Banks under pressure
In May, bank and brokerage stocks gave up much of the gains they managed in late March and April. As the chart below illustrates, financial stocks have lagged the broader market not only over the last year, but also over the last month. A slowdown in the investment-banking business and renewed concerns about how the largest financial firms manage their risk continue to drag on the stocks. The struggle to raise capital continues, and more asset write-downs are likely in the June quarter.
Many financial giants are planning massive divestitures. Merrill Lynch ($44; NYSE: MER) is forming a team to unload its subprime-mortgage assets and other securities hammered by the implosion of the housing and credit markets. The company has already written down the value of its assets by more than $30 billion, and the divestiture is geared to strengthen its balance sheet by removing some assets entirely. Merrill Lynch didn’t say what assets it intended to sell or how much it expected to receive. Merrill Lynch, down 18% for the year, is rated Neutral.
Citigroup ($22; NYSE: C) has already announced plans to sell $400 billion in assets over the next two to three years, as it raises cash and tightens its focus on core banking businesses. Charles Prince was ousted as CEO in November after the company posted $11 billion in losses, the first of about $40 billion in losses over the last three quarters. Citigroup, down 26% so far this year, is rated Neutral.
A combination of consumer pessimism, labor woes, and high metals prices has hit U.S. automakers hard. Since the end of April, General Motors ($17; NYSE: GM) shares have fallen 25%, while Ford Motor ($7; NYSE: F) has declined 18%. Both companies have struggled for years with an inability to generate consistent profits at their core businesses, and both GM and Ford are down 74% over the last 10 years.
Workers at GM supplier American Axle & Manufacturing ($19; NYSE: AXL) ended their three-month strike, allowing GM to ramp up production in 30 plants slowed or idled by the work stoppage. The automaker said the strike reduced expected June-quarter production by 230,000 vehicles, costing the company $1.8 billion on top of roughly $800 million in earnings lost in the March quarter. GM also promised $215 million to fund worker buyouts as part of the deal. General Motors is rated Underperform . . . Ford lowered its production outlook and said it may not achieve its goal of profitability by 2009. Weak consumer demand is likely to continue pressuring revenue, while high prices for metal and other commodities have reduced profitability. Ford projects sales volumes for the June and September quarters down 15% to 20% from year-earlier numbers. According to published reports, Ford may cut up to 12% of its salaried work force. Ford is rated Underperform.
Microsoft, Yahoo update
Microsoft ($28; NASDAQ: MSFT) hopes to satisfy European regulators investigating the company by allowing users of the Office 2007 suite of business software to save files in multiple formats, including ones created by other companies. EU officials are investigating Microsoft in part because they say it has not made its programs interoperable with rivals’ software.
In an effort to better compete with Google ($561; NASDAQ: GOOG), Microsoft also announced a new program that offers cash rebates to users who buy products after using Microsoft’s Live Search program. The company is also continuing talks with Yahoo ($27; NASDAQ: YHOO) about buying or arranging a partnership with Yahoo’s search business.
Yahoo has problems of its own. The company has postponed its annual meeting from July 3 to the end of that month. The company renominated all of its board members, except for one who has stepped down, as activist investor Carl Icahn moves to replace them with a separate slate of candidates in order to bring Microsoft back to the bargaining table. Microsoft has said it is no longer interested in buying all of Yahoo, but such sentiment can change quickly on Wall Street. Microsoft is a Buy and a Long-Term Buy. Yahoo is rated Neutral.
The U.S. Department of Defense authorized $2.2 billion in funds to purchase six Lockheed Martin ($107; NYSE: LMT) F-35 stealth fighter jets, along with the option to buy six F-35s specially designed for short takeoffs and landings. Israel also asked the United States for permission to buy 25 F35s with the option of buying another 50, at a cost of about $80 million each. Lockheed Martin is a Focus List Buy and a Long-Term Buy . . . Belgian brewer InBev, maker of Stella Artois and Beck’s, is rumored to be preparing a $46 billion, or $65-per-share, bid to take over Anheuser-Busch ($57; NYSE: BUD). The U.S. brewer’s shares rose nearly 8% on the news. Anheuser has rejected takeover offers in the past, and CEO August Busch IV said the company would not change hands while he was in charge. However, the brewer had not commented on InBev’s potential offer at press time. Anheuser-Busch is rated Neutral . . . Southwest Airlines ($13; NYSE: LUV) says it doesn’t plan on charging passengers extra for carrying up to two pieces of luggage. Rival American Airlines announced last week that it would charge some passengers $15 for the first checked bag. News reports had suggested Southwest was considering a similar move. In other news, at the company’s annual meeting, founder and former President Herb Kelleher stepped down as chairman of the board after 30 years. Southwest is rated Neutral . . . Oilfield-services giant Halliburton ($48; NYSE: HAL) has launched a bidding war for U.K.-based Expro International Group. Halliburton said it would offer $3.38 billion, topping by 6% an earlier bid from a private-equity consortium called Umbrellastream. Umbrellastream then raised its offer to $3.43 billion. Halliburton is rated Neutral.
Food-equipment maker Enodis is recommending that shareholders accept a $2.1 billion takeover offer from Manitowoc ($39; NYSE: MTW), which has offered more than rival bidder Illinois Tool Works ($52; NYSE: ITW). Manitowoc is a Focus List Buy and a Long-Term Buy.
Kimberly-Clark ($63; NYSE: KMB) announced it would raise the prices of some diapers, facial tissues, and bathroom tissues by 6% to 8% beginning in July to offset rising material and energy expenses. Kimberly-Clark is rated Neutral.
Citizens Communications ($12; NYSE: CZN) is changing its name to Frontier Communications and its ticker symbol to FTR on July 31. Citizens is rated Neutral.