From Briefing.com: Close Dow +37.32 at 10458.46, S&P +5.27 at 1181.39, Nasdaq +8.25 at 1999.32: The market extended yesterday's gains as falling oil prices and Pfizer's restructuring kept sellers in check...
Another day of profit taking (-1.7%) in crude oil futures ($56.05/bbl -$1.68) - a day after surging to all-time highs above $58/bbl - underpinned a positive tone that carried into the close... The commodity opened under pressure amid news of Saudi Aramco's plans to expand refinery capacity and closed even lower after Fed Chairman Alan Greenspan commented on higher inventories easing the oil price frenzy...
Roughly two hours before the close of trading, Greenspan spoke to a petrochemical conference... While he said that falling energy use is "virtually inevitable" and that the world's refining capacity remains "worrisome," the absence of any comments regarding monetary policy or oil's impact on economic growth, failed to more persuasively push equities or bonds in either direction... Treasurys, due to the lack of inflationary comments and notable economic reports, were range-bound all day and had little if any impact on market activity, as the benchmark 10-year note closed down 3 ticks to yield 4.46%...
Meanwhile, Pfizer's (PFE 26.92 +0.99) proposed $4.0 bln cost-cutting plan, during what the drug maker has dubbed a "transition year," was much larger than analysts expected (estimates were $2-3 bln)... So much so that investors viewed Pfizer's in-line Q1 guidance and a lower than expected FY05 earnings outlook with a grain of salt, as the news shed some new light on the improving health of a tarnished bellwether and provided a boost to blue chips across the board... Health Care (+1.8%) paced the way to the upside following Pfizer's restructuring while upbeat analyst comments on Sanofi-Aventis (SNY 43.14 +1.29) also provided a lift to Drug (+2.3%)...
Financial (+0.2%) also extended yesterday's gains, benefiting from strength in online brokerage following upbeat analyst comments... Morgan Stanley highlighted E*Trade (ET 12.02 +0.15) and Ameritrade (AMTD 10.74 +0.51) as solid buying opportunities in a group that has declined roughly 20% in 2005 amid persistent concerns about pricing pressure and choppy trading conditions...
Strength in Airline (+3.2%), following strong March traffic increases from the likes of Delta Air Lines (DAL 4.12 ++0.12), Southwest Airlines (LUV 14.30 +0.27) and American Airlines (AMR 11.15 +0.17) of 14.4%, 12.0% and 9.1%, respectively, helped Transportation close to the upside... Technology, however, was mixed, as modest gains in Semiconductor somewhat offset losses in Networking, Hardware and Software... Software was weak amid earnings warnings from the likes of Mentor Graphics (MENT 10.04 -3.61) and RSA Security (RSAS 11.32 -4.55) and a more unfavorable short-term outlook for the group... One bright spot was Google (GOOG 188.57 +3.28), which was upgraded by Lehman Brothers...
Energy (-1.3%) was the only economic sector closing to the downside, as late-day profit taking in oil prices erased early gains in the sector... Separately, General Motors (GM 29.21 +0.16) made headlines when its long term debt rating was cut by Moody's to Baa3 - a notch above junk status - temporarily pushing the indices to their lowest levels of the day... But the knee-jerk ended about as fast as it began, as such a decision, while negative, was arguably already anticipated by investors... DJTA +0.4, DJUA +0.7, DOT -0.2, Nasdaq 100 +0.5, Russell 2000 +0.1, SOX +0.1, S&P Midcap 400 +0.1, XOI -1.0, NYSE Adv/Dec 1854/1412, Nasdaq Adv/Dec 1602/1447
3:12PM Treasury Trade Remains Tight, Looks to GSE Testimony: : The market slid lower, gaining only some brief bumps on Greenspan and the negative credit rate actions on GM and Ford. The quiet session had been keyed on the potential for something from Greenspan regarding energy costs filtering down,inducing serious pricing pressure. The inflationary comments did not show-up in the prepared text, and therefore prices saw a slight relief bounce. The market was held captive by a lack of economic data and Greenspan speech potential keeping the market in very tight ranges across the curve. The dollar faltered at key technical levels, giving up its, largely short-covering driven rally mid-session (please see chart on 12:58ET comment). Even as, on the one hand, as the market fretted a bit over the inflationary aspects of oil prices, it chose to essentially disregard the possible outcome and stick close to its tight range. There are no economic releases on tap for tomorrow, but one potentially important and possible market moving event will be the weekly petroleum inventories data scheduled to be released at 10:30ET. The early Bloomberg consensus is for crude supplies to rise by 2.5M barrels in the week ended Apr 1 (please see chart on 13:31ET comment). The market will also be waiting for comments by Greenspan who will be testifying at 9:30ET on the regulatory reform of government sponsored enterprises (Freddie and Fannie) before the Senate Banking Committee. The potential for GSE regulation may disrupt the markets as caps on the groups activities may become a reality. The 10-yrs are currently -03/32nds yielding 4.468%.
10:28AM Software Sector Weakness : Following warnings from more than a half-dozen Software cos yesterday, Software group is under pressure today with Software Index down 0.7%. Names under pressure that did not issue warnings include: SNPS -4.7%, QSFT -4.6%, SRNA -4%, MCRS -3.3%, CDN -3.2%, RHAT -2.8%, SEBL -2.3%, ISSX -2%, WBSN -2%, MSTR -1.8%, MACR -1.6%, COGN -1.6%, ADSK -1.4%, BOBJ -1.4%, MERQ -1%, ADBE -0.8%... See 08:09 update for related commentary
10:03AM Altair Nanotechnologies and Bateman Engineering announce joint venture (ALTI) 4.22 +0.13: Co announced that it has signed a binding memorandum of understanding with Bateman Engineering BV to form a strategic joint venture. The new venture, "Altairnano-Bateman Titania, Inc." will leverage ALTI's proprietary and patented titanium dioxide pigment manufacturing process and Bateman's engineering expertise to focus on the worldwide development and manufacture of pigment products and services.
9:22AM Gapping Down : Gapping down on lowered guidance: RSAS -23% (also RBC downgrade; Raymond James downgrade), VNWK -20% (also Kaufman downgrade), MENT -19% (also Merrill downgrade; Wells Fargo downgrade), NMSS -18%, CIPH -23%, ATRS -10%, PLCM -7% (also First Albany downgrade; WR Hambrecht downgrade), MONE -7% ... Other News: FBR -20% (co-CEO to retire), ARTX -14%, NAVR -12% (downgraded to Source of Funds at ThinkEquity), ATPL -4.3% (continues yesterday's 11% drop), MWD -2% (Lehman downgrade).
9:07AM Gapping Up : Gapping up on strong guidance: NAPS +17%, SCUR +13%.... Other News: NVEC +12% (notified by the PTO of expected grant of key biosensor patent), MOBE +12% (receives equity investment from RSH, MOT), CTIC +9% (completes enrollment of NCI cooperative group Phase III trial of Trisenox), TIVO +7% (gets new advertisement deal with DirecTV), KOSN +7% (clinical trial update), STSI +4.8%, JCOM +4.3% (started with a Buy at Kaufman; tgt $46), ALTI +3.4% (extension of 14% move yesterday), EZPW +3.4% (extension of 13% move yesterday), TZOO +3.2% (bounces after 5% drop yesterday), NGPS +3.1%, GOOG +1.5% (Lehman upgrade).... Under $3: ANCC +14% (gets $1.6 mln contract), TGAL +14% (receives order), NTOP +10% (signs five year contracts w/ two broadband service providers; upgraded to Buy at Stanford; tgt $2.50).
1:43PM Fortune Brands Inc (FO) 84.25 +0.92: Fortune Brands and Pernod Ricard SA of France are in talks to buy Bristol-based Allied Domecq, the world's second largest liquor maker. The company, which has a market value of USD$13 bln, said it was in talks about a potential offer with the companies, but would not disclose details. The deal would double US sales for both companies adding brands including Malibu rum and Beefeater gin to their portfolios.
The purchase will give Pernod and Fortune the ability to better compete with the world's largest beverage company, Diageo Plc (DEO). The deal was not a big surprise with regard to Pernod, which is the third largest beverage company in the world, after it announced last month it had hired JP Morgan and Morgan Stanley to look into possible acquisitions. The deal could be structured several different ways including all three companies operating under one umbrella, or Pernod and Fortune could parcel out brands like Pernod and Diageo did back in 2001 when they jointly bought Seagrams. For Pernod, the attractiveness of Allied is its wine portfolio adding to its already successful Jacobs Creek brand. According to industry analysts, the deal would not increase competition for Constellation Brands (00C), which operates as small player in the spirits business and as the leader in the US wine market.
Fortune Brands is a well diversified consumer products company, which actually derives the majority of its revenues from its cabinet and faucet businesses including Aristokraft and Moen, respectively. By virtue of its scope of products from Home & Hardware, Golf, Office to Spirits & Wine, FO is a barometer for consumer spending trends. The Spirits & Wine business, which includes Jim Beam bourbon brand, accounts for just over 20% of sales. But this business is garnering renewed attention due to increased share gains and strong trends so far this year. A possible deal will only add to the momentum. This business is also highly profitable generating operating margins of 27% vs. overall at 17%. As such, even though revenues are only 20%, it makes up almost 30% of profits. Revenues rose 7.2% in FY04.
Earnings momentum remains quite positive, as the company has topped consensus estimates for the last eight consecutive quarters. It reports Q1 on April 21st before the open with consensus EPS of $1.03, up from $0.91 last year. We continue to like the story due to company's strength of its brands and breadth of products, combined with Fortune's large cap high quality status providing investors with low risk and long-term growth. The company is expected to achieve low double-digit earnings growth this year, which appears reasonable considering market share gains and new product launches. The risk with regard to its exposure to the housing market is already priced into shares. In addition, despite higher gasoline prices and rising interest rates, consumer spending still underpins economic growth. We will have to wait and see how this potential deal works out. The stock is now trading at a forward price to earnings multiple of 16.0x a discount to its peer consumer companies. ----Kimberly DuBord, Briefing.com
1:32PM Shaw Group (SGR) 22.06 -0.11: The Baton Rouge-based industrial company reported its Q2 results after Monday's close, topping estimates by two pennies. Shaw's businesses reach across many industries worldwide as a supplier of fabricated piping systems and construction services for the electric power, chemical, petrochemical, and refining industries. Earnings for the quarter came in at $9.7 mln, or $0.15 per share on revenue growth of 10.8% year/year to $763.5 mln. Revenues were a bit lighter than consensus estimates. Despite the beat, shares traded down in the after-market by 1.1%.
Shaw's backlog was down sequentially totaling $5.1 bln at the end of the February, 46% of which is expected to be converted during the next 12 months. Despite what the company calls strong momentum, the downward slope is a concern. Half of the backlog is within the environmental and the infrastructure sectors for Federal government agencies and commercial entities. About 35% of the work is for nuclear and fossil fuel power plants with another 13% attributed to chemical process industry facilities.
We recently wrote on the cyclical upturn in the chemical industry last week Wed, which Shaw benefited from this quarter. Management noted today a marked increase in activity pertaining to the recovery of the energy and chemical markets boosting revenues. Even though the company does operate worldwide, almost 85% of the top line is generated in the US with the next closest region being Asia at 8%. Gross margins were 9.2%, up 40 basis points year/year. The company announced it would sell 12.5 mln common shares using the proceeds to fund a tender offer for its 10.75% senior notes due in 2010 in order to delever the balance sheet and reduce borrowing costs. Shaw also noted potential acquisitional possibilities should they arise.
At first glance the quarter appears to be slightly better, but when taking a closer look the quality of earnings stands out as earnings benefited from contributions from other income. In addition, Shaw's backlog continued its downward trend after peaking in Q3 of last year at $6.0 bln declining sequentially for the last three quarters to $5.1 bln in Q2. This gives rise to execution concerns and sustainability of earnings. As such, the stock appears to be fully valued trading at 27.4x forward earnings above its five-year historical average of 21.9x. Over the longer-term, its proprietary products and end-market demand within the energy, chemicals, and power generation industries should drive earnings growth.----Kimberly DuBord, Briefing.com
12:07PM Verizon (VZ) $35.90 +0.25 (+0.7%) Verizon is up today, despite the press release that seems to imply they are willing to drop the acquisition of MCI (MCIP), if the board decides the current Qwest (Q) bid is better than the current Verizon bid for the company. While we think the statement is closer to "negotiations posturing" than any change in the desire to own MCI, it is also probably true that Verizon will not again raise their bid.
The MCI board now finds themselves in a lose/lose situation, ironically. If they choose the Qwest bid, having been pressured by large shareholders that this is their fiduciary duty, they may well face intense criticism a year from now, when the combined MCI/Qwest entity is struggling financially and comes up for sale again, probably at a lower price. In addition, MCI would have to pay Verizon its $250 million termination fee ($240 million fee, plus up to $10 million legal fees). At that time, would MCI directors face possible breach of fiduciary responsibility lawsuits if VZ stock is in the $45 range while the Q stock is below current levels?
On the other hand, if the MCI board accepts the current, unrevised Verizon bid, they face criticism and possible lawsuits for having accepted a "lower bid" for the company. They are already facing that criticism for having done so twice.
It all boils down to a decision over whether the "right" thing to do should be judged by short term or long term criteria. The Verizon letter to MCI summarizes the situation succinctly: "If the MCI board, capitulating to Qwest's artificial deadline, declares this bid to be `superior,' it would seem to us that the decision-making process is being driven by the interests of short-term investors rather than the company's long-term strength and viability."
The irony, of course, is that almost everyone on Wall Street "agrees" that the Verizon bid is the better bid, despite the math that shows the Qwest bid as "higher" currently. The issue is all about how to value the stock component of each bid and virtually no one thinks that a combined Q/MCI entity would be a stronger competitor than a VZ/MCI entity. In fact, the frankness with which this viewpoint is taken tells how deeply the viewpoint is held. An AG Edwards report issued on Friday called the Qwest bid a "big nickel" and the Verizon bid "a tiny dime," echoing the schoolyard arguments that the older students make to naive first graders.
We have written about this acquisition battle numerous times over the past month, both on the Story Stocks page and the Ahead of the Curve column. From the beginning, we have made two distinct points: a) Verizon needs the MCI enterprise customer base and the internet backbone network to leap ahead in the new age of telecommunications; and, b) since both bids are more than half stock, the "future value" of the stock is more important than the current value, and the MCI board has twice affirmed that, by choosing a lower "current value" Verizon bid. Based on the fact that the MCI board has twice selected the Verizon bid over a "higher" Qwest bid, it is clear they value VZ stock more than Q stock.
It is now hard to predict what the MCI board will do, but we still the correct perspective to view $4 billion worth of stock is the long term outlook and from that perspective, the Verizon bid is the one MCI should accept. All the MCI board has to do is convince everyone else that the long term perspective is the correct vantage point. (The Ahead of the Curve column of March 29, "Verizon Wins MCI And Grabs The Future" for more details and a listing of prior related articles.) - Robert V. Green
9:34AM Page One - Nothing to Get Excited About : The modest gains yesterday have set a decent tone for today. Futures suggest a higher open.
This is still a lull time in terms of news. There is nothing on the economic calendar for today. There are no major earnings reports. Yesterday after the close, Mentor Graphics, RSA Security, and Polycom warned. This morning, Tweeter, and Ethan Allen did as well, along with a few smaller companies. The broader market has not shown concern, however, as this is normally a heavy time for earnings warnings, and this is actually not a particularly worrisome list.
Oil remains a key factor for the market this week given the dearth of other news. This morning, it is down about $0.30 on reports that Saudi Arabia might increase output, but is still hovering just below $57 a barrel. Federal Reserve Chairman Greenspan will be speaking on energy prices today at 12:30 ET at the National Petrochemical and Refiners Association.
Pfizer has a an analyst meeting starting at 9:00 ET in which it will discuss its outlook. For more on this, please see the current Looking Ahead column.
First quarter earnings reports will start up heavily next week. Until then, the market tone is likely to remain restrained.Dick Green, Briefing.com
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