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Monday, July 21, 2003 9:14:22 PM
RobBlack.com MarketWrap
http://www.robblack.com/rb_marketwrap.shtml
U.S. stocks declined for a fourth day in five, led by drug shares, after Merck lowered sales estimates for its top-selling drug Zocor and reported quarterly profit that missed analysts' estimates. The S&P 500 slid 14 points (-1.5%) to 978, its lowest close this month. Health-care and computer- related stocks accounted for 40 percent of the decline. The DJIA lost 91 points (-1.0%) to 9096, paced by Merck. The Nasdaq Composite shed 27 points (-1.6%) to 1681. Last week, the market declined on heavy volume, and rallied on low volume -- more a sign of distribution, than any new love-fest. The big picture is the substantial advance since March 11, and the inability to extend an over-extended market. From here, best case is we move side-wise, but no way can we accelerate. Meanwhile, U.S. Treasurys fell again, sending the yield on the benchmark 10-Year Note to its highest since January. The 10-Year Note Yield backed up to 4.12%, the highest since January 10. Of course, rising rates tend to under-cut the mortgage market, and home building stocks were hard-hit, with KB Home, Centex, and Ryland all losing over a point.
Strong Sectors: internet, gold
Weak Sectors: storage, drug, computer hardware, dept store, auto, biotech, utility
Top Stories . . . The index of leading U.S. economic indicators rose 0.1 percent in June, the third straight increase, reflecting higher stock prices, a rise in the money supply and more permits for home construction.
Citigroup and Goldman Sachs are leading a global revival in investment banking following a three-year slump that led to the elimination of 100,000 jobs.
Merck, the second-biggest U.S. drugmaker, lowered estimates for its top-selling Zocor drug and said quarterly profit climbed 6.6 percent as the dollar weakened.
Merck, the second-biggest U.S. drugmaker, lowered estimates for its top-selling Zocor drug and said quarterly profit climbed 6.6 percent as the dollar weakened.
Quotes of Note . . . ``Merck illustrates the environment we're in. We may not have a strong economy lifting all stocks. It's a good example of a stock that was fairly valued.'' said Robert Bissell, president of Wells Capital Management, which oversees $114 billion.
``Second-quarter earnings have come in very nicely, but the market was priced for that to happen. The numbers were fine, but weren't up enough to get us going for another substantial leg up.'' said W. Shannon Reid, who manages the $1.3 billion Evergreen Strategic Growth Fund.
Gurus . . . Elaine Garzerelli told the Kudlow-Cramer Show that we are in the early stages of a bull market, and that stocks remain undervalued relative to bonds. She favors the basic material sector, as well as financials, centering on stocks such as Home Depot and Maytag. She sees 1200 on the S&P by year-end. (It is currently 993.) Guest Scott Rothburt of Lakeview Assets favors some of the small restaurant stocks, like Applebee's, Chicago Pizza, and Lone Star Steakhouse, as well as specialty retailer, Dick's Sporting Goods.
On the Rukeyser Show, Mario Gabelli continues to favor smaller media companies like Pulitzer Publishing, Paxon Broadcasting, and Young Broadcasting.
As for the Dow Theory, it's in the eye of the beholder. Richard Moroney, who runs Dow Theory Forecasts, has gotten a buy signal, since both the Dow Jones Industrial and Transportation indices have exceeded previous peaks in the past 5-weeks. Not so, says Richard Russell, who runs the Dow Theory Letter. He notes that the Transports made a new high in July, but the Industrials did not confirm. Meanwhile, the first week's earnings scorecard finds 156 companies, or 31%, have reported, with earnings up 9.8% on average, against an overall projection of 5%-to-6% when all 500 companies report.
Edward Keon, quantitative strategist at Prudential, said second quarter results have topped Wall Street forecasts by about 6 percent so far, and are on track to exceed targets for a "bullish scenario for profits." He added that risk aversion in the market place is still high, but he sees some signs that anxiety may be easing.
Quality Investing . . . Low-quality stocks and bonds are overvalued today while high-quality assets are undervalued, Merrill Lynch chief strategist Richard Bernstein said Monday in a note to clients. "Our indicators continue to suggest that second-half 2003 profits might be considerably weaker than is currently generally expected," Bernstein wrote. Valuations of low-quality assets suggest "investors are not anticipating an economic recovery, but rather are anticipating an all-out economic boom." Price-to-earnings ratios of 'A' rated stocks are around 15, while P/E ratios of 'C' and 'D' rated assets are over 40.
Eco Speak . . . The Index of Leading Indicators rose 0.1% in June, in line with consensus expectations. Four of the ten components helped the Index during the month - stock prices, money supply, building permits, and a decline in initial unemployment claims. Consumer goods orders, vendor performance, consumer confidence, and the interest rate spread impacted the Index negatively. The final two components (average workweek and new orders for business equipment) had no effect on the Index. June's gain represents the third consecutive increase in the Index, and follows an upwardly revised 1.1% spike in May.
Fund Flow . . . U.S. stock funds took in an estimated $3.3 billion in the week ended July 17, TrimTabs.com reported Monday. Stock funds have added cash for 11 straight trading days, an unbroken string not seen since March 2002. TrimTabs also said inflows to stock funds reached $17.7 billion in June instead of the $11.1 billion originally estimated. Trim Tabs reiterated its bearish position on stocks, warning that fund investors "appear to have lost all fear" and have boosted holdings even as the market declines.
Government Spending . . . The Office of Management and Budget (OMB) now projects that the deficit will increase to $455 billion in 2003 ending in September, a big jump from the $158 billion actual deficit in 2002. OMB’s February estimate of the 2003 deficit was $304 billion. For 2004, OMB raised its estimate to $475 billion from $307 billion in February. Expect the 2004 estimate to go higher due to Iraq spending unless economic growth meets our above-consensus expectations. Of particular concern is the acceleration in the growth in government spending, and the further shift toward “mandatory spending”. OMB expects federal spending to hit $2.27 trillion in 2004.
As a percentage of GDP, the government’s outstanding debt (marketable debt held by the public) is rising only modestly. It is projected to rise from 37.5% of GDP in 2003 to a peak of 40.6% in 2006. The debt/GDP ratio was lower in the 1970s, but that was the result of inflation driving tax revenues up faster than debt service costs, a temporary effect.
At under 40%, the U.S. debt/GDP ratio is among the lowest in the industrial world. The corresponding net debt-to-GDP ratios in Germany and France are above 40%, while Japan’s is nearly 70% (with gross debt/GDP now above 140%).
The 2003 deficit is expected to be 4.2% of GDP. The deficit expanded to a bigger portion of GDP after the 1982 recession (record 6% of GDP deficit in FY1983) and after the 1990-1991 recession.
Financials . . . Golden West said its second quarter net income rose 22 percent to $272.5 million, or $1.76 per share compared to $226.4 million, or $1.44 per share a year ago. The firm said strong loan originations and new mortgage volume aided the results. Analysts expected the company to earn $1.69 per share in the second quarter.
PNC Financial reported earnings of $184 million, or 65 cents per share, down from its year-ago profit of $320 million, or $1.12 per share. Excluding $87 million in expenses related to an agreement with the Justice Department, PNC earned $271 million, or 96 cents per share, in the latest quarter. 15 analysts were looking for a profit of 93 cents per share in the June period. Revenue fell to $1.3 billion in the latest three months from $1.43 billion in the same period a year earlier. As of June 30, the company had $328 billion in assets under management.
Private Bancorp reported earnings of $4.6 million, or 56 cents per share, up from its year-ago profit of $2.6 million, or 33 cents per share. Analysts were looking for earnings of 46 cents per share in the period. The bank holding firm attributed the strong results to a significant increase in non-interest income due to securities gains, and growth in loans and deposits. The company recorded a gain of $2.4 million in the latest quarter on the sale of a single $10 million corporate bond from its available-for-sale investment security portfolio.
UBS is cautious on Concord EFS going into company's 2nd quarter earnings report July 29. The firm continues to believe that CE will continue to face decelerating growth and increasing pricing pressure, and lower margins and cash flow per transaction. The firm expects that 2nd quarter earnings report could pressure shares of CE and First Data -1% (due to the 0.4 fixed exchange rate per the pending merger) in the near-term. The firm believes weaker than expected results could cause CE shares to be under pressure, which could cause shares of FDC to be weaker as well.
Diebold announced that an order valued at approx $55.6 million from state of Maryland, which was scheduled to close in 2nd quarter, actually closed today. Result will be 2nd quarer revenues will come in approximately $30 million from previous guidance. DBD sees 2nd quarter EPS of approximately $0.57, in line with consensus.
Countrywide upgraded at Wachovia to Outperform from Market Perform based on valuation. The firm sees valuation range at $70-$80.
Wachovia upgraded at Morgan Stanley to Overweight from Equal-Weight The firm is saying solid execution skills, risk mgmt, and lower earnings transition risk should support multiple expansion; firm is also more comfortable on capital discipline and potential acquisition risk given the company's revised dividend policy. Target is $46.
PNC Bank reported earnings of $0.65 per share, including $0.31 in charges related to Dept of Justice agreement, in line with the consensus of $0.65. Revenues fell 9% year/year to $1.30 billion versus the $1.26 billion consensus. First Call's consensus of $0.93 is on an ex items basis, and compares with pro forma EPS actual of $0.96.
Oil & Gas . .. Halliburton reached agreement to request stay extension. The firm announced an agreement was reached among DII Industries, Harbison-Walker Refractories Company and the Official Committee of Asbestos Creditors that will be presented for the Harbison-Walker bankruptcy court's approval at a Status Conference to be held July 22. The agreement provides for the extension, subject to bankruptcy court approval, of the court's temporary restraining order until Sept 30.
Weatherford International reported net income of $28.8 million, or 23 cents a share, $38.9 million, or 31 cents a share in the same period a year ago. Excluding non-recurring items such as severance and debt restructuring charges, earnings were 31 cents a share, matching the forecast. Revenue rose 4 percent to $617.7 million. The oil services company said strong sequential revenue growth in Eastern Hemisphere and Latin American helped offset flat revenue in North America.
Millennium Chemicals CEO William Landuyt has resigned, and the company is eliminating its dividend. The company said Robert Lee has been named President and Chief Executive Officer and Worley Clark, Jr. will become chairman. The company also said it expects to lose about 25 to 30 cents per share in the full year 2003, reflecting pricing pressures at its titanium dioxide business.
Metals . . . Steel Technologies reported earnings of $972,0000, or 10 cents per share, down from its year-ago profit of $5 million, or 51 cents per share, but in line with the average estimate. Sales rose 1 percent in the latest three months to $129.6 million from $128 million in the same period a year earlier. The producer of flat rolled steel products said the results met its expectations. It attributed the year-over-year decline in performance to a 9 percent drop in volume levels, and margin contraction due to a continuing supply/demand imbalance. Looking ahead, Steel Technologies said it's seeing soft demand in current booking levels.
Transports . . . Southwest Air reported 2nd quarter earnings of $0.13 per share, $0.02 better than the consensus of $0.11. Revenues rose 2.9% year/year to $1.51 billion vs the $1.51 billion consensus.. The air carrier said improved traffic and revenue beginning in mid-June helped offset soft bookings early in the quarter due to the Iraq campaign. Looking ahead, the company expects third quarter earnings to increase over last year, as high demand for vacation travel has led to strong bookings for July and August.
Photography . . . Eastman Kodak announced an agreement to buy PracticeWorks for $500 million, or $21.50 a share in cash. Kodak expects the deal for the provider of dental practice management software, which is projected to close by the end of the year, to be slightly dilutive to earnings through 2005, and slightly accretive thereafter.
Consumer Products . . . 3M reported second-quarter earnings of $619 million, or $1.56 per share, a nickel ahead of the average estimate. In the same period a year earlier, the firm posted earnings before items of $539 million, or $1.36 per share. Worldwide sales leapt 10.1 percent in the latest three months to $4.58 billion from $4.16 billion in the same period a year earlier. Looking ahead, the firm raised its outlook for the year to earnings before items of $5.90 to $6.05 per share. Wall Street's current consensus estimate is for a profit of $5.91 per share in 2003. The company sees earnings of $1.56 to $1.60 per share for the third quarter.
Education . . . University of Phoenix under preliminary FBI investigation over stolen passwords. The WSJ reported the FBI performing a preliminary investigation into allegations that the co's subsidiary, The University of Phoenix, stole trade secrets from its former testing software provider. No charges have been filed as a result of the investigation.
Tobacco . . . Altria asks Illinois Supreme Court to reinstate reduced bond in Price suit.
Retail . . . U.S. Bancorp Piper Jaffray analyst lowered J. Jill to "market perform". Jeff Klinefelter said he sees little to keep business strong in retail in the second half. He thinks that if mall traffic doesn't significantly accelerate, J. Jill in particular. He took down his profit projections to 18 cents from 22 cents a share in the third quarter and to 47 cents from 49 cents a share for the fourth quarter. His 12-month price target is $16.25.
Mattel reported 2nd quarter 2003 operating earnings of $0.07 per share, in line with consensus. The $0.07 excluded certain one-time charges. On a GAAP basis, the company reported EPS of $0.05. Positives from the quarter included strong gross margins in the face of declining sales and free cash flow growth that outpaced revenue growth. The financial plan is on track to deliver $80 million of savings this year, and management is "actively engaged" in decisions pertaining to the capital deployment plan. Areas that drew investors' focus were the weak top line results, the potential for Flavas to cannibalize sales of existing MAT products, efforts to get an early read on how that line is doing, and questions about the level of advertising and promotion dollars that Mattel will bring to bear against its competition in the critical back-half of the year.
Wal-Mart said last week's sales put it on track to reach the high end of its July sales forecast. The world's largest retailer said warm-weather merchandise is driving demand. The Bentonville, Ark. component of the Dow Jones Industrial Average forecasted July same-store sales to grow 2-4 percent, with business so far tracking at the high end of that range.
Tractor Supply declared a two-for-one split of its common stock. The farm and ranch retail chain said the split is intended to enhance liquidity in its shares and reflects confidence in its plan to grow the company from 458 stores to approximately 700 stores in the next four years.
Toys . . . Mattel, which makes Barbie dolls and Hot Wheels toy cars, plans to buy back up to $250 million of its shares as part of a previously announced capital plan.
Hasbro reported earnings of $11.4 million, or 6 cents per share, 2 cents ahead of the average estimate of. In the same period a year earlier, the company lost of $25.9 million, or 15 cents per share, a performance that reflects a charge of $21 million, or 12 cents per share, related to a decline in an investment. Driven by strong demand for the company's core Trivial Pursuit and Transformer brands and success of certain new products, revenue jumped 7 percent in the latest three months to $581.5 million from $546 million in last year's quarter. Looking ahead, the firm said it hasn't significantly changed its expectations for the year.
Restaurants . . . Panera Bread target raised at Raymond James. The firm increased price target to $47 from $45 based on continued strong company-specific fundamentals and generally rising equity market valuations. Firm reiterates its Strong Buy rating.
Healthcare . . . Renal Care upgraded at Robinson Humphrey to Overweight from Equal-Weight based on the following factors: 1) firm believes believes the Board may be more inclined to execute a large-scale share repurchase during the next 2-3 qtrs, 2) potential legislation within the Medicare drug benefit could be favorable for RCI, and 3) firm believes RCI is enjoying a favorable cost trend that should allow it to produce at least a few pennies of upside to consensus estimates during 2003. Sees fair value at $45.
Healthcare . . . Callaway Golf was cut to Underperform at Bear Stearns based on valuation. In addition, firm believes that competitive pressures will only intensify and the amount of spending needed to support product will continue to increase as the "competitive advantage" of product differentiation once enjoyed continues to erode.
Drugs . . . Biovail marketing programs comes under scrutiny in this weekend’s Barron's. The article echoes some of the concerns over its aggressive marketing tactics of paying doctors to write perscriptions for Cardizem LA. The stock has recently been weighed down by these concerns with the company seeing nothing wrong with its marketing programs. The company says the program was developed with the help of a Durham, N.C. consulting firm, which has developed similiar "clinical experience" programs for other firms. However, a doctor interviewed in the article states "It's rather transparent that Biovail is trying to get around this by calling this research".
Barr Labs was upgraded at First Albany to Buy from Neutral based on valuation as well as: 1) the company's impressive pipeline, 2) significant upside potential to EPS ests from patent challenges not in projections, 3) a swing to positive EPS comps beginning this qtr, and 4) consistent new approval flow. Target is $72.
IDEXX Labs reported earnings of $0.47 per share, $0.05 better than the consensus of $0.42. Revenues rose 15.2% year/year to $121.8 million versus the $117.9 million consensus. The company sees 3rd quarter EPS of $0.39-0.41 consensus is $0.41. Revenues of $118-120 million, estimate $116.6 million. For 2003 sees EPS of $1.62, consensus is $1.58 on revenues of $470 million versus consensus $461.6.
Merck reported earnings of $1.87 billion, or 83 cents per share, up from its year-ago profit of $1.75 billion, or 77 cents per share. Analysts were looking for earnings of 84 cents per share in the June period. Consolidated sales rose 4 percent in the latest three months to $13.3 billion from $12.8 billion in the same period a year earlier. Wall Street's consensus estimate was for revenue of $13.63 billion in the quarter. The firm said sales were reduced by $405 million in the latest quarter by purchases at fixed prices by wholesalers. The firm expects to complete the spin-off of its Medco Health Solutions' operations in the third quarter. Looking ahead, Merck said it anticipates earnings of $3.40 to $3.47 per share for full-year 2003, surrounding Wall Street's consensus view of $3.41 per share.
Biotech . . . Imclone announced the resignation of Chief Scientific Office Harlan W. Waksal, effective July 22. Dr. Waksal has also resigned has position as a Director. "My departure has nothing to do with any concern about ERBITUX, its testing or its regulatory process."
Medical Devices . .. Medtronic cut to Neutral at Fulcrum. The firm is saying the company's sheer size mutes the impact of the co's leading position in the ICD marker, and the result is that strong growth (in excess of 40% for 4+ quarters) falls on deaf ears; firm also thinks the likelihood is small that mgmt will meaningfully raise EPS guidance, and considers sector rotation the greatest risk to MDT shares.
Hotel & Leisure . . . Penn National Gaming higher after slot bill passes Pennsylvania House.
Bear Stearns downgraded Caloway Golf to Underperform from Peer Perform. The change in rating is based on the fact that the stock is now priced within our estimated range of the business' intrinsic value and our belief that the opportunity cost of owning Callaway relative to some of our other names has increased. While “best case” discounted cash flow analysis incorporates levels of sales and profitability supporting a higher estimate of value, we currently do not see enough risk-adjusted opportunity relative to the current share price — margin of safety — to recommend owning Callaway at this time. Analysts have confidence that the Top-Flite acquisition can create value for ELY shareholders at the proposed terms.
However, questions about some issues that have not been articulated yet: potential for a still-higher bid, amount of overlapping revenue that may be lost, time period over which efficiencies can be realized, and whether Top-Flite is currently profitable. Furthermore, do not believe Callaway’s proposed resolution of its ball business is the sole issue plaguing future growth and profitability for the company. There are a number of issues we encourage investors to consider when assessing whether or not to own shares of Callaway at these levels. Should become more comfortable incorporating expectations supporting a higher estimate of value or should the current share price pull back adequately to present what we believe to be a reasonable margin of safety for investment, BS would clearly revisit rating.
Six Flags pre-announced weak 2nd quarter results last night after the close. Due to the inclement weather throughout much of the spring, the results are not particularly suprising. Analysts are lowering 2nd quarter EBITDA estimate to $103 million from $121 million. Analysts are trimming 3rd quarter projects., bringing full year estimate to $356 million. Analysts are also taking down 2004 projection to $401 million from $417 million. What is more discouraging is that despite a marked improvement in the weather since the end of June, trends have not picked up in any meaningful way. Attendance, per capita spending and future bookings since the beginning of July have shown mixed trends, but are generally unimpressive. Continue to believe that Six Flags' regional theme park business is a tough one and that respectable returns on capital and meaningful free cash flow will be difficult to come by. Based on new projections, PKS shares are trading at 8.0x and 7.4x our revised '03 and '04 EBITDA estimates. At these levels, and given the company's low return, highly leveraged business, we reiterate our Underperform rating.
Media . . . The Financial Times reports that the California Public Employees' Retirement System (CalPERS) filed a lawsuit against AOL in California. The lawsuit outlines some well-documented accusations against the co, alleging that America Online exaggerated its earnings in 2000 to complete its merger with Time Warner and that the accounting irregularities continued in 2001 as the co clung to optimistic growth forecasts and executives sold stock worth millions of dollars.
EchoStar and SBC Comm will enter co-branding pact to aggressively market co-branded "SBC DISH Network" multichannel television services as a fully integrated part of their bundled services. The two companies will begin work immediately on integrating operations, including order entry, customer service and billing, so they can begin offering customers the co-branded service in early 2004. As part of the multi-year agreement, SBC Communications will help fund the development of the co-branded bundled video services.
Goldman Sachs said AOL is "moving in the right direction," a signal that Wall Street continues to gain confidence in AOL's ability eventually to turn around its troubled America Online division and achieve robust results in many of the Time Warner businesses. Goldman said it expects AOL to match or top its "conservative" 2003 second quarter estimate for revenues of $10.5 billion.
Federal Communications Commission chairman Michael Powell may leave his post by the fall, according to a report by Time magazine. The report cited industry sources as saying, "Powell has told confidants he'd like to leave by fall, and three of his four top staff members are putting out job feelers." Powell has denied he's leaving soon.
Smith Barney raised its rating on Yahoo to outperform from in-line and put a $38, 12-month price target on the stock overnight, telling clients "we believe expectations for Yahoo's second half results are conservative and see the Overture buy as an important strategic move to help propel growth." Yahoo's shares have slipped 15 percent since second quarter results failed to exceed speculative hopes and the company announced the acquisition of Overture, the broker noted.
Network Equipment . . . Ericsson price target goes to $16 from $10 at USB Piper Jaffray. According to firm, cost reductions load ERICY for EPS growth in 2004.
Cox Comm selects Terayon Comm as primary supplier of cable modems in Arizona.
Motorola was downgraded at CSFB to Underperform from Neutral based on their belief that the accelerating phone product life cycle will continue to weigh on MOT's market share and/or operating margins. The firm also thinks that consensus rev and EPS ests for 2003-04 are too aggressive. Target is $7.
Network Equipment . . . Tim Luke at Lehman Brothers raised his price target on the shares of Cisco Systems to $20, citing increased confidence in the networker's ability to meet or exceed his fiscal fourth quarter earnings and revenue forecast due to evidence of strengthened demand trends in the U.S. market. While Luke believes the company will provide a "conservative" outlook for its fiscal first quarter, he thinks potential exists for an upside to his fiscal 2004 estimates.
Riverstone Networks uncovered certain accounting "irregularities," and intends to restate financial statements for the fiscal 2002 and for the first three quarters of fiscal 2003. The network switch and router maker said the irregularities relate to the "appropriateness and timing of revenue recognized by certain customers." The company said it couldn't be certain when its review of accounting practices and issuance of restated results would occur.
DSL.Net closed on a $30 million financing agreement with institutional investors. Based on current projections, the financing will fund the company to become cash-flow positive.
Credit Suisse dropped its rating on Motorola to underperform from neutral overnight. "We believe the accelerating phone product life cycle will continue to weigh on Motorla's market share and/or operating margins," CSFB told clients. It said it expected the consensus estimates for revenue and earnings per share for Motorola in 2003 and 2004 "are too aggressive."
Alcatel saw its estimates raised by Goldman Sachs to a breakeven EBITDA and 5 percent sales rise during the second quarter. "We believe that Alcatel has enjoyed a strong second quarter in key profit generating businesses: wireless equipment, DSL and narrowband switching," Goldman said. The broker kept its underperform rating on the stock as it does not see operator capex improving in the second half, and does not see Alcatel achieving organic sales growth until 2006.
Scientific-Atlanta received a second favorable ruling in the patent infringement case with Gemstar-TV Guide. The U.S. District Court of Georgia said Scientific-Atlanta's set-top boxes did not infringe on Gemstar's U.S. patent. The company added that there were still other patent issues still before the court.
Semiconductor Equipment . . . The North American Semiconductor Equipment Industry reported a monthly book-to-bill ratio of 0.93 for June, up from a revised 0.90 ratio in May. Moors and Cabot's estimate for June was 0.92, so this report appears to be a bit better than expected. However, bookings of $720 million came in just below revised May 2003 level of $724 million and 39% below the $1.17 billion in orders reported in the year-ago period.
Cymer downgraded at Lehman to Equal-Weight from Overweight, citing valuation as well as their belief that investors may not have factored in potentially weak 2nd half 2003 orders and profits. The firm firm sees a more attractive entry point under $30. The firm cuts target to $30 from $37.
Semiconductors . . . DSP Group reported 2nd quarter earnings of $0.26 per share, excluding net $0.07 in ex items, $0.07 better than the Reuters Research consensus of $0.19. Revenues rose 20.8% year/year to $38.5 million versus the $38.0 million consensus.
Genesis Microchip CEO resigns effective immediately. The company's CFO will serve as interim CEO until such time as Mr. Donegan's successor is determined. "I strongly disagree with the memorandum opinion recently issued in the litigation between the company and Silicon Image pending in the United States District Court for the Eastern District of Virginia. However, in the best interest of the company and its stockholders, I have resigned effective immediately."
Boxmakers . . . Lexmark reported net earnings of $101.7 million, or 77 cents a share, up from 67 cents a share in the year-earlier period, but a penny a share shy of the forecast. The printer maker indicated that third-quarter earnings would be 63 to 73 cents a share, below analyst projections of 80 cents, due to concerns over softness in corporate and consumer spending and pricing pressures. Revenue for the latest quarter rose 6 percent to $1.12 billion, matching expectations, and is expected to see percentage growth in the "low to mid-single digits" in the third quarter.
Software . . . Deutsche maintaining Buy on Electronic Arts due to conservative accounting policies and would be buyers on weakness
Raymond James upgraded Cognos to Outperform from Mkt Perform, saying they see positive implications for COGN following BOBJ's acquisition of Crystal; while the acquisition creates a bigger competitor. The firm thinks Crystal has much more product overlap than what BOBJ is prepared to admit, and the acquisition leaves several of BOBJ's weaknesses unaddressed. Target is 31.
Hyperion Solutions software selected by Symantec for quick and efficient financial consolidations and reporting from a single enterprise source.
Piper Jaffray upgraded Business Objects to Outperform from Market Perform and raised their target to $27 from $20. While they had previously been concerned with forward estimate revisions due to the greenfield nature of the Enterprise 6.0 sale, the margin improvement and growth prospects associated with the acquisition of Crystal Decisions make them much more confident the stock will see near-term positive momentum.
webMethods reported a 1st quarter loss of $0.12 per share, in line with the Reuters Research consensus of ($0.12); revenues fell 9.4% year/year to $43.2 mln vs the $42.6 million consensus. Company sees 2nd quarter pro forma loss of $0.06-0.12 versus consensus of a loss of $0.07 on revenues of $42-47 million, consensus is $43.6 million.
Acclaim, Activision, and THQ said that the SEC has requested information from them in connection with an investigation into video game manufacturers and distributors, according to their respective 8-Ks filed on Friday afternoon. The SEC investigation is a non-public, formal one and should not be construed as an indication that any violations of the law have occurred, according to the filings. Specifically, the investigation appears to be focused on certain accounting practices common to the interactive entertainment industry, with specific emphasis on revenue recognition, according to the filings. See below for each company's revenue recognition and allowance policy. While the investigation appears to be sector-wide, and not company specific, to date, neither Electronic Arts nor Take-Two have filed 8-Ks regarding this investigation. Expect Activision and THQI to address this issue during their respective earnings calls this week.
Anthony Gikas at USB Piper Jaffray feels the likelihood that the SEC inquiry is a result of fraud is "modest," given that current revenue reporting methods have been in practice for years and have been subject to numerous reviews and audits. "That said, the risk that video game publishers could be asked to restate revenue and earnings is real and could further pressure stocks at some point," Gikas said
Edward Maguire at Merrill Lynch said that Check Point Software’s overall results met consensus Wall Street expectations, product revenue of $54.8 million fell short of his forecast of $58.9 million. "At first glance, the second quarter results look solid overall but the revenue mix is a concern," Maguire said.
Check Point reported net income of $60.2 million, or 24 cents a share, down from 27 cents a share in the same period a year ago, but in line with the average analyst. Revenue fell 2.3 percent to $106.1 million, also matching analyst forecasts. The Internet security software company said it generated net cash flow of $73.1 million during the quarter, bringing total cash to nearly $1.5 billion.
Business Objects is acquiring Crystal Decisions for $820 million in a cash-and-stock deal. "This combination of two leaders in the business intelligence segment we interpret as a major step towards creating a clear leader, with a comprehensive product offering and broad geographical reach, and could create pressure on other vendors to take similar strategic action," noted Goldman Sachs.
Internet . . . Barron's suggests Chinese Internet stocks are in "over-heated" market. Barron's questions whether the recent appreciation of Chinese Internet stocks might be another bubble or the real thing. The companies mentioned are SOHU, China.com, SINA and Netease with all four now having market caps north of $1 billion. Despite these concerns, the article suggests these web portals ad revenues keep on growing at double digit percentage year over year growth. However, these stocks face "significant" risks and suggests the presence of an "overheated market" with a MDB Capital Group analyst recently downgrading his rating on SINA to hold on the basis of valuation.
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U.S. stocks declined for a fourth day in five, led by drug shares, after Merck lowered sales estimates for its top-selling drug Zocor and reported quarterly profit that missed analysts' estimates. The S&P 500 slid 14 points (-1.5%) to 978, its lowest close this month. Health-care and computer- related stocks accounted for 40 percent of the decline. The DJIA lost 91 points (-1.0%) to 9096, paced by Merck. The Nasdaq Composite shed 27 points (-1.6%) to 1681. Last week, the market declined on heavy volume, and rallied on low volume -- more a sign of distribution, than any new love-fest. The big picture is the substantial advance since March 11, and the inability to extend an over-extended market. From here, best case is we move side-wise, but no way can we accelerate. Meanwhile, U.S. Treasurys fell again, sending the yield on the benchmark 10-Year Note to its highest since January. The 10-Year Note Yield backed up to 4.12%, the highest since January 10. Of course, rising rates tend to under-cut the mortgage market, and home building stocks were hard-hit, with KB Home, Centex, and Ryland all losing over a point.
Strong Sectors: internet, gold
Weak Sectors: storage, drug, computer hardware, dept store, auto, biotech, utility
Top Stories . . . The index of leading U.S. economic indicators rose 0.1 percent in June, the third straight increase, reflecting higher stock prices, a rise in the money supply and more permits for home construction.
Citigroup and Goldman Sachs are leading a global revival in investment banking following a three-year slump that led to the elimination of 100,000 jobs.
Merck, the second-biggest U.S. drugmaker, lowered estimates for its top-selling Zocor drug and said quarterly profit climbed 6.6 percent as the dollar weakened.
Merck, the second-biggest U.S. drugmaker, lowered estimates for its top-selling Zocor drug and said quarterly profit climbed 6.6 percent as the dollar weakened.
Quotes of Note . . . ``Merck illustrates the environment we're in. We may not have a strong economy lifting all stocks. It's a good example of a stock that was fairly valued.'' said Robert Bissell, president of Wells Capital Management, which oversees $114 billion.
``Second-quarter earnings have come in very nicely, but the market was priced for that to happen. The numbers were fine, but weren't up enough to get us going for another substantial leg up.'' said W. Shannon Reid, who manages the $1.3 billion Evergreen Strategic Growth Fund.
Gurus . . . Elaine Garzerelli told the Kudlow-Cramer Show that we are in the early stages of a bull market, and that stocks remain undervalued relative to bonds. She favors the basic material sector, as well as financials, centering on stocks such as Home Depot and Maytag. She sees 1200 on the S&P by year-end. (It is currently 993.) Guest Scott Rothburt of Lakeview Assets favors some of the small restaurant stocks, like Applebee's, Chicago Pizza, and Lone Star Steakhouse, as well as specialty retailer, Dick's Sporting Goods.
On the Rukeyser Show, Mario Gabelli continues to favor smaller media companies like Pulitzer Publishing, Paxon Broadcasting, and Young Broadcasting.
As for the Dow Theory, it's in the eye of the beholder. Richard Moroney, who runs Dow Theory Forecasts, has gotten a buy signal, since both the Dow Jones Industrial and Transportation indices have exceeded previous peaks in the past 5-weeks. Not so, says Richard Russell, who runs the Dow Theory Letter. He notes that the Transports made a new high in July, but the Industrials did not confirm. Meanwhile, the first week's earnings scorecard finds 156 companies, or 31%, have reported, with earnings up 9.8% on average, against an overall projection of 5%-to-6% when all 500 companies report.
Edward Keon, quantitative strategist at Prudential, said second quarter results have topped Wall Street forecasts by about 6 percent so far, and are on track to exceed targets for a "bullish scenario for profits." He added that risk aversion in the market place is still high, but he sees some signs that anxiety may be easing.
Quality Investing . . . Low-quality stocks and bonds are overvalued today while high-quality assets are undervalued, Merrill Lynch chief strategist Richard Bernstein said Monday in a note to clients. "Our indicators continue to suggest that second-half 2003 profits might be considerably weaker than is currently generally expected," Bernstein wrote. Valuations of low-quality assets suggest "investors are not anticipating an economic recovery, but rather are anticipating an all-out economic boom." Price-to-earnings ratios of 'A' rated stocks are around 15, while P/E ratios of 'C' and 'D' rated assets are over 40.
Eco Speak . . . The Index of Leading Indicators rose 0.1% in June, in line with consensus expectations. Four of the ten components helped the Index during the month - stock prices, money supply, building permits, and a decline in initial unemployment claims. Consumer goods orders, vendor performance, consumer confidence, and the interest rate spread impacted the Index negatively. The final two components (average workweek and new orders for business equipment) had no effect on the Index. June's gain represents the third consecutive increase in the Index, and follows an upwardly revised 1.1% spike in May.
Fund Flow . . . U.S. stock funds took in an estimated $3.3 billion in the week ended July 17, TrimTabs.com reported Monday. Stock funds have added cash for 11 straight trading days, an unbroken string not seen since March 2002. TrimTabs also said inflows to stock funds reached $17.7 billion in June instead of the $11.1 billion originally estimated. Trim Tabs reiterated its bearish position on stocks, warning that fund investors "appear to have lost all fear" and have boosted holdings even as the market declines.
Government Spending . . . The Office of Management and Budget (OMB) now projects that the deficit will increase to $455 billion in 2003 ending in September, a big jump from the $158 billion actual deficit in 2002. OMB’s February estimate of the 2003 deficit was $304 billion. For 2004, OMB raised its estimate to $475 billion from $307 billion in February. Expect the 2004 estimate to go higher due to Iraq spending unless economic growth meets our above-consensus expectations. Of particular concern is the acceleration in the growth in government spending, and the further shift toward “mandatory spending”. OMB expects federal spending to hit $2.27 trillion in 2004.
As a percentage of GDP, the government’s outstanding debt (marketable debt held by the public) is rising only modestly. It is projected to rise from 37.5% of GDP in 2003 to a peak of 40.6% in 2006. The debt/GDP ratio was lower in the 1970s, but that was the result of inflation driving tax revenues up faster than debt service costs, a temporary effect.
At under 40%, the U.S. debt/GDP ratio is among the lowest in the industrial world. The corresponding net debt-to-GDP ratios in Germany and France are above 40%, while Japan’s is nearly 70% (with gross debt/GDP now above 140%).
The 2003 deficit is expected to be 4.2% of GDP. The deficit expanded to a bigger portion of GDP after the 1982 recession (record 6% of GDP deficit in FY1983) and after the 1990-1991 recession.
Financials . . . Golden West said its second quarter net income rose 22 percent to $272.5 million, or $1.76 per share compared to $226.4 million, or $1.44 per share a year ago. The firm said strong loan originations and new mortgage volume aided the results. Analysts expected the company to earn $1.69 per share in the second quarter.
PNC Financial reported earnings of $184 million, or 65 cents per share, down from its year-ago profit of $320 million, or $1.12 per share. Excluding $87 million in expenses related to an agreement with the Justice Department, PNC earned $271 million, or 96 cents per share, in the latest quarter. 15 analysts were looking for a profit of 93 cents per share in the June period. Revenue fell to $1.3 billion in the latest three months from $1.43 billion in the same period a year earlier. As of June 30, the company had $328 billion in assets under management.
Private Bancorp reported earnings of $4.6 million, or 56 cents per share, up from its year-ago profit of $2.6 million, or 33 cents per share. Analysts were looking for earnings of 46 cents per share in the period. The bank holding firm attributed the strong results to a significant increase in non-interest income due to securities gains, and growth in loans and deposits. The company recorded a gain of $2.4 million in the latest quarter on the sale of a single $10 million corporate bond from its available-for-sale investment security portfolio.
UBS is cautious on Concord EFS going into company's 2nd quarter earnings report July 29. The firm continues to believe that CE will continue to face decelerating growth and increasing pricing pressure, and lower margins and cash flow per transaction. The firm expects that 2nd quarter earnings report could pressure shares of CE and First Data -1% (due to the 0.4 fixed exchange rate per the pending merger) in the near-term. The firm believes weaker than expected results could cause CE shares to be under pressure, which could cause shares of FDC to be weaker as well.
Diebold announced that an order valued at approx $55.6 million from state of Maryland, which was scheduled to close in 2nd quarter, actually closed today. Result will be 2nd quarer revenues will come in approximately $30 million from previous guidance. DBD sees 2nd quarter EPS of approximately $0.57, in line with consensus.
Countrywide upgraded at Wachovia to Outperform from Market Perform based on valuation. The firm sees valuation range at $70-$80.
Wachovia upgraded at Morgan Stanley to Overweight from Equal-Weight The firm is saying solid execution skills, risk mgmt, and lower earnings transition risk should support multiple expansion; firm is also more comfortable on capital discipline and potential acquisition risk given the company's revised dividend policy. Target is $46.
PNC Bank reported earnings of $0.65 per share, including $0.31 in charges related to Dept of Justice agreement, in line with the consensus of $0.65. Revenues fell 9% year/year to $1.30 billion versus the $1.26 billion consensus. First Call's consensus of $0.93 is on an ex items basis, and compares with pro forma EPS actual of $0.96.
Oil & Gas . .. Halliburton reached agreement to request stay extension. The firm announced an agreement was reached among DII Industries, Harbison-Walker Refractories Company and the Official Committee of Asbestos Creditors that will be presented for the Harbison-Walker bankruptcy court's approval at a Status Conference to be held July 22. The agreement provides for the extension, subject to bankruptcy court approval, of the court's temporary restraining order until Sept 30.
Weatherford International reported net income of $28.8 million, or 23 cents a share, $38.9 million, or 31 cents a share in the same period a year ago. Excluding non-recurring items such as severance and debt restructuring charges, earnings were 31 cents a share, matching the forecast. Revenue rose 4 percent to $617.7 million. The oil services company said strong sequential revenue growth in Eastern Hemisphere and Latin American helped offset flat revenue in North America.
Millennium Chemicals CEO William Landuyt has resigned, and the company is eliminating its dividend. The company said Robert Lee has been named President and Chief Executive Officer and Worley Clark, Jr. will become chairman. The company also said it expects to lose about 25 to 30 cents per share in the full year 2003, reflecting pricing pressures at its titanium dioxide business.
Metals . . . Steel Technologies reported earnings of $972,0000, or 10 cents per share, down from its year-ago profit of $5 million, or 51 cents per share, but in line with the average estimate. Sales rose 1 percent in the latest three months to $129.6 million from $128 million in the same period a year earlier. The producer of flat rolled steel products said the results met its expectations. It attributed the year-over-year decline in performance to a 9 percent drop in volume levels, and margin contraction due to a continuing supply/demand imbalance. Looking ahead, Steel Technologies said it's seeing soft demand in current booking levels.
Transports . . . Southwest Air reported 2nd quarter earnings of $0.13 per share, $0.02 better than the consensus of $0.11. Revenues rose 2.9% year/year to $1.51 billion vs the $1.51 billion consensus.. The air carrier said improved traffic and revenue beginning in mid-June helped offset soft bookings early in the quarter due to the Iraq campaign. Looking ahead, the company expects third quarter earnings to increase over last year, as high demand for vacation travel has led to strong bookings for July and August.
Photography . . . Eastman Kodak announced an agreement to buy PracticeWorks for $500 million, or $21.50 a share in cash. Kodak expects the deal for the provider of dental practice management software, which is projected to close by the end of the year, to be slightly dilutive to earnings through 2005, and slightly accretive thereafter.
Consumer Products . . . 3M reported second-quarter earnings of $619 million, or $1.56 per share, a nickel ahead of the average estimate. In the same period a year earlier, the firm posted earnings before items of $539 million, or $1.36 per share. Worldwide sales leapt 10.1 percent in the latest three months to $4.58 billion from $4.16 billion in the same period a year earlier. Looking ahead, the firm raised its outlook for the year to earnings before items of $5.90 to $6.05 per share. Wall Street's current consensus estimate is for a profit of $5.91 per share in 2003. The company sees earnings of $1.56 to $1.60 per share for the third quarter.
Education . . . University of Phoenix under preliminary FBI investigation over stolen passwords. The WSJ reported the FBI performing a preliminary investigation into allegations that the co's subsidiary, The University of Phoenix, stole trade secrets from its former testing software provider. No charges have been filed as a result of the investigation.
Tobacco . . . Altria asks Illinois Supreme Court to reinstate reduced bond in Price suit.
Retail . . . U.S. Bancorp Piper Jaffray analyst lowered J. Jill to "market perform". Jeff Klinefelter said he sees little to keep business strong in retail in the second half. He thinks that if mall traffic doesn't significantly accelerate, J. Jill in particular. He took down his profit projections to 18 cents from 22 cents a share in the third quarter and to 47 cents from 49 cents a share for the fourth quarter. His 12-month price target is $16.25.
Mattel reported 2nd quarter 2003 operating earnings of $0.07 per share, in line with consensus. The $0.07 excluded certain one-time charges. On a GAAP basis, the company reported EPS of $0.05. Positives from the quarter included strong gross margins in the face of declining sales and free cash flow growth that outpaced revenue growth. The financial plan is on track to deliver $80 million of savings this year, and management is "actively engaged" in decisions pertaining to the capital deployment plan. Areas that drew investors' focus were the weak top line results, the potential for Flavas to cannibalize sales of existing MAT products, efforts to get an early read on how that line is doing, and questions about the level of advertising and promotion dollars that Mattel will bring to bear against its competition in the critical back-half of the year.
Wal-Mart said last week's sales put it on track to reach the high end of its July sales forecast. The world's largest retailer said warm-weather merchandise is driving demand. The Bentonville, Ark. component of the Dow Jones Industrial Average forecasted July same-store sales to grow 2-4 percent, with business so far tracking at the high end of that range.
Tractor Supply declared a two-for-one split of its common stock. The farm and ranch retail chain said the split is intended to enhance liquidity in its shares and reflects confidence in its plan to grow the company from 458 stores to approximately 700 stores in the next four years.
Toys . . . Mattel, which makes Barbie dolls and Hot Wheels toy cars, plans to buy back up to $250 million of its shares as part of a previously announced capital plan.
Hasbro reported earnings of $11.4 million, or 6 cents per share, 2 cents ahead of the average estimate of. In the same period a year earlier, the company lost of $25.9 million, or 15 cents per share, a performance that reflects a charge of $21 million, or 12 cents per share, related to a decline in an investment. Driven by strong demand for the company's core Trivial Pursuit and Transformer brands and success of certain new products, revenue jumped 7 percent in the latest three months to $581.5 million from $546 million in last year's quarter. Looking ahead, the firm said it hasn't significantly changed its expectations for the year.
Restaurants . . . Panera Bread target raised at Raymond James. The firm increased price target to $47 from $45 based on continued strong company-specific fundamentals and generally rising equity market valuations. Firm reiterates its Strong Buy rating.
Healthcare . . . Renal Care upgraded at Robinson Humphrey to Overweight from Equal-Weight based on the following factors: 1) firm believes believes the Board may be more inclined to execute a large-scale share repurchase during the next 2-3 qtrs, 2) potential legislation within the Medicare drug benefit could be favorable for RCI, and 3) firm believes RCI is enjoying a favorable cost trend that should allow it to produce at least a few pennies of upside to consensus estimates during 2003. Sees fair value at $45.
Healthcare . . . Callaway Golf was cut to Underperform at Bear Stearns based on valuation. In addition, firm believes that competitive pressures will only intensify and the amount of spending needed to support product will continue to increase as the "competitive advantage" of product differentiation once enjoyed continues to erode.
Drugs . . . Biovail marketing programs comes under scrutiny in this weekend’s Barron's. The article echoes some of the concerns over its aggressive marketing tactics of paying doctors to write perscriptions for Cardizem LA. The stock has recently been weighed down by these concerns with the company seeing nothing wrong with its marketing programs. The company says the program was developed with the help of a Durham, N.C. consulting firm, which has developed similiar "clinical experience" programs for other firms. However, a doctor interviewed in the article states "It's rather transparent that Biovail is trying to get around this by calling this research".
Barr Labs was upgraded at First Albany to Buy from Neutral based on valuation as well as: 1) the company's impressive pipeline, 2) significant upside potential to EPS ests from patent challenges not in projections, 3) a swing to positive EPS comps beginning this qtr, and 4) consistent new approval flow. Target is $72.
IDEXX Labs reported earnings of $0.47 per share, $0.05 better than the consensus of $0.42. Revenues rose 15.2% year/year to $121.8 million versus the $117.9 million consensus. The company sees 3rd quarter EPS of $0.39-0.41 consensus is $0.41. Revenues of $118-120 million, estimate $116.6 million. For 2003 sees EPS of $1.62, consensus is $1.58 on revenues of $470 million versus consensus $461.6.
Merck reported earnings of $1.87 billion, or 83 cents per share, up from its year-ago profit of $1.75 billion, or 77 cents per share. Analysts were looking for earnings of 84 cents per share in the June period. Consolidated sales rose 4 percent in the latest three months to $13.3 billion from $12.8 billion in the same period a year earlier. Wall Street's consensus estimate was for revenue of $13.63 billion in the quarter. The firm said sales were reduced by $405 million in the latest quarter by purchases at fixed prices by wholesalers. The firm expects to complete the spin-off of its Medco Health Solutions' operations in the third quarter. Looking ahead, Merck said it anticipates earnings of $3.40 to $3.47 per share for full-year 2003, surrounding Wall Street's consensus view of $3.41 per share.
Biotech . . . Imclone announced the resignation of Chief Scientific Office Harlan W. Waksal, effective July 22. Dr. Waksal has also resigned has position as a Director. "My departure has nothing to do with any concern about ERBITUX, its testing or its regulatory process."
Medical Devices . .. Medtronic cut to Neutral at Fulcrum. The firm is saying the company's sheer size mutes the impact of the co's leading position in the ICD marker, and the result is that strong growth (in excess of 40% for 4+ quarters) falls on deaf ears; firm also thinks the likelihood is small that mgmt will meaningfully raise EPS guidance, and considers sector rotation the greatest risk to MDT shares.
Hotel & Leisure . . . Penn National Gaming higher after slot bill passes Pennsylvania House.
Bear Stearns downgraded Caloway Golf to Underperform from Peer Perform. The change in rating is based on the fact that the stock is now priced within our estimated range of the business' intrinsic value and our belief that the opportunity cost of owning Callaway relative to some of our other names has increased. While “best case” discounted cash flow analysis incorporates levels of sales and profitability supporting a higher estimate of value, we currently do not see enough risk-adjusted opportunity relative to the current share price — margin of safety — to recommend owning Callaway at this time. Analysts have confidence that the Top-Flite acquisition can create value for ELY shareholders at the proposed terms.
However, questions about some issues that have not been articulated yet: potential for a still-higher bid, amount of overlapping revenue that may be lost, time period over which efficiencies can be realized, and whether Top-Flite is currently profitable. Furthermore, do not believe Callaway’s proposed resolution of its ball business is the sole issue plaguing future growth and profitability for the company. There are a number of issues we encourage investors to consider when assessing whether or not to own shares of Callaway at these levels. Should become more comfortable incorporating expectations supporting a higher estimate of value or should the current share price pull back adequately to present what we believe to be a reasonable margin of safety for investment, BS would clearly revisit rating.
Six Flags pre-announced weak 2nd quarter results last night after the close. Due to the inclement weather throughout much of the spring, the results are not particularly suprising. Analysts are lowering 2nd quarter EBITDA estimate to $103 million from $121 million. Analysts are trimming 3rd quarter projects., bringing full year estimate to $356 million. Analysts are also taking down 2004 projection to $401 million from $417 million. What is more discouraging is that despite a marked improvement in the weather since the end of June, trends have not picked up in any meaningful way. Attendance, per capita spending and future bookings since the beginning of July have shown mixed trends, but are generally unimpressive. Continue to believe that Six Flags' regional theme park business is a tough one and that respectable returns on capital and meaningful free cash flow will be difficult to come by. Based on new projections, PKS shares are trading at 8.0x and 7.4x our revised '03 and '04 EBITDA estimates. At these levels, and given the company's low return, highly leveraged business, we reiterate our Underperform rating.
Media . . . The Financial Times reports that the California Public Employees' Retirement System (CalPERS) filed a lawsuit against AOL in California. The lawsuit outlines some well-documented accusations against the co, alleging that America Online exaggerated its earnings in 2000 to complete its merger with Time Warner and that the accounting irregularities continued in 2001 as the co clung to optimistic growth forecasts and executives sold stock worth millions of dollars.
EchoStar and SBC Comm will enter co-branding pact to aggressively market co-branded "SBC DISH Network" multichannel television services as a fully integrated part of their bundled services. The two companies will begin work immediately on integrating operations, including order entry, customer service and billing, so they can begin offering customers the co-branded service in early 2004. As part of the multi-year agreement, SBC Communications will help fund the development of the co-branded bundled video services.
Goldman Sachs said AOL is "moving in the right direction," a signal that Wall Street continues to gain confidence in AOL's ability eventually to turn around its troubled America Online division and achieve robust results in many of the Time Warner businesses. Goldman said it expects AOL to match or top its "conservative" 2003 second quarter estimate for revenues of $10.5 billion.
Federal Communications Commission chairman Michael Powell may leave his post by the fall, according to a report by Time magazine. The report cited industry sources as saying, "Powell has told confidants he'd like to leave by fall, and three of his four top staff members are putting out job feelers." Powell has denied he's leaving soon.
Smith Barney raised its rating on Yahoo to outperform from in-line and put a $38, 12-month price target on the stock overnight, telling clients "we believe expectations for Yahoo's second half results are conservative and see the Overture buy as an important strategic move to help propel growth." Yahoo's shares have slipped 15 percent since second quarter results failed to exceed speculative hopes and the company announced the acquisition of Overture, the broker noted.
Network Equipment . . . Ericsson price target goes to $16 from $10 at USB Piper Jaffray. According to firm, cost reductions load ERICY for EPS growth in 2004.
Cox Comm selects Terayon Comm as primary supplier of cable modems in Arizona.
Motorola was downgraded at CSFB to Underperform from Neutral based on their belief that the accelerating phone product life cycle will continue to weigh on MOT's market share and/or operating margins. The firm also thinks that consensus rev and EPS ests for 2003-04 are too aggressive. Target is $7.
Network Equipment . . . Tim Luke at Lehman Brothers raised his price target on the shares of Cisco Systems to $20, citing increased confidence in the networker's ability to meet or exceed his fiscal fourth quarter earnings and revenue forecast due to evidence of strengthened demand trends in the U.S. market. While Luke believes the company will provide a "conservative" outlook for its fiscal first quarter, he thinks potential exists for an upside to his fiscal 2004 estimates.
Riverstone Networks uncovered certain accounting "irregularities," and intends to restate financial statements for the fiscal 2002 and for the first three quarters of fiscal 2003. The network switch and router maker said the irregularities relate to the "appropriateness and timing of revenue recognized by certain customers." The company said it couldn't be certain when its review of accounting practices and issuance of restated results would occur.
DSL.Net closed on a $30 million financing agreement with institutional investors. Based on current projections, the financing will fund the company to become cash-flow positive.
Credit Suisse dropped its rating on Motorola to underperform from neutral overnight. "We believe the accelerating phone product life cycle will continue to weigh on Motorla's market share and/or operating margins," CSFB told clients. It said it expected the consensus estimates for revenue and earnings per share for Motorola in 2003 and 2004 "are too aggressive."
Alcatel saw its estimates raised by Goldman Sachs to a breakeven EBITDA and 5 percent sales rise during the second quarter. "We believe that Alcatel has enjoyed a strong second quarter in key profit generating businesses: wireless equipment, DSL and narrowband switching," Goldman said. The broker kept its underperform rating on the stock as it does not see operator capex improving in the second half, and does not see Alcatel achieving organic sales growth until 2006.
Scientific-Atlanta received a second favorable ruling in the patent infringement case with Gemstar-TV Guide. The U.S. District Court of Georgia said Scientific-Atlanta's set-top boxes did not infringe on Gemstar's U.S. patent. The company added that there were still other patent issues still before the court.
Semiconductor Equipment . . . The North American Semiconductor Equipment Industry reported a monthly book-to-bill ratio of 0.93 for June, up from a revised 0.90 ratio in May. Moors and Cabot's estimate for June was 0.92, so this report appears to be a bit better than expected. However, bookings of $720 million came in just below revised May 2003 level of $724 million and 39% below the $1.17 billion in orders reported in the year-ago period.
Cymer downgraded at Lehman to Equal-Weight from Overweight, citing valuation as well as their belief that investors may not have factored in potentially weak 2nd half 2003 orders and profits. The firm firm sees a more attractive entry point under $30. The firm cuts target to $30 from $37.
Semiconductors . . . DSP Group reported 2nd quarter earnings of $0.26 per share, excluding net $0.07 in ex items, $0.07 better than the Reuters Research consensus of $0.19. Revenues rose 20.8% year/year to $38.5 million versus the $38.0 million consensus.
Genesis Microchip CEO resigns effective immediately. The company's CFO will serve as interim CEO until such time as Mr. Donegan's successor is determined. "I strongly disagree with the memorandum opinion recently issued in the litigation between the company and Silicon Image pending in the United States District Court for the Eastern District of Virginia. However, in the best interest of the company and its stockholders, I have resigned effective immediately."
Boxmakers . . . Lexmark reported net earnings of $101.7 million, or 77 cents a share, up from 67 cents a share in the year-earlier period, but a penny a share shy of the forecast. The printer maker indicated that third-quarter earnings would be 63 to 73 cents a share, below analyst projections of 80 cents, due to concerns over softness in corporate and consumer spending and pricing pressures. Revenue for the latest quarter rose 6 percent to $1.12 billion, matching expectations, and is expected to see percentage growth in the "low to mid-single digits" in the third quarter.
Software . . . Deutsche maintaining Buy on Electronic Arts due to conservative accounting policies and would be buyers on weakness
Raymond James upgraded Cognos to Outperform from Mkt Perform, saying they see positive implications for COGN following BOBJ's acquisition of Crystal; while the acquisition creates a bigger competitor. The firm thinks Crystal has much more product overlap than what BOBJ is prepared to admit, and the acquisition leaves several of BOBJ's weaknesses unaddressed. Target is 31.
Hyperion Solutions software selected by Symantec for quick and efficient financial consolidations and reporting from a single enterprise source.
Piper Jaffray upgraded Business Objects to Outperform from Market Perform and raised their target to $27 from $20. While they had previously been concerned with forward estimate revisions due to the greenfield nature of the Enterprise 6.0 sale, the margin improvement and growth prospects associated with the acquisition of Crystal Decisions make them much more confident the stock will see near-term positive momentum.
webMethods reported a 1st quarter loss of $0.12 per share, in line with the Reuters Research consensus of ($0.12); revenues fell 9.4% year/year to $43.2 mln vs the $42.6 million consensus. Company sees 2nd quarter pro forma loss of $0.06-0.12 versus consensus of a loss of $0.07 on revenues of $42-47 million, consensus is $43.6 million.
Acclaim, Activision, and THQ said that the SEC has requested information from them in connection with an investigation into video game manufacturers and distributors, according to their respective 8-Ks filed on Friday afternoon. The SEC investigation is a non-public, formal one and should not be construed as an indication that any violations of the law have occurred, according to the filings. Specifically, the investigation appears to be focused on certain accounting practices common to the interactive entertainment industry, with specific emphasis on revenue recognition, according to the filings. See below for each company's revenue recognition and allowance policy. While the investigation appears to be sector-wide, and not company specific, to date, neither Electronic Arts nor Take-Two have filed 8-Ks regarding this investigation. Expect Activision and THQI to address this issue during their respective earnings calls this week.
Anthony Gikas at USB Piper Jaffray feels the likelihood that the SEC inquiry is a result of fraud is "modest," given that current revenue reporting methods have been in practice for years and have been subject to numerous reviews and audits. "That said, the risk that video game publishers could be asked to restate revenue and earnings is real and could further pressure stocks at some point," Gikas said
Edward Maguire at Merrill Lynch said that Check Point Software’s overall results met consensus Wall Street expectations, product revenue of $54.8 million fell short of his forecast of $58.9 million. "At first glance, the second quarter results look solid overall but the revenue mix is a concern," Maguire said.
Check Point reported net income of $60.2 million, or 24 cents a share, down from 27 cents a share in the same period a year ago, but in line with the average analyst. Revenue fell 2.3 percent to $106.1 million, also matching analyst forecasts. The Internet security software company said it generated net cash flow of $73.1 million during the quarter, bringing total cash to nearly $1.5 billion.
Business Objects is acquiring Crystal Decisions for $820 million in a cash-and-stock deal. "This combination of two leaders in the business intelligence segment we interpret as a major step towards creating a clear leader, with a comprehensive product offering and broad geographical reach, and could create pressure on other vendors to take similar strategic action," noted Goldman Sachs.
Internet . . . Barron's suggests Chinese Internet stocks are in "over-heated" market. Barron's questions whether the recent appreciation of Chinese Internet stocks might be another bubble or the real thing. The companies mentioned are SOHU, China.com, SINA and Netease with all four now having market caps north of $1 billion. Despite these concerns, the article suggests these web portals ad revenues keep on growing at double digit percentage year over year growth. However, these stocks face "significant" risks and suggests the presence of an "overheated market" with a MDB Capital Group analyst recently downgrading his rating on SINA to hold on the basis of valuation.
Hot Items - Check out the "Hot Items" section on the front page of www.robblack.com (updated daily)
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