Cooper added as Long-Term Buy

6/23/2008


Cooper Industries ($43; NYSE: CBE), a maker of electrical products and tools used in construction and industry, is being initiated as a Long-Term Buy. While the stock is down 19% this year on concerns about a slowdown in commercial construction, Cooper’s product diversity and exposure to healthy end markets suggest consensus expectations of double-digit growth in per-share earnings this year are reasonable.

Domestic commercial construction accounts for roughly 18% of revenue, but half of that comes from renovation and repair work — not new building starts. Robust utility, energy, and industrial end markets provide roughly 60% of revenue. International sales have been growing at 14% per year since 2003 and now make up roughly a third of revenue, with 12% coming from developing markets in Asia and Latin America. With new energy-
efficient lighting systems also likely to enjoy solid demand, Cooper seems well positioned to grow despite a slowing construction market.

The stock trades at 12 times expected year-ahead earnings, at the low end of its five-year rage. Cooper, with an Overall Quadrix score of 95, is being added as a Long-Term Buy.

FedEx downgraded
FedEx ($83; NYSE: FDX) reported adjusted May-quarter earnings fell 24% to $1.45 per share, slightly below the consensus estimate. Including an $891 million charge related to the decision to change the name of the Kinkos retail business, the company reported a loss of $0.78 per share. Results were hampered by high fuel prices and a slow U.S. economy. For fiscal 2008 ended May, per-share earnings fell 44% to $3.60.

For fiscal 2009, FedEx offered guidance for per-share earnings of $4.75 to $5.25, well below the consensus estimate of $5.92. While discouraging guidance from FedEx is not surprising, the extent of the shortfall suggests the pass-through of rising fuel prices is impacting demand more than anticipated. In the May quarter, U.S. express shipments were down 3% in the May quarter as customers shifted toward lower-cost ground shipments.

FedEx is a well-managed company with solid long-term prospects. But with profit margins and demand eroding — and the Quadrix Overall score down to 57 — the stock no longer ranks among our top picks for two- to four-year gains. FedEx is being downgraded to Neutral and dropped from the Long-Term Buy List.

Sales and earnings
Adobe Systems ($41; NASDAQ: ADBE) reported adjusted May-quarter earnings per share of $0.50, up 35% and $0.04 above the consensus estimate. Revenue rose 19% to $887 million. Revenue received a 5% boost from foreign currency translation, as more than half of sales came from overseas. U.S. sales were flat. The company forecast per-share earnings of $0.45 to $0.47 for the August quarter, compared to consensus estimates of $0.45. Some analysts were disappointed by revenue guidance for the August quarter, which was slightly below expectations. But the company has a history of issuing conservative guidance, and Adobe remains well positioned for brisk profit growth over the next 12 to 18 months. Adobe is a Buy and a Long-Term Buy.


Qualcomm ($49; NASDAQ: QCOM) said it expects higher-than-anticipated profits for the June quarter and full year, reflecting strong demand for third-generation cell phones. The company said per-share earnings in the June quarter would be $0.54 to $0.55 excluding special items, up from previous guidance of $0.50 to $0.52. Full-year earnings per share are expected to be between $2.09 and $2.13, up from earlier guidance of $2.04 to $2.09. Qualcomm is a Focus List Buy and a Long-Term Buy.


Wal-Mart Stores ($59; NYSE: WMT) announced May sales rose 10%. Sales at stores open more than a year were up 4%, and traffic also increased. The retailer said that capital expenditures for the year ending January would be at the low end of previous guidance as the company focuses on improving its cash flow. Operating cash flow has been improving, and Wal-Mart told investors that it intended to continue making share repurchases. Dividend increases are also likely. Wal-Mart is a Long-Term Buy.

Beverage news
Anheuser-Busch ($62; NYSE: BUD) received a $46.35 billion, or $65 per share, cash takeover bid from Belgium-based brewer InBev. At the same time, Anheuser is reportedly considering buying the 50% of Mexican brewer Grupo Modelo that it does not already own. InBev has warned Anheuser that purchasing Modelo could make a takeover too expensive for InBev. Anheuser-Busch is rated Neutral.


Shares of Coca-Cola ($54; NYSE: KO) and PepsiCo ($66; NYSE: PEP) have slumped on concerns about beverage demand and increasing costs. Coca-Cola Hellenic Bottling ($30; NYSE: CCH), a leading Coke bottler based in Greece, warned June 13 that near-term profits would be sharply lower than previous estimates due to weak volumes and higher plastic prices. PepsiCo says its commodity and energy costs are likely to keep rising, and flooding in the Midwest has interrupted some production. Nevertheless, the company reaffirmed on June 16 its per-share earnings guidance, saying it will earn at least $3.72 per share in 2008, up 10% from 2007. Coca-Cola is rated Neutral. PepsiCo is a Buy and a Long-Term Buy.

Financial news
The board of American International Group ($31; NYSE: AIG) has removed CEO Martin Sullivan following two of the insurer’s worst quarterly performances. Chairman of the board Robert Willumstad, a former executive at Citigroup ($20; NYSE: C), will replace Sullivan. AIG is also facing an SEC investigation regarding accounting practices under its long-time CEO Maurice “Hank” Greenberg, who left in 2005. Though seemingly cheap at just 12 times expected 2008 earnings and six times expected 2009 earnings, Neutral-rated AIG poses too many risks for the Forecasts to recommend at this time.


Federal Reserve regulators approved Bank of America’s ($29; NYSE: BAC) $4 billion acquisition of Countrywide Financial ($5; NYSE: CFC). Bank of America shares have dropped more than 40% since August, when the company first invested $2 billion in Countrywide, the nation’s largest mortgage lender. Investors are concerned that mortgage-related losses and consumer credit problems will weigh on results, particularly as Countrywide’s loan portfolio is integrated. Earnings estimates continue to fall for Bank of America, rated Neutral.


Fifth Third Bancorp ($10; NYSE: FITB) said that it would raise $2 billion through the sale of preferred stock and some assets. The bank, citing rising loan losses, plans to cut its dividend by 66%. Fifth Third is rated Neutral.

Merger developments
Microsoft ($29; NASDAQ: MSFT) and Yahoo ($23; NASDAQ: YHOO) have ended all talks regarding Microsoft’s attempt to acquire the Internet portal, purchase its search business, or enter into an advertising deal. The end of discussions freed Yahoo to pursue a search advertising arrangement with Google ($569; NASDAQ: GOOG) that the company estimates will provide $800 million annually to Yahoo. Microsoft opposes the deal, arguing that it would put 90% of all web searches into Google’s hands. Microsoft is a Buy and a Long-Term Buy. Yahoo and Google are rated Neutral.


Verizon Wireless, jointly owned by Verizon Communications ($36; NYSE: VZ) and Vodafone ($30; NYSE: VOD), agreed to buy wireless carrier Alltel for $5.9 billion in stock and the assumption of $22.2 billion in debt. The deal will make Verizon Wireless the largest cellphone carrier in the U.S. Verizon is rated Neutral.


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