intelligent investor us edition february 7 2011

8/7/2019 Intelligent Investor US edition February 7 2011

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07 February 2011 The Intelligent InvestorU.S.

The Economic Monitor Series. Free Edition.

The Dow advanced to their highest levels since June 2008 onMonday as a flurry of merger news and solid earnings sparkedbroad gains. The DJIA closed at 12,161.63, up by 69.48 points, or0.57 percent.

Benchmark 10-year notes fell 9/32 in price for a 3.68 percent yield,hovering at its highest since May, up from 3.64 percent at Friday'sclose.

The euro briefly erased its losses against the dollar, helped bygains in U.S. stocks and easing concerns about the euro zone debtcrisis. The euro climbed as high as $1.3590, before retreating to$1.3580, slightly down on the day.

Gold prices inched up, underpinned by inflation concerns, but amore optimistic economic outlook and worries about interest ratehikes kept bullion from rising further. Spot gold was up 0.2percent at $1,348.90 an ounce by 2:17 p.m. EST.

Oil prices fell sharply, as concerns about Egypt's political turmoilaffecting oil flows in the region eased and investor focus returnedto rising U.S. inventories and a tepid employment picture. U.S.crude oil for March delivery fell $1.55 to settle at $87.48 a barrel.

MARKETS AT A GLANCE

STOCK INDICES

CURRENCIES

INDEX LAST PRIOR

Euro (EUR/USD) 1.3584 1.359

U.K. Pound (GBP/USD) 1.6107 1.6097

Japanese Yen (USD/JPY) 82.3 82.2

All prices are at 04:07 PM EST

FUTURES

INDEX LAST CHNG % CHNG

DJIA* 12161.63 69.48 0.57

Nasdaq* 2783.99 14.69 0.53

S&P 500* 1319.05 8.18 0.62

DJ Total Stock Market* 13914.41 96.11 0.7

Global Dow* 2200.03 12.01 0.55

* CLOSING VALUES

LAST CHANGE

Crude Oil, Feb. 87.33 -1.7

Natural Gas, Mar. 4.124 -0.186

Gold, Dec, Feb. 1350.5 1.5

Copper, Mar. 454.85 -3.1

All prices are at 03:56 PM EST

INSIDE THE REPORT

Stock recommendations and price targets from topbrokerage firms

Analysis and views on Plane Truth: Boeing 737

Conundrum - Airline' Perspective

Economic Indicator Watch

Important Events Scheduled on 08 February.

Economic Events

Federal Reserve Bank of Dallas President RichardFisher speaks on "A Report on the Economy" beforethe Stemmons Corridor Business Association AnnualMeeting - 1800 GMT

Federal Reserve Bank of Atlanta President DennisLockhart speaks before the Calhoun CountyChamber of Commerce - 1800 GMT

Corporate Events

Entergy, Sara Lee, Walt Disney Company andMcAfee are some of the S&P 500 companiesreporting quarterly results

Top Stories

AOL to buy The Huffington Post

Ensco to buy Pride International for $7.3 billion

Danaher agrees to buy Beckman Coulter Sanofi close for Genzyme takeover

Humana posts low profit

Nokia shares up on executive shake-up speculation

Chesapeake puts shale field for sale
http://online.wsj.com/mdc/public/npage/2_3051.html?mod=mdc_h_dtabnk&symb=DJIAhttp://online.wsj.com/mdc/public/npage/2_3051.html?mod=mdc_h_dtabnk&symb=$COMPQhttp://online.wsj.com/mdc/public/npage/2_3051.html?mod=mdc_h_dtabnk&symb=SPXhttp://online.wsj.com/mdc/public/npage/2_3051.html?mod=mdc_h_dtabnk&symb=DWChttp://online.wsj.com/mdc/public/npage/2_3051.html?mod=mdc_h_dtabnk&symb=GDOW&page=intlhttp://online.wsj.com/mdc/public/npage/2_3051.html?mod=mdc_h_dtabnk&symb=GDOW&page=intlhttp://online.wsj.com/mdc/public/npage/2_3051.html?mod=mdc_h_dtabnk&symb=DWChttp://online.wsj.com/mdc/public/npage/2_3051.html?mod=mdc_h_dtabnk&symb=SPXhttp://online.wsj.com/mdc/public/npage/2_3051.html?mod=mdc_h_dtabnk&symb=$COMPQhttp://online.wsj.com/mdc/public/npage/2_3051.html?mod=mdc_h_dtabnk&symb=DJIA


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The Intelligent Investor - U.S.

STOCK RECOMMENDATIONS BY BROKERAGE HOUSES

Disclaimer: The views and investment tips expressed by investment experts are their own, and not that of IBTimes or its management. We advise users to check with certified experts beforetaking any investment decisions.

BROKERAGE/COMPANY ACTIONS RATING

KBWAon Raises price target to $53 from $50 BofA MerrillBroadcom Reinstates with buy rating and $53 price target BuySusquehannaPulteGroup Inc Cuts price target to $7 from $8 NeutralApple Raises price target to $465 from $445 Positive

ICSC Chain Store Sales

Forecast: NA Prior: -1 pct

The International Council of Shopping Centers and Goldman Sachs will release data on chain store sales for week ended 04-Feb at0745 EST.

ICSC Research had cut its January forecast for industry sales growth to 1.5 to 2.0 percent because of bad weather that month.

It measures nominal same-store sales, excluding restaurant and vehicle demand, and represents about 75 retail chain stores.

Redbook Chain Store Sales

Forecast: NA Prior: -0.9 pct

Redbook Research will release data on chain store sales at 0855 EST.The Johnson Redbook Retail Sales Index is a sales-weighted index of year-over-year same-store sales growth in a sample of large U.S.general merchandise retailers representing about 9,000 stores.

IBD Consumer Optimism Index

Forecast: NA Prior: 51.9

Investor's Business Daily and TechnoMetrica will release data on consumer optimism for the month of February at 0830 EST

Readings above 50 indicate optimism, while those below 50 point to pessimism.

ECONOMIC INDICATOR WATCH ON 08 FEBRUARY 2011


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Plane Truth: Boeing 737 Conundrum - Airline' Perspective

By IB Times Staff Reporter

RBC Capital Markets said in the Plane Truth edition that it spoke to most of Boeing Co.'s (BA) 25 largest 737 customers (accounting for about 70

percent of the 737 backlog) to gauge their interest in a re-engined 737, a new clean-sheet-of-paper narrowbody plane, and their appetite for theAirbus A320 NEO (New Engine Option) offering.

"Our key takeaways are a replacement aircraft is preferable to re-engining; Boeings key 737 customers are unlikely to 'defect' to Airbus; and themajority of Boeings customers are extremely satisfied with the performance of the 737NG, with some remarking 'if its not broken, dont fix it'," said

Robert Stallard, an analyst at RBC Capital Markets.

RBC Capital said its findings suggest that Boeing wont launch a re-engined 737 plane, and will likely push for a new narrowbody plane targeting the180-200 seat market, with entry into service by 2020.

"Although Boeing may sacrifice some near term market share loss to Airbus, we believe by exercising patience, they will maximize market share inthe long run. We remain positive on commercial aerospace, with Precision Castparts Corp. (PCP) and BE Aerospace Inc. (BEAV) as our Top Picks," saidStallard.

Customers Want A New Toy

Stallard said more than half of the 737 customers favor waiting for a next generation narrow body solution from Boeing, rather than re-engining forseveral reasons. Customers want a step function increase in unit cost savings, unwilling to compromise for a paltry 2 percent to 4 percent savingsfrom a re-engined aircraft.

Moreover, many of Boeings 737NG customers are either low cost carriers that demand fleet simplicity, or carriers such as AMR that are using the737-800 for replacement purposes, RBC Capital Markets said in a note to clients.

Boeing 737 Customers Won't Defect

Stallard said leading Boeing customers suggest theyre very happy with the dispatch reliability and cost performance of the 7 37NG; 737NG is slightlycheaper to operate than the A320 family, and the proposed A320 NEO only offers 2 percent to 4 percent unit cost advantage; and Most Boeingcustomers want fleet simplicity or are concerned about residual values.

Stallard said perhaps full service carriers that operate mixed fleets may prefer a new plane type such as the NEO or CSeries, especially those that areconsidering large scale replacement orders. Although Airbus is making good progress on the NEO, booking potentially 500-600 new orders by theParis Airshow in late June, Stallard thinks quintessential 737NG operators will not be defecting.

Time Is On Boeing's Side

As most airline customers are in no rush to commit to a new fleet type for either replacement or capacity growth, Stallard think Boeing has plenty oftime to introduce a replacement narrowbody aircraft.

"Based on our airline conversations, we estimate that top 25 customers make up roughly 70 percent of Boeing's 737 production in 2011. And theyhave reserved close to 40 percent of the expected production in 2015 and about 30 percent of that in 2016 skyline. Only six or so airlines, of whichthree have Boeing only narrowbody fleets, still need to firm up delivery positions in the 2013-15 time frame," said Stallard.

Given the relatively long delivery skyline already in place, Stallard thinks airlines will wait for the OEs to flush out their designs and unit costadvantages before making decisions on the next leg of narrowbody requirements beyond 2015.

The NEO -- 737s Perenial Competitor Gets A Refresh

Airbus confirmed in December 2010 that it is going to re-engine its best selling A320 family narrowbody aircraft, with the new CFM Leap X and Pratt& Whitney PW1100G (aka GTF) engines being used to power the aircraft.

The A320 NEO is planned to be delivered in spring 2016, and Airbus states that the new engine and other improvements, notably wing tip sharklets,should deliver fuel savings of up to 15 percent, as well as noise, emission and maintenance savings.

The NEO will have over 95 percent airframe commonality with the current A320 family, whilst also offering 500 nautical miles (926 kilometers) morerange and two tonnes more payload. Airbus sees a market potential of 4,000 aircraft for the NEO over the next 15 years.

Given that Airbus has a number of other development programs ongoing at the moment, Stallard is not surprised to the Airbus CEO Tom Enderscomment "Finding the necessary resources for the A320NEO wasn't exactly a walk in the park".

Following the announcement, Airbus signed a Memorandum of Understanding with Indian LCC IndiGo for 180 A320s, including 150 NEOs, and thiswas followed by a firm order for 60 A320s, including 30 NEOs, from Virgin America (both these airlines currently operate A320s, and not 737s).According to the latest Airbus list prices for 2011, it is charging an extra $6.2 million for the re-engined A320 family aircraft versus the currentbaseline, though as always these prices will be negotiated on a customer by customer basis.

ANALYSIS AND VIEWS


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ANALYSIS AND VIEWS

Re-engining the 737 is Not Easy Task

Whereas the Airbus A320 re-engining appears to be a relatively straight forward engineering project, which should only require some strengtheningof the wing, to re-engine the Boeing 737 is a trickier prospect.

The wing on the 737 is closer to the ground, and to attach the GTF or Leap-X engines with their larger fans would require some extensive rework ofboth the wing and the pylons, and potentially the landing gear. If the main gear needs altering as result, this would also probably impact the wingbox -- and at this point Boeing would be looking at redesigning half the aircraft.

Given its experience with the 747-8, which was also supposed to be a simple re-engining, Stallard thinks Boeing is understandably cautious of takingon unnecessary development risk, particularly as the 737 continues to generate good sales and good operating margins for Boeing.

Boeing's Commercial Aircraft head Jim Albaugh noted back in March 2010 that "One thing I've learned that there's nothing simple about a derivativeairplane. There's certainly nothing simple about a re-engine. If you did a re-engine the pylon would change, the empennage would change, andyoud have to raise the front gear a little but, drive some different loads into the airplane, drive some different loads into the wing."

Stallard thinks this situation has not changed, and that re-engining the 737 remains a challenging, though not impossible, engineering project.

Financing Raises Concerns

A big concerns and potential negatives of re-engining is the aircraft financing perspective. An aircraft lessor or bank is probably not going to see theappeal of buying an aircraft that has a limited production run, as it widely expected that a re-engined plane will be replaced by the next generationnarrowbody in the middle of the next decade.

In aerospace terms, a 9-10 year production run is very short, and this would have negative implications on the residual value model versus aircraftthat have a more normal 20-plus year production run. The other unknown is what the impact of the re-engined plane would be on the residualvalues of the existing models.

The vast majority of the fleets that are owned by leasing companies consist of the most popular 737 and A320 models, and the lessors have someconcern about what the impact of the A320 NEO will be to A320 valuations as Stallard gets closer to the entry into service of the re-engined aircraft -- and the same would go for the 737 if it were re-engined.

What also remains to be seen is the impact that the NEO has on demand for the current A320 family, and whether there is a gap in demand ascustomers wait for the re-engined plane to enter service. Although it is not a like for like comparison, the transition that Boeing saw in the 737 as itmoved from one generation to the next was not entirely smooth, though the aircraft differences in these past examples were more extreme than the

A320 versus the A320 NEO.

Implications for Aerospace Suppliers Probably Positive

If Boeing decides to forgo re-engining the 737, and focus on the next generation narrowbody, Stallard thinks this outcome would be largely viewedas positive for aerospace suppliers.

As it stands today, Boeing and its suppliers are making good, relatively low risk returns on the 737 NG, and with a strong backlog in an improvingorder environment, there is an understandable aversion to disrupting this situation. The decision to punt on re-engining would also mean that theincumbent suppliers on the 737 have a decade or so before they have to re-compete to get on a successor aircraft.

Remain Positive On Commercial Aerospace

After an increase of 35 percent in 2009, and then 23 percent in 2010, aerospace stocks have had a good run. With an average valuation of 13.8 timesof 2012 price-to-earnings, Stallard thinks much of the optimism on the aerospace upcycle is priced in, and that it will take an improved earningsoutlook to move the stocks higher.

As aftermarket and original equipment manufacturer growth come through this year, Stallard expects to see good operating leverage and upside toearnings per share, particularly in the second half.

Stallard said he would be making the most of any stock price consolidation in the aerospace sector in the short term to be adding to positions,particularly in his favored names like Precision Castparts and BE Aerospace.

December Global Airline Traffic Analysis

According to RBC Capital Markets' airline survey, global airline traffic in December 2010 increased 2.3 percent year-over-year, moderating fromincreases of 5.0 percent and 7.9 percent in the previous two months, respectively. Traffic growth slowed after a strong summer season that extendedinto autumn, largely because of tougher comps. Global capacity in December increased 2.4 percent, also moderating from mid single-digit growthyear over year since May 2010, as comps become more difficult. Similar to November, annual capacity growth was in line with traffic increase in

December, driven by respectable capacity growth in the U.S. and Asia while Europe was relatively flat.

"Global load factors decreased a slight 10 basis point annually in December to 79.2 percent, but decreased 90 basis points sequentially primarily dueto seasonality. Monthly load factors have expanded year over year in the first eleven months of 2010, starting back in January at 77.2 percent. Duringthe slower winter flying season, a load factor of over 79 percent is still a strong result, in our view," said Stallard.


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TOP STORIES

AOL to buy The Huffington Post

AOL has agreed to spend $315 million on one of its biggest acquisition, news aggregator Huffington Post, adding another leaf to itsportfolio of content which includes other names like TechCrunch and Engadget. Web-based content gains mileage on the internettraffic that a news portal is able to garner. With Huffington Post in its kitty and Arianna Huffington crowned president and editor-in-

chief of a newly-created Huffington Post Media Group, AoL will bring together all its assets like Engadget, TechCrunch and Patchunder one umbrella. While Huffington becomes the top boss, AOL is sure to benefit in terms learning the art of creating low-costonline content.

Ensco to buy Pride International for $7.3 billion

Ensco Plc will buy its rival Pride International Inc for about $7.3 billion. Ensco will purchase shares of Pride at $41.60 apiece, apremium of 21 percent to Friday's closing price. Pride stockholders will receive 0.4778 newly issued shares of Ensco plus $15.60 incash for each share of Pride common stock. The deal will be financed through a combination of existing cash on the balance sheetand newly issued Ensco shares and debt. Total cash paid to Pride shareholders will be about $2.8 billion. The deal will give Enscogreater leverage to the Brazilian market, one of the fastest growing basins in the world, he said. The combined company would likelysee annual expense savings of $50 million from 2012. The deal is expected to be accretive to Ensco's earnings per share in 2011 and2012.

Danaher agrees to buy Beckman Coulter

The Danaher Corporation agreed to buy the maker of diagnostic research equipment for biomedical company, Beckman Coulter ina deal of $5.8 billion in cash. According to the deal, Danaher will pay $83.50 a share in a tender offer for Beckmans share which is 11percent higher than Beckmans closing price on Friday and 45 percent above the companys stock price on December 9, beforereports of a potential deal emerged.

Sanofi close for Genzyme takeover

French drug maker Sanofi-Aventis is reportedly expected to sweeten its bid for U.S. biotechnology company Genzyme later thisweek. The two companies are said to be negotiating a cash deal worth $74 a share or $19 billion, plus extra payments linked toexperimental multiple sclerosis drug Lemtrada. A Wall Street Journal report said the talks have taken longer than anticipated as Sanoficontinues to examine the books of Genzyme. Sanofi is said to be concerned about the past manufacturing problems at Genzyme.Genzyme had last year rejected Sanofi's $69 per share or $18.5 billion offer on grounds of undervaluation. Sanofi took the bid directlyto shareholders in October and extended the offer until February 15. The purchase of Genzyme would give Sanofi access to thegrowing market of rare diseases and also compensate for revenue losses as patents expire on some of its biggest-selling products.

Humana posts low profit

Health insurer Humana Inc posted a quarterly net profit which was hurt by a variety of expenses. Humana said fourth-quarter netincome fell 57 percent to $107.3 million, or 63 cents per share, from $250.7 million, or $1.48 per share, a year ago but raised its 2011earnings forecast on better-than-expected sales of its Medicare plans for the elderly. Its revenue rose more than 9 percent to $8.35billion. The company now expects 2011 earnings of $5.70 to $5.90 per share, up from its prior range of $5.45 to $5.65.

Nokia shares up on executive shake-up speculationShares of Nokia Corp were up on speculation that the mobile phone maker will soon engineer a major reshuffling of itsmanagement and board as the company tries to wrestle back domination of the premium handset market. Nokia shares are up about1.58 percent as of 12:58 p.m. (EDT). The Wall Street Journal reported over the weekend new CEO Stephen Elop (who took over lastfall) seeks to change the companys strategy and this will include the exit of several senior managers. Nokia is expected to announce anew strategy at a briefing on Feb. 11 briefing.

Chesapeake puts shale field for sale

Chesapeake Energy Corp confirmed its decision of selling holdings in Arkansas' Fayetteville shale natural gas field and stakes in twocompanies to raise $5 billion so that it can trim its heavy debt load. Chesapeake said that sales of its Fayetteville shale acreage andequity investments in Frac Tech Holdings LLC and Chaparral Energy are expected to be completed in the first half of the year.


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This report is produced byInternational Business TimesFor questions or commentsreach us [email protected]

For more information aboutour products visitwww.ibtimes.com

IBTimes 2010. All rights reserved.

THE NEXT TRADING DAY

Economic Events

Federal Reserve Bank of Dallas President Richard Fisher speaks on "A Report on the Economy" before the StemmonsCorridor Business Association Annual Meeting - 1800 GMT

Federal Reserve Bank of Atlanta President Dennis Lockhart speaks before the Calhoun County Chamber of Commerce -1800 GMT

Company Events

Avon Products will release Q4 results. The street estimates a profit of 67 cent per share, almost flat from 68 cents in thesame quarter last year. Third-quarter net income had improved to $166.7 million or $0.38 per share from $156.2 million or$0.36 per share in the year-ago quarter.

Analysts expect Coventry Health Care to report a profit of 88 cents per share for the fourth quarter, up from 74 cents inthe year-ago quarter. The company's third-quarter net earnings had more than doubled to $189.95 million or $1.29 pershare from $70.63 million or $0.48 per share in the same quarter last year.

The street expects Walt Disney to announce a profit of 56 cents per share for the first quarter, up from 47 cents in thecorresponding quarter last year. Fourth-quarter net income attributable to the Company declined 7% to $835 million,from $895 million in the same quarter last year. Earnings per share were $0.43 down 9% from $0.47 in the prior-yearquarter.

Entergy is due to announce its Q4 results. Analysts expect a profit of $1.24 per share, down from $1.75 in the year-agoperiod. Company's third-quarter net income was $492.89 million or $2.62 per share, up from $455.17 million or $2.32 pershare in the year-ago quarter.

Fidelity National Information is expected to report a profit of 60 cents per share for the fourth quarter, up from 44 centsin the fourth quarter last year. Third quarter net income attributable to common shareholders of $83.2 million or $0.36 pershare, compared to $73.4 million or $0.32 per share in last year quarter.

McAfee will announce its Q4 results. It is expected to report a profit of 69 cents per share, versus 64 cents in the sameperiod last year. For the third quarter company posted GAAP net income of $47 million or $0.30 per share for the thirdquarter, up from $37 million or $0.23 per share in the prior year quarter.

Analysts expect NYSE Euronext to report a profit of 43 cents per share for the fourth quarter, down from 58 cents in thecorresponding quarter last year. The company reported third-quarter net income of $128 million or $0.49 per share,compared to $125 million or $0.48 per share a year ago.

Wall Street expects Pitney Bowes to announce a profit of 61 cents per share for the fourth quarter, compared to 61 centsreported last year during the same period. For the third quarter, net income attributable to Pitney Bowes was $88.9 millionor $0.43 per share, compared to $103.2 million or $0.50 per share in the same quarter last year.

Sara Lee is expected to report a profit of 25 cents for the second quarter, down from 28 cents in the prior-year quarter.For the first quarter, it had reported net income attributable to the company of $192 million or $0.29 per share, compared

with $284 million or $0.41 per share last year.

intelligent investor us edition february 7 2011

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