From Briefing.com: Close: Benchmark yields plummeted and oil prices fell 1.6%, but neither was enough to incite much interest for stocks, as the major averages again closed mixed in lackluster fashion... The day began on a promising note, as investors embraced the positive value implications of low bond yields, which plunged even in the absence of scheduled market-moving economic reports... Concerns about slowing global growth, spurred by record high energy costs as well as the dissenting tone from two policy makers voting for a rate reduction, underpinned the attractiveness of higher-yielding investments far and wide...
The benchmark 10-year note surged 26 ticks to yield 3.94% while even the German bund surged, knocking yields to near record lows of 3.114%... Notwithstanding lower interest rates, which raise the current value of future earnings and thus increase the current value of stocks, the indices failed to retrace early-morning highs, as five economic sectors closed higher while the other five closed lower...
Implications that a market top may be in the offing, as the S&P trades at 17 times estimated operating earnings and several stocks trade near the upper end of their ranges, also kept buying interest in check following last week's strong performance that lifted the averages to three-month highs... Pacing the way higher was the Utilities sector, as the Dow Utilities Index closed at its best levels in four years... While falling bond yields - which make dividend-paying stocks more attractive to investors seeking income - provided a floor of support for utilities, positive comments from billionaire investor Warren Buffett, who plans to invest heavily in power plants, also fueled buying interest...
9:49AM ATI Tech announces Radeon Xpress 200M drives HP's new AMD Turion 64 mobile technology-based commercial notebooks (ATYT) 12.97 0.00:Co announced that Radeon Xpress 200M is the chipset platform in HPQ's new line of AMD Turion 64 mobile technology-based thin-and-light commercial notebooks - the HP Compaq nx6125 notebook PC.9:02AM
Photronics announces 7 mln share offering (PLAB) 25.31 :
CNXT +10% (Wachovia upgrade).
2:36PM Jabil Circuit (JBL) 31.40 +2.96: Jabil Circuit, a leading contract manufacturer of electronic components, recorded strong earnings and revenue growth for the fiscal third quarter. The St.Pertersburg-based company stated Q3 earnings, excluding one-time charges, of $84.7 million, or $0.33/share, up from $66.7 million, or $0.26/share, from the year-ago period. Net revenue climbed 19% to $1.94 billion, as strength across most sectors provided the basis for trending sales. Additionally, management stated that they expect the "growth momentum to continue in the fourth quarter and into fiscal 2006". Core earnings for the following quarter are expected at $0.35-0.37/share on $2-2.1 billion in revenue, while earnings of $0.40-0.44/share on $2.2-2.4 billion are forecasted for the first quarter 2006.
Looking ahead, Jabil's strong customer relationships and lineup of potential new business opportunities affirms management's positive outlook. As non-traditional end-markets continue to garner greater interest in the electronic manufacturing services (EMS) industry, the company has increased focus on broadening operations from its traditional mainstay. While strength in networking, computing, and consumer have primarily fueled operations, new areas such as medical, automotive, and defense/aerospace have created opportunities for future growth.
Despite sizeable market potential in each sector, however, penetration rates have been relatively modest. The widespread embrace of outsourcing has been blurred by cost implications and structural considerations. While the impeding forces will not be relinquished in the near-term, the incentive to outsource is gaining momentum. As the notion of outsourcing continues to gain strength among different sectors, Jabil is well positioned to capitalized on the opportunities presented.
With a large cash balance, the company has the capacity to fund aggressive growth initiatives, and leverage its manufacturing experience and industry-leading reputation to expand its footprint in the market. In particular, the recent acquisition of Varian (00C0) has lifted the company's position in the medical/technical instruments segment and has presented additional opportunities for cross-selling. The company expects the acquisition to contribute $200-225 million to the top-line, once fully ingrained into current operations.
As the outlook for traditional business segments, such as telecommunications and networking, shows signs of improvement and new opportunities present themselves in non-traditional sectors, Jabil should continue to generate positive results. The current multiple of 33.9x trailing earnings is in-line with the average PE level of 33.8x over the past five years, although considerably higher than the multiple of 23.4x, relative to the industry. As Jabil has exuded great market strength as a leader in the EMS industry, its premium valuation is justified as a long-term investment opportunity. ---Richard Jahnke, Briefing.com
12:51PM Worthington Industries (WOR) 16.80 +0.15: Steel stocks have come under pressure as increasing inventories has led to price declines. Just this week, the group sold off after China said its production of the metal surged 38% in May. While the question of whether this supply moved into inventories or into production, the market has been increasingly jittery over the last few months. One company better positioned to ride out the storm is Worthington. This diversified steel processor's profits are derived from the end products it produces. WOR has enjoyed record earnings over the last year on the back of rising steel prices and lower priced inventory. Now with the release of its fourth quarter, the company faces the challenge of trying to top last year's record performance.
The Columbus, Ohio-based company reported earnings of $40.8 mln, or $0.46 per diluted share - second only in its history to last year's fourth quarter. For the year, earnings reached an all time record of $179.4 mln, or $2.03 per diluted share. Despite record earnings, results came up shy of consensus by a nickel. The tough comparisons showed up sales performance up 4.4% year/year to $817 mln, but still 4% above consensus estimates. WOR diversified its business in 2004 successfully executing a valued added strategy through joint ventures and acqusitions including specialty gas cylinder assets of Western Industries.
Its largest segment, Processed Steel Products, posted 5% sales growth to $460.67 mln. The rise was driven by higher pricing up 15% y/y as volumes declined. Excluding asset sales volumes fell two percent. Operating profits narrowed as high material costs reduced the spread between selling prices. WOR did note, however, that segment profits still remain at historical highs. The Metal Framing unit, roughly thirty-percent of total sales, saw revenues drop 4% to $223.3 mln. WOR noted continued weakness within the commercial office construction market leading to a 13% drop in volumes. Even through pricing gained another 13%, material costs resulted in a slide in operating profits. However, this segment's operating profits quadrupled last year. An acquisition helped boost sales within the Pressure Cylinders segment offsetting a 14% fall in volumes.
As expected, gross margins plummeted from a record high of 22% last year to 13% for Q4. WOR ended the year with margins up fifty basis points to 16.2%. Operating margins were 6.7% for the quarter and 8.7% for the full year. Financially speaking, WOR is much better positioned at the close of FY05 with $57 mln in cash and cash equivalents up from $2 mln last year. Something to watch over the next couple quarters is the inventory levels up 17%. What we like about the fifty year old company is its corporate philosophy, earning money for its shareholders. The board declared a quarterly cash dividend on May 21st of $0.17 per share offering a gross yield of 4.08%. Further, the board approved a share repurchase program up to ten million or 11% of its shares outstanding.
While typically a five cent headline miss would result in a sell-off in shares, Worthington's stock is trading up. The market's reaction speaks more to the fact that shares have been beaten up recently dropping 40% over the past three months. The processed steel segment is highly competitive, thus producers tend to compete on prices. WOR has been able to achieve a slight advantage trying to focus more on service. Overall, despite facing numerous headwinds from high material costs, record comps, and significantly higher inventories, WOR pulled out a solid quarter. The bull case, Worthington offers an attractive dividend yield, better positioned downstream, and the industry leader in terms of sales and profit growth. The bears will chime in noting the trend in inventories, exposure to the automotive industry, and slower growth in Europe. The stock trades at 11x forward earnings vs. some of its peers including Jorgensen (JOR) at 5.6x, Steel Technology (STTX) 5.5x, and Gibraltar Industries (ROCK) at 10.1x. Kimberly DuBord, Briefing.com
11:24AM Morgan Stanley (MWD) 50.82 -0.15: Following last week's warning that fiscal second quarter earnings would fall by 15% to 20% from last year and the high profile departure of Chairman and CEO Philip Purcell, Morgan Stanley reported earnings per diluted share short of its revised guidance. Citing difficult market conditions and higher legal expenses, the ailing company recorded Q2 diluted EPS of $0.86 on $6.04 billion in revenue, down 22% from the yr-ago period. Although revenues exceeded the consensus estimate of $5.63 bln, the results marked a 9% decline year/year. Additionally, net income fell 24% to $928 million from $1.2 billion.
While Lehman Brothers (LEH) and Bear Stearns (BSC) both reported solid earnings for the current quarter, Morgan Stanley has failed to keep pace with its peers. The company's languishing earnings and stock performance are reflective of the ongoing concerns over management management style and continued infighting.
The ousting of Philip Purcell was announced last week as pressure from dissident employees and discontented shareholders continued to mount. Purcell, whom the dissidents blamed for the company's deteriorating performance and increased management dissention, stated that he will remain with the company until a successor is named, however not beyond the company's next annual meeting in March. While the impending departure of Purcell has raised questions about who will succeed him as chief executive officer, the company has offered little insight into the progress of the search. However, several notable names have surfaced as possible candidates for the job, including John Mack, former president of Morgan Stanley, William Donaldson, former SEC Chairman, and John Thornton, former president of Goldman Sachs.
In regards to a possible spin-off of its Discover Financial Services credit card division, the company stated that it is still reviewing potential opportunities and hopes to reach a decision as quickly as possible. While the spin-off is likely to happen, as it was affirmed by the board, a final decision will likely include the opinion of Purcell's successor.
The outlook for the company remains unclear, as lackluster performance continues to resonate the company's increased public scrutiny and ongoing talent drain. Direction for the company will be contingent upon the successful transition of a chief executive officer and the integration of new management styles in guiding strategic initiatives, including the Discover spin-off. ---Richard Jahnke, Briefing.com
10:25AM Ameritrade (AMTD) 15.22 +0.40: For some time now it has been speculated that Ameritrade (AMTD) will be part of a consolidation equation in the online brokerage industry. The one unknown, however, is on which side of the equation Ameritrade would fall. According to CNBC, Ameritrade has opted to fall on the buy-side, with the object of its affection being Toronto Dominion's TD Waterhouse business. While Ameritrade has yet to confirm its intentions, reports suggest the Omaha-based broker has offered approximately $3.0 bln for TD Waterhouse.
The plot in this acquisition case is a bit thicker, though, as CNBC simultaneously reported that rival E*Trade (ET 13.18, +0.27) made a $17.50 per share bid for Ameritrade, offering $2.3 bln in cash and 50% of the combined company.
E*Trade started courting Ameritrade in May with an offer that involved $1.5 bln in cash and 47.5% in the combined company. Ameritrade wasn't interested and quickly put out a press release noting it wasn't for sale. To be sure, all companies are for sale at the right price. Despite its proclamations, what Ameritarde was saying, is that it wasn't for sale under the terms E*Trade was proposing. In essence, it was a veiled indication that E*Trade needed to open its wallet a lot further - or so we thought. If the CNBC report about Ameritrade spurning a $17.50 per share offer is true, maybe Ameritrade really meant what it said.
Whether it did or not, though, could be a moot point, because its shareholders will certainly have something to say about the alleged acquisition offer from E*Trade. The market is sensing as much, as shares of AMTD are trading higher in the wake of the report it will acquire TD Waterhouse. As that news hit the wires, AMTD surrendered pre-market gains, which isn't all that unusual for the stock of a company that is making an acquisition.
Granted an acquisition with TD Waterhouse should help improve Ameritrade's competitive position in the industry, as it enables Ameritrade to diversify its revenue stream with non-trading products; however, it was striking that AMTD shares quickly rebounded when CNBC publicized the alleged offer by E*Trade. This type of price action suggests investors aren't going to let the E*Trade offer just fall by the wayside, not when the reported offer is nearly 20.0% above where AMTD shares closed on Tuesday.
There is a chance, then, that E*Trade's bid turns hostile as it makes its case to institutional investors who, in turn, have the ability to make some vocal waves that force Ameritrade's Board of Directors to reconsider the idea of selling to E*Trade.
On a related note, it is remarkable that shares of ET aren't trading lower today either. After all, it should be taken as a negative that competition will heat up with an Ameritrade-TD Waterhouse union. The fact that ET is trading up in the wake of that prospect implies one of two things: (1) investors are confident E*Trade will ultimately succeed in its bid to acquire Ameritrade or (2) investors believe E*Trade's failure to acquire Ameritrade will entice the company to do a deal, perhaps, with Charles Schwab (SCH 11.57, unch) or, possibly, to entertain takeover offers from larger financial services companies looking to capitalize on E*Trade's well-established online presence.
(Disclosure: Briefing.com has a business relationship with E*Trade, Ameritrade, TD Waterhouse, and Charles Schwab; I own Charles Schwab in my IRA account)--Patrick J. O'Hare, Briefing.com
9:03AM Page One - The 10-Yr Yield Is Back Below 4.00% : Stock futures indicate a solid up open. Chalk up another one for the resilient market. There isn't much news to account for the bounce, but a rally in the bond market is helping.
Ford lowered its profit estimate for the year, but Wall Street had already done that as well. Ford now says profits will be $1.00 to $1.25 per share. Their previous estimate had been $1.25 to $1.50. The average Wall Street estimate had already dropped below that range, to $1.19. So this isn't big news, but more earnings estimate cuts are likely from analysts. Ford did say, however, that second quarter profits would be $0.30 to $0.35 per share, which is above the average estimate of $0.12. This news from the auto industry isn't shocking and isn't having a broad impact.
At first blush Morgan Stanley reported profits below expectations, but Reuters Estimates has informed Briefing.com that, when a $140 mln legal charge is excluded, MWD posted a profit of $0.95 that was four cents ahead of consensus; revenue was a bit higher than expected too. We wouldn't normally mention this but the company has been in the news because of the management turmoil. Brokerage results in general are mixed and the Morgan Stanley results don't have implications for other firms.
The 10-year note yield has dropped back below 4%. The yield is at 3.99%. Bonds have rallied as Bill Gross of PIMCO said that the Fed will probably raise rates only one more time, and then may start cutting rates later this year. Lower bond yields provide support to the stock market.
Oil prices are down a bit this morning and still just below $59 a barrel. The weekly inventory data are due at 10:30 ET this morning.
The start of summer yesterday saw light volume. No surprise there. It may continue that way for a few days. There are no major economic or earnings releases scheduled for the remainder of the week. Meanwhile, the market continues to show good resilience. A big help has been the lack of earnings warnings. Not much has been heard from the tech sector. That helps. We remain neutral. Dick Green, Briefing.com
9:35AM Packeteer (PKTR) Kaufman Bros initiates BUY. Target $16.5. Firm believes PKTR is positioned to capitalize upon an increasingly important area of networking, WAN optimization, and to continue its history of strong financial performance. In addition, they believe its current valuation does not reflect its opportunity and overly discounts the impact new competitors will have on Packeteer.
9:35AM Rome Bancorp (ROME) Ryan, Beck & Co initiates OUTPERFORM. Target $11. They say the recent second-step conversion strengthens fundamentals, the balance sheet is not typical of a traditional thrift, and that current valuation appears attractive.
9:34AM LTX Corp (LTXX) CIBC Wrld Mkts downgrades Sector Outperform to SECTOR PERFORM. Firm adjusts their ratings to reflect expanding test buy rate and depressed relative valuations: they expect test equipment shares to outperform the SCE industry in aggregate. Firm's top pick is TER and they drop the Speculative qualifier on CMOS. They say to generate a reasonable 10% net return, they estimate a minimum of 12% market share required to support $66mln/Q cost level. They say A, CMOS and ATE are each hovering around this level, and LTXX is well below; they think consolidation is inevitable.
9:34AM Celgene (CELG) JMP Securities downgrades Strong Buy to MKT OUTPERFORM. JMP Securities downgrades CELG saying that in addition to announcing receipt of priority review status for Revlimid yesterday, CELG mgmt suggested that it may be required to have an ODAC panel review. Firm is concerned, as they believe investors will be, with the ODAC panel setting serving as a forum for raising scrutiny on the data and the clinical program (Phase II unblinded uncontrolled trial) by FDA regulators. They note that the stock has risen 10+% in the last 2 months to $41, near their tgt of $44, and see a possibility that the stock could take a breather in advance of clarity on the outcome from the ODAC panel meeting.
9:34AM Jos. A. Bank (JOSB) Wells Fargo Sec initiates BUY. Target $51. Firm believes the co has an effective growth strategy with two legs. The first is expansion of the co's store base, which is projected to almost double from the current level. The second is the potential to acquire a complementary retailer. They anticipate that the 18-20% earnings "Joe-Mentum" will continue after the co reaches the goal of 500 stores in FY07. They say continued Joe-Mentum should be driven by a rapidly maturing store base and continued consistency of merchandise leading to improved profitability.
9:33AM Pier 1 Imports (PIR) KeyBanc Capital Mkts / McDonald upgrades Underweight to HOLD. KeyBanc upgrades PIR saying though they remain concerned by a number of issues currently facing the co - including negative comp trends, deteriorating margins and increased competition - with the stock down over 20% since our downgrade, they believe the risk/reward profile is now balanced and see little further downside in the shares. Firm notes that the co has made a number of marketing and merchandising improvements that they believe could lead to a pickup in SSS in 2H06, although it is taking much longer than they expected to win back customers following last year's execution errors.
9:33AM Wells Fargo (WFC) Advest initiates BUY. Target $72. Firm believes the co is a likely late-cycle winner, well positioned to outperform its peers and the broad mkt by delivering consistently strong growth and profitability that is resistant to changes in the interest rate and economic cycles. Firm also initiates HU and AF with Neutrals.
9:30AM Jamdat Mobile (JMDT) IRG Research initiates BUY. Target $35. Firm believes wireless game downloads are an early stage high-growth worldwide mkt opportunity. They expect a combination of 3G network deployments around the world, advanced handsets with color screens, and increased handset functionality to contribute to accelerated growth in mobile gaming downloads. Firm expects the co to leverage its mkt leadership and to benefit from the increasing demand of its Tier 1 carrier customers for wireless mobile gaming content.
9:30AM Petroleum Helicopters (PHEL) UBS initiates BUY. Target $32.5. They say PHEL is nearing completion of a turnaround that began in 2001. They believe co is leveraged to the growing deepwater Gulf of Mexico mkt and is diversifying business by expanding the air medical segment. They also believe the stock trades at a material discount to competitors and peer group.
9:30AM Methanex (MEOH) IRG Research downgrades Buy to NEUTRAL. Firm believes reduced deliveries of Argentine natural gas to MEOH's Chilean facility have cut methanol production at the plant by nearly 50%. Although mgmt is exploring all avenues to alleviate the situation, they say the magnitude and duration of the natural gas curtailment is uncertain. Firm cuts their 2005 EPS est to $2.01 from $2.40 (consensus $2.34).
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