Citigroup's 3Q Powered by Global Consumer Business
And we look at Apple's ripe 4Q and the SEC's inquiry into newspaper circulation.
Citigroup's C third-quarter results, released Thursday, showed why this firm remains the world's premier big bank franchise. Return on common equity registered 21%, powered by the performance of the global consumer business. The cards business was a particular standout within the global consumer franchise, as revenue, earnings, and receivables were all up while the net loss rate in North America dropped a whopping 95 basis points sequentially. However, we found it disappointing that the global corporate and investment banking business registered a relatively weak earnings gain of 7% year over year, compared with 23% in the consumer business. Although Citi's diversified franchise allows various units to pick up the slack when other units enter a cyclical downturn, we are growing a bit concerned about how long consumer can carry the day for the firm.
Craig Woker, CFA
Several newspaper publishing companies announced Monday that the SEC has inquired about their newspaper circulation reporting practices. These companies include Belo BLC, Dow Jones & Company DJ, Gannett GCI, Knight Ridder KRI, McClatchy MNI, New York Times NYT, and Washington Post WPO and may eventually include other publishers. The SEC's industrywide review comes on the heels of earlier findings of circulation overstatement by publications at Belo, Hollinger International HLR, and Tribune TRB. Circulation figures are important to both publishers and advertisers, as they determine rates that the publishers charge the advertisers. At this point, we have no reason to believe that the SEC inquiry will result in any new overstatement issues. However, we will monitor this situation closely, as any significant circulation overstatement may result in large refunds to advertisers, fines, or lawsuits.
James M. Walden, CPA
Apple Computer AAPL announced robust fourth-quarter and fiscal-year-end numbers Wednesday afternoon. We'll likely raise our $22 fair value estimate to $26-$27 to reflect higher revenue assumptions and an improved operating margin outlook, but we think the stock remains quite overvalued. We are particularly concerned about the effect the low-margin iPod will have on overall gross margins as iPod revenues become a larger percentage of overall revenues. Apple's iPod music player unit sales exceeded all expectations with more than 2 million units sold in the quarter; the product is now a little more than one fifth of Apple's revenues. New computers with powerful new processor chips are also selling well now that chip supply issues are being resolved. And the company continues to sell a healthy number of computers to first-time Mac buyers who like the iPod/iLife software experience enough to take the plunge into a full computer system. Management continues to believe the company must retain its large cash balance for strategic acquisitions or new product investments rather than return it to shareholders through dividends or share buybacks--a high-risk, high-return strategy investors should be sure they're comfortable embracing.
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