Interview: Riversource Investments---Joy, David---Equity Strategist
>> news after the bell from agilent. let’s go toeb eb.
>> That's right, Lori. the company reports earnings after the bell. agilent fourth-quarter earnings per share, five cents, 38 cents per share on an adjusted better as analysts expected 11 cents. 37 cents. the company says it is remaining comfortable with its fiscal year 2006 forecast, also saying it will buy back up to $2.7 billion in shares, echoing what we’ve heard from intel and time warner, boosting share buybacks. agilent after the close saying it will buy back up to $2.7 billion of shares at prices between $32 and $37. keep in mind, shares up 37% so far this year. the company is the biggest maker of scientific testing equipment and keep in mind it has been exiting the chip-related business.
>> a flurry of reports including c.p.i., p.p.i. and retail sales are due tomorrow and wednesday. how’s the market setting up ahead of the data and will we see a year-end stock market rally? david joy with riversource investments joins us from boston with his outlook. welcome, david.
>> thank you.
>> let’s start with the economic data points. which reports will have the biggest impact on the market ?
>> i guess it’s going to be the core numbers for both c.p.i. and p.p.i. we’ve been lucky so far that we haven’t seen any spillover of the headline pressure into the core numbers and i think that’s generally what’s expected this time around. i would say, however, that i think the markets are a little bit vulnerable to the possibility of some bad news there. but that’s not our expectation. but it will keep the markets on edge until we get beyond them.
>> the economists are forecasting the p.p.i. and c.p.i. numbers that might suggest higher prices are passed along to the consumers. last week we had evidence of that can kimberly-clark and kraft announcing product price hikes. how will the market react if we see higher consumer prices?
>> i think it will depend on the level. let’s say, expectations are running roughly .2% at the core level for both p.p.i. and c.p.i. if we got .3%, i think it would be mostly overlooked. if it was higher than that, i think the markets would be a little unnerved because it would be the first signs it is starting to creep into the core level so there is a line of demarcation.
>> let’s talk about retail sales. the latest round were healthy. do you think consumers are used to higher gas prices and how will that impact the holiday season?
>> i’m not sure they are used to them. i think consumers are still buying―by and large expecting energy prices to come back down. they’ve been conditioned to that over the years and with the moderation we’ve seen in the last couple of weeks, i think there is a lingering expectation that prices will come back down. and they have, indeed, if you look at unleaded gasoline futures, down 30% this quarter. but i read a slightly unnerving report recently that particularly in used car lots, s.u.v.’s are once becoming the most popular vehicle of choice. so i’m not sure consumers are quite prepared for the higher prices ahead that we expect, particularly once the weather gets cold.
>> exactly. what kind of crunch on consumer discretionary spending will home heating bills create?
>> that’s the real question. i think if and when consumers become used to the idea that higher energy prices are, in fact, here to stay, that’s when we expect them to modify their behavior. we have consumer spending slowing down this quarter and in response to your earlier question, i think the holiday spending season is going to be ok, but modest and then as we get into the first half of next year, we have consumer spending falling even more than that so it looks as though, to us, the g.d.p. is going to come in below 3% in the first half of next year, all attributable to a slowing consumer sector. >> does any of this encourage the fed to slow down sooner rather than later?
>> i would guess clearly they’re going to raise rates in december. my guess is that they will raise them again in january. of course, this will be data-driven. if the data tells us the economy is slowing of its own volition, and they don’t need to go further, they’ll respond to that. but you also have, i think, the interesting dynamic of mr. bernanke taking over and wanting to establish his credibility to some extent so he may be predisposed to raise interest rates simply to send a message to the market , even if the data is coming in as it has so it’s an interesting time and i think we’re at a critical juncture for monetary hisicy and its implications on the consumer.
>> i’m curious for your outlook for the s&p 500 by the end of the year? >> it seems as though the market wants to go up. it has been clearly propelled by moderating energy prices and as a result, the fact that longer term interest rates have more or less plateaued around 4.6%. if we get good inflation numbers and we don’t get any negative surprises between now and then, i think we can hold on to these recent gains, maybe add a little bit from here but i’m not sure i see a real catalyst to the upside.
>> david joy, riversource investments, thanks for joining us. stay tuned as “after the bell” continues.
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Interview: William Blair---Lane, Mark---Analyst
>> a.i.g., a 10-q report with the securities and exchange commission, headlines released right now. the company reporting third-quarter earnings per share of 65 cents. 68 cents on an adjusted basis. the company saying its assets at september 30 were $843 billion. the company saying that the third-quarter net income number includes net catastrophe-related losses of 60 cents a share, equalling $1.75 billion. the company says fourth-quarter losses from hurricane rita will include costs of $400 million. in after-hours’ trading, the shares down .3%. keep in mind, we have the information coming out right now but it was last week a.i.g. said it would restate earnings for a second time to fix errors in derivatives and income tax filings. at that time, a.i.g. said net income for the quarter would be about $1.7 billion because of $1.6 billion in costs from hurricanes katrina and rita as well as other catastrophes. as for those a.i.g. shares, keep in mind, through the close today, up 2.9% so far this year. the company, it has ousted its chief executive, hank greenberg and pledged to resolve a securities fraud suit by new york attorney general eliot spitzer. recapping headlines, third-quarter adjusted net income coming in at 68 cents a share. sending back to you.
>> thank you very much. we want to continue our analysis of a.i.g.’s numbers out after the bell with mark lane with william blair and company. hi, there, mark. can you hear me?
>> i can.
>> let me get your reaction to the numbers.
>> the details are still coming out. what we’ve been able to tell so far is just top-line numbers at this time, including, within their general insurance business, which is their property casualty operations and premium growth, there, seems a little bit light of expectations, probably due to continued competitive conditions within the commercial property casualty market although, given all the recent record catastrophe events in the past civil weeks, i’m not sure the market ‘s too focused on what happened in the third quarter. we weren’t look for surprises this quarter. the company held an analysts and investors meeting at the end of september, reannouncing the bottom-line number last week showing results were in line to slightly ahead of expectations on an underlying basis so we’ll be focused on quality, top-line growth in property casualty, want to see the foreign life business continue to gain momentum. they’ve had problems in the domestic life business, some as a result of the regulatory fallout so we want to see if those results bounce back after issues in the first half.
>> how critically are you looking at the catastrophe-related loss of 60 cents a share. if you were to strip that out in the bottom line third quarter, what do the results tell you about a.i.g.’s performance, really, amid the scandals and restatement and what-not?
>> the catastrophe losses overall are very, very manageable and very manageable for a company with the size of a.i.g. if we adjust for the catastrophe losses, the underlying numbers that were preannounced last week seem to be in line, if not better than underlying expectations and really there’s only been a few smaller businesses that have been impacted by the regulatory investigations. the domestic life business, we’ve seen issues with production there. also in of the more credit sensitive businesses, including the institutional fixed annuity business as well as derivatives business but the total of those businesses contribute less than 5% of earnings so earnings have actually been quite strong year to date and we have not seen any material impact on a.i.g.’s bottom-line results from the regulatory investigation.
>> we’ll have to leave it there, mark lane from william blair and company. thank you. breaking news, now, target corporation, second largest u.s. discount retailer, said november comparable store sales may fall below its forecast of 4% to 6%. let’s check shares in extended trading, target shares down 4.1%, trading at $56. the company says sales for the period will be below our planned range based on data for the first two weeks of november. that word from target in a recorded call today. we’ll have more on the story as it develops. in the meantime, deals and potential deals on this monday. knight-ridder will consider a sale and strategic alternative. the publisher hired goldman sachs to help evaluate strategic options and koch industries will purchase georgia-pacific for $13.2 billion in cash. the deal catapults koch industries to the largest closely held company in the united states. bloomberg’s brett gehrig is ahead with the georgia-pacific story. also, host marriott will buy 38 properties from starwood hotels worldwide for $4 billion. the stock at the close, shares of host marriott down 4.5%. the settling numbers as the market closed -- more, now, on koch industry’s deal to buy georgia-pacific for $13.2 billion plus debt. the transaction would be the biggest ever for koch. brett gehrig has the details.
>> chief executive officer charles koch is taking over a business threatened knee rising energy costs and rising lumber prices. international paper and smurfit are trying to cope by selling mills or assets. g.p.’s c.e.o. has spent the past five years transforming the company into one that relies mainly on consumer tissues. charles koch thinks he can squeeze more profit out of that business. he wrote a letter to georgia-pacific workers saying he reinvests 90% of earnings back into businesses to fuel growth. georgia-pacific competes with procter & gamble and kimberly-clark in the tissue business and is biggest plywood maker in north america and third largest maker of boxes. claudia shank with j.p. morganchase says the deal signals that private equity interest in the paper and forest products sector is alive and well. koch has annual revenue of more than $60 billion. in addition to assuming $7.8 billion in debt, koch is paying a 39% premium for g.p.’s shares. that kind of valuation could spark consolidation in the industry.
>> always when you have a deal in an industry, people begin to look around at the other players in the industry, it helps their stock. whether there will be another deal or not remains to be seen but whenever you have some consolidation, it makes people think about whether they should be part of that trend.
>> if the deal is completed, georgia-pacific will be able to focus on long-term profit growth rather than quarterly results. lori?
>> thank you. wal-mart posted its smallest profit gain in more than four years because hurricanes shut stores and climbing energy prices limited consumer spending. coldstream capital management chief investment officer said sales are holding up but earnings are not doing so well, because profit was cut by $40 million in expenses for hurricanes katrina and rita and wilma, which closed 10 stores. shoppers spurned unnecessary spending and stocked up on low-margin essential items such as groceries, which helped boost sales. third-quarter net income increased almost 4% to 57 cents a share from 54 cents a year earlier, meeting the average analyst estimates. revenue in the quarter rose 10%. u.s. same-store sales rose 3.8%.
>> it was good news. it was the smallest profit growth but a lot of that was baked in and i think people actually investors thought it would be far worse than it turned out. you had a lot of things going on with wal-mart, sales started slowing at the end of august. you had the hurricane and a little bit of inflation bubbling up, high energy prices.
>> chief executive h. lee scott is adding more fashionable apparel and upgrading stores as wal-mart loses customers to target. with a new line of clothing for 25 to 40-year-old women, wal-mart is reaching out to shoppers who avoid buying clothes from them. it’s added more expensive items including $1,000 toshiba notebook computers and flat-screen televisions. some question that strategy.
>> that can be risky. this company owns the low-income price point or the entry level price point. they sell more dry dog food than anybody.
>> wal-mart shares have fallen 7% this year compared with a 12% gain for target, the second largest u.s. discount retailer. of 26 analysts tracked by bloomberg, 15 recommend buying wal-mart shares, 10 suggest holding and one says sell. still ahead, third-quarter earnings season is coming to an end. we’ll get an outlook for 2006 with chief market strategist at river forest investment.
