Afternoon Review

Bloomberg reports the U.S. Securities and Exchange Commission agreed to back an effort by banks that may delay writedowns on some securities tied to losses that have cost companies more than $640 billion.

******

JPMorgan Chase & Co. (JPM) managed a profit of 11 cents a share, down from 97 cents a share a year earlier. JPM’s Tier 1 ratio – which gauges a bank’s ability to withstand loan losses – was $112 billion, or 8.9 percent of risk-weighted assets (the minimum for a “well-capitalized” rating from regulators is 6 percent).

The bank’s retailing unit profits fell 61 percent as revenue rose 16 percent, while commercial banking earnings rose 21 percent amid an 11 percent rise in revenues. Big earnings drops were also seen at JPM’s asset-management and credit-card segments. It is not surprising at all to see the asset-management arm struggle amidst falling equity markets. JPM expects credit-card charge offs to gradually rise during the rest of the year and they plan to set aside additional reserves as the economy slows.

JPM is adding about $600 million to reserves due to charge-offs in its retail and credit-card businesses, as well as $2 billion to loan-loss reserves because of accounting issues in the WaMu deal. JPM also showed a $642 million loss on Fannie Mae and Freddie Mac preferred stock.

Revenue growth in many of its businesses is being driven by customers leaving banks perceived as weaker than JPM. With rapidly evolving banking landscape, JPM has been able to capitalize on the crisis’ victims at basement prices. After WaMu purchase, JPM is the biggest bank by domestic deposits.

CEO James Dimon said this about the company’s future: “Given the uncertainty in the capital markets, housing sector and economy overall, it is reasonable to expected reduced earnings for our firm over the next few quarters.”

Meredith Whitney is REALLY enjoying her 15-minutes of fame; the analyst is featured in this article that spotlights her questions and remarks during JPM’s conference call.

******

St. Jude Medical (STJ) posted a 20 percent rise in third quarter net income, helped by strong sales of defibrillators as well as pacemakers and cardiovascular products as margins improved.

STJ narrowed its full-year forecast, projecting earnings of $2.30 to $2.32 compared with an earlier forecast of $2.28 to $2.33. STJ sells products usually covered by insurance and that treat serious problems and thus its business is less affected by swings in the economy and discretionary spending.

******

The credit crunch, declining air traffic and the Boeing (BA) strike are likely to hurt earnings for the suppliers of aircraft parts including United Technologies (UTX) and Goodrich (GR).

Aerospace companies are in some ways better prepared for the current economic woes than they might have been in the past. Having survived the crisis of the 2001 terrorist attacks and subsequent wars and epidemics that damped demand for new planes, most aerospace companies now have terrific balance sheets with plenty of cash and not much debt. Fitch Ratings say that BA and Airbus (their biggest competitor) have the capability to provide several billions of dollars of their own financing if customers need help, without affecting their credit ratings.

BA machinists are still demanding that the company guarantee it will outsource less, but BA needs flexibility to react quickly to market changes by outsourcing some jobs. Considering the state of the global economy, these workers should be happy that they have jobs. When they finally do return to work, they’ll have more than seven years worth of orders to keep them busy (and then they will probably strike again). I don’t blame BA for not wanting to make any guarantees about work orders that are more than seven years away and don’t even exist yet.

******

The CRB Index of 19 commodities is down nearly 40 percent from its May 2008 record as falling equities, tighter lending conditions and slowdowns in manufacturing and construction are signaling a drop in demand.

Energy was the worst performing sector today. Overseas, there were reports of demand weakening which has hurt the space in general and the coal names in particular. Refiners still cannot catch a bid despite crude falling below the $75 level as fears that consumer demand destruction will outweigh crude’s price drops. Exxon Mobil (XOM) and Chevron (CVX) both fell 13.95 percent 12.49 percent, respectively. Arch Coal (ACI) lost 17.99 percent and Peabody Energy (BTU) finished 20.65 percent lower. Drillers, Transocean (RIG) and Noble (NE), were each down about 20 percent.

******

InBev’s $52 billion deal to buy Anheuser-Busch hit another snag when the InBev announced it was forced to postpone a $9.8 billion rights offering intended to help fund the purchase. InBev said that the delay would have no impact on the deal and that it still expects to close the acquisition by the end of the year. The postponed offerings are more of a speed bump than a signal that the deal may be in trouble; however, the stock price still reflects a degree of uncertainty as BUD closed today at $62.20.

******

Intel (INTC) projected a larger than normal range for the fourth quarter and scheduled a rare midquarter update for December. In explaining the large guidance range, CEO Paul Otellini said, “It is clear that the financial crisis is creating some signs of stress that may impact our business, but the extent of that is difficult to quantify.”

Demand patterns were mixed due to the volatile macro environment with weakness in corporate (especially U.S.) off-set by strength in notebooks/netbooks and emerging markets (especially China). The most important number in regards to INTC’s business is their gross margins, which were strong for 3Q (58.9% from 55.4% the previous quarter). 4Q gross margin guidance seems fine, but the lack of projectability makes the number less useful. Many questions during the call were related to INTC’s new ultra-small chip called Atom, which is intended for low-end laptop and portable internet devices. The major concern with this product is that it will cannibalize sales of higher-end portables that use more expensive chips and have better profit margins.

In my opinion, these lower cost chips will allow INTC to maintain (and possibly expand) their market share in this challenging economic environment. In addition, the future of computers lies in very portable devices that perform basic computing functions and surf the internet on the same browsers as a desktop computer uses (think iPhone and, even more so, iTouch). Expect to see more of these devices released as companies try to grab market share of this growing division of computers. Because 3Q margins increased and 4Q margins are projected to be higher, Atom margins are likely better than people are estimating.

Prepared by:

Peter Lazaroff, Junior Analyst