Sentiment on Wall Street was tempered by General Electric’s results, which countered the optimism emanating from Citigroup and Bank of America’s better than expected quarterly results.
US bellwether General Electric tumbled 4.8% to $11.80 a share this afternoon after unveiling a disappointing 17% slump in second quarter revenues, which came in at $39.1 billion – trailing Bloomberg’s average analyst estimate of $41.95 billion.
Earnings over the period slumped around 47%, as recessionary pressures hit its finance, healthcare and NBC Universal units. Net income from continuing operations came in at $2.87 billion, or 26 cents a share, slightly better than Bloomberg’s average estimate for a profit of 24 cents a share. That compares with profit of $5.39 billion, or 54 cents a share, in the same period last year.
Internet advertising giant Google was also trading lower this afternoon, despite unveiling results that topped forecasts last night, as investors were disappointed to learn of slowdown sales growth. Google’s share price slid 2.9% to $429.82 per share.
Banks bucked the negative trend on Wall Street, however, with Citigroup rising 2.3% to $3.10 and Bank of America up 0.2% to $13.19 after their second-quarter results led the market to believe that these two banks may, in fact, survive the crisis.
Citigroup today reported second-quarter profits of $4.28 billion (equivalent to 49 cents a share) thanks to a $6.7 billion (after tax) gain related to the combination of its Smith Barney brokerage operations with those of Morgan Stanley.
The exclusion of that one-off gain left Citigroup with an operating loss of 27 cents a share, which was narrower than Bloomberg’s average analyst estimate for a loss of 33 cents a share and the prior year’s second quarter loss of 55 cents a share.
The bank’s revenues were also stronger, up 71% to $30 billion, but the rise was mainly due to gains from Smith Barney and net write ups.
Citigroup’s balance sheet was substantially stronger at the end of the second quarter; its Tier 1 Capital Ratio stood at 12.7%, up from 8.7% in the year before and 11.9% at the end of the first quarter. That also compares favourably with JP Morgan’s Tier 1 Capital ratio, which stood at 9.7%.
It is also worth noting that Citigroup is expected to start converting $33 billion worth of preference shares and the government’s $25 billion bailout stake into common stock this month - a development the would leave the US government with a 34% stake in the company.
In the meantime, Bank of America also released its second quarter results today. The biggest US bank by assets also unveiled a quarterly profit that beat consensus expectations, with net income coming in at $3.22 billion, or 33 cents per diluted share, topping Bloomberg’s expectations for earnings of 18 cents a share.
Bank of America’s net income was, nevertheless, 5.5% lower than a year ago and its Card Services division had swung a loss of $1.62 billion from a $582 million profit the year ago, as rising unemployment left borrowers unable to service their credit card repayments. This has been a recurring theme with banks reporting lately – rising unemployment is exerting pressure on credit card divisions and raising bad debts, but banks have been able to counter this weakness through cost cutting and record revenues and profits generated from other divisions.
Shares in JPMorgan Chase added nearly 2% to $36.83 a share while Goldman Sachs edged 0.3% higher to $157.28.
Elsewhere in the financial sector today, shares in embattled US commercial lender CIT Group soared nearly 40% to $0.571 after announcing that it is in talk with potential lenders to secure funding.
Toy maker Mattel was also in earnings news today. It share price advanced 4.6% to $16.93 after unveiling an 82% rise in second-quarter net income of $21.5 million, or 6 cents a share. That compares with $11.8 million, or 3 cents a share, a year earlier. The company managed to bolster its profitability, despite a seeing a 19% decline in revenues, which came in at $898.2 million.
On the macro front, data released this afternoon showed US housing starts rising by 3.6% in June to a seasonally adjusted annualised rate of 582,000 in June, the highest level since November and better than Bloomberg’s expectations for a drop to 530,000 from 562,000. In addition, US building permits rose 8.7% to an annual rate of 563,000 in June, the highest level of the year.
‘Builders are beginning to see some opportunities to get back to work,’ said Mark Vitner of Wells Fargo Securities. While a strong rebound is not likely to occur for some time, ‘it seems clear that housing starts bottomed in the first quarter.’ [1]
By around 4pm (London time) the Dow Jones Industrial Average was 13.23 (-0.15%) lower at 8698.59 while the wider (more representative) S&P 500 declined 4.28 points (-0.45%) to 936.46. The Nasdaq was also lower, down 2.26 points (-0.15%) to 1516.61.
[1] Source: Bloomberg News (17 July 2009)
By Anthony Grech, Research Analyst, IG Index.
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