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We also discuss J.P. Morgan Chase, Capital One, Ford, and many more
By Morningstar Analysts / 07-17-02

Here's Morningstar's daily briefing on stocks we cover.

Citigroup's C http://quote.morningstar.com/switch.html?ticker=C
second-quarter results, released Wednesday, suggest that the
indefatigable consumer is continuing to pull up a depressed corporate
sector. Operating income in the global consumer unit was up 25% year
over year, driven by a combination of acquisitions, lower-cost
funding, cost-cutting, and better pricing. Further, as we've seen
with other banks that already have reported, consumer bad debt seems
to be cresting industrywide, and the loss rate was up only 2 basis
points sequentially at Citigroup. The weak corporate business,
however, remains a cause for concern.
Craig Woker

Intel's INTC http://quote.morningstar.com/switch.html?ticker=INTC
June quarter, reported Tuesday, was weak as anticipated (a sober
midquarter update had already deflated expectations). It is troubling
that gross margins fell below an already-low hurdle, the result of
poor demand for PC processors and a shift toward lower-priced chips.
We expect the back-to-school and holiday seasons will lead to a
stronger second half of 2002, with sales growth and better margins.
Todd Bernier

Washington Mutual WM
http://quote.morningstar.com/switch.html?ticker=WM reported strong
second-quarter income Tuesday as low interest rates and good mortgage
volume drove earnings. We think shares of the country's largest
thrift are a compelling value at their current price. That said,
profits grew a lot faster than earnings per share over the past year
because of the higher share count. Also, expenses grew faster than
revenue in the second quarter, largely the result of integration
costs, and charge-offs continued to rise, hitting their highest level
in five quarters. We don't see much cause for concern overall, though.
Richard McCaffery

J.P. Morgan Chase's JPM
http://quote.morningstar.com/switch.html?ticker=JPM weak second-
quarter earnings, which fell short of consensus estimates, show that
this troubled bank has a long road to recovery. That said, the firm's
results, released Wednesday, were relatively in line with our more
conservative forecast. Perhaps most important, the firm's balance
sheet is growing stronger, with capital ratios improving from the
first quarter. Rising consumer charge-offs--spurred by the recent
acquisition of a subprime credit card portfolio--are becoming a
concern. However, we were pleased to see a drop in corporate bad
debt, which tends to be much more volatile.
Craig Woker

Capital One's COF http://quote.morningstar.com/switch.html?ticker=COF
strong second-quarter results, reported Tuesday, are less the story
than a deal reached with regulators requiring the company to boost
capital against subprime loans, increase the allowance for loss
reserves, and to improve systems and internal controls. The company
has already met the capital and reserve requirements, and is working
to upgrade systems to handle its blistering growth rate. We believe
Capital One's conservative underwriting and constant modeling of
recession scenarios ensures that its portfolio is sound. That said,
the situation points to the risk of Capital One's high-growth
strategy.
Richard McCaffery

Ford Motor F http://quote.morningstar.com/switch.html?ticker=F
outperformed expectations in the second quarter, reporting Wednesday
a $0.31-per-share gain that reversed last year's $0.31 loss and beat
First Call estimates by a nickel. Noteworthy was the return of black
ink to Ford's North American auto operations, which notched a modest
$45 million profit compared with last year's $1.1 billion loss
related to the Firestone tire recall. However, we don't expect
profits to extend into the balance of 2002; despite cuts in
production capacity, little short-term progress on Ford's core
problems (sliding market share and excessive product costs) is likely.
Josh Peters

Motorola's MOT http://quote.morningstar.com/switch.html?ticker=MOT
second-quarter results, reported Wednesday, were the usual mixed bag
and included a massive $3.4 billion special pretax charge. Although
sales exceeded expectations by 5%, Motorola's order book declined
materially from a year ago, resulting in an overall book/bill ratio--
which measures whether sales are being replaced with new orders--of
just 1. Unless new orders start to come through the door, Motorola
will have difficulty keeping its full-year sales decline to just 5%-
10%.
Todd Bernier

Coca-Cola KO http://quote.morningstar.com/switch.html?ticker=KO
reported solid second-quarter earnings Wednesday on strong volume,
while bottler Coca-Cola Enterprises CCE
http://quote.morningstar.com/switch.html?ticker=CCE handily beat Wall
Street estimates and raised its forecasts for the rest of the year.
Coke's earnings of $0.52 per share were right in line with First Call
estimates, and its 5% unit case volume growth, including 4% in North
America, was helped by the introduction of such new products as Diet
Coke with Lemon. Those new products didn't have as much impact on
CCE, which saw comparable case volume increase only 1.5% in the
quarter, but improved cost structures helped the company exceed
earnings forecasts anyway. These results bode well for the new spirit
of cooperation between Coke and CCE, which have worked since December
to repair their frayed relationship.
David Kathman

Several aerospace and defense firms reported second-quarter results
Wednesday; our initial response is very positive. Boeing BA
http://quote.morningstar.com/switch.html?ticker=BA, General Dynamics
GD http://quote.morningstar.com/switch.html?ticker=GD, United
Technologies UTX http://quote.morningstar.com/switch.html?ticker=UTX,
and Northrop Grumman NOC
http://quote.morningstar.com/switch.html?ticker=NOC all beat First
Call consensus estimates. At $0.92 per share, Boeing blew past its
$0.80 earnings estimate, a pleasant surprise prompted by strong
showings in its defense units. Another strong performer was Northrop
Grumman, which took in $1.53 per share in the quarter compared with
the $1.46 First Call estimate. Honeywell's HON
http://quote.morningstar.com/switch.html?ticker=HON earnings of $0.55
per share were flat with a year ago, although this is largely due to
a change in accounting for goodwill. On an adjusted basis,
Honeywell's earnings were actually 9% lower this quarter, not too bad
given the challenges in the commercial aerospace market. Overall,
these firms' results were impressive and somewhat surprising. We will
be reviewing our fair value estimates in light of these strong
showings; that said, General Dynamics, Boeing, Northrop Grumman, and
United Technologies are already trading at attractive prices for long-
term investors, in our opinion.
Jonathan Schrader

In light of Apple's AAPL
http://quote.morningstar.com/switch.html?ticker=AAPL lackluster June
quarter and the poor outlook for the September quarter, we are
lukewarm on the stock. We are reviewing our fair value estimate after
Tuesday's earnings release; we don't expect it to decline
substantially, given the company's large cash holdings and our
expectation that Apple will remain profitable, but we still see
substantial risks. The company's bold push for market share is
leading to increased spending, especially on new stores, so uncertain
growth prospects for the rest of the year make us somewhat nervous.
Joseph Beaulieu

I2 Technologies ITWO
http://quote.morningstar.com/switch.html?ticker=ITWO announced
terrible June-quarter results Tuesday, losing $757.4 million on a 50%
year-over-year decline in revenue. We're not surprised, given that i2
is attempting to overcome various internal problems (a heavy
dependence on the high-tech industry and well-publicized problems
with customers) as well as the slowdown in information technology
spending. We continue to see no reason to incur the risk of owning
the stock until i2 provides a clear path to profitability and
businesses start spending on supply-chain software again.
Mike Trigg

Profits in the auto parts sector continued to improve in the second
quarter, boosted primarily by higher North American vehicle
production. On Wednesday, Dana DCN
http://quote.morningstar.com/switch.html?ticker=DCN and industry
leader Delphi DPH http://quote.morningstar.com/switch.html?ticker=DPH
reported healthy earnings gains from a year ago. Delphi made $0.39
per share in the quarter (in line with the First Call consensus)
compared with $0.29 a year ago; sales growth with customers other
than its former parent (General Motors GM
http://quote.morningstar.com/switch.html?ticker=GM) rose 13%. Dana's
per-share profit of $0.45 ($0.02 ahead of consensus) was well ahead
of last year's $0.10. Extended cost reduction and restructuring also
contributed to both firms' earnings gains, though we remain cautious
on their respective outlooks.
Josh Peters

St. Jude Medical STJ
http://quote.morningstar.com/switch.html?ticker=STJ released
impressive second-quarter results Wednesday. However, until we are
more confident that the firm will continue stealing market share over
the next few years, we will not be increasing our fair value
estimate. Net sales increased 20% in the quarter from a year ago.
Earnings per share rose to $0.38, a 41% increase from the year-
earlier period. Earnings in this quarter as well as the year-ago
period excluded purchased research and development expenses that
affected reported net income. We are encouraged that new products,
like the Medical Identity pacemakers and Medical Atlas
defibrillators, won some share in the quarter, but this is not enough
to convince us for the long haul.
Travis Pascavis

Manpower's MAN http://quote.morningstar.com/switch.html?ticker=MAN
second-quarter results, released Wednesday, confirmed the trends that
the firm experienced in the first quarter. Demand for light
industrial workers continued to grow and the firm noted some
improvement in the market for office and professional workers. As an
internationally diversified organization, Manpower also benefited
significantly from the appreciation of foreign currencies relative to
the U.S. dollar.
Dan Schick

Knight Trading NITE
http://quote.morningstar.com/switch.html?ticker=NITE posted another
round of dismal quarterly results Wednesday, thanks to the low volume
of equity trading. The market-maker has been struggling to keep its
head above water amid sluggish world markets. The company announced a
second-quarter loss of $0.04 per share, which includes charges for
shutting down much of its international operations. This is a much-
needed step as most of Knight's international endeavors have not been
profitable. But even without these money-losers, Knight's domestic
operations just broke even for the quarter, indicating that the
company must come up with a plan that will sustain its business
during bear markets. Until this happens, we would avoid Knight shares.
Rachel Barnard

Minimill steel company Nucor NUE
http://quote.morningstar.com/switch.html?ticker=NUE on Wednesday
announced second-quarter earnings of $0.77 per share, compared with
$0.43 a year ago. Composite prices remained unchanged from last year,
but shipments increased 7%, accounting for the big gain. Nucor has
undoubtedly benefited from the tariffs imposed on foreign steel
earlier in 2002, helping it further solidify its position as the most
efficient, well-run steel company in the beleaguered U.S. steel
industry. While the company's performance has exceeded our
expectations so far in 2002, we continue to believe the stock is way
overvalued.
Dan Quinn

Another blow to Wyeth's WYE
http://quote.morningstar.com/switch.html?ticker=WYE female hormone-
replacement therapy (HRT) lineup came Tuesday, when a study linking a
higher risk of ovarian cancer to estrogen-only treatments was
released by The Journal of the American Medical Association. Premarin
is Wyeth's estrogen-only treatment and its largest revenue stream,
bringing in more than $2 billion last year. Last week, a study
showing that Prempro, Wyeth's combination estrogen-progestin HRT, may
lead to heart trouble or a higher risk of breast cancer sent the
shares tumbling. We've put Wyeth under review until we can assess the
damage. In the meantime, we recommend staying clear of the stock.
Todd Lebor

Teradyne TER http://quote.morningstar.com/switch.html?ticker=TER
reported Wednesday that its business in the second quarter had
improved relative to the first quarter. Sales grew 25% and gross
orders booked grew 15%, while the firm cut its losses by 30%. Demand
for chip equipment still appears uncertain, judging by the wide range
of revenue that the firm forecasts to achieve in the upcoming quarter.
Dan Schick

Genzyme's GENZ http://quote.morningstar.com/switch.html?ticker=GENZ
second-quarter earnings, released Wednesday, show the company is on
track to meet our lowered revenue expectations. The niche biotech
player lowered its projected 2002 revenue from kidney disease drug
Renagel as a result of high inventory levels and a goal to decrease
inventory on hand from 12 weeks to 4-6 weeks. This quarter's earnings
of $0.23 per share keep the firm on track to meet our full-year
expectations. But with slower-than-expected progress toward achieving
the lowered inventory levels (there's still 8.5 weeks' worth on
wholesalers' shelves), we will be closely monitoring Genzyme's
progress and will revisit our fair value estimate if Renagel sales
don't start to pick up soon.
Jill Kiersky

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