Government reports on GDP growth, jobless claims and manufacturing reinforced investor optimism that the economy and profits are picking up. The Dow Jones Industrial Average, up by triple digits earlier in the day, ended up 33 points (+0.4%) to 9,233. The S&P 500, which had been up as much as 1.7 percent, rose 2 points (+0.3%) to 990. The S&P 500 completed its fifth straight monthly gain, the longest streak since 1998. Exxon Mobil, the world's biggest publicly traded oil company, gained after reporting earnings that topped the average analyst estimate. The Nasdaq Composite jumped 14 points (+0.8%) to 1735. This month, the S&P 500 gained 1.6 percent. The index has rallied 24 percent from its 2003 low in March as investors speculated economic and profit growth would accelerate in the second half of the year amid tax cuts, the lowest interest rates in four decades and the end of the Iraq war. Treasuries took a hit on the heels of the day's upbeat economic reports, reversing gains posted right out of the gate. Bellwether yields are at one-year highs. The bond market has come under massive selling pressure since the end of June as a series of events -- including improving economic news and a smaller-than-expected Fed rate cut at the last FOMC meeting -- combined to spook bond investors.
Strong Sectors: semis, computer storage & peripherals, electronic manufacturing, auto manufacturers, drug retail, wireless services
Top Stories . . . The U.S. economy expanded at a 2.4 percent annual rate in the second quarter, powered by consumer purchases, business investment and the biggest increase in defense spending since 1951.
Filings for jobless benefits unexpectedly fell for the third straight week to the lowest since early February, a government report showed, suggesting companies are slowing the pace of firings.
An index of Chicago-area manufacturing rose to 55.9 from 52.5 in June. Readings greater than 50 mean business expanded at the region's factories, and lower readings signify contraction.
The dollar rose to its highest in almost two weeks against the euro in New York trading after government reports showed the U.S. economy grew faster than expected in the second quarter and first-time claims for jobless benefits fell last week.
U.S. Treasury notes fell, pushing 10- year yields close to the highest in a year, reports showed the economy grew faster in the second quarter than analysts forecast and initial jobless claims declined.
Procter & Gamble, the biggest U.S. household-goods maker, said fourth-quarter profit rose 4.9 percent as the company sold more Pampers diapers and Tide detergent and a weaker U.S. dollar boosted revenue overseas.
Two HealthSouth executives have agreed to plead guilty to conspiracy charges for their role in an alleged $2.5 billion fraud, raising to 14 the number of employees charged in the widening U.S. investigation.
Quotes of Note . . . ``There are reasons to be confident in the economy, and earnings will follow,'' said Jon Brorson, who manages $2 billion at Neuberger Berman in Chicago. He's been buying companies he said have the potential for faster earnings growth such as Bear Stearns. and Applied Materials. He's been selling American International Group Inc. and Pfizer.
``The 400,000 level on jobs is key,'' said John Wheeler, head of trading at American Century Investments, which manages about $75 billion.
Fund Flow . . . Mutual fund flows are encouraging. After the $18.7-billion June in-flow announced yesterday, the beat seemed to go on in July. Fidelity Investments said July stock fund flow was very strong, while bond funds showed outflow. Vanguard said investors put an estimated $2.8-billion into its stock funds in July, up from $2.6-billion in June. At TRowe Price, stock fund flow remained strong in July, although at a slightly slower pace than in June. Strong funds in Milwaukee said through July 29, it totaled $96-million in-flow, compared to $72-million in June.
Bond Direction & Stocks . . . One reason for the recent stall in the stock market has been the rise in bond yields. Yesterday, yields fell back as the over-sold bonds jumped. Cummins Catherwood, who oversees $750-million, says yields are not high enough to shift back into bonds. Francois Trahan, strategist for Bear Stearns, says in mid-June, the S&P 500 fair value was 1100, based on the 45-year low in rates. Since the 100-basis point rate back-up, he says fair value is now in the 950-to-970 range. Still, he would keep stock holdings unchanged, and make any bond purchase from cash. He says growth in earnings will offset any rise in rates.
IPO . . . Netgear priced 7 million shares at $14 each, the top end of its upped price range, for its debut Thursday. The maker of networking products is raising $98 million with underwriter Lehman Brothers. It upped its price range from $10 to $12 per share in a sign of strong demand. It's the second IPO to increase its price range in a week after IPass debuted last week. Meanwhile, Citadel Broadcasting is slated to debut on Friday.
Eco Speak . . . A rise in the costs of benefits outstripped wage gains in the second quarter, propelling the Labor Department's Employment Cost Index to a 0.9 percent gain in the second quarter, matching expectations. Separately, the government said initial weekly jobless claims for the week ending July 26 totaled 388,000, a decline of 3,000 from a revised figure of 391,000 the previous week. The four-week moving average for claims was 408,750, a decline of 11,750 from the previous week's revised average of 420,500.
U.S. economic growth accelerated in the second quarter, boosted by the largest increase in defense spending since the Korean War era, the Commerce Department estimated Thursday. Real gross domestic product rose at a 2.4 percent annual rate after growing at 1.4 percent rate in the first quarter. Economists were expecting a growth rate of about 1.5 percent. Defense spending rose 44.1 percent, the largest increase since the third quarter of 1951. Consumer spending rose 3.3 percent, and investments in equipment and software rose 6.9 percent. Trade was a large drag on 2nd quarter growth and inventories had a smaller negative impact. Consumer prices rose 0.9 percent.
Manufacturing activity in the Chicago region expanded for a third month in a row in July, the Chicago Purchasing Managers said Thursday. The group's monthly gauge rose to 55.9 from 52.5 in June. Readings above "50" signal factory-sector expansion, while readings below that mark show contraction.
What is Next . . . The key variables for the second half of the year will be the
direction in oil and bond prices. A drop in oil prices could provide the impetus for a renewed uptrend in the equity market, albeit bond yields will have to halt their advance for this to occur.
The recent rise in longterm yields exceeds those typically seen prior to the beginning of a Fed tightening cycle. With the yield curve hovering near its steepest levels in 50 years, the bond market will likely need to pause and wait for the economy to catch up before yields can resume a sustainable downtrend.
Momentum and volatility measures show that the recent rise in yields has been one of the most intense in history. The conclusion is that the bond market is deeply oversold and due for a temporary bounce back.
Financial sector is carrying more weight than any time in the last 25 years. The weight of interest-rate-sensitive stocks in the S&P 500 is at a 25-year high, suggesting that the market is more sensitive to the bond outlook than ever before. Moreover, high valuations also add a greater degree of interest-sensitivity to the equity market backdrop.
Several industry segments present strong correlations to changes in Treasury yields as well as the yield curve. A trough in bond yields marks the end of outperformance for a number of segments, specifically Financials and the dawn for others, mainly cyclicals.
Financials . . . PMI Group reported diluted earnings of $0.77 per share, excluding net realized investment loss of ($0.01), $0.01 better than the consensus of $0.76. Revenues rose 8.4% year/year to $299.3 million versus the $280.3 million consensus.
Janus Capital upgraded at CIBC to Sector Outperform from Sector Perform based on the company's improved outlook. The firm says 2nd quarter results showed not only that mgmt has been able to leverage its brand name to sell additional products, but has kept costs down and improved profitability. Also, relative valuation is cheap at 14.2x.
Homebuilders . . . UBS Thursday raised it earnings estimate and price target for real estate developer Rouse based on more land sales and lower interest costs than previously expected. "We are increasing our 2004 funds from operations estimate by 5 cents to $4.23, UBS said. It left its 2003 estimates unchanged, but raised its 12 month price target for the shares to $40 from $37.
Metals . . . Miner Newmont Mining said that its second quarter net income grew as the average realized price it received for gold rose 12 percent from a year ago. The company earned $90.8 million, or 22 cents per share in the second quarter, versus $69 million, or 17 cents per share a year ago. Revenue rose to $747.2 million from $643.7 million. Analysts it polled expected the company to earn 22 cents per share in the quarter.
Oil & Gas . . . Exxon Mobil reported net income of $4.17 billion, or 62 cents per share, up from $2.64 billion, or 39 cents, in the year-ago period. The No. 1 oil firm said profit gained on higher oil and gas prices and better refining margins. The company beat the forecast of 56 cents per share.
Evergreen Resources reported earnings of $18.4 million, or 92 cents per share, up from its year-ago profit of $3.3 million, or 17 cents per share. Analysts were looking for earnings of 94 cents per share in the June period, on average. The company's board also declared a two-for-one stock split. The natural gas firm said revenue jumped in the latest three months to $53.3 million from $23.4 million in the same period a year earlier. Evergreen added that it has held preliminary talks regarding the possible sale of Carbon Energy's Piceance and Uintah Basin assets once it completes its acquisition of Carbon.
Exxon Mobil reported earnings of $0.62 per share, $0.06 better than the consensus of $0.56. Revenues rose 12.5% year/year to $57.17 billion. The company announced it will pay a 3rd quarter dividend of $0.25, the same as 2nd quarter.
Anadarko Petro downgraded at Bank of America to Neutral from Buy and cuts their target to $44 from $50. In light of recent indications that the co is likely to let go of up to 30 onshore rigs in the U.S. The firm believes that their 2004 production growth projections are too aggressive. The firm also noted that APC trades at a premium to its peers.
Halliburton reported net income of $26 million, or 6 cents a share, vs. a loss of $1.15 a share in the year-earlier period. Excluding discontinued operations, earnings were 9 cents a share. Revenue rose 11 percent to $3.6 billion, due primarily to increased activity in certain engineering and construction projects, including government services work in the Middle East. Analysts had been forecasting sales of $3.2 billion, on average. Looking ahead, the oil services company expects to earn 32 cents a share in the third quarter, which is above current analyst forecasts of 31 cents.
Cooper Cameron was upgraded at UBS to Buy from Neutral following solid 2nd quarter results. The firm believes the company remains poised for a substantial ramp-up in earnings in 2nd half 2003 and into 2004 based on rising shipments from the company's record backlog. Also, while firm was concerned about rumors that CAM was going to buy ABB's oil & gas business, they think the odds of such a deal have diminished and the stock price has declined to the point where they do not see this as a significant risk. Target is $60.
Energy . . . Constellation Energy reported net income of $96.8 million, or 58 cents a share, up from 50 cents a share in the year-earlier period. The results exceeded the company's earlier earnings forecast of 33 to 43 cents a share. The electricity supplier said competitive supply activity at its power source unit exceeded expectations, while Baltimore Gas and Electric results were at the low end of the expected range due to milder than normal weather conditions. Total revenue for the quarter ending June rose 120 percent to $2.27 billion, amid a 269 percent surge in non-regulated revenue.
Plug Power reported a net loss of $12.8 million, or 21 cents a share, compared with a loss of $12.2 million, or 24 cents a share, for the same period last year. First Call had projected a loss of 20 cents a share. The fuel-cell specialist posted total revenue of $3.1 million in the quarter, up from the $2.5 million reported in the year-ago period.
Transports . . . Fleetwood Enterprises said revenue rose 6 percent in the latest three months to $647 million from $611 million in the same period a year earlier. The maker of recreational vehicles said sales jumped sharply in its motor home and travel trailer businesses, offsetting declines in the company's housing group and folding trailer operations. Fleetwood expects to report a 'slight profit' when it reports its final first-quarter results in a few weeks.
Mesa Air target was raised to $15 at BB&T. The firm says it appears that MESA has finally turned the corner and begun to leverage its lower cost structure to generate solid earnings growth.
Airborne Freight reported earnings of $0.08 per share which was in line with the consensus of $0.08. Revenues rose 1.9% year/year to $827.1 million versus the $858.2 million consensus.
Food & Beverage . . . Sara Lee reported net income totaled $296 million, or 37 cents a share, compared with $351 million, or 43 cents a share, in the year-ago period. First Call had expected earnings of 38 cents a share in the quarter. Net sales for the quarter rose 3 percent to $4.63 billion from $4.50 billion a year ago. The company sees 2003 EPS of $1.51-1.61 versus consensus of $1.60.
ConAgra was cut to Underperform at CSFB and target goes to $21 from $24. The downgrade is due to the continuation of weak results in its retail packaged foods division; firm says the co lost share in 17 out of its 18 major categories in the 13-week period ending July 12, according to Nielsen data, and grocery shipments were down 3% in 4th quarter.
Tasty Baking reported net income of $400,000, or 5 cents per share, down from $900,000, or 11 cents per share last year. The food firm matched the forecast of 3 cents per share. Gross sales fell to $62.9 million from $65.6 million. The company said sales dropped partly because of its exit from its unprofitable business on the West Coast. "Reduced sales of certain Classic Baked Goods and family pack varieties were offset by an increase in single serve pie sales," Tasty Baking said. The company is forecasting forward earnings momentum in the second half of the year.
Robert Mondavi reported earnings of $1 million, or 6 cents per share, down from its year-ago profit of $10.2 million, or 62 cents per share. The latest results include a charge of $4 million from inventory write-downs, $2.9 million in severance costs, a charge of $1.2 million related to grape contract buyouts, and a pre-tax gain of $1.2 million from the sale of certain assets. Analysts were looking for a profit of 29 cents per share from the wine maker in the period, on average. Revenue slid 3 percent in the latest three months to $120.8 million from $125.1 million in the same period a year earlier.
The Wall Street Journal's "Heard on the Street" column reported Unilever has been suffering at the hands of slow growing categories at the hands of rival P&G and might need to re-evaluate its targeted growth plans of 5% to 6%. However, the co last month stunned investors when it reported it would not hit its goal for the year and instead deliver 4%. Bernstein's analyst believes the co needs to stop chasing their growth expectations and accept its reality. The Co is currently trading at a price-to-earnings of 12.6 times 2003 consensus earnings as estimated by data provider JCF Group with its stock trading at a 5% discount to European food and beverage company's. This is also below its U.S. peers, which trade at about 20 times 2003 earnings.
Consumer Products . . . Newell Rubbermaid was cut to Sell from Buy at Merrill Lynch.
Revlon reported a loss of $37.8 million, or 68 cents per share, slightly narrower than its year-ago loss of $38.9 million, or 74 cents per share. Sales rose 5 percent in the latest three months to $322 million from $308 million in the same period a year earlier. First Call doesn't publish a consensus estimate for the company's results. The cosmetics firm attributed the higher sales to the positive impact of favorable foreign currency translation, and strength in several key markets, which offset softness in Brazil and Mexico. Revlon said adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) fell to $20.6 million in the quarter from $36.1 million in the same period a year earlier.
Procter & Gamble reported net earnings of $955 million, or 68 cents a share, up from $910 million, or 64 cents a share in the year-earlier period. Core earnings, which exclude non-recurring items, were $1.22 billion, or 87 cents a share, topping the average analyst estimates compiled by Reuters Research of 86 cents a share. Net sales rose 7 percent to $10.9 billion, above analyst forecasts of $10.8 billion, as favorable currency translation helped offset pricing and promotion investments. Unit volume grew 5 percent, driven by double-digit percentage growth in its healthcare business and strength in Asia and Central and Eastern Europe. For 1st quarter (Sep) PG is "comfortable with the current earnings per share estimate" versus consensus is $1.23. Looking ahead, the consumer products company expects earnings for fiscal 2004 to grow in line with current expectations.
Newell Rubbermaid indicated that third-quarter and full-year earnings would fall short of expectations due primarily to a softer than anticipated sales outlook for its picture frame business, pricing pressures and retailer inventory cuts. The company expects to earn, excluding non-recurring items, 40 to 44 cents a share in the third quarter and $1.60 to $1.68 a share for the year, versus the average analyst forecast of 52 cents and $1.79, respectively. For the second-quarter, net income was $73.8 million, or 27 cents a share, down from 33 cents a share in the year-earlier period. Excluding non-recurring items, earnings increased to 42 cents a share from 39 cents, matching analyst estimates. Net sales rose 4.3 percent to $1.98 billion.
Apparel . . . Russell posted net income of $6.7 million, or 20 cents a diluted share and at the high end of its forecast. In the year-ago period, the branded athletic-wear company, posted a loss of $6.1 million. Net sales rose 6 percent to $267.9 million. Looking ahead, the company said it sees net sales for 2003 in the range of $1.25 billion to $1.28 billion. It affirmed forecasts of earnings per share for fiscal 2003 to range between $1.60 and $1.75.
Restaurants . . . Outback Steakhouse reported July same-store sales fell 0.6 percent at its namesake steakhouses in the U.S. At U.S. locations of its Carrabba's Italian Grill restaurants, same-store sales dipped 0.8 percent during the month. The company cited the shift in the Independence Day holiday to a Thursday this year from a Friday last year for the decline.
CIBC cuts Restaurant sector to Market Weight from Overweight. The downgrade is based on a combination of 1) slowing relative earnings growth to the S&P 500 in the 2nd-half, 2) rising commodity costs and, 3) view that profit taking/rotation are likely to hamper group upside in the 2nd-half. Firm believes that best 2nd half performance likely to come from fast food due to stronger relative earnings growth, easy comps and more leverage to an economic recovery. McDonald’s and Yum! Brands are top picks. Other ways to find outperformance: turn-arounds (MCD), growth stories (StarBucks) and strong franchise models (Applebee’s). Also believes that Small cap/growth names (Krispy Kreme, PF Chang’s) are likely to stay in favor.
Wendy's was cut to Sector Perform from Sector Outperform at CIBC. The firm believes that despite near trough level valuation, a 2nd-half recovery may never materialize to extent Wall Street believes, thwarted by MCD's recent successes and the zero-sum nature of the QSR segment. Firm lowers price target to $31 from $37. CIBC notes that the call is being made in conjunction with the downgrade of its sector stance on the restaurant group to Market Weight from Overweight.
McDonald's was upped to Sector Outperform at CIBC based on increased conviction of a 2nd-half earnings recovery and belief that turnaround stories will be among few areas in restaurants that will outperform near term. The firm raised 2004 estimate to $1.50 from $1.40 to reflect more sustained sales and margin recovery in the U.S. and improving margin trends in Europe, which are occurring despite still negative comparable store sales. Price target goes to $29 from $25.
Retail . . . bebe stores was upped to Buy from Hold at Sanders Morris Harris. The firm believes that BEBE has made substantial inroads toward improving its business. Overall, firm is greatly encouraged by the direction of the business and believes the company has put many of its production and inventory delivery problems behind it. Sanders Morris establishes a 12-month target of $27.
Whole Foods posted higher profit and sales. The organic and natural foods grocery retailer made $28.7 million, or 45 cents a share, in the quarter, up 30 percent from $22.1 million, or 36 cents a share, the year before. Sales rose as well, to $749 million from $648.8 million. Whole Foods said it expects fourth-quarter earnings of 38 cents to 39 cents per share. Analysts are currently anticipating earnings, on average, of 39 cents. For the full year, the company expects earnings to be at the lower end of the $1.62 to $1.69 range. Analysts are forecasting earnings per share of $1.64.
Chico's acquired The White House chain for $90 million. The White House is a privately held specialty retailer offering distinctive private label women's apparel. Co currently operates 103 stores in 30 states.
CVS Corp was upgraded at Morgan Stanley to Overweight from Equal-Weight. The firm raised their target to $33 from $27; given the continued sequential improvement in pharmacy comps and the first sign of positive comps on the front-end, firm believes CVS shares will start to work out of the "valuation penalty box" they have been in since the company's 2001 earnings collapse.
Healthcare . . . Anthem said net income rose as all its businesses performed well. The health insurer and benefit provider posted second quarter net income of $177.3 million, or $1.25 per share, compared with net income of $106.2 million, or $1.01 per share a year ago. Excluding net realized gains and losses in both periods, adjusted net income for the second quarter of 2003 increased to $1.30 per share, or 31 percent, compared with adjusted net income of 99 cents per share for the second quarter of 2002. Anthem sees 2003 EPS of $5.10-5.15 versus consensus is $5.09.
Aetna revised its earnings guidance for the rest of 2003 and expects operating earnings to be $884 million to $909 million, or about $5.55 to $5.70 a share. This is up from Aetna's previous full year forecast of $4.75 to $4.90 a share. Analysts had expected $4.70 for the year. Aetna, a healthcare provider, foresees membership to be stable at about 13 million while its 2003 expense reduction target remains at $200 million.
Omnicare reported earnings of $0.47 per share, ex items which was $0.01 better than the consensus of $0.46. Revenues rose 29.5% year/year to $838.2 million versus the $826.2 million consensus.
Caremark Rx cut to Hold at AG Edwards on valuation.
Cardinal Health reported earnings of $0.89 per share, in line with the consensus of $0.89. Revenues rose 14.8% year/year to $13.51 billion versus the $13.47 billion consensus. For 2003, company sees EPS growth in the mid-teens or better.
UnitedHealth Group said that its CEO and its chief operating officer have exercised 1.9 million and 0.8 million stock options, respectively, and subsequently sold the underlying shares. The exercises represent approximately 10 percent of the options held by each executive. Both Dr. McGuire and Mr. Hemsley indicated to the UnitedHealth Group Board of Directors that they have no plans for the further sale of stock in 2003.
Medical Devices . . . Merit Medical Systems will do a 4 for 3 stock split.
Cardiac Science signed a distribution and development agreement with General Electric's medical systems division. GE will market Cardiac's automated external defibrillators and in-hospital monitors, and Cardiac will develop a line of external defibrillators for exclusive sale by GE.
Drugs . . . Schering-Plough gets FDA approval for Rebetol for pediatric hepatitis C.
Bradley Pharmaceuticals posted net income of $3.4 million, or 29 cents a share, up from $1.8 million, or 16 cents a share, a year ago. First Call had projected earnings of 23 cents a share in the quarter. Net sales for the quarter totaled $16.3 million, up 75 percent compared with $9.4 million in the year-ago period.
EU probes AstraZeneca for blocking discounters from selling older and cheaper versions of Losec (stomach ulcers, heartburn) in some of its more-profitable markets.
Bradley Pharmaceuticals reported earnings of $0.29 per share which was $0.06 better than the consensus of $0.23. Revenues rose 74.7% year/year to $16.4 million versus the $13.3 million consensus.
KOS Pharma reported earnings of $0.31 per share, $0.26 better than the consensus of $0.05. Revenues rose 69.5% year/year to $64.9 million versus the $62.4 million consensus. The company sees 2003 EPS of $1.20-1.30 versus consensus of $0.70 on revenues of $280 million versus consensus $275 million.
Immunogen and Aventis enter anticancer drug development pact. The two will discover, develop, and commercialize novel antibody-based anticancer products. Aventis will acquire the worldwide commercialization rights to the new product candidates created by the collaboration as well as worldwide commercialization rights to three early-stage product candidates in ImmunoGen's research pipeline. ImmunoGen will receive an upfront payment of $12 million and more than $50 million in committed research funding over a three-year period. Additionally, for each product candidate, ImmunoGen can receive milestone payments of between $20 million and $30 million based on development and regulatory achievements as well as royalties on commercial sales.
Biotech . . . Gilead Sciences inks HIV licensing agreement with Japan Tobacco. Japan Tobacco will commercialize products in Gilead's HIV portfolio in Japan. GILD will receive an up-front fee and is entitled to receive additional cash payments upon achievement of certain milestones.
Media . . . IMAX reported net earnings from continuing operations of 2 cents a share compared with net earnings from operations of 9 cents a share in the year-ago period. Including a gain of 1 cent a share from discontinued operations, the entertainment company reported net earnings of 3 cents a share compared with net earnings of 9 cents a share a year ago. First Call had projected earnings of 3 cents a share. Revenue in the quarter totaled $34.8 million versus $38.9 million in the prior-year period.
Comcast raised its guidance for cash flow this year our by $100 million to between $6.3 and $6.4 billion. "We are... continuing to realize significant operating efficiencies in our cable operations, driving our cable cash flow margin up to 36.5 percent and our annualized cable operating cash flow per subscriber to nearly $300," it said. The company we added 12,100 basic subscribers in the quarter, it said. Consolidated revenue rose to $5.685 billion, up from $2.704 billion a year-ago and in line with the average estimate. The company said it now sees basic subscribers to 125,000 to 150,000 net additions for the year, up from previous guidance of 75,000 to 100,000 net additions.
Charter Communications reported losses that narrowed and revenue that rose over year-earlier levels. The net loss for the quarter was $38 million, or 13 cents a share, versus last year's loss of 55 cents, while revenue rose 7 percent to $1.2 billion. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) increased 11 percent to $497 million, exceeding the average analyst forecast of $485.5 million. The company added that high-speed data customers increased 76,700 during the quarter to 1.35 million.
Hotel & Leisure . . . Multimedia Games cut to Buy at Roth Capital. The downgrade is based on view that Class II environment will continue to operate in a state of ambiguity, thus preventing multiple expansion and appropriate reward for growth to MGAM shareholders. Price target cut to $29 from $39.
Argosy Gaming was downgraded at Jefferies to Hold from Buy based on valuation, as the stock has exceeded their $23 target.
Telecom . . . Cincinnati Bell reported earnings of $0.07 per share, excluding numerous items that represented a $1.11 gain in total, $0.05 worse than the Reuters Research consensus of $0.12. Revenues fell 19% year/year to $450.6 million versus the $473.7 million consensus.
Covad reported a loss of $27.3 million, or 12 cents per share, narrower than its first-quarter loss of $34.7 million, or 16 cents per share. A single analyst was looking for a loss of 15 cents per share in the June period. The provider of broadband services said it added 36,000 DSL customers in the quarter, a sequential jump of 9 percent that brings its total to more than 453,000. Revenue rose in the latest three months to $92.4 million from $90.9 million in the first quarter. Looking ahead, Covad forecast revenue of $95 million to $98 million in the third quarter, and subscriber growth of 50,000 to 55,000 lines.
United Online reported earnings of $0.31 per share, ex items, $0.03 better than the consensus of $0.28. Revenues rose 46.2% year/year to $79.6 million versus the $79.2 million consensus. The company sees 1st quarter revenues of $83-85 million versus consensus of $83.8 million.
EMS . . . Solectron announced an agreement in principle with NEC to provide manufacturing and after-sales services for 3G cell phones. The advanced 3G handsets have multimedia features such as video calling, video and photo messaging, video downloading, and games. SLR has already begun manufacturing the first 3G phone under this contract (for wireless provider Hutchison 3G) and the full ramp will begin in Nov. Under this organic outsourcing agreement, SLR will manufacture NEC's 3G handsets for markets outside of Japan. NEC, currently produces its 3G products in Japan, but plans to gradually transfer production to SLR's facility in Suzhou, China, after initial pilot production of each new product in Japan. The NEC agreement follows SLR's joint venture agreement with Soutec to produce handsets in China. SLR is not acquiring any assets in this outsourcing agreement, underscoring a more rational EMS model. Under this agreement, NEC's cell phone manufacturing capacity outside of Japan would rise to more than 1million units/month. NEC has roughly 3% market share (12 million units/year). While we don't know how many units SLR will produce, assuming $100 cost/unit, each million units would equal $100 million in revenue. SLR already has a strong relationship with NEC dating back to its Oct. 2001 deal to manufacture servers, workstations, and storage products in Ibaraki, Japan. This agreement leaves three key takeaways: (1) NEC will continue to embrace the outsourcing model, (2) SLR remains well positioned to win more NEC business, and (3) SLR plans to be a key player in handsets (~5-8% of sales). Combined with the recent Samsung agreement (EMS services as well as in-warranty service engineering for Samsung's satellite set top boxes), the NEC deal adds to a new book of business for high volume products at Solectron.
Storage . . . StorageNetworks "has approved a plan of liquidation of the company and that it will file a proxy statement seeking shareholder approval of such plan". All employees will be terminated, except small team to "wind down the business". Company estimates it will be able to deliver approx $1.60-1.70 per share in liquidation.
JP Morgan was upgraded EMC to Overweight from Neutral based on their increasingly positive outlook for the company approaching 4th quarter. The firm believes that 4 will favor companies with high-end enterprise exposure, customers will spend the majth quarter majority of their hardware budgets on projects with high ROI such as SANs, and EMC's restructuring actions and recent product launches have positioned it well for improved storage spending levels.
JP Morgan downgraded Network Appliance to Neutral from Overweight, citing valuation, a lack of near-term catalysts, and their belief that further operational improvements (particularly in margins) will be difficult in the near-term.
Network Equipment . . . Raj Srikanth at Deutsche Bank believes Cisco will report fiscal fourth-quarter earnings that top expectations by a penny a share and revenue that will "modestly exceed" forecasts. He expects the company will be cautious in its outlook and will forecast sequential growth for the fiscal first quarter despite the generally weak information technology spending environment and seasonal weakness. Cisco is slated to reveal July quarter results on Aug. 5, with analysts expecting earnings of 15 cents a share and revenue of $4.66 billion, on average.
Scientific-Atlanta started with a Strong Buy at Brean Murray and target $43. The firm's optimism is based on belief that the domestic cable MSOs will be forced to re-focus on their core video business over the next 2-3 years due to aggressive pricing by the RBOCs for data services and increasing competition with new technologies from satellite operators. Believes Scientific-Atlanta should be a prime beneficiary of a massive upgrade cycle by cable operators to offer enhanced services such as high-definition television and DVR services in order to defend its core video subscriber base, reduce churn, and capture new revenues.
Terayon Comm was upgraded at Needham to Strong Buy from Buy and raises their target to $7 from $4. The firm believes that TERN has a shot at CMTS market leadership within the next 12 months or so, driven by a globalizing DSL/cable bandwidth blowout that has already started in Korea and Japan; firm also still believes Comcast could decide a major CMTS bid around Aug 15.
Motorola hosted a cautiously optimistic analyst day yesterday in Chicago. After a disappointing first half, the company continues to expect a sequential revenue rebound in the second half on the back of a rebound in Asia/China and new product introductions from segments such as PCS (handsets). Checks indicate that business trends in July including handsets and semis have been in line with guidance, with China being the strongest, while Europe remains soft. On the margin side, Motorola appears focused on enhancing its profitability in all segments through continued restructuring and internal corporate initiatives like Digital Six Sigma and improved procurement systems. While the company has done an admirable job in shoring up its balance sheet and returning to profitability over the past few years, remain cautious about the growing competitive pressure in wireless handsets and infrastructure, as well as in some semiconductor segments that might limit Motorola’s ability to post a significant earnings recovery. Although Motorola’s valuation appears to be only slightly aggressive based on our DCF analysis (discounting 8% revenue growth over the next ten years using 10% operating margins, 4% terminal growth, and 10% WACC), need to see some stronger signs of recovery in the overall business and less uncertainty about the wireless infrastructure segment’s future in order to become more positive.
Which Vendors Are Most Leveraged To Verizon Oriented Disruptions? While Verizon sells to a large number of vendors, we think that are a couple that are particularly vulnerable to any spending disruptions arising from a work stoppage. These include Tellabs and Lucent. For both of these vendors, it is not atypical for Verizon to contribute up 10%-20% of their revenue streams. A strike during the month of August probably would not be too damaging as August tends to normally be one of the slowest months of the year. Thus, estimate that probably no more than 10%-15% of orders would be vulnerable if the strike does not extend past this month. As we move into September, then the impact could become more meaningful. Typically, about 50% of a quarter's business occurs in the final month of the quarter. Thus, the potential impact would be much more damaging if the strike extended deep into September.
From a sentiment standpoint, other vendors like Advanced Fibre and Nortel could come pressure as well. While Verizon is not a 10% customer for AFCI, expectations of progress in penetrating the carrier probably ties the shares' performance to the outcome of the strike. Similarly, Verizon is not a 10% customer of Nortel, so while sentiment might deteriorate with a strike, fundamentally, it should not meaningfully impact its results.
While Juniper sells some equipment to Verizon through its Unisphere product line, we do not believe that business has ramped to the point that the vendor could not replace it if a strike occurred. Similarly, while Cisco has a strong position from a routing perspective with Verizon, their sheer size and enterprise-orientation should allow them to manage through any disruption in orders from the service provider.
Semiconductors . . . Merrill Lynch analyst Joe Osha upgraded a number of semiconductor stocks amid a more positive stance on the sector globally, as he sees earnings estimates unlikely to fall, revenue momentum improving and low inventory levels. The firm believes that unlike mid 2002, earnings estimates are reasonable or even conservative; and with earnings estimates unlikely to fall, revenue growth momentum improving into 4th quarter, and the supply chain showing very low inventory levels. The firm believes that the stage is set for growth in earnings into 2004 aided by an inventory snap back as lead times lengthen. He upgraded Intersil, Linear Technology, Maxim Integrated Products, Microchip Technology, Semtech and National Semiconductor to "buy" from "neutral." Intel was already rated a "buy." Osha left his ratings on European chip stocks unchanged, however, as further strengthening of the euro represents a risk to earnings estimates.
Broadcom downgraded at Wachovia to Market Perform from Outperform. The company's core business continues to achieve solid growth, checks indicate BRCM should experience considerable weakness in its server rev in 2nd half 2004. Also, while firm remains impressed with BRCM's emerging products, this segment's growth may not be sufficient to make up their previous server revenue contribution; sees valuation range of $19-$24.
GlobeSpan Virata started with a Buy at Adams Harkness. The firm also gives it a $9-$10 target range. The firm says the DSL market remains a bright spot in the telecom market, and they do not feel that the discount is warranted. The DSL market is again exhibiting strong growth dynamics, driven by healthy demand in Asia and Europe, and regulatory relief in the U.S. market for broadband services should be a major catalyst for increased carrier spending.
Texas Instruments bought privately held Radia Communications, based in Sunnyvale, Calif., for an undisclosed amount. Radia specializes in designing chips for 802.11 wireless local area networks. The two companies have worked together in the past.
Analysts are incrementally more positive on prospects for Intersil’s power management business in 2004. Intel’s introduction and the subsequent transition to the 90nm process technology node is a catalyst for Intersil. The move on the part of Intel to 90nm with its Prescott Pentium 4 microprocessor, which is sampling now and expected to go into volume production by 4th quarter 03, is very likely to result in faster processors that consume higher levels of current. Power management now comprises nearly 50% of Intersil’s revenues following its exit of the WLAN business. Nearly half of power management is in desktop power applications, where Intersil is a leading supplier of PWM (pulse width modulation) controllers and FET (field effect transistor) drivers. The transition to higher speed 90nm microprocessors is likely to cause a significant mix shift from 3-phase power to 4-phase power controllers, which handle higher current levels. This could improve ASPs for Intersil’s PWM business and should also result in increased unit demand for the company’s FET drivers. Analysts are raising 2004 estimates from $0.86 to $0.93. Intersil’s power management business could potentially see near term inventory issues following its strong June Quarter. The stock has retreated 23% from recent highs.
Boxmakers . . . Cray reported earnings of $7.9 million, or 10 cents per share, well above its year-ago profit of $1.2 million, or 2 cents per share. The company said the latest results benefited from the deferral of $6 million in revenue from the first quarter, but the impact on earnings wasn't quantified. Analysts were looking for a profit of four cents per share in the period, on average. Revenue soared in the latest three months to $61.8 million from $38.6 million in the same period a year earlier. Cray noted product margins got a lift in the June period from higher volumes, lower component costs, and improved yields. Looking ahead, Cray left intact its outlook for revenue of at least $220 million in 2003.
Software . . . Sybase was started with a Buy at Midwest and $22.50 target. The firm says their research indicates that the co is uniquely positioned to build market share in the next-generation enterprise applications, Homeland Security projects, and in mid-market enterprises.
Sonic Solutions upped to Strong Buy from Buy at Roth. The firm believes SNIC is strongly positioned to capitalize on accelerating trends in the DVD recordable market and is poised to achieve substantial earnings growth over the coming quarters. Price target goes to $15 from $11. (The upgrade follows last night's earnings report).
Eidos announced that it has experienced a strong sell-through and increased license activity of the new 'Lara Croft'. Eidos has shipped all but 500k of the new game. As a result, it confirmed that it would meet original consensus sales and EBITDA(pre Lara Croft delay in Europe) in 2003 of £150mn and £13- 14 million, recanting its previous profits warning. Following the departure of Jeremy Heath-Smith, the Development Director and Managing Director of Core Design (the makers of Lara Croft), Eidos has concluded that it will transfer the development of the Lara Croft franchise to its Crystal Dynamics studio in the US. This is a step in the right direction for Eidos to deliver any future Lara Croft games on time. Estimate top line growth of 25% in 2004 and EBITDA of £17 million. Hit titles for 2004 are expected to include Hitman 3, Championship Manager, Backyard Wrestling, Commandos 3, Legacy of Kain and Deus Ex 2. There will not be another Lara Croft in this fiscal year, but will be released in 2005. Remain cautious on Eidos' sales and operating profit for 2004, which largely hinge on flawless games launches and robust demand. Given Eidos' patchy execution history, remain skeptical, at least until the majority of its games delivered on time.
Internet . . . Register.com plans to distribute $120 million in cash to its shareholders, in a self tender offer to be priced at $6.35 a share.
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