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Tuesday, June 01, 2004 6:49:54 PM
U.S. stocks rose, led by energy companies including Exxon Mobil as the price of crude oil surged to a record in the wake of terrorist attacks in Saudi Arabia, the world's largest oil exporter. Transportation stocks such as Delta Air Lines, whose fuel costs rise with the increase in oil prices, slumped. The S&P 500 Index gained 0.52 points (+0.1%) to 1121. The DJIA advanced 14 points (+0.1%) to 10,202. The Nasdaq added 4 points (+0.2%) to 1990. The index climbed for a seventh day, its longest rally since Sept. 4. About 15 stocks rose for every 14 that fell on the NYSE. Some 1.2 billion shares changed hands on the Big Board, 17 percent less than this year's daily average and the fourth straight day of below-average trading. Friday's employment report may show the economy added 225,000 jobs in May, according to economists surveyed by Bloomberg News. A reading higher than that may spark concern that the central bank will raise its target interest rate more quickly than expected to keep inflation in check, Coolidge said.
Strong Sectors: internet, biotech, oil services, transportation, healthcare facilities, coal
Weak Sectors: REIT, gold, broker/dealer, personal & household products, airline
Top Stories . . . Crude oil rose the most in five months after the killing of 22 foreign workers in Saudi Arabia Saturday raised concern that attacks on the infrastructure of the world's largest oil exporter might disrupt supplies.
Viacom President Mel Karmazin unexpectedly resigned from the third-largest U.S. media company after three years of tension between him and Chief Executive Officer Sumner Redstone.
A gauge of U.S. manufacturing unexpectedly rose last month, close to a two-decade high, as increased demand prompted more factories to hire than at any time in 31 years, an industry report showed.
Boston Scientific, the world's largest maker of heart stents, agreed to buy closely held Advanced Bionics for about $740 million in cash to add products that treat neurological disorders.
Anheuser-Busch., the world's biggest beermaker, raised its stake in Harbin Brewery Group, setting up a bidding contest with SABMiller Plc for China's oldest brewer.
Quotes of Note . . . ``Higher sustainable oil prices would be favorable for companies in the energy sector. Spending on oil services and equipment would have to increase.'' Brett Gallagher, who helps manage $9 billion as head of U.S. equities at Julius Baer Investment Management.
``The stronger-than-expected economic data we saw earlier today have enabled the markets to shrug off the higher oil prices.'' Todd Clark, head of listed trading at Wells Fargo Securities.
``We're sort of in waiting mode. There's no real impetus to go out there and sell or buy.''' Peter Coolidge, a money manager with Deltec Asset Management.
Gurus . . . On the Rukeyser Show, panelist recommendations for Comcast, Prudential, Johnson & Johnson, ExxonMobil, Microsoft, Alcoa, Ingersoll Rand, and Dow Chemical. Guest John Rogers of Ariel Capital favors Northern Trust, Markel, and St. Paul. He likes Rouse for yield, and recently sold Kroger and SafeWay.
Stan Druckmeiler, who runs Duquesne Capital, says the most striking domestic economic development has been the enhancement of corporate profitability, and the generation of free cash flow. He tells CNBC that over the painful corrective period, corporations went from a debt position, to a $250 billion surplus. He sees the Stock Market in a cyclical trading range. He feels the unraveling of the "carry trade," based on 1.0% money, has been largely completed, so that the actual Fed funds rate boost should not be that punitive. And, while he does not see the price of oil soaring higher, he does believe a new floor has been created above $30.00. His favorite market is Japan, which he feels has entered a secular bull market after 13 years, with cash flow improving, and costs under control.
Byron Wien, strategist for Morgan Stanley, says the S&P 500, up just 1.0% this year, could finish 2004 near 1300, 15.0% above current levels. He does not see why the S&P 500 can't trade at 20 times 2004 operating earnings in an environment of relatively benign inflation and interest rates.
Bear Stearns economist David Malpass believes acceleration in the global economy is still being underestimated, which has positive implications for growth in corporate profits. He noted that wages, readings on the quality and quantity of jobs and small business income are all reaching all-times highs. Of the 30 "major" countries he looked at, 23 are expected to post growth of 8 percent in 2004 in dollar terms.
Smith Barney equity strategist Tobias Levkovich believes a summer decline in stocks is more probable than expectations among traders of a summer rally, as the recent focus on day-to-day newsflow will be more of a distraction that an investment style. He believe there will be a "V-shaped" trading pattern over the next 6 to 9 months, as a sharp pullback over the next few months is followed by a rally starting in late 2004 and into 2005. Levkovich believes a defensive approach to stocks is appropriate for the time being, but that should shift to a more aggressive stance by the fourth quarter.
Dividend Achievers . . . Barron's highlights companies, which recently increased their stock dividends. With a record-setting quarter tucked in its tool-belt, Home Depot is remodeling its dividend again. The world's No.1 home-improvement retailer hiked its quarterly common payout on Wednesday to 8.5 cents a share, from 7 cents. Additionally, directors cleared another $1 billion for stock repurchases; not including a 20-cent-a-share special dividend it paid in March. Charter Financial now sports a 3% yield, following its 25% dividend hike last Wednesday; One of the nation's biggest food wholesalers, Supervalu, last Wednesday raised its quarerly to 15.25 cents a share from 14.5 cents. That marked the 33rd consecutive year in which it has boosted its payout; citing its stronger earnings and cash flow, Western Gas Resources announced last Monday a 2-for-1 stock split and said it will maintain its nickel dividend on the greater number of shares outstanding after the split, in effect doubling its payout. In a seperate article, Barron's highlights European dividend plays Allianz, Bayer, Credit Suisse and Serono favorably. In addition, the article also suggests Alcatel, Bayer, Credit Suisse Group are probably overvalued dividend plays.
How to buy cheap stocks . . . Barron's highlights M&A strategy for long term investors. A favorite fantasy of many short-term investors is to identify the target co before a deal is publicly disclosed, then sell the shares after they climb on the announcement. But, alas, trying to anticipate which company will attract an offer is usually a fool's game and attempted deals sometimes fizzle. But there's another way to profit in the corporate-marriage game. When merger attempts are terminated, the target's shares usually face sharp, prolonged downturns as they come under selling pressure from short-term investors. This can create opportunities for patient investors. Of course, like all investment strategies, betting on the targets of broken deals isn't foolproof. Barron's suggests that investors shouldn't blindly buy every broken-deal target. As with any investment, they shouldn't make a decision without examining factors such as management quality, the company's operating performance and the state of its industry. But busted deals are clearly worth a look. Shares of PeopleSoft, for example, may sell off if Oracle's longstanding hostile bid, now valued at $21 a share, collapses. The Justice Department has filed a suit seeking to bar the linkup, which it deems anticompetitive, and most observers expect the takeover effort to fail. If the bid fails, and PeopleSoft shares do indeed swoon, that might create a nice opportunity, article suggests. Based on its 1st quarter results, PeopleSoft is generating positive cash flow, and its balance sheet is strong, with net liquid assets of $1.6 billion and no long-term debt.
Next Big Tech-Wave . . . Barron's highlights RFID technology, which tracks goods from every stage of production to consumers' shopping carts, suggesting it has the potential to rev up the economy, perhaps even more than the Internet or PC's. "That's where all the action is," says Lyle Ginsburg, managing partner of technology innovation at consulting firm Accenture. "The world keeps getting smaller and faster and more competitive, and the need for more information is king." Certainly, RFID is becoming one of the single biggest drivers of tech spending, according to William Whyman, co-founder and president of the Precursor Group, a technology and telecom research firm. And, in no small part, that is because two of the largest organizations on the planet, Wal-Mart Stores and the Defense Department, have seen the future and decided it includes RFID. Also other company's around the globe are quietly moving ahead with their own programs, including Metro, Tesco, Target and Boeing. As a result, RFID is expected to be a $4.6 billion market by 2007, up from $1.03 billion at the end of 2003, according to market-research firm Venture Development and brokerage house Robert W. Baird. Reik Read, a Baird supply-chain analyst, thinks that estimates could prove conservative as pilot programs and adoption mandates expand. According to the article, about 30 company's are playing an active role in the RFID market, including Accenture, Capgemini, Philips Electronics, Texas Instruments, Infineon, IBM, SAP, Sun Microsystems, Manugistics, Alien Technology, Matrics and VeriSign. In addition, as the technology becomes more pervasive, look for data-management and server-and-storage companies such as EMC, Hewlett-Packard and Network Appliance to benefit. Baird's Read is recommending Zebra Technologies, which makes printers and encoders for the RFID market; Unova, whose Intermec unit is a leader in data collection and wireless networking in the warehousing and distribution industry; and Manhattan Associates, another major warehouse-management-system co, as company's likely to profit in this early phase. Longer-term, Mr Read likes the positioning of Symbol Technologies, Accenture, Manugistics and SAP. Bear Stearns' supply-chain research team also likes Manhattan Associates, Zebra and Unova as well as Tibco Software, which writes computer programs that link trading partners with real-time data.
U.S. Income Growth Surges . . . One of the most tenacious underestimates of the U.S. economy relates to concerns about the U.S. consumer. I disagree with the view that the consumer will slump. The factors adding to personal disposable income heavily outweigh (by roughly 3:1) the increased cost of gasoline, the increase in mortgage rates, the reduction in mortgage refinancings and the wind-down of tax rebates
and tax refunds.
• The aggregate data shows that the household sector is strong in terms of assets, income from assets, income from labor and the resulting increases in saving. This explains the steady growth in consumption and the likely sustainability of that growth into 2005.
• There is a severe underestimate of the U.S. personal savings rate -- the monthly savings data excludes income from assets and the related buildup of liquid assets to record levels. As a result, the U.S. household sector is a big net creditor and will benefit on average from the coming interest rate hikes.
• Some leveraged households will be squeezed by debt, inflation and rising interest rates, but the great majority of households will benefit unde a durable expansion, mild inflation, rising interest rates. In the aggregate, the squeeze will be more than offset by hiring, increased interest income from liquid assets, and income growth.
Personal disposable income will continue to exceed expectations, powered by relatively high wages, the improvement in the quality and quantity of jobs, and the growth benefits from the 2003 income tax cut.
• Data released May 28 showed that personal income grew 0.6% in April. This brings year-over-year growth in personal income to 5.7%.
• The first-quarter GDP report released May 27 provided a strong upward revision to wage and salary income. While the exact details will be released later, the revision is due to changes in hours worked, the number of jobs, and/or the wage level. The revision reflects an improving job situation, an important driver in the ongoing U.S. economic acceleration. The upward revision to wages and salaries will probably result in an upward revision in the payroll survey of employment, bringing it more into line with the stronger picture in the household survey.
• While much attention, both positive and negative, has been focused on the major records being set in corporate profits, income in smaller businesses is also growing fast. Non-farm proprietors’ income increased 11.3% in the year through April. This nearly matches the peak growth rate in the late 1990s.
Eco Speak . . . Fueled by low interest rates, U.S. construction spending surged to a record high level in April after rising faster than previously estimated in March. Construction spending rose 1.3 percent in April to a record $970.4 billion. Economists had forecast a 0.4 percent rise in the month. In March, construction spending rose a revised 2.4 percent after the department initially estimated a 1.5 percent gain. Residential construction spending rose 1.2 percent to $520.7 billion in April. Public construction spending rose 1.7 percent in the month to a record $230.5 billion.
Factory activity in the United States accelerated in May from its already high level, the Institute for Supply Management reported Tuesday. The ISM index rose to 62.8 percent in May from 62.4 percent in April. This is the seventh month in a row that the index has been above 60. The increase was unexpected. The consensus forecast of estimates collected by CBS Marketwatch was for the index to fall slightly to 62.0. Readings above 50 indicate expansion. New orders fell to 62.8 in May from 65.0 in April. The employment index rose to 61.9 in May from 57.8.
Financials . . . Merrill Lynch downgrades Chicago Mercantile to Neutral from Buy based on valuation, as the stock is nearing their $132 target, and is up 370% from its Dec 2002 IPO. The firm also notes that there is also potential selling pressure arising from the lock-up period ending June 4, as 19 million shares (over half of shares outstanding) will be available for potential sale.
Jefferies upgrades Providian to Buy from Hold and raises their target to $16 from $12. The firm says that the company's recent delinquency trends indicate that the co will experience much greater loss rate improvement over the next 12 months than firm had anticipated, and they are increasingly confident that the company's net interest margin will remain relatively stable at or near current levels, easing concerns that its ongoing portfolio transition will erode profitability. In addition, based upon increased marketing spending in 1st quarter and a number of new marketing partnerships, firm believes that the company's asset generation platform is gaining strength.
Homebuilders . . . UBS says positive news and the sell off in homebuilders has reawakened investor interest in homebuilders. Positive media attention on the builders has accelerated, with news articles highlighting the sustainability of demand and EPS power. While this positive attention is a welcome relief from 'bubble' reports, the highlighted changes are not new, but have evolved over the last 10 years. Favorable demographic trends and a sophisticated mortgage market are contributing to robust, steady demand. This, combined with supply constraints and record low inventories, should result in steady EPS growth and continued margin expansion. Positive news flow along with a 30% dip in the stocks appears to be peaking investors interest. Also, short interest is bottoming at just 4 days.
Barron's cover story discusses the housing market, which has been booming lately. In the late 1990s, the baby-boom generation, 80 million strong, entered its peak earning years. "More and more, we see baby boomers 'buying up' for retirement and also purchasing second homes," says Jim Gillespie, president and CEO of Coldwell Banker Real Estate, a subsidiary of Cendant. "Generally, boomers have more wealth than previous generations. They have built up tremendous equity in their homes and are using inheritances left by their parents to purchase second and even third homes." In discussion, how to buy own piece of paradise, the following company's are mentioned positively: Cendant, Starwood Hotels & Resorts, Four Seasons, Sonesta and Hilton Hotels.
Energy . . . Barron's highlights the windmill and solar panel market, as big corporations are starting to plow billions into the field. Giants such as General Electric and Royal Dutch/Shell have jumped into the manufacturing end of the business, while wind farms are finding equity financing from the likes of FPL Energy, a unit of Florida's FPL Group; PPM Energy, a unit of Scottish Power; and the Zilkha family of Texas. "We're in [the wind business] because we think we can make money at it," says Terry Hudgens, CEO of PPM Energy, Scottish Power's U.S. subsidiary. "The convergence of the lower cost to produce wind power along with higher price of natural gas [used to power utilities] has made wind economically attractive." Indeed, the surging prices of oil and natural gas this year have added real urgency to the effort -- and raised the stakes for everyone from state governments to private investors. Right now, there are no direct plays on the industry for individual investors, but opportunities are sure to arise as the industry moves to fund its expansion. There is no question that wind- and sun-generated electricity is gaining ground. Last year alone, new windmills boosted total wind-energy production by 36%, to almost 6,400 megawatts. Likewise, the total U.S. capacity of solar power jumped 21%, to 218 megawatts. Though wind and sun power still account for less than 3% of all electricity produced in the U.S., the new markets should keep growing at a blistering pace. Some consultants figure that wind and solar each will grow 20% annually for the next 5 to 10 years. One of the largest projects in limbo is a 310-megawatt wind farm planned for Iowa by MidAmerican Energy, a unit of Berkshire Hathaway and the latest entrant into the market. The company had expected to start the $323 million project this year, but it will put construction on hold until the tax credit passes, says Jack Alexander, senior vice president of supply and marketing at MidAmerican.
Oil & Gas . . . Refining margins declined 21% on the West Coast to $20.63/bbl, due to lower product prices. Gasoline and diesel prices on the West Coast fell 15 cents per gallon and 10 cents per gallon, respectively, an 8% decrease for both products. Elsewhere, refining margins fell 2% on the East Coast and 8% in the Midwest. Refining margins were up 0.2% on the Gulf Coast. Tanker traffic is reportedly high for European gasoline imports. Exports from West African reportedly have increased as well. While overall gasoline imports in 2004 have lagged 2003 levels by 6%, we believe the current arbitrage spread will attract more imports. The arbitrage spread for May has averaged 4.3 cents per gallon, verses 0.5 cents per gallon in April and -2 cents
per gallon in May during the last five years. Expect gasoline imports to increase significantly in June. Earlier this week, analysts indicated that refining margins have reached record levels but that these margins may be “as good as it gets.” Findings show that seasonally adjusted demand tends to be elastic when retail prices exceed $1.75 per gallon. Nationwide average gasoline prices are at $2.06 per gallon. As expected, gasoline conservation efforts are starting to make headlines. Expect demand to dampen at the same time that supplies increase, resulting in an inventory build.
Transports . . . UPS upped to Hold from Sell at AG Edwards. The upgrade is based upon on firm's bullish outlook for the economy. AG Edwards continues to have two basic long-term reservations about UPS's stock. One of those is based in the company's inability to improve its Return on Invested Capital (ROIC) and the other is a reflection of firm's view on the valuation. Hence, firm doesn't believe it warrants a Buy rating. That said, AG Edwards sees an extremely robust surge in the U.S. economy unfolding, as the manufacturing sector rebounds with unpredicted vigor.
Retail . . . AmTech downgraded EBAY to Hold from Buy based on the following factors: 1) stock has reached their $86 target, and is trading at the highest forward multiple since July 2002; 2) firm doesn't see as much upside to the June qtr versus the March quarter, yet they see the 8% intra-qtr rise in EBAY is an expectation of significant June qtr upside; 3) typical weak seasonality in the June and Sept quarters; 4) lack of positive near-term catalysts; and 5) positive sentiment.
The WSJ reports that a new law will throw China's retail and distribution sectors wide open to foreign investors, and probably lead to faster growth in an already rapidly expanding area of the economy. The law, which was issued in April and goes into effect today, removes both longstanding restrictions and the threat of recently proposed measures to further hamper foreign investment. Beginning in December, foreign retailers can do business without Chinese partners and set up stores anywhere in the country. The law removes prohibitive asset and sales requirements that had barred all but the world's largest retail chains from entering China, and it loosens an earlier rule that all store openings needed approval from the central government. While the law merely puts into effect China's promises to the World Trade Organization, under which Beijing agreed to open its retail and distribution sector within three years of joining the global trade body, it is particularly welcome to foreign investors, since it runs counter to recent protectionist calls by Chinese retailers and some officials. "It will increase the speed of expansion of the big retailers," says Li Fei, a professor at Tsinghua University's School of Economics and Management who was involved in drafting the new law. In recent years, global chains like Wal-Mart Stores and France's Carrefour SA have expanded aggressively in China. Local retailers had lobbied heavily for protection from the onslaught.
The WSJ's "Ahead of the Tape" column highlights Kmart Holdings, which has been a public company for over a year, but you couldn't tell that from the companies actions. Instead, Eddie Lampert, the Kmart Holding chairman and hedge-fund manager who controls a majority of the stock in the retailer, continues to run the co as he does his hedge fund, very quietly. Kmart has yet to hold a conference call for analysts and investors after its quarterly financial reports. It doesn't even deign to prerecord a call from executives about the quarter, as Wal-Mart Stores does. Kmart hasn't yet held an analyst or investor day to discuss its strategy and has no plans to hold one soon. It hasn't attended investor conferences or put up a tent at any dog-and-pony shows. Unlike the vast majority of retailers, it doesn't issue weekly or monthly sales updates. And last week, the co turned away some non-shareholders and interested potential investors from its annual meeting. Kmart has the right to a grace period as a re-emerged public co to hunker down and operate the business. Moreover, it's typical practice for a co to let only shareholders into an annual meeting, but this was hardly the run-of-the-mill annual meeting attended mostly by 72-year-old retirees. This was the only opportunity so far to hear from top Kmart executives and owners about their strategy. Article suggests that Kmart could have made an exception to normal practice. Kmart seems to be adopting the Berkshire Hathaway model of investor relations, hoping to let the financials and the stock price speak for them. It hardly needs mentioning that there are fairly significant differences between Berkshire and Kmart. Nevertheless, investors, like people everywhere, tend to find reticence charming and imbue strong and silent types with all sorts of talents.
Healthcare . . . Merrill Lynch adds Caremark Rx to their Focus 1 List and reiterates their $40 target. The firm believes that CMX is well-positioned as the leading PBM, with substantial scale and expertise across a broad array of product lines. The firm also notes that the company is either the number one or two PBM in every major business category, and given the winning of the FEP contract is quickly closing the gap with the market leader in the all-important mail segment.
Medical Devices . . . Barron's highlights Cyberonics, whose request to sell an implantable pacemaker for treating people who suffer depression will be voted on June 15 at a panel of FDA advisers. The submission by Cyberonics is a first for the FDA, because the agency has never before evaluated a device for a psychiatric illness. People with drug-resistant depression are in the first group that researchers are trying to help with devices like Cyberonics'. But FDA approval is far from assured for the pioneering Cyberonics device. The FDA knows its first psychiatric-device approval will set standards for all that follow, so some of the agency's top brass have been scrutinizing Cyberonics' depression studies. Experts in psychiatry and neurology have criticized the Cyberonics' studies as poorly designed and executed, with the resulting data, consequently, offering insufficient grounds for subjecting millions of patients to surgical implantation of the company's device. One leader of Cyberonics' studies was Dr. Mark George, a psychiatry and neurology researcher at the Medical University of South Carolina. In a Thursday conference call, Mr George acknowledged that the Cyberonics implant hadn't proved to be "a home run" in its depression trial, but he argued that it indeed works. He predicted that the plight of patients with hard-to-treat depression would move the FDA to approve the device anyway, perhaps with a requirement for post-approval studies. "There is intense pressure from the mental-health advocates to allow this to go out," Mr George said of the antidepressant implant. According to the article, Cyberonics might not be the trustiest steward of a post-approval study. An accomplished neurologist says he put a stop to the company's data collection in a post-approval study on epilepsy when he found that a Cyberonics salesman had pulled patients' charts and was himself rating the patients' progress. The company's aggressiveness has antagonized some neurologists, who say the co has an extreme style of direct-to-consumer marketing, in which salespeople have met directly with families of people with epilepsy.
CSFB downgrades Guidant to Neutral from Outperform after the co announced that it identified issues with the stent platform for its Champion drug-eluting stent; if the issue can be addressed with only a manufacturing change, firm says the company's timetable will likely remain intact, however firm assigns this scenario just a 25% probability, with the more likely outcome being a redesign that pushes Future IV back 6 months and FDA approval from 1H06 to late 2006. With GDT's internally developed drug-eluting stent (Spirit) on its best-in-class Vision stent slated for US launch in 1st quarter 2007, firm wonders if it's even worth launching Champion if it gets delayed. Also, assuming the mid-point of EPS guidance for 2nd quarter ($0.54-$0.60). The firm says GDT would have to earn $1.26 in 2nd half 2004 to meet the low-end of its range for the full year ($2.40-$2.55), which is an 11% increase from 1st half 2004, which makes them nervous considering they don't see much changing between now and then.
TriPath Imaging received approval for expanded labeling claims from the U.S. FDA to include the use of a brush/plastic spatula combination collection device with TPTH Imaging's liquid-based cytology system. The approval was granted based on a supplemental filing to TPTH Imaging's PreMarket Approval (PMA) of its liquid-based cytology system. The data submitted to the FDA included results from a prospective, paired sample clinical study that demonstrated that an endocervical brush/plastic spatula combination is as effective as the currently approved broom-type collection device in transferring representative cervical material from the sampling device to the SurePath preservative fluid.
Genzyme and Medtronic announced that they were launching a new joint venture targeted at creating cardiac therapies. The new entity, MG BioTherapeutics, will look for ways to combine coronary medical devices with cellular therapies. The new company will assume development of Genzyme's cellular therapy for the treatment of ischemic cardiomyopathy, which is currently in Phase II clinical trials.
Biotech . . . POZEN announced that the FDA issued a not-approvable letter on Friday, May 28, 2004 concerning the New Drug Application (NDA) for MT 100 for the acute treatment of migraine. MT 100 is a novel combination of naproxen sodium and metoclopramide in a single tablet. In the letter, the Agency noted that POZEN demonstrated unambiguous statistically significant superiority of MT 100 compared to an appropriate control on a valid measure of pain as well as on the three associated symptoms of nausea, photophobia, and phonophobia in one study. However, they noted that MT 100 did not clearly meet these criteria in a second study. The FDA also cited the apparent lack of superiority of MT 100 over naproxen for sustained pain relief, which was the primary endpoint for the two component studies. This appears to arise primarily from an apparent difference in understanding between POZEN and the Agency as to the appropriate statistical analysis of this endpoint. "Based on our understanding of our many previous communications with the FDA and the data contained in the NDA, we are extremely surprised and very disappointed by the Agency's action."
Array Biopharma has received a $420,000 research milestone payment from Amgen. The payment resulted from a drug discovery agreement initiated between AMGN and ARRY in January 2002. As part of the agreement, ARRY collaborated with AMGN on the discovery of proprietary lead compounds for an AMGN therapeutic target. ARRY would be entitled to additional payments if AMGN's program continues to advance and additional program milestones are achieved.
Media . . . Newsweek reports that Martha Stewart plans to try to shorten her jail time by offering to serve part or all of her sentence helping underprivileged women start businesses. Ms Stewart approached the Women's Venture Fund, a New York-based nonprofit group, o-ffering to work 20 hours a week, teaching low-income and minority women to become entrepreneurs, according to the report which cited the venture's president Maria Otero.
Merrill Lynch analyst Jessica Reif Cohen believes the resignation Viacom president Mel Karmazin is a "very significant negative" for the media giant, given that the company loses "an extremely talented" operating executive. She kept her rating on the stock at "buy," however, due to what she views as "very attractive" valuation and "very strong" operating fundamentals. She feels the downside risk is limited vs. the stock's upside potential.
Smith Barney says it would be buyers of Viacom's stock on potential weakness related to today's management moves, as firm feels that this paves the way to a smoother management progression at the top. Also, with financial targets likely to be reaffirmed on the conference call today, these announcements do remove an overhang that has been plaguing Viacom for years.
Telecom . . . The WSJ reports that Qwest and MCI became the first major telecom company's to sign an accord over network leasing rates, an issue that has pitted long-distance carriers against local phone company's for years. Representatives of the nation's largest phone company's negotiated over the holiday weekend at the headquarters of the FCC at the request of top FCC officials, who are urging a negotiated solution to the leasing dispute, instead of sending the matter back to the courts. Other companies involved in the negotiations included AT&T, SBC and Verizon. For its part, AT&T late last night labeled the three days of talks "failed." The Qwest and MCI pact, which is expected to be announced today, outlines a series of wholesale rates Qwest will charge MCI to lease its network to offer local phone service to consumers and businesses, overriding rates set by regulators. If talks among the larger companies fail, the FCC could still seek a U.S. Supreme Court review of rules governing what local phone companies can charge for long-distance companies to lease their lines.
Storage . . . The WSJ reports that Sun Microsystems, hurt by the falling price of computer hardware, is moving to put similar pricing pressure on sellers of the popular Linux OS. According to the article, the company today will outline plans to woo customers to its Solaris OS and subscription-based software and services. Sun is highlighting the lower price for Solaris compared with Red Hat, whose popular version of Linux is resold by IBM, H-P and others. Jonathan Schwartz argues that Sun has a distinct advantage over company's that don't make their own OS' for low-end servers. While pricing Solaris aggressively, either as a separate product, or bundled with servers, Sun can still derive additional rev from the software to counteract the effect of falling hardware prices, he said. Mr. Schwartz, who is describing the strategy at a customer gathering this week in Shanghai, predicts that recurring rev from software and services could allow Sun to offer company's hardware on a subscription basis or for free, a bit like the way cellphone services subsidize the price of handsets. "My belief is in 5 years, customers will no longer be paying for hardware, it will be free," Mr. Schwartz said.
Network Equipment . . . Merrill Lynch upgrades Foundry Networks to Buy from Neutral. The firm says that Federal spending (about 32% of rev) on data networking gear should continue to grow, and notes that Federal revenues in the next 2 quarters are typically seasonally strong. Also, the company's focus on the enterprise market this year should be a good move, with hints of a recovery in spending. Target is $16.
Smith Barney out on Tellabs saying that based on their conversations with industry contacts, they believe Tellabs has won a large ($100+ million) multi-year contract with Verizon as a strategic vendor of edge IP/MPLS multiservice switching/routing. Under this contract the Tellabs 8800 router, acquired last year via Vivace, would be used in Verizon's enterprise network to aggregate a variety of services, place an MPLS header on the various frames, and put the services onto an IP core transport network. According to the firm, this should be viewed as a significant catalyst for the stock as one of the bear cases around Tellabs has been the slow takeoff of the Vivace revenue ramp. Verizon contract should allow Tellabs to grow its broadband data revenues into the double-digit millions in the near term and should help allay concerns about the company's ability to integrate acquisitions. Firm also notes that Lucent is acquiring Equipe's IP after the Multiservice switch startup founded in 1999, shut down last week, apparently after having been informed that it did not win the Verizon contract Tellabs appears to have won. Finally, Tellabs's win at Verizon should be considered a negative for CIENA's chances of expanding its DN 7000 (WaveSmith) rollout to include MultiService IP/MPLS apps. Smith Barney is reiterating Buy on TLAB with $11 target.
Semiconductors . . . Global sales of semiconductors in April rose 37 percent over the same period a year ago, and 4.1 percent from March, to $16.94 billion, according to the Semiconductor Industry Association, the highest level seen since July 2000. Results were boosted by strong demand fop cell phones, personal computers and digital cameras, as well as economic growth in the U.S. and China. "The fundamentals are in place for strong growth through the remainder of the year, and it is likely that growth for 2004 will significantly surpass last fall's forecast of 19 percent growth," said SIA president George Scalise.
Zoran was upped to Buy from Market Perform at Unterberg. Price target was $22. According to firm, 2/3s of way through the quarter, ZRAN's business is tracking ahead of expectations driven by strength in the DVD player business: firm believes ZRAN's DVD player business is tracking ahead of plan driven partly by the co's growing market share due to its competitive cost position at the low end and partly due to the ever increasing size of the DVD player market. The firm is adjusting 2004 estimates slightly from $390 million and $0.67 to $394 million and $0.67 (due to slightly lower gross margin assumption). However, firm's conservative 2005 estimates go up from $472M and $0.83 to $472 million and $1.00 (due to higher operating leverage).
Lehman sees a buying opportunity in National Semi ahead of its 4th quarter (May) report. The firm believes concerns over a slowdown at NSM has created an opportunity ahead of what should be strong 4th quarter results and guidance on June 10. NSM, along with ADI, remains one of the best analog plays at this stage of the cycle with both strong growth and margin leverage on the horizon at a compelling price.
Digitimes reports, citing sources with DRAM makers, that DRAM contract prices are forecast to drop up to 5% in the first half of June, ending a rally that began in Jan. Average contract prices for 256Mbit (32Mbitx8) DDR have surged 44% since Jan to $5.33 during late May, although these months are generally regarded as the weak months for PC sales. Market observers attributed the scenario to the previous round of price surges in the spot market. Contract prices will drop for the 1H of this month to reflect the eroding spot prices, commented Pei-lin Pai, spokesperson of Nanya Technology. Spot prices for 256Mbit DDR have dropped below $5 after they peaked at $6.5 in early April, according to DRAMeXchange. Albert Lin, spokesperson of ProMOS Technologies, said the drop in contract prices is normal since demand for PC is usually weak in June. The outlook for DRAM pricing is still positive, he added.
SiliconStrategies reports that Intel has reserved 50 to 70 acres of land in Chennai, in the South of India, for a manufacturing plant. The land is at the Siruseri IT Park, the report said, adding that Intel executives had earlier looked at other sites, including one in the Mahindra Industrial Park. "Intel has finalized its plans for the Chennai plant over the last fortnight and is expected to sign an agreement within the next few weeks," the report quoted an un-named local official as saying. However, it remains unclear whether Intel is considering a wafer processing facility or, more likely, a test and assembly facility in the city.
Toshiba has selected Trident Microsysem's PanelTV SVP chip to deliver home-theater quality video for multimedia PC applications on Toshiba's line of Dynabook Notebook PCs.
First Albany is out on Intel saying they expect the company to tighten the ranges of revenues and gross margin guidance in its mid-quarter update on June 3. However, they think there is more risk of the company lowering the midpoints of its revenue and gross margin ranges than raising them. Firm's EPS and revenue estimates for the June qtr are $0.25 and $7.95 billion, respectively. Firm expects INTC to tighten the revenue range to $7.8-$8 billion from $7.6-$8.2 billion, with a small risk for the co to lower the midpoint of the revenue range. According to the firm, 2nd quarter is typically a back-end-weighted quarter. Their most recent checks indicate that PC demand is a bit soft. Estimates call for revenues to be down 1.7% sequentially. Over the last 8 years 2nd quarter results have been flat to down 8%, with an average decline of 3.4% sequentially. Also, there seems to be some risk to gross margin guidance that is likely to come in at 60% plus or minus a point vs previous 0% plus or minus a couple of percentage points. This is due to the increase in inventory at the company. First Albany is maintaining their Buy rating and $35 target, as the company is entering the seasonally strong period of demand, but thinks the upside potential in the shares is somewhat limited.
The U.S. International Trade Commission (I.T.C.) in the patent lawsuit with Broadcom (BRCM) has now been finalized in favor of Microtune. The I.T.C. denied BRCM's petition to review a final initial determination made on 4/2, by Administrative Law Judge Sidney Harris finding no violation of Section 337 of the Tariff Act of 1930 and announced the termination of its investigation. The final determination of the I.T.C. can still be appealed by BRCM to the U.S. Court of Appeals for the Federal Circuit.
Digitimes reports Hynix Semiconductor may double its wafer starts for NAND flash to 40,000 8-inch equivalent wafers per month in the third quarter, after completing a hike to 20,000 wafers this month, according to a June 1 Commercial Times report, citing sources with chip distributors. According to the article, the move suggests that NAND flash production would take up almost the entire capacity at one of Hynix's 8-inch fabs and it also means less capacity will go to DRAM, the report indicated.
Boxmakers . . . Hewlett-Packard, one of the biggest backers of the Linux operating system, said it will increase its backing of "open source" software by being the first large technology company to certify and support programs made by MySQL AB and JBoss Inc. The move by H-P is intended as a competitive strike against rival IBM, which sells its own stack of proprietary "middleware" software. H-P says that by adding open-source programs from MySQL and JBoss to its offerings -- which also include middleware programs from ORCL and BEAS. -- it is giving customers more software choices.
Software . . . Fulcrum upgrades Siebel to Buy from Neutral, saying conversations with customers suggest improved demand. The firm says that their channel checks reveal strength this qtr in mid-six figure to low-seven figure deals, with particular demand noted in government & education, telco & high tech, healthcare services, transportation, and travel services. Also, firm says customers indicated that SEBL pricing has stabilized, providing further evidence towards increased demand. Target is $13.25.
Prudential downgrades Oracle to Neutral-Weight from Overweight and cuts their target to $13 from $15. The firm is saying ORCL's long-term license growth prospects remain limited to the single-digits without the help of favorable currency or acquisitions. Looking into 2005, firm is beginning to question the company's ability to organically achieve license rev growth above its core database market of 5-6%, and their biggest concern is that ORCL is not innovating quick enough beyond its core database offering (80% of license revs) to drive a higher level of top-line growth required to meaningfully accelerate the stock from current levels.
UBS analysts reiterated their "buy" stance on Oracle shares ahead of the company's quarterly earnings report expected later this month. Analyst Heather Bellini sees a good buying opportunity for the shares ahead of the earnings report. Oracle is likely to meet or exceed Wall Street estimates for the quarter for the third time in a row, Bellini said in a note to clients. UBS' price target for the shares is $16.50.
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Strong Sectors: internet, biotech, oil services, transportation, healthcare facilities, coal
Weak Sectors: REIT, gold, broker/dealer, personal & household products, airline
Top Stories . . . Crude oil rose the most in five months after the killing of 22 foreign workers in Saudi Arabia Saturday raised concern that attacks on the infrastructure of the world's largest oil exporter might disrupt supplies.
Viacom President Mel Karmazin unexpectedly resigned from the third-largest U.S. media company after three years of tension between him and Chief Executive Officer Sumner Redstone.
A gauge of U.S. manufacturing unexpectedly rose last month, close to a two-decade high, as increased demand prompted more factories to hire than at any time in 31 years, an industry report showed.
Boston Scientific, the world's largest maker of heart stents, agreed to buy closely held Advanced Bionics for about $740 million in cash to add products that treat neurological disorders.
Anheuser-Busch., the world's biggest beermaker, raised its stake in Harbin Brewery Group, setting up a bidding contest with SABMiller Plc for China's oldest brewer.
Quotes of Note . . . ``Higher sustainable oil prices would be favorable for companies in the energy sector. Spending on oil services and equipment would have to increase.'' Brett Gallagher, who helps manage $9 billion as head of U.S. equities at Julius Baer Investment Management.
``The stronger-than-expected economic data we saw earlier today have enabled the markets to shrug off the higher oil prices.'' Todd Clark, head of listed trading at Wells Fargo Securities.
``We're sort of in waiting mode. There's no real impetus to go out there and sell or buy.''' Peter Coolidge, a money manager with Deltec Asset Management.
Gurus . . . On the Rukeyser Show, panelist recommendations for Comcast, Prudential, Johnson & Johnson, ExxonMobil, Microsoft, Alcoa, Ingersoll Rand, and Dow Chemical. Guest John Rogers of Ariel Capital favors Northern Trust, Markel, and St. Paul. He likes Rouse for yield, and recently sold Kroger and SafeWay.
Stan Druckmeiler, who runs Duquesne Capital, says the most striking domestic economic development has been the enhancement of corporate profitability, and the generation of free cash flow. He tells CNBC that over the painful corrective period, corporations went from a debt position, to a $250 billion surplus. He sees the Stock Market in a cyclical trading range. He feels the unraveling of the "carry trade," based on 1.0% money, has been largely completed, so that the actual Fed funds rate boost should not be that punitive. And, while he does not see the price of oil soaring higher, he does believe a new floor has been created above $30.00. His favorite market is Japan, which he feels has entered a secular bull market after 13 years, with cash flow improving, and costs under control.
Byron Wien, strategist for Morgan Stanley, says the S&P 500, up just 1.0% this year, could finish 2004 near 1300, 15.0% above current levels. He does not see why the S&P 500 can't trade at 20 times 2004 operating earnings in an environment of relatively benign inflation and interest rates.
Bear Stearns economist David Malpass believes acceleration in the global economy is still being underestimated, which has positive implications for growth in corporate profits. He noted that wages, readings on the quality and quantity of jobs and small business income are all reaching all-times highs. Of the 30 "major" countries he looked at, 23 are expected to post growth of 8 percent in 2004 in dollar terms.
Smith Barney equity strategist Tobias Levkovich believes a summer decline in stocks is more probable than expectations among traders of a summer rally, as the recent focus on day-to-day newsflow will be more of a distraction that an investment style. He believe there will be a "V-shaped" trading pattern over the next 6 to 9 months, as a sharp pullback over the next few months is followed by a rally starting in late 2004 and into 2005. Levkovich believes a defensive approach to stocks is appropriate for the time being, but that should shift to a more aggressive stance by the fourth quarter.
Dividend Achievers . . . Barron's highlights companies, which recently increased their stock dividends. With a record-setting quarter tucked in its tool-belt, Home Depot is remodeling its dividend again. The world's No.1 home-improvement retailer hiked its quarterly common payout on Wednesday to 8.5 cents a share, from 7 cents. Additionally, directors cleared another $1 billion for stock repurchases; not including a 20-cent-a-share special dividend it paid in March. Charter Financial now sports a 3% yield, following its 25% dividend hike last Wednesday; One of the nation's biggest food wholesalers, Supervalu, last Wednesday raised its quarerly to 15.25 cents a share from 14.5 cents. That marked the 33rd consecutive year in which it has boosted its payout; citing its stronger earnings and cash flow, Western Gas Resources announced last Monday a 2-for-1 stock split and said it will maintain its nickel dividend on the greater number of shares outstanding after the split, in effect doubling its payout. In a seperate article, Barron's highlights European dividend plays Allianz, Bayer, Credit Suisse and Serono favorably. In addition, the article also suggests Alcatel, Bayer, Credit Suisse Group are probably overvalued dividend plays.
How to buy cheap stocks . . . Barron's highlights M&A strategy for long term investors. A favorite fantasy of many short-term investors is to identify the target co before a deal is publicly disclosed, then sell the shares after they climb on the announcement. But, alas, trying to anticipate which company will attract an offer is usually a fool's game and attempted deals sometimes fizzle. But there's another way to profit in the corporate-marriage game. When merger attempts are terminated, the target's shares usually face sharp, prolonged downturns as they come under selling pressure from short-term investors. This can create opportunities for patient investors. Of course, like all investment strategies, betting on the targets of broken deals isn't foolproof. Barron's suggests that investors shouldn't blindly buy every broken-deal target. As with any investment, they shouldn't make a decision without examining factors such as management quality, the company's operating performance and the state of its industry. But busted deals are clearly worth a look. Shares of PeopleSoft, for example, may sell off if Oracle's longstanding hostile bid, now valued at $21 a share, collapses. The Justice Department has filed a suit seeking to bar the linkup, which it deems anticompetitive, and most observers expect the takeover effort to fail. If the bid fails, and PeopleSoft shares do indeed swoon, that might create a nice opportunity, article suggests. Based on its 1st quarter results, PeopleSoft is generating positive cash flow, and its balance sheet is strong, with net liquid assets of $1.6 billion and no long-term debt.
Next Big Tech-Wave . . . Barron's highlights RFID technology, which tracks goods from every stage of production to consumers' shopping carts, suggesting it has the potential to rev up the economy, perhaps even more than the Internet or PC's. "That's where all the action is," says Lyle Ginsburg, managing partner of technology innovation at consulting firm Accenture. "The world keeps getting smaller and faster and more competitive, and the need for more information is king." Certainly, RFID is becoming one of the single biggest drivers of tech spending, according to William Whyman, co-founder and president of the Precursor Group, a technology and telecom research firm. And, in no small part, that is because two of the largest organizations on the planet, Wal-Mart Stores and the Defense Department, have seen the future and decided it includes RFID. Also other company's around the globe are quietly moving ahead with their own programs, including Metro, Tesco, Target and Boeing. As a result, RFID is expected to be a $4.6 billion market by 2007, up from $1.03 billion at the end of 2003, according to market-research firm Venture Development and brokerage house Robert W. Baird. Reik Read, a Baird supply-chain analyst, thinks that estimates could prove conservative as pilot programs and adoption mandates expand. According to the article, about 30 company's are playing an active role in the RFID market, including Accenture, Capgemini, Philips Electronics, Texas Instruments, Infineon, IBM, SAP, Sun Microsystems, Manugistics, Alien Technology, Matrics and VeriSign. In addition, as the technology becomes more pervasive, look for data-management and server-and-storage companies such as EMC, Hewlett-Packard and Network Appliance to benefit. Baird's Read is recommending Zebra Technologies, which makes printers and encoders for the RFID market; Unova, whose Intermec unit is a leader in data collection and wireless networking in the warehousing and distribution industry; and Manhattan Associates, another major warehouse-management-system co, as company's likely to profit in this early phase. Longer-term, Mr Read likes the positioning of Symbol Technologies, Accenture, Manugistics and SAP. Bear Stearns' supply-chain research team also likes Manhattan Associates, Zebra and Unova as well as Tibco Software, which writes computer programs that link trading partners with real-time data.
U.S. Income Growth Surges . . . One of the most tenacious underestimates of the U.S. economy relates to concerns about the U.S. consumer. I disagree with the view that the consumer will slump. The factors adding to personal disposable income heavily outweigh (by roughly 3:1) the increased cost of gasoline, the increase in mortgage rates, the reduction in mortgage refinancings and the wind-down of tax rebates
and tax refunds.
• The aggregate data shows that the household sector is strong in terms of assets, income from assets, income from labor and the resulting increases in saving. This explains the steady growth in consumption and the likely sustainability of that growth into 2005.
• There is a severe underestimate of the U.S. personal savings rate -- the monthly savings data excludes income from assets and the related buildup of liquid assets to record levels. As a result, the U.S. household sector is a big net creditor and will benefit on average from the coming interest rate hikes.
• Some leveraged households will be squeezed by debt, inflation and rising interest rates, but the great majority of households will benefit unde a durable expansion, mild inflation, rising interest rates. In the aggregate, the squeeze will be more than offset by hiring, increased interest income from liquid assets, and income growth.
Personal disposable income will continue to exceed expectations, powered by relatively high wages, the improvement in the quality and quantity of jobs, and the growth benefits from the 2003 income tax cut.
• Data released May 28 showed that personal income grew 0.6% in April. This brings year-over-year growth in personal income to 5.7%.
• The first-quarter GDP report released May 27 provided a strong upward revision to wage and salary income. While the exact details will be released later, the revision is due to changes in hours worked, the number of jobs, and/or the wage level. The revision reflects an improving job situation, an important driver in the ongoing U.S. economic acceleration. The upward revision to wages and salaries will probably result in an upward revision in the payroll survey of employment, bringing it more into line with the stronger picture in the household survey.
• While much attention, both positive and negative, has been focused on the major records being set in corporate profits, income in smaller businesses is also growing fast. Non-farm proprietors’ income increased 11.3% in the year through April. This nearly matches the peak growth rate in the late 1990s.
Eco Speak . . . Fueled by low interest rates, U.S. construction spending surged to a record high level in April after rising faster than previously estimated in March. Construction spending rose 1.3 percent in April to a record $970.4 billion. Economists had forecast a 0.4 percent rise in the month. In March, construction spending rose a revised 2.4 percent after the department initially estimated a 1.5 percent gain. Residential construction spending rose 1.2 percent to $520.7 billion in April. Public construction spending rose 1.7 percent in the month to a record $230.5 billion.
Factory activity in the United States accelerated in May from its already high level, the Institute for Supply Management reported Tuesday. The ISM index rose to 62.8 percent in May from 62.4 percent in April. This is the seventh month in a row that the index has been above 60. The increase was unexpected. The consensus forecast of estimates collected by CBS Marketwatch was for the index to fall slightly to 62.0. Readings above 50 indicate expansion. New orders fell to 62.8 in May from 65.0 in April. The employment index rose to 61.9 in May from 57.8.
Financials . . . Merrill Lynch downgrades Chicago Mercantile to Neutral from Buy based on valuation, as the stock is nearing their $132 target, and is up 370% from its Dec 2002 IPO. The firm also notes that there is also potential selling pressure arising from the lock-up period ending June 4, as 19 million shares (over half of shares outstanding) will be available for potential sale.
Jefferies upgrades Providian to Buy from Hold and raises their target to $16 from $12. The firm says that the company's recent delinquency trends indicate that the co will experience much greater loss rate improvement over the next 12 months than firm had anticipated, and they are increasingly confident that the company's net interest margin will remain relatively stable at or near current levels, easing concerns that its ongoing portfolio transition will erode profitability. In addition, based upon increased marketing spending in 1st quarter and a number of new marketing partnerships, firm believes that the company's asset generation platform is gaining strength.
Homebuilders . . . UBS says positive news and the sell off in homebuilders has reawakened investor interest in homebuilders. Positive media attention on the builders has accelerated, with news articles highlighting the sustainability of demand and EPS power. While this positive attention is a welcome relief from 'bubble' reports, the highlighted changes are not new, but have evolved over the last 10 years. Favorable demographic trends and a sophisticated mortgage market are contributing to robust, steady demand. This, combined with supply constraints and record low inventories, should result in steady EPS growth and continued margin expansion. Positive news flow along with a 30% dip in the stocks appears to be peaking investors interest. Also, short interest is bottoming at just 4 days.
Barron's cover story discusses the housing market, which has been booming lately. In the late 1990s, the baby-boom generation, 80 million strong, entered its peak earning years. "More and more, we see baby boomers 'buying up' for retirement and also purchasing second homes," says Jim Gillespie, president and CEO of Coldwell Banker Real Estate, a subsidiary of Cendant. "Generally, boomers have more wealth than previous generations. They have built up tremendous equity in their homes and are using inheritances left by their parents to purchase second and even third homes." In discussion, how to buy own piece of paradise, the following company's are mentioned positively: Cendant, Starwood Hotels & Resorts, Four Seasons, Sonesta and Hilton Hotels.
Energy . . . Barron's highlights the windmill and solar panel market, as big corporations are starting to plow billions into the field. Giants such as General Electric and Royal Dutch/Shell have jumped into the manufacturing end of the business, while wind farms are finding equity financing from the likes of FPL Energy, a unit of Florida's FPL Group; PPM Energy, a unit of Scottish Power; and the Zilkha family of Texas. "We're in [the wind business] because we think we can make money at it," says Terry Hudgens, CEO of PPM Energy, Scottish Power's U.S. subsidiary. "The convergence of the lower cost to produce wind power along with higher price of natural gas [used to power utilities] has made wind economically attractive." Indeed, the surging prices of oil and natural gas this year have added real urgency to the effort -- and raised the stakes for everyone from state governments to private investors. Right now, there are no direct plays on the industry for individual investors, but opportunities are sure to arise as the industry moves to fund its expansion. There is no question that wind- and sun-generated electricity is gaining ground. Last year alone, new windmills boosted total wind-energy production by 36%, to almost 6,400 megawatts. Likewise, the total U.S. capacity of solar power jumped 21%, to 218 megawatts. Though wind and sun power still account for less than 3% of all electricity produced in the U.S., the new markets should keep growing at a blistering pace. Some consultants figure that wind and solar each will grow 20% annually for the next 5 to 10 years. One of the largest projects in limbo is a 310-megawatt wind farm planned for Iowa by MidAmerican Energy, a unit of Berkshire Hathaway and the latest entrant into the market. The company had expected to start the $323 million project this year, but it will put construction on hold until the tax credit passes, says Jack Alexander, senior vice president of supply and marketing at MidAmerican.
Oil & Gas . . . Refining margins declined 21% on the West Coast to $20.63/bbl, due to lower product prices. Gasoline and diesel prices on the West Coast fell 15 cents per gallon and 10 cents per gallon, respectively, an 8% decrease for both products. Elsewhere, refining margins fell 2% on the East Coast and 8% in the Midwest. Refining margins were up 0.2% on the Gulf Coast. Tanker traffic is reportedly high for European gasoline imports. Exports from West African reportedly have increased as well. While overall gasoline imports in 2004 have lagged 2003 levels by 6%, we believe the current arbitrage spread will attract more imports. The arbitrage spread for May has averaged 4.3 cents per gallon, verses 0.5 cents per gallon in April and -2 cents
per gallon in May during the last five years. Expect gasoline imports to increase significantly in June. Earlier this week, analysts indicated that refining margins have reached record levels but that these margins may be “as good as it gets.” Findings show that seasonally adjusted demand tends to be elastic when retail prices exceed $1.75 per gallon. Nationwide average gasoline prices are at $2.06 per gallon. As expected, gasoline conservation efforts are starting to make headlines. Expect demand to dampen at the same time that supplies increase, resulting in an inventory build.
Transports . . . UPS upped to Hold from Sell at AG Edwards. The upgrade is based upon on firm's bullish outlook for the economy. AG Edwards continues to have two basic long-term reservations about UPS's stock. One of those is based in the company's inability to improve its Return on Invested Capital (ROIC) and the other is a reflection of firm's view on the valuation. Hence, firm doesn't believe it warrants a Buy rating. That said, AG Edwards sees an extremely robust surge in the U.S. economy unfolding, as the manufacturing sector rebounds with unpredicted vigor.
Retail . . . AmTech downgraded EBAY to Hold from Buy based on the following factors: 1) stock has reached their $86 target, and is trading at the highest forward multiple since July 2002; 2) firm doesn't see as much upside to the June qtr versus the March quarter, yet they see the 8% intra-qtr rise in EBAY is an expectation of significant June qtr upside; 3) typical weak seasonality in the June and Sept quarters; 4) lack of positive near-term catalysts; and 5) positive sentiment.
The WSJ reports that a new law will throw China's retail and distribution sectors wide open to foreign investors, and probably lead to faster growth in an already rapidly expanding area of the economy. The law, which was issued in April and goes into effect today, removes both longstanding restrictions and the threat of recently proposed measures to further hamper foreign investment. Beginning in December, foreign retailers can do business without Chinese partners and set up stores anywhere in the country. The law removes prohibitive asset and sales requirements that had barred all but the world's largest retail chains from entering China, and it loosens an earlier rule that all store openings needed approval from the central government. While the law merely puts into effect China's promises to the World Trade Organization, under which Beijing agreed to open its retail and distribution sector within three years of joining the global trade body, it is particularly welcome to foreign investors, since it runs counter to recent protectionist calls by Chinese retailers and some officials. "It will increase the speed of expansion of the big retailers," says Li Fei, a professor at Tsinghua University's School of Economics and Management who was involved in drafting the new law. In recent years, global chains like Wal-Mart Stores and France's Carrefour SA have expanded aggressively in China. Local retailers had lobbied heavily for protection from the onslaught.
The WSJ's "Ahead of the Tape" column highlights Kmart Holdings, which has been a public company for over a year, but you couldn't tell that from the companies actions. Instead, Eddie Lampert, the Kmart Holding chairman and hedge-fund manager who controls a majority of the stock in the retailer, continues to run the co as he does his hedge fund, very quietly. Kmart has yet to hold a conference call for analysts and investors after its quarterly financial reports. It doesn't even deign to prerecord a call from executives about the quarter, as Wal-Mart Stores does. Kmart hasn't yet held an analyst or investor day to discuss its strategy and has no plans to hold one soon. It hasn't attended investor conferences or put up a tent at any dog-and-pony shows. Unlike the vast majority of retailers, it doesn't issue weekly or monthly sales updates. And last week, the co turned away some non-shareholders and interested potential investors from its annual meeting. Kmart has the right to a grace period as a re-emerged public co to hunker down and operate the business. Moreover, it's typical practice for a co to let only shareholders into an annual meeting, but this was hardly the run-of-the-mill annual meeting attended mostly by 72-year-old retirees. This was the only opportunity so far to hear from top Kmart executives and owners about their strategy. Article suggests that Kmart could have made an exception to normal practice. Kmart seems to be adopting the Berkshire Hathaway model of investor relations, hoping to let the financials and the stock price speak for them. It hardly needs mentioning that there are fairly significant differences between Berkshire and Kmart. Nevertheless, investors, like people everywhere, tend to find reticence charming and imbue strong and silent types with all sorts of talents.
Healthcare . . . Merrill Lynch adds Caremark Rx to their Focus 1 List and reiterates their $40 target. The firm believes that CMX is well-positioned as the leading PBM, with substantial scale and expertise across a broad array of product lines. The firm also notes that the company is either the number one or two PBM in every major business category, and given the winning of the FEP contract is quickly closing the gap with the market leader in the all-important mail segment.
Medical Devices . . . Barron's highlights Cyberonics, whose request to sell an implantable pacemaker for treating people who suffer depression will be voted on June 15 at a panel of FDA advisers. The submission by Cyberonics is a first for the FDA, because the agency has never before evaluated a device for a psychiatric illness. People with drug-resistant depression are in the first group that researchers are trying to help with devices like Cyberonics'. But FDA approval is far from assured for the pioneering Cyberonics device. The FDA knows its first psychiatric-device approval will set standards for all that follow, so some of the agency's top brass have been scrutinizing Cyberonics' depression studies. Experts in psychiatry and neurology have criticized the Cyberonics' studies as poorly designed and executed, with the resulting data, consequently, offering insufficient grounds for subjecting millions of patients to surgical implantation of the company's device. One leader of Cyberonics' studies was Dr. Mark George, a psychiatry and neurology researcher at the Medical University of South Carolina. In a Thursday conference call, Mr George acknowledged that the Cyberonics implant hadn't proved to be "a home run" in its depression trial, but he argued that it indeed works. He predicted that the plight of patients with hard-to-treat depression would move the FDA to approve the device anyway, perhaps with a requirement for post-approval studies. "There is intense pressure from the mental-health advocates to allow this to go out," Mr George said of the antidepressant implant. According to the article, Cyberonics might not be the trustiest steward of a post-approval study. An accomplished neurologist says he put a stop to the company's data collection in a post-approval study on epilepsy when he found that a Cyberonics salesman had pulled patients' charts and was himself rating the patients' progress. The company's aggressiveness has antagonized some neurologists, who say the co has an extreme style of direct-to-consumer marketing, in which salespeople have met directly with families of people with epilepsy.
CSFB downgrades Guidant to Neutral from Outperform after the co announced that it identified issues with the stent platform for its Champion drug-eluting stent; if the issue can be addressed with only a manufacturing change, firm says the company's timetable will likely remain intact, however firm assigns this scenario just a 25% probability, with the more likely outcome being a redesign that pushes Future IV back 6 months and FDA approval from 1H06 to late 2006. With GDT's internally developed drug-eluting stent (Spirit) on its best-in-class Vision stent slated for US launch in 1st quarter 2007, firm wonders if it's even worth launching Champion if it gets delayed. Also, assuming the mid-point of EPS guidance for 2nd quarter ($0.54-$0.60). The firm says GDT would have to earn $1.26 in 2nd half 2004 to meet the low-end of its range for the full year ($2.40-$2.55), which is an 11% increase from 1st half 2004, which makes them nervous considering they don't see much changing between now and then.
TriPath Imaging received approval for expanded labeling claims from the U.S. FDA to include the use of a brush/plastic spatula combination collection device with TPTH Imaging's liquid-based cytology system. The approval was granted based on a supplemental filing to TPTH Imaging's PreMarket Approval (PMA) of its liquid-based cytology system. The data submitted to the FDA included results from a prospective, paired sample clinical study that demonstrated that an endocervical brush/plastic spatula combination is as effective as the currently approved broom-type collection device in transferring representative cervical material from the sampling device to the SurePath preservative fluid.
Genzyme and Medtronic announced that they were launching a new joint venture targeted at creating cardiac therapies. The new entity, MG BioTherapeutics, will look for ways to combine coronary medical devices with cellular therapies. The new company will assume development of Genzyme's cellular therapy for the treatment of ischemic cardiomyopathy, which is currently in Phase II clinical trials.
Biotech . . . POZEN announced that the FDA issued a not-approvable letter on Friday, May 28, 2004 concerning the New Drug Application (NDA) for MT 100 for the acute treatment of migraine. MT 100 is a novel combination of naproxen sodium and metoclopramide in a single tablet. In the letter, the Agency noted that POZEN demonstrated unambiguous statistically significant superiority of MT 100 compared to an appropriate control on a valid measure of pain as well as on the three associated symptoms of nausea, photophobia, and phonophobia in one study. However, they noted that MT 100 did not clearly meet these criteria in a second study. The FDA also cited the apparent lack of superiority of MT 100 over naproxen for sustained pain relief, which was the primary endpoint for the two component studies. This appears to arise primarily from an apparent difference in understanding between POZEN and the Agency as to the appropriate statistical analysis of this endpoint. "Based on our understanding of our many previous communications with the FDA and the data contained in the NDA, we are extremely surprised and very disappointed by the Agency's action."
Array Biopharma has received a $420,000 research milestone payment from Amgen. The payment resulted from a drug discovery agreement initiated between AMGN and ARRY in January 2002. As part of the agreement, ARRY collaborated with AMGN on the discovery of proprietary lead compounds for an AMGN therapeutic target. ARRY would be entitled to additional payments if AMGN's program continues to advance and additional program milestones are achieved.
Media . . . Newsweek reports that Martha Stewart plans to try to shorten her jail time by offering to serve part or all of her sentence helping underprivileged women start businesses. Ms Stewart approached the Women's Venture Fund, a New York-based nonprofit group, o-ffering to work 20 hours a week, teaching low-income and minority women to become entrepreneurs, according to the report which cited the venture's president Maria Otero.
Merrill Lynch analyst Jessica Reif Cohen believes the resignation Viacom president Mel Karmazin is a "very significant negative" for the media giant, given that the company loses "an extremely talented" operating executive. She kept her rating on the stock at "buy," however, due to what she views as "very attractive" valuation and "very strong" operating fundamentals. She feels the downside risk is limited vs. the stock's upside potential.
Smith Barney says it would be buyers of Viacom's stock on potential weakness related to today's management moves, as firm feels that this paves the way to a smoother management progression at the top. Also, with financial targets likely to be reaffirmed on the conference call today, these announcements do remove an overhang that has been plaguing Viacom for years.
Telecom . . . The WSJ reports that Qwest and MCI became the first major telecom company's to sign an accord over network leasing rates, an issue that has pitted long-distance carriers against local phone company's for years. Representatives of the nation's largest phone company's negotiated over the holiday weekend at the headquarters of the FCC at the request of top FCC officials, who are urging a negotiated solution to the leasing dispute, instead of sending the matter back to the courts. Other companies involved in the negotiations included AT&T, SBC and Verizon. For its part, AT&T late last night labeled the three days of talks "failed." The Qwest and MCI pact, which is expected to be announced today, outlines a series of wholesale rates Qwest will charge MCI to lease its network to offer local phone service to consumers and businesses, overriding rates set by regulators. If talks among the larger companies fail, the FCC could still seek a U.S. Supreme Court review of rules governing what local phone companies can charge for long-distance companies to lease their lines.
Storage . . . The WSJ reports that Sun Microsystems, hurt by the falling price of computer hardware, is moving to put similar pricing pressure on sellers of the popular Linux OS. According to the article, the company today will outline plans to woo customers to its Solaris OS and subscription-based software and services. Sun is highlighting the lower price for Solaris compared with Red Hat, whose popular version of Linux is resold by IBM, H-P and others. Jonathan Schwartz argues that Sun has a distinct advantage over company's that don't make their own OS' for low-end servers. While pricing Solaris aggressively, either as a separate product, or bundled with servers, Sun can still derive additional rev from the software to counteract the effect of falling hardware prices, he said. Mr. Schwartz, who is describing the strategy at a customer gathering this week in Shanghai, predicts that recurring rev from software and services could allow Sun to offer company's hardware on a subscription basis or for free, a bit like the way cellphone services subsidize the price of handsets. "My belief is in 5 years, customers will no longer be paying for hardware, it will be free," Mr. Schwartz said.
Network Equipment . . . Merrill Lynch upgrades Foundry Networks to Buy from Neutral. The firm says that Federal spending (about 32% of rev) on data networking gear should continue to grow, and notes that Federal revenues in the next 2 quarters are typically seasonally strong. Also, the company's focus on the enterprise market this year should be a good move, with hints of a recovery in spending. Target is $16.
Smith Barney out on Tellabs saying that based on their conversations with industry contacts, they believe Tellabs has won a large ($100+ million) multi-year contract with Verizon as a strategic vendor of edge IP/MPLS multiservice switching/routing. Under this contract the Tellabs 8800 router, acquired last year via Vivace, would be used in Verizon's enterprise network to aggregate a variety of services, place an MPLS header on the various frames, and put the services onto an IP core transport network. According to the firm, this should be viewed as a significant catalyst for the stock as one of the bear cases around Tellabs has been the slow takeoff of the Vivace revenue ramp. Verizon contract should allow Tellabs to grow its broadband data revenues into the double-digit millions in the near term and should help allay concerns about the company's ability to integrate acquisitions. Firm also notes that Lucent is acquiring Equipe's IP after the Multiservice switch startup founded in 1999, shut down last week, apparently after having been informed that it did not win the Verizon contract Tellabs appears to have won. Finally, Tellabs's win at Verizon should be considered a negative for CIENA's chances of expanding its DN 7000 (WaveSmith) rollout to include MultiService IP/MPLS apps. Smith Barney is reiterating Buy on TLAB with $11 target.
Semiconductors . . . Global sales of semiconductors in April rose 37 percent over the same period a year ago, and 4.1 percent from March, to $16.94 billion, according to the Semiconductor Industry Association, the highest level seen since July 2000. Results were boosted by strong demand fop cell phones, personal computers and digital cameras, as well as economic growth in the U.S. and China. "The fundamentals are in place for strong growth through the remainder of the year, and it is likely that growth for 2004 will significantly surpass last fall's forecast of 19 percent growth," said SIA president George Scalise.
Zoran was upped to Buy from Market Perform at Unterberg. Price target was $22. According to firm, 2/3s of way through the quarter, ZRAN's business is tracking ahead of expectations driven by strength in the DVD player business: firm believes ZRAN's DVD player business is tracking ahead of plan driven partly by the co's growing market share due to its competitive cost position at the low end and partly due to the ever increasing size of the DVD player market. The firm is adjusting 2004 estimates slightly from $390 million and $0.67 to $394 million and $0.67 (due to slightly lower gross margin assumption). However, firm's conservative 2005 estimates go up from $472M and $0.83 to $472 million and $1.00 (due to higher operating leverage).
Lehman sees a buying opportunity in National Semi ahead of its 4th quarter (May) report. The firm believes concerns over a slowdown at NSM has created an opportunity ahead of what should be strong 4th quarter results and guidance on June 10. NSM, along with ADI, remains one of the best analog plays at this stage of the cycle with both strong growth and margin leverage on the horizon at a compelling price.
Digitimes reports, citing sources with DRAM makers, that DRAM contract prices are forecast to drop up to 5% in the first half of June, ending a rally that began in Jan. Average contract prices for 256Mbit (32Mbitx8) DDR have surged 44% since Jan to $5.33 during late May, although these months are generally regarded as the weak months for PC sales. Market observers attributed the scenario to the previous round of price surges in the spot market. Contract prices will drop for the 1H of this month to reflect the eroding spot prices, commented Pei-lin Pai, spokesperson of Nanya Technology. Spot prices for 256Mbit DDR have dropped below $5 after they peaked at $6.5 in early April, according to DRAMeXchange. Albert Lin, spokesperson of ProMOS Technologies, said the drop in contract prices is normal since demand for PC is usually weak in June. The outlook for DRAM pricing is still positive, he added.
SiliconStrategies reports that Intel has reserved 50 to 70 acres of land in Chennai, in the South of India, for a manufacturing plant. The land is at the Siruseri IT Park, the report said, adding that Intel executives had earlier looked at other sites, including one in the Mahindra Industrial Park. "Intel has finalized its plans for the Chennai plant over the last fortnight and is expected to sign an agreement within the next few weeks," the report quoted an un-named local official as saying. However, it remains unclear whether Intel is considering a wafer processing facility or, more likely, a test and assembly facility in the city.
Toshiba has selected Trident Microsysem's PanelTV SVP chip to deliver home-theater quality video for multimedia PC applications on Toshiba's line of Dynabook Notebook PCs.
First Albany is out on Intel saying they expect the company to tighten the ranges of revenues and gross margin guidance in its mid-quarter update on June 3. However, they think there is more risk of the company lowering the midpoints of its revenue and gross margin ranges than raising them. Firm's EPS and revenue estimates for the June qtr are $0.25 and $7.95 billion, respectively. Firm expects INTC to tighten the revenue range to $7.8-$8 billion from $7.6-$8.2 billion, with a small risk for the co to lower the midpoint of the revenue range. According to the firm, 2nd quarter is typically a back-end-weighted quarter. Their most recent checks indicate that PC demand is a bit soft. Estimates call for revenues to be down 1.7% sequentially. Over the last 8 years 2nd quarter results have been flat to down 8%, with an average decline of 3.4% sequentially. Also, there seems to be some risk to gross margin guidance that is likely to come in at 60% plus or minus a point vs previous 0% plus or minus a couple of percentage points. This is due to the increase in inventory at the company. First Albany is maintaining their Buy rating and $35 target, as the company is entering the seasonally strong period of demand, but thinks the upside potential in the shares is somewhat limited.
The U.S. International Trade Commission (I.T.C.) in the patent lawsuit with Broadcom (BRCM) has now been finalized in favor of Microtune. The I.T.C. denied BRCM's petition to review a final initial determination made on 4/2, by Administrative Law Judge Sidney Harris finding no violation of Section 337 of the Tariff Act of 1930 and announced the termination of its investigation. The final determination of the I.T.C. can still be appealed by BRCM to the U.S. Court of Appeals for the Federal Circuit.
Digitimes reports Hynix Semiconductor may double its wafer starts for NAND flash to 40,000 8-inch equivalent wafers per month in the third quarter, after completing a hike to 20,000 wafers this month, according to a June 1 Commercial Times report, citing sources with chip distributors. According to the article, the move suggests that NAND flash production would take up almost the entire capacity at one of Hynix's 8-inch fabs and it also means less capacity will go to DRAM, the report indicated.
Boxmakers . . . Hewlett-Packard, one of the biggest backers of the Linux operating system, said it will increase its backing of "open source" software by being the first large technology company to certify and support programs made by MySQL AB and JBoss Inc. The move by H-P is intended as a competitive strike against rival IBM, which sells its own stack of proprietary "middleware" software. H-P says that by adding open-source programs from MySQL and JBoss to its offerings -- which also include middleware programs from ORCL and BEAS. -- it is giving customers more software choices.
Software . . . Fulcrum upgrades Siebel to Buy from Neutral, saying conversations with customers suggest improved demand. The firm says that their channel checks reveal strength this qtr in mid-six figure to low-seven figure deals, with particular demand noted in government & education, telco & high tech, healthcare services, transportation, and travel services. Also, firm says customers indicated that SEBL pricing has stabilized, providing further evidence towards increased demand. Target is $13.25.
Prudential downgrades Oracle to Neutral-Weight from Overweight and cuts their target to $13 from $15. The firm is saying ORCL's long-term license growth prospects remain limited to the single-digits without the help of favorable currency or acquisitions. Looking into 2005, firm is beginning to question the company's ability to organically achieve license rev growth above its core database market of 5-6%, and their biggest concern is that ORCL is not innovating quick enough beyond its core database offering (80% of license revs) to drive a higher level of top-line growth required to meaningfully accelerate the stock from current levels.
UBS analysts reiterated their "buy" stance on Oracle shares ahead of the company's quarterly earnings report expected later this month. Analyst Heather Bellini sees a good buying opportunity for the shares ahead of the earnings report. Oracle is likely to meet or exceed Wall Street estimates for the quarter for the third time in a row, Bellini said in a note to clients. UBS' price target for the shares is $16.50.
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