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From Briefing.com: 4:08PM Weekly Wrap : It was a wild ride this week, with fears of higher interest rates one day and euphoria over earnings reports the next. The week ended with gains in the indices, but the near-term trend is still flat to up only slightly.

The week started with very tame and mixed action on Monday. Then on Tuesday, Federal Reserve Chairman Greenspan testified in the afternoon to the Senate Banking Committee. He said that banks and the financial systems are well positioned to deal with higher interest rates. This did little more than confirm that the Fed is likely to raise rates later this year, but it nonetheless put the stock market into a mild panic, and the Dow fell 123 points on the day. Expectations of higher interest rates are a legitimate negative for the stock market. On Tuesday, it was all traders cared about.

Through the week, however, the earnings reports kept flooding in. And they were extremely good. Almost 50% of Dow companies reported and over 35% of the S&P 500 companies. Through Friday, over 75% of these reports were above the average Wall Street forecast. That is well above the normal 60%. Total operating earnings growth is running over 3% ahead of expectations, which suggests that the final gain for the S&P 500 will be over 20% for the third straight month. Earnings guidance is very upbeat for the second quarter. There are far too many reports to cover even the big ones, but some are particularly noteworthy. On Thursday, Microsoft (MSFT) produced a stellar report, beating the average profit estimate by 5 cents, and coming in way above revenue forecasts. It was perhaps the most influential report. Other excellent reports through the week came from 3M (MMM), Altria (MO), Eli Lilly (LLY), General Motors (GM), Wells Fargo (WFC), Motorola (MOT), Coca-Cola (KO), Ford (F), eBay (EBAY), Caterpillar (CAT), and Amgen (AMGN). Also noteworthy were the impressive reports from manufacturing firms. Companies such as Danaher (DHR), Illinois Tool Works (ITW), Cummins (CMI), and Honeywell (HON) posted very strong revenue and earnings gains. The positive impact from the strong earnings numbers broke through on Thursday. The Dow gained 144 points that day and the Nasdaq jumped 37 points. The Nasdaq added another 15 points to that gain on Friday (after the Microsoft report). It outperformed the other major indices as it posted a 2.7% gain following a 2.8% drop last week.
There wasn't much economic data this week. Initial claims for unemployment for the week ended April 17 fell 9,000 to 353,000, but that was very disappointing after the 32,000 increase the prior week. This suggests only a moderate gain in April nonfarm payrolls to be reported in early May. March PPI rose 0.5%, but the core rate was up only 0.2%. That continues a slightly firmer trend this year than last year for the core rate, but there is widespread recognition that inflation is up a bit, and there was little market concern over these numbers. The biggest economic news came Friday, as March durable goods new orders were up a very strong 3.4%. The February increase was revised to +3.8% from an originally reported 2.5% gain. This reflects very strong business investment. Orders in the first quarter have been strong across the board, and support expectations that real GDP for the period will be up 5% or more.

In sum, it was a choppy week. The bearish impact of likely higher interest rates battled the bullish impact of strong earnings growth. This week, the earnings numbers proved more influential. Next week almost as many earnings reports are scheduled as there were this past week. Dr. Greenspan has no major scheduled speaking engagements, but that doesn't mean interest rates will be off the radar screen. The 10-year note yield closed Friday at 4.44%, up from 4.35% at the close of the prior week. A rise through 4.50% could be psychologically negative for stocks. Still, the focus will probably be on positive earnings results.Briefing.com retains a moderately bullish long-term stance. Short-term action could remain very choppy, but the long-term bullish impact of very strong earnings growth still makes a strong argument for blue chip stocks.

 
 Index    Started Week Ended Week Change % Change YTD  
 DJIA         10451.97  10472.84  20.87  0.2 % 0.2 %  
 Nasdaq        1995.74   2049.77  54.03  2.7 % 2.3 %  
 S&P 500       1134.57   1140.60   6.03  0.5 % 2.6 %  
 Russell 2000   583.37    590.71   7.34  1.3 % 6.1 %

Close Dow +11.64 at 10,472.84, S&P +0.67 at 1,140.60, Nasdaq +16.86 at 2,049.77: On the one hand, the major averages failed to accomplish much in today's session as they closed basically unchanged versus their respective opening levels... On the other hand, however, today's action was a microcosmic representation of the action seen through most of the past week... Specifically, despite upbeat earnings reports from influential companies such as Microsoft (MSFT 27.52 +1.57), Broadcom (BRCM 42.24 +1.44), Amgen (AMGN 58.15 +1.01), and Gilead (GILD 59.86 +0.64), the major averages spent the morning hours declining...
Particularly interesting was the fact that the stronger than anticipated Durable Orders report, which checked in at 3.4% (consensus 0.7%) was used as an excuse to take some money off the table, since participants viewed it as yet another reason for the Fed to raise interest rates sooner rather than later... To that effect, the bond market pulled back in response to the Durable Orders report, with the 10-year note closing down 17/32, bringing its yield up to 4.45%...

Despite the early weakness, in the second half of the session the market was able to focus on strong Q1 earnings, which have been coming in 26.3% above last year's, leading to a rebound in the major averages, which closed at their session highs and up compared to last Friday's closing levels... Among the leaders to the upside of note were the networking, semiconductor, computer, software, and coal groups... Laggards of note included the internet, REIT, gold, insurance, oil services, broker/dealer, and homebuilding sectors...NYSE Adv/Dec 1145/2163, Nasdaq Adv/Dec 1454/1688

12:46PM Microsoft (MSFT) 27.42 +1.47: Microsoft published Q3 results after the close on Thursday. The software giant printed EPS of $0.12, including $0.05 in stock based compensation and $0.17 in legal charges, on revenue of $9.175B (+17.1% Y/Y) vs. consensus at $0.29 on $8.668B. Favorable foreign exchange rates added approximately $350MM to revenue.

Results exceeded expectations across almost all seven business segments. Stronger than expected PC shipments drove OEM sales of Windows XP, Windows server, Office 2003, Exchange, SQL Server and Visual Studio products. Strong Xbox console and software sales and higher MSN advertising revenue also contributed to results.

Management estimated total PC units increased approximately 14%, driven by strong business demand across geographies; total server hardware units increased approximately 17%, with Windows sever shipments growing faster than the overall market at 25%.

The U.S., EMEA and Asia-Pacific region, excluding Japan, grew at a low to mid double-digit rate. Japan and Latin America grew at a mid to high single-digit rate. Continuing to see strong PC unit growth in emerging markets where a greater percentage of PCs ship with pirated software or with Linux.

The following table shows sales, gross margin and Y/Y change in gross margin by revenue segment. Segment Revenue
($ in B) % Sales Y/Y Growth Gross Margin Y/Y bps change in GM
Client 2.924 32% 15.7% n/a
Server and Tools 2.177 24% 19.2%
Information Worker 2.739 30% 17.7%
Business Solutions 0.153 2% 4.1%
MSN 0.591 6% 16.3%
Mobile and Embedded Devices 0.061 1% 32.6%
Home and Entertainment 0.530 6% 17.0%
Total 9.175 100% 17.1% 84.6% 88
Client. Windows OEM license units increased 16%, and OEM revenue increased 18% due to a 2 point increase in the mix of professional versions of Windows to 58% on strong business PC shipments.

Server and Tools. Improving demand for Windows server, Exchange, SQL Server and Visual Studio products. Windows server new licenses up 31% Y/Y.

Information Worker. Office experienced strong sales across customer segments. OEM revenue increased 35%, and revenue from volume licensing, retail package products and pre-installed versions of Office 2003 in Japan increased 15%.

Microsoft Business Solutions. Added 5,500 new customers. Operating loss from MBS improved 29% on lower operating expenses.

MSN. Advertising revenue increased 43%, driven by both traditional on-line and search-based advertising. Subscription revenue declined approximately 6% Y/Y or $17MM as narrow band subscribers continue to migrate to broadband. Subscribers at 8.2MM.

Mobile and embedded devices. Upcoming Windows mobile-based smartphones, including Motorola MPx and MPx100 generating strong interest. Released Windows mobile 2003 second edition software. Mobile and embedded devices operating loss improved 47% due to lower operating expenses.

Home and entertainment. Xbox console volumes increased 30% Y/Y. March NPD data showed that Xbox market share increased 8 points Y/Y to 30% in March of 2004. Operating loss for improved 25% driven by revenue growth and improved Xbox console and third-party software margins. Xbox business continues to enjoy steady console growth, strong software sales, and increasing numbers of on-line subscribers. Expects Xbox shipments to be 14.5-16.0MM consoles in F04.

Gross margin increased 88 bps Y/Y to 84.6%. Operating margin, excluding legal charges, increased 648 bps Y/Y to 41.5%; excluding stock based compensation and legal charges, operating margin increased 1,463 bps Y/Y to 49.7%.

Management expects corporate PC spending to outpace consumer in H2. Outlook meshes with our view of a recovery that is steadily unfolding across the globe, with corporate IT spending rising in the latter half of 2004 and ramping into 2005.

Management forecast F04 PC unit growth to be in the low teens and F05 to be in the mid to upper single digits; server hardware to increase 14% in F04 and to increase 11-13% in F05, representing both Windows and proprietary UNIX hardware; expects Windows to grow faster than overall server segments.

Guided for Q4 EPS of $0.28, excluding stock based compensation expense of $0.05, on operating income of $2.8-2.9B and revenue of $8.9-9.0B (+10.4-11.6% Y/Y) vs. consensus EPS at $0.27 on revenue of $8.860B; F05 EPS of $1.31-1.33, excluding stock based compensation expense of $0.15, on operating income of $15.9-16.3B and revenue of $37.8-38.2B (+3.4-4.5% Y/Y) vs. consensus at $1.28 on revenue of $38.502; operating margin to improve 1-2 points in Q4.

MSFT shares are, based on our inverted EVA/DCF model, priced for sustained lower 20% revenue growth assuming lower 40% operating margin.

The following table shows price multiples and Y/Y growth rates for MSFT compared against a broad range of peers, and the software & programming, computer services groups. Company *P/SG Ratio **P/OPG Ratio P/S Y/Y Revenue Growth
TTM 2004E 2005E TTM 2004E 2005E
Microsoft (MSFT) 3.9 18.5 7.9 7.6 7.3 13.5% 13.4% 5.5%
IBM (00C) 10.5 26.8 1.7 1.6 1.5 9.7% 8.0% 6.1%
BEA Systems (BEAS) 2.6 22.3 5.0 4.5 4.0 8.4% 11.4% 11.8%
Computer Associates (CA) 2.5 (210.9) 4.9 4.9 4.3 7.2% 6.3% 14.6%
Oracle (ORCL) 3.4 11.6 6.5 6.3 5.9 5.2% 7.3% 7.2%
palmSource (PSRC) 1.5 (19.3) 6.5 3.5 3.1 n/a (1.6%) 11.8%
Research in Motion (RIMM) 5.6 118.8 14.0 7.0 5.5 93.9% 98.6% 29.0%
Sun Microsystems (SUNW) 1.0 (20.8) 1.3 1.3 1.3 (6.9%) 4.1% 1.6%
Yahoo! (YHOO) 5.4 43.7 22.1 15.3 12.1 101.3% 54.0% 26.0%
Software & Programming 2.9 32.1 5.1 n/a 4.8% n/a
Computer Services 1.2 18.3 1.7 6.4%
Blended 1.8 23.0 2.6 5.8%
*P/SG Ratio: Trailing 12 month (Price / Sales) / Growth ratio as of April 16, 2004.
**P/OPG Ratio: Trailing 12 month (Price / Operating Income) / Growth ratio as of April 16, 2004.

Q3 results reinforce our assessment that there are still ample opportunities for growth given MSFT's strong market position and pricing power in an improving demand environment, that Microsoft will deliver growth above our model, and estimates will be revised higher as demand for enterprise products as well as home entertainment and mobility products accelerate. See Q1 preview and review, Q2 review, Story Stocks, October 23-24, 2003, and January 23, 2004 for details.

As we wrote back in October, visionary, not mature, is perhaps the single word that most precisely captures the essence of Microsoft. We cited the company's heavy investments in R&D, and provided as an example, Microsoft's vision of the personal computer, as embodied in Athens and One Note.

Microsoft is just beginning to reap the returns on investments in products such as Windows XP, Office, Windows Server, Exchange, Small Business Server, Visual Studio, CRM, Tablet PC, Media Center, MSN 9, Smartphone, Pocket PC and the Xbox, even as the company continues to invest to innovate a range of new products for, among other applications, business intelligence, collaboration, rights management, search, security and speech. Upcoming products include Longhorn Client, Longhorn Server and SQL Server.

The market opportunities are just as attractive and larger thirty years following the introduction of the first desktop computer to run Microsoft as the company expands across product and geographic markets.

Shares trade at a premium to peers reflecting the company's strong leadership position and market dominance. We think MSFT can sustain this premium and the patient investor will be rewarded. Microsoft is a component in Briefing.com's Conservative Portfolio. MSFT's outlook is a positive datapoint on tech; speaks to a broadbased recovery that is unfolding across sectors and geographies. We would also continue to focus on Intel (INTC 27.34 +0.82), which is part of the Active Portfolio.--Ping Yu, Briefing.com

11:36AM The Week Ahead : This week was all about earnings, and next week, the same can be said. There will be less than the 500 companies that reported this week, but not by a lot. The market can be expected to keep its attention on the outpouring of numbers as - this time - Fed Chairman Greenspan will not be delivering testimony on the state of the economy. Concerns about rising interest rates might be put on hold with the attention shifted back to earnings reports - the combination of which caused Thursday's impressive rally.

A nice cross-section across all sectors is on the calendar for the week. EDS (EDS) on Monday, BP (BP), DuPont (DD), Verizon (VZ), Maxim Integrated (MXIM), and McDonald's (MCD) on Tuesday, JDS Uniphase (JDSU), QLogic (QLGC), and Symantec (SYMC) on Wednesday, Aetna (AET), Exxon Mobil (XOM), and Nortel (NT) on Thursday, and Avon Products (AVP), ChevronTexaco (CVX), and Procter & Gamble (PG) on Friday. Briefing.com readers should use In-Play, a platinum product, Earnings Briefing, and Story Stocks for updates and analysis.

Others events that should be making headlines are the International Monetary Fund and World Bank's annual spring conferences, and the G-7 meeting that starts this weekend. The Bush administration's aim will be to convince Europe (in particular) to boost its growth as the US prepares for a rise in interest rates. The dollar's recent gains could be tested as the group of finance ministers discusses currency issues (e.g. China and Japan's intervention in their currency).

Economic data will also be plentiful and focused primarily on the consumer. April Consumer Confidence is due out on Tuesday, and the revision to April Consumer Sentiment and April Personal Income & Spending on Friday. The April Chicago PMI Index will also be released on Friday, and on Tuesday, probably the most influential economic report of all - advance Q1 GDP - comes out. The market is looking for a rise of 5.0%, up from Q4's 4.1%

In other news, 5 Dow components will be having their annual shareholder meetings: IBM (IBM) and Merck (MRK) on Tuesday, General Electric (GE) on Wednesday, Altria Group (MO) on Thursday, and Alcoa (AA) on Friday.

Finally, as a point of information, next Friday marks the end of the 'Best 6 Months' theory as highlighted by the Stock Trader's Almanac. For the last 53 years, the Dow has outperformed from November-April versus May-October. Of course, last year the Dow continued to move higher during May-October, but its gains were smaller. So far, the Dow has advanced 6% since November 2003. -- Heather Smith, Briefing.com

9:05AM Brooks Automation (BRKS) 18.05: Brooks Automation is the world's largest designer and manufacturer of automation solutions for semiconductor manufacturers.

Automation hardware, software and services is growing as a percentage of total capital expenditures. This is because the number of manufacturing process steps increases with each successive generation of fabs, and the transition to advance processes such as 300mm increases the weight and value of a production lot, making the manual handling of wafers difficult, costly and risky.

A 200mm fab can cost as much as $1.5B and is generally only partially automated, while a 300mm fab can run over $2.5B and is generally fully automated. The result is the investment in automation hardware, software and services has increased from approximately $50MM in a 200mm fab to almost $200MM in a 300mm fab.

BRKS is benefiting from these trends as well as a resurgence in capital investments after a prolonged industry downturn. The company reported Q2 results after the close on Thursday; EPS of $0.29 on revenue of $137.984MM (+48.4% Y/Y) vs. Reuters Research consensus at $0.13 on $123.39MM.

Sales demonstrated good breadth across customers and geographies. The largest order was under $4.5MM and the second largest under $2.5MM. Top ten customers account for 48% of sales; top 20 62%. The North America account for 46% of sales; Europe 29%; Asia 25%.

Gross margin increased 1,038 bps Y/Y to 36.9%. Operating margin increased 2,878 bps Y/Y to 9.3%. Results reflect cost containment and product rationalization initiatives implemented during the downturn. Expect incremental improvement.

Guided for Q3 EPS of $0.29-0.34, excluding $0.04 of restructuring and amortization items, on revenue of $140-150MM (+66.6-78.5% Y/Y) vs. consensus at $0.21 on $134.19MM.

BRKS shares are, based on our inverted EVA/DCF model, priced for sustained upper teens revenue growth, from F06, assuming 13-14% operating margin.

Semiconductor capital spending is expected to increase 40-50% Y/Y in 2004, with double digit unit demand, high capacity utilization and new fab build-outs driving demand for equipment into 2005. But sustainability of growth is a concern. Operating margin expectation as reflected in our model is modestly below management's long-term target of 15%.

The following table shows price multiples and Y/Y growth rates for BRKS compared against the semiconductor equipment group. Company *P/SG Ratio **P/OPG Ratio P/S Y/Y Revenue Growth
TTM 2004E 2005E TTM 2004E 2005E
Brooks Automation (BRKS) 1.8 (9.5) 2.1 1.7 1.3 5.3% 41.2% 31.5%
Applied Materials (AMAT) 5.2 (369.8) 6.8 4.4 3.6 (2.7%) 74.4% 22.7%
Asyst Technologies (ASYT) 1.4 (6.1) 1.6 1.3 0.7 (1.9%) 7.8% 99.6%
Newport (NEWP) 4.3 (46.8) 4.8 4.0 3.4 (17.8%) 22.0% 16.0%
ASM International (ASMI) 1.0 56.1 1.6 1.2 0.9 12.1% 34.7% 27.6%
Semiconductor Equipment 2.9 (244.9) 3.4 (10.9%)
*P/SG Ratio: Trailing 12 month (Price / Sales) / Growth ratio as of April 16, 2004.
**P/OPG Ratio: Trailing 12 month (Price / Operating Income) / Growth ratio as of April 16, 2004.

BRKS is one of the more reasonably priced names within the semiconductor equipment group. But given sustained high growth expectations priced into shares, investors would be prudent to limit exposure to minor position. We would continue to focus on ASM International (ASMI 21.75) for investors seeking a capital equipment play. ASMI has one of the broadest product portfolios, and despite having risen over 28% since we first spotlighted the company on Tech Stocks (October 14, 2003), remains one of the most attractively priced names within the group.--Ping Yu, Briefing.com

http://biz.yahoo.com/mu/story.html