Afternoon Review

**Earnings release was yesterday

T. Rowe Price Group (TROW)** -7.60%
TROW’s fourth quarter earnings fell 87 percent, the second straight decline, as market losses reduced asset-management fees and the company wrote down the value of investments in its own funds.

Assets under management fell 20 percent to $276.3 billion in the quarter. Net outflows from mutual funds were $2.2 billion in the quarter, including $1.4 billion from stock funds and $1.5 billion from bond funds. The company’s target-date retirement funds drew $700 million in net inflows, about half the previous quarter.

On the bright side, T. Rowe is on of the few major U.S. asset managers not to eliminate jobs to compensate for the steep drop in fees.

Despite the negative effect the bear market has on asset managers, T. Rowe’s well-respected brand, solid fund performance, high customer switching costs and scale positions the company well when global markets rebound.


3M (MMM)** -4.88%
3M posted better-than expected earnings for the fourth quarter, but moved its guidance down in anticipation of a steeper decline in sales.

3M’s international sales fell 14 percent and U.S. sales fell 6 percent. Asia-Pacific sales dropped 18 percent and European sales fell 13 percent, while Latin America and Canada dropped 9.2 percent.

CFO Patrick Campbell said the first quarter “will be by far the most difficult quarter we have. As we work through the inventory correction, later in the year, we will see the recovery.” 3M is cutting capital expenditures by 30 percent and it will cease stock buybacks until the “environment improves.”

On the bright side, 3M produced solid free cash flow and returns on invested capital that widely exceeded its estimated cost of capital. 3M faces the same challenges as everyone else, but their pristine balance sheet and prudent cost control will help them


Illinois Tool Works (ITW)** -3.37%
Illinois Tool Works fourth-quarter results came in slightly above their reduced guidance given in December, but the company provided a dismal outlook for 2009.

As cited by most industrial companies, the markets deteriorated considerably throughout the fourth quarter. The company expects its revenue from business acquisitions, ITW’s main growth driver, to fall by more than half this year.

Despite their grim outlook for the U.S. and Europe, the company remains optimistic about its positioning in Asia. In countries such as China and India, the company has heavy exposure to infrastructure projects in its welding and construction units.


Alliant Techsystems (ATK)** +2.16%
Alliant Techsystems said fiscal third-quarter sales rose 11 percent on higher sales of commercial and military ammunition.

The company sees this fiscal 2009 profit coming in at the top of the company’s forecast range, but pension costs and a change in accounting rules for convertible debt put Alliant’s 2010 forecast well below consensus estimates. Although these factors have no real impact on the core and growth operations of Alliant, they are likely to lead to a flat year for earnings in 2010.

In the long-run, Alliant’s competitive advantage from low-cost production and its industry’s high barriers to entry should continue to generate impressive profitability and robust free cash flow.


L-3 Communications (LLL)** +0.86%
L-3 said fourth-quarter earnings rose 29 percent, exceeding estimates, thanks to a gain from a divestiture. The company‘s 2009 outlook trailed its previous forecast because of an increase in pension expenses.

Total revenue for the quarter increased 5 percent due to strong growth in aircraft modernization and maintenance as well as specialized products. The operating margin for the quarter increased from last year in every segment expect for the C3ISR (command, control, communication, intelligence, surveillance and reconnaissance) unit.

Full-year revenue increased 7 percent, driven by double-digit growth in C3ISR and specialized products. These segments should continue to fuel total revenue growth in coming years because the global political landscape and unchanged, if not increasing, U.S. defense budget.


Arch Coal (ACI) -9.53%
Arch Coal’s earnings beat analyst estimates because of higher prices on long-term contracts for the fuel.

Coal companies benefited last year from locking contracts for the fuel as it surged to a record $137.50 a ton for Eastern supplies before the U.S. recession curtailed demand. Arch plans to slow production growth until the economy rebounds. Cash prices for coal in Wyoming’s Power River Basin, where Arch gets about three-fourths of its production, rose 20 percent from a year earlier.

Like rival Peabody Energy (BTU), Arch discussed its expansion into the Asia-Pacific rim, which they expect will “set the stage for increased participation when global economic growth resumes.”

Although coal prices have outperformed other commodities, it is unlikely coal companies will rebound until the oil prices move higher and expectations for the global economy become more optimistic.


Chevron (CVX) -0.14% , ExxonMobil (XOM) -0.68%
Earnings from Exxon and Chevron both exceed expectations largely because of widening margins on refined fuel.

Both companies experienced significant declines in revenue as a global recession eroded fuel demand, spurring a 56 percent drop in oil futures. Still, Chevron and Exxon capitalized from significant overseas refining operations because diesel demand outside the U.S. has remained relatively strong.

While other large oil companies like ConocoPhillips and Occidental Petroleum are cutting their capital budgets, Exxon is increasing their capital spending this year and Chevron plans to maintain their current levels.

Chevron said stock buybacks will be suspended in the current quarter after the company bought back $8 billion in stock last year. Exxon, who has far deeper pockets than their competitors, plans to repurchase $7 billion in shares during the current quarter after spending $32 billion on buybacks in 2008.

Chevron and Exxon’s ability to generate robust cash flows in this difficult environment is very positive sign that both will be able to weather the storm in coming quarters.


Fortune Brands (FO)** -5.07%
Fortune Brands reported disappointing fourth quarter earnings and cut its 2009 earnings forecast well below estimates.

Declining home prices, rising unemployment and tight credit caused consumer confidence to drop to record lows during the quarter. This resulted in consumers purchasing fewer of the company’s discretionary brands including Titleist Golf, MasterLock padlocks, Moen faucets, Jim Beam, etc.


Procter & Gamble (PG) -6.39%
P&G reported revenue that fell more expected and lowered its annual forecast as consumers spent less and the dollar’s gains hurt overseas sales where they get more than half of their revenue.

The company’s revenues were hurt by consumers trading down and buying less expensive versions of necessary items, such as P&G’s Gain laundry detergent instead of Tide. The company also saw consumers purchasing fewer discretionary hair-care products and fine fragrances.


Qualcomm (QCOM)** -1.65%
Qualcomm reported disappointing earnings despite higher revenues that were driven primarily by the mix of higher-end chipsets and higher priced data capable (web browsing, text messages, etc) devices.

The company said it saw “healthy demand” for 3G as CDMA-based device shipments in the quarter were at the high end of its expectations.

Qualcomm did not issue earnings guidance “due to the volatility of financial markets and the impact it has had and may have on our investment portfolio and net income.” They did, however, provide revenue guidance for their second fiscal quarter that translates to a year-over-year revenue decline between 6 and 14 percent.


Eli Lilly (LLY)** -3.03%
Eli Lilly reported earnings that topped expectations and reaffirmed its outlook for 2009. Revenues were basically flat, but fell shy of consensus estimates.

The company said it expects volume growth in sales again in 2009, driven by Cymbalta, Alimta, Cialis, Humalog and the anticipated launches of prasugrel, as well as the Elanco animal health division. However, the negative impact of weaker foreign currencies and the impact of generic competition in certain markets for Gemzar are anticipated to partially offset these positive impacts.



Peter Lazaroff, Junior Analyst