Sector Investing

[ReturntoSender]

From Briefing.com: 4:07PM Standard Micro beats by $0.07, ex items; guides above consensus (SMSC) :Reports Q2 (Aug) earnings of $0.25 per share, excluding non-recurring items, $0.07 better than the Reuters Estimates consensus of $0.18; revenues rose 57.7% year/year to $79.1 mln vs the $75.6 mln consensus. Co issues upside guidance for Q3, sees EPS of $0.31-0.37, ex items vs. $0.21 consensus; sees Q3 revs of $81-86 mln vs. $77.08 mln consensus.

Close Dow -103.49 at 10378.03, S&P -11.14 at 1210.20, Nasdaq -26.69 at 2106.64: The equity market spent the session underwater, retaining the bearish bias that the FOMC, with its 11th consecutive 25 basis point rate hike and unchanged policy directive, triggered yesterday afternoon and that a strengthening Hurricane Rita exacerbated today...
Rita's reported Texas-bound path, and the possible disruption/damage to refining operations and offshore platforms, roiled a Katrina-shaken market that fears further oil supply disruptions. .. Accordingly, crude futures gained as much as 3% in the early going before slipping back on speculation Rita might veer far enough south to spare Texas' refining facilities... On a related note, the EIA's weekly inventory report indicated gasoline and distillate supplies unexpectedly rose while crude oil inventories unexpectedly fell (by 323K barrels vs. analysts' estimate of a 1.0 mln bbl rise)... To say the least, it was a busy day in the energy pits and in the trading of energy stocks, which comprised the stock market's only winning sector...Since traders had no economic data with which to contend today, rising crude prices sat center stage...

While the commodity closed off of its session highs, it booked a 1.0% increase with its $66.90/bbl finish, spurring the Energy's sector's (+1.2%) gain... The remaining sectors all finished with a loss... The lack of leadership and several profit warnings from a variety of companies spanning several sectors underpinned today's cautious tone... To that end, The New York Times (NYT 30.00 -2.13), Avon Products (AVP 27.01 -3.59), Jack In the Box (JBX 27.65 -5.87), and Diebold (DBD 37.35 -7.02) were among the companies cutting earnings expectations...

On the flip side, FedEx (FDX 83.10 +6.10) and Morgan Stanley (MWD 52.01 -0.39) delivered reassuring earnings news, but ultimately, their good fortune wasn't enough to shift the bearish tide... Financials, after languishing all day, finished with a loss of 1.5%, leaving it as the worst performing sector... Banks, which dropped 1.4%, led the retreat as a flattening yield curve prompted selling interest... Technology also spent the day in the red, unable to benefit from increased fiscal Q4 guidance from Qualcomm (QCOM 43.81 +0.39) and a Merrill Lynch upgrade of Intel (INTC 24.51 +0.03) to Buy from Neutral...

Industrials (-0.6%), while submerged all day, fared better than some sectors, bolstered by an upgrade of Southwest Airlines (LUV 14.22 +0.14) at JP Morgan and the gain in FedEx... The Dow Jones Transportation Average rose 0.4% today... The Treasury market, meanwhile, endured a very different day. While the benchmark 10-year note jumped 17 ticks, lowering its yield to 4.18%, the 30-year note rose 34 ticks, and its yield dropped to 4.46%. Strength at the inflation sensitive, back-end part of the curve, on the heels of the Fed's rate decision, reflects traders' belief that the Fed will remain vigilant with its inflation-fighting policy so that long-term inflation expectations will remain contained...DJTA +0.44, DJUA -1.28, DOT -0.57, Nasdaq 100 -1.04, Russell 2000 -1.48, SOX -1.74, S&P Midcap 400 -2.18, XOI +0.52, NYSE Adv/Dec 1118/2175, Nasdaq Adv/Dec 774/2280

12:11PM Semiconductors Hldrs Trust probing gap support (SMH) 35.83 -0.44: -Technical- The SMH is down for the sixth session in a row with it currently probing support at its early July gap between 35.82 and 35.61. Its June reaction high is in the same neighborhood at 35.62-- session low 35.76.

8:31AM Qualcomm raises Q4 rev and EPS guidance (QCOM) 43.42 :Based on the current business outlook, co now expects Q4 pro forma EPS of $0.32-0.33 vs $0.30 consensus; expects revs of $1.48-$1.58 bln vs $1.49 bln consensus. Co sees FY05 EPS of $1.16-$1.17 vs $1.15 consensus, revs of $5.6-5.7 bln vs $5.6 mln consensus. This estimate is based on the shipment of approximately 40 mln MSM phone chips during the quarter compared to 39 mln in the year ago quarter. QCOM previously anticipated Q4 pro forma EPS of approximately $0.29-$0.31 and estimated shipments of approximately 38-40 mln MSM phone chips. They estimate June quarter shipments of approximately 48 mln CDMA and WCDMA units at an average selling price of approximately $213 compared to prior estimate of approximately 43-45 mln units at an average selling price of approximately $215. QCOM pro forma earnings estimate for the Q4 includes $0.02 reduction in EPS for $35 mln of additional tax expense for fiscal 2005, and $0.01 increase in EPS for $18 mlnn of investment income related to the expiration of a put option sold in connection with their stock repurchase program which expired in Sept 2005.

3:20PM AutoZone (AZO)
85.72 -4.55: Shares of AutoZone slipped more than 6% on Wednesday after the auto-parts retailer reported fourth quarter profits below analyst expectations, as margins were squeezed by increased operating costs. The Memphis, Tennessee-based company, whose largest shareholder is Edward Lampert - the mastermind behind Kmart's turnaround - earned $206.6 million, or $2.66 per share, in the quarter, compared with $209.4 million, or $2.53 per share, a year ago. However, after considering a discrete income tax benefit of $6 million for the period, EPS amounted to $2.59, versus $2.41 last year, on a comparable basis. Analysts were forecasting earnings of $2.83 per share, according to Reuters Estimates.

AutoZone's EPS upside, on a year/year basis, reflects the benefit of the company's ongoing share repurchase program. During the quarter, it repurchased 1.3 million common shares at an average price of $93 per share, helping to lower average shares outstanding by about 5 million.

Meanwhile, sales climbed a mere 2.5% from the year ago period to $1.88 billion - inline with the consensus estimate. The slightly higher top-line, however, was offset by increased operating expenses as AutoZone invested more aggressively in operations and labor to improve the customer shopping experience. AutoZone said, "We increased training, placed additional focus on improving the appearance of our stores, and we intensified efforts to drive our unique and powerful culture." Operating expenses as a percentage of sales increased to 30% from 29.4% last year. As a result, comparable store sales, or sales for stores open at least one year, were down by 1%, while operating margin decreased 116 basis points to 18.7%.

Additionally, the company said gross profit as a percentage of sales fell to 48.7% in the fourth quarter from 49.2% a year ago. Last year's results reflect the inclusion of $15.5 million of pre-tax gain from warranty credits. Therefore, on a comparable basis, gross margin was 48.7% compared with 48.3% last year. AutoZone's gross margin improvement benefited from the company's ongoing category management initiatives and supply chain enhancements, as well as reduced sales of non-core, lower-margin merchandise. Excluding last year's warranty credit, operating profit was up 0.8%.

AutoZone's fourth quarter results were undoubtedly disappointing, as rising gas prices and aggressive in-store investments have limited the potential upside opportunity. However, as noted by management's comments, the near-term financial impact, namely margin compression, is supported by the long-term goal of maintaining top-line growth and market share as competitive pressures in the industry mount. Notwithstanding gasoline related pressures, which have hindered consumer discretionary spending, particularly for scheduled auto maintenance, AutoZone's weak performance has been largely company-specific in nature.

Although there are number of positive factors that support the current investment opportunity, such as industry-leading sales and market share, declining fundamentals will likely limit stock performance. While competitors move to narrow the sales gap, AutoZone continues to experience weakening comps. As such, given the slowing sales growth due to competitive pressures and shrinking margins, as well as the near-term implications of rising gas prices, an investment at this juncture is unwarranted. Investors should remain on the sidelines until the company's efforts to improve merchandising and customer service are more clearly presented. --Richard Jahnke, Briefing.com

1:19PM Morgan Stanley (MWD)

52.13 -0.27: The Mack is back. This was the first quarter for new CEO and Chairman John Mack, who took over the helm in June replacing Phil Purcell. Mack has already made his mark on the company bringing over many of his people from CSFB and reversing course by saying the Discover unit will stay. Going into the quarter, we expected Morgan to get all the bad news out front, which it did. What surprised the market was the strong top line growth Morgan generated this quarter, but it's still early in the game.

Earnings for the largest securities firm by market value dropped 83%, resulting from $1 bln in costs related to the planned sale of its aircraft-leasing unit. Net income fell to $144 mln, or $0.13 per share, from $837 mln, or $0.76 last year. Excluding non-recurring items, MWD earned $1.21 per share - $0.16 better than the consensus estimate. Consolidated revenues grew 29% y/y and 15% sequentially to $6.95 bln. The sequential growth was the result of record performance in Institutional Securities, driven by fixed income and equity business and investment banking.

Under the IS segment, fixed income sales and trading revenues increased 49% q/q, while equities performed modestly, up 14%, compared to its peers with increases of 30%. On the investment banking side, underwriting revenue jumped 35% and M&A fees grew 9% from last quarter. Considering the watershed of executive changes over the last quarter, compensation expense increased exponentially. Morgan's comp ratio for the quarter was 48%, largely due to a whopping $156 mln in severance and new hire expenses.

Revenues within the Retail Brokerage segment grew only 2% and were offset by non-interest expenses. Legal, regulatory, and severance costs weighed on profits. Morgan's sales force reduction plan reduced its broker count by 11% to 9,311. The Investment Management business grew revenues 6%, but was outpaced by higher expenses and negative fund flows. Assets under management grew 3% thanks to market value appreciation. Lastly, Credit Services suffered from rising expenses and credit costs with revenue advancing only 3%.

While we won't say the quarter was a wash, considering a stronger than expected top line, the MWD story is more about the next few quarters. The market will be looking for Mack to "right the ship" so to speak, certainly a challenge in this intense competitive environment, but Mack is well suited for the task. Key areas of interest include expanding its international presence, improving profitability within the Individual Investment segment, and extracting value from the Discover brand. As we stated in our Goldman Sachs Story Stock on Tuesday, investors looking for quality should look to Goldman, but those looking for a turnaround play should look to Morgan.

A key area of growth for both firms is the international capital markets. Both firms have expanded their presence over the last decade, and are now well positioned to leverage the ensuing growth opportunities, particularly in Asia, on the horizon. The recent attempt - albeit a failed one - of Chinese company CNOOC (CEO) to purchase Unocal, is a harbinger of more to come. Merrill Lynch estimates China's capital market fees will grow 3x to $12 bln, anticipating 20% average growth through 2009. ---Kimberly DuBord, Briefing.com

11:24AM Qualcomm (QCOM)

44.36 +0.94: Qualcomm on Wednesday increased its financial guidance for the fourth quarter and fiscal year ending September 25, 2005, citing strong market momentum for high-speed wireless chipsets. The company, which manufactures and licenses advanced wireless technologies, said it is seeing strength across many geographies in shipments of third-generation CDMA handsets. During the June quarter, both CDMA - the mobile standard in North America - and WCDMA handset shipments increased sequentially in most regions of the world.

Based on the current business outlook, Qualcomm expects to earn approximately $0.32 to $0.33 per share on revenue in the range of $1.48 to $1.58 billion, compared with its earlier estimate of $0.29 to $0.31 per share on $1.43 to $1.53 billion in sales. The revised forecast, which includes a $0.02 reduction for additional tax expenses and $0.01 for investment related income, represents an increase in earnings of around 7% to 10% year/year and sales growth of 8% to 15%. On average, analysts had projected EPS of $0.30 on revenue of $1.49 billion.

Conjointly, the company anticipates FY05 earnings of $1.16 to $1.17 per share with revenue between $5.6 and $5.7 billion, versus the consensus estimate for earnings of $1.15 per share and revenue of $5.61 billion. The latest estimate is based on shipments of roughly 40 million MSM, or Mobile Station Modem, chips during the current quarter. This is in comparison to approximately 39 million in the same period last year. Furthermore, the company estimates June quarter shipments of about 48 million CDMA and WCDMA units at an average selling price of $213, compared to its previous estimate of 43 to 45 million units at an average selling price of about $215.

The improvement in handset estimates, as compared to the prior guidance, was attributed to greater CDMA handset shipments in North America, Latin America, and the rest of the world. In addition, the company highlighted the degree of traction that WCDMA chipsets have received from mobile device manufacturers.

As a result of the healthy sales estimates for mobile chipsets, carried by strong momentum in third-generation wireless technology - which promises to provide consumers with many advanced features and new data services - Qualcomm is well positioned to accelerate earnings and drive multiple expansion. The company's demonstrated ability to respond to market trends, as well as improve its handset performance and pricing in an extremely competitive environment, continues to support growth prospects. As the company, and the industry, transitions to 3G technology, its competitive market position and strong fundamentals should afford it a bounty of opportunities looking ahead. At the current price level, Qualcomm trades at approximately 38x trailing earnings, an enticing valuation compared to the average level of 49x over the past five years. --Richard Jahnke, Briefing.com

10:26AM FedEx (FDX)

82.26 +5.26: We argued back in June that investors should remain on the sidelines until FedEx's shares bottomed out. It's now September and shares are still on a downward slope with a new low reached Tuesday of $76.81. This compares to its peak reached in March of $101.87 as concerns over slower economic growth and energy costs have caused a demoralized view toward the stock. Well, this downward trajectory is likely to halt abruptly after FedEx delivered stronger profit gains for the first quarter, driven by freight and express, and punctuated its solid showing by raising its full year guidance.

FedEx reported earnings of $1.10 per share for the first quarter compared to $1.08 in last year's period. The quarter did include a one-time, non-cash charge of $79 mln to adjust for facility leases. Excluding the charge, earnings were $1.25 per share, topping analysts' expectations of $1.17. On the top line, revenues rose 10.5% y/y to $7.71 bln including an increase of 11% in Express, 14% in Ground, and 11% in Freight. Operating income rose 1% to $584 mln as margins contracted 70 basis points from last year to 7.6%. The one-time charge stripped 0.9 percentage points off margins. FDX suffers from seasonal trends, though, with weaker margins in the first and third quarters.

FedEx Express, which accounts for the bulk of the top line, posted a solid quarter as revenues grew 11% to $4.62 bln. Domestic Express (43% of sales) generated a 4% volume increase, with overall revenues up 8% driven by higher fuel charges. Growth within the International Express segment (22% of revs) was slower, with volumes up 6% and overall revenues gaining 13% due to higher fuel charges. FedEx continues to increase its worldwide capacity, launching the first overnight express link between India and China in September as part of its new eastbound around-the-world flight. This route will connect its US hub in Memphis with Europe, India, China and Japan. We were pleased to see improved profitability for Express. Stripping out the charge, operating margins improved 30 basis points to 7%.

The Ground segment faced tough comparisons, but volume was up 4% and revenues jumped 14% to $1.07 bln. Operating margins declined to 12.1% from 13.7% last year amid slower growth and losses from SmartPost, in addition to new technology investments and the opening of three new hubs. Accounting for just over 10% of sales, Freight volume grew modestly (2%), but FDX delivered a strong operating performance with yields up 10% and margins widening to 15.1% from 12.8% last year.

In a statement, FedEx said its operations would be impacted by Hurricane Katrina, although the storm did not have a significant effect in the first quarter. Katrina inflicted damage on facilities in the Gulf Coast, but operations have resumed with the exception of New Orleans. In the quarter, combined daily package volume at FedEx Express and FedEx Ground grew 5% y/y driven by international express, US domestic express, and ground shipments. FDX stated the pricing environment has firmed, but has seen aggressive pricing on an account-by-account basis, which is coming from both DHL and UPS.

The upside momentum was further supported after the company raised its full year guidance to $5.25-5.50 per share, above the current consensus of $5.30. In the second quarter, it forecasts a range of $1.30-1.45, in-line with consensus of $1.35. The great unknown for the company remains energy prices. Management noted its surprise on just how elastic demand has been to this point. It feels it can manage the current pricing environment only if oil remains in the $65-70 range, but anything north becomes "unknown territory."

Given, today's strong results and upside guidance, FDX has found its bottom and will likely gain increased momentum into its seasonally strong quarters, assisted by its bundled product offering and international exposure. The bottom line: FDX delivered in what is a challenging operating environment for all of the transport and freight companies. It now looks to be back on track from what was a disappointing fourth quarter. The stock trades at a forward multiple of 15.6x compared to UPS at 19.6x and at a 28% discount to its 5-year historical average. ---Kimberly DuBord, Briefing.com

8:48AM Page One - Rita Adds to Market Anxiety

The market is paralyzed by Hurricane Rita. That has set a negative tone in what would have been a difficult period in any case. The Fed news yesterday wasn't bad - the negative spin reflects the difficult market conditions.

Rita is a serious issue. It could cause damage and affect oil production and refineries. It is expected to reach land late Friday or Saturday. That means the market may be on edge for the remainder of the week. The effects are likely to prove temporary, just like those of Katrina, but the current uncertainty is troubling.

Even with the understandable nervousness over Rita this would be a difficult time for the market. The end of the calendar quarter is earnings warnings period, and those are picking up.

This morning, Hillenbrand, Avon, Jack in the Box, and Diebold warned. Yesterday, American Eagle warned during market hours and that slammed a number of retailers. The New York Times also warned. There will be more warnings over the next couple of weeks.

The outlook for third quarter earnings reports is actually quite good. Expectations are for aggregate operating earnings for the S&P 500 to rise 17% over the same quarter last year. The good news of actual reports is several weeks away, however.

There was also a piece of good news this morning as Qualcomm raised current quarter guidance for both profits and revenues.

The Fed policy announcement was less significant than the market reaction. The rate hike was expected. The statement said "core inflation has been relatively low in recent months and longer-term inflation expectations remain contained."

That could have been taken positively. But, the market reacted negatively, presumably on concerns that the Fed may not be addressing inflation enough. This after the Fed raised rates and core CPI and PPI are up at about a 1% annual rate the past five months. In any case, that issue is past and the Fed is expected to raise rates at the next meeting as well.

We have long said that the final weeks of a calendar quarter can be treacherous for the stock market. This is now the case. Hurricane Rita only adds to the difficult conditions. However, conditions may look a lot brighter in a couple of weeks, depending on exactly what happens with Rita. The good news is that the market may be setting up for a classic earnings season rally. Those frequently start about half way through earnings reports. Unfortunately, that is about four weeks away. -- Dick Green, Briefing.com

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.