NBR Complete Transcripts: 04-10-2007
Tuesday, April 10, 2007Alcoa Beats the Street
SUSIE GHARIB: Earnings season got off to a good start today as Alcoa topped quarterly estimates. The aluminum giant said after the bell today that it posted the strongest first quarter in its history. Alcoa earned $0.79 a share, $0.03 more than expected. Revenues also came in better than expected, up 11 percent to $7.9 billion. The company said its earnings benefited from higher metals prices and sales to the aerospace, (AUDIO GAP) industries. Thanks to that demand, aluminum prices rose more than 15 percent in the quarter. Alcoa shares closed the regular session at $34.90, up $0.03 and rose slightly in after hours trading.
PAUL KANGAS: Back to our top story, those Alcoa earnings. We're joined now by Scott Burns, aluminum analyst at Morningstar. Scott, welcome back to NIGHTLY BUSINESS REPORT.
SCOTT BURNS, ALUMINUM ANALYST, MORNINGSTAR: Thanks Paul.
KANGAS: Give us your read on Alcoa's numbers out late today.
BURNS: Well, the numbers were surprisingly strong. I say surprisingly because the company has had a fairly inconsistent track record the past couple quarters. Earnings were up almost 9 percent and it kind of goes in line with where aluminum prices are. So the big challenge for this company in the past few quarters has really been keeping costs in line. The aluminum price is going to fall where it does but it's all up to the company to execute. So things look pretty strong for the company.
KANGAS: Will the metals market remain strong, do you think?
BURNS: I think so. I think you've got a lot of demand in the developing countries, the Brit (ph) countries, Brazil, Russia, India and China, especially China, and also aluminum especially, a strong tail wind from the aerospace sector. We think here at Morningstar that there's going to be a long-term secular demand for airplanes going forward on the scale of 10 to 12 years. So aluminum is going to be the beneficiary of that.
KANGAS: But what about the weakness in the housing and automotive sectors? Will that be a factor for the big aluminum producers?
BURNS: I keep getting asked this question about housing but there's surprisingly little aluminum in a house. The days of aluminum siding are well behind us. Vinyl and plank siding if you're really taking care of it and there's no real wiring in the house. So aluminum is actually very insulated from the housing sector outside of high-powered tension lines that would go to new subdivisions.
Auto would be a stronger concern. The aluminum companies work very hard to get more aluminum per pound into a vehicle, but, you know, we're seeing kind of a soft patch and you can't allow the bad numbers at GM and Ford to really paint the whole picture on North American auto production. It's still going to be strong. It's just going to be done by different companies.
KANGAS: Understood. Alcoa was the star of the Dow Industrial Average in the first quarter with shares gaining 13 percent. Can that momentum continue? We're looking at a chart here. I know you're familiar with it. What do you think is going to happen here?
BURNS: Well a lot of that positive news has been spurred by rising aluminum prices of course, but there has also been some merger speculations surrounding the company. There's nothing definitive out there, but I would not say that it's totally unforeseeable that one of these large mining conglomerates international, BHP Billiton a Rio Tinto or SBRG (ph) could look to add a sizable company like Alcoa to their portfolio so that they can truly be the supermarket for metal commodities to the world.
KANGAS: So Alcoa is not too big to be taken over, you think?
BURNS: No, I think a lot of your viewers will be surprised to see how large some of these international mining conglomerates are.
KANGAS: Now, excuse me, the company boosted its annual dividend in January. It launched a big stock buyback, about 10 percent of those outstanding. Do you think they'll continue to do things like this to support the shares?
BURNS: I think they will. The company's been very shareholder friendly when it comes to returning capital despite some of their inconsistent operating issues. You know, one thing definitely to take away from this quarterly results was how strong the free cash flow generation was, up $700 million from last year and a record cash flow generation. So this company, when they really set their mind to it, can really throw off a lot of cash.
KANGAS: Interesting. Do you own Alcoa shares or have any other disclosure to make Scott?
BURNS: I do not.
KANGAS: OK. I want to thank you very much for sharing your very interesting information with us.
BURNS: Thank you, you guys have a good one. KANGAS: Thank you. My guest, Scott Burns, aluminum analyst at Morningstar.
DR Horton's Sales Setback
SUSIE GHARIB: Well, more dismal news on the housing front. DR Horton, one of the nation's largest homebuilders said today its order cancellation rate remains unusually high. Even worse, Horton said it has not seen the uptick in sales which is normal for this time of year. As Scott Gurvey reports, analysts say Horton's not alone in facing continuing problems.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Investors hoping to see some indication the bottom is at hand for the besieged real estate market were disappointed today as the nation's number two builder in terms of revenue reported a sharp drop in sales. DR Horton said home sales in its fiscal second quarter ending March 31 fell 37 percent while the value of those homes fell 41 percent compared to the same quarter last year. In a statement today, company chairman Donald R. Horton said it has yet to see the normal start of the spring home buying season. That is the most important season for the industry. Last month Horton CEO Donald Tomnitz told analysts the new home market, quote is going to suck, all 12 months of the calendar year, closed quote. Standard & Poor's analyst Tom Smith is sympathetic.
TOM SMITH, EQUITY ANALYST, STANDARD AND POOR'S: The man from Horton made a name for himself by going ahead with ugly language to describe ugly market conditions for 2007. I think most of the CEOs in the business would agree with him that it will be kind of a terrible year and one to be waded through with much travail of writing off inventory and reporting sorry loses.
GURVEY: Analysts stress the problems are not specific to Horton. They are industry wide, a consequence of overbuilding and a tightening of credit following rising defaults particularly in the sub-prime mortgage market. Real estate analyst Eric Landry of Morningstar sees a bad year in 2007 but improvement in 2008.
ERIC LANDRY, REAL ESTATE ANALYST, MORNINGSTAR: At some point this is going to end. And most of these quality builders are trading just a little bit and some even a bit below. So, one could argue for a contrarian play. It's probably not a bad idea at this point. It' just going to be a while before anyone gets paid.
GURVEY: Horton actually reports quarterly earnings on April 19. That is when investors will find out just how much in the way of write-downs the company decides to take. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
Reining In CEO Pay & Perks
SUSIE GHARIB: It looks like many CEOs in corporate America were well paid last year. A survey of 350 publicly traded U.S. companies shows CEO pay increased nearly 9 percent in 2006. The Securities and Exchange Commission is now requiring greater disclosure on executive pay packages. And as Stephanie Dhue reports, that has some companies changing how they pay the boss.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Country club memberships, chauffeured cars, even reimbursement for income taxes. Those are just some of the perks CEOs have enjoyed. John Castellani heads the Business Roundtable, an association of CEOs. He says perks are problematic.
JOHN CASTELLANI, PRESIDENT, BUSINESS ROUNDTABLE: Perquisites should only be for paid if there is a direct business need for being reimbursed for that purpose. If not, compensation should be balanced, should be in cash, should be in equity, should be for the long term results of the company. So I think you'll see more and more companies get away from perks and go to things that are better aligned with the shareholders interest.
DHUE: Still, the average CEO received nearly $200,000 in perks last year. But there are extremes. For example, corporate governance researchers at the corporate library say R. Chad Dreier, CEO of Ryland Group, whose compensation was $31 million, received an additional $7 million in perks and benefits. That included the payment of taxes on stock options grants, reimbursement for personal health and services and charitable donations made on his behalf. Executive pay packages are under increased scrutiny because of the new disclosure requirements. TIAA-CREF's corporate governance director John Wilcox is judging companies this year based on how well they explain their executives pay packages.
JOHN WILCOX, SR. VP & HEAD, COPORATE GOVERNANCE, TIAA-CREF: We're not really interested in micromanaging how much companies pay their executives. We don't want to substitute our judgment for that of the directors and the management of the company, but we want the ability to let them know if we're not happy.
DHUE: This proxy season, shareholders will vote at more than 60 companies on proposals giving them a say on pay. Today, 37 percent of Morgan Stanley shareholders and 47 percent of Bank of New York shareholders voted for a say on pay. While those vote fall short of the 50 percent needed to force the boards to adopt the measure, supporters are encouraged. Richard Ferlauto is with employees union AFSCME, which sponsored the proposals voted on today.
RICH FERLAUTO, PENSION DIR., AFSCME: I think shareholders are rallying around the concept and are going to be pushing to get a greater voice when it comes to compensation.
DHUE: Say on pay legislation is also moving through Congress and a dozen S&P 500 companies are studying how to adopt the idea. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
"Of Mutual Interest,"-Mutual Funds & Taxes
SUSIE GHARIB: With tax day just a week away, many Americans are facing the tax consequences of their investment decisions. But when it comes to mutual fund investing, there are some ways to curb the tax bite. In tonight's segment "Of Mutual Interest," Erika Miller looks at tax-efficient investing strategies that could help ease your tax burden.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: As most investors know, mutual funds are required to pass along the income and realized profits in their portfolios to shareholders in the form of a capital gains distribution. So, if you invest in the fund through a taxable account, you will have to pay taxes on those gains. As Christopher Davis of Morningstar points out, this can take a huge bite out of your returns.
CHRISTOPHER DAVIS, FUND ANALYST, MORNINGSTAR: I've seen a lot of statistics that say that the average equity fund investor sacrifices around two percentage points a year of their returns to taxes. So, it's a pretty substantial hit. And over decades, that's going to add up to tens, if not hundreds of thousands of dollars, depending on how much you're investing.
MILLER: Tax-managed funds are designed to keep distributions to a minimum through a variety of strategies. Donald Peters, who manages three tax efficient funds for T. Rowe Price, keeps turnover low.
DONALD PETERS, PORTFOLIO MANGER, T. ROWE PRICE: The primary thing that we do is invest for the long-term. So, as an investor with a multi-year time horizon, we tend to trade much more, much less frequently than competitors who are focused on just pre-tax returns.
MILLER: But not all trading is discouraged. Tax-managed funds typically like to sell losing stocks.
PETERS: Loss recognition generally is very good because we can build up a tax shield or a loss carry forward that we can have offset any sort of gains that we would recognize.
MILLER: If you want to evaluate the tax bite of various funds, the Internet can help. For example, on Morningstar's website, you can pull up a fund's tax-cost ratio, the percentage of return that goes to the tax man. You can also find out its tax adjusted returns over a particular period. So what should you do if you have your heart set on a fund which typically carries a heavy tax load?
DAVIS: If you are going to invest in a fund that is not going to be tax efficient, try to keep it in something like an IRA or in your 401k.
MILLER: Tax-efficient investing can be an easy way to boost your investment returns, but experts say it shouldn't be the only criteria in picking a mutual fund. After all, some funds are tax efficient, because they lose money. Erika Miller, NIGHTLY BUSINESS REPORT, Short Hills, New Jersey.
"Kevin McCormally's Tax Tips"-Roth IRA
SUSIE GHARIB: As we mentioned earlier, there's just one week to go now until the Federal income tax filing deadline. So, every night this week, we'll bring you another last minute tax tip that can help make it easier to file. Tonight, fixing a Roth IRA SNAFU. Here's our tax expert, Kevin McCormally, editorial director of "Kiplinger's Personal Finance."
KEVIN MCCORMALLY, EDITORIAL DIR., "KIPLINGER'S PERSONAL FINANCE": I've heard from a surprising number of NIGHTLY BUSINESS REPORT viewers who make too much money. Too much, that is, to contribute to a Roth IRA. Unfortunately, they made this discovery after they made the contribution. Now what do they do? You can't make a 2006 Roth contribution if your 2006 income was over $110,000 if you file a single return or over $160,000 on a joint return. The trick is that savvy investors know that the earlier in the year they stash their cash in an IRA, the sooner the earnings are tax free. But you're never certain about your income until the end of the year.
That's the pickle these viewers find themselves in. There are a couple of ways to solve the problem. You can simply ask your IRA sponsor to give you your money back. As long as it's out of the Roth before you file your 2006 return, you'll avoid the 6 percent excess contribution penalty. Now, the sponsor also has to figure out how much the contribution has earned so far and send that money to you, too. You have to report and pay tax on the earnings on your 2006 return. And you'll owe a 10 percent penalty if you're under age 59 1/2.
The other solution is to have the IRA sponsor move your Roth contribution and its earnings to a traditional IRA. Do this by April 17 and the law treats it as though your money went into the regular IRA in the first place. There's no income limit for contributing to a traditional IRA but, if you also have a retirement plan at work, you won't be allowed to deduct your deposit. Whichever method you choose, get that extra money out of the Roth by April 17 to avoid that 6 percent penalty. I'm Kevin McCormally.
KANGAS: You can submit your tax questions to Kevin McCormally and learn more about the stories in tonight's broadcast on our website. Go to NIGHTLY BUSINESS REPORT on pbs.org. Look for the tax tips logo on our home page. You can also e-mail us at nbr@phs.org.
Paul Kangas' Stocks in the News
PAUL KANGAS: Stocks on Wall Street drifted higher on light volume this morning, defying a rise in oil prices and that bad news on housing from DR Horton. After an hour of trading, the Dow was up 14 points. NASDAQ rose 10 points. A mid-session slump sent the blue chips to a 17 point deficit, but a firm tech sector kept the NASDAQ higher and that along with optimism about Alcoa's results, led to a positive close. The Dow Jones Industrial Average ended up 4.71 at 12,573.85. That was its eighth straight gain. The NASDAQ rose 8.43 to 2477.61. Standard & Poor's 500 up 3.78, ending at 1448.39. Over in the bond market, the 10-year note rose 7/32 to 99 7/32, putting the yield at 4.72 percent.
Big board volume leader on nearly 18 million shares, Seagate Technology (STX) down $1.46, traded as low as $21.27 after the company cut its third quarter sales forecast from about $3 billion down to $2.8 billion. Meanwhile, Needham Securities brokerage downgraded the stock from "strong buy" to "buy."
Kraft Foods (KFT) dropped $0.07.
But General Electric (GE) moved up a dime.0
Pfizer (PFE) no change there.
Micron Tech (MU), fifth in volume, edged $0.04 higher.
Advanced Micro (AMD) lost $0.08.
ExxonMobil (XOM) on those higher prices today, up $0.77.
Halliburton (HAL) was up $0.26.
And then Citigroup (C) an $0.82 rise. The company reportedly is set to slash anywhere from 15 to 25,000 jobs as part of its cost-cutting plan.
Qwest Comm (Q) was down $0.11 and tenth in big board volume.
Moving along, we see Dow Chemical (DOW) giving back $1.12 of yesterday's gain of $2.16. That was on speculation of a leveraged buyout, but the company says it has had no talks about any leveraged buyout. Down went the stock today.
Cemex Sa (CX), this is the big Mexican cement producer, up nearly $2 a share. Positive reaction to the company boosting its bid for Rinker to just over $79 per American depository receipt. Rinker ADRs were up $3.25 to $78.55 today.
Freeport-McMoran Copper & Gold (FCX) rising $1.48. Lehman Brothers brokerage upgraded it a target from $80 a share to $100 a share target. Also name it as the top pick in sector.
United Rentals (URI) moving up $4.81. The company is going to explore strategic alternatives and that could include the possible sale of the entire firm.
BCE (BCE), that's the big Canadian phone company, up on takeover speculation but the company downplays any KKR bid or other private equity firm about going private.
Cascade (CAE) makes forklifts and things like that, up $6.12. Fourth quarter earnings jumped to $0.80, a nickel above the Street estimate and way up from $0.63 last year. Sales were up nearly 10 percent during the period.
American Home Mortgage (AHM) losing another $2.37 after dropping almost $4 yesterday when the company cut its first quarter earnings guidance and also slashed its quarterly dividend from $1.12 to $0.70 and today, Citigroup downgraded it from "hold" to a "sell" recommendation.
Giant Industries (G), big refiner, down $1.03. The Federal Trade Commission may try to block Western Refining from acquiring Giant for $77 a share.
Intel (INTC) topped the NASDAQ active list, moving up $0.58.
Dendreon (DNDN) down $1.43. It was up over $5.50 yesterday. Dendreon had the promising treatment for prostate cancer.
Then Google (GOOG) down $1.71.
Apple (AAPL) a $0.60 gainer.
Microsoft (MSFT) $0.17 rise, drop I should say. That was fifth in volume.
Cisco Systems (CSCO) fell $0.21.
Applied Materials (AMAT) moved up $0.76.
Amgen (AMGN) $0.07 loss.
Research in Motion (RIMM) did well, up $2.05.
And Dell (DELL) a $0.20 gain, tenth in dollar volume.
Adolor (ADLR), look at that massive loss, almost 59 percent on the downside. The company and its partner, Glaxosmithkline halted late stage trials for a gall disorder treatment because of safety concerns.
And then we see Simulations Plus (SLP), this is over on the American Exchange, software firm. Second quarter earnings, $0.07, more than double last year's $0.03 and sales as you see up 71 percent.
Those are the stocks in the news tonight.
