Thursday, April 19, 2007

Paperstand (HSY, GOOG, BSX, GDP)

The WSJ reports that Freddie Mac (FRE) and Fannie Mae (FNM) said they expect to buy tens of billions of dollars of newly created subprime mortgage loans over the next few years to help prop up the roughly $1.3trln subprime mkt as lenders tighten their credit standards or flee altogether. The move shows how the two govt-sponsored co’s are redeeming themselves on Capitol Hill by depicting themselves as part of the solution to surging defaults on subprime mortgages, those for borrowers with weak credit records or high debt in relation to income. The promises to help such borrowers are bolstering their support in Congress just as lawmakers debate legislation to tighten regulation of Fannie and Freddie, both emerging from accounting scandals. That makes it less likely that Congress will back longstanding calls from the Federal Reserve and others for tight constraints on the amounts of mortgages they can retain as investments, currently around $1.4trln, or 14% of US home loans outstanding.

Notablecalls: NY Post reports that FRE and FNM bailout sum is about $20bn and in addition WaMu helps with $2bn. A win-win situation for FRE and FNM. Expect a positive reaction in subprime stocks.

“Heard on the Street” column out saying that shares of Hershey (HSY) might turn bitter before becoming sweet again. With a potential tug of war for the confectionery brands of Cadbury Schweppes (CSG) in the offing, Hershey might not be able to resist the temptation to make a bid. Any attempt by Hershey to purchase Cadbury's chocolate and chewing-gum brands, with an estd value of about $19bn, would put a squeeze on Hershey's earnings. But it may be an opportunity Hershey can't afford to miss. Analysts have bandied about various scenarios for a Cadbury deal, including one in which Hershey could buy Cadbury's gum business, while Kraft Foods (KFT) or Wrigley (WWY) could bid for its cream eggs and milk-chocolate bars. If Hershey were to consume a sizable chunk of Cadbury's brands, it would position the co as a global confectionery powerhouse. Hershey valuation of about 21x ‘07 earnings is lofty. "In our view, a large part of the run-up in Hershey shares is due to the mkt's belief that Hershey could be involved in some form of transaction with Cadbury Schweppes confectionery," JP Morgan analyst Pablo Zuanic wrote in a note. Mr. Zuanic downgraded Hershey's stock Mon to Sell from Hold.

“Ahead of the Tape” column discusses Google’s (GOOG) upcoming earnings report, suggesting a miss. What might pop up after search titan reports earnings later today is a story about Google. Google's search growth has blown past analyst expectations for so long that Wall St. might now be setting the bar too high. 33 of the 38 Google analysts have a Buy rating or better on the stock. Google is expected to post earnings excluding one-time items of $3.30 a share, up 69%. But search growth at Google and among its rivals is slowing down, which is understandable after years of supercharged gains. In March, Google's search queries in the US were up 29% from last year, below the 36% growth rate in Feb and down from more than 50% last year. Google is still growing faster than the industry. Industrywide, online searches in March were up 15%, compared with gains of 33% in Oct. Not surprisingly, Yahoo posted disappointing results late Tue. Google's stock, sliding since mid-Jan, may already be reflecting the trend. The co has also been on a spending binge, which could hurt profit margins. Last Fri the co said it will pay $3.1bn for DoubleClick. Google hasn't undershot earnings tgts since the 4Q05, and it blew past its 4Q06. An earnings miss now would be a shock to many. But with expectations so high, perhaps it shouldn't be.

Barron’s Online highlights Boston Scientific (BSX), whose shares have jumped 11% over 3 weeks, fueled largely by takeout speculation and an end to regulatory sanctions. But the co says it is not for sale. And with the co still facing big problems, the stock could either fall or languish. The mkts for stents and implantable defibrillators remain weak. New rival stents could steal business. Regulatory issues still need fixing. Profits, meanwhile, could fall in ‘07 for the 2nd straight year. "They still face a number of fundamental issues," says Michael Barr, of Victory Capital Mgmt. "The needle has shifted to some degree. The news about the FDA helped, but it isn't enough to get me to buy the stock." Last month, BMO cut its rating to Mkt Perform. "6 mo’s ago I would have said this was a value name, but now I am not so sure," says BMO analyst Joanne Wuensch. "It feels like a value trap."

“Inside Scoop” section reports that Josiah Austin, a Goodrich Petroleum (GDP) director, spent $1.9m to buy 60K Goodrich shares on the open mkt. Mr. Austin is already co’s largest stockholder. He now controls a 20.1% stake in Goodrich with nearly 5.69m shares, valued at $182m. Ben Silverman, of, notes that Austin has spent only about $36m to build the stake since Jun’00. This week's transactions raised Austin's cost basis to $6.30 per share from $6.00. Silverman says Austin has proved to be a smart buyer and continues to show "an enormous amount of faith in the co." Unlike well-known names like billionaires Carl Icahn or Harold Simmons, Austin "keeps a low profile" and has made strategic, and lucrative, plays in recent years.

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