From Briefing.com: 5:20PM Market Internals : The Dow decreased (1.63%) closing at 11094, the Nasdaq was down (2.06%) to finish at 2165, and the S&P was down (1.59%) to finish at 1260. Leading sectors included: oil and gas storage and trans +6.2%, education svc +0.94%, publishing and printing +0.41%, specialized consumer srvc +0.27%, healthcare srvc +0.25%. Lagging sectors included: steel --5.4%, auto manu -5.0%, div mtls and min -4.6%, agricultural pdcts -4.3%, home entertainment -4.3%. Today's movement came from below average volume (NYSE 1552, vs. closing avg of 1656; Nasdaq 1773, vs. 2117), with lower advance/decline ratios (NYSE 766/2512; Nasdaq 724/2314, and with new high's coming in lower than new low's on the NYSE, but higher on the Nasdaq (NYSE 25/129, Nasdaq 61/76).
4:20 pm : Stocks closed at their worst levels of the day, snapping a three-day winning streak and positioning the broader market for its worst monthly performance in nearly two years as renewed inflation fears prompted broad-based consolidation. All 10 economic sectors lost at least 1.0% as the Nasdaq paced the way lower among the majors with a decline of 2.0% that pushed the tech-heavy index back into the red for the year.
With the market still extremely sensitive to weak economic data since the Fed's last rate hike on May 10th, Wal-Mart (WMT 48.41 -1.24) attributing higher gas prices to a May sales gain of only 2.3%, which was at the low end of a previously guided range of 2-4%, piqued concerns about the pace of consumer spending. Even though weak economic data recently had some positive implications on the hopes that it might lead the Fed to end their rate hike cycle, weak data today were taken at face value for their bearish implications for earnings growth.
Playing into concerns about consumption was a 6% drop in May Consumer Confidence -- the biggest decline since last September. Although the index does not correlate well with consumer spending and had little initial impact on stocks, investors were bothered by the idea that the report's detail showed a much less-confident outlook for the next 6 months -- concerns we've echoed since lowering our market view rating to Neutral in February.
Despite another decline in the greenback, which typically makes dollar-denominated commodities more attractive, the Materials sector turned in the day's worst performance as falling gold and copper prices sparked more profit-taking. The dollar chalked up its biggest loss against the euro in six weeks amid uncertainty as to whether or not Goldman Sachs Group (GS 149.91 -3.03) CEO Henry Paulson, who was tapped by President Bush this morning to replace John Snow as Treasury Secretary, can tactfully defend the Bush administration's dollar policy without undermining investor confidence.
Benefiting from the weaker dollar, though, was oil, which closed above $72 a barrel amid continued nuclear tensions with Iran but fueled concerns about escalating gas prices, especially now that the summer driving season has begun. Further underscoring the nervousness was the Energy sector's inability to take advantage of oil's 1.1% surge, which merely exacerbated the sense of uncertainty behind the sustainability of recent market gains. Even as Oil & Gas Storage turned in the day's best performance amid reports that an investment group is bidding to take Kinder Morgan (KMI 100.30 +15.89) private for about $13.4 bln, Energy's long-term prospects failed to renew the enthusiasm which has lifted the sector to a year-to-date leading 10.3%.
Consumer Discretionary was also in focus after valuation concerns prompted Deutsche Bank to downgrade General Motors (GM 26.57 -1.51). The year's best performing Dow component, up 48% year-to-date on Friday, relinquished nearly half of last week's upgrade-induced 14% surge. Aside from Autos, Homebuilding was another weak spot for the sector as weakness in the Treasury market lifted the 10-yr yield to 5.08%. Bonds were weak across the yield curve following hawkish remarks from Chicago Fed President Moskow, who told CNBC that inflation is near the upper end of the Fed's comfort zone, at about 2%. DJ30 -184.18 NASDAQ -45.63 SP500 -20.29 NASDAQ Dec/Adv/Vol 2314/724/1.76 bln NYSE Dec/Adv/Vol 2519/761/1.55 bln
4:33PM Microchip reiterates Q1 rev and EPS guidance (MCHP) 33.35 -0.76 : Co stated that it is reaffirming its guidance for net sales and earnings per share for Q1 of fiscal 2007 ending June 30, 2006. Net sales are expected to be up ~5-6% and non-GAAP earnings per share are expected to be about $0.37. Including the effects of stock-based compensation expenses, earnings per share are expected to be ~$0.35. No conference call will be held in conjunction with this guidance update. Microchip plans to announce its Q1 financial results after market close on Thursday, July 20, 2006.
4:32PM Semtech announces $50 mln stock buyback (SMTC) :
4:15PM Altera reaffirms that second quarter sales will be in line with previous guidance for 7% to 10% sequential growth (ALTR) 19.01 -0.17 : Co reaffirms that second quarter sales will be in line with previous guidance for 7% to 10% sequential growth (roughly $313-322 mln vs $317.3 mln consensus). The co now expects up to several mln dollars of additional SG&A expense in the second quarter resulting from its previously announced review of stock option granting practices and related accounting.
10:48 am Albertson's Inc. (ABS)
25.69 +0.07: Shares in Albertson's Inc. are a smidgen higher this morning after the U.S. grocer, which is being acquired by a consortium of retailers and financial buyers, reported first-quarter earnings of $0.36 per share, excluding non-recurring items. That was $0.12 better than a Reuters Estimates consensus of $0.24.
Revenues for the company fell 0.5% year over year to $9.94 billion versus a $10.05 billion single-analyst estimate from Reuters Estimates. The company's banner stores include Albertson's, Acme, Shaw's, Jewel-Osco, Sav-on Drugs, Osco Drug, and Star Market, as well as Super Saver and Bristol Farms, which are operated independently.
Albertson's said in January that it had entered into definitive agreements to sell itself to a consortium of investors including Supervalu Inc. (SVU), CVS Corp. (CVS) and an investor group led by Cerberus Capital Management, L.P. for a total transaction value of approximately $17.4 billion in cash, stock and assumed debt. The value of the transaction to ABS shareholders is about $26.29 per share. Reports were that grocery giant had been having trouble keeping up with competition from others such as Wal-Mart Stores Inc. (WMT).
Albertson's and Supervalu shareholders voted Tuesday morning in favor of splitting the company among retailers and financial buyers. The deal is also up for approval Tuesday from the shareholders of Supervalu. Parties would proceed to close the transaction by early June.
CVS would buy 700 Sav-On and Osco pharmacies and a distribution center as part of the deal, while Cerberus Capital Management and Kimco Realty Corp. (KIM) would buy distribution centers and 655 stores.
--Christine Marie Nielsen, Briefing.com
10:33 am CA, Inc. (CA)
21.70 -0.46: CA, Inc. on Tuesday said it would delay filing its fourth quarter and full-year results, due to additional work that needs to be completed on sales commission expense and income taxes. The maker of business and data management software also issued preliminary results below analysts' expectations, sending shares lower in early market action.
The announcement reaffirms our bearish view on the company, which already warned last month that fourth quarter results would miss earlier forecasts due to an accounting change in the recognition of revenue, slower bookings, and higher expenses.
For the fourth quarter, CA reported a loss of ($0.07) per share, including a $0.03 per share favorable impact from a restatement of results in the third quarter. That compares with its previous forecast of a profit of $0.02 per share. Excluding non-recurring items, the company posted earnings of $0.14 per share. Revenue for the period increased to $947 million, versus prior guidance of $940 to $950 million. According to Reuters Estimates, analysts on average were looking for earnings of $0.15 per share on revenue of $945.33 million.
The company blamed the shortfall on higher than expected sales commission expenses. "Clearly we are disappointed that what would have been a solid year was impacted by execution issues relating to commissions, which adversely affected our fourth quarter performance and led to a restatement of our third quarter results," said chief executive John Swainson.
--Richard Jahnke, Briefing.com
09:28 am Tribune Co. (TRB)
27.89: Tribune Company said Tuesday that its Board of Directors has authorized the repurchase of up to 53 million shares of its common stock in a modified "Dutch Auction" tender offer, as well as an additional 10 million shares from its principal shareholder, McCormick Tribune Foundation and Cantigny Foundation, which hold about 13.6% of the stock, and up to 12 million shares through open market repurchases after the tender. The buyback of up to 75 million shares through these transactions represents approximately 25% of the common shares outstanding with a total value of more than $2 billion.
The company, which publishes the Chicago Tribune, Los Angeles Times, and Baltimore Sun, said the repurchases will be funded through a combination of bank debt and publicly issued bonds, and will be repaid from the significant free cash flow generated by its media businesses and proceeds from at least $500 in asset sales, including certain non-core broadcasting and publishing assets. It said it expects its current credit rating to be lowered as a result of the increased debt.
"The repurchase transactions are expected to be accretive to earnings per share and will lower Tribune's cost of capital," said chief executive Dennis FitzSimmons. "They also allow us to optimize our capital structure while maintaining financial flexibility."
Based on the announcement, Tribune shares are trading sharply higher in pre-market activity, temporarily allaying investors' concerns over slowing growth and ongoing challenges related to an evolving industry. Over the past year, the stock has fallen more than 21%, and is down nearly 7% since the beginning of the year.
While the repurchase of shares is typically viewed as a positive sign for shareholders, as it reduces the number of shares outstanding and increases earnings per share, it can also be used as a tool by management to mask larger, more fundamental issues in an effort to reinvigorate a depressed stock. As is the case for Tribune and other newspaper publishers, such as New York Times Co. (NYT) and Gannet Co. (GCI), slowing advertising growth, rising costs, and the migration toward the Internet continues to cloud prospects.
--Richard Jahnke, Briefing.com
09:18 am Mittal Steel (MT)
33.71: M&A activity continues to be a main focus of the European stock and commodities world, with Mittal Steel Company NV saying Tuesday that it remains focused on obtaining a significant holding of second-largest steelmaker Arcelor SA.
Earlier this month, Mittal offered a bid of $32.9 billion for Luxemboug-based Arcelor that would have reduced the Mittal's family stake in the combined company to 45%. Last week, however, Arcelor made a move to help fend off a hostile bid from rival Mittal, which has been bidding for Arcelor since early 2006, reaching a deal giving it a controlling stake in Russia's largest steelmaker Severstal and $1.59 billion in cash in exchange for 32% of Arcelor.
But on Monday, a shareholder rights group representing around 5% of Arcelor wrote to the company's chairman to voice their concerns about the deal with the Russian steelmaker. A shareholder meeting scheduled for late June could put the kibosh on the deal as a vote of 50% of the equity against the deal could block it. There's also talk that Goldman Sachs has been an active supporter of Arcelor shareholders who oppose the deal, and has already assembled 20% of the shares to call a meeting to change the voting rules.
Mittal representatives have said this week that they are aiming for as large as a 51% stake in Arcelor. They've been noted in some media reports as saying though that the company might also settle for 40% of the shares in a combined Arcelor and Severstal group.
--Christine Marie Nielsen, Briefing.com
09:12 am Vodafone Group Plc (VOD)
22.29: Shares in Vodafone Group Plc, the world's largest mobile phone company, are moving higher in Europe after the UK-based company announced plans to boost its dividend and return $16.9 bln back to shareholders. The news comes after Vodafone reported the largest loss in European corporate history.
The Newbury, England-based company reported a net loss for the year through March that was 21.9 bln pounds, or 35.01 pence per share, compared to a profit of 6.41 bln pounds, or 9.65 pence a year earlier. The market was expecting a loss of 22.2 bln pounds, while sales came inline, up 10% to 29.35 bln pounds. The results were impacted by a significant charge for asset write-downs from the slew of acquisitions the company made back during "The Bubble" years. CEO Arun Sarin has engineered a pullout of Japan and Sweden, reversing a $300 bln expansion by his predecessor Christopher Gent.
Shares have remained underwater due to concerns over the fate of its stake in Verizon Wireless. Verizon (VZ) has recently stated its desire to buy Vodafone's 45% share of the number two wireless provider. The lack of clarity on this issue is being overshadowed by the significant payout proposed, which includes a 49% dividend increase to 6.07 pence per share and plans for a 60% payout. While Sarin has made some progress in restructuring the mobile giant, the market remains skeptical about Vodafone's growth prospects. The company aims to cut costs by as much as 264 mln pounds over 3-5 years, but anticipates EBITDA margins a percentage point lower this year due to investments and lower prices.
We currently hold the Telecom Services sector at Overweight as these stocks offer defensive-minded investors low risk returns, which is an attractive characteristic in a late-cycle economy. Our favored names remain Sprint (S) and Verizon (VZ) given what we view as the trend towards the conversion of telecom, communication, and entertainment services. Considering the recent pullback in shares, the current levels offers an attractive entry point for long-term investors.
--Kimberly DuBord, Briefing.com
09:01 am Wal-Mart (WMT)
49.65: Calling attention to the effects of higher gasoline and utility prices on its customers, Wal-Mart indicated that May same-store sales should be up approximately 2.3%. The problem for investors is that Wal-Mart previously said it expected same-store sales to be up 2.0-4.0%. The understanding, then, that sales will be on the low end of the forecasted range is piquing broader concerns about the pace of consumer spending.
Frankly, it shouldn't be any real surprise that spending is slowing. After all, that is the logical outcome of the Fed's rate hikes and rising energy costs. The slowdown in spending is embedded in Briefing.com's second quarter GDP forecast, which calls for 3.5% growth versus the 5.3% growth seen in the first quarter. The key factor behind our forecast is an expected deceleration in consumer spending to 3.3% from 5.2% in the first quarter
It is important to remember that spending isn't actually declining; it's just slowing from a hotter pace and continues to be underpinned by strong growth in personal income. It appears that similar situation is playing out for Wal-Mart. The retailer is still reporting growth for the four-week period ended May 26, only that growth isn't as robust as had been hoped.
With shares of Wal-Mart up 8.0% since their intra-day low on May 15, the latter consideration will take some wind out of the stock's sails. However, our opinion remains unchanged that Wal-Mart remains an attractively-priced stock for patient-minded investors and that consumer spending, while slowing, will remain at a level that should support positive GDP growth.
--Patrick J. O'Hare, Briefing.com
08:15 am Kinder Morgan (KMI)
84.41: Shares in the Houston-based pipeline owner, Kinder Morgan, are rising in Europe on news that a group led by Richard Kinder offered $13.4 bln for the company he co-founded in 1999. With rising energy prices boosting returns, Kinder, who owns roughly 18% of the company, along with investors including the Carlyle Group, AIG and Goldman Sachs Group, aim to take the company private at $100 per share in cash.
Kinder Morgan owns and operates 43,000 miles of pipelines across the United States that transport natural gas, crude, and petroleum products with more than 150 terminals. With crude prices reaching a record of $75.35 per barrel last month, energy producers from the service providers to the terminal and pipeline owners are reaping the benefits.
Richard Kinder will remain CEO and Chairman and plans to reinvest all of his 24 mln KMI share. Management and participating board members would invest almost $2.8 bln in the transaction with the remaining equity provided by the financial sponsors. The value of the purchased equity and debt of $14.5 bln is $22 bln, which is almost a 19% premium over Friday's closing price. Kinder, who left Enron in 1996, stated the reason for the buyout was "to give our shareholders a real fair and clear value for their interest in the company," according to an interview.
Shares in KMI have declined over 8% this year after gaining 12% over the past 52 weeks. Even though the pipeline stocks are located within the energy sector of the S&P 500, shares tend to trade more in line with the utilities. KMI offers a dividend yield of 4.15%.
--Kimberly DuBord, Briefing.com
09:51 am The9 Ltd: Deutsche Securities upgrades Hold to Buy. Firm ups rating on a valuation basis after a recent decline in its stock price. The firm likes its licensing strategy and strong pipeline consisting of four high-end MMORPG -SUN, GE, Guild Wars and the recently licensed Hellgate: London. Though The9 has to rely on WoW in the short run and commercialization of new games is still 2-3 quarters down the road, the firm thinks the risk-reward is getting attractive. The firm maintains their $31 price target, pending the new game's launch plan, and upgrade the stock to Buy on 19% potential upside. The firm's TP is based on 12-m rolling FDEPS of $1.32, a 2006-08 EPS CAGR of 23.6%, and PEG of 1.0x,in line with the low interest rate environment and stable GDP growth.
09:50 am Amphenol: RBC Capital Mkts upgrades Sector Perform to Outperform. Target $58 to $63. Firm ups rating and price tgt believing that the TCS acquisition will be more accretive than street expectations. Firm anticipates operating leverage from cable segments should raw material prices ease in H206 to drive EPS upward. Firm recommends investors take advantage of recent pullback due to short-term raw material concerns to add/initiate positions.
09:46 am Embarq: Banc of America Sec initiates Buy. Target $47. Firm initiates with a Buy saying there are 3 issues working against Embarq's stock in the near term. 1) they expect ongoing selling pressure from a portion of those investors who received Embarq shares as part of the Sprint split-up; 2) Embarq issued lower-than-anticipated guidance for financial and operating performance; and 3) A vocal commitment to low leverage and payout targets will likely constrain relative valuation. However, the firm believes these issues will moderate as the stock seasons. The firm says as the market works through post-split selling pressure, Embarq should see incremental stability in stock trading in the coming weeks. Over the coming months, the firm believes early guidance may prove conservative leaving room for upside to estimates. Longer term, the firm says mgmt's contrarian wireline business optimism will either prove correct, or mgmt will be forced to change strategy and/or sell, leading to a dividend payday down the road.
09:45 am Openwave: Cowen & Co initiates Neutral. Firm ups rating based on improved risk-reward profile. Firm believes that at current levels the market is already factoring in growth concerns. Firm believes further valuation downside is limited, given a) the expected signing of 3-4 systems deals; b) one or more EMEA deals; c) some new product wins in client/gateway businesses, and d) resolution of the SEC inquiry. Firm also believes current valuation has already sufficiently discounted a Q4 systems deal, which, if it does close, may provide some offsetting upside. Firm says legacy growth is slowing within an increasing competitive environment, offset by a) lower-margin system deals and b) upfront multi-year license deals structured so as to possibly limit subsequent license opportunities.
09:44 am Vonage: Am Tech/JSA Research initiates Buy. Target $20. Firm initiates with a Buy after the stock has lost almost 25% in less than a week following its IPO. Firm believes the bear thesis of intense competition will prove to be overly simplistic and wrong in timing, fundamental attributes, and sentiment. VG has 25% to 50% of the USA market and is expanding internationally. A customer base collapse for any reason seems remote for at least 6 to 12 months. VG has very efficient customers. When one looks at lifetime revs versus acquisition cost, VG is one of the top subscriber models at getting profitable customers, which makes them a very attractive acquisition target in addition to being a leveraged stand-alone carrier. After 9 major investment banks placed the IPO, the share sell-off and subsequent negative reports imply a level of near-universal pessimism. Firm believes ongoing subscriber growth and better understanding of customer quality will change this view.
09:42 am Harris & Harris: Canaccord Adams initiates Buy. Target $15. Firm initiates with a Buy rating and a $15 tgt saying with it's unique combination of leverage and diversification, they believe TINY is the perfect way for investors to get exposed to the upcoming growth in nanotechnology.
09:36 am Intl Paper: CIBC Wrld Mkts downgrades Sector Outperform to Sector Perform. Firm lowers rating saying market pulp and newsprint are still the two commodities in which they expect the most new announcements of mill closures. However, they now think the Europeans will be closing less pulp capacity than they had initially assumed, dampening our enthusiasm for pulp prices in 2007.
09:35 am Westamerica Banc: Sanders Morris Harris downgrades Buy to Hold. Firm lowers rating saying that the co continues to suffer through the seemingly never-ending increase in short-term interest rates. Firms says the impact has reached a point where the funding cost increases are outstripping any rising yields on earning assets. They say it appears to be getting worse as deposit customers switch into higher-yielding products, exacerbating this already tough situation. WABC estimates that the funding costs at the co may increase at least 13 basis points for the June quarter with no material offsetting increase in earning assets yields which could compress the Q2 margin by 13 basis points or more. Firm thinks this sluggishness may impact earnings until short-term deposit rates stabilize. Firm recommends investors take a more neutral stance on the shares until the strong competitive environment for deposits subsides.
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