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Friday, May 06, 2005 10:57:10 PM
From Briefing.com: 4:51PM Weekly Wrap: It was a good week for the stock market. The S&P index followed the up-down pattern of last week, as it was up on Monday and Wednesday, but down on Tuesday, Thursday and Friday. Fortunately, however, the down days were small while Monday and Wednesday saw large gains. The index was up 15 points for the week.
The Fed policy statement on Tuesday and the April employment data on Friday dominated the news.
On Tuesday, the Fed raised the fed funds rate target for overnight bank loans to 3% from 2 3/4%. This was the eighth straight meeting at which the Fed raised the target by 1/4%. That was fully expected by the market.
The statement accompanying the announcement indicated that "after this action, the stance of monetary policy remains accommodative." That means more rate hikes are coming. Most economists expect the fed funds rate target to be at 3 3/4% or 4% by the end of the year.
The statement did not reflect any need to raise rates at a more rapid pace, however, as it also included (after a slight delay) the phrases "Longer-term inflation expectations remain well contained" and "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."
Those phrases help ease underlying inflation concerns.
Underlying economic concerns were addressed on Friday.
The April employment report showed a surge of 274,000 in non-farm payrolls. This is a big increase and was well ahead expectations of 175,000 increase. In addition, the February and March gains were revised significantly higher. The average payroll gain for the past three months is now 240,000. That is well above the 187,000 average monthly gain in 2004, when real GDP rose 4.4%. There is no question that payroll growth is more than sufficient to sustain real GDP growth at or above its long-term trend of 3.1%.
There are still concerns that the soft patch that consumer spending hit in March continued into April. Same store sales data from retail chains, as released on Thursday of this week, showed only modest gains. Wal-Mart checked in with only a 0.9% increase over April of last year. But even a soft patch in consumer spending hardly means that the strong momentum in the economy is over. The growth in payrolls lays a strong foundation that will keep economic growth on track over time. The market reaction on Friday was muted, but it is clearly bullish and will provide underlying stock market support by lessening arguments that a significant economic slowdown is occurring.
The other big news item this week was that General Motors debt was downgraded to junk status on Thursday. That caused a market drop that day. It has been talked about for weeks, however, and isn't a great surprise. The company's problem is the massive benefits liability in the years ahead. This is a cost problem affecting debt. It isn't a sign of underlying weakness in the economy.
There were plenty more earnings reports this week, but none of major impact. First quarter operating earnings growth is on target for 14%. Second quarter forecasts are now at about 8%. Given the propensity for conservative forecasts at this point in the quarter, this suggests another gain of 10% or more is in store.
The April retail sales report on Thursday of next week is important, but that's about it for the economic calendar. There are very few earnings reports next week, but Cisco on Tuesday and Dell on Thursday are big.
Oil prices were up this week from $49.72 last Friday to $50.96 this week. The yield on the 10-year note jumped to 4.26% from 4.19%, largely in reaction to the strong jobs data.
The S&P notched its third straight weekly gain. It is now up 3.1% from the lows this year set in April. But it is still down 3.3% for the year. The excessive pessimism from April has been wrung out of the market, but there are few expectations of a major rally in the summer months ahead.
4:43PM Swing Trader : -Technical- Markets opened higher this morning off positive job data, but the momentum was short-lived near yesterday's highs and resulted in a relatively quiet, but choppy range. Market Breadth was neutral as Advancers were relatively equal to Decliners and as New Highs was relatively equal to New Lows. Not much has changed as the daily action in the SPY remains under its 50-day simple moving average (118.08) and closed under its 50-day exponential ma (117.39). As I said on Thursday, the market looks short-term overbought this week and leaves the door open for some selling pressure around this area...(continued)
2:13PM Corning - - Relative Strength (GLW) 14.90 +1.09: -Technical- The stock displays relative strength today as it stages a breakout above its 14.00 resistance area to trade at a new 3 year high.
10:43AM ZUMZ -- IPO opens for trading at $20.55 23.00 +5.00:See 10:26 comment for full write-up.
10:26AM Zumiez IPO prices above range; action sports related apparel for young people (ZUMZ) 18.00 :Zumiez prices its IPO at $18, above the expected range of $15-$17. Zumiez, pronounced "zoomies", is a retailer of action sports related apparel and footwear catering to young men and women between age 12-24 focusing on skateboarding, surfing, snowboarding, and motocross. The co operates 140 stores in 18 states primarily located in shopping malls. Most of its stores feature couches and action sports oriented video game stations intended to keep customers in the store longer.... The co has increased sales from $44.5 mln in fiscal 1999 to $153.6 mln in fiscal 2004, for a compound annual growth rate of 28.1%. Importantly, the co has been profitable in every year of its 26-year history. Briefing.com Take: The nearest comp would probably be Skechers (SKX). We would have thought SKX's Q2 warning last week would have dampened demand, but apparently not. Other comparables include PSUN and ZQK. ZUMZ's growth rates, its profitability track record and the small float of 3.1 mln shares helped to boost the pricing above the expected range. Either way, keep this name on the radar as a secondary play if those other cos guide higher. Also, ZUMZ could be seen as a back-to-school play later this year. This deal is being led by Piper Jaffray and Wachovia.
10:02AM China Techfaith Wireless IPO prices; large mobile handset designer in China (CNTF) 16.25 :China Techfaith Wireless prices its IPO at $16.25, slightly above the middle of its expected range of $15-$17. The co is one of the largest independent mobile handset design houses in China. It handles the entire handset design cycle: from hardware design to pilot production. The co designs GSM-based mobile handsets and has recently begun developing mobile handsets for use on WCDMA and CDMA networks. The co has also begun to develop smart phones. Customers include large Chinese brands, as well as Alcatel, Kyocera, Mitsubishi, NEC and UTStarcom. From its inception in July 2002, the co has designed 58 mobile handset models. In 2004, the co was profitable and posted revenue of US$46.6 mln, up 380% yoy.... Briefing.com Take: UTStarcom's (UTSI -28%) weak report and guidance last night is probably not the best timing for CNTF. In general, we would think a handset maker based in China would be subject to price cutting and low margins. However, CNTF provides full design services so it's tough to get a clear read. Overall, the IPO market is improcing this week thanks to the high profile LAZ and MORN deals... This is a 8.7 mln share deal led by Merrill Lynch.
9:23AM Gapping Down :Gapping down on disappointing earnings/guidance: UTSI -31% (also OpCo downgrade), SEAC -14%, ARDI -14% (also Needham and Raymond James downgrades), AZPN -8.1%, SINA -6.9%, ATVI -2.6%, ... Other News: KERX -8.2% (Phase 2 clinical data), NAPS -6.6%, CBK -4.2% (profit taking after 14% move yesterday), GBX -3.2% (to sell 4.5 mln shares), AEOS -3.1% (BofA downgrade).
9:17AM Gapping Up :Gapping up on strong earnings/guidance: CKCM +37%, PIXR +6.3%, JMDT +14%, BCSI +12%, FSTC +10%, ADSX +8.6%, MFE +7.3% (also Kaufman upgrade), ASTM +5.5%... Other News: CRXL +9.1% (extension of 33% move over last 5 weeks), MWV +3% (tender offer for $850 mln of debt and up to 16 mln shares), SHR +2.3% (affiliate Berlex completes patient enrollment for Phase 2 trial), BRCM +2.2%... Under $3: UHCP +31% (extends 27% move yesterday).
8:47AM Bois D Arc Energy IPO prices; oil and gas exploration in Gulf of Mexico (BDE) 13.00 :Bois d'Arc Energy prices its IPO at $13, roughly mid-range of expectations of $12-$15. The co is an oil and gas exploration firm. The co focuses on the Gulf of Mexico shelf principally because it believes this region has significant undiscovered reserves. Additionally, many major energy cos have redirected resources over the last several years away from the Gulf of Mexico to focus on larger projects in the deepwater Gulf of Mexico and other areas of the world... If yeterday's related IPO (oil and gas marine transport) debut of Teekay LNG Partners (TGP) is an indication, that's good news for BDE. TGP rose more than 10% after pricing at the high end of the range. Other recent oil explorations IPOs have done ok. Bill Barrett (BBG 28.26) and W&T Offshore (WTI 20.41) are up 13% and 7.4% from their respective offering prices. WTI is also primarily in the Gulf of Mexico... After a slump the past few weeks, the overall IPO market has improved this week thanks to high profile IPOs LAZ and MORN.... This is a 13.5 mln share deal led by Raymond James.
7:34AM General Electric boosts Q2 guidance; reaffirms Y05; restates (GE) 35.85 :Co issues raises guidance for Q2 (Jun), to EPS of $0.43-0.45 from $0.42-0.44 vs. $0.43 Reuters Estimates consensus. Co reaffirms Y05 guidance. Co also announced that it is amending its 2004 Form 10K to restate its financial statements for the years 2002 through 2004, and certain financial information for the year 2001 and each quarter in 2003 and 2004. The cumulative effect of these changes is a non-cash earnings increase of $381 million from 2001 through the first quarter of 2005, less than six-tenths of one percent of GE's earnings over this period.
3:36PM Pixar (PIXR) 49.16 +2.92: The market has long awaited news regarding a possible distribution deal between the Pixar Animation Studios and The Walt Disney Co (DIS). A New York Times article today sparked speculation that a deal is closer than some thought. To say it was a strained relationship between Steve Jobs and Michael Eisner is a severe understatement, as it looked more like a schoolgirl cat fight sometimes. Eisner's critics have blamed him directly for the breakdown in talks between the two companies as one of the reasons cited for the vote to strip him of the Chairman's title. But now Disney is under new management with Bob Iger officially taking over the helm later this year, which has ignited hopes of a resolution to the 10-year old relationship it has had with Pixar.
Shares in the animation studio soared after its Chairman Steve Jobs indicated for the first time, after breaking off communication with Disney, that a distribution agreement may be possible. He is quote as saying in a New York Times article, I've had some nice conversations with Bob Iger, but we are not yet in any negotiations to strike a new deal with Disney at this time. We are still waiting to see what happens and we will let you know when something, if something starts to happen. Jobs also noted he planned to talk with several studios later this year. Adding, if we don't enter into any negotiation with Disney all I really want to say is that sequels will play a part of it. The market also received clarity on the timing of the deal set to expire next year, with Jobs saying a new deal should be in place by the end of the year.
Under the current agreement Pixar and Disney share the production costs with Disney taking 12.5% of the gross revenues and half of the remaining profits. In turn, Disney distributes the films and retains the rights for the sequels and to create theme-parks and merchandising based on the computer-animated characters. Pixar now wants just only a distribution deal and to keep the rest of the profits and ancillary revenues. Disney is a great partner for Pixar due to its vast media outlets from the box office, TV networks, home entertainment, and theme parks, not to mention a premier brand name with a worldwide appeal.
Separately, Pixar announced its first quarter earnings results after the bell on Thursday topping expectations by twenty cents. This should not have come as a big surprise since the studio has surpassed expectations consistently for the last seven years. Earnings were $81.9 mln, or $0.67 per share up from $26.7 mln, or $0.23 per share last year. Revenues rocketed 200% to $161.2 mln, vs. consensus of $117.5 mln. It was the weight-challenged super hero and his family The Incredibles which blew away estimates. The film is likely to generate a strong second quarter as well, after the video hits the international markets. Next on the schedule of releases is Cars which will hit theaters in June 2006.
If Mr. Iger signs a new contract with Pixar, this would certainly be a huge feather in his cap and a great way to begin his tenure as CEO of Disney. The house of Mickey is not the only suitor here, as such the price tag will be an area of much contention. Pixar's success is undeniable with blockbusters like Toy Story and Finding Nemo - the highest gross animated film of all time making it a hot property for studios like Warner Bros, TimeWarner (00C), MGM (MGM), NewsCorp (NWS), or Sony (SNE). It's amazing what difference a year makes with Jobs calling it quits back in Jan of last year. Shares in Disney, a suggested holding in our Active Portfolio, are sure to get a nice boost if a deal get done. Let's just hope Nemo can find his way home to the Magic Kingdom. ---Kimberly DuBord, Briefing.com
11:59AM SBC Communications (SBC) $23.66 -0.02 (-0.1%) SBC apparently warned at an investor conference yesterday that their fiber optic video delivery service has been delayed due to technical reasons, but also difficulties in getting licenses from local authorities, who view the fiber optic service as regulated by cable TV laws. There are some research reports out today painting this as a real negative sign for the RBOCs overall, extremely negative sign for the video server firms, such as SeaChange (SEAC) and Scientific-Atlanta (SFA) and a positive for the satellite TV firms. With respect to the video delivery manufacturers, this may be negative, but it is mostly irrelevant for the RBOCs and even the satellite TV firms.
First of all, revenue for the RBOCs from video services delivered over fiber optic networks or even DSL lines to consumers is so minimal that it barely even shows up in an analysis. Integrating video into the telecom networks is still a long way off. Nevertheless, RBOCs delivering video will probably arrive sooner than cable companies delivering phone service, so delays in the RBOC video delivery services don't equate to a threat from cable companies.
Secondly, the RBOCs relationships with satellite TV firms are currently mostly hype. As marketing agreements only, it basically amounts to a Verizon representative asking new telephone customers if they would also like to have DirecTV installed. There is no technical integration and even the billing is separate. For the most part, it is a "hollow" exercise that is largely designed just to get people to start thinking about an RBOC as providing more than just local phone service. Actual results from the this type of cross-selling are very mixed. So delays in RBOC video services don't really mean a lot of positives for the satellite TV companies, in our view.
In fact, the delays might help clarify the current gray areas in regulation. Federal cable TV regulations allowed for cable companies to have monopolies on a local level, by granting towns and cities the authority to issue a single contract to a cable company. The rationale was that cable companies would only invest the capital to wire an entire town if they had some certainty of spreading the installation costs over the entire locale.
That rationale, however, never envisioned the RBOCs being willing to install their own fiber optic networks capable of digital video delivery. The RBOCs already have a "cable network" grid in every city in America. Adding new capacity for video is not prohibitive. But the local authorities are not certain they can issue a "cable TV" license to an RBOC, since the currently installed cable company is "entitled" to a monopoly for the duration of their local contract.
In fact, the delays detailed by SBC might be a positive for RBOCs in general, if they start complaining about it and force Congress to clarify the gray zone between "cable TV" and video delivered by a phone company. The intersection of those two technologies is just beginning and if current regulations are clarified to allow more competition between the cable companies and the RBOCs, it will certainly benefit the consumer. It will also benefit the RBOCs, too, in our opinion, so we think that SBC should actually start complaining a lot more. That would make the delays a positive for everyone involved, except the satellite TV companies. - Robert V. Green
11:43AM Trading Call of the Week, Sterman of Halpern Capital on BBA ($4.81), ADBL ($13.62)
Trading Call of the Week goes to David Sterman of Halpern Capital, who forwarded Bombay Co. (BBA) as an idea on Monday, ahead of same-store sales figures that helped those who took his call seriously gain as much as 25% on the stock by Thursday.
Sterman said that Bombay, a stock that had slipped more than 40 percent to a trough of $3.60 last week from $6.20 in mid-March amid sales worries, would start to rebound toward the $5 mark once investors saw their first evidence of stabilized revenue at the home furnishings retailer. He also noted that BBA had slipped to a potential fundamental trough, trading at about 80% of its tangible book value, a level he said couldn’t last. Sterman added that he believed that merchandising changes would start to bear fruit in the spring.
On Thursday, Bombay reported an April same-store sales increase of 7% from the same period a year ago, vs. the Briefing.com consensus of a sales decrease of 3.5%. Following that report, Bombay shares shot up about 20% in intraday trading to $4.96, just 4 cents short of Sterman’s near-term target. The stock gained about 25% in the two days following his note.
Following his winning trading call, we wanted to know what else Sterman, a special situations analyst, is watching. He told us that his best near-term idea right now is Audible (ADBL), ahead of the company’s earnings on Monday. Sterman says he expects a strong report from the online retailer of downloadable audio books, as he believes the company’s results usually track two quarters behind Apple iPod sales, which were very strong six months ago heading into the holiday season.
“I’m starting to think the company did better than consensus,” Sterman told us, adding that he believes the company is just starting to crack international sales opportunities and the education market.
Of note, Audible shares were crushed following its Q4 report, gapping down as much as 40% to about $16 from more than $28. The stock now sits at about $13.30. Audible reported Q4 sales that were short of analysts’ expectations. And following the report, some analysts started to worry that the company’s future growth would come at a higher cost, possibly squeezing ’05 margins.
Yet Sterman says Audible is now less than half the price it was prior to the Q4 report, and now trades at about 26 times his 2006 earnings estimate and about 4 ties his ’05 revenue estimate. He says the current price is “much more realistic,” reflecting the company’s business opportunities, as opposed to portable media player hype.
Sterman says Audible will likely face a headwind in the second half of ’05, as the overall growth of the iPod slows and analysts begin to trim estimates for companies tied to portable media. But he likes ADBL as a trade heading into earnings, and he still believes ADBL is a long-term pick, as the company will start to benefit from the sale of cell-phone-based portable music players in ’06 and ’07. Even with the eventual arrival of other competitors (possibly Amazon.com, Yahoo or even Microsoft), he says Audible will maintain a sizable share of the audio book downloads market.
Briefing.com Note: It can be dangerous holding a stock into earnings, especially in a volatile name that gapped down on disappointing results in the previous quarter. But we are forwarding this speculative idea of Sterman’s based on his past idea. We figure he’ll either be a hero or zero with this one. We note technical support for ADBL just above $12, which may not be meaningful if the company happens to disappoint shareholders again – Mike Tarsala, mtarsala@briefing.com.
11:18AM General Electric Co (GE) 35.97 +0.12: It was a busy Friday morning for the largest company in the US, as General Electric raised its second quarter guidance, announced a restatement, sold off its storage business, hosted a conference call, and may be selling its liability insurer business to Warren Buffett. The market closely watches GE as it's seen as a barometer for US economic growth due to the pure size and scope of its businesses. This correlation is evident when looking at a chart of GE and the S&P 500 over the past five years, where there is little divergence in terms of performance. GE also holds a 3.5% weighting in the S&P 500.
First on the revision, GE said an internal audit found its accounting practices did not comply with FAS 133 accounting standards for derivatives and hedging activities. This is in regard to certain transactions GE uses to protect its financial services business from changes in interest rates and currency exchange rates. As a result, GE is amending its 2004 Form 10K to restate its financial statements for the years 2002 through 2004, in addition to certain financial information for the year 2001 and each quarter in 2003 and 2004. GE noted this non compliance was a result of an accounting change.
The cumulative effect of these changes is a non-cash earnings increase of $381 million from 2001 through the first quarter of 2005, representing less than six-tenths of one percent of GE's earnings over this period. GE Chief Financial Officer Keith Sherin, said in a statement "Looking back, the result of not using hedge accounting is immaterial on an annual basis. However, on a quarterly basis the impact would be material and we decided to restate results."
Moody's came out Friday reaffirming its ratings on General Electric, GE Capital Corp, and GE Capital Services. It said, "The restatement has a negligible impact on the companies' financial condition and business franchises and that management has conducted a thorough investigation into the circumstances of the transactions and has taken the necessary measures to address any related controllership issues." The debt rating on each of these businesses is Aaa with a Stable outlook.
GE also raised its second quarter guidance to a range of $0.43-0.45 per share, a penny higher than its previous estimate of $0.42-0.44 vs. consensus of $0.43. For the full year, it reaffirmed guidance or $1.78 to $1.83 per share. During its conference call, management noted "broad-based" growth and "strong business conditions" for the quarter. Stating further that ten of eleven of its businesses are generating double-digit growth, with an increasing possibility the eleventh will do so as well. Using the current Reuters Estimates consensus of $1.81 for FY05, which is likely to be revised higher following today's boost, earnings growth for this year is 14% following by 13% in FY06.
GE Insurance Solutions unit has agreed to sell its Medical Protective Corp to Warren Buffet's insurance holding company Berkshire Hathaway Inc. for $825 mln, or 112% of book value. This is a professional liability insurer for 75,000 physicians and dentists with gross premiums written of $737 mln in 2004. The transaction will result in a $75 mln in profit for GE and, if approved by regulators, is expected to close by the end of June. On Thursday, GE said it also had agreed to sell its self storage business, Storage USA for $2.3 bln.
There has been a lot of speculation over the possibility that GE may sell off its Insurance Solutions Business. The company maintains its reviewing strategic options to reduce its investment in this business because it does not fit with its overall strategy. So what is GE's overall strategy? After years of anemic growth throughout the 1990's, Jeffrey Immelt has been repositioning the company returning it to double-digit growth. GE continues to rework its portfolio of business striping away units that possess slower growth profiles. Concurrently, GE continues to return value back to its shareholders by raising its dividend (2.45%) and executing share buybacks.
GE continues to make good on its promise of a more streamlined, higher growth company. Shares have been dead in the water over the last few months, despite beating expectations over the last two quarters, indicating a certain degree of pessimism in the marketplace. Yet, the cynics may be proven wrong with quarter-to-date orders up 11% and 12% organic growth, we could see further upside in the second quarter. Shares are trading at 19.8x forward earnings in-line with the S&P 500. ---Kimberly DuBord, Briefing.com
9:06AM Page One - Payroll Data Flat Out Bullish : April nonfarm payrolls surged 274,000. This will put to rest the worst fears that the soft patch in the economy in March signalled worse to come.
The payrolls increase of 274,000 was well ahead of the expected 175,000 gain. The March number was revised upwards by 36,000 to show an increase of 146,000 from an originally reported 110,000 gain. This strength shows that the stock market overreacted to the weakness in the March payroll numbers (and associated weakness in March consumer spending data). The economy has good momentum. There will be weak months even during periods of solid economic growth. This data serves as a stark reminder of that, and is flat-out bullish for stocks.
One piece of slightly negative news was that average hourly earnings rose 0.3% for the second straight month. That is hardly huge, but it is up from the trend of about 0.2% in prior months. Firming wage gains add to inflationary pressures by raising cost inputs. Productivity gains keep unit labor costs very low, but not quite as low if hourly earnings were not rising as much. This is not unexpected, however, and it will not undermine the bullish impact from the payrolls data.
The S&P is set to post its third straight weekly gain. Last week was a minimal increase, but this one could be large. Starting today, the S&P is up 16 points for the week. Futures indicate a strong up open today. The index is now up 3.2% off its lows of April. That reestablishes the trading range mentality, as the index is also down 3.3% for this year entering today.
The payrolls data today has the potential to alter underlying economic assumptions. There was talk that slow economic growth meant no economic growth was around the corner. That is clearly wrong. Even in periods of above-trend economic growth there can be months of sluggish data. That is what March looks like now. Real GDP in 2005 may not match the stellar 4.4% growth of 2004, but it will still probably be at or above the long-term trend of 3.1%. That in turn means solid earnings growth, and ultimately a likely up year for the S&P. We remain neutral intermediate term, but long-term investors should take heart from today's data. Dick Green, Briefing.com
9:54AM Satyam Computer (SAY) Goldman Sachs upgrades In-Line to OUTPERFORM. Oppenheimer downgrades UTSI following Q1 results and a highly disappointing outlook for 2Q05 and the balance of the year. Firm says they are concerned about the potential of asset write-offs in the future, given the likelihood of declining PAS sales. Given the prospect of declining sales, they believe that the potential for inventory write-offs has increased.
9:48AM UTStarcom (UTSI) Oppenheimer downgrades Neutral to SELL . Oppenheimer downgrades UTSI following Q1 results and a highly disappointing outlook for 2Q05 and the balance of the year. Firm says they are concerned about the potential of asset write-offs in the future, given the likelihood of declining PAS sales. Given the prospect of declining sales, they believe that the potential for inventory write-offs has increased.
9:47AM W.P. Carey (WPC) AG Edwards downgrades Buy to HOLD. A.G. Edwards downgrades WPC, citing the following: 1) business fundamentals though decent, appear to becoming incrementally more difficult; 2) as disclosed during 1Q04, co is under investigation by the SEC regarding potential violations related to the sale of CPA:15 shares; and 3) mgmt was notably cautious on the outlook for the remainder of 2005, and was unable to offer a timeline when performance fees could perhaps be recognized.
9:46AM Cablevision (CVC) Oppenheimer upgrades Neutral to BUY. With the recent Voom shutdown and the agreement by Adelphia to be sold to the TWX-CMCSA partnership, firm thinks the focus of CVC investors should return to the co's fundamentals. Over the past two quarters, firm says CVC has displayed the best balance of customer and financial growth, while beating all of their estimates. Now, with the froth out of the stock, firm notes that CVC trades at 9.3x 2005 cash flow, nearly 1.5x below their new target.
9:43AM McAfee (MFE) Kaufman Bros upgrades Hold to BUY. Target $30. Kaufman upgrades MFE following strong Q1 results, saying the outperformance was attributable to the consumer security business and Intrushield and the large enterprise business, which were all significantly above their forecast. Firm says they would be aggressively buying the stock after scrutinizing these results, and now believe there is little risk in execution to reaching the 25% operating margin goal in 2005.
9:42AM Crown Hldgs (CCK) KeyBanc Capital Mkts / McDonald upgrades Buy to AGGRESSIVE BUY. Target $19.5. Firm thinks the co has multiple catalysts to enable margin expansion, earnings growth, and higher cash flow, including: 1) productivity initiatives coupled with a benign pricing environment, 2) debt refinancing that could lower interest expense by $35 mln or more, 3) share repurchase activities, and 4) lower asbestos payments from favorable legislation either at a state or national level.
9:41AM Gladstone Commercial (GOOD) Robert W. Baird downgrades Outperform to NEUTRAL. Target $19 to $17. Firm reducing its 2005 and 2006 FFO and AFFO estimates due to concerns regarding lower going-in acquisition yields, disappointing acquisition volume, and increased overhead expenses.
9:41AM Interface (IFSIA) Legg Mason upgrades Hold to BUY. Target $9. Legg Mason upgrades IFSIA citing the stock's 39% decline since Dec 21, improved first quarter continuing operating earnings results, and their belief that mgmt and the Board of Directors are committed to tangible debt reduction.
The Fed policy statement on Tuesday and the April employment data on Friday dominated the news.
On Tuesday, the Fed raised the fed funds rate target for overnight bank loans to 3% from 2 3/4%. This was the eighth straight meeting at which the Fed raised the target by 1/4%. That was fully expected by the market.
The statement accompanying the announcement indicated that "after this action, the stance of monetary policy remains accommodative." That means more rate hikes are coming. Most economists expect the fed funds rate target to be at 3 3/4% or 4% by the end of the year.
The statement did not reflect any need to raise rates at a more rapid pace, however, as it also included (after a slight delay) the phrases "Longer-term inflation expectations remain well contained" and "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."
Those phrases help ease underlying inflation concerns.
Underlying economic concerns were addressed on Friday.
The April employment report showed a surge of 274,000 in non-farm payrolls. This is a big increase and was well ahead expectations of 175,000 increase. In addition, the February and March gains were revised significantly higher. The average payroll gain for the past three months is now 240,000. That is well above the 187,000 average monthly gain in 2004, when real GDP rose 4.4%. There is no question that payroll growth is more than sufficient to sustain real GDP growth at or above its long-term trend of 3.1%.
There are still concerns that the soft patch that consumer spending hit in March continued into April. Same store sales data from retail chains, as released on Thursday of this week, showed only modest gains. Wal-Mart checked in with only a 0.9% increase over April of last year. But even a soft patch in consumer spending hardly means that the strong momentum in the economy is over. The growth in payrolls lays a strong foundation that will keep economic growth on track over time. The market reaction on Friday was muted, but it is clearly bullish and will provide underlying stock market support by lessening arguments that a significant economic slowdown is occurring.
The other big news item this week was that General Motors debt was downgraded to junk status on Thursday. That caused a market drop that day. It has been talked about for weeks, however, and isn't a great surprise. The company's problem is the massive benefits liability in the years ahead. This is a cost problem affecting debt. It isn't a sign of underlying weakness in the economy.
There were plenty more earnings reports this week, but none of major impact. First quarter operating earnings growth is on target for 14%. Second quarter forecasts are now at about 8%. Given the propensity for conservative forecasts at this point in the quarter, this suggests another gain of 10% or more is in store.
The April retail sales report on Thursday of next week is important, but that's about it for the economic calendar. There are very few earnings reports next week, but Cisco on Tuesday and Dell on Thursday are big.
Oil prices were up this week from $49.72 last Friday to $50.96 this week. The yield on the 10-year note jumped to 4.26% from 4.19%, largely in reaction to the strong jobs data.
The S&P notched its third straight weekly gain. It is now up 3.1% from the lows this year set in April. But it is still down 3.3% for the year. The excessive pessimism from April has been wrung out of the market, but there are few expectations of a major rally in the summer months ahead.
Index Started Week Ended Week Change %Change YTD
DJIA 10192.51 10345.40 152.89 1.5 % -4.1 %
Nasdaq 1921.65 1967.35 45.70 2.4 % -9.6 %
S&P 500 1156.85 1171.35 14.50 1.3 % -3.3 %
Russell 2000 579.38 596.52 17.14 3.0 % -8.4 %
4:43PM Swing Trader : -Technical- Markets opened higher this morning off positive job data, but the momentum was short-lived near yesterday's highs and resulted in a relatively quiet, but choppy range. Market Breadth was neutral as Advancers were relatively equal to Decliners and as New Highs was relatively equal to New Lows. Not much has changed as the daily action in the SPY remains under its 50-day simple moving average (118.08) and closed under its 50-day exponential ma (117.39). As I said on Thursday, the market looks short-term overbought this week and leaves the door open for some selling pressure around this area...(continued)
2:13PM Corning - - Relative Strength (GLW) 14.90 +1.09: -Technical- The stock displays relative strength today as it stages a breakout above its 14.00 resistance area to trade at a new 3 year high.
10:43AM ZUMZ -- IPO opens for trading at $20.55 23.00 +5.00:See 10:26 comment for full write-up.
10:26AM Zumiez IPO prices above range; action sports related apparel for young people (ZUMZ) 18.00 :Zumiez prices its IPO at $18, above the expected range of $15-$17. Zumiez, pronounced "zoomies", is a retailer of action sports related apparel and footwear catering to young men and women between age 12-24 focusing on skateboarding, surfing, snowboarding, and motocross. The co operates 140 stores in 18 states primarily located in shopping malls. Most of its stores feature couches and action sports oriented video game stations intended to keep customers in the store longer.... The co has increased sales from $44.5 mln in fiscal 1999 to $153.6 mln in fiscal 2004, for a compound annual growth rate of 28.1%. Importantly, the co has been profitable in every year of its 26-year history. Briefing.com Take: The nearest comp would probably be Skechers (SKX). We would have thought SKX's Q2 warning last week would have dampened demand, but apparently not. Other comparables include PSUN and ZQK. ZUMZ's growth rates, its profitability track record and the small float of 3.1 mln shares helped to boost the pricing above the expected range. Either way, keep this name on the radar as a secondary play if those other cos guide higher. Also, ZUMZ could be seen as a back-to-school play later this year. This deal is being led by Piper Jaffray and Wachovia.
10:02AM China Techfaith Wireless IPO prices; large mobile handset designer in China (CNTF) 16.25 :China Techfaith Wireless prices its IPO at $16.25, slightly above the middle of its expected range of $15-$17. The co is one of the largest independent mobile handset design houses in China. It handles the entire handset design cycle: from hardware design to pilot production. The co designs GSM-based mobile handsets and has recently begun developing mobile handsets for use on WCDMA and CDMA networks. The co has also begun to develop smart phones. Customers include large Chinese brands, as well as Alcatel, Kyocera, Mitsubishi, NEC and UTStarcom. From its inception in July 2002, the co has designed 58 mobile handset models. In 2004, the co was profitable and posted revenue of US$46.6 mln, up 380% yoy.... Briefing.com Take: UTStarcom's (UTSI -28%) weak report and guidance last night is probably not the best timing for CNTF. In general, we would think a handset maker based in China would be subject to price cutting and low margins. However, CNTF provides full design services so it's tough to get a clear read. Overall, the IPO market is improcing this week thanks to the high profile LAZ and MORN deals... This is a 8.7 mln share deal led by Merrill Lynch.
9:23AM Gapping Down :Gapping down on disappointing earnings/guidance: UTSI -31% (also OpCo downgrade), SEAC -14%, ARDI -14% (also Needham and Raymond James downgrades), AZPN -8.1%, SINA -6.9%, ATVI -2.6%, ... Other News: KERX -8.2% (Phase 2 clinical data), NAPS -6.6%, CBK -4.2% (profit taking after 14% move yesterday), GBX -3.2% (to sell 4.5 mln shares), AEOS -3.1% (BofA downgrade).
9:17AM Gapping Up :Gapping up on strong earnings/guidance: CKCM +37%, PIXR +6.3%, JMDT +14%, BCSI +12%, FSTC +10%, ADSX +8.6%, MFE +7.3% (also Kaufman upgrade), ASTM +5.5%... Other News: CRXL +9.1% (extension of 33% move over last 5 weeks), MWV +3% (tender offer for $850 mln of debt and up to 16 mln shares), SHR +2.3% (affiliate Berlex completes patient enrollment for Phase 2 trial), BRCM +2.2%... Under $3: UHCP +31% (extends 27% move yesterday).
8:47AM Bois D Arc Energy IPO prices; oil and gas exploration in Gulf of Mexico (BDE) 13.00 :Bois d'Arc Energy prices its IPO at $13, roughly mid-range of expectations of $12-$15. The co is an oil and gas exploration firm. The co focuses on the Gulf of Mexico shelf principally because it believes this region has significant undiscovered reserves. Additionally, many major energy cos have redirected resources over the last several years away from the Gulf of Mexico to focus on larger projects in the deepwater Gulf of Mexico and other areas of the world... If yeterday's related IPO (oil and gas marine transport) debut of Teekay LNG Partners (TGP) is an indication, that's good news for BDE. TGP rose more than 10% after pricing at the high end of the range. Other recent oil explorations IPOs have done ok. Bill Barrett (BBG 28.26) and W&T Offshore (WTI 20.41) are up 13% and 7.4% from their respective offering prices. WTI is also primarily in the Gulf of Mexico... After a slump the past few weeks, the overall IPO market has improved this week thanks to high profile IPOs LAZ and MORN.... This is a 13.5 mln share deal led by Raymond James.
7:34AM General Electric boosts Q2 guidance; reaffirms Y05; restates (GE) 35.85 :Co issues raises guidance for Q2 (Jun), to EPS of $0.43-0.45 from $0.42-0.44 vs. $0.43 Reuters Estimates consensus. Co reaffirms Y05 guidance. Co also announced that it is amending its 2004 Form 10K to restate its financial statements for the years 2002 through 2004, and certain financial information for the year 2001 and each quarter in 2003 and 2004. The cumulative effect of these changes is a non-cash earnings increase of $381 million from 2001 through the first quarter of 2005, less than six-tenths of one percent of GE's earnings over this period.
3:36PM Pixar (PIXR) 49.16 +2.92: The market has long awaited news regarding a possible distribution deal between the Pixar Animation Studios and The Walt Disney Co (DIS). A New York Times article today sparked speculation that a deal is closer than some thought. To say it was a strained relationship between Steve Jobs and Michael Eisner is a severe understatement, as it looked more like a schoolgirl cat fight sometimes. Eisner's critics have blamed him directly for the breakdown in talks between the two companies as one of the reasons cited for the vote to strip him of the Chairman's title. But now Disney is under new management with Bob Iger officially taking over the helm later this year, which has ignited hopes of a resolution to the 10-year old relationship it has had with Pixar.
Shares in the animation studio soared after its Chairman Steve Jobs indicated for the first time, after breaking off communication with Disney, that a distribution agreement may be possible. He is quote as saying in a New York Times article, I've had some nice conversations with Bob Iger, but we are not yet in any negotiations to strike a new deal with Disney at this time. We are still waiting to see what happens and we will let you know when something, if something starts to happen. Jobs also noted he planned to talk with several studios later this year. Adding, if we don't enter into any negotiation with Disney all I really want to say is that sequels will play a part of it. The market also received clarity on the timing of the deal set to expire next year, with Jobs saying a new deal should be in place by the end of the year.
Under the current agreement Pixar and Disney share the production costs with Disney taking 12.5% of the gross revenues and half of the remaining profits. In turn, Disney distributes the films and retains the rights for the sequels and to create theme-parks and merchandising based on the computer-animated characters. Pixar now wants just only a distribution deal and to keep the rest of the profits and ancillary revenues. Disney is a great partner for Pixar due to its vast media outlets from the box office, TV networks, home entertainment, and theme parks, not to mention a premier brand name with a worldwide appeal.
Separately, Pixar announced its first quarter earnings results after the bell on Thursday topping expectations by twenty cents. This should not have come as a big surprise since the studio has surpassed expectations consistently for the last seven years. Earnings were $81.9 mln, or $0.67 per share up from $26.7 mln, or $0.23 per share last year. Revenues rocketed 200% to $161.2 mln, vs. consensus of $117.5 mln. It was the weight-challenged super hero and his family The Incredibles which blew away estimates. The film is likely to generate a strong second quarter as well, after the video hits the international markets. Next on the schedule of releases is Cars which will hit theaters in June 2006.
If Mr. Iger signs a new contract with Pixar, this would certainly be a huge feather in his cap and a great way to begin his tenure as CEO of Disney. The house of Mickey is not the only suitor here, as such the price tag will be an area of much contention. Pixar's success is undeniable with blockbusters like Toy Story and Finding Nemo - the highest gross animated film of all time making it a hot property for studios like Warner Bros, TimeWarner (00C), MGM (MGM), NewsCorp (NWS), or Sony (SNE). It's amazing what difference a year makes with Jobs calling it quits back in Jan of last year. Shares in Disney, a suggested holding in our Active Portfolio, are sure to get a nice boost if a deal get done. Let's just hope Nemo can find his way home to the Magic Kingdom. ---Kimberly DuBord, Briefing.com
11:59AM SBC Communications (SBC) $23.66 -0.02 (-0.1%) SBC apparently warned at an investor conference yesterday that their fiber optic video delivery service has been delayed due to technical reasons, but also difficulties in getting licenses from local authorities, who view the fiber optic service as regulated by cable TV laws. There are some research reports out today painting this as a real negative sign for the RBOCs overall, extremely negative sign for the video server firms, such as SeaChange (SEAC) and Scientific-Atlanta (SFA) and a positive for the satellite TV firms. With respect to the video delivery manufacturers, this may be negative, but it is mostly irrelevant for the RBOCs and even the satellite TV firms.
First of all, revenue for the RBOCs from video services delivered over fiber optic networks or even DSL lines to consumers is so minimal that it barely even shows up in an analysis. Integrating video into the telecom networks is still a long way off. Nevertheless, RBOCs delivering video will probably arrive sooner than cable companies delivering phone service, so delays in the RBOC video delivery services don't equate to a threat from cable companies.
Secondly, the RBOCs relationships with satellite TV firms are currently mostly hype. As marketing agreements only, it basically amounts to a Verizon representative asking new telephone customers if they would also like to have DirecTV installed. There is no technical integration and even the billing is separate. For the most part, it is a "hollow" exercise that is largely designed just to get people to start thinking about an RBOC as providing more than just local phone service. Actual results from the this type of cross-selling are very mixed. So delays in RBOC video services don't really mean a lot of positives for the satellite TV companies, in our view.
In fact, the delays might help clarify the current gray areas in regulation. Federal cable TV regulations allowed for cable companies to have monopolies on a local level, by granting towns and cities the authority to issue a single contract to a cable company. The rationale was that cable companies would only invest the capital to wire an entire town if they had some certainty of spreading the installation costs over the entire locale.
That rationale, however, never envisioned the RBOCs being willing to install their own fiber optic networks capable of digital video delivery. The RBOCs already have a "cable network" grid in every city in America. Adding new capacity for video is not prohibitive. But the local authorities are not certain they can issue a "cable TV" license to an RBOC, since the currently installed cable company is "entitled" to a monopoly for the duration of their local contract.
In fact, the delays detailed by SBC might be a positive for RBOCs in general, if they start complaining about it and force Congress to clarify the gray zone between "cable TV" and video delivered by a phone company. The intersection of those two technologies is just beginning and if current regulations are clarified to allow more competition between the cable companies and the RBOCs, it will certainly benefit the consumer. It will also benefit the RBOCs, too, in our opinion, so we think that SBC should actually start complaining a lot more. That would make the delays a positive for everyone involved, except the satellite TV companies. - Robert V. Green
11:43AM Trading Call of the Week, Sterman of Halpern Capital on BBA ($4.81), ADBL ($13.62)
Trading Call of the Week goes to David Sterman of Halpern Capital, who forwarded Bombay Co. (BBA) as an idea on Monday, ahead of same-store sales figures that helped those who took his call seriously gain as much as 25% on the stock by Thursday.
Sterman said that Bombay, a stock that had slipped more than 40 percent to a trough of $3.60 last week from $6.20 in mid-March amid sales worries, would start to rebound toward the $5 mark once investors saw their first evidence of stabilized revenue at the home furnishings retailer. He also noted that BBA had slipped to a potential fundamental trough, trading at about 80% of its tangible book value, a level he said couldn’t last. Sterman added that he believed that merchandising changes would start to bear fruit in the spring.
On Thursday, Bombay reported an April same-store sales increase of 7% from the same period a year ago, vs. the Briefing.com consensus of a sales decrease of 3.5%. Following that report, Bombay shares shot up about 20% in intraday trading to $4.96, just 4 cents short of Sterman’s near-term target. The stock gained about 25% in the two days following his note.
Following his winning trading call, we wanted to know what else Sterman, a special situations analyst, is watching. He told us that his best near-term idea right now is Audible (ADBL), ahead of the company’s earnings on Monday. Sterman says he expects a strong report from the online retailer of downloadable audio books, as he believes the company’s results usually track two quarters behind Apple iPod sales, which were very strong six months ago heading into the holiday season.
“I’m starting to think the company did better than consensus,” Sterman told us, adding that he believes the company is just starting to crack international sales opportunities and the education market.
Of note, Audible shares were crushed following its Q4 report, gapping down as much as 40% to about $16 from more than $28. The stock now sits at about $13.30. Audible reported Q4 sales that were short of analysts’ expectations. And following the report, some analysts started to worry that the company’s future growth would come at a higher cost, possibly squeezing ’05 margins.
Yet Sterman says Audible is now less than half the price it was prior to the Q4 report, and now trades at about 26 times his 2006 earnings estimate and about 4 ties his ’05 revenue estimate. He says the current price is “much more realistic,” reflecting the company’s business opportunities, as opposed to portable media player hype.
Sterman says Audible will likely face a headwind in the second half of ’05, as the overall growth of the iPod slows and analysts begin to trim estimates for companies tied to portable media. But he likes ADBL as a trade heading into earnings, and he still believes ADBL is a long-term pick, as the company will start to benefit from the sale of cell-phone-based portable music players in ’06 and ’07. Even with the eventual arrival of other competitors (possibly Amazon.com, Yahoo or even Microsoft), he says Audible will maintain a sizable share of the audio book downloads market.
Briefing.com Note: It can be dangerous holding a stock into earnings, especially in a volatile name that gapped down on disappointing results in the previous quarter. But we are forwarding this speculative idea of Sterman’s based on his past idea. We figure he’ll either be a hero or zero with this one. We note technical support for ADBL just above $12, which may not be meaningful if the company happens to disappoint shareholders again – Mike Tarsala, mtarsala@briefing.com.
11:18AM General Electric Co (GE) 35.97 +0.12: It was a busy Friday morning for the largest company in the US, as General Electric raised its second quarter guidance, announced a restatement, sold off its storage business, hosted a conference call, and may be selling its liability insurer business to Warren Buffett. The market closely watches GE as it's seen as a barometer for US economic growth due to the pure size and scope of its businesses. This correlation is evident when looking at a chart of GE and the S&P 500 over the past five years, where there is little divergence in terms of performance. GE also holds a 3.5% weighting in the S&P 500.
First on the revision, GE said an internal audit found its accounting practices did not comply with FAS 133 accounting standards for derivatives and hedging activities. This is in regard to certain transactions GE uses to protect its financial services business from changes in interest rates and currency exchange rates. As a result, GE is amending its 2004 Form 10K to restate its financial statements for the years 2002 through 2004, in addition to certain financial information for the year 2001 and each quarter in 2003 and 2004. GE noted this non compliance was a result of an accounting change.
The cumulative effect of these changes is a non-cash earnings increase of $381 million from 2001 through the first quarter of 2005, representing less than six-tenths of one percent of GE's earnings over this period. GE Chief Financial Officer Keith Sherin, said in a statement "Looking back, the result of not using hedge accounting is immaterial on an annual basis. However, on a quarterly basis the impact would be material and we decided to restate results."
Moody's came out Friday reaffirming its ratings on General Electric, GE Capital Corp, and GE Capital Services. It said, "The restatement has a negligible impact on the companies' financial condition and business franchises and that management has conducted a thorough investigation into the circumstances of the transactions and has taken the necessary measures to address any related controllership issues." The debt rating on each of these businesses is Aaa with a Stable outlook.
GE also raised its second quarter guidance to a range of $0.43-0.45 per share, a penny higher than its previous estimate of $0.42-0.44 vs. consensus of $0.43. For the full year, it reaffirmed guidance or $1.78 to $1.83 per share. During its conference call, management noted "broad-based" growth and "strong business conditions" for the quarter. Stating further that ten of eleven of its businesses are generating double-digit growth, with an increasing possibility the eleventh will do so as well. Using the current Reuters Estimates consensus of $1.81 for FY05, which is likely to be revised higher following today's boost, earnings growth for this year is 14% following by 13% in FY06.
GE Insurance Solutions unit has agreed to sell its Medical Protective Corp to Warren Buffet's insurance holding company Berkshire Hathaway Inc. for $825 mln, or 112% of book value. This is a professional liability insurer for 75,000 physicians and dentists with gross premiums written of $737 mln in 2004. The transaction will result in a $75 mln in profit for GE and, if approved by regulators, is expected to close by the end of June. On Thursday, GE said it also had agreed to sell its self storage business, Storage USA for $2.3 bln.
There has been a lot of speculation over the possibility that GE may sell off its Insurance Solutions Business. The company maintains its reviewing strategic options to reduce its investment in this business because it does not fit with its overall strategy. So what is GE's overall strategy? After years of anemic growth throughout the 1990's, Jeffrey Immelt has been repositioning the company returning it to double-digit growth. GE continues to rework its portfolio of business striping away units that possess slower growth profiles. Concurrently, GE continues to return value back to its shareholders by raising its dividend (2.45%) and executing share buybacks.
GE continues to make good on its promise of a more streamlined, higher growth company. Shares have been dead in the water over the last few months, despite beating expectations over the last two quarters, indicating a certain degree of pessimism in the marketplace. Yet, the cynics may be proven wrong with quarter-to-date orders up 11% and 12% organic growth, we could see further upside in the second quarter. Shares are trading at 19.8x forward earnings in-line with the S&P 500. ---Kimberly DuBord, Briefing.com
9:06AM Page One - Payroll Data Flat Out Bullish : April nonfarm payrolls surged 274,000. This will put to rest the worst fears that the soft patch in the economy in March signalled worse to come.
The payrolls increase of 274,000 was well ahead of the expected 175,000 gain. The March number was revised upwards by 36,000 to show an increase of 146,000 from an originally reported 110,000 gain. This strength shows that the stock market overreacted to the weakness in the March payroll numbers (and associated weakness in March consumer spending data). The economy has good momentum. There will be weak months even during periods of solid economic growth. This data serves as a stark reminder of that, and is flat-out bullish for stocks.
One piece of slightly negative news was that average hourly earnings rose 0.3% for the second straight month. That is hardly huge, but it is up from the trend of about 0.2% in prior months. Firming wage gains add to inflationary pressures by raising cost inputs. Productivity gains keep unit labor costs very low, but not quite as low if hourly earnings were not rising as much. This is not unexpected, however, and it will not undermine the bullish impact from the payrolls data.
The S&P is set to post its third straight weekly gain. Last week was a minimal increase, but this one could be large. Starting today, the S&P is up 16 points for the week. Futures indicate a strong up open today. The index is now up 3.2% off its lows of April. That reestablishes the trading range mentality, as the index is also down 3.3% for this year entering today.
The payrolls data today has the potential to alter underlying economic assumptions. There was talk that slow economic growth meant no economic growth was around the corner. That is clearly wrong. Even in periods of above-trend economic growth there can be months of sluggish data. That is what March looks like now. Real GDP in 2005 may not match the stellar 4.4% growth of 2004, but it will still probably be at or above the long-term trend of 3.1%. That in turn means solid earnings growth, and ultimately a likely up year for the S&P. We remain neutral intermediate term, but long-term investors should take heart from today's data. Dick Green, Briefing.com
9:54AM Satyam Computer (SAY) Goldman Sachs upgrades In-Line to OUTPERFORM. Oppenheimer downgrades UTSI following Q1 results and a highly disappointing outlook for 2Q05 and the balance of the year. Firm says they are concerned about the potential of asset write-offs in the future, given the likelihood of declining PAS sales. Given the prospect of declining sales, they believe that the potential for inventory write-offs has increased.
9:48AM UTStarcom (UTSI) Oppenheimer downgrades Neutral to SELL . Oppenheimer downgrades UTSI following Q1 results and a highly disappointing outlook for 2Q05 and the balance of the year. Firm says they are concerned about the potential of asset write-offs in the future, given the likelihood of declining PAS sales. Given the prospect of declining sales, they believe that the potential for inventory write-offs has increased.
9:47AM W.P. Carey (WPC) AG Edwards downgrades Buy to HOLD. A.G. Edwards downgrades WPC, citing the following: 1) business fundamentals though decent, appear to becoming incrementally more difficult; 2) as disclosed during 1Q04, co is under investigation by the SEC regarding potential violations related to the sale of CPA:15 shares; and 3) mgmt was notably cautious on the outlook for the remainder of 2005, and was unable to offer a timeline when performance fees could perhaps be recognized.
9:46AM Cablevision (CVC) Oppenheimer upgrades Neutral to BUY. With the recent Voom shutdown and the agreement by Adelphia to be sold to the TWX-CMCSA partnership, firm thinks the focus of CVC investors should return to the co's fundamentals. Over the past two quarters, firm says CVC has displayed the best balance of customer and financial growth, while beating all of their estimates. Now, with the froth out of the stock, firm notes that CVC trades at 9.3x 2005 cash flow, nearly 1.5x below their new target.
9:43AM McAfee (MFE) Kaufman Bros upgrades Hold to BUY. Target $30. Kaufman upgrades MFE following strong Q1 results, saying the outperformance was attributable to the consumer security business and Intrushield and the large enterprise business, which were all significantly above their forecast. Firm says they would be aggressively buying the stock after scrutinizing these results, and now believe there is little risk in execution to reaching the 25% operating margin goal in 2005.
9:42AM Crown Hldgs (CCK) KeyBanc Capital Mkts / McDonald upgrades Buy to AGGRESSIVE BUY. Target $19.5. Firm thinks the co has multiple catalysts to enable margin expansion, earnings growth, and higher cash flow, including: 1) productivity initiatives coupled with a benign pricing environment, 2) debt refinancing that could lower interest expense by $35 mln or more, 3) share repurchase activities, and 4) lower asbestos payments from favorable legislation either at a state or national level.
9:41AM Gladstone Commercial (GOOD) Robert W. Baird downgrades Outperform to NEUTRAL. Target $19 to $17. Firm reducing its 2005 and 2006 FFO and AFFO estimates due to concerns regarding lower going-in acquisition yields, disappointing acquisition volume, and increased overhead expenses.
9:41AM Interface (IFSIA) Legg Mason upgrades Hold to BUY. Target $9. Legg Mason upgrades IFSIA citing the stock's 39% decline since Dec 21, improved first quarter continuing operating earnings results, and their belief that mgmt and the Board of Directors are committed to tangible debt reduction.
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