Wednesday, June 18, 2008

Boeing Wins Protest of Northrop Aerial-Tanker Award

June 18 (Bloomberg) -- Boeing Co. deserves another chance to bid on the $35 billion U.S. Air Force aerial-tanker contract won by rival Northrop Grumman Corp., a government agency said.

``Our review of the record led us to conclude that the Air Force had made a number of significant errors that could have affected the outcome of what was a close competition between Boeing and Northrop Grumman,'' the U.S. Government Accountability Office announced today in Washington. ``We therefore sustained Boeing's protest.''

Boeing appealed to the GAO after Northrop and partner European Aeronautic, Defence & Space Co. won the contract Feb. 29, snaring a program that had been Boeing's for more than half a century. Boeing claimed changes the Air Force made during the competition favored Northrop. The selection of Northrop was undermined June 12 when both companies confirmed the Air Force miscalculated operating costs of the competing aircraft.

``While the variance in costs is trivial, it points to a broader erosion in the government's rationale for picking the Northrop-EADS plane,'' Loren Thompson, an analyst at Lexington Institute, an Arlington, Virginia-based public policy research group, said in an e-mail before the announcement. ``The outcome of the competition was fairly close, as Boeing has argued in its filings, rather than a decisive win for the Northrop-EADS team as the Air Force asserts.''

Boeing shares have declined 11 percent since the decision, compared with a 12 percent drop in Northrop. Boeing rose $1.08 to $75.46 at 1:22 p.m. in New York Stock Exchange trading, while Northrop fell 33 cents to $70.76.

Air Force Response

Boeing beat the odds in winning support from the GAO, the investigative arm of Congress that sustains only one in four protests. Winning the protest also helps Boeing keep its main commercial-aircraft rival, EADS' unit Airbus SAS, from a getting a foothold in the U.S. defense industry. Airbus took the No. 1 commercial-plane position away from Boeing in 2003.

GAO rulings are advisory. While the Air Force isn't required to follow the agency's recommendation, the service has to explain to Congress if it chooses to ignore the advice.

The Air Force must now respond within 60 days with a course of action based on the GAO findings, adding to a four-year delay in the program that the service says is needed to replace a fleet of airborne tankers in use since 1956.

Replacing Fleet

Efforts to begin replacing the fleet of more than 500 tankers have been held up since 2004, when a plan to lease and buy 100 aircraft from Boeing collapsed amid ethical violations by an executive and an Air Force official that sent both to jail.

Alabama Governor Bob Riley was in an editorial board meeting at Bloomberg headquarters in New York when he learned of the news, which will create further delay in Northrop's plans to build the tankers in his state and create at least 1,500 jobs.

``Oh, God, that's not good,'' said Riley, a Republican serving his second term. Earlier, he said it would take ``an absolute nutcase'' to prefer the Boeing bid over Northrop's.

The GAO decision doesn't imply that Boeing now has an easy road to reversing the original award and capturing the work for itself, said Jim McAleese of McAleese & Associates, a government contracting and national-security law firm in McLean, Virginia.

``To be successful in any potential re-competition, Boeing must demonstrate that it is either technically superior at a reasonable cost/price-premium, or that it is significantly lowest-evaluated-cost,'' McAleese said in an e-mail before the announcement. He wasn't involved in the protest.

Tuesday, June 10, 2008

Bernanke's Rate Spike Poker Face

By Maurna Desmond

(Forbes) Investors and economists placed their bets Tuesday, some with investments and some with pens, on whether Federal Reserve Chairman Ben Bernanke will make good on his tough inflation talk and spike U.S. fed funds interest rates.

Late Monday, the Fed chief said that the likelihood of a significant American economic downturn had diminished substantially in recent months. He expressed concern, however, about inflationary pressures in the United States. His statements implied the Federal Reserve is more worried about stemming inflation, perhaps by raising interest rates, than stimulating a not-quite-so-weak economy.

While many on Wall Street jumped at the prospect of a rate hike, some aren't buying that the Fed will increase interest rates again. Morgan Stanley's Global head of interest rate strategy said Monday that he thinks it is "unlikely" the Fed will raise rates until mid-2009. He added that U.S. two-year treasury bonds are undervalued due to Fed interest rate hike fears. The economist added that he views the U.S. as "lingering below-trend growth" and not a prolonged recession according to
Treasury bonds were hit hard by the Fed chairman's statement, with interest rates apparently rising both because of the outlook that the Fed might begin to undo its easy-money policy of the past year and because of the inflation threat. The yield on the 10-year Treasury note, a benchmark for the world's capital markets, rose to 4.10% from 3.99% late Monday. As inflation rises, investors demand higher returns on bonds since the purchasing power of the money invested will be eroded. The 10-year yield ended the first quarter of this year at 3.43% as fears of financial collapse had investors running for the perceived safe haven of the U.S. government market.

The dollar benefited from the idea that the Fed might raise short-term rates. While the greenback gained to 107.20 yen from 106.30 late on Monday, the euro fell to $1.547 from $1.563 and the British pound slipped to $1.9548 from $1.9733.

Boston Fed President Eric Rosengren echoed Bernanke's concerns Monday saying that rising food and energy costs are impacting the economy from the top down, complicating the outlook for inflation. Dallas Fed President Richard Fisher warned that gradualism was still a watchword for the central bank, even though it had acted very aggressively in lowering interest rates to combat the fallout of the subprime mortgage crisis last year.

Not everyone believes that inflation is the greatest threat to the U.S. economy, but rather the burgeoning U.S. trade deficit which hit $60.9 billion in April, up from $56.5 billion in March. April's gap was substantially larger than the $59.5 billion economists had expected.

"The trade deficit heightens the risk of recession and surging unemployment," said Peter Morici, a professor at the University of Maryland School of Business and Forbes columnist. "Ben Bernanke’s recent comments about oil driven inflation only serve to distract attention from these issues and aggravate risks."

Morici argued that money spent on foreign oil, China's lopsided trade relationship that is propped up by a devalued yuan, and a few other key deficit components pose a growing threat to the financial health of the United States.

Thursday, June 5, 2008

Natus Medical cuts full-year profit expectations

NEW YORK (Associated Press) - Natus Medical Inc., a provider of medical devices for newborn care, said Thursday it lowered its 2008 full-year profit projection as a result of an acquisition and two stock offerings. Natus now expects full-year profit between 68 cents and 70 cents per share on revenue between $163 million and $164 million. Previously, the company projected per-share profit between 70 cents and 72 cents and revenue between $161 million and $162 million. Analysts surveyed by Thomson Financial expect full-year profit of 69 cents on revenue of $161.7 million. The company reaffirmed its second-quarter earnings projection of between 14 cents and 15 cents per share. Analysts expect earnings of 14 cents per share. For the second quarter, the company now expects revenue of $38.3 million to $39.3 million. It had previously said it expected revenue of $38 million to $39 million. Analysts expect revenue of $39 million. In May, Natus completed its $9 million acquisition of privately held Sonamed Corp., which makes products to test for hearing loss in newborns. Natus also completed a public offering of 4.6 million shares in May, bringing in proceeds of $84.3 million before expenses. In April, the company closed a 885,500 share offering, raising $15.4 million.

Monday, June 2, 2008

Major Music Distributor Handleman Exits Music Business

Major music distributor Handleman Corp. announced Monday (June 2) that it is exiting the music business. The Wal-Mart chain has been Handleman's biggest CD customer. Handleman president/CEO Albert A. Koch said, "CD music sales have been declining at double-digit rates for several years, both industry wide and at our customers' stores, resulting in a sharp drop-off in our business. Unfortunately, even the significant steps we've taken over the past two years to reduce our costs have not enabled the company to return to profitability." The Troy, Mich.-based company will lay off 260 workers. Its inventory and other assets will be sold to Anderson, based in Amarillo, Tex. Handleman said it will continue to operate its other units, including video game maker Crave Entertainment.

Analysts see JPMorgan Chase as suitor for Wachovia

by Katy Finger

(The Business Journal of Milwaukee)Wall Street analysts say the ouster of Ken Thompson as Wachovia Corp. chief executive could lead to a sale of the bank, with JPMorgan Chase & Co., which has a large Milwaukee-area presence, identified as the most likely buyer.

Even without such a sale, Charlotte, N.C.-based Wachovia (NYSE: WB), which has no Wisconsin bank branches, is facing a period of significant change that some analysts view as a chance to improve the bank's earnings but others expect will mean more weakness and uncertainty.

"Under Ken Thompson's leadership, he took a defeated First Union franchise and transformed it into one of the premier retail banks in the country and significantly improved profitability," wrote Citigroup Global Markets Inc. analyst Keith Horowitz in a research note Monday. "Unfortunately, his legacy will more likely be defined by the ill-timed Golden West acquisition, which left Wachovia very exposed to the mortgage crisis."

Wachovia has been hit by a string of bad news in recent months, but the company's financial woes have revolved largely around its massive exposure to the declining mortgage market, a byproduct of its 2006 acquisition of Golden West Financial Corp., a California thrift that specialized in nontraditional, option-adjustable-rate mortgage loans. The deal put Wachovia in California and other Western states, but the bank bought the thrift at the peak of the mortgage market and has become swamped with defaulting mortgage loans.

Thompson has since conceded the acquisition was poorly timed.

The bank also recently cut its dividend to 37.5 cents per share from 64 cents per share while raising $8 billion in new common and preferred stock, which diluted the value of existing shareholders' stock.

Several analysts think a sale to New York City-based JPMorgan (NYSE: JPM) may be likely. JPMorgan Chase entered the Milwaukee market with its 2004 purchase of Bank One of Chicago. Chase is now the third-largest bank in the Milwaukee area based on local deposits.

"JPMorgan would be regarded as the most likely buyer," wrote Edward Najarian, research analyst at Merrill Lynch & Co. Inc., in a research note Monday. He points out that JPMorgan's CEO, James Dimon, has said he would like to expand JPMorgan's branch network in the Southeast. "He would also likely find Wachovia's over 14,000 retail brokers an attractive asset," he wrote.

Deutsche Bank analysts also say Wachovia offers what JPMorgan wants. "JPMorgan has indicated at times that it would be interested in franchises that include a combination of California, Texas, Florida and brokerage," analysts Mike Mayo and Chris Spahr wrote Monday, "and Wachovia contains all of these."

However, after JPMorgan, "potential buyers dwindle materially," Merrill Lynch's Najarian wrote. Charlotte, N.C.-based Bank of America Corp. (NYSE: BAC) is an unlikely suitor because of antitrust issues, he wrote. And Citigroup Inc. (NYSE:C) doesn't have the capital, he wrote.