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Thursday, October 30, 2008

Afternoon Review

Harris Corporation (HRS) +4.32%
HRS reported earnings that beat estimates after yesterday’s closing bell. The company reported that revenue during its first quarter of fiscal 2009 increased 11 percent and net income rose 18 percent. Double-digit organic revenue and earnings growth was a result of rapidly expanding international sales. Additionally, the company ended their first quarter in excellent financial position with $345 million in cash, no long-term debt maturing until 2016, and a new five-year $750 million revolving credit facility.

Highlighting the earnings release was the RF Communications segment, which makes military and law enforcement radios, increasing revenue 31 percent thanks to successful new products and new markets. International revenue growth accelerated and represented over 35 percent of total revenue in the quarter, compared to 27 percent of revenue for all of fiscal 2008. International revenue growth is expected to remain strong throughout fiscal 2009 and beyond, as U.S. allies implement defense communications modernization programs.

HRS reconfirmed its earnings guidance for fiscal 2009, with revenues increasing by 8 to 10 percent.

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Harsco Corporation (HSC) +12.70%
HSC earnings beat expectations as 3Q sales increased 13 percent to a record 1.04 billion.
Solid 3Q number were a result of improved results in the Middle East, Asia-Pacific and North America, more than offsetting weaker performance in Europe. Double-digit organic growth drove fantastic sales number across all business segments. Higher than expected production cuts by steel mill across the globe led to declining margins in HSC’s Mill Services segment, particularly in September. HSC expects steel production to begin to return to more normalized levels in the later quarters of 2009.

The company announced a number of measures to reinforce 2009 performance in the face of “enormous uncertainty and anxiety throughout the world.” HSC is accelerating cost reduction actions, which will result in a restructuring chare of approximately $0.17 a share in 4Q, but will save $30 million annually. The reduction to be realized in 2009 is about $0.25 per share. The company is also significantly reducing growth capital expenditure in 2009 by approximately $150 million from 2008 with the intention of using this discretionary cash for share repurchases and targeted acquisitions. In addition, HSC is redeploying equipment from slowing markets to new projects in such strategically important areas as the Middle East and Africa, India, China, and several other key countries.

HSC lowered its full-year 2008 guidance, but this should be viewed as a positive because they are taking many restructuring charges in their 4Q to insure they hit the ground running in 2009.
HSC repurchased approximately 1.1 million shares since the beginning of the year, including close to 755,000 shares in 3Q. Approximately 5 million shares remain under HSC’s share repurchase authorization.

The company’s balance sheet is very health and should have no difficulties maintaining their dividend (which as of now yields 3.38 percent).

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Curtiss-Wright (CW) +6.42%
CW beat earnings estimates despite the Boeing strike, delays on the Eclipse and Boeing 787 programs, and foreign exchange losses associated with the VMetro acquisition.

Sales growth of 10 percent in 3Q was generated by solid organic growth across all segments. Higher operating margins were realized in all three of CW’s segments. The increase in both organic operating income and margin was largely due to higher sales volumes, improved profitability on several long-term contracts, and reduced R&D costs.

Defense programs continue to show growth and CW’s commercial markets remain strong, specifically the commercial nuclear power market, which CW expects to continue growing at a rapid rate. CW lowered its 2008 guidance, citing dilutive effects of the VMetro acquisition, build-up of inventory due to program delays and the Boeing strike, and build-up of inventory in CW’s oil and gas market for anticipated orders that have shifted into 2009.

Record backlog of $1.7 billion indicates continuing success of CW’s products and programs.

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Mylan (MYL) +17.05%
MYL, the biggest U.S. maker of generic drugs, reported 3Q profit before one-time items that was more than double the average analyst estimate, according to Bloomberg data. MYL said profit gained on the sale of blood pressure drug Bystolic and revenue from acquisitions. The economic crisis has so far had little impact on the underlying demand for MYL’s generic products.

MYL paid more than its own market value for Merck KGaA’s generics business last year to increase manufacturing capacity and reach fast-growing European markets. The unit contributed more than half of net revenue, which doubled.

MYL increased its forecast for 2008 earnings to the range of $0.64 to $0.67, from $0.47 to $0.53.

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Alliant Techsystems (ATK) +2.33%
ATK said quarterly earnings rose 27 percent, which exceed expectations, and announced full-year profit will be higher than their original forecast. Increased sales of commercial and military ammunition drove sales thanks to strong demand from law enforcement and international markets.
Sales and profit rose at ATK’s armament and mission systems groups, but declined at the space division. Space revenue declined on reduced work on the Minuteman II missile program and delays on the launch abort system being developed for the new Orion spacecraft. Armament group sales gained 19 percent lifted by ammunition demand and the mission systems group boosted sales 2.5 percent on military rocket motors.

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ExxonMobil (XOM) +0.54%
XOM said 3Q profit jumped 58 percent, exceeding analyst estimates, as record crude prices made up for the largest drop in output in at least a decade. Earnings from oil and gas wells alone were higher than XOM’s total profit a year earlier, even as output fell 8.2 percent, the most since at least 1997. Spending on drilling rigs, refinery expansions, and new gas plants may jump to $30 billion annually in the next five years – a 20 percent increase from their March estimate.
Oil and gas output will increase in 2009, in part because of a new liquefied-gas project in Qatar.

XOM’s ratio of market value to crude and gas reserves is the highest among the world’s 10 largest oil companies. XOM trades at about $16 per barrel of oil-equivalent reserves, 60 percent above the average for its peers.

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In news outside of earnings reports…

Emerging market stocks climbed out of a bear market after surging more than 20 percent in three days, as the U.S. agreed to pump as much as $90 billion into Brazil, Mexico, and South Korea and the International Monetary Fund approved an emergency loan program. A 20 percent gain in a stock index is the common definition of a bull market. Emerging markets rally was boosted further by a jump in the price of commodities that sustain many nations. Crude oil rose above $70 a barrel for the first time in a week.

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With Procter & Gamble, Kellogg, Kraft, Colgate, and other consumer product companies reporting strong earnings due to price hikes, it is not surprising to see that grocery chains are resisting any further price hikes. The Wall Street Journal ran this interesting article today on the topic.

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Peter Lazaroff, Junior Analyst

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