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Sunday, October 02, 2005 8:25:51 PM
From Briefing.com: Week ending 30-Sep-05 : Weekly Recap - The S&P 500 was up every day this week. The market also closed September with a gain. That marks only the thirteenth time in the past thirty-five years that the market has posted a gain for September.
Hurricane Rita was, of course, a significant factor this past week. It hit land over the weekend, but caused far less damage than was feared.
That did not stop concerns about the economic outlook from arising. The obsession this week was on the prospects for consumer spending. There was a lot of talk about the possibility that consumer spending for the upcoming holiday season will be weak because high energy prices will sap consumer spending power. There was also further talk, spurred in part by comments by Federal Reserve Chairman Greenspan, that housing prices may be a bubble that will soon pop. This could curtail consumer spending as well.
The economic data this week provided some justification for these views. August personal spending fell 0.5%, and there may have been a bit of a Katrina impact in that data. But spending had been up a total of 2% in the prior two months, so it is not clear that a new trend is developing.
August new home sales dropped 9%, but that was from a very high level, and August existing home sales were up 2%. Housing trends are leveling off, but are far from plunging.
Energy prices did move higher this past week. Crude oil was up to $66.24 at the end of this week from $64.19 last week. Gasoline and natural gas futures were also higher. That does raise legitimate fears that higher energy prices will curtail consumer spending this winter.
The math on that is not nearly as severe as commonly assumed, however. Energy costs eat up only 6% of consumer spending. That is up about 1% from a year ago. Consumer will have to tighten their belts a bit, but the impact on total GDP growth should be about 1/2% to 1%, much as already assumed. It is not a catastrophic scenario.
That seems to be what the market has concluded. In addition, profit growth trends are improving.
Third quarter earnings will start coming out in a couple of weeks. Expectations are for operating earnings for the S&P 500 in aggregate to post 18% growth for the third quarter. That is very impressive and up from about 12% in the first half of the year.
Supporting the positive earnings outlook is the fact that earnings warnings for the third quarter have been limited. Normally, there are a number of warnings in the final weeks of the calendar quarter. This quarter that was not the case. Journalists may be obsessed with economic pessimism, but companies keep generating more and more profits.
Next week the September employment data will be out on Friday. That may have a big impact on economic expectations. Our view continues to be that the hurricanes and higher energy prices are a clear negative, but not so much as to cut real GDP growth below 3% or to slow profit growth significantly.
The stock market has performed remarkably well given the recent hurricanes and the impact on energy prices. It may very well be setting up for a classic earnings season rally in mid to late October.
SanDisk (SNDK) and Sony (SNE) announce the development of the "Memory Stick Micro" format, an ultra-small IC recording media designed to meet the growing storage needs of highly compact, multifunctional mobile phones...
8:00AM Cisco Systems to acquire Nemo Systems for up $12.5 mln in cash (CSCO) 17.86 :Under the terms of the agreement, Cisco will pay up to $12.5 million in cash for Nemo. The acquisition is subject to various standard closing conditions, including applicable regulatory approvals, and is expected to close in the first quarter of Cisco's fiscal year 2006 ending October 29, 2005.
7:01AM Acacia Research licenses Computer Cache Coherency technology to AMD (ACTG) 5.93 :Acacia Research (ACTG & CBMX) announces that its subsidiary Computer Cache Coherency has entered into a license with Advanced Micro Devices (AMD), covering a portfolio of patents that apply to certain core logic computer chipsets. The license to AMD resolves a patent infringement lawsuit against AMD, which was pending in the District Court for the Northern District of California.
3:30PM Trading Call of the Week -- Amtech's Freedman on Micron
Trading Call of the Week goes to Doug Freedman of AmTech Research, who recommended buying Micron (MU -- $13.41, +$1.22) shares aggressively ahead of the company's better-than expected earnings report, resulting in a nearly 10% gain from when he put out his earnings preview late last week.
Last Thursday, Freedman raised both his EPS and revenue targets on Micron, saying that he believed the company had reduced its inventory levels, and was starting to see stronger growth in its higher margin image sensor and mobile memory markets. He also noted that the stocks short interest had risen in September, which he said could create an increased positive reaction if his call on the company's quarter was correct.
Indeed, Freedman was spot on. Micron reported fiscal Q4 earnings last night of $0.07, which was $0.15 better than the Reuters Estimates consensus of a loss of $0.08. The result was largely driven by higher gross margin, which was 22.4% vs. an 18.8% Street expectation, driven by a 40% increase in sales of image sensors, as well as N.A.N.D. flash memory sales that were five times higher than the prior quarter.
Following his call on Micron, we asked Freedman if there was another chip name that he likes here. He pointed to Freescale Semi (FSL -- $23.45, +$0.00), believing that the stock will be driven short-term by the company's wireless and communications chip businesses, as well as expansion of FSL's gross margins.
Freedman calls FSL somewhat of a defensive play, as he says its not dependent on strong revenue increases to make its numbers. He suggests that the company could post roughly 30% EPS growth in 06 on only 5% revenue growth, due to margin expansion, driven by cost controls namely better management of the company's fabrication assets. He says that the company will still post EPS growth, even if it doesnt add many handset chip customer wins.
One knock on FSL is that the company is still very dependent on Motorola (MOT), which accounts for about 27-28% of total revs, and about 75% of Freescale's wireless chip revenue. Yet Freedman notes that FSL has done a good job retaining that business, recently winning a 3G handset win from MOT that could have gone to Texas Instruments, Qualcomm, or even Ericsson.
And while FSL is not a stellar growth company, management is now rewarding employees with an improved stock bonus program, which should help the company meet its growth targets, Freedman says. He adds that FSL is buying back its own shares to mitigate the dilution to existing holders.
Freedman believes that FSL shares are on their way to $30.
We at Briefing.com note that on a technical basis, we like FSLs chart, and believe that Freedman's price target seems reasonable based on its chart. One strategy would be to wait for a slight pullback on FSL shares, possibly to the $22.60 to $22.80 range, before getting more aggressive with the name, with an eye toward holding to resistance at $26, and possibly beyond Mike Tarsala, mtarsala@briefing.com.
3:29PM Caterpillar (CAT)
58.65 +0.66: The market swept up shares in construction-related stocks as Hurricanes Katrina and Rita blew through the Gulf Coast states in anticipation of the rebuilding effort. Yet, the prevailing winds have shifted towards concerns over a higher cost environment for the manufacturing sector, potentially overshadowing the expected increase in demand. Throughout the year, manufacturers have faced higher raw materials, energy, and transportation costs. The concern is whether companies will be able to navigate cost headwinds, through price increases, in order to mitigate the impact on earnings. As history has taught us, manufacturers, and the market alike, will adjust to a higher cost operating environment. We think any potential selling would demonstrate a short-sidedness by the market, and would point investors towards one company in particular that has the strength to adjust to changes in the weather.
Think big, really big. That's the view most investors have of Caterpillar. The manufacturer of all things that dig, shovel, move, transport, lift, and haul has been enjoying a cyclical upturn in demand for its products globally over the past few years. Caterpillar has risen from a $20 bln company, to a $30 bln growth machine over the last five years.
Last year was the turning point for the Peoria-based company, producing 33% revenue growth and an 85% jump in profits to $2.03 bln. The game changed, in terms of earnings expectations, from Wall Street's perspective back in April after Caterpillar surpassed consensus estimates by $0.27 per share and achieved 29% revenue growth in the first quarter. Caterpillar raised its full year forecasts on what it called "the strong fundamental growth outlook for its end-markets." Robust demand from the commercial and residential construction markets, along with the mining and energy (coal, gas, and oil) industries, has culminated in strong demand globally. The mining industry has become a compelling growth market, with producers now flush with cash from soaring metals prices. As a result, they are investing in large-scale infrastructure projects to increase production capacity to meet demand and improve operational efficiency. CAT also stated it felt commercial construction and housing in most countries will further demand for its products.
In July, Q2 earnings again beat expectations, this time by seven cents to $1.08 per share on revenue growth of 24% to $8.78 bln. CAT again raised revenue forecasts to 18-20% growth, with earnings coming in a range of $4.00-4.29 per share vs. consensus of $3.96. Caterpillar releases its third quarter results on October 21st. This quarter, the market is looking for earnings of $1.06 per share, but will be sensitive to any change in CAT's incremental margins. Gross margins dipped last quarter, which CAT had forewarned, as the costs started rising in the second half of last year, making for difficult comparisons. CAT has been operating at this high cost level and anticipates the second half of the year will be better than the first.
Over the last two years, Caterpillar has been able to offset core operating costs through price increases. The main culprit in the core operating costs is steel. Caterpillar consumes an enormous amount of steel, utilizing many types of raw and fabricated steel products in manufacturing equipment. It actually owns its own foundry, along with joint operations outside the US, but also purchases steel from the global market place. Steel prices boomed in 2004 due to soaring demand in North America and China. Prices have declined this year due to a combination of declines in shipments, consumption, and production. Standard & Poor's recently said the "industry bottomed late in the second quarter," and prices should stabilize this year. While lower steel prices will be a welcome relief, Caterpillar does not anticipate costs declining from 1H05, as other commodities remain elevated, including copper and heat-treated plate.
We feel Caterpillar will be able to meet the challenge and that investors should take advantage of any nervous selling ahead of its release. Caterpillar has been operating in this inflationary environment and inevitably prices will adjust to rising costs. CAT has already implemented price increases of 1-5% effective in January. Just last quarter, management confirmed, "price realizations will more than exceed the material cost increase." We wouldn't bet against The Cat, as demand trends remain robust. We think Caterpillar is a long-term growth story, a company as solid as its machines. The Gulf Coast revitalization and rebuilding effort should start in earnest next year and is likely to last years. Further, the recent consumption trends of copper in China speak to a continuation of its urbanization. In the end Caterpillar, like the market, will adjust. ---Kimberly DuBord, Briefing.com
2:34PM AutoZone (AZO)
83.61 -3.24: AutoZone CFO Michael Archbold on Thursday announced his resignation, effective Friday, September 30th, to embark on a new career as Chief Financial Officer and Chief Administrative Officer of luxury retailer Saks Fifth Avenue. The departure follows the resignation of CEO Steve Odland, who accepted a similar position at Home Depot in early March. According to AG Edwards, Mr. Archbold's decision was on his own terms and was not a forced-out situation due to a difference of opinion between himself or current CEO Bill Rhodes. However, given the severity of the two executive level departures within a year, AG Edwards believes the move suggests an internal realization of limited opportunities for further financial acceleration to sales and operating profits.
Consequently, shares of the auto parts retailer have drifted nearly 4% lower during the regular trading session. The stock has shed more than 7% year-to-date and approximately 20% since early August after reaching a 52-week high of $103.94. The alarming drop in share price coincides with the company's slowing sales trends and concerns over long-term declines in market share. Notwithstanding, gasoline related pressures - which have weighed on consumer discretionary spending, particularly for scheduled auto maintenance - and competing firms such as Advanced Auto Parts (AAP) and O'Reilly Automotive (ORLY) have narrowed the sales gap and continue to gain momentum on the maturing company.
As reported on Briefing.com's Story Stock page last week, AutoZone reported fourth quarter financial results below analysts' expectations as margins were squeezed by increased operating costs. The company earned $2.59 per share - well below the consensus estimate of $2.83 per share - while sales rose a stark 2.5% to $1.88 billion. Operating expenses as a percentage of sales increased to 30% from 29.4% last year, largely due to an attempt to stem declining sales trends. As a result, comparable store sales for the latest quarter fell by 1% while operating margin decreased 116 basis points to 18.7%.
As previously mentioned, AutoZone's slowing sales growth and shrinking margins - primarily due to greater investment in operations, as well as lower store productivity - undermine the current investment picture. The resignation of Michael Archbold, along with the previously announced departure of CEO Steve Odland, further supports this outlook. The seemingly coincidental departure arguably signals management's fading confidence in the company's growth opportunities and bespeaks the operational challenges ahead. --Richard Jahnke, Briefing.com
11:39AM Micron Technology (MU)
13.07 +0.88: Micron Technology beat Wall Street's financial estimates for its fiscal fourth quarter late Thursday, due in part to higher-than-expected sales of DRAM (dynamic random access memory) from increased demand in the PC market. After a disappointing third quarter which was weakened by declining DRAM prices, the Boise, Idaho-based company said revenue for the latest quarter rose to $1.26 billion - an increase of 19.3% sequentially and 5.8% year/year. At the same time, the company said it earned $43.1 million, or $0.07 per share - down from earnings of $93.5 million, or $0.14 per share, in the year ago period, but higher than a reported loss of $127.9 million, or $(0.20) per share, in the third quarter. According to Reuters Estimates, analysts had predicted a loss of $(0.08) per share on revenue of $1.16 billion.
The growth in sales, as compared to the third quarter, was driven by sequential increases of 15% in sales of its core PC DRAM chips and 40% in sales of CMOS image sensors. In addition, NAND Flash memory sales were five time higher compared to the level in the same period a year earlier. In the fourth quarter, the company said sales of specialty DRAM products represented roughly 30% of sales, while sales of CMOS image sensors and NAND Flash memory products represented approximately 15%, collectively. Sales of DRAM products constituted more than 50% of net sales in the quarter, reflecting a pick-up in seasonal demand and higher selling prices.
"Micron's efforts to strengthen our product lines through expansion of our specialty DRAM products, CMOS image sensors and NAND Flash memory products continue to have a positive impact on our gross margin," said Steve Appleton, the company's Chairman, President and CEO. Accordingly, gross margin expanded to 22.4% - a 14.2% sequential improvement. The higher gross margin reflects the strength of higher-margin products (i.e. specialty DRAM, NAND Flash memory, and CMOS image sensor chips), as well as a 10% increase in megabit sales and 3% increase in average selling prices for DRAM products. The company cited across-the-board gross margin improvement among its entire product line, helped by cost improvements in a relatively flat pricing environment.
As evidenced by Micron's solid, albeit unexpected, fourth quarter results, the company continues to make progress in diversifying its product portfolio in response to improving demand for the NAND Flash and non-DRAM chip market, which generate higher margin and sales. In a recent statement, the company said "we continue to dedicate additional resources to expanding our presence in the mobile, consumer and server markets while remaining a leading DRAM supplier for computing applications." However, the diversification and technology transition has come at the expense of its share in the volatile DRAM market.
Micron's position in the market has waned amidst its diversification plans, in comparison to market leader Samsung. Samsung is the second largest chipmaker in the world and is the leader in DRAM, NAND, and SRAM chips. Its diverse product portfolio and manufacturing capabilities provides it with considerable leverage and flexibility to adjust to price discrepancies and shifts in supply/demand. Furthermore, Samsung announced on Thursday that it will spend $33 billion to build new semiconductor factories and research facilities during the next seven years, expanding its focus to non-memory chips. This presents some concern for Micron, as well as other chipmakers, amid increased price pressures and heightened competition. Additional perspective on Samsung's investment plan is detailed in Briefing.com's Story Stock column for Friday.
Despite this, Micron continues to reap benefits of its diversification plans, which should become more apparent in the coming year. With less dependence on the volatile DRAM market, the company is well positioned to capture new growth in areas such as NAND Flash and CMOS chips for digital cameras and mobile phones. At the current price level, the company trades at roughly 49x the FY06 EPS estimate of $0.26. While this appears to be a lofty valuation level, it is supported by an attractive potential upside opportunity. For growth investors who are not averse to higher risk, the stock presents a compelling investment opportunity. --Richard Jahnke, Briefing.com
11:37AM Samsung to Open Its Wallet
The world's leading electronics goods maker laid out an ambitious seven-year capital investment plan for its mainstay semicon business. Samsung is the world largest manufacturer of semiconductor memory chips and the second largest semiconductor manufacturer behind Intel (INTU). Its products reach across numerous industries from TFT-LCDs, telecom equipment as a market leader in GSM and CDMA handsets, digital media, and home appliances. But Samsung's main profit center is semiconductors. It has superior technologies and economies of scale in the business and has spent a great deal building a strong brand image, which garners its products premium pricing.
Samsung released an investment plan worth $33 bln in capital spending for its semiconductor business over the next seven years until 2012. The expansion will create the world's largest compilation of production facilities in the world. The total sum equates to $4.7 bln per annum, roughly equal to what the company had been spending on average over the last three years. The plans, while not committed dollars, have long-term implications for memory, semiconductor, and semi equipment producers.
According to the company's press release, the build-out will include eight additional fabrication lines and one research and development (R&D) facility at its semi complex in Hwaseong, which is roughly 30 miles outside Seoul. This plan, which will start in 2006, excludes plans it may have for investments outside this main facility. For some perspective on just how massive this silicon complex will become, Samsung already has sixteen fabrication lines currently in operation at its Hwaseong-Giheung complex. The eight new lines will be housed in four buildings and will produce 8+Gb NAND flash chips. Additionally, Samsung is allocating significant R&D dollars dedicated to introducing next generation 16" and 18" wafers vs. the current size of 12" giving producers more yield. Its R&D plans also include 4Gb and 8Gb DRAMs, and 32Gb and 64Gb NAND flash chips. This aspiring strategy will add another 14,000 new jobs by 2012, at which time the HG semicon complex will have twenty-four fabrication lines and six R&D facilities - almost 400 acres of semiconductor might.
Samsung's goal is to meet the rising demand for semiconductors that go into everything from Apple's iPods to Sony's PlayStation and Dell's personal computers. To date, the company has spent the majority of its capex within the semicon business. The DRAM, NAND, and TFT-LCD businesses are extremely cyclical. As a result producers' earnings can be quite lumpy due to seasonal patterns in these mainly consumer-driven end markets. Being the market leader is both a blessing and a curse, as an oversupply of product will hurt pricing, and hence, profits. Samsung is attempting to move more into IC logic production and expand its LCD business, focusing on the TV market. Both of these areas hold significant growth potential.
Last year, it had chip sales of $17.5 bln. Samsung, through its new capex plan, aims to triple this figure, targeting an aggressive sales goal of $61 bln by 2012. This equates to a CAGR of 20%, according to industry analysts. IDC is forecasting only 10% in semi growth until then, but tack on Samsung's TFT-LCD and flash business, and the goal at first glance appears possible. Its market strategy is simple: to outspend its competitors. This includes its rival Intel, along with any other smaller players in the semiconductor industry. If it reaches this sales target, Samsung would garner 14% of the market, and become an increasing threat to Intel.
In sum, the announcement speaks to Samsung's confidence about the positive outlook for the memory market, which is certainly good for its main competitor in this business, Micron (MU). However, considering the level of investment and additional capacity, it will also enable Samsung to keep its competitive advantage. DRAM pricing has stabilized, but there are signs of a possible oversupply in the near-term. Yet, this surplus is expected to reverse course at the end of 2006 when Microsoft launches its new operating system Vista that will demand more DRAM per PC. ---Kimberly DuBord, Briefing.com
9:02AM Page One - Up Again Amidst All the Pessimism
The S&P 500 index rose for the sixth straight trading session on Thursday. This has occurred despite the obsession on everything negative from journalists.
There is very little news today, but that is much better than it first appears. Today is the final day of the calendar quarter and there still have been very few earnings warnings. This is very surprising and suggests that the upcoming third quarter earnings reports will be excellent. Very few companies have taken the opportunity to blame the hurricanes for an earnings miss.
Another piece of non-news that is good news is that energy prices are flat. Crude futures are trading down $0.35 at $66.45 a barrel. November gasoline futures were very volatile yesterday before settling down 3 cents at $2.14 a gallon. This, rather than the global market for crude, is where the real crunch occurs from the hurricane damage.
There was no avoiding some pressure on gas prices due to refinery damage but the price rise has not been severe. Gas prices at the pump have been up a bit in recent days but are still below the highs after Katrina and certainly have not approached the $5 levels that had been forecast by some.
One of the reasons for this is that demand has actually fallen in recent weeks. To the surprise of many (but not beginning economics students) higher prices have actually curtailed demand. Meanwhile, every day that passes brings further repairs to damaged refineries.
In earnings news, the once-important Micron reported profits that were substantially ahead of expectations. That's pretty much it on corporate announcements for today.
August personal income was weaker than expected, and the Commerce Department stated that Katrina was a factor. Income fell 0.1% rather than the 0.3% gain that was expected. This is not a large or surprising drop. Personal spending fell 0.5%. That may have been impacted by Katrina as well, but it would have been down anyway. Auto sales fell sharply after big numbers in June and July that produced 1% gains in spending. The data does not alter post-Katrina conclusions of a one-half to one percent hit to GDP in the third quarter. -- Dick Green, Briefing.com
9:34AM Kellogg (K) Morgan Stanley upgrades Equal-weight to OVERWEIGHT. Firm believes the co has one of the most attractive risk-rewards in the industry following a period of share-price underperformance and strong, industry-leading operating results. They retain a decidedly negative view of the overall US Packaged Food sector.
9:27AM Verifone (PAY) Sun Trust Rbsn Humphrey initiates NEUTRAL. Firm is saying that while they are bullish on PAY's long-term sustainable organic revenue growth prospects and its competitive position, they believe the shares' current valuation reflects these investment positives. Firm would likely review their rating on PAY in the mid-to-high teens.
9:27AM Murphy Oil (MUR) UBS initiates NEUTRAL. Target $54. Firm believes the co appears to an exception to the typically lower returns seen by exploration-oriented companies. While they like the co's strong growth and ROCE outlook, they say it appears fully valued.
9:26AM Mainsource Fincl (MSFG) FTN Midwest downgrades Buy to NEUTRAL. Firm is saying their outlook for upside has changed due to: 1) slightly reduced earnings expectations, 2) integration risk of 3 acquisitions totaling 43% of current assets, 3) continued flattening of the yield curve, and 4) Fed-induced sector pressure.
9:25AM Affymetrix (AFFX) Lehman Brothers upgrades Underweight to EQUAL-WEIGHT. Target $40 to $45. After Tuesday evening's pre-announcement, firm believes that the negative sentiment around shortfall in sales and earnings, delay of ParAllele acquisiton, and risk around new product launches has been priced into the stock.
9:25AM Zhone Technologies (ZHNE) Needham & Co upgrades Hold to BUY. Target $3. Upgrade is a result of a greater confidence in profitability and ability to outperform our new financial model, following the recent Paradyne acquisition. While they don't believe the valuation is ultra-cheap by any means, they believe any upside to their new estimates should be able to push the stock upwards to at least their $3 tgt.
9:24AM hi/fn (HIFN) Avondale Partners downgrades Mkt Outperform to MKT PERFORM. Target $7.5 to $5.5. Downgrade follows negative Q4 pre-announcement. While not specifically disclosed, firm believes an inventory adjustment within CSCO business was the key reason for the earnings warning. They also note that mgmt was not able to give a timeframe on when the inventory adjustment will correct itself, and that the lack of visibility is the main reason for their downgrade.
9:24AM Callaway Golf (ELY) Wedbush Morgan upgrades Hold to BUY. Target $15 to $18. Upgrade follows Q3 guidance and announced initiatives. Firm believes a premium multiple is warranted by the co's growing top line momentum, driven by successful recent new product launches, as well as its significant opportunity to improve the cost structure as a result of major restructuring initiatives.
9:23AM Perry Ellis (PERY) Wedbush Morgan initiates BUY. Target $26. Firm also initiates PVH with a Buy and $36 tgt. For PERY, firm believes the co has solid opportunities for top and bottom line growth over the next 2-3 years through broader and deeper distribution of the co's product in the U.S., international expansion opportunities and the potential for retail store growth. For PVH, they believe the co has opportunities for top and bottom line growth over the next 2-3 years through growth in both its direct sales and licensing divisions.
9:23AM Symmetry Medical (SMA) FTN Midwest initiates BUY. Target $29. Firm believes that the co will benefit from consistent orthopedic implant volumes, an expanding outsourcing mkt, and a market shift toward single source suppliers. Firm expects the co to impress investors with mkt share gains and over 20% internal growth, which should drive positive upside earnings surprises.
9:22AM Barr Pharma (BRL) WR Hambrecht initiates BUY. Target $65. Firm says the market is currently assigning BRL a discount to its peers, while the co continues to offer sustainable growth averaging 20% with lots of upside. Firm highlights 5 key reasons to own BRL now: 1) favorable macro environment for generics; 2) trading 10% below peers with favorable comparisons going forward; 3) solid fundamentals with balanced growth supporting stable to rising margins; 4) upside from patent challenges with 85% success rate in 13 cases, with expected Shire deal near-term catalyst which could be worth $6 for BRL stock; and 5) mgmt track record.
Hurricane Rita was, of course, a significant factor this past week. It hit land over the weekend, but caused far less damage than was feared.
That did not stop concerns about the economic outlook from arising. The obsession this week was on the prospects for consumer spending. There was a lot of talk about the possibility that consumer spending for the upcoming holiday season will be weak because high energy prices will sap consumer spending power. There was also further talk, spurred in part by comments by Federal Reserve Chairman Greenspan, that housing prices may be a bubble that will soon pop. This could curtail consumer spending as well.
The economic data this week provided some justification for these views. August personal spending fell 0.5%, and there may have been a bit of a Katrina impact in that data. But spending had been up a total of 2% in the prior two months, so it is not clear that a new trend is developing.
August new home sales dropped 9%, but that was from a very high level, and August existing home sales were up 2%. Housing trends are leveling off, but are far from plunging.
Energy prices did move higher this past week. Crude oil was up to $66.24 at the end of this week from $64.19 last week. Gasoline and natural gas futures were also higher. That does raise legitimate fears that higher energy prices will curtail consumer spending this winter.
The math on that is not nearly as severe as commonly assumed, however. Energy costs eat up only 6% of consumer spending. That is up about 1% from a year ago. Consumer will have to tighten their belts a bit, but the impact on total GDP growth should be about 1/2% to 1%, much as already assumed. It is not a catastrophic scenario.
That seems to be what the market has concluded. In addition, profit growth trends are improving.
Third quarter earnings will start coming out in a couple of weeks. Expectations are for operating earnings for the S&P 500 in aggregate to post 18% growth for the third quarter. That is very impressive and up from about 12% in the first half of the year.
Supporting the positive earnings outlook is the fact that earnings warnings for the third quarter have been limited. Normally, there are a number of warnings in the final weeks of the calendar quarter. This quarter that was not the case. Journalists may be obsessed with economic pessimism, but companies keep generating more and more profits.
Next week the September employment data will be out on Friday. That may have a big impact on economic expectations. Our view continues to be that the hurricanes and higher energy prices are a clear negative, but not so much as to cut real GDP growth below 3% or to slow profit growth significantly.
The stock market has performed remarkably well given the recent hurricanes and the impact on energy prices. It may very well be setting up for a classic earnings season rally in mid to late October.
Index Started Week Ended Week Change %Change YTD
DJIA 10419.59 10568.70 149.11 1.4 % -2.0 %
Nasdaq 2116.84 2151.90 35.06 1.7 % -1.1 %
S&P 500 1215.29 1228.81 13.52 1.1 % 1.4 %
Russell 2000 655.46 667.80 12.34 1.9 % 2.5 %
SanDisk (SNDK) and Sony (SNE) announce the development of the "Memory Stick Micro" format, an ultra-small IC recording media designed to meet the growing storage needs of highly compact, multifunctional mobile phones...
8:00AM Cisco Systems to acquire Nemo Systems for up $12.5 mln in cash (CSCO) 17.86 :Under the terms of the agreement, Cisco will pay up to $12.5 million in cash for Nemo. The acquisition is subject to various standard closing conditions, including applicable regulatory approvals, and is expected to close in the first quarter of Cisco's fiscal year 2006 ending October 29, 2005.
7:01AM Acacia Research licenses Computer Cache Coherency technology to AMD (ACTG) 5.93 :Acacia Research (ACTG & CBMX) announces that its subsidiary Computer Cache Coherency has entered into a license with Advanced Micro Devices (AMD), covering a portfolio of patents that apply to certain core logic computer chipsets. The license to AMD resolves a patent infringement lawsuit against AMD, which was pending in the District Court for the Northern District of California.
3:30PM Trading Call of the Week -- Amtech's Freedman on Micron
Trading Call of the Week goes to Doug Freedman of AmTech Research, who recommended buying Micron (MU -- $13.41, +$1.22) shares aggressively ahead of the company's better-than expected earnings report, resulting in a nearly 10% gain from when he put out his earnings preview late last week.
Last Thursday, Freedman raised both his EPS and revenue targets on Micron, saying that he believed the company had reduced its inventory levels, and was starting to see stronger growth in its higher margin image sensor and mobile memory markets. He also noted that the stocks short interest had risen in September, which he said could create an increased positive reaction if his call on the company's quarter was correct.
Indeed, Freedman was spot on. Micron reported fiscal Q4 earnings last night of $0.07, which was $0.15 better than the Reuters Estimates consensus of a loss of $0.08. The result was largely driven by higher gross margin, which was 22.4% vs. an 18.8% Street expectation, driven by a 40% increase in sales of image sensors, as well as N.A.N.D. flash memory sales that were five times higher than the prior quarter.
Following his call on Micron, we asked Freedman if there was another chip name that he likes here. He pointed to Freescale Semi (FSL -- $23.45, +$0.00), believing that the stock will be driven short-term by the company's wireless and communications chip businesses, as well as expansion of FSL's gross margins.
Freedman calls FSL somewhat of a defensive play, as he says its not dependent on strong revenue increases to make its numbers. He suggests that the company could post roughly 30% EPS growth in 06 on only 5% revenue growth, due to margin expansion, driven by cost controls namely better management of the company's fabrication assets. He says that the company will still post EPS growth, even if it doesnt add many handset chip customer wins.
One knock on FSL is that the company is still very dependent on Motorola (MOT), which accounts for about 27-28% of total revs, and about 75% of Freescale's wireless chip revenue. Yet Freedman notes that FSL has done a good job retaining that business, recently winning a 3G handset win from MOT that could have gone to Texas Instruments, Qualcomm, or even Ericsson.
And while FSL is not a stellar growth company, management is now rewarding employees with an improved stock bonus program, which should help the company meet its growth targets, Freedman says. He adds that FSL is buying back its own shares to mitigate the dilution to existing holders.
Freedman believes that FSL shares are on their way to $30.
We at Briefing.com note that on a technical basis, we like FSLs chart, and believe that Freedman's price target seems reasonable based on its chart. One strategy would be to wait for a slight pullback on FSL shares, possibly to the $22.60 to $22.80 range, before getting more aggressive with the name, with an eye toward holding to resistance at $26, and possibly beyond Mike Tarsala, mtarsala@briefing.com.
3:29PM Caterpillar (CAT)
58.65 +0.66: The market swept up shares in construction-related stocks as Hurricanes Katrina and Rita blew through the Gulf Coast states in anticipation of the rebuilding effort. Yet, the prevailing winds have shifted towards concerns over a higher cost environment for the manufacturing sector, potentially overshadowing the expected increase in demand. Throughout the year, manufacturers have faced higher raw materials, energy, and transportation costs. The concern is whether companies will be able to navigate cost headwinds, through price increases, in order to mitigate the impact on earnings. As history has taught us, manufacturers, and the market alike, will adjust to a higher cost operating environment. We think any potential selling would demonstrate a short-sidedness by the market, and would point investors towards one company in particular that has the strength to adjust to changes in the weather.
Think big, really big. That's the view most investors have of Caterpillar. The manufacturer of all things that dig, shovel, move, transport, lift, and haul has been enjoying a cyclical upturn in demand for its products globally over the past few years. Caterpillar has risen from a $20 bln company, to a $30 bln growth machine over the last five years.
Last year was the turning point for the Peoria-based company, producing 33% revenue growth and an 85% jump in profits to $2.03 bln. The game changed, in terms of earnings expectations, from Wall Street's perspective back in April after Caterpillar surpassed consensus estimates by $0.27 per share and achieved 29% revenue growth in the first quarter. Caterpillar raised its full year forecasts on what it called "the strong fundamental growth outlook for its end-markets." Robust demand from the commercial and residential construction markets, along with the mining and energy (coal, gas, and oil) industries, has culminated in strong demand globally. The mining industry has become a compelling growth market, with producers now flush with cash from soaring metals prices. As a result, they are investing in large-scale infrastructure projects to increase production capacity to meet demand and improve operational efficiency. CAT also stated it felt commercial construction and housing in most countries will further demand for its products.
In July, Q2 earnings again beat expectations, this time by seven cents to $1.08 per share on revenue growth of 24% to $8.78 bln. CAT again raised revenue forecasts to 18-20% growth, with earnings coming in a range of $4.00-4.29 per share vs. consensus of $3.96. Caterpillar releases its third quarter results on October 21st. This quarter, the market is looking for earnings of $1.06 per share, but will be sensitive to any change in CAT's incremental margins. Gross margins dipped last quarter, which CAT had forewarned, as the costs started rising in the second half of last year, making for difficult comparisons. CAT has been operating at this high cost level and anticipates the second half of the year will be better than the first.
Over the last two years, Caterpillar has been able to offset core operating costs through price increases. The main culprit in the core operating costs is steel. Caterpillar consumes an enormous amount of steel, utilizing many types of raw and fabricated steel products in manufacturing equipment. It actually owns its own foundry, along with joint operations outside the US, but also purchases steel from the global market place. Steel prices boomed in 2004 due to soaring demand in North America and China. Prices have declined this year due to a combination of declines in shipments, consumption, and production. Standard & Poor's recently said the "industry bottomed late in the second quarter," and prices should stabilize this year. While lower steel prices will be a welcome relief, Caterpillar does not anticipate costs declining from 1H05, as other commodities remain elevated, including copper and heat-treated plate.
We feel Caterpillar will be able to meet the challenge and that investors should take advantage of any nervous selling ahead of its release. Caterpillar has been operating in this inflationary environment and inevitably prices will adjust to rising costs. CAT has already implemented price increases of 1-5% effective in January. Just last quarter, management confirmed, "price realizations will more than exceed the material cost increase." We wouldn't bet against The Cat, as demand trends remain robust. We think Caterpillar is a long-term growth story, a company as solid as its machines. The Gulf Coast revitalization and rebuilding effort should start in earnest next year and is likely to last years. Further, the recent consumption trends of copper in China speak to a continuation of its urbanization. In the end Caterpillar, like the market, will adjust. ---Kimberly DuBord, Briefing.com
2:34PM AutoZone (AZO)
83.61 -3.24: AutoZone CFO Michael Archbold on Thursday announced his resignation, effective Friday, September 30th, to embark on a new career as Chief Financial Officer and Chief Administrative Officer of luxury retailer Saks Fifth Avenue. The departure follows the resignation of CEO Steve Odland, who accepted a similar position at Home Depot in early March. According to AG Edwards, Mr. Archbold's decision was on his own terms and was not a forced-out situation due to a difference of opinion between himself or current CEO Bill Rhodes. However, given the severity of the two executive level departures within a year, AG Edwards believes the move suggests an internal realization of limited opportunities for further financial acceleration to sales and operating profits.
Consequently, shares of the auto parts retailer have drifted nearly 4% lower during the regular trading session. The stock has shed more than 7% year-to-date and approximately 20% since early August after reaching a 52-week high of $103.94. The alarming drop in share price coincides with the company's slowing sales trends and concerns over long-term declines in market share. Notwithstanding, gasoline related pressures - which have weighed on consumer discretionary spending, particularly for scheduled auto maintenance - and competing firms such as Advanced Auto Parts (AAP) and O'Reilly Automotive (ORLY) have narrowed the sales gap and continue to gain momentum on the maturing company.
As reported on Briefing.com's Story Stock page last week, AutoZone reported fourth quarter financial results below analysts' expectations as margins were squeezed by increased operating costs. The company earned $2.59 per share - well below the consensus estimate of $2.83 per share - while sales rose a stark 2.5% to $1.88 billion. Operating expenses as a percentage of sales increased to 30% from 29.4% last year, largely due to an attempt to stem declining sales trends. As a result, comparable store sales for the latest quarter fell by 1% while operating margin decreased 116 basis points to 18.7%.
As previously mentioned, AutoZone's slowing sales growth and shrinking margins - primarily due to greater investment in operations, as well as lower store productivity - undermine the current investment picture. The resignation of Michael Archbold, along with the previously announced departure of CEO Steve Odland, further supports this outlook. The seemingly coincidental departure arguably signals management's fading confidence in the company's growth opportunities and bespeaks the operational challenges ahead. --Richard Jahnke, Briefing.com
11:39AM Micron Technology (MU)
13.07 +0.88: Micron Technology beat Wall Street's financial estimates for its fiscal fourth quarter late Thursday, due in part to higher-than-expected sales of DRAM (dynamic random access memory) from increased demand in the PC market. After a disappointing third quarter which was weakened by declining DRAM prices, the Boise, Idaho-based company said revenue for the latest quarter rose to $1.26 billion - an increase of 19.3% sequentially and 5.8% year/year. At the same time, the company said it earned $43.1 million, or $0.07 per share - down from earnings of $93.5 million, or $0.14 per share, in the year ago period, but higher than a reported loss of $127.9 million, or $(0.20) per share, in the third quarter. According to Reuters Estimates, analysts had predicted a loss of $(0.08) per share on revenue of $1.16 billion.
The growth in sales, as compared to the third quarter, was driven by sequential increases of 15% in sales of its core PC DRAM chips and 40% in sales of CMOS image sensors. In addition, NAND Flash memory sales were five time higher compared to the level in the same period a year earlier. In the fourth quarter, the company said sales of specialty DRAM products represented roughly 30% of sales, while sales of CMOS image sensors and NAND Flash memory products represented approximately 15%, collectively. Sales of DRAM products constituted more than 50% of net sales in the quarter, reflecting a pick-up in seasonal demand and higher selling prices.
"Micron's efforts to strengthen our product lines through expansion of our specialty DRAM products, CMOS image sensors and NAND Flash memory products continue to have a positive impact on our gross margin," said Steve Appleton, the company's Chairman, President and CEO. Accordingly, gross margin expanded to 22.4% - a 14.2% sequential improvement. The higher gross margin reflects the strength of higher-margin products (i.e. specialty DRAM, NAND Flash memory, and CMOS image sensor chips), as well as a 10% increase in megabit sales and 3% increase in average selling prices for DRAM products. The company cited across-the-board gross margin improvement among its entire product line, helped by cost improvements in a relatively flat pricing environment.
As evidenced by Micron's solid, albeit unexpected, fourth quarter results, the company continues to make progress in diversifying its product portfolio in response to improving demand for the NAND Flash and non-DRAM chip market, which generate higher margin and sales. In a recent statement, the company said "we continue to dedicate additional resources to expanding our presence in the mobile, consumer and server markets while remaining a leading DRAM supplier for computing applications." However, the diversification and technology transition has come at the expense of its share in the volatile DRAM market.
Micron's position in the market has waned amidst its diversification plans, in comparison to market leader Samsung. Samsung is the second largest chipmaker in the world and is the leader in DRAM, NAND, and SRAM chips. Its diverse product portfolio and manufacturing capabilities provides it with considerable leverage and flexibility to adjust to price discrepancies and shifts in supply/demand. Furthermore, Samsung announced on Thursday that it will spend $33 billion to build new semiconductor factories and research facilities during the next seven years, expanding its focus to non-memory chips. This presents some concern for Micron, as well as other chipmakers, amid increased price pressures and heightened competition. Additional perspective on Samsung's investment plan is detailed in Briefing.com's Story Stock column for Friday.
Despite this, Micron continues to reap benefits of its diversification plans, which should become more apparent in the coming year. With less dependence on the volatile DRAM market, the company is well positioned to capture new growth in areas such as NAND Flash and CMOS chips for digital cameras and mobile phones. At the current price level, the company trades at roughly 49x the FY06 EPS estimate of $0.26. While this appears to be a lofty valuation level, it is supported by an attractive potential upside opportunity. For growth investors who are not averse to higher risk, the stock presents a compelling investment opportunity. --Richard Jahnke, Briefing.com
11:37AM Samsung to Open Its Wallet
The world's leading electronics goods maker laid out an ambitious seven-year capital investment plan for its mainstay semicon business. Samsung is the world largest manufacturer of semiconductor memory chips and the second largest semiconductor manufacturer behind Intel (INTU). Its products reach across numerous industries from TFT-LCDs, telecom equipment as a market leader in GSM and CDMA handsets, digital media, and home appliances. But Samsung's main profit center is semiconductors. It has superior technologies and economies of scale in the business and has spent a great deal building a strong brand image, which garners its products premium pricing.
Samsung released an investment plan worth $33 bln in capital spending for its semiconductor business over the next seven years until 2012. The expansion will create the world's largest compilation of production facilities in the world. The total sum equates to $4.7 bln per annum, roughly equal to what the company had been spending on average over the last three years. The plans, while not committed dollars, have long-term implications for memory, semiconductor, and semi equipment producers.
According to the company's press release, the build-out will include eight additional fabrication lines and one research and development (R&D) facility at its semi complex in Hwaseong, which is roughly 30 miles outside Seoul. This plan, which will start in 2006, excludes plans it may have for investments outside this main facility. For some perspective on just how massive this silicon complex will become, Samsung already has sixteen fabrication lines currently in operation at its Hwaseong-Giheung complex. The eight new lines will be housed in four buildings and will produce 8+Gb NAND flash chips. Additionally, Samsung is allocating significant R&D dollars dedicated to introducing next generation 16" and 18" wafers vs. the current size of 12" giving producers more yield. Its R&D plans also include 4Gb and 8Gb DRAMs, and 32Gb and 64Gb NAND flash chips. This aspiring strategy will add another 14,000 new jobs by 2012, at which time the HG semicon complex will have twenty-four fabrication lines and six R&D facilities - almost 400 acres of semiconductor might.
Samsung's goal is to meet the rising demand for semiconductors that go into everything from Apple's iPods to Sony's PlayStation and Dell's personal computers. To date, the company has spent the majority of its capex within the semicon business. The DRAM, NAND, and TFT-LCD businesses are extremely cyclical. As a result producers' earnings can be quite lumpy due to seasonal patterns in these mainly consumer-driven end markets. Being the market leader is both a blessing and a curse, as an oversupply of product will hurt pricing, and hence, profits. Samsung is attempting to move more into IC logic production and expand its LCD business, focusing on the TV market. Both of these areas hold significant growth potential.
Last year, it had chip sales of $17.5 bln. Samsung, through its new capex plan, aims to triple this figure, targeting an aggressive sales goal of $61 bln by 2012. This equates to a CAGR of 20%, according to industry analysts. IDC is forecasting only 10% in semi growth until then, but tack on Samsung's TFT-LCD and flash business, and the goal at first glance appears possible. Its market strategy is simple: to outspend its competitors. This includes its rival Intel, along with any other smaller players in the semiconductor industry. If it reaches this sales target, Samsung would garner 14% of the market, and become an increasing threat to Intel.
In sum, the announcement speaks to Samsung's confidence about the positive outlook for the memory market, which is certainly good for its main competitor in this business, Micron (MU). However, considering the level of investment and additional capacity, it will also enable Samsung to keep its competitive advantage. DRAM pricing has stabilized, but there are signs of a possible oversupply in the near-term. Yet, this surplus is expected to reverse course at the end of 2006 when Microsoft launches its new operating system Vista that will demand more DRAM per PC. ---Kimberly DuBord, Briefing.com
9:02AM Page One - Up Again Amidst All the Pessimism
The S&P 500 index rose for the sixth straight trading session on Thursday. This has occurred despite the obsession on everything negative from journalists.
There is very little news today, but that is much better than it first appears. Today is the final day of the calendar quarter and there still have been very few earnings warnings. This is very surprising and suggests that the upcoming third quarter earnings reports will be excellent. Very few companies have taken the opportunity to blame the hurricanes for an earnings miss.
Another piece of non-news that is good news is that energy prices are flat. Crude futures are trading down $0.35 at $66.45 a barrel. November gasoline futures were very volatile yesterday before settling down 3 cents at $2.14 a gallon. This, rather than the global market for crude, is where the real crunch occurs from the hurricane damage.
There was no avoiding some pressure on gas prices due to refinery damage but the price rise has not been severe. Gas prices at the pump have been up a bit in recent days but are still below the highs after Katrina and certainly have not approached the $5 levels that had been forecast by some.
One of the reasons for this is that demand has actually fallen in recent weeks. To the surprise of many (but not beginning economics students) higher prices have actually curtailed demand. Meanwhile, every day that passes brings further repairs to damaged refineries.
In earnings news, the once-important Micron reported profits that were substantially ahead of expectations. That's pretty much it on corporate announcements for today.
August personal income was weaker than expected, and the Commerce Department stated that Katrina was a factor. Income fell 0.1% rather than the 0.3% gain that was expected. This is not a large or surprising drop. Personal spending fell 0.5%. That may have been impacted by Katrina as well, but it would have been down anyway. Auto sales fell sharply after big numbers in June and July that produced 1% gains in spending. The data does not alter post-Katrina conclusions of a one-half to one percent hit to GDP in the third quarter. -- Dick Green, Briefing.com
9:34AM Kellogg (K) Morgan Stanley upgrades Equal-weight to OVERWEIGHT. Firm believes the co has one of the most attractive risk-rewards in the industry following a period of share-price underperformance and strong, industry-leading operating results. They retain a decidedly negative view of the overall US Packaged Food sector.
9:27AM Verifone (PAY) Sun Trust Rbsn Humphrey initiates NEUTRAL. Firm is saying that while they are bullish on PAY's long-term sustainable organic revenue growth prospects and its competitive position, they believe the shares' current valuation reflects these investment positives. Firm would likely review their rating on PAY in the mid-to-high teens.
9:27AM Murphy Oil (MUR) UBS initiates NEUTRAL. Target $54. Firm believes the co appears to an exception to the typically lower returns seen by exploration-oriented companies. While they like the co's strong growth and ROCE outlook, they say it appears fully valued.
9:26AM Mainsource Fincl (MSFG) FTN Midwest downgrades Buy to NEUTRAL. Firm is saying their outlook for upside has changed due to: 1) slightly reduced earnings expectations, 2) integration risk of 3 acquisitions totaling 43% of current assets, 3) continued flattening of the yield curve, and 4) Fed-induced sector pressure.
9:25AM Affymetrix (AFFX) Lehman Brothers upgrades Underweight to EQUAL-WEIGHT. Target $40 to $45. After Tuesday evening's pre-announcement, firm believes that the negative sentiment around shortfall in sales and earnings, delay of ParAllele acquisiton, and risk around new product launches has been priced into the stock.
9:25AM Zhone Technologies (ZHNE) Needham & Co upgrades Hold to BUY. Target $3. Upgrade is a result of a greater confidence in profitability and ability to outperform our new financial model, following the recent Paradyne acquisition. While they don't believe the valuation is ultra-cheap by any means, they believe any upside to their new estimates should be able to push the stock upwards to at least their $3 tgt.
9:24AM hi/fn (HIFN) Avondale Partners downgrades Mkt Outperform to MKT PERFORM. Target $7.5 to $5.5. Downgrade follows negative Q4 pre-announcement. While not specifically disclosed, firm believes an inventory adjustment within CSCO business was the key reason for the earnings warning. They also note that mgmt was not able to give a timeframe on when the inventory adjustment will correct itself, and that the lack of visibility is the main reason for their downgrade.
9:24AM Callaway Golf (ELY) Wedbush Morgan upgrades Hold to BUY. Target $15 to $18. Upgrade follows Q3 guidance and announced initiatives. Firm believes a premium multiple is warranted by the co's growing top line momentum, driven by successful recent new product launches, as well as its significant opportunity to improve the cost structure as a result of major restructuring initiatives.
9:23AM Perry Ellis (PERY) Wedbush Morgan initiates BUY. Target $26. Firm also initiates PVH with a Buy and $36 tgt. For PERY, firm believes the co has solid opportunities for top and bottom line growth over the next 2-3 years through broader and deeper distribution of the co's product in the U.S., international expansion opportunities and the potential for retail store growth. For PVH, they believe the co has opportunities for top and bottom line growth over the next 2-3 years through growth in both its direct sales and licensing divisions.
9:23AM Symmetry Medical (SMA) FTN Midwest initiates BUY. Target $29. Firm believes that the co will benefit from consistent orthopedic implant volumes, an expanding outsourcing mkt, and a market shift toward single source suppliers. Firm expects the co to impress investors with mkt share gains and over 20% internal growth, which should drive positive upside earnings surprises.
9:22AM Barr Pharma (BRL) WR Hambrecht initiates BUY. Target $65. Firm says the market is currently assigning BRL a discount to its peers, while the co continues to offer sustainable growth averaging 20% with lots of upside. Firm highlights 5 key reasons to own BRL now: 1) favorable macro environment for generics; 2) trading 10% below peers with favorable comparisons going forward; 3) solid fundamentals with balanced growth supporting stable to rising margins; 4) upside from patent challenges with 85% success rate in 13 cases, with expected Shire deal near-term catalyst which could be worth $6 for BRL stock; and 5) mgmt track record.
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