JOYG closes at 95.24 +5.13(5.69%)

At the closing bell, JOYG climbed 5.13(5.69%) to 95.24. Despite poor US manufacturing results, industrial companies have seen excellent results in the last week and a half. Joy Global’s recent success can be attributed to their acquisition of Letourneau Technologies, which was finalized on June 22(blogged on May 16).

As reported in the release of JOYG’s 2-Q results, China’s stockpiles of coal touched a yearly low in April, which has created a shortage for the coming summer. Also, the effects of major earthquakes and droughts in Asia have created a reduction in the usage of Hydro generation and nuclear generators. This should bode well for coal demand and production. In the 1-Q of 2011, US coal exports rose 49% to its highest level of exports since 1992. The industry witnessed a 160% increase in steam coal demand, in the same period.

-Jim

CAT Bounces Back

Since June 15th, Caterpillar, Inc. has surged nearly 12% to $106.46, a price not seen since mid-May.  This latest run reflects the flash of confidence investors are showing and their willingness to seek riskier assets.  Although CAT released their plan to invest $120M into a factory and hire over 200 employees, it is believed that this run was not specifically related to any news from the company.  CAT is currently approaching their target price of $108.74 and will be closely monitored in the coming days.

Jeremy Pellizzari

Nike 4Q Review

Nike, Inc. reported 4Q results after the close on Monday and held an investor conference today. The company reported quarterly EPS of $1.24 versus street expectation of $1.16 and our modeled $1.09. 4Q2011 net revenues were $5.7bn, a 14% increase from last year and greater than the 9% analyst consensus. Gross margin, as expected, decreased 310 basis points due to increased inflation and sourcing costs. Full year revenue was $20.8 bn. 7.5mn shares were repurchased during the quarter for a total of $607mn.

Top-line performance was driven by 21% growth in the North American market, 16% in the Greater China region and 19% in Emerging Markets; partially offset by a 1% decline in Central/Eastern Europe and -26% in Japan. Inventory increased 33% on a year-over-year basis, which management commented was due to early summer shipments. Total futures orders, a key determinant of upcoming demand, were up 12% on a consolidated basis versus the expected 9%.

CEO Mark Parker commented during the investor presentation today that “Nike holds more than twice the number of invention patents than its closest top 5 competitors combined.” Last year, Parker stated that a company-wide goal was to report net revenues north of $27bn by FY2014. During today’s conference, he not only stated that they were well ahead of meeting that mark, but also revised the guidance up to $28 to $30bn.

Shares of the stock surged over 10% during the day. Notably, the higher than expected top-line growth was more than enough to offset the significant decline in gross margin. Additional pressure on gross margin continues to be the major risk going forward, as any major deceleration in sales would quickly flow through and affect the bottom-line. Nike is well positioned within the large emerging markets and retains several competitive advantages, solidifying its position as a growth story.

-Ian

Endo Pharmaceuticals (ENDP) Court Ruling

Endo Pharmaceuticals (ENDP) dropped 1.8% today after a U.S. federal court ruled unfavorably in a case regarding the pain-relief patch Lidoderm. The firm has been in litigation with Watson Pharmaceuticals (WPI) over Watson's potential patent infringement. Watson has been attempting to market a generic version of Lidoderm, a product which comprises approximately 30% of Endo Pharmaceutical's revenues. Although the actual patent-infringement trial will not begin until February 2012, the court sided with Watson's interpretation of the Lidoderm patent, causing shares of WPI to rise 4.2%, and shares of ENDP to fall 1.8%.

It is my view that the court ruling will not have a significant impact on ENDP. Although Lidoderm is an important part of Endo Pharmaceuticals drug portfolio, with 30% of net revenues, its importance to the firm has been diminishing over the past few years. At one point the drug represented 60% of revenues, but the proportion has been decreasing as the firm has continued to successfully diversify its product line-up. In addition, the court ruling does not absolve Watson Pharmaceuticals from the patent-infringement accusation. Whether or not ENDP will actually face generic competition will not be decided until February 2012. With Lidoderm's impact weakening, and Endo Pharmaceuticals strong prospects in the tamper-resistant Opana, the ruling should not pose a significant threat to the firm or our investment.

-Ryan M. Kennedy

Rambus Inc. v. Micron Technology Inc

Today the stock price of Micron Technology has dropped almost 4 % on the news that California judge will not impose bad shredding rulings on Rambus, Inc. Last month, the U.S. Court of Appeals for the Federal Circuit found Rambus was wrong to shred hundreds of boxes of documents relevant in two patent infringement lawsuits it filed. However, this time,  jurors will not be told by the court that Micron have already proven that the chipmaker shredded documents as part of its legal strategy, Instead, Hynix and Micron will have to present evidence on that issue. Rambus is suing Micron and Hynix for $4.3 billion and according to California laws, this amount might be tripled. 

In the light of these events we will be closely monitoring Micron, as the trial progresses.

-Vlad

Ford's Mid-Decade Outlook Calls for Aggressive Expansion

On June 7th Ford announced its mid-decade outlook. They expect the following:

• Overall vehicle sales to increase by 50% to about 8 million  -- from 5.3 million in 2010
• Global Automotive operating margins will increase to 8 to 9 percent from 6.1 percent in 2010, with operating margins in North America by the mid-decade in the 8 to 10 percent range
• Capex will average about $6 billion annually through mid-decade, an increase from the $3.9 billion in capital spending in 2010
• They will pay down approximately $6.6 billion in debt bringing their total automotive debt to about $10 billion, down from $33.6 billion in 2009 
• The company expects to return to investment-grade in the near-term, and resume paying dividends
• The company plans to triple its electric vehicle capacity between now and 2013, going from 35,000 EV sales yearly to more than 100,000 come 2013

F plans to achieve these milestones by continuing to make progress on its Ford One plan.

By 2014, F plans to increase its global product portfolio by 140% from 2009 levels. Based on current trends the company expects 55% of its totals sales to come from small cars by 2020, with nearly a 32% contribution from the Asia-Pacific region. The company also expects to drop vehicle prices by $1,000 to $2,000 in emerging markets, in order to meet customer needs and win new buyers for its products, while maintaining top standards for quality, fuel efficiency, safety, smart design and value that customers expect. In the month of May China sales were up 14%, while China sales for rivals GM, Toyota, and Honda fell 2.7%, 35%, and 32% respectively. 

A key factor that is driving F’s mid-decade outlook is the expectations for growth of industry volumes. Ford is expecting industry volumes to grow to the 95 million to 100 million range by mid-decade, from the74 million in 2010.

Last year the company reduced its total automotive debt by $14.3 billion and the anticipated further debt reduction will help F secure an investment-grade debt rating helping it resume dividend payments.

Despite positive projections, healthy expansion plans, strong numbers, portfolio upgrades and debt reductions F shares fell as low as $12.88, down 3.52%, today as investors reacted to an Ohio court’s $2 billion judgment against the automaker late Friday in a class action lawsuit filed by a group of commercial truck dealers. The jury found that Ford had overcharged the dealers $800 million for commercial trucks. The $2 billion award factors in interest. Ford is appealing the ruling and said it is confident that the ruling will be reversed. The headline number appears very large, but it can take several years for any award to be dispersed, as well as the possibility that both sides could settle for a lower amount. Analysts are confident that a failure to win an appeal would be costly, but absorbable for F. No settlement or reduction in the amount awarded could erase about 47 cents per diluted share in Ford’s shareholders’ equity. However, upon further review, S&P equity analyst raised their 2012 EPS estimate by 1 cent to $2.19.

F’s initiatives have given us ample reasons to take a positive view on the company and we remain bullish on Ford in the long-term. F shares finished the day at $13.14, down 1.57%.


-Michael Biagi 
     

Morningstar Introduces New Ratings for Mutual Funds

http://www.marketwatch.com/story/mutual-funds-get-a-tough-report-card-2011-06-12?siteid=rss&rss=1

For those unfamiliar with Morningstar, it offers a 1-5 star rating system for mutual funds based off past performance for 1-, 3-, 5-, and 10-year time frames and is highly regarded in the industry by both individual and institutional investors alike. Previously, Morningstar did not offer any forward-looking analysis. Today, they announced a new outlook system similar to the outlooks given by ratings agencies such as S&P or Moody's. Funds will be assigned a positive, neutral, or negative outlook based off of analyst recommendations.

This development will add an entirely new dynamic to analyzing mutual fund companies. Funds with better outlooks will likely be more attractive to prospective investors, thus improving (or conversely, worsening) organic inflows. Depending on the frequency of outlook changes, this change could greatly increase the volatility of an already-volatile industry. The specifics of how Morningstar will use the "Five Pillars" - process, performance, price, people, and  parent - are yet to be seen, but it will certainly be interesting to see if/how it will influence fund managers and their investment strategies.

We sold out of TROW at our last conference call, so we currently do not have any direct exposure to the industry. I will stay on top of this as more information becomes available. If it looks like TROW will materially benefit from the new ratings, I will reconsider a position.

-Dan