Five for Friday: The Companies Moving the Markets
Life + Money

Five for Friday: The Companies Moving the Markets

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Jefferies Foreshadows Upcoming Investment Bank Earnings
Rising compensation costs tied to a recent hiring spree were partly to blame for Jefferies Group’s disappointing profits of 39 cents per share in the three months ending in May. But investors of the larger investment banks, which announce earnings next month, are taking note of CEO Richard Handler’s comments on trading activities. In a conference call with analysts, Handler said, “Our fixed income revenues were $223 million for the quarter … down from the very strong $318 million reported for the first quarter of 2011.” Banks have already cut back in response to the slowdown. Challenger, Gray and Christmas recently said U.S. banks laid off 11,400 employees this year. However, investors may have already priced in these concerns. On the day of its earnings announcement, Jefferies stock actually closed at $21.35, 10 cents above the previous day’s closing price.

H&M Profit Margins Crushed by Cotton Costs and Swedish Krona
Hennes & Mauritz, the Swedish proprietor of 2,300 H&M clothing stores worldwide, said sales in the three months ending in May sales increased 12 percent in local currencies. Unfortunately, the relatively strong Swedish krona had unfavorable effects on reported results.  The greater concern, however, is soaring cotton costs, which are squeezing profit margins. Net income plunged 18.3 percent to 4.26 billion Swedish krona.  Management is reluctant to pass higher costs to consumers through higher prices because H&M’s main appeal is its affordable offerings.  Steeper price tags could be particularly detrimental to sales when customers are already tightening their purse strings. CEO Karl-Johan Persson noted: “Increasing interest rates, higher energy prices, and austerity measures in many economies have decreased consumer spending power.” H&M may benefit from higher volumes later this year.  Earlier this week, it announced it would offer a collection from fashion designer Donatella Versace.

Amazon Ups Ante in Texas Tax Holdout is seeking an exemption from collecting taxes from its Texas-based customers.  According to The Dallas Morning News, Amazon said it would create 5,000 jobs and spend $300 million on distribution centers in the Lone Star state in exchange for a 4 ½ year moratorium. Under the terms of the proposal, customers would have to take it upon themselves to pay any owed sales-taxes. In May, South Carolina accepted a similar deal from Amazon, which said it would build a $125 million distribution center employing 2,000 South Carolinians. Earlier this year, Amazon said it would exit Texas due to a $269 million tax dispute with the state’s comptroller.

FedEx Expresses Optimism on the Economy
FedEx, a bellwether of economic activity, had unexpectedly positive things to say about the past and future.  In its fiscal fourth quarter, which ended in May, earnings jumped 32 percent year-over-year to a better-than-expected $1.75 cents per share. “During fiscal 2011, an improved economy, strong customer demand and decisive actions to grow our business led to increased volumes and yields across all transportation segments," said CEO Fred Smith. FedEx successfully blunted the impact of high fuel costs with fuel surcharges, which customers accepted without balking. For the full fiscal year, it earned $4.90 per share. “With this positive momentum, moderate economic growth and subsiding cost headwinds, FedEx is well positioned to deliver strong earnings growth in fiscal 2012,” Smith added. The company expects fiscal 2012 earnings to grow a minimum of 30 percent to $6.35-$6.85 per share. FedEx stock gained 2.6 percent on the news.

Homebuilder Lennar Builds Hopes of Housing Bottom
Lennar, one of the largest domestic homebuilders, reported Q2 revenues of $764.5 million and net income of 7 cents per share, which reflect 6 percent and 65 percent declines, respectively, from a year ago. However, both figures were better than expected. CEO Stuart Miller is optimistic about the future. “For the month of May, new orders were up over 30 percent,” Miller said, “while new orders declined approximately 11 percent in the prior two months. Given that the housing stimulus tax credit was eliminated in May 2010, we should experience favorable year-over-year comparisons going forward.”  On Thursday, the Commerce Department said new home sales in May declined just 2.1 percent from April to an annual rate of 319,000, which wasn’t as bad as economists had expected. Last week, the Commerce Department reported that housing starts grew 3.5 percent to 560,000 at an annual rate, which again beat economists’ expectations. All of this suggests that the market for new homes, which are pricier than existing homes, is in better shape than was thought.