Microsoft, Yahoo talking deal again

5/26/2008


Microsoft ($29; NASDAQ: MSFT) is taking another stab at a deal with Yahoo ($27; NASDAQ: YHOO). The software giant attempted to acquire the provider of Internet search and advertising services earlier this year. Yahoo rejected the overture, angering many influential shareholders.

The new deal does not involve the takeover of Yahoo — Microsoft apparently hopes to either purchase or set up a partnership with Yahoo’s search business. The new negotiations began on the heels of activist billionaire Carl Icahn’s threat to oust Yahoo’s board. Icahn is upset that Yahoo did not sell out to Microsoft, which was reportedly willing to pay $33 per share for Yahoo earlier this month.

The current talks could lead to another takeover offer, though Microsoft has said it does not intend to bid for the company again. Microsoft is a Buy and a Long-Term Buy. Yahoo is rated Neutral.

News roundup
The U.S. Air Force awarded Lockheed Martin ($109; NYSE: LMT) a $1.46 billion contract to build a new generation of global- positioning satellites. Lockheed beat out rival Boeing ($85; NYSE: BA) to win the deal, which could be worth $3.57 billion if the Air Force exercises its option to purchase additional satellites. The Air Force said it planned to stick with Lockheed as the supplier of future satellites but did not completely rule out the option of competitive bidding. Lockheed is a Focus List Buy and a Long-Term Buy. Boeing is rated Neutral . . . Qualcomm ($46; NASDAQ: QCOM) paid more than $16 million for radio spectrum in the U.K. that the company hopes to use for mobile television and other new technologies. Qualcomm plans to recruit a partner to help develop the new services. The stock rose about 5% over the last week, lifted in part by the spectrum purchase and optimistic estimates of microchip demand in Asia. Qualcomm is a Focus List Buy and a Long-Term Buy . . . An agreement between the United Auto Workers union and auto-parts supplier American Axle & Manufacturing ($20; NYSE: AXL) could put an end to the three-month strike that has slowed or stopped work at about 30 General Motors ($20; NYSE: GM) factories. Union members were expected to vote on the new contract from May 19 through May 22. Union leadership endorsed the contract, which cuts many workers’ wages by a third, but at press time it was not apparent whether workers would ratify the agreement. GM is rated Underperform . . . American International Group ($38; NYSE: AIG) will sell some noncore businesses and issue nearly $7 billion in debt securities to raise cash. In recent weeks, the insurer has raised $13.4 billion through the sale of stock and equity units in an attempt to cover investment losses and invest in growing divisions. In other news, the Securities and Exchange Commission said former chief executive Maurice “Hank” Greenberg is under investigation for his alleged role in transactions that made it look like AIG had more reserves against losses than it really did. Greenberg’s lawyer said the investigation should have no material effect on AIG’s financial statements. AIG is rated Neutral . . . Time Warner ($16; NYSE: TWX) announced details of its plan to split off its cable business. Time Warner Cable ($31; NYSE: TWC) will pay a one-time $10.27-per-share dividend, and majority shareholder Time Warner will receive about 85% of the $10.9 billion payout. The arrangement will cut Time Warner’s debt by two-thirds and allow a tighter focus on the media-content businesses. Time Warner is rated Neutral.

Health-care review
Ruling in favor of Merck ($40; NYSE: MRK), a Texas appeals court overturned a jury’s $32 million award to the widow of a man who had died after taking the painkiller Vioxx. The award had already been lowered to $7.75 million to comply with caps on punitive-damage awards in Texas. But the appeals court ruled that there was no definitive link between Vioxx and the man’s death. Including this reversal, Merck has won 10 of the 14 Vioxx cases that have reached verdicts — many more cases are pending or under way. Merck faced the threat of roughly 26,600 lawsuits before agreeing to settle at least 25,000 of them for a combined $4.85 billion. Merck is rated Neutral . . . A clinical trial found that Amgen’s ($42; NASDAQ: AMGN) denosumab osteoporosis drug worked better than a similar drug produced by Merck ($40; NYSE: MRK). Women taking denosumab gained 80% more bone-mineral density than those treated with Merck’s Fosamax. Amgen and Merck are rated Neutral.

Earnings
Hewlett-Packard ($46; NYSE: HPQ) announced April-quarter profits of $0.87 per share excluding amortization of intangible assets, up 24% on an 11% revenue increase to $28.26 billion. Sales and profits topped consensus estimates. H-P saw growth across all business units and geographies, and sales outside the U.S. accounted for 70% of revenue. The company also raised per-share-earnings guidance for fiscal 2008 ending October to between $3.54 and $3.58, versus the $3.54 consensus. H-P is a Buy and a Long-Term Buy.


BMC Software ($38; NYSE: BMC) reported March-quarter per-share earnings of $0.63 excluding special items, up 47% on 11% sales growth. License revenue rose 14%, while the small services unit enjoyed 37% growth, offsetting an increase of less than 7% in maintenance revenue. Profits topped consensus estimates by $0.12 per share. Including charges for restructuring, amortization, share-based compensation, and other items, BMC earned $0.50 per share. The company expects earnings of $2.10 per share to $2.20 per share in fiscal 2009 ending March, above the $2.09 consensus at the time of the announcement. BMC Software is a Focus List Buy.


Deere ($82; NYSE: DE) reported April-quarter earnings of $1.74 per share, up 28% but a penny shy of consensus estimates. Sales rose 18% to $8.10 billion, powered by 46% growth outside of the U.S. and Canada. Strength in the global farm market drove most of the gains, as sales in the agricultural division rose 34%. The company warned that rising materials costs will pressure future earnings, and consensus profit estimates have declined since the announcement. Deere is rated Neutral.

Freeport's road to growth paved with copper
High metals reserves should help Freeport-McMoRan ($126; NYSE: FCX) maintain its strong cash flow. Per-share operating cash flow jumped to $15.22 in 2007, up from $8.42 in 2006 and $2.72 in 2002. With about 77 billion pounds of copper reserves to tap and one of the lowest cost structures in the industry, Freeport should generate more than enough cash to pay down debt, explore new reserves, and raise dividends through the end of the decade.

Copper demand has consistently outstripped supply in recent years. Over the last decade, copper consumption rose at an annualized rate of 3.4%, while production increased only 2.7%. Despite a slowdown in U.S. home construction, which has reduced the country’s copper demand, supply disruptions should keep prices at historically high levels.

Freeport is expanding operations at the Tenke Fungurume mine in the Democratic Republic of Congo. Tenke is widely believed to contain the largest body of undeveloped copper and cobalt ore in the world. Freeport estimates the mine will produce 250 million pounds of copper and 18 million pounds of cobalt annually, starting in 2009. Some estimates project peak production of two or three times the company’s target. Despite Freeport’s rich portfolio of mining assets, the stock trades at just 11 times estimated 2008 earnings. Freeport is a Focus List Buy and a Long-Term Buy.

News digest
Shares of National Oilwell Varco ($83; NYSE: NOV), which was expected to open a Brazilian distribution center in the June quarter, jumped on news that Brazilian oil giant Petrobras ($74; NYSE: PBR) plans to contract 40 deepwater rigs or drilling ships through 2017. National Oilwell is a Buy and a Long-Term Buy.


Assurant ($67; NYSE: AIZ) raised its quarterly dividend 17% to $0.14, payable June 10. Assurant is a Focus List Buy.


Steelmaker Nucor ($80; NYSE: NUE) plans to issue more than $2 billion in stock, or nearly 10% of its market value. Nucor is rated Neutral.


Broadcaster CBS Corp ($23; NYSE: CBS) agreed to pay $1.8 billion in cash to purchase CNET Networks ($11; NASDAQ: CNET), an online media company. CBS is rated Neutral.


General Electric ($32; NYSE: GE) confirmed media reports that it is looking to sell its 101-year-old appliance business, which could be worth more than $6 billion. General Electric is rated Neutral.


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