Morning News: July 18, 2011
Posted by Eddy Elfenbein on July 18th, 2011 at 7:27 am

Allianz’s Achleitner Suggests Voluntary Swap for Greek Bonds

Allegations Against Chinese Companies to Continue, Affect Funding – Fitch

Stocks, Euro Drop on EU Crisis Concerns

Pain Builds in Europe’s Sovereign Debt Risk

Investors Boost Bullish Commodity Bets

Moody’s Suggests U.S. Eliminate Debt Ceiling

Hertz Will Pay $250 Million to Buy Leasing Firm Donlen

Philips Chief Makes $2.8 Billion Bet on Overhaul to Meet Goals

Google CEO Page Adds About $1.9 Billion in Personal Wealth After Earnings

Man to Acquire Lehman Estates Liabilities From GLG Funds

No Bidders for Borders as Deadline Passes

Fast Traders, in Spotlight, Battle Rules

Phil Pearlman: Google Behaving Like Its Too Small Too Fail

Epicurean Dealmaker: The Cheapest Substance in the World

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Google Soars on Earnings
Posted by Eddy Elfenbein on July 15th, 2011 at 11:40 am

Last month, I highlighted how inexpensive shares of Google ($GOOG) had become (which was actually a follow-up from a similar post in May).

I noted that the premium for Google’s valuation was just 8.8% based on this year’s earnings, and 6.5% based on next year’s. Yesterday, the company reported Q2 earnings of $8.74 per share which was 89 cents higher than estimates. The stock has been up as much as $71 today.

CWS Market Review – July 15, 2011
Posted by Eddy Elfenbein on July 15th, 2011 at 8:10 am

The second-quarter earnings season has officially begun. Very soon we’ll get a handle on how well Corporate America fared during the second three months of the year. So far, we’ve had good earnings reports from companies like Google ($GOOG) and Yum Brands ($YUM). If all goes well, this earnings season will mark a new all-time record for corporate profits.

The current earnings record was set during the second quarter of 2007 when the S&P 500 earned $24.06. Not long after, things fell apart in a serious way. The good news is that we’ve recovered strongly. Wall Street’s current consensus for this year’s Q2 is $24.13 which would be a new record although not by much (and less than inflation over the last four years). Still, it’s nearly a 75% increase over the Q2 earnings of 2009. More importantly for us, the S&P 500 is over 15% lower than it was four years ago today despite earnings being higher.

Let me explain what’s happening. The earnings outlook is still very favorable for most companies. The S&P 500 has a shot of earning $100 this year and perhaps as much as $112 next year. However, earnings growth is decelerating, meaning that earnings are growing but at a slower rate. Second-quarter earnings will probably come in around 15% higher than last year’s Q2.

This slowing rate of growth is concerning many money managers and that’s part of the reason why the market has been jittery lately. Consider that every day this week, the S&P 500 has closed more than 1% below its high for the day. Simply put, the very easy money has been made. Now folks are madly searching for bargains and anything less than perfection gets tossed aside.

I’ll give you an example of what I mean: DuPont ($DD) will probably earn close to $4 per share this year. At the low from 2009, the stock was going for just over $16 per share. In other words, DuPont’s stock was going for just four times earnings from just two years into the future! And we’re not talking about some unknown pink sheet listing. This is a Dow component and one of the largest industrial companies in the world. It was a stock screaming to be bought (and yes, I missed it).

Now let’s look at what’s been happening to DuPont. Three months ago, the company reported very solid earnings for Q1 (15 cents higher than the Street) and raised expectations. So what did the stock do? It went down. Two months after the earnings report, DuPont was trading 10% lower than before its earnings report.

Don’t get me wrong. I don’t mean to pick on DuPont; it’s a fine company. But I want to show you just how nervous investors have become, especially about cyclical stocks. Since mid-February, the Morgan Stanley Cyclical Index (^CYC) has trailed the S&P 500 by roughly 3.5%. When a stock that’s delivering on earnings is getting smacked around, you know something’s up. The lesson here is that investors have been scared and they’ve been looking for reasons to sell. When the problems in Europe came along, that seemed like as good a time as any.

What investors need to understand is that the earnings are still out there, but they’re not nearly as easy to find as they used to be. Another example is JPMorgan Chase ($JPM), a Buy List stock, which reported very good earnings on Thursday. For last year’s Q4 and this year’s Q1, I was highly confident that JPM was going to beat the Street’s estimate, and I was right both times. This time around, I wasn’t nearly as certain. Many financial stocks are in rough shape. I’m particularly leery of companies like Citigroup ($C), Bank of America ($BAC) and Morgan Stanley ($MS). I’m afraid their earnings reports will not be pretty.

The good news is that JPM came through once again. The bank earned $1.27 per share for Q2 which was six cents higher than Wall Street’s consensus. Although Thursday was a down day for the broader stock market, shares of JPM closed higher by 1.84% (and were up as much as 4% during the trading day).

Similar to the story at DuPont, JPMorgan’s business has been doing well but investors have been skittish of the stock. In this case, the focus is on the bank’s exposure to Europe, although CEO Jamie Dimon has tried to calm those fears. One of the fears going into Thursday’s earnings report was that fixed-income trading had plunged. Fortunately, this was not the case.

I was especially impressed by the news that JPM is going to float a 30-year bond. No major bank has done that in six months. Bloomberg noted that the market is becoming more convinced of JPM’s creditworthiness. In October, the bank floated 30-year bonds that were 165 basis points higher than similarly-dated U.S. Treasuries. Now that spread is down to 115 basis points. That’s a good sign, so it’s smart to take advantage of the market’s judgment and raise some cash.

Although JPM has been a poorly performing stock for the last three months, I still like the shares. I would like them a lot better if the company could double its dividend (the Fed would need to sign off on that). The bottom line is that money is cheap, the yield curve is wide and the stock is down. All of that combines for a good case in owning JPM. I’m keeping my buy-below price at $44 per share.

I don’t know yet when all of the companies on our Buy List will report Q2 earnings (be sure to check the blog for updates), but I do know that three of our healthcare stocks are due to report next week. Both Stryker ($SYK) and Johnson & Johnson ($JNJ) will report on Tuesday, July 19, and Abbott Laboratories ($ABT) will report on Wednesday, July 20th.

Of the three, Stryker is the most compelling buy right now. The company impressed Wall Street earlier this year when it gave very strong full-year guidance of $3.65 to $3.73 per share. Importantly, they’ve reaffirmed that guidance since then. Even though Stryker beat earnings by a penny per share in April, the stock hasn’t done much of anything. The Street expects 90 cents per share for Q2. That sounds about right though maybe a penny or two too low. I don’t think SYK will have any trouble hitting their optimistic range for this year. Stryker is a good buy up to $60.

After doing nearly everything wrong, Johnson & Johnson is finally on the right path again. The company recently raised its quarterly dividend for the 49th year in a row. In April, JNJ gave us a strong earnings report and upped its full-year forecast to $4.90 to $5 per share. Wall Street expects $1.23 for Q2; I think $1.30 is doable.

At the current price, JNJ yields 3.37% which is more than a 10-year Treasury bond. The stock has been in a mostly losing battle with the $70 barrier for more than six years. If next week’s earnings come in strong, I think JNJ will finally burst through $70 for good. Just to be ready, I’m raising my buy price on JNJ to $70.

Wall Street expects Abbott Labs to earn $1.11 per share for its second quarter. The company has topped Wall Street’s forecast by one penny per share for the last six quarters. I don’t like surprises on my Buy List so let’s make it seven in a row. The company has already forecast full-year earnings of $4.54 to $4.64 per share. That’s a big number and if it’s right (which I think it is), that means that ABT is going for just 11.6 times the mid-point of that forecast. The shares currently yield 3.61%. I’m raising my buy on Abbott from $52 to $54.

That’s all for now. Be sure to keep visiting the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

Morning News: July 15, 2011
Posted by Eddy Elfenbein on July 15th, 2011 at 7:16 am

German Government: No Set Plans For Euro-Zone Leaders Meeting

Italy Parliament Prepares to Pass Austerity Package

Europe’s Banks Brace For Clutch of Health Test Failures

Markets Shrug After S&P Says 50% Chance of U.S. Credit-Rating Downgrade

Citigroup Profit Beats Analysts’ Estimates

U.S. Stock-Index Futures Advance on Citigroup

Stocks Lose Gains as Bernanke Dims Stimulus Hopes

U.S. Consumer Prices Fall on Drop in Fuel Costs

Biden’s Influence Seen From Stimulus to Talks

Icahn Makes $12.6 Billion Bid for Clorox

Mining Giant BHP Billiton to Acquire Petrohawk for $12.1 Billion

Pizza Demand in Asia Boosts U.S. Cheese Exports

Rebekah Brooks Resigns From Murdoch’s British Subsidiary

Stone Street: The Securities and Exchange Commission of La Mancha

Joshua Brown: 7000 Muni Bonds at Risk of Automatic Downgrade

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Reinhart and Rogoff on the Economy
Posted by Eddy Elfenbein on July 14th, 2011 at 9:18 am

Bloomberg has an interesting op-ed from Carmen Reinhart and Kenneth Rogoff. They warn that growing yourself out of debt isn’t so easy because at some point, debt begins to impede growth.

As public debt in advanced countries reaches levels not seen since the end of World War II, there is considerable debate about the urgency of taming deficits with the aim of stabilizing and ultimately reducing debt as a percentage of gross domestic product.

Our empirical research on the history of financial crises and the relationship between growth and public liabilities supports the view that current debt trajectories are a risk to long-term growth and stability, with many advanced economies already reaching or exceeding the important marker of 90 percent of GDP. Nevertheless, many prominent public intellectuals continue to argue that debt phobia is wildly overblown. Countries such as the U.S., Japan and the U.K. aren’t like Greece, nor does the market treat them as such.

Indeed, there is a growing perception that today’s low interest rates for the debt of advanced economies offer a compelling reason to begin another round of massive fiscal stimulus. If Asian nations are spinning off huge excess savings partly as a byproduct of measures that effectively force low- income savers to put their money in bank accounts with low government-imposed interest-rate ceilings — why not take advantage of the cheap money?

ConocoPhillips Plans to Split Into Two
Posted by Eddy Elfenbein on July 14th, 2011 at 9:05 am

ConocoPhillips ($COP) announced today that it’s going to split itself into two companies. Marathon Oil split itself up earlier this year. Generally, in a commodities industry, when prices go down, the industry consolidates. When prices rise, the industry separates.

COP’s CEO said, “We have concluded that two independent companies focused on their respective industries will be better positioned to pursue their individually focused business strategies.”

The reason I highlight this is that you can often find good bargains when top-quality stocks break themselves up. The hitch is that it’s often the less glamorous company that does well.

Earlier this year, Motorola split itself in two, years after promising us it would. I joked that the company would now be two lousy companies instead of one.

At the time, I wrote that the one to watch was Motorola Solutions ($MSI), the less glamorous spin-off:

The one to steer clear of is Motorola Mobility. I firmly expect these guys to be crushed to dust. Motorola Solutions, however, might be a compelling buy. They do the “everything else” part of Motorola’s business which is things like barcode scanners and two-way radios.

So far, I’ve been right.

Many people have experienced a situation at a company where one part of the firm is much more profitable than other parts are. This can often lead to problems when employees feel that they’re “carrying” the rest of the company.

ConocoPhillips wants to become a refining and marketing company and an exploration and production company. The refining and marketing is probably the safer bet.

JPMorgan Posts Good Earnings
Posted by Eddy Elfenbein on July 14th, 2011 at 8:13 am

I hadn’t expressed any opinion on JPMorgan Chase‘s ($JPM) second-quarter earnings because I didn’t have a good “feel” for how they were going to shake out. Sometimes the numbers are pretty clear but I just didn’t have that clarity this time around.

From what I saw, it looks like Wall Street was pretty anxious about JPM and the entire banking sector. The Street was expecting JPM to earn $1.21 per share. The good news is that the bank reported Q2 earnings this morning of $1.27 per share.

Analysts have expected strength in the bank’s capital market business. On Thursday, J.P. Morgan said its investment-banking arm’s profit jumped 49%. The retail financial services business, meanwhile, reported a 44% slide in profit.

Credit-loss provisions were $1.81 billion, down from $3.36 billion a year earlier and $1.17 billion in the prior quarter. Many banks have seen earnings boosted by a reduction in loan-loss reserves as credit conditions improve.

J.P. Morgan reported a profit of $5.43 billion, or $1.27 a share, up from $4.8 billion, or $1.09 a share, a year earlier. The latest period included a net seven cent charge, due in part to costs of foreclosure-related matters. The prior-year period included a net benefit of 12 cents related to a reduction in loan-loss reserves.

Revenue on a managed basis, which excludes the impact of credit-card securitizations and is on a tax-equivalent basis, rose 7% to $27.41 billion.

Analysts polled by Thomson Reuters most recently forecast a per-share profit of $1.21 on $25.13 billion in revenue.

The bank resolved a number of legal problems during the quarter. Earlier this month, it agreed to a $228 million settlement with the U.S. Securities and Exchange Commission over claims it rigged municipal bond transactions. In June, it said it would pay $153.6 million to settle charges it misled investors by packaging complex securities tied to the housing market before its downturn.

Here’s a PDF from the company with all the details.

I added JPM to the Buy List this year because I felt the stock was underpriced. The shares had a great start to the year and broke $47 by early April. Ever since then, the stock has trended lower and it broke below $40 recently.

Three months ago, JPM reported earnings of $1.28 which was 12 cents above the Street’s consensus. With today’s earnings report, the company has delivered again. Going by yesterday’s close, JPM is going for an absurd 8.1 times earnings.

The bank got approval to raise its quarterly dividend from five cents per share to 25 cents per share. I think it’s pretty obvious the dividend can go a lot higher — probably even to 50 cents per share. Even by the current dividend, JPM yields 2.52%.

The shares are up over 2% in the pre-market.

Morning News: July 14, 2011
Posted by Eddy Elfenbein on July 14th, 2011 at 7:58 am

Italy Calls for Austerity Vote

Italy Pays High Yields; Sells Bonds At Range Top

Asian Stocks Decline as Concern Over U.S. Debt Rating Threatens Exporters

EU: Hard To Understand Fitch’s Greek Credit Downgrade Decision

Gold Hits Record Highs on U.S. Easing Talk, Euro Zone Debt Woes

Moody’s Downgrade Warning Pressures U.S. on Debt Deal

Bernanke Says Fed ‘Prepared to Respond’ If Stimulus Needed

China Struggles to Tame Pork Prices

Bank Delays Push 1 Million U.S. Foreclosures Into 2012 in ‘Ominous Shadow’

JPMorgan Chase Quarterly Profit Rises 13% to $5.4 Billion

ConocoPhillips Plans to Split in Two

Amazon Takes on California

Borders Faces Liquidation After Takeover Bid’s Rejection

Todd Sullivan: Are LinkedIn’s Users Becoming Less Engaged?? The Data Says Yes…

Stone Street: A Chinese Reverse Merger “Fraud” CEO Speaks

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Surprising Results for Gilead’s AIDS Drugs
Posted by Eddy Elfenbein on July 13th, 2011 at 2:46 pm

This sounds pretty impressive:

Two studies released Wednesday show AIDS drugs can sharply reduce the risk of heterosexuals acquiring HIV, adding to a growing number of new methods to slow the spread of the virus world-wide.

Many researchers now believe science has developed sufficient tools to contain the pandemic, which is thought to infect about 2.6 million people annually. But tight budgets may limit deployment of these methods.

The results are the latest to demonstrate that existing medications are an important tool for prevention as well as treatment of HIV/AIDS, and show their effectiveness in the population hit hardest by HIV globally—heterosexuals in Africa. The findings also are likely to help alleviate concerns that emerged in April after another study was unable to determine whether the drugs protected women at high risk.

Both of the new studies, conducted in different African countries, found that giving antiretroviral drugs to heterosexuals reduced the risk of HIV infection by at least 62%—”which is huge,” said Jared Baeten, co-chairman of one of the studies, led by researchers at the University of Washington International Clinical Research Center.

That study examined 4,758 heterosexual couples in Kenya and Uganda in which one partner had HIV and the other didn’t. Researchers found that those who received a daily dose of a drug called tenofovir had an average of 62% fewer infections than those taking a placebo, while those who received a drug combining tenofovir and another medication, emtricitabine, had an average of 73% fewer infections. The drugs, marketed by Gilead Sciences Inc. under the brand names Viread and Truvada, respectively, are thought to work by preventing the virus from replicating and establishing an infection.

The study, funded by the Bill and Melinda Gates Foundation, wasn’t supposed to end until late 2012. But after reviewing partial results, an independent data and safety monitoring board decided Sunday to halt the trial early because the findings were so strong, Dr. Baeten said.

The Onion: Banks Introduce 75-Cent Surcharge For Using Word ‘Bank’
Posted by Eddy Elfenbein on July 13th, 2011 at 2:35 pm