From Briefing.com: Close Dow +12.58 at 10456.21, S&P -0.03 at 1215.66, Nasdaq -5.04 at 2116.42: The market closed right back where it started, paring late-day gains that came with crude's 1.1% pullback and relief in a speech from Fed Chairman Alan Greenspan that largely reiterated prior statements and featured little new information. Stocks spent the majority of the session hovering around both sides of the flat line, bound within a tight trading range after traders swallowed a worse than expected consumer confidence report. While the September read of 86.6 - the lowest level in two years - fell short of economists' expectations (consensus 95.0) and dipped 17.9% from the Aug. report, it had been no real surprise. At the same time, though, the data gave traders another glimpse at Katrina's destruction and perhaps braced them for future reports related to Hurricane Rita... The market's subsequent decline was, however, somewhat minimized by the fact that concerns about the economy's growth prospects related to the devastation from Katrina, and the resulting surge in energy prices, had perhaps been baked into recent market weakness that pulled the three major indices down nearly 2.0% last week...
While the early part of the session lacked any real sector leadership and thus made for a static session, the Consumer Staples and Industrials sectors gained steam post-lunch, chalking respective gains of 0.9% and 0.6%. Their contributions, however, were unable to counter broad-based selling pressure that kept more influential sectors underwater. Energy (+0.1%), challenged by crude oil's ($65.07/bbl -$0.75) slide and an analyst downgrade on ExxonMobil (XOM 64.62 +0.02) that offset an upgrade on Chevron (CVX 64.18 -0.06), Financials (+0.1%), stunted by banks' extended weakness, and Materials (+0.01%) vacillated around the flat line throughout the day. It was the Financial sector's passive stance, coupled with the Tech sector's 0.3% decline, that served as the biggest impediment to upward efforts. To that end, Technology was the heaviest decliner while Health Care's 0.5% decline also kept the indices further in check. The Consumer Discretionary sector also had a poor showing, bogged down by weakness in homebuilders (-0.1%) after a report revealed a 10% decline in Aug. new home sales (to 1237K vs. the 1350K consensus)...
As for the gainers today, Consumer Staples served as the brightest spot, turning in a leading 0.9% gain after an analyst upgrade on Walgreen's (WAG 43.17 +1.67) shares and the Wall Street Journal's coining of Coca-Cola (KO 42.33 -0.04) and Heinz (HNZ 35.75 +0.67) as bargains lent day-long support... The Industrials sector was fueled by soaring Boeing' (BA 66.56 +1.88) shares, as the company attracted considerable follow-through buying interest following yesterday's agreement to end its largest union's strike...
Separately, the Treasury market staged a bit of a recovery, perhaps an indication of Greenspan-related relief, closing the benchmark 10-year note up two ticks and at a 4.28% yield, and spurring a 0.3% gain in the interest-rate sensitive Utilities sector... DJTA +0.05, DJUA +0.41, DOT -0.11, Nasdaq 100 -0.26, Russell 2000 -0.18, SOX -1.23, S&P Midcap 400 -0.10, XOI -0.15, NYSE Adv/Dec 1398/1917, Nasdaq Adv/Dec 1353/1644
12:52PM WellPoint (WLP)
74.92 -0.17: Today WellPoint, the nation's largest health-insurance provider, confirmed plans to merge with WellChoice (WC) for a price tag of $6.5 bln. This equates to $77.23 in cash and stock - almost a 10% premium to WC's closing price on Monday. The transaction is being viewed positively by the market, as its footprint fits within WLP's operations and strategic vision.
WellChoice, along with its subsidiary Empire Blue Cross Blue Shield ("BCBS"), is the largest health insurer in the State of New York with 5 mln customers. WellPoint is clearly looking to leverage Choice's top market position in the NY metro area, which covers 22% of the population. Additionally, it will have exclusive rights to use the Blue Cross and Blue Shield names. According to industry analysts, WLP's strategy is to combine Blue's plans, and WellChoice fits right in due to its ability to write National Accounts Business. According to Bloomberg, BCBS covers one in every three US customers of programs in thirteen states.
For every Choice share WellPoint is offering $38.25 in cash and 0.5191 in WLP stock. WellPoint expects to receive $1.0 bln in cash off WellChoice's balance sheet. This transaction is projected to be neutral to FY06 earnings per share and accretive thereafter. In combination with the deal, WLP increased its share buyback to $1 bln in 2006 after the deal's close.
Consolidation within the managed care industry has been a recurring theme. The main catalyst for providers is growth generation, while leveraging scope to reduce costs. Health care costs will continue to rise as the population ages. As advanced treatment options become more readily available, providers need to manage these medical cost trends. WellPoint is the formulation of Anthem's takeover of the company announced back in the spring of 2004. Other deals include UnitedHealth's (UNH) acquisition of Mid-Atlantic Medical. The WellChoice merger puts WLP face-to-face with UnitedHealth Group's Oxford Health plans - the second largest medical insurer.
WellPoint has a dominant market share position with a top tier brand. Prior to the Anthem merger, WLP said it had provided medical insurance for 28.8 mln Americans, up 77% from a year prior. The WellChoice merger serves many functions ranging from adding market position in NY to the considerable cost synergies it can achieve. Managed care stocks have performed exceptionally well over the last four years, gaining 187% compared to the once beloved Pharmaceuticals which have remained in a steady descent. The reason for the disparity is more attractive growth rates and less risk. This divergence is likely to continue with the group sporting average earnings growth of 17.7% next year. Currently, the managed care group trades at 19.4x - a 22% discount to the HealthCare sector. --Kimberly DuBord, Briefing.com
11:13AM Lennar Corp. (LEN)
56.74 -0.33: Benefiting from continued strength in the homebuilding market - in spite of the Fed's steady rate hikes and disappointing August new home sales (-9.9%) - Lennar on Monday reported third quarter earnings that eclipsed analysts' expectations. The Miami-based homebuilder said it earned $337.3 million, or $2.06 per share, compared with $225.0 million, or $1.36 per share, in same period last year as "new home sales activity continued to point to strong consumer demand." Analyst had expected EPS of $2.02, according to Reuters Estimates. Moreover, with the 10-year Treasury - the benchmark for 30-year mortgages - remaining at historically low levels and underpinning favorable market conditions, Lennar raised its FY05 earnings forecast and offered an upbeat outlook for 2006.
During the third quarter, revenue rose 27.3% year/year to $3.50 billion - beating the consensus estimate of $3.48 billion - with new home deliveries higher across all of the company's regions. Revenue from home sales totalled $3.2 billion, up 30% from a year earlier, primarily due to a 14% increase in the number of home deliveries and increased pricing power. The company closed on 10,503 homes in the period versus the 9,213 homes reported last year. Reflecting that strength and favorable pricing conditions in Arizona, California, Florida, Maryland/Virginia, Nevada, and Texas, gross margin on home sales improved 340 basis points to $846.4 million, or 26.3%. The average sales price for new homes in the period increased 14% to $306,000.
Underpinning Lennar's positive guidance is a robust backlog of $8.1 billion, which represents a 33% increase from the same period last year. "Assuming general economic stability and minimal impact from the recent hurricane activity, our record-level backlog, strong balance sheet and strategic positioning give us confidence in our future outlook," the company said. Accordingly, it increased its FY05 EPS target from $7.80 to $8.10 and directed FY06 earnings guidance to $9.25 per share. This compares with Wall Street's expectations for EPS of $7.94 and $8.88 in FY05 and FY06, respectively.
Even as rising interest rate pressures, increased competition, and recent economic uncertainty - namely from the impact of Hurricane Katrina and Hurricane Rita - continue to weigh on the housing market, positive fundamentals remain largely intact for many larger and more efficient homebuilders. Correspondingly, KB Home (KBH), which reported results last Thursday, trounced Wall Street's estimates with earnings of $2.55 per share on revenue of $2.53 billion. This compares with EPS of $1.42 on revenue of $1.76 billion in the prior year and the consensus estimate of $1.39 per share on $2.50 billion. Expounding on its recent performance, KBH raised its full year outlook as demand and backlog levels continue to show strength.
While low mortgage rates continue to fuel the interest rate sensitive housing market, Lennar and other larger homebuilders are well-positioned to respond to robust housing demand levels. Although the market is likely to slow as rates continue to climb, it is Briefing.com's view that mortgage rates would have to approach the mid/upper 6% level to really constrain the booming housing market. Therefore, solid fundamentals along with favorable business conditions (i.e. historically low interest rates and strong employment levels) continue to highlight Lennar's current growth prospects, as compared to smaller less diverse homebuilders. As rates, along with general economic conditions, remain stable, Lennar should continue to demonstrate outperformance relative to its peers. --Richard Jahnke, Briefing.com
10:06AM Jabil Circuit (JBL)
30.18 -0.19: Jabil Circuit continues to show strong momentum on the top and bottom lines, producing yet again another solid quarter. The EMS company, which manufacturers products for Nokia, Phillips, and Hewlett Packard, generated fourth quarter profit growth of 59%, as sales increased at the fastest rate in over a year.
The company reported net earnings of $70.5 mln, or $0.34 per share. On a comparable basis, excluding non-recurring items, earnings were $76.8 mln, or $0.37 per share - a penny above consensus. On the top line, sales grew an impressive 25% from last year's period and 5% sequentially to $2.04 bln. Gross margins remained steady at 8.4% with EBIT margins widening to 4.2% - a sequential improvement of 40 basis points.
Jabil's customer base reaches into many sectors and industries. For the quarter, Consumer, at 31% of total revenues, played a significant role as the largest industry segment and was driven by the ongoing ramp of new and existing products. Expanding sales of LCDs led growth in Peripherals, which gained 25% this quarter. Automotive (7% of total revs) declined, as production levels fell in the industry due to seasonality. Computing & Storage and Telecom declined 15% while Instrumentation & Medical (IM) grew 10%.
During its conference call, management noted it has not seen any discernable slowdown due to the hurricanes in the Gulf. Speaking to what it thinks will be the strongest industries next year, management highlighted IM, Defense & Aerospace, Consumer, and Computer & Storage. It also sees a shift toward full product development and order fulfillment, particularly in Consumer Electronics, along with full supply chain management of complex production - all trends that fit well into Jabil's strengths.
Jabil has one of the strongest balance sheets in the business, with consistent cash flow generation. Its sales cycle of 17 days - an improvement of three days sequentially - marked the best performance in the company's history. Return on invested capital expanded to 19%, up from 18% last year, and exceeding its weighted cost of capital. Jabil is the only US EMS company with an investment grade rating from all three rating agencies.
For investors looking for a consistent earner with a low risk profile, strong balance sheet, and industry-leading profitability, Jabil certainly fits the bill. The St. Petersburg, Florida-based manufacturer expects to see a repeat performance of 2005 next year, forecasting top line growth of 20% and earnings growth of 25%. It provided full year estimates for the first time, saying it expects to earn $1.55 to $1.65 per diluted share. That forecast is in-line with the current consensus. Net revenue is estimated to be in a range of $8.7 to $9.3 bln.
Jabil, providing an end-to-end solution, is well-positioned to benefit from the increasing outsourcing trend. Performance will be achieved through market share gains and end-market demand, as the company ramps production capacity and capability worldwide to accommodate a plethora of platforms, industries, and sectors. Investors have been rewarded this year as JBL is up 18.7% year-to-date compared to the Technology sector, which is down 3.5%. The stock now trades at 18.9x forward earnings, which we feel is attractive due to its low-risk profile, consistent performance, and strong earnings growth. ---Kimberly DuBord, Briefing.com
8:57AM Page One - Shift in Focus to Strong Earnings Will Help
Stock futures indicate a flat open. This follows modest gains yesterday.
We had expected the S&P 500 index to reverse more of last week's decline than the meager 0.34 point gain it ultimately managed. After all, the economic impact from Hurricane Rita clearly will be far less than had been feared.
A rebound in oil prices during the day kept the market in check. The $1.63 rise to $65.82 a barrel still left oil well below the levels after Katrina hit, however, and there is now talk that prices have topped. The market still could have performed better.
Yet, the outlook for stocks remains good. A shift in focus to the fact that earnings growth remains surprisingly good will help. Earnings season doesn't start up until mid-October, but over time the focus will move to third quarter earnings reports. Projections right now call for very strong growth of 18% or more for the S&P 500 companies in aggregate.
There is still the issue of assessing economic and inflation data post-Katrina. That will take a few weeks. The employment report a week from Friday will help; but the national consumer spending, business investment, and industrial production data will actually be more revealing. Those data will show continued growth while payrolls may drop. Our belief is that, over time, the economic data will provide comfort to the stock market that economic growth remains solid.
The inflation numbers will also take some time to assess. CPI and PPI data won't be out until mid-October. Our view on these is also that the market's fears won't be realized and that the data will prove comforting to the market.
There is not much news this morning. Oil is down $0.75 to $65.05 a barrel. There are still surprising few earnings warnings. Jabil, Lennar, Stride Rite, and Pepsi Bottling had good earnings reports.
At 10:00 ET today the Conference Board consumer confidence index will be out. Expect a large decline. The hurricanes will slam confidence, but confidence numbers don't correlate well with spending. Far too much emphasis will be placed on the data.
Our view is that the market might struggle for a few more weeks, but that the fundamentals will support a rally in the fourth quarter. Strong earnings and a recognition that the impact from the hurricanes is less than feared will provide the necessary stimulus. -- Dick Green, Briefing.com
9:46AM IPC Holdings (IPCR) Morgan Stanley upgrades Equal-weight to OVERWEIGHT. Firms also upgrades ACE to Overweight from Equal Weight with a $53 tgt. For IPCR they cite: 1) tighter control of aggregate limits at the co vs. other reinsurers translates into less downside risk; 2) modest multiple expansion from pre-Katrina levels means lower pricing expectations already in the stock; and 3) the co's 2006e ROE is the most highly geared to underwriting changes (i.e., pricing) among stocks they follow. For ACE, they cite: 1) the co has reasonable gearing to underwriting returns and could use any post-storm dislocation to grow opportunistically; 2) multiple expansion from pre-Katrina levels is notable; and 3) and the co has better geographic and product diversification than most other commercial insurers they follow.
9:45AM Cubist Pharma (CBST) Harris Nesbitt downgrades Outperform to NEUTRAL. Firm believes that the run-up in valuation following dalbavancin's regulatory delay last week is excessive given their belief that dalbavancin poses a relatively small competitive threat to Cubicin. Whereas firm believes that Cubicin's strength lies in its robust efficacy against resistant infections, they view dalbavancin's most clearly demonstrated advantage more as one of convenience.
9:44AM Sunstone Hotel Invest. (SHO) Calyon Securities initiates BUY. Target $29. Firm cites several sources of upside to EBITDA and FFO estimates, including better-than-expected RevPAR, improved operating margin, accretive acquisitions, and potential dividend increases. Firm also initiates HPT with a Neutral and $46 tgt.
9:44AM Kona Grill (KONA) Oppenheimer initiates BUY. Target $14. Firm says the co has an aggressive business plan, experienced mgmt, and say unit economics are powered by sales per square foot of $777, among the highest in the industry. They believe this allows the co to have store level operating margins nearing 20%, and creates a cash on cash return in the neighborhood of 50%.
9:42AM Elizabeth Arden (RDEN) Brean Murray initiates STRONG BUY. Target $30. Firm believes current price levels represent a compelling entry point for three short-term reasons and many longer-term reasons. Firm thinks last week's negative pre-announcement by EL reflected co-specific issues and underlined the competitive advantages of the co vs. Lauder, yet the co sold off. Also, they note the co typically outperforms in the months through reported results for the holidays; their detailed channel checks indicate very strong early sales and momentum on its biggest new launch, the fantasy Britney Spears fragrance.
9:23AM Bank of Hawaii (BOH) Sandler O'Neill upgrades Hold to BUY. Target $58 to $55. Firm says that although the pullback in share price is likely more industry related, it is possible that some of the share price weakness is related to BOH's credit exposure to the airline industry, which totaled $114 mln at 6/30/05. BOH noted in its most recent 10-Q that it had $19.3 mln of exposure to "domestic legacy" carriers, which we assume includes some exposure to Delta. They say mgmt has been focused for some time on its air transportation credit exposure, and note that BOH appears very well reserved.
9:21AM Optimal Group (OPMR) Fulcrum initiates BUY. Target $30. Firm sees substantial growth opportunities in online gaming processing and stability in non-gaming processing, coupled with lucrative margins. They note that while the co's non-gaming processing focuses on small and medium-sized merchant acquiring opportunities where the co can exploit its expertise in card-not-present transactions and risk mgmt, they believe the co's true investment appeal rests in the rapidly expanding online gaming-processing segment, where margins are particularly lucrative.
9:19AM Franklin Credit Mngmt (FCMC) Ryan, Beck & Co initiates OUTPERFORM. Target $14. Firm says FCMC is the only public co with a primary focus on the acquisition and resolution of non-performing or non-standard residential mortgages. These loans are generally purchased at a significant discount from face value. Firm believes that the co is well-positioned to benefit from any deterioration in residential credit quality, and notes that FCMC's strategy is similar to the successful model used by Asta Funding (ASFI) in the distressed consumer receivables area. Firm also says FCMC is attractively valued at a discount to peers.
9:18AM Massey Energy (MEE) CSFB downgrades Outperform to NEUTRAL. Firm believes that the combination of yet another downward revision to 2005-06 ests, coupled with the recent share price appreciation, suggests to them that MEE will be hard-pressed to deliver significant share price outperformance relative to its closest U.S. coal peers in the coming 12 months.
9:17AM Openwave (OPWV) Morgan Joseph initiates BUY. Target $25. Firm thinks the co is a leading provider of end-to-end client/server-based wireless infrastructure solutions. They believe accelerating deployments of wireless data services are driving increasing demand for OPWV's software, and say the co leads the emerging MVNO market.
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