Auto bailout stalls

12/22/2008


Congress denied American automakers a federal bailout, but the Bush administration is considering an aid package of $10 billion to $40 billion. Funding could come from the Troubled Asset Relief Program (TARP) designed for financial companies and might require a prearranged bankruptcy agreement.

GMAC Financial Services and its mortgage arm, Residential Capital, failed to reduce debt by $30 billion, a condition for becoming a bank holding company. General Motors ($4; NYSE: GM) owns a 49% stake in the finance company, a major contributor to the automaker’s cash crisis. In other news, GM will close dozens of plants for several weeks in January to conserve cash and reduce March-quarter production by about 30%.

Ford ($3; NYSE: F) has sidestepped short-term liquidity problems, but it could look to strengthen its financial footing by selling the Volvo unit. A Chinese partner has reportedly shown interest in the line, though Ford is giving no hints. Volvo and GM’s Saab received a boost from their native Sweden, which pledged $3.4 billion to protect the Swedish automotive industry. Ford and GM are rated
Underperform.

Profit warnings don’t slow stocks
Corporate America’s pessimism is running high. In the five trading days ended Dec. 16, negative profit warnings outnumbered positive announcements by a ratio of 6.6-to-1. However, during that five-day period, the S&P 500 Index rose 2.8%, as many stocks did not decline on the negative profit news.

Lower energy prices drove Energen ($30; NYSE: EGN) to slash 2009 guidance for per-share earnings to $3.20 to $3.60, down from an earlier range of $3.70 and $4.10. The company’s guidance relies on pessimistic energy-price estimates, providing room for positive surprises. Energen, which rose 4% on the announcement, is a Long-Term Buy.


United Technologies ($52; NYSE: UTX) projected 2009 per-share profits of $4.65 to $5.15. The range’s midpoint was below the consensus of $5.03 at the time of the announcement, but the shares rose slightly on the news. United Technologies is a Buy and a Long-Term Buy.


Western Digital ($13; NYSE: WDC) projects December-quarter revenue will fall 18% to 23%, hurt by weak hard-drive demand and price competition. The revenue warning, while disappointing, is not entirely unexpected. The stock rose on the announcement, which also included cost-saving measures. Western Digital is an aggressive name considering the downturn in technology spending. But the stock seems unduly cheap at six times the lowest analyst profit estimate for fiscal 2009 ending June. Western Digital, which seems due for a bounce to at least $14 or $15, is ranked Buy.


General Electric ($18; NYSE: GE) projects 2008 per-share earnings of $1.78 to $1.84, in line with earlier targets but below the consensus estimate of $1.90. The company will no longer provide quarterly earnings guidance. General Electric is rated Neutral.

Retail roundup
Wal-Mart Stores’ ($55; NYSE: WMT) same-store sales rose 3.4% excluding gasoline in the U.S., more than double last year’s rate. The average ticket rose, as did the frequency of visits, helped by lower fuel prices. International sales fell 11%, hurt by the dollar’s strength, but were solid at constant currency. Wal-Mart is a Long-Term Buy . . . Walgreen’s ($26; NYSE: WAG) same-store sales slipped 0.9% in November, the first decline in the company’s history. Black Friday brought heavy traffic, though the average transaction size declined. In other news, the company opened 94 stores in November, and slowing that rapid expansion could prove challenging. Walgreen often signs leases in advance. Walgreen is a Long-Term Buy.

News report
A fourth patient taking Biogen Idec’s ($49; NASDAQ: BIIB) multiple sclerosis drug Tysabri contracted a potentially deadly brain infection. The incidence rate is 0.01%, well below the level mentioned on the warning label. In clinical trials, Tysabri lowered the chance of relapse by 68%, while rivals’ offerings only reduced it by a third. Biogen is a Focus List Buy and a Long-Term Buy . . . The U.S. Supreme Court ruled that consumers can sue tobacco companies under state fair-trade laws. That’s bad news for Altria ($15; NYSE: MO), owner of cigarette giant Phillip Morris. A group of Maine consumers are expected to resume their lawsuit claiming that Phillip Morris ads deceptively implied low-tar cigarettes were less harmful. Altria is rated Neutral . . . Liberty Entertainment ($18; NASDAQ: LMDIA), 52%-owner of DirecTV ($24; NASDAQ: DTV), is switching from a tracking stock to an equity backed by assets. Industry watchers say the move could attract the interest of a suitor such as AT&T ($28; NYSE: T). In other news, AT&T raised its quarterly dividend nearly 3% to $0.41, payable Feb. 2, marking the 25th consecutive annual increase. DirecTV is a Focus List Buy and a Long-Term Buy. AT&T is rated Neutral . . . Mylan ($19; NYSE: MYL) moves to the Nasdaq Stock Market effective Dec. 29, keeping its current ticker. Mylan is rated Neutral . . . Stryker Corp ($41; NYSE: SYK) increased its annual dividend 21% to $0.40, payable Jan. 30, marking the 16th straight year of dividend hikes. Stryker Corp is rated Neutral . . . Pfizer ($17; NYSE: PFE) ended a 40-year string of dividend increases, holding the payout steady. The company has sufficient cash to continue the rich dividend, but a lack of new drugs to offset future patent expirations could drive the drugmaker to cut the payout in an effort to fund additional research or acquisitions. Pfizer, yielding 7.7%, is rated Neutral.

Financial update
Goldman Sachs ($76; NYSE: GS) lost $4.97 per share in the November quarter, $1.24 below the consensus, versus a profit of $7.01 per share a year earlier. Investment-banking revenue plunged 48%, while the trading unit recorded $4.36 billion in negative net revenue. Goldman is rated Neutral . . . Morgan Stanley ($16; NYSE: MS) lost $2.24 per share from continuing operations in the November quarter, compared to a $3.61 loss in the year-ago period. In the interest of restoring liquidity, the company reduced its leverage by 65% in fiscal 2008 ended November. Morgan Stanley is rated Neutral . . . Bank of America ($15; NYSE: BAC) sold $9 billion in debt backed by the Federal Deposit Insurance Corp. In other news, shareholders approved the acquisition of Merrill Lynch ($13; NYSE: MER), a deal once valued at $50 billion that’s now worth less than $20 billion. Also, Bank of America plans to eliminate 30,000 to 35,000 jobs, or about 10% of its work force, in the next three years. Bank of America and Merrill Lynch are rated Neutral . . . Wells Fargo ($30; NYSE: WFC) plans to sell $6 billion in debt insured by the FDIC. In other news, the bank will reportedly take a $40 billion charge related to the purchase of Wachovia ($6; NYSE: WB), adding to the $11 billion of write-downs already expected in the December quarter. Wells Fargo is rated Neutral.


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