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Tuesday, February 10, 2009

Principal Financial Group (PFG) -29.59%
Principal Financial earnings (reported after the closing bell yesterday) beat forecasts, but unrealized investment portfolio losses were substantially worse than expected, raising concerns the company may need more capital.

Gross unrealized losses on corporate debt widened to $5.1 billion from $2.8 billion, driven by declines in holdings of banks, insurers and industrial companies. Unrealized losses, which don’t affect net income, are watched by regulators and rating firms to gauge financial strength.

It was no surprise that Moody’s lowered its outlook on Principal to negative saying, “the company’s pension and asset management businesses are highly sensitive to equity market risk, and to the weakening economy. This, together with additional asset impairments, will continue to depress earnings in 2009.” On the other hand, Moody’s admits that “the ultimate economic losses from Principal’s investments are likely to be significantly less than current market values suggest.”

Those who rely on book value for valuing investments must be disgusted. The increase in unrealized losses of about $16.08 a share resulted in a decline in the company’s book value (which is basically a measure of all its assets if the company was liquidated immediately) to $7.45 a share from $19.56 a share a quarter earlier, and $26.55 a share a year ago.

Also hurting shares was the lack of visibility in the Obama administrations financial bailout plan and the realization that insurance companies are unlikely to get near term aid.


FedEx (FDX) -6.52%
While most companies looking at Washington to see how the stimulus plan shakes out, FedEx faces the return of a bill that could escalate a lobbying war with organized labor and rival United Parcel Service (UPS).

The legislation contains a provision that specifically targets FedEx’s and its ability to keep more of its express delivery employees from organizing. Without getting into too much detail, FedEx would lose its rights to bargain under the Railway Labor Act if the bill succeeds. As a result, the company could no longer block FedEx Express workers from organizing at a local level.

UPS, founded as a ground-based courier, has not enjoyed the same treatment as FedEx, because the original exemption covers railways and airlines. FedEx was founded as an airline. UPS has been pushing for the exemption to be scrapped for many years.

With the exception of the pilots’ union, FedEx has been very successful at holding off unions. The risk of unionization would increase significantly if FedEx Express was moved out of the Railway Labor Act.


Cisco (CSCO) -4.75%
Cisco’s surprisingly large $4 billion debt sale on Monday follows a string of successful efforts just in the past five weeks to tap the market for corporate debt. The size of the offering and the relatively low-risk premiums attached to the bonds indicate that investors are hungry for debt from highly rated companies.

While Cisco has about $29 billion of cash and investments and roughly $6 billion in debt, only about $3 billion to $4 billion of its cash is held in the U.S.

Cisco said it would use the proceeds of the offering to bolster its domestic cash position for general purposes that may include stock buybacks, debt repayment, acquisitions, investments, capital expenditure and advances to subsidiaries. Many viewed Cisco’s debt offering as a sign that an acquisition is coming.

My feeling has long been that EMC would be a good fit for them. During their conference call last week, Cisco alluded to virtualization software, cloud computing or data center technology as areas of interest – all areas that EMC could provide a boost.


Intel (INTC) -5.57%
Intel announced a $7 billion investment over two years in new manufacturing facilities in the U.S., which it says will help safeguard 7,000 high-wage highly skilled jobs in three states.

While most chipmakers are reducing spending on production capacity, this will be Intel’s largest ever investment for a new manufacturing process, which also represents an acceleration of its move to 32-nanometer technology, allowing it to build faster, smaller chips that consume less energy and cost less to produce.

The company also said it plans to initially use the 32-nanometer process to create chips for use in mainstream desktop computers and laptops. In the past, Intel has often started by using new production recipes to make chips for high-performance desktop PCs or server systems, products that command higher prices and profits.

This should not only allow it to extend its lead in PC microprocessor technology over its rival Advanced Micro Devices, but it will also help it to achieve faster penetration of other markets such as embedded devices and cell phones.


Quick Hits

Peter Lazaroff, Junior Analyst

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