This is another landmark day in the ongoing battle to punish and reform major Wall Street investment firms.
Today, 10 companies agreed to the final terms of a $1.4 billion settlement for charges of issuing biased and untruthful research reports in order to secure more investment-banking business. This is the same case we've written about before, but it wrapped up today with a look at some of the details involving individual firms.
Citigroup's (NYSE: C) Salomon Smith Barney unit was hit the hardest with a $400 million fine and a permanent ban on former telecom analyst Jack Grubman from working in the financial services industry. Grubman also agreed to $15 million in fines. Henry Blodget, a former Internet analyst with Merrill Lynch(NYSE: MER), was also banned and will pay $4 million in fines.
Besides Salomon and Merrill, other firms involved are Credit Suisse Group's(NYSE: CSR) CSFB, Goldman Sachs(NYSE: GS), Morgan Stanley(NYSE: MWD), Bear Stearns(NYSE: BSC), J.P. Morgan Chase(NYSE: JPM), Lehman Brothers(NYSE: LEH), UBS Warburg, and U.S. Bancorp's(NYSE: USB) Piper Jaffray.
In today's Motley Fool Take:
- P&G Cleans Up
- Quote of Note
- Don't Invest in Generalizations
- David and Tom Gardner: Uncensored
- Consumer Spending: A Catch-22
- Discussion Board of the Day: Hockey Fans
- Quick Takes: McDonald's , Goodrich, Sysco, more
- And Finally...
P&G Cleans Up
A week after diapers creamedKimberly-Clark's(NYSE: KMB) first-quarter results, consumer products company Procter & Gamble(NYSE: PG) reported a boost in fiscal third-quarter earnings, thanks to the handy little disposable nappies.
P&G earned $1.27 billion for the quarter, including a $66 million after-tax restructuring charge. It posted $1.07 billion in earnings for the prior quarter, also including a charge. Excluding charges, the company netted $1.34 billion, 13% ahead of last year's Q3 on the same basis. Per share, it returned $0.96 versus $0.84, before charges.
Total sales for the purveyor of everything from Folgers coffee to Crest Whitestrips to Pampers diapers rose 8% to $10.66 billion, benefiting by 3% from a positive foreign exchange impact. Continued pricing pressure in such highly competitive markets as diapers and whitening oral care products weighed on sales.
P&G's baby products division saw a strong 9% sales increase and 7% volume growth, driven by the Pampers Baby Stages line. Other units returning solid results were beauty care and health care, with 10% and 18% sales growth, respectively.
P&G cut prices recently on Crest Whitestrips to compete more effectively with Colgate-Palmolive's(NYSE: CL) Colgate Simply White brush-on gel, which then helped boost the volume for the health-care division. The company is reinvesting proceeds from its gross margin progress into advertising for oral care products, since this is a huge market for it.
One admirable trait about P&G is that it releases a lot of information with its earnings announcements. We can see immediately how the company's doing free cash flow-wise, which provides us with a good check on earnings. In this quarter, it produced $2.06 billion in free cash flow, substantially ahead of its reported earnings. We like that. Through the first nine months of the fiscal year, it's thrown off $5.77 billion in excess green, ahead of the same period last year by 37%.
Quote of Note
"Knowledge without wisdom is double folly." -- Baltasar Gracián (1601-1658), Spanish Jesuit philosopher and writer
Don't Invest in Generalizations
When you come across an article with this kind of reasoning, "If just 1% of the money rotated from large-cap funds to mid caps, that would translate into a 4% rise in the amount of cash spent on mid caps," turn the page.
Just as unexplored places on maps in the Middle Ages were labeled "that way be dragons," the article's author doesn't know what's coming. So he guesses. The fact that his guesses sound authoritative doesn't change the fact that they are blind guesses.
Of course, I'm not sure what I should've expected from an article called "Mid-Caps May Be Best in Months to Come." The piece was issued forth by Reuters(Nasdaq: RTRSY) over the weekend, and Yahoo!'s(Nasdaq: YHOO) Finance section thought enough of it to put it in a lead slot.
Articles like this must sit in newsrooms around the globe in Mad Lib style. Just fill in the verbs and nouns, get a quote, tag it, and bag it. No thought required.
Referring to the offending line above, what does the rotation of money into funds have to do with the value of any single mid-cap stock? And, more importantly, what earthly effect would a rotation into mid-cap funds do for the underlying performance of mid-cap companies? And since when does a cohort of several thousand companies, spanning every industry, in every phase of their business cycles, do anything at the same time?
The author posits that mid caps didn't suffer as severe a drop as large caps. He says they could have values, and then asks a couple of mid-cap mutual fund managers whether they like mid caps going forward. Can you believe it? Mid-cap fund managers, who make money based on their ability to get people to put assets under their management, like mid caps over the near future?! Color us stunned.
Got that? Never mind that mid-cap funds and mid-cap stocks are two different things. And never mind that the hope of a fund rotation has absolutely no bearing at all on whether any one of the companies in this cohort is a good investment at this or any other price. Just wishing for the inevitable pop from a rotation in funds is enough, apparently.
Never mind that fund managers have no real insight into what stocks are going to do in the short run.
Heck, it might happen. It'll be a nice change of pace for the folks who make prognostications to get one right for a change. Won't change the fact that it would be blind, stupid luck, though.
It can't be said enough: Don't invest in generalizations.
David and Tom Gardner: Uncensored
If you're interested in advice that's geared toward average investors instead of rich hotshots, check out David and Tom Gardner's newsletter, Motley Fool Stock Advisor. Each issue features a Tom and David tête-à-tête, during which they explain their stock ideas.
Consumer Spending: A Catch-22
"War is depressing -- let's go to the mall!"
That may not be exactly what Americans said last month, but that's what many did. The Commerce Department announced this morning that consumer spending, which accounts for two-thirds of the economy, rose 0.4% in March. That's up from a 0.1% decrease in January and a 0.1% increase in February.
News of more buying is a mixed bag. We all want the economy to pick up, but we also know that people aren't saving enough for retirement and other goals. In fact, the savings rate decreased slightly in March, to 3.6% from 3.7% in February.
This brings us to a theory economists call "the paradox of thrift." Essentially, this theory says that savings are good for the individual, but bad for the economy. Every individual is better off having money in the bank and investments in their portfolios, but the less people spend, the less the economy grows.
As with everything in economics, however, not everyone agrees. Many experts argue that saving is better for the long-term economy since accumulated savings eventually become big purchases.
So don't justify your trip to Disney World as an attempt to prop up the stock market. You, and the rest of America, will be better served if you have an emergency fund set aside and a fully funded IRA before you splurge on a Jacuzzi.
Discussion Board of the Day: Hockey Fans
Given the Mighty Ducks' strong swim this season, do you disagree that owning a hockey franchise is bad business? Do you think your fellow Fools know the difference between a jester cap and a hat trick? All this and more -- in the Hockey Fans discussion board. Only on Fool.com.
Quick Takes
The Golden Arches are gleaming again. McDonald's(NYSE: MCD) earned $327.4 million, or $0.26 a share, in its first quarter -- 29% ahead of last year's Q1. Excluding accounting changes, McDonald's earned $0.29 a share versus $0.27, topping estimates by a penny. Total revenues rose 5% to $10.15 billion, thanks to beneficial currency effects. U.S. McDonald's-branded comp sales dropped 2%, and worldwide comps declined 3.6%.
Goodrich (NYSE: GR) , an aircraft equipment maker, reported first-quarter income of $29.4 million, or $0.25 a share, including a gain from the sale of Avionics. In the prior Q1, it earned $14.3 million, or $0.15 a share. Sales rose to $1.09 billion from $896 million. The company sees bleak times ahead, however, and will slash 1,700 jobs. It also ratcheted down sales and earnings expectations for the rest of 2003.
Dial (NYSE: DL) has delayed the beginning of its sexual harassment trial so it can try to reach a settlement. Dial faces allegations that female workers were groped and had to endure sexual comments and suggestions from male coworkers to view pornographic films. Negotiations to settle the $27 million lawsuit brought by 90 female employees began over the weekend.
Food distributor Sysco(NYSE: SYY) posted 11% higher profits today. The company earned $168.4 million on earnings of $6.4 billion. Per share, it returned $0.26 compared to $0.23 in the prior quarter.
And Finally...
Today on Fool.com:
- For updated stories throughout the day, bookmark our ever-changing News section.
- Fools Debate Wal-Mart: Is all the hand-wringing much ado about nothing?
- What's really at stake in the suit between merchants and Visa and MasterCard?
- Matt Richey assesses whether LendingTree's high short interest is bullish, bearish, or other.
- Disney's Cinderella Story: The Mighty Ducks keep their heads above water.
- In Fool's School, we explain why holding on to bankrupt companies might not be your best bet.
Contributors:
Bob Bobala, Robert Brokamp, Mathew Emmert, Jeff Fischer, Tom Jacobs, LouAnn Lofton, Bill Mann, Selena Maranjian, Rex Moore, Rick Munarriz, Matt Richey, Jackie Ross, Reggie Santiago, Dayana Yochim
