The S&P 500 lost 2 points (-0.21%) to 1,148. The DJIA climbed 12 points (+0.12%) to 10,570. The Nasdaq Composite lost 19 points (-.9%) to 2060.
Strong Sectors: airlines, tobacco, railroads Weak Sectors: communications equipment, semiconductors, tires, tech in general
Top Stories . . . U.S. Treasury notes rose in New York for the first day in four on speculation Asian central banks will invest currency sale proceeds in the securities at government auctions today and tomorrow.
Lucent Technologies, the biggest U.S. telephone-equipment maker, fired four employees at its Chinese unit after discovering potential violations of a U.S. law that prohibits paying foreign officials to win or keep business.
Lockheed Martin, the largest U.S. maker of military equipment, said it's in talks to sell Latin American governments jets that double for combat and training, as nations in the region seek to replace aging planes.
Rupert Murdoch's News Corp., the world's fifth-largest media company, plans to shift its domicile to New York from Australia, making it easier to raise money and attract investors.
Morgan Stanley, the second-biggest U.S. securities firm, agreed to buy Barra Inc., which creates stock indexes and portfolio risk assessment tools, for $816.4 million in cash
Birthday of Note . . . Billy Dee Williams is 67. Happy Birthday Lando Calrissian.
Gurus . . . Ed Hyman points to a Federal Reserve study showing that changes in Fed funds, the dollar, stock prices, and tax cuts influence growth for one and two years. Based on the study's sensitivities, the decline in Fed funds in 2003, the decline in the dollar in 2003, the rise in stock prices last year, and the 2003 tax cuts will combine to lift 2005 real GDP by 3.75%.
Tom McManus, strategist for Bank America, tells CNBC that 46.0% of the S&P companies have guided upward for this quarter. The question is how much has been discounted by the market's advance.
According to the Lowry's Service, the uptrend has resumed, and the breadth figures have been distorted by the rate rise. Almost half of the Big Board listed stocks are REITs, closed- end funds, and preferreds that move with the rate structure, explaining the recent plurality of Big Board losers to winners. When the distortions are stripped away, Lowry's says Big Board breadth has been positive.
Barclay's Capital says the price of base metals, such as aluminum and copper, will keep rising this decade because of demand from large emerging markets, such as China. China, followed by India, Russia, and Eastern Europe are generating a surge in demand for raw materials not seen since World War II.
The global economic recovery is firmly underway after three years of stagnation, but the abundance of cheap money could cause a decline in asset prices if the inevitable rise of record low interest rates is not handled carefully, the International Monetary Fund said Tuesday. "Overall, many market indicators suggest that the current benign financial conditions in mature and emerging markets will likely continue for the time being," the IMF said in its semi-annual Global Financial Stability Report. Still, "as rates rise, asset valuations predicated on an unusually low level of risk-free rates could be called into question," said the 219-page report, prepared by the IMF's International Capital Markets Department.
CEO Confidence . . . The Conference Board reports that confidence of Chief Executives in the U.S. economy surged in the first-quarter to the highest level in 20 years. Half of the CEOs surveyed anticipate an increase in hiring plans over the course of the year, suggesting labor market growth should gain momentum in the months ahead.
Eco Speak . . . Layoffs announced by U.S. corporations fell for the second month in a row in March to 68,034, the lowest level in nine months, according to outplacement firm Challenger Gray & Christmas. The figure marked a 12 percent decline from the 77,250 cuts in February and was 20 percent lower than the 85,396 cuts announced in March 2003. The March figure was the lowest since 59,715 in June 2003.
Financials . . . Bear Stearns comments that Friday's sell-off in Banks was not surprising given potential for stronger economic growth, sooner than expected tightening, and sector's YTD outperformance and cyclically high valuations. Generally higher interest rates are a positive for the group's fundamentals and earnings growth prospects, but the stocks do not outperform in a rising rate environment. Offsetting this weakness/volatility are the following: reasonable EPS growth in 2004, competitive dividend yields, share buybacks and M&A activity. Firm would use the weakness as an opportunity to buy New York Community Bancorp, North Fork Bancoporation, and Sovereign Bancorp all rated Outperform and all should benefit from higher rates.
Goldman Sachs reinitiates coverage of General Electric with an Outperform rating (prior rating In-Line). The firm is citing improving industrial demand, management's progress in executing its sweeping portfolio transformation, their increased confidence in the co's ability to return to double-digit earnings growth in 2005, and the stock's attractive relative valuation. Firm says the overhang from GE's ongoing portfolio transformation (including the approx $10.4 billion in share issuance to pay for Amersham) is creating an attractive entry point for investors, and they expect the near-term news flow to be positive following the company's recent positive preannouncement for 1H04 earnings and improving business trends.
First Data revised its 2004 EPS guidance upward by $0.17 to the range of $2.17-$2.35. The revision reflects a gain on a recent sale, partially offset by restructuring charges. Analysts are maintaining $2.15 estimate for 2004, which reflects earnings from recurring operations. With the earnings update, FDC was signaling that it is comfortable with street consensus for recurring operating EPS. The gain reflects the March sale of FDC's 67% interest in GCA Holdings, LLC, the parent holding company of Global Cash Access LLC (GCA). The gain will be partially offset by restructuring charges associated with eONE Global. First Data will continue to provide its core services through GCA, including Western Union wire transfer and TeleCheck check guarantee services. The sale of GCA enables FDC to focus on its faster growing core products
and services. With the Concord deal closed, Western Union stabilizing, and the company's stock buyback resuming, the shares of FDC are poised to Outperform.
Roth Capital upgrades New Century to Strong Buy from Buy after the company announced that it will convert to a REIT. The firm believes that this decision unlocks considerable value, as the REIT structure can help the company: 1) get off the origination (and, perhaps GAAP earnings) treadmill, 2) insulate equity shareholders from the inherent volatility in the mortgage banking biz, and 3) provide a compelling reason own the stock regardless of conditions in the fixed income markets or the broader economy. Target is $70.
Morgan Stanley Capital Int'l and Barra announced today the signing of a definitive merger agreement. Under the terms of the agreement, MSCI's majority shareholder, Morgan Stanley, will acquire Barra for $41.00 per share in cash, or an aggregate consideration of approximately $816.4 million. Barra's operations will be combined with MSCI following the closing of the transaction. The transaction is currently expected to close in 60-120 days.
The WSJ reports that Fannie Mae has relied heavily on legal but misleading methods to smooth out its reported earnings, the Center for Financial Research & Analysis says. The findings were presented yesterday by John Barnett, a senior analyst at the research firm, majority-owned by TA Associates. Mr. Barnett spoke at a seminar sponsored by the American Enterprise Institute, a conservative think tank and frequent critic of Fannie and Freddie Mac. One way Fannie adjusts is to repay some of its debt early, which often produces a loss because investors must be compensated. Another method is to adjust the portfolio of derivative contracts Fannie uses to hedge interest-rate risk. Mr. Barnett said the co has favored the latter method in recent years because that allows it to stretch out any losses from interest-rate movements over a number of years rather than immediately taking a big hit to earnings. Mr. Barnett also argued that Fannie hasn't taken deep enough write-downs to adjust for the deterioration of its $8 bln of securities backed by manufactured-housing loans.
Diversified . . . CSFB downgrades Fortune Brands to Neutral from Outperform based on valuation, as the stock has exceeded their $76 target. Also, although FO will benefit from operating leverage in its Office Products segment, firm says the co faces increasingly difficult comparisons in Golf Products and Spirits & Wine throughout the year.
Industrial Equipment . . . Cummins raises guidance, now sees 1st quarter EPS of $0.65-0.75 versus the consensus of $0.47 and prior guidance of $0.40-0.50. The firm sees 2nd quarter EPS of $1.00-1.10 versus the consensus of $0.91, and sees 2004 EPS of $4.00-4.20 versus the consensus of $3.66 and prior guidance of $3.20-3.40. The company attributes upside guidance to growing demand across all of its markets and the company's improved cost structure.
Transports . . . Prudential upgrades Winnebago Industries to Overweight from Neutral as the firm believes a number of unfounded concerns have impacted the shares. Following WGO's mid-March F2Q04 earnings call and the subsequent share sell-off, the firm believes shares are now trading at a significant discount to their underlying value. While gross margin pressure is certainly not a good thing, analyst remains confident that WGO will maintain leadership in industry profitability with gross margins in the 13%-14% range. The firm rolls out 2005 EPS estimate of $2.20 and retains $40 target.
Alaska Air Group said traffic at its Alaska Airlines and Horizon Air subsidiaries rose 15 percent and 37 percent, respectively, in March to 1.33 billion and 177.7 million revenue passenger miles. Load factor at Alaska Airlines rose 2.2 percentage points to 72.1 percent and rose 6.8 percentage points at Horizon to 67 percent, as capacity increased 12 percent and 23 percent, respectively, to 1.85 billion and 265.3 million available seat miles.
Southwest Airlines said traffic for the month of March increased 15 percent over year-earlier levels to 4.7 billion revenue passenger miles. Load factor rose 6.3 percentage points to best-ever 73.6 percent, amid a 5.4-percent gain in capacity to 6.4 billion available seat miles. The air carrier said bookings were "strong" so far for April and May, helped by recent fare sales.
Mesa Air said traffic in March increased 78 percent over year-earlier levels to 423.6 million revenue passenger miles. Load factor rose 9.5 percentage points to 72.4 percent, as capacity grew 55 percent to 585 million available seat miles.
JetBlue Airways' March traffic rose 39 percent to 1.24 billion revenue passenger miles, the discount airline said Tuesday. Capacity rose 37 percent in March while load factor rose 1.1 percentage points to 83.4 percent.
Defense & Aerospace . . . L-3 Communications Division announced that its Link Simulation and Training division has been awarded a subcontract with a potential value of $471.7 million, if all options are exercised, to serve as a major subcontractor to Computer Sciences Corp in the development and support of the U.S.Army's Flight School XXI program.
According to CNBC, weakness in Taser stock yesterday may have been due to a preview of CBS story on TASR. However, the report contained information on recent deaths, information that has previously been disclosed. Besides news of the deaths, the report apparently contained very positive reviews by law enforcement on the TASER device.
Consumer Products . . . Tupperware announced that EPS for 1st quarter (March) are expected to be $0.21-0.24, including $0.01-0.02 cents per share from a gain on land development, Reuters consensus is $0.14. Sales are expected to be up by a high single digit percentage versus the 2003 quarter. This expected improvement in EPS is due to better operational performance, primarily in Europe and Latin America, lower net interest expense and lower corporate costs. The full-year EPS expectation is raised to $1.23-1.33 (previously $1.20-1.30), Reuters consensus is $1.13.
CSFB downgrades Black & Decker to Neutral from Outperform based on valuation, as the stock is near their $60 target. In the longer-term firm believes the company will continue to be challenged by several secular headwinds, such as increased competition and deflationary pressure from imports, and continued gross margin and working capital pressures from the major retailers. Also, after realizing restructuring savings of $50 million in 2003 and an expected $45 million in 2004, firm thinks BDK will face difficult operating margin comparisons in the future.
Skechers sees 1st quarter EPS above previously guided range of $0.05-0.10 versus the consensus of $0.11 (First Call consensus is $0.10), due to a lower level of inventory markdowns. The company also sees revenues above previously guided range of $190-200 million versus an estimate of $205.2 million versus consensus of $206.2 million). "The momentum has continued into the first quarter 2004 as we have seen better than expected shipments and increased demand for our products both domestically and internationally, including updates of core styles and new SKECHERS Sport outsoles."
Food & Beverage . . . Kellogg pre-announces robust 1st quarter results, with EPS growth of 30% anticipated over year-ago $0.40. Main driver of better-than-expected performance is double digit sales gain; favorable foreign exchange translation also credited. Company ups full year earnings guidance to $2.07-$2.11, from previous $2.05-$2.09. Anticipated 8%-10% bottom line growth now includes some $0.10-$0.12 of upfront costs, versus prior forecast of $0.05 per share, and well documented commodity cost headwinds. Analysts are raising 1st quarter EPS estimate to $0.52, from $0.42, and full year view to $2.13, from $2.10. 2005 estimate becomes $2.32, implying 9% year-over-year growth.
Retail . . . U.S. weekly chain store sales rose in the latest week, according to the ICSC-UBS weekly chain store index. The index rose 0.3 percent in the week ended April 3. This follows a 1.9 percent decline in the previous week. The index rose 7.5 percent year-over-year, up sharply from 6.6 percent in the previous week. The year-over-year comparisons benefit from weak sales last March when the Iraq war was launched. "Despite the recent slowdown in sales, overall, March year-over-year comp-store sales growth is likely to be exceedingly strong," said Mike Niemira, ICSC's chief economist. March comp-store sales results will be released on Thursday.
Healthcare . . . Bernstein believes that while a Wellchoice acquisition of Oxford Health could face substantial hurdles (potential anti-trust concerns, Blue Cross & Blue Shield approval). The real obstacle could yet turn out to be the emergence of another suitor for OHP at a higher price than WC supposedly bid. Firm says that United Health in particular could pursue an OHP deal at a meaningful premium over the rumored WC take-out price ($62.90 per OHP share) that would be immediately accretive to EPS and that would make strategic sense. Firm says Aetna could pursue an OHP deal as well, but they view it as less likely given the synergies necessary to get the deal done at a premium. Firm maintains Market Perform rating on OHP and raises their target to $63 from $46.
Medical Devices . . . Boston Scientific pre-announced preliminary 1st quarter US TAXUS Express sales of $98 million, better than $91 million expectations and the company’s own guidance of $54-75 million. The additional $56 million in the last 8 selling days of the quarter suggests that Boston exited the quarter at greater than 65% market share. Stent utilization per account also is on the rise. The company will likely hit their goal of 70% market share and 70% penetration in 70 days...much sooner than expected. Analysts are not changing our 1st quarter EPS estimate of $0.20, but would not be surprised if the company reports a penny or two upside given the higher gross margins from the incremental TAXUS sales. Analysts are, however, changing our 2004 and 2005 exit market share assumptions to 70%-30% Boston versus J&J, as
compared to our prior 60%-40% estimate. New 2004 and 2005 EPS projections are $1.80 and $2.15, up from our prior $1.70 and $2.05, respectively.
Drugs . . . Merrill Lynch reiterates their Buy rating and $75 target on Taro Pharma, saying the stock has compelling upside potential at the current price. The firm believes it is reasonable to assume that 1/3 of the company's pipeline products are "mature" and could be approved over the next 6-12 months, and if this is the case, they believe that the 2004 consensus of $2.60 could prove conservative (their estimate is $2.67).
Hotel & Leisure . . . Wells Fargo raises its target on Shuffle Master to $55 from $44. The firm assumes that, beginning in 4th quarter (Oct), the positive impact of the CARD acquisition, combined with the expected table game price increase, should lead to higher than expected results in October Quarter and 2005. The firm believes it could see significant increases in the company's net margins primarily as a result of pricing flexibility and sales of specialty table games. The firm raises its target multiple to 30x from 25x.
Media . . . CIBC noting that last night after the close, DoubleClick email competitor Digital Impact announced an approx. 5% revenue shortfall for its March quarter. With email accounting for 14% of DCLK revenues, the news could modestly pressure the company's shares. According to the firm, DCLK could also be affected by the negative 1st quarter industry trends cited by DIGI, including soft new business activity and delayed campaigns. Thus, they believe there exists modest downside risk to their email revenue forecast of $10 million, a 7% Quarter/Quarter decline roughly equivalent to that of 1Q03. However, they believe DoubleClick is better insulated by the diversity of its offerings and should be able to offset any weakness in email with strength in other areas. As such, the firm remains comfortable with their 1st quarter tech revenue estimate of $46.4 million, the mid-range of company guidance.
Schwab SoundView downgrades Yahoo to Neutral from Outperform as they believe the value of Yahoo! Japan now exceeds that of any other Internet company in the world. Its $50 billion market capitalization equates to an unsustainable 87x forward multiple on consensus 2005E EBITDA estimates. Firm believes that a sharp correction in the Yahoo! Japan shares would make YHOO shares appear much more expensive. The firm stresses that the new rating has nothing to do with YHOO's fundamentals in the first quarter, in 2004, or beyond. They believe the results will come in very strong.
All about Yahoo! . . . Yahoo! is in a great position to benefit from the expected shift of ad dollars online. As advertisers become increasingly frustrated with the shortcomings and escalating prices of traditional media we believe they will allocate more of their budgets to large portals with broad reach and precise targeting capabilities. Analysts have compared online advertising growth to the historical share shift to cable. Over its 20 year history, cable has gradually assumed 6% of ad budgets as advertisers followed their consumers toward this more targeted medium. Assuming the Internet follows the same pattern, this suggests online advertising would grow about 18% per year over the next 15 years. Yahoo!'s impressive search technology and its many initiatives to monetize its user base through paid premium services could enhance the overall growth projected for the online ad industry. Expect its relatively fixed cost structure to lead to annual margin improvements, delivering robust double-digit cash flow and earnings growth.
Online advertising is gaining share in an improving market, and Yahoo! is a great play on this anticipated shift. The ad market finally seems to be gaining momentum, coming out of its worst recession since WWII. This is a broad-based ad recovery with all media participating, including the Internet. Many traditional advertisers who abandoned the Internet after the dot-com fallout in 2001 are once again allocating dollars to that medium for branding and also for more targeted search-related advertising. Internet ad spending is projected to grow at 15%-20% in 2004 according to most estimates, outpacing our 6% projected growth in overall ad budgets, which suggests the Internet will capture a larger share of the ad pie. Unlike the growth in online advertising during the 1990s, which was fueled largely by dot-com companies, we believe this renewed interest mostly will come from traditional advertisers biased toward well-known, highly-trafficked Web sites such as Yahoo! (given that approximately 70% of ad dollars is spent on the top three portals, it is no surprise that Yahoo! counts 70 of the top 100 traditional advertisers among its clients.) Yahoo! is well-positioned to continue to capture a meaningful portion of the growing online ad pie.
Sophisticated search technology and a broad-based platform offer meaningful growth opportunities. The acquisition of Inktomi and Overture in 2003 allowed Yahoo! to develop its own competitive search technology, which today powers approximately 50% of all searches done on the Internet. Beyond the 128% search revenue growth expect in 2004 from Yahoo!’s core search business, the company is also expanding search to other Yahoo! verticals such as Yahoo! Autos and Yahoo! Shopping. This expansion will improve ad targeting capability and create new growth channels. Echoing a move made by Google last month, Yahoo! also is tapping the local search market, hoping to capture some of the $14 billion advertising dollars spent each year in the offline Yellow Pages. These multiple opportunities utilizing Yahoo! search capabilities could double Yahoo!’s search revenues from our 2004 forecast of nearly $1 billion, to $2 billion over the next four years.
Taking it Global. Yahoo! has made significant investments to expand in Europe and Asia. While the company has already achieved profitability in some regions (e.g. France and Germany), most other international markets remain in their infancy. As Internet usage and broadband penetration ramps up overseas, we expect revenue contributions from Yahoo!’s non-U.S. assets to accelerate (complemented by select acquisitions) and, as more international regions turn profitable over time, improve the company’s margins.
Highly leverageable business model. Expect Yahoo! to continue its steady growth in unique users and active registered users, which by year-end 2003 stood at 263 million and 133 million, respectively. This growth will enable the company to further monetize its existing platform. In addition, Yahoo! has made impressive headway toward its goal of achieving 7-7.5 million fee-paying customers by the end of 2004; the company reported 4.9 million fee-paying customers at the end of 2003. This projected traffic and fee growth (on a predominately fixed-cost basis) should lead to meaningful margin improvement over the next four years, to reach a projected 27% in 2007.
Strong balance sheet and impressive cash flow. Yahoo! ended 2003 with $2.6 billion in cash on its balance sheet and total debt of $750 million. All of the debt was in the form of a convertible bond that is now in the money and that we thus consider as equity. A highly leverageable business model with minimum capital expenditure requirements should lead to healthy free cash flow of $465 million in 2004 and $660 million in 2005, further strengthening
Yahoo!’s capital structure. And with no debt, the company can pursue acquisitions to fuel further growth.
Slowdown in ad growth. As we learned during the deep ad recession in 2001, there is no guarantee that growth in the overall advertising market will continue. Advertising remains a highly cyclical business and negative economic trends could adversely impact its projected growth. Furthermore, while many factors seem to point toward a shift in ad dollars online, lack of consistent industry measurement standards and frustrations with the inability to reach the same mass audiences that more traditional media can capture could temper advertisers’ enthusiasm for the Internet and slow the shift of traditional ad dollars online.
Competition. Yahoo! continues to compete with other top portals as well as lesser-known Web sites for ad dollars. Yahoo!’s main competitors include AOL, MSN and Google, each of which is also aggressively building its platforms not only in the search space but also, as in the case of Google, broadening its product offering and thereby potentially increasing the competitive environment and challenging Yahoo!’s market share. When Microsoft launches its own
search engine as expected in 2005, Yahoo! could lose some revenues through relationships Overture and Inktomi have with MSN, as well as face heightened competition for search dollars.
Google IPO. It is widely anticipated that Google will likely go public sometime in mid-2004. This offering could bring further attention to Google from an advertiser’s perspective, and also lead to increased volatility for Yahoo! shares as investors may look to Google as an alternative investment idea.
New Search Technology. In February 2004, Yahoo! migrated off of the Google technology onto its own system, created through its acquisitions of Overture and Inktomi. As with any new technology, there is the risk of challenges to implementation or deployment which could impact the growth of search.
Option Dilution. The FASB will likely mandate the expensing of stock options as of January 2005. Like many other technology companies, Yahoo!’s stock compensation is significant, totaling $203 million in 2003. If these options had been expensed, it would have led to a $0.32 dilution in 2003 EPS. Expect Yahoo! will begin to expense stock options in 2005, which will likely reduce earnings significantly. This could raise questions about Yahoo!’s valuation.
Yahoo! Japan. Yahoo! owns 33.6% of Yahoo! Japan. This equates to about 26% of Yahoo!’s market cap or $13 per share after tax. Any meaningful decline in Yahoo! Japan’s share price could have an adverse impact on Yahoo!’s valuation. Given the volatility of the Japanese equity markets, this presents a risk to YHOO shares.
Telecom . . . Covad Comm partners with A&T to offer bundled DSL and voice services in 11 new states.
Merrill Lynch upgrades Sprint to Buy from Neutral with a $23.50 target, due to valuation, stable to positive operating trends at Sprint PCS and the potential for Street estimate upgrades in the future. First, factoring in a potentially improving outlook for Sprint PCS, the firm raises its 2005E EPS estimate from below consensus to above consensus by about 13%. Second, its valuation estimates based on a DCF analysis, sum of the parts valuation and relative comparisons (with the integrated telcos), yield a price objective of $23-$24. With regard to the percentage of revenues from wireless on 2005E estimates, the firm estimates that 52% of Sprint's revenues are attributable to wireless. This compares to ALLTEL at 63%, BellSouth (pro forma for the Latin American assets sale) 39%, SBC 33% and Verizon Comm. 26%. Over the past two years Sprint had significant distractions that took mgmt away from running the business. Now that it is well on track to meet its balance sheet targets and the PCS and FON tracking stocks will be recombined on April 23 rd , mgmt can primarily focus on its operations in 2004.
Less than two months after the sale of AT&T Wireless to Cingular was announced, AT&T Corp. is already looking for a partner to help it get back into the wireless business. The largest U.S. long-distance company has recently said it will quickly re-establish its brand in the growing market for wireless phones once the Cingular deal is complete, by reselling the service of another wireless company, as Virgin Mobile does with Sprint Corp. The question being raised in the industry is whether AT&T will look to a rival such as Sprint, which could offer the widest coverage and a variety of services, or avoid a direct competitor in favor of a smaller player, such as Nextel Communications Inc.
Network Equipment . . . SG Cowen comments that Nokia shortfall appears to be market share related implying impact on broadline semi suppliers could be less than impact on NOK. Notes that Texas Instruments is roughly an 8% customer. The firm estimates that TXN has 70% share of all GSM basebands so a shift to other GSM suppliers would have minimal impact. A shift to CDMA phones would have a more significant negative impact on TXN.
Nokia now sees 1st quarter EPS at low end of previous guidance of 0.17-0.19 Euros, or approx $0.21, using current exchange rate, the consensus is $0.24, NOK sees 1st quarter sales below previous guidance, declining by 2% year-on-year due to sales of cheaper handsets. NOK says "lower than expected volumes and the product mix negatively impacted Mobile Phones' sales and operating profit."
Thomas Weisel upgrades Symbol Tech to Outperform from Peer Perform based on: 1) the vast majority of accounting-related issues are behind the co, 2) significantly enhanced leverage to an accelerating recovery, 3) market expectations are now a little more conservative than reality, and 4) the co is well-positioned to benefit from the FDA bar code mandate and RFID.
Smith Barney out positive on Foundry Networks saying that with the shares off nearly 50% since company reported above consensus 4th quarter 2003 results on Jan 28. Given the market seems to be pricing in a 1st quarter miss, could see solid upside if they hit numbers. Based on channel checks, conversations with mgmt, and other industry contacts firm sees continuing strength in Foundry's business despite the fact that 1st quarter is a seasonally weak period and despite some easing of the government business. They think the co will meet or exceed consensus expectations of $112.6 million in revenues with a book to bill at or slightly above 1.0, and meet or exceed consensus EPS estimate of $0.17.
Storage . . . Banc of America cuts their June quarter and 2004-05 EPS estimates below consensus for Maxtor, Seagate, and Western Digital. During their latest checks, firm says distributors mentioned soft end-demand for desktop drives as well as continued aggressive pricing on enterprise drives, which suggests that the drive company's will do no better than normal seasonality; firm says this is consistent with comments from Hutchinson, which last week pre-announced for the second time this quarter.
Adaptec announced that it expects 4th quarter revenue of approximately $121 million and pro forma net income per share of approximately $0.05-0.06 versus consensus of $115 million and $0.04, respectively. The company states, "We attribute our improved operating results to higher levels of IT spending, resulting in higher-than-expected demand from our OEM customers and increased sales of our external storage solutions".
EMS . . . The WSJ's "Heard on the Street" column highlights Flextronics due to the company's gearing up for expansion in China being a sign that the recent slide in Flextronics's share price may be unwarranted, analysts and investors say. "I think the [stock's] pullback gives you an opportunity to add to positions," says Jay Zelko, manager of the $1.4 billion Evergreen Strategic Growth Fund and a holder of Flextronics shares. The still-palpable nervousness about tech stocks has caused some investors to avoid company's in the electronics contract-manufacturing industry, Mr. Zelko says. But Flextronics, the industry's biggest player with $13 billion in sales last year, already is seeing its margins inch up as tech spending improves and company's continue to outsource work overseas. Flextronics also is close to completing a deal with Nortel Networks to take over five of Nortel's manufacturing facilities, a transaction that could add $2 bln a year to Flextronics's revenue. The co is also moving into new products, including camera modules for new camera-equipped cellphones. CIBC analyst Todd Coupland lifted his rating on Flextronics in Jan to "Sector Outperformer" from "Sector Performer" and increased his price target to $23.
Semiconductor Equipment . . . Taiwan Semi to supply semiconductor manufacturing services for Microsoft's future Xbox products. The breakthrough agreement expands an ongoing relationship between the two companies by providing Microsoft with direct, collaborative access to TSMC's advanced semiconductor process technologies.
Semiconductors . . . JMP Securities lowers estimates on Intel and its target price to $35 from $38. The estimate cuts are based on several factors: 1) delays in the high-volume 90nm technology production ramp of Intel's new desktop Prescott (Pentium 4) processor, mobile Dothan (new Centrino) processor until late in 2nd quarter 2004; 2) a more aggressive forecasted processor pricing environment in PCs and server chips due to vigorous competition from a rejuvenated AMD; 3) continuing pricing pressure in the flash memory market; and 4) a somewhat sluggish, seasonally weak first-half PC industry. 2004 rev and GAAP EPS estimates go to $34.5 billion and $1.15 from $35.3 billion and $1.20.
RF Micro Device announced that it is shipping high-volume production of its RF3146 third-generation PowerStar power amplifier module to Samsung Electronics. The industry-leading 7x7x0.9mm RF3146 is powering multiple Samsung GPRS handsets across numerous phone platforms.
Dresdner upgrades Micron to Hold from Reduce. According to firm, capacity tightness continues in the DRAM market, leading spot prices dramatically higher in the last month. As a result of contract prices starting to move up (which follow spot prices), firm expects MU to be more profitable. Thus, firm sees little chance of sizable downside from the current valuation.
Barron's Online highlights National Semi that, despite a 160% run in the past 12 months, may have room to run as demand remains strong for National's power-saving chips and other chips found in popular cellular phones, notebook computers and flat panel screens. "We're in an unbelievable industrial boom and analog chips are in short supply," says Rick Whittington, an analyst at Caris & Co. who rates the stock Above Average. "[National Semi] is going to earn a lot more than people think." Analog chip production accounts for more than three-quarters of National's revenues; other semiconductors, like mixed-signal chips that combine analog and digital processing, comprise the rest. National has $793 mln, or more than $4.00 a share, in cash and little debt. And last month, it announced it would buy back up to $400 mln worth of its shares. National Semi fetches about 21x projected earnings for the fiscal year that ends next May, well below peers like Linear Technology, which trades at 32x projected June 2005 earnings. And the co's shares look comparatively cheap on a P/S basis, selling at only 4.5x trailing-12-months sales. Linear sells at 18x sales, and Analog Devices at 9x sales. Mr. Whittington sees National Semi earning $2.70 a share in fiscal 2005, 44 cents above Wall Street's consensus. He puts the stock's value at about 55.
Boxmakers . . . Digitimes reports that Hewlett-Packard hopes to have its worldwide suppliers and distributors ready with RFID technology by the end of this year, Ian Robertson, director of HP's RFID Program, said. HP will implement the RFID standards worldwide to meet the requirements from the US retailer giant Wal-Mart and US Department of Defense. HP will require its Taiwanese suppliers of printers to attach a RFID chip on the outer package of each product starting May and then expand the program to include notebook suppliers in August. Starting early 2005, HP will ask all of its suppliers to install the RFID chips inside the manufactured goods.
Software . . . Procom Tech announced it has signed a multi-year agreement with Sun Microsystems under which SUNW may license certain Procom technologies. Additionally, company will also provide engineering and support services to SUNW.
William Blair upgrades SAP to Outperform from Market Perform given improving market conditions as well as the company's continued ability to win market share away from weaker players. The firm's surveys consistently show that the co is gaining share in ancillary product areas such as supply chain, CRM, and portals, and although the March qtr is always tough, their initial field checks indicate that SAP had a strong showing, with both deal sizes and closure rates ticking up; firm also notes that the company's pipeline of new business continues to strengthen.
First Albany says 1st quarter was a strong start to what should be a very good 2004 for video games. Although the final numbers will be reported in the coming weeks, earnings for the firm's coverage group of software companies were up 25.5% year over year, an acceleration over the 20% year over year growth in calendar 2003. The firm is encouraged by upside announcements of Activision and THQ Interactive. With the recent Xbox price cut driving fundamentals in the near term, a potential competitive response from Sony before the holiday, the upcoming E3, and a strong pipeline to stimulate demand, fundamentals are trending positively for the year. From a stock perspective, the group continues to outperform other indices, up 92% quarter over quarter vs the Nasdaq's 51% growth and the S&P's increase of 32%. Activision (has the most earnings upside potential in the group in 2004), THQI (has the pipeline in place to outperform estimates), Electronic Arts (should continue to be a solid large-cap growth stock in 2004, but valuation is approaching target), Atari (pipeline is delivering higher-quality software and sales are gaining momentum. Firm expects a recovery in 2004).
Raymond James raises its target to $54 from $50 and its 4th quarter (Mar) estimates on Symantec on consumer strength. Revenue and EPS estimates go to $520.3 million and $0.36 from $510.3 million and $0.32. The firm also raises estimates for 2004 and 2005. Consumer sales should once again drive upside in the quarter based on virus outbreaks (MyDoom) and the belief that much of spending in the consumer anti-virus market is event driven. Message Labs data suggest that the virus infection rate in the March 04 quarter was twice the high level set late last summer. The new $54 target represents a P/E of 36x calendar 2005 EPS.
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