MarketView for May 20

MarketView

 

Events defining the day's trading activity on Wall Street

 

Lauren Rudd

 

Tuesday, May 20, 2008

 

 

 

 

Summary

 

Stock prices moved sharply lower on Tuesday after the price of a barrel of oil prices hit $129 per barrel and the producer price index (PPI) rose more than expected, adding to mounting concerns over both inflation and consumers' discretionary spending power. According to the Labor Department, the PPI, excluding volatile food and energy costs, rose 0.4 percent last month. The rise for the year through April was the largest since 1991.

 

Weak quarterly results and outlooks from Target and Home Depot added to the day’s bad news while at the same time underscoring how consumers are struggling as gasoline prices soar and home values continue to plummet. Target ended the day down 63 cents, or 1.15 percent, to close at $54.29 after it said its sales growth will likely remain sluggish until the U.S. economic environment improves or stabilizes. Shares of Home Depot fell $1.50, or 5.20 percent, to close at $27.37 after the home improvement chain posted a 66 percent slide in quarterly profit.

 

Large banks were the greatest drag on both the Dow Jones industrial average and the S&P 500 index after an influential Wall Street analyst warned that the credit crisis was far from over. Meredith Whitney, banking analyst at Oppenheimer & Co, said the credit crisis will result in three years of multibillion-dollar revenue declines for banks. As a result, JPMorgan Chase saw its share price fall $2.29, or 4.98 percent, to close at $43.70.

 

Technology shares also took a heavy beating. Intel closed down 79 cents, or 3.18 percent at $24.09, a day after SanDisk warned that higher oil prices will hurt consumer spending on technology. SanDisk saw its share price fall $1.01, or 3.36 percent, to close at $29.01.

 

The only two companies escaping the sell-off on the Dow were Chevron and Exxon Mobil, which benefited from the latest record high in oil prices. Exxon closed up 20 cents, or 0.21 percent, at $94.56, while Chevron ended the day up 89 cents, or 0.87 percent, at $103.09.

 

Inflation Numbers Help To Sink Stocks

 

Producer prices excluding energy and food rose at the fastest pace since 1991, highlighting inflation concerns that could limit the Federal Reserve's options in shoring up a weak economy. According to the Labor Department its producer price index rose 0.2 percent last month as food prices took a respite from their march upward and as gasoline costs, which usually climb sharply in April, fell after adjustment for seasonal swings.

 

However, core producer prices, which strip out volatile energy and food costs, increased by 0.4 percent. Over the past 12 months, core prices rose 3 percent, the largest gain since December 1991. Overall producer prices were up an even-stiffer 6.5 percent.

 

Rising energy costs have buoyed producer prices and spilled into broader measures of inflation in a worrying fashion for the Fed. Fed Vice Chairman Donald Kohn said in a speech that rising inflation expectations were a concern but the economy was still dogged by a housing slump, creating a high level of uncertainty that demands policy flexibility.

 

The Fed is widely expected to hold rates steady at its next meeting in late June, but financial markets see some chance policy-makers will push borrowing costs higher by year end.

 

The rise in the core index reflected increases in a broad range of costs, including higher auto prices. Gasoline prices fell 4.6 percent, but they were up 23 percent over the past year. Seasonal factors aided the April drop and economists warned it would prove temporary. While food prices were unchanged, the price of rice jumped by 17.4 percent, the largest rise since 1993. The report also suggested price pressures further back in the chain of production, with core crude goods up 7.9 percent in April.

 

Good News from Hewlett-Packard

 

Hewlett-Packard posted a higher quarterly operating margin on Tuesday, and pointed to strength in its international business. The company also confirmed preliminary earnings figures for its fiscal second quarter released last week that showed a net profit of $2.1 billion, or 80 cents per share, as compared to $1.8 billion, or 65 cents per share, a year ago. Revenue was $28.3 billion, up 11 percent from a year earlier.

 

The company also kept intact its earlier forecast for third-quarter earnings of 82 cents to 83 cents per share, excluding special items, on revenue of $27.3 billion to $27.4 billion. Operating margin, excluding special items, was 10 percent, up from 9 percent a year earlier and 9.9 percent in the first quarter, HP said.

 

Hewlett-Packard said that international markets accounted for 70 percent of total revenue, with revenue from Brazil, Russia, India and China growing 26 percent over a year earlier. The company’s shares ended the regular trading day down 25 cents, or 0.54 percent, to close at $46.46.

 

Higher Earnings at Staples

 

Staples reported higher earnings on Tuesday and stood by its outlook for the full year. According to the company, which has launched a hostile bid to buy smaller Dutch rival Corporate Express NV, warned that it expects weak economic conditions to persist through 2008, and that it could not say when things would start to look up.

 

Earnings were $212 million, or 30 cents per share, in the first quarter that ended May 3, as compared to $209 million, or 29 cents per share, a year ago. Quarterly sales rose 6 percent to $4.9 billion. While international same-store sales rose 4 percent in the quarter, North American retail same-store sales fell 6 percent.

 

"When you report a negative 6 percent same-store sales number, the monthly trend is bad, bad, and bad," Chief Executive Ron Sargent said during a conference call. However, he added, "I do feel like we're in the trough and the general direction is up from here."

 

Like smaller rivals Office Depot and OfficeMax, Staples' sales have weakened in recent quarters as slowing job growth; the housing downturn and the credit debacle have forced small businesses to cut spending. Product categories that suffered the most, Staples noted, were business machines and furniture, which include higher-priced, discretionary items. For the second quarter, Staples forecast earnings to be flat with the year-ago period.

 

The company said it opened 35 stores in the first quarter and had plans for about 100 more in the year. The retailer is in the process of trying to acquire Corporate Express, a Netherlands-based wholesaler of office supplies. Last week, Corporate Express rejected a sweetened 8 euro-per-share offer, saying it undervalued the company, but said it was willing to talk.

 

The equity value of the offer is 1.46 billion euros, or about $2.34 billion, based on the offer price of 8 euros a share for about 182.848 million shares outstanding. Staples cited Corporate Express' unwillingness to negotiate, as it launched its hostile bid.

 

Staples officials said during the conference call that Corporate Express' reluctance toward the deal was "kind of surprising to us given the trajectory of their business and the fact that our offer represents a 90-percent premium over where their stock was trading prior to our involvement." Staples has secured a $3 billion credit line to finance its offer.

 

Staples' shares ended the day up 4 cents, or 0.17 percent, to close at $23.61.

 

Home Depot, Target and Others See Discouraging Times Ahead

 

Two of the country’s largest retailers said on Tuesday that the weak U.S. economy and battered housing industry were discouraging cash-strapped consumers from making anything more than basic purchases. Home Depot and Target both reported lower earnings and warned that results for the rest of the year would be sluggish.

 

"As gas and food prices continue to rise and housing market slows, consumers are facing increased financial pressure and reducing their spending, especially in discretionary categories," Target Chief Executive Gregg Steinhafel said on a call with analysts.

 

While Target and Home Depot have different business models, the weakness in consumer spending is widespread. Upscale department store owner Saks was also downbeat about prospects for the rest of this year.

 

"I do believe that we're in a rough economic period right now," Saks Chief Executive Stephen Sadove said. "The consumer is operating as if we are in a recession, whether we're technically in one or not."

 

Target reported a 7.5 percent drop in quarterly profit as consumers ignored clothing and jewelry in favor of basics like food. According to Target, its earnings came in at $602 million, or 74 cents per share, for its fiscal first quarter ended May 3, down from $651 million, or 75 cents per share, a year earlier. Sales, excluding credit card revenue, rose 5 percent to $14.3 billion, boosted by new stores openings. But sales at stores open at least a year, a key retail gauge known as same-store sales, fell 0.7 percent.

 

Target said the first-quarter gross margin rate declined from last year, driven by faster sales growth in lower-margin merchandise. The company, which has been under pressure from activist investor William Ackman to boost its stock price, said earlier this month that it would sell a 47 percent interest in its credit card business to JPMorgan Chase.

 

Home Depot said its profit fell 66 percent as the housing meltdown hurt sales. It also took a charge to close stores and curb expansion plans. Net income fell to $356 million or 21 cents per share, in the first quarter ended May 4, as compared to $1.05 billion, or 53 cents a share, a year ago.

 

Those results included a charge of $543 million to close 15 underperforming U.S. stores and scrap plans to open 50 stores that had been in the company's pipeline. Excluding the charge, profit was 41 cents a share, compared with the average forecast of 37 cents. Sales fell 3.4 percent to $17.9 billion, topping estimates of $17.63 billion. Sales at stores open at least a year fell 6.5 percent.

 

"The housing and home improvement markets remained difficult in the first quarter; in fact, conditions worsened in many areas of the country," Home Depot Chairman Frank Blake said in a statement. In a call with analysts, Chief Financial Officer Carol Tome said the Home Depot expected further tough quarters ahead. She also said a planned $22.5 billion share buyback, or recapitalization, program was still "on pause" as the company awaits stability in its business and the credit markets.