merger

The improving economy is helping more consumers repay their loans on time. That’s pushing down loan losses at J.P. Morgan and Wells Fargo. However, high unemployment is hurting loan demand, and the government is introducing new banking regulations. That will weigh on both banks’ short-term profits. J.P. MORGAN CHASE & CO. $36 (New York symbol JPM; Income Portfolio, Finance sector; Shares outstanding: 4.0 billion; Market cap: $144.0 billion; Price-to-sales ratio: 1.4; Dividend yield: 0.6%; WSSF Rating: Average) is one of the world’s largest financial-services companies, with over 5,100 branches in the U.S. Aside from retail banking, Morgan offers credit cards, wealth-management and investment-banking services. In the three months ended June 30, 2010, Morgan earned $4.8 billion, or $1.09 a share. The company is setting aside less money to cover bad loans. As a result, loan-loss provisions fell 58.1%, to $3.4 billion from $8.0 billion, including a $1.5-billion reversal of earlier provisions. This one-time item added $0.36 a share to Morgan’s latest earnings, and helped offset a $0.14-a-share charge for new bank taxes in the U.K....

ALGONQUIN POWER & UTILITIES CORP. $4.10 (Toronto symbol AQN; Shares outstanding: 93.9 million; Market cap: $385.1 million; SI Rating: Extra Risk; Dividend yield: 5.9%) converted to a dividend-paying corporation in October 2009. Prior to its conversion, it was called Algonquin Power Income Fund. Algonquin holds interests in 45 renewable-power facilities in Canada and the northeastern U.S., as well as 14 thermal-energy plants and 19 water-distribution and waste-water facilities. These assets include facilities it owns through a partnership with Emera Inc. (Toronto symbol EMA). Emera is a recommendation of The Successful Investor, our affiliated publication. Emera holds 9.9% of Algonquin. The company has started building its 26.4-megawatt Red Lily wind farm in Saskatchewan. Algonquin expects the $67.7-million project to start generating power in early 2011. The company has already signed an agreement with SaskPower, the province’s main electricity supplier, to buy all of Red Lily’s power for 25 years....

Warner Chilcott plc, $23.19, symbol WCRX on Nasdaq (Shares outstanding: 252.2 million; Market cap: $5.8 billion), researches and develops drugs. Its main products include Femcom Fe and Loestrin24 Fe (birth control), Enablex (bladder control), Actonel (osteoporosis), Doryx (acne) and Asacol (colitis). Warner Chilcott is based in Bermuda, but its main plants are in the U.S., Puerto Rico, Northern Ireland and Germany. North America accounts for 80% of its revenue. On October 30, 2009, the company paid $2.9 billion for the prescription-drug business of Procter & Gamble Co. (New York symbol PG). This business’s drugs include Enablex and Actonel. The company expects this business to add about $2.3 billion to its annual revenue, and $540 million to its annual earnings....

PLEASE NOTE: Our next Hotline will go out on Friday, July 9, 2010. GENNUM CORP., $6.60, Toronto symbol GND, earned $4.1 million, or $0.12 a share (all amounts except share price in U.S. dollars) in the three months ended May 31, 2010. That’s a big improvement over the $1.1 million, or $0.03 a share, it lost a year earlier. Gennum makes chips and other electronic equipment that lets television broadcasters store, edit and transfer video signals without losing picture quality. It also makes chips that improve the flow of data inside computer networks....

KRAFT FOODS INC. $30 (New York symbol KFT; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 1.7 billion; Market cap: $51.0 billion; Price-to-sales ratio: 1.2; Dividend yield: 3.9%; WSSF Rating: Above Average) is the world’s second-largest food company, after Swiss-based Nestle. Kraft has 11 brands that each generate over $1 billion in yearly sales. Aside from Kraft (cheeses, pasta and salad dressings), these brands include Philadelphia (cream cheese), Maxwell House (coffee), Nabisco (biscuits), Oreo (cookies), Trident (gum) and Oscar Meyer (meats). Wal-Mart, the company’s biggest customer, accounted for 16% of its 2009 sales. In February 2010, Kraft bought 71.7% of U.K.-based Cadbury plc, and acquired the remainder in April 2010. Cadbury is a leading maker of confectioneries, including chocolate, candy and gum....

Kraft’s stock fell from $29 to below $26 after it launched its takeover bid for U.K.-based chocolate maker Cadbury in September 2009. That’s partly because prominent Kraft shareholders, including billionaire Warren Buffett, felt the price for Cadbury was too high. (Buffett later cut his stake in Kraft to 6% from 8%.) Buying Cadbury also increased Kraft’s exposure to Europe. Investors worry that high levels of government debt in Greece, Spain and other European countries will hurt Kraft’s overall earnings. These debt problems will probably have little impact on chocolate demand. However, concern about European debt is pushing down the euro. That means Kraft’s European profits translate into fewer U.S. dollars. Of course, growing by acquisition exposes Kraft to hidden risks. But Cadbury, which began making chocolate in the 1850s, owns some of the industry’s best-known brands. That makes it hard for competitors to cut into its market share, no matter how good their products. Cadbury’s growing presence in developing markets should also help expand sales of Kraft’s other foods....

FEDEX CORP., $78.70, New York symbol FDX, reported better-than-expected earnings this week. However, the stock fell 3% on a weaker-than-expected earnings outlook. In its 2010 fiscal year, which ended May 31, 2010, FedEx earned $1.2 billion, or $3.76 a share. That beat the consensus earnings estimate of $3.75 a share. The latest earnings are also a big improvement over the $98 million, or $0.31 a share, that FedEx earned in fiscal 2009. However, FedEx’s fiscal 2009 results included several unusual charges, including a $1.2-billion writedown of goodwill related to its 2004 purchase of Kinko’s Inc. (now called FedEx Office), a chain of stores that sell printing and copying services. Without these charges, FedEx would have earned $3.76 a share in fiscal 2009....

BANK OF NOVA SCOTIA, $49.23, Toronto symbol BNS, rose 3% this week after the bank reported higher earnings and revenue in its latest quarter. In the three months ended April 30, 2010, Bank of Nova Scotia earned a record $1.1 billion, or $1.02 a share. That’s up 25.8% from $872 million, or $0.81 a share, a year earlier. The latest earnings also beat the consensus estimate of $0.91 a share. Revenue rose 7.7%, to $3.9 billion from $3.7 billion. Most of the earnings increase came from the Canadian retail-banking division, which supplies 45% of the bank’s total earnings. This division’s profits jumped 42.4%, mainly because low interest rates spurred demand for mortgages and personal loans....

INTERNATIONAL BUSINESS MACHINES CORP., $131.19, New York symbol IBM, aims to double its earnings to $20 a share by 2015. To achieve this goal, IBM will expand in developing markets like Russia, India, Brazil and China. These countries are attracting more business activity as their economies grow. That’s increasing the need for IBM’s mainframe computers and technical expertise. By 2015, IBM aims to get 25% of its revenue from these markets, up from 19% last year. The company will also continue to spur its growth by purchasing related companies and assets. It will probably spend $20 billion on these purchases through 2015. That’s equal to 12% of its $170.4-billion market cap....

SUNCOR ENERGY INC. $33 (Toronto symbol SU; Conservative Growth Portfolio, Resources sector; Shares outstanding: 1.6 billion; Market cap: $52.8 billion; Price-to-sales ratio: 1.7; Dividend yield: 1.2%; SI Rating: Average) became Canada’s largest oil company when it bought Petro-Canada (old symbol PCA) on August 1, 2009. Petro-Canada shareholders received 1.28 Suncor shares for each Petro-Canada share they held. Conventional oil and natural gas account for about 60% of the merged company’s production. The remaining 40% comes from oil sands. That includes its 12% stake in the massive Syncrude oil-sands development. Suncor also operates four refineries and over 1,800 retail gas stations under the Petro-Canada banner. The company wants to expand its oil sands operations until they account for about 70% of its production. To that end, it is selling some conventional and offshore properties that belonged to Petro-Canada. However, Suncor will probably keep Petro-Canada’s projects in Libya and Syria....