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Sunday, July 27, 2003 8:37:13 PM
Bull Market Weekly Update:
COMMENTARY: GOOD NEWS COMES IN SMALL DOSES, BUT INVESTORS STILL FEEL GOOD
Earnings reports continued to flow out of the floodgates this week, but investors had their eyes on more than 2Q results. Good thing, too, for if earnings reporting was a dart throwing match, then this week the results looked like amateur night. They were all over the place. The major indices followed suit, kicking off the week on a down note before coming back strong to close higher for the week. A good, though low-volume session on Friday helped out the rally cause.
FOR THE WEEK, THE DOW JONES rose 97 points, or 1.1%, to end at 9285.
THE S&P 500 ticked up 6 points, or 0.6%, to close at 999.
AND THE NASDAQ climbed 22, or 1.3%, to finish the week at 1731.
As we noted, earnings were all over the map. We saw a bit of everything: Companies beating expectations; companies missing expectations; companies showing year-over-year growth but still missing expectations. And the reactions to these results were as varied as the results themselves. Overall, however, we have to say that reactions were on the optimistic side, and in some cases the overly optimistic side. GATEWAY (GTW, $4.14, up 0.23), for instance, reported a larger-than-expected drop in revenues (20%), and a bigger loss than last year, exemplifying the weakness in the PC market, but thanks to its "smaller-than-expected" loss investors pumped up the stock 13% the day it announced.
Some of this past week's optimism evidently came from outside the corporate world. A better-than-expected rise in Durable Goods Orders suggested to some that business spending is coming back. They added strength to their argument by pointing to MICROSOFT's (MSFT, $27, unch.) announcement that it will boost its R&D budget to $7 billion. We think such an assessment of the business spending environment is premature, and we'll give you two reasons why.
First, those analysts who have been saying a second-half recovery is just around the corner have been extremely reluctant to face the economic facts. Months of weak economic numbers have been pouring in, and yet so many economists and analysts have been loathe to say there is any negative trend. Instead, they say, a rebound is right around the corner. Then, we get one positive report and they are ready to declare that growth has taken hold. WE say that one report does not a growth trend make. The jury is still out on the economy, and it will be out for a while yet.
Second, tapping Microsoft as an example of corporate America is like tapping Warren Buffett as an example of the typical investor. The fact that Microsoft is upping its R&D budget says little about the prospects for capital spending in the rest of the country. Microsoft has almost $50 billion in cash. Furthermore, its R&D is based less on optimism than on necessity. It knows it needs to diversify its revenue streams, especially because all its attempts to do so have thus far failed. Finally, it is noteworthy that Microsoft's R&D budget is a matter of no little discontent for some of its shareholders. Given the lower R&D spending levels of its rivals and its disappointing track record of R&D wins, many investors feel that Microsoft OVERSPENDS on R&D. Shareholders, they say, would be better off having that money distributed among them. The fact that Microsoft, ever reluctant to issue a sizable dividend, has diverted more money to R&D suggests that the much-wanted dividend will remain elusive. In fact, Bill Gates said this week that they won't be paying a dividend any time in the near future.
Still, the news -- both on Durable Goods and Microsoft -- gave investors something to chew on, and they liked the taste. The other tidbit that tickled their fancy came from Iraq, where American forces killed Saddam's sons. Known for their brutality, these former second-in-commands were viewed as formidable sources of ongoing resistance in Iraq. With their deaths, everyone hopes the messy cleanup after our victory there will come to a quick end. That will be good for everyone: Our soldiers, the Iraqi people, our economy, and our stock markets. Let's hope it happens soon.
If it does, then we can all expect this rally to gain some strength. While we don't see solid ground for this rally or its continuation, investors have proven that they are content to carry on buying without good reason. We're pleased to see the stocks in our Portfolios reporting solid earnings and strong growth. We expect that to continue, and we expect the share prices to continue to appreciate. Barring any major shocks to the system, we would expect the same share price growth to continue for less-worthwhile stocks. This rally, as they say, has some legs.
ECONOMY WATCH
1. LEADING INDICATORS LOOK GOOD
The Index of Leading Economic Indicators rose 0.1% in June after ratcheting up a revised 1.1% in May. It's the third straight increase in the index, which is designed to forecast economic performance six to nine months in advance. Four of the 10 indicators rose in June, led by money supply, stock prices, jobless claims and building permits. Four other indicators fell, led by consumer expectations, vendor performance, interest rate spreads and orders for consumer goods. Two indicators, core capital goods orders and the factory workweek, were unchanged.
Our take? June doesn't tell us a thing. Economists were expecting 0.2%, and it came in at 0.1%. Not much to go on here. We'll have to look elsewhere for clues as to where our economy is headed.
2. JOBLESS CLAIMS FALL TO FIVE-MONTH LOW
In a positive economic sign, the Commerce Department reported on Thursday that Jobless Claims for the latest week fell under the key 400,000 barrier for the first time since February. Claims declined by 29,000 to 386,000, ending a multi-month streak of 400,000+ Claims. However, the four-week average, which economists see as a more stable measure of the job market, remained above 400,000 for the 21st straight week, falling 5,000 to just under 420,000 claims. Remember that fewer Jobless Claims are more a sign of less firing, not more hiring, so it's not necessarily getting easier for the country's unemployed to find new work. But at least we're seeing some improvement. The key now is to see if this downward trend can last.
3. DURABLE GOODS ORDERS JUMP
The Commerce Department said on Friday that Durable Goods Orders grew a better-than-expected 2.1% last month, their largest increase since January and well above the expected 1.3% uptick. Non-defense capital goods orders rose a solid 2.0%, although excluding aircraft the number rose just 0.6%. Still, the numbers were strong, and they suggest that manufacturing activity and business demand are on the rise.
4. RECORD NEW HOME SALES, BUT EXISTING SALES FALL
New Home Sales climbed 4.7% to a record annual rate of 1.16 million units in June, according to a report from the Commerce Department released on Friday. That was better than the 1.08 million rate that economists expected. However, the National Association of Realtors reported that Existing Home Sales slipped 0.3% last month, to an annualized pace of 5.83 million. Economists expected Sales to rise to 6 million units.
What this tells us is that despite rising mortgage rates last month, consumers continued to become homeowners at a frenzied rate. Increased buying activity may suggest that consumers feel more comfortable about their financial positions to undertake such a big investment as buying a house, a good sign for the economy. Of course, some buyers may overextend themselves, setting themselves up for bankruptcies and loan defaults in the future.
MARKET MOVERS
I. UPS (UPS, $64, unch.)
Quarter 2Q02 2Q03
Revenue $7.7B $8.2B
Net Income $610M $690M
EPS $0.54 $0.61
UPS got some overseas help for its 13% rise in quarterly earnings -- which beat Wall Street expectations by 2 cents -- on 7% higher revenue. Foreign shipment revenue climbed 20% to $1.4 billion, as operating income more than doubled to $160 million. However, domestic operating profit fell 8% to $830 million, due to higher healthcare and pension costs. That's one reason why we prefer rival FEDEX (FDX, $65, unch.) -- which last month posted 19% earnings expansion on 8% revenue growth -- over UPS. FedEx uses mostly independent contractors for its ground shipment unit, so its employee costs aren't as high. That's why the firm was able to post higher earnings growth than UPS on nearly the same percentage increase in revenue.
II. TEXAS INSTRUMENTS (TXN, $19.05, up 0.36)
Quarter 2Q02 2Q03
Revenue $2.2B $2.3B
Net Income $95M $120M
EPS $0.05 $0.07
Texas Instruments, a leading maker of communications chips for wireless phones, released its earnings after the bell on Monday, which beat Wall Street expectations by a penny a share. Like Wireless firms MOTOROLA (MOT, $9.17, up 0.12) and NOKIA (NOK, $15.30, up 0.54), the firm reduced its 2Q earnings outlook last month due to SARS-related business weakness. But unlike the other two firms, Texas Instruments lowered its outlook enough to beat estimates, hence the stock's 8% jump in Tuesday's session. Although the firm cited a surge in wireless chip sales towards the end of last quarter, the company remained cautious on the future, affirming that the industry is saddled with excess inventory.
III. AMERITRADE (AMTD, $9.82, up 1.49)
Quarter 3Q02 3Q03
Revenue $105M $195M
Net Income $6M $50M
EPS $0.03 $0.12
It was a solid quarter for online discount brokerage Ameritrade, as the firm posted sharply higher profits in its fiscal third quarter (ended June 27th) and beat the Street by 2 cents a share. The stock surged 14% on the news. Keep in mind that last quarter's numbers include results from Datek, which Ameritrade acquired in September 2002 for $715 million. The acquisition gave the firm 800,000 more customers and resulted in merger synergies of $130 million last quarter. There's no doubt that Ameritrade has greatly benefited from the return of the individual investor during the latest stock market rally. Personally, we would suggest investing in rival CHARLES SCHWAB (SCH, $11.00, down 0.48), which we used to own in our Financial Portfolio, if you're interested in the industry. If the market keeps going up -- and that's a BIG if -- barring any surprise problems, both firms should post higher profits over the coming year.
IV. EASTMAN KODAK (EK, $28, up 2)
Quarter 2Q02 2Q03
Revenue $3.34B $3.35B
Net Income $285M $110M
EPS $0.97 $0.39
Kodak reported a staggering 60% decline in quarterly earnings and announced up to 6,000 layoffs, showcasing the true depths of the downturn in the photographic film industry. The job cuts could range from 4,500-6,000 jobs, or 8-9% of the firm's total work force. More and more consumers are using digital cameras instead of traditional film-based ones, cutting demand for Kodak's film services. The company has its own digital product offerings, but it's not nearly as dominant in that market as it was in the traditional film industry. But excluding one-time items, Kodak earned 60 cents a share -- well above the consensus estimate of 29 cents on those terms. That's what caused the stock's 9% jump, despite the predominantly dour news spewing from the company. But until Kodak truly addresses its flagging film development business and comes up with alternative revenue streams, we urge you to stay away from the stock.
V. BOEING (BA, $33, unch.)
Quarter 2Q02 2Q03
Revenue $13.9B $12.8B
Net Income $780M -$190M
EPS $0.96 -$0.24
Boeing posted a net loss for the second straight quarter, following up a 1Q $480 million loss with a $190 million one. However, earnings were 19 cents better than the 43-cent loss that analysts' expected. Revenue fell 8%, as the slump in the Travel industry deepened. Just last week, CONTINENTAL AIRLINES (CAL, $14.65, up 0.23) delayed shipments of the bulk of its huge Boeing order, dealing the Aerospace firm a blow. In fact, Boeing lowered its high-end estimate for jet shipments in 2004, from 300 to 290. The company also tempered its 2004 revenue projections, from $53 billion to $52 billion. That will lead to a profit of $1.85 a share, instead of $2.20 like the firm previously expected. Until we see signs that air travel is bouncing back, expect Boeing -- and its stock -- to suffer.
VI. AMAZON.COM (AMZN, $42, up 7)
Quarter 2Q02 2Q03
Revenue $805M $1.1B
Net Income -$95M -$45M
EPS -$0.25 -$0.11
It was a solid quarter for Amazon, as sales jumped 37% and the firm narrowed its quarterly loss. Excluding one-time items, the e-tailer earned 10 cents a share, 4 cents better than expected. Orders were strong, as customers bought 42% more items on Amazon's website than last year. International sales were particularly brisk, soaring 81%. The company upped its estimate for annual sales to $5.0 billion, from $4.7 billion. There's no doubt that Amazon is a strong company with a recognizable brand that generates solid revenues and, sometimes, profits. But the stock is overvalued, in our opinion, especially after its recent run-up. After this week's surge, the stock sports a 2003 PE over 80.
VII. SUN MICROSYSTEMS (SUNW, $3.97, down 0.62)
Quarter 4Q02 4Q03
Revenue $3.4B $3.0B
Net Income $60M $12M
EPS $0.02 $0.00
Fiscal 4Q (ended June 30th) profits fell to virtually nothing, as sales sank 12% for Sun, a leading maker of IT servers. The stock fell as well, by 19% in Wednesday's session. Excluding one-time items, the firm earned a penny a share, still short of the 2-cent consensus estimate. Obviously, business IT spending hasn't recovered from its stark decline over the past two years. Sun continued to cut costs to deal with the business decline, slashing $500 million in annual selling, general, and administrative expenses. Without any signs of a business spending recovery in the near future, Sun will likely have to keep cutting.
VIII. AT&T (T, $20, up 1)
Quarter 2Q02 2Q03
Revenue $9.6B $8.8B
Net Income -$12.8B $535M
EPS -$17.11 $0.68
AT&T WIRELESS (AWE, $8.59, up 0.77)
Quarter 2Q02 2Q03
Revenue $4.1B $4.2B
Net Income $20M $220M
EPS $0.01 $0.08
AT&T bounced back from a steep loss a year ago to post solid profits last quarter. The Telecom giant earned 68 cents a share, higher than the 54-cent consensus estimate. The strong performance caused the stock to rise 2% on the news in Thursday's bearish session. In addition, the company raised its quarterly dividend 27% to 23.75 cents a share and will repurchase $2 billion of its huge debt load, currently at $27.5 billion. On a down note, however, revenue fell 8% due to increased competition. Local phone providers like the Baby Bells entered the long-distance market. AT&T went the other way, introducing its own local phone service.
As for AT&T Wireless, the company's profit of 8 cents a share doubled the consensus estimate of 4 cents, as sales rose 6%. Subscriber growth was almost twice as much as in the first quarter of the year, largely from the company's new GoPhone product, a prepaid calling plan for higher-risk customers. The firm expects to report subscriber growth of 7% for the full year. The solid report translated into a 9% jump in the stock in Thursday's trading.
IX. SBC COMMUNICATIONS (SBC, $24, unch.)
Quarter 2Q02 2Q03
Revenue $10.8B $10.2B
Net Income $1.8B $1.4B
EPS $0.53 $0.42
Dow component SBC posted a 22% decline in quarterly earnings on 6% lower revenue, even as the Telecom firm achieved a record number of new clients for both its long-distance and DSL Internet services. Earnings matched Wall Street estimates, but revenue fell short of the $12.5 billion that analysts expected. The problem was increased competition and the dreaded pension bug, which led to higher costs. But the company added 2.3 million customers to its long-distance service last quarter, and passed the 10 million mark this month. 305,000 new consumers subscribed to the firm's DSL service, for a total of 2.8 million -- a 60% jump year over year. But somehow, those new customers didn't translate into strong revenue gains, and that's a problem that SBC needs to solve.
X. DAIMLERCHRYSLER (DCX, $36, up 1)
Quarter 2Q02 2Q03
Revenue $45.2B $39.3B
Net Income $1.3B $125M
DaimlerChrysler, parent of Big Three US automaker Chrysler, suffered a staggering 90% plunge in 2Q profits, waving a big red flag over the entire Auto industry. A disappointing quarter was to be expected, as rivals GENERAL MOTORS (GM, $37, up 1) and FORD MOTOR (F, $10.97, down 0.02) reported similar results last week. Chrysler was the big sore spot in the company's operations, as the division posted a loss of $1.1 billion. Mitsubishi, the Japanese car company which is 37% owned by DaimlerChrysler, didn't fare well either, as it will record a loss for the first half of the year, due to stiff US competition and a high number of car loan defaults. We can't say this enough: STAY AWAY FROM THE AUTO SECTOR.
XI. VIACOM (VIA, $45, up 1)
Quarter 2Q02 2Q03
Revenue $5.9B $6.4B
Net Income $545M $660M
EPS $0.31 $0.37
It was a solid quarter for Viacom, as earnings beat Wall Street expectations by a penny and revenue climbed 10%. Last quarter's results were boosted by the acquisition of the Comedy Central TV network from AOL TIME WARNER (AOL, $15.32, down 1.42), as well as by a 19% jump in revenue from fall TV season advertising sales. Viacom also declared its first dividend since 1987, a payout of 6 cents a share. To top it all off, the Media firm upped guidance for the full year, forecasting double-digit earnings growth on high single-digit revenue expansion. Viacom has been one of the strongest performers in the Media sector, and while we don't recommend it as an investment, consider taking a look at the firm if you're looking for some Media exposure.
XII. EBAY (EBAY, $112, up 2)
Quarter 2Q02 2Q03
Revenue $265M $510M
Net Income $55M $110M
EPS $0.19 $0.33
Just looking at the numbers, it looks like an amazing quarter for eBay. Net income more than doubled last quarter, and sales surged 91%. Earnings of 37 cents a share, excluding one-time items, beat expectations by 2 cents. Furthermore, the company announced a 2-for-1 stock split, raised its full-year outlook for earnings to $1.47, 6 cents better than expected. Revenue may reach $2.75 billion, well above the $2.5 billion consensus estimate.
But the stock dropped 3% on the news in a very bullish session, and one brokerage firm downgraded the stock to a "Neutral" rating. Why? It's all about valuation. The stock is up 70% since the beginning of the year and 130% since October 2002. The firm has a market capitalization of $37 billion, which is one-seventh the value of WAL-MART STORES (WMT, $56, down 1), the world's largest company. But eBay's revenues are only 1% of Wal-Mart's. And did we mention that the stock's PE is over 100? This stock isn't really the best value play out there.
XIII. NORTEL NETWORKS (NT, $2.98, up 0.03)
Quarter 2Q02 2Q03
Revenue $2.8B $2.3B
Net Income -$695M -$15M
EPS $0.20 $0.00
Nortel significantly narrowed its quarterly loss and broke even on a per-share basis, matching Wall Street expectations. However, the company's CEO was disappointed with the results and blamed the weak Telecom spending environment. The firm sees continued weakness that will hurt business this quarter as well.
Nortel has been one of the hardest-hit companies during the Tech bust, as it catered to the struggling Telecom sector and suffered from nonexistent customer spending. Cost cutting ensued, and the company laid off nearly 60,000 workers over the past two years. Future restructuring this year could cost the company up to $400 million. Hmm, continued business shrinkage and no signs of a spending pickup? We don't see any reason to buy this stock.
XIV. LEHMAN BROTHERS MAKES A BIG INVESTMENT
LEHMAN BROTHERS (LEH, $64, down 1) agreed on Tuesday to acquire asset manager NEUBERGER BERMAN (NEU, $40, down 1) for $2.6 billion, ending speculation on the firms' potential merger. This wasn't the quickest of acquisitions; the two firms had been in talks for weeks about the deal. Here are the final terms: Lehman will pay $41.48/share in combined cash and stock for the company. The breakdown is $9.49 in cash and 0.496 Lehman shares for each share of Neuberger stock. Lehman expects job losses to be "minimal" and the deal to slightly reduce earnings in 2004.
This is a good move for Lehman; the investment bank recognized that investors are returning to the stock market and wanted to bolster its investment management operations. Neuberger provides a lot of ammo, with nearly $65 billion in assets under management. That boosts Lehman's total client assets under management to over $100 billion, dropping investing costs and enhancing mutual fund offerings.
XV. MICROSOFT TO GIVE BOOST TO STRUGGLING JOB MARKET
Wow! Some good corporate job news for a change! MICROSOFT (MSFT, $27, unch.) plans to hire 4-5,000 employees, of which 3,000-3,500 will come in the US. In addition, the Software giant will increase its research and development spending this year as much as 8%, or $6.9 billion, during this fiscal year (ending June 2004). It sounds like Gates & Co. are expecting a business pickup in the near future. That's the kind of corporate spending news that we like to hear. Hopefully, more firms will follow.
Good investing next week!
Todd Shaver
Editor in Chief
Editor@BullMarket.com
THE BULL MARKET REPORT
United States of America
Educating investors since 1997
1. SECTOR-RELATED NEWS
FINANCIAL
AMERICAN INTERNATIONAL GROUP ENSURES ITS SUCCESS
Financial Portfolio holding AMERICAN INTERNATIONAL GROUP (AIG, $65, up 5) posted earnings growth of 26% in the second quarter, as rising insurance premiums and favorable currency exchange rates provided a boost to earnings. The insurer recorded net income of $2.3 billion, or 87 cents a share, up from a year-ago profit of $1.8 billion, or 68 cents. Excluding realized capital losses of $245 million, the firm earned 96 cents -- 2 cents better than expected.
TODD'S TAKE: It was a solid quarter for AIG, as the world's largest insurer rode a favorable insurance environment to strong profit growth.
In the Insurance business, the key to making money is to charge as much as possible for your coverage. AIG has always been one of the most successful firms in this respect, and that didn't change last quarter.
The company managed to introduce strong premium increases, leading to a 30% jump in global general insurance premium revenue, to $8.8 billion. US net premiums written jumped 37% to $5.1 billion, their highest level ever for the company. And the firm raised its property-casualty rates as well, pushing 30-40% rate increases through in most of those product lines.
A weaker dollar also helped business, especially at AIG's life insurance unit. Premiums increased 6% to $5.5 billion for the division, which does much of its business in Asia. Speaking of the region, AIG warned that the SARS outbreak could negatively impact earnings, since the firm generates nearly 30% of its revenue from Asia. But as the number of SARS cases dwindled, so did the threat of weaker earnings. According to AIG's chairman, life insurance business in the area has "improved dramatically" in the two months since AIG's announcement.
So, it was another strong quarter for one of the world's largest Financial Services firms. And shareholders will benefit directly from some of this strength, in the form of a dividend increase. AIG raised its quarterly dividend from 5.2 cents a share to 6.5 cents a share, payable in September. We think this is peanuts. Out of 81 cents, they pay 6 cents? Peanuts.
AIG was a strong performer last quarter, and all signs point to another solid period this quarter. The threat of SARS is gone, so life insurance business should be even better. And we see no signs of a slowdown in the rate of insurance premium increases. We recommend AIG as strong coverage for your portfolio.
MEDIA
AOL TIME WARNER: HIGHER PROFITS ON WEAKER INTERNET BUSINESS
In one of Wednesday's major earnings reports, AOL TIME WARNER (AOL, $15.32, down 1.42) posted a 2Q profit that nearly tripled year over year. Due to one-time gains from the sale of its Comedy Central cable TV network and the settlement of its problems with MICROSOFT (MSFT, $27, unch.), the company achieved net income of $1.1 billion, or 23 cents a share, up sharply from a profit of $395 million, or 9 cents, in the year-ago quarter. Excluding one-time gains, the firm earned $575 million, or 12 cents, 2 cents better than expected. Revenue increased 6% to $10.8 billion.
On a down note, however, the SEC informed AOL that the company used inappropriate accounting techniques on two of its advertising deals with German Media firm Bertelsmann, raising the chances of an earnings restatement.
TODD'S TAKE: Before you go gaga over the prospect of tripling earning s at AOL, remember that the one-time gains that boosted the firm's quarterly profit north of the $1 billion mark won't be a recurring benefit.
Then delve a little deeper into the earnings report, and you'll see the same old challenges facing the company, which has been struggling for the past couple of years: Strong media properties but a declining dial-up Internet service business.
AOL's Warner Bros. movie studio scored one of the summer's biggest hits, "The Matrix Reloaded." Cable TV was also strong, and the firm cut costs at its flagging online business. But America Online continued to suffer from steep subscriber losses, losing over 845,000 customers since the first quarter. Analysts expected more muted losses of 500,000. Over the past 12 months, 1.2 million subscribers have said "Goodbye" to the service.
That led to a revenue decline of 6% at the unit, to $2.1 billion, and a 9% drop in operating earnings, to $430 million. Even though the Advertising industry has bounced back in recent months, ad revenue plunged a staggering 48% at America Online. For the full year, AOL expects online revenues to decline in the mid-single digits on a percentage basis, with ad revenue dropping about 40%.
On top of all that, the firm faces the specter of accounting problems. And you know how damaging those can be. Sure, AOL has some strong properties, and if it can figure out how to transfer its dial-up subscribers to its proprietary broadband service, then this firm could be in for a strong future. But actions speak louder than words, and so far AOL hasn't done anything to stem the decline. Stay away from this stock.
PHARMACEUTICAL
MERCK MISSES THE MARK
The world's third-largest pharmaceuticals company, MERCK (MRK, $58, down 4), missed earnings estimates by a penny, coming in at 83 cents last quarter. Despite the modest disappointment however, earnings rose 8% to $1.9 billion compared to last year's $1.75 billion. Total revenues were up just 4% to $13.3 billion, from last year's $12.8 billion.
Sales of Merck's top-selling Zocor and Vioxx drugs were stagnant, and the company cut earnings projections for both products for the full year; but increased projections for Cozaar/Hyzaar and Fosamax.
TODD'S TAKE: All things considered, sales of some of their big products were up and some were down. It sounds like a wash, and overall, Merck reconfirmed its EPS guidance for the year at $3.40-$3.47. But Merck, like any pharmaceutical company, needs new drugs, and to their credit, they are on top of the game with pain reliever Arcoxia, and cholesterol drug Zetia. Merck on Monday announced that they plan to resubmit their application for approval of Arcoxia, a sister drug to the company's arthritis treatment drug, Vioxx. Merck also plans to ask regulators to allow Merck to market Proscar for the purpose of prostate cancer prevention. Proscar is currently approved for treatment of enlarged prostate.
Merck's plan to spin off its Medco subsidiary later this year will serve to tighten up the company's profitability. Although Medco accounted for more than half of Merck's revenue, it generates significantly less profit than the company's pharmaceuticals business. Medco is Merck's prescription benefit management subsidiary. Medco earned $105 million in net income for the quarter, compared to $1.8 billion for the pharmaceutical business. Clearly, the company gets more bang for the buck out of their drug business, and that's where they should be putting all their energies. Guidance requires a little keener attention this time, as the GAAP number assumes income from Medco for the entire year. The final numbers will of course reflect the loss of income from the Medco spinoff.
The stock price dropped 3% in trading on Monday due to the firm's missing estimates, but there appears no danger here of any further significant drops. The combination of new drugs, and the spinoff of the Medco subsidiary will combine to keep the company on target and profitable for the year.
"Source: The Bull Market Report www.BullMarket.com" Thank you very much.
Copyright The Bull Market Report, LLC, 2003.
All rights reserved
COMMENTARY: GOOD NEWS COMES IN SMALL DOSES, BUT INVESTORS STILL FEEL GOOD
Earnings reports continued to flow out of the floodgates this week, but investors had their eyes on more than 2Q results. Good thing, too, for if earnings reporting was a dart throwing match, then this week the results looked like amateur night. They were all over the place. The major indices followed suit, kicking off the week on a down note before coming back strong to close higher for the week. A good, though low-volume session on Friday helped out the rally cause.
FOR THE WEEK, THE DOW JONES rose 97 points, or 1.1%, to end at 9285.
THE S&P 500 ticked up 6 points, or 0.6%, to close at 999.
AND THE NASDAQ climbed 22, or 1.3%, to finish the week at 1731.
As we noted, earnings were all over the map. We saw a bit of everything: Companies beating expectations; companies missing expectations; companies showing year-over-year growth but still missing expectations. And the reactions to these results were as varied as the results themselves. Overall, however, we have to say that reactions were on the optimistic side, and in some cases the overly optimistic side. GATEWAY (GTW, $4.14, up 0.23), for instance, reported a larger-than-expected drop in revenues (20%), and a bigger loss than last year, exemplifying the weakness in the PC market, but thanks to its "smaller-than-expected" loss investors pumped up the stock 13% the day it announced.
Some of this past week's optimism evidently came from outside the corporate world. A better-than-expected rise in Durable Goods Orders suggested to some that business spending is coming back. They added strength to their argument by pointing to MICROSOFT's (MSFT, $27, unch.) announcement that it will boost its R&D budget to $7 billion. We think such an assessment of the business spending environment is premature, and we'll give you two reasons why.
First, those analysts who have been saying a second-half recovery is just around the corner have been extremely reluctant to face the economic facts. Months of weak economic numbers have been pouring in, and yet so many economists and analysts have been loathe to say there is any negative trend. Instead, they say, a rebound is right around the corner. Then, we get one positive report and they are ready to declare that growth has taken hold. WE say that one report does not a growth trend make. The jury is still out on the economy, and it will be out for a while yet.
Second, tapping Microsoft as an example of corporate America is like tapping Warren Buffett as an example of the typical investor. The fact that Microsoft is upping its R&D budget says little about the prospects for capital spending in the rest of the country. Microsoft has almost $50 billion in cash. Furthermore, its R&D is based less on optimism than on necessity. It knows it needs to diversify its revenue streams, especially because all its attempts to do so have thus far failed. Finally, it is noteworthy that Microsoft's R&D budget is a matter of no little discontent for some of its shareholders. Given the lower R&D spending levels of its rivals and its disappointing track record of R&D wins, many investors feel that Microsoft OVERSPENDS on R&D. Shareholders, they say, would be better off having that money distributed among them. The fact that Microsoft, ever reluctant to issue a sizable dividend, has diverted more money to R&D suggests that the much-wanted dividend will remain elusive. In fact, Bill Gates said this week that they won't be paying a dividend any time in the near future.
Still, the news -- both on Durable Goods and Microsoft -- gave investors something to chew on, and they liked the taste. The other tidbit that tickled their fancy came from Iraq, where American forces killed Saddam's sons. Known for their brutality, these former second-in-commands were viewed as formidable sources of ongoing resistance in Iraq. With their deaths, everyone hopes the messy cleanup after our victory there will come to a quick end. That will be good for everyone: Our soldiers, the Iraqi people, our economy, and our stock markets. Let's hope it happens soon.
If it does, then we can all expect this rally to gain some strength. While we don't see solid ground for this rally or its continuation, investors have proven that they are content to carry on buying without good reason. We're pleased to see the stocks in our Portfolios reporting solid earnings and strong growth. We expect that to continue, and we expect the share prices to continue to appreciate. Barring any major shocks to the system, we would expect the same share price growth to continue for less-worthwhile stocks. This rally, as they say, has some legs.
ECONOMY WATCH
1. LEADING INDICATORS LOOK GOOD
The Index of Leading Economic Indicators rose 0.1% in June after ratcheting up a revised 1.1% in May. It's the third straight increase in the index, which is designed to forecast economic performance six to nine months in advance. Four of the 10 indicators rose in June, led by money supply, stock prices, jobless claims and building permits. Four other indicators fell, led by consumer expectations, vendor performance, interest rate spreads and orders for consumer goods. Two indicators, core capital goods orders and the factory workweek, were unchanged.
Our take? June doesn't tell us a thing. Economists were expecting 0.2%, and it came in at 0.1%. Not much to go on here. We'll have to look elsewhere for clues as to where our economy is headed.
2. JOBLESS CLAIMS FALL TO FIVE-MONTH LOW
In a positive economic sign, the Commerce Department reported on Thursday that Jobless Claims for the latest week fell under the key 400,000 barrier for the first time since February. Claims declined by 29,000 to 386,000, ending a multi-month streak of 400,000+ Claims. However, the four-week average, which economists see as a more stable measure of the job market, remained above 400,000 for the 21st straight week, falling 5,000 to just under 420,000 claims. Remember that fewer Jobless Claims are more a sign of less firing, not more hiring, so it's not necessarily getting easier for the country's unemployed to find new work. But at least we're seeing some improvement. The key now is to see if this downward trend can last.
3. DURABLE GOODS ORDERS JUMP
The Commerce Department said on Friday that Durable Goods Orders grew a better-than-expected 2.1% last month, their largest increase since January and well above the expected 1.3% uptick. Non-defense capital goods orders rose a solid 2.0%, although excluding aircraft the number rose just 0.6%. Still, the numbers were strong, and they suggest that manufacturing activity and business demand are on the rise.
4. RECORD NEW HOME SALES, BUT EXISTING SALES FALL
New Home Sales climbed 4.7% to a record annual rate of 1.16 million units in June, according to a report from the Commerce Department released on Friday. That was better than the 1.08 million rate that economists expected. However, the National Association of Realtors reported that Existing Home Sales slipped 0.3% last month, to an annualized pace of 5.83 million. Economists expected Sales to rise to 6 million units.
What this tells us is that despite rising mortgage rates last month, consumers continued to become homeowners at a frenzied rate. Increased buying activity may suggest that consumers feel more comfortable about their financial positions to undertake such a big investment as buying a house, a good sign for the economy. Of course, some buyers may overextend themselves, setting themselves up for bankruptcies and loan defaults in the future.
MARKET MOVERS
I. UPS (UPS, $64, unch.)
Quarter 2Q02 2Q03
Revenue $7.7B $8.2B
Net Income $610M $690M
EPS $0.54 $0.61
UPS got some overseas help for its 13% rise in quarterly earnings -- which beat Wall Street expectations by 2 cents -- on 7% higher revenue. Foreign shipment revenue climbed 20% to $1.4 billion, as operating income more than doubled to $160 million. However, domestic operating profit fell 8% to $830 million, due to higher healthcare and pension costs. That's one reason why we prefer rival FEDEX (FDX, $65, unch.) -- which last month posted 19% earnings expansion on 8% revenue growth -- over UPS. FedEx uses mostly independent contractors for its ground shipment unit, so its employee costs aren't as high. That's why the firm was able to post higher earnings growth than UPS on nearly the same percentage increase in revenue.
II. TEXAS INSTRUMENTS (TXN, $19.05, up 0.36)
Quarter 2Q02 2Q03
Revenue $2.2B $2.3B
Net Income $95M $120M
EPS $0.05 $0.07
Texas Instruments, a leading maker of communications chips for wireless phones, released its earnings after the bell on Monday, which beat Wall Street expectations by a penny a share. Like Wireless firms MOTOROLA (MOT, $9.17, up 0.12) and NOKIA (NOK, $15.30, up 0.54), the firm reduced its 2Q earnings outlook last month due to SARS-related business weakness. But unlike the other two firms, Texas Instruments lowered its outlook enough to beat estimates, hence the stock's 8% jump in Tuesday's session. Although the firm cited a surge in wireless chip sales towards the end of last quarter, the company remained cautious on the future, affirming that the industry is saddled with excess inventory.
III. AMERITRADE (AMTD, $9.82, up 1.49)
Quarter 3Q02 3Q03
Revenue $105M $195M
Net Income $6M $50M
EPS $0.03 $0.12
It was a solid quarter for online discount brokerage Ameritrade, as the firm posted sharply higher profits in its fiscal third quarter (ended June 27th) and beat the Street by 2 cents a share. The stock surged 14% on the news. Keep in mind that last quarter's numbers include results from Datek, which Ameritrade acquired in September 2002 for $715 million. The acquisition gave the firm 800,000 more customers and resulted in merger synergies of $130 million last quarter. There's no doubt that Ameritrade has greatly benefited from the return of the individual investor during the latest stock market rally. Personally, we would suggest investing in rival CHARLES SCHWAB (SCH, $11.00, down 0.48), which we used to own in our Financial Portfolio, if you're interested in the industry. If the market keeps going up -- and that's a BIG if -- barring any surprise problems, both firms should post higher profits over the coming year.
IV. EASTMAN KODAK (EK, $28, up 2)
Quarter 2Q02 2Q03
Revenue $3.34B $3.35B
Net Income $285M $110M
EPS $0.97 $0.39
Kodak reported a staggering 60% decline in quarterly earnings and announced up to 6,000 layoffs, showcasing the true depths of the downturn in the photographic film industry. The job cuts could range from 4,500-6,000 jobs, or 8-9% of the firm's total work force. More and more consumers are using digital cameras instead of traditional film-based ones, cutting demand for Kodak's film services. The company has its own digital product offerings, but it's not nearly as dominant in that market as it was in the traditional film industry. But excluding one-time items, Kodak earned 60 cents a share -- well above the consensus estimate of 29 cents on those terms. That's what caused the stock's 9% jump, despite the predominantly dour news spewing from the company. But until Kodak truly addresses its flagging film development business and comes up with alternative revenue streams, we urge you to stay away from the stock.
V. BOEING (BA, $33, unch.)
Quarter 2Q02 2Q03
Revenue $13.9B $12.8B
Net Income $780M -$190M
EPS $0.96 -$0.24
Boeing posted a net loss for the second straight quarter, following up a 1Q $480 million loss with a $190 million one. However, earnings were 19 cents better than the 43-cent loss that analysts' expected. Revenue fell 8%, as the slump in the Travel industry deepened. Just last week, CONTINENTAL AIRLINES (CAL, $14.65, up 0.23) delayed shipments of the bulk of its huge Boeing order, dealing the Aerospace firm a blow. In fact, Boeing lowered its high-end estimate for jet shipments in 2004, from 300 to 290. The company also tempered its 2004 revenue projections, from $53 billion to $52 billion. That will lead to a profit of $1.85 a share, instead of $2.20 like the firm previously expected. Until we see signs that air travel is bouncing back, expect Boeing -- and its stock -- to suffer.
VI. AMAZON.COM (AMZN, $42, up 7)
Quarter 2Q02 2Q03
Revenue $805M $1.1B
Net Income -$95M -$45M
EPS -$0.25 -$0.11
It was a solid quarter for Amazon, as sales jumped 37% and the firm narrowed its quarterly loss. Excluding one-time items, the e-tailer earned 10 cents a share, 4 cents better than expected. Orders were strong, as customers bought 42% more items on Amazon's website than last year. International sales were particularly brisk, soaring 81%. The company upped its estimate for annual sales to $5.0 billion, from $4.7 billion. There's no doubt that Amazon is a strong company with a recognizable brand that generates solid revenues and, sometimes, profits. But the stock is overvalued, in our opinion, especially after its recent run-up. After this week's surge, the stock sports a 2003 PE over 80.
VII. SUN MICROSYSTEMS (SUNW, $3.97, down 0.62)
Quarter 4Q02 4Q03
Revenue $3.4B $3.0B
Net Income $60M $12M
EPS $0.02 $0.00
Fiscal 4Q (ended June 30th) profits fell to virtually nothing, as sales sank 12% for Sun, a leading maker of IT servers. The stock fell as well, by 19% in Wednesday's session. Excluding one-time items, the firm earned a penny a share, still short of the 2-cent consensus estimate. Obviously, business IT spending hasn't recovered from its stark decline over the past two years. Sun continued to cut costs to deal with the business decline, slashing $500 million in annual selling, general, and administrative expenses. Without any signs of a business spending recovery in the near future, Sun will likely have to keep cutting.
VIII. AT&T (T, $20, up 1)
Quarter 2Q02 2Q03
Revenue $9.6B $8.8B
Net Income -$12.8B $535M
EPS -$17.11 $0.68
AT&T WIRELESS (AWE, $8.59, up 0.77)
Quarter 2Q02 2Q03
Revenue $4.1B $4.2B
Net Income $20M $220M
EPS $0.01 $0.08
AT&T bounced back from a steep loss a year ago to post solid profits last quarter. The Telecom giant earned 68 cents a share, higher than the 54-cent consensus estimate. The strong performance caused the stock to rise 2% on the news in Thursday's bearish session. In addition, the company raised its quarterly dividend 27% to 23.75 cents a share and will repurchase $2 billion of its huge debt load, currently at $27.5 billion. On a down note, however, revenue fell 8% due to increased competition. Local phone providers like the Baby Bells entered the long-distance market. AT&T went the other way, introducing its own local phone service.
As for AT&T Wireless, the company's profit of 8 cents a share doubled the consensus estimate of 4 cents, as sales rose 6%. Subscriber growth was almost twice as much as in the first quarter of the year, largely from the company's new GoPhone product, a prepaid calling plan for higher-risk customers. The firm expects to report subscriber growth of 7% for the full year. The solid report translated into a 9% jump in the stock in Thursday's trading.
IX. SBC COMMUNICATIONS (SBC, $24, unch.)
Quarter 2Q02 2Q03
Revenue $10.8B $10.2B
Net Income $1.8B $1.4B
EPS $0.53 $0.42
Dow component SBC posted a 22% decline in quarterly earnings on 6% lower revenue, even as the Telecom firm achieved a record number of new clients for both its long-distance and DSL Internet services. Earnings matched Wall Street estimates, but revenue fell short of the $12.5 billion that analysts expected. The problem was increased competition and the dreaded pension bug, which led to higher costs. But the company added 2.3 million customers to its long-distance service last quarter, and passed the 10 million mark this month. 305,000 new consumers subscribed to the firm's DSL service, for a total of 2.8 million -- a 60% jump year over year. But somehow, those new customers didn't translate into strong revenue gains, and that's a problem that SBC needs to solve.
X. DAIMLERCHRYSLER (DCX, $36, up 1)
Quarter 2Q02 2Q03
Revenue $45.2B $39.3B
Net Income $1.3B $125M
DaimlerChrysler, parent of Big Three US automaker Chrysler, suffered a staggering 90% plunge in 2Q profits, waving a big red flag over the entire Auto industry. A disappointing quarter was to be expected, as rivals GENERAL MOTORS (GM, $37, up 1) and FORD MOTOR (F, $10.97, down 0.02) reported similar results last week. Chrysler was the big sore spot in the company's operations, as the division posted a loss of $1.1 billion. Mitsubishi, the Japanese car company which is 37% owned by DaimlerChrysler, didn't fare well either, as it will record a loss for the first half of the year, due to stiff US competition and a high number of car loan defaults. We can't say this enough: STAY AWAY FROM THE AUTO SECTOR.
XI. VIACOM (VIA, $45, up 1)
Quarter 2Q02 2Q03
Revenue $5.9B $6.4B
Net Income $545M $660M
EPS $0.31 $0.37
It was a solid quarter for Viacom, as earnings beat Wall Street expectations by a penny and revenue climbed 10%. Last quarter's results were boosted by the acquisition of the Comedy Central TV network from AOL TIME WARNER (AOL, $15.32, down 1.42), as well as by a 19% jump in revenue from fall TV season advertising sales. Viacom also declared its first dividend since 1987, a payout of 6 cents a share. To top it all off, the Media firm upped guidance for the full year, forecasting double-digit earnings growth on high single-digit revenue expansion. Viacom has been one of the strongest performers in the Media sector, and while we don't recommend it as an investment, consider taking a look at the firm if you're looking for some Media exposure.
XII. EBAY (EBAY, $112, up 2)
Quarter 2Q02 2Q03
Revenue $265M $510M
Net Income $55M $110M
EPS $0.19 $0.33
Just looking at the numbers, it looks like an amazing quarter for eBay. Net income more than doubled last quarter, and sales surged 91%. Earnings of 37 cents a share, excluding one-time items, beat expectations by 2 cents. Furthermore, the company announced a 2-for-1 stock split, raised its full-year outlook for earnings to $1.47, 6 cents better than expected. Revenue may reach $2.75 billion, well above the $2.5 billion consensus estimate.
But the stock dropped 3% on the news in a very bullish session, and one brokerage firm downgraded the stock to a "Neutral" rating. Why? It's all about valuation. The stock is up 70% since the beginning of the year and 130% since October 2002. The firm has a market capitalization of $37 billion, which is one-seventh the value of WAL-MART STORES (WMT, $56, down 1), the world's largest company. But eBay's revenues are only 1% of Wal-Mart's. And did we mention that the stock's PE is over 100? This stock isn't really the best value play out there.
XIII. NORTEL NETWORKS (NT, $2.98, up 0.03)
Quarter 2Q02 2Q03
Revenue $2.8B $2.3B
Net Income -$695M -$15M
EPS $0.20 $0.00
Nortel significantly narrowed its quarterly loss and broke even on a per-share basis, matching Wall Street expectations. However, the company's CEO was disappointed with the results and blamed the weak Telecom spending environment. The firm sees continued weakness that will hurt business this quarter as well.
Nortel has been one of the hardest-hit companies during the Tech bust, as it catered to the struggling Telecom sector and suffered from nonexistent customer spending. Cost cutting ensued, and the company laid off nearly 60,000 workers over the past two years. Future restructuring this year could cost the company up to $400 million. Hmm, continued business shrinkage and no signs of a spending pickup? We don't see any reason to buy this stock.
XIV. LEHMAN BROTHERS MAKES A BIG INVESTMENT
LEHMAN BROTHERS (LEH, $64, down 1) agreed on Tuesday to acquire asset manager NEUBERGER BERMAN (NEU, $40, down 1) for $2.6 billion, ending speculation on the firms' potential merger. This wasn't the quickest of acquisitions; the two firms had been in talks for weeks about the deal. Here are the final terms: Lehman will pay $41.48/share in combined cash and stock for the company. The breakdown is $9.49 in cash and 0.496 Lehman shares for each share of Neuberger stock. Lehman expects job losses to be "minimal" and the deal to slightly reduce earnings in 2004.
This is a good move for Lehman; the investment bank recognized that investors are returning to the stock market and wanted to bolster its investment management operations. Neuberger provides a lot of ammo, with nearly $65 billion in assets under management. That boosts Lehman's total client assets under management to over $100 billion, dropping investing costs and enhancing mutual fund offerings.
XV. MICROSOFT TO GIVE BOOST TO STRUGGLING JOB MARKET
Wow! Some good corporate job news for a change! MICROSOFT (MSFT, $27, unch.) plans to hire 4-5,000 employees, of which 3,000-3,500 will come in the US. In addition, the Software giant will increase its research and development spending this year as much as 8%, or $6.9 billion, during this fiscal year (ending June 2004). It sounds like Gates & Co. are expecting a business pickup in the near future. That's the kind of corporate spending news that we like to hear. Hopefully, more firms will follow.
Good investing next week!
Todd Shaver
Editor in Chief
Editor@BullMarket.com
THE BULL MARKET REPORT
United States of America
Educating investors since 1997
1. SECTOR-RELATED NEWS
FINANCIAL
AMERICAN INTERNATIONAL GROUP ENSURES ITS SUCCESS
Financial Portfolio holding AMERICAN INTERNATIONAL GROUP (AIG, $65, up 5) posted earnings growth of 26% in the second quarter, as rising insurance premiums and favorable currency exchange rates provided a boost to earnings. The insurer recorded net income of $2.3 billion, or 87 cents a share, up from a year-ago profit of $1.8 billion, or 68 cents. Excluding realized capital losses of $245 million, the firm earned 96 cents -- 2 cents better than expected.
TODD'S TAKE: It was a solid quarter for AIG, as the world's largest insurer rode a favorable insurance environment to strong profit growth.
In the Insurance business, the key to making money is to charge as much as possible for your coverage. AIG has always been one of the most successful firms in this respect, and that didn't change last quarter.
The company managed to introduce strong premium increases, leading to a 30% jump in global general insurance premium revenue, to $8.8 billion. US net premiums written jumped 37% to $5.1 billion, their highest level ever for the company. And the firm raised its property-casualty rates as well, pushing 30-40% rate increases through in most of those product lines.
A weaker dollar also helped business, especially at AIG's life insurance unit. Premiums increased 6% to $5.5 billion for the division, which does much of its business in Asia. Speaking of the region, AIG warned that the SARS outbreak could negatively impact earnings, since the firm generates nearly 30% of its revenue from Asia. But as the number of SARS cases dwindled, so did the threat of weaker earnings. According to AIG's chairman, life insurance business in the area has "improved dramatically" in the two months since AIG's announcement.
So, it was another strong quarter for one of the world's largest Financial Services firms. And shareholders will benefit directly from some of this strength, in the form of a dividend increase. AIG raised its quarterly dividend from 5.2 cents a share to 6.5 cents a share, payable in September. We think this is peanuts. Out of 81 cents, they pay 6 cents? Peanuts.
AIG was a strong performer last quarter, and all signs point to another solid period this quarter. The threat of SARS is gone, so life insurance business should be even better. And we see no signs of a slowdown in the rate of insurance premium increases. We recommend AIG as strong coverage for your portfolio.
MEDIA
AOL TIME WARNER: HIGHER PROFITS ON WEAKER INTERNET BUSINESS
In one of Wednesday's major earnings reports, AOL TIME WARNER (AOL, $15.32, down 1.42) posted a 2Q profit that nearly tripled year over year. Due to one-time gains from the sale of its Comedy Central cable TV network and the settlement of its problems with MICROSOFT (MSFT, $27, unch.), the company achieved net income of $1.1 billion, or 23 cents a share, up sharply from a profit of $395 million, or 9 cents, in the year-ago quarter. Excluding one-time gains, the firm earned $575 million, or 12 cents, 2 cents better than expected. Revenue increased 6% to $10.8 billion.
On a down note, however, the SEC informed AOL that the company used inappropriate accounting techniques on two of its advertising deals with German Media firm Bertelsmann, raising the chances of an earnings restatement.
TODD'S TAKE: Before you go gaga over the prospect of tripling earning s at AOL, remember that the one-time gains that boosted the firm's quarterly profit north of the $1 billion mark won't be a recurring benefit.
Then delve a little deeper into the earnings report, and you'll see the same old challenges facing the company, which has been struggling for the past couple of years: Strong media properties but a declining dial-up Internet service business.
AOL's Warner Bros. movie studio scored one of the summer's biggest hits, "The Matrix Reloaded." Cable TV was also strong, and the firm cut costs at its flagging online business. But America Online continued to suffer from steep subscriber losses, losing over 845,000 customers since the first quarter. Analysts expected more muted losses of 500,000. Over the past 12 months, 1.2 million subscribers have said "Goodbye" to the service.
That led to a revenue decline of 6% at the unit, to $2.1 billion, and a 9% drop in operating earnings, to $430 million. Even though the Advertising industry has bounced back in recent months, ad revenue plunged a staggering 48% at America Online. For the full year, AOL expects online revenues to decline in the mid-single digits on a percentage basis, with ad revenue dropping about 40%.
On top of all that, the firm faces the specter of accounting problems. And you know how damaging those can be. Sure, AOL has some strong properties, and if it can figure out how to transfer its dial-up subscribers to its proprietary broadband service, then this firm could be in for a strong future. But actions speak louder than words, and so far AOL hasn't done anything to stem the decline. Stay away from this stock.
PHARMACEUTICAL
MERCK MISSES THE MARK
The world's third-largest pharmaceuticals company, MERCK (MRK, $58, down 4), missed earnings estimates by a penny, coming in at 83 cents last quarter. Despite the modest disappointment however, earnings rose 8% to $1.9 billion compared to last year's $1.75 billion. Total revenues were up just 4% to $13.3 billion, from last year's $12.8 billion.
Sales of Merck's top-selling Zocor and Vioxx drugs were stagnant, and the company cut earnings projections for both products for the full year; but increased projections for Cozaar/Hyzaar and Fosamax.
TODD'S TAKE: All things considered, sales of some of their big products were up and some were down. It sounds like a wash, and overall, Merck reconfirmed its EPS guidance for the year at $3.40-$3.47. But Merck, like any pharmaceutical company, needs new drugs, and to their credit, they are on top of the game with pain reliever Arcoxia, and cholesterol drug Zetia. Merck on Monday announced that they plan to resubmit their application for approval of Arcoxia, a sister drug to the company's arthritis treatment drug, Vioxx. Merck also plans to ask regulators to allow Merck to market Proscar for the purpose of prostate cancer prevention. Proscar is currently approved for treatment of enlarged prostate.
Merck's plan to spin off its Medco subsidiary later this year will serve to tighten up the company's profitability. Although Medco accounted for more than half of Merck's revenue, it generates significantly less profit than the company's pharmaceuticals business. Medco is Merck's prescription benefit management subsidiary. Medco earned $105 million in net income for the quarter, compared to $1.8 billion for the pharmaceutical business. Clearly, the company gets more bang for the buck out of their drug business, and that's where they should be putting all their energies. Guidance requires a little keener attention this time, as the GAAP number assumes income from Medco for the entire year. The final numbers will of course reflect the loss of income from the Medco spinoff.
The stock price dropped 3% in trading on Monday due to the firm's missing estimates, but there appears no danger here of any further significant drops. The combination of new drugs, and the spinoff of the Medco subsidiary will combine to keep the company on target and profitable for the year.
"Source: The Bull Market Report www.BullMarket.com" Thank you very much.
Copyright The Bull Market Report, LLC, 2003.
All rights reserved
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