Tonight looking back at the BP Indices I note that it is possible for the BPNDX to fall fairly precipitously without the NASDAQ losing a tremendous percentage of its value.
Unfortunately it is also possible for the NASDAQ to fall very hard. Today the BPNDX lost another 2 buy signals. This is the largest drop in buy signals so far since the uptrend began back in March.
Into the fourth month of a bull market climb, the natural inclination would be to expect some form of conventional correction. Instead, pull backs are short, and the "buy on dips" crowd is unable to buy on dips. This leads to frustration, triggering buy programs, and short covering that allows the rally to feed on itself. The result today was another unexpected stunner that lifted the popular averages to new highs for the year. The S&P 500 jumped 22 points (+2.3%) to 1,010, the first close above 1,000 since June 20, 2002, and biggest jump in two and a half months. The DJIA rose 201 points (+2.2%) to 9318. the highest close since July 5. The Nasdaq added 40 points (+2.5%) to 1667. Twelve stocks rose for every five that fell on the New York Stock Exchange. Some 1.31 billion shares traded on the Big Board, 8.5 percent less than the daily average over the past three months. Upside volume trounced the downside volume. Also notable was 410 new Big Board highs, against 7 new lows.
Top Stories . . . Manufacturing in New York state expanded at a stronger-than-expected pace this month, led by more orders and sales, a Federal Reserve report showed.
American Express, the fourth- largest issuer of credit cards, agreed to buy London-based Threadneedle Asset Management Holdings Ltd. for about $570 million in cash, its biggest acquisition in almost two decades.
Airbus SAS and Boeing Co., the world's two biggest planemakers, won orders from Emirates, the Middle East's fastest-growing airline, for a total 67 new planes, which the carrier valued at as much as $19 billion.
Guidant, the world's largest maker of heart stents, said it will stop making implanted devices that caused it to settle with the U.S. government last week because the company concealed defects linked to 12 deaths.
PeopleSoft, trying to fend off a hostile takeover by Oracle Corp., revised its $1.76 billion all- stock offer for rival business-software maker J.D. Edwards & Co. to pay half of the price in cash.
Rite Aid's former chief executive officer, Martin Grass, will plead guilty tomorrow in federal court in Harrisburg, Pennsylvania, where he was scheduled to begin trial next week on accounting fraud charges.
Of Note . . . Ford Motor holds its annual meeting, celebrating its first 100-years.
On the flow of funds front, equity mutual funds received more than $1.5-billion in the week that ended on Wednesday -- the 13th straight week of inflows. Meanwhile, the cover story of the weekend Barron's proclaimed the bull market is no flash in the pan, while Ned Davis, a widely followed market guru, told the publication that the market still has 10% left.
Broad Rally of Note . . . The S&P 500 scored its eighth advance in nine weeks, and now sits 23% higher than the March 11 low.
Gurus . . . Ned Davis, who monitors developments from his perch in Venice, Florida, is impressed with the enormous stimulus in the boiler, on the Fiscal and monetary side. While his asset-allocation is 65% stock, 30% bonds, and 5% cash, he feels that bonds are not a good hiding place. He feels the averages could rise another 10% or more, and the major institutional spur will come from pension funds overweighted in bonds, and now shifting to stocks. And while classifying the advance as a cyclical bull in a secular bear, Davis says that other cyclical bulls have advanced as much as 50%, and lasted as long as 371-days.
Byron Wien, strategist for Morgan Stanley, says his valuation model, which employs Treasurys, corporate earnings growth, and an equity-risk premium, suggests the S&P 500 is 45% undervalued. By year-end, he predicts the Dow will reach 10,000, about 10% above its closing level on Friday, and the S&P 500 might hit 1100, a gain of 11%.
Eco Speak . . . Conditions in the factory sector in the New York region improved markedly in early June, the Federal Reserve Bank of New York said Monday. Its Empire State index of manufacturing conditions rose to a record 26.8 from 10.6 in May. Readings over zero show growth in the sector. New orders rose to 16.1 from 10.5. Shipments rose to 15.3 from 13.2. The index mimics the national Institute of Supply Management survey that's due out next week. The New York Fed survey was instituted at the beginning of 2002.
The Wall Street Journal reported the U.S. agriculture sector is showing strong signs of revival after spending five years in a recession. Commodity prices have been increasing combined with exports climbing. The revenue farmers generate this year is projected to increase. In addition, the Bush administration also increased the amount of federal aid being distributed to farmers by nearly double this year to $21.4 billion. The article mentions companies such as Tyson Foods who are benefiting from the robust agricultural upturn.
Hot IPO . . . San Francisco-based e-commerce firm Red Envelope filed plans to raise up to $41 million in an initial public offering with underwriter WR Hambrecht. Red Envelope plans to trade on the Nasdaq under the ticker, "REDE." The company takes its name from an Asian tradition, in which gifts are presented in a red envelope, "a timeless symbol of good fortune, love and appreciation," the company said. The company rang up a loss of $7.7 million on $70 million in revenue in fiscal 2003, vs. a loss of $14.1 million and revenue of $55.8 million in the previous period. It's the most recent so called "Dutch auction" IPO deal from underwriter W.R. Hambrecht, which advocates a system that provides IPO shares to institutions and individuals on equal footing.
Fed Deficit going Higher . . . The Federal budget deficit appears to be on track for $500 billion in the fiscal year end September 30, based on numbers released earlier this week which placed the monthly (May) shortfall at $90 billion. Consensus currently centers on the $400 billion mark, although the Congressional Budget Office (CBO) did note last week that the 2002 shortfall may now be more than $400 billion. Through May, the current fiscal year deficit has totaled nearly $300 billion, nearly double the pace of a year ago.
There are signs of stabilization on the revenue side of the ledger. Individual tax receipts withheld were unchanged in May, compared to April on a seasonally adjusted basis, consistent with indications of some steadying in labor market conditions in the private sector. They remain 6% below year-ago levels, however. And while corporate profits are improving and corporate tax receipts are expected to follow suit, keep in mind that such receipts represent just 8% of total Federal revenues.
In the meantime, delays in the appropriations process should keep discretionary spending rising at a double digit pace. Indeed, they should rise more than 11% through the end of the fiscal year. This should be particularly noticeable at defense vendors. With withholding tables being adjusted for the tax cut and child credit checks being mailed, prospects for a half-a-trillion-dollar budget deficit are improving.
Homeland Security . . . Barron's article highlights companies that will benefit from the homeland security act due to their focus on biometrics. The following companies were mentioned as potential beneficiaries: American Science & Engineering, Armor Holdings, Drexler Tech, Flir Systems, Identix, Invision, Kroll, L-3, OSI Systems and Verint. Biometrics is essentially the science of identification built on physical characteristics which cannot be duplicated. The government has earmarked $385 million in this year's defense budget to get the border identification program started and projects spending another $2 billion in 2004.
Tech Investing . . . Lehman downgrades the Tech sector to Neutral from Overweight, saying earnings revisions have run well ahead of those for the rest of the market and a period of convergence is now likely. However, firm says Tech does not appear expensive, especially software.
Financials . . . American Express agreed to buy Threadneedle Asset Management for $570 million from Zurich Financial Services. Threadneedle is to continue to manage some of Zurich's British assets for up to eight years. It will also maintain its name, Zurich Financial said. The deal is subject to regulatory approval and is expected to close by year-end.
SEI Investments was upped to Outperform at Barrington. Price target $45. The firm believes that SEIC should benefit from the recent strength in financial assets and our outlook for a more positive stock market environment for the remainder of the year. Notes that stock currently sells at the low end of its ten year P/E ratio.
Real estate investment trust Equity Inns closed a $110 million unsecured revolving credit agreement with six banks. The line carries a variable interest rate ranging between 2.5 percent and three percent above LIBOR, depending on certain ratio of debt and earnings. The line replaces an earlier $125 million line. Equity Inns said with the new line in place, it has no debt maturing until 2007. Banks in the syndicate include Bank One, Credit Lyonais, Fleet National, National Bank of Commerce, AmSouth Bank and Union Planters National Bank.
Capital One released Auto Trust data for May. Overall, delinquency rates increased partly reflecting seasonality. All of the series passed their trigger and compliance tests. The 60+ day delinquency rate increased for all six series. This is consistent with seasonal trends after the first quarter. Of the six, the 2002-C and 2003-1 series, are newer securitizations seasoned only for 5 and 2 months respectively. The lack of seasoning for these two series may also have contributed to the rise in delinquencies. Extension rates were higher in three of the six series, down in one and basically flat in one series (up 2 bp sequentially). The trust data for the 2003-1 series did not include extension rates. This could be because the company may not be allowed to provide extensions until a series has seasoned for a few months. Performance tests consist of the reserve fund trigger and the insurance agreement tests (both based on the average delinquency rate and cumulative loss rate) and a compliance test based on the average extension rate. In May, all of the series were in compliance with these tests. The auto trust data for May partly reflects a normal seasonal rise in delinquencies. Auto lending will be a more significant contributor to loan growth as relatively little card account growth could limit card balance growth.
Chubb plans to raise a total of $1.2 billion in two separate offerings of stock and equity units. The insurance firm plans to sell 13.5 million common shares, and 16 million equity units at a price of $25 per unit. The deal includes an over-allotment option for the sale of up to 2.025 additional common shares, and up to 2.4 million additional equity rights.
Fannie's Mae's May monthly numbers were largely as expected. Liquidations rose again, the retained portfolio didn't grow, MBS portfolio growth remained strong, credit quality remained high, and interest rate risk measures reflected the challenges of declining rates but still remained in ranges that we are comfortable with. Refinance induced portfolio liquidations restricted growth in the retained portfolio (-3% annualized rate). But commitments surged, which will translate into solid growth in June despite the further increase in liquidations expect. MBS growth remains very strong (14% annualized rate), reflecting lenders' preference for the company's execution in the current environment. Fannie Mae maintained its market share gains on Freddie Mac in May and that this will persist for at least the next couple of months. Fannie Mae's duration gap widened to -5 months in May, but this still remained within the company's targeted range of +/-6. The further decline in rates in June may push this metric further out, but do not expect it to reach the levels seen last Fall which alarmed the markets - Fannie Mae remains conscious of the ramifications.
Homebuilders . . . Toll Brothers CEO Robert Toll filed to sell up 1 million shares.
Oil & Gas . . . ConocoPhillips is set to begin work on a $1.5 billion gas development project in Darwin, Australia after receiving final approval from the Timor Sea Designated Authority. ConocoPhillips said the project will involve a gas pipeline from the gas field, Bayu-Undan, to Darwin and a liquefied natural gas facility located at Wickham Point, Darwin. According to the company, the Bayu-Undan gas field is thought to hold 400 million barrels of condensate and liquefied petroleum gas and 3.4 trillion cubic feet of natural gas.
RBC Capital Markets has become cautious on the near-term outlook for the oil service group due to recent negative gas injection trends and our assessment of reduced reward/risk profile and historical seasonal trading patterns. Leads firm to downgrade 13 sector names to Sector Perform (from Outperform) and 5 names to Underperform (from Sector Perform).
Deutsche Securities revised their ratings on major oil stocks. The firm upgraded Royal Dutch to Buy from Hold based on global gas strength and structural recovery, and downgrades British Petroleum and Exxon Mobil to Hold from Buy and downgraded Chevron Texaco and Norsk Hydro to Sell from Hold, all based on valuation.
Parker-Hannifin was upgraded at CSFB to Outperform from Neutral and raised their target to $54 from $45. While concern over aerospace has hampered results and the market remains skeptical about the long-anticipated improvement in Europe, if the industrial economy does turn. The firm says PH will be early out of the blocks.
Transocean Sedco expects revenues for 2nd quarter 2003 to be "at or slightly below" 1st quarter 2003 revenue levels or $616 million versus consensus of $620 million. The company cited recent incident on its Discoverer Enterprise drillship, unexpected downtime on several other rigs and an approx $10 million loss of revenues due to Nigeria labor strike.
Energy . . . TECO Energy sold $300 million of senior unsecured notes late last week after boosting the planned amount from $200 million due to strong demand. The notes were priced at 98.9 percent of par, and with a 7.5 percent coupon will yield 7.7 percent. The company said the proceeds would be used to pay down existing debt and for general corporate purposes. The diversified energy company's CFO, Gordon Gillette, said, "This was an excellent opportunity for us to access the capital markets during a period of favorable interest rates, and we experienced strong investor demand in both the high grade and high yield markets."
Industrial Equipment . . . Caterpillar price target is raised to $65 from $59 at CSFB.
Defense & Aerospace . . . Boeing said its 7E7 "continues to be on track to seek authority to offer the airplane later this year." Boeing said that airframe candidate companies selected to participate in the design and manufacture of large subassemblies include: Alenia Aeronautica, Fuji Heavy Industries, Kawasaki Heavy Industries, Mitsubishi Heavy Industries and Vought Aircraft Industries as external candidates.
Boeing forecasted a $5.2 trillion market for new commercial airplanes and aviation services over the next 20 years. The forecast was released at the Paris Air Show, which started over the weekend and lasts for the week. Boeing is estimating the world fleet will more than double to 34,000 jets by 2022, comprising approximately 18,400 airplanes for market growth; 5,900 airplanes for replacement; and 9,700 airplanes currently flying. It said that is sees the mix of current and new airplanes to accommodate a forecast of 5.1 percent per year growth in world air travel. It said regional growth varies between 4 and 7.3 percent, with Latin America expected to be the fastest-growing region.
Transports . . . Bill Ford Jr., head of Ford Motor, said at the company's annual shareholder meeting that the No. 2 automaker is on track with its restructuring plan and expects to report a "slight increase" in its share of the U.S. market. The company's CFO is expected to speak later.
Frontier Airlines got an upgrade at Morgan Stanley. William Greene told clients data suggests pricing in the discount carrier's top markets has stabilized and is moving higher, leading him to believe the company will return to profits within the next 12 months.
Harley-Davidson commentsed on retail sales and issued a statement clarifying remarks in light of a nonintentional comment that one of its executives made regarding the prospect of strong June retail sales of Harley-Davidson motorcycles. The comment was based on 10 days of June retail data. "We are pleased with the retail performance our dealers have experienced since the weather improved in the second quarter. The quarter is still a few weeks from being over, but we are expecting that Harley-Davidson retail registrations in the quarter will grow faster than the overall motorcycle industry."
DaimlerChrysler concerns were highlighted in Barron's. The article focuses on concerns associated with DCX's Chrysler division which stunned the street by saying it would lose $1.2 billion in the second quarter and might just breakeven. In addition, the co's share of the U.S. vehicle market continues to decline going from 16.2% five years ago to 13.6% today. An auto analyst comments on the company by stating, "This is a merger that just didn't work, and, quite frankly, didn't ever have much chance of working." The company is also facing even more pressure from a car market which is being paralleled by industry analysts as the "worst crisis" for the Big Three automakers since they posted a loss of $7.5 billion in 1991.
Food & Beverage . . . Dreyer's Grand Ice Cream said that the deadline for its $2.8 billion merger with Nestle S.A. has been extended until June 30. Dreyer's and Nestle agreed to the extra time in order to obtain clearance from the Federal Trade Commission, which must approve the deal. In March, the FTC voted to block Nestle's $2.8 billion buy of Dreyer's because such a merger would eliminate competition and raise prices for super premium brands. Since then the companies have made changes to the deal and are expected to sell all their premium brands, including Starbucks-branded ice cream, as well as distribution assets to Coolbrands International to gain FTC approval.
Consumer Products . . . Gillette was downgraded at AG Edwards to Hold from Buy based on valuation, as the shares are close to their previous price target of $36.
Retail . . . Best Buy said an affiliate of investment firm Sun Capital is buying all the capital stock of the troubled Musicland Group in a cash-free transaction. In exchange for the stock, Sun Capital is taking all of Musicland's liabilities, including lease obligations. Musicland is a leading specialty retailer of home-entertainment software products and operates 1,100 U.S. stores as Media Play, Sam Goody and Suncoast. Best Buy, which has struggled with Musicland since purchasing the company two years ago, said in March that it would unload the business as part of a wider strategic plan.
Kmart said its loss reached $862 million in its first fiscal quarter, against a year-earlier $1.44 billion loss. The company said its loss before interest, reorganization items, income taxes and discontinued operations was $32 million, compared with a loss of $920 million during the same period a year ago. The year-ago results included a charge of $542 million related to store closings. Net sales for the period were $6.18 billion, down 13.9 percent from $7.18 billion a year ago. On a same-store basis, sales fell 3.2 percent from last year's first quarter. As of April 30, the company said it had about $1.23 billion in cash and cash equivalents and could still borrow $1.5 billion of its $2 billion credit line.
Healthcare . . . WebMD agreed to acquire privately held Advanced Business Fulfillment, a provider of healthcare claims communication services. The consideration includes $110 million in cash at closing, and up to an additional $150 million beginning in April of 2004 if certain milestones are achieved. The additional payment may be made over a three-year period in WebMD common stock or cash based on certain circumstances.
Community Health System, a rural acute care hospital company has 70 facilities and expected 2003 revenue of $2.73 billion and EBITDA margins of 16.2%. CYH's near-term outlook for near-term top-line growth is the best in industry, driven by the expectation of nine acquisitions in 2003. Although the company's cash flow has improved significantly over recent years, do not believe current growth rates are sustainable into 2004 without additional funding, a potential risk if the capital markets deteriorate. CYH's relatively young portfolio (34% of beds in service have been acquired since 2000) offers the opportunity for long-term margin expansion, however, a more restrictive healthcare environment and several recently completed acquisitions could depress margins in the near-to intermediate-term. CYH posted negative 0.4% same store admission growth in the March quarter, well below annual 3%-4% guidance, which remains unchanged as of this point, creating the potential for a reduction in expected same store admissions if recent trends persist.
HCA Healthcare is an urban acute care hospital company with 185 facilities and 82 outpatient surgical centers. 2003 expected revenues are $22 billion and EBITDA Margins 19%. HCA continues to have the largest capital spending budget among peers, both on an absolute and per bed basis illustrating one of the company's cornerstone strategies, which is to drive above market average patient volumes and reimbursement levels through facility investment (i.e. expanding service offerings and improving outcomes). HCA's favorable demographic profile should enable the company to drive strong future returns from current capital investments. However, near term operational scalability may be limited as recent patient volume weakness may be prolonged hindering EPS growth (although HCA's current $1.5 billion share repurchase program should somewhat offset this). Despite this near term concern, our analysis of HCA's enterprise value to its demonstrated return suggests the current stock price significantly discounts HCA's true "asset" value reversing an 8-yr. relationship and thereby supporting the outperform rating.
C.R. Bard has acquired substantially all the assets of Source Tech Medical, a developer, manufacturer, marketer of radioactive isotopes used to treat prostrate cancer patients. Terms were not disclosed. BCR says transaction will not change its Y203 guidance.
Medical Devices . . . Guidant plans to discontinue its Ancure Endograft system product line for the treatment of abdominal aortic aneurysms. The company said there is no risk to patients currently implanted with the Ancure Endograft system, and that it will continue to ship product and provide support to implanting Ancure physicians and their patients through Oct. 1, 2003. The company is discontinuing operations of its Endovascular Technologies unit, and it expects a total after-tax loss from discontinued operations of between $100 million and $125 million for calendar 2003. Last week, Guidant reached a settlement to settle felony charges related to the Ancure Endograft system, paying more than $90 million.
Guidant will discontinue Ancure Endograft System product line for the treatment of abdominal aortic aneurysms (AAA). GDT anticipates the reported total after-tax loss from discontinued operations, including settlement charges, cost associated with closing the business and operating losses to be $100 to $125 million.
Drugs . . . Amylin Pharms reported Phase III results for type 2 diabetes treatment. Amylin and Eli Lilly announced that results from a Phase 3 open-label study of exenatide, a novel drug candidate for the treatment of type 2 diabetes, showed that more than half of the participants who completed 20 weeks of treatment achieved average glucose levels within the American Diabetes Association's (ADA) target range. Analysts estimate exeantide could be approved 2005 and have a peak sales of $500 million-$1 billion.
Amgen and Wyeth reported that Enbrel offered significant relief for RA patients. Enbrel combination therapy inhibited progression of joint damage and offered significant symptom relief for rheumatoid arthritis (RA) patients.
Eli Lilly was upgraded at Fulcrum to Buy from Neutral and raises target to $75 from $65. The firm is saying the company's sales and earnings growth appears to be entering a solid double-digit phase beginning in 2004 following the flat EPS trend expected for the 2003.
Watson Pharma was upgraded from an Underperform to a Peer Perform based on an improved outlook for 2003 and 2004. Shares are now trading at 21.7x and 19.5x revised EPS estimates for 2003 and 2004 of $1.85 and $2.05, respectively. While there is not significant near-term upside to stock performance, the company is better positioned than it has been in years. Since October of last year, Watson has made several key management changes which now giving analysts significantly more comfort in the near and long-term strategic direction of the company. Watson has made significant headway in rebuilding senior management following the departure of Fred Wilkinson in 2001. Joe Papa, currently President and COO joined the company in November 2001 as COO and was later promoted to President last October. Joe Papa, has made significant advancements in rebuilding both the branded and generic businesses utilizing his extensive industry experience (DuPont, Pharmacia and Searle). Furthermore, Joe has added key hires in the generic business within the last year to help rebuild the company’s pipeline, and improve both manufacturing efficiency and customer service. The recent appointment of Charles Slacik as CFO is a strong positive as the company now has strong leadership on both an operational and financial front. The underlying fundamentals in Watson’s generic business continue to show signs of improvement and are expected to show further improvement through expected top line revenue growth driven by several product alliances/supply agreements. Year to date, Watson has already completed four alliances for 9 products. Recently, Watson has expanded its product development alliance with Cipla which now includes up to 26 products or which one ANDA could be filed this year. The company’s agreement with GlaxoSmithKline assumed to be related to generic Wellbutrin SR should allow Watson to launch an “authorized generic” bupropion product in 2003 or 2004. In total the company currently has 20 ANDAs pending at FDA (70+ in development), with 5+ generic product launches expected before year-end. While the company had underinvested in its generic business in prior years, its recent strategic initiatives (i.e. Cipla and GSK) are expected to drive top-line segment growth. Additionally, Watson expects to file 10-15 ANDAs in 2003. Watson’s focused niche branded business is also expected to show significant growth in 2003 resulting from the launch of Oxytrol, the acquisition of Fiorinal/Fioricet product line from Novartis and additional oral contraceptive (OC) product launches. The company expects to launch three additional OC’s this year (four launched YTD) and continue to increase market share. While Barr Labs and to a lesser extend Andrx (expected to enter OC market late this year or in 2004) are expected to increase competition in the space, expect that Watson could still increase market share as Ortho Tri-Cyclen comes off patent this year or next. Importantly, pricing remains strong in this OC market. Additionally, Watson has four brand products pending at FDA or in phase III clinical trial. Management is now in the process of addressing manufacturing efficiency and customer service levels which have been somewhat overlooked in recent years. Anticipate that manufactured gross margins will improve over the next several years as the company improves capacity utilization. In light of these improvements to the branded and generic businesses and increased confidence in management, we are increasing our 2003 and 2004 EPS estimates to $1.85 (from $1.78) and $2.05 (from $1.88), respectively. Expect 2nd quarter 2003 EPS to come in at $0.45 or at the high end of recent guidance of $0.43-$0.45. While the promotional costs associated with the recent launch of Oxytrol create added pressure to EPS during the 2nd half 2003, believe that improved underlying fundamentals in Watson’s generic and branded businesses will support our EPS growth estimate of 14%.
Banc of America believes that that low expectations for Pfizer's analyst meeting should provide opportunity for upside. Firm continues to stress that Pfizer's pipeline is under-appreciated and would buy the stock ahead of the meeting. Notes that a potential adjustment in 2003 EPS guidance should not be perceived as a negative; due to the slight delay in the closing of the Pharmacia Merger, 03 guidance could be tweaked lower.
Biotech . . . Cell Therapeutics received fast-track designation for its Xyotax treatment for advanced non-small cell lung cancer from the Food and Drug Administration for patients with poor performance status. Xyotax is currently in two phase III trials for these patients, the company said, and a new drug for Xyotax is targeted for the end of 2004.
Media . . . Soundview Technology Group's raised its rating on Yahoo! to 'outperform' with a $35 price target. "Yahoo is in the sweet spot of the Internet right now - benefiting from broadband adoption, increased e-commerce activity, uptick in search revenues, and a surprisingly robust spot market for online advertising," the firm said in a research note to clients. "We believe the streak of earnings upsides will continue into 2004, and, as such, are willing to accept a premium valuation."
BT Group announced a marketing alliance with Yahoo. The venture, to be called BT Yahoo Broadband, will replace BT's Openworld brand. BT is aiming to take on rivals AOL Time Warner's AOL and Freeserve, the British Press Association reported. The service, which offers anti-virus protection, integrated parental controls and 100Mb of web space for £29.99 a month, is expected to launch in September. BT Group on Monday said it's aiming for 5 million broadband customers by 2006.
Tribune is saying consolidated revenue rose 6 percent in May to $452 million from $429 million in the same period a year earlier. The media firm also forecast earnings of 54 to 60 cents per share for the second quarter, surrounding the consensus estimate for a profit of 57 cents per share. The company sees a mid-single digit increase in consolidated operating expenses for the first half of 2003, and a decrease to low-single digits in the second half.
Hotel & Leisure . . . Priceline said it effected a 1-for-6 reverse stock split of all outstanding shares of its common stock at 12:01 a.m. Monday and said it was "comfortable" with second quarter estimates. The move means holders will get one share for every six. As a result of the reverse split, PCLN changed its targets. On a post-split basis, Priceline said it sees earnings between 12-18 cents a share "and we remain comfortable with estimates within that range." The average First Call consensus earnings estimate for the second quarter 2003 was for net income of $3.6 million, which translates to 10 cents per share on a post-split basis, it said.
Alliance Gaming was upgraded at Deutsche to Buy from Hold based on their increased confidence in better than expected gaming and systems sales over the next few quarters, as well as continued growth in the installed base of recurring revenue games. The firm raised target to $21 from $19.
Choice Hotels was cut to Neutral at UBS based on valuation, as the stock has reached their $27 target.
Telecom . . . Nextel Communications will redeem all of its 13% Series D Exchangeable Preferred Stock. It said the move will reduce Nextel's annual preferred dividend obligations by about $60 million. "This move is another important step forward in Nextel's efforts to further strengthen our balance sheet, improve our credit profile and enhance free cash flow," said CFO Paul Saleh in a statement.
With wireless usage increasing & 3G upgrades on the horizon, demand for spectrum continues to rise. Legislators, the FCC, and the Bush Administration has been vocal about making more spectrum available. In light of this and the recent press reports, let’s take an opportunity to outline the issues around NextWave and highlight some of the potential outcomes.
NEXTWAVE / CINGULAR DEAL? Press reports have surfaced in the past few weeks suggesting that Cingular will acquire $1.5 billion in licenses from NextWave. Checks indicate this is a possibility, but caution that any process involving NextWave and the federal government could take some time to resolve. NextWave’s next scheduled bankruptcy court date is Tuesday, June 17th. There are 4 scenarios; 1) liquidation of all licenses, 2) partial liquidation of profitable licenses, return unprofitable licenses to FCC, 3) partial liquidation and buildout of data network with leftovers, and/or 4) enter into spectrum leasing deal with others. It likely that FCC and NextWave will arrive at a consensual resolution resulting in a combination of these scenarios.
While getting spectrum into the hands of the carriers is important, that carriers could solve spectrum shortages through an auction process rather than through consolidation is negative for the industry, as it lessens the incentives for the carriers to merge. Continue to rate the sector Market Underweight.
Among stocks, expect AT&T Wireless to bid, and Sprint PCS and Nextel to remain on the sidelines unless the process is delayed beyond the resolution of NXTL’s spectrum swap. Given AWE’s position as the safe haven with the cleanest balance sheet, the stock could slip were the company to increase its net debt substantially in acquiring spectrum, but see its interest at only $1-2 billion.
Verizon Wireless management mentioned that some potential customers are currently trialing Verizon Wireless’s push to talk product. Tom Lynch, President of Motorola’s Personal Communications Sector (handset) business at the Bear Stearns Technology conference in which confirmed Motorola would ship CDMA-based push to talk handsets in 3rd quarter 2003. Phil Cusick, a wireless services analyst, has been speaking with several corporate wireless telecom buyers who have indeed been using Verizon Wireless’s PTT product on a trial basis. These corporations have been advised that they may take receipt of Verizon Wireless PTT handsets as early as July, though some corporate buyers have been advised to wait until several months after the formal launch of PTT to allow the company time to work out any potential software kinks.
Number Portability Impact on Verizon Wireless. Management hypothesized that wireless industry net adds could be light in 3rd quarter 2003 if service providers heavily promote the ability to switch providers when number portability takes effect on November 24, as consumers might then wait until 4th quarter 2003 to begin new service with their existing wireless number.
Share expansion of enterprise accounts is a significant focus for Verizon Wireless. The ability to offer customers a single bill has been a significant driver of corporate acceptance (Verizon Wireless has consolidated down to six or seven billing systems, improving billing efficiency in the process). Verizon Wireless is also selling corporations on network quality. Data capabilities does not yet seem to be a major driver of enterprise demand.
Verizon Wireless management indicated that minutes of use have been growing about 35% year/year for the past several months. This compares favorably to 2nd quarter 2003 growth estimate of 23%. Overall churn in 2nd quarter 2003 should be similar to 1st quarter 2003’s 2.1%. Verizon Wireless has found that two major drivers of keeping churn in check are network quality and its “Worry Free Guarantee” plans (customers can change to any qualifying price plan or airtime promotion at any time and get a free new phone every two years if they sign up for Verizon Wireless’s “New Every Two” two-year contract).
ARPU has been increasing, in part due to early traction with data offerings and new customers signing on to higher than average ARPU plans. For example, a key driver of net adds have been adopters of Verizon Wireless’s Family SharePlan in which an additional line can be added for a family member for $20 per month and all lines share the monthly airtime allowance of the primary plan. Family SharePlan users tend to have higher than average ARPU (and lower churn). Verizon Wireless has no intention of offering an unlimited minutes plan at this time.
Verizon Wireless management stated that wireless/wireline bundled plans numbered “in the low tens of thousands” (this should not be confused with Verizon’s ONE BILL single wireless/wireline bill initiative; the bundle offers a discount on wireless in exchange for a customer taking multiple service offerings). Verizon Wireless management speculated that such bundles were more important for its competitors, who are struggling for market share. Prepaid wireless churn continues to decline and is now in the mid to high single digits.
Verizon Wireless should completely finish its IXRTT buildout in the next 30 to 45 days. IXRTT provides about 2x the voice call carrying capacity of CDMA, based on Verizon Wireless’s testing. At the end of 1st quarter 2003, 20% of Verizon Wireless’s customer base had 1XRTT handsets. EV-DO deployments will be limited in nature; Verizon Wireless’s longer term strategy revolves around nationwide EV-DV deployments, which should begin in late 2004/early 2005. EV-DO is capable of data rates of up to 384 kilobits per second for mobile users and up to 2.4 megabits per second for stationary users. Verizon Wireless currently has EV-DO trials in place in Washington DC and San Diego, two areas where the company has a particularly deep spectrum position. Spectrum is an important consideration when deploying EV-DO. Unlike the migration to 1XRTT, EV-DO requires dedicating at least one 1.25 MHz carrier upstream and downstream to data-only traffic, which decreases the spectrum available to support voice traffic. Verizon Wireless management contends that WiFi is merely a near-term “fill in” strategy where high speed data capabilities are not yet in place. Management also indicated that capital spending in 2003 would be smoother across quarters than in previous years.
IT Services . . . Register.com said co-founder Richard Forman has resigned as president and CEO, effective immediately. Peter Forman, Richard's brother and co-founder of the company, will assume both positions. Richard Forman will continue to serve on the board.
Loudeye inks distribution pact with DMI, it is a seven figure technology licensing and distribution outsourcing agreement through which Loudeye will enable DMI to provide a broadband content service to its Japanese partners. Loudeye is providing a complete media management and distribution system to support the streaming and downloading of digital audio and video content for DMI to be used with their Broadband ISP and content partners.
Storage . . . Seagate Tech price target raised to $23 at Fulcrum.
Network Equipment . . . The U.S. government put a bid out for a wireless network to be built in Iraq. The wireless system there will be built on a standard, GSM, prevalent in Europe. Alcatel is a big supplier of networking gear based on the GSM standard. Alcatel also picked up a $150 million contract to build a satellite to be used for wireless services across the continent of Africa.
Nokia said it doesn't expect large volumes of 3G phones in the market until 2nd half 2004.
Semiconductors . . . Moors & Cabot believes that recent run up in Micron has been related a recent firming of DRAM pricing, as investors speculate on the sustainability of demand trends. In an internal call, firm indicates that it does not believe demand trends will be sustainable, and thus believes pricing in the DRAM market will decline after almost two months of stability. Recommends that investors reduce their exposure to the stock, on view that there is significant downside potential versus upside from current levels.
Bear Stearns checks indicate that bookings for high performance analog components, while still healthy, have flattened out after a strong start to the year. Firm believes that book-to-bill ratios are poised to decline as we head into the summer, which could cause revenues to flatten out as we progress into 2nd half 2003. This could impact ADI's October and January-ending quarters. Firm believes revenue upside potential could be limited later in the year.
PMC-Sierra was upped to Sector Perform at CIBC based on valuation. Firm views PMCS as a premium company in the sector that should outperform most peers. Also comments on co's exposure to access networks and sees PMCS as a beneficiary of increased DLS rollouts, which should keep shares at a premium valuation.
Boxmakers . . . Gateway CFO Rod Sherwood reiterated the company's guidance on cost savings ($200 million from COGS and $200 mm from SG&A) from its restructuring efforts as well as consensus estimates for revenue and EPS in the three remaining quarters of the year (GTW had previously issued these financial expectations at its analyst meeting on May 8). Commenting on the June quarter, Sherwood indicated that April and May had tracked to plan, but demand in June was too early to call. Sherwood highlighted the continued strong uptake for notebooks, particularly in corporate. Although not new guidance, Sherwood stated GTW’s plan to drive towards a cash flow positive profile by 4th quarter 2003, with the stretch goal of turning profitable on an EPS basis. During his presentation, Sherwood highlighted Gateway's transformation plan -- recently outlined in detail at the company's analyst meeting -- from a PC-centric manufacturer to a "branded integrator" of packaged technology solutions, with a focus on PCs, digital TVs, home entertainment and imaging in consumer and servers, storage, services and switches (in addition to PCs) in corporate. While Sherwood expects Gateway to be profitable in 2004 and sees the potential for “significant" profitability in 2005, analysts are more skeptical given the competitive landscape and the company’s historical track record. Analysts are maintaining estimates for 2003 of an EPS loss of $1.00 on revenue of $3.36 billion (down 19% Year/Year) and for 2004 of an EPS loss of $0.50 on revenue of $3.38 billion (up 1% Year/Year).
Software . . . SG Cowen came away from a recent conference call with Macrovision's chief financial officer saying pricing for DVD copy protection products should remain 'fairly stable' this year. The firm rates Macrovision a 'strong buy' with a $20 price target.
Oracle appealed to PeopleSoft shareholders in a full-page Wall Street Journal ad on Monday, telling them they have a choice between PeopleSoft's (current management and Oracle's hostile bid. The ad charted PeopleSoft's stock slide from around $40 in December 2002, to $15.11 before Oracle's offer on June 5. A separate chart demonstrated a slide in new license sales growth over the same time period.
Oracle and PeopleSoft both took out full-page ads in the Wall Street Journal Monday in efforts to appeal to PeopleSoft's shareholders in the latest round in the company's hostile takeover fight. In his letter, PeopleSoft CEO Craig Conway called upon those considering buying PeopleSoft's products to show their support for the company by moving forward with their purchases. Oracle's ad highlighted the company's all-cash bid for PeopleSoft as more secure than holding on to PeopleSoft's stock.
PeopleSoft increased its bid for rival software maker J.D. Edwards , in hopes of closing the deal quickly. PeopleSoft is facing a $5.1 billion hostile bid from Oracle Corp. Based on PeopleSoft's closing price Friday, each J.D. Edwards common stock would be worth $14.33, valuing the deal at $1.75 billion, up from $1.7 billion previously. And instead of an all-cash deal, shareholders will receive a combination of $863 million in cash and $52.6 million in new PeopleSoft shares. Each J.D. Edwards stockholder can choose cash or stock, subject to proration.
Standard Microsystems reported first-quarter income from continuing operations of $1.9 million, or 11 cents per share, compared to $400,000, or 2 cents per share in the year-ago period. Real estate and securities transactions boosted income by $500,000, or 3 cents per share. Revenue rose to a better-than-expected $42.7 million, up from $34 million. A survey of analysts forecasted earnings of 4 cents per share and revenue of $42 million. The. communications software maker said it expects second-quarter EPS of 5 cents, ahead of the Wall Street forecast of 4 cents per share.
Lehman Brothers raised it rating on Check Point Software to overweight from equal weight on indications of improving spending on security software, dealers confirmed. There are positive spending trends for firewall/VPN infrastructure and last minute upgrades to Next Generation. The broker raised its price target on the stock to $25 from $18.
Take-Two price target raised to $39 from $28 at Dougherty.
Soundview maintains Underweight on Red Hat and $4 target ahead of tomorrow's 1st quarter release. The firm continues to believe that RHAT's rich valuation reflects an overly optimistic view of the company's ability to capitalize on the Linux opportunity; firm also thinks that the SCO Group's recent actions may dampen the growth rate of Linux as customers contemplate their legal liability around Linux.
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