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From Briefing.com: 4:36PM Rackable Systems beats by $0.03 (RACK) 13.03 +0.93:Reports Q2 (Jun) earnings of $0.12 per share, excluding non-recurring items, $0.03 better than the Reuters Estimates consensus of $0.09; revenues rose 26.2% year/year and 44% sequentially to $44.0 mln vs the $40.8 mln consensus.

4:28PM Altera beats by a penny, guides Q3 revs above consensus (ALTR) :Reports Q2 (Jun) earnings of $0.18 per share, $0.01 better than the Reuters Estimates consensus of $0.17; revenues rose 6.1% year/year to $285.5 mln vs the $277 mln consensus. Co issues upside guidance for Q3, sees Q3 revs of $288-294 mln vs. $283.51 mln consensus. Gross margins will be 68-69%, unchanged from the co's previous second half gross margin expectations.

4:03PM Volterra Semi misses by a penny, ex items (VLTR) :Reports Q2 (Jun) earnings of $0.05 per share, excluding non-recurring items, $0.01 worse than the Reuters Estimates consensus of $0.06; revenues rose 44.2% year/year to $13.2 mln vs the $13.8 mln consensus.

Close Dow -54.70 at 10596.48, S&P -4.65 at 1229.03, Nasdaq -13.00 at 2166.74: Stocks closed lower as a mixed batch of earnings reports, rising oil prices and benchmark yields near two-month highs prompted broad-based consolidation following another week of market gains... Blue chips like American Express (AXP 54.64 +0.07) and BellSouth (BLS 26.89 +0.17) both beat analysts' Q2 expectations by $0.03 but Xerox (XRX 13.15 -0.90) missed Q2 forecasts by $0.03 and issued downside Q3 guidance...
While overall indications remain good for Q2 earnings to check in above initial expectations of 7.5%, as the blended aggregate of reported actuals with remaining forecasts is a bit over 9%, a lack of more influential earnings reports also added to the market's overall cautious stance... Further weighing on sentiment was a rebound in crude oil prices ($59/bbl +$0.37) midday that extended last Friday's 2.7% surge and closed the commodity near a one-week high... Of the nine economic sectors finishing in negative territory, Consumer Discretionary was one of the day's worst performing sectors, losing ground amid weakness in retail (-0.8%) and homebuilding (-2.6%)...

The latter was in focus throughout the session following a 2.7% rise in June existing-home sales to a record 7.33 mln units (consensus 7.15 mln) and an upward revision to May's figures (to 7.14 mln from 7.13 mln)... Even though the report lent further proof to the understanding that job growth and low mortgage rates continue to underpin strong buying demand, which provided some early support for stocks, new home sales, which will be released on Wednesday (10:00 ET), could have a more influential economic impact on the market since they typically carry more weight...

The fact that the majority of homebuilders have recently hit historic highs, coupled with rising borrowing costs - as the 10-year note closed down 7 ticks to yield 4.24% - also left the window open for widespread profit-taking... A more influential interest-rate sensitive area also impacted by a flattening yield curve was Financial... The Treasury market lost ground as traders consolidated some of Friday's gains ahead of a busy week of economic data and upcoming bond auctions...

The Industrials sector was weighed down by weakness from conglomerates (i.e. GE, TYC and UTX) and transportation (i.e. FDX and BNI) while Health Care, which was in focus following Teva Pharmaceutical's (TEVA 31.23 +0.07) confirmed $7.4 bln bid for Ivax (IVX 25.17 +2.29) also traded lower... Providing the bulk of sector weakness was consolidation in biotech stocks (i.e. GILD and GENZ), losses from large-cap drug names like JNJ (-1.5%) and MRK (-1.3%) and a Q2 report from Quest Diagnostics (DGX 51.11 -0.51) which merely matched expectations... Technology was also under pressure amid weakness in the hardware and semiconductor...

Chip stocks, which were under the microscope ahead of Q2 reports after the bell from Texas Instruments (TXN 30.60 -0.16) and Altera (ALTR 22.53 +0.33), lost ground after Merrill Lynch downgraded LSI Logic (LSI 9.89 -0.33) on valuation concerns... Energy, however, paced a day of limited gains, getting a boost from rising oil prices as well as more positive analyst commentary on Halliburton (HAL 54.86 +1.57) and Schlumberger (SLB 84.88 +2.60)...DJTA -1.3, DJUA -0.2, DOT -0.7, Nasdaq 100 -0.5, Russell 2000 -1.0, SOX -0.6, S&P Midcap 400 -0.6, XOI +0.3, NYSE Adv/Dec 1231/2062, Nasdaq Adv/Dec 1169/1902

3:21PM Xerox (XRX)
13.05 -1.00: It's all about the right mix and Xerox's mix for the second quarter didn't sit well with us, nor the market following the release of its second quarter result. The world's largest document-management company has gone through a major restructuring process, but its transformation towards higher growth remains elusive. The product sales mix pressured gross margins, which slipped to 39% from the 41% level reached last year. As a result, earnings, excluding multiple items, missed expectations by three cents. While Xerox hopes the fourth quarter will be its saving grace, this certainly does not paint a pretty picture for Q3, which it expects could result in another miss.

Second quarter earnings included a restructuring charge of $0.13 to adjust current expenses to its changing product mix, more than offsetting a tax gain of $0.33. Excluding these non-recurring items, Xerox reported earnings of $0.20 per share on revenues that were up 1.8% y/y, excluding currency. We were disappointed to see gross margin guidance was down slightly to 40-41%. Xerox also forecasted full year earnings to come in at the bottom-end of its range. Excluding items, Xerox sees earnings straying between $0.90-1.00 per share vs. consensus of $0.94.

The Office segment, which generates almost half of the top line, rose 2.4%. Even though equipment sales rose 7%, the mix clearly was not in its favor as operating margins slipped a full point to 9%. The other main segment is the Production unit, which focuses on commercial printers and document intensive industries with high speed digital technology providing on-demand, personalized printing. Since Xerox not only sells the equipment, but provides the post-sale services and financing, segment performance must be looked at in parts. Production equipment sales rose 3% y/y including color installs, which were up 18%. Yet, these gains were offset by declines in post-sale and financing revenues along with demand for its high-end production monochrome systems. The mix again resulted in margins dropping to 7% from 10.8% last year. SG&A as a percentage of sales also grew to 26.7% vs. expectations of closer to 26%.

Xerox breaks out revenues earned within the color segment and they were up 17% for the quarter. Xerox's strategy is to increase the number of pages printed, plus those in color, as a means of generating future post-sale growth. Even though color has been around a while, the penetration rate remains considerably low. The percentage of pages printed on color devices is only 3%. Xerox expects this count will rise to 10% by 2008, opening a potential market opportunity of $22 bln. Color holds the key to Xerox's future as it carries five times the profits as black and white. Last quarter color sales represented 27% of total compared to 26% last year.

Acknowledging this is a turnaround story, we have to say this was quite a disappointing quarter. We highlighted the stock as a recommended holding for active investors on June 15th, as Xerox's restructuring efforts seemed to be taking hold. Margins trends were stabilizing at 41%, providing a backdrop for continued mix improvement. Our investment thesis appears to be a few quarters early. We hoped to see an impressive portfolio of new product launches in the second quarter take hold, generating upward momentum in the sales mix. We were frustrated to see not only higher lower-margin product sales, but lackluster sell throughs for the new products as well. While we would refrain from selling on a day like today with the stock down over six percent, we plan to remove Xerox from our Active Portfolio. The lack of near-term visibility and expectations earnings are likely to suffer further downside has caused us to alter our investment perspective on the story.

We will, however, keep an eye on the stock as the fourth quarter could generate an upward surprise driven, once again, on the right product mix. Yet, the outlook is clearly marred by today' result, coupled with the fact the timing and the magnitude of the ensuing margin expansion remains in question. ----Kimberly DuBord, Briefing.com

11:34AM BellSouth (BLS)

26.93 +0.23: BellSouth, a leading telecommunications provider in the southeast United States, saw profits slip for the fiscal second quarter due primarily to financing costs associated with the acquisition of AT&T Wireless by its Cingular Wireless joint venture. The Atlanta-based company reported normalized EPS of $0.46, which includes merger integration and debt extinguishment costs of $0.02 and $0.01 per share, respectively, compared to $0.51 in the same quarter last year. At the same time, total revenue for the quarter rose 27% to $8.52 billion, bolstered by Cingular's continued growth and merger integration progress. Analysts were expecting earnings of $0.43 per share on revenues of $8.51 billion.

Cingular Wireless, the company's joint venture with SBC Communications, reported strong operating results with approximately 1.1 million net customer additions, which brings its national customer base to 51.6 million, and low churn rate of 2.2%. Revenue for the segment amounted to $8.6 billion, representing a 5.4% increase from a year ago. BellSouth's normalized revenue includes its 40% share in Cingular's reported revenue.

In addition to strong momentum in wireless, wireline trends also continued to improve. For the second quarter, wireline revenue increased slightly to $4.62 billion, with revenue growth from long distance, DSL, and small business access lines effectively offsetting weakness in residential access lines and large business services. The company added 301k net long distance customers, extending its reach to nearly 6.8 million customers. Meanwhile, the number of new DSL subscribers climbed 124k to more than 2.4 million customers, helping to drive network data revenue to $1.17 billion, an increase of 4.5% from the year ago period. Despite a boost from the small business segment, total access lines were down 419k to 20.8 million, with residential down a considerable 204k. Access line loss was largely attributed to wireless substitution and increased competition.

Overall, the results for the quarter reflect stable wireline trends and rising demand for wireless. As the company continues to realign its assets toward wireless and broadband services, integration efforts, with regards to Cingular/AT&T Wireless, should begin to bear fruit and drive further margin improvements. Given that BellSouth has the highest exposure to wireless among its peers (40% of revenue compared to 32% for SBC and 29% for Verizon), it stands to greatly benefit from developing trends in the industry, and arguably deserves a premium valuation over its peers.

Currently, shares are trading at 15.9x trailing earnings, in-line with the average level of 15.4x over the last five years. In comparison, SBC Communications and Verizon Communications are trading at 16.1x and 13.4x, respectively. The strong growth rates and improving fundamentals at Cingular coupled with stable top-line metrics in the wireline business suggest BLS warrants investment consideration. ---Richard Jahnke, Briefing.com

10:30AM Smith Intl. (SII)

68.71 -0.83: Strong demand overseas and increased spending within the US land based-market enabled Smith International to offset seasonal weakness from the spring breakup in Canada paring drilling activity. Earnings for this oil and gas services company doubled from last year to $68.1 mln, or $0.67 per share for the second quarter - two cents ahead of expectations. The windfall of spending by the exploration and production companies around the globe continues to propel growth. Consolidated revenues grew 27% y/y and 5% q/q to $1.35 bln - 5% above consensus.

Its M-I SWACO unit offers a variety of services including drilling fluids and services, completion fluids, production chemicals, horizontal directional drilling, and drilling-water management. Demand outside North America jumped 26% y/y driven by new contracts and increased market penetration in North Sea, West Africa and the Middle East regions. On a sequential basis, growth in the Eastern Hemisphere helped compensate for the seasonal downturn in Canadian drilling activity. Revenues rose 7% q/q and 20% y/y to $660.0 mln accounting for half of total revenues. The Smith Services division provides products and services to the energy and manufacturing industries including drilling bits, turbines, elastomers, polycrystalline diamonds, and specialty welding. For Q2, the unit contributed $137.7 mln in revenues, down 3% q/q and up 14% y/y. The decline, again, due to seasonal weakness in Canada, was offset somewhat by strong demand for diamond drill bit products.

Smith Services generated revenues of $171.4 mln up 15% y/y and 47% y/y indicating continued solid growth across all core products and services. Smith's production distribution and supply-chain management unit, Wilson generated $381.2 mln on the top line, up modestly from last quarter, but up an impressive 38% from last year. SII believes it will see margin expansion in the second half of the year due to the return of the Canadian drilling season, plus further price realization due to continued strong demand. As a result, the company raised its full year EPS guidance to $2.80-2.90, pre split, vs. $2.75 consensus. Smith's shares will split on a two-for-one basis next month.

The spring break up period in Canada arrives as frozen marshes start to thaw, limiting access to areas otherwise unreachable by heavy drilling rigs. This yearly occurrence will effect sequential earnings for many companies up and downstream from Devon Energy (00C), Nabors (NBR), BJ Services (BJS), to Maverick Tube (MVK).

The seasonal downturn in Canada resulted in a loss of higher-margin products, keeping gross margins restrained at 30%. Yet considering the seasonal downturn, this was a solid quarter on the top and bottom line. Cash flow generation remains strong, resulting in the company accelerating its share buyback program. Stalwart demand and E&P spending trends provide the backdrop for further growth ahead in terms of volume and pricing gains. SII shares trade at 28.9x current earnings compared to the S&P Oil Service Index at 26.8x and the Phili Oil Service Index (OSX) at 31.8x. The stock has reached a multi-year high, as is the case with many energy names, so it could suffer some profit taking. We suggest investors take advantage of any exaggerated weakness due to the strong earnings momentum for the entire group. ----Kimberly DuBord, Briefing.com

9:03AM Page One - Summary of Earnings Reports Shows Good Trends : The S&P last week managed its fourth straight weekly gain. Whether five in a row is in the cards will depend on the reaction to earnings reports. So far, the indications are good.

The reports to date have been modestly better relative to expectations than historical averages would have suggested. Over 71% of companies have reported earnings above the average Wall Street forecast. The historical norm is about 62%. Only about 13% have reported below expectations, with the rest in line with forecasts.

The aggregate increase in operating earnings for the S&P 500 was expected to be about 7.5%. So far, with about 40% of the S&P 500 having reported, the blended aggregate of reported actuals with remaining forecasts is a bit over 9%. Over the past two years, the final increase has been 3% to 5% above the forecast. The data so far suggest that a final increase of 10% or a bit more is likely. That would be a pretty good increase given the difficult comparisons from a strong second quarter last year.

Also supportive to the stock market is the fact that guidance for the third quarter has led to a modest upward revision to expectations for earnings growth. There have not been many warnings flags raised.

There are plenty of earnings reports due this week. Another 30% or so of the S&P 500 companies will report earnings. There were no major report this morning. BellSouth beat by 3 cents and Xerox missed by 3 cents but neither is having broad impact. American Express reports during trading hours and Texas Instruments after the close today. Tomorrow, Amazon.com, Verizon, International Paper, Lockheed Martin, and DuPont will report. Wednesday brings Boeing. Thursday's list has Aetna, Dow Chemical, and ExxonMobil. Friday has its typically light schedule.

Stock futures point to a near flat open this morning. The only economic release today is existing home sales data at 10:00 ET. The big economic report this week will be durables goods orders on Wednesday. Oil prices are down about $0.25 this morning at $58.35.

Market sentiment remains upbeat. Earnings reports are coming in just fine. The summer doldrums are giving ground to the positive fundamentals. Dick Green, Briefing.com

9:45AM Premium Standard Farms (PORK) Piper Jaffray initiates MARKET PERFORM. Target $16. Firm says PORK is well positioned to grow and believes internal growth opportunities include increased value added and further processing, and sales to food service, which now only represents 3% of sales. They believe growth through acquisitions is also very likely as consolidation in the industry continues. They think PORK has a strong balance sheet and now a "currency" to acquire, and mgmt has indicated interests in strengthening the pork processing side of the business.
9:45AM Hercules Tech (HTGC) JMP Securities initiates STRONG BUY. Target $19. They say the unique niche HTGC fills and the manner in which it chooses and structures its investments, allows it to deliver very strong returns while taking very manageable credit risk. Simultaneously, they say the co is rapidly building a warrant portfolio in a diverse group of technology companies. Firm believes HTGC will deliver a strong current yield while providing investors with equity participations in the technology investments of the nation's top tier venture capital funds.

9:44AM Bakers Footwear (BKRS) BB&T Capital Mkts upgrades Hold to BUY. Target $16. Firm believes the powerful transformation of Bakers' P&L is now set to accelerate into 2006 and beyond as execution improves and more productive new units and re-formatted stores become a more meaningful part of the base, contributing to increasingly profitable growth and netting to improved free cash flow as well.

9:42AM Mercantile Bank (MBWM) Oppenheimer downgrades Neutral to SELL . Oppenheimer downgrades MBWM following the co's lowered guidance. They think new guidance more than offsets recent 2% increase in consensus EPS. They note mgmt's new EPS guidance represents a 5% decline from this past Friday's consensus EPS level, translating to a level 2% below they were pre-2Q earnings. Thus, firm believes as consensus EPS declines, so will MBWM recently expanded trading multiples.

9:41AM Logitech Intl SA (LOGI) Needham & Co upgrades Hold to BUY. Target $42. Needham upgrades LOGI based on the prospect that the co's revenues could accelerate going forward, with two major drivers for acceleration: 1) a new opportunity-portable music players, led by the iPod; 2) the next generation of game consoles. Firm raises their 2006 EPS est as they believe the co should be able to grow its earnings per share faster than revenues because its operating margin should continue to expand.

9:39AM Halliburton (HAL) UBS reiterates BUY. Target $65 to $73. UBS raises their 2005 and 2006 EPS ests on HAL to $2.95 and $3.40 (consensus $2.47 and $2.79), up from $2.49 and $2.80, respectively. Firm also raises their tgt to $73 from $65. ESG has started to see the benefits of its focus on margin improvement over the past few qtrs. Firm believes this was one of the reasons for the strong 2Q performance, especially in its int'l business. Firm expects ESG to continue to take strides towards "closing the profit gap" in the int'l business relative to its peers. Despite the recent strong stock performance, HAL remains UBS's top pick among the large cap oil service stocks.

9:37AM LCC Intl (LCCI) Punk, Ziegel & Co downgrades Buy to MKT PERFORM. Target $7 to $5. Punk Ziegel downgrades LCCI following co's 8K filing announcing the signing of a receivables financing agreement with Commerce Funding Corp under which LCCI will be able to factor up to $3.0 mln of its account receivables. While they recognize that LCCI collects its receivables based on milestones, they believe that there is a risk that U.S. Cellular (USM) might not pay the Company its total balance. Specifically, since LCCI stopped performing the majority of work for the carrier in 1Q05, they say the co should have met most of the milestones and ultimately collected the majority of receivables by now. They believe LCCI could have to write-off some of the amount due and potentially increase the need to finance a larger portion of its balance sheet.

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