Stock Picks: Goodyear, Salesforce, Limited, GameStop

Goodyear Tire & Rubber Co.: KeyBanc Capital Markets analyst Saul Ludwig maintained a buy rating on shares ofGoodyear Tire & Rubber Co. (GT), the biggest U.S. tiremaker, on Feb. 25.

In a note, Ludwig said that the company's fourth-quarter 2009 earnings per share (EPS) of 14 cents, reported on Feb. 18, topped his estimate of 4 cents. "In general, there were no major 4Q09 surprises, but rather than dissecting 4Q09 further, we believe what lies ahead is much more important," the analyst wrote.

Ludwig noted that on Feb. 24, the company promoted Richard J. Kramer to chief executive officer to replace Robert J. Keegan, who will remain as executive chairman. "Kramer is smart, has strong interpersonal skills, is strong in finance and has exceptional support from his team members at GT," Ludwig wrote. "We view this expected promotion of Mr. Kramer to CEO as a positive move for GT and its management team".

Important factors in the company's earnings for 2010 will be its ability to price its products to offset raw material cost increases in the second half of the year and its success in mitigating currency devaluation in Venezuela, Ludwig said. He said improving demand, low fill rates (i.e., shortages) and inventories at 10-year low levels "will pave the way for GT -- and its competitors -- to increase prices this spring". The analyst also noted favorable potential for several new, higher margin products.

Ludwig lowered his 2010 EPS estimate from $1.00 to $0.85. His first-quarter 2010 estimate remains a loss of 7 cents; he set an initial estimate for 2011 of $1.50 EPS.

"We remain positive in our view toward GT," Ludwig said. He maintained his $19 price target on the shares.

Salesforce.com Inc.: Standard & Poor's equity analyst Zaineb Bokhari maintained a sell recommendation on shares of Salesforce.com Inc. (CRM) on Feb. 25.

On Feb. 24, the largest seller of Internet-based customer-management software reported fourth- quarter profit that topped analysts' estimates as more companies switched to online applications.

Bokhari said in a posting on the S&P MarketScope service that the company's fourth-quarter EPS of 16 cents, vs. 11 cents one year earlier, was 2 cents over her estimate, on lower taxes. Sales of $354 million, up 7% from a year earlier, were $12 million above her view.

"We see CRM as [the] clear on-demand leader, but year-to-year growth (sales, bookings, deferreds) continues to slow," Bokhari said. She noted that the company will expand distribution of its offerings, "but contrary to our prior view, does not plan to use recently raised capital to fund much M&A".

The analyst cut her fiscal 2011 (ending January) EPS estimate by 26 cents to 60 cents on higher projected marketing and interest expense; she set a fiscal 2012 forecast at 71 cents. She lifted her 12-month price target by $2 to $68.

Limited Brands Inc.: Cowen & Co. analyst Laura Champine reiterated a neutral rating on shares of Limited Brands Inc. (LTD) on Feb. 25.

On Feb. 24, the owner of Victoria's Secret and Bath & Body Works chains reported fourth-quarter profit excluding some items of $1.01 a share. The average analyst estimate in a Bloomberg survey was 99 cents a share.

In a note, Champine said that Limited's fourth-quarter EPS was four cents ahead of her estimate, on previously announced same-store sales growth of 1% vs. a 10% decline one year earlier. She said Limited's gross margin of 40.8% was 90 basis points higher than her estimate.

"We believe that tighter inventory management limited the need for the massive markdowns seen in Q4 [of 2008] and boosted merchandise margins," Champine said. "[W]e would not expect to see any meaningful operating expense leverage in FY10".

Champine said Limited's management expects first-quarter operating EPS to be 5 cents to 10 cents on total company same-store sales growth of 2%; the company's guidance for fiscal 2010 stands at $1.40 to $1.60. Limited also revised its February same-store sales outlook from flat to a high single-digit to low-double-digit increase, which may imply "very strong" Valentine's Day sales this year, the analyst said.

Champine raised her first-quarter operating EPS estimate by 2 cents to 6 cents and expects operating EPS of $1.44 in fiscal 2010, 2 cents above the Wall Street consensus view. Her fiscal 2011 operating EPS estimate of $1.52 is 11 cents below the consensus view.

GameStop Inc.: Piper Jaffray analyst Anthony Gikas lowered his rating on shares of GameStop Inc. (GME) to neutral from overweight and cut his price target for the shares to $16 from $24 on Feb. 25.

In a note, Gikas said it is becoming more evident that interactive game sales are shifting from packaged goods to digital, with packaged goods game sales declining from around 85% of category sales to nearly 70% during the past two years. "We expect the shift to digital entertainment will continue as the current video game cycle plateaus and declines during the next three years," the analyst said. He expects industry-wide packaged goods game sales will peak during 2010, and GameStop will experience peak earnings during 2011.

"To be sure, GameStop's business is not going away anytime soon," the analyst wrote. Gikas expects GameStop will gain market share and grow its margins during 2010-2012, but will not offset sales declines related to the current hardware lifecycle and the shift to digital entertainment. He estimates EPS of $2.65 for fiscal 2010 and $2.80 for fiscal 2011.

"Although [GameStop's] valuation and cash flow characteristics look attractive, we find it difficult to recommend a business with little long-term earnings growth," Gikas said.

(businessweek.com)

Market Watch 15 – 19 February 2010

By Yium Tavarolit

China Won’t Appreciate The Yuan In The Near Future

A nation’s currency is said to appreciate when exchange rates change so that a unit of its own currency can buy more units of foreign currency. The currency is said to depreciate when exchange rates change so that a unit of its currency can buy fewer units of foreign currency as defined by William J. Baumol and Alan S. Blinder. They explained further that in a world of floating exchange rate, with no government interferences, exchange rates are determined by the law of demand and supply. And the demand for a country’s currency is derived from the demands of foreigners for its export goods and services and for its assets, including financial assets, factories, and machinery. The supply of a country’s foreign currency arises from its imports and from foreign investment by its own citizens.  Some economists argue that floating exchange rates open room for speculative activities in free markets and will lead to wild gyration in prices as we have seen nowadays if market forces cannot play their roles transparently and efficiently. Furthermore, some central banks ignore or hesitate to intervene or moderate exchange movements whenever they judge that such actions are appropriate. And typically, deficit nations always buy their own currencies to prevent them from depreciation, and surplus nations also always sell their own currencies to prevent them from appreciation.

We come back to Chinese yuan exchange rates against other currencies, especially against the U.S. dollar. Beijing was successful in managing the floating exchange rate regime in 2007, with the floating band of the yuan and the U.S. dollar trading price in the inter-bank spot market expanded from 0.3% to 0.5%. At the end of 2007, the central parity of the yuan against the U.S. dollar was 7.3046 yuan per dollar, an appreciation of 6.9% from the beginning of 2007. The flexibility of the yuan exchange rate gradually increased, and the exchange rate remained generally stable at an adaptive and equilibrium level, according to the China Financial Stability Report 2008. When we look at roles and objectives of the China’s central bank or the People’s Bank of China (PBC), the objective of its monetary policy is to maintain the stability of the value of the yuan and thereby promote economic growth through monetary policy instruments, i.e. reserve equipment ratio, central bank base interest rate, rediscounting, central bank lending, open market operation and other policy instruments specified by the State Council.

And from the Fourth Quarterly Meeting of Monetary Policy Committee in December 2009, the Committee reviewed the monetary policy conduct in 2009 after launching a moderately easy monetary policy to liquidate the banking system in the country. The Meeting addressed that structural problems in 2010 still persist, and inflation must be managed properly. Importantly, the easy monetary policy will be continued to ensure policy consistency and stability. A macro-prudential management system will be set up to prevent and to resolve potential financial risks and to ensure secure and stable function of the financial system. The PBC is concerned that surplus of both current and capital accounts of the country has resulted in rapid buildup of official foreign exchange reserves and cross-border capital inflow being attracted by higher returns in investments and fixed exchange rates of the yuan against other currencies. That means foreign investors don’t have to worry about volatility and risk of the yuan.

Now, the PBC is being pressured by Western countries, especially the U.S., to appreciate the yuan. In response to this requirement, Chinese Premier Wen Jaibao reiterated in last month that China will not yield to foreign pressure to appreciate its currency after the yuan has been pegged against the U.S. dollar at 6.83 yuan since the middle of last year. Furthermore, Calla Wiemer cited in WSJ on 8-10 January 2010 that the exchange rate isn’t a relevant factor in achieving a sustainable rebalancing in China’s foreign trade. A surplus of exports over imports is simply the external manifestation of an excess of savings over domestic investment. Export revenues not spent on imports are used to acquire foreign assets, which represent Chinese saving invested abroad. She added that a long-term resolution of imbalances with China must come from more consumption and less saving in China but is not from the yuan appreciation. A question now is how to encourage or activate them to spend more that Western market researchers have to work out. As has been said repeatedly that the higher costs of most of goods and the higher cost of living in the West than in the East are their export barriers and a cause of their foreign trade deficits, there is no reason or plausibility for consumers in China or elsewhere to pay more for the same goods which can be produced in their countries at cheaper costs of production.

Stocks, Financial and Energy Movement

Asian shares mostly declined on Friday as the U.S. Federal Reserve's decision to raise its discount rate by a quarter percentage points to 0.75% late Thursday pushed the dollar higher but hurt investor sentiment and commodity prices. Japan's Nikkei Stock Average of 225 companies fell 2.1% to 10,123.58 and Hong Kong's Hang Seng Index slid back below the 20,000-point level, ending 2.6% lower at 19,894.02. Australia's S&P/ASX 200 dropped 0.4%, South Korea's Kospi fell 1.7% and in afternoon trading, India's Sensex slid 0.8%. Markets in China, Taiwan and Vietnam remained closed for the Lunar New Year holidays.

European stock markets erased early losses to gain ground for the fifth consecutive session on Friday, with strong results from Nestle lifting the food-and-beverage sector and underpinning sentiment. Subdued U.S. inflation data triggered the bounce, however, soothing fears that the Fed will increase rates in the near future. After trading as low as 246.55 earlier in the session, the Dow Jones Stoxx 600 rose 0.5% to close at 250.33. Of major regional equity markets in Europe, the FTSE 100 rose 0.6% to close at 5,358.17, the German DAX Xetra gained 0.7% to end at 5,722.05 and the French CAC-40 rose 0.6% to settle at 3,769.54.

U.S. stocks rallied modestly on Friday as investors focused on the optimism underpinning the Fed's discount-rate increase and sent the shares of such industrials to soar such as Boeing, while Pfizer climbed as a rival suffered setbacks. Damping sentiment, Dell slid after the computer company's fourth-quarter profit declined. The Dow Jones Industrial Average climbed 9.45 points, or 0.09%, to 10,402.35, its fourth straight day of gains. The measure is now up 3.3% for the month, but down 0.3% year to date. The Nasdaq Composite edged up 2.16, or 0.1%, to 2,243.87. The Nasdaq was up 4.5% for the month, but down 1.1% year to date. The Standard & Poor's 500-share index gained 2.42, or 0.22%, to 1,109.17. The S&P 500 was up 3.29% for the month, but down 0.53% since 1 January.

The euro surged against the dollar and the yen on Friday afternoon as stronger demand for risk sent U.S. stocks, oil, gold and other growth-sensitive assets higher. In choppy trading, the dollar had wavered briefly earlier after news that core U.S. inflation decreased for the first time since 1982, but investors' attention was once again focused on the Fed's move to increase emergency bank-lending rates, in a sign that the economic recovery is healthy enough for authorities to begin withdrawing the massive monetary stimulus pumped into financial markets. Friday afternoon in New York, the euro was at US$1.3593 from US$1.3527 late Thursday, according to EBS via CQG. The dollar was at Y91.83 from Y91.80, while the euro was at Y124.76 from Y124.25. The U.K. pound was at US$1.5444 from US$1.5575. The dollar was at CHF1.0777 from CHF1.0829.

Crude oil rose to its highest level in over five weeks on Friday as an ongoing strike by French refinery workers raised concern about future gasoline supply and concern about building a nuclear warhead by Iran that might escalate confrontation between the U.S. and Iran. Light, sweet crude for March delivery settled 75 cents, or 1%, higher at US$79.81 a barrel on the New York Mercantile Exchange (Nymex). Brent crude on the ICE futures exchange settled 41 cents, or 0.5% higher, at US$78.19 a barrel, Dow Jones reported.

Movement of Rubber Markets

While rubber futures, especially Tokyo rubber futures, were very subdued because China was absent from the rubber market for a whole week, but natural rubber (NR) prices on the physical market defied price movement on rubber futures and stayed high on the back of strong demand from the tire industry and latex products, especially healthcare products, worldwide. It is noticeable that crude oil futures on Nymex continued to rise since an earlier Monday (8 February) until Friday 19 February whereas the Japanese yen also continued to weaken against the greenback, and regional currency exchange rates stayed firm against the greenback during the same period of time. These can be interpreted that investors feel confident about global economic recovery and the U.S. and it was obvious and evident when the U.S. Federal Reserve (Fed) announced late Thursday that it would raise its discount rate by 25 basis points charge for emerging lending to banks, to 0.75%. In the table below we see NR prices on both rubber futures and physical markets rose across the board on Friday 19 February comparing with an earlier Friday.

Description	19-Feb-10	12-Feb-10	Change	Unit
IRCo's DCP	313.77	307.51	6.26	US cents/kg
TOCOM/RSS3 *
- Feb.	284.70	274.40	10.30	Yen/kg
- Jul.	294.60	285.20	9.40	Yen/kg
- Volume	10,788	9,620	1,168	Lots
SHFE/RSS3 **	Closed	24,045	-	Yuan/ton
AFET/RSS3
- Mar.	106.05	103.50	2.55	THB/kg
- Sep.	105.05	103.70	1.35	THB/kg
- Volume	477	645	-168	Lots
SMR20 ***	318.00	310.00	8.00	US cents/kg
SIR20 ***	313.00	307.00	6.00	US cents/kg
RRIT
- RSS3	106.35	103.20	3.15	THB/kg
- STR20	105.40	102.20	3.20	THB/kg
- USS3	99.55	96.06	3.49	THB/kg
- Conc. Latex	70.60	69.50	1.10	THB/kg
- Field Latex	99.00	96.00	3.00	THB/kg
Source: IRCo Notes: * The day session           ** The highest daily trading volume on 12 Feb. was the benchmark May 2010 contract          *** Offers, f.o.b., Asian physical rubber prices on 12 Feb. for Mar/Apr 2010 shipment               and on 19 Feb. for Apr. 2010 shipment

The technical MACD and Signal Line continued to rise in positive territory day to day during the week. The RSI also rose from 50.63% on an earlier Friday to 70.05% on Friday 19 February, and there is room for the RSI to rise further in the coming week after it rebounded from the trough of 19.31% on 8 February. Technically, NR prices on rubber futures still have room to go higher in the coming week, but we might see some market corrections following a move of crude oil futures, a currency exchange rate between the greenback and the Japanese yen, and profit-taking by funds.

As for physical rubber markets in the region, particularly in Thailand, prices are expected to stay firm on a higher side, and IRCo’s DCP should continue to be buoyant above US$3.0 per kilogram in the coming week. We hope that the Thursday visit of Tibet’s exiled spiritual leader to the White House won’t have any impact on the global economy for the time being.

(irco.biz)