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Weekly Financial Report
With Scott Roulston of Fairport Asset Management
Friday, April 19, 2002
Scott Roulston, CEO of Fairport Asset Management, discusses
the flood of earnings being released and the trends they represent, the
impact the steel tariffs have made thus far, the ongoing saga of TRW and
the takeover bid by Northrup, and the SEC investigation into the improprieties
at Merrill Lynch.
April Baer–This week the nation' markets surged
and dove as dozens of major U.S. corporations rolled out earnings reports
for the first quarter of 2002. While the earlier part of the week was
mixed, the DOW took a dive yesterday after negative reports and profit
warnings from computer software giant, Microsoft and a few other tech
powerhouses. In Cleveland, the battle over TRW raged on. Defense contractor,
Northrup Grumman, tried to forward its takeover plans for the Cleveland-based
industrial company by making a second offer to TRW stockholders and taking
out a full page ad in the Plain Dealer urging stockholders to join up
or else. Local observers have suggested that if Northrup is successful
in its takeover bid, it could be end of TRW's long and profitable residence
in Cleveland. Scott Roulston of Fairport Asset Management joins us now
to review these stories and the rest of the news. Good morning, Scott.
Scott Roulston–Good morning, April.
AB–Let's go over the highlights of the many,
many earnings reports that came out this week. Did you see any overall
trends in manufacturing?
SR–Manufacturing is doing quite poorly, actually,
of all of the sectors. It's down and the capital goods sector is about
as weak as any. And that reflects the poor capital spending that we have
been talking about for some time. I think on a year-to-date basis, the
sector (the industrial sector) is down about 8% in the stock market. And
as you mentioned, we are in earnings season. About half of the earnings
reports are in, so we have a pretty good feel. In general, the economy
is going pretty well. About 60% of the companies have beaten their forecasts.
Only 16% have come in below. But a lot of the manufacturers are still
pretty weak and the expectations are pretty low.
AB–Well, it's been several months now since
President Bush imposed tariffs on foreign steel. Has there been any -
is that part of what's been going on in manufacturing?
SR–Not really yet, but we are starting to
see it play out. I was with a good friend in the steel business the last
couple of days. He was telling me that hot roll has gone from $200 to
$380 a ton, just in the last three months or so - almost a doubling of
steel prices. I think you are going to see this playing out over the next
few months. Manufacturers, who are already squeezed, are seeing their
costs of these raw materials going up. And that is going to play out in
the marketplace. I think you're going to see some real protest, not to
mention how this is playing out abroad.
AB–Two of the biggest high tech companies
in the United States had very crummy weeks - that is really the only word
for it. IBM and Microsoft didn't have a lot of good news for their stockholders.
What's been going in other parts of the high tech world?
SR–In general, things are not too good in
the technology world. The sector (information technology) is down about
16% on the year. That's much worse than the market. There are signs here
and there, though, that things are starting to firm up and bottom out.
So the comparison is that while they are down versus last year, we may
start to see some sequential up quarters as we go through the rest of
the year. In other words, things aren't going to get any worse. It looks
like - I was just with Motorola the last couple of days in Chicago and
they were telling us that it certainly is getting a little bit firmer.
They can look out a little bit further and start to see things are starting
to get a little bit better.
AB–I wanted to ask you about TRW's situation.
Northrup Grumman and TRW were the dance partners everybody was watching
this week. I can't figure out what's going on here, though. Northrup Grumman
tries to turn up the heat on TRW by making a higher stock offer, but ends
the week with a lower stock price than it started with?
SR–Well, you know they have been buying time.
Over the last six weeks there have been a lot of things going on behind
the scenes, I'm sure. It all boils down, I think, to TRW trying to get
as many options out there as they can. We haven't seen any other buyers
come forward just yet and that probably indicates that this new stock
price is about as high as it's going to go. Maybe a little bit higher
than the $53, but it looks like TRW as we know it is going to have a tough
time staying around.
AB–Let's talk about something a little bit
different for a minute. It looks like Merrill Lynch has reached a deal
with New York Attorney General, Elliot Spitzer, regarding some improprieties
that may have been happening. What happened was one of the top analysts
at the firm - one of his e-mails got leaked, suggesting that the company
was telling its customers one thing about certain companys' value, while
the analysts themselves were actually thinking something a little bit
different here. The thing I am wondering about this situation was why
are the authorities going after Merrill Lynch specifically?
SR–They are going after Merrill Lynch, but
I think they are going to go after other firms. The rumor on the street
is that they are looking at CSFB First Boston and they are next on the
hit parade. But what you are referring to is Henry Blodgett, the internet
analyst, had buy recommendations out and at the same time internally he
was calling the stock a "dog". I think Spitzer went after them because
they were very visible and that was low hanging fruit. You know, you had
the proverbial smoking gun. But I wouldn't be surprised if you see more
of these kinds of cases as he goes after some other firms.
AB–Scott, one last thing. You know I'm always
on the lookout for hot, new ideas in retail. I think I've found the mother
of all buys. The Vaughn Bassett Furniture Company is introducing a new
line of bedroom furniture inspired by Elvis Presley. I just never thought
it would come to this. This includes the "Love Me Tender" bed and the
"Burning Love" heart-shaped mirror. I think I have some ideas here. What
about a "Shake-Rattle and Roll-away" bed? Do you think that would sell?
SR–(Laughter) Well, April, you have a birthday
coming up pretty soon. I think we maybe could ask your program director
to get a "Blue Suede" captain's chair for you and David Barnett.
AB–I don't know if that would quite go with
our standing décor but I'll pass the suggestion along anyway. Thanks very
much, Scott.
SR–Have a great weekend.
AB–Scott Roulston of Fairport Asset Management
talks business with us on Fridays.
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