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Friday, September 23, 2005 11:04:04 PM
From Briefing.com: 6:45PM Weekly Wrap: The market was obsessed with hurricane Rita this past week.
There were fears that Rita would further curtail oil output in the Gulf of Mexico and damage oil refineries such that gasoline would become in short supply. It compounded all the fears the Katrina brought.
The obsession dominated the market every day. When the hurricane was upgraded in strength early in the week, the market went down. When it was downgraded late in the week and veered away from major refineries, the market went up.
Tropical storm Rita first hit the market's radar screen on Monday. Oil prices surged over $4 to $67.39 a barrel on news that it would soon turn into a hurricane that could disrupt oil output in the Gulf of Mexico and might be headed towards oil refineries in Texas. The S&P 500 index lost almost 7 points.
The focus shifted a bit to the Federal Reserve on Tuesday, but that provided little comfort. The Fed raised the fed funds rate target another 1/4% to 3 3/4%. That was widely expected. They also stated that they will raise rates at a measured pace, and affirmed that "core inflation has been relatively low in recent months and longer-term inflation expectations remain contained."
That sounds comforting, but the negative tone in the market led to the spin that perhaps the Fed wasn't being aggressive enough in the inflation fight. Underlying fears about Rita were probably more of a reason. The S&P lost 10 points that day.
Wednesday the S&P lost another 11 points. Rita was now a category 5 hurricane with the potential to be extremely devastating. Oil prices were up sharply.
The mood improved on Thursday as Rita veered a bit northward and was downgraded to a category 4 hurricane. That raised hopes that it might steer wide of the major refineries along the Texas coast. The S&P 500 index gained 4 points. Oil prices fell.
On Friday, Rita was downgraded to category 3 and continued to look like its path would take it to areas where it would cause less damage than otherwise. The S&P was flat as the market went into a wait-and-see mode. Oil prices dropped sharply for the second straight day and ended the week at $64.19 a barrel. That was up only $1.19 for the week despite a sharp rise early in the week as Rita gained strength.
There wasn't much other news of note this week. Oracle had a slightly disappointing earnings report. Alcoa warned that current quarter profits would not meet expectations. There were other warnings as well, but not as many as might be expected for this time of the quarter.
There were no economic reports which provided insight on underlying trends. August housing starts dipped, but it falls into the pre-Katrina realm, and is thus not seen as of predictive value. New claims for unemployment were high for the second straight week, but that was due to Katrina. The economic and earnings data was lost amidst the potentially severe impact from Rita.
The outlook for next week depends heavily on how much damage Rita does. If the damage is not severe, the market may rebound significantly. The degree of damage to oil refineries will be very important to the outlook for gasoline prices and thus the economy. The fears may be overdone simply because Katrina had such a large impact. Much more will be known shortly.
Close Dow -2.46 at 10419.59, S&P +0.67 at 1215.29, Nasdaq +6.06 at 2116.84: A Rita-roiled market maintained a wait-and-see stance throughout the session, ultimately finishing in mixed fashion and within a tight, day-long trading range that encircled the flat line. Staging a modest recovery mid-afternoon upon the hurricane's downgrade - to a still-dangerous Category Three - and amid a subsequent decline in energy prices, the market mirrored yesterday's downgrade-induced rebound, but today could not quite sustain gains as uneasy traders began the weekend anticipating Rita's arrival...
With a blank economic calendar and a similarly uneventful earnings docket to steal some attention, the market remained on a session-long Rita watch. Early reports that the hurricane's path veered, eyeing the eastern part of Texas as opposed to the Houston refining region, led to a sell-off across the energy complex (crude closed 3.5% lower to $64.19/bbl) that held throughout the session and fostered some modest bargain hunting action in the wake of 3.1%, 1.8%, and 2.3% declines on the Dow, S&P, and Nasdaq, respectively...
A pair of disappointments on the corporate front, however, further infected the market's sentiment and undercut upward efforts. Alcoa's (AA 24.44 -1.46) Q3 profit warning sent its shares spiraling 5.6%, impeded the Dow, and left the Materials sector languishing for most of the day. Although managing to close with a 0.2% gain, the sector remained one of the session's laggards, second only to Energy - which declined 1.7% alongside energy price pullbacks and resulting reasons for profit-taking...
Oracle (ORCL 12.39 -1.13) delivered the second piece of disappointing news. While reporting in-line earnings last night, Wall Street was turned off by lower than expected Q1 (Aug) sales and earnings that reflected decelerating growth of about 2%, which sent shares tumbling 8.4%. Oracle's distress weighed heavily upon the Tech sector, which eventually found support as lifts in Texas Instruments (TXN 33.86 +1.13), Qualcomm (QCOM 44.76 +0.76), and Motorola (MOT 22.79 +0.64) offset ORCL's effect. But hardware's 1.7% decline, largely due to Palm Inc.'s (PALM) disappointing outlook, and software's 0.6% dip ultimately stunted an overall advance...
The Financial sector's 0.3% gain came with rebounds in banks (+0.2%) and brokers (+0.3%), despite a weak Treasury market, and lent muscle to the market; in the end, though, it was too modest to sustain the indices' gains... A particular area of strength today was within Consumer Discretionary (+0.2%). A turnaround in retailers (+0.4%), spurred by a 2.3% surge in Best Buy (BBY 42.91 +0.71) after UBS initiated coverage with a Buy rating and falling gas prices, a better than expected Q1 (Aug) report and a 400% dividend increase from Darden (DRI 29.75 +0.68), Goodyear's (GT 15.49 +0.49) announced turnaround plan, and an analyst upgrade on Delphi (DPH 3.46 +0.34), helped the sector maintain its positive footing throughout most of the session...DJTA +0.35, DJUA +0.18, DOT +0.10, Nasdaq 100 +0.28, Russell 2000 +0.58, SOX +0.79, S&P Midcap 400 +0.41, XOI -1.62, NYSE Adv/Dec 1683/1578, Nasdaq Adv/Dec 1813/1176
6:24AM Semiconductor Manufacturing Intl reports results for six months ended June 30 (SMI) 9.55 :Co announced results for the six months ended June 30, 2005. Sales increased by 29.5% to US$528.3 mln for the six months ended June 30, 2005, from US$407.9 mln for the six months ended June 30, 2004. Wafer shipments increased to 615,411 8-inch wafers equivalent for the six months ended June 30, 2005 from 375,859 8-inch wafers equivalent for the six months ended June 30, 2004.
2:42PM Oracle (ORCL)
12.33 -1.19: Oracle on Thursday reported fiscal first quarter profits, excluding non-recurring items, in-line with analyst expectations, due in part to the $11.1 billion acquisition of PeopleSoft. However, slowing growth in the business software maker's principal database business, combined with a lighter-than-expected revenue forecast for the second quarter, drove shares nearly 9% lower during the regular trading session.
In the midst of ongoing integration challenges stemming from its aggressive acquisition strategy, Oracle posted earnings, ex-items, of $738 million, or $0.14 per share, during the first quarter. This represents a 38% increase from the level of $535 million, or $0.10 per share, earned in the same period last year. On average, analysts had forecast EPS of $0.14 on revenue of $2.94 billion.
On a non-GAAP basis, total revenue increased 31% year/year to $2.91 billion - just shy of the consensus estimate - with total software revenue of $2.13 billion. Database and middleware license sales increased 1% to $502 million, reflecting the slowest growth in almost two years. However, given the 19% growth in the year ago period, CEO Larry Ellison said that growth was consistent with its target of 10%. Meanwhile, the company reported new software license revenue of $629 million. This was below the analysts' target near $694 million and reflects slower growth in new business.
Looking ahead to the second quarter, Oracle said it expects to earn $0.19 per share on revenue in the range of $3.37 to $3.46 billion. While the earnings guidance was in-line with analyst expectations, the company's revenue forecast largely fell below the average estimate of $3.44 bln, according to Reuters Estimates. In addition, the company predicted growth in new software license sales between 21% and 25% for the current quarter. Its full year earnings outlook was reiterated at $0.78 to $0.81 per share on revenue of $14.2 to $14.4 billion, compared to the consensus EPS estimate of $0.80 on $14.4 billion in sales.
With significant shifts taking place in the enterprise software market, Oracle has been rapidly transforming its business to become the dominant provider of enterprise applications. The company has acquired, or announced its plans to acquire, nine companies in the past year, including PeopleSoft and most recently Siebel Systems (This is discussed further in Briefing.com's Story Stocks column on Sep. 12, 2005). Although the acquisitions are intended to expand Oracle's market breadth and bolster performance in the face of stiff competition from the likes of Microsoft (MSFT), SAP (SAP), and IBM (IBM), impending integration issues continue to weigh on the company's near-term prospects. However, given its strong market position and clear strategic focus, the company is well positioned for the long-run. For additional perspective on ORCL, please refer to Briefing.com's Ahead of the Curve column for Sep. 13, 2005 and Sep. 21, 2005. --Richard Jahnke, Briefing.com
12:48PM Phelps Dodge (PD)
118.52 +1.42: As Hurricane Rita nears the Texas and Louisiana borders, copper prices are heading for their biggest weekly gain in more than six years on expectations the rebuilding efforts will drive consumption. Copper prices had already been on a tear even before Katrina and Rita hit the Gulf coast, up over thirty percent year-to-date as demand continued to outpace supply.
The copper market was forecasted to close the year in deficit, as demand from the US and China exceeded global output. Seasonal weakness this quarter has been more than offset by low inventories and supply disruptions, particularly from worker strikes. With new mine restarts and production coming on line in 2006, the market started to focus its attention on next year's easing supply conditions.
Then the hurricane season went into full force, producing two Category 4 hurricanes hitting the US within weeks of one another. Just remember we still have two more months in the hurricane season. The subsequent copper price acceleration currently is all hurricane-related, as the eventual demand from rebuilding these communities will put further pressure on an already tight market.
Copper has diverse benefits and is difficult to substitute, making demand inelastic. It is an excellent conductor of heat and electricity and can be alloyed with other metals. Combine it with zinc and it becomes brass, just add in aluminum or tin and copper transforms into bronze. Copper is a leading indicator of economic growth, as its uses cover many industries including construction, electronics, industrial machinery, transportation, and consumer products.
Friday, copper futures rose $0.50 to $1.715 per pound on the NYMEX. If it holds that level at the close, futures will have gained 8% for the week. Metal traders estimate prices could gain another 5% just from Hurricane Katrina. We need to keep some perspective here as the rebuild will represent a small portion of global demand. Nevertheless, the storms/rebuilding efforts will dictate the price markets for the near-term.
As we stated back in September, after Citigroup called a "top" to the copper markets (clearly a bit premature), we maintain investors should remain long copper stocks, including our suggested holding for active investors, Phelps Dodge (PD). Higher copper and molybdenum prices will generate strong cash flows and earnings for producers with the caveat being high energy prices. Producers also have become more shareholder-friendly returning value back to investors through increasing dividends and share buybacks. PD earned $4.52 per share in Q2 (7/28) and $2.96 in the third quarter of FY04. It will announce third quarter results on October 27th. The current Reuters Estimates consensus is $3.65 per share, but we would expect to see upside due to higher average prices.
Other producers ranked by total production include (Bloomberg symbols): Codelco 1.84 mln metric tons (non public), BHP Billiton (BHP) 1.09 mln tons, Grupo Mexico (GMBXF), 874k tons, Anglo American (AAUK) 766k tons, Rio Tinto (RTP) 753k, KGHM Polska (KGH GR) 550k, Falconbridge (FAL) 491k, and Freeport McMoRan (FCX) at 452k metric tons. ---Kimberly DuBord, Briefing.com
11:18AM 3Com (COMS)
3.85 +0.23: Network equipment maker 3Com reported a wider first quarter loss due largely to charges related to ongoing restructuring efforts, but guided second quarter revenues above analysts' estimate. Net loss for the quarter was $42 million, or $0.11 per share, compared with $36 million, or $0.09 per share, in the same period last year. However, excluding restructuring and other charges, which represents about $0.02 per share, 3Com's loss amounted to $0.09 per share - still a significant amount, despite well-intended efforts to control costs. Analysts had been expecting a loss of $0.11 per share on $173.42 million in revenue, according to Reuters Estimates.
Even though 3Com still lacks profitability, the company saw revenue for the quarter jump 9.4% year/year to $178 million - about flat on a sequential basis. North America sales totaled $69 million, while Europe, Middle East and Africa was $75 million and Latin America was $14 million. Strong growth in North America - 13% sequentially - helped offset softness in other geographic regions, including EMEA, Latin America, and Asia Pacific, which were down 4%, 10%, and 11%, respectively. Meanwhile, on a product and services basis, networking sales, which comprises the bulk of product revenue, totaled $127 million. Although networking revenue was essentially flat with the prior quarter level, sales of products sourced from H-3C, a joint venture with China-based Huawei, experienced strong growth, climbing 85% sequentially. In addition, the company demonstrated progress in the key Voice and Security product groups, which grew 9% and 13%, respectively.
Supported by the recent restructuring program announced in late February and improvements in costs, gross profit margin improved to 39%, as compared to 35% in 4Q05 and 38% in 1Q05. However, high expense levels continue to be a significant obstacle to profitability. Although operating expenses for the latest quarter declined 6% sequentially to $117 million, they were up nearly 20% from the year ago period and remain at exorbitant levels. Sales and marketing, research and development, and general and administrative expenses combined were $110 million, which is down $3 million from 4Q05, but up roughly $16 million from last year. The sequential decline was primarily driven by reduced spending in research and development.
Despite seemingly inadequate cost control efforts, the company was encouraged by its first quarter performance and progress in implementing its strategy. As such, the company offered better than expected revenue guidance for the second quarter. It anticipates revenue to be about $190 million, reflecting continued strong growth in North America, as well as seasonal improvements in EMEA and Latin America. Although the company did not provide an earnings forecast, it said it expects gross profit margin to improve to about 40%. On average, analysts had projected a loss of $0.10 per share on revenue of $180.23 million.
Aside from relative strength in product revenue, particularly from the TippingPoint security business and the strategic partnership with Huawei, 3Com's latest results were marred by high expense levels and a subsequent lack of earnings. While the company has been aggressively trying to reduce costs and reposition itself amidst an extremely competitive business environment, its path to profitability remains unclear. With larger - and profitable - companies such as Cisco (CSCO) and Netgear (NTGR) increasing competitive pressures and extending market share, the challenges ahead will likely only intensify. Therefore, given the ongoing restructuring efforts and heightened competitive pressures, the current risk reward proposition is not well balanced. --Richard Jahnke, Briefing.com
9:30AM Alcoa (AA)
25.90: Alcoa is sixth worst performing stock in the Dow Jones Industrials year-to-date as overcapacity and soaring production costs forged extensive obstacles for the aluminum producer. After Thursday's close, Alcoa hit the market with a downtrodden profit forecast, saying it is getting squeezed by weaker aluminum pricing and higher input costs. The announcement comes only two weeks before Alcoa is scheduled to report its third quarter results.
The company, which moves a quarter of the world's aluminum every day, cited a weaker upstream pricing environment and significant challenges in combating higher energy and raw materials costs. Additionally, on the demand side, seasonal weakness in Europe and in the automotive markets reduced profitability. Alcoa now sees earnings in the range of $0.27-0.31 per share, well below the current consensus of $0.44. This compares to its second quarter earnings of $0.46 per share. We were still surprised to see a wide range in these estimates considering there are only days left in the quarter. The downgrade reflects Alcoa's continuing inability to manage cost pressures despite being in restructuring mode for the last several years.
In its last earnings report, Alcoa was bearing some fruit from its efforts, both in its upstream and downstream operations. It has been rationalizing global operations, closing plants while expanding opportunities in key growth markets, including acquiring new plants in Russia, along with a low-cost alumina refinery in Australia. A key area of weakness restraining the market's view on the aluminum producer is Europe, which continued to be a drag on operations as the markets there remained soft. The hope was that Alcoa, through its restructuring efforts that included significantly reducing overhead, streamlining operations, and increasing productivity, would be able to leverage an improved aluminum market environment.
While prices have reversed course, strengthening from recent lows during the quarter, lower prices still took their toll. Aluminum prices on the London Metal Exchange on a 30-day lagging basis fell $80 per metric ton during the quarter. Additionally, there was a $40 per metric ton decline in the premium for Mid-West delivery. Alcoa also noted Q3 earnings would reflect the temporary closure of its Point Comfort, Texas, alumina refinery and the Lake Charles, LA, anode plants as a result of Hurricane Rita.
The downgrades from Wall Street have already begun with Goldman Sachs lowering its rating on the stock to Underperfrom from In-Line and Prudential moving to Underweight from Neutral Weight and cutting the price target by ten dollars to $20. There will be a slew of downward earnings revisions as the street takes into account lower prices, offline production due to Hurricane Rita, and cost pressures. The revisions will also impact the outlook for Alcan (AL), the Montreal-based producer. We certainly would be a part of this bandwagon as the fundamentals remain pitiable with an eroding supply demand picture and Alcoa's inability to fight off inflationary pressures. ---Kimberly DuBord, Briefing.com
8:40AM Page One - All About Rita
The markets are positioning to anticipate the damage that Hurricane Rita will cause. That assessment is extremely difficult to make. Stock futures are mixed this morning. Energy futures are lower.
Oil prices are down $0.75 this morning to $65.75 a barrel. Global oil prices have been held in check because governmental agencies and OPEC are prepared to increase supply if necessary.
Futures prices on unleaded gasoline are down $0.05 at $1.99 a gallon. Concerns that refinery capacity will be badly hit are apparently far less severe amongst futures traders than among journalists forecasting $5 a gallon gasoline at the pump. The futures are well below the $2.46 that occurred after Hurricane Katrina and caused a quick spike in pump prices.
Energy markets are assuming that the damage from Rita will not be severe.
The stock market bounced back yesterday when Hurricane Rita dropped to a category 4 hurricane and shifted a bit northward. The stock market is also reflecting some optimism this morning simply by holding firm. If Rita is not severely damaging, it is very possible that the stock market also jumps on Monday and recovers some of this week's 2% losses.
Oracle reported earnings in line with expectations but revenues were slightly below Wall Street expectations. In addition, new software license revenue was only $629 million. That was well below forecasts near $694 million. That reflects slower growth in new business for the company. As a result, the stock is indicated to open lower and is a major reason the Nasdaq futures are down (while S&P futures are up a bit).
Palm had a good earnings report but the stock, which has been on a good run, sold off in after hours trading. Darden Restaurants had a good earnings report, as did 3Com. Alcoa, however, warned of lower than expected profits for the current quarter.
There are no economic releases today.
It all comes down to Rita. The hurricane is expected to reach land Saturday morning. The markets will have two days to assess the economic impact. It is extremely hard to judge, but it very well may be that the stock market has built in fears of worse damage than will result. -- Dick Green, Briefing.com
9:42AM Cardiome Pharma (CRME) Rodman & Renshaw initiates MKT OUTPERFORM. Target $10. Firm believes the intravenous RSD1235 is undervalued considering the positive Phase III data. At current prices, they also believe investors are getting a free call option on oral RSD1235, which could be a blockbuster chronic treatment for patients in whom AF has been terminated but who are at continued risk for recurrence. Finally, they believe CRME has shown itself to be a pragmatic business development organization that is committed to steadily adding new product candidates to its pipeline.
9:42AM Reckson Assc Rlty (RA) Lehman Brothers upgrades Equal-weight to OVERWEIGHT. Upgrade based on valuation and the successful execution of several initiatives that will both strengthen the balance sheet and further upgrade the overall asset quality.
9:41AM Oracle (ORCL) Prudential downgrades Overweight to NEUTRAL. Downgrade follows in-line Q1 report and low end of consensus guidance for revs. The firm believes it will be a lengthy process for the co to successfully integrate the 10 acquisitions/investments over the past year to drive rev growth beyond the core database/middleware business. Firm also cuts their ests for FY06 and FY07.
9:40AM Nutrisystem (NTRI) Kaufman Bros initiates BUY. Target $28. Firm believes the co has a huge mkt opportunity and strong value proposition. They say NTRI is in its preliminary stages of growth and has been very successful in communicating its value proposition through various marketing channels. With new products, channels and marketing vehicles, they believe the co has the potential to drive significant penetration and brand awareness.
9:39AM Kohl's (KSS) CSFB upgrades Neutral to OUTPERFORM. Target $55 to $58. Firm says while they remain cautious on the prospects for their broadline retail coverage universe, they believe the recent pullback provides an attractive entry point into a two-fold story of growth and margin expansion.
9:39AM Comtech Telecom (CMTL) Needham & Co downgrades Buy to HOLD. Downgrade follows the co's upside guidance. Firm says they balance the positive fundamentals of CMTL's business and potential for upside with the emergence of some incremental competition in OTH and the IED jammer markets that could mitigate some potential upside, and think the stock's forward P/E of 26x, which is at the high end of the co's historical range, seemingly bakes in much of this potential upside. They would look for either a catalyst for a substantial upward estimate revision (such as a DoD OTH order) or a correction in the shares to revisit their rating.
9:38AM Center Finl (CLFC) Oppenheimer initiates BUY. Target $27. Firm believes: 1) the co is positioned to sustain net interest margins; 2) strong internal capital generation to support balance sheet growth; 3) valuations are attractive given growth outlook; and 4) restatement & MOU are noise. Firm estimates that the co can be worth $30-$34 in a takeout, based on 2-year forward EPS dilution/accretion for scenarios run on their bank merger model.
9:38AM Wilshire Bancorp (WIBC) Oppenheimer initiates BUY. Target $17. Firm believes the co is positioned to manage sustained balance sheet and earnings growth in 2H05 and 2006 as it expands into new markets. They also cite attractive valuation.
9:37AM Ventana Medical (VMSI) Leerink Swann upgrades Mkt Perform to OUTPERFORM. Firm believes the co's core special stains business continues to benefit from attractive pricing, volume, and mix fundamentals. With the recent delay in the launch of the Symphony System (for primary H&E staining) and yesterday's announcement re: Cytologix, two major pieces of overhang have been removed from the stock. They believe that Symphony will prove a successful product, which will serve a valuable unmet need in clinical laboratory automation within primary staining.
9:32AM Lesco, Inc (LSCO) Dougherty & Company initiates BUY. Target $20. Firm believes the co is approaching the end of a multi-year restructuring plan in which under-performing assets have been jettisoned. They believe the co's service center initiatives will introduce a growth driver that has been absent from the co in recent years.
There were fears that Rita would further curtail oil output in the Gulf of Mexico and damage oil refineries such that gasoline would become in short supply. It compounded all the fears the Katrina brought.
The obsession dominated the market every day. When the hurricane was upgraded in strength early in the week, the market went down. When it was downgraded late in the week and veered away from major refineries, the market went up.
Tropical storm Rita first hit the market's radar screen on Monday. Oil prices surged over $4 to $67.39 a barrel on news that it would soon turn into a hurricane that could disrupt oil output in the Gulf of Mexico and might be headed towards oil refineries in Texas. The S&P 500 index lost almost 7 points.
The focus shifted a bit to the Federal Reserve on Tuesday, but that provided little comfort. The Fed raised the fed funds rate target another 1/4% to 3 3/4%. That was widely expected. They also stated that they will raise rates at a measured pace, and affirmed that "core inflation has been relatively low in recent months and longer-term inflation expectations remain contained."
That sounds comforting, but the negative tone in the market led to the spin that perhaps the Fed wasn't being aggressive enough in the inflation fight. Underlying fears about Rita were probably more of a reason. The S&P lost 10 points that day.
Wednesday the S&P lost another 11 points. Rita was now a category 5 hurricane with the potential to be extremely devastating. Oil prices were up sharply.
The mood improved on Thursday as Rita veered a bit northward and was downgraded to a category 4 hurricane. That raised hopes that it might steer wide of the major refineries along the Texas coast. The S&P 500 index gained 4 points. Oil prices fell.
On Friday, Rita was downgraded to category 3 and continued to look like its path would take it to areas where it would cause less damage than otherwise. The S&P was flat as the market went into a wait-and-see mode. Oil prices dropped sharply for the second straight day and ended the week at $64.19 a barrel. That was up only $1.19 for the week despite a sharp rise early in the week as Rita gained strength.
There wasn't much other news of note this week. Oracle had a slightly disappointing earnings report. Alcoa warned that current quarter profits would not meet expectations. There were other warnings as well, but not as many as might be expected for this time of the quarter.
There were no economic reports which provided insight on underlying trends. August housing starts dipped, but it falls into the pre-Katrina realm, and is thus not seen as of predictive value. New claims for unemployment were high for the second straight week, but that was due to Katrina. The economic and earnings data was lost amidst the potentially severe impact from Rita.
The outlook for next week depends heavily on how much damage Rita does. If the damage is not severe, the market may rebound significantly. The degree of damage to oil refineries will be very important to the outlook for gasoline prices and thus the economy. The fears may be overdone simply because Katrina had such a large impact. Much more will be known shortly.
Index Started Week Ended Week Change %Change YTD
DJIA 10641.94 10419.59 -222.35 -2.1 % -3.4 %
Nasdaq 2160.35 2116.84 -43.51 -2.0 % -2.7 %
S&P 500 1236.92 1215.29 -21.63 -1.7 % 0.3 %
Russell 2000 671.98 655.46 -16.52 -2.5 % 0.6 %
Close Dow -2.46 at 10419.59, S&P +0.67 at 1215.29, Nasdaq +6.06 at 2116.84: A Rita-roiled market maintained a wait-and-see stance throughout the session, ultimately finishing in mixed fashion and within a tight, day-long trading range that encircled the flat line. Staging a modest recovery mid-afternoon upon the hurricane's downgrade - to a still-dangerous Category Three - and amid a subsequent decline in energy prices, the market mirrored yesterday's downgrade-induced rebound, but today could not quite sustain gains as uneasy traders began the weekend anticipating Rita's arrival...
With a blank economic calendar and a similarly uneventful earnings docket to steal some attention, the market remained on a session-long Rita watch. Early reports that the hurricane's path veered, eyeing the eastern part of Texas as opposed to the Houston refining region, led to a sell-off across the energy complex (crude closed 3.5% lower to $64.19/bbl) that held throughout the session and fostered some modest bargain hunting action in the wake of 3.1%, 1.8%, and 2.3% declines on the Dow, S&P, and Nasdaq, respectively...
A pair of disappointments on the corporate front, however, further infected the market's sentiment and undercut upward efforts. Alcoa's (AA 24.44 -1.46) Q3 profit warning sent its shares spiraling 5.6%, impeded the Dow, and left the Materials sector languishing for most of the day. Although managing to close with a 0.2% gain, the sector remained one of the session's laggards, second only to Energy - which declined 1.7% alongside energy price pullbacks and resulting reasons for profit-taking...
Oracle (ORCL 12.39 -1.13) delivered the second piece of disappointing news. While reporting in-line earnings last night, Wall Street was turned off by lower than expected Q1 (Aug) sales and earnings that reflected decelerating growth of about 2%, which sent shares tumbling 8.4%. Oracle's distress weighed heavily upon the Tech sector, which eventually found support as lifts in Texas Instruments (TXN 33.86 +1.13), Qualcomm (QCOM 44.76 +0.76), and Motorola (MOT 22.79 +0.64) offset ORCL's effect. But hardware's 1.7% decline, largely due to Palm Inc.'s (PALM) disappointing outlook, and software's 0.6% dip ultimately stunted an overall advance...
The Financial sector's 0.3% gain came with rebounds in banks (+0.2%) and brokers (+0.3%), despite a weak Treasury market, and lent muscle to the market; in the end, though, it was too modest to sustain the indices' gains... A particular area of strength today was within Consumer Discretionary (+0.2%). A turnaround in retailers (+0.4%), spurred by a 2.3% surge in Best Buy (BBY 42.91 +0.71) after UBS initiated coverage with a Buy rating and falling gas prices, a better than expected Q1 (Aug) report and a 400% dividend increase from Darden (DRI 29.75 +0.68), Goodyear's (GT 15.49 +0.49) announced turnaround plan, and an analyst upgrade on Delphi (DPH 3.46 +0.34), helped the sector maintain its positive footing throughout most of the session...DJTA +0.35, DJUA +0.18, DOT +0.10, Nasdaq 100 +0.28, Russell 2000 +0.58, SOX +0.79, S&P Midcap 400 +0.41, XOI -1.62, NYSE Adv/Dec 1683/1578, Nasdaq Adv/Dec 1813/1176
6:24AM Semiconductor Manufacturing Intl reports results for six months ended June 30 (SMI) 9.55 :Co announced results for the six months ended June 30, 2005. Sales increased by 29.5% to US$528.3 mln for the six months ended June 30, 2005, from US$407.9 mln for the six months ended June 30, 2004. Wafer shipments increased to 615,411 8-inch wafers equivalent for the six months ended June 30, 2005 from 375,859 8-inch wafers equivalent for the six months ended June 30, 2004.
2:42PM Oracle (ORCL)
12.33 -1.19: Oracle on Thursday reported fiscal first quarter profits, excluding non-recurring items, in-line with analyst expectations, due in part to the $11.1 billion acquisition of PeopleSoft. However, slowing growth in the business software maker's principal database business, combined with a lighter-than-expected revenue forecast for the second quarter, drove shares nearly 9% lower during the regular trading session.
In the midst of ongoing integration challenges stemming from its aggressive acquisition strategy, Oracle posted earnings, ex-items, of $738 million, or $0.14 per share, during the first quarter. This represents a 38% increase from the level of $535 million, or $0.10 per share, earned in the same period last year. On average, analysts had forecast EPS of $0.14 on revenue of $2.94 billion.
On a non-GAAP basis, total revenue increased 31% year/year to $2.91 billion - just shy of the consensus estimate - with total software revenue of $2.13 billion. Database and middleware license sales increased 1% to $502 million, reflecting the slowest growth in almost two years. However, given the 19% growth in the year ago period, CEO Larry Ellison said that growth was consistent with its target of 10%. Meanwhile, the company reported new software license revenue of $629 million. This was below the analysts' target near $694 million and reflects slower growth in new business.
Looking ahead to the second quarter, Oracle said it expects to earn $0.19 per share on revenue in the range of $3.37 to $3.46 billion. While the earnings guidance was in-line with analyst expectations, the company's revenue forecast largely fell below the average estimate of $3.44 bln, according to Reuters Estimates. In addition, the company predicted growth in new software license sales between 21% and 25% for the current quarter. Its full year earnings outlook was reiterated at $0.78 to $0.81 per share on revenue of $14.2 to $14.4 billion, compared to the consensus EPS estimate of $0.80 on $14.4 billion in sales.
With significant shifts taking place in the enterprise software market, Oracle has been rapidly transforming its business to become the dominant provider of enterprise applications. The company has acquired, or announced its plans to acquire, nine companies in the past year, including PeopleSoft and most recently Siebel Systems (This is discussed further in Briefing.com's Story Stocks column on Sep. 12, 2005). Although the acquisitions are intended to expand Oracle's market breadth and bolster performance in the face of stiff competition from the likes of Microsoft (MSFT), SAP (SAP), and IBM (IBM), impending integration issues continue to weigh on the company's near-term prospects. However, given its strong market position and clear strategic focus, the company is well positioned for the long-run. For additional perspective on ORCL, please refer to Briefing.com's Ahead of the Curve column for Sep. 13, 2005 and Sep. 21, 2005. --Richard Jahnke, Briefing.com
12:48PM Phelps Dodge (PD)
118.52 +1.42: As Hurricane Rita nears the Texas and Louisiana borders, copper prices are heading for their biggest weekly gain in more than six years on expectations the rebuilding efforts will drive consumption. Copper prices had already been on a tear even before Katrina and Rita hit the Gulf coast, up over thirty percent year-to-date as demand continued to outpace supply.
The copper market was forecasted to close the year in deficit, as demand from the US and China exceeded global output. Seasonal weakness this quarter has been more than offset by low inventories and supply disruptions, particularly from worker strikes. With new mine restarts and production coming on line in 2006, the market started to focus its attention on next year's easing supply conditions.
Then the hurricane season went into full force, producing two Category 4 hurricanes hitting the US within weeks of one another. Just remember we still have two more months in the hurricane season. The subsequent copper price acceleration currently is all hurricane-related, as the eventual demand from rebuilding these communities will put further pressure on an already tight market.
Copper has diverse benefits and is difficult to substitute, making demand inelastic. It is an excellent conductor of heat and electricity and can be alloyed with other metals. Combine it with zinc and it becomes brass, just add in aluminum or tin and copper transforms into bronze. Copper is a leading indicator of economic growth, as its uses cover many industries including construction, electronics, industrial machinery, transportation, and consumer products.
Friday, copper futures rose $0.50 to $1.715 per pound on the NYMEX. If it holds that level at the close, futures will have gained 8% for the week. Metal traders estimate prices could gain another 5% just from Hurricane Katrina. We need to keep some perspective here as the rebuild will represent a small portion of global demand. Nevertheless, the storms/rebuilding efforts will dictate the price markets for the near-term.
As we stated back in September, after Citigroup called a "top" to the copper markets (clearly a bit premature), we maintain investors should remain long copper stocks, including our suggested holding for active investors, Phelps Dodge (PD). Higher copper and molybdenum prices will generate strong cash flows and earnings for producers with the caveat being high energy prices. Producers also have become more shareholder-friendly returning value back to investors through increasing dividends and share buybacks. PD earned $4.52 per share in Q2 (7/28) and $2.96 in the third quarter of FY04. It will announce third quarter results on October 27th. The current Reuters Estimates consensus is $3.65 per share, but we would expect to see upside due to higher average prices.
Other producers ranked by total production include (Bloomberg symbols): Codelco 1.84 mln metric tons (non public), BHP Billiton (BHP) 1.09 mln tons, Grupo Mexico (GMBXF), 874k tons, Anglo American (AAUK) 766k tons, Rio Tinto (RTP) 753k, KGHM Polska (KGH GR) 550k, Falconbridge (FAL) 491k, and Freeport McMoRan (FCX) at 452k metric tons. ---Kimberly DuBord, Briefing.com
11:18AM 3Com (COMS)
3.85 +0.23: Network equipment maker 3Com reported a wider first quarter loss due largely to charges related to ongoing restructuring efforts, but guided second quarter revenues above analysts' estimate. Net loss for the quarter was $42 million, or $0.11 per share, compared with $36 million, or $0.09 per share, in the same period last year. However, excluding restructuring and other charges, which represents about $0.02 per share, 3Com's loss amounted to $0.09 per share - still a significant amount, despite well-intended efforts to control costs. Analysts had been expecting a loss of $0.11 per share on $173.42 million in revenue, according to Reuters Estimates.
Even though 3Com still lacks profitability, the company saw revenue for the quarter jump 9.4% year/year to $178 million - about flat on a sequential basis. North America sales totaled $69 million, while Europe, Middle East and Africa was $75 million and Latin America was $14 million. Strong growth in North America - 13% sequentially - helped offset softness in other geographic regions, including EMEA, Latin America, and Asia Pacific, which were down 4%, 10%, and 11%, respectively. Meanwhile, on a product and services basis, networking sales, which comprises the bulk of product revenue, totaled $127 million. Although networking revenue was essentially flat with the prior quarter level, sales of products sourced from H-3C, a joint venture with China-based Huawei, experienced strong growth, climbing 85% sequentially. In addition, the company demonstrated progress in the key Voice and Security product groups, which grew 9% and 13%, respectively.
Supported by the recent restructuring program announced in late February and improvements in costs, gross profit margin improved to 39%, as compared to 35% in 4Q05 and 38% in 1Q05. However, high expense levels continue to be a significant obstacle to profitability. Although operating expenses for the latest quarter declined 6% sequentially to $117 million, they were up nearly 20% from the year ago period and remain at exorbitant levels. Sales and marketing, research and development, and general and administrative expenses combined were $110 million, which is down $3 million from 4Q05, but up roughly $16 million from last year. The sequential decline was primarily driven by reduced spending in research and development.
Despite seemingly inadequate cost control efforts, the company was encouraged by its first quarter performance and progress in implementing its strategy. As such, the company offered better than expected revenue guidance for the second quarter. It anticipates revenue to be about $190 million, reflecting continued strong growth in North America, as well as seasonal improvements in EMEA and Latin America. Although the company did not provide an earnings forecast, it said it expects gross profit margin to improve to about 40%. On average, analysts had projected a loss of $0.10 per share on revenue of $180.23 million.
Aside from relative strength in product revenue, particularly from the TippingPoint security business and the strategic partnership with Huawei, 3Com's latest results were marred by high expense levels and a subsequent lack of earnings. While the company has been aggressively trying to reduce costs and reposition itself amidst an extremely competitive business environment, its path to profitability remains unclear. With larger - and profitable - companies such as Cisco (CSCO) and Netgear (NTGR) increasing competitive pressures and extending market share, the challenges ahead will likely only intensify. Therefore, given the ongoing restructuring efforts and heightened competitive pressures, the current risk reward proposition is not well balanced. --Richard Jahnke, Briefing.com
9:30AM Alcoa (AA)
25.90: Alcoa is sixth worst performing stock in the Dow Jones Industrials year-to-date as overcapacity and soaring production costs forged extensive obstacles for the aluminum producer. After Thursday's close, Alcoa hit the market with a downtrodden profit forecast, saying it is getting squeezed by weaker aluminum pricing and higher input costs. The announcement comes only two weeks before Alcoa is scheduled to report its third quarter results.
The company, which moves a quarter of the world's aluminum every day, cited a weaker upstream pricing environment and significant challenges in combating higher energy and raw materials costs. Additionally, on the demand side, seasonal weakness in Europe and in the automotive markets reduced profitability. Alcoa now sees earnings in the range of $0.27-0.31 per share, well below the current consensus of $0.44. This compares to its second quarter earnings of $0.46 per share. We were still surprised to see a wide range in these estimates considering there are only days left in the quarter. The downgrade reflects Alcoa's continuing inability to manage cost pressures despite being in restructuring mode for the last several years.
In its last earnings report, Alcoa was bearing some fruit from its efforts, both in its upstream and downstream operations. It has been rationalizing global operations, closing plants while expanding opportunities in key growth markets, including acquiring new plants in Russia, along with a low-cost alumina refinery in Australia. A key area of weakness restraining the market's view on the aluminum producer is Europe, which continued to be a drag on operations as the markets there remained soft. The hope was that Alcoa, through its restructuring efforts that included significantly reducing overhead, streamlining operations, and increasing productivity, would be able to leverage an improved aluminum market environment.
While prices have reversed course, strengthening from recent lows during the quarter, lower prices still took their toll. Aluminum prices on the London Metal Exchange on a 30-day lagging basis fell $80 per metric ton during the quarter. Additionally, there was a $40 per metric ton decline in the premium for Mid-West delivery. Alcoa also noted Q3 earnings would reflect the temporary closure of its Point Comfort, Texas, alumina refinery and the Lake Charles, LA, anode plants as a result of Hurricane Rita.
The downgrades from Wall Street have already begun with Goldman Sachs lowering its rating on the stock to Underperfrom from In-Line and Prudential moving to Underweight from Neutral Weight and cutting the price target by ten dollars to $20. There will be a slew of downward earnings revisions as the street takes into account lower prices, offline production due to Hurricane Rita, and cost pressures. The revisions will also impact the outlook for Alcan (AL), the Montreal-based producer. We certainly would be a part of this bandwagon as the fundamentals remain pitiable with an eroding supply demand picture and Alcoa's inability to fight off inflationary pressures. ---Kimberly DuBord, Briefing.com
8:40AM Page One - All About Rita
The markets are positioning to anticipate the damage that Hurricane Rita will cause. That assessment is extremely difficult to make. Stock futures are mixed this morning. Energy futures are lower.
Oil prices are down $0.75 this morning to $65.75 a barrel. Global oil prices have been held in check because governmental agencies and OPEC are prepared to increase supply if necessary.
Futures prices on unleaded gasoline are down $0.05 at $1.99 a gallon. Concerns that refinery capacity will be badly hit are apparently far less severe amongst futures traders than among journalists forecasting $5 a gallon gasoline at the pump. The futures are well below the $2.46 that occurred after Hurricane Katrina and caused a quick spike in pump prices.
Energy markets are assuming that the damage from Rita will not be severe.
The stock market bounced back yesterday when Hurricane Rita dropped to a category 4 hurricane and shifted a bit northward. The stock market is also reflecting some optimism this morning simply by holding firm. If Rita is not severely damaging, it is very possible that the stock market also jumps on Monday and recovers some of this week's 2% losses.
Oracle reported earnings in line with expectations but revenues were slightly below Wall Street expectations. In addition, new software license revenue was only $629 million. That was well below forecasts near $694 million. That reflects slower growth in new business for the company. As a result, the stock is indicated to open lower and is a major reason the Nasdaq futures are down (while S&P futures are up a bit).
Palm had a good earnings report but the stock, which has been on a good run, sold off in after hours trading. Darden Restaurants had a good earnings report, as did 3Com. Alcoa, however, warned of lower than expected profits for the current quarter.
There are no economic releases today.
It all comes down to Rita. The hurricane is expected to reach land Saturday morning. The markets will have two days to assess the economic impact. It is extremely hard to judge, but it very well may be that the stock market has built in fears of worse damage than will result. -- Dick Green, Briefing.com
9:42AM Cardiome Pharma (CRME) Rodman & Renshaw initiates MKT OUTPERFORM. Target $10. Firm believes the intravenous RSD1235 is undervalued considering the positive Phase III data. At current prices, they also believe investors are getting a free call option on oral RSD1235, which could be a blockbuster chronic treatment for patients in whom AF has been terminated but who are at continued risk for recurrence. Finally, they believe CRME has shown itself to be a pragmatic business development organization that is committed to steadily adding new product candidates to its pipeline.
9:42AM Reckson Assc Rlty (RA) Lehman Brothers upgrades Equal-weight to OVERWEIGHT. Upgrade based on valuation and the successful execution of several initiatives that will both strengthen the balance sheet and further upgrade the overall asset quality.
9:41AM Oracle (ORCL) Prudential downgrades Overweight to NEUTRAL. Downgrade follows in-line Q1 report and low end of consensus guidance for revs. The firm believes it will be a lengthy process for the co to successfully integrate the 10 acquisitions/investments over the past year to drive rev growth beyond the core database/middleware business. Firm also cuts their ests for FY06 and FY07.
9:40AM Nutrisystem (NTRI) Kaufman Bros initiates BUY. Target $28. Firm believes the co has a huge mkt opportunity and strong value proposition. They say NTRI is in its preliminary stages of growth and has been very successful in communicating its value proposition through various marketing channels. With new products, channels and marketing vehicles, they believe the co has the potential to drive significant penetration and brand awareness.
9:39AM Kohl's (KSS) CSFB upgrades Neutral to OUTPERFORM. Target $55 to $58. Firm says while they remain cautious on the prospects for their broadline retail coverage universe, they believe the recent pullback provides an attractive entry point into a two-fold story of growth and margin expansion.
9:39AM Comtech Telecom (CMTL) Needham & Co downgrades Buy to HOLD. Downgrade follows the co's upside guidance. Firm says they balance the positive fundamentals of CMTL's business and potential for upside with the emergence of some incremental competition in OTH and the IED jammer markets that could mitigate some potential upside, and think the stock's forward P/E of 26x, which is at the high end of the co's historical range, seemingly bakes in much of this potential upside. They would look for either a catalyst for a substantial upward estimate revision (such as a DoD OTH order) or a correction in the shares to revisit their rating.
9:38AM Center Finl (CLFC) Oppenheimer initiates BUY. Target $27. Firm believes: 1) the co is positioned to sustain net interest margins; 2) strong internal capital generation to support balance sheet growth; 3) valuations are attractive given growth outlook; and 4) restatement & MOU are noise. Firm estimates that the co can be worth $30-$34 in a takeout, based on 2-year forward EPS dilution/accretion for scenarios run on their bank merger model.
9:38AM Wilshire Bancorp (WIBC) Oppenheimer initiates BUY. Target $17. Firm believes the co is positioned to manage sustained balance sheet and earnings growth in 2H05 and 2006 as it expands into new markets. They also cite attractive valuation.
9:37AM Ventana Medical (VMSI) Leerink Swann upgrades Mkt Perform to OUTPERFORM. Firm believes the co's core special stains business continues to benefit from attractive pricing, volume, and mix fundamentals. With the recent delay in the launch of the Symphony System (for primary H&E staining) and yesterday's announcement re: Cytologix, two major pieces of overhang have been removed from the stock. They believe that Symphony will prove a successful product, which will serve a valuable unmet need in clinical laboratory automation within primary staining.
9:32AM Lesco, Inc (LSCO) Dougherty & Company initiates BUY. Target $20. Firm believes the co is approaching the end of a multi-year restructuring plan in which under-performing assets have been jettisoned. They believe the co's service center initiatives will introduce a growth driver that has been absent from the co in recent years.
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