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Monday, June 30, 2003 8:57:57 PM
RobBlack.com MarketWrap
http://www.robblack.com/rb_marketwrap.shtml
U.S. stocks ended with modest losses as the Standard & Poor's 500 Index ended with its biggest quarterly advance since the end of 1998. Investors anticipate corporate profit growth will accelerate in the second half. The S&P 500 slipped 1 point (-0.2%) to 974. The Nasdaq Composite shed 2 points (-0.2%) to 1622. The DJIA lost 3 points to 8985. On the economic calendar, the Chicago Purchasing Manger's Index for June rose to 52.5 from 52.2 in May, coming in a tad below expectations. This is symptomatic of an economy showing slow-but-sure recovery progress, but nothing that would knock your socks off. The annual reconstitution of Russell's 21 U.S. stock indexes will take effect on Tuesday, with the start of the third quarter. The change in the makeup of the indexes is made to more accurately reflect the stock market's performance. Government bonds ended higher. The 10-year Treasury note climbed 6/32 to yield 3.515 percent while the 30-year government bond gained 12/32 to yield 4.56 percent. The Treasury market crumbled last week in the aftermath of a tame 1/4-point rate cut from the Federal Reserve. Investors had hoped for a more aggressive 1/2-point move.
Strong Sectors: internet, apparel, aluminum
Weak Sectors: airline, wireless, homebuilding
Top Stories . . . Chicago-area manufacturing expanded less than forecast in June, suggesting a slow recovery for the nation's factories following the war with Iraq, an industry survey showed.
U.S. Treasuries rose after an industry report showed Chicago-area manufacturing expanded in June by a smaller amount than some economists forecast and stocks pared gains.
Metro-Goldwyn-Mayer, one of six bidders for Vivendi Universals U.S. media assets, agreed to sell its 20 percent stake in three cable channels to Cablevision Systems for $500 million.
Companies trading on the biggest U.S. stock markets must get shareholder approval before granting stock options and other equity compensation under rules cleared by the Securities and Exchange Commission.
Quotes of Note . . . ``We are living with a modest economic recovery that should enable stocks to continue to move up,'' said Doug Altabef, who helps manage about $750 million at Matrix Asset Advisors Inc. He's been adding to Guidant Corp., his largest holding.
Eco Speak . . . Manufacturing activity in the Chicago region expanded for a second month in a row in June, the Chicago Purchasing Managers said Monday. The group's monthly gauge read 52.5 this month, up from 52.2 in May. Readings above "50" signal factory-sector expansion, while readings below that mark show contraction. Economists expected a reading at 52.8.
Tough Times . . . Nevada is considering for the first time a tax on its state-sanctioned brothels to raise about $2.5 million.
Gurus . . . Trim Tabs has turned "aggressively bearish" on stocks due to an onslaught of new corporate offerings and a lack of corporate purchases in the form of stock buybacks. The fund flow tracker also points to widespread bullishness among most investors, a worrisome signal from a contrarian standpoint. While U.S. equity fund inflows slowed in the latest week, Trim Tabs said the second-quarter is on pace to register $40 billion in inflows, the most since the first quarter of last year. Still, that's a far cry from the $93 billion inflow registered during the first-quarter of 2000, when the stock averages peaked.
Richard McCabe, chief market analyst at Merrill Lynch, told clients he believe the market's upward trend will resume this summer following a consolidation phase that could extend into early or mid-July. "Near-term momentum indicators are already at or near oversold levels, but intermediate trend-related ones are still at or near overbought readings. They may need to fall back from this condition before the market is able to generate a sustained new phase of advance," McCabe maintained.
Smith Barney's equity research analyst Tobias Levkovich feels that recent equity weakness represents a buying opportunity for skeptical investors. While investors appear "deeply worried" the second-half recovery story will fade as it did in the past three years, he thinks stocks could overshoot his 2003 S&P 500 target of 1,075. The strategist gave a number of reasons that stocks could sizzle during the heat of summer: Investor earnings expectations appear low; the potential for near-term upside earnings surprises remain high thanks to cost cutting, improved demand and the weak dollar; the relative valuation of stocks still looks reasonable; asset allocation shifts towards equities remain plausible since stocks look attractively valued relative to bonds and cash; renewed mergers and acquisition activity points to improvements in the market; and market technicals have improved, including the advance-decline ratio.
Merrill Lynch's chief U.S. strategist Richard Bernstein feels the equity market is more overvalued than many believe. He said investors are enthusiastic that interest rates are low but seem to forget that lower rates imply lower inflation and weaker earnings. His "Sell Side" indicator stood at 64.9 percent in June, unchanged from May's reading. Readings at or above 62.3 percent generate "sell" signals in Bernstein's model while reading at or below 50.2 percent generate "buy" signals. A 64.9 percent level reveals a good deal of bullishness among Wall Street strategists. From a contrarian standpoint, excessive bullishness on Wall Street has been a reliable sell signal, Bernstein explained. "Equity valuations are getting stretched as speculative behavior broadens and the [equity] bubble reflates," he told clients in a research note. Going against the grain, the strategist feels there is no "bubble" in the bond market.
Smith Barney economist Steven Wieting upped his 2003 S&P 500 dividend-per-share forecast to $17.70 from $16.80 and his 2004 forecast to $19.50 from $17.82. "This raises the forecast growth rate to slightly over 10 percent from just over 5 percent previously. Improving cash flow and smaller share repurchases suggest many firms have room to raise dividends," the economist told clients.
On The Lou Rukeyser Show, Lazl Birinyi noted that only 10 of the S&P 500 was down for the quarter, underscoring the broad sweep of advance. He sees a near-term shake-out, and then higher. The flow of funds indicates greater investor confidence, and as for specific stocks, he favors dividend-paying issues, like Verizon, Bristol-Myers, Citigroup, and Baxter Int'l.
Tom Gallagher, Washington Chief for Schwab, sees the Dow making a high of 9900 this year, and would be buying stocks that would benefit from a new Medicare prescription drug bill, like Cardinal Health and Mylan Labs. He would be selling bonds.
Kim Goodwin of State Street Bank also sees the market taking a breather before proceeding onto 9500 on the Dow, and 1700 for the NASDAQ. She favors Disney, Microsoft and Amdocs.
Roger McNamee of Integral Partners is a selective tech buyer of Flextronics, Cisco, and Intel. He sees the Dow at 9500, and NASDAQ at 1700.
On the Cavuto Show, Jim Rogers says he has become a seller, and is now beginning to short the advance. Tom Dorsey endorses a cautious short-term position, but would be a selective buyer, with Bed Bath & Beyond one of his favorites.
Steve DeSanctis, head of Small Cap Research at Prudential, notes that $20-billion is Indexed to the Russell 2000 Index, and fund managers must reshuffle portfolios to match the Index. Last year, on the final day of the quarter, it was a sleepy session until the final hour, and then, a volume explosion.
John Hughes, equity analyst at Epiphany Equity Research, said some last minute "window dressing," as portfolio managers scramble to embellish their statements for quarter end, could be stoking stocks Monday. He believes equities need to consolidate recent gains until the fundamental picture for U.S. earnings and economic growth improves. But Hughes expects sell-offs to be orderly -- meaning on low volume and not very aggressive in terms of price pullbacks -- as they have been over the past two weeks. "The Dow may consolidate down to the 8,800 area and the S&P down to around 950. It would be constructive for the market over the longer term to build a base before [resuming its upward trend]," Hughes said.
Barron’s interviews Larry Haverty, a leisure analyst at State Street Research & Management . The market specialist suggests the economy is in a bull market and points to the consumer being very strong. He believes dividend taxation is very important given the recent positive market reactions to Mandalay Bay and International Game Tech. In addition, his outlook on the economy is optimistic projecting disposable income being up 10% in 3rd quarter in light of tax cuts. Mr. Haverty interests include a large gamut from Internet services, Wal-Mart in light of its radio-frequency inventory management and IGT due to its enviable cash flow growth. His picks include the following companies: IACI, Yahoo, International Game Tech, Comcast, News Corp and Disney.
Bad Boys . . . Regulators at the National Association of Securities Dealers, the Securities and Exchange Commission and the New York Stock Exchange are investgating eight investment banks for alleged infractions involving initial public offerings, the Wall Street Journal reported. The probe involves banks such as U.S. Bancorp Piper Jaffray that weren't included in a global $1.4 billion settlement over conflicts of interest on Wall Street. The investigation is similar to past efforts focusing on "spinning" IPOs during the bull market -- a process in which banks used shares of IPOs to allegedly lure more investment banking business.
Financials . . . Legg Mason upgraded MBNA to Buy from Hold due to a more positive fundamental outlook. The firm is optimistic that the co will continue to exceed expectations this year, and says an improved competitive environment should improve growth, reduce attrition, and stem margins; in addition, as rates begin to rise KRB should be more successful than anticipated repricing customers up to offset its rising funding costs.
Transports . . . BB&T Capital upgraded SkyWest to Strong Buy from Buy and raises their target to $26 from $20. The firm thinks believe the majority of overhanging risk for the stock has been removed following its recent memorandum of understanding with UAL Corp.
BB&T Capital upgraded Atlantic Coast Air to Strong Buy from Buy. The firm raised 2003-04 estimates, and raised their target to $20 from $12. The firm thinks ACAI's recently-announced contract with its pilots should allow the co to present UAL Corp with an even more attractive cost structure for regional jet operations. Also, firm believes ACAI and UAL Corp are now close to reaching a new amended agreement similar to the one SKYW reached with UAL Corp in early June, and thinks that any new agreement
that ACAI reaches with UAL will allow the company to take on new code share partners.
The Wall Street Journal reports that Daimler Chrysler outlined a strategy to consolidate parts of its truck operations in an attempt to boost profit and leverage economies of scale. The strategy calls for unifying purchasing, development and other parts of its Mercedes-Benz and Freightliner divisions.
Defense & Aerospace . . All Nippon Airways purchases 45 planes from Boeing (34.22)
The Wall Street Journal reports Japan's second largest carrier All Nippon Airways has completed a $2.4 bln dollar deal with Boeing to buy 45 of its aircraft. This deal more than doubles the co's orders for the year and illustrates the co's decision to shift to an all-Boeing fleet.
Raytheon announced the award of a defense contract for production display systems that will help soldiers "see" in total darkness, adverse weather, and through battlefield smoke and dust. ThinkEquity views this deal with one of the largest defense contractors as a significant win for Kopin and believes Raytheon could become a large customer over time.
Trash . . . Waste Management plans to eliminate 600 employee and 200 contract worker positions as a part of ongoing restructuring efforts. The company expects to record a pre-tax charge of $20 million in the second quarter to cover severance and other costs related to the layoffs.
Food & Beverage . . . Dean Foods agreed to acquire the remaining 87 percent interest in Horizon Organics that it doesn't already own for $216 million, or $24 per share, and the assumption of roughly $ 40 million in debt. The deal is expected to close in the fourth quarter. Dean Foods expects the transaction to neutral to slightly accretive to its results in the first full year following completion.
Retail . . . Wal-Mart said its June U.S. comparable-store sales are tracking in the 2 percent to 4 percent range, with warmer weather driving sales of seasonal products. The retailing giant also said it sold over 1 million copies of the latest "Harry Potter" installment. Wal-Mart added that the East Coast saw the strongest sales during the latest week. Wal-Mart will report its monthly sales on July 10.
PetSmart announced the initiation of quarterly cash dividends. The first such payout, in the amount of 2 cents per share, will be paid Nov. 21 to shareholders of record on Oct. 31.
Prudential reiterated their Buy rating on eBay and raised their target to $120 from $108. The firm is citing attractive growth opportunities and a powerful business model. In addition, following a meeting of EBAY Powersellers over the weekend, firm believes these people are helping to build one of the most impressive growth companies in the world.
Joseph. A. Bank target raised to $42 at Brean Murray and the firm raised their target to $42 from $36. The firm says the company likely experienced good Father's Day sales, and firm consequently anticipates higher 2nd quarter earnings. In addition, firm expects June comps to gain mid-single digits (+5%) vs. a 3.7% decline last year.
Restaurants . . . Roth Capital upgraded Checkers Drive-In to Buy from Neutral. The firm raised their 2003 EPS est to $1.00 from $0.76 to reflect the co's extremely strong sales momentum and margin improvement during 1st half 2003, and anticipated that the company can sustain same-store sales increases of 3.0-3.5% through 2004. Target is $16.
Panera Bread valuations too lofty despite growth according to Barron's. The company operates 505-unit chain of bakery cafes has grown dramatically with sales nearly tripled since 1999 to $775 million. However, skeptics have sold short nearly 30% given the stock trading at a pricey 40 times estimates earnings. Sidoti's analyst believes "We believe the fundamentals at Panera are sound, but too rich on a valuation basis." The co is heading west in an effort to expand its markets and achieve its goals of opening 120 stores this year. Despite the co's growth, the article suggests "sales growth slows, public tastes change and investors too, move on newer, hotter concepts."
Healthcare . . . JP Morgan initiated Omnicare with an Overweight rating and adds the stock to their Focus List. The firm is citing the following factors: 1) company's leadership position, 2) their belief that the NCS acquisition should drive accelerating earnings growth in 2003, 3) the government reimbursement environment has improved for OCR and its clients in the last qtr, and 4) their belief that the co will increasingly look to leverage its footprint by expanding into other services lines including dialysis and infusion therapy. Target is $42.
Drugs . . . Corixa and GlaxoSmithKline are saying that Bexxar has received Food and Drug Administration approval for the treatment of patients with non-Hodgkin's lymphoma. The approval covers patients whose disease is refractory to Rituximab and has relapsed following chemotherapy. The companies will co-market the drug in the U.S.
Barr Labs filed ANDA with FDA for generic Premarin for an "AB"-rated conjugated estrogens product, which would be a generic version of WYE's Premarin conjugated estrogens.
Bayer reported positive findings for Levitra erectile function treatment. The firm announced new clinical findings on the long-term efficacy, safety and tolerability of the oral investigational drug Levitra showed that men with erectile dysfunction reported clinically significant, sustained improvement in erectile function over a two-year period. "It was impressive that 90 percent of men reported improvement in erectile function after taking LEVITRA over a two-year period."
Biotech . . . Genta's Genasense anti-cancer agent for chronic lymphocytic leukemia received fast track designation from the Food and Drug Administration. Fast Track designation speeds up regulatory review of new drugs that are designed to treat serious or life-threatening conditions. The drugs also typically demonstrate the potential to address unmet medical needs.
SuperGen initiated Phase I/II trial of Dacogen in cancer patients.
Corixa and Glaxo announced Bexxar approva from the FDA. Bexxar can be used for treatment of patients with CD20 positive, follicular, non-Hodgkin's lymphoma. (Briefing note: This news is important in that Bexxar is Corixa's lead drug. However, approval was widely anticipated).
Morgan Keegan reiterates their Outperform rating on Millennium Cell. The firm is saying the recent Samsung agreement and the government funding announcement have been largely unnoticed in the market; firm says both developments provide immediate cash flows to the co, and MCEL stands to receive additional cash flows as more project milestones are achieved under the Samsung agreement.
InterMune upgraded at Wachovia to Outperform from Market Perform due to several possible near-term catalysts, including: 1) possible resumption of Actimmune patient adds in 2nd half 2003, 2) an expected expense restructuring to be detailed as soon as next month's analyst meeting, 3) conservative Actimmune guidance for 2003 leaves limited downside risk, and 4) publication of Actimmune phase III data and commencement of a phase III confirmatory trial in 2H03; sees valuation range of $17-$21.
Pain Therapeutics initiated Phase III study of Oxytrex for chronic pain. The initiation of the study follows the successful completion of a 21-day Phase II study. The Phase II study met its primary efficacy endpoint, showing a statistically significant reduction in chronic pain using Oxytrex.
Adams Harkness reiterates their Strong Buy rating and $52 target on Martek Biosciences. The firm is saying the recent study published in the Journal of Pediatrics was the first one they can recall that shows benefits to kids given formula with DHA/ARA after breast-feeding and after 6 months of age. Also, a petition has been filed by a nutritional co asking the FDA to strengthen claim on dietary supplements and foods containing Omega-3 fats, which firm thinks should prove to be a catalyst for MATK's food fortification opportunity over the next 12-24 months.
AVI BioPharma files IND application with FDA for West Nile virus drug.
Media . . . Pixar Animation and Walt Disney’s "Finding Nemo," took in $13.9 million over the weekend to bring its five-week box office total to $253.9 million. Sony’s sequel, "Charlie's Angels: Full Throttle," was the top grosser at the weekend box office, picking up $38 million in its debut.
Cablevision struck a deal to buy MGM's 20 percent stake in three of Rainbow Media's cable stations, American Movie Classics, Independent Film Channel and WE: Women's Entertainment for $500 million. Cablevision sold the stake to MGM two years ago.
Pixar Animation was upgraded at Gerard Klauer Mattison to Outperform from Neutral. The firm believes that investors will soon begin to focus on the announcement of a new distribution agreement for PIXR films for 2006 and beyond, and that the company can potentially retain 80-90% of the operating income from its films beyond 2006. In addition, firm expects analysts to raise their 2003-04 estimates based on the strength of Finding Nemo, and thinks the stock can move up to a level that discounts a much higher level of future profitability. Target is $70.
SG Cowen expects Hollywood Entertainment to beat comps guidance of 9% by 2-3 percentage points when comps are reported July 1. Firm believes that a comps increase of 11-12% could result in a penny or two upside to EPS.
Vivendi Universal intends to challenge an arbitration tribunal's decision on June 27 in New York. The panel rejected Vivendi Universal's claim that former CEO Jean-Marie Messier's so-called U.S. Termination Agreement dated July 1, 2002, be voided. Vivendi said the panel ordered it to pay Messier 20.6 million euro ($23 million). "After reviewing the tribunal findings, Vivendi Universal intends to challenge this decision through all available legal actions, both in France and in the United States. Tomorrow, the Board of Directors of Vivendi Universal will review this matter during its meeting," it said.
Hughes upgraded to Overweight at Lehman.
Hotel & Leisure . . . Cendant will "meet or exceed" its previous profit forecast of 35 cents for the second quarter. The provider of travel and consumer services also reiterated its previously announced cash flow projections. In addition, the company said it would initiate payments of dividends, with the quarterly rate to be set at 7 cents a share. No formal record or payout dates were set.
IT Services . . . Electronic Data Systems reaffirmed its 2003 outlook for free cash flow, but it will fall short of its projection for the second quarter due to a delay in a payment from MCI, the former WorldCom. The company had been looking for free cash flow of $75 million to $125 million in the second quarter. EDS now expects to receive the $98 million in pre-bankruptcy receivables from MCI later this year, boosting its free cash flow expectations for the second half.
Unisys mentioned favorably in Barron's. The article highlights the co's revenues, which are growing for the first time since 1999 to approximately $5.8 billion with further growth expected to be $6.2 billion in 2004. While the company has missed some key windows of market opportunities associated with the computing era, it appears to be poised for growth with price upside on the horizon. The stock trades at 12x consensus 2004 earnings estimates, which is comparatively low to other services and hardware companies. In addition, the company has been able to get its balance sheet under control by lowering its long term debt to $1 billion, an improvement from $2.3 billion in 1997.
Telecom . . . Sprint said it has an agreement with Sony Music Entertainment to offer downloadable ringers created by the Sony Music Mobile Products Group, including animated polyphonic tones for PCS customers. Separately, Sprint said it expects to expand its streaming-music subscription service with Warner Music Group to include full-length streamed tracks.
UTStarcom signed first contract in Europe with Cyprus Telecom. The firm announced its first contract in Europe with the Cyprus Telecommunications Authority (CYTA).UTStarcom will supply its AN-2000 Broadband Multi-Service Access Network (MSAN) in support of CYTA's nationwide rollout of a "Fiber-to-the-Cabinet" (FTTCab) network. Separately, co announced the signing of a $43 mln pact with China Netcom to deploy its IP-based P.A.S. equipment in several cities in the HeiLongJiang Province.
Nextel is 'baffled' by Verizon suit. The company issued a statement in response to news that Verizon Wireless has filed a suit against Nextel alleging that it improperly acquired prototypes of Verizon's new push-to-talk cellphone and gained unauthorized access to Verizon Wireless' network. Nextel says it is confident it has conducted itself properly with respect to the allegations in Verizon Wireless' complaint filed today in the United States Federal District Court. "We are, therefore, baffled by the claims made by Verizon Wireless in its filing."
JP Morgan initiated coverage of Mobile Telesystems & Vimpelcom. JP Morgan initiates coverage of MBT with an Overweight rating, saying the company is their favorite investment vehicle among Russian mobile operators due to attractive valuation and strong mkt position. Firm also initiates coverage of VIP with a Neutral rating, citing relative valuation (VIP trades at a premium to MBT on EV/EBITDA and price/free cash flow) as the primary reason for their cautious stance.
Storage . . . Seagate Tech reiterated as a Buy at Fulcrum. The firm says would be buyers on weakness related to secondary filing; says the filing was anticipated and is neither non-dilutive nor fundamental.
Seagate Technology filed a registration statement with the Securities and Exchange Commission for the sale of 60 million shares held by its parent company new SAC. Seagate also updated its financial outlook and raised its dividend. The company now sees fourth-quarter earnings of 30 to 33 cents per share on revenue ranging from $1.53 billion to $1.56 billion. Analysts are currently looking for a profit of 28 cents per share in the period on revenue of $1.54 billion, on average. The quarterly dividend was boosted to 4 cents per share from 3 cents. In addition, Seagate plans to increase its investment in property and equipment to $700 million in fiscal 2004.
Network Equipment . . . Cable Design Technology plans to sell $110 million worth of convertible subordinated notes due 2023. The deal includes an over-allotment option for the sale of an additional $16.5 million in notes. Cable Design plans to use the proceeds to buy back $83 million in debt and $20 million in common shares, and for general corporate purposes.
Legg Mason reiterating Nortel stock as its top pick with a Buy rating and $3.50 target price. Nortel's stock price has settled into firm's expected range as we enter the 2nd quarter 2003 reporting season presenting what firm views as an opportune time to buy. Legg Mason believes that Wall Street has underestimated Nortel's ability to deliver bottom line results over the next several quarters and as estimates are revised upward. The firm believes the company's share price should appreciate as earnings estimates increase and it is rewarded a P/E multiple in line with comparable companies.
Nokia and Fujitsu collaborate to provide mobile solutions to develop and provide end-to-end mobile solutions and services for enterprises utilizing Nokia's range of business terminals and platforms and Fujitsu's wide range of capabilities in consulting, systems integration and managed services.
Semiconductor Equipment . . . Adams Harkness reiterated a Buy on Cree. Price target $25. The company has filed a motion to dismiss the lawsuit filed by former chairman Eric Hunter, and firm believes that as the dust settles the overhang will be removed and CREE's valuation will rise; in addition, firm thinks the co is seeing good demand for its LED products used in cell phones, auto backlighting, and indoor/outdoor signs.
Semiconductors . . . Samsung licensed Rambus' Yellowstone technology for its next generation memory chips.
Smith Barney upgraded Intel to Outperform from In-Line, citing the following factors: 1) firm thinks 2nd quarter and 3rd quarter estimates appear achievable, 2) the current environment is allowing INTC to slow price decreases and thereby increase profitability, 3) management is increasingly focused upon improving ROIC, and 4) the company is beginning to accelerate just as the rest of the chip industry is decelerating (seasonally and Year over Year). The firm raised target to $23 from $20.
Texas Instruments intends to build a $3 billion manufacturing plant in Dallas. The chipmaker has scheduled a news conference with Texas Gov. Rick Perry for this afternoon.
Marvell was upped to Outperform from Neutral at GKM.
National Semi was cut to In-Line at Smith Barney and cuts target to $20 from $22 based on their belief that NSM's restructuring benefits are largely embedded in the stock price at current levels. In addition, firm is concerned about NSM's 30% exposure to wireless given excess handsets in Asia and the possible component inventory build due to SARS, and also notes that the co has sizeable exposure to the low-end analog segment, which has been facing tough price competition from TXN.
LSI Logic expects sequential revenue growth of 9 percent for the second quarter from its first-quarter total of $372.8 million, a forecast that's at the high end of its previously disclosed range. The chip technology firm now sees a pro forma loss for the quarter of 6 to 8 cents per share, 4 cents better than its prior outlook. Twelve analysts are currently looking for a loss of 11 cents per share in the period, on average. LSI attributed the improved pro forma view to better than expected gross margins and the benefits of its expense control efforts. On a GAAP (generally accepted accounting principles) basis, the company sees a loss of 43 to 50 cents per share, wider than its previous prediction for a loss of 23 to 31 cents per share. This change reflects an increase in special items to be recorded in the quarter due to the company's restructuring program. The company now expects special items to run from $140 million to $160 million for the period, up from its original estimate of $50 million to $70 million. LSI also said it plans to sell its manufacturing facility in Tsukuba, Japan.
Texas Instruments risk rating goes to High from Medium at Smith Barney due to a substantial miss in company's 2nd quarter wireless chip business. Smith Barney believes TXN unintentionally built up internal inventories in 2nd quarter. Looking out slightly further, firm expects co' earnings to decline sequentially in 4th quarter versus current consensus showing a sequential increase.
Broadcom and National Semi settle patent litigation and agreed to a comprehensive patent cross-license.
The SIA reported that semiconductor sales for May were up 6.6% quarter/quarter and 11.3% year/year. On a 3-month rolling average basis, sales increased 2% Month/Month and almost 10% Year/Year. According to Needham, the SIA report was most positive for PLDs/standard cell, analog, wired communications, and graphics chips. The data was generally negative for SRAM, DSPs, and microprocessors. Firm believes the relatively strong performance for May supports its thesis of industry growth this year a couple of percentage points above the SIA forecast update from June 11 calling for 10.1% growth.
The SIA revised its April worldwide shipments estimate by $340 million—most of which came from analog and DSP shipments and in Asia Pacific. The SIA cited an error in calculating April shipments by one of its members as the reason for the large revision. Given the product categories affected, probably TI is the 'unnamed' company. This revision plus others like it in the past is one reason why we have traditionally been reticent to publish a monthly forecast.
Shipments in the Americas accelerated modestly to -7% Year over Year in May from -9% year over year in April, while all other regions decelerated: Asia Pacific to +12% Year over Year in May from +14% Year over Year in April, Japan from to +26% Year over Year in May from +29% Year over Year in April, and Europe to +9% Year over Year in May from +11% Year over Year in April. On a month-over- month basis, shipments in Europe dropped -3% Month over Month, while all other regions were up 3 to 4% Month over Month. Overall semiconductor pricing improved to +6% Year over Year in May from +3% Year over Year in April due to easy comparisons (particularly in optoelectronics). Integrated Circuit ASPs (which is what is sold by most companies we follow), although still down yoy, improved slightly to -3% Year over Year in May from -5% Year over Year in April.
On a segment basis, most segments decelerated on a year-over-year basis with the exceptions being Microprocessors, rising from to +2% Year over Year in May from +1% Year over Year in April, compared to our estimate of -2% yoy, while DRAM improved from -18% to -11% in May, compared to our -14% estimate. DRAM bit growth was relatively unchanged at +61% yoy compared to +59% yoy in April. Relative strength in these two segments suggest that the PC end-market is doing relatively better than the rest of the end-markets.
As expected DSP slowed significantly from +43% year over year to +32% in May. DSP shipments for April were revised up in the May report by about $120 million (to $423 million), which raised April year-over-year growth from +31% previously to +43%. Analog was the other segment where April numbers were revised up by about $180 million (to $1.99 billion), raising April year-over-year growth from +9% year over year to +13% year over year. In May, Analog shipments decelerated nonetheless to 10% year over year.
Importantly, the SIA reports numbers on sell-in, not upon sell-through basis and therefore does not provide a good read on what is actually happening to inventories or in orders. Based on a variety of data points, we continue to believe that orders are slowing for most of our companies.
Software . . . RealNetworks confirmed plans to provide audio and video services for Vodafone mobile phones. The move is expected to boost RealNetworks' effort to grow its wireless media streaming business.
Jason Maynard, a software analyst at Merrill Lynch, told Barron's that Microsoft will ``do something to appease'' shareholders next month. The world's biggest software maker can afford to boost its annual dividend to 50 cents a share from 8 cents without sacrificing its $46 billion cash reserve, Barron's reported.
Southwest Securities downgraded Watchguard to Neutral from Strong Buy. Although demand for firewall/VPN appliances in the SME segment remains robust. WGRD has been slow to complete reorganization of its Asia Pacific distribution. In addition, the RapidStream/Check Point product line has not gained visible momentum, as Check Point is not actively endorsing the products.
SG Cowen maintains their Strong Buy rating on Magma Design, saying concerns regarding the company's dismissal of their auditor are overdone (see Friday's comment in the archive for details). Following discussions with management, firm is satisfied that there is nothing material in the move and that business and accounting controls are solid.
FreeMarkets was downgraded at Bear Stearns to Peer Perform from Outperform based on valuation as well as their concern that migration from higher priced products to lower priced offerings continues despite high customer satisfaction. Target is $7.
Sonic Solutions shipped new DVD creation software. The company is now shipping Sonic PrimeTime, the world's first DVD recording application designed exclusively for Windows XP Media Center Edition.
http://www.robblack.com/rb_marketwrap.shtml
U.S. stocks ended with modest losses as the Standard & Poor's 500 Index ended with its biggest quarterly advance since the end of 1998. Investors anticipate corporate profit growth will accelerate in the second half. The S&P 500 slipped 1 point (-0.2%) to 974. The Nasdaq Composite shed 2 points (-0.2%) to 1622. The DJIA lost 3 points to 8985. On the economic calendar, the Chicago Purchasing Manger's Index for June rose to 52.5 from 52.2 in May, coming in a tad below expectations. This is symptomatic of an economy showing slow-but-sure recovery progress, but nothing that would knock your socks off. The annual reconstitution of Russell's 21 U.S. stock indexes will take effect on Tuesday, with the start of the third quarter. The change in the makeup of the indexes is made to more accurately reflect the stock market's performance. Government bonds ended higher. The 10-year Treasury note climbed 6/32 to yield 3.515 percent while the 30-year government bond gained 12/32 to yield 4.56 percent. The Treasury market crumbled last week in the aftermath of a tame 1/4-point rate cut from the Federal Reserve. Investors had hoped for a more aggressive 1/2-point move.
Strong Sectors: internet, apparel, aluminum
Weak Sectors: airline, wireless, homebuilding
Top Stories . . . Chicago-area manufacturing expanded less than forecast in June, suggesting a slow recovery for the nation's factories following the war with Iraq, an industry survey showed.
U.S. Treasuries rose after an industry report showed Chicago-area manufacturing expanded in June by a smaller amount than some economists forecast and stocks pared gains.
Metro-Goldwyn-Mayer, one of six bidders for Vivendi Universals U.S. media assets, agreed to sell its 20 percent stake in three cable channels to Cablevision Systems for $500 million.
Companies trading on the biggest U.S. stock markets must get shareholder approval before granting stock options and other equity compensation under rules cleared by the Securities and Exchange Commission.
Quotes of Note . . . ``We are living with a modest economic recovery that should enable stocks to continue to move up,'' said Doug Altabef, who helps manage about $750 million at Matrix Asset Advisors Inc. He's been adding to Guidant Corp., his largest holding.
Eco Speak . . . Manufacturing activity in the Chicago region expanded for a second month in a row in June, the Chicago Purchasing Managers said Monday. The group's monthly gauge read 52.5 this month, up from 52.2 in May. Readings above "50" signal factory-sector expansion, while readings below that mark show contraction. Economists expected a reading at 52.8.
Tough Times . . . Nevada is considering for the first time a tax on its state-sanctioned brothels to raise about $2.5 million.
Gurus . . . Trim Tabs has turned "aggressively bearish" on stocks due to an onslaught of new corporate offerings and a lack of corporate purchases in the form of stock buybacks. The fund flow tracker also points to widespread bullishness among most investors, a worrisome signal from a contrarian standpoint. While U.S. equity fund inflows slowed in the latest week, Trim Tabs said the second-quarter is on pace to register $40 billion in inflows, the most since the first quarter of last year. Still, that's a far cry from the $93 billion inflow registered during the first-quarter of 2000, when the stock averages peaked.
Richard McCabe, chief market analyst at Merrill Lynch, told clients he believe the market's upward trend will resume this summer following a consolidation phase that could extend into early or mid-July. "Near-term momentum indicators are already at or near oversold levels, but intermediate trend-related ones are still at or near overbought readings. They may need to fall back from this condition before the market is able to generate a sustained new phase of advance," McCabe maintained.
Smith Barney's equity research analyst Tobias Levkovich feels that recent equity weakness represents a buying opportunity for skeptical investors. While investors appear "deeply worried" the second-half recovery story will fade as it did in the past three years, he thinks stocks could overshoot his 2003 S&P 500 target of 1,075. The strategist gave a number of reasons that stocks could sizzle during the heat of summer: Investor earnings expectations appear low; the potential for near-term upside earnings surprises remain high thanks to cost cutting, improved demand and the weak dollar; the relative valuation of stocks still looks reasonable; asset allocation shifts towards equities remain plausible since stocks look attractively valued relative to bonds and cash; renewed mergers and acquisition activity points to improvements in the market; and market technicals have improved, including the advance-decline ratio.
Merrill Lynch's chief U.S. strategist Richard Bernstein feels the equity market is more overvalued than many believe. He said investors are enthusiastic that interest rates are low but seem to forget that lower rates imply lower inflation and weaker earnings. His "Sell Side" indicator stood at 64.9 percent in June, unchanged from May's reading. Readings at or above 62.3 percent generate "sell" signals in Bernstein's model while reading at or below 50.2 percent generate "buy" signals. A 64.9 percent level reveals a good deal of bullishness among Wall Street strategists. From a contrarian standpoint, excessive bullishness on Wall Street has been a reliable sell signal, Bernstein explained. "Equity valuations are getting stretched as speculative behavior broadens and the [equity] bubble reflates," he told clients in a research note. Going against the grain, the strategist feels there is no "bubble" in the bond market.
Smith Barney economist Steven Wieting upped his 2003 S&P 500 dividend-per-share forecast to $17.70 from $16.80 and his 2004 forecast to $19.50 from $17.82. "This raises the forecast growth rate to slightly over 10 percent from just over 5 percent previously. Improving cash flow and smaller share repurchases suggest many firms have room to raise dividends," the economist told clients.
On The Lou Rukeyser Show, Lazl Birinyi noted that only 10 of the S&P 500 was down for the quarter, underscoring the broad sweep of advance. He sees a near-term shake-out, and then higher. The flow of funds indicates greater investor confidence, and as for specific stocks, he favors dividend-paying issues, like Verizon, Bristol-Myers, Citigroup, and Baxter Int'l.
Tom Gallagher, Washington Chief for Schwab, sees the Dow making a high of 9900 this year, and would be buying stocks that would benefit from a new Medicare prescription drug bill, like Cardinal Health and Mylan Labs. He would be selling bonds.
Kim Goodwin of State Street Bank also sees the market taking a breather before proceeding onto 9500 on the Dow, and 1700 for the NASDAQ. She favors Disney, Microsoft and Amdocs.
Roger McNamee of Integral Partners is a selective tech buyer of Flextronics, Cisco, and Intel. He sees the Dow at 9500, and NASDAQ at 1700.
On the Cavuto Show, Jim Rogers says he has become a seller, and is now beginning to short the advance. Tom Dorsey endorses a cautious short-term position, but would be a selective buyer, with Bed Bath & Beyond one of his favorites.
Steve DeSanctis, head of Small Cap Research at Prudential, notes that $20-billion is Indexed to the Russell 2000 Index, and fund managers must reshuffle portfolios to match the Index. Last year, on the final day of the quarter, it was a sleepy session until the final hour, and then, a volume explosion.
John Hughes, equity analyst at Epiphany Equity Research, said some last minute "window dressing," as portfolio managers scramble to embellish their statements for quarter end, could be stoking stocks Monday. He believes equities need to consolidate recent gains until the fundamental picture for U.S. earnings and economic growth improves. But Hughes expects sell-offs to be orderly -- meaning on low volume and not very aggressive in terms of price pullbacks -- as they have been over the past two weeks. "The Dow may consolidate down to the 8,800 area and the S&P down to around 950. It would be constructive for the market over the longer term to build a base before [resuming its upward trend]," Hughes said.
Barron’s interviews Larry Haverty, a leisure analyst at State Street Research & Management . The market specialist suggests the economy is in a bull market and points to the consumer being very strong. He believes dividend taxation is very important given the recent positive market reactions to Mandalay Bay and International Game Tech. In addition, his outlook on the economy is optimistic projecting disposable income being up 10% in 3rd quarter in light of tax cuts. Mr. Haverty interests include a large gamut from Internet services, Wal-Mart in light of its radio-frequency inventory management and IGT due to its enviable cash flow growth. His picks include the following companies: IACI, Yahoo, International Game Tech, Comcast, News Corp and Disney.
Bad Boys . . . Regulators at the National Association of Securities Dealers, the Securities and Exchange Commission and the New York Stock Exchange are investgating eight investment banks for alleged infractions involving initial public offerings, the Wall Street Journal reported. The probe involves banks such as U.S. Bancorp Piper Jaffray that weren't included in a global $1.4 billion settlement over conflicts of interest on Wall Street. The investigation is similar to past efforts focusing on "spinning" IPOs during the bull market -- a process in which banks used shares of IPOs to allegedly lure more investment banking business.
Financials . . . Legg Mason upgraded MBNA to Buy from Hold due to a more positive fundamental outlook. The firm is optimistic that the co will continue to exceed expectations this year, and says an improved competitive environment should improve growth, reduce attrition, and stem margins; in addition, as rates begin to rise KRB should be more successful than anticipated repricing customers up to offset its rising funding costs.
Transports . . . BB&T Capital upgraded SkyWest to Strong Buy from Buy and raises their target to $26 from $20. The firm thinks believe the majority of overhanging risk for the stock has been removed following its recent memorandum of understanding with UAL Corp.
BB&T Capital upgraded Atlantic Coast Air to Strong Buy from Buy. The firm raised 2003-04 estimates, and raised their target to $20 from $12. The firm thinks ACAI's recently-announced contract with its pilots should allow the co to present UAL Corp with an even more attractive cost structure for regional jet operations. Also, firm believes ACAI and UAL Corp are now close to reaching a new amended agreement similar to the one SKYW reached with UAL Corp in early June, and thinks that any new agreement
that ACAI reaches with UAL will allow the company to take on new code share partners.
The Wall Street Journal reports that Daimler Chrysler outlined a strategy to consolidate parts of its truck operations in an attempt to boost profit and leverage economies of scale. The strategy calls for unifying purchasing, development and other parts of its Mercedes-Benz and Freightliner divisions.
Defense & Aerospace . . All Nippon Airways purchases 45 planes from Boeing (34.22)
The Wall Street Journal reports Japan's second largest carrier All Nippon Airways has completed a $2.4 bln dollar deal with Boeing to buy 45 of its aircraft. This deal more than doubles the co's orders for the year and illustrates the co's decision to shift to an all-Boeing fleet.
Raytheon announced the award of a defense contract for production display systems that will help soldiers "see" in total darkness, adverse weather, and through battlefield smoke and dust. ThinkEquity views this deal with one of the largest defense contractors as a significant win for Kopin and believes Raytheon could become a large customer over time.
Trash . . . Waste Management plans to eliminate 600 employee and 200 contract worker positions as a part of ongoing restructuring efforts. The company expects to record a pre-tax charge of $20 million in the second quarter to cover severance and other costs related to the layoffs.
Food & Beverage . . . Dean Foods agreed to acquire the remaining 87 percent interest in Horizon Organics that it doesn't already own for $216 million, or $24 per share, and the assumption of roughly $ 40 million in debt. The deal is expected to close in the fourth quarter. Dean Foods expects the transaction to neutral to slightly accretive to its results in the first full year following completion.
Retail . . . Wal-Mart said its June U.S. comparable-store sales are tracking in the 2 percent to 4 percent range, with warmer weather driving sales of seasonal products. The retailing giant also said it sold over 1 million copies of the latest "Harry Potter" installment. Wal-Mart added that the East Coast saw the strongest sales during the latest week. Wal-Mart will report its monthly sales on July 10.
PetSmart announced the initiation of quarterly cash dividends. The first such payout, in the amount of 2 cents per share, will be paid Nov. 21 to shareholders of record on Oct. 31.
Prudential reiterated their Buy rating on eBay and raised their target to $120 from $108. The firm is citing attractive growth opportunities and a powerful business model. In addition, following a meeting of EBAY Powersellers over the weekend, firm believes these people are helping to build one of the most impressive growth companies in the world.
Joseph. A. Bank target raised to $42 at Brean Murray and the firm raised their target to $42 from $36. The firm says the company likely experienced good Father's Day sales, and firm consequently anticipates higher 2nd quarter earnings. In addition, firm expects June comps to gain mid-single digits (+5%) vs. a 3.7% decline last year.
Restaurants . . . Roth Capital upgraded Checkers Drive-In to Buy from Neutral. The firm raised their 2003 EPS est to $1.00 from $0.76 to reflect the co's extremely strong sales momentum and margin improvement during 1st half 2003, and anticipated that the company can sustain same-store sales increases of 3.0-3.5% through 2004. Target is $16.
Panera Bread valuations too lofty despite growth according to Barron's. The company operates 505-unit chain of bakery cafes has grown dramatically with sales nearly tripled since 1999 to $775 million. However, skeptics have sold short nearly 30% given the stock trading at a pricey 40 times estimates earnings. Sidoti's analyst believes "We believe the fundamentals at Panera are sound, but too rich on a valuation basis." The co is heading west in an effort to expand its markets and achieve its goals of opening 120 stores this year. Despite the co's growth, the article suggests "sales growth slows, public tastes change and investors too, move on newer, hotter concepts."
Healthcare . . . JP Morgan initiated Omnicare with an Overweight rating and adds the stock to their Focus List. The firm is citing the following factors: 1) company's leadership position, 2) their belief that the NCS acquisition should drive accelerating earnings growth in 2003, 3) the government reimbursement environment has improved for OCR and its clients in the last qtr, and 4) their belief that the co will increasingly look to leverage its footprint by expanding into other services lines including dialysis and infusion therapy. Target is $42.
Drugs . . . Corixa and GlaxoSmithKline are saying that Bexxar has received Food and Drug Administration approval for the treatment of patients with non-Hodgkin's lymphoma. The approval covers patients whose disease is refractory to Rituximab and has relapsed following chemotherapy. The companies will co-market the drug in the U.S.
Barr Labs filed ANDA with FDA for generic Premarin for an "AB"-rated conjugated estrogens product, which would be a generic version of WYE's Premarin conjugated estrogens.
Bayer reported positive findings for Levitra erectile function treatment. The firm announced new clinical findings on the long-term efficacy, safety and tolerability of the oral investigational drug Levitra showed that men with erectile dysfunction reported clinically significant, sustained improvement in erectile function over a two-year period. "It was impressive that 90 percent of men reported improvement in erectile function after taking LEVITRA over a two-year period."
Biotech . . . Genta's Genasense anti-cancer agent for chronic lymphocytic leukemia received fast track designation from the Food and Drug Administration. Fast Track designation speeds up regulatory review of new drugs that are designed to treat serious or life-threatening conditions. The drugs also typically demonstrate the potential to address unmet medical needs.
SuperGen initiated Phase I/II trial of Dacogen in cancer patients.
Corixa and Glaxo announced Bexxar approva from the FDA. Bexxar can be used for treatment of patients with CD20 positive, follicular, non-Hodgkin's lymphoma. (Briefing note: This news is important in that Bexxar is Corixa's lead drug. However, approval was widely anticipated).
Morgan Keegan reiterates their Outperform rating on Millennium Cell. The firm is saying the recent Samsung agreement and the government funding announcement have been largely unnoticed in the market; firm says both developments provide immediate cash flows to the co, and MCEL stands to receive additional cash flows as more project milestones are achieved under the Samsung agreement.
InterMune upgraded at Wachovia to Outperform from Market Perform due to several possible near-term catalysts, including: 1) possible resumption of Actimmune patient adds in 2nd half 2003, 2) an expected expense restructuring to be detailed as soon as next month's analyst meeting, 3) conservative Actimmune guidance for 2003 leaves limited downside risk, and 4) publication of Actimmune phase III data and commencement of a phase III confirmatory trial in 2H03; sees valuation range of $17-$21.
Pain Therapeutics initiated Phase III study of Oxytrex for chronic pain. The initiation of the study follows the successful completion of a 21-day Phase II study. The Phase II study met its primary efficacy endpoint, showing a statistically significant reduction in chronic pain using Oxytrex.
Adams Harkness reiterates their Strong Buy rating and $52 target on Martek Biosciences. The firm is saying the recent study published in the Journal of Pediatrics was the first one they can recall that shows benefits to kids given formula with DHA/ARA after breast-feeding and after 6 months of age. Also, a petition has been filed by a nutritional co asking the FDA to strengthen claim on dietary supplements and foods containing Omega-3 fats, which firm thinks should prove to be a catalyst for MATK's food fortification opportunity over the next 12-24 months.
AVI BioPharma files IND application with FDA for West Nile virus drug.
Media . . . Pixar Animation and Walt Disney’s "Finding Nemo," took in $13.9 million over the weekend to bring its five-week box office total to $253.9 million. Sony’s sequel, "Charlie's Angels: Full Throttle," was the top grosser at the weekend box office, picking up $38 million in its debut.
Cablevision struck a deal to buy MGM's 20 percent stake in three of Rainbow Media's cable stations, American Movie Classics, Independent Film Channel and WE: Women's Entertainment for $500 million. Cablevision sold the stake to MGM two years ago.
Pixar Animation was upgraded at Gerard Klauer Mattison to Outperform from Neutral. The firm believes that investors will soon begin to focus on the announcement of a new distribution agreement for PIXR films for 2006 and beyond, and that the company can potentially retain 80-90% of the operating income from its films beyond 2006. In addition, firm expects analysts to raise their 2003-04 estimates based on the strength of Finding Nemo, and thinks the stock can move up to a level that discounts a much higher level of future profitability. Target is $70.
SG Cowen expects Hollywood Entertainment to beat comps guidance of 9% by 2-3 percentage points when comps are reported July 1. Firm believes that a comps increase of 11-12% could result in a penny or two upside to EPS.
Vivendi Universal intends to challenge an arbitration tribunal's decision on June 27 in New York. The panel rejected Vivendi Universal's claim that former CEO Jean-Marie Messier's so-called U.S. Termination Agreement dated July 1, 2002, be voided. Vivendi said the panel ordered it to pay Messier 20.6 million euro ($23 million). "After reviewing the tribunal findings, Vivendi Universal intends to challenge this decision through all available legal actions, both in France and in the United States. Tomorrow, the Board of Directors of Vivendi Universal will review this matter during its meeting," it said.
Hughes upgraded to Overweight at Lehman.
Hotel & Leisure . . . Cendant will "meet or exceed" its previous profit forecast of 35 cents for the second quarter. The provider of travel and consumer services also reiterated its previously announced cash flow projections. In addition, the company said it would initiate payments of dividends, with the quarterly rate to be set at 7 cents a share. No formal record or payout dates were set.
IT Services . . . Electronic Data Systems reaffirmed its 2003 outlook for free cash flow, but it will fall short of its projection for the second quarter due to a delay in a payment from MCI, the former WorldCom. The company had been looking for free cash flow of $75 million to $125 million in the second quarter. EDS now expects to receive the $98 million in pre-bankruptcy receivables from MCI later this year, boosting its free cash flow expectations for the second half.
Unisys mentioned favorably in Barron's. The article highlights the co's revenues, which are growing for the first time since 1999 to approximately $5.8 billion with further growth expected to be $6.2 billion in 2004. While the company has missed some key windows of market opportunities associated with the computing era, it appears to be poised for growth with price upside on the horizon. The stock trades at 12x consensus 2004 earnings estimates, which is comparatively low to other services and hardware companies. In addition, the company has been able to get its balance sheet under control by lowering its long term debt to $1 billion, an improvement from $2.3 billion in 1997.
Telecom . . . Sprint said it has an agreement with Sony Music Entertainment to offer downloadable ringers created by the Sony Music Mobile Products Group, including animated polyphonic tones for PCS customers. Separately, Sprint said it expects to expand its streaming-music subscription service with Warner Music Group to include full-length streamed tracks.
UTStarcom signed first contract in Europe with Cyprus Telecom. The firm announced its first contract in Europe with the Cyprus Telecommunications Authority (CYTA).UTStarcom will supply its AN-2000 Broadband Multi-Service Access Network (MSAN) in support of CYTA's nationwide rollout of a "Fiber-to-the-Cabinet" (FTTCab) network. Separately, co announced the signing of a $43 mln pact with China Netcom to deploy its IP-based P.A.S. equipment in several cities in the HeiLongJiang Province.
Nextel is 'baffled' by Verizon suit. The company issued a statement in response to news that Verizon Wireless has filed a suit against Nextel alleging that it improperly acquired prototypes of Verizon's new push-to-talk cellphone and gained unauthorized access to Verizon Wireless' network. Nextel says it is confident it has conducted itself properly with respect to the allegations in Verizon Wireless' complaint filed today in the United States Federal District Court. "We are, therefore, baffled by the claims made by Verizon Wireless in its filing."
JP Morgan initiated coverage of Mobile Telesystems & Vimpelcom. JP Morgan initiates coverage of MBT with an Overweight rating, saying the company is their favorite investment vehicle among Russian mobile operators due to attractive valuation and strong mkt position. Firm also initiates coverage of VIP with a Neutral rating, citing relative valuation (VIP trades at a premium to MBT on EV/EBITDA and price/free cash flow) as the primary reason for their cautious stance.
Storage . . . Seagate Tech reiterated as a Buy at Fulcrum. The firm says would be buyers on weakness related to secondary filing; says the filing was anticipated and is neither non-dilutive nor fundamental.
Seagate Technology filed a registration statement with the Securities and Exchange Commission for the sale of 60 million shares held by its parent company new SAC. Seagate also updated its financial outlook and raised its dividend. The company now sees fourth-quarter earnings of 30 to 33 cents per share on revenue ranging from $1.53 billion to $1.56 billion. Analysts are currently looking for a profit of 28 cents per share in the period on revenue of $1.54 billion, on average. The quarterly dividend was boosted to 4 cents per share from 3 cents. In addition, Seagate plans to increase its investment in property and equipment to $700 million in fiscal 2004.
Network Equipment . . . Cable Design Technology plans to sell $110 million worth of convertible subordinated notes due 2023. The deal includes an over-allotment option for the sale of an additional $16.5 million in notes. Cable Design plans to use the proceeds to buy back $83 million in debt and $20 million in common shares, and for general corporate purposes.
Legg Mason reiterating Nortel stock as its top pick with a Buy rating and $3.50 target price. Nortel's stock price has settled into firm's expected range as we enter the 2nd quarter 2003 reporting season presenting what firm views as an opportune time to buy. Legg Mason believes that Wall Street has underestimated Nortel's ability to deliver bottom line results over the next several quarters and as estimates are revised upward. The firm believes the company's share price should appreciate as earnings estimates increase and it is rewarded a P/E multiple in line with comparable companies.
Nokia and Fujitsu collaborate to provide mobile solutions to develop and provide end-to-end mobile solutions and services for enterprises utilizing Nokia's range of business terminals and platforms and Fujitsu's wide range of capabilities in consulting, systems integration and managed services.
Semiconductor Equipment . . . Adams Harkness reiterated a Buy on Cree. Price target $25. The company has filed a motion to dismiss the lawsuit filed by former chairman Eric Hunter, and firm believes that as the dust settles the overhang will be removed and CREE's valuation will rise; in addition, firm thinks the co is seeing good demand for its LED products used in cell phones, auto backlighting, and indoor/outdoor signs.
Semiconductors . . . Samsung licensed Rambus' Yellowstone technology for its next generation memory chips.
Smith Barney upgraded Intel to Outperform from In-Line, citing the following factors: 1) firm thinks 2nd quarter and 3rd quarter estimates appear achievable, 2) the current environment is allowing INTC to slow price decreases and thereby increase profitability, 3) management is increasingly focused upon improving ROIC, and 4) the company is beginning to accelerate just as the rest of the chip industry is decelerating (seasonally and Year over Year). The firm raised target to $23 from $20.
Texas Instruments intends to build a $3 billion manufacturing plant in Dallas. The chipmaker has scheduled a news conference with Texas Gov. Rick Perry for this afternoon.
Marvell was upped to Outperform from Neutral at GKM.
National Semi was cut to In-Line at Smith Barney and cuts target to $20 from $22 based on their belief that NSM's restructuring benefits are largely embedded in the stock price at current levels. In addition, firm is concerned about NSM's 30% exposure to wireless given excess handsets in Asia and the possible component inventory build due to SARS, and also notes that the co has sizeable exposure to the low-end analog segment, which has been facing tough price competition from TXN.
LSI Logic expects sequential revenue growth of 9 percent for the second quarter from its first-quarter total of $372.8 million, a forecast that's at the high end of its previously disclosed range. The chip technology firm now sees a pro forma loss for the quarter of 6 to 8 cents per share, 4 cents better than its prior outlook. Twelve analysts are currently looking for a loss of 11 cents per share in the period, on average. LSI attributed the improved pro forma view to better than expected gross margins and the benefits of its expense control efforts. On a GAAP (generally accepted accounting principles) basis, the company sees a loss of 43 to 50 cents per share, wider than its previous prediction for a loss of 23 to 31 cents per share. This change reflects an increase in special items to be recorded in the quarter due to the company's restructuring program. The company now expects special items to run from $140 million to $160 million for the period, up from its original estimate of $50 million to $70 million. LSI also said it plans to sell its manufacturing facility in Tsukuba, Japan.
Texas Instruments risk rating goes to High from Medium at Smith Barney due to a substantial miss in company's 2nd quarter wireless chip business. Smith Barney believes TXN unintentionally built up internal inventories in 2nd quarter. Looking out slightly further, firm expects co' earnings to decline sequentially in 4th quarter versus current consensus showing a sequential increase.
Broadcom and National Semi settle patent litigation and agreed to a comprehensive patent cross-license.
The SIA reported that semiconductor sales for May were up 6.6% quarter/quarter and 11.3% year/year. On a 3-month rolling average basis, sales increased 2% Month/Month and almost 10% Year/Year. According to Needham, the SIA report was most positive for PLDs/standard cell, analog, wired communications, and graphics chips. The data was generally negative for SRAM, DSPs, and microprocessors. Firm believes the relatively strong performance for May supports its thesis of industry growth this year a couple of percentage points above the SIA forecast update from June 11 calling for 10.1% growth.
The SIA revised its April worldwide shipments estimate by $340 million—most of which came from analog and DSP shipments and in Asia Pacific. The SIA cited an error in calculating April shipments by one of its members as the reason for the large revision. Given the product categories affected, probably TI is the 'unnamed' company. This revision plus others like it in the past is one reason why we have traditionally been reticent to publish a monthly forecast.
Shipments in the Americas accelerated modestly to -7% Year over Year in May from -9% year over year in April, while all other regions decelerated: Asia Pacific to +12% Year over Year in May from +14% Year over Year in April, Japan from to +26% Year over Year in May from +29% Year over Year in April, and Europe to +9% Year over Year in May from +11% Year over Year in April. On a month-over- month basis, shipments in Europe dropped -3% Month over Month, while all other regions were up 3 to 4% Month over Month. Overall semiconductor pricing improved to +6% Year over Year in May from +3% Year over Year in April due to easy comparisons (particularly in optoelectronics). Integrated Circuit ASPs (which is what is sold by most companies we follow), although still down yoy, improved slightly to -3% Year over Year in May from -5% Year over Year in April.
On a segment basis, most segments decelerated on a year-over-year basis with the exceptions being Microprocessors, rising from to +2% Year over Year in May from +1% Year over Year in April, compared to our estimate of -2% yoy, while DRAM improved from -18% to -11% in May, compared to our -14% estimate. DRAM bit growth was relatively unchanged at +61% yoy compared to +59% yoy in April. Relative strength in these two segments suggest that the PC end-market is doing relatively better than the rest of the end-markets.
As expected DSP slowed significantly from +43% year over year to +32% in May. DSP shipments for April were revised up in the May report by about $120 million (to $423 million), which raised April year-over-year growth from +31% previously to +43%. Analog was the other segment where April numbers were revised up by about $180 million (to $1.99 billion), raising April year-over-year growth from +9% year over year to +13% year over year. In May, Analog shipments decelerated nonetheless to 10% year over year.
Importantly, the SIA reports numbers on sell-in, not upon sell-through basis and therefore does not provide a good read on what is actually happening to inventories or in orders. Based on a variety of data points, we continue to believe that orders are slowing for most of our companies.
Software . . . RealNetworks confirmed plans to provide audio and video services for Vodafone mobile phones. The move is expected to boost RealNetworks' effort to grow its wireless media streaming business.
Jason Maynard, a software analyst at Merrill Lynch, told Barron's that Microsoft will ``do something to appease'' shareholders next month. The world's biggest software maker can afford to boost its annual dividend to 50 cents a share from 8 cents without sacrificing its $46 billion cash reserve, Barron's reported.
Southwest Securities downgraded Watchguard to Neutral from Strong Buy. Although demand for firewall/VPN appliances in the SME segment remains robust. WGRD has been slow to complete reorganization of its Asia Pacific distribution. In addition, the RapidStream/Check Point product line has not gained visible momentum, as Check Point is not actively endorsing the products.
SG Cowen maintains their Strong Buy rating on Magma Design, saying concerns regarding the company's dismissal of their auditor are overdone (see Friday's comment in the archive for details). Following discussions with management, firm is satisfied that there is nothing material in the move and that business and accounting controls are solid.
FreeMarkets was downgraded at Bear Stearns to Peer Perform from Outperform based on valuation as well as their concern that migration from higher priced products to lower priced offerings continues despite high customer satisfaction. Target is $7.
Sonic Solutions shipped new DVD creation software. The company is now shipping Sonic PrimeTime, the world's first DVD recording application designed exclusively for Windows XP Media Center Edition.
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