Our view of  Novartis NVS as one of the best-positioned pharma companies was reaffirmed by its fourth-quarter results, announced Thursday. Sales increased 15% and earnings per share increased 16%. Sales were driven by strong results from the pharmaceutical group, which grew 15% in U.S. dollars and 9% in local currency. Standout performers included top seller Diovan for hypertension, which increased sales 28% in the quarter and reached $3 billion in sales for the full year. Sales of Gleevec for colorectal cancer soared 45% in the quarter as a result of further market penetration and increased dosing. The pipeline for new drugs is very promising. Novartis has more than 70 drugs in development and expects to file five new drug applications in 2005. The sole area of weakness in the quarter came from the generic unit, Sandoz. Sales increased 5%, but operating income declined 50% because of the impact of restructuring, intense price competition, and a difficult prior-year comparison. CEO Daniel Vasella gave an encouraging forecast for 2005, which included sales growth in the high single digits and earnings growth of at least that. Novartis appears well on track to outperform the industry in 2005 and remains one of our top picks.
Tom D'Amore

 Citigroup C finally received a long-awaited lift in the corporate and investment-banking sectors in the fourth quarter. We anticipate no material change to our fair value estimate. Citi once again clocked nice overall returns, with a fourth-quarter return on equity of 20.1% on 12% growth in earnings per share. Unlike in recent years, Citi didn't need to rely entirely on its consumer-banking divisions to bolster these results. Instead, the corporate and investment-banking division generated one of the most pleasantly surprising quarters in recent memory. The fourth quarter--normally an extremely slow season for this business--turned out to be the second most profitable quarter of the year, thanks to a pickup in investment-banking fees, improved proprietary-trading revenue, and the fourth consecutive quarter of loan-loss releases, this time partly due to an improving credit-recovery picture associated with Parmalat. The consumer picture still looked fairly bright despite a noticeable slowdown in revenue growth, with the global consumer business up just 8% year over year in the fourth quarter compared with 15% for the full year. In our opinion, much of this appears to be due to a weakening in the card business--Citi's most important consumer line--offset slightly by better-than-anticipated performance in the consumer-finance unit.
Craig Woker

 Washington MutualWM reported fourth-quarter and full-year results Wednesday. Earnings of $3.26 per share for 2004 represented a decline of about 23% from 2003, but were a penny better than Wall Street's expectations. WaMu's turnaround from its second-quarter woes has progressed better than we'd projected, so we'll probably raise our fair value estimate once we digest the financial information and listen to the conference call. The earnings shortfall in 2004 was primarily related to a 56% drop in income from WaMu's mortgage-banking unit--its problem child--which was the result of steep declines in mortgage originations nationwide combined with high expenses. We think management has taken good steps to fix its mortgage bank, but volatility is unavoidable in that segment, and our expectations remain modest. While the mortgage bank struggled, the firm's retail-banking segment--its crown jewel--reported a 32% increase in net income in 2004, and its prospects still look very bright, even though deposit growth is slowing.
Ryan Batchelor

After reviewing  Jack Henry's JKHY second-quarter earnings release, we don't anticipate making any material changes to our $22 fair value estimate for the shares. The company continued to show nice leverage in its business, with operating income increasing 24% and revenue increasing 21% from the year-ago quarter. Jack Henry has gone on a $114 million acquisition spending spree over the past six months, so we were pleased to learn that internal revenue growth was 16% for the quarter while internal operating income expanded 20%. This suggests that Jack Henry's core business is strong and meeting or slightly exceeding our forecasts.
Todd Lukasik

 EBay's EBAY revenue and operating income for 2004, reported Wednesday, hit our expectations, but the company's forecast for 2005 fell far short of Wall Street's expectations and just short of our own. Key operating metrics for the fourth quarter and the full year looked solid and we think the company remains on track, so we aren't worried about eBay's long-term competitive position, despite what some view as a disappointing forecast for the coming year. We are reviewing the assumptions in our discounted cash-flow model, but we don't expect our $64 fair value estimate to change significantly.
Joseph Beaulieu

 Capital One COF reported fourth-quarter and full-year results Wednesday. The firm earned $0.77 per share in the fourth quarter and $6.21 per share for 2004, much lower than Wall Street's expectations. These results were also slightly lower than our forecast, thanks to higher actual marketing costs and additions to loss reserves, but we do not foresee any significant change to our fair value estimate, which is not very sensitive to quarterly fluctuations. Earnings continued to be fueled by strong loan growth in Capital One's global financial services and auto finance segments, at 29% and 18%, respectively, in 2004. Earnings growth during the year for these two segments was even more impressive, at 229% and 65%, respectively. This diversification, combined with good credit quality, helped Capital One maintain strong performance despite 2004 growth of only 5% in its U.S. credit-card portfolio. We think 2005 will be another difficult year for U.S. credit card growth, but Capital One's diversified business model should help the firm navigate any choppy waters.
Ryan Batchelor

 Ford Motor Company F reported weak fourth-quarter earnings Thursday and has yet to provide an outlook for 2005. However, we had expected continued weakness at Ford, and our fair value estimate is unchanged. The operating margin for automotive operations deteriorated to negative 4.3% from negative 4.2% in the year-ago quarter, dragged down by continued losses at the luxury division. However, income from financial services improved to just over $1 billion for the quarter from $860 million a year ago. The addition of interest income and some tax benefits pushed net income just into positive territory of $0.06 per share. Net earnings for the year were up to $1.73 per share from $1.46 last year. Until we see a major shakeout of excess production capacity, we remain quite bearish on the auto industry as a whole.
Philip Guziec

We are increasing our fair value estimate for  Linear Technology LLTC to $35 per share from $32 after Wednesday's fiscal second-quarter conference call. Sales fell 1% from the first quarter, as Linear saw some weakness caused by excess industry inventory, albeit less than other chipmakers. We view this weakness as short-term in nature, as the long-term demand drivers for Linear's power-management chips remain intact. The firm's days of inventory remain rational, at roughly 54, and have been on the decline. Gross margins have exceeded our expectations in the first two quarters of fiscal 2005. These margins in the high 70s are stellar and reflect the highly proprietary nature of Linear's products. Sales have also been better than we expected, because Linear has not felt the effects of inventory overhang as much as many of the other chipmakers we cover.
Jeremy Lopez

We were not surprised by  Calpine's CPN announcement Thursday that losses will be larger than previously expected, and we continue to believe investors face significant risk when purchasing these overvalued shares. Among the laundry list of charges the company expects to take in the fourth quarter are $200 million for the write-down of 6% of its natural-gas reserves, unexpected repair and maintenance expenses, and project and equipment write-downs. Including these charges, the company now expects to report a loss of $0.69-$0.78 per share for 2004. Given the currently abysmal economics of producing power via natural gas, we would be shocked if these were the last write-downs Calpine takes on its power plant portfolio.
Paul Larson

 Interpublic Group of Companies' IPG change in senior management, announced Wednesday, isn't likely to alter our fair value estimate. The appointment of Michael Roth as cochairman and chief executive officer was not surprising to us, as he has been chairman since July 2004 and has been active in the firm's operations. David Bell, who had been CEO since February 2003, was named cochairman. As CEO, Bell initiated an ambitious turnaround plan, but it produced only mixed results, in our view. Roth's senior management experience seems ample, but we're waiting to see how he applies his weaker (in our opinion) level of industry knowledge to the new job.
Thomas Forte

 MBNA's KRB fourth-quarter and full-year earnings, reported Thursday, were good despite an industrywide slowdown in U.S. credit-card balances. Our fair value estimate is unlikely to change much. The firm reported earnings per share of $2.05 in 2004, an increase of 14.5% from 2003. Earnings growth primarily resulted from better credit quality--lower loan-loss provisions--and flat operating expenses. MBNA's managed loan balances grew less than 3% in 2004, much lower than the consistent double digits we're used to. As an apparent response to slowing conditions, MBNA announced it would take a one-time restructuring charge in early 2005 of about $300-$350 million related to voluntary retirement and severance programs. The firm also announced a $2 billion share-repurchase program over the next two years. We think these announcements highlight the tough competitive environment; however, we believe the credit-card slowdown is temporary, and we remain positive on the long-term future of MBNA and the consumer credit market as a whole.
Ryan Batchelor

 Golden West's GDW fourth-quarter and full-year earnings were excellent, and within our expectations. Our fair value estimate will probably increase slightly after we incorporate 2004's results into our model. Earnings per share rose 16% during the year to $4.13. Loan balances--the primary driver of Golden West's profits--increased 31% in 2004 on a 36% increase in loan originations, as borrowers flocked to the firm's flagship adjustable-rate mortgages. However, the higher income Golden West received from its burgeoning loan balances was partially offset by higher interest costs on its borrowings, which typically adjust to interest rates faster than its adjustable-rate loans. This resulted in an interest-rate spread--interest income over interest expense--of 2.76% in 2004, down from 2.94% in 2003. We're not too concerned about 2004's slightly lower spreads, because Golden West has proved that it can perform well in almost all interest-rate environments and its prospects continue to be very good, in our opinion.
Ryan Batchelor

 Comerica's CMA 2004 results were surprisingly strong, with profits of $727 million beating our expectations. Loan growth had been trending higher throughout 2004, but fourth-quarter annualized growth of more than 11%, coupled with the 10-basis-point increase in the net interest margin, surpassed our optimistic projections. We're pleased with expense controls--expenses rose less than 1% for the year--but we are less enthusiastic about the $21 million taken from loan-loss reserves. Credit quality remained flat at a net charge-off rate of 34 basis points, and reserves still stand at 1.65% of loans. Without the reversal of reserves, fourth-quarter earnings per share would have been almost 7% lower and near consensus estimates. Still, there's no denying management's ability to rein in expenses and realize loan growth, and we believe Comerica could be in for a strong 2005.
Jim Callahan

On Thursday,  iStar Financial SFI announced the acquisition of Falcon Financial Investment Trust FLCN for $7.50 per share, an 11% premium to the previous day's closing price. We don't expect much of a change to our $48 fair value estimate for iStar. The all-cash deal would strike most investors as odd: Falcon's expertise is in lending to auto dealers, while iStar focuses on high-end commercial real estate. However, the two firms have a working relationship already, as iStar is the warehouse lender to Falcon. We believe management's intentions are to take the inefficiently run Falcon and provide the financing and lending efficiencies seen at iStar.
Jim Callahan

 International Game TechnologyIGT reported sluggish first-quarter results Thursday. We will review the assumptions in our model, but we don't expect a material change to our $38 fair value estimate. Domestic sales were very weak in the quarter--shipments were down 35% from year-ago levels--as the cashless replacement cycle continues to wind down rapidly. Casinos have rushed to replace their slots with cashless ones in recent years, which pulled some demand forward. As such, we expect 2005 to be somewhat of a vacuum year, with the normal slot replacement cycle (8-10 years) resuming in 2006 and 2007. International sales were very strong, particularly in Japan. However, since these machines carry much lower margins than domestic slots, IGT's overall gross margin took a hit, falling 4 percentage points from last year. We still believe that IGT's long-term growth prospects are intact; over time, we expect several more states to legalize or expand gaming in order to keep tax revenue in-state.
Sanjay Ayer