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Railroad Switch

Union Pacific (UNP) and Burlington Northern Santa Fe (BNI) reported better-than-expected earnings on Oct. 23. But prices rose at a slower clip than in the second quarter at both West Coast companies, creating fears that profits would slip. That drove shares down more than 5%.

Typically, West Coast rails trade at higher price-earnings ratios than East Coast ones. That may change. In this battered economy, pricing trumps all else, says UBS (UBS) analyst Rick Paterson, and railroads are facing stiff competition from truckers for shipping container business. Since West Coast rails do more of this business, the pricing pressure has hurt them most. Burlington saw its rate of price growth fall from 4% to 3%, and Union Pacific from 5% to 4%. East Coast rival CSX (CSX) saw no decline.

Since the earnings reports, the East-West valuation gap has narrowed, with Union Pacific and CSX trading at p-e's of 13.7 and 13.3, respectively. On Oct. 27, when Norfolk Southern (NSC) reported that prices rose 6.2%, the trend was confirmed. Paterson now expects CSX and Norfolk to outperform West Coast rivals and to trade at p-e's of about 15.

Media Marriage: Buy Now?

Independent analysts at Collins Stewart raised their price target for shares of DirecTV Group (DTV), which currently trade at 25, to 36 on Oct. 22. The impetus: an announcement that the digital television provider will hold a special shareholder meeting next month related to its proposed merger with Liberty Entertainment (LMDIA), a division of Liberty Media that has a separately listed stock. The analysts say the deal, which is likely to close shortly after the Nov. 19 meeting, should result in a "favorable trading pattern" for DTV's stock. Shares of Liberty Entertainment, which owns interests in Starz Entertainment and the Game Show Network, are also a buy, according to Bank of America (BAC) Merrill Lynch's Jessica Reif Cohen. She estimates the shares, now at 30, are worth 37. Analysts at Barclays Capital (BCS) are bullish as well, noting that Liberty is an attractive "way to get the upside potential from DirecTV."

Semi Signs

Analysts monitor semiconductor orders carefully for signs of an economic pickup. Jenny Van Leeuwen Harrington, a money manager at Gilman Hill Asset Management in Westport, Conn., also focuses on staffing. So she took note when Taiwan Semiconductor Manufacturing (TSM), which reports earnings Oct. 29 and employs 23,000 people, said it planned to rehire 700 employees. That has her bullish on business conditions and Taiwan Semi, which controls half of the global contract chipmaking market. It trades at about 14 times projected earnings for 2010; historically, its p-e has been around 18. Rising chip sales and a 3.5% dividend on the stock's American depositary receipts could bring an 11% to 16% gain next year, she says, which is why she owns more than 62,000 shares.

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