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Tuesday, April 20, 2004 8:32:16 PM
U.S. stocks fell, sending the S&P 500 Index to its biggest decline in seven months, after Federal Reserve Chairman Alan Greenspan hinted that interest rates are headed higher. Shares of Phelps Dodge, the world's second-biggest copper company, and other producers of raw materials led the decline on concern higher interest rates will cool the economy. Benchmark indexes fell even as profit from 20 members of the S&P 500 today exceeded the average analyst forecast. The S&P 500 shed 17 points (-1.6%) to 1118, for its steepest decline since Sept. 24. An index of computer-related shares was the biggest contributor to the drop among the benchmark's 10 industry groups. The Nasdaq, which gets 39 percent of its value from technology shares, dropped 41 points (-2.1%) to 1978. The DJIA lost 123 points (-1.2%) to 10,314. More than three stocks fell for every one that rose on the New York Stock Exchange. Some 1.51 billion shares changed hands on the Big Board, 2.1 percent more than the three-month daily average.
Strong Sectors: autos, office equipment
Weak Sectors: gold, security systems, oil, REITs, mining, semiconductors
Top Stories . . . Federal Reserve Chairman Alan Greenspan said the threat of deflation is ``no longer an issue'' for the U.S. and companies appear to have a greater ability to raise prices.
General Motors, the world's largest automaker, said profit in the first quarter fell 14 percent after a gain last year from the sale of a military business generated a third of earnings. The company raised its earnings forecast for the year.
Wells Fargo, the fifth-biggest U.S. bank, said first-quarter profit rose 18 percent as the company opened more accounts and made more loans to consumers.
Pfizer, the world's largest drugmaker, said first-quarter earnings fell 50 percent on costs related to its purchase of Pharmacia and Esperion Therapeutics, as sales of the cholesterol-lowering Lipitor drug increased.
Starwood Capital Group and casino operator Kerzner International raised their joint offer for Wembley Plc to 309 million pounds ($555 million), topping an MGM Mirage bid, as U.K. government plans to relax gambling laws prompt competition for venues.
Janus Capital Group said Chief Executive Officer Mark Whiston is stepping down as the U.S. mutual fund company struggles to settle allegations that it permitted improper trading that hurt investors.
Motorola, the world's second- largest maker of mobile phones, said first-quarter profit more than tripled to the highest since at least 1990 as phone handset sales surged 67 percent.
NextWave Telecom, which filed for bankruptcy in 1998 because it couldn't pay $4.3 billion for cell-phone airwave licenses it won in auctions, agreed to return most of its remaining spectrum to the U.S. government and pay $386 million.
Quotes of Note . . . ``The earnings are coming in great, but that is not the focus right now. eople are focused on interest rates.'' Greenspan was ``pretty subtle in indicating interest rates are going to rise.'' Arthur Micheletti, who helps manage $1.5 billion for Bailard Biehl & Kaiser.
Gurus . . . Bloomberg says there is still back-and-forth on the rate outlook. Remarkably, says the financial service, Ed McKelvey, Senior Economist at Goldman Sachs, continues to feel a Fed policy change is a 2005 affair, citing continued slack in the Labor Market in particular, and the economy in general. He says the 10-year note will end the year with a 3.9% yield. On the other hand, Richard Berner, Morgan Stanley's Chief Economist, says Treasury notes are in a bear market that will drive yields to the highest in almost two years. He feels the labor market has turned the corner.
Ed Hyman of ISI is lifting his inflation forecast to 3.0% for the Consumer Price Index. As a result, he expects the Fed to tighten by 100 basis points by the middle of next year, and for bond yields to move above 5.0%.
As for stock gurus, CBS Market Watch says Bob Brinker of Market Timer remains bullish. The noted timing guru and radio personality believes the fundamentals supporting this cyclical bull remains in place. These include low inflation, high productivity, and rising corporate profits.
Of Note . . . An industry group said North American chip equipment makers had their eighth straight monthly gain in orders in March.
Standard & Poor announced that Mylan Labs will be added to the S&P 500, replacing Sprint PCS after the close on Thursday, while Valero Energy will replace John Hancock Financial Service at a date to be announced.
IPO . . . The New York Post reports that because of a technicality, Google's IPO may come as soon as the end of this month. SEC rules state that a company must report financial results if it has at least $10 million in assets and has more than 500 shareholders. Google has both and may have to issue quarterly reports starting April 30. If true, it would make sense for Google to go public as soon as possible, to avoid disclosing its financial information without the benefits of a stock offering. Because of the expense and the private information that is revealed, very few company's file reports with the SEC yet remain privately held. The other option for Google would be to buy back shares from some of its employees, but that is expensive and unlikely. Google officials refused to comment on the company's filing plans.
Financials . . . Bank One reported earnings of $0.87 per share, excluding $0.22 in one-time gains, $0.06 better than the consensus of $0.81. Revenues rose 15.8% year/year to $4.57 billion versus the $4.69 billion consensus.
The SEC notified Novastar Financials that it is conducting an informal inquiry into certain business practices. This follows a WSJ story last week that the co had compliance issues with certain state licensing agencies. The co says it is currently approved and authorized to do business in every state in which it operates, but has hired a law firm to do an outside review.
Fannie Mae reported core business EPS of $2.03, well above estimate of $1.92. The positive surprise was attributable to a wider than expected net interest margin and higher than expected guaranty-fee rate. Both will decline in future quarters we believe, making the retained portfolio once again the principal driver of earnings growth. The net interest margin widened to 107 bps in 1st quarter from 105 bps in 4th quarter, apparently a result of higher short term debt (though without a balance sheet, it is difficult to tell). The NIM is expected to begin falling again as refinancings and prepayments decline. Guarantee fees were very strong, reflecting healthy MBS portfolio growth and higher prepayment related average guaranty fee rates. MBS growth should remain robust, but the g-fee rate will likely decline as prepayments fall. The retained portfolio declined at a 7.8% annualized rate in the first quarter. Analysts remain optimistic that growth will
improve in the second half of 2004, assuming prepayments decline and short-term interest rates rise. Portfolio growth remains the most important variable in our estimates. First quarter earnings were very strong, but largely as a result of abnormally high margins in both the retained and
MBS businesses. Retained portfolio growth still remains difficult. Analysts are raising 2004 estimate to $8.05 from $7.93 to reflect the 1st quarter margin strength, but are reducing 2005 estimate to $8.60 form $8.70 to reflect slightly weaker portfolio growth this year.
Ameritrade reported earnings of $0.19 per share, $0.01 better than the consensus of $0.18. Revenues rose 63.8% year/year to $249.4 million versus the $254.9 million consensus. The company sees 3rd quarter EPS of $0.14-0.22 versus the consensus of $0.22. The company sees 2004 EPS of $0.59-0.79 versus the consensus of $0.73
The WSJ's "Heard on the Street" column discusses investor's rumors of a potential Wachovia acquisition. The concerns on Wall St are that the chairman and CEO G. Kennedy Thompson could lead the bank into a dilutive acquisition that damages the co's bottom line, which has hampered the stock's rise and made it cheap compared with its peers. That is on top of worries that rising interest rates could slice into profits at Wachovia and other banks. Still, it might be a mistake to ignore Wachovia's shares. Even if the bank were to jump into another megamerger, the 53-year-old Mr. Thompson and his integration team showed that after First Union acquired the former Wachovia in 2001, it can put together two big banks without hurting earnings in the long run. For now, some outsiders also think Wachovia is looking only at relatively small, nondilutive acquisitions in attractive states such as Texas. "If people are worried about a big crazy deal, I don't think you're going to get it in Texas," says Robert Maneri, a bank analyst at Victory Capital Management in Cleveland. Victory owned about 500,000 Wachovia shares as of Dec. 31. "I think the stock's cheap," Mr. Maneri adds.
Life insurance stocks have strongly outperformed the broad equity market both year to date and over the past 12 months, especially “cyclical” higher-beta insurance stocks, whose profitability is more highly affected by the equity markets. Valuations now favor the larger, more diversified companies like Prudential and MetLife. With 1,462 life/health insurers, consolidation should remain a major force shaping the industry. However, recent M&A transactions have shown that this is a buyer’s market. Simply put, M&As should not be a catalyst for sector valuations. Consider MetLife to be well-positioned to benefit from the consolidation trend. Decomposition of ROE analysis is a modification of the “Dupont model” used to analyze non-financial companies. This analysis provides a useful look at the key drivers of profitability for the different companies.
The industry’s generally positive operating fundamentals are now reflected in the sector’s valuation.
Oil & Gas . . . Diamond Offshore reported a loss of $0.08 per share, $0.02 worse than the consensus of ($0.06). Revenues rose 26.1% year/year to $184.2 million versus the $176.3 million consensus. The company attributes shortfall to the impact from planned surveys as well as greater than anticipated idle time on several of companys mid-water and deepwater units.
Energy . . . Dominion reported operating earnings adjusted for certain items of $1.37 per share, $0.01 worse than the consensus of $1.38, citing pressure on several areas of its business; revenues rose 8.4% year/year to $3.88 billion versus the $3.65 billion consensus. The company also revises guidance, now sees 2004 EPS of $4.75-4.90, versus the consensus of $4.94 and prior guidance of $4.80-5.00. The firm sees 2005 EPS of 5.10-5.20, vs the consensus of $5.18.
Ballard Power named Heliocentris Energy Systems as a distributor in N. America and Europe of Ballard's AirGen portable fuel cell generator and Nexa fuel cell power module. Heliocentris is the third worldwide (excluding Japan) distributor Ballard has signed to distribute the AirGen portable fuel cell generator, after MGE UPS SYSTEMS Inc. and Mitsubishi Canada Limited.
The WSJ's "Tracking the Numbers" column highlights Devon Energy, a company that has made $20 billion in acquisitions since 1999, completing a deal a year in each of the past five years. Buoyed by soaring commodity prices, the co announced record earnings for 2003, and its stock has leapt 35% in the last six months. Still, David Tameron isn't convinced the growth story can continue. Mr. Tameron, a senior exploration-and-production analyst in Denver for Stifel Financial's Stifel, Nicolaus & Co. is concerned about Devon's ability to digest so many acquisitions and has a market underperform rating on the stock. That puts him squarely in the contrarian camp. The mean target price for the stock among all of the analysts who follow Devon is $67; Mr. Tameron's target is $53. According to Mr. Tameron, Devon has executed so many acquisitions in the past few years that the key issue is whether it has the ability to grow organically. His general take on it is that finding and development costs have been higher than the industry average, and we haven't seen sufficient growth internally. There are some upfront development costs, for example with a project in the Gulf of Mexico, that will show up as costs but don't yet show up as production. According to Mr. Tameron look at the valuation of the co today against its peers, and it appears fully valued.
Transports . . . General Motors reported earnings of $2.25 per share, $0.47 better than the Reuters Research consensus of $1.78; total auto and other revenues rose 0.8% year/year to $40.14 billion versus the $38.97 billion consensus. The company also guides, sees 2nd quarter EPS of $2.00-2.25 (ex items), versus the consensus of $1.87, and 2004 EPS of $7.00, versus the consensus of $6.26 and prior guidance of $6.00-6.50.
The WSJ's "Ahead of the Tape" column highlights car industry problems. Investors have started to fear inflation, but car and truck prices are still subject to discounts. After three months of anemic sales, General Motors fell back into heavy use of incentives in April. Interest rates are going up and this is going to likely pinch profits and, potentially, sales. At this point in an economic recovery, usually the prices are firming, points out BofA's Ronald Tadross. The problem, of course, is that there is little pent-up demand for autos since people took advantage of 0% financing and bought new ones throughout the downturn. Deutsche Bank's Rod Lache has been writing about the problem that many customers are coming into the dealer with "negative equity" in their cars. In other words, the debt that remains on the car loan is greater than the trade-in value of the car itself. The average amount financed on a new car was $26,221 in 2003, he says, compared with $22,822 in 2001. The problem of being "upside down" in a loan, another term for having negative equity, could have serious ramifications. Meanwhile, inventories are up near record levels. GM, which posts 1st quarter results today, had inventory at 1.3 million units at the end of March, while normally it might have inventory of about 1 million to 1.1 million. Ford Motor inventory is high, too. Says Mr. Lache, the auto makers need "to move the metal or else."
Defense & Aerospace . . . TASER reported pre-split earnings of $0.24 per diluted share, $0.02 better than the consensus of $0.22. Revenues rose 286.5% year/year to $13.1 million versus the $12.8 million consensus. The companyo will be completing a two-for-one stock split effective on April 29, 2004, for all of shareholders of record on April 15, 2004.
Food & Beverage . . . Kraft reports pro forma 1st quarter of $0.45, $0.02 ahead of consensus on lower tax rate. Base volume growth of 0.8% is disappointing, as company cites shifts in promotions, inventory deloading and damage from low-carb diets. Better results seen in cheese, cold cuts and Planters nuts. But planned annual 3% revenue growth now more heavily second half loaded, as is incremental $500-$600 million in marketing spend. Cutting second quarter forecast by $0.03, to $0.47, on higher marketing spending, soaring cheese costs. Commodities pose risk to achieving low end of previous $1.93 to $2.00 range. Analysts maintain Outperform rating and 2004 EPS estimate of $1.94. Valuation attractive at 16.2x, versus 17.1x for large
cap group average.
Tobacco . . . Altria reported earnings of $1.16 per share, excluding a $0.09 charge for food restructuring and other items, $0.03 better than the consensus of $1.13. Revenues rose 12.7% year/year to $21.84 billion versus the $20.59 billion consensus. The company reaffirms prior 2004 (Dec) guidance of $4.80-4.90, ex items, consensus is $4.86.
Retail . . . Linens'n Things reported earnings of $0.11 per share, ex items, $0.13 better than the consensus of ($0.02). Revenues rose 15.0% year/year to $552.8 million versus the $548.9 million consensus. The company sees Q2 EPS, ex items, of $0.15-0.16 versus the consensus of $0.06. For 2004 sees EPS ex items of $1.91-1.96 ex items, versus the consensus of $1.75.
Smith Barney upgrades Amazon.com to Hold from Sell based on valuation. However, while they believe that the company's pricing and growth strategies are fundamentally sound, they believe that lower gross margins will act as somewhat of an offset to stronger free cash flow growth, and will likely weigh on share price performance in the near-term. Target is $55.
Coach reported earnings of $0.30 per share, $0.03 better than the consensus of $0.27. Revenues rose 42.1% year/year to $313.1 million versus the $302.1 million consensus. The company expects 4th quarter (Jun) revenue and EPS of at least $330 million and at least $0.30 versus consensus of $316 million and $0.27. For fiscal 2005, co expects revs and EPS of at least $1.55 billion and at least $1.60 versus consensus of $1.53 billion and $1.51, respectively.
Ethan Allen reported earnings of $0.61 per share, $0.01 worse than the consensus of $0.62. Revenues rose 8.9% year/year to $244.6 million versus the $239.5 million consensus. Company reaffirms, "we continue to believe we have the opportunity to generate fiscal year sales and earnings per share increases of approximately 5% and 10%, respectively."
Restaurants . . . Thomas Weisel upgrades Panera Bread to Outperform from Peer Perform to reflect their growing conviction that top-line rev trends will begin to strengthen during 2004 and continue into 2005. The firm believes that stronger sales trends will be driven by: 1) a diminishing impact from the adverse effects linked with the low-carb diet craze, 2) stronger new product development and innovation, 3) the rollout of the Via Panera take-out/delivery platform, 4) enhanced volume contribution from other dining day parts, and 5) progress in alleviating throughput constraints at its bakery-cafes during peak lunch hours. Target is $50.
Outback Steakhouse reported earnings of $0.62 per share, $0.02 worse than the consensus of $0.64. Revenues rose 25.3% year/year to $816.6 million versus the $778.7 million consensus.
McDonald's Chairman & CEO, Jim Cantalupo, died of an apparent heart attack last night in Orlando where the company's worldwide operator convention was starting today. Analysts credit Mr. Cantalupo, who returned to McDonald's as CEO effective January 2003, with the tighter capital allocation that has been a critical part of the company's turnaround efforts. Expect MCD's board to act quickly to at least fill the CEO slot on an interim basis and possibly to act more
decisively and skip the "interim" step. The most likely candidate to be named CEO is 43-year old Charlie Bell, President & COO. Charlie and Jim Cantalupo were the only two members of management on MCD's board. Expect MCD to maintain the strategic course set by Jim Cantalupo. CFO Matt Paull is a champion of the tighter capital allocation. Mike Roberts is a very effective leader of the U.S. business. Charlie Bell came through the operating ranks in the international business. Jim Skinner will continue in a senior role. A price target of $33-$35, roughly 18-19x 2005 EPS estimate. Jim Cantalupo's death obviously adds a new level of uncertainty. But the stock is inexpensive and we expect the company to stay the course on its turnaround efforts.
Healthcare . . . Barron's Online highlights HCA Healthcare's stock, which has dropped 9% since last Wednesday due to the co cutting profit projections for 2004. "We are getting pretty close to the point where we are unlikely to see any improvement in 2004, and there is more than a 50% likelihood that things will get worse before they get better," says Kemp Dolliver, an analyst with SG Cowen. According to the article, the problem is that not all employers provide employee health benefits. Those that do often make new hires wait several months before extending coverage. Other company's continue to slash benefits, forcing workers to pay higher deductibles and co-payments, says Paul Ginsberg, a healthcare economist. As long as the trend continues, bad debt will be an increasing issue for hospitals," he added. HCA expects to earn from $2.60 to $2.70 a share in '04, down 25 cents from previous projections. On Monday, Gary Taylor, an analyst with BofA, downgraded the stock to Neutral from Buy. At 38.71, the stock fetches 14x earnings over the next four qrtrs, or a 19% discount to the industry. Historically, it commands a median P/E multiple of 17.4x forward earnings.
Medical Devices . . . Boston Scientific reported earnings of $0.23 per share, $0.01 better than the consensus of $0.22. Revenues rose 34.1% year/year to $1.08 billion versus the $1.04 billion consensus. Co reports Q1 TAXUS stent worldwide sales were $216 million. Preliminary U.S. sales from Apr 1st-19th (13 selling days) were approx $93 million. Co said it was shipping to approx 1,100 accounts at the end of this period; estimates its share of the U.S. drug-eluting stent market - as of April 19th - to be approx 70%, on a reorder basis; estimates the adoption rate for drug-eluting stents in the U.S. to be approx 70%.
Drugs . . . Pfizer reported earnings of $0.52 per share, excluding non-cash charges, $0.01 better than the consensus of $0.51. Revenues rose 46.8% year/year to $12.49 billion versus the $12.53 billion consensus and the $12.65 billion consensus. The company also guides, sees 2004 adjusted EPS of $2.13 (ex items), versus the consensus of $2.10, and revenues of $54 billion versus an estimate of $52.84 billion.
Lilly’s new products (Cialis, Strattera, Forteo, Xigris, Alimta) and upcoming launches (Cymbalta, Yentreve) make Lilly’s product portfolio among the youngest in the industry. Management continues to expect summer 2004 launch for Cymbalta and late-2004/early-2005 launch of Yentreve (duloxetine) in U.S. Aside from Zyprexa patent litigation, the company is also facing little in the way of near-term generic erosion of major brands. There are, however, some concerns regarding the growth prospects for the base business with Zyprexa prescriptions in steady decline and U.S. sales growth a sluggish 3% in the quarter. It is unclear when or if Zyprexa volume growth will resume. Lilly could benefit from the new Medicare law, when enacted in 2006, when dual-eligible beneficiaries (those old enough to be eligible for Medicare and with incomes low
enough to be eligible for Medicaid) will be covered by the Medicare Rx benefit. For Zyprexa, this change could result in a $200 million reduction in Medicaid rebate payments to states, albeit a one-time event. Strattera market share has also flattened at around the 11% level after a very strong start in the first half of 2003.
Biotech . . . JMP Securities upgrades Protein Design to Outperform from Market Perform and raises their target to $32 from $11; with business model risk substantially reduced and royalties achieving critical mass in 2004. The firm says investors can now focus on real pipeline data coming out in the next 12 months. Also, firm does not believe that investors have fully accounted for the upside in PDLI's rev coming from recent developments in its royalty biz, nor resulting from increasingly probable development of at least one drug from the company's emerging pipeline of five clinical stage product candidates.
Hotel & Leisure . . . Deutsche Bank raises their target on Shuffle Master to $40, and refers to the company as a "mini IGT" in the making since it continues to model itself after the highly successful IGT model. The firm also believes that SHFL's pending CARD acquisition and new product introductions could likely provide upside to their 2004-05 estimates, and thinks the company's desire to repurchase shares is a very bullish signal investors should be paying attention to.
Station Casinos reported adjusted earnings of $0.51 per share, excluding non-recurring items, $0.05 better than the consensus of $0.46. Revenues rose 19.7% year/year to $239.0 million versus the $232.0 million consensus. The company also guides, sees 2nd quarter EPS of $0.45-0.49 versus the consensus of $0.45, and 2004 EPS of $1.81-1.96, versus the consensus of $1.80.
Media . . . CSFB lowers their view on the Cable sector to Underweight from Marketweight given increasing competitive pressure as well as the likelihood that free cash flow forecasts will have to come down. Firm says that high speed data competition will continue to be strong, the entry of the RBOCs into video could be significant enough in 2004 to drive basic subscriber growth negative for several of the largest MSOs, the competitive nature of VoIP will be more intense than expected, and competitive pressures coupled with greater than expected capex and higher cash tax burdens will drive lower than expected free cash flow. Cuts Comcast target to $32 from $36 and cuts COX target to $32 from $34.
CSFB out positive on Disney saying they think that Street estimates for 2005 are potentially low to a significant degree -- calling it a definitely non- consensus, out of the box thinking these days, particularly as people think Street estimates are too high for 2005. The firm believes the biggest drivers going forward are the theme parks and ESPN, but the TV stations are performing well despite weakness at the network. TV performance over the past several quarters has outperformed the industry and they believe that its major market presence and strong local news should drive outperformance going forward. With the shares trading 10.7x 2005 EBITDA, the firm is reiterating their Outperform rating and $37 target.
The Financial Times reports that Liberty Media is in talks with News Corp about acquiring international TV production and programming assets from the company. John Malone, Liberty chairman, said the co could swap News Corp shares it holds for operating assets as Liberty expands internationally. In an interview with the FT, Mr Malone described the talks as "fairly active". He said: "There are certain small assets that we feel fit Liberty better than News Corp. We could exchange small amounts of our News Corp shares back for these assets." This year Liberty increased its stake in News Corp to 17%, representing more than 9% of the voting rights - second only to the Murdoch family interests. Mr Malone declined to name the assets Liberty was targeting. But people familiar with the situation hinted that the co was looking at the international arms of News Corp's National Geographic and FX channels. Trading at $11.07 yesterday, Liberty's shares face a discount of more than 30% against the sum of its parts, which include stakes in company's. "The impact of the spin-off and rights issue will be a step in the right direction," said Mr Malone. "But we don't anticipate that this single action by itself will wipe out the discount. Mr. Malone states "There may be subsequent actions that Liberty will need to take to address that large and growing discount." He said that Liberty could sell off non-strategic holdings to cut debts or seek a bigger stake in Discovery, the TV network.
Telecom . . . EarthLink reported 1st quarter non-GAAP earnings of $0.11 per share, before facility exit costs, $0.03 better than the consensus of $0.08. Revenues fell 0.6% year/year to $351.6 million versus the $350.0 million consensus. The company guides, sees 2nd quarter EPS of $0.13-0.17 versus the consensus of $0.13, and revenues of $350-355 million versus an estimate of $353.8 million. The company reaffirms 2004 revenues of $1.41-1.44 billion versus an estimate of $1.43 billion. The company also signs three-year marketing and sales agreement with Sprint, building on their six-year relationship and ensuring that EarthLink will be preferred high-speed ISP for Sprint's local residential and small-business customers.
The New York Post reports that AT&T introduced a VoIP calling plan for New York yesterday as part of the company's aggressive rollout of the digital technology. The service cuts AT&T's costs and allowing consumers such computer-friendly features as a merged voice mail and e-mail inbox. "What we've seen is that consumers like the price, but that the features are the wow factor," said Cathy Martine, senior vice president at AT&T. Price differences may also be a wash for most customers, since they are required to pay for a high-speed Internet connection to use the phone service. At first, AT&T VoIP will cost $20 a month for unlimited calls; that will go up to $40 a month later this year. Verizon plans to roll out VoIP in New York this summer; Time Warner cable hopes to introduce its service sometime this year.
Sprint FON reported earnings of $0.36 per share, ex items, $0.01 better than the consensus of $0.35. Revenues fell 4% year/year to $3.44 billion versus the $3.46 billion consensus. Sprint PCS reports 1st quarter (Mar) loss of $0.08 per share, ex items, $0.01 better than the Reuters Research consensus of ($0.09); revenues rose 16.6% year/year to $3.44 billion versus the $3.32 billion consensus. Company will combine its tracking stocks on Friday, raises 2004 combined revenue guidance from previous expectation of 2-3% growth to 3-4% revenue growth; co reaffirms combined EPS guidance for 2004 of $0.70-0.75 per share. No combined company consensus estimates available as of yet.
Electronics . . . Sony Corp boosts outlook for fiscal year 2004 (ended Mar 31) to 88 billion yen (approx. $715 million) from 55 billion yen. Sales outlook goes to 7,500 trillion yen from 7,400 trillion yen.
Barron's Online highlights PalmOne, a company that has seen its stock triple over the past year as it launched its famous PalmTreo and sold about 100,000 Treos in each of its past two quarters. Yet "one sparrow doesn't make a spring," Charles Wolf, an analyst at Needham, wrote recently. Despite the success of the Treo, PalmOne still generates just under three-quarters of its sales from plain-old personal digital assistants. And Gartner Dataquest, a market research firm expects the worldwide market for handheld organizers to decline by 6%, to 11.2 million next year from 12 million in 2002. Meanwhile, the market share of rivals like Sony, Hewlett-Packard and Dell grew as more people bought Pocket PCs, which use the Windows CE operating system. Last year Windows CE picked up nearly 12 points of market share to about 38%. That puts it in striking distance of the Palm operating system's shrinking 50% share. Among all-in-one devices, Research in Motion has a strong lead over PalmOne. While Research in Motion has been selling the BlackBerry device for several years, it added more than 200,000 BlackBerry subscribers in the three-month period that ended in Feb. While CFO Bruner says the co will meet its 4th quarter demand and is bolstering its list of suppliers, the co may not be able to ramp up Treo production after May. PalmOne is expected to lose 26 cents a share for its fiscal year that ends next month. But based on F05 estimates, the shares change hands at a premium to RIMM's 30x F05 consensus estimate. Also, at 1.1x trailing-12-months sales, PalmOne's stock is at a premium to its five-year median ratio of 0.8x sales.
Storage . . . UBS upgrades EMC to Buy from Neutral and raises their target to $17 from $16, as they believe that storage fundamentals are solid and that EMC is well-positioned to benefit as the market leader. The firm says software sales are tracking ahead of expectations, the CLARiiON product line has momentum (with more key products to come), and they believe that competitors' bark may be worse than their bite in 2nd half 2004 in terms of Symmetrix competition.
Network Equipment . . . CIBC initiates coverage of Redback Networks with a Sector Perform rating and no target. The firm says that the company appears well-positioned for growth due to its status as a pure play on residential broadband secular growth, however it needs to demonstrate solid traction for its new SmartEdge platform and show solid growth following its recent financial restructuring.
Lucent reported earnings of $0.03 per share, ex items, $0.01 better than the consensus of $0.02. Revenues fell 8.7% year/year to $2.19 billion versus the $2.16 billion consensus.
Semiconductor Equipment . . . Analysts generally considering the March below-consensus book-to-bill ratio of 1.10 a non-event with JP Morgan noting that as long as bookings rise in absolute terms and incremental news flow builds investor confidence in the potential length and upside magnitude of the cycle, they think equipment stocks can lead the market higher again as the year unfolds. Morgan Stanley out saying they believe that the shortfall in March front-end bookings may be explained by a heavily back-end loaded, April Quarter for Applied Materials and relative weakness in 1st quarter order intake at KLA-Tencor. Under this scenario, to support AMAT's guidance for +30% Quarter/Quarter order growth for April Quarter, the firm estimates that SEMI front-end bookings need to increase by approx +14% Month/Month to $1,150 million next month. Firm maintains their Attractive view on the sector. Merrill Lynch noting they believe investors should hold on to semiconductor equipment stocks and use the recent pullback in particular to add positions. Firm thinks that the current malaise of stocks in the sector already discounts the expected slower order growth in the mid-summer time frame but does not reflect the likely potential for accelerating orders in 4th quarter 2004 and into early 2005.
Semiconductors . . . Smith Barney out cautious on Pixelworks advising investors to stay levelheaded about this potentially strong growth company. According to the firm, Q1 came in very strong with EPS, revenue and gross margin ahead of expectations. The firm thinks that Q2 might come in good too but possibly without the same momentum or gross margin upside. With the stock trading at 37x their forward estimates, the firm believes Pixelworks is fully valued at current levels. Firm's $15 target price is based upon a 30x multiple of our forward 2005 earnings estimate of $0.50.
Boxmakers . . . Lexmark delivered another impressive quarter with upside reflecting strong inkjet demand, and issued even more favorable guidance which still assumes incremental pricing competitiveness (leaving potential for EPS upsides) and underestimates Dell's potential unit contribution. Analysts are raising 2004/2005 numbers and year-end 2004 target from $95 to $115 and reiterate an Outperform rating. The thesis on LXK remains that it is poised for upsides in 2004 as its guidance continually assumes further price aggression, contrary to the view that H-P is less likely to accelerate its competitive posture given the self-impact and H-P's agenda to subsidize PC/server margins to meet EPS targets. Further, LXK's inkjet business upside bodes
well for volume strength at Dell in its April quarter. LXK reported 1st quarter 2004 EPS of $0.91 that surpassed our high-end estimate of $0.89 and Street at $0.87 on stronger revenues of $1.26 billion (up 13% Year over Year) fueled by demand strength in consumer/inkjet. Robust hardware sales grew 17% Year over Year (boosted an incremental 28% Year over Year in units from Dell by our estimate), while supplies growth, up 14% Year over Year, reaccelerated nicely after 4 straight quarters of solid hardware sales.
Software . . . CSFB out positive on Activision saying they believe the co is an effective way to play the growth in the overall entertainment software industry. The firm notes that while Activision's growth has underperformed most of its peers, over the past 12-months the stock has outperformed the group, as the company's holiday products exceeded expectations and investors focused on a strong product pipeline. With the shares trading at a 19% discount to its historical cycle P/E multiple, the easy money has been made, but some additional upside remains. The firm subtracted the impact of the company's interest income on their 2005 estimate of $0.70 and applied a multiple of 20x and $5.65 in cash per share, arriving at new target price of $19 (vs $15.50 perviously). Separately, Schwab SoundView has initiated coverage of ATVI this morning with an Outperform and $20 target.
Check Point reported earnings of $0.25 per share, $0.02 better than the consensus of $0.23. Revenues rose 10.8% year/year to $116.1 million versus the $113.9 million consensus. License revenues rose 8.2% year/year to $63 million.
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Strong Sectors: autos, office equipment
Weak Sectors: gold, security systems, oil, REITs, mining, semiconductors
Top Stories . . . Federal Reserve Chairman Alan Greenspan said the threat of deflation is ``no longer an issue'' for the U.S. and companies appear to have a greater ability to raise prices.
General Motors, the world's largest automaker, said profit in the first quarter fell 14 percent after a gain last year from the sale of a military business generated a third of earnings. The company raised its earnings forecast for the year.
Wells Fargo, the fifth-biggest U.S. bank, said first-quarter profit rose 18 percent as the company opened more accounts and made more loans to consumers.
Pfizer, the world's largest drugmaker, said first-quarter earnings fell 50 percent on costs related to its purchase of Pharmacia and Esperion Therapeutics, as sales of the cholesterol-lowering Lipitor drug increased.
Starwood Capital Group and casino operator Kerzner International raised their joint offer for Wembley Plc to 309 million pounds ($555 million), topping an MGM Mirage bid, as U.K. government plans to relax gambling laws prompt competition for venues.
Janus Capital Group said Chief Executive Officer Mark Whiston is stepping down as the U.S. mutual fund company struggles to settle allegations that it permitted improper trading that hurt investors.
Motorola, the world's second- largest maker of mobile phones, said first-quarter profit more than tripled to the highest since at least 1990 as phone handset sales surged 67 percent.
NextWave Telecom, which filed for bankruptcy in 1998 because it couldn't pay $4.3 billion for cell-phone airwave licenses it won in auctions, agreed to return most of its remaining spectrum to the U.S. government and pay $386 million.
Quotes of Note . . . ``The earnings are coming in great, but that is not the focus right now. eople are focused on interest rates.'' Greenspan was ``pretty subtle in indicating interest rates are going to rise.'' Arthur Micheletti, who helps manage $1.5 billion for Bailard Biehl & Kaiser.
Gurus . . . Bloomberg says there is still back-and-forth on the rate outlook. Remarkably, says the financial service, Ed McKelvey, Senior Economist at Goldman Sachs, continues to feel a Fed policy change is a 2005 affair, citing continued slack in the Labor Market in particular, and the economy in general. He says the 10-year note will end the year with a 3.9% yield. On the other hand, Richard Berner, Morgan Stanley's Chief Economist, says Treasury notes are in a bear market that will drive yields to the highest in almost two years. He feels the labor market has turned the corner.
Ed Hyman of ISI is lifting his inflation forecast to 3.0% for the Consumer Price Index. As a result, he expects the Fed to tighten by 100 basis points by the middle of next year, and for bond yields to move above 5.0%.
As for stock gurus, CBS Market Watch says Bob Brinker of Market Timer remains bullish. The noted timing guru and radio personality believes the fundamentals supporting this cyclical bull remains in place. These include low inflation, high productivity, and rising corporate profits.
Of Note . . . An industry group said North American chip equipment makers had their eighth straight monthly gain in orders in March.
Standard & Poor announced that Mylan Labs will be added to the S&P 500, replacing Sprint PCS after the close on Thursday, while Valero Energy will replace John Hancock Financial Service at a date to be announced.
IPO . . . The New York Post reports that because of a technicality, Google's IPO may come as soon as the end of this month. SEC rules state that a company must report financial results if it has at least $10 million in assets and has more than 500 shareholders. Google has both and may have to issue quarterly reports starting April 30. If true, it would make sense for Google to go public as soon as possible, to avoid disclosing its financial information without the benefits of a stock offering. Because of the expense and the private information that is revealed, very few company's file reports with the SEC yet remain privately held. The other option for Google would be to buy back shares from some of its employees, but that is expensive and unlikely. Google officials refused to comment on the company's filing plans.
Financials . . . Bank One reported earnings of $0.87 per share, excluding $0.22 in one-time gains, $0.06 better than the consensus of $0.81. Revenues rose 15.8% year/year to $4.57 billion versus the $4.69 billion consensus.
The SEC notified Novastar Financials that it is conducting an informal inquiry into certain business practices. This follows a WSJ story last week that the co had compliance issues with certain state licensing agencies. The co says it is currently approved and authorized to do business in every state in which it operates, but has hired a law firm to do an outside review.
Fannie Mae reported core business EPS of $2.03, well above estimate of $1.92. The positive surprise was attributable to a wider than expected net interest margin and higher than expected guaranty-fee rate. Both will decline in future quarters we believe, making the retained portfolio once again the principal driver of earnings growth. The net interest margin widened to 107 bps in 1st quarter from 105 bps in 4th quarter, apparently a result of higher short term debt (though without a balance sheet, it is difficult to tell). The NIM is expected to begin falling again as refinancings and prepayments decline. Guarantee fees were very strong, reflecting healthy MBS portfolio growth and higher prepayment related average guaranty fee rates. MBS growth should remain robust, but the g-fee rate will likely decline as prepayments fall. The retained portfolio declined at a 7.8% annualized rate in the first quarter. Analysts remain optimistic that growth will
improve in the second half of 2004, assuming prepayments decline and short-term interest rates rise. Portfolio growth remains the most important variable in our estimates. First quarter earnings were very strong, but largely as a result of abnormally high margins in both the retained and
MBS businesses. Retained portfolio growth still remains difficult. Analysts are raising 2004 estimate to $8.05 from $7.93 to reflect the 1st quarter margin strength, but are reducing 2005 estimate to $8.60 form $8.70 to reflect slightly weaker portfolio growth this year.
Ameritrade reported earnings of $0.19 per share, $0.01 better than the consensus of $0.18. Revenues rose 63.8% year/year to $249.4 million versus the $254.9 million consensus. The company sees 3rd quarter EPS of $0.14-0.22 versus the consensus of $0.22. The company sees 2004 EPS of $0.59-0.79 versus the consensus of $0.73
The WSJ's "Heard on the Street" column discusses investor's rumors of a potential Wachovia acquisition. The concerns on Wall St are that the chairman and CEO G. Kennedy Thompson could lead the bank into a dilutive acquisition that damages the co's bottom line, which has hampered the stock's rise and made it cheap compared with its peers. That is on top of worries that rising interest rates could slice into profits at Wachovia and other banks. Still, it might be a mistake to ignore Wachovia's shares. Even if the bank were to jump into another megamerger, the 53-year-old Mr. Thompson and his integration team showed that after First Union acquired the former Wachovia in 2001, it can put together two big banks without hurting earnings in the long run. For now, some outsiders also think Wachovia is looking only at relatively small, nondilutive acquisitions in attractive states such as Texas. "If people are worried about a big crazy deal, I don't think you're going to get it in Texas," says Robert Maneri, a bank analyst at Victory Capital Management in Cleveland. Victory owned about 500,000 Wachovia shares as of Dec. 31. "I think the stock's cheap," Mr. Maneri adds.
Life insurance stocks have strongly outperformed the broad equity market both year to date and over the past 12 months, especially “cyclical” higher-beta insurance stocks, whose profitability is more highly affected by the equity markets. Valuations now favor the larger, more diversified companies like Prudential and MetLife. With 1,462 life/health insurers, consolidation should remain a major force shaping the industry. However, recent M&A transactions have shown that this is a buyer’s market. Simply put, M&As should not be a catalyst for sector valuations. Consider MetLife to be well-positioned to benefit from the consolidation trend. Decomposition of ROE analysis is a modification of the “Dupont model” used to analyze non-financial companies. This analysis provides a useful look at the key drivers of profitability for the different companies.
The industry’s generally positive operating fundamentals are now reflected in the sector’s valuation.
Oil & Gas . . . Diamond Offshore reported a loss of $0.08 per share, $0.02 worse than the consensus of ($0.06). Revenues rose 26.1% year/year to $184.2 million versus the $176.3 million consensus. The company attributes shortfall to the impact from planned surveys as well as greater than anticipated idle time on several of companys mid-water and deepwater units.
Energy . . . Dominion reported operating earnings adjusted for certain items of $1.37 per share, $0.01 worse than the consensus of $1.38, citing pressure on several areas of its business; revenues rose 8.4% year/year to $3.88 billion versus the $3.65 billion consensus. The company also revises guidance, now sees 2004 EPS of $4.75-4.90, versus the consensus of $4.94 and prior guidance of $4.80-5.00. The firm sees 2005 EPS of 5.10-5.20, vs the consensus of $5.18.
Ballard Power named Heliocentris Energy Systems as a distributor in N. America and Europe of Ballard's AirGen portable fuel cell generator and Nexa fuel cell power module. Heliocentris is the third worldwide (excluding Japan) distributor Ballard has signed to distribute the AirGen portable fuel cell generator, after MGE UPS SYSTEMS Inc. and Mitsubishi Canada Limited.
The WSJ's "Tracking the Numbers" column highlights Devon Energy, a company that has made $20 billion in acquisitions since 1999, completing a deal a year in each of the past five years. Buoyed by soaring commodity prices, the co announced record earnings for 2003, and its stock has leapt 35% in the last six months. Still, David Tameron isn't convinced the growth story can continue. Mr. Tameron, a senior exploration-and-production analyst in Denver for Stifel Financial's Stifel, Nicolaus & Co. is concerned about Devon's ability to digest so many acquisitions and has a market underperform rating on the stock. That puts him squarely in the contrarian camp. The mean target price for the stock among all of the analysts who follow Devon is $67; Mr. Tameron's target is $53. According to Mr. Tameron, Devon has executed so many acquisitions in the past few years that the key issue is whether it has the ability to grow organically. His general take on it is that finding and development costs have been higher than the industry average, and we haven't seen sufficient growth internally. There are some upfront development costs, for example with a project in the Gulf of Mexico, that will show up as costs but don't yet show up as production. According to Mr. Tameron look at the valuation of the co today against its peers, and it appears fully valued.
Transports . . . General Motors reported earnings of $2.25 per share, $0.47 better than the Reuters Research consensus of $1.78; total auto and other revenues rose 0.8% year/year to $40.14 billion versus the $38.97 billion consensus. The company also guides, sees 2nd quarter EPS of $2.00-2.25 (ex items), versus the consensus of $1.87, and 2004 EPS of $7.00, versus the consensus of $6.26 and prior guidance of $6.00-6.50.
The WSJ's "Ahead of the Tape" column highlights car industry problems. Investors have started to fear inflation, but car and truck prices are still subject to discounts. After three months of anemic sales, General Motors fell back into heavy use of incentives in April. Interest rates are going up and this is going to likely pinch profits and, potentially, sales. At this point in an economic recovery, usually the prices are firming, points out BofA's Ronald Tadross. The problem, of course, is that there is little pent-up demand for autos since people took advantage of 0% financing and bought new ones throughout the downturn. Deutsche Bank's Rod Lache has been writing about the problem that many customers are coming into the dealer with "negative equity" in their cars. In other words, the debt that remains on the car loan is greater than the trade-in value of the car itself. The average amount financed on a new car was $26,221 in 2003, he says, compared with $22,822 in 2001. The problem of being "upside down" in a loan, another term for having negative equity, could have serious ramifications. Meanwhile, inventories are up near record levels. GM, which posts 1st quarter results today, had inventory at 1.3 million units at the end of March, while normally it might have inventory of about 1 million to 1.1 million. Ford Motor inventory is high, too. Says Mr. Lache, the auto makers need "to move the metal or else."
Defense & Aerospace . . . TASER reported pre-split earnings of $0.24 per diluted share, $0.02 better than the consensus of $0.22. Revenues rose 286.5% year/year to $13.1 million versus the $12.8 million consensus. The companyo will be completing a two-for-one stock split effective on April 29, 2004, for all of shareholders of record on April 15, 2004.
Food & Beverage . . . Kraft reports pro forma 1st quarter of $0.45, $0.02 ahead of consensus on lower tax rate. Base volume growth of 0.8% is disappointing, as company cites shifts in promotions, inventory deloading and damage from low-carb diets. Better results seen in cheese, cold cuts and Planters nuts. But planned annual 3% revenue growth now more heavily second half loaded, as is incremental $500-$600 million in marketing spend. Cutting second quarter forecast by $0.03, to $0.47, on higher marketing spending, soaring cheese costs. Commodities pose risk to achieving low end of previous $1.93 to $2.00 range. Analysts maintain Outperform rating and 2004 EPS estimate of $1.94. Valuation attractive at 16.2x, versus 17.1x for large
cap group average.
Tobacco . . . Altria reported earnings of $1.16 per share, excluding a $0.09 charge for food restructuring and other items, $0.03 better than the consensus of $1.13. Revenues rose 12.7% year/year to $21.84 billion versus the $20.59 billion consensus. The company reaffirms prior 2004 (Dec) guidance of $4.80-4.90, ex items, consensus is $4.86.
Retail . . . Linens'n Things reported earnings of $0.11 per share, ex items, $0.13 better than the consensus of ($0.02). Revenues rose 15.0% year/year to $552.8 million versus the $548.9 million consensus. The company sees Q2 EPS, ex items, of $0.15-0.16 versus the consensus of $0.06. For 2004 sees EPS ex items of $1.91-1.96 ex items, versus the consensus of $1.75.
Smith Barney upgrades Amazon.com to Hold from Sell based on valuation. However, while they believe that the company's pricing and growth strategies are fundamentally sound, they believe that lower gross margins will act as somewhat of an offset to stronger free cash flow growth, and will likely weigh on share price performance in the near-term. Target is $55.
Coach reported earnings of $0.30 per share, $0.03 better than the consensus of $0.27. Revenues rose 42.1% year/year to $313.1 million versus the $302.1 million consensus. The company expects 4th quarter (Jun) revenue and EPS of at least $330 million and at least $0.30 versus consensus of $316 million and $0.27. For fiscal 2005, co expects revs and EPS of at least $1.55 billion and at least $1.60 versus consensus of $1.53 billion and $1.51, respectively.
Ethan Allen reported earnings of $0.61 per share, $0.01 worse than the consensus of $0.62. Revenues rose 8.9% year/year to $244.6 million versus the $239.5 million consensus. Company reaffirms, "we continue to believe we have the opportunity to generate fiscal year sales and earnings per share increases of approximately 5% and 10%, respectively."
Restaurants . . . Thomas Weisel upgrades Panera Bread to Outperform from Peer Perform to reflect their growing conviction that top-line rev trends will begin to strengthen during 2004 and continue into 2005. The firm believes that stronger sales trends will be driven by: 1) a diminishing impact from the adverse effects linked with the low-carb diet craze, 2) stronger new product development and innovation, 3) the rollout of the Via Panera take-out/delivery platform, 4) enhanced volume contribution from other dining day parts, and 5) progress in alleviating throughput constraints at its bakery-cafes during peak lunch hours. Target is $50.
Outback Steakhouse reported earnings of $0.62 per share, $0.02 worse than the consensus of $0.64. Revenues rose 25.3% year/year to $816.6 million versus the $778.7 million consensus.
McDonald's Chairman & CEO, Jim Cantalupo, died of an apparent heart attack last night in Orlando where the company's worldwide operator convention was starting today. Analysts credit Mr. Cantalupo, who returned to McDonald's as CEO effective January 2003, with the tighter capital allocation that has been a critical part of the company's turnaround efforts. Expect MCD's board to act quickly to at least fill the CEO slot on an interim basis and possibly to act more
decisively and skip the "interim" step. The most likely candidate to be named CEO is 43-year old Charlie Bell, President & COO. Charlie and Jim Cantalupo were the only two members of management on MCD's board. Expect MCD to maintain the strategic course set by Jim Cantalupo. CFO Matt Paull is a champion of the tighter capital allocation. Mike Roberts is a very effective leader of the U.S. business. Charlie Bell came through the operating ranks in the international business. Jim Skinner will continue in a senior role. A price target of $33-$35, roughly 18-19x 2005 EPS estimate. Jim Cantalupo's death obviously adds a new level of uncertainty. But the stock is inexpensive and we expect the company to stay the course on its turnaround efforts.
Healthcare . . . Barron's Online highlights HCA Healthcare's stock, which has dropped 9% since last Wednesday due to the co cutting profit projections for 2004. "We are getting pretty close to the point where we are unlikely to see any improvement in 2004, and there is more than a 50% likelihood that things will get worse before they get better," says Kemp Dolliver, an analyst with SG Cowen. According to the article, the problem is that not all employers provide employee health benefits. Those that do often make new hires wait several months before extending coverage. Other company's continue to slash benefits, forcing workers to pay higher deductibles and co-payments, says Paul Ginsberg, a healthcare economist. As long as the trend continues, bad debt will be an increasing issue for hospitals," he added. HCA expects to earn from $2.60 to $2.70 a share in '04, down 25 cents from previous projections. On Monday, Gary Taylor, an analyst with BofA, downgraded the stock to Neutral from Buy. At 38.71, the stock fetches 14x earnings over the next four qrtrs, or a 19% discount to the industry. Historically, it commands a median P/E multiple of 17.4x forward earnings.
Medical Devices . . . Boston Scientific reported earnings of $0.23 per share, $0.01 better than the consensus of $0.22. Revenues rose 34.1% year/year to $1.08 billion versus the $1.04 billion consensus. Co reports Q1 TAXUS stent worldwide sales were $216 million. Preliminary U.S. sales from Apr 1st-19th (13 selling days) were approx $93 million. Co said it was shipping to approx 1,100 accounts at the end of this period; estimates its share of the U.S. drug-eluting stent market - as of April 19th - to be approx 70%, on a reorder basis; estimates the adoption rate for drug-eluting stents in the U.S. to be approx 70%.
Drugs . . . Pfizer reported earnings of $0.52 per share, excluding non-cash charges, $0.01 better than the consensus of $0.51. Revenues rose 46.8% year/year to $12.49 billion versus the $12.53 billion consensus and the $12.65 billion consensus. The company also guides, sees 2004 adjusted EPS of $2.13 (ex items), versus the consensus of $2.10, and revenues of $54 billion versus an estimate of $52.84 billion.
Lilly’s new products (Cialis, Strattera, Forteo, Xigris, Alimta) and upcoming launches (Cymbalta, Yentreve) make Lilly’s product portfolio among the youngest in the industry. Management continues to expect summer 2004 launch for Cymbalta and late-2004/early-2005 launch of Yentreve (duloxetine) in U.S. Aside from Zyprexa patent litigation, the company is also facing little in the way of near-term generic erosion of major brands. There are, however, some concerns regarding the growth prospects for the base business with Zyprexa prescriptions in steady decline and U.S. sales growth a sluggish 3% in the quarter. It is unclear when or if Zyprexa volume growth will resume. Lilly could benefit from the new Medicare law, when enacted in 2006, when dual-eligible beneficiaries (those old enough to be eligible for Medicare and with incomes low
enough to be eligible for Medicaid) will be covered by the Medicare Rx benefit. For Zyprexa, this change could result in a $200 million reduction in Medicaid rebate payments to states, albeit a one-time event. Strattera market share has also flattened at around the 11% level after a very strong start in the first half of 2003.
Biotech . . . JMP Securities upgrades Protein Design to Outperform from Market Perform and raises their target to $32 from $11; with business model risk substantially reduced and royalties achieving critical mass in 2004. The firm says investors can now focus on real pipeline data coming out in the next 12 months. Also, firm does not believe that investors have fully accounted for the upside in PDLI's rev coming from recent developments in its royalty biz, nor resulting from increasingly probable development of at least one drug from the company's emerging pipeline of five clinical stage product candidates.
Hotel & Leisure . . . Deutsche Bank raises their target on Shuffle Master to $40, and refers to the company as a "mini IGT" in the making since it continues to model itself after the highly successful IGT model. The firm also believes that SHFL's pending CARD acquisition and new product introductions could likely provide upside to their 2004-05 estimates, and thinks the company's desire to repurchase shares is a very bullish signal investors should be paying attention to.
Station Casinos reported adjusted earnings of $0.51 per share, excluding non-recurring items, $0.05 better than the consensus of $0.46. Revenues rose 19.7% year/year to $239.0 million versus the $232.0 million consensus. The company also guides, sees 2nd quarter EPS of $0.45-0.49 versus the consensus of $0.45, and 2004 EPS of $1.81-1.96, versus the consensus of $1.80.
Media . . . CSFB lowers their view on the Cable sector to Underweight from Marketweight given increasing competitive pressure as well as the likelihood that free cash flow forecasts will have to come down. Firm says that high speed data competition will continue to be strong, the entry of the RBOCs into video could be significant enough in 2004 to drive basic subscriber growth negative for several of the largest MSOs, the competitive nature of VoIP will be more intense than expected, and competitive pressures coupled with greater than expected capex and higher cash tax burdens will drive lower than expected free cash flow. Cuts Comcast target to $32 from $36 and cuts COX target to $32 from $34.
CSFB out positive on Disney saying they think that Street estimates for 2005 are potentially low to a significant degree -- calling it a definitely non- consensus, out of the box thinking these days, particularly as people think Street estimates are too high for 2005. The firm believes the biggest drivers going forward are the theme parks and ESPN, but the TV stations are performing well despite weakness at the network. TV performance over the past several quarters has outperformed the industry and they believe that its major market presence and strong local news should drive outperformance going forward. With the shares trading 10.7x 2005 EBITDA, the firm is reiterating their Outperform rating and $37 target.
The Financial Times reports that Liberty Media is in talks with News Corp about acquiring international TV production and programming assets from the company. John Malone, Liberty chairman, said the co could swap News Corp shares it holds for operating assets as Liberty expands internationally. In an interview with the FT, Mr Malone described the talks as "fairly active". He said: "There are certain small assets that we feel fit Liberty better than News Corp. We could exchange small amounts of our News Corp shares back for these assets." This year Liberty increased its stake in News Corp to 17%, representing more than 9% of the voting rights - second only to the Murdoch family interests. Mr Malone declined to name the assets Liberty was targeting. But people familiar with the situation hinted that the co was looking at the international arms of News Corp's National Geographic and FX channels. Trading at $11.07 yesterday, Liberty's shares face a discount of more than 30% against the sum of its parts, which include stakes in company's. "The impact of the spin-off and rights issue will be a step in the right direction," said Mr Malone. "But we don't anticipate that this single action by itself will wipe out the discount. Mr. Malone states "There may be subsequent actions that Liberty will need to take to address that large and growing discount." He said that Liberty could sell off non-strategic holdings to cut debts or seek a bigger stake in Discovery, the TV network.
Telecom . . . EarthLink reported 1st quarter non-GAAP earnings of $0.11 per share, before facility exit costs, $0.03 better than the consensus of $0.08. Revenues fell 0.6% year/year to $351.6 million versus the $350.0 million consensus. The company guides, sees 2nd quarter EPS of $0.13-0.17 versus the consensus of $0.13, and revenues of $350-355 million versus an estimate of $353.8 million. The company reaffirms 2004 revenues of $1.41-1.44 billion versus an estimate of $1.43 billion. The company also signs three-year marketing and sales agreement with Sprint, building on their six-year relationship and ensuring that EarthLink will be preferred high-speed ISP for Sprint's local residential and small-business customers.
The New York Post reports that AT&T introduced a VoIP calling plan for New York yesterday as part of the company's aggressive rollout of the digital technology. The service cuts AT&T's costs and allowing consumers such computer-friendly features as a merged voice mail and e-mail inbox. "What we've seen is that consumers like the price, but that the features are the wow factor," said Cathy Martine, senior vice president at AT&T. Price differences may also be a wash for most customers, since they are required to pay for a high-speed Internet connection to use the phone service. At first, AT&T VoIP will cost $20 a month for unlimited calls; that will go up to $40 a month later this year. Verizon plans to roll out VoIP in New York this summer; Time Warner cable hopes to introduce its service sometime this year.
Sprint FON reported earnings of $0.36 per share, ex items, $0.01 better than the consensus of $0.35. Revenues fell 4% year/year to $3.44 billion versus the $3.46 billion consensus. Sprint PCS reports 1st quarter (Mar) loss of $0.08 per share, ex items, $0.01 better than the Reuters Research consensus of ($0.09); revenues rose 16.6% year/year to $3.44 billion versus the $3.32 billion consensus. Company will combine its tracking stocks on Friday, raises 2004 combined revenue guidance from previous expectation of 2-3% growth to 3-4% revenue growth; co reaffirms combined EPS guidance for 2004 of $0.70-0.75 per share. No combined company consensus estimates available as of yet.
Electronics . . . Sony Corp boosts outlook for fiscal year 2004 (ended Mar 31) to 88 billion yen (approx. $715 million) from 55 billion yen. Sales outlook goes to 7,500 trillion yen from 7,400 trillion yen.
Barron's Online highlights PalmOne, a company that has seen its stock triple over the past year as it launched its famous PalmTreo and sold about 100,000 Treos in each of its past two quarters. Yet "one sparrow doesn't make a spring," Charles Wolf, an analyst at Needham, wrote recently. Despite the success of the Treo, PalmOne still generates just under three-quarters of its sales from plain-old personal digital assistants. And Gartner Dataquest, a market research firm expects the worldwide market for handheld organizers to decline by 6%, to 11.2 million next year from 12 million in 2002. Meanwhile, the market share of rivals like Sony, Hewlett-Packard and Dell grew as more people bought Pocket PCs, which use the Windows CE operating system. Last year Windows CE picked up nearly 12 points of market share to about 38%. That puts it in striking distance of the Palm operating system's shrinking 50% share. Among all-in-one devices, Research in Motion has a strong lead over PalmOne. While Research in Motion has been selling the BlackBerry device for several years, it added more than 200,000 BlackBerry subscribers in the three-month period that ended in Feb. While CFO Bruner says the co will meet its 4th quarter demand and is bolstering its list of suppliers, the co may not be able to ramp up Treo production after May. PalmOne is expected to lose 26 cents a share for its fiscal year that ends next month. But based on F05 estimates, the shares change hands at a premium to RIMM's 30x F05 consensus estimate. Also, at 1.1x trailing-12-months sales, PalmOne's stock is at a premium to its five-year median ratio of 0.8x sales.
Storage . . . UBS upgrades EMC to Buy from Neutral and raises their target to $17 from $16, as they believe that storage fundamentals are solid and that EMC is well-positioned to benefit as the market leader. The firm says software sales are tracking ahead of expectations, the CLARiiON product line has momentum (with more key products to come), and they believe that competitors' bark may be worse than their bite in 2nd half 2004 in terms of Symmetrix competition.
Network Equipment . . . CIBC initiates coverage of Redback Networks with a Sector Perform rating and no target. The firm says that the company appears well-positioned for growth due to its status as a pure play on residential broadband secular growth, however it needs to demonstrate solid traction for its new SmartEdge platform and show solid growth following its recent financial restructuring.
Lucent reported earnings of $0.03 per share, ex items, $0.01 better than the consensus of $0.02. Revenues fell 8.7% year/year to $2.19 billion versus the $2.16 billion consensus.
Semiconductor Equipment . . . Analysts generally considering the March below-consensus book-to-bill ratio of 1.10 a non-event with JP Morgan noting that as long as bookings rise in absolute terms and incremental news flow builds investor confidence in the potential length and upside magnitude of the cycle, they think equipment stocks can lead the market higher again as the year unfolds. Morgan Stanley out saying they believe that the shortfall in March front-end bookings may be explained by a heavily back-end loaded, April Quarter for Applied Materials and relative weakness in 1st quarter order intake at KLA-Tencor. Under this scenario, to support AMAT's guidance for +30% Quarter/Quarter order growth for April Quarter, the firm estimates that SEMI front-end bookings need to increase by approx +14% Month/Month to $1,150 million next month. Firm maintains their Attractive view on the sector. Merrill Lynch noting they believe investors should hold on to semiconductor equipment stocks and use the recent pullback in particular to add positions. Firm thinks that the current malaise of stocks in the sector already discounts the expected slower order growth in the mid-summer time frame but does not reflect the likely potential for accelerating orders in 4th quarter 2004 and into early 2005.
Semiconductors . . . Smith Barney out cautious on Pixelworks advising investors to stay levelheaded about this potentially strong growth company. According to the firm, Q1 came in very strong with EPS, revenue and gross margin ahead of expectations. The firm thinks that Q2 might come in good too but possibly without the same momentum or gross margin upside. With the stock trading at 37x their forward estimates, the firm believes Pixelworks is fully valued at current levels. Firm's $15 target price is based upon a 30x multiple of our forward 2005 earnings estimate of $0.50.
Boxmakers . . . Lexmark delivered another impressive quarter with upside reflecting strong inkjet demand, and issued even more favorable guidance which still assumes incremental pricing competitiveness (leaving potential for EPS upsides) and underestimates Dell's potential unit contribution. Analysts are raising 2004/2005 numbers and year-end 2004 target from $95 to $115 and reiterate an Outperform rating. The thesis on LXK remains that it is poised for upsides in 2004 as its guidance continually assumes further price aggression, contrary to the view that H-P is less likely to accelerate its competitive posture given the self-impact and H-P's agenda to subsidize PC/server margins to meet EPS targets. Further, LXK's inkjet business upside bodes
well for volume strength at Dell in its April quarter. LXK reported 1st quarter 2004 EPS of $0.91 that surpassed our high-end estimate of $0.89 and Street at $0.87 on stronger revenues of $1.26 billion (up 13% Year over Year) fueled by demand strength in consumer/inkjet. Robust hardware sales grew 17% Year over Year (boosted an incremental 28% Year over Year in units from Dell by our estimate), while supplies growth, up 14% Year over Year, reaccelerated nicely after 4 straight quarters of solid hardware sales.
Software . . . CSFB out positive on Activision saying they believe the co is an effective way to play the growth in the overall entertainment software industry. The firm notes that while Activision's growth has underperformed most of its peers, over the past 12-months the stock has outperformed the group, as the company's holiday products exceeded expectations and investors focused on a strong product pipeline. With the shares trading at a 19% discount to its historical cycle P/E multiple, the easy money has been made, but some additional upside remains. The firm subtracted the impact of the company's interest income on their 2005 estimate of $0.70 and applied a multiple of 20x and $5.65 in cash per share, arriving at new target price of $19 (vs $15.50 perviously). Separately, Schwab SoundView has initiated coverage of ATVI this morning with an Outperform and $20 target.
Check Point reported earnings of $0.25 per share, $0.02 better than the consensus of $0.23. Revenues rose 10.8% year/year to $116.1 million versus the $113.9 million consensus. License revenues rose 8.2% year/year to $63 million.
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