Tuesday, October 28, 2008

Wall Street Breakfast: Must-Know News

Wall Street Breakfast: Must-Know News

by SA Editor Eli Hoffmann

  • Bigger profits for BP. BP (BP) reported Q3 results this morning, including a better-than-expected 83% rise in quarterly net profit thanks to higher oil prices. Net profit for Q3 totalled $8.05B, as compared to $4.41B a year earlier, and beat estimates of $6.78B. Revenue rose to $104.8B from $72.8B. The company's underlying rise in production, adjusting for fluctuations in oil price, was 5% on the year. Shares +7.0% pre-market.
  • Financial crisis saps SAP. This morning, SAP AG (SAP) released Q3 earnings far short of analyst expectations (see below). The world's largest maker of business-management software also withdrew its 2008 sales forecast and lowered its profit-margin target in light of the global economic downturn. The adjusted operating margin will be around 28% vs. earlier forecasts of 28.5%-29%. SAP will also cut R&D spending, freeze hiring and curb travel expenses. Shares -7.7% in German trading.
  • 5,000 layoffs at Whirlpool. Whirlpool (WHR), the world's largest appliance maker, will eliminate 5,000 jobs by the end of 2009 to cut costs amid reduced demand and a global credit crisis. "We are in the midst of a rapidly changing and very challenging economic environment. We have seen a sharp drop in demand in North America and Europe during the third quarter, and we do not expect demand conditions to improve in the near term," CEO Jeff Fettig said. "The global credit crisis has had a profound negative impact on what was already a weakening and very fragile global economy. Declining home values, rising unemployment and very low consumer confidence levels will likely prolong a negative demand environment at least through the middle of 2009." Along with factory closings, the moves will produce $275M/year in savings.
  • Banks balk on Huntsman sale. Chemical producer Huntsman (HUN) has been informed by Hexion that its proposed $5.6B, $28/share buyout will not close today because the banks that were to fund the deal - Deutsche Bank (DB) and Credit Suisse (CS) - no longer plan to do so. Hexion is trying to "resolve the banks' concerns and is still seeking to close the merger," Huntsman said. Hexion previously tried to break off the deal, but was ordered by a Delaware court to proceed.
  • Government may broker GM/Chrysler deal. There is a push within the government to release some of the $25B in auto-industry-earmarked Treasury funds, sources say, a move that could send ongoing merger talks between GM (GM) and Chrysler into high gear. A possible $5B loan, toward the $10B the pair would need to deal with layoffs and plant closures, would come from a $25B pool of low-interest loans being administered by the Energy Department. The money was originally intended to speed the availability of fuel-saving technologies. On Monday Moody's downgraded the pair, saying "GM's liquidity profile will continue to erode in 2009" even with the government program.
  • GE borrows Fed funds. General Electric (GE) tapped the Federal Reserve's new commercial-paper facility, borrowing under $5B yesterday when the facility debuted. With $88B in short-term loans, GE is the largest borrower in the $1.5T commercial-paper market. Though the company has managed to meet its funding needs, market turmoil has forced up GE's borrowing costs, providing GE with a vested interest in making sure the Fed's new facility is effective. GE and its financial services arm are eligible to borrow up to $96B from the new Fed program.
  • Volkswagen takes pole position. Volkswagen (VLKAY.PK) surpassed ExxonMobil (XOM) to become the world's biggest company by market cap after Porsche announced plans to raise its stake in the German carmaker to 75% from 42.6%, triggering a short squeeze. Shares rose as much as 93% yesterday, and were up another 55% in Frankfurt this morning, bringing its market value to €296B ($370) vs. Exxon's $343B. As of Oct. 23, almost 13% of Volkswagen's shares were on loan, mostly to short sellers who were forced to swallow massive losses and exit their positions. "Volkswagen has been one of the greatest shorts of hedge funds, and it's been an absolute, absolute disaster," GLG Partner's Emmanuel Roman said. Elsewhere around the globe, carmakers are struggling with plunging sales and a lack of cash.
  • Markets rally, Treasurys drop. U.S. Treasurys fell in overnight trading (see below) as global markets rallied, and as it becomes clear the government needs to borrow enormous amounts of money to help pay for its costly financial rescue framework. "Increasing supply will help push up yields," Credit Suisse fixed income strategist Rasmus Rousing said. "We're also seeing a slight reversal of stock-market declines of the last few days (see below) and that's helping to take some buying interest out of Treasurys." Today's record $34B note auction could be a tough sell.
  • Rescue plan hits a snag. The $700B financial rescue plan is being delayed due to difficulties in hiring asset managers to oversee the program. On Oct. 3 the Treasury said it would quickly hire asset managers so that the program could be up and running within a few weeks. Sources say hurdles include issues over the fees the government will pay asset managers and a lack of manpower at Treasury. They also say Allianz's (AZ) Pimco will likely be named as an asset manager. Fees could be about 0.15% to 0.20% of assets under management, compared to a more typical 0.35%. The longer the delay, the greater the risk investors will lose confidence in the plan's efficacy.
  • Barclays in talks with Russia banks for capital boost. Barclays (BCS) is seeking investments from two state-backed Russian banks - OAO VTB and OAO Sberbank - in an effort to boost its capital. Barclays plans to raise £6.5B ($10.34B) from private sources to meet government capital requirements, rather than accepting government largesse which comes with limitations such as a limit of dividends.
  • Google strikes back against Viacom. Google (GOOG) fired back against Viacom (VIA) in its $1B lawsuit by demanding the internal records of copyright police service BayTSP Inc. Google alleges the documents will refute Viacom's assertion it's uncapable of monitoring improper use of its content; will demonstrate Viacom routinely uploaded its own content to Google's YouTube; and that BayTSP "remained silent" about copyright infringement for a months-long period in late 2006, then deluged it with more than 100,000 requests to take down infringing material in a single day as a prelude to Viacom's lawsuit. Viacom is suing Google for more than $1B; Google argues it isn't legally liable for copyrighted material uploaded to YouTube.

Earnings: Tuesday Before Open

  • Amedisys (AMED): Q3 EPS of $0.89 beats by $0.07. Revenue of $322M (+77.7%) vs. $312M. [PR]
  • BP (BP): Q3 net profit of $8.05B vs. $6.78B. Revenue of $104.8B vs. $72.8B last year.
  • Check Point Software Technologies (CHKP): Q3 EPS of $0.44 beats by $0.01. Revenue of $200M (+8.5%) in-line. [PR]
  • Health Management Associates (HMA): Q3 EPS of $0.07 misses by $0.01. Revenue of $1.1B (+3.4%) in-line. [PR]
  • SAP AG (SAP): Q3 EPS of $0.41 misses by $0.16. Revenue of $2.8B (+15.8%) vs. $4.0B. [PR]
  • Smith International (SII): Q3 EPS of $1.01 beats by $0.04. Revenue of $2.85B (+26.9%) vs. $2.71B. [PR]
  • Whirlpool (WHR): Q3 EPS of $2.15 beats by $0.46. Revenue of $4.90B (+1.3%) vs. $5.0B. [PR]

Earnings: Monday After Close

  • Atheros Communications (ATHR): Q3 EPS of $0.37 beats by $0.02. Revenue of $138M in-line. Shares +3.8%. (PR)
  • Buffalo Wild Wings (BWLD): Q3 EPS of $0.25 misses by $0.06. Revenue of $106M vs. $104M. Shares -13.9%. (PR)
  • Choice Hotels International (CHH): Q3 EPS of $0.57 beats by $0.01. Revenue of $179M vs. $191M. Shares -2.9%. (PR)
  • Parexel International (PRXL): FQ1 EPS of $0.23 beats by $0.01. Revenue of $320M vs. $274M. Sees FQ2 EPS of $0.18-0.20 vs. $0.27. Shares -13.1%. (PR)
  • Rent-A-Center (RCII): Q3 EPS of $0.44 misses by $0.48. Revenue of $709M vs. $700M. Sees Q4 revenue of $698-713M vs. $721M. Shares -9.6%. (PR)
  • Texas Roadhouse (TXRH): Q3 EPS of $0.12 misses by $0.01. Revenue of $218M in-line. Shares -4.6%. (PR)
  • Universal Health Services (UHS): Q3 EPS of $0.73 misses by $0.04. Revenue of $1.24B in-line. (PR)
  • Wausau Paper (WPP): Q3 EPS of $0.08 beats by $0.02. Revenue of $312M in-line. (PR)
  • WMS Industries (WMS): FQ1 EPS of $0.27 beats by $0.02. Revenue of $151M vs. $148M. (PR)

Today's Markets

  • Asia markets posted a strong comeback, led by Hong Kong +14.35% to 12,596. Nikkei +6.41% to 7622. Shanghai +2.81% to 1772. BSE Sensex closed.
  • In Europe at midday, gains across the board. London +2.4%. Paris +2.6%. Frankfurt +5.8% led by Volkswagen.
  • U.S. futures are back at yesterday's pre-late-day-selloff levels. Dow +4.3% to 8353. S&P +4.5%. Nasdaq +4%.
  • Crude +11.9% to $64.42. Gold +0.2% to $743.
  • 30-year bond -0.77%. 10-year not -0.61%. 5-year -0.36%. 2-year -0.08%.

Tuesday's Economic Calendar

Seeking Alpha editor Rachael Granby contributed to this post.

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