Afternoon Review

Caterpillar (CAT) -8.38%
Caterpillar, often a barometer of various segments of the U.S. economy, posted disappointing earnings and announced 20,000 job cuts. CEO James Owens, an economist, provided a bleak outlook for the world economy in its earnings release.

The U.S. market, where construction has been weak, saw sales fall four percent while sales outside North America rose 13 percent and made up 64 percent of total sales, up from 60 percent a year earlier. Machinery and engine sales gained 6.7 percent while the company’s financial arm posted a 2.4 percent increase in financial-products revenue despite turbulence in the financial markets.

The financial crisis continues to hinder Caterpillar’s ability to issue corporate bonds. Its finance arm has been driven to offer sharply higher yields on recent bond sales to lure investors

2008 was the company’s sixth consecutive year or record sales and revenue. The company has benefited from a five-year boom led by emerging markets in big need for the heavy construction equipment made by Caterpillar. During that time, the work force rose nearly 50 percent to 101,000 as revenue more than doubled.


Pfizer (PFE) -10.32%
Pfizer agree to pay $68 billion, or about $50.19 per share, to acquire rival Wyeth, in the largest pharmaceutical deal in nearly a decade. Wyeth shareholders will receive $33 a share in cash and 0.985 a share in Pfizer stock. The deal is set to close “no earlier than later in the third quarter.”

Pfizer is paying for the acquisition with roughly one-third in borrowed money, one-third in stock and one-third from cash reserves. Pfizer will borrow $22.5 billion from a number of banks to finance the deal. Under the loan agreement, the banks can withhold financing if Pfizer’s credit rating falls below a certain threshold. If that occurs, Pfizer would have to pay Wyeth a reverse breakup fee of $4.5 billion. That potential penalty is very high by historical norms and underscores the difficulty of completing deals in the current environment. As it turns out, the other big M&A news today was that Dow Chemical won’t close its $15 billion merger with Rohm & Haas on time.

In order to protect its credit rating, Pfizer plans to cut its quarterly dividend, which was 32 cents last quarter, by half. That should save the company more than $1 billion per quarter. Pfizer believes the deal will lead to annual savings of $4 billion by the end of the third year and will be accretive to earnings in the second full year after closing.

The combined company will have 17 products that generate more than $1 billion in annual sales. However, Pfizer has a poor history of large acquisitions that destroyed shareholder wealth. The company’s reliance on growth-by-acquisition instead of strong in-house research and smart licensing could eventually take its toll.

On the earnings front, Pfizer’s fourth quarter net income fell to $26 million, or four cents a share, down from $2.72 billion, or 40 cents a share, a year earlier. Excluding one-time items, earnings rose to 65 cents from 50 cents.


Quest Diagnostics (DGX) +9.85%
Despite slowing revenue growth, Quest beat Wall Street targets in the fourth quarter as operating margins expanded. In efforts increase margins further, the firm is in the middle of a plan to reduce costs by $500 million by the end of 2009.

Clinical testing revenue rose 2.3 percent despite a 0.4 percent decline in volume of drug-abuse testing, which is sensitive to job-hiring volume, dropped. Quest offers a variety of tests, from routine blood work to sophisticated genetic tests, and no one type provides a large portion of its revenue.

Management reiterated that all major managed-care contracts have been renewed or expanded into 2010 and beyond. This is a good sign for Quest, considering the upheaval in managed-care contracting just a couple of years prior.

The company’s shares had been in decline earlier this month, as Quest admitted it provided possibly wrong results for thousands of vitamin D tests in the past two years. The company said it had fixed the problem and is offering free retests, but the incident could raise call for more regulation of diagnostic testing just as it is playing a more important role in guiding medical treatment.


Danaher (DHR) +9.29%
Danaher reported a lower fourth quarter profit, but still topped earnings estimates, as
the manufacturer of bar code readers, medical products and Craftsman tools accounted for restructuring charges related to its acquisition of test and measurement equipment maker Tektronix.

Revenue increased 1.3 percent to $3.18 billion and gross margins rose to 54.3 percent from 53.8 percent.

CEO H. Lawrence Culp expects 2009 to be a difficult year, but anticipates Danaher will outperform given its strong balance sheet and businesses. Danaher is vulnerable to challenges in the retail environment, as shoppers cut back on their discretionary spending. Same-store sales have been steadily falling at stores like Sears and Kmart, with categories such as home appliances and tools feeling the impact of the housing slump.


Kimberly-Clark (KMB) -0.63%
Kimberly-Clark posted an 8.1 percent drop in fourth quarter net income and projected 2009 results below analysts’ expectations. The company also announced that they won’t buy back stock this year because of a quadrupling in 2009 pension costs.

KMB reported fourth-quarter net income of $419 million, or $1.01 a share, down from $456 million, or $1.07 a share, a year earlier. The stronger dollar cut the bottom line by 20 cents a share. On the bright side, gross margin widened to 31.6 percent from 30.7 percent as commodity costs were down “dramatically.”

CEO Thomas Falk said, “Economic weakness impacted our categories more than anticipated, particularly in North America and Europe,” adding the company believes some of the effects are temporary, reflecting inventory reductions by both retailers and consumers.

Trade-down also affected sales. The continuing downturn in the economy has led some consumers to shift to private-label from name-brand goods and to use up products in their pantries rather than spending on new ones.


General Electric (GE) +3.24%
General Electric’s, and finance arm GE Capital’s, AAA debt ratings are not “immediately affected” by the company’s fourth-quarter earnings results, Standard & Poor’s said.

Still, for GE Capital there are signs that 2009 will be even more difficult than the ratings agency assumed when S&P revised the outlook on the both companies to negative on Dec. 18, 2008, S&P said. GE Capital would have reported a significant net loss for the quarter, were it not for a substantial tax credit, the ratings company said.


Quick Hits

• Pfizer-Wyeth: What’s To Keep It From Falling Apart?
• Heard on the Street: GE’s Approaching Date With Destiny
• Bernanke Risks ‘Very Unstable’ Bond Market as He Ponders Buying Treasuries
• In October 2007, Financials made up 22.3% of the S&P 500. Today, they are just 9.7% of the index.
  
  

Peter Lazaroff, Junior Analyst