Sector Investing

[ReturntoSender]

From Briefing.com: 7:42PM Swing Trader: PXD, COST, FD : -Technical- Markets gapped higher Wednesday morning and showed some hesistation after the last 3 session run-up, but after a mid-day consolidation above Tuesday's highs, the indices managed to launch higher and trend upwards into the close. Market Breadth leaned positive as Advancing stocks outpaced Decliners about 2.7 to 1 and the number of New Lows basically ran even with New Highs...(continued)

5:16PM EMCORE beats by $0.04 (EMKR) :Reports Q2 (Mar) loss of $0.10 per share, $0.04 better than the Reuters Estimates consensus of ($0.14); revenues rose 31.1% year/year to $30.4 mln vs the $29.4 mln consensus.

4:43PM Axcelis Tech beats by $0.01, light on revs; guides for Q2 (ACLS) 6.07 +0.02:Reports Q1 (Mar) earnings of $0.05 per share, ex-items, $0.01 better than the Reuters Estimates consensus of $0.04; revenues rose 5.8% year/year to $100 mln vs the $99.3 mln consensus; gross margins were 41.8% for Q1. Co issues downside guidance for Q2, sees EPS of $0.00-0.04 vs. $0.04 consensus; sees Q2 revs of $85-95 mln vs. $98.44 mln consensus; sees gross margins in the low 40s.

4:38PM QLogic beats by 3 cents ex-items (QLGC) :Reports Q4 (Mar) earnings of $0.50 per share, excluding non-recurring items, $0.03 better than the Reuters Estimates consensus of $0.47; revenues rose 22.5% year/year to $157.2 mln vs the $154.9 mln consensus.

4:33PM O2Micro reports in-line (OIIM) :Reports Q1 (Mar) earnings of $0.05 per share, in-line with the Reuters Estimates consensus of $0.05; revenues rose 5.0% year/year to $23.3 mln vs the $23 mln consensus.

4:07PM IBM Plans Restructuring Actions, Company Will Take Q2 Charge (IBM) 77.08 :IBM today announced it plans to implement a series of restructuring actions designed to improve the company's efficiencies, strengthen its client-facing operations and capture opportunities in high-growth markets. The actions will accelerate progress toward more globally integrated operations, while addressing profitability in slower-growth regions, primarily in Europe. These actions will also allow IBM to shift resources to higher-growth markets and opportunities such as Business Performance Transformation Services. As a result, IBM estimates that it will record a pre-tax charge of between $1.3 bln and $1.7 bln in the second quarter. The company expects to realize benefits starting in the second half of the year. IBM's restructuring actions include voluntary and involuntary workforce reductions of between 10,000 and 13,000 employees worldwide. The majority of the overall workforce reductions are planned for Europe, and the company has initiated discussions of these changes with local consultation bodies.

4:00PM Qualcomm reaffirms Q3 guidance (QCOM) 35.65 :-Update- QUALCOMM today reaffirmed its financial guidance previously provided on April 20, 2005, for the third fiscal quarter ending June 26, 2005, to facilitate discussion at its analyst meeting. The previously provided financial guidance is detailed in QUALCOMM's second quarter fiscal 2005 earnings press release and can be found at the following Website. QUALCOMM is hosting its analyst meeting for institutional investors and equity analysts on May 5, 2005. Briefing.com note: On April 20, the co guided the following for Q3: sees EPS of $0.24-0.26 vs. $0.28 consensus; sees Q3 revs of $1.26-1.36 bln vs. $1.46 bln consensus. For FY05, co sees EPS of $1.10-1.14 vs. $1.16 consensus; sees FY05 revs of $5.5-5.7 bln vs. 5.9 bln consensus.

Close Dow +127.69 at 10384.64, S&P +14.48 at 1175.65, Nasdaq +29.16 at 1962.23: Upbeat news across the board underpinned broad-based buying on heavy volume that closed virtually every sector to the upside and the major averages with gains of at least 1.2%... The market, which was poised to open slightly higher amid strong earnings, M&A activity and falling oil prices, got an added boost after Kirk Kerkorian's Tracinda Corp. announced plans to more than double its existing 3.3% stake in General Motors (GM 32.77 +5.00) with a tender offer for up to 28 mln GM shares at $31 a share - a 13.4% premium...

The news prompted Merrill Lynch to upgrade the stock to Neutral, further fueling a buying frenzy that left the auto maker as the most actively traded issue on the NYSE and accounting for roughly 25% of the Dow's strong performance... But the news was anything but company-specific, as huge gains in Autos and Auto Parts were accompanied by strength in many other consumer cyclical stocks, as well as capital goods (i.e. aerospace) and transportation (i.e. trucking)...

Also contributing to a bullish bias that left barely a stone unturned in search of value and closed all ten economic sectors in positive territory, were better than expected earnings and a couple of multi-billion dollar mergers... This morning, Time Warner (TWX 17.20 +0.52) beat estimates by a penny while Cigna (CI 96.59 +2.14) handily beat forecasts and issued upside FY05 guidance... Last night, MetLife (MET 43.45 +4.61) handily beat estimates, raised its FY05 earnings outlook and issued upside FY06 guidance while Aon Corp (AOC 24.47 +3.20) beat expectations by $0.14... With regards to M&A activity, American Tower (AMT 17.20 -0.01) agreed to buy SpectraSite (SSI 61.20 +5.00) for $3.1 bln while Fresenius Medical Care agreed to acquire Renal Care Group (RCI 45.70 +6.40) for $4 bln...

Meanwhile, Consumer Discretionary (+2.0%) paced the way higher ahead of April same-store sales figures from more than 50 retailers... Financial (+1.9%) - the most influential of the 10 economic sectors - was strong across the board... Insurance Brokers (+8.9%) was one of the best performing S&P groups, led by AOC's upside earnings surprise and Smith Barney's upgrade on Marsh & McLennan (MMC 29.96 +1.71), while Banc of America's upgrade on Bear Stearns (BSC 97.38 +3.80) provided a boost to Brokerage (+3.7%)...

Aside from Financial, another influential sector also posting year-to-date losses but realizing widespread gains today was Technology... Semiconductor led the charge, as all 19 components of the PHLX Semi Index surged after the SIA showed that worldwide chip sales in Q1 grew 13.2% from a year ago... Even Software (+0.6%) which was weak most of the session amid an earnings warning from Electronic Arts (ERTS 49.45 -3.45) turned positive late in the day... The Materials (+1.5%) sector was also strong, benefiting from a weak dollar and renewed interest in Steel stocks...

The dollar was weak against the euro (1.2943) and yen (104.53) after the Fed said "the solid pace of spending growth has slowed somewhat."... Also taking advantage of dollar weakness, but more notably a recovery in oil prices, was Energy (+1.2%), despite an earnings miss from Devon Energy (DVN 44.62 -0.35)... Crude oil futures ($50.13/bbl $+0.63), which sold off following a bearish report from the Energy Dept. that showed larger than expected inventory builds, closed up 1.3% amid some short-covering... Crude oil supplies rose 2.6 mln barrels (consensus +1.25 mln) - the 12th increase in 13 weeks - while gasoline inventories rose 2.2 mln barrels (consensus +875K)...

Even Utility, which was weak amid downside Q2 guidance from Dominion Resources (D 72.41 +2.74), eked out a modest gain... Bonds, however, finished lower after the U.S. Treasury said it may reintroduce the 30-year bond, as the benchmark 10-year note closed down 5 ticks to yield 4.18%... Since the 30-year bond was abruptly suspended in Oct. 2001 over concerns about costs, Federal debt has increased almost 30% - surging to $4.7 tln from $3.3 tln...

Separately, the April ISM services index - today's only economic report - slipped to 61.7 (consensus 61.0) from a March reading of 63.1, but since the data don't necessarily provide good reads on the economy, the report was largely ignored...DJTA +1.7, DJUA +0.1, DOT +1.9, Nasdaq 100 +1.7, Russell 2000 +1.8, SOX +2.4, S&P Midcap 400 +1.4, XOI +1.1, NYSE Adv/Dec 2521/801, Nasdaq Adv/Dec 2095/958

2:09PM M-Wave clarifies prior press release on its unqualified auditor's opinion (MWAV) 1.07 +0.18:"We have learned by various news reports that the previous April 25th announcement of our receipt of the Unqualified Opinion of our current auditors as to our financial statements in our 2004 Annual Report on Form 10-KSB was apparently mistaken to relate negative information. This is inexplicable and entirely incorrect. In our Annual Reports for 2002 and 2003 our prior auditors expressed a qualification that M-Wave would be able to operate as a going concern in the forthcoming year. The 2004 Unqualified Opinion, in effect, removes any negative of M-Wave being a Going Concern and is thus totally good news. In fact, M-Wave in 2004 had its best year since 2001 and the audit opinion clearly does not question M-Wave's future in fiscal 2005..."

9:27AM Gapping Down :Gapping down on disappointing earnings/guidance: STRA -16% (down in sympathy: APOL -4%), ERTS -11%, ZBRA -10.7%, NIKU -8.4%, CACH -7.2%, SBL -5.6%, CEPH -4%, TKLC -3.4%... Other News: IDCC -12.6% (replaces CEO; Wells Fargo downgrade), SIMG -3.1% (receives notice of non-compliance from Nasdaq).

9:19AM Gapping Up :GM +9.5% (Tracinda to plans tender offer for up to 28 mln GM shares at $31/share; up in sympathy: F +3.5%, DCX +2.7%), RNVS +125% (positive clinical data; Piper says announcement is overwhelmingly positive; firm raises target to $32 from $19), RCI +18% (to be acquired), NYNY +17% (announces positive Indian gaming court ruling), RNAI +15% (clinical data), IMAX +8.5% (chosen by A.M.C. Theaters to install 5 theaters), SSI +5% (to be acquired; up in sympathy: SBAC +10%), NOK +2.2% (wins 3G deal with Vodafone Hungary)..... Gapping up on strong earnings/guidance: UNTD +17% (also co initiates dividend with 9% yield; Piper upgrade), WMS +13%, AQNT +11%, PWER +9.2%, AOC +8%, PWER +7.4%, IACI +5.3% (up in sympathy: VCLK +6.8%, ASKJ +4%), DWSN +5% (also Raymond James upgrade), MET +4.3%, CI +3.8%, MXIM +1.8%.

1:28PM Devon Energy Corp (DVN) 43.97 -1.00: Despite higher realized oil and natural gas prices, Devon Energy, an independent oil and gas producer, reported earnings well shy of consensus. The miss was due to a $33 mln charge resulting from a change in the fair value of derivative financial instruments not associated with hedging, coupled with another $25 mln charge for oil hedges associated with recently divested US properties. Net earnings for the quarter were $563 mln, or $1.17 per share up 14% from last year's period of $494 mln, or $1.03 per share. Excluding non-recurring items earnings were $1.12 per share $0.12 worse than the Reuters Estimates consensus of $1.24. On the top line, revenues rose 5.0% to $2.35 bln - 3% ahead of consensus.

Devon was quite busy in the first quarter drilling 129 wells, up 20% y/y with a success rate of 89%. This was the most active winter drilling program in the company's history. Its Canadian operations accounted for 56% of the wells drilled running at a success rate of 97%. At the peak, Devon was operating 64 wells in Canada. In the US, the Oklahoma-based company drilled 47 wells in the Barnett Shale - the largest natural gas field in Texas where Devon is the largest producer. It also commenced several drilling projects in the Gulf of Mexico including its Cascade discovery and two wells in the Magnolia deepwater fields. DVN is one of five of the largest lease holders in the promising deepwater market in the GOM.

Higher realized prices caused sales of oil, gas, and natural gas liquids to rise 6% to $1.9 bln y/y. Oil and natural gas prices rose 9% to $34.47 per barrel and $5.50 per million cubic feet, respectively. Liquids jumped 23% to $24.30 per barrel. Combined production declined 6% to 660 million Boe/day. The majority of the decline was attributed to North American properties the company is divesting, along with its Zafiro field in Equatorial Guinea. Devon is taking advantage of the strong pricing market divesting some of its mature fields, proceeds of which it plans to use for further share buybacks.

Increased activity levels within the energy patch has resulted in higher costs for the exploration and production industry. DVN's lease operating expenses increased 12% to $348 million, while unit lease operating expenses jumped 21% to $5.85 per Boe. Taxes, well workover expenses, repairs, maintenance, power, fuel, and impact of a weaker dollar drove the increase in unit costs. DVN's production taxes also soared 25% to $78 million due to higher oil and gas revenues and a retroactive tax adjustment due to regulatory rulings caused the increase. G&A decreased 24% to $58 million.

Higher energy prices generated cash flows of $1.1 bln, which the company is using for debt repayment. Its net debt to adjusted capitalization was 26% at the end of the quarter down from 31%. The company continued its share repurchase program buying 18 mln shares in Q1 for a total cost of $746 mln. It plans to finish its 10% of total shares program by the end of Sept - six months ahead of schedule due to higher proceeds from divestitures. Purchase and sales agreements have been signed for some non-core US and Canadian assets. Gross and after-tax proceeds from these divestitures are forecasted at $2.3 bln and $2.0 bln, respectively above the $1.5 bln at the upper end of its original target.

As a past suggested holding in our Active Portfolio, we continue to like Devon due to its large natural gas reserve base. Demand for the commodity continues to rise as supplies dwindle. New gas-fired power plants coming on line will further drive demand. The idea of importing liquefied natural gas is a good one, but it's costly to transport. Large-scale importation is most likely a ways off, therefore Devon through its US reserves should enjoy strong growth in sales and margins for the longer-term. The company has been able to successfully integrate a slew of large-scale acquisitions, which has doubled its size over the last few years. It is now selling off mature assets that will also reduce its cost structure. Key properties driving growth over the longer-term include its deepwater fields in the GOM, Barnett Shale, and the Mackenzie Delta. The risks remain volatile gas prices and challenges in drilling deepwater wells. Shares are down in early trading following the miss. Investors should be wary of investing in the Energy sector right now, as stocks are trading more on fluctuations in crude futures. The recent weakness in crude prices is the result of higher inventory levels and higher utilization rates and output at the refineries. Investors with a longer-term view should take advantage of weakness in favored energy stocks as the outlook for these companies on an earnings and cash flow basis is quite strong. ---Kimberly DuBord, Briefing.com

11:56AM Time Warner (TWX) $17.17 +0.49 (+2.9%) Just imagine what a powerful growth machine - and cash cow - Time Warner would be, if they could just dump AOL off on someone. Even with the drag on growth that AOL has been, Time Warner has managed to come up with incredibly strong growth; the AOL division is the only division that hasn't shown terrific growth over the past two years.

The following table illustrates best how AOL has failed to keep up with the growth seen in the cable divisions.
Item - TWX 05 Q1 Growth, Year Before Year
04Q1 versus 03Q1 Growth,Year Over Year
05Q1 versus 04Q1
Total Revenue 9.8% 2.9%
AOL Total Revenue -0.2% -2.6%
Cable Total Revenue 10.9% 9.9%
AOL Subscriber Revenue 1.1% -7.6%
Cable Subscriber Revenue 11.1% 10.0%


The other divisions (filmed entertainment, networks, and publishing) have all shown the same type of strong growth that cable has shown, but to a lesser extent. Filmed entertainment is still the highest contributor to revenue, at 28.8%, but its year-over-year growth was just 0.9% this quarter. Cable has shown the strongest growth, and this quarter's 9.9% continues that trend.

In fact, looking back over the trending statistics that Time Warner publishes for each division, AOL's "burden" is very clear. AOL's highest revenue quarter in the past two years was a full two years ago. The 2003 Q1 AOL total revenue was $2,195 million then, while cable's revenue was $1,842. In this quarter, AOL's revenue was $2,133 million, while cable's is now higher, at $2,246 million.

AOL subscriber revenue shows a similar trend of decline compared to cable's subscriber revenue trends. The two year ago number of $1,898 is higher than this quarter's $1,774 million, while cable's subscriber revenue jumped from $1,740 million two years ago to the just reported $2,127 million.

AOL's drag on TWX growth is so obvious that the company feels compelled to preemptively address the issue. In today's conference call, CEO Dick Parsons stated that they are working on "realizing the value" in AOL and that they view it as a "a real opportunity." Exactly what that means is unclear, although we think they would sell the entire unit if they could just find a buyer. But who would buy AOL now? It is too big for almost every potential buyer and Time Warner's failure to realize any synergy from this merger certainly discourages others. What aspiring executive at any major corporation would be willing to stake their career on buying AOL and turning it into the "next era" media giant that the Time Warner/AOL merger was supposed to be?

What it all means is that Time Warner, while still showing fantastic revenue growth, cash flow, and new initiatives, simply has to live with the "problem child" that AOL continues to be. There might be something they could still do to create the "media giant meets the internet" vision that was the root of the famous merger, but the full synergy of "any movie, any time" delivered over the web is still a long ways off. The stock would be performing a lot better if they could do one of the following: a) sell AOL; b) leverage Time Warner content as revenue to AOL subscribers; or, c) make AOL grow by itself. Until one of those happens, TWX stock won't get the valuation it would otherwise deserve. - Robert V. Green

8:33AM Page One: The market went through its typical wild gyration after the Fed policy statement. And that was before the "corrected" statement was made. When the dust settled, little had changed. Futures suggest a modest up open this morning after the S&P lost 1 point yesterday.

As expected, the Fed raised the fed funds rate target by 1/4%. It is now 3% after eight straight meetings in which a 1/4% rate hike was announced. The policy statement affirmed what everyone already knew - that inflationary pressures have increased, and that economic growth has slowed. The statement said "Pressures on inflation have picked up in recent months" and "the solid pace of spending growth has slowed somewhat." We knew that.

After releasing the statement, the Fed announced late in the afternoon said that the sentence "Longer-term inflation expectations remain well contained" had been inadvertently dropped and it put out a revised statement. Here it is (the bold is in the original to highlight the correction):

The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. Recent data suggest that the solid pace of spending growth has slowed somewhat, partly in response to the earlier increases in energy prices. Labor market conditions, however, apparently continue to improve gradually. Pressures on inflation have picked up in recent months and pricing power is more evident. Longer-term inflation expectations remain well contained. The Committee perceives that, with appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal. With underlying inflation expected to be contained, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.

There are two key takeaways from all this. First, the Fed is not as concerned about the uptick in inflation rates, or the slow patch in the economy as is the market. The Fed realizes that the longer-term view is that the economy still has momentum and inflation can be controlled (look at long rates for confirmation). The Fed is not going to overreact to a month of data as does the market.

Second, more rate hikes are likely. Perhaps three more, perhaps, four or more. It depends on how the economy reacts to the recent rate hikes. This is consistent with market expectations, which is why the market has shown little net change.

It is now on to the employment release on Friday. The April auto sales data released yesterday were reasonably strong, showing that the consumer has not rolled over. A decent payroll gain on Friday would go a long way to putting the excessive economic pessimism to rest. Later this morning, oil inventory data come out. There is a chance that oil prices head back towards $45 over the coming month. The price this morning is about $49.50 a barrel. The Fed is maintaining a steady course with a long-term plan. Investors should follow suit. (OPENX)

9:31AM Coldwater Creek (CWTR) Brean Murray initiates BUY. Target $20. Firm says the co has numerous top-line and profitability initiatives that they expect will lead to at least 25% EPS growth over the next several years, and they think the stock's recent sell-off provides an excellent entry point.

9:29AM Gibraltar Industries (ROCK) Robert W. Baird initiates NEUTRAL. Target $24. Baird initiates ROCK saying the co's solid growth profile and meaningful cost structure savings opportunities could drive above-average earnings growth over the next 3-5 years. They think acquisitions remain a primary focus with mgmt targeting $2 bln in sales. Firm believes the stock adequately discounts fundamental outlook with improved ROIC/margin expansion as the primary catalysts for valuation multiple expansion. They would be buyers in the high teens.

9:29AM Wilson Greatbatch (GB) Lazard Freres upgrades Hold to BUY. Target $17 to $30. Firm also raises their ests for FY05 and FY06, based on improving outlook in batteries for 3 disparate applications (implantable defibrillators, neurostimulators, and oil pipeline inspection devices) combined with improving operating margins.

9:29AM Terayon Comm (TERN) Merriman Curhan Ford upgrades Neutral to BUY. Merriman upgrades TERN based on the value, growth, and earnings power of the co's digital video unit. They say combined with sound expense control, the increasing revenue contribution of the high-margin digital video business is forecasted to drive significant earnings power for Terayon on a stand-alone basis. They believe the digital video unit could be worth even more to a potential acquirer, allowing for additional upside potential.

9:28AM Electronic Arts (ERTS) Wedbush Morgan upgrades Hold to BUY. Target $58. Firm believes the disappointing guidance is likely to lead to a sell-off of ERTS shares, and anticipates that the stock could bottom at $45 or lower. They believe that ERTS will maintain its market leadership position, and expect its share price to rebound dramatically later this year. They think that the projected loss during 1H will revert to a more normalized profit in future years, and think that the co is well positioned to grow earnings dramatically in FY07.

9:28AM Intrado (TRDO) Morgan Keegan downgrades Outperform to MKT PERFORM. Morgan Keegan downgrades TRDO, following Q1 report and cloudy outlook for 2H05 due to pricing and accounting impacts of wireline/ wireless renewals. Firm thinks that upcoming contract renewals in Q2 have the potential to negatively impact wireless revs even though they will likely result in an increase in mkt share for Intrado. Additionally, both of the co's licensed software customers are considering moving to a service bureau model, which would be a positive longer term for Intrado, but in the near term, they think the typical seasonal strength of licensed sales in the back half of the year is unlikely.

9:26AM Encore Wire Corp (WIRE) Southwest Securities upgrades Neutral to LT BUY. Target $12.5. Firm believes the current competitive landscape could result in capacity leaving the industry. They think the co is well-positioned to capitalize on any volume that comes onto mkt as a result of competitors exiting; however, mkt share concentration of 70%+ among the top three copper wire producers would limit market share pick-up from a smaller competitor exiting the industry.