Friday, October 17, 2008

Wall Street Breakfast: Must-Know News

Wall Street Breakfast: Must-Know News

by SA Editor Rachael Granby

  • Pilgrim's Pride near end of line. Burdened by a heavy debt load, sources tell the Wall Street Journal Pilgrim's Pride (PPC) may be forced to seek bankruptcy protection which could be used to help expedite a sale of the company. A company spokesman said Friday PPC does not expect to file for protection, and is focused on developing a plan to meet the financial and operational challenges currently facing Pilgrim's Pride and the broader industry. "At the same time, we are continuing to explore opportunities to refinance and recapitalize our business." Shares are down to $3.23 from $33 a year ago as the firm struggles with higher grain prices, weak poultry demand, and frozen credit markets.
  • OPEC responds to oil's spill. OPEC called an emergency meeting for next week as oil prices dipped below $70/barrel, a 14-month low, on signs of continued reduced demand from the battered U.S. economy. Prices have fallen nearly $40 in three weeks and were trading at a record $145/barrel as recently as July. OPEC members, who provide 40% of the world's oil, will weigh a production cut at the Oct. 24 meeting to buoy prices. Deutsche Bank estimates both Iran and Venezuela need oil prices around $95/barrel to balance their national budgets, and OPEC President Chakib Khelil said yesterday the 'ideal' price for crude oil was $70-$90/barrel. Qatari Oil Minister Abdullah al-Attiyah expects a cut would likely be 1M barrels/day.
  • Recession fears loom large. The U.S. economy is showing similarities to patterns associated with the painful recessions of the mid-1970s and early 1980s, including fewer factory orders, mass layoffs, drastic cuts in consumer demand and other negative indicators. Economists believe the economy has contracted for the third consecutive quarter, something that hasn't happened in 33 years, and could reach a bottom at -1.3% growth in Q4. The same survey of economists predicts that growth will not resume until the second half of 2009 and even then a recovery is likely to be mild at best.
  • Fed loans spike up. Banks continued to set new milestones in the amount of money borrowed from the Fed, with borrowing at a record $437.53B/day on average last week vs. $420.16B/day the week before. Some analysts are growing concerned that this over-reliance on the Fed, meant to be a lender of last resort, may become institutionalized long term and difficult to change. According to one strategist, "we have effectively allowed the central banks to disintermediate the banking system... Unwinding it will be very difficult."
  • AIG sees slow sales. AIG (AIG) is under pressure to quickly repay the government's high-interest loan, but asset sales are taking longer than company executives hoped as buyers wait for bargains and credit for deals is difficult to come by. To expedite the process, AIG has hired Bank of America (BAC) and investment bank Keefe, Bruyette & Woods (KBW) to help with the sale of some U.S. units. This is in addition to the role Blackstone Group (BX) and JPMorgan Chase (JPM) will play as global coordinators for AIG's divestiture program. Separately, AIG agreed to allow its spending habits to be reviewed after NY AG Andrew Cuomo criticized the company for large bonus payments and a planned $8M worth of conferences and events. Cuomo said he wants to determine whether several bonus and severance payments violated New York law and should be returned.
  • Speculation abounds on MSFT/YHOO deal. Rumors are swirling about Microsoft's (MSFT) stance on acquiring Yahoo (YHOO). Microsoft issued a statement yesterday that its "position hasn’t changed. Microsoft has no interest in acquiring Yahoo!; there are no discussions between the companies.” Yahoo shares jumped over 10% anyway after Microsoft CEO Steve Ballmer confirmed discussions were not underway but admitted a tie-up may still make sense. Analyst Colin Gillis thinks Ballmer is "trying to set the stage for a lower valuation" for Yahoo to keep the door open to a future acquisition, adding, "there's been a school of thought that's long said that a Microsoft-Yahoo deal would happen over time just because of the obvious synergies."
  • Cerberus shops Chrysler. Private equity firm Cerberus is in preliminary talks with Renault and General Motors (GM) to sell all or part of Chrysler's operations in a deal that could break up the No. 3 automaker, say sources connected to the discussions. Cerberus, Chrysler's majority owner, is considering a transaction in which GM could buy some of Chrysler's assets instead of purchasing the smaller company altogether. Another scenario involves GM trading its 49% GMAC stake to Cerberus in exchange for Chrysler's auto operations. Renault is said to be considering options ranging from an alliance to an acquisition of Jeep, generally considered to be Chrysler's most valuable brand. Renault denies talks between the two companies.
  • Fed pushes talks on CDS market. The Federal Reserve Bank of New York has a third meeting planned for today with the credit-default swap industry as it pushes to create a central clearinghouse for the $55T market. Four groups have expressed interest in handling clearing operations, including NYSE Euronext (NYX) and a partnership between CME Group (CME) and Citadel Investment Group. The Fed has said it isn't looking to endorse a specific group and is just trying to keep discussions going until the industry can find a workable solution.
  • Google gets frugal. Internet bellwether Google (GOOG) surprised pessimists by reporting Q3 EPS that well exceeded analyst consensus on a 31% increase in revenue (see below). Google's U.S. paid clicks grew 18% in Q3, down from 19% growth in Q2 and 20% in Q1 - a sharp deceleration from 30% in Q4 and 45% a year ago. But many in the industry believe its slower click growth is a result of steps Google has taken to weed out less-lucrative advertisers. Perhaps more important than its robust yet slowing revenue growth are signs Google is quickly reducing its expense growth, which had been outpacing revenue. Capital expenditures were at the lowest level since 2006. "Against a backdrop of material macro concerns, these are impressive results," Citigroup analysts said after the report. "Though not immune, Google is clearly more resilient to macro headwinds than other companies." Shares are up 8.5% pre-market.
  • Efficiency drives IBM earnings. IBM (IBM) said late Thursday Q3 profit jumped nearly 20% (see below), surpassing analyst estimates despite having released partial results last week to calm jittery investors. IBM continues to improve its profit margins: Gross profit margin rose to 43.3% of sales from 41.3%, led by cost-cutting and shunning less-profitable deals. IBM reiterated its full-year EPS target: "We'd have to see a dramatic slowdown in our emerging countries," CFO Mark Loughridge told analysts on the earnings conference call with analysts. "Even in a weaker demand environment, we have put exceptional focus on cost, expense and margin management." Morningstar called the results impressive: "Despite the slowing demand growth, the company continues to deliver terrific operating profit growth on the basis of improved profitability across virtually all of its businesses."
  • CPI remains flat. The Consumer Price Index stayed unchanged in September, vs. expectations of a 0.1% gain. Consumer prices are 4.9% higher than a year ago, down from last month's 5.4%. Core CPI was up 0.1%, and is up 2.5% from last year. CPI may well be flat-to-down for several more months. "The inflation outlook has improved dramatically. That of course, provides little help to the liquidity crisis, but it does provide some positive economic news."
  • Jobless numbers beat estimates. Initial Jobless Claims fell by 16,000 to 461,000 - better than consensus of 470,000. The 4-week moving average was 483,250, up by 750. Ohio was worst off, due to automobile industry layoffs. The labor market remains soft as evidenced by the four-week moving average ticking up and continuing claims increasing to 3.71M from 3.67M. Economists expect a tenth consecutive month of nonfarm payroll declines.
  • Treasury International Capital. Net foreign purchases of long-term securities for August were $14B, short of the $30B consensus. Foreign holdings of dollar-denominated short-term U.S. securities, including Treasurys and other custody liabilities increased $7.6B.
  • Industrial production declines. September's industrial production fell 2.8%, far worse than the expected 0.5% drop and the weakest showing since 1974. Capacity utilization was 76.4% vs. 78.4%, reflecting disruptions caused by Hurricanes Gustav and Ike.
  • Philly Fed survey. The Philadelphia Fed said local manufacturing conditions deteriorated significantly in October. A decrease in price pressures is the only bright spot in a report that sees the headline index fall 3.8 - its biggest one-month drop ever. Indicators for future business conditions also fell markedly.
  • Nat-gas and crude inventories. Natural gas inventory grew by 79 billion cubic feet to 3,277 bcf. Analysts had expected a build of 80 bcf. Crude inventories grew by 5.61M barrels, far more than the consensus for a build of 2.6M. Gasoline inventories were up 6.97M vs. 3M. Distillate inventories fell by 0.45M vs. +0.5M consensus.
  • NAHB Housing index. Reflecting profound uncertainties tied to the financial market shocks of recent weeks, homebuilder confidence receded to a new record low. The NAHB's index fell to 14, vs. a consensus forecast of 17. Index numbers less than 50 indicate poor conditions.

Earnings: Friday Before Open

  • Honeywell (HON): Q3 EPS of $0.97 beats by $0.02. Revenue of $9.28B (+6.2%) vs. $9.59B. "We believe that demand for Honeywell's differentiated technologies and solutions, combined with our great positions in good industries, will help the company outperform despite tougher global economic conditions," it says. (PR)
  • Schlumberger (SLB): Q3 EPS of $1.29 beats by $0.04. Revenue of $7.26B (+22.5%) vs. $7.02B. "The recent rapid deterioration in credit markets will undoubtedly have an effect on our activity," it says. (PR)
  • Sony Ericsson (SNE) (ERIC) posts a Q3 net loss of €25M vs. a €267M profit a year ago on weaker sales and slowing consumer demand, but cost-cutting helps it beat analyst expectations. Net sales fell 9.7% to €2.81B. Gross margin fell to 22% from 31%. It shipped 25.7M phones, up 5.3% from Q2. SNE +5.2% in Japan. ERIC +3.3% in Stockholm. (DJ)

Earnings: Thursday After Close

  • Advanced Micro Devices (AMD): Q3 EPS of $0.07 beats by $0.47. Revenue of $1.78B vs. $1.48B. Gross margin was 51% vs. 37% last quarter. Shares +13.1% after hours.(PR)
  • Capital One (COF): Q3 EPS of $1.00 misses by $0.01. Revenue of $4.21B (-2.5%) in-line. Delinquency rate increases by 0.35% to 3.99%. Says capital ratios are 'comfortably above' targets. Shares -0.8% after hours. (PR)
  • Evergreen Solar (ESLR): Q3 EPS of -$0.18 misses by $0.08. Revenue of $22.1M (+21.9%) vs. $25M. Shares -9.0% pre-market. (PR)
  • Gilead Sciences (GILD): Q3 EPS of $0.52 beats by $0.03. Revenue of $1.37B (+29.5%) vs. $1.32B. Will accelerate $750M of its $3B buyback program. Shares +3.3% after hours. (PR)
  • Google (GOOG): Q3 EPS of $4.92 beats by $0.16. Revenue of $4.04B (+31%) in-line. Paid clicks were up 18% Y/Y and 4% sequentially. Shares +10.5% after hours. (PR)
  • IBM (IBM): Q3 EPS of $2.05 beats by $0.02. Revenue of $25.3B (+5%) vs. $25.88B. Revenue from growth markets rose 13%. (PR)
  • Informatica (INFA): Q3 EPS of $0.19 beats by $0.02. Revenue of $114M (+18.5%) vs. $112M. (PR)
  • Leggett & Platt (LEG): Q3 EPS of $0.34 misses by $0.01. Revenue of $1.13B (+3.7%) in-line. "The markets we serve weakened appreciably toward the quarter's end, as consumers reign in spending during this unprecedented period of tight credit and high stock market volatility." Shares -11.2% after hours. (PR)
  • PMC-Sierra (PMCS): Q3 EPS of $0.13 beats by $0.01. Revenue of $139M (+18.6%) in-line. Shares +0.9% after hours. (PR)
  • Stryker (SYK): Q3 EPS of $0.66 misses by $0.01. Revenue of $1.65B (+13.8%) in-line. (PR)

Today's Markets

  • Asia markets closed mixed. Nikkei +2.8% to 8,694. Hang Seng -4.4% to 14,554. Shanghai +1.1% to 1,931. BSE -5.7% to 9,975.
  • In Europe: London +0.7%. Paris +1.7%. Frankfurt +1.1%.
  • U.S. futures: Dow -1.5%. S&P -1.4%. Nasdaq -1.9%. Crude +1.6% to $70.96. Gold -1.5% to $792.10.

Friday's Economic Calendar

Seeking Alpha editor Eli Hoffmann contributed to this post.

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