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Saturday, May 14, 2005 12:04:35 AM
From Briefing.com: 5:23PM Weekly Wrap: The S&P 500 index started this week almost exactly where it was six months prior. That hardly means it has been a flat market. It has been a very bumpy ride, and the volatility continued this week.
In fact, the market continued its recent pattern of reversing trend on a daily basis. After a down day last Friday, the market was up on Monday, down on Tuesday, up on Wednesday, down on Thursday, and back up on Friday before an afternoon sell-off. This see-saw pattern has been treacherous for even the most seasoned traders, and this week there were reports of hedge funds experiencing liquidity problems. That was a negative factor for stocks through the week.
The fundamental news this week was bullish. The economic data eased concerns that the recent economic softness was not the start of something worse.
The March trade deficit was much lower than expected at $55.0 billion. That will likely lead to an upward revision to first quarter real GDP growth, which was originally put at 3.1%, and to second quarter numbers as well if the trend continues.
Also boosting the second quarter outlook was a much stronger than expected 1.4% in April retail sales. That gets the quarter off to a pretty good start. Wal-Mart indicated that May same store sales were on target for 2% to 4% growth after a disappointing 0.9% in April. Even Dell chipped in with some good news, saying in their first quarter earnings reports that sales were up sharply in April after a sluggish March.
This litany of good economic news builds on the report last Friday that nonfarm payrolls surged 274,000 in April.
All this helps support the contention that the weak March data was just the proverbial "soft patch." The economic outlook is much improved.
A sharp decline in oil prices this week could also help support consumer spending in the months ahead. Oil fell from $50.96 at the close of last week to $48.67 this week. As long as gasoline prices hold steady at the pump, they will not detract from the growth in consumer spending in future months. Declining gasoline prices could even give spending a boost above trend.
The inflation outlook remains unsettled. There was no data this past week to alter expectations. Next week, April PPI data are due on Tuesday and CPI data on Wednesday. Expectations are for a 0.2% increases in the core rates. A 0.1% in either could be very bullish for stocks, while 0.3% or 0.4% would be bearish.
There were some earnings reports of note this past week. Cisco and Dell both produced fine numbers. Cisco reported per share earnings growth of 21%, and Dell 32%. Revenue gains were 10% and 16%, respectively. The Nasdaq is down quite a bit this year, but Intel, Cisco, Dell, and Microsoft have all had very good reports for the first quarter.
The 10-year note yield eased this week to 4.12% from 4.26% last week. Finally, it should also be noted that the dollar has rallied to 1.26 against euro from 1.34 just a couple of months ago. The decline in the dollar earlier this year was considered a sign of impending doom by some very vocal bears. There has been barely a peep from that quarter about the recent dollar strength.
In terms of sectors, energy and materials tanked. This is one reason the S&P was down even while the fundamental news was so good. These sectors had provided "leadership" but were hurt this week by falling prices and a strong dollar. This is only a short-term factor for the broad market.
The market ended its three-week winning streak despite bullish economic, earnings, and oil news. This reflects the underlying nervousness that is leading to an increased risk premium on stocks. The price/earnings multiple on operating earnings for the S&P 500 has plunged over the past six months from 20.2 to 16.8. That has produced talk that blue chips stocks are reaching excellent valuation levels. Yet, until some of the nervousness subsides, this value will not be realized. It may take some better inflation numbers and continued solid economic numbers for that to happen, but fundamentals remain supportive such that the value in stocks will ultimately be realized.
10:42AM Sector Watch: Semi Index - SOX- strong performance nearing resistance 406.58 +9.56: -Technical- The sector has been a solid performer this month and is the leading sector thus far today as its extends the breakout above the late April/early May highs. Top performing components this morning include: BRCM +3.8%, TER +3.3%, MXIM +3.2%, MU +3.1%, NVLS +2.8%, KLAC +2.2%, AMD +1.5%, XLNX +1.4%. The SOX has pentrated its 50 ema this morning but is facing a solid chart barrier just above at 406 (session high 406.58). This resistance marks its Mid-April breakdown point as well as its 200/50 day sma (406.87/406.95). (click for chart)
9:45AM Danaher (DHR) CSFB upgrades Neutral to OUTPERFORM. Following their dental industry review, firm thinks favorable demographics, new technologies and industry consolidation are likely to fuel growth for many years, and believe the co is looking to further expand its dental platform via bolt-on acquisition.
9:44AM Dow Jones (DJ) JP Morgan upgrades Neutral to OVERWEIGHT. JP Morgan upgrades DJ based on the likelihood of an imminent restructuring of the co's assets, as well as the repositioning of the flagship WSJ. Firm thinks the co will ultimately prevail in transitioning towards more consumer advertising, and believes that by 2007 the co should be able to garner an incremental $82 mln in consumer advertising from the Weekend Edition and Personal Journal.
9:44AM Primus Guaranty (PRS) Keefe Bruyette upgrades Mkt Perform to OUTPERFORM. Firm believes that credit and growth perceptions have driven the revaluation of the stock over the last 2 months, creating an oversold opportunity. They believe the fundamentals of the co are facing a period of acceleration, and the depressed valuation offers an opportunity to take advantage of this expected improvement.
9:43AM Micromuse (MUSE) Raymond James upgrades Outperform to STRONG BUY. Target $7.25. Firm believes co's end mkts are improving, and that visibility will accordingly increase and permit it to expand operating margins given its highly leverageable model. Firm believes recent acquisition multiples and peer group multiples suggest at least 35% upside in the stock.
9:42AM Teradyne (TER) Moors & Cabot upgrades Hold to BUY. Target $15. Moors & Cabot upgrades TER as they believe the stock has bottomed and the prevailing negative street sentiment towards the test sector is already priced in. They believe TER's competitive positioning has further strengthened and that it stands to benefit from its broad gaming platform test wins.
9:39AM Alaska Comms (ALSK) Raymond James downgrades Outperform to MKT PERFORM. They continue to believe the co has significan long-term earnings potential, as Risperdal Consta continues to post strong performance and with product A.I.R. Insulin targeting a sizable potential inhaled insulin mkt, advancing into late stage development.
9:39AM Arctic Cat (ACAT) Ryan, Beck & Co downgrades Mkt Perform to UNDERPERFORM . Target $27 to $18. Firm notes that results were impacted by sustained increases in raw material prices, a mild winter in many of the co's key snowmobile markets, and a late qtr snowmobile promotion to assist the co's dealers. Additionally, the company expects an unfavorable yen/dollar exchange to hinder results going forward. In firm's view, these issues are unlikely to subside over the near term.
9:38AM Columbia Sportswear (COLM) McAdams,Wright,Ragen upgrades Hold to BUY. Target $53. Firm notes that stock is trading near its 52-wk low and at the low-end of its historical P/E range, and firm believes there is the potential for both earnings and multiple expansion.
2:26PM Tiffany & Co. (TIF) 30.37 +0.61: There is a palpable excitement which comes from being on the receiving end of that robin egg blue box wrapped with a silk white ribbon. Tiffany has been synonymous with quality, elegance, and exclusivity dating back to its beginning in 1837. There was a definite change in sentiment surrounding Tiffany's shares on Friday following its better than expected start to the year. The driver for the quarter was the American consumer. Robust US sales helped the luxury retailer offset higher costs and continued weakness in one of its key markets, Japan.
Tiffany's earnings rose nine percent to $40.1 mln, or $0.27 per share up from $36.8 mln, or $0.25 per share last year. The figures surpassed estimates by three cents. Stores opened longer than a year, a key measure for Retailers, rose 5%. Performance was heavily weighted to the US with comps gaining 11%, as Japan plummeted 10%. This was the fifth consecutive month of declines in Japan. A turnaround in performance in the country is key to TIF's longer-term prospects as it's the second largest market. Lackluster sales have been well telegraphed by the market keeping shares in a trading range for some time. Tiffany has previously raised prices on its successful line of silver jewelry, which has negatively impacted sales. The CEO said it had revamped its strategy offering more gold jewelry and more selection of pieces over $2,000 in order to spark demand.
Overall revenues rose 12% to $509.9 mln - two points above expectations. A weaker dollar tacked on another point to comps for the quarter. Tiffany's was going up against quite challenging comps for the quarter with sales up 20% last year. During the quarter, it opened four stores and introduced a new line of diamond bands called Celebration. International sales rose 3% to $190.3 mln, despite a five point drag from Japan. Higher precious metal prices weighed on profitability, which have retreated during over the last few weeks on worries of slower economic growth. Gross margins plummeted 280 basis points and operating margins slipped 70.
The company reiterated guidance for FY06 seeing EPS in the range of $1.45-$1.55 vs. $1.50 consensus on sales growth between 8-10%. It expects US sales to be in the mid-high single digits, a slight upward revision, and Japan comps in the low single digits. Despite the higher end coming in above consensus it all rest on the land of the rising sun. TIF added caution saying earnings could be at the lower end of that range if full year comparable store sales in Japan were to decline by a single-digit percentage. The issues in Japan are structural and have to deal with consumers' tastes and trends. As such, it will not be a quick fix. Another question is whether the US consumer can sustain growth enough to offset these negative pressures. Clearly, the market is choosing to focus more on the optimistic guidance and less on the uphill battle in Japan with shares making a substantial splash today.
It's a toss up. The quarter was solid, but within the guidance resides a bevy of issues which could hamper growth. First on the plus side, US sales were definitely strong, which in part was attributed to a weaker dollar. Considering the recent strength in the green back, don't expect this to continue. New stores and product lines are performing quite well. Now for the other side to the coin, let's see what management had to say about Japanese sales, No visible signs yet of a turnaround. Making up a quarter of its sales, Japan will remain a key factor to watch. Also despite strong sales, profitability continues to weaken. Gross margins are now expected to be down versus TIF's prior guidance of up slightly. Also in Q1 Europe, particularly the UK, was weak. Taking all this into consideration, coupled with TIF's discounted valuation, we still suggest caution until TIF delivers a nicely wrapped package with no strings attached.---Kimberly DuBord, Briefing.com
2:11PM Trading Call of the Week -- Halpern's Sterman on ADBL, JJZ
David Sterman of Halpern Capital becomes our first-ever back-to-back winner of Trading Call of the Week, after recommending Audible.com (ADBL) ahead of last week's better-than-expected earnings report, giving traders a chance for as much as a 30% gain over three trading sessions.
We note that the previous week, we talked to Sterman for the very first time, as we liked his call on Bombay Co. (00C) just ahead of a much better-than-expected same-store sales report that lifted that stock some 25% in a matter of a few days.
If it seems suspicious that we're highlighting Sterman twice in a row, rest assured that neither Briefing.com nor anyone who works here has business ties to Sterman or Halpern Capital - we simply think he's made some excellent stock calls.
Last week in this very column, Sterman said he expected a strong report from Audible, the online retailer of downloadable audio books, for the following reasons: 1) He believed the company would beat EPS consensus. 2) He noted that ADBL's results usually trade two quarters behind Apple iPod sales, and the iPod revenue was extremely strong six months previously. 3) Sterman noted that ADBL was just starting to crack international sales opportunities and the education market. 4) He liked ADBL's valuation, as shares had fallen as much as 40% since just before the company's Q4 report in which it missed sales expectations.
Sterman pretty much read ADBL like an audio book. The company beat earnings expectations by $0.03, sales that rose nearly 90% to $12.9 mln, above the $12.0 mln analyst consensus. The company also raised revenue expectations for fiscal '05, noting strong sales to iPod customers. And on its conference call, ADBL talked up plans for an Audible UK launch on June 15, as well as an education market expansion.
Audible shares traded at $13.30 on May 6 when we forwarded Sterman' s ADBL trading idea. The stock rose to an intraday high of $17.68 (more than 4 points higher) by May 10, a day after the company reported its financial results, for a potential gain of more than 30%.
Based on his track record, we AGAIN went to Sterman for a stock pick this week. He told us he's now watching Jacuzzi Brands, (JJZ) as a potential takeout candidate. Sterman explains that the company is likely to sell out to a competitor. And according to his analysis, the company's breakup value is at least $12 a share, and as much as $14 or $15 a share, vs. the stock's current price of about $8.40.
Business at Jacuzzi is not nearly as strong as one of its whirlpool jets, Sterman explains. Management has recently announced that the company is simply too small to get sufficient operating leverage. Despite a vastly refreshed product line, the company's spa division failed to generate the modest sales growth Sterman had expected for its second quarter, ended March. Operating margins at the spa division is also a concern.
At this point, Sterman says that Jacuzzi's management has already pursued and achieved, "virtually every avenue to cost savings." He says the company is now working with investment banker Lazard Freres to find "alternatives", one of which is a possible sale of all or part of the company.
According to Sterman's breakup analysis, the spa division of the company is worth about 1x sales, in line with its peers, or about $930 mln. He adds that Jacuzzi's plumbing business is worth about 8x the midpoint of EBITDA, or about $600 mln. Adding those together ($1.53 bln), and taking out the company's $320 mln in net debt leaves a total value of $1.21 bln, or about $16 a share. Even if investors believe the company must accept a 25% lower price for each division, Sterman says the shares would be worth $12, a more than 40% premium to the stock's current price - Mike Tarsala, mtarsala@briefing.com
12:02PM Dell Inc. (DELL) 38.92 +2.31: Dell's optimistic guidance and overall positive tone was warmly received by the market on this Friday the 13th. The Round Rock, Texas-based company released Q1 results after Thursday's bell meeting expectations. The market held a cautious view ahead of the release on concerns of decelerating demand and a weak environment may have caused the company to miss. The tone was justified since last month Dell cautioned that February and March sales were weaker than expected, further magnified by IBM's disappointing results that it blamed partially on weakness in Japan and Europe. Lingering wariness is clearly evident with shares in the hole by 13% since January. But today, the market breathed a collective sigh.
Overall this was a solid quarter, but what the market focused in on was the forward guidance. Dell is typically quite conservative, therefore a decidedly upbeat tone came somewhat as a surprise. For the second quarter, it sees EPS of $0.37-0.39 vs. $0.38 consensus on revenues of $13.6-13.8 bln vs. $13.64 bln consensus.
The largest PC manufacturer in the world generated 30% profit growth earning $934 mln, or $0.37 per share with revenues up 16% to $13.39 bln just under expectations of $13.42 bln. This was the fourth consecutive quarter revenues have come in just under estimates. Dell was able to overcome weakness in Feb and March with stronger sales in April, enjoying particular strength overseas. With regard to its international business, DELL said it's making strides outside the US (40% of revenues), and plans to expand manufacturing in Europe. International sales jumped 21% as sales of printers, data storage, and TVs in Europe and Japan helped offset slowing growth in desktop PCs.
Looking at the quarter on a revenue basis by product category, it's clear the momentum remains with its new categories and regions. Revenues for Desktop PCs were $5.3 bln down 5% sequentially, but up 6% from last year. Mobility, a key growth segment, generated sales of $3.3 bln, up 4% from last quarter and 22% y/y. Others businesses include Servers $1.3 bln -1% and +12%, Storage $0.4 bln +5% and +49%, Enhanced Services $1.1 bln +1% and +30%, and Software & Peripherals $2.0 bln +4% and +29%. By region, overseas markets far outpaced the US. The Americas declined four percent from last quarter, but gained 14% y/y. Europe aspired 2% and 20%, respectively while Asia Pacific generated 15% in sequential gains and almost 20% from last year's period.
Dell's ability to diversify away from the PC business will be the key to its success for the near-term until the PC demand environment strengthens. This could come in the form of the new operating system "Longhorn" which MSFT launches next year. Sales of products and services beyond its core PC business were essential to growth in the quarter, as desktop PCs rose only 6%. Sales of printers soared 77% y/y, as it gained share in Hewlett-Packard's (HPQ) dominated market. Dell now commands 10% of the laser printer market and 18% of the inkjet market, according to the company.
On the cost side, prices for components it uses to build PCs dropped materially during the latter part of the quarter. Various types of memory chips fell from 10% to 50% in the final weeks, according to industry analysts. In addition, Taiwanese suppliers of flat panel displays have lowered prices by almost ten percent since the start of the year. Gross margins were 18.6% vs. consensus estimates of 18.4% - the highest level in four years. While operating margins gained 40 basis points to 8.8% last year's period. Dell's cash flow generation remains one of its key strengths reaching $1.2 billion. Dell deployed cash back to stockholders, repurchasing more than 50 million shares worth $2 billion.
The strength of Dell lies in its business model. Simply put, Dell believes the most efficient path to the customer is a direct one. This approach gives Dell the ability to understand its customers' wants and needs. It has successfully applied this strategy not just in the PC business, but to a bevy of new product categories (i.e. EMC in storage and Lexmark in printers) increasing its ability to drive growth over the longer-term. Further, product category expansion has diversified its business away from its PC-centric past, now accounting for 40% down five points from 2004. Instead of focusing on R&D to generate growth like an Intel (INTC) or Microsoft (MSFT), its strength lies within its brand name and distribution. The bottom line, no one has been able to duplicate its direct model, which Dell will continue to leverage gaining market share and driving growth. This quarter proves the company is executing well. As such, shares are not likely to remain undervalued for very long as the market becomes more optimistic about its prospects ahead.---Kimberly DuBord, Briefing.com
11:53AM Warner Music Group (WMG) $16.00 -0.10 (-0.6%) Timing is everything, particularly in music. It is starting to look like Warner Music Group's IPO on Wednesday (at $17.00) is either extremely good timing or extremely bad timing, depending on your point of view. For purchasers in the IPO, the timing might turn out to be as bad as it could be. For the private equity firms that bought Warner Music less than 15 months ago, the IPOs timing is of the "just in the nick of time" category.
The private equity funds led by Edgar Bronfman, Jr, include such well known names as Thomas H. Lee, Bain Capital, and Providence Equity Partners, bought Time Warner's music division last March for $2.6 billion. The share price of $16 today values the company at $2.3 billion, which might seem to imply the investors are currently at a loss. However, because of financial maneuvers during the 14 months the firm was private, the current shareholders have almost no capital at risk currently. The purchase last year involved an outlay of $1.25 billion, with the rest financed by debt. That cash outlay has already been repaid almost completely by the company issuing new debt of more than $1 billion less than six months ago, which was then used to "redeem" preferred stock included the preferred's accrued dividends.
The IPO then brought in more than $550 million, of which all but $7.5 million will used to redeem pay a special dividend to the original investors. That puts the original investors, who put up just $1.25 billion in "at-risk-capital," already "up" by more than $250 million, but still holding almost 70% of the public company. Wouldn't you like to have your public stock holdings not only be financed entirely by someone else, but make a profit of 20% in 14 months doing it? That's what the private equity financial transaction of WMG's IPO amounts to.
New investors in WMG, on the other hand, have a real problem on their hand. Not only is the "new" Warner Music Group now burdened with debt of over $2 billion, the IPO brought just $7.5 million on new capital into the firm. That amount is so low, it almost makes a mockery of the idea that the stock market's purpose is to "serve the capital needs of businesses." The situation is so extreme that one of Warner Music's biggest selling artists, Linkin Park, strongly criticized the IPO deal and demanded a release from their contract, for which four more albums are still owed. Even if Linkin Park is eventually deemed obligated to fulfill their contract, the band's clear unhappiness will certainly make all other artists leery of doing business with Warner Music. In fact, the Linkin Park fiasco hurts Warner's ability to sign new bands, whether Linkin Park is released from their contract or forced to fulfill it. Warner loses.
When combined with the idea that the music industry is just now on the verge of a fundamental sea-change in the business model for the distribution of music, it makes the new investors timing seem even riskier. Yahoo!'s innovate new "unlimited rental" music service has the potential for making the core Warner Music Group's business model obsolete. What Warner Music really sells is the physical embodiment of music, not the music itself. In fact, the physical aspect of CDs might be a negative for consumers in just five years. Why have CDs at all, when you can easily get the same music digitally on a subscription basis with no incremental cost for more new music? The revolution in how music is distributed has just started and Warner Music Group is one of the giants that the revolution intends to slay.
There are always two ways to make money in a business. One involves "business plays" where the objective is increasing value by growing the revenue, market share, or profitability by innovative marketing, new products, or operational efficiency. The other involves "financial plays" where value is created by financial restructuring, recapitalization, asset sales, LBOs, or IPOs. Many corporate strategies involve a mixture of both plays. The Warner Music Group's IPO, however, is a good example of an almost pure financial play. It definitely created value for the private equity investors, but unless some clear new "business plays" are rolled out, the most popular tune among WMG shareholders is likely to be "Swan Song." - Robert V. Green
9:22AM Page One - Looking for Reasons to Sell in an Up and Down Market : The S&P opens today down 12 points for the week. The three week winning streak is almost certain to end.
The market took a beating yesterday, and there were plenty of different reasons ascribed to the move. Energy stocks were off sharply as oil declined. Materials stocks were off supposedly due to the strength of the dollar.
Now wait a minute. Aren't lower oil prices good for the US stock market? Of course! Sure, it makes sense to see energy stocks decline. But there was very little talk about the overall beneficial impact. There certainly is plenty of talk about the bearish impact every time oil prices tick up 5 cents.
And isn't a stronger dollar supposed to be good for US stocks? Earlier this year when the dollar was sinking, there were plenty of talking heads on TV to warn of the doom this foretold. Now, the dollar has rallied from about 1.36 against the euro to 1.26 over the past few months. This major move has been met with virtually no talk that it is bullish for US stocks.
For full disclosure, we must admit that our view has always been contrary to the conventional wisdom that a strong dollar is good for US stocks. The stronger dollar will reduce the value of overseas US corporate profits and US exports. That aside, the complaint about the dollar move yesterday reveals more about the market than the fundamentals.
The market was simply taking down some of the sectors that have been strong lately over the general economic fears. The oil and dollar moves triggered some of the selling but hardly explain the broad market losses. After three up weeks, the underlying fears about the economic outlook burst through again.
There is some good news this morning to help offset those fears. Dell reported earnings and revenue in line with expectations for the quarter ended April 30. Still, it was widely viewed as a positive report. The company noted that demand picked up sharply in April, which tends to support the temporary soft patch theory on the economy (remember how IBM noted weak demand in March). The company also said that revenue for the current quarter would be $13.6 to $13.8 billion, which is a range that compares favorably with current Wall Street estimates that average $13.64 billion. The stock is indicated higher and that will give a boost to the Nasdaq at the open.
The market has been on an incredible daily pattern of reversing direction. After Friday's down day last week, Monday was up. Then Tuesday was down. Wednesday was then up. Thursday was down. And now maybe Friday will be up. The market has posted very few two-day moves the past month. It makes for a very dangerous environment for trading. Even major hedge funds have been getting burned lately. It is a time when extrapolating from the mood of the moment can be very dangerous. --Dick Green, Briefing.com
In fact, the market continued its recent pattern of reversing trend on a daily basis. After a down day last Friday, the market was up on Monday, down on Tuesday, up on Wednesday, down on Thursday, and back up on Friday before an afternoon sell-off. This see-saw pattern has been treacherous for even the most seasoned traders, and this week there were reports of hedge funds experiencing liquidity problems. That was a negative factor for stocks through the week.
The fundamental news this week was bullish. The economic data eased concerns that the recent economic softness was not the start of something worse.
The March trade deficit was much lower than expected at $55.0 billion. That will likely lead to an upward revision to first quarter real GDP growth, which was originally put at 3.1%, and to second quarter numbers as well if the trend continues.
Also boosting the second quarter outlook was a much stronger than expected 1.4% in April retail sales. That gets the quarter off to a pretty good start. Wal-Mart indicated that May same store sales were on target for 2% to 4% growth after a disappointing 0.9% in April. Even Dell chipped in with some good news, saying in their first quarter earnings reports that sales were up sharply in April after a sluggish March.
This litany of good economic news builds on the report last Friday that nonfarm payrolls surged 274,000 in April.
All this helps support the contention that the weak March data was just the proverbial "soft patch." The economic outlook is much improved.
A sharp decline in oil prices this week could also help support consumer spending in the months ahead. Oil fell from $50.96 at the close of last week to $48.67 this week. As long as gasoline prices hold steady at the pump, they will not detract from the growth in consumer spending in future months. Declining gasoline prices could even give spending a boost above trend.
The inflation outlook remains unsettled. There was no data this past week to alter expectations. Next week, April PPI data are due on Tuesday and CPI data on Wednesday. Expectations are for a 0.2% increases in the core rates. A 0.1% in either could be very bullish for stocks, while 0.3% or 0.4% would be bearish.
There were some earnings reports of note this past week. Cisco and Dell both produced fine numbers. Cisco reported per share earnings growth of 21%, and Dell 32%. Revenue gains were 10% and 16%, respectively. The Nasdaq is down quite a bit this year, but Intel, Cisco, Dell, and Microsoft have all had very good reports for the first quarter.
The 10-year note yield eased this week to 4.12% from 4.26% last week. Finally, it should also be noted that the dollar has rallied to 1.26 against euro from 1.34 just a couple of months ago. The decline in the dollar earlier this year was considered a sign of impending doom by some very vocal bears. There has been barely a peep from that quarter about the recent dollar strength.
In terms of sectors, energy and materials tanked. This is one reason the S&P was down even while the fundamental news was so good. These sectors had provided "leadership" but were hurt this week by falling prices and a strong dollar. This is only a short-term factor for the broad market.
The market ended its three-week winning streak despite bullish economic, earnings, and oil news. This reflects the underlying nervousness that is leading to an increased risk premium on stocks. The price/earnings multiple on operating earnings for the S&P 500 has plunged over the past six months from 20.2 to 16.8. That has produced talk that blue chips stocks are reaching excellent valuation levels. Yet, until some of the nervousness subsides, this value will not be realized. It may take some better inflation numbers and continued solid economic numbers for that to happen, but fundamentals remain supportive such that the value in stocks will ultimately be realized.
Index Started Week Ended Week Change %Change YTD
DJIA 10345.40 10140.12 -205.28 -2.0 % -6.0 %
Nasdaq 1967.35 1976.79 9.44 0.5 % -9.1 %
S&P 500 1171.35 1154.05 -17.30 -1.5 % -4.8 %
Russell 2000 596.52 582.02 -14.50 -2.4 % -10.7 %
10:42AM Sector Watch: Semi Index - SOX- strong performance nearing resistance 406.58 +9.56: -Technical- The sector has been a solid performer this month and is the leading sector thus far today as its extends the breakout above the late April/early May highs. Top performing components this morning include: BRCM +3.8%, TER +3.3%, MXIM +3.2%, MU +3.1%, NVLS +2.8%, KLAC +2.2%, AMD +1.5%, XLNX +1.4%. The SOX has pentrated its 50 ema this morning but is facing a solid chart barrier just above at 406 (session high 406.58). This resistance marks its Mid-April breakdown point as well as its 200/50 day sma (406.87/406.95). (click for chart)
9:45AM Danaher (DHR) CSFB upgrades Neutral to OUTPERFORM. Following their dental industry review, firm thinks favorable demographics, new technologies and industry consolidation are likely to fuel growth for many years, and believe the co is looking to further expand its dental platform via bolt-on acquisition.
9:44AM Dow Jones (DJ) JP Morgan upgrades Neutral to OVERWEIGHT. JP Morgan upgrades DJ based on the likelihood of an imminent restructuring of the co's assets, as well as the repositioning of the flagship WSJ. Firm thinks the co will ultimately prevail in transitioning towards more consumer advertising, and believes that by 2007 the co should be able to garner an incremental $82 mln in consumer advertising from the Weekend Edition and Personal Journal.
9:44AM Primus Guaranty (PRS) Keefe Bruyette upgrades Mkt Perform to OUTPERFORM. Firm believes that credit and growth perceptions have driven the revaluation of the stock over the last 2 months, creating an oversold opportunity. They believe the fundamentals of the co are facing a period of acceleration, and the depressed valuation offers an opportunity to take advantage of this expected improvement.
9:43AM Micromuse (MUSE) Raymond James upgrades Outperform to STRONG BUY. Target $7.25. Firm believes co's end mkts are improving, and that visibility will accordingly increase and permit it to expand operating margins given its highly leverageable model. Firm believes recent acquisition multiples and peer group multiples suggest at least 35% upside in the stock.
9:42AM Teradyne (TER) Moors & Cabot upgrades Hold to BUY. Target $15. Moors & Cabot upgrades TER as they believe the stock has bottomed and the prevailing negative street sentiment towards the test sector is already priced in. They believe TER's competitive positioning has further strengthened and that it stands to benefit from its broad gaming platform test wins.
9:39AM Alaska Comms (ALSK) Raymond James downgrades Outperform to MKT PERFORM. They continue to believe the co has significan long-term earnings potential, as Risperdal Consta continues to post strong performance and with product A.I.R. Insulin targeting a sizable potential inhaled insulin mkt, advancing into late stage development.
9:39AM Arctic Cat (ACAT) Ryan, Beck & Co downgrades Mkt Perform to UNDERPERFORM . Target $27 to $18. Firm notes that results were impacted by sustained increases in raw material prices, a mild winter in many of the co's key snowmobile markets, and a late qtr snowmobile promotion to assist the co's dealers. Additionally, the company expects an unfavorable yen/dollar exchange to hinder results going forward. In firm's view, these issues are unlikely to subside over the near term.
9:38AM Columbia Sportswear (COLM) McAdams,Wright,Ragen upgrades Hold to BUY. Target $53. Firm notes that stock is trading near its 52-wk low and at the low-end of its historical P/E range, and firm believes there is the potential for both earnings and multiple expansion.
2:26PM Tiffany & Co. (TIF) 30.37 +0.61: There is a palpable excitement which comes from being on the receiving end of that robin egg blue box wrapped with a silk white ribbon. Tiffany has been synonymous with quality, elegance, and exclusivity dating back to its beginning in 1837. There was a definite change in sentiment surrounding Tiffany's shares on Friday following its better than expected start to the year. The driver for the quarter was the American consumer. Robust US sales helped the luxury retailer offset higher costs and continued weakness in one of its key markets, Japan.
Tiffany's earnings rose nine percent to $40.1 mln, or $0.27 per share up from $36.8 mln, or $0.25 per share last year. The figures surpassed estimates by three cents. Stores opened longer than a year, a key measure for Retailers, rose 5%. Performance was heavily weighted to the US with comps gaining 11%, as Japan plummeted 10%. This was the fifth consecutive month of declines in Japan. A turnaround in performance in the country is key to TIF's longer-term prospects as it's the second largest market. Lackluster sales have been well telegraphed by the market keeping shares in a trading range for some time. Tiffany has previously raised prices on its successful line of silver jewelry, which has negatively impacted sales. The CEO said it had revamped its strategy offering more gold jewelry and more selection of pieces over $2,000 in order to spark demand.
Overall revenues rose 12% to $509.9 mln - two points above expectations. A weaker dollar tacked on another point to comps for the quarter. Tiffany's was going up against quite challenging comps for the quarter with sales up 20% last year. During the quarter, it opened four stores and introduced a new line of diamond bands called Celebration. International sales rose 3% to $190.3 mln, despite a five point drag from Japan. Higher precious metal prices weighed on profitability, which have retreated during over the last few weeks on worries of slower economic growth. Gross margins plummeted 280 basis points and operating margins slipped 70.
The company reiterated guidance for FY06 seeing EPS in the range of $1.45-$1.55 vs. $1.50 consensus on sales growth between 8-10%. It expects US sales to be in the mid-high single digits, a slight upward revision, and Japan comps in the low single digits. Despite the higher end coming in above consensus it all rest on the land of the rising sun. TIF added caution saying earnings could be at the lower end of that range if full year comparable store sales in Japan were to decline by a single-digit percentage. The issues in Japan are structural and have to deal with consumers' tastes and trends. As such, it will not be a quick fix. Another question is whether the US consumer can sustain growth enough to offset these negative pressures. Clearly, the market is choosing to focus more on the optimistic guidance and less on the uphill battle in Japan with shares making a substantial splash today.
It's a toss up. The quarter was solid, but within the guidance resides a bevy of issues which could hamper growth. First on the plus side, US sales were definitely strong, which in part was attributed to a weaker dollar. Considering the recent strength in the green back, don't expect this to continue. New stores and product lines are performing quite well. Now for the other side to the coin, let's see what management had to say about Japanese sales, No visible signs yet of a turnaround. Making up a quarter of its sales, Japan will remain a key factor to watch. Also despite strong sales, profitability continues to weaken. Gross margins are now expected to be down versus TIF's prior guidance of up slightly. Also in Q1 Europe, particularly the UK, was weak. Taking all this into consideration, coupled with TIF's discounted valuation, we still suggest caution until TIF delivers a nicely wrapped package with no strings attached.---Kimberly DuBord, Briefing.com
2:11PM Trading Call of the Week -- Halpern's Sterman on ADBL, JJZ
David Sterman of Halpern Capital becomes our first-ever back-to-back winner of Trading Call of the Week, after recommending Audible.com (ADBL) ahead of last week's better-than-expected earnings report, giving traders a chance for as much as a 30% gain over three trading sessions.
We note that the previous week, we talked to Sterman for the very first time, as we liked his call on Bombay Co. (00C) just ahead of a much better-than-expected same-store sales report that lifted that stock some 25% in a matter of a few days.
If it seems suspicious that we're highlighting Sterman twice in a row, rest assured that neither Briefing.com nor anyone who works here has business ties to Sterman or Halpern Capital - we simply think he's made some excellent stock calls.
Last week in this very column, Sterman said he expected a strong report from Audible, the online retailer of downloadable audio books, for the following reasons: 1) He believed the company would beat EPS consensus. 2) He noted that ADBL's results usually trade two quarters behind Apple iPod sales, and the iPod revenue was extremely strong six months previously. 3) Sterman noted that ADBL was just starting to crack international sales opportunities and the education market. 4) He liked ADBL's valuation, as shares had fallen as much as 40% since just before the company's Q4 report in which it missed sales expectations.
Sterman pretty much read ADBL like an audio book. The company beat earnings expectations by $0.03, sales that rose nearly 90% to $12.9 mln, above the $12.0 mln analyst consensus. The company also raised revenue expectations for fiscal '05, noting strong sales to iPod customers. And on its conference call, ADBL talked up plans for an Audible UK launch on June 15, as well as an education market expansion.
Audible shares traded at $13.30 on May 6 when we forwarded Sterman' s ADBL trading idea. The stock rose to an intraday high of $17.68 (more than 4 points higher) by May 10, a day after the company reported its financial results, for a potential gain of more than 30%.
Based on his track record, we AGAIN went to Sterman for a stock pick this week. He told us he's now watching Jacuzzi Brands, (JJZ) as a potential takeout candidate. Sterman explains that the company is likely to sell out to a competitor. And according to his analysis, the company's breakup value is at least $12 a share, and as much as $14 or $15 a share, vs. the stock's current price of about $8.40.
Business at Jacuzzi is not nearly as strong as one of its whirlpool jets, Sterman explains. Management has recently announced that the company is simply too small to get sufficient operating leverage. Despite a vastly refreshed product line, the company's spa division failed to generate the modest sales growth Sterman had expected for its second quarter, ended March. Operating margins at the spa division is also a concern.
At this point, Sterman says that Jacuzzi's management has already pursued and achieved, "virtually every avenue to cost savings." He says the company is now working with investment banker Lazard Freres to find "alternatives", one of which is a possible sale of all or part of the company.
According to Sterman's breakup analysis, the spa division of the company is worth about 1x sales, in line with its peers, or about $930 mln. He adds that Jacuzzi's plumbing business is worth about 8x the midpoint of EBITDA, or about $600 mln. Adding those together ($1.53 bln), and taking out the company's $320 mln in net debt leaves a total value of $1.21 bln, or about $16 a share. Even if investors believe the company must accept a 25% lower price for each division, Sterman says the shares would be worth $12, a more than 40% premium to the stock's current price - Mike Tarsala, mtarsala@briefing.com
12:02PM Dell Inc. (DELL) 38.92 +2.31: Dell's optimistic guidance and overall positive tone was warmly received by the market on this Friday the 13th. The Round Rock, Texas-based company released Q1 results after Thursday's bell meeting expectations. The market held a cautious view ahead of the release on concerns of decelerating demand and a weak environment may have caused the company to miss. The tone was justified since last month Dell cautioned that February and March sales were weaker than expected, further magnified by IBM's disappointing results that it blamed partially on weakness in Japan and Europe. Lingering wariness is clearly evident with shares in the hole by 13% since January. But today, the market breathed a collective sigh.
Overall this was a solid quarter, but what the market focused in on was the forward guidance. Dell is typically quite conservative, therefore a decidedly upbeat tone came somewhat as a surprise. For the second quarter, it sees EPS of $0.37-0.39 vs. $0.38 consensus on revenues of $13.6-13.8 bln vs. $13.64 bln consensus.
The largest PC manufacturer in the world generated 30% profit growth earning $934 mln, or $0.37 per share with revenues up 16% to $13.39 bln just under expectations of $13.42 bln. This was the fourth consecutive quarter revenues have come in just under estimates. Dell was able to overcome weakness in Feb and March with stronger sales in April, enjoying particular strength overseas. With regard to its international business, DELL said it's making strides outside the US (40% of revenues), and plans to expand manufacturing in Europe. International sales jumped 21% as sales of printers, data storage, and TVs in Europe and Japan helped offset slowing growth in desktop PCs.
Looking at the quarter on a revenue basis by product category, it's clear the momentum remains with its new categories and regions. Revenues for Desktop PCs were $5.3 bln down 5% sequentially, but up 6% from last year. Mobility, a key growth segment, generated sales of $3.3 bln, up 4% from last quarter and 22% y/y. Others businesses include Servers $1.3 bln -1% and +12%, Storage $0.4 bln +5% and +49%, Enhanced Services $1.1 bln +1% and +30%, and Software & Peripherals $2.0 bln +4% and +29%. By region, overseas markets far outpaced the US. The Americas declined four percent from last quarter, but gained 14% y/y. Europe aspired 2% and 20%, respectively while Asia Pacific generated 15% in sequential gains and almost 20% from last year's period.
Dell's ability to diversify away from the PC business will be the key to its success for the near-term until the PC demand environment strengthens. This could come in the form of the new operating system "Longhorn" which MSFT launches next year. Sales of products and services beyond its core PC business were essential to growth in the quarter, as desktop PCs rose only 6%. Sales of printers soared 77% y/y, as it gained share in Hewlett-Packard's (HPQ) dominated market. Dell now commands 10% of the laser printer market and 18% of the inkjet market, according to the company.
On the cost side, prices for components it uses to build PCs dropped materially during the latter part of the quarter. Various types of memory chips fell from 10% to 50% in the final weeks, according to industry analysts. In addition, Taiwanese suppliers of flat panel displays have lowered prices by almost ten percent since the start of the year. Gross margins were 18.6% vs. consensus estimates of 18.4% - the highest level in four years. While operating margins gained 40 basis points to 8.8% last year's period. Dell's cash flow generation remains one of its key strengths reaching $1.2 billion. Dell deployed cash back to stockholders, repurchasing more than 50 million shares worth $2 billion.
The strength of Dell lies in its business model. Simply put, Dell believes the most efficient path to the customer is a direct one. This approach gives Dell the ability to understand its customers' wants and needs. It has successfully applied this strategy not just in the PC business, but to a bevy of new product categories (i.e. EMC in storage and Lexmark in printers) increasing its ability to drive growth over the longer-term. Further, product category expansion has diversified its business away from its PC-centric past, now accounting for 40% down five points from 2004. Instead of focusing on R&D to generate growth like an Intel (INTC) or Microsoft (MSFT), its strength lies within its brand name and distribution. The bottom line, no one has been able to duplicate its direct model, which Dell will continue to leverage gaining market share and driving growth. This quarter proves the company is executing well. As such, shares are not likely to remain undervalued for very long as the market becomes more optimistic about its prospects ahead.---Kimberly DuBord, Briefing.com
11:53AM Warner Music Group (WMG) $16.00 -0.10 (-0.6%) Timing is everything, particularly in music. It is starting to look like Warner Music Group's IPO on Wednesday (at $17.00) is either extremely good timing or extremely bad timing, depending on your point of view. For purchasers in the IPO, the timing might turn out to be as bad as it could be. For the private equity firms that bought Warner Music less than 15 months ago, the IPOs timing is of the "just in the nick of time" category.
The private equity funds led by Edgar Bronfman, Jr, include such well known names as Thomas H. Lee, Bain Capital, and Providence Equity Partners, bought Time Warner's music division last March for $2.6 billion. The share price of $16 today values the company at $2.3 billion, which might seem to imply the investors are currently at a loss. However, because of financial maneuvers during the 14 months the firm was private, the current shareholders have almost no capital at risk currently. The purchase last year involved an outlay of $1.25 billion, with the rest financed by debt. That cash outlay has already been repaid almost completely by the company issuing new debt of more than $1 billion less than six months ago, which was then used to "redeem" preferred stock included the preferred's accrued dividends.
The IPO then brought in more than $550 million, of which all but $7.5 million will used to redeem pay a special dividend to the original investors. That puts the original investors, who put up just $1.25 billion in "at-risk-capital," already "up" by more than $250 million, but still holding almost 70% of the public company. Wouldn't you like to have your public stock holdings not only be financed entirely by someone else, but make a profit of 20% in 14 months doing it? That's what the private equity financial transaction of WMG's IPO amounts to.
New investors in WMG, on the other hand, have a real problem on their hand. Not only is the "new" Warner Music Group now burdened with debt of over $2 billion, the IPO brought just $7.5 million on new capital into the firm. That amount is so low, it almost makes a mockery of the idea that the stock market's purpose is to "serve the capital needs of businesses." The situation is so extreme that one of Warner Music's biggest selling artists, Linkin Park, strongly criticized the IPO deal and demanded a release from their contract, for which four more albums are still owed. Even if Linkin Park is eventually deemed obligated to fulfill their contract, the band's clear unhappiness will certainly make all other artists leery of doing business with Warner Music. In fact, the Linkin Park fiasco hurts Warner's ability to sign new bands, whether Linkin Park is released from their contract or forced to fulfill it. Warner loses.
When combined with the idea that the music industry is just now on the verge of a fundamental sea-change in the business model for the distribution of music, it makes the new investors timing seem even riskier. Yahoo!'s innovate new "unlimited rental" music service has the potential for making the core Warner Music Group's business model obsolete. What Warner Music really sells is the physical embodiment of music, not the music itself. In fact, the physical aspect of CDs might be a negative for consumers in just five years. Why have CDs at all, when you can easily get the same music digitally on a subscription basis with no incremental cost for more new music? The revolution in how music is distributed has just started and Warner Music Group is one of the giants that the revolution intends to slay.
There are always two ways to make money in a business. One involves "business plays" where the objective is increasing value by growing the revenue, market share, or profitability by innovative marketing, new products, or operational efficiency. The other involves "financial plays" where value is created by financial restructuring, recapitalization, asset sales, LBOs, or IPOs. Many corporate strategies involve a mixture of both plays. The Warner Music Group's IPO, however, is a good example of an almost pure financial play. It definitely created value for the private equity investors, but unless some clear new "business plays" are rolled out, the most popular tune among WMG shareholders is likely to be "Swan Song." - Robert V. Green
9:22AM Page One - Looking for Reasons to Sell in an Up and Down Market : The S&P opens today down 12 points for the week. The three week winning streak is almost certain to end.
The market took a beating yesterday, and there were plenty of different reasons ascribed to the move. Energy stocks were off sharply as oil declined. Materials stocks were off supposedly due to the strength of the dollar.
Now wait a minute. Aren't lower oil prices good for the US stock market? Of course! Sure, it makes sense to see energy stocks decline. But there was very little talk about the overall beneficial impact. There certainly is plenty of talk about the bearish impact every time oil prices tick up 5 cents.
And isn't a stronger dollar supposed to be good for US stocks? Earlier this year when the dollar was sinking, there were plenty of talking heads on TV to warn of the doom this foretold. Now, the dollar has rallied from about 1.36 against the euro to 1.26 over the past few months. This major move has been met with virtually no talk that it is bullish for US stocks.
For full disclosure, we must admit that our view has always been contrary to the conventional wisdom that a strong dollar is good for US stocks. The stronger dollar will reduce the value of overseas US corporate profits and US exports. That aside, the complaint about the dollar move yesterday reveals more about the market than the fundamentals.
The market was simply taking down some of the sectors that have been strong lately over the general economic fears. The oil and dollar moves triggered some of the selling but hardly explain the broad market losses. After three up weeks, the underlying fears about the economic outlook burst through again.
There is some good news this morning to help offset those fears. Dell reported earnings and revenue in line with expectations for the quarter ended April 30. Still, it was widely viewed as a positive report. The company noted that demand picked up sharply in April, which tends to support the temporary soft patch theory on the economy (remember how IBM noted weak demand in March). The company also said that revenue for the current quarter would be $13.6 to $13.8 billion, which is a range that compares favorably with current Wall Street estimates that average $13.64 billion. The stock is indicated higher and that will give a boost to the Nasdaq at the open.
The market has been on an incredible daily pattern of reversing direction. After Friday's down day last week, Monday was up. Then Tuesday was down. Wednesday was then up. Thursday was down. And now maybe Friday will be up. The market has posted very few two-day moves the past month. It makes for a very dangerous environment for trading. Even major hedge funds have been getting burned lately. It is a time when extrapolating from the mood of the moment can be very dangerous. --Dick Green, Briefing.com
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