Sector Investing

[ReturntoSender]

Tuesday May 11, 2004 Daily MarketWrap

http://www.robblack.com/rb_marketwrap.shtml

Summary: I will be speaking at a two day financial freedom seminar this weekend. It should be a fun event in San Jose. This is not a pure investment seminar. Some of the topics that will be covered over the two days include how to get started, find money, tax savings, property management, foreclosures, 1031 exchanges, property analysis, creative financing, negotiating skills, partnerships, networking, and of course some real estate investment angles. For more information go to http://sjrei.net/financialfreedom.html

U.S. stocks gained, recovering from yesterday's drop that sent benchmark indexes to their lows for 2004, on optimism that a growing economy will limit the effects of rising interest rates on corporate profits. Cisco., the largest maker of computer-networking gear, advanced before its quarterly earnings report. Intel. rose as the company boosted inventories in anticipation of higher chip demand. The DJIA closed below 10,000 yesterday on speculation the Federal Reserve may boost its benchmark lending rate as early as June. Investors including Jack Caffrey said the drop made some stocks worth buying. The S&P 500 Index climbed 8 points (+0.8%) to 1095. The Nasdaq rose 35 points (-1.9%) to 1931. The DJIA rose for the first time in five days, adding 29 points (+0.3%) to 10,019. The gain was limited by a drop in shares of Altria Group. Since reaching a 23-month high on Feb. 11, the S&P 500 has shed 5.4 percent, while the Dow has lost 6.7 percent from its 31- month high the same day. The Nasdaq has retreated 10 percent since its two-and-a-half year high set in January. Almost four stocks rose for every one that fell on the NYSE today, making it the broadest advance in three months. Some 1.5 billion shares changed hands on the Big Board, 1.2 percent more than this year's daily average. Yesterday, seven stocks closed at new 52-week highs on the NYSE, the lowest in almost eight years. There were 635 new lows, the most in almost two years.

Strong Sectors: biotech, hardware, software, internet, networking, telecom, semiconductor, industrial, oil services, transportation, broker/dealer
Weak Sectors: tobacco

Top Stories . . . The dollar rose against the euro as the Organization for Economic Cooperation and Development boosted its forecast for U.S. growth and said the Federal Reserve should raise its key interest rate by mid-year.

Crude oil futures in New York surged, closing higher than $40 a barrel for the first time since 1990, on speculation that a growing global economy will boost fuel demand and lower inventories.

Cisco Systems, the largest maker of computer-network equipment, said third-quarter earnings rose 23 percent to $1.21 billion as it added home-network products and sold more Internet routers and switches to corporations.

The Senate Banking Committee will ask the Securities and Exchange Commission to investigate whether Citigroup, Merrill Lynch and other banks stuffed client shares into mutual funds during the three-year stock market decline, said a spokesman for Committee Chairman Senator Richard Shelby.

May Department Stores, the owner of Lord & Taylor and Foley's, said first-quarter profit rose 5.6 percent, the smallest gain in three quarters, as sales plunged last month.

Quotes of Note . . . ``In the short term, the selling has gotten too far ahead of itself. It certainly seems like we are due for a bounce.'' Jack Caffrey, equity strategist at J.P. Morgan Private Bank, which oversees $280 billion in New York.

Gurus . . . Don Hays of Hays Advisory tells Kudlow-Cramer that the gloom is overdone. He notes that on Friday, 20% of the Big Board stocks were at 52-week lows. Going back in history, Hays has found the aftermath of extreme days like that finds the market higher 60-to-90 days later. He is also encouraged by the growing bearish attitude of day traders, as expressed in the Rydex Index, as well as the put-to-call ratio. Finally, a steep yield curve is eventually friendly to stocks. Hays turned cautious in January when the mood was euphoric, and is willing to go against the crowd at this time.

Ed Yardeni of Prudential said he still believes in the global synchronized boom theory, although tighter conditions in China begin to test this theory. The outlook for our economy remains strong, as profits continue to soar. However, it is hard to conjure up a catalyst to turn the tide beyond the Fed actually doing the deed.

Technical deterioration has caused Smith Barney to realign its grouping. They upgrade healthcare distributors, drug retail, and pharmaceuticals. They downgrade construction and farm machinery, household appliance, life and health insurance, and move broadcasting and cable to a sell status.

Brian Westbury, economist for GKST Economics, feels geopolitics have been the important downside factor. He says the Fed could triple rates tomorrow, and Fed policy would still be accommodative.

Jobs . . . The New York Post discusses Friday's labor report and suggests that investors should not get too excited about all those new jobs that were supposed to have been created in April. According to the article, the bottom line is that most of the 288K jobs that the Labor Department says were created last month may not really exist and they could be figments of statisticians' optimism. Back in the March employment report, the government added 153K positions to its revised total of 337K new jobs because it thought (but couldn't prove) loads of new company's were being created in this economy. That estimate comes from the Labor Department's "birth/death model." As staggering as the assumption about new company's was in March, the Labor Department got even more brazen in April as it was disclosed that these imaginary jobs had been increased by 117K to 270K for the latest month. Without those extra 117K make-believe jobs, the total growth for April would have been just 171K, which is sub-par for an economy that's supposed to be growing at more than 4% a year.

Financials . . . Merrill Lynch, the biggest U.S. securities firm, revenue growth from Merrill's retail brokerage over the next two years will make up for declines in other businesses such as fixed-income sales and trading, Michael Hecht, an analyst at Bank of America Securities. He raised the stock to ``buy'' from ``neutral.''

UBS upgrades Washington Mutual to Buy from Neutral based on valuation, as the stock is now trading at 9x their 2004 EPS estimate, which is below the company's historic average of 10.1x; firm also notes that the stock's current price/book ratio of 1.7x is materially below the historic average 2.2x. Target is $45.

ThinkEquity upgrades Intuit to Overweight from Equal-Weight based on valuation; firm believes the recent sell-off, which reflects in part concerns over QuickBooks growth prospects, is overdone in light of Intuit's earnings growth potential. Firm believes that Intuit is on track to report an in-line qtr led by a solid TurboTax season, and believes that the recent pullback in the shares is consistent with the seasonal trading pattern that INTU has experienced since 1998.

MBNA released its 10Q filing for the first quarter of 2004 which provided additional details on the acquisition of Premium Credit and Sky Financial, sensitivity to interest rates and credit quality statistics. With the acquisition of Premium Credit in the UK, MBNA assumed $1.2 billion of ABS debt on balance sheet at March 31, 2004. MBNA recorded goodwill and other intangibles of $323 million and expects an increase of $11 million from amortization of the intangibles in 2004. The company also recorded acquired reserves of $22 million from this acquisition. The acquisition of Sky Financial, consisted of $893 million of receivables. MBNA recorded goodwill and other intangibles of $47 million and also recorded acquired reserves of $21.4 million for credit losses. MBNA's interest rate sensitivity analysis to a 100 bp parallel shift upward in interest rates shows that projected managed net interest income by $67 million.

Fannie Mae released its 10Q after the close on Monday, providing some previously undisclosed information, including the company's March 31 balance sheet and the resolution of OFHEO's criticism of Fannie's calculation of impairment (the first from its ongoing "examination"). The 10Q disclosed that while the SEC accepted the company's prior calculations of impairment of some of the company's ABS investments, changes will be required beginning April 1 that will likely result in impairment of about $250 million in 2nd quarter. An increase in impairment, while equivalent to about $0.17 per share in 2nd quarter, won't have a material effect on the

company's capital or business. It is possible that some portion of these additional write downs could be recovered over time through earnings. New derivatives disclosure and discussion of changes in the value of derivatives are useful in evaluating changes in the company's portfolio and balance sheet, but derivative use remains complex.

Oil & Gas . . . AG Edwards upgrades Exxon Mobil to Buy from Hold, as they believe production growth has reached a positive inflection point, augmented by an impressive pipeline of development projects. Also, firm notes that XOM is trading at 18.3x their 2005 mid-cycle earnings estimate, at the lower end of its historic range of 18-20x. Target is $47.

Homebuilders . . . Raymond James downgrades Centex, D.R. Horton, Lennar, Pulte, Ryland, Toll Brothers, Standard Pacific, and WCI Communitieis on growing concern over rapidly rising interest rates and deteriorating general market conditions. The firm is becoming increasingly concerned, in light of the recent sharp move in Treasury yields, that negative investor sentiment will make stock outperformance more challenging, in spite of the fact that fundamental performance will likely continue to outpace the broader economy. Firm says negative sentiment is likely to be exacerbated in the near-term as investors point to decelerating, albeit still robust, housing data points.

Paper . . . Goldman Sachs upgrades the paper/forest products sector to Attractive from Neutral due to the following factors: 1) tightening sector fundamentals, as shipments are rising as end mkt demand is picking up; 2) improving earnings outlook,; and 3) favorable valuation. Firm upgrades IP to Outperform from In-Line, and downgrades PKG to In-Line from Outperform.

Consumer Products . . . Procter & Gamble has purchased remaining stake in its China joint venture from its partner, Hutchison Whampoa China Ltd, which will now give co 100% ownership in its operations in China. PG, or its designee, will acquire its remaining 20% stake in joint venture for $1.8 bln, which is the purchase price of $2.0 bln net of minority interest and related obligations that will be eliminated as a result of transaction; deal expected to close on June 18, 2004.

Retail . . . CVS reports a 5.4% increase in April comps and a 7.3% increase in pharmacy same store sales, while front-end same store sales increased 1.4%. Total pharmacy sales represented 69.7% of total co sales in April.

Medical Devices . . . Barron's Online highlights Varian Medical, which has jumped almost 60% over the last 12 months. According to the article, despite the adoption of Intensity Modulated Radiation Therapy, the co faces several headwinds and has little room for error. The stock trades well above historic valuations at a time when rev and profit growth appears to be slowing, especially U.S. oncology sales. What's more, hospitals with severe financial problems may delay large purchases. And low-cost competition in Europe could further pressure sales. "(The stock) is priced for perfection," says Ryan Rauch, an analyst with SunTrust. "They are a great co with a great backlog, but we would rather be on the sidelines." In F03, oncology sales generated $856 mln, or 82% of rev with X-ray products and brachytherapy technology comprising the rest. Earnings per share jumped 38% to $1.87 and rev rose 19%. But, according to the article, like other fast-growing co's, Varian Medical may not sustain such rapid growth. This year, profits should grow 23%, followed by a 17% gain in F05. About half of all U.S. cancer patients receive radiation and about 10 mln new cases are diagnosed worldwide per year, with about 1.3 mln in the U.S. alone. While Varian Medical has most of this market, Sweden-based Elekta, one of its main rivals, has cheaper prices, which could attract smaller, financially strapped hospitals. The stock fetches 34.5x projected earnings over the next four qtrs, compared to its median multiple of 29.4x forward earnings for the past 5 years, which is a 110% premium to the S&P's 500 Index and a 40% premium to its peers. The stock also trades well above historic medians for price to sales and price to cash flow.

Orthopedics . . . As far as we can see, the favorable backdrop for the orthopedic industry can continue. Due to the surprising stability of market shares, we continue to think Biomet, Stryker, and Zimmer will all benefit operationally from strong industry fundamentals. Although priced for perfection at current levels, Zimmer continues to have the most potential for earnings upside given the accretion power of the Centerpulse integration. Stryker remains the most consistent performer, and this can continue due to uptake of the company’s new products and its excellent execution strategy. Biomet remains our favorite ortho play for value-sensitive investors — investors continue to underappreciate the potential positive developments ahead for Biomet’s spinal, European, and hip businesses.

Although investors continue to be concerned about ongoing pricing increases on existing products, we argue that pricing is the least significant growth catalyst. Instead, sustainability of the favorable mix shift and how providers will continue to allocate reimbursement given the potential benefits of new, premium-priced products could be the more significant areas to focus on. The recent rollouts of alternative-bearing materials, biologics, and the pending launches of innovative spinal disc replacements give us more confidence that the favorable mix shift could continue.

Unlike the cardio industry, given the glacial nature of market share shifts in ortho, short product lead times, the consolidated nature of the industry, and the unusual degree of surgeon loyalty to their sales reps, positive market trends could continue to benefit all players. All of the large players continue to have leverage over hospitals with respect to increasing prices and driving through sales of premium-priced implants.

Drugs . . . Barr Pharmaceuticals received U.S.FDA approval for its New Drug Application (NDA) for Enjuvia 0.625 and 1.25 mg tablets. Enjuvia is the only plant-derived, synthetic conjugated estrogen product that includes the component delta 8, 9-dehydroestrone sulfate, an additional active estrogenic component. The patent on Enjuvia expires in 2020. BRL's application for Enjuvia 0.3 mg and 0.45 mg tablets is currently pending at the FDA.

Mylan Labs reported earnings of $0.25 per share, excluding net gains on legal settlements, $0.02 worse than the consensus of $0.27. Revenues fell 5.7% year/year to $333.4 million versus the $344.4 million consensus. The company affirms 2005 EPS guidance of $1.30-$1.40 versus consensus of $1.36. Note, this anticipates a July 24, 2004 launch of fentanyl.

Shares of Watson Pharma have declined approximately 26% YTD following a revaluation of the generic group (down 25% YTD vs. 2% decline of S&P) driven by several peer group earnings misses (PRX, TARO) and market concerns relating to inventory buying patterns and widespread generic pricing pressure. However, the sell off was particularly extreme for Watson which now trades at 8.0x EV/2004 EBITDA and 13.5x 2005 EPS (10% discount from average peer

P/E of 15.0x). Continue to believe that industry fundamentals remain solid and that investors should focus on companies with more diversified businesses and stable long-term duration assets. Target price remains $48 or 22x 2004 EPS of $2.18 (+17%). Continue to expect that the company has the potential to exceed consensus EPS in 2004 and into 2005 EXCLUDING potential dilution from its convert from solid underlying business fundaments.

Media . . . Young Broadcasting reported 1st quarter 2004 net revenue of $50.9 million, $1.5 million or 3% better than $49.4 million estimate, and 7.9% or $3.7 million ahead of the $47.2 million reported in the year ago period. The company benefited from an incremental $4 million of gross political revenues (or roughly $3.4 million on a net basis) versus $0.2 million in 1st quarter 2003. Excluding net political revenues, estimate that revenues grew roughly 1.0% to $47.5 million. According to management, local was up over 2 percent while national was essentially flat

with the year ago period. According to management, local and national revenues in January were down 7.2% from January 2003, while there was a rebound in March to 13.5% from March 2003.

In terms of station performance, management said that KRON revenues grew at a mid-single digit clip during the quarter, suggesting that the affiliates grew at a high single digit clip.

The company noted that it continues to make headway in San Francisco. During 1st quarter 2004,

the company estimates that KRON’s market share grew slightly to 11.5% on a consecutive basis from 11.0% in 4th quarter 2003 but was above the 10.8% garnered in 1st quarter 2003. Management thinks that the market, while weak in early 1st quarter and sold on lower rates, will grow in 2nd quarter. Management mentioned that the market has been sold out for a good month or so for the second quarter. On its call, management said that the market was up at its height of roughly $750 million. That was the height of the .com boom in 1999/2000. Since then it dropped to $600 million. Management believes the market could be up 5 %to 10% higher this year. Young is trading at 18.0x projected 2004 EBITDA and 13.9x projected 2004 BCF. However, it is more appropriate to value KRON separately (since it is not currently generating significant cash flow), then applying a multiple to the cash flow of the company’s remaining network affiliated TV stations. Analysts conservatively value KRON at the value at which the company’s auditor’s valued KRON in 2nd quarter 2002: $412 million. The company has taken no additional write-downs since then.

Walt Disney, the second-biggest U.S. media company, will have strong growth this year based on improving theme park business, political advertising, and DVD sales, said UBS analyst Timothy Wallace in a research note. He boosted his rating to ``buy'' from ``neutral.'' Target is $30.

AmTech initiates coverage of ASK Jeeves with a Buy rating and $47 target. The firm cites the following key factors: 1) +30% growth estimated for overall internet advertising, 2) strength in search advertising (75% of revs and fastest growing segment of overall internet advertising with 200% growth in 2003), 3) strong rev growth and potential margin expansion, 4) potential upside to consensus, 5) negative sentiment reflected in the 14% of float short interest, and 6) attractive valuation at 21x their 2005 free cash flow est vs its 25-30% sustainable rate. Firm also initiates CNET and Doubleclick with Hold ratings.

CSFB says they continue to be big bulls on Disney, and believe that the stock continues to have a big cyclically-driven run in front of it and could comfortably break through the $30 mark this year. Firm believes there is potential for upside versus Street expectation with the 2nd quarter report this week, and notes that DIS has beaten Street expectations four out of the last five quarters. They also continue to believe that Street consensus for 2004 of $0.98 is very beatable. With the shares trading at 11.5x their 2004 est, they see a 12-18 month target of $37.

Smith Barney upgrades Dow Jones to Buy from Hold and raises its target to $64 from $48 on a higher mid-cycle EBITDA estimate. A recent uptick in WSJ advertising is likely to be an important driver for the stock. Also, the company's change in ROIC is expected to be among the best in the group.

Fulcrum upgrades Viacom to Buy from Neutral and raises their 2004-05 above the top-end of guidance. The firm believes that sentiment is at or is nearing a bottom (VIAB is right near its 52-week low, despite improving business trends), and while several risks remain, they believe the risk/reward in the stock has finally become attractive. Target is $42.50.

CSFB initiates coverage of Netflix with an Outperform rating and $43 target. The firm believes that the company can continue to grow by capitalizing on the dramatic growth in both Internet usage and DVD player penetration, and also cites the stock's relatively attractive valuation. In addition to growth in DVD player penetration and Internet usage, firm believes that widespread broadband adoption, int'l opportunities, and the significant operating leverage in the company's model will drive nearly 45% compound annual sales growth and nearly 50% compound annual EPS growth over the next five years.

Goldman Sachs recommends buying Yahoo, saying recent weakness in the stock presents an opportunity as their study of top 200 US advertiser activity on YHOO demonstrates continued positive branded online ad trends; firm also sees the following near-term catalysts: 1) the company's 2-for-1 stock split on 5/11, 2) the 5/13 analyst day, and 3) firm's own conference on 5/26. Firm also notes that the stock is trading at 28x 2004 and 20x 2005 EV/EBITDA estimates, and sees potential 25-30% upside to an implied value of $60-$70.

Yesterday, Liberty Media announced its 1st quarter 2004 results, without a conference call. The numbers looked good, and there were no negative surprises. Management did not hold a conference call as they will be hosting an investor day Thursday in New York City. All major operating subsidiaries beat our expectations:

• QVC exceeded expectations significantly (21% revenue growth and 28% OCF growth versus expectations of 8% for both, driven largely by the international businesses).

• Starz Encore beat our OCF numbers modestly while missing revenue only slightly (revenue growth of 1% and OCF decline of 36% versus our expectations 5% and -45%, respectively).

• Discovery Communications revenue was up 23% and OCF rose 37%, their revenue better than our expected 17% growth rate and OCF roughly in line with expectation for 34% growth.

• Jupiter Telecommunications grew revenue 29% and OCF 56% (excluding the effects of currency, these growth rates were 15% and 40%, respectively). We were expecting growth of 10% for revenue and closer to 20% for OCF.

• Finally, the Jupiter Programming Co. (JPC) grew revenue 43% and OCF doubled (excluding the forex impact these growth rates were 28% and 73% respectively). Analysts had been expecting 10% and 40% growth, more analogous to the growth excluding forex impact.

Hotel & Leisure . . . Brean Murray initiates coverage of Orbitz with a Buy rating and $30 target. The firm believes the company is ideally positioned to benefit from an offline to online channel shift as well as an extension of its strong air offering to higher-margin products.

Telecom . . . MCI and Microsoft announce a global strategic relationship to jointly develop and market communication and collaboration solutions featuring Microsoft Office Live Meeting, beginning with the next generation of MCI's Net Conferencing services. In addition, Microsoft and MCI are establishing a relationship as preferred communication and collaboration partners, including Web conferencing services. This agreement expands on the companies' existing relationship.

Covad will file for a five-day extension with the SEC to submit its Form 10-Q for 1st quarter. The delay is being requested because of a lone accounting issue regarding treatment of stock issued to Covad employees under its 2003 Employee Stock Purchase Plan (ESPP).

Oppenheimer initiates coverage of Earthlink with a Neutral rating. While the company has established a viable major alternative to AOL and MSN in the premium ISP category, the declines in this core segment (its most profitable) and the difficulty it faces in competing with cable and telephone company's for broadband customers create considerable rev pressure, and thus adds significant uncertainty to its outlook.

Nortel and Polycom will team to promote to enterprises a SIP (Session Initiation Protocol)-based, rich video conferencing solution for next generation IP broadband networks, the companies announced at Networld+Interop Las Vegas 2004. NT and PLCM have executed an interim letter of agreement covering the initial terms of this arrangement. They expect to replace the LOA with a long-term agreement within the next few months. NT and PLCM will develop fully-interoperable multipoint video capabilities that will enable PLCM systems to take advantage of NT multimedia features like voice call processing, forward, transfer, hold, presence and instant messaging. In addition, the companies are drafting and sponsoring SIP-based video standards in the Internet Engineering Task Force and the International Telecommunications Union.

Storage . . . Thomas Weisel upgrades Brocade to Peer Perform from Underperform based on: 1) a lower valuation, 2) their expectations for a decent April quarter, and 3) improved visibility for the back half of the year driven by new products. However, firm remains cautious on the stock longer-term due to the competitive environment in SAN switching and BRCD's low-end focus.

Brocade is providing new SAN Switch Modules for IBM eServer BladeCenter. The module is a high-performance 16-port fabric switch, designed to support seamless integration of Brocade's Advanced SAN features into IBM eServer BladeCenter solutions.

Network Equipment . . . . Baird upgrades Symbol to an Outperform from Neutral based on strengthening revenue trends, better channel conditions and improving service execution, combined with recent stock price weakness. The firm expects to see incremental fundamental improvement throughout the remainder of 2004 and into 2005. Also, the stock is down roughly 35% since its peak last January, and currently trades 18x 2005 EPS estimate. Historically, Symbol trades, on average, 25x-30x.... Wachovia also upgrades the stock to Outperform as the co appears to be gaining share. The stock has sold-off in recent months to a level that is more reflective of the opportunity.

Nokia has been chosen by Polkomtel S.A. to supply and deploy the initial phase of its 3G network deployment in Poland, under amendments to the two companies' existing contract. In addition, Nokia will provide GSM/EDGE infrastructure to expand Polkomtel's existing mobile networks. 3G deliveries will begin in May; deliveries of EDGE have already started.

Piper Jaffray upgrades Linktone to Outperform from Mkt Perform and raises their target to $15 from $12 based on: 1) company's strong 1st quarter performance with upside to ests and mkt share gains, 2) their increased rev and margins ests, and 3) their increased confidence in the co's ability to outperform estimates. Separately, ThinkEquity upgraded LTON to Overweight from Equal-Weight.

All about Intel . . . Intel, the world's largest semiconductor maker, added 45 cents to $27 and was the biggest contributor to the S&P 500's gain. Intel has increased inventories to the highest levels since 2001 in a bet that spending on electronics will rise. Worldwide chip sales surged 32 percent in March from a year earlier, the Semiconductor Industry Association said last week. Intel is holding an investor meeting Thursday in New York.

Intel is hosting its Spring Analyst Meeting on 5/13 in NY from 1pm-5pm. Expect the tone of the meeting to be relatively upbeat given the easing of a number of recent investor concerns: (1) its progress with the 90nm transition: with yields better than expected in 1st quarter 2004 and the launch of Dothan earlier this week, (2) the turnaround in its flash business, and (3) recovery in the notebook market. Expect Intel to provide an update on its product roadmaps, given recent changes with the cancellation of the Tejas and Jayhawk processors and acceleration of its roadmap for dual-core desktop processors. The reworking of Intel’s roadmap is positive at the margin, as the shift is likely to ease concerns about heat dissipation in the next-generation of processors. The shift also reflects a closer alignment to end market demand, as users increasingly move to applications that are able to take advantage of the benefits offered by a dual-core processor.

Intel is likely to highlight its headroom with gross margin improvement, as the shift to 300mm/90nm manufacturing continues. Based on its 1st quarter 2004 results we believe Intel’s manufacturing story is coming through, and our GM for 2004, at 63.4%, remains at the high end of guidance of 62%+/-a few points. Though the launch of Dothan is slightly behind indications at its Fall Analyst Meeting, the overall transition appears to be largely on track, and expect the majority of its microprocessor shipments to be based on 300mm/90nm by year-end.

On the communications side, Intel’s flash business is clearly turning around, and we expect the company to highlight its recent strategic shift to diversify beyond the cellular market and into the broader flash markets. Given the price cuts it has implemented, expect Intel to also recapture some of its lost market share on the cellular side. This would be negative at the margin for AMD. Expect Intel to also highlight its longer-term strategy to enter the data flash market, which is currently dominated by NAND flash. $38 price target. From a valuation perspective, Intel is currently trading at 16x 2005 pro forma EPS estimate, well below the past five year median of 29x, and the stock offers a compelling risk-reward ratio. Intel should benefit from strong PC unit growth in 2nd half 2004 as the ongoing PC replacement cycle continues, which should allow the company to take advantage of the leverage in its business model.

Semiconductors . . . Lehman upgrades National Semi to Overweight from Equal-Weight and Micrel to Equal-Weight from Underweight, and downgrades Integrated Silicon, Linear Tech, and Maxim Integrated to Equal-Weight from Overweight. The firm maintains their Overweight on ADI, which remains their top pick. Firm remains encouraged by improving broad-based demand trends, which should enable an upswing of the current cycle to extend beyond where current valuation suggests.

Boxmakers . . . Merrill Lynch maintains their Neutral rating on Hewlett-Packard. While the excess notebook inventory appears worked off and they think the company will achieve their $0.34 estimate, firm gets the sense that Europe, especially Germany, may be weakening even as U.S. enterprise demand improves (HPQ is dependent on Europe). While benign pricing is a near-term positive for printing, firm doesn't see profitability improving much from here and wouldn't be surprised to see perhaps 3 points of margin compression 12-18 months out (creating a $0.17 headwind) as HPQ defends its business from new entrants. On the other hand, firm says valuation is becoming quite compelling.

Software . . . Electronic Arts and Microsoft sign agreement that will allow players of EA Sports and EA Games titles to compete and play online through Xbox Live. Players will have access to voice communication, tournaments, and ladders. The first game to include Xbox Live capability will be NCAA Football 2005, scheduled for release in July. Madden NFL 2005, Tiger Woods PGA Tour, NBA Live 2005 will follow.

Hot Items - Check out the "Hot Items" page (updated daily)


--------------------------------------------------------------------------------

Disclaimer: Due to the nature of the Internet, RobBlack.com and Goodwyn, Long & Black (GLB) does not make specific trading recommendations or give individualized market advice. Information contained in this publication is provided as an information service only. RobBlack.com and (GLB) recommends that you get personal advice from an investment professional before buying or selling stocks or other securities. The securities markets and especially Internet stocks are highly speculative areas for investments and only you can determine what level of risk is appropriate for you. Also, readers should be aware that GLB, its employees and affiliates may own securities that are the subject of reports, reviews or analysis within this publication. We obtain the information reported herein from what it deems reliable sources, no warranty can be given as to the accuracy or completeness of any of the information provided or as to the results obtained by individuals using such information. Each user shall be responsible for the risks of their own investment activities and, in no event, shall GLB or its employees, agents, partners, or any other affiliated entity be liable for any direct, indirect, actual, special or consequential damages resulting from the use of the information provided. Rob Black and (GLB) carry positions in many of the names reported on. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. RobBlack.com and Goodwyn, Long & Black Investment Inc. relies on information provided by corporations, news services, in-house research, published brokerage research, Edgar filings, and also may include information from outside sources and interviews conducted by ourselves. Readers should not rely solely on the information contained in this publication, but should consult with their own independent tax, business and financial advisors with respect to any investment opportunity, including any contemplated investment in any security.

http://www.robblack.com/rb_marketwrap.shtml