Sector Investing

[ReturntoSender]

From Briefing.com: Close: The market opened lower but closed near session highs after gaining momentum midday amid a pullback in oil prices from record levels... With inflation on the minds of so many this week, particularly ahead of tomorrow's July CPI report, oil prices played a key role in dictating Monday's action... When oil prices hit their highs of the day in early trade, reminding investors about oil's inflationary impact on corporate profits and consumer spending, the market fell to its worst levels...

But crude oil futures ($66.27/bbl -$0.59) closing lower for just the second time in 13 sessions helped pave the way for investors looking for bargains following Friday's partly oil-induced consolidation efforts... To that end, commodities traders locked in some of the gains that last week resulted in oil's largest weekly advance (+6.8%) in two months... Meanwhile, market breadth turning positive midday also validated the turnaround in underlying sentiment that helped seven out of ten economic sectors close higher... Despite benchmark yields on the 10-year note (-7/32) closing at session highs (4.27%), Financial provided the bulk of upside leadership...

The sector got a boost as investors embraced upbeat comments from Barron's about a potential bank revival, which highlighted large-cap names like Citigroup (C 43.79 +0.17), Bank of America (BAC 43.18 +0.49) and JP Morgan (JPM 34.66 +0.35)... With regard to bonds, the Treasury market initially dipped on a better-than-expected NY manufacturing report while a mixed net foreign purchases report fueled further profit-taking following Friday's relief rally and ahead of upcoming inflation data...

2:50PM Agilent Technologies (A)

30.23 +3.82: Agilent Technologies announced on Monday a significant restructuring of operations, as well as reported higher than expected third quarter earnings, sending shares higher during intraday trading. The Palo Alto-based company said that it plans to divest its semiconductor business to private equity firms Kohlberg Kravis Roberts (KKR) and Silver Lake Partners for $2.66 billion, as part of its repositioning as a focused measurement company. Furthermore, the company agreed to sell its 47% stake in Lumileds, a manufacturer of high-powered LEDs, to Phillips Electronics (PHG) for $950 million and repayment of $50 million of debt, and spin-off its SOC and memory test business in 2006.

Agilent said that it will use the cash proceeds of the divestures for a $4 billion share repurchase program and call its $1.15 billion convertible debenture, which will potentially reduce its outstanding shares by 36 million. Management expects the restructuring to be mostly complete by fiscal 2006 and believes the proceeds from the sale of property and assets will offset the approximately $200 million in implementation costs. The company also presumes to cut global infrastructure costs by $450 million and trim its workforce by roughly 1,300 jobs, which will be accomplished through a combination of employee transfers to the divested business, attrition, and labor force reduction.

The aforementioned actions will effectively reduce Agilent's scope of operations and allow it to realize greater potential in the measurement instruments industry, its best positioned segment. Since being spun-off from Hewlett Packard in 2000, the company has struggled to advance its core business unit because of outside interests and scattered operational focus. As a result, Agilent has not effectively leveraged its full potential as a measurement company and has detracted from its operational strengths. The repositioning should allow the company to better innovate and serve its customers, as well as generate added value for shareholders.

On a separate note, Agilent reported third quarter earnings of $104 million, or $0.21 per share, compared with $100 million, or $0.20 per share, in the year ago period. Excluding restructuring charges and tax benefits amounting to $38 million, the company earned $142 million, or $0.28 per share, topping the consensus estimate of $0.26 per share. On a comparable basis, last year's earnings were $154 million, or $0.30 per share.

At the same time, revenue declined 10.5% year/year to $1.69 billion, below the consensus estimate of $1.75 billion, with orders increasing 1% from a year ago to $1.80 billion. By segment, momentum remained mixed with Test and Measurement revenue down 8% year/year to $705 million, due primarily to a seasonally weak quarter and lower demand for communications and wireless products. Concurrently, orders of $722 million for the segment were 6% below the year ago figure. Semiconductor Products revenue decreased 2% to $450 million; however, third quarter orders were up 25% from last year, led by strength in personal systems, which was up 37%.

Looking ahead, Agilent reaffirmed its guidance for the fourth quarter, with normal seasonality and stronger demand contributing upside momentum. The company expects fourth quarter revenue in the range of $1.79 billion to $1.89 billion and earnings between $0.33 and $0.38 per share. This compares to the analyst earnings forecast of $0.34 per share on revenue of $1.85 billion.

Following in the wake of Agilent's restructuring announcement and mixed third quarter results, shares have soared over 16% on Monday. The substantial spike in the stock price arguably reflects investors' optimistic outlook for the company and the prospects for greater growth opportunities, given its increased operational focus. While the stock has climbed nearly 30% in the past year, the current investment opportunity is shadowed by associated restructuring risks. As such, investors should look for further updates on the company's ongoing efforts to realign its operations and strategic initiatives before committing to the stock. Shares are currently trading at 22.9x the FY06 EPS estimate of $1.32 and a PEG ratio of 1.83. --Richard Jahnke, Briefing.com

3:58PM Materials Sector
After being Overweight the Materials sector throughout 2004, we downgraded our position back in April. In hindsight the move was a timely one, as stocks sold off big throughout April on concerns of slower economic growth in the US and China. Since then, the sector has endured a period of higher highs and lower lows, underperforming the broader market with a year-to-date decline of 3.6% compared to the 1.7% gain in the S&P 500. Yet, expectations of an accelerating economy, albeit at a moderate pace, and strong earnings growth and operational performance, have renewed interest in these names.

There were few complaints following what can only be described as a strong second quarter. Earnings typically beat expectations with companies benefiting from strong top line growth, driven by demand and soaring commodity prices. Alcoa, which moves a quarter of the worlds aluminum, generated the strongest revenue quarter in the companys history. Many producers are enjoying robust end-market demand from the aerospace, building construction, commercial transportation, and industrial products markets.

Production shut-ins and worker strikes have impacted the metals markets from copper to gold. Copper fundamentals remain quite favorable as prices, up 18% this year and doubling over the last two years, are at historic levels. The outlook for the metal continues to hold its luster as world production will likely not grow to exceed demand, owing to constraints from mine depletions, declining ore grades, violence near mining production, and environmental restrictions. As the worlds largest consumer of the metal, Chinas urbanization has been the driving force behind demand. As long as the numbers remain strong, as was the case in July with Chinese industrial production up 16.1%, copper prices will retain current levels. Gold remains coupled with the dollar reaching a high of $455/lb as the greenback weakened against the euro throughout July and August.

Accelerating industrial production and record temperatures this summer have led to soaring coal prices. A healthy pace of 56.6 for the July ISM manufacturing survey has ameliorated concerns about a possible slowdown, which most are now putting off into 2006. Electric power demand forecasts are looking conservative, which has supported shares in coal and natural gas producers, as well as the rails and utility stocks. Steel producers have rallied back, as excess inventory levels have been worked off and prices bottomed. As such, the outlook for the industry has improved with producers putting through price increases for fourth quarter shipments and production increasing in mid Q4. The sector underperformer continues to be the pulp and paper stocks due to a slower than expected turnaround, as fundamentals remain hampered by high production levels and declining prices.

While we are retaining our Market Weight position for the sector, we remain committed to the metals and mining stocks in particular due to their earnings and cash flow potential, coupled with improving shareholder value. Following a great Q2, earnings should continue to gain momentum if companies are able to manage inflationary pressures from higher raw material, fuel costs, and production costs, supported by high commodity prices.

Standard & Poors forecasts the pace of growth in operating earnings for the sector to drop sequentially, but still produce a healthy 4.6% y/y rise in the third quarter. For the full year, the Materials sector is expected to generate 22% operating earnings growth, revised up from 19.6% back in April - still well above the market at 11.8%. The sector trades at a price to earnings multiple of 13.9x, right on the heels of the Financial sector at 13.2x, and it, too, offers an attractive dividend yield of 2.19%. ---Kimberly DuBord, Briefing.com

11:12AM Lowe's (LOW)

64.70 -0.49: Supported by favorable demographic trends and a robust housing market, Lowe's, the world's second largest home improvement retailer, posted strong second quarter results - topping analysts' expectations - and updated its outlook for the full year. The North Carolina-based company reported sales of $11.9 billion for the 3-month period, a 17.3% increase from $10.2 billion last year, with same-store sales up 6.5%. Comparable sales figures exceeded the original guidance of an increase of 4% to 6%, driven by the company's purported Big 3 sales initiatives in the areas of installations, special orders, and commercial business customers. Further contributing to the strong sales trends, Lowe's opened 27 new stores during the quarter, bringing its total to 1,138 stores in 49 states.

Meanwhile, gross margin improved by roughly 50 basis points, as net earnings increased to $838 million, or $1.05 per share, compared to $700 million, or $0.87 per share, in the same quarter last year. The results eclipsed the consensus estimate for earnings of $1.02 per share and revenue of $11.8 billion.

Looking ahead, Lowe's expects sales to increase approximately 16% year/year, with a comparable sales gain of 4% to 6%. The company further expects earnings to be in the range of $0.76 to $0.78 per share with operating margin improving by about 10 basis points. According to Reuters Estimates, analysts had projected third quarter sales of $10.5 billion and EPS of $0.76.

The company's full year financial forecast includes earnings between $3.31 to $3.37 per share and a 17% increase in revenue - better than the Wall Street EPS estimate of $3.29 per share on revenue of $42.5 billion. Furthermore, Lowe's anticipates a comparable store sales increase of 5% and operating margin improvement between 20 to 30 basis points.

Despite interest rate pressures stemming from constant increases in short term rates, Lowe's surpassed expectations for the second quarter as it capitalized on favorable trends in the housing market. With relatively low rates on the 30-year mortgage continuing to rouse new home sales and refinancing activities, Lowe's and rival do-it-yourself-retailer, Home Depot (HD), which is slated to report quarterly results on Tuesday, have largely benefited from the home improvement craze. However, as interest rates continue to ascend and accelerating housing trends begin to slow, Lowe's and other interest rate sensitive retailers should feel increasing earnings pressure.

In the meantime, Lowe's strong second quarter results and favorable sales trends should continue to drive near-term momentum. The stock has climbed nearly 40% in the past year and is well suited to advance further, with shares trading at a multiple of 19.6x the FY06 EPS estimate of $3.29 and a PEG ratio of 0.94. However, investors should keep in mind that while Lowe's remains positioned to capitalize on strong housing and demographic trends, it is only a matter of time before rising interest rates begin to afflict greater pressure. --Richard Jahnke, Briefing.com

11:07AM Sysco (SYY)

34.81 +0.76: The number one food service marketing and distribution company faced a challenging year as food inflation and fuel costs cut into organic growth. Sysco has been able to drive it core business in the upper mid-single digits for over the last five years with acquisitions tacking on another 3.5%. Yet, it closed its fiscal year 2005 generating just over one percent organic revenue growth, as price increases failed to offset food and fuel inflationary pressures.

For the fourth quarter, Sysco's profit rose 1.5% to $284.7 mln from last year's period of $280.6 mln. Diluted earnings came in at $0.44 per share, matching the street's expectations. Sysco's numbers were a bit skewed, on a comparable basis, as this year included an extra week. On a comparable basis, fourth quarter sales were $7.98 bln, up 5.5%. Acquisitions accounted for 1% of sales, while food cost inflation, measured by the change in cost of goods sold, was 1.6%. Full year earnings grew 7.3% y/y to $961.5 mln on sales growth of 5.3% to $30.3 bln on a comparable basis.

Broadline is Sysco's largest business segment, accounting for 80% of total sales, and servicing the restaurant and hotel industries. During the fourth quarter, this unit suffered a 4.2% decline in revenues, as higher prices failed to offset higher beef and fuel costs. After the last two years of low double-digit growth, Broadline's full year revenues grew only 1.7% to $24.1 bln, while Sysco's much smaller "Other" segments posted solid double-digit growth.

Slower growth trends are directly linked to fuel costs, as is Sysco's fate. Not only do they impact its operating costs through transportation expenses, but more importantly, the buying habits of its customers. Higher prices at the pump directly impact discretionary spending, causing consumers to dine out less often or to favor lower-cost menu alternatives. Sysco even noted last year that its restaurant customers were exhibiting signs of uncertainty restricting industry growth. Even though food costs are expected to trend lower by the year's end, higher fuel cost effects will restrict the company's top line.

Servicing over 400,000 customers in North America, Sysco continued its strategy to add growth via acquisitions, buying two specialty meat distributors. The acquisitions were completed during the fourth quarter. Sysco targets acquisitions to add 3% per year in sales growth. In terms of profitability, even though gross margins slipped thirteen basis points to 19.34%, Sysco was able to hold operating margins flat at 5.8% as it tightened its belt around expenses. This has been an area of considerable improvement over the past five years. Sysco lowered operating expenses, as a percentage of sales, by 11 basis points y/y to 13.5% in Q4, down from 15% in 2001. The company, which sells and distributes 300,000 products, continues to show considerable leverage in extracting operating performance through internal efficiencies and value-added initiatives for customers, as inflation has remained a headwind over the last two years.

Sysco's stock has taken a hit over the last week in anticipation of the company's earnings release, as the stock has dropped well below its 200-day simple moving average - a key level of support. The market was somewhat relieved with the in-line report, causing a bump up in shares on Monday. The Reuters Estimates consensus is looking for earnings per share of $1.68 for FY06, indicating growth of 12.7% y/y. Sysco noted the effect of expensing stock options would equate to 11-13 cents in earnings for the year. We feel, despite trading at a discount to its historical multiple, that shares are fully valued at the current level of 23.3x considering the costs headwinds and slower growth trajectory. ----Kimberly DuBord, Briefing.com

9:41AM Page One - Choppy Action Possible through Month-End

August is upon us. Earnings season is winding down. There are no major economic releases today. Oil prices are down a bit but still above $66 a barrel. The S&P futures suggest a slightly lower open.

Over 90% of the S&P 500 companies have now reported second quarter earnings. The aggregate increase in operating earnings will be up about 12%. That is well above the 7 1/2% expected as the reports started. It has been a very good quarter.

This week, there are a few major reports left. Retailers dominate the list. Wal-Mart and Home Depot report before the open on Tuesday. Along with the Hewlett-Packard report after the close that day, those are the final reports for the Dow 30 stocks.

The New York Empire State index stayed at a very strong 23.0 for August. This early read on August suggests that manufacturing conditions remain strong. US industrial production is at record levels, and tomorrow morning a 0.5% increase for July is expected. The data this morning suggests that August was another good month as well.

Oil prices are down about $0.35 this morning but still over $66 a barrel. Oil will remain a key focus this week. Another possible key focus will be the CPI and PPI data due tomorrow and Wednesday. These releases are discussed in more detail in this morning's Big Picture column.

Market action may remain choppy through the end of the month with a focus on oil prices and any signs of variance from what have been very bullish economic and inflation data of late. -- Dick Green, Briefing.com

9:29AM United Dominion (UDR) KeyBanc Capital Mkts / McDonald upgrades Hold to BUY. Target $28. KeyBanc upgrades UDR citing the co's strong operating results, future growth potential and their view that its shares are relatively undervalued compared to the multifamily sector in general.
9:29AM Harris (HRS) Lehman Brothers initiates OVERWEIGHT. Target $41. Lehman initiates HRS as they believe defense will continue growing for several years, and likely faster than expectations. Firm has less certainty about commercial businesses, but say the share price attributes little value to these businesses. With earnings likely to grow for several years, they think the stock should do well.

9:27AM Home Prop of NY (HME) KeyBanc Capital Mkts / McDonald downgrades Hold to UNDERWEIGHT. Firm says despite evidence of a secular turnaround appearing throughout the apartment group, the co continues to struggle to match the growth of its peers. They also think the co's exposure to underperforming mkts has hampered results as the co's strategy of shifting its portfolio in greater proportion to the East Coast is coming along slowly.

9:23AM Watsco (WSO) KeyBanc Capital Mkts / McDonald upgrades Hold to BUY. Target $53. KeyBanc upgrades WSO saying they believe weakness in the stock last week was attributable largely to a competitor's note citing predictions of a difficult hurricane season and its potential impact on the co's business, as well as some profit-taking on recent stock strength and a mixed overall mkt.

9:21AM Expedia (EXPE) JP Morgan initiates NEUTRAL. Wachovia downgrades ARLP saying while the the co is well positioned to increase distributions at a five-year CAGR of approximately 20% supported by a strong overall coal mkt, they think this upside is fairly reflected in the current valuation.

9:20AM Alliance Resource (ARLP) Wachovia downgrades Outperform to MKT PERFORM. Wachovia downgrades ARLP saying while the the co is well positioned to increase distributions at a five-year CAGR of approximately 20% supported by a strong overall coal mkt, they think this upside is fairly reflected in the current valuation.

9:18AM Skechers USA (SKX) Wedbush Morgan upgrades Hold to BUY. Target $20. Firm cites the following: 1) recent channel checks and industry contacts show 1H05 momentum is continuing into 2H05; 2) their positive reaction to the Spring 2006 line, which could drive solid top line growth in 2006 across distribution channels; 3) a return to low-double-digit operating margins; 4) the potential for accelerated retail store openings in 2006; and 5) the potential for the co to broaden its consumer appeal based on its new spokesperson and American Idol winner, Carrie Underwood.

9:18AM Power-One (PWER) Am Tech/JSA Research downgrades Buy to HOLD. Target $5.5. Amtech downgrades PWER cuts their ests below consensus. Firm's checks indicate that PWER is in the midst of losing significant dollar content per line card at CSCO, its largest customer, creating short-term and longer term risk to revenue growth. Firm also believes LLTC is benefiting from the shift to an intermediate bus architecture from a distributed power architecture. They also think adoption of Z-One could take longer than they had originally anticipated and say the September quarter revenue guidance could be tough.

9:16AM Commercial Capital Bancorp (CCBI) Moors & Cabot upgrades Hold to BUY. Target $20.5. Moors and Cabot upgrades CCBI following the recent pull back in the stock. Firm believes the hiring of a group of employees from Comerica's (CMA) Financial Services Division helps to address CCBI's difficulty in gathering low-cost funding. Firm does not think the recent complaint by CMA or the related temporary restraining order issued by the court will impair the ability of this new group at CCBI to conduct business.

http://biz.yahoo.com/mu/short.html