From Briefing.com: 4:07PM Silicon Labs transceiver chosen by SAGEM (SLAB) 29.02 -0.34: Co announces that SAGEM, a global provider of mobile phones, has adopted its Aero II transceiver for use across its GSM/GPRS handset platforms. This transceiver improves handset system performance while reducing the design time and bill-of-materials required for highly-integrated, feature-rich GSM/GPRS handsets.
Close Dow -94.88 at 10470.51, S&P -12.07 at 1171.71, Nasdaq -18.17 at 1989.34: Just a few Fed words was all it took to erase a day of modest gains, as the major averages closed near session lows... While this morning's PPI data initially provided investors with a tinge of optimism, as Feb core PPI of 0.1% (consensus 0.1%) - which excludes high energy costs - eased inflation fears, the language of the FOMC's policy statement declared a slightly different message...
As widely expected, the Fed raised the fed funds rate by 25 basis points to 2.75% for the seventh consecutive time and maintained a balanced risk assessment saying "policy accommodation can be removed at a pace that is likely to be measured"... However, additions to the policy statement that cited "pressures on inflation have picked up in recent months and pricing power is more evident" underpinned worries that producers are now more apt to raise prices to offset higher costs... The news unnerved the bond market and renewed fears of more aggressive Fed tightening, pounding Tresurys enough to lift yields on the benchmark 10-year note (-22/32) to 4.61% - levels not seen since last July - subsequently pummeling stocks, reversing a bullish bias and closing virtually every sector in the red...
Software (-2.4%) paced the list of laggards, following downside FY05 EPS and revenue guidance from Electronic Arts (ERTS 55.20 -11.15) and concerns ahead of Oracle Corp's (ORCL 12.50 -0.15) Q3 earnings report, as Technology was weak across the board... Interest-rate sensitive issues like Financial (-1.9%), Utility (-1.9%) and REITs (-2.2%) also got hammered after bond yields surged while Telecom Services (-1.2%), Consumer Discretionary (-0.8%), Industrials (-0.6%) and Health Care (-0.1%) also finished to the downside...
Energy ended the day lower as crude oil prices closed down 2.5% at $56.03/bbl (-$1.43) - a drubbing in the commodity that had temporarily lifted the indices to session highs ahead of the FOMC's report... Materials (-0.4%) traded higher throughout most of the session, lifted by strength in Steel and a weak greenback, but lost ground into the close as the dollar recovered lost ground... The dollar rallied against both the euro (1.3081) and the yen (105.56) as bonds became less attractive...
Homebuilding (+0.2%) however, amid better than expected Q1 earnings and upside FY05 guidance from Lennar (LEN 55.80 +0.93) and KB Home (KBH 118.25 +1.55), held onto modest gains despite higher bond yields... Transportation also posted modest gains, led by resilience in Airline (+1.0%) and upside Q1 guidance from railroad operator Union Pacific (UNP 69.43 +3.36)... Separately, reports that lawyers have begun talks to settle the government's fraud and racketeering case against cigarette makers minimized losses in Consumer Staples (-0.5%)...DJTA +0.1, DJUA -2.0, DOT -1.2, Nasdaq 100 -1.3, Russell 2000 -0.5, SOX -0.8, S&P Midcap 400 -0.5, XOI -1.8, NYSE Adv/Dec 964/2363, Nasdaq Adv/Dec 1183/1902
1:36PM Cypress Semi: Takachiho and Cypress Extend Distribution Agreement (CY) 13.39 +0.37: -- Update -- Cos reached a distribution agreement that will enable Takachiho to sell the complete range of Cypress products to the Japanese market
11:08AM Sirius Satellite to offer $250 mln of senior notes due 2015 (SIRI) 5.33 -0.06: Based upon its current plans, before giving effect to the proceeds of the offering, SIRIUS has sufficient cash on hand to cover its estimated funding needs through cash flow breakeven, the point at which the co's revenues are sufficient to fund expected operating expenses, capital expenditures, working capital requirements, interest and principal payments, and taxes. SIRIUS expects cash flow breakeven to occur in 2007.
9:07AM Gapping Down : ERTS -13.4% (guides lower; down in sympathy: ATVI -5.5%, THQI -5.2%, TTWO -5.1%, ELBO -3.9%), GDYS -10.6% (guides lower), NRG -2.4%, RETK -2.4% (to be acquired by Oracle; ends bidding war with SAP; apparently market not happy with the price), GM -2% (mentioned in WSJ), RIMM -2% (Microsoft licenses e-mail technology to Symbian - WSJ).... Small cap momentum energy names seeing some profit taking: USEG -4.7%, FUEL -2.9%, ABLE -2.8%, GEOI -2.1%.
9:06AM Gapping Up : WYE +2.9% (guides Q1 EPS above consensus), OVTI +7% (key design win from handset maker), TASR +7% (introduces new air cartridge), CTIC +5.4% (initiates Phase 3 trial for Xyotax), CY +5.4% (UBS upgrade), WGAT +4.4% (reports Q4), STTX +4.3% (guides higher), AGIX +4.2% (Needham upgrade), SDS +3.6% (extension of 25% move yesterday on takeover talk), LEN +3.5% (reports FebQ), NTGR +3.3% (started with a Buy at Smith Barney; tgt $20), BOOM +2.5% (extension of 23% move yesterday), UNP +2.4% (guides higher).... Stem cell stocks higher on CNN.com story: ASTM +10.4%, STEM +10.3%, VIAC +4.9%, GERN +4.6%..... Under $3: UHCP +49% (Heritage Food Group spin-off), ELTK +30% (reports Q4), EIDSY +21% (to be acquired -- WSJ).
4:05PM Union Pacific Corp (UNP) 69.71 +3.64: Shares in Union Pacific rocketed after this granddaddy of the rails raised its Q1 guidance by 50%. After a blowout 2004, rail stocks have continued their upward momentum this year with the S&P 500 Rail index up over 20%. UNP has been a laggard in terms of performance, but today the company sharply raised its guidance citing increasing volumes, higher yields, and less than expected impact from the storms out West. The revision highlights the enduring bull environment the rail industry is experiencing, which is likely to result in another year of record demand for transportation services creating a strong pricing environment.
UNP now expects Q1 earnings to range between $0.43-0.48 per share, up dramatically from its prior guidance of $0.25-0.35. This is well above the current Reuters Estimates consensus of $0.35. The reason behind the upside was stronger than projected revenue growth for the first quarter. It expects the top line should be up approximately 8%, vs. the previously forecasted growth rate of 4-6% y/y. CEO and Chairman Dick Davidson said during its conference call that overall network volume has increased along with better yields in the first quarter. It noted stronger shipment growth for agricultural products, coal, imports from Asia, and building materials. The only group below expectations has been autos.
During its Q4 conference call back in Jan, the company said it was nervous about the impact the severe storms in California and Nevada would have on earnings. It had to shut down five lines and declare embargoes on several major routes. But as the clouds dispersed, the picture did not look as bad as it anticipated. UNP said the storms would account for $60 mln in capital spending and $55 mln in lower operating income, this compares to its previous estimates of $100 mln for both.
Higher fuel costs remains one of the caveats to this bull story. UNP stated that partially offsetting this revenue growth has been higher than projected fuel prices. First quarter 2005 diesel fuel costs are expected to average $1.43 per gallon vs. the projected range of $1.30 to $1.35 per gallon. However, what is more telling is the spike in prices from last year, during which diesel averaged $1.02!
We first highlighted the Rails back in June of last year as continued capacity constraints in surface transportation coupled with strong overall demand was generating positive price appreciation for the rail operators. This bull environment was translating into positive profit growth for the industry. However, UNP was not as quick on the uptake, unable to leverage the strong growth due to continued operational issues including traffic bottlenecks coupled with labor and locomotive shortages. Today, UNP said the key to leveraging the market was getting velocity up and maximize it networks. The latter of which remains a challenge, as it's operating below optimal levels, which may limit margin expansion. The company is targeting operating margins of just under 10%, although excluding storms and fuel, it's slightly improved. The largest US railroad also noted that labor remains a challenge and it's experiencing line constraints. For Q1, it forecasts a 1% rise in freight volume.
The bottom line UNP is getting on board and the outlook for it, as well as the rest of the industry, looks bright as the pricing environment leads to continued profit growth. In terms of valuation, UNP trades at 22.2x foward earnings, Burlington Northern (BNI) at 15.9x, Norfolk Southern (00C) at 15.5x, and CSX (CSX) at 16.5x.----Kimberly DuBord, Briefing.com
1:51PM General Mills (GIS) 50.18 -1.34: General Mills, which has an impressive catalog of high quality, well established dominant brand names including Cheerios, Lucky Charms, Wheaties, Total, Häagen-Dazs and Betty Crocker, topped estimates with its Q3 results. The company reported earnings of $230 mln, or $0.58 per share down from last year, but excluding charges, certain taxes, and an accounting change, earnings were $0.74 per share. Despite coming in four cents above consensus, overall results were a mix bag of nuts.
GIS, which holds the number one or number two positions in 13 leading food categories, generated revenue growth of 2.6% year/year to $2.77 bln. Top line growth was quite disappointing coming in below consensus. Retail sales, which accounts for the bulk of revenues, was flat for the quarter at $1.93 bln as higher promotional spending offset 1% unit volume growth and positive pricing and mix. Bakeries & Food Service sales rose 11% to $413 mln. Its International segment was quite strong, gaining 13% to $429 mln, with forex gains adding 6%. GIS noted double-digit growth in cereal and snacks in Canada, in addition to solid performance in China and India.
While operating profits rose 6.8% and earnings were ahead of expectations, what the market will focus on is the flat retail growth. GIS was going up against very easy comps from last year during the height of the Atkins low-carb craze.
The cereal segment suffered a 9% drop in volume and its Pillsbury segment fell 4%. The drop-off was the result of its attempts to raise price points negatively impacting sales, while facing increasing competition from retailer's private label brands. There were some bright spots including an 18% jump in yogurt sales due to Yoplait Light and Go-gurt and a 7% rise in Snacks again driven by new products including Nature Valley Sweet & Salty Nut Granola bars.
General Mills did provide some comfort looking ahead by reaffirming its guidance for the full year. For FY05, it sees EPS of $2.85-2.95, ex items vs. Reuters Estimates consensus of $2.92.
Overall, Q3 was a mixed bag of nuts. We still like the name as the company has a strong track record of earnings growth with an average of +8% over the last five years, with the exception of FY01 when it purchased Pillsbury. GIS also recently launched a slew of new products, including adding whole grain to all its leading brand cereals to increase the health benefits. The company did reap some of the benefits this quarter, however, sales trends in its cereal segment are disconcerting.
Today's result is likely to cause downside pressure in shares. We feel over the longer-term, GIS offers solid earnings growth potential driven by price increases and sustained volume growth, with upside potential derived from new products, international markets, and distribution channels. GIS has consistently and successfully offered consumers healthy and convenient new products. Its management is known as one of the best in the industry. Shares are trading at 17.4x forward earnings vs. its competitors Pepsi (PEP) at 20.5x, Kraft (KFT) at 16.7x, and Kellogg (K) at 18.1x.----Kimberly DuBord, Briefing.com
11:54AM Compuware (CPWR) $7.45 +0.48 (+6.9%) IBM (IBM) and Compuware reached a major settlement this morning, which puts an end to the anti-trust and patent infringement lawsuit filed by Compuware and countersuits filed by IBM. The trial was already in its sixth week. In essence, IBM has won, because the settlement apparently involves only an obligation to purchase $400 million worth of software licenses and services over the next four years. There appears, from the press release, to be no payment for prior infringements or damages suffered by Compuware (as result of antitrust behavior).
The total revenue impact to Compuware is positive, particularly as the revenue trend has been clearly downward recently. Assuming equal allocation over the four years, the agreement amounts to $100 million per year. Compuware's trailing twelve month (TTM) revenue is $1.25 billion. This makes IBM revenue 8% of current revenue and (probably) makes it Compuware's biggest single customer.
However, the impact on earnings is much greater than the revenue boost. It can be assumed that IBM is not paying the best price for Compuware licenses and services, so it might add a little to gross margin expansion. However, the savings on Compuware's huge legal expenses will boost earnings tremendously. Compuware has GAAP TTM net income of $84 million, or $0.22 per share. The legal costs for this lawsuit alone in fiscal 2004 (per 10-K) were $45.0 million, almost $0.11 per share. Since estimates for CPWR earnings going forward (forward four quarters) is just $0.30, it is very likely that earnings estimates will be raised.
However, this deal also makes Compuware an ideal acquisition candidate for IBM. Suddenly, it is almost as if they get a $400 million discount on the price that anyone else would have to pay for Compuware. Since Compuware is an ideal acquisition target in the integration and system tools space, with a strong presence in mainframe functionality, it simply makes a lot of sense for IBM to follow-up on this settlement with an offer to buy the entire company. Someone is going to buy Compuware fairly soon, we think. It would be a good fit for the Symantec/Veritas combo or Computer Associates. It would be an even better fit for IBM. The odds on Compuware becoming a hot item in the acquisition arena just went up tremendously. - Robert V. Green
11:42AM Microsoft (MSFT) $24.22 +0.02 (0.1%) Today Microsoft made two key announcements that deserve a deeper analysis, as they both bring the investment picture into clearer focus.
The first of the two announcements is that the company is acknowledging a significant shortage of Xbox consoles in the retail channel. While this seems to suggest all they have to do is make more, there is a bigger story at work here. The idea is that the Xbox, after just a few years on the market, may be becoming the console of choice for gamers. This is a subjective idea, but it is clear that demand for the Xbox is outweighing the supply in larger than expected numbers.
Strong demand for the Xbox further underscores the progress that Microsoft is making towards its goal of moving to the family room from the home office. The Xbox console, while not Microsoft's first attempt at the home entertainment market, is certainly the most successful. Down the road, it may be possible for Microsoft to leverage its foothold in the home for additional products. In the near term, it seems inevitable that the company will focus more resources on the entertainment market, as it is now a serious contender with Nintendo and the very popular PlayStation.
The other item this morning from Microsoft is the deal they announced with Symbian. Symbian is a British company that developed a popular mobile operating system and today agreed to license synchronization software from Microsoft in an effort to win more corporate customers. The software called ActiveSync enables Symbian-powered handhelds to wirelessly receive emails via network computers running Microsoft's Exchange Server software. Handheld maker Nokia, which is by far the largest seller of Symbian-powered devices, has already signed the same licensing deal with Microsoft.
This development is clearly in response to the impact that Research In Motion (RIMM) has made in the corporate environment. The Symbian/Microsoft technology is not a true push-email technology, but will still compete with RIMM's BlackBerry technology. The most formidable part of this deal is that there are 20 million Symbian devices in service today, a number far greater than the total number of BlackBerry's in service.
Both of these developments have to be viewed as positives for Microsoft, even if the immediate impact on revenue is minimal. Microsoft has been "stuck in neutral" on many fronts, as it tries to settle the myriad lawsuits against it and continues its fight with the EU Commission. The fight with the EU is certainly the biggest drag on the stock as they could fine the company $5 million a day for failing to comply with previously issued court mandates. Once Microsoft's legals problems are resolved, the stock market may once again turn its attention to the strategic efforts Microsoft is making, two seeds of which were planted today.
9:04AM Page One - Obsessing Over the Wording While Rates Are Moving Higher : The market has gotten through the PPI report. Now, the concern is the Fed policy announcement this afternoon.
February PPI was up 0.4% and the core rate 0.1%. Those increases were about in line with expectations and there was little market reaction. The core rate was up 0.8% in January, however, and that still translates into a strong two-month gain. It is still not clear whether an uptrend in underlying inflation is developing.
Tomorrow morning, the February CPI data will be released. The core rate in CPI has been up 0.2% for four straight months and a similar gain is expected with the February data. If it is at 0.3%, the stock market may react negatively.
For now, however, the focus is on the Fed policy announcement this afternoon. A seventh straight 1/4% hike in the fed funds rate is almost certain. The market is obsessing over whether the words in the announcement might signal more rapid rate hikes ahead. Frankly, the market is getting too worked up over this. The Fed is going to raise rates further until they reach a neutral position, no matter what the statement says. The stock market is likely to be very volatile this afternoon regardless. It would be dangerous to read too much into the statement or the market's reaction.
The corporate news is mixed. Electronic Arts warned that FY05 profits would be lower than Wall Street expected. The stock of the interactive game company was down 14% in after hours trading, and other game makers were similarly hit. But homebuilder Lennar Corp had a very good report, General Mills had a good report, and Steel Techologies guided profit estimates higher for this quarter. That collection of news has helped the broader market, while the Electronic Arts news has weighed on the Nasdaq.
Regardless of the exact wording of the policy announcement this afternoon, interest rates are heading higher. Oil is still near $57 a barrel, and inflation is inching higher. That is not a ringing endorsement to dive into the stock market right now. Dick Green, Briefing.com
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