Focus List switch
Johnson & Johnson ($64; NYSE: JNJ) earned $1.17 per share excluding special charges in the September quarter, up 10% and $0.06 above consensus estimates. Sales grew 6% to $15.9 billion on the strength of Listerine mouthwash and Zyrtec, an allergy medicine. The company raised its 2008 per-share-profit target to $4.50 to $4.53, representing growth of 8% to 9%. PepsiCo’s ($54; NYSE: PEP) September-quarter profits improved to $1.06 per share excluding losses on commodity hedges, up 6% but $0.02 below the consensus. Revenue rose 11%. Citing slower beverage sales, the company lowered its 2008 profit target. We expect PepsiCo to rebound, and the stock remains on our Buy List and Long-Term Buy List. But J&J represents a better pick among defensive stocks, so it is replacing PepsiCo on the Focus List.
Mergers and deals
Cerberus Capital Management is seeking to sell at least part of its 80.1% stake in Chrysler, but talks with rival General Motors ($7; NYSE: GM) have stalled. Earlier this month, Ford Motor ($2; NYSE: F) rebuffed GM’s request for merger talks. GM and Ford are rated Underperform . . . Struggling insurers MetLife ($38; NYSE: MET) and Hartford Financial ($33; NYSE: HIG) were reportedly discussing a merger, though the talks ended without a deal. Both companies recently warned of lower-than-expected profits and announced plans to raise more capital. Hartford cut its quarterly dividend 40% to $0.32 per share, payable Jan. 2. Hartford and MetLife are rated Neutral, and we would not be owners of either stock . . . The Federal Reserve Board and Federal Trade Commission signed off on Wells Fargo’s ($34; NYSE: WFC) purchase of Wachovia ($6; NYSE: WB) for about $12 billion. Pending shareholder approval, the deal should close by the end of the year. Wells Fargo and Citigroup ($19; NYSE: C) spent nearly a week seeking a way to split up the company. No agreement was reached, and Citigroup is suing for $60 billion in damages, claiming that Wachovia violated an exclusivity contract after agreeing to a deal with Citigroup just four days earlier. In other news, Wells Fargo posted September-quarter profits of $0.49 per share excluding write-downs of investments in troubled financial companies. Earnings fell 23% but topped consensus estimates by $0.08 on 5% revenue growth. Also, Wells Fargo and Citigroup are two of nine major banks participating in the federal recovery plan. Citigroup will sell $25 billion in preferred stock to the government, while Wells Fargo will sell at least $20 billion. Wells Fargo and Citigroup are rated Neutral . . . United Technologies ($53; NYSE: UTX) with drew a long-standing $2.63 billion offer to acquire Diebold ($29; NYSE: DBD), a maker of automated teller and voting machines. United Technologies is a Buy and a Long-Term Buy . . . Eli Lilly ($35; NYSE: LLY) agreed to buy ImClone Systems ($68; NASDAQ: IMCL) for $6.5 billion in cash, or $70 per share, outbidding Bristol-Myers Squibb ($18; NYSE: BMY). Lilly and Bristol-Myers are rated Neutral.
IBM ($94; NYSE: IBM) earned $2.05 per share, up 22% and $0.02 above Wall Street expectations. The company has topped profit estimates in each of the last five quarters. IBM reaffirmed its 2008 guidance, projecting per share profits of at least $8.75, up at least 22%. IBM is a Focus List Buy and a Long-Term Buy . . . General Electric ($21; NYSE: GE) posted per-share profits of $0.45 from continuing operations, down 10%. Revenue rose 11%, but higher sales couldn’t offset steep profit declines at the GE Capital financing arm or tightening profit margins. General Electric is rated Neutral . . . Intel ($16; NASDAQ: INTC) delivered per-share profits of $0.35, up 17% and topping the consensus by a penny. Sales rose 1% to $10.22 billion. Intel’s revenue and profit-margin guidance for the December quarter were slightly below the consensus. Intel is rated Neutral.
Morgan Stanley ($22; NYSE: MS) received a $9 billion investment from Japan’s Mitsubishi UFJ Financial Group in exchange for a 21% stake in the company. Morgan Stanley is rated Neutral.
Jeffrey Rein resigned suddenly from his position as CEO of Walgreen ($23; NYSE: WAG) after 26 years with the company. Walgreen is a Long-Term Buy.
Transocean ($85; NYSE: RIG) will move its incorporation and top executives to Switzerland to take advantage of tax benefits. Transocean is a Focus List Buy and a Long-Term Buy.
New federal intervention lifts stocks, hopes
For the last month, the federal government has been trying to stem the panic. Bailing out Fannie Mae ($1; NYSE: FNM) and Freddie Mac ($1; NYSE: FRE) didn’t work. Backing American International Group ($3; NYSE: AIG) with federal loans didn’t work. Nor did passing a $700 billion package that promised to dislodge toxic mortgage securities choking the financial sector.
Banks, suspicious of unrealized losses lurking in each other’s balance sheets, remained fearful of lending to each other. Anxious investors dumped their stocks, and the Dow Jones Industrial Average slid 18% in the week ended Oct. 10, its worst week ever. But on Oct. 13, following the United Kingdom’s lead, the U.S. implemented an idea dismissed weeks earlier.
In its most aggressive market intervention yet, the government says it will invest $250 billion in distressed financial companies. The news helped drive the Dow Industrials up 936 points, or 11%. The money will come from the $700 billion package, which now has the government buying both troubled assets and stakes in the banks selling them. Nine of the country’s largest banks agreed to the deal, which could be extended to thousands of smaller U.S. banks. The move will partially nationalize the banking industry — in the process infusing cash into troubled banks far faster than would happen in any auction of distressed securities.
The government’s stake will take the form of preferred stock, boosting banks’ debt levels but not diluting common equity. The Federal Deposit Insurance Corp. also pledged unlimited insurance for deposits in bank accounts that do not pay interest.
Hopefully, the cash infusion will revive the credit market, boosting banks’ ability — and willingness — to make loans.