Drug giant Merck & Co. Inc. (NYSE: MRK) reported third-quarter 2018 results before markets opened Thursday. The company reported adjusted diluted earnings per share (EPS) of $1.19 and revenues of $10.79 billion. In the same period a year ago, Merck reported EPS of $1.11 on revenues of $10.33 billion. Third-quarter results also compare to the Thomson Reuters consensus estimates for EPS of $1.14 and $10.88 billion in revenues.
On a GAAP basis, Merck posted EPS of $0.73, which includes acquisition- and divestiture-related costs, restructuring costs, a charge of $420 million related to the termination of a collaboration agreement with Samsung Bioepis (Samsung) for insulin glargine and certain other items.
Net income on a GAAP basis totaled $1.95 billion, while non-GAAP net income totaled $3.18 billion. Non-GAAP net income excludes $651 million in costs related to acquisitions and divestitures, $149 million in restructuring costs and $431 million in certain other items.
Pharmaceutical sales were up 5% year over year. Excluding currency exchange effects, sales were up 7%. The company’s Keytruda cancer drug posted a sales increase of 80% in the quarter, ringing up $1.89 billion in sales. Other cancer drugs, Gardasil and Gardasil 9, posted a 55% sales gain to $1.05 billion.
Merck’s board chair and chief executive, Kenneth C. Frazier, said:
We built on our strong momentum during the quarter and believe that Merck is well-positioned to continue creating sustainable value for shareholders and patients. Our focused execution is driving our operational results, with KEYTRUDA making a difference to cancer patients around the world. We are also continuing to advance our broad pipeline, including in oncology, vaccines, hospital and specialty as well as animal health. With this strong performance, we are highly confident in our portfolio, strategy and pipeline as demonstrated by our announced capital return actions today.
In its financial outlook statement, Merck narrowed and lowered its full-year adjusted EPS range from $2.51 to $2.59 to a new range of $2.41 to $2.47. The decline is the result of the $420 million charge related to the cancellation of the company’s contract with Samsung. On a GAAP basis, Merck raised its EPS forecast from $4.22 to $4.30 to a new range of $4.30 to $4.36. The revenue forecast of $42.1 to $42.7 billion was unchanged.
Analysts have estimated fourth-quarter adjusted EPS at $1.04 and full-year EPS at $4.29. Fourth-quarter revenue is tagged at $10.82 billion and full-year revenue at $42.46 billion.
Since the beginning of the year, Merck’s stock is up 25.4%, the second-best performer among the Dow 30 stocks.
Shares of Merck’s stock traded up about 1% in Thursday’s premarket, at $71.25 in a 52-week range of $52.83 to $73.49. The 12-month consensus price target on the stock was $77.93 before today’s report.
Wells Fargo & Co. (NYSE: WFC) has repented and turned away from a series of dubious business practices, it says. This did not stop the New York State Attorney General from savaging the bank as the state announced the settlement of a case that accused it of bad business actions. In the meantime, Wells Fargo is marketing to the public regarding its new and improved approach to customers.
The $65 million fine was due to a settlement over misleading investors about dubious operations. The announcement by the AG read:
Attorney General Barbara D. Underwood announced today that Wells Fargo & Company will pay a $65 million penalty following the Attorney General’s investigation into the bank’s fraudulent statements to investors in connection with its “cross-sell” business model, related sales practices, and the bank’s publicly reported cross-sell metrics.
The New York AG’s office also said other investigations of the bank will continue.
These sales practices were critical to charges by investors and government authorities that could keep Wells Fargo in court for years. The scandal cost Wells Fargo’s longtime CEO John Stumpf his job in 2016. He was replaced by Chief Operating Officer Timothy Sloan. Critics argue that Sloan should go as well since he held senior management jobs over much of the period during which the bank’s practices caused the investigations and the charges.
Wells Fargo’s campaign to improve its image has been backed by millions of dollars in advertising and promotions. In these, it has disclosed it past flaws and a portion of what it has paid in reparations. But at the core of the message is that it will “make things right, build a better bank, and earn back the trust of our customers, team members, and the American public.”
Recently the accusations against Wells Fargo have grown. It allegedly charges mortgage customers penalties they did not deserve. It improperly reposed cars from customers who had loans from the bank. It settled a securities fraud class action case for $480 million.
The bad news will continue to shower down on Wells Fargo. Its pitch to the public about its new practices rings hollow.
China was granted admission to the World Trade Organization (WTO) in late 2001 and since then the U.S. annual trade deficit with China increased from $83.0 billion to $375.2 billion in 2017. That increase has cost U.S. workers 4.14 million lost jobs due to the number of goods imported from China and added 780,000 jobs in U.S. jobs that produced goods for export. The net impact has been the loss of 3.36 million American jobs in the 16 years since China became a full member of the WTO.
The data were reported Tuesday morning in a new study from the Economic Policy Institute (EPI) titled “The China Toll Deepens.” EPI has been updating its research on U.S.-China trade and jobs since 2012. The EPI model estimates the amount of labor (number of jobs) required to produce a given volume of exports and the labor displaced when a given volume of imports is substituted for domestic output. The difference between these two numbers is essentially the jobs displaced by the growing trade deficit, holding all else equal.
The report’s authors, Robert E. Scott and Zane Mokhiber, offer this one-sentence outline:
As with our previous analyses, we find that because imports from China have soared while exports to China have increased much less, the United States is both losing jobs in manufacturing (in electronics and high tech, apparel, textiles, and a range of heavier durable goods industries) and missing opportunities to add jobs in manufacturing (in exporting industries such as transportation equipment, agricultural products, computer and electronic parts, chemicals, machinery, and food and beverages).
Every state and every congressional district in every state has lost jobs. The 10 states hit hardest were New Hampshire, Oregon, California, Minnesota, North Carolina, Rhode Island, Massachusetts, Vermont, Wisconsin and Texas. As a percentage of total state employment, New Hampshire lost 3.55% of its jobs while Texas lost 2.57%.
Based on total jobs lost, the five states hit the hardest were California (562,500 jobs lost), Texas (314,000), New York (183,500), Illinois (148,200) and Pennsylvania (136,100). The trade deficit hit the computer and electronic parts industry hardest, costing 1.21 million jobs over the period, or about 35% of the total.
In nominal dollars, the manufacturing trade deficit with China totals $320.8 billion, of which some $230.5 billion represents durable goods. Nearly all (99.4%) of growth in U.S. imports of Chinese goods is accounted for by manufactured goods.
Of the total 3.4 million jobs lost since 2001 related to trade with China, 74.4% (2.5 million) were manufacturing jobs.
The EPI report attributes the swelling U.S. trade deficit with China is to “China’s trade-distorting practices, aided by China’s currency manipulation and misalignment and its suppression of wages and labor rights.” Add to this the Chinese failure to ramp up demand for either imported or domestically produced goods and expanded foreign direct investment in China. The inevitable outcome was overproduction of goods like steel, renewable energy products (solar PV cells) and others that ended up being dumped on global markets, particularly the United States.
Citing prior research, the EPI study estimates that between 2001 and 2011, 2.7 million U.S. workers were displaced from jobs in exporting industries that paid an average of $1,021.66 a week to jobs that competed with imported goods (if such a job could be found) that paid an average of $791.14 a week. That works out to a direct net wage loss of $37 billion annually.
Indirect losses would push that total even higher. Again citing earlier research, the EPI study estimates that indirect, macroeconomic losses to U.S. workers without college degrees caused by growing trade with low-wage nations were about five times as large as the $37 billion in direct wage losses in 2011 from trade with China.
The futures traded lower again Friday morning as investors tried to balance yesterday’s relief rally. Prior to the big rally on Thursday, the S&P 500 had been down six days in a row. The one and only time it was down a seventh day in the past five years was right before the 2016 election, and while that statistic was avoided, we look to trade down big again today. The trend of buying the dips has not worked as well in 2018 as it has in prior years, and many investors have been considering how they want their investments positioned for the longer term.
24/7 Wall St. reviews dozens of analyst research reports each day of the week to find new investing ideas and trading ideas for our readers. Some of the top analyst reports cover stocks to buy. Other analyst calls cover stocks to sell or to avoid.
Additional color and commentary also has been added on some of these daily analyst calls. The consensus analyst price target data are from the Thomson Reuters sell-side research service.
These were the top analyst upgrades, downgrades and other research calls from Friday, October 26, 2018.
FirstCash Inc. (NASDAQ: FCFS) was raised to Outperform from Neutral with a $90 price target at Wedbush. That compares with the Wall Street consensus target of $94.14. The stock closed trading on Thursday at $74.94.
Goldcorp Inc. (NYSE: GG) was raised to Outperform from Market Perform at BMO Capital Markets. The 52-week trading range for the stock is $8.42 to $15.55. The consensus price target is set at $14.79. The shares closed Thursday at $8.49.
Gilead Sciences Inc. (NASDAQ: GILD) was downgraded to Neutral from Overweight at Piper Jaffray. The 52-week trading range for the biotech giant is $64.27 to $89.54, and the consensus price target is set at $87.11. The stock ended trading on Thursday at $68.62.
GrubHub Inc. (NASDAQ: GRUB) was added to the Conviction Buy list at Goldman Sachs. The 52-week trading range is a wide $58.14 to $149.35, and the consensus price target is posted at $137.23. The shares closed trading on Thursday at $96.48, down almost 12% on the day.
Hilton Worldwide Holdings Inc. (NYSE: HLT) was raised to Outperform from In Line at Evercore ISI. The 52-week trading range for the lodging giant is $63.76 to $88.11, and the consensus price objective is $85.22. The shares ended trading on Thursday at $85.22.
KKR & Co. Inc. (NYSE: KKR) was raised to Buy from Hold at Argus. The 52-week trading range is $18.74 to $28.73. The consensus price target for the firm is $31.33, and the shares closed Thursday at $23.51.
Raymond James Financial Inc. (NYSE: RJF) was downgraded to Neutral from Buy at Citigroup. The stock has traded between $73.74 and $102.17 over the past year. The consensus price target is posted at $107.75. The stock was down almost 5% in premarket action, after closing Thursday at $75.56.
SVB Financial Group (NASDAQ: SIVB) was raised to Buy from Neutral at D.A. Davidson. The 52-week trading range is $204.32 to $333.74. The consensus price target is $362.30, and the stock closed Thursday at $263.92.
Daniel Cullinane CPA
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2500 Plaza 5 25th fl Jersey City NJ 07311 phone 732-516-1648 fax 732-516-9778
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OCTOBEER NEWSLETTER 3
Copyright © Daniel Cullinane CPA.
Following the housing bust of 2007, the value of a foreclosed home in Denver dropped by 21%. Since then, that same home has appreciated in value by 116%.
While Denver is an extreme example, the value of a foreclosed home since the bust has grown 1.6 times faster than a typical home, according to a new report from online real estate firm Zillow.
Nearly half (45.5%) of the homes foreclosed between January 2007 and December 2015 were valued in the bottom third of all U.S. homes. Many of those homes were owned by the least wealthy Americans, and when they lost their largest single asset in the housing bust, they also lost the chance to regain that wealth as their lost homes quickly regained valued during the recovery.
According to Zillow’s report, values for the lowest priced homes fell farther, and more quickly, when the housing market collapsed. People who owned these homes were soon underwater — that is, they owed more on their mortgage than the home was worth.
Combined with job losses and longer periods of unemployment during the recession that followed the housing bust, foreclosed homeowners were forced to rent. That sent rents through the roof and made it nearly impossible for former homeowners to begin accumulating wealth again, whether through savings or buying another home.
These former homeowners missed out on the recovery. And what a recovery it was. Zillow notes:
To be sure, the recovery has been robust. Nationwide, previously foreclosed homes lost 42.6 percent of their value during the bust, but have since earned it all back and then some. Today, the median, previously foreclosed home is worth 0.1 percent more than it was during its pre-recession peak, a testament to the precipitous pace of home value growth over the past six years. Over the same time, the typical U.S. home value fell 25.9 percent – a much more moderate decline – and is worth 8.1 percent more today than it was before the recession. Throughout the recovery, the typical foreclosed home grew in value 1.6 times faster than the typical home nationwide.
The housing bust and recovery widened the gap between the wealthy and the poor in the United States. Zillow concludes:
Wealth and income inequality have been at the forefront of discussion as the nation climbs out of one of its greatest recessionary periods, and for good reason. The gap between the rich and poor in the U.S. worsened throughout the housing bust and foreclosure crisis that followed, as millions lost not only the roof over their heads, but the wealth – and the opportunity to potentially build more – that came with it.
The Zillow report on the housing bust is available at the company’s website.
Here’s our look at a recent report from the Federal Reserve Bank of St. Louis on how much of Americans’ personal wealth is tied up in their homes.
While firing an underperforming chief executive officer can help a company, sometimes the bad news is that more bad news is coming. This week’s firing of John Flannery as CEO of General Electric Co. (NYSE: GE) should put investors on alert that a breakup of GE is now more likely than it was even back when Flannery was conducting his own review of the company.
This potential breakup became more likely after the news broke that GE was booted out of the Dow Jones industrial average. But a new CEO only will create more of a belief that a breakup of GE is more likely. And when investors consider who is taking over at GE, they probably will consider the breakup case even further.
While there is a case that GE is better off as a whole entity and that separating GE’s various debt instruments from unit to unit would be difficult, there is the very serious notion that nothing else may work. What if Wall Street continues to treat the combined General Electric as a company named General Eclectic?
.Flannery bombed in convincing Wall Street that his strategy was going to turn GE around. Its new CEO is Larry Culp, who is only 55 years old. Culp previously served as chief executive officer and president of Danaher from 2000 to 2014, leading a transformation from an industrial manufacturer into a leading science and technology company. What does this tell you about GE as being an industrial manufacturing outfit?
If you look beyond the quotes in GE’s press release, the company noted that Culp effectively executed a disciplined capital allocation approach, and that he helped with a series of strategic acquisitions and dispositions and targeted investing in high-impact organic growth and margin expansion.
The GE announcement also noted that, under Culp, Danaher delivered strong free cash flow to drive long-term shareholder value and that Danaher’s market capitalization and revenues grew fivefold under his 14-year tenure.
Now break out the actual quote from Culp on assuming the CEO role:
GE remains a fundamentally strong company with great businesses and tremendous talent. It is a privilege to be asked to lead this iconic company. We will be working very hard in the coming weeks to drive superior execution, and we will move with urgency. We remain committed to strengthening the balance sheet including deleveraging. Tom and I will work with our board colleagues on opportunities for continued board renewal. We have a lot of work ahead of us to unlock the value of GE.
Also noted in last week’s news break was the turbines from the power business. GE said on Monday that it will take a noncash goodwill impairment charge related to the GE Power business and that the charge is likely to constitute substantially all the $23 billion or so tied to the unit. Also worth noting was the statement that the impairment charge is not yet finalized and remains subject to review, which means more charges may be possible (and less for that matter). Still, GE cited weaker performance in the GE Power business as the main reason for lowering its previously indicated guidance for free cash flow and in earnings per share for 2018.
Now consider how CEO Culp has an incentive to boost GE’s share price. He will receive payouts if GE’s stock rises at least 50% and can stay there for 30 consecutive trading days. The news of his hire took it up about 10% alone.
Several analysts have issued views in the wake of GE’s big CEO change.
RBC Capital Markets raised its rating to Outperform from Sector Perform and raised its price target to $15 from $13 after the CEO change.
Moody’s said that it was reviewing GE Credit for a possible downgrade, and that downgrade was more than one notch. Standard & Poor’s downgraded GE, and it is now only three notches above “junk bond” status. These both addressed weakness in power, but also both include at least inklings about GE’s future structure changing as the company tries to deleverage its balance sheet.
Merrill Lynch has only a Neutral rating but also has a $14 price objective. The firm is projecting a significant dividend cut as one of the first orders of business as the company has to shore up its balance sheet before lots of debt comes due in 2019. The Merrill Lynch report said:
We expect additional management and operational changes within GE’s segments, particularly Power… Accelerating portfolio moves announced in July could be another avenue to shore up the balance sheet, such as accelerating monetization of 62.5% BHGE ownership.
Morningstar has a $16.10 fair value estimate on GE, but it thinks that the Culp strategy may be quite similar to Flannery’s strategy. That report said:
We think Culp is the right person for CEO and should help GE realize the value of its assets. Given an outsider’s operating pedigree, we expect differences in execution under Culp, even as we suspect he’ll largely stick with GE’s current roadmap–focusing on Aviation, Power, and Renewable Energy — as laid out by Flannery and approved by the current board.24/7 Wall St.
Top Analysts Have 5 New Red-Hot Stocks Trading Under $10 to Buy Now
It’s hard to imagine that the future GE will look nothing like the GE that prior generations knew. That said, the world keeps on turning — and GE hasn’t been keeping up with it.
GE shares closed up 4.2% at $13.18 on Friday. That’s up nearly 17% from the $11.29 the prior Friday, before Flannery was fired and Culp was named CEO. Its 52-week trading range is now $11.21 to $24.54.I'm interested in the Newsletter
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Ford Motor Co. (NYSE: F) met with its U.S. dealers in Las Vegas as it sent a team led by CEO Jim Hackett. The event was, among other things, a chance for Ford to boast about the “onslaught of new vehicles.” As the show went on, Ford’s stock continued to collapse, and more investors worried about its dividend.
The biggest news out of the meeting was that Bryan Cranston, actor and former star of TV series “Breaking Bad,” would be featured in a series of new Ford advertisements. It was not clear why he was chosen, but the commercials are part of a new turnaround pitched to the dealers as “Built Ford Proud.” The campaign will run well into next year.
Notably, the “onslaught” features “new vehicles in the hot-selling SUV and truck segments, including the Ranger pickup, which starts production this month at Ford’s Michigan Assembly Plant, and the new Escape and Explorer on sale next year.”
Hatchett had a closed meeting with dealers, showed the new models and said three-quarters of the model line will be new by 2020.
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These segments are already crowded to choking by vehicles from every car manufacturer that does business. All of these and Ford will need to fight for share in a U.S. market that has peaked at about 17 million a year. Ford will need to elbow out the competition, but it did not say which one.
Ford’s other notable announcement of the week is that it will build 1,350 of its GT model, up from 1,000, because of demand.
At about the same time the Ford dealers were meeting, Morgan Stanley analyst Adam Jonas cut his target price on Ford’s stock to $4 from $10. That is less than half of Ford’s current price of $8.50.
Ford’s stock has fallen by about a third this year. There are few buyers for Hackett’s plan to be a leader in the electric and autonomous vehicle segments. Investors are similarly unimpressed about a planned $11 billion restructuring.
New models are at the core of Ford’s U.S. turnaround, which is one few people think will come.