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Wednesday, October 29, 2008

Afternoon Review

Procter & Gamble (PG) posted better profits that expected and widened the lower end of its earnings target to $4.15 to $4.25 from $4.18 to $4.25, due to volatility of the energy and commodities market.

Net sales for 3Q increased nine percent to $22 billion. Price increases added three percent to net sales. Favorable foreign exchange contributed five percent to sales growth. Organic sales increased five percent in 3Q. The household care segment (the largest segment of the company) had 10 percent sales growth, and net sales in the beauty segment also increased by 10 percent.

Operating margin was down 60 basis points due to a commodity-driven decline in gross margin which more than offset lower SG&A (selling, general and administrative) expenses as a percentage of sales. Gross margin declined by 240 basis points to 50.5 percent as higher commodity and energy costs were partially offset by the impact of prices increases and manufacturing cost savings. SG&A expenses were down 180 basis points primarily scale leverage, overhead productivity improvements, and the positive impact of foreign transaction gains on working capital balances caused by strengthening of the U.S. dollar late in the quarter.

PG’s results solidify their reputations as a company whose earnings remain consistent in a slumping economy, since consumers rely on their products (click here to see a list of all the PG brands). To lure shoppers into buying more-expensive versions of items, rather than generic brands, PG introduces new styles of products (which are often very similar to old styles, but have different packaging).

PG fell 3.54 percent today.

Consumer staples Kraft (KFT) and Kellogg (K) also posted positive earnings today.
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Garmin Ltd (GRMN) missed earnings estimates and lowered their forecast; however, the forecast was not lowered as much as expected. 3Q revenue climbed 19 percent, but profits fell 12 percent because of costs related to the acquisition of some European distributors. Competition with Amsterdam-based TomTom NV has forced GRMN to cut prices, and the financial crisis is curbing demand for personal navigation devices.

GRMN had strong revenue growth in Auto (21 percent), outdoor/fitness (35 percent), and aviation (9 percent) segments, but revenues declined 8 percent in the marine unit. Auto unit now represents 72 percent of GRMN’s business. North American sales grew 21 percent, Europe sales rose 9 percent, and Asia Pacific revenues fell 21 percent.

GRMN said their new smartphone remains on track for launch in the first half of 2009 (the release was originally planned for Fall 2008, but was pushed back earlier this year).

CEO Min Kao said GRMN is scaling back operations “to better match current business conditions” and will make changes to inventory that will allow them to reduce inventory levels by $150 million by the end of the year. The company also plans to increase advertising spending.

GRMN advanced 2.43 percent today.
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Pharmaceutical companies fell after a closely watched annual forecast from IMS Health Inc. said sales in the U.S. (the world’s biggest market) will grow far less than originally forecast this year and are in for meager growth next year as economic turmoil and a lack of new products take their toll.

IMS now expects drug sales to rise just one to two percent this year and next, compared to their prior 2008 forecast of four to five percent sales growth. IMS attributes is weakening sales outlook to Americans visiting their doctors and filling prescriptions less in light of economic uncertainty, fewer new drug discoveries, and fewer medicines being approved by the FDA due to heightened safety awareness.

Earlier in this decade, the U.S. accounted for 40 to 50 percent of the growth in global pharmaceutical sales each year. Next year, the U.S. will account for just 9 percent, IMS forecast in its report, as the industry devotes more attention to emerging markets.

Insurers also are hurting sales by not quickly covering new drugs and by pushing consumers and doctors toward low-cost generic drugs. IMS also expects a slowdown in generic drug sales because intense competition among generic-drug makers in the U.S. and Europe is driving down prices. IMS predicted the global generic market will grow by five to seven percent next year, down from double-digit growth in the past.
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This DealBook article reviews the debate over mark-to-market accounting (or fair value accounting), as the SEC held a roundtable to discuss the pros and cons of the accounting standard and whether the current standard could be improved.
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Bloomberg reports that Fannie Mae will write down about $20 billion of assets due to the reduced value of deferred tax assets, which increases the likelihood of a cash injection from the U.S. Treasury.
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Peter Lazaroff, Junior Analyst

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