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In today's Motley Fool Take:
- LUV Hurts, CEO Walks
- Shameless Plug: Save $5 on Your Credit Report
- Apple Bears Fruit
- Discussion Board of the Day: Reality Television
- Citigroup Avoids Bad Juju
- Quote of Note
- More on Fool.com Today
LUV Hurts, CEO Walks
Even as it reported its 53rd consecutive profitable quarter today, Southwest Airlines
Its executive ranks are also in pain today. Following the firm's earnings release this morning, CEO James Parker abruptly resigned, effective immediately. The official reason given in Southwest's press release was "personal reasons," but the timing can't help but encourage investors to form their own conclusions. Parker ascended to the CEO title in 2001, and has been with Southwest for 18 years. CFO Gary Kelly will step in to fill the position, and treasurer Laura Wright will become CFO.
While revenues of $1.72 billion for the most recent quarter beat both Wall Street estimates of $1.66 billion and the $1.52 billion in revenues for the same quarter last year, earnings fell short. The company reported net income of $113 million, or $0.14 a share, below both Wall Street's estimate of $0.16 per share and last year's results of $246 million, or $0.30 a share.
As I wrote in June, higher fuel costs may actually be good for the industry in the long term by forcing a much-needed shakeout. But in the short term, industry profits are being squeezed across the board. Southwest is 80% hedged on fuel costs through 2005 with prices capped at approximately $25 per barrel. If, despite the hedge, its results are below expectations, weaker carriers that have not been able to hedge will feel an even greater amount of pain from the high cost of fuel.
In addition, pricing is now coming under severe pressure in the industry. As Brian Gorman reported, Southwest recently initiated a vicious price war. Other airlines were forced to quickly follow its price cuts, with JetBlue
Southwest is the first airline to announce second-quarter earnings, but a couple of recent announcements from legacy carriers indicate that they are suffering. Delta said earlier this week that it would take $1.65 billion in non-cash charges, including $1.53 billion related to deferred income taxes, because of the fact that it is unlikely to generate sufficient taxable income to realize its deferred income tax assets. In addition, this week United (OTC BB: UALAQ.OB) also stated that it has made the decision to postpone its minimum quarterly payment to its pension funds.
Most airlines will announce second-quarter earnings next week. Based on Southwest's disappointing announcement today, next week's news is likely to be even more painful.
Fool contributor Salim Haji lives in Denver and does not own shares in any of the companies mentioned.
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Apple Bears Fruit
Isn't it really just a matter of time before Apple Computer
In sum, this should be music to investing ears. This isn't to say that Apple is fading in the desktop space. Macintosh sales actually grew by 19% during the June quarter. However, one has to wonder how far this revival would have gotten if it weren't for the company's melodic endeavors.
Apple moved 876,000 Macintosh units and 860,000 iPods. On a dollar basis, sure, the Macs trump the cheaper music players by a wide margin. The iPods contributed a thin $249 million slice of the revenue pie. However, you have to attribute some of those Mac sales to Apple getting its brand name into the eyes -- and ears -- of the Microsoft
The company saw revenue soar by 30% to hit $2 billion during its fiscal third quarter -- its best showing in eight years for the June period -- but the company seems to be making as many headlines in the music world as it is in computing circles. It is succeeding where such major labels as Time Warner
Instead of surrendering market share to Dell
Apple expects the good times to continue, closing out its fiscal year in September by earning between $0.16 and $0.17 a share on $2.1 billion in revenue in its final quarter. So go ahead and let Apple whistle while it works. That's a catchy tune if I ever heard one.
Longtime Fool contributor Rick Munarriz really does think that Apple will save the music industry. He does not own shares in any companies mentioned in this story.
Discussion Board of the Day: Reality Television
Fox will begin airing a new reality cable network in 2005. Will viewers flock to the new channel, or have they had enough? Share your thoughts on our Reality Television discussion board.
Citigroup Avoids Bad Juju
Let me prepare the table for what's going to happen the remainder of the year for folks who oversimplify their investing process by slavish devotion to net earnings or the price-to-equity ratio.
Naturally, there are few companies out there that could absorb $5 billion in charges and still post a profit. And what we're talking about here is the quarter, not the year: Citigroup, despite this massive charge against earnings, still managed to earn $1.14 billion, or $0.22 per share. If you add back the amount of the charge, then Citi's earnings for the quarter would have been $1.02. Ah, yes, there was one other thing: Citigroup sold its 20% stake in a Saudi Arabian bank, Samba Financial, giving it a gain on sale of $756 million, or $0.15 per share. (Is it just me, or does "Samba" sound a wee bit more Brazilian than it does Saudi?)
These all, of course, are events that matter to Citigroup from a financial perspective. But these are not recurring events. Citigroup cannot continue to sell that same 20% stake in a Saudi bank, nor (for shareholders' sake) should one expect recurring multibillion legal charges and fines. My own opinion? Citigroup, Merrill Lynch
Each of Citigroup's main operating components showed spectacular top- and bottom-line growth in the quarter over the same quarter last year. Given that last year's comparable quarter straddled the Iraq war and the concomitant uncertainty, perhaps this is not much of a surprise. Areas where Citigroup has variable rate debt, in particular its burgeoning credit card division, should see at least an initial tailwind as those rates slide higher with the small Fed rate increase, but traditionally, financial companies do not perform as well in rising interest rate environments.
Ignore anyone who attempts to pin that as a justification of the valuation of Citigroup or any other financial company. It is well to remember that the Fed has kept interest rates at what are emergency levels for more than two years -- an unprecedented act, and the recent small bump up doesn't change the fact that interest rates are still set at a desperately low level. What happens, then, when rates rise from a 4% level and what happens in an economy where the Fed has essentially dropped bags of money on street corners are likely to be very different things.
Citigroup had, depending on how you look at it, a very good quarter, or a very bad one. I think that the quarter was exceptional, once you take out all of the charges and gains. However, I'm not quite sure how the environment could be any more tilted in Citigroup's favor. This will come to an end, one way or another. What the company has going for it is its wide reach, in terms of products and geography. I'm not sure how things could go much better than they did in this most recent quarter, everywhere, in every way.
- Citi Blackout, by Bill Mann
- Grubman's Latest Grease Job, by Al Silber
- Dollars and Cents in the Citi, by Alyce Lomax
Quote of Note
"A friendship founded on business is better than a business founded on friendship." -- John D. Rockefeller
More on Fool.com Today
David Meier thinks printing company Multi-Color should be on anyone's small-cap watch list in Small Cap Prints Money.... Selena Maranjian's Make Money as a Landlord reports on Fools' response to an article on things to keep in mind if you're thinking of taking a step into the world of real estate.
In other news:
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