Stocks rose for a third day in four. The day was dominated by earnings reports, with favorable results for Amazon, Amgen, and Kodak, balanced with some stinkers for Sun Micro, AOL Time-Warner, and Charles Schwab. Amazon.com and Amgen each raised 2003 sales estimates, fueling optimism that growth will accelerate in the second half. The DJIA added 35 points (+0.4%) to 9194, with Kodak accounting for almost half of the gain. The S&P 500 gained half a point (+0.1%) to 988. The Nasdaq Composite advanced 13 points (+0.8%) to 1719. As the earnings season moves deeper into its second big week, estimates are being ratcheted upward. According to First Call S&P earnings are now estimated at +7.5%. Just a week ago, the projections had been for gains of 5.5%. Also moving higher were estimates for third and fourth-quarter results, with a 14% rise in the third-quarter, and 22% in the fourth. Those estimates have been rising since the third quarter began July 1. No major economic data were released Wednesday, but the Mortgage Bankers Association said applications for loans fell in the latest week, as the average mortgage rate jumped to 5.72%. In the bond pits, Treasury Notes rose after Federal Reserve Governor Ben Bernanke said a U.S. economic recovery could still be associated with disinflation. Bernanke said the Fed could still cut its overnight rate if disinflationary pressures don't dissipate. The benchmark 10-year note rose 6/32 at 96 6/32 to yield 4.10 percent. The euro gained 1.3 percent against the U.S. dollar to a three-week high of $1.1475, and the dollar lost 0.1 percent against the yen to 118.91. Gold stocks gained 5.4 percent after gold futures hit a five-week high above $358 an ounce. Crude oil gained 7 cents to $29.74 after dropping Tuesday on the Iraqi news.
Weak Sectors: media, paper packing, insurance broker, oil & gas services, utilities, wireless
Top Stories . . . Federal Reserve Governor Ben Bernanke said stronger economic growth in the next year may not halt further declines in inflation and that the central bank is prepared to hold or cut its benchmark interest rate.
AOL Time Warner, the world's largest media company, said second-quarter net income more than doubled, largely because of gains related to the sale of investments and a $750 million payment from Microsoft.
Eastman Kodak, the world's largest photography company, said it will eliminate as many as 6,000 jobs because profit for the rest of the year will fall short of forecasts as its consumer-film business shrinks.
Boeing., the world's biggest airplane maker, said it has a second quarter net loss after a year-earlier profit and lowered its 2004 forecast because of lower demand for commercial airplanes.
Freddie Mac's former chief executive played a bigger role than first thought in accounting errors that will force the second-largest source of U.S. mortgage financing to restate profit higher by as much as $4.5 billion over the past three years, an independent investigation found.
Gurus . . . Tony Crescenzi, strategist for Miller Tabak, says the rate rise has been due to signs of economic improvement, and optimism voiced by the Federal Reserve. The rate rise, therefore, looks justified, at least thus far. Whether the rate rise will continue is debatable, but there appears to be little risk that rates will increase to levels that affect economic growth.
Ed Hyman, Wall street's top economist, says last week's economic news was encouraging, and odds of a 5% growth in the third-quarter has gone up significantly. He noted that money supply is increasing at a rapid 15% annual rate, 3 surveys of business confidence have come in affirmative, and unemployment claims fell sharply. With consumer spending accelerating, payroll employment seems likely to turn around.
Quotes of Note . . . “Results are meeting expectations and even beating them. Most companies have completed their restructuring and that is bearing fruit.' said Roberto Ruiz Scholtes, who helps manage the equivalent of $3.4 billion in global assets at Gesbeta MeesPierson in Madrid.
``It would be nice to see the market slow and let earnings catch up a bit,' Sandy Lincoln, CIO at Wayne Hummer Asset Management. Wayne Hummer manages $1.3 billion.
He said What? . . . Federal Reserve Board Chairman Alan Greenspan and the Fed's policymaking committee should stand ready to cut rates to zero if the economy needs an extra jolt. "We should be willing to cut the funds rate to zero, should that prove necessary to provide the required support to the economy," Federal Reserve Board Governor Ben Bernanke said. The policymaking committee's point man on deflation said the risk of further declines in inflation from an already low level outweighs the risk of a resurgence in inflation. "Hence, monetary ease appears to be indicated for a considerable period," Bernanke said, adding "keeping the funds rate target at or near its current level for an extended period may be sufficient."
Sentiment. . .Individual investors are getting less bearish, according to a survey conducted by the Conference Board and released Wednesday. The number of individuals who say the current investment climate is "bad" fell to 56 percent from 62 percent six months ago, the board said. The percentage who expect a better investment climate over the next six months improved to 26 percent from 24 percent. Twenty-two percent plan to invest in stocks in the next six months, up from 21 percent.
Of Note . . . Second-quarter profits for S&P 500 companies should rise 6.9. At the beginning of June, Wall Street forecast a 5.8% increase. 34% have beaten earnings estimates by at least 5%. The typical percentage is 28%. Only 4% of companies have missed estimates badly versus the normal 10%.
About 40 percent of S&P 500 companies have reported second- quarter results, with almost two-thirds exceeding analysts' forecasts, according to Thomson Financial.
Mortgage Talk . . . Applications for new mortgage loans in the United States fell 5.4 percent in the latest week, the Mortgage Bankers Association of America said. The group's refinance index fell 7.2 percent while loans to buy a home fell 1.1 percent. The average rate for a 30-year mortgage rose to 5.72 percent from 5.33 percent a week earlier.
Financials . . . Charles Schwab said second quarter net income surged 77 percent from the first quarter to $126 million, and was up 29 percent over the year-ago period as markets improved. Revenue rose 13 percent over the first quarter to $1.018 billion, down 2 percent from the year-ago. Looking ahead, Schwab said it remained cautious. "Our 152,000 new account openings and less than $7 billion in net new assets for the second quarter indicate that many investors continue to approach the markets with hesitancy, leading us to remain cautious about the sustainability of our improved business results."
Greater Bay reported earnings of $0.41 per share, $0.01 better than the consensus of $0.40.
Countrywide downgraded at Jefferies to Hold from Buy following yesterday's 40% increase in 2003 earnings guidance. The firm says that without asset or servicing sales, CFC's "post boom" operating run rate could fall short of 2003's $13-$15 EPS; although the stock's discount valuation relative to peers will likely to prevent massive price implosion, their anticipated 21% decline in 2004 earnings -- at a time when earnings momentum is increasing for other financials -- should impede significant price improvement from current levels.
Diebold reported second-quarter earnings of $41.3 million, or 57 cents per share, up from its year-ago profit of $39.8 million, or 55 cents per share, and in line with the average estimate. Revenue slipped in the latest three months to $480.9 million from $483.5 million in the same period a year earlier. Diebold said its voting business was dilutive to results after a $30 million contract with the state of Maryland was pushed back to the third quarter. Looking ahead, the N. provider of delivery and security systems and services raised its earnings forecast for the year to $2.35 to $2.45 per share from $2.32 to $2.42 per share.
Ameritrade cut to Outperform at Raymond James based on valuation. Price target goes to $10.50 from $10.00
Independence Community Bank reported second quarter 2003 EPS of $0.65, representing 14% year-over-year EPS growth. Analysts are raising 2003 EPS estimate to $2.55 and setting a 2004 EPS estimate of $2.75. New target price is $35. Results were driven by strong non-interest income growth, specifically mortgage banking fees and service fee income, balance sheet leverage, and a reduction in the share count. Commercial and consumer deposit relationships continue to contribute to robust core deposit growth. Core deposits were up 14.1% year over year to $3.67 billion at the end of the quarter. Core deposits represented 71% of total deposits at June 30 2003 vs. 65% in the year ago quarter. As the economy improves and commercial lending picks up, believe ICBC will be a beneficiary. ICBC currently trades at 12.3x 2003 GAAP EPS estimate (a 13% discount to our BSC Mid-Cap Bank Index). As the company continues its successful transition to a commercial banking model believe the valuation discount will narrow and ICBC will trade more in line with its peers.
The Wall Street Journal's "Heard on the Street" column discusses the looming possibility of the AIG's "charismatic" 78 year old chairman Hank Greenberg possibly leaving and what it might mean to its stock price. The article points out few companies are so strongly identified with a single man, which makes analysts and investors concerned over the possibility of the departure prompting a re-evaluation of the co's stock and its venerable triple-A debt rating. Under Mr. Greenberg, the co has returned 318% for the past 10 years vs. the Dow Jones Industrial Average return of 159%. The article suggests investors are penalizing the stock for the co's lack of clarity on succession issues in light of it trading at 14 times forward earnings vs. the 17.4 times forward earnings associated with the S&P 500 index.
Freddie Mac said a report prepared by outside counsel shows problems with the company's past accounting, internal controls and disclosure, as well as with former management's governance practices. The company is working toward completing the restatement process and releasing its restated results during 3rd quarter, and continues to expect that the cumulative effect of the restatement will be to increase retained earnings as of Dec 31, 2002 by a range of $1.5-$4.5 billion, and expects to report a material increase in the fair value of shareholders' equity for year-end 2002 over 2001.
Homebuilders . . . D.R. Horton declared a quarterly cash dividend of 7 cents per share, a 17 percent increase from last year's equivalent payout. The home builder said the dividend will be paid on August 22 to shareholders of record on August 8. The
Oil & Gas . . . The American Petroleum Institute reported a 700,000-barrel fall in crude stocks for the week ended July 18 -- lower than the 2.3 million-barrel decline reported by the Energy Department. Supplies now total 277 million barrels, the API said. Gasoline supplies fell by 1.1 million barrels to 208.4 million barrels and distillate inventories stand at 113.8 million barrels, up 400,000 barrels from the previous week, the API said.
Metals . . . Alcan Aluminum upgraded at Prudential and raises their target to $38 from $32; firm cites valuation as well as a "win-win-win" scenario in which: 1) recent unexpected biz development efforts offset the adverse quarterly currency impacts, 2) the Canadian dollar lessens the currency penalties, and 3) Pechiney merger is concluded with some sweetening as no other bidders emerged yet.
Defense & Aerospace . . . L-3 Communications reported net income of $53.4 million, or 53 cents a share, up from 38 cents a share in the year-earlier period. Excluding a charge related to the early retirement of debt, earnings were 60 cents a share. Analysts had been expecting earnings 58 cents a share, on average. Sales for the period rose 28 percent to $1.23 billion, as strong demand in its defense businesses more than offset lower volume in commercial aviation and commercial communication products and lower sales of explosive detection systems. Looking ahead, the company expects 2003 sales to rise 20 percent over last year.
Paper . . . Kimberly-Clark said second-quarter sales rose 4 percent to $3.5 billion, bolstered by the weaker dollar. Net income rose to 82 cents a share vs. 81 cents a year-ago. Compared with earnings before unusual items of 86 cents per share in 2002, second quarter earnings per share declined about 5 percent, the company said. "Sales volumes were essentially flat, reflecting weaker-than-expected growth in a number of key categories in North America, particularly diapers and consumer tissue products. Net selling prices were approximately the same as last year," it said. Looking ahead, the company warned "for the year, we are still aiming for earnings before unusual items of $3.36 per share. Without some improvement in the business environment, however, it's possible that target could prove to be optimistic."
Transports . . . Norfolk Southern reported second-quarter net income of $137 million, 35 cents a share, up from 31 cents a share in the year-earlier period, but below the average analyst estimate of 37 cents a share. Revenue rose 2.5 percent to $1.63 billion, amid a slight decline in general merchandise revenue and increases in paper and forest products and coal revenue.
Boeing reported a second-quarter net loss of $192 million, or 24 cents a share, versus earnings of $779 million, or 96 cents a share in the year-earlier period. The results for the quarter ending June include a previously disclosed charge of $693 million, or 87 cents a share related to its launch and satellite businesses. Revenue declined 7.9 percent to $12.8 billion, above the average analyst estimate of $12.42 billion, amid 7 percent growth in integrated defense system sales, 13 percent growth from its Boeing Capital unit, and a 34 percent decline in commercial airplane sales.
UPS reported continuing 2nd quarter EPS of $0.60—$0.01 above consensus, and $0.06 over a year ago. Strength once again was in Int’l. and Non-Package, while Domestic Package was modestly weaker than projected. As expected, fuel and currency benefited the quarter ($0.03 and $0.02), while UPS overcame higher-than-expected non-operating expenses ($0.02 more than we projected). UPS announced on the call that it would begin flying 12 additional frequencies from Hong Kong to the Philippines and Cologne in October. This is consistent with UPS’s recent Asia strategy, which has led to ~15% annual volume growth on avg. in the region over the past three years. UPS’s overnight air express volumes were up a striking 9.1% year-over-year, implying market share gains. Yields for the product were off 4.8%, though likely in part the result of mix. Pricing in ground remains firm. Trends favor UPS With domestic vol’s showing an inflection, turn focus to expected improvements in domestic margins as the Teamster contract grandfathers in 3rd quarter and higher-paid part-timers gradually cycle out. These company-specific benefits are why UPS is one of the few transports that has held full-year C03 guidance steady despite no help from the economy.
Photography . . . Eastman Kodak net income was $112 million, or 39 cents per share vs. $284 million, or 97 cents per share in the year-ago period. The photo giant's earnings from operations were 60 cents per share, ahead of the lowered forecast of 29 cents per share. The company also said it would cut up to 6,000 jobs. The company lowered its earnings target from 60 to 80 cents per share to 25 to 30 cents per share on June 18. The company cited better-than-expected performance from joint ventures and a lower-than-expected tax rate. Sales totaled $3.352 billion, about flat with last year's $3.33 billion. Wall Street expected revenue of $3.29 billion. Based on preliminary plans, Kodak expects to reduce employment by a range of 4,500-6,000, beginning later this year. The cut amounts to 6-9 percent of the company's worldwide employment base. The company will take charges during the next twelve months in the range of $350 million to $450 million to cover the costs associated with the new reductions. The company expects to generate annual savings of $300 million to $400 million from the new reductions, with $275 million to $325 million expected to be realized in 2004.
Consumer Products . . . Avon Products reported net income of $171.5 million, or 71 cents a share, up from $155 million, or 64 cents a share in the same period a year ago, and above the average analyst estimate of 69 cents a share. Revenue rose 8 percent to $1.66 billion, amid strength in sales of beauty products and gain in the number of representatives. Gross margin expanded by 1.1 percentage points to 62.6 percent. The direct seller of beauty products raised its full-year earnings forecast to $2.60 to $2.65 a share from $2.55 a share.
Retail . . . Credit Suisse First Boston and J.P. Morgan Securities raised their ratings on Amazon.com. J.P. Morgan raised the stock to neutral from underweight, telling clients: "Fundamentals appear to be accelerating at Amazon."
CSFB upgraded Amazon.com to Outperform from Neutral and raised their target to $40 from $26 following stronger than expected results. Valuation is still a concern, firm believes that the potential for further upside to estimates and the 3.6% 2004 free cash flow yield should provide support at these levels. CSFB believes that there is potential for further upside to estimates, and the 3.6 percent 2004 free cash flow yield should provide support at these levels.
Apparel . . . Merrill Lynch downgraded Reebok to Neutral from Buy citing valuation as well as the following concerns: 1) excess inventories could complicate mgmt's guidance of 15% earnings growth this year, and 2) firm believes RBK's increased presence at Foot Locker is a growing risk, as Foot Locker's US stores are losing traffic and firm is concerned that Foot Locker will turn to RBK for more margin support as this traffic erosion continues.
Restaurants . . . P.F. Chang's China reported earnings of $7.1 million, or 27 cents per share, up from its year-ago profit of $4.9 million, or 19 cents per share, and in line with the average estimate of 13 analysts polled by Thomson First Call. Revenue jumped to $136.6 million in the latest three months from $101.7 million in the same period a year earlier. Looking ahead, the restaurant operator forecast revenue of $556 million for fiscal 2003, a figure that would yield net income of $28 million, or $1.07 per share. P.F. Chang's expects earnings of $36 million, or $1.32 per share, on revenue of $692 million in fiscal 2004. Wall Street's respective consensus estimates for these periods are for profits of $1.07 and $1.33 per share.
Healthcare . . . LCA-Vision (laser vision correction services) said second-quarter results swung to a profit amid an 11 percent jump in procedure volume and a 12 percent increase in average price realization per procedure to $1,231. The company earned $1.8 million, or 17 cents per share, in the June period, up from its year-ago loss of $2.3 million, or 21 cents per share. Analysts were looking for earnings of a nickel per share in the quarter. Revenue surged 24 percent in the latest three months to $20.2 million from $16.3 million in the same period a year earlier. Citing optimism about a new custom procedure and strong volume growth, the company raised its outlook for the year to a profit of between 45 and 50 cents per share.
Medical Devices . . . Zimmer Holdings proposed $3.1 billion takeover of Centerpulse has received regulatory clearance by European authorities as well as early termination of the waiting period under applicable U.S. antitrust laws. Smith & Nephew has also made a $2.5 billion rival bid for Centerpulse, a maker of medical implants such as artificial joints and dental inserts.
Drugs . . . GlaxoSmithKline said U.S. pharmaceutical sales rose 2 percent to 2.4 billion pounds in the second quarter, impacted by a reversal of wholesaler stocking patterns that had boosted first quarter sales. European sales were up 2 percent in the quarter to nearly 1.3 billion pounds as Central and Eastern European growth of 7 percent helped to offset the negative impact of government reforms on healthcare spending. It said it expects approval for anti-erectile dysfunction drug Levitra from the U.S. early in the second half of the year and said it would find out Sept. 1 whether the Food and Drug Administration would approve Wellbutrin XL.
Wyeth reported second-quarter net income of $864.4 million, or 65 cents a share, up from $599.9 million, or 45 cents a share in the same period a year ago, boosted by gains on product sales and lower interest expense, which was partially offset by the higher cost of goods sold. Net revenue rose 7 percent to $3.75 billion. Analysts had been expecting the drugmaker to earn 48 cents a share on revenue of $3.66 billion.
Schering-Plough said second quarter net income decreased 71 percent to $182 million, reflecting the loss of U.S. sales and profits of the Claritin prescription franchise, which was introduced for over-the-counter (OTC) sale in December 2002. Per share, earnings dropped 72 percent to 12 cents. Sales decreased 17 percent to $2.3 billion. Global sales of prescription claritin dropped to $112 million in the 2003 second quarter vs. sales of $792 million. Citing the Claritin impact as well as potential generic competition for Rebetol, SP warned: "Earnings in the 2003 second half may not reach the levels achieved in the first half (excluding any possible charges for unusual items)."
Biotech . . . Celera Genomics reported a loss of $19.4 million, or 27 cents per share, in line with the average estimate. The biotechnology firm posted a loss of $28.8 million, or 42 cents per share, in last year's quarter, which included a $2.8 million restructuring charge and a $6 million charge for the write-down of investments. Revenue dropped in the latest three months to $21.5 million from $28.1 million in the same period a year earlier. Looking ahead, Celera forecast a year-over-year decline in revenue in fiscal 2004 to between $55 million and $60 million.
Amgen reported adjusted EPS for the quarter of $0.49, exceeding estimates of $0.45 and consensus estimate of $0.46. Total product sales of $1.92 billion exceeded estimates of $1.75 billion across all products. Estimate that Amgen benefited by approximately $43 million in the quarter from a favorable impact in foreign exchange. Combined Epogen/Aranesp sales were $959 million compared to estimates of $850 million, combined Neupogen/Neulasta sales were $634 million compared to our estimate of $562 million and Enbrel sales were $304 million compared to estimate of $291 million. Operating expenses as a percentage of product sales were in line with expectations. Amgen raised financial guidance for the year with combined Epogen/Aranesp guidance of $3.7 billion to $3.9 billion from $3.4 billion to $3.6 billion. Amgen also raised guidance for the Neupogen/Neulasta franchise from $2.3 billion to $2.5 billion to $2.4 billion to $2.6 billion. Guidance for diluted EPS for the year has increased from a range of $1.80 to $1.90 to $1.85 to $1.95. Having raised guidance twice this year, Amgen continues to execute well with respect to both the top-line and bottom-line. Analysts are revising estimates based on new company guidance. After adjusting for 2nd quarter 2003 sales and increasing our estimates, our revised estimate for combined Epogen/ Aranesp sales is $3.86 billion. estimate for combined Neupogen/ Neulasta sales is $2.57 billion. Enbrel estimates for the remainder of the year remains unchanged at $1.28 billion. Diluted EPS estimate is now $1.95 for the year.
Media . . . AOL Time Warner reported earnings of $0.12 per share (ex-items), $0.02 better than the consensus of $0.10. Revenues rose 6.0% year/year to $10.82 bln versus the $10.65 billion consensus. "Our solid results in this quarter and the first half of the year give us confidence that we can deliver on all of our 2003 financial objectives." For 2003, company pegs revenue growth in the mid-single digits (consensus calls for 4.6% rev growth). AOL also discloses that after reviewing related transactions between America Online and Bertelsmann, the SEC concluded that the accounting for these transactions is incorrect. Company and its auditors continue to believe its accounting for these transactions is appropriate.
Ask Jeeves reported earnings that exceeded expectations and raised its outlook for the year. Youssef Squali at First Albany followed by reiterating his "buy" rating on the stock, and raising his price target to $18 from $13. Deutsche Bank's Jeetil Patel also maintained his "buy" rating, and bumped up his 12-month price target to $20.
Blockbuster reported net income of $61.2 million, or 34 cents per share, up from $41.7 million, or 23 cents per share in the year-ago period. Revenue rose to $1.392 billion from $1.271 billion. A survey of analysts forecasted earnings of 24 cents per share and revenue of $1.398 billion. The company expects the percentage increase in gross profit dollars to be in the high-single digit range for the third quarter and the full year 2003 over the respective periods of 2002, driven primarily by growth in rental and retail profitability. Worldwide same-store revenue will be approximately flat for the third quarter and the percentage increase for 2003 to be in the low-single digit range.
CNET upgraded at CSFB to Outperform from Neutral, citing expectations of a major turn in online advertising fundamentals in 2004-05. The firm raiseed target to $11 from $3.
MarketWatch.com reported a second-quarter net loss of $209,000, or a penny per share, compared with a loss of $4.1 million, or 24 cents per share, in the year-ago period. Revenue was $11.1 million, compared to $12 million last year. The company reported its fourth consecutive quarter of positive EBITDA, with $706,000 in the second quarter. Advertising revenue, which includes online and broadcast sales, totaled $5.4 million in the second quarter, up 4 percent from the first quarter and relatively flat from the year-ago period.
Hotel & Leisure . . . Regal Entertainment reported 2nd quarter EPS of $0.34 excluding merger and restructuring expenses, in-line with expectations and a penny ahead of consensus. Revenue and EBITDA were $648.1 million and $136.1 million, respectively, both slightly ahead of consensus number. The strength of the quarter was driven by much higher than anticipated average ticket prices. ATP's increased 7.7% year over year while estimates called for a modest 3.5% rise. However, some of the upside was offset by lower than anticipated concession per caps (up 0.7% versus our projection of up 2.5%). Most notably, the company maintained it's $0.15 per share quarterly dividend. Previously, due to the $5.05 per share extraordinary dividend Regal had paid earlier in the quarter, the company had anticipated cutting the recurring quarterly dividend to $0.12 per share. Regal shares have pulled back roughly 5% since the special dividend pay-out (July 2) compared with AMC's roughly 7% decline and a 1% decline in the S&P. In our view, the theater stocks are off due in large part to the soft start to the 3rd quarter box office and what appears to be a seasonal trading pattern for the stocks. At current levels, RGC is trading at 7.3x and 6.5x our 2003 and 2004 EBITDA estimates. Given these valuations and the higher than expected quarterly dividend, the recent pull-back could be an opportunity to purchase shares at attractive prices.
Telecom . . . BellSouth posted a net profit of $951 million, or 51 cents a share, in the second quarter, up from $263 million, or 14 cents, a year ago. Adjusted for onetime items, the local phone giant recorded income of $971 million, or 52 cents a share, down slightly from $975 million, or 52 cents, a year ago. That beat the 49-cent consensus of analysts. Revenue fell 2 percent to $7.1 billion from a year ago, but it rose from the previous quarter's total of $6.9 billion. Cingular, the company's joint venture with SBC Communications, added a net 540,000 wireless subscribers, up from 189,000 in the prior quarter.
Radio Shack announced that wireless revenue was up 14% from the second quarter 2002. While that revenue is more attributable to higher handset ASPs than unit volumes, management did note improvements this quarter at PCS – a nice reversal from the last two quarters. If ou applied sensitivity analysis to Sprint’s net adds based on market share of gross additions, sequential growth for gross additions, and churn. There may be upward pressure on our 325,000 net addition estimate in the quarter. Starting in July Sprint PCS increased its regulatory recovery fee by $0.63 per customer to make up for the costs of portability. This could increase revenue by nearly $60 million in 2003. Last week analysts were briefed by industry contacts on Sprint’s 2003 Business Users Forum held in early June. While none of the information was earth-shattering,some interesting data points that we wanted to pass along. Incremental information included on coverage plans, capex, faster data speeds, push-to-talk plans, and bundling details.
Storage . . . Maxtor was upped to Strong Buy at Hoefer & Arnett. .( Maxtor continues its impressive turnaround and on view that co's strong position in the 80 GB/platter desktop market, stable desktop pricing, a growing PVR/DRV market, and an increased share of the enterprise market will all contribute to growth on the bottom line.
Sun Micro’s Earnings . . . Despite having issued no guidance for the fiscal fourth-quarter 2003, Sun Microsystems reported pro forma EPS of $0.01 versus $0.01 a year ago, which was below consensus of $0.02, owing to lower than expected revenue of roughly $118 million from our model, more aggressive pricing which led to a 140 basis point gross margin shortfall as well as higher operating expenses of $22 million from our estimates. Moreover, interest income of $45 million, above our $33 million estimate, added an incremental $0.01 in EPS relative to our estimates. Total revenue for the quarter of $2.98 billion, down 13% year/year but growing 7% sequentially, fell short of our $3.1 billion estimate by $118 million or 4%, though we would note that Sun had given no specific guidance. Nonetheless, given Sun’s average 4th quarter/3rd quarter sequential revenue growth of 13% over the past 10 years and owing to positive signs of demand in key verticals that Sun had highlighted at B.S. Technology conference, the revenue miss was disappointing in light of Sun’s typical fiscal year-end strength and some of its competitors results (IBM in Unix, EMC in Storage).
Total revenue of $2.98 billion fell 13% year/year (up 7% sequentially) and was short of our estimate of $3.10 billion. The impact of currency was a favorable 1.5% points from the year-ago period and 4.7% points from the prior quarter. Product revenue of $2.0 billion (67% of the total) declined 20% year/year, highlighted by a 21% decline in computer systems to $1.6 billion and a 16% drop in network storage revenue to $423 million. Relative to the prior quarter, product revenue rose 6% sequentially, paced by storage which grew 15% sequentially as well as datacenter servers which showed relative strength in 4-way/8-way servers, translating to 3% sequential growth in computer systems. Services revenue (33% of the total) grew to a record high at $979 million, up 7% year/year and 10% sequentially, with year-over-year and quarter-over-quarter growth in all segments, including support (up 9% year/year and 7% sequentially to $755 million) and professional/education (up 1% year/year and 19% sequentially to $224 million). From a geographical perspective, U.S. revenue (44% of total) fell 23% year/year to $1.3 billion, but was up 10% sequentially. In Europe (32% of total), revenue fell 2% year/year and grew 8% sequentially to $954 million, while Japan fell 1% year/year and 18% sequentially to $200 million.
Gross margins for the quarter of 43.7% missed our expectations of 45.1% but rose 240 bps from 41.3% last year, though were down 90 basis points from 44.6% in the prior quarter. The 160 basis points sequential gross margin decline in products to 44.6% was driven by aggressive pricing and discounting and Sun’s reductions in the cost of purchasing components were not enough to offset these pricing effects, which contributed only a 50 basis points improvement in margins sequentially. Services gross margin of 42.0% grew 10 basis points from the prior year and 90 basis points from the prior quarter, helped by more efficient use of third-party delivery capabilities and logistics and owing to Sun’s leveraged services model.
Operating expenses for the quarter of $1.3 billion declined 4% year/year, less than the 13% decline in revenue, and were above our projection by $22 million. Operating expenses (R&D and SG&A) of a percentage of sales came in at 43.9%, up 420 basis points from the prior year, though down 120 basis points from the March quarter.
Sun continued to strengthen its balance sheet as total cash and equivalents rose to $5.74 billion, up $203 million from the March quarter’s $5.54 billion based on roughly $335 million in net cash from operating activities or $115 million in free cash generation. Inventory levels exited the quarter at $416 million, up $19 million from the March quarter’s $397 million but down $175 million from the year-ago period. Accounts receivable rose $85 million from the March quarter to $2.4 billion but was down $364 million from the prior year, translating to DSOs of 72 days, an improvement over the prior quarter’s result of 74 days and in line with the year-ago period. DSO improvement was driven by better shipment linearity and improved collections. Sun’s cash conversion cycle remained flat from the prior quarter at 46 days.
Analysts are lowering 2004 estimates from $0.10 in EPS to $0.05 on lower revenue of $12.4 billion (up 8% year/year but below our prior $12.7 billion estimate). While Sun has provided no specific revenue and EPS guidance, we’ve reduced 1st quarter 2004 (ended September) estimates from $0.01 in EPS to a loss of $0.02 (vs. a loss of $0.02 in the year-ago period) on lower revenue of $2.7 billion (down 1% Year/Year and 9% sequentially and below prior $2.9 billion projection)
While Sun has a strong balance sheet ($4.2 billion or $1.30 per share in net cash, excluding debt), its nearterm business outlook as well as longer-term strategic positioning remain challenging, and there are few fundamental or valuation catalysts for the stock. At its analyst meeting in February, Sun provided a scenario analysis assuming different levels of revenues, costs, and expenses and pointed out that it could have an EPS level in the range of $0.01 to $0.15 – from a “steady state” scenario to a “with opportunities” scenario. A 20x-25x multiple on EPS of $0.15, which is at the high-end of this range, would imply a valuation level of about $3-$4, below the stock’s current price. Sun's core strategy is to constantly expand its available market based on its core competitive strengths (i.e., being able to tightly integrate its SPARC microprocessor, Solaris/Unix operating system into scalable, highly available systems, identifying new markets, and focus on a simple consistent message).
Network Equipment . . . Westell reported fiscal first quarter results. The company said late Tuesday that it earned $4.6 million, or 7 cents a share in the quarter ending June on revenue of $55.3 million, versus year-earlier earnings of a penny a share and revenue of $49.8 million. Anton Wahlman at Needham said that while overall results were in line with expectations, DSL Modem sales of $30 million were down sequentially and below an anticipated $35 million. Wahlman added that at current valuations, the stock was fully valued given the company's relatively weak balance sheet.
ADC Telecom was upped to Equal Weight at Morgan Stanley based primarily valuation driven, but firm also notes that future operating leverage and fundamental stability contribute to the action. Firm's DCF fair value estimate for the stock is $2.00
Corning upgraded at Deutsche (to Buy from Hold following stronger than expected results. The firm believes that the company's long restructuring is paying off in a faster than expected return to profitability, and that the strong business momentum will continue to flow through to the bottom line. The firm raised target to $10 from $6.
Lucent reported a loss of $0.07 per share, in line with the consensus of ($0.07). Revenues fell 18.2% year/year to $1.97 billion versus the $1.97 billion consensus.
Semiconductor Equipment . . . DuPont Photomasks reported a fiscal fourth-quarter net loss of $59.1 million, or $3.27 a share, versus a profit of 10 cents a share in the same period a year ago. Included in the results are total asset impairment and severance charges of $47.6 million, and a $3.6 million tax benefit for its decision to carry back allowable losses in Europe. Revenue for the quarter ending June fell 13 percent to $81.8 million, topping the average analyst forecast of $80.5 million.
Teradyne was upgraded at Wells Fargo to Buy from Hold. The upgrade is based on their belief that the companyshould continue to see nice upticks in semi-test orders through 2H03 and in 2004, driven by demand for high-end SOC test systems and the return of capacity-oriented orders. Target is $24.
Semiconductors . . . Agere Systems reported a fiscal third quarter net loss of $78 million, or a nickel a share, narrower than the $332 million, or 20 cents a share it lost in the same period a year ago. Excluding non-recurring items, the loss was 4 cents a share, matching the average analyst forecast. Revenue for the quarter ending June fell 8.4 percent to $456 million. The provider of integrated circuits for wireless data lowered its revenue forecast for the full fiscal year 2003 to $1.81 billion to $1.83 billion from $1.85 billion.
Deutsche Bank raised its global DRAM average selling price forecasts for the second half of the year "on the basis of slightly better PC demand, low DRAM inventories as well as relative supply tightness." It raised its blended DRAM contract pricing forecasts to $4.85 from $4.30 for the third quarter and to $5.25 from $5.00 for the fourth quarter. "We see further upside to DRAM shares near term," it said. Deutsche raised its price target for Infineon Technology to 13 euro from 12 euro and Micron Technology to $19 from $17.
NVIDIA has adopted Artisan Components design platform including its advanced memory products for NVIDIA's 130- and 90-nanometer designs.
Soundview upgraded Micron to Outperform from Neutral. The firm is saying a seasonal inventory build in consumer should lead to a 6-8 week window where DRAM pricing will likely continue to rise; also, firm thinks analysts appear to be late in accounting for MU's flirtation with profitability in the current quarter. The firm raised target to $21 from $9.
CIBC believes Broadcom's recent run and premium multiples may prove to be unsustainable as quarterly growth rates return to single digits. Looking out to 2004, firm thinks co will face investor skepticism as competition heats up in its end markets.
Fahnestock is cautious on Broadcom due to slowing revenue growth from its wireless businesses and potential market share loss to Intel in its ServerWorks business (20% of revenues). In addition, the analyst cites concerns over mganagment's decision in 2nd quarter to write off all goodwill associated with ServerWorks acquisition as another caveat in the story.
Transmeta upped to Accumulate at PacificAmerican based on view that company's next-generation TM8000 processor and additional embedded-system opportunities for their current-generation TM5800 processor will provide new market opportunities for the company. Believes that these combined opportunities could go a long way to reducing the company's cash-burn rate in 2004.
Software . . . Sybase reported pro forma earnings of $23.2 million, or 24 cents per share, 3 cents ahead of the average estimate. In the same period a year earlier, the Dublin, Calif., maker of wireless communications software earned $25.9 million, or 26 cents per share, on a pro forma basis. Revenue reached $192 million for the June period, ahead of Wall Street's consensus estimate of $186.5 million.
Activision reported June quarter EPS of $0.04, beating consensus by $0.04, and guidance by $0.05. This quarter was largely in-line with expectations. Despite the upside, Management maintained its full-year guidance for 2004 of $0.47 on revenue of $750 million. Shifting its "True Crime" title to the December Quarter from September Quarter is a Net-Negative. Indeed, the largest incremental item of the call was pushing out this risky, new, and wholly-owned game to the December quarter. This leaves a big gap in the release schedule, increases launch risk, and eliminates any near-term potential catalyst. Anlaysts are maintaining full-year 2004 estimates at $0.49, but shifting the quarterly composition according to recent changes in the Company's release schedule changes.New September quarter EPS estimate goes to ($0.13) from $0.03 and our new revenue estimate goes to $100 million from $129 million Management, however, is setting the stage for a robust 2005 with 60+ plus SKUs (vs. 40 in 2004) including some major, movie-themed content in the first-half. But, investors will have to wait until 2005 for Activision to once again hit its stride. Estimates for 2004 are not aggressive as there remains a healthy dose of new, unproven product in ATVI’s back-half release slate with risk that Doom 3 for the PC slips into 2005.
ITWO’s stock was down 5.7% yesterday (versus the COMP up 1.5%) after the company hosted a conference call to discuss the completion of its re-audits, the filing of its 2002 10K, and its results for 1st quarter and preliminary results for 2nd quarter. With the re-audits behind them, ITWO’s success going forward hinges on the ability of its sales force to execute in a tough environment after pipelines have suffered over the greater part of the last six months since the re-audits were announced. Management indicated on the call that approximately two thirds of the license revenue generated in 1st quarter was attributable to existing customers—and that this number grew in 2nd quarter, underscoring the impact the re-audits had on pipeline activity over the past two quarters. Going forward, management noted that it plans to focus on growing its pipelines, and this will be a crucial part of ITWO’s strategy. Management also indicated that it expects total costs and expenses to be in the range of $108.0 million to $113.0 million in 3rd quarter, without providing any top line guidance, which implies that visibility remains weak, as the company—like the majority of those in the software universe—continues to make efforts to improve costs to align with weak revenue expectations. Given the challenging spend environment, and what appears to be weak visibility at ITWO, analysts do not see any upside catalysts in the near term and remain on the sidelines.
UBS upgraded Intuit to Buy from Neutral following the recent pullback in the shares. The firm continues to believe that there are few positive catalysts on the horizon over the next few months, the stock typically outperforms in the fall, ahead of the seasonally strong January quarter and April quarter. The firm raised target to $52 from $49.
Activision downgraded at Deutsche to Hold from Buy and cuts their target to $11 from $13. The firm cited the following factors: comapny is undergoing a near-term transition in the 2004 title lineup, the recent SEC investigation should act as an overhang on the stock in the near-term, and they would like to see more clarity on the timing of the Doom III launch. The firm believes the stock should remain in the $10-$12 range.
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Optimism about the future pushes CBOE Market Volatility Index ($VIX) below 20. Both economic and earnings news has created confidence, even though the major market indices are seeing just mild gains in midday trading. Nonetheless, with the VIX moving below 20 today, traders should be cautious about entering short-term bullish strategies.
Economic news was positive on Thursday, with weekly jobless claims falling below 400K for the first time since mid-February. Estimates were for a reading of 420K, so the drop was unexpected. However, economists are quick to point out that the numbers are hard to take at face value due statistical variances in July. Nonetheless, the move is in the right direction and has added some hope that a lagging labor market is bottoming out.
Biotech stocks got good and bad news on Thursday, leading to just a minor gain for the Biotechnology Index ($BTK). Biogen (BGEN) shares are down more than five percent today even though the company beat estimates by two cents a share. The reason for the decline is that trials for their Crohn’s disease drug were disappointing. This also has pushed shares of Elan (ELN) down more than 25 percent.
Software stocks are leading the advance today, with the CBOE GSTI Software Index ($GSO) up nearly 3 percent. Microsoft (MSFT) shares have added one percent after telling analysts that they would hire up to 5,000 workers this year, as well as boosting its R&D spending by 8 percent. Positive earnings news from several software companies has also added to the bullish move for the sector. Both Symantec (SYMC) and Veritas (VRTS) are up more than 10 percent after announcing better than expected second quarter earnings.
Though the news has mostly been positive today, there is one glaring negative that traders need to be aware of. The VIX has finally moved below 20, which is normally a sign of a market top. Even though stocks could continue to move higher for a while or move sideways, a reading of 20 normally means that lower prices are ahead. The last time the VIX moved below 20 was March 21, 2002. Within one month, the S&P 100 ($OEX) had lost 5.5 percent, with these losses accelerating through July. This doesn’t mean it is going to happen this way again, but should raise a red flag when trading bullish option strategies.
Jody Osborne Senior Staff Writer & Options Strategist Optionetics.com ~ Your Options Education Site
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