US Share Market Spread Betting Report

Posted on | November 3, 2009 |

The downtrend on the Dow and S&P 500 resumed, as wider-than-expected losses at UBS and a downgrade on semiconductor stocks encouraged investors to reduce their exposure to equities.

The downtrend on the Dow and S&P 500 resumed, as wider-than-expected losses at UBS and a downgrade on semiconductor stocks encouraged investors to reduce their exposure to equities.

US banking shares came under pressure this afternoon after Swiss banking giant UBS unveiled disappointing quarterly results. UBS reported a third quarter net loss of 564 million Swiss francs, which was more than double the 207 million loss expected by Reuters.

The bank’s key wealth and asset management business continued to haemorrhage, with total net withdrawals coming in at a staggering 36.6 billion Swiss francs.

UBS’s shares sunk 4.7% to $16 a share on the New York Stock Exchange. Meanwhile, Citigroup’s shares slid 2.3% to $3.9 and Bank of America fell 1% to $14.48 a share.

Semiconductor shares were also under pressure after being struck by a downgrade from Morgan Stanley. The broker lowered its rating on US semiconductors stocks from ‘attractive’ to ‘cautious’, warning that fundamentals are peaking across the sector and that inventories are beginning to creep up again.

Morgan Stanley also downgraded chip giant Intel Corp from ‘overweight’ to ‘equal weight’ and lowered its ratings on Micron Technology, Altera Corp and Xilinx, among others. [1]

Intel’s shares plunged 3.4% to $18.36 and Micron Technology fell 2.7% to $6.40. Altera declined 2.69% to $19.39 while Xilinx dropped 2.6% to $21.18.

By 3.30pm (London time) the Dow Jones Industrial Average was trading 46.4 points (-0.47%) in the red at 9743.04, while the broader S&P 500 was 4.98 points (-0.48%) below its previous close at 1037.90. The Nasdaq fared relatively worse, falling 10.04 points (-0.60%) to 1662.87.

Railroad transportation shares managed to buck the negative trend today after Berkshire Hathaway, owned by renowned billionaire investor Warren Buffett, made its biggest acquisition in the sector.

Berkshire announced that it has agreed to acquire the remaining 77% stake of the railroad company Burlington Northern Santa Fe Corp for $100 a share in cash and stock, valuing the transaction at around $44 billion.

Buffett made this acquisition on the view that the US economy will continue to recover from one of the worst recessions in history. He views railroad companies as having an advantage over other forms of transportation that depend on fuel.

‘As oil prices go up, higher diesel fuel raises costs for rails, but it raises costs for its competitors, truckers, roughly by a factor of four,’ Buffett told his shareholders at an annual meeting back in 2007. ‘There could be a lot more business there than there was in the past.’ [2]

Interestingly, my calculations show that Buffett is paying 18.1 times Burlington’s estimated 2010 earnings of $5.528 per share and around 2.65 times its estimated book value of $37.688 a share.

In comparison, rivals Union Pacific and CSX Corp traded at multiples that were substantially lower than Burlington’s forward multiples. This could, in theory, suggest that there may be further upside in the share values of Union Pacific and CSX Corp – although I must warn that theory may not necessarily prevail in current market conditions.

Union Pacific’s share price traded 5.3% higher at $58 a share this afternoon, which is 13.77 times its 2010 earnings-per-share estimates of $4.213 and 1.67 times next year’s forecast book value of $34.78 a share.

In order for Union Pacific to trade at similar multiples to Burlington, its share price would have to be trading 31% higher at $76.

Similarly, CSX Corp, another of Burlington’s rivals, traded 6.9% higher at $45.80 a share this afternoon. This is 14.01 times its 2010 estimated earning per share of $3.269 and double next year’s forecast book value of $22.93 a share.

In theory, CSX Corp would have to be trading around 29% higher at $59 a share in order to be trading close to Burlington’s 2010 estimated multiples. [3]

The Black & Decker Corporation, the maker of power drills, also bucked the trend, rallying 26% to $59.64 after agreeing to be acquired by Stanley Works for $3.5 billion in stock. Stanley Works advanced 6.7% to $48.17 a share following the announcement.

Source: [1] Wall Street Journal (3 November 2009)
Source: [2] Bloomberg News (3 November 2009)
Source: [3] The 2010 per share earnings and book value estimates for Union Pacific and CSX Corp was based on Bloomberg’s median analyst estimates and on GAAP accounting standards.

By Anthony Grech, Research Analyst, IG Index.

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