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Tuesday, September 20, 2005 9:38:00 PM
From Briefing.com: Close Dow -76.11 at 10481.52, S&P -9.68 at 2131.33, Nasdaq -13.93 at 1221.34: Plummeting after traders digested the Fed's 11th consecutive 25 basis point rate hike in 15 months, along with the FOMC's unchanged policy directive that retained the "measured" language that so many participants hoped that Katrina (and now Rita) would have nixed, the market erased early gains more than twice over and shoved each economic sector into the red. Easing prices across the energy complex served as an early bullish catalyst, affording the market some relief after crude jumped a record $4.39/bbl yesterday - a 7% rise that accompanied 12% surges in both gasoline and natural gas. While OPEC's decision to release an additional 2 mln barrels of crude per day (beginning Oct. 1) added to the commodity's early weakness, reports that newly-upgraded Hurricane Rita may further disturb Gulf oil operations injected some fresh buying interest in crude futures, which closed down 1.7% at $66.23/bbl (-$1.16), that effectively pared the indices' gains and roped them into a tight trading range heading into the FOMC's policy announcement at 2:15 ET...
To that end, while another 1/4% rate hike was widely anticipated, retaining the "measured" language this time around, when so many were hoping the Fed may provide a clearer picture as to when the tightening may come to an end, weighed on sentiment and closed every sector near session lows...
Loss of leadership from the influential Financial and Technology sectors negated hopes for a late-day rebound and was mostly responsible for the dismal close. The two sectors, which account for over 35% of the overall market, had together been the source of steam for intraday gains. While Financials ultimately lost 0.5%, its brokerage group clung to a 0.3% gain following a blowout Q3 earnings report from Goldman Sachs (GS 118.05 -0.23). With EPS of $3.25, Goldman surpassed analysts' expectations by $0.90 on $7.29 bln in revenues (consensus $5.8 bln). In the end, though, Goldman's positive impact was trumped by the rate-sensitive sector's response to the FOMC headlines... As for Tech, the sector's -0.6% finish dragged the Nasdaq down with it and further exacerbated the effect of Financial's fall, as reversals in semi, software and hardware offset relative strength in networking...
Utilities, the other rate-sensitive sector, finished 0.5% lower while the S&P's third weightiest sector - Healthcare - lost 0.8% amid across-the-board selling pressure... It was Consumer Discretionary that closed the day in last place, adding a 1.7% loss to its 7.3% year-to-date decline. Homebuilders exerted their influence over the sector, with a 3.3% plunge after disappointing housing data (Aug. housing starts fell 1.3% while building permits tumbled 2.2%) sparked a third straight day of consolidation...
Continued weakness in Retail (-1.8%), worsened by American Eagle's (AEOS 21.89 -3.00) late-day Q3 earnings warning, pushed the sector even deeper into negative territory, leaving Circuit City (CC 16.43 +0.92), which posted better than expected Q2 earnings and upside FY06 guidance, as one of the only components to post a gain. Third-quarter profit warnings from Leggett & Platt (LEG 19.80 -3.00), Brunswick (BC 36.98 -5.52) and Maytag (MYG 18.00 -0.54) also weighed on the sector...
Separately, the Treasury market's reaction to the FOMC announcement lied in stark contrast to the equity market's response. While the 25 basis point hike was no surprise for either market, longer-term bonds liked the idea that the Fed remains on an inflation-busting course. As such, the 30-year note rose 11 ticks and its yield fell to 4.52% while the benchmark 10-year finished at 4.25%, off one tick and well above midday lows... DJTA -0.23, DJUA -0.63, DOT -0.59, Nasdaq 100 -0.49, Russell 2000 -0.94, SOX -0.40, S&P Midcap 400 -0.90, XOI -1.11, NYSE Adv/Dec 1008/2278, Nasdaq Adv/Dec 1225/1796
10:06AM Wet Seal (WTSLA) Brean Murray upgrades Sell to HOLD. Brean Murray upgrades WTSLA saying that while the inherent risks they believe the co faces remain almost wholly intact, the decline in the share price has reduced the relative reward of a Sell rating. Firm also believes that the co should be able to remain a strong comps performer for the next four months. As such, they believe that the potential for further gains in selling WTSLA are somewhat limited in the short term. Firm says the could become positive on the shares if they saw the potential for consistent growth or expansion that would result in an increase in projected earnings potential.
10:04AM Global Industries (GLBL) Hibernia Southcoast Capital reiterates BUY. Target $13 to $18. Firm believes the offshore construction markets are continuing to improve and that firm's previous margin assumptions were too low. Believes GLBL stands to benefit from inspection work (diving), as well as platform and pipeline repair work associated with Hurricane Katrina.
10:03AM M-Systems (FLSH) CE Unterberg Towbin downgrades Buy to MARKET PERFORM. CE Unterberg downgrades FLSH as the stock has reached their $30 tgt. Firm views the U3 initiative as a long term positive, but does not expect any material near term impact from the U3 platform that will increase revenues above what is already factored into their model for the next few qtrs. They believe their model already factors in a strong seasonal ramp for USB flash drives, as well as embedded MDOC for products such as multimedia handsets.
10:02AM National Fuel Gas (NFG) UBS upgrades Neutral to BUY. Target $35 to $40. Firm says NFG enjoys the enviable position of having cash to deploy from the recent sale of its Czech business, while generating growing FCF over the next five years. Firm expects the excess cash flow to be reinvested in: 1) E&P, 2) the Empire Connector, 3) Tuscarora storage interconnection, and also returned to shareholders through dividends increases and share repurchases.
10:01AM Amylin Pharms (AMLN) WR Hambrecht upgrades Hold to BUY. Target $36. Firm cites 1) better-than-expected Byetta adoption with favorable TRx trends; 2) epidemic mkt expansion of Type 2 diabetes with an expected 1 mln more patients growing AMLN's tgt mkt to over 10 mln; and 3) Exubera panel meeting having passed, with approval and launch now expected with initial adoption more likely on Type 1 diabetics looking to replace mealtime injectable insulin and therefor less likely to impact Byetta adoption. Firm's new Byetta sales ests result in their forecast for full year profitability in 2007, one year earlier than their previous expectation.
9:59AM IHOP Corp (IHP) Avondale Partners upgrades Mkt Perform to MKT OUTPERFORM. Target $42 to $50. Firm believes investors should be looking to hold defensive names in the consumer sector that should outperform their peers as consumer confidence wanes and discretionary income shrinks. They believe IHP offers investors an attractive investment opportunity because EPS at IHP are less sensitive to SSS than most restaurant companies, due to its focus on franchising. Furthermore, the co yields strong cash flows and is committed to returning that cash to investors through a generous dividend and share repurchases.
9:58AM Adams Respiratory Therapeutics (ARXT) RBC Capital Mkts reiterates OUTPERFORM. Target $35 to $40. RBC Capital raises their ARXT tgt following the announced launch of Mucinex-D in October, coinciding with the beginning of the 2005/2006 cough, cold and flu season. They say mgmt had previously indicated that the launch would not take place until the early part of calendar 2006. With Mucinex-D now expected to be on the market for the entire peak of 05/06 flu season, firm has increased confidence that the brand will perform better in the 06/07 season as well.
3:55PM American Eagle Outfitters (AEOS)
21.94 -2.95: It was the specialty retailer that seemingly could do no wrong... until today. Citing lower than expected business trends, American Eagle Outfitters, which sells casual clothing for 15 to 25 year olds, cut its Q3 (Oct) EPS outlook to $0.43-0.44 from $0.45-0.46 (consensus $0.47). The revised estimate range still translates to decent EPS growth of 10-13% from the yr-ago period. That doesn't mean much at this juncture, though, because the warning is creating concern that AEOS's growth story is no longer as strong as it used to be. In turn, it is creating concern for the retail sector in general that high gas prices are taking their toll on the consumer.
To be sure, any teenager/young adult having to pay for their own gas and rent is quickly learning that it's more important to get to their job at the mall than it is to buy yet another pair of jeans at the mall. American Eagle didn't attribute its revision to a specific factor, like high gas prices, but it is something that can be inferred in light of warnings from other retailers and the lower income levels of teenagers/young adults, many of whom are confronted with rent payments that are more challenging to make as the cost of gasoline pushes $3.00/gallon.
Not surprisingly, many of American Eagle Outfitters' competitors have come under pressure on the presumption that they, too, are likely to trim earnings expectations. Companies of note in AEOS's niche include Abercrombie & Fitch (ANF 45.97, -2.54), Aeropostale (ARO 21.30, -1.35), Limited (00C 19.70, -0.43), Gap (GPS 17.33, -0.53), Urban Outfitters (URBN 51.43, -2.58), and Pacific Sunwear (PSUN 21.41, -0.85). In reality, though, few retailers have been spared from the AEOS-induced sell-off. Even Polo Ralph Lauren (RL 47.88, -1.97), Gymboree (GYMB 13.50, -0.20), and Ann Taylor (ANN 25.44, -0.81), which cater to an entirely different demographic, have encountered increased selling pressure following the AEOS warning.
As for AEOS, it indicated that store traffic has been inconsistent in September (and it didn't blame Hurricane Katrina for that), but that overall traffic month-to-date is still slightly positive at the 240 stores where traffic comps are measured. Altogether AEOS has 784 stores in the U.S., District of Columbia and Puerto Rico, and 71 stores in Canada. Through September 19, comp-store sales are up approximately 11%. That compares to a gain of 22.7% in consolidated comparable store sales in the yr-ago period and an 11.8% increase in August.
At its current level, AEOS trades at approximately 11.0x est. FY05 earnings. It can be reasoned, then, that the response to the warning is overdone and that weakness should be treated as a buying opportunity when taking into account the market's projection that AEOS will deliver 15% EPS growth over the next five years. We would concur that there is value here for the very patient-minded investor. Be that as it may, we'd refrain from committing new money at this time given the pressing concerns about the impact of high gas prices on discretionary spending and the concern, in the wake of today's warning, that the eagle has landed in terms of the company's growth trajectory in the current cycle. --Patrick J. O'Hare, Briefing.com
3:49PM XTO Energy (XTO)
41.39 -0.33: The real story of Katrina is natural gas. Before the hurricane even reached the shores of the Gulf Coast, the nation was 1 trillion cubic feet (tcf) short of the 3.3 tcf of store gas considered to be sufficient supply for the winter, according to the US Energy Dept. Then Katrina hit, taking out 24% of the US Gulf of Mexico ("GOM") production.
Natural gas prices have skyrocketed 105% since this time last year. With most of the news media focused on the reaction in the crude markets to Katrina, what they have been missing is the longer-term gas story. As the hurricane crossed the Gulf, forcing companies to cease production, oil made its biggest gain in 29 months, closing at $67.74 per barrel. Prices crossed the $70 level as the storm reached the coast - up 4.6% over the initial four day period. With the announcement that SPR loans would be available, crude prices started to drop. Meanwhile, natural gas jumped 17% over the same period to close on Sept 1st at $11.96/MMbtu, but have retained this level over concerns regarding the expected production shortfall caused by the storm. Prices reached another record high ($13.40/MMbtu) on Monday as the seventeenth storm this season, Hurricane Rita, is projected to hit the Texas coast.
Yet, prices had already risen to record highs even before Katrina reared her ugly head. Demand from peak electricity loads over the summer months, as consumers turned up the air trying to combat the heat, made it difficult to achieve typical natural gas injection levels. By the end of the summer natural gas had already moved over $8. It takes something like four times the power to cool than it takes to heat, so it's easy to see how weather played a critical role in where the markets are today. Today roughly 30% of the lost production has been restored, but gas utilities are behind in filling storage caverns ahead of the winter heating season. As of Sept 15th, the EIA reported underground natural gas storage of 2,758 (Bcf) for the lower 48 states. This figure is 3.7% higher than the 5-year average but below stocks from last year of 2,860 (Bcf). Further, the east coast, which is highly energy intensive, is only 1.9% higher than compared to the 5-year average.
So what does all this mean for investors? We are currently Overweight the energy sector as high natural gas and crude prices will drive cash flows and earnings for the sector, and in turn, improve returns and shareholder value for investors. One of our suggested holdings for an active investor, BJ Services (BJS), is an oil services company geared to the North American pressure pumping market. There are other gas heavy-producers that we like, including XTO Energy (XTO), a mid-cap producer, along with small-cap companies Quicksilver Resources (KWK) and Ultra Petroleum (UPL). What all these producers have in common is that they do not have any exposure to the GOM market. We feel the GOM market will continue to benefit from consolidation as large cap producers seek deepwater assets in the area, which was the driving force in Norsk's (NHY) buyout of Spinnaker (SKE). The downside for the GOM market is it's a maturing and rising cost basin. There are many exploratory developments within our borders that offer upside at lower risk.
XTO's strategy is to buy and redevelop maturing fields, mainly onshore in the US. This Fort-Worth, Texas based company has been quite successful in implementing this strategy, increasing production, reserves, and value. It buys properties that have already been owned by large oil companies, which are expected to produce for many years, known as "long-lived properties." XTO increases production through low risk means, generating incremental cash flows creating shareholder value. Given our view that natural gas prices will remain tight, particularly if we have a colder-than-normal winter, XTO is well positioned to reap the rewards with 87% of production being natural gas.
XTO's success is in finding and exploiting properties at a low cost. Achieving production growth without compressing margins is the key to its long-term growth prospects. XTO achieves record margins through lower than industry finding and development costs (F&D), averaging $1.29 this year compared to the industry at $1.72, according to AG Edwards. In sum, XTO is a low-cost, growth-minded US natural gas play. Bernstein estimates XTO can generate 15% organic production growth - 30% including acquisitions - and 24% cash flow over the next four years given its exposure to the Permian, Mid Continent, and Rockies. It also own properties within Barnett Shale - the largest natural gas field in Texas. --Kimberly DuBord, Briefing.com
2:59PM Tempur Pedic Intl. (TPX)
11.98 -4.40: Tempur Pedic International on Monday lowered its fiscal year sales and earnings guidance as a result of attractive auto promotions during July/August, which diverted consumer spending away from mattresses and other big ticket items, as well as the effects of Hurricane Katrina, namely higher fuel prices. The outlook provoked a number of downgrades from Adams Harkness, Citigroup, Goldman Sachs, Piper Jaffray, and Sun Trust Robinson Humphrey on Tuesday. Consequently, shares of Tempur Pedic have slid more than 26% during the regular trading session, scraping a new 52-week low of $11.97. The stock is down approximately 45% year-to-date.
After the close on Monday, Tempur Pedic said it expects net sales of $845 to $855 million, compared with its previous guidance of $880 to $890 million. Net sales at the revised level would be an increase of 23% to 25% from sales of $684.9 million in fiscal 2004.
At the same time, the company expects full year earnings to be in the range of $1.05 to $1.07 per share. This compares to the previous guidance of $1.10 to $1.13 per share and would represent an increase of 28% to 30% from a year earlier. According to Reuters Estimates, analysts had projected earnings of $1.12 on revenue of $885.79 million.
Tempur Pedic also provided an outlook for the current quarter (Q3). The company said, based on an updated review, it expects sales to be between $203 to $207 million, compared to last year's third quarter sales of $181.7 million. Earnings are anticipated to be approximately $0.22 to $0.23 per share - well below the consensus estimate of $0.29 per share.
"Although the revised guidance still reflects significant growth in our net sales and earnings compared to 2004, a number of unanticipated factors have arisen this quarter that have adversely affected our net sales growth, primarily in our U.S. furniture retail channel," commented Chief Executive Officer Robert Trussell, Jr. Specifically, weaker than anticipated demand, slower seasonal trends, and increasing price pressures were cited for the softness in performance.
While management seemingly denounced the impact of competition, the threat of competitive offerings, particularly in areas where the company does not have a presence, concedes the possibility of market share erosion. With lower-priced knock-offs barraging the market, as well as traditional innerspring offerings from Sealy and Serta - both of which have recently introduced foam mattresses - the potential for priced-based competition and subsequent margin compression remains a notable concern. Given that Tempur Pedic is a premium priced company, the resulting pressures could disproportionately affect its growth prospects.
Although the launch of the new lower-priced Original mattress should help the company sustain its market share and remove concerns of competitive price pressures in the near-term, its efforts to undercut the competition has exacerbated concerns about a price war. As the current outlook confirms fears of competitive price pressures, the currently depressed price level does not justify a buying opportunity. Investors should, therefore, sleep on the current investment proposition. --Richard Jahnke, Briefing.com
11:34AM Goldman Sachs (GS)
119.65 +1.37: It's confounding how analysts can misjudge estimates within their own industry, but nevertheless, quarter after quarter investment firms beat consensus estimates by a wide margin. Last week we saw record numbers from Lehman (LEH), with Bear Stearns (BSC) following with a solid quarter of its own. This week it's Goldman and Morgan Stanley's turn to impress. For Goldman, considering the firm has topped the analyst survey by at least 20% over the last seven quarters, the market was anticipating no less this quarter. Goldman came through in spades generating its best quarterly result with record revenues and earnings.
Goldman achieved many records in the third quarter. Earnings for the second largest securities firm by market value rose 84% from last year, driven by investment management and trading. This outclassed profit gains of 74% and 34% at Lehman and Bear, respectively, both of which are more focused on fixed income. Net income rose to $1.62 bln, or $3.25 per share, up from $879 mln or $1.74 last year. These results surpassed Reuters Estimates by a whopping $0.90. On the top line, performance was exceptional. Total revenues rose 51.6% y/y and 10% q/q to $7.29 bln, beating consensus estimates by 25%!
Goldman reaped rewards from soaring energy prices from its commodity trading, along with a hot M&A market. These areas will continue to shine brightly for Goldman. The commodity market is likely to remain volatile, at least for the near-term due to the supply tightness not only in energy, but the metal markets as well. Also Goldman's premier status in investment banking will provide significant opportunities for the firm worldwide for the near and long-term.
The bulk of its revenue and profits are generated within the Trading and Principal Investments segment, which reported an 88% y/y and 80% q/q jump in net revenues to $5.06 bln. Operating in a favorable credit market, FICC (fixed income, currency, and commodities) revenues soared 41% to $2.63 bln, led by credit products, currencies, mortgages, commodities and interest rate products. Higher equity prices and customer-driven activity led equity net revenue up 75% y/y to $1.59 bln. Goldman's principal strategies contributed greatly to the quarter, coupled with its customer franchise businesses. Principal investment recorded net revenues of $843 mln, compared to a loss of $245 mln in the third quarter of 2004 from its holdings in Sumitomo Mitsui Financial Group.
It was no surprise to see strong performance out of its Investment Banking segment considering the active market conditions. Net revenue grew 14% y/y and 25% q/q to $1.02 bln propelled by a 24% y/y gain in investment advisory revenues that was helped by an increase in M&A activity, which grew 24% y/y to $559 mln. Underwriting revenues grew 4% to $456 mln primarily due to debt and investment-grade issuance, offsetting weakness in equity underwriting. Lastly, Asset Management performed well contributing $1.20 bln in revenues, up 28% y/y and 3% q/q, on higher management fees and assets under management, including an impressive $18 bln in net flows.
Pretax margins were a solid 33% as compensation and benefits expenses of $3.64 bln were commensurate with revenues and non-comp costs down as a percentage of revenues. The ratio of compensation and benefits was 50% for the first nine months of the year, consistent with 2004.
We are hard pressed to find any holes in the results, as they were impressive by all standards. Goldman did benefit from a lower share count, buying back 16.3 mln shares at an average price of $106.76 per share, bringing its tally to 43 mln, but the impact was minimal when compared to the significant upside. With total revenue up 52% sequentially, Goldman outperformed its peers and is clearly firing on all cylinders. Particularly impressive were the trading revenues, which set a new record for the quarter, up 61% q/q, excluding principal investments. Goldman continues to outshine, outperform, and outgross its peers. Shares have returned 15.2% for the year compared to the S&P 500 Investment Banking and Brokerage index, up 7.5%. This brings us back to the numbers. Today's results set a new bar for the fourth quarter and the fiscal year. The current Reuters consensus estimate is way too low at $9.70 per share, so look for the Street to react in kind.
The stock is currently trading at 11.6x current earnings compared to its peer group of 12.9x. We feel a premium valuation is more than warranted due to its position in the capital markets and merchant banking segments. For those looking for more of an underachiever in the group, cast your eyes on Morgan Stanley (MWD), whose shares have declined 5% YTD. Wednesday, the largest brokerage house will report its quarterly results with the market looking for a 34% rise in profits. We would expect MWD to put on a good showing considering it's John Mack's debut as Chairman and CEO. ---Kimberly DuBord, Briefing.com
11:12AM Circuit City (CC)
16.38 +0.87: Circuit City on Tuesday reported fiscal second quarter results ahead of analyst expectations, as continued strong demand for plasma televisions and other digital products helped stem a loss from the year ago period. The latest results for the embattled retailer, which has struggled to revitalize its business and reverse declining market share to rival Best Buy (BBY), marks a return to profitability for the first time in five years.
During the second quarter, Circuit City earned $1.3 million, or $0.01, compared to a loss of $11.4 million, or $0.06 per share, a year earlier. Meanwhile, sales increased 7.8% to $2.56 billion from $2.38 billion, reflecting a comparable stores sales gain of 5.1%. Analysts, on average, were expecting a loss of $0.03 per share on revenue of $2.44 billion.
The company benefited from strong same store sales of television sets, led by triple digit growth in flat panel displays. However, growth in television sales, along with gains in digital imaging products, were partially offset by double digit declines in camcorders, DVD players, and digital video services. Nonetheless, the company's video category, which represents 41% of total revenue, delivered a double digit comparable store sales increase for the quarter.
In contrast, the information technology category, which accounts for 34% of sales, produced a single digit comparable store sales decline, driven by waning personal computer hardware sales. Although sales from notebook computers and PC Services remained stalwart, weak sales performance in desktop computers, monitors, and printers helped fuel overall declines in the IT category.
Circuit City's gross margin was 23.9% in the quarter compared with 24.9% a year earlier, falling primarily because of declines in margin rates of PC hardware, projection televisions, and DVD software. In addition, the company said more aggressive implementation of competitive financing offers compared to last year contributed to narrower margins.
As a result of the recent performance, Circuit City updated its outlook for the fiscal year, raising its guidance for total sales growth to 5% to 8% from the previous range of 3% to 6%. Likewise, the company expanded its target range for domestic comparable sales growth to "low to mid-single digit range" from the low-single digits. According to Reuters Estimates, analysts are projecting total sales of $10.95 billion, on top of earnings of $0.61 per share.
In recent years, Circuit City has made strident efforts to reinvigorate its business and focus on profitability. The most important improvements have been more efficient operating procedures, a flatter organizational structure, and better internal communications. However, comparable store sales results and gross margin expansion remained the defining metrics for the company's progress. While the recent performance and upbeat guidance is encouraging and a step in the right direction, investors should remain cautious about current prospects until the company can deliver sustainable results and begin to expand market share.
At current prices, Circuit City trades at about 27x the FY06 EPS estimate of $0.61, compared to 20x for Best Buy. Best Buy remains the market leader in the increasingly competitive electronics retail environment. Circuit City's premium valuation, which is supported by exaggerated near-term prospects, is unwarranted. --Richard Jahnke, Briefing.com
10:43AM Page One - Fed Meeting Amidst a Storm
The Federal Reserve's monetary policy committee will make a statement at about 2:15 ET today. The market is also keeping a close eye on tropical storm Rita.
The market is largely expecting the Fed to raise the fed funds target for the eleventh straight time. This time, however, the expectation is not unanimous. There is some talk that the Fed will not raise rates at this meeting and instead announce a pause to assess the economic impact of hurricane Katrina. That would not alter long-term expectations.
It might prove even more significant if there is any change in the policy statement that suggests the Fed sees the end of the current round of tightening approaching. The market also will be extremely sensitive to any statements about the outlook for inflation. Today's announcement holds the potential for greater volatility compared to recent policy statements.
Meanwhile, tropical storm Rita is moving towards the Gulf. The market is understandably more nervous about this storm than would normally be the case. Any disruption to oil output would be magnified in terms of market impact.
The one area that is surprisingly quiet is in earnings warnings. This morning, trucking company Swift Trans is the only company warning, while Progress Software and Gildan Activewear are raising guidance. These are all small companies, but this still rates as good news.
Expectations are for strong third quarter profit growth of 17% for the S&P 500 companies. The dearth of warnings so far is encouraging.
August housing starts dipped 1.3%to a still strong 2.009 million annual rate. The data is pre-Katrina so not much significance is attached. The market awaits post-Katrina data to assess the economic outlook.
Oil prices are down about $0.90 at $66.50 after a $4 spike yesterday. The market could remain very choppy today with the Fed announcement and the risk from Rita. -- Dick Green, Briefing.com
To that end, while another 1/4% rate hike was widely anticipated, retaining the "measured" language this time around, when so many were hoping the Fed may provide a clearer picture as to when the tightening may come to an end, weighed on sentiment and closed every sector near session lows...
Loss of leadership from the influential Financial and Technology sectors negated hopes for a late-day rebound and was mostly responsible for the dismal close. The two sectors, which account for over 35% of the overall market, had together been the source of steam for intraday gains. While Financials ultimately lost 0.5%, its brokerage group clung to a 0.3% gain following a blowout Q3 earnings report from Goldman Sachs (GS 118.05 -0.23). With EPS of $3.25, Goldman surpassed analysts' expectations by $0.90 on $7.29 bln in revenues (consensus $5.8 bln). In the end, though, Goldman's positive impact was trumped by the rate-sensitive sector's response to the FOMC headlines... As for Tech, the sector's -0.6% finish dragged the Nasdaq down with it and further exacerbated the effect of Financial's fall, as reversals in semi, software and hardware offset relative strength in networking...
Utilities, the other rate-sensitive sector, finished 0.5% lower while the S&P's third weightiest sector - Healthcare - lost 0.8% amid across-the-board selling pressure... It was Consumer Discretionary that closed the day in last place, adding a 1.7% loss to its 7.3% year-to-date decline. Homebuilders exerted their influence over the sector, with a 3.3% plunge after disappointing housing data (Aug. housing starts fell 1.3% while building permits tumbled 2.2%) sparked a third straight day of consolidation...
Continued weakness in Retail (-1.8%), worsened by American Eagle's (AEOS 21.89 -3.00) late-day Q3 earnings warning, pushed the sector even deeper into negative territory, leaving Circuit City (CC 16.43 +0.92), which posted better than expected Q2 earnings and upside FY06 guidance, as one of the only components to post a gain. Third-quarter profit warnings from Leggett & Platt (LEG 19.80 -3.00), Brunswick (BC 36.98 -5.52) and Maytag (MYG 18.00 -0.54) also weighed on the sector...
Separately, the Treasury market's reaction to the FOMC announcement lied in stark contrast to the equity market's response. While the 25 basis point hike was no surprise for either market, longer-term bonds liked the idea that the Fed remains on an inflation-busting course. As such, the 30-year note rose 11 ticks and its yield fell to 4.52% while the benchmark 10-year finished at 4.25%, off one tick and well above midday lows... DJTA -0.23, DJUA -0.63, DOT -0.59, Nasdaq 100 -0.49, Russell 2000 -0.94, SOX -0.40, S&P Midcap 400 -0.90, XOI -1.11, NYSE Adv/Dec 1008/2278, Nasdaq Adv/Dec 1225/1796
10:06AM Wet Seal (WTSLA) Brean Murray upgrades Sell to HOLD. Brean Murray upgrades WTSLA saying that while the inherent risks they believe the co faces remain almost wholly intact, the decline in the share price has reduced the relative reward of a Sell rating. Firm also believes that the co should be able to remain a strong comps performer for the next four months. As such, they believe that the potential for further gains in selling WTSLA are somewhat limited in the short term. Firm says the could become positive on the shares if they saw the potential for consistent growth or expansion that would result in an increase in projected earnings potential.
10:04AM Global Industries (GLBL) Hibernia Southcoast Capital reiterates BUY. Target $13 to $18. Firm believes the offshore construction markets are continuing to improve and that firm's previous margin assumptions were too low. Believes GLBL stands to benefit from inspection work (diving), as well as platform and pipeline repair work associated with Hurricane Katrina.
10:03AM M-Systems (FLSH) CE Unterberg Towbin downgrades Buy to MARKET PERFORM. CE Unterberg downgrades FLSH as the stock has reached their $30 tgt. Firm views the U3 initiative as a long term positive, but does not expect any material near term impact from the U3 platform that will increase revenues above what is already factored into their model for the next few qtrs. They believe their model already factors in a strong seasonal ramp for USB flash drives, as well as embedded MDOC for products such as multimedia handsets.
10:02AM National Fuel Gas (NFG) UBS upgrades Neutral to BUY. Target $35 to $40. Firm says NFG enjoys the enviable position of having cash to deploy from the recent sale of its Czech business, while generating growing FCF over the next five years. Firm expects the excess cash flow to be reinvested in: 1) E&P, 2) the Empire Connector, 3) Tuscarora storage interconnection, and also returned to shareholders through dividends increases and share repurchases.
10:01AM Amylin Pharms (AMLN) WR Hambrecht upgrades Hold to BUY. Target $36. Firm cites 1) better-than-expected Byetta adoption with favorable TRx trends; 2) epidemic mkt expansion of Type 2 diabetes with an expected 1 mln more patients growing AMLN's tgt mkt to over 10 mln; and 3) Exubera panel meeting having passed, with approval and launch now expected with initial adoption more likely on Type 1 diabetics looking to replace mealtime injectable insulin and therefor less likely to impact Byetta adoption. Firm's new Byetta sales ests result in their forecast for full year profitability in 2007, one year earlier than their previous expectation.
9:59AM IHOP Corp (IHP) Avondale Partners upgrades Mkt Perform to MKT OUTPERFORM. Target $42 to $50. Firm believes investors should be looking to hold defensive names in the consumer sector that should outperform their peers as consumer confidence wanes and discretionary income shrinks. They believe IHP offers investors an attractive investment opportunity because EPS at IHP are less sensitive to SSS than most restaurant companies, due to its focus on franchising. Furthermore, the co yields strong cash flows and is committed to returning that cash to investors through a generous dividend and share repurchases.
9:58AM Adams Respiratory Therapeutics (ARXT) RBC Capital Mkts reiterates OUTPERFORM. Target $35 to $40. RBC Capital raises their ARXT tgt following the announced launch of Mucinex-D in October, coinciding with the beginning of the 2005/2006 cough, cold and flu season. They say mgmt had previously indicated that the launch would not take place until the early part of calendar 2006. With Mucinex-D now expected to be on the market for the entire peak of 05/06 flu season, firm has increased confidence that the brand will perform better in the 06/07 season as well.
3:55PM American Eagle Outfitters (AEOS)
21.94 -2.95: It was the specialty retailer that seemingly could do no wrong... until today. Citing lower than expected business trends, American Eagle Outfitters, which sells casual clothing for 15 to 25 year olds, cut its Q3 (Oct) EPS outlook to $0.43-0.44 from $0.45-0.46 (consensus $0.47). The revised estimate range still translates to decent EPS growth of 10-13% from the yr-ago period. That doesn't mean much at this juncture, though, because the warning is creating concern that AEOS's growth story is no longer as strong as it used to be. In turn, it is creating concern for the retail sector in general that high gas prices are taking their toll on the consumer.
To be sure, any teenager/young adult having to pay for their own gas and rent is quickly learning that it's more important to get to their job at the mall than it is to buy yet another pair of jeans at the mall. American Eagle didn't attribute its revision to a specific factor, like high gas prices, but it is something that can be inferred in light of warnings from other retailers and the lower income levels of teenagers/young adults, many of whom are confronted with rent payments that are more challenging to make as the cost of gasoline pushes $3.00/gallon.
Not surprisingly, many of American Eagle Outfitters' competitors have come under pressure on the presumption that they, too, are likely to trim earnings expectations. Companies of note in AEOS's niche include Abercrombie & Fitch (ANF 45.97, -2.54), Aeropostale (ARO 21.30, -1.35), Limited (00C 19.70, -0.43), Gap (GPS 17.33, -0.53), Urban Outfitters (URBN 51.43, -2.58), and Pacific Sunwear (PSUN 21.41, -0.85). In reality, though, few retailers have been spared from the AEOS-induced sell-off. Even Polo Ralph Lauren (RL 47.88, -1.97), Gymboree (GYMB 13.50, -0.20), and Ann Taylor (ANN 25.44, -0.81), which cater to an entirely different demographic, have encountered increased selling pressure following the AEOS warning.
As for AEOS, it indicated that store traffic has been inconsistent in September (and it didn't blame Hurricane Katrina for that), but that overall traffic month-to-date is still slightly positive at the 240 stores where traffic comps are measured. Altogether AEOS has 784 stores in the U.S., District of Columbia and Puerto Rico, and 71 stores in Canada. Through September 19, comp-store sales are up approximately 11%. That compares to a gain of 22.7% in consolidated comparable store sales in the yr-ago period and an 11.8% increase in August.
At its current level, AEOS trades at approximately 11.0x est. FY05 earnings. It can be reasoned, then, that the response to the warning is overdone and that weakness should be treated as a buying opportunity when taking into account the market's projection that AEOS will deliver 15% EPS growth over the next five years. We would concur that there is value here for the very patient-minded investor. Be that as it may, we'd refrain from committing new money at this time given the pressing concerns about the impact of high gas prices on discretionary spending and the concern, in the wake of today's warning, that the eagle has landed in terms of the company's growth trajectory in the current cycle. --Patrick J. O'Hare, Briefing.com
3:49PM XTO Energy (XTO)
41.39 -0.33: The real story of Katrina is natural gas. Before the hurricane even reached the shores of the Gulf Coast, the nation was 1 trillion cubic feet (tcf) short of the 3.3 tcf of store gas considered to be sufficient supply for the winter, according to the US Energy Dept. Then Katrina hit, taking out 24% of the US Gulf of Mexico ("GOM") production.
Natural gas prices have skyrocketed 105% since this time last year. With most of the news media focused on the reaction in the crude markets to Katrina, what they have been missing is the longer-term gas story. As the hurricane crossed the Gulf, forcing companies to cease production, oil made its biggest gain in 29 months, closing at $67.74 per barrel. Prices crossed the $70 level as the storm reached the coast - up 4.6% over the initial four day period. With the announcement that SPR loans would be available, crude prices started to drop. Meanwhile, natural gas jumped 17% over the same period to close on Sept 1st at $11.96/MMbtu, but have retained this level over concerns regarding the expected production shortfall caused by the storm. Prices reached another record high ($13.40/MMbtu) on Monday as the seventeenth storm this season, Hurricane Rita, is projected to hit the Texas coast.
Yet, prices had already risen to record highs even before Katrina reared her ugly head. Demand from peak electricity loads over the summer months, as consumers turned up the air trying to combat the heat, made it difficult to achieve typical natural gas injection levels. By the end of the summer natural gas had already moved over $8. It takes something like four times the power to cool than it takes to heat, so it's easy to see how weather played a critical role in where the markets are today. Today roughly 30% of the lost production has been restored, but gas utilities are behind in filling storage caverns ahead of the winter heating season. As of Sept 15th, the EIA reported underground natural gas storage of 2,758 (Bcf) for the lower 48 states. This figure is 3.7% higher than the 5-year average but below stocks from last year of 2,860 (Bcf). Further, the east coast, which is highly energy intensive, is only 1.9% higher than compared to the 5-year average.
So what does all this mean for investors? We are currently Overweight the energy sector as high natural gas and crude prices will drive cash flows and earnings for the sector, and in turn, improve returns and shareholder value for investors. One of our suggested holdings for an active investor, BJ Services (BJS), is an oil services company geared to the North American pressure pumping market. There are other gas heavy-producers that we like, including XTO Energy (XTO), a mid-cap producer, along with small-cap companies Quicksilver Resources (KWK) and Ultra Petroleum (UPL). What all these producers have in common is that they do not have any exposure to the GOM market. We feel the GOM market will continue to benefit from consolidation as large cap producers seek deepwater assets in the area, which was the driving force in Norsk's (NHY) buyout of Spinnaker (SKE). The downside for the GOM market is it's a maturing and rising cost basin. There are many exploratory developments within our borders that offer upside at lower risk.
XTO's strategy is to buy and redevelop maturing fields, mainly onshore in the US. This Fort-Worth, Texas based company has been quite successful in implementing this strategy, increasing production, reserves, and value. It buys properties that have already been owned by large oil companies, which are expected to produce for many years, known as "long-lived properties." XTO increases production through low risk means, generating incremental cash flows creating shareholder value. Given our view that natural gas prices will remain tight, particularly if we have a colder-than-normal winter, XTO is well positioned to reap the rewards with 87% of production being natural gas.
XTO's success is in finding and exploiting properties at a low cost. Achieving production growth without compressing margins is the key to its long-term growth prospects. XTO achieves record margins through lower than industry finding and development costs (F&D), averaging $1.29 this year compared to the industry at $1.72, according to AG Edwards. In sum, XTO is a low-cost, growth-minded US natural gas play. Bernstein estimates XTO can generate 15% organic production growth - 30% including acquisitions - and 24% cash flow over the next four years given its exposure to the Permian, Mid Continent, and Rockies. It also own properties within Barnett Shale - the largest natural gas field in Texas. --Kimberly DuBord, Briefing.com
2:59PM Tempur Pedic Intl. (TPX)
11.98 -4.40: Tempur Pedic International on Monday lowered its fiscal year sales and earnings guidance as a result of attractive auto promotions during July/August, which diverted consumer spending away from mattresses and other big ticket items, as well as the effects of Hurricane Katrina, namely higher fuel prices. The outlook provoked a number of downgrades from Adams Harkness, Citigroup, Goldman Sachs, Piper Jaffray, and Sun Trust Robinson Humphrey on Tuesday. Consequently, shares of Tempur Pedic have slid more than 26% during the regular trading session, scraping a new 52-week low of $11.97. The stock is down approximately 45% year-to-date.
After the close on Monday, Tempur Pedic said it expects net sales of $845 to $855 million, compared with its previous guidance of $880 to $890 million. Net sales at the revised level would be an increase of 23% to 25% from sales of $684.9 million in fiscal 2004.
At the same time, the company expects full year earnings to be in the range of $1.05 to $1.07 per share. This compares to the previous guidance of $1.10 to $1.13 per share and would represent an increase of 28% to 30% from a year earlier. According to Reuters Estimates, analysts had projected earnings of $1.12 on revenue of $885.79 million.
Tempur Pedic also provided an outlook for the current quarter (Q3). The company said, based on an updated review, it expects sales to be between $203 to $207 million, compared to last year's third quarter sales of $181.7 million. Earnings are anticipated to be approximately $0.22 to $0.23 per share - well below the consensus estimate of $0.29 per share.
"Although the revised guidance still reflects significant growth in our net sales and earnings compared to 2004, a number of unanticipated factors have arisen this quarter that have adversely affected our net sales growth, primarily in our U.S. furniture retail channel," commented Chief Executive Officer Robert Trussell, Jr. Specifically, weaker than anticipated demand, slower seasonal trends, and increasing price pressures were cited for the softness in performance.
While management seemingly denounced the impact of competition, the threat of competitive offerings, particularly in areas where the company does not have a presence, concedes the possibility of market share erosion. With lower-priced knock-offs barraging the market, as well as traditional innerspring offerings from Sealy and Serta - both of which have recently introduced foam mattresses - the potential for priced-based competition and subsequent margin compression remains a notable concern. Given that Tempur Pedic is a premium priced company, the resulting pressures could disproportionately affect its growth prospects.
Although the launch of the new lower-priced Original mattress should help the company sustain its market share and remove concerns of competitive price pressures in the near-term, its efforts to undercut the competition has exacerbated concerns about a price war. As the current outlook confirms fears of competitive price pressures, the currently depressed price level does not justify a buying opportunity. Investors should, therefore, sleep on the current investment proposition. --Richard Jahnke, Briefing.com
11:34AM Goldman Sachs (GS)
119.65 +1.37: It's confounding how analysts can misjudge estimates within their own industry, but nevertheless, quarter after quarter investment firms beat consensus estimates by a wide margin. Last week we saw record numbers from Lehman (LEH), with Bear Stearns (BSC) following with a solid quarter of its own. This week it's Goldman and Morgan Stanley's turn to impress. For Goldman, considering the firm has topped the analyst survey by at least 20% over the last seven quarters, the market was anticipating no less this quarter. Goldman came through in spades generating its best quarterly result with record revenues and earnings.
Goldman achieved many records in the third quarter. Earnings for the second largest securities firm by market value rose 84% from last year, driven by investment management and trading. This outclassed profit gains of 74% and 34% at Lehman and Bear, respectively, both of which are more focused on fixed income. Net income rose to $1.62 bln, or $3.25 per share, up from $879 mln or $1.74 last year. These results surpassed Reuters Estimates by a whopping $0.90. On the top line, performance was exceptional. Total revenues rose 51.6% y/y and 10% q/q to $7.29 bln, beating consensus estimates by 25%!
Goldman reaped rewards from soaring energy prices from its commodity trading, along with a hot M&A market. These areas will continue to shine brightly for Goldman. The commodity market is likely to remain volatile, at least for the near-term due to the supply tightness not only in energy, but the metal markets as well. Also Goldman's premier status in investment banking will provide significant opportunities for the firm worldwide for the near and long-term.
The bulk of its revenue and profits are generated within the Trading and Principal Investments segment, which reported an 88% y/y and 80% q/q jump in net revenues to $5.06 bln. Operating in a favorable credit market, FICC (fixed income, currency, and commodities) revenues soared 41% to $2.63 bln, led by credit products, currencies, mortgages, commodities and interest rate products. Higher equity prices and customer-driven activity led equity net revenue up 75% y/y to $1.59 bln. Goldman's principal strategies contributed greatly to the quarter, coupled with its customer franchise businesses. Principal investment recorded net revenues of $843 mln, compared to a loss of $245 mln in the third quarter of 2004 from its holdings in Sumitomo Mitsui Financial Group.
It was no surprise to see strong performance out of its Investment Banking segment considering the active market conditions. Net revenue grew 14% y/y and 25% q/q to $1.02 bln propelled by a 24% y/y gain in investment advisory revenues that was helped by an increase in M&A activity, which grew 24% y/y to $559 mln. Underwriting revenues grew 4% to $456 mln primarily due to debt and investment-grade issuance, offsetting weakness in equity underwriting. Lastly, Asset Management performed well contributing $1.20 bln in revenues, up 28% y/y and 3% q/q, on higher management fees and assets under management, including an impressive $18 bln in net flows.
Pretax margins were a solid 33% as compensation and benefits expenses of $3.64 bln were commensurate with revenues and non-comp costs down as a percentage of revenues. The ratio of compensation and benefits was 50% for the first nine months of the year, consistent with 2004.
We are hard pressed to find any holes in the results, as they were impressive by all standards. Goldman did benefit from a lower share count, buying back 16.3 mln shares at an average price of $106.76 per share, bringing its tally to 43 mln, but the impact was minimal when compared to the significant upside. With total revenue up 52% sequentially, Goldman outperformed its peers and is clearly firing on all cylinders. Particularly impressive were the trading revenues, which set a new record for the quarter, up 61% q/q, excluding principal investments. Goldman continues to outshine, outperform, and outgross its peers. Shares have returned 15.2% for the year compared to the S&P 500 Investment Banking and Brokerage index, up 7.5%. This brings us back to the numbers. Today's results set a new bar for the fourth quarter and the fiscal year. The current Reuters consensus estimate is way too low at $9.70 per share, so look for the Street to react in kind.
The stock is currently trading at 11.6x current earnings compared to its peer group of 12.9x. We feel a premium valuation is more than warranted due to its position in the capital markets and merchant banking segments. For those looking for more of an underachiever in the group, cast your eyes on Morgan Stanley (MWD), whose shares have declined 5% YTD. Wednesday, the largest brokerage house will report its quarterly results with the market looking for a 34% rise in profits. We would expect MWD to put on a good showing considering it's John Mack's debut as Chairman and CEO. ---Kimberly DuBord, Briefing.com
11:12AM Circuit City (CC)
16.38 +0.87: Circuit City on Tuesday reported fiscal second quarter results ahead of analyst expectations, as continued strong demand for plasma televisions and other digital products helped stem a loss from the year ago period. The latest results for the embattled retailer, which has struggled to revitalize its business and reverse declining market share to rival Best Buy (BBY), marks a return to profitability for the first time in five years.
During the second quarter, Circuit City earned $1.3 million, or $0.01, compared to a loss of $11.4 million, or $0.06 per share, a year earlier. Meanwhile, sales increased 7.8% to $2.56 billion from $2.38 billion, reflecting a comparable stores sales gain of 5.1%. Analysts, on average, were expecting a loss of $0.03 per share on revenue of $2.44 billion.
The company benefited from strong same store sales of television sets, led by triple digit growth in flat panel displays. However, growth in television sales, along with gains in digital imaging products, were partially offset by double digit declines in camcorders, DVD players, and digital video services. Nonetheless, the company's video category, which represents 41% of total revenue, delivered a double digit comparable store sales increase for the quarter.
In contrast, the information technology category, which accounts for 34% of sales, produced a single digit comparable store sales decline, driven by waning personal computer hardware sales. Although sales from notebook computers and PC Services remained stalwart, weak sales performance in desktop computers, monitors, and printers helped fuel overall declines in the IT category.
Circuit City's gross margin was 23.9% in the quarter compared with 24.9% a year earlier, falling primarily because of declines in margin rates of PC hardware, projection televisions, and DVD software. In addition, the company said more aggressive implementation of competitive financing offers compared to last year contributed to narrower margins.
As a result of the recent performance, Circuit City updated its outlook for the fiscal year, raising its guidance for total sales growth to 5% to 8% from the previous range of 3% to 6%. Likewise, the company expanded its target range for domestic comparable sales growth to "low to mid-single digit range" from the low-single digits. According to Reuters Estimates, analysts are projecting total sales of $10.95 billion, on top of earnings of $0.61 per share.
In recent years, Circuit City has made strident efforts to reinvigorate its business and focus on profitability. The most important improvements have been more efficient operating procedures, a flatter organizational structure, and better internal communications. However, comparable store sales results and gross margin expansion remained the defining metrics for the company's progress. While the recent performance and upbeat guidance is encouraging and a step in the right direction, investors should remain cautious about current prospects until the company can deliver sustainable results and begin to expand market share.
At current prices, Circuit City trades at about 27x the FY06 EPS estimate of $0.61, compared to 20x for Best Buy. Best Buy remains the market leader in the increasingly competitive electronics retail environment. Circuit City's premium valuation, which is supported by exaggerated near-term prospects, is unwarranted. --Richard Jahnke, Briefing.com
10:43AM Page One - Fed Meeting Amidst a Storm
The Federal Reserve's monetary policy committee will make a statement at about 2:15 ET today. The market is also keeping a close eye on tropical storm Rita.
The market is largely expecting the Fed to raise the fed funds target for the eleventh straight time. This time, however, the expectation is not unanimous. There is some talk that the Fed will not raise rates at this meeting and instead announce a pause to assess the economic impact of hurricane Katrina. That would not alter long-term expectations.
It might prove even more significant if there is any change in the policy statement that suggests the Fed sees the end of the current round of tightening approaching. The market also will be extremely sensitive to any statements about the outlook for inflation. Today's announcement holds the potential for greater volatility compared to recent policy statements.
Meanwhile, tropical storm Rita is moving towards the Gulf. The market is understandably more nervous about this storm than would normally be the case. Any disruption to oil output would be magnified in terms of market impact.
The one area that is surprisingly quiet is in earnings warnings. This morning, trucking company Swift Trans is the only company warning, while Progress Software and Gildan Activewear are raising guidance. These are all small companies, but this still rates as good news.
Expectations are for strong third quarter profit growth of 17% for the S&P 500 companies. The dearth of warnings so far is encouraging.
August housing starts dipped 1.3%to a still strong 2.009 million annual rate. The data is pre-Katrina so not much significance is attached. The market awaits post-Katrina data to assess the economic outlook.
Oil prices are down about $0.90 at $66.50 after a $4 spike yesterday. The market could remain very choppy today with the Fed announcement and the risk from Rita. -- Dick Green, Briefing.com
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