Follow-up on monitored stocks
Hindered by the rising dollar and weakening market conditions, Cooper Industries ($22; NYSE: CBE) expects December-quarter results to fall short of its earlier guidance of $0.83 to $0.92 excluding restructuring charges. The company has seen lower retail orders as customers request delays or change quotes on projects. Cooper’s guidance is disappointing, and the problems the company cites are not likely to be resolved quickly. Cooper is being downgraded to Neutral . . . DirecTV ($22; NASDAQ: DTV), already a Focus List Buy, is replacing Cooper on the Long-Term Buy List. DirecTV focuses on the upper end of the premium-television market and screens the credit quality of its customer base. In February, DirecTV begins a new contract with AT&T ($27; NYSE: T) to compete with the popular phone-Internet-cable bundles offered by competitors.
The U.S. government has stepped up its efforts to bail out the financial industry and revive lending. The Federal Deposit Insurance Corp. now guarantees as much as $1.4 trillion in U.S. bank debt, while the Federal Reserve has pledged $4.7 trillion to bailout efforts. Financial institutions have already drawn on $3.2 trillion.
The U.S. Treasury agreed to invest $20 billion in Citigroup ($6; NYSE: C) preferred stock. Also, two government agencies will guarantee $306 billion in risky assets, with Citigroup responsible for the first $29 billion in losses. In return for the debt guarantees, Citigroup will issue $7 billion in preferred stock and warrants for about 254 million shares of common stock. Citigroup’s quarterly dividend will be cut to $0.01 per share for three years. Citigroup is rated Neutral, and we would avoid the shares.
Congress, unconvinced by U.S. automakers’ strategy to become profitable, closed the coffer it had opened to financial companies. Ford ($2; NYSE: F), General Motors ($4; NYSE: GM), and Chrysler had requested a $25 billion bridge loan to stave off insolvency. The Big Three have until Dec. 2 to pitch a more persuasive plan to lawmakers. Many worry that GM and Ford, blowing through more than $2 billion a month, and Chrysler lack the cash to survive through 2009 without assistance. Ford and GM are rated Underperform.
Hewlett-Packard’s ($36; NYSE: HPQ) profits surged 20% to $1.03 per share excluding one-time adjustments, $0.02 above consensus estimates. Sales, helped by the acquisition of consultant EDS, climbed 19% to $33.60 billion. Excluding EDS, sales rose 5%. In fiscal 2009 ending October, H-P expects per-share earnings between $3.88 and $4.03, for growth of 7% to 11%. Wall Street expects 2009 profits of $3.80 per share. H-P is a Buy and Long-Term Buy . . . Dell ($10; NASDAQ: DELL) earned $0.37 per share, up 9% and $0.06 better than the consensus. Revenue fell 3% to $15.2 billion. The company expects weak global demand in coming quarters. Dell is rated Neutral.
A U.S. court suspended the sale of Teva Pharmaceutical Industries’ ($42; NASDAQ: TEVA) generic version of AstraZeneca’s ($38; NYSE: AZN) Pulmicort asthma treatment. AstraZeneca must also freeze distribution of its own generic offering. AstraZeneca’s lawsuit for patent infringement against the Israeli company is set to begin Jan. 12. Citing the legal tussle, AstraZeneca slightly lowered its December-quarter profit guidance. AstraZeneca, trading at just eight times projected 2009 earnings, is rated Buy and Long-Term Buy . . . Johnson & Johnson ($59; NYSE: JNJ) agreed to buy Omrix Biopharmaceuticals of Israel for $438 million, or $25 per share. J&J is a Focus List Buy and a Long-Term Buy . . . Microsoft ($21; NASDAQ: MSFT) plans to enter the debt market to help fund corporate expenses, including share buybacks. The company did not provide details, but Microsoft’s board has authorized the software giant to borrow up to $6 billion. Microsoft is rated a Buy and a Long-Term Buy.
Don’t give up on Manitowoc
Manitowoc ($6; NYSE: MTW) has seen few customers cancel orders for cranes. Drumming up new business in 2009 will be a challenge, but a $3.3 billion crane backlog should help to keep Manitowoc busy through 2010.
In October, Manitowoc completed the purchase of Enodis, the British kitchen-equipment maker, for about $2.7 billion. Manitowoc financed the purchase with a loan facility led by J.P. Morgan Chase ($28; NYSE: JPM). Manitowoc is obligated to repay most of the loan from asset sales, new borrowings, and equity offerings. Fears of dilution from an equity offering have weighed on the shares. While this is not the best time to be adding debt to a balance sheet, Manitowoc generates sufficient cash flow to cover its debt load. Manitowoc, trading at less than three times the lowest analyst profit estimate for 2009, is a Focus List Buy and a Long-Term Buy.
GE solvent, but not a good buy
Shares of General Electric ($15; NYSE: GE) have lagged the market in recent weeks. Over the last month, GE is down 14%, versus a 3% decline in the S&P 500 Index. Weighing on the conglomerate are concerns that the financial crisis threatens the stability of GE’s huge finance arm and the safety of the dividend. Investors also worry about whether the economic slowdown will affect industrial businesses. While GE is far from a sure bet and the Forecasts would not want to own the shares, fears of a pending bankruptcy appear unfounded.
In November, the Federal Deposit Insurance Corp. agreed to back up to $139 billion of GE Capital’s long-term debt, more than enough to cover the up to $81 billion that comes due by the end of next year. Under another federal program, GE can tap $98 billion in short-term liquidity. The company has sufficient liquidity to fund operations at least through the end of 2009, though it may have to borrow to cover the dividend if profits are weaker than expected. At the current annual rate of $1.24 per share, dividends would cost GE more than $13 billion in the year ahead. Last month, GE said it planned to continue paying the dividend, which represents about 71% of estimated 2009 earnings. Still, a dividend cut is possible if conditions worsen further.
Several industrial businesses are seeing slowdowns in demand, and the transformation of several large consumer-finance companies into banks brings the long-term viability of the GE Capital business model into question. Consensus estimates, which now project a 10% decline in per-share profits next year, continue to fall. GE is rated Neutral and should be avoided.