amr

MAJOR PAPERS:

• The FDA is soon expected to issue an alert to physicians about "serious risks" regarding the use of drugs to diagnose heart problems while using ultrasound imaging machines, reported the Wall Street Journal. The key drug is Bristol-Myers Squibb's (NYSE: BMY) Definity and General Electric Company's (NYSE: GE) Optison.
• According to the Wall Street Journal's "Heard the Street" column, there's no quick recovery in sight for AMR Corporation (NYSE: AMR), as significant revenue gains are not apparent and the company is saddled with high costs.
• JPMorgan Chase (NYSE: JPM) and Bank of America (NYSE: BAC) are expected to reveal combined losses of about $3B on holdings of mortgage securities and leveraged loans when they report Q3 results this month, reported the Financial Times.

OTHER PAPERS:

• A consortium led by Goldman Sachs Group (NYSE: GS) is believed to be the frontrunner in the GBP4B auction of Southern Water, the utility that supplies water to more than 1 million households in the Southeast, reported the U.K. Times.
• Rumors are reportedly circulating at telecom company Covad Communications (NYSE: DVW) that Best Buy (NYSE: BBY) is seeking to buy the company, a source told Broadband Reports.

MAJOR PAPERS:

• Under pressure to improve results, AMR Corporation (NYSE: AMR), the parent of American Airlines, will prepay $545M in aircraft debt in the fourth quarter, cutting its annual interest expense by $25M, reported the Wall Street Journal.
• AT&T (NYSE: T) and India's Mahindra Telecommunications Private LTD have jointly applied for a unified access service license in India to provide wireless service, according to the Wall Street Journal.

OTHER PAPERS:

• The New York Times reported that the tentative contract between General Motors Corporation (NYSE: GM) and the United Auto Workers union would allow GM to close two plants, and possibly shut down several other facilities, according to a copy of the agreement posted on the Internet.

WEBSITES:

• According to the BetaNews Web site, Microsoft Corporation (NASDAQ: MSFT) will reportedly hold an event today to launch the second generation of its Zune music players.
• Google Inc's (NASDAQ: GOOG) AdSense system that now reportedly allows people in Malaysia to make payments through Western Union Company (NYSE: WU) could become a "quasi bank," according to Bear Stearns analyst Robert Peck, reported CNet.com.

MOST NOTEWORTHY: Southwest Airlines, AMR Corp, ConocoPhillips, Comcast and Time Warner Cable were today's noteworthy downgrades:

• Citigroup downgraded shares on both Southwest Airlines (NYSE: LUV) and AMR Corp (NYSE: AMR) to Hold from Buy to reflect elevated risks from continued high fuel prices and relative valuations.
  
• Deutsche Bank lowered shares of ConocoPhillips (NYSE: COP) to Sell from Hold on valuation noting that 13 out of the past 15 years, integrated oils have underperformed during the period October 1st to December 5th. They also believe the company's 3rd October trading statement could raise concerns over Q4. on valuation noting that 13 out of the past 15 years, integrated oils have underperformed during the period October 1st to December 5th. They also believe the company's 3rd October trading statement could raise concerns over Q4.
  
• Soleil downgraded shares of Comcast Corporation (NASDAQ: CMCSA) and Time Warner Cable (NYSE: TWC) to Hold from Buy due to concerns about the company's prospects in a weakening economy.

OTHER DOWNGRADES:

• RBC Capital downgraded Research in Motion Limited (NASDAQ: RIMM) to Outperform from Top Pick.
  
• Citrix Systems (NASDAQ: CTXS) was downgraded to Neutral from Buy at Banc of America.
  
• Deutsche Bank lowered shares of VistaCare (NASDAQ: VSTA) to Sell from Hold and Publicis (PUB) to Hold from Buy.
  
• Thomas Weisel downgraded SunPower Corporation (NASDAQ: SPWR) to Market Weight from Overweight.

Barron's piece on AMR Corporation's (NYSE: AMR) American Airlines points to how investor sentiment might be changing toward the airline industry. The airlines are profitable, have huge cash positions and little debt outside of the leases for their planes.

One potential catalyst could be the spinning off of many of the industry's frequent flyer programs, similar to what Air Canada did with its Aviation Holdings frequent flyer program.

Also, as American Airlines and UAL Corporation (NASDAQ: UAUA) are getting pitched by investment bankers about spinning off assets, the supply-and-demand balance for oil and jet fuel are looking more favorable for a price decline. With demand slowing and new supplies coming to market from Saudi Arabia, the drop in fuel could be considerable.

With American having corrected from $40 and now selling for $22, and UAL Corp holding up better, but still selling for a cheap valuation, both stocks seem to have a number of catalysts in place to drive both airline stocks higher.

AMR Corp. (NYSE: AMR), parent of American Airlines, was urged by one of its top shareholders to consider "all options to enhance shareholder value" such as spinning-off American's frequent flier program, according the ' DealBook blog.

In a letter to the Fort Worth-based company, FL Group of Iceland said "a conservative analysis" of AMR
shows "there is significant hidden shareholder value to be unlocked." In particular, FL Group believes that unbundling AMR's AAdvantage ("AAD") Frequent Flier program could increase shareholder value "by more than $4 billion."

The idea isn't without precedent. As DealBook notes UAL Corp (NYSE: UAUA), the parent of United Airlines, are expected to consider spin-offs at its annual meeting this week and that Air Canada has already spun off its frequent flier plan. Shares of AMR, which have plunged 50% since January, are trading slightly higher today. But investors who have watched airlines destroy billions of dollars in shareholder value over the years shouldn't get their hopes up.

Ceylon Securities analyst Ray Neidl told Bloomberg News that AMR sees "greater value in keeping all of the parts together."

Maybe AMR will change its tune if other shareholders join forces with FL Group.

Before the bell: Higher open seen today ahead of data

Bed Bath & Beyond Inc (NASDAQ: BBBY) posted a slightly higher quarterly profit on Wednesday after the close, helped by increased sales. The company also approved a $1 billion share buyback program. Net income rose to $147 million, or 55 cents a share. Excluding the one-time benefit, the company earned 52 cents a share, meeting Wall Street analysts' average forecast, according to Reuters Estimates. Quarterly sales rose 10% to $1.77 billion, in line with analysts' average estimate.

British Airways made its largest aircraft purchase in nearly a decade, dividing the order between rivals Boeing (NYSE: BA) and Airbus., ordering 24 Boeing 787 aircraft and 12 Airbus A380s for $8.2 billion combined at list prices.

AMR Corp. (NYSE: AMR) shares are up over 4.7% in premarket trading as FL Group, a firm with a sizable stake in American Airlines' parent, is pushing the carrier to cut loose its frequent flyer program to boost returns to investors.

Wal-Mart Stores Inc. (NYSE: WMT) was upgraded at Rochdale Securities from Hold to Buy and target upped to $55 from $39.

Google (NASDAQ: GOOG) may be working on its own Google Phone, but for now it has demonstrated that its Google Web ToolKit can be used to create applications that work well on Apple Inc.'s (NASDAQ: AAPL) iPhone as well a traditional desktop browser.

Moody's Investors Service downgraded the ratings of McDonald's Corp. (NYSE: MCD) due to its more aggressive financial strategy.

Thanks to a sour revenue outlook from AMR Corp. (NYSE: AMR), the AMEXあめっくす Airline Index (XAL) is in the red, bringing up the rear among most sector indices despite a modest pullback in crude prices (which generally help lift airline stocks).

The group can hang the blame for today's declines on the American-Airlines parent, which said late Friday that passenger revenue would rise 3.7% to 4.7% in the third quarter. This growth rate is notably lower than rival Continental Airlines (NYSE: CAL), which recently noted that unit revenue rose 6.5% to 7.5% in August. Other rivals, including UAL Corp. (NASDAQ: UAUA) have also projected better revenue numbers. AMR did note with its report that costs were rising, as the company has earmarked funds to improve customer service. And on the plus side (barely), fuel prices are likely to average $2.21 a gallon, the company said, compared to a July forecast of $2.24.

MOST NOTEWORTHY: Rockwell Automation, Barclays, F5 Networks, Foundry Networks, AMR Corp., and Red Hat were today's noteworthy downgrades:

• JP Morgan downgraded Rockwell Automation Inc (NYSE: ROK) to Neutral from Overweight based on valuation, as the firm believes the recent credit market turbulence could make a material recapitalization less likely.
  
• Bear Stearns downgraded shares of Barclays (NYSE: BCS) to Underperform from Peer Perform on valuation and expectations for losses in the company's Capital division.
  
• Nollenberger downgraded shares of F5 Networks Inc (NASDAQ: FFIV) to Neutral from Buy, as they believe the company is transitioning from a "beat and raise" story to a "meet and maintain" story given the recent disruptions in the financial services sector and slowing growth in active web hosts on the net. The firm also downgraded shares of Foundry Networks Inc (NASDAQ: FDRY) to Neutral from Buy on valuation, seeing a well balanced risk/reward profile at current levels.
  
• Soleil downgraded shares of AMR Corporation (NYSE: AMR) to Hold from Buy to reflect the company's deteriorating revenue and non-fuel cost outlook.
  
• Red Hat Inc (NYSE: RHT) was downgraded to Neutral from Outperform at Credit Suisse, citing lack of progress in execution.

OTHER DOWNGRADES:

• LDK Solar (NYSE: LDK) was downgraded at CIBC to Sector Performer from Outperformer.
  
• Friedman Billings downgraded Parker Hannifin Corporation (NYSE: PH) to Market Perform from Outperform.
  
• Morgan Keegan downgraded Cree Inc (NASDAQ: CREE) to Market Perform from Outperform.

Apple (NASDAQ: AAPL) October implied volatility at 39 into Citigroup raising target to $185.

• AAPL is recently up $1.05 cents to $145.20 in pre-open trading.
  
• Citigroup Smith Barney-SBSH says: "We are raising FY08 and FY09 earnings estimates to reflect higher gross margin and lower operating expense assumptions. Our above-consensus estimates suggest a new twelve-month target of $185. We remain buyers of AAPL."
  
• AAPL is expected to report EPS in mid-October.
  
• AAPL October option implied volatility of 39 is below its 26-week average of 42 according to Track Data, suggesting decreasing price movement.

AMR Corp (NYSE: AMR) implied volatility Flat prior to weak 3Q investor Update.

• AMR closed at $24.26.
  
• Soleil Securities says: "On the heels of a somewhat disturbing mid-quarter update from AMR that was released late Friday, we are slashing earnings estimates, cutting our target price to $24 from $33, and reducing our investment rating to Hold from Buy."
  
• WTI Crude futures are down 1.13% to $80.70 according to Bloomberg.
  
• AMR October option implied volatility of 50 is near its 26-week average according to Track Data, suggesting non-directional risk.

Daily options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.

MOST NOTEWORTHY: The ethanol sector, BT Group, AMR Corp and Kyphon were today's noteworthy downgrades:

• Friedman Billings downgraded Aventine Renewable Energy (NYSE: AVR) and Pacific Ethanol Inc (NASDAQ: PEIX) to Underperform and VeraSun Energy Corporation (NYSE: VSE) was downgraded to Market Perform from Outperform. The firm said the ethanol market has become increasingly challenging as spot market prices have declined by 30% in the past few months and expect pressure to remain through 2008 as the industry's growing pains continue.
  
• Morgan Stanley downgraded shares of BT Group (NYSE: BT) to Underweight from Equal Weight on valuation and regulation uncertainty ahead of Ofcom's first consultation document next week.
  
• AMR Corporation (NYSE: AMR) was downgraded to Sell from Neutral at Goldman to reflect the company's U.S. exposure as they expect the U.S. economy to slow.
  
• Banc of America downgraded shares of Kyphon Inc (NASDAQ: KYPH) to Neutral from Buy on valuation as the spread on the acquisition by Medtronic Inc (NYSE: MDT) has now narrowed.

OTHER DOWNGRADES:

• Pepsi Bottling Group Inc (NYSE: PBG) was downgraded to Market Perform from Outperform at Bernstein.
  
• Oppenheimer downgraded Signature Bank (NASDAQ: SBNY) to Neutral from Buy.
  
• ThinkEquity downgraded BioCryst Pharmaceuticals (NASDAQ: BCRX) to Accumulate from Buy.
  
• Merrill Lynch downgraded Luxottica Group (NYSE: LUX) to Neutral from Buy.

Since it came out of bankruptcy two months ago, Northwest Airlines (NYSE: NWA) has canceled a significant amount of flights because of a pilot shortage. Over 147 Northwest flights were canceled over the past weekend and more than 60 were canceled on Monday. By mid-day today, 30 more were grounded.

While these recent cancellations don't compare to the 1,000 flights that were cut in June, Northwest failed to meet the industry's target of 98.0% completed flights. The numbers are also worse than Northwest's rivals' performances. USA Today reported that Northwest's 76 cancellations Sunday totaled 5.6% of the day's flights. In comparison, American Airlines (NYSE: AMR) cut six flights, United Airlines (NASDAQ: UAUA) canceled 33 and Delta (NYSE: DAL) cut four. All provide more daily flights than Northwest.

As of today, there's a new airline in the skies: Virgin America. That's right folks: British Billionaire Richard Branson has expanded his Virgin Atlantic fleet across the pond. The new San Francisco-based start-up will use a fleet of Airbus A320's to fly two routes: San Francisco to J.F.K in New York and San Francisco to Los Angeles International.

While Virgin America will only open with those two routes, they plan on ramping its schedule fast. In the next three months, Virgin will add Las Vegas and Washington Dulles to the schedule and move up to a total 10 U.S. destinations a year from now. The fleet plans to service 30 destinations within the next five years.

Fuel costs are on the rise and on-time rates are at record lows -- it's no wonder that earnings are a delicate topic at the major airlines. Here's a quick summary of the lackluster results from AMR Corp. (NYSE: AMR), Delta Air Lines (NYSE: DAL), and Southwest Airlines (NYSE: LUV):

• AMR, the parent of American Airlines, reported second-quarter net income of $317 million, or $1.08 per share, up 9% from year-ago results. Revenue was down 1.6% to $5.88 billion. Both figures were below analysts' earnings and revenue estimates of $1.19 per share and $5.98 billion, respectively. According to MarketWatch, AMR cited "severe weather disruptions," calling the quarter's meteorological phenomenon "an enormous obstacle." Looking forward, AMR expects capacity to drop 2.4% on a year-over-year basis in the third quarter.

• DAL announced quarterly results for the first time since emerging from bankruptcy at the end of April. The airline netted a profit of $1.8 billion, or $4.49 per share. Excluding items, Delta would have banked 70 cents per share, topping Street estimates. Sales rose 5.5% during the period to $5 billion, also topping Thomson Financial's composite target.

• Finally, LUV said its net profit was off 16.5% at $278 million, or 36 cents per share (or 25 cents per share excluding items). Total operating revenue was up 5.5% to $2.58 billion. The "low-cost" carrier expects its fuel cost to rise to $1.70 a gallon in the current third quarter, up from $1.62 in the second. Its costs excluding fuel are also expected in increase above year-ago figures.

Beth Gaston Moon is an analyst at Schaeffer's Investment Research.

MOST NOTEWORTHY: Wilshire Bancorp (WIBC), American Express (AXP), AMR Corp (AMR), Delta Air Lines (DAL) and UAL Corp (UAUA) were some of today's noteworthy upgrades:

• Friedman Billings upgraded shares of Wilshire Bancorp (NASDAQ: WIBC) to Market Perform from Underperform based on valuation.

• Goldman Sachs upgraded shares of American Express (NYSE: AXP) to Buy from Neutral as they believe American's network business is undervalued.

• UBS upgraded AMR Corp (NYSE: AMR), Delta Air Lines (NYSE: DAL) and UAL Corp (NASDAQ: UAUA) to Neutral from Reduce saying the capacity cuts bode well for industry pricing...

OTHER UPGRADES:

• Wachovia raised Orbital Sciences (NYSE: ORB) to Outperform from Market Perform.

• Cognos Inc (NASDAQ: COGN) was raised to Strong Buy from Outperform at JMP Securities.

• Deutsche Bank upgraded PetroChina Co Ltd (NYSE: PTR) to Buy from Hold.

• JP Morgan upgraded Lear Corp (NYSE: LEA) to Overweight from Neutral.

• Matrix USA raised Marriot International (NYSE: MAR) to Buy from Hold.

Analyst summaries provided by TheFlyOnTheWall.com (subscription required).

AMR Corporation (NYSE: AMR) opened at $27.50. So far today the stock has hit a low of $27.40 and a high of $28.45. As of 10:30, AMR is trading at 28.20, up 1.14 (4.2%).

After hitting a one year high of $41.00 in February, the stock has crept downward to flatten out just above 25 over the past few months. Continental (NYSE: CAL) is leading airlines up this morning following an upgrade from Soleil Securities. The industry is also being helped by falling oil futures. Recent technical indicators for AMR have been neutral and improving, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.

For a bullish hedged play on this stock, I would consider a July bull-put credit spread below the $25 range. AMR hasn't been below $25 since October and has shown support around $26 recently. This trade could be risky if crude oil prices spike even higher over the next few weeks, but even if that happens, it looks like this stock could find support right near $25, where the stock has bounced three times since April.

Brent Archer is an options analyst and writer at Investors Observer. Do you have any deadwood in your portfolio? Check out the 18 Warning Signs That Tell You When To Dump A Stock.

DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in AMR or CAL.