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Tuesday, August 01, 2006 12:26:41 AM
From Briefing.com: 4:20 pm : Stocks struggled to get any traction all day as last week's impressive rally prompted some modest profit-taking that carried into the close of trading for the month of July.
With August earmarked as the worst month for the S&P 500 over the last 15 years, according to The Stock Traders Almanac, buyers weren't exactly jumping at the chance to extend recent gains ahead of such historically seasonal weakness, especially following last week's average gains for the major indices of 3.3%.
Also, heading into what is expected to be a busy week of economic reports, the next FOMC meeting only eight days away, and the market's focus shifting back to "incoming" data, as roughly two-thirds of the S&P 500 have already reported quarterly earnings, the absence of notable market-moving news and industry leadership to support recent gains stalled momentum in stocks.
The sluggish start got little help from St. Louis Fed President Poole, who said before the opening bell that he still sees a 50% chance of another rate hike on August 8. Since that was slightly more hawkish than the roughly 35% chance being priced in by the fed funds futures, buyers stood on guard to see if upcoming commentary from voting Fed President Yellen echoed Poole's less certain outlook for a possible pause.
As trading worked its way through the New York lunch hour, Yellen saying the Fed is "close to the end of the road" with its tightening helped bonds stabilize and close relatively flat. However, she also acknowledged that there have been no signs of easing inflation pressures in the economic data which, with the Fed's favored gauge of inflation -- core PCE -- hitting the wires tomorrow morning (8:30 ET) only added to reluctance on the part of buyers.
Of the eight sectors trading lower, the lack of follow-through was most evident in the Industrials sector as AGCO Corp (AG 22.95 -2.75) missing forecasts and saying it expects FY06 sales to decline weighed heavily on farm equipment maker Deere & Co. (DE 72.57 -1.35). Another pullback in the transportation group, as a 1.5% rebound in oil prices continued to question valuations, also pushed the sector closer to breakeven for the year.
Crude oil futures climbed back above $74 per barrel after Israeli Prime Minister Olmert said that there will be no cease-fire until the Hezbollah threat is over. Unfortunately for the bulls struggling to extend market gains, the rebound in oil coupled with a 14% surge in natural gas futures to three-month highs amid heat wave warnings throughout much of the Midwest was only beneficial for the Energy sector, which reclaimed its lead over Telecom as this year's best performing sector.
With Health Care turning in the best performance in July (+5.4%), led by Merck (MRK 40.32 -0.80) hitting a 52-week high last Friday, consolidation throughout the drug space overshadowed a rebound in HMOs fueled by a better than expected Q2 report from Humana (HUM 55.84 +4.30).
Consumer Staples was also in focus after Wal-Mart (WMT 44.55 +0.09) said July same-store sales rose 2.4%, toward the high end of its expected 1-3% range, reminding investors that while consumer spending may be slowing, it isn't declining. Be that as it may, as trading at month's end so often dictates, especially after such a huge run-up last week, profit-taking in Tobacco -- the third best performing S&P industry group in July -- as well as Avon Products (AVP 29.00 -3.81) plunging 10% after posting a 35% decline in operating profit, prevented the sector from showing up Monday as a defensive play in a down market. DJ30 -34.02 NASDAQ -2.67 SP500 -1.89 NASDAQ Dec/Adv/Vol 1463/1569/1.62 bln NYSE Dec/Adv/Vol 1580/1653/1.62 bln
5:44PM Brooks Automation announces it files amended Form 10-K for 2005, driven by matters related to past stock option gr (BRKS) 11.29 +0.07 : Driven by matters related to past stock option grants, the co has revised its financial statements for the fiscal years 1996 through 2005 to record cumulative additional non-cash, pre-tax stock-based compensation expense of $64.5 million. Additionally the Company recorded a $1.8 million income tax benefit related to the above charges. The co will hold a conference call on Tuesday, August 1, 2006 at 9:00 a.m. Eastern to discuss the impact of the restatement contained in the filing and the schedule of future filings.
5:29PM Market Internals (MKTIN) : The Dow decreased 0.30% closing at 11186, the Nasdaq was down 0.13% to finish at 2091, and the S&P was down 0.15% to finish at 1277. Leading sectors included: coal and consumable fuels +7.6%, diversified metals and mining +5.7%, tires and rubber +4.1%, oil and gas equip +2.5%, application software +2.1%. Lagging sectors included: personal products -7.5%, wireless telecom services --2.9%, construction materials -2.6%, home furnishings -2.3%, homebuilding --1.7%. Today's movement came from lower than avg. volume (NYSE 1617, vs. closing avg of 1708; Nasdaq 1693, vs. 2009), with advancers outpacing decliners (NYSE 1637/1609; Nasdaq 1582/1444, and with NYSE new highs outpacing new lows and Nasdaq new lows outpacing new highs (NYSE 94/59, Nasdaq 78/79).
4:47PM AMIS Holdings subsidiary to acquire select businesses of NanoAmp Solutions for $21 mln (AMIS) 9.38 -0.57 : AMI Semiconductor, subsidiary of AMIS, today announced that it entered into an agreement to acquire the Ultra Low Power six-transistor SRAM and medical System-on-Chip A.S.I.C. businesses of NanoAmp Solutions for approx $21 mln in cash, plus an adjustment for closing inventory of the business. The businesses to be acquired consist primarily of designs that are still in development; however, the SRAM business is currently providing revenue, anticipated at approx $7 - $8 mln for all of 2006. For the balance of 2006, the acquisition is expected to be neutral to non-GAAP earnings per share and be accretive by $0.01 per share in 2007.
4:30PM Photronics lowers Q3 guidance; sees EPS of $0.09-0.11 vs $0.29 Reuters consensus; revs $106-107 mln vs $123.11 mln Reuters consensus (PLAB) 13.97 -0.32 : Co lowers Q3 guidance; sees EPS of $0.09-0.11 ex items vs $0.29 Reuters consensus; revs $106-107 mln vs $123.11 mln consensus, down from $119-124 mln prior guidance. PLAB stated that the primary reason for the revenue and earnings revision was the result of a shortfall in flat panel display (F.P.D.) mask orders and shipments compared to the Company's initial forecasts. The slower than forecasted growth rate in the demand for F.P.D. mask technology and services was experienced in both the Korean and Taiwanese regions. The co believes that the impact of current market dynamics will be short-term in nature and that F.P.D. design activity continues to be focused on leveraging new manufacturing capability coming on-line from Generation 7 and Generation 8 facilities in both Korea and Taiwan.
1:09 pm Avon Products (AVP)
29.53 -3.28: "Avon calling" was once a popular tag-line for the multi-national beauty supplies company. In looking at Avon's stock today, however, the more appropriate tag-line would seem to be "Avon falling," as a disappointing second quarter earnings report has shares of AVP down 10% in today's session. Regrettably for shareholders, the response appears warranted.
Avon registered a 35% decline in operating profit, a 650 basis point contraction in operating margins, and a 54% drop in net income to $150.9 million, or $0.33 per diluted share. For good measure, the latter was four cents shy of the Reuters Estimates consensus estimate. Total revenue was up 5.0% to $2.10 billion and active representatives increased 4.0%, but those gains were aided by Avon's acquisition of a licensee in Colombia in late-2005.
The sharp drop in net income was the result of several items that included $49 million of restructuring costs, stock-option expensing, a 128% increase in interest expense, and a 78% increase in advertising spending. Operating profit was down at a double-digit percentage rate versus the year-ago in five of six geographic segments while its China segment suffered an operating loss of $4.3 million.
The number of active representatives in North America and Asia Pacific declined 7.0% and 14.0%, respectively, with some offset provided by Latin America and Central and Eastern Europe where active representatives increased 13.0% and 7.0%. China had 114,000 certified sales promoters and more than 31,000 applicants are currently engaged in a sales certification process.
In a Bargain Hunting piece we penned this past April, we discussed Avon's contrarian appeal. In doing so, we indicated that a combination of accelerating top-line growth and margin expansion would be the real catalysts that would validate the success of the company's turnaround plan. That combination wasn't seen in the June quarter and Avon didn't delude one into thinking it will be seen in the near-term as it acknowledged it was in the early days of its turnaround and dubbed 2006 "a transition year." While we still see appeal in Avon as a contrarian play, it is clear that the operating environment for Avon right now isn't a pretty picture. Accordingly, we'd continue to hold the stock, but we wouldn't be averaging down at this point.
--Patrick J. O'Hare, Briefing.com
12:06 pm UAL Corp. (UAUA)
27.59 +0.07: Shares in UAL Corp., parent company of United Air Lines Inc., saw some gains Monday morning as some chose to view better-than-expected revenues as a sign the company is recovering from turbulence. The company said that in the latest period it saw its first profit in six years.
The company, which has a market cap of about $2.73 billion, reported second quarter earnings of $1.09 per share, excluding non-recurring items, $0.03 worse than a Reuters Estimates consensus of $1.12. Revenues rose 15.6% year over year to $5.11 billion versus consensus of $5.03 billion. The earnings made formal preliminary results announced about a week ago.
Company Chairman and CEO Glenn Tilton said the second quarter results speak to the progress the company made to reduce costs, optimize revenue, and improve customer experiences. The Elk Grove Village, Ill.-based company, which emerged from bankruptcy in February, also lowered its full year 2006 consolidated capacity guidance to +2.5 to 3%.
At around $27 a share, UAL's stock price is about 25% lower than where it started trading early in the year, and it's unlikely the tailspin will reverse. Briefing.com mentioned in a Bull vs. Bear column in early February that we hold a bearish opinion on the stock, and that continues to be the case. True, United cut down its expense structure by paring about 30% of its employees, reducing its capacity by 20%, instituting pay cuts, and eliminating its benefit pension plan. It also improved its financial situation by carrying $8 billion less in debt than in December 2002. Despite all of this though, United faces some daunting challenges ahead.
Major airlines have raised ticket prices several times already this year to offset skyrocketing fuel prices. The question now is how much airlines, including United, will be able to raise seat prices in the face of a weakening economy and a slower travel period. Furthermore, United is one of the airlines that has the most exposure to rising fuel prices as it was one of the least hedged going into the fuel market rally.
--Christine Marie Nielsen, Briefing.com
10:33 am Tyson (TSN)
13.69 -0.88: Chicken, beef, and pork producer Tyson Foods Inc. left investors clucking Monday when it said continued weaker performance in its chicken and beef sectors caused it to post a loss in the latest quarter. The company, which has a market cap of about $5.17 billion, also issued downside guidance for the full year of 2006.
The company, which is the largest U.S. meat processor, said it saw losses of $0.07 per share, excluding non-recurring items, $0.03 worse than Reuters Estimates consensus of ($0.04). Revenues fell 4.8% year over year to $6.38 billion versus consensus of $6.64 billion. The company said in a press release that oversupply of chicken and forward sales of leg quarters led to lower sales prices. It added that beef results rose in May and June, but not enough to offset April performance.
The company issued downside guidance for the full year of 2006, seeing losses of $0.41 to $0.51 versus losses of $0.04 consensus. Tyson said Canadian operations "continue to struggle," as the Canadian dollar remains strong. The company also said it has started a review of its tax account balances after noticing differences in deferred tax liabilities during renewal of some leases.
Rival poultry producers Pilgrim's Pride Corp. (PPC) and Sanderson Farms Inc. (SAFM) have also been reporting declines in sales and margins as a result of a glut of animals, due in part to avian flu fears. These concerns have caused Tyson to lose over 21% in share price over the last 52 weeks.
With trailing 12-month earnings of about 31.95, the Springdale, Ark.-based company is currently at over twice the industry average. Unattractive fundamental factors, including about $3.99 billion in company debt in the most recent quarter and renewed fears of mad cow disease which led South Korea and Japan to close their borders to beef imports, make the stock an unattractive purchase at this time.
--Christine Marie Nielsen, Briefing.com
10:17 am Exelon (EXC)
58.45 +0.10: Exelon Corp., which distributes electricity to more than 5 million customers in northern Illinois and in southeastern Pennsylvania through its subsidiaries Commonwealth Edison (ComEd) and PECO Energy, reported a higher second quarter profit on Monday, helped by higher margins on wholesale market sales. Investors, in turn, lifted shares of the Chicago-based power company, which were up slightly in early trading.
Specifically for the quarter, Exelon earned $644 million, or $0.95 per share, up from $514 million, or $0.76 per share. Excluding non-recurring items, the company would have earned $0.85 per share - five-cents better than the Reuters Estimates consensus. Revenues totaled $3.69 billion, up 6% from $3.48 billion last year.
The company, which is in the process of acquiring Public Service Enterprise Group (PEG), said it benefited from higher margins on wholesale market sales and increased output from Exelon Generation, as well as higher electric rates at PECO. Generation margins continued to improve over last year, along with core growth in its delivery service business, the company said. These positive factors, however, were partially offset by the effects of unfavorable weather conditions in the ComEd and PECO service areas, including Chicago and Philadelphia.
Based on its strong performance, which supports our positive view on the stock, Exelon reaffirmed its full-year earnings forecast of $3 to $3.30 per share. Analysts are looking for a profit of $3.27 per share, according to Reuters Estimates. At the current price, the company's shares are trading at 17.8x this year's projected earnings and boast a dividend yield of 2.7%.
--Richard Jahnke, Briefing.com
10:05 am Pfizer (PFE)
26.35 +0.24: Whenever a company makes a major announcement after the close of trading on a Friday, it is usually done for one of two reasons - to try and lessen the trading impact of a negative announcement or to give the market added time (i.e. over the weekend) to digest the ramifications of the announcement. The latter, we suspect, was the intended action by Dow component Pfizer, which announced after Friday's close that it has named a new CEO.
Pfizer's move isn't a minor one by any stretch of the imagination given its leadership position in the pharmaceutical industry and its status as a widely-held stock by professional and retail investors alike. Although it was well-known that Pfizer was considering successor candidates to Hank McKinnell, who has been at Pfizer for 35 years, it was a surprise that the appointment of the new CEO, Jeffrey B. Kindler, is effective immediately. McKinnell, who has been under fire for Pfizer's sagging stock price (down nearly 50% from its April '99 high) and his generous pay package, will remain as chairman of the board until he retires in February 2007.
Like other drug companies, Pfizer has faced patent expiration issues that have weighed heavily on the performance of its stock along with the allegations that use of painkillers Celebrex and Bextra put patients at increased risk of a cardiovascular event. A slower pace of earnings growth has been a telltale signal that the company's fortunes have deteriorated. In time, then, Kindler's appointment may ultimately be viewed as the inflection point that restored Pfizer to blue chip prominence - or not.
Kindler joined Pfizer in 2002 and had been serving as its vice chairman and general counsel. The line on him is that he is smart, and is more than just a lawyer, as he played a key role in driving McDonald's (MCD) decision to buy Boston Market Corporation and then restoring the bankrupt company to profitability before joining Pfizer.
His success at Boston Market notwithstanding, press reports indicate that there is some concern that Kindler lacks the degree of operational experience necessary to get Pfizer turned around. Again, time will tell if that is the case, but we would argue that it is a plus for Pfizer that he doesn't have a lot of experience at the company. At times like these, it often helps to have someone whose thought process about Pfizer might not be as sharply-ingrained as that of his predecessor. That consideration may have ultimately worked against other successor frontrunners - Karen Katen and David Shedlarz - who are longtime Pfizer veterans.
In the press release announcing the CEO change, Kindler is quoted as saying , "we will transform virtually every aspect of how we do business, focusing on actions that crate and sustain value for our shareholders." To his benefit, Kindler is working off a relatively low-priced stock base, so any incremental improvement from an operational standpoint could go a long way to boosting confidence in Kindler and the stock, which is up modestly following news of his appointment.
--Patrick J. O'Hare, Briefing.com
09:15 am Humana (HUM)
51.54: Humana, one of the nation's leading health care providers, said earnings for its fiscal second quarter rose 10%, due to strong results in its Medicare Advantage, commercial, and Tricare businesses. The Louisville, Kentucky-based company also backed its full-year guidance, sending shares sharply higher in pre-market activity. The stock, which has traded between $39.25 and $58.26 over the past 52 weeks, is down about 5% since the start of the year.
For the most recent quarter, Humana reported net income of $89.5 million, or $0.53 per share, up from $81.4 million, or $0.49 per share, in the year ago period. That was $0.18 better than the Reuters Estimates consensus of $0.35 per share. Revenues totaled $5.41 billion, up 52% from $3.55 billion last year, with total premium and administrative service fees also up 52% compared to the prior year period. The company said the increase was driven by higher enrollment in its Medicare Advantage plans and new revenue from stand alone prescription drug plans for Medicare beneficiaries.
Meanwhile, the company's medical cost ratio increased 130 basis points to 85.1%, as improvements in the commercial segment were offset by a higher government segment due to the introduction of Medicare prescription drug plans.
Based on the latest results, Humana reaffirmed its full-year earnings guidance of $2.82 to $2.88 per share on revenue between $21 and $22 billion. Analysts on average are expecting earnings per share of $2.78 on $21.24 billion in revenue, according to Reuters Estimates. For the current quarter, the company projected earnings in the range of $0.95 to $1 per share, versus the consensus estimate of $0.98 per share.
Overall, Humana reported a solid quarter, reaffirming our Market Weight rating on the Health Care sector. Humana shares are currently trading at 18.5x forward earnings, compared to 11.7x for Aetna (AET), 16.2x for Unitedhealth Group (UNH), and 15.8x for WellPoint (WLP).
--Richard Jahnke, Briefing.com
09:05 am Playtex Products Inc. (PYX)
10.15: Shares in Playtex Products Inc. were up over 15% in premarket trade after the personal products company posted better than expected profits for the period Monday thanks to consumer summertime needs. The company said its Banana Boat sunscreen products and Wet Ones hand and face wipes both saw strong sales. Playtex also reiterated its guidance for 2006.
Westport, Connecticut-based Playtex said its saw second quarter earnings of $0.17 per share, $0.02 better than Reuters Estimates consensus of $0.15. Revenues rose 10.1% year over year to $180.3 million versus consensus of $171.8 million.
Excluding net sales of the brands divested in 2005, the company - founded in 1932 - said net sales for 2006 are seen being up mid -single digits versus the prior year. On a reported basis, net sales for 2006 are expected to be down low-single digits versus the prior year due to $48.6 million of divested brand sales in 2005. The company expects 2006 operating income to be between $103 to $108 million.
With a beta of only 0.42, Playtex is 58% less volatile than the market, and that should put the stock on the radar screens of investors as the question of "will they or won't they" continues to loom regarding Federal Reserve rate hikes. Companies selling items that consumers have a hard time living without remain steady in these uncertain times.
In addition, Playtex focuses on building value for shareholders by improving its fundamentals through business process improvements and a focus on cost and debt reduction. With the stock trading at a significant premium to its closest competitors though, investors should wait for a pullback in price before getting involved in the issue.
--Christine Marie Nielsen, Briefing.com
08:29 am Wal-Mart (WMT)
44.46: The retail community will be reporting same-store sales results for July this Thursday. Over the weekend Wal-Mart provided an encouraging indication that industry-wide results should be better than most people were inclined to believe just a few weeks ago.
In a pre-recorded call, Wal-Mart said its same-store sales in the U.S. for the four-week period ended July 28 are estimated to be up 2.4%. That is above the midpoint of the company's prior guidance range of 1-3% and it marks an acceleration from the 1.2% growth rate achieved in June.
There was no other color provided on the call, but various reports are suggesting Wal-Mart benefited from earlier-than-normal back-to-school promotions. With hotter-than-normal temperatures blanketing the U.S. in recent weeks, it stands to reason that strong sales of seasonal merchandise might have also played a role.
We'll know more on Thursday, but for now, Wal-Mart's update is a constructive way to begin the week and a clear-cut signal that consumer spending, while slowing in the face of rising gas prices and interest rates, isn't grinding to a halt. It is an added signal, too, that reinforces our belief that WMT, at 16.3x trailing twelve month earnings, is attractively-priced for the patient-minded investor.
In a separate item, twenty-five workers at a Wal-Mart store in China have reportedly organized to form a union - a move that it is being billed as a sign of things to come in China for Wal-Mart, which shuns the idea of unionization in the U.S. This is a development worth watching as it unfolds.
--Patrick J. O'Hare, Briefing.com
09:16 am Insituform Tech: Morgan Joseph upgrades Hold to Buy. Target $27. Firm upgrades saying despite reporting EPS below their estimate, they believe INSU's 2Q06 results are an inflection point signaling major issues in the co's tunneling business are mostly over. The firm says problem projects that have been plaguing INSU's profitability seem to finally be completed and the co's current tunneling backlog consists of higher margined work, bid with a much more disciplined process.
09:14 am Rightnow Tech: Robert W. Baird upgrades Neutral to Outperform. Target $17. Firm ups rating saying that the recent sell-off presents a good buying opportunity. The firm believes that on-demand software is still in the early stages of growth, and that RightNow is well positioned within the industry.
09:13 am Cisco Systems: UBS reiterates Neutral. Target $23 to $21. Firm cuts price tgt expecting CSCO to report in line with their ests of $7.29 bln in sales and $0.28-0.29 EPS with strength likely from S.M.Bs and S.F.A. THe firm says various datapoints in the food chain imply that QoQ strength in IP Tel, WLAN, Home Networking, set top boxes and routing with help CSCO come in line with their sales est. The firm says given the deteriorating outlook by V.A.Rs in their recent survey and somewhat of a Neutral view from food chain datapoints they are lowering their sales outlook for FY07 to 11.5% YoY growth from 12.4% previously. The firm says CSCO may also be considering strategic actions for part of its Optical business.
09:11 am SLM Corp: Prudential initiates Overweight. Target $60. Firm initiates saying they have a positive view on Sallie Mae's long-term growth outlook and franchise value for three reasons. First, they expect Sallie Mae to continue to benefit from its strong incumbent position in the federally guaranteed student loan business due to a high entry barrier. Second, they believe that Sallie Mae can successfully execute its diversification into private education loans and debt management operations and continue to generate 15%-20% EPS growth.
09:10 am Allegheny Energy: RBC Capital Mkts reiterates Outperform. Target $43 to $48. Firm raises price tgt following Q2 results. The firm notes the continued strong financial performance, on-going plant performance improvements, actual realization of rate increase in PA, agreement with MD regulators on how best to phase in competitive rates, attainment of investment grade credit, and dividend initiation.
09:06 am Pacific Sunwear: BB&T Capital Mkts downgrades Buy to Hold. Firm downgrades saying recent anecdotes and channel checks suggest that sales are trending below plan in July which, coupled with the speculation of an impending inventory write-down in Q2, strongly hint at another earnings revision and/or a sales outlook that remains ambiguous.
09:06 am SanDisk: CIBC Wrld Mkts upgrades Sector Perform to Sector Outperform. Target $60. Firm ups rating following its proposed acquisition of FLSH. Firm believes this merger is a perfect complement, and leaves no doubt as to who the flash king is. On its face, firm says the deal seems extremely attractive for SNDK, as it adds FLSH's imposing system-level mobile technologies and its disruptive X4 IP to SNDK's already-dominant quiver, replete with NAND manufacturing capability, rich IP, and ubiquitous branding. Firm thinks the merger could add about 20 cents to SNDK's FY07 EPS, and says the addition of FLSH makes SNDK a much more formidable NAND force. Firm would be strong buyers at this level.
09:04 am Apple Computer: Banc of America Sec upgrades Neutral to Buy. Firm ups rating and price tgt saying that channel checks show higher end demand for MacBooks than their previous checks. Firm is encouraged that Street expectations have moved lower for iPods, which was part of the reason for their downgrade in Dec 05. Firm sees the same product introduction schedule as they have mentioned previously - a new Nano late in the Sept Q and modestly upgraded Video in Q4, in time for a holiday demand. Further EPS upside potential from iPod of $0.08-0.12. Also, firm is not including the impact of an AAPL phone, which could be $0.03-0.05 in F07.
09:02 am Phelps Dodge: Prudential upgrades Underweight to Overweight. Target $60 to $110. Firm ups rating and price tgt as they believe mid-summer copper markets appear better than expected, the odds will likely shift towards the co becoming a takeover target if it stands alone without completing an Inco buyout or if it combines with Inco as well, and shares will likely rebound if it doesn't succeed in buying Inco as investors don't like the goodwill, new shares, or added debt, in their view
With August earmarked as the worst month for the S&P 500 over the last 15 years, according to The Stock Traders Almanac, buyers weren't exactly jumping at the chance to extend recent gains ahead of such historically seasonal weakness, especially following last week's average gains for the major indices of 3.3%.
Also, heading into what is expected to be a busy week of economic reports, the next FOMC meeting only eight days away, and the market's focus shifting back to "incoming" data, as roughly two-thirds of the S&P 500 have already reported quarterly earnings, the absence of notable market-moving news and industry leadership to support recent gains stalled momentum in stocks.
The sluggish start got little help from St. Louis Fed President Poole, who said before the opening bell that he still sees a 50% chance of another rate hike on August 8. Since that was slightly more hawkish than the roughly 35% chance being priced in by the fed funds futures, buyers stood on guard to see if upcoming commentary from voting Fed President Yellen echoed Poole's less certain outlook for a possible pause.
As trading worked its way through the New York lunch hour, Yellen saying the Fed is "close to the end of the road" with its tightening helped bonds stabilize and close relatively flat. However, she also acknowledged that there have been no signs of easing inflation pressures in the economic data which, with the Fed's favored gauge of inflation -- core PCE -- hitting the wires tomorrow morning (8:30 ET) only added to reluctance on the part of buyers.
Of the eight sectors trading lower, the lack of follow-through was most evident in the Industrials sector as AGCO Corp (AG 22.95 -2.75) missing forecasts and saying it expects FY06 sales to decline weighed heavily on farm equipment maker Deere & Co. (DE 72.57 -1.35). Another pullback in the transportation group, as a 1.5% rebound in oil prices continued to question valuations, also pushed the sector closer to breakeven for the year.
Crude oil futures climbed back above $74 per barrel after Israeli Prime Minister Olmert said that there will be no cease-fire until the Hezbollah threat is over. Unfortunately for the bulls struggling to extend market gains, the rebound in oil coupled with a 14% surge in natural gas futures to three-month highs amid heat wave warnings throughout much of the Midwest was only beneficial for the Energy sector, which reclaimed its lead over Telecom as this year's best performing sector.
With Health Care turning in the best performance in July (+5.4%), led by Merck (MRK 40.32 -0.80) hitting a 52-week high last Friday, consolidation throughout the drug space overshadowed a rebound in HMOs fueled by a better than expected Q2 report from Humana (HUM 55.84 +4.30).
Consumer Staples was also in focus after Wal-Mart (WMT 44.55 +0.09) said July same-store sales rose 2.4%, toward the high end of its expected 1-3% range, reminding investors that while consumer spending may be slowing, it isn't declining. Be that as it may, as trading at month's end so often dictates, especially after such a huge run-up last week, profit-taking in Tobacco -- the third best performing S&P industry group in July -- as well as Avon Products (AVP 29.00 -3.81) plunging 10% after posting a 35% decline in operating profit, prevented the sector from showing up Monday as a defensive play in a down market. DJ30 -34.02 NASDAQ -2.67 SP500 -1.89 NASDAQ Dec/Adv/Vol 1463/1569/1.62 bln NYSE Dec/Adv/Vol 1580/1653/1.62 bln
5:44PM Brooks Automation announces it files amended Form 10-K for 2005, driven by matters related to past stock option gr (BRKS) 11.29 +0.07 : Driven by matters related to past stock option grants, the co has revised its financial statements for the fiscal years 1996 through 2005 to record cumulative additional non-cash, pre-tax stock-based compensation expense of $64.5 million. Additionally the Company recorded a $1.8 million income tax benefit related to the above charges. The co will hold a conference call on Tuesday, August 1, 2006 at 9:00 a.m. Eastern to discuss the impact of the restatement contained in the filing and the schedule of future filings.
5:29PM Market Internals (MKTIN) : The Dow decreased 0.30% closing at 11186, the Nasdaq was down 0.13% to finish at 2091, and the S&P was down 0.15% to finish at 1277. Leading sectors included: coal and consumable fuels +7.6%, diversified metals and mining +5.7%, tires and rubber +4.1%, oil and gas equip +2.5%, application software +2.1%. Lagging sectors included: personal products -7.5%, wireless telecom services --2.9%, construction materials -2.6%, home furnishings -2.3%, homebuilding --1.7%. Today's movement came from lower than avg. volume (NYSE 1617, vs. closing avg of 1708; Nasdaq 1693, vs. 2009), with advancers outpacing decliners (NYSE 1637/1609; Nasdaq 1582/1444, and with NYSE new highs outpacing new lows and Nasdaq new lows outpacing new highs (NYSE 94/59, Nasdaq 78/79).
4:47PM AMIS Holdings subsidiary to acquire select businesses of NanoAmp Solutions for $21 mln (AMIS) 9.38 -0.57 : AMI Semiconductor, subsidiary of AMIS, today announced that it entered into an agreement to acquire the Ultra Low Power six-transistor SRAM and medical System-on-Chip A.S.I.C. businesses of NanoAmp Solutions for approx $21 mln in cash, plus an adjustment for closing inventory of the business. The businesses to be acquired consist primarily of designs that are still in development; however, the SRAM business is currently providing revenue, anticipated at approx $7 - $8 mln for all of 2006. For the balance of 2006, the acquisition is expected to be neutral to non-GAAP earnings per share and be accretive by $0.01 per share in 2007.
4:30PM Photronics lowers Q3 guidance; sees EPS of $0.09-0.11 vs $0.29 Reuters consensus; revs $106-107 mln vs $123.11 mln Reuters consensus (PLAB) 13.97 -0.32 : Co lowers Q3 guidance; sees EPS of $0.09-0.11 ex items vs $0.29 Reuters consensus; revs $106-107 mln vs $123.11 mln consensus, down from $119-124 mln prior guidance. PLAB stated that the primary reason for the revenue and earnings revision was the result of a shortfall in flat panel display (F.P.D.) mask orders and shipments compared to the Company's initial forecasts. The slower than forecasted growth rate in the demand for F.P.D. mask technology and services was experienced in both the Korean and Taiwanese regions. The co believes that the impact of current market dynamics will be short-term in nature and that F.P.D. design activity continues to be focused on leveraging new manufacturing capability coming on-line from Generation 7 and Generation 8 facilities in both Korea and Taiwan.
1:09 pm Avon Products (AVP)
29.53 -3.28: "Avon calling" was once a popular tag-line for the multi-national beauty supplies company. In looking at Avon's stock today, however, the more appropriate tag-line would seem to be "Avon falling," as a disappointing second quarter earnings report has shares of AVP down 10% in today's session. Regrettably for shareholders, the response appears warranted.
Avon registered a 35% decline in operating profit, a 650 basis point contraction in operating margins, and a 54% drop in net income to $150.9 million, or $0.33 per diluted share. For good measure, the latter was four cents shy of the Reuters Estimates consensus estimate. Total revenue was up 5.0% to $2.10 billion and active representatives increased 4.0%, but those gains were aided by Avon's acquisition of a licensee in Colombia in late-2005.
The sharp drop in net income was the result of several items that included $49 million of restructuring costs, stock-option expensing, a 128% increase in interest expense, and a 78% increase in advertising spending. Operating profit was down at a double-digit percentage rate versus the year-ago in five of six geographic segments while its China segment suffered an operating loss of $4.3 million.
The number of active representatives in North America and Asia Pacific declined 7.0% and 14.0%, respectively, with some offset provided by Latin America and Central and Eastern Europe where active representatives increased 13.0% and 7.0%. China had 114,000 certified sales promoters and more than 31,000 applicants are currently engaged in a sales certification process.
In a Bargain Hunting piece we penned this past April, we discussed Avon's contrarian appeal. In doing so, we indicated that a combination of accelerating top-line growth and margin expansion would be the real catalysts that would validate the success of the company's turnaround plan. That combination wasn't seen in the June quarter and Avon didn't delude one into thinking it will be seen in the near-term as it acknowledged it was in the early days of its turnaround and dubbed 2006 "a transition year." While we still see appeal in Avon as a contrarian play, it is clear that the operating environment for Avon right now isn't a pretty picture. Accordingly, we'd continue to hold the stock, but we wouldn't be averaging down at this point.
--Patrick J. O'Hare, Briefing.com
12:06 pm UAL Corp. (UAUA)
27.59 +0.07: Shares in UAL Corp., parent company of United Air Lines Inc., saw some gains Monday morning as some chose to view better-than-expected revenues as a sign the company is recovering from turbulence. The company said that in the latest period it saw its first profit in six years.
The company, which has a market cap of about $2.73 billion, reported second quarter earnings of $1.09 per share, excluding non-recurring items, $0.03 worse than a Reuters Estimates consensus of $1.12. Revenues rose 15.6% year over year to $5.11 billion versus consensus of $5.03 billion. The earnings made formal preliminary results announced about a week ago.
Company Chairman and CEO Glenn Tilton said the second quarter results speak to the progress the company made to reduce costs, optimize revenue, and improve customer experiences. The Elk Grove Village, Ill.-based company, which emerged from bankruptcy in February, also lowered its full year 2006 consolidated capacity guidance to +2.5 to 3%.
At around $27 a share, UAL's stock price is about 25% lower than where it started trading early in the year, and it's unlikely the tailspin will reverse. Briefing.com mentioned in a Bull vs. Bear column in early February that we hold a bearish opinion on the stock, and that continues to be the case. True, United cut down its expense structure by paring about 30% of its employees, reducing its capacity by 20%, instituting pay cuts, and eliminating its benefit pension plan. It also improved its financial situation by carrying $8 billion less in debt than in December 2002. Despite all of this though, United faces some daunting challenges ahead.
Major airlines have raised ticket prices several times already this year to offset skyrocketing fuel prices. The question now is how much airlines, including United, will be able to raise seat prices in the face of a weakening economy and a slower travel period. Furthermore, United is one of the airlines that has the most exposure to rising fuel prices as it was one of the least hedged going into the fuel market rally.
--Christine Marie Nielsen, Briefing.com
10:33 am Tyson (TSN)
13.69 -0.88: Chicken, beef, and pork producer Tyson Foods Inc. left investors clucking Monday when it said continued weaker performance in its chicken and beef sectors caused it to post a loss in the latest quarter. The company, which has a market cap of about $5.17 billion, also issued downside guidance for the full year of 2006.
The company, which is the largest U.S. meat processor, said it saw losses of $0.07 per share, excluding non-recurring items, $0.03 worse than Reuters Estimates consensus of ($0.04). Revenues fell 4.8% year over year to $6.38 billion versus consensus of $6.64 billion. The company said in a press release that oversupply of chicken and forward sales of leg quarters led to lower sales prices. It added that beef results rose in May and June, but not enough to offset April performance.
The company issued downside guidance for the full year of 2006, seeing losses of $0.41 to $0.51 versus losses of $0.04 consensus. Tyson said Canadian operations "continue to struggle," as the Canadian dollar remains strong. The company also said it has started a review of its tax account balances after noticing differences in deferred tax liabilities during renewal of some leases.
Rival poultry producers Pilgrim's Pride Corp. (PPC) and Sanderson Farms Inc. (SAFM) have also been reporting declines in sales and margins as a result of a glut of animals, due in part to avian flu fears. These concerns have caused Tyson to lose over 21% in share price over the last 52 weeks.
With trailing 12-month earnings of about 31.95, the Springdale, Ark.-based company is currently at over twice the industry average. Unattractive fundamental factors, including about $3.99 billion in company debt in the most recent quarter and renewed fears of mad cow disease which led South Korea and Japan to close their borders to beef imports, make the stock an unattractive purchase at this time.
--Christine Marie Nielsen, Briefing.com
10:17 am Exelon (EXC)
58.45 +0.10: Exelon Corp., which distributes electricity to more than 5 million customers in northern Illinois and in southeastern Pennsylvania through its subsidiaries Commonwealth Edison (ComEd) and PECO Energy, reported a higher second quarter profit on Monday, helped by higher margins on wholesale market sales. Investors, in turn, lifted shares of the Chicago-based power company, which were up slightly in early trading.
Specifically for the quarter, Exelon earned $644 million, or $0.95 per share, up from $514 million, or $0.76 per share. Excluding non-recurring items, the company would have earned $0.85 per share - five-cents better than the Reuters Estimates consensus. Revenues totaled $3.69 billion, up 6% from $3.48 billion last year.
The company, which is in the process of acquiring Public Service Enterprise Group (PEG), said it benefited from higher margins on wholesale market sales and increased output from Exelon Generation, as well as higher electric rates at PECO. Generation margins continued to improve over last year, along with core growth in its delivery service business, the company said. These positive factors, however, were partially offset by the effects of unfavorable weather conditions in the ComEd and PECO service areas, including Chicago and Philadelphia.
Based on its strong performance, which supports our positive view on the stock, Exelon reaffirmed its full-year earnings forecast of $3 to $3.30 per share. Analysts are looking for a profit of $3.27 per share, according to Reuters Estimates. At the current price, the company's shares are trading at 17.8x this year's projected earnings and boast a dividend yield of 2.7%.
--Richard Jahnke, Briefing.com
10:05 am Pfizer (PFE)
26.35 +0.24: Whenever a company makes a major announcement after the close of trading on a Friday, it is usually done for one of two reasons - to try and lessen the trading impact of a negative announcement or to give the market added time (i.e. over the weekend) to digest the ramifications of the announcement. The latter, we suspect, was the intended action by Dow component Pfizer, which announced after Friday's close that it has named a new CEO.
Pfizer's move isn't a minor one by any stretch of the imagination given its leadership position in the pharmaceutical industry and its status as a widely-held stock by professional and retail investors alike. Although it was well-known that Pfizer was considering successor candidates to Hank McKinnell, who has been at Pfizer for 35 years, it was a surprise that the appointment of the new CEO, Jeffrey B. Kindler, is effective immediately. McKinnell, who has been under fire for Pfizer's sagging stock price (down nearly 50% from its April '99 high) and his generous pay package, will remain as chairman of the board until he retires in February 2007.
Like other drug companies, Pfizer has faced patent expiration issues that have weighed heavily on the performance of its stock along with the allegations that use of painkillers Celebrex and Bextra put patients at increased risk of a cardiovascular event. A slower pace of earnings growth has been a telltale signal that the company's fortunes have deteriorated. In time, then, Kindler's appointment may ultimately be viewed as the inflection point that restored Pfizer to blue chip prominence - or not.
Kindler joined Pfizer in 2002 and had been serving as its vice chairman and general counsel. The line on him is that he is smart, and is more than just a lawyer, as he played a key role in driving McDonald's (MCD) decision to buy Boston Market Corporation and then restoring the bankrupt company to profitability before joining Pfizer.
His success at Boston Market notwithstanding, press reports indicate that there is some concern that Kindler lacks the degree of operational experience necessary to get Pfizer turned around. Again, time will tell if that is the case, but we would argue that it is a plus for Pfizer that he doesn't have a lot of experience at the company. At times like these, it often helps to have someone whose thought process about Pfizer might not be as sharply-ingrained as that of his predecessor. That consideration may have ultimately worked against other successor frontrunners - Karen Katen and David Shedlarz - who are longtime Pfizer veterans.
In the press release announcing the CEO change, Kindler is quoted as saying , "we will transform virtually every aspect of how we do business, focusing on actions that crate and sustain value for our shareholders." To his benefit, Kindler is working off a relatively low-priced stock base, so any incremental improvement from an operational standpoint could go a long way to boosting confidence in Kindler and the stock, which is up modestly following news of his appointment.
--Patrick J. O'Hare, Briefing.com
09:15 am Humana (HUM)
51.54: Humana, one of the nation's leading health care providers, said earnings for its fiscal second quarter rose 10%, due to strong results in its Medicare Advantage, commercial, and Tricare businesses. The Louisville, Kentucky-based company also backed its full-year guidance, sending shares sharply higher in pre-market activity. The stock, which has traded between $39.25 and $58.26 over the past 52 weeks, is down about 5% since the start of the year.
For the most recent quarter, Humana reported net income of $89.5 million, or $0.53 per share, up from $81.4 million, or $0.49 per share, in the year ago period. That was $0.18 better than the Reuters Estimates consensus of $0.35 per share. Revenues totaled $5.41 billion, up 52% from $3.55 billion last year, with total premium and administrative service fees also up 52% compared to the prior year period. The company said the increase was driven by higher enrollment in its Medicare Advantage plans and new revenue from stand alone prescription drug plans for Medicare beneficiaries.
Meanwhile, the company's medical cost ratio increased 130 basis points to 85.1%, as improvements in the commercial segment were offset by a higher government segment due to the introduction of Medicare prescription drug plans.
Based on the latest results, Humana reaffirmed its full-year earnings guidance of $2.82 to $2.88 per share on revenue between $21 and $22 billion. Analysts on average are expecting earnings per share of $2.78 on $21.24 billion in revenue, according to Reuters Estimates. For the current quarter, the company projected earnings in the range of $0.95 to $1 per share, versus the consensus estimate of $0.98 per share.
Overall, Humana reported a solid quarter, reaffirming our Market Weight rating on the Health Care sector. Humana shares are currently trading at 18.5x forward earnings, compared to 11.7x for Aetna (AET), 16.2x for Unitedhealth Group (UNH), and 15.8x for WellPoint (WLP).
--Richard Jahnke, Briefing.com
09:05 am Playtex Products Inc. (PYX)
10.15: Shares in Playtex Products Inc. were up over 15% in premarket trade after the personal products company posted better than expected profits for the period Monday thanks to consumer summertime needs. The company said its Banana Boat sunscreen products and Wet Ones hand and face wipes both saw strong sales. Playtex also reiterated its guidance for 2006.
Westport, Connecticut-based Playtex said its saw second quarter earnings of $0.17 per share, $0.02 better than Reuters Estimates consensus of $0.15. Revenues rose 10.1% year over year to $180.3 million versus consensus of $171.8 million.
Excluding net sales of the brands divested in 2005, the company - founded in 1932 - said net sales for 2006 are seen being up mid -single digits versus the prior year. On a reported basis, net sales for 2006 are expected to be down low-single digits versus the prior year due to $48.6 million of divested brand sales in 2005. The company expects 2006 operating income to be between $103 to $108 million.
With a beta of only 0.42, Playtex is 58% less volatile than the market, and that should put the stock on the radar screens of investors as the question of "will they or won't they" continues to loom regarding Federal Reserve rate hikes. Companies selling items that consumers have a hard time living without remain steady in these uncertain times.
In addition, Playtex focuses on building value for shareholders by improving its fundamentals through business process improvements and a focus on cost and debt reduction. With the stock trading at a significant premium to its closest competitors though, investors should wait for a pullback in price before getting involved in the issue.
--Christine Marie Nielsen, Briefing.com
08:29 am Wal-Mart (WMT)
44.46: The retail community will be reporting same-store sales results for July this Thursday. Over the weekend Wal-Mart provided an encouraging indication that industry-wide results should be better than most people were inclined to believe just a few weeks ago.
In a pre-recorded call, Wal-Mart said its same-store sales in the U.S. for the four-week period ended July 28 are estimated to be up 2.4%. That is above the midpoint of the company's prior guidance range of 1-3% and it marks an acceleration from the 1.2% growth rate achieved in June.
There was no other color provided on the call, but various reports are suggesting Wal-Mart benefited from earlier-than-normal back-to-school promotions. With hotter-than-normal temperatures blanketing the U.S. in recent weeks, it stands to reason that strong sales of seasonal merchandise might have also played a role.
We'll know more on Thursday, but for now, Wal-Mart's update is a constructive way to begin the week and a clear-cut signal that consumer spending, while slowing in the face of rising gas prices and interest rates, isn't grinding to a halt. It is an added signal, too, that reinforces our belief that WMT, at 16.3x trailing twelve month earnings, is attractively-priced for the patient-minded investor.
In a separate item, twenty-five workers at a Wal-Mart store in China have reportedly organized to form a union - a move that it is being billed as a sign of things to come in China for Wal-Mart, which shuns the idea of unionization in the U.S. This is a development worth watching as it unfolds.
--Patrick J. O'Hare, Briefing.com
09:16 am Insituform Tech: Morgan Joseph upgrades Hold to Buy. Target $27. Firm upgrades saying despite reporting EPS below their estimate, they believe INSU's 2Q06 results are an inflection point signaling major issues in the co's tunneling business are mostly over. The firm says problem projects that have been plaguing INSU's profitability seem to finally be completed and the co's current tunneling backlog consists of higher margined work, bid with a much more disciplined process.
09:14 am Rightnow Tech: Robert W. Baird upgrades Neutral to Outperform. Target $17. Firm ups rating saying that the recent sell-off presents a good buying opportunity. The firm believes that on-demand software is still in the early stages of growth, and that RightNow is well positioned within the industry.
09:13 am Cisco Systems: UBS reiterates Neutral. Target $23 to $21. Firm cuts price tgt expecting CSCO to report in line with their ests of $7.29 bln in sales and $0.28-0.29 EPS with strength likely from S.M.Bs and S.F.A. THe firm says various datapoints in the food chain imply that QoQ strength in IP Tel, WLAN, Home Networking, set top boxes and routing with help CSCO come in line with their sales est. The firm says given the deteriorating outlook by V.A.Rs in their recent survey and somewhat of a Neutral view from food chain datapoints they are lowering their sales outlook for FY07 to 11.5% YoY growth from 12.4% previously. The firm says CSCO may also be considering strategic actions for part of its Optical business.
09:11 am SLM Corp: Prudential initiates Overweight. Target $60. Firm initiates saying they have a positive view on Sallie Mae's long-term growth outlook and franchise value for three reasons. First, they expect Sallie Mae to continue to benefit from its strong incumbent position in the federally guaranteed student loan business due to a high entry barrier. Second, they believe that Sallie Mae can successfully execute its diversification into private education loans and debt management operations and continue to generate 15%-20% EPS growth.
09:10 am Allegheny Energy: RBC Capital Mkts reiterates Outperform. Target $43 to $48. Firm raises price tgt following Q2 results. The firm notes the continued strong financial performance, on-going plant performance improvements, actual realization of rate increase in PA, agreement with MD regulators on how best to phase in competitive rates, attainment of investment grade credit, and dividend initiation.
09:06 am Pacific Sunwear: BB&T Capital Mkts downgrades Buy to Hold. Firm downgrades saying recent anecdotes and channel checks suggest that sales are trending below plan in July which, coupled with the speculation of an impending inventory write-down in Q2, strongly hint at another earnings revision and/or a sales outlook that remains ambiguous.
09:06 am SanDisk: CIBC Wrld Mkts upgrades Sector Perform to Sector Outperform. Target $60. Firm ups rating following its proposed acquisition of FLSH. Firm believes this merger is a perfect complement, and leaves no doubt as to who the flash king is. On its face, firm says the deal seems extremely attractive for SNDK, as it adds FLSH's imposing system-level mobile technologies and its disruptive X4 IP to SNDK's already-dominant quiver, replete with NAND manufacturing capability, rich IP, and ubiquitous branding. Firm thinks the merger could add about 20 cents to SNDK's FY07 EPS, and says the addition of FLSH makes SNDK a much more formidable NAND force. Firm would be strong buyers at this level.
09:04 am Apple Computer: Banc of America Sec upgrades Neutral to Buy. Firm ups rating and price tgt saying that channel checks show higher end demand for MacBooks than their previous checks. Firm is encouraged that Street expectations have moved lower for iPods, which was part of the reason for their downgrade in Dec 05. Firm sees the same product introduction schedule as they have mentioned previously - a new Nano late in the Sept Q and modestly upgraded Video in Q4, in time for a holiday demand. Further EPS upside potential from iPod of $0.08-0.12. Also, firm is not including the impact of an AAPL phone, which could be $0.03-0.05 in F07.
09:02 am Phelps Dodge: Prudential upgrades Underweight to Overweight. Target $60 to $110. Firm ups rating and price tgt as they believe mid-summer copper markets appear better than expected, the odds will likely shift towards the co becoming a takeover target if it stands alone without completing an Inco buyout or if it combines with Inco as well, and shares will likely rebound if it doesn't succeed in buying Inco as investors don't like the goodwill, new shares, or added debt, in their view
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