Telefonaktiebolaget LM Ericsson (ADR) (NASDAQ: ERIC), a telecom-related business whose colleagues include Alcatel-Lucent (NYSE: ALU) and Cisco Systems, Inc. (NASDAQ: CSCO), reported earnings for the third quarter. And, unless I miss my guess, the market liked what it saw. As I write this, shares are up over 15%, and the trading volume is high. So, what's going on here?
Well, according to this source, revenue and profit for the quarter went beyond the expectations of analysts. The top line soared 13%. Nothing wrong with that. The bottom line, however, went down 28%, even though it exceeded what was expected. And then there was the gross margin improvement. A lot of times that can work wonders for a company's shares. Gross margin went from 35.6% to 37%. Wall Street was impressed.
Now, this is all well and good, but am I a buyer of Ericsson after the report? No. There are a few things to consider here. First, the global economy is a mess. Second, statements made by management in terms of the near future indicate a cautious stance. Third, there's no way I'm buying a stock that just rallied by a double-digit percentage in this market. Especially not a tech stock. There are harder ways to lose money. The 52-week low on the ADR's is about $6 per share, and I can easily see this one revisiting that level as we continue to get news on the economy throughout the quarter. Obviously, many investors out there disagree with me. But this is not the time to play momentum trader, in my opinion. I'm happy to sit on the sidelines in this case, even if I turn out to be wrong.
Disclosure: I don't own any company mentioned; positions can change without notice.
While the earnings crunch for this quarter is all but over, there is still plenty of action in the earnings arena this coming week. For instance, analysts surveyed by Thomson Financial are expecting America's Car Mart Inc. (NASDAQ: CRMT) and Campbell Soup Co. (NYSE: CPB) to be among this week's top earnings gainers.
Bentonville, Ark.-based America's Car Mart is expected to post net income of 38 cents per share (up 52.6% from the same period a year ago) on revenue of $73.8 million (up 25.8%). The used car dealer chain has tended in recent quarters toward positive surprises -- by 21 cents per share, or 73.5%, in the previous quarter. The long-term EPS growth forecast is 15%, about the same as the S&P 500. The consensus recommendation of analysts is to buy CRMT.
Campell is tentatively scheduled to report this week, and the world's biggest soup maker is expected to post net income of 25 cents per share (up 44.0% from a year ago) on revenue of $1.7 billion (up 7.5%). The Camden, N.J.-based company has just missed earnings estimates in the past three quarters. Its long-term EPS growth forecast is 7.5%, which is less than the industry average, but about the same as rivals Kraft Foods (NYSE: KFT) and Heinz (NYSE: HNZ). The analysts' consensus recommendation is currently to buy Campbell.
When Alcatel and Lucent agreed to merge in April 2006, there were the typical phrases in the press release: "new growth opportunities," "cost synergies," "global convergence," "increased scale," "global capabilities" and so on. Oh, and yes, it would "create enhanced value for shareholders."
Yet, there was something that was curious. The CEO of the new entity, Patricia Russo, said she would not learn French, even though Alcatel was based in France. Might this be a sign that there would be some cultural issues?
Alas, the fact remains that the benefits of the deal haven't materialized as Alcatel-Lucent's (NYSE: ALU) stock price has gone from $14.50 to $7.50.
Well, this week, Alcatel-Lucent had its annual meeting. No doubt, it wasn't fun as shareholders provided an earful. After all, the company had to write down $4.55 billion in asset value because of the merger (there were also thousands of layoffs).
Interestingly enough, shareholders passed a resolution that allows Alcatel-Lucent's board to rid its chairman/CEO with a majority vote instead of a two-thirds of a vote.
Unfortunately, I don't see this amounting to much. Keep in mind that -- with consolidation of wireless carriers -- its tough for equipment providers to get any leverage. Plus, the competition is still intense.
By the way, Russo apparently is learning to speak French now. And she even spoke some words at the meeting. However, she will need to learn a more important language: profits.
Often taking a look at 52-week low gives a hint as to which sectors are in trouble. But, it also may provide investors a look at shares that could come back under the right circumstances. Bottom fishing sometimes pay dividends.
McClatchy Co. (NYSE: MNI): The Wall Street Journal did a major story on McClatchy last week. Its shares are down over 70%, but the company CEO insists that when weak parts of the economy in Florida and California make a comeback, newspapers will recover, too. There may be some wisdom to the observation, but probably not for McClatchy. Most of the company's newspapers are in median-sized markets and that makes it harder for the firm to have a major presence in the internet ad business. Companies like The New York Times Co. (NYSE: NYT) and Gannett Inc. (NYSE: GCI) with their large internet operations like USAToday.com have a much better chance of offsetting falling print revenue with online sales.
Sandisk Corp. (NASDAQ: SNDK): This tech company finds itself in the wrong place at the wrong time. At just over $33, its shares are down by almost half this year. The company is one of the world's largest producers of flash memory chips and the prices for the products are crashing. The turnaround at the company may come when prices for these chips become more stable because demand is moving up. Sandisk products are a big part of what goes into cell phones, digital cameras, and multimedia players. A bottom on flash prices should bring shares back.
Nortel Networks (NYSE: NT): Supplying infrastructure to the world's big telecom and cable companies used to look like a sexy business. But, Nortel shares are off to $15.20 from a 52-week high of $31.79. Rival Alcatel-Lucent (NYSE: ALU) is doing no better. The build-out of systems like 3G and WiMax is going slower than planned and mergers of big telecom companies have taken some customers out of the picture. The market may begin to improve, but companies with more advanced tech, like Cisco Systems (NASDAQ: CSCO), are likely to benefit.
Douglas A. McIntyre is an editor at 247wallst.com.
MOST NOTEWORTHY: Atmel, Skyworks, Alcatel-Lucent, Parexel and Map Pharma were today's noteworthy initiations:
Kaufman Bros. initiated Atmel (NASDAQ: ATML) with a Buy rating and $6 target, as they believe the company's increasing focus around its core microcontroller business can drive an improved growth and profitability profile going forward and would be buyers at current levels.
The firm also started shares of Skyworks (NASDAQ: SWKS) with a Buy rating and a $10 target, as they like the company's balanced customer positioning and find the stock attractively valued at current levels.
JP Morgan initiated Alcatel-Lucent (NYSE: ALU) with an Overweight rating and believes the risks are more than fully priced into shares at current levels.
Parexel (NADSAQ: PRXL) was initiated with a Neutral rating at Broadpoint, as they believe the company's improved execution is already priced into shares.
Deutsche Bank finds shares of Map Pharmaceuticals (NASDAQ: MAPP) attractively valued given the opportunity from the company's two late stage product candidates, UDB and Tempo Migraine. The firm started shares off with a Buy rating and $19 target.
MOST NOTEWORTHY: International Paper, Autodesk, Oracle and Vistaprint were today's noteworthy upgrades:
Citigroup upgraded shares of International Paper (NYSE: IP) to Buy from Hold on valuation and their belief that recent declines in the dollar will support pulp, paper and paperboard prices going forward.
Autodesk (NASDAQ: ADSK) was upgraded to Buy from Hold at Jefferies after their proprietary survey yielded positive data points going into Q3. They also raised their estimates due to currency. Broadpoint raised its rating on Oracle to Buy from Neutral on valuation following the recent underperformance.
Oracle (NASDAQ: ORCL) was also upgraded to Sector Outperformer from Sector Performer at CIBC, as they believe the company's growing product portfolio, improving margins and successful acquisition strategy should continue to drive double-digit EPS gains.
William Blair added Vistaprint (NASDAQ: VPRT) to its Current Better Values List. The firm believes the company has a large market opportunity and expects its business momentum to continue. They view the recent weakness as a buying opportunity.
OTHER UPGRADES:
Merrill Lynch upgraded Alcatel-Lucent (NYSE: ALU) to Neutral from Sell.
MOST NOTEWORTHY: Tyson Foods, Unilever, Brooks Automation, Akzo Nobel and Yahoo! were today's noteworthy upgrades:
Deutsche Bank upgraded shares of Tyson Foods (NYSE: TSN) to Buy from Hold on valuation and the potential for protein complex improvement.
Goldman upgraded shares of Unilever (NYSE: UN) to Neutral from Sell to reflect the company's diversified product range and growing exposure to developing and emerging markets.
Bear Stearns raised its rating on Brooks Automation (NASDAQ: BRKS) to Outperform from Peer Perform. The firm cited the company's compelling valuation and growth drivers.
Akzo Nobel (OTC: AKZOY) was upgraded to Buy from Hold at SNS Securities, as they see absolute total return greater than 20%.
CIBC upgraded Yahoo! (NASDAQ: YHOO) to Sector Outperformer from Sector Performer on valuation following the recent pullback and their analysis of Yahoo's non-operating assets. They believe Yahoo's stake in Alibaba Group is now worth about $4/share and raised their target to $31 from $28.
OTHER UPGRADES:
First Analysis upgraded Spss Inc (NASDAQ: SPSS) to Overweight from Equal Weight.
UBS upgraded Yamana Gold (NYSE: AUY) to Buy from Neutral.
MOST NOTEWORTHY: Heelys, Citigroup, Alvarion, UBS AG and Alcatel-Lucent were today's noteworthy downgrades:
CIBC downgraded Heelys (NASDAQ: HLYS) to Underperformer from Sector Performer. The analyst has little confidence sales will recover following the recent drop.
CIBC also downgraded Citigroup (NYSE: C) to Sector Underperformer from Sector Performer, as they believe the company may have to cut its dividend, raise cash or sell assets in order to raise $30B over the near-term; the firm believes such a move would pressure shares significantly.
Merriman downgraded shares of Alvarion (NASDAQ: ALVR) to Neutral from Buy after the in-line results as they now believe increased competition will pressure gross margins and minimize operating leverage in FY08.
Merrill downgraded shares of UBS AG (NYSE: UBS) to Neutral from Buy to reflect the potential of further write downs.
Banc of America lowered its rating on Alcatel-Lucent (NYSE: ALU) to Neutral from Buy to reflect poor execution of the company's turnaround strategy.
OTHER DOWNGRADES:
Goldman removed Vimpelcom (NYSE: VIP) from its Pan European Buy List and downgraded shares to Neutral from Buy.
Since business at Alcatel-Lucent (NYSE:ALU), the telecommunications equipment supplier, can not get much worse, it has decided to fire more people. Four thousand souls will lose their jobs. The CFO is among that number.
The firm announced that [subscription required] it lost €345 million in the third quarter against a pro forma profit of €532 million last year. The company uses pro forma numbers to show the results of the corporation as if the merger had been completed in the 2006 period. Revenue fell 11% to €4.35 billion.
Alcatel-Lucent said that its wireless revenue had dropped during that quarter.
The company and its CEO Patricia Russo are now out of excuses. The reason for the merger of the US and French companies was to save hundreds of million of dollars in redundant costs and create a global sales force to sell the products of both companies. The move also ended competition between the firms, which should have allowed for less discounting to gain customers.
Based on results from competitor Ericsson, it appears that spending on equipment at big telecommunications companies has slowed down, at least for now. That makes Alcatel-Lucent's position even more difficult.
Even with further cost cuts, the company is not likely to recover if its core markets are drying up.
MOST NOTEWORTHY: Ericsson, Alcatel-Lucent, General Motors and Anglo American were today's noteworthy downgrades:
Ericsson (NASDAQ: ERIC) was downgraded to Reduce from Buy at WestLB and to Neutral from Outperform at Credit Suisse following the company's Q3 profit warning.
WestLB downgraded shares of Alcatel-Lucent (NYSE: ALU) to Reduce from Hold following Ericsson's profit warning, as they believe Alcatel-Lucent's mobile business will face top-line and margin issues.
Bear Stearns downgraded shares of General Motors Corporation (NYSE: GM) to Underperform from Peer Perform after learning that benefits from the new union contract will be lower than expected in 2008 and 2009. The broker recommends swapping into Ford Motor Company (NYSE: F).
HSBC downgraded shares of Anglo American (NASDAQ: AAUK) to Neutral from Overweight on valuation. Morgan Stanley downgraded shares of Anglo to Equal Weight from Overweight also on valuation, as they see better value elsewhere in the sector.
Carl Icahn is not targeting Motorola Inc. (NYSE: MOT) for any big shareholder action now. He is not trying to put himself on the board. But, yesterday he once again called for the company to break itself up.
Icahn said that "the company's handheld business could be worth about $10 billion," according to Reuters. This means that Icahn's math could be off, at least for current Motorola shareholders. The company has a market cap of $44 billion. It is hard to see how the firm's two smaller divisions would be worth more than $35 million.
Motorola's network and home mobility division has its set-top box operation and the business that sells infrastructure products for telecommunications. The operation had revenue of $2.5 billion last quarter and operating income of $191 million. Given what has happened to the share prices of competing operations like Nortel Networks Corp. (NYSE: NT) and Alcatel-Lucent (NYSE: ALU), it is hard to imagine that this could be sold for more than one time its $10 billion in annual revenue.
This leaves the company's enterprise mobility business, which does business for government and private networks. The division is in good shape. Last quarter, on $1.8 billion in revenue, the operation had $303 million in operating income. In the June quarter, this part of Motorola grew 41%. But, even if it is worth 3x sales, the $30 billion would bring Motorola's entire value to $50 billion.
MOST NOTEWORTHY: First Solar, JA Solar, Alcatel-Lucent, Nokia and Ericsson were today's noteworthy initiations:
First Solar (NASDAQ: FSLR) and JA Solar Holdings (NASDAQ: JASO) were initiated with Buy ratings and targets of $160 and $61 at Collins Stewart. Collins Stewart sees room for margin expansion and is positive on First Solar after channel checks; the firm expects JA Solar to expand capacity given its long-term supply agreements with four wafer suppliers.
Merrill Lynch started shares of Alcatel-Lucent (NYSE: ALU) with a Sell rating, citing a lack of revenue growth prospects.
The firm also started shares of Nokia Corporation (NYSE: NOK) with a Buy rating, as they believe the company's share gains and margin expansion will continue.
Merrill also resumed coverage of Ericsson (NASDAQ: ERIC) with a Neutral rating, expecting high single digit earnings and share growth, but not enough for a Buy rating.
OTHER INITIATIONS:
Goldman initiated the trucking and railroad sectors with Neutral ratings.
While the earnings crunch for this quarter is all but over, there is still plenty of action in the earnings arena this coming week. For instance, analysts surveyed by Thomson Financial are expecting 
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