From Briefing.com: In our previous update on this page, we suggested in a tongue-and-cheek way that there might be suggestions on Wednesday that the tech sector traded higher because of the better than expected earnings report from aluminum company, Alcoa (AA 25.47 -0.34). As it so happens, the tech sector traded higher, but in proper fashion, it traded higher in spite of Alcoa, not because of it.
Alcoa's Q2 report, frankly, was decent relative to what was expected of the company, but overall, it came up short in delivering on the market's bullish expectations given the company's acknowledgment that it hasn't seen signs of market improvements. Recall that Briefing.com has suggested that the guidance from corporate America needs to validate that the scope of the rally off the March lows was warranted. Alcoa didn't deliver in that regard, and hence, the cyclical shares fell prone to profit taking activity on Wednesday.
The tech sector, for its part, continued its winning ways as the lack of disappointing news in that arena, coupled with the drab market commentary from Alcoa, enabled the sector to avoid a negative outing. To be sure, a one-point gain by the Nasdaq doesn't look like much, but given that it was up 84 points, or 5.0%, in the preceding two sessions, it qualifies as a definite victory for the bulls.
The sector's relative strength was tied to a report in a Dutch newspaper that quoted Cisco's (CSCO 18.80 +0.07) CEO, John Chambers, as saying that spending on IT products will recover in the next 2-4 months. Later in the day, however, the company clarified that Chambers had been misquoted, noting that he hadn't said anything new and that, in fact, he said companies will start spending on IT products 2-4 months after their business turns up. An interesting sidenote to all of this is that the Nasdaq, which was in negative territory before the clarification, traded higher after it. Once again, we were reminded of the bullish sentiment that has prevailed in the tech sector.
On Thursday, that sentiment is expected to be tested. Following Wednesday's close, Yahoo! (YHOO 35.29 +0.19) reported its Q2 results, which were solid by just about any measure, with the exception of living up to the market's aberrantly high expectations. The company's profit of $0.08 per share was in-line with the Reuters Research consensus estimate, revenue of $321.4 mln was slightly ahead of expectations, and YHOO offered Q3 and FY03 revenue guidance that bracketed current consensus estimates. In after hours action, however, YHOO was down more than $2 as the lack of an upside surprise in its guidance prompted some selling on the news. Keep in mind, though, that YHOO is up 116% year-to-date and up nearly 300% since it bottomed last September.
Accordingly, look for YHOO's report to serve as a reality check in early trading on Thursday that tech companies may have a hard time living up to the bullish expectations embedded in their rising stock prices. YHOO's report was a good one, though, especially when taking into account that consensus estimates were revised upward. Thus, it wouldn't be any surprise to see the tech sector show some resolve and bounce back from opening losses. At this juncture, though, Briefing.com is still skeptical that the market will experience an earnings season rally given the market's high expectations and the fact that it never really sold off during the earnings warning period.-- Patrick J. O'Hare, Briefing.com
6:01PM Wednesday After Hours Price levels are as of 4 pm EST: After seesaw day, the market closed lower as it awaited the earnings release from Yahoo (YHOO) and Genetech (00C). YHOO might very well push the market lower tomorrow as the Company reported EPS in line with estimates. There were several reports that suggested that YHOO would beat estimates. The Dow closed lower by more than 66 points and stands at 9142, the S&P 500 added 11 points and closed at 993. S&P 500 futures were at 998, three points below fair value. NASDAQ 100 futures were down nine points from fair value at 1288.
Yahoo! (YHOO 33.20 -2.09), The online search enginer reported Q2 (Jun) earnings of $0.08 per share, in line with the Reuters Research consensus. Revenues rose 42.3% yr/yr to $321.4 mln and ahead of the $313.3 mln consensus. YHOO sees Q3 revenues of $318-338 mln vs current consensus of $325.5 mln, for Y03 sees revs of $1.26-1.31 bln, consensus is $1.28 bln.
Genentech (DNA 76.51 -0.87) Reported Q2 (Jun) earnings of $0.31 per share, $0.05 better than the Reuters Research consensus of $0.26. Revenues rose 28.5% yr/yr to $799.7 mln vs the $755.6 mln consensus. DNA is a biotechnology company using human genetic information to develop drugs.
Nautilus Group (NLS 10.80 -2.24) Co. sees Q2 EPS in the range of $0.13-0.15, below Reuters Research consensus of $0.26 and Q2 revenues of $95-100 mln vs. R.R. consensus of $112 mln. NLS also sees Y03 EPS of $1.00-1.10, also below R.R. consensus of $1.59 and Y03 revenues of $450-470 mln, vs. R.R. consensus of $527 mln. Co cites "A challenging business environment, Bowflex product line competition, and lackluster consumer spending" to be the major reasons for their shortfalls
American Eagle (AEOS 18.83 -0.82) Company reports same store sales down 5.3% vs. consensus of -2.5%, sees Q2 EPS of $0.10-0.12 vs R.R. consensus of $0.09. New guidance is based on July same store sales decrease in the "mid-to-low single digits"
Galyan's Trading (GYLN 15.06 +0.00) Company sees Q2 EPS as a loss of $0.01 to a gain of $0.03, ex items, vs. Reuters Research consensus of a $0.21 gain. Company also sees Q2 revenues in the range of $160-164 mln vs. R.R. consensus of $174 mln. Company is also expecting to report a same store sales decline of 8-10 %. Company cites the poor economy and the unfavorable weather for shortfall.
Brown and Brown (BRO 32.67 +0.00) Reported Q2 (Jun) earnings of $0.41 per share, $0.02 better than the Reuters Research consensus of $0.39. Revenues rose 20.0% yr/yr to $137.9 mln vs the $142.1 mln consensus.
Tomorrow looks to be a light way of earnings announcement, of note, Abbott Labs (ABT) and Pepsi (PEP) and the first of the banks comes out, as Sun Trust (STI) reports tomorrow before the bell. . For more detail on these, and other after hours developments, be sure to visit Briefing.com's In Play, Earnings Calendar and Guidance pages..--Brian Bolan, Briefing.com
3:16PM Kulicke & Soffa signs volume purchase agreement with National Semi (KLIC) 7.60 +0.46: Co and National Semiconductor (NSM) sign a volume purchase agreement for Maxum wire bonders. KLIC will be the exclusive supplier of wire bonders over the next 12 months.
3:00PM Yahoo! Earnings Preview (YHOO) 35.27 +0.17: -- Update -- Yahoo reports its Q2 after the close with Reuters Research consensus estimates of $0.08 per share and revenues of $313.3 mln. Credit Suisse First Boston believes the co will beat both its published and consensus estimates. Despite its lofty valuations, the analyst believes the stock could still have upside given the current market environment and analyst earnings revisions reflecting potentially higher guidance for the year. Deutsche Bank also shares some of the same sentiment on estimates with the analyst believing most of the revenue upside should be coming from the marketing services business. In addition, upside is suggested to come from improved pricing from the paid search segment along with a marked improvement in branded advertising segment.
1:37PM Microsoft (MSFT) 27.33 -0.37: First, Microsoft issued a dividend; now, it says that it will no longer issue stock options. What will the company think of next? Speculation has it that Microsoft is entertaining the thought of issuing a special dividend of $10 bln. Management downplayed such talk, but whatever the case may be, Microsoft seems to be forging a path these days that would force one to re-consider the tendency to think of Microsoft as a growth company.
The market, in Briefing.com's estimation, has caught on to the software giant's changing investment complexion. After all, with investors growing less risk averse since March, and the tech stocks rebounding in intrepid fashion, it is reasonable to think MSFT would have been at the head of the recent rally. On the contrary, it was a notable laggard. At the end of June, MSFT was up 12.5% from its March 11 lows versus the Nasdaq Composite, which was up 27.6%. To be fair, a 12.5% gain in roughly three months is a solid investment return, but when pitted against the performance of other growth stocks, it qualifies as disappointing.
As for last night's announcement that Microsoft will no longer issue stock options, but instead, will start granting Stock Awards -or restricted stock - Briefing.com is not disappointed. Rather, we are encouraged by the move. Starting with its 2004 fiscal year (i.e. now), Microsoft will begin expensing all equity-based compensation, including previously granted stock options. That decision, understandably, has created concern about lower levels of profitability, which is why MSFT is on the defensive today. However, the new approach is a prudent one, as it should produce greater transparency in the company's results, increase the likelihood of a dividend boost, and enhance the appeal of working for Microsoft .
Expensing stock options, of course, has been a hot button issue, particularly for technology companies that have come to rely on them as a key incentive for attracting top talent. Options, to say the least, were seen as manna from heaven during the heyday of the tech bubble, but the popping of that bubble and the scourge of the alternative minimum tax, have created plenty of angst, and have bred plenty of ill-will, for recipients of stock options.
Hoping to correct that situation, and with an eye toward attracting, and retaining, top talent, Microsoft reshaped its compensation philosophy. Now, Microsoft employees will be a direct owner of the company through these Stock Awards and won't be disillusioned by the thought of holding stock options that are underwater, and frankly, may never prove to be of any value.
Loyalists, we suspect, would decry the re-classification of Microsoft as a mature company and the labeling of its stock as a value-oriented investment. That's fine, but let's face it, the payment of a dividend, the abandonment of stock options, and the expensing of equity-based compensation, are aberrations for most technology companies, and certainly for most growth companies. The latest move by Microsoft reinforces our recent decision to add its stock to our Value Core, but more importantly, it reinforces our view that MSFT represents an attractive investment idea at current levels.-- Patrick J. O'Hare, Briefing.com
12:07PM RJ Reynolds (RJR) 36.87 -1.26: Speculators are seeing a merger between the number two and number three sellers of tobacco, but this may only come on the heels of a sudden burst in M&A throughout the market. A story in The Wall Street Journal has RJ Reynolds (RJR 36.49 -1.64) and British American Tobacco (BTI 21.60 -0.14 ) in talks to do a deal, but the article mentions that the two are unlikely to consummate the transaction.
RJR, the maker of Camel and Winston cigarettes, is the No. 2 U.S. cigarette maker behind Altria Group Inc.'s (MO 42.83 -3.94) Phillip Morris division. Several possible deal scenarios have been discussed, including the Brown and Williams division being sold to RJR. At the other end of the spectrum is a possible BTI buyout of RJR. Whatever the rumor, neither company will comment on any specifics.
The same litany of excuses are present for not owning a tobacco stock - the increased competition from discount brands, the higher taxes from a number of states, and the continued threat of litigation. RJR, though, has more than just those excuses against it.
One sign that doesn't bode well for either RJR, or a potential deal, is that the Company's CFO resigned back in early June. The resignation of a CFO is a major red flag, and gets a lot of short sellers interested in a stock. The CFO tends to have the best idea of where sales and expenses are headed, and a resignation after only a year on the job is not a positive signal.
Back in June, when the same rumor (BTI and RJR merging) ran its course, RJR was said to have hired Booz Allen Hamilton, a consulting firm, with the express interest of exploring the opportunity to sell the Company. Since then, both good and bad news has circulated around RJR. The company has witnessed the litigation risk being slightly reduced, as profiled in a Story Stock, and also has seen its credit problems persist. Standard & Poor's recently lowered RJR's corporate credit and senior unsecured rating to below investment grade. About $2.5 billion of RJR debt was outstanding at the end of March. This sets the stage for a White Knight with a solid balance sheet and a plan to cut costs to come to the rescue.
The only problem is that no White Knight wants to buy that much trouble; and chances are the White Knight would have already ridden up and defended its "prize." Lots of debt, coupled with a junk rating from two of the three rating agencies, and a tough market doesn't really bring a lot of White Knights out of hiding. Whether RJR does a full scale sale, or lets go, or sells, parts of the Company remains to be seen. What is certain is that RJR is the laggard of the group, and is not benefitting as much from the recent upturn in the market. Briefing.com sees a lot potential for the industry as a whole, but certainly regards RJR as the black sheep of the sector.--Brian Bolan, Briefing.com
11:37AM Ratings Briefing - HAL : Halliburton (HAL 23.68 +0.85) has drawn fire on several fronts over the past two years - SEC probes into the company's accounting practices and grand jury investigations into charges of overbilling the government - but undoubtedly its largest issue has been the enormous number of asbestos claims stemming from its 1998 purchase of Dresser Industries. At the time, HAL believed that the accrued liability would not exceed its set-aside reserve of $24 mln, and as of late last year, settlements had totaled approximately $2.8 bln.
HAL's fortunes, however, have taken a turn for the better as analysts have suggested that the company's asbestos turmoil has subsided. An asbestos bill proposed by Senators Feinstein and Kohl that would replace the current tort system used to resolve asbestos claims has provided investors relief, and in turn, has helped lift the stock to a new 52-week high (on June 12).
The bill would eliminate some of the uncertainty for companies confronted with thousands of asbestos suits by creating a $108-153 bln trust fund that would distribute set payouts for particular ailments. Members of the Senate Judiciary Committee remain divided over how much should be paid for specific claims; and Chairman Hatch has pushed out a vote to approximately two weeks from now. Goldman Sachs noted today that the bill will most likely pass the committee - as only a simple majority is needed - but stipulated that support from Senator Leahy and other influential Democrats is needed for enactment. As it stands now, Goldman rates the chance of passage at no more than 50-50.
Regardless of the outcome of the proposed bill, JP Morgan re-examined today what closure to HAL's asbestos travails would mean for the stock. Its scenario analysis suggested that, in a flat Oil Services Index (i.e. OSX), moving beyond the asbestos issue would create potential upside of 61% versus downside potential of just 5% for HAL. If investor sentiment deteriorates to the point at which the current oil services cycle is viewed as being "over," however, the aforementioned risk-reward range would need to be shifted lower. The latter declaration aside, JP Morgan upgraded HAL to Overweight from Neutral, noting that current supply constraints for both oil and natural gas, and upstream investment trends, are inconsistent with a cyclical downturn.
Although Briefing.com would refrain from issuing such a strong opinion on HAL, we do agree that a resolution to the asbestos matter - particularly the pending legislation in the Senate - would remove a tremendous overhang from the stock and enable it to trade at P/E multiples more on par with sector peers. We recommend investors watch the Congressional proceedings closely as a sizable cap to asbestos payouts would most likely incite a bounce in HAL, as well as other companies burdened with asbestos liability. -- Heather Smith, Briefing.com
11:03AM Ahead of the Curve: Tenet Healthcare (THC) 11.98 -0.17 (-1.4%) Now the SEC investigates. It was inevitable, frankly, given the prior Department of Justice investigation into outlier Medicare payments to Tenet hospitals. Back in January, Tenet announced that it would revise its policy for how outlier payments are received at Tenet owned hospitals - and the result would be a drop from $65 million per month to closer to $8 million per month. This represents approximately $57 million per month or $680 million per year. That is almost three-quarters of a billion. Tenet's entire revenue is in the $16 billion range, so this would represent only about 5%, at most, of their total revenue. Nevertheless, the SEC investigation, which apparently stretches all the way back to 1997, is probably looking at what role the outlier payments represented in Tenet's revenue stream over this time period.
There is simply no way that any of this news can be viewed as positive for Tenet Healthcare. There are undoubtedly some looking to take positions when they feel the market has over-discounted the stock. That approach might work, because Tenet can probably pay any fine that gets imposed. But it is not a strong investment premise, in our opinion, for those wanting healthcare stocks. In the last of our Stock Brief series on the entire Healthcare Sector, published today on the Stock Brief page, we outlined the facilities industry, of which Tenet is the fourth largest company (out of 88). In the entire healthcare facilities industry, we have no individual stock pick, largely because the services model does not provide the opportunity for improved margins with scale. However, we do have several strong picks in the other industries of the healthcare sector: 1) major drugs (ABT); 2) biotechnology and drugs (TEVA); 3) healthcare equipment and supplies (BLUD), (STE), (AMI). For details on why, see the Stock Brief page. Each article's title starts with: Ahead of the Curve: Healthcare.
The real concern on our part, is whether the investigation stays limited to Tenet, from the DOJ perspective. This is an industry where the primary customer is the government and insurance companies. Insurance companies have already managed to find a way to exert some cost controls, but they primarily rely on passing on costs to the payer - corporate HR departments. The government, on the other hand, has not shown much real strength in policing the Medicare and Medicaid systems. If real abuses, particularly if they are in the "grey area" rather than clearly illegal activities, turn up, it might actually lead to a much more focused review of the entire system. That won't happen in the near future, as no politician is willing to pick up that flag for the parade, but as a distant spectre looming on the horizon, it should be of concern for every investor in the healthcare sector. For that reason, we think it is worth following the Tenet story closely, even though we don't have a pick in the entire facilities industry. The other sectors are all driven by the public/private system we have built in this country. Miracle drugs are invented that will cost $10,000 and prolong life for six months. Most of patients that will use them will not be able to buy them if they are not covered by government or private insurance programs. The role of the government in this sector is extremely important - and the Tenet case - which now includes the DOJ and the SEC - may give some guidance as to how government will view their role in the industry over the coming years. - Robert V. Green, Briefing.com
9:24AM The Technical Take : Gains across the board for the market averages amid improved volume which is exactly the type of action that bulls are looking for. The overall focus remains more so on Nasdaq related stocks as the Composite index easily outperformed the other large cap averages in terms of percentage gain, volume and breadth while also establishing a new 52-wk high. Although the Dow and S&P 500 have yet to take out their respective highs from June, small-cap (Russell 2000, S&P 600) and mid-cap (S&P 400) averages have joined the Nasdaq at fresh yearly highs. The inability of the larger cap "blue chip" averages to join in the upside extension is not considered a negative divergence but rather merely a period of underperformance. This is based on the continued favorable chart action in the Dow and S&P 500, bullish internals and the impressive technical performance of the majority of the sector indices (see below for details).
Nasdaq Composite: We highlighted the 50 period simple mov avg on a 5 minute bar chart yesterday as a good indicator of the very short term bias. The Nasdaq Comp tested this area in the first 10 minutes of action and rebounded aggressively falling a few points shy of a short term resistance near 1751. Based in the pre-market readings the market is set up for a minor pullback off the open. For the early action will be watching 1735 which marks this average as well as an intraday range (green line) in the chart below. A secondary short term floor is in the 1725/1720 area.
Beyond any early consolidation, both the short and intermediate term bull trend remain intact. To see the remainder of The Technical Take on the Nasdaq Comp and a similar take on the S&P 500 along with levels for the Dow Industrial Avg see the Stock Brief. Send suggestions, comments or questions to -- Jim Schroeder, Briefing.com
Stocks dropped late in the afternoon after being hit with disappointing economic data and Yahoo’s failure to beat the Street earnings estimate. The S&P 500 declined 13 points (-1.4%) to 988, with computer-related companies accounting for more than a quarter of the drop. The Nasdaq Composite slid 31 points (-1.8%) to 1715. Both had their biggest two-day declines since May 19-20. The DJIA lost 120 points (-1.3%) to 9036. The Nasdaq reached its highest closing price since April 2002 yesterday as investors expected those companies to benefit first as the economy rebounds. Yahoo's results raise concerns that optimism may be overdone. The S&P 500 has jumped 23 percent since touching its 2003 low on March 11, while the Nasdaq has climbed 35 percent. Investors will watch companies' results for signs of economic growth. General Electric Co., the second-largest company by market value, reports results tomorrow. U.S. companies expect the economy to rise at an annual rate of as much as 4 percent in the second half, according to a survey by the National Association for Business Economics. It gained 1.4 percent in the first quarter.
Top Stories . . . The number of Americans filing first- time applications for state unemployment benefits unexpectedly rose last week, suggesting U.S. companies were still slashing payrolls to cut costs heading into the last half of the year.
U.S. 10-year Treasury notes rose for a third day in New York trading after a Labor Department report showed the world's largest economy still faces sluggish employment growth.
PepsiCo, the world's No. 2 soft- drink maker, said second-quarter earnings climbed 15 percent after sales were boosted by Gatorade and the introduction of a lower-fat line of Lay's potato chips and Cheetos cheese puffs.
Wal-Mart Stores, Limited Brands and Costco Wholesale said June sales rose amid tepid spending by U.S. shoppers because of concerns about employment and rainy weather on the East Coast.
SunTrust Banks, the first of the 10 largest U.S. banks to report second-quarter results, said earnings dropped 4 percent as falling interest rates squeezed profits from lending.
A U.S. Senate committee hit a snag in efforts to reach agreement on legislation creating a $108 billion trust fund to compensate asbestos-exposure victims and end lawsuits that have bankrupted more than 60 U.S. companies.
Quotes of Note . . . ``People have priced in better-than-expected earnings, and Yahoo is one that gets people worried about what they've been predicting,'' said Edgar Peters, who oversees $12 billion as chief investment officer at PanAgora Asset Management in Boston. ``The rally has gotten tired.''
Of Note . . . While the recent strength in equities has been impressive, investors should not be overly surprised since equities have typically rebounded sharply in the wake of past bubbles. There remains upside to the S&P 500 this year. However, the pace of the advance will likely slow in the coming quarters as the current overbought condition eases.
At the sector level, the greatest contributors to second-half earnings growth are expected to be financial and technology. Investors should be aware that the interest rate and capex outlooks are still very uncertain, and could have a dramatic impact on second-half 2003 estimates for both sectors, respectively.
Gurus . . . Bear Stearns investment strategist Francois Trahan believes the pace of the recent equity market advance will slow as he expects earnings growth in the second half of the year to decelerate, versus Wall Street expectations of an acceleration. He feels diminishing productivity and pricing power will weigh on earnings, and the interest rate and capital expenditure outlooks remain uncertain. "Accordingly, earnings-focused investors are likely to be disappointed as estimates continue to be shaved toward more realistic levels," Trahan said. He kept his year-end price target on the S&P 500 Index at 1,050, which is 5.7 percent above the current level of 993. The index had gained 11 percent in the first six months of the year.
Of Note . . . Bidding for lunch with the "Oracle of Omaha" aka Warren Buffett will end tomorrow night. The listed value for the item on eBay is "priceless," with the auction item already at over $60,000 with one full day of bidding remaining. Bidders are competing for an intimate lunch at a table of eight in NYC. In addition, bay area residents will also have a chance to win lunch for eight with Mr. Buffett in San Francisco by bidding during a Best of the Bay Area 2003 event. Buffett will donate the proceeds to Glide Foundation, the largest social service provider in San Francisco.
Greenspeak . . . Economists are not robots and can't make mechanical judgments about which is more valuable: economic growth or a pristine environment, Federal Reserve Chairman Alan Greenspan said Thursday. The Fed chairman said Congress, as the voice of the people, must weigh the competing "human values" of a strong economy and preserving the wilderness for future generations. Greenspan made the comments at a hearing devoted to the natural gas shortage in the United States, at which some senators suggested rolling back environmental restrictions on energy development on federal lands.
Eco Speak . . . U.S. unemployment lines are getting even longer. The average number of jobless workers filing for initial state unemployment benefits over the past four weeks rose by 1,000 to 426,750 in the week ending July 5. The number filing in the most recent week increased 5,000 to 439,000, the most in five weeks. The numbers are seasonally adjusted to account for variations such as factory retoolings. This is the 19th consecutive week initial jobless claims have been above the psychologically significant 400,000, which many economists consider the dividing line between overall job growth and job loss.
Financials . . . SunTrust Banks reported second-quarter net income of $330.4 million, down 4 percent from the same period in 2002. On a per-share basis, the company made $1.17 a share vs. the $1.18 that had been projected. Net charge-offs in the second quarter totaled $82.2 million, or 0.44 percent of average loans -- flat from the first quarter. The company said it believes this is "generally indicative of overall improving credit quality conditions." SunTrust chairman states, "There were no surprises in this quarter's results."
Energy . . . Merrill Lynch downgraded Mirant to "sell" from "neutral." Elizabeth Parrella believes the probability that the energy producer files for bankruptcy is increasing, as the likelihood of an out-of-court debt restructuring by the July 14 midnight deadline has declined to below 50 percent, "maybe well below." Parrella believes downside risk in the stock price is between "worthless" and $2. The company said late Wednesday that it had amended some of the terms of its offer to restructure bank debt as it pursues a prepackaged plan of reorganization.
Entergy guides above consensus as they now see EPS of $1.15 versus consensus of $1.07, however guidance includes "disproportionate income allocated to Entergy in accordance with the terms of the Entergy-Koch", so not clear if comparable to consensus. ETR reaffirms "operational" 2003 EPS of $3.75-3.95, consensus is $3.96.
Transports . . . Mesa Air target goes to $14 from $10.50 at Raymond James.
In light of Harley's upcoming earnings report, soon-to-be-unveiled new model year, and the amount of attention focused on the company's performance at retail, we recently took to the phones and spoke with over 40 dealers from all parts of the country. On the "negative" side, we heard that the used bike market is still soft, Buell and V-Rod sales continue to lag, and HDFS has extended and introduced financing specials for Buell and H-D motorcycles, respectively. On the "positive" side, most dealers see their demand as better than last year, are eager to increase their allocations for MY 2004, and do not think they are over-inventoried. Furthermore, we have high expectations for the MY 2004 offerings, which could spark additional demand at retail when they are shipped around October. Analysts are lowering target asset value range to $50-$52 from $60-$62 to reflect less aggressive top line growth assumptions (we encourage Harley to articulate future growth initiatives underpinning a more aggressive top line growth estimate). In addition, lower asset value accounts for the expensing of previously granted options, future grants, and the unfunded pension liability. While oong-term investment thesis remains unchanged, we think that negative momentum, coupled with the possibility of some disappointments next week, will continue to weigh on shares of HDI over the near-term. Maintain Outperform.
Food & Beverage . . . Pepsico reported second-quarter earnings of $1.01 billion, or 58 cents per share, up from its year-ago profit of $875 million, or 48 cents per share, and in line with the average estimate. Revenue at the soft drink maker swelled to $6.54 billion in the latest three months from $6.12 billion in the same period a year earlier. Pepsico said a reduction in costs related to its Quaker merger helped earnings in the latest quarter, as did 'excellent volume and revenue growth' at its Frito-Lay snack business. Total worldwide volume rose 5 percent in the quarter. The company added that it's on track to deliver earnings of $2.16 to $2.19 per share in 2003, including 3 cents per share in merger costs.
UBS upgraded Pepsico to Buy from Neutral and raised their target to $55 from $45. The firm's new target represents a 30% premium to the S&P 500 on their 2004 estimate, which they believe is justified by PEP's superior long-term sales, earnings, and free cash flow growth prospects.
Restaurants . . . Panera Bread downgraded at Stifel Nicolaus based on valuation. PNRA shares have appreciated about 38% since the company reported 1st quarter earnings results in mid-May, and roughly 55% since they upgraded the stock in early-February.
Checkers reported 2nd quarter (Jun) earnings of $0.32 per share, $0.04 better than the consensus of $0.28. Revenues rose 7.7% year/year to $45.9 million versus the $46.6 million consensus.
Apparel . . . Skechers was upped to Buy at Wedbush Morgan based primarily on stock's compelling valuation; believes that the market is currently pricing in too pessimistic a scenario for Skechers, and believes the risk/reward tradeoff is very favorable; views current weakness in business and stock price is a buying opportunity. Firm's price target is $10.00.
Retail . . . Wal-Mart said total sales for the month of June rose 11 percent over the same period a year ago to $24.6 billion, with Wal-Mart division sales rising 9.5 percent to $16.7 billion and Sam's Club sales increasing 8 percent to $3.1 billion. Wal-Mart reported a 2.7% rise in June comps. This figure falls slightly below consensus of 2.9%. Same-store sales rose 2.4 percent for Wal-Mart stores and 4.1 percent for Sam's Club stores. Wal-Mart expects to hit high end of July same-store sales forecast.
Hot Topic target raised to $35 at Sanders Morris Harris. The firm is saying solid comp trends continue to reveal the strength of the company and strong momentum in key areas of its business should fuel healthy top line growth.
Wet Seal says loss "could be between $0.35 and $0.45 per share", consensus is a loss of $0.08. WTSLA June comp store sales down 21.5%, consensus called for 15% decline.
Claire's Stores reported 4% increase in June comps. This figure falls below the Lazard est. of +5%. "We believe we are on track to meet the five to six percent increase in consolidated same store sales projected for the second quarter."
American Eagle Outfitters reported June consolidated same-store sales fell 5.7 percent. Total sales for the five weeks ended July 5 rose 5.3 percent to $128.2 million from $121.7 million in the same period a year earlier. Looking ahead, the company forecast earnings of 10 to 12 cents per share for the second quarter, ahead of Wall Street's consensus estimate for a profit of 9 cents per share. It sees a decline in the mid-to-low single digits in same-store sales for July.
Costco Wholesale reported total June sales of $4.3 billion, an increase of 11 percent over the same period a year ago. Comparable-store sales for the month rose 7 percent, amid a 5 percent increase in U.S. stores and an 18 percent rise in international.
Barnes & Noble reported June same-store sales increased 10.5 percent. Excluding the contribution of the new Harry Potter book, same-store sales would have logged a gain of 4.9 percent for the period. The company's B. Dalton Bookseller stores, which comprise 5 percent of total sales, posted a same-store sales increase of 9.7 percent in June, but removing Harry Potter from the equation results in a drop of 5 percent.
Nordstrom said total June sales increased 6.4 percent over the same period a year ago to $616 million. Comparable-store sales for the month rose 1.9 percent, helped by gains in sales of shoes, men's apparel, cosmetics, women's active wear and women's designer apparel.
Target reported that June comparable-store sales increased 0.8 percent while net retail sales increased 7.9 percent to $4.135 billion. The retailer said the "significance" of June's contribution to its second-quarter earnings would cause it to post earnings-per-share of 39 cents to 40 cents. Thomson First Call currently expects second-quarter earnings of 40 cents a share.
Gap reported June same-store sales jumped 10 percent versus consensus of 7.8%. Total sales for the five weeks ended July 5 surged 13 percent to $1.5 billion from $1.3 billion in the same period a year earlier. The San Francisco-based casual apparel retailer said the total sales figure met its expectations as "all brands began to clear summer inventory in preparation for the arrival of fall merchandise."
Kohl's lowered its fiscal second-quarter earnings outlook to 30 to 32 cents a share, below the average analyst estimate of 39 cents a share, as a result of "very aggressive" pricing during the quarter to clear seasonal merchandise. Separately, the company said total June sales increased 11 percent over the same period a year ago to $828.7 million, while same-store sales for the month declined 2.4 percent. KSS reports June comp store sales decreased 2.4%, Lazard was looking for a decrease of 2.0%.
Abercrombie & Fitch reported June same-store sales fell 5 percent. Total sales for the five weeks ended July 5 rose 10 percent to $129.5 million from $117.7 million in the same period a year earlier.
Sears said total June sales declined 1.2 percent from the same period a year ago to $2.66 billion, while comparable-store sales dipped 1.8 percent. The broadline retailer said the results were in line with its expectations. The company added that lawn and garden sales continued to perform strongly and apparel trends improved due to a stronger promotional stance.
bebe stores issued upside preannouncement for 4th quarter (June), sees EPS of $0.11-0.13 versus consensus of $0.09, reports June same store sales up 3.3%, consensus called for decline of 0.4%.
Shoe Carnival guided below consensus for 2nd quarter (Jul), sees EPS of $0.10-0.13 versus consensus of $0.26, June comp store sales down 5.4%, company cites "sales results below expectations".
Aeropostale was cut to Neutral at Fulcrum based on valuation, as the stock has exceed their $25 target.
Jones Apparel was upped to Buy from Hold at Prudential based on view that company's multiple is too cheap (11x 2004 estimate) and that earnings are depressed. Firm's price target moves to $37 from $28.
Mothers Work reported third quarter EPS will "meet or exceed the high end" of $1.35-1.45, estimate $1.45. Reports comp store sales for June decreased 0.6%.
Pacific Sunwear cut to Hold from Buy at Prudential based on valuation.
Fred's reaffirmed 2nd quarter guidance, June comps increase 4.6%.
Michaels Stores guided inline with consensus for 2nd quarter (Jul), sees EPS of $0.32-0.36 versus consensus of $0.33. June comp store sales up 2%, Lazard was looking for an 8% gain.
Sharper Image sees 2nd quarter earnings of $0.02-$0.03 versus previous guidance of $0.01 (consensus $0.01). SHRP also reports a June comp sales increase of 15%.
Healthcare . . . AdvancePCS inks agreement to distribute Xolair.
Prof Detailing guides up for 2003 as it sees EPS of $0.75-0.80 vs. consensus of $0.47. The company cited "strength of new business awarded to its contract sales unit and anticipated continued strong performance from Lotensin(R) in its Pharmaceutical Products Group through year end 2003" for the upturn.
Drugs . . . Novartis announced its affiliate companies have come to an agreement with Glaxo-SmithKline over lawsuits related to its claimed Augmentin trade secrets. Under the agreement terms, GSK will be the recipient of a single-digit percentage of the royalties of generic versions of Augmentin sold through NVS for the four-year period beginning in July 2002 and ending June 2006.
Abbott Labs reported $0.52 per share, in line with the consensus of $0.52. Revenues rose 9.5% year/year to $4.72 billion versus the $4.64 billion consensus. Company sees 3rd quarter EPS of $0.52-0.54 versus consensus of $0.55, reaffirmed 2003 EPS view of $2.20-2.25 versus consensus of $2.21.
Wyeth was raised to Buy from Neutral at Bank of America. The firm is saying over the last few months the co has shown real signs of operational improvement and they believe its gross margin guidance of 72-74% is too conservative; firm now believes risks regarding manufacturing issues, product liabilities, supply constraints, and bad HRT news are limited and they can focus again on long-term prospects. Price target is $56.
Biotech . . . AVE and Vertex Pharma announced that Aventis has started its enrollment into the Phase IIb clinical trial of pralnacasan, which is a anti-cytokine therapy for rheumatoid arthritis. The two companies are collaborating on the development and commercialization of the pralnacasan product.
Myriad Genetics and Mayo Clinic collaborate on Alzheimer's drugs based upon several drug candidates that have been discovered at Mayo Clinic. Myriad has received worldwide exclusive therapeutic rights to the drug candidates and to further drug discoveries that result from collaboration on compounds that lower the beta amyloid peptide, Abeta42. Myriad has also licensed a broad patent application from Mayo Clinic that relates to compounds that lower Abeta42.
Geron reported the publication of research results that advance the breadth of applications for human embryonic stem cells (hESCs) in Regenerative Medicine. The published study demonstrates that hESCs, when exposed in vitro to specific factors that stimulate bone formation, differentiate into cells that express molecular markers of bone-forming cells such as osteocalcin, parathyroid hormone receptor, and collagen 1.
Genentech target raised to $93 from $83 at Merrill Lynch.
Genentech reported diluted non-GAAP EPS of $0.31, beating estimates and consensus estimate of $0.26. This resulted largely from better than expected Pulmozyme and Herceptin sales. (Herceptin sales included an unexpected $10 million payment from Roche for ex-US manufacturing of Herceptin.) Rituxan sales of $328 million were in line with recently reduced estimate of $329 million. Contract revenue were also higher than expected, reflecting Roche's recent announcement to opt-in for ex-US rights to Avastin. Genentech also benefited from biotech stock gains in the quarter estimated at $20 million. Operating expenses as a percentage of product sales were in line with expectations. Analysts have revised Herceptin estimates for 3rd quarter 2003 from $100 million to $105 million and have not made any changes to our 4th quarter 2003 estimate of $111.6 million. Full year Herceptin estimate is $409.4 million. Rituxan estimate remains unchanged at $1.33 billion for 2003. EPS estimates for 3rd quarter 2003 and 4th quarter 2003 also remain unchanged. With respect to Avastin, Genentech expects to complete its regulatory application by the end of September and to receive FDA approval by the end of 1st quarter 2004. The recently announced Phase III data of Avastin in colorectal cancer presented at ASCO will provide the basis for the BLA. Important events expected later this year for Genentech include the results from the Avastin support trial and Tarceva in the first line setting for NSCLC (Roche and Genentech-sponsored trials) as well as regulatory action for Raptiva.
Hotel & Leisure . . . Hilton Hotels was upgraded at Raymond James to Strong Buy from Outperform based on the stock's attractive relative valuation as well as signs that industry fundamentals have begun to turn more favorable. The firm raised target to $17 from $15.
International Speedway reported 2nd quarter EPS of $0.27, excluding one-time charges, consistent with company guidance and a penny better than consensus. The one-time non-cash charge of $0.03 per share was related to a track reconfiguration project at Homestead-Miami Speedway. Revenue and EBITDA were more or less in-line with our expectations at $119.6 million and $41.1 million for the quarter, respectively. Poor weather at key events early in the quarter, including the "NASCAR Triple Header Weekend at Darlington", was offset in part by an increase in corporate spending. Some of the second quarter's difficulties have continued into the fiscal third quarter. Despite increased television ratings at Daytona's Pepsi 400, the company highlighted softer than expected attendance-related revenues at the track. As a result, ISCA lowered its 3rd quarter and full-year 2003 guidance. Despite the earnings revision, analysts are maintaining our estimates (save for flow through from the 2nd quarter results), as projections had previously been on the conservative side of guidance. However, it should be noted that 3rd quarter and full-year consensus estimates are likely to pull back as they currently exceed the company's new guidance. Shares are trading at 19.8x and 17.5x 2003 and 2004 EPS estimates, respectively. On an EBITDA basis, the shares are trading at 9.3x and 8.0x, respectively. At current levels the shares are fully-priced.
Media . . . Yahoo! Was cut to Neutral at First Albany on valuation. The downgrade from Buy is based on valuation and a tepid upward guidance revision for FY03.
Yahoo! reported second-quarter results that beat top-line estimates but missed above-consensus bottom-line estimate. Revenues came in at $321 million (versus our $313 million estimate), while EPS was $0.08 (matching consensus, but a penny below our $0.09 estimate). Significantly, management raised its revenue and operating cash flow guidance for the remainder of the year.
On the plus side, CEO Terry Semel noted that the 2nd quarter increase in core advertising revenues (approximately 12% Year over Year) was due to a more substantial base of customers, as opposed solely to market- share gains, suggesting that the online advertising market may finally be showing signs of life. However, on the negative side, growth in premium service subscribers remains unimpressive, and continue to question the ultimate growth rate for the uptake on these offerings. The majority of the 600,000 net subscriber adds came from SBC, which provides the connectivity, and controls the customer relationship. If YHOO is serious about competing for premium services customers, it will ultimately have to spend significant sums to build or secure proprietary content. While YHOO reported strong results and raised guidance for the back half of the year, the current valuation leaves investors exposed to limited upside potential, and significant downside risk. The company currently trades at an EV/OIBDA (operating income before depreciation and amortization, formerly called EBITDA by the company) multiple of 43x 2003 OIBDA estimate, and 32x 2004 OIBDA estimate, compared to average EV/EBITDA multiples of 12x and 10x, respectively, for traditional media companies.
YHOO’s Marketing Services segment revenues totaled $219 million in the quarter (versus estimate of $213 million), a 45% increase from the year-ago period. The company noted that the increase in Marketing Services revenue was a result of two factors. First, “rapid secular growth” in its Sponsored Search business, which was due to a greater number of queries, higher click-through rates, and a significantly higher price-per-click. The second contributor to this quarter’s outperformance was improved advertising revenue, with strength across a broad range of product verticals, including automobiles, telecommunications, retail, entertainment, and pharmaceuticals. Management revealed that marketing services, excluding sponsored search, grew at the high end of its full-year growth target of 8%-12%, despite tough comparisons in the international segment from last year’s World Cup. Significantly, CEO Terry Semel noted that the second-quarter increase in advertising revenues was due to a more substantial base of customers, as opposed solely to market-share gains, suggesting that online advertising may finally be showing some signs of life. Remind investors that marketing services, excluding sponsored search grew slightly above 12% in the first quarter. For full-year 2003, we anticipate a 37% year-over-year increase in Marketing Services segment revenue, with gains coming from sponsored search significantly higher than from traditional online advertising.
Second-quarter gross margin came in at 85.4%, up 60 basis points from 84.8% in the first quarter, and up 390 bps from 81.5% in the year-ago quarter. OIBDA (formerly called EBITDA by the company) margin came in at 30.3% in the quarter, versus 29.7% in 1Q’03, and 16.0% in the year-ago period, revealing the leverage in YHOO’s model. The company disclosed that its OIBDA margin was 33% in the U.S., and 13% internationally (compared to 32% and 16%, respectively in the first quarter). Anticipate company-wide OIBDA margins of 31.8% in full-year 2003 (compared to 21.6% in 2002).
Fees segment revenues (which includes SBC Yahoo!, Yahoo! Personals and Yahoo! Mail) came in at $70 million in the quarter, up 10% sequentially from $64 million in 1st quarter 2003, and up 43% from the year-ago period. Listings segment revenues (which includes HotJobs and other classifieds revenue) improved to $32 million in the quarter, up 10% from $29 million in 1Q’03, and up 29% from $25 million in the year ago period. Estimate that HotJobs contributed approximately $21.5 million to second-quarter listings revenues, suggesting that listings segment revenues excluding HotJobs grew an estimated $2-3 million year-over-year. (estimate that HotJobs contributed an additional $3.5 million in fees revenues, for a total of $25 million of revenue during the second quarter. HotJobs revenues are down 26% from their pre-acquisition peak of $34 million in 1st quarter 2001.) Together, these “non-Marketing Services” revenues accounted for 32% of YHOO’s 2nd quarter 2003 companywide revenues, down from 33% in 1st quarter 2003, and 33% in the year-ago quarter.
Management noted that, at the end of the second quarter, Yahoo! had approximately 3.5 million premium service customers in the U.S., versus 2.9 million at the end of the first quarter, and approximately 1.0 million one year ago. For the most part, these customers are paying for premium services such as SBC/Yahoo! Access, Yahoo! Personals, Yahoo! Mail, as well as Yahoo! Games, equating to approximately $4.00-$5.00 in revenue per month, per unique user. Management stated that during the second quarter, approximately 90,000 customer additions were related to the migration of SBC’s DSL customers over to the SBC/Yahoo! Service, compared to approximately 235,000 in the 1st quarter 2003. The majority of the remaining customer additions (510,000 in 2nd quarter 2003 and 465,000 in 1st quarter 2003) also came from the SBC relationship.
Telecom . . . AT&T Wireless stated that it is evaluating its billing contracts as part of a companywide review of costs, "a move that could hurt Convergys," which according to Reuters depended on AWE for 20% of its revenues last quarter.
Vodafone was cut to Underweight by JP Morgan Europe as it appears unattractive on the basis of its trading multiples relative to its wireless and wireline sectors. Firm believes the co offers the least upside to its fair value in the wireless sector with exposure to stock-and sector-specific risks. While its March 04 guidance looks achievable, firm believes growing competition and upcoming termination rate cuts could potentially augur downside risk to the firm's estimates and consensus.
GRIC Comms cut to Sell from Hold at Kaufman Brothers as the firm believes that GRIC is ahead of fundamentals. Price target $3.00.
IT Services . . . Loudeye announced its strategic expansion into the wireless digital music distribution market in N. America, Europe and Japan, with the signing of service contracts with four leading providers of wireless content to subscribers of several major wireless carriers.
Network Equipment . . . Friedman Billings Ramsey upgraded Lucent to Outperform from Market Perform based on their view that the company's second largest customer, AT&T, could be boosting capital spending in 2004. AT&T could be considering a network upgrade in 2004 that could add an incremental $250-$500 million in expenditures per year, and firm thinks LU could be a major beneficiary of this spending; raises target to $3 from $2.
Andrew Corp upgraded at Piper Jaffray to Outperform from Market Perform. The firm is saying ANDW (post the Allen acquisition) has an attractive valuation at current levels; firm believes that even in a market of stagnant growth in 2004, ANDW will be able to grow EPS qtr over qtr throughout the year, and should end market conditions in 2004-05 improve earlier than expected, this would represent upside to their preliminary estimates. Raises target to $15 from $12.
Semiconductor Equipment . . . Needham initiated Mykolis with a Buy rating and $18 target; firm says materials company's tend to have higher valuations than equipment co's in the current environment, which occurs because of the more stable growth and less risk of materials rev streams; as such, firm believes that MYK is mispriced since it is trading at lower multiples than both the semi materials co's and semi subsystems company's that it competes against.
Semiconductors . . . Micron Technology saw its rating raised by UBS to a "buy" rating from a "neutral" and lifted its 12-month price target to $18 from $12. UBS cited three factor as reason for the upward action on Micron: the likelihood of continued strong pricing in the second half; the probability of better supply-demand dynamics during the rest of 2003 and through much of 2004; and the potential for margin and earnings upside.
Broadcom was reiterated Hold at Legg Mason following announcement last night that company has discovered another problem with one of its Grand Champion chipsets from its ServerWorks division. While Broadcom does not officially expect any specific material financial impact from this issue, Legg Mason believes there could be broader implications. With two significant Grand Champion issues in four months, firm believes that customers will at least have to make a more concerted consideration of diversifying its supplier base.
Toshiba and Elpida introducing XDR DRAM is seen as favorable for Rambus.
Vitesse Semi target raised to $8 at Wedbush Morgan from $5.50 reflecting greater confidence in better end-markets for company's storage, enterprise and service provider businesses. The firm noted that recent surveys of IT spending indications have indicated a more positive tone for the second half of 2003 and 2004. Additionally, Seagate has signaled a strong demand for enterprise hard disk drives.
Rambus announced that the Court of Chancery of the State of Delaware has issued a stipulated order dismissing without prejudice the amended complaint in a consolidated derivative case against Rambus. The dismissed derivative case arose from allegations concerning Rambus' 1991 - 1995 attendance at a standard setting body called JEDEC. The plaintiffs in this case agreed to stipulate to dismissal without prejudice following rulings favoring Rambus from the Court of Appeals for the Federal Circuit.
Texas Instruments sold 24.7 million shares of its stake in Micron, which provides the co with pre-tax gain in accordance with GAAP of $106 million with the sale. This transaction will be recorded in other income in Texas Instruments 3rd quarter results. In addition, the company will also recognize a reserved tax benefit of $162 million in 3rd quarter, which is attributed to the realization of a tax loss carryback due to the sale.
Boxmakers . . . Bill Shope at J.P. Morgan said his outlook on PC demand continues to be cautious following Dell Computer chief operating officer Kevin Rollins' comments that demand was not improving and business conditions are still difficult. Dell shares are slipping 27 cents to $32.90 in pre-open trading. "Mr. Rollins was very explicit in his view that there are no signs of any end user demand recovery," Shope said.
Synaptics was cut to Hold at WR Hambrecht due to valuation getting ahead of fundamentals and maintains $10 price target. The analyst maintains a positive view on the company's prospects but cites concerns over its 97% revenue exposure to the notebook markets. By having such exposure to a market with projected growth of 15-20% for 2003 and an aggressive pricing environment, the co may see pressure on its average selling prices.
Software . . . Jason Maynard at Merrill Lynch said Oracle feels business may have bottomed, and is bullish about the future. "Although we like the business long term, we believe the stock is fairly valued at current levels," Maynard said. Oracle chief executive Larry Ellison added that the company was "likely to be successful" in its $6.3 billion hostile takeover bid for PeopleSoft, but did not give any hint about strategy, including whether Oracle is prepared to up its bid.
The Wall Street Journal's "Heard on the Street" column suggests Microsoft's decision to restate all of its earnings is rather "unusual". This is due to its decision to replace stock options with stock grants as its favored method of equity based employee pay. The co has decided to voluntarily restate all of its prior years financial results to reflect stock options compensation as an expense on the income statement. Most companies loathe the possibility of having to take such actions, however, MSFT is doing so to ensure its year-over-year earnings are presented on an "apples-to-apples" basis. However, an even further benefit could be lowering past years earnings to make it easier to show year-over-year earnings growth in future periods.
Half-year Xbox figures "disastrous" in Japan. An article in spong.com, which is an online Internet computer games database, reports half year Xbox sales were "disastrous" for MSFT. According to the article, Xbox managed to garner only 1.6% of the hardware sales in this significant territory for the last six months.
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