:LLNW) in the CDN (Content Delivery Network) market. CDN is currently only 10% of INAP's profit mix, but that stands to grow fast on the heels of its proprietary software that allows it to guarantee 100% uninterrupted content delivery. Barron's says Internap's Tuesday earnings report will forecast higher growth, lifting its $13.42 shares back towards January's $20 price. (Full summary)
  • After attending Microsoft Corp.'s (NASDAQ:MSFT) Financial Analyst Meeting Thursday, Barron's editor Eric Savitz says investors won't likely have the patience to wait around for the company's long-term growth prospects to bear fruit. Analysts are concerned that Microsoft's new businesses (advertising, computer electronics) are more cut-throat than its current mix. They worry the company is building internet infrastructure rather than building sites that bring in users, and say Bill Gates's plan to pass control of product development to Ray Ozzie "will not be a smooth one." (Full summary)
  • GPS giant Garmin's (NASDAQ:GRMN) shares ($80) have rallied more than 150% since last February. Dougherty & Co. analyst Jeff Evanson says they still have room, noting that marine and aviation markets have yet-to-be tapped by GPS devices, rivals are struggling in the Garmin-dominated U.S. markets, and that Garmin just recently began selling units through Wal-Mart (NYSE:WMT). Shares could hit $93 within a year. (Full summary)
  • Bio-chemical giant DuPont (NYSE:DD) missed analysts' $1.06/share earnings estimates last week by five cents, sending the stock down $6 to $46.82 on the week. Barron's says that despite the earnings miss, DuPont should make good on its biotech promise, and shares could soon make another run at $55. "In the meantime, it pays a 3% dividend." (Full summary)
  • Subprime-leery investors are avoiding lending stocks, especially U.S.-centric ones. But Raymond James Financial (NYSE:RJF) no subprime exposure, and recorded 20% higher net income and a 41% revenue increase in Q2 from rising deposits. Analysts have largely missed the $3.7 billion cap company's potential as the largest independent brokerage house. CEO Thomas James says RJF's not for sale, but bulls say the stock could reach $37-$38, or $40 on a buyout bid. (Full summary)


U.S. Market: Durable Goods & GDP
Week's IPOs: IPOs Part I: Amedica Corp. , Concho Resources, Dolan Media Co.
Long Idea: Despite Akamai's Tumble, the CDN Industry Is Still Strong
Short Idea: Complacency Runs Deep: Time To Sell
Internet: Why the FTC Should Care About Global Competition
Telecom: Timing Key If Telus Wants To Bid for Bell Canada
Networking: Riverbed: Rich Multiple Keeps Ratings Down
Chips: Cymer Wins Needham Upgrade On Increasing Market Dominance
Software: McAfee: W.R. Hambrecht Says Buy, Now That Troubles Put To Rest
Media: MGM Mirage: The Most Attractive Gambling Stock
Healthcare: Still Bullish On Flamel, Despite Last Week's Bad News
Biotech: Drug Pricing and the Incentives to Innovate
Retail: Starbucks Faces More Headwinds Going Into Earnings
Gold: Southern Copper Corp.: Is That The Top Ahead?
Energy: Solid Buying Opportunity in NRG Energy Following Goldman Call
Financial: A Look At Provident Financial Services
Asia: Update on China Yuchai
ETFs: Fund Fees Are Falling (Just Barely)
Hedge Funds: The Key To Goldman Sachs' New Hedge Fund Operation: Teamwork
IPO Analysis: Lululemon Makes Other Hot Clothing IPOs Look Cheap
Jim Cramer: Latest stock picks
Earnings Transcripts: Compuware F1Q07VeriSign Q2 2007Rambus Q2 2007Celgene Q2 2007Becton, Dickinson F3Q07Dow Chemical Q2 2007Varian Semiconductor Equipment Associates F3Q07Semiconductor Manufacturing International Q2 2007Ingram Micro Q2 2007Enterprise Products Partners Q2 2007Luxottica Group Q2 2007AutoNation Q2 2007Foundry Networks Q2 2007Ryland Group Q2 2007Chartered Semiconductor Manufacturing Q2 2007Lawson Software F4Q07Royal Dutch Shell Q2 2007McKesson F1Q08Global Payments F4Q07Digital River Q2 2007TEPPCO Partners Q2 2007AVX F1Q08NTT DoCoMo F1Q08Gemstar-TV Guide Q2 2007Baker Hughes Inc. Q2 2007National Instruments Q2 2007Infineon Technologies F3Q07Chevron Q2 2007Sepracor Q2 2007Dassault Systemes Q2 2007Ingersoll-Rand Q2 2007BG Group Q2 2007Coca-Cola FEMSA Q2 2007Enbridge Energy Partners Q2 2007Sadia Q2 2007

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