Goldman Sachs (NYSE:GS) has raised $10 billion to invest in existing LBO loans. According to the FT, the investment house plans to make money by "taking advantage of a gap in the financing markets created by the credit crisis." In other words, Goldman believes that the problems in the lending market have driven leveraged buy-out loans below their logical values. Panic has created opportunity.
While the news may be good for banks that hold some of these loans and do not want to write them off if they fail, Goldman is making a bet beyond the fact that LBO loans may be selling at a discount now. Goldman is essentially betting the economy will get better in the fairly near-term.
For many of these loans to perform well, the economy has to avoid a deep recession. Even loans with reasonable credit ratings, debt in companies with strong prospects and earnings, could fail if the general business conditions deteriorate into a prolonged period of negative growth. Under such circumstances, Goldman could pick relatively safe debt and still get burned.
Someone at Goldman sees light at the end of the economic tunnel.
Douglas A. McIntyre is an editor at 247wallst.com.
Despite high commodity prices and challenging market conditions that put pressure on consumer spending, McDonald's Corp. (NYSE: MCD) was able to surprise Wall Street by reporting a stronger-than-expected second quarter profit. However, investors' positive reaction didn't last too long as the company announced it anticipates further high beef costs, which could lead to an increase in prices on its popular dollar menu.
Back in May, McDonald's executives announced they had no plans to make changes to its "everyday affordability" concept, but the company's chief operating officer, Ralph Alvarez, recently noticed that the dollar menu is coming under pressure from rising ingredient costs. "The cost implications of having that value menu have changed when you see what's going on in beef and chicken," Alvarez stated to the Chicago Tribune.
Alvarez didn't offer too many details on how the dollar menu might change. However, the news is not great for all you lovers of the famous double cheeseburger. A spokesman for the hamburger giant said one of the company's strategies that is already tested in some markets was to lift prices for this best-selling U.S. sandwich.
Looking ahead, McDonald's said it expects cheese cost to jump by 21% this year in the U.S., while the price it pays for chicken may see a growth in a range between 5% and 6%. For 2008 U.S. beef costs, the company also anticipates an increase between 8% and 9%.
Rising commodity prices was one of the main reasons why the research firm Deutsche Bank to lower its rating on the company to a hold earlier this morning.
Going into this morning's earnings announcement, analysts had been expecting to see the company show earnings of 26 cents per share, but the company shocked everyone by coming in well above those estimates, with a reported 35 cents per share for the quarter. Wall Street is rewarding the stock nicely this morning, pushing shares up over 14% in early morning trading.(See more of today's earnings news).
While the company was able to show a nice increase in sales, it did caution investors that the current economic condition is challenging, and that it expects this to remain the case for the foreseeable future. It has been tough for RadioShack recently to compete with stronger rivals such as Best Buy (NYSE: BBY), but the company showed good signs of life during the quarter by posting a 6.4% increase in sales. This is a very good sign for the company, which has been struggling the past several quarters.
Before the market opens tomorrow morning, American auto maker Ford Motor (NYSE: F) will be reporting its second quarter numbers. Wall Street is not looking for a great quarter from the company.
Analysts on average expect the struggling auto maker to post a loss for the quarter of 25 cents per share, and revenues totaling $34.6 billion. The last time that the company reported earnings was back on April 24 when it shocked Wall Street with a 5 cents a share profit versus consensus estimate for a loss of 16 cents for its first quarter.
This quarter has proven to be tough for the company, which recently posted pretty bad June sales figures. In fact, sales for June declined by a devastating 28% compared to the same period last year.
Disproving reports that its growth days are behind it, Amazon.com Inc. (NASDAQ: AMZN) today reported quarterly results that far exceeded Wall Street estimates.
Net income at the No.1 e-tailer more than doubled to $158 million, or 37 cents a share, up from $78 million or 19 cents per share. Revenue jumped 41% to $4.06 billion. The New York Times noted that analysts had expected a 26 cent profit on sales of $3.96 billion. The results, though, were not good enough for Wall Street, and investors sent Amazon's shares tumbling in after-hours trading.
One reason for the thumbs down may be that the company's gross margins -- always a concern with investors -- contracted slightly. The company also maintained its revenue forecast for the current period. Maybe investors were expecting the company to boost earnings guidance as it benefits from shoppers bypassing malls and spending on gasoline in favor of shopping at home.
Skeptics, including me, have underestimated the company. Soleil Securities analyst Scott Tilghman told BloombergNews that "There's a misperception out there that e-commerce is much more mature than it actually is. They (Amazon) offer one-stop shopping and often better prices than bricks-and-mortar stores, which should offset any slowdown in consumer spending."
Looks like he may have a point.
[July 24 UPDATE: Amazon shares soar after Chief Executive Jeff Bezos' bullish comments. The shares were little changed at first until Bezos said on the earnings conference call that the company was benefiting from consumers avoiding driving to brick-and-mortar stores because of concerns about high gas prices. Shares are up over 15% by early afternoon Thursday.]
Shares of Apple Inc. (NASDAQ: AAPL) have jumped after the New York Times reported that Chief Executive Steve Jobs has told associates that he is cancer free.
Concern about Jobs' health have kept Apple's shares depressed even as it faces soaring demand for the just released iPhone 3G. The company's reluctance to discuss the CEO's health during the recent earnings conference call only added to the speculation.
That's why the Times' report saying "in recent weeks, Mr. Jobs has reassured several people that he is doing well and that four years after a successful operation to treat a rare form of pancreatic cancer, he is cancer free" is so curious. Why didn't the company just say that when it released earnings? The question was bound to come up given how awful Jobs has looked during recent public appearances.
Of course, Apple's paranoia is legendary. It guards its secrets even more zealously than the CIA. Jobs decided that his health is no one's business even though as a CEO of a public company it is of material interest to shareholders. But the matter is still not closed entirely.
"People who are close to Mr. Jobs say that he had a surgical procedure this year to address a problem that was contributing to a loss of weight," the paper said, not offering any specifics. Investors' concern is understandable since according to a patient group, 75% of all pancreatic cancer patients die within the first year of diagnosis.
Jobs has defied the odds. Let's hope that actor Patrick Swayze does as well.
The folks in Detroit may be pleased to see Toyota Motor Corp. (NYSE: TM) cutting its sales forecasts, but the pleasure is sure to be short lived. Despite its more modest outlook, Toyota leads General Motors (NYSE: GM) in global vehicle sales -- and its lead is only getting bigger.
According to a report on Reuters, GM sold 4.54 million vehicles worldwide in the first two quarters of 2008. This represents a 3% drop from the same period last year. Although sales in Europe, Latin America and Asia actually rose, the General couldn't overcome a whopping 15% decline in North America.
Toyota, on the other hand, saw a 2.2% increase in global sales, to 4.8 million units. This gives Toyota a lead in the range of a quarter million vehicles or more. And with its global sales growing, the lead is likely to widen, especially as Toyota switches over to producing more efficient cars in North America and fewer of the wasteful trucks that Americans loved so much until just a few weeks ago.
As Autoblog points out, the sales crown is important to both companies, although neither will admit it publicly. GM was the global sales king for 77 years, and the loss of that title will certainly hurt. Last year, the sales race ended essentially in a tie. But with these results, it looks like Toyota will be the champ in 2008 and, in all likelihood, beyond.
The Great Atlantic & Pacific Tea Company (NYSE: GAP), better known as SuperFresh and Pathmark grocery stores, is in the midst of a remodel and turnaround that seems to be working.
It is, however, a bit difficult to parse an earnings release that states "our annualized run-rate of synergies is approximately $100 million." Good thing that the "format driven capital investment program" continues to improve. Clearly, CEO Eric Claus wants investors to believe these factoids are positive and meaningful pieces of information.
In more concrete terms, same store sales are up 3% and the company is remodeling many of its locations in the New York-New Jersey area in order to expand its market share. Sales increased $1.2 billion to $2.9 billion, so the trend is in the right direction. Quarterly adjusted income from operations was $16 million, compared to an $8 million adjusted loss from operations one year ago. 1Q loss per share was $0.51 compared to $1.54 loss per share one year ago.
Given the steep rise in food prices, forecast to worsen into the winter, A&P is well positioned to attract value-driven grocery shoppers. The stock has recently fallen under $18, though it is inching back up today.
Microsoft Corp. (NASDAQ: MSFT) has to deal with improving sales for the Sony (NYSE: SNE) PS3. Sony has been able to get a greater number of attractive games for its console. It has also added better features to play live over the internet with friends connected by broadband.
Now the Xbox 360 will add a feature that Sony cannot match, at least for now.
According to the FT, Microsoft "has struck deals with five horror movie directors for a series of short films in a move aimed at boosting the original entertainment content available on its Xbox console." If the first part of the experiment works, Microsoft will probably go forward with more short content which cannot be seen by owners of rival consoles.
The executives at Toyota Motor Corp. (NYSE: TM) must live in a world all their own. They have maintained the forecast for their worldwide vehicle sales in the face of a massive downturn in the US auto market and weakness in Japan and parts of Europe.
The big Japanese car company finally bowed to reality and cut its prediction for units sales, but not by much. According to MarketWatch, "The automaker forecast sales for the full year in the lower 9.5 million unit range, down from the previously targeted goal of 9.85 million cars and trucks."
While the revision is a defeat for Toyota, it is also an odd acknowledgment of how well its does with car sales around the world and how clever it has been in designing and marketing new cars. In the US, where most auto firms are dying, Toyota has had a smashing success with its Prius hybrid. It cannot make enough of the cars to keep up with demand.
To no one's surprise, Ford (NYSE: F) will detail its plans to dive into the small car market when it announces earnings on Thursday. It is a lot late to get religion.
According toThe New York Times, "as part of the huge bet it is placing on the future direction of the troubled American auto industry, Ford will realign factories to manufacture more fuel-efficient engines." The bet is a smart one, but it may not matter.
Ford is now close to a decade behind the curve. Companies such as Toyota (NYSE: TM) have produced small cars for the US market since the days they began to open dealerships in America as Ford chased immediate profits in pick-ups and SUVs. The margins in these products were outstanding, but their success relied on gas staying at $2 a gallon forever. Things did not work out that way.
Ford will now go through a process of more cost cutting, firings, and expensive retooling of its plants. To make all of this work, the car company will have to borrow money or sell more stock. In either case, current shareholders are likely to be diluted.
Ford has been so slow to move into the market for fuel-efficient vehicles that it may have trouble staying solvent if the US car market stays very soft for the next two years.
That means Ford's future as an independent company could be in jeopardy.
Douglas A. McIntyre is an editor at 247wallst.com.
General Motors (NYSE: GM) has finally come up with something to save its bacon. It will team with a number of utilities including Con Edison (NYSE: ED) and Duke Power (NYSE: DUK) to create a broad market for electric cars.
According toThe Wall Street Journal, "Auto makers need the cooperation of utilities since they control the new technology's primary fuel -- electricity -- and must make sure that the vehicles' recharging processes mesh with the electricity grid and don't inadvertently undermine grid reliability." In other words, no one wants the cars to cause brown outs. GM also plans to negotiate special rates to make its electric cars cheaper to recharge.
The announcement is one of GM's first intelligent moves in a long time. It has allowed its reliance on pickup trucks and SUVs to drive down its sales and cut its market share in the US. Foreign rivals that kept lines of smaller cars now have products with broad appeal to consumers. This is particularly true of their hybrids.
GM's concern remains whether being late to the market will make it too late. Its potential customers want fuel-efficient cars now, when the price of gas is high. GM will lose billions of dollars while it tries to catch up.
The competition will not be sitting still.
Douglas A. McIntyre is an editor at 247wallst.com.
McDonald's (NYSE: MCD) program to sell premium coffee is not going well. That would make some sense. Even Starbucks (NASDAQ: SBUX), the kings of expensive Java, is doing poorly.
According toThe Wall Street Journal, "Management may have to defend its giant bet on lattes and cappuccinos, which they want to add at all McDonald's 14,000 U.S. restaurants by next year." The newspaper says that early sales figures for the new drinks are mediocre.
If McDonald's did pull back on its sales of high end coffee-based drinks, it would be the best news Starbucks has had in a couple of years. As US same-store sales growth rates at the chain have fallen, the company's stock has moved from over $40 to below $15. Getting some competition out of the market could be critical to Starbucks recovery.
But Starbucks is not likely to be so lucky. With its massive size and tremendous cash-flow, McDonald's can afford to stay in the premium coffee business for years without a meaningful impact on its earnings. It sells too many hamburgers to be hurt by a slow start in latte sales.
McDonald's can wait Starbucks out and hope that, as things get worse for the coffee company, customers will turn to Ronald McDonald more frequently.
Douglas A. McIntyre can be reached at 247wallst.com.
Although Ford Motor Co. (NYSE: F) has fallen on hard times -- like much of the auto industry -- the company will eventually come back around. Its success, like that of competitor General Motors Corp. (NYSE: GM), will be on its ability to be flexible enough to build the vehicles customers want as needs change.
That's a large order, though. Ford CEO Alan Mulally recently stated that his Way Forward plan was behind schedule, and the automaker wasn't expected to post an annual profit until 2010. Ford knows it needs to be more globally flexible or it won't even make that extended target. Profit centers like SUVs are so 1999.
On top of all that, a Volkswagen (OTC: VLKAY) executive recently said that the German automaker intends to surpass Ford to become the third-largest seller of vehicles in the world. That's quite a bold prediction and it puts Ford under even more pressure to get automobiles delivered to customers with increasing manufacturing and selling flexibility. As of last year, Volkswagen sold 6.19 million vehicles to Ford's 8.55 million. Is one year enough of a background to declare VW a future winner over Ford? Possibly.
Then again, Japanese automakers Honda Motor Corp. (NYSE: HMC) and Nissan Motor Co. (NASDAQ: NSANY) are not going anywhere and will continue to put up a great fight. Toyota Motor Co. (NYSE: TM) is currently the king of the Japanese automakers, right behind GM globally. If Volkswagen really believes it can charge into the third spot, it better have the global vehicle finesse to know what its regions' customers want before they want it -- and then, make those sales.
It may be too late for Ford (NYSE: F) to get back some of its market share in the U.S. It may have waited too long to offer a wide variety of small cars with good gas mileage.
But, the company refuses to give up the ghost, at least for now. According to The Wall Street Journal, Ford "is preparing plans to retool some U.S. plants to produce small passenger cars that the company has been making and selling mainly in Europe."
By using products that are already fully developed, Ford will cut its time to market with cars designed for an environment with high gas prices.
Making the plant changes necessary to manufacture the car will take over a year-and-a-half. Because the new product is not a hybrid, it does not help Ford offer direct competition to the best cars from Toyota (NYSE: TM).
Ford has a band-aide, but it will not work on a wound that is gushing blood.
Douglas A. McIntyre is an editor at 247wallst.com.
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Crocs shares tank on updated guidance
Earnings preview: Does Kraft have the recipe for a successful quarter?
