Microsoft stops chasing Yahoo


Microsoft ($30; NASDAQ: MSFT) walked away from its proposed purchase of Yahoo ($26; NASDAQ: YHOO) after the Internet company rejected a bid of $47.5 billion. After weeks of wrangling and public posturing, Microsoft was willing to raise its offer by $5 billion from the current value of the original deal, but Yahoo wanted at least another $5 billion. The deal made operational sense for Microsoft, which has had trouble gaining traction in the market for Internet searching and advertising. But many investors balked at the price.

Yahoo shares plunged on the news, and the company faces pressure to forge a partnership with a major player, such as Google ($586; NASDAQ: GOOG), AOL, or News Corp. ($19; NYSE: NWSa) property MySpace. Microsoft is likely to consider another acquisition or series of deals to address its Internet problems, but continued weakness in Yahoo shares could spark renewed overtures, with the troubled Internet company perhaps more willing to listen the second time around.

With no debt and $26.34 billion ($2.79/share) in cash and short-term investments at the end of March, Microsoft enjoys the flexibility to pursue acquisitions, invest in its own businesses, and continue buying back shares and raising the dividend. Excluding its cash holdings, Microsoft trades at an attractive 13 times projected year-ahead earnings. Microsoft is a Buy and a Long-Term Buy. Yahoo and Google are rated Neutral.

March-quarter earnings
Transocean ($158; NYSE: RIG) reported profits of $3.80 per share, up 52% excluding special charges and gains, and 11% above consensus estimates. Sales jumped 134%, boosted by a large acquisition and higher rig rental rates. In other news, Transocean won a five-year drilling contract worth about $1 billion, scheduled to start in late 2010. Transocean is a Focus List Buy and a Long-Term Buy.

Insurer Assurant ($67; NYSE: AIZ) reported earnings of $1.80 per share excluding realized investment losses, up 27% and $0.29 above the consensus estimate. Net earned premiums rose 10% to $1.94 billion, but investment income fell 9% to $198 million. Including investment losses, net earnings rose 8%. Assurant is a Focus List Buy.

Oceaneering International ($66; NYSE: OII) reported revenue of $436 million, up 27%, and earnings of $0.74 per share, up 23%. Income at the remotely operated vehicle (ROV) division rose 50%, offsetting flat or lower profits at subsea products and subsea projects. The company added two new ROVs in the quarter. Oceaneering is a Focus List Buy.

Oshkosh ($39; NYSE: OSK) said earnings rose 43% to $0.97 per share on 7% revenue growth. Weakness in U.S. residential construction was offset by strong international demand and military orders. Shares fell as the company affirmed previous fiscal 2008 earnings guidance below consensus estimates. Oshkosh is a Buy.

Exxon Mobil ($90; NYSE: XOM) announced earnings of $2.03, up 25% on 34% revenue growth to $116.85 billion. Profits fell short of expectations, hurt by tighter refining and chemical margins, lower production, and higher operating costs. Production fell 5.6%, or 3% excluding the fields expropriated by Venezuela, divestitures, and a few other factors. In other news, Exxon raised its quarterly dividend 14% to $0.40 per share, payable June 10. Exxon is a Long-Term Buy.

Chevron’s ($97; NYSE: CVX) earnings beat consensus estimates, rising 14% to $2.48 per share on revenue of $65.94 billion, up 37%. Strong exploration-and-production earnings offset sharp declines in refining and chemicals. Production fell 2% in the quarter but rose slightly excluding fluctuations in cost recovery and royalty volumes. The company also raised its quarterly dividend 12% to $0.65 per share, payable June 10. Chevron is a Buy and a Long-Term Buy.

Excluding $560 million in investment losses, MetLife ($62; NYSE: MET) reported per-share earnings of $1.52, up 8% and topping the consensus estimate by $0.04. Including investment results, earnings fell 34%. Revenue rose 1% to $13.03 billion, as growth of 12% in premiums and 11% in fees offset investment losses. MetLife is a Buy and a Long-Term Buy.

Airgas ($57; NYSE: ARG) earned $0.76 per share, up 41%. Revenue increased 27% to $1.09 billion, with acquisitions accounting for about two-thirds of the growth. Same-store sales rose 8%. Airgas shares jumped 15% on the news. Airgas is a Buy.

Per-share earnings from continuing operations increased 35% to $0.58 at Disney ($34; NYSE: DIS), $0.07 higher than the consensus. Revenue rose 10% to $8.71 billion. Disney also said it agreed buy 220 Disney stores from The Children’s Place Retail Stores for an undisclosed amount, with plans to close about 100 of the stores. Disney is a Long-Term Buy.

Scotts Miracle-Gro (30; NYSE: SMG) blamed a late start to the lawn and garden season for a 13% decline in per-share earnings excluding the effect of product recalls. Revenue fell 4%. The company lowered profit guidance for fiscal 2008 ending September, and the shares fell more than 10% on the news. Scotts is rated Neutral.

News roundup
Home Depot ($29; NYSE: HD) announced it would close 15 stores and cut back on new store openings as the weak housing market continues to pressure sales. Home Depot is rated Neutral . . . Bristol-Myers Squibb ($23; NYSE: BMY) agreed to sell its ConvaTec wound-care business to private-equity investors for $4.1 billion in an effort to focus on its core pharmaceutical business. The company will also sell between 10% and 20% of its Mead Johnson nutritional business this year through an initial public offering. Bristol-Myers is rated Neutral. . . Ailing telecom provider Sprint Nextel ($9; NYSE: S) will join forces with Clearwire ($16; NASDAQ: CLWR) to create a $14.5 billion next-generation wireless company offering extremely fast Internet access. Major cable companies, Internet giant Google ($586; NASDAQ: GOOG), and semiconductor leader Intel ($24; NASDAQ: INTC) are backing the venture, which uses the untested WiMax technology. Sprint is rated Underperform. Intel and Google are rated Neutral.

News digest
Cisco ($26; NASDAQ: CSCO) reported a 12% increase in April-quarter earnings to $0.38 per share excluding stock-based compensation and acquisition costs on 10% revenue growth. Cisco is rated Neutral.

PepsiCo ($69; NYSE: PEP) raised its quarterly dividend 13% to $0.425 per share, payable June 30. PepsiCo is a Focus List Buy and a Long-Term Buy.

Walgreen ($35; NYSE: WAG) sales rose 8% to $4.85 billion in April, with same-store sales up 1.6%. Walgreen is a Long-Term Buy.

Union Pacific ($149; NYSE: UNP) announced a 2-for-1 stock split to be completed May 28. Union Pacific is rated Neutral.

Wal-Mart Stores ($56; NYSE: WMT) is expanding its $4 prescription program by selling 90-day supplies of up to 350 generic drugs for $10. Wal-Mart is a Long-Term Buy.

Mortgage-lending giant Fannie Mae ($31; NYSE: FNM) reported a March-quarter loss of $2.51 billion and announced plans to cut its quarterly dividend 29%. Fannie Mae is rated Neutral.

Retailer Target ($53; NYSE: TGT) plans to sell 47% of its credit-card assets to J.P. Morgan Chase ($48; NYSE: JPM) for $3.6 billion. Target and J.P. Morgan are rated Neutral.

After writing down the value of its life-insurance portfolio, Wachovia ($30; NYSE: WB) restated its March-quarter preliminary results, posting a per-share loss of $0.36 per share versus the $0.20 reported three weeks ago. Wachovia is rated Neutral.

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