Afternoon Review

The government is expected to invest up to $250 billion in the banks via preferred stock, with about half of that going to nine major banks. The FDIC will temporarily provide unlimited insurance on non-interest bearing accounts, bringing the U.S. in line with guarantees offered by several European governments. The U.S. will also guarantee most new debt issued by banks for up to three years.

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Johnson & Johnson (JNJ) beat earnings estimates thanks to strong sales in their consumer-products and medical device divisions. JNJ reported 3Q sales grew 6.4 percent to $15.9 billion, and EPS increased 10.4 percent to $1.17. The improvement in the consumer segment is all the more impressive given the problems in the economy. Increased generic competition is slowing growth in JNJ’s pharmaceutical unit, but their diverse revenue base and robust research pipeline has the company optimistic about the future. JNJ boosted its full-year 2008 earnings forecast to a range of $4.50 to $4.53 a share, from a previous range of $4.45 to $4.50 a share.

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Intel (INTC) beat earnings estimates and met gross margin targets despite selling cheaper computer processors (Atom). INTC’s processors are a key component of more than 75 percent of the world’s PCs, making its financial performance an indicator of global technology demand. We will have to wait for INTC’s conference call to get more details.

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Johnson Controls (JCI) slid 6.98 percent after saying that full-year profit will fall as much as 16 percent as carmakers worldwide slow production. JCI’s CEO says he plans to leverage their strong financial position to wrestle away contracts from weaker suppliers, as well as making $950 million in capital investments during 2009 and hiring more sales staff.

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Boeing (BA) failed to reach an agreement with their machinist union in negotiations that have spanned six weeks. Analysts estimate the work stoppage is costing BA more than $100 million in lost revenue a day since they usually get paid upon delivery. New 787 Dreamliner, which is at least 15 months behind schedule and was supposed to fly for the first time next month, is expected to experience further delays. Job security is the main conflict between BA and their machinists, but BA feels that outsourcing is an integral part of their business strategy. BA faces the additional threat of a strike by its 21,000 engineers, who have likewise listed outsourcing as a chief complaint. Final talks begin October 28.

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JPMorgan (JPM) was left out of the financial rally and declined 3.05 percent. Investors may also be concerned about JPM’s next earnings report, which is scheduled to be release on Wednesday morning. A Citigroup analyst cut his estimates for JPM and suggested that future quarters could be weak: “We believe the near- to intermediate-term outlook remains challenged in light of higher credit costs in card and the retail bank, as well as the increasing likelihood of sustained lower revenues from JPMorgan’s capital markets business.”

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Principal Financial Group (PFG) gained 7.71 percent today and 49.07 percent in the last three sessions. Credit Suisse notes: “One positive for PFG is that much of its separate account/equity market related exposure does not have living benefits guarantee risks, since it is predominantly a 401(k) provider versus a retail variable annuity company. Thus the risks of asymmetrical earnings leverage, hedge breakage, and substantive capital charges in a declining market are less than they are for companies with large variable annuity franchises.” Part of the reason PFG’s earnings held up better than expected is because they didn’t take sizeable variable annuity DAC adjustments as some peers have done. With equity markets remaining very weak, it is possible that this will be a source of future earnings pressure.

Prepared by:
Peter Lazaroff, Junior Analyst