The Bull Market Weekly Advisor
SECTOR-RELATED NEWS
FINANCIAL
CITIGROUP, BANK OF AMERICA REPORT SOLID EARNINGS
Two of the world's biggest banks released their latest earnings reports Monday morning, and the results were encouraging. BANK OF AMERICA (BAC, $83, unch.) reported 2Q net income of $2.7 billion, or $1.80 a share, up 23% from a year-ago profit of $2.2 billion. Results blew by the consensus estimate of $1.57. Revenue, meanwhile, jumped 12% to $9.6 billion.
CITIGROUP (C, $46, unch.), a holding in our Financial Portfolio, also posted strong results. 2Q earnings rose 5% to $4.3 billion, or 83 cents a share, from $4.1 billion a year earlier. And last year's results were boosted by a one-time gain of $255 million from the spin-off of Travelers Property Casualty. Profits beat Wall Street expectations by 3 cents, and revenue jumped 8% to a record $19.4 billion.
The firm also raised its quarterly dividend for the second time this year. Citigroup increased its payout by 2 cents to 20 cents a share in January. This time, the firm raised it by 15 cents, to 35 cents a share. The bigger dividend is payable on August 22nd to shareholders of record as of August 4th.
TODD'S TAKE: The story for both of these banks was improving credit conditions and the continued surge in the mortgage market.
Bank of America had a particularly strong quarter due to these two factors. Credit losses sank 13% to $770 million, their lowest level in two years. Meanwhile, mortgage banking income quadrupled to $560 million, as consumers continued to take advantage of low mortgage rates for new loans and refinanced old ones in droves.
Bank of America's other units also did well. Investment banking income rose 5% to $490 million, while credit card income jumped 23% to $760 million.
For Citigroup, the world's largest Financial Services firm, it was business as usual. Revenue growth was strong across the board, with a 24% jump in retail banking, a 21% climb in private banking, and a 7% rise in capital markets revenue.
As with Bank of America, increased mortgage business boosted retail banking income for Citigroup, which surged 63% to $1.1 billion. The acquisition of Golden State Bancorp also added to earnings in the division.
Speaking of acquisitions, many analysts expect Citigroup to hit the start shopping at the merger market once again. The firm has done well with recent takeovers, and we're confident that the next deal, when it happens, will be a successful one as well.
The latest earnings from Citigroup tell us that all is well with the bank. It weathered the domestic economic downturn and is poised to profit from the upcoming recovery. The stock set a new 52-week high on Monday, and we see this as a true long-term investment. Keep this stock in your portfolio, or buy it if you don't have a position.
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TECHNOLOGY
INTEL PROFITS DOUBLE YEAR-AGO RESULTS
Chipmaker INTEL (INTC, $25, up 2) reported 2Q earnings of $895 million, or 14 cents a share, double its year-ago results of 7 cents. The company posted sales of $6.8 billion, up from $6.3 billion in 2Q02, and right at the high end of its last revenue projection. Stock analysts had been expecting Intel to report earnings of 13 cents a share on sales of $6.7 billion. The company managed to beat those estimates on the strength of rising margins and improved demand for its computer chips, particularly in Asia. Intel's communications chip business, however, showed continued signs of weakness, with sales down 5% compared to a year earlier.
TODD'S TAKE: Let's break this earnings report into two categories: The good things about Intel the company and the bad things about Intel the stock.
First, the good things about Intel the company. The firm's manufacturing investments are clearly paying off. The Pentium 4 chip is gaining market share at the expense of chips from rival ADVANCED MICRO DEVICES (AMD, $7.12, down 0.08) because, quite simply, it is more advanced and has more growth ahead of it in terms of speed and applications. Meanwhile, Intel has hot new chips in the Centrino mobile chip and the Xeon server chip. To top it all off, Intel's moves to more advanced manufacturing processes are churning out higher performance chips at lower costs. Margins are up again, this time to 54%. The credit goes to the more efficient plants and processes. Improved margins also help explain why a company that saw a 12% jump in chip revenue could produce a 100% gain in profits.
Clearly, Intel is doing many things right on many fronts. The firm makes the top computer processors, it is gaining market share, and it is doing so while becoming a more efficient and more advanced manufacturer.
Unfortunately, none of these things make Intel the stock a wise investment. Here are the reasons why.
To start, Intel made it clear that it sees no sign of an economic recovery, nor any sign of companies upgrading PCs or increasing their IT budgets. This is from a Technology giant that is likely to have one of the best quarterly reports this season. Yuck. This lack of demand is why Intel doesn't expect 3Q sales to be any better than usual (again, the company is counting on its improved manufacturing to lift margins.)
Of course, lackluster demand isn't Intel's fault. And many will argue that with so much going for it, the company is bound to prosper wildly once the economy recovers. We don't buy it. Intel expects to earn 62 cents a share this year. That puts its 2003 PE ratio at 39.
Now, if we said that in 1996 the company earned 72 cents a share (which it did), then many Intel stock lovers would probably say, "Sure, but today you can get Intel shares relatively cheap compared to back then." Yes, at the end of 1996 you could buy Intel shares for $131 apiece -- which, when adjusted for splits, works out to about $16 a share. But here's the kicker: As inflated as growth expectations were for Intel in 1996, they were still probably more realistic than the expectations for profit growth needed to justify the firm's current PE of 40. At least when Intel headed into 1997, it had a track record of growth and operated in a PC-hungry market, fueled by the advent of the Internet, to inflate expectations.
Today, Intel has lower earnings per share than it did six years ago, it has quarter after quarter of sales stuck in a swamp, and it has virtually no expectations for a strong rebound in the PC market.
Now, if you think you can buy Intel today and find someone to buy it for a higher price down the road, then by all means do it. But the game has to come to an end sometime, and we have no interest in being stuck with Intel shares when it does.
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HEALTH INSURANCE
UNITEDHEALTH GROUP BEATS EXPECTATIONS
Health insurer and Healthcare bellwether UNITEDHEALTH GROUP (UNH, $51, unch.) announced strong quarterly earnings, which rose more than 35% and beat both analyst and in-house expectations. 2Q net income was $440 million, or 71 cents per share, rising from $325 million, or 51 cents, in the year-ago quarter.
Revenues rose 17% last quarter to $7 billion as a result of increased membership rolls and strong control over medical costs.
TODD'S TAKE: UnitedHealth is the first major US health insurer to issue earnings this quarter, and the firm's strong results give us good reason to be bullish on the Healthcare sector in general. Although medical costs are rising rapidly, insurers are keeping pace by hiking premiums at a faster pace. The insurers that are coming out on top, which include UnitedHealth, are combining premium hikes with strong cost control measures and new sales initiatives. Operating costs have been held in check, improving 80 basis points from the same quarter last year.
UnitedHealth in particular is showing balanced growth across all business segments. We're also seeing some strong new business sales. Market share gains, along with higher premiums and cost controls, will yield full-year 2003 earnings growth of 34%, according to company management. EPS growth in 2004 is projected to come in at 18-20%. UnitedHealth has a strong track record of meeting or exceeding expectations, and we expect management to deliver on its latest projections. Add this one to your portfolio for strong growth this year and next.
"Source: The Bull Market Report www.BullMarket.com"
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