Royal Bank of Canada Feels Subprime Pain; China Fire and Security Rings Up Record Earnings; Japan's NTT Dials Up Emerging Market Profits; McDonalds Puts U.S. Operations on Back Burner to Go Global
- The Royal Bank of Canada (RY), Canada's largest lender, announced yesterday (Tuesday) that it would take an after-tax charge of $160 million related to the markdown of subprime mortgage and collateralized debt obligations. The bank has a $1.03 billion exposure to these risky markets and the markdowns will represent about 33% of the total on a pre-tax basis. The Canadian bank said it also will be booking a charge of $80 million for rapidly rising costs it experienced during the quarter that were associated with its credit card loyalty rewards programs. Unlike many U.S. and European banks, however, the Royal Bank of Canada does not expect the charges to have a significant impact on fourth-quarter earnings. The bank will record a quarterly after-tax gain of $270 million as a result of a restructured relationship with Visa Inc. Royal Bank of Canada plans to make its final earnings for the quarter available on Nov. 30. Shares of the bank traded up $2.15 a share, or 4.12%, to close at $54.35, as investors appeared to welcome the news that the impact of bad debts will be minimal for the year's final quarter.
- China Fire and Security Group Inc. (CFSG) announced record third-quarter earnings and revenue, Reuters News Agency reported yesterday (Tuesday). Revenue increased 44.2% and net income jumped 186%. By concentrating on higher-margin proprietary products, gross margins at China Fire rose to 59.2%, also a new record. Sales were $11.6 million in the third quarter, compared to just $8 million last year. Earnings rose more than fourfold, from $1 million in last year's third quarter to $4.4 million this year. "We are pleased to report another consecutive quarter of record revenues. During this quarter our top three customers are from [the] iron and steel, power and petrochemical sectors," Brian Lin, CEO of China Fire and Security, said of the company's earnings report. In light of the record-breaking quarter, China Fire raised its full-year estimate. Previous net-income estimates of $14.7 to $15 million were boosted to a minimum of $16.6 million. Earnings per share should reach 60 cents on a fully diluted basis, compared to a previous range of 50 to 54 cents. Shares rose sharply after the report, climbing $2.44 each, or 17.88%, to close at $16.09.
- NTT DoCoMo Inc. (DCM), better known as NTT, said yesterday (Tuesday) it would be looking to invest between $5 billion and $8 billion in emerging-markets telecommunications companies as part of its effort to diversify away from the weak Japanese market. Earlier this week, NTT reported a drop in earnings of 33%, which it attributed largely to a weak economy and intense competition. In an interview with Dow Jones News, Toshinari Kunieda, a senior vice president and managing director, said that NTT's leadership believed that entering the fast-growing emerging markets where cellular markets still offer substantial first-time sales potential would allow it to grow revenue faster than in the crowded Japanese cellular marketplace. NTT DoCoMo hopes to see global revenue grow from $400 million this year to $1 billion over the next three years. While it is still the dominant mobile phone company in Japan, with a market share of 54%, rivals Softbank Corp. (SFTBF) and Corp. are growing much faster. NTT DoCoMo shares climbed 62 cents each, or 4.26%, to close at $15.16 in New York.
- McDonalds Corp. (MCD) announced yesterday (Tuesday) that it is reducing direct ownership of restaurants in order to focus on emerging-markets expansion, specifically India, Russia, and China, Reuters reported. The company - along with PepsiCo Inc. (PEP) and Yum! Brands Inc. (YUM) one of the globally focused U.S.-based stocks favored by Money Morning's investment experts - intends to sell 1,000 to 1,500 stores primarily in the United Kingdom, United States and Canada. Roughly $225 million of the company's $2 billion capital spending budget in 2008 will be directed at these markets. McDonald's plans to open 125 new restaurants in China, and another 25 to 40 in Russia next year. According to Chief Financial Officer Matt Paull, Russia is the most profitable country in the world for McDonalds on a per-restaurant basis. The company also reaffirmed its guidance for average sales and revenue growth of 3% to 5% worldwide and average annual operating income growth of 6% to 7%. "We are ready to maximize the opportunities created by the booming economies of high-potential markets like China and Russia. We will grow top-line sales while optimizing the ownership mix in our remaining markets. The level of cash we return to our shareholders will be substantial," Chief Executive Officer James A. Skinner said in a web cast presentation of the new strategy. McDonald's shares closed today at $57.10, up 6 cents each, or 0.11%.