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EADS eyes higher 2012 profit as Airbus orders surge

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EADS predicted Airbus would sell more than 1,000 planes in 2011, helped by a decision to revamp its single-aisle A320 series to use less fuel that gave it a headstart over Boeing in the best-selling jetliner segment.

The group posted forecast-beating second-quarter results on Friday, as did Boeing two days earlier, and raised its free cash flow target for the year to around 1 billion euros ($1.44 billion), excluding spending on acquisitions.

EADS said it still expected 2011 operating profit before one-offs to remain stable year-on-year at around 1.3 billion euros. Earnings per share could lag or exceed last year's depending on the euro's strength against the dollar.

But for 2012, the group expects a "significant improvement" in its earnings before interest and tax and one-offs thanks to "higher volume, better pricing and improvement of A380 (superjumbo) performance at Airbus," EADS added.

"They are rather confident on the level of orders, so they are raising their free cash flow target quite considerably," Oddo analyst Yan Derocles said. EADS said it had net cash of 11 billion euros as of June 30.

EADS shares were 1 percent higher at 24.53 euros by 0925 GMT, outperforming a 0.7 percent weaker French blue-chip CAC-40 index .FCHI.

EADS generates around 70 percent of sales at its Airbus division, with the rest fairly evenly split between its helicopter, space and defense businesses. EADS is chipping away at its cash pile to fund acquisitions as it looks to rebalance its portfolio and reduce its exposure to the euro.

The group said quarterly earnings before interest and tax (EBIT) rose 15 percent to 371 million euros in the three months to June 30, while sales rose 6 percent to 12.1 billion.

NARROW-BODY BATTLE

EADS had been expected to post EBIT of 317 million euros, down from 323 million a year ago, on sales of 11.6 billion in the second quarter, according to a Global Markets analyst poll.

"Our results for the first half of 2011 mirror the strong demand in the commercial aviation sector," Chief Executive Louis Gallois said.

Boeing, which splits its business more evenly between commercial aircraft and defense, on Wednesday posted forecast-beating quarterly profit on strong sales of its commercial airplanes, cost management and a good mix of deliveries of its defense products.

It also raised its 2011 earnings forecast.

Airbus showed that a bet on a re-engined version of its A320 family, known as the A320neo, had paid off as it picked up hundreds of orders for the aircraft at last month's Paris Air Show.

Boeing had wanted to take more time to weigh whether to put more fuel-efficient engines on its competing 737 or whether to redesign it.

But after Airbus' air show wins and when loyal Boeing customer AMR Corp's (AMR.N) American Airlines threatened to give an entire narrow-body order to Airbus, Boeing bowed to pressure and opted for a re-engined 737.

Airbus still won a large chunk of the American Airlines order, giving it a major boost in the U.S. market as carriers prepare to replace aging fleets.

EADS said Airbus should deliver 520 to 530 aircraft this year, including around 25 A380 superjumbos, helping revenue exceed last year's level.

Boeing this week trimmed its delivery forecast slightly to 485-495 commercial aircraft from 485-500.

Planemakers receive downpayments when orders are confirmed but airlines hand over the bulk of the price on delivery.

($1=.6963 Euro)

(Reporting by James Regan; Editing by Christian Plumb and Erica Billingham)

Chevron profit jumps with oil, output growth slow

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The numbers out on Friday were the latest in a string of huge profits from the industry, which got a boost from the highest oil prices in nearly three years. Exxon Mobil Corp and Royal Dutch Shell Plc also benefited from acquisitions and shifts into new projects.

Chevron's better-than-expected second-quarter performance was largely due to the strength of its U.S. and international refineries, according to Oppenheimer & Co analyst Fadel Gheit.

Still, the oil and gas production business yielded nearly 90 percent of Chevron's earnings. "This is the most leveraged company to oil price in the whole group," Gheit said.

Its profit rose to $7.7 billion, or $3.85 per share, from $5.4 billion, or $2.70 per share, a year earlier. Analysts had expected $3.56 a share, according to Thomson Global Markets I/B/E/S. Revenue rose 30 percent to $69 billion.

Shares of Chevron were down 0.7 percent to $104.30 by midday on the New York Stock Exchange amid a broad sell-off.

OIL OUTPUT SLIPS, OUTLOOK TRIMMED

Chevron reported 2.69 million barrels per day (bpd) of oil-equivalent output, compared with 2.75 million a year-ago.

Chevron trimmed its 2011 oil and gas production forecast to 2.76 million bpd due to a slower ramp-up of its Perdido project in the Gulf of Mexico and a pipeline problem in Thailand. Chevron had targeted 2.79 million bpd, or 1 percent growth.

"The full-year production impact of these two items is about 30,000 barrels per day and they are approximately split between the two," said George Kirkland, vice chairman and executive vice president for upstream and gas.

But it stuck to its 2011-2014 average annual production growth target of 1 percent, and 4 percent to 5 percent for 2014-2017.

European benchmark Brent oil prices averaged $117 per barrel in the second quarter, up from $79 in the same quarter in 2010 and $11 higher than the first quarter. Chevron said in April that it switched to Brent from the U.S. benchmark when calculating production-sharing changes.

Higher crude prices mean Chevron must leave more production in the hands of state-owned partners. The new target still assumes oil prices of $79 per barrel, whereas with Brent at $111 per barrel Chevron sees output at 2.73 million bpd.

On Thursday, Exxon reported a 41 percent rise in quarterly profit that missed analysts' forecasts.

Exxon has aggressively pushed into U.S. natural gas, while Chevron has made a more deliberate move with two deals in the Marcellus shale in the past year. Kirkland signaled there would be no more big deals.

"We're very close to putting together what we want in the Marcellus," Kirkland said. "There will be additional additions, small additions there, where it makes sense."

As for Bulgaria, where the San Ramon, California-based company has added 1.1 million acres to its interests in Romania and Poland, he said seismic work would likely begin next year.

In the Gulf of Mexico, while some operators have expressed frustration at the pace of permitting, Kirkland said its near-term drilling program was on track with two more deepwater rigs due to join its three already working there now.

Chevron shares are up 15 percent in 2011, outpacing an 8 percent rise in the Chicago Board Options Exchange oil companies index and a 10 percent rise in Exxon's stock.

(Reporting by Matt Daily in New York and Braden Reddall in San Francisco, editing by Dave Zimmerman, Phil Berlowitz)

Merck to slash jobs in cost-savings drive

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The No. 2 U.S. drugmaker eliminated 12,465 positions last year, offset by almost 6,500 new hires, reducing its workforce to 91,000 employees as of June 30.

The company, which also reported quarterly earnings in line with forecasts, said on Friday it would cut its workforce by an additional 12 percent to 13 percent from the 100,000 employees it had at the end of 2009 after buying Schering-Plough Corp.

A company spokesman declined to peg the planned size of its workforce, saying the job cuts would be substantially offset by new hires in strategic growth areas, such as emerging markets.

"The new phase of restructuring will create an additional $1.3 billion to $1.5 billion in annual cost savings," company spokesman David Caouette said.

Job cuts will come largely from administrative positions, consolidation of offices and sale or closure of manufacturing sites.

Merck is streamlining operations following its $41 billion purchase of Schering-Plough.

"I think we're going to see other firms continue to expand their cost-reduction programs," Morningstar analyst Damien Conover said, pointing to increasingly difficult reimbursement environments in Europe and the United States.

"We have to remember that 10 years ago these firms were extremely bloated and in an entirely different operating mold and it's really shifted to one where you don't need the gigantic sales forces that you once needed," Conover said.

Many other big drugmakers have slashed their workforces in recent years to ensure profit growth as they face patent expirations that will subject them to generic competition, the costs of healthcare reform and efforts by insurers to keep a lid on drug prices.

Eli Lilly LLY.O, facing one of the industry's biggest "patent cliffs," said in late 2009 it would cut 5,500 employees, or 13 percent of its workforce, by the end of 2011 to create $1 billion in savings. But like Merck, its cuts have been largely offset by increased hiring in emerging markets.

Before Pfizer bought Wyeth in 2009, the world's largest drugmaker said it would cut 15 percent of the combined workforce, or almost 20,000 jobs. The company, whose Lipitor cholesterol fighter goes generic late this year, swung its ax again in February, saying it would lay off more than 2,000 researchers to deliver on a 2012 profit forecast.

Merck, unlike many of its rivals, has vowed to maintain research and development spending at stable levels, rather than slash research costs to meet earnings targets. But the company on Friday shaved the high end of its 2011 research budget by $100 million, to between $8 billion and $8.3 billion.

The drugmaker said it halted development of a treatment for migraine headaches, called telcagepant, after unfavorable data from a late-stage trial. The medicine had been linked to liver toxicity in earlier studies.

With the new job cuts, Merck's restructuring program will yield annual savings of $4 billion to $4.6 billion by the end of 2015, compared with an earlier estimate of $2.7 billion to $3.1 billion by late 2012, Merck said.

The company reported a second-quarter profit in line with Wall Street expectations, helped by big tax gains. But sales handily outpaced forecasts.

It earned $2.02 billion, or 65 cents per share, compared with $752 million, or 24 cents per share, in the year-earlier second quarter, when it took a big restructuring charge for the Schering Plough acquisition.

Excluding special items, Merck earned 95 cents per share, matching the average forecast among analysts polled by Thomson Global Markets I/B/E/S.

Global sales rose 7 percent to $12.15 billion, but would have risen only 3 percent if not for the weaker dollar. Sales exceeded Wall Street's expectations by $370 million, helped by strong sales of newer obesity drugs Januvia and Janumet, arthritis treatment Remicade and vaccines.

The company, which slightly raised the low end of its 2011 profit forecast, now expects earnings of $3.68 billion to $3.76 billion, excluding special items.

Merck shares fell 2.3 percent to $34.13 on the New York Stock Exchange, amid a 0.6 percent decline for the drug sector.

(Additional reporting by Lewis Krauskopf; editing by Derek Caney, Steve Orlofsky and Andre Grenon)

Amgen results beat Street; Xgeva sales strong

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The company also implemented its first quarterly dividend, 28 cents a share. Its stock was up 1.9 percent at $54.43 on Friday afternoon on the Nasdaq.

Excluding one-time items, the company earned $1.37 a share in the second quarter. Analysts on average were expecting $1.28, according to Thomson Global Markets I/B/E/S.

Net profit fell to $1.17 billion, or $1.25 a share, from $1.20 billion, or $1.25 a share, a year earlier. Revenue rose 4 percent to $3.96 billion, topping the average Wall Street forecast of $3.78 billion.

"Overall, we think the quarter was solid with very low expectations going into the second quarter," Geoff Meacham, an analyst at JPMorgan, said in a research note.

U.S. sales of Xgeva totaled $73 million in the second quarter, up from $42 million in the first quarter, its first full quarter on the market.

Analysts on average expected U.S. sales of Xgeva, considered Amgen's most important growth driver, of $66 million.

Christopher Raymond, an analyst at Robert W. Baird, sees Xgeva sales hitting at least $1.8 billion in 2014.

Sales of the osteoporosis drug Prolia, which has the same active ingredient as Xgeva, were $44 million in the second quarter, up from $27 million in the first quarter.

Sales of the company's top-selling anemia drug Aranesp, which have been slowing following several years of safety concerns, fell 3 percent to $585 million. Sales of its older anemia drug Epogen fell 17 percent to $543 million.

In January, the Centers for Medicare & Medicaid Services, the federal agency that administers Medicare and Medicaid, changed the way it pays physicians for services and medications provided to dialysis patients.

The changes, which involve paying a fixed amount to dialysis centers for a bundle of services that include medications, give doctors an incentive to reduce the amount of Epogen they use. To counteract that, CMS has initiated a quality improvement program, to be implemented next year, under which centers would be penalized if they provide sub-standard service.

But under a proposed CMS policy, facilities would no longer be penalized for cutting their use of Epogen. That would probably lead to a reduction in use of the drug. CMS's proposal follows a decision by the U.S. Food and Drug Administration in June to add additional warnings to Epogen's label. The drug is one of a class of drugs that have been linked, at higher doses, to an increased risk of cardiovascular problems and stroke.

Eric Schmidt, an analyst at Cowen & Company, said most investors believe the CMS proposal will take effect, even though Amgen will likely fight it.

The company's chief executive, Kevin Sharer, told analysts on a conference call that the company plans to lobby hard against the proposal in Washington, D.C.

"I respect CMS's point of view but I am also confident we have arguments on the patient side that are important," he said. "We've been at this for 20 years and while I'm not predicting any outcome, this isn't our first Rodeo."

If the change takes effect, Amgen said it expects Epogen dose reductions this year of 20 to 25 percent, partially offset by patient population growth and higher prices. He said Amgen has built that into its earnings forecasts.

Previously, the company said it expected dose reductions in the mid-teens.

The company said it expects the majority of the dosing changes to be implemented by the end of 2011, with some residual impact in early 2012.

Sharer said Amgen has considered and rejected the idea of selling off its Epogen business.

"Despite the challenges this business has presented, it remains a very large contributor to revenues and income," he said. "We're not wedded to any given business, but our judgment right now is that we best serve patients and shareholders by managing this business well."

The company said it expects revenue in 2011 to be at the upper end of its current forecast of $15.1 billion to $15.5 billion. It expects 2011 adjusted earnings to be at the upper end of its current forecast of $5.00 to $5.20 a share.

(Reporting by Toni Clarke; editing by John Wallace and Matthew Lewis)

Nursing home companies fall on final reimbursement rate cuts

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The Centers for Medicare & Medicaid Services (CMS) cut payments for skilled nursing facilities by 11.1 percent, or $3.87 billion, to correct an unintended spike in payment levels and align Medicare payments with costs.

The CMS had introduced a new model in fiscal 2011 to ensure there would be no change in overall spending levels, but it instead led to a significant increase in Medicare expenditures.

In April, CMS had proposed two options for FY2012, one which would have resulted in a net increase of 1.5 percent in Medicare payments based on inflation or a cut of 11.3 percent in reimbursement rates.

Kindred shares fell 26 percent to $14.01, after closing at $18.84, while those of Skilled Healthcare slid 20 percent to $7.00, from its closing of $8.80 on Friday on the New York Stock Exchange.

Sun Healthcare shares plunged 39 percent to $4.25, after closing at $7 on Nasdaq.

(Reporting by Shravya Jain in Bangalore; Editing by Viraj Nair)

Aon Q2 beats on Hewitt buy, says soft pricing to continue

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High unemployment and stiff competition made it hard for insurers to raise premiums, hurting insurance brokers like Aon, Marsh & McLennan (MMC.N) and Willis Group (WSH.N) that depend on commissions for much of their revenue.

As insurers have faced high levels of losses over the last year, analysts expect them to increase premiums, benefiting insurance brokers like Aon. But the company is not optimistic.

"Despite industry loss expense in the first half, we believe excess capacity globally will continue to drive soft pricing, albeit at a more modest rate of decline," Aon Chief Executive Greg Case said on a conference call.

Aon's views on soft insurance come in sharp contrast to what has been said by virtually every major insurer to report results so far this season.

Sandler O'Neill analyst Paul Newsome said the disconnect between the brokers and insurance companies relates to the difference between renewal pricing and new insurance pricing.

The fall in the operating margin for Aon's brokerage unit also disappointed investors, but analysts expect the margin to expand in the future.

"We should see stronger margins in the back half of the year as organic growth continues," Stifel analyst Meyer Shields told Global Markets.

For the second quarter, the adjusted operating margin from the brokerage operations fell to 19.6 percent from 21 percent a year ago.

Second-quarter net income attributable to common shareholders rose to $258 million, or 75 cents a share, from $153 million, or 54 cents a share, in the year-ago period.

Excluding items, earnings from continuing operations were 83 cents a share.

Analysts, on average, expected the company to earn 82 cents a share, according to Thomson Global Markets I/B/E/S.

Total revenue rose 48 percent to $2.8 billion. HR solutions revenue more than tripled to $1.09 billion.

Aon Corp last year spent $4.9 billion to buy Hewitt Associates Inc in an aggressive bid to leapfrog arch rival Marsh and McLennan and create the world's largest human resource services company.

Shares of the Chicago-based company were down 3 percent at $47.98 in morning trade on Friday on the New York Stock Exchange.

(Reporting by Jochelle Mendonca in Bangalore; Additional reporting by Ben Berkowitz in New York; Editing by Joyjeet Das and Gopakumar Warrier)

Starbucks raises outlook, pins hopes on the affluent

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The world's biggest coffee chain, which is coming off a years-long restructuring that involved closing poorly performing stores to rekindle growth, on Thursday reported better-than-expected fiscal third-quarter earnings.

Seattle-based Starbucks joined a raft of other premium-positioned companies -- including burrito chain Chipotle Mexican Grill (CMG.N) and Whole Foods Market Inc (WFM.O) -- in reporting out-sized same-store sales gains.

"The higher end is alive and well," said RBC Capital Markets analyst Larry Miller. Steakhouses and seafood restaurants also had strong results, he said.

"Reports of the consumer's demise were greatly exaggerated," said Miller, who added that McDonald's Corp (MCD.N) and other restaurant chains showed surprising health during the latest quarter.

Sales at Starbucks' U.S. cafes open at least 13 months, and which yield about four-fifths of its revenue, jumped 8 percent in its fiscal third-quarter ended July 3. Analysts expected a 5.3 percent increase.

Traffic in its home market climbed 6 percent, while average spending per visit rose 2 percent.

Chief Financial Officer Troy Alstead told Global Markets menu price increases accounted for the bigger part of the rise in spending, but customers were also buying more food.

Starbucks targets more affluent consumers than the typical U.S. fast-food chain. Those customers have fared better than their lower-income counterparts as the U.S. economy sputters, and they have resumed spending on discretionary items like $4 lattes and organic foods.

CATERING TO THE WELL-HEELED

Starbucks shares, which have benefited from a massive restructuring that slashed costs and shut over 900 poorly performing cafes around the world, are up 60 percent from a year ago. On Thursday, it said it would be adding a net 800 stores globally in 2012.

That expansion comes despite high unemployment and the uncertain outcome of the U.S. debt ceiling debate weighing on the minds of consumers.

Upscale diners seem less wary. Chipotle, which offers naturally-raised meats and organic produce where possible, saw same-restaurant sales jump 10 percent in the most recent quarter. Whole Foods, top U.S. seller of organic food products, said its identical-store sales jumped 8.1 percent.

The gains at Starbucks, Chipotle and Whole Foods outpaced a 4.5 percent rise in U.S. same-restaurant sales at McDonald's, one of the restaurant industry's top performers and the leader among fast-food chains.

"Our results are a little bit in contrast to what I still believe to be an uncertain and fragile environment out there," Alstead said.

Wall Street also was upbeat about the coffee chain's new partnership with Green Mountain Coffee Roasters Inc (GMCR.O), whose popular Keurig machines control about 80 percent of the fast-growing North American single-serve brewing segment.

The companies plan to begin selling Starbucks coffee and Tazo tea for Keurig machines at wholesale clubs, drugstores and supermarkets in North America this autumn, in time for the important winter holiday season.

Alstead said the partnership would generate 3 cents to 5 cents in incremental earnings per share in fiscal 2012.

Green Mountain shares soared more than 16 percent on Thursday, one day after it said that deals with the likes of Starbucks and newly public Dunkin' Donuts (DNKN.O) would brew up bigger profits.

Seattle-based Starbucks boosted its earnings forecast for this fiscal year to $1.50-$1.51 per share from $1.46 to $1.48 a share, previously. Analysts, on average, were expecting a fiscal 2011 profit of $1.50 per share.

It also forecast a 15 percent to 20 percent increase in earnings per share in 2012 and a 10 percent increase in revenue. The forecast is based on mid-single digit comparable store sales growth and the opening of net 800 new stores.

The 2012 forecast includes the expected contribution from the Green Mountain deal.

Starbucks' third-quarter net income rose 34 percent to $279.1 million, or 36 cents per share, beating analysts' average estimate by 2 cents per share, according to Thomson Global Markets I/B/E/S. Revenue rose 12 percent to $2.93 billion.

Shares were up 1.3 percent to $40.50 in after-hours trade. That gain came after the shares added 2.6 percent in regular Nasdaq trade on Thursday.

(Editing by Edwin Chan, Bernard Orr)

Brazil's Vale falls after Q2 results miss estimates

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Despite reporting a hefty 74 percent surge in second-quarter net income to $6.45 billion from a year earlier, investors cited rising wage and operating costs resulting from a drop in the U.S. dollar as a concern for the coming quarters. Vale was expected to earn $7.45 billion in the quarter, according to a Global Markets poll of five analysts.

Reflecting a trend throughout the industry, Vale said the cost of goods sold jumped 39 percent to $5.72 billion from the previous quarter, driven by acquisition of raw materials, higher wages and pricier services such as cargo freight and maintenance.

The strengthening of the Brazilian currency, which traded around 10 percent stronger in the second quarter of this year compared with 2010, was also a key factor in rising costs.

"We believe there is room for further disappointment in the quarters ahead, although cost inflation seems to be moderating," Edmo Chagas, a senior mining analyst with BTG Pactual in Rio de Janeiro, wrote in a note to clients.

Nonvoting shares (VALE5.SA) of Rio de Janeiro-based Vale, Brazil's biggest private sector company, shed 1.6 percent to 45.46 reais, the fourth decline in five sessions. The stock, Vale's most widely traded class of shares, is down 3 percent this year.

Voting shares (VALE3.SA) tumbled 2.3 percent, dragging down the benchmark Bovespa index .BVSP 1 percent on Friday.

Earnings before interest, debt, depreciation and amortization, a gauge of operational profits known as EBITDA, of $9.07 billion also missed analysts' estimates of $10.33 billion in the second quarter.

EBITDA fell short of those projections because of lower shipments, non-recurrent issues on ferrous and non-ferrous production, and higher operating expenses, according to Goldman Sachs Group analyst Marcelo Aguiar.

Limiting declines in the stock was the company's offering of a one-time dividend worth $3 billion, analysts said.

The company will likely end up distributing about $8 billion in dividends to shareholders this year, BB Investimentos analyst Victor Penna said in a report.

(Reporting by Guillermo Parra-Bernal, editing by Dave Zimmerman)

Newell beats; outlook not as bad as feared

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The results echoed those from other consumer products makers. Big gains in Latin America covered up U.S. declines at Colgate-Palmolive (CL.N) and Avon Products (AVP.N) as well.

Newell, the maker of Sharpie markers and Rubbermaid storage containers, had already lowered the bar for its new chief executive officer -- former Unilever (ULVR.L) executive Michael Polk. In early June, it predicted a weak second quarter and slashed its 2011 forecast, prompting a 12 percent slide in its shares.

On Friday, investors overlooked the consumer product maker's second profit warning in two months, pushing the stock up 8 percent to $15.51. The stock is still trading below where it was before the June 3 warning.

"The revised guidance is not a surprise in the current economic environment," BMO Capital Markets analyst Connie Maneaty said, adding that the new CEO would likely want to have achievable targets.

The company now expects to earn $1.55 to $1.62 a share this year, excluding items, down from the lowered forecast of $1.60 to $1.67 given just eight weeks ago.

The latest forecast is "slightly above" the $1.50 to $1.55 or so that many analysts were anticipating, said JPMorgan analyst John Faucher.

The average Wall Street forecast is $1.58 per share, according to Thomson Global Markets I/B/E/S.

SHOWTIME FOR NEW CEO

Polk, who joined Newell in mid-July, was not responsible for the second-quarter performance.

Now he is trying to set the company's future tone, including some price increases that Newell asserts are necessary even as shoppers contend with economic woes.

"The consumer environment remains very tough," Polk said. "The debt crisis in the U.S. and across many countries in Europe could further stress consumer confidence."

Despite the uncertain sales climate, the company -- which counts Target Corp (TGT.N), Staples Inc (SPLS.O) and Williams-Sonoma (WSM.N) as customers -- raised its prices again in July as it pays more for oil, resin and other necessities.

As prices have gone up, the company is seeing some consumers buy less, as it expected, Polk said.

The company is well-positioned for the back-to-school season, Polk said. However the "key uncertainty is whether the consumer will show up and spend."

TAKING DOWN SALES EXPECTATIONS

Oppenheimer analyst Joe Altobello was more skeptical about Newell's sales prospects for the rest of the year and concerned about rising commodity costs. He rated Newell's shares at "perform" despite what he called a "reasonable" valuation.

Newell forecast core sales growth of 1 percent to 3 percent, down from its previous forecast of 3 percent to 4 percent. Core sales exclude foreign currency impact.

Net income rose to $146.7 million, or 49 cents a share, in the second quarter, from $130.4 million, or 41 cents a share, a year earlier.

Excluding items, the company earned 46 cents a share, beating the analysts' average estimate of 42 cents, according to Thomson Global Markets I/B/E/S.

Net sales rose 5.1 percent to $1.57 billion, while analysts expected $1.55 billion.

(Reporting by Dhanya Skariachan; Editing by Lisa Von Ahn, Derek Caney and Gunna Dickson)

Nintendo product flop crushes shares, outlook crumbles

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The plunge wiped off $5 billion from Nintendo's market value after the company said profits would fall to their lowest in 27 years as it braced for losses from its latest 3D gadget.

Brokers cut the company's forecasts, a day after it swung to a quarterly loss and slashed prices of its 3D-capable handheld games device by about a third.

With sales of its DS and Wii fading, Nintendo was relying on the new 3D model to revive profits and fend off renewed competition from motion-gaming peripherals of Sony Corp and Microsoft. Many casual gamers are also flocking to devices such as Apple's blockbuster iPhone and iPad.

"They are standing on the edge," said Yuuki Sakurai, CEO and president of Fukoku Capital Management in Tokyo. "When I ride on the trains I see people using their smartphones to play games and people don't want to overlap their spending on other devices," he said.

The Kyoto-based company must consider providing games to these new platforms rather than focusing on new hardware, Sakurai said.

Nintendo President Satoru Iwata took a 50 percent pay cut, and other executives took 20-30 percent cuts to take responsibility for the poor performance.

The company also reduced sales forecasts for its Wii home games console and the previous generation DS handheld device.

"We needed to do something extremely daring to change the situation, so we decided on the price-cut," said Iwata, a former game designer, who launched the Wii and expanded the gaming population, toppling Sony from the industry's top spot.

Nintendo's shares fell as much 20 percent on Friday to 11,100 yen, its lowest intraday level since May 2004. They ended down 12.2 percent on the day, for a drop this year of nearly 50 percent.

Speaking to reporters in Osaka on Thursday, Iwata acknowledged sales of the much-anticipated 3DS had lost momentum shortly after the launch earlier this year.

"However, by cutting the price before you get economies of scale, of course you make losses on the hardware," he said.

Nintendo sold only 710,000 units of the 3DS in April-June, compared with 3.6 million in the month following its launch, and a tiny fraction of the 16 million unit target for the year to March 2012.

The Wii sold only 1.56 million units, half the figure in the same period last year. The device took the industry by storm five years ago by replacing button clicking with motion control, attracting a new wave of gamers that expanded the market.

Nintendo cut its annual operating profit forecast after market hours on Thursday to 35 billion yen from an initial forecast of 175 billion yen. The new estimate is far short of the previous consensus of 154.9 billion yen based on 24 analysts' forecasts ahead of the results.

UNCERTAIN OUTLOOK

JP Morgan cut its rating on the company behind the Super Mario franchise to "underweight" from "overweight", saying the current situation was worse than feared and the outlook uncertain.

"The timing of the 3DS hardware price cut is surprising, given the major in-house software releases... We believe the 3DS will be a heavy weight on earnings over the medium term. The lack of a share buyback announcement is also disappointing," analyst Hiroshi Kamide said in a report.

Nintendo has been criticized for being too centered on hardware as the market increasingly shifts to a battleground over software, with games played over Internet networks linking millions of players.

"The software wasn't terribly compelling," said Ricardo Torres, editor-in-chief of gamespot.com. "There wasn't enough to do with it," he said.

Japanese electronic companies have been hit by weak consumer spending in North America and Europe.

U.S. consumer spending, which accounts for about 70 percent of the country's economic activity, is expected to have decelerated sharply in the second quarter of 2011 to the weakest level since the end of the 2007-09 recession two years ago.

Shares of Sony Corp also fell on Friday, a day after the Japanese consumer electronics group slashed its outlook for TV sales and cut its full-year net profit forecast to 60 billion yen from 80 billion yen. ($1=77.8 Yen)

(Additional reporting by James Topham, Ayai Tomisawa, Mariko Katsumura and Tim Kelly; Editing by Anshuman Daga)