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Tuesday, November 15, 2005 8:18:07 PM
From Briefing.com: 4:01PM Analog Devices announces tentative settlement of SEC's previously announced investigation (ADI) :Co announces a tentative settlement of the SEC stock option investigation of ADI, first disclosed in the co's 10-K filing dated Nov 30, 2004. Co and its President and CEO, Jerald Fishman, have made an offer of settlement to the Staff of the SEC, which is subject to agreement regarding the specific language of the SEC's administrative order and other settlement documents. The SEC Staff has decided to recommend the offer of settlement to the Commission. A final settlement is subject to review and approval by the Commission. ADI has determined that no restatement of its historical financial results would be necessary due to the proposed settlement.
Close Dow -10.73 at 10686.44, S&P -4.75 at 1229.01, Nasdaq -14.21 at 2186.74: The market failed to hold onto modest midday gains as the absence of spirited leadership amid mixed economic data and company guidance closed the indices near their worst levels of the session. Before the bell, core-PPI unexpectedly fell 0.3% - the largest one-month decline in more than two years, easing inflation fears. Nevertheless, before investors could use a tame producer inflation read as a catalyst to justify an average three-week, 4.9% advance for the major indices and lend further support to Briefing.com's anticipation of a traditional year-end rally, the market awaited Ben Bernanke's views on Fed tightening and inflation targeting. While the Fed Chair nominee's remarks were reassuring to the Treasury market, uncertainty surrounding tomorrow's more influential consumer inflation (CPI) data acted as an overhang. Even though Oct. retail sales, ex autos, rose a stronger than expected 0.9%, and retail earnings reports continue to be good, as Home Depot (HD 42.35 -0.22) beat Q3 forecasts and boosted its FY05 growth guidance, a warning from Target (TGT 54.26 -4.17) that Nov. sales will miss previous forecasts tarnished investors expectations of a strong holiday season and weighed heavily on Consumer Discretionary. While Briefing.com expects consumer spending in Q4 to be flat, we think improved labor conditions and the fact that Americans almost always spend more than expected during the holidays will result in decent holiday spending. Signs of a more restrictive lending policy, as evidenced in the flattening of the yield curve between the 2-yr and 10-yr note to 9 basis points - the narrowest yield curve since January 2001, exacerbated consolidation efforts in Financial. The 10-yr note more than erased yesterday's pullback, finishing up 13 ticks to yield 4.55% after Bernanke pledged Fed continuity and guidance to reduce uncertainty about the direction of interest rates. Losses across the board in Technology, as evidenced in the tech-heavy Nasdaq outpacing its blue chip counterparts to the downside, and weakness in Energy, which provided early leadership when oil prices were at session highs above $58/bbl but closed down as crude oil lost 1.2%, also weighed on overall sentiment. Health Care, however, provided some support, as a 3.8% surge in Johnson & Johnson (JNJ 62.81 +2.30), after agreeing to revise its acquisition price for Guidant Corp. (GDT 62.52 +4.77), helped counter reports that Pfizer's (PFE 21.88 -0.37) Lipitor failed to beat Zocor in a recent heart study. DJTA -1.3, DJUA +0.4, DOT -0.7, Nasdaq 100 -0.5, Russell 2000 -1.2, SOX -0.3, S&P Midcap 400 -0.5, XOI -0.5, NYSE Adv/Dec 1038/2258, Nasdaq Adv/Dec 892/2136
3:52PM UTStarcom to reopen at 4:15 ET (UTSI) 8.11 +1.54: -Update-
3:13PM UTStarcom: China Telecom to Launch IPTV Service Powered by UTStarcom's mVision End-to-End IPTV System (UTSI) 6.57 : -Update- Co confirms that China Telecom, has chosen the co's mVision end-to-end IPTV system to support its new IPTV service in China to be launched by the end of the year. The first official service launch of up to 5,000 subscribers is scheduled to be in Shanghai. "While we don't expect rev associated with this agreement to be meaningful in the near term, we do believe this represents a significant opportunity over the next several years...We believe that IPTV technology will revolutionize the way people watch TV by empowering users with the ability to choose the programs they want to watch when they want to watch them. According to a recent report from ABI Research, IPTV subscriber growth is expected to exceed 110 mln people by 2010, with the Asia Pacific region accounting for more than 50% of the subscribers worldwide." (Briefing.com note: stock is currently halted refer back to 11:57 and 11:59)
2:20PM Agilent Technologies (A)
34.59 +1.69: Agilent Technologies on Monday reported lower fourth quarter earnings as restructuring charges related to the sale of its Semiconductor Products business and other non-recurring items offset improved sales. The Palo Alto-based company, which was spun off from Hewlett-Packard in 2000, said it earned $26 million, or $0.05 per share, in the latest quarter, compared with $74 million, or $0.15 per share, a year earlier. Excluding charges, the company would have earned $193 million, or $0.38 per share - a penny better than the average analyst estimate of $0.37 per share, according to Reuters Estimates.
Net revenue for the quarter increased 5% from year ago to $1.41 billon, while orders rose 26% to $1.5 billion. By segment, Electronic Measurement revenue fell slightly to $866 million from $870 million, however orders grew nearly 18% to $903 million with double-digit growth in both wireless and wireline test markets. Gross margin for the division expanded to 55% of revenue from 53% a year earlier. Momentum in the Bio-Analytical Measurement segment also improved, as orders were up 9.8% to $402 million, with life sciences and chemical analysis up 11% and 9%, respectively. Revenue was up 8.5% to $382 million. Although the company said demand from large pharmaceutical customers was mixed, the segment saw strength in both biotech firms and generic pharmaceutical companies. Meanwhile, the rebound in Semiconductor Test Solutions, which the company plans to spin-off "as soon as practical in 2006," continued in the quarter with orders up more than 200% to $199 million and revenue up 39% to $159 million. However, due to a $10 million write-off of Flash memory test inventory, the segment recorded a $2 million loss from operations in the segment. Last year, the segment posted a loss of $18 million.
As part of its reorganization announced last August, Agilent divested its semiconductor business to private equity firms Kohlberg Kravis Roberts and Silver Lake Partners for $2.66 billion. The company also reached an agreement to sell its 47% stake in Lumileds, a manufacturer of high-powered LEDs, to Phillips Electronics (PHG) for $950 million and repayment of $50 million of debt, and spin-off its SOC and memory test business in 2006. Last month, PMC-Sierra (PMCS) agreed to buy Agilent's storage semiconductor unit for $425 million in cash.
Agilent said it expects to receive proceeds from the sale of its stake in Lumileds within the month, and to complete the sale of its semiconductor products business on December 1. It added that preparations for a planned spin-off of its Semiconductor Test Solutions business remains on schedule with an expected IPO in mid-2006. Based on its latest results, Agilent issued first quarter guidance that matched analysts' expectations. For the current quarter, the company said it sees EPS of $0.25 to $0.30 per share, versus the consensus estimate of $0.29.
Separately, the company announced its intention to repurchase $2.7 billion in common stock through a modified "Dutch Auction." It said it plans to purchase up to 73 million shares of its common stock at a price per share not less than $32.00 and not greater than $37.00.
In the wake of Agilent's better-than-expected report and progress on its transition to a focused scientific instrument company, shares have climbed more than 6% during the regular trading session. Although the company is better positioned to capitalize on growth opportunities given its increased operational focus, it still faces many hurdles associated with its restructuring efforts.
--Richard Jahnke, Briefing.com
12:57PM American Eagle Outfitters (AEOS)
23.65 -0.70: American Eagle Outfitters (AEOS) delivered third quarter EPS of $0.47 versus a year-ago profit of $0.38 per share that included a $0.01 per share loss from discontinued operations. AEOS surpassed the Reuters Estimates consensus by a penny and exceeded its own guidance, which was revised down to $0.43-0.44 on Sept. 20th and subsequently raised again to $0.45-0.46 on Nov. 2nd. AEOS bought back 6.0 million shares during the quarter. Although the company still had more shares outstanding than the year-ago period, Q3 earnings would have been closer to $0.45 per share if that buyback hadn't occurred.
Revenues also rose 20.5% to $577.7 mln. Comparable store sales rose 13.6% on top of a 26.8% increase for the corresponding period last year. On its conference call, American Eagle noted that transactions per average store were up in the low double digits, but that units per transaction declined. Increased markdowns, against what the company called "an exceptional full-price business last year," led to a 280 basis point decline in merchandise margins. At 46.6%, American Eagle's third quarter gross margin contracted by 220 basis points.
For its fourth quarter, which encompasses the holiday shopping season, American Eagle expects to earn between $0.73-0.75 per share, which translates to EPS growth of approximately 4-7%. According to Reuters Estimates, analysts were expecting the company to post a profit of $0.76 for Q4. For the full year (Jan. 06), Wall Street anticipates earnings of $1.94 per share.
With today's decline considered, AEOS shares currently trade at 12.2x estimated full-year earnings, a sharp discount to its five-year historical average of 17.4x. The company's shares are also priced at a discount to the likes of Gap (GPS), Abercrombie & Fitch (ANF), and Urban Outfitters (URBN).
--Lisa Beilfuss, Briefing.com
12:44PM Home Depot (HD)
42.63 +0.72: Home Depot, the world's largest home improvement retailer, beat third quarter estimates, helped by stronger commercial sales and a higher average ticket, and boosted its full-year growth outlook. The results, announced before the market opened, follow a similarly strong report from rival Lowe's Companies (LOW) on Monday.
Atlanta-based Home Depot reported earnings of $1.5 billion, or $0.72 per share, compared with $1.3 billion, or $0.60 per share, a year earlier - four cents better than the consensus estimate. Sales for the period increased 10.5% to $20.74 billion with double-digit growth in the Home Depot Supply - the professional division that provides products and services to builders and contractors. Home Depot's service business grew 21% to $1.2 billion, aided by strong demand for installation categories such as HVAC, kitchens, countertops, windows, and roofing. Growth in comparable store sales, or sales at stores open at least a year, was 3.6%, while the company's average ticket increased to a record $58.92. Operating margin expanded 97 basis points from a year ago to 11.92%.
During the third quarter, Home Depot benefited from the active hurricane season, which bolstered demand for such items as generators, flashlights, and other core supplies, as well as initiatives focused on increasing operational efficiency and improving the customer shopping experience. As a result of the recent hurricanes, the company said it has and will continue to see opportunities within the Home Depot Supply group of companies as rebuilding along the Gulf Coast commences.
Meanwhile, rival Lowe's said Monday its third quarter earnings increased approximately 26% and beat analysts' estimate. The home improvement retailer earned $649 million, or $0.81 per share, compared with $516 million, or $0.65 per share, last year. That surpassed the average analyst EPS estimate of $0.77. Lowe's revenue for the period increased 16.9% from a year ago to $10.59 billion, while same store sales grew 6.2%. Its operating margin improved 102 basis points to 10.41%.
In contrast to other retailers who lowered their guidance on concerns about the impact of rising gasoline and home heating costs on consumer spending trends, both Home Depot and Lowe's raised their outlook for the year. Specifically, Home Depot increased its FY05 sales growth target to 10% to 12%, up from 9% to 12%. Furthermore, it projected EPS growth of 17% to 18%, compared with its previous forecast of 14% to 17%.
The latest results by Home Depot and Lowe's came in spite of a slowing housing market and a macro-environment marked by rising energy costs and interest rates. For Home Depot, continued investments in technology and efforts to develop its professional services have helped it generate positive results amid moderating new store growth and margin expansion. While its earnings and sales growth trails that of Lowe's, Home Depot generates greater profits from its sales, as evidenced by its higher operating margin, and continues to drive productivity through expanding services (e.g. the Home Depot Supply) and better cost controls. In addition, the company has its sights set on expanding operations in such high growth markets as Mexico and China, which should help bolster long-term prospects.
Even with the mixed economic picture, Home Depot and Lowe's continue to show strong quarterly performance. Although a material slowdown in the housing market will likely reverberate to the home improvement retail sector, the underlying fundamentals remain strong compared to historical levels and should continue to support near-term prospects. Home Depot shares currently trade at 16.8x trailing earnings, compared with 19.8x for Lowe's. While Lowe's higher growth profile justifies a premium valuation, Home Depot remains an exciting growth story as it continues to focus on improving efficiencies and expanding operations to new international markets. Additionally, Home Depot has a strong record of returning value to shareholders through increased dividend payments and its commitment to repurchasing its stock. At the current level, HD sells for a reasonable price and warrants investment consideration.
--Richard Jahnke, Briefing.com
11:55AM J.C. Penney (JCP)
52.90 -0.85: Aided by an improved operating performance, lower net interest expense, and stock buyback activity, department store operator J.C. Penney reported a 57% increase in Q3 net income. Diluted earnings of $0.94 per share were up sharply from $0.50 in the year-ago period and eclipsed the Reuters Estimates consensus number by two cents. Net sales of $4.48 billion were up 2.1% and in line with the consensus estimate. Comparable department store sales, meanwhile, rose 2.5% on top of a 2.6% increase last year.
J.C. Penney's overall performance in the third quarter was commendable given the consumer spending deterrents of hurricane activity, rising energy costs, and higher interest rates. Gross margin improved 110 basis points to 41.8% of sales and operating margins improved by a like amount to 8.9% of sales. The company was able to reduce its long-term debt by approximately $500 million from last year and said its free cash flow, helped by an improved operating performance, will be at least $300 million, or $1.18 per share, for the fiscal year.
The market has been guarded in its response to J.C. Penney's fine performance as its in-line guidance for Q4 and the fiscal year, an acknowledgment that it is "cautiously optimistic" about the holiday season, and a November sales warning from Target (TGT) have tempered the market's enthusiasm. In terms of its own guidance, J.C. Penney expects earnings from continuing operations to be approximately $1.58 per share for Q4 (Jan) and approximately $3.51 for the full year. Those estimates are predicated on an expectation of low single-digit increases for both comparable department store and Direct sales coupled with improved gross margin and SG&A expense versus last year.
Investors shouldn't be too unnerved by the lackluster response to J.C. Penney's report. Its stock, after all, has risen 22.0% in the past five weeks, so it makes some sense that in-line guidance would be a cue for momentum accounts to take some money off the table. As for the tried-and-true investor, J.C. Penney's fundamental condition continues to improve and should serve as the more convincing benchmark for maintaining a position in the stock. Valuation can be looked at as another factor, as JCP, at 16.8x trailing twelve month earnings, trades at a notable discount to its 10-year historical average of 19.5x and is expected to deliver EPS growth of 16.2% for its next fiscal year.
--Patrick J. O'Hare, Briefing.com
10:51AM AIG, Inc. (AIG)
67.03 -0.47: The market has looked past restatements and expected hurricane losses, sending shares in American International Group, Inc., up more than 30% from their April low. Hurricane claims led to a 36% decline in third quarter profits to $1.72 bln for the world's largest insurer. The figure was in line with a previous announcement, which has been delayed several times as the company grapples with financial restatements. In the quarter, Hurricanes Katrina and Rita ramped up claims for natural catastrophes to $1.57 bln.
Net income came in at $0.65 per share compared to $2.69 bln, or $1.02 per share, last year. Excluding catastrophes, operating income grew an impressive 18% to $3.3 bln or $1.28 per share. The company announced it expects to incur losses from Hurricane Wilma of $440 mln after-tax, or $0.15 per share. The quarter overall was solid, with notable strength in Property & Casualty, excluding catastrophes, and Foreign Life offsetting weakness in Domestic Life insurance. AIG's international operations remain strong, particularly in Japan, with its life and retirement services jumping almost 20% in operating income.
The market is placing robust expectations on AIG's P&C business as the aftermath of the hurricanes is expected to lead to market tightness. As was the case following 9/11, policy holders are likely to bear the burden in the form of higher premiums. AIG said it would continue to offer coverage to hard-hit hurricane areas despite expectations of reduced reinsurance coverage which helps spread the risk. In the quarter, net premiums written grew 0.1% to $10.3 bln, with net premiums earned gaining 2.5% to $10.1 bln. Net investment income grew 32% to $980 mln. The combined ratio was 112.2%, up from 101.3% a year ago. Stripping out the hurricane, the combined ratio improved to 91.6%.
The third quarter includes AIG's second accounting restatement this year. Just last week, AIG said it would be restating financial statement for the years 2000 and 2001 to reflect changes in accounting to derivatives, income tax accounting, and manufacturers' payments. In May, AIG restated five years of results, reducing shareholder equity by $2.26 bln. AIG's troubles are well documented, but strong performance within the financial sector and views of AIG as a strongly capitalized AA institution continue to support the stock.
--Kimberly DuBord, Briefing.com
9:33AM Johnson & Johnson (JNJ)
60.51: Johnson & Johnson said today it will acquire medical device maker Guidant Corp. (GDT) for $21.5 billion, salvaging a deal that has been damaged by a torrent of Guidant product recalls in recent months. The companies had originally entered into an agreement in December 2004, by which Johnson & Johnson said it would acquire Guidant for $25.4 billion, or $76 per share.
Under the terms of the revised agreement, Johnson & Johnson will purchase Guidant for cash and stock valued at $63.08 per share. Guidant shareholders, who must still vote on the revised deal, will receive $33.25 in cash and 0.493 shares of Johnson & Johnson common stock for each share. The transaction has a net acquisition cost of $19 billion, based upon Guidant's approximately 340 million fully diluted shares outstanding, net of cash on hand at the time of closing.
The Federal Trade Commission conditionally approved the proposed deal on November 2, 2005. In accordance with the FTC clearance, Johnson & Johnson agreed to divest certain rights and assets of its businesses in drug-eluding stents, endoscopic vessel harvesting products, and anastomotic assist devices. The revised agreement, which comes after Guidant initiated a lawsuit against Johnson & Johnson last week to complete the deal, has been approved by the Board of Directors of Johnson & Johnson and Guidant. Pending Guidant shareholder approval, the transaction is expected to close in the first quarter of 2006.
--Richard Jahnke, Briefing.com
8:45AM Target (TGT)
58.43: After Monday's close, Target announced November comparable store sales growth may fall below its forecast of 4% to 6%. The stock dropped 4.3% in after-hours trading and is likely to extend declines in today's session. Target said sales for the period would be "below our planned range" for the month, based on data compiled for the first two weeks of November. The downdraft in sales expectations could likely cause analysts to reduce earnings forecasts for the quarter.
With Wal-Mart confirming its November sales target of 3-5% on Monday, Target is clearly feeling the sting of increased competition. The largest discount retailer has stepped up the pace of discounting after it was slow to respond last season. If Target is forced to follow suit, it could cause margin compression in the quarter. Target is typically more immune to higher gasoline prices due to its customer base; therefore, the catalyst for a drop in sales is more likely to be store traffic trends.
Target just released its third quarter earnings on November 10th, beating analysts' expectations by four cents. Sales in the quarter rose 12% to $12.2 bln. Same-store sales over the past few months have trended quite strong. October and September comps outpaced the Briefing.com consensus of 4.8% for both months, coming in up 5.7% and 5.6%, respectively. Target is also going up against an easy comparable of +3.2% from last November. The comps become more challenging in December and January, as gains in those periods last year were 5.1% and 9.4%.
This morning SunTrust reduced its rating on the stock from Buy to Neutral, while ThinkEquity raised its rating on Wal-Mart to Accumulate. We currently hold an Underweight rating for the Discretionary sector, but feel consumer spending will remain resilient through the holiday season and support gains for the retailers. We have recently made a valuation argument for buying Wal-Mart at these levels for longer-term investors. TGT's reign of outpacing the rest of the General Merchandise sector may be over for the near-term, but retailers will remain in fashion following this morning's report that October retail sales surpassed expectations, rising 0.9%, ex-autos, versus the consensus estimate that called for an increase of 0.3%.
--Kimberly DuBord, Briefing.com
8:25AM Euro Update
The German DAX index has been one of the best performing indices to date, up almost 20%, as the economy continues to gain momentum. Business confidence jumped to a five-year high last month. The dollar, however, rose to a two-year high against the euro after the ZEW Center for European Economic Research said German investor confidence unexpectedly fell to 38.7 from 39.4 in October as concerns over higher interest rates and tax increases overshadowed improving economic growth in the euro nations. Economists predicted a reading of 44, according to Bloomberg.
Germans are focusing on the recent talk of raising the VAT tax and a possible ECB rate hike. The European Union countries grew at the fastest pace in the third quarter since 2004, up 0.6%. As a result, the European Central Bank has signaled it is ready to raise rates, which could coincide with Germany's new government's plans to raise taxes in 2007. On November 3rd, ECB President Jean-Claude Trichet said he can raise rates "at any time." German GDP expanded at 0.6% in the third quarter, which has prompted market speculation of a possible rate hike in December to stem inflationary pressures.
The new German government is scheduled to take office on November 22. Chancellor-designate Angela Merkel's Christian Democrats and her Social Democrat allies just approved a program to raise the VAT tax and to increase income tax on higher wage earners. Unemployment remains close to a post-World War II high of 11.6%. Economic growth is expected to rise less than 1.0% this year, marking the fifth year of expansion that is less than 1%. The euro has declined 14% against the dollar this year, helping to make German exports more attractive. The dollar is currently trading at 1.653 euros, down from a high reached at the end of 2004 of 1.366.
--Kimberly DuBord, Briefing.com
9:46AM Build-A-Bear Workshop (BBW) Oppenheimer initiates BUY. Target $32. Oppenheimer initiates Build-A-Bear as they believe the co is at the front of the emergence of experiential retailing concepts and stands to benefit from strong unit expansion opportunities, new concepts, margin improvement and cash flow generation over and above that needed for growth.
9:43AM Discovery Labs (DSCO) Jefferies & Co initiates BUY. Target $10. Jefferies initiates Discovery Labs as they expect Surfaxin to receive both US and European approval in Q206 for the treatment of newborns with respiratory distress syndrome, an estimated $200 mln worldwide opportunity.
9:41AM Target (TGT) Sun Trust Rbsn Humphrey downgrades Buy to NEUTRAL. Suntrust downgrades Target following a very disappointing weekly sales update, issued after Monday's close, as they now look for Nov same-store sales to fall below a guided range of 4% to 6%, reflecting what seems to have been a sharp deceleration in the latter half of the second week of the month.
9:39AM Epicor Software (EPIC) Jefferies & Co initiates BUY. Target $17.5. Jefferies initiates Epicor Software as they believe the co is taking share in mid-tier Enterprise Resource Planning software and appears well positioned to continue, given favorable positioning relative to important application software trends.
9:38AM Brocade (BRCD) AG Edwards upgrades Sell to HOLD. AG Edwards upgrades Brocade following the co's filing of its financials with the SEC ahead of the deadline, which they believe should lift an overhang, and now expect the co to meet or beat the est for its Oct quarter.
9:33AM Education Realty Trust (EDR) KeyBanc Capital Mkts / McDonald downgrades Buy to HOLD. KeyBanc downgrades Education Realty following Q3 results, which represents the second consecutive reduction in outlook related to cost pressure at its acquired properties.
9:32AM Clear Channel Outdoor (CCO) Stanford Research initiates BUY. Target $23. Stanford initiates Clear Channel Outdoor given that CCO has a strong parent co (CCU) and a similar valuation to LAMR, firm suggests investors purchase the stock as a compliment to their positions in LAMR.
http://biz.yahoo.com/mu/short.html
Close Dow -10.73 at 10686.44, S&P -4.75 at 1229.01, Nasdaq -14.21 at 2186.74: The market failed to hold onto modest midday gains as the absence of spirited leadership amid mixed economic data and company guidance closed the indices near their worst levels of the session. Before the bell, core-PPI unexpectedly fell 0.3% - the largest one-month decline in more than two years, easing inflation fears. Nevertheless, before investors could use a tame producer inflation read as a catalyst to justify an average three-week, 4.9% advance for the major indices and lend further support to Briefing.com's anticipation of a traditional year-end rally, the market awaited Ben Bernanke's views on Fed tightening and inflation targeting. While the Fed Chair nominee's remarks were reassuring to the Treasury market, uncertainty surrounding tomorrow's more influential consumer inflation (CPI) data acted as an overhang. Even though Oct. retail sales, ex autos, rose a stronger than expected 0.9%, and retail earnings reports continue to be good, as Home Depot (HD 42.35 -0.22) beat Q3 forecasts and boosted its FY05 growth guidance, a warning from Target (TGT 54.26 -4.17) that Nov. sales will miss previous forecasts tarnished investors expectations of a strong holiday season and weighed heavily on Consumer Discretionary. While Briefing.com expects consumer spending in Q4 to be flat, we think improved labor conditions and the fact that Americans almost always spend more than expected during the holidays will result in decent holiday spending. Signs of a more restrictive lending policy, as evidenced in the flattening of the yield curve between the 2-yr and 10-yr note to 9 basis points - the narrowest yield curve since January 2001, exacerbated consolidation efforts in Financial. The 10-yr note more than erased yesterday's pullback, finishing up 13 ticks to yield 4.55% after Bernanke pledged Fed continuity and guidance to reduce uncertainty about the direction of interest rates. Losses across the board in Technology, as evidenced in the tech-heavy Nasdaq outpacing its blue chip counterparts to the downside, and weakness in Energy, which provided early leadership when oil prices were at session highs above $58/bbl but closed down as crude oil lost 1.2%, also weighed on overall sentiment. Health Care, however, provided some support, as a 3.8% surge in Johnson & Johnson (JNJ 62.81 +2.30), after agreeing to revise its acquisition price for Guidant Corp. (GDT 62.52 +4.77), helped counter reports that Pfizer's (PFE 21.88 -0.37) Lipitor failed to beat Zocor in a recent heart study. DJTA -1.3, DJUA +0.4, DOT -0.7, Nasdaq 100 -0.5, Russell 2000 -1.2, SOX -0.3, S&P Midcap 400 -0.5, XOI -0.5, NYSE Adv/Dec 1038/2258, Nasdaq Adv/Dec 892/2136
3:52PM UTStarcom to reopen at 4:15 ET (UTSI) 8.11 +1.54: -Update-
3:13PM UTStarcom: China Telecom to Launch IPTV Service Powered by UTStarcom's mVision End-to-End IPTV System (UTSI) 6.57 : -Update- Co confirms that China Telecom, has chosen the co's mVision end-to-end IPTV system to support its new IPTV service in China to be launched by the end of the year. The first official service launch of up to 5,000 subscribers is scheduled to be in Shanghai. "While we don't expect rev associated with this agreement to be meaningful in the near term, we do believe this represents a significant opportunity over the next several years...We believe that IPTV technology will revolutionize the way people watch TV by empowering users with the ability to choose the programs they want to watch when they want to watch them. According to a recent report from ABI Research, IPTV subscriber growth is expected to exceed 110 mln people by 2010, with the Asia Pacific region accounting for more than 50% of the subscribers worldwide." (Briefing.com note: stock is currently halted refer back to 11:57 and 11:59)
2:20PM Agilent Technologies (A)
34.59 +1.69: Agilent Technologies on Monday reported lower fourth quarter earnings as restructuring charges related to the sale of its Semiconductor Products business and other non-recurring items offset improved sales. The Palo Alto-based company, which was spun off from Hewlett-Packard in 2000, said it earned $26 million, or $0.05 per share, in the latest quarter, compared with $74 million, or $0.15 per share, a year earlier. Excluding charges, the company would have earned $193 million, or $0.38 per share - a penny better than the average analyst estimate of $0.37 per share, according to Reuters Estimates.
Net revenue for the quarter increased 5% from year ago to $1.41 billon, while orders rose 26% to $1.5 billion. By segment, Electronic Measurement revenue fell slightly to $866 million from $870 million, however orders grew nearly 18% to $903 million with double-digit growth in both wireless and wireline test markets. Gross margin for the division expanded to 55% of revenue from 53% a year earlier. Momentum in the Bio-Analytical Measurement segment also improved, as orders were up 9.8% to $402 million, with life sciences and chemical analysis up 11% and 9%, respectively. Revenue was up 8.5% to $382 million. Although the company said demand from large pharmaceutical customers was mixed, the segment saw strength in both biotech firms and generic pharmaceutical companies. Meanwhile, the rebound in Semiconductor Test Solutions, which the company plans to spin-off "as soon as practical in 2006," continued in the quarter with orders up more than 200% to $199 million and revenue up 39% to $159 million. However, due to a $10 million write-off of Flash memory test inventory, the segment recorded a $2 million loss from operations in the segment. Last year, the segment posted a loss of $18 million.
As part of its reorganization announced last August, Agilent divested its semiconductor business to private equity firms Kohlberg Kravis Roberts and Silver Lake Partners for $2.66 billion. The company also reached an agreement to sell its 47% stake in Lumileds, a manufacturer of high-powered LEDs, to Phillips Electronics (PHG) for $950 million and repayment of $50 million of debt, and spin-off its SOC and memory test business in 2006. Last month, PMC-Sierra (PMCS) agreed to buy Agilent's storage semiconductor unit for $425 million in cash.
Agilent said it expects to receive proceeds from the sale of its stake in Lumileds within the month, and to complete the sale of its semiconductor products business on December 1. It added that preparations for a planned spin-off of its Semiconductor Test Solutions business remains on schedule with an expected IPO in mid-2006. Based on its latest results, Agilent issued first quarter guidance that matched analysts' expectations. For the current quarter, the company said it sees EPS of $0.25 to $0.30 per share, versus the consensus estimate of $0.29.
Separately, the company announced its intention to repurchase $2.7 billion in common stock through a modified "Dutch Auction." It said it plans to purchase up to 73 million shares of its common stock at a price per share not less than $32.00 and not greater than $37.00.
In the wake of Agilent's better-than-expected report and progress on its transition to a focused scientific instrument company, shares have climbed more than 6% during the regular trading session. Although the company is better positioned to capitalize on growth opportunities given its increased operational focus, it still faces many hurdles associated with its restructuring efforts.
--Richard Jahnke, Briefing.com
12:57PM American Eagle Outfitters (AEOS)
23.65 -0.70: American Eagle Outfitters (AEOS) delivered third quarter EPS of $0.47 versus a year-ago profit of $0.38 per share that included a $0.01 per share loss from discontinued operations. AEOS surpassed the Reuters Estimates consensus by a penny and exceeded its own guidance, which was revised down to $0.43-0.44 on Sept. 20th and subsequently raised again to $0.45-0.46 on Nov. 2nd. AEOS bought back 6.0 million shares during the quarter. Although the company still had more shares outstanding than the year-ago period, Q3 earnings would have been closer to $0.45 per share if that buyback hadn't occurred.
Revenues also rose 20.5% to $577.7 mln. Comparable store sales rose 13.6% on top of a 26.8% increase for the corresponding period last year. On its conference call, American Eagle noted that transactions per average store were up in the low double digits, but that units per transaction declined. Increased markdowns, against what the company called "an exceptional full-price business last year," led to a 280 basis point decline in merchandise margins. At 46.6%, American Eagle's third quarter gross margin contracted by 220 basis points.
For its fourth quarter, which encompasses the holiday shopping season, American Eagle expects to earn between $0.73-0.75 per share, which translates to EPS growth of approximately 4-7%. According to Reuters Estimates, analysts were expecting the company to post a profit of $0.76 for Q4. For the full year (Jan. 06), Wall Street anticipates earnings of $1.94 per share.
With today's decline considered, AEOS shares currently trade at 12.2x estimated full-year earnings, a sharp discount to its five-year historical average of 17.4x. The company's shares are also priced at a discount to the likes of Gap (GPS), Abercrombie & Fitch (ANF), and Urban Outfitters (URBN).
--Lisa Beilfuss, Briefing.com
12:44PM Home Depot (HD)
42.63 +0.72: Home Depot, the world's largest home improvement retailer, beat third quarter estimates, helped by stronger commercial sales and a higher average ticket, and boosted its full-year growth outlook. The results, announced before the market opened, follow a similarly strong report from rival Lowe's Companies (LOW) on Monday.
Atlanta-based Home Depot reported earnings of $1.5 billion, or $0.72 per share, compared with $1.3 billion, or $0.60 per share, a year earlier - four cents better than the consensus estimate. Sales for the period increased 10.5% to $20.74 billion with double-digit growth in the Home Depot Supply - the professional division that provides products and services to builders and contractors. Home Depot's service business grew 21% to $1.2 billion, aided by strong demand for installation categories such as HVAC, kitchens, countertops, windows, and roofing. Growth in comparable store sales, or sales at stores open at least a year, was 3.6%, while the company's average ticket increased to a record $58.92. Operating margin expanded 97 basis points from a year ago to 11.92%.
During the third quarter, Home Depot benefited from the active hurricane season, which bolstered demand for such items as generators, flashlights, and other core supplies, as well as initiatives focused on increasing operational efficiency and improving the customer shopping experience. As a result of the recent hurricanes, the company said it has and will continue to see opportunities within the Home Depot Supply group of companies as rebuilding along the Gulf Coast commences.
Meanwhile, rival Lowe's said Monday its third quarter earnings increased approximately 26% and beat analysts' estimate. The home improvement retailer earned $649 million, or $0.81 per share, compared with $516 million, or $0.65 per share, last year. That surpassed the average analyst EPS estimate of $0.77. Lowe's revenue for the period increased 16.9% from a year ago to $10.59 billion, while same store sales grew 6.2%. Its operating margin improved 102 basis points to 10.41%.
In contrast to other retailers who lowered their guidance on concerns about the impact of rising gasoline and home heating costs on consumer spending trends, both Home Depot and Lowe's raised their outlook for the year. Specifically, Home Depot increased its FY05 sales growth target to 10% to 12%, up from 9% to 12%. Furthermore, it projected EPS growth of 17% to 18%, compared with its previous forecast of 14% to 17%.
The latest results by Home Depot and Lowe's came in spite of a slowing housing market and a macro-environment marked by rising energy costs and interest rates. For Home Depot, continued investments in technology and efforts to develop its professional services have helped it generate positive results amid moderating new store growth and margin expansion. While its earnings and sales growth trails that of Lowe's, Home Depot generates greater profits from its sales, as evidenced by its higher operating margin, and continues to drive productivity through expanding services (e.g. the Home Depot Supply) and better cost controls. In addition, the company has its sights set on expanding operations in such high growth markets as Mexico and China, which should help bolster long-term prospects.
Even with the mixed economic picture, Home Depot and Lowe's continue to show strong quarterly performance. Although a material slowdown in the housing market will likely reverberate to the home improvement retail sector, the underlying fundamentals remain strong compared to historical levels and should continue to support near-term prospects. Home Depot shares currently trade at 16.8x trailing earnings, compared with 19.8x for Lowe's. While Lowe's higher growth profile justifies a premium valuation, Home Depot remains an exciting growth story as it continues to focus on improving efficiencies and expanding operations to new international markets. Additionally, Home Depot has a strong record of returning value to shareholders through increased dividend payments and its commitment to repurchasing its stock. At the current level, HD sells for a reasonable price and warrants investment consideration.
--Richard Jahnke, Briefing.com
11:55AM J.C. Penney (JCP)
52.90 -0.85: Aided by an improved operating performance, lower net interest expense, and stock buyback activity, department store operator J.C. Penney reported a 57% increase in Q3 net income. Diluted earnings of $0.94 per share were up sharply from $0.50 in the year-ago period and eclipsed the Reuters Estimates consensus number by two cents. Net sales of $4.48 billion were up 2.1% and in line with the consensus estimate. Comparable department store sales, meanwhile, rose 2.5% on top of a 2.6% increase last year.
J.C. Penney's overall performance in the third quarter was commendable given the consumer spending deterrents of hurricane activity, rising energy costs, and higher interest rates. Gross margin improved 110 basis points to 41.8% of sales and operating margins improved by a like amount to 8.9% of sales. The company was able to reduce its long-term debt by approximately $500 million from last year and said its free cash flow, helped by an improved operating performance, will be at least $300 million, or $1.18 per share, for the fiscal year.
The market has been guarded in its response to J.C. Penney's fine performance as its in-line guidance for Q4 and the fiscal year, an acknowledgment that it is "cautiously optimistic" about the holiday season, and a November sales warning from Target (TGT) have tempered the market's enthusiasm. In terms of its own guidance, J.C. Penney expects earnings from continuing operations to be approximately $1.58 per share for Q4 (Jan) and approximately $3.51 for the full year. Those estimates are predicated on an expectation of low single-digit increases for both comparable department store and Direct sales coupled with improved gross margin and SG&A expense versus last year.
Investors shouldn't be too unnerved by the lackluster response to J.C. Penney's report. Its stock, after all, has risen 22.0% in the past five weeks, so it makes some sense that in-line guidance would be a cue for momentum accounts to take some money off the table. As for the tried-and-true investor, J.C. Penney's fundamental condition continues to improve and should serve as the more convincing benchmark for maintaining a position in the stock. Valuation can be looked at as another factor, as JCP, at 16.8x trailing twelve month earnings, trades at a notable discount to its 10-year historical average of 19.5x and is expected to deliver EPS growth of 16.2% for its next fiscal year.
--Patrick J. O'Hare, Briefing.com
10:51AM AIG, Inc. (AIG)
67.03 -0.47: The market has looked past restatements and expected hurricane losses, sending shares in American International Group, Inc., up more than 30% from their April low. Hurricane claims led to a 36% decline in third quarter profits to $1.72 bln for the world's largest insurer. The figure was in line with a previous announcement, which has been delayed several times as the company grapples with financial restatements. In the quarter, Hurricanes Katrina and Rita ramped up claims for natural catastrophes to $1.57 bln.
Net income came in at $0.65 per share compared to $2.69 bln, or $1.02 per share, last year. Excluding catastrophes, operating income grew an impressive 18% to $3.3 bln or $1.28 per share. The company announced it expects to incur losses from Hurricane Wilma of $440 mln after-tax, or $0.15 per share. The quarter overall was solid, with notable strength in Property & Casualty, excluding catastrophes, and Foreign Life offsetting weakness in Domestic Life insurance. AIG's international operations remain strong, particularly in Japan, with its life and retirement services jumping almost 20% in operating income.
The market is placing robust expectations on AIG's P&C business as the aftermath of the hurricanes is expected to lead to market tightness. As was the case following 9/11, policy holders are likely to bear the burden in the form of higher premiums. AIG said it would continue to offer coverage to hard-hit hurricane areas despite expectations of reduced reinsurance coverage which helps spread the risk. In the quarter, net premiums written grew 0.1% to $10.3 bln, with net premiums earned gaining 2.5% to $10.1 bln. Net investment income grew 32% to $980 mln. The combined ratio was 112.2%, up from 101.3% a year ago. Stripping out the hurricane, the combined ratio improved to 91.6%.
The third quarter includes AIG's second accounting restatement this year. Just last week, AIG said it would be restating financial statement for the years 2000 and 2001 to reflect changes in accounting to derivatives, income tax accounting, and manufacturers' payments. In May, AIG restated five years of results, reducing shareholder equity by $2.26 bln. AIG's troubles are well documented, but strong performance within the financial sector and views of AIG as a strongly capitalized AA institution continue to support the stock.
--Kimberly DuBord, Briefing.com
9:33AM Johnson & Johnson (JNJ)
60.51: Johnson & Johnson said today it will acquire medical device maker Guidant Corp. (GDT) for $21.5 billion, salvaging a deal that has been damaged by a torrent of Guidant product recalls in recent months. The companies had originally entered into an agreement in December 2004, by which Johnson & Johnson said it would acquire Guidant for $25.4 billion, or $76 per share.
Under the terms of the revised agreement, Johnson & Johnson will purchase Guidant for cash and stock valued at $63.08 per share. Guidant shareholders, who must still vote on the revised deal, will receive $33.25 in cash and 0.493 shares of Johnson & Johnson common stock for each share. The transaction has a net acquisition cost of $19 billion, based upon Guidant's approximately 340 million fully diluted shares outstanding, net of cash on hand at the time of closing.
The Federal Trade Commission conditionally approved the proposed deal on November 2, 2005. In accordance with the FTC clearance, Johnson & Johnson agreed to divest certain rights and assets of its businesses in drug-eluding stents, endoscopic vessel harvesting products, and anastomotic assist devices. The revised agreement, which comes after Guidant initiated a lawsuit against Johnson & Johnson last week to complete the deal, has been approved by the Board of Directors of Johnson & Johnson and Guidant. Pending Guidant shareholder approval, the transaction is expected to close in the first quarter of 2006.
--Richard Jahnke, Briefing.com
8:45AM Target (TGT)
58.43: After Monday's close, Target announced November comparable store sales growth may fall below its forecast of 4% to 6%. The stock dropped 4.3% in after-hours trading and is likely to extend declines in today's session. Target said sales for the period would be "below our planned range" for the month, based on data compiled for the first two weeks of November. The downdraft in sales expectations could likely cause analysts to reduce earnings forecasts for the quarter.
With Wal-Mart confirming its November sales target of 3-5% on Monday, Target is clearly feeling the sting of increased competition. The largest discount retailer has stepped up the pace of discounting after it was slow to respond last season. If Target is forced to follow suit, it could cause margin compression in the quarter. Target is typically more immune to higher gasoline prices due to its customer base; therefore, the catalyst for a drop in sales is more likely to be store traffic trends.
Target just released its third quarter earnings on November 10th, beating analysts' expectations by four cents. Sales in the quarter rose 12% to $12.2 bln. Same-store sales over the past few months have trended quite strong. October and September comps outpaced the Briefing.com consensus of 4.8% for both months, coming in up 5.7% and 5.6%, respectively. Target is also going up against an easy comparable of +3.2% from last November. The comps become more challenging in December and January, as gains in those periods last year were 5.1% and 9.4%.
This morning SunTrust reduced its rating on the stock from Buy to Neutral, while ThinkEquity raised its rating on Wal-Mart to Accumulate. We currently hold an Underweight rating for the Discretionary sector, but feel consumer spending will remain resilient through the holiday season and support gains for the retailers. We have recently made a valuation argument for buying Wal-Mart at these levels for longer-term investors. TGT's reign of outpacing the rest of the General Merchandise sector may be over for the near-term, but retailers will remain in fashion following this morning's report that October retail sales surpassed expectations, rising 0.9%, ex-autos, versus the consensus estimate that called for an increase of 0.3%.
--Kimberly DuBord, Briefing.com
8:25AM Euro Update
The German DAX index has been one of the best performing indices to date, up almost 20%, as the economy continues to gain momentum. Business confidence jumped to a five-year high last month. The dollar, however, rose to a two-year high against the euro after the ZEW Center for European Economic Research said German investor confidence unexpectedly fell to 38.7 from 39.4 in October as concerns over higher interest rates and tax increases overshadowed improving economic growth in the euro nations. Economists predicted a reading of 44, according to Bloomberg.
Germans are focusing on the recent talk of raising the VAT tax and a possible ECB rate hike. The European Union countries grew at the fastest pace in the third quarter since 2004, up 0.6%. As a result, the European Central Bank has signaled it is ready to raise rates, which could coincide with Germany's new government's plans to raise taxes in 2007. On November 3rd, ECB President Jean-Claude Trichet said he can raise rates "at any time." German GDP expanded at 0.6% in the third quarter, which has prompted market speculation of a possible rate hike in December to stem inflationary pressures.
The new German government is scheduled to take office on November 22. Chancellor-designate Angela Merkel's Christian Democrats and her Social Democrat allies just approved a program to raise the VAT tax and to increase income tax on higher wage earners. Unemployment remains close to a post-World War II high of 11.6%. Economic growth is expected to rise less than 1.0% this year, marking the fifth year of expansion that is less than 1%. The euro has declined 14% against the dollar this year, helping to make German exports more attractive. The dollar is currently trading at 1.653 euros, down from a high reached at the end of 2004 of 1.366.
--Kimberly DuBord, Briefing.com
9:46AM Build-A-Bear Workshop (BBW) Oppenheimer initiates BUY. Target $32. Oppenheimer initiates Build-A-Bear as they believe the co is at the front of the emergence of experiential retailing concepts and stands to benefit from strong unit expansion opportunities, new concepts, margin improvement and cash flow generation over and above that needed for growth.
9:43AM Discovery Labs (DSCO) Jefferies & Co initiates BUY. Target $10. Jefferies initiates Discovery Labs as they expect Surfaxin to receive both US and European approval in Q206 for the treatment of newborns with respiratory distress syndrome, an estimated $200 mln worldwide opportunity.
9:41AM Target (TGT) Sun Trust Rbsn Humphrey downgrades Buy to NEUTRAL. Suntrust downgrades Target following a very disappointing weekly sales update, issued after Monday's close, as they now look for Nov same-store sales to fall below a guided range of 4% to 6%, reflecting what seems to have been a sharp deceleration in the latter half of the second week of the month.
9:39AM Epicor Software (EPIC) Jefferies & Co initiates BUY. Target $17.5. Jefferies initiates Epicor Software as they believe the co is taking share in mid-tier Enterprise Resource Planning software and appears well positioned to continue, given favorable positioning relative to important application software trends.
9:38AM Brocade (BRCD) AG Edwards upgrades Sell to HOLD. AG Edwards upgrades Brocade following the co's filing of its financials with the SEC ahead of the deadline, which they believe should lift an overhang, and now expect the co to meet or beat the est for its Oct quarter.
9:33AM Education Realty Trust (EDR) KeyBanc Capital Mkts / McDonald downgrades Buy to HOLD. KeyBanc downgrades Education Realty following Q3 results, which represents the second consecutive reduction in outlook related to cost pressure at its acquired properties.
9:32AM Clear Channel Outdoor (CCO) Stanford Research initiates BUY. Target $23. Stanford initiates Clear Channel Outdoor given that CCO has a strong parent co (CCU) and a similar valuation to LAMR, firm suggests investors purchase the stock as a compliment to their positions in LAMR.
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