Investing pioneer John Templeton believes there is still huge downside risk to the stock market -- and he's almost as bearish on house prices.
By Bill Fleckenstein
Wall Street has its statesmen and its noisemakers. Into the former camp fall the likes of Warren Buffett, the late Leon Levy and John Templeton, the founder of the Templeton funds group. Their wisdom is there for the taking, but when it's deemed to be "pessimistic," folks turn away.
That's where the noisemakers come in, ready to rev up any story that gets people buying stocks. Some technology chieftains have demonstrated remarkable skill in that arena. After all, the performance of their stock options depends on folks' willingness to believe. Imagine, then, the scene behind closed doors when Microsoft (MSFT, news, msgs) announced its decision to show options the door.
Templeton’s take: The stock market is broken Last week, a friend was kind enough to e-mail a copy of an interview that Sir John Templeton gave recently to Robert J. Flaherty of Equities magazine. I, in turn, would like to share its wisdom with readers of the Contrarian Chronicles.
During previous interviews with the publication in 1999 and 2000, Sir John said investors should expect a 1929-style crash in stocks. Flaherty notes that those earlier interviews prompted two very different responses. Some folks expressed gratitude for the money they'd saved by reading Sir John's comments (both at the time and later), while others opined that Sir John was "old and out of touch," and what did he know about today's market, anyway?
In his current interview, Sir John, who is now 90, devotes most of his thoughts to the housing market. What he tells Flaherty comes as surprise to the downside, since the writer had been expecting to hear more encouraging words: "Because I was hoping for good news," Flaherty writes, "I was personally taken aback and depressed by Sir John's short-term pessimism."
In that vein, Sir John offers this observation about Wall Street at large: "The stock market is broken, and it will take some time, maybe years, to repair it. Mass media, especially TV (read: Bubblevision) today is so short-term that few in its audience grasp the lasting damage and corrective impact which will continue to linger from the greatest financial crash in world history."
He continues: "It would be unlikely that the bear market is over when the American stock market is only down about 30%, when in the biggest boom ever, it had been up 10 times over where it had been years earlier. . . . Following such a large increase, a 30% decrease is small." (I am assuming that here, he was obviously not talking about the Nasdaq ($COMPX).)
I guess I like that passage because it's a refrain that I've often pounded away at in my daily column.
Bear markets and housing markets Moving on to housing prices, Sir John comments: "Every previous major bear market has been accompanied by a bear market in home prices. . . . This time, home prices have gone up 20%, and this represents a very dangerous situation. When home prices do start down, they will fall remarkably far. In Japan, home prices are down to less than half what they were at the stock market peak." Sir John adds, "A home price decline of as little as 20% would put a lot of people in bankruptcy."
Sir John also had a few words about debt -- a four-letter word that folks seem not to care about: "Emphasize in your magazine how big the debt is. . . . The total debt of America is now $31 trillion. That is three times the GNP of the U.S. That is unprecedented in a major nation. No nation has ever had such a big debt as America has, and it's bigger than it was at the peak of the stock market boom. Think of the dangers involved. Almost everyone has a home mortgage, and some are 89% of the value of the home (and yes, some are more). If home prices start down, there will be bankruptcies, and in bankruptcy, houses are sold at lower prices, pushing home prices down further." On that note, he has a word of advice: "After home prices go down to one-tenth of the highest price homeowners paid, then buy."
Well, that's a pretty extreme view, even for me. But I guess it shows you how bearish Sir John is. I'm sure his latest comments will elicit the same kind of response as when he shared his bearish views during the bubble -- that he just doesn't get it. (It's certainly the earful that I and others heard on the back of our bearish sentiments.) Folks who make that argument, protesting that this time it's different, are generally in the unfortunate position of having confused a bull market/rising prices with brains.
Of restricted stock and the Microsoft flock Last week's big news was Microsoft's announcement that it would replace stock options with restricted stock and treat remaining options as an expense. Microsoft's move is an intellectually honest one, in my opinion, and a rather brilliant one at that. By awarding restricted shares to its employees, it's basically issuing a form of golden handcuffs: the shares vest over time, and the employees must remain with the company in order to sell them. Since Microsoft's stock amounts to a pretty stable form of currency (which is not to say it can't go down, but that a total collapse is unlikely), I believe this will give the company an added edge in attracting top talent. Other companies interested in aping Microsoft may not have as stable a stock, and, of course, most stocks in technology remain wildly, wildly overinflated. Microsoft may be expensive, but I don't consider it to be as egregiously valued as several others. (And, yes, I know, Microsoft is the publisher of MSN Money.)
Microsoft’s move should put pressure on other companies to start expensing options and go the same route, though lots of companies will resist the change. The wampum kings, as represented by Cisco Systems (CSCO, news, msgs) CEO John Chambers, will certainly resist it, as will Craig Barrett at Intel (INTC, news, msgs). But over time, I suspect that these other companies will also be forced to expense options, and probably will be forced to do something like Microsoft has done. In any case, I applaud the move, as it obviously aligns everyone's interests more closely.
Silver shows signs of a rebound Turning to an arena that I refer to in my daily column as "away from stocks," my contacts close to the silver market note that it's "changing" (and they continue to be bullish). Finally, we are seeing the earliest signs of investment demand, something that's been missing from the silver market thus far. Folks have already decided they want to own gold as protection from the Fed's printing presses, and it now appears that a little of the same kind of money is trickling into silver. As a much smaller market than gold, it stands to benefit disproportionately. That said, silver remains very volatile, and the uptick in investment demand is in its infancy. But this glimmer of change strikes me as a big deal.
Fixed income, too, may be witnessing an interesting change, on the back of last Wednesday's news that Peter Fisher will step down as Treasury undersecretary. Fisher had been adamant that 30-year bonds wouldn't be issued on his watch. Now that he's going, and, in view of our government's exploding deficit, perhaps the Treasury may start issuing 30-year bonds again. So, for anyone who has an interest in the long bond, this may turn out to matter.
Of please-wait mail and hate mail Finally, a closing word or two on my e-mail. I continue to try to answer your questions as best I can, but a backlog of nearly 600 has thrown a wrench into responding in a timely manner. Please bear with me and keep sending in your questions to my site, Fleckensteincapital.com, as I do grind through them. If I don't answer your e-mail specifically, it may be lodged in my in-box (most of them now are older e-mails), or perhaps I've already answered a similar question.
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Also, for those of you keeping score at home, my hate-mail indicator predictably went 'tilt' last week, indicating this phase of the rally might be on borrowed time. I'm not sure when it will end, but all the signs of speculative activity and sentiment changes are in place, and it could happen at any moment. I only short a little and very, very judiciously, until I see signs of a failed rally. (Last week’s sell-off was more like exhaustion. But I have been stepping up my purchase of fall puts, as I think we will see a total collapse before the fall is out.)
Meantime, I continue to be struck by the number of bulls given to end-zone dancing. This reminds me of the apocryphal story concerning advice by a football coach to one of his players: If you happen to get in the end zone, don't act like it's the first time it's happened.
Bill Fleckenstein is president of Fleckenstein Capital, which manages a hedge fund based in Seattle. He also writes a daily Market Rap column for TheStreet.com's RealMoney. At the time of publication, he held long positions in put options for Cisco and Intel. He is also short Cisco and Intel common stock. His investment positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security. The views and opinions expressed in Bill Fleckenstein's columns are his own and not necessarily those of CNBC on MSN Money.
Alan Greenspan, economics, and the earnings were the headline attractions, as the bulls pit their expectations against reality. On the tape, the DJIA dropped 48 points (-0.5%) to 9,128. Early in the session, three of the Dow's 30 components -- Citigroup, J.P. Morgan Chase and Walt Disney -- hit new 52-week highs. The Nasdaq Composite gave up early gains and closed down a little over a point (-0.1%) to 1,753. The S&P 500 surrendered 3 points (-0.3%), closing at 1,000. Testifying on Capitol Hill, Federal Reserve Chief Alan Greenspan made clear that interest rates would remain low for the foreseeable future to promote "satisfactory economic growth." Treasury yields soared to 10-week highs following Greenspan's recovery remarks, underscoring the Fed chief's difficult task in attempting to balance investor reactions in the equity and bond markets. The surge in Treasury yields smacked the shares of homebuilders while gold stocks fell as the precious metal plunged in the futures markets.
Top Stories . . . The U.S. economy is poised to accelerate and the Federal Reserve will leave interest rates low ``for as long as necessary'' to ensure that happens, Fed Chairman Alan Greenspan said.
U.S. retail sales rose more than expected in June, paced by purchases of building materials, furniture and apparel, a government report showed, bolstering expectations the economy will accelerate in coming months.
The U.S. government's budget deficit will widen to about $475 billion in the fiscal year that ends Sept. 30, the largest in U.S. history, an administration official said.
Merrill Lynch, the world's biggest securities firm by capital, said second-quarter earnings rose 61 percent, as gains from bond trading and a stock market rally drove revenue higher for the first time since 2000.
Loral Space, the satellite maker that's lost money since 1998, filed for Chapter 11 bankruptcy protection.
Boeing, the world's biggest airplane maker, will have $1.1 billion of second-quarter expenses because of declining demand for the company's satellite-launch services.
Quotes of Note . . . ``They are hiding behind the war and homeland security to excuse their own fiscal irresponsibility,'' Joe Lieberman, of Connecticut, said. ``Everyone knows what is really responsible for these deficits -- the unfair, unaffordable, and ineffective Bush tax cuts, which give the most to those who need the least.''
``We had a recession, we had lower revenues and a war on terrorism that led to the deficit coming back,'' Whitehouse Spokesman Scott McClellan said. The deficit ``remains a concern but it is one that remains manageable,'' he said.
Greenspeak . . .
on consumer housing & spending . . . ``Significant balance sheet restructuring in an environment of low interest rates has gone far beyond that experienced in the past,'' Greenspan said. ``In addition to balance sheet improvements, the recently passed tax legislation will provide a considerable lift to disposable personal incomes of households in the second half of the year, even accounting for some state and local offsets.''
On corporate risk taking . . . ``Corporate executives and boards of directors are seemingly unclear, in the wake of recent intense focus on corporate behavior, about how an increase in risk-taking on their part would be viewed by shareholders and regulators,'' Greenspan said. ``Still-ample capacity in some sectors and lingering uncertainty about the strength of prospective final sales have added to the reluctance to expand capital outlays.''
On employment . . . ``One consequence of these improvements in efficiency has been an ability of many business to pare existing workforces and still meet increases in demand,'' Greenspan said.
On bumps within the economy . . . ``Given the highly stimulative stance of monetary and fiscal policy and well-anchored inflation expectations, the Committee concluded that economic fundamentals are such that situations requiring special policy actions are most unlikely to arise,'' the Fed chairman said.
M&A Mania . . . MGM is raising its bid to $11.5-billion for Vivendi’s TV and film assets
The WSJ reported that AOL is close to selling Time Warner's DVD and CD-manufacturing business to ONe, a private equity firm, for $1-billion.
Of Note . . . The average U.S. company was able to pay off its debt in 4.2 years at the end of the first quarter, down from a recent high of 5.1 a year earlier, Fitch Ratings said. But lackluster revenue gains contributed little to the belt-tightening. Rather, companies sacrificed capital investment to pay off debt. Companies cut capital spending by 14 percent in the period. "We are not likely to see a general improvement in credit quality, including upgrades, until leverage is reduced through revenue and profit growth, not shrinking business investments," said Fitch Ratings CFO Robert Grossman.
Earnings . . . Standard and Poor's believes reported earnings for the companies within the S&P 500 will continue to improve throughout 2003, resulting in 54 percent growth over 2002 levels. Reported earnings for 2004 are expected to grow 23 percent over 2003. Excluding unusual items, S&P anticipates earnings growth of 16 percent and 14 percent for 2003 and 2004, respectively. Based on the earnings outlook, the firm estimates its benchmark S&P 500 Index will rise 17 percent in 2003 to close the year at 1,030.
Interesting . . . Federal Reserve board chairman Alan Greenspan stressed that the Federal Open Market Committee would not even consider raising its target for short-term interest rates until strong economic growth emerges. "If the recovery is indeed fragile...I would suggest to you that it is unlikely that we would be moving rates," Greenspan said. "We would seek significant improvement in the performance from what we currently see before that is even on the table," he added. Greenspan said the Fed wasn't surprised by the back-up in bond rates after the FOMC's last meeting on June 25. He said the economy could be on the brink of a "period of extended growth."
Financials . . . AmSouth Bancorp said it met Wall Street analysts' consensus estimate on the back of solid growth in loans and deposits, and rising service and mortgage fees. The company posted second quarter net income of $154.8 million, or 44 cents per diluted share, versus $152.4 million, or 42 cents per share in the year-ago quarter. The bank said the positives however, were mostly offset by lower net interest income and higher noninterest expenses. "Net interest income was $349.4 million in the second quarter, while the net interest margin declined to 3.84 percent. Net interest income was lower than expected due to the impact of sharply lower longer-term interest rates and earning asset growth that was less than anticipated," the company said.
State Street posted a second-quarter net loss of $23 million, after taking a $292 million pre-tax loss for restructuring. It posted baseline earnings per share of 52 cents per share against expectations of 47 cents. State Street saw total revenue of $1.08 billion, against $1 billion in the second quarter of last year.
Fannie Mae said its second net quarter net income fell as deriviatives it uses to hedge interest rate fluctuations fell. The company earned $1.1 billion, or $1.09 per share, versus $1.46 billion, or $1.44 per share a year ago. The company's reported "core earnings per share" were $1.86, 20 percent ahead of year -ago results, but a penny shy of Wall Street analysts' estimates. The estimates ranged from $1.81 to $2.05.
Fifth Third Bancorp said its second quarter net income was $435.5 million or 75 cents per share, up from $404.1 million, or 68 cents per share in the year-ago period. The bank beat the forecast of 74 cents per share. The company cited strong loan growth, a stable net interest margin and credit quality for its eight percent rise in earnings.
FleetBoston Financial said it had second quarter net income of $624 million, or 59 cents per share, compared with a net loss of $386 million, or 37 cents per share, in the second quarter of last year, slightly topping analyst estimates of 58 cents per share earnings. The bank said it saw higher revenues in a number of fee-based services and continued control over expenses, and said nonperforming assets declined by 12 percent, or $370 million, in the second quarter to $2.6 billion.
The Wall Street Journal reported JP Morgan is close to reaching two separate settlements with regulators for as much as $175 million over its role in the Enron debacle. The Manhattan District Attorney's office and the SEC have both been examining the bank's role in the financing of Enron.
Alliance Capital downgraded at Merrill Lynch (to Neutral from Buy based on valuation, as the shares are near their $39 target.
Providian downgraded at Wachovia to Market Perform from Outperform based on valuation. In addition, firm also believes the intense competitive landscape of the credit card industry is likely to make net receivables growth for PVN a challenge for the remainder of 2003. The firm believes PVN shares will trade in a range of $8-$10 over the next 12 months.
Merrill Lynch said its second quarter net profit rose 61 percent from a year ago on the back of solid fixed income trading profits and renewed interest in the stock market among its retail clients. The company earned $1.02 billion in net income in the quarter, or $1.05 per diluted share, versus the $634 million or 66 cents per diluted share a year ago. The results were way ahead of the 72 cent consensus analyst estimate. The estimates of the analyst polled ranged from 65 cents to 80 cents, and had been mostly raised over the last month as Merrill rivals Goldman Sachs, Lehman Brothers and Morgan Stanley all posted results. Revenue for the quarter totaled $5.32 billion, ahead of the consensus estimate of $4.84 billion and ahead the year ago's $4.95 billion.
GreenPoint Financial reported second-quarter earnings from continuing operations of $130 million, or $1.54 per share, up 14 percent from its year-ago equivalent profit of $122.8 million, or $1.35 per share, and in line with Wall Street's consensus estimate. The financial services firm attributed the improved profits in the latest quarter to the favorable impact of low interest rates on its mortgage banking operations. This performance offset weakness in net interest income and margin compression.
Tech Data upgraded at Lehman (to Overweight from Equal-Weight based on stabilization in the US. The firm also thinks that TECD will benefit from the consolidation accelerating in Europe as Hewlett-Packard rationalizes distributors, as well as HPQ continuing to de-emphasize their direct strategy. The firm raised target to $35 from $27.
TradeStation Group checked in with second-quarter net income of $2.9 million, or 7 cents a share, up from $341,278, or a penny a share, in the year-ago period and in line with the estimate. The company benefited from a 30-percent increase in brokerage revenues during the quarter, which took total revenue to $15 million, up 22 percent from the $12.2 million posted in the year-ago quarter. The provider of electronic trading platforms expects to report earnings-per-share of 8 cents in the third quarter, 10 cents in the fourth quarter and 30 cents for the full year. That compares to the 8 cents, 9 cents and 30 cents a share, respectively, expected by First Call. Revenue is expected to total $16.4 million in the third-quarter, $17.8 million in the fourth-quarter and $62.5 million for all of 2003.
Correctional Properties Trust boosted its quarterly dividend by 7 percent to 45 cents per share from 42 cents. The correctional facility real estate investment trust also reported funds from operations of $4.7 million, or 60 cents per share, for the second quarter, in line with the average estimate. In the same period a year earlier, funds from operations totaled $4.3 million, or 59 cents per share.
Wells Fargo said net income rose from year-ago levels as loans and deposits grew, and credit quality improved. The company earned $1.53 billion, or 90 cents per share in the latest quarter, up from $1.42 billion, or 82 cents per share in the year-ago period. The results were a penny short of the consensus analyst estimate of 91 cents.
Bear Stearns is reiterating an Outperform rating on Bank of America and raising EPS estimates and price target to $95 after Bank of America reported second quarter earnings of $1.80, well above estimate of $1.56 and the recently increased consensus of $1.57. BS views the quarter as demonstrating improving credit quality, good revenue growth from capital markets and investment businesses, and continued expense discipline. Estimate that inflows of commercial non-performing loans declined dramatically in the quarter to about $20 million, down from about $400 million in the first quarter and more than $800 million in the fourth quarter. As importantly for the near-term, the quarter showed that Bank of America is willing to make fairly dramatic changes to its investment portfolio rapidly to adapt to changing interest-rate and financial market environments, and can do so successfully. While past success is no guarantee of future performance, Bank of America has shown a degree of agility in the past two years that has surprised many investors. Continue to recommend BAC shares as a major beneficiary of improving commercial credit quality and an increasing participant in a capital-markets recovery.
BB&T reported EPS of $0.71 on an operating basis for the second quarter and $0.67 on a reported basis, which includes $7 million in merger-related charges and $13 million related to a charitable contribution. Analysts remain confident that BB&T will be able to achieve its 40% cost savings goal for the First Virginia acquisition, which closed ahead of schedule on July 1st, but will monitor the sales finance business closely as revenues have apparently come under pressure in the quarter. Although disappointed that management is lowering its long-term annual cash earnings growth rate to 10% from 12% as well as earnings guidance for the year to a range of $2.75 to $2.85, we believe that this sets more reasonable expectations in the current market environment. The balance sheet restructuring that was announced at the earnings release will be beneficial in the long-term, reducing BB&T’s interest rate exposure and its interest expense. Earnings for the second-quarter earnings were characterized by margin compression, record mortgage originations and fee income growth, with strength in investment banking, brokerage and commissions, as well as agency insurance commissions. Analysts have brought GAAP EPS estimates for 2003 down to $2.84 from $2.86 and increased cash estimates to $2.92 from $2.89, which reflects the close of First Virginia. Analysts are maintaining 2004 GAAP estimate of $3.10 and bringing cash estimate up to $3.21 from $3.13.
Homebuilders . . . M.D.C. Holdings reported net income of $42.7 million, or $1.43 a share, up from $1.11 a share in the year-earlier period, and above the average analyst forecast of $1.20 a share. Total revenue increased 35 percent to $689 million. The home builder said earnings growth was particularly strong in Las Vegas, Phoenix, Southern California and Virginia.
BB&T Capital upgraded Centex to Strong Buy from Buy based on valuation. In addition, firm's outlook is enhanced by the likelihood of upside surprises by CTX over the next few quarters given recent strength of demand for homebuilding and mortgage banking services, and firm also expects that over the long term the largest homebuilders will continue to grow faster than their market and increase their already-impressive margins. Target is $105.
Energy . . . Dynegy plans to exchange cash for outstanding Dynegy 2005 and 2006 bonds; restructuring $1.5 billion of convertible preferred stock held by a subsidiary of ChevronTexaco, and issue $300 million of convertible bonds.
Mirant filed for Chapter 11 bankruptcy protection. The power generator was facing a midnight deadline to complete a bond-exchange offer and also had a $1.125 billion term loan due Tuesday.
Oil & Gas . . . Rowan reported a second-quarter loss 24 percent narrower than the year ago period, as revenue grew 20 percent on improved rig utilization. The oil service company said it lost $6.6 million, or 7 cents a share, on revenue of $158.1 million, vs. a loss of $8.7 million, or 9 cents a share, on revenue of $148.5 million in the second quarter of 2002. Analysts were expecting Rowan to lose 4 cents a share. Analysts had also predicted revenue of $157.81 million.
Defense & Aerospace . . . Boeing will record a second-quarter charge of $1.1 billion, or 87 cents a share due to continued weakness in the commercial space launch market, higher mission and launch costs on its Delta IV program and cost growth in its satellite business. Of the total, 66 cents a share is attributable to its Delta IV program following the "significantly reduced" global demand outlook, and 21 cents a share for losses in its satellite systems business.
Loral Space said it's selling its six North American telecommunications satellites to Intelsat, Ltd. for up to $1.1 billion in cash and filing for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Loral plans to reorganize around its remaining fleet of five satellites and its satellite manufacturing operations, "allowing the company to go forward as a viable enterprise with opportunities for future growth." Intelsat has agreed to order a new satellite from Loral and will make a $100 million down payment on that order. Loral will use proceeds from the satellite sale to repay all $959 million of its outstanding secured bank debt. The transaction is expected to close within four to six months, pending Bankruptcy Court and regulatory approval.
Transports . . . JP Morgan expects the market to mostly look past weak 2nd quarter earnings for auto stocks (and probably weak 3rd quarter earnings as well), to focus on what will likely be a positive trend in U.S. industry demand. After a weak start to the year, the average 2nd quarter SAAR rose to 16.2 million, and firm's early read is that the SAAR in July may be as high as 17 million and they expect a further rise in 3rd quarter-4th quarter. Firm thinks that Ford and Lear could beat 2nd quarter consensus, Ford based on the strength of its 1st quarter earnings momentum, and LEA because of the likelihood of continuing market share gains. The firm also expects GT to disappoint.
JB Hunt reported 2nd quarter earnings of $0.62 per share, $0.14 better than the consensus of $0.48. Revenues rose 7.7% year/year to $600.0 million versus the $600.0 million consensus.
Consumer Durables . . . Maytag said second quarter sales declined to $1.163 billion vs. $1.193 billion a year ago. Net income was $25.2 million, or 32 cents per share, including an after-tax restructuring charges of $18.8 million for closing a manufacturing plant and job cuts. The results were in-line with forecasts. A year-ago, Maytag posted net income for the period was $68 million, or 86 cents per share.
Stanley Furniture reported earnings of $0.53, a nickel better than consensus. Revenues rose 11% year/year to $61.4 million versus the $57.6 million consensus. The company guided 3rd quarter revenue in-line ($62-65 million versus estimate of $64.5 million) but guides lower for EPS. The company now expects EPS of $0.52-$0.57 versus consensus of $0.65.
Food & Beverage . . . Smithfield Foods will buy bankrupt Farmland Foods' pork production and processing business for $363.5 million in cash. The agreement is subject to bankruptcy court approval.
Goldman Sachs analyst lifted Hershey Foods second-quarter earnings estimate by 2 cents to 54 cents a share., Romitha Mally said she was raising her estimate above the analyst consensus because she expects sales to come in above projections by about 5 percent. She thinks that recent price increases have not hurt volume sales, she said, adding that she's looking for Hershey to increase its dividend in the next six months.
Interstate Bakeries reported a loss of $0.05 per share for its final May fiscal quarter, bringing its yearly total to a disappointing $0.80. The yearly and quarterly totals exclude a restructuring charge of $3.5 million, or $0.05, related to bakery and thrift store closings, but include an $8.4 million pretax expense, or $0.12 per share, for higher self-insurance reserves. The most surprising development in the quarter was the volume performance. IBC said snack cake volumes (Hostess, Dolly Madison, Drake, et al.) fell 8.2% in the period. Branded bread volumes were off 6.6%. While we had not expected volume gains in either category, the depth of the decline was greater than anticipated and, we believe, signals that IBC faces a major challenge in reviving its top line.
Costs pressures, too, continue to plague the company. Higher costs for commodities, energy and employee-related spending sent gross margin down by almost 350 basis points, to 49.5%. On the ensuing conference call, IBC officials estimated that commodity and energy expenses would be come $10 million higher in fiscal 2004. That tally, management said, does not include any possible increase in employee costs such as health care. Nor did they rule out another increase in self-insurance reserves. Analysts left the call wondering whether IBC will be able to generate better earnings in 2004 than the depressed total of this year. In addition to the $10 million in higher commodity and energy costs, expect the company to spend a similar amount in incremental marketing to revive its product line this year. That amounts to an additional $20 million.
Tobacco . . . An Illinois appeals court said a trial judge exceeded his authority when he reduced the bond that Altria needed to post to appeal a $10.1 billion class-action judgment. Analyst David Adelman at Morgan Stanley said the ruling is unfavorable, but not any worse than expected. Prudential's Robert Campagnino said that while the ruling does increase uncertainty, he believes the amount of the needed bond will be reduced to an amount the company can pay. Goldman says its legal contacts see an 80-90% probability that the IL Supreme Court will find that the trial court had the authority to lower the bond amount.
Retail . . . Retail sales rose 0.5 percent in June from the prior month. The report was tempered by lackluster demand for auto sales, which fell 0.1 percent in the month. Excluding auto sales, retail sales rose 0.7 percent in the month. Economists were expecting the 0.5 percent gain in the headline figure, but were expecting a stronger 0.3 percent gain in sales excluding autos. The gain was led by strong demand for sales of goods for outdoor activities. Sales at sporting goods and hobby stores rose 3.0 percent in June following a 0.9 percent decline a month earlier, the largest gain in the sector since February, 2001.
Sales at U.S. chain stores rose by a solid 0.9 percent from the prior week for the period ending July 12, according to a joint report from the Bank of Tokyo-Mitsubishi and UBS Warburg. Boosted by discounts, seasonal sales, and an increase in disposable incomes from recent tax cuts, sales were 2.3 percent ahead of a year ago. The weekly sales index rose to a new high, and the BTM/UBSW Weekly Chain Store Sales report said the index is on track for "what is likely to be the strongest monthly sales gain since at least April's 1.3 percent Easter-inflated year-over-year rise." June industry same-store sales rose by 2.4 percent from a year ago. Expectations are for July same-store sales to be up about 3 percent.
Tractor Supply reported 2nd quarter earnings of $1.37 per share, in line with the consensus of $1.37. Revenues rose 14.6% year/year to $449.4 million versus the $451.8 million consensus. The company sees revenues of $670-690 million for the second-half of 2002. The company says this outlook is "consistent with previously provided expectations", however R.R. consensus for 2H is $697 million.
Hollywood Entertainment reported net income of $19.2 million, or 30 cents per share vs. $17.5 million, or 27 cents per share in the year-ago period. The video rental store chain beat the forecast of 27 cents per share. Revenue totaled $389.4 million, an increase of 13 percent compared to revenue of $345.3 million last year.
Healthcare . . . Johnson & Johnson said second-quarter profit fell to $1.2 billion, or 40 cents per share, compared with $1.6 billion, or 54 cents per share, in the 2002 second quarter. The health-care-products giant attributed the decline to acquisition-related charges. Excluding the charges, profit was $2.1 billion, or 70 cents per share. Analysts had been expecting 69 cents per share.
HCA warned uninsured accounts will cause it to report lower-than-expected second-quarter earnings of 46-48 cents per share. The new estimate includes an allowance of 13 cents per share, or $106 million, for a pretax adjustment for doubtful accounts and a previously announced charge of $130 million, or 15 cents per share, for impairment of long-lived assets. A survey of analysts was forecasting earnings of 77 cents per share, compared to earnings of 66 cents per share reported last year. The health care provider expects to report an 11.5 percent increase in consolidated revenue to $5.5 billion, in line with the forecast of $5.47 billion.
Johnson & Johnson issued a press release providing investors with an update regarding the Eprex-related pure red cell aplasia (PRCA) situation in Europe. Overall, the update appears positive as the total number of suspected cases of PRCA dropped to 3 so far this year. However, in this latest update, the total number of suspected PRCA cases in 2002 increased to 92, or a 31% increase. These ongoing changes reflect JNJ’s attempts to properly attribute the year of disease onset (as opposed to year of diagnosis) to the correctly identified incident trends.
Medical Devices . . . Guidant downgraded at Lazard to Hold from Buy based on valuation, ahead of 2nd quarter results on Thursday. Several firms have upgraded GDT in the last 5 days based on the strength of its bare-metal coronary stent franchise, but firm feels this is now fully in the stock. Target is $47.
Needham upgraded Candela Corp to Buy from Hold. The firm is saying they believe the company is the aesthetic laser company best positioned to benefit from the industry trends driven by the aging of the baby boomer generation. Target is $16.
Thoratec Labs has received notice that the Centers for Medicare & Medicaid Services plans to extend by 30 days the due date for its decision regarding coverage for LVADs (left ventricular assist devices) for Destination Therapy to allow additional time for agency clearance. THOR has been informed by CMS that the extension was a result of CMS' standard review process.
Drugs . . . Forest Labs said its fiscal first-quarter profit surged 45 percent to $179.8 million, or 48 cents per share, compared with $123.8 million, or 33 cents per share, in the year-ago period. Earnings were in line with the average estimate.
An Ohio Appeals Court affirmed certification of a class action consisting of thousands of Ohio residents injured by the narcotic OxyContin. The suit alleges that Defendants Purdue Pharma and Abbott Labs sold and distributed OxyContin and encouraged the medical community to widely prescribe OxyContin despite knowing that OxyContin was highly addictive and unsuited for most patients.
JP Morgan raised their view on the pharma sector to positive from neutral based on the following factors: 1) industry earnings appear poised to accelerate and relative earnings momentum is now turning positive, 2) attractive valuation, and 3) a favorable U.S. political environment. WYE (their top pick) and Pfizer are both rated Overweight because of their low risk EPS growth outlook and attractive valuation, Merck (Neutral) is unlikely to disappoint this year but seems appropriately valued for the modest long-term growth outlook; Eli Lily (Neutral) and Schering Plough (Neutral) should return to robust growth by late 2004, but lofty valuations with plenty of risk may cap upside for now; BMY (Underweight) has had a nice run on Abilify's launch and positive Erbitux developments but seems expensive given the meager growth outlook and earnings risk.
Southwest Securities believes that Roche will be able to supply up to 50% more Fuzeon by the end of 2003 as a positive for Chronimed. According to firm, CHMD has exclusive distribution rights (for a limited period) on the drug and will clearly benefit from this increase in supply. Firm reiterating its Strong Buy rating on the stock.
Biotech . . . Vical has been requested to make supplies of an experimental West Nile Virus vaccine. Development of the vaccine is being planned by the Vaccine Research Center, the National Institute of Allergy and Infectious Diseases and the National Institute of Health.
ImClone will receive a total $6 million in milestone payments as part of its license agreement with Merck KGaA. The payments were triggered when Merck KGaA's submitted applications to market ImClone's Erbitux colorectal cancer treatment in the European Union and Switzerland. ImClone will issue a total 183,220 shares of common stock to Merck KGaA upon receipt of the payments, representing a ten percent premium to the current market value of the shares.
Geron announced publication of GRN163 results data on cell and animal testing of GRN163, its telomerase inhibitor anti-cancer drug. The results include the demonstration that GRN163 suppresses the growth of human prostate cancer when administered systemically to mice.
Media . . . Dow Jones reported second-quarter earnings of $30.8 million, or 38 cents per share, down from its year-ago profit of $54 million, or 64 cents per share. Excluding items, the publisher of the Wall Street Journal earned $22.2 million, or 27 cents per share, in the three months ended June 30, slightly above its year-ago equivalent profit of $21.4 million, or 25 cents per share, and two cents ahead of the average estimate. Revenue fell 5.6 percent to $393.6 million in the period from $417 million a year earlier. U.S. Wall Street Journal ad linage slipped 7.9 percent in the quarter from last year's level. Dow Jones sees earnings before special items in the upper single digit per share range for the third quarter. This forecast is below the current average projection analysts for a profit of 13 cents per share in the period. This outlook assumes linage at the U.S. Wall Street Journal will be flat to up slightly in the quarter versus year-ago levels. "While the advertising and business environment is still difficult, we are beginning to see some indications of improvement," said CEO Peter Kann. "Over the past few years, we have invested in and improved our products, controlled our spending, and continue to execute on Business Now, our long-range plan."
The New York Times reported second-quarter net income of $72.8 million, or 47 cents a share, down from $78.8 million, or 51 cents a share in the year-earlier period amid war-related advertising weakness. The results exceeded the average analyst estimate of 46 cents a share. Revenue rose 3.8 percent to $801.9 million, just shy of the $807.8 million expected by analysts. The newspaper publisher lowered its full-year forecast for expenses and "significantly" reduced capital expenditures projections amid uncertainty in the advertising environment. Meanwhile, earnings per share is still expected to show percentage growth in the "low- to mid-single digits."
Gannett reported that second-quarter net income climbed 7 percent to $324.3 million compared with $303.9 million in 2002's second quarter thanks to a solid performance in its newspaper operations. Earnings-per-share totaled $1.20 in the second quarter vs. $1.13 in the year-ago period and revenues increased 6 percent to $1.71 billion from $1.61 billion in the same quarter last year. The company's per-share profit was in line with the Thomson First Call estimate.
Media General warned that third-quarter earnings would be below consensus expectations of 52 cents a share and could be at the low end of the previously provided expected range of 44 cents to 58 cents a share, amid weakness in its broadcast division and uncertainty in its newsprint business. For the second quarter, the company recorded net income of $17.5 million, or 75 cents a share, up from 70 cents in the year-earlier period, and above the average analyst forecast of 72 cents.
Univision upgraded at RBC to Outperform from Sector Perform based on healthy momentum in Spanish-language media. The firm now believes the soon-to-be-completed Spanish-language TV up-fronts could yield 15% volume increases, and channel sources indicate advertiser interest in Spanish-language TV continues to expand; also, ratings momentum for primary competitor Telemundo is not picking up, and upstart Azteca America failed to impact up-fronts. Target is $35.
Oracle and Yahoo have teamed up to provide business customers with personalized news for its employees. Customers will have access to more than 100 pre-built news portlets, featuring content from more than 2,000 news and trade sources.
Telecom . . . The Wall Street Journal reports of a growing "disconnect" between Vodafone and Verizon despite what appeared to be a synergistic joining of forces to form Verizon Wireless three years ago. The two company's teamed up and built a profitable $20 billion business with a coast-to-coast network that serves more customers than its competitors. However, the article points to a bail-out clause called "the nuclear option" as a possible reason of putting the venture at risk of breaking up. The article suggests the company's have been at odds with each other over various issues with VOD executives frustrated over its lack of name exposure in the U.S. In addition, the possibility of this option being put to VZ would require it to buy out VOD's interest in whole or in part. VZ would have some level of difficulty writing potentially a $10 billion check given its debt load. However, the article suggests VZ executives appear to be indifferent about the VOD relationship.
PanAmSat reported net income of $30.3 million, or 20 cents a share, up from 13 cents a share in the year-earlier period, and above the average analyst forecast of 17 cents a share amid substantial reductions in costs. Revenue for the quarter declined 2.7 percent to $203.6 million, due to the lack of the World Cup soccer tournament. Looking ahead, the satellite operator said it expects to earn 12 to 16 cents a share in the third quarter and 54 cents and 64 cents a share for the year, versus analyst projections of 15 cents and 66 cents.
Qualcomm estimates cut at CSFB for its 2004 estimates to $1.25 from $1.45 due to lower share assumptions and more aggressive pricing. The firm is also reducing 2004 revenue estimate to $3.5 billion from $3.9 billion versus current consensus is for EPS of $1.42 and revenues of $3.9 billion.
IT Services . . . IBM won an $801 miilion contract to build and run California's child-support system. The eight-year deal with the California Department of Child Support Services calls for Big Blue IBM to build, operate and manage the California Child Support Enforcement System. IBM will be responsible for system architecture and operations, infrastructure, help desk and overall project management.
Storage . . . Lehman believes that Western Digital is on track to beat firm's June Quarter estimate of $0.18 (consensus is $0.19). The firm believes that WDC experienced additional market share gains within Dell and saw sequential growth in high capacity hard disk drives during the quarter. Applying an 18x P/E, firm arrives at a new price target of $17 (up from old target of $12).
EMS . . . Celestica was upgraded at UBS to Buy from Neutral based on their belief that the risk of the company's restructuring efforts has declined and current consensus forecasts are overly pessimistic. The firm sees less risk in operations due to recent European plant closures and new production in China. Raises target to $22 from $17.75.
Network Equipment . . . Ericsson won a $500 million contract from Deutsche Telekom unit T-Mobile USA. Ericsson will help expand and upgrade the operator's wireless network to support customer growth and demand for GPRS and higher-speed data networks.
Scientific-Atlanta was cut to Hold from Buy at Needham based on valuation. Following recent rally in share price, SFA now trades at 20x firm's 2004 estimate of $1.36.
Adtran said second-quarter profit doubled, to $12.38 million, or 31 cents a share. That compared with pro forma, or adjusted earnings, of $6.08 million, or 16 cents, a year earlier. Adtran easily beat the 27-cent consensus estimate. Adtran's revenue rose to $90.44 million from $85.78 million -- more than expected. Adtran is one of the few telecom equipment makers to see improved results, the result of higher purchases by phone companies offering high-speed access to their customers. In light of its strong results, Adtran declared a special dividend of $2 a share, payable Aug. 29. It also declared a regular quarterly dividend of 15 cents a share.
The joint venture between Sony and Ericsson to produce mobile phones has seen sales in the second quarter rise 18 percent year-over-year to 1.12 billion euros, on 34 percent growth in units shipped. The GSM business posted 84 percent year-on-year growth in shipments and Japanese standards shipments increased 45 percent year-on-year. Net income including restructuring costs declined to an 88 million euro loss from 83 million. The restructuring costs of approximately 70 million euros for phasing out its American business and ending its Munich R&D business will lead to a net loss for the year, but Sony Ericsson said that for the second half of the year, it will be profitable.
Semiconductor Equipment . . . Timothy Arcuri at Deutsche Bank raised his 2004 earnings estimate and stock price target following Applied Materials's "well-attended" analyst meeting. The stock is rallying 46 cents, or 2.5 percent, to $18.60. He now expects the company to earn 52 cents a share in 2004, up from 41 cents, and now has a target of $23 on the stock, up from $20. Arcuri said management's tone was "more bullish than prior commentary," suggesting signs of an early cyclical recovery in the second half of 2003.
ASML Holding was upped to Overweight from Equal-weight at Morgan Stanley Europe. While the firm believes 2nd quarter results have some downside risk, thinks that orders are likely to improve sequentially in 3rd quarter and 4th quarter and that 2nd quarter backlog will mark the low pt for this cycle.
AG Edwards raised their target on Helix Tech to $20 from $15 due to their reinforced expectation that the semiconductor equipment business is stable. Also, firm believes there is a move to seek more attractive valuations than currently found at Applied Materials, for example, and HELX, with its good balance sheet and strong mgmt is a prime candidate.
Semiconductors . . . Merrill Lynch expected Microchip to meet firm's estimates when 1st quarter earnings are reported, while offering a conservative 2nd quarter forecast of 3% revenue growth quarter/quarter to $167 million. While considers MCHP a well-diversified company, believes that at 42x 2003 estimate and 36x 2004 estimate, stock is fully valued. MCHP is scheduled to report July 17.
USB Piper Jaffray analyst Ashok Kumar issues comments on the Gigabit Ethernet market. The firm believes that INTC will dominate the Gigabit Ethernet segment and that Broadcom will likely leverage its WLAN and server chipset portfolio to grow share. Kumar also believes that Marvell Tech remains the loser in this shakeout, and will increasingly depend on a deep cyclical sector and mature segment (HDD) for growth.
MIPS Techs started with a Buy at B. Rile and $4.75 target. The stock is trading at 1.5x cash and 1.4x book, firm feels that the shares are an attractive value. In addition, firm expects new MIPS-based applications and design wins like Sony's new PlayStation Portable, DTV, VoIP, and smart cards to help drive the company's top-line recovery.
Rambus was upped to Buy from Neutral at B. Riley. The upgrade is based on firm's view that RMBS will succeed in overcoming the brunt of the charges that the FTC is bringing against it. At a minimum, firm believes the FTC will be unable to restrict RMBS' right to DDR SDRAM royalties. Estimates that RMBS could soon be in the position to collect as much as $420 million per year in DDR royalties alone (at the RAND royalty rate of 3.5%). At RMBS' 32% tax rate, this represents $286 million in after tax cash flow, or $2.71 per share. Firm's new price target of $37.50 is based on a 15x P/E on a $2.50 EPS target.
AMD will report 2nd quarter 2003 earnings after the market close on July 16, and will host a conference call at 5:30pm ET. Analysts forecast revenues to come in at $615 million, down 13.9% Quarter over Quarter, in line with the June 25 pre-announced figure. Estimate a loss per share at $(0.59) versus $(0.42) in 1st quarter. No guidance on the bottom line was provided and consensus is at $(0.54). AMD’s 2nd quarter 2003 shortfall confirmed that it lost share in the microprocessor market, due to a less competitive product offering and the accelerated shift from desktops to notebooks driven by Intel’s Centrino push. Estimate AMD's overall microprocessor share declined to 15.7% in 2nd quarter from 16.6% in 1st quarter, and expect its share to be flat in the third quarter. Forecast AMD’s 3rd quarter revenues to increase 6.9% Quarter over Quarter to $658m and expect loss per share to improve to $(0.49). Analysts have factored in a normal seasonal increase in microprocessor shipments, based on our motherboard checks and the fact that almost 90% of AMD's MCP shipments are for desktops. Expect weakness in flash as Intel recoups some of its lost share, negatively impacting both units and pricing. Analysts have excluded the financial impact of the new AMD-Fujitsu JV that was inaugurated this week, and will wait until AMD provides details in the earnings release before adjusting our model. Though reported flash sales could approximately double on AMD's financials, expect minimal impact to earnings. The JV restructuring changes little from an economic standpoint. Maintain a Peer Perform rating on AMD. Although the valuation of AMD shares appears attractive at 1.1x current book and 1.3x end-2003E book value, analysts prefer not to take a more positive view on the stock until we see success with the Athlon-64. In addition, do not expect the company to return to profitability until 4th quarter 2004, and forecast book value per share to erode to $4.72 at end-2004.
Software . . . Bob Austrian at Banc of America said there is "a buying opportunity in the making" in the shares of Microsoft, given that the overhang from the company's "underwater" options plan is less than feared. The stock, a component of the Dow industrials, is tacking on 6 cents to $27.46. Austrian feels initial concerns that Microsoft's plan to allow employees to sell "underwater" options to realize much of their options value would lead to selling in fiscal 2004 is "unwarranted," given that the overhang is relatively modest.
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