NBR Transcripts June 18, 2008
Wednesday, June 18, 2008FedEx Delivers Dismal Quarterly Earnings
SUSIE GHARIB: Disappointing quarterly earnings at FedEx today raised new questions about the health of the U.S. economy. Because FedEx is considered a proxy for business activity, its results are being closely scrutinized. Excluding a one-time charge, FedEx earned $1.45 a share in its fiscal forth quarter, down sharply from a year ago and $0.02 below analysts' estimates. The package delivery giant also issued a weak forecast for fiscal 2009, citing high fuel prices. Shares of FedEx fell 2 percent. Suzanne Pratt reports.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: FedEx blamed the earnings shortfall squarely on rising fuel costs and the cooling U.S. economy. The nation's second largest package shipping company has been unable to raise fuel surcharges fast enough to keep up with rising energy costs, which have doubled in the past year. On top of that, FedEx customers are also getting squeezed by higher fuel prices, causing them to cut demand for FedEx services. Edward Jones analyst Daniel Ortwerth says the results suggest surging fuel costs may erode business for many industries.
DANIEL ORTWERTH, TRANSPORTATION ANALYST, EDWARD JONES: The impact of rising energy costs on the U.S. economy is more significant than surface level numbers tell us. There are deeper ripple effects that are very hard to quantify and that we might quantify until academia does it years from now.
PRATT: Particularly disconcerting to analysts was the company's negative outlook for fiscal 2009. FedEx said fiscal first quarter earnings would be $0.80 to $1 a share, much lower than the $1.27 analysts were expecting. JPMorgan analyst Tom Wadewitz, whose firm has done investment banking and other business with FedEx in the past year, says the one-two punch of oil and the anemic economy is behind the weak guidance.
TOM WADEWITZ, TRANSPORTATION ANALYST, JPMORGAN: I would say that the fiscal '09 guidance is based on more of the same of what we saw in fourth quarter and perhaps the margin impact resulting from the weak volume trend is greater than we had anticipated.
PRATT: The challenging environment that FedEx faces is reflected in its stock price. In the past year, the shares have fallen 25 percent, moving from $110 a share to about $82. Some analysts disagree on the outlook for the stock.
WADEWITZ: We rate FedEx "neutral" and I think we have concern that you are not going to see, really, drivers for earnings growth or earnings performance to pick up in the next couple of quarters.
ORTWERTH: For the disciplined long-term investor, this is a marvelous buying opportunity, because the company has the right business strategy, has a tremendous head start on anybody who would like to compete with them other than UPS and they have the strength to get through this storm.
PRATT: Analysts say one bright spot in the otherwise disappointing FedEx results was its international business; it grew at 6 percent in the latest quarter. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
To Offshore Drill or Not To Offshore Drill....
PAUL KANGAS: As gas prices head toward $5 a gallon, President Bush today asked Congress to lift the ban on offshore drilling exploration. That ban has been in place for almost three decades and as Darren Gersh reports, removing it won't be an easy sell.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: The oil industry now has the technology to run dozens of wells from a single platform. That's just one example of how offshore drilling is much safer than it was when Congress limited it almost 30 years ago. Given such advances and with gas prices topping $4 a gallon, the president says it is time to lift the ban on offshore exploration.
GEORGE W. BUSH, PRESIDENT OF THE UNITED STATES: Congress must face a hard reality. Unless members are willing to accept gas prices at today's painful levels or even higher, our nation must produce more oil and we must start now.
GERSH: Democrats agree oil companies should ramp up exploration. But Illinois Democrat Rahm Emanuel sats the place to start is on the 68 million acres on and offshore oil companies already lease, but have not yet explored.
REP. RAHM EMANUEL (D) ILLINOIS: What are you going to do with the leases you have today and are not drilling? If it's a capacity issue, then no other new leases is going to solve that.
GERSH: Industry analysts say the ability to explore is pinched by a shortage of rigs and trained engineers. So lifting the moratorium on offshore drilling won't necessarily lead to new production, unless the industry also ramps up spending. To make sure that happens, Rice University energy expert Amy Myers Jaffe says policy makers will have to get creative.
AMY MYERS JAFFE, ASSOCIATE DIRECTOR, RICE UNIVERSITY ENERGY PROGRAM: For those companies and there are several, who are not adding spending to their portfolios for oil and gas and we say we're offering this acreage, you don't bite? Then we're going to tax away some of your profits.
GERSH: Given the political standoff between the White House and Congress, no one expects the offshore drilling ban will be lifted anytime soon. But oil market analyst Phil Flynn believes shifting public opinion may eventually pressure Washington to act.
PHIL FLYNN, SR. MARKET ANALYST, ALARON: People are going to start doing the math and realizing that this is a luxury that they can no longer afford. It's doing damage to our economy, whether we want to admit it or not.
GERSH: And now for the usual energy spoiler alert. Analysts caution, even if the entire U.S. coastline were open for drilling right now, it might not do much to bring down prices at the pump. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
One on One with Royal Caribbean Chairman & CEO Richard Fain
SUSIE GHARIB: Well, those high oil prices are rocking the boat at cruise ship companies like Royal Caribbean. The world's second largest cruise company expects its fuel bill to hit about $800 million this year and it's now charging customers fuel surcharges of $10 per person per day. Joining us now, Royal Caribbean Chairman and CEO Richard Fain. Mr. Fain, welcome to NIGHTLY BUSINESS REPORT.
RICHARD FAIN, CHMN. & CEO, ROYAL CARIBBEAN CRUISES: Thank you very much for having me.
GHARIB: Tell us what impact are high oil prices having on your customers and reservations for cruises?
FAIN: Well, the first and most effective thing of course it's just increasing our costs. I think the impact is both from the supplement and from the general economy. We're not doing as well as we might wish in a more normal economy, but I think it's also surprising that we've done remarkably well. We're still filling our ships. And as we said in our last earnings call, we expect to be raising our prices even today.
GHARIB: But getting to the ship is difficult, I would assume, for many customers. They have to take an airplane. We see that the airlines are raising their fares and they're cutting routes and they're charging other fees. Is that going to have an impact on your reservations?
FAIN: Well, we hope not. Obviously it makes it more difficult to travel however you're traveling and whatever you're doing for your vacation, but people really demand their vacations. It's no longer seen as a luxury. So what we're seeing is people may trade down a little bit, but people still want to take their vacations. When we look at it cruising is the best value out there. And in fact, if you take a cruise, you probably have to do less airplane travel than otherwise. So that particular point hasn't affected us as badly as the direct cost of fuel or the general state of the economy.
GHARIB: If fuel prices continue to go up, what measures do you think that you're going to have to take so that you can stay profitable?
FAIN: Well, certainly we hope it doesn't continue to go up. But we're already taking great actions. We're trying to cut our fuel costs. We're trying to -- we're operating better ships. We're operating with new types of paint, new types of energy efficient air conditioning. In fact today we just unveiled some of the more details on our Oasis flagship which has probably the most fuel efficient ship ever built. It will probably be about 25 percent less energy to drive per passenger day than anything we've seen before. So there's still conservation measures we can take. There are other cost elements we can take. And then we also have to look overseas. We're a dollar-cost company and there's an enormous potential amongst euro-based consumers and other currencies which is stronger than the dollar. So by expanding and focusing on getting more customers from abroad, we also think that will help mitigate the agony that these high fuel prices are causing.
GHARIB: You mentioned about this new cruise ship that you're going to be launching in 2009 and it's huge. It's going to be world's biggest cruise ship. Do you think you will be able to fill that ship in good times and bad?
FAIN: Absolute total confidence on that. The industry has shown its resilience and this is a spectacular ship, offering a series of amenities for our guests nobody has ever seen before and revealing the new Central Park on board the ship, the amphitheatre at sea with this spectacular like a Greek amphitheatre on a cruise ship. All these amenities we feel will attract passengers even in difficult times. I think that is something we've seen over and over again and we're hopefully we'll see it as time goes on.
GHARIB: It's sounds great and we wish you the best of luck with that venture. Thank you so much for coming on our program.
FAIN: Thanks for the interest.
GHARIB: My guest tonight Richard Fain, chairman and CEO of Royal Caribbean cruises.
"Street Critique"-Patrick O'Hare, Chief Market Analyst, briefing.com
PAUL KANGAS: As pinched consumers curtail their discretionary spending, Target has been well off the mark and that has tonight's "Street Critique" guest taking a closer look at the stock. He's Patrick O'Hare, chief market analyst at the financial information web site briefing.com. Pat, welcome back to NIGHTLY BUSINESS REPORT.
PATRICK O'HARE, CHIEF MARKET ANALYST, BRIEFING.COM: Hi, Paul. Thanks for having me.
KANGAS: At briefing.com, you write the bargain hunting column where you look at stocks through a contrarian lens. Why has Target stock landed on your radar?
O'HARE: Well several reasons. One is just that the stock is down considerably from its 52-week high, down about 30 percent at today's closing price. Also the stock is trading at a little over 15 times (INAUDIBLE) 12-month earnings. It's trading at about 40 percent discount to its 10-year historical average. And I would add that it's exhibiting some nice (INAUDIBLE) strength this year. It's up about 2 percent year to date which isn't great in its own right but it's certainly pretty good relative to the broader market.
KANGAS: Trades TGT the symbol on the big board, right?
O'HARE: That's correct.
KANGAS: Target's larger rival Wal-Mart appears to be benefiting from consumer belt tightening. Why is Target losing out here?
O'HARE: Well, Target caters primarily to the middle class consumer and obviously in the face of rising food and energy prices and falling home values, that consumer is trading down to the low-price leader Wal-Mart trying to stretch that dollar a little bit further. I would also add that the irony in Wal-Mart's out performance is it comes due to Target's past successes that have made for some easier comparisons from Wal-Mart. So Wal-Mart is doing a commendable job of servicing that consumer that's trading down as it lack (ph) some easier comparisons.
KANGAS: Are Target's current issues strictly driven by the current economic situation or is there something that management could be doing better?
O'HARE: We think it's primarily macro-related. The company is doing a really good job of managing expenses here. Add that inventory was up about 7 percent at the end of the first quarter. That was just ahead of the pace of sales growth. Also if you look at last year in 2007, sales were up about 6.5 percent, about half the rate of sales from 2006. Yet the company's operating margin only fell about 20 basis points to 8.3 percent. So we pin this issue primarily on the macro economy.
KANGAS: Will the fiscal stimulus checks that are going out and being received help the stock at all?
O'HARE: We think it certainly will. We think it will help the entire retail sector. But Target of course is a very recognizable leader in that space. It just stands to reason that that middle class consumer is going to feel some relief there as they get those stimulus checks and will head to Target to spend them.
KANGAS: OK, with the stock trading at around $51 a share, would you step in at these levels or are you waiting for it to go lower?
O'HARE: We do so somewhat cautiously. We wouldn't go all in right now but we think because of how much the stock has pulled back, that you could start to build a position here. I would add also that Target itself is buying its stock. It has an aggressive $10 billion share buy-back program. It aims to have about half of that program complete by the end of 2008.
KANGAS: Pat, do you own Target shares or have any other disclosure to make.
O'HARE: No, I do not.
KANGAS: All right. Very good, thanks for joining us once again.
O'HARE: Thank you, Paul.
KANGAS: My guest, Patrick O'Hare, chief market analyst at briefing.com.
"Money File"-Fight The Fees
SUSIE GHARIB: In tonight's "Money File," eliminating extra fees that banks and credit card companies impose. Here's Harriet Johnson Brackey, personal finance columnist at the "South Florida Sun Sentinel."
HARRIET JOHNSON BRACKEY, PERSONAL FINANCE REPORTER, SO. FLORIDA SUN- SENTINEL: Overdraftees are out of control. We're ringing up more than $17 billion a year in overdraft charges and I don't think it's because consumers don't know how to balance their checkbooks. I think it is largely the fault of banks, which have added something called automatic overdraft protection to checking accounts in recent years. That means they always OK your debit card purchases, whether there is money in the account or not. A government study shows most banks never even told consumers about this. This is protection, but for whom? Not for someone who puts a $5 hamburger on a debit card, only to find that it triggered $30 in overdraft fees. What you can do about it is tell the Federal Reserve you don't want it. Bank regulators have proposed giving consumers the right to opt out of automatic overdraft protection and we should have that right. And while it's writing new rules, the Fed is also looking to make changes in credit cards. One proposed rule would require cards to give you a reasonable amount of time between when the bill arrives and the payment is due, so that you're not hit with late fees so often. Another would prohibit credit card companies from hiking the interest rate after you make a purchase on your balance. Now, those are real protections for consumers and we need them. Speak up, I say. You have until August 4 to tell the Fed how you feel. I'm Harriet Johnson Brackey.
Paul Kangas' Stocks in the News
PAUL KANGAS: Morgan Stanley also reported quarterly results today, coming in with a 57 percent drop in earnings for the second quarter. But the numbers were still better than Wall Street expected. Morgan Stanley earned $0.95 a share; analysts were looking for $0.92. Revenue though, fell 38 percent to $6.5 billion. CEO John Mack blamed continued fallout from the credit crisis. Those sharply lower results from Morgan Stanley and FedEx set a bearish tone on Wall Street early on as once again, the financials led the market steadily lower this morning. The Dow posted a 134 point loss at 11:00 a.m., while the NASDAQ fell 33 points. A dip in oil futures gave the market a little lift around mid-session, but a sell-off in regional bank stocks and then a sharp rebound in oil quashed the rally and sent stocks toward their lows by the end of the day at the final bell. The Dow Industrial Average closed off 131.24 points at 12,029.06. The NASDAQ Composite lost 28.02 points to 2,429.71. Standard & Poor's 500 dropped 13.12 ending at 1,337.81. In the bond market, the 10-year note gained 15/32 to 97 27/32, putting the yield at 4.14 percent.
Now, let's change gears and take a look at our stocks in the news tonight. Big board volume leader on 20 3/4 million shares, Wachovia (WB) down $0.28 in a very weak financial sector. Pfizer (PFE) however, moved up a nickel. The company reached a deal with generics manufacturer Ranbaxy Labs of India to end a large part of the five-year battle over the cholesterol drug Lipitor. The agreement will forestall generic competition in the United States by 20 months.
Bank of America (BAC) down $0.87.
$0.06 drop in Citigroup (C).
Ford Motor (F) fell $0.38.
General Electric (GE) $0.65 loss.
Motorola (MOT) down $0.39.
Washington Mutual (WM) bucked the trend with a $0.04 gain.
Regions Financial (RF) led that whole regional bank group lower, down $1.33. Stock hit by worries over problem loans, future earnings as well as dividends.
And then Lehman Brothers (LEH) off $0.36. The chief exec says contrary to rumors making the rounds, the company is not for sale.
General Motors (GM) down $0.93, closing at the lowest level since 1982 in February, off $0.93. Deutsche Bank says the auto makers in the U.S. need to cut production in the second half because car lots are filled with product right now.
Monsanto (MON) down $1.19, even though the company this afternoon boosted its quarterly earnings by, I should say quarterly dividend, by 37 percent. It'll go from $0.175 to $0.24 a share. The stock's had quite a run though.
Carmax (CMX) down $2 a share. First quarter earnings jumped or I should say fell to $0.13 from $0.30 a year ago as lower gross profits offset a 1 percent rise in same store sales. The company temporarily is suspending its same store sales guidance. Wachovia repeated an "under perform" on the stock.
Union Pacific (UNP), finally a gainer, up $3.35. The company says severe Midwest weather will cut its second quarter earnings by only a nickel a share. Morgan Keegan brokerage repeated an "out perform" rating. Morgan Stanley says the negative impact of the weather on results should be just short term.
MF Global (MF) plunging $5.43, almost 41 percent of its value. The options and futures broker issued a pessimistic outlook, plans $300 million of preferred stock and convertible stock and notes in private offerings.
General Mills (GIS) up $1.91. The company boosted its 2009 expectations despite higher marketing expenses.
Then Lindsay Corp (LNN), the irrigation systems company, plunging $20.73, traded as low as $90.80 today. Third quarter earnings jumped to $1.15 from $0.62 a year ago, but that was $0.07 below the Wall Street consensus.
And then Clarcor (CLO), which is in industrial filters, down $5.25. Higher second quarter earnings, $0.48 versus $0.41 a year ago, a penny above the Street estimate, but the company lowered its 2008 outlook by a nickel a share, down to $2.
NASDAQ's most active Apple (AAPL) up or down $2.68. Then Research in Motion (RIMM) up $2.29. Lehman Brothers boosted its price target on Research from $145 to $165 a share.
Google (GOOG) down $7.08.
Microsoft (MSFT) $0.34 drop there.
Cisco Systems (CSCO) $0.69 loss, fifth in NASDAQ volume.
Qualcomm (QCOM) $0.47 gain.
Fifth Third Bancorp (FITB) plunging $3.47. The company cut its quarterly dividend 66 percent. It'll go from $0.44 to $0.15 and it plans to sell $1 billion in convertible preferred stock on top of that.
Intel (INTC) $0.30 drop.
baidu.com (BIDU) $0.15 loss there.
And First Solar (FSLR) down $6.47.
And finally, Medicision (MEDE) surged $4.91 on news it will be acquired by Healthcare Service Corporation for $7 per share, what a jump, huge jump.
