Friday, October 29, 2010

A Fistful of Life Sciences

As the whirlwind that is earnings season churns on, a host of life sciences companies have recently reported earnings. Although conditions were not quite as strong in general as a year ago, the sector continues to grow. Here are some of the major highlights and takeaways for investors. 

A SOLiD Plan
Although Life Technologies (Nasdaq:LIFE) is often compared to Illumina, it is actually a considerably larger and more diversified company. True, sequencing is important here (and demand for the SOLiD 4 platform helped boost Genetic Systems growth into the low teens), but other businesses like PCR, reagents and flow cytometry are significant.

The third quarter was pretty good for LIFE, despite some challenging comps. Revenue rose almost 8% (6% on an organic basis), and very tight expense control fueled a 15% improvement in operating income

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Vivus Gets An Encouraging No

In a reversal of a recent trend, the FDA actually gave a glimmer of hope to a biotech company and its shareholders. Although almost everyone was counting on the FDA's rejection of Vivus's (Nasdaq:VVUS) obesity drug candidate Qnexa, the FDA left the window open wider than many people expected. With what amounts to an "encouraging rejection", there may yet again be reason to hope that at least one new obesity drug can make it to market in the foreseeable future. 

More Analysis, Please
When the FDA rejects a drug, it sends companies what is called a "complete response letter" (or CRL) outlining the agency's objections and indicating the sort of deficiencies that the company must correct before the FDA will reconsider approval. In some cases, the FDA requires new full-scale clinical trials, while other times the agency simply wants the results of trials already underway or new kinds of data analysis. (For related reading, check out FDA To Obesity Drugs: Drop Dead.)

For the full piece, please click below:

Vale Still Looks Iron-Clad

Experienced investors know that the market is always playing a game of "he loves me, he loves me not" when it comes to commodities and commodity companies like Vale (Nasdaq: VALE), but this Brazilian iron ore giant has nevertheless managed to produce impressive long-term gains for shareholders. While the company's ever-increasing size argues that it will be more beholden to global commodity cycles in the future, the company's growth plans suggest that further growth is still possible. 

A Hot Third Quarter
Much to the chagrin of steelmakers like U.S. Steel (NYSE:X) and POSCO (NYSE:PKX), iron ore prices are hot right now. Much to the delight of Vale shareholders, the company translated higher prices and production into more than double the level of last year's sales and 46% sequential growth. Earnings were also far higher on an annual basis, and up 63% sequentially, while adjusted EBTIDA nearly tripled annually and increased almost 60% sequentially.

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Motorola Back From The Dead This Halloween

Motorola (NYSE:MOT) was not supposed to do this. The company was supposed to be dead and buried, and just another entry in the pages of American technology companies that used to matter but could not compete. And yet, here the company is - revitalized by the smartphone boom and perhaps with another chance to make a real go of it.

Nothing Spooky About The Quarter
Motorola reported that total revenue rose 6% in the third quarter, with revenue from continuing operations up 13% to nearly $5 billion. The difference comes from the part of the networking business that is being sold to Nokia Siemens Network. Overall, GAAP earnings per share were 5 cents a share, a 400% increase over 2009 third quarter earnings. The year-over-year increase was similar in non-GAAP earnings which increased from 6 cents to 16 cents, well above the company's guidance figures. 

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Divergent Paths For Broadcom and Silicon Labs

Once again, the semiconductor sector offers a remedial lesson that not every company in a sector is inexorably bound to the fate of its brothers. While semiconductor stocks from Linear (Nasdaq:LLTC) to Texas Instruments (NYSE:TXN) to Intel (Nasdaq:INTC) have had their issues with near-term growth outlooks, Broadcom (Nasdaq:BRCM) seems to be rolling on without many worries. In contrast, Silicon Labs (Nasdaq:SLAB) seems mired in a miss-and-lower cycle that is punishing patient shareholders.

The Quarters That Were
Broadcom certainly is not suffering its prime exposure to Apple's (Nasdaq:AAPL) iPhone/iPad, nor its decision to focus on high-performance "combo" chips. Revenue for this third quarter jumped 44% from last year, and 13% sequentially. Better still, the company actually raised its guidance for the next quarter, and is looking for modest sequential growth (where most companies are forecasting sequential declines). Broadcom also benefited by holding reported operating expense growth to 26% - meaning that the company saw significant operating leverage and operating income growth.

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Penn Virginia Still A Worthwhile Partner

Coal has been hot again lately. Prices have rebounded from last year, domestic utilities have worked down stockpiles and overseas demand continues to grow. As a result, coal companies all across the board are near their 52-week highs, including giants like Peabody Energy (NYSE:BTU) and Arch Coal (NYSE:ACI). For investors more inclined towards income-producing assets, however, there is still time to consider the merits of Penn Virginia Resource Partners (NYSE:PVR) - a high-quality company involved in both coal and natural gas. 

A Third Quarter Lacking A Bit of Energy
On first blush, Penn Virginia's third quarter results do not look like the sort that would get investors very excited. Distributable cash flow (a non-GAAP metric that gives a sense of the company's distribution-paying capability) was down 9% and adjusted net income was down about 13% from last year.

The coal business held up well enough - royalty revenue rose 17% on a 15% increase in royalties per ton, while production barely ticked higher. That, in turn, fueled 25% operating income growth.

To read the full piece, please click below:

Thursday, October 28, 2010

Analysts Redline Cummins

By any reasonable standard, Cummins (NYSE:CMI) had a great third quarter. Then again, things have not necessarily been "reasonable" regarding Cummins for some time. Analysts dramatically ratcheted up expectations (and price targets) in the wake of the second quarter, and Cummins has become something of a darling among the industrials. When a cyclical stock (even a high-quality one) is trading at a forward PE of 14 and a trailing EV/EBITDA of 15, expectations are definitely running hot and any disappointment will be a blow to the stock.

Expectations Aside
Leaving aside the analyst community's expectations, Cummins continued a strong recovery from the depths of the recession. Revenue was up 34% to over $3.4 billion, led by strength in the medium and light duty engine segments. Overall engine revenue rose 44%, even with some pronounced weakness in heavy-duty engines. Power generation and components were both strong (up 44% and 30% respectively), and accounted for a little less than half of total revenue. Profitability did not meet analyst expectations, but is certainly getting better. Reported EBIT jumped more than 150%, as both engines and power delivered double-digit margins. (For more, see The Bottom Line On Margins.)

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The Good and Bad of DuPont's Strength

If no good deed goes unpunished, then maybe it is true that good news from DuPont (NYSE:DD) can often come with a catch. While DuPont is a highly diversified chemicals and materials company, the company's products are all largely inputs for other companies' products. This sets up the good news/bad news dilemma - solid volume growth at DuPont should be reasonable confirmation that economic growth really is recovering, but solid price growth also points to the risk of oncoming cost-push inflation.

DuPont's Third Quarter
DuPont disappointed no one with its sales performance in the third quarter, as revenue rose 17% and surpassed even the highest published analyst estimate. Growth was fueled both by mid-teens volume growth (14%) and mid-single digit price growth (5%).

This revenue growth was not necessarily balanced, however. Agriculture and coatings grew by single-digit amounts (and had the lowest volume-based growth), while electronics, chemicals, materials, and safety/protection all grew in excess of 20% (and all had volume growth above 15%).

Please see the link below for the full article:

Stryker Pulls The Trigger

Funny how rumors work. There were widely-spread rumors that Stryker (NYSE: SYK) and Boston Scientific (NYSE: BSX) were talking deal, with Stryker being seen as a likely buyer for BSX's neuromodulation business.

Well ... the rumors were partially right. Stryker and Boston Scientific did announce a deal, but in a real twist Stryker decided to buy BSX's neurovascular business for $1.4 billion in cash and potentially another $100 million in earn-outs. Unlike the neuromodulation business, which largely involves pacemaker-like devices that deliver controlled electrical pulses to nerves or tissue to control conditions like pain, the neurovascular business involves stroke treatment and prevention, with a suite of products including wires, catheters, balloons, and embolic coils.

It's a curious decision. Neuromodulation is sometimes seen as a logical fit with orthopedics since so much of the demand for the devices is in pain relief following unsuccessful back surgery. Moreover, BSX's under-investment in this business and flagging competitiveness relative to Medtronic (NYSE: MDT) and St. Jude (NYSE: STJ) had many looking at it as a solid fix'er-up/turnaround opportunity.

In the neurovascular business, Stryker is buying a unit that should produce in excess of $300 million in revenue and has been a market leader. Unfortunately, BSX has been losing ground to competition from ev3 (now part of Covidien (NYSE: COV)) and Micrus (now part of Johnson & Johnson (NYSE: JNJ)). Part of the problem here is a lack of innovation and simply falling behind in terms of product performance. Although there has been some optimism about new devices that will roll out over the next couple of years, the general thought has been that Boston Scientific was dangerously close to becoming a "has been" - at least in terms of leading-edge devices.

I have to give BSX credit, though, and that is not something I do often - they got a fine price for this unit. While there is absolutely every chance that this can be a lucrative unit for Stryker, it will need some work and Stryker will be competing against large and experienced rivals. So, to get 4.5x sales (assuming the full earn-out) for the unit, BSX did well. By comparison, Micrus got a multiple of about 5.2x, while ev3 sold out for a similar amount.

To an extent, Stryker had to do this deal - they need to inject more growth into the business, and neither orthopedics, surgical instruments, or hospital equipment are likely to do it. What's more, there are not too many obvious alternatives for the company - wound care is a tough business, and entering robotics (presumably by buying Intuitive Surgical (Nasdaq: ISRG)) would have been enormously expensive.

For BSX, the cash will be welcome and can either go towards paying down debt or identifying some small early-stage tech ideas for acquisition.

All in all, it's amusing to see how the conventional rumors were wrong on this deal. It's also an interesting sign of what lengths Stryker needs to go to to get growth these days; while the stock looks cheap maybe I need to reconsider some of my growth assumptions.

Disclosure - I own shares of JNJ

Wednesday, October 27, 2010

No Damming Digital River

Nothing irks value investors like an expensive stock that stays expensive and more or less delivers the performance investors want. E-commerce specialist Digital River (Nasdaq: DRIV) is a good example. The stock has rarely been cheap, but the company continues to separate itself from would-be rivals and seems to have a way of bouncing back from setbacks. 

The Quarter That Was
Digital River announced that revenue fell 14% in the third quarter, due mostly to the loss of Symantec (Nasdaq:SYMC) as a customer. The company has done a great job of scrambling to replace that loss, though. Revenue excluding Symantec would have been up more than 20% over last year, due in part to the expansion of the company's relationship with other software companies like Microsoft (Nasdaq:MSFT) and Electronic Arts (Nasdaq:ERTS).

Profitability was a bit more problematic, however. The company made scant progress in trimming down expenses in sync with revenue, and Digital River saw total operating expenses fall only a bit more than $2 million. Consequently operating income fell precipitously, though the company's adjusted earnings were fine relative to Wall Street expectations.

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Taking Multiple Cuts At Plum Creek

These are strange times for companies trying to operate in the timberland industry. Although timberland theoretically offers the advantage of allowing companies to sit tight and literally let their assets grow, the reality for public companies is the expectation of ongoing dividend payments and growth that necessitates active management. As one of the go-to names in the timber business, Plum Creek (NYSE:PCL) is a mixed bag of good and bad news for investors today.

The Quarter That Was
Expectations were not all that high for the third quarter, but Plum Creek disappointed nevertheless. Performance in the actual timber business was not too bad - sawlog prices were higher than in the year-ago period, although still not at a level that is all that attractive. Due in part to uninspiring market conditions, then, Plum Creek has pulled back on its harvest levels.

The bigger issue, though, was in the real estate business. Not surprisingly, demand for land for housing remains weak and revenue and operating profits tied to real estate sales have dropped precipitously, draining away a high-margin source of business. Due in part to the ongoing slump in real estate, Plum Creek took down numbers for the fourth quarter. 

Please see the link below for the full piece on PCL:

Atheros and Texas Instruments - Chips Ahoy

Atheros (Nasdaq:ATHR) and Texas Instruments (NYSE:TXN) are indeed very different kinds of chip companies, but there are basically in the same boat today. The big rebound in chip demand is over, demand and supply are basically back in alignment and investors are probably looking at a couple quarters of uninspiring performance before growth returns. 

The Quarters That Were
Atheros reported 4% sequential sales growth, as an exceptionally strong result in the consumer business offset weakness in PCs and networking. Inventories rose by 10% on a sequential basis, and the company trimmed fourth quarter guidance by about 10% relative to prior expectations. While the company has quality customers like Hewlett Packard (NYSE:HPQ) and Amazon (Nasdaq:AMZN), consumer products cannot fully compensate for the weaker PC and networking environment. Atheros is still small enough that individual product delays like the pushout of Nintendo's 3DS still matter.

For the far larger Texas Instruments, sales were up a similar amount - 7% on a sequential basis. TI did see an improvement in gross margins, though. Performance was strongest in high-performance analog, but a 0.92 book-to-bill is not encouraging, and it looks like TI is in for a couple of quarters of sequential revenue declines. That is broadly consistent with what Linear Technology (Nasdaq:LLTC), another major analog player, has been saying and TI management does not seem to see anything unusual in this mid-cycle slowdown. (For more, see Is Linear A Canary Or A Duck?)

Please click the link for the full piece:

Tuesday, October 26, 2010

FinancialEdge: 10 Reasons To Fear The U.S. Economy

Halloween is a time for the sort of fear we all enjoy - cheesy horror movies, clever costumes and a general appreciation for the macabre and creepy. Far less enjoyable, though, is thinking about some of the reasons investors may have for fearing the U.S. economy. Unlike ghosts and goblins, some of these fears may prove to be very real and offer more than just a friendly little tingle up the spine.

1. Crumbling Infrastructure
While the U.S. government has handed out plenty of money over the past three years, relatively little of it has made its way towards bridges, roads, schools and hospitals. That is unfortunate, as the U.S. went through a building boom in the 1950s and 1960s and is now badly in need of repair and expansion. Infrastructure underpins economic growth. Without better public facilities, there will be a long-term drag on economic productivity.  

2. High Debt
Of all the problems in the United States, large budget deficits and a growing debt burden are probably the best-known. Public debt is at about $13.6 trillion in the United States, or roughly 94% of annual GDP. That puts the country in uncomfortable company with the likes of Japan, Italy, Greece and Portugal.

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Is Carlyle Looking At The Next Fiber Gold Rush?

Private equity has certainly been waking up to tech lately (including the recent discussions about disk drive maker Seagate (NYSE:SGX), so perhaps Carlyle's interest in cable and wireless equipment maker CommScope (NYSE:CTV) is nothing more than an opportunistic deal. Thinking about the bigger picture, maybe Carlyle is looking for a second gold rush in the cable and fiber markets. 

The Deal That Might Be
At this point there is no official deal, but CommScope has confirmed that there are discussions. According to a Bloomberg report, Carlyle would possibly offer $31.50 per share in cash - a deal that would be a decent one-third premium to CommScope's closing price on Friday. Interestingly enough, though, not only is that price not all that rich on a valuation basis, but it does not even match the company's 52-week high. (For related reading, check out Private Equity A Trendsetter For Stocks.)

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Should Investors Take A Chance On Savient?

Savient (Nasdaq:SVNT) shareholders have been on a wild ride of late. While the stock languished for months in the low-to-mid teens as this company navigated the tricky FDA approval process for its gout drug Krystexxa, formal FDA approval sent the stock rocketing up into the low-$20s. Now the roller coaster is taking another swoop down, though, as the company announced that it was unsuccessful in its efforts to auction itself off.

The Deal That Could Have Been
Savient management had made no secret of its intention to try to sell the company upon receiving approval for Kyrstexxa. Although the drug could be quite profitable, Savient has no sales force and no pipeline. That made the decision to seek a sale of the company a quite rational decision on the part of management.

Unfortunately, however rational it might have been, there were no takers - or at least no takers at a price that the board deemed acceptable. Investors will probably never know all of the details of the process, but it was widely thought that both Novartis (NYSE:NVS) and Bristol-Myers Squibb (NYSE:BMY) had some level of interest. Clearly a deal could not be struck, though, and the stock has responded poorly to the news. (For related reading, check out Stocks On Drugs: What It takes To Get High.)

Please click the link for the full article on Savient:

Monday, October 25, 2010

Eaton, Dover, and Ingersoll Rand - Oh My!

Strong third quarter earnings are only going to go so far to reassure people about the health of the economy. After all, earnings reports are historical documents, and Wall Street is always trying to see the future. That said, the reports from three major industrial conglomerates - Eaton (NYSE:ETN), Dover (NYSE:DOV), and Ingersoll Rand (NYSE:IR) - reflect some relatively common themes. Non-residential construction is still moribund (and dead-weight on the recovery), but heavy industry and electronics are definitely coming back, and strong overseas markets are a major asset to internationally diversified companies. 

Three Quarters in Brief
Eaton reported third quarter revenue growth of 18%, with near-record operating margins at the segment level. The electrical systems category was a laggard (with revenue growth of "just" 12%), while hydraulics and trucks were both up better than 30%.

Dover saw organic revenue growth of 25%, with double-digit performance across the board. The engineered systems segment grew slowest (if 16% growth can be called slow), while fluid management grew 32% and electronic technologies revenue was up 41%. Margins were up strongly in every segment but engineered systems (where margin declined), with fluid management and electronic technologies margins both improving by nearly five percentage points.

The link below will take you to the full story:

Friday, October 22, 2010

Does Bad PR Make For A Good Investment Opportunity?

There is really no question "if" there will be another public relations scandal that taints a publicly-traded company. The only questions really revolve around "when", "how bad" and whether the next bad PR event will create a buying opportunity for shareholders. Like most other kinds of turnaround investing, though, investing in the face of bad PR can be a high-risk/high-reward situation. Accordingly, it is a good idea for investors to do what they can to tilt the odds in their favor.

Assess the Situation Across Four MetricsWhen approaching a stock that looks cheap because the company has made a very public gaffe, there are a few key constituencies to keep in mind. Ultimately the reactions of these groups will go a long way toward separating the wounded-but-will-recover from the permanently maimed.

Impact on CustomersIt probably seems obvious that the first place to check for fallout is among the people the company depends upon for its business - if a company alienates its customer base, and they do not come back, the company is doomed. Likewise, if a brand's cache or premium positioning is tarnished, the company may never again be able to charge similar prices. On the other hand, if customers really just do not care about the problem, it will likely not have any lasting impact.

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GE Goes Outside The Box In Healthcare

There is an old saying that if you are going to make predictions, you may as well make a lot of them. Even though I recently laid out multiple medical technology acquisition prospects for General Electric (NYSE:GE), GE managed to go off the board with an interesting purchase. 

On Friday morning, GE announced an agreement to acquire Clarient (Nasdaq:CLRT), a specialist in oncology diagnostics services. GE is paying cash in this deal, giving common shareholders $5 a share (versus Thursday's close of $3.74) and preferred shareholders $20 per share. That is a total deal value of $580 million for a company with about $100 million in trailing revenue.

As a major holder (more than 30 million shares as of September), Safeguard Scientifics (NYSE:SFE) will benefit significantly from this deal, booking roughly a $145 million gain in the transaction. (For more, see Is GE About To Stir Up The Medical Arena?)

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Feeling Better With Danaher

Danaher (NYSE:DHR) may be a real handful for the analysts that follow the stock, but its diverse business model is a good barometer of many different markets. Although some of Danaher's strong performance this quarter should certainly be attributed to the quality of the company and its management, it seems reasonable to conclude that economic conditions are actually not too bad. 

The Quarter That Was
Danaher reported another quarter of double-digit growth (the company has an informal target of 10% quarterly growth), with revenue up 16%. Of that figure, "core" revenue growth was better than 12%.

The medical segment was something of a laggard at better than 7% organic growth, but that is actually not a bad performance at all by the current standards of healthcare. Tools was also relatively weak at 5% organic growth, but the company's joint venture with Cooper Industries (NYSE:CPB) makes the comparison less useful. Professional instrumentation was strong at over 15% growth, and industrial was the leader at better than 16% growth.

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Nucor Adds A Note Of Caution To The Season

 Lest anyone get too assured by companies going through the normal beat-and-raise cycle of earnings this quarter, Nucor (NYSE:NUE) gave an outlook that could certainly sober up a few giddy investors. Given Nucor's well-earned reputation for honest and shareholder-friendly management (as well, perhaps, as some conservatism), it would seem unwise to just dismiss their concerns out of hand. 

The Quarter That Was
Nucor had provided guidance for the third quarter some time before, but results were somewhat disappointing. Nucor reported that sales grew 33% from last year to $4.1 billion (down 1% sequentially), and that was actually a bit above the highest published estimate. While production was basically flat with last year's level, shipments rose 9%. Pricing was also relatively solid, as average sales price per ton increased 20% from last year, while falling 3% on a sequential basis.

The news below the top line was not as good, though. The company saw scrap costs rise from last year (though fall from the second quarter), while power prices were higher as well. All in all, the company ended up reporting operating earnings of 7 cents a share - certainly within the company's guidance range, but below the more optimistic guesses of analysts. Although the company had guided for operating earnings of 5 to 10 cents per share, the range of analyst estimates was 10 to 15 cents.

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Thursday, October 21, 2010

U.S. Bancorp Rises To The Top

Good times can make it easier for investors to confuse the pretenders with the long-term winners, particularly if those pretenders are willing to ratchet up the risk and leverage in their business model to reap easy profits. When times get tough though, it is the best models and management teams that rise to the top. With the banking sector still firmly in the midst of malaise, U.S. Bancorp (NYSE:USB) is making a case that it may be the best bank investors can buy. 

The Quarter That Was
Two significant points jump out with U.S. Bancorp's third quarter release - first, the company actually beat the consensus revenue estimate, and it did not need to release any reserves to meet or beat its earnings target.

Revenue rose 1.5% on a sequential basis, helped by a 3% sequential increase in net interest income. Unlike many banks, USB showed an increase in net interest margin (tiny as it may have been), and loans actually grew on a sequential basis. Total non-interest income was flat on a sequential basis, but fees did rise 5% as the company was able to offset deposit fee declines prompted by new banking regulations. 

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St. Jude Is Fine Today, But What About Tomorrow?

St. Jude Medical (NYSE:STJ) is one of the relatively few large-cap medical technology companies managing to deliver ongoing growth through this tough part of the cycle. Unfortunately for shareholders, there is a great deal of uncertainty about whether St. Jude is going to continue to deliver enough growth to make the stock appealing for the long-haul. 

The Quarter That Was
St. Jude reported total revenue growth of 7% for the third quarter, with the company's large CRM (cardiac rhythm management) business growing at 7%, and the smaller atrial fibrillation and neuromodulation businesses growing 8% and 11% respectively. Relative to "same-store" results from Boston Scientific (NYSE:BSX) and off-calendar comparisons to Medtronic (NYSE:MDT), St. Jude is almost certainly capturing shares in the large and lucrative (but slow-growing) CRM market. That is a good thing, as that is 60% of the company's business.

Please see the link below for the full piece:

Trick or Treat for Biodel?

Biotech CEOs should be forgiven if they feel like the FDA has turned almost every day into Halloween. Companies ranging from Jazz Pharmaceuticals (Nasdaq:JAZZ) to Alexza Pharmaceuticals (Nasdaq:ALXA) to the obesity triumvirate of Vivus (Nasdaq:VVUS), Arena (Nasdaq:ARNA), and Orexigen (Nasdaq:OREX) have all seen the scarier side of the FDA drug approval process lately. The FDA has handed out rejections to the first two, panels have recommended against the next two, and Orexigen has been batted around by investors who wonder if the FDA (or its panel) will take out their knees next. 

All in all, it is easy to understand why shareholders of biotech Biodel (Nasdaq:BIOD) would be nervous these days. Although the company's Linjeta insulin could be a blockbuster for the company, problems with a pivotal study and an October 30 FDA PDUFA date have investors wondering if they are going to be left waiting in vain for the Great Pumpkin on Halloween. 

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Abbott Labs Showing Meaningful Growth

Abbott Labs (NYSE:ABT) has always been a little different as a medical technology company, with a  history of zigging when other companies zag. For now, that somewhat contrarian philosophy is paying off, as Abbott is one of the very few large-cap medical technology companies to be showing any meaningful growth. 

The Quarter That Was
Abbott came through with 12% revenue growth in the third quarter (or 13% if foreign currency effects are reversed). Pharmaceuticals is still overwhelmingly the largest business at Abbott, and this unit grew more than 23% due in large part to the acquisition of Solvay. Without this deal, growth was probably in the very low single-digits. Elsewhere, the nutritional business was disappointing (down more than 2%) due to a recall, while the diagnostics business was basically on target (up about 2%), and the vascular business was strong (up almost 20%).

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Boston Scientific Has A Long Road Back

Turnarounds are hard enough in the best of times, and when a company's core markets are in shaky condition it becomes all the more difficult. Even if med-tech player Boston Scientific (NYSE:BSX) is really into improving its operations, there are some significant headwinds pushing against it. Still, with a patient long-term approach to improving operations it may be possible for this company to unlock some value for its long-suffering shareholder base. 

The Quarter That Was
Boston Scientific delivered a mixed third quarter announcement - the company did well vis-a-vis analyst estimates (especially on the bottom line), but the fundamental performance was not all that strong. Consolidated revenue fell 5%, as the company balanced double-digit declines in stent revenue and high single-digit declines in cardiac rhythm management with modest growth in endosurgery and neuromodulation.

Turning to profitability, the company did manage to improve adjusted gross margin by more than a full point, and adjusted earnings grew a little bit over last year's level. 

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MSC Industrial Does It Again

I have been a big fan of MSC Industrial Direct (NYSE: MSM) for years, and the company just does not let me down. Last night's earnings report and special dividend announcement are just the latest entries in that pattern.

MSM announced that sales jumped more than 30% for the fiscal fourth quarter, which is a very solid result.

Margins were also good. Gross margin was slightly soft, but that seems to be a mix issue as well as the product of some large drop-ship orders. I think it is quite significant, though, that the company saw just $2M in incremental operating expenses from the prior quarter. That ultimately led to operating income growth of almost 69%, and a 3.5% improvement in operating margin from the year-ago level.

Guidance for the next quarter was not too bad - more or less in line with expectations, I think, and this company does have a history of delivering more than management promises.

I also like the timing of the special dividend - putting a little extra cash in shareholders' hands before the presumed change in dividend taxes in 2011. I am not generally enamored of special dividends (at least if the company has growth/expansion possibilities), but I will give management the benefit of the doubt here.

Disclosure - I own shares of MSM

BB&T - What a Mess

Oh man ... reading BB&T's (NYSE: BBT) third quarter earnings report gives me a headache. There are a lot of moving parts to this report and it is easy to get lost.

But here is a really simplified summary:
- BBT is doing a good job of cleaning up its balance sheet, and is doing so faster than the likes of SunTrust (NYSE: STI), Bank of America (NYSE: BAC), Wells Fargo (NYSE: WFC), and other comparables. BBT put $1.3B of non-performing loans in the held-for-sale bucket, and this basically pulls forward the losses. In other words, BBT is making the decision to report worse results now to accelerate the clean-up process. If this works, BBT will be reporting good earnings and returns in the future while other banks are still cleaning up the mess.

- BBT sold more assets than most people expected, but credit quality is improving. In the meantime, gains on the sale of securities helped neutralize the sales of bad loans. Interestingly, the effective duration for BBT is now below 3yrs - possibly an interesting statement about where BBT thinks rates might head.

- Unlike most banks, BBT is actually expanding its lending. Now, you can argue that BBT is growing its loan book when rates are still low (which would be bad), but the spreads over the cost of capital should still be pretty good. What's more, by staying "in the game", I think BBT might gain market share and customers from rivals.

- The mortgage buyback issue that has bedeviled large banks like JPMorgan (NYSE: JPM), Bank of America, and Citi (NYSE: C) does not appear to be much of a problem for BBT.

- Mortgage banking was really strong, and helped offset declines in deposit fees related to new banking rules. Unfortunately, the insurance business (the largest non-interest income generator) is not doing all that great, which is consistent with the soft P&C market right now.

- Net interest income was not bad on a relative basis, and the company is doing well on expense control.

I value BBT on the assumption that ROE can climb back to 14% in five years. Doing so gives me a target of $33.50 per share. That makes BBT more or less as cheap as Bank of America, Citi, and JPMorgan, and slightly cheaper than USBancorp (NYSE: USB).

Disclosure - I own shares of BBT and JPM

Wednesday, October 20, 2010

Taking A Stab At Valuing Amylin Post-FDA

So, I decided to have a go at valuing Amylin (Nasdaq: AMLN) after this FDA debacle.
I came up with the following model (and I apologize for the formatting):

2010 2011 2012 2013 2014 2015 2016
550 385 270 230 180 120 80
90 90 90 90 90 90 90

300 750 1000 1250 1500
Total Revenue     640     475     660  1,070  1,270  1,460  1,670
90% 90% 82% 75% 76% 77% 78%
Gross Profit 576.0 427.5 541.2 802.5 965.2 1124.2 1302.6
165 165 165 165 165 165 165
300 275 325 325 350 375 400
250 175 200 250 300 400 490

Net inc
-139 -187.5 -148.8 62.5 150.2 184.2 247.6
100 100 100 100 100 100 100

OCF -39 -87.5 -48.8 162.5 250.2 284.2 347.6

So, a few points:
- I excluded obesity revenue, but I'll get back to that later...
- I excluded interest expense (because it is not that significant)
- I used $100M in non-cash add-backs as a "plug"
- I excluded significant CapEx in the DCF, as I don't see the company needing much...

If I plug those numbers into a DCF, and discount the result at 14%, I get a value of $14.50 per share. Amylin has debt, though, and that amounts to about $4.50/share (assuming that they cannot just continue to roll it over or convert it at favorable rates).

Now, obesity ... if I assign $1B in total revenue potential to the obesity program and discount it both by the likelihood of approval (25%) and the split between AMLN and Takeda, I get a value somewhere in the $4 range.

So, at a bottom line, Amylin should be worth something like $14 today, based on an assumption that Bydureon gets approved in 2012, maxes out at $1.5B/yr, and that obesity contributes about $4 in share value in five years' time and beyond.

I realize this is a crude model and a crude approach to the problem, but I figure it's at least an educated guess...

Disclosure - I own share of Amylin

Steel Dynamcis - Buy The Muddle-Through?

Just how healthy is the economy, anyway? Retailers have been seeing shoppers return to their stores, and railroads continue to see carload volumes increase, but banks are still struggling and non-residential building is all but asleep. Even aluminum is no help - Alcoa (NYSE:AA) is doing better, but some of that is because of more rational Chinese producers and a recovery in aerospace. It is a very muddled picture, then, for Steel Dynamics (Nasdaq:STLD) as this large mini-mill operator moves into the final quarter of the year.

The Quarter That Was
Steel Dynamics had previously guided third-quarter numbers down, but nevertheless managed to deliver results on the upper side of that range. For a "tough" quarter, sales were surprisingly strong - Steel Dynamics reported 35% revenue growth over last year on 5% higher shipment volume. On the other hand, sequentially, Steel Dynamics saw revenue fall 3% on 4% higher shipments.

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5 Could-Be Bubbles Waiting To Burst

One of the oldest sayings of Wall Street (and one that happens to be true!) is that "there is always a bull market somewhere." In other words, no matter how bad one segment of the market may be performing, there is almost always some unrelated asset that is doing well at the same time. Taking that to its logical extreme, if there is always a bull market somewhere, there are almost always a few potential bubbles emerging. So which markets look like they have heated up to the melting point? (For more, check out The Myth About Market Bubbles.)

1. Bonds
To a lot of people, the current yield on government bonds just makes no sense. These people see the federal budget deficit, the huge debt burden and the risk of a stagflation-type environment of low growth and high inflation, and cannot understand how investors could be piling into bonds. Moreover, there is a strong sense that these artificially low rates are just a prelude to a withering bout of inflation that will smack fixed-income instruments hard.

For better or worse, there are other dynamics at work in the bond market. For starters, banks can make a solid "carry trade" on government bonds - banks take their ultra-low cost deposits and invest them in higher-yielding government securities. 

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An Improving Tale For This Citi

More than any of the other U.S. money center banks, Citigroup (NYSE:C) arguably most owes its continuing survival to the government's bailout. Staggering credit losses probably should have toppled this bank, but a huge infusion of cash stabilized the situation and the company is slowing pulling itself towards recovery. Citi's third-quarter earnings are not spotless, but do support the idea that this one-time giant has a future once again.

The Quarter That Was
A system-wide mess concerning foreclosure documentation has really dominated the talk about banks recently, but that was not a meaningful factor for Citigroup. What was meaningful was a 6% sequential decline in revenue (down approximately 10% year over year), but an overall improvement in credit. Although net interest income fell about 6% sequentially, the company did see some strength in equity trading, improved investment banking results and a decent performance in the regional consumer banking unit.

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What Drives A Bank of America Recovery?

Like most other major U.S. banks, Bank of America (NYSE:BAC) is managing to deliver successively less-worse quarterly reports. Credit is getting better and the securities markets are closer to back-to-normal. What is not so clear, though, is what horse Bank of America is going to ride back to prosperity. After all, less-bad can only power a turnaround story for so long.   

The Quarter That Was
Due in part to better credit conditions and sizable loan loss reserve releases, Bank of America beat on the bottom line while missing slightly on the top line. Revenue rose 2% from last year, but fell more than 8% on a sequential basis, led in part by a 4% sequential decline in net interest income. Although revenue from card services did drop sequentially, investment banking did a little better.

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Tuesday, October 19, 2010

I Think I Give Up On The FDA

With tonight's news of Amylin (Nasdaq: AMLN) getting yet another complete response letter (CRL) from the FDA on Bydureon, I am just about ready to give up on the FDA. Even though Bydureon has shown no particular cardiovascular risk, the FDA has decided to ask for a QT study - a request that is going to take at least a year to fulfill (to say nothing of another six months or so for review).

I would love to know why the FDA did not request this back in the first CRL. I cannot stand conspiracy theorizing, but I am beginning to wonder if the FDA has just decided to abandon its supposed mission of evaluating the safety and efficacy of new drugs in favor of just ruling that any and all new drugs are potentially unsafe and therefore unapprovable.

Although I think Amylin has the capital to endure this delay, and I still believe Bydureon is the best drug in its class, I do not know how anybody can just assume that the drug will get approval. It seems clear to me that the FDA does NOT want to approve this drug and will come up with whatever obstacles are necessary to block it.

By the same token, then, this is bad news for any company looking to get a new compound through the FDA. Maybe Big Pharma can still push some compounds through, but it feels like the little companies do not stand a chance.Good luck, then, to Biodel (Nasdaq: BIOD) and its problematic Phase 3 data on Linjeta - if the FDA will not approve Bydureon, I cannot see how Biodel gets through.

I wonder how long this will go on before somebody decides it is time to audit and investigate the FDA and re-examine its mandate. I appreciate and respect the necessity of protecting the public from unsafe drugs, but allowing unmet medical needs to remain unmet simply because of fanciful fears of possible harm does nobody any good. At this point, I argue that the FDA is abusing its mandate and needs a Congressional slap upside the head to remind it of its obligations to facilitate the introduction of new drugs and devices.

Anyways, I do not wish to turn this into a long-winded rant about the FDA, so I will bring this to a close. This is a major disappointment to Amylin shareholders, but it is not the end of the story yet. I still have some hope that this story will work out, but it is definitely going to take longer than I had hoped.

Disclosure - I own shares of Amylin

St. Jude Sews Up A Lucrative Niche

St. Jude Medical (NYSE:STJ) does not often do flashy deals, but the company has a solid track record of buying just-under-the-radar companies with strong positions in lucrative niche markets. St. Jude rolled out that formula again on Monday, announcing a cash and stock deal for AGA Medical (Nasdaq:AGAM) - a small-cap med-tech company with a great franchise in niche applications of cardiac structural repair and vascular abnormalities. 

The Deal
To bring AGA Medical into the fold, St. Jude is paying about $1.1 billion in a mix of cash and stock, and assuming over $200 million in AGA Medical debt. All told, St. Jude is facing a $1.3 billion price tag, while AGA Medical shareholders get about $20.80 per share divided equally between cash and stock. In order to neutralize the impact of these shares, St. Jude's board also authorized a share repurchase program of up to $600 million. (For more, see  The Wacky World Of Mergers And Acquisitions.)

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Is GE About To Stir Up The Medical Arena?

With the worst of the credit crunch over and plenty of cheap candidates, General Electric (NYSE:GE) may be about to become more active with acquisitions. With some oblique comments from a senior executive, it would seem that this American conglomerate is once again about to leverage its considerable capital resources. Investors may want to consider the sorts of companies that GE may be looking at as potential targets.

Sticking to the Knitting
Although GE is a frequently-mentioned name in the guessing game of healthcare acquisitions, the company is actually rather focused and consistent with its healthcare business. GE is a significant presence in the imaging, diagnostics, life sciences and healthcare IT spaces. By and large, the company steers away from interventional products, so the likelihood that GE would buy a company like Stryker (NYSE:SYK) is quite low.

Cancer Therapy
Although GE is not active in interventional medicine, Varian (NYSE:VAR) might be a logical way for the company to make that transition. An argument could be made that Varian's radiation therapy systems would be a natural extension of GE's diagnostic imaging products. Along similar lines, TomoTherapy (Nasdaq:TOMO) or Accuray (Nasdaq:ARAY) could get some consideration, though TOMO may be too small and Accuray too novel.

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Another Mediocre Johnson & Johnson Quarter

Johnson & Johnson (NYSE: JNJ) seems to be making a habit of the "miss on the top, beat on the bottom" earnings report. While I am somewhat pleased to see the company finding new levers to pull for profitability, the absence of top-line growth is a festering long-term issue.

Overall revenue dropped about 1% to $15B - a touch below the consensus guess of $15.2B. The details, though, are interesting.

Consumer sales fell sharply, down almost 11%, as the company really suffered for those recalls and manufacturing suspensions. Pharmaceutical sales, though, were pretty strong at nearly 5% growth. Performance in devices was mostly mediocre-to-negative, with just 1% growth.

Below the top line, nothing really changed all that much from last year. The gross margin went down a bit (likely because of those manufacturing problems and recalls), and the company spent more on R&D, but also got a benefit from "other" income. All in all, pre-tax profitability was unchanged as a percentage of sales.

Looking again at consumer health, every single category was down except for Baby Care, and the overall U.S. consumer business was down almost 25% - a pretty stunning drop for a profitable and well-known business. It looks like management really has its work cut out for itself in fixing this business, and I'm not sure they're up to the challenge (repair-work usually takes some amount of dynamism and that seems to be outside the skill-set of this team).

Nothing really jumped out about the performance of the pharmaceutical business, but I was surprised to see just how weak Cordis was within devices. I realize Abbott (NYSE: ABT) has left JNJ in the dust with drug-coated stents, but I had expected a bit more stability. Orthopedics eaked out a gain, while the diabetes business fell. All in all, a mediocre performance.

So, what about this stock? It still seems cheap relative to its cash-generation potential ... but not so cheap as to be compelling. I'm ratcheting down my free cash flow growth expectations to the 2-3% range, due entirely to lower revenue growth in the future. That translates into about 10% upside exclusive of the nice dividend and ongoing buybacks.

If you're willing to assume that JNJ can grow the top line at 4% a year, the valuation goes up to about $80 a share. Maybe the drug and device pipeline support that, but I'm not as confident in that outlook anymore.Still, I would not sell this one today, so I will settle for being a grouchy owner.

Disclosure - I own shares of JNJ

Monday, October 18, 2010

Quick and Dirty on SABMiller

So, SABMiller (Nasdaq: SBMRY) put out a quick trading update today covering volumes for the first half of the year. SAB served up a surprise, with 1% first-half volume growth, which translates into about 3% growth in the second quarter.

Expectations were pretty consistently in the 0-1% and 1-2% range, respectively, so this was a modest beat for SAB. Interestingly, they had a strong quarter in China (which is a low-margin market) and South Africa (which is a very profitable market). Actually, the only market that was not better than expected for them was the U.S. That is not all that surprising - iffy long-term performance was part of the motivation for forging the relationship with Molson Coors (NYSE: TAP) a little while ago.

SABMiller is an unusual company for such well-known brands - it is strong in the growth areas of the world (Africa, Asia, LatAm, Eastern Europe) and relatively weak in the mature, slow-growth markets (W. Europe, North America). That is a big part of why I bought the stock years ago and continue to hold it - SAB is focusing most of its attention on markets where there is a lot of room for market share gains and overall per capita consumption growth.

I suspect that I'm closer to the end of time holding this stock than the beginning, but there still looks to be enough room to run to be worth hanging on for a while. I think the company can deliver quite a few years of high-single digit (if not low-teens) free cash flow growth, and that would make the stock undervalued by about 10%. That is not a lot to get excited about, and not enough for me to suggest others jump in ... but it is enough for me to hang on for now. I might look at this one as a source of cash, though, if I decide to pull the trigger on something like Abbott (NYSE: ABT) or Becton Dickinson (NYSE: BDX (or some new idea altogether).

Disclosure - I own shares of SABMiller

Forget BRIC, It's Time For CIVETS

Wall Street loves sound bites and handy acronyms. Whether it is ROE, NPV or NAV, there is no shortage of handy terms. For growth-oriented investors, BRIC has been one of the most important acronyms of the past ten years. Encompassing the dynamic economies of Brazil, Russia, India and China, BRIC was a guidepost for many investors and there is no questioning the strong stock performance of this group (particularly China and Brazil). (Historically, international investing has worked out well for investors, but this may no longer be the case.

Things change, though, and it may be time for investors to pay more attention to a new name. A civet may be an odd-looking creature (imagine a cross between a raccoon and a cheetah), but the CIVETS could be the next major destination for international investing.

Meet the CIVETS
CIVETS is an acronym, reportedly coined by Michael Geoghegan at HSBC (NYSE:HBC), for Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa. Investors may think of this as a second-generation of emerging economies, as these countries generally have fast-rising (and young) populations, relatively well-established financial infrastructure, internal stability and a pathway towards significant economic growth and potential co-leadership in their economic spheres.

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Please note - I ordinarily also would have mentioned Turkcell (NYSE: TKC) as part of this group, but I own Turkcell in my own accounts, and therefore cannot mention it within Investopedia articles.

Is Linear A Canary Or A Duck?

Linear Technology (Nasdaq:LLTC) has long suffered from a decided lack of analyst support and enthusiasm. Despite an extensive record of strong financial performance, the company has never put to rest the doubts that its high margins will be whittled away by the likes of Analog Devices (NYSE:ADI), Texas Instruments (NYSE:TXN), Maxim (Nasdaq:MXIM) and a host of foreign and smaller competitors. 

Now, another worry comes into play - whether or not Linear can maintain its business, and whether customers over-ordered during the early stages of this economic recovery. With Linear looking for a sequential drop in revenue into the last calendar quarter of this year, the question is whether Linear is the canary in the coal mine for broad-based analog chip demand, or simply an odd duck with its own unique ship-ahead problems.

The Quarter That WasAll in all, Linear did more or less as expected in its fiscal first quarter. Revenue rose 6% on a sequential basis, and 65% on an annual basis. Gross margins ticked up sequentially by about 60 basis points, and while reported operating margin fell a bit, adjusted operating margin (excluding a legal charge) would have increased sequentially.

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Roche Needs A Shot Of Adrenalin

Paradoxically, a value stock is only a value if there is some growth to the name. True, there is the occasional "wasting asset" stock that is worth more than its current price, but most operating companies need some reasonable amount of growth to deliver that value. That is the problem with Swiss medical technology giant Roche (Nasdaq:RHHBY.PK) these days - while the company has several valuable franchises under its roof, the growth performance has been lackluster and the company seems slow to change this. 

A Look Ahead at a Mediocre Third Quarter
Roche gave investors a preview of results on Thursday. Reported sales fell 3% in local currency terms, which was about 2% below the average analyst expectation. A 2% miss is no reason to panic, but investors should be at least modestly concerned that the business was weaker than expected, more or less, across the board. Pharmaceutical sales were down 5%, as the company saw a fall-off in Tamiflu and very low single-digit growth from its big three of Avastin, Herceptin and Rituxan.

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Grainger Moving To The Next Phase

Companies like Grainger (NYSE:GWW) tend to do quite well in the early phases of an economic recovery. Not only do these companies have to replenish low inventories of components and supplies (worked down below normally desirable levels during a slowdown), but they actively begin expanding production again. The question, though, is what happens when that early cycle is over - companies will continue to order from Grainger as this recovery moves into its next phase, but investor enthusiasm may transition on to the next flavor-of-the-month. (For related reading, see The Best Business To Be In During A Recovery.)

The Quarter that Was
Sales grew 19%, as reported in the third quarter, with the company's U.S. business growing 13% (ex-acquisitions). Volume made up about 9% of that overall growth, with pricing more or less flat. Within the numbers, heavy and light manufacturing were the strongest sectors, while government, commercial and contractor categories limped along at single-digit growth. A little more concerning, though, was the pattern of growth - every month of the third quarter was weaker on a year-over-year basis than the prior quarter. In other words, the company is still logging impressive double-digit growth, but the rate is slowing, and that will certainly perturb some momentum and growth investors. 

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Friday, October 15, 2010

No Recession In High-End Goods

The regular cornerstone franchises of most American malls like Dillards (NYSE:DDS) or J.C. Penney (NYSE:JCP) may not be seeing great consumer interest, but the luxury side of retail seems to be making a solid comeback. This is why, with an update on third-quarter sales Thursday, it's pretty clear that French luxury giant LVMH (Nasdaq:LVMUY.PK) is once again doing well among the well-to-do. 

Double Digits Across the Board
While LVMH only gave a partial update (sales, not profits), that update was nonetheless very positive. Total sales climbed nearly 24% as reported, with organic sales growth of 14%. That was a fair bit better than the already-healthy analyst expectation of 11% organic growth.

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Thursday, October 14, 2010

CSX Running Hot On The Rails

If the first earnings report from the railroad sector is any indicator, there is going to be plenty of fundamental support to back up the hot stock performance of recent times. CSX (NYSE: CSX) does not have the best historical reputation, but if this company is doing well it stands to reason that this is going to be a fine quarter for this part of the transportation sector. 

The Quarter That Was
CSX reported that overall revenue rose 16% in the third quarter. Merchandise sales rose 15% (that is basically non-coal rail traffic), while coal revenue was up 23%. Carload volume increased nearly 10% this quarter (not bad), while yields were up about 6% (better!). 

Interestingly, intermodal revenue was up only 6% this quarter - interesting, as that is weaker than recent rail reports have indicated for the intermodal industry. Then again, with Western Europe in something close to hibernation, perhaps CSX's East Coast exposure keeps a lid on that intermodal performance. If that is true, then Union Pacific (NYSE:UNP), Berkshire Hathaway's (NYSE:BRK.A) Burlington Northern, and the two Canadian operators (Canadian Pacific (NYSE:CP) and Canadian National (NYSE:CNI)) could be expected to do quite a bit better on that line. 

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Rails Roll On Into The Fall

Although the railroad sector spent most of the summer chopping along (as did the broader market), between fears of a double-dip recession and the realities of ongoing strength, the fall has been off to a good start. Looking at the rail traffic data provided by the American Association of Railroads, September was another strong result for U.S. carriers and if this keeps up, the stocks will likely continue to find healthy bids. 

The Cars Of September
The data shows that U.S. carloads rose almost 8% on a year-over-year basis in September and achieved the highest average number of carloads per week since October of 2008. Industry-watchers may remember this as the high point before the bottom fell out in this recent recession. In any event, traffic was still down almost 8% from the 2008 level, while carloads did rise 2% on a sequential seasonally-adjusted basis. (For more, see Rails And Supplies Suggest More Volatility) 

What is interesting is that there appears to be a bit of a divergence between the United States and Canada. Although the four non-holiday weeks of this September were some of the most active weeks all year, Canadian traffic is showing less momentum. Now, it is true that Canada never got as bad as the U.S. and the momentum is still positive, but the relative outperformance gap seems to be shrinking a bit. 

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Intel - Stable Will Have To Do For Now

With all of Wall Street's eyes upon it, Intel (Nasdaq:INTC) did what it had to do - the world's largest chip company delivered a quarter that should be good enough to calm some of the near-term fears about the PC and consumer electronic markets. By the same token, though, there is nothing in the guidance or management's commentary to suggest that business will be booming again anytime soon. 

The Quarter That Was
Intel reported that third quarter revenue rose a little more than 3% sequentially (and more than 18% annually) to about $11.1 billion - a number that was slightly higher than the company's earlier disappointing guidance. Within the numbers, Intel reported that PC group microprocessor sales were up more than 2% sequentially, and made up about 57% of the company's revenue base.

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