AI
| Followers | 71 |
| Posts | 12229 |
| Boards Moderated | 1 |
| Alias Born | 04/01/2000 |
Wednesday, April 14, 2004 9:42:56 PM
Stocks fell for the second straight session on Wednesday, as data on consumer prices fueled fears that inflation could prompt a Federal Reserve rate hike sooner than previously expected. The S&P 500 fell 1 point to 1,128. The DJIA lost 3 point to 10,377. The Nasdaq Composite shed 5 points to 2,024. According to the federal funds futures market at the Chicago Board of Trade, the Federal Reserve's overnight interest rate target will likely rise to 1.75 percent by the end of the year from the current 1 percent. While odds of a rate hike at the May meeting remain low, the odds of hike in June rose to 46 percent from 32 percent earlier, based on the July contract. A rate hike in August is fully priced into the market, with a 32 percent chance of a half-point hike. The market predicts further increases at the September and December meetings. The Federal Reserve next meets to discuss interest rates on May 4.
Strong Sectors: biotech, internet, drug, chemical, transportation
Weak Sectors: metal mining, restaurant, healthcare facilities, iron & steel, financial, homebuilding, utility
Top Stories . . . Prices paid by U.S. consumers in March rose 0.5 percent, a fourth straight increase, boosted by rising energy, transportation and clothing costs. Excluding energy and food, core prices climbed the most in two years.
The U.S. trade deficit narrowed to $42.1 billion in February from a record the previous month as a weaker dollar and improving global economy contributed to the biggest rise in exports in more than seven years.
U.S. Treasury notes fell, pushing the yield on the benchmark 10-year note to the highest this year, after the consumer price index rose more than forecast in March, raising concerns of faster inflation.
Bank of America, the second- biggest U.S. bank, said first-quarter profit rose 11 percent as consumer lending increased and fees from money management and investment banking rose.
HCA, the biggest U.S. hospital chain, said profit for the first quarter fell short of its forecasts and lowered its 2004 outlook because more patients didn't pay bills. The shares fell as much as 11 percent.
Mortgages Numbers . . . Mortgage applications fell for the 4th consecutive drop-off with the applications index falling 22.1%, according to the Mortgage Bankers Association. The purchase index dropped 9.5%, the lowest going back to early January, while refinancing tanked by 30.7%, the largest drop since late July. Thirty-year fixed-rate mortgages bumped up 2 basis points to 5.77% from a week ago, hitting a 3-month high.
Market Comment . . . Rather than a rollover, we are at an upward inflection point in the global economic outlook. The U.S. has moved fully out of its strong-dollar deflation crash of 2000-2001 and Japan is following along. Larger firms have finally started buying inventory and hiring new workers, after lagging behind U.S. small businesses in 2002 and 2003 .
Strong March retail sales (up 1.8% m/m), the upward revisions to January and February, the strength of February inventory growth, and the continued growth in real and nominal wages support our expectation of consumer resilience and a coming snapback in inventories. This should contribute to further hiring and inventory rebuilding, adding to the expansion despite interest rate increases.
The bears contend that U.S. consumption growth depends on tax refunds and mortgage refinancings. We disagree. U.S. consumption growth is more firmly based, depending instead on:
• Real wage and salary income, which has been strong in the last decade as explained below;
• Lifetime income expectations, which have been properly bolstered by productivity growth and the steady 20-year downtrend in the unemployment rate (see No Rollover in Consumption, September 30, 2002); and
• The steadily high savings rate and record household net worth. The government’s misleadingly low “personal savings rate” (1.9% in February) substantially understates actual additions to savings by excluding realized gains on houses, equities and mortgage refinancing payments.
We don’t think mortgage refinancings and tax refunds are key variables in the outlook.
• True, we expect sharp rises in interest rates and bond yields. This will curtail the mortgage refinancing bulge, but we think cash-out refinancings have been overstated as a cause of consumption.
• Also true, the extra tax refunds will stop, but the much more important factor, lower income tax rates and the related gains in disposable income, are likely to last at least through 2010 (assumes a second Bush term).
• Some thought U.S. consumption growth would stop in the fourth quarter of 2003 after the third quarter burst (supposedly driven by rebate checks and cash-out mortgage refinancings). Instead, consumption growth remained steady in the fourth quarter.
• In recent years, disposable income has been bumpier than consumption due to tax changes. Both continue to grow strongly,
Wage Growth Continues
Critics of the 2002-2004 U.S. expansion contend that wage growth has slowed (true) and is now weak (not by historical standards). Part of the confusion is that wage growth is usually expressed in nominal terms, without taking into account the dramatic decline in the inflation rate in the 1980s and 1990s. In addition, we think wage growth was exaggerated in the late 1990s by the 3.8% unemployment extreme.
• In real terms, hourly wages rose 0.5% in the 12 months through March, which is less that the 3% peak growth in 1998 but better than the real wage declines after the 1982 and 1990-1991 recessions. Why did real wage growth hold up so well after the 2001 recession? It was due to the flexibility of the work force, productivity growth, and because the unemployment rate peaked at only 6.3%, much lower than after previous recessions.
• Importantly, the growth in total wages and salaries, a measure which combines wages, the length of the work week and total employment, has revived.
Part-time, Low-paying Jobs?
Some contend that nearly all of the 308,000 net new jobs in the March employment survey were part-time jobs, which increased 296,000. This isn’t correct. It confuses information from two different surveys.. The 308,000 increase was the change in nonfarm payrolls and came from a survey of firms. This survey doesn’t ask whether a job is part-time or full-time. The 296,000 increase in part-time employment is from the household survey, which asks respondents if they are working full or part time. The household survey has been showing a decline in part-time jobs, so March was a catch-up month for part-time jobs.
• In February, part-time jobs fell 277,000 while the establishment survey showed an increase of 46,000, yet that doesn’t mean that part-time jobs were converted into full-time jobs—the data is from two different surveys.
• Over the three months through March, part-time jobs were down 55,000 and over the six months through March it was down 163,000.
• The proper conclusion is that part-time jobs have been declining while full-time employment, whether based on the establishment or household survey, has been rising. Another argument is that the U.S. is substituting lower-paying jobs for higher-paying jobs. This isn’t correct. The share of manufacturing jobs has been declining steadily for 50 years, yet U.S. per capita income has been rising strongly. The key reason behind relative strong wage and salary growth in the face of the weakness in manufacturing employment is that non-manufacturing wages are nearly as high as manufacturing wages.
• In March, average hourly earnings of production workers in manufacturing were $15.16 ($16.01 with overtime) while average hourly earnings in service sector jobs was $15.13.
• Average earnings in service-sector jobs have been, on average, narrowing the gap with manufacturing jobs for at least 20 years and have now almost reached parity.
• When retail and leisure jobs are excluded, service jobs paid $17.20 on average.
• Over the past six months, service jobs excluding retail and leisure have risen by more than 400,000 while manufacturing jobs have fallen 65,000. The lower-paying retail and leisure jobs rose 204,000.
Economy Heating Up . . . The Wall Street Journal carries a front page article on an economy that is gathering, you should pardon the expression, "increased momentum." Everybody is rushing to adjust first-quarter GDP from 4.0%-to-5.0%, and ISI says March will probably be viewed as a turning point for the recovery to broad-based, and self-feeding.
Yesterdays Shakeout . . . .The intense downside reaction yesterday has something to do with the goodies being enjoyed by the 45-year low in short rates. There is the carry trade, where professionals have been borrowing at 1.0%, and getting a return 300 basis points higher. Jim Bianco says the Bond Market is twice as leveraged as it was ten years ago, when the Fed began a tightening round. Also, more and more consumer debt is adjustable. Of the $2.3 trillion increase in consumer debt over the past three years, 44.0% is tied to short-rates, according to macro mavens. But, it is not a given that the Fed is going to tighten by August. Maybe they would want to see a couple of confirming months in job creation, and consumer spending. All of which places enormous focus on April 21st, when Fed Chief Alan Greenspan will appear before the Joint Economic Committee of Congress.
Financials . . . Merrill Lynch downgrades Annaly Mortgage to Neutral from Buy due to the increasing risk of Fed action on short term interest rates. The firm notes that the company's dividend typically comes under pressure as the yield curve flattens, and firm says the more the yield curve flattens as the Fed raises rates, the more pressure they would expect on NLY's dividend. Also, firm says their earnings estimates reflect 100 basis points of rising short-term interest rates over 2005, and should the Fed act sooner, it would likely cause modest short-term pressure on their earnings estimate.
American International was upped to Overweight at Lehman. The upgrade from Equal Weight comes as firm now expects the favorable environment for AIG`s P/C business to be more sustainable than firm originally had thought. Additionally, Lehman thinks life segment earnings are more sustainable than firm did previously due to company's strong position in less competitive distribution channels. Firm's 2004 estimate goes to $4.52 from $4.35 and initiates above-consensus 2005 estimate of $5.31 (consensus $5.13). Price target goes to $92 from $72.
Bank of America reported earnings of $1.83 per share, which includes $0.16 charge to cover mutual fund settlement, $0.04 better than the consensus of $1.79. Revenues rose 5.7% year/year to $9.69 billion versus the $9.80 billion consensus. If one adds back the $0.16 charge, company beat consensus by $0.20. In touch with Reuters to ascertain which actual is comparable to consensus.
Merrill Lynch reported first quarter 2004 operating EPS of $1.22 - 14% ahead of consensus-like estimate of $1.07 per share. Overall, net revenues rose 25% Quarter/Quarter and believe it is important to note the top-line growth at MER, as many doubted the firm’s ability to put up such top-line growth. The firm's record quarterly results were primarily driven by principal transactions. However, MER saw a second consecutive quarterly improvement in investment banking revenue (up 10%) and retail activity (commissions grew 17%) quarter over quarter. In conjunction with MER’s recently announced $2 billion share repurchase plan, the firm repurchased 8.2 million shares for a total of roughly $500 million. Expect the same rate of share repurchases over the remaining three quarters of 2004. Looking ahead, expect organic growth to remain solid and believe MER management will continue functioning with operating discipline. Additionally, would not be surprised to see MER do a bolt-on acquisition, perhaps in order to further automate its trading business. Analysts are raising: 1) 2nd quarter 2004E from $1.05 to $1.17 per share; 2) 2004E from $4.22 to $4.72 per share; and 3) 2005E from $4.70 to $5.30 per share. Reiterate an Outperform rating on MER shares and our $72 yearend 2004 price target. MER shares are currently trading at an unwarranted 10% discount to peers.
Capital One reported March performance data for its auto finance trusts this morning. Overall, the data showed a continued seasonal decrease in delinquencies. All the trust series were in compliance with their respective credit quality and extension rate tests. Of the ten auto loan securitizations, seven have seasoned for ten months or more. All of these securitizations showed a decrease in delinquencies. Extension rates declined in six of the series and remained unchanged in one series, indicating that the decrease in delinquency rates was not attributable to an increase in extensions. Recoveries may have benefited from slightly higher used car prices in March as the Manheim Index increased by 1.7% from February, showing the highest monthly increase in used car prices since July 1998. Although the continued decline in delinquency rates appears to be largely seasonal, the delinquency
Paper . . . Georgia-Pacific issues upside preannouncement for 1st quarter (March), sees EPS of approximately $0.60, excluding a $0.06 charge versus consensus of $0.48. GP cites strong performance in its building products businesses.
Transports . . . Delta Air Lines reported a loss of $3.12 per share, $0.10 worse than the consensus of ($3.02). Revenues rose 4.3% year/year to $3.29 billion versus the $3.33 billion consensus. "This was a disappointing quarter for Delta and there are more challenging times ahead," said Gerald Grinstein, Delta C.E.O.."Continued losses of this magnitude are unsustainable".
Harley-Davidson reported earnings of $0.68 per share, $0.04 better than the Reuters Research consensus of $0.64. Revenues rose 4.7% year/year to $1.17 billion versus the $1.17 billion consensus.
Food & Beverage . . . Pepsi Bottling cut to Equal Weight from Overweight at Morgan Stanley. The downgrade is based on valuation upside relative to firm's beverage coverage universe.
Consumer Products . . . Procter & Gamble cut to Neutral from Buy at Bank of America. The downgrade is based on valuation as stock sits within 1% of firm's $107 price target.
Restaurants . . . The WSJ reports that Global-Dining, a Tokyo-based restaurant chain, is in talks with Krispy Kreme Doughnuts to jointly bring the U.S. doughnut chain's shops to Japan, according to a senior executive at Global-Dining. The Japanese company last met with Krispy Kreme in February at the doughnut maker's headquarters, said Michael Nishi, Global-Dining's CFO. The co is waiting for Krispy Kreme to make a decision about whether to go ahead with the partnership. A spokeswoman for Krispy Kreme said the company is eager to expand in Japan, but declined to discuss any possible tie-ups.
McDonald's cut to Sector Perform at CIBC. The downgrade is based on company's report of weak same-store sales in March. CIBC believes that the shares are hyper-sensitive to comp metric given much more challenging comps starting in May. While U.S. comp deceleration is subtle, it raises macro issues (higher gas prices, food costs) and competitive ones (can MCD comp as well if Burger King is positive too?).
UBS out in defense of McDonalds after the company last night reported disappointing March same store sales in both Europe and the US, causing the stock to fall 3% in after hours trading. US same store sales growth was +10% vs. 11-13% Street expectation with Europe same store sales declining -3% vs. firm's +3% expectation. UBS notes they would be buyers on weakness as they believe the higher than expected EPS growth was driven by stronger than expected margin expansion at company-owned restaurants. The firm also thinks their +3% European SSS estimate in 2Q04 could prove conservative based upon the rollout of salads and other better-for-you menu items in Europe as well as a lessening negative weather impact. They are reiterating their Buy rating with $35 target.
McDonald's guided 1st quarter EPS to be about $0.40, better than $0.38 estimate and consensus of $0.37. Strong EPS guidance even in the face of softer than expected March international sales supports view that MCD is still operating at a below normalized earnings level. March same store sales were strong in the U.S., up 9.9%, exceeding up 9% expectation. But European constant
currency same store sales declined 2.9%, against a down 5.4% comparison. APMEA comps were also softer than expected, up 2.7%, versus down 9.9%. There were negative trade day influences in the month that we were aware of-- down 1% in the U.S., down 2.2% in Europe and down 3.3% in APMEA. MCD offered little color on Europe, but the Salads Plus intro in the U.K. and Germany was not completed until the very end of the month with no advertising until early April. MCD focus in 2004 is on Europe, which has significant earnings leverage. Analysts are concerned about the March sales disappointment in Europe but still anticipate a 2004 turnaround in that key region. Analysts are maintaining above consensus estimates despite the encouraging 1st quarter guidance until European trends are clearer.
Retail . . . CL King maintains their Sell rating on Wild Oats, saying checks indicate that the company is retaining much lower proportions than others of the business gained during the 20 week strike/lockout at the "Big 3" Southern California supermarket chains ended late February.
Banc of America downgrades Target to Neutral from Buy based on valuation, as the stock is trading near their $46 target. While firm says it is clear that the co has seen an inflection point in earnings, those buying the stock today will need to push estimates higher and higher to make the stock work.
Healthcare . . . Tenet Healthcare announced that it has been informed of two unrelated new inquiries being conducted by federal investigators in Southern California. The company said it has received a voluntary document request from the U.S. Attorney's office in Los Angeles seeking information from 1993 to the present about coding and billing practices at the Comprehensive Cancer Center at Tenet's Desert Regional Medical Center in Palm Springs. Separately, co has received a voluntary request for documents from the Los Angeles U.S. Attorney's office primarily seeking information from Jan. 1, 2003 to present about the relationship between Tenet's Centinela Hospital Medical Center and Allied Homecare Consultants.
Barron's Online highlights Visx, which warned in January that the company's first-quarter outlook would fall short of Wall Street's estimates. But according to article, Visx should generate eye-popping growth this year as the economy improves and a new technology boosts revenues. More patients are likely to undergo laser surgery and more doctors should begin using a new system that will generate higher royalties for Visx. As Visx's margins widen in the face of analysts' lowered expectations, its earnings could beat Wall Street's consensus. "If you look at what they are expected to earn this year, it is around 70 cents a share. I think that by 2005, it will be $1.00 a share," says Joseph Garner, director of research for Emerald Asset Management. Known as lasik or refractive laser surgery, this elective surgery costs between $1,800 and $5,000 for both eyes and is not covered by most health plans. Jason Mills, an analyst at First Albany, says Visx shares could fetch a P/E multiple of 28.6x his 2005 earnings estimate of 90 cents a share -- or 26. And Emerald's Garner says it could command 30 times his 2005 earnings estimate of $1 a share, for a target price of 30.
HCA Healthcare now sees 1st quarter EPS of $0.69 versus the consensus of $0.76, to reflect results of company's March "hindsight analysis" of its accounts receivable and a significant increase in uninsured volumes. The company also revises 2004 guidance, now sees EPS of $2.60-2.70, versus the consensus of $2.87 and prior guidance of $2.85-2.95, to reflect a decrease in its previously expected medical liability insurance premium expense of approx $28 million.
Johnson & Johnson reported solid first quarter results. EPS at $0.83 up 20.3% year/year beat estimates by $0.04 and consensus by $0.03. First quarter sales rose 17.7% to a record $11.6 billion, benefiting 5.4% from positive FX. Analysts are increasing 2004 EPS estimate to $2.97 (+12% year/year) from $2.95 previously. This estimate is below management's $3.00 guidance because it now incorporates the assumption of DURAGESIC generic competition from July 2004 on vs. early 2005, as the market takes a more conservative stand on the topic. Total 2004 sales should increase 9% to $45.75 billion. Not much has changed in the J&J story. Competition in key products continues to intensify and the threat of generic pharmaceuticals is increasingly real. While the market has yet to gain real clarity as to how management will successfully offset these near-term risks, cost cutting initiatives are underway which should help fund R&D investment and help sustain EPS growth as well. Still, JNJ continues to exceed expectations, the company has an enviable cash position and balance sheet and JNJ shares trade at compelling valuation levels. Analysts continue to believe that JNJ shares could reach $57 by year-end, as the company delivers solid results and investor's worst case fears don't fully materialize. During 1st quarter 2004, Pharmaceutical and Consumer sales increased 15.2% and 14.3% year/year respectively, exceeding estimates by approx. 5%. MD&D rose 22.9% despite CYPHER sales of $532M versus $606 million estimate.
Drugs . . . Piper Jaffray upgrades Pharmaceutical Resources to Outperform from Market Perform. Yesterday, the company announced both an interesting acquisition and a disappointing 1st quarter report. The firm would use the stock's extended weakness over the past several days as an opportunity for longer-term investors to begin rebuilding positions in this well run emerging generic story. However, CIBC downgrades the stock to Sector Perform from Sector Outperform due to the acquisition, sub-optimal economics in the generic Ribavirin market, and delays in launches of generic Catapres-TTS and Glucovance. Although the stock trades at a 35% discount to the generic group, the name now appears to be more of an 2005 story. The firm's target goes to $59 from $84.
The WSJ reports Pfizer will offer free Viagra pills to loyal users in a move to maintain market share for impotence treatments as new rivals Levitra and Cialis come on the market. After six Viagra prescriptions are filled, the seventh will be free, Pfizer told the Journal. But the plan will only apply to those who pay for Viagra themselves, not for patients whose Viagra purchases are subsidized by insurance, it said.
Biotech . . . Vaxgen reports positive results of animal efficacy studies of Smallpox vaccine candidate.
Media . . . Sanders Morris Harris has a negative note out on Sirius Satellite this morning due to the firm's expectations of 90k subs in 1st quarter, which is below consensus of just over 100k. According to the firm, to get this, SIRI spent an estimate $75 million or $833/new sub, which comes with a payback period well over a decade. In addition, SIRI management gave themselves 65 million shares and options, which at current levels equates to a bonus of over $700/sub in 2003. The firm believes that is a considerable amount of money given the company's monthly rev of $13. SMH believes the company built a massive cash war chest (est. $655 mm at the end of 1st quarter), and are overspending to fuel sub growth.
Knight-Ridder was upped to Overweight from Neutral at JP Morgan based on valuation. According to firm, improving macroeconomic statistics indicate that labor markets are finally beginning to tighten. KRI has the most exposure to the high margin depressed help wanted category of any of the publishing groups. They also have the most relative exposure the increasingly successful online CareerBuilder, where metrics continue to show nice momentum. The firm increases estimates for '04 to $4.00 from $3.86 due to more optimistic estimates for help wanted and retail advertising. According to analyst, KRI is cheap on EV/2004 EBITDA at 10.2x, an 18% discount to peers. It is also undervalued on a private market basis. In addition, KRI has been willing to return capital to shareholders, which should allow for solid returns via dividends, share buy back, and modest EPS growth.
EMS . . . Thomas Weisel previews 1st quarter for the EMS sector. The firm expects strong revenue numbers, reflecting a broad-based recovery in key end markets, but the earnings picture continues to be mixed. The firm believes Flextronics has the best chance to beat its EPS forecast with others making the numbers, but Celestica may struggle. After Jabil, FLEX is clearly the best of the rest. The firm expects Sanmina to meet estimates though there is greater likelihood of top line upside.
Storage . . . Susquehanna Group upgrades Adaptec to Net Positive from Continued Net Neutral as its new product portfolio provides significant upside. Adaptec is on the cusp of a transition. The company is benefiting from the growth in the platforms business and from a technology shift to SATA and SAS from SCSI. Its storage platform business can double in 2005. The firm believes the co has a time-to-market advantage in the iSCSI storage arrays (with SATA drives), and the firm's checks indicate a solid pipeline in this area. Other subsystems including (FC-SATA storage arrays) are also gaining traction.
Network Equipment . . . Thomas Weisel expects Scientific- Atlanta to beat consensus fiscal 3rd quarter rev/EPS estimate of $408.3million/$0.31 and at least meet firms $419.8 million/$0.31 estimate. Firm expects upside to be driven by continued strength in DVR shipments and incremental contributions from previously dormant elements of the customer base. In addition, a higher mix shift toward HD and HD-DVR set-tops means more customers are upgrading. Given the healthy growth outlook over the next couple of years, driven by the DVR upgrade cycle, the potential for upward earnings revisions and the attractive valuation, firm continues to be bullish on the stock.
Schwab SoundView out saying they think Motorola's 1st quarter results will show substantial improvement in handset unit sales, beating their above-consensus 21.7 million unit estimate.
IRG initiates coverage of InterDigital Communications with Buy rating and $27 price target. With many leading wireless OEMs as licensees, the company is well-positioned to benefit from wireless-industry spending as it transitions from 2G to 3G platforms. Catalysts include favorable arbitration resolution with Nokia and Samsung, share gains by current licensees, signing additional licensees, and market acceptance of a full W-CDMA (3G) solution. Firms $27 price target is based on a blended multiple of 2005E EPS. With only one direct comparable (Qualcomm), a peer-group valuation is not possible. InterDigital has a solid balance sheet, with $1.80 in cash per share and little debt. Also, its products typically carry 100% gross margins.
Semiconductors . . . CIBC believes that Linear Tech's quarter and outlook speaks well for its analog peers Maxim, Semtec, Microsemi and Integrated Silicon and lends credence to firm's continuing thesis that high performance analog will outperform and lead the broader semi group in 2004.
Susquehanna upgrades AMD to Net Positive from Net Neutral and raises 1st quarter-2nd quarter estimates above consensus; despite a back-end loaded 1st quarter. The firm believes that AMD should be able to beat consensus revenue of $1.12 billion. The firm says the key driver to AMD's strength in 1st quarter is its flash business, which appears to have come in higher than expected due to strong demand for handsets; also, checks confirm that the company has successfully transitioned its Athlon 64 processors targeting the notebook PC and enterprise markets.
Analyst community in general seeing Intel's earnings and guidance as a non-event with no rating changes or meaningful changes to estimates issued. Smith Barney comments that Intel's results and outlook were somewhere between the bull and bear cases for the occasion -- but the bull and bear cases were not terribly far apart in the first place. Even though guidance implies that Street consensus needs to be trimmed for 2nd quarter, they believe that investors had been widely anticipating that change. They also note that some of the more negative speculation in recent weeks about gross margins did not materialize, which may be a bit of a relief for some investors. JP Morgan out saying they are concerned that Intel's inventory has ballooned to 79 days, the highest level since 1995. Although the company claimed this was due to unexpected yield improvements on its 90nm Prescott products, JP Morgan and several other firms noting this might not be the whole truth and that Intel needs above-seasonal revenue growth during 2nd half 2004 in order to avoid either an inventory write-down or lower utilization rates. On a more positive side, the company commented that it believes inventory levels of notebook processors, which caused the lower-than-expected revenue in 1st quarter 2004, have normalized and Intel is expecting seasonal unit shipment patterns going forward.
Intel’s gross margin in 1st quarter 2004 was notably strong, and was attributed to better than expected yields in its 90- nanometer production. Excluding the settlement charge, which was included in the cost of sales, GM was 62.2%, well above the company's guidance of 60% +/-1%, and above our estimate of 60.8%. On a sequential basis, despite the 7.4% Quarter over Quarter decline in revenues, gross margin in 1st quarter 2004 actually stayed flat, excluding one-time factors. Intel guided for 2nd quarter 2004 revenues of $7.6-$8.2bn (down 2.4% Quarter over Quarter at the mid-point) and gross margin of 60%+/2%. Anlaysts are lowering revenue estimate from $8.05 billion to $8.00 billion and our EPS from $0.28 to $0.27. Analysts are maintaining gross margin estimate at 62.2%. Analysts strongly believe Intel's gross margin guidance is conservative, as revenues are expected to decline by only 1.1% Quarter over Quarter, and expect startup costs for 65nm development to be minimal. In addition, expect 90nm production to increase at a rapid pace and believe yields will continue to improve. The manufacturing story is coming through as we expected and Intel's execution is par excellent. Analysts are maintaining our gross margin estimates for the remainder of this year: our GM for 2004 is now 63.4%, which
remains above Intel’s guidance of 62% +/- a few points. Analysts have lowered revenue estimates slightly from $34.68bn (+15.1% Year over Year) to $34.44bn (+14.3% Year over Year). EPS goes from $1.34 to $1.30, though note that $0.02 of the reduction is due to the legal settlement which we had not factored into estimates previously. Intel shares present a compelling risk-reward ratio in our view, and we reiterate our Outperform rating and $38 price target. Expect recent concerns surrounding the stock to be put to rest as: (1) notebook channel inventory has clearly been worked down, (2) concerns surrounding 90nm delays should be alleviated given the excellent execution in 1st quarter, (3) Intel is clearly starting to regain market share in flash.
Software . . . Amtech reiterates their Buy rating on Take-Two after the company warned and announced the resignation of CEO Jeff Lapin. They believe any weakness in the name today represents a buying opportunity; while the co is changing its publishing schedule with two franchises, firm notes that it has maintained that the next Grand Theft Auto game, San Andreas, is still coming in October. Also, firm notes that the mgmt change comes after what they understand has been internal issues, and even though TTWO changed Lapin's compensation in Dec in an effort to retain him.
Portal Software upped to Sector Outperform at CIBC. Price target is $10. The upgrade reflects likelihood of two possible scenarios, improved financial performance or acquisition candidate, over the next 12-18 months, either of which could present meaningful upside to current stock price and limited downside risk. With respect to the acquisition possibility. The firm believes that following recent contract announcements in CommSoft industry, M&A could now become a more viable way to increase market share - quality of assets and customers and stock's relative valuation could make an attractive acquisition target.
Sprint has significantly expanded its deployment of MicroStrategy's platform, adopting MicroStrategy Report Services, and making MicroStrategy its enterprise-wide business intelligence standard. Sprint is harnessing MicroStrategy for such areas as call-traffic analysis, marketing analysis, financial performance assessments, and Web-traffic analysis.
Take-Two guides below consensus for 2nd quarter (Apr), now sees a loss of $0.15 versus consensus of a $0.34 profit, on revenues of $170 million, consensus $220 million. Cut in guidance is result of moving of launch of Red Dead Revolver game to 3rd quarter from 2nd quarter. The company also reiterates 3rd quarter guidance, still sees EPS of $0.12-0.17 versus consensus of $0.16 on revenues of $180-200 million, consensus is $188.6 million. TTWO also announces Richard Roedel has been named Executive Chairman and Interim C.E.O., following resignation of Jeffrey Lapin as C.E.O.. Take-Two also announces Paul Eibeler has been named President. Eibeler previously served as President and a director of Take-Two from Dec 2000 to June 2003.
JP Morgan upgrades NetIQ to Overweight from Neutral and raises their 2004 estimates above consensus. The firm thinks that a seasonally slower March quarter is in the stock and the earnings picture improves starting in June, which will serve as a catalyst for outperformance. The firm also notes that the stock trades at a discount to peers at 1.8x EV/Sales versus peers at closer to 4.0x.
Hot Items - Check out the "Hot Items" page (updated daily)
--------------------------------------------------------------------------------
Disclaimer: Due to the nature of the Internet, RobBlack.com and Goodwyn, Long & Black (GLB) does not make specific trading recommendations or give individualized market advice. Information contained in this publication is provided as an information service only. RobBlack.com and (GLB) recommends that you get personal advice from an investment professional before buying or selling stocks or other securities. The securities markets and especially Internet stocks are highly speculative areas for investments and only you can determine what level of risk is appropriate for you. Also, readers should be aware that GLB, its employees and affiliates may own securities that are the subject of reports, reviews or analysis within this publication. We obtain the information reported herein from what it deems reliable sources, no warranty can be given as to the accuracy or completeness of any of the information provided or as to the results obtained by individuals using such information. Each user shall be responsible for the risks of their own investment activities and, in no event, shall GLB or its employees, agents, partners, or any other affiliated entity be liable for any direct, indirect, actual, special or consequential damages resulting from the use of the information provided. Rob Black and (GLB) carry positions in many of the names reported on. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. RobBlack.com and Goodwyn, Long & Black Investment Inc. relies on information provided by corporations, news services, in-house research, published brokerage research, Edgar filings, and also may include information from outside sources and interviews conducted by ourselves. Readers should not rely solely on the information contained in this publication, but should consult with their own independent tax, business and financial advisors with respect to any investment opportunity, including any contemplated investment in any security.
http://www.robblack.com/rb_marketwrap.shtml
Strong Sectors: biotech, internet, drug, chemical, transportation
Weak Sectors: metal mining, restaurant, healthcare facilities, iron & steel, financial, homebuilding, utility
Top Stories . . . Prices paid by U.S. consumers in March rose 0.5 percent, a fourth straight increase, boosted by rising energy, transportation and clothing costs. Excluding energy and food, core prices climbed the most in two years.
The U.S. trade deficit narrowed to $42.1 billion in February from a record the previous month as a weaker dollar and improving global economy contributed to the biggest rise in exports in more than seven years.
U.S. Treasury notes fell, pushing the yield on the benchmark 10-year note to the highest this year, after the consumer price index rose more than forecast in March, raising concerns of faster inflation.
Bank of America, the second- biggest U.S. bank, said first-quarter profit rose 11 percent as consumer lending increased and fees from money management and investment banking rose.
HCA, the biggest U.S. hospital chain, said profit for the first quarter fell short of its forecasts and lowered its 2004 outlook because more patients didn't pay bills. The shares fell as much as 11 percent.
Mortgages Numbers . . . Mortgage applications fell for the 4th consecutive drop-off with the applications index falling 22.1%, according to the Mortgage Bankers Association. The purchase index dropped 9.5%, the lowest going back to early January, while refinancing tanked by 30.7%, the largest drop since late July. Thirty-year fixed-rate mortgages bumped up 2 basis points to 5.77% from a week ago, hitting a 3-month high.
Market Comment . . . Rather than a rollover, we are at an upward inflection point in the global economic outlook. The U.S. has moved fully out of its strong-dollar deflation crash of 2000-2001 and Japan is following along. Larger firms have finally started buying inventory and hiring new workers, after lagging behind U.S. small businesses in 2002 and 2003 .
Strong March retail sales (up 1.8% m/m), the upward revisions to January and February, the strength of February inventory growth, and the continued growth in real and nominal wages support our expectation of consumer resilience and a coming snapback in inventories. This should contribute to further hiring and inventory rebuilding, adding to the expansion despite interest rate increases.
The bears contend that U.S. consumption growth depends on tax refunds and mortgage refinancings. We disagree. U.S. consumption growth is more firmly based, depending instead on:
• Real wage and salary income, which has been strong in the last decade as explained below;
• Lifetime income expectations, which have been properly bolstered by productivity growth and the steady 20-year downtrend in the unemployment rate (see No Rollover in Consumption, September 30, 2002); and
• The steadily high savings rate and record household net worth. The government’s misleadingly low “personal savings rate” (1.9% in February) substantially understates actual additions to savings by excluding realized gains on houses, equities and mortgage refinancing payments.
We don’t think mortgage refinancings and tax refunds are key variables in the outlook.
• True, we expect sharp rises in interest rates and bond yields. This will curtail the mortgage refinancing bulge, but we think cash-out refinancings have been overstated as a cause of consumption.
• Also true, the extra tax refunds will stop, but the much more important factor, lower income tax rates and the related gains in disposable income, are likely to last at least through 2010 (assumes a second Bush term).
• Some thought U.S. consumption growth would stop in the fourth quarter of 2003 after the third quarter burst (supposedly driven by rebate checks and cash-out mortgage refinancings). Instead, consumption growth remained steady in the fourth quarter.
• In recent years, disposable income has been bumpier than consumption due to tax changes. Both continue to grow strongly,
Wage Growth Continues
Critics of the 2002-2004 U.S. expansion contend that wage growth has slowed (true) and is now weak (not by historical standards). Part of the confusion is that wage growth is usually expressed in nominal terms, without taking into account the dramatic decline in the inflation rate in the 1980s and 1990s. In addition, we think wage growth was exaggerated in the late 1990s by the 3.8% unemployment extreme.
• In real terms, hourly wages rose 0.5% in the 12 months through March, which is less that the 3% peak growth in 1998 but better than the real wage declines after the 1982 and 1990-1991 recessions. Why did real wage growth hold up so well after the 2001 recession? It was due to the flexibility of the work force, productivity growth, and because the unemployment rate peaked at only 6.3%, much lower than after previous recessions.
• Importantly, the growth in total wages and salaries, a measure which combines wages, the length of the work week and total employment, has revived.
Part-time, Low-paying Jobs?
Some contend that nearly all of the 308,000 net new jobs in the March employment survey were part-time jobs, which increased 296,000. This isn’t correct. It confuses information from two different surveys.. The 308,000 increase was the change in nonfarm payrolls and came from a survey of firms. This survey doesn’t ask whether a job is part-time or full-time. The 296,000 increase in part-time employment is from the household survey, which asks respondents if they are working full or part time. The household survey has been showing a decline in part-time jobs, so March was a catch-up month for part-time jobs.
• In February, part-time jobs fell 277,000 while the establishment survey showed an increase of 46,000, yet that doesn’t mean that part-time jobs were converted into full-time jobs—the data is from two different surveys.
• Over the three months through March, part-time jobs were down 55,000 and over the six months through March it was down 163,000.
• The proper conclusion is that part-time jobs have been declining while full-time employment, whether based on the establishment or household survey, has been rising. Another argument is that the U.S. is substituting lower-paying jobs for higher-paying jobs. This isn’t correct. The share of manufacturing jobs has been declining steadily for 50 years, yet U.S. per capita income has been rising strongly. The key reason behind relative strong wage and salary growth in the face of the weakness in manufacturing employment is that non-manufacturing wages are nearly as high as manufacturing wages.
• In March, average hourly earnings of production workers in manufacturing were $15.16 ($16.01 with overtime) while average hourly earnings in service sector jobs was $15.13.
• Average earnings in service-sector jobs have been, on average, narrowing the gap with manufacturing jobs for at least 20 years and have now almost reached parity.
• When retail and leisure jobs are excluded, service jobs paid $17.20 on average.
• Over the past six months, service jobs excluding retail and leisure have risen by more than 400,000 while manufacturing jobs have fallen 65,000. The lower-paying retail and leisure jobs rose 204,000.
Economy Heating Up . . . The Wall Street Journal carries a front page article on an economy that is gathering, you should pardon the expression, "increased momentum." Everybody is rushing to adjust first-quarter GDP from 4.0%-to-5.0%, and ISI says March will probably be viewed as a turning point for the recovery to broad-based, and self-feeding.
Yesterdays Shakeout . . . .The intense downside reaction yesterday has something to do with the goodies being enjoyed by the 45-year low in short rates. There is the carry trade, where professionals have been borrowing at 1.0%, and getting a return 300 basis points higher. Jim Bianco says the Bond Market is twice as leveraged as it was ten years ago, when the Fed began a tightening round. Also, more and more consumer debt is adjustable. Of the $2.3 trillion increase in consumer debt over the past three years, 44.0% is tied to short-rates, according to macro mavens. But, it is not a given that the Fed is going to tighten by August. Maybe they would want to see a couple of confirming months in job creation, and consumer spending. All of which places enormous focus on April 21st, when Fed Chief Alan Greenspan will appear before the Joint Economic Committee of Congress.
Financials . . . Merrill Lynch downgrades Annaly Mortgage to Neutral from Buy due to the increasing risk of Fed action on short term interest rates. The firm notes that the company's dividend typically comes under pressure as the yield curve flattens, and firm says the more the yield curve flattens as the Fed raises rates, the more pressure they would expect on NLY's dividend. Also, firm says their earnings estimates reflect 100 basis points of rising short-term interest rates over 2005, and should the Fed act sooner, it would likely cause modest short-term pressure on their earnings estimate.
American International was upped to Overweight at Lehman. The upgrade from Equal Weight comes as firm now expects the favorable environment for AIG`s P/C business to be more sustainable than firm originally had thought. Additionally, Lehman thinks life segment earnings are more sustainable than firm did previously due to company's strong position in less competitive distribution channels. Firm's 2004 estimate goes to $4.52 from $4.35 and initiates above-consensus 2005 estimate of $5.31 (consensus $5.13). Price target goes to $92 from $72.
Bank of America reported earnings of $1.83 per share, which includes $0.16 charge to cover mutual fund settlement, $0.04 better than the consensus of $1.79. Revenues rose 5.7% year/year to $9.69 billion versus the $9.80 billion consensus. If one adds back the $0.16 charge, company beat consensus by $0.20. In touch with Reuters to ascertain which actual is comparable to consensus.
Merrill Lynch reported first quarter 2004 operating EPS of $1.22 - 14% ahead of consensus-like estimate of $1.07 per share. Overall, net revenues rose 25% Quarter/Quarter and believe it is important to note the top-line growth at MER, as many doubted the firm’s ability to put up such top-line growth. The firm's record quarterly results were primarily driven by principal transactions. However, MER saw a second consecutive quarterly improvement in investment banking revenue (up 10%) and retail activity (commissions grew 17%) quarter over quarter. In conjunction with MER’s recently announced $2 billion share repurchase plan, the firm repurchased 8.2 million shares for a total of roughly $500 million. Expect the same rate of share repurchases over the remaining three quarters of 2004. Looking ahead, expect organic growth to remain solid and believe MER management will continue functioning with operating discipline. Additionally, would not be surprised to see MER do a bolt-on acquisition, perhaps in order to further automate its trading business. Analysts are raising: 1) 2nd quarter 2004E from $1.05 to $1.17 per share; 2) 2004E from $4.22 to $4.72 per share; and 3) 2005E from $4.70 to $5.30 per share. Reiterate an Outperform rating on MER shares and our $72 yearend 2004 price target. MER shares are currently trading at an unwarranted 10% discount to peers.
Capital One reported March performance data for its auto finance trusts this morning. Overall, the data showed a continued seasonal decrease in delinquencies. All the trust series were in compliance with their respective credit quality and extension rate tests. Of the ten auto loan securitizations, seven have seasoned for ten months or more. All of these securitizations showed a decrease in delinquencies. Extension rates declined in six of the series and remained unchanged in one series, indicating that the decrease in delinquency rates was not attributable to an increase in extensions. Recoveries may have benefited from slightly higher used car prices in March as the Manheim Index increased by 1.7% from February, showing the highest monthly increase in used car prices since July 1998. Although the continued decline in delinquency rates appears to be largely seasonal, the delinquency
Paper . . . Georgia-Pacific issues upside preannouncement for 1st quarter (March), sees EPS of approximately $0.60, excluding a $0.06 charge versus consensus of $0.48. GP cites strong performance in its building products businesses.
Transports . . . Delta Air Lines reported a loss of $3.12 per share, $0.10 worse than the consensus of ($3.02). Revenues rose 4.3% year/year to $3.29 billion versus the $3.33 billion consensus. "This was a disappointing quarter for Delta and there are more challenging times ahead," said Gerald Grinstein, Delta C.E.O.."Continued losses of this magnitude are unsustainable".
Harley-Davidson reported earnings of $0.68 per share, $0.04 better than the Reuters Research consensus of $0.64. Revenues rose 4.7% year/year to $1.17 billion versus the $1.17 billion consensus.
Food & Beverage . . . Pepsi Bottling cut to Equal Weight from Overweight at Morgan Stanley. The downgrade is based on valuation upside relative to firm's beverage coverage universe.
Consumer Products . . . Procter & Gamble cut to Neutral from Buy at Bank of America. The downgrade is based on valuation as stock sits within 1% of firm's $107 price target.
Restaurants . . . The WSJ reports that Global-Dining, a Tokyo-based restaurant chain, is in talks with Krispy Kreme Doughnuts to jointly bring the U.S. doughnut chain's shops to Japan, according to a senior executive at Global-Dining. The Japanese company last met with Krispy Kreme in February at the doughnut maker's headquarters, said Michael Nishi, Global-Dining's CFO. The co is waiting for Krispy Kreme to make a decision about whether to go ahead with the partnership. A spokeswoman for Krispy Kreme said the company is eager to expand in Japan, but declined to discuss any possible tie-ups.
McDonald's cut to Sector Perform at CIBC. The downgrade is based on company's report of weak same-store sales in March. CIBC believes that the shares are hyper-sensitive to comp metric given much more challenging comps starting in May. While U.S. comp deceleration is subtle, it raises macro issues (higher gas prices, food costs) and competitive ones (can MCD comp as well if Burger King is positive too?).
UBS out in defense of McDonalds after the company last night reported disappointing March same store sales in both Europe and the US, causing the stock to fall 3% in after hours trading. US same store sales growth was +10% vs. 11-13% Street expectation with Europe same store sales declining -3% vs. firm's +3% expectation. UBS notes they would be buyers on weakness as they believe the higher than expected EPS growth was driven by stronger than expected margin expansion at company-owned restaurants. The firm also thinks their +3% European SSS estimate in 2Q04 could prove conservative based upon the rollout of salads and other better-for-you menu items in Europe as well as a lessening negative weather impact. They are reiterating their Buy rating with $35 target.
McDonald's guided 1st quarter EPS to be about $0.40, better than $0.38 estimate and consensus of $0.37. Strong EPS guidance even in the face of softer than expected March international sales supports view that MCD is still operating at a below normalized earnings level. March same store sales were strong in the U.S., up 9.9%, exceeding up 9% expectation. But European constant
currency same store sales declined 2.9%, against a down 5.4% comparison. APMEA comps were also softer than expected, up 2.7%, versus down 9.9%. There were negative trade day influences in the month that we were aware of-- down 1% in the U.S., down 2.2% in Europe and down 3.3% in APMEA. MCD offered little color on Europe, but the Salads Plus intro in the U.K. and Germany was not completed until the very end of the month with no advertising until early April. MCD focus in 2004 is on Europe, which has significant earnings leverage. Analysts are concerned about the March sales disappointment in Europe but still anticipate a 2004 turnaround in that key region. Analysts are maintaining above consensus estimates despite the encouraging 1st quarter guidance until European trends are clearer.
Retail . . . CL King maintains their Sell rating on Wild Oats, saying checks indicate that the company is retaining much lower proportions than others of the business gained during the 20 week strike/lockout at the "Big 3" Southern California supermarket chains ended late February.
Banc of America downgrades Target to Neutral from Buy based on valuation, as the stock is trading near their $46 target. While firm says it is clear that the co has seen an inflection point in earnings, those buying the stock today will need to push estimates higher and higher to make the stock work.
Healthcare . . . Tenet Healthcare announced that it has been informed of two unrelated new inquiries being conducted by federal investigators in Southern California. The company said it has received a voluntary document request from the U.S. Attorney's office in Los Angeles seeking information from 1993 to the present about coding and billing practices at the Comprehensive Cancer Center at Tenet's Desert Regional Medical Center in Palm Springs. Separately, co has received a voluntary request for documents from the Los Angeles U.S. Attorney's office primarily seeking information from Jan. 1, 2003 to present about the relationship between Tenet's Centinela Hospital Medical Center and Allied Homecare Consultants.
Barron's Online highlights Visx, which warned in January that the company's first-quarter outlook would fall short of Wall Street's estimates. But according to article, Visx should generate eye-popping growth this year as the economy improves and a new technology boosts revenues. More patients are likely to undergo laser surgery and more doctors should begin using a new system that will generate higher royalties for Visx. As Visx's margins widen in the face of analysts' lowered expectations, its earnings could beat Wall Street's consensus. "If you look at what they are expected to earn this year, it is around 70 cents a share. I think that by 2005, it will be $1.00 a share," says Joseph Garner, director of research for Emerald Asset Management. Known as lasik or refractive laser surgery, this elective surgery costs between $1,800 and $5,000 for both eyes and is not covered by most health plans. Jason Mills, an analyst at First Albany, says Visx shares could fetch a P/E multiple of 28.6x his 2005 earnings estimate of 90 cents a share -- or 26. And Emerald's Garner says it could command 30 times his 2005 earnings estimate of $1 a share, for a target price of 30.
HCA Healthcare now sees 1st quarter EPS of $0.69 versus the consensus of $0.76, to reflect results of company's March "hindsight analysis" of its accounts receivable and a significant increase in uninsured volumes. The company also revises 2004 guidance, now sees EPS of $2.60-2.70, versus the consensus of $2.87 and prior guidance of $2.85-2.95, to reflect a decrease in its previously expected medical liability insurance premium expense of approx $28 million.
Johnson & Johnson reported solid first quarter results. EPS at $0.83 up 20.3% year/year beat estimates by $0.04 and consensus by $0.03. First quarter sales rose 17.7% to a record $11.6 billion, benefiting 5.4% from positive FX. Analysts are increasing 2004 EPS estimate to $2.97 (+12% year/year) from $2.95 previously. This estimate is below management's $3.00 guidance because it now incorporates the assumption of DURAGESIC generic competition from July 2004 on vs. early 2005, as the market takes a more conservative stand on the topic. Total 2004 sales should increase 9% to $45.75 billion. Not much has changed in the J&J story. Competition in key products continues to intensify and the threat of generic pharmaceuticals is increasingly real. While the market has yet to gain real clarity as to how management will successfully offset these near-term risks, cost cutting initiatives are underway which should help fund R&D investment and help sustain EPS growth as well. Still, JNJ continues to exceed expectations, the company has an enviable cash position and balance sheet and JNJ shares trade at compelling valuation levels. Analysts continue to believe that JNJ shares could reach $57 by year-end, as the company delivers solid results and investor's worst case fears don't fully materialize. During 1st quarter 2004, Pharmaceutical and Consumer sales increased 15.2% and 14.3% year/year respectively, exceeding estimates by approx. 5%. MD&D rose 22.9% despite CYPHER sales of $532M versus $606 million estimate.
Drugs . . . Piper Jaffray upgrades Pharmaceutical Resources to Outperform from Market Perform. Yesterday, the company announced both an interesting acquisition and a disappointing 1st quarter report. The firm would use the stock's extended weakness over the past several days as an opportunity for longer-term investors to begin rebuilding positions in this well run emerging generic story. However, CIBC downgrades the stock to Sector Perform from Sector Outperform due to the acquisition, sub-optimal economics in the generic Ribavirin market, and delays in launches of generic Catapres-TTS and Glucovance. Although the stock trades at a 35% discount to the generic group, the name now appears to be more of an 2005 story. The firm's target goes to $59 from $84.
The WSJ reports Pfizer will offer free Viagra pills to loyal users in a move to maintain market share for impotence treatments as new rivals Levitra and Cialis come on the market. After six Viagra prescriptions are filled, the seventh will be free, Pfizer told the Journal. But the plan will only apply to those who pay for Viagra themselves, not for patients whose Viagra purchases are subsidized by insurance, it said.
Biotech . . . Vaxgen reports positive results of animal efficacy studies of Smallpox vaccine candidate.
Media . . . Sanders Morris Harris has a negative note out on Sirius Satellite this morning due to the firm's expectations of 90k subs in 1st quarter, which is below consensus of just over 100k. According to the firm, to get this, SIRI spent an estimate $75 million or $833/new sub, which comes with a payback period well over a decade. In addition, SIRI management gave themselves 65 million shares and options, which at current levels equates to a bonus of over $700/sub in 2003. The firm believes that is a considerable amount of money given the company's monthly rev of $13. SMH believes the company built a massive cash war chest (est. $655 mm at the end of 1st quarter), and are overspending to fuel sub growth.
Knight-Ridder was upped to Overweight from Neutral at JP Morgan based on valuation. According to firm, improving macroeconomic statistics indicate that labor markets are finally beginning to tighten. KRI has the most exposure to the high margin depressed help wanted category of any of the publishing groups. They also have the most relative exposure the increasingly successful online CareerBuilder, where metrics continue to show nice momentum. The firm increases estimates for '04 to $4.00 from $3.86 due to more optimistic estimates for help wanted and retail advertising. According to analyst, KRI is cheap on EV/2004 EBITDA at 10.2x, an 18% discount to peers. It is also undervalued on a private market basis. In addition, KRI has been willing to return capital to shareholders, which should allow for solid returns via dividends, share buy back, and modest EPS growth.
EMS . . . Thomas Weisel previews 1st quarter for the EMS sector. The firm expects strong revenue numbers, reflecting a broad-based recovery in key end markets, but the earnings picture continues to be mixed. The firm believes Flextronics has the best chance to beat its EPS forecast with others making the numbers, but Celestica may struggle. After Jabil, FLEX is clearly the best of the rest. The firm expects Sanmina to meet estimates though there is greater likelihood of top line upside.
Storage . . . Susquehanna Group upgrades Adaptec to Net Positive from Continued Net Neutral as its new product portfolio provides significant upside. Adaptec is on the cusp of a transition. The company is benefiting from the growth in the platforms business and from a technology shift to SATA and SAS from SCSI. Its storage platform business can double in 2005. The firm believes the co has a time-to-market advantage in the iSCSI storage arrays (with SATA drives), and the firm's checks indicate a solid pipeline in this area. Other subsystems including (FC-SATA storage arrays) are also gaining traction.
Network Equipment . . . Thomas Weisel expects Scientific- Atlanta to beat consensus fiscal 3rd quarter rev/EPS estimate of $408.3million/$0.31 and at least meet firms $419.8 million/$0.31 estimate. Firm expects upside to be driven by continued strength in DVR shipments and incremental contributions from previously dormant elements of the customer base. In addition, a higher mix shift toward HD and HD-DVR set-tops means more customers are upgrading. Given the healthy growth outlook over the next couple of years, driven by the DVR upgrade cycle, the potential for upward earnings revisions and the attractive valuation, firm continues to be bullish on the stock.
Schwab SoundView out saying they think Motorola's 1st quarter results will show substantial improvement in handset unit sales, beating their above-consensus 21.7 million unit estimate.
IRG initiates coverage of InterDigital Communications with Buy rating and $27 price target. With many leading wireless OEMs as licensees, the company is well-positioned to benefit from wireless-industry spending as it transitions from 2G to 3G platforms. Catalysts include favorable arbitration resolution with Nokia and Samsung, share gains by current licensees, signing additional licensees, and market acceptance of a full W-CDMA (3G) solution. Firms $27 price target is based on a blended multiple of 2005E EPS. With only one direct comparable (Qualcomm), a peer-group valuation is not possible. InterDigital has a solid balance sheet, with $1.80 in cash per share and little debt. Also, its products typically carry 100% gross margins.
Semiconductors . . . CIBC believes that Linear Tech's quarter and outlook speaks well for its analog peers Maxim, Semtec, Microsemi and Integrated Silicon and lends credence to firm's continuing thesis that high performance analog will outperform and lead the broader semi group in 2004.
Susquehanna upgrades AMD to Net Positive from Net Neutral and raises 1st quarter-2nd quarter estimates above consensus; despite a back-end loaded 1st quarter. The firm believes that AMD should be able to beat consensus revenue of $1.12 billion. The firm says the key driver to AMD's strength in 1st quarter is its flash business, which appears to have come in higher than expected due to strong demand for handsets; also, checks confirm that the company has successfully transitioned its Athlon 64 processors targeting the notebook PC and enterprise markets.
Analyst community in general seeing Intel's earnings and guidance as a non-event with no rating changes or meaningful changes to estimates issued. Smith Barney comments that Intel's results and outlook were somewhere between the bull and bear cases for the occasion -- but the bull and bear cases were not terribly far apart in the first place. Even though guidance implies that Street consensus needs to be trimmed for 2nd quarter, they believe that investors had been widely anticipating that change. They also note that some of the more negative speculation in recent weeks about gross margins did not materialize, which may be a bit of a relief for some investors. JP Morgan out saying they are concerned that Intel's inventory has ballooned to 79 days, the highest level since 1995. Although the company claimed this was due to unexpected yield improvements on its 90nm Prescott products, JP Morgan and several other firms noting this might not be the whole truth and that Intel needs above-seasonal revenue growth during 2nd half 2004 in order to avoid either an inventory write-down or lower utilization rates. On a more positive side, the company commented that it believes inventory levels of notebook processors, which caused the lower-than-expected revenue in 1st quarter 2004, have normalized and Intel is expecting seasonal unit shipment patterns going forward.
Intel’s gross margin in 1st quarter 2004 was notably strong, and was attributed to better than expected yields in its 90- nanometer production. Excluding the settlement charge, which was included in the cost of sales, GM was 62.2%, well above the company's guidance of 60% +/-1%, and above our estimate of 60.8%. On a sequential basis, despite the 7.4% Quarter over Quarter decline in revenues, gross margin in 1st quarter 2004 actually stayed flat, excluding one-time factors. Intel guided for 2nd quarter 2004 revenues of $7.6-$8.2bn (down 2.4% Quarter over Quarter at the mid-point) and gross margin of 60%+/2%. Anlaysts are lowering revenue estimate from $8.05 billion to $8.00 billion and our EPS from $0.28 to $0.27. Analysts are maintaining gross margin estimate at 62.2%. Analysts strongly believe Intel's gross margin guidance is conservative, as revenues are expected to decline by only 1.1% Quarter over Quarter, and expect startup costs for 65nm development to be minimal. In addition, expect 90nm production to increase at a rapid pace and believe yields will continue to improve. The manufacturing story is coming through as we expected and Intel's execution is par excellent. Analysts are maintaining our gross margin estimates for the remainder of this year: our GM for 2004 is now 63.4%, which
remains above Intel’s guidance of 62% +/- a few points. Analysts have lowered revenue estimates slightly from $34.68bn (+15.1% Year over Year) to $34.44bn (+14.3% Year over Year). EPS goes from $1.34 to $1.30, though note that $0.02 of the reduction is due to the legal settlement which we had not factored into estimates previously. Intel shares present a compelling risk-reward ratio in our view, and we reiterate our Outperform rating and $38 price target. Expect recent concerns surrounding the stock to be put to rest as: (1) notebook channel inventory has clearly been worked down, (2) concerns surrounding 90nm delays should be alleviated given the excellent execution in 1st quarter, (3) Intel is clearly starting to regain market share in flash.
Software . . . Amtech reiterates their Buy rating on Take-Two after the company warned and announced the resignation of CEO Jeff Lapin. They believe any weakness in the name today represents a buying opportunity; while the co is changing its publishing schedule with two franchises, firm notes that it has maintained that the next Grand Theft Auto game, San Andreas, is still coming in October. Also, firm notes that the mgmt change comes after what they understand has been internal issues, and even though TTWO changed Lapin's compensation in Dec in an effort to retain him.
Portal Software upped to Sector Outperform at CIBC. Price target is $10. The upgrade reflects likelihood of two possible scenarios, improved financial performance or acquisition candidate, over the next 12-18 months, either of which could present meaningful upside to current stock price and limited downside risk. With respect to the acquisition possibility. The firm believes that following recent contract announcements in CommSoft industry, M&A could now become a more viable way to increase market share - quality of assets and customers and stock's relative valuation could make an attractive acquisition target.
Sprint has significantly expanded its deployment of MicroStrategy's platform, adopting MicroStrategy Report Services, and making MicroStrategy its enterprise-wide business intelligence standard. Sprint is harnessing MicroStrategy for such areas as call-traffic analysis, marketing analysis, financial performance assessments, and Web-traffic analysis.
Take-Two guides below consensus for 2nd quarter (Apr), now sees a loss of $0.15 versus consensus of a $0.34 profit, on revenues of $170 million, consensus $220 million. Cut in guidance is result of moving of launch of Red Dead Revolver game to 3rd quarter from 2nd quarter. The company also reiterates 3rd quarter guidance, still sees EPS of $0.12-0.17 versus consensus of $0.16 on revenues of $180-200 million, consensus is $188.6 million. TTWO also announces Richard Roedel has been named Executive Chairman and Interim C.E.O., following resignation of Jeffrey Lapin as C.E.O.. Take-Two also announces Paul Eibeler has been named President. Eibeler previously served as President and a director of Take-Two from Dec 2000 to June 2003.
JP Morgan upgrades NetIQ to Overweight from Neutral and raises their 2004 estimates above consensus. The firm thinks that a seasonally slower March quarter is in the stock and the earnings picture improves starting in June, which will serve as a catalyst for outperformance. The firm also notes that the stock trades at a discount to peers at 1.8x EV/Sales versus peers at closer to 4.0x.
Hot Items - Check out the "Hot Items" page (updated daily)
--------------------------------------------------------------------------------
Disclaimer: Due to the nature of the Internet, RobBlack.com and Goodwyn, Long & Black (GLB) does not make specific trading recommendations or give individualized market advice. Information contained in this publication is provided as an information service only. RobBlack.com and (GLB) recommends that you get personal advice from an investment professional before buying or selling stocks or other securities. The securities markets and especially Internet stocks are highly speculative areas for investments and only you can determine what level of risk is appropriate for you. Also, readers should be aware that GLB, its employees and affiliates may own securities that are the subject of reports, reviews or analysis within this publication. We obtain the information reported herein from what it deems reliable sources, no warranty can be given as to the accuracy or completeness of any of the information provided or as to the results obtained by individuals using such information. Each user shall be responsible for the risks of their own investment activities and, in no event, shall GLB or its employees, agents, partners, or any other affiliated entity be liable for any direct, indirect, actual, special or consequential damages resulting from the use of the information provided. Rob Black and (GLB) carry positions in many of the names reported on. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. RobBlack.com and Goodwyn, Long & Black Investment Inc. relies on information provided by corporations, news services, in-house research, published brokerage research, Edgar filings, and also may include information from outside sources and interviews conducted by ourselves. Readers should not rely solely on the information contained in this publication, but should consult with their own independent tax, business and financial advisors with respect to any investment opportunity, including any contemplated investment in any security.
http://www.robblack.com/rb_marketwrap.shtml
Discover What Traders Are Watching
Explore small cap ideas before they hit the headlines.
