Plus, Mills gets hitched, JDS Uniphase surprises, and more.
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Robust Fourth-Quarter Results for Novartis
Novartis NVS reported strong fourth-quarter results on Thursday. Sales were in line with Morningstar analyst Heather Brilliant's expectations, and strong growth in operating income helped Novartis improve its profitability. Growth primarily came from the firm's pharmaceutical division, as double-digit growth continued in the company's core drug franchises, including Diovan and Lotrel for hypertension and cancer drug Gleevec. Brilliant wasn't surprised to see flat sales (excluding currency impacts) in the fourth quarter for the firm's Sandoz generic drug division, as the year-ago quarter included a boost from the Eon Labs acquisition; excluding this impact, Sandoz sales grew 3%, and Brilliant thinks growth will accelerate in the coming year. Operating income rose a strong 23% in the quarter, thanks to small improvements in the pharmaceutical division and a tremendous 71% increase in Sandoz's operating profit driven by several product launches and the cost-saving benefits of recent acquisitions. Even as Novartis invests heavily in research and marketing, it continues to churn out robust free cash flow. As a result, the firm proposed a 17% increase in its dividend, representing the 10th year of dividend increases. Brilliant is leaving her fair value estimate unchanged.
Mills to Merge with Brookfield Asset Management
Mills MLS announced it has finalized an agreement under which Brookfield Asset Management BAM would purchase the retail property developer for $21 per share, well below Morningstar analyst Akash Dave's fair value estimate. Although indications are that bidding for Mills was competitive, Dave thinks that counteroffers could materialize, given the valuation level. Under Brookfield's offer, Mills shareholders will receive as much as 20% of the consideration in stock of a newly formed subsidiary of Brookfield, thereby giving them the opportunity to participate in some of the firm's upside potential. What's more, Brookfield agreed to provide debt financing to Mills until the deal closes, alleviating the liquidity crunch that Mills faced in servicing its $1 billion term loan from Goldman Sachs GS. Nevertheless, Dave wouldn't be surprised to see a few more wrinkles unfold in the coming weeks. He's leaving his fair value estimate unchanged for the time being.
JDS Uniphase's Test Business Shows Strength
JDS Uniphase JDSU announced that it expects December-quarter revenue of $360-$365 million, well above Morningstar analyst John Slack's $345 million estimate and the company's prior guidance. All of the upside in the quarter was driven by the strong performance of the testing and network diagnostics business, which carries higher margins than the communications business and, thus, should lead to improved overall profitability for the company. Slack believes we are in the early stages of a multiyear optical upgrade cycle, as telecom carriers upgrade their networks to the latest technologies in order to lower operating costs and push high-speed fiber connections closer to their customers. As a component vendor to nearly every telecom equipment manufacturer participating in service providers' fiber buildouts, JDS should, in Slack's view, see an uptick in its communications business as carriers ramp up their fiber rollouts in earnest after a pause in the second half of 2006. While JDS has struggled through the past few years, it has rationalized its cost structure to a point where Slack thinks it should start to notch margin improvements over the next couple of years. He is leaving his fair value estimate unchanged.
Apple Posts Robust Quarterly Profits
On Wednesday, Apple AAPL posted very robust holiday-quarter profits amid better-than-expected iPod sales and lower component costs. Morningstar analyst Rod Bare thinks Apple's entry into the wireless phone market will be a catalyst for improving the scale economics of the company's business as a whole. Counting chickens before they hatch is always a tricky business, and there are some questions surrounding the true value proposition of Apple's first phone product. But Apple has several factors in its favor, in Bare's opinion, from manufacturing to marketing, that help him handicap the firm's chances in this space. The initial phone might have a few technological rough edges, but like successive versions of the iPod, the next few generations of handsets should resonate well with several key customer segments. As such, Bare is raising fair value estimate to better reflect Apple's wireless phone opportunity and higher expected profitability overall as the company continues to scale in size. PAGEBREAK
IBM's Fourth-Quarter Results as Expected
IBM IBM reported fourth-quarter and full-year results Thursday that were in line with Morningstar analyst Rod Bare's expectations. IBM's low- to mid-single-digit revenue growth trajectory remains in place, which is fine for this $90 billion global behemoth. In Bare's opinion, the key for IBM is profitability, and division margins continue to improve at a reasonable pace. Bare thinks there is room for continued improvement in the services division. He would also like to see management hold the ground it has gained in the hardware division. Yet, the high-margin software division continues to be the place to invest, and IBM remains on track with that strategy. Bare sees IBM as well positioned, from both a product and a geographic perspective, for another solid year. He's leaving his fair value estimate unchanged.
No Surprises in General Electric's Fourth-Quarter Results
General Electric's GE fourth-quarter results, released Friday, were impressive but in line with Morningstar analyst Peter Smith's expectations. Revenue climbed 11% from the year-ago quarter, with 8% of that internal growth. The commercial finance segment showed particular strength, up 30% from last year's fourth quarter, while the industrial segment continued to languish, contracting 5% primarily due to competitive issues that have dogged the plastics business as well as the recent sale of the advanced material business. The company announced a strategic review for the plastics business, and Smith thinks a divestiture of that unit is likely sometime in 2007. Profitability increased in all segments except the industrial business. Notably, profit growth resumed in the NBC Universal segment, evidence that a long-awaited turnaround appears to be in full swing. Smith is leaving his fair value estimate unchanged.
M/I Homes Reports Impairment Charges
On Friday, M/I Homes MHO announced it would take pretax land impairment charges and option write-offs of $68-$78 million. Though Morningstar analyst Eric Landry doesn't think he'll be changing his fair value estimate as a result, an increase in his risk rating may be in the cards. At roughly 7% after taxes, the decrease in book value isn't far out of line with the write-offs that other builders have suffered in the recent past. M/I should report a year-end book value around $45 per share, significantly higher than today's price. However, the company's debt level, at 53% of total capital, may prove nettlesome. As of now, M/I is in full compliance with all covenants. But with its current backlog 46% lower than year-end 2005 levels and margins compressing, coverage ratios will be perilously close to covenant levels if conditions don't improve or if management is unsuccessful in its cost-cutting attempts.