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Tuesday, May 31, 2005 10:22:01 PM
From Briefing.com: 6:09PM Swing Trader: TRI, DCAI, MHS, BBBY : -Technical- Markets were weak coming off the 3-day weekend to wrap up the end of the month's activity. Market Breadth was mixed as Decliners were just slightly higher than Advancers and New Highs exceeded New Lows. Market action started off relatively weak, but stabilized into mid-day, leading to an early afternoon rally that was slammed down to new lows the last hour of trade...(continued)
Close Dow -75.07 at 10467.48, S&P -7.27 at 1191.51, Nasdaq -7.51 at 2068.22: The major averages finished the month of May sharply higher but ended the day on a downbeat note, as widespread profit-taking following mixed economic data overshadowed plummeting bond yields and closed virtually every sector in negative territory... After returning from the long holiday weekend, investors had little in the way of upside catalysts to hold on to recent gains following the market's best monthly advance since last November...
Sure, an unexpected jump to 102.2 in May consumer confidence, versus expectations of 96.0 and an April read of 97.5, ended three consecutive months of declines and suggested that consumers may finally be starting to identify with improved job market conditions... However, the fact that the Conference Board's report doesn't correlate well with spending patterns failed to provide investors with enough optimism to offset disappointing regional manufacturing data... May Chicago PMI plunged to 54.1 - the lowest level since June 2003 - checking in below expectations of 62.0, an April read of 65.6 and a 17-yr high of 69.2 in March...
Even though any number above 50 reflects expansion, that point was lost in the recognition that May marked the second consecutive month that the new orders, production, and employment components of the report were also lower than the previous month... The discouraging data - on the heels of disappointing reads in the NY Empire Manufacturing Index and Philly Fed - also checked in a day before tomorrow's 10:00 ET release of the May ISM Index (consensus 52.2)... Meanwhile, eight out of ten economic sectors closed lower... Technology (-0.9%) was the most influential leader to lose ground...
Weighing most heavily on the sector was Hardware (-1.2%) and Networking (-1.0%), while Software (+0.3%) showed relative strength and losses in Semiconductor (-0.4%) were minimized by gains in Novellus Systems (NVLS 26.69 +0.77), which raised its Q2 guidance, and Advanced Micro Devices (AMD 16.40 +0.19), which unveiled its dual-core chips... Not far behind were Materials (-0.8%) and Energy (-0.8%), both under pressure from a strong dollar... The greenback surged to a near eight-month high against the euro (1.2304) after the French voted "no" for a new EU constitution... Energy also failed to take advantage of rising crude oil prices ($51.97/bbl +$0.12) and two analyst upgrades on ExxonMobil (XOM 56.20 -0.60)...
Financial (-0.4%) was also weak, getting hit by a 1.5% sell-off in American International Group (AIG 55.55 -0.85), which finally filed its thrice delayed 10-K... However, the Brokerage space (+0.8%) caught a bid amid confirmation that Ameritrade (AMTD 14.86 +0.47) and TD Waterhouse (TD 42.53 +1.18) are in talks of a possible merger valued between $2.0 bln and $3.0 bln...
Health Care and Industrials were also influential leaders to the downside while weakness in Retail pressured Consumer Discretionary and a Smith Barney downgrade on the Food, Beverage & Tobacco group weighed on Consumer Staples... Utilities (+0.1%), however, eked out a modest gain, getting a boost from falling bond yields and a 10.4% surge in shares of Calpine Corp. (CPN 2.98 +0.28), which is selling its UK-based Saltend power plant for roughly $900 mln... Treasurys rallied on the disappointing PMI figure, ignoring the positive consumer confidence data, as yields on the benchmark 10-year note (+19/32) closed below the psychological 4.0% for the first time since early February...
Strong follow-through buying interest in bonds knocked the benchmark yield down to 3.998% and improved sentiment late in the day; but with volume running at a below average pace, choppy trading going into the close proved to be too much for the bulls to handle... DJTA -0.7, DOT +0.3, Nasdaq 100 -0.5, Russell 2000 unch, SOX -0.3, XOI -1.2, NYSE Adv/Dec 1693/1589, Nasdaq Adv/Dec 1474/1597
3:12PM Treasuries Add to Rally, Stabs Through 4% :Treasuries had a big, solid up-day, with the long-end leading the charge higher and pushing 10-yr yields through 4%. The 30-yr yields were knocked back to the lowest level seen since mid-2003, while 2-yr yields remain at their highest in the same timeframe. Many players are scratching their heads over this ongoing bid, while some bond-market experts are drinking from the "low inflation, consistent growth" trough while a number of prominent mouthpieces are feeding from the "prolonged economic slowdown" one. "The market is telling us that inflation is behind us," says one long time dealer, "but I am not so sure. Even if oil prices come in there will be price pressures," showing up elsewhere in wages or "we measure it ex-food and energy, well [pressure will] show up in the ex." The dollar is seeing an afternoon push stronger looking to test 1.2300, which would be significant. The dollar has rallied over 2% since Friday. The economic calendar tomorrow offers construction spending and ISM. All eyes will be on ISM as the Fed has never raised rates when the national manufacturing index reports below 50. Some are speculating the manufacturing gauge will come in below 50 due to recent weakness in the regional manufacturing surveys. The ISM index will report the national manufacturing outlook and activity on the heels of the May NY Empire Index plummeting to -11.1, Philly Fed reading below consensus at 7.1, and the disappointing 54.1 reading on Chicago PMI today. In addition, automakers will be releasing May auto and truck sales data throughout the session tomorrow. Important events overseas will the Netherlands vote on the EU constitution. The 10-yrs are currently +19/32nds yielding 3.994%.
11:52AM Treasuries Bump Through 4% on Mixed Data :The market climbed higher on the disappointing Chicago PMI read, shrugging off the up-side surprise read of 102.2 on consumer confidence. The Chicago PMI headline of 54.1 came in well below expectations (61.4) and the components disappointed across the board. All components pointed to a bullish movement in treasuries as the employment gauge plummeted to 54.7 from 62.3 and prices paid fell for the sixth consecutive month to 54.3 from 66.1. The market has hovered near 4% for the majority of the session after players took the 10-yrs up to knock the yield through the key barrier and touched down to 3.998%. The session is seeing the ongoing bull-flattening trade pushing to ever flatter levels (please see 11:25ET comment). The reads of the extreme curve action (like the reading of tea leaves), are all over the map, it is the result of low-inflation expectations in an expanding economy or a slowing economy likely to stumble even in extreme accommodative conditions. As with previous forays through 4% on the 10-yrs, the general belief is the trip will be short-lived, although funds piling into long bullish options positions off the 10-yr futures may look to extend the run. The dollar is trading at its strongest level on the euro since mid-Oct, near 1.2350. The strength comes on the heels of the French public rejecting the referendum on the EU constitution by a margin of 55% to 45% and ahead of the Netherlands vote tomorrow. The latest commitment of traders report released last Friday shows speculators holding the second biggest aggregate net long dollar positions since the launch of the euro in Jan 1999. The 10-yrs are currently 4.010%.
10:03AM Diodes Appoints Dr. Keh-Shew Lu as President & CEO, current CEO C.H. Chen will continue to serve as Vice Chairman of the Board (DIOD) 33.45 -0.06:
9:38AM Novellus - - 200 Day Alert (NVLS) 27.00 +1.08: -Technical- -Update- As the stock gaps higher this morning, it challenges its 200-day exponential moving average at 26.99. Next level of resistance above this average is marked by its April peak of 27.28.
9:21AM Gapping Down :ABRX -10.5% (announces workforce reduction), TIBX -10.3% (guides below consensus), RNVS -8.2% (clinical data presented), CNET -6.2% (negative mention in Barron's), TRAC -11%, GEOI -5.4% (profit taking after 16% move on Friday), DHC -4.8%, BSTE -4% (Wachovia downgrade), GLNG -3.4%, FRO -3.3% (reports Q1), EYET -3.1% (lower on DNA clinical data), AMTD -3% (co and TD Waterhouse in advanced talks), RHAT -2.8% (negative mention in Barron's), IMCL -2.7% (negative Tier-1 broker call), NOK -1.5%.
9:21AM More On the Wires :Edgar Online (EDGR) says it'll power U.S. company information using eXtensible Business Reporting Language format in Japan... Triarc (TRY) to buy RTM Restaurant Group, Arby's largest franchise, for $175 mln cash, and either 10mmln TRY Class B shares or 10 mln shares of a newly created, non-voting TRY Class B stock; also, TRY subsidiary to assume about $420 mln of net debt... Sherwin-Williams Co. (SHW) says Joseph M. Scaminace, president and COO, is leaving co, has resigned from board to accept position at another NYSE-listed company... Ericsson (ERICY) signs GSM expansion contract with Mobitel in Sri Lanka... Matthews (MATW) to buy Milso Industries, terms not disclosed... Tercica (TRCA) and Genentech (DNA) file motion for preliminary injunction against Insmed (INSM) and Celtrix in U.S. District Court for Northern District of California... Synopsys (SNPS) to advance its V.C.S. comprehensive R.T.L. verification solution by incorporating number of new capabilities that enable engineers to find more design bugs faster and achieve up to 5 times faster verification performance; also, SNPS says Huawei Tech adopts SNPS' V.C.S. verification solution w/ Native Testbench... Evogene (CGEN) names Ofer Haviv as CEO... Siebel Systems (SEBL) Odyssey OneSource chooses SEBL C.R.M. OnDemand... See previous On the Wires at 9:10, 8:53, 8:42, 8:28, 8:14, 7:56, 7:37, 7:24, 6:22 and 6:05.
9:15AM S&P futures vs fair value: -0.8. Nasdaq futures vs fair value: +0.5. :Futures market trading at its best levels of the morning, now suggesting a mixed open for the cash market... Nasdaq futures have recently inched above fair value, following upbeat industry comments and raised Q2 guidance from Novellus Systems (NVLS), while blue chips remain poised to open a relatively flat note
9:10AM More On the Wires :Orbitz (ORBZ) offers customers opportunity to rent Harley Davidson motorcycles from website... Amerigroup (AGP) says Texas Legislature adjourns after approving increased role for managed care in state's Medicaid program, expanding managed care services for people w/ long term disabilities from 1 metropolitan area to 8... Great American Financial Resources (GFR) completes project by converting 30k fixed annuity policies from recent acquisition to P.D.M.A. LifePro system... Vignette (VIGN) gets ok for 10 for 1 reverse stock split... Abaxis (ABAX) releases new Piccolo Lipid Panel Plus to diagnose patients for heart disease, metabolic syndrome and liver enzyme monitoring combined in one point-of-care test... OpenTV (OPTV) names Shum Mukherjee as CFO... See previous On the Wires at 8:53, 8:42, 8:28, 8:14, 7:56, 7:37, 7:24, 6:22 and 6:05.
9:03AM Gapping Up :NVLS +3.4% (provides mid-qtr update), SYMC +2.3% (Piper upgrade), AIG +2% (files long delayed 10-K), GOOG +1.4% (Piper raises target to $300 from $275), IIJI +13% (extends Friday's 28% move), MAGS +9% (announces contracts), XPRSA +8.6% (FWRD to buy airport-to-airport op assets), CPN +16% (to sell Saltend Energy Center), DRAM +10% (reports AprQ), GTOP +4.5% (CEO believes MyVax will have transforming effect), STEM +4.2%, NWAC +4% (hearing tier-1 upgrade).... Under $3: LJPC +55% (gets fast track designation for Riquent), ITCD +36% (obtains financing commitment), BDCO +6.4%.
8:53AM More On the Wires :Correctional Properties (CPV) finishes purchase of existing 300-bed expansion at Lawton Correctional Facility in from GEO Group (GGI) for $3.5 mln... ResCare (RSCR) gets 2 year contract w/ 3 one-year options by U.S. Department of Labor to continue operating Guthrie Job Corps Center; co expects revs of $29.5 mln over 2 years... Healthcare Tech (HCTL) completes sale of its equity interest in Procognia to HCTL's principal stockholder, Gamida-for-Life; HCTL regains compliance w/ Nasdaq's minimum stockholders' equity requirement... See previous On the Wires at 8:42, 8:28, 8:14, 7:56, 7:37, 7:24, 6:22 and 6:05.
8:42AM More On the Wires :GameTech (GMTC) says U.S. District Court in Las Vegas rules in favor of GMTC in long-standing patent litigation brought by competitor, Planet Bingo; Planet Bingo to appeal... URS Corp. (URS) says CFO Kent P. Ainsworth to retire in Feb. '06, to be succeeded by H. Thomas Hicks... El Paso (EP) sells Lakeside Technology Center to Digital Realty Trust (DLR) for about $140 mln cash, plus possible additional payments... eLinear Solutions (ELU) gets $450,000 in new technology solutions business... Mediware Information (MEDW) says William Beaumont Hospital signs contract for H.C.L.L. Transfusion software to help manage its transfusion services... Idenix Pharma (IDIX) completes enrollment of Valopicitabine Phase IIb trial in treatment refractory hepatitis C genotype 1 patients... Tekelec (TKLC) says Yadkin Valley Telephone deploys TKLC Integrated App Solutions to recover lost revs, protect network investments and create new rev-generating services... AdStar (ADST) says Charleston Newspapers selects ADST for web-based ad transaction services... Inverness Medical (IMA) to buy Determine/DainaScreen assets of Abbott's (ABT) rapid diagnostics business for $56.5 mln... Martin Marietta (MLM) CFO Janice K. Henry to retire in '06; MLM names Anne Lloyd as replacement... ITCDeltaCom (ITCD) says it obtains financing commitment from Tennenbaum Capital Partners for about $239 mln... See previous On the Wires at 8:28, 8:14, 7:56, 7:37, 7:24, 6:22 and 6:05.
8:28AM More On the Wires :ArvinMeritor (ARM) forms joint venture w/ First Auto Works Sihuan Axle Brake Group; ARM expects venture to expand capacity to produce commercial vehicle foundation air brakes... Radyne ComStream (RADN) complete buyout of Xicom Tech for $37.7 in cash, 219.7k shares of RADN, and assumption of $5.1 mln in debt... Brocade (BRCD) releases Brocade Tapestry family of app infrastructure solutions, 2 additions to SilkWorm family of infrastructure solutions, and professional service and support offerings... See previous On the Wires at 8:14, 7:56, 7:37, 7:24, 6:22 and 6:05.
2:04PM Electronic Arts (ERTS) 52.61, +0.56: With next-generation platforms from Sony, Microsoft, and Nintendo poised to make their debut within the next year, videogame developers will be presented with new opportunities, and risks, for growth.
Electronic Arts, the world's leading videogame publisher, posted FY05 revenues of $3.1 billion with gross margins of 61.75%. The company develops, publishes, and distributes interactive software for leading videogame consoles, personal computers, and the Internet. With 31 titles selling more than one million copies over the last year, including Madden NFL, NCAA Football, Medal of Honor, Need For Speed, and The Sims, Electronic Arts is responsible for some of the most successful game franchises in the industry. The company's principle competitors include Activision (ATVI), THQ (00C0), and Take-Two Interactive Software (TTWO).
The success of Electronic Arts has been exacerbated by the booming videogame industry, which is expected to grow 9% annually through 2008, primarily through the introduction of new technologies from Sony, Microsoft, and Nintendo. As the market continues to grow, the competitive pressure on software publishers will increase. Software developers, such as Electronic Arts, will be tested as they react to the changing environment and position themselves to capitalize on the market growth.
While the opportunities for growth are evident, as next-generation platforms will require new complementing software, the high and increasing costs of creating new games will threaten, and potentially eliminate, many developers. The fragmented industry is characterized by small independent developers who are heavily reliant on outside funding to support the various stages of development, marketing, and distribution, with few firms possessing the necessary resources to maximize revenues. Electronic Arts, with a market cap of $16 billion, exhibits economies of scale and effectively utilizes its encompassing operations to capture value throughout the industry value chain. With operations in both software development and publishing, Electronic Arts seeks to eliminate dependence on other firms.
The development of successful game titles will determine the longevity and growth of the industry as software publishers adapt to changing technologies. As one of the most successful software developers for the videogame industry, Electronic Arts possesses the necessary resources and keen market knowledge to retain leadership. Its ability to produce successful titles will continue to dictate revenue growth and provide the impetus for success. With a trailing P/E of 32.8x, the current valuation level of the company, while higher than that of its key competitors, Activision (23.4x) and TakeTwo Interactive (20.1x), warrants investment consideration as the company continues to exude great leadership strength and long-term prospects. --Richard Jahnke, Briefing.com
1:35PM The Breakdown of the S&P 500 : (OPENX) The market can't seem to make up its mind this year, rising one week, only to give back all the gains the next. To date, it has been the macroeconomic picture and other market influencing factors more than company specifics that have lead us to where we are today with the S&P 500 down just over one percent year-to-date. So as we approach the summer doldrums, as it's lovingly referred, where do we go from here? If you are looking for an answer you will not find it here because our crystal ball is out of commission. Still we will try and outline the current market position and the prospects ahead using the S&P 500 as our foundation.
Let's start with performance to date. The chart below outlines the winners and losers by sector to date.
With crude prices remaining at higher than expected levels, it did not take a fortune teller to predict that Energy would remain in the spotlight this year. Actually, the sector traded down to its 200-day simple moving average back in mid-May, but sharply reversed gaining 7.4% over the past two weeks. This shows the market anticipates that the current supply constraints will keep prices at elevated levels, which is good news for energy stocks. Just today, both JPMorgan and Smith Barney upgraded Exxon (XOM) to Overweight citing discounted valuation and operating performance. Exxon is currently trading at 12.7x forward earnings over a twenty percent discount to its historical average. However, it should be noted that Energy historically has traded at a discount to the broader market.
Other gainers to date have been the defensive sectors like the Utilities and Consumer Staples. Given this year's macro uncertainly, the market turned defensive opting for less risk. In the wake of the recent April CPI and employment reports the slowdown concerns have been somewhat mitigated, therefore looking ahead the market may become less risk averse. All eyes will be watching the release of Friday's employment report for confirmation of this perspective. This leadership change has already started to take place as Technology, Consumer Discretionary, and Financials are up 8.6%, 6.5%, and 3%, respectively in May. The top ten stocks within the last month include names like LSI Logic (LSI), Sanmina-Sci Corp (SANM), Nvidia (NVDA), along with General Motors (GM) and Delta Airlines (DAL). On the downside has been US Steel (X), Clorox (CLX), Tyco (TYC), Morgan Stanley (MWD), and Goldman Sachs (GS). The Brokers have held back the overall returns for the Financial sector.
Shifting from price to earnings performance, for the first quarter the S&P 500 earnings growth was 13%. Briefing.com estimates this will be followed by a 10% gain in the second quarter with the year coming in about +7%. Standard & Poor's estimates operating earnings will expand by 11.2% for the year down from 23.7% in 2004. On a valuation basis, it forecasts a price to earnings multiple of 15.9x for the year. The S&P is currently trading at 19.5x current earnings down from 20.3x at the end of the year and 21.2x last Memorial Day. Basically what this means is the market is pricing in lower growth ahead.
So even though the trajectory of growth has changed, which sectors offer the strong growth profiles? According to Standard & Poor's, the top sectors generating double-digit operating profits include Materials (+27.3%), Energy (+20.3%), Industrials (+19.4%), Information Technology (+15.0%), and Utilities (+12.4%). Earnings for the Energy and Material sectors are expected to peak this year, as such may be vulnerable to downward revisions. The rest of the pack includes gains in Telecom Services (+7.4%), Health Care (+9.3%), Financials (+8.4%), Consumer Staples (+2.8%), and a drop in operating earnings for the Consumer Discretionary sector of -0.4%.
From a price to earnings multiple perspective here is the breakdown for the S&P 500 listed according to its weighing in the index: Financials 13.6x, Tech 26.0x, HealthCare 25.6x, Staples 19.5x, Discretionary 31.3x, Industrials 22.5, Energy 12.4x, Telecom Services at 31.1x, Materials 15.8x, and Utilities 18.8x. For our perspective on each of the top ten sectors, please visit our Sector View page. ----Kimberly DuBord, Briefing.com
1:33PM Boeing Co (BA) 63.47 +0.45: Despite flying without a pilot, Boeing is enjoying bright skies ahead. Shares of this Dow component have reached a multi-year high returning over 20% year-to-date and almost 40% over the last one year period. The abrupt departure of former CEO Harry Stonecipher kindled concern it would lead Boeing off track, but to no avail. Boeing has never looked better enjoying a soaring upcycle in commercial aviation ushered in by its new 787 Dreamliner. This show stopper continues to win order after order from carriers around the globe. The head to head battle for the number one position with the European conglomerate Airbus is certainly on and for those keeping track, Boeing is up 218 to 145 orders to date.
Even though this plane will not make its debut until 2008, the 787 has won contracts from 35 carriers drawn in by promises of fuel efficiency, low maintenance costs, and its sleek aerodynamic design. According to Boeing, the aircraft demands 20% less fuel, which is music to the ears of carriers now faced with new reality in jet fuel prices. It also provides customers with 45% more cargo revenue capacity and travelers with a new interior environment including higher humidity, wider seats and aisles, and larger windows. Clearly, from its early success and the overwhelming positive response, the Dreamliner could be what is called a category killer generating strong growth for Boeing over the long haul.
So exactly what type of growth rates are we talking about for the industry? The Chicago-based company estimates the world fleet will double by 2023 to 34,764 planes. What is difficult to calculate though, is the replacement market as carriers typically replace jets not on a jet-for-jet basis, but on a seat-by-seat. By its calculations, a quarter of the market for new commercial jets will be replacements with the remaining for passenger and cargo growth. Jets have almost as long a shelf life as a Twinkie, okay bad analogy, but BA estimates 60% of the fleet in operation today will be around 20 years from now.
Breaking down the demand from a fleet perspective, currently 62% of the market is single-aisle planes followed by 18% for twin aisle, 14% regional jets, and 6% 747 and larger. Looking out to 2023, the single-aisle segment will shrink to 58%, while twin aisle will grow to 21%. Regional jets will command three-fourths of the fleet due to a change in the routing systems as point-to-point service will replace hub-to-hub, therefore smaller planes will be used to increase domestic frequencies and shorter-haul international flights increasing carrier efficiencies. Boeing is betting the market for large scale airplanes will become smaller over the years. Clearly, Airbus would disagree as it just recently launched the maiden voyage of the behemoth A380.
Switching gears from the commercial aviation business to what has been Boeing's bread-winner over the past two years, Defense. Due to an unprecedented rise in military spending by the Bush administration, this unit has grown to sixty percent of BA's top line from 40% just five years ago. Defense has generated ten percent revenue growth and accelerating profitability and even though this growth rate will no doubt slow ahead, there is still room for further margin expansion.
In 2005, the baton has been tossed to the Commercial group, which is likely to show a strong rise in production throughout the year. Boeing estimates aircraft deliveries to range between 375-385, but industry analysts expect that number could be more in the high 390s-400 range for FY06. This is a significant recovery from trough levels reached back in 2004 of 285 aircraft deliveries. Additional upside is also likely to be achieved on the margin, as Boeing's guidance of 6.5% seems conservative due to product mix and revenue growth to date.
The outlook for Boeing remains quite promising due to the visibility for solid growth throughout 2005 and 2006. This outlook is predicated by the upcycle in commercial aviation and modest growth in the defense market, along with strong free cash flow generation and improving profitability. There is some speculation Boeing may deploy cash for small M&A downstream deals, or through a share repurchase program. The stock's performance is likely to continue to be news flow driven including the much anticipated announcement of a new CEO, legacy aircraft orders, and the upcoming Paris Air Show on June 13-19th. During previous upcycles, Boeing has enjoyed rapid multiple expansion. As such, its 24x forward price to earnings multiple remains attractive. Yet aviation is a risky business, therefore execution on high profile programs, a lackluster summer travel season, or a global economic slowdown would certainly change its current trajectory. For now, however, Boeing is enjoying clear skies ahead. ---Kimberly DuBord, Briefing.com
8:53AM Page One - European Paralysis : Stock futures indicate a slightly lower open. The no vote from the French on the European constitution is the top headline.
Briefing.com's Big Picture column this morning takes a look at European economic conditions. The data are not encouraging.
European economies are falling behind. Per capita GDP in the US is 57% higher than in the European Union of 25 members. The highest output per capita of the major countries, the United Kingdom, trails the US by 33%.
And Europe is falling further behind each year. Growth in 2004 in the Euro 25 was 2.4%, compared to 4.4% in the US, 2.8% in Canada, and 2.7% in Japan. European growth trailed the US and Canada in each of 2002 and 2003 as well. Euro growth for 2005 is forecast at just 1.2%, compared to 3.6% for the US.
There is also a major demographic problem in Europe. Birthrates are well below replacement levels across the region, and population is already falling in many countries. Overall European populations would be falling in five years were it not for immigration, and even with immigration, total population is expected to decline starting in twenty years. The ageing of the population will put a massive strain on pension programs.
Now, of course, the rejection of the European constitution by the French has created political turmoil. Leaders in Germany, Italy, and even Britain are on shaky political grounds, as is Chirac in France. The political uncertainty will make it very hard to achieve economic reform necessary for greater growth. Political paralysis could paralyze European economies even further.
All of this has the dollar much stronger against the Euro. It is at 1.23. A few months ago it was at 1.35 and notables such as George Soros and Warren Buffett proclaimed that the dollar could only go lower. That seems like years ago.
The problems in Europe are somewhat troubling for the US and other world economies. Weakness in European economies means lower profits for US companies operating in Europe. It won't slam the US economy, however. European exports account for about 3% of US GDP. A 10% move has just a 0.3% impact on US GDP growth.
There isn't much other news. Oil is a bit lower but still above $51 a barrel. There are no earnings reports of note today. In fact, there are no major reports due all week. The only economic releases today are the Chicago PMI and Consumer Confidence, both at 10:00 ET. The May employment data on Friday loom as the big event of the week.
Our view on the market remains neutral. Dick Green, Briefing.com
9:26AM Agere Systems (AGR.A) Morgan Stanley upgrades Equal-weight to OVERWEIGHT. Firm believes that stronger demand and the benefits of the co's previously announced restructuring efforts will promote a return to profitability in the June qtr, with a steady improvement in margins and overall earnings power thereafter.
9:25AM Centurytel (CTL) Bear Stearns upgrades Peer Perform to OUTPERFORM. Bear Stearns upgrades CTL based on attractive valuation and their belief that, in the absence of attractively priced assets to acquire, the co could implement a more material dividend structure while maintaining flexibility for acquisitions.
9:25AM Biosite (BSTE) Wachovia downgrades Mkt Perform to UNDERPERFORM . Firm says that Friday's long awaited Stroke data portrayed a product with slimer prospects for FDA approval, and significantly less clinical and mkt value than they estimated before. They believe this 180 degree turn on Stroke also lowers perceived value in the co's "multi-mkt panel test" pipeline. They think the co's current price ascribes too much value to this pipeline.
9:24AM Doral Fincl (DRL) Hibernia Southcoast Capital downgrades Hold to SELL . Target $16 to $11. They say the recent 8-K released from DRL sets forth several new risks, including technical default of $1 bln in debt, the potential risks to the derivatives portfolio, the potential loss of clients, and the potential inability to attract and maintain employees, among other things. Firm believes legal risks and costs could be substantial, and that regulatory risks could be substantial as well. Further, they anticipate higher costs and slower growth ahead, do not believe the co will be bought or sold in the intermediate term, and question whether the mortgage franchise is nearly as valuable as once believed.
9:24AM National Atlantic Holdings (NAHC) Sandler O'Neill initiates BUY. Target $13.5. Firm thinks the co should demonstrate above-average premium growth and steady EPS and book value growth within New Jersey, due to an improved capital position, a unique Partner Agent network, and a cross-selling opportunity resulting from recent acquisitions. They think the stock is currently selling at an attractive discount to book value and consider the co to be well suited for small-cap, value-oriented investors.
9:23AM FLIR Systems (FLIR) Raymond James upgrades Outperform to STRONG BUY. Target $36. Raymond James upgrades FLIR given their view that order activity is beginning to accelerate, backlog growth will steadily ensue, and a new product cycle could begin to catalyze a very robust 18-month cycle of sales growth and positive EPS revisions. Firm expects to see an investor psychology rebound, multiple expansion, and positive EPS revisions as drivers for stock appreciation.
9:22AM eBay (EBAY) AmTech Research upgrades Hold to BUY. Target $50. Firm believes EBAY has significant growth opportunities worldwide and will remain the dominant provider of trading services for selling anything to anyone. Firm's recent lisings data has shown upside to their previous 2Q05 estimate and, more importantly, has shown improvement in EBAY's more mature markets in the U.S. and Germany. They say that assuming Q2 goes smoothly, they think the biggest issue for the stock is now 2005 guidance. As long as the co does not disappoint or guide down when reporting Q2 earnings in July (which they think is unlikely), they believe there is more upside opportunity than downside risk for the stock. Firm raises their Q2 EPS est to $0.19 (consensus $0.18) and rev est to $1.07 bln (consensus $1.04 bln).
9:22AM Komag (KOMG) Needham & Co reiterates STRONG BUY. Target $31 to $35. Needham raises their KOMG tgt saying they believe further stock appreciation for KOMG is likely given: 1) continued growth in average platter counts; 2) rising capacity requirements for consumer electronics applications; and 3) the elimination of concern for a soft June qtr. They encourage investors to profit from the possible earnings upside at KOMG over the next few qtrs and say that overall, KOMG remains one of the most inexpensive and least understood names in the HDD industry.
Close Dow -75.07 at 10467.48, S&P -7.27 at 1191.51, Nasdaq -7.51 at 2068.22: The major averages finished the month of May sharply higher but ended the day on a downbeat note, as widespread profit-taking following mixed economic data overshadowed plummeting bond yields and closed virtually every sector in negative territory... After returning from the long holiday weekend, investors had little in the way of upside catalysts to hold on to recent gains following the market's best monthly advance since last November...
Sure, an unexpected jump to 102.2 in May consumer confidence, versus expectations of 96.0 and an April read of 97.5, ended three consecutive months of declines and suggested that consumers may finally be starting to identify with improved job market conditions... However, the fact that the Conference Board's report doesn't correlate well with spending patterns failed to provide investors with enough optimism to offset disappointing regional manufacturing data... May Chicago PMI plunged to 54.1 - the lowest level since June 2003 - checking in below expectations of 62.0, an April read of 65.6 and a 17-yr high of 69.2 in March...
Even though any number above 50 reflects expansion, that point was lost in the recognition that May marked the second consecutive month that the new orders, production, and employment components of the report were also lower than the previous month... The discouraging data - on the heels of disappointing reads in the NY Empire Manufacturing Index and Philly Fed - also checked in a day before tomorrow's 10:00 ET release of the May ISM Index (consensus 52.2)... Meanwhile, eight out of ten economic sectors closed lower... Technology (-0.9%) was the most influential leader to lose ground...
Weighing most heavily on the sector was Hardware (-1.2%) and Networking (-1.0%), while Software (+0.3%) showed relative strength and losses in Semiconductor (-0.4%) were minimized by gains in Novellus Systems (NVLS 26.69 +0.77), which raised its Q2 guidance, and Advanced Micro Devices (AMD 16.40 +0.19), which unveiled its dual-core chips... Not far behind were Materials (-0.8%) and Energy (-0.8%), both under pressure from a strong dollar... The greenback surged to a near eight-month high against the euro (1.2304) after the French voted "no" for a new EU constitution... Energy also failed to take advantage of rising crude oil prices ($51.97/bbl +$0.12) and two analyst upgrades on ExxonMobil (XOM 56.20 -0.60)...
Financial (-0.4%) was also weak, getting hit by a 1.5% sell-off in American International Group (AIG 55.55 -0.85), which finally filed its thrice delayed 10-K... However, the Brokerage space (+0.8%) caught a bid amid confirmation that Ameritrade (AMTD 14.86 +0.47) and TD Waterhouse (TD 42.53 +1.18) are in talks of a possible merger valued between $2.0 bln and $3.0 bln...
Health Care and Industrials were also influential leaders to the downside while weakness in Retail pressured Consumer Discretionary and a Smith Barney downgrade on the Food, Beverage & Tobacco group weighed on Consumer Staples... Utilities (+0.1%), however, eked out a modest gain, getting a boost from falling bond yields and a 10.4% surge in shares of Calpine Corp. (CPN 2.98 +0.28), which is selling its UK-based Saltend power plant for roughly $900 mln... Treasurys rallied on the disappointing PMI figure, ignoring the positive consumer confidence data, as yields on the benchmark 10-year note (+19/32) closed below the psychological 4.0% for the first time since early February...
Strong follow-through buying interest in bonds knocked the benchmark yield down to 3.998% and improved sentiment late in the day; but with volume running at a below average pace, choppy trading going into the close proved to be too much for the bulls to handle... DJTA -0.7, DOT +0.3, Nasdaq 100 -0.5, Russell 2000 unch, SOX -0.3, XOI -1.2, NYSE Adv/Dec 1693/1589, Nasdaq Adv/Dec 1474/1597
3:12PM Treasuries Add to Rally, Stabs Through 4% :Treasuries had a big, solid up-day, with the long-end leading the charge higher and pushing 10-yr yields through 4%. The 30-yr yields were knocked back to the lowest level seen since mid-2003, while 2-yr yields remain at their highest in the same timeframe. Many players are scratching their heads over this ongoing bid, while some bond-market experts are drinking from the "low inflation, consistent growth" trough while a number of prominent mouthpieces are feeding from the "prolonged economic slowdown" one. "The market is telling us that inflation is behind us," says one long time dealer, "but I am not so sure. Even if oil prices come in there will be price pressures," showing up elsewhere in wages or "we measure it ex-food and energy, well [pressure will] show up in the ex." The dollar is seeing an afternoon push stronger looking to test 1.2300, which would be significant. The dollar has rallied over 2% since Friday. The economic calendar tomorrow offers construction spending and ISM. All eyes will be on ISM as the Fed has never raised rates when the national manufacturing index reports below 50. Some are speculating the manufacturing gauge will come in below 50 due to recent weakness in the regional manufacturing surveys. The ISM index will report the national manufacturing outlook and activity on the heels of the May NY Empire Index plummeting to -11.1, Philly Fed reading below consensus at 7.1, and the disappointing 54.1 reading on Chicago PMI today. In addition, automakers will be releasing May auto and truck sales data throughout the session tomorrow. Important events overseas will the Netherlands vote on the EU constitution. The 10-yrs are currently +19/32nds yielding 3.994%.
11:52AM Treasuries Bump Through 4% on Mixed Data :The market climbed higher on the disappointing Chicago PMI read, shrugging off the up-side surprise read of 102.2 on consumer confidence. The Chicago PMI headline of 54.1 came in well below expectations (61.4) and the components disappointed across the board. All components pointed to a bullish movement in treasuries as the employment gauge plummeted to 54.7 from 62.3 and prices paid fell for the sixth consecutive month to 54.3 from 66.1. The market has hovered near 4% for the majority of the session after players took the 10-yrs up to knock the yield through the key barrier and touched down to 3.998%. The session is seeing the ongoing bull-flattening trade pushing to ever flatter levels (please see 11:25ET comment). The reads of the extreme curve action (like the reading of tea leaves), are all over the map, it is the result of low-inflation expectations in an expanding economy or a slowing economy likely to stumble even in extreme accommodative conditions. As with previous forays through 4% on the 10-yrs, the general belief is the trip will be short-lived, although funds piling into long bullish options positions off the 10-yr futures may look to extend the run. The dollar is trading at its strongest level on the euro since mid-Oct, near 1.2350. The strength comes on the heels of the French public rejecting the referendum on the EU constitution by a margin of 55% to 45% and ahead of the Netherlands vote tomorrow. The latest commitment of traders report released last Friday shows speculators holding the second biggest aggregate net long dollar positions since the launch of the euro in Jan 1999. The 10-yrs are currently 4.010%.
10:03AM Diodes Appoints Dr. Keh-Shew Lu as President & CEO, current CEO C.H. Chen will continue to serve as Vice Chairman of the Board (DIOD) 33.45 -0.06:
9:38AM Novellus - - 200 Day Alert (NVLS) 27.00 +1.08: -Technical- -Update- As the stock gaps higher this morning, it challenges its 200-day exponential moving average at 26.99. Next level of resistance above this average is marked by its April peak of 27.28.
9:21AM Gapping Down :ABRX -10.5% (announces workforce reduction), TIBX -10.3% (guides below consensus), RNVS -8.2% (clinical data presented), CNET -6.2% (negative mention in Barron's), TRAC -11%, GEOI -5.4% (profit taking after 16% move on Friday), DHC -4.8%, BSTE -4% (Wachovia downgrade), GLNG -3.4%, FRO -3.3% (reports Q1), EYET -3.1% (lower on DNA clinical data), AMTD -3% (co and TD Waterhouse in advanced talks), RHAT -2.8% (negative mention in Barron's), IMCL -2.7% (negative Tier-1 broker call), NOK -1.5%.
9:21AM More On the Wires :Edgar Online (EDGR) says it'll power U.S. company information using eXtensible Business Reporting Language format in Japan... Triarc (TRY) to buy RTM Restaurant Group, Arby's largest franchise, for $175 mln cash, and either 10mmln TRY Class B shares or 10 mln shares of a newly created, non-voting TRY Class B stock; also, TRY subsidiary to assume about $420 mln of net debt... Sherwin-Williams Co. (SHW) says Joseph M. Scaminace, president and COO, is leaving co, has resigned from board to accept position at another NYSE-listed company... Ericsson (ERICY) signs GSM expansion contract with Mobitel in Sri Lanka... Matthews (MATW) to buy Milso Industries, terms not disclosed... Tercica (TRCA) and Genentech (DNA) file motion for preliminary injunction against Insmed (INSM) and Celtrix in U.S. District Court for Northern District of California... Synopsys (SNPS) to advance its V.C.S. comprehensive R.T.L. verification solution by incorporating number of new capabilities that enable engineers to find more design bugs faster and achieve up to 5 times faster verification performance; also, SNPS says Huawei Tech adopts SNPS' V.C.S. verification solution w/ Native Testbench... Evogene (CGEN) names Ofer Haviv as CEO... Siebel Systems (SEBL) Odyssey OneSource chooses SEBL C.R.M. OnDemand... See previous On the Wires at 9:10, 8:53, 8:42, 8:28, 8:14, 7:56, 7:37, 7:24, 6:22 and 6:05.
9:15AM S&P futures vs fair value: -0.8. Nasdaq futures vs fair value: +0.5. :Futures market trading at its best levels of the morning, now suggesting a mixed open for the cash market... Nasdaq futures have recently inched above fair value, following upbeat industry comments and raised Q2 guidance from Novellus Systems (NVLS), while blue chips remain poised to open a relatively flat note
9:10AM More On the Wires :Orbitz (ORBZ) offers customers opportunity to rent Harley Davidson motorcycles from website... Amerigroup (AGP) says Texas Legislature adjourns after approving increased role for managed care in state's Medicaid program, expanding managed care services for people w/ long term disabilities from 1 metropolitan area to 8... Great American Financial Resources (GFR) completes project by converting 30k fixed annuity policies from recent acquisition to P.D.M.A. LifePro system... Vignette (VIGN) gets ok for 10 for 1 reverse stock split... Abaxis (ABAX) releases new Piccolo Lipid Panel Plus to diagnose patients for heart disease, metabolic syndrome and liver enzyme monitoring combined in one point-of-care test... OpenTV (OPTV) names Shum Mukherjee as CFO... See previous On the Wires at 8:53, 8:42, 8:28, 8:14, 7:56, 7:37, 7:24, 6:22 and 6:05.
9:03AM Gapping Up :NVLS +3.4% (provides mid-qtr update), SYMC +2.3% (Piper upgrade), AIG +2% (files long delayed 10-K), GOOG +1.4% (Piper raises target to $300 from $275), IIJI +13% (extends Friday's 28% move), MAGS +9% (announces contracts), XPRSA +8.6% (FWRD to buy airport-to-airport op assets), CPN +16% (to sell Saltend Energy Center), DRAM +10% (reports AprQ), GTOP +4.5% (CEO believes MyVax will have transforming effect), STEM +4.2%, NWAC +4% (hearing tier-1 upgrade).... Under $3: LJPC +55% (gets fast track designation for Riquent), ITCD +36% (obtains financing commitment), BDCO +6.4%.
8:53AM More On the Wires :Correctional Properties (CPV) finishes purchase of existing 300-bed expansion at Lawton Correctional Facility in from GEO Group (GGI) for $3.5 mln... ResCare (RSCR) gets 2 year contract w/ 3 one-year options by U.S. Department of Labor to continue operating Guthrie Job Corps Center; co expects revs of $29.5 mln over 2 years... Healthcare Tech (HCTL) completes sale of its equity interest in Procognia to HCTL's principal stockholder, Gamida-for-Life; HCTL regains compliance w/ Nasdaq's minimum stockholders' equity requirement... See previous On the Wires at 8:42, 8:28, 8:14, 7:56, 7:37, 7:24, 6:22 and 6:05.
8:42AM More On the Wires :GameTech (GMTC) says U.S. District Court in Las Vegas rules in favor of GMTC in long-standing patent litigation brought by competitor, Planet Bingo; Planet Bingo to appeal... URS Corp. (URS) says CFO Kent P. Ainsworth to retire in Feb. '06, to be succeeded by H. Thomas Hicks... El Paso (EP) sells Lakeside Technology Center to Digital Realty Trust (DLR) for about $140 mln cash, plus possible additional payments... eLinear Solutions (ELU) gets $450,000 in new technology solutions business... Mediware Information (MEDW) says William Beaumont Hospital signs contract for H.C.L.L. Transfusion software to help manage its transfusion services... Idenix Pharma (IDIX) completes enrollment of Valopicitabine Phase IIb trial in treatment refractory hepatitis C genotype 1 patients... Tekelec (TKLC) says Yadkin Valley Telephone deploys TKLC Integrated App Solutions to recover lost revs, protect network investments and create new rev-generating services... AdStar (ADST) says Charleston Newspapers selects ADST for web-based ad transaction services... Inverness Medical (IMA) to buy Determine/DainaScreen assets of Abbott's (ABT) rapid diagnostics business for $56.5 mln... Martin Marietta (MLM) CFO Janice K. Henry to retire in '06; MLM names Anne Lloyd as replacement... ITCDeltaCom (ITCD) says it obtains financing commitment from Tennenbaum Capital Partners for about $239 mln... See previous On the Wires at 8:28, 8:14, 7:56, 7:37, 7:24, 6:22 and 6:05.
8:28AM More On the Wires :ArvinMeritor (ARM) forms joint venture w/ First Auto Works Sihuan Axle Brake Group; ARM expects venture to expand capacity to produce commercial vehicle foundation air brakes... Radyne ComStream (RADN) complete buyout of Xicom Tech for $37.7 in cash, 219.7k shares of RADN, and assumption of $5.1 mln in debt... Brocade (BRCD) releases Brocade Tapestry family of app infrastructure solutions, 2 additions to SilkWorm family of infrastructure solutions, and professional service and support offerings... See previous On the Wires at 8:14, 7:56, 7:37, 7:24, 6:22 and 6:05.
2:04PM Electronic Arts (ERTS) 52.61, +0.56: With next-generation platforms from Sony, Microsoft, and Nintendo poised to make their debut within the next year, videogame developers will be presented with new opportunities, and risks, for growth.
Electronic Arts, the world's leading videogame publisher, posted FY05 revenues of $3.1 billion with gross margins of 61.75%. The company develops, publishes, and distributes interactive software for leading videogame consoles, personal computers, and the Internet. With 31 titles selling more than one million copies over the last year, including Madden NFL, NCAA Football, Medal of Honor, Need For Speed, and The Sims, Electronic Arts is responsible for some of the most successful game franchises in the industry. The company's principle competitors include Activision (ATVI), THQ (00C0), and Take-Two Interactive Software (TTWO).
The success of Electronic Arts has been exacerbated by the booming videogame industry, which is expected to grow 9% annually through 2008, primarily through the introduction of new technologies from Sony, Microsoft, and Nintendo. As the market continues to grow, the competitive pressure on software publishers will increase. Software developers, such as Electronic Arts, will be tested as they react to the changing environment and position themselves to capitalize on the market growth.
While the opportunities for growth are evident, as next-generation platforms will require new complementing software, the high and increasing costs of creating new games will threaten, and potentially eliminate, many developers. The fragmented industry is characterized by small independent developers who are heavily reliant on outside funding to support the various stages of development, marketing, and distribution, with few firms possessing the necessary resources to maximize revenues. Electronic Arts, with a market cap of $16 billion, exhibits economies of scale and effectively utilizes its encompassing operations to capture value throughout the industry value chain. With operations in both software development and publishing, Electronic Arts seeks to eliminate dependence on other firms.
The development of successful game titles will determine the longevity and growth of the industry as software publishers adapt to changing technologies. As one of the most successful software developers for the videogame industry, Electronic Arts possesses the necessary resources and keen market knowledge to retain leadership. Its ability to produce successful titles will continue to dictate revenue growth and provide the impetus for success. With a trailing P/E of 32.8x, the current valuation level of the company, while higher than that of its key competitors, Activision (23.4x) and TakeTwo Interactive (20.1x), warrants investment consideration as the company continues to exude great leadership strength and long-term prospects. --Richard Jahnke, Briefing.com
1:35PM The Breakdown of the S&P 500 : (OPENX) The market can't seem to make up its mind this year, rising one week, only to give back all the gains the next. To date, it has been the macroeconomic picture and other market influencing factors more than company specifics that have lead us to where we are today with the S&P 500 down just over one percent year-to-date. So as we approach the summer doldrums, as it's lovingly referred, where do we go from here? If you are looking for an answer you will not find it here because our crystal ball is out of commission. Still we will try and outline the current market position and the prospects ahead using the S&P 500 as our foundation.
Let's start with performance to date. The chart below outlines the winners and losers by sector to date.
With crude prices remaining at higher than expected levels, it did not take a fortune teller to predict that Energy would remain in the spotlight this year. Actually, the sector traded down to its 200-day simple moving average back in mid-May, but sharply reversed gaining 7.4% over the past two weeks. This shows the market anticipates that the current supply constraints will keep prices at elevated levels, which is good news for energy stocks. Just today, both JPMorgan and Smith Barney upgraded Exxon (XOM) to Overweight citing discounted valuation and operating performance. Exxon is currently trading at 12.7x forward earnings over a twenty percent discount to its historical average. However, it should be noted that Energy historically has traded at a discount to the broader market.
Other gainers to date have been the defensive sectors like the Utilities and Consumer Staples. Given this year's macro uncertainly, the market turned defensive opting for less risk. In the wake of the recent April CPI and employment reports the slowdown concerns have been somewhat mitigated, therefore looking ahead the market may become less risk averse. All eyes will be watching the release of Friday's employment report for confirmation of this perspective. This leadership change has already started to take place as Technology, Consumer Discretionary, and Financials are up 8.6%, 6.5%, and 3%, respectively in May. The top ten stocks within the last month include names like LSI Logic (LSI), Sanmina-Sci Corp (SANM), Nvidia (NVDA), along with General Motors (GM) and Delta Airlines (DAL). On the downside has been US Steel (X), Clorox (CLX), Tyco (TYC), Morgan Stanley (MWD), and Goldman Sachs (GS). The Brokers have held back the overall returns for the Financial sector.
Shifting from price to earnings performance, for the first quarter the S&P 500 earnings growth was 13%. Briefing.com estimates this will be followed by a 10% gain in the second quarter with the year coming in about +7%. Standard & Poor's estimates operating earnings will expand by 11.2% for the year down from 23.7% in 2004. On a valuation basis, it forecasts a price to earnings multiple of 15.9x for the year. The S&P is currently trading at 19.5x current earnings down from 20.3x at the end of the year and 21.2x last Memorial Day. Basically what this means is the market is pricing in lower growth ahead.
So even though the trajectory of growth has changed, which sectors offer the strong growth profiles? According to Standard & Poor's, the top sectors generating double-digit operating profits include Materials (+27.3%), Energy (+20.3%), Industrials (+19.4%), Information Technology (+15.0%), and Utilities (+12.4%). Earnings for the Energy and Material sectors are expected to peak this year, as such may be vulnerable to downward revisions. The rest of the pack includes gains in Telecom Services (+7.4%), Health Care (+9.3%), Financials (+8.4%), Consumer Staples (+2.8%), and a drop in operating earnings for the Consumer Discretionary sector of -0.4%.
From a price to earnings multiple perspective here is the breakdown for the S&P 500 listed according to its weighing in the index: Financials 13.6x, Tech 26.0x, HealthCare 25.6x, Staples 19.5x, Discretionary 31.3x, Industrials 22.5, Energy 12.4x, Telecom Services at 31.1x, Materials 15.8x, and Utilities 18.8x. For our perspective on each of the top ten sectors, please visit our Sector View page. ----Kimberly DuBord, Briefing.com
1:33PM Boeing Co (BA) 63.47 +0.45: Despite flying without a pilot, Boeing is enjoying bright skies ahead. Shares of this Dow component have reached a multi-year high returning over 20% year-to-date and almost 40% over the last one year period. The abrupt departure of former CEO Harry Stonecipher kindled concern it would lead Boeing off track, but to no avail. Boeing has never looked better enjoying a soaring upcycle in commercial aviation ushered in by its new 787 Dreamliner. This show stopper continues to win order after order from carriers around the globe. The head to head battle for the number one position with the European conglomerate Airbus is certainly on and for those keeping track, Boeing is up 218 to 145 orders to date.
Even though this plane will not make its debut until 2008, the 787 has won contracts from 35 carriers drawn in by promises of fuel efficiency, low maintenance costs, and its sleek aerodynamic design. According to Boeing, the aircraft demands 20% less fuel, which is music to the ears of carriers now faced with new reality in jet fuel prices. It also provides customers with 45% more cargo revenue capacity and travelers with a new interior environment including higher humidity, wider seats and aisles, and larger windows. Clearly, from its early success and the overwhelming positive response, the Dreamliner could be what is called a category killer generating strong growth for Boeing over the long haul.
So exactly what type of growth rates are we talking about for the industry? The Chicago-based company estimates the world fleet will double by 2023 to 34,764 planes. What is difficult to calculate though, is the replacement market as carriers typically replace jets not on a jet-for-jet basis, but on a seat-by-seat. By its calculations, a quarter of the market for new commercial jets will be replacements with the remaining for passenger and cargo growth. Jets have almost as long a shelf life as a Twinkie, okay bad analogy, but BA estimates 60% of the fleet in operation today will be around 20 years from now.
Breaking down the demand from a fleet perspective, currently 62% of the market is single-aisle planes followed by 18% for twin aisle, 14% regional jets, and 6% 747 and larger. Looking out to 2023, the single-aisle segment will shrink to 58%, while twin aisle will grow to 21%. Regional jets will command three-fourths of the fleet due to a change in the routing systems as point-to-point service will replace hub-to-hub, therefore smaller planes will be used to increase domestic frequencies and shorter-haul international flights increasing carrier efficiencies. Boeing is betting the market for large scale airplanes will become smaller over the years. Clearly, Airbus would disagree as it just recently launched the maiden voyage of the behemoth A380.
Switching gears from the commercial aviation business to what has been Boeing's bread-winner over the past two years, Defense. Due to an unprecedented rise in military spending by the Bush administration, this unit has grown to sixty percent of BA's top line from 40% just five years ago. Defense has generated ten percent revenue growth and accelerating profitability and even though this growth rate will no doubt slow ahead, there is still room for further margin expansion.
In 2005, the baton has been tossed to the Commercial group, which is likely to show a strong rise in production throughout the year. Boeing estimates aircraft deliveries to range between 375-385, but industry analysts expect that number could be more in the high 390s-400 range for FY06. This is a significant recovery from trough levels reached back in 2004 of 285 aircraft deliveries. Additional upside is also likely to be achieved on the margin, as Boeing's guidance of 6.5% seems conservative due to product mix and revenue growth to date.
The outlook for Boeing remains quite promising due to the visibility for solid growth throughout 2005 and 2006. This outlook is predicated by the upcycle in commercial aviation and modest growth in the defense market, along with strong free cash flow generation and improving profitability. There is some speculation Boeing may deploy cash for small M&A downstream deals, or through a share repurchase program. The stock's performance is likely to continue to be news flow driven including the much anticipated announcement of a new CEO, legacy aircraft orders, and the upcoming Paris Air Show on June 13-19th. During previous upcycles, Boeing has enjoyed rapid multiple expansion. As such, its 24x forward price to earnings multiple remains attractive. Yet aviation is a risky business, therefore execution on high profile programs, a lackluster summer travel season, or a global economic slowdown would certainly change its current trajectory. For now, however, Boeing is enjoying clear skies ahead. ---Kimberly DuBord, Briefing.com
8:53AM Page One - European Paralysis : Stock futures indicate a slightly lower open. The no vote from the French on the European constitution is the top headline.
Briefing.com's Big Picture column this morning takes a look at European economic conditions. The data are not encouraging.
European economies are falling behind. Per capita GDP in the US is 57% higher than in the European Union of 25 members. The highest output per capita of the major countries, the United Kingdom, trails the US by 33%.
And Europe is falling further behind each year. Growth in 2004 in the Euro 25 was 2.4%, compared to 4.4% in the US, 2.8% in Canada, and 2.7% in Japan. European growth trailed the US and Canada in each of 2002 and 2003 as well. Euro growth for 2005 is forecast at just 1.2%, compared to 3.6% for the US.
There is also a major demographic problem in Europe. Birthrates are well below replacement levels across the region, and population is already falling in many countries. Overall European populations would be falling in five years were it not for immigration, and even with immigration, total population is expected to decline starting in twenty years. The ageing of the population will put a massive strain on pension programs.
Now, of course, the rejection of the European constitution by the French has created political turmoil. Leaders in Germany, Italy, and even Britain are on shaky political grounds, as is Chirac in France. The political uncertainty will make it very hard to achieve economic reform necessary for greater growth. Political paralysis could paralyze European economies even further.
All of this has the dollar much stronger against the Euro. It is at 1.23. A few months ago it was at 1.35 and notables such as George Soros and Warren Buffett proclaimed that the dollar could only go lower. That seems like years ago.
The problems in Europe are somewhat troubling for the US and other world economies. Weakness in European economies means lower profits for US companies operating in Europe. It won't slam the US economy, however. European exports account for about 3% of US GDP. A 10% move has just a 0.3% impact on US GDP growth.
There isn't much other news. Oil is a bit lower but still above $51 a barrel. There are no earnings reports of note today. In fact, there are no major reports due all week. The only economic releases today are the Chicago PMI and Consumer Confidence, both at 10:00 ET. The May employment data on Friday loom as the big event of the week.
Our view on the market remains neutral. Dick Green, Briefing.com
9:26AM Agere Systems (AGR.A) Morgan Stanley upgrades Equal-weight to OVERWEIGHT. Firm believes that stronger demand and the benefits of the co's previously announced restructuring efforts will promote a return to profitability in the June qtr, with a steady improvement in margins and overall earnings power thereafter.
9:25AM Centurytel (CTL) Bear Stearns upgrades Peer Perform to OUTPERFORM. Bear Stearns upgrades CTL based on attractive valuation and their belief that, in the absence of attractively priced assets to acquire, the co could implement a more material dividend structure while maintaining flexibility for acquisitions.
9:25AM Biosite (BSTE) Wachovia downgrades Mkt Perform to UNDERPERFORM . Firm says that Friday's long awaited Stroke data portrayed a product with slimer prospects for FDA approval, and significantly less clinical and mkt value than they estimated before. They believe this 180 degree turn on Stroke also lowers perceived value in the co's "multi-mkt panel test" pipeline. They think the co's current price ascribes too much value to this pipeline.
9:24AM Doral Fincl (DRL) Hibernia Southcoast Capital downgrades Hold to SELL . Target $16 to $11. They say the recent 8-K released from DRL sets forth several new risks, including technical default of $1 bln in debt, the potential risks to the derivatives portfolio, the potential loss of clients, and the potential inability to attract and maintain employees, among other things. Firm believes legal risks and costs could be substantial, and that regulatory risks could be substantial as well. Further, they anticipate higher costs and slower growth ahead, do not believe the co will be bought or sold in the intermediate term, and question whether the mortgage franchise is nearly as valuable as once believed.
9:24AM National Atlantic Holdings (NAHC) Sandler O'Neill initiates BUY. Target $13.5. Firm thinks the co should demonstrate above-average premium growth and steady EPS and book value growth within New Jersey, due to an improved capital position, a unique Partner Agent network, and a cross-selling opportunity resulting from recent acquisitions. They think the stock is currently selling at an attractive discount to book value and consider the co to be well suited for small-cap, value-oriented investors.
9:23AM FLIR Systems (FLIR) Raymond James upgrades Outperform to STRONG BUY. Target $36. Raymond James upgrades FLIR given their view that order activity is beginning to accelerate, backlog growth will steadily ensue, and a new product cycle could begin to catalyze a very robust 18-month cycle of sales growth and positive EPS revisions. Firm expects to see an investor psychology rebound, multiple expansion, and positive EPS revisions as drivers for stock appreciation.
9:22AM eBay (EBAY) AmTech Research upgrades Hold to BUY. Target $50. Firm believes EBAY has significant growth opportunities worldwide and will remain the dominant provider of trading services for selling anything to anyone. Firm's recent lisings data has shown upside to their previous 2Q05 estimate and, more importantly, has shown improvement in EBAY's more mature markets in the U.S. and Germany. They say that assuming Q2 goes smoothly, they think the biggest issue for the stock is now 2005 guidance. As long as the co does not disappoint or guide down when reporting Q2 earnings in July (which they think is unlikely), they believe there is more upside opportunity than downside risk for the stock. Firm raises their Q2 EPS est to $0.19 (consensus $0.18) and rev est to $1.07 bln (consensus $1.04 bln).
9:22AM Komag (KOMG) Needham & Co reiterates STRONG BUY. Target $31 to $35. Needham raises their KOMG tgt saying they believe further stock appreciation for KOMG is likely given: 1) continued growth in average platter counts; 2) rising capacity requirements for consumer electronics applications; and 3) the elimination of concern for a soft June qtr. They encourage investors to profit from the possible earnings upside at KOMG over the next few qtrs and say that overall, KOMG remains one of the most inexpensive and least understood names in the HDD industry.
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