By Harry Boxer, The Technical Trader (www.thetechtrader.com) We had two very distinct markets today. The market gapped up early, pulled back and then ran to new highs for the last three-day rally, getting up to resistance. At that point the market went into a very orderly sideways coiled flag-type consolidation pattern, and it sure looked like the market would take off again in another leg up in the afternoon.
But when a couple attempts to break out failed, the market started heading south with a couple hours left, breaking three levels of support on the way down and closing near the lows for the session going away.
So it was a very negative reversal day, and I’m going to have to re-examine all the charts and technicals to see if this is a key reversal day or just a sharp pullback within the confines of a rally. But it’s not a good day, and individually most stocks reversed very negatively.
Net on the day the Dow was down nearly 82 after being up a like amount earlier. The S&P 500 was down 7 after being up nearly 10 earlier. The Nasdaq 100 was down nearly 15 after being up about the same amount. So we had about an equal reversal from where we were up in the morning to where we ended down.
After being up sharply in the morning, the technicals ended slightly down, but not too badly. New York was about 17 to 16 negative on advance-declines and about 16 to 15 on Nasdaq. Up/down volume was about 5 to 3 negative on New York with a total of nearly 1.6 billion traded. There was 1.85 billion traded on Nasdaq with about 1.1 billion of it to the downside and about 750 million to the upside, so about 11 to 7 negative.
A review of my personal board showed a very mixed picture because of the reversals. On the upside, Veritas (VRTS) continued to hold most of its gains today. Although it did back off 1.60, it was still up 2.30 on the day on very heavy volume on a good earnings report. That was the standout leader today.
Other than that, there were very few gainers to speak of. Qualcomm (QCOM) was strong most of the day, up nearly a point, and BEA Systems (BEAS), a stock we haven’t mentioned in a while, had a very good day, up 42 cents.
Most low-priced stocks were fractionally mixed. On the downside, stocks of note were QLogic (QLGC) down a point, Nvidia (NVDA) down 84 cents, and IBM (IBM) 79 cents. Amgen (AMGN) got hit for 1.22 and was the loss leader on my board.
Tomorrow’s going to be an important day. I thought today would be, and the market sure looked strong in the morning when we broke out, but it looks like they gave us a head fake.
We’ll have to see if we hold support tomorrow. We’re probably in for some key testing, and we’ll see how resilient this market can be. Support levels we’ll be watching tomorrow are short-term at the 980 level on the S&P 500 and below that 975. If we take those levels out the market may be in trouble. Nasdaq 100 support levels would be around the 1248-50 zone and then the 1230-33 area. Those are key short-term levels, the latter levels being the lows for this last move down that if we retest successfully it can result in some strong upward movement.
But a downside break of those key secondary support levels could result in quite a bit of technical damage.
Quiet day in corporate news and research but the market spoke loud. U.S. stocks advanced as better-than- expected corporate profits and the biggest monthly gain in durable goods orders since January buoyed optimism economic growth will prolong the market's rally. The S&P 500 added 17 points (+1.7%) to 998, for the biggest gain in almost three weeks. The DJIA rose 172 points (+1.9%) to 9284, with General Electric leading the advance. It's the Dow's biggest jump in almost six weeks. The Nasdaq gained 29 points (+1.7%) to 1730. The S&P 500 is up 25 percent since reaching its 2003 low on March 11 on expectations that corporate profit and economic growth would accelerate. The benchmark had its third weekly increase in the last four weeks, adding 0.5 percent. The Dow gained 1 percent, while the Nasdaq rose 1.3 percent.
Top Stories . . . U.S. factory orders for durable goods last month surged by the most since January, helped by spending on new equipment, suggesting companies are adding spark to an economic recovery that's been carried by consumers.
U.S. Treasury notes rebounded from seven-month lows after an industry report showing U.S. sales of previously owned homes unexpectedly fell last month.
Wall Street firms are headed for their third most-profitable year ever, driven by a revival in merger advice and stock sales and trading, Securities Industry Association figures show.
Pfizer, the world's largest drugmaker, posted a quarterly loss of $3.59 billion because of costs related to its April acquisition of Pharmacia.
Dynegy, a U.S. utility owner and power producer, said its second-quarter loss narrowed to $290 million as the company exited the money-losing energy trading and telecommunications businesses.
EBay, the world's biggest Internet auctioneer, fell as much as 5.7 percent after second-quarter profit and forecasts for this quarter weren't as high as some investors expected.
Earnings of Note . . . About two thirds of the companies in the S&P 500 have reported second-quarter results. On average, earnings have been 6.2 percent higher than estimates, causing many analysts to ramp up their expectations for the second half of 2003. Historically, companies in the index exceed the average estimate by 2.8 percent, said Thomson Financial.
Sixty-seven percent of the S&P 500 companies that have released earnings have exceeded the average analyst estimate. Earnings for companies in the S&P 500 probably rose 8.1 percent for second-quarter quarter. Profit is expected to grow 13.6 this quarter and 21.6 percent in the fourth.
Quotes of Note . . . ``We've had some pretty good numbers. Things are improving.'' said Gil Knight, who helps manage $12 billion at Allied Investment Advisors in Baltimore.
``We're very encouraged by the tone of this market. We're getting pretty positive feedback'' from the companies we own that have reported results.” said Lee Kopp, president of Kopp Investment Advisors, which has about $1.5 billion under management.
Pfizer CEO Hank McKinnell said he doesn't expect proposed legislation to allow importation of cheaper prescription drugs will become law. The U.S. House passed such a bill early Friday, but the CEO noted that the FDA and the Bush administration oppose the legislation. "This is not going to happen," McKinnell said.
Gurus . . . David Briggs, head trader for Federated Investors -- which runs $185-billion, says money managers are putting fresh money into industrial, health care, energy, and utility stocks that have trailed the market advance. Meanwhile, rising share prices have attracted the public. According to AMG Data Services, June saw investors add $19.9-billion into equity funds, the biggest inflow since March of 2002.
Small Cap Add & Subtract . . . Electronics Boutique will enter the S&P SmallCap 600 Index after the close of trading today, replacing APWRE (being delisted). Also selected for the Index is Cross Country Healthcare, replacing NOR. Cross Country will be added after the close of trading Monday.
Fund Flow . . . Funds investing primarily in U.S. equities took in $3.2 billion in new money during the week ended Wednesday, estimates Trim Tabs, adding to inflows of $2.9 billion the week before. Meanwhile, international stock funds had outflows of $800 million, after losing $2.4 billion the prior week. Bond funds had inflows of $1.5 billion the latest week after taking in $2 billion the week before.
Good Year on Wall Street . . . Securities firms appear to have "turned the corner" and are expected to record pre-tax profit in 2003 of $15 billion, nearly double the $6.9 billion posted in 2002. Domestically, second quarter profits are seen jumping 11 percent to $3.9 billion. Commissions for the quarter rose 5 percent to $6 billion in second quarter due to increasing volumes and value of trading. "Now with profits recovering and expected to remain strong in near term, compensation is rising and employment gains are expected for the industry as whole by end year," the industry group said.
Eco Speak . . . Orders for durable goods rose at a faster than expected rate of 2.1 percent in June. Economists had predicted new orders would rise 1.3 percent in the month. The gain was the largest increase since January. Orders for non-defense capital goods, a closely watched gauge on the economy, rose 2.0 percent in the month after rising 0.2 percent in May. Excluding aircraft, non-defense capital goods rose 0.6 percent in June after rising 0.5 percent in the prior month. Overall goods orders, excluding the transportation sector, rose 1.4 percent in June after rising 0.9 percent in the month. Overall goods orders, excluding the defense sector, rose 1.7 percent in the month after rising 1.2 percent in May.
Boosted by bargain-basement mortgage rates, sales of new homes jumped 4.7 percent to a record 1.16 million units in June. The increase in new home sales was widespread, as every region in the country posted gains in the month. It also beat expectations. Economists predicted new home sales to hit 1.08 million units in June. Sales in May were revised downward to 1.11 million units from an initial estimate of 1.16 million units.
Sales of U.S. existing single-family homes fell 0.3 percent in June, to a seasonally adjusted annual rate of 5.83 million units. The figure was below the consensus forecast for a 6 million unit annual rate. May sales were revised down to 5.85 million units, from a previous reading of 5.92 million. The NAR said June sales activity was 8.6 percent above the 5.37 million unit pace seen in June 2002, and was tied for the fourth-highest month on record. An NAR economist said year-to-date home sales are 4.5 percent above the same period in 2002, and remain on track for a new record this year.
Financials . . . T. Rowe Price Group reported earnings of $54 million, or 42 cents per share, up slightly from its year-ago profit of $52 million, or 40 cents per share, and 4 cents ahead of the analysts. Revenue dipped in the latest three months to $237 million from $240 million in the same period a year earlier. Assets under management, helped largely by the recent rebound in financial markets, swelled to $161.2 billion as of June 30 from $139.9 billion at the same time last year. Net cash inflows were also strong, totaling almost $4 billion for the period.
CIT Group target raised to $31 from $27 at BofA. The firm noted that CIT offers significant leverage to a recovering economy with exposure to the commercial side of the economy. With an improving economy, credit gets better, debt spreads get better, loan volume ultimately improves and so does the valuation. Net interest margin widened to 3.80% from 3.63% in 1st quarter. Some of the improvement can be attributed to reduced liquidity, but looking forward, the company's significantly lower funding spreads (now 80bp over Treasuries down from over 300bp last fall) should provide a benefit. We now assume stable margins rather than further compression. Managed assets rose $47.9 billion from $47.5 billion at 3/31. Growth was concentrated in capital finance (rail and aircraft), business credit, and home equity. Other portfolios shrunk slightly during the quarter. Securitization gains were $3 million higher than 1st quarter but VC losses increased by $8 million.
Oil & Gas . . . National-Oilwell reported earnings of $20.4 million, or 24 cents per share, up from its year-ago profit of $17 million, or 21 cents per share, but 3 cents short of the average estimate. Revenue rose in the latest three months to $475.4 million from $372.4 million in the same period a year earlier. The oil and gas capital equipment firm said it expects improvement in net income in each of the next two quarters. It also noted that many of its business 'benefit disproportionately' from drilling activity in the Gulf of Mexico, and this activity remained flat in the second quarter.
Lyondell Chem was upgraded at JP Morgan to Overweight from Neutral, citing the company's above-average dividend yield (6.3%) and the potential for a cyclical recovery in EPS.
Energy . . . Dynegy reported a net loss of $290 million, or $1 a share, versus a loss of $561 million, or $1.76 million in the year-earlier period. Excluding the impact of losses from its customer risk management business, which the company is exiting, and a charge for legal reserves recorded, the loss for the period was $18 million. Revenue fell 23 percent to $1.05 billion, below the average analyst forecast of $1.21 billion, as demand for electric and natural gas was "slightly lower" than the company had anticipated. The energy merchant higher interest costs resulting from its refinancing plan, as well as higher expenses and reserves for litigation, "will result a lower guidance estimate for 2003."
Metals . . . Nucor posted a decline in earnings to $8.4 million, or 11 cents a share, vs. $59.7 million or 76 cents a share a year ago. Nucor earnings declined amid higher than expected scrap and energy costs, continued severely depressed levels of non-residential construction and capital goods markets, increased pre-operating and start-up costs, and unexpected equipment related downtime and production curtailments at Nucor's Alabama sheet mill and North Carolina plate mill. Looking ahead, it said it "expects that weak economic conditions and depressed levels of non-residential construction will continue to impact the third quarter of 2003, and that earnings will be in the range of 15-20 cents a share." Consolidated net sales increased 27 percent in the second quarter to $1.52 billion. It said average sales price per ton rose 2 percent from the second quarter of 2002 and increased 4 percent from the first quarter of 2003.
Transports . . . Cummins reported earnings of $0.34 per share, $0.23 better than the consensus of $0.11. Revenues rose 11.0% year/year to $1.54 billion versus the $1.51 billion consensus. The company also guided higher as it sees 3rd quarter EPS of $0.60-0.70 versus consensus of $0.62, and 2003 EPS of $1.20-1.40 versus estimate of $0.81
Defense & Aerospace . . . Switzerland approves use of new Taser X26 for law enforcement agencies.
Retail . . . First Albany downgraded EBay to Neutral from Buy and cuts their target to $112 from $116 due to: 1) more pronounced seasonality expected in 3rd quarter, 2) increasing operating costs and capex that will continue to put pressure on margins, and 3) tepid guidance for 2nd half 2003.
EBay more than doubled earnings to $109.7 million, or 33 cents per share, in the second quarter, up from $54.3 million, or 19 cents per share, in the year-ago period. Excluding certain items, EBay earned $120.9 million, or 37 cents per share, topping the consensus estimates by 2 cents. The online marketplace operator also posted sales of $509.3 million, up 91 percent from $266.3 million a year earlier, and better than the $505.9 million expected on Wall Street. Additionally, EBay's board approved a two-for-one stock split, payable Aug. 28, to stockholders of record on August 4. EBay also raised its outlook for earnings and sales for the year to $1.47 per share, excluding certain charges, and $2.075 billion.
Wild Oats Markets started with an Underweight at JP Morgan. The firm says the company is in the 5th inning of its turnaround, and at current levels the stock is valued at a multiple higher than WFMI, even though WFMI has lower execution risk. JP Morgan initiates WFMI with a Neutral rating.
Restaurants . . . Starbucks reported profits that were 23 percent higher and a penny ahead of Wall Street's expectations. The world's largest maker of coffee said it earned $68.4 million, or 17 cents a share, over last year's $55.7 million, or 14 cents a share. Revenues generated from retail operations grew 23.3 percent to $877.8 million. Comparable-store sales rose 8 percent, driven by higher customer traffic.
Starbucks reported 3rd quarter net of $0.17, a penny above consensus. Goldman Sachs highlights how co often becomes a victim of its success and being priced for perfection, as the market expected more given tremendous comps growth year-to-date. CIBC calls quarter mixed, with continued good news on the size of the U.S. biz opportunity and comps success, offset by reality that margin expansion is challenging even in the best of quarters.
California Pizza target cut at CIBC to $17 from $23 after company reduced 2004 guidance and ousted the CEO. Firm indicates that real estate selection and new store productivity is at heart of the matter -- something that CIBC has been flagging. New management move to reduce unit growth is wise in firm's decision, but CIBC calls into question the ultimate potential of the concept. CPKI is rated Sector Underperform at CIBC.
Applebee's and Weight Watchers will develop a number of new, exclusive items for the Applebee's menu, including appetizers, entrees and desserts.
Healthcare . . . HCR Manor Care declared its first quarterly cash dividend of 12.5 cents a share. The long-term care center operator also reported second-quarter net income of $18.9 million, or 21 cents a share, up from 38 cents a share in the same period a year ago. The results include a total of 15 cents a share in unusual items, related to a settlement of a review of Medicare costs, insurance changes and expenses for stock-related compensation. Revenue for the period rose 3 percent to $750.6 million. Analysts had been expecting earnings, excluding non-recurring items, of 35 cents a share and revenue of $759.9 million, on average.
McKesson was upped to Outperform from Neutral at Baird . The firm believes that McKesson may continue to beat estimates, that the risk profile has improved, and that valuation is increasingly compelling. Price target goes to $45 from $37.
Bausch & Lomb upgraded at First Albany to Strong Buy from Buy. The firm is citing operating margin upside, FDA approval and share gain from Zyoptix in 3rd quarter, and market share penetration of the daily disposable contact lens market in Japan (4th quarter launch). Target is $48.
Medical Devices . . . Zimmer was reiterated a Buy at Prudential. The firm believes stock is increasingly compelling; believes that management's credible tone and continued stellar track record are building confidence that mgmt will not overpay for Centerpulse and can effectively manage the resulting organization. Target $55.
Osteotech reported earnings of $2.7 million, or 15 cents per share, up from its year-ago profit of $320,000, or 2 cents per share, and a nickel ahead of the average estimate of analysts l. Revenue at the firm (provider of transplantable bone and bone connective tissue and other biomedical products) rose 8 percent in the latest three months to $24.8 million from $23 million in the same period a year earlier. The company said it saw improved revenue from its demineralized bone matrix, or DBM, business, and its base allograft tissue business. Looking ahead, Osteotech sees revenue in the third quarter coming in flat to slightly above its second-quarter total. In an effort to spur domestic interest in its Grafton DBM products, the company has boosted agent commissions for these products by 50 percent, and instituted a plan offer hospitals its Grafton Plus DBM paste product through aggressively priced contracts. T
Drugs . . . Pfizer posted a 37 percent increase in second quarter revenue to $9.993 billion, with the drug maker saying sales growth was driven by "the inclusion of Pharmacia results, strong performances by a broad range of products and businesses, and the weakening of the U.S. dollar relative to other currencies." Pfizer reported a net loss in the quarter of $3.591 billion or 48 cents a share, including non-cash charges relating to purchase accounting for the Pharmacia acquisition of $5.860 billion after tax, as well as merger-related costs of $178 million after tax and certain significant items of $73 million of income-net after tax. Excluding those charges, Pfizer said it earned 30 cents a share. Analysts were expecting, on average, earnings 29 cents a share and revenue of $10.7 billion, according to Reuters Research. Pfizer said that Lipitor realized more than $2 billion in revenues in the second quarter.
Business Week article discusses the rise of the Hollis-Eden Pharms shares due to its product which can treat immune system disorders including radiation woes. The co has teamed up with the Armed Forces Radiobiology Research Institute to develop HE2100, which shields military personnel from nuclear radiation with "surprising efficacy". If the defense dept finds this product attractive, an investment co president believes it may be as large as $160 million. This could potentially boost its market value to $500 million or $29 per share by year end 2004.
Pfizer affirmed its expectation for adjusted diluted earnings per share in 2003 of $1.73 and of $2.13 in 2004. It said it anticipates diluted EPS on a GAAP basis in 2003 of $.86 and in 2004 of $1.77. "The second quarter has unfolded as expected, and our expectations for adjusted diluted EPS for 2003 and 2004 are unchanged," said CFO David Shedlarz. The company anticipates 2004 revenue of $54 billion, representing 10 percent compound annual revenue growth. "Strong investment will be made in support of our marketed products and pipeline candidates, with 2003 R&D expenditures expected to be about $7.1 billion. Margin expansion is anticipated through ongoing cost-saving initiatives and achievement of merger-related cost synergies, which are expected to approach $4 billion in 2005, significantly more than originally estimated," it said.
The Wall Street Journal's "Heard on the Street" column discusses possible concerns in regards to the "mysterious" development of sluggish sales of the cholesterol lowering medicines called statin. Investors are particularly concerned with big players such as Merck and Pfizer given the troublesome trends associated with there statin products. The statin growth in sales has been in the double-digits for over a decade. However, current indications suggest sales of the drug will not likely grow faster than single-digit rates for 2003. The portfolio manager for the T. Rowe Price Health Sciences Fund states "I'm not sure that one needs to press the panic button, but I think this needs much closer monitoring." The article suggests the possible causes for the slowdown could be attributed to lower priced generic alternatives and insurers imposing steeply tiered copayments for prescriptions.
Biotech . . . Amgen's Enbrel approved by FDA for ankylosing spondylitis as the first biologic approved to reduce the signs and symptoms in patients with active ankylosing spondylitis (AS). Ankylosing spondylitis marks the fourth indication for the drug. The FDA's decision follows an expedited review.
An article in BusinessWeek speculates that IVAX's chairman and CEO is possibly being ready to put his company on the block. Given the current stock price down from its 2001 high of 41, a fund manager believes it is takeover time. In addition, the chairman of Bedford Oaks Partners likes the idea of the co as a takeover play with projected earnings of 70 cents a share in 2003, 90 cents in 2004, and $1.10 in 2005. He believes the stock "fetch" up to 30 in a deal.
Media . . . Belo reported net earnings of $39.4 million, or 34 cents a share, down from 36 cents a share in the year-earlier period, but above the average analyst forecast of 33 cents a share. The diversified media company said continued cost cutting helped produce a better than anticipated close to the quarter ending June in the face of "uneven economic and advertising conditions" and the absence of significant political spending. Net operating revenue rose 0.9 percent to $369.5 million, falling just shy of the $372.9 million expected by analysts. Looking ahead, Belo believes there is a "glimmer of optimism" given recent stock market gains and new product introductions by advertisers.
Hotel & Leisure . . . AMC Entertainment reported quarter net earnings of $4 million, or 11 cents a share, versus a loss of 28 cents a share in the year-earlier period. Revenue rose 3 percent to $473 million. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) as a percentage of revenue increased 1.2 percentage points Analysts had been expecting a loss of 2 cents a share and revenue of $473.2 million on average.
Priceline posted a 22 percent jump in second-quarter profit. The online travel booking agent reported income of $7.7 million, or 20 cents per share, versus $6.3 million, or 16 cents per share in the same period the year before. Priceline had previously forecast per-share results of between 12 and 18 cents for the quarter. The company posted revenues of $239.6 million compared with $304.5 million.
Telecom . . . Nigel Coe at Deutsche Bank upgraded Alltel to "hold" from "sell," citing the turnaround in the company's wireless business during the second quarter. The company reported net subscriber additions of 80,000 versus Coe's estimates of 55,000. Coe also raised his share price target to $42.40 from $41.
Metro One Telecommunications (directory service) reported a net loss of $9.2 million, or 37 cents a share, versus a profit of 30 cents a share in the year-earlier period, as the company incurred $17 million in advertising expenses to launch its Infone service and transitioned away from Sprint PCS businesses. Revenue fell 25 percent to $51.04 million. Analysts had been expecting a loss of 12 cents a share and revenue of $54.5 million, on average.
Goldman Sachs reiterated an Outperform on SBC. The firm is saying the company executed well on all factors under its control, including strong LD and DSL performance, which in turn helped to significantly diminish UNE-P losses. In addition, firm says true sequential erosion in wireline margins was only 130bp, not the apparent 310bp presented, as a corporate expense allocation distorted comparisons; adjusting for this, wireline margins were not nearly as weak as they appeared.
Total revenue was lower than our expectation ($8.795 billion versus $8.904 billion). Weakness in Business Services revenue accounted for most of the difference ($6.406 billion versus $6.497 billion). However, SG&A was also below expectation ($1.837 billion versus $1.959 billion). This resulted in total operating income of $1.029 billion, roughly in line with $1.009 billion estimate. EPS was $0.68, well above $0.56 estimate. EPS was driven by non-operating items including higher other income, net ($86 million versus $15 million), and net earnings related to equity investments ($25 million versus nil). Business Services results were hampered by a 10.9% decline in long distance voice revenue, partially offset by managed services growth of more than 6% and local voice revenue growth of approximately 39%. Business Services added nearly 135K local access lines in 2nd quarter 2003 versus over 157K local access lines added in 1st quarter 2003. Business Services operating income was $597 million versus estimate of $585 million. Consumer Services revenue decreased 18.4% versus our forecast for a 17.7% decline. The company reported that bundled revenue (combined local/long distance products) nearly doubled from a year ago (as it did in 1st Quarter 2003) and now represents around 19% of total Consumer revenue (versus 17% in 1st quarter 2003). Operating income of $489 million was slightly ahead of our forecast of $479 million. AT&T announced a 27% increase in the company's quarterly dividend to $0.2375 from $0.1875. Additionally, the Board of Directors has authorized a $2 billion debt repurchase which is in line with the company's intention to reduce net debt to below $10 billion by year-end.
Level 3 reported revenue of $941 million, below guidance of $945 million and consensus $970 million forecast. The underperformance primarily stemmed from lower than expected information services revenue ($491 million versus expected $510 million), which excludes $17 million of revenue from the discontinued contact services business. Including contact services, revenue would have been $958 million, above guidance. EBITDA of $114 million was above $89 million guidance and $103 million expectation due to better than expected synergies from the Genuity acquisition, including a onetime $8 million reduction in property tax expense. Communications revenue was $434 million, above guidance of $425 million but slightly below $440 milion forecast. Communications EBITDA was $112M versus guidance of $80M and our expected $88M, primarily due to synergies from Genuity, including a headcount reduction of 350 and $8 million in lower property tax expense. Management issued new guidance, narrowing revenue expectations to $4.05B-4.28B from $3.99B-$4.43 billion, and raising EBITDA guidance to $725 million-$775 million from $705 million-$755 million. The company continues to actively manage its debt by issuing equity. Net debt was reduced to $4.3 billion from $4.8 billion at 3/31/03, and was positively impacted by conversion of convertible notes and debt-for-equity swaps. However, the company remains overleveraged for its business model, in our view.
EMS . . . Benchmark Electronics target raised to $52 from $45 at Needham. The increased target is based on higher EPS estimates for 2004 and the possibility of further upside EPS leverage.
Celestica reported 2003 2nd quarter adjusted cash EPS of ($0.07) versus guidance of $0.02-($0.10), in-line with estimates of ($0.07) and $0.03 below consensus. Adjusted cash EPS decreased $0.13 Quarter/Quarter from $0.04 in 1st quarter, and decreased $0.33 Year/Year from $0.28. Revenue was $1.60 billion (versus guidance of $1.55-$1.75 billion), below estimate of $1.63 billion, and up 0.7% Quarter/Quarter from $1.59 billion in 1st quarter, and down 28.9% Year/Year. Sales of $1.59 billion were $35 million below estimates due to late quarter weakness in Comm & IT (likely Sun Microsystems and Lucent). EPS of ($0.07) was inline with estimates as operating margin fell substantially, or 169 bps from 0.7% to -1%. The primary driver of the weak margin was increasing losses in Europe (22% of revs, $34 million in EBIAT losses vs. $25M last quarter) as weak demand and restructuring inefficiencies continued. B/S & CF. A/R fell 1.8M Quarter/Quarter and $154 million over the past two qtr helping DSOs fall 5 days to 36. Inventory rose by $29M or 4%, and turns were flat at 7.6x. CLS’s CCC declined two days to 29 due to DSO improvement. CFO was a negative $100 million and FCF after capex was a negative $130 million. Cash fell $308 million to $1.45 billion due to cash burn, and debt and stock repurchases.
Flextronics reported revenue of $3.11 billion, up 1.5% Quarter/Quarter and down 0.7% Year/Year on proforma EPS of $0.04 down 22% Quarter/Quarter and 35% Year/Year. FLEX took a $294 million ($21 million in cash) restructuring charge to close its bare printed circuit board (PCB) plants in Minnesota and Guadalajara, Mexico. Closures reduced PCB capacity by another 15% and should help margins in 4th quarter. Variance/Analysis: Cash EPS was $0.01 below our est. and consensus as a result of higher interest expense from the recent $400 million debt offering. Rev. was $20M below our est. as the new Siemens program ($500M/year) was only 50% ramped during qtr vs. our expectation of a 75% ramp. Still handsets increased 9% Quarter/Quarter offset by consumer (down 14% Quarter/Quarter) due to softness with Casio. B/S & Cash Flow: A/R rose $79 million or 6%, but DSOs fell 2 days to 43 days as avg. A/R has been declining. Inventory rose slightly, or $9 million and turns ticked up to 10.3x vs. 9.9x in March. Industry leading CCC improved 1 day to 25 days. CFO was $246 million and FCF was $214million in the quarter. Cash more than doubled Quarter/Quarter to $860 million as a result of the $400M debt offering combined with the FCF generation. Outlook: FLEX provided two quarters of guidance which were inline with our EPS estimates and up Quarter/Quarter for both rev. and EPS. Sept guidance is $3.3-$3.5 billion (rev) and $0.06-$0.08 (EPS) and December guidance is for $3.5-$3.9 billion and $0.11- $0.15. 2nd half growth should be led by seasonal consumer spending (handhelds, inkjet printers, Xbox - 31%, 10%, and 10% respectively). PCB closures will positively impact margins.
Storage . . . Western Digital was cut to Hold at Hoefer & Arnett based on the uncertainty of the effects of Read-Rite on WDC's financial performance. The firm also notes that WDC shares have advanced 300% since its Buy recommendation was issued last July. The firm believes that these gains, coupled with concerns about the Read-Rite acquisition and the 80 GB/platter product ramp at Western Digital, could cause some investors to become more cautious.
Seagate Tech priced 60 million share at $18.75.
Western Digital was cut to Hold from Buy at Needham. The firm believes the acquisition of Read Rite creates sufficient business model uncertainties (both in terms of dilution and supply chain relationships) as to require a downgrade of the stock.
SunGard Data was upgraded at AG Edwards to Buy from Hold, as firm believes that downside is limited and that the company is experiencing the worst of the internal revenue deceleration. The firm thinks that as the next several quarters progress, barring a major market downturn, the company will see some improvement in internal revenue growth dynamics, a focus on costs will help maintain and/or strengthen margins, and accretive acquisitions will support EPS growth. Target is $31.
Network Equipment . . . CIBC World Markets upgraded Nortel Networks to "sector perform" from "sector underperform" following the company's second quarter report, on the belief that the company has "successfully stabilized its business." The company said late Thursday that it broke even on a per share basis, versus a loss of 20 cents a year ago and Wall Street expectations of a profit of a penny. Sales fell 3 percent.
Nortel was upped to Outperform from In-Line at Goldman Sachs. Although stock has already made a strong run over the past quarter, Goldman believes Nortel offers investors one of the more compelling risk-reward profiles of stocks in its universe -- with 15-20% upside and 5% downside.
Adv Fibre was upgraded at Wachovia to Outperform from Market Perform following stronger than expected results. The firm cited valuation as well as a near-term improved outlook for their upgrade. The firm sees valuation range at $17-$19.
Nortel was upped to Sector Perform at CIBC based on firm's view that business has stabilized. CIBC contrasts this with the continued uncertainty overhanging rival Lucent and expects investors will do the same. Results thus far have led firm to believe that liquidity is no longer a risk.
Semiconductor Equipment . . . Michael O'Brien at SoundView Technology upgraded KLA-Tencor to "outperform" from "neutral" on the anticipation of a "typical stock retreat" despite reported "solid" quarterly results. O'Brien believes the company's business is "tracking well" and thinks its outlook will be exceeded. The firm reported fiscal fourth-quarter net income that declined from year-earlier levels but matched Wall Street expectations
Kulicke & Soffa upgraded at Soundview to Outperform from Neutral. The firm is citing the company's stronger than expected 3rd quarter operating margin as well as data points that suggest the industry is in the early phase of a broad-based recovery. The firm raised target to $12 from $5.
Semiconductors . . . Integrated Silicon started with an Outperform and $12 target. The firm is citing consistent execution, new products, a healthy balance sheet, and improving gross margins.
Boxmakers . . . Andrew Neff at Bear Stearns raised his rating on Gateway to "peer perform" from "underperform," given that the PC maker's business appears to have stabilized, the stock is trading at cash value and seasonal factors. Neff noted that while the company's latest quarterly results were "still anemic," they met their forecasts after falling short the last two quarters. He added that the company's "situation" has improved to "not so bad" from "bad," and the stock typically performs well in the second half of the year.
Gateway reported a loss that grew by 16 percent from a year ago. Gateway recorded a loss of $73 million, or 22 cents a share, compared to $61 million and 19 cents a share during the same period last year. Revenue fell to $800 million, a 20 percent decline from the $1 billion in sales it reported in last year's second quarter. Gateway issued third- and fouth-quarter loss outlooks that improved on analysts' forecasts. The personal-computer maker said it expects to lose 19 cents a share in its third quarter, compared to the 20-cents-a-share loss forecast. Gateway also lowered its fourth-quarter loss estimate to 9 cents a share, a penny less than analysts estimates. The company said it was comfortable with analysts' revenue forecasts of $874 million in third-quarter revenue, and fourth-quarter sales of $954 million.
Software . . . Openwave said it would hold a shareholder vote seeking approval of a 1 for 3 or 1 for 5 reverse stock split. "Given our improved operating results and growing relevance in the industry, we believe the timing is right for a reverse stock split that would attract a broader and more diversified investor base," said CEO Don Listwin. Separately, the provider of communications software reported fiscal fourth quarter revenue of $66.5 million, down 5.1 percent from year-earlier levels, but above the average analyst forecast of $62.5 million. The net loss for the quarter ending June, which included restructuring charges of a nickel a share, was $25.7 million, or 14 cents a share, versus last year's loss of $2.73 a share.
Openwave was added to Wedbush's Focus List and reiterated a $4 target. The firm feels that the company has finally turned the corner, as revenue is starting to grow, the company is winning major customers such as Telefonica Moviles, new compelling OPWV products are hitting the market, and the company is nearing profitability.
Prudential maintains their Hold rating and $9 target on Siebel, saying Microsoft's new CRM application does not bode well for SEBL's mid-tier initiative. The firm demo'd MSFT's new application, and said ease of use, tight integration to MSFT Outlook, and a digestible price point (ranges per seat from $395-$995 versus $1,500-$3,000 for SEBL) are common themes.
Internet . . . Homestore.com inks deal with Yahoo (for Homestore Apartments & Rentals listings to be a source for Yahoo! Real Estate.
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