Afternoon Review

Markets rallied on a Fed-led plan to flood the global financial system with dollars, as well as reports that government equity injections will be aimed at “healthy” firms, will be voluntary and have attractive terms to encourage participation.

Japan’s biggest lender, Mitsubishi UFJ, purchased $9 billion of Morgan Stanley preferred stock (with a 10 percent dividend) and will now own 21 percent stake of the investment bank. Moody’s Investors Service said the investment from Mitsubishi UFJ is “critical” for Morgan Stanley to keep its current credit ratings (A1 long-term debt rating was on review for downgrade on October 9). This is the second overseas investor to take a significant stake in Morgan Stanley. China Investment Corp. paid $5.58 billion for equity units in MS that pay 9 percent a year and convert to common stock in 2010, granting CIC about 10 percent of MS.

Principal Financial Group (PFG) surged over 26 percent after reassuring investors by saying it sees operating profits in 3Q of $0.92-0.97 per share, versus the Reuters forecast of $0.93. PFG called the results “very solid,” particularly in light of weakness in the economy and extreme market conditions, and said its capital position improved from 2Q to about $375 million in excess of levels needed to maintain a AA rating. PFG cut its annual dividend in half to $0.45 per share and will suspend its stock buyback, which it termed as prudent capital management in the volatile environment.

AT&T (T) rose 16.28 percent. AT&T, fighting cable companies for customers, announced that it will sell its U-verse high-speed Internet service at Wal-Mart Stores and Circuit City Stores, the first national agreements to sell the products at retailers.

Total System Services (TSS) earnings came in short of estimates, but weren’t disastrous (due to recurring revenue model) considering the challenging operating environment. Revenues were slightly higher, but margins were notably weaker. Card accounts were down due to client purges of inactive accounts and the loss of a $12 million pre-paid account from Nordstrom. Potential client losses ahead as WaMu (WM) and Wachovia (WB) represented roughly 4.5 percent of revenues for TSS, and could potentially be absorbed by JPMorgan (JPM) and Wells Fargo (WFC). TSS’s processing contracts with WM and WB haven’t been made yet, but JPM does most of their consumer card processing in-house, while WFC processes with FirstData. The combination of potential client losses, purging of accounts, and continued weakness in financials and the global economy appears to have kept investors cautious.

United Technologies (UTX) said today that it has withdrawn its $2.6 billion offer for Diebold, the maker of automated teller machines and electronic voting machines. UTX had offered $40 a share after having pursued Diebold for two years. In Diebold, UTX sought to expand its electronic security business with on of the field’s largest players. Last year, UTX bought Initial Electronic Security Systems for about $1.2 billion.

Great article in the Deal Book, about the large deal spreads (current price vs deal price) that has some good insights the InBev – Anheuser-Busch deal and includes some possible obstacles to such deals. InBev’s $50 billion acquisition of Anheuser-Busch (BUD) has with a deal spread of about 10.8 percent, down from 19.4 percent on Friday. Dow Chemical’s (DOW) $15 billion acquisition of Rohm and Haas (ROH) has a deal spread of about 20.4 percent, down from 28.5 percent on Friday.

Last week, Controladora Comercial Mexicana SAB, the third largest retailer in Mexico, filed for bankruptcy reorganization after defaulting on 400 million pesos in commercial paper. Likely a positive for Wal-Mart (WMT), which has seen a slowdown in Mexican business of late. WMT believes it could benefit by gaining additional market share. Approximately 25 percent of the total square footage of Wal-Mart International is in Mexico. Wal-Mart International contributes roughly 26 percent of total company sales and 21 percent of total company operating profit.

Lots of big earnings reports this week…

Tomorrow we will get a first look into the technology sector with Intel (INTC) reporting earnings. The most watched aspect of the report tomorrow will not be the 3Q results, but the 4Q and forward outlook. Many expect to see tech spending weakness. This is a good article from Bloomberg on tech budget cuts. As for INTC, they have one of their strongest product lineups in years. Their microprocessors serve as the “brain” for most personal computers. INTC has done particularly well in portables, which to little surprise has began to outsell desktop models on a global basis. INTC trying to expand by promoting low-end laptops called netbooks and new pocket-sized devices for surfing the Web (think iPhone-like browsing ability).

Also reporting earnings tomorrow is Johnson & Johnson (JNJ), who should serve as a good indicator for health care markets.


Prepared by:
Peter Lazaroff, Junior Analyst