More Job Losses

There was a big announcement today as many companies announced job losses due to a declining economy. Home Depot, Sprint, GM, Caterpillar and Pfizer are all planning on slashing jobs.

Of particular interest is Pfizer, who acquired rival Wyeth for $68 billion this weekend and also said it will cut about 8,000 jobs from its current workforce. More cuts are expected once the merger is complete with a few years according to Pfizer management.

One of the main reasons for the acquisition is that Lipitor is worth almost a quarter of Pfizer's total sales and has a looming patent expiry (meaning more competition from generic brands). This is of particular interest to watch as M&A in this environment takes on more of a restructuring and divestiture overtone as cash is tight and companies are looking to improve the bottom line.

Although it could be argued that without a recession, Pfizer would have to have found a solution for its expected decline of it's leading drug one way or another, this seems to also provide additional justification for cutting jobs.

We can expect to see similar types of acquisition activity in the market for several months until earnings begin to pick up.

Defensive Stocks

McDonald's released it's earnings report today and exceeded expectations by about 4c at 87c.

Apparently with the decline in the economy, defensive stocks such McDonald's and Walmart have generally "declined" less than their counterparts (8% versus 30%) and proved that there are some bright spots in a recession.

Sunday Reflection: Chinese New Year

No real reflection for this Sunday.

However, an interesting cultural note, "Happy New Year" in Chinese is (Xīnnián kuàilè - ping ying). The "controversy" is that "kuàilè" (Happy) sounds like "drop fast" and with all the recent turmoil in the market some Chinese have changed it to a different phrase meaning "Improve".

So "Improve New Year everyone!"

GE and the decline of Earnings Guidance

As I am trying to price a sell range for GE in the 3 to 9 month time frame, I'm reminded of the fact that GE recently decided to stop giving earnings guidance. This not uncommon as managers of companies usually hate giving earnings guidance ("I'll manage the company... You manage the stock expectation.").

Here are some great articles on the matter:

Why GE Should Never Give Earnings Guidance Again

General Electric discontinues quarterly earnings guidance

These articles make some good points. However, even if guidance is not given, analysts should still continue to provide guidance of their own based on MD&A and their own analysis. PE ratios as a model requires earnings and has a solid grounding in as a method of valuation.

But beyond "just making the numbers", more important is why they are plus or minus expected EPS and the repercussions on long term business profitability.

GE Earnings Report

GE makes their Q4 target, but as our reader astutely mentioned GE has mentioned (once more) profit smoothing techniques in the form of One-Time global benefits and Other (page 9 of their webcast presentation) which accounts for about 3.68c of their earnings (by my math).

There's also a component called Restructuring and other high tax jurisdiction income. This area might be a bit more grey in terms of it's true impact on EPS.

I'd expect the stock price to come down a bit, however, the management guidance based on the information and projections are moderate. I'd expect some positive news for them in 3 to 6 months which should boost their stock price.

I'd watch this stock price and buy at a slightly lower price. However, It's tough to put in a price (and yesterday's target might be too low). I'd try not to guess the bottom and get in at a price you can sleep at.

Buy range: $11.5 to 13.00

GE @ $13.48

GE's earnings report is coming out early tomorrow morning (8:30am) and people are looking for management guidance regarding their earnings.

I think people who are pushing for earnings guidance outside of 2010 are being unreasonable when management says the outlook is uncertain.

However, I also think that GE is in a great position to take advantage of the infrastructure investments by the government intended to stimulate the economy. Especially in green power, GE has a great advantage in wind energy (solar isn't really all that green yet... the energy consumed in oil used to produce a solar cell is disproportional)

I think that the earnings report will be dim and will probably take earnings down.

Rating:
Buy @ $10.50 (number to be reviewed pending outcome of tomorrow's call)

GE @ $13.03

Kevin O'Leary was on BNN (Squeeze Play) and when asked by a caller about GE, he mentioned that GE management guaranteed the 2009 dividend but not 2010. He then went on to say that GE would test single digit prices and new 52 week lows (which it hit today at $11.88).

However, if you look at PE and yield (as the caller did) you would think that GE is undervalued. He also mentioned that GE was in a strong position to benefit from the infrastructure investment that governments were initiating to boost their economy.

At the very least, GE should be on a watch list despite it's Hold rating.