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Monday, October 31, 2005 10:07:13 PM
From Briefing.com: 5:09PM Dell, Inc. (DELL)
30.05 -1.83: Acknowledging its consumer businesses in the U.S. and U.K. fell short of expectations, Dell now expects fiscal third quarter revenues to be approximately $13.9 billion and its earnings, on a non-GAAP basis, to be $0.39 per share. Following the company's disappointing guidance in August, which sent its stock into a tailspin, consensus estimates had been revised to $0.40 and $14.3 billion. Dell also said it will take a charge of approximately $450 million, or $0.14 per share, in the fiscal third quarter that will yield expected GAAP earnings of $0.25 per share.
The Q3 revision is a disconcerting piece of news that will cause some short-term weakness in the stock. By the same token, though, it is an opportunistic shortcoming for the investment-minded individual who will have the chance to purchase DELL at one of its most reasonable prices in some time.
Anyone who has taken a look at Dell's stock chart recently might be inclined to think Dell's tempered guidance isn't that much of a surprise. To wit, shares of DELL are down 19% since the company reported its Q2 results and down 10% since the start of September. Its revised guidance translates to year/year EPS growth of 21.0% and revenue growth of 11.0%. That's decent growth for most companies, but for a company like Dell that has made a habit out of raising the market's expectations bar, the realization that prior growth expectations will not be met still carries some shock value.
As to be expected, DELL is trading down in the after hours session and related companies like Intel (INTC) and Hewlett-Pakcard (HPQ) are following suit. For the time being, investors can expect Dell to be fighting an uphill perception battle as the market questions its valuation and growth profile. Given the stock's recent suffering, though, those concerns aren't likely to run as deep as feared. Prior to its warning, Dell was trading at 20.1x est. FY06 earnings and 22.0x trailing twelve month earnings, which is roughly a 40% discount to its 5-yr historical average.
--Patrick J. O'Hare, Briefing.com
Close Dow +37.30 at 10440.07, S&P +8.60 at 1207.01, Nasdaq +30.42 at 2120.30: Today's market retained the bullish bias that infected Friday's session and closed the major indices comfortably above the flat line. More evidence of solid third quarter earnings teamed with a host of news on the M&A front, and a 2.3% pullback in the price of crude, in extending the prior session's rally. Leadership was active and gains were wide-spread; all ten of the economic sectors managed to maintain positive footing throughout the day. Consumer Discretionary was once again the standout, sporting a 1.9% gain that came on the heels of energy price action, rising retailers and surging department stores. Further to oil's decline, today's report from the AAA showed that nationwide prices at the pump have eased significantly over the past month. While also supporting the Consumer Staples sector (+0.8%), Wal-Mart's (WMT 47.30 +1.80) increased same store sales guidance for October contributed to the 3.0% retail surge. Department stores, meanwhile, ran after Saks (SKS 18.17 +1.51) announced its plan to sell its Northern department stores. With respect to Consumer Staples, notable strength in brewers paired with WMT's rise in offsetting a guidance-induced plunge in Kellogg (K 44.14 -2.32) shares. Although taking a brief oil-related detour, the Energy sector stood strong today and closed 1.3% higher. Upside earnings reports from Valero Energy (VLO 105.24 +5.74) and Occidental Petroleum (OXY 78.82 +1.92) led to its early rally and effectively catalyzed buying interest that countered the drop in crude. Brokers soared today - the AMEX brokerage index hit new highs - and sent the Financials sector to a weighty 0.6% gain. Some added focus rested upon Healthcare from the early going. Ahead of the bell, Humana (HUM 44.39 +0.47) reported Q3 earnings that exceeded analysts' estimates; Novartis (NVS 53.82 +0.42) announced that it will pay about $5.1 bln to acquire the remaining 58% stake of Chiron (CHIR 44.11 +0.71) that it does not already own; and Pfizer (PFE 21.74 +0.24) received approval for its Zeldox drug in Europe. The plethora of positive attention helped the sector climb 0.7%. Largely due to Yahoo's (YHOO 36.97 +1.39) and Apple's (AAPL 57.59 +3.12) credit, Technology lent a strong 1.4%. With respect to the latter, traders cheered iPod order data reported today, and sent shares soaring over 5%. Buying across the tech board was broad based, though, and fostered the Nasdaq's session-long outperformance. A sharp drop in Newmont Mining (NEM 42.60 -1.53), spurred by competitor Barrick Gold's (ABX 25.25 -1.25) bid for Placer Dome (PDG) and simultaneous indication of its intent to sell assets to Goldcorp (GG 19.96 +0.58), pressured Materials (+0.3%). However, Monsanto's (MON 63.01 +2.46) momentum, on reports of its new breed of soybeans, counteracted NEM's effect. Caterpillar (CAT 52.59 +1.52) emerged as one of the Dow's strongest gainers, rising after a bullish analyst meeting and following the company's comments that its forecast for dramatically improved performance includes $50 bln in sales by 2010; the stock offset selling across the Industrial sector and pushed it to a +0.2% lagging gain. Separately, the economic front offered some reassuring manufacturing and personal spending and income data. The reports ultimately garnered little attention today, though, as investors await tomorrow's FOMC meeting and the widely-expected twelfth consecutive 25 basis point increase to the fed funds rate.NYSE Adv/Dec 2442/812, Nasdaq Adv/Dec 2164/866
10:48AM American Financial Realty Trust (AFR) Friedman Billings downgrades Outperform to MKT PERFORM. Target $17 to $13.25. Upgrade follows the co's reported adjusted funds from operations (AFFO) of $33 mln, or $0.25 per share, well below their est of $43 mln, or $0.32 per share. They note that while the co hit their acquisition tgt for the qtr, lease expirations occurred at a much faster rate than estimated. They also note that the co was unable to earn its dividend for the third consecutive qtr. Firm now believes that the co will not be able to out-earn its current quarterly dividend this year as more leases expire faster than initially estimated.
10:40AM Grant Prideco (GRP) Calyon Securities initiates BUY. Target $47. Firm believes the co enjoys leading market positions in drilling products, premium tubular products and drill bits, and believe it is very well positioned for strong growth. With a sharp increase in the number of rigs being refurbished and an increasing number of new rigs under construction, they believe GRP's drill pipe sales have reached an inflection point.
10:38AM Sirius Satellite (SIRI) UBS upgrades Neutral to BUY. Target $7.75. Firm says that as they saw in the 3Q05 results reported by XMSR, gross additions from the demand perspective remain robust, while company specific churn issues impacted XM's results. They believe SIRI's results may show a company specific increase in churn as well. However, they say strong gross additions at both XMSR and Sirius alleviate some concern over consumer demand in 4Q05 and add comfort to firm's 06 outlook.
10:36AM Covad (DVW) Kaufman Bros downgrades Buy to HOLD. Target $3 to $1.5. Downgrade reflects increased concerns related to slower-than-expected traction in the VoIP business segment. They need to see execution before they can regain confidence. They continue to believe that VoIP offers a meaningful long-term opportunity. Nonetheless, in the absence of results and traction they cannot continue to give the co credit as the timing of execution has grown more uncertain.
10:36AM AGL Resources (ATG) BB&T Capital Mkts upgrades Hold to BUY. Target $38. Firm upgrades following Q3 results, due to 1) the expected realization of earnings in 4Q05 and 1Q06 by the Sequent energy marketing business due to natural gas price--related arbitrage opportunities captured during 3Q05, and 2) their growing confidence in mgmt's ability to continue driving down Distribution segment operating costs.
10:34AM NII Holdings (NIHD) Legg Mason reiterates BUY. Target $110 to $125. Firm ups target in light of the strong quarterly financials, and their increasing confidence in the company's current growth profile, due to the stronger-than-expected growth, which rolled through their discounted cash flow analysis. They believe the co has the potential for significant subscriber growth and margin expansion over the next couple of years, with several catalysts, which they believe have been overlooked by many investors, helping to add to the already large growth opportunity.
10:32AM Health Management (HMA) Fulcrum downgrades Neutral to SELL . Target $17.85. They also note that for several qtrs now, the co has been reporting significant increases in its uninsured volumes and rev per adjusted admission that is significantly below that of its peers. In addition, they say that this qtr, the co showed it is experiencing a lack of pricing leverage among the paying patients it has. They think this would be bad enough that no-pay heads rise, but when paying heads' revs grow at 2% or so, say there is no leverage to cover supply or labor cost inflation rates of 4-7%. They think that margin pressure is tough to overcome.
10:30AM Axsys Technologies (AXYS) Ryan, Beck & Co initiates OUTPERFORM. Target $25. Firm believes demand for AXYS products should lead to organic growth above that of the defense and homeland security budgets and its management team has shown the ability to identify, acquire and integrate cos that can boost growth.
10:30AM Pixelworks (PXLW) Longbow initiates SELL . Target $3.6. Firm thinks the co has a weak competitive position in the TV mkt, the newly acquired Equator business is facing challenges in the videoconferencing business, there is considerable uncertainty regarding the timing of IPTV service roll outs and a return to profitability is unlikely in the near term.
3:16PM Occidental Petroleum (OXY)
79.02 +2.12: Following on the heels of its three larger peers, Occidental Petroleum reported its third quarter profits nearly doubled on the back of record energy prices. The upside was a mere two cents, but the uplifting reaction across all the integrateds and exploration and production stocks signals continued buying interest in the sector. Energy traded well in the green on Monday in the face of sliding crude and natural gas futures. The broad view of OXY's results was that they were strong given lost production due to Gulf Hurricanes. OXY reported net income of $1.75 bln, or $4.25 per share, on sales growth of 35% to $4.06 bln. Refine the results by stripping out ex-items and the comparable figure is $2.69 per share.
In the third quarter, consolidated production, not including interests in Russia, Columbia and Yemen, was flat year/year and up 1% from last quarter to 539 MBOE. Strong performance out of its natural gas assets helped counteract declines in Latin America and Oman. Natural gas production increased 15.5% to 564 MMCF, led by a ramp to 186 MMCF, up 52% y/y in the Permian Basin.
Total crude production again was flat at 251 MBBL per day with the Permian again lifting output. Turning the spigot on in Libya resulted in production of 9 MBBL per day, with total worldwide production of 562 million barrels of energy per day in production. As of the end of 2004, OXY had proven reserves of 2,489 mln barrels of oil and gas equivalent. Chemicals were a bit light on higher feedstock costs, but that was expected. OXY realized prices of $55.04 per barrel in oil (+45% y/y) and $5.49 tcf in gas (+15% y/y) in the third quarter.
Production is expected to rise between 580,000 to 590,000 barrels of oil per day in the current quarter, according to the company. In mid-October, the company purchased Vintage Petroleum for $3.5 billion and shipped its first barrel of oil out of Libya in almost twenty years. Oil and gas producers are hard pressed to drive production, now rarely achieved through the drill bit. As a consequence, consolidation within the energy patch is inevitable. Strong free cash flow generation has enabled OXY to pay down debt, while pursing acquisitions. Its current debt to cap is 17% - amongst the lowest in the E&P industry. We maintain our favor for these names and feel OXY's continual strong performance, along with an attractive yield of 1.84%, bodes well for investors.
--Kimberly DuBord, Briefing.com
3:08PM Novartis (NVS)
53.82 +0.42: Drug maker Novartis AG said Monday it agreed to acquire the remainder Chiron Corp. (CHIR 44.21 +0.81), the world's fifth largest vaccine producer, that it does not already own, after having its original offer rejected last month. The Swiss pharmaceutical company, which currently owns 42% of Chiron, said it will acquire approximately 113 million shares for $5.1 billion, or $45 per share, in cash. That represents a 23% premium over the price of Chiron shares on August 31, before Novartis made its initial proposal of $4.5 billion, or $40 per share. The agreement, which is still subject to shareholder and regulatory approval, is expected to be completed in the first half of 2006.
On account of the announced deal, which is expected to bolster Novarits' competencies and capabilities amid growing consolidation in the industry, shares of NVS have trended higher in intraday trading. The stock has gained nearly 7% year-to-date, and trades at approximately 17.3x forward earnings at the current price level. While the benefits of the merger may take a few years to be fully realized, the acquisition of Chiron supports Novartis' already strong operations and should provide substantial growth opportunities, particularly in the vaccine and blood-testing businesses.
Chiron, which is still reeling from production problems at its British facility that kept it from delivering its Fluvirin flu vaccine to the United States last year, has struggled to reverse declining profits and rising expenses. In 2004, the Emeryville, CA-based company earned $156 million on revenue of $1.7 billion, compared with earnings of $304 million on revenue of $1.8 billion in the previous year.
While Chiron's flu vaccine business has garnered the most attention as of late, especially amid growing concerns of a bird flu pandemic, Novartis noted that the deal also provides the company access to notable cancer therapeutics, blood-testing products, and royalty and licensing fees. The company anticipates cost synergies of $200 million within three years after closing the deal, with 50% expected to be achieved in the first 18 months.
Novartis said the transaction will strengthen Chiron's capabilities to better meet the needs of patients with high-quality vaccines, and provide the company entry into a dynamic growth market. "Our plan is to turn around the Chiron vaccines business, which will require investments in R&D and manufacturing to increase quality and capacity, so that we can better meet customer demand and address public health needs. Together with the dynamically growing diagnostics business, vaccines will form a new division, while biopharmaceuticals will be integrated into the existing pharmaceuticals business," noted Novartis' Chairman and CEO, Dr. Daniel Vasella.
--Richard Jahnke, Briefing.com
12:33PM Sysco (SYY)
31.99 -0.27: Sysco Corp., the nation's largest foodservice marketer and distributor, said Monday that first quarter profits fell from a year ago, due to escalating fuel costs, higher pension costs, as well as expenses from serving customers affected by hurricanes Katrina and Rita. The company, based in Houston, Texas, earned $199.2 million, or $0.31 per share, excluding the effect of an accounting change, down from $225.9 million, or $0.52 per share, in the same period last year. The results for the latest quarter included stock-based compensation costs of $0.05 per share. On average, analysts had expected quarterly earnings of $0.33 per share, according to Reuters Estimates.
Sysco's bottom line was impacted by a number of cost pressures, including persistently high fuel costs and higher pension costs, despite stronger revenue. Sales rose 6.4% year/year to $8.01 billion - in-line with analyst expectations - while inflation, as measured by company's cost of goods, was 0.4% versus 5.9% last year. Sysco said the declining food cost inflation contributed to better gross margin performance as the company experienced its smallest decline in gross profit margin in the past twelve quarters.
Operating expenses, as a percent of sales, increased 11.5% to $1.18 billion compared to last year. For the latest quarter, fuel costs increased approximately 50%, or $15 million, while higher pension costs added $6 million to expenses. In addition, costs related to the company's National Supply Chain Project impacted EPS by $0.01.
Sysco, which has been investing heavily in supply chain initiatives, also noted that its new distribution center is operating at 50% of full capacity and indicated that the financial impact of the center was predicated on the projections that it would achieve full volumes in January 2006. However, with a number of operational changes identified to make the distribution center more efficient, the company does not expect the previous earnings guidance of flat to slightly accretive for FY06 to be met. The consensus earnings estimate for FY06 stands at $1.41 per share on revenue of $32.6 billion, according to Reuters Estimates.
While the deployment of the National Supply Chain Project remains a long-term catalyst for the company, shares have largely been pressured by high gas prices. Reflecting this, the stock has fallen more than 12% since the beginning of the year. However, with the impact of volatile fuel costs already factored into the current price level, combined with ongoing traction in supply chain initiatives, Sysco shares present a compelling risk/reward proposition. The company is currently trading at approximately 22.8x forward earnings.
--Richard Jahnke, Briefing.com
11:30AM Kellogg (K)
43.93 -2.53: The market reacted to Kellogg's third quarter result like it was a bowl of soggy cereal. The displeasure was caused by the company's downside guidance for the December quarter and the full year, which overshadowed a solid third quarter. The largest cereal producer in the US posted an 11% rise in net earnings to $274.3 mln, as net sales grew 7.3% to $2.62 bln. The EPS figure of $0.66 per share was two cents ahead of expectations, but was assisted by a lower tax rate.
North America internal sales grew 8%, which was impressive considering the company was going up against challenging comparisons. The performance was driven by Retail Cereals, up11% on brand-building exercises and new product launches, which does not bode well for General Mills (GIS). Retail Snacks chewed up sales growth of 6% despite weak sales of Pop-Tarts and cookies. Frozen and Specialty Channels made a strong showing with net sales up 8%, led by Eggos, frozen foods, and its Food Away from Home business. South America was the standout in the quarter within the International segment, gaining 16% in internal sales. Gross margins slipped to 45.2% from 46.1%, depressed by raw materials and upfront costs, in addition to competitive pressures.
Input costs and international competitive pressures remain a sticking point for all global food companies. Looking to the fourth quarter, Kellogg is anticipating per share earnings in a range of $2.32-2.34, which is up from its previous guidance of $2.30 to $2.33, but still below consensus of $2.38 on mid single-digit sales growth. Kellogg gave preliminary estimates for next year, which did little to entice buyers. For FY06, it sees earnings between $2.50-2.55 per share, excluding items, compared to consensus of $2.62, on sales growth in the low single-digits. Management stated on its conference call that higher energy and commodity costs will eat into next year's profits.
Notwithstanding several Overweight ratings by Wall Street analysts, shares have suffered one of their biggest down slides in recent memory. Kellogg has been supporting its stock price through share buybacks that totaled $260 mln in the third quarter. The company plans to step up buybacks with the board approving an additional $650 mln authorization for next year. Kellogg holds a third of the US, and 50% of the international, cereal market. Reading into today's release, it's clear earnings accretion will be achieved more so through buybacks than on the operating line. The stock does offer investors a dividend yield of 2.51%. We currently hold a market weight view of the Staples sector as growth is being tempered by rising costs.
--Kimberly DuBord, Briefing.com
10:05AM Humana (HUM)
44.42 +0.50: Health benefits provider Humana, Inc., on Monday reported lower third quarter earnings as expenses related to a legal settlement and Hurricane Katrina offset a 20% jump in revenue. For the latest quarter, the Louisville, Kentucky-based company said it earned $49.9 million, or $0.30 per share, compared with $84.3 million, or $0.52 per share, in the year-ago period. The results included $0.27 per share in expenses for the settlement of a class-action lawsuit and $0.03 per share associated with Hurricane Katrina. Excluding these charges, Humana would have earned $0.60 per share - $0.09 better than the consensus EPS estimate of $0.51. Revenue rose to $3.82 billion from $3.18 billion last year, while the company's medical expense ratio increased 70 basis points to 83.4%.
Overall, Humana's third quarter results reflect continued strength in the government segment, offset in part by weakness in the commercial business, as well as one-time charges. Despite the lackluster performance, though, the company stands to benefit from the potential opportunities afforded by the new Medicare plan beginning in January 2006. Humana currently trades at 22.8x trailing earnings, compared with the average level of 17.4x over the past five years.
Driven by higher Medicare membership, the government segment recorded operating earnings of $124.4 million, excluding non-recurring items, versus $88.8 million in the previous year. Medicare Advantage premiums climbed 59% from a year ago to $814.6 million, as membership increased 131,800, or 35% year/year, to approximately 503,100 members. Meanwhile, the commercial segment reported earnings of $25.6 million, ex-items, compared with $38.7 million last year, as a more competitive pricing environment led to higher medical membership attrition. Segment membership decreased 21,800, or 1%, to 3.18 million members, generating premiums and services fees of $1.67 billion - a 7% drop from $1.79 billion a year earlier.
Looking to the fourth quarter, Humana projected EPS of $0.45 to $0.47, excluding expenses for the litigation settlement and the impact of Hurricane Katrina, versus analysts' expectation of $0.57. However, the company reaffirmed its guidance for the current year and fiscal 2006. For FY05, Humana expects earnings of $2.09 to $2.11 per share on revenue of $14.5 billion, compared with the consensus estimate for EPS of $2.12 on revenue of $14.32 billion. The company sees FY06 EPS of $2.80, excluding $0.10 for stock compensation expenses. Analysts had projected earnings of $2.79 per share, according to Reuters Estimates.
--Richard Jahnke, Briefing.com
9:29AM Barrick Gold (ABX)
27.20: The Toronto, Ontario-based gold producer, Barrick Gold, made a hostile bid for rival Canadian producer Placer Dome. Barrick is the world's third largest producer behind Newmont Mining and AngloGold, with Placer ranking fifth behind Gold Field's. The offer is valued at $9.2 bln in cash and stock. Placer's shareholders will have the right to receive $20.50 per share in cash or 0.7518 ABX shares and five cents in cash for each share of PDG. Goldcorp has agreed with Barrick to buy some of Placer's assets, if the bid should succeed, for $1.35 bln in cash. The deal will increase production for Goldcorop by 50% to more than 2 million ounces.
Placer's assets are located in the Campbell, Porcupine and Musselwhite gold mine in Ontario, along with the La Coipa silver mine in Chile. Barrick just released its third quarter results and beat the consensus estimate by two cents. Profits nearly tripled on higher prices. The company added several new mines, which assisted production by 22% to 1.51 million ounces. Barrick stated Placer's assets were attractive due to the close proximity of its mines and that it expects the deal to be accretive to earnings and cash flows.
Gold's allure as a means to hedge inflation is not the metal's only appeal. Traders are pushing prices higher on speculation that demand from jewelry makers in China will exceed supply. Gold futures gained 1.2% last week to $474.80 an ounce on the NY Mercantile Exchange. Year-to-date the metal has risen 11%, with a 17-year high reached in mid October of $483.10 per ounce. Most analysts predict gold will top $500 before year end.
As is the case with several metals, the pace of demand is rising as mine output declines. Newmont reported a 6.8% drop in production in third quarter, while AngloGold suffered a 2% slide. Newmont is planning to run its gold refinery in Chiasso, Switzerland, at full capacity for at least four months in order to meet jewelry demand. Typically demand ramps up in September and October ahead of the holiday season, with January the peak month due to the wedding season in India.
Global consolidation among metal producers is likely to continue. Soaring metals prices has resulted in a windfall of cash for producers, which are looking to increase output in order to take advantage of the current bull market in commodities. Mining is a heavily capital-intensive business and production costs continue to escalate from tires, to steel, to fuel, to labor, to power. Barrick is one of the few producers that did not raise its cost guidance for the full year following its third quarter results. Further, Barrick actually was able to increase net profit margins, something few metal producers were able to accomplish. The stock remains in favor by institutions due to its growth profile from existing assets, along with several new tantalizing exploration projects.
--Kimberly DuBord, Briefing.com
9:18AM Wal-Mart (WMT)
45.50: On Friday the Q3 GDP report revealed consumer spending rose at a 3.9% annual rate of growth. Briefing.com characterized the increase as "very good," but acknowledged in our Economic briefing that spending may ease in the fourth quarter due to high energy prices. Consistent with that view, we are currently expecting consumer spending to increase 1.0% in the fourth quarter.
After Wal-Mart's same-store sales update for October this morning, we certainly don't see any need to revise our spending forecast lower. Furthermore, the latest update from Wal-Mart reinforces the belief expressed a few weeks ago in our Bargain Hunting column that Wal-Mart is an attractive long-term investment idea at current price levels.
For the past several weeks Wal-Mart has indicated that it expects October same-store sales growth to be within its guidance of 2-4%. Apparently, though, the final week of its reporting period ended on a solid note as the world's largest retailer now expects U.S. same-store sales to be up 4.3%. When gasoline sales are excluded from the computation, Wal-Mart believes same-store sales would have been approximately 30 basis points less, or at the high end of its guidance range.
It is worth noting that general merchandise sales were stronger than food in the final week of the reporting period. In the previous three weekly sales summaries for October, food comparative sales were reported to be stronger than general merchandise. The role reversal in the final week is an anecdotal sign that discretionary spending may be improving amid some relief at the gas pump. According to the Energy Information Administration, U.S. gas prices averaged $2.92 per gallon the week of October 3rd and $2.56 per gallon the week of October 24th.
Wal-Mart will report its official results on November 3rd.
--Patrick J. O'Hare, Briefing.com
8:47AM Valero Energy (VLO)
$99.50: The largest US oil processor reported a third quarter profit of $4.37 per share, up from $1.57 per share last year, on soaring refined profit margins. The street failed to keep pace with Valero, as the company transcended expectations by $0.40 per share. Valero certainly had a challenging third quarter with the Gulf hurricanes and the addition of a sizeable acquisition. The real story, though, was the tight refining capacity, not only in the US, but worldwide. Valero commented in today's release that it believes the ramp in pump prices will "soon be behind us," which is certainly good news for consumers.
Crack spreads are what a refiner earns from turning raw crude into refined products such as gasoline, jet fuel, diesel, and heating oil. These "cracks" have widened considerably on strong demand and limited capacity. The record hurricane season this year took a significant portion of refining capacity off line, thus reducing supplies and pushing the crack spreads higher. The average profit margin on refined fuels soared to a record $15.22 per barrel, representing a 92% increase over one year, as gasoline prices outpaced the rise in crude. Valero benefited as one of the largest high-sulfur producers, which is much cheaper than the sweet-crude. Valero's output is roughly 70% sour.
Valero added four refineries through its acquisition of Premcor. The deal boosted Valero above the largest cap integrated oil companies, Exxon (XOM) and ConocoPhillips (COP), as the largest refiner by capacity. It operators 16 refineries in the US with a total capacity to produce 2.34 mln barrels of crude per day. Valero is making changes at the top. CEO Bill Greehey will be stepping down at the end of the year, but will remain as Chairman. The Chief Operating Officer, Bill Kleese, will become the new chief executive as of January 1st.
Valero stated the outlook for Q4 "is outstanding." Gulf Coast gasoline margins for November and December are around $4.00 per barrel and $17.00 for heating oil. Sour crude discounts continue to widen further from the already record levels. With the integration of the Premcor assets, coupled with the margin outlook, Valero stated the current First Call estimate of $3.67 per share is "significantly too low." The company estimates that it will generate a per share profit of $2.30 in October alone. Valero's bullish guidance has sent shares up in pre-market trading, which is adding to its stature as the best performing stock this year within the S&P 500 Index.
--Kimberly DuBord, Briefing.com
30.05 -1.83: Acknowledging its consumer businesses in the U.S. and U.K. fell short of expectations, Dell now expects fiscal third quarter revenues to be approximately $13.9 billion and its earnings, on a non-GAAP basis, to be $0.39 per share. Following the company's disappointing guidance in August, which sent its stock into a tailspin, consensus estimates had been revised to $0.40 and $14.3 billion. Dell also said it will take a charge of approximately $450 million, or $0.14 per share, in the fiscal third quarter that will yield expected GAAP earnings of $0.25 per share.
The Q3 revision is a disconcerting piece of news that will cause some short-term weakness in the stock. By the same token, though, it is an opportunistic shortcoming for the investment-minded individual who will have the chance to purchase DELL at one of its most reasonable prices in some time.
Anyone who has taken a look at Dell's stock chart recently might be inclined to think Dell's tempered guidance isn't that much of a surprise. To wit, shares of DELL are down 19% since the company reported its Q2 results and down 10% since the start of September. Its revised guidance translates to year/year EPS growth of 21.0% and revenue growth of 11.0%. That's decent growth for most companies, but for a company like Dell that has made a habit out of raising the market's expectations bar, the realization that prior growth expectations will not be met still carries some shock value.
As to be expected, DELL is trading down in the after hours session and related companies like Intel (INTC) and Hewlett-Pakcard (HPQ) are following suit. For the time being, investors can expect Dell to be fighting an uphill perception battle as the market questions its valuation and growth profile. Given the stock's recent suffering, though, those concerns aren't likely to run as deep as feared. Prior to its warning, Dell was trading at 20.1x est. FY06 earnings and 22.0x trailing twelve month earnings, which is roughly a 40% discount to its 5-yr historical average.
--Patrick J. O'Hare, Briefing.com
Close Dow +37.30 at 10440.07, S&P +8.60 at 1207.01, Nasdaq +30.42 at 2120.30: Today's market retained the bullish bias that infected Friday's session and closed the major indices comfortably above the flat line. More evidence of solid third quarter earnings teamed with a host of news on the M&A front, and a 2.3% pullback in the price of crude, in extending the prior session's rally. Leadership was active and gains were wide-spread; all ten of the economic sectors managed to maintain positive footing throughout the day. Consumer Discretionary was once again the standout, sporting a 1.9% gain that came on the heels of energy price action, rising retailers and surging department stores. Further to oil's decline, today's report from the AAA showed that nationwide prices at the pump have eased significantly over the past month. While also supporting the Consumer Staples sector (+0.8%), Wal-Mart's (WMT 47.30 +1.80) increased same store sales guidance for October contributed to the 3.0% retail surge. Department stores, meanwhile, ran after Saks (SKS 18.17 +1.51) announced its plan to sell its Northern department stores. With respect to Consumer Staples, notable strength in brewers paired with WMT's rise in offsetting a guidance-induced plunge in Kellogg (K 44.14 -2.32) shares. Although taking a brief oil-related detour, the Energy sector stood strong today and closed 1.3% higher. Upside earnings reports from Valero Energy (VLO 105.24 +5.74) and Occidental Petroleum (OXY 78.82 +1.92) led to its early rally and effectively catalyzed buying interest that countered the drop in crude. Brokers soared today - the AMEX brokerage index hit new highs - and sent the Financials sector to a weighty 0.6% gain. Some added focus rested upon Healthcare from the early going. Ahead of the bell, Humana (HUM 44.39 +0.47) reported Q3 earnings that exceeded analysts' estimates; Novartis (NVS 53.82 +0.42) announced that it will pay about $5.1 bln to acquire the remaining 58% stake of Chiron (CHIR 44.11 +0.71) that it does not already own; and Pfizer (PFE 21.74 +0.24) received approval for its Zeldox drug in Europe. The plethora of positive attention helped the sector climb 0.7%. Largely due to Yahoo's (YHOO 36.97 +1.39) and Apple's (AAPL 57.59 +3.12) credit, Technology lent a strong 1.4%. With respect to the latter, traders cheered iPod order data reported today, and sent shares soaring over 5%. Buying across the tech board was broad based, though, and fostered the Nasdaq's session-long outperformance. A sharp drop in Newmont Mining (NEM 42.60 -1.53), spurred by competitor Barrick Gold's (ABX 25.25 -1.25) bid for Placer Dome (PDG) and simultaneous indication of its intent to sell assets to Goldcorp (GG 19.96 +0.58), pressured Materials (+0.3%). However, Monsanto's (MON 63.01 +2.46) momentum, on reports of its new breed of soybeans, counteracted NEM's effect. Caterpillar (CAT 52.59 +1.52) emerged as one of the Dow's strongest gainers, rising after a bullish analyst meeting and following the company's comments that its forecast for dramatically improved performance includes $50 bln in sales by 2010; the stock offset selling across the Industrial sector and pushed it to a +0.2% lagging gain. Separately, the economic front offered some reassuring manufacturing and personal spending and income data. The reports ultimately garnered little attention today, though, as investors await tomorrow's FOMC meeting and the widely-expected twelfth consecutive 25 basis point increase to the fed funds rate.NYSE Adv/Dec 2442/812, Nasdaq Adv/Dec 2164/866
10:48AM American Financial Realty Trust (AFR) Friedman Billings downgrades Outperform to MKT PERFORM. Target $17 to $13.25. Upgrade follows the co's reported adjusted funds from operations (AFFO) of $33 mln, or $0.25 per share, well below their est of $43 mln, or $0.32 per share. They note that while the co hit their acquisition tgt for the qtr, lease expirations occurred at a much faster rate than estimated. They also note that the co was unable to earn its dividend for the third consecutive qtr. Firm now believes that the co will not be able to out-earn its current quarterly dividend this year as more leases expire faster than initially estimated.
10:40AM Grant Prideco (GRP) Calyon Securities initiates BUY. Target $47. Firm believes the co enjoys leading market positions in drilling products, premium tubular products and drill bits, and believe it is very well positioned for strong growth. With a sharp increase in the number of rigs being refurbished and an increasing number of new rigs under construction, they believe GRP's drill pipe sales have reached an inflection point.
10:38AM Sirius Satellite (SIRI) UBS upgrades Neutral to BUY. Target $7.75. Firm says that as they saw in the 3Q05 results reported by XMSR, gross additions from the demand perspective remain robust, while company specific churn issues impacted XM's results. They believe SIRI's results may show a company specific increase in churn as well. However, they say strong gross additions at both XMSR and Sirius alleviate some concern over consumer demand in 4Q05 and add comfort to firm's 06 outlook.
10:36AM Covad (DVW) Kaufman Bros downgrades Buy to HOLD. Target $3 to $1.5. Downgrade reflects increased concerns related to slower-than-expected traction in the VoIP business segment. They need to see execution before they can regain confidence. They continue to believe that VoIP offers a meaningful long-term opportunity. Nonetheless, in the absence of results and traction they cannot continue to give the co credit as the timing of execution has grown more uncertain.
10:36AM AGL Resources (ATG) BB&T Capital Mkts upgrades Hold to BUY. Target $38. Firm upgrades following Q3 results, due to 1) the expected realization of earnings in 4Q05 and 1Q06 by the Sequent energy marketing business due to natural gas price--related arbitrage opportunities captured during 3Q05, and 2) their growing confidence in mgmt's ability to continue driving down Distribution segment operating costs.
10:34AM NII Holdings (NIHD) Legg Mason reiterates BUY. Target $110 to $125. Firm ups target in light of the strong quarterly financials, and their increasing confidence in the company's current growth profile, due to the stronger-than-expected growth, which rolled through their discounted cash flow analysis. They believe the co has the potential for significant subscriber growth and margin expansion over the next couple of years, with several catalysts, which they believe have been overlooked by many investors, helping to add to the already large growth opportunity.
10:32AM Health Management (HMA) Fulcrum downgrades Neutral to SELL . Target $17.85. They also note that for several qtrs now, the co has been reporting significant increases in its uninsured volumes and rev per adjusted admission that is significantly below that of its peers. In addition, they say that this qtr, the co showed it is experiencing a lack of pricing leverage among the paying patients it has. They think this would be bad enough that no-pay heads rise, but when paying heads' revs grow at 2% or so, say there is no leverage to cover supply or labor cost inflation rates of 4-7%. They think that margin pressure is tough to overcome.
10:30AM Axsys Technologies (AXYS) Ryan, Beck & Co initiates OUTPERFORM. Target $25. Firm believes demand for AXYS products should lead to organic growth above that of the defense and homeland security budgets and its management team has shown the ability to identify, acquire and integrate cos that can boost growth.
10:30AM Pixelworks (PXLW) Longbow initiates SELL . Target $3.6. Firm thinks the co has a weak competitive position in the TV mkt, the newly acquired Equator business is facing challenges in the videoconferencing business, there is considerable uncertainty regarding the timing of IPTV service roll outs and a return to profitability is unlikely in the near term.
3:16PM Occidental Petroleum (OXY)
79.02 +2.12: Following on the heels of its three larger peers, Occidental Petroleum reported its third quarter profits nearly doubled on the back of record energy prices. The upside was a mere two cents, but the uplifting reaction across all the integrateds and exploration and production stocks signals continued buying interest in the sector. Energy traded well in the green on Monday in the face of sliding crude and natural gas futures. The broad view of OXY's results was that they were strong given lost production due to Gulf Hurricanes. OXY reported net income of $1.75 bln, or $4.25 per share, on sales growth of 35% to $4.06 bln. Refine the results by stripping out ex-items and the comparable figure is $2.69 per share.
In the third quarter, consolidated production, not including interests in Russia, Columbia and Yemen, was flat year/year and up 1% from last quarter to 539 MBOE. Strong performance out of its natural gas assets helped counteract declines in Latin America and Oman. Natural gas production increased 15.5% to 564 MMCF, led by a ramp to 186 MMCF, up 52% y/y in the Permian Basin.
Total crude production again was flat at 251 MBBL per day with the Permian again lifting output. Turning the spigot on in Libya resulted in production of 9 MBBL per day, with total worldwide production of 562 million barrels of energy per day in production. As of the end of 2004, OXY had proven reserves of 2,489 mln barrels of oil and gas equivalent. Chemicals were a bit light on higher feedstock costs, but that was expected. OXY realized prices of $55.04 per barrel in oil (+45% y/y) and $5.49 tcf in gas (+15% y/y) in the third quarter.
Production is expected to rise between 580,000 to 590,000 barrels of oil per day in the current quarter, according to the company. In mid-October, the company purchased Vintage Petroleum for $3.5 billion and shipped its first barrel of oil out of Libya in almost twenty years. Oil and gas producers are hard pressed to drive production, now rarely achieved through the drill bit. As a consequence, consolidation within the energy patch is inevitable. Strong free cash flow generation has enabled OXY to pay down debt, while pursing acquisitions. Its current debt to cap is 17% - amongst the lowest in the E&P industry. We maintain our favor for these names and feel OXY's continual strong performance, along with an attractive yield of 1.84%, bodes well for investors.
--Kimberly DuBord, Briefing.com
3:08PM Novartis (NVS)
53.82 +0.42: Drug maker Novartis AG said Monday it agreed to acquire the remainder Chiron Corp. (CHIR 44.21 +0.81), the world's fifth largest vaccine producer, that it does not already own, after having its original offer rejected last month. The Swiss pharmaceutical company, which currently owns 42% of Chiron, said it will acquire approximately 113 million shares for $5.1 billion, or $45 per share, in cash. That represents a 23% premium over the price of Chiron shares on August 31, before Novartis made its initial proposal of $4.5 billion, or $40 per share. The agreement, which is still subject to shareholder and regulatory approval, is expected to be completed in the first half of 2006.
On account of the announced deal, which is expected to bolster Novarits' competencies and capabilities amid growing consolidation in the industry, shares of NVS have trended higher in intraday trading. The stock has gained nearly 7% year-to-date, and trades at approximately 17.3x forward earnings at the current price level. While the benefits of the merger may take a few years to be fully realized, the acquisition of Chiron supports Novartis' already strong operations and should provide substantial growth opportunities, particularly in the vaccine and blood-testing businesses.
Chiron, which is still reeling from production problems at its British facility that kept it from delivering its Fluvirin flu vaccine to the United States last year, has struggled to reverse declining profits and rising expenses. In 2004, the Emeryville, CA-based company earned $156 million on revenue of $1.7 billion, compared with earnings of $304 million on revenue of $1.8 billion in the previous year.
While Chiron's flu vaccine business has garnered the most attention as of late, especially amid growing concerns of a bird flu pandemic, Novartis noted that the deal also provides the company access to notable cancer therapeutics, blood-testing products, and royalty and licensing fees. The company anticipates cost synergies of $200 million within three years after closing the deal, with 50% expected to be achieved in the first 18 months.
Novartis said the transaction will strengthen Chiron's capabilities to better meet the needs of patients with high-quality vaccines, and provide the company entry into a dynamic growth market. "Our plan is to turn around the Chiron vaccines business, which will require investments in R&D and manufacturing to increase quality and capacity, so that we can better meet customer demand and address public health needs. Together with the dynamically growing diagnostics business, vaccines will form a new division, while biopharmaceuticals will be integrated into the existing pharmaceuticals business," noted Novartis' Chairman and CEO, Dr. Daniel Vasella.
--Richard Jahnke, Briefing.com
12:33PM Sysco (SYY)
31.99 -0.27: Sysco Corp., the nation's largest foodservice marketer and distributor, said Monday that first quarter profits fell from a year ago, due to escalating fuel costs, higher pension costs, as well as expenses from serving customers affected by hurricanes Katrina and Rita. The company, based in Houston, Texas, earned $199.2 million, or $0.31 per share, excluding the effect of an accounting change, down from $225.9 million, or $0.52 per share, in the same period last year. The results for the latest quarter included stock-based compensation costs of $0.05 per share. On average, analysts had expected quarterly earnings of $0.33 per share, according to Reuters Estimates.
Sysco's bottom line was impacted by a number of cost pressures, including persistently high fuel costs and higher pension costs, despite stronger revenue. Sales rose 6.4% year/year to $8.01 billion - in-line with analyst expectations - while inflation, as measured by company's cost of goods, was 0.4% versus 5.9% last year. Sysco said the declining food cost inflation contributed to better gross margin performance as the company experienced its smallest decline in gross profit margin in the past twelve quarters.
Operating expenses, as a percent of sales, increased 11.5% to $1.18 billion compared to last year. For the latest quarter, fuel costs increased approximately 50%, or $15 million, while higher pension costs added $6 million to expenses. In addition, costs related to the company's National Supply Chain Project impacted EPS by $0.01.
Sysco, which has been investing heavily in supply chain initiatives, also noted that its new distribution center is operating at 50% of full capacity and indicated that the financial impact of the center was predicated on the projections that it would achieve full volumes in January 2006. However, with a number of operational changes identified to make the distribution center more efficient, the company does not expect the previous earnings guidance of flat to slightly accretive for FY06 to be met. The consensus earnings estimate for FY06 stands at $1.41 per share on revenue of $32.6 billion, according to Reuters Estimates.
While the deployment of the National Supply Chain Project remains a long-term catalyst for the company, shares have largely been pressured by high gas prices. Reflecting this, the stock has fallen more than 12% since the beginning of the year. However, with the impact of volatile fuel costs already factored into the current price level, combined with ongoing traction in supply chain initiatives, Sysco shares present a compelling risk/reward proposition. The company is currently trading at approximately 22.8x forward earnings.
--Richard Jahnke, Briefing.com
11:30AM Kellogg (K)
43.93 -2.53: The market reacted to Kellogg's third quarter result like it was a bowl of soggy cereal. The displeasure was caused by the company's downside guidance for the December quarter and the full year, which overshadowed a solid third quarter. The largest cereal producer in the US posted an 11% rise in net earnings to $274.3 mln, as net sales grew 7.3% to $2.62 bln. The EPS figure of $0.66 per share was two cents ahead of expectations, but was assisted by a lower tax rate.
North America internal sales grew 8%, which was impressive considering the company was going up against challenging comparisons. The performance was driven by Retail Cereals, up11% on brand-building exercises and new product launches, which does not bode well for General Mills (GIS). Retail Snacks chewed up sales growth of 6% despite weak sales of Pop-Tarts and cookies. Frozen and Specialty Channels made a strong showing with net sales up 8%, led by Eggos, frozen foods, and its Food Away from Home business. South America was the standout in the quarter within the International segment, gaining 16% in internal sales. Gross margins slipped to 45.2% from 46.1%, depressed by raw materials and upfront costs, in addition to competitive pressures.
Input costs and international competitive pressures remain a sticking point for all global food companies. Looking to the fourth quarter, Kellogg is anticipating per share earnings in a range of $2.32-2.34, which is up from its previous guidance of $2.30 to $2.33, but still below consensus of $2.38 on mid single-digit sales growth. Kellogg gave preliminary estimates for next year, which did little to entice buyers. For FY06, it sees earnings between $2.50-2.55 per share, excluding items, compared to consensus of $2.62, on sales growth in the low single-digits. Management stated on its conference call that higher energy and commodity costs will eat into next year's profits.
Notwithstanding several Overweight ratings by Wall Street analysts, shares have suffered one of their biggest down slides in recent memory. Kellogg has been supporting its stock price through share buybacks that totaled $260 mln in the third quarter. The company plans to step up buybacks with the board approving an additional $650 mln authorization for next year. Kellogg holds a third of the US, and 50% of the international, cereal market. Reading into today's release, it's clear earnings accretion will be achieved more so through buybacks than on the operating line. The stock does offer investors a dividend yield of 2.51%. We currently hold a market weight view of the Staples sector as growth is being tempered by rising costs.
--Kimberly DuBord, Briefing.com
10:05AM Humana (HUM)
44.42 +0.50: Health benefits provider Humana, Inc., on Monday reported lower third quarter earnings as expenses related to a legal settlement and Hurricane Katrina offset a 20% jump in revenue. For the latest quarter, the Louisville, Kentucky-based company said it earned $49.9 million, or $0.30 per share, compared with $84.3 million, or $0.52 per share, in the year-ago period. The results included $0.27 per share in expenses for the settlement of a class-action lawsuit and $0.03 per share associated with Hurricane Katrina. Excluding these charges, Humana would have earned $0.60 per share - $0.09 better than the consensus EPS estimate of $0.51. Revenue rose to $3.82 billion from $3.18 billion last year, while the company's medical expense ratio increased 70 basis points to 83.4%.
Overall, Humana's third quarter results reflect continued strength in the government segment, offset in part by weakness in the commercial business, as well as one-time charges. Despite the lackluster performance, though, the company stands to benefit from the potential opportunities afforded by the new Medicare plan beginning in January 2006. Humana currently trades at 22.8x trailing earnings, compared with the average level of 17.4x over the past five years.
Driven by higher Medicare membership, the government segment recorded operating earnings of $124.4 million, excluding non-recurring items, versus $88.8 million in the previous year. Medicare Advantage premiums climbed 59% from a year ago to $814.6 million, as membership increased 131,800, or 35% year/year, to approximately 503,100 members. Meanwhile, the commercial segment reported earnings of $25.6 million, ex-items, compared with $38.7 million last year, as a more competitive pricing environment led to higher medical membership attrition. Segment membership decreased 21,800, or 1%, to 3.18 million members, generating premiums and services fees of $1.67 billion - a 7% drop from $1.79 billion a year earlier.
Looking to the fourth quarter, Humana projected EPS of $0.45 to $0.47, excluding expenses for the litigation settlement and the impact of Hurricane Katrina, versus analysts' expectation of $0.57. However, the company reaffirmed its guidance for the current year and fiscal 2006. For FY05, Humana expects earnings of $2.09 to $2.11 per share on revenue of $14.5 billion, compared with the consensus estimate for EPS of $2.12 on revenue of $14.32 billion. The company sees FY06 EPS of $2.80, excluding $0.10 for stock compensation expenses. Analysts had projected earnings of $2.79 per share, according to Reuters Estimates.
--Richard Jahnke, Briefing.com
9:29AM Barrick Gold (ABX)
27.20: The Toronto, Ontario-based gold producer, Barrick Gold, made a hostile bid for rival Canadian producer Placer Dome. Barrick is the world's third largest producer behind Newmont Mining and AngloGold, with Placer ranking fifth behind Gold Field's. The offer is valued at $9.2 bln in cash and stock. Placer's shareholders will have the right to receive $20.50 per share in cash or 0.7518 ABX shares and five cents in cash for each share of PDG. Goldcorp has agreed with Barrick to buy some of Placer's assets, if the bid should succeed, for $1.35 bln in cash. The deal will increase production for Goldcorop by 50% to more than 2 million ounces.
Placer's assets are located in the Campbell, Porcupine and Musselwhite gold mine in Ontario, along with the La Coipa silver mine in Chile. Barrick just released its third quarter results and beat the consensus estimate by two cents. Profits nearly tripled on higher prices. The company added several new mines, which assisted production by 22% to 1.51 million ounces. Barrick stated Placer's assets were attractive due to the close proximity of its mines and that it expects the deal to be accretive to earnings and cash flows.
Gold's allure as a means to hedge inflation is not the metal's only appeal. Traders are pushing prices higher on speculation that demand from jewelry makers in China will exceed supply. Gold futures gained 1.2% last week to $474.80 an ounce on the NY Mercantile Exchange. Year-to-date the metal has risen 11%, with a 17-year high reached in mid October of $483.10 per ounce. Most analysts predict gold will top $500 before year end.
As is the case with several metals, the pace of demand is rising as mine output declines. Newmont reported a 6.8% drop in production in third quarter, while AngloGold suffered a 2% slide. Newmont is planning to run its gold refinery in Chiasso, Switzerland, at full capacity for at least four months in order to meet jewelry demand. Typically demand ramps up in September and October ahead of the holiday season, with January the peak month due to the wedding season in India.
Global consolidation among metal producers is likely to continue. Soaring metals prices has resulted in a windfall of cash for producers, which are looking to increase output in order to take advantage of the current bull market in commodities. Mining is a heavily capital-intensive business and production costs continue to escalate from tires, to steel, to fuel, to labor, to power. Barrick is one of the few producers that did not raise its cost guidance for the full year following its third quarter results. Further, Barrick actually was able to increase net profit margins, something few metal producers were able to accomplish. The stock remains in favor by institutions due to its growth profile from existing assets, along with several new tantalizing exploration projects.
--Kimberly DuBord, Briefing.com
9:18AM Wal-Mart (WMT)
45.50: On Friday the Q3 GDP report revealed consumer spending rose at a 3.9% annual rate of growth. Briefing.com characterized the increase as "very good," but acknowledged in our Economic briefing that spending may ease in the fourth quarter due to high energy prices. Consistent with that view, we are currently expecting consumer spending to increase 1.0% in the fourth quarter.
After Wal-Mart's same-store sales update for October this morning, we certainly don't see any need to revise our spending forecast lower. Furthermore, the latest update from Wal-Mart reinforces the belief expressed a few weeks ago in our Bargain Hunting column that Wal-Mart is an attractive long-term investment idea at current price levels.
For the past several weeks Wal-Mart has indicated that it expects October same-store sales growth to be within its guidance of 2-4%. Apparently, though, the final week of its reporting period ended on a solid note as the world's largest retailer now expects U.S. same-store sales to be up 4.3%. When gasoline sales are excluded from the computation, Wal-Mart believes same-store sales would have been approximately 30 basis points less, or at the high end of its guidance range.
It is worth noting that general merchandise sales were stronger than food in the final week of the reporting period. In the previous three weekly sales summaries for October, food comparative sales were reported to be stronger than general merchandise. The role reversal in the final week is an anecdotal sign that discretionary spending may be improving amid some relief at the gas pump. According to the Energy Information Administration, U.S. gas prices averaged $2.92 per gallon the week of October 3rd and $2.56 per gallon the week of October 24th.
Wal-Mart will report its official results on November 3rd.
--Patrick J. O'Hare, Briefing.com
8:47AM Valero Energy (VLO)
$99.50: The largest US oil processor reported a third quarter profit of $4.37 per share, up from $1.57 per share last year, on soaring refined profit margins. The street failed to keep pace with Valero, as the company transcended expectations by $0.40 per share. Valero certainly had a challenging third quarter with the Gulf hurricanes and the addition of a sizeable acquisition. The real story, though, was the tight refining capacity, not only in the US, but worldwide. Valero commented in today's release that it believes the ramp in pump prices will "soon be behind us," which is certainly good news for consumers.
Crack spreads are what a refiner earns from turning raw crude into refined products such as gasoline, jet fuel, diesel, and heating oil. These "cracks" have widened considerably on strong demand and limited capacity. The record hurricane season this year took a significant portion of refining capacity off line, thus reducing supplies and pushing the crack spreads higher. The average profit margin on refined fuels soared to a record $15.22 per barrel, representing a 92% increase over one year, as gasoline prices outpaced the rise in crude. Valero benefited as one of the largest high-sulfur producers, which is much cheaper than the sweet-crude. Valero's output is roughly 70% sour.
Valero added four refineries through its acquisition of Premcor. The deal boosted Valero above the largest cap integrated oil companies, Exxon (XOM) and ConocoPhillips (COP), as the largest refiner by capacity. It operators 16 refineries in the US with a total capacity to produce 2.34 mln barrels of crude per day. Valero is making changes at the top. CEO Bill Greehey will be stepping down at the end of the year, but will remain as Chairman. The Chief Operating Officer, Bill Kleese, will become the new chief executive as of January 1st.
Valero stated the outlook for Q4 "is outstanding." Gulf Coast gasoline margins for November and December are around $4.00 per barrel and $17.00 for heating oil. Sour crude discounts continue to widen further from the already record levels. With the integration of the Premcor assets, coupled with the margin outlook, Valero stated the current First Call estimate of $3.67 per share is "significantly too low." The company estimates that it will generate a per share profit of $2.30 in October alone. Valero's bullish guidance has sent shares up in pre-market trading, which is adding to its stature as the best performing stock this year within the S&P 500 Index.
--Kimberly DuBord, Briefing.com
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