Hear ye! Hear ye! Gather round the olde towne square, for we have announcements to share. We'll nail this news to a post. The news regards second-quarter earnings from Johnson & Johnson (NYSE: JNJ), Intel (Nasdaq: INTC), and Mellon Financial (NYSE: MEL).
In general, second-quarter results at our companies fell short of hopes, but especially at Mellon. Should we hang these companies for their shortcomings, burn them at the stake, tar and feather them, or let them live on? Let's look.
Jolly J&J giant a little short
Despite landing two cents short of the average earnings per share estimate, J&J displayed the best overall performance of our three companies. Second-quarter revenue rose 8.8% year-over-year, to $8.3 billion, while diluted net income totaled $1.5 billion, or $0.51 per share, up a healthy 16.2%. Pharmaceutical sales rose a strong 16.5%.
Why a few pennies short of the estimate? The consumer products division had its worst sales growth since 1998, nearly flat, and overseas currencies aren't helping. In the "good news" department, management stated in the conference call that it is comfortable with 2002 earnings estimates, which range from $2.15 to $2.20 per share. At $54, the stock trades at about 24.8 times 2002's estimate.
Overall, we continue to be pleased by J&J, but we do hope for lower share prices before we eventually buy more. Fool News has more on J&J's results.
Intel ahead of expectations, but down anyway
Of the three, this is the company that you care most about, isn't it?
Before charges, Intel earned $0.12 per share and was expected to earn only $0.10, so that was good. Gross margin dropped to 48% from about 58% over much of 2000, as Intel continued to cut prices. Its newest Pentium 4 chip is down to $350 apiece, where Intel's newest chips used to sell (just a year or two ago) at $700 and up. Cuts aren't stopping. This week Intel cut prices on 1 GHz and 900 MHz Pentium IIIs by 37%.
Second-quarter revenue was reported as $6.3 billion, down 23% from last year, while net income was $854 million, down 76%. Intel stated that third-quarter revenue should be between $6.2 and $6.8 billion. This slowdown is partially due to a glut of chips at personal computer manufacturers. Unit sales of microprocessors are down 30% from last year, while computer sales are flat to down approximately 10%, depending on whose estimate you read. This shows how PC makers have chips in inventory, and until they sell them, PC chip sales will be even weaker than PC sales. Meanwhile, large corporate purchases of high-end processors logically remain slow.
Some good news is that chip set sales are stabilizing and rising, and microprocessor sales typically follow the lead of chip set sales, though with a lag.
Intel's slowdown isn't a case of poor management or a stumbling business. External factors have beaten the business down from a record 2000 -- and better competition from Advanced Micro Devices (NYSE: AMD) hasn't helped. Overall, however, Drip Port continues to be confident about Intel's long-term business prospects. Chips are typically cyclical, after all. We bought more shares of Intel in early July, and we may buy more before long. Fool News wrote more on chip news in general.
Mellon in a jam
Yikes. Earnings per share growth of 10% was anticipated, but Mellon only grew 'em 5% to $0.40. What happened?
The performance of Mellon's retail brokerage, private equity, and other undefined small business divisions pulled down the company's earnings. The company's core businesses -- corporate finance services and asset management -- performed well, growing 13% in the first six months of this year; management said that the company's business overall (based on continuing operations) should grow 14% in 2002.
Despite only a 5% gain in earnings per share this quarter, management is optimistic about 2002 because Mellon will soon sell many slower growing divisions, namely its retail banking and small business services. These divisions are slated to be sold to Citizens Financial Group for $2 billion in cash. Mellon is divesting these businesses in order to focus on fee-based businesses, which are already its core business. Fee-based revenue is typically a steadier, more reliable revenue source than retail banking, for example, and therefore financial companies in fee-based businesses are typically awarded higher valuation multiples than banks. Mellon wants that.
This quarter's earnings shortfall can't be overlooked, though. It's very meaningful to investors. The company was expected to earn $2.24 per share in 2001 prior to this shortfall. Now some estimates have been cut all the way to $1.70 per share. If that proves accurate, even if we boldly assume 14% growth in 2002, earnings per share in 2002 will still fall far short of the old 2001 estimate of $2.24, at around $1.93 per share. In other words, the stock recently traded based on expectations that were much higher than they are now.
That said, Mellon is hinting that earnings this year should be closer to $1.90 per share, meaning, with 14% growth, 2002 earnings could be around $2.17 per share. That's still far short of old estimates, though.
Since the second-quarter news, Mellon's stock has fallen about 8%, to $39, but it still doesn't look inexpensive based on revised expectations. It's at about 22 times what Mellon may earn in 2001. I believe that we'll continue to see Mellon's stock decline for a while, eventually giving us attractive buying opportunities, hopefully, because I also believe that this will prove a short-term blip as Mellon continues to focus its business on fee generation and waits out a slow brokerage and equity business, which is a macro event.
So, our eyes will be on Mellon, looking for a newly attractive buy point.
Finally, PepsiCo (NYSE: PEP) announced results this morning. It topped expectations by a penny, earning $0.44 per share, up 14% from last year. Next week, we'll look closer and decide where to send our August investment money. Stay Foolish, steady investors....
Jeff Fischer enjoys strawberry jam in the springtime, but doesn't care for Mellon's jam in the summertime. He owns the stocks in Drip Port. The Motley Fool has a full disclosure policy.