We keep asking what this bull market can do for an encore, and we are amazed to find out. Merger mania is beginning to heat up. Of course, mergers represent corporate confidence in the future, as well as a welcome source of fee income for bankers and brokers. Yesterday, we had the Alcan bid for Pechiney, and the VF-Nautica deal. Today, EMC reached out for Legato, Yellow Freight bid aggressively for Roadway Express, and Arvin Meritor bid for auto parts biggie, Dana Corp. The zeal-to-deal offset the profit-taking developed out of yesterday's moon-shot, and allowed another respectable session on the Street of Dreams. Keep in mind that Friday marks month #4 of the advance without an orthodox correction. The S&P 500 added 3 points (+0.3%) to 1,007. The Nasdaq Composite, which gets 42 percent of its value from computer-related companies, jumped 25 points (+1.5%) to 1,746. The DJIA increased 6 points (+0.1%) to 9223. Four stocks rose for every three that fell on the New York Stock Exchange. More than 1.5 billion shares changed hands on the Big Board, 7.7 percent above its three-month daily average. U.S. Treasurys declined in New York, pushing 10-Year Note Yields to a 9-week high on speculation the economic recovery will accelerate. The yield has risen almost 75-basis points since the low point in mid-June.
Strong Sectors: Auto supply, Autos, Dept Stores, Retail, Brokers, Airlines
Weak Sectors: gold, oil, utilities
Top Stories . . . ArvinMeritor, the world's largest maker of heavy-truck axles, offered to buy Dana Corp. for $2.2 billion in cash.
EMC, the world's biggest maker of data-storage software, agreed to buy rival Legato Systems for $1.3 billion in stock to offer more higher-profit programs that protect information and rely less on sales of machines.
Yellow, the second-biggest U.S. trucking company, is seeking to buy larger rival Roadway for $966 million in cash and shares.
Pepsi Bottling Group, the world's largest distributor of Mountain Dew and Pepsi-Cola sodas, said second-quarter earnings fell 5.8 percent after rainy weather hurt sales in the U.S., its largest market.
PG&E National Energy Group, PG&E Corp.'s wholesale power and energy trading unit, became the utility-holding company's second major unit to file for bankruptcy in the past 26 months.
Gurus . . . As the earnings season kicks-off, Tom McManus, strategist for Bank America, notes that only 27-companies warned of profit shortfalls in the week that ended June 30, while 50-companies issued warnings during the final week of the first-quarter. As a result, estimates of second-half profits may be more accurate than they were a year ago.
John Bollinger notes that NASDAQ has just turned in it's third consecutive quarterly gain, the longest winning streak for any major U.S. Index since the bull market ended. All but 11 of the NASDAQ 100 Index are up for the year.
Byron Wien, Strategist for Morgan Stanley, told The Kudlow-Cramer Show that we are in a secular bull that will bring the S&P 500 between 1100-and-1200 this year, while the Dow will exceed 10,000. He says dividend-paying stocks remain in vogue with some of the better-yielding Dow components, including Honeywell, Boeing, and Alcoa.
J.P. Morgan global equity strategist Abhijit Chakraborrti believes the absolute upside for equities is now "limited," but his global portfolio remains overweight stocks relative to bonds. He continues to favor U.S. stocks over those in the eurozone, and added that his preference for stocks over bonds is strongest in Japan.
State Street Investment Strategist, Ned Riley, tells CNBC that the trend remains friendly, and he believes the earnings season will prove affirmative.
Morgan Stanley's Steve Galbraith expects stocks to remain the preferred asset class, even if Treasury yields continue to climb, since he expects the dividend yields of S&P 500 companies to climb into next year. And Morgan Stanley economist Richard Berner feels the pace of U.S. economic growth could quicken to 4 percent or more going forward. "The forces propelling faster growth will overcome those holding it back," Berner said, adding that the economic statistics will soon show this improvement.
Quotes of Note . . . ``We've gone a little too far too fast'' after a rally that's lifted the Standard & Poor's 500 Index by 25 percent in almost four months, said Dennis Fitzpatrick, who helps manage $2.5 billion for First Investors Management in New York. ``I'm betting the recovery will be a little less strong than most optimists in the second half.''
On Mergers . . . ``Companies are recognizing that perhaps one of the ways to grow is to broaden their offerings to customers,'' said David Currie, who manages $700 million as head of U.S. equities at Edinburgh Fund Managers. ``They are making a judgment about where we are in the economic cycle and on how to best use their capital.''
Bond Market . . . .A bearish overtone has blanketed the market essentially since the June FOMC meeting, as investors come to grips with the possibility that the Fed might be done cutting short-term interest rates for now. Improving prospects for an imminent economic upturn and recent equity market enthusiasm have prompted the market to reconsider just how attractive a 3.50% - 3.75% yield on a ten-year Treasury note is right now. As well, within the fixed income markets, corporate and high-yield bonds have been benefiting from the increased optimism relating to economic growth and corporate profits, as investors are feeling more comfortable stomaching the greater relative risk these securities entail versus Treasuries.
Financials . . . The Securities and Exchange Commission broadened its investigation of mortgage buyer Freddie Mac to include reserve accounts, the Wall Street Journal reported Tuesday, citing sources. It said the regulators are examining whether the company used its reserve accounts in an effort to smooth out earnings.
Greenpoint Financial announced a 3-for-2 split and a dividend increase.
CheckFree was downgraded at JMP Securities to Market Perform from Outperform based on their belief that moderating revenue and earnings growth in 2004 (June) will place a cap on further multiple expansion. The firm has confidence that management's guidance for 2004 will support their estimate of $0.95, they believe that the company may have seen the end of the steady stream of upside surprises that marked 2003.
Diversified . . . John Inch at Merrill Lynch trimmed earnings forecast for Honeywell to $1.56 a share from $1.58 a share for 2003 and to $1.80 a share from $1.90 for 2004, on the belief that the company's internal margin projections for its aerospace and automation and control units may be "too aggressive." He reiterated his "neutral" rating on the company, saying he believes the company is among the better positioned to benefit from a recovery in industrial markets.
Energy . . . PG&E said that its PG&E National Energy Group unit and certain PG&E NEG subsidiaries have filed for Chapter 11 bankruptcy protection. The electric utility had said in May that a restructuring of PG&E NEG would inevitably lead to a bankruptcy filing. The company noted that it does not have any material obligations to PG&E NEG, and does not expect the unit's bankruptcy to have any "material adverse effect" on PG&E Corp.'s financial condition.
Transports . . . Roadway reported second-quarter net income of $6.31 million, or 33 cents a share, compared with $5.67 million, or 30 cents a share in the second quarter of 2002. The results were in line with the estimate. Quarterly revenue came in at $741.5 million, up 13 percent from the year-ago period. Looking forward, the trucking company expects third-quarter revenue growth of 11.5 percent to 12.5 percent and earnings-per-share from continuing operations to fall in the range of 60 cents to 70 cents. For all of 2003, Roadway anticipates revenue growth of 8.5 percent to 9.5 percent and earnings-per-share from continuing operations of $2.36 to $2.60. First Call currently expects earnings of 47 cents in the third quarter and $2.43 for the full year.
General Motors announced the launch of its "Summerdrive 2" marketing program, which offers zero-percent financing for five years and cash rebates of up to $4,000 on select new 2003 vehicles from July 8 through July 31. In addition, GM will offer low financing rates and cash rebates on select 2004 models. The automaker also said it would continue its "GM Driveway" and "24-Hour Test Drive" programs through Sept. 2.
Ken Hoexter at Merrill Lynch views Yellow's proposed acquisition of Roadway as "positive" for the less-than-truckload (LTL) industry, given that capacity will likely be reduced once synergies are achieved. Hoexter also believes the disruption in business for Yellow and Roadway while the merger is being completed and the decrease in pricing competition will benefit the remaining LTL carriers. He upgraded Arkansas Best and USF Corp. to "neutral" from "sell," and maintained his "neutral" rating on CNF Inc.. Hoexter feels the merger will also benefit units of FedEx, up 1.3 percent, and Union Pacific, up 0.1 percent.
Photography . . . Craig Ellis at Smith Barney cut his 2003 earnings forecast for Eastman Kodak to $1.40 a share from $1.70 a share due to a lowered outlook for the company's consumer film business. His revenue forecast was cut to $12.5 billion from $12.7 billion. Ellis reiterated his "underperform" rating on the stock and $24 price target.
Food & Beverage . . . Pepsi Bottling expects fiscal 2003 earnings to be at the low end of the previously provided target range of $1.61 to $1.67 a share, due to weak volume trends in the first half of the year. Analysts currently expect 2003 earnings of $1.60 a share. The maker and marketer of Pepsi-Cola beverages said worldwide constant territory volume is expected to be flat to up 1 percent for the year, while reported operating income is anticipated to grow 10 percent. Separately, the company reported fiscal second quarter earnings and revenue that topped analyst expectations.
Marc Cohen at Goldman Sachs said his research indicated that Coca-Cola’s June bottler case sales in Japan declined approximately 2 to 3 percent, versus his forecast of a 2 percent decline. Cohen attributed the recent stock decline to concerns over volumes from a few select Japanese bottlers. Meanwhile, he reiterated his "outperform" rating on the stock and maintained his second quarter earnings estimate of 55 cents a share, saying the June performance was still "basically consistent" with his expectation of flat Japanese volume for Coke on an equivalent case basis.
Morgan Stanley upgrades Coca-Cola Enterprises to Equal-Weight from Underweight. The firm is citing valuation as well as their belief that the co should post a solid 2nd quarter driven by US volume growth, US pricing, strong European growth, and currency benefits. The firm also downgraded Coors to Underweight from Equal-Weight, as they see the company's business fundamentals deteriorating in the US despite the disarray at Miller, and also note an increasingly competitive environment in the UK.
Retail . . . U.S. chain store sales rose 0.7 percent in the week ended July 5, according to Bank of Tokyo Mitsubishi and UBS. Sales had fallen 0.5 percent in the previous week. On a year-on-year basis, sales were up 1.1 percent in the latest week. BTM-UBS said weekly chain store sales continue "to paint a picture of an uneven improvement in non-automotive consumer demand." Most retailers will report June sales on Thursday.
CVS said comparable-store sales for the month of June rose 4.9 percent over the same period a year ago, with pharmacy same-store sales increasing 7.8 percent and front-end sales declining 0.9 percent. The drugstore chain said pharmacy sales growth was negatively impacted by approximately 2 percent by recent generic introductions. Total sales for the month increased 6.9 percent to $2.45 billion. For the second quarter, same-store sales rose 5.5 percent and total sales increased 7.6 percent to $6.44 billion.
Rite Aid said comparable-store sales for the month of June increased 5.2 percent over the same period a year ago, with pharmacy same-store sales rising 6.5 percent and front-end sales advancing 2.9 percent. Total drugstore sales for the month increased 4.3 percent to $1.26 billion.
Mothers Work expects to meet or beat the high end of its outlook for a profit of $1.35 to $1.45 per share in the third quarter. The maternity apparel retailer attributed the better than anticipated results to strong gross margins and its focus on controlling expenses. Also, the company said same-store sales slipped 0.6 percent in June, and that total sales for the month rose 7.7 percent to $41.8 million from $38.8 million in the same period a year earlier.
Chico's FAS reported June same-store sales jumped 16.5 percent. This figure is more than double the approx. 8% gain that analysts were predicting. Total sales for the five weeks ended July 5 rose 41.7 percent to $65.9 million from $46.5 million in the same period a year earlier.
Petco reaffirmed 2nd quarter & 2003 in line with consensus. The company reaffirmed 2nd quarter EPS guidance of $0.18-0.19 versus consensus of $0.19, and 2003 EPS of $1.02-1.04 versus estimate of $1.05.
Pacific Sunwear of California raised its fiscal second quarter earnings forecast to 23 cents a share from 20 cents, citing sales results for the month of June. Total June sales rose 22 percent over the comparable period a year ago to $89.6 million, and same-store sales rose 13 percent.
Stephens says they would not be surprised if Helen of Troy reported EPS below consensus of $0.24 tomorrow or lowered 2004 guidance. The firm cited the weak retail environment during the last several months, SARS issues in China, and the volatility and lack of visibility in the Tactica segment evident in 4th quarter.
Electronics Boutique target raised to $31.50 from $27 at Wedbush Morgan.
Children's Place upgraded at Brean Murray to Buy from Hold based on their belief that the worst is over. The firm says the stock appears poised to further appreciate from its lows with the important back to school season about to begin, and look for an improving comp trend, with a return to positive comps likely to occur by July. Target is $24.
Dollar Tree was cut to Neutral from Outperform at Baird based on valuation.
Healthcare . . . Citing low valuations, Merrill Lynch moved the healthcare sector to an "overweight" view in its model portfolio from is prior "equal weight" while reducing its exposure to technology and consumer discretionary companies. "Pharmaceuticals remain the most attractive industry in the sector based largely on their valuations. These stocks appear undervalued even with their reduced growth expectations," Merrill chief U.S. strategist Richard Bernstein told clients. He has a more negative stance on the tech and consumer discretionary.
Medical Devices . . . With Guidant and Boston Scientific already having pre-announced, there should be few surprises this quarter among the cardiovascular players. In CRM, both Medtronic and Guidant have indicated that this quarter’s tachy growth should top 40%. On the Vascular side, both Guidant and Boston Scientific have reported better than expected coronary stent numbers given JNJ’s limited supply of Cypher. Field checks during the quarter suggest to us that the favorable pricing environment in the domestic recon market remains relatively unchanged. Thus, we would not be surprised to see continued +4% price increases reported for 2nd quarter 2003. The weakening of the US dollar against the Euro and favorable year ago comparisons against the yen should provide a nice top-line lift for our universe of companies.
Drugs . . . Bernstein Research downgraded its Eli Lilly to a "market perform" rating from an "outperform", citing little upside in its earnings potential until 2004 given its tight budget. The firm also feels that the drug stock is already trading at a substantial premium to its peers and that any incremental revenue at Lilly is more likely to be spent than passed on as earnings.
Eli Lilly was downgraded at Bernstein to Market Perform from Outperform. The firm is saying the stock already trades at a substantial premium to peers, Zyprexa's patent risk constrains further multiple expansion, and outperformance prior to 2004 is unlikely given that they see little chance of upward EPS revisions in 2003-04. Target is $74.
XOMA Limited announced Neuprex supply agreement with Baxter Healthcare Corpofor XOMA's Neuprex product. In return for a release from its obligations under the agreements, Baxter has agreed to a one-time $10 million payment to XOMA to be made no later than Jan 2004.
Taro Pharm was downgraded at Bear Stearns to Peer Perform from Outperform based on valuation, as the stock has exceeded their $50 target.
Biotech . . . Roche obtains rights to Genentech’s Avastin outside U.S., under the existing agreement with DNA; DNA will retain all rights to market the product in the U.S.
Amgen and Wyeth submit sBLA for use of Enbrel to treat moderate to severe plaque psoriasis.
Piper Jaffray initiates coverage on select genomics stocks, saying a separation of quality has occurred in the genomics sector that is only now beginning to be reflected in the valuations of the emerging winners. Initiates EXEL with a Strong Buy; Affymetrix, Human Genome, and Lexicon with Outperform ratings; and CRA with an Underperform. Firm sees Millineum Pharma, Human Genome, Exelixis, Lexicon, Myriad Genetics, and Zymogenetics as distancing themselves from the rest of the pack.
Upcoming Biotech News . . . Expect that a number of additional products in the queue will also make it through. These include Gilead’s Emtriva (Coviracil) (approved 2nd July), Cubist’s Cidecin (PDUFA of September 20, pushed back from June 20th), label expansion for Enbrel to include ankylosing spondylitis and once weekly administration in RA, Genentech’s Raptiva (with a potential panel meeting prior to approval) and Lilly/ICOS’s Cialis.
Regulatory Filings: We also expect regulatory filings for Imclone/ BMY’s Erbitux, Amgen/NPSP’s Cinacalcet, sBLA submission for Enbrel in psoriasis and Genentech’s Avastin.
Clinical Data: Pivotal Phase III data expected from Biogen’s Antegren in Crohn’s disease, OSI/Genentech/Roche’s Tarceva, ECOG data from Genentech’s Avastin in combination with FOLFOX.
Other News: The Biogen/IDEC merger is expected to be completed by the end of 3rd quarter or beginning of 4th quarter. Also remain watchful of the activities in Congress related to the Prescription Drug Benefit and the associated plans for reforms surrounding average wholesale price (AWP) and reimbursement of oncology drugs.
Media . . . Viacom and Spike Lee have apparently settled a lawsuit that prevented VIA from changing the name of its cable network TNN to Spike TV in conjunction with its programming format change to a "male-targeted" network. Lee had sued VIA claiming that he would be too closely associated with the network. A judge had issued a temporary order that barred the name change, which we believe cost VIA $10+ million since the network had already spent promotional dollars supporting the name change. The network did change the programming in June, though it maintained the former TNN name.
Scholastic was cut to In-Line at Goldman Sachs. The downgrade from Outperform is based on view that shares may be in the 'penalty box' for an extended period given questions on management's ability to forecast revenues and manage costs. While Harry Potter #5 is shaping up to be the success firm anticipated, weaker than expected results in the other components of the children's publishing business mean that the revenue, EPS and free cash flow shortfall being seen in 2003 will likely continue in 2004.
Hotel & Leisure . . . Goldman Sachs believes that priceline.com is on track to meet/beat firm's 2nd quarter estimate of $0.16 versus consensus for the quarter is $0.14.
Four Seasons was cut to Reduce at UBS based on valuation, as the stock has exceeded their $35 target.
Telecom . . . Bell South is rolling out a cheaper DSL service called "DSL Lite" for $35 a month, featuring Internet access that is five times faster than dial-up but slower than BLS's standard DSL service. BLS has become the latest RBOC, following Verizon and SBC, to lower the price on a DSL offering. BLS is positioning the service as a "light" offering whereas VZ and SBC lowered the price on their core DSL offerings. Believe that reduced DSL pricing will ultimately drive an increase in DSL subs. The question is whether this growth will be incremental to the category or "taken" from the cable operators. Comcast, COX, Cablevision continue to argue that they have seen no impact on their broadband growth from the reduction in DSL pricing. MSOs could experience a slowdown in subscriber growth over the next few Quarter’s due to the RBOCs pricing moves.
United Online was cut to Hold at Kaufman based on valuation, as the stock has exceeded their $29 target.
AT&T Wireless and Western Wireless announce a roaming agreement laying the groundwork for delivery of high quality GSM/GPRS to AT&T Wireless customers in portions of 17 western states. The agreement is effective through December, 2006.
UTStarcom target raised at CSFB to $45 from $32. The firm believes that strength in both China and international markets will lead to upward revision to firm's 2003 and 2004 sales/EPS targets after UTSI reports.
The Wall Street Journal's "Heard on the Street" column highlights Qwest and its 30% increase on the NYSE over the past three months, which has far outpaced its peers. While investors give the company's management credit for avoiding a bankruptcy-court filing during a cash crunch and several probes into its precedent of sales practices, telecom fund managers have cut their exposure. Fidelity Select Telecommunications Portfolio held 12.5 million shares on Feb. 28th, which was down 2.4 million from six months earlier. The article cites concerns over the co trading at six times this year's earnings before interest, taxes, depreciation and amortization which are above "stronger" peers such as VZ trading at 5.5 times EBITDA. However, a T. Rowe Price analyst believes the co can accomplish a great deal through partnerships to "improve its competitive position."
Storage . . . EMC will acquire Legato, in a stock transaction valued at approximately $1.3 billion. Has been long expected although deal at $700 million level did not occur, EMC now presumably has richer currency to fund $1.3 billion/110 million share buy. Since only 5% of shares out and rev run rate, overall impact will be immaterial. Most important, from EMC's perspective, lifts SW rev mix (if count all of LGTO as SW) from 21%+ to 24%+ (towards 30% goal) and takes non-EMC platform SW rev from just 1/3 of SW mix to more like 45%. Achievement of accretion requires probably not much more than $20-25 million cut in annual opex rates. More formidable competitor to Veritas. Also, EMC now expects 2nd quarter total rev to be around the high end of the previously stated range of $1.425 billion-$1.475 billion, and EPS to meet, or exceed by $0.01, the previously stated NI target of $0.03. Shares remain richly priced at 45+X consensus 2004 EPS; maintain Market Perform despite preannounced upper end to June 2nd quarter range. The deal shows EMC willingness to move more assertively as SW provider. It looks like a decent price at 4x 2003 revenues, close to 6x trailing. EPS of $0.08 for 2003 shows steep premium to earnings. Primary LGTO competitors likely to see knee jerk decline today, but competitive implications are complex and may not be particularly negative. Would buy Veritas and Computer Associates on weakness.
Western Digital may come under pressure after J.P. Morgan Chase lowered its rating on the stock to 'underweight' from 'neutral' due to more aggressive pricing in the second quarter, lackluster demand for desktop PCs, the stock's recent run-up, and the looming transition to 80 gigabyte/platter technology. The firm trimmed its revenue estimates on the company and maintained its below consensus earnings per share estimate of 80 cents per share for fiscal 2004.. Notes that WDC is trading at 1.0x 2003 sales, above the prior 5-year historical range and matching the peak valuation from 1997.
SunGard Data was upgraded at Needham to Buy from Hold. The firm is saying they now believe the spending trough has been reached and commentary from the channel indicates a nascent recovery is underway. The firm thinks that SDS is highly leveraged to a pickup in brokerage technology spending and that the shares remain attractively valued despite notable recent strength. Target is $34.
Lexar Media was cut to Hold at WR Hambrecht on view that near-term upside is limited as shares are currently trading at 32x CY04 earnings. Despite firm's belief that business is solid, would recommend staying on the sidelines until the co demonstrates growth outside of the core digital camera market. Target price is increased to $9.
EMC announced its preliminary 2nd quarter results with earnings per share expected to meet or beat by $0.01 its previous guidance of $0.03 per share. In addition, the company expects total consolidated revenues to be at the high end of its previously stated range of $1.425 billion and $1.475 billion versus estimate of $1.457 billion.
Network Equipment . . . Extreme Networks announced that Harold Covert will be leaving his post as VP and CFO. Mr. Covert will resign effective Aug. 31, 2003 to pursue other opportunities. Reginal King at WR Hambrecht recommended investors sell the stock ahead of the networker's reporting of what he believes has been a "challenging close" to its June quarter.
Tellabs was upgraded to Neutral at UBS from Reduce based on valuation, as the stock is trading within 10% of their $6.30 target. However, firm remains cautious on the company's long-term earnings power given its significant exposure (around 45% of sales) to the US optical network space, which is likely to lag behind the overall telecom equipment sector in a recovery and is in need of consolidation.
Morgan Stanley believes that Lucent may miss revenue expectations on a qtr that appears more back-end loaded than usual. Firm also believes that weather-related issues that hampered Eastern operations could have negative top-line impact on the outside plant-related businesses of Adtran, Advanced Fibre and Tellabs. With respect to possible upside surprises, firm thinks that past restructuring and limited pricing pressure could drive positive earnings surprises at Cisco and Adtran. On the rev line, thinks Polycom may show upside; believes strong demand for high-end set top boxes could provide rev upside for Scientific Atlanta but could hurt earnings.
Agere Systems was upgraded at Lehman to Overweight from Equal-Weight, saying margin expansion and profitability are the next potential catalysts for the stock. Raises target to $3.50 from $2.50.
Network Equipment Preview . . . For enterprise-focused vendors, we believe this quarter will see flattish to a modest growth in sales. Expect Extreme Networks to deliver sales growth of around 2-3% Quarter/Quarter, while Foundry should again outperform the group on continued strong business momentum, particularly in the government sector. After delivering stable sales last quarter, we would not be surprised to see AV report a modest 1%-2% Quarter/Quarter decline in sales. Cisco's quarter ends in July, so it still has roughly three weeks left in the quarter, but we believe the company is tracking to a modest sequential growth of around 1%-2%.
Carrier-focused vendors could see flat to down revenue performance. Nortel sales could be flat to down slightly, and expect Lucent to report revenues close to or below our $2.1 billion estimate, which compares to consensus of $2.3B. Juniper stands out from the crowd, mainly because of the momentum it is seeing in the RBOC market and contributions from its channel partners.
On the consumer handset side, expect Nokia to meet its handset target outlined in the mid - quarter update. Expect NOK sales to grow around 3% Quarter/Quarter, and believe it will see CDMA market share gains in the quarter. Going forward, NOK should benefit from the new product introduction cycle through 2003.
Semiconductor Equipment . . . Taiwan Semi and United Micro expect increasing 3rd quarter analog, controller and driver chip orders from handset IC clients such as Texas Instruments and STM as SARS fears have dwindled and inventories at handset makers returned to under three-month levels.
Asyst wins multi-million dollar order to provide its 300mm automated material handling system to Singapore fab, combo of United Microelectronics, Infineon Technologies, and the Singapore Economic Development Board's investment arm.
Varian forecast earnings of 29 to 31 cents per share on sales of between $208 million and $210 million, less than previously expected. Four analysts are currently looking for a profit of 40 cents per share in the quarter, on average. The provider of scientific instruments and contract electronic manufacturing services attributed the shortfall to the weak U.S. dollar, which hurt international operations and raised the cost of foreign-sourced components. Varian also expects to record a number of unusual items in the third quarter, including a loss of $1 million to $1.5 million in revenue from delayed shipments, $500,000 in start-up costs related to an acquisition, and a $1.1 million restructuring charge.
DuPont Photomasks will reduce its global workforce by 5 percent, or 96 positions, as the company moves to halt internal pellicle production at its Conneticut facility. The company will outsource its pellicle supply, and has signed a multi-year supply agreement with Micro Lithography. The maker of chip making equipment said it would record charges of $1.7 million to $2.2 million in its fiscal first and second quarter for the job cuts and record net proceeds of $1.7 million from the sale of pellicle assets.
Semi Equipment Outlook . . . Checks suggest front-end orders for semi equipment companies could be up about 10% quarter/quarter on average for the September quarter (Novellus up 15%-20% quarter/quarter, Lam Research up about 10% quarter/quarter, and KLA-Tencor up about 5%-10% quarter/quarter). Expecting 10% sequential order growth for the December quarter. Order activity in the September quarter could include: Samsung Phase II of its Line 12 in the month of September time frame with tool delivery in 1st quarter 2004, TSMC Fab 12 (capex guidance is $1 billion-$1.5 billion, and believe it could be at the high end of range given improving utilization rates), SMIC 300mm pilot line in Beijing in the early part of July, Inotera (JV between Infineon and Nanya) in July, further orders out of Japan (Sony, Toshiba, and others), Intel Fab 24 in Ireland orders across 2nd half 2003, as well as smaller orders from others. Regarding wafer foundries, we believe wafer starts continue to be strong for TSMC and September quarter revenues could be up about 7% quarter/quarter or more. Also, we believe utilization rates could improve from 86% in the June quarter to about 90% in the September quarter, which translates to improving gross margins.
Semiconductors . . . SoundView Technology expects Intel to "meet or exceed" the midpoint of its second-quarter outlook for $6.7 billion in revenue and earnings of 13 cents a share thanks to a favorable product mix. SoundView also said it expects Intel to offer a wider growth range for the third quarter.
Silicon Labs upgraded at Lehman to Overweight from Equal-Weight, saying the stock has underperformed peers due to handset inventories in China and expected weakness for the company. The firm thinks expectations are lowered and that 3rd quarter and 2004 targets seem reasonable, especially in the face of historical execution, and believes that there is also an ASP expansion story in their high-margin wireline businesses. Raises target to $35 from $30.
Lehman Brothers upgraded chipmakers Broadcom and Marvell Technologies to "overweight" from "equal weight," and raised its price target on Broadcom stock to $35 from $25 and on Marvell stock to $45 from $30. Arnab Chanda believes Broadcom is likely to show upside on both revenue and earnings in its latest quarter, and thinks the company's outlook will be "strong." For Marvell, Chanda feels fundamentals remain solid as the company takes market share in the storage integrated circuit market.
Intel bought privately held West Bay Semiconductor for undisclosed terms. West Bay, based in Vancouver, makes optical networking chips.
Lehman upgraded Marvell to Overweight from Equal-Weight based on their belief that fundamentals remain solid as the co continues to take market share in storage ICs and is well positioned to continue to take part in the transition to Gigabit Ethernet. Products in WLAN and consumer drives are new products that should provide continued top line growth into 2004. Raises target to $45 from $30.
Broadcom was upgraded at Lehman to Overweight from Equal-Weight based on their belief that the company's core business has started to see signs of strength, with enterprise networking (31% of revs) likely to grow with the Gigabit Ethernet ramp in infrastructure while cable (19% of revs) has begun to grow after 2 years of sluggish performance. Raises target to $35 from $25.
Boxmakers . . . Ingram Micro was upgraded at Merrill Lynch to Buy from Sell. The firm is saying the company should benefit from a normal seasonal second-half pickup in demand, while they believe that recent price competition will lessen.
Hewlett-Packard target raised to $28 at Fulcrum.
Software . . . Massachusetts is investigating whether Microsoft retaliated against a computer maker for promoting a rival operating system, a possible violation of the company's landmark settlement.
WebSense reported revenue of $19.4-$19.6 million and pro forma EPS of $0.18 versus estimate of $19.1 million and $0.16. Billings rebounded strongly to $25 million, up 35% from weak 1st quarter and indicative of a solid L-T outlook. As the billings also represented recovery of slipped 1st quarter deals, see this Quarter as evidence WBSN is still a solid performer capable of posting 30+% growth even in difficult times. While definitely inline with expectations, continue to look for traction from new products including CAM and BWOP to cement WBSN as a solution provider. Analysts have left estimates unchanged pending further detail on the quarterly conf. call scheduled for July 22 but will likely raise our estimates modestly.
Michael Turits at Prudential raised Check Point Software to "buy" from "hold," and upped his price target on the stock to $25 from $15, citing evidence of improved network business spending trends. Firm's June channel checks reported an increase in firewall/VPN sales activity; some CHKP channel also seeing sales driven by the newly released AI technology and by NG upgrades. Turits also upgraded NetScreen to "buy" from "hold," and raised his price target to $30 from $19. He also raised his fiscal 2004 revenue and earnings forecasts for NetScreen to $318 million and 61 cents a share, respectively, from $300 million and 49 cents.
Goldman Sachs analyst Rick Sherlund believes that reports indicating Microsoft is considering a one-time dividend of more than $10 billion is "inconsistent with prior comments" he has heard from management and feels it's an unlikely occurrence. Sherlund expects Microsoft to focus on an expanded share repurchase program at its July 24 analyst meeting -- and perhaps a higher dividend as well -- but believes expectations "may be getting too carried away when it comes to such a large one-time dividend."
MicroStrategy inked a $5 million software deal with the U.S. Postal Service.
Application Software Preview . . . Soft demand in 2nd quarter, more bullish 2nd half 2003. Channel checks suggest a weak demand environment for the Big 5 applications software vendors (SAP, Oracle, Peoplesoft, JD Edwards, Siebel). While product evaluations remain active, customers appear to be pushing out application spending until 2nd half 2003 and into 2004. Don't expect license revenue upside, but in-line EPS. While there still remains modest risk to our published 2nd quarter industry license estimates, we have more conviction vendors can hit EPS estimates. Don't expect vendors to revise 3rd quarter guidance given a continued muted demand environment and a seasonally weak summer 3rd quarter. The majority of earnings reports from other software vendors over the past week support this claim. Valuations for the Big 5 vendors have expanded 50% over the past three months, but continued weak fundamentals in 2nd quarter may adversely impact the recent run. 2nd half 2003 spending environment looks more encouraging, but near-term 2nd quarter license weakness puts -6% 2003 license estimates at risk still.
Internet . . . Overture Services was upgraded at First Albany to Neutral from Underperform, as they expect positive news flow tied to upcoming earnings (initially from Yahoo, then from the company), and the announcement of customer renewals/wins; however, long-term prospects remain clouded by rising traffic acquisition cost and timing for profitability of international.
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