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Ericsson Shares Plunge; Roche Earnings Disappoint; Bank of Canada Holds Steady; Domino's Doesn't Deliver; Intel Surprises
- Shares of Swedish telecommunication giant L.M. Ericsson (ERIC) , after the company announced that revenue and earnings would be far below analyst estimates – and even below earlier company guidance. Ericsson's American Depository Receipts (ADRs) dropped $9.60 each, or 23.45%, to close at $31.33, after the firm said that sales plummeted in its mobile network upgrade-and-expansion unit – one of its highest-margin businesses. Given that company Chief Executive Officer Carl-Henric Svanborg had issued very optimistic sales-and-profit forecasts as recently as a month ago, many analysts and investors are starting to question the leadership and business aptitude of the company's top executives.
- In another of several disappointing global business reports yesterday, Roche Holdings AG (RHHBY), the world's largest drugmaker, announced that its third-quarter revenue fell short of analyst estimates. Although sales did grow by $9.39 billion (11.1 billion Swiss Francs), that was well short of the increase of $9.64 billion (11.4 billion Swiss Francs) that securities analysts who follow the company had expected. In particular, the sales of two of its blockbuster drugs were far below projections: Roche said sales of its influenza pill, Tamiflu, appear to have peaked, while the sales-growth-rate of the breast-cancer drug, Herceptin, advanced at only an 18% clip, its lowest level in the past five quarters. Despite the sales shortfall, the company stood by profit forecasts from earlier this year, as they continue to focus on such higher-margin products such as Herceptin and Avastin, the first drug shown to choke off blood supply to tumors. Roche expects to continue testing them on other types of cancer and their use at earlier stages of the disease. Roche's U.S. ADRs dropped $1.83 each, or 1.99%, to close at $90.20.
- The Bank of Canada announced that it was holding its target rate for overnight funds at 4.5%. Strong commodity prices and continued worldwide economic growth have the Canadian economy advancing at a rate that's 2% ahead of expectations. Core inflation grew at a 2.2% rate in August, while consumer inflation, which had been above 2% since early spring, finally dropped below that level to just 1.7%. With the Canadian dollar's dramatic rise against the U.S. greenback, Canadian central bank officials expect exports to the United States to drop. And since the United States is Canada's largest trading partner, that drop in exports will continue to exert a drag on the economy. Strong household demand should partially offset this drag, which is why the bank sees economic growth of 2.65% in 2007 and 2.35% in 2008.
- The shares of Domino's Pizza Inc. (DPZ) plunged nearly 14% to a three-year low yesterday after the company said that the soaring costs of wheat-and-dairy products caused third-quarter profits to plunge 55%. Although the company's international sales and profits were the best since 2005 – rising more than 8% – the U.S. operations were crushed by soaring commodity costs, with wheat being the biggest culprit, Domino's CEO David Brandon said. Domino's buys over 5.5 million bushels of wheat, which has seen its price rise threefold this year. The company was also impacted by the 64% year-to-date increase in cheese prices, part of a big run-up in dairy prices being fueled by growing demand in China [For a Money Morning report outlining profit opportunities created by this demand in Asia, please click here. The report is free of charge]. These higher costs combined with a competitive business environment that forced Domino's to discount heavily to avoid losing business or market share. Shares dropped $2.27 each, or 13.71%, to close at $14.29 each.
- Japanese bank shares continued to slide yesterday on growing concerns that fallout from the U.S. subprime mortgage mess will continue to have a negative impact on their financial performance. The sell-off was sparked by remarks from U.S.-based Citigroup Inc. (C), which announced that U.S. consumer credit markets would continue to weaken this quarter as mortgage delinquencies accelerate. Takahiko Murai, the general manger of equities at Nozomi Securities, told Reuters that "we still do not have the whole picture of this, and more information will emerge as U.S. financial firms publish their results over the next month or so." Industry leader Mitsubishi UJF Financial Group Inc. saw its U.S.-listed ADRs lose 50 cents each, or 5.31%, to close at $8.91.
- Buoyed by demand for chips for notebook computers, Intel Corp. (INTC) yesterday reported a 43% increase in third quarter net income and substantially boosted its guidance for the fourth quarter. The microprocessor giant reported earnings of 31 cents a share, a penny better than analyst forecasts. Revenue for the third quarter was $10.1 billion, up 16%. Profit margins expanded to 52.4%, from 46.9% in the second quarter. Company President Paul Ortellini credited innovative products, growing worldwide demand and greater operational efficiency for the 64% year-over-year earnings increase. He also projected these trends will continue with higher sales and greater margins going forward. The earnings report was made after the close of regular trading, during which Intel shares slid 27 cents each, or 1.05%. However, in after-hours trading, the earnings surprise helped propel Intel shares higher by $1.31 each, or 5.14%, to $26.79. Shares on Intel were up sharply after hours. Advanced Micro Devices Inc. (AMD), Intel's main competitor, is expected to report a net loss of 62 cents per share, according to analysts surveyed by Thomson First Call, when it announces its earnings tomorrow (Thursday).
Contributing Editor Keith Fitz-Gerald, a brand-new addition to The Money Morning team, is one of the world's foremost experts on the Asian markets, especially China and Japan. A professional trader who works with qualified investors and institutions, Fitz-Gerald likes to do “boots-on-the-ground” research. In doing so, he’s established a deep intelligence network throughout Asia. He and his family split their time between Oregon, Austria and Japan. He writes regularly for Money Morning, our daily global news service. He’s also the new editor of The New China Trader, one of our VIP Trading Services. If you’d like to learn more about this VIP trading service, please click here. To subscribe to Money Morning, our popular and fast-growing free global investing news service, please click here. If you sign up for Money Morning, you will receive our free 6,000-word research report, ‘The Three Best Investments in Asia Today.’