Wall Street Breakfast: Must-Know News

• Ofheo warns of more GSE writedowns. Fannie (FNM) and Freddie (FRE) regulator Ofheo cautions the GSEs may be hit by more writedowns after they expanded their purchases of subprime and Alt-A mortgages even as other investors fled. The value of their $217B in 'non-agency' debt continues to fall as other firms write down their portfolios. "To the extent that [other] institutions recognize fair value losses on their private-label portfolios under GAAP, Fannie Mae and Freddie Mac may have to do so as well," it says. Freddie's exposure appears to be about twice that of Fannie.
• Fannie, Freddie books under scrutiny. Officials from the Fed and the Office of the Comptroller of the Currency are 'combing' the books of Fannie Mae (FNM) and Freddie Mac (FRE), a source says, to assess the GSEs' financial condition in case the government needs to step in and take them over. Their regulator Ofheo has said their capital remains above regulatory minimums. Treasury Secretary Henry Paulson said Monday he still believes the firms have enough cash, but admitted to some confusion as to whom to believe - the markets or Ofheo.
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• Apple dives on weak outlook, Jobs's health. Shares of Apple (AAPL) fell more than 10% in extended trading despite EPS and revenue that exceeded analyst consensus after its FQ4 outlook disappointed (see below), and investors continued to fret over CEO Steve Jobs's health. Apple did little to dispel the speculation when the inevitable question came up: "I’m really sorry to ask, because it’s a very private matter, but would you mind addressing" yesterday's NY Post report that called the venerated chief's health into question, Lehman's Ben Reitzes asked during the company's earnings call. "Ben, Steve loves Apple. He serves as the CEO at the pleasure of Apple's board, and has no plans to leave Apple. Steve’s health is a private matter."
• TV's about to get costlier. TiVo (TIVO) is looking to turn the remote control into an electronic credit card. In partnership with Amazon.com (AMZN), viewers will soon be seeing links to buy products like CDs, DVDs and books that appear on, say Oprah, Letterman, The Daily Show - or The Simpsons - during both live programming and commercials.
• GE and Mubadala launch multi-billion dollar global investment fund. GE (GE) is partnering with Abu Dhabi's Mubadala Development Co. in an $8B fund ($4B each) to invest in financial assets hurt by the global credit crunch. The two hope to reach $40B in assets. "We can use our unique financial and industrial capabilities to establish profitable relationships across a number of businesses and we welcome them as a long-term shareholder," GE CEO Jeffery Immelt said.
• Brocade to buy Foundry Networks. Brocade Communications Systems (BRCD) said late Monday it will acquire Foundry Networks (FDRY) for $19.25 in cash and stock. Brocade says the move will help it develop "a networking infrastructure strategy that will serve as the foundation for capitalizing on these dynamic opportunities." Foundry closed at $13.66, and jumped 32% to $18.08 in AH trading. Keep an eye on Foundry's (FDRY) peers: NT, ALU, COMS, JNPR, and FFIV.
• Roche offer attracts analyst scorn. Analysts unanimously decided Roche's (RHHBY.PK) offers to buy the 44% of Genentech (DNA) it doesn't own for $89/share ($43.7B) (a one-day premium of 8.8% and one month premium of 19%) way undervalues the company. Lazard analysts said DNA will likely strive to remain independent, while Bernstein's Geoffrey Porges cautioned a Roche/Genentech link-up would cause "an irrevocable breach in [the pair's] relations," and many DNA top scientists would likely move on if it became a research arm of Roche. Rodman and Renshaw called Roche's $89 opening bid laughable. Shares finished +15% to $93.88, indicating markets tend to agree it's a lowball.
• Vytorin study disappoints. Shares of Schering-Plough (SGP -12%) and Merck (MRK -6%) plunged Monday after their jointly-produced cholesterol drug Vytorin proves ineffective for treatment of aeortic valve disease, and raises cancer red flags. Earnings shortfalls sent the pair further down in extended trading (see below).
• Accounting errors lead to WellCare earnings restatement. WellCare Group (WCG) said after the close Monday it will restate its financial statements from 2004 to Q2 2007 due to accounting errors, which will lead to reduced EPS over some of the periods. Shares gained 6% in AH trading.
• ICSC's weekly retail sales index rose by 0.1%.
• June Leading Indicators: -0.1%, in-line. May -0.2% revised from +0.1%. The decline has moderated, but continues to be widespread.

Earnings: Tuesday Before Open

• Assured Guaranty (AGO): Sees Q2 EPS of $0.42 vs. $0.57. AGO says it's disturbed by Moody's 'possible downgrade' Monday, which it sees as unjustified. [PR]
• Autoliv (ALV): EPS of $1.24 beats by $0.01. Revenue of $1.91B (+10.4%) in-line. [PR]
• Baker Hughes (BHI): Q2 EPS of $1.36 beats by $0.12. Revenue of $3B (+18.1%) vs. $2.76B. [PR]
• BJ Services (BJS): EPS of $.048 beats by $0.08. Revenue of $1.33B (+15.2%) vs. $1.24B. Sees FQ4 EPS of $0.54-0.57 vs. $0.50. [PR]
• Canadian Pacific Railway (CP): EPS of C$1.00 misses by $0.02. Revenue of C$1.22B (+0.4%) in-line. [PR]
• Caterpillar (CAT): EPS of $1.74 beats by $0.20. Revenue of $13.62B (+20%) vs. $12.69B. Shares +2.5%. "Never in my 35 plus years with the company have I seen Caterpillar do so well in the face of such a difficult economic climate in the U.S." [PR]
• Check Point Software (CHKP): Q2 EPS of $0.43 in-line. Revenue of $200M (+13.3%) vs. $195M. [PR]
• CME Group (CME): EPS of $3.93 beats by $0.08. Revenue of $563M (+71.1%) in-line. [PR]
• Corn Products International (CPO): EPS of $0.90 beats by $0.07. Revenue of $1.03B (+20%) in-line. Sees full-year EPS of $3.15-3.35 vs. $3.11. [PR]
• Domino's Pizza (DPZ): EPS of $0.22 misses by $0.01. Revenue of $334 (-1.8%) vs. $332. "Returning to positive sales comps in the U.S. has proven difficult." [PR]
• DuPont (DD): EPS of $1.11 beats by $0.04. Revenue of $8.84B (+12.2%) vs. $8.47B. [PR]
• Ericsson (ERIC): Q2 EPS of 0.60 kroner misses by 0.37. Revenue of 48.53B kroner vs. 48.08B. Operating profit fell to 2.89B from 9.26B a year ago. Margin fell to 10% from 19%. [DJ]
• Fifth Third Bancorp (FITB): EPS of $0.05 beats by $0.05. [PR]
• Forest Laboratories (FRX): EPS of $0.87 beats by $0.07. Revenue of $967M (+4.2%) in-line. Shares -0.4%. [PR]
• Freeport-McMoRan (FCX): EPS of $2.25 misses by $0.19. Revenue of $5.44B (unchanged). Shares -3.2%. [PR]
• Gentex (GNTX): EPS of $0.19 misses by $0.01. Revenue of $170M (+4.3%) in-line. [PR]
• Halliburton (HAL): EPS of $0.68 in-line. Revenue of $4.49B (+20.1%) vs. $4.25B. [PR]
• JetBlue Airways (JBLU): EPS of -$0.03 beats by $0.04. Revenue of $859M (+17.7%) in-line. [PR]
• KeyCorp (KEY): EPS of -$2.70 misses by $0.12, including a previously disclosed $1B tax charge. Will reduce dividend in Q3. [PR]
• Lexmark (LXK): EPS of $0.96 beats by $0.18. Revenue of $1.14B (-5.7%) in-line. [PR]
• Lockheed Martin (LMT): EPS of $2.01 beats by $0.13. Revenue of $11.04B (+3.6%) vs. $10.86B. [PR]
• PACCAR (PCAR): EPS of $0.86 beats by $0.02. Revenue of $3.78B (+10.3%) in-line. Shares -4%. [PR]
• Regions Financial (RF): EPS of $0.39 misses by $0.03. Reduces dividend to $0.10 from $0.38. Shares -4%. [PR]
• SunTrust Banks (STI): EPS of $0.78 beats by $0.14. Revenue of $2.6B (+9.4%) vs. $2.13B. [PR]
• SuperValu (SVU): EPS of $0.79 beats by $0.03. Revenue of $13.35B (+0.4%) vs. $13.19B. [PR]
• UnitedHealth (UNH): EPS of $0.67 beats by $0.03. Revenue of $20.27B (+6.7%) vs. $20.04B. Sees full-year EPS of $2.95-3.05 vs. $2.95. [PR]
• UPS (UPS): EPS of $0.85 in-line. Revenue of $13B (+6.7%) vs. $12.81B. Sees full-year EPS of $3.50-3.70 vs. $3.64. It sees slightly stronger results in the second half. Shares -2.5%. [PR]
• Vodafone (VOD): FQ1 sales of £9.82B (+19.1%) in-line. Sees full-year sales at the bottom of its £39.88-40.7B range; profit outlook unchanged at £11-11.5B. [DJ]
• Wachovia (WB): EPS of $-1.27 misses by $0.49. The loss includes a $6.1B goodwill impairment charge reflecting declining market valuations and asset values. Adds $5.6B to its loan-loss reserve to increase it by $4.2B and cover charge-offs. Cuts dividend to $0.05 from $0.375. Shares -10%. [PR]
• Webster Financial (WBS): Q2 EPS of $0.42 beats by $0.02. [PR]
• Western Union (WU): EPS of $0.33 beats by $0.02. Revenue of $1.35B (+12%) in-line. Sees full-year EPS of $1.29-1.33 vs. $1.28. [PR]
• XM Satellite Radio (XMSR): EPS of -$0.38 beats by $0.03. Revenue of $318M (+14.8%) vs. $323M. [PR]

Earnings: Monday After Close

• American Express (AXP): Q2 EPS of $0.56 misses by $0.27. Revenue of $7.48B (+7.9%) vs. $7.6B. Loss provisions of $1.5B, vs. $640B last year. "In light of the weakening economy, we are no longer tracking to our prior forecast of 4-6% EPS growth." "Consumer spending slowed during the latter part of the quarter and credit indicators deteriorated beyond our expectations." Shares -11%. [PR]
• America Movil (AMX): Q2 profits rise 25% after adding 6.1M new mobile customers. Shares +0.1%. [Reuters]
• Amylin Pharmaceuticals (AMLN): Q2 EPS of -$0.47 beats by $0.02. Revenue of $222M (+12.7%) in-line. Shares -1%. [PR]
• Apple (AAPL): FQ3 EPS of $1.19 beats by $0.11. Revenue of $7.46B (+38%) vs. $7.37B. Sees Q4 EPS of $1 vs. $1.24, and revenue of $7.8B vs. $8.32B. Sold 11.01M iPods in Q3 (+12%); 717,000 iPhones (doesn't include iPhone 3G); 2.5M Macs. Shares -10%. [PR]
• Boston Scientific (BSX): Q2 EPS of $0.20 beats by $0.09. Revenue of $2.02B (-2.3%) in-line. Sees Q3 EPS of $0.14-0.19 vs. $0.13. Shares -5%. [PR]
• Canadian National Railway (CNI): Q2 EPS of C$0.90 beats by $0.04. Revenue of C$2.1B in-line. Shares +2%. [PR]
• Celanese (CE): Q2 EPS of $1.20 beats by $0.06. Revenue of $1.87B (+20.1%) in-line. Sees full-year EPS of $3.60-3.85 vs. $3.98. [PR]
• Equifax (EFX): Q2 EPS of $0.64 beats by $0.02. Revenue of $502M (+10.4%) vs. $508M. Remains confident in full-year performance. [PR]
• Everest Re Group (RE): Q2 EPS of $2.90 misses by $0.37. Revenue of $1.08B (-15%) in-line. [PR]
• F.N.B. (FNB): Q2 EPS of $0.17 misses by $0.10. Shares -8%. [PR]
• Foundry Networks (FDRY): Q2 EPS of $0.17 beats by $0.02. Revenue of $161M (+12.2%) vs. $153.5M. Shares +32% on Brocade (BRCD) buyout. [PR]
• Hercules (HPC): Q2 EPS of $0.54 beats by $0.11. Revenue of $613M +11.6%) vs. $601M. Shares +0.2%. [PR]
• Hexcel (HXL): Q2 EPS of $0.21 misses by $0.03. Revenue of $359M (+24.1%) vs. $337M. Sees full-year EPS of $0.90-0.95 vs. $0.96. Shares -2%. [PR]
• Jacobs Engineering (JEC): EPS of $0.87 beats by $0.05. Revenue of $2.92B (+40.1%) vs. $2.75B. [PR]
• Lincare (LNCR): Q2 EPS of $0.82 beats by $0.10. Revenue of $428M (+7.9%) in-line. Shares +1.5%. [PR]
• Logitech (LOGI): EPS of $0.16 misses by $0.03. Revenue of $509M (+18.4%) in-line. Shares +3.5%. [PR]
• Merck (MRK): Q2 EPS of $0.86 beats by $0.03. Revenue of $6.05B (-1%) in-line. No guidance as it is still assessing the impact of today's Vytorin test results. Shares -7%. [PR]
• Mohawk Industries (MHK): Q2 EPS of $1.29 beats by $0.02. Revenue of $1.84B (-6.9%) in-line. Sees Q3 EPS of $1.06-1.15 vs. $1.40. Shares -4%. [PR]
• QLogic (QLGC): FQ1 EPS of $0.31 beats by $0.02. Revenue of $168M (+30.6%) vs. $162M. [PR]
• Royal Caribbean (RCL): Q2 EPS of $0.40 in-line. Revenue of $1.86B (+6.9%) in-line. Sees FQ3 EPS of $1.65-1.70 vs. $1.64. Plans to reduce spending by $125M/year. [PR]
• SanDisk (SNDK): Q2 EPS of -$0.10 misses by $0.23. Revenue of $816M (-1.3%) vs. $906M. Sees Q3 revenue of $750-850M vs. $1.09B. Shares -14%. [PR]
• Schering-Plough (SGP): Q2 EPS of $0.45 beats by $0.03. Revenue of $4.9B vs. $4.77B. Shares -3.2%. [PR]
• Steel Dynamics (STLD): EPS of $1.05 beats by $0.12. Revenue of $2.4B (163.8%) vs. $2.35B. Sees Q3 EPS of $1.05-1.15 vs. $0.97, and full-year EPS of $3.80-3.90 vs. $3.46. Shares +2%. [PR]
• Texas Instruments (TXN): Q2 EPS of $0.44 misses by $0.02. Revenue of $3.4B (-2.2%) in-line. Sees Q3 EPS of $0.41-0.47 vs. $0.51 and revenue of $3.26-3.54B vs. $3.56B. Demand slowed unexpectedly in June as distributors did not restock. Shares -11.5%. [PR]
• Volterra Semiconductor (VLTR): Q2 EPS of $0.25 beats by $0.07. Revenue of $28.7M (+55.3%) vs. $27.5M. Shares +1%. [PR]
• Woodward Governor (WGOV): FQ3 EPS of $0.47 beats by $0.04. Revenue of $330M vs. $309M. Sees full-year EPS of $1.75 vs. $1.67. Shares +5%. [PR]

Today's Markets

• Asia closed mixed Tuesday, with Tokyo up sharply after a day off on Monday. Nikkei +3% to 13,185. Hang Seng flat at 22,527. Shanghai -0.5% to 2,846. BSE +1.8% to 14,105.
• Europe markets are sharply lower at midday. London -1.75%. Paris -1.2%. Frankfurt -1%.
• Futures have not recovered from the post-close drop on weak earnings. Dow -1%. S&P -0.9%. Nasdaq -1.9%. Crude -0.1% to $130.86. Gold +1% to $973.

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Comments

[Ishortyou]

well looks like Moody's go unlished playing the rating game again without foundation or facts and just based on speculation. They need to reinstate triple A ratings on some of the bond insurers that were downgraded unjustifiably

[notsosmart]

why pay attention to moody,s? why pay attention to anybody? all have an agenda & its not to put money in your pocket.once you know that selfserving lying & greed is the game you should think for yourself.

[Right inSanFrancisco]

It is amazing that so much of the financial health of the western world hinges on the performance of these public / private entities Fannie and Freddie. I was once a stockholder (liked the dividend), but sold when it became apparent to me a few years ago that I did not understand who the management worked for. If they are a cornerstone of the economy, the performance of their management needs to be judged by a standard of security, not growth of EPS, which drove them away from their government mission toward chasing the returns of sub-prime loans. Then the government wanted them to broaden the size of loans that they would handle. Despite hating a larger role for government, I have reluctantly come to the conclusion that they neeed to be publicly owned and directed. Ugh. I can't believe that I said that.

[Pj568]

Many of the numbers referenced above appear to be adjusted and not actual. WB and BSX are two that jumped out as being off. One would expect adequate disclosure from the SA Editor about the numbers being referenced. Constantly reporting and discussing adjusted numbers is a sign of weakness that shouldn't be ignored.

[SA EditorEli Hoffmann]

PJ568, thanks for your feedback. We largely report adjusted earnings. This is due to the fact that analyst consensus estimates, which are the gauge by which many judge whether a given company has beaten or missed expectations, are formulated based on adjusted earnings.

[User 161804]

ISV worth a look, good fundamentals, there were spikes on Thursday and Friday despite a bad market. A cup and handle was formed maybe in anticipation of good earnings.