From Briefing.com: The June employment report proved to be a disappointment and the market's reaction to it was not unexpected as the indices traded lower, but not as low as one would think following the disappointing data.
The tech sector, which led the broader market's advance during the week, was not immune from the selling activity. Ironically, it did maintain its leadership position on Friday, only this time, it led to the downside. All things considered, the losses were modest in scope given that the Nasdaq had rallied 55 points in the two, preceding sessions.
The lack of conviction on the part of sellers was in keeping with the resilient manner in which the tech sector traded throughout the week. In actuality, we should say bullish manner considering the tech-heavy Nasdaq ended the abbreviated week with a gain of 2.3%.
The real proof of the tech sector's disposition, however, will come shortly when the Q2 earnings reporting period picks up. Yahoo! (YHOO) and Juniper Networks (JNPR) will get things rolling in that respect with earnings reports after the close on Wednesday, but it isn't until the following week when the reports from the tech sector start to flow in earnest. Until then, we'll opt to maintain a cautious stance toward the tech sector as we await word as to whether the scope of the recent rally was warranted.-- Patrick J. O'Hare, Briefing.com
2:12PM Weekly Wrap : There was cause for excitement this week and not just because there was a holiday at the end of it. Rather, there was cause for excitement in the market's resilience to selling efforts and the positive manner in which it started the third quarter.
Additionally, there was a renewed sense that bullish sentiment still prevails. Feeding that sense was the leadership exhibited by the tech sector, the bounce in the major indices that occurred with re-tests of important support levels, and the market's ability to hold its own despite some disappointing indications from the key ISM Index and employment reports for the month of June. The market, though, for various reasons, found a silver lining in each report.
In the case of the ISM Index, which checked in at 49.8 versus the consensus estimate of 51.0, there was some encouragement in the fact that the new orders, production, and employment indices all rose in June. For the employment report, which showed a 30K decline in non-farm payrolls and an uptick in the unemployment rate to 6.4% - the highest since April 1994 - two considerations acted as mitigating factors. The first was that there was still a willingness to believe, despite a jump in initial claims to 430K in the week ending June 28, that employment trends should be improving. The second was the belief that the uptick in the unemployment rate may really be an indication of growing optimism in a strengthening economy as it could reflect more people starting to look for work again. The latter, at least, is how the Labor Secretary opted to spin it.
Arguably, the Treasury market was thinking along the same lines as it traded down in the wake of the employment report. In fact, the 10-yr note fell nearly a point and saw its yield back up to 3.64% on Friday. The yield on the 10-yr note is now up 37 basis points since the FOMC elected to cut rates by 25 basis points at its June meeting - an increase that suggests the Treasury market senses the Fed's easing cycle has come to an end.
A continued backup in interest rates would be a negative for stocks, but for the time being, it isn't too unsettling since inflation remains low and the backup is predicated on a belief that a stronger economic environment lies ahead. Accordingly, there was talk this week of asset allocation helping to prop up stock prices.
As noted above, the tech sector paced the market's advance, but another winning standout of note was the brokerage industry, which rallied after a federal judge dismissed class action claims against Merrill Lynch that sought restitution for misleading research. By and large, there weren't many notable laggards, but the utility, auto, chemical, oil & gas exploration, airline, and apparel industry groups underperformed on a relative basis.
For added thoughts on next week's action, be sure to read our Looking Ahead Story Stock. In the meantime, bear in mind that Briefing.com still believes the short-term outlook remains mixed as the market is anxiously awaiting some validation that the scope of the rally from the March lows was warranted. That will - or won't - happen when companies check in with their Q2 results, and more importantly, with their guidance for Q3 and the remainder of the year. Alcoa (AA) gets the earnings reporting period rolling next week when it reports its June quarter results before the open on Tuesday.-- Patrick J. O'Hare, Briefing.com
Not bad for the dog days of summer. U.S. stocks surged, led by computer- related companies, after a Goldman Sachs survey of corporate executives indicated a decline in technology spending is almost over. Microsoft, the world's biggest software company, gained on reports that the company is considering paying shareholders a special dividend. The S&P 500 Index jumped 19 points (+1.9%) to 1,004, with computer-related and financial shares accounting for more than half of the gain. The DJIA climbed 146 points (+1.6%) to 9,216 and the Nasdaq Composite added 57 points (+3.5%) to 1,719. Some investors say the lowest U.S. interest rates in 45 years and $330 billion in federal tax cuts will help stocks extend their first-half rally. Technology companies have led the S&P 500's gain in 2003, jumping 25 percent versus 14 percent for the index. This week kicks-off the second-quarter earnings season, with such notables as Alcoa, Yahoo, Abbott Labs, Pepsi, and General Electric making the scene. Optimistic overtones are alive as we inch closer to earnings season, though many good vibes have already been baked into the cake. Nevertheless, the bulls are getting the benefit of the doubt, as the averages maintain their gains.
Top Stories . . . U.S. Treasuries declined in New York trading as investors shifted money into stocks on evidence faster economic growth will deter the Federal Reserve from cutting interest rates again this year.
Alcan, the world's second-biggest aluminum maker, made a hostile 3.39 billion-euro ($3.88 billion) bid for rival Pechiney SA to cut costs and gain sales to airplane makers after a collapse in metals prices.
Schering-Plough reduced a profit forecast for the fourth time since October as its former top- selling product, the Claritin allergy drug, lost sales to generic versions more quickly than the company had expected.
BMC Software, whose software manages mainframe and server computers, had a fiscal first-quarter loss as sales missed forecasts.
VF Corp., the maker of Lee jeans and North Face outdoor clothing, agreed to buy Nautica Enterprises Inc. for $585.6 million in cash to expand into sportswear and add a more upscale brand name to sell to department stores.
Banks worldwide, led by Citigroup, arranged a record $2.1 trillion of bond sales in the first half as the lowest interest rates since the 1950s prompted governments and companies to refinance more expensive debt.
WorldCom won a judge's approval of a $750 million settlement resolving accounting-fraud claims brought by the U.S. Securities and Exchange Commission. The accord is the largest-ever in an accounting-fraud case.
Quote of Note . . . ``We are optimistic about the future,'' said Klaus Toepper, who helps manage about $5.2 billion in U.S. equities at Deka Investment in Frankfurt. ``The hope is that the economy will accelerate in the second half of the year. Earnings are improving.''
Profit for companies in the S&P 500 rose 5.3 percent last quarter, according to the average estimate of analysts surveyed by Thomson Financial. The analysts forecast a 13 percent increase this quarter and a 21 percent gain next quarter.
Gurus . . . Richard McCabe, Merrill Lynch's chief market analyst, said the market's recent "consolidation phase" could soon give way to new attempts to extend the post-March rally. "Short-term momentum indicators are already oversold and are starting to turn up, while the CBOE put/call ratio has improved sharply during the last week. These factors could support renewed market strength in July," McCabe told clients. But the strategist cautioned that medium-term momentum measures remain overbought, which he feels could limit the market's upside in the coming weeks and could lead to a larger correction in late summer or early fall.
Kevin Marder, chief market strategist at Ladenburg Thalmann Asset Management, said the stand-up behavior of the major averages reveals that institutional investors are showing "very little propensity" to sell stocks in the wake of its recent advance. "The market has had a number of opportunities to sell off, the latest of which was Thursday's release of a soggy employment report, but has yet to do so in a convincing manner," Marder noted. "We expect the market to make further progress as leading issues move out of their short-term consolidation patterns."
Market historian Ned Davis told The Rukeyser Show that these cyclical bull markets have a tendency to exceed upside expectations. He would be concentrating on tech, multimedia, Internet, and Japan. He says the Bond Market is not a problem, but any move in the 10-Year Note above a 4.5% yield would begin to become competitive to stocks. He feels the new dividend tax legislation will steer investment money into yield situations, and finds gold interesting as a way to play a currency hedge.
Tim Hayes, Strategist for Davis Research, says that when Corporate Bond Yields have been this low, compared with stock valuations, stocks have tended to rise at a rate of 26% a year.
James Paulsen, Chief Investment Officer for Wells Capital, says the recent rise in stock prices has come in the face of skepticism about a bear market trap. That may make the rally more sustainable than those of early 2001. This means, if the economy does pick-up, it will still be a surprise to most people, and they will shift into equities.
IT Spending . . . Goldman Sachs told clients that its latest information technology spending survey, which was taken in mid-June, showed "general improvement in spending intentions" for the first time since the survey began in the fall of 2001. "Although much of the rebound is simply a bounce from the highly depressed results of our April survey, there are indications that the second-half spending outlook has improved somewhat," analysts Laura Conigliaro and Rick Sherlund commented in a research note. The Goldman analysts said early 2004 spending plans point to expectations for a 3.5 percent growth rate in IT budgets.
``Information technology spending does follow corporate profits,'' said James Grefenstette, manager of the $700 million Federated Growth Strategies Fund, who has been buying shares of Applied Materials Inc., the biggest maker of equipment to produce semiconductors. ``I don't think we are done rallying.''
Government Issuance . . . The U.S. Treasury said it plans to offer $11 billion in 10-year inflation-indexed notes to raise new cash. The 10-year notes will be issued July 15 and will expire on July 15, 2013.
The U.S. Treasury said it will offer $17 billion worth of 4-week bills on Tuesday to refund bills maturing July 10. The new bills will expire Aug. 7.
Financials . . . General Electric expects its acquisition of Finnish medical equipment maker Instrumentarium to close in the third quarter. GE said it's "continuing (its) constructive dialogue with the European Commission." GE on Friday received the EC's "Statement of Objections," a confidential document that likely outlines the Commission's antitrust review. GE said the document "reflects our discussions to date." It was not made clear whether the Commission was asking for disposals or other steps before clearing the acquisition. GE announced the proposed $2 billion in December., Mario Monti, the Competition Commissioner said that "the initial investigation has shown that the merger combines two major competitors and leads to high market shares. It also raises vertical issues."
The Wall Street Journal's "Heard on the Street" column discussed American Express possibly being the beneficiary of litigation, which was brought against Visa USA. and Mastercard International by the Justice Dept. The suit alleges the two associations wrongly restricted their member banks from entering into agreements with Amex and other card brands. The case received a ruling in the Justice Dept's favor in Oct. 2001 with the case on appeal and a decision expected within a year. If the judges decide to uphold the original decision, Amex will be open to court a myriad of banks, which could potentially ramp up volume and transaction fees. Sanford Bernstein's analyst believes the co winning the right to market "bank-Amex" cards could mean considerable growth of 15% in per share earnings by 2005. In addition, the analyst estimates do not include the possibility of a possible settlement if the ruling is in the company's favor.
Morgan Stanley reiterated their Overweight rating on MBNA and $24 target, saying the stock is their top pick in the specialty finance group. The firm also raises 2003-04 ests above consensus based on expectations that loan growth and other fee income in 2nd quarter will come in stronger than originally thought.
Merrill Lynch upgraded Morgan Stanley to Buy from Neutral based on valuation. The firm says the company's price/book premium is low by historic standards, especially when considering tangible book relative to peers as well as accounting and compensation conservatism. In addition, firm thinks mgmt may take further restructuring action in the retail brokerage segment if the mkts do not provide relief, there appears to have been a meaningful turn in the latter part of 2002 in investment banking, and the co may consider selling the mature Discover asset. Target is $52.
Barron’s article cited concerns over Portfolio Recovery valuations and expected growth. The article points to PRAA's stock price doubling to a recent 31 since debuting in November with concerns over its trading at 31 times trailing 12-month earnings, which is double the industry average. To justify this growth, the company would have to grow earnings 20% annually. However, growing at this rate could be a negative as well given previous collection firms who have overreached and eventually gone out of business. If the company decides to not grow at the current projected rates, the article suggests the stock could decline by as much as 40% or greater. A president of privately held firm in the same business suggests the company could be "courting trouble" by trying to replenish and constantly expand its portfolio to maintain 20% growth.
Oil & gas . . . Baker Hughes entered into a $500 million, three-year revolving credit facility, which it will use as a backup to commercial paper and for general corporate purposes. The facility matures on July 7, 2006 and replaces an aggregate of $594 million in credit lines that were set to mature in September and October.
Fulcrum downgraded oil service stocks Haliburton, BJ Services, Cooper Cameron, Smith International, Universal Compressor, Varco, Weatherford, Diamond Offshore, Noble, Rowan, and Transocean to Sell from Neutral, citing the following factors: 1) rapidly increasing US gas inventories will likely result in adequate storage levels, 2) sluggish oil demand growth likely to lead to lower oil prices, 3) 2nd half 2003 earnings outlook is becoming increasingly tenuous, 4) institutional investors are likely to be net sellers of oil services stocks in 3rd quarter, and 5) oil services valuations are likely to trend lower.
UBS Warburg says that Apache continues to be their top pick in the E&P sector for the following reasons: 1) healthy balance sheet and free cash flow generation enable the co to further pursue M&A opportunities, 2) its moderate risk int'l exploration plays in Egypt and Australia should generate attractive growth, and 3) its superior full cycle returns and track record of value creation. In addition, firm says the co has been one of the few independents to masterfully manage the commodity cycle over the last several years. Target is $81.
Energy . . . Dominion filed a universal shelf that will allow Dominion to issue up to $3 billion in securities over the next two years. The second filing is an equity shelf registration to provide capacity to accommodate previously issued mandatory convertible securities maturing over the next several years.
Homebuilders . . . Beazer Homes said total new home orders for the second quarter increased 12 percent over the same period a year ago to 4,734. The results include a 29 percent increase in orders in the Mid-Atlantic region, a 21 percent increase in the Southeast, and a 12 percent decline in the Midwest.
Transports . . . JetBlue said its June traffic jumped 62.7 percent from last year as the low-fare carrier had a 60.4 percent increase in capacity. The load factor for the period rose as well by 1.3 points to 87 percent.
Frontier Airlines indicated that fiscal first-quarter results would exceed expectations amid a surge in traffic in June. The air carrier now expects to breakeven or earn a nickel a share in the quarter ending June, versus the average analyst forecast compiled by Thomson First Call of a loss of 14 cents a share. Traffic for June increased 40 percent over the same period a year ago to 422 million revenue passenger miles, while capacity rose 19 percent to 558.5 million available seat miles. That represented a load factor rise of 11 percentage points to 75.6 percent.
Consumer Products . . . Avon Products target raised to $72 from $65 at Prudential. Prudential thinks that it will continue to be one of the best performing stocks in firm's universe based on its potential for acceleration in unit growth (10%-plus from 9% over the past 5 years) and EPS growth (13-14% from 11% in 2003E).
Restaurants . . . Wendy's expects earnings of 56 cents per share for the second quarter, excluding the impact of a tax rate change tp 39.5% from 36%. This forecast is in line with the average estimate. For the full year, the fast food restaurant operator dropped its outlook to earnings of $1.97 to $2.03 per share. It had been looking for a profit of $2.02 to $2.08 per share. The company also said changes in state tax law will result in additional tax expense of $3.2 million, or 3 cents per share, in the second quarter. Overall, Wendy's believes its new estimated annual tax rate will be 37.25 percent, up from its previous rate of 36 percent. The company also reported same-store sales at its Wendy's U.S. company stores fell 1.9 percent in June.
Wendy’s was cut to Market Perform from Outperform at Piper.
Retail . . . Kroger upgraded at Bernstein to Outperform from Market Perform and raised their target to $21.50 from $17.25. The upgrade is based on the following factors: firm's new value-driven dominance analysis suggests that KR is substantially better positioned than competitors, better use of customer data to drive sales and lower supply chain costs, and their belief that price investments and operational restructuring that used to plague KR's performance are starting to pay off.
First Albany upgraded bebe Stores to Buy from Neutral, The firm is saying recent store checks leads them to believe that both merchandise assortment and product flow have continued to improve, and therefore firm expects the company to beat guidance of flat comps for fiscal 4th quarter. In addition, firm believes that production issues, which resulted in lack of sufficient inventory, are largely resolved. Target is $25.
Short Interest in Retail . . .
Luxury Goods. Short interest in Coach stock declined 14.5% in June, to 4.1 million shares, which is higher than its 42-month average short interest of 2.8 million shares. Coach’s stock price increased for the fifth consecutive month in June, rising 1.2% on top of a 12.9% gain in May, and continues to trade near its 52-week high. Coach’s stock is up an impressive 51.1% year to date (following a 68.9% gain in 2002), handily outperforming the AMEX, Nasdaq, NYSE, and the Bear Stearns Retail Composite (which are up 17.6%, 21.5%, 10.2%, and 13.6%, respectively). Coach’s 3.9 days-to-cover ratio is well above its 42-month average of 3.0 days, but down considerably from May’s 5.3 days. At Tiffany & Co., short interest decreased by 13.2% to 6.4 million shares from 7.4 million shares in May. Nevertheless, Tiffany’s short interest is still well above its 42-month average of 5.7 million shares. Tiffany’s days-to-cover ratio increased to 8.7 days from 5.8 days in May, and is above the 42-month average of 5.6 days. Tiffany & Co.’s share price slightly decreased 0.2% on a month-over-month basis in June (following an 18.1% increase in May).
Consumer Electronics. Short interest in Best Buy shares fell 15.4% during June, to 17.9 million shares, which is still above its 42-month average of 14.2 million shares. Best Buy’s days-to-cover ratio decreased to 4.4 days from 5.8 days in May, and also remains well above its 42-month average of 3.3 days. Short interest in the shares of Circuit City Stores increased 14.0%, to 8.3 million shares from 7.3 million shares in May. The days-to-cover ratio at Circuit City decreased to 1.3 days from 2.1 days last month, and is belowits 42-month average of 2.2 days. Short interest in RadioShack’s stock declined 16.6% to 4.9 million shares from 5.9 million shares in May, dropping below its 42-month average short interest of 5.3 million shares. RadioShack’s days-to-cover ratio decreased to 5.4 days from 6.7 days in May. In terms of monthly price performance, shares of Best Buy (up 13.5%) fared worse than Circuit City (up 22.4%) but better than RadioShack (up 9.2%), though all did well during June. Year-to-date, shares of Best Buy and RadioShack outperformed Circuit City, increasing 81.9% and 40.4%, respectively, versus Circuit City’s 18.6% gain.
Home Furnishings. The change in short interest in our home furnishings universe was mixed during June, while most stock prices rose during the month. At Bed Bath & Beyond, short interest increased 0.9%, to remain unchanged at about 9.3 million shares, and is above its 42-month average of 8.5 million shares. Bed Bath & Beyond’s days-to-cover ratio contracted to 2.3 days from 3.3 days in May. Bed Bath & Beyond’s share price fell 7.1% in June, following a 5.9% gain in May. Short interest at Linens ‘n Things rose 5.5%, to 2.5 million shares from 2.3 million shares in May, but remains slightly below its 42-month average of 2.6 million shares. Linens ‘n Things’ days-to-cover ratio remained unchanged at 4.4 days in June. Linens ‘n Things’ share price increased 2.6% in June. Rent-A-Center’s short interest fell 7.6%, to 1.0 million shares, which comes on top of May’s 39.2% decrease. Rent-A-Center’s short interest is below its 42-month average of 1.5 million shares. Rent-A-Center’s days-to-cover ratio contracted to 2.4 days from 3.5 days in May, and remained comfortably below the 42-month average of 5.1 days. On top of a 3.2% rise in May, Rent-A-Center’s stock price appreciated 14.4% in June. Short interest in Tuesday Morning fell 3.8%, to 0.5 million shares, which is still above its 42-month average of 0.3 million shares. Tuesday Morning’s days-to-cover ratio decreased to 2.6 days from 3.4 days in May, and is also above its 42-month average of 1.9 days. Tuesday Morning’s share price rose 14.6% in June, and the shares are up 54% year to date. At Williams-Sonoma, short interest increased by 12.9%, to 9.0 million shares, and is above its 42-month average of 7.7 million shares. Williams-Sonoma’s days-to-cover ratio rose to 8.4 days from 5.3 days in May. Year-to-date, Williams-Sonoma’s shares are up 7.6%.
Home Improvement. During June, short interest in Home Depot fell 10.9%, to 26.9 million shares from 30.2 million shares, but remains well above its 42-month average of 20.1 million shares. The company’s days-to-cover ratio increased to 3.1 days from 2.5 days in May, and is still above its 42-month average of 2.4 days. Continuing last month’s 7.3% decrease, short interest in the shares of Lowe’s declined 11.3% in June, to 16.2 million shares, which continues to be considerably higher than its 42-month average of 13.3 million shares. Lowe’s days-to-cover ratio increased to 3.5 days in June from 3.0 days in May. On a year-to-date basis, Lowe’s share increase has been outshined by Home Depot, increasing 14.5% versus Home Depot’s 37.9% gain. On a month-over-month basis, Lowe’s stock posted a 1.6% rise, compared to Home Depot’s 1.9% rise in June.
Office Superstores. During June, short interest increased for Office Depot’s stock, but declined for the shares of Staples. Short interest in Office Depot’s shares rose 8.0%, to 2.7 million shares, but remains well below its 42-month average of 6.4 million shares.
Following the rise in short interest, Office Depot’s share price is down 1.7% year-to-date. Office Depot’s days-to-cover ratio increased slightly to 1.2 days from 1.1 days in May. At Staples, short interest decreased 21.2%, to 5.5 million shares, and continues to be below its 42-month average level of 8.0 million shares. Staples’ days-to-cover ratio decreased to 1.0 days from 1.3 days in May, and remains below its 42-month average of 1.7 days. In terms of stock performance, Staples’ shares decreased 5.4% on a month-over-month basis, underperforming relative to Office Depot’s stock, which was up 8.3% in the same period. On a year-to-date basis, however, Staples’ shares have performed better than Office Depot’s shares, increasing 0.3% versus Office Depot’s 1.7% decline.
Video Retailers. Short interest increased in our video retailers universe during June. Blockbuster’s short interest increased 28.5%, to 5.3 million shares in June, which is well above its 42-month average of 2.0 million shares. Blockbuster’s days-to-cover ratio rose to 6.5 days from 5.5 days, which is above its 42-month average of 3.4 days. Short interest in Hollywood Entertainment’s shares rose 4.5%, to 6.5 million shares in June, and is at its highest level since we started tracking data in January 2000. Hollywood’s days-tocover ratio fell to 7.2 days from 7.6 days, which is well above its 42-month average of 3.0 days. At Movie Gallery, short interest increased 18.0%, to 3.5 million shares from 2.9 million shares in May, and remains well above its 42-month average of 1.9 million shares. Movie Gallery’s days-to-cover ratio increased to 10.8 days from 7.8 days, which is above its 42-month average of 6.8 days. In terms of stock price performance during June, Blockbuster’s shares fell 0.3%, Hollywood Entertainment’s shares rose 3.8%, and Movie Gallery’s stock was down 0.7%. Year to date, Blockbuster’s shares have gained 37.6%, Hollywood Entertainment’s stock is up 15.2%, and Movie Gallery’s shares have increased 43.3%.
Drugs . . . Schering-Plough warned that second-quarter results would be 12 cents a share, below the average analyst forecast of 18 cents a share, due to continued competitive pressures on its major products, such as allergy treatments Clarinex and Nasonex and its hepatitis C treatment PEG-Intron/Rebetol. The company added that earnings for the second half of the year may not reach levels seen in the first half. Schering-Plough will consolidate its global pharmaceutical businesses effective Aug. 1 in an effort to sharpen its focus on key products in major markets. In addition, the company said it would reorganize and simplify its marketing operations, including the elimination of its global marketing department, as it attempts to bring management closer to its customers. The drugmaker had also warned that second-quarter results would not meet expectations.
Healthcare . . . Deutsche downgraded Cerner on checks that suggest management's 2nd quarter bookings target of $175-$180 million is at risk.. The firm cuts target to $15 from $25.
Medical Devices . . . St. Jude Medical cut to Outperform from Strong Buy at SG Cowen. While firm expects a strong 2004, believes the ICD market is likely to slow to 15-17% and CRT devices should gain more share. SG Cowen also doesn't see material upside relative to consensus.
Drugs . . . First Albany reiterated its Buy rating on Ligand Pharma due to IMS prescription data for Avinza that suggest that Ligand is on track to meet or beat expectations in 2nd quarter.
SuperGen received notice of allowance for cancer treatment patent.
Wachovia upgraded Medicis to Outperform from Mkt Perform based on improving Loprox and Dynacin Rx trends, their belief that 2004 earnings guidance understates "intrinsic" earnings power, and the prospect of near-term Restylane approval. Sees valuation range at $65-$67.
Biotech . . . Cellegy Pharmaceucticals received a non-approvable letter from the U.S. Food and Drug Administration regarding its new drug application its testosterone gel Fortigel 2 percent. Cellegy said it continues to believe that evidence submitted to the FDA supports product approval, and plans to meet with the FDA to explore its options related to the decision. PDI, Inc. entered into an exclusive license agreement to commercialize Fortigel in North America.
Ariad Pharma preclinical study for blood cancer shows potency and activity. The company announced, for the first time, results of pre-clinical studies demonstrating the potency and activity of AP23464, its product candidate to treat life-threatening forms of blood cancer. Separately, co issued a press release late Thursday announcing a shelf registration covering 7.5 million shares.
Imclone partner filed Erbitux applications in Europe to market the Erbitux cancer treatment. Merck KGaA expects a Swiss decision this year, and word from the EU next year.
Media . . . JP Morgan raised its earnings and revenue estimate on Yahoo based on expectations for solid advertising sales in the second quarter. The broker said it now expects second quarter revenue of $317 million, up from $305 million and earnings of 9 cents a share vs. an earlier projection of 8 cents a share.
Comcast announced the sale of its QVC stake to Liberty Media for $7.9 billion in cash and stocks. Liberty has yet to detail concretely how it plans to pay for the acquisition. Lehman Brothers expects Liberty will choose to issue the maximum equity contribution it can for QVC, leaving Liberty with $5.35 billion in cash, and with a three-year note. Such terms would leave Liberty a leading contender for Vivendi Universal's U.S. entertainment assets, Lehman concludes.
The sale of Comcast's 57% equity in QVC was somewhat unexpected, as we expected Comcast to be the more likely buyer. The implied valuation of $14.1 billion is in line with consensus, valuation for the asset. There should be a tax liability of under $2 billion due on the sale, or a $0.68-$0.81 per share impact. However, with after-tax proceeds of $6.0-$6.3 billion ultimately being used to reduce debt, we believe the net financial effect of this transaction will be greeted positively. There can be upside from here: a tax-efficient strategy can be worked out with Liberty's assistance. The transaction will use up all the pre-2003 NOLs, meaning that sometime in the near future Comcast will begin to pay taxes. Therefore, tax strategy will become more of a factor in strategic decisionmaking. With an estimated $6.0-$6.3 used to reduce net debt, Comcast will have the strongest balance sheet it has had in years. Pro forma for the sale, net debt is estimated at 3.1 times for year end 2003 and 2.5 times year end 2004. This balance sheet strength can also enhance strategic positioning, ultimately enhancing equity values, in our view. Comcast remains our top cable pick for the long-term investor. and one of our top picks overall. It is likely a $35 year-end price target based on an 11.4 times multiple as applied to 2004 (year-ahead) EBITDA, or $4,011 per subscriber. Year-end 2004 target is $45. Both targets represent 33% annualized appreciation from the current price.
Cablevision announced on Thursday that the SEC has launched a formal investigation into accounting issues at its Rainbow Media division. While CVC has been proactive in dealing with this issue, it is impossible to predict the outcome of any SEC investigation. The uncertainty surrounding this action is another reason that we remain cautious on CVC.
Telecom . . . Nextel rolled out coast-to-coast walkie-talkie service ahead of schedule. Nationwide Direct Connect is the first and only nationwide coast-to-coast, walkie-talkie service (originally scheduled for completion in Aug) is ahead of schedule and will be available in all markets later this month.
Piper Jaffray upgraded United Online to Outperform from Market Perform based on their belief that the company's subscriber growth is likely to stronger than expected, and that the company's momentum in signing up subscribers for its new high speed product at $14.95 is very strong and could provide additional upside. The firm also cited discounted relative valuation. The firm raised target to $33 from $25.
Consumer Electronics . . . On July 3 after the close of market, Palm released the S-4 on the spin-off of PalmSource (Palm's OS business) and the acquisition of Handspring. Investors reviewing the fairness opinions may come away with what we see as a mistaken impression of the fair value of HAND shares. Fairness opinions seems to overstate HAND by understating “illustrative” values of PalmSource. By way of background, Palm announced on June 4 that it would spin off PalmSource (PSRC) to shareholders (each share of Palm will receive 0.34 shares of PSRC) and then acquire HAND at a ratio of 0.09 shares of PALM (after PSRC distribution) for HAND shares. At the time that HAND appeared overvalued and seems to reflect 0.09 times all of PALM (both Palm Solutions and PalmSource). Estimating the value of HAND by first determining the value of PSRC, then subtracting it from the market value of Palm, and applying the exchange ratio of 0.09 to the remaining Palm Solutions. Assume PSRC at 50% of Palm, which seems reasonable since it is at a discount to the $320 million valuation used by Sony in October 2002 when it purchased 6.25% of PalmSource at $20 million. However, the fairness opinions in the S-4 give much lower "illustrative" values for PalmSource -- from $25-$100 mm -- which would imply a higher value for HAND than our model. However, a careful reading of the S-4 notes that the fairness opinions either decline to express a view of the value of HAND or -- using circular logic – take the market value of HAND to be the value of HAND. Keeping in mind that Sony paid $20 million for 6.25% of PSRC last year (a valuation of $320 million), assume that there are two outcomes -- either the valuation of PSRC is low (and HAND is overvalued) or -- if this valuation of $25-$100 mm is appropriate, then Sony may likely buy the rest of PSRC, emerging as a stronger competitor to Palm with the control of the OS.
IT Services . . . Loudeye expects second-quarter operating results to be the "best quarterly financial performance" since becoming public in mid-2000 due primarily to improved gross margins, reduced expenses and growing use outsourced digital media services by online retailers, music subscription and download services. In addition, total cash and short-term and restricted investments at the end of the quarter ending June are expected to increase sequentially.
Network Equipment . . . Today, Redback Networks announces a potential debt-for-equity swap with holders of 67% of the company's 5% convertible notes due 2007 (balance was $478 million in 1st quarter). Completion of the swap is subject to completion of the note exchange offer, which requires a minimum tender of 98% of the outstanding principal amount of the Notes and approval of existing stockholders (these are not a given). If approved, the swap will result in the bondholders receiving 95% share of the company's equity, with the remaining 5% going to existing common shareholders (existing shareholders receive warrants that entitle them to increase their share of the company's equity to 15%). As we pointed out in the past several earnings notes, the company's weak negotiating position to convert its debt will result in massive dilution for existing shareholders if the swap is approved. Despite this potential recapitalization, we continue to be concerned about the competitive environment and RBAK's ability to stage a successful comeback. Cash burn not abating; $18 million in 3rd quarter, $21 million in 4th quarter, $16 million in 1st quarter, and $25-30 million expected for 2nd quarter to bring the balance to $73-78 million.
UTStarcom wins DSLAM contract from China Telecom to deploy more than 200,000 lines of its AN-2000 IB solution in eight provinces throughout China. This marks the third and largest IP-DSLAM contract announcement with China Telecom to date.
Alcatel wins order to deliver 1 million broadband DSL lines in China.
Redback Networks guided sees 2nd quarter revenues of approximately $22 million versus the consensus est for the quaret is $30.65 million.
Tellabs signed a deal with Swiss manufacturer ABB whereby ABB will provide power and utility company's worldwide with TLAB's next-generation SDH and DWDM solutions.
Semiconductor Equipment . . . Goldman Sachs believes that Semiconductor Equipment stocks could outperform over the next two weeks as the market anticipates/reacts to what firm expect to be an upbeat Semicon West trade show that begins July 14th.
Coherent expects revenue of between $98 million and $101 million for the third quarter, below the average estimate for revenue of $103.7 million. The photonics technology firm cited weakness in demand from its Lamda Physik unit's industrial customers in Asia, and weakness in the unit's lithography business for the shortfall.
Taiwan Semi June revenues reached NT$17.85 billion, up 6.2% Month/Month and 14% Year/Year. 2nd quarter revenue NT$49.92 billion up 27% compared with 1st quarter. TSMC’s utilization rate for the 2nd quarter grew to 86% from 67% in 1st quarter. Taiwan Semiconductor said second-quarter factory utilization of 86 percent.
Credence denied reports of NPTest negotiations with Schlumberger,Francisco Partners and Shah Management to acquire NPTest. Credence also stated that it has no intention to enter into negotiations to acquire NPTest or its assets.
Prudential initiates coverage of Cymer (target $36) and ASML (target $9) with Hold ratings. The firm is saying the lithography sector could underperform in the near-term due to significant reuse of the installed base of 248nm scanners until there is capacity expansion by new fab projects.
Semiconductors . . . The 3rd version of the shoot-em-up PC game Doom 3 arrives this fall and should be positive for graphics chip makers ATI Technologies and Nvidia.
Sharp and Texas Instruments will cooperate in system solutions of devices for use in camera-equipped mobile phone handsets.
Needham says they are becoming increasingly bullish on the outlook for DRAMs. The firm is citing the recent trend of firming market prices driven by the emergence of the new, high-speed 400MHz DDR interface offering. The firm noted that Micron's earnings are highly leveraged to DRAM market prices, and believes this trend will continue given: supplier financial pressure, continuing migration to faster devices, and DRAM prices on a per megabit basis that will take nearly 2 years at current levels to return to the very long term trend line.
Barron's article discussed the market for graphics chips, which is currently dominated by ATI Tech and NVIDIA. Despite ATYT moving firmly ahead of NVDA, an analyst in the article points to the trading disparity between the two companies with NVDA trading at 55 times forward 2004 earnings of 43 cents a share and ATYT trading at 13 times the analyst expectations of 80 cents a share for 2004 ending in August. Despite concerns over the introduction of the more inexpensive integrated graphics chipset vs its "discrete" graphics chips. The analyst believes the co ATI can make a profit of $10 on a $30 chipset. In addition, the analyst also believes ATYT has surpassed NVDA for Microsoft's choice for its graphics in the XBox2.
FOCUS Enhancements raises raised fiscal 2003 revenue guidance to a range of $28-$30 million from its previous forecast of $22-$24 million (no estimates available). FCSE attributes the improved outlook to new chip orders from Microsoft, Sony and other unannounced customers, combined with additional sales to customers such as JVC and new product introductions such as FireStore FS-3 and CenterStage CS-HD.
Cirrus Logic appointed a new CFO and also said it expects 1st quarter revenues to come in at the low end of previous revenue guidance.
Semi Notes . . . It could be argued that 4th quarter 2003 may provide the first 'fair' year-over-year comparison for the chip industry in quite some time. For example, 1st quarter, 2nd quarter and 3rd quarter 2003 are arguably 'not fair' because of the effect of SARS, the Iraqi War, and also the major inventory 'head-fake' of 1st half 2002 distorts Year over Year comparisons. IF 4th quarter is a reasonable snapshot of the semi world, perhaps it can also be employed to gauge the picture for 2004.
Employing two different methods for estimating 4th quarter chip sales. First, total up the estimates for the stocks we follow (i.e., a bottom-up approach) and find that 4th quarter 2003 is up 9.0% versus 4th quarter 2002. Second, a 10-year average month-over-month extrapolation of the SIA data produces a 10.7% year-over- year comparison.
These calculations for 4th quarter 2003 are reasonably close to the 12% 'forecast of record' hurdle we project for semiconductor industry growth in 2004. Put differently, our 2004 industry forecast of 12% represents only a mild acceleration over the rate at which we are exiting 2003. 12% forecast of record is driven by end-market growth analysis coupled with ASP trends (anticipate a mildly rising ASP environment next year).
Chip companies are the tail of the tech dog, and the tail normally points backward, not forward. Thus, we try to find other data sources that might give us some inkling of intermediate or longer-term demand drivers. One of the sources we have found useful is the monthly Purchasing Manager Indicator report.
There are several important hazards in using the PMI. First, it is a US-centric data set, which is a mismatch with the worldwide nature of the semiconductor industry. In addition, the PMI can be "noisy", and in the past has shown false up-trends and false downtrends -- reversing course in subsequent months.
With those caveats in mind, it can be gleaned that Year over Year inflections in semiconductor shipments have generally lagged the PMI by 6-7 months.
The PMI data set a trough in April, which implies that semis should bottom around October or November of this year. This is reasonably close to the 3rd quarter bottom predicted by our analysis of Semiconductor Industry Association (SIA) unit and shipment data.
The question is whether the PMI can tell us anything about the shape of the post-3rd quarter semi curve. The two readings post-April have been just a shade under 50 (above 50 indicates a growth environment). In a (probably overly) strict interpretation, the PMI data would therefore imply no meaningful Year over Year re- acceleration for chips post 3rd quarter. More realistically, we anticipate that overseas markets, particularly Asia, will drive most chip industry growth.
In any case, we advise investors to keep an eye on the ISM data as a possible leading indicator of chip demand.
Summary: Processor prices were flat to down slightly in a holiday-shortened week. The discount to list on Intel processors widened by a point, but was unchanged on P4s. AMD processor prices slipped by less than 1% over the week. DRAM spot pricing was mixed last week with DDR 266/333MHz moving modestly higher while SDRAM and DDR 400MHz moved modestly lower.
Processors: Prices generally flat, with volumes light in holiday-shortened week
Processor pricing changed very slightly in the U.S. spot markets, with volumes somewhat light, in part due to the July 4th holiday. The discount to list on Intel processors widened from 6% to 7%, mostly due to further declines in prices of Celerons. On P4's the discount to list was unchanged at 6%. AMD processor prices were also pretty stable, declining slightly less than 1% over the week. Intel's 3.2GHz P4 has still not made it onto the spot markets, despite its formal launch about two weeks ago, likely due to limited shipments at this time. Even though processor trading volume remains thin, there has been a meaningful uptick in Intel motherboard volumes recently, according to some of our industry contacts.
As expected, Intel introduced new higher speed versions of its Xeon MP processors for multi-processor mid-range servers, along with higher speed versions of its 64-bit Itanium enterprise server processors. Dell, Hewlett Packard and IBM simultaneously launched servers using the new Itanium processor. Intel will be further augmenting its Xeon family next Monday (7/14/03), and introduce a 3.06GHz Xeon with a 1MB cache for workstations and low-end uni-processor servers; all of the older Xeons for workstations and uni-processor servers currently have a 512KB cache. Along with this launch, Intel will be cutting prices on six older Xeons by about 26% on average. On the Itanium side, next up is a low power version of the Itanium 2, codenamed Deerfield. Deerfield has a smaller 1.5MB level three (L3) memory cache, or half that of the Itanium with the smallest cache introduced last week, but will consume about half the power of the Itaniums built on the 0.18 micron process, or about 60 Watts While the introduction schedule of this part has not been released, we expect it will debut within the next two months.
Not to be out done, early last week AMD launched new versions of its 64-bit Opteron microprocessor for 4-processor and 8-processor servers, and also for uni-processor workstations and servers. These processors augment the Opterons for dual-processor servers introduced in late April. Nvidia announced that it had begun volume shipment of the nForce3 chipset for Opteron based systems.
Taiwanese chipset manufacturers Silicon Integrated Systems (SiS) and VIA reported their June sales figures last week. These two companies account for slightly less than 20% of global chipset market-share each. 2nd quarter sales at SiS were down 22% qoq, and down 30% qoq at VIA largely due to weakness in the white-box PC market during the quarter. Also suspect that both companies may have lost some market share to Intel in the quarter, as they obtained licenses to produce chipsets for the new P4s with the 800MHz front side bus (FSB) very late in the quarter, and therefore did not have a competitive offering against Intel's Springdale chipsets. Both companies expect a solid recovery in chipset sales in 3rd quarter.
Graphics controller and chipset manufacturer, ATI, announced that it had extended its cross-licensing agreement with Intel to produce chipsets with support for the 800MHz FSB. The company had introduced a P4 chipset with integrated graphics capability about two weeks ago, which according to some reports only supported a 533MHz FSB. We expect that in Q3 Intel's chipset business will likely see significant competition, with 800MHz FSB chipset offerings from SiS, VIA, ATI, and also from Acer Labs (ALi).
Estimates are that 2nd quarter motherboard shipments from the top-tier Taiwanese motherboard manufacturers declined 10% quarter over quarter, followed by a 26% quarter over quarter growth in 3rd quarter.
DRAM Spot Pricing Mixed: DDR 266/333MHz Moves Higher, SDRAM Slides
DRAM spot pricing was mixed last week with DDR 266/333MHz moving modestly higher while SDRAM and DDR 400MHz moved modestly lower. The DDR 128Mb 266MHz increased 4% to $1.85, the DDR 256Mb 266MHz increased 3% to $3.71, the DDR 256Mb 333MHz increased 1% to 3.94, and the DDR 256Mb 333MHz declined 4% to $4.73. The DDR price premium of the DDR 400MHz vs. the DDR 266MHz compressed to 28% from 36% a week ago. SDRAM prices continued to slide with the SDRAM 128Mb part declining 7% to $2.61 and the SDRAM 256Mb part declining 1% to $3.38. Since their interim peak set on April 11, SDRAM 128Mb and 256Mb parts have declined 28% and 15%, respectively.
Channel contacts indicated that activity last week was stronger than anticipated given the U.S. holiday. First half of July contract pricing negotiations are underway and we hear the most likely outcome is a 5% increase in all DDR parts with flat contract pricing for SDRAM parts. The DDR 400MHz contract prices may rise by more than 5%, though given the downtick in 400MHz spot pricing this week, more than a 5% increase in contract pricing may be too optimistic.
General sentiment in the market place is that DRAM supply continues to be tight, with both the DRAM manufacturers and PC OEMs/ODMs carrying lean inventory levels. Demand has been above average also with back to school builds driving some activity. Given the lean supply levels, it only takes a small uptick in demand to ripple through the DRAM sector, potentially sending spot prices higher.
Nanya said that its June revenues increased 7% compared to May. The company cited better DRAM pricing as driving its increased revenues. The company's total DRAM output for June was similar to its May output. The company claims that 38%-40% of its output was DDR400.
Micron and Infineon released specifications for their reduced latency DRAM II (RLDRAM II) architecture specifications. RLDRAM II is going to be the next generation mainstream DRAM, beginning to replace current DDR parts in early 2004. Remain watchful of the production schedule for these parts as a transition to DDR II will have major ramifications for DRAM pricing, as did the SDRAM to DDR transition during 2nd half 2002.
Powerchip announced that the company expects its capacity production to increase about 70% in 2003 compared to expected global DRAM bit growth of about 50%. Capacity is increasing at the company's 300mm Fab 2, increasing from 12,000 wafers per month to 15,000 wafers per month by the end of 2003 and 30,000 wafers per month a year from now. The company also stated that full capacity at the site is 40,000 wafers per month.
Pricing for NOR flash 16Mb firmed this week primarily due to a 19% increase in AMD's 16Mb TSOP F016 to $1.25 and a 9% increase in AMD's L-Volt TSOP LV160 to $1.25. This boosted the average 16Mb flash price 2.7% to $2.88. All other parts remained unchanged with the 128Mb average at $11.50, the 64Mb average at $10.70, the 32Mb average at $7.75, the 8Mb average at $0.60, and the 1Mb average at $0.35.
Samsung Techwin reported a 25% increase in digital camera shipments in June to 100,000 units compared to 1st quarter 2003. The company introduced two new digital cameras (Digimax V3 and V4). Koo also believes that memory per digital camera is increasing from 16MB to 32MB, while the 3M and 4M pixel specifications are becoming the standard. Digital camera demand is picking up strongly from 2nd quarter 2003. Increasing flash densities and increasing unit shipments of digital still cameras bode well for NAND flash, a segment that continues to outgrow the industry.
Boxmakers . . . Hewlett-Packard announced that it will acquire all of the SelectAccess SW assets of Baltimore Technologies. The identity management technologies in SelectAccess will become part of HP's Adaptive Mgmt SW portfolio, providing more secure user access to network services and enterprise resources. HP has been slower to react as evidenced by IBM's entry in this space a year ago from its acquisition of Access 360. Analysts have been writing about convergence for some time and the HP move certainly is in this direction. Given its dominance in network management with HP Open View, adding access control is a logical extension into one area of security. Baltimore was a fast growing encryption provider competing heavily against Entrust (ENTU) and RSA Security. When that market weakened, BALT was left with little growth and asset sales have been a frequent occurrence.
Software . . . FileNet said second-quarter results would be below expectations due largely to the delay and deferrals of several "large" transactions. The company now expects earnings of 1 to 3 cents a share and revenue of $85 million to $90 million, versus the average analyst forecast of 5 cents a share and $90.9 million.
Smith Barney upgraded Siebel Systems to an "in-line" rating from an "underperform" based on the company's improved risk profile. "With the second-quarter pre-announcement behind the company, we believe much of the risk is out of the stock," the firm told clients. Smith Barney also lifted its 2004 earnings estimates, citing Siebel's cost-cutting efforts.
The Financial Times reported that Microsoft is considering paying shareholders a special dividend of more than $10 billion to reduce its $46 billion cash position. The FT cites its sister publication Les Echos as the source of the story. MSFT generates about $14 billion annually in free cash; dividend is only $0.08 per share right now.
BMC Software warned that fiscal first-quarter earnings and revenue would fall miss prior forecasts due to delays in purchasing decisions by larger customers. BMC now expects to earn 1 to 4 cents a share, excluding non-recurring items, on revenue of $305 million to $312 million during the quarter ending June, versus the average analyst forecasts of 8 cents a share and $331 million, respectively. The company cited the shortfall to "unanticipated delays in customer purchasing decisions."
Jack Henry downgraded at Putnam Lovell to Sector Perform from Outperform based on valuation. The firm raised target to $18 from $16 to reflect their increased confidence in the operating environment for financial institution services co's as a whole.
MSC.Software plans to discontinue its systems business due to a deterioration in its pipeline, continued pressure on margins, and weak trends in hardware purchasing. The company now sees software and services revenue from continuing operations of between $59 million and $61 million for the second quarter. MSC.Software also said it has reduced its global workforce by an undisclosed amount. It plans to record charges totaling between $25 million and $30 million in the quarter related to the discontinued operations, the restructuring, and the refinancing of its debt facility. Analysts were looking for a profit of 6 cents per share in the second quarter on revenue of roughly $86.5 million.
Raymond James raised Openwave Systems to 'outperform' from 'underperform' citing valuation and the likelihood of stabilization to improvement in Openwave's business by year-end. The firm expects to see growth in the company's client software, applications and maintenance services' businesses, not its wireless Internet gateway operations.
Siebel pre-announced revenue and EPS of $330-334 million and $.02, versus $350 million and $0.03 estimates, blaming economy-related delay of several end of Quarter deals. With little spending relief in sight, the company will re-structure its operating model to reduce costs. Sales capacity could be affected. Analysts are lowering 2003 and 2004 revenue estimates to $1.38 billion and $1.5 billion from $1.43 billion and $1.56 billion based on continued spending weakness. Analysts are raising our 2003 and 2004 EPS estimates to $0.13 and $0.26, up from $0.12 and $0.18 based on reduced cost structure. Based on SEBL's large cash position ($2.3 billion or $4.50/share) and takeover speculation, there is limited downside risk in the stock at the current level. The valuation looks reasonable.
Security . . . WatchGuard Technologies warned that second-quarter results would not meet prior forecasts, due the continued realignment of its Asia-Pacific marketing channels, lower sales in Europe and continued competitive pricing. The provider of Internet security services now expects pro forma losses, which excludes non-recurring items, of 7 to 10 cents a share and revenue of $19.8 million to $20.2 million. Analyst are expecting the company to breakeven on revenue of $22.1 million, on average.
Internet . . . Overture Services expanded and extended its relationship with Microsoft. The agreement to provide search results for Microsoft's MSN Search will now be accessible in Italy, and has been extended by one year to December 2004.
Articles of Note:
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