C.M.O. 12.04.2009
Credit Market Overview
December 4, 2009
When he and Bruce Willis are not saving the world from internet terrorists intent on shutting down the United States in “Live Free or Die Hard”, Justin Long spends his time battling John Hodgman to save the world from the other internet terrorist, Microsoft (MSFT), in the long running series of Mac vs. PC commercials from Apple Inc. (AAPL).
The latest threat to our sanity from Gates & Co., Windows 7, seems to be meeting with some critical acclaim as MSFT’s CEO, Steve Ballmer, said recently that the Redmond WA firm’s latest offering was “selling twice as fast as any previous version of the operating system software”, calling the product’s reception “fantastic”. A MSFT spokesperson later said that Mr. Ballmer was referring to both the boxed version of the software as well as the copies it sells to PC makers.
This being America “twice as fast” is always better than half fast and since every operating system needs something to operate on the world, or at least the business world, has been watching the PC makers to see what the “trickle up” effect would be.
The battle in the PC world isn’t played out in cute commercials but in the real world of selling boxes. In that fight it is primarily Dell Inc. (DELL) vs. Hewlett-Packard Co. (HPQ) and the former recently reported a 54% drop in quarterly profit producing a bottom line decline of 15% putting it at the other end of the spectrum of HPQ’s increase in Q309 earnings and raised 2010 outlook.
Rob Cihra, and analyst with Caris & Co. gave his thoughts on DELL saying. “The PC market has been showing some nice recovery, yet Dell’s quarter shows they absolutely continue to lag that recovery”. “They keep talking about cost cutting but that didn’t help profitability”, Bill Kreher, an analyst with Edward Jones added.
The cost cutting continues at DELL as it was reported yesterday that the company just sold a PC factory in Poland to Foxconn, a Taiwanese electronics company. “They’ve been trying to get rid of plants for some time” Shaw Wu, an analyst at Kaufman Bros. said. Wu thinks the sale will be “positive” for earnings since owning all levels of the vertical includes the associated costs. “It’s just become overhead for them”, he said.
The tech recovery that Cihra cited was evidenced by Stacy Smith, CFO of Intel Corp., (INTC) when she said, “Our sales guys are picking up more interest at corporations”. Going on to say, “In general, what we see is that things are improving”.
Putting its money where its mouth is INTC’s board recently approved a 12.5% increase in the company’s dividend. “The dividend increase is another sign of our confidence in business prospects going forward”, Paul Otellini, the company’s CEO said during the announcement.
DELL’s CDS/equity combo has been positively correlated recently but unlike a number of other combo’s that are seeing rising CDS levels confounded by rising stock prices, DELL’s situation is the exact opposite with the stock closing at $13.46 last night after touching $16.06 on 11/18 and $16.92 before that on 9/16. The CDS closed at 75bps last night down from 84bps on 11/27 which was up from 44bps on 10/6.
HPQ also saw a rise in its CDS recently reaching 34bps on 11/27 before closing last night at 29bps. The most recent high in the stock was $51.32 on 11/17 before closing last night at $48.96.
INTC’s CDS seem’s to be reacting to its announcement of an increased dividend as last night’s close of 28bps was higher than the 25bp close on 11/16, the day before the dividend increase was announced. The stock closed at $19.87 last night up from its recent low of $18.50 on 11/3 but not yet back up to the $20.83 close of 10/14.
Enjoy the weekend.
Jim Delaney
