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Friday, November 04, 2005 9:32:06 PM
From Briefing.com: 4:56PM Weekly Wrap: The stock market had a great week. The S&P 500 was up four out of five days. The data this past week was decent, but the news didn't propel the market. Rather, the positive tone from recent weeks carried through.
Earnings continued to flow. Over 85% of the S&P companies have now reported. Operating earnings are still on track for 15% growth. The fourth quarter outlook also has not changed. Forecasts remain in the 12% to 15% range. A stable earnings outlook is good for the stock market considering all the concerns about the economic outlook.
The economic releases were mixed. The big report was the October employment report. Payrolls were up 56,000. The September decline was revised to just an 8,000 decline from an originally reported 35,000 drop. That left a net gain of 83,000, which was below an expected 100,000 level. That wasn't far enough off expectations to cause much concern, however, given the improved tone of the market.
More encouraging was the September same store sales data. The big three of Wal-Mart, Costco, and Target all reported excellent gains that exceeded expectations. Most other stores also posted very good numbers. This shows that high energy prices haven't yet shut down the consumer.
October auto sales were not as good. Sales were very soft. Late in the week, General Motors announced enhanced rebates. For all the attention on gasoline prices, it is not generally recognized that consumers spend more on cars than gas. Flat auto prices have been a factor holding inflation in check.
The worst news of the week was that the 10-year bond yield continued to rise. It closed the week at 4.66% from 4.58% last week. The Fed, of course, raised the fed funds rate to 4% on Tuesday. The policy statement suggested that more rate hikes are coming. Rising rates across the yield curve will eventually hamper economic growth. Higher bond yields also reduce implied stock valuations.
Oil prices were little changed this week as crude closed at $60.58 a barrel. Natural gas prices continued to decline, however, and dropped about $2 in a little over a week from $13 per mmbtu to close to $11 on the December futures contract. This mitigated concerns about the consumer being squeezed by heating costs this winter.
The biggest corporate news was an earnings warning from Dell and a court victory for Merck in Vioxx litigation. Neither ultimately had broad impact.
The market finally found some sector leadership. Retail stocks did well, as did some energy sectors, and financials had another strong week.
The market action this week was good despite any overtly bullish data. Negative news was ignored. Positive news gave stocks or the broad market a good boost. The tone clearly improved as the traditionally strong month of November began. The market is no longer obsessing over possible inflationary pressures or a total collapse of the economy in the fourth quarter. The outlook remains modestly upbeat.
Close Dow +8.17 at 10530.76, S&P +0.20 at 122.14, Nasdaq +9.21 at 2169.43: Breaching the tight range within which they had been confined throughout most of the session, each of the indices headed into the weekend with modest gains. While the Nasdaq clung to such all day, the Dow and S&P spent almost the entire session in the red. While a lower than anticipated 56K rise in October non-farm payrolls (consensus +100K) did not initially stir selling, digestion of the somewhat disappointing data injected a bearish air that left the market on the defensive. Although wage costs are still not of considerable inflationary concern and productivity gains are outpacing wages, the 0.5% increase in hourly earnings (consensus +0.2%) further perturbed inflation-flustered investors. With little else on either the corporate or economic fronts to share the spotlight or to serve as a catalyst, the economic sectors' stances were static until moments before the close. Leadership did not emerge, and the market was left leaning on modest gains in Healthcare and Technology as sole sources of support throughout most of the day. A 2.0% drop in the price of crude sent the Energy sector to a market-dragging 2.6% loss while doing little to help other areas of the market. Even transportation issues did not benefit, and sent the Dow Jones Transportation Average to a 1.1% loss. Within Energy, refiners fared worst, but Exxon Mobil's (XOM 57.90 -0.67) decline was a particular pocket of weakness within the S&P and Dow. Materials, Consumer Staples, Utilities, and Industrials also traded on negative turf all day and helped further stall upward efforts. Weakness within the Treasury market served as a bearish cloud over the equity market; after breaking through a 16-month high yesterday, the 10-year note's 4.67% yield surpassed that today. The disappointing jobs data sparked some transitory improvement, but bond buying was perhaps halted upon the recognition that - with last month's upward revision considered - the number was not that bad. Despite sharp focus upon that market, the Financial sector (+0.4%) managed to recover mid-day - lending 0.4% upon banks' similar rise and a reversal in brokers. The sector's rise paired with Technology's and Healthcare's performances in pushing the averages to their late-day gains. Semiconductors and software teamed with especial strength in Oracle (ORCL 12.58 +0.38) shares to offset Apple's (AAPL 61.09 -0.76) downgrade-induced decline. For its part, ORCL jumped over 3.0% after announcing a management change and following Goldman Sachs' positive comments. On account of a pair of gainers, Healthcare (+0.4%) was the only sector to stand solid from open to close. Amgen (AMGN 79.18 +1.67) enjoyed follow-through buying interest after disclosing positive results on studies of its cancer drug yesterday, and Pfizer (PFE 22.28 +0.41) rose after announcing European approval of its hypertension drug Revatio. NYSE Adv/Dec 1506/1724, Nasdaq Adv/Dec 1529/1465
8:34AM Vishay beats by $0.03, misses on revs (VSH) 11.85 :Co reports Q3 pro-forma EPS of $0.14, which excludes $0.03 in charges, $0.03 better than $0.11 consensus; revs fell 3.1% to $566.1 mln vs $576.7 mln consensus.
2:34PM Sanmina-SCI (SANM)
4.43 +0.77: Sanmina-SCI shares rose sharply during the regular trading session, gaining as much as 23%, after the electronics manufacturing services company reported better than expected fourth quarter results and provided in line guidance for the December quarter. Sanmina on Thursday reported earnings of $31.3 million, or $0.06 per share, excluding non-recurring items, compared with earnings in the year-ago period of $35.4 million, or $0.07 per share. On the same basis, the results were a penny better than the consensus estimate of $0.05 per share.
The company posted revenue of $2.77 billion, down 16.3% from $3.3 billion last year. Analysts, on average, were expecting revenue of $2.75 billion, according to Reuters Estimates. Gross margin expanded 30 basis points to 5.5%, while operating margin gained 10 basis points to 2.3%, due in part to lower restructuring costs. Although the largest expense item in the period, restructuring costs declined to 26% from a year ago to $18.3 million. Overall operating expenses, meanwhile, declined to $113.8 million from $126.8 million a year earlier.
Looking to the fiscal first quarter, Sanmina sees earnings in the range of $0.06 to $0.08 per share and revenue between $2.8 and $2.9 billion. That compares with analysts' estimate for earnings of $0.07 per share and revenue of $2.92 billion. In the same period last year, the company earned $0.09 per share on revenue of $3.25 billion.
Despite trading down roughly 45% since the beginning of the year, Sanmina shares have rebounded sharply following the better than expected quarterly results. With the company beginning to show some benefits from its ongoing restructuring efforts, investors have seemingly regained interest in the stock. Adding to investor sentiment, research firm Robert W. Baird upgraded shares of the company to Neutral from Underperform and raised its target price to $4 from $3, stating business appears to have stabilized and poses reduced downside risk. Nonetheless, as Sanmina's turnaround story continues to unfold, Briefing.com believes investors should remain cautious of current prospects in the face of challenging market conditions and increased competition.
--Richard Jahnke, Briefing.com
11:38AM Noble Energy (NBL)
39.70 -1.28: Profits nearly doubled over the last year for Noble Energy, a US oil and gas producer. The bull market environment helped counterbalance the significant damage the industry infrastructure sustained in the Gulf. The standout for Noble in the third quarter was production growth, notably its continued drilling success overseas. Net income grew to $177 mln, or $0.99 per share, from $83.7 mln, or $0.70 per share, in the prior year. On a comparable basis, earnings were $1.00 per share, below consensus of $1.18. The miss came from several items, including higher exploration expenses for "dry holes," lease operating expenses, and lower than expected natural gas price realizations.
Production rose 61% to 168,666 barrels of oil equivalent per day (Boepd), nearly a 29% rise over the last quarter. Noble's success outside North America is a key driver of the stock. The upside in production in Q3 came from initial gas production from Swordfish, along with China, Equatorial Guinea, and Israel. US production was negatively impacted by the hurricanes, but Noble has been successful in getting Gulf production back on line. Gulf production is now above 20k barrels per day, or 70% of pre-Katrina levels, compared to the industry average of 50%. Domestic production totaled 168,666 barrels (Boepd), as the hurricanes reduced output by 7,600 Boepd.
Noble took full advantage of the strong market fundamentals. Higher production volumes combined with soaring commodity prices led to a doubling in revenues to $645.2 mln over the prior year. Noble realized natural gas prices of $5.65 per thousand cubic feet, up 25% year/year in the quarter, while crude prices increased 34% to $47.58 per barrel. This was the first quarter the Patina Oil & Gas acquisition was fully integrated into its operations, which lessened the impact the hurricanes had on operations than in prior seasons.
The company reiterated 2005 production guidance of 145-146 MBOE/d, up 36% from 2004. It also maintained a capex budget of $987 mln, a quarter of which is allocated towards exploration. Noble ended the quarter with debt of $2.1 bln, down $400 mln quarter/quarter and said it will continue to use cash to further reduce this position. Noble's double-digit organic production growth and new field potential buttress our positive view of the stock.
--Kimberly DuBord, Briefing.com
11:25AM Computer Sciences (CSC)
53.22 -0.28: Computer Sciences Corp. posted higher than expected second quarter earnings, driven by strong revenue growth from U.S. commercial activities and federal government operations. The IT services company said Thursday it earned $99.5 million, or $0.53 per share, including an asset impairment charge of $33.1 million, or $0.18 per share, related to a contract with Nortel Networks. Excluding the charge, the company would have earned $0.71 per share - four-cents better than the consensus EPS estimate of $0.67. Last year, CSC reported earnings of $130.5 million, or $0.68 per share.
Second quarter revenue increased 5.3% from a year ago to $3.57 billion - slightly below the consensus estimate of $3.63 billion. CSC said both its commercial and government units reported strong sales increases, aided by meaningful outsourcing contracts in the U.S. and overseas. Commercial sales grew 4.1% to $2.33 billion, with U.S. commercial sales up 11.3% versus the prior year. European revenue, in contrast, declined 4.9% year/year, while non-European international revenue rose 13.9%.
The company's federal business - representing 35% of total sales - posted a 7.5% increase to $1.24 billion. Revenue from Department of Defense related business climbed 19.9% to $835.4 million, which offset an 8.7% decline in civil agencies activities, to $383.4 million. Separately, CSC said it anticipates approximately $30 billion in U.S. federal government opportunities over the next 17 months, with about one-third of those opportunities scheduled for award during the remainder of the fiscal year.
Turning to the third quarter, CSC expects earnings in the mid-$0.80 per share range on revenue around $3.8 billion. Analysts had projected EPS of $0.85 and revenue of $3.77 billion. For the year, the company lowered its revenue target to $15 billion, compared with its previous range of $15 to $15.2 billion, citing an adverse impact from currency fluctuations. Full-year earnings are expected to be in the range of $3.25 to $3.30 per share, versus its previously stated range of $3.20 to $3.30. According to Reuters Estimates, analysts are expecting FY06 EPS of $3.25 on revenue of $15.1 billion.
Amid speculation that Lockheed Martin (LMT) and three private equity firms are considering a $12 billion offer for the company, CSC shares have gained more than 20% while reaching a new 52-week high of $59.90 since the news circulated last week. At the same time, however, shares are down nearly 3% year-to-date. Although CSC's most recent results surpassed expectations as technology spending continues to gain traction, the company's conservative outlook along with the recent run-up in its stock detract from a more favorable investment opportunity. As such, investors should refrain from committing new money at this time.
--Richard Jahnke, Briefing.com
11:21AM Polo Ralph Lauren (RL)
53.79 +1.64: Polo Ralph Lauren Corp. (RL), which has beaten or matched Wall Street forecasts for 27 consecutive quarters, reported Q2 (Sep) earnings of $0.97 per share, $0.07 better than the Reuters Estimates consensus.
Net revenues for the three months ended Oct. 1 rose 15% to $1.03 bln, well above the $970.3 mln consensus estimate and $895.6 mln from a year ago. The largest percentage of sales again came from the Wholesale segment, as demand for menswear, childrenswear and business in Europe generated sales of $578 mln. Also contributing to the 15% year/year wholesale sales growth was a small increase from the inclusion of RL's newly acquired footwear licensee business Ralph Lauren Footwear Co.
The Retail group, which consists of 64 Ralph Lauren stores, four Rugby stores, 73 Club Monaco stores, 135 Polo factory stores, 13 Polo Jeans Co. factory stores, and five Club Monaco factory stores, also helped solidify RL's leadership position as the world's largest luxury apparel company. Retail sales were up 17% year/year to $387 mln, reflecting increases in all of the company's retail formats.
For the second half of fiscal 2006, the New York-based retailer projected consolidated revenue growth to be in the mid-single digit percent range and operating margins to increase 425 to 450 basis points. Should that come to fruition, FY06 earnings should check in between $2.85 and $2.92 per share, which is actually below the Reuters Estimates consensus of $2.94. However, the company has been known to be overly conservative with its guidance.
Shares of Polo Ralph Lauren are up more than 25% year to date and, with today's gain, are near a historic high.
--Brian Duhn, Briefing.com
9:44AM Expedia (EXPE)
22.66 +1.95: Expedia, which was spun-off from IAC/Interactive (IACI) in August, reported third quarter results that eclipsed analysts' expectations, aided by solid bookings growth. For its first quarter as an independent company, the online travel company reported earnings of $126.9 million, or $0.35 per share, ex-items, compared with earnings in the year ago period of $110.2 million. Analysts were expecting adjusted earnings of $0.31 per share, according to Reuters Estimates.
Expedia, whose businesses include Expedia.com, Hotels.com, Hotwire, and TripAdvisor, said revenue grew 16% to $584.7 million during the period, driven by increased worldwide merchant hotel revenue, acquisitions, and growth in its car rental business. Hotel revenue increased 15% while air travel revenue increased 3%. Even though the company noted that results were negatively affected by recent hurricane and terrorist activity, gross bookings increased 21% to $3.9 billion, with domestic bookings up 16% and international bookings up 39% versus the prior year.
Gross profit for the third quarter grew 14% from a year ago to $457 million. However, gross margin was down 112 basis points to 78.1%, largely due to the acquisition of a destination services company in February 2005, which has historically generated lower margins than Expedia's core business. Strong top-line growth in the latest period was offset in part by lower gross margin, as well as higher general and administrative and technology and content expenses, which rose 50% and 28%, respectively.
In August, Expedia was spun-off from Barry Diller's IAC/Interactive and has emerged as a more distinct company, with many more brands to complement its core operations. The new travel company represents more than 50% of market share for Internet travel companies. Although competitive pressures are likely to remain intact, the company, supported by its broad spectrum of brands, is well positioned to benefit from growth in the online travel market, particularly overseas. Expedia shares currently trade at approximately 18.5x forward earnings.
--Richard Jahnke, Briefing.com
9:29AM Fortune Brands (FO)
77.80: Fortune Brands is one of those stocks investors buy when the US economy starts to pick up steam on expectations of the rising demand for its wide-ranging consumer brands. Fortune sells a bevy of products from Titleist golf balls to Moen facets to Jim Beam bourbon. The stock started moving up in the fall of 2001 and hasn't looked back, topping out at $90 per share at the end of July. What Fortune offers investors is a full-bodied portfolio of products, brand strength, long-term growth and a strong operational and shareholder-friendly track record. Recently, investors have been taking profits, dropping the stock below $80 per share.
On Friday Fortune reported an in-line third quarter on organic growth of 8%. There were many moving parts in the quarter, namely the acquisitions of several spirits and wine brands that include Sauza, Courvoisier, Canadian Club and Clos du Bois. FO also spun-off its office products business to shareholders. Growth was broad-based, with positive sales in each of its three consumer businesses: Home & Hardware, Spirits & Wine, and Golf. It continues to gain market share in key markets and mustered double-digit growth in cabinets, faucets, and entry doors.
Net income rose to $92.2 mln of $0.61 per diluted share. Excluding non-recurring items, earnings were $1.12 per share. Net sales rose 19% to $1.8 bln, including an 11 point swing on acquisitions, excise taxes, and forex. The Lincolnshire, Illinois-based company was able to maintain gross margins at 45.3% despite higher raw material and energy costs. Fortune reaffirmed its full year outlook for double digit growth in earnings before items. After generating 20% growth last year, Fortune faces challenging comparisons in the fourth quarter, not to mention the acquisitions integration, a slowing housing market, and concerns over the pace of consumer spending. Our view, however, is that the economy is maintaining a healthy pace and we would steer investors towards companies with long-term growth prospects - exactly where FO's fortune lies. Expectations are for 15% earnings growth next year. Shares are now trading at a forward multiple of 16.7x.
--Kimberly DuBord, Briefing.com
9:21AM Oracle (ORCL)
12.20: Oracle Corp (ORCL) lost its second CFO in just five months. Yesterday, Gregory Maffei stepped down after serving a little more than four months as the company's finance chief to pursue a "terrific professional opportunity." While he said in a statement that his "resignation from Oracle is not a reflection on the company, its executives or employees," his actions speak louder than words and have raised concern about the high turnover rate recently of company executives.
After all, Maffei's departure follows the resignation of Harry You, who left in March after only eight months on the job. You is now the CEO at BearingPoint (BE), the consulting services firm formerly known as KPMG Consulting.
Even though Maffei will stay at Oracle through Nov. 15, his exodus will interfere with Larry Ellison's mission to create the world's No. 1 software company that would eventually displace his nemesis, Microsoft (MSFT), the same company that employed Maffei as its CFO from July 1997 to December 1999. To that end, Ellison has been on an aggressive buying spree, paying $11.1 bln for rival PeopleSoft in January 2005 and most recently offering $5.85 bln for competitor Siebel Systems (SEBL). The ongoing digestion of PeopleSoft and the upcoming integration of Siebel remain uncertain.
On a positive note, Maffei will be handing over the reins to company co-President Safra Catz, a former investment banker who assumed the CFO position for 3 1/2 months earlier this year and is responsible for M&A at Oracle. Despite Catz's qualifications, the turnover of top talent at the company is a terrible distraction for investors at a time when Oracle needs to be completely focused on merger integration issues.
--Brian Duhn, Briefing.com
8:25AM Toyota Motor (TM)
93.14: The Nikkei reached a milestone overnight, topping 14,000 for the first time in more than four years. The Japanese market continues to gather momentum on the back of a recovering economy. The index rose almost 6% just this week - the biggest gain since August 2003. One stock that has gone along for the ride is Toyota. Its shares have reached a new multi-year high, gaining almost 30% year to date, while Ford (F) and GM (GM) have lost a combined 76% in value. Toyota, the world's largest automaker by value, reported a 2.1% rise in profits. Net income grew to 303.7 bln yen ($2.6 bln) on sales growth of 10% to 4.97 tln.
The company is in the midst of expanding its factory capacity, building new facilities around the globe from China to Canada. It's raised the bar on spending for next year to a record 1.4 trillion yen. Investors have been jumping on board on the back of Toyota's long-term growth outlook. The spending weighed on last quarter's operating profits, which fell 3.2% to 404.3 bln yen. Still, Toyota has been able to find the right mix of products, selling 1.89 mln vehicles in the quarter, up 6.2% year/year. Asian sales rose 19%, North American sales gained 9%, and Europe grew 5.7%. Toyota continues to struggle in its own backyard, however, as domestic sales fell 5.6% to 536,000 units with profits weakening on a mix of smaller lower-profit cars.
While the automaker did not provide guidance, Senior Managing Director Takeshi Suzuki said full year profits would rise to a fourth straight record from 1.17 trillion yen last year. After surpassing Ford last year, Toyota could overtake GM as the world's largest carmaker next year. Toyota raised it global sales forecast to 8.03 mln units - an increase of 8.4% from last year. A weaker yen is certainly helping all of the Japanese automakers. Toyota generates 60% of its operating profits in the US and every point move in the yen adds a hefty sum to its bottom line.
Toyota has been a prime beneficiary of record gas prices in the US. Its Prius hybrid car, which can travel 55 miles on one gallon of gas, has reached near cult status. Its vehicles are viewed worldwide as the some of the best built and most reliable on the road today. With the Asian automakers swallowing up additional share each year, GM and Ford now stand at the crossroads and need to make the difficult, but necessary, choices to ensure they remain competitive.
--Kimberly DuBord, Briefing.com
9:56AM HealthTronics (HTRN) Deutsche Securities downgrades Buy to HOLD. Downgrade reflects the firms reduced confidence in growth. The firm states vehicle segment remains an erratic performer and they question the co's near/mid-term prospects for a sale of this unit. The firm says due to HTRN's poor execution, they cannot be as optimistic about its uro-product/service initiatives, which lack visibility heading into 2006.
9:55AM Mine Safety (MSA) Oppenheimer downgrades Buy to NEUTRAL. Downgrade follows disappointing Q3 results. They note that MSA gave greater disclosure concerning its 2006 outlook, which, at this time, they say looks relatively vulnerable primarily due to a projected drop off in military-related revenue. Firm believes fair value is now in the mid-$30 range.
9:54AM Ziprealty (ZIPR) Deutsche Securities downgrades Buy to HOLD. Downgrade follows a lighter than expected outlook for 4Q and 2006. They believe the co is being impacted in an abrupt transition in the real estate market that pretty much started in September (and has now persisted into November).
9:52AM Panacos Pharma (PANC) Bear Stearns initiates OUTPERFORM. Firm is saying PANC is one of the few small cap biotech pure plays on the HIV space. The firm believes its lead drug (PA-457) is the first ever "maturation inhibitor". Saying early data has been generally positive, and, if approved, peak sales could reach $700 mln.
9:51AM Red Robin Gourmet (RRGB) Oppenheimer upgrades Sell to NEUTRAL. Upgrade is following Q3 results that were as anticipated, saying there seems to be no ill effect from the recent management changes. They note that the conference call outlined a more explicit growth strategy which includes an estimated 22% EPS growth rate going forward.
9:50AM Biovail (BVF) Morgan Stanley upgrades Equal-weight to OVERWEIGHT. Firm is saying the company has defied their skepticism, by inking a solid deal with JNJ on Tramadol ER. The firm states BVF will be collecting 37.5% of net sales in '07-'08 and an undisclosed fixed rate between 27.5%-37.5% for remainder of the ten-year term. The firm mentions the reward/risk profile no longer warrants a negative rating and mentions their concern about the generic threat to Wellbutrin XL, which accounts for nearly all of current profitability.
9:49AM Gemstar-TV Guide (GMST) Kaufman Bros downgrades Buy to HOLD. Target $4.5 to $3.25. Downgrade follows in line Q3 earnings results. The firm cites mgmt's reduced Q4 and beyond guidance. The firm is concerned that cash burn over the remainder of the year is expected to be heavy, and CE IPG licensing is failing to gain traction in North America.
9:47AM Amylin Pharms (AMLN) Rodman & Renshaw initiates MKT PERFORM. Firm notes after AMLN received FDA approval for two innovative diabetes products, Byetta and Symlin, with impressive clinical data that was well received by endocrinologists. The firm says although Byetta is extremely promising, competition in the market leads them to look for a more appropriate entry point. In the long run, they believe AMLN is an attractive investment, but would begin to build positions in this company at lower prices.
9:46AM TreeHouse Foods (THS) CSFB downgrades Outperform to NEUTRAL. Downgrade follows below expectations Q3 EPS and lowered Q4 guidance. Firm's greatest concern is that THS had such little visibility to the rising costs. They say shareholders are paying too big a premium for "we didn't see it coming," and CEO Sam Reed knows it.
9:44AM Guidant (GDT) Lazard Captial upgrades Hold to BUY. Target $68. Lazard upgrading on belief that JNJ merger negotiations likely still apace; even without them, independent outlook supports higher valuation... Firm comments that investors have apparently drawn the conclusion that Johnson & Johnson's public statements are a clear sign that the JNJ/GDT merger is likely off. Firm believes odds still favor the deal being completed. By purchasing GDT shares now, investors may be rewarded by either (a) Johnson & Johnson completing its purchase of Guidant for $65-$68 per share (still the most likely outcome, in firm's view), or (b) entering at what may be near the point of maximum negativity.
9:43AM Qualcomm (QCOM) Bernstein initiates OUTPERFORM. Target $32. The firm believes QCOM will benefit from a significant expansion of its addressable market, driven by a faster and more complete than expected shift to 3G W-CDMA technology. The firm expects this shift to drive better than 27% sales and profit growth from QCOM's patent licensing operation through the end of the decade, with little effect expected from the recent complaints lodged with the E.C.
Earnings continued to flow. Over 85% of the S&P companies have now reported. Operating earnings are still on track for 15% growth. The fourth quarter outlook also has not changed. Forecasts remain in the 12% to 15% range. A stable earnings outlook is good for the stock market considering all the concerns about the economic outlook.
The economic releases were mixed. The big report was the October employment report. Payrolls were up 56,000. The September decline was revised to just an 8,000 decline from an originally reported 35,000 drop. That left a net gain of 83,000, which was below an expected 100,000 level. That wasn't far enough off expectations to cause much concern, however, given the improved tone of the market.
More encouraging was the September same store sales data. The big three of Wal-Mart, Costco, and Target all reported excellent gains that exceeded expectations. Most other stores also posted very good numbers. This shows that high energy prices haven't yet shut down the consumer.
October auto sales were not as good. Sales were very soft. Late in the week, General Motors announced enhanced rebates. For all the attention on gasoline prices, it is not generally recognized that consumers spend more on cars than gas. Flat auto prices have been a factor holding inflation in check.
The worst news of the week was that the 10-year bond yield continued to rise. It closed the week at 4.66% from 4.58% last week. The Fed, of course, raised the fed funds rate to 4% on Tuesday. The policy statement suggested that more rate hikes are coming. Rising rates across the yield curve will eventually hamper economic growth. Higher bond yields also reduce implied stock valuations.
Oil prices were little changed this week as crude closed at $60.58 a barrel. Natural gas prices continued to decline, however, and dropped about $2 in a little over a week from $13 per mmbtu to close to $11 on the December futures contract. This mitigated concerns about the consumer being squeezed by heating costs this winter.
The biggest corporate news was an earnings warning from Dell and a court victory for Merck in Vioxx litigation. Neither ultimately had broad impact.
The market finally found some sector leadership. Retail stocks did well, as did some energy sectors, and financials had another strong week.
The market action this week was good despite any overtly bullish data. Negative news was ignored. Positive news gave stocks or the broad market a good boost. The tone clearly improved as the traditionally strong month of November began. The market is no longer obsessing over possible inflationary pressures or a total collapse of the economy in the fourth quarter. The outlook remains modestly upbeat.
Index Started Week Ended Week Change % Change YTD
DJIA 10402.77 10530.76 127.99 1.2 % -2.3 %
Nasdaq 2089.88 2169.43 79.55 3.8 % -0.3 %
S&P 500 1198.41 1220.14 21.73 1.8 % 0.7 %
Russell 2000 635.33 658.16 22.83 3.6 % 1.0 %
Close Dow +8.17 at 10530.76, S&P +0.20 at 122.14, Nasdaq +9.21 at 2169.43: Breaching the tight range within which they had been confined throughout most of the session, each of the indices headed into the weekend with modest gains. While the Nasdaq clung to such all day, the Dow and S&P spent almost the entire session in the red. While a lower than anticipated 56K rise in October non-farm payrolls (consensus +100K) did not initially stir selling, digestion of the somewhat disappointing data injected a bearish air that left the market on the defensive. Although wage costs are still not of considerable inflationary concern and productivity gains are outpacing wages, the 0.5% increase in hourly earnings (consensus +0.2%) further perturbed inflation-flustered investors. With little else on either the corporate or economic fronts to share the spotlight or to serve as a catalyst, the economic sectors' stances were static until moments before the close. Leadership did not emerge, and the market was left leaning on modest gains in Healthcare and Technology as sole sources of support throughout most of the day. A 2.0% drop in the price of crude sent the Energy sector to a market-dragging 2.6% loss while doing little to help other areas of the market. Even transportation issues did not benefit, and sent the Dow Jones Transportation Average to a 1.1% loss. Within Energy, refiners fared worst, but Exxon Mobil's (XOM 57.90 -0.67) decline was a particular pocket of weakness within the S&P and Dow. Materials, Consumer Staples, Utilities, and Industrials also traded on negative turf all day and helped further stall upward efforts. Weakness within the Treasury market served as a bearish cloud over the equity market; after breaking through a 16-month high yesterday, the 10-year note's 4.67% yield surpassed that today. The disappointing jobs data sparked some transitory improvement, but bond buying was perhaps halted upon the recognition that - with last month's upward revision considered - the number was not that bad. Despite sharp focus upon that market, the Financial sector (+0.4%) managed to recover mid-day - lending 0.4% upon banks' similar rise and a reversal in brokers. The sector's rise paired with Technology's and Healthcare's performances in pushing the averages to their late-day gains. Semiconductors and software teamed with especial strength in Oracle (ORCL 12.58 +0.38) shares to offset Apple's (AAPL 61.09 -0.76) downgrade-induced decline. For its part, ORCL jumped over 3.0% after announcing a management change and following Goldman Sachs' positive comments. On account of a pair of gainers, Healthcare (+0.4%) was the only sector to stand solid from open to close. Amgen (AMGN 79.18 +1.67) enjoyed follow-through buying interest after disclosing positive results on studies of its cancer drug yesterday, and Pfizer (PFE 22.28 +0.41) rose after announcing European approval of its hypertension drug Revatio. NYSE Adv/Dec 1506/1724, Nasdaq Adv/Dec 1529/1465
8:34AM Vishay beats by $0.03, misses on revs (VSH) 11.85 :Co reports Q3 pro-forma EPS of $0.14, which excludes $0.03 in charges, $0.03 better than $0.11 consensus; revs fell 3.1% to $566.1 mln vs $576.7 mln consensus.
2:34PM Sanmina-SCI (SANM)
4.43 +0.77: Sanmina-SCI shares rose sharply during the regular trading session, gaining as much as 23%, after the electronics manufacturing services company reported better than expected fourth quarter results and provided in line guidance for the December quarter. Sanmina on Thursday reported earnings of $31.3 million, or $0.06 per share, excluding non-recurring items, compared with earnings in the year-ago period of $35.4 million, or $0.07 per share. On the same basis, the results were a penny better than the consensus estimate of $0.05 per share.
The company posted revenue of $2.77 billion, down 16.3% from $3.3 billion last year. Analysts, on average, were expecting revenue of $2.75 billion, according to Reuters Estimates. Gross margin expanded 30 basis points to 5.5%, while operating margin gained 10 basis points to 2.3%, due in part to lower restructuring costs. Although the largest expense item in the period, restructuring costs declined to 26% from a year ago to $18.3 million. Overall operating expenses, meanwhile, declined to $113.8 million from $126.8 million a year earlier.
Looking to the fiscal first quarter, Sanmina sees earnings in the range of $0.06 to $0.08 per share and revenue between $2.8 and $2.9 billion. That compares with analysts' estimate for earnings of $0.07 per share and revenue of $2.92 billion. In the same period last year, the company earned $0.09 per share on revenue of $3.25 billion.
Despite trading down roughly 45% since the beginning of the year, Sanmina shares have rebounded sharply following the better than expected quarterly results. With the company beginning to show some benefits from its ongoing restructuring efforts, investors have seemingly regained interest in the stock. Adding to investor sentiment, research firm Robert W. Baird upgraded shares of the company to Neutral from Underperform and raised its target price to $4 from $3, stating business appears to have stabilized and poses reduced downside risk. Nonetheless, as Sanmina's turnaround story continues to unfold, Briefing.com believes investors should remain cautious of current prospects in the face of challenging market conditions and increased competition.
--Richard Jahnke, Briefing.com
11:38AM Noble Energy (NBL)
39.70 -1.28: Profits nearly doubled over the last year for Noble Energy, a US oil and gas producer. The bull market environment helped counterbalance the significant damage the industry infrastructure sustained in the Gulf. The standout for Noble in the third quarter was production growth, notably its continued drilling success overseas. Net income grew to $177 mln, or $0.99 per share, from $83.7 mln, or $0.70 per share, in the prior year. On a comparable basis, earnings were $1.00 per share, below consensus of $1.18. The miss came from several items, including higher exploration expenses for "dry holes," lease operating expenses, and lower than expected natural gas price realizations.
Production rose 61% to 168,666 barrels of oil equivalent per day (Boepd), nearly a 29% rise over the last quarter. Noble's success outside North America is a key driver of the stock. The upside in production in Q3 came from initial gas production from Swordfish, along with China, Equatorial Guinea, and Israel. US production was negatively impacted by the hurricanes, but Noble has been successful in getting Gulf production back on line. Gulf production is now above 20k barrels per day, or 70% of pre-Katrina levels, compared to the industry average of 50%. Domestic production totaled 168,666 barrels (Boepd), as the hurricanes reduced output by 7,600 Boepd.
Noble took full advantage of the strong market fundamentals. Higher production volumes combined with soaring commodity prices led to a doubling in revenues to $645.2 mln over the prior year. Noble realized natural gas prices of $5.65 per thousand cubic feet, up 25% year/year in the quarter, while crude prices increased 34% to $47.58 per barrel. This was the first quarter the Patina Oil & Gas acquisition was fully integrated into its operations, which lessened the impact the hurricanes had on operations than in prior seasons.
The company reiterated 2005 production guidance of 145-146 MBOE/d, up 36% from 2004. It also maintained a capex budget of $987 mln, a quarter of which is allocated towards exploration. Noble ended the quarter with debt of $2.1 bln, down $400 mln quarter/quarter and said it will continue to use cash to further reduce this position. Noble's double-digit organic production growth and new field potential buttress our positive view of the stock.
--Kimberly DuBord, Briefing.com
11:25AM Computer Sciences (CSC)
53.22 -0.28: Computer Sciences Corp. posted higher than expected second quarter earnings, driven by strong revenue growth from U.S. commercial activities and federal government operations. The IT services company said Thursday it earned $99.5 million, or $0.53 per share, including an asset impairment charge of $33.1 million, or $0.18 per share, related to a contract with Nortel Networks. Excluding the charge, the company would have earned $0.71 per share - four-cents better than the consensus EPS estimate of $0.67. Last year, CSC reported earnings of $130.5 million, or $0.68 per share.
Second quarter revenue increased 5.3% from a year ago to $3.57 billion - slightly below the consensus estimate of $3.63 billion. CSC said both its commercial and government units reported strong sales increases, aided by meaningful outsourcing contracts in the U.S. and overseas. Commercial sales grew 4.1% to $2.33 billion, with U.S. commercial sales up 11.3% versus the prior year. European revenue, in contrast, declined 4.9% year/year, while non-European international revenue rose 13.9%.
The company's federal business - representing 35% of total sales - posted a 7.5% increase to $1.24 billion. Revenue from Department of Defense related business climbed 19.9% to $835.4 million, which offset an 8.7% decline in civil agencies activities, to $383.4 million. Separately, CSC said it anticipates approximately $30 billion in U.S. federal government opportunities over the next 17 months, with about one-third of those opportunities scheduled for award during the remainder of the fiscal year.
Turning to the third quarter, CSC expects earnings in the mid-$0.80 per share range on revenue around $3.8 billion. Analysts had projected EPS of $0.85 and revenue of $3.77 billion. For the year, the company lowered its revenue target to $15 billion, compared with its previous range of $15 to $15.2 billion, citing an adverse impact from currency fluctuations. Full-year earnings are expected to be in the range of $3.25 to $3.30 per share, versus its previously stated range of $3.20 to $3.30. According to Reuters Estimates, analysts are expecting FY06 EPS of $3.25 on revenue of $15.1 billion.
Amid speculation that Lockheed Martin (LMT) and three private equity firms are considering a $12 billion offer for the company, CSC shares have gained more than 20% while reaching a new 52-week high of $59.90 since the news circulated last week. At the same time, however, shares are down nearly 3% year-to-date. Although CSC's most recent results surpassed expectations as technology spending continues to gain traction, the company's conservative outlook along with the recent run-up in its stock detract from a more favorable investment opportunity. As such, investors should refrain from committing new money at this time.
--Richard Jahnke, Briefing.com
11:21AM Polo Ralph Lauren (RL)
53.79 +1.64: Polo Ralph Lauren Corp. (RL), which has beaten or matched Wall Street forecasts for 27 consecutive quarters, reported Q2 (Sep) earnings of $0.97 per share, $0.07 better than the Reuters Estimates consensus.
Net revenues for the three months ended Oct. 1 rose 15% to $1.03 bln, well above the $970.3 mln consensus estimate and $895.6 mln from a year ago. The largest percentage of sales again came from the Wholesale segment, as demand for menswear, childrenswear and business in Europe generated sales of $578 mln. Also contributing to the 15% year/year wholesale sales growth was a small increase from the inclusion of RL's newly acquired footwear licensee business Ralph Lauren Footwear Co.
The Retail group, which consists of 64 Ralph Lauren stores, four Rugby stores, 73 Club Monaco stores, 135 Polo factory stores, 13 Polo Jeans Co. factory stores, and five Club Monaco factory stores, also helped solidify RL's leadership position as the world's largest luxury apparel company. Retail sales were up 17% year/year to $387 mln, reflecting increases in all of the company's retail formats.
For the second half of fiscal 2006, the New York-based retailer projected consolidated revenue growth to be in the mid-single digit percent range and operating margins to increase 425 to 450 basis points. Should that come to fruition, FY06 earnings should check in between $2.85 and $2.92 per share, which is actually below the Reuters Estimates consensus of $2.94. However, the company has been known to be overly conservative with its guidance.
Shares of Polo Ralph Lauren are up more than 25% year to date and, with today's gain, are near a historic high.
--Brian Duhn, Briefing.com
9:44AM Expedia (EXPE)
22.66 +1.95: Expedia, which was spun-off from IAC/Interactive (IACI) in August, reported third quarter results that eclipsed analysts' expectations, aided by solid bookings growth. For its first quarter as an independent company, the online travel company reported earnings of $126.9 million, or $0.35 per share, ex-items, compared with earnings in the year ago period of $110.2 million. Analysts were expecting adjusted earnings of $0.31 per share, according to Reuters Estimates.
Expedia, whose businesses include Expedia.com, Hotels.com, Hotwire, and TripAdvisor, said revenue grew 16% to $584.7 million during the period, driven by increased worldwide merchant hotel revenue, acquisitions, and growth in its car rental business. Hotel revenue increased 15% while air travel revenue increased 3%. Even though the company noted that results were negatively affected by recent hurricane and terrorist activity, gross bookings increased 21% to $3.9 billion, with domestic bookings up 16% and international bookings up 39% versus the prior year.
Gross profit for the third quarter grew 14% from a year ago to $457 million. However, gross margin was down 112 basis points to 78.1%, largely due to the acquisition of a destination services company in February 2005, which has historically generated lower margins than Expedia's core business. Strong top-line growth in the latest period was offset in part by lower gross margin, as well as higher general and administrative and technology and content expenses, which rose 50% and 28%, respectively.
In August, Expedia was spun-off from Barry Diller's IAC/Interactive and has emerged as a more distinct company, with many more brands to complement its core operations. The new travel company represents more than 50% of market share for Internet travel companies. Although competitive pressures are likely to remain intact, the company, supported by its broad spectrum of brands, is well positioned to benefit from growth in the online travel market, particularly overseas. Expedia shares currently trade at approximately 18.5x forward earnings.
--Richard Jahnke, Briefing.com
9:29AM Fortune Brands (FO)
77.80: Fortune Brands is one of those stocks investors buy when the US economy starts to pick up steam on expectations of the rising demand for its wide-ranging consumer brands. Fortune sells a bevy of products from Titleist golf balls to Moen facets to Jim Beam bourbon. The stock started moving up in the fall of 2001 and hasn't looked back, topping out at $90 per share at the end of July. What Fortune offers investors is a full-bodied portfolio of products, brand strength, long-term growth and a strong operational and shareholder-friendly track record. Recently, investors have been taking profits, dropping the stock below $80 per share.
On Friday Fortune reported an in-line third quarter on organic growth of 8%. There were many moving parts in the quarter, namely the acquisitions of several spirits and wine brands that include Sauza, Courvoisier, Canadian Club and Clos du Bois. FO also spun-off its office products business to shareholders. Growth was broad-based, with positive sales in each of its three consumer businesses: Home & Hardware, Spirits & Wine, and Golf. It continues to gain market share in key markets and mustered double-digit growth in cabinets, faucets, and entry doors.
Net income rose to $92.2 mln of $0.61 per diluted share. Excluding non-recurring items, earnings were $1.12 per share. Net sales rose 19% to $1.8 bln, including an 11 point swing on acquisitions, excise taxes, and forex. The Lincolnshire, Illinois-based company was able to maintain gross margins at 45.3% despite higher raw material and energy costs. Fortune reaffirmed its full year outlook for double digit growth in earnings before items. After generating 20% growth last year, Fortune faces challenging comparisons in the fourth quarter, not to mention the acquisitions integration, a slowing housing market, and concerns over the pace of consumer spending. Our view, however, is that the economy is maintaining a healthy pace and we would steer investors towards companies with long-term growth prospects - exactly where FO's fortune lies. Expectations are for 15% earnings growth next year. Shares are now trading at a forward multiple of 16.7x.
--Kimberly DuBord, Briefing.com
9:21AM Oracle (ORCL)
12.20: Oracle Corp (ORCL) lost its second CFO in just five months. Yesterday, Gregory Maffei stepped down after serving a little more than four months as the company's finance chief to pursue a "terrific professional opportunity." While he said in a statement that his "resignation from Oracle is not a reflection on the company, its executives or employees," his actions speak louder than words and have raised concern about the high turnover rate recently of company executives.
After all, Maffei's departure follows the resignation of Harry You, who left in March after only eight months on the job. You is now the CEO at BearingPoint (BE), the consulting services firm formerly known as KPMG Consulting.
Even though Maffei will stay at Oracle through Nov. 15, his exodus will interfere with Larry Ellison's mission to create the world's No. 1 software company that would eventually displace his nemesis, Microsoft (MSFT), the same company that employed Maffei as its CFO from July 1997 to December 1999. To that end, Ellison has been on an aggressive buying spree, paying $11.1 bln for rival PeopleSoft in January 2005 and most recently offering $5.85 bln for competitor Siebel Systems (SEBL). The ongoing digestion of PeopleSoft and the upcoming integration of Siebel remain uncertain.
On a positive note, Maffei will be handing over the reins to company co-President Safra Catz, a former investment banker who assumed the CFO position for 3 1/2 months earlier this year and is responsible for M&A at Oracle. Despite Catz's qualifications, the turnover of top talent at the company is a terrible distraction for investors at a time when Oracle needs to be completely focused on merger integration issues.
--Brian Duhn, Briefing.com
8:25AM Toyota Motor (TM)
93.14: The Nikkei reached a milestone overnight, topping 14,000 for the first time in more than four years. The Japanese market continues to gather momentum on the back of a recovering economy. The index rose almost 6% just this week - the biggest gain since August 2003. One stock that has gone along for the ride is Toyota. Its shares have reached a new multi-year high, gaining almost 30% year to date, while Ford (F) and GM (GM) have lost a combined 76% in value. Toyota, the world's largest automaker by value, reported a 2.1% rise in profits. Net income grew to 303.7 bln yen ($2.6 bln) on sales growth of 10% to 4.97 tln.
The company is in the midst of expanding its factory capacity, building new facilities around the globe from China to Canada. It's raised the bar on spending for next year to a record 1.4 trillion yen. Investors have been jumping on board on the back of Toyota's long-term growth outlook. The spending weighed on last quarter's operating profits, which fell 3.2% to 404.3 bln yen. Still, Toyota has been able to find the right mix of products, selling 1.89 mln vehicles in the quarter, up 6.2% year/year. Asian sales rose 19%, North American sales gained 9%, and Europe grew 5.7%. Toyota continues to struggle in its own backyard, however, as domestic sales fell 5.6% to 536,000 units with profits weakening on a mix of smaller lower-profit cars.
While the automaker did not provide guidance, Senior Managing Director Takeshi Suzuki said full year profits would rise to a fourth straight record from 1.17 trillion yen last year. After surpassing Ford last year, Toyota could overtake GM as the world's largest carmaker next year. Toyota raised it global sales forecast to 8.03 mln units - an increase of 8.4% from last year. A weaker yen is certainly helping all of the Japanese automakers. Toyota generates 60% of its operating profits in the US and every point move in the yen adds a hefty sum to its bottom line.
Toyota has been a prime beneficiary of record gas prices in the US. Its Prius hybrid car, which can travel 55 miles on one gallon of gas, has reached near cult status. Its vehicles are viewed worldwide as the some of the best built and most reliable on the road today. With the Asian automakers swallowing up additional share each year, GM and Ford now stand at the crossroads and need to make the difficult, but necessary, choices to ensure they remain competitive.
--Kimberly DuBord, Briefing.com
9:56AM HealthTronics (HTRN) Deutsche Securities downgrades Buy to HOLD. Downgrade reflects the firms reduced confidence in growth. The firm states vehicle segment remains an erratic performer and they question the co's near/mid-term prospects for a sale of this unit. The firm says due to HTRN's poor execution, they cannot be as optimistic about its uro-product/service initiatives, which lack visibility heading into 2006.
9:55AM Mine Safety (MSA) Oppenheimer downgrades Buy to NEUTRAL. Downgrade follows disappointing Q3 results. They note that MSA gave greater disclosure concerning its 2006 outlook, which, at this time, they say looks relatively vulnerable primarily due to a projected drop off in military-related revenue. Firm believes fair value is now in the mid-$30 range.
9:54AM Ziprealty (ZIPR) Deutsche Securities downgrades Buy to HOLD. Downgrade follows a lighter than expected outlook for 4Q and 2006. They believe the co is being impacted in an abrupt transition in the real estate market that pretty much started in September (and has now persisted into November).
9:52AM Panacos Pharma (PANC) Bear Stearns initiates OUTPERFORM. Firm is saying PANC is one of the few small cap biotech pure plays on the HIV space. The firm believes its lead drug (PA-457) is the first ever "maturation inhibitor". Saying early data has been generally positive, and, if approved, peak sales could reach $700 mln.
9:51AM Red Robin Gourmet (RRGB) Oppenheimer upgrades Sell to NEUTRAL. Upgrade is following Q3 results that were as anticipated, saying there seems to be no ill effect from the recent management changes. They note that the conference call outlined a more explicit growth strategy which includes an estimated 22% EPS growth rate going forward.
9:50AM Biovail (BVF) Morgan Stanley upgrades Equal-weight to OVERWEIGHT. Firm is saying the company has defied their skepticism, by inking a solid deal with JNJ on Tramadol ER. The firm states BVF will be collecting 37.5% of net sales in '07-'08 and an undisclosed fixed rate between 27.5%-37.5% for remainder of the ten-year term. The firm mentions the reward/risk profile no longer warrants a negative rating and mentions their concern about the generic threat to Wellbutrin XL, which accounts for nearly all of current profitability.
9:49AM Gemstar-TV Guide (GMST) Kaufman Bros downgrades Buy to HOLD. Target $4.5 to $3.25. Downgrade follows in line Q3 earnings results. The firm cites mgmt's reduced Q4 and beyond guidance. The firm is concerned that cash burn over the remainder of the year is expected to be heavy, and CE IPG licensing is failing to gain traction in North America.
9:47AM Amylin Pharms (AMLN) Rodman & Renshaw initiates MKT PERFORM. Firm notes after AMLN received FDA approval for two innovative diabetes products, Byetta and Symlin, with impressive clinical data that was well received by endocrinologists. The firm says although Byetta is extremely promising, competition in the market leads them to look for a more appropriate entry point. In the long run, they believe AMLN is an attractive investment, but would begin to build positions in this company at lower prices.
9:46AM TreeHouse Foods (THS) CSFB downgrades Outperform to NEUTRAL. Downgrade follows below expectations Q3 EPS and lowered Q4 guidance. Firm's greatest concern is that THS had such little visibility to the rising costs. They say shareholders are paying too big a premium for "we didn't see it coming," and CEO Sam Reed knows it.
9:44AM Guidant (GDT) Lazard Captial upgrades Hold to BUY. Target $68. Lazard upgrading on belief that JNJ merger negotiations likely still apace; even without them, independent outlook supports higher valuation... Firm comments that investors have apparently drawn the conclusion that Johnson & Johnson's public statements are a clear sign that the JNJ/GDT merger is likely off. Firm believes odds still favor the deal being completed. By purchasing GDT shares now, investors may be rewarded by either (a) Johnson & Johnson completing its purchase of Guidant for $65-$68 per share (still the most likely outcome, in firm's view), or (b) entering at what may be near the point of maximum negativity.
9:43AM Qualcomm (QCOM) Bernstein initiates OUTPERFORM. Target $32. The firm believes QCOM will benefit from a significant expansion of its addressable market, driven by a faster and more complete than expected shift to 3G W-CDMA technology. The firm expects this shift to drive better than 27% sales and profit growth from QCOM's patent licensing operation through the end of the decade, with little effect expected from the recent complaints lodged with the E.C.
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