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Tuesday, May 18, 2004 5:58:04 PM
Wall Street pushed the big rock up that big hill of worry. After yesterday's bad news barrage, conditions were a lot less fearsome this morning. India bounced back and Oil prices have slipped. Retailers including Home Depot, J.C. Penney and Staples reported higher-than-expected earnings. Computer-related shares, the second-worst performing industry group of 10 in the S&P500 Index this year, accounted for one-fourth of the benchmark's advance. Yesterday, stocks slumped on concern rising oil prices and the prospect of higher interest rates will slow economic growth. The S&P 500 added 7 points (+0.7%) to 1091. The DJIA increased 61 points (+0.6%) to 9968. The Nasdaq climbed 21 points (+1.3%) to 1897. Eight stocks advanced for every three that declined on the NYSE. Some 1.4 billion shares changed hands on the Big Board, 8.7 percent less than the three-month daily average. About 1.4 billion shares changed hands on the Nasdaq, making it the lightest trading day of the year. The market is living hour-to-hour these days, but valuations draw some interest especially with robust earnings.
Strong Sectors: hardware, internet, networking, semiconductor, telecom, biotech, banking, REITs, gold, industrials, broker/dealer, transportation, steel, coal, retail
Weak Sectors: oil services
Top Stories . . . U.S. housing starts fell 2.1 percent in April, the third decline in four months, as higher mortgage rates deterred some homebuilders from beginning work on projects they haven't yet sold.
Hewlett-Packard, the world's No. 2 computer maker, said second-quarter net income rose 34 percent as demand from Asia and Europe drove revenue to a record. The shares rose after the company said second-half sales may beat analysts' forecasts.
President George W. Bush said he is nominating Alan Greenspan to a fifth term as chairman of the Federal Reserve, reflecting the central banker's ``superb job'' in guiding the U.S. economy to the fastest growth in two decades.
Marsh & McLennan, the world's largest insurance brokerage, said it agreed to buy security firm Kroll Inc. for $1.9 billion in cash.
Home Depot, the world's largest home-improvement chain, said first-quarter profit climbed 21 percent as remodeling of older stores and demand for John Deere lawn tractors helped sales. The retailer also boosted its annual earnings forecast.
Deere, the world's largest farm- equipment maker, said second-quarter profit rose 86 percent as farmers boosted spending and consumers bought more lawnmowers and utility tractors. The company raised its full-year forecasts.
Quotes of Note . . . ``The momentum is quite strong for corporate profits. There are a lot of things that will mitigate the negative aspects of interest-rate increases.'' Randy Bateman, who oversees $10 billion as chief investment officer at Huntington Capital Corp. Bateman said the S&P 500 may rise as much as 10 percent this year as gains in U.S. company payrolls bolster earnings growth. The benchmark has lost 1.8 percent so far in 2004.
Market Bottom . . . Investor's Daily says one silver lining of yesterday's sell-off was to push the market's panic button. The put-to-call ratio jumped to 0.96 from Friday's 0.80. The ratio moves higher when more option traders by bearish puts than bullish calls. Spikes over 1.0 have coincided with key market bottoms.
Short or Long-Term . . . Over the short-term conomic developments seem to play second fiddle to geopolitical events, Goldman Sachs says technology spending looks promising. The firm's IT spending survey shows rising end-market demand from top customers, leading to improved revenue, and earnings growth. They see 2004 margins averaging 15%, and notes Information Technology is more attractively valued, relative to the market, than it was in March of 2003. Those undervalued include: Microsoft, Cisco, and Dell.
Interest Rates & the Market . . . The Leuthold Group says that since 1946, the S&P 500 has risen by an average of 9.9% in the first year after the Fed's initial rate increase. And, Investech Research says the benchmark peaked before the Central Bank started rising rages only twice in the past 50 years.
India . . . Indian shares rebounded six percent from the wrenching decline the day before, as investors found value in stocks hammered by fears a new leftist-backed government would stall economic growth. The rupee was firmer, moving away from an eight-month intra-day low struck on Monday, while bonds rose as the central left interest rates on hold. "The confidence seems to be coming back, and the valuations are attractive at these levels to the long-term players, who are not as affected by the negative sentiment," said associate vice president of HDFC Securities. "It is anyone's guess if the rally will sustain, but the negative bias does not seem to be as dominant today." Software bellwether Infosys Technologies was up seven percent while Wipro rose 11.5 percent.
Financials . . . Goldman Sachs would be a buyer of Aflac in anticipation of a positive analyst meeting on Friday. At a recent meeting the firm had with the CEO, the recovery in US sales was reconfirmed and the continued margin improvement in Japan given substance. The May analyst day has been the forum where AFL adds an additional year's target EPS growth rate - this time for 2006. The firm expects that growth rate to be 15% in local currency. In addition, the co would benefit from rising interest rates particularly in Japan given the annual cash flow of 390 billion yen that needs to be invested.
The NY Times reports that an investigation into the fees that insurance companies pay insurance brokers could change a profitable business practice that reaps hundreds of millions of dollars for the brokers. The investigation by the New York attorney general, Eliot Spitzer, is advancing. Late yesterday, an investigator involved in the case disclosed that several major insurance companies had received subpoenas from Mr. Spitzer's office, in addition to the four brokers that reported last month that they were under investigation, the Marsh & McLennan Companies, Aon, Willis Group Holdings and Kaye Insurance Associates. The investigator's disclosure came after Chubb said after the close of the market yesterday that it had received a subpoena. The American International Group declined to say whether it had been subpoenaed. A spokesman for the Hartford Financial Services Group said the co had received a subpoena. The investigation is looking into potential conflicts of interest among the brokers, whose role is to arrange the best possible coverage for corporate clients at the best possible price. "This is a new round of subpoenas,'' the investigator said of those to the major insurance companies, which he said were delivered to the insurers early last week. "It's all part of the same investigation into the insurance brokers,'' he said to the paper.
Sandler O'Neill notes that Netbank reported April operating statistics yesterday, where total mortgage production increased 15.4% to $1.5 billion, however mortgage sales totaled $826 million (down 48% from the prior month) and nonconforming production was up 9.2% from March, but sales were down 4.2%. While management had initially expected 2nd quarter results to be comparable to 1st quarter. The firm says the company stated that "pricing pressure in the conforming mortgage operation and servicing net hedge performance pose additional downside risk." Firm says their 2nd quarter estimate of $0.19 is below consensus of $0.20, and says this announcement reinforces their view that NTBK's transition period could last longer than anticipated. The firm now believes that NTBK could report soft results for what will be the third quarter in a row (firm had previously thought it could be a one or two qtr phenomenon). Maintains Hold rating and $11 target.
April data indicates that Fannie Mae's retained portfolio did not grow (-$430 mil.) for the seventh month in a row. Although purchases improved ($26 billion vs. $20 billion in March), liquidations also increased offsetting the higher business volume. The decline in the retained portfolio was expected. Purchase spreads still remain relatively unattractive. Purchase commitments entered into in April were similar to March ($29.4 billion versus $28.9 billion). About $23 billion remain outstanding, suggesting that the portfolio won't grow again in May, though on the trend in
liquidations. Analysts are still optimistic that higher interest rates and interest rate volatility will result in better purchase opportunities for FNM in the months ahead. Combined with lower liquidation rates, this should lead to some retained portfolio growth. An $8.05 EPS estimate does not assume any retained portfolio growth in 2nd quarter, but does assume an improvement in the second half. Fannie's MBS portfolio grew only slightly in April (1.6% annualized) which reflects the spike in the liquidation rate (36% vs. 27% in March) that typically occurs before an increase in new issuance. Expect balances to grow more in May. FNM's duration gap widened to 3 months from 0 in March, though remained within the company's targeted range. The company also reported a slight increase in sensitivity to a 50bp rate shock and less to a 25bp shock. We don't consider these changes significant. Higher rates should create bigger problems for other mortgage investors, eventually providing FNM with improved purchase opportunities.
MBNA reported monthly managed data for April this morning in an 8-K filing. The managed loan portfolio declined, partly reflecting the appreciation of the US dollar against the UK Pound and the Canadian Dollar. The decline was also due to the decreased used of teaser rates on balance transfer offers. Credit quality continued to improve in April. The managed loan portfolio fell by $1.17 billion in April from the end of March (1% decline) to $116.4 billion.
We estimate that the strengthening of the US Dollar versus the UK Pound and the Canadian Dollar, reduced managed loans by about $815 million. However, even without the impact of the stronger dollar, estimate that managed loans would have declined by 30 bp in April. The company indicated that the decline in managed loans is at least partly due to its reduced use of teaser rate balance transfer offers. Fewer teaser rate offers should help the net interest margin, providing some offset to slower loan growth. Analysts have not yet revised our estimate that managed loans will grow by about 9% in 2004. In April, the managed chargeoff rate decreased to 4.88% from 4.98% in March. The credit card chargeoff declined by 9 bp to 4.69% and the consumer loan chargeoff rate decreased by 27 bp to 6.01%. The managed delinquency rate fell by 7 bp to 4.20%, with similar declines in the card and consumer loan portfolios. While loan balances at the end of April were lower than we had anticipated (credit card loans declined by about $200 million, adjusting for currency during the month), we are maintaining our EPS estimates, rating and price target.
Oil & Gas . . . Merrill Lynch upgrades BJ Services to Buy from Neutral, citing the recent pullback in the stock and their view that the company's outlook continues to improve. The firm believes that the company's leverage to global natural gas markets positions it for above average growth in 2004-05, and notes that global natural gas demand is growing faster than oil demand as producers seek to monetize natural gas resources around the world. Target is $50.
The WSJ reports the Pentagon says it has suspended nearly $160 mln in payments to Halliburton as part of a lingering dispute over the charge for feeding U.S. troops and other personnel in Iraq. The suspension, which Defense Department officials said was necessary "to protect the Army's financial interests," could complicate the provisioning of troops in Iraq if it disrupts payments to Halliburton's many subcontractors who cook and serve about 300K meals a day. Some Defense officials suggested the financial cost to Halliburton's Kellogg Brown & Root unit could increase substantially as the two sides feud over the bills for feeding U.S. personnel.
Goldman Sachs upgrades their view of the Integrated Oil, E&P, R&M sector to Attractive from Neutral, as they see the potential for the stocks to rally 30-40% to peak valuations versus an estimated 10% trading downside risk. Although their 2004 EPS estimates are broadly in-line with consensus, their 2005 EPS estimates are approx 25% above consensus on average. The firm now sees the risks to their $30/bbl forecast for 2004 and 2005 as skewed to the upside given greater confidence in the sustainability of Chinese oil demand growth, demand elsewhere in Asia and the US, ongoing geopolitical turmoil, and generally tight supply; in terms of timing, firm no longer believes that a correction in oil prices to below $30/bbl is likely this spring.
Metals . . . Alcan Aluminium announced its intention to pursue a spin-off to its shareholders of substantially all of the rolled products businesses held by Alcan prior to its acquisition of Pechiney. The proposed distribution will create the world's largest aluminum rolled products company.
Paper . . . Goldman Sachs reiterates its Attractive sector view of the paper stocks as recent data points and conversations support the view that the cyclical upturn in papers is underway. This view is based on: (1) April preliminary printing/writing paper shipments increased 5.2% Year/Year; (2) Pulp & Paper Week reported higher uncoated free sheet prices in May; and (3) participants (both buyers and sellers) at the Market Pulp Conference last week expect pulp and paper markets to tighten further in 2004. The firm continues to like DTC, SPP, and IP because of their leverage to paper and upside to peak value.
Transports . . . Air Tran Holdings finalized an agreement for six more Boeing 717 airplanes to be delivered in 2005. The six aircraft represent the exercise of four options and firm orders for two additional aircraft, and the announcement comes only a few weeks before AirTran Airways accepts delivery of the first of 100 new Boeing 737-700 aircraft. AAI already operates the youngest all-Boeing fleet in U.S., currently flying 76 Boeing 717s with an average age of three years.
Legg Mason says strong economic growth is combining with a strong freight market to create opportunities. The US freight market is strong across-the-board, as the Cass Freight Index (shipment volumes) is up 12.9%, year-over-year, in March, air cargo traffic comps are up domestically and internationally, railroad carload and intermodal container load traffic are both up over last year, West Coast port traffic is up double-digits, and the American Trucking Associations' truck tonnage index is up double-digits as well. The firm highlights some of its Buy recommendations: Heartland, JB Hunt, Knight Transportation, Old Dominion Freight, Burlington Northern.
Industrial Equipment . . . Deere reported earnings of $1.88 per share, $0.13 better than the consensus of $1.75. Revenues rose 43.6% year/year to $5.30 billion versus the $4.87 billion consensus. Company sees 3rd quarter sales growth of approximately 25-27% year/year.
Defense & Aerospace . . . TASER announced four significant orders for TASER conducted energy weapons. The three Florida orders include a purchase by the Tampa Police Department of 515 TASER X26 units; a purchase by the Hillsborough County Sheriff's Office of 500 TASER X26 units; and a purchase by the Pinellas County Sheriff's Office of 250 ADVANCED TASER M26 units. In addition, the Charlotte-Mecklenburg Police Department in North Carolina purchased 197 TASER X26 conducted energy weapons and accessories. The four purchase orders total over $1.2 million.
Northrop Grumman confirms 2004 and 2005 financial guidance today at its Annual Meeting of Stockholders. Consistent with previous guidance, the company expects 2004 sales of approx $28 billion and EPS from continuing operations are expected to range between $5.60-5.90 ($2.80-2.95 after two-for-one split) versus the consensus of $28.6 billion and $5.90, respectively. Net cash provided by operating activities for 2004 is expected to total approx $1.5 billion. For 2005, co expects sales of approx $30 billion ( consensus $30.6 billion), continued margin expansion and solid double-digit growth in EPS. The company expects 2005 cash provided by operations to be between $1.8-2.0 billion.
CE Unterberg comments on ID Systems' passing of a series of key tests administered by the FAA and TSA yesterday. The system is being used to control and secure ground service equipment in and around the Newark airport. With the test successfully completed, IDSY has now been granted additional funding for a more expanded rollout covering up to 150 fuel trucks, baggage carts, plane tugs and other Port Authority vehicles. With over 1 million ground service vehicles at US airports alone, this represents a potential market of over $2 billion. The firm believes that IDSY has established a meaningful lead in this market and is well positioned for further funding and rollout. The firm raises its target to $14.
Education . . . SunTrust Robinson Humphrey upgrades Corinthian Colleges to Neutral from Reduce based on their view that the unique risk associated with the company's high allied health enrollment is now more fully reflected in the stock price. Firm notes that the stock is trading at 19.9x their 2005 estimate, well below its peer average of 27.9x as well as its own 5-year average in the mid-twenties. While they believe the co will be negatively influenced by slowing demand in the health segment, they are still unsure of the timing and magnitude of this effect; also, COCO generates around half of its rev in non-healthcare segments that should have more of a positive leverage to the economy, and therefore the co may sustain rev and earnings growth over the next several quarters that is sufficient to support a P/E valuation in the upper-teens, even if there is some relative slowing in growth.
Food & Beverage . . . The Washington Post reports that the nation's appetite for low-carbohydrate foods seems bottomless, judging by the many low-carb products showing up in supermarkets and the new menu items at restaurants and fast-food chains. And when Krispy Kreme Doughnuts recently announced slowing sales, it put part of the blame on low-carb diets. Yet the mood at a recent Washington conference on the business was bleak. Sales of low-carb products have fallen sharply at independent and health food stores, and some longtime industry insiders say a shakeout has begun. "I do think now we're on the downside of the roller coaster, and there will be ups again, but not as high," said Dean Rotbart, executive editor of industry trade publication LowCarbiz, which organized the conference. Even as they rush to cash in on the craze, some major food manufacturers say they see the phenomenon cooling down and becoming one part of the broad market for weight-loss products. "It's kind of exploded, it's a trend, and then it becomes, really, a niche," said Michael E. Diegel, a spokesman for the Grocery Manufacturers of America Inc. "That's where it looks like it's going at this point." Curtis Price, co-owner with his brother and another partner of Whoa . . . That's Lo!, a low-carb store in Silver Spring, is typical of specialty retailers feeling the pinch, with sales off 15% to 20% in the past two months. "It reached a peak, and now it's trickling off, but it's going to eventually level out," he said. "
The WSJ's "Heard on the Street" column highlights Atkins and South Beach diet related stocks that many investors have picking up recently. According to the article, now many of these stocks have climbed too high in recent months. In fact, some co's benefiting from the popularity of the Atkins and South Beach diets are beginning to look risky, some say, especially if the stock market continues to experience weakness. "Many of these stocks are expensive, and while the earnings are great, expectations are going too high," says John Romero, who runs Aptus Partners LP hedge fund. "It's all a great story, and the momentum investors have been getting in, but they'll get right back out when the companies stop increasing their earnings guidance." According to the article, overpriced stocks include: Hormel Foods, Smithfield Foods, Tyson Foods, MGP Ingredients, Hansen Natural, Cal-Maine Foods and Lifeway Foods.
Retail . . . Home Depot reported earnings of $0.52 per share, ex items, $0.09 better than the consensus of $0.43. Revenues rose 16.2% year/year to $17.55 billion versus the $17.11 billion consensus. The company sees 2004 sales growth of 10-12%. The company also raised its 2004 EPS growth guidance from 7-11% to 10-14%. Excluding items company sees 2004 EPS growth of 13-16%.
Dick's Sporting Goods reported earnings of $0.21 per share, $0.03 better than the consensus of $0.18. Revenues rose 19.5% year/year to $364.2 million versus the $360.5 million consensus. The company sees 2nd quarter EPS of $0.33-0.34, excluding $0.01 charge for store relocation consensus is $0.36.
Barnes & Noble reported earnings of $0.17 per share, $0.05 better than the consensus of $0.12; revenues rose 22.5% year/year to $1.45 billion versus the $1.47 billion consensus. The company sees 2nd quarter EPS of $0.12-0.17 versus the consensus of $0.18. For 2004 the company sees EPS of $2.19-2.26 versus the consensus of $2.25.
Goldman Sachs upgrades Rite Aid to In-Line from Underperform, primarily based on improved valuation. The firm notes that the stock has declined 25% YTD (vs a flat performance for drug retailers and a slight decline for the S&P 500), and now trades at 7.7x their 2005 EBITDA estimate, which more accurately reflects stubbornly soft pharmacy productivity gains; with robust front-end sales and gross profits driving above-trend EBITDA growth, firm sees little additional downside in the stock, but says that as long as the comp script count remains anemic, the stock will likely tread water over the next several months.
The WSJ's "Ahead of the Tape" column highlights Kmart's stock, which gained 10% on the news of its 1st quarter earnings. The company reported net income of $93 million in the quarter, compared with a loss of $862 million last year and cash on hand went up from the prior quarter. But according to the article, this isn't proof that Kmart is back. The company swung to an operating profit of $165 million from a loss of $39 million last year. Those numbers underwent several adjustments for one-time events. Since the co wrote down its property in conjunction with the bankruptcy filing, it had depreciation and amortization of $7 million in the quarter, compared with $177 million a year earlier. If you add back the latter D&A figure to last year's loss, along with a $37 million charge for restructuring taken in that quarter, one gets a $175 million profit from operations. For this year, add the $7 million in D&A and take away $32 million in asset-sale gains to the most-recent quarter's figures, and operating income was $140 million, down from last year. Using those figures, Kmart shows a modest improvement in operating margin. But since it had significant clearance sales last year, there should be. It isn't as dramatic an improvement as it appears. Kmart is hunkering down, it is reducing ad spending, raising prices and cutting its sales personnel in stores. According to the article, that isn't exactly a tried-and-true recipe for retail success. Same-store sales fell 13% in the qrtr. Other bulls think that retail success isn't why the investment will work. They want management to milk the business for cash until it can sell its underlying real estate. However, the article suggests that strategy is even more uncertain.
Lowes reported 1st quarter 2004 EPS of $0.57 vs. $0.53 last year and estimates of $0.53. During 1st quarter 2004, total sales increased by 22.0% to $8.68 billion vs. $7.12 billion last year and estimates of an increase of 18.0% to $8.40 billion, with same-store sales of 9.9% vs. 0.1% a year ago, and our estimate of 6.0%. The 1st quarter 2004 average ticket increased by 8.7% to $62.56 from $57.57 a year ago, and customer count increased slightly more than 12% during the quarter. Higher year-over-year lumber and building materials prices positively impacted 1st quarter 2004 same-store sales by 175 bps. The sales performance for the quarter was well-balanced, with every region and product category delivering positive comps. Categories that performed above average in 1st quarter 2004 included millwork, lumber, rough electrical, outdoor power equipment, seasonal living and cabinets. In addition, the tool category reported same-store sales roughly inline with the company average during the quarter. Through the first 16 days of 2nd quarter 2004, LOW has experienced same-store sales that have exceeded its 6%-7% quarterly guidance range. In 1st quarter 2004, the gross margin increased 190 bps to 33.1% of sales vs. 31.2% last year and our estimate of a 120-bp increase to 32.4%. The improvement was due to better margin rates driven by lower inventory costs and a 5-bp reduction in inventory shrink. The gross margin improvement was partially offset by a 30-bp negative impact from product mix related to strength in the lower margin lumber category. There was a 300-bp increase in the 1st quarter 2004 operating expense ratio to 24.0% from 21.0% a year ago and our estimate for a 270-bp increase to 23.7%, driven primarily by the impact of the adoption of EITF 02-16, which had a negative effect of 355 bps. Offsetting this negative factor was leverage of occupancy and other operating and administrative expenses. In addition, 1st quarter 2004 SG&A includes $18MM (or 14 bps) related to LOW’s decision to expense stock options beginning in 1st quarter 2003. The 1st quarter 2004 operating margin decreased by 100 bps to 9.1% of sales vs. 10.1% a year ago and our estimate of a decrease of 130 bps to 8.8% of sales. During 1srt quarter 2004, LOW opened 29 new stores, and closed one, to end the quarter with 980 total stores in 45 states and 111.9MM sq. ft., which increased approximately 15.1% over last year’s 97.2MM sq. ft. During the quarter, LOW opened 8 new 94,000 sq. ft. format stores, bringing the total for the year to 40 stores. In addition, during the quarter, LOW opened stores in Tucson, AZ; Las Vegas, NV; Dallas, TX; and Brooklyn, NY. For 2Q04, LOW plans to open 19 new stores, including 2 relocations.
Restaurant . . . Barron's Online highlights Panera Bread, which lost 11% last Thursday following the company's latest quarterly earnings report. Despite a 26% rise in net income for the quarter, the company's management discussed margin pressure due to the rising costs of milk and butter. Management also warned of higher labor costs as the company opens more stores. "I see limited upside," says Mathew DiFrisco, an analyst with Harris Nesbitt Gerard. DiFrisco downgraded the stock from Outperform to Neutral on Panera's 1st quarter earnings news, citing factors including the lower productivity of new stores. According to the article, the stock is looking stale. Panera traded at 34.56 late Monday, 28% off its 52-week high. While its P/E ratio is below its long-term growth rate and below its median forward P/E of 32.3 for the last five years, it is trading at a P/B ratio of 5.1x for the last five years. That's above its median P/B of 1.6x for the same time period. And its forward P/E has fallen sharply from 33x to 27x, since Barron's Online first wrote skeptically about the stock in January.
Medical Devices . . . Boston Scientific announced clinical trial data supporting the safety and effectiveness of the Enteryx procedure in relieving the symptoms of gastroesophageal reflux disease (GERD) at 24 months post- treatment. David A. Johnson, M.D., Professor of Medicine, Chief of Gastroenterology at Eastern Virginia School of Medicine and the study's Principal Investigator, presented study findings Monday showing that 67% of the patients who were dependent on proton pump inhibitors (PPIs) prior to the Enteryx procedure were no longer using these medications two years after the procedure. An additional 5% (3/64) of the patients were able to reduce their dose of PPIs by at least 50%. "Data in this study suggests that GERD symptoms can be managed effectively and safely over a two-year period using the Enteryx procedure," said Dr. Johnson. "These results support the use of Enteryx as an attractive alternative to daily medications for the relief of GERD symptoms."
QLT Inc upgraded to Market Perform at Raymond James on valuation. Price target $26.
Drugs . . . Bentley Pharm announced that its Spanish subsidiary has been granted approval to market a generic equivalent of simvastatin in the U.K. through a company focused in the UK. According to IMS, the market size of this product in the UK is approx $480 million and growing at an annual rate of approx 30%.
Barron's highlights generic drug maker stock's, which have lost some steam lately. However, the article suggests there are several reasons why the sector now looks enticing. Verdicts in several patent litigation cases this year could open the door to new generic drugs in 2005. And several companies expect to reap rewards from partnerships with other drug makers. The proprietary drug businesses that many companies launched to diversify profits continue to grow, too. "I think people overreacted [to the sell-off]," says Jeffrey Long-McGie, an analyst with Think Equity. "I think we are still in a position where generic pharmaceutical companies have a lot of rev fuel in front of them." By 2006, 40 million Medicare recipients will receive prescription drug benefits, which should prove a boon for the industry. And generics replaced their brand-name equivalents in less than half of all new prescriptions written last year, leaving lots of room for growth. "The new product flow is the lifeblood of the industry. Without that, the core business is a declining business," says Adam Greene, an analyst with First Albany. According to the article, Watson Pharmaceuticals, for one, is well positioned. The nation's largest maker of oral contraceptives should launch 12 new generic drugs this year, including six "authorized generics" as part of agreements with name-brand drug makers. Watson has 28 to 29 "authorized generic opportunities" in its pipeline. The stock trades at just 16.4x projected earnings over the next four quarters compared with a historical median of 20.4x future earnings. Another potential winner is Andrx, which is successfully leveraging its expertise in developing time-release medications to generate higher profits and limit competition. "This way you see three or four competitors instead of twelve," says Mr Greene. This year, the co expects to launch 15 new generic drugs. At 25.53, shares of Andrx trade at only 19.5x projected earnings over the next four quarters, compared to a historic median of 25.1x.
Biotech . . . Gilead Sciences granted priority FDA review for a New Drug Application for the fixed dose co-formulation of the company's anti-HIV medications Viread and Emtriva. Gilead submitted its application to the FDA on March 12, 2004 and had anticipated a decision by January 12, 2005 based on a 10-month traditional review. Under priority review, the NDA will be reviewed within six months.
Gilead Sciences upped to Outperform from Market Perform at FBR. The firm notes that in two days there have been three important catalysts for Gilead: priority review of the Viread/Emtriva co-formulation, FDA easing of requirements needed to bring co-formulations of approved HIV drugs to market, and an imminent deal with Bristol Myers that should make Gilead benefit preferentially from this FDA change of heart. Firm's price target goes to $80 from $59.
Genencor has manufactured research sample quantities of enzymes that will neutralize sarin gas and certain other organophosphate-based nerve agents. The company is providing samples to formulators for development into sprays, foams and detergents for use by military and civilian first responders, such as firefighters, police and hazardous material response teams. The enzymes were developed in collaboration with the U.S. Army Edgewood Chemical Biological Center.
Media . . . First Albany initiates NetFlix with a Buy and $36 target. The firm estimates that DVDs were in 58% of all US households, up dramatically from just 13% in 2000. This migration to the DVD format has fueled an 83% CAGR in DVD rentals over the last 3 years. While competitors such as Wal-Mart and Blockbuster could never be dismissed entirely, the competitive bar in the on-line subscription rental market has been raised, as Netflix expands its brand and gains consumer mind-share. As a result, the firm believes on-line subscription rental will be a one-company market.
First Albany initiates Ask Jeeves with a Neutral and $40 target. The firm is not convinced that Ask Jeeves can sustain its recent share gains, particularly as the larger destinations have substantially more resources to invest in both product and marketing initiatives. As a result, over the long run, the firm expects market share to consolidate around the three largest destinations: Yahoo!, MSN, and Google. In addition, the firm is wary of Ask Jeeves' reliance on a competitor-Google (about 70% of 1st quarter revenues)-and expect the economics of traffic acquisition to rationalize over time.
Piper Jaffray comments on the potential impact of Microsoft's Janus Technology on Apple's iPod. While Janus will begin to be integrated into subscription music services in 2nd half 2004, the firm does not expect Apple's iTunes or iPod revenue to be significantly impacted in the next several quarters. However, long term (late 2005, into 2006), Janus will gain momentum. The firm expects the inflection point in the portable device market to be when 20GB devices are available in the $150 range, possibly toward the end of CY05. Microsoft unveiled its Janus technology on 5/2. The firm expects services, such as Napster , to have Janus enabled offerings by the end of 2004.
Morgan Stanley upgrades Univision to Overweight from Underweight; firm cites valuation (stock has almost 20% upside to their $36 target), as well as their expectation that the Spanish language upfront should benefit from CPM pricing levels established by general market trends, and since UVN's rating share may stabilize in 2005, firm believes another 15%+ upfront is possible in deals completed in June through August.
Telecom . . . Nextel’s CFO Paul Saleh and CTO Barry West discussed the current issues and business environment facing Nextel. Investors’ main focus continues to be the Consensus Plan outcome with the FCC (potentially resolved this or next month), despite Nextel’s continued strong fundamentals. Nextel management displayed no apprehension toward customer growth or cash flow guidance, and seemed upbeat overall despite the stock weakness. The company stated that it has not been loosening credit standards, rather tightening restrictions on some credit classes. Nextel reiterated its stance against receiving 2.1GHz spectrum as another comment period and incumbent competitors could delay a transition. Investors seemed to worry about not only the potential swap outcome but also its impact on FCF. Specifically, how much for the swap and when to pay it, and then Nextel’s future technology path and expense. Nextel views the Flarion technology as more flexible and superior to CDMA EVDO at present, offering cost advantages and a 2-year lead time. Though still in early stages, the trials are providing valuable
information regarding usage, value to price proposition and customer market segmentation. 30% of subs are “mobile” users, hitting at least 7 cell sites per day. Despite the excitement with Nextel’s performance and FCF generation, the spectrum swap overhang cannot be overlooked. Analysts do not see a consensus building and believe a conclusion this month is unlikely. Given investors’ obvious focus on the swap and technology path we believe the stock will remain range bound until there is additional clarity.
Expect Vodafone to report a solid set of 2004 results with consolidated revenues of up 10.6% to £33.6 billion (consensus £33.5bn), and EBITDA up 15.3% to £12.8 billion (consensus £12.7bn), equating to a margin of 38.1%. Analysts forecast clean EPS of up 34.5% to 9.16p share, ahead of consensus of 9.0p. Lower capital expenditure, combined with growth in operating income and a
bumper dividend stream from SFR, should result in March 2004 cashflow of up 45.0% to £7,498 million, in line with Vodafone’s guidance of at least £7 billion. Lower net debt, but affected by acquisitions. Analysts forecast net debt of £9,373 million at March 2004, down from £13,839 million in March 2003. However, the proceeds from the sale of the Japan Telecom fixed line business were more than offset by the acquisition of the UK service providers, the minorities in Telecel and Panafon and the share buyback. Investors will focus on Vodafone’s use of cashflow,
M&A strategy, the progress of the Japanese business and an update on the UMTS launch. An update on guidance for the year to March 2005 (currently: high single digit revenue and subs growth, mobile margins flat to modestly ahead and capex of around £5bn) will also be closely watched. Seven potential catalysts could close the valuation discount. Consensus forecasts for March 2005 look too low; concerns about bidding for Verizon appear misplaced; France is unlikely to be a near term event; expansion is possible but impediments likely to limit activity; the buyback could be extended; Japan needs to be put into context and the network advantage of 3G will become more apparent.
IT Services . . . IBM and Cisco Systems said they will launch a joint services and product offering aimed at corporations who buy telephone services over the Internet. IBM said it would jointly market its consulting services with Cisco's voice, video and conference solutions because it wants to help develop the nascent market. IBM said that both companies will make significant investments in the area, which is seeing increasing demand from medium and large-sized corporations, according to IBM's Don Fitzpatrick, vice president of Cisco strategic alliances. "We think we have hit that inflection point. We think it's taking off," Fitzpatrick said. "We think it's a significant opportunity." The companies also will also work on making their future products and technologies in this area work better together
Network Equipment . . . The WSJ reports that a portion of the Cisco Systems software that runs most of the networking equipment on the Internet was apparently stolen and published on the Web. The apparent theft might allow hackers to exploit weaknesses in the code and could embarrass Cisco, which has a growing business helping other co's fend off cyberthreats. A Russian computer-security Web site published two snippets of software code and said they were a small portion of the 800 megabytes of code that had been stolen. According to the article, security experts said publication of the code wasn't an immediate security threat. Still, they said hackers might study the code for flaws that would allow them to disrupt or disable Cisco routers, which could have a big impact on the Internet.
Lucent awarded contracts worth more than $120 million by China Unicom for further CDMA network expansion.
ThinkEquity upgrades Packeteer to Overweight from Equal-Weight and maintains their $18 target; firm says channel checks indicate that Q2 demand remains solid, and they say their contacts have also indicated that system integrators are starting to design WAN optimization products into new network deployments and, while early, this would be a major catalyst for this space; firm also says longer-term trends (system integrator interest and strategic partnerships) will keep the momentum going in 2005.
Semiconductors . . . Amtech comments that overnight the European Patent Office released the specifics behind their decision to revoke one of Rambus' patents in February. In layman's terms, the patent was revoked because of lack of inventiveness on this particular patent. While Amtech had previously marginalized the impact of the EPO on US litigation (and continues to believe so), the rationale for revoking one of the top 4-5 patents is perhaps troublesome and ominous for RMBS. Firm maintains Hold rating.
Software . . . UBS upgrades THQ Interactive to Buy from Neutral and raises their target to $26 from $21. The think the multiple can expand throughout the year due to a better balance sheet and product lineup. The firm thinks the company's product portfolio is materially better than last year, as it has a solid kids and wrestling biz (about 65% of revs are existing brands) and they think its action-oriented games are much improved, which gives the co a well-rounded portfolio to hit all segments of the market.
Wind River reported a loss of $0.02 per share, $0.01 better than the consensus of ($0.03). Revenues rose 8.9% year/year to $52.8 million versus the $50.2 million consensus. The company sees 2nd quarter non-GAAP loss of $0.01-0.03 versus consensus of ($0.03) on revenues of $53-55 million consensus $51.2 million.
Check Point Software announces that Check Point Next Generation with Application Intelligence has passed rigorous testing to achieve the National Institute of Standards and Technology Federal Information Processing Standard (FIPS) 140-2 Level 2 certification and meets the cryptographic requirements of the US govt's National Security Telecom and Information Systems Security Policy (NSTISSP) Number 11. NIST's Cryptographic Module Validation Program (CMPV) provides module and algorithm testing for FIPS 140-2, which is a standard that applies to federal agencies using validated cryptographic modules to protect highly sensitive government data in computer and telecom systems.
Piper Jaffray thinks April video game sales tracked in-line and earnings estimates for April QuarterQ are achievable for videogame retailers. ELBO and GME are well-positioned to benefit from near-term industry catalysts including recent hardware price cuts (Xbox to $149 on 3/29 and PS2 to $149 on 5/11) and the launch of highly-anticipated video game properties such as Spiderman, Shrek, and Harry Potter.
Hot Items - Check out the "Hot Items" page (updated daily)
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Strong Sectors: hardware, internet, networking, semiconductor, telecom, biotech, banking, REITs, gold, industrials, broker/dealer, transportation, steel, coal, retail
Weak Sectors: oil services
Top Stories . . . U.S. housing starts fell 2.1 percent in April, the third decline in four months, as higher mortgage rates deterred some homebuilders from beginning work on projects they haven't yet sold.
Hewlett-Packard, the world's No. 2 computer maker, said second-quarter net income rose 34 percent as demand from Asia and Europe drove revenue to a record. The shares rose after the company said second-half sales may beat analysts' forecasts.
President George W. Bush said he is nominating Alan Greenspan to a fifth term as chairman of the Federal Reserve, reflecting the central banker's ``superb job'' in guiding the U.S. economy to the fastest growth in two decades.
Marsh & McLennan, the world's largest insurance brokerage, said it agreed to buy security firm Kroll Inc. for $1.9 billion in cash.
Home Depot, the world's largest home-improvement chain, said first-quarter profit climbed 21 percent as remodeling of older stores and demand for John Deere lawn tractors helped sales. The retailer also boosted its annual earnings forecast.
Deere, the world's largest farm- equipment maker, said second-quarter profit rose 86 percent as farmers boosted spending and consumers bought more lawnmowers and utility tractors. The company raised its full-year forecasts.
Quotes of Note . . . ``The momentum is quite strong for corporate profits. There are a lot of things that will mitigate the negative aspects of interest-rate increases.'' Randy Bateman, who oversees $10 billion as chief investment officer at Huntington Capital Corp. Bateman said the S&P 500 may rise as much as 10 percent this year as gains in U.S. company payrolls bolster earnings growth. The benchmark has lost 1.8 percent so far in 2004.
Market Bottom . . . Investor's Daily says one silver lining of yesterday's sell-off was to push the market's panic button. The put-to-call ratio jumped to 0.96 from Friday's 0.80. The ratio moves higher when more option traders by bearish puts than bullish calls. Spikes over 1.0 have coincided with key market bottoms.
Short or Long-Term . . . Over the short-term conomic developments seem to play second fiddle to geopolitical events, Goldman Sachs says technology spending looks promising. The firm's IT spending survey shows rising end-market demand from top customers, leading to improved revenue, and earnings growth. They see 2004 margins averaging 15%, and notes Information Technology is more attractively valued, relative to the market, than it was in March of 2003. Those undervalued include: Microsoft, Cisco, and Dell.
Interest Rates & the Market . . . The Leuthold Group says that since 1946, the S&P 500 has risen by an average of 9.9% in the first year after the Fed's initial rate increase. And, Investech Research says the benchmark peaked before the Central Bank started rising rages only twice in the past 50 years.
India . . . Indian shares rebounded six percent from the wrenching decline the day before, as investors found value in stocks hammered by fears a new leftist-backed government would stall economic growth. The rupee was firmer, moving away from an eight-month intra-day low struck on Monday, while bonds rose as the central left interest rates on hold. "The confidence seems to be coming back, and the valuations are attractive at these levels to the long-term players, who are not as affected by the negative sentiment," said associate vice president of HDFC Securities. "It is anyone's guess if the rally will sustain, but the negative bias does not seem to be as dominant today." Software bellwether Infosys Technologies was up seven percent while Wipro rose 11.5 percent.
Financials . . . Goldman Sachs would be a buyer of Aflac in anticipation of a positive analyst meeting on Friday. At a recent meeting the firm had with the CEO, the recovery in US sales was reconfirmed and the continued margin improvement in Japan given substance. The May analyst day has been the forum where AFL adds an additional year's target EPS growth rate - this time for 2006. The firm expects that growth rate to be 15% in local currency. In addition, the co would benefit from rising interest rates particularly in Japan given the annual cash flow of 390 billion yen that needs to be invested.
The NY Times reports that an investigation into the fees that insurance companies pay insurance brokers could change a profitable business practice that reaps hundreds of millions of dollars for the brokers. The investigation by the New York attorney general, Eliot Spitzer, is advancing. Late yesterday, an investigator involved in the case disclosed that several major insurance companies had received subpoenas from Mr. Spitzer's office, in addition to the four brokers that reported last month that they were under investigation, the Marsh & McLennan Companies, Aon, Willis Group Holdings and Kaye Insurance Associates. The investigator's disclosure came after Chubb said after the close of the market yesterday that it had received a subpoena. The American International Group declined to say whether it had been subpoenaed. A spokesman for the Hartford Financial Services Group said the co had received a subpoena. The investigation is looking into potential conflicts of interest among the brokers, whose role is to arrange the best possible coverage for corporate clients at the best possible price. "This is a new round of subpoenas,'' the investigator said of those to the major insurance companies, which he said were delivered to the insurers early last week. "It's all part of the same investigation into the insurance brokers,'' he said to the paper.
Sandler O'Neill notes that Netbank reported April operating statistics yesterday, where total mortgage production increased 15.4% to $1.5 billion, however mortgage sales totaled $826 million (down 48% from the prior month) and nonconforming production was up 9.2% from March, but sales were down 4.2%. While management had initially expected 2nd quarter results to be comparable to 1st quarter. The firm says the company stated that "pricing pressure in the conforming mortgage operation and servicing net hedge performance pose additional downside risk." Firm says their 2nd quarter estimate of $0.19 is below consensus of $0.20, and says this announcement reinforces their view that NTBK's transition period could last longer than anticipated. The firm now believes that NTBK could report soft results for what will be the third quarter in a row (firm had previously thought it could be a one or two qtr phenomenon). Maintains Hold rating and $11 target.
April data indicates that Fannie Mae's retained portfolio did not grow (-$430 mil.) for the seventh month in a row. Although purchases improved ($26 billion vs. $20 billion in March), liquidations also increased offsetting the higher business volume. The decline in the retained portfolio was expected. Purchase spreads still remain relatively unattractive. Purchase commitments entered into in April were similar to March ($29.4 billion versus $28.9 billion). About $23 billion remain outstanding, suggesting that the portfolio won't grow again in May, though on the trend in
liquidations. Analysts are still optimistic that higher interest rates and interest rate volatility will result in better purchase opportunities for FNM in the months ahead. Combined with lower liquidation rates, this should lead to some retained portfolio growth. An $8.05 EPS estimate does not assume any retained portfolio growth in 2nd quarter, but does assume an improvement in the second half. Fannie's MBS portfolio grew only slightly in April (1.6% annualized) which reflects the spike in the liquidation rate (36% vs. 27% in March) that typically occurs before an increase in new issuance. Expect balances to grow more in May. FNM's duration gap widened to 3 months from 0 in March, though remained within the company's targeted range. The company also reported a slight increase in sensitivity to a 50bp rate shock and less to a 25bp shock. We don't consider these changes significant. Higher rates should create bigger problems for other mortgage investors, eventually providing FNM with improved purchase opportunities.
MBNA reported monthly managed data for April this morning in an 8-K filing. The managed loan portfolio declined, partly reflecting the appreciation of the US dollar against the UK Pound and the Canadian Dollar. The decline was also due to the decreased used of teaser rates on balance transfer offers. Credit quality continued to improve in April. The managed loan portfolio fell by $1.17 billion in April from the end of March (1% decline) to $116.4 billion.
We estimate that the strengthening of the US Dollar versus the UK Pound and the Canadian Dollar, reduced managed loans by about $815 million. However, even without the impact of the stronger dollar, estimate that managed loans would have declined by 30 bp in April. The company indicated that the decline in managed loans is at least partly due to its reduced use of teaser rate balance transfer offers. Fewer teaser rate offers should help the net interest margin, providing some offset to slower loan growth. Analysts have not yet revised our estimate that managed loans will grow by about 9% in 2004. In April, the managed chargeoff rate decreased to 4.88% from 4.98% in March. The credit card chargeoff declined by 9 bp to 4.69% and the consumer loan chargeoff rate decreased by 27 bp to 6.01%. The managed delinquency rate fell by 7 bp to 4.20%, with similar declines in the card and consumer loan portfolios. While loan balances at the end of April were lower than we had anticipated (credit card loans declined by about $200 million, adjusting for currency during the month), we are maintaining our EPS estimates, rating and price target.
Oil & Gas . . . Merrill Lynch upgrades BJ Services to Buy from Neutral, citing the recent pullback in the stock and their view that the company's outlook continues to improve. The firm believes that the company's leverage to global natural gas markets positions it for above average growth in 2004-05, and notes that global natural gas demand is growing faster than oil demand as producers seek to monetize natural gas resources around the world. Target is $50.
The WSJ reports the Pentagon says it has suspended nearly $160 mln in payments to Halliburton as part of a lingering dispute over the charge for feeding U.S. troops and other personnel in Iraq. The suspension, which Defense Department officials said was necessary "to protect the Army's financial interests," could complicate the provisioning of troops in Iraq if it disrupts payments to Halliburton's many subcontractors who cook and serve about 300K meals a day. Some Defense officials suggested the financial cost to Halliburton's Kellogg Brown & Root unit could increase substantially as the two sides feud over the bills for feeding U.S. personnel.
Goldman Sachs upgrades their view of the Integrated Oil, E&P, R&M sector to Attractive from Neutral, as they see the potential for the stocks to rally 30-40% to peak valuations versus an estimated 10% trading downside risk. Although their 2004 EPS estimates are broadly in-line with consensus, their 2005 EPS estimates are approx 25% above consensus on average. The firm now sees the risks to their $30/bbl forecast for 2004 and 2005 as skewed to the upside given greater confidence in the sustainability of Chinese oil demand growth, demand elsewhere in Asia and the US, ongoing geopolitical turmoil, and generally tight supply; in terms of timing, firm no longer believes that a correction in oil prices to below $30/bbl is likely this spring.
Metals . . . Alcan Aluminium announced its intention to pursue a spin-off to its shareholders of substantially all of the rolled products businesses held by Alcan prior to its acquisition of Pechiney. The proposed distribution will create the world's largest aluminum rolled products company.
Paper . . . Goldman Sachs reiterates its Attractive sector view of the paper stocks as recent data points and conversations support the view that the cyclical upturn in papers is underway. This view is based on: (1) April preliminary printing/writing paper shipments increased 5.2% Year/Year; (2) Pulp & Paper Week reported higher uncoated free sheet prices in May; and (3) participants (both buyers and sellers) at the Market Pulp Conference last week expect pulp and paper markets to tighten further in 2004. The firm continues to like DTC, SPP, and IP because of their leverage to paper and upside to peak value.
Transports . . . Air Tran Holdings finalized an agreement for six more Boeing 717 airplanes to be delivered in 2005. The six aircraft represent the exercise of four options and firm orders for two additional aircraft, and the announcement comes only a few weeks before AirTran Airways accepts delivery of the first of 100 new Boeing 737-700 aircraft. AAI already operates the youngest all-Boeing fleet in U.S., currently flying 76 Boeing 717s with an average age of three years.
Legg Mason says strong economic growth is combining with a strong freight market to create opportunities. The US freight market is strong across-the-board, as the Cass Freight Index (shipment volumes) is up 12.9%, year-over-year, in March, air cargo traffic comps are up domestically and internationally, railroad carload and intermodal container load traffic are both up over last year, West Coast port traffic is up double-digits, and the American Trucking Associations' truck tonnage index is up double-digits as well. The firm highlights some of its Buy recommendations: Heartland, JB Hunt, Knight Transportation, Old Dominion Freight, Burlington Northern.
Industrial Equipment . . . Deere reported earnings of $1.88 per share, $0.13 better than the consensus of $1.75. Revenues rose 43.6% year/year to $5.30 billion versus the $4.87 billion consensus. Company sees 3rd quarter sales growth of approximately 25-27% year/year.
Defense & Aerospace . . . TASER announced four significant orders for TASER conducted energy weapons. The three Florida orders include a purchase by the Tampa Police Department of 515 TASER X26 units; a purchase by the Hillsborough County Sheriff's Office of 500 TASER X26 units; and a purchase by the Pinellas County Sheriff's Office of 250 ADVANCED TASER M26 units. In addition, the Charlotte-Mecklenburg Police Department in North Carolina purchased 197 TASER X26 conducted energy weapons and accessories. The four purchase orders total over $1.2 million.
Northrop Grumman confirms 2004 and 2005 financial guidance today at its Annual Meeting of Stockholders. Consistent with previous guidance, the company expects 2004 sales of approx $28 billion and EPS from continuing operations are expected to range between $5.60-5.90 ($2.80-2.95 after two-for-one split) versus the consensus of $28.6 billion and $5.90, respectively. Net cash provided by operating activities for 2004 is expected to total approx $1.5 billion. For 2005, co expects sales of approx $30 billion ( consensus $30.6 billion), continued margin expansion and solid double-digit growth in EPS. The company expects 2005 cash provided by operations to be between $1.8-2.0 billion.
CE Unterberg comments on ID Systems' passing of a series of key tests administered by the FAA and TSA yesterday. The system is being used to control and secure ground service equipment in and around the Newark airport. With the test successfully completed, IDSY has now been granted additional funding for a more expanded rollout covering up to 150 fuel trucks, baggage carts, plane tugs and other Port Authority vehicles. With over 1 million ground service vehicles at US airports alone, this represents a potential market of over $2 billion. The firm believes that IDSY has established a meaningful lead in this market and is well positioned for further funding and rollout. The firm raises its target to $14.
Education . . . SunTrust Robinson Humphrey upgrades Corinthian Colleges to Neutral from Reduce based on their view that the unique risk associated with the company's high allied health enrollment is now more fully reflected in the stock price. Firm notes that the stock is trading at 19.9x their 2005 estimate, well below its peer average of 27.9x as well as its own 5-year average in the mid-twenties. While they believe the co will be negatively influenced by slowing demand in the health segment, they are still unsure of the timing and magnitude of this effect; also, COCO generates around half of its rev in non-healthcare segments that should have more of a positive leverage to the economy, and therefore the co may sustain rev and earnings growth over the next several quarters that is sufficient to support a P/E valuation in the upper-teens, even if there is some relative slowing in growth.
Food & Beverage . . . The Washington Post reports that the nation's appetite for low-carbohydrate foods seems bottomless, judging by the many low-carb products showing up in supermarkets and the new menu items at restaurants and fast-food chains. And when Krispy Kreme Doughnuts recently announced slowing sales, it put part of the blame on low-carb diets. Yet the mood at a recent Washington conference on the business was bleak. Sales of low-carb products have fallen sharply at independent and health food stores, and some longtime industry insiders say a shakeout has begun. "I do think now we're on the downside of the roller coaster, and there will be ups again, but not as high," said Dean Rotbart, executive editor of industry trade publication LowCarbiz, which organized the conference. Even as they rush to cash in on the craze, some major food manufacturers say they see the phenomenon cooling down and becoming one part of the broad market for weight-loss products. "It's kind of exploded, it's a trend, and then it becomes, really, a niche," said Michael E. Diegel, a spokesman for the Grocery Manufacturers of America Inc. "That's where it looks like it's going at this point." Curtis Price, co-owner with his brother and another partner of Whoa . . . That's Lo!, a low-carb store in Silver Spring, is typical of specialty retailers feeling the pinch, with sales off 15% to 20% in the past two months. "It reached a peak, and now it's trickling off, but it's going to eventually level out," he said. "
The WSJ's "Heard on the Street" column highlights Atkins and South Beach diet related stocks that many investors have picking up recently. According to the article, now many of these stocks have climbed too high in recent months. In fact, some co's benefiting from the popularity of the Atkins and South Beach diets are beginning to look risky, some say, especially if the stock market continues to experience weakness. "Many of these stocks are expensive, and while the earnings are great, expectations are going too high," says John Romero, who runs Aptus Partners LP hedge fund. "It's all a great story, and the momentum investors have been getting in, but they'll get right back out when the companies stop increasing their earnings guidance." According to the article, overpriced stocks include: Hormel Foods, Smithfield Foods, Tyson Foods, MGP Ingredients, Hansen Natural, Cal-Maine Foods and Lifeway Foods.
Retail . . . Home Depot reported earnings of $0.52 per share, ex items, $0.09 better than the consensus of $0.43. Revenues rose 16.2% year/year to $17.55 billion versus the $17.11 billion consensus. The company sees 2004 sales growth of 10-12%. The company also raised its 2004 EPS growth guidance from 7-11% to 10-14%. Excluding items company sees 2004 EPS growth of 13-16%.
Dick's Sporting Goods reported earnings of $0.21 per share, $0.03 better than the consensus of $0.18. Revenues rose 19.5% year/year to $364.2 million versus the $360.5 million consensus. The company sees 2nd quarter EPS of $0.33-0.34, excluding $0.01 charge for store relocation consensus is $0.36.
Barnes & Noble reported earnings of $0.17 per share, $0.05 better than the consensus of $0.12; revenues rose 22.5% year/year to $1.45 billion versus the $1.47 billion consensus. The company sees 2nd quarter EPS of $0.12-0.17 versus the consensus of $0.18. For 2004 the company sees EPS of $2.19-2.26 versus the consensus of $2.25.
Goldman Sachs upgrades Rite Aid to In-Line from Underperform, primarily based on improved valuation. The firm notes that the stock has declined 25% YTD (vs a flat performance for drug retailers and a slight decline for the S&P 500), and now trades at 7.7x their 2005 EBITDA estimate, which more accurately reflects stubbornly soft pharmacy productivity gains; with robust front-end sales and gross profits driving above-trend EBITDA growth, firm sees little additional downside in the stock, but says that as long as the comp script count remains anemic, the stock will likely tread water over the next several months.
The WSJ's "Ahead of the Tape" column highlights Kmart's stock, which gained 10% on the news of its 1st quarter earnings. The company reported net income of $93 million in the quarter, compared with a loss of $862 million last year and cash on hand went up from the prior quarter. But according to the article, this isn't proof that Kmart is back. The company swung to an operating profit of $165 million from a loss of $39 million last year. Those numbers underwent several adjustments for one-time events. Since the co wrote down its property in conjunction with the bankruptcy filing, it had depreciation and amortization of $7 million in the quarter, compared with $177 million a year earlier. If you add back the latter D&A figure to last year's loss, along with a $37 million charge for restructuring taken in that quarter, one gets a $175 million profit from operations. For this year, add the $7 million in D&A and take away $32 million in asset-sale gains to the most-recent quarter's figures, and operating income was $140 million, down from last year. Using those figures, Kmart shows a modest improvement in operating margin. But since it had significant clearance sales last year, there should be. It isn't as dramatic an improvement as it appears. Kmart is hunkering down, it is reducing ad spending, raising prices and cutting its sales personnel in stores. According to the article, that isn't exactly a tried-and-true recipe for retail success. Same-store sales fell 13% in the qrtr. Other bulls think that retail success isn't why the investment will work. They want management to milk the business for cash until it can sell its underlying real estate. However, the article suggests that strategy is even more uncertain.
Lowes reported 1st quarter 2004 EPS of $0.57 vs. $0.53 last year and estimates of $0.53. During 1st quarter 2004, total sales increased by 22.0% to $8.68 billion vs. $7.12 billion last year and estimates of an increase of 18.0% to $8.40 billion, with same-store sales of 9.9% vs. 0.1% a year ago, and our estimate of 6.0%. The 1st quarter 2004 average ticket increased by 8.7% to $62.56 from $57.57 a year ago, and customer count increased slightly more than 12% during the quarter. Higher year-over-year lumber and building materials prices positively impacted 1st quarter 2004 same-store sales by 175 bps. The sales performance for the quarter was well-balanced, with every region and product category delivering positive comps. Categories that performed above average in 1st quarter 2004 included millwork, lumber, rough electrical, outdoor power equipment, seasonal living and cabinets. In addition, the tool category reported same-store sales roughly inline with the company average during the quarter. Through the first 16 days of 2nd quarter 2004, LOW has experienced same-store sales that have exceeded its 6%-7% quarterly guidance range. In 1st quarter 2004, the gross margin increased 190 bps to 33.1% of sales vs. 31.2% last year and our estimate of a 120-bp increase to 32.4%. The improvement was due to better margin rates driven by lower inventory costs and a 5-bp reduction in inventory shrink. The gross margin improvement was partially offset by a 30-bp negative impact from product mix related to strength in the lower margin lumber category. There was a 300-bp increase in the 1st quarter 2004 operating expense ratio to 24.0% from 21.0% a year ago and our estimate for a 270-bp increase to 23.7%, driven primarily by the impact of the adoption of EITF 02-16, which had a negative effect of 355 bps. Offsetting this negative factor was leverage of occupancy and other operating and administrative expenses. In addition, 1st quarter 2004 SG&A includes $18MM (or 14 bps) related to LOW’s decision to expense stock options beginning in 1st quarter 2003. The 1st quarter 2004 operating margin decreased by 100 bps to 9.1% of sales vs. 10.1% a year ago and our estimate of a decrease of 130 bps to 8.8% of sales. During 1srt quarter 2004, LOW opened 29 new stores, and closed one, to end the quarter with 980 total stores in 45 states and 111.9MM sq. ft., which increased approximately 15.1% over last year’s 97.2MM sq. ft. During the quarter, LOW opened 8 new 94,000 sq. ft. format stores, bringing the total for the year to 40 stores. In addition, during the quarter, LOW opened stores in Tucson, AZ; Las Vegas, NV; Dallas, TX; and Brooklyn, NY. For 2Q04, LOW plans to open 19 new stores, including 2 relocations.
Restaurant . . . Barron's Online highlights Panera Bread, which lost 11% last Thursday following the company's latest quarterly earnings report. Despite a 26% rise in net income for the quarter, the company's management discussed margin pressure due to the rising costs of milk and butter. Management also warned of higher labor costs as the company opens more stores. "I see limited upside," says Mathew DiFrisco, an analyst with Harris Nesbitt Gerard. DiFrisco downgraded the stock from Outperform to Neutral on Panera's 1st quarter earnings news, citing factors including the lower productivity of new stores. According to the article, the stock is looking stale. Panera traded at 34.56 late Monday, 28% off its 52-week high. While its P/E ratio is below its long-term growth rate and below its median forward P/E of 32.3 for the last five years, it is trading at a P/B ratio of 5.1x for the last five years. That's above its median P/B of 1.6x for the same time period. And its forward P/E has fallen sharply from 33x to 27x, since Barron's Online first wrote skeptically about the stock in January.
Medical Devices . . . Boston Scientific announced clinical trial data supporting the safety and effectiveness of the Enteryx procedure in relieving the symptoms of gastroesophageal reflux disease (GERD) at 24 months post- treatment. David A. Johnson, M.D., Professor of Medicine, Chief of Gastroenterology at Eastern Virginia School of Medicine and the study's Principal Investigator, presented study findings Monday showing that 67% of the patients who were dependent on proton pump inhibitors (PPIs) prior to the Enteryx procedure were no longer using these medications two years after the procedure. An additional 5% (3/64) of the patients were able to reduce their dose of PPIs by at least 50%. "Data in this study suggests that GERD symptoms can be managed effectively and safely over a two-year period using the Enteryx procedure," said Dr. Johnson. "These results support the use of Enteryx as an attractive alternative to daily medications for the relief of GERD symptoms."
QLT Inc upgraded to Market Perform at Raymond James on valuation. Price target $26.
Drugs . . . Bentley Pharm announced that its Spanish subsidiary has been granted approval to market a generic equivalent of simvastatin in the U.K. through a company focused in the UK. According to IMS, the market size of this product in the UK is approx $480 million and growing at an annual rate of approx 30%.
Barron's highlights generic drug maker stock's, which have lost some steam lately. However, the article suggests there are several reasons why the sector now looks enticing. Verdicts in several patent litigation cases this year could open the door to new generic drugs in 2005. And several companies expect to reap rewards from partnerships with other drug makers. The proprietary drug businesses that many companies launched to diversify profits continue to grow, too. "I think people overreacted [to the sell-off]," says Jeffrey Long-McGie, an analyst with Think Equity. "I think we are still in a position where generic pharmaceutical companies have a lot of rev fuel in front of them." By 2006, 40 million Medicare recipients will receive prescription drug benefits, which should prove a boon for the industry. And generics replaced their brand-name equivalents in less than half of all new prescriptions written last year, leaving lots of room for growth. "The new product flow is the lifeblood of the industry. Without that, the core business is a declining business," says Adam Greene, an analyst with First Albany. According to the article, Watson Pharmaceuticals, for one, is well positioned. The nation's largest maker of oral contraceptives should launch 12 new generic drugs this year, including six "authorized generics" as part of agreements with name-brand drug makers. Watson has 28 to 29 "authorized generic opportunities" in its pipeline. The stock trades at just 16.4x projected earnings over the next four quarters compared with a historical median of 20.4x future earnings. Another potential winner is Andrx, which is successfully leveraging its expertise in developing time-release medications to generate higher profits and limit competition. "This way you see three or four competitors instead of twelve," says Mr Greene. This year, the co expects to launch 15 new generic drugs. At 25.53, shares of Andrx trade at only 19.5x projected earnings over the next four quarters, compared to a historic median of 25.1x.
Biotech . . . Gilead Sciences granted priority FDA review for a New Drug Application for the fixed dose co-formulation of the company's anti-HIV medications Viread and Emtriva. Gilead submitted its application to the FDA on March 12, 2004 and had anticipated a decision by January 12, 2005 based on a 10-month traditional review. Under priority review, the NDA will be reviewed within six months.
Gilead Sciences upped to Outperform from Market Perform at FBR. The firm notes that in two days there have been three important catalysts for Gilead: priority review of the Viread/Emtriva co-formulation, FDA easing of requirements needed to bring co-formulations of approved HIV drugs to market, and an imminent deal with Bristol Myers that should make Gilead benefit preferentially from this FDA change of heart. Firm's price target goes to $80 from $59.
Genencor has manufactured research sample quantities of enzymes that will neutralize sarin gas and certain other organophosphate-based nerve agents. The company is providing samples to formulators for development into sprays, foams and detergents for use by military and civilian first responders, such as firefighters, police and hazardous material response teams. The enzymes were developed in collaboration with the U.S. Army Edgewood Chemical Biological Center.
Media . . . First Albany initiates NetFlix with a Buy and $36 target. The firm estimates that DVDs were in 58% of all US households, up dramatically from just 13% in 2000. This migration to the DVD format has fueled an 83% CAGR in DVD rentals over the last 3 years. While competitors such as Wal-Mart and Blockbuster could never be dismissed entirely, the competitive bar in the on-line subscription rental market has been raised, as Netflix expands its brand and gains consumer mind-share. As a result, the firm believes on-line subscription rental will be a one-company market.
First Albany initiates Ask Jeeves with a Neutral and $40 target. The firm is not convinced that Ask Jeeves can sustain its recent share gains, particularly as the larger destinations have substantially more resources to invest in both product and marketing initiatives. As a result, over the long run, the firm expects market share to consolidate around the three largest destinations: Yahoo!, MSN, and Google. In addition, the firm is wary of Ask Jeeves' reliance on a competitor-Google (about 70% of 1st quarter revenues)-and expect the economics of traffic acquisition to rationalize over time.
Piper Jaffray comments on the potential impact of Microsoft's Janus Technology on Apple's iPod. While Janus will begin to be integrated into subscription music services in 2nd half 2004, the firm does not expect Apple's iTunes or iPod revenue to be significantly impacted in the next several quarters. However, long term (late 2005, into 2006), Janus will gain momentum. The firm expects the inflection point in the portable device market to be when 20GB devices are available in the $150 range, possibly toward the end of CY05. Microsoft unveiled its Janus technology on 5/2. The firm expects services, such as Napster , to have Janus enabled offerings by the end of 2004.
Morgan Stanley upgrades Univision to Overweight from Underweight; firm cites valuation (stock has almost 20% upside to their $36 target), as well as their expectation that the Spanish language upfront should benefit from CPM pricing levels established by general market trends, and since UVN's rating share may stabilize in 2005, firm believes another 15%+ upfront is possible in deals completed in June through August.
Telecom . . . Nextel’s CFO Paul Saleh and CTO Barry West discussed the current issues and business environment facing Nextel. Investors’ main focus continues to be the Consensus Plan outcome with the FCC (potentially resolved this or next month), despite Nextel’s continued strong fundamentals. Nextel management displayed no apprehension toward customer growth or cash flow guidance, and seemed upbeat overall despite the stock weakness. The company stated that it has not been loosening credit standards, rather tightening restrictions on some credit classes. Nextel reiterated its stance against receiving 2.1GHz spectrum as another comment period and incumbent competitors could delay a transition. Investors seemed to worry about not only the potential swap outcome but also its impact on FCF. Specifically, how much for the swap and when to pay it, and then Nextel’s future technology path and expense. Nextel views the Flarion technology as more flexible and superior to CDMA EVDO at present, offering cost advantages and a 2-year lead time. Though still in early stages, the trials are providing valuable
information regarding usage, value to price proposition and customer market segmentation. 30% of subs are “mobile” users, hitting at least 7 cell sites per day. Despite the excitement with Nextel’s performance and FCF generation, the spectrum swap overhang cannot be overlooked. Analysts do not see a consensus building and believe a conclusion this month is unlikely. Given investors’ obvious focus on the swap and technology path we believe the stock will remain range bound until there is additional clarity.
Expect Vodafone to report a solid set of 2004 results with consolidated revenues of up 10.6% to £33.6 billion (consensus £33.5bn), and EBITDA up 15.3% to £12.8 billion (consensus £12.7bn), equating to a margin of 38.1%. Analysts forecast clean EPS of up 34.5% to 9.16p share, ahead of consensus of 9.0p. Lower capital expenditure, combined with growth in operating income and a
bumper dividend stream from SFR, should result in March 2004 cashflow of up 45.0% to £7,498 million, in line with Vodafone’s guidance of at least £7 billion. Lower net debt, but affected by acquisitions. Analysts forecast net debt of £9,373 million at March 2004, down from £13,839 million in March 2003. However, the proceeds from the sale of the Japan Telecom fixed line business were more than offset by the acquisition of the UK service providers, the minorities in Telecel and Panafon and the share buyback. Investors will focus on Vodafone’s use of cashflow,
M&A strategy, the progress of the Japanese business and an update on the UMTS launch. An update on guidance for the year to March 2005 (currently: high single digit revenue and subs growth, mobile margins flat to modestly ahead and capex of around £5bn) will also be closely watched. Seven potential catalysts could close the valuation discount. Consensus forecasts for March 2005 look too low; concerns about bidding for Verizon appear misplaced; France is unlikely to be a near term event; expansion is possible but impediments likely to limit activity; the buyback could be extended; Japan needs to be put into context and the network advantage of 3G will become more apparent.
IT Services . . . IBM and Cisco Systems said they will launch a joint services and product offering aimed at corporations who buy telephone services over the Internet. IBM said it would jointly market its consulting services with Cisco's voice, video and conference solutions because it wants to help develop the nascent market. IBM said that both companies will make significant investments in the area, which is seeing increasing demand from medium and large-sized corporations, according to IBM's Don Fitzpatrick, vice president of Cisco strategic alliances. "We think we have hit that inflection point. We think it's taking off," Fitzpatrick said. "We think it's a significant opportunity." The companies also will also work on making their future products and technologies in this area work better together
Network Equipment . . . The WSJ reports that a portion of the Cisco Systems software that runs most of the networking equipment on the Internet was apparently stolen and published on the Web. The apparent theft might allow hackers to exploit weaknesses in the code and could embarrass Cisco, which has a growing business helping other co's fend off cyberthreats. A Russian computer-security Web site published two snippets of software code and said they were a small portion of the 800 megabytes of code that had been stolen. According to the article, security experts said publication of the code wasn't an immediate security threat. Still, they said hackers might study the code for flaws that would allow them to disrupt or disable Cisco routers, which could have a big impact on the Internet.
Lucent awarded contracts worth more than $120 million by China Unicom for further CDMA network expansion.
ThinkEquity upgrades Packeteer to Overweight from Equal-Weight and maintains their $18 target; firm says channel checks indicate that Q2 demand remains solid, and they say their contacts have also indicated that system integrators are starting to design WAN optimization products into new network deployments and, while early, this would be a major catalyst for this space; firm also says longer-term trends (system integrator interest and strategic partnerships) will keep the momentum going in 2005.
Semiconductors . . . Amtech comments that overnight the European Patent Office released the specifics behind their decision to revoke one of Rambus' patents in February. In layman's terms, the patent was revoked because of lack of inventiveness on this particular patent. While Amtech had previously marginalized the impact of the EPO on US litigation (and continues to believe so), the rationale for revoking one of the top 4-5 patents is perhaps troublesome and ominous for RMBS. Firm maintains Hold rating.
Software . . . UBS upgrades THQ Interactive to Buy from Neutral and raises their target to $26 from $21. The think the multiple can expand throughout the year due to a better balance sheet and product lineup. The firm thinks the company's product portfolio is materially better than last year, as it has a solid kids and wrestling biz (about 65% of revs are existing brands) and they think its action-oriented games are much improved, which gives the co a well-rounded portfolio to hit all segments of the market.
Wind River reported a loss of $0.02 per share, $0.01 better than the consensus of ($0.03). Revenues rose 8.9% year/year to $52.8 million versus the $50.2 million consensus. The company sees 2nd quarter non-GAAP loss of $0.01-0.03 versus consensus of ($0.03) on revenues of $53-55 million consensus $51.2 million.
Check Point Software announces that Check Point Next Generation with Application Intelligence has passed rigorous testing to achieve the National Institute of Standards and Technology Federal Information Processing Standard (FIPS) 140-2 Level 2 certification and meets the cryptographic requirements of the US govt's National Security Telecom and Information Systems Security Policy (NSTISSP) Number 11. NIST's Cryptographic Module Validation Program (CMPV) provides module and algorithm testing for FIPS 140-2, which is a standard that applies to federal agencies using validated cryptographic modules to protect highly sensitive government data in computer and telecom systems.
Piper Jaffray thinks April video game sales tracked in-line and earnings estimates for April QuarterQ are achievable for videogame retailers. ELBO and GME are well-positioned to benefit from near-term industry catalysts including recent hardware price cuts (Xbox to $149 on 3/29 and PS2 to $149 on 5/11) and the launch of highly-anticipated video game properties such as Spiderman, Shrek, and Harry Potter.
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