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Thursday, February 09, 2006 7:32:42 PM
From Briefing.com: 5:17PM Oracle issues Q3, Q4 and FY06 guidance (ORCL) 12.69 +0.12 : Co issues guidance for Q3 (Feb), sees Q3 (Feb) GAAP EPS $0.13-0.16 which includes various charges and is not comparable to consensus; sees Q3 revs of $3.45-3.49 bln vs. $3.45 bln Reuters Estimates consensus. Co issues guidance for Q4 (May), sees Q4 GAAP EPS of $0.21-0.23, which includes various charges and is not comparable to consensus; sees Q4 (May) revs of $4.385-4.546 bln vs. $4.35 bln consensus. Co sees FY06 GAAP EPS of $0.60-0.62, which is also not comparable to consensus; sees revs $13.9-14.1 bln vs $14.04 bln Reuters consensus. Co sees Q3 new software lic revs $1.086-1.13 bln, sees Q4 new software lic revs $1.726-1.887 bln.
4:31PM Credence: AMD selects Sapphire ATE System for end-to-end test of next-generation processors (CMOS) 8.84 : Co announced that Advanced Micro Devices (AMD) has chosen Credence's Sapphire ATE platform as its test system of record. AMD will use the Sapphire platform for all of its advanced processors testing requirements, from development and characterization through high-volume production test. Early collaboration efforts with AMD resulted in an AMD Opteron processor-based workstation controller option for the Sapphire platform, achieving up to 40 percent improvement in test efficiency.
4:20 pm : Despite a lack of notable market-moving catalysts, stocks gradually continued where they left off last night -- in rally mode. However, follow-through buying momentum spurred largely by the last big batch of [better- than-expected] earnings, which had set the stage for the market's biggest two-day rally since October 2005, petered out into the close, as sentiment became mixed and the major averages closed in split fashion.
Blue chips like Aetna (AET 99.27 +3.15), Coca-Cola Enterprises (CCE 20.09 +0.63) Electronic Data Systems (EDS 25.71 +0.20), Marriott (MAR 67.64 +1.53), Prudential (PRU 75.31 -0.33), and News Corp (NWS.A 16.48 -0.28), a suggested holding in our Active Portfolio, all reported earnings that exceeded expectations. With guidance for Q1 and Q2 failing to impress investors and validating an expected deceleration in earnings growth, raised Q4 EPS guidance from Best Buy (BBY 52.96 +4.13) also offered some comfort.
Providing additional support throughout most of the day were a couple of economic reports that typically go unnoticed. One showed that companies increased wholesale inventories twice as much as expected while an initial claims report, which checked in below the 300K level for a fourth straight week, reiterated that labor conditions remain strong. The re-issuance of the 30-yr bond at 1:00 ET, which grabbed a strong indirect bidder participation of 65.4% following the first auction ($14 bln worth) of its kind in five years, also provided some relief, easing some of the fears that foreign demand for dollar-denominated assets was waning.
Nonetheless, at the end of the day, uncertainty related to Fed policy, which plays into why we recently lowered our Market View to Neutral from Moderately Bullish, returned to the forefront of investors' minds as the reality of earnings season coming to a close leaves the number of catalysts going forward few and far between.
Of the six sectors holding onto gains, Industrials turned in the best performance, led by a 1.6% rise in 3M Co (MMM 72.12 +1.12) and Honeywell (HON 39.52 +0.50), which hit an intraday 52-week high, playing into our Overweight rating on the sector. Utilities and Financial also showed relative strength, getting a boost following a late-day revival in bonds which inched yields a bit lower. The latter got an extra lift after AIG (AIG 67.12 +0.74) reached a resolution with the Justice Dept. and SEC.
4:10 pm Research In Motion (RIMM)
69.62 +0.97: Research In Motion, maker of the popular Blackberry communication device, on Thursday said that it has developed and tested a "workaround" that would keep its service running if a court imposes an injunction against the company in the current patent dispute with NTP Inc. RIMM said it has incorporated the workaround designs into a software update called Blackberry Multi-Mode Edition that would support normal Blackberry operations without infringing on any of NTP's patent claims.
Although RIMM remains intent on settling the matter with NTP and believes its has strong legal grounds to speak against an injunction, the company said it developed the new software as an alternative to avoid potential disruption to U.S. Blackberry sales and service. "RIMM's workaround provides a contingency for our customers and partners and a counter balance to NTP's threats," said Jim Balsillie, Chairman and CEO at Research In Motion. He added "This will hopefully lead to more reasonable negotiations since NTP risks losing all future royalties if the workaround is implemented."
RIMM's workaround strategy provides assurance for existing customers frightened of a potential halt to their service, while bolstering the company's bargaining power with NTP for a possible settlement. However, NTP will likely challenge the legal merits of the workaround, which could prolong the ongoing litigation between the two companies. While RIMM's workaround contingency quells near-term concerns of an injunction, the company's prospects will remain in question until a settlement is made and the legal overhang is put to rest.
--Richard Jahnke, Briefing.com
2:41 pm American International Group (AIG)
66.90 +0.52: American International Group on Thursday announced that it has reached a settlement with federal and state regulators that will require the company to pay $1.64 billion. The settlement, which covers a host of regulatory issues, including improper accounting practices and missed payments to state workers' compensation funds, will result in an after-tax charge of approximately $1.15 billion in the fourth quarter.
Consequently, shares of AIG trended higher during the regular trading session, as the resolution of the claims against the company seemingly marks an end to a troublesome period for the storied insurance giant, and eliminates a considerable overhang on the stock. We currently have a Market Weight rating on the Financial sector and favor larger, more diverse banks. However, we also believe the insurance group still holds investment appeal given its defensive characteristics.
Separately, after a comprehensive review of its loss reserves in its property and casualty insurance operations, AIG said it will take a fourth quarter charge of approximately $1.10 billion to increase its net reserve for loss and loss expenses of approximately $1.69 billion. That includes $870 million for asbestos and environmental exposures and $820 million for other exposures. The increase represents about 3% of the company's total general insurance loss and loss expense reserves.
AIG also expects to incur a $150 million fourth quarter charge for additional losses from Hurricane Katrina and other third quarter catastrophes. That is an increase of about 9.4% from its previous estimate. The company noted that costs related to Hurricane Wilma will be approximately $400 million in the quarter.
--Richard Jahnke, Briefing.com
1:57 pm Marriott International (MAR)
67.69 +1.58: Marriott International delivered record fourth quarter earnings per share of $1.07, which surpassed Wall Street's expectations by nine cents. Versus the year-ago period, EPS jumped 35%. The hotel operator credited strong worldwide economic expansion and lodging industry strength for its performance. Revenues jumped 16% to $3.6 billion.
International systemwide comparable RevPAR (revenue per available room), which is the barometer of health in the hotel industry, rose 11.0% in constant currencies. In both its North America and International segments, systemwide comparable RevPAR similarly rose 11.0%. Increases in the average daily rate and occupancy were driving factors. Strong growth in timeshare interval sales and in base and franchise and incentive fees also benefited the top line.
For the full-year, Marriott reported record earnings. Chief Executive J.W. Marriott, Jr., asserted that Marriott expects 2006 to be another outstanding year, as U.S. industry supply growth should remain modest while lodging demand continues to strengthen. North American RevPAR is forecasted to increase 8-10%, 80% of which should be rate-driven. The hotel chain foresees 13-15% total fee revenue growth, which translates to $1.165-1.185 billion. Management noted that new accounting rules for the timeshare industry come into effect this year, and estimates a dilutive, one-time, non-cash impact of $0.50-0.53 per share in 1Q06. Excluding that effect, and excluding stock-based compensation expenses, Marriott anticipates profit per share of $0.70-0.76 for the first quarter and $3.08-3.18 for the full-year. According to Reuters Estimates, the consensus estimates are pegged at $0.68 and $3.20, respectively.
At 21.7x expected FY06 earnings, MAR shares trade at a discount to competitors Hilton Hotels (HLT) and Starwood Hotels (HOT). HLT shares are priced at 23.9x forward earnings, while HOT trade at 28.0x forward earnings.
--Lisa Beilfuss, Briefing.com
1:42 pm Prudential Financial (PRU)
75.37 -0.27: After the close Wednesday, Prudential Financial reported a 19% increase in fourth quarter profit, despite a loss in its investment division due to the impact of a large legal expense. The financial services giant also reaffirmed its full year profit outlook of $5.40 to $5.60 per share, in line with analysts' expectations of $5.57 per share. However, that is based on the assumption that the S&P 500 Index will rise 8% for the year.
In the most recent quarter, financial services profit climbed to $377 million, or $0.78 per share, from $317 million, or $0.64 per share, a year earlier. Operating earnings were $524 million, or $1.06 per share, compared with $488 million, or $0.96 per share, in the year ago period. That included expenses of $267 million, or approximately $0.40 per share, related to an ongoing investigation in the company's retail brokerage business. Without the charge, operating earnings would have been $1.46 per share - $0.23 better than the Reuters Estimates consensus. Fourth quarter revenue rose 11.8% year/year to $5.82 billion, slightly below the consensus estimate of $5.85 billion.
The investment division reported a loss of $4 million in the quarter, compared with operating income of $111 million in the year ago period, due in large part to the increased legal costs. The company also said increased expenses in the quarter, including costs incurred to expand distribution and client servicing capabilities for the division's retirement business, more than offset a decrease in transition costs associated with the integration of the retirement business acquired from Cigna. Meanwhile, operating income for the insurance division was up 23% to $365 million, helped by lower occupancy costs and staff reductions. The international division reported operating income of $378 million for the quarter, up more than 50% from year earlier. The company said the results benefited $44 million from investment income associated with a single joint venture.
Given the relatively mixed results and current valuation levels, the near-term prospects for Prudential remain modest. As such, we would not commit new money at this time. At the current level, the stock is trading at 15.6x trailing earnings, compared with 11.5x for Citigroup (C) and 11.9x for MetLife (MET).
--Richard Jahnke, Briefing.com
11:51 am Applebee's (APPB)
23.67 -0.10: For its fourth quarter, Applebee's International reported a 16% decline in net earnings that translated to a profit of $0.27 per diluted share, which matched the Reuters Estimates consensus. Revenues rose 10.7% to $300.2 million.
Higher costs weighed upon the bottom line and offset the sales growth. Total cost of company restaurant sales, as a percentage of sales, increased 304 basis points to 78.97%. As had been previously reported, system-wide comparable store sales increased 1.0% during the quarter. Comparable sales for both company and franchise restaurants declined, though. Management noted that sales during the month of January were better, but also said that it recognizes the fact that a four-week period is a time frame not long enough to declare a sustainable improvement in trends.
Applebee's acknowledged the external challenges it faced, but was still disappointed with its performance during the year. Higher energy costs and rising interest rates adversely affected the consumer that is at Applebee's core. At the same time, though, consumer spending is holding up and bright spots do exist. Competitor Brinker (EAT), which is the parent company of several casual restaurant concepts that include Chili's and Maggiano's, upped its guidance for the current quarter and full-year yesterday. Brinker also reported stronger January same-store sales. At the fast-food end of the spectrum, McDonald's (MCD) similarly reported very strong same-store sales on Wednesday. MCD remains our favored stock in the space, and is a recommended holding in our suggested portfolio for active investors.
Applebee's indicated that its 2006 initiatives include more rapid innovation of its food, advertising evolution, and leveraging its key points of differentiation with consumers. Applebee's reaffirmed its full-year guidance, saying it expects $1.43-1.47 in earnings per share, a range that brackets the current consensus estimate. The range excludes the impact of stock compensation expense. APPB shares currently trade at 16.3x expected FY06 earnings, a valuation that is in-line with MCD's forward multiple as well as the sector's forward multiple.
--Lisa Beilfuss, Briefing.com
11:35 am XM Satellite Radio (XMSR)
26.17 +1.56: XM Satellite Radio on Thursday announced a three-year, $55 mln deal with Oprah Winfrey to launch a new satellite radio channel called "Oprah & Friends." XM Satellite shares, in turn, have climbed more than 7% during the regular trading session as investors have responded favorably to the news amid heavy competition from rival Sirius Satellite Radio (SIRI), which recently signed a five-year $500 million deal with Howard Stern and an 11-year deal with Major League Baseball.
The channel, which will debut in September, will feature programming on fitness, health, self improvement, home, and current events from popular personalities from "The Oprah Winfrey Show" and O, The Oprah Magazine. In addition to regular segments hosted by such personalities as Bob Greene, Dr. Mehmet Oz, Dr. Robin Smith, Marianne Williamson, and Nate Berkus, the new channel will also feature an exclusive weekly radio show with Oprah Winfrey and Gayle King.
While both XM Satellite and Sirius have been actively investing in operations and adding exclusive programming to bolster subscriber growth, they have been incurring large losses and have not yet reached profitability. As these investments continue to weigh on the bottom line, we would remain on the sidelines until the profit outlook becomes more clear.
--Richard Jahnke, Briefing.com
10:40 am Whole Foods Market (WFMI)
68.12 -3.93: Whole Foods Market last night reported a diluted profit of $0.40 per share, which was up 17% from the year-ago period. That profit included stock-based compensation expenses of $0.01 per share. Analysts were expecting Whole Foods to post a profit of $0.41, but it is unclear if their estimates included the stock-based compensation expense. Driven by a 15% increase in weighted average square footage and 13% same-store sales growth, the company's top line expanded 21.8% to $1.67 billion. Average weekly store sales hit a record high, and the company noted that its same-store sales result marked its ninth straight quarter of double-digit growth.
The grocer continues to believe that it will produce earnings growth through sales rather than through significant margin leverage. New stores generally have lower gross margins and higher direct stores expenses than more mature stores. Versus the year-ago period, gross margins slipped seven basis points to 34.5%.
On its conference call, the company asserted that it will continue to put its cash to work in funding growth and added that excess cash will be returned to shareholders. Last quarter, WFMI paid approximately $17 million to shareholders in cash dividends.
Whole Foods reaffirmed its fiscal 2006 (Sept.) guidance, saying it sees sales growth of 18-21% driven by comparable store sales growth of 8-11%; earnings per share are anticipated to grow slightly less than 18-21%. According to Reuters Estimates, analysts' average estimates are $5.68 billion and $1.41, respectively. Management noted on its conference call that it is moving away from issuing detailed quarterly guidance, as it wants the focus to shift to longer term goals.
WFMI shares currently trade at 49.5x estimated FY06 earnings. Shares of its rival in the specialty grocer space, Wild Oats Markets (OATS), also trade at a sharp premium to the Consumer Staples sector multiple of 17.3x FY06 earnings.
--Lisa Beilfuss, Briefing.com
10:21 am Best Buy (BBY)
52.63 +3.80: Shares of Best Buy are making a notable mover after the nation's largest consumer electronics chain raised its fourth quarter profit forecast due to strong revenue results for the holiday period. Best Buy attributed strong revenue momentum and the improved outlook to a better than expected promotional environment, tighter expense controls, and increased gift card spending.
Since we highlighted Best Buy in our Stock Swap column last December, and suggested that investors accumulate shares based on the company's strong underlying fundamentals and attractive valuation levels, the stock has climbed more than 18%, including today's gains. While the first quarter, when the company grew EPS by 85% year/year, will likely present tougher comparisons, we remain optimistic about the potential for further price appreciation given the company's solid long-term growth prospects.
For the three months ending February 25, Best Buy projected earnings from continuing operations of $1.25 to $1.30 per share, up from its previous guidance of $1.06 to $1.16 per share. That exceeded Wall Street's estimate of $1.16 per share and represents an increase of approximately 23% from last year's profit of $1.04 per share. For the full year, the company forecasted earnings in the range of $2.24 to $2.29, versus the consensus estimate of $2.13 per share. The new guidance reflects a 29% increase over earnings from continuing operations of $1.75 per share for fiscal 2005.
The improved outlook for the the quarter also includes a same store sales gain of 6% to 7%, compared to the range of 3% to 5% that Best Buy previously estimated. The company credited the growth to strength in flat panel TVs, portable audio products such as MP3 players, notebook computers, and video game systems. Furthermore, an increase of approximately 20% in gift cards issued during the holiday season also contributed to the strong revenue results.
--Richard Jahnke, Briefing.com
10:09 am News Corp. (NWS.A)
15.68 -0.16: As is the case with most conglomerates, News Corp's second quarter had some good and some bad, but this media giant, unlike many others, continues to work. Operating profits nearly doubled year/year to $694 mln with the per share figure exceeding estimates by a penny on asset sales and strength in cable networks. Revenues of $6.6 bln were up marginally year/year. The highlights included a 15% rise in cable network programming profits, driven by strong ratings for Fox News Channel and FX on the success of Nip/Tuck, which drove affiliate fees and advertising revenues, along with impressive progress at its satellite businesses.
The Filmed Entertainment division delivered operating income of $299 mln despite difficult comparisons due to last year's release of Star Wars Episode IV. The Newspapers division suffered a decline in operating profits on lower circulation. The satellite businesses, Sky Italia and Star, are now finally entering the profitability phase after years of capital investment. Sky is on its way to delivering the first full year of profitability. The Television unit is also reaping the benefits of stronger programming and ratings, with operating profits up 20% this quarter.
Net-net, it was a solid quarter with News Corp continuing to execute well on its growth strategies. We retain our positive view on the stock, a suggested holding in our Active Portfolio, and will take a more in depth look at the quarter on our Large Cap page on Monday.
--Kimberly DuBord, Briefing.com
09:15 am Electronic Data Systems (EDS)
25.51: In the midst of a turnaround, Electronic Data Systems on Wednesday said fourth quarter profits more than doubled as recent layoffs and other cost cutting initiatives outweighed modest revenue growth. The technology services company also issued mixed guidance, stating that first quarter earnings would fall below analysts' expectations, but full year results would be stronger than expected. On account of the overall positive report and progress in completing its turnaround amid deteriorating revenue, EDS shares traded sharply higher in pre-market action.
For the fourth quarter, EDS earned $112 million, or $0.21 per share, up from $53 million, or $0.10 per share, a year earlier. On a pro forma basis, which excludes discontinued operations, stock options expense, and restructuring costs, the company earned $131 million, or $0.25 per share - two cents better than the Reuters Estimates consensus of $0.23. Quarterly revenue, meanwhile, rose 1.3% year/year to $5.15 billion versus the consensus estimate of $5.10 billion. GM revenue for the period decreased 10% to $463 million, while non-GM revenue rose 3%.
EDS said it signed $5.3 billion in contracts during the quarter, up 45% from a year earlier. New contracts for the period included a $500 million IT services contract with global retailer Royal Ahold as well as an IT services contract with United Airlines. Given its progress, both financially and competitively, the company said it expects to earn $0.10 to $0.15 per share, ex-items, on revenue between $4.7 and $4.8 billion. That compares with Wall Street's estimate of $0.21 per share on revenue of $4.97 billion, according to Reuters Estimates. For the full year, EDS anticipates EPS of $1.05 to $1.15 and revenue of $20 to $20.5 billion, versus the consensus estimate for EPS of $1.01 and revenue of $20.1 billion.
--Richard Jahnke, Briefing.com
09:08 am General Motors (GM)
21.99: The goodwill gesture GM made this week in slashing its dividend and cutting senior management compensation raised expectations the automaker would be able to garner the necessary concessions from the UAW. Today, however, The Wall Street Journal reported that negotiations between GM, Delphi and the United Auto Workers union may have hit a snag, "raising doubts" about a possible settlement over the fate of the auto parts company's workers. The UAW is hoping to soften the blow for the Delphi workers without provoking a strike or squeezing too much cash out of GM, according to the article.
The Journal stated a setback came this week when UAW negotiators did not show up to make an expected presentation on how GM can reduce its workforce. These plans were expected to include early retirements and buyouts options. Even though GM spun off its parts unit in 1999, it retains responsibility for many of Delphi's workers. The automaker was aiming to return some of the workers to GM, but the UAW appears concerned over how long GM is willing to subsidize worker compensation, which could be cut by more than 60%.
Delphi is expected to ask a U.S. bankruptcy court to void its union contracts on February 17th - a move that the UAW says, if taken, could prompt a strike and effectively cripple GM. The current UAW contract does not expire until 2007. GM has stated it targets 30,000 UAW jobs for elimination over the next 5 years as it attempts to restructure its North American operations. The Delphi issue and possible sale of GMAC remain the key issues on the table for GM at this point. The stock will likely continue to be news-driven until some resolution is achieved. We continue to believe there is no investable thesis to own GM, but concede the downside below $20 appears limited.
--Kimberly DuBord, Briefing.com
07:52 am Aetna Inc. (AET)
96.12: Aetna, the third largest US insurer, bested estimates for the fourth quarter as profits rose 41% on strong membership gains. Net income grew to $423 mln, or $1.42 per share. Stripping out non-recurring items, the per share figure of $1.26 exceeded estimates by three cents as revenues climbed 13.5% to $6 bln. After a whirlwind rise over the last two years, the result should go a long way in stating AET's case for further upside in the quarters ahead, particularly as its cost ratio declines.
The managed care industry has far exceeded the market's returns and looks poised to do so again this year, as medical cost trends decelerate and membership rises driven in part by the prescription drug plan Part D. Aetna has been able to lower its medical costs further than its peers, enabling the company to pass the savings to customers, wooing new enrollment through specialty services. In the quarter, Aetna's medical plan enrollment rose 8% from the prior year to 14.8 mln.
Aetna forecasts medical membership to grow this year by 900,000 to 1 mln, up from its prior range of 800,000 to 900,000, including a gain of 575,000 in the first quarter. Aetna's CEO John Rowe, who has increased the company's market value by more than $23 bln in five years, is set to retire on February 14th and will be replaced by current President, Ronald Williams. Aetna is looking for full year earnings in the range of $5.42-$5.48 per share, well within the consensus of $5.46. Overall, Aetna posted a solid result. With shares trading at a discount to the group at 17.x, we think AET remains a strong investment for 2006.
--Kimberly DuBord, Briefing.com
10:33 am Zebra Tech: Miller Johnson upgrades Neutral to Buy. Target $42 to $42. The firm says product introduction delays are largely resolved, the Paxar litigation threat is pushed out until 2007, and the co appears to be gaining traction in RFID tagging programs.
10:33 am TEKELEC: Robert W. Baird upgrades Neutral to Outperform. Target $15 to $15. Firm believes fundamentals remain intact and new CEO Frank Plastina has a strong financial background and will make prudent financial decisions about division/product rationalization to enhance Tekelec's margin profile. They would buy stock at current levels as fundamentals are intact, but expect financial improvements to be realized late 2006 and in 2007.
10:31 am MasTec: Ferris Baker Watts initiates Buy. Target $16. The firm believes that the increasingly competitive nature of the residential telecommunications business will force carriers to increase investment in their networks in order to offer enhanced services. With MTZ's strong brand recognition and customer relationships, they believe that the co is well positioned as a high-value solutions provider in the network infrastructure market.
10:29 am HNI Corp.: BB&T Capital Mkts downgrades Buy to Hold. Firm continues to believe HNI's revenue growth will outpace the two industries in which the company competes. Moreover, they believe HNI mgmt will continue to demonstrate its industry-leading operational prowess. However the firm says, with EPS growth set to slow to mid-teens from the mid-20% range in FY'05, they believe current all-time-high multiples are unsustainable.
10:23 am Cubic: Needham & Co downgrades Buy to Hold. Firm believes the modest improvement in CUB's transportation business, the biggest drag on earnings last year, and continued solid showing from the defense business is priced into the shares, which have climbed 23% since in less than two months. They believe further upside in the stock over the near term will be challenging.
10:22 am Watts Ind: Needham & Co downgrades Buy to Hold. Firm is saying their enthusiasm is tempered by the +20% run up in the stock yesterday and by the fact that the is stock trading at roughly 19x their F2006 EPS estimate and 10x their F2006 EBITDA estimate. They are waiting for an entry point at more attractive long-term multiples. They believe the positive trends in the wholesale markets, led by a strong non-residential construction market, will help offset a slowing residential/retail market.
10:20 am Chattem: BB&T Capital Mkts downgrades Buy to Hold. Based on uncertainties around the outlook for near-term fundamentals as well as non-fundamentals (particularly options costs, which the company has not yet guided on), they have lowered their FY'06 EPS forecast to $2.20 from $2.37.
4:31PM Credence: AMD selects Sapphire ATE System for end-to-end test of next-generation processors (CMOS) 8.84 : Co announced that Advanced Micro Devices (AMD) has chosen Credence's Sapphire ATE platform as its test system of record. AMD will use the Sapphire platform for all of its advanced processors testing requirements, from development and characterization through high-volume production test. Early collaboration efforts with AMD resulted in an AMD Opteron processor-based workstation controller option for the Sapphire platform, achieving up to 40 percent improvement in test efficiency.
4:20 pm : Despite a lack of notable market-moving catalysts, stocks gradually continued where they left off last night -- in rally mode. However, follow-through buying momentum spurred largely by the last big batch of [better- than-expected] earnings, which had set the stage for the market's biggest two-day rally since October 2005, petered out into the close, as sentiment became mixed and the major averages closed in split fashion.
Blue chips like Aetna (AET 99.27 +3.15), Coca-Cola Enterprises (CCE 20.09 +0.63) Electronic Data Systems (EDS 25.71 +0.20), Marriott (MAR 67.64 +1.53), Prudential (PRU 75.31 -0.33), and News Corp (NWS.A 16.48 -0.28), a suggested holding in our Active Portfolio, all reported earnings that exceeded expectations. With guidance for Q1 and Q2 failing to impress investors and validating an expected deceleration in earnings growth, raised Q4 EPS guidance from Best Buy (BBY 52.96 +4.13) also offered some comfort.
Providing additional support throughout most of the day were a couple of economic reports that typically go unnoticed. One showed that companies increased wholesale inventories twice as much as expected while an initial claims report, which checked in below the 300K level for a fourth straight week, reiterated that labor conditions remain strong. The re-issuance of the 30-yr bond at 1:00 ET, which grabbed a strong indirect bidder participation of 65.4% following the first auction ($14 bln worth) of its kind in five years, also provided some relief, easing some of the fears that foreign demand for dollar-denominated assets was waning.
Nonetheless, at the end of the day, uncertainty related to Fed policy, which plays into why we recently lowered our Market View to Neutral from Moderately Bullish, returned to the forefront of investors' minds as the reality of earnings season coming to a close leaves the number of catalysts going forward few and far between.
Of the six sectors holding onto gains, Industrials turned in the best performance, led by a 1.6% rise in 3M Co (MMM 72.12 +1.12) and Honeywell (HON 39.52 +0.50), which hit an intraday 52-week high, playing into our Overweight rating on the sector. Utilities and Financial also showed relative strength, getting a boost following a late-day revival in bonds which inched yields a bit lower. The latter got an extra lift after AIG (AIG 67.12 +0.74) reached a resolution with the Justice Dept. and SEC.
4:10 pm Research In Motion (RIMM)
69.62 +0.97: Research In Motion, maker of the popular Blackberry communication device, on Thursday said that it has developed and tested a "workaround" that would keep its service running if a court imposes an injunction against the company in the current patent dispute with NTP Inc. RIMM said it has incorporated the workaround designs into a software update called Blackberry Multi-Mode Edition that would support normal Blackberry operations without infringing on any of NTP's patent claims.
Although RIMM remains intent on settling the matter with NTP and believes its has strong legal grounds to speak against an injunction, the company said it developed the new software as an alternative to avoid potential disruption to U.S. Blackberry sales and service. "RIMM's workaround provides a contingency for our customers and partners and a counter balance to NTP's threats," said Jim Balsillie, Chairman and CEO at Research In Motion. He added "This will hopefully lead to more reasonable negotiations since NTP risks losing all future royalties if the workaround is implemented."
RIMM's workaround strategy provides assurance for existing customers frightened of a potential halt to their service, while bolstering the company's bargaining power with NTP for a possible settlement. However, NTP will likely challenge the legal merits of the workaround, which could prolong the ongoing litigation between the two companies. While RIMM's workaround contingency quells near-term concerns of an injunction, the company's prospects will remain in question until a settlement is made and the legal overhang is put to rest.
--Richard Jahnke, Briefing.com
2:41 pm American International Group (AIG)
66.90 +0.52: American International Group on Thursday announced that it has reached a settlement with federal and state regulators that will require the company to pay $1.64 billion. The settlement, which covers a host of regulatory issues, including improper accounting practices and missed payments to state workers' compensation funds, will result in an after-tax charge of approximately $1.15 billion in the fourth quarter.
Consequently, shares of AIG trended higher during the regular trading session, as the resolution of the claims against the company seemingly marks an end to a troublesome period for the storied insurance giant, and eliminates a considerable overhang on the stock. We currently have a Market Weight rating on the Financial sector and favor larger, more diverse banks. However, we also believe the insurance group still holds investment appeal given its defensive characteristics.
Separately, after a comprehensive review of its loss reserves in its property and casualty insurance operations, AIG said it will take a fourth quarter charge of approximately $1.10 billion to increase its net reserve for loss and loss expenses of approximately $1.69 billion. That includes $870 million for asbestos and environmental exposures and $820 million for other exposures. The increase represents about 3% of the company's total general insurance loss and loss expense reserves.
AIG also expects to incur a $150 million fourth quarter charge for additional losses from Hurricane Katrina and other third quarter catastrophes. That is an increase of about 9.4% from its previous estimate. The company noted that costs related to Hurricane Wilma will be approximately $400 million in the quarter.
--Richard Jahnke, Briefing.com
1:57 pm Marriott International (MAR)
67.69 +1.58: Marriott International delivered record fourth quarter earnings per share of $1.07, which surpassed Wall Street's expectations by nine cents. Versus the year-ago period, EPS jumped 35%. The hotel operator credited strong worldwide economic expansion and lodging industry strength for its performance. Revenues jumped 16% to $3.6 billion.
International systemwide comparable RevPAR (revenue per available room), which is the barometer of health in the hotel industry, rose 11.0% in constant currencies. In both its North America and International segments, systemwide comparable RevPAR similarly rose 11.0%. Increases in the average daily rate and occupancy were driving factors. Strong growth in timeshare interval sales and in base and franchise and incentive fees also benefited the top line.
For the full-year, Marriott reported record earnings. Chief Executive J.W. Marriott, Jr., asserted that Marriott expects 2006 to be another outstanding year, as U.S. industry supply growth should remain modest while lodging demand continues to strengthen. North American RevPAR is forecasted to increase 8-10%, 80% of which should be rate-driven. The hotel chain foresees 13-15% total fee revenue growth, which translates to $1.165-1.185 billion. Management noted that new accounting rules for the timeshare industry come into effect this year, and estimates a dilutive, one-time, non-cash impact of $0.50-0.53 per share in 1Q06. Excluding that effect, and excluding stock-based compensation expenses, Marriott anticipates profit per share of $0.70-0.76 for the first quarter and $3.08-3.18 for the full-year. According to Reuters Estimates, the consensus estimates are pegged at $0.68 and $3.20, respectively.
At 21.7x expected FY06 earnings, MAR shares trade at a discount to competitors Hilton Hotels (HLT) and Starwood Hotels (HOT). HLT shares are priced at 23.9x forward earnings, while HOT trade at 28.0x forward earnings.
--Lisa Beilfuss, Briefing.com
1:42 pm Prudential Financial (PRU)
75.37 -0.27: After the close Wednesday, Prudential Financial reported a 19% increase in fourth quarter profit, despite a loss in its investment division due to the impact of a large legal expense. The financial services giant also reaffirmed its full year profit outlook of $5.40 to $5.60 per share, in line with analysts' expectations of $5.57 per share. However, that is based on the assumption that the S&P 500 Index will rise 8% for the year.
In the most recent quarter, financial services profit climbed to $377 million, or $0.78 per share, from $317 million, or $0.64 per share, a year earlier. Operating earnings were $524 million, or $1.06 per share, compared with $488 million, or $0.96 per share, in the year ago period. That included expenses of $267 million, or approximately $0.40 per share, related to an ongoing investigation in the company's retail brokerage business. Without the charge, operating earnings would have been $1.46 per share - $0.23 better than the Reuters Estimates consensus. Fourth quarter revenue rose 11.8% year/year to $5.82 billion, slightly below the consensus estimate of $5.85 billion.
The investment division reported a loss of $4 million in the quarter, compared with operating income of $111 million in the year ago period, due in large part to the increased legal costs. The company also said increased expenses in the quarter, including costs incurred to expand distribution and client servicing capabilities for the division's retirement business, more than offset a decrease in transition costs associated with the integration of the retirement business acquired from Cigna. Meanwhile, operating income for the insurance division was up 23% to $365 million, helped by lower occupancy costs and staff reductions. The international division reported operating income of $378 million for the quarter, up more than 50% from year earlier. The company said the results benefited $44 million from investment income associated with a single joint venture.
Given the relatively mixed results and current valuation levels, the near-term prospects for Prudential remain modest. As such, we would not commit new money at this time. At the current level, the stock is trading at 15.6x trailing earnings, compared with 11.5x for Citigroup (C) and 11.9x for MetLife (MET).
--Richard Jahnke, Briefing.com
11:51 am Applebee's (APPB)
23.67 -0.10: For its fourth quarter, Applebee's International reported a 16% decline in net earnings that translated to a profit of $0.27 per diluted share, which matched the Reuters Estimates consensus. Revenues rose 10.7% to $300.2 million.
Higher costs weighed upon the bottom line and offset the sales growth. Total cost of company restaurant sales, as a percentage of sales, increased 304 basis points to 78.97%. As had been previously reported, system-wide comparable store sales increased 1.0% during the quarter. Comparable sales for both company and franchise restaurants declined, though. Management noted that sales during the month of January were better, but also said that it recognizes the fact that a four-week period is a time frame not long enough to declare a sustainable improvement in trends.
Applebee's acknowledged the external challenges it faced, but was still disappointed with its performance during the year. Higher energy costs and rising interest rates adversely affected the consumer that is at Applebee's core. At the same time, though, consumer spending is holding up and bright spots do exist. Competitor Brinker (EAT), which is the parent company of several casual restaurant concepts that include Chili's and Maggiano's, upped its guidance for the current quarter and full-year yesterday. Brinker also reported stronger January same-store sales. At the fast-food end of the spectrum, McDonald's (MCD) similarly reported very strong same-store sales on Wednesday. MCD remains our favored stock in the space, and is a recommended holding in our suggested portfolio for active investors.
Applebee's indicated that its 2006 initiatives include more rapid innovation of its food, advertising evolution, and leveraging its key points of differentiation with consumers. Applebee's reaffirmed its full-year guidance, saying it expects $1.43-1.47 in earnings per share, a range that brackets the current consensus estimate. The range excludes the impact of stock compensation expense. APPB shares currently trade at 16.3x expected FY06 earnings, a valuation that is in-line with MCD's forward multiple as well as the sector's forward multiple.
--Lisa Beilfuss, Briefing.com
11:35 am XM Satellite Radio (XMSR)
26.17 +1.56: XM Satellite Radio on Thursday announced a three-year, $55 mln deal with Oprah Winfrey to launch a new satellite radio channel called "Oprah & Friends." XM Satellite shares, in turn, have climbed more than 7% during the regular trading session as investors have responded favorably to the news amid heavy competition from rival Sirius Satellite Radio (SIRI), which recently signed a five-year $500 million deal with Howard Stern and an 11-year deal with Major League Baseball.
The channel, which will debut in September, will feature programming on fitness, health, self improvement, home, and current events from popular personalities from "The Oprah Winfrey Show" and O, The Oprah Magazine. In addition to regular segments hosted by such personalities as Bob Greene, Dr. Mehmet Oz, Dr. Robin Smith, Marianne Williamson, and Nate Berkus, the new channel will also feature an exclusive weekly radio show with Oprah Winfrey and Gayle King.
While both XM Satellite and Sirius have been actively investing in operations and adding exclusive programming to bolster subscriber growth, they have been incurring large losses and have not yet reached profitability. As these investments continue to weigh on the bottom line, we would remain on the sidelines until the profit outlook becomes more clear.
--Richard Jahnke, Briefing.com
10:40 am Whole Foods Market (WFMI)
68.12 -3.93: Whole Foods Market last night reported a diluted profit of $0.40 per share, which was up 17% from the year-ago period. That profit included stock-based compensation expenses of $0.01 per share. Analysts were expecting Whole Foods to post a profit of $0.41, but it is unclear if their estimates included the stock-based compensation expense. Driven by a 15% increase in weighted average square footage and 13% same-store sales growth, the company's top line expanded 21.8% to $1.67 billion. Average weekly store sales hit a record high, and the company noted that its same-store sales result marked its ninth straight quarter of double-digit growth.
The grocer continues to believe that it will produce earnings growth through sales rather than through significant margin leverage. New stores generally have lower gross margins and higher direct stores expenses than more mature stores. Versus the year-ago period, gross margins slipped seven basis points to 34.5%.
On its conference call, the company asserted that it will continue to put its cash to work in funding growth and added that excess cash will be returned to shareholders. Last quarter, WFMI paid approximately $17 million to shareholders in cash dividends.
Whole Foods reaffirmed its fiscal 2006 (Sept.) guidance, saying it sees sales growth of 18-21% driven by comparable store sales growth of 8-11%; earnings per share are anticipated to grow slightly less than 18-21%. According to Reuters Estimates, analysts' average estimates are $5.68 billion and $1.41, respectively. Management noted on its conference call that it is moving away from issuing detailed quarterly guidance, as it wants the focus to shift to longer term goals.
WFMI shares currently trade at 49.5x estimated FY06 earnings. Shares of its rival in the specialty grocer space, Wild Oats Markets (OATS), also trade at a sharp premium to the Consumer Staples sector multiple of 17.3x FY06 earnings.
--Lisa Beilfuss, Briefing.com
10:21 am Best Buy (BBY)
52.63 +3.80: Shares of Best Buy are making a notable mover after the nation's largest consumer electronics chain raised its fourth quarter profit forecast due to strong revenue results for the holiday period. Best Buy attributed strong revenue momentum and the improved outlook to a better than expected promotional environment, tighter expense controls, and increased gift card spending.
Since we highlighted Best Buy in our Stock Swap column last December, and suggested that investors accumulate shares based on the company's strong underlying fundamentals and attractive valuation levels, the stock has climbed more than 18%, including today's gains. While the first quarter, when the company grew EPS by 85% year/year, will likely present tougher comparisons, we remain optimistic about the potential for further price appreciation given the company's solid long-term growth prospects.
For the three months ending February 25, Best Buy projected earnings from continuing operations of $1.25 to $1.30 per share, up from its previous guidance of $1.06 to $1.16 per share. That exceeded Wall Street's estimate of $1.16 per share and represents an increase of approximately 23% from last year's profit of $1.04 per share. For the full year, the company forecasted earnings in the range of $2.24 to $2.29, versus the consensus estimate of $2.13 per share. The new guidance reflects a 29% increase over earnings from continuing operations of $1.75 per share for fiscal 2005.
The improved outlook for the the quarter also includes a same store sales gain of 6% to 7%, compared to the range of 3% to 5% that Best Buy previously estimated. The company credited the growth to strength in flat panel TVs, portable audio products such as MP3 players, notebook computers, and video game systems. Furthermore, an increase of approximately 20% in gift cards issued during the holiday season also contributed to the strong revenue results.
--Richard Jahnke, Briefing.com
10:09 am News Corp. (NWS.A)
15.68 -0.16: As is the case with most conglomerates, News Corp's second quarter had some good and some bad, but this media giant, unlike many others, continues to work. Operating profits nearly doubled year/year to $694 mln with the per share figure exceeding estimates by a penny on asset sales and strength in cable networks. Revenues of $6.6 bln were up marginally year/year. The highlights included a 15% rise in cable network programming profits, driven by strong ratings for Fox News Channel and FX on the success of Nip/Tuck, which drove affiliate fees and advertising revenues, along with impressive progress at its satellite businesses.
The Filmed Entertainment division delivered operating income of $299 mln despite difficult comparisons due to last year's release of Star Wars Episode IV. The Newspapers division suffered a decline in operating profits on lower circulation. The satellite businesses, Sky Italia and Star, are now finally entering the profitability phase after years of capital investment. Sky is on its way to delivering the first full year of profitability. The Television unit is also reaping the benefits of stronger programming and ratings, with operating profits up 20% this quarter.
Net-net, it was a solid quarter with News Corp continuing to execute well on its growth strategies. We retain our positive view on the stock, a suggested holding in our Active Portfolio, and will take a more in depth look at the quarter on our Large Cap page on Monday.
--Kimberly DuBord, Briefing.com
09:15 am Electronic Data Systems (EDS)
25.51: In the midst of a turnaround, Electronic Data Systems on Wednesday said fourth quarter profits more than doubled as recent layoffs and other cost cutting initiatives outweighed modest revenue growth. The technology services company also issued mixed guidance, stating that first quarter earnings would fall below analysts' expectations, but full year results would be stronger than expected. On account of the overall positive report and progress in completing its turnaround amid deteriorating revenue, EDS shares traded sharply higher in pre-market action.
For the fourth quarter, EDS earned $112 million, or $0.21 per share, up from $53 million, or $0.10 per share, a year earlier. On a pro forma basis, which excludes discontinued operations, stock options expense, and restructuring costs, the company earned $131 million, or $0.25 per share - two cents better than the Reuters Estimates consensus of $0.23. Quarterly revenue, meanwhile, rose 1.3% year/year to $5.15 billion versus the consensus estimate of $5.10 billion. GM revenue for the period decreased 10% to $463 million, while non-GM revenue rose 3%.
EDS said it signed $5.3 billion in contracts during the quarter, up 45% from a year earlier. New contracts for the period included a $500 million IT services contract with global retailer Royal Ahold as well as an IT services contract with United Airlines. Given its progress, both financially and competitively, the company said it expects to earn $0.10 to $0.15 per share, ex-items, on revenue between $4.7 and $4.8 billion. That compares with Wall Street's estimate of $0.21 per share on revenue of $4.97 billion, according to Reuters Estimates. For the full year, EDS anticipates EPS of $1.05 to $1.15 and revenue of $20 to $20.5 billion, versus the consensus estimate for EPS of $1.01 and revenue of $20.1 billion.
--Richard Jahnke, Briefing.com
09:08 am General Motors (GM)
21.99: The goodwill gesture GM made this week in slashing its dividend and cutting senior management compensation raised expectations the automaker would be able to garner the necessary concessions from the UAW. Today, however, The Wall Street Journal reported that negotiations between GM, Delphi and the United Auto Workers union may have hit a snag, "raising doubts" about a possible settlement over the fate of the auto parts company's workers. The UAW is hoping to soften the blow for the Delphi workers without provoking a strike or squeezing too much cash out of GM, according to the article.
The Journal stated a setback came this week when UAW negotiators did not show up to make an expected presentation on how GM can reduce its workforce. These plans were expected to include early retirements and buyouts options. Even though GM spun off its parts unit in 1999, it retains responsibility for many of Delphi's workers. The automaker was aiming to return some of the workers to GM, but the UAW appears concerned over how long GM is willing to subsidize worker compensation, which could be cut by more than 60%.
Delphi is expected to ask a U.S. bankruptcy court to void its union contracts on February 17th - a move that the UAW says, if taken, could prompt a strike and effectively cripple GM. The current UAW contract does not expire until 2007. GM has stated it targets 30,000 UAW jobs for elimination over the next 5 years as it attempts to restructure its North American operations. The Delphi issue and possible sale of GMAC remain the key issues on the table for GM at this point. The stock will likely continue to be news-driven until some resolution is achieved. We continue to believe there is no investable thesis to own GM, but concede the downside below $20 appears limited.
--Kimberly DuBord, Briefing.com
07:52 am Aetna Inc. (AET)
96.12: Aetna, the third largest US insurer, bested estimates for the fourth quarter as profits rose 41% on strong membership gains. Net income grew to $423 mln, or $1.42 per share. Stripping out non-recurring items, the per share figure of $1.26 exceeded estimates by three cents as revenues climbed 13.5% to $6 bln. After a whirlwind rise over the last two years, the result should go a long way in stating AET's case for further upside in the quarters ahead, particularly as its cost ratio declines.
The managed care industry has far exceeded the market's returns and looks poised to do so again this year, as medical cost trends decelerate and membership rises driven in part by the prescription drug plan Part D. Aetna has been able to lower its medical costs further than its peers, enabling the company to pass the savings to customers, wooing new enrollment through specialty services. In the quarter, Aetna's medical plan enrollment rose 8% from the prior year to 14.8 mln.
Aetna forecasts medical membership to grow this year by 900,000 to 1 mln, up from its prior range of 800,000 to 900,000, including a gain of 575,000 in the first quarter. Aetna's CEO John Rowe, who has increased the company's market value by more than $23 bln in five years, is set to retire on February 14th and will be replaced by current President, Ronald Williams. Aetna is looking for full year earnings in the range of $5.42-$5.48 per share, well within the consensus of $5.46. Overall, Aetna posted a solid result. With shares trading at a discount to the group at 17.x, we think AET remains a strong investment for 2006.
--Kimberly DuBord, Briefing.com
10:33 am Zebra Tech: Miller Johnson upgrades Neutral to Buy. Target $42 to $42. The firm says product introduction delays are largely resolved, the Paxar litigation threat is pushed out until 2007, and the co appears to be gaining traction in RFID tagging programs.
10:33 am TEKELEC: Robert W. Baird upgrades Neutral to Outperform. Target $15 to $15. Firm believes fundamentals remain intact and new CEO Frank Plastina has a strong financial background and will make prudent financial decisions about division/product rationalization to enhance Tekelec's margin profile. They would buy stock at current levels as fundamentals are intact, but expect financial improvements to be realized late 2006 and in 2007.
10:31 am MasTec: Ferris Baker Watts initiates Buy. Target $16. The firm believes that the increasingly competitive nature of the residential telecommunications business will force carriers to increase investment in their networks in order to offer enhanced services. With MTZ's strong brand recognition and customer relationships, they believe that the co is well positioned as a high-value solutions provider in the network infrastructure market.
10:29 am HNI Corp.: BB&T Capital Mkts downgrades Buy to Hold. Firm continues to believe HNI's revenue growth will outpace the two industries in which the company competes. Moreover, they believe HNI mgmt will continue to demonstrate its industry-leading operational prowess. However the firm says, with EPS growth set to slow to mid-teens from the mid-20% range in FY'05, they believe current all-time-high multiples are unsustainable.
10:23 am Cubic: Needham & Co downgrades Buy to Hold. Firm believes the modest improvement in CUB's transportation business, the biggest drag on earnings last year, and continued solid showing from the defense business is priced into the shares, which have climbed 23% since in less than two months. They believe further upside in the stock over the near term will be challenging.
10:22 am Watts Ind: Needham & Co downgrades Buy to Hold. Firm is saying their enthusiasm is tempered by the +20% run up in the stock yesterday and by the fact that the is stock trading at roughly 19x their F2006 EPS estimate and 10x their F2006 EBITDA estimate. They are waiting for an entry point at more attractive long-term multiples. They believe the positive trends in the wholesale markets, led by a strong non-residential construction market, will help offset a slowing residential/retail market.
10:20 am Chattem: BB&T Capital Mkts downgrades Buy to Hold. Based on uncertainties around the outlook for near-term fundamentals as well as non-fundamentals (particularly options costs, which the company has not yet guided on), they have lowered their FY'06 EPS forecast to $2.20 from $2.37.
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