From Briefing.com: 4:30PM Storage Tech beats by $0.02 (STK) 28.58 +0.49:Reports Q1 (Mar) earnings of $0.22 per share, $0.02 better than the Reuters Estimates consensus of $0.20; revenues fell 3.1% year/year to $499.3 mln vs the $501.6 mln consensus. "While we grew our profits on a year-over-year basis, this was not the quarter that we had expected to deliver... However, as we enter the second quarter, our backlog and pipeline of business have improved and we anticipate delivering better results for the remainder of 2005."
4:25PM Altera beats by $0.02 (ALTR) 19.25 +0.24:Reports Q1 (Mar) earnings of $0.17 per share, $0.02 better than the Reuters Estimates consensus of $0.15; revenues rose 9.0% year/year to $264.8 mln vs the $254.3 mln consensus.
4:12PM Volterra Semi reports in-line Q1 results (VLTR) :Reports Q1 (Mar) earnings of $0.09 per share, excluding non-recurring items, in line with the Reuters Estimates consensus of $0.09; revenues rose 92.1% year/year to $14.6 mln vs the $14.3 mln consensus.
Close Dow +84.76 at 10242.47, S&P +9.98 at 1162.10, Nasdaq +18.59 at 1950.78: Stocks started strong, amid robust M&A news, encouraging housing data, and the prospects for improved profit growth, and closed near session highs as virtually every sector finished to the upside... While MCI Inc.'s (MCIP 26.65 -0.04) declaration that Qwest's (Q 3.53 -0.02) latest $9.7 bln takeover was superior to Verizon's (VZ 33.91 -0.15) $7.6 bln offer marked today's largest deal, a proposed $6.9 bln bid by Valero Energy (VLO 76.10 +1.06) - the best performing stock on the S&P 500 this year - for Premcor (PCO 70.10 +11.10) arguably provided the bulk of excitement for investors...
After all, the anticipated deal, which will create North America's largest refiner of crude oil, directly addresses one of the biggest issues currently weighing on consumers - the need to improve refinery capacity amid rising gasoline prices...
A $1.1 bln buyout of DoubleClick (DCLK 8.12 -0.45), the potential $2.5 bln sale of General Electric's (GE 36.39 +0.29) self-storage business and reports that former NYSE director Kenneth Langone may negotiate a better deal than the proposed $3.3 bln merger between the NYSE and Archipelago Holdings (AX 28.55 -1.21) also contributed to an improved overall sentiment... Meanwhile, March existing home sales rose 1.0% to 6.89 mln (consensus 6.80 mln) - the third highest level ever - versus an upwardly revised Feb. figure of 6.82 mln, suggesting that the overall economic picture remains solid and that Friday's broad-based selling efforts may have been overdone... Further supporting the notion of an arguably oversold market was the fact that N. Korea did not prepare a nuclear-weapons test over the weekend...
Also providing a floor of support for stocks that helped lift all ten economic sectors into positive territory was the growing reality that aggregate Q1 EPS growth may now check in closer to 13% (about 5% above prior forecasts), following better than expected earnings from SBC Communications (SBC 23.30 +0.10)... Financial (1.3%) paced the way to the upside, led by gains from brokerage firms like Lehman Brothers (LEH 92.85 +2.38) and Morgan Stanley (MWD 51.23 +0.98), which advised VLO and PCO, respectively, on their proposed merger... Also assisted by the pending VLO-PCO combination was Energy (+1.2%), which pared even larger gains as crude oil futures ($54.57/bbl -$0.82) closed near session lows...
The commodity was on pace to close higher for the fifth consecutive session ahead of President Bush's meeting with Saudi Crown Prince Abdullah, but as Saudi Adviser Jubeir said world oil supplies remained adequate and that Saudi Arabia will provide more oil if buyers want it, the commodity reversed overnight gains... Technology (+0.9%) was strong across the board...
CSFB raising its rating on Apple Computer (AAPL 36.98 +1.48) helped Hardware surge 1.6% while Piper Jaffray's upgrade on Ciena (CIEN 1.99 +0.08), not only lifted Networking stocks (+1.5%) but helped CIEN recover some of the 60% in lost value since the stock surpassed $5 a share nearly a year ago to the day... Even Health Care (+0.1%), despite modest weakness in both Biotech and Drug, closed in positive territory... Treasurys, however, closed in lackluster fashion as traders prepared for more influential economic data to provide some upside incentive... The benchmark 10-year note finished flat yielding 4.24%...DJTA +0.9, DJUA +0.9, DOT +1.3, Nasdaq 100 +1.1, Russell 2000 +1.2, SOX +0.5, S&P Midcap 400 +1.3, XOI +1.4, NYSE Adv/Dec 2291/1041, Nasdaq Adv/Dec 1814/1277
3:16PM Cirrus Logic announces intent to divest video product line to focus on core analog IC business; reconfirms guidance (CRUS) 3.92 +0.05:Co announced its intent to divest its digital video product line assets and focus operations around its core, high-precision analog, mixed-signal and embedded integrated circuits for audio and industrial applications. The co expects Q4 results to be within previous guidance issued on Jan. 26, 2005, which was for revs of $40-42 mln.
3:01PM Microsoft names Chris Liddell new C.F.O. (MSFT) 24.93 -0.05:Co names Chris Liddell as its new CFO beginning May 9. Liddell most recently served as the CFO at International Paper (IP).
12:28PM M-Wave announces it receives unqualified opinion from its auditors in its annual report (MWAV) 1.25 +0.08:Co announced today that it received an unqualified audit opinion from its auditors, McGladrey & Pullen LLP, on the 2004 financial statements contained in the co's Annual Report on Form 10-KSB. The 2003 and 2002 financial statements audited by Grant Thornton contained a going-concern qualification. The unqualified opinion reflects improvements in the overall financial condition and the recapitalization of the Company during 2004.
9:16AM Gapping Down :SIMG -8.6% (announces 4 board resignations), BIOI -7% (reports Q1), DCLK -4.3% (to be acquired for $8.50/sh in cash) FRO -2.4%, RIMM -2% (fairly negative WSJ article), VLO -1.7% (to acquire PCO), AIG -1.7% (faces further troubles after new review - Financial Times).
9:08AM Gapping Up :PCO +20% (to be acquired by VLO), LEXR +11.4% (Barron's highlight), KENT +41%, VSEC +10% (gets large Navy contract), XXIA +6.2% (two upgrades), BEAV +5.6% (reports Q1), CHRT +5.6% (Goldman and Merrill upgrades), CD +5.5% (reports tonight), STTS +5.3% (Merrill upgrade), ADSX +5.3%, RMBS +4.5% (announces developments in Patent and Antitrust Cases), PLAY +4.2% (CSFB upgrade), MU +3.7% (Smith Barney upgrade), HANS +2.2% (coverage initiated), AAPL +2% (CSFB upghrade), SEPR+1.7% (reports Q1).... Under $3: CIEN +7.3% (Piper upgrade), ALTI +5.4% (co and Bateman Engineering initiate 2 projects in their joint venture).
9:04AM Rudolph Tech reschedules Q1 earnings conference call to May 4 from May 9 (RTEC) 12.21 :The co did not give a reason for the scheduling change.
8:35AM Silicon Image announces resignations from four members of its board of directors (SIMG) 11.49 :Christopher Paisley (chairman of the board and member of the audit, compensation and governance and nominating committees) and David Courtney (chairman of the audit committee and member of the governance and nominating committee) stated that they were resigning due to a disagreement over whether or not David Lee should be re-nominated to the Company's board of directors. Keith McAuliffe (chairman of the compensation committee and member of the audit and governance and nominating committees) stated that he was resigning due to events surrounding the question of whether or not David Lee should be re-nominated to the Co's board of directors. Richard Sanquini (member of the compensation and governance and nominating committees) resigned without stating a reason... Co re-affirms the financial guidance that we provided in our conference call on April 21.
8:04AM Rambus announces developments in Patent and Antitrust Cases (RMBS) 14.36 :Rambus announces developments last week in three separate litigation matters. First, in an antitrust case brought last year by Rambus against several DRAM manufacturers, the California Superior Court for the City and County of San Francisco last Friday overruled a demurrer that had been jointly filed by defendants seeking dismissal of the case. In other proceedings in the Rambus antitrust case, the San Francisco court resolved certain issues relating to a draft protective order, directed the parties to meet and confer about other issues relating to that order, and ordered defendants to produce to Rambus all documents they had previously produced to the Department of Justice within 30 days from the entry of that protective order. In a third case, the patent case against Micron now pending in the District of Delaware, the Delaware court last week denied a motion by Micron seeking to schedule an early hearing on its spoliation allegations against Rambus and seeking to stay the rest of the case.
2:11PM Arch Coal Inc. (ACI) 46.31 +1.32: First quarter profits for the second largest coal producer in the US more than doubled as strong demand to fuel power plants and increased gas volumes generated soaring prices. Arch Coal delivered Q1 earnings of $0.25 per share, excluding non-recurring items - three cents below the Reuters Estimates consensus. Revenues skyrocketed to $600.5 mln vs. the $565.1 mln consensus due to higher price realizations in all three geographic regions.
For the quarter, Arch sales volumes grew to 37.0 mln tons compared to 25.8 mln last year. The bull environment for coal sent revenues up by almost 50% to $600.5 mln due to higher price realizations, as well as consolidating acquisitions. For the quarter, ACI realized a sales price of $15.92/ton up from $15.12 last year, with operating costs of $14.52/ton up from $13.88/ton in Q1 '04. The company ended the quarter with very little coal left to sell for the remainder of 2005. In 2006, it has 45-55 mln tons of its expected production yet to be priced, and in 2007 it has 90-100 mln tons not under contract.
Within its Central Appalachia unit, soaring prices helped to offset weaker volumes and higher costs. It produced 7.2 mln tons down 4% y/y with prices gaining 27% to $41.90/ton. The quarter was negatively impacted by continued challenges at its Mingo Logan mine adversely affected by geological conditions. The Power River Basin (PBR) unit delivered very strong results for the quarter. It produced 23.6 mln tons up 42% y/y with prices rising to $7.79 from $6.86 last year. Arch also signed a new agreement for 10 mln tons for 2006, 2007, and 2008 at 40% and 60% higher than current prices. This is a small amount in terms of total production, but speaks to the strength of the demand curve. Lastly, the Western Bituminous Region produced 4.8 mln tons up 2% y/y with prices rising to $17.08 up 10% y/y.
Operating income was $35.9 mln up 53% y/y, excluding special items. Adjusted EBITDA was $86.8 mln from $64.0 mln last year, which benefited from a large gain for the sale of its stake in Natural Resource Partners. Higher price realizations have generated an enormous amount of cash, which it has in part used to pay down debt. Total debt as a percentage of total capitalization declined to 47% from 84% at the end of 2000.
Assisting shares after the miss was the company's upside guidance. For FY05, it sees EPS of $1.50-2.00 vs. $1.87 consensus and EBITDA in the range of $400-450 mln. The company stated, "We remain on track for substantially improved operating results in 2005, and additional progress in 2006 and 2007". It expects stronger results in each successive quarter throughout the year.
While the Q1 was a miss when compared to consensus, overall this was still a strong quarter. The Street is likely to reduce FY05 estimates due to the shortfall in the Q1, however, the outlook remains quite bullish considering the steep demand curve and resulting higher price realizations within the industry. In addition, Arch noted that the operational issues related to its Mingo Logan mine are largely behind it.
Investing in coal stocks is not for the faint of heart, as the ebb and flow of economic growth expectations generates substantial swings in prices. We first highlighted the industry and suggested Arch as a investment idea back in October as rail car loadings were showing increasing volume shipments. Fundamentals this year will remain quite strong, as continued demand from power generators and steel manufacturers will limit supply builds. In addition, exports may rise as the global coal market remains tight, coupled high freight rates making the US producers more competitive. For Arch, performance will center on operational efficiencies including cost controls and its ability to translate higher prices into higher profits. The stock trades at 24.8x forward earnings compared to the largest producer, Peabody Energy (00C), at 15.2x. ---Kimberly DuBord, Briefing.com
2:10PM SBC Communications Inc. (SBC) 23.40 +0.18: On the upside for the quarter was strong growth in long distance and data services, yet an in-line report may not be enough to entice investors back into SBC's shares. The company reported Q1 earnings of $0.34 per share, excluding non-recurring items - a penny above the Reuters Estimates consensus of $0.33. On the top line, excluding its 60% stake in Cingular, revenues rose 2.4% year/year to $10.25 bln. Its voice segment remains a disappointment declining 2.4%, although slightly improved from the fourth quarter -2.7%. On the wireline side revenues grew 2.8%, yet at a slower pace from last quarter of 3.6% growth.
The revenue breakdown was as follows: Voice -2.4% y/y ($5.06 mln), Data +6.7% ($2.8 mln), Long-Distance Voice +20.3 ($901 mln), Directory Advertising -1.7% ($946 mln), and Other +11.3% ($491 mln). Its DSL rollout continues to enjoy strong growth trends. Actually, this was its best-ever quarter in DSL generating 10% growth by adding 504k net adds, reaching a total of 5.6 mln in service. This growth rate outpaces its peers. Over the last four quarters, it added more than 1.6 mln DSL lines. Revenues for this segment jumped 27.6% year/year. On the long distance side, it added 1.1 mln users during the quarter reaching 22 mln. Over the past four quarters, SBC added 5 mln LD lines.
SBC also offers a bundled service for its retail customers, which includes long distance, DSL, joint-billed Cingular Wireless or SBC, and DISH Network video. This unit rose 64% q/q and 50% y/y. This is a more profitable approach to reaching its consumers, as the average revenues per retail consumer access line rose 8.4% just from the first quarter. The weakness was supposed to show up on the retail access line segment, however, SBC posted its first quarterly gain in five-years in primary residential lines up 16k. This was a significant turnaround from the 73k decline in Q4. While retail residential lines declined 3.8% - a sequential improvement.
Cingular previously announced its results with earnings coming in at $885 mln, or $0.27 per share. Before merger-related expenses earnings were $1.1 bln, or $0.34 per share. Cingular enjoyed its second straight quarter of strong subscriber growth of 50.4 mln with reduced churn. SBC's EBITDA margins were in-line at 30.4% of sales.
Overall, no real surprises on the up or down side from the second largest telecommunications company in the US. The market was hoping for a better result on the wireline side, although segment trends remain relatively stable. Growth remains heavily weighed within the DSL and long distance units, with voice lagging. SBC will complete its merger with AT&T by some time next year. Industry analysts expect SBC will not face the integration issues that Verizon or Qwest will face with MCI. Also, it should achieve cost synergies through headcount reductions, still topline growth will remain challenging.
Performance in the Telecom Service group has been more about the continuing consolidation story than growth. Considering its 5.56% dividend yield, SBC is more of a defensive play than anything else, as revenue growth and improved profitability at Cingular have been a positive factor, but most of this upside is already discounted into shares. Shares are down almost 10% year-to-date and are now trading at 16.3x forward earnings. ---Kimberly DuBord, Briefing.com
11:24AM Verizon Communications (VZ) $34.20 +0.14 (+0.4%) It is no surprise that MCI (MCIP) accepted the revised Qwest (Q) bid of $30 per share, of which $16 is cash. Qwest essentially met the criteria MCI had previously said would be acceptable. Although the downside protection against a decline in the value of Q stock was not exactly what MCI had previously specified, the bid is "close enough" that the MCI board had virtually no choice. The entire VZ/Q bidding war has had a shadow of "uncertain fiduciary duty" hanging over it, since the MCI board has had to argue that the future value of Q stock was so risky that a lower current VZ bid was actually higher. To turn Qwest away now would have been a clear breach of the board's duty to get the highest value for shareholders. At this point, the MCI board is no longer in the "fiduciary shadows." No one can now argue that the board did get the highest possible value for MCI.
The only question remaining is whether Verizon or Qwest will be the one that delivers that highest value to MCI shareholders. It is not surprising that Verizon did not respond in any way to Qwest's renewed bid, made on Thursday, until MCI had made a decision on the new Qwest bid. Any increased bid before that decision would have amounted to Verizon bidding against itself, since last week Verizon was the leading bidder with a signed merger agreement.
As we stated on Friday, we think the most likely scenario is for Verizon to raise its bid by increasing both the cash and the stock portion of the bid, but probably not match the current value of the Qwest bid. How close do they need to come? MCI has previously given Verizon a 15-18% discount over Qwest bids, but that was when each bid was about 60-70% stock. Qwest's bid is now 53% cash.
To be close enough to be better, we think Verizon will need to be within at least 10% of the $30 current value total and have at least half of the bid be in the form of cash. This means a total of at least $27 per share or higher, with at least $13.50 per share in cash. Verizon's current bid already has a stock swap value (protected against declines) of $14.75, but it is probably important that their bid have a near equal cash-stock percentage for the MCI board to retain their clean fiduciary-duty status. This means that Verizon could lower the stock swap ratio, but that seems unlikely. The future value of VZ stock has been Verizon's strongest weapon in this entire battle. Sheathing it now would be a tactical error.
Using this line of thinking implies that Verizon should revise their bid by upping the cash portion to $13.50 and leaving the stock ratio unaltered. This would be a total of $28.25 per MCIP share and allow the MCI board to keep their fiduciary high ground. Such a bid would be an increase of $5 per share of cash, or a total of $1.6 billion more in cash. Verizon's bid would then have a $4.4 billion in cash component. Verizon could afford this through debt issue, although reducing their debt burden has been a priority of the past 2 years.
Will Verizon match the Qwest bid? At this point, we confess to being uncertain about Verizon's willingness to fork over an additional $1.6 billion, even though we think it would strategically be a great investment and position Verizon to become the most powerful telecom company of the coming years.
The irony is that Verizon is now an appealing investment regardless of whether they win MCI or not. In January, VZ traded near $40, and then lost 10% when the company announced that pension and other costs would eat up at least $0.20 per share in earnings, or about $550 million total. Verizon will get a lot of this "lost earnings" back, as MCI will pay a $250 million breakup fee and VZ will have a gain of $190 million on the 13.4% of MCI they bought last week (for $25.72). Yet the stock is 15% cheaper than four months ago and the increased dividend is now at the 4.8% level. A Q/MCIP combination will not pose much of a competitive threat; it only postpones Verizon's penetration of the enterprise market. It all adds up to VZ being the best play in this merger battle, from a short term perspective if they lose MCI and a long term perspective if they win. Robert V. Green
9:01AM Page One - Earnings Much Better than Expected : Futures suggest an up open. That is not going to convince anyone that the recent turbulence is over.
The stock market is about where it was six months ago. Concern that rising inflation and rising interest rates will slow economic and earnings growth has put a greater risk premium on stocks. But the earnings growth certainly remains good for now.
The first quarter earnings numbers are coming in very strong. So far, 42% of the S&P 500 have reported. About 65% of companies have reported earnings above Wall Street expectations. That is higher than the normal 62%. Aggregate earnings are running about 5% above expectations, which is above the typical 3%.
As a result, first quarter operating earnings in aggregate will rise close to 13%. That is well above the 8% expected a few weeks ago. This is a surprisingly strong increase given the difficult comparisons from a very strong first quarter last year, and given the slowdown in economic demand.
The strong earnings gain will push the P/E on operating earnings for the S&P 500 down to about 16.4. That is lower than it has been for years and in theory represents very good value relative to a 4.23% 10-year note yield. The problem, of course, is that the market is putting a greater risk premium on stocks due to concerns that the economy will slow significantly later this year as the Fed fights inflationary pressures. If the Fed pulls off a soft landing, however, by slowing economic growth enough to rein in inflation while maintaining GDP growth near its long-term trend of 3%, the value on stocks will become clear.
The news this morning is limited. MCI now says it prefers Qwest's $9.7 billion bid to Verizon's. Oil refiner Valero Energy is buying Premcor for $6.9 billion. DoubleClick is being bought by a private investment firm for $1.1 billion. It will be a very busy week for earnings, but this morning there are only a few of note. SBC beat by a penny, and Kimberly-Clark reported in-line. Oil is up about $0.25 and holding above $55 a barrel. There are no economic releases until the existing home sales data at 10:00 ET.
The key to the stock market outlook is inflation. Once the market believes the Fed has inflation back under control, the value in stocks will become apparent. Until then, the risk of higher interest rates and the resulting slower economic and earnings growth will keep the market in check.--Dick Green, Briefing.com
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