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Tuesday, April 27, 2004 6:31:29 PM
The S&P 500 Index rose after a stronger-than-expected reading on consumer confidence encouraged investors that growth in earnings and the economy will help extend the market's 14-month rally. Pulte Homes gained after the homebuilder reported profit that beat the average analyst estimate. Energy shares advanced, paced by Exxon Mobil, after OPEC's president said the cartel might raise its oil-price target by 30 percent. The S&P 500 rose 2 points (+0.2%) to 1138, its fourth advance in five days. It has jumped 42 percent since its 2003 low in March of that year. The DJIA added 33 points (+0.3%) to 10,478.16. The Nasdaq lost 4 points (-0.2%) to 2032.. Benchmark indexes pared gains after reports of explosions in Syria and gunfire in Iraq. The United Nations building was on fire and a terrorist group started shooting following three explosions in a western Damascus neighborhood, Al-Arabiya news reported, citing the Syrian state news agency SANA. Six stocks rose for every five that fell on the New York Stock Exchange. Some 1.5 billion shares changed hands on the Big Board, in line with the three-month daily average.
Strong Sectors: oil services, oil, retail, drugstores
Weak Sectors: gold, semiconductors, computer storage
Top Stories . . . Verizon, the largest U.S. local-telephone provider, earned $1.2 billion in the first quarter as demand for wireless calls lifted sales 3.9 percent, ending nine quarters of little or no revenue growth.
U.S. consumer confidence rose in April to a three-month high and previously owned home sales increased to the second-fastest pace amid job and income growth.
More crude oil is needed to encourage U.S. refiners to expand inventories and to ease record fuel prices, Deputy U.S. Energy Secretary Kyle McSlarrow said after meeting Saudi oil minister Ali al-Naimi in Washington.
Wyeth, which has set aside $16.6 billion to resolve suits over damages caused by fen-phen diet combinations, must pay $1.013 billion to the family of a Texas woman who died from a lung disease after taking weight-loss pills that the company makes, a jury ruled.
Lockheed Martin, the biggest U.S. military contractor, said first-quarter profit climbed 16 percent, buoyed by U.S. spending on Patriot missiles used in Iraq and to develop new jets. The company raised its 2004 forecasts.
DuPont, the second-biggest U.S. chemical maker, said profit rose 25 percent in the first quarter on foreign exchange gains and sales of synthetic fibers and chemicals used to make electronics.
Janus Capital Group may pay about $200 million, including fee reductions, to settle allegations that it allowed clients to engage in improper mutual- fund trading.
ImClone Systems, a drugmaker that last year won U.S. regulatory approval for its Erbitux cancer medicine, soared after the company reported a five-fold increase in revenue.
Quotes of Note . . . ``The stock market is torn right now between fear of higher interest rates and the really good company earnings we are seeing,'' said Erich Hein, who helps oversee the equivalent of $7.1 billion at SEB Invest GmbH. Hein has been selling shares of banks including Citigroup and J.P. Morgan Chase because the companies may be hurt by rising interest rates. He's been buying drugmakers such as Pfizer Inc. and Merck & Co., which tend to be less affected by shifts in rates.
``We expect a deceleration of earnings estimates and a tightening of rates in coming months and we are trying to anticipate that as much as possible,'' said Sebastien Doisy, a strategist at CDC Ixis Asset Management in Paris.
``If consumer confidence is up, then, de facto, investor confidence has got to be up as well.'' Dave Briggs, head of global equity trading at Federated Investors.
Gurus . . . UBS says recent evidence suggests that while information technology spending in Europe has passed the bottom, the rate of recovery remains slow. Even in the U.S., the recovery in the IT service sector is relatively gradual.
Smith Barney continues to expect a 10%-to-15% correction from here by mid-summer. Strategist Tobias Levkovic notes earnings growth is likely to slow, given high margin levels, and anticipated rising compensation costs. Large cap safe-havens include Wal-Mart, GE, Microsoft, Altria, United Parcel, and American Int'l.
Joe Carson, Director of Economic Research at Alliance Capital, says current dollar GDP should top 7.0% in the first-quarter. Real GDP is expected to exceed 5.0%. Nominal GDP exceeded 7.0% only once in the most recent bottom (the second-quarter of 2000). No wonder corporations are in the pink! First-quarter pre-tax profits should rise to a record $1.275 trillion, which would represent 11.0% of GDP. In the first-quarter of 2003, the profit share of GDP was 8.6%. The expected increase would represent the biggest one year jump in more than 40 years.
Financials . . . The New York Times reported Allied Capital has come under scrutiny over a $9 million transaction, which has led to questions on Wall Street about the quality of its financial statements and to an informal inquiry by federal securities regulators. However, the company says that the 2003 transaction with a related entity was both immaterial and irrelevant and did nothing to affect the financial status of either business. For that reason, a company executive said, details of the transaction - which involved the transfer of defaulted loans to Allied from Business Loan Express, the largest company in its investment portfolio - were not specifically disclosed.
REITs . . . Kimco reported 1st quarter 2004 FFO of $0.89 per share, materially ahead of estimates
($0.84) and the consensus ($0.85). The quarterly result included a $0.04 per share impairment charge; as such, the $0.93 per share operating result exceeded our estimate by $0.09 per share. Better than expected results were due to strong internal growth and external expansion. Occupancy moved higher sequentially and year-over-year. As of 1st quarter 2004, occupancy was 91.9% compared with 90.7% as of December 31, 2003 and 89.1% a year ago, a sign of Kimco's leasing ability. KIR was 97.3% occupied and KROP was 98.0%. In 1st quarter 2004, Kimco acquired six shopping centers and one land parcel for $256.6 million,
representing 1.7 million square feet. Analysts are assuming $600 million of acquisitions in 2004. Dispositions totaled $63.4 million (2 in KROP, 3 in Kimsouth). Given these run-rates, it is possible that there will be some upside to portfolio expansion assumptions. 2004 and 2005 FFO per share estimates are $3.45 and $3.75, implying growth of 6.8% and 8.7%, respectively. Kimco's raised its 2004 FFO guidance range to $3.47-$3.52 from $3.41-$3.46 per share. This guidance confirms thesis on the shopping center sector; namely, landlords have pricing power and the sector is characterized by accelerating earnings momentum.
Homebuilders . . . Pulte Homes, the fourth-largest U.S. homebuilder said earnings jumped 53 percent as falling mortgage rates spurred more people to buy new houses. Profit from continuing operations totaled $1.02 cents a share, exceeding the 85-cent analyst estimate.
Oil & Gas . . . Bloomberg.com reported that OPEC may raise its target price by 30 percent because the weak dollar has reduced purchasing power and boosted inflation in member states, the group's president said.
Baker Hughes reported 1st quarter GAAP earnings from continuing operations of $0.29 per diluted share, excluding $0.01 from discontinued operations, $0.04 better than the consensus of $0.25. Revenues rose 16.6% year/year to $1.40 billion versus the $1.35 billion consensus.
Transocean reported earnings of $0.07 per diluted share, $0.04 better than the consensus of $0.03. Revenues rose 5.8% year/year to $652.0 million versus the $581.9 million consensus. Company also reported an "adjusted" EPS number of $0.15, associated with early debt retirement and TODCO initial public offering (IPO)-related items, so upside surprise could be bigger.
Chemicals . . . DuPont reported earnings of $0.96 per share, $0.01 better than the consensus of $0.95. Revenues rose 14.2% year/year to $8.21 billion versus the $7.99 billion consensus. The company sees 2nd quarter EPS of approximately $0.78 versus consensus of $0.77, First Call consensus of $0.78. The company reaffirmed 2004 previously issued EPS guidance of $2.10-2.30, consensus $2.33.
Metals . . . U.S. Steel reported earnings of $0.47 per share, reflecting assumed conversion of company's convertible preferred shares into approximately 16 million common shares, $0.09 better than the consensus of $0.38. Revenues rose 55.6% year/year to $2.97 billion versus the $2.64 billion consensus.
Barrick Gold is looking forward to 2004 and beyond. Both management and market is focused on the
company's aggressive growth strategy to reach 6.8-7.0 million ounces by 2007. Management followed through on promise to reduce hedgebook (800k oz in 1st quarter), even at a significant opportunity
loss and below market gold prices. ABX reiterated its new no-hedge policy even in a higher significantly higher gold price environment as the company has outgrown its need to hedge. Expect lower volumes and higher costs 2004-2005 before new projects come on line 2006-2007. Analysts have adjusted 2004 expectations to $0.33 from $0.35 to reflect the negative impact expected from management's plan
to deliver 1.5 million ounces into the hedgebook (in 2004). Analysts maintain 2005 forecast of $0.40.
1st quarter came in modestly below expectations due to a lower than expected realized gold price impacted by delivery of lower priced hedged ounces. Excluding non-recurring items ($10 million post-tax non-hedge derivative loss), ABX earned $0.07/share - modestly below expectations. Analysts continue to believe that the market is factoring in most of the negative news surrounding Barrick. Investors continue to focus on ABX's large negative MTM hedgebook. A more aggressive de-hedging would allow a faster collapse of its
valuation discount.
Defense & Aerospace . . . Lockheed Martin, the biggest U.S. military contractor, said net income climbed to 65 cents a share, more than the 53-cent average forecast. Revenues rose 18.2% year/year to $8.35 billion versus the $7.73 billion consensus. The company sees 2004 EPS of $2.50-2.60, up from previous guidance of $2.30-2.40, in line with consensus of $2.53, on revenues of $33.8-34.8 billion, consensus is $34.4 billion.
L-3 Comms reported earnings of $0.67 per share, $0.03 better than the consensus of $0.64. Revenues rose 39.7% year/year to $1.52 billion versus the $1.42 billion consensus. The company sees 2004 EPS of $3.35-3.40 on revenues of $6.5 billion versus the consensus of $3.36 $6.32 billion respectively.
Armor Holdings received a contract award from the U.S.Army Tank-Automotive and Armaments Command (TACOM) to supply additional crew protection kits for the U.S. Army heavy truck fleet. Under the contract, which totals approx $60 mln, co will supply armor solutions for the Heavy Expanded Mobility Transport Truck (HEMTT), the Palletized Loading System (PLS), the Heavy Equipment Transporter (HET), and the M915 series of trucks. Co noted that it expects this new business to represent approx $60 mln of revenue incremental to company's previous 2004 revs guidance.
The WSJ reports that Boeing faces a federal criminal investigation that has expanded into whether it used a rival company's documents to compete for NASA contracts, according to government and industry officials close to the probe. Investigators are trying to determine whether a former employee of Lockheed Martin hired by Boeing in 2001 gave his new employer access to documents containing sensitive pricing data. Government officials are increasingly focusing on whether the Lockheed Martin documents affected Boeing's pricing decisions concerning rocket-launch contracts for the NASA and other government customers.
Lear Corporation announced 1st quarter 2004 EPS of $1.30, up 29% from last year, on the back of $4.5
billion of revenue, up 15% from last year. The $1.30 per share was higher than our expectations, but mostly
because $0.10 per share of facility closing costs did not occur in the quarter and were instead pushed into 2nd quarter. Approximately $250 million (just under half) of the year-over-year revenue increase was truly from new business, with the balance a result of FX movements. Of the $250 million, $180 million of this was from Europe, as the company has previously disclosed it expects most growth to come from outside of North America this year. Margins were negatively impacted by ongoing facility consolidation costs -- a trend analysts expect will continue in the near-term but reverse in 2005 as the company's cost structure will be more competitive. Lear believes commodity pricing had a negative $0.04 per share impact on the quarter's results, and could have a $0.10 negative impact for the year but believes savings can be generated elsewhere to offset this expense; approximately half of the expense is steel-related.
Education . . . Piper Jaffray raises its target on Corinthian Colleges to $40 from $36 based on 29x 2005E EPS of $1.38, in line with the company's peer group. The firm believes the company's strategy for new program adoptions throughout CDI, Corinthian's Canadian postsecondary education business, will ultimately drive both enrollment growth and operating margin expansion at CDI. The firm recommends the stock as a core higher education holding due to its large exposure to the appealing allied health education field, its growing online business, its strong and consistent operating results, and the potential for upside to March quarter estimates.
Merrill Lynch downgrades Apollo Group to Neutral from Buy based solely on valuation. The firm believes the potential stock appreciation is limited and that investors have built APOL's success into its stock price. Currently trading at a premium at 49.8x 2004E EPS of $1.91/sh and 38.3x 205E EPS of $2.48/sh vs. the group average of 36.6x and 29.8x.
Apparel . . . The WSJ's "Tracking the Numbers" column highlights K-Swiss, which ran up 122% last year, but may lose traction. K-Swiss's success has been fueled by the popularity of its Classic original, essentially unchanged from the all-white, all-leather tennis shoe that the co first started selling 37 years ago. Sales of the shoe rose to $163 million in 2003, when it represented 38% of the company's total sales. K-Swiss got a further boost from a long-running spat between Foot Locker and Nike. The result: Foot Locker had extra shelf space to fill, and one of the things that it filled it with was shoes from K-Swiss. Foot Locker and Nike recently made amends, and there are signs the trend toward white-on-white classics that boosted K-Swiss's sales is beginning to fade. The 6 month order backlog from Foot Locker fell only 4% to about $34 million at the end of 2003. That doesn't seem bad, unless you consider that the order backlog had risen earlier in 2003. According to conference-call transcripts, the order backlog rose to about $48 million by the end of the 3rd quarter of last year, nearly 40% above where it started 2003. Viewed in those terms, the $14 million drop in its order backlog to $34 million in the 4th quarter was stark. According to the article, a shift in trend away from white-on-white classic sneaker styles also could hamper K-Swiss. Mindful of this danger, K-Swiss has been focusing its efforts on Classic original-derived shoes that add color and has launched an ad campaign that, as K-Swiss vice president of marketing Debbie Mitchell put it on the company's 4th quarter conference call, features "a diverse group of hip people, each with their K-Swiss shoe of choice." Unfortunately, such top-down efforts at generating buzz are difficult to pull off, particularly for a company like K-Swiss, whose past derives from the tennis court rather than the basketball court.
Martha Martha Martha . . . Martha Stewart Living Omnimedia announced that it has extended its key merchandising agreement with Kmart by two years, through January 2010. The Kmart contract is extremely important to MSO, having become the company’s largest profit generator given the depressed state of the flagship Martha Stewart Living magazine. The contract was also
revised to provide certain concessions to both Kmart and MSO. An amended contract will be filed along with the company’s 2nd quarter 2004 10Q filing in August 2004. Concurrent with this announcement, Kmart has withdrawn its lawsuit against MSO (filed in February 2004) which contested certain terms of the contract.
Going forward, Kmart’s payments to MSO will be based on the higher of 1) a royalty on total sales of Martha Stewart Living Everyday products sold in stores or 2) a minimum guaranteed threshold level. The annual minimum guaranteed payment to MSO has been lowered modestly, perhaps by $3-4 million. The company’s 2003 10K filing disclosed that the minimum payment for 2004 was
scheduled to be $53.4 million. The annual minimum guaranteed payment (in absolute dollars)
will continue to rise about 10% annually through the balance of the contract.
There will be no secondary level of minimum guaranteed payments to MSO based on sales by specific product category. It is our understanding that MSO prized the product level categories due to the protection that they gave in ensuring adequate floor space for emerging product lines in
Kmart stores. Despite this adjustment, it does appear that Kmart is committed to expanding the Martha Stewart Everyday franchise as evidenced by the announcement of plans to develop new categories, such as ready-to-assemble furniture. Estimate that the secondary level of guarantees would have totaled about $3.5 million in 2003. Following the lawsuit by Kmart back in February, analysts had already adjusted estimates to exclude this figure. Therefore, this revision will have no impact on our earnings estimates.
Healthcare . . . Medco Health reported earnings of $0.48 per share, ex items, in line with the consensus of $0.48. Revenues rose 6.9% year/year to $8.91 billion versus the $9.00 billion consensus. The company sees 2004 EPS of $2.03-2.14, ex items, versus consensus of $2.10.
Barron's Online highlights managed care stocks, such as UnitedHealth, Wellpoint Health Networks, Anthem, Aetna and Health Net. According to the article, the economic recovery should eventually boost premium revenues, meanwhile, many HMO stocks' valuations still appear reasonable, in some cases, downright cheap, especially in light of increased mergers and acquisitions in the sector. Managed care company's profits depend on the spread between premiums and medical costs. Since 2000, premiums have risen faster than costs have, boosting earnings. Last year, medical costs rose less than expected as employers cut jobs and raised workers' out-of-pocket medical expenses. Patients also used more generic drugs and delayed unnecessary medical procedures, cutting hospital admissions and HMOs' reimbursements. The trend should continue this year, although spreads could narrow in 2005 if cost increases pick up and premium hikes slow, says Edmund Kroll, an analyst with SG Cowen. And Wall St is selective, too, favoring industry powerhouses like Wellpoint Health, Anthem, Aetna and UnitedHealth. "[UnitedHealth] is a growth stock in a growth industry, and it is cheap," says Caspar Rock, portfolio manager of the Munder Healthcare Fund. According to the article, shares of Health Net look even cheaper, trading at a 51% discount to the S&P 500, a bit below its historic discount of 47% to the market. The stock trades at about 8.7x earnings over the next four qrtrs; it historically fetches 11.1x forward earnings.
Piper Jaffray upgrades Immucor to Outperform from Market Perform. The FDA approval of Immucor's 510k filing for the Galileo immunohematology analyzer comes a full 6 months earlier than the firm had expected and modeled. Automation is presently used in less than 20% of U.S. hospital blood banks. The firm believes there are at least 600-800 metro hospitals that would be prime candidates for Galileo - putting the equipment opportunity alone at roughly $90 million. The firm expects the co will be ramping sales and service support quickly to try and launch by mid-May.
Tenet Healthcare issues 1st quarter guidance. The firm now sees a loss of $0.25, which is not comparable to the consensus of $0.00. THC guidance includes multiple charges totaling $0.23.
Late yesterday evening, UnitedHealth announced that it had entered into a definitive agreement to purchase Oxford Health Plans for about $4.9 billion, about a 13% premium to the prior day’s closing price. Under terms of the stock/cash deal, which is expected to close in the fourth quarter of 2004, UnitedHealth will pay consideration of $16.17 in cash per share and exchange 0.6357 shares of UNH for each share of OHP, (the exchange ratio is fixed, no collar exists). The terms compute to a valuation of $56.79 per share for OHP at yesterday’s UNH closing price. The price equates to 12.6x and 11.5x our 2004 and 2005 earnings estimates for Oxford, respectively (the full group currently trades at 13.7x and 12.2x 2004 and 2005 earnings estimates, respectively). For comparative purposes, recent transactions have typically averaged in the 14x to 17x range on next year’s earnings. Including the $200 million of cash in excess of debt and capital requirements, the transaction is more closely valued at about $4.7 billion. On an enterprise value-to-EBITDA, the deal is valued at about $3,200/member (the full managed care group trades at approximately $1,400 per member and recent transactions have typically ranged closer to $1,000/member). The significantly higher per member valuation reflects Oxford’s much higher than industry average profit per member, though that factor seems to be adequately reflected in the lower price-to-net valuation indicated above. The transaction is expected to close in the fourth quarter 2004, subject to regulatory and shareholder approvals.
Medical Devices . . . QLT reported earnings of $0.34 per share, $0.03 better than the consensus of $0.31. Revenues rose 25.3% year/year to $41.3 million versus the $39.7 million consensus. The consensus includes net gain of $0.15 from Kinetek acquisition, consensus of $0.24 appears to include some estimates which include gain and some estimates which exclude it. The company raises 2004 Visudyne guidance from $420-455 million to $430-455 million. Treating convertible notes on a "not converted basis", company sees 2004 EPS of $0.86-0.96 versus consensus of $0.94.
Drugs . . . Bristol-Myers reported the settlement of patent infringement litigation by it and patent holder Research Corporation Technologies Inc against TEVA subsidiary Pharmachemie Group in relation to Paraplatin, or carboplatin. Under the agreement, BMY will, in addition to continuing to distribute Paraplatin, sell product to Pharmachemie allowing it to distribute an unbranded version of carboplatin commencing June 24, 2004, subject to several conditions including approval by the Federal Trade Commission.
Sepracor reported a net loss of $0.59 per diluted share, which includes a charge of $30.7 million or $0.36 for selling and marketing expense related to termination (effective Dec. 31, 2004) of agreement to co-promote XOPENEX, may not be comparable to the Reuters Research consensus of ($0.45). Revenues rose 17.8% year/year to $99.5 million versus the $107.7 million consensus and the $107.7 consensus.
Analyst community somewhat divided on how to react to news from last night of Wyeth walking away from the Flumist deal. The more bearish firms point to the fact that FluMist is unprofitable at current levels and therefore represents a drag on earnings. MedImmunehas previously indicated that if Wyeth were to exit the collaboration, it would cost an additional $0.10-0.20 per share per year through 2007. Furthermore, the company had previously indicated that the FluMist franchise will not materially contribute to revenue growth until the introduction of the CAIV-T (next gen. FluMist) product in the 2007-2008 flu season. Smith Barney out noting they believe the stock could be under pressure today, as they believe the large majority of Street earnings estimates, including their own estimates, currently do not reflect Wyeth exiting the collaboration and therefore, will likely be substantially lowered. Firm maintains their Sell rating and $19 target. On a more positive note there are firms out saying the dissolution of FluMist deal should mark the beginning of a new era for the company. Prudential noting the news was expected and is establishing an 18-month price target of $32 based on 2007 EPS estimate of $1.00, anticipating primarily solid Synagis growth in worldwide markets with accelerating product sales growth coming from CAIV-T in 2007... Finally, Goldman Sachs saying that depending on the upfront payment to WYE, which they estimate should be around $30 million, the shares may react slightly positive. However, they note, significant share appreciation is unlikely near term because FluMist will probably not be profitable until 2008/09.
Biotech . . . ImClone, which won U.S. regulatory approval for its Erbitux cancer medicine last year, said first-quarter revenue totaled $109.6 million, besting the $62.2 million average analyst in a Thomson Financial survey. Imclone reported earnings of $0.76 per share, $0.59 better than the consensus of $0.17. Revenues rose 460.1% year/year to $109.6 million versus the $62.2 million consensus. The comapny states "We were pleased with the sales of ERBITUX in just over five weeks of product shipments during the quarter, as they appear to indicate that physicians are rapidly integrating this first-of-its-kind antibody into patients' treatment regimens"
Genentech target goes to $144 from $124 at Lazard.
Goldman Sachs out on Genentech following positive results from Phase III Tarceva trial saying they estimate sales potential of NSCLC to be $0.5-0.6B based on $15,000-20,000/patient/year. Assuming 5x sales, value of Tarceva is $2.5 billion-3.0 billion, which the firm believes is reflected in DNA shares. According to Goldman, the share reaction implies expectation for use outside of NSCLC and may be higher pricing/penetration. They also note that DNA's p/e of 84x on 2004 EPS or PEG of 3.1 is near historical peak for biotech. On 2005 EPS, the 66X p/e and 2.4 PEG may be sustained if there are further positive product news and sentiment remains bullish. They would not be surprised if DNA shares consolidate in the near term but maintains its Outperform rating for long term investors based on a robust pipeline and momentum of the Avastin launch. Rating remains Neutral.
Wall Street Journal's Health column highlights new treatments for brain cancer. Until now, new drugs have offered the promise of better treatments for cancer in virtually every organ except one: the brain. Now for the first time, a growing number of new methods of delivering chemotherapy to the brain are being tested and offered to patients with brain cancer. Xenova plans to start a clinical trial later this year to treat brain-cancer patients with its drug TransMID using this system. Guilford Pharma recently won FDA approval to use its Gliadel wafer in newly diagnosed patients with malignant brain cancer along with surgery and radiation.
Media . . . FindWhat.com, an Internet advertising service, said profit totaled 27 cents a share, topping its earlier estimate of 22 cents.
Metro-Goldwyn-Mayer approved a one-time dividend of $8 a share, payable May 17 to shareholders on record May 7. Separately, the Wall Street Journal reported that a group of bidders, led by Sony, sent MGM a letter formally indicating an interest in acquiring the company.
Since Echostar reported its 4th results, the market has heard concerns from investors on the increased costs that DISH discussed in its 10K and conference call. While higher spending is a concern, we believe that the additional money spent will lead to increased revenue growth and free cash flow acceleration. While DISH's increased satellite obligations call for addt'l payments of >$600M ('04-'10), and total payments of +$2.5 billion (~10 years) "back of the envelope" analysis which assumes an addt'l 425K net adds and modest ARPU increases, justifies the increased spending. The incremental revenues from expanded services will also prove profitable for EchoStar. As for increased SAC, analysis indicates that DISH will make the choice to spend more for a better, longer lasting subscriber which will lead to an increase in cash flows and a higher NPV per sub. DISH also will continue to capitalize on its lead into 116 local markets (DirecTV is currently in 64). DISH reports 1st quarter results on Thursday, May 6. Although inventory shortages continued in Q1, which contributed to the net add miss in 3rd quarter, analysts remain optimistic that DISH can hit our 281K net add estimate with the rollout of 6 more local markets in Q1 and additional foreign language programming. Analysts remind investors that the company' $190 milion share buy back in 4th quarter coupled with the early retirement of its $1 billion 4 7/8% convertible notes at $45.55 in October, signals that DISH mgt believes that its shares are undervalued. Analysts have a valuation of $44 per share, based on a DCF model as well as FCF and EPS multiples, supports our valuation.
Hotel & Leisure . . . Prudential has presented 10 reasons why they believe International Gaming Tech has never been more promising, including: replacement cycle is actually accelerating with no rational prospects for 2005/2006 slowdown; yields on participation games should improve in conjunction with gaming budget recoveries; rising interest rates should help consolidated gross margins; class II gaming and systems initiatives are abound; domestic gaming expansion appears more likely in 2004 than in 2002 and 2003; tangible international opportunities exist.
Argosy Gaming reported earnings of $0.63 per share, excluding after-tax expenses of $14.8 million or $0.50 associated with February 2004 refinancing of company's outstanding 10-3/4% notes due 2009, $0.14 better than the consensus of $0.49. Net revenues rose 11.8% year/year to $264.1 million versus the $250.3 million consensus. The company also guides, sees 2004 EPS of $1.73-1.83, after deduction of $0.52 in charges related to debt refinancing, versus the consensus of $2.21.
Electronics . . . Sony, the world's second- biggest consumer-electronics maker, said profit will total 100 billion yen ($921 million) in the year ending March 31, 2005, lower than the median estimate of 107.9 billion yen by six analysts.
Bloomberg.com reported that Canon, Sony and Sharp led Japanese consumer electronics companies forecasting higher annual earnings on rising demand for DVD recorders, flat- screen televisions and digital cameras. Canon, the world's second-biggest digital camera seller, forecast a 12 percent gain in 2004 net income to 309 billion yen ($2.8 billion), raising its January estimate. Sony, the world's second-biggest consumer electronics maker, forecast a 13 percent gain in profit in the year ending next March 31, lagging analysts' estimates. Sharp forecast a 24 percent profit gain. The Senior Managing Director of Canon told a press conference the company will sell 15.2 million digital cameras this year, raising its forecast from 15 million.
AmTech comments on Sony's Earnings: While SNE made its FY goal of shipping 20mm PlayStation 2 units, on a regional basis, Europe and Japan sales were up but North America was down 37% (greater than anticipated). SNE is also now forecasting FY05 shipments down 30%. The firm believes the declining PS2 sales in North America may help prompt a price cut before E3 trade show in 2 weeks. Any delay in this anticipated price cut beyond E3 would likely disappoint the Street and be considered a negative for Activision, Electronic Arts, Take-Two and THQ-Interactive.
Telecom . . . Verizon, the largest U.S. local- telephone provider said first-quarter profit, excluding some items, was 58 cents a share, beating the average estimate of analysts by 1 cent, according to Thomson. Revenues rose 3.9% year/year to $17.14 billion versus the $17.18 billion consensus.
Washington Post tech section reports that New York state Attorney General Eliot L. Spitzer yesterday urged the Federal Communications Commission to sharply increase the amount Nextel Communications should pay for a swath of higher-frequency spectrum it would get in exchange for moving its airwaves to minimize radio interference with public safety communications. Entering an already contentious dispute, Mr. Spitzer said in a letter dated yesterday, "Nextel must be required to compensate the United States Treasury for the spectrum it receives in the amount that would have been received at an auction of that spectrum."
IT Services . . . EDS reported 1st quarter 2004 results that were generally in-line with expectations. However, the company lowered EPS and Free Cash Flow guidance for the full-year. Free Cash Flow continues to disappoint. In 1st quarter 2004, EDS recorded negative Free Cash Flow of $166 million versus
+$122 million in 1st quarter 2003. The company expects 2004 Free Cash Flow of $300-$500 million, down from previous guidance of $500-$600 million. The free cash flow will be back-end loaded. NMCI continues to be a challenge. The "other" losing contract (Dow Chemical) will likely be terminated resulting
in further write downs and ultimately no return on the effort. "New" business signings remain weak, at approximately $2.2 Billion (vs. $1.7 Billion a year ago). Revenue from General Motors remains under pressure as EDS gets closer to renegotiating the Master Service Agreement in 2006. Expect a significant portion of this high margin, less capital intensive business to go away under a new agreement.
Network Equipment . . . Scientific-Atlanta adds VoIP launch program to SciCare services for cable operators.
UTStarcom upped to Overweight from Equal Weight at Lehman. The firm believes that sub traction lifts visibility into handset and infra sales, thus lift firm's estimates once again. Lehman's 2004 estimate goes to $1.95/$2.7 billion from $1.91/$2.6 billion; 2005 goes to $2.25/$2.95 billion from $$2.18/$2.9 billion. While recognizing concerns over international sales and 3G positioning, firm considers these concerns reflected in the share price, now 13x 2005. Target $37, or 16x 2005 EPS.
Schwab SoundView has learned that Nokia is taking swift action to mitigate its handset share loss, the company is aggressively lowering phone prices and offering attractive terms to dealers. The firm believes this will have a stimulative effect on the global mobile phone market, but it is revenue neutral for Nokia as higher Nokia units are offset by lower ASPs. The firm is raising global mobile phone market 2nd quarter estimates today. Also firm also skeptical of the long-term efficacy of Nokia’s actions.
Semiconductors . . . Conexant Systems, which makes semiconductors for high- speed modems and cable television set-top boxes, said its net loss for the second quarter widened to $143.4 million from $68 million a year earlier and announced it will cut 200 jobs, or 8.3 percent of its workforce, by the end of the year.
UBS provides color on market share shifts which occurred in 1st quarter. The firm notes strong desktops offset weak notebooks in 1st quarter according to a Mercury Research PC graphics chip report on data from 1st quarter. In addition, the average selling price was flat at $19.03. UBS provides color on overall market share: Intel gained 1.5% pts market share (now 33%), NVIDIA gained 2.5% (now 27%) and ATI lost 0.7% pts (now 24%) due to the disproportionate decline in notebook shipments in 1st quarter. The firm notes the decline in notebook shipments in 1st quarter due to channel inventory has been well documented. The firm also suggests strong desktop market bodes well for Nvidia's April quarter.
Merrill Lynch out on Advanced Micro saying that despite the long-term story looking interesting, the firm sees challenges in the intermediate term that investors may have overlooked. According to the firm, one reason for the dramatic improvement in AMD's financial performance during the past two quarters has been flash memory. Now, their checks indicate that Intel is moving aggressively to retake share, and that pricing for NOR flash into handset OEMs is beginning to weaken. Firm thinks it's unlikely that flash memory will continue to improve as dramatically for AMD. With the shares trading 25x their $0.65 2004 EPS estimate, the shares look fully valued. Firm reiterates their Neutral rating.
ATI Tech announces that the FireGL T2-128 and the FireGL X1-256p graphics accelerators will be the 3D graphics options available in the new H-P Workstation c8000.
Agere reported pro forma EPS of $0.05, which includes an $82 million tax gain that was not included in analysts' estimates. After backing this out, Agere reported net breakeven, the consensus is $0.01. Revenues rose 4.3% year/year to $462.0 million versus the $469.1 million consensus. The company sees 2nd quarter EPS of $0.00-0.01 versus consensus of $0.00 on revenues of $495-505 million versus consensus is $504 million.
Software . . . E.piphany, the maker of software for online marketing campaigns estimated that second-quarter sales will be $19 million to $22 million, below the analyst estimate of $22.7 million.
Red Flag. Reuters reported that Oracle dismissed two Danish managers last week but declined to comment further on a report they had left after accounting irregularities were revealed. Oracle Denmark said Peter Perregaard, vice-president Oracle’s European Emerging Markets and Danish Sales Manager Jan Skelbaek had both left the company. Financial daily Borsen reported on Tuesday the two had been dismissed after an internal audit revealed accounting irregularities in the Danish business.
As previously expected, Computer Associates management announced that it would be re-stating its 2000 and 2001 financials as per the findings of its internal audit. In total, the gross amount of prematurely booked revenues for fiscal year 2000 and 2001 totaled $1.8 billion, above the $1.4 billion indicated by the SEC’s investigation, as CA’s own internal investigation uncovered additional contracts that were improperly booked in the fiscal 2000 year. For fiscal 2000, restated revenue is expected to decline by $2 million to $6,092 million and no effect in net income is expected due to the insignificant change in revenue. For fiscal 2001, more meaningful changes will occur as revenues increase by $553 million to $4,748 million while the net income loss for that year declines by $333 million to a loss of $258 million or an EPS loss of $0.44, as restated. In addition, CA estimated that improperly booked revenues for fiscal 1998-1999 would have a net effect of reducing revenue for those 2 years by $561 million and lowering net income by $333 million.
Analysts do not expect the implications from this restatement to have any negative impact to current financials. The prematurely booked revenues were related to the fiscal 2000-2001 years (ending in March), and this practice ceased after the new business model began on October 2000. The restatement will mostly re-allocate the revenues that were prematurely booked into their respective quarters. Please note that the aggregate amount recognized by the re-statement has not changed, just the timing of it. The changes will
have no impact to the deferred revenue accounts in CA’s current balance sheet. CA will be releasing its fiscal 2004 10K as expected on May 12.
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Strong Sectors: oil services, oil, retail, drugstores
Weak Sectors: gold, semiconductors, computer storage
Top Stories . . . Verizon, the largest U.S. local-telephone provider, earned $1.2 billion in the first quarter as demand for wireless calls lifted sales 3.9 percent, ending nine quarters of little or no revenue growth.
U.S. consumer confidence rose in April to a three-month high and previously owned home sales increased to the second-fastest pace amid job and income growth.
More crude oil is needed to encourage U.S. refiners to expand inventories and to ease record fuel prices, Deputy U.S. Energy Secretary Kyle McSlarrow said after meeting Saudi oil minister Ali al-Naimi in Washington.
Wyeth, which has set aside $16.6 billion to resolve suits over damages caused by fen-phen diet combinations, must pay $1.013 billion to the family of a Texas woman who died from a lung disease after taking weight-loss pills that the company makes, a jury ruled.
Lockheed Martin, the biggest U.S. military contractor, said first-quarter profit climbed 16 percent, buoyed by U.S. spending on Patriot missiles used in Iraq and to develop new jets. The company raised its 2004 forecasts.
DuPont, the second-biggest U.S. chemical maker, said profit rose 25 percent in the first quarter on foreign exchange gains and sales of synthetic fibers and chemicals used to make electronics.
Janus Capital Group may pay about $200 million, including fee reductions, to settle allegations that it allowed clients to engage in improper mutual- fund trading.
ImClone Systems, a drugmaker that last year won U.S. regulatory approval for its Erbitux cancer medicine, soared after the company reported a five-fold increase in revenue.
Quotes of Note . . . ``The stock market is torn right now between fear of higher interest rates and the really good company earnings we are seeing,'' said Erich Hein, who helps oversee the equivalent of $7.1 billion at SEB Invest GmbH. Hein has been selling shares of banks including Citigroup and J.P. Morgan Chase because the companies may be hurt by rising interest rates. He's been buying drugmakers such as Pfizer Inc. and Merck & Co., which tend to be less affected by shifts in rates.
``We expect a deceleration of earnings estimates and a tightening of rates in coming months and we are trying to anticipate that as much as possible,'' said Sebastien Doisy, a strategist at CDC Ixis Asset Management in Paris.
``If consumer confidence is up, then, de facto, investor confidence has got to be up as well.'' Dave Briggs, head of global equity trading at Federated Investors.
Gurus . . . UBS says recent evidence suggests that while information technology spending in Europe has passed the bottom, the rate of recovery remains slow. Even in the U.S., the recovery in the IT service sector is relatively gradual.
Smith Barney continues to expect a 10%-to-15% correction from here by mid-summer. Strategist Tobias Levkovic notes earnings growth is likely to slow, given high margin levels, and anticipated rising compensation costs. Large cap safe-havens include Wal-Mart, GE, Microsoft, Altria, United Parcel, and American Int'l.
Joe Carson, Director of Economic Research at Alliance Capital, says current dollar GDP should top 7.0% in the first-quarter. Real GDP is expected to exceed 5.0%. Nominal GDP exceeded 7.0% only once in the most recent bottom (the second-quarter of 2000). No wonder corporations are in the pink! First-quarter pre-tax profits should rise to a record $1.275 trillion, which would represent 11.0% of GDP. In the first-quarter of 2003, the profit share of GDP was 8.6%. The expected increase would represent the biggest one year jump in more than 40 years.
Financials . . . The New York Times reported Allied Capital has come under scrutiny over a $9 million transaction, which has led to questions on Wall Street about the quality of its financial statements and to an informal inquiry by federal securities regulators. However, the company says that the 2003 transaction with a related entity was both immaterial and irrelevant and did nothing to affect the financial status of either business. For that reason, a company executive said, details of the transaction - which involved the transfer of defaulted loans to Allied from Business Loan Express, the largest company in its investment portfolio - were not specifically disclosed.
REITs . . . Kimco reported 1st quarter 2004 FFO of $0.89 per share, materially ahead of estimates
($0.84) and the consensus ($0.85). The quarterly result included a $0.04 per share impairment charge; as such, the $0.93 per share operating result exceeded our estimate by $0.09 per share. Better than expected results were due to strong internal growth and external expansion. Occupancy moved higher sequentially and year-over-year. As of 1st quarter 2004, occupancy was 91.9% compared with 90.7% as of December 31, 2003 and 89.1% a year ago, a sign of Kimco's leasing ability. KIR was 97.3% occupied and KROP was 98.0%. In 1st quarter 2004, Kimco acquired six shopping centers and one land parcel for $256.6 million,
representing 1.7 million square feet. Analysts are assuming $600 million of acquisitions in 2004. Dispositions totaled $63.4 million (2 in KROP, 3 in Kimsouth). Given these run-rates, it is possible that there will be some upside to portfolio expansion assumptions. 2004 and 2005 FFO per share estimates are $3.45 and $3.75, implying growth of 6.8% and 8.7%, respectively. Kimco's raised its 2004 FFO guidance range to $3.47-$3.52 from $3.41-$3.46 per share. This guidance confirms thesis on the shopping center sector; namely, landlords have pricing power and the sector is characterized by accelerating earnings momentum.
Homebuilders . . . Pulte Homes, the fourth-largest U.S. homebuilder said earnings jumped 53 percent as falling mortgage rates spurred more people to buy new houses. Profit from continuing operations totaled $1.02 cents a share, exceeding the 85-cent analyst estimate.
Oil & Gas . . . Bloomberg.com reported that OPEC may raise its target price by 30 percent because the weak dollar has reduced purchasing power and boosted inflation in member states, the group's president said.
Baker Hughes reported 1st quarter GAAP earnings from continuing operations of $0.29 per diluted share, excluding $0.01 from discontinued operations, $0.04 better than the consensus of $0.25. Revenues rose 16.6% year/year to $1.40 billion versus the $1.35 billion consensus.
Transocean reported earnings of $0.07 per diluted share, $0.04 better than the consensus of $0.03. Revenues rose 5.8% year/year to $652.0 million versus the $581.9 million consensus. Company also reported an "adjusted" EPS number of $0.15, associated with early debt retirement and TODCO initial public offering (IPO)-related items, so upside surprise could be bigger.
Chemicals . . . DuPont reported earnings of $0.96 per share, $0.01 better than the consensus of $0.95. Revenues rose 14.2% year/year to $8.21 billion versus the $7.99 billion consensus. The company sees 2nd quarter EPS of approximately $0.78 versus consensus of $0.77, First Call consensus of $0.78. The company reaffirmed 2004 previously issued EPS guidance of $2.10-2.30, consensus $2.33.
Metals . . . U.S. Steel reported earnings of $0.47 per share, reflecting assumed conversion of company's convertible preferred shares into approximately 16 million common shares, $0.09 better than the consensus of $0.38. Revenues rose 55.6% year/year to $2.97 billion versus the $2.64 billion consensus.
Barrick Gold is looking forward to 2004 and beyond. Both management and market is focused on the
company's aggressive growth strategy to reach 6.8-7.0 million ounces by 2007. Management followed through on promise to reduce hedgebook (800k oz in 1st quarter), even at a significant opportunity
loss and below market gold prices. ABX reiterated its new no-hedge policy even in a higher significantly higher gold price environment as the company has outgrown its need to hedge. Expect lower volumes and higher costs 2004-2005 before new projects come on line 2006-2007. Analysts have adjusted 2004 expectations to $0.33 from $0.35 to reflect the negative impact expected from management's plan
to deliver 1.5 million ounces into the hedgebook (in 2004). Analysts maintain 2005 forecast of $0.40.
1st quarter came in modestly below expectations due to a lower than expected realized gold price impacted by delivery of lower priced hedged ounces. Excluding non-recurring items ($10 million post-tax non-hedge derivative loss), ABX earned $0.07/share - modestly below expectations. Analysts continue to believe that the market is factoring in most of the negative news surrounding Barrick. Investors continue to focus on ABX's large negative MTM hedgebook. A more aggressive de-hedging would allow a faster collapse of its
valuation discount.
Defense & Aerospace . . . Lockheed Martin, the biggest U.S. military contractor, said net income climbed to 65 cents a share, more than the 53-cent average forecast. Revenues rose 18.2% year/year to $8.35 billion versus the $7.73 billion consensus. The company sees 2004 EPS of $2.50-2.60, up from previous guidance of $2.30-2.40, in line with consensus of $2.53, on revenues of $33.8-34.8 billion, consensus is $34.4 billion.
L-3 Comms reported earnings of $0.67 per share, $0.03 better than the consensus of $0.64. Revenues rose 39.7% year/year to $1.52 billion versus the $1.42 billion consensus. The company sees 2004 EPS of $3.35-3.40 on revenues of $6.5 billion versus the consensus of $3.36 $6.32 billion respectively.
Armor Holdings received a contract award from the U.S.Army Tank-Automotive and Armaments Command (TACOM) to supply additional crew protection kits for the U.S. Army heavy truck fleet. Under the contract, which totals approx $60 mln, co will supply armor solutions for the Heavy Expanded Mobility Transport Truck (HEMTT), the Palletized Loading System (PLS), the Heavy Equipment Transporter (HET), and the M915 series of trucks. Co noted that it expects this new business to represent approx $60 mln of revenue incremental to company's previous 2004 revs guidance.
The WSJ reports that Boeing faces a federal criminal investigation that has expanded into whether it used a rival company's documents to compete for NASA contracts, according to government and industry officials close to the probe. Investigators are trying to determine whether a former employee of Lockheed Martin hired by Boeing in 2001 gave his new employer access to documents containing sensitive pricing data. Government officials are increasingly focusing on whether the Lockheed Martin documents affected Boeing's pricing decisions concerning rocket-launch contracts for the NASA and other government customers.
Lear Corporation announced 1st quarter 2004 EPS of $1.30, up 29% from last year, on the back of $4.5
billion of revenue, up 15% from last year. The $1.30 per share was higher than our expectations, but mostly
because $0.10 per share of facility closing costs did not occur in the quarter and were instead pushed into 2nd quarter. Approximately $250 million (just under half) of the year-over-year revenue increase was truly from new business, with the balance a result of FX movements. Of the $250 million, $180 million of this was from Europe, as the company has previously disclosed it expects most growth to come from outside of North America this year. Margins were negatively impacted by ongoing facility consolidation costs -- a trend analysts expect will continue in the near-term but reverse in 2005 as the company's cost structure will be more competitive. Lear believes commodity pricing had a negative $0.04 per share impact on the quarter's results, and could have a $0.10 negative impact for the year but believes savings can be generated elsewhere to offset this expense; approximately half of the expense is steel-related.
Education . . . Piper Jaffray raises its target on Corinthian Colleges to $40 from $36 based on 29x 2005E EPS of $1.38, in line with the company's peer group. The firm believes the company's strategy for new program adoptions throughout CDI, Corinthian's Canadian postsecondary education business, will ultimately drive both enrollment growth and operating margin expansion at CDI. The firm recommends the stock as a core higher education holding due to its large exposure to the appealing allied health education field, its growing online business, its strong and consistent operating results, and the potential for upside to March quarter estimates.
Merrill Lynch downgrades Apollo Group to Neutral from Buy based solely on valuation. The firm believes the potential stock appreciation is limited and that investors have built APOL's success into its stock price. Currently trading at a premium at 49.8x 2004E EPS of $1.91/sh and 38.3x 205E EPS of $2.48/sh vs. the group average of 36.6x and 29.8x.
Apparel . . . The WSJ's "Tracking the Numbers" column highlights K-Swiss, which ran up 122% last year, but may lose traction. K-Swiss's success has been fueled by the popularity of its Classic original, essentially unchanged from the all-white, all-leather tennis shoe that the co first started selling 37 years ago. Sales of the shoe rose to $163 million in 2003, when it represented 38% of the company's total sales. K-Swiss got a further boost from a long-running spat between Foot Locker and Nike. The result: Foot Locker had extra shelf space to fill, and one of the things that it filled it with was shoes from K-Swiss. Foot Locker and Nike recently made amends, and there are signs the trend toward white-on-white classics that boosted K-Swiss's sales is beginning to fade. The 6 month order backlog from Foot Locker fell only 4% to about $34 million at the end of 2003. That doesn't seem bad, unless you consider that the order backlog had risen earlier in 2003. According to conference-call transcripts, the order backlog rose to about $48 million by the end of the 3rd quarter of last year, nearly 40% above where it started 2003. Viewed in those terms, the $14 million drop in its order backlog to $34 million in the 4th quarter was stark. According to the article, a shift in trend away from white-on-white classic sneaker styles also could hamper K-Swiss. Mindful of this danger, K-Swiss has been focusing its efforts on Classic original-derived shoes that add color and has launched an ad campaign that, as K-Swiss vice president of marketing Debbie Mitchell put it on the company's 4th quarter conference call, features "a diverse group of hip people, each with their K-Swiss shoe of choice." Unfortunately, such top-down efforts at generating buzz are difficult to pull off, particularly for a company like K-Swiss, whose past derives from the tennis court rather than the basketball court.
Martha Martha Martha . . . Martha Stewart Living Omnimedia announced that it has extended its key merchandising agreement with Kmart by two years, through January 2010. The Kmart contract is extremely important to MSO, having become the company’s largest profit generator given the depressed state of the flagship Martha Stewart Living magazine. The contract was also
revised to provide certain concessions to both Kmart and MSO. An amended contract will be filed along with the company’s 2nd quarter 2004 10Q filing in August 2004. Concurrent with this announcement, Kmart has withdrawn its lawsuit against MSO (filed in February 2004) which contested certain terms of the contract.
Going forward, Kmart’s payments to MSO will be based on the higher of 1) a royalty on total sales of Martha Stewart Living Everyday products sold in stores or 2) a minimum guaranteed threshold level. The annual minimum guaranteed payment to MSO has been lowered modestly, perhaps by $3-4 million. The company’s 2003 10K filing disclosed that the minimum payment for 2004 was
scheduled to be $53.4 million. The annual minimum guaranteed payment (in absolute dollars)
will continue to rise about 10% annually through the balance of the contract.
There will be no secondary level of minimum guaranteed payments to MSO based on sales by specific product category. It is our understanding that MSO prized the product level categories due to the protection that they gave in ensuring adequate floor space for emerging product lines in
Kmart stores. Despite this adjustment, it does appear that Kmart is committed to expanding the Martha Stewart Everyday franchise as evidenced by the announcement of plans to develop new categories, such as ready-to-assemble furniture. Estimate that the secondary level of guarantees would have totaled about $3.5 million in 2003. Following the lawsuit by Kmart back in February, analysts had already adjusted estimates to exclude this figure. Therefore, this revision will have no impact on our earnings estimates.
Healthcare . . . Medco Health reported earnings of $0.48 per share, ex items, in line with the consensus of $0.48. Revenues rose 6.9% year/year to $8.91 billion versus the $9.00 billion consensus. The company sees 2004 EPS of $2.03-2.14, ex items, versus consensus of $2.10.
Barron's Online highlights managed care stocks, such as UnitedHealth, Wellpoint Health Networks, Anthem, Aetna and Health Net. According to the article, the economic recovery should eventually boost premium revenues, meanwhile, many HMO stocks' valuations still appear reasonable, in some cases, downright cheap, especially in light of increased mergers and acquisitions in the sector. Managed care company's profits depend on the spread between premiums and medical costs. Since 2000, premiums have risen faster than costs have, boosting earnings. Last year, medical costs rose less than expected as employers cut jobs and raised workers' out-of-pocket medical expenses. Patients also used more generic drugs and delayed unnecessary medical procedures, cutting hospital admissions and HMOs' reimbursements. The trend should continue this year, although spreads could narrow in 2005 if cost increases pick up and premium hikes slow, says Edmund Kroll, an analyst with SG Cowen. And Wall St is selective, too, favoring industry powerhouses like Wellpoint Health, Anthem, Aetna and UnitedHealth. "[UnitedHealth] is a growth stock in a growth industry, and it is cheap," says Caspar Rock, portfolio manager of the Munder Healthcare Fund. According to the article, shares of Health Net look even cheaper, trading at a 51% discount to the S&P 500, a bit below its historic discount of 47% to the market. The stock trades at about 8.7x earnings over the next four qrtrs; it historically fetches 11.1x forward earnings.
Piper Jaffray upgrades Immucor to Outperform from Market Perform. The FDA approval of Immucor's 510k filing for the Galileo immunohematology analyzer comes a full 6 months earlier than the firm had expected and modeled. Automation is presently used in less than 20% of U.S. hospital blood banks. The firm believes there are at least 600-800 metro hospitals that would be prime candidates for Galileo - putting the equipment opportunity alone at roughly $90 million. The firm expects the co will be ramping sales and service support quickly to try and launch by mid-May.
Tenet Healthcare issues 1st quarter guidance. The firm now sees a loss of $0.25, which is not comparable to the consensus of $0.00. THC guidance includes multiple charges totaling $0.23.
Late yesterday evening, UnitedHealth announced that it had entered into a definitive agreement to purchase Oxford Health Plans for about $4.9 billion, about a 13% premium to the prior day’s closing price. Under terms of the stock/cash deal, which is expected to close in the fourth quarter of 2004, UnitedHealth will pay consideration of $16.17 in cash per share and exchange 0.6357 shares of UNH for each share of OHP, (the exchange ratio is fixed, no collar exists). The terms compute to a valuation of $56.79 per share for OHP at yesterday’s UNH closing price. The price equates to 12.6x and 11.5x our 2004 and 2005 earnings estimates for Oxford, respectively (the full group currently trades at 13.7x and 12.2x 2004 and 2005 earnings estimates, respectively). For comparative purposes, recent transactions have typically averaged in the 14x to 17x range on next year’s earnings. Including the $200 million of cash in excess of debt and capital requirements, the transaction is more closely valued at about $4.7 billion. On an enterprise value-to-EBITDA, the deal is valued at about $3,200/member (the full managed care group trades at approximately $1,400 per member and recent transactions have typically ranged closer to $1,000/member). The significantly higher per member valuation reflects Oxford’s much higher than industry average profit per member, though that factor seems to be adequately reflected in the lower price-to-net valuation indicated above. The transaction is expected to close in the fourth quarter 2004, subject to regulatory and shareholder approvals.
Medical Devices . . . QLT reported earnings of $0.34 per share, $0.03 better than the consensus of $0.31. Revenues rose 25.3% year/year to $41.3 million versus the $39.7 million consensus. The consensus includes net gain of $0.15 from Kinetek acquisition, consensus of $0.24 appears to include some estimates which include gain and some estimates which exclude it. The company raises 2004 Visudyne guidance from $420-455 million to $430-455 million. Treating convertible notes on a "not converted basis", company sees 2004 EPS of $0.86-0.96 versus consensus of $0.94.
Drugs . . . Bristol-Myers reported the settlement of patent infringement litigation by it and patent holder Research Corporation Technologies Inc against TEVA subsidiary Pharmachemie Group in relation to Paraplatin, or carboplatin. Under the agreement, BMY will, in addition to continuing to distribute Paraplatin, sell product to Pharmachemie allowing it to distribute an unbranded version of carboplatin commencing June 24, 2004, subject to several conditions including approval by the Federal Trade Commission.
Sepracor reported a net loss of $0.59 per diluted share, which includes a charge of $30.7 million or $0.36 for selling and marketing expense related to termination (effective Dec. 31, 2004) of agreement to co-promote XOPENEX, may not be comparable to the Reuters Research consensus of ($0.45). Revenues rose 17.8% year/year to $99.5 million versus the $107.7 million consensus and the $107.7 consensus.
Analyst community somewhat divided on how to react to news from last night of Wyeth walking away from the Flumist deal. The more bearish firms point to the fact that FluMist is unprofitable at current levels and therefore represents a drag on earnings. MedImmunehas previously indicated that if Wyeth were to exit the collaboration, it would cost an additional $0.10-0.20 per share per year through 2007. Furthermore, the company had previously indicated that the FluMist franchise will not materially contribute to revenue growth until the introduction of the CAIV-T (next gen. FluMist) product in the 2007-2008 flu season. Smith Barney out noting they believe the stock could be under pressure today, as they believe the large majority of Street earnings estimates, including their own estimates, currently do not reflect Wyeth exiting the collaboration and therefore, will likely be substantially lowered. Firm maintains their Sell rating and $19 target. On a more positive note there are firms out saying the dissolution of FluMist deal should mark the beginning of a new era for the company. Prudential noting the news was expected and is establishing an 18-month price target of $32 based on 2007 EPS estimate of $1.00, anticipating primarily solid Synagis growth in worldwide markets with accelerating product sales growth coming from CAIV-T in 2007... Finally, Goldman Sachs saying that depending on the upfront payment to WYE, which they estimate should be around $30 million, the shares may react slightly positive. However, they note, significant share appreciation is unlikely near term because FluMist will probably not be profitable until 2008/09.
Biotech . . . ImClone, which won U.S. regulatory approval for its Erbitux cancer medicine last year, said first-quarter revenue totaled $109.6 million, besting the $62.2 million average analyst in a Thomson Financial survey. Imclone reported earnings of $0.76 per share, $0.59 better than the consensus of $0.17. Revenues rose 460.1% year/year to $109.6 million versus the $62.2 million consensus. The comapny states "We were pleased with the sales of ERBITUX in just over five weeks of product shipments during the quarter, as they appear to indicate that physicians are rapidly integrating this first-of-its-kind antibody into patients' treatment regimens"
Genentech target goes to $144 from $124 at Lazard.
Goldman Sachs out on Genentech following positive results from Phase III Tarceva trial saying they estimate sales potential of NSCLC to be $0.5-0.6B based on $15,000-20,000/patient/year. Assuming 5x sales, value of Tarceva is $2.5 billion-3.0 billion, which the firm believes is reflected in DNA shares. According to Goldman, the share reaction implies expectation for use outside of NSCLC and may be higher pricing/penetration. They also note that DNA's p/e of 84x on 2004 EPS or PEG of 3.1 is near historical peak for biotech. On 2005 EPS, the 66X p/e and 2.4 PEG may be sustained if there are further positive product news and sentiment remains bullish. They would not be surprised if DNA shares consolidate in the near term but maintains its Outperform rating for long term investors based on a robust pipeline and momentum of the Avastin launch. Rating remains Neutral.
Wall Street Journal's Health column highlights new treatments for brain cancer. Until now, new drugs have offered the promise of better treatments for cancer in virtually every organ except one: the brain. Now for the first time, a growing number of new methods of delivering chemotherapy to the brain are being tested and offered to patients with brain cancer. Xenova plans to start a clinical trial later this year to treat brain-cancer patients with its drug TransMID using this system. Guilford Pharma recently won FDA approval to use its Gliadel wafer in newly diagnosed patients with malignant brain cancer along with surgery and radiation.
Media . . . FindWhat.com, an Internet advertising service, said profit totaled 27 cents a share, topping its earlier estimate of 22 cents.
Metro-Goldwyn-Mayer approved a one-time dividend of $8 a share, payable May 17 to shareholders on record May 7. Separately, the Wall Street Journal reported that a group of bidders, led by Sony, sent MGM a letter formally indicating an interest in acquiring the company.
Since Echostar reported its 4th results, the market has heard concerns from investors on the increased costs that DISH discussed in its 10K and conference call. While higher spending is a concern, we believe that the additional money spent will lead to increased revenue growth and free cash flow acceleration. While DISH's increased satellite obligations call for addt'l payments of >$600M ('04-'10), and total payments of +$2.5 billion (~10 years) "back of the envelope" analysis which assumes an addt'l 425K net adds and modest ARPU increases, justifies the increased spending. The incremental revenues from expanded services will also prove profitable for EchoStar. As for increased SAC, analysis indicates that DISH will make the choice to spend more for a better, longer lasting subscriber which will lead to an increase in cash flows and a higher NPV per sub. DISH also will continue to capitalize on its lead into 116 local markets (DirecTV is currently in 64). DISH reports 1st quarter results on Thursday, May 6. Although inventory shortages continued in Q1, which contributed to the net add miss in 3rd quarter, analysts remain optimistic that DISH can hit our 281K net add estimate with the rollout of 6 more local markets in Q1 and additional foreign language programming. Analysts remind investors that the company' $190 milion share buy back in 4th quarter coupled with the early retirement of its $1 billion 4 7/8% convertible notes at $45.55 in October, signals that DISH mgt believes that its shares are undervalued. Analysts have a valuation of $44 per share, based on a DCF model as well as FCF and EPS multiples, supports our valuation.
Hotel & Leisure . . . Prudential has presented 10 reasons why they believe International Gaming Tech has never been more promising, including: replacement cycle is actually accelerating with no rational prospects for 2005/2006 slowdown; yields on participation games should improve in conjunction with gaming budget recoveries; rising interest rates should help consolidated gross margins; class II gaming and systems initiatives are abound; domestic gaming expansion appears more likely in 2004 than in 2002 and 2003; tangible international opportunities exist.
Argosy Gaming reported earnings of $0.63 per share, excluding after-tax expenses of $14.8 million or $0.50 associated with February 2004 refinancing of company's outstanding 10-3/4% notes due 2009, $0.14 better than the consensus of $0.49. Net revenues rose 11.8% year/year to $264.1 million versus the $250.3 million consensus. The company also guides, sees 2004 EPS of $1.73-1.83, after deduction of $0.52 in charges related to debt refinancing, versus the consensus of $2.21.
Electronics . . . Sony, the world's second- biggest consumer-electronics maker, said profit will total 100 billion yen ($921 million) in the year ending March 31, 2005, lower than the median estimate of 107.9 billion yen by six analysts.
Bloomberg.com reported that Canon, Sony and Sharp led Japanese consumer electronics companies forecasting higher annual earnings on rising demand for DVD recorders, flat- screen televisions and digital cameras. Canon, the world's second-biggest digital camera seller, forecast a 12 percent gain in 2004 net income to 309 billion yen ($2.8 billion), raising its January estimate. Sony, the world's second-biggest consumer electronics maker, forecast a 13 percent gain in profit in the year ending next March 31, lagging analysts' estimates. Sharp forecast a 24 percent profit gain. The Senior Managing Director of Canon told a press conference the company will sell 15.2 million digital cameras this year, raising its forecast from 15 million.
AmTech comments on Sony's Earnings: While SNE made its FY goal of shipping 20mm PlayStation 2 units, on a regional basis, Europe and Japan sales were up but North America was down 37% (greater than anticipated). SNE is also now forecasting FY05 shipments down 30%. The firm believes the declining PS2 sales in North America may help prompt a price cut before E3 trade show in 2 weeks. Any delay in this anticipated price cut beyond E3 would likely disappoint the Street and be considered a negative for Activision, Electronic Arts, Take-Two and THQ-Interactive.
Telecom . . . Verizon, the largest U.S. local- telephone provider said first-quarter profit, excluding some items, was 58 cents a share, beating the average estimate of analysts by 1 cent, according to Thomson. Revenues rose 3.9% year/year to $17.14 billion versus the $17.18 billion consensus.
Washington Post tech section reports that New York state Attorney General Eliot L. Spitzer yesterday urged the Federal Communications Commission to sharply increase the amount Nextel Communications should pay for a swath of higher-frequency spectrum it would get in exchange for moving its airwaves to minimize radio interference with public safety communications. Entering an already contentious dispute, Mr. Spitzer said in a letter dated yesterday, "Nextel must be required to compensate the United States Treasury for the spectrum it receives in the amount that would have been received at an auction of that spectrum."
IT Services . . . EDS reported 1st quarter 2004 results that were generally in-line with expectations. However, the company lowered EPS and Free Cash Flow guidance for the full-year. Free Cash Flow continues to disappoint. In 1st quarter 2004, EDS recorded negative Free Cash Flow of $166 million versus
+$122 million in 1st quarter 2003. The company expects 2004 Free Cash Flow of $300-$500 million, down from previous guidance of $500-$600 million. The free cash flow will be back-end loaded. NMCI continues to be a challenge. The "other" losing contract (Dow Chemical) will likely be terminated resulting
in further write downs and ultimately no return on the effort. "New" business signings remain weak, at approximately $2.2 Billion (vs. $1.7 Billion a year ago). Revenue from General Motors remains under pressure as EDS gets closer to renegotiating the Master Service Agreement in 2006. Expect a significant portion of this high margin, less capital intensive business to go away under a new agreement.
Network Equipment . . . Scientific-Atlanta adds VoIP launch program to SciCare services for cable operators.
UTStarcom upped to Overweight from Equal Weight at Lehman. The firm believes that sub traction lifts visibility into handset and infra sales, thus lift firm's estimates once again. Lehman's 2004 estimate goes to $1.95/$2.7 billion from $1.91/$2.6 billion; 2005 goes to $2.25/$2.95 billion from $$2.18/$2.9 billion. While recognizing concerns over international sales and 3G positioning, firm considers these concerns reflected in the share price, now 13x 2005. Target $37, or 16x 2005 EPS.
Schwab SoundView has learned that Nokia is taking swift action to mitigate its handset share loss, the company is aggressively lowering phone prices and offering attractive terms to dealers. The firm believes this will have a stimulative effect on the global mobile phone market, but it is revenue neutral for Nokia as higher Nokia units are offset by lower ASPs. The firm is raising global mobile phone market 2nd quarter estimates today. Also firm also skeptical of the long-term efficacy of Nokia’s actions.
Semiconductors . . . Conexant Systems, which makes semiconductors for high- speed modems and cable television set-top boxes, said its net loss for the second quarter widened to $143.4 million from $68 million a year earlier and announced it will cut 200 jobs, or 8.3 percent of its workforce, by the end of the year.
UBS provides color on market share shifts which occurred in 1st quarter. The firm notes strong desktops offset weak notebooks in 1st quarter according to a Mercury Research PC graphics chip report on data from 1st quarter. In addition, the average selling price was flat at $19.03. UBS provides color on overall market share: Intel gained 1.5% pts market share (now 33%), NVIDIA gained 2.5% (now 27%) and ATI lost 0.7% pts (now 24%) due to the disproportionate decline in notebook shipments in 1st quarter. The firm notes the decline in notebook shipments in 1st quarter due to channel inventory has been well documented. The firm also suggests strong desktop market bodes well for Nvidia's April quarter.
Merrill Lynch out on Advanced Micro saying that despite the long-term story looking interesting, the firm sees challenges in the intermediate term that investors may have overlooked. According to the firm, one reason for the dramatic improvement in AMD's financial performance during the past two quarters has been flash memory. Now, their checks indicate that Intel is moving aggressively to retake share, and that pricing for NOR flash into handset OEMs is beginning to weaken. Firm thinks it's unlikely that flash memory will continue to improve as dramatically for AMD. With the shares trading 25x their $0.65 2004 EPS estimate, the shares look fully valued. Firm reiterates their Neutral rating.
ATI Tech announces that the FireGL T2-128 and the FireGL X1-256p graphics accelerators will be the 3D graphics options available in the new H-P Workstation c8000.
Agere reported pro forma EPS of $0.05, which includes an $82 million tax gain that was not included in analysts' estimates. After backing this out, Agere reported net breakeven, the consensus is $0.01. Revenues rose 4.3% year/year to $462.0 million versus the $469.1 million consensus. The company sees 2nd quarter EPS of $0.00-0.01 versus consensus of $0.00 on revenues of $495-505 million versus consensus is $504 million.
Software . . . E.piphany, the maker of software for online marketing campaigns estimated that second-quarter sales will be $19 million to $22 million, below the analyst estimate of $22.7 million.
Red Flag. Reuters reported that Oracle dismissed two Danish managers last week but declined to comment further on a report they had left after accounting irregularities were revealed. Oracle Denmark said Peter Perregaard, vice-president Oracle’s European Emerging Markets and Danish Sales Manager Jan Skelbaek had both left the company. Financial daily Borsen reported on Tuesday the two had been dismissed after an internal audit revealed accounting irregularities in the Danish business.
As previously expected, Computer Associates management announced that it would be re-stating its 2000 and 2001 financials as per the findings of its internal audit. In total, the gross amount of prematurely booked revenues for fiscal year 2000 and 2001 totaled $1.8 billion, above the $1.4 billion indicated by the SEC’s investigation, as CA’s own internal investigation uncovered additional contracts that were improperly booked in the fiscal 2000 year. For fiscal 2000, restated revenue is expected to decline by $2 million to $6,092 million and no effect in net income is expected due to the insignificant change in revenue. For fiscal 2001, more meaningful changes will occur as revenues increase by $553 million to $4,748 million while the net income loss for that year declines by $333 million to a loss of $258 million or an EPS loss of $0.44, as restated. In addition, CA estimated that improperly booked revenues for fiscal 1998-1999 would have a net effect of reducing revenue for those 2 years by $561 million and lowering net income by $333 million.
Analysts do not expect the implications from this restatement to have any negative impact to current financials. The prematurely booked revenues were related to the fiscal 2000-2001 years (ending in March), and this practice ceased after the new business model began on October 2000. The restatement will mostly re-allocate the revenues that were prematurely booked into their respective quarters. Please note that the aggregate amount recognized by the re-statement has not changed, just the timing of it. The changes will
have no impact to the deferred revenue accounts in CA’s current balance sheet. CA will be releasing its fiscal 2004 10K as expected on May 12.
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