Daily Archives: March 21, 2007

Cramer Almost Changed His Wal-Mart Stance

Cramer on CNBC’s MAD MONEY tonight, actually came out and reviewed Wal-Mart (WMT) as one of his segment stocks.  He is taking a contrarian view on it to see the other side after having a challenge on it from his UT Austin presentation yesterday. He still has Lee Scott on his Wall of Shame (we think Scott still needs to be fired).  Cramer thinks that despite all the negative press and negative coverage, the fact that 16 of 28 analysts follow the stock with a BUY or a BUY-bias and that is too bullish for him.  He thinks they will scale back store openings to boost the dividend and that is good, but he doesn’t like the company stores even if they are trying to make them better.  He says he is taking this rating UP now (sort of) from a Triple Sell to a "DON’T BUY."  There was some trading activity as it sounded like Cramer was going to change his stance on the company, but it is back to unchanged after closing up almost 1% on the day.

We actually had something here on this today as far as a strategy for the company.  Wal-Mart needs to lower its headcount.  We actually gave a strategy for it where it could avoid announcing lay-offs and thereby avoid the massively negative PR they would get for it.  That might not entirely save Lee Scott, but it might help shareholders that have been long and wrong for far too long.

Jon C. Ogg
March 21, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.

Cramer’s Play on Diabetes

On tonight’s MAD MONEY on CNBC, Jim Cramer said the action of the Defensive Stocks makes you need to watch the drug stocks in case the Fed doesn’t actually cut rates like they should.  Cramer has some picks in the sector from overseas, because these could be immune from the same pressures that domestics could be under in a democratic environment. 

Novo Nordisk (NVO-NYSE) out of Denmark is the best play he has in the foreign drug stocks because they have 50% of the global diabetes market in its insulin treatments.  It outsells Pfizer (PFE) and Sanofi Aventus (SNY) in these analog insulins.  Its patents are good through 2011, longer than most.  It already sells its old fashion human insulin play at low prices so it is insulated against pressure there from generics.  It also fell after failing a Phase III trial in a non-diabetes treatment drug for an expanded use that wasn’t really important to Cramer.  He likes it purely from the diabetic perspective. 

If this stock is familiar sounding from us, it is because this one of our "15 Second Line Defensive Stocks" we ran as a stock to hide out in when the market was crummy.  Do you think diabetics will stop taking insulin if the economy softens or if they are losing too much money in their tech stocks? We don’t think so either.

Jon C. Ogg
March 21, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.

Cramer’s Unusual Specialty Metals Play

On tonight’s MAD MONEY on CNBC, Jim Cramer said the bulls got what they wanted as the Federal Reserve removing the "firming" bias from their statement today. The market is back according to Cramer.  The defensive stocks bottoms, then the financials, and then the commodities and cyclical stocks.  Cramer also noted that Shanghai is back up above its pre-drop levels.  Cramer said the short national nightmare is over.  But since things are not that great he thinks the Fed will go toward a rate cut.

Cramer now thinks that the big cyclicals like Boeing (BA), Caterpillar (CAT), United Tech (UTX), Deere (DE), Ingersoll Rand (IR), & Freeport McMoRan (FCX) have bottomed.  A specific company, Haynes International (HAYN-NASDAQ) is one you will hear a lot about from Cramer.  It sold 1 million shares for itself to bolster the balance sheet.  It is in performance metals and in the same group as Allegheny (ATI).  He think the demand for its products is big and now the company got itself off of the pink sheets and it now has enough stock to make it an in-demand stock and liquid.  HAYN is now up 2.4% to $69.50 per share in after-hours and Cramer thinks it is going higher after shoring up its balance sheet.

Jon C. Ogg
March 21, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.

Motorola Tries to Offset Falling Margins

Motorola (MOT-NYSE) shares were halted for trading after the close.  Its stock had closed down 0.4% at $18.74 on 36 million shares (10% above average volume) and the speculation was rampant that it was the defacto buyer of Palm (PALM).

Well, here is why Motorola was halted: The company is revising guidance and names GREG BROWN as president & COO; Thomas Meredith has been appointed as Acting CFO.  The company is accelerating share buybacks of $2.0 Billion and increased the total share buyback plan to $7.5 Billion.   

Ed Zander, CEO & Chairman (consolidated quotes): "Performance in our Mobile Devices business continues to be unacceptable, and we are committed to restoring its profitability.  After a further review following the leadership change in our Mobile Devices business, we now recognize that returning the business to acceptable performance will take more time and greater effort.  The steps we are announcing today will enable Motorola to perform better for our shareholders, customers, partners and employees. I am confident Motorola has the right assets, brand and intellectual property, as well as a strong heritage of innovation and a strong balance sheet — all of which we will draw upon in the coming months."

REVISED GUIDANCE: Motorola now expects sales for the first quarter of 2007 to be in the range of $9.2 to $9.3 billion (compared to estimates of $10.4 to $10.5 Billion). First quarter GAAP results are expected to be a loss in the range of $0.07 to $0.09 per share, including charges of approximately $0.09 from the items highlighted below.  The estimated loss on a GAAP basis includes acquisition-related charges and in-process R&D expenses associated with the acquisitions of Symbol Technologies, Good Technology and Netopia, totaling approximately $0.06 per share. Also included are business reorganization charges of approximately $0.03 per share related to the previously announced workforce reduction of approximately 3,500. Additional charges for this reduction in force will be recorded in subsequent quarters.  The revised guidance is attributable to lower than anticipated sales and operating earnings in the Mobile Devices business due to lower overall unit volumes, a difficult pricing environment, particularly for low-tier products and a limited 3G product portfolio. The Mobile Devices business expects to report an operating loss for the first quarter of 2007.  The lower volume is due largely to a shift in the Mobile Devices business to focus on long-term gross margin improvement rather than focusing primarily on market share growth. In emerging markets, particularly India, Africa and South Asia, competitors lowered prices at a faster rate than anticipated. Given the renewed focus on gross margin improvement, the company chose not to match prices in all instances. The company noted that the business continues to show strength in the Americas and North Asia.

FULL YEAR LOWERED AS WELL: For the full year 2007, Motorola currently expects overall sales, profitability and operating cash flow to be substantially below prior guidance. The company expects to be profitable for the full year and also to generate positive operating cash flow. The company expects the Mobile Devices business to incur an operating loss in the first quarter, and to experience a gradual recovery in the second half and be profitable for the full year.  The company reaffirmed its previously stated guidance for the Networks & Enterprise and Connected Home Solutions businesses. For the Networks & Enterprise business, Motorola expects mid-teen annual revenue growth and double-digit operating margins. For the Connected Home Solutions business, Motorola expects sales growth to exceed market growth and operating earnings to increase as compared to full year 2006.  The company will continue to make necessary adjustments to its cost structure in line with its revised revenue expectations without compromising key future growth areas such as WiMAX, enterprise mobility and IPTV.

CONJECTURE: It looks like Carl Icahn is getting his way, yet again.  But at what price?  This signal’s "severe margin compressions at Motorola" at this point.  Palm (PALM) shares are now down 2.3% at $18.99 after closing up 3.6% at $19.45 on the day.  Will they still try to acquire Palm (PALM)?  Maybe, but they will have to make a cash offer now if they want to be listened to.  So far there has been very little spill-over into Nokia (NOK) and Ericsson (ERIC).  Broadcom (BRCM) is down 0.8% at $33.14 after-hours and that is after closing down 0.5% at $33.40 on the day.  Marvell (MRVL) is actually up 0.3% at $18.13 in after-hours and that is after a 0.8% rise to $18.07 in regular trading.  Qualcomm (QCOM) shares are down 0.5% at $43.48 in after-hours trading after closing up 1.6% at $43.73 on the day.

Jon C. Ogg
March 21, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.

The 52-Week Low Club

US Auto Parts (PRTS) Poor Q1 forecast for online auto parts company. Down to $5.46. The 52-week high is $12.61.

FSI Intl (FSII) Microelectronics fabrication firm releases negative news on Q1. Down to $4.07. The 52-week high was $7.18.

NetBank (NTBK) Investors unhappy with monthly operating results. Stock down to $2.00 from 52-week high of $7.57.

Diversa (DVSA) Specialty enzyme company is selling $75 million in convertibles. Stock drops to $6.09. THe 52-week high was $12.54.

Emageon Inc. (EMAG) makes information technology used to store and analyze digital medical images. Q4 results seem good but stock has continued down. Now $9.75 against 12-month high of $18.03.

Hancock Fabrics (HFK) Store chain files for Chapter 11. Drops to $.84. The 52-week high was $4.36.

Proquest (PQE) Educational publisher still has not filed its 2005 annual report. NYSE suspends shares. Down to $7.90 from 52-week high of $22.50.

Spectrum Brands (SPC) Battery, lawn and garden care company is refinancing debt. Share down to $5.72 from 52-week high of $22.23.

McClatchy (MNI) The newspaper chain is back again. Most newspaper companies report poor monthly numbers. Stock down to $31.90 from 52-week high of $50.64.

Douglas A. McIntyre

Companies That Need A Headcount Reduction: Wal-Mart

Wal-Mart (WMT-NYSE) may find itself with little choice, although there are ways it can accomplish the same end-result without the negative publicity that would come from a headline of “Layoffs!”.  In fact, it can accomplish this in a way that may reward shareholders and have almost no negative social backlash to the company itself.

24/7 is taking an ongoing look at some companies in a wide array of businesses that may be forced to reduce headcount or close stores in order to maintain existing margin levels and earnings growth, especially in an environment of declining GDP growth as has been forecast for 2007 and beyond. 

The mere mention of “Wal-Mart” and “employees” in the same sentence conjures up strong emotions in many people, but for a moment let’s set aside the debate on how those employees are compensated and focus on their contribution to top-line (and therefore the bottom-line) performance.   That’s what it really comes down to for WMT shareholders.

Wal-Mart may be at an inflection point where future revenue per employee figures could decline and force the company to reduce headcount, close underperforming stores, or scale back on new store openings.   In order to have some workable figures on Wal-Mart, we have to do some massaging of the raw revenue data to account for Sam’s Club and the international operations, which skew the results for domestic Wal-Mart stores: Sam’s Club operates in a much different model, having far fewer employees per location and revenue per employee at a level nearly three-times higher than at Wal-Mart stores.  And as for the international units, the store density figures don’t come close to what we find in the U.S., where the company has over 3,300 Wal-Mart stores and employs about 1.3 million people as of January 31, 2007.  At what point does cannibalizing occur at a level that can’t be ignored?  Many living in the U.S. can probably drive to three or four different Wal-Mart stores in 30 to 45 minutes or so, and the company is planning on opening up to 330 new stores domestically.

If we just looked at company-wide revenues that included Sam’s Club and international stores, Wal-Mart would sport a revenue/employee figure of about $190,000.  But if we isolate the domestic Wal-Mart store revenues, we arrive at a revenue figure for 2007 of roughly $226 billion, and total revenue per stated employee of nearly $175,000.  This compares to $176,000 in revenue per employee at Target, but the difference that overall volume is much more important to Wal-Mart because it runs on operating margins that are lower than Target.  In order to achieve the same level of profitability metrics as Target, Wal-Mart’s revenue per employee would need to be 40% higher if everything remained static.  Online sales figures may skew these numbers slightly, but they are generally lumped in at other discount and big-box retailers as well.

Wal-Mart is not getting it done with their comparable same-store-sales anymore; same-store sales came in at less than 1% in February; forecasts are not that much higher for this month; and the company is slashing prices more and more in the holidays to bump up its raw sales numbers on volume.  As employee costs rise either through minimum-wage hikes or a public-relations benefits increase (it could actually happen), the revenue per employee figures could fall off the proverbial cliff regardless of how many cheap plasma TV’s it sells.

Investors who have been impatiently stuck over the last 5-years should not be too surprised if the company announces a reduction in store growth in the upcoming quarters, as this would probably be a much easier-to-digest first step than an announcement of a headcount reduction.  Wal-Mart also has a saving grace that could keep it from ever having to make any announcement about any headcount reductions, even if it is a somewhat of a dubious honor:  company-wide employee turnover out of all units is in the vicinity of 600,000 annually.  The company could merely just replace some of these workers at a much slower rate and that would give the company the opportunity to actually reduce headcount without even announcing any layoffs.  It can also attempt more employee transfers to newer stores if the geography allows. 

The company just boosted its dividend to investors on March 8 and shares closed down $0.05 that day at $47.65 because of weak same-store-sales.  As of 3:30 PM EST today shares were $47.70 and that is after the Fed-related rally, while the DJIA is up close to 2%.  The company gave up its bid for an industrial loan charter over the Wal-Mart banking criticism, Lee Scott has been criticized over his excessive bonus for “meeting sales targets,” and we still think the company needs to toss him out in favor of someone that can appear as “more likable.”  Lee Scott will get even more negative PR if he announces layoffs, but here is a method he can use that might actually work better for shareholders.  This should also come before their recent expansion in China.  If the company is already doing this, they need to do it better and in a manner that shareholders will actually know it.

Written by Ryan Barnes,
edited by Jon C. Ogg
March 21, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.

Cramer Sticks With a May Rate Cut Prediction

On today’s STOP TRADING segment on CNBC, Jim Cramer did note that this was a loosening of the bias out of the Fed today even though there was no rate cut.  At the time of the statement it seemed harsh, but the fed doesn’t want to cause a panic.  He still thinks you’ll see a MAY cut and this is a dovish statement.  If anyone is reading this non-dovishly they are not looking at the data, according to Cramer.  He said this is why banks are rallying.  Bill Gross and Rick Santelli both came back with the same analogy of rates coming down and the banks rallying. 

After today’s rally, the DJIA is now up 136 points at 12,424.29.  Cramer gave no individual picks other than in broader sectors.

Jon C. Ogg
March 21, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.

Conflicts of Interest Statement for FDA Advisory Committees

Did you ever think the FDA or other industry-government regulatory and advisory boards were free from a conflict of interest?  If so, guess again.  Today the FDA is issuing some new guidelines that are more strict and may clean up some of the image and voting of the advisory committees.  But to much of America and to any aggressive reporters, the new guidelines are still going to make this look somewhat sleazy or full of ongoing conflicted interests. 

This is by no means the same sort of "we are looking into the consulting fees and stock trading of our members," but this one may be open for criticism in the papers over the next few days.  Here is the statement I received in an email:

FDA PROPOSES NEW, TOUGHER PROCEDURES FOR MEMBERSHIP ON ADVISORY COMMITTEES

The U.S. Food and Drug Administration (FDA) todayannounced new draft guidance that would implement a more stringentapproach for considering potential conflicts of interest for itsadvisory committee members and for recommending eligibility for meetingparticipation. FDA is accepting public comments on the proposal for thenext 60 days.

“FDA is committed to making the advisorycommittee process more rigorous and transparent so that the public hasconfidence in the integrity of the recommendations made by its advisorycommittees,” said Randall Lutter, Ph.D., FDA’s acting deputycommissioner for policy. “Today’s draft guidance document shouldprovide more consistency in the consideration of who is eligible toparticipate in advisory committee meetings and would simplify theprocess.”

FDA currently screens all prospective advisorycommittee participants before each meeting to determine whether thepotential for a financial conflict of interest exists. Under law, FDAmay grant a waiver when certain criteria are met, such as when the needfor an individual’s expertise outweighs the potential for a conflict ofinterest.

The draft guidance document would replace guidance issued in 2000 on FDA Waiver Criteria (www.fda.gov/oc/advisory/conflictofinterest/intro.html).The 2000 guidance attempted to address the complex set of variablesthat can be applied in reaching a decision about an individual advisorycommittee participant. However, because of its complexity, FDAofficials found it difficult to achieve consistent results that thepublic could readily understand.   

This new guidance (www.fda.gov/oc/advisory/waiver/coiguidedft.html)would reduce the likelihood that the process for recommending waiverswould vary from meeting to meeting. In addition to a more streamlinedapproach for considering who may participate in meetings, FDA wouldtighten its policy for considering eligibility for participation. If anindividual has disqualifying financial interests whose combined valueexceeds $50,000, after applying certain exemptions, the person wouldgenerally not be considered for participation in the meeting,regardless of the need for his or her expertise. If the financialinterests are $50,000 or less, after applying certain exemptions, theindividual might be recommended to participate as a non-voting member.Only individuals with no potential conflicts would be eligible to fullyparticipate in meetings as voting members.

Financial interest means the potential for gainor loss to a person (or their family and outside affiliations) as aresult of the government’s action on a particular topic. Financialinterests screened include, but are not limited to, stock ownership,related research and consulting arrangements.

A notice will appear in the Federal Register soon. To submit electronic comments on the draft guidance, visit www.regulations.gov or www.fda.gov/dockets/ecomments.Written comments may be sent to: Division of Dockets Management(HFA-305), U.S. Food and Drug Administration, 5630 Fishers Lane, Rm.1061, Rockville, MD, 20852. Comments must include the docket number 2007D-0101.

Today’s announcement is part of the agency’soverall effort to improve its advisory committee process. As announcedin January, FDA will be establishing a new advisory committee on how toimprove FDA’s communication policies and practices consistent with thebest available and evolving evidence. In addition, the agency launcheda Web page dedicated to improving recruitment of advisory committeemembers and enhancing public participation in the process. For moreinformation, go to: www.fda.gov/oc/advisory/.

Advisory committees provide FDAwith independent advice from outside experts on issues related to humanand veterinary drugs, biological products, medical devices, and food.In general, advisory committees include a chair, several members, plusa consumer, industry, and sometimes a patient representative.Additional experts with special knowledge may be consulted as needed.Although the committees provide advice to the agency, theirrecommendations are not binding and FDA makes final decisions.

FOMC Leaves Rates Unchanged on Different Language in Statement

As expected, the FOMC left rates unchanged today at 5 1/4%.

At the last meeting, the DJIA closed at 12,621.69 on the January 31, 2007 date and right before today’s announcement the DJIA was 12,289.70.  This language is actually a bit different than before and there is something for bulls and bears alike.  5 minutes after the announcement, the DJIA is at 12,309.81.

Today’s Statement:

Recent indicators have been mixed and the adjustment in the housing sector is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters.

Recent readings on core inflation have been somewhat elevated. Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures.

In these circumstances, the Committee’s predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

Here is the PRIOR statement from the January 31 release:

Recent indicators have suggested somewhat firmer economic growth, and some tentative signs of stabilization have appeared in the housing market. Overall, the economy seems likely to expand at a moderate pace over coming quarters.

Readings on core inflation have improved modestly in recent months, and inflation pressures seem likely to moderate over time. However, the high level of resource utilization has the potential to sustain inflation pressures.

The Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

Jon C. Ogg
March 21, 2007

Starbucks Keeps Coming Up With Big Claims

Starbucks (SBUX) keeps talking about where it will be in several years. With the number of unknowns involved, it might want to play that down, but the company won’t listen.

The big online coffee company says that it will open 10,000 stores in the next five years, double the size of the company in the next 4 to 5 years, and that net earnings will grow even faster than revenue.

To put the numbers in perspective, Starbucks would have about $20 billion in revenue in four years.

If something doesn’t go wrong.

Douglas A. McIntyre

Google Gains Search Share, Ask.com Loses

The comScore February data, Google (GOOG) gain search share in February, going from 47.5 % of the US market in January to 48.1%. The largest drop was Ask.com (IACI) which went from 5.2% to 5.0%.

In second place, as usual, was Yahoo! (YHOO), flat at 28.1%. Next, Microsoft (MSFT) moved up from 10.5% to 10.6%. The Time Warner Network (TWX) dropped from 5.0% to 4.9%.

Congratulations to all the winners.

Douglas A. McIntyre

ORCL: Oracle Earnings

By William Trent, CFA of Stock Market Beat

Over the weekend our forecast for Large Cap Watch List member Oracle’s (ORCLAnnual Report) earnings report was that “We think acquisitions will result in upside to estimates though organic growth may disappoint.” Then, we noticed an article suggesting that the company would beat estimates due to a late-quarter sales surge. This worried us, and put us on the alert for “linearity” references when we saw the earnings release:

Third quarter GAAP revenues were up 27% to $4.4 billion, while quarterly GAAP net income was up 35% to $1.03 billion. Total GAAP software revenues were up 25% to $3.5 billion with GAAP database and middleware new license revenues up 17% and GAAP applications new license revenues up 57%. GAAP services revenues were $916 million, up 36% compared to the same quarter last year.Third quarter non-GAAP earnings per share were up 31% to $0.25, and non- GAAP net income was up 30% to $1.3 billion compared to Q3 last year.

The consensus number was for $0.23 on $4.33 billion in revenues. We also saw another article putting the guidance for the coming quarter at $0.34, right in line with the consensus figure. So far, so good. But we still have two problems: there is no breakdown of organic versus acquired growth and there is no clarity on the linearity.

On the conference call, CFO Safra Catz partially addressed the organic growth issue, saying:

Even though we have now owned Siebel for over a year, we got it mid-quarter last year so if you exclude Siebel entirely from both last year and this year, new license revenues were up 32%, still four times the reported growth rate of SAP.

The problem with that cut is that Oracle has since acquired, according to their site, eleven more companies (not counting the recently announced Hyperion deal.)   While these were relatively small acquisitions “with most takeovers likely falling in the range of $5 million to $100 million,” as the company described it, five million here and $100 million there and pretty soon you’re talking big money. Catz provided some perspective on the conference call:

We bought a lot of smaller things that are not at scale, and that is one of the reasons that our margins have not been shooting up higher than they are now going, and that is because we have been — we invest in them for a while before they are at scale and then the revenue comes in and then all the marginal revenue is very, very profitable.

Unfortunately, however, the small initial size means the company doesn’t have to keep track of the initial contribution when comparing year/year results.

One positive indicator on that front is the company’s accounts receivable balance, which declined to $2.8 billion from $3.5 billion last quarter and $3.2 billion one year ago, despite the rise in sales. Since customers are generally given some time after ordering to make payment, the later sales occur in the quarter the higher the receivables balance would likely be. The fact that receivables actually declined suggests that earnings may be of much higher quality than investors were expecting, which would account for the rising share price in extended trading.

Catz also addressed the possibility that a couple of very large deals skewed the results:

I know there are rumors of mega-deals in the quarter, a couple at over $100 million, and those rumors are simply not true. Even if you added up the top five deals in the quarter, you do not get to $100 million in new license revenue. You add the top 20, you do not get to $200 million.

Not that the company wouldn’t mind a mega-deal or two, but investors rightly exclude them from forecasts due to their rarity, and prefer to look at them as gravy.

So all in all, it was a good quarter and good guidance – as far as we can tell.

Disclosure: Stock Market Beat has partnered with PrecisionIR Group to offer our readers access to annual reports at no charge. As part of the agreement, Stock Market Beat will receive a referral fee for any reports downloaded or ordered through our site.

http://www.stockmarketbeat.com/

FDX: FedEx Earnings Disappointing, As We Expected

By William Trent, CFA of Stock Market Beat

Over the weekend we made our forecast for the FedEx earnings report, saying “We think the risks lie to the downside due to consumer weakness and the read-through from box makers.” As it turns out, we nailed this one.
FedEx Reports Third Quarter Earnings: Financial News – Yahoo! Finance

FedEx Corp. (NYSE: FDX – News) today reported earnings of $1.35 per diluted share for the third quarter ended February 28, compared to $1.38 per diluted share a year ago. Third quarter results were negatively impacted by a slowing economic environment, lower fuel surcharges and severe winter storms, with the storm impact estimated to be $0.06 per diluted share. Results for the quarter also include an $0.08 per diluted share benefit from a reduction in the company’s effective tax rate.

FedEx Corp. reported the following consolidated results for the third quarter:

  • Revenue of $8.59 billion, up 7% from $8.00 billion the previous year
  • Operating income of $641 million, down 10% from $713 million a year ago
  • Operating margin of 7.5%, down from last year’s 8.9%
  • Net income of $420 million, down 2% from $428 million a year ago

Total combined average daily package volume at FedEx Express and FedEx Ground grew 4% year over year for the quarter, led by ground and international express package growth.

“The U.S. economy grew at a lower rate than we expected in the third quarter, and we saw continued adjustments in the automotive and housing markets. I believe, however, this represents a healthy transition for the economy as it phases into a more sustainable growth rate,” said Frederick W. Smith, FedEx Corp. chairman, president and chief executive officer. “FedEx is in excellent position to take full advantage of global economic-growth trends and deliver overall outstanding financial results in the long run.”

Consensus estimates called for $1.33 in EPS and $8.7 billion in revenue. With a net $0.02 benefit from one-time items, the EPS number was right in line but sales were light. For next quarter the Street expected $9.3 billion in revenues with $2.03 in EPS, while for the full year they were hoping for $6.78 on $35.5. billion. The midpoint of the guidance range provided by the company is disappointing.

For the fourth quarter, earnings are expected to be $1.93 to $2.08 per diluted share, while earnings for the full year are expected to be $6.45 to $6.60 per diluted share. Excluding the net impact of the costs associated with the new pilot labor contract, the updated guidance for fiscal 2007 is $6.70 to $6.85 per diluted share, an increase of 12% to 15% year over year excluding the impact of last year’s non-cash lease accounting charge.

Given that the disappointment appears to be in line with our expectations (which were previously discussed) we have little to add here.

Disclosure: Stock Market Beat has partnered with PrecisionIR Group to offer our readers access to annual reports at no charge. As part of the agreement, Stock Market Beat will receive a referral fee for any reports downloaded or ordered through our site.

http://www.stockmarketbeat.com/

S&P 500 Performance Leading Up to the Start of Bear Markets

From Ticker Sense

Last week we compared sector performance now versus their performance leading up to bear markets.  Today we compare how the S&P 500 has performed over the last eighteen months, with the comparable period leading up to each of the bear markets since 1962.

Of the eight prior periods we examined, we found that the current period bears little resemblance to the most recent five, while a case can be made that the earliest three periods bear some similarity to the present.  Just as we found in our sector study (and was pointed out in the comments section of last week’s post), it appears as though the 1966 period has the most in common with today.

1966_1968_sp_500_2 

1973_1980_sp_500_2 

1987_1990_sp_500

1998_2000_sp_500_2 

http://www.tickersense.typepad.com/

Market Action and the Fed

From Ticker Sense

With the Fed rate decision coming today at 2:15 PM ET, we updated our table of how the S&P 500 has performed on the day of rate decisions as well as the week following.  On the day of the last meeting (1/31), the S&P was up 70 bps on the day and up 82 bps over the next 5 trading days.  The performance following the last decision was unusual, however, as the Index move over the next week has been in the opposite direction of its move on the day of the decision 68% of the time (since 6/04).

Feddays321

http://www.tickersense.typepad.com/

Largest $ Movers of Note – StreetInsider.com – 03/21/2007

UPWARD MOVERS:
Advanced Magnetics Inc. (Nasdaq: AMAG) +$3.90; Deutsche Bank Starts at Buy; $100 price target.

Morgan Stanley (NYSE: MS) +$3.23; Reports Q1 EPS of $2.40, versus the consensus of $1.88. Revenues came in at $11 billion versus the consensus of $9.42 billion.

ICF International (Nasdaq: ICFI) +$2.94; Reports Q4 EPS of $0.65 vs. consensus of $0.30. Fourth quarter 2006 revenue of $113.9 million was up 5.7% sequentially from the $107.8 million reported for the 2006 third quarter. In the 2005 fourth quarter, ICF generated revenue of $51.8 million. Based on currently available information, the Company expects to report revenues for the quarter ending March 31, 2007, in the range of $125 million to $135 million and for the full year 2007 in the range of $480 million to $520 million. For both the quarter and the year, the Company seeks to earn net income equal to approximately 5% of revenues. (No consensus available)

GSI Commerce (NASDAQ: GSIC) +$2.44; Goldman Sachs raised from Neutral to a Buy with 25% upside to new $24.00 target (this was Jim Cramer’s e-commerce stealth play too).

MEMC Electronic Materials (NYSE: WFR) +$2.43; Stock has moved up approx. 40% since the beginning of 2007. No specific news releases tied to today’s gains.

DOWNWARD MOVERS:
U.S. Auto Parts Network (Nasdaq: PRTS) -$4.84; Net sales for the fourth quarter ended December 31, 2006 were $36.8 million, 134% from $15.7 million in the prior year period. Net loss was $(0.02) million, or $(0.00) per diluted share compared to net income of $2.1 million, or $0.16 per diluted share.

Cintas (Nasdaq: CTAS) -$3.92; Reports Q3 EPS of $0.48, 4 cents worse than estimates.(0.52) Revenues were $905.4 million vs. $925.10 million consensus. Sees FY revenues between $3.65-3.725 billion vs. $3.76 billion consensus. Sees FY EPS between $2.03-2.08 vs. $2.16.

SL Green Realty Corp. (NYSE: SLG) -$3.00; announced it has priced and up-sized its private offering to qualified institutional buyers in accordance with Rule 144A under the Securities Act of 1933, as amended, of exchangeable senior notes, from $500 million to $750 million. Also, SLG announces real estate swap transaction with Mack-Cali Realty (NYSE: CLI).

Buffalo Wild Wings (Nasdaq: BWLD) -$2.65; Jefferies & Co downgrades Buffalo Wild Wings from Buy to Hold. Price target $67.

FedEx Corporation (NYSE: FDX) -$2.38; Reports Q3 EPS of $1.35 (with 6c cut from storms, 8c tax gain), versus the consensus of $1.33. Revenues came in a $8.59 billion versus the consensus of $8.7 billion. Sees Q4 EPS of $1.93-$2.08, versus the consensus of $2.03. Sees FY07 EPS ex-new pilot pact cost of $6.70-$6.85 versus the consensus of $6.78.

http://www.streetinsider.com/index.php

Cheniere Energy Partners Debuts at a Premium

Today marks the debut for Cheniere Energy Partners (CQP-AMEX), the new limited partnership out of Cheniere (LNG-AMEX) itself.  The IPO priced at $21.00, which was the top of the of the $19.00 to $21.00 range.  Credit Suisse, Citigroup, and Merrill Lynch were the book runners and co-managers are listed as Sanders Morris Harris, RBC Capital, and Stifel Nicolaus.

This is the limited partnership that will operate the Liquified Natural Gas storage terminal being constructed in Louisiana.  Here was our full piece after they set the terms for the IPO.

Shares of CQP are trading at $21.75 on more than 2.5 million shares after the IPO has opened; LNG shares are up 0.1% at $30.98.

Jon C. Ogg
March 21, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.

Death Spiral Resumes in Newspapers

Where does one start in tracking the trends of the newspaper industry?  If you have been reading anything online over the last 3 years you will know that the industry has been under a significant challenge.  This went from a steady-eddie sector with predictable profits to one that looks like it is in a secular decline with no real end in sight.

This morning Goldman Sachs has a note specific to McClatchy (MNI-NYSE), but the sector itself was given a bit of a road rash if you read into their notes.  McClatchy AD REVENUE is dropping 5.2% in 2007 (according to report) and overall revenues falling 5/1% on a pro forma basis.  The classifieds are getting killed: down 12.4% in FEB and down 10.4% year to date (employment -11.3%, auto -12.5%, and real estate -15.4%).  You just have to assume that the poor housing environment is racking the paper industry that much harder.  Goldman Sachs notes that the pure-play McClatchy "ILLUSTRATES THE CHALLENGES OF THE INDUSTRY."  The few bright spots that helped in 2006 have turned south (help wanted, real estate); ad revenue declines have reached levels not seen in non-recession years.  Goldman Sachs’ research even says that "Despite Herculean efforts by publishers, virtually no amount of cost cutting or newsprint price decreases could yield earnings growth given this level of revenue decline.  We remain cautious on the newspaper industry."  Goldman trimmed this year earnings from $2.35 to $2.23 and next year estimates trimmed from $2.53 to $2.38.  We have also noted that McClatchy is one of the companies that management just might not be able to fix.

This is far from isolated.  Tribune (TRB-NYSE) posted a drop in February revenues of -3.4% from $398 million to $385 million: Publishing revenues $294M compared with $310M last year, down 5.1%; Advertising revenues decreased 5.1% to $233M from $245M; Circulation revenues were down 7.0% due to single-copy declines and continued selective discounting in home deliveries.  Tribune at least saw an increase in TV and radio broadcast and entertainment.  Does Sam Zell REALLY want to own this?

Last night the New York Times (NYT-NYSE) said revenue declined 3.6% in continuing operations fell to $246.5 million from $255.7 million in February 2006.  Advertising sales from continuing operations dropped 6 percent to $158.6 million from 168.7 million; Advertising sales for The New York Times Media Group fell 8% to $93.8M from $101.4M, due to weak sales in areas such as tech products, banking and corporate advertising; Classified Ad revenue dropped 15% to $40.9M from $47.9M as a result of soft real estate, auto and help-wanted advertising sales.  NYT at least has some of its print media hedges as it has been somewhat aggressive in its online media operations.  It owns About.com and was at least initially aggressive into new media.

Jim Cramer recently went over this last week as a sector where the advertisers were migrating away from newspapers to the web and elsewhere because they are having a hard time reaching the target audience in each ad.  This morning Cramer says in an article at TheStreet.com, "The Times is the best paper there is. I have no idea what the heck I’d do if I were running that place at this point." 

When I think of these areas that are posting drops I cannot help but think of how each area where the traffic is going.  Classifieds: losing to Craigslist.org and Yahoo!/Google.  Cars: losing to cars.com, Yahoo! Autos, Autobytel.  Jobs: Monster.com. 

Billionaires have been expressing more interest in the sector, but the papers each generally want a higher price than the billionaires are willing to pay.  That isn’t a 100% truth, but in general it holds.  The staffs on these companies are all ripe for job cuts and that really seems inevitable.  Many of these stocks had started a recovery last year after seeing a 3-year death spiral because of private equity and because these finally started looking cheap enough that value investors were starting to nibble.  Most of these are getting back close to their 52-week lows again and one would have to wonder just what the industry can do to save itself.  This should also be noted that this really pertains to Major Markets, because many of the indications are that smaller regionals and weeklies are actually holding their own so far.  Last night, Forbes even ran an article showing where the premiere newsletter covering the newspaper industry, the Morton-Groves Newspaper Newsletter, is closing down and noted painful forecasts and never seeming to be down enough.

The long and short of the matter is this: Newspapers are in a slow secular decline and that isn’t likely to change.  These companies are not going to go away with a whimper in the night, so what is the likely outcome?  They will scale down operations in print to a sleeker product and a much leaner staff.  The companies all have an online presence now, but they are going to have to do more and they are going to have to do more than all run the same syndicated pieces from the Associated Press on their sites.  There will be more and more syndicated or partnered content arrangements AND these newspapers will probably have to go out and buy more and more online media properties that have come up.  User-generated content and social networking is just too valuable even though the newspapers view them as a threat.  here is a reason that these are referred to as "OLD MEDIA."  They have no choice but to embrace this if they want to remain at the front of news and media.

Jon C. Ogg
March 21, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.

Goldman Sachs Full Research Summary (MAR 21, 2007)

NVIDIA (NVDA) Raised to Buy; replaces LLTC on AMERICAS BUY LIST; Goldman Sachs says it still has National Semi (NSM) and Intersil (ISIL) as Buys in analog chip sector.

GSI Commerce (GSIC) raised from Neutral to a Buy with 25% upside to new $24.00 target (this was Cramer’s ecommerce stealth play too).

OfficeMax (OMX) started as Buy.

Deere (DE) maintained on Goldman’s Conviction Buy List after analyst day.

Linear Tech (LLTC) downgraded from Buy to Neutral.

Hedge Fund operator Fortress Group (FIG) started as Buy at Goldman Sachs.

Targa Resources Partners LP (NGLS) started as Buy.

Earnings estimates INCREASED on Adobe (ADBE), NVIDIA (NVDA), Oracle (ORCL).

Earnings estimates DECREASED on NOVA Chemicals (NCX), McClatchy (MNI), Cheesecake Factory (CAKE), Halliburton (HAL), Global Crossing (GLBC).

Jon C. Ogg
March 21, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.

Upgrades & Downgrades on Wall Street (MAR 21, 2007)

AA cut to Underweight at Prudential (stock down almost 1%).
AAI raised to Overweight at JPMorgan (stock up 2%).
AFL raised to Outperform at KBW.
AL cut to Neutral at Prudential.
AMAG started as Buy at Deutsche Bank.
AXL raised to Buy at UBS.
BWLD cut to Hold at Jefferies (indicated down $1.00+, no volume).
CLX raised to Overweight at JPMorgan.
DF cut to Neutral at Prudential.
DPM cut to Hold at Citigroup.
EDA started as Buy at First Albany.
FIG started as Buy at B of A; started as Buy at Goldman Sachs; started as Hold at Citigroup; started as Overweight at Lehman (FIG up 4% pre-market).
GHL cut to Mkt Perform at Wachovia.
JASO started as Outperform at RBC.
LLTC cut to Neutral at Goldman Sachs (stock down 1%).
MSCC raised to Outperform at Piper Jaffray.
NCC cut to Underperform at KBW.
NGLS started as Outperform at Wachovia.
NVDA added to Americas Buy List at Goldman Sachs (stock up 3%).
OMX raised to Buy at Goldman Sachs.
OPTR started as Buy at Jefferies.
PLD raised to Outperform at Wachovia.
PRTS started as Market Weight at Thomas Weisel.
RGNC cut to Hold at Citigroup.
RICK started as Buy at Merriman Curhan Ford (indicated up 1%, no volume).
SAPE raised to Outperform at Bear Stearns (stock up 3%).
SDXC started as Sector Perform at CIBC.
SYK started as Neutral at Credit Suisse.
TEF raised to Buy at Merrill Lynch.
TIF raised to Buy at B of A.
VCI raised to Outperform at Baird.
WERN raised to Neutral at UBS.
ZMH started as Outperform at Credit Suisse.

Jon C. Ogg
March 21, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.