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   May 25, 2013 @ 6:10 AM EDT
FRIDAY'S REPORTS (5/24/2013)
Investment Grade
Hewlett-Packard  (with Analyst's Data Sheet) The fact that Hewlett-Packard's fiscal second quarter earnings (ended April 30th) and future guidance surpassed consensus estimates was encouraging, but...
Squeezing More Cash Out Of Lower Revenue by Dave Novosel, CFA
High Yield
Novelis Inc.  (with Analyst's Data Sheet) Novelis (NVL) continues to spend heavily on expanding its rolling, finishing, and recycling capabilities, putting pressure on its fiscal 2013 (ended March 31)...
Investing In Growth  by Evan Mann, CFA
FRIDAY'S COMMENTS (5/24/2013)
11:54am General Electric GE said this week that the GE Capital's board of directors has approved plans for upstream...
News by Kathleen Shanley, CFA
GE said this week that the GE Capital's board of directors has approved plans for upstream dividends of $6.5 billion in 2013. The company plans on paying out about 30% of GECC's 2103 earnings, but also intends to pay $4.5 billion in special dividends. GE Capital earned $1.8 billion in the first quarter ended 3/31/13 ($1.9 billion from continuing operations.) GE continues to shrink the size of its finance operations. The company's ending net investment in GE Capital was $402 billion at the end of March. (The company's goal is to reduce this to $300 billion to $350 billion by the end of 2014.) GECC had $68 billion in cash at quarter-end, and a Tier 1 common ratio of 11.1%, so there is adequate capital and liquidity to fund the dividend payments. At the parent level, GE says it plans to distribute $18 billion in cash to shareholders this year, including $10 billion in buybacks. At an investor conference this week, CEO Jeffrey Immelt said the company is considering the possibility of divesting part of its finance business via an IPO. While Mr. Immelt did not go into specifics, one possibility for a spin-off would be the private label credit card unit, which the company previously considered selling in 2007. While the business is profitable, Federal regulators may not want to see the business sold to a commercial bank, because of too-big-to-fail concerns. Ideally, a hypothetical spinoff company would include a bank, similar to the Discover Financial Services model. Discover is lower-rated than GE Capital, but we do not expect that GE would plan on spinning off GECC's public debt if it moves forward with an IPO. Over the long-term, a smaller GE Capital (with smaller funding needs) would likely be a favorable development for GECC's credit spreads. Our credit score remains stable.
11:49am Gap Inc. Gap reported strong fiscal first quarter results yesterday, most of which had been previewed earlier in...
Earnings by Carol Levenson, CFA
Gap reported strong fiscal first quarter results yesterday, most of which had been previewed earlier in the month when the company reported its April sales. Refreshingly, there was no whining about the weather. Earnings adjusted for a one-time tax benefit soared 35% on a comparable-store sales increase of 2% on top of 4% last year. Probably the most impressive element of Gap's results was its gross margin expansion of nearly 200 basis points (albeit in an easy comparison), most of which was from higher merchandise margins driven by better unit costs. Combined with an improvement in its operating expense ratio of nearly 100 basis points, this meant that the company's operating margin expanded by a stunning 290 basis points to 14.2%, the highest in three years. The two major brands, Gap and Old Navy, posted 3% growth in comparable-store sales, while sales at Banana Republic were flat. Free cash flow was more than sufficient to fund modest share repurchases, leaving total debt unchanged. We estimate rent-adjusted debt/EBITDAR on a trailing twelve months basis improved year-over-year by half a "turn" to 3.0x, definitely supporting its recently achieved full investment grade status.
10:54am Sears What an unpleasant surprise. Sears Holdings' (SHLD) revenues and adjusted EBITDA for the fiscal 2013 first...
Earnings by Evan Mann, CFA
What an unpleasant surprise. Sears Holdings' (SHLD) revenues and adjusted EBITDA for the fiscal 2013 first quarter were disappointing. For the quarter ended May 4, sales fell 8.8% to $8.5 billion reflecting the closing of Kmart and Sears stores, a drop in same store sales (3.6% domestic and 2.6% for Sears Canada), and last fall's spin-off of Sears Hometown and Outlet. The adjusted EBITDA margin contracted as the gross margin was hurt by increased markdowns and timing of vendor allowances for Kmart's apparel and grocery & household categories as well as Sears selling merchandise to Sears Hometown and Outlet at cost pursuant to terms of their separation agreement and increased commodity costs in automotive. As a result, adjusted EBITDA swung to a loss of $8 million from positive $160 million in the year ago period. For the LTM, interest coverage was 1.8x and leverage was 8.2x, deterioration from 2.3x and 5x for fiscal 2012. SHLD ended the quarter with $481 million of cash and $1.8 billion of credit availability, down sequentially due to the weak results and seasonal working capital needs. The first quarter free cash flow shortfall surged to $773 million from $139 million in the year ago period. As a result, total debt at quarter end was up $526 million year over year to $3.8 billion. The retailer indicated it was exploring alternatives to monetize its Protection Agreement business to meet last fall's stated goal of raising at least $500 million of additional liquidity in fiscal 2013. We will update our fiscal 2013 projections and review our rating shortly.
THURSDAY'S REPORTS (5/23/2013)
Investment Grade
PPL Corp., PPL Capital Funding  (with Analyst's Data Sheet) Earlier this week, PPL Capital Funding, the financing subsidiary for PPL Corp., issued $1.15 billion of debt at maturities of five,...
Timely Equity Tonic by Philip C. Adams, CFA
Aon  (with Analyst's Data Sheet) Aon plc is currently paying a scant 0.25% to 0.40% on its commercial paper. But the company decided this week to lock in some attractive long-term funding, given that...
Long-term Funding by Kathleen Shanley, CFA
High Yield
MGM Resorts International  (with Analyst's Data Sheet) MGM Resorts is achieving a slow turnaround in its domestic operations but its business in China is really helping financial results. The...
Chinatown  by Kim Noland
Toll Brothers  (with Analyst's Data Sheet) Toll Brothers made it look easy again in its release yesterday of impressive fiscal second quarter results as of April 30 which topped market expectations...
Slugger by Vicki Bryan
Gimme Credit will not publish on Monday, May 27, 2013, Memorial Day .
New Investment Grade Bottom Ten coming Tuesday, May 28th.

Genworth 5/3 
Cenovus 4/25 
An Independent Viewpoint
Rigorous Analysis
Coverage of Key Securities
Every report is one page, and concludes with an actionable investment recommendation.
May 24, 2013 | Bloomberg
KS on Ally Seen Retiring Preferreds on Path to IPO Q-"The settlement is higher than Ally's original $750 million offer, but not so high as to deplete all of the company's liquidity."
May 20, 2013 | DBR High Yield Weekly
KN on No Break From the Weather Q-Full Report on Mohegan Sun Featured
May 19, 2013 | Bloomberg
DN on Gaming wins boosting AMD Q-"The deals show that Microsoft and Sony have high regard for AMD's product."
May 16, 2013 | Bloomberg
CL on Merck Bondholder Discontent Revealed in Sale Q-"While share repurchases are one of our least favorite uses of cash, especially borrowed cash, Merck's financial position is unassailably strong..."
May 16, 2013 | Bloomberg
PA on Default Swaps in U.S. Fall Third Day; Hess Credit Risk Declines Q-"For bondholders, we think this compromise is a better near-term result than an outright victory by Elliott..."
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