By Harry Boxer, The Technical Trader (www.thetechtrader.com) The market had its fourth day of declines off the June 14th top. The session started out with a rather large gap down. We had a brief try at a rally, which failed & the indices went sharply lower very quickly and then stabilized until about the lunch hour. At that point , after forming bear flags and not being able to rally above resistance, the market took a third leg down to near the lows for the session.
We then had an early afternoon rally attempt that failed at resistance and then a late-afternoon decline that took us right back down to the lows on the Nasdaq 100 at 1250. That held, creating an intraday double-bottom, so the market rallied late in the session.
The S&P 500 loss wasn’t quite as spectacular and neither was the Dow, but net on the day it was still a down day and a fairly ugly one. The Dow was only down 43.77. That was about 33 points off the low, so it recovered about 40% of its losses. The Nasdaq was much worse today, down 50 on the Composite and 36 on the 100. The Nasdaq Composite closed under 1700 for the first time in 10 days. The S&P 500, down 12 and change, closed down near key support around 980, closing at 981 and change after dipping slightly underneath that.
A review of the technicals showed how ugly the day was and confirmed the negative decline, especially on Nasdaq where advance-declines were 25 to 6 negative, nearly climactic. Up/down volume was 10 to 1 negative with 1.7 billion to the downside and about 172 million to the upside. Nearly 2 billion shares traded today on Nasdaq, a heavy day, and it looked sort of climactic at one point. NYSE advance-declines were a bit better but not much, about 3 to 1 negative. The up/down volume was about 4 to 1 negative with a total of about 1.6 billion traded.
So Wall Street had a negative day and for the first time in recent memory my personal board showed 100% losers. They were led by market leaders IBM down 3.41, QLogic down 4.81 on an earnings report and several others such as Broadcom down 1.91 and Emulex 1.63. That really hurt the SOX Index, which, by the way, was down nearly 17 today, or about 5%.
In the lower-cap sector, OmniVision made a new 52-week high at 40 ¼ but reversed sharply and closed down 2.65 at 37. Several other stocks had sharp drops. FindWhat.com dropped from 23 to 19.60, closing at 20, down 3 ¼. TIVO was down 1.37, and the Asian Internet stocks once again got hammered, with China.com down 1.84 and ASIA down a dollar.
Stepping back and reviewing at the chart patterns, the hourly charts reveal that we have come down to the 1250-60 support zone, which was key support on the Nasdaq 100 and held there on a couple occasions today.
With the NYSE McClellan Oscillator now heavily oversold short-term at -241, we could very well see a bounce back rally tomorrow.
The S&P 500 has slightly broken short-term support at 985, getting down to around 978 before snapping back a bit to close at around 982. So we’ll see if that’s just a nominal break and whether it can rebound as well.
The S&P 500 has now dropped from 1015 to 978 in just four sessions and is also near its intermediate rising trendline. So again, cause for optimism short-term in terms a potential snapback rally, which I’m looking for tomorrow.
After three days of declines, Bulls charged back as cyclicals got a bid for a second-day. Profit-taking continued in techs, although a decent report from Microsoft tended to stop the bleeding. Volume was light, which is normal for a Friday in July. Consumer confidence, as measured by The University of Michigan survey, rose for the third month in four, showing its highest reading in more than a year. Microsoft raised its fiscal 2004 revenue forecast and an analyst said McDonald's sales this month are encouraging. The S&P 500 climbed 11 points (+1.2%) to 993. More than 80 percent of the index's members closed higher. Industrial shares, including Caterpillar and General Electric accounted for one sixth of the gain. The DJIA rose 137 points (+1.5%) to 9,188. Twenty-seven of the Dow's 30 members advanced. The Nasdaq Composite added 10 points (+0.6%) to 1,708 as Ericsson AB, the world's largest maker of wireless equipment, said its quarterly loss narrowed more than analysts predicted. After the first full week of second-quarter earnings, the trend appears friendly. Of the 156 S&P members who have reported, profit is up 9.8%. The Street consensus going into the earnings season was for gains in the 5.5%-to-6.0% range. Analysts are projecting 13% growth for the third-quarter, and 21% for the fourth-quarter. The week ahead brings another flood-tide of second-quarter earnings, some key economic figures on durable goods and home sales, and an investment community wary of past market excess, but intrigued by irrepressible animal spirits.
Top Stories . . . U.S. consumer confidence rose this month as a measure of current economic conditions increased to the highest in more than a year, a University of Michigan survey showed.
AOL Time Warne, the world's largest media company, agreed to sell its compact disc and DVD- manufacturing operations to Canada's Cinram International for $1.05 billion in cash.
Mattel, the world's largest toymaker, said second-quarter earnings rose 6.6 percent after paring debt amid fewer sales of Barbie dolls and Hot Wheels cars.
Ford, the fourth-largest employer in the Standard & Poor's 500 index, will cut spending on its salaried workforce by 10 percent to help meet the company's goal of saving $2.5 billion this year.
Quotes of Note . . . ``The overall tone of business results are good. I don't think they're stellar, but I think they're good enough reports that the rally we've experienced so far this year should be sustained.'' '' said Erick Maronak, who helps manage $2 billion for KeyCorp's Victory NewBridge unit.
``The Microsoft news is pushing things a little higher. We had a big sell-off yesterday, and as long as Microsoft didn't' blow it, you were going to have an uptick today.'' said Tom Shapero, head of Nasdaq trading at Sanford C. Bernstein.
Earnings of Note . . . With 143, or 29%, of the S&P 500 reports already in, 66% beat expectations, 13% fell short, and 21% matched estimates. Relative to history, more companies are beating estimates, and fewer are missing. Typically, a bit fewer than 20% miss estimates. Joe Cooper of First Call says he puts less importance in how many beat or miss than in the size of the profit surprises. Usually, the average surprise is less than 3%. This quarter, it's running at 6.4%. Cooper says that is a huge number, noting that the first-quarter average 6.1% surprise was the largest ever.
Gurus . . . James Paulsen of Wells Capital Management says that while the investment advisories are bullish, the investment managers may be making the other bet. The Rydex Funds bet against the market, and there is 1.31 invested in Rydex, or hold cash for every one dollar in funds that own shares. The two short-selling Rydex funds has done poorly this year with the URSA Fund, which bets against the S&P 500, down 14%, while the Arktos Fund, which shorts the NASDAQ, down 27%.
Tom Metzold, manager of the Eaton Vance National Municipal Fund, has been buying California Munis, placing $30-million as the state struggles with its worst financial crisis ever. Bond yields in California are at record-levels.
Fund Flow . . . Funds investing primarily in U.S. stocks took in $2.9 billion in new money during the week ending July 16, estimates Trim Tabs director of research Carl Wittnebert, adding to inflows of $2.2 billion the week before. Meanwhile, international equity funds had outflows of $2.4 billion, after taking in $800 million the prior week, Wittnebert said. Bond funds had inflows of $2 billion, versus inflows of $1.3 billion the week before.
Correction . . . "The number of correcting stocks is increasing, as noted by the weak advance-decline readings of the past three days. This correcting trend is spreading into more issues, and we believe that it will cause the Dow to break below the support at 9,000," said Robert Dickey of RBC Dain Rauscher. The technical strategist feels the stock averages may move down another 5 percent to 7 percent over the next few months to set up for a better year-end run. "The August-October period has historically been the most challenging for the market, and this year could fit that pattern once again."
Bad Boys . . . Federal investigators have undercover video tapes of Abbott Labs salespeople urging a medical products distributor to allegedly overcharge government insurance programs, The Wall Street Journal reported Friday. The tapes have emerged as a key piece of evidence in the probe of Abbott's Ross Products division, according to the report, which cited unnamed sources. Abbott last month took a $622 million charge against earnings for an anticipated settlement of the probe.
Eco Speak . . . Consumer sentiment improved in July, according to reports about the University of Michigan consumer sentiment index. The preliminary July index rose to 90.3 from 89.7 in June. The rise was not as large as expected. Wall Street analysts projected the consumer sentiment index would rise to 90.5. A final reading for July will be released on Aug. 1.
Financials . . . Goldman Sachs and Merrill Lynch will split $31 million in fees for their advisory roles in the Biogen/IDEC Pharmaceuticals merger,. Goldman earned $16 million or 0.21 percent of the total deal transaction of $7.5 billion. Merrill earned $15 million, or 0.2 percent of the deal value, in fees for its role in advising the buyer, IDEC.
J.P. Morgan added credit card giant Capital One's shares to it its Focus List of stocks to watch, saying the firm is at a turning point and business should improve significantly in the second half of 2003. Morgan set a 12 month, 63 price target for the shares, which closed Thursday at $48.22. "We believe there is light at the end of the tunnel for the revenue riddle that has plagued earnings quality in the first half," the Morgan report said.
Zions Bancorp was upped to Buy from Neutral at Merrill Lynch. The upgrade is based on strong Q2 performance and firm's expectation of above average EPS growth in 2003 and 2004. Price target $62.00.
J.P. Morgan Friday began AIG with an "overweight" rating, saying the company has terrific growth opportunities in foreign life insurance markets. Morgan also said the company will benefit from rising equity markets. We estimate that roughly 20% of the company's earnings should benefit from the positive movement in the S&P 500 since the beginning of 2nd quarter 2003," the research note said.
JP Morgan initiated American International (aka AIG) with an Overweight rating, as they think the 15-20% earnings growth potential in AIG's foreign life business is underappreciated and offers significant growth and return potential. The firm also believes that consensus ests for 2004 are understated and should see upwards revision driven by accelerating foreign life growth as a result of the recent acquisition of GE's Japan life operations, the strength in the equity market, and rising investment yields.
JP Morgan added Capital One to their Focus List based on valuation as well as their belief that the co is poised to re-emerge from the qualitative quagmire that has plagued results through mid-2002; credit quality, reserve levels, marketing spending, and loan growth are all expected to improve in 2nd half 2003. Target is $63.
Merrill Lynch upgraded Chubb to "buy" from a "neutral" on reduced concerns over near-term earnings and expectations that earnings momentum will improve over the next six quarters.
Smith Barney upgraded Protective Life to Outperform from In-Line and raised their target to $33 from $30. The firm says that on a fundamental basis, PL remains the most attractive investment option among small- to mid-cap names within the North American life insurance sector, and firm now considers the shares attractively undervalued.
First Data reported generally in-line but not stellar results for 2nd quarter 2003. FDC's 2nd quarter 2003 revenue was slightly below estimates while EPS was in-line, helped by a one-time gain. Revenue increased 12% (below 13% revenue estimate) while EPS increased 21% on a reported basis or 15% on a recurring basis to $0.47, in-line with estimate. Payment Services (Western Union) revenue was light and Merchant Processing did not generate the upside some investors may have been anticipating. Furthermore, 2n quarter 2003 results were helped by a $20 million pre-tax gain associated with a merger-related termination of a small FDC alliance relationship and the sale of FDC's interest in the associated merchant portfolio. Management remains "confident" it will achieve its guidance for 2003: Revenue growth 14-17%; EPS growth 13-16%. Analysts are maintaining 2003 estimate of $1.93 which is at the high end of the guidance range. Management stated it remains focused on concluding the Concord transaction and is targeting an October 1st close. The pending First Data - Concord EFS merger creates a massive payment processing company with significant incremental growth opportunities. To the extent FDC's ultimate objectives are achieved, the combination may create a powerful alternative to MasterCard and Visa.
Oil & Gas . . . Arch Coal reported income before special items of $2.7 million, or 5 cents a share, compared with income of $2.1 million, or 4 cents a share, in the year-ago period. First Call had expected a loss of 6 cents share. After items, the company lost $3.25 million, or 6 cents a share. The nation's second largest coal producer posted revenues of $403.1 million in the quarter, up from $374.5 million in the year-ago period. The company notes that trends in U.S. coal markets continue to be encouraging, with coal consumption on the rise. Arch Coal said it expects breakeven results in the third quarter, excluding mark-to-market adjustments and charges.
The Oilfield Service group is demonstrating relative strength again following solid gains in the space yesterday. Contributing to the positive sentiment this morning is a Banc of America Sec call to be aggressive buyers of select Oilfield Services stocks on view that the stock and drilling cycles are not yet over and in anticipation of a positive outlook from conference calls. Firm's special situation recommendations includes Hanover and Halliburton.
Dow Chemical is highlighted in BusinessWeek article due to its stock woes associated with asbestos liabilities and surging oil and gas prices. A managing director of an asset management firm believes the stock is worth 42, plus a 4% dividend yield. He is optimistic about the company's problems due to the Senate moving forward with its $108 bln victim fund. The company's problems stem from its purchase of Union Carbide which once made asbestos producing products. The asset manager believes natural gas prices will drop later this year and sees other options for supply with Russia and elsewhere. However, the street only has 4 buys out of 14 analysts covering it in light of what is described as a transitional year for the company.
Energy . . . Dominion Resources reported operating earnings $0.84, compared to estimates of $0.82 and last year’s 2nd quarter 2002 EPS of $0.97. Mild weather in Dominion’s territory was the main cause for the weaker performance. On a GAAP basis, the company reported a lower EPS of $0.76 as a result of write down of assets currently held for sale. These assets were acquired in the CNG merger and carry a combined book value of $114 million. They include a pipeline in Australia and a new generation plant in Hawaii. The sale of these assets should have no impact on earnings. Dominion remains highly hedged in its E&P production and merchant generation positions. For E&P, practically all of its production is hedged in 2nd half 2003, while production for 2004 and 2005 is hedged by 65% and 45%, respectively. In merchant generation, 80% of its electric output is hedged in 2003 while 60% and 50% are hedged, respectively for each of the following years. Including the requirements of Dominion’s franchise utility business, these hedge positions increase to 95% in 2003, 90% in 2004, and 85% in 2005.
Defense & Aerospace . . . The Wall Street Journal reported Boeing is facing a private lawsuit in addition to its government probe alleging the co acquired proprietary documents from the same rival which gave Boeing an edge in bidding for satellite contracts. The government probe is over the co illicitly obtaining a rival's documents during a significant rocket competition.
Transports . . . Bear Stearns analyst David Strine upgraded one and downgraded the other. Strine believes Continental Airlines can return to profitability amid strong load factors and continued cost controls, while the outlook for Delta's costs were discouraging given the "highly uncertain" timing for a labor deal.
CSFB downgraded Delta Air Lines to Neutral from Outperform based on the following concerns: 1) company's cost outlook is disappointing, and revisions to the 2003 outlook have been frequent and meaningful enough that they are skeptical of longer-term goals, 2) given the improved liquidity at other airlines, any stock price premium linked to DAL's relatively solid cash position is dissipating, and 3) firm expects this strong liquidity to impede DAL's ability to obtain concessions from its pilots, thereby leaving it with the industry's highest labor costs. Cuts target to $17 from $21.
Prudential upgraded Lear to Buy from Hold following stronger than expected results. The firm believes that the possibility for the co to post double-digit earnings growth over the remainder of this year and in 2004 has improved, and thinks the stock could benefit from a few short- to medium-term catalysts such as: 1) believes company is on the cusp of a debt ratings upgrade to investment grade status, 2) firm expects the company could initiate a dividend towards the end of this year if debt is upgraded, and 3) firm thinks there is a good chance the company will be added to the S&P 500 over the next 12 months. The firm raised target to $61 from $51.
Visteon reported a net loss of $167 million, or $1.33 a share, versus a profit of 56 cents a share in the year-earlier period. Included in the results is a $170 million charge for the exit from its seating business. Taking out one-time items, the autoparts maker earned 2 cents a share, besting the average analyst forecast for a loss of 2 cents a share. Total sales declined 8.5 percent to $4.61 billion, amid a 14 percent reduction in Ford Motors' North American volumes, but topped analyst forecasts of $4.54 billion.
The Detroit Free Press reported that Ford is considering the elimination of up to 2,000 white-collar jobs in North America later this year. The reductions would help the No. 2 automaker meet its long-range cost-cutting targets, the newspaper reported, citing executives speaking on condition of anonymity. Word of the cuts could be officially made as early as this morning. Ford is aiming to pare back its salary-related expenses by 10 percent, with less than half that coming from job reductions, according to the Free Press. Shares of Dearborn, Mich.-based Ford, which said earlier this week that it will report a loss in the third quarter, lost 16 cents to $10.83 in Thursday's action.
Food & Beverage . . . Constellation Brands expects second-quarter comparable earnings of 61 to 64 cents per share, slightly below the current average estimate of analysts polled by Thomson First Call for a profit of 65 cents per share. However, the company sees comparable earnings of $2.46 to $2.53 per share for fiscal 2004, a range that's ahead of Wall Street's current consensus estimate of $2.55 per share. On a GAAP (generally accepted accounting principles) basis, including various charges and gains, the Fairport, N.Y., alcohol seller sees earnings of 24 to 27 cents per share, and $1.90 to $1.97 per share for the respective periods.
Retail . . . Restoration Hardware started with a Strong Buy at Roth. Price target $7. The company likely to be profitable this year and earnings expected to increase 30% over the next couple of years, firm believes the shares provide investors meaningful upside from current price levels.
Restaurants . . . Bear Stearns upgraded McDonald's to "outperform" from "peer perform." Joe Buckley said improved trends and management tactics give him confidence in his earnings forecast for 2003 and 2004, which are above consensus estimates. He noted that while there was little clarity on sales beyond the summer, there were also a number of potential positives, such as a "significant" dividend increase, the launch of a new advertising campaign and the continuation of a "more stringent" capital spending program.
Healthcare . . . Tenet Healthcare announced that a federal grand jury returned an indictment accusing Alvarado Hospital Medical Center and Tenet HealthSystem Hospitals of illegal use of physician relocation agreements. Tenet HealthSystem Hospitals is the legal entity that was doing business as Alvarado Hospital Medical Center during some of the period mentioned in the indictment. "The company had disclosed earlier this week that it expected the indictment to be returned."
Drugs . . . Bentley Pharm was cut to Market Perform at Raymond James based on valuation. The shares are near their former $16 targe. The firm also noted that BNT trades at about 24x their 2004 EPS est vs its peer group multiple of 20x.
The Wall Street Journal reported Barr Labs is currently in talks to acquire Galen Holdings in a transaction valued at more than $2.07 billion. The two company's have been in talks for several weeks and was required by Britian's takeover panel to issue a statement due to an unusual jump in the company's stock price.
Biotech . . . Gen-Probe announced that it has filed its FDA Pre-market Notification, ahead of schedule, for U.S. marketing clearance of its Tigris DTS System.
Media . . . AOL Time Warner announced the sale of Warner Music Group’s DVD and CD manufacturing and distribution business to Cinram International for $1.05 billion in cash. Over the past several months, management had clearly stated this asset was non-strategic and for sale, so this announcement comes as no surprise. According to the company, the DVD and CD manufacturing and distribution business accounted for approx. $130 million of EBITDA in 1st half 2003, which is almost 70% of estimated Music division EBITDA in that same time period. However, for the full year 2003 we believe that this business would have accounted for approximately 56% of estimated $447 million of Music division EBITDA, or $250 million. The transaction price implies an EBITDA multiple of roughly 4x, which appears to be in-line with recent deals for manufacturing companies (4x-5x range). This business may be approaching its peak, as many studios have already released their primary library titles on the DVD format, though there are still a few years of growth left - making it a good time for AOL Time Warner to sell.
24/7 Media mentioned favorably in BusinessWeek . The stock is benefiting from the run-up in tech and Internet stocks according to BusinessWeek article. It has traded from as low as 9 cents in September 2001 to the more recent 1.81 on July 16, 2003. The marketing company specializes in targeting consumers online and is benefiting from the increase in online advertising. The co's web alliance network "aggregates and sells" ads of a myriad of smaller sites who cannot afford their own sales force. According to a fund manager, 80% to 90% of web traffic is handled by major portals such as AOL, Yahoo! and Microsoft with TFSM handling the remaining sites with strong sales traffic and no sales reps. He also believes the company will turn a profit in 2003 on revenues of $45 mln.
TheStreet.com reported second-quarter cash flow of $300,000, versus a cash burn of $700,000 in the same period a year ago, marking the company's first-ever positive cash flow quarter. The net loss for the quarter was $1.3 million, or a nickel a share, versus last year's loss of $2 million, or 8 cents a share. The average loss forecast of the two analysts was 9 cents a share. Revenue rose 17 percent to $6.4 million, amid 19 percent increases in both subscription and advertising revenue.
Switchboard and Google introduced content-targeted ads through the Google AdSense program into the Switchboard Yellow Pages. Switchboard will share in the revenue generated when their users click on Google advertisements.
Hotel & Leisure . . . International Game Tech was cut to Hold at Jefferies based on valuation, as the stock is near their $29 target and trades at the top of its historical valuation range.
Telecom . . . The CWA said 92% of its Verizon members voted in favor of the strike authorization. Negotiations with Verizon are underway. The current collective bargaining agreement expires at midnight on August 2nd. For a strike to take place, the next step would be for CWA's 20-member executive board to authorize President Morton Bahr to set a strike date. While this heightens investor's concern regarding the potential strike effects on spending and equipment vendors' September Quarter, most equipment companies expect this to be largely a non-issue -that is either reaching a pre-strike agreement or a strike of short-duration. Only time will tell, but unlike other issues that the wireline/wireless sector is dealing with, this is a temporary one that should see a full bounceback if spending is impacted.
Network Equipment . . . Packeteer reported earnings of $2.1 million, or 8 cents per share, up from its year-ago profit of $499,000, or 2 cents per share, and in line with consensus view. Revenue in the latest three months rose to $17.5 million from $13.1 million in the same period a year earlier.
Harmonic was downgraded at CIBC to Sector Perform from Sector Perform from Outperform due to concerns about near-term cash requirements.
J.P. Morgan downgraded Nokia to neutral from overweight. Nokia posted second quarter results Thursday. Nokia's "results disappointed on average selling prices, development, handset margins, and outlook for third quarter 2002 revenues and earnings," the broker said. "Limited visibility on ASPs going forward reaffirms concerns of growth prospects for company over near-term."
Ericsson’s rally is driven largely by the commitment to returning to profitability, unlike other companies such as Lucent or Motorola which have reduced guidance. Ericsson's top line and industry guidance calling for a decline of greater than 10%, which remains unchanged, is largely in line with expectations. However, from an industry impact perspective and relative to ERICY's prior expectations, 3rd quarter top line guidance of flat vs. a 7% increase could be perceived as slightly disappointing. Analysts largely expect flat 3rd quarter top line guidance (excluding handset-related companies) and this remains consistent.
Friedman Billings Ramsey upgraded Nokia to Outperform from Market Perform. The firm is saying the company is poised to further improve its position in the mobile handset market given new product introductions for both the low- and high-end mkts as well as CDMA. Also, improved gross margins at Nokia Mobile Phones is allowing the co to continue to reinvest for the long-term, while still offering sequentially stronger earnings in 2nd half 2003 compared to 1st half 2003, and further earnings improvement in 2004 and enabling it to continue to generate strong cash flow; target is $18.
Extreme Networks reported a net loss of $170.4 million, or $1.47 a share, versus a profit of 2 cents a share in the same period a year ago. Excluding a non-recurring charge to establish a valuation allowance for deferred tax assets, the loss for the quarter ending June was 6 cents a share, a penny wider than the average analyst forecast. Revenue dropped 23 percent to $87.3 million, but matched analyst expectations.
Jeffrey Shelton at Deutsche Bank downgraded Scientific-Atlanta to "sell" from "hold," saying a "blowout" fiscal fourth quarter report was not enough to support current valuations. The set-top box maker reported a quarterly profit, versus a loss in the year-earlier period, that handily topped expectations. Shelton followed by increasing his price target to $20 from $17 due to improved clarity and an increase in discounted cash flow. "However, we believe that the recent appreciation in Scientific-Atlanta's share price more than fully reflects the improved fundamentals mentioned above," Shelton said in a note to clients.
Fahnestock initiated Scentific Atlanta with a Buy rating and $36 price target. Believes SFA will benefit from the continued rollout of HDTV service and PVRs by cable operators.
Nokia posted results for 2nd quarter 2003 that were in line with guidance given on the mid-quarter update and in line with expectations. Nokia reported 2nd quarter 2003 revenues of EUR 7.0 billion in line with our expectations. Handset revenues were app. EUR 5.5 billion, slightly below estimates of EUR 5.6 billion. Infrastructure revenues were EUR 1.5 billion, above our estimate oour estimate of EUR 1.4 billion Nokia gained share globally, but 1) lost share in GSM to Samsung, SonyEricsson, 2) lost share in China to domestic vendors again in 2nd quarter 2003, 3) but gained share in CDMA versus Samsung. This implies that vendors like Nokia and Samsung are now invading each other’s dominant markets, GSM for Nokia and CDMA for Samsung. This trend is line with our thesis of a heightened competition. Anlaysts are lowering 2003 and 2004 EPS estimates given our concerns over a higher level of competition. 2003 estimates are declining from EUR 0.80 to EUR 0.75, including charges and 0.71, including charges. Our 2004 estimates are declining from EUR 0.89 to EUR 0.81. Nokia indicated that it will increase its level of spending in order to introduce new product categories in to the market (e.g. N-Gage) as well as to more aggressively pursue market share (e.g. CDMA). The strategy is likely to result in operating margins remaining at lower levels than we have seen over the last few quarters, but is the right one.
Semiconductor Equipment . . . Fahnestock reits Sell on Novellus and $22 target. Thee firm believes that the company's exposure to the copper equipment market gives it above-average growth potential, they are concerned that the company's acquisitions will meaningfully reduce its margins. Also, firm cautions that industry visibility remains low, and while orders from two large Asian company's may boost 3rd quarter bookings, they do not expect a significant order upturn to begin until 4th quarter.
Semiconductors . . . Xilinx reported 2nd quarter revenue of $313.3 million (+2.5% Quarter/Quarter), which was slightly below estimates, but EPS of $.13 was in-line. XLNX guided for 3rd quarter revenue to come in flat to slightly up on a Quarter/Quarter basis. Project an increase of 0.9% Quarter/Quarter and view the guidance as slightly disappointing, however, lower opex leave our EPS estimates unchanged. After a very disappointing level of growth in the March Q, Consumer, Industrial, and Other applications surged 26%. Most of the strength came from Japan and Asia. Continue to expect the majority of PLD growth to come from these non-IT end market applications. Based on Xilinx and Cypress reports, September estimates at Altera and Lattice SEmi are more at risk.
Xilinx reiterated as Neutral at SoundView. Price target cut to $27from $34 and reiterated its Neutral rating. The firm believes Xilinx will trade flat to down over the next few months. Fact that June was weaker than May does not resonate well with firm.
UBS upgraded Xilinx to a "buy" rating from a "neutral". UBS said it views the chip firm as "a very high quality company" and believes investors should take advantage of the lower-than-expected outlook provided for its September quarter and related weakness in the stock over the near term to add to positions.
Fairchild Semi was cut to Neutral at HNG. The firm is saying continued component pricing pressure, an increase in channel inventories, a lack of improvement in its capacity utilization, and a late cycle restructuring leads them to believe that FCS's business should remain challenged for the foreseeable future.
Transmeta was started with an Outperform at Soundview. Price target $2.50. The market has dismissed TMTA as irrelevant in the notebook space due to past execution problems, the new management at the company is set to introduce the TM8000, which they believe will be a viable alternative to INTC's Centrino in 2004.
Xilinx was upped to Buy from Neutral at UBS. The firm feels that they are a very high quality company and feels that investors should take advantage of the lower than expected guidance for the September quarter and related weakness in the stock to add to positions. UBS maintains its $32 target on the name.
Fairchild Semi reported 2nd quarter results with revenues of $348.1 million which were below consensus and roughly in line with estimates, which reduced June 4. EPS was $0.03, a penny better than our estimate and in line with consensus but aided by an unexpected 3-cent tax benefit. The disappointing results were consistent with our previous commentary on the challenging business climate. The computing segment (29% of sales), particularly desktops and notebooks, and the communications segment (21% of sales), specifically wireless handsets, were especially weak. Shipments were healthy in automotive, which grew by 20% but accounted for only 6% of sales. The consumer segment (21% of sales) also saw strength in CD/DVD players, VCRs, and game consoles. The company announced a restructuring plan to lower costs by consolidating manufacturing facilities and eliminating non-core operations. By shutting down several of its facilities in Asia, consolidating fab lines in South Portland, and exiting the non-volatile and hybrid memory business, Fairchild expects to achieve $53-58 million in pretax savings in 2004 with some portion benefit in 2nd half 2003. Guidance for a 4-6% sequential revenue decline was also well below expectations. Visibility remains virtually non-existent as the company’s 13-week backlog declined more than 10% quarter/quarter. Pricing in standard linear and logic markets remain weak, and the company expects operating margins to be flat to down. Analysts are lowering estimates. 2003 EPS is now $0.14 down from $0.22 and new 2004 EPS is now $0.43 down from $0.49. Continue to view Fairchild as a long-term value play that possesses significant potential earnings leverage. However, the current business environment remains weak and the stock lacks a catalyst.
Software . . . Microsoft reported operating EPS of $.23 which was in line with estimates on stronger than expected revenues of $8.07 billion (+11%). Estimated bookings of $8.55 billion (+6%) were well above expectations as unearned revenues rose $483 million Quarter/Quarter. Management raised guidance for 2004 revenues and pre-stock expense EPS by $1.1 billion and $.05 respectively to $34.5 billion and $1.10 due to stronger fundamentals and a change in accounting for unearned revenues. Stock compensation expenses of $.24 bring GAAP EPS guidance to $.86. Along with a pickup in IT spending, we continue to believe a new product cycle with the rollout of new server and desktop products should fuel stronger growth in 2004-05, particularly as compares ease after the September Quarter. Analysts raised 2004E revenue and pre-stock expense EPS by $700 million and $0.05 to $34.5 billion (+7%) and $1.11. With stock expenses, our GAAP EPS estimate is $0.87. At $27, the stock has modest upside based on its implied 4.8% yield and is relatively attractive based on its modest discount to other leading SW stocks at current prices. Continue to look for approximately 6% WW PC unit growth in 2003, followed by 10% growth in 2004.
Peoplesoft reported revenue and EPS of $497.4 million (+3%) and $.14, in-line with its pos pre-announcement. Licenses of $112 million were down 15% Year/Year and services revenues of $386 million were up 10% Year/Year. Despite solid results, which came in well above St's original expectations, question sustainability of revenue given high number of "rebate" deals booked. Management attributes success to rebound in IT spending that is not otherwise readily apparent. The company does not providing guidance for combined JDEC-PSFT entity. Nonetheless, analysts have tweaked 2003 standalone numbers--lowering revs by $21 million to $1.96 billion, but leaving EPS at $0.53. Expect JDEC to add $0.27 to 2004 EPS of $0.62. Currently trading at 29X 2004 EPS estimate, shares of PSFT seem fully valued given our uncertainty about the true drivers behind the solid 2nd quarter performance. Wait and see for some evidence of sustainability before getting interested. Channel checks suggest that a few large infrastructure players seem to have provided favorable deal terms in various PSFT deals in an effort to thwart Oracle’s bid.
Check Point Sftwr reiterated a Buy at Prudential. The firm believes that overall positive results from four small firewall/VPN vendors so far this quarter bode well for an in-line quarter from firewall/VPN software leader Check Point despite 2nd quarter disappointments from Antivirus and IDS vendors Network Associates and ISS. Firm reiterates its Buy rating and $25 price target.
JP Morgan reiterates their neutral view of the interactive software group. The firm cautions investors that Electronic Arts, Activision, and THQ Interactive have experienced significant stock appreciation heading into the back half of the cycle and they currently view the risk/reward level as less attractive than other stocks under coverage.
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