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From Briefing.com: 4:27 pm Weekly Wrap

The stock market was hammered this week by two factors. First, there was disappointment over guidance given in key earnings reports. Second, there was concern over the situation with Iran and the implications for oil prices.

Oil prices hit first. The S&P 500 index fell 5 points on Tuesday after the Monday holiday. The main cause was a jump in oil prices to over $67 a barrel after veiled threats from Iran that oil supplies would be disrupted if the international community attempted to interfere with its nuclear plans.

Then the earnings problems began. After the close on Tuesday, Intel reported fourth quarter profits three cents below expectations. Revenue was also less than expected. Worse, the company said that first quarter revenue would be far less than current Wall Street estimates. That afternoon, Yahoo also said that fourth quarter profits and revenue were below expectations. Guidance for the first quarter was viewed as disappointing.

Intel and Yahoo dragged the market down on Wednesday. The Nasdaq dropped 23 points and the S&P 500 another 5 points.

The news after the close on Wednesday wasn't quite as bad. Advanced Micro Devices had a blowout report. But Apple Computer also gave disappointing guidance for the first quarter. The company beat profit estimates for the fourth quarter but the stock nevertheless slid on Thursday. The situation was similar for eBay, which reported good profits but said revenues this quarter would be below prior expectations.

Earnings reports Thursday morning included good numbers from Pfizer, Merrill Lynch, UnitedHealth, and Harley-Davidson. That helped the S&P rebound 7 points that day, but the better tone didn't last long.

On Friday, the market caved. This time it was Motorola, Citigroup, and General Electric that presented disappointing outlooks and earnings. Oil also shot up to close at $68.48 a barrel on continued concerns about the Iranian situation as well as new threats from al-Qaeda. The S&P plunged 24 points.

The economic news this past week wasn't bad. December industrial production was up 0.6%. Housing starts dropped sharply. Consumer sentiment was up, and new claims for unemployment down sharply. The December core rate of CPI came in at 0.2%, in line with the prior two months and indicating steady inflation rates. Overall, it was a mixed bag that had marginal impact on the stock market.

It was clearly the worrisome guidance that caused the majority of the decline this week. Earnings reports for the fourth quarter were fine. They are on track for 13% growth over the fourth quarter from the year before. But the market is adjusting to the reality that earnings growth can't continue at the strong rate of the past two and one-half years. Earnings growth this year will probably slip to 7% and perhaps even lower.

This is largely a matter of the market adjusting to the reality that has been long anticipated. The earnings trends aren't bad. Intel, Yahoo, and eBay, for example, are all doing very well from a business standpoint. So are banks and industrial firms. But there are always concerns when a slowdown is occurring, and this week those concerns slammed the overall market.

The Briefing.com view is that the market adjustment is understandable. The guidance was in fact disappointing. But the market often hits turbulence during the early portion of earnings season and the bigger picture trend in earnings is still good. The market may very well steady later in the month and even rebound as earnings season starts to wind up in February.

The situation in Iran is more of a wild card. It presents a risk that is very hard to quantify. That could derail the first quarter outlook for the stock market even more than the adjustment to a more reasonable earnings outlook for 2006.

 
 Index      Started Week Ended Week  Change  %Change  YTD  
 DJIA         10959.87    10667.39  -292.48   -2.7 % -0.5 %  
 Nasdaq        2317.04     2247.70   -69.34   -3.0 %  1.9 %  
 S&P 500       1287.61     1261.49   -26.12   -2.0 %  1.1 %  
 Russell 2000   708.44      704.60    -3.84   -0.5 %  4.7 % 
 

9:12AM MIPS Techs tgt rasied to $11 at Adams Harkness (MIPS) 7.73 : Adams Harkness is raising their tgt on MIPS to $11 from $8 after the co reported earnings. Firm says as MIPS executes on its market opportunities in the digital consumer and communications segments, they expect strong financial performance and expect the stock to move higher.

11:27 am Citigroup (C)

46.24 -1.70: Like a number of other banks this week, Citigroup reported its fourth quarter and year-end results. In turn, like many of those same banks, it talked about net interest margin compression and a surge in consumer bankruptcy filings that occurred prior to more stringent bankruptcy laws going into effect in October. Unlike other banks, Citigroup hasn't fared too well following its report. The market, though, has reason to be disappointed in Citigroup.

While fourth quarter net income of $6.93 billion, or $1.37 per share, was up 30% from the year-ago period, the result included a $2.1 billion after-tax gain from the sale of its asset management business to Legg Mason. Excluding that item and results from discontinued operations, income from continuing operations was $4.97 billion, or $0.98 per share. That was down 3.0% from the year-ago period and its EPS result was two cents shy of analysts' average estimate according to Reuters Estimates.

Income from continuing operations was aided by the after-tax release of $375 million from Worldcom/Research litigation reserves, a $248 million gain on the sale of Nikko Cordial stock, and a $57 million gain on the sale of its European Card Acceptance business. Those items, though, were essentially offset by charges for a one-time accounting change cost, and increases in reserves for consumer bankruptcy filings and previously disclosed legal matters.

The aforementioned bankruptcy filing issue cut into Citigroup's U.S. credit card business, which suffered approximately $120 million pre-tax of reduced interest and fee revenue. The bank's trading and investment banking operations, however, were a bright spot. Equity trading revenue was up 39% and investment banking revenue rose 3.0%, highlighted by a 25% increase in advisory revenues that hit record levels. Citigroup ended 2005 as the top underwriter of stocks and held the number two position in completed global mergers and acquisitions.

The latter rankings aside, the pace of profit growth at Citigroup is disappointing and won't necessarily pick up easily as heightened competition from its peers and the compression in net interest margin that stems from the flattening yield curve are creating a challenging environment.

At 11.9x trailing twelve month earnings, Citigroup trades at a 15% discount to its 5-year historical average. In turn, with the added announcement today that the company's board approved an 11% increase in the quarterly dividend to $0.49 per share, it sports an attractive dividend yield of 4.24%. Accordingly, it holds ample appeal for value-oriented investors seeking an income component with their stock holdings. However, Citigroup isn't as ideally suited for the active investor as we thought it was when we added it to our Active Portfolio in August 2004 and we will be removing it today. Since its inclusion, Citigroup is up 6.8%, including dividends.

--Patrick J. O'Hare, Briefing.com

09:57 am Schlumberger (SLB)

119.47 +4.60: Less than 24 hours after announcing the approval of a two-for-one stock split and increasing its quarterly dividend 19% to $0.25 per share (on a pre-split basis), upbeat news continued to flow out of Schlumberger like a geyser of black gold. Surprise, surprise, the world's largest oilfield services company said Q4 profits doubled, beating the most optimistic of Wall Street forecasts, as earnings of $1.05 per share, excluding non-recurring items, checked in nine cents better than the Reuters Estimates consensus.

Operating revenues surged 31.2% year/year to $4.02 bln, again surpassing expectations (consensus $3.88 bln), as Oilfield Services revenue rose 30.0% year/year to $3.57 bln. According to Chairman and CEO Andrew Gould, one of the most respected executives in the oil industry, "The very strong activity that we have seen in the fourth quarter resulted in new record levels of oilfield revenue and net income for Schlumberger." At Oilfield Services, sequential growth in the Eastern Hemisphere was greater than the growth in the U.S. for the second straight quarter, confirming increased activity, improved equipment utilization and stronger prices in those markets. The pent up demand within the international markets, supporting volume and pricing gains, plays into our Overweight rating on Energy.

Gould went on to note that shortages of people and equipment across the industry will place a high premium on reliable suppliers (like SLB) while the technology needed to improve the productivity of a limited personnel base will be in high demand. He also said that "exploration activity, where Schlumberger has an unmatched portfolio of services, will show a large increase in 2006" and continue for a number of years. As a result, management expects top line growth in fiscal 2006 to be similar to the 25% growth experienced in 2005; analysts were expecting revenue this year to grow about 18%.

Shares of Schlumberger, which trades at 35.4x forward earnings, have already surged 18% this year alone. Competitor BJ Services (BJS) -- a suggested holding in our portfolio for active investors, which has tacked on 11%, sports a forward P/E multiple of 20.2x.

--Brian Duhn, Briefing.com

09:43 am General Electric (GE)

34.07 -0.61: The world's second largest business by market value reported its smallest quarterly profit since 2004 after exiting its insurance business to focus more on higher growth markets. After some confusion over the exclusion of the insurance business, the fact GE missed analysts' revenue estimate by more than a billion dollars took the market by surprise and weighed on stock futures. Revenues rose 3% to $40.7 bln compared to the consensus view of $42.39 bln. Despite the top line miss, GE's earnings per share came in right on target with consensus estimates, assisted by a lower tax rate and share count. For the year, total orders rose 10%, equipment backlog grew 5% to $24 bln, and Client Services backlog increased 15% to $87 bln. GE closed the year with considerable financial flexibility, which will enable it to continue to strengthen its growth businesses.

In December, GE guided revenues to $42 bln+, so the question put to management on its conference call was where the billion dollar miss came from? GE stated the difference was due to the following: $300-$400 mln in forex, $400-$500 from less than expected asset sales, and the rest from its plastics business due to price and volume mix.

Organic revenues rose 8% for both the quarter and the year. All six business units delivered double-digit earnings growth. Notable revenue growth came from Consumer Finance (+14%), Infrastructure (+11%), and Health Care (+5%). Commercial Finance and Infrastructure combined accounts for over half of GE's total segment profits. Both businesses showed margin acceleration with Commercial Finance accelerating to 24.5% from 20% last quarter. Revenues from its non-financial unit rose 3%, with weaker results in plastics and aircraft engines. NBC Universal was hurt by poor television ratings. The Olympics should help push the top line for NBC in the first quarter.

Considering the breadth and size of GE's business, the market focuseson its outlook for the global economy. CEO Jeffery Immelt stated, the "current economic environment remains positive...with continued strong growth in Asia and developing markets" - a key growth area for GE. Further, it anticipates "mid-single digit growth in the Americas and slow growth in Europe." GE's Q1 and FY06 guidance was roughly in-line with what the market was expecting. For Q1, it sees earnings of $0.38-$0.40 (consensus $0.39) and FY06 EPS of $1.91-$2.02 (consensus $1.98).

GE's cash flow is up an astounding 42% this year to $21.6 bln, which GE used to raise its dividend for the 30th straight year and to expand its buyback program from $15 bln through 2007 to $25 bln through 2008. We continue to like GE due to its high quality and predictable nature of earnings and strong, flexible financial position. GE will be able to achieve the multiple expansion that has eluded it through driving revenue growth within its long-cycle businesses. Over the longer-term, it will be the industrial areas, like aircraft engines and power turbines, that will bring good things to life for GE.

--Kimberly DuBord, Briefing.com

09:20 am KeyCorp (KEY)

33.13: While many on Wall Street remain concerned about banks suffering from compressed net interest margins, KeyCorp's Q4 report should alleviate some of those worries. Compared with last year's comparable quarter, taxable-equivalent revenue rose by $132 mln, reflecting strong commercial loan growth, higher fee income, growth in core deposits and an improved net interest margin, which rose to 3.71% from 3.63% a year earlier. Lending income rose 7% from a year ago to $748 mln while fee income rose 17% to $561 mln.

Net income was $296 mln, resulting in earnings of $0.72 per share that were five cents better than the Reuters Estimates consensus. This was the 11th straight quarter KeyCorp has beaten analysts' expectations.

KeyCorp's solid Q4 results were attributed to management's success in growing revenue, which rose 11% year/year to $1.31 bln, as well as an improved business mix and stronger credit risk profile. Management issued upside guidance for the first quarter, saying it now sees earnings of $0.67 to $0.71 per share (consensus $0.66). For fiscal 2006, Cleveland-based KeyCorp sees earnings of $2.80 to $2.90 per share (consensus $2.80).

While we maintain a Market Weight rating on the Financial sector, a money center bank like KeyCorp, which also complements its commercial banking and consumer finance businesses with investment banking products and services, warrants consideration for long-term investment value. To that end, KeyCorp's board approved an increase in the quarterly dividend to $0.345 from $0.325. The bank has increased its dividend for 41 consecutive years, a trend that bodes well for income-oriented investors who may be concerned about slowing economic growth and earnings deceleration in 2006.

--Brian Duhn, Briefing.com

09:05 am Capital One Financial (COF)

85.52: After the close Thursday, Capital One Financial Corp. reported a 44% jump in fourth quarter profits, aided by the recent acquisition of Louisiana-based Hibernia Corp. For the quarter, the credit card issuer said it earned $280 million, or $0.97 per share, up from $195.1 million, or $0.77 per share, a year earlier. The acquisition of Hibernia, which was completed in November, contributed approximately $30.6 million to net income for the period. The results beat analysts' average estimate of $0.95, according to Reuters Estimates.

Quarterly revenue increased to $2.7 billion from $2.31 billion in the same period last year. Net interest income, or profits from loans and deposits, rose to $1.04 billion from $784.6 million, while non-interest income increased to $1.67 billion from $1.52 billion in the year ago period.

Capital One, which generates substantial earnings from its loan portfolio, said managed loans at the end of the quarter totaled $105.5 billion, up $25.7 billion, or 32%, from the prior year. That includes organic growth of $4.4 billion and approximately $16.3 billion of loans acquired through Hibernia.

For fiscal 2006, Capital One said it expects its managed loan loan portfolio to grow between 7% and 9%. Furthermore, the company projected full year earnings in the range of $7.40 to $7.80 per share - in line with the Reuters Estimates consensus of $7.68 per share. With the acquisition of Hibernia completed, the outlook for Capital One should become more clear as the company focuses on integrating and re-branding the bank, as well as efforts to increase the revenue contribution from fee-based businesses. Briefing.com currently has a Market Weight rating on the Financial sector. However, a more positive stance is limited by the current yield curve effect, a slowdown in mortgage demand, and increases in loan-loss reserves.

--Richard Jahnke, Briefing.com

08:18 am Motorola (MOT)

24.35: A small miss on revenues and in-line guidance left the market wanting more from Motorola, a suggested holding in Briefing.com's Active Portfolio. The Schaumburg-based company closed the fiscal year setting a new record in revenues, which rose 18% year/year to $10.4 bln, but were still below consensus of $10.6 bln. Earnings came in a penny ahead of expectations at $0.35 per share, but then again MOT has topped consensus for all of 2005. While the market may be disappointed, our positive opinion on the stock still rings true. The motormomentum continues, as Motorola's market position continues to improve within the high-end and emerging markets.

MOT shipped a record 44.7 mln handsets in the quarter, 40% year/year increase. Yet, due to supply constraints, it was unable to fill all of the demand. Management anticipates this should not be an issue going forward. The worldwide success of Motorola's handsets, in particular the Razr, which is now the best selling clamshell in the world, has propelled the company's share of the global handset market. This quarter, Motorola gained another 3 points. Average selling prices came in ahead of expectations, up 3% sequentially, which the company believes will remain strong in Q1 due to new product launches.

As of the July quarter, management stated it will no longer provide EPS guidance, but will provide other information for investors. This is the second time this week a major technology company announced the end to quarterly guidance. From management's perspective, it shifts the market's focus from near-term results to the company's longer-term growth targets. While we acknowledge the street does get caught up with meeting, or actually beating, those consensus estimates each quarter, the lack of quarterly guidance limits visibility into the company's operations.

In-line guidance did little to offset the slight miss on revenues. Motorola sees Q1 earnings of $0.27-$0.30 per share, excluding two cents in stock options versus consensus of $0.28 on revenues of $9.3-$9.5 bln - right on par with what the market's expectations for $0.28 and $9.33 bln, respectively. Management expects continued share gains in the handset market and a less than seasonal decline in handset units in Q1. Overall, the fourth quarter was a solid quarter, but with the success of its new handsets, the market was expecting a blowout. Capacity issues were likely the main cause, but we recommend investors focus on the bigger picture of continued market share gains, rising ASPs, margin expansion, and accelerating earnings.

--Kimberly DuBord, Briefing.com

10:25 am Renovis: Needham & Co reiterates Buy. Target $20 to $20. Firm saying Renovis merits greater attention from investors, given the co's successful execution of the SAINT trials to date, as well as expected upcoming newsflow which will further highlight progress of lead drug candidate, Cerovive. Firm says Renovis' 4Q05 highpoint was the announcement by partner AstraZeneca (AZN) of the interim safety review of 1,597 patients, which gave a "go ahead" signal for the Phase 3 SAINT II Cerovive trial.

10:24 am F5 Networks: JMP Securities downgrades Mkt Outperform to Mkt Perform. Target $60. Firm saying that while F5's Dec quarter results were above expectations and the co issued above consensus March quarter guidance, they believe the co's Dec quarter results indicate that it is facing increased risk.

10:22 am Beazer Homes: Credit Suisse downgrades Neutral to Underperform . Target $67 to $67. The firm says that with mix proving a negative in the coming year, pricing power minimal and major markets for BZH (Denver, Las Vegas, New Jersey, Phoenix, the Inland Empire, Sacramento and Washington D.C.) materially changing over the last six to nine months, they believe the valuation premium currently assigned to the co is unjustified. Ultimately, they expect fundamentals to win out over share buybacks.

10:21 am Harmonic: Brean Murray downgrades Strong Buy to Hold. Brean Murray downgrades HLIT to Hold from Strong Buy and suspending their tgt following Q4 results, as they have lost their confidence that the company can gain its fair share of the 2006 spend by the domestic satellite operators to upgrade local markets to HD. Firm is are also cutting their 2006 EPS view to $0.16 from $0.42. Firm no longer believes Harmonic will get fair share of satellite business.

10:20 am Genesis Microchip: CE Unterberg Towbin downgrades Buy to Market Perform. CE Unterberg downgraded GNSS to Mkt Perform from from Buy. The product transitions within both the L.C.D monitor business and D.T.V will likely dampen rev growth for GNSS through much of 2006, in their view, as new lower priced components are replacing older higher A.S.P products.

10:19 am Allscripts: Caris & Company downgrades Above Average to Average. Caris downgrades MDRX to Average from Above Average. The firm says that GE is now "officially" able to mkt its competitive solution to IDX clients, and in turn MDRX will pay at least a 50% lower royalty to IDX on TouchWorks sales.

http://biz.yahoo.com/mu/story.html