Archive for April, 2006

  • Citigroup Cuts Dell to Sell
    , April 21st, 2006 at 9:14 am

    From TheStreet:

    The pricing advantage enjoyed by Dell is eroding as competitors adapt its inventory and supply-chain innovations, and the company needs to contemplate lower margins to preserve its franchise, Citigroup said in downgrading the stock to sell Friday.
    The brokerage slashed its price target on the computer company’s shares to $28 from $37, saying Dell must adjust its profitability expectations in order to kick start growth and market share. In premarket trading Friday, the shares slipped 74 cents, or 2.6%, to $27.50.
    “Dell management has been vocal that the business model functions optimally when PC and server units are growing above-market — this has not been the case for several quarters. Given that Dell’s price advantage has eroded to 5% or less since ’01, a margin reset is necessary to re-widen the price gap and gain share,” Citigroup wrote.
    “There is historical precedent for such a reset,” Citi wrote. “When end-market growth decelerated through calendar 2000, Dell ultimately slashed gross margin by 300 basis points in a single quarter in order to take share during the downturn and position for the next upturn.”
    Citi noted that Dell’s stock fell from $42 in July to $30 at the end of 2005, and blamed the decline on the company’s inability to outgrow the global PC market in unit terms for the first time in a decade.
    “With Dell’s highly profitable U.S. PC business going ex-growth in the first calendar quarter of 2006, further end-market end market deceleration likely, especially in Dell’s largest segments and geographies, we think the probability of a ‘margin reset’ is rising,” Citigroup said.

  • Danaher Earns 67 Cents a Share
    , April 20th, 2006 at 12:36 pm

    A few weeks ago, Danaher (DHR) raised the lower end of its guidance. It turns out, the company was right!
    Today, Danaher reported earnings of 67 cents a share, two cent more than Wall Street estimates.

    Danaher earned $216 million, or 67 cents per share, compared with $188 million, or 58 cents per share, a year earlier.
    Analysts on average expected 65 cents per share, according to Reuters Estimates, after the company said last week that results would exceed its earlier range of 61 cents to 64 cents. Danaher had previously raised its forecast in March.
    The results included 2.5 cents per share in stock options expense, as well as a 1-cent tax-related benefit and a 1-cent gain for the sale of real estate.
    Danaher, whose products range from Craftsman tools to gas station equipment and water treatment systems, said it saw broad strength across its businesses, and it was confident it would deliver positive results for the rest of the year.
    Sales rose 17.5 percent to $2.14 billion, matching the estimate the company provided last week, when it announced its biggest-ever acquisition.

    The company is trading lower today due to its conservative forecast for the rest of 2006. Danaher said that it expects to earn between 73 and 78 cents a share for the second quarter, and $3.07 per share to $3.17 a share for the year.
    Wall Street was expecting 77 cents for the second quarter, and $3.13 for the year. I think the company is simply being cautious.

  • Imagine
    , April 20th, 2006 at 10:05 am


    Imagine no possesions,

    I wonder if you can,

    No need for greed or hunger,

    A brotherhood of man,

    Imagine all the people

    Sharing all the world…

    John Lennon’s Schoolbook Fetches $226,150 in London

    April 20 (Bloomberg) — John Lennon’s schoolbook, entitled “My Anthology,” fetched 126,500 pounds ($226,150) at a London sale of rock memorabilia last night. Auction house Cooper Owen Plc had set a minimum price of 100,000 pounds for the 12-year-old’s scribbles and drawings.

  • Golden West’s Earnings
    , April 20th, 2006 at 9:49 am

    Golden West Financial (GDW) reported first-quarter earnings of $1.25 a share, one penny below expectations.

    Golden West Financial Corp., the nation’s second-largest savings and loan, reported Thursday that strong performance from its adjustable-rate mortgage lending products helped push up first-quarter profit by 12 percent.
    The parent company of World Savings Bank reported profit for the period of January through March rose to $390.9 million, or $1.25 per share, from $348.3 million, or $1.12 per share, a year earlier. Results missed Wall Street projections for earnings of $1.26 per share, according to Thomson Financial.
    “As always, the key driver behind the growth of the company’s profits was the ability to expand our mortgage portfolio, which is our primary earning asset,” Chairman and Chief Executive Herbert Sandler said in a statement.
    Golden West’s loans receivable increased by $14.8 billion, or 14 percent, from the year-ago period. Adjustable-rate mortgages, or ARMs, are popular when interest rates become unpredictable and fixed-rate loans become difficult to obtain.
    Sandler said low long-term interest rates have made fixed-rate loans more attractive to borrowers, while the cost of adjustable-rate mortgages continues to climb. He said the company’s loan volume during the quarter edged up to $11.6 billion from $11.2 billion.
    Banks with large lending operations have seen margins squeezed after 15 straight Federal Reserve interest rate hikes, which have also curbed demand for refinancing and home loans. Banks make money from the spread between deposits and what they charge for loans.
    Golden West also reported deposit growth of $1.4 billion, down from a first-quarter record of $2.6 billion set in 2005. Renewed interest in the stock market along with aggressive pricing by our competitors slowed deposit inflows from last year’s all-time high level, the company said.

  • The Late Cyclicals Surge Higher
    , April 19th, 2006 at 3:06 pm

    Here’s another sign of an overheated market. The late-stage cyclical stocks are starting to outperform early-stage cyclicals.
    Here’s a graph of the Merrill Lynch Late Cyclical Index (^XT), the gold line, with the Merrill Lynch Early Cyclical Index (^XE), the black. Notice how closely this indexes tend to track each other. But recently, the late-stage cyclical stocks have jumped higher while the early-stage stocks are bouncing along.
    XE.bmp
    The XE is comprised of stocks that do well once the economy starts to show some life. These tend to be more consumer-oriented stocks. In fact, Wal-Mart is about 30% of the index. The index also inlcudes names like Lowe’s, Home Depot, Costco and Target.
    The XT is made up of stocks that do well when the economic cycle starts to show its age. These are mostly heavy-industry and commodity stocks like Dupont, Dow Chemical, Alcoa, Phelps Dodge and Nucor.
    Bloomberg News polled 41 economists and all of them agreed that the Federal Reserve will raise rates to 5% on May 10.

  • Cash Is King
    , April 19th, 2006 at 9:58 am

    Today is a huge day for earnings. Six Dow components report today. Thanks to yesterday’s big move, the market is again close to five-year highs.
    The government reported that consumer inflation rose by 0.4% last month. The core rate, which excludes food and energy prices, rose 0.3%. Although bonds rallied on Monday and Tuesday, yields are headed higher this morning.
    I’ve been looking at a lot of balance sheets lately, and I’m surprised at the level of cash that many corporations are holding. Microsoft (MSFT), for example, has $35 billion in the bank. Think about that. Their bank account is larger than most banks. In fact, by itself, Microsoft’s bank account would be the 70th largest stock in the S&P 500. ExxonMobil (XOM) isn’t far behind with $29 billion in cash, and Pfizer (PFE) has $22 billion.
    What is everyone waiting for? Perhaps Microsoft will pay another special dividend. I think it’s interesting that a software company is one of the largest lenders in the country, and it isn’t even part of the Federal Reserve System.
    On my first job as a broker, I remember how we were trained in our “pitches” to say things like “best of all, this company has a mountain of cash” or “don’t forget, cash is king.” I didn’t know what the hell I was talking about. Holding a lot of cash isn’t in and of itself a great thing. Cash doesn’t do much besides earn interest, and I don’t need to buy a stock to do that. The whole idea of investing is exchanging cash for assets that are (hopefully) more productive.
    While I’d prefer to own a company that has little debt and a nice wad of cash, it’s not imperative. It can even be a slight negative. This is what’s known as the Bladder Theory of corporate finance. The odds that you’ll do something intelligent with your cash stash is inversely proportional to the amount of cash you have. Given the past few years, I don’t think the Bladder Theory is just a theory anymore. Google (GOOG) is sitting on $8 billion. That’s $27.13 a share. We all know they’re great at technology, but now we have to see how good they are at investing. I hope they’re better at investing than they are at PR. I know they’re going to buy somebody soon, but dear lord, I’m afraid to guess.
    The reason why I like to see how much cash a company has is that it can distort how much a stock is worth. Let’s look at Microsoft again. The company is going for $27.13 a share, which is about 17.7 times next year’s earnings of $1.53 a share (their fiscal year ends in June).
    But! The company has no debt and $3.35 a share in cash. So let’s remove the cash and look at the valuation. Minus the bank account, Microsoft is trading at $23.78 a share. Let’s estimate that the cash will generate earnings of 15 cents a share (that’s about 4.5%). This means that Microsoft’s business will generate earnings of $1.38 a share. So Microsoft’s business operations are really going for 17.2 times earnings. That’s a slightly different picture.
    While Microsoft is trading at 8.1 times cash, Dell is going for just 7.3 times its cash. Other cash-rich stocks on our Buy List include Fair Isaac at 8.3, Golden West at 11.8, Harley-Davidson at 13.4, Medtronic at 12.1, Respironics at 10.4 and UnitedHealth at 11.2.

  • J&J Beat by a Penny
    , April 18th, 2006 at 12:56 pm

    Johnson & Johnson (JNJ) earned 99 cents a share, one penny more than the Street was specting. The company reiterated its forecast of $3.65 to $3.72 for this year.

    Johnson & Johnson’s first-quarter profit jumped 17 percent, mainly due to a big termination fee from its failed attempt to acquire heart device maker Guidant Corp., while revenues were hurt by exchange rates and generic competition to some former blockbuster drugs.
    The world’s most diversified health products maker on Tuesday reported net income grew to $3.31 billion, or $1.10 per share, from $2.84 billion, or 94 cents per share, a year ago.
    The results included a termination fee, worth $622 million, or 12 cents per share, paid by Indianapolis-based Guidant after it accepted Boston Scientific Corp.’s takeover bid instead of J&J’s earlier in the quarter.
    Excluding that fee and a 1 cent-per-share charge for two acquisitions, Johnson & Johnson’s income would have been $2.97 billion, or 99 cents per share, for the latest quarter. That beat by a penny the consensus forecast of analysts surveyed by Thomson Financial.
    J&J, which makes everything from contact lenses and contraceptives to baby shampoo and skincare products, said revenue rose 1 percent to $12.99 billion from $12.83 billion last year. Analysts had been expecting sales of $13.2 billion.
    Generic competition reduced sales of drugs including anti-fungal medicine Sporanox, painkiller Ultracet and Duragesic, a skin patch for chronic pain.
    Chief financial officer Robert J. Daretta said despite continuing pressures from generics and currency fluctuations, results should pick up, forecasting operational growth of about 8 percent for the next three quarters.
    “We very much are looking forward to a year of accelerating growth on both the top and bottom line,” Daretta told analysts during a conference call.

  • UnitedHealth Earned 68 Cents a Share
    , April 18th, 2006 at 9:21 am

    This was a good quarter for UnitedHealth (UNH):

    U.S. health insurer UnitedHealth Group Inc. on Tuesday posted higher-than-expected quarterly profit as it benefited from the acquisition of PacifiCare Health Systems, and boosted its full-year profit forecast.
    Shares of UnitedHealth rose 3 percent before the market opened.
    The $9.2 billion PacifiCare purchase, completed in December, helped fuel a 58 percent surge in revenue in the first quarter to $17.59 billion. The company said it now provides services to about 70 million U.S. health consumers, an increase of 27 percent over the prior year.
    The largest U.S. health insurer by market value said net income rose to $899 million, or 63 cents per share, from $743 million, or 55 cents, a year earlier. Last year’s results were restated to account for new stock option expensing rules.
    UnitedHealth posted adjusted earnings of 68 cents per share, which were changed for costs under the new Medicare Part D drug plans. Premiums rose 60 percent to $16.21 billion.
    The adjusted results were 3 cents ahead of analysts’ average projections of 65 cents, according to Reuters Estimates.
    UnitedHealth said first-quarter results compared with its previous forecast for net earnings of 58 cents per share and adjusted earnings of 65 cents.
    The insurer increased its full-year forecast for net earnings to a range of $2.88 per share to $2.92 per share, or growth of 22 percent to 24 percent. In January, UnitedHealth forecast 2006 earnings per share of between $2.85 to $2.90.
    Shares of the Minneapolis-based company closed at $51.67 on Monday. The stock has fallen about 17 percent so far this year, compared to about a 2 percent dip in the Morgan Stanley Healthcare Payor index (^HMO).

    The WSJ has more:

    UnitedHealth Group Inc. Chairman and Chief Executive William W. McGuire said Tuesday he is recommending that the insurer, which is under scrutiny for the timing of past stock-options awards, forgo equity-based payments and grants for most senior executives.
    The company also said it posted higher-than-expected first-quarter earnings but lowered its guidance for next year. Earnings at the country’s second-biggest health insurer climbed 21% to $899 million, or 63 cents a share, in the quarter, from $743 million, or 55 cents per share, a year earlier. UnitedHealth’s acquisition of PacifiCare Health Systems Inc., which it completed late last year, and its new Medicare drug-benefit plans helped fuel profits, as a well as a 58% jump in first-quarter revenues to $17.59 billion.
    As a result, Dr. McGuire said the company now expects full-year earnings between $2.88 and $2.92 a share — a 22% to 24% increase from 2005 — compared with its earlier projection of between $2.85 to $2.90 a share.
    Dr. McGuire prefaced his discussion of the company’s performance with his first comments on the controversy over his massive financial windfall from stock options, now totaling $1.6 billion in unrealized gains. In a move that could prove to be a significant pullback from what has been an enormously generous remuneration package, Dr. McGuire said he was recommending that the company eliminate change-in-control severance payments and “noncash perquisites,” for the most senior executives, as well as capping supplemental retirement plans and eliminating further equity-based grants “for the foreseeable future.” UnitedHealth’s board will consider that idea at its next meeting in May, he said.
    Dr. McGuire’s suggestion does not restrict him or other executives from exercising options they’ve already received, and a company spokesman declined to specify what perks Dr. McGuire suggested be eliminated.
    Earlier this month, UnitedHealth said a committee of its independent directors would review the company’s options-grant practices in light of Securities and Exchange Commission scrutiny of options grants at numerous companies, including UnitedHealth.
    The Wall Street Journal reported last month that Dr. McGuire’s options grants were regularly dated just before substantial run-ups in share price and after a sharp fall.

  • The Great Quake
    , April 18th, 2006 at 6:00 am

    At 5:12 a.m., one hundred years ago today, San Francisco was destroyed by a massive earthquake. Of a population of 400,000, an estimated 225,000 to 300,000 were made homeless. The official death toll was 478, but it was probably closer 3,000.
    That day, the Dow dropped from 96.84 to 95.67. Two weeks later, the Dow closed at 86.45. In today’s terms, that would be equivalent to a loss of 1,200 points.
    The market recovered but crashed again in March 1907, then again in October 1907 after two brothers tried to corner United Copper. They failed (sound familiar), and it led to a huge bank run.
    The financial system was bailed out thanks to a loan from J.P. Morgan. The crisis led to the passage of the Federal Reserve Act in 1913.

  • Johnson & Johnson’s Earnings
    , April 17th, 2006 at 5:55 pm

    Johnson & Johnson (JNJ) isn’t on our Buy List, but I like the stock a lot. I’m amazed at how poorly health care stock have been doing lately.
    One of the best ways to find great stocks is to pick the best names out of the weakest sectors. Studies have shown that much of a stock’s daily movement is due to what industry it’s in.
    As the health care sector has stumbled, the good and the bad have fallen. One year ago, Johnson & Johnson was closing in on $70 a share. Today, shares of J&J are hovering just above its 52-week low of $56.70.
    If J&J beats earnings and fails to rally, we’ll really have an example of poor investor confidence. Here’s an earnings preview:

    OVERVIEW: The company started the quarter losing out to Boston Scientific Corp. in a bidding war for heart device maker Guidant Corp. In February, the company’s Ortho Evra birth control patch was in the spotlight after the Food and Drug Administration released a study reporting double the risk of blood clots in women compared with those using the pill.
    Flush with cash, the company’s board approved the repurchase of up to $5 billion of common stock in March, roughly 85.1 million shares of J&J’s 3 billion shares outstanding. Toward the end of the quarter, an arbitration panel ruled against the company after J&J alleged that medical device maker Medtronic Inc.’s Driver brand stents infringed patents owned by the company’s Cordis Corp. unit.
    EXPECTATIONS: Analysts surveyed by Thomson Financial estimate earnings per share of 98 cents on sales of $13.21 billion.
    ANALYST TAKE: Merrill Lynch analyst Katherine Martinelli estimates earnings per share of 98 cents on revenue of $12.99 billion, slightly less than consensus due to generic competition. Martinelli expects pharmaceuticals sales to drop 3 percent to $5.57 billion, but medical device sales to rise 5 percent to $5.03 billion, resulting in a 1 percent rise in total sales. Banc of America analyst Glenn J. Novarro forecast earnings per share of $1 on $13.2 billion in sales.
    WHATS AHEAD: Despite an expected rise in medical device sales due to captured market share from Boston Scientific in the drug-coated stent market, Johnson & Johnson could face sales challenges along with the rest of the sector following recently proposed Medicare rules that would cut reimbursements to hospitals for heart-related devices.
    STOCK PERFORMANCE: Shares of Johnson & Johnson fell about 3 percent over the quarter to close at $59.22 on the New York Stock Exchange on March 31. The stock traded between $56.70 and $69.99 over the past 52 weeks.