Friday, January 23, 2009

January 23, 2009: Morning Call

January 23, 2009: Morning Call

Fair Value: SP500 – 824.60; NDX: 1167.86; DOW: 8083.57

Technical Levels:

SPX: 752-755, 800, 816 support/848-852, 899-908 resistance


Pre-market EPS: GE (.43/48.8B); HOG (.58/1.3B); SLB (1.08/7.0B)
04:00: Euro-zone PMI Manufacturing (Jan): 33.1; Services: 41.5; Composite: 37.4 (slightly better: Manufacturing at 34.5, Services at 42.5, and Composite at 38.5)
04:30: UK GDP (Q4): -1.2% QoQ; -1.4% YoY (weaker: -1.5% QoQ, -1.8% YoY).
08:30: GE earnings call
09:00: SLB earnings call
10:30: EIA Natural Gas Storage Change

Foreign Market Summary/Key Macro News/Commentary:

The S&P futures are trading 16 points below fair value and the NASDAQ futures are trading 17 points below fair value at 7:50 am ET. Weakness in Asian markets, a sharper than expected contraction in fourth quarter UK GDP, and weakness in the British Pound is pressuring the futures in early trading. Asian markets moved sharply lower overnight (Japan down 3.8%, Australia down 4.1%, Hong Kong down 0.60%, Shanghai down 0.50%, India down 1.6%). Technology stocks were hit hard on the MSFT earnings and a warning from Samsung Electronics. Sinopec (386.HK) and Chalco (2600.HK) both fell after profit warnings. Steelmakers fell after Nippon Steel (5401.JP) said it would more than double its planned output cuts for H2 ending 31-Mar. Australia saw the region's biggest declines led down by banks, after a former central bank governor predicted a long recession. Sims Metal Management (SGM.AU) plunged on a profit warning. European markets are down 2.0% with insurance and mining stocks leading the market lower. Decliners on the FTSE 100 lead advancers 9-1. Insurers fell following yesterdays steep sector declines in the US.

Impact Research Calls/Market Moving News:

GE (13.48): General Electric reports Q4 EPS $0.36, including charges, vs guidance of $0.36-$0.42, on same basis: Company reports revenues of $46.21B vs Reuters $50.14B. GE says it remains committed to the $1.24/share dividend for the year. StreetAccount notes that some had incorporated the preferred dividend, amounting to $0.01/share, into their estimates. First Call is $0.37. Orders - infrastructure (6%). Revenue and profits by segment: Technology Infrastructure: revenue 1% to $12.56B and profit 1% to $2.50B. Energy Infrastructure: revenue 21% to $11.41B and profit 11% to $2.01B. Capital Finance: revenue (17%) to $14.77B and profit (67%) to $1.03B.

GOOG (306.50): Google reports Q4 non-GAAP EPS $5.10 vs Reuters $4.95: First Call is $4.96. Company reports revenues of $5.70B, including TAC vs Reuters $5.64B, which includes TAC. Excluding TAC, GOOG reports revenues of $4.22B vs. First Call $4.12B. Google reports Q4 aggregate paid clicks +18% y/y vs StreetAccount consensus +16%. Key operating metrics: Google Sites gross revenue was $3.81B vs SA $3.77B, while Networks revenues were $1.69B vs SA $1.73B. Licensing/other revenues reported $196.3M vs SA $202M. Geographies: International revenues totaled $2.86B vs SA $2.75B, including the UK at $685M, and accounted for 50% of total company revenues compared to 51% in Q3; company notes that international revenues would have been $334M higher at constant currency rates. US revenue came in at $2.84B vs SA $2.91B. TAC was $1.48B during the quarter compared to $1.50B in Q3; TAC as a percentage of ad revenues was 27% compared to 28% in Q3. Cash flow: operating cash flow was $2.12B and capex was $368M, resulting in free cash flow of $1.75B. Headcount: total employees were 20.222K at quarter end versus 20.123K at the end of Q3; implies a net employee gain of 99 versus 519 in Q3. Google reports Q4 results; to offer one-for-one stock exchange program: Company reports that it will be offering employees a voluntary, one-for-one stock option exchange; the program will begin on 29-Jan and end on 3-Mar and is intended to create more incentives for employees to remain at the company.

SLB (37.27): Schlumberger reports Q4 EPS $1.03 ex-items vs Reuters $1.04: First Call is $1.06. Company reports revenues of $6.87B vs Reuters $6.84B. SLB expects 2009 activity to weaken across the board with the most significant declines occurring in North American gas drilling, Russian oil production enhancement and in mature offshore basins. SLB says it is adjusting its operating cost base and is taking action to reduce global workforce, taking a related charge in Q4 of $0.08. SLB repurchased 2.7M shares during Q4 and had $7.1B of its common stock remaining for repurchase under its current $8B repurchase program.

COF (21.94): Capital One reports Q4 EPS ($1.59) cont. operations, unclear if comparable to Reuters $0.28: The company added $1.0B to allowance for loan losses in anticipation of increasing charge-offs in 2009. Allowance as a percent of reported loans increased 90 basis points in Q4 of 2008 to 4.5%. The company recognized an $810.9M non-cash impairment of goodwill in conjunction with its revised outlook for its Auto Finance business. Total deposits at December 31, 2008 were $108.6B, up 31.2% from the prior year and up 9.8% from Q3 of 2008, with stable deposit margins.

COF (21.94): WSJ highlights the grim outlook at Capital One: The Journal notes that while the bank wrote off an additional $1B in bad loans and posted a larger-than-expected loss due to a rising default rate in Q4, it losses to worsen this year based on its expectations for an 8.7% unemployment rate and another 10% decline in home prices. The article also points out that the bank's outlook for loan losses in 2009 has risen 20% in just the last three months.

COF (21.94): Capital One downgraded to reduce from neutral at SunTrust Robinson Humphrey

HOG (12.40): Harley-Davidson reports Q4 EPS $0.34 vs. Reuters $0.57: Company reports revenues of $1.29B vs Reuters $1.30B. Q4 retail sales fell 13.1% y/y; US retail sales were down 19.6% y/y. Full year shipments were 303,479 units vs year-ago 330,619. Guides Q1 shipments to 74,000-78,000 motorcycles. Guides 2009 shipments to 264,000-273,000 motorcycles. Due to the current economic environment, the company did not provide 2009 EPS guidance

CME (168.37): CME Group downgraded to market perform from outperform at Bernstein: The firm has reduced EPS estimates for CME and ICE by 25%-30% for 09 with 2010 estimates reduced 30%-35%. Targets for the shares are reduced to $200 and $80. ICE shares, however, remain outperform rated.

PBR (24.29): Petrobras downgraded to equal-weight from overweight at Morgan Stanley: Price target decreased to $25 from $46.

Lawmakers propose eliminating tax break for merging banks - NYTA DealBook article says the new stimulus package now has a clause that would rescind the Treasury Department's amendment of a 1986 rule limiting a buyer's ability to use a target's net operating losses to shield taxable income in the future.

MSFT (17.11): Microsoft's cost-cutting efforts leave something to be desired – WSJ: In a "Heard on the Street" column, the Journal notes that while Microsoft said it accelerated a cost-reduction plan in the December quarter, the company was actually still hiring. The article notes that general and administrative headcount rose 6%, while sales and marketing rose 4%. The Journal also points out that given that the company plans to continue to hire in areas where it sees opportunity (such as search), it will employ more people after the cuts than at the end of F08 last June.

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