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Friday, January 27, 2006 10:16:42 PM
From Briefing.com: 4:16 pm Weekly Wrap
It took all week, but the market recouped almost all of the losses incurred last Friday. The uptrend this week was accompanied by mixed earnings and economic reports.
Almost 50% of the S&P 500 companies have now reported. The reports this quarter are not as upbeat relative to expectations as in recent quarters. The total year-over-year increase in operating earnings for the S&P 500 in aggregate is on track for 13% growth. That is no higher than the forecast before the reports came out. In recent quarters, earnings have been above expectations by 3% to 5%.
This quarter, 63% of companies have beaten expectations. In recent quarters, that percentage has been in the 67% to 70% range. The 19% of companies reporting below expectations is also larger than in recent quarters.
Very few large companies have reported revenue significantly above expectations, and many have come in below Wall Stret forecasts. Guidance for upcoming quarters has also been a problem. Many large companies have been guiding revenue expectations lower for 2006.
Overall, the reports are uninspiring.
Yet, the market has taken the news reasonably well. The market plunged last Friday on realizations that 2006 expectations were too high. Now, the market is coming to terms with the outlook and finds it reasonably good, if not spectacular.
The economic news this past week was also mixed. Fourth quarter real GDP was up at just a 1.1% annual rate. That was well below the 3.5% growth rate for 2005 as a whole, and the 4.4% rate of 2004.
The data wasn't a huge surprise, however. The weakness was due in large part to a drop in spending on durable goods (autos) after a surge the previous two quarters, as well as a temporary drop in government spending. Consumption of nondurables and services remained on a solid growth path, and investment was up at a 12.2% annual rate. Most economists therefore expect a rebound in growth in the first quarter as the durables and government weakness won't be in the upcoming numbers.
Nevertheless, the lower fourth quarter growth signals that 2006 overall growth is likely to ease to the long-term trend of 3%. A more moderate rate of growth in the economy is consistent with the lowered revenue guidance given by many large firms.
The outlook for Fed policy has not changed. A 1/4% rate hike is still expected at the Tuesday meeting, and the fed funds rate futures are pricing in another such hike before July. Oil prices closed this week a bit over $67 a barrel. That is unchanged from the week before.
The market is adjusting to the realization that economic and earnings growth will slow in 2006. The strong growth of recent years simply can't continue. Valuations are reasonable, and decent earnings growth still leaves room for the market to move higher this year, but expectations are constrained. Risks still exist that the Fed will raise rates too high, or that oil prices will spike higher. The S&P is up 3% for the year already, but it may struggle to post further significant gains through the first half of the year.
4:20 pm : Another solid round of earnings reports catalyzed a pervasive bullish sentiment Friday. A lower than expected read on fourth quarter GDP growth did little to temper buying action, and appeared to take a back seat to the corporate front today.
Dow components Microsoft (MSFT 27.77 +1.27) and Proctor & Gamble (PG 59.75 +0.93) were the session's highlights. The former delivered strong profits and issued reassuring guidance that supported both the Tech sector (+1.0%) and the broader market. Surging Broadcom (BRCM 69.87 +11.15) shares, following its blowout Q4 results, lent significant upside and underpins our Overweight rating on the sector. On account of BRCM and KLA Tenecor (KLAC 54.17 +0.16), which also reported better than expected earnings, semiconductors soared.
Up 1.9%, the Energy sector led. Amid continued geopolitical tensions, (i.e., Iran and Nigeria) supply concerns drove the price of crude 2.3% higher. Along with that factor, further indications of oil companies' profitability drove buyers to the Energy sector. Last night, Haliburton (HAL 78.95 +3.80)delivered strong earnings, followed by Chevron (CVX 60.77 +0.55) this morning. Health Care (+1.2%) also contributed to the market's advance. The health care equipment industry ran following Styker's (SYK 50.55 +6.22) earnings news, as did healthcare suppliers after Milipor (MIL 71.34 +5.90) reported. Pfizer (PFE 25.99 +0.94) was the muscle behind the rise; the company announced approval for its Exubera drug, and was also featured in Barron's today. Boston Scientific (BSX 21.55 -1.60) was the sector's weakest link - following its receipt of an FDA warning letter and on account of disappointing earnings from Guidant (GDT 73.73 1.53).
Homebuilders fared well after this morning's housing data, and a subsequent rise in the home furnishing industry took the Consumer Discretionary sector to a 0.4% gain. New home sales rose a surprising 2.9% last month; declines are still expected in the months ahead, but the report nonetheless served as another bullish factor for equities today. Proctor & Gamble's fiscal Q2 results stirred buying across the Consumer Staples (+0.8%) sector, and surging steel stocks were behind a 0.9% rise in Materials. On a related note, Mittal Steel (MT 34.13 +1.83) made a $2.27 billion cash bid for Arcelor SA this morning.
With respect to the GDP data, the economy grew 1.1% during Q4; economists had expected a 2.8% increase. Stock investors shrugged off the report, though. A sharp drop in auto sales was largely responsible for the miss relative to the consensus estimate, and we expect to see a rebound in Q1. Also, the fact that the data is dated helped investors get over the surprise. Anecdotally, the "soft" Q4 GDP report could actually serve as a source of support as it feeds the argument the Fed, after its Jan. 31 FOMC meeting, will have reason to pause its tightening activities. Ultimately, the market's attention rested upon the solid earnings front.DJ30 +97.74 NASDAQ +21.23 SP500 +9.89 NASDAQ Dec/Adv/Vol 1238/1758/2.24 bln NYSE Dec/Adv/Vol 1174/2085/1.94 bln
10:24 am PortalPlayer: Kaufman Bros upgrades Hold to Buy. Target $28 to $28. The firm believes that this rating is justified given the earnings momentum headed into 2006. More significant in their thinking is their belief that PLAY now represents a very attractive acquisition candidate. Their analysis suggests PLAY could be acquired at a significant premium to their $40 price tgt. A deal above this value could still be accretive to a larger acquirer such as BRCM or INTC, both of which, in their opinion, have reasons to be interested in PLAY's business.
10:23 am Citizens: Bear Stearns upgrades Peer Perform to Outperform. Firm is noting that the stock is trading near its 52-week low and its 8.3% dividend yield is close to its high since the co instituted its current high-yield dividend policy in 3Q04. Firm believes that fundamentals support strong free cash flow generation, and believe that additional share repurchases are likely in the near-term.
10:19 am Packeteer: Harris Nesbitt downgrades Outperform to Neutral. Target $14 to $14. Firm thinks the stock will open as much as 20% higher today following its strong 4Q earnings, but they don't believe the upside from there to their new $13 tgt is sufficient to warrant their highest rating.
10:17 am Sierra Wireless: Avondale Partners upgrades Mkt Perform to Mkt Outperform. Upgrade is following Q4 results, given traction with both Sprint (S) EV-DO and Cingular (BLS; T) HSDPA deployments, and the potential upside driven by embedded module deals with Hewlett-Packard (HPQ) and Lenovo.
10:16 am Andrew: Needham & Co upgrades Hold to Buy. Upgrade is following Q1 earnings. Firm continues to believe that the downward margin trajectory the co has experienced for several quarters appears to have finally reversed and the demand outlook for the co's products appears solid.
10:15 am MEMC Elec: Needham & Co upgrades Buy to Strong Buy. Firm believes that WFR is an attractive investment for the following reasons: 1) Solid financial position that will enable them to be profitable and grow their business unlike several competitors. 2) Favorable mkt conditions in the semiconductor and solar cell industry that include strong demand from both markets; increasing capacity utilization favoring ASPs; shortage of polysilicon favoring ASPs; and consolidation in the industry favoring suppliers that are qualified for 300 mm diameter substrates (WFR being one); 3) New management strategy focusing on profitability, market-share and technology
10:13 am Scopus Video Networks: Needham & Co initiates Buy. Target $9. Firm believes the main drivers, beyond the obvious analog-to-digital transition, are 1) TelcoTV as the new competitive entrant, possibly followed by new wireless networks, 2) HDTV channel growth, and 3) targeted advertising combined with personalized TV services.
10:11 am hi/fn: Avondale Partners upgrades Mkt Perform to Mkt Outperform. Firm says that SHW reported Q4 EPS -- on an apples/apples basis -- of $0.64 versus $0.49, a gain of 31%, demonstrating the co's distribution strength through its powerful retail system and its constant focus on improving margins.
10:08 am Constellation Energy: Deutsche Securities upgrades Hold to Buy. Target $65.5. The firm says that in light of the recent weakness (off 3.2% since Jan 23, versus the UTY being off 2.9%) and their tgt of $45.50 per share for FPL, they believe CEG represents an attractive opportunity for investors willing to withstand mkt volatility and patience.
10:06 am Robt Half: CL King downgrades Strong Buy to Neutral. Target $42. Firm says co's results were solid, but margins were below expectations because of expansion costs, primarily at Protiviti. They note that Protiviti's Q1 revs will be flat to down slightly from Q4. Thus, the potential for a strong upside surprise over the short term seems limited.
10:04 am Sunpower: Am Tech/JSA Research upgrades Hold to Buy. Target $45. Upgrade follows the co's solid results in Q4. More importantly, firm is encouraged by mgmt's guidance in terms of manufacturing ramp and available silicon supply. While firm expects that solar stocks will be volatile in the near-term, they also expect the volatility to trend towards higher-highs and higher-lows, providing compelling long-term returns.
09:51 am Openwave: WR Hambrecht reiterates Buy. Target $24 to $24. Target change represents 22x firm's new CY:07 EPS est of $1.12. This multiple is more or less in line with the peer group, despite the co's higher earnings growth profile (+23%) in 2007. They believe investors will be happy with the improvement in cash flow due to better collections effort, margin expansion above expectations, and significant deal signings during the qtr which indicate that mgmt's vision of offering an integrated application solution is gaining traction with customers. These positive developments support their view that underlying fundamentals will continue to improve in 2006, leading to multiple expansion and further share price appreciation.
12:56 pm McKesson (MCK)
53.86 +1.73: Shares of McKesson Corp. traded higher on Friday, gaining more than 4%, after the prescription drug wholesaler beat analysts' third quarter profit and sales expectations. Furthermore, the company raised its outlook for the full year, due to the strong growth in generic pharmaceuticals and continued progress in its business.
In the third quarter, McKesson earned $193 million, or $0.61 per share, compared with $144 million, or $0.49 per share, in the year ago period. That included a $37 million pre-tax gain in Pharmaceutical Solutions related to an anti-trust settlement and a $15 million pre-tax charge in Medical-Surgical Solutions to expense a pre-paid licensing agreement. Excluding non-recurring items, the company would have earned $0.49 per share. Revenues for the period were up 9% to $22.6 billion, driven by solid growth in all business segments. According to Reuters Estimates, the company was expected to post earnings of $0.52 per share on revenue of $22.6 billion.
By segment, Pharmaceutical Solutions revenue increased 9%, aided by strong sales of generic drugs and new and expanded distribution agreements in the U.S. Excluding the $37 million anti-trust settlement, operating profit was up 11% year/year. In Medical-Surgical, revenues rose 11%; however, operating profits fell 67%, to $8 million, as a result of the $15 million charge in the division. Provider Technologies revenue were up 21%, led by a 38% jump in software and software systems sales. Profit for the division climbed 36% to $38 million.
Given McKesson's quarterly performance and strong momentum across all of its businesses, the company lifted its earnings target for fiscal 2006. The company now expects to earn $2.21 to $2.46 per share, well ahead of the Reuters Estimates consensus of $2.27. Furthermore, the company forecasted fourth quarter earnings of $0.65 to $0.70 per share. That was in line with the consensus EPS estimate of $0.68. The latest results reflect the company's continued progress, and further underscores Briefing.com's Market Weight rating on the Health Care sector. As McKesson continues to benefit from growth in higher margin generic drugs, as well as the potential opportunity afforded by the new prescription drug benefit plan, formally know as Medicare Part D, the company should continue to gain momentum.
--Richard Jahnke, Briefing.com
10:42 am Boston Scientific (BSX)
22.00 -1.15: Boston Scientific revealed late Thursday that federal regulators have issued the company a warning letter related to its quality control systems, as well as recent product recalls. The letter received from the U.S. Food and Drug Administration expresses concerns over the medical device maker's procedures in detecting defects and responding to quality control complaints at six of its plants. Furthermore, the agency cited continuing regulatory problems at three facilities it inspected last summer, which reviewed the manufacture of such leading products as the Taxus and Liberte drug-eluting stents.
Accordingly, the FDA said it will not approve any pre-market applications for devices to which the concerns in the letter are reasonably related until the outstanding issues are resolved. While the result of the warning could impact a number of newer products, it may also upset the pending acquisition of Guidant Corp. (GDT), as the company tries to gain shareholder and antitrust approval. According to Prudential Securities, the warning may impact the Guidant acquisition in a few ways: federal regulators may delay approval of Guidant's products upon completion of the acquisition; Guidant's board may reconsider Boston Scientific's $27 billion bid, potentially in favor of rival Johnson & Johnson's latest offer; and in the event Boston Scientific's stock price falls below the collar of $22.62, the value of the current offer for Guidant will decline.
Meanwhile, Guidant Corp. on Friday reported lower sales and profits for its fiscal fourth quarter, as it continues to grapple with recent product recalls and legal scrutiny. For the period, the Indianapolis-based company said earnings from continuing operations were $85 million, or $0.25 per share, compared with last year's profit of $124 million, or $0.38 per share. Sales fell $140 million, or 14%, to $828 million. The results, which reflect the impact of product recalls and merger-related expenses, fell short of Wall Street's estimate for earnings of $0.27 per share, but topped expectations for revenue of $828.2 million.
For the quarter, Guidant said worldwide implantable defibrillator sales declined 19% year/year to $372 million, with U.S. sales down approximately 23%. Worldwide pacemaker and coronary stent sales were also down significantly during the period, falling 24% and 6% from the year ago period, respectively.
On top of Boston Scientific's recent regulatory issues, the pending acquisition of Guidant continues to draw concerns from many investors as product performance remains a challenge in the face of product recalls. Even if the pending merger receives antitrust and regulatory approval, Boston Scientific will have to clear a number of hurdles to capitalize on the $10 billion cardiac rhythm market. Based on the news, shares of both BSX and GDT are trading lower.
--Richard Jahnke, Briefing.com
10:02 am Chevron (CVX)
60.22: Chevron, the second largest oil company in the US, reported a 20% rise in fourth quarter profits on record energy prices. Chevron closes what was a record year for the industry, generating more than a billion dollars in profits over FY04, despite the worst hurricane season on record that caused lower production, costly repairs, and operational disruptions.
Fourth quarter net income rose to $4.1 bln, or $1.86 bln, from $3.4 bln or $1.63 per share last year - surpassing expectations by three cents. CVX's top line, which is dominated by the upstream exploration and production segment, swelled to $53 bln. The 26% rise in sales and other operating revenues was derived mainly through higher prices for crude, natural gas, and refined products - not to mention the integration of the Unocal assets.
Upstream revenues rose 46% to $3.2 bln, again, mainly attributed to higher energy prices. In the US, the average price per barrel rose $14 to $52 per barrel, with international prices rising to more than $50/barrel. Worldwide oil-equivalent production grew 11% from the fourth quarter of 2004, including strong volumes out of the Canadian oil sands and a new service agreement in Venezuela. Downstream earnings, which include refining, marketing, and transportation, were $808 mln, down 25% year/year due to lower refining margins, hurricane carryover effects, and other items.
Chevron ends the year in a strong financial position. Its debt ratio has declined to 17% from 20% last year and it has a cash balance of $11.1 bln. Chevron expects average worldwide oil-equivalent production of 2.5 mln barrels/day to increase to 2.7-2.8 mln in 2006. The expected increase is mainly attributed to the addition of the Unocal assets to offset normal field declines.
We expected a strong earnings season from the super-majors given the market environment. We remain long-term energy bulls given the positive risk/reward profile for stocks, underscored by strong earnings and cash flow momentum and attractive valuations. We favor stocks with the best production profiles, which includes CVX. Chevron trades at 7.9x forward earnings, compared to Exxon (XOM) at 6.7x, ConocoPhillips (COP) at 6.7x, and Occidental Petroleum (OXY) at 9.0x.
--Kimberly DuBord, Briefing.com
09:44 am Stryker Corp. (SYK)
47.51 +3.18: Hoping to prevent a knee-jerk reaction similar to the one that rocked shares of Stryker Corp. when it missed forecasts by a penny last October, the maker of knee and hip implants last night posted results that matched Wall Street's expectations. The company reported Q4 (Dec) net earnings of $185.7 mln, or $0.45 per share. Excluding special non-recurring items, Stryker grew earnings 21.5% year/year to an adjusted $0.48 per share, which was in line with the Reuters Estimates consensus and stood true to the 20%+ profit growth shareholders have grown to love for so long. Management, in turn, projected diluted net EPS for 2006 of $2.02, a healthy 21% year/year increase but below the consensus estimate of $2.09, which was based on the company's prior FY06 EPS guidance of $2.10.
Total revenue rose 10.6% year/year to $1.28 bln, which was just shy of the $1.29 bln consensus. Worldwide sales of Orthopaedic Implants were up 7.6% year/year to $738 mln, based on higher shipments of reconstructive (hip, knee and shoulder), trauma, spine and micro implant systems. Worldwide sales of MedSurg Equipment rose 16.4% from a year ago to $475 mln, based on higher shipments of powered surgical instruments, operating room equipment, and endoscopic products.
Even though management's outlook for 2006 continues to be optimistic regarding underlying growth rates in orthopaedic procedures, we're still not fully convinced Stryker Corp. can weather a much tougher pricing environment that management confessed in October would be a factor going forward. Thus, the potential for increased pricing pressure on Orthopaedic Implants products in the U.S. and certain other foreign markets, Japan in particular, coupled with safety investigations that continue to entangle the medical device industry, suggests investors should stand pat on orthopedics and wait until more progress can be seen.
-- Brian Duhn, Briefing.com
09:26 am SanDisk (SNDK)
70.68: Shares in the world's largest marker of flash memory cards for electronics took a hit on concerns price reductions will cut into profits. SanDisk announced plans to reduce prices by 25-30% in the first quarter to boost sales in several new products. Lower average selling prices for flash memory, used in consumer electronic products from handsets to digital phones, continue to decline. With shares having tripled over the last 12 months we would be sellers as the fundamentals are starting to show signs of deterioration.
Fourth quarter profits rose 71% to $133.9 mln, or $0.68 per share, from $78.3 mln, or $0.42 per share, a year earlier - topping analysts' expectations by a dime. Revenues rose 37% to $750.6 mln. But the key number to focus on was gross margins, which contracted to 40% from 44% in the third quarter, as SNDK now becomes a volume-based, rather than a price-based flash manufacturer. The average price per megabyte of memory sold was down 40% in the fourth quarter from last year.
Analysts will react in kind and slash earnings estimates for the company in the quarters ahead. The outlook for NAND flash remains strong given the end market demand. However, with capacity ramping in FY06 from the Intel/Micron joint venture and Hynix, the pricing environment will remain tenuous. SNDK is betting the price reductions will spark demand for higher density removable storage devices this year. With contracting prices and market share, the outlook for SNDK looks less than promising at this juncture.
--Kimberly DuBord, Briefing.com
09:19 am Microsoft (MSFT)
26.50: After Thursday's closing bell, Microsoft reported second quarter earnings in-line with expectations. The market was anticipating softness on the revenue line due to production constraints for the newly launched Xbox 360 game console. The top line rose 9% year/year to $11.84 bln - the highest quarterly revenue figure in its history. The key takeaway was that this was basically an in line report and guidance. Overall, it was solid quarter with no surprises for MSFT - something tech investors will take to heart.
Net income grew 5% to $3.65 bln, up from $3.46 bln in the same quarter last year. Excluding a one cent tax benefit, earnings came in at 33 cents, topping the Reuters Estimate by a penny. Operating income declined 2% to $4.66 bln, reflecting higher marketing and promotional expenses, which swelled to 22.7% of sales from 19.6% last year, resulting from the launch of several new products, including the Xbox 360 and SQL Server.
The company shipped 1.5 mln Xbox machines in the quarter. Sales in the Home & Entertainment segment, which includes the game console, rose 13% to $1.56 bln. Stronger than expected PC sales in the quarter boosted sales of Windows by 8.3% to $3.46 bln. MSN revenues fell 2.1% to $593 mln due to competitive pressures from rival Google (GOOG) and Yahoo! (YHOO). Microsoft reported broad-based strength and generated a 14% rise in revenues within the Server and Tools segment, including a 20% hike in sales of the SQL Server.
Microsoft returned over $8.5 bln to shareholders through dividends and share buybacks. Looking at the all important guidance, revenues are expected to be in the range of $10.9-$11.2 bln with earnings of $0.32-$0.33 per share in the first quarter. The estimates are in-line with consensus of $0.33 and $11 bln, respectively.
If there is a year to own Microsoft, this would be it. The Redmond-based company has a big product year ahead of it, including SQL servers and Office 12 not to mention a new flagship OS. After four years of waiting...and waiting...Microsoft plans to release its new operating system, Vista, this year. It's critical for MSFT to keep this '06 deadline. The company is forecasting revenues for the year ending June 30th of $44.0-$44.5 bln vs. consensus of $44.19 bln. Operating income is expected to be in a range of $17.9 bln to $18.3 bln, including $361 mln for Q1 settlement charge. It sees earnings, ex-items, of $1.29 to $1.32 per share, again right on target with expectations.
(Disclosure: Briefing.com has a business relationship with Microsoft.)
--Kimberly DuBord, Briefing.com
09:15 am Procter & Gamble (PG)
58.82: Dow component Procter & Gamble reported Q2 (Dec) earnings of $0.72 per share. Excluding $0.03 in one-time dilution expenses from its acquisition of Gillette, second quarter earnings of $0.75 checked in six cents better than the Reuters Estimates consensus. Beating Wall Street forecasts is nothing new for the world's largest consumer products company, as P&G has beaten expectations in 20 of the last 21 quarters. On the minds of investors, though, is just how effectively the Cincinnati, Ohio-based company will integrate its largest-ever acquisition. Management stated that they are making "very strong progress on both the revenue and cost synergies and remains on track with its three year revenue and cost synergy commitments."
Strong top line growth enabled P&G to exceed earnings expectations in what management had anticipated would be the most difficult cost quarter of the fiscal year. Net sales rose 27% year/year to $18.34 bln, versus the $18.22 bln consensus, as unit volume increased 27%. P&G's Health Care business delivered 31% volume growth, Beauty volume increased 9%, and Fabric Care and Home Care delivered strong volume growth of 7%. In fact, every business segment except Snacks and Coffee, which was adversely impacted by Hurricane Katrina, delivered mid-single digit or higher organic volume growth. Every geographic region also delivered organic growth, with developing regions growing organic volume in the mid-teens.
In its second quarter, P&G repurchased $3.5 bln of stock as part of its previously announced Gillette share buyback program. The buyback brought the cumulative value of shares purchased under the program to $12.0 bln and P&G expects to repurchase about $20 bln in total under the program and complete the program by mid-calendar year 2006.
As a result of P&G's robust innovation pipeline and good progress incorporating Gillette's businesses - Blades and Razors and Duracell and Braun - management raised their outlook for fiscal 2006. For Q3, the company sees EPS of $0.58-0.61, which includes $0.02-0.03 in one-time dilution expenses and may not be comparable to the $0.60 consensus. For FY06, management projects EPS of $2.58-2.62, which includes $0.09-0.11 in one-time dilution expenses and also may not be comparable to the consensus, which stands at $2.59.
Either way, a backdrop of slowing economic growth and earnings deceleration should bode well for a stock like P&G. Currently, we have a Market Weight rating on the Consumer Staples sector, but favor the household products industry in that space.
-- Brian Duhn, Briefing.com
09:02 am KLA-Tencor (KLAC)
54.01: After the close Thursday, KLA-Tencor said its second quarter earnings fell from a year earlier on lower revenue, but still beat Wall Street's estimate. For the latest quarter, the semiconductor equipment supplier earned $77 million, or $0.38 per share, compared with $122 million, or $0.61 per share, in the same period last year. Excluding stock-based compensation charges, earnings were $102 million, or $0.50 per share - three cents better than the Reuters Estimates consensus of $0.47.
Revenue for the period fell 8% year/year to $533 million. However, the results beat analysts' estimate of $468.15 million. KLAC reported ending the quarter with approximately nine months of product-related shipment and revenue backlog. In terms of geography, Korea, China, and Singapore, combined, represented 32% of orders, compared with their historical average of 20%. Japan also demonstrated relative strength, accounting for 21% of orders, versus its historical average of 20%. Conversely, the U.S. was 17% of orders and Europe was 12% of orders, lower than their historical average of 25% and 15%, respectively.
Looking to the fiscal third quarter, KLAC forecasted earnings in the range of $0.54 to $0.57 per share on revenue of $500 to $510 million. In addition, the company expects bookings of approximately $540 million in the quarter, driven by increased consumer optimism and continued strong demand for consumer electronics - a trend that underpins our Overweight rating on the Technology sector. As it continues to grow revenue and shipments, the company is looking to deliver 60% to 70% margin.
Despite the drop in second quarter profits, investors remained focused on KLAC's better than expected results and positive guidance, lifting shares higher in early trading. Over the past year, shares have gained nearly 20%, and are up about 9% since the beginning of the year. At the current level, the stock is trading at 26.6x forward earnings.
--Richard Jahnke, Briefing.com
08:45 am Broadcom (BRCM)
73.01: Broadcom, which makes chips used in iPods and handsets, said fourth quarter profits almost tripled. Net income surpassed all expectations, soaring to $194.8 mln, or $0.50 per share, from $71.1 mln, or $0.20 per share earned last year. Sales skyrocketed 52% to $820.6 mln. That wasn't all.
This fabless semi solutions company caught the Street by surprise, forecasting Q1 sales of $870 mln, more than $100 mln above analysts' estimates. This equates to sales growth of as much as 59% over last year.
The quarter was dictated by strong growth across multiple segments from mobile multimedia devices, satellite boxes, gigabyte switches, DSL modems, and Bluetooth chips. The shares rocketed in the after-hours, punctuated by the announcement of a 3-for-2 stock split and a $500 mln share repurchase. Analysts will be in a frenzy to revise guidance upward to match the company's forecasts.
Broadcom's appeal is its broad-based portfolio of products that will drive strong revenue growth and improve profitability. Its chip sets, which are used in Motorola's (MOT) Razr, Palm's Treo, and Apple's iPods, make it easier for products to be multifunctional. We continue to think the stock should be a core holding for 2006. Broadcom's mission of "Connecting everything" fully integrates into our theme within the Technology sector of everything portable, everything digital. The risks include a shift in product mix towards lower end margin markets, inventory builds, or competitive pressures.
--Kimberly DuBord, Briefing.com
08:08 am Mittal (MT)
73.38: The world's largest steelmaker made an unsolicited cash bid to buy Arcelor SA for 18.6 bln euros ($22.7 bln). The transaction would transform the industry, giving billionaire owner Lakshimi Mittal more than 10% control over the world's steel market - 3x its closest rival.
The Rotterdam-based Mittal bid 28.21 euros per share for Arcelor, roughly 3.5x EBITDA. The stock jumped 35% to 30.11 euros in Madrid. Mittal has also agreed to sell Canada's Dofasco Inc. to Germany's ThyseenKrupp AG. The deal, if closed, would be the biggest ever in the industry, creating a company with 320k employees and annual revenues of more than $6 bln. The steel industry is notoriously fragmented, therefore the combination would make economic sense. Observers do not anticipate any regulatory hurdles.
Mittal became the largest North American steel maker after buying International Steel Group in April of last year for $4.5 bln. Mittal has been on a buying spree, picking up steel mills from South Africa to Poland, since 1993. The deal would give Mittal greater price control with the world's largest industrial consumers. Advisers on the deal include Goldman Sachs (GS), Citigroup (C), CSFB (CSR), and HSBC (HSBC).
--Kimberly DuBord, Briefing.com
It took all week, but the market recouped almost all of the losses incurred last Friday. The uptrend this week was accompanied by mixed earnings and economic reports.
Almost 50% of the S&P 500 companies have now reported. The reports this quarter are not as upbeat relative to expectations as in recent quarters. The total year-over-year increase in operating earnings for the S&P 500 in aggregate is on track for 13% growth. That is no higher than the forecast before the reports came out. In recent quarters, earnings have been above expectations by 3% to 5%.
This quarter, 63% of companies have beaten expectations. In recent quarters, that percentage has been in the 67% to 70% range. The 19% of companies reporting below expectations is also larger than in recent quarters.
Very few large companies have reported revenue significantly above expectations, and many have come in below Wall Stret forecasts. Guidance for upcoming quarters has also been a problem. Many large companies have been guiding revenue expectations lower for 2006.
Overall, the reports are uninspiring.
Yet, the market has taken the news reasonably well. The market plunged last Friday on realizations that 2006 expectations were too high. Now, the market is coming to terms with the outlook and finds it reasonably good, if not spectacular.
The economic news this past week was also mixed. Fourth quarter real GDP was up at just a 1.1% annual rate. That was well below the 3.5% growth rate for 2005 as a whole, and the 4.4% rate of 2004.
The data wasn't a huge surprise, however. The weakness was due in large part to a drop in spending on durable goods (autos) after a surge the previous two quarters, as well as a temporary drop in government spending. Consumption of nondurables and services remained on a solid growth path, and investment was up at a 12.2% annual rate. Most economists therefore expect a rebound in growth in the first quarter as the durables and government weakness won't be in the upcoming numbers.
Nevertheless, the lower fourth quarter growth signals that 2006 overall growth is likely to ease to the long-term trend of 3%. A more moderate rate of growth in the economy is consistent with the lowered revenue guidance given by many large firms.
The outlook for Fed policy has not changed. A 1/4% rate hike is still expected at the Tuesday meeting, and the fed funds rate futures are pricing in another such hike before July. Oil prices closed this week a bit over $67 a barrel. That is unchanged from the week before.
The market is adjusting to the realization that economic and earnings growth will slow in 2006. The strong growth of recent years simply can't continue. Valuations are reasonable, and decent earnings growth still leaves room for the market to move higher this year, but expectations are constrained. Risks still exist that the Fed will raise rates too high, or that oil prices will spike higher. The S&P is up 3% for the year already, but it may struggle to post further significant gains through the first half of the year.
Index Started Week Ended Week Change %Change YTD
DJIA 10667.39 10907.21 239.82 2.2 % 1.8 %
Nasdaq 2247.70 2304.23 56.53 2.5 % 4.5 %
S&P 500 1261.49 1283.72 22.23 1.8 % 2.8 %
Russell 2000 704.60 732.22 27.62 3.9 % 8.8 %
4:20 pm : Another solid round of earnings reports catalyzed a pervasive bullish sentiment Friday. A lower than expected read on fourth quarter GDP growth did little to temper buying action, and appeared to take a back seat to the corporate front today.
Dow components Microsoft (MSFT 27.77 +1.27) and Proctor & Gamble (PG 59.75 +0.93) were the session's highlights. The former delivered strong profits and issued reassuring guidance that supported both the Tech sector (+1.0%) and the broader market. Surging Broadcom (BRCM 69.87 +11.15) shares, following its blowout Q4 results, lent significant upside and underpins our Overweight rating on the sector. On account of BRCM and KLA Tenecor (KLAC 54.17 +0.16), which also reported better than expected earnings, semiconductors soared.
Up 1.9%, the Energy sector led. Amid continued geopolitical tensions, (i.e., Iran and Nigeria) supply concerns drove the price of crude 2.3% higher. Along with that factor, further indications of oil companies' profitability drove buyers to the Energy sector. Last night, Haliburton (HAL 78.95 +3.80)delivered strong earnings, followed by Chevron (CVX 60.77 +0.55) this morning. Health Care (+1.2%) also contributed to the market's advance. The health care equipment industry ran following Styker's (SYK 50.55 +6.22) earnings news, as did healthcare suppliers after Milipor (MIL 71.34 +5.90) reported. Pfizer (PFE 25.99 +0.94) was the muscle behind the rise; the company announced approval for its Exubera drug, and was also featured in Barron's today. Boston Scientific (BSX 21.55 -1.60) was the sector's weakest link - following its receipt of an FDA warning letter and on account of disappointing earnings from Guidant (GDT 73.73 1.53).
Homebuilders fared well after this morning's housing data, and a subsequent rise in the home furnishing industry took the Consumer Discretionary sector to a 0.4% gain. New home sales rose a surprising 2.9% last month; declines are still expected in the months ahead, but the report nonetheless served as another bullish factor for equities today. Proctor & Gamble's fiscal Q2 results stirred buying across the Consumer Staples (+0.8%) sector, and surging steel stocks were behind a 0.9% rise in Materials. On a related note, Mittal Steel (MT 34.13 +1.83) made a $2.27 billion cash bid for Arcelor SA this morning.
With respect to the GDP data, the economy grew 1.1% during Q4; economists had expected a 2.8% increase. Stock investors shrugged off the report, though. A sharp drop in auto sales was largely responsible for the miss relative to the consensus estimate, and we expect to see a rebound in Q1. Also, the fact that the data is dated helped investors get over the surprise. Anecdotally, the "soft" Q4 GDP report could actually serve as a source of support as it feeds the argument the Fed, after its Jan. 31 FOMC meeting, will have reason to pause its tightening activities. Ultimately, the market's attention rested upon the solid earnings front.DJ30 +97.74 NASDAQ +21.23 SP500 +9.89 NASDAQ Dec/Adv/Vol 1238/1758/2.24 bln NYSE Dec/Adv/Vol 1174/2085/1.94 bln
10:24 am PortalPlayer: Kaufman Bros upgrades Hold to Buy. Target $28 to $28. The firm believes that this rating is justified given the earnings momentum headed into 2006. More significant in their thinking is their belief that PLAY now represents a very attractive acquisition candidate. Their analysis suggests PLAY could be acquired at a significant premium to their $40 price tgt. A deal above this value could still be accretive to a larger acquirer such as BRCM or INTC, both of which, in their opinion, have reasons to be interested in PLAY's business.
10:23 am Citizens: Bear Stearns upgrades Peer Perform to Outperform. Firm is noting that the stock is trading near its 52-week low and its 8.3% dividend yield is close to its high since the co instituted its current high-yield dividend policy in 3Q04. Firm believes that fundamentals support strong free cash flow generation, and believe that additional share repurchases are likely in the near-term.
10:19 am Packeteer: Harris Nesbitt downgrades Outperform to Neutral. Target $14 to $14. Firm thinks the stock will open as much as 20% higher today following its strong 4Q earnings, but they don't believe the upside from there to their new $13 tgt is sufficient to warrant their highest rating.
10:17 am Sierra Wireless: Avondale Partners upgrades Mkt Perform to Mkt Outperform. Upgrade is following Q4 results, given traction with both Sprint (S) EV-DO and Cingular (BLS; T) HSDPA deployments, and the potential upside driven by embedded module deals with Hewlett-Packard (HPQ) and Lenovo.
10:16 am Andrew: Needham & Co upgrades Hold to Buy. Upgrade is following Q1 earnings. Firm continues to believe that the downward margin trajectory the co has experienced for several quarters appears to have finally reversed and the demand outlook for the co's products appears solid.
10:15 am MEMC Elec: Needham & Co upgrades Buy to Strong Buy. Firm believes that WFR is an attractive investment for the following reasons: 1) Solid financial position that will enable them to be profitable and grow their business unlike several competitors. 2) Favorable mkt conditions in the semiconductor and solar cell industry that include strong demand from both markets; increasing capacity utilization favoring ASPs; shortage of polysilicon favoring ASPs; and consolidation in the industry favoring suppliers that are qualified for 300 mm diameter substrates (WFR being one); 3) New management strategy focusing on profitability, market-share and technology
10:13 am Scopus Video Networks: Needham & Co initiates Buy. Target $9. Firm believes the main drivers, beyond the obvious analog-to-digital transition, are 1) TelcoTV as the new competitive entrant, possibly followed by new wireless networks, 2) HDTV channel growth, and 3) targeted advertising combined with personalized TV services.
10:11 am hi/fn: Avondale Partners upgrades Mkt Perform to Mkt Outperform. Firm says that SHW reported Q4 EPS -- on an apples/apples basis -- of $0.64 versus $0.49, a gain of 31%, demonstrating the co's distribution strength through its powerful retail system and its constant focus on improving margins.
10:08 am Constellation Energy: Deutsche Securities upgrades Hold to Buy. Target $65.5. The firm says that in light of the recent weakness (off 3.2% since Jan 23, versus the UTY being off 2.9%) and their tgt of $45.50 per share for FPL, they believe CEG represents an attractive opportunity for investors willing to withstand mkt volatility and patience.
10:06 am Robt Half: CL King downgrades Strong Buy to Neutral. Target $42. Firm says co's results were solid, but margins were below expectations because of expansion costs, primarily at Protiviti. They note that Protiviti's Q1 revs will be flat to down slightly from Q4. Thus, the potential for a strong upside surprise over the short term seems limited.
10:04 am Sunpower: Am Tech/JSA Research upgrades Hold to Buy. Target $45. Upgrade follows the co's solid results in Q4. More importantly, firm is encouraged by mgmt's guidance in terms of manufacturing ramp and available silicon supply. While firm expects that solar stocks will be volatile in the near-term, they also expect the volatility to trend towards higher-highs and higher-lows, providing compelling long-term returns.
09:51 am Openwave: WR Hambrecht reiterates Buy. Target $24 to $24. Target change represents 22x firm's new CY:07 EPS est of $1.12. This multiple is more or less in line with the peer group, despite the co's higher earnings growth profile (+23%) in 2007. They believe investors will be happy with the improvement in cash flow due to better collections effort, margin expansion above expectations, and significant deal signings during the qtr which indicate that mgmt's vision of offering an integrated application solution is gaining traction with customers. These positive developments support their view that underlying fundamentals will continue to improve in 2006, leading to multiple expansion and further share price appreciation.
12:56 pm McKesson (MCK)
53.86 +1.73: Shares of McKesson Corp. traded higher on Friday, gaining more than 4%, after the prescription drug wholesaler beat analysts' third quarter profit and sales expectations. Furthermore, the company raised its outlook for the full year, due to the strong growth in generic pharmaceuticals and continued progress in its business.
In the third quarter, McKesson earned $193 million, or $0.61 per share, compared with $144 million, or $0.49 per share, in the year ago period. That included a $37 million pre-tax gain in Pharmaceutical Solutions related to an anti-trust settlement and a $15 million pre-tax charge in Medical-Surgical Solutions to expense a pre-paid licensing agreement. Excluding non-recurring items, the company would have earned $0.49 per share. Revenues for the period were up 9% to $22.6 billion, driven by solid growth in all business segments. According to Reuters Estimates, the company was expected to post earnings of $0.52 per share on revenue of $22.6 billion.
By segment, Pharmaceutical Solutions revenue increased 9%, aided by strong sales of generic drugs and new and expanded distribution agreements in the U.S. Excluding the $37 million anti-trust settlement, operating profit was up 11% year/year. In Medical-Surgical, revenues rose 11%; however, operating profits fell 67%, to $8 million, as a result of the $15 million charge in the division. Provider Technologies revenue were up 21%, led by a 38% jump in software and software systems sales. Profit for the division climbed 36% to $38 million.
Given McKesson's quarterly performance and strong momentum across all of its businesses, the company lifted its earnings target for fiscal 2006. The company now expects to earn $2.21 to $2.46 per share, well ahead of the Reuters Estimates consensus of $2.27. Furthermore, the company forecasted fourth quarter earnings of $0.65 to $0.70 per share. That was in line with the consensus EPS estimate of $0.68. The latest results reflect the company's continued progress, and further underscores Briefing.com's Market Weight rating on the Health Care sector. As McKesson continues to benefit from growth in higher margin generic drugs, as well as the potential opportunity afforded by the new prescription drug benefit plan, formally know as Medicare Part D, the company should continue to gain momentum.
--Richard Jahnke, Briefing.com
10:42 am Boston Scientific (BSX)
22.00 -1.15: Boston Scientific revealed late Thursday that federal regulators have issued the company a warning letter related to its quality control systems, as well as recent product recalls. The letter received from the U.S. Food and Drug Administration expresses concerns over the medical device maker's procedures in detecting defects and responding to quality control complaints at six of its plants. Furthermore, the agency cited continuing regulatory problems at three facilities it inspected last summer, which reviewed the manufacture of such leading products as the Taxus and Liberte drug-eluting stents.
Accordingly, the FDA said it will not approve any pre-market applications for devices to which the concerns in the letter are reasonably related until the outstanding issues are resolved. While the result of the warning could impact a number of newer products, it may also upset the pending acquisition of Guidant Corp. (GDT), as the company tries to gain shareholder and antitrust approval. According to Prudential Securities, the warning may impact the Guidant acquisition in a few ways: federal regulators may delay approval of Guidant's products upon completion of the acquisition; Guidant's board may reconsider Boston Scientific's $27 billion bid, potentially in favor of rival Johnson & Johnson's latest offer; and in the event Boston Scientific's stock price falls below the collar of $22.62, the value of the current offer for Guidant will decline.
Meanwhile, Guidant Corp. on Friday reported lower sales and profits for its fiscal fourth quarter, as it continues to grapple with recent product recalls and legal scrutiny. For the period, the Indianapolis-based company said earnings from continuing operations were $85 million, or $0.25 per share, compared with last year's profit of $124 million, or $0.38 per share. Sales fell $140 million, or 14%, to $828 million. The results, which reflect the impact of product recalls and merger-related expenses, fell short of Wall Street's estimate for earnings of $0.27 per share, but topped expectations for revenue of $828.2 million.
For the quarter, Guidant said worldwide implantable defibrillator sales declined 19% year/year to $372 million, with U.S. sales down approximately 23%. Worldwide pacemaker and coronary stent sales were also down significantly during the period, falling 24% and 6% from the year ago period, respectively.
On top of Boston Scientific's recent regulatory issues, the pending acquisition of Guidant continues to draw concerns from many investors as product performance remains a challenge in the face of product recalls. Even if the pending merger receives antitrust and regulatory approval, Boston Scientific will have to clear a number of hurdles to capitalize on the $10 billion cardiac rhythm market. Based on the news, shares of both BSX and GDT are trading lower.
--Richard Jahnke, Briefing.com
10:02 am Chevron (CVX)
60.22: Chevron, the second largest oil company in the US, reported a 20% rise in fourth quarter profits on record energy prices. Chevron closes what was a record year for the industry, generating more than a billion dollars in profits over FY04, despite the worst hurricane season on record that caused lower production, costly repairs, and operational disruptions.
Fourth quarter net income rose to $4.1 bln, or $1.86 bln, from $3.4 bln or $1.63 per share last year - surpassing expectations by three cents. CVX's top line, which is dominated by the upstream exploration and production segment, swelled to $53 bln. The 26% rise in sales and other operating revenues was derived mainly through higher prices for crude, natural gas, and refined products - not to mention the integration of the Unocal assets.
Upstream revenues rose 46% to $3.2 bln, again, mainly attributed to higher energy prices. In the US, the average price per barrel rose $14 to $52 per barrel, with international prices rising to more than $50/barrel. Worldwide oil-equivalent production grew 11% from the fourth quarter of 2004, including strong volumes out of the Canadian oil sands and a new service agreement in Venezuela. Downstream earnings, which include refining, marketing, and transportation, were $808 mln, down 25% year/year due to lower refining margins, hurricane carryover effects, and other items.
Chevron ends the year in a strong financial position. Its debt ratio has declined to 17% from 20% last year and it has a cash balance of $11.1 bln. Chevron expects average worldwide oil-equivalent production of 2.5 mln barrels/day to increase to 2.7-2.8 mln in 2006. The expected increase is mainly attributed to the addition of the Unocal assets to offset normal field declines.
We expected a strong earnings season from the super-majors given the market environment. We remain long-term energy bulls given the positive risk/reward profile for stocks, underscored by strong earnings and cash flow momentum and attractive valuations. We favor stocks with the best production profiles, which includes CVX. Chevron trades at 7.9x forward earnings, compared to Exxon (XOM) at 6.7x, ConocoPhillips (COP) at 6.7x, and Occidental Petroleum (OXY) at 9.0x.
--Kimberly DuBord, Briefing.com
09:44 am Stryker Corp. (SYK)
47.51 +3.18: Hoping to prevent a knee-jerk reaction similar to the one that rocked shares of Stryker Corp. when it missed forecasts by a penny last October, the maker of knee and hip implants last night posted results that matched Wall Street's expectations. The company reported Q4 (Dec) net earnings of $185.7 mln, or $0.45 per share. Excluding special non-recurring items, Stryker grew earnings 21.5% year/year to an adjusted $0.48 per share, which was in line with the Reuters Estimates consensus and stood true to the 20%+ profit growth shareholders have grown to love for so long. Management, in turn, projected diluted net EPS for 2006 of $2.02, a healthy 21% year/year increase but below the consensus estimate of $2.09, which was based on the company's prior FY06 EPS guidance of $2.10.
Total revenue rose 10.6% year/year to $1.28 bln, which was just shy of the $1.29 bln consensus. Worldwide sales of Orthopaedic Implants were up 7.6% year/year to $738 mln, based on higher shipments of reconstructive (hip, knee and shoulder), trauma, spine and micro implant systems. Worldwide sales of MedSurg Equipment rose 16.4% from a year ago to $475 mln, based on higher shipments of powered surgical instruments, operating room equipment, and endoscopic products.
Even though management's outlook for 2006 continues to be optimistic regarding underlying growth rates in orthopaedic procedures, we're still not fully convinced Stryker Corp. can weather a much tougher pricing environment that management confessed in October would be a factor going forward. Thus, the potential for increased pricing pressure on Orthopaedic Implants products in the U.S. and certain other foreign markets, Japan in particular, coupled with safety investigations that continue to entangle the medical device industry, suggests investors should stand pat on orthopedics and wait until more progress can be seen.
-- Brian Duhn, Briefing.com
09:26 am SanDisk (SNDK)
70.68: Shares in the world's largest marker of flash memory cards for electronics took a hit on concerns price reductions will cut into profits. SanDisk announced plans to reduce prices by 25-30% in the first quarter to boost sales in several new products. Lower average selling prices for flash memory, used in consumer electronic products from handsets to digital phones, continue to decline. With shares having tripled over the last 12 months we would be sellers as the fundamentals are starting to show signs of deterioration.
Fourth quarter profits rose 71% to $133.9 mln, or $0.68 per share, from $78.3 mln, or $0.42 per share, a year earlier - topping analysts' expectations by a dime. Revenues rose 37% to $750.6 mln. But the key number to focus on was gross margins, which contracted to 40% from 44% in the third quarter, as SNDK now becomes a volume-based, rather than a price-based flash manufacturer. The average price per megabyte of memory sold was down 40% in the fourth quarter from last year.
Analysts will react in kind and slash earnings estimates for the company in the quarters ahead. The outlook for NAND flash remains strong given the end market demand. However, with capacity ramping in FY06 from the Intel/Micron joint venture and Hynix, the pricing environment will remain tenuous. SNDK is betting the price reductions will spark demand for higher density removable storage devices this year. With contracting prices and market share, the outlook for SNDK looks less than promising at this juncture.
--Kimberly DuBord, Briefing.com
09:19 am Microsoft (MSFT)
26.50: After Thursday's closing bell, Microsoft reported second quarter earnings in-line with expectations. The market was anticipating softness on the revenue line due to production constraints for the newly launched Xbox 360 game console. The top line rose 9% year/year to $11.84 bln - the highest quarterly revenue figure in its history. The key takeaway was that this was basically an in line report and guidance. Overall, it was solid quarter with no surprises for MSFT - something tech investors will take to heart.
Net income grew 5% to $3.65 bln, up from $3.46 bln in the same quarter last year. Excluding a one cent tax benefit, earnings came in at 33 cents, topping the Reuters Estimate by a penny. Operating income declined 2% to $4.66 bln, reflecting higher marketing and promotional expenses, which swelled to 22.7% of sales from 19.6% last year, resulting from the launch of several new products, including the Xbox 360 and SQL Server.
The company shipped 1.5 mln Xbox machines in the quarter. Sales in the Home & Entertainment segment, which includes the game console, rose 13% to $1.56 bln. Stronger than expected PC sales in the quarter boosted sales of Windows by 8.3% to $3.46 bln. MSN revenues fell 2.1% to $593 mln due to competitive pressures from rival Google (GOOG) and Yahoo! (YHOO). Microsoft reported broad-based strength and generated a 14% rise in revenues within the Server and Tools segment, including a 20% hike in sales of the SQL Server.
Microsoft returned over $8.5 bln to shareholders through dividends and share buybacks. Looking at the all important guidance, revenues are expected to be in the range of $10.9-$11.2 bln with earnings of $0.32-$0.33 per share in the first quarter. The estimates are in-line with consensus of $0.33 and $11 bln, respectively.
If there is a year to own Microsoft, this would be it. The Redmond-based company has a big product year ahead of it, including SQL servers and Office 12 not to mention a new flagship OS. After four years of waiting...and waiting...Microsoft plans to release its new operating system, Vista, this year. It's critical for MSFT to keep this '06 deadline. The company is forecasting revenues for the year ending June 30th of $44.0-$44.5 bln vs. consensus of $44.19 bln. Operating income is expected to be in a range of $17.9 bln to $18.3 bln, including $361 mln for Q1 settlement charge. It sees earnings, ex-items, of $1.29 to $1.32 per share, again right on target with expectations.
(Disclosure: Briefing.com has a business relationship with Microsoft.)
--Kimberly DuBord, Briefing.com
09:15 am Procter & Gamble (PG)
58.82: Dow component Procter & Gamble reported Q2 (Dec) earnings of $0.72 per share. Excluding $0.03 in one-time dilution expenses from its acquisition of Gillette, second quarter earnings of $0.75 checked in six cents better than the Reuters Estimates consensus. Beating Wall Street forecasts is nothing new for the world's largest consumer products company, as P&G has beaten expectations in 20 of the last 21 quarters. On the minds of investors, though, is just how effectively the Cincinnati, Ohio-based company will integrate its largest-ever acquisition. Management stated that they are making "very strong progress on both the revenue and cost synergies and remains on track with its three year revenue and cost synergy commitments."
Strong top line growth enabled P&G to exceed earnings expectations in what management had anticipated would be the most difficult cost quarter of the fiscal year. Net sales rose 27% year/year to $18.34 bln, versus the $18.22 bln consensus, as unit volume increased 27%. P&G's Health Care business delivered 31% volume growth, Beauty volume increased 9%, and Fabric Care and Home Care delivered strong volume growth of 7%. In fact, every business segment except Snacks and Coffee, which was adversely impacted by Hurricane Katrina, delivered mid-single digit or higher organic volume growth. Every geographic region also delivered organic growth, with developing regions growing organic volume in the mid-teens.
In its second quarter, P&G repurchased $3.5 bln of stock as part of its previously announced Gillette share buyback program. The buyback brought the cumulative value of shares purchased under the program to $12.0 bln and P&G expects to repurchase about $20 bln in total under the program and complete the program by mid-calendar year 2006.
As a result of P&G's robust innovation pipeline and good progress incorporating Gillette's businesses - Blades and Razors and Duracell and Braun - management raised their outlook for fiscal 2006. For Q3, the company sees EPS of $0.58-0.61, which includes $0.02-0.03 in one-time dilution expenses and may not be comparable to the $0.60 consensus. For FY06, management projects EPS of $2.58-2.62, which includes $0.09-0.11 in one-time dilution expenses and also may not be comparable to the consensus, which stands at $2.59.
Either way, a backdrop of slowing economic growth and earnings deceleration should bode well for a stock like P&G. Currently, we have a Market Weight rating on the Consumer Staples sector, but favor the household products industry in that space.
-- Brian Duhn, Briefing.com
09:02 am KLA-Tencor (KLAC)
54.01: After the close Thursday, KLA-Tencor said its second quarter earnings fell from a year earlier on lower revenue, but still beat Wall Street's estimate. For the latest quarter, the semiconductor equipment supplier earned $77 million, or $0.38 per share, compared with $122 million, or $0.61 per share, in the same period last year. Excluding stock-based compensation charges, earnings were $102 million, or $0.50 per share - three cents better than the Reuters Estimates consensus of $0.47.
Revenue for the period fell 8% year/year to $533 million. However, the results beat analysts' estimate of $468.15 million. KLAC reported ending the quarter with approximately nine months of product-related shipment and revenue backlog. In terms of geography, Korea, China, and Singapore, combined, represented 32% of orders, compared with their historical average of 20%. Japan also demonstrated relative strength, accounting for 21% of orders, versus its historical average of 20%. Conversely, the U.S. was 17% of orders and Europe was 12% of orders, lower than their historical average of 25% and 15%, respectively.
Looking to the fiscal third quarter, KLAC forecasted earnings in the range of $0.54 to $0.57 per share on revenue of $500 to $510 million. In addition, the company expects bookings of approximately $540 million in the quarter, driven by increased consumer optimism and continued strong demand for consumer electronics - a trend that underpins our Overweight rating on the Technology sector. As it continues to grow revenue and shipments, the company is looking to deliver 60% to 70% margin.
Despite the drop in second quarter profits, investors remained focused on KLAC's better than expected results and positive guidance, lifting shares higher in early trading. Over the past year, shares have gained nearly 20%, and are up about 9% since the beginning of the year. At the current level, the stock is trading at 26.6x forward earnings.
--Richard Jahnke, Briefing.com
08:45 am Broadcom (BRCM)
73.01: Broadcom, which makes chips used in iPods and handsets, said fourth quarter profits almost tripled. Net income surpassed all expectations, soaring to $194.8 mln, or $0.50 per share, from $71.1 mln, or $0.20 per share earned last year. Sales skyrocketed 52% to $820.6 mln. That wasn't all.
This fabless semi solutions company caught the Street by surprise, forecasting Q1 sales of $870 mln, more than $100 mln above analysts' estimates. This equates to sales growth of as much as 59% over last year.
The quarter was dictated by strong growth across multiple segments from mobile multimedia devices, satellite boxes, gigabyte switches, DSL modems, and Bluetooth chips. The shares rocketed in the after-hours, punctuated by the announcement of a 3-for-2 stock split and a $500 mln share repurchase. Analysts will be in a frenzy to revise guidance upward to match the company's forecasts.
Broadcom's appeal is its broad-based portfolio of products that will drive strong revenue growth and improve profitability. Its chip sets, which are used in Motorola's (MOT) Razr, Palm's Treo, and Apple's iPods, make it easier for products to be multifunctional. We continue to think the stock should be a core holding for 2006. Broadcom's mission of "Connecting everything" fully integrates into our theme within the Technology sector of everything portable, everything digital. The risks include a shift in product mix towards lower end margin markets, inventory builds, or competitive pressures.
--Kimberly DuBord, Briefing.com
08:08 am Mittal (MT)
73.38: The world's largest steelmaker made an unsolicited cash bid to buy Arcelor SA for 18.6 bln euros ($22.7 bln). The transaction would transform the industry, giving billionaire owner Lakshimi Mittal more than 10% control over the world's steel market - 3x its closest rival.
The Rotterdam-based Mittal bid 28.21 euros per share for Arcelor, roughly 3.5x EBITDA. The stock jumped 35% to 30.11 euros in Madrid. Mittal has also agreed to sell Canada's Dofasco Inc. to Germany's ThyseenKrupp AG. The deal, if closed, would be the biggest ever in the industry, creating a company with 320k employees and annual revenues of more than $6 bln. The steel industry is notoriously fragmented, therefore the combination would make economic sense. Observers do not anticipate any regulatory hurdles.
Mittal became the largest North American steel maker after buying International Steel Group in April of last year for $4.5 bln. Mittal has been on a buying spree, picking up steel mills from South Africa to Poland, since 1993. The deal would give Mittal greater price control with the world's largest industrial consumers. Advisers on the deal include Goldman Sachs (GS), Citigroup (C), CSFB (CSR), and HSBC (HSBC).
--Kimberly DuBord, Briefing.com
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