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Monday, July 14, 2003 6:00:39 PM
RobBlack.com MarketWrap:
http://www.robblack.com/rb_marketwrap.shtml
The market begins month number 5 of the bull-run that began on March 12th. This week, about 1/3 of the S&P 500 stocks will report bottom-line results, and Wall Street will be focused on the number and guidance going forward. Upbeat reports from Citigroup and Bank America have bolstered sentiment, while a Merrill Lynch upgrade of Intel may allow the overachieving Nasdaq to further overachieve. In Monday’s session, the S&P 500 added 5 points (+0.5%) to 1003. The DJIA jumped 57 points (+0.6%) to 9210 and the Nasdaq Composite gained 20 points (+1.2%) to 1760. The S&P 500 has climbed 26 percent from this year's low in March amid optimism that growth in profits and the economy will accelerate. Government bonds tumbled, with the 10-year Treasury note off 20/32 to yield 3.705 percent, while the 30-year government bond plunged 1 5/32 to yield 4.755 percent. There were no economic reports on Monday's agenda in a week that will be jam-packed with key releases. Among them: June retail sales, the June consumer price index and June industrial production.
Strong Sectors: semiconductor, financial, wireless, storage, internet, auto, gold, retail, drug
Weak Sectors: oil service
Top Stories . . . Citigroup and Bank of America, the two biggest U.S. banks by market value, said second- quarter earnings rose, driven by surging consumer demand for mortgages and credit cards.
Boise Cascade, the fourth- biggest U.S. maker of lumber and paper, agreed to buy office- supply retailer OfficeMax Inc. for $1.15 billion and said it will consider reducing its dependence on manufacturing further.
Wal-Mart Stores, the world's largest retailer, said July sales at stores open at least a year are rising at the high end of its forecast for a gain of as much as 4 percent, led by purchases of groceries and swimwear.
Continental Airlines, the fifth- largest U.S. carrier, is delaying deliveries of 36 Boeing Co. planes as the airline seeks to lower costs and stem losses caused by a slump in travel spending.
Yahoo!, the owner of the world's most-used Internet sites, said it will acquire Overture Services for $1.63 billion to enhance its position in Web searching, a fast-growing area where Google has emerged as the leader.
Quote Of Note . . . ``This is a big earnings week and to have those two companies (Bank of America and Citigroup) come in and beat estimates. I think lends a little credence to this market rally,'' said Benjamin Pace, who helps oversee $22 billion at Deutsche Private Wealth Management.
``The market's gotten into a little bit of a momentum stage, where money is coming into the market,'' driving stocks higher, said Matt Sauer, director of research at Oak Value Capital Management Inc., which manages $1.4 billion in Durham, North Carolina. ``There's no money left to be made in cash.''
Of Note . . . The S&P has climbed 25 percent since touching this year's low in March amid optimism that economic growth will accelerate. Companies such as Intel may benefit as businesses and consumers make purchases they had earlier put off, investors have said.
Gurus . . . On the Nightly Business Report, Bernie Schaefer, the widely-followed option strategist, says he believes the NASDAQ will continue to outperform the S&P, as technology will continue to lead. He would be buying 6-month calls in Ford and Calpine, while buying put options in General Electric.
On the Kudlow-Cramer Show, Jim Cramer has upped his Dow forecast to 10,000, while Larry Kudlow is staying with 10,800. Bob Froelich, Chief Strategist for Scudder remains constructive, and would be buying Microsoft and EMC Corp.
On The Wall Street Week Show, Bob Olstein, the balance sheet maven, would continue to concentrate on companies with excess cash flow. He would be buying Chubb, with a target of 90, and Tyco, with a target of 25. He would be shorting JetBlue and Yahoo!.
On the Rukeyser Show, panelist Bob Stovall would be a buyer on dips. Some high yielding favorites would be BP, Sara Lee, and Vornado.
Banc of America economist Peter Kretzmer projects sustained improvement in consumer spending, but believes businesses will remain cautious, tempering the acceleration of economic growth. Ketzmer thinks the economy will rise to trendline growth, but no materially higher, as he projects pickups in inventory building and business investment to be relatively muted and delayed.
Richard Bernstein, Merrill Lynch's chief quantitative strategist, said only four of its 10 profit indicators suggest the profit cycle will be stronger than current expectations. He notes that indicators showing improvement are technical ones while fundamental readings remain "quite weak," which suggests that earnings expectations for the second half of the year may be "much too optimistic." To wade through current market conditions, Bernstein advises investors to overweight "higher-quality" assets: companies that pay dividends and have better-than-average balance sheets.
David Malpass, global economist at Bear Stearns, believes a "strong acceleration" in the economy is likely as a result of a snapback in inventories and business investment. He added that tax rate cuts are spreading and demand in Europe should strengthen due to the stronger euro, while Japan may be on the verge of coming out of a 13-year deflationary period.
Smith Barney institutional equity strategist Tobias Levkovich reiterated his positive stance on the financial sector, telling investors that he favors big banks and diversified financials rather than regional banks. "The earnings story for the largest financial institutions is far better than that for the smaller regionals, which are more dependant on net interest margin spreads," Levkovich explained. He feels the financial sector is "well positioned for incremental relative performance gains" and estimates 15 percent to 20 percent upside from current levels. "Improving capital markets should boost many financial companies' investment banking, brokerage and asset management results, which are coming off depressed levels," the strategist concluded.
Eco Speak . . . Sherry Cooper, global economic strategist at BMO Financial Group, believes that expectations for a second-half rebound will be justified this year. "Stocks have risen sharply since their lows in early October, and, for the first time since early 2002, stocks are up year-over-year. Also, for the first time since 1999, stocks have outperformed bonds," she noted. Cooper said there's a "very good chance" the U.S. will have the strongest economy among the Group of Seven most industrialized nations for the remainder of this year and next. "U.S. corporate balance sheets have improved and so has American competitiveness." While Cooper acknowledges that U.S. stocks are not cheap by historical standards, she believes equities "look cheap" in comparison to bonds. Cooper does expect some sideways action in stocks during the second-half of the year as they work off overbought levels and as a precursor to a "sustained rally next year."
Takeovers? . . . Barron's article provides a list of 35 stocks, which could be potential acquisition targets according to equity strategist Vadim Zlotnikov of Sanford C. Bernstein. His list is based off of cash flow which would support an acquisition price that's higher than recent trading levels. The 35 stocks are the following: ABF, AIN, AM, ALOG, ANN, BN, BBOX, HRB, CLS, CVG, CBE, EDS, FD, FLS, FL, FDP, GR, IM, IBC, KWD, NCR, JCP, PBY, PPG, RJR, RDK, SFA, SHPGY, SVU, TXT, TOM, TUP, USTR, WLP, ZLC. In addition, these stocks are also highly ranked on Mr. Zlotnikov's stockpicking screens.
Biz Survey . . . Business executives around the globe are more confident about business conditions, according to a survey conducted by an economics consulting and forecasting firm. The Economy.com business confidence index reached a new high of 130.6 in the week ending July 11 vs. 127.9 last week. Executives of North American manufacturing and transportation companies were particularly bullish, the firm said. Confidence fell slightly among executives in Asia, Europe and Latin America. The survey is just six months old, so it doesn't have a strong track record of forecasting growth.
Barron’s Press . . . Barron's interviewed Brian Stark and Micheal Roth, whose partnership fund has been up 18.45% a year since 1994. The two lawyers's fund specializes in risk arbitrage, convertible arbitrage, distressed investing and capital structure arbitrage. The fund's picks consist of GM, F and CCL. It has pared back its convertible exposure in the past six months and built significant exposure in the distressed markets with a special interest in the airlines, directly and indirectly. The example given for airline companies is AMR through its relationship with Dallas-Forth Worth Airport Facility revenue bonds. Some of these municipal bonds have cross default protection in the event that AMR went bankrupt and default on these bonds, it would be forced to accept or reject the lease of the facility at DFW airport. This facility is a key hub for American Airlines and would likely still have a need for these facilities even if it went bankrupt.
American Express and Sony drew separate articles in Barron's lauding their prospects. The weekly publication said American Express has climbed out of its post-9/11 trench and the question is how high its stock can climb. Already, the credit and travel company has lifted its ratio of price-to-expected earnings to 19, above a regular 16, says Barron's. Key components of further gains would be increased business travel and a legal victory by banks that are fighting Visa and MasterCard exclusivity contracts, which could open the field to American Express credit cards. Barron's notes in a cover story that Sony is a potential value stock buy. The stock has moved up since it was clobbered by an April earnings warning, but U.S.-listed shares are still down 20 percent year to date, Barron's notes. Calculating market cap and debt, minus cash, against earnings, Barron's says Sony has a 6.6 ratio vs. AOL Time Warner's 9.9. A turnaround plan to cut costs would have to pan out and the company chairman's vision of interconnected electronic products would have to work. Patience is the key, says Barron's, as Sony has set a 2006 target year for doubling its profit margin.
Financials . . . Sandy Spring Bancorp reported second-quarter net income of $8.8 million, or 60 cents per share, compared to $7.2 million, or 48 cents per share in the year-ago period. The company beat the forecast of 53 cents per share in a survey of analysts on income from the early termination of a sublease agreement.
Citigroup said strong consumer businesses like credit card and mortgage lending lifted quarterly earnings above Wall Street estimates. The company posted income from operations of $4.30 billion, or 83 cents per share, up 12 percent and 14 percent respectively from year-ago levels. The earnings per share were 3 cents ahead of the analysts consensus. Revenues rose 7.6% year/year to $19.35 billion versus the $19.43 billion consensus. "Citigroup's performance this year continues to be outstanding, with 12 percent income growth in the second quarter driven by an 8 percent increase in our total revenues. We also reached an important milestone this quarter, as our total stockholders' equity and trust preferred securities exceeded $100 billion," Sanford Weill, Chief Executive Officer. Citigroup's approved a 75 percent increase in its quarterly common stock dividend to 35 cents a share from 20 cents a share. The dividend is payable on August 22, 2003, to stockholders of record on August 4, 2003. "The recent change in the tax law levels the playing field between dividends and share repurchases as a means to return capital to shareholders. This substantial increase in our dividend will be part of our effort to reallocate capital to dividends and reduce share repurchases," CEO Sandy Weill.
Bank of America said second quarter earnings rose to $2.74 billion, or $1.80 per share, up 23 percent from $2.22 billion, or $1.40 per share, a year ago. The bank said revenue grew 12 percent to $9.78 billion. It said credit losses declined from the prior quarter and year and were at their lowest level since first quarter 2001. Provision for credit losses was $772 million, down 7 percent from the first quarter. In investment banking, it said: Global Corporate and Investment Banking earned $440 million, down 14 percent from a year ago. Revenue decreased 2 percent to $2.26 billion.
Marshall & Ilsley reported earnings of $134.7 million, or 59 cents per share, up from its year-ago profit of $120.4 million, or 54 cents per share, and a penny ahead of the average estimate. As of June 30, assets stood at $34.1 billion, up from $29.1 billion at the same time last year.
M&T Bank reported net income of $134 million, or $1.10 a share, down from $1.19 a share in the year-earlier period. Excluding non-recurring items, earnings were $1.38 a share, exceeding the average analyst forecast of $1.24 a share, helped by growth in average loans outstanding and the benefits of a continued low interest rate environment. The regional bank holding company added that it expects to meet expectations for the full year.
BB&T said second quarter net income fell to $316.2 million, or 67 cents per share, compared to $328 million, or 68 cents per share last year on merger-related and other nonrecurring charges. The bank reported operating earnings of $336.9 million, or 71 cents per share, up from 68 cents. The figure matched the forecast of 71 cents per share. The company is forecasting 2003 EPS of $2.75 to $2.85 vs. $2.84 expected by Wall Street.
American Home to acquire Apex Mortgage and will reorganize as a REIT. Currently, deal valued at $6.21 per Apex share. AHMH expects deal to be accretive to be 2003 and 2004 earnings per share, as well as to its book value.
Oil & Gas . . . Jefferies reiterated a Buy on Maverick Tube and $28 target. The firm attributes the stock's weakness last week to a pre-announcement by competitor LSS and overall softness in the OSX. The firm says the unexpected jump in LSS's steel costs are not a direct reflection on MVK's steel costs, and continue to expect MVK's steel costs to trend down in 2nd half 2-03.
Transports . . . Continental Airlines said it will defer firm deliveries of 36 Boeing 737 aircraft originally scheduled for delivery in 2005, 2006 and 2007 on weakness in the aircraft industry. "We can't determine our need for additional airplanes until we see some return on the capital we've invested in our existing fleet of new airplanes and are confident we have a competitive long-term cost structure," said Chief Executive Officer Gordon Bethune. The airline will take scheduled delivery of four 737-800 aircraft in the fourth quarter of 2003 and 12 737-800 aircraft in 2004. In addition, Continental is in discussions with The Boeing Company regarding the terms of delivery of the 11 remaining 757-300 aircraft that Continental has on order. "We can't determine our need for additional airplanes until we see some return on the capital we've invested in our existing fleet of new airplanes and are confident we have a competitive long-term cost structure... We are not going to invest in aircraft that we cannot profitably fly in the current marketplace."
Defense & Aerospace . . . UBS downgraded Textron to Neutral from Buy in order to reflect continued signs of weakness in the business jet market. The firm cuts 2004 est. below consensus and cuts target to $40 from $46.
Industrial Equipment . . . Prudential reiterated a Buy on Deere and $56 target, citing "very solid" June sales; firm continues to anticipate the co will benefit from higher equipment demand levels, primarily in its North American agricultural equipment division, which should drive higher revs against an improving internal cost structure.
Education . . . Edison Schools inked a definitive merger agreement with a company formed by its founder and an affiliate of Liberty Partners, a private equity firm based in New York City. The deal values Edison Schools at about $174 million, including the assumption and refinancing of outstanding debt.
Banc of America reiterates their Sell rating on DeVry. The firm is saying their bearish outlook is based on the severe challenges in reconciling valuation with the beleaguered state of enrollment at the co's core DeVry Institutes business; firm's research indicates that DV's primary locations are, in general, operating at 1998 levels. Target is $20.
Food & Beverage . . . Interstate Bakeries reported a fourth-quarter net loss of $4.57 million, or 10 cents per share vs. a gain of $22 million, or 45 cents per share in the year-ago period. The loss of 10 cents per share includes restructuring charges of $3.46 million, or 5 cents per share. Revenue fell to $818 million from $832 million. A survey of analysts was targeting a loss of 3 cents per share and revenue of $826.8 million. The food company cited a reduction in branded sales volume, coupled with "significant" cost increases in ingredients, energy and employee-related costs. The company said it won't provide an earnings per share target by quarter or for the year.
Pilgrim's Pride expects to report higher-than-anticipated earnings for the fiscal third quarter, citing "improved" conditions in the fresh chicken market as well as "significant" profit improvement from greater efficiencies in the poultry producer's Mexico operations. The company now expects earnings for the quarter ended June 30 to range from 40 to 42 cents per share, including one-time gains of 24 to 26 cents. This compares favorably to the consensus view of 5 cents. The one-time gains reflect Pilgrim's Pride compensation from vitamin lawsuit settlements. Pilgrim's Pride, which will report results on July 23, also announced that the Hart-Scott-Rodino regulatory waiting period has expired on its pending deal with ConAgra Foods to acquire ConAgra's chicken division.
Performance Food warned for 2nd quarter, now sees 2nd quarter $0.48-0.49 versus consensus of $0.51 and prior guidance of $0.50-0.52, based on "industry-wide increased demand from quick-service restaurants for new premium salad products". The company also issues 2003 EPS guidance, sees $1.75-1.79 vs. estimate of $1.78.
Restaurants . . . McDonald's said system-wide sales rose 10 percent over the same period a year ago to $11.5 billion for the second quarter, and increased 11 percent to $3.9 billion for the month of June. Excluding the effect of foreign currency translation, sales increased 4 percent and 5 percent, respectively. Comparable store sales for the quarter rose 4.9 percent, and increased 7 percent for the month. The fast food behemoth added that it expects to earn 37 cents a share in the quarter ending June, matching the average analyst forecast. MCD also reports comparable sales increases of 7.0% for the month and 4.9% for the quarter.
Retail . . . Wal-Mart said on its weekly phone update that July U.S. comparable store sales were tracking at the "high end" of its 2 percent to 4 percent range. The strongest categories for the week ended July 11 were men's apparel, electronics, toys and swimwear, the retailer said, while the Northeast was the strongest region.
OfficeMax entered into a definitive agreement to be acquired by Boise Cascade in a deal valued at $1.154 billion, or $9.00 per share. Boise will pay the purchase price in cash and common stock, using 30% cash and 70% common stock. Boise has the option of increasing the cash component to 45% and decreasing the stock component to 55%, at its discretion. BCC sees deal adding $0.15-$0.30 to 2004 earnings.
Healthcare . . . Johnson & Johnson was upgraded to an "outperform" rating from a "peer perform" by Bear Stearns in a note entitled "It's cheap, it's J&J and the concerns are well known." Rick Wise told clients that he feels the stock is increasingly attractive for long-term investors at current levels and that most of investors' concerns are "well understood and have been discussed by the investment community." J&J will unfurl its second-quarter earnings on Tuesday, with First Call anticipating earnings-per-share of 69 cents.
Cigna lowered its second-quarter profit estimate and cautioned on its full-year results. Specifically, Cigna said that second-quarter income will range from $1.00 to $1.15 per share and that full-year 2003 income will be between $5.00 and $5.25 per share. Analysts had been carrying a 2003 earnings consensus of $6.01 a share. Cigna cited the impact of steeper-than-expected medical inflation and a slowdown in membership. In addition to his other executive duties, Chairman and CEO Ed Hanway will move to directly manage the company's health-care operations, replacing Patrick Welch. The company also hired industry veteran John Coyle to help manage Cigna HealthCare.
Cigna membership losses should benefit United Health. .
CIGNA target cut to $40 from $50 at Bank of America.
Medical Devices . . . Michael Weinstein at J.P. Morgan upgraded Guidant to "overweight" from "neutral." JP Morgan cited the following factors: 1) their belief that the impact of drug-eluting stents will not prove as damaging to GDT's near-term earnings as the Street has previously perceived, 2) their view that the value of GDT's CRM biz suggests downside support near $40 with significant upside should the co demonstrate progress in drug-eluting stents, and 3) their expectation that the near-term newsflow around GDT's everolimus DES program is likely to prove positive.
Drugs . . . Mara Goldstein at CIBC World Markets upgraded Merck to "sector performer" from "sector underperformer”. The firm is citing increased clarity on revenue acceleration following the expected spin-off of the company's Medco unit and attractive valuation. Goldstein added that the drug giant is likely to meet 2003 and 2004 financial targets.
Merck was upped to Sector Perform at CIBC based on increasing visibility for revenue acceleration following expected spin-off of Medco, better comps for Vioxx (arthritis) and Singulair (asthma), and valuation. Establishes target of $64.
AstraZeneca said its anti-clotting drug Exanta is as effective as the current standard of care treatment regimen, enoxaparin/warfarin, in the treatment of acute venous thromboembolism and secondary prevention of recurrent VTE events, according to a study unveiled in Birmingham, England. The six-month study also showed a favorable trend for Exanta in bleeding and mortality rates compared with the standard therapy regimen, AstraZeneca said.
Forest Labs target goes to $69 from $63 at UBS.
Pfizer announced that a study presented at an AIDS conference found a statistically significant reduction in Viracept-associated diarrhea through a step-wise dietary and pharmacological intervention program. The application of this algorithm was also linked to an enhanced quality of life for those individuals.
Biotech . . . ImClone Systems said its anti-cancer compounds showed promise in preclinical research, which is done on animals. "We're pleased with the progress that ImClone Systems' pipeline programs have made this year and with the valuable contribution that these data will make on our future research and development," Harlan Waksal, the company's chief scientific officer said.
Gilead Sciences said its second quarter 2003 earnings will exceed analyst expectations, driven primarily by higher product revenue. A survey of analysts is currently forecasting earnings of 20 cents per share and revenue of $179.4 million. Gilead estimates its total net revenue will be in the range of $236-239 million. The company cited strong sales growth of Viread, one of its antiviral drugs for the treatment of HIV. Gilead expects that Viread sales will be approximately $165 million for the second quarter, compared to $107 million for the first quarter.
Entremed (released positive pre-clinical data on its Panzem drug candidate. The company said Panzem demonstrated anti-cancer activity and a lack of toxicity in three separate pre-clinical studies.
Gilead Sciences announces positive Emtriva results of a Phase III clinical trial that show Emtriva significantly more potent in suppressing replication of HIV when compared with another NRTI, stavudine (d4T), in combination with other antiretroviral agents.
Alkermes was upgraded at Jefferies to Buy from Hold and raises their target to $13.50 from $10, citing the following factors: 1) high likelihood of an approval letter for Risperdal Consta within the next 3 months, 2) continued approval in foreign mkts and stronger than expected performance in countries where Risperdal Consta has already been launched, 3) improved understanding of the development and regulatory timeline for Vivitrex, and 4) the fact that hedging activity following the announced and upcoming conversion of the debt issue has precipitated a pullback in the stock.
Vertex Pharma presented the first preclinical results for 640385, an investigational HIV protease inhibitor (PI) jointly discovered by GlaxoSmithKline and Vertex. The compound has shown activity in vitro against the HIV virus, including strains resistant to multiple protease inhibitor drugs.
Cephalon cut to Market Perform at UBS Piper Jaffray. The firm transfers coverage and lowers rating to Market Perform from Strong Buy. The firm believes CEPH has little hope of holding off generic competition for its flagship product Provigil; while many current investors maintain focused on the relatively strong near-term prospects. The firm expects attention to steadily shift toward the longer-term generic issues. Target $49.
Dendreon announced updated results from its ongoing Phase 1 trial of APC8024. The company’s investigational immunotherapy for breast, colon, and ovarian cancer, indicate APC8024 is showing continued clinical benefit and targeted T-cell immune responses in patients with advanced, metastatic, Her-2 positive breast cancer; also, results were presented for the first time that demonstrated a durable immune response could be boosted by re-treatment with APC8024.
Geron announced that preclinical data on its telomerase inhibitor anti-cancer drug GRN163 demonstrate excellent safety and tolerability of daily intravenous dosing in rats for 4 weeks and, in a separate study, in dogs for 7 days, as well as good tolerability of continuous intracranial delivery for the same time periods in both species; also, a series of stability studies demonstrated that GRN163 has appropriate stability in both liquid and powder formulations.
Zymogenetics demonstrated that Interleukin 21 (IL-21) treatment suppressed the growth of the tumors in mice without the toxic effects commonly seen with other cytokine therapies.
Gilead Sciences target goes to $78 at Merrill Lynch.
Media . . . E.W. Scripps expects third quarter earnings to be 55 to 65 cents a share, below the average analyst forecast of 68 cents, hurt by the media company's continued investment in the Shop At Home Network. Revenues rose 24.8% year/year to $474.9 million versus the $478.8 million consensus. For the second quarter, the company reported net income of $64.7 million, or 80 cents a share, up from 33 cents a share in the year-earlier period. Excluding non-recurring items related to investment write-downs, earnings were approximately 83 cents a share, in line with analyst forecasts. Operating revenue increased 25 percent to $474.8 million.
TiVo and AOL unveiled an offering for AOL members who are TiVo subscribers that allows them to program their TiVo DVR through the AOL service.
Cable network ESPN said that radio talk show host Rush Limbaugh will join its "Sunday NFL Countdown" pre-game show. Walt Disney owned ESPN said Limbaugh will "provide a weekly opinion piece on an aspect of the NFL making news that week" and challenge the opinions of the show's other analysts on various NFL-related issues.
The Wall Street Journal reports PanAmSat has suffered new technical problems which could force it to "swap" out two additional orbiting spacecraft. In addition, the company would also have to seek additional insurance claims and therefore complicate its efforts to cut its capital expenditures.
Telecom . . . Deutsche Telekom was upgraded at Merrill Lynch to Buy from Neutral based on valuation. In addition, following a meeting with T-Mobile USA mgmt, firm now feels that numbers will remain robust in coming quarters and their concerns over execution risk have been alleviated.
Verizon started with a Sell at Kaufman. Price target $34. The firm cites sum-of-parts-valuation for its rating and target; says would be sellers of the stock at least until it approaches the low 30s or a dividend yield of close to 5%.
UTStarcom started with a Buy at Prudential with a Buy rating and $47 target. The firm believes the company will likely maintain its strong sales and EPS momentum, benefiting from its leadership in wireless PHS in China, strong backlog, and excellent visibility.
Titan Pharma announced preclinical anti-cancer study results demonstrating that Pivanex, combined with the approved chemotherapeutic agent docetaxel, significantly increased anti-tumor activity in non-small cell lung cancer cells.
EMS . . . Solectron remains in compliance with its debt covenants following the obtainment of amendments to minimum tangible net worth covenants. The amendment was obtained on July 9, and relate to the company's undrawn $450 million credit facilities.
Storage . . . Network Appliance signs distribution agreements with the North American Computer Products group of Arrow Electronics, Inc. and Avnet Hall-Mark, which are value added distributors of enterprise servers, storage, software and services. This new development will allow the co's storage solutions to be offered to regional and specialized VARs in geographies and markets not previously covered.
Sun Microsystems boardroom meeting next week to address contentious stock options issue. Financial Times article discusses the contentiousness associated with the stock options issue in light of Sun's looming boardroom challenge to its official position of not deducting the cost of stock options from earnings, which is happening next week. The article suggests the company's directors will come to a showdown on the issue at its company board meeting on July 23. The opposition will be led by Lynn Turner, a former chief accountant of the SEC and outspoken proponent of expensing options, who joined the co's board last year. However, Mr. Lynn will have to face a strong proponent of not expensing options from the co's chairman and chief executive Scott McNealy.
McDATA and Network Appliance extended storage networks partnership.
Network Equipment . . . Motorola's mobile content download platform selected by China Unicom. MOT's Java technology-based download platform will deliver mobile content to its millions of subscribers in China over its CDMA2000 1X network.
Semiconductor Equipment . . . Semiconductor equipment sales are expected to rise 4 percent in 2003 over sales of $19.8 billion a year ago, according to a survey of companies conducted by Semiconductor Equipment and Materials International. Leading the way is an anticipated 30 percent growth in assembly and packaging equipment, and an expected growth of 18 percent in chip testing equipment. Wafer processing is projected to remain flat. Growth is expected to increase to 24 percent in 2004 and 18 percent in 2005, and contract slightly in 2006.
The Wall Street Journal article suggests customer cautiousness in ordering new equipment to expand capacity might be coming to an end soon. The article points to one piece of evidence being factories filling up with Taiwan Semi recently reporting its factories operating at 86% capacity in the second quarter, up from 67% in the first quarter. In addition, market research firm Gartner estimates plant utilization at 81% for the entire industry. However, Intel plans to spend between $3.5 billion and $3.9 billion in 2003, which is down as much as 25% from last year. The article also suggests excess optimism is possible with last year being used as an example due to TSMC and other co's placing orders in Spring 2002 only to cancel them by Semicon due chip demand being illusory.
Applied Materials will set tone for SemiCon with 7/14 analyst meeting. Expect slowly building confidence in mid term outlook. Despite speculation, we expect no layoffs beyond those announced. KLA Tencor, Lam Research, Brooks Automation analyst meetings on 7/15. Most products have been pre-announced. Cautious optimism from LRCX, KLAC, a bit more cautious BRKS (Near-Term). Teradyne, Novellus, Lam Research, KLA Tencor, ancelis should meet June Quarter expectations. Expect Septmber Quarter bookings guidance +10%. None suggests a big 2nd half 2003 turn but tightening utilization, strong unit growth, improving foundries, and a slew of 300mm projects sets up strong 2004 rebound. Larger cap names now trading at 30-35x 2004E. Stocks may pause but expect further upside as recovery anticipation turns to confirmation. Analysts are more confident about modest order improvement in 2nd half. Risk/reward still positive. Advise buying on any dips/weakness.
Applied Materials will focus on new etch. CMP, and ECP tools at SemiCon show. Rising utilization (now 86%) at TSMC is a bullish sign especially for AMAT. It is still early, but July Quarter on track (flat guidance). Analysts speculatively expect October bookings up around 10%.
KLA Tencor reports 4th quarter on 7/24, expect their analyst meeting (7/15) to be largely product focused. Given that June is historically KLAC‘s strongest Quarter, anticipate bookings will exceed conservative flat guidance. Estimate $335-345 million (+6-10% Quarter/Quarter). Best positioned name in the group with the only issue is valuation.
Novellus will be the first major front-end vendor to report 2nd quarter on 7/21. Analysts are looking for $0.05 on $238 million (flat). Despite its mid-Q reaffirmation of $188M in orders (- 23% Quarter/Quarter), we expect the company to show upside - est. orders above $200 million. Continue to believe that NVLS is one of the key names to own in the space.
Semiconductors . . . Smith Barney downgraded Altera and Xilinx to "in-line" from "outperform," citing valuation concerns. Altera is a dime better at $19.23 and Xilinx is 19 cents higher at $27.81. Analyst Clark Westmont said Altera is trading near or above pre-2000 levels on a relative and absolute basis and Altera is trading in the top quartile of its 10-year historical valuation range. He has a $15 price target for Altera and cut his Xilinx price target to $28 from $30.
Merrill Lynch raised its rating on Intel to buy from a neutral rating and put a $29 price target on the stock on expectations for improvement in gross margins. "Better average selling prices should continue to flow from the shift towards mobile machines, where Intel sees better pricing, and a shift towards higher-priced Pentium M processors within the mobile segment," Merrill told clients. "We also think Intel has been able to price less aggressively in its desktop processor business as AMD has continued to struggle."
Smith Barney Europe is calling cyclical bottom in European Semis. They are upgrading the European Semiconductor industry (to Marketweight from Underweight). On a stock specific basis, firm raising ASML to Outperform from In Line (target to Eur15 from Eur6.30), ST Micro target goes to US$22 from US$18. Maintaining Outperform rating and Eur11.5 target on Infineon.
Broadcom introduced a new Fast Ethernet switch.
Pixelworks chip selected for Samsung's latest LCD television.
Boxmakers . . . CDW Corp as cut to In-Line at Goldman Sachs based on valuation. Firm believes that the biggest risk to its downgrade is that CDWC could put its large cash balance to work to build value for investors; thinks that part of recent run has been driven by speculation of the possibility for an increased dividend.
Software . . . Intuit bought Income Dynamics in a stock deal value at $10 million to help its TurboTax users determine the fair market value of items donated to charities. Intuit does not expect the acquisition to materially change its fiscal 2003 or 2004 outlook. Intuit reaffirmed 2003 & 2004 EPS in line with consensus. The company reaffirms Y03 EPS guidance of $1.36-1.39, versus consensus of $1.37, and 2004 EPS of $1.57-1.67 vs. estimate of $1.62.
Yahoo reached a definitive agreement to acquire Overture Services for roughly $1.63 billion. The deal calls for Yahoo to swap 0.6108 shares of its common stock and $4.75 in cash for each Overture share. The transaction is expected to close in the fourth quarter.
Pumatech (business synchronization software) announced the signing of a co-development agreement with Japan's Hitachi to synchronize Hitachi's Web-based messaging service with personal digital assistants, and Macintosh and Microsoft-based email services. Hitachi plans to market the combined product in Japan beginning in the fall of 2003.
SoundView Technology upgraded Tibco Software to a "neutral" rating. SoundView said it believes that it can sustain profitability for the foreseeable future, separating it from the other pure plays.
Compuware (business software for mainframe and server computers) indicated that fiscal first quarter results would fall short of expectations. John Rizzuto at CS First Boston said that while the company did not give specifics on expenses, he believes they will be "well above" expectations "as the mix deterioration alone does not justify the earnings shortfall."
WSJ says Computer Associates will unveil new programs in the on-demand field at its user conference. CEO Sanjay Kumar expects 1/4 of CA’s customers to do some sort of on-demand computing in the next two to three years. CA's platform-independent systems management portfolio offers key advantage in this effort. More details at user group meeting today and tomorrow. Look for news in security, storage and Linux along with these new initiatives in on-demand computing.
Barron’s article speculated that if Oracle were to succeed in rolling up Peoplesoft and JD Edwards, Oracle could solidify its place in applications and pose a more serious threat to IBM. The article says that both MSFT and IBM might have to rethink their stances on the application SW business and postulates that IBM should consider hooking up with SAP. Points to the application server as the key. ORCL, IBM and SAP each offers one. The app sever, as well as MSFT's .NET technology, is at the heart of the race to the next big thing: Web Services. MSFT has already moved into applications through acquisition and could certainly do more. IBM has staked out a position in infrastructure. It could change this stance but may prefer to become the partner of choice for all the second and third tier apps vendors. It is way too soon for such speculation since PSFT is still far from in ORCL's grip. IBM has close to 100 strategic ISV partners; acquiring SAP would undermine its credibility with all of these.
Articles of Note
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The market begins month number 5 of the bull-run that began on March 12th. This week, about 1/3 of the S&P 500 stocks will report bottom-line results, and Wall Street will be focused on the number and guidance going forward. Upbeat reports from Citigroup and Bank America have bolstered sentiment, while a Merrill Lynch upgrade of Intel may allow the overachieving Nasdaq to further overachieve. In Monday’s session, the S&P 500 added 5 points (+0.5%) to 1003. The DJIA jumped 57 points (+0.6%) to 9210 and the Nasdaq Composite gained 20 points (+1.2%) to 1760. The S&P 500 has climbed 26 percent from this year's low in March amid optimism that growth in profits and the economy will accelerate. Government bonds tumbled, with the 10-year Treasury note off 20/32 to yield 3.705 percent, while the 30-year government bond plunged 1 5/32 to yield 4.755 percent. There were no economic reports on Monday's agenda in a week that will be jam-packed with key releases. Among them: June retail sales, the June consumer price index and June industrial production.
Strong Sectors: semiconductor, financial, wireless, storage, internet, auto, gold, retail, drug
Weak Sectors: oil service
Top Stories . . . Citigroup and Bank of America, the two biggest U.S. banks by market value, said second- quarter earnings rose, driven by surging consumer demand for mortgages and credit cards.
Boise Cascade, the fourth- biggest U.S. maker of lumber and paper, agreed to buy office- supply retailer OfficeMax Inc. for $1.15 billion and said it will consider reducing its dependence on manufacturing further.
Wal-Mart Stores, the world's largest retailer, said July sales at stores open at least a year are rising at the high end of its forecast for a gain of as much as 4 percent, led by purchases of groceries and swimwear.
Continental Airlines, the fifth- largest U.S. carrier, is delaying deliveries of 36 Boeing Co. planes as the airline seeks to lower costs and stem losses caused by a slump in travel spending.
Yahoo!, the owner of the world's most-used Internet sites, said it will acquire Overture Services for $1.63 billion to enhance its position in Web searching, a fast-growing area where Google has emerged as the leader.
Quote Of Note . . . ``This is a big earnings week and to have those two companies (Bank of America and Citigroup) come in and beat estimates. I think lends a little credence to this market rally,'' said Benjamin Pace, who helps oversee $22 billion at Deutsche Private Wealth Management.
``The market's gotten into a little bit of a momentum stage, where money is coming into the market,'' driving stocks higher, said Matt Sauer, director of research at Oak Value Capital Management Inc., which manages $1.4 billion in Durham, North Carolina. ``There's no money left to be made in cash.''
Of Note . . . The S&P has climbed 25 percent since touching this year's low in March amid optimism that economic growth will accelerate. Companies such as Intel may benefit as businesses and consumers make purchases they had earlier put off, investors have said.
Gurus . . . On the Nightly Business Report, Bernie Schaefer, the widely-followed option strategist, says he believes the NASDAQ will continue to outperform the S&P, as technology will continue to lead. He would be buying 6-month calls in Ford and Calpine, while buying put options in General Electric.
On the Kudlow-Cramer Show, Jim Cramer has upped his Dow forecast to 10,000, while Larry Kudlow is staying with 10,800. Bob Froelich, Chief Strategist for Scudder remains constructive, and would be buying Microsoft and EMC Corp.
On The Wall Street Week Show, Bob Olstein, the balance sheet maven, would continue to concentrate on companies with excess cash flow. He would be buying Chubb, with a target of 90, and Tyco, with a target of 25. He would be shorting JetBlue and Yahoo!.
On the Rukeyser Show, panelist Bob Stovall would be a buyer on dips. Some high yielding favorites would be BP, Sara Lee, and Vornado.
Banc of America economist Peter Kretzmer projects sustained improvement in consumer spending, but believes businesses will remain cautious, tempering the acceleration of economic growth. Ketzmer thinks the economy will rise to trendline growth, but no materially higher, as he projects pickups in inventory building and business investment to be relatively muted and delayed.
Richard Bernstein, Merrill Lynch's chief quantitative strategist, said only four of its 10 profit indicators suggest the profit cycle will be stronger than current expectations. He notes that indicators showing improvement are technical ones while fundamental readings remain "quite weak," which suggests that earnings expectations for the second half of the year may be "much too optimistic." To wade through current market conditions, Bernstein advises investors to overweight "higher-quality" assets: companies that pay dividends and have better-than-average balance sheets.
David Malpass, global economist at Bear Stearns, believes a "strong acceleration" in the economy is likely as a result of a snapback in inventories and business investment. He added that tax rate cuts are spreading and demand in Europe should strengthen due to the stronger euro, while Japan may be on the verge of coming out of a 13-year deflationary period.
Smith Barney institutional equity strategist Tobias Levkovich reiterated his positive stance on the financial sector, telling investors that he favors big banks and diversified financials rather than regional banks. "The earnings story for the largest financial institutions is far better than that for the smaller regionals, which are more dependant on net interest margin spreads," Levkovich explained. He feels the financial sector is "well positioned for incremental relative performance gains" and estimates 15 percent to 20 percent upside from current levels. "Improving capital markets should boost many financial companies' investment banking, brokerage and asset management results, which are coming off depressed levels," the strategist concluded.
Eco Speak . . . Sherry Cooper, global economic strategist at BMO Financial Group, believes that expectations for a second-half rebound will be justified this year. "Stocks have risen sharply since their lows in early October, and, for the first time since early 2002, stocks are up year-over-year. Also, for the first time since 1999, stocks have outperformed bonds," she noted. Cooper said there's a "very good chance" the U.S. will have the strongest economy among the Group of Seven most industrialized nations for the remainder of this year and next. "U.S. corporate balance sheets have improved and so has American competitiveness." While Cooper acknowledges that U.S. stocks are not cheap by historical standards, she believes equities "look cheap" in comparison to bonds. Cooper does expect some sideways action in stocks during the second-half of the year as they work off overbought levels and as a precursor to a "sustained rally next year."
Takeovers? . . . Barron's article provides a list of 35 stocks, which could be potential acquisition targets according to equity strategist Vadim Zlotnikov of Sanford C. Bernstein. His list is based off of cash flow which would support an acquisition price that's higher than recent trading levels. The 35 stocks are the following: ABF, AIN, AM, ALOG, ANN, BN, BBOX, HRB, CLS, CVG, CBE, EDS, FD, FLS, FL, FDP, GR, IM, IBC, KWD, NCR, JCP, PBY, PPG, RJR, RDK, SFA, SHPGY, SVU, TXT, TOM, TUP, USTR, WLP, ZLC. In addition, these stocks are also highly ranked on Mr. Zlotnikov's stockpicking screens.
Biz Survey . . . Business executives around the globe are more confident about business conditions, according to a survey conducted by an economics consulting and forecasting firm. The Economy.com business confidence index reached a new high of 130.6 in the week ending July 11 vs. 127.9 last week. Executives of North American manufacturing and transportation companies were particularly bullish, the firm said. Confidence fell slightly among executives in Asia, Europe and Latin America. The survey is just six months old, so it doesn't have a strong track record of forecasting growth.
Barron’s Press . . . Barron's interviewed Brian Stark and Micheal Roth, whose partnership fund has been up 18.45% a year since 1994. The two lawyers's fund specializes in risk arbitrage, convertible arbitrage, distressed investing and capital structure arbitrage. The fund's picks consist of GM, F and CCL. It has pared back its convertible exposure in the past six months and built significant exposure in the distressed markets with a special interest in the airlines, directly and indirectly. The example given for airline companies is AMR through its relationship with Dallas-Forth Worth Airport Facility revenue bonds. Some of these municipal bonds have cross default protection in the event that AMR went bankrupt and default on these bonds, it would be forced to accept or reject the lease of the facility at DFW airport. This facility is a key hub for American Airlines and would likely still have a need for these facilities even if it went bankrupt.
American Express and Sony drew separate articles in Barron's lauding their prospects. The weekly publication said American Express has climbed out of its post-9/11 trench and the question is how high its stock can climb. Already, the credit and travel company has lifted its ratio of price-to-expected earnings to 19, above a regular 16, says Barron's. Key components of further gains would be increased business travel and a legal victory by banks that are fighting Visa and MasterCard exclusivity contracts, which could open the field to American Express credit cards. Barron's notes in a cover story that Sony is a potential value stock buy. The stock has moved up since it was clobbered by an April earnings warning, but U.S.-listed shares are still down 20 percent year to date, Barron's notes. Calculating market cap and debt, minus cash, against earnings, Barron's says Sony has a 6.6 ratio vs. AOL Time Warner's 9.9. A turnaround plan to cut costs would have to pan out and the company chairman's vision of interconnected electronic products would have to work. Patience is the key, says Barron's, as Sony has set a 2006 target year for doubling its profit margin.
Financials . . . Sandy Spring Bancorp reported second-quarter net income of $8.8 million, or 60 cents per share, compared to $7.2 million, or 48 cents per share in the year-ago period. The company beat the forecast of 53 cents per share in a survey of analysts on income from the early termination of a sublease agreement.
Citigroup said strong consumer businesses like credit card and mortgage lending lifted quarterly earnings above Wall Street estimates. The company posted income from operations of $4.30 billion, or 83 cents per share, up 12 percent and 14 percent respectively from year-ago levels. The earnings per share were 3 cents ahead of the analysts consensus. Revenues rose 7.6% year/year to $19.35 billion versus the $19.43 billion consensus. "Citigroup's performance this year continues to be outstanding, with 12 percent income growth in the second quarter driven by an 8 percent increase in our total revenues. We also reached an important milestone this quarter, as our total stockholders' equity and trust preferred securities exceeded $100 billion," Sanford Weill, Chief Executive Officer. Citigroup's approved a 75 percent increase in its quarterly common stock dividend to 35 cents a share from 20 cents a share. The dividend is payable on August 22, 2003, to stockholders of record on August 4, 2003. "The recent change in the tax law levels the playing field between dividends and share repurchases as a means to return capital to shareholders. This substantial increase in our dividend will be part of our effort to reallocate capital to dividends and reduce share repurchases," CEO Sandy Weill.
Bank of America said second quarter earnings rose to $2.74 billion, or $1.80 per share, up 23 percent from $2.22 billion, or $1.40 per share, a year ago. The bank said revenue grew 12 percent to $9.78 billion. It said credit losses declined from the prior quarter and year and were at their lowest level since first quarter 2001. Provision for credit losses was $772 million, down 7 percent from the first quarter. In investment banking, it said: Global Corporate and Investment Banking earned $440 million, down 14 percent from a year ago. Revenue decreased 2 percent to $2.26 billion.
Marshall & Ilsley reported earnings of $134.7 million, or 59 cents per share, up from its year-ago profit of $120.4 million, or 54 cents per share, and a penny ahead of the average estimate. As of June 30, assets stood at $34.1 billion, up from $29.1 billion at the same time last year.
M&T Bank reported net income of $134 million, or $1.10 a share, down from $1.19 a share in the year-earlier period. Excluding non-recurring items, earnings were $1.38 a share, exceeding the average analyst forecast of $1.24 a share, helped by growth in average loans outstanding and the benefits of a continued low interest rate environment. The regional bank holding company added that it expects to meet expectations for the full year.
BB&T said second quarter net income fell to $316.2 million, or 67 cents per share, compared to $328 million, or 68 cents per share last year on merger-related and other nonrecurring charges. The bank reported operating earnings of $336.9 million, or 71 cents per share, up from 68 cents. The figure matched the forecast of 71 cents per share. The company is forecasting 2003 EPS of $2.75 to $2.85 vs. $2.84 expected by Wall Street.
American Home to acquire Apex Mortgage and will reorganize as a REIT. Currently, deal valued at $6.21 per Apex share. AHMH expects deal to be accretive to be 2003 and 2004 earnings per share, as well as to its book value.
Oil & Gas . . . Jefferies reiterated a Buy on Maverick Tube and $28 target. The firm attributes the stock's weakness last week to a pre-announcement by competitor LSS and overall softness in the OSX. The firm says the unexpected jump in LSS's steel costs are not a direct reflection on MVK's steel costs, and continue to expect MVK's steel costs to trend down in 2nd half 2-03.
Transports . . . Continental Airlines said it will defer firm deliveries of 36 Boeing 737 aircraft originally scheduled for delivery in 2005, 2006 and 2007 on weakness in the aircraft industry. "We can't determine our need for additional airplanes until we see some return on the capital we've invested in our existing fleet of new airplanes and are confident we have a competitive long-term cost structure," said Chief Executive Officer Gordon Bethune. The airline will take scheduled delivery of four 737-800 aircraft in the fourth quarter of 2003 and 12 737-800 aircraft in 2004. In addition, Continental is in discussions with The Boeing Company regarding the terms of delivery of the 11 remaining 757-300 aircraft that Continental has on order. "We can't determine our need for additional airplanes until we see some return on the capital we've invested in our existing fleet of new airplanes and are confident we have a competitive long-term cost structure... We are not going to invest in aircraft that we cannot profitably fly in the current marketplace."
Defense & Aerospace . . . UBS downgraded Textron to Neutral from Buy in order to reflect continued signs of weakness in the business jet market. The firm cuts 2004 est. below consensus and cuts target to $40 from $46.
Industrial Equipment . . . Prudential reiterated a Buy on Deere and $56 target, citing "very solid" June sales; firm continues to anticipate the co will benefit from higher equipment demand levels, primarily in its North American agricultural equipment division, which should drive higher revs against an improving internal cost structure.
Education . . . Edison Schools inked a definitive merger agreement with a company formed by its founder and an affiliate of Liberty Partners, a private equity firm based in New York City. The deal values Edison Schools at about $174 million, including the assumption and refinancing of outstanding debt.
Banc of America reiterates their Sell rating on DeVry. The firm is saying their bearish outlook is based on the severe challenges in reconciling valuation with the beleaguered state of enrollment at the co's core DeVry Institutes business; firm's research indicates that DV's primary locations are, in general, operating at 1998 levels. Target is $20.
Food & Beverage . . . Interstate Bakeries reported a fourth-quarter net loss of $4.57 million, or 10 cents per share vs. a gain of $22 million, or 45 cents per share in the year-ago period. The loss of 10 cents per share includes restructuring charges of $3.46 million, or 5 cents per share. Revenue fell to $818 million from $832 million. A survey of analysts was targeting a loss of 3 cents per share and revenue of $826.8 million. The food company cited a reduction in branded sales volume, coupled with "significant" cost increases in ingredients, energy and employee-related costs. The company said it won't provide an earnings per share target by quarter or for the year.
Pilgrim's Pride expects to report higher-than-anticipated earnings for the fiscal third quarter, citing "improved" conditions in the fresh chicken market as well as "significant" profit improvement from greater efficiencies in the poultry producer's Mexico operations. The company now expects earnings for the quarter ended June 30 to range from 40 to 42 cents per share, including one-time gains of 24 to 26 cents. This compares favorably to the consensus view of 5 cents. The one-time gains reflect Pilgrim's Pride compensation from vitamin lawsuit settlements. Pilgrim's Pride, which will report results on July 23, also announced that the Hart-Scott-Rodino regulatory waiting period has expired on its pending deal with ConAgra Foods to acquire ConAgra's chicken division.
Performance Food warned for 2nd quarter, now sees 2nd quarter $0.48-0.49 versus consensus of $0.51 and prior guidance of $0.50-0.52, based on "industry-wide increased demand from quick-service restaurants for new premium salad products". The company also issues 2003 EPS guidance, sees $1.75-1.79 vs. estimate of $1.78.
Restaurants . . . McDonald's said system-wide sales rose 10 percent over the same period a year ago to $11.5 billion for the second quarter, and increased 11 percent to $3.9 billion for the month of June. Excluding the effect of foreign currency translation, sales increased 4 percent and 5 percent, respectively. Comparable store sales for the quarter rose 4.9 percent, and increased 7 percent for the month. The fast food behemoth added that it expects to earn 37 cents a share in the quarter ending June, matching the average analyst forecast. MCD also reports comparable sales increases of 7.0% for the month and 4.9% for the quarter.
Retail . . . Wal-Mart said on its weekly phone update that July U.S. comparable store sales were tracking at the "high end" of its 2 percent to 4 percent range. The strongest categories for the week ended July 11 were men's apparel, electronics, toys and swimwear, the retailer said, while the Northeast was the strongest region.
OfficeMax entered into a definitive agreement to be acquired by Boise Cascade in a deal valued at $1.154 billion, or $9.00 per share. Boise will pay the purchase price in cash and common stock, using 30% cash and 70% common stock. Boise has the option of increasing the cash component to 45% and decreasing the stock component to 55%, at its discretion. BCC sees deal adding $0.15-$0.30 to 2004 earnings.
Healthcare . . . Johnson & Johnson was upgraded to an "outperform" rating from a "peer perform" by Bear Stearns in a note entitled "It's cheap, it's J&J and the concerns are well known." Rick Wise told clients that he feels the stock is increasingly attractive for long-term investors at current levels and that most of investors' concerns are "well understood and have been discussed by the investment community." J&J will unfurl its second-quarter earnings on Tuesday, with First Call anticipating earnings-per-share of 69 cents.
Cigna lowered its second-quarter profit estimate and cautioned on its full-year results. Specifically, Cigna said that second-quarter income will range from $1.00 to $1.15 per share and that full-year 2003 income will be between $5.00 and $5.25 per share. Analysts had been carrying a 2003 earnings consensus of $6.01 a share. Cigna cited the impact of steeper-than-expected medical inflation and a slowdown in membership. In addition to his other executive duties, Chairman and CEO Ed Hanway will move to directly manage the company's health-care operations, replacing Patrick Welch. The company also hired industry veteran John Coyle to help manage Cigna HealthCare.
Cigna membership losses should benefit United Health. .
CIGNA target cut to $40 from $50 at Bank of America.
Medical Devices . . . Michael Weinstein at J.P. Morgan upgraded Guidant to "overweight" from "neutral." JP Morgan cited the following factors: 1) their belief that the impact of drug-eluting stents will not prove as damaging to GDT's near-term earnings as the Street has previously perceived, 2) their view that the value of GDT's CRM biz suggests downside support near $40 with significant upside should the co demonstrate progress in drug-eluting stents, and 3) their expectation that the near-term newsflow around GDT's everolimus DES program is likely to prove positive.
Drugs . . . Mara Goldstein at CIBC World Markets upgraded Merck to "sector performer" from "sector underperformer”. The firm is citing increased clarity on revenue acceleration following the expected spin-off of the company's Medco unit and attractive valuation. Goldstein added that the drug giant is likely to meet 2003 and 2004 financial targets.
Merck was upped to Sector Perform at CIBC based on increasing visibility for revenue acceleration following expected spin-off of Medco, better comps for Vioxx (arthritis) and Singulair (asthma), and valuation. Establishes target of $64.
AstraZeneca said its anti-clotting drug Exanta is as effective as the current standard of care treatment regimen, enoxaparin/warfarin, in the treatment of acute venous thromboembolism and secondary prevention of recurrent VTE events, according to a study unveiled in Birmingham, England. The six-month study also showed a favorable trend for Exanta in bleeding and mortality rates compared with the standard therapy regimen, AstraZeneca said.
Forest Labs target goes to $69 from $63 at UBS.
Pfizer announced that a study presented at an AIDS conference found a statistically significant reduction in Viracept-associated diarrhea through a step-wise dietary and pharmacological intervention program. The application of this algorithm was also linked to an enhanced quality of life for those individuals.
Biotech . . . ImClone Systems said its anti-cancer compounds showed promise in preclinical research, which is done on animals. "We're pleased with the progress that ImClone Systems' pipeline programs have made this year and with the valuable contribution that these data will make on our future research and development," Harlan Waksal, the company's chief scientific officer said.
Gilead Sciences said its second quarter 2003 earnings will exceed analyst expectations, driven primarily by higher product revenue. A survey of analysts is currently forecasting earnings of 20 cents per share and revenue of $179.4 million. Gilead estimates its total net revenue will be in the range of $236-239 million. The company cited strong sales growth of Viread, one of its antiviral drugs for the treatment of HIV. Gilead expects that Viread sales will be approximately $165 million for the second quarter, compared to $107 million for the first quarter.
Entremed (released positive pre-clinical data on its Panzem drug candidate. The company said Panzem demonstrated anti-cancer activity and a lack of toxicity in three separate pre-clinical studies.
Gilead Sciences announces positive Emtriva results of a Phase III clinical trial that show Emtriva significantly more potent in suppressing replication of HIV when compared with another NRTI, stavudine (d4T), in combination with other antiretroviral agents.
Alkermes was upgraded at Jefferies to Buy from Hold and raises their target to $13.50 from $10, citing the following factors: 1) high likelihood of an approval letter for Risperdal Consta within the next 3 months, 2) continued approval in foreign mkts and stronger than expected performance in countries where Risperdal Consta has already been launched, 3) improved understanding of the development and regulatory timeline for Vivitrex, and 4) the fact that hedging activity following the announced and upcoming conversion of the debt issue has precipitated a pullback in the stock.
Vertex Pharma presented the first preclinical results for 640385, an investigational HIV protease inhibitor (PI) jointly discovered by GlaxoSmithKline and Vertex. The compound has shown activity in vitro against the HIV virus, including strains resistant to multiple protease inhibitor drugs.
Cephalon cut to Market Perform at UBS Piper Jaffray. The firm transfers coverage and lowers rating to Market Perform from Strong Buy. The firm believes CEPH has little hope of holding off generic competition for its flagship product Provigil; while many current investors maintain focused on the relatively strong near-term prospects. The firm expects attention to steadily shift toward the longer-term generic issues. Target $49.
Dendreon announced updated results from its ongoing Phase 1 trial of APC8024. The company’s investigational immunotherapy for breast, colon, and ovarian cancer, indicate APC8024 is showing continued clinical benefit and targeted T-cell immune responses in patients with advanced, metastatic, Her-2 positive breast cancer; also, results were presented for the first time that demonstrated a durable immune response could be boosted by re-treatment with APC8024.
Geron announced that preclinical data on its telomerase inhibitor anti-cancer drug GRN163 demonstrate excellent safety and tolerability of daily intravenous dosing in rats for 4 weeks and, in a separate study, in dogs for 7 days, as well as good tolerability of continuous intracranial delivery for the same time periods in both species; also, a series of stability studies demonstrated that GRN163 has appropriate stability in both liquid and powder formulations.
Zymogenetics demonstrated that Interleukin 21 (IL-21) treatment suppressed the growth of the tumors in mice without the toxic effects commonly seen with other cytokine therapies.
Gilead Sciences target goes to $78 at Merrill Lynch.
Media . . . E.W. Scripps expects third quarter earnings to be 55 to 65 cents a share, below the average analyst forecast of 68 cents, hurt by the media company's continued investment in the Shop At Home Network. Revenues rose 24.8% year/year to $474.9 million versus the $478.8 million consensus. For the second quarter, the company reported net income of $64.7 million, or 80 cents a share, up from 33 cents a share in the year-earlier period. Excluding non-recurring items related to investment write-downs, earnings were approximately 83 cents a share, in line with analyst forecasts. Operating revenue increased 25 percent to $474.8 million.
TiVo and AOL unveiled an offering for AOL members who are TiVo subscribers that allows them to program their TiVo DVR through the AOL service.
Cable network ESPN said that radio talk show host Rush Limbaugh will join its "Sunday NFL Countdown" pre-game show. Walt Disney owned ESPN said Limbaugh will "provide a weekly opinion piece on an aspect of the NFL making news that week" and challenge the opinions of the show's other analysts on various NFL-related issues.
The Wall Street Journal reports PanAmSat has suffered new technical problems which could force it to "swap" out two additional orbiting spacecraft. In addition, the company would also have to seek additional insurance claims and therefore complicate its efforts to cut its capital expenditures.
Telecom . . . Deutsche Telekom was upgraded at Merrill Lynch to Buy from Neutral based on valuation. In addition, following a meeting with T-Mobile USA mgmt, firm now feels that numbers will remain robust in coming quarters and their concerns over execution risk have been alleviated.
Verizon started with a Sell at Kaufman. Price target $34. The firm cites sum-of-parts-valuation for its rating and target; says would be sellers of the stock at least until it approaches the low 30s or a dividend yield of close to 5%.
UTStarcom started with a Buy at Prudential with a Buy rating and $47 target. The firm believes the company will likely maintain its strong sales and EPS momentum, benefiting from its leadership in wireless PHS in China, strong backlog, and excellent visibility.
Titan Pharma announced preclinical anti-cancer study results demonstrating that Pivanex, combined with the approved chemotherapeutic agent docetaxel, significantly increased anti-tumor activity in non-small cell lung cancer cells.
EMS . . . Solectron remains in compliance with its debt covenants following the obtainment of amendments to minimum tangible net worth covenants. The amendment was obtained on July 9, and relate to the company's undrawn $450 million credit facilities.
Storage . . . Network Appliance signs distribution agreements with the North American Computer Products group of Arrow Electronics, Inc. and Avnet Hall-Mark, which are value added distributors of enterprise servers, storage, software and services. This new development will allow the co's storage solutions to be offered to regional and specialized VARs in geographies and markets not previously covered.
Sun Microsystems boardroom meeting next week to address contentious stock options issue. Financial Times article discusses the contentiousness associated with the stock options issue in light of Sun's looming boardroom challenge to its official position of not deducting the cost of stock options from earnings, which is happening next week. The article suggests the company's directors will come to a showdown on the issue at its company board meeting on July 23. The opposition will be led by Lynn Turner, a former chief accountant of the SEC and outspoken proponent of expensing options, who joined the co's board last year. However, Mr. Lynn will have to face a strong proponent of not expensing options from the co's chairman and chief executive Scott McNealy.
McDATA and Network Appliance extended storage networks partnership.
Network Equipment . . . Motorola's mobile content download platform selected by China Unicom. MOT's Java technology-based download platform will deliver mobile content to its millions of subscribers in China over its CDMA2000 1X network.
Semiconductor Equipment . . . Semiconductor equipment sales are expected to rise 4 percent in 2003 over sales of $19.8 billion a year ago, according to a survey of companies conducted by Semiconductor Equipment and Materials International. Leading the way is an anticipated 30 percent growth in assembly and packaging equipment, and an expected growth of 18 percent in chip testing equipment. Wafer processing is projected to remain flat. Growth is expected to increase to 24 percent in 2004 and 18 percent in 2005, and contract slightly in 2006.
The Wall Street Journal article suggests customer cautiousness in ordering new equipment to expand capacity might be coming to an end soon. The article points to one piece of evidence being factories filling up with Taiwan Semi recently reporting its factories operating at 86% capacity in the second quarter, up from 67% in the first quarter. In addition, market research firm Gartner estimates plant utilization at 81% for the entire industry. However, Intel plans to spend between $3.5 billion and $3.9 billion in 2003, which is down as much as 25% from last year. The article also suggests excess optimism is possible with last year being used as an example due to TSMC and other co's placing orders in Spring 2002 only to cancel them by Semicon due chip demand being illusory.
Applied Materials will set tone for SemiCon with 7/14 analyst meeting. Expect slowly building confidence in mid term outlook. Despite speculation, we expect no layoffs beyond those announced. KLA Tencor, Lam Research, Brooks Automation analyst meetings on 7/15. Most products have been pre-announced. Cautious optimism from LRCX, KLAC, a bit more cautious BRKS (Near-Term). Teradyne, Novellus, Lam Research, KLA Tencor, ancelis should meet June Quarter expectations. Expect Septmber Quarter bookings guidance +10%. None suggests a big 2nd half 2003 turn but tightening utilization, strong unit growth, improving foundries, and a slew of 300mm projects sets up strong 2004 rebound. Larger cap names now trading at 30-35x 2004E. Stocks may pause but expect further upside as recovery anticipation turns to confirmation. Analysts are more confident about modest order improvement in 2nd half. Risk/reward still positive. Advise buying on any dips/weakness.
Applied Materials will focus on new etch. CMP, and ECP tools at SemiCon show. Rising utilization (now 86%) at TSMC is a bullish sign especially for AMAT. It is still early, but July Quarter on track (flat guidance). Analysts speculatively expect October bookings up around 10%.
KLA Tencor reports 4th quarter on 7/24, expect their analyst meeting (7/15) to be largely product focused. Given that June is historically KLAC‘s strongest Quarter, anticipate bookings will exceed conservative flat guidance. Estimate $335-345 million (+6-10% Quarter/Quarter). Best positioned name in the group with the only issue is valuation.
Novellus will be the first major front-end vendor to report 2nd quarter on 7/21. Analysts are looking for $0.05 on $238 million (flat). Despite its mid-Q reaffirmation of $188M in orders (- 23% Quarter/Quarter), we expect the company to show upside - est. orders above $200 million. Continue to believe that NVLS is one of the key names to own in the space.
Semiconductors . . . Smith Barney downgraded Altera and Xilinx to "in-line" from "outperform," citing valuation concerns. Altera is a dime better at $19.23 and Xilinx is 19 cents higher at $27.81. Analyst Clark Westmont said Altera is trading near or above pre-2000 levels on a relative and absolute basis and Altera is trading in the top quartile of its 10-year historical valuation range. He has a $15 price target for Altera and cut his Xilinx price target to $28 from $30.
Merrill Lynch raised its rating on Intel to buy from a neutral rating and put a $29 price target on the stock on expectations for improvement in gross margins. "Better average selling prices should continue to flow from the shift towards mobile machines, where Intel sees better pricing, and a shift towards higher-priced Pentium M processors within the mobile segment," Merrill told clients. "We also think Intel has been able to price less aggressively in its desktop processor business as AMD has continued to struggle."
Smith Barney Europe is calling cyclical bottom in European Semis. They are upgrading the European Semiconductor industry (to Marketweight from Underweight). On a stock specific basis, firm raising ASML to Outperform from In Line (target to Eur15 from Eur6.30), ST Micro target goes to US$22 from US$18. Maintaining Outperform rating and Eur11.5 target on Infineon.
Broadcom introduced a new Fast Ethernet switch.
Pixelworks chip selected for Samsung's latest LCD television.
Boxmakers . . . CDW Corp as cut to In-Line at Goldman Sachs based on valuation. Firm believes that the biggest risk to its downgrade is that CDWC could put its large cash balance to work to build value for investors; thinks that part of recent run has been driven by speculation of the possibility for an increased dividend.
Software . . . Intuit bought Income Dynamics in a stock deal value at $10 million to help its TurboTax users determine the fair market value of items donated to charities. Intuit does not expect the acquisition to materially change its fiscal 2003 or 2004 outlook. Intuit reaffirmed 2003 & 2004 EPS in line with consensus. The company reaffirms Y03 EPS guidance of $1.36-1.39, versus consensus of $1.37, and 2004 EPS of $1.57-1.67 vs. estimate of $1.62.
Yahoo reached a definitive agreement to acquire Overture Services for roughly $1.63 billion. The deal calls for Yahoo to swap 0.6108 shares of its common stock and $4.75 in cash for each Overture share. The transaction is expected to close in the fourth quarter.
Pumatech (business synchronization software) announced the signing of a co-development agreement with Japan's Hitachi to synchronize Hitachi's Web-based messaging service with personal digital assistants, and Macintosh and Microsoft-based email services. Hitachi plans to market the combined product in Japan beginning in the fall of 2003.
SoundView Technology upgraded Tibco Software to a "neutral" rating. SoundView said it believes that it can sustain profitability for the foreseeable future, separating it from the other pure plays.
Compuware (business software for mainframe and server computers) indicated that fiscal first quarter results would fall short of expectations. John Rizzuto at CS First Boston said that while the company did not give specifics on expenses, he believes they will be "well above" expectations "as the mix deterioration alone does not justify the earnings shortfall."
WSJ says Computer Associates will unveil new programs in the on-demand field at its user conference. CEO Sanjay Kumar expects 1/4 of CA’s customers to do some sort of on-demand computing in the next two to three years. CA's platform-independent systems management portfolio offers key advantage in this effort. More details at user group meeting today and tomorrow. Look for news in security, storage and Linux along with these new initiatives in on-demand computing.
Barron’s article speculated that if Oracle were to succeed in rolling up Peoplesoft and JD Edwards, Oracle could solidify its place in applications and pose a more serious threat to IBM. The article says that both MSFT and IBM might have to rethink their stances on the application SW business and postulates that IBM should consider hooking up with SAP. Points to the application server as the key. ORCL, IBM and SAP each offers one. The app sever, as well as MSFT's .NET technology, is at the heart of the race to the next big thing: Web Services. MSFT has already moved into applications through acquisition and could certainly do more. IBM has staked out a position in infrastructure. It could change this stance but may prefer to become the partner of choice for all the second and third tier apps vendors. It is way too soon for such speculation since PSFT is still far from in ORCL's grip. IBM has close to 100 strategic ISV partners; acquiring SAP would undermine its credibility with all of these.
Articles of Note
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