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Friday, April 02, 2004 9:30:10 PM
U.S. stocks ended sharply higher as a stronger-than-expected March employment report reassured investors the U.S economic recovery was now well in place. The growth in jobs, which beat expectations for the first time in five months, was strong enough that investors ignored warnings from numerous economists that the data may prompt the Federal Reserve to rethink its accommodative interest rate policy. The DJIA ended up 97 points (+0.9%) to 10,470, with 25 of 30 components gaining ground. The blue chip barometer reached a one-month high of 10,496 earlier in the session. The technology-friendly Nasdaq Composite jumped 42 points (+2.1%) to 2,057, and the S&P 500 added 9 points (+0.9%) to 1,141. Better-than-expected jobs growth sent bonds reeling. The yield on the benchmark 10-year Treasury note charged up to 4.14 percent, and reached a 2-month high of 4.171 percent vs. 3.89 percent at the previous U.S. close. This is the biggest rise in yields since last July. Currency traders bid up the dollar across the board on the data, as higher interest rates would make the U.S. currency more attractive to foreign investors. The dollar rose 2.1 percent vs. the euro to $1.2108, rallied 2.4 percent against the Swiss franc to $1.2927 and climbed 0.6 percent vs. the Japanese yen to 104.30. Within commodities, June gold futures fell more than $6 an ounce to end the week narrowly lower, dragged down by the resurgent dollar. May crude futures reversed course in the last few minutes of trading on the New York Mercantile Exchange to log a gain of 12 cents for the session. It closed at $34.39 per barrel, but down 3.8 percent from the week-ago close.
Strong Sectors: employment service, tech, airline, basic material, biotech, casino, aerospace, lodging, retail, drug, insurance
Weak Sectors: gold, homebuilding
Top Stories . . . The U.S. economy added 308,000 jobs in March, almost three times economists' expectations and the biggest gain since April 2000. Stocks rose on the report, which is likely to boost President George W. Bush's re-election bid.
The U.S. dollar surged against the euro and yen after a government report showed the economy added 308,000 jobs last month, the most in four years and almost three times the amount economists had forecast.
U.S. Treasury notes had their biggest drop since July after the economy last month created the most jobs in about four years, raising speculation the Federal Reserve may boost its target interest rate in the second half the year.
Sun Microsystems, whose losses in the past six quarters totaled $3.84 billion, said it will cut 3,300 jobs and named Jonathan Schwartz president after analysts criticized Chief Executive Officer Scott McNealy's leadership.
The six-month criminal trial of former Tyco Chief Executive Officer L. Dennis Kozlowski and his top lieutenant Mark Swartz ended after the judge declared a mistrial because of outside pressure on a juror.
Gurus . . . Investors who track the Dow Jones Industrial Average have reason to hope that next week's three changes to its membership will do more to boost its value than the previous four. Companies that were added the last time the average was overhauled, -- Home Depot, Intel, Microsoft, and SBC Communications -- all dropped more than the U.S. market benchmark after their inclusion in 1999. Fund manager Phil Orlando says Dow Jones focuses on companies that have become industry icons because of their past growth rate. So, by definition, they have seen the lion's share of growth. Hence, the underperformance.
Election Economy . . . President Bush may be hoping for a bear market in Treasury notes, as a sign he will win in November. A drop in price would signal the economy has gained enough momentum to boost employment. Since Bush took office in January 2000, the economy has lost 2.3 million jobs, and the yield on the 10-year Treasury note has fallen 1.29% to 3.88%. Strategist Larry Kanter says if you are in the White House, what you really care about is jobs. If you get job growth, and the cost is higher yields, they will take that trade any time.
Financials . . . Raymond James upgrades Automatic Data to Strong Buy from Market Perform given the stronger than expected employment numbers released this morning coupled with improving key indicators for the business. Target is $49.
Metals . . . The market remains bullish on copper fundamentals. The most important big-picture drivers include a combination of (a) well-managed supply – with few new major copper resources seen threatening the favorable market tightness for the foreseeable future; (b) the ongoing industrialization of China and growing demand recovery in the Western world; (c) low inventory levels; (d) supply interruptions. Data remain supportive of strong prices. Copper inventories held on the LME continue to fall at a surprisingly swift pace. Total inventories (LME, COMEX, Shanghai, refineries, merchants, etc.) reside at 6.8 weeks of supply. Global supply-demand analysis continues to suggest that the copper market, in deficit by 400,000 metric tons in
2003. Copper price forecast for 2004 now US$1.25/lb. In light of the strong fundamentals and acknowledging the strong copper price year to date, Bear Sterns recently raised its 2004 copper price expectation to $1.25/lb. The forecast is lower than the current spot price of US$1.39/lb, as BS is conservatively assuming that near-term inventory work-down in Asia, the greater supply growth expected in 2nd half 2004. You need to factor in higher copper price assumption, EBITDA and EPS estimates for 2004 estimates rise by 24% and 48%, respectively, to US$1.49 billion and US$0.62/share. EPS estimate for 2005 rises by roughly 2% to US$0.67/share given the additional reduction in interest expenses from lower debt. Now forecast that debt levels can decline by US$950 million (was US$750 million) by the end of 2005.
Transports . . . Last week, Raymond James surveyed 30 Harley-Davidson dealers to gauge demand levels at retail. The results of the survey were somewhat mixed. Despite dealers indicating higher sales, inventory levels are also indicated to be higher. For dealers selling at MSRP, wait times have been shrinking and premiums have been falling for above MSRP dealers. Used bike prices are also lower. The firm found no evidence of financing incentives offered by HDI, but did find certain dealers that had arranged special financing offers through local financial institutions. Demand for the redesigned Sportster was consistently mentioned as strong. Demand for the new VROD model was more mixed. One dealer chose to not take his full allocation of VRODs for 2004. Based on recent industry sales, the firm believes that March could show another decline in HDI retail sales.
Consumer Products . . . Clorox upped to Overweight from Neutral at Prudential. The firm's price target goes to $60 from $53 on the assumption that the stock moves to a 13% premium to the market, near its premium from the mid-1990's when it produced consistent double-digit EPS growth.
Retail . . . UBS initiates Kmart with a Buy to reflect asset values which provide support for the stock at this level. The assets include $21 in cash per share and a $38 a share NOL (which present values to about $11). This leaves an underlying stock trading at 1.9x estimated 2004 cash flow. The firm says this is not a turnaround retail story, but a slower burn of existing operations. The firm has a $54 target, reflecting 4.5x '04E EBITDA after taking out cash and NOL.
Prudential downgrades American Eagle to Neutral from Overweight based on valuation, as the stock has reached their $28 target. Also, firm is concerned that expectations for the group and for March sales are very high, and they wonder whether there may have been a slowdown in the fourth week of March.
Gap Stores CEO Paul Pressler and CFO Byron Pollitt are carefully developing and executing strategies to return this large organization to a position of financial strength that allow it to generate consistent top line and earnings growth. A first step was tackling the product issues and creating attractive assortments at each division that compel customers to purchase at full price. With the merchandising firmly on track and the product development process significantly improved, the subsequent steps involve optimizing various elements of GPS’s infrastructure, supply chain, inventory investment, real estate fleet and store sizes, and labor from both a service
and productivity standpoint. Gap’s compelling growth prospects, stemming from its turnaround and its ability to capitalize on growth opportunities, warrant a richer valuation. A target price of $25-$28 implies a P/E multiple of 19x-21x 2005 EPS estimate of $1.35. However, appreciation is likely to stem from upside to EPS projections, and more modest multiple expansion.
Healthcare . . . First Albany upgrades VISX to Buy from Neutral for the following reasons: 1) consensus expectations have come down markedly in the last few months and are achievable, if not beatable, 2) favorable risk/reward profile based on PEG and DCF metrics, and 3) firm's survey of LASIK surgeons suggests procedure volume and conversion to custom are tracking favorably relative to our Q1 and 2004 ests. Target is $26.
Medical Devices . . . Zimmer Holdings expects reported sales for 1st quarter of approximately $740 million, exceeding the consensus estimate of $704 million. The company states every geographic segment and product category overachieved constant currency, internal expectations. The company also said that it expects to significantly exceed the First Call consensus EPS estimate for 1st quarter of $0.49 (excluding acquisition and integration costsand inventory step-up).
Drugs . . . Barron's Online highlights Abbott Labs, which has seen its shares drop 12% this year, sharply underperforming the S&Ps 500. Wall St is getting antsy about the company's fate given the potential of Senator John Kerry possibly defeating President Bush in Nov. According to the article, Abbott's diversity gives it some protection, plus other growth opportunities, especially from medical products, which generated more than $8 bln in sales 2003. Meanwhile, it's rolling out 50 new diagnostic products and returning 60 others to the market four years after the FDA halted manufacturing at one of its plants because of quality concerns. That cost it many customers in the U.S. But in Dec, the FDA lifted its consent decree, and since Jan Abbott has launched or reintroduced 19 diagnostic products. Abbott has as many as ten drugs in late-stage development, including the experimental cancer treatment Atrasentan, that could be launched soon, CEO Miles White tells Barron's. Several other Abbott drugs also generate significant sales growth, including the AIDS drug Kaletra, the depression medication Depakote and Biaxin, an antibiotic that generates annual sales of over $1 billion. Glenn Reicin, an analyst with Morgan Stanley, says Abbott should trade at a 10% premium to the S&P and expects the stock to reach 55 over the next 12 months.
Biotech . . . Brean Murray initiates coverage of Dendreon with a Buy rating and $21 target. The firm believes that company will have several major catalysts in 2004, as: 1) the company is in active discussions with potential partners for the commercialization of Provenge, and they believe that the co will finalize the terms by early 3rd quarter; 2) patient enrollment for both the pivotal Phase III for AIPC and the mkt expansion study Phase III for ADPC indications are expected to be completed by 2nd quarter and 3rd quarter, respectively; and 3) firm estimates that the co will initiate a Phase II trial of APC8024 for the treatment of Her-2/neu metastatic breast cancer in 3rd quarter.
Media . . . Stifel Nicolaus downgrades XM Satellite to Market Perform from Outperform. While the company handily beat Street estimates for 1st quarter subscribers. The firm believes the stock could pull back amidst a lack of new news as well as their expectations of market share improvements by Sirius. Firm believes that SIRI now offers the best risk/reward, as they think upside in the qtr is coming from the retail distribution channel; firm maintains their $4.25 target on SIRI, but sees realistic scenarios where SIRI could reach $5-$7 within 2 years.
XM Radio reported over 320K net adds for 1st quarter 2004, outperforming estimates of 250K and Street consensus estimates of 270K, ending the quarter with more than 1.68M subscribers. This strong performance most likely means that revenues also came in higher than expected for
the quarter. The company also reiterated its guidance of more than 2.8 million ending subs for 2004. While the results may at first blush indicate a very strong second half from the 1.5 million ending subscriber number given out in mid-February, we caution investors not to extrapolate a net adds run rate given that we do not know the exact date the company crossed that threshold. However, continue to believe that there is upside to 2.9 million 2004 ending subscriber estimate. Sometimes the stock has pulled back after the pre-announcement as investors worry about the lack of near-term catalysts. This time we do not believe that this will be the case as we expect further positive catalysts emanating from the NY Autoshow commencing April 7, including possible announcements on new hardware, new programming, and car production figures.
Hotel & Leisure . . . Roth Capital reiterates their Buy rating on Scientific Games and raises their target to $25 from $20. The firm says the company's analyst day confirmed their view that instant ticket and online lotteries serve as key growth catalysts for the next several years, and they believe that int'l instant ticket contracts present upside to their estimates.
Thomas Weisel upgrades Boyd Gaming and Caesar’s to Outperform from Peer Perform. The firm is saying gaming stocks should benefit from improved industry fundamentals, co-specific growth initiatives, and low relative valuations. Regarding BYD, firm says the co has turned a corner, as same-store comps are near a Q2 inflection, Borgata is ramping, projects add visibility, deals add heft and EPS, and the stock trades at a discount. Regarding CZR, firm says the reemergence of Caesars Palace should yield outsized gains on the Strip, Atlantic City resorts are holding up well, new hotel/ tribal deals/ $400+ mln free cash provide longer-term visibility, and the stock trades at a discount.
Merrill Lynch adds Viacom to their Focus 1 List based on valuation, as the stock is trading near 12-month lows. The firm says the company has a significantly lower level of financial risk and higher degree of flexibility than virtually all peers based on its balance sheet strength and free cash flow generation, and they expect 1st quarter results to mark an important inflection point for the company's businesses and investor sentiment. Target is $53.
Storage . . . Sun Microsystems and Microsoft announce they have entered into a broad technology collaboration arrangement to enable their products to work better together and to settle all pending litigation between the two companies. The companies have also entered into agreements on patents and other issues. The agreements involve payments of $700 million to Sun by Microsoft to resolve pending antitrust issues and $900 million to resolve patent issues. In addition, Sun and Microsoft have agreed to pay royalties for use of each other's technology, with Microsoft making an up-front payment of $350 million and Sun making payments when this technology is incorporated into its server products.
Sun Microsystems guides below consensus for 3rd quarter, now sees a loss of $0.06-0.08, ex items, versus consensus of ($0.03) on revenues of $2.65 billion versus consensus of $2.8 million. Company will also reduce workforce by 3300, take related charge of $475 mln spread over next several quarters. SUNW also announces it has appointed current Exec V.P. Jonathan Schwartz as C.O.O. and Pres, effective immediately. McNealy will remain Chairman and C.E.O. Sun Microsystems and Microsoft enter into a broad cooperation agreement and settle all outstanding litigation.
Network Equipment . . . Merrill Lynch raised Qualcomm’s 2004-2005 EPS estimates and target on Qualcomm, based on introduction of WCDMA estimates and strong demand for CDMA handsets. The firm is raising 2004 EPS estimate from $1.76 to $1.78 and for 2005 from $1.85 to $1.96 as they now assume a 7% WDCMA penetration in 2005 representing 36 million handsets in Japan and W. Europe based on statements from the leading operator, Vodafone, and capex guidance of other operators suggest that the technology is rapidly becoming a certainty. Price target goes to $75 from $65.
JP Morgan upgrades Lucent to Neutral from Underweight. According to the firm, while topline growth still appears less than stellar, the co has re-aligned its cost structure with the current revenue opportunity. In addition, the CDMA wireless infrastructure market looks strong over the next 2 yrs and the overall wireline spending environment appears stable. The firm forecasts 7% growth in 2004 for CDMA infrastructure, rebounding from an 11% decline in 2003 and believes Lucent has an opportunity to win WCDMA business outside of Western Europe, specifically in the US and China as those geographies move closer to deploying WCDMA. Analyst raises EPS in 2nd quarter 2004 to $0.02 from $0.01; in 2004 to $0.10 from $0.06; and in 2005 to $0.19 from $0.10.
Merrill Lynch downgrades F5 Networks to Neutral from Buy based on valuation (stock is near their $38 target), their belief that their 2004-05 revenue estimates leave little room to deliver upside surprise, and they are already assuming $12 million and $24 million in 2004 and 2005 revs for the new SSL VPN FirePass product, a nascent product line that generated $1.5 million in revenues last quarter.
Ericsson pre-announced that 1st quarter 200 4 gross margin would improve over the 41.6% achieved in 4th quarter 2003, significantly better than estimates of 39%. The cost cutting story remains strong, and have raised our gross margin estimates for 2004 and 2005. However, 1st quarter 2004 rev's appear in line with previous guidance of moderate Year/Year growth. Revenue estimate down 22% Quarter/Quarter and up 9% Year/Year remains unchanged. GM’s expected to be very strong, showing 5 straight quarters of improvement. Analysts raised 1st quarter 2004 GM to 43.6% from 39%, and for 2004 to 43.9% from 41.1%. ERICY has done a good job transitioning from 2G to 3G, with the margin gap closing between the two. EDGE shipments to TIM and Cingular were meaningful in 1st quarter - EDGE is a software upgrade which typically carries higher margins. With the GM improvement, analysts significantly raised EPS estimates for 2004 from SEK 0.58 to SEK 0.74, or $0.71 to $0.91, and for 2005, from SEK 0.80 to SEK 0.89, or $0.98 to $1.09. More bullish assumptions of slightly better revenue growth and 17% op. margin (about as good as its gets) would yield $1.25 in 2005, implying a 24x EPS multiple. With Euro operators raising CAPEX recently, the secular spending rebound remains intact. However, with the cost-cutting story largely priced in, investors may be looking for top line growth exceeding our 9% estimate for 2004. Thus far the market is not seeing major upside to revenue estimates – we think the U.S., specifically AWE cutbacks, may pressure spending sooner than expected.
Semiconductor Equipment . . . JP Morgan is positive on select semi equipment stocks. In line with their bullish thesis on the sector, they recommend the following basket of stocks, some of which are currently exhibiting leadership within the group with 50-day MA breakouts to the upside: Brooks Automation, Cymer, MKSI, Mattson, and Photronics. According to the firm, these represent a broad and regional spread with Brooks being the largest player in the above-average growth automation segment, Cymer the dominant supplier in lasers for lithography, MKS the leading sub-system supplier and proxy to large OEMs, Mattson gaining share in Strip and RTP, and Photronics a proxy for accelerating chip design activity with strong leverage. All five of these companies are executing well this cycle and the firm expects them all to deliver in line or better results with upbeat forward guidance as they report the first calendar quarter.
Semiconductors . . . Wedbush Morgan removes NVIDIA from their Focus List based on valuation, as the stock is near their $28 target, and with the stock trading at 1.6x their 2005 EV/Sales estimate, has closed the valuation gap with ATYT. Maintains Buy rating.
Next Generation Equity Research is initiating coverage of Pixelworks with a Buy rating and price target of $20. The firm notes PXLW has a dominant share in system on chip solutions for projectors at 85% and its increasing market share in digital TVs with the Photopia roll out while exiting low margin monitor business. The firm notes the co trades at valuations that are a slight premium to its peers in the digital media/semiconductor industry, but believes the co merits higher valuations because of better margins and less exposure to pricing pressures in the desktop monitor business. The 12-month price target of $20 is based on 5-6x price to sales and price to book and 50x 2004 EPS of $0.40.
Digitimes reports that Infineon will reduce its DDR supply by around 50% in April from 50 million 256Mbit-equivalent units in March, according to sources in the industry. If true, supply in the global DRAM market is set to tighten even further. According to the article, Infineon explained that its DRAM output would drop due to production reallocation, but declined to comment on the actual amount. The co gave three main reasons why DRAM output would drop in April: 1. Output in Feb and March has been 10-20% more than normal. 2. Infineon plans to allocate some of its DRAM capacity to logic IC production in the company's 3rd quarter. 3. Infineon also plans to maintain low DRAM inventory levels in the same quarter.
Global sales of chips rose by a record 31% year-on-year in February as consumers and businesses snapped up computers and mobile phones and prices rose on the back of tighter supply according to numbers from the World Semiconductor Trade Statistics. Bank of America out noting that although chip momentum in January showed the first sign of deceleration, it looks as if it was a minor hiccup as momentum continues to increase across all segments. According to the firm, there were periods in the 1990's where momentum stalled for a short period and then reaccelerated. At present chipmakers continue to telegraph an acceleration in fundamentals. ThinkEquity says the breadth and magnitude of the revenue increase surprised even firm's own optimism. However, at the same time firm would avoid being too exuberant as these sales growth numbers benefited from favorable compares, and strong pricing, which masked less than robust unit growth. Nevertheless, the overall picture does support firm's comments since February, that the over-reaction to Jan weakness should not be viewed as a portent of further weakness, but a buy-on-weakness opportunity. Among the stocks ThinkEquity believes were "thrown out with the bath-water": Intel (down 15% YTD), Minespeed (-4%), Maxim Integrated (-3%), and even Texas Instruments (up just 2%, despite broad strength).
NVIDIA held its annual Analyst Day today. There were no real surprises at the meeting. Discussion was focused on its strategies for its various businesses and the company did not comment on business conditions or outlook. Regarding its first-generation PCI Express products, NVIDIA admitted that their products have a cost disadvantage due to the extra translator chip, confirming recent talk. NVIDIA reiterated that its gross margins should improve more significantly when it ramps up its new NV4x family of GPUs, as it expects the production costs to be lower compared to its current architecture, due to a better product design. NV40, the first product based on the new architecture and targeted to the enthusiast segment will launch this month, while mainstream and value segment products are likely to be launched around mid-2004. This means the ramp should start to positively impact margins meaningfully in late 2nd quarter 2004 (ending Jul-04) and more significantly in subsequent quarters as shipments are ramped.
Analysts are raising gross margin assumption for fiscal 2006 from 32.3% to 33.3%, which leads to an increase in EPS estimate from $0.81 to $0.90. Analysts are also raising 4th quarter 2005 EPS from $0.23 to $0.24 based on a slight increase in gross margin. Analysts are not changing revenue estimates. Note that we had previously modeled for a more modest margin improvement. Based on today’s reiteration of gross margin improvement, analysts are raising margin assumptions. NVIDIA’s comments were not new. Expect the gross margin story to play out in 2nd half 2004 as the NV4x ramps, from a top-line perspective, NVIDIA continues to see continued competitive pressure from ATI, and concerns about its overall product portfolio have not dissipated. From a valuation perspective, the stock’s current P/E at 29x 2006 EPS is unattractive. Revenue growth concerns stem from the following factors: 1) though inventory build led to a weak notebook market in 1st quarter 2004, expect a higher growth trend for notebooks compared to desktops to resume in 2nd quarter 2004 and continue through the rest of 2004, a trend which disfavors NVIDIA due to its lower market share in notebook graphics (11% vs. 28% for desktops), 2) its lack of an Intel chipset license, and 3) peaking Xbox shipments.
Boxmakers . . . Needham downgrades Gateway to Underperform from Hold after the company announced it plans to close its retail stores on April 9. While the move will result in a significant reduction in operating expenses, it effectively ends the company's "branded integrator" strategy, which appeared to be Gateway's only hope to restore profitability. Moreover, it leaves the company in the precarious position of being almost completely dependent on the fortunes of eMachines, a company it recently acquired. The risks now significantly exceed the possible rewards.
Bear Stearns upgrades Gateway to Peer Perform as GTW's decision to shut its retail ops addresses a major drag on its profitability. While it's hard to assess an appropriate valuation given a lack of info on GTW's financial profile, the stock may be more event-driven in the near future. As far as collateral impact, the firm views the news as mixed for Hewlett-Packard as it eliminates the competition of GTW stores but leaves a better-capitalized eMachines in retail with the prospect for increasing shelf space over time. For Dell, the announcement is more a non-event, as it does not compete aggressively in low-end consumer. The firm says fair value looks to be around $3.80-$5.70.
Digitimes reports that Intel is likely to give up its current practice of launching processors for desktops and notebooks respectively. Instead, the company is expected to launch a brand new processor, dubbed Merom, for all PCs starting 2007, according to sources at Taiwanese motherboard makers. The Merom will be made using a 0.65nm process and will run under the current architecture used by Intel's Pentium M processors, said the sources to paper. Intel's Netburst architecture that supports the Pentium 4 processors is likely to be phased out from the PC market when the Merom comes online, according to the sources.
Software . . . Sybase guides below consensus for 1st quarter (Mar), sees pro forma EPS of $0.18-0.20 versus consensus of $0.24. "We were impacted by several large telecom transactions that did not close this quarter as anticipated, but which we expect to close future quarters." Company reaffirms 2004 EPS view of pro forma EPS of $1.08-1.10, consensus is $1.09.
Netegrity believes the risk/reward has moved from neutral to positive on name. Price target goes to $11 from $10.
RBC upgrades Magma Design to Outperform from Sector Perform based on valuation and their confidence in the company's long-term growth; firm says the stock has been volatile in anticipation of a number of large deals, and while they don't know if any of these large deals closed in 4th quarter, they believe that several large deals remain in the pipeline, and that any orders that did not close in 4th quarter are not lost, but delayed. Target is $30.
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Strong Sectors: employment service, tech, airline, basic material, biotech, casino, aerospace, lodging, retail, drug, insurance
Weak Sectors: gold, homebuilding
Top Stories . . . The U.S. economy added 308,000 jobs in March, almost three times economists' expectations and the biggest gain since April 2000. Stocks rose on the report, which is likely to boost President George W. Bush's re-election bid.
The U.S. dollar surged against the euro and yen after a government report showed the economy added 308,000 jobs last month, the most in four years and almost three times the amount economists had forecast.
U.S. Treasury notes had their biggest drop since July after the economy last month created the most jobs in about four years, raising speculation the Federal Reserve may boost its target interest rate in the second half the year.
Sun Microsystems, whose losses in the past six quarters totaled $3.84 billion, said it will cut 3,300 jobs and named Jonathan Schwartz president after analysts criticized Chief Executive Officer Scott McNealy's leadership.
The six-month criminal trial of former Tyco Chief Executive Officer L. Dennis Kozlowski and his top lieutenant Mark Swartz ended after the judge declared a mistrial because of outside pressure on a juror.
Gurus . . . Investors who track the Dow Jones Industrial Average have reason to hope that next week's three changes to its membership will do more to boost its value than the previous four. Companies that were added the last time the average was overhauled, -- Home Depot, Intel, Microsoft, and SBC Communications -- all dropped more than the U.S. market benchmark after their inclusion in 1999. Fund manager Phil Orlando says Dow Jones focuses on companies that have become industry icons because of their past growth rate. So, by definition, they have seen the lion's share of growth. Hence, the underperformance.
Election Economy . . . President Bush may be hoping for a bear market in Treasury notes, as a sign he will win in November. A drop in price would signal the economy has gained enough momentum to boost employment. Since Bush took office in January 2000, the economy has lost 2.3 million jobs, and the yield on the 10-year Treasury note has fallen 1.29% to 3.88%. Strategist Larry Kanter says if you are in the White House, what you really care about is jobs. If you get job growth, and the cost is higher yields, they will take that trade any time.
Financials . . . Raymond James upgrades Automatic Data to Strong Buy from Market Perform given the stronger than expected employment numbers released this morning coupled with improving key indicators for the business. Target is $49.
Metals . . . The market remains bullish on copper fundamentals. The most important big-picture drivers include a combination of (a) well-managed supply – with few new major copper resources seen threatening the favorable market tightness for the foreseeable future; (b) the ongoing industrialization of China and growing demand recovery in the Western world; (c) low inventory levels; (d) supply interruptions. Data remain supportive of strong prices. Copper inventories held on the LME continue to fall at a surprisingly swift pace. Total inventories (LME, COMEX, Shanghai, refineries, merchants, etc.) reside at 6.8 weeks of supply. Global supply-demand analysis continues to suggest that the copper market, in deficit by 400,000 metric tons in
2003. Copper price forecast for 2004 now US$1.25/lb. In light of the strong fundamentals and acknowledging the strong copper price year to date, Bear Sterns recently raised its 2004 copper price expectation to $1.25/lb. The forecast is lower than the current spot price of US$1.39/lb, as BS is conservatively assuming that near-term inventory work-down in Asia, the greater supply growth expected in 2nd half 2004. You need to factor in higher copper price assumption, EBITDA and EPS estimates for 2004 estimates rise by 24% and 48%, respectively, to US$1.49 billion and US$0.62/share. EPS estimate for 2005 rises by roughly 2% to US$0.67/share given the additional reduction in interest expenses from lower debt. Now forecast that debt levels can decline by US$950 million (was US$750 million) by the end of 2005.
Transports . . . Last week, Raymond James surveyed 30 Harley-Davidson dealers to gauge demand levels at retail. The results of the survey were somewhat mixed. Despite dealers indicating higher sales, inventory levels are also indicated to be higher. For dealers selling at MSRP, wait times have been shrinking and premiums have been falling for above MSRP dealers. Used bike prices are also lower. The firm found no evidence of financing incentives offered by HDI, but did find certain dealers that had arranged special financing offers through local financial institutions. Demand for the redesigned Sportster was consistently mentioned as strong. Demand for the new VROD model was more mixed. One dealer chose to not take his full allocation of VRODs for 2004. Based on recent industry sales, the firm believes that March could show another decline in HDI retail sales.
Consumer Products . . . Clorox upped to Overweight from Neutral at Prudential. The firm's price target goes to $60 from $53 on the assumption that the stock moves to a 13% premium to the market, near its premium from the mid-1990's when it produced consistent double-digit EPS growth.
Retail . . . UBS initiates Kmart with a Buy to reflect asset values which provide support for the stock at this level. The assets include $21 in cash per share and a $38 a share NOL (which present values to about $11). This leaves an underlying stock trading at 1.9x estimated 2004 cash flow. The firm says this is not a turnaround retail story, but a slower burn of existing operations. The firm has a $54 target, reflecting 4.5x '04E EBITDA after taking out cash and NOL.
Prudential downgrades American Eagle to Neutral from Overweight based on valuation, as the stock has reached their $28 target. Also, firm is concerned that expectations for the group and for March sales are very high, and they wonder whether there may have been a slowdown in the fourth week of March.
Gap Stores CEO Paul Pressler and CFO Byron Pollitt are carefully developing and executing strategies to return this large organization to a position of financial strength that allow it to generate consistent top line and earnings growth. A first step was tackling the product issues and creating attractive assortments at each division that compel customers to purchase at full price. With the merchandising firmly on track and the product development process significantly improved, the subsequent steps involve optimizing various elements of GPS’s infrastructure, supply chain, inventory investment, real estate fleet and store sizes, and labor from both a service
and productivity standpoint. Gap’s compelling growth prospects, stemming from its turnaround and its ability to capitalize on growth opportunities, warrant a richer valuation. A target price of $25-$28 implies a P/E multiple of 19x-21x 2005 EPS estimate of $1.35. However, appreciation is likely to stem from upside to EPS projections, and more modest multiple expansion.
Healthcare . . . First Albany upgrades VISX to Buy from Neutral for the following reasons: 1) consensus expectations have come down markedly in the last few months and are achievable, if not beatable, 2) favorable risk/reward profile based on PEG and DCF metrics, and 3) firm's survey of LASIK surgeons suggests procedure volume and conversion to custom are tracking favorably relative to our Q1 and 2004 ests. Target is $26.
Medical Devices . . . Zimmer Holdings expects reported sales for 1st quarter of approximately $740 million, exceeding the consensus estimate of $704 million. The company states every geographic segment and product category overachieved constant currency, internal expectations. The company also said that it expects to significantly exceed the First Call consensus EPS estimate for 1st quarter of $0.49 (excluding acquisition and integration costsand inventory step-up).
Drugs . . . Barron's Online highlights Abbott Labs, which has seen its shares drop 12% this year, sharply underperforming the S&Ps 500. Wall St is getting antsy about the company's fate given the potential of Senator John Kerry possibly defeating President Bush in Nov. According to the article, Abbott's diversity gives it some protection, plus other growth opportunities, especially from medical products, which generated more than $8 bln in sales 2003. Meanwhile, it's rolling out 50 new diagnostic products and returning 60 others to the market four years after the FDA halted manufacturing at one of its plants because of quality concerns. That cost it many customers in the U.S. But in Dec, the FDA lifted its consent decree, and since Jan Abbott has launched or reintroduced 19 diagnostic products. Abbott has as many as ten drugs in late-stage development, including the experimental cancer treatment Atrasentan, that could be launched soon, CEO Miles White tells Barron's. Several other Abbott drugs also generate significant sales growth, including the AIDS drug Kaletra, the depression medication Depakote and Biaxin, an antibiotic that generates annual sales of over $1 billion. Glenn Reicin, an analyst with Morgan Stanley, says Abbott should trade at a 10% premium to the S&P and expects the stock to reach 55 over the next 12 months.
Biotech . . . Brean Murray initiates coverage of Dendreon with a Buy rating and $21 target. The firm believes that company will have several major catalysts in 2004, as: 1) the company is in active discussions with potential partners for the commercialization of Provenge, and they believe that the co will finalize the terms by early 3rd quarter; 2) patient enrollment for both the pivotal Phase III for AIPC and the mkt expansion study Phase III for ADPC indications are expected to be completed by 2nd quarter and 3rd quarter, respectively; and 3) firm estimates that the co will initiate a Phase II trial of APC8024 for the treatment of Her-2/neu metastatic breast cancer in 3rd quarter.
Media . . . Stifel Nicolaus downgrades XM Satellite to Market Perform from Outperform. While the company handily beat Street estimates for 1st quarter subscribers. The firm believes the stock could pull back amidst a lack of new news as well as their expectations of market share improvements by Sirius. Firm believes that SIRI now offers the best risk/reward, as they think upside in the qtr is coming from the retail distribution channel; firm maintains their $4.25 target on SIRI, but sees realistic scenarios where SIRI could reach $5-$7 within 2 years.
XM Radio reported over 320K net adds for 1st quarter 2004, outperforming estimates of 250K and Street consensus estimates of 270K, ending the quarter with more than 1.68M subscribers. This strong performance most likely means that revenues also came in higher than expected for
the quarter. The company also reiterated its guidance of more than 2.8 million ending subs for 2004. While the results may at first blush indicate a very strong second half from the 1.5 million ending subscriber number given out in mid-February, we caution investors not to extrapolate a net adds run rate given that we do not know the exact date the company crossed that threshold. However, continue to believe that there is upside to 2.9 million 2004 ending subscriber estimate. Sometimes the stock has pulled back after the pre-announcement as investors worry about the lack of near-term catalysts. This time we do not believe that this will be the case as we expect further positive catalysts emanating from the NY Autoshow commencing April 7, including possible announcements on new hardware, new programming, and car production figures.
Hotel & Leisure . . . Roth Capital reiterates their Buy rating on Scientific Games and raises their target to $25 from $20. The firm says the company's analyst day confirmed their view that instant ticket and online lotteries serve as key growth catalysts for the next several years, and they believe that int'l instant ticket contracts present upside to their estimates.
Thomas Weisel upgrades Boyd Gaming and Caesar’s to Outperform from Peer Perform. The firm is saying gaming stocks should benefit from improved industry fundamentals, co-specific growth initiatives, and low relative valuations. Regarding BYD, firm says the co has turned a corner, as same-store comps are near a Q2 inflection, Borgata is ramping, projects add visibility, deals add heft and EPS, and the stock trades at a discount. Regarding CZR, firm says the reemergence of Caesars Palace should yield outsized gains on the Strip, Atlantic City resorts are holding up well, new hotel/ tribal deals/ $400+ mln free cash provide longer-term visibility, and the stock trades at a discount.
Merrill Lynch adds Viacom to their Focus 1 List based on valuation, as the stock is trading near 12-month lows. The firm says the company has a significantly lower level of financial risk and higher degree of flexibility than virtually all peers based on its balance sheet strength and free cash flow generation, and they expect 1st quarter results to mark an important inflection point for the company's businesses and investor sentiment. Target is $53.
Storage . . . Sun Microsystems and Microsoft announce they have entered into a broad technology collaboration arrangement to enable their products to work better together and to settle all pending litigation between the two companies. The companies have also entered into agreements on patents and other issues. The agreements involve payments of $700 million to Sun by Microsoft to resolve pending antitrust issues and $900 million to resolve patent issues. In addition, Sun and Microsoft have agreed to pay royalties for use of each other's technology, with Microsoft making an up-front payment of $350 million and Sun making payments when this technology is incorporated into its server products.
Sun Microsystems guides below consensus for 3rd quarter, now sees a loss of $0.06-0.08, ex items, versus consensus of ($0.03) on revenues of $2.65 billion versus consensus of $2.8 million. Company will also reduce workforce by 3300, take related charge of $475 mln spread over next several quarters. SUNW also announces it has appointed current Exec V.P. Jonathan Schwartz as C.O.O. and Pres, effective immediately. McNealy will remain Chairman and C.E.O. Sun Microsystems and Microsoft enter into a broad cooperation agreement and settle all outstanding litigation.
Network Equipment . . . Merrill Lynch raised Qualcomm’s 2004-2005 EPS estimates and target on Qualcomm, based on introduction of WCDMA estimates and strong demand for CDMA handsets. The firm is raising 2004 EPS estimate from $1.76 to $1.78 and for 2005 from $1.85 to $1.96 as they now assume a 7% WDCMA penetration in 2005 representing 36 million handsets in Japan and W. Europe based on statements from the leading operator, Vodafone, and capex guidance of other operators suggest that the technology is rapidly becoming a certainty. Price target goes to $75 from $65.
JP Morgan upgrades Lucent to Neutral from Underweight. According to the firm, while topline growth still appears less than stellar, the co has re-aligned its cost structure with the current revenue opportunity. In addition, the CDMA wireless infrastructure market looks strong over the next 2 yrs and the overall wireline spending environment appears stable. The firm forecasts 7% growth in 2004 for CDMA infrastructure, rebounding from an 11% decline in 2003 and believes Lucent has an opportunity to win WCDMA business outside of Western Europe, specifically in the US and China as those geographies move closer to deploying WCDMA. Analyst raises EPS in 2nd quarter 2004 to $0.02 from $0.01; in 2004 to $0.10 from $0.06; and in 2005 to $0.19 from $0.10.
Merrill Lynch downgrades F5 Networks to Neutral from Buy based on valuation (stock is near their $38 target), their belief that their 2004-05 revenue estimates leave little room to deliver upside surprise, and they are already assuming $12 million and $24 million in 2004 and 2005 revs for the new SSL VPN FirePass product, a nascent product line that generated $1.5 million in revenues last quarter.
Ericsson pre-announced that 1st quarter 200 4 gross margin would improve over the 41.6% achieved in 4th quarter 2003, significantly better than estimates of 39%. The cost cutting story remains strong, and have raised our gross margin estimates for 2004 and 2005. However, 1st quarter 2004 rev's appear in line with previous guidance of moderate Year/Year growth. Revenue estimate down 22% Quarter/Quarter and up 9% Year/Year remains unchanged. GM’s expected to be very strong, showing 5 straight quarters of improvement. Analysts raised 1st quarter 2004 GM to 43.6% from 39%, and for 2004 to 43.9% from 41.1%. ERICY has done a good job transitioning from 2G to 3G, with the margin gap closing between the two. EDGE shipments to TIM and Cingular were meaningful in 1st quarter - EDGE is a software upgrade which typically carries higher margins. With the GM improvement, analysts significantly raised EPS estimates for 2004 from SEK 0.58 to SEK 0.74, or $0.71 to $0.91, and for 2005, from SEK 0.80 to SEK 0.89, or $0.98 to $1.09. More bullish assumptions of slightly better revenue growth and 17% op. margin (about as good as its gets) would yield $1.25 in 2005, implying a 24x EPS multiple. With Euro operators raising CAPEX recently, the secular spending rebound remains intact. However, with the cost-cutting story largely priced in, investors may be looking for top line growth exceeding our 9% estimate for 2004. Thus far the market is not seeing major upside to revenue estimates – we think the U.S., specifically AWE cutbacks, may pressure spending sooner than expected.
Semiconductor Equipment . . . JP Morgan is positive on select semi equipment stocks. In line with their bullish thesis on the sector, they recommend the following basket of stocks, some of which are currently exhibiting leadership within the group with 50-day MA breakouts to the upside: Brooks Automation, Cymer, MKSI, Mattson, and Photronics. According to the firm, these represent a broad and regional spread with Brooks being the largest player in the above-average growth automation segment, Cymer the dominant supplier in lasers for lithography, MKS the leading sub-system supplier and proxy to large OEMs, Mattson gaining share in Strip and RTP, and Photronics a proxy for accelerating chip design activity with strong leverage. All five of these companies are executing well this cycle and the firm expects them all to deliver in line or better results with upbeat forward guidance as they report the first calendar quarter.
Semiconductors . . . Wedbush Morgan removes NVIDIA from their Focus List based on valuation, as the stock is near their $28 target, and with the stock trading at 1.6x their 2005 EV/Sales estimate, has closed the valuation gap with ATYT. Maintains Buy rating.
Next Generation Equity Research is initiating coverage of Pixelworks with a Buy rating and price target of $20. The firm notes PXLW has a dominant share in system on chip solutions for projectors at 85% and its increasing market share in digital TVs with the Photopia roll out while exiting low margin monitor business. The firm notes the co trades at valuations that are a slight premium to its peers in the digital media/semiconductor industry, but believes the co merits higher valuations because of better margins and less exposure to pricing pressures in the desktop monitor business. The 12-month price target of $20 is based on 5-6x price to sales and price to book and 50x 2004 EPS of $0.40.
Digitimes reports that Infineon will reduce its DDR supply by around 50% in April from 50 million 256Mbit-equivalent units in March, according to sources in the industry. If true, supply in the global DRAM market is set to tighten even further. According to the article, Infineon explained that its DRAM output would drop due to production reallocation, but declined to comment on the actual amount. The co gave three main reasons why DRAM output would drop in April: 1. Output in Feb and March has been 10-20% more than normal. 2. Infineon plans to allocate some of its DRAM capacity to logic IC production in the company's 3rd quarter. 3. Infineon also plans to maintain low DRAM inventory levels in the same quarter.
Global sales of chips rose by a record 31% year-on-year in February as consumers and businesses snapped up computers and mobile phones and prices rose on the back of tighter supply according to numbers from the World Semiconductor Trade Statistics. Bank of America out noting that although chip momentum in January showed the first sign of deceleration, it looks as if it was a minor hiccup as momentum continues to increase across all segments. According to the firm, there were periods in the 1990's where momentum stalled for a short period and then reaccelerated. At present chipmakers continue to telegraph an acceleration in fundamentals. ThinkEquity says the breadth and magnitude of the revenue increase surprised even firm's own optimism. However, at the same time firm would avoid being too exuberant as these sales growth numbers benefited from favorable compares, and strong pricing, which masked less than robust unit growth. Nevertheless, the overall picture does support firm's comments since February, that the over-reaction to Jan weakness should not be viewed as a portent of further weakness, but a buy-on-weakness opportunity. Among the stocks ThinkEquity believes were "thrown out with the bath-water": Intel (down 15% YTD), Minespeed (-4%), Maxim Integrated (-3%), and even Texas Instruments (up just 2%, despite broad strength).
NVIDIA held its annual Analyst Day today. There were no real surprises at the meeting. Discussion was focused on its strategies for its various businesses and the company did not comment on business conditions or outlook. Regarding its first-generation PCI Express products, NVIDIA admitted that their products have a cost disadvantage due to the extra translator chip, confirming recent talk. NVIDIA reiterated that its gross margins should improve more significantly when it ramps up its new NV4x family of GPUs, as it expects the production costs to be lower compared to its current architecture, due to a better product design. NV40, the first product based on the new architecture and targeted to the enthusiast segment will launch this month, while mainstream and value segment products are likely to be launched around mid-2004. This means the ramp should start to positively impact margins meaningfully in late 2nd quarter 2004 (ending Jul-04) and more significantly in subsequent quarters as shipments are ramped.
Analysts are raising gross margin assumption for fiscal 2006 from 32.3% to 33.3%, which leads to an increase in EPS estimate from $0.81 to $0.90. Analysts are also raising 4th quarter 2005 EPS from $0.23 to $0.24 based on a slight increase in gross margin. Analysts are not changing revenue estimates. Note that we had previously modeled for a more modest margin improvement. Based on today’s reiteration of gross margin improvement, analysts are raising margin assumptions. NVIDIA’s comments were not new. Expect the gross margin story to play out in 2nd half 2004 as the NV4x ramps, from a top-line perspective, NVIDIA continues to see continued competitive pressure from ATI, and concerns about its overall product portfolio have not dissipated. From a valuation perspective, the stock’s current P/E at 29x 2006 EPS is unattractive. Revenue growth concerns stem from the following factors: 1) though inventory build led to a weak notebook market in 1st quarter 2004, expect a higher growth trend for notebooks compared to desktops to resume in 2nd quarter 2004 and continue through the rest of 2004, a trend which disfavors NVIDIA due to its lower market share in notebook graphics (11% vs. 28% for desktops), 2) its lack of an Intel chipset license, and 3) peaking Xbox shipments.
Boxmakers . . . Needham downgrades Gateway to Underperform from Hold after the company announced it plans to close its retail stores on April 9. While the move will result in a significant reduction in operating expenses, it effectively ends the company's "branded integrator" strategy, which appeared to be Gateway's only hope to restore profitability. Moreover, it leaves the company in the precarious position of being almost completely dependent on the fortunes of eMachines, a company it recently acquired. The risks now significantly exceed the possible rewards.
Bear Stearns upgrades Gateway to Peer Perform as GTW's decision to shut its retail ops addresses a major drag on its profitability. While it's hard to assess an appropriate valuation given a lack of info on GTW's financial profile, the stock may be more event-driven in the near future. As far as collateral impact, the firm views the news as mixed for Hewlett-Packard as it eliminates the competition of GTW stores but leaves a better-capitalized eMachines in retail with the prospect for increasing shelf space over time. For Dell, the announcement is more a non-event, as it does not compete aggressively in low-end consumer. The firm says fair value looks to be around $3.80-$5.70.
Digitimes reports that Intel is likely to give up its current practice of launching processors for desktops and notebooks respectively. Instead, the company is expected to launch a brand new processor, dubbed Merom, for all PCs starting 2007, according to sources at Taiwanese motherboard makers. The Merom will be made using a 0.65nm process and will run under the current architecture used by Intel's Pentium M processors, said the sources to paper. Intel's Netburst architecture that supports the Pentium 4 processors is likely to be phased out from the PC market when the Merom comes online, according to the sources.
Software . . . Sybase guides below consensus for 1st quarter (Mar), sees pro forma EPS of $0.18-0.20 versus consensus of $0.24. "We were impacted by several large telecom transactions that did not close this quarter as anticipated, but which we expect to close future quarters." Company reaffirms 2004 EPS view of pro forma EPS of $1.08-1.10, consensus is $1.09.
Netegrity believes the risk/reward has moved from neutral to positive on name. Price target goes to $11 from $10.
RBC upgrades Magma Design to Outperform from Sector Perform based on valuation and their confidence in the company's long-term growth; firm says the stock has been volatile in anticipation of a number of large deals, and while they don't know if any of these large deals closed in 4th quarter, they believe that several large deals remain in the pipeline, and that any orders that did not close in 4th quarter are not lost, but delayed. Target is $30.
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