From Briefing.com: So the Nasdaq has strung together two consecutive negative sessions -- mark your calendar. Yet this recent sell pressure isn't entirely out of place in the context of that genuinely massive prior leg higher. Note that coming off the Nasdaq's opening level of 1489 on May 22nd, the index had returned as much as 13.1% in a matter of just twelve sessions.
From a technical perspective, the current outlook remains consistent with our assessment this morning. That is, the immediate bias remains consolidative within the context of this broader bullish bias. Note the near-term bias would improve to the extent the index can reestablish a posture above 1619 on a closing basis. To the downside, the Nasdaq's first broader support point currently rests in the vicinity of 1591 to 1595 -- this area appears to represent the first real candidate for a reversal of this bearish immediate bias.
Looking towards the remainder of the week, the identifiable catalysts are somewhat limited. On the economic front, continue to look for Retail Sales data due out Thursday morning at 8:30 ET, followed by the preliminary Michigan Sentiment number scheduled for Friday just after the market open at 9:45 ET.
On the corporate earnings front, the calendar is virtually vacant, though earnings pre-announcements should start making the rounds with more regularity the next several weeks. For a more detailed look at upcoming reports, please visit Briefing.com's Earnings Calendar and Economic Calendar. -- Mike Ashbaugh -- Briefing.com
Close Dow -82.79 at 8980.00, S&P -11.83 at 975.93, Nasdaq -23.45 at 1603.97: The stock market suffered sizable losses today as a number of valuation-related downgrades and uninspiring corporate announcements prompted traders to sell into the prior months' strength... Since their mid-March lows, the indices have raced higher by more than 20% amid expectations of stronger 2H03 economic and corporate growth... As such, the arrival of the June quarter "warnings" season has provided investors an easy opportunity to book profits... Motorola (MOT 8.62 -0.27), in fact, cut its Q2 (June) earnings and revenue forecast and said lower-than-expected cellular handset sales in Asia could impact Q3 (Oct) and Q4 (Dec) results as well... Freddie Mac (FRE 50.27 -9.60) added fuel to the fire through its announcement that COO David Glenn was fired for not fully cooperating with auditors reviewing FRE's earnings statements from 2000 through 2002... Meanwhile, analysts suggested near-term, upside movement could be harder to come by through several stock downgrades based on valuation...
In particular, technology standouts QLogic (QLGC 48.95 -2.08) and Adobe Systems (ADBE 35.44 -1.85) were downgraded: QLGC by Goldman Sachs (to Underperform from In-line) and ADBE by Smith Barney (to Underperform from In-line)... Consequently, the equity market fell progressively lower throughout the day and finished near the worst levels of the session... Former rally leaders - such as financial, technology, and biotech - endured the brunt of the selling activity, although losses from an industry (as well as market-cap) perspective were broad-based... Separately, market participants shrugged off the 0.1% drop (consensus of +0.2%) in April Wholesale Inventories given its read on the war-impacted month...
Tomorrow's market should take note of Nokia's (NOK 17.96 +0.21) mid-quarter call before the open, particularly in light of MOT's reduced Q2 guidance...Nasdaq 100 -1.5%, Russell 2000 -2.0%, SOX -2.4%, S&P Midcap 400 -1.9%, NYSE Adv/Dec 1089/2234, Nasdaq Adv/Dec 1129/1066
3:43PM Ratings Review - SUNW 5.12 -0.08: An upgrade by one of Wall Street's favorites, Laura Conigliaro of Goldman Sachs, is not having its usual market-moving effect that investors have come to expect from this analyst's calls. Specifically, Ms. Conigliaro's upgrade of Sun Microsystems (SUNW) to In-Line from Underperform this morning has not elicited much of a reaction, as the stock is treading water right below the unchanged line.
The rating change was based on signs that the near-term business is no longer deteriorating, demand is stabilizing, and SUNW's valuation is below several of its peers'. Given signs that some of the company's key end markets have bottomed, Ms. Conigliaro believes SUNW is likely to see seasonal patterns that are closer to normal, which should cause the stock to generally track its peers.
So, why is it that SUNW's stock is not flying high after Ms. Conigliaro's seemingly encouraging comments? Several factors are at play here.
First, the analyst made a point of reiterating her earlier substantial secular concerns, pointing out that around 35% of SUNW's revenues come from financial services and telecom, which remain two of tech's most depressed sectors. Second, Ms. Conigliaro's call is hardly revolutionary as 15 other analysts rate the stock with an equivalent of a Hold. Two analysts have the equivalent of a Buy rating, while five analysts have the equivalent of a Sell recommendation. Finally, investors may be holding their horses in the face of SUNW's 5.7% appreciation on Friday, which followed a favorable note out of Sterling in which the firm reiterated its Buy rating and increased the price target to $7 from $5.
Keeping in mind the fact that the stock has more than doubled off its October low of $2.34, Briefing.com sides with the majority of analysts, who have stopped short of suggesting taking an aggressive stance on the shares at current levels. We would be inclined to turn more positive when evidence of a more meaningful acceleration in information technology spending surfaces. -- Victoria Glikin, Briefing.com 3:25PM QLogic (QLGC) 48.54 -2.49: Being one of the stronger technology stocks, QLogic (00C0) has been able to maintain sequential sales growth, solid margins and earnings growth. What did all of these good results get them? An upgrade, new coverage or a pick of the month designation? Well not quite. QLogic was downgraded by Goldman Sachs today, based on 'valuation.' The downgrade moves them from In-Line to Underperform.
In the note, Goldman leads with the idea that valuation has taken a backseat to momentum in the current market. This has caused QLGC's stock to rise to very high multiples, including a 37x multiple for next FY earnings. Goldman also notes that the rise in the stock has moved its P/S '03 to 9.5x and 11x LTM sales. These are both the highest in their group.
Another reason for the downgrade was that Goldman had concerns for the upcoming September quarter (1Q04). The coming quarter is the one with most risk for the HBA (host bus adaptors) market. While the implications of a poor quarter relate to all the companies in the HBA market, Goldman only downgraded QLGC, but more or less hinted that Emulex (ELX) was next in line. At the same time, Goldman goes on to say that they expect QGLC to beat their estimates for the coming quarter. The only concern is that the decline in its customers business might in turn affect QLGC.
The consistency of growth the Company has shown has earned it its high valuation, but the negative side of that high valuation and excellent performance is that the expectations are now even higher. This is really main issue that Goldman has with owning QGLC in the short-term. QGLC, which designs and supplies storage network infrastructure components and software for server and storage subsystem manufacturers, has posted 2% to 5% topline growth over the past three quarters. Goldman says that there is only a 35% chance that this streak will not continue.
This downgrade did carry some weight, as the stock is off a little more than 5% on the day. We feel that one more point made in the note should be discussed, and it's obviously a more important one if we talk about it last. In the beginning of the note, Goldman noted that it had to maintain its required distribution of ratings, and that there must always be at least 10% of followed stocks rates as Underperform. This particular downgrade was made in conjunction with the upgrade of Sun Microsystems (SUNW), making us wonder if just because of its past performance the Company was downgraded. SUNW was upgraded to In-Line from Underperform.
Briefing.com believes that the downgrade of QLGC is a short term move, and gives long term investors a nice pull back at which they will find a quality growth stock. It's very hard to suggest that investors purchase a stock that trades at 9.5x sales and 37x next FY earnings, but we are confident that QLGC will continue to post solid results as its model has yet to really show any weakness in an already weak environment. --Brian Bolan, Briefing.com
3:09PM Nokia Mid-Qtr Preview (NOK) 17.75 unch: While the MOT news is still fresh in everyone's mind, Nokia is scheduled to provide its mid-quarter update tomorrow morning with a Friedman Billings analyst suggesting the co will "tighten" its revenue guidance to the downside in light of the 5% move in the U.S. dollar relative to Euro while its EPS should remain -0.13 to -0.16. The analyst also suggests the co will likely reduce its 2003 mobile phone forecast due to growing Asian handset inventories and the SARS outbreak. UBS also shares the same concerns over the U.S. Dollar and SARS with its analyst expecting the Nokia Mobile Phone revenues to be up 5-6% year/year vs. firm's formal estimate of 7% for growth. In addition, the firm expects no material change to industry or company guidance.
11:58AM Technical Levels: So it looks like that Friday reversal may have raised a few eyebrows. Recall when we reviewed the Nasdaq on Friday, June 6th we addressed this prospect of inverse capitulation -- a session of panic-induced buy interest in which even the most bearish trader throws in the towel and goes long. As a rule, capitulation days are interpreted to 'wash out' the predominant near-term trend, laying the groundwork for a reversal of the immediate bias. (As a point of interest, note the practical implications of this prospective 'inverse capitulation' were initially addressed here in the May 30th review.)
Now in the early going Friday, the Nasdaq exhibited the markings of this underlying 'panic-induced' behavior. Recall off the session's open, the index carried this unusual disposition in which advancing volume outpaced declining volume by a truly off the chart reading of 31 to 1. At the same time, total volume was on pace to carve out yet another calendar-year record. By the end of the day, the Nasdaq reversed to close 57 points off its session high at 1684 -- the pronounced reversal came behind Nasdaq total volume of nearly 3.0 billion shares.
So this first chart is a fifteen-minute chart of the Nasdaq in which each bar on the chart represents the opening and closing levels for each fifteen-minute time frame. The primary point here ties into our bias parameters from the Friday review.
To provide context, the relevant passage from that June 6th review follows: "The 'real' question is how the indices respond to their respective breakout points at Dow 9,000 and Nasdaq 1619. If the indices can hold those areas on a closing basis, the near-term bias is likely to remain bullish. A reversal that would take the indices under those levels on the close would contribute to the case for a more neutral to bearish immediate bias. So from a practical standpoint, keep an eye on support in the very broad area of 1619 to 1632. The immediate bias improves or deteriorates based on its relationship to that general area."
The chart above illustrates that near-term 'bias range' spanning from 1619 to 1632. Note the general area is relatively cluttered with random levels of varying importance. Yet also note Friday's close placed the index comfortably in the middle of that 13-point range. So that price action Friday raised a flag as to the prospect of this additional follow through today.
To read the remainder of this review -- which addresses levels of interest on the S&P 500 -- please see the Stock Brief page. -- Mike Ashbaugh, Briefing.com 11:49AM Ratings Review - ADBE : Later this week, software company Adobe Systems (ADBE 35.23 -2.06) will be delivering its fiscal Q2 (May) earnings report. The market is expecting to hear good things - very good things. How do we know? A look at ADBE's stock chart suggests as much as the stock is up 28% from its March 12 close and up 114% from its 52-week low reached last August.
A performance like that, understandably, will turn more than a few heads in the investment community. Today, it has grabbed the attention of Smith Barney, which downgraded ADBE to Underperform from In-Line citing valuation. The firm said that it expects a solid Q2 from the company, but it also stressed that the recent appreciation in ADBE's stock price has stretched its valuation to 34.2x, which is near peak levels.
Smith Barney attributed the surge in ADBE's stock price to two quarters of solid financial performance and expectations for its just-released Acrobat 6.0 upgrade cycle. Interestingly, Smith Barney noted that in each of the last three launches ADBE shares peaked within a month of the new product launch. The firm added that, although a Photoshop upgrade is possible in Q4/Q1, the timing is uncertain and trends suggest caution is warranted.
ADBE's stock hasn't taken kindly to the Smith Barney downgrade as it is off 5.5% on heavy volume. At current levels, it is trading below Smith Barney's $36 price target. The weakness in the tech sector has, in all likelihood, compounded the negative response to the Smith Barney downgrade.
Since the broader market rally began in mid-March, valuation concerns, among other things, have provided the rationale for more than a few firms taking a cautious stance on ADBE. To that end, WR Hambrecht downgraded ADBE on March 21 to Hold from Buy; Deutsche Securities reiterated its Sell rating on March 26; Lehman Bros. revised its view on May 6 to Underweight from Equal Weight; and Ryan Beck maintained its Underperform rating on May 8, saying that "hyperventilated expectations" have bloated ADBE's valuation to premium levels.
Smith Barney, of course, has the reach to move a stock like ADBE but, frankly, it isn't breaking new ground with respect to its concerns about valuation. Nonetheless, in the absence of a blow-out earnings report after the close on Thursday, the growing list of firms expressing concern about valuation should slow the momentum of ADBE's stock.-- Patrick J. O'Hare, Briefing.com
11:26AM Motorola (MOT) 8.50 -0.39: Slower cellular handset sales in Asia caused Motorola (MOT) to revise guidance for 2Q03. MOT is now expecting its second quarter sales to be between $6.0 bln and $6.2 bln, versus its prior guidance of $6.4 bln to $6.6 bln. Earnings guidance was also lowered, as the Company now expects a breakeven quarter, compared to previous guidance of $0.03 to $0.05 of EPS.
The reason for the shortfall in sales was blamed on the effects of SARS, an issue which has seen little press in the last few weeks, but had enough of an impact in the first few weeks of the quarter to cause management to alter guidance. An earthquake in Sendai, Japan, (measured at 7.0 on the Richter scale) also proved to be a factor in lowering guidance. The earthquake temporarily disrupted manufacturing operations and will result in repair and clean up costs in the second quarter. This will only affect earnings and not sales in the quarter. On the call, management noted that business was tracking "as expected" throughout the rest of the world, which somewhat quelled fears that this reduction in sales had some other origin rather than SARS.
Inventory issues were also a point of concern as local Asian distributors had increased inventories due to weaker sales. The Company reported that it has 20 mln handsets in inventory and is looking to lower inventory in the coming weeks. This gave many analysts fears that ASPs will be driven down sharply in order to bring the inventory levels into a respectable range.
MOT stated that it expects to gain Asia market share in the calendar year, and pointed to the launch of 2 new GSM products in 2Q03, 8 launches in 3Q03, and 9 planned launches in 4Q03. The added investment in local, in-country design and engineering also helped management justify its idea of market share growth.
Sell through rates are struggling in Asia, as the Company noted that sales were down 20% from what it had expected. China was even worse, showing a 30% drop in demand. The Company also noted that there was increased competition in cellular handset sales in Asia.
A further breakdown of the problem shows that of the $400 mln decrease in revenue (from old midpoint to new midpoint) one third is from the semiconductor division and two thirds is from its PCS (personal cellular segment). This implies that each unit could experience as much as an 11% decrease in sales from the previous quarter. The other business units, which accounted for accounted for 44% of sales in the previous quarter are expected to be flat to higher in the coming quarter. Operating margins, which are expected to see decreases in both the PCS and SPS (semiconductor products segment), are likely to be flat to higher across the other 4 operating units.
During the call, management went very quickly through a presentation that noted that the slowdown would be industry wide, and cause lower sell through throughout Asia. This will adversely impact inventory levels, ASPs and adoption rates of new products. Further, that same slide noted the company sees SARS possibly effecting 4Q03. This is a little hard for us to understand, seeing as travel bans have been lifted to many Asian countries and relatively few new cases have been reported.
Overall, analysts were on the low end of previous guidance, so the reduction in guidance didn't really hurt too much. Down only 4% after this bad news really isn't too bad, but that doesn't make this stock a buy. It still trades at a lofty 19x next year's earnings and has a lot of uncertainty surrounding it. Management even noted that while world markets were showing signs of stability, a recovery has been postponed. Given this cautious outlook and high valuation, Briefing.com does not suggest new money be invested in MOT (For added perspective on earnings pre-announcements, be sure to read today's Stock Brief). --Brian Bolan, Briefing.com
1:47PM Punk Ziegel downgrades QLGC, BRCD, MCDT, ELX : Punk Ziegel downgrades select enterprise storage stocks, saying valuation has gotten too far ahead of growth. Firm downgrades QLGC to Sell from Mkt Perform, saying it is the most expensive in the group at 7x sales; target is $37. Firm downgrades BRCD to Sell from Mkt Perform, as firm thinks the stock should trade at 2x sales, not 2.7x; target is $4.75. Firm downgrades MCDT to Mkt Perform from Buy and cuts price target to $13 from $15, citing valuation. And firm downgrades ELX to Mkt Perform from Buy and cuts their target to $24 from $28, saying a multiple of 25x forward earnings is reasonable.
9:55AM ChipPAC target raised to $10 at Needham (CHPC) 6.86 -0.20: Firm reiterates its Buy rating and raises price target to $10 (from $7) based on view that revs, EBITDA and EPS should meet or exceed consensus estimates over the next 18 months, financial position has been materially strengthened, and valuation.
9:30AM Cymer downgraded at Moors & Cabot (CYMI) 34.24 -0.27: Moors & Cabot downgrades to Sector Perform from Sector Outperform based on valuation, as the stock has almost reached their $36 target; also, the co's mid-qtr update is likely to be cautious, and checks indicate that litho suppliers are not showing any pickup in demand.
9:21AM Nasdaq technical levels : -- Technical -- From current levels, look for initial support in the vicinity of 1619 to 1621, followed closely by additional support at 1614. To the upside, look for initial resistance at 1630 to 1632, followed by additional overhead at 1638.
8:38AM Axcelis Tech reaffirms Q2, appoints new interim CFO (ACLS) 6.60: Company reaffirms Q2 EPS loss of $0.10-0.12, vs Reuters Research consensus of ($0.10), and revs of $120-130 mln vs estimate of $81.8 mln. Co also appoints Stephen G. Bassett as interim CFO following departure of Neil Moses.
8:33AM Photronics downgraded at First Albany (PLAB) 17.40: First Albany downgrades to Neutral from Buy based on valuation, as they think the shares are fairly valued at 20.7x their FY04 est, 3.3x tangible book, and 1.6x FY03 sales; also, firm is concerned about the co's mix going forward and wants to see high-end demand accelerate before becoming more constructive; target is $17.
8:29AM Adaptec downgraded at First Albany (ADPT) 8.31: First Albany downgrades to Neutral from Buy based on valuation, as the stock is near their $8.72 price target.
8:13AM Freddie Mac terminates Pres/COO, announces CFO resignation (FRE) 59.87: Co announces the resignation of Pres/CFO Vaughn Clarke and termination of former Pres/COO David Glenn. Mr. Glenn was terminated because of serious questions as to the timeliness and completeness of his cooperation and candor with the Board's Audit Committee counsel, retained in January 2003 to review the facts and circumstances surrounding the principal accounting errors identified during the restatement process. The corporation has informed its regulator OFHEO, the SEC and the NYSE about the matters described in this release. FRE also announced the retirement of its CEO/Chairman.
U.S. stocks fell, sending the Standard & Poor's 500 Index to its biggest drop in three weeks, after Freddie Mac ousted its top three executives amid a federal probe of employee misconduct and Motorola cut its profit forecasts. The S&P 500 lost 11 points (-1.2%) to 975. The DJIA dropped 82 points (-0.9%) to 8980, retreating from an 11-month high. The Nasdaq Composite shed 23 points (-1.4%) to 1603. Declines were broad-based, with losses especially pronounced in the semiconductor, financial, airline and biotech sectors. Government bonds took off across the board, with the yield on a 2-year note remaining below the fed funds rate target of 1.25 percent, suggesting investors are betting on a rate cut when the Federal Reserve meets to decide on monetary policy later in the month.
Top Stories . . . U.S. 10-year Treasury notes rose in New York trading as investors sought the safety of government debt after Freddie Mac said it replaced its top three executives and federal regulators were investigating employee misconduct.
Freddie Mac, the second-biggest buyer of U.S. mortgages, ousted its top three executives and said the company's president altered documents related to a restatement of financial results the past three years. Shares of the government- chartered enterprise tumbled.
Motorola, the world's second- biggest mobile-telephone maker, reduced sales and profit forecasts for the year, blaming excess inventory and the outbreak of severe acute respiratory syndrome in Asia.
General Dynamics, the fifth- largest U.S. military contractor, agreed to buy Veridian for about $1.23 billion to increase sales of intelligence gathering as the U.S. government expands its fight against terrorism.
Quote of Note . . . ``It's going to be a slow grinding recovery and the market's going to be very volatile as we enter the earnings period,'' said Dennis Fitzpatrick, who helps manage $2.5 billion for First Investors Management Co. in New York. ``I'm still bullish, but I think we've come too far, too fast.''
``Valuations are just too high to ignore,'' wrote Lehman Brothers analyst Steven Levy in a note to clients. He lowered his rating on the stocks to ``underweight'' from ``equal-weight.'' ``The negative news from Motorola as well as some analyst downgrades of telecom stocks is giving the market an excuse'' to sell shares, said Jim Herrick, head of trading at Robert W. Baird in Milwaukee.
Gurus . . . Prudential strategist, Ed Yardeni, was on CNBC this morning, reiterating his constructive market view, which has been enhanced by the enormous amount of stimulative steam in the boiler. Ed also made reference to the minuscule returns available to small investors in money funds and bank CD's, suggesting some of that cash is finding it's way into the market place. He also notes that Fed Chief Alan Greenspan will address the House Energy Committee on the subject of natural gas pricing, and shortages that could be hurtful.
On the Kudlow-Cramer Show, Mike Holland, who runs his own shop, has been buying Intel, Varian Semiconductor, and Bank of New York, while Bruce Wilcox of Cumberland Associates is a buyer of Manpower and Laidlaw. Jim Cramer says he has been accumulating Anadarko and Schering-Plough.
On the Rukeyser Show, Ed Brown has been buying American International Group, HCA Inc., and AmeriSource-Bergen. Guest on the show was Francois Trahan, strategist for Bear Stearns, who had been cautious, but has turned friendlier to the long side. Recent recommendations include Omnicom, First Data, and Apollo Industries. His asset-allocation remains 60% stocks, 25% bonds, and the rest in cash, but he may be upping the stock position.
Barron’s interviewed Seth Glickenhaus, whose fund has delivered returns of 17% a year on average since 1981. The fund manager's outlook on the economy in the article is pessimistic with little or no enthusiasm for its prospects going forward. However, he still looks for stocks which have "abnormally" good prospects and price/earnings multiples that are "ridiculously" low. He mentions Countrywide Credit, Pengrowth Energy, Old Republic and Peabody Energy favorably and advises to stay away from blue chips due to their multiples selling too high.
Eco Speak . . . Plunging oil prices led to a record 2% decline in U.S. wholesale trade sales in April. In March, total wholesale trade sales rose 1%. Sales are up 3.8% in the past 12 months. Sales of wholesale petroleum dropped a record 24% in April, pushing down sales of non-durable goods a record 3.6%. The data go back to 1992. Sales of durable goods at the wholesale level dropped 0.2% in April following a 2.1% gain in March. Meanwhile, wholesale inventories sank 0.1% after rising 0.4% in March. With sales falling faster than inventories, the inventory-to-sales ratio bounced to 1.23 in April from a record low 1.21 in March. Inventories are still extremely tight, which means that any increase in demand from retailers would soon be answered by increased orders to manufacturers.
Internet Superhighway Roadkill . . . IPO.com Web site, which covered the market for initial public offerings during the bull market, has shut down, according to a letter on the Web site from David H. Roberts, co-founder and chief executive officer. Roberts did not say why IPO.com was ceasing operations, but the IPO market has been grinding away at multi-decade lows in terms of the number of deals. "It was a few days and six years ago that IPO.com was founded," Roberts said in a letter posted on the site. "In that time we have tracked the equity markets during the glory days of the Internet and through the darker days of terrorism and recession." The move comes just a few days after WebFN ceased its Internet Webcasts.
Fund Flows. . . Trim Tabs remains cautiously bearish on the market, viewing the recent inflows into equity funds as a negative. The fund flow tracker notes that a surge in inflows has always been a sign of a market top. Trim Tabs estimated that U.S. equity funds got a $3.6 billion cash infusion over the week ended last Thursday, the biggest inflow since mid-April.
Financials . . . Caren Mayer at Banc of America downgraded Freddie Mac to "neutral" from "buy," after the company said its Chairman and chief executive had retired, its chief financial officer had resigned, and its chief operating officer had been fired. He also noted that the government sponsored mortgage services company's restatement of prior results would not be completed until the end of the second quarter, or into the third. "Until there is some clarity on the issues surrounding Freddie Mac, we believe the stock will stay under pressure," Mayer said. Mayer said Fannie Mae shouldn't be pressured along with Freddie Mac's as the company is not subject to the same accounting concerns and has "extraordinarily strong" corporate governance.
Freddie Mac was cut to Hold from Buy at AG Edwards. In the firm's opinion, the complete change at the top of FRE management combined with the restatement process and the uncertainty that the previous executives were not fully "up-front" with all of the issues, creates a situation where firm's comfort level does not warrant purchase at this time.
Freddie Mac announced the retirement of Leland Brendsel, its chairman and chief executive, the resignation of Vaughn Clarke, its chief financial officer, and the termination of David Glenn, its chief operating officer. Gregory Parseghian was named chief executive, Shaun O'Malley was appointed non-executive chairman, Martin Bauman was named chief financial officer and Paul Peterson was named chief operating officer. Separately, the company said it continues to expect the previously announced restatements of its 2000 through 2002 financial results will lead to a "materially increase" in reported earnings and capital surplus due to adjustments affecting the timing of income recognition, but will have offsetting effects in future periods. The company expects "increased volatility" in reports for future periods.
E*TRADE announced portable mortgages. The company announces a program enabling consumers to lock in today's low portable mortgage rates on a home loan and then transfer the rate to the next home they purchase. The program enables borrowers to transfer the terms of the loan to a new future residence, rather than paying off the existing loan and applying for a new loan at potentially higher market interest rates.
MBNA announced today that it is acquiring a small portfolio of affinity cards from Royal Bank of Canada. This acquisition should help continue MBNA's growth as a major issuer in Canada, an important (though still significantly smaller than the US and UK) element in its international growth. Royal Bank of Canada is selling "less than 1%" of its roughly C$7 Billion managed portfolio to MBNA. These are apparently balances related to affinity cards. Royal Bank is apparently exiting the affinity market. MBNA's affinity strategy continues to distinguish the company from its competitors in each of the countries it operates in. Affiniity endorsements enable MBNA to generate significant growth in accounts and balances, without the reliance on price that some other major issuers have been forced to have. In Canada, MBNA currently has just over $2.7 billion of managed loans and relations with some 470 affinity groups. Over the past year, balances grew by 30% and endorsements by about 18%.
Energy . . . Fitch Ratings raised the debt rating of Xcel Energy to "BBB-" -- considered "investment grade" status -- from "BB+" -- seen as "junk" status -- due to the "substantial dividends upstreamed by its four main regulated subsidiaries," and the expectation that the company's exposure to the obligations of its bankrupt subsidiary will be limited. The outlook is now "stable." The debt rating agency noted that Xcel's subsidiaries -- Northern States Power of Minnesota and Wisconsin, Southwestern Public Service and Public Service Co. of Colorado -- distributed $567 million in dividends to the company in 2002, and have "strong" financial profiles.
Metals . . . UBS analysts Daniel Brebner and Brian MacArthur downgraded Alcoa to a "reduce" rating from "neutral," in contrast to an upgrade by rival brokerage firm Merrill Lynch. The analysts said investors are being "excessively pre-emptive towards a meaningful recovery in aluminum and downstream markets." While profitability for Alcoa is expected to improve in the second quarter 2003, "further earnings strength is likely to remain challenging in our view," they said.
Alcoa was boosted to a "buy" from a "neutral" at Merrill Lynch. Daniel Roling said that he sees "significant upside opportunity ahead resulting from strong industry and company fundamentals and a low current valuation." He set a $32 price target for the stock.
Defense & Aerospace . . . Northrop Grumman will pay $111 million to settle a lawsuit over alleged overcharging on government contracts at its recently acquired TRW business. However, Northrop said it is still on track to make cash from operations of $1.1 billion to $1.3 billion this year. The fiscal-year earnings estimate of $3.80 to $4.20 a share also stands.
General Dynamics said it'll buy Veridian for $35 per share. The price is a premium of 28 percent over Veridian's closing price of $27.35 on Friday. The deal includes the assumption of $270 million of debt. Veridian went public on June 5 of last year at an IPO price of $16 per share. Veridian is a provider of information-based systems to the U.S. government.
Staffing . . . Brandt Sakakeeny at Deutsche Bank upgraded Manpower, Resources Connection and Robert Half -- which he considers the top names in the staffing sector -- to "buy" from "hold," citing early signs of an economic recovery. Though labor market data is less certain, Sakakeeny believes improving economic growth trends suggests the worst may be over. "Although it is still too early to call the trend a definite one, we believe the time is now for long-term investors to begin buying staffing names," Sakakeeny said in a note to clients. His price targets increased for Manpower to $24, for Resources Connection to $28 and for Robert Half to $24.
Food & Beverage . . . ConAgra agreed to sell its chicken business to Pilgrim's Pride for roughly $590 million. The consideration will include $100 million in cash, $235 million in Pilgrim's Pride class A common stock, and $255 million in subordinated notes. ConAgra, which expects the deal to close this summer, will record a pre-tax charge of about $112 million related to the sale in the fourth quarter to reflect a write-down of the chicken business' assets. It believes the sale will not have a significant impact on its fiscal 2004 results.
Tobacco . . . R.J. Reynolds Tobacco chief financial officer, Richard Bogan, has resigned to pursue other opportunities. The company appointed Dianne Neal to replace Bogan, effective immediately. Neal, who joined the company in 1988, was named controller in 1997 and vice president of investor relations in 1999.
Retail . . . Safeway earned a spot on J.P. Morgan Chase's "focus list," as the brokerage raised its price target on the stock to $23.50. Analyst Stephen Chick said the grocer's centralization project is on track and "progress is being made" in efforts to cut labor costs. He also expects the results of the company's overhead review -- expected in August -- to lead to important changes in coming quarters. Chick said he sees the sale of the Chicago-based Dominick's chain eventually adding to earnings.
Deutsche Securities initiated Kohl’s with a Sell rating and $44 target. The firm believes that 1st quarter was the first major crack in the company's high-growth story, and that 18-20% square footage growth could result in national saturation of the co's only proven format; in addition, firm says both new and mature stores are showing declining productivity, and that the company's massive inventory bets have now backfired and will lead to significant margin erosion in 2nd quarter-3rd quarter, compounded by difficult comps.
Christine Augustine at Bear Stearns reiterated her "outperform" rating on Wal-Mart, given that opening price points continue to drive sales and that excess inventory should be worked through by the end of its fiscal second quarter. Augustine added that its Sam's Club division has begun to turnaround, as members have started to respond to product assortments refocused on small business customers.
Restaurants . . . McDonald's reported much better than expected May sales with constant currency worldwide same store sales up 2.2%, including a 6.3% increase in the U.S. Analysts had been expecting U.S. comps to be up about 3%.The month benefited from an extra weekend day, but nevertheless the performance was impressive. European same store sales were down 1% on a constant currency basis (versus a plus 6.4%), much better than expected even with about a 1.5% benefit from the extra weekend day. Total European sales were up 2% in constant currencies but up 24% on a reported basis given the soft dollar. MCD warned of $50 million in 2nd quarter expenses related to streamlining the business, including getting out of some real estate deals, as well as billboard spending. This equates to about $0.025 in EPS impact. Analysts are maintaining 2nd quarter EPS estimate at $0.37.
Healthcare .. . Legg Mason upgraded Beverly Enterprises to Buy from Hold following the announcement of 3.26% increase in Medicare reimbursement for nursing home operators. The firm believes that the additional Medicare funding will improve the company's financial performance and reduce the risk of any potential financial default; in addition, industry sources indicate there is strong interest in the properties the co is divesting, indicating divestiture transactions could come as soon as 2nd quarter that will further improve BEV's financial performance and reduce its liability risk profile. Target is $5.50.
Medical Equipment . . . Cytyc after the medical device firm won Food and Drug Administration clearance for an imaging system used in cervical cancer screening. The company has marketed a test, the ThinPrep Pap, for cervical cancer since 1996.
Biotech . . . Enzo Biochem has initiated a phase II trial of its antigen treatment for Crohn's disease. The company said results of its phase I trial were 'promising' with seven of the 10 patients enrolled achieving clinical remission. Enzo expects to enroll 30 individuals in the phase II trial.
Oxigene said its Combretastatin A4 pro-drug will be combined with chemotherapy drugs carboplatin and paclitaxel in a new trial treating patients with advanced ovarian cancer. Combretastatin is Oxigene's lead vascular targeting agent.
NaPro Biotherapeutics announced over the weekend "promising" results from a study of its treatment for Huntington's disease. The company said its proprietary technology worked in a "medicinal way" rather than a "genetic way," and inhibited aggregation and extended the life of neuronal cells. NaPro noted that the aggregation of the Huntington protein leads to neurotoxicity and cell death.
Michael King at Banc of America Securities upgraded Regeneron Pharmaceuticals's shares to "buy" from "neutral." In a note to clients, King cited the promise of Regeneron's experimental cancer therapy.
Consumer Electronics . . . TiVo received patent license from Gemstar-TV Guide. The companies dismiss pending litigation.
Telecom . . . Merrill Lynch upgraded Sprint PCS to "buy" from "neutral." Linda Mutschler believes the company's results, including churn and net subscriber additions, will improve sequentially. In addition, she feels the stock's valuation can be drive even higher than her $7 price target given the company's low free cash flow margin and high leverage.
Blake Bath at Lehman Brothers raised his rating on SBC Communications to "overweight" from "equal weight," as part of a more positive view on the telecom services industry. Bath also raised his price target on the stock to $30 from $26. He believes the regional bell operating companies will return to positive growth in revenue and cash flow by next year, while the overall industry returns to growth by 2005. Bath maintained his "overweight" rating on Verizon and his "equal weight" rating on BellSouth, but upped his price targets on the stocks to $48 and $30, respectively from $45 and $26.
Storage . . . Goldman Sachs upgraded Sun Microsystems to "in line" from "underperform." Analyst Laura Conigliaro said she still believes the company faces secular challenges, but feels stabilizing demand and relatively low valuation warrant make it more likely the stock will trade in line with it peer group.
Punk Ziegel downgraded select enterprise storage stocks, saying valuation has gotten too far ahead of growth. The firm downgraded Q-Logic to Sell from Market Perform, saying it is the most expensive in the group at 7x sales; target is $37. The firm also downgraded Brocade to Sell from Market Perform, as firm thinks the stock should trade at 2x sales, not 2.7x; target is $4.75. Firm downgrades McData to Market Perform from Buy and cuts price target to $13 from $15, citing valuation. And the firm downgraded Emulex to Market Perform from Buy and cuts their target to $24 from $28, saying a multiple of 25x forward earnings is reasonable.
Adaptec was downgraded at First Albany to Neutral from Buy based on valuation, as the stock is near their $8.72 price target.
Network Equipment . . . Steven Levy reaffirmed his view that the telecommunications services company has bottomed, and the stabilization phase of a recovery has begun, but he downgraded a number of companies in the group due to excessive valuation. He cut ADC Telecommunications, Nortel Networks, Sonus Networks and Tellabs to "underweight" from "equal weight," saying the differences between those stocks and the respective price targets were "too glaring to ignore."
Motorola warned of a second-quarter earnings and revenue shortfall. The company had blamed SARS and excess inventory for lower than anticipated handset sales in Asia. Cellular sales in North America, Latin America and Europe have been meeting expectations. The company now expects to breakeven for the quarter ending June, excluding one-time items, versus prior projections of 3 to 5 cents a share. Revenue for the period is now expected to be $6 billion to $6.2 billion, down from prior forecasts of $6.4 to $6.6 billion. Motorola said the issues that negatively affected its second quarter are expected to also impact its third and fourth quarters, leading to lower forecasts for the full year.
Raymond James raised Sonus Networks their 2004 est. to $0.03 from $0.00 versus consensus of ($0.03), based on their belief that capital spending trends are stabilizing and communications operators are making strategic investments. The firm thinks Voice Over IP deployments are occurring and traffic can grow at a 60-80% clip, and SONS will participate in that growth. Target is $7.
Ericsson sold its holding of France Telecom's 456 million euro convertible bond to a financial investor. The transaction will be completed before the end of the third quarter, Ericsson said. The bond is tied to Ericsson's outstanding customer financing to German operator Mobilcom, Ericsson said.
Adams Harkness believes that Advanced Fibre represents one of the most compelling plays on the broadband upgrade cycle. The firm expects AFCI to capture a meaningful share of the recent network expansion announced at Verizon and SBC.
Extreme Networks was cut to Underperform at RBC. The downgrade from Sector Perform is based on view that stock is pricing in an overly optimistic revenue outlook. Assuming a 30x multiple of 2004, EXTR's revs would have to grow by more than 30% in fiscal 2004 to justify its current price. Firm's $4 target is based on a sum of the parts valuation.
Semiconductor Equipment . . . Moors & Cabot downgraded Cymer to Sector Perform from Sector Outperform based on valuation, as the stock has almost reached their $36 target. Also, the company's mid-quarter update is likely to be cautious, and checks indicate that litho suppliers are not showing any pickup in demand.
Semiconductors . . . Goldman Sachs downgraded Qlogic (networking chips) to "underperform" from "in line," citing valuation and long-held concerns about risks to industry growth. She believes the company has "earned its place with investors" and deserves a premium valuation, but at current levels she feels the near-term risk outweighs the potential reward.
Taiwan Semiconductor Manufacturing said its May sales grew 10.6 percent from the same month last year to NT$16.8 billion ($484 million). The figure also represent an 10.1 percent increase from April. The company's shares advanced 0.85 percent to NT$59.
Software . . . CS First Boston downgraded Check Point Software to "underperform" from "neutral" due to valuation, given that the stock is trading well-above the new $17 price target. Analyst Todd Raker said his fundamental thesis on the company remains unchanged, but believes the company will continue to lose market share to rivals Cisco Systems and NetScreen.
J.D. Edwards said Oracle's hostile bid to buy PeopleSoft could possibly violate U.S. and European antitrust laws, given that it would "sharply reduce" options for business software customers. Meanwhile, the company said its merger with PeopleSoft was a "positive, bold step" that would share the future of the industry. PeopleSoft announced an agreement to buy J.D. Edwards on June 2.
J.D. Edwards officials cited the benefits of a merger with PeopleSoft while at the same time raising the specter of antitrust and integration issues should Oracle's $5.1 billion hostile takeover attempt of PeopleSoft be approved. Speaking at an annual customer event in Denver, J.D. Edwards CEO Bob Dutkowsky said a combined Oracle-PeopleSoft business would be large enough to bring up "serious antitrust problems" in the U.S. and aboard because its would leave customers with fewer software choices. Dutkowsky said J.D. Edwards approached PeopleSoft last fall about merging but that there was never a "for sale" sign on J.D. Edwards.
Merrill Lynch said that SAP could benefit if Oracle succeeds in taking over PeopleSoft, but is unlikely to become a target of bids itself and called Friday's share price gains "hard to justify." It reiterated its neutral outlook. SAP could benefit because of Oracle's desire to force PeopleSoft customers to its products; clients may opt to switch to SAP instead if forced to switch, the broker reasoned. SAP shares were off 1 percent in Frankfurt.
M&A activity really took off in the enterprise software market last week, starting with PeopleSoft’s announcement that it planned to acquire JD Edwards in an all-stock deal worth $1.7 billion (at the time). Following that, Software AG was bid up following an article in German financial daily, Boersen-Zeitung, that it was a potential bid target for either Microsoft or IBM, which was subsequently denied by Software AG. Finally, Oracle tabled an unsolicited cash offer for PSFT in a deal worth $16 per share, or $5.1 billion. The ORCL bid really set things alight and just about every stock in our coverage universe took off, although share prices pulled back by the close of the European trading day, and even further following the European close but by the end of trading in the US.
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