Weekly Roundup: IBM, GE, UNH, JCI, RJF

Tough week for equities, which are now on a 4.9% skid. Regulatory overhaul of U.S. financial institutions and speculation that China will rein in bank lending were in the spotlight this week. Several companies reported earnings that beat expectations, yet investors wouldn’t bid up prices – it’s fair to say many of those release quarterly results were priced for perfection. Here are some of the Approved List companies that reported earnings this week and their weekly gain/loss performance.

International Business Machines (IBM) -5.81%

• IBM reported solid fourth quarter results, but the fact the stock traded lower is testament to the view that all the good news is priced in.
• Although IT spending appears to be improving, customers’ appetite for expensive IT equipment remains weak.
• IBM’s largely counter- cyclical portfolio and more limited services margin expansion should be partially countered by improving revenue growth in 2010.
  

General Electric (GE) -0.21%

• Fourth quarter results continued the stabilizing process with better-than-expected cash flow, improved orders, and declining nonperforming assets.
• There are two ways to look at GE earnings. Optimists are quick to acknowledge the earnings beat and $16.6 billion in cash from operating activities in a difficult year. Pessimists would describe the results as tax-driven and of low-quality.
  

UnitedHealth Group (UNH) -0.48%

• Better-than-expected fourth quarter capped a solid year. Quarterly and full-year revenues increased by 7%, while operating margins declined on business mix changes and lower investment income.
• Prescription Solutions, the firm’s pharmacy benefit manager, was the star performer with full-year operating income increasing 90%. UnitedHealth is the least likely of the managed-care organizations to consider divesting its PBM.
• 2009 medical cost ratio was slightly higher than a year ago, but the firm had lower administrative costs as a percentage of operating revenue. Medical cost ratio was better than most peers, which is telling of UnitedHealth’s strong competitive position and sound understanding of underlying cost trends.
  

Johnson Controls (JCI) +0.38%

• Auto parts and building-systems specialist, JCI, reported record fiscal first quarter earnings thanks to spending on improving education and government buildings.
• School building projects had been stalled while waiting for government money, but projects are now being funded through bond issuance – a more traditional approach.
• The company raised its full-year profit guidance to reflect “cautiously optimistic” view on the auto sector and continued improvement in the building-systems division.
  

Raymond James Financial (RJF) +1.65%

• Fiscal first quarter profit fell 20% despite higher revenue and lower provisions for loan losses. Still, earnings beat analysts’ estimates.
  
• Nonperforming assets fell to 1.82% of total assets from 2.10%. With decent credit metrics and reserve levels, it seems like RJF will avoid the dilution that has plagued other banks that expanded aggressively over the past several years.
  

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Peter J. Lazaroff, Investment Analyst