There will be no after-market summary today due to scheduling conflicts. Midday stocks were mixed in Friday's session. Blue chips got a boost after economists at Goldman Sachs raised their 2004 GDP forecast from 2.5% to 3.3%. Bonds were lower for a fourth day in five, while the debate on interest rates rages on. An article in Friday's Wall Street Journal said the Fed remains undecided on how deep next week's rate cut should be. But on Thursday, a Washington Post article suggested the central bank was ready to lop off 1/2 point from the overnight fed funds target, which currently stands at 1.25 percent.
Weak Sectors: homebuilder, electronic manufacturing services, construction materials, oil & gas equipment, communications equipment, utilities
Top Stories . . . U.S. Treasuries headed toward their biggest weekly decline since mid-March as investors reassessed signs of an economic rebound to conclude that the Federal Reserve will cut interest rates by only a quarter percentage point.
General Motors said it plans to sell $13 billion of bonds, one of the biggest U.S. bond sales, and will use most of the proceeds to reduce deficits in its pension plans.
PeopleSoft's directors rejected Oracle's increased offer to purchase the business software maker for $6.3 billion, or $19.50 a share.
Halliburton, the world's second-largest provider of oilfield services, said profit this quarter probably will plunge to 2 cents a share because of widening losses at an oil project off the coast of Brazil.
General Electric, the world's largest company by market value, maintained its 2003 profit forecast of $1.55 to $1.70 a share even after orders for plastics and appliances dropped last month.
Verizon Wireless, the largest U.S. mobile-telephone carrier, will begin selling a walkie-talkie phone as early as next month, marking the first challenge to Nextel Communications, said people familiar with the matter.
Rate Cut Gurus. . . John Berry in The Washington Post is suggesting the Fed will cut by 50-basis points on Wednesday, while Greg Ip of The Wall Street Journal leads the front page this morning with an argument for 25-basis points.
Bob Macintash, Chief Economist for Eaton Vance, who argues that no rate reduction would be the best decision. He sees enough signs of recovery for The Central Bank to wait a while. Of 133 economists polled by Bloomberg, 116 expect a rate-cut, with 80 opting for 25-basis points, and 36 holding out for 50.
Wayne Angell, former Fed Vice Chairman is in the 50-basis point camp. He says we are increasing the capacity to produce goods faster than demand for products is rising, thereby eroding pricing power. If the funds rate is not cut to 0.75%, we are not going to get the rate of output that is going to turn this job market around.
Brian Wesbury, economist at Griffin Kubik, says a rate reduction will over-stimulate the economy, and force aggressive Fed tightening next year.
Economist Donald Stalheim worries about the impact on money market mutual funds, which are averaging returns of 0.73%. Signs are pointing to an overly easy monetary policy, with gold prices up, the dollar weak, a steep yield-curve, and rising commodity prices.
Fed Cut Comment . . . It’s hard to see that the Fed has an interest in disappointing expectations. So it is more likely to go ahead with a 50bp rate cut. The Fed will explain the rate cut as “insurance”, implying a low cost and a substantial benefit in the unlikely event of another deflation. The result is extreme -- an overnight interest rate of 0.75% at a time when the economy is growing, the dollar has fallen to a non-deflationary level, unemployment is at 6.1%, and a massive growth-oriented tax cut has been enacted. The cost of interest rate extremes (from 6.5% in January 2001 to a possible 0.75% in June 2003) is substantial in terms of distortions within the economy.
Monetary policy is very powerful. Mistakes can start both inflation (as in the 1970s) and deflation (as in the late 1990s). The central bank can stop these by matching the supply of dollars with the demand for dollars, a step Japan never took with the yen. The 2001 interest rate cuts weren’t as powerful as some had expected because real interest rates were still very high and the dollar’s strength was still causing deflation (see our piece Deflationary Central Banks on October 19, 2001).
In November 2002, the Fed lowered rates another 50 basis points and, more importantly, made it clear that it understood the risks of deflation and had the tools and resolve to stop it. The dollar weakened to a non-deflationary level and real interest rates fell into negative territory. That ended the risk of deflation.
Pension Problems . . . David Bianco, head of valuation and accounting at UBS Investment Research, estimates that the total pension deficit for the S&P 500 reached $239 billion at the end of May -- the highest in history -- versus $212 billion at the end of 2002. Bianco said the deficits have expanded despite strength in the equity markets as "significant" declines in interest rates have raised the value of pension liabilities more than the improvement in asset values. "Pension deficits should still be a serious investor concern, particularly for many industrial, material and consumer discretionary companies," Bianco said. He feels that S&P 500 earnings estimates should be reduced by $2 a share given that "aggressive" long-term pension asset return assumptions are unlikely to be met.
Quotes of Note . . . ``You have two big companies saying things appear to be better, and that the outlook isn't deteriorating,'' said Kurt Brunner, who helps manage $1.3 billion at Swarthmore Group. ``The building blocks (for an improved economy) continue to be put in place. It seems people want to be in stocks now.''
``The background for equities is good,'' said Mark Beale, who helps manage about $500 million of U.S. stocks at New Star Asset Management in London. A possible interest-rate cut by the U.S. Federal Reserve and ``reasonably positive'' economic numbers should be ``a key driver for the equity markets.''
Fund Flow . . . Funds investing primarily in U.S. equities took in $4.8 billion in new money during the week ending Wednesday, estimates Trim Tabs director of research Carl Wittnebert, adding to inflows of $3.2 billion the week before. Bond funds had inflows of $1.8 billion, the mutual fund tracker said, versus last week's inflows of $2.1 billion.
Harry Potter Day . . . The new Harry Potter book, set to go on sale at midnight, is expected to set new records in the book marketing industry. Barnes & Noble, the world's largest bookseller, and Barnes & Noble.com expect the book, published by Scholastic, to break all previous records for first day and first week sales for any book. The retailer predicts the book to sell more than one million copies by the end of its first week on sale. Delivery service FedEx said it will deliver more than 250,000 copies of the book on June 21 to Amazon.com customers, making it the largest single-day, e-commerce delivery event.
Eco Speak . . . Economists at Goldman Sachs say they have become "more optimistic" about the U.S. economic outlook thanks to more accommodative financial conditions over the past months. The brokerage expects the Federal Reserve to slice short-rates by 1/2-point next week and then remain on hold through 2004. Goldman hoisted its 2004 gross domestic product growth projection to 3.3 percent from 2.5 percent. The brokerage said it's also more confident that growth improvements will be sustainable. "What's important here is the shift in the Fed's regime -- to focus on keeping short-term rates low for a sustained period in order to prevent deflation," the firm told clients. Goldman also forecasts "slightly firmer" profit growth and predicts the yield on a 10-year Treasury note will rise to 3.80 percent by year-end, then fall back to 3.40 percent by the end of 2004. Goldman added that the economy is likely to "downshift to a slower growth pace" in the second half of 2004 as the stimulus from tax cuts subside.
The U.S. economy is poised to recover, but it won't be spectacular, the Economic Cycle Research Institute reported Friday. The ECRI's weekly leading index rose from 5.5 percent to 6.1 percent growth in the latest week, the highest rate since July 1999. "It's not bad," said Lakshman Achuthan, managing director of the research group. "But I would not conclude that we are about to experience a very strong rebound." Achuthan said pockets of weakness persist, especially in the manufacturing sector. "It's going to feel like 2002," he said. The ECRI index has a good track record of forecasting turning points in the economy over the past 50 years.
Financials . . . Merrill Lynch initiated Ameritrade and E-Trade with "buy" ratings. Amerirtade added 2.3 percent and E-Trade rose 2.2 percent. Merrill also reinstated coverage of Charles Schwab with a "neutral" rating.
Merrill Lynch said it's initiating ETrade with a "buy" rating and a price target of $11.50 per share. Merrill said the company is "the farthest along of the online brokers in developing an integrated financial services platform, rapidly diversifying revenues into retail banking and mortgages." Diversification has allowed the company to deliver relatively stable earnings, with bank revenue up 36 percent year-over-year in the first quarter of 2003, offset by a 21 percent decline in brokerage revenue, Merrill said. Although ETrade stock is up 113 percent since early March, its valuation "remains much lower than its peers," Merrill said.
General Electric reiterated its second quarter earnings target of 37-39 cents per share. In an analyst meeting, CFO Keith Sherin said GE's 2003 EPS target is $1.55 per share to $1.70 per share. It'll tighten its total year outlook at its second-quarter conference call with analysts. The move comes after some Wall Street analyst trimmed their full-year profit outlook for GE on a sluggish global markets and weak results at GE's plastics division. GE said its NBC unit had a "great" up front ad selling season, and that service and technology units are strong, but it's seeing slow economic growth. There will be an impact from SARs, but it's now diminishing, GE said. GE said it confirmed it reached a tentative labor agreement on Jun 15 with various unions. Ratification votes are on June 23 and GE is "optimistic."
Lehman Brothers was downgraded at Bernstein to Market Perform from Outperform following yesterday's results, saying they believe the high water mark for fixed income revs this year will have occurred in 1st quarter-2nd quarter. The firm expects 3rd quarter-4th quarter revenue to have a lower contribution from fixed income as an ever-smaller number of fixed income sectors continue to rally. Target is $80.
Golden West's loan portfolio continued to grow at roughly the same rate as the market in April (11.7% annualized rate). Year to date, it has grown slightly faster (12.8% annualized rate). Most of the company's originations (91% in May) continue to be adjustable rate mortgages, loans that Golden West is prepared to hold regardless of interest rate trends. In May, the net interest spread declined slightly (2.94% vs. 3.01% in April). Still, the margin will compress less than we originally expected this year given current monetary policy. Credit quality remains stable. NPAs were 63 bps, consistent with the 62 to 65 bps they have averaged for the last nine months. Deposit growth (1.1%) picked up again in May, after slowing in April (tax season). Year to date deposit balances have grown by $3.04 billion, nearly sufficient to fund all of the company's $3.4 billion of loan growth.
Oil & Gas . . . Halliburton expects to record additional losses in the second quarter due to higher estimated costs and schedule extensions for its Barracuda-Caratinga project. Halliburton now expects to earn at least two cents in the second quarter.
Halliburton said the cash required to fund the settlement on asbestos claims may "modestly exceed" previous forecasts of $2.78 billion, due to an increase in the estimated number of claims. If it does exceed expectations, the oil services company said it would seek to adjust the settlement to reduce the overall amount per claim, or increase the amount it would be willing to pay to resolve the claims. Separately, the company said it would take an additional operating loss of $104 million, or 24 cents a share on its Barracuda-Caratinga project due primarily to higher costs and schedule extensions.
Marathon Oil & Kinder Morgan dissolve MKM Partners L.P.,which has oil and gas production operations in the Permian Basin of Texas. Marathon holds an 85 percent equity interest in the MKM partnership.
Valero Energy warned that second quarter earnings would fall short of expectations due to higher natural gas prices, unplanned outages at some refineries, lower sour crude discounts and declines in distillate margins. The refinery operator now expects to earn $1 to $1.10 a share in quarter ending June, below the average analyst forecast of $1.58 a share.
Halliburton addressed asbestos claims & Barracuda-Caratinga project. The firm announced additional operating losses on Barracuda-Caratinga project of approx $104 mln or $0.24 per share after tax. The additional charges follow a thorough review of the project indicating higher cost estimates, schedule extensions and other factors. The firm sees diluted EPS from continuing operations of at least $0.02 in 2nd quarter. In addition, Co. has continued to conduct due diligence on current asbestos claims. Documentation continues to improve and supports previously proposed settlement. However, as a result of an increase in the estimated number of claims, the cash required to fund the settlement may exceed previously announced $2.775 billion. If it does, the company would either adjust settlement matrices to reduce overall amounts per claim, or increase the amount it would be willing to pay to resolve its asbestos and silica claims.
Energy . . . PG&E's, along with its bankrupt utility unit Pacific Gas & Electric and the California Public Utilities Commission reached a tenative settlement agreement related to the utility's Ch. 11 bankruptcy. If approved, PG&E said the deal would allow the utility to emerge from bankruptcy intact, as an investment grade utility and to pay all valid creditor claims without raising customer rates.
Semco Energy dropped its annual dividend to 30 cents per share from 50 cents, and lowered its earnings outlook to reflect higher than anticipated financing costs and weak results from its construction services business. The company now sees a profit before items of 30 to 35 cents per share in 2003, down from its prior projection for earnings of 55 to 60 cents per share.
Transports . . . Fitch Ratings said its "BBB+" rating on General Motors already incorporates the automaker's plan to offer $10 billion in debt and convertible debentures to fund its pension plan. The debt rating agency said that pre-funding of near-term requirements "crystallizes these liabilities" into obligations with fixed terms and carrying costs, but added that it does extend the maturities. The firm said the issuance "could provide a buffer against further deterioration in the economic environment or in the company's operating performance."
Jetblue Airways was downgraded at Raymond James to Outperform from Strong Buy based on valuation, as the stock is nearing their former target of $41.
Deutsche Securities says they remain bullish on the growth prospects of the regional airlines, since the majors continue to highlight the use of regional jets as an important part of their financial recovery. Based on 15x their 2004 ests, firm believes Sky West should trade to $23 and Atlantic Coast Airlines should trade to $18. The firm favors SKYW since the co has already reached a new agreement with United, so their growth for 2004 is more certain, and the company doesn't have any outstanding labor contracts as they are non-union.
Michael Bruynesteyn at Prudential upgraded General Motors to "buy" from "sell," and raise his price target on the stock to $45 from $29 on the belief that an eventual economic recovery will overcome short-term negative news. Bruynesteyn said he was looking past 2004 and into 2005, when earnings should top $6 a share, and concerns over its pension and benefit plans, pricing and volume should stabilize. The firm thinks the $2 dividend is likely safe in the medium-term, providing a downside cushion for the shares. Separately, the automaker had announced that it would offer $10 billion in debt and convertible securities to fund its pension plan.
FedEx reported 4th quarter earnings before the market opens on June 24. Expect an inline quarter characterized by (1) continued double-digit y-o-y volume growth in Ground; (2) strong International Priority volumes; and (3) gains from fuel surcharges and currency, offset by weakening LTL results and continued weakness in core domestic Express volumes and margins. 4th quarter is likely to be an anticlimactic quarter because the company has already provided 2004 guidance and initial comments on the Express restructuring. Suspect investors will instead be focused on forward-looking comments regarding the restructuring, 2004 pension, the direction of ground volumes, and general economic conditions. Potential downside in the quarter could result if further weakness surfaces in core overnight air express volumes or LTL pricing and tonnage. Express and Freight have one less working day year-over-year in 4th quarter, making it incrementally more difficult for FDX to substantially upside our margin assumptions. This note details our expectations by product, as well as a list of ten items for investors to focus on in the 4th qurter report. Expect FDX mgmt to provide greater details on its recently announced domestic headcount reductions and 2004 pension assumptions. While additional restructuring announcements could drive the stock, expect few new specifics to emerge on the call.
Food & Beverage . . . Business Week reporting that although the performance of the ketchup king Heinz has been lackluster over the past few years there are a few pros who think the co might be an appetizing takeover bait. One hedge-fund manager interviewed says Neste might be salivating. One analyst who runs his own research firm is set to recommend Heinz on takeover expectations. He figures the stock is worth $50 in a buyout. Heinz could regain its growth status under aggressive management. The shares which hit $60 in 1999, now go for $34.
Office Equipment . . . Xerox Corp sets pricing on the issuance of new common stock, mandatory convertible preferred stock and senior unsecured notes. The company also said that it finalized the terms of a new revolving credit facility. The offering includes approx 40 mln shares of common stock at $10.25.
Retail . . . CarMax reported fiscal first-quarter net earnings of $35.3 million, or 34 cents a share, up from 28 cents a share in the year-earlier period. Revenue for the quarter ending May rose 17 percent to $1.17 billion. The results were in line with the average analyst forecast. The used car retailer said gross margin dollars per used unit achieved targets, and used unit comparable-sales growth was above forecasts. Looking ahead, the company expects to earn 33 to 35 cents a share, versus analyst forecasts of 33 cents.
Bed, Bath & Beyond announced on Thursday, June 19 the approximately $200 million all cash acquisition of Christmas Tree Shops, a privately-held retailer of giftware and household items. It is very important to understand that this is not a Christmas-only business. Analysts are maintaining 2nd quarter 2003 EPS estimate of $0.30 vs. $0.25 last year. Analysts are raising 2003 EPS estimate $0.02 to $1.23 due to the addition of the profitable sales of the newly acquired business. Analysts are raising 2004 EPS estimate $0.05 to $1.50. Analysts view this transaction positively, as it adds to top line growth and is accretive to EPS by $0.02 in 2003. Moreover, the concept has the potential to be a nationwide chain, as it has a valuepriced merchandise offering of seasonal and party goods, gourmet food, glassware, dinnerware, and decorative items and an intensely loyal customer base.
Restaurants . . . Starbucks said overnight that while it is "mindful of the financial cycles in the global marketplace, they have not had significant impact on Starbucks overall business." The coffee retailer said it's committed to plans to open at least 15,000 stores in international markets. It said it's nearing profitability in the near-term in the U.K. market.
Yum Brands reported Period 6 (final period of 2nd quarter) sales that were mixed but overall better than we expected. International sales were surprisingly good with local currency system sales up 6% and dollar sales up 13%, a sequential improvement. Domestic company blended same store sales were flat against a difficult plus 5%, with Taco Bell up 5%, Pizza Hut up 2% and despite a down 8% performance at KFC. Period 6 sales raise our confidence in our 2nd quarter and full year estimates. Taco Bell's performance against a plus 8% last year is especially encouraging because part of the long term thesis on YUM is that greater operational focus should lead to more consistent sales performance and Taco Bell, in our view, was the first of the brands to step up its operational focus. Pizza Hut enjoyed stronger sales than we expected aided by the reintroduction of the P'Zone which boosted the Red Roof business. KFC remains the problem area at Yum; more extensive menu and brand work is planned for this brand. Yum picks up international results on a lagged basis and we had anticipated softer (up 3% local currency) sales as more of the SARS effect in China was reflected in the numbers. The peak SARS effect in China should be reflected in Period 7 results, but we are encouraged by the period 6 performance.
Darden Restaurants was cut to Underperform at Smith Barney following last night's earnings report, saying the magnitude of their concerns regarding poor sales at Bahama Breeze and various cost pressures such as insurance has deepened. The firm says company's goal of 8-12% EPS growth in 2004 looks even worse once one realizes the target incorporates the earnings boost from 2004's extra 53rd week. The firm cuts target to $18 from $22.
Darden reported 4th quarter & full year EPS a penny better than estimates of $0.34 and $1.30, respectively, despite softer than expected May sales. The company repurchased 5.8 million shares in the 4th quarter and a lower than expected tax rate added $0.01 to EPS. Darden guided EPS growth for fiscal 2004 of 8%-12% or $1.41-$1.47, advising that the $0.05-$0.06 per share
boost to FY 2004 EPS from a 53rd week would be reinvested in the business. Same store sales are forecasted to grow 1%-3%. Analsts are reducing 2004 EPS estimate from $1.48 to $1.45. Analysts had expected a $0.05 boost to EPS from the extra week. The company maintained more aggressive long term EPS growth targets, stating that in a normalized economic environment long term EPS growth should be at least 15%. This seems aggressive given a modest unit expansion rate of 4%-5%. Darden ended the year on a soft note with May same store sales flat at Olive Garden and down 2%-3% at Red Lobster. 4th quarter same store sales were up 0.1% at Olive Garden and up 0.9% at Red Lobster. Full year same store sales growth was up 2.2% at Olive Garden and 2.7% at Red Lobster.
Apparel . . . Nautica (has withdrawn one of its nominees for election to Nautica's board. Barington, which has complained about the company's direction, still has two nominees for the board. Nautica said the withdrawal "only confirms the company's view that the Barington Group's intentions are not in the best interests of all stockholders." Nautica added, however, that it remains open to exploring opportunities to enhance shareholder value, and that it's in talks with regards to the possible sale of the company.
Heathcare . . . WebMD disclosed plans to sell $300 million in convertible subordinated notes due 2023. The healthcare information services plans to use the proceeds of the deal, which includes a $15 million overallotment option, for general corporate purposes.
Express Scripts disclosed it had been subpoenaed by New York's attorney general. The subpoena seeks information about "the company's compliance with certain state and federal antitrust and consumer protection statutes." Express said it believes its practices comply with the law.
OraSure Tech was upgraded at UBS Warburg to Buy from Neutral. The firm is saying their discussions with the CDC indicates that it is likely that OSUR will receive an order for their OraQuick rapid HIV test for about $2 million, and firm believes there is potential for further government-related orders in 2004, which could have a more significant impact on numbers. The firm raises target to $9 from $6.
Wachovia initiated coverage of the managed care industry with a positive bias. The firm initiated Aetna and Coventry Health with Outperform ratings based on their belief that they have the highest probability of meaningful EPS upside as well as valuations that are especially attractive. The firm initiatesd Anthem, Humana, Mid Atlantic, United Health and Well Point with Market Perform ratings based on valuation; and initiates Cigna and Oxford Health with Underperform ratings, as they see EPS growth problems for both company's.
Drugs . . . King Pharmaceuticals received approval from the U.S. Food and Drug Administration for a supplemental New Drug Application covering pediatric and adult formulations of the Company's nerve gas antidote AtroPen. King said the antidote uses auto-injector technology stemming from king's the January 2003 acquisition of Meridian Medical Technologies.
Biotech . . . Amgen and its partner Wyeth announced yesterday results from a second Phase III Enbrel trial in psoriasis at the International Psoriasis Symposium. Results from the study were consistent with the results from the Phase III trial that was presented at the recent AAD meeting. We expect that Amgen could submit the data to the FDA in 3rd quarter 2003 with an approval in 1st half 2004. Additional data was presented at EULAR which included results from a Phase III Enbrel trial in ankylosing spondylitis (currently under review by the FDA) and once weekly use of Enbrel in RA at 50mg (the currently approved dose is 25 mg twice weekly). The timing and outcome of these trials are in line with expectations. Amgen submitted data for a label extension to include ankylosing spondylitis on January 22, 2003 and expect a regulatory response in 2nd half 2003. The FDA is also reviewing a label extension to include once-weekly dosing in RA. Such a label expansion will enable Amgen/Wyeth to position Enbrel to be even more competitive from a convenience standpoint relative to recent biologic entrants to the market such as Abbott’s Humira. Humira is also administered as a SC injection but is given once every two weeks.
Genentech PDUFA date for Xolair is today for moderate to severe allergic asthma. Genentech and partners TNOX/NVS are expected to receive a full approval. Also PDLI is set to receive a 3% royalty on the projected $500 mln worldwide sales. Of note, the FDA panel unanimously backed Xolair on May 15.
Media . . . CIBC believes that Fox Entertainment is again on track to beat street estimates for 6th straight Quarter, despite the Auto-led meltdown in Spot. Firm is raising its 4th quarter est to $0.27 from $0.26, or 4 cents above consensus.
SG Cowen believes that near-term pluses are priced into XM Satelliteite, but that 2nd-half should offer more upside. Specifically, believes stock has priced in expected 2nd quarter outperformance, but subscriber accelerations in 2nd half could trigger a further rally later this year. Firm's DCF valuation suggests a $15 share price.
Telecom . . . Arindam Basu at Morgan Stanley downgraded Research in Motion to "underweight" from "equal weight," due primarily to valuation. Basu feels the stock is now "priced for perfection" following the sharp run up since the company's analyst meeting in early May.
Research In Motion downgraded at Morgan Stanley based on valuation, as the stock has rallied 35% since the co's May 5 analyst day and firm believes it is priced for perfection.
Nextel target raised to $22 at Friedman Billings.
Consumer Electronics . . . Palm earnings could be at high end of guidance. Owing to good initial acceptance of Palm's newest consumer product, Zire 71, as well as modest expectations for the quarter, Palm could report in-line results toward the high end of the guidance. The major issue for investors is assessing the value of the two divisions – Palm Solutions (hardware) and PalmSource (software) – in front of the spin-off.
EMS . . . Solectron, one of the largest contract manufacturers of printed circuit boards and other computer innards, reported a $3.1 billion quarterly loss. Variance/Analysis (Sales & Earnings) Strength in Consumer (up 124% Quarter/Quarter) and Semi-Test (up 43% Quarter/Quarter) due to new outsourcing programs caused revenue to be $112M above consensus and above the midpoint of management's guidance range. EPS was $0.07 less than estimate and consensus due to lower than expected gross margins ($0.04 impact) and an unexpected deferred tax asset allowance in the quarter. Both Inventory (-6%) and A/R (-2%) were down in the quarter. Flat sales combined with the inventory and A/R decline caused DSOs to decrease 3 days and turns to tick up to 6.6x from 6.1x. This resulted in CCC declining 5 days to 61. CFO was $72 million and capex was $35 million producing FCF of $38 million. Cash declined $442 million, due primarily to the $514M in required LYON debt payment in the qtr offset with FCF generation. The company faced a wave of analyst stock downgrades after reporting that it lost more money than it recorded in sales during the period. The contract manufacturer is now out of compliance with an untapped credit facility and is talking to bankers about how to amend it.
Semiconductor Equipment . . . Mark Fitzgerald at Banc of America suspects that the recent run up in the stock prices of semiconductor equipment makers "is not sustainable" without a sharp turn in fundamentals. He thinks most companies will meet earnings and revenue forecasts, but believes third-quarter order growth will be only 2 percent, versus consensus expectations of 10 to 15 percent growth. "We think the recovery will be a series of disappointments where investors' expectations will need to be ratcheted back," Fitzgerald said in a note to clients. Among chip equipment makers, Applied Materials, KLA-Tencor and Novellus Systems.
Semiconductors . . . LSI Logic seen as likely SAS silicon partner for Hewlett-Packard. RBC Capital Mkts believes that the Industry Standard Server group within Hewlett-Packard is close to selecting a silicon partner for its initial SAS strategy. The firm believes that HP is likely to select LSI over Adaptec for this program.
Business Week wrote about the little-known RF Monolithics, a maker of radio parts, could become a highflier. RF supplies filters and transceivers to Sirius Satellite Radio, helping listeners tune in to stations anywhere in the U.S. via satellite. Products are also being designed for XM Satellite Radio, which may have 1.2 mln subscribers in 2004. Casey Stern of investment boutique Fagenson, which bought the stock at 2 in mid-March thinks it could hit $10 in a year.
Cypress Semi restated quarterly results in a 10-Q/A filing, the company revises quarterly results to reflect an error in the extraction of data related to the number of stock options utilized to arrive at the deduction for stock-based employee compensation expense. The correct pro forma loss per share is $0.33 and $0.56 for the three month periods ended March 30, 2003 and March 29, 2002 (vs previously reported losses of $0.28 and $0.35).
Morgan Stanley maintains Underweight on PMC-Sierra. Although they believe the co is well-positioned and the telecom industry fundamentals appear to have at least stabilized, they are uncomfortable with the aggressive expectations that are driving the stock's premium valuation.
Boxmakers . . . Although Apple historically has used its developers conference for software announcements, this year could be different since Apple is not participating in Macworld this summer: the prevailing wisdom is that Apple could preview its next-generation platform based on the long-awaited G5 chip. Expect to see "Panther," the next version of OS X.
Software . . . Ryshawy at BNP Paribas downgraded SAP to "underperform" relative to Europe, citing evidence that the U.S. recovery remains "modest," with customers still reluctant to commit to major software investments. In additions, Ryshawy doesn't feel the positive impact from Oracle's hostile takeover bid for PeopleSoft will be enough to offset weakness in Europe.
First Albany initiated FileNet with a "buy" rating and set a price target of $23. Earlier in the session, the shares reached a 52-week high of $19.30. The firm believes that enterprise content management, FileNet's forte, is becoming a "top-spending priority" for companies, and that the company has a "highly leverageable financial model" and "a compelling valuation."
Merrill Lynch dropped Business Objects to 'neutral' from 'buy.' The firm cited recent price appreciation, lack of a near-term catalyst, and a heightened competitive landscape for the downgrade.
Roxio said it has completed a private placement of 4 million shares of its common stock for $5.50 each. The deal yielded gross proceeds of $22 million, which Roxio plans to add to its working capital.
SAP is on track to continue to gain market share over the medium term. However, with absolute growth still elusive, majority exposure to the weak European market and significant execution risk in 2nd half, following easy 2nd quarter comps, the current valuation is stretched c/f our €92 fair value estimate. Freeing Up IT Budgets For Innovation. The TCO/ROI story was as apparent in Orlando as it has been at other recent conferences. SAP conceded that IT budgets are likely to remain pressurised for some time and laid out proposals for companies to use SAP products to reduce the TCO of their IT infrastructures in order to free up some IT budget ... to spend on more SAP products in pusuit of growth. Although there was little evidence to suggest that improved customer interest has translated into deals actually being closed, the tone from SAP, as well as integrators and customers, suggested an improvement in business conditions in the US market, consistent with our findings at our own tech conference last week. Product Break-Outs More Updating Than Revelationary. SAP updated us on progress on its SMB, software verticalisation and enterprise services architecture strategies, as well as formally unveiling CRM 4.0. Although
there was little fundamentally new, SAP showed that it is making good progress in each of the strategies outlined over the past twelve months or so. SAP became more vocal about its position on the ORCL/PSFT/JDEC triangle during the conference. Very unlikely to get involved in any similarly large M&A activity, SAP is aiming to offer its competitors' installed customers a stable alternative. However, even assuming that the uncertainty lasts, SAP only hopes to see a positive impact on its own business towards year-end.
B. Riley downgraded Roxio to Sell from Neutral. The firm believes the company's private placement provides further indication that ROXI is facing a major dilemma with its declining software business and aggressive spending plans to build the online music distribution biz, which is burning cash. The firm firm is especially concerned about mgmt's lack of attention to shareholder value. Target is $3.50.
Smith Barney initiated the software industry with a Market-Weight rating, saying current valuations leave little room for upside as earnings growth resumes. The firm initiated coverage of BEA Systems and Quest Software with an Outperform; Mercury Interactive and Veritas with an In-Line; and BMC Software, Siebel, and Symantec with an Underperform.
U.S. stocks witnessed the heaviest selling in five weeks as worries over the upcoming second-quarter earnings season kept buyers on the sidelines. The S&P 500 fell 14 points (-1.4%) to 981. The DJIA declined 127 points (-1.4%) to 9072. Both indexes have dropped three of the past four days. The Nasdaq Composite shed 33 points (-2.1%) to 1610. Some 1.4 billion shares changed hands on the Big Board, 5 percent less than its daily average over the past three months. The S&P 500 has risen 16 percent this quarter and is headed toward its largest quarterly gain since the final three months of 1998. The rally has boosted investor optimism about financial markets to the highest in more than a year, according to a survey by UBS AG and the Gallup Organization. The UBS Index of Investor Optimism jumped to 77 in June from 42 in May. The Federal Reserve meets this week to discuss monetary policy. The fed funds futures markets are fully pricing in a 1/4-point rate cut and are factoring in a roughly 60-percent chance for half a point. The Fed's decision on the overnight lending rate will be unfurled Wednesday, at the conclusion of a two-day meeting to review U.S. monetary policy.
Top Stories . . . The dollar rose to a five-week high against the euro in London trading on analysts' expectations that the U.S. Federal Reserve won't cut interest rates by more than a quarter percentage point on Wednesday.
Idec Pharmaceuticals, maker of the cancer drug Rituxan, and Biogen agreed to merge in a stock swap valued at $6.79 billion and form the third-biggest U.S. biotechnology company by sales.
Tenet Healthcare, the hospital chain whose Medicare billing is being probed, lowered estimates for second-quarter and full-year profit because it's facing higher costs and getting lower payments from the U.S. government.
MetLife, the biggest U.S. life insurer, said it would buy John Hancock Financial Services's group life insurance business.
The U.S. Attorney in Philadelphia plans to sue Merck & Co.'s Medco unit, a manager of prescription drug plans, for improperly pushing more expensive medications and canceling orders to meet deadlines.
Quotes of Note . . . ``If the economic data doesn't confirm there's a recovery in the coming weeks we could see some sell-off'' in the stock market, said Rene Clerix, who helps manage the equivalent of $9.2 billion in global equities at Dexia Asset Management.
``M&A activity is going to be one of the things that drives the market,'' said Scott Lynch, co-head of listed trading at Credit Suisse First Boston in New York. ``That is bullish and we are seeing more and more of it.''
Eco Lesson . . . Growth in disposable income is the major driver for consumer spending. Growth in disposable income has been relatively strong, supported by robust real wage growth, tax cuts, and subdued inflation. Low inflation and the continued surge in productivity have combined to generate healthy growth in real wages even though job growth has been weak, in some ways resembling the “jobless” recovery after the 1990-91 recession. Real wages are growing rather than contracting, which should provide adequate support for consumption growth.
Disposable income is about to be boosted further by the income tax cuts recently legislated. Withholding tables will be adjusted beginning in July and child-care rebates will be disbursed soon after. Expect disposable income to reach $8.72 trillion in May 2004, up 7.9% from an expected $8.09 trillion in May 2003. The growth rate in disposable income will be even higher in the peak April 2004/April 2003 comparison due to the tax cut.
Recent magazine and newspaper articles have discussed a contraction in paychecks. The May 26 Time magazine cover story asserted that “paychecks are shrinking for millions of Americans.” The June 8 New York Times magazine criticized the “sink-or-swim economy” using the “Labor Department’s report last month that the average weekly paycheck, once inflation and seasonal factors are considered, shrank 0.3% from March to April of this year.”
In both cases, these stories appear to be using hours worked per week which have been declining. This measure does not take into account taxes, which have also been declining. To get a true picture of the purchasing power of the consumer, the proper measure is disposable income, which factors in wages (which are growing), hours worked per week (which have been declining since at least the 1970s) and taxes (which have declined enough to offset the shorter work-week.)
Critics of the state of the economy often argue that consumers are spent out. Their savings, it is argued, are so low that they might decide to rebuild savings, reducing consumption and putting the economy in serious trouble. Consumer balance sheets are in reasonably good shape.
First, consumers were never as spendthrift in the 1990s as government statistics indicated. The official savings rate did fall precipitously in the late 1990s. But this is a very inaccurate measure of savings. In calculating personal savings, it ignores realized capital gains on equities and homes, and the cash flow benefits of mortgage refinancings. Thus, it severely understates personal savings when capital gains on equities and homes are strong or mortgage rates are falling.
To get a better picture of savings, adjust the personal savings rate by including realized capital gains on equities, just one of the three major adjustments needed to make the series more accurate. (haven’t found a good way to adjust for capital gains on homes or cash flow benefits of lower mortgage payments.) The chart below shows that this adjusted savings rate was relatively stable in the 1990s and, has remained in normal ranges. Consequently, don’t think that consumers are savings-deficient, and so will not choose to rebuild savings going forward at the expense of spending.
Second, consumer balance sheets show a high level of net worth from an historical perspective (well above the 1975-94 trend). Net worth has recently begun to rise again after the stock market losses of 2000-2002.
Venture Capital . . . Visto won an additional round of private equity financing of $20.1 million to bring it to a total of $50.4 million raised in the last 90 days. The company makes personal and corporate mobile access software.
Financials . . . MetLife agreed to acquire the group life insurance business of John Hancock Financial Services. The companies expect the deal to close later this year. MetLife doesn't expect the acquisition to have a material impact on its net income or operating earnings in 2003.
Barron's article highlighted concerns over American Capital's loan portfolio, which is described as "deteriorating" and not reflective in its distinctive "net operating income" measure of earnings. While the company boasts a large dividend yield, the rules governing regulated investment companies allow it to pay out its dividends in nearly all of its net operating income derived from net interest income and fees of its loan and investment portfolio currently at $1.3 billion. The article suggests its unimpressive track record should not allow for its stock to trade at a premium to book value.
iPayment was initiated as Outperform at Wachovia. The firm thinks the company's target market of very small merchants can continue to support profitable organic growth, and continued acquisition activity could be a source of upside as the company seeks to put its new capital to use. The firm sees valuation range of $21-$26.
In the wake of Freddie Mac's accounting issues, the New York Times reports that some money managers and independent accounting experts are now raising questions about Fannie Mae’s profits. The article issaying the company appears to have suffered a big loss last year that was obscured by the complexity of its accounting; these money managers argue that FNM's fair-value balance sheet presents a more accurate picture of its earnings than its income statement, and the balance sheet shows that the company lost billions of dollars when interest rates plunged last summer, nearly wiping out its profit for the year; accounting rules enabled FNM to keep those losses out of its profit report, but the losses will reduce the co's earnings in the future, the managers say.
The Wall Street Journal's "Heard on the Street" column suggests a myriad of big banks could be interested in acquisitions in an effort to grow faster. The article suggests several factors such as stock prices on the rise, low-cost capital at their disposal and internal growth prospects slowing could augur well for acquisitions by large banks. The "buzz" around the industry over banks which could move first consist of Citigroup, Bank of America, Wells Fargo, Wachovia and Bank One. These potential acquisition targets are "super-regionals" such as Fleet Boston, PNC Financial, Comerica, Key Corp and US Bancorp. However, the article suggests big banks going after such these co's would require their shares to trade at a higher multiple to earnings than their targets. The gap between potential acquirers and some of the super-regionals is narrow and in some cases non-existent.
American Home target goes to $23 from $19 at Friedman Billings. The firm also raising estimates following announcement of American Mortgage LLC asset purchase: 2003 goes to $3.45 from $3.30 and 2004 to $2.66 from $2.40.
Oil & Gas . . . Rohm & Haas projected a second-quarter loss of 3 cents to 6 cents a share, including $95 million in after-tax restructuring charges. The per-share impact of the charges wasn't disclosed by the specialty materials products manufacturer. Wall Street has been expecting a quarterly profit of 42 cents a share. Rohm & Haas also said sales are expected to rise by 8 to 10 percent for the June quarter, with currency translations, price increases and acquisitions offsetting volume that's anticipated to be "flat, at best." On the plus side, the Philadelphia-based company said "prices appear to have peaked" for most raw materials.
Rohm and Haas revised 2nd quarter outlook, sees several ex items. The company revised 2nd quarter outlook, now sees loss of $0.03-0.06 despite an 8-10 % Year over Year increase in revenues. However, new EPS guidance, which includes $95 million in after tax charges related to restructuring and asset impairments, does not appear to be comparable to consensus of $0.42.
Energy . . . Merrill Lynch upgraded PG&E to Buy from Neutral to reflect further upside potential in the wake of Friday's better than expected outcome to the company's bankruptcy settlement talks. Under the settlement, PCG remains an integrated utility under state regulation, and in return, the CPUC would agree to a regulatory plan supporting earnings power closer to the levels suggested under PCG's original plan. Target is $26.
Moody's Investors Service said it is considering an upgrade of PG&E subsidiary Pacific Gas & Electric after the utility said it has reached a tentative agreement with California regulators to emerge from bankruptcy. Moody's currently rates the utility's senior unsecured debt "Caa2." "The rating review will assess the prospects for the settlement being adopted along with the financial implications of the settlement to Pacific Gas & Electric Company's future earnings and cash flow profile," Moody's wrote.
Homebuilders . . . JMP downgraded Beazer Homes and KB Home to Market Perform from Market Outperform. The firm is saying the co's remain focused only on the entry-level market, in which they believe will be difficult to find attractive returns over the next couple of years given rising land costs.
Defense . . . IGEN International has been awarded a $23 million contract over four years to provide technology to detect biological warfare agents. The Defense Department will use the company's Origen technology to detect a wide array of agents or toxins in the environment. The company expects revenues to double from sales of biodefense tools. This contract provides for product sales to the U.S. Army of $23 million over the next four years, including $7 million over the next 12 months.
RBC Capital downgrades Benchmark Electronics, Celestica, Jabil, Sanmina, and TTM Technologies to Sector Perform from Outperform, saying the group is becoming susceptible to profit taking given optimistic investor sentiment vs weak order trends.
Education . . . University of Phoenix was cut to Hold from Buy at Legg Mason. The firm cited valuation for the downgrade, but also notes that the magnitude of outperformance this quarter was probably not sufficient to serve as catalyst for further near-term appreciation in either these shares or those of the rest of the postsecondary stocks given lofty valuations and above-average discounting of quarterly outperformance.
University of Phoenix reported 3rd quarter earnings of $0.27 per share, $0.02 better than the consensus of $0.25. Revenues rose 60.2% year/year to $145.8 million versus the $145.4 million consensus. The company sees 4th quarter EPS of $0.26, versus consensus of $0.26, and revenue of $154-155 million, versus estimate of $154 million. The company co also sees 2003 EPS of $0.90 versus consensus of $0.88, and revenues of $527-528 million versus estimate of $526.9 million.
Industrial Equipment . . . Deere was upgraded at Merrill Lynch to Buy from Neutral and adds to their Focus 1 list, based on the following factors: 1) believes the present level of U.S. agricultural equipment sales is a cyclical trough and not part of an ongoing secular decline in the industry, 2) the USDA recently raised its forecast for farm cash receipts on the back of a strong start to the current crop year, which could provide the catalyst for U.S. farmers to buy agricultural equipment beginning in the latter part of 2003 and into 2004; 3) DE has significant operating leverage to an upswing in agricultural equipment sales, 4) DE's valuation is below its long-term historical avg. Target is $59.
Transports . . . Jetblue Airways was downgraded at Bear Stearns to Peer Perform from Outperform based on valuation, as the shares have exceed their $37 target. JetBlue is demonstrating excellent execution of a sound business model. Near term, however, the valuation has become rich given our earnings forecasts (which are at the high-end of the street range). The shares have risen 67% off their low there low this year compared with 25% for the S&P 500 over the same period, and now stand at $39.71, above our $37 target (the high end of target range). (Priced as of close on 6/19/03 -- the time of this writing). This implies a 35x PE multiple on our 2003 EPS estimate of $1.15 and 26x 2004 EPS estimate of $1.55. A fair multiple for JetBlue is in the 26-29x range given its own historical range and the average historical multiple for Southwest Airlines (LUV, $16.91, peer perform), perhaps the best comp in the market. Some argue that JetBlue deserves a higher multiple than Southwest because its growth rate is faster right now, however, we believe the high end of Southwest historical band is appropriate for JetBlue.
Goodyear Tire and Rubber said operating income fell in May in the company's North American business, citing higher raw material costs and weaker prices. The company's business in the European Union posted higher operating income, however. In North America, shipments of consumer replacement tires rose from the year-ago period even though the rest of the global tire industry saw a 4 percent decline in May. The company also said it added to its market share for commercial replacement tires shipped.
Morgan Stanley says they see no signs to suggest a second half recovery is around the corner for the Air Freight & Surface Transport group; unless firm sees a sudden acceleration in the economy or oil prices should drop quickly, there is a greater likelihood that EPS ests will be revised down rather than up. Firm upgrades C.H. Robinson to Equal-Weight from Underweight and downgraded JB Hunt to Underweight from Equal-Weight, citing relative valuations. The firm initiated coverage of Heartland Express with an Equal-Weight rating, saying the stock is not cheap at 21.5x forward EPS, but the co is the best-run carrier in the truckload sector.
Food & Beverage . . . Unilever said its leading brand sales figures for the full year will disappoint at 4 percent because Slim.Fast accounts for a little over 0.4 percent off the growth rate for the year, sharper than expected trade de-stocking including the effect of some retailers facing financial difficulties, which will also hit full year earnings 40 basis points, and the market conditions in Prestige and out of home channels including foodservice have an impact of 0.3 percent.
Heineken said that beer sales have been affected by the conflict in Iraq, poor weather in North America and the SARS epidemic in Asia, without detailing those sales figures, and warned that its net profit excluding non recurring items will now be around the same level as during the first half of 2003. But, it noted, a substantial part of beer sales occur in July and August, and it will not be able to make a full year forecast until then.
J.P. Morgan Securities raised its second quarter sales and earnings per share estimates on Coca-Cola, citing the "more favorable foreign exchange rates during the quarter." It raised its sales growth estimate to 8.2 percent from 6.5 percent.
Tobacco . . . Morgan Stanley raises their targets for Phillip Morris to $62 from $48 and CG to $30 from $25 based on their belief that the stocks' valuations will increase as the market more fully recognizes the stabilization in US cigarette fundamentals and the significant reduction in total legal risk; even in a static fundamental and legal environment, firm anticipates further multiple expansion. Firm also downgrades RJR to Underweight from Equal-Weight, saying the shares appear overvalued given that the co has the industry's lowest profit margin structure and faces the group's most significant competitive challenges.
Retail . . . Walgreen posted net earnings for its fiscal third quarter ending May 31 up 14.3 percent to $296.1 million or 29 cents per share, up from 25 cents per share in the same quarter a year ago. Earnings benefited from a smaller, $9 million LIFO charge in the quarter. The quarter also was aided by a $12 million litigation settlement credit this year, it said. Sales increased 12.6 percent to a record $8.3 billion for the third quarter. The sales increase wasn't enough to offset increased store costs, including payroll, it said. "A major contributor to those payroll costs is the nearly 25 percent increase in our 24-hour store base over the past year," the company said. "We now have 1,049 locations open 24 hours. This is expensive, but it's an important part of our convenience strategy for both today and the future. We believe we're the best-positioned drugstore chain."
99 Cents Only cut to Hold at AG Edwards on valuation.
FTD was upgraded at McDonald Investments to Buy from Hold based on valuation. The firm also cited strong brand recognition, the anticipated migration of floral orders to the Internet, the strong cash flow nature of the business, and low financial risk in the business model. Price target target is $27.
Restaurants . . . Applebee's was downgraded at RBC Capital to Sector Perform from Outperform based on valuation, as the stock has neared their $32 target.
Apparel . . . Nautica cut to Sell at Prudential on view that valuation is extended and that a sell of the co is unlikely. Firm maintains its price target of $11.
Healthcare . . . Tenet Healthcare sees second-quarter results 'significantly below analysts' consensus expectations' due to lower-than-expected revenue trends, increasing cost pressures, industry issues, and company problems, especially past pricing practices 'that have placed the company in an especially difficult position.' Analysts were looking for a profit of 34 cents per share from Tenet in the June period, on average. The company says earnings from continuing operations for the first two months of the quarter were 2 cents per share, a figure that reflects charges totaling 15 cents per share from severance and benefit costs and a change in the discount rate used to value unfunded retirement plan and malpractice liabilities. For 2003, Tenet now projects a profit of 40 to 50 cents per share on revenue of $13.9 billion. Wall Street's consensus estimate is for earnings of $1.40 per share.
Medical Devices . . . SG Cowen's early read into the Cypher launch in U.S. is that stents/procedure, DES penetration, and ASPs all appear more promising than firm previously realized, leading SG Cowen to up overall market estimates: increases 2004 sales by $615 million to $4.95 billion and 2005 by $1.34 billion to $6.2 billion. This is a positive for Boston Scientific.
Lumenis gets FDA clearance for expanded indications of IPL. The firm announced that the FDA has granted clearance to Lumenis Intense Pulsed Light products for the treatment of hyperpigmentation and erythema associated with the skin condition rosacea.
Drugs . . . Novartis received U.S. Food and Drug Administration approval for its Xolair anti-asthma drug. Xolair will be marketed by both Novartis and Genentech.
Forest Labs was upgraded to Buy from Hold at Jeffries and they raised its price target to $65 citing more confidence in the possibility of memantine getting approved by year end. The firm believes last week's sell off, which was due to a study not showing a statistically significant benefit from its combination therapy provides a buying opportunity on weakness with underlying fundamentals that continue to be strong.
Biotech . . . Biogen warned it'll post lower-than-expected second-quarter profit of 32-38 cents per share because of a shortfall of royalties on its Intron drug. A survey of analysts is forecasting earnings of 42 cents per share. Biogen blamed softer royalties from Schering-Plough's INTRON franchise.. The biotech firm confirmed its full-year guidance of $1.72 to $1.85 vs. the $1.79 expected by Wall Street.
Idec Pharmaceutical is buying Biogen in a deal that will leave Idec shareholders with 50.5 percent of the stock of the combined company and Biogen shareholders will own 49.5 percent. Terms set each Biogen exchanged for 1.150 shares of Idec common stock. The companies said the merger agreement has been unanimously approved by the boards of directors of both companies. The transaction is expected to be completed by the end of 3rd quarter or early in 4th quarter of 2003. "Bringing our companies together accelerates both companies' strategic plans and creates a biotechnology leader with the products, pipeline, infrastructure and financial resources to grow faster and create sustainable shareholder value beyond what either company could achieve separately," said CEO James C. Mullen.
IDEC Pharm sees Biogen merger immediately accretive. Excluding merger-related expenses, the transaction is expected to be accretive by 15 plus percent to IDPH cash EPS immediately following closing of the transaction. On a GAAP EPS basis, the transaction is expected to be accretive within two to three years. The companies see Biogen Idec achieving 15% compound annual revenue growth, and approx 20% compound annual cash earnings per share growth in the 2003-2007 period. The combined co will have pro forma 2002 revenue of $1.55 bln and more than $1.5 bln in net cash.
Immunomedics reported progress in cancer therapy at conference. The company announced that four presentations made at this annual meeting of nuclear medicine physicians and scientists indicated progress in the development and use of antibody-based therapeutics for cancer therapy, particularly colorectal cancers.
IDEC Pharma was upped to Buy from Hold at Deutsche. The firm's price target goes to $45 from $32.
Generex Biotech reported details from its study at the Endocrine Society's ENDO 2003 which suggests its proprietary Oralin(TM) insulin formulation could be a viable and safe alternative to injected insulin to treat patients with Type-1 and Type-2 diabetes. The company's product is delivered as a fine spray to the buccal (oral) cavity utilizing its Rapidmist device.
Ribapharm's board calls ICN's unsolicited bid 'inadequate' . Ribapharm also announces that it is adopting a "poison pill."
Biogen was upgraded to Neutral from Reduce at UBS.
Aastrom announced it has received a European patent covering the key culture device components of its AastromReplicell System or ARS. The patent provides coverage of key features of ARS which includes the entire closed loop system for the production of cells for human use.
Alkermes presented results from a Phase II clinical study that showed that patients treated with once-monthly injections of Vivitrex, in combination with psychosocial therapy, experienced a 50% reduction in heavy drinking days compared to patients receiving placebo injections in combination with psychosocial therapy.
Adams Harkness downgraded Tanox to Market Perform from Buy based on their belief that the Xolair launch could ramp slowly due to: difficulty securing reimbursement, an educational effort to inform physicians on how to appropriately use the drug, and concerns about the risk of malignancy and the lack of data supporting the usage in several patient populations; at current levels, firm believes TNOX shares are fully valued and reflect an aggressive peak sales forecast. Price target is $16.
Media . . . XM Satellite was started with a Market Underperform at Rodman & Renshaw. Given the significant execution risk inherent to the company's business plan, and the material funding gap created by debt repayment obligations, Rodman & Renshaw does not believe XMSR shares deserve the premium valuation currently assigned by the market. Firm's cash flow analysis indicates that XM will not generate sufficient cash to meet the repayment obligations of the majority its debt maturing in 2009-2010. XM's enterprise value places a value of 21x 2004 sales and $1,900 per subscriber. Firm notes that DBS and Cable operators are currently valued in the range of $2,000 to$3,500 per subscriber and generate revenue per subscriber 5x that of XM, and are largely profitable today. Firm's $6 target equates to an enterprise-value- to-sales ratio of 12x and a per subscriber valuation of $1,100 based on our estimates for 2004.
Sirius Satellite reached 100k subscriber mark.
The movie starring the company's Incredible Hulk' character opened this weekend and was the top box office draw, taking in roughly $63 million in the U.S. 'Finding Nemo' a Walt Disney release produced by Pixar came in second with $20.5 million in receipts. The 'Hulk' debut, however, fell short of the initial weekend take for last summer's comic book hero hit 'Spiderman.' Universal Pictures, a division of Vivendi, is distributing the 'Hulk' movie. Marvel Enterpriseshas a tie to the franchising of the property.
Southwest Securities blames Marvel's weakness on the weaker-than-expected opening weekend performance of The Hulk. The film was below the opening weekend earnings of X-Men ($86 million) and Spiderman ($115 million). However, firm believes that Marvel will likely earn the maximum possible amount under the deal (from box offices). With a 12-month outlook, firm maintains its Strong Buy rating and $25 target.
The Wall Street Journal reported Vivendi's auction of its entertainment business, which include Universal Studios and USA cable network to be highly anticipated with at least five groups interested in the bidding process. These companies include Liberty Media, General Electric and MGM. In addition, its Universal Music Group has received interest from oil billionaire Marvin Davis and former Seagram Chief Executive Edgar Bronfman, Jr. with the offer potentially being $15 billion.
Hotel & Leisure . . . Ameristar Casinos is raising its second-quarter profit outlook to 45-47 cents per share, ahead of the current forecast of 39 cents per share. The Las Vegas company also raised its 2003 earnings forecast to $1.53 to $1.71 per share, up from the earlier level of $1.35 to $1.59.
Jacuzzi Brands said it continues to see 2003 income from continuing operations of about $35 million or 46 cents per share. It said it expects net sales to rise to about $1.2 billion in fiscal 2003. The global manufacturer and distributor of bath and plumbing products said the continued global economic weakness and political uncertainty could affect its outlook.
Telecom . . . Nobuharu Ono, CEO and president of NTT DoCoMo USA, said in the brutally competitive U.S. wireless market, new services are the best way for the six nationwide carriers to get new customers. Ono's comments serve only the interests of DoCoMo. Expect no carrier to seriously consider a 3G rollout with the accompanying billions of dollars of upgrade costs, just after turning FCF positive. Carriers are just beginning to demonstrate demand for new data services. Current 2.5G networks can already support images.
UTStarcom target raised to $40 from $30 at USB Piper Jaffray.
Consumer Electonics . . . TiVo initiated with a Buy at Adams Harkness. The firm believes the co is fast approaching critical mass, has has an attractive recurring rev-based business model, and can outperform expectations for both new subscribers and subscriber acquisition costs. The firm sees fair value around $13.
Samsung will adopt Echelon's power line technology. Samsung will use the PL 3120 and PL 3150 Power Line Smart Transceivers and the LonWorks platform for its Home Vita home and consumer. Additionally, Samsung will promote the PL 3120 and PL 3150 Power Line Smart Transceivers to both its Home Vita alliance partners and to other electronics companies.
Network Equipment . . . Lehman Brothers raised its rating Advanced Fibre Communications to 'overweight' from 'equal-weight'. The firm said it believes the shares have an attractive valuation.The upgrade was also based on the following factors: 1) firm anticipates the soon-to-be-released FCC Triennial review to be a catalyst for increased Broadband spending by the RBOCs and a generator of higher revs for AFCI in 2nd half 2003 and 2004, and 2) shares are attractively valued; raises 2003-04 estimates above consensus, and raised target to $20 from $15.
British Telecom expands SAN connectivity service with Nortel equipment.
Semiconductor Equipment . . . Taiwan Semi may begin volume production on a low-k dielectric process on its 0.13-micron process in 3rd quarter, gaining an important technological lead over rivals, most notably, IBM.
Agilent announced it sold more than 20,000 of its oligonucleotide-based microarrays in the 2nd quarter and is gaining market share on the microarray industry leader, Affymetrix
Semiconductors . . . WSJ says a movement to build powerful computers from inexpensive components is gaining ground, and new chips from Intel and Advanced Micro could accelerate the pace.
A semiannual study being released today says that 119 of the 500 fastest machines in the world use Intel chips. MPP is the dominant supercomputing method today; and these chips merely increase the power. These systems lack the internal communications speed to compete with the CRAY architecture for the most challenging technical computing problems. Also, remember that CRAY is developing an MPP machine with funds from Sandia that will use the AMD Opteron. This should be visible in mid-2004.
Intel announced a faster P4 with performance-enhancing hyper-threading technology. Said that it will run at 3.2 gigahertz.
Cypress Semiconductor has not restated its pro forma earnings for the first quarters of 2002 and 2003, contrary to "several published reports" that it believes 'misinterpreted its filing of an Amended 10Q" for the quarter ended March 31, 2003. The company said the published stories 'incorrectly assumed" it had restated earnings when it had only amended part of a footnote disclosure on stock options, a change that 'had no impact on reported earnings, GAAP or pro forma, in any quarter.'
Centillium sets new benchmark with ADSL chipset. The company announced the Palladia 220, which is an ADSL 2/ADSL2plus-compatible chipset for customer premises equipment that can deliver up to 50 Mbps and extend the reach 22,000 feet. In addition, it is scalable to provide a full suite of connectivity options such as high speed Wi-Fi.
Boxmakers . . . Dell plans to add three printers to its lineup Tuesday and they are manufactured again by Lexmark. Also plans to introduce two redesigned flat-panel displays.
Cray could be poised for upside in the scientific supercomputing markets according to Barron's. The article suggests the co's unique scientific supercomputing products have garnered renewed interest by potential customers such as secret and "super-secret government agencies" which have more money to spend. The significance of the co's supercomputers can be attributed to its ability to solving staggeringly complex problems in weeks or months as opposed to years. While its market share in this market was 6% as of 2002, a Miller Johnson Steichen Kinnard analyst believes the co will grow market share to "from single digits to high 20's" in light of its products coming to market and upper management's performance running the company.
Software . . . Analysts have started to set initial 2005 EPS estimates for Computer Associates at $1.00, with further upside towards FCF of $1.80+ per share beyond that. Balance sheet will improve measurably along the way. Boosted by its more flexible licensing and focus on higher growing market segments like enterprise mgmt, storage and security, CA has been delivering some of strongest results in large cap SW. Business model transition to accelerate. Fueled by a rising level of contracts up for renewal and rapidly growing subscription fees, bookings and revenues should accelerate in 2004-05 and beyond. Valuation remains compelling. DOJ/SEC resolution remains a key trigger. Still no word on how and when this inquiry will be resolved, but we continue to expect CA to see minimal impact. CA’s FCF multiple of just 11X (implied 9% yield) has plenty of room to expand to catch up with those of other mature, large cap SW stocks like Oracle, Microsoft and SAP, that are trading 18-23X (implied 4.5% to 5.5% yield).
Microsoft is upgrading its SW for hand-held computers, ratcheting up competition with features that include easier wireless communications. Has signed three new licensees: Gateway Inc., Matsushita Electric Industrial, and Victor.
FairMarket agrees to sell assets to eBay. The agreement with eBay is to sell substantially all its technology and business assets for $4.5 million in cash. FairMarket also indicated that it plans to announce a cash distribution to its stockholders of approx $38 million.
First Albany maintains their Neutral rating on Websense based on increasing competition in the company's core market and limited revenue contribution from new products for 2003. The firm says intensifying competition is increasing the pricing pressure, existing customers are asking for bigger discounts, and new customer seat counts are getting smaller.
Documentum was downgraded at ThinkEquity to Equal-Weight from Overweight based on valuation, as the stock has exceeded their $21 price target.
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