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   July 31, 2010 @ 2:10 PM EDT
FRIDAY'S REPORTS (7/30/2010)
Investment Grade
Boeing  (with Analyst's Data Sheet) Investors seem to be philosophical about the latest "schedule pressure" for the first 787 delivery. Meanwhile the company's second quarter sales and profits fell...
Up, Up, And Away: Some Day by Carol Levenson, CFA
Capital One Financial  (with Analyst's Data Sheet) As we've discussed in several recent reports, the theme of the second quarter for the banking sector has been declining loans/improving credit...
Cautious Cardholders by Kathleen Shanley, CFA
High Yield
Massey Energy  (with Analyst's Data Sheet) Massey Energy's second quarter results, released earlier this week, made it clear that the operational recovery from the Upper Big Branch coal mine...
Time Heals All Wounds  by Evan Mann, CFA
Eastman Kodak  (with Analyst's Data Sheet) Eastman Kodak had been hoping that profitability in the traditional Film, Photo, and Entertainment (FPEG) segment would be sufficient until the Consumer...
Disappearing Film by Dave Novosel, CFA
FRIDAY'S COMMENTS (7/30/2010)
4:23pm Newell Rubbermaid Inc. Newell reported solid results for its second quarter. Reported net sales fell 0.5%,...
Earnings by B. Craig Hutson, CFA
Newell reported solid results for its second quarter. Reported net sales fell 0.5%, but core sales growth was 1.5%. Newell is cycling product line exits and unfavorable foreign currency. Core sales would have been up nearly 4% if adjusted for purchases made in advance of an SAP implementation project. This is consistent with adjusted results in the first quarter. Core sales rose the most in its Tools, Hardware & Commercial Products segment. Despite a weak economy and consumer, Newell is benefiting from robust product innovation and significant investments in brand building. Adjusted OI fell slightly due entirely to the Home & Family segment. This segment is the most consumer-oriented and NWL is investing heavily in advertising, promotion, and strategic S,G&A. We estimate adjusted EBITDA was essentially flat. Newell is gaining market share and distribution and its new products will more positively impact results over the next 12 months. Its adjusted E.P.S. of $0.51 compares to $0.47 one year ago and the $0.44 consensus estimate. The better than expected results caused NWL to boost its E.P.S. guidance by two cents and its core sales forecast to mid-single-digit growth. It is on track to achieve net CFFO in excess of $500 million and free cash flow before dividends of $330+ million even with $70-$100 million of cash restructuring payments. We expect NWL to use its free cash flow to repay debt and to improve its overall credit profile. We remain bullish about its near-term prospects. Its cash bonds continue to offer attractive value.
3:56pm Chevron You don't need us to tell you Chevron had a great quarter, but we have a couple of observations from the...
Earnings by Philip C. Adams, CFA
You don't need us to tell you Chevron had a great quarter, but we have a couple of observations from the earnings release and call. Second quarter Free Cash Flow was $2 billion. June 30 cash was $13.2 billion, which the company swears is not a war chest (and that M&A valuations are generally too high, anyway.) Total debt was $10.5 billion, so net debt is a negative $2.7 billion. CVX is not inclined to start with share repurchases until it has a little better view on capex and by extension, FCF. CVX had said awhile ago it would lighten up on natural gas production in response to weak prices, and that natural decline rates would therefore decrease production. But in Q2, production efficiency actually resulted in worldwide natural gas production of 5 Bcf/d, flat to a year ago. CVX says the Gulf of Mexico deepwater drillng moratorium should be lifted and that deepwater drilling can be done safely and reliably. The full-year impact of the moratorium will be approximately 10,000 bpd, or about 0.4% of the Q2 production rate. (Hurricane Alex was a bigger factor in Q2, curtailing GoM production by about 20,000 bpd.) At YTD market prices (higher prices increase host country entitlements) CVX expects 3% production growth for 2010, at 2,750 MBOED, versus an original outlook of 2,730 MBOED.
3:27pm Stanley Black & Decker Stanley Black & Decker stayed true to its word. Following the March 12 merger with...
Acquisition by B. Craig Hutson, CFA
Stanley Black & Decker stayed true to its word. Following the March 12 merger with BDK, Stanley indicated it would consider bolt-on acquisitions that did not cost it more than $500 million each. Yesterday it announced a deal to buy CRC-Evans for a cash purchase price of $445 million. CRC-Evans supplies specialized equipment and provides services for the oil and natural gas transmission industry. It is SWK's first acquisition for its Infrastructure segment established in January 2009. For its 2020 fiscal year ended March 31, CRC-Evans generated $250 million of revenues and $60 million of EBITDA in what was considered a down year. The enterprise value/EBITDA multiple works out to roughly 7.5x. We suspect CRC-Evans also has high capital spending requirements. The business clearly diversifies SWK away from the traditional tools, security, and fasteners focus. SWK is optimistic it can grow the Infrastructure segment through both internal and external growth. CRC-Evans generates 75% of its sales outside the U.S. and has a strong EMD presence, particularly in Russia. SWK can easily fund the deal with its $1.5 billion of cash or $1.5 billion of available revolver. SWK does not expect its debt levels to be above its prior year-end commitment. SWK certainly has its hands full with the integration of Black & Decker and its latest acquisition. We would expect it to focus on improving its credit profile which is stretched in the short-term for its ratings.
2:24pm Southwest Airlines Co Southwest Air yesterday reported an all-time quarterly record of $3.2 billion of...
Earnings by B. Craig Hutson, CFA
Southwest Air yesterday reported an all-time quarterly record of $3.2 billion of revenues. Revenues rose 21.1% on higher average yields, better traffic, and longer routes. The nation's largest domestic carrier is observing a much stronger rebound in consumer demand versus business travel. It is on pace to achieve a record load factor in July. We believe Southwest is gaining market share because it is the only carrier to not charge for checked baggage. Its adjusted EBITDA increased over 70% to $568 million. While fuel expense rose during the period, unit costs excluding fuel were up only 6.4%. Southwest is gaining operating leverage from its prior voluntary buyout program and the top line momentum. Its adjusted E.P.S. of 29 cents beat the 27 cent consensus estimate. Southwest believes its second half of 2010 will be similar to the impressive results in the first half. The higher earnings helped boost net CFFO to $913 million year-to-date versus $420 million. Southwest will generate substantial free cash flow this year after a projected $600 million in capital spending. Its liquidity is excellent with $3.1 billion of cash and a $600 million unused revolver compared to $3.4 billion of debt. Lease adjusted leverage was 3x. We are optimistic about the near-term prospects for Southwest. Fitch raised its outlook to stable from negative on its 'BBB' rating earlier today. The airline has excellent revenue initiatives in place and it still must re-vamp its frequent flyer program and equip its fleet with Wi-Fi access. It does not expect its net fleet to expand in the next couple years even though it will be flying to several new cities. We changed our recommendation to sell credit protection on Southwest on April 23.
2:20pm Walt Disney Company, The Disney finally sold its Miramax film studio for $660 million, plus adjustments, ...
Asset Sale by Dave Novosel, CFA
Disney finally sold its Miramax film studio for $660 million, plus adjustments, to Filmyard Holding. The offer reportedly exceeds the amount investor Ron Burkle was willing to pay. Disney has been looking to sell the unit for well over six months, as it has decided to focus on films under the Disney, Pixar, and Marvel brands. Disney is not alone in cutting back on film production, as a glut of films led to reduced profitability in the industry. The Miramax studio was purchased by Disney in 1993. The deal is slated to close sometime between September and the end of the year.
12:47pm Public Service Enterprise Group Public Service Enterprise Group reported second quarter 2010 operating...
Earnings by Philip C. Adams, CFA
Public Service Enterprise Group reported second quarter 2010 operating earnings of $331 million, up 4% from a year ago. Regulated utility subsidiary PSE&G contributed the greatest growth, with operating earnings up $32 million to $75 million, mostly on increased demand, with a modest assist from weather and cost control. PSEG Power is still the dominant earnings contributor, but its Q2 operating earnings of $239 million were down $14 million from the year-ago quarter, attributable to lower results in non-BGS wholesale power trading (a mark-to-market reflecting an estimated decline in the value of full requirements contracts, driven by lower volume), and a writedown in the value of S02 allowances, driven by June market price movements in response to draft EPA rules. PSEG Energy Holdings operating earnings were down $9 million to $21 million, reflecting lower cross-border lease income and a lack of gains on termination of the leases, as occured in 2009. We really like how PSEG has handled its cross-border lease dispute -- another lease was terminated in the quarter, leaving just 3 remaining leases. PSEG's exposure to the IRS is a maximum of $550 million (assuming total capitulation to the IRS), against which the company has already posted $320 million of cash (earns at an above-market rate and immunizes the company against penalty accrual). At PSE&G, recent rate case settlements mean an additional $100 million of annualized revenue from electric and gas customers, with new rates implemented in June. This is partially offset by an agreement to rebate $122 million to customers over the next 24 months to settle a market transition dispute from industry restructuring 10 years ago (reported as a non-operting item.) Delays by the National Park Service in granting permits for the western portion of the $750 million Susquehanna-Roseland transmission line will mean a 2-3 year delay in that project. PSE&G is trimming its distribution capex guidance by $140 million per year for 2010-2012, continuing only with projects for which it has contemporaneous recovery. Items excluded from PSEG's quarterly results include a $10 million gain on nuclear decommissioning trust investment activity, a $45 million mark-to-market loss on PSEG Power hedge management, and a $72 million (A.T.) market transition charge refund at PSE&G. PSEG 2010 Operating EPS guidance remains $3.00-$3.25, the midpoint of which is flat to 2009's $3.12. That's $1.52-$1.65 billion, with PSEG Power expected to contribute about $1.1 billion (down about $100 million from 2009), PSE&G $425-455 million (up over $100 million), and PSEG Energy Holdings $30-$40 million (down about $10 million). PSEG Enterprise (holdco and other) expected operating net income of $5-$15 million is roughly flat to 2009. We agree with Chairman Ralph Izzo's view that theme for the remainder of the year is "steady as she goes", focusing on good operations and cost control. PSEG Power will get dinged a little in Q3 by a 17-day unplanned outage at Salem, but generally speaking, economic recovery should boost demand and prices, restoring the historic locational advantage of PSEG Power in the eastern load pocket.
12:13pm France Telecom France Telecom managed to keep the revenue decline in the second quarter to a manageable 0.4%...
Earnings by Dave Novosel, CFA
France Telecom managed to keep the revenue decline in the second quarter to a manageable 0.4%. However, EBITDA margins declined 80 basis points, although still better than the 110 basis point deterioration in the first quarter. Margins were buffeted by higher labor costs as the result of the Part-time for Seniors Plan, higher mobile handset purchases, the impact of regulatory measures, and higher commercial expenses. Most of the margin contraction was in the France segment. Management reiterated its outlook for relatively flat revenue in the second half and a 100 basis point decline in margins for 2010. Responding to criticism that France Telecom is less shareholder friendly than its peers, the company committed to paying a dividend of EUR1.40 per share for the next three years (2010-2012). On the positive side, management indicated that it does not intend to make any acquisitions that would change its debt/EBITDA ratio, suggesting mostly smaller deals. France Telecomm will focus on the Africa/Middle East region because it already has a presence in 19 of those countries. While results were not disappointing, our overriding concern is the tight spread levels on these bonds.
11:55am Genworth Financial Genworth's shares are trading down today in the equity markets, following press reports...
Earnings by Kathleen Shanley, CFA
Genworth's shares are trading down today in the equity markets, following press reports which suggest that the company is among the insurers being subpoenaed by New York Attorney General Andrew Cuomo. The Attorney General's Office is investigating claims that life insurers earned so-called "secret profits" by investing death benefits for the families of deceased policyholders (without paying a fair return on the funds). Genworth is one of a number of insurers said to be on the list, including industry leaders such as MetLife and Prudential. Genworth said yesterday that it earned $77 million in the second quarter ended 6/30/10. The company has made progress in restoring its balance sheet to a sound footing. In the second quarter, Genworth issued $400 million of new public debt, and used $200 million to repay a portion of its credit facility. In the second half, the company expects to collect about $175 million from its majority-owned Canadian mortgage insurance subsidiary. Overall, Genworth told investors this morning that it expects the holding company to receive $350 to $400 million in proceeds (operating dividends and return of capital) in the second half, primarily from international subsidiaries. While the liquidity situation is positive, the U.S. Mortgage segment remains a drag on consolidated results, with a net operating loss of $40 million in the second quarter. Primary sales were down sharply, to $2.2 billion versus $3.3 billion a year ago. The company expressed optimism that the Dodd-Frank bill will have a positive impact on private mortgage insurers, but for the moment, the balance remains heavily tilted in favor of FHA loans. Overall delinquencies improved in the second quarter, but late stage delinquencies are increasing, and the company's outlook for the remainder of the year remains cautious.
10:40am American Axle & Manufacturing American Axle reported second quarter results looked especially robust...
Earnings by Shelly Lombard
American Axle reported second quarter results looked especially robust against dismal comps from 2009. Revenue more than doubled from the year ago quarter, growing to $559.6 million from $245.6. The outsize growth was due to a rebound in demand for full size truck and SUV's, the bread and butter for Axle and its main customers General Motors and Chrysler. The second quarter of 2009 also suffered from an extended summer shutdown at those two OEM's who were in Chapter 11 at the time. We estimate second quarter EBITDA, excluding special charges, was $84.9 million, up from a $34 million loss in the year ago quarter. We estimate LTM EBITDA was $259.5 million which covered interest expense 2.9x and 1.8x after capex. Thanks to EBITDA growth and last year's equity offering, leverage is down to 3.9x.
10:29am DTE Energy DTE Energy's second quarter earnings were a "miss" in terms of EPS expectations, but there was...
Earnings by Philip C. Adams, CFA
DTE Energy's second quarter earnings were a "miss" in terms of EPS expectations, but there was nothing wrong at the regulated utilities (in fact MichCon nearly broke even in what's always a seasonal loss), and the relatively poor results in Energy Trading were at least partly due to accounting treatment. Net income attributable to DTE of $86 million was $3 million better than a year ago. Detroit Edison's operating earnings were up $4 million to $87 million, with a $40 million rate relief bump offset by a non-repeat of a 2009 property tax settlement and slightly higher O&M and depreciation expense. MichCon's $1 million loss was a $14 million improvement from a year ago, with rate relief and lower O&M partly offset by adverse weather (a warm April). Energy Trading operating earnings were down $55 million to $12 million, of which $16 million was due to rising gas prices (bad bet) and a negative performance from a transmission portfolio. Another $32 million was attributable to accounting rules, where the income from transactions occuring in Q2 should be realized in future periods. From a cash flow perspective, DTE has generated Net Cash from operating activities of $1.15 billion, versus capex of $515 million and dividends of $176 million, for a surplus of $459 million. Two cautions: The company's presentation included working capital changes (looks like $257 million, although the exhibit may not tie to the 10Q), which may reverse in the second half. In addition, full-year capex is still budgeted at $1.4 billion, leaving nearly $900 million for the second half. So the first half surplus could be more than reversed in Q3 and Q4, perhaps by several hundred million dollars. DTE raised its dividend by 5.7% to $2.24 per share annually, which would be 62% of the midpoint of 2010 operating EPS guidance of $3.45-$3.80. DTE also noted that it will make rate-based investments of $3.4-$3.9 billion over the next three years, on pace or a bit lower than 2010. DTE said it plans to retire substantially all of its $600 million maturity in 2011, we think we heard via pushing the debt down to the utility opco level. Overall, an OK result, although maintaining a 60+% dividend payout ratio in the face of continued hefty capex makes us squirm a little bit.
10:11am Telefonica Although overshadowed by the announcement of the purchase of Portugal Telecom's stake in Vivo,...
Earnings by Dave Novosel, CFA
Although overshadowed by the announcement of the purchase of Portugal Telecom's stake in Vivo, Telefonica did report second quarter earnings yesterday. Revenue surged 9%, with particular strength in Latin America (+16%) and O2/Europe (+14%). These gains offset the poor results in Spain, where revenue fell 3.2%. Revenue was aided by the change in foreign currency rates. We expect more of the same going forward, especially with the enhanced position in Brazil. Spain is not likely to recover anytime soon. EBITDA margins fell again, with the biggest decline in the Spain segment (-290 basis points). The erosion was attributable to higher commercial expenses associated with the fast pace of customer growth, higher commissions, increased network maintenance, and the negative impact of regulatory measures. We expect margins to slightly improve from current levels in the second half, but margins should still be down from 2009.
10:08am Belo Corporation As Belo predicted, its second quarter nonpolitical advertising revenue gain beat its first...
Earnings by Shelly Lombard
As Belo predicted, its second quarter nonpolitical advertising revenue gain beat its first quarter performance. The company reported second quarter results this morning. Its total revenue was $163 million, a 15% year over year increase that was better than the 12% revenue gain it had in the first quarter. Political ad revenue increased to $2.5 million from $1.9 million. But the real driver was core spot advertising, excluding political, that rose 14% year over year. Local nonpolitical advertising revenue was up 10% while national nonpolitical advertising revenue surged 24%. As other broadcasters have noted, auto advertising is back with a vengeance, up 51% from its lows in 2009. And advertising on Belo's websites grew 14%. Belo's station operating expenses and corporate overhead crept up 6.8% due to higher incentive bonus and pension expense. Second quarter EBITDA improved to $56.2 million from $44.8 million. LTM EBITDA was $204.9 million (versus $169.1 million at the end of 2009) and it covered LTM interest expense 2.8x. Leverage is 4.8x.
8:57am American Electric Power American Electric Power's ongoing second quarter earnings of $355 million were up...
Earnings by Philip C. Adams, CFA
American Electric Power's ongoing second quarter earnings of $355 million were up $34 million from a year ago, better than expected, as rate relief was assisted by favorable weather. In May, AEP took a $293 million charge to reduce headcount by 11.5% (2,461 positions) which resulted in GAAP net income for the quarter being just $136 million, versus $316 million a year ago. By segment, ongoing Utility Operations income was up $22 million to $348 million, as the previously noted rate relief, weather, a 9.4% incresase in industrial sales, and $25 million lower O&M expense offset lower off-system sales, third party transmission revenue, and higher finance charges. By region, utility gross margin improved the most amont the "East Regulated Integrated Utilities" (includes Appalachian Power, Kentucky Power, Indiana Michigan Power), up $52 million to $639 million. Second place went to the West Regulated Integrated Utilities (Southwestern Electric, Public Service of Oklahoma) up $38 million to $344 million. The Ohio subidiaries and the Texas Wires segments posted gross margin increases of $12 and $13 million, respectively. Lower off-system sales is not surprising, given low natural gas prices and the slow pace of recovery. We would expect some upside from this if hot weather and economic recovery continue. AEP affirmed 2010 ongoing EPS guidance of $2.80 - $3.20.
8:10am BT Group BT Group just can't seem to get the top line moving. Revenue in its fiscal first quarter (ended June...
Earnings by Dave Novosel, CFA
BT Group just can't seem to get the top line moving. Revenue in its fiscal first quarter (ended June 30th) declined 4.4%. The decrease was as large as any over the past five quarters, possibly reflecting a European economy that is trailing the progress of the U.S. Revenue was down in all four segments, with Wholesale (-10%) and Overreach (-8%) the weakest units. Key factors driving the revenue decrease are the continued decline in calls and lines and the impact of the mobile termination rate reductions. In addition, revenue may be buffeted by pressures on government to reduce public spending. Despite the softness in revenue, margins rose 240 basis points. All four segment recorded higher margins, with Openreach showing the most improvement. The margin expansion is largely due to headcount reductions, the renegotiation of supplier contracts, the simplification of its portfolio of products and services, and the enhancement of the debtor management processes. Free cash flow was GBP719 million. While we would characterize the results as encouraging, BT Group still has to deal with the massive pension deficit. The company indicated that a move to the use of CPI may reduce its liabilities, but nothing is concrete at this point.
THURSDAY'S REPORTS (7/29/2010)
Investment Grade
Valero Energy  Valero Energy reported its first profitable quarter in over a year, with a $1.1 billion increase in operating income to $921 million. We revisit our call...
All Clear? by Philip C. Adams, CFA
Daimler AG  Earlier this week Daimler AG reported excellent results for its second quarter. Less than two weeks ago the automaker provided preliminary guidance that was...
Luxury In The Lead by B. Craig Hutson, CFA
High Yield
Starwood Hotels & Resorts  Starwood reported such good second quarter results that its recovery from the lodging downturn looks almost V-Shaped so far. The operator...
V-Shaped by Kim Noland
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Kellogg 7/29 
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Alcoa 7/12 
Allstate 7/7 
Phillips-VanH 7/7 
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Jul 30, 2010 | Los Angeles Times
CH on "Slashing lease prices could be a risky move for Toyota" Quote- "By offering such low monthly payment options, Toyota is essentially betting that the vehicles will have superior resale value when they are returned after the lease ends."
Jul 30, 2010 | WSJ.com
DN on "High Stakes For Eastman Kodak" Quote- "The fortunes of Kodak rest on the performance of the core of the CDG [Consumer Digital Imaging Group] segment, and more specifically its performance in the fourth quarter."
Jul 29, 2010 | The Wall Street Journal
CL on "McDonald's Back in Debt Market" Quote- "We don't generally approve of buying a company's bonds before it has released its balance sheet and cash flow statement for the latest reported quarter."
Jul 29, 2010 | Charlotte Observer
PA on "Expect red-hot electric bills" Quote- "Another factor: As older appliances wear out, they're replaced by new, energy-efficient models."
Jul 28, 2010 | The Detroit News
CH on "Mercedes sales boost Daimler's profit" Quote- "The improvement in the truck business reflected the global economic recovery."
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