Wall Street had a brief fling this morning, with delusions of granduer, but by the final hour, it was not meant to be. Stocks fell, led by Home Depot and Altria, on concern an increase in interest rates and oil prices may crimp consumer spending. Stocks initially rose after Hewlett-Packard said second- half revenue may exceed estimates and Applied Materials Inc.'s earnings and sales beat forecasts. They slipped after a Department of Energy report showing a drop in oil inventories sent crude oil to within 5 cents of a record in New York. Higher energy prices, along with concern that the Federal Reserve will start raising its benchmark interest rate next month, had sent the S&P 500 Index to its low for the year on Monday. The S&P 500 Index fell 2 points (-0.3%) to 1088, for its fourth decline in five days. The DJIA lost 30 points (-0.3%) to 9937. The Nasdaq, which gets 40 percent of its value from technology companies, was little changed, adding 0.35 to 1898. Each of the benchmarks had risen at least 1.3 percent earlier. Seven stocks rose for every six that fell on the NYSE. Some 1.5 billion shares changed hands on the Big Board, 4.2 percent more than the three-month daily average.
Top Stories . . . Cardinal Health, the second- biggest U.S. drug wholesaler, agreed to buy Alaris Medical Systems for about $1.62 billion in cash. The transaction would give Cardinal systems that deliver drugs intravenously and sales outside the U.S.
U.S. Treasury notes fell for a second day on concern accelerating inflation may lead the Federal Reserve to raise interest rates faster than investors expect.
Crude oil rose and gasoline futures surged to an all-time high after the Energy Department said U.S. stockpiles of the motor fuel increased less than expected.
SBC Communications. is facing the largest U.S. strike since 1997 after the union negotiating labor contracts for 100,000 workers rebuffed the telephone company's latest offer and called a four-day walkout.
An index of U.S. mortgage applications fell 12 percent last week as home purchases slowed for the first time in more than a month and loan refinancing dropped to the lowest level since early January.
Merrill Lynch, the biggest securities firm, picked Morningstar and BNY Jaywalk to provide independent research to its clients as part of the company's settlement with regulators over biased stock advice.
The NASD is targeting American Express's securities broker-dealer unit in connection with an allegation that it received kickbacks for marketing outside mutual funds, the company said in a regulatory filing.
Quotes of Note . . . ``While we have had good earnings reports for the first quarter and good guidance for the second quarter, the impact of interest rates rising overwhelms that. People fear that rates will rise quickly.'' Horacio Valeiras, who oversees $18 billion as CIO at Nicholas Applegate Capital Management.
Dividends of Note . . . Meanwhile, S&P 500 companies are expected to pay out a record $183 billion in dividends this year, helped by rising profits. Dividends and profits are some items lost in the geopolitical shuffle of late, but is still relevant.
Gurus . . . The Merrill Lynch survey of global money managers became the least optimistic in three years about economic growth. Cited was the prospect for rising rates, and a slow down in the Chinese economy. More than half the 280 fund managers polled said they expect the world's economy to expand in the next 12 months, down from 61% in April. Investors are still optimistic about profit prospects in Japan, but less so in Europe.
Mark Hulbert, who surveys the market gurus, says there are 11 market timers who have beaten a buy-and-hold approach over the past 10 years. Only three are outright bears, and the other eight are, in some degree, of bullishnesss.
Mortgages . . . Mortgage applications fell hard last week, even as 30-year mortgage rates dropped 11 basis points to an average 6.21%, according to the Mortgage Bankers Association. The index dropped 11.9%, the lowest level since the beginning of the year, while the refinancing index tanked by 16.8%, also the lowest since January, and the purchase index was off 8.1%, after seeing its 2nd highest level on record the week before.
Inflationary Situations . . . The most prominent feature in the price statistics so far this year has been increases in commodity prices and in the indexes where commodity inputs play a key role. They have appeared in three major areas.
Energy-price hikes have dominated public discussion recently. Actually, the rise over the past 12 months is less than it was a short time ago because the increases have occurred in several stages—in 2000, 2002, and 2003—raising the base level used for the current comparisons. Crude-energy prices (from the PPI) are up 12.6% over the past 12 months, intermediate-energy goods—partly processed items—are up by 6.4%—and finished-energy goods are up by 9.3%. At the consumer level, the increase from a year ago is 5.6%.
In the agricultural and food arena, the increases have been larger over the past 12 months—at least in pure commodities. Crude foodstuffs and feedstuffs (from the PPI) have risen by 26.3% over the past 12 months, intermediate foods and feeds are up 18.0%, and finished consumer foods have risen by 5.9%. At the consumer level, food prices have advanced by 3.4%.
Industrial commodities have also shown large advances. One measure of that comes from core crude goods in the PPI, which are up by 26.3% in April 2004 from April 2003.
A number of forces have been operating to produce these results. Faster demand growth around the world is one key element, and in several cases, there are supply constraints. From the U.S. perspective, increasing export demand has been important in the food/agricultural and industrial markets. Some speculative buying by hedge funds has been noted as well. Recently, a little flattening has occurred in agricultural and industrial commodities, as fear of a slowdown in China has emerged. One pattern worth noting, is that as the commodities move closer to end products, the rate of price advance is generally smaller, reflecting the fact that more labor and distribution costs are added to the total. These costs tend to be more stable than raw commodities.
More on Oil . . . Oil closed last week over $41.00 per barrel. With faster world growth and concern about the security of supplies, oil prices now are about $15.00 per barrel higher than they were last summer; natural gas, at $6.70 per MCF, is also well above expectations. A permanent $10.00 hike in oil prices could reduce GDP by about 0.7% because of the direct and indirect effect of diverting nearly $37 billion in purchasing power (3.67 billion barrels of imported oil in 2003 times $10 per barrel) into the hands of overseas producers. Additional but smaller impacts from higher prices for domestic oil and gas could add another 0.2%-0.5% to the reduction. So, GDP could be reduced by 0.9%-1.2%. Now with oil $15.00 higher, these impacts could be even more—about 1.5% of GDP, within a range of 1.2% to 1.8%.
…But The Impact Has Been Limited, So Far. I think the effect on the economy will not be as large as these figures imply for several reasons.
* Part of the price hike is a symptom of better economic performance; this is similar to the
way higher interest rates reflect greater strength.
* The increase in energy prices has unfolded gradually over the past year rather than as a
sudden spike.
* Even if the deduction were to be as much as my calculation, noted earlier, it would not end the expansion. Given the prospects for 4%-5% GDP growth, a 1.5% deduction would be
painful, but not enough to reverse the upward trend.
* The most visible energy price—gasoline—is at record highs in nominal terms, but adjusted for the rise in the Consumer Price Index, the real price is not at record levels.
Clearly, though, it would be much better for the economy if energy prices began to fall from
the current peaks. That would seem a reasonable prospect given the rapid ascent we
have experienced.
Financials . . . The WSJ reports, citing person familiar with the matter, E*Trade Financial is seeking to sell its string of 15K automated teller machines, which it hopes will raise between $80 million and $100 million. The company began shopping the network to potential buyers a few weeks ago, this person said to the paper. It would like to keep its name on the machines through a branding arrangement but is open to other options.
Golden West's monthly data for April showed loan originations of just under $3.8 billion, in line with March and at the upper end of the range for monthly volumes over the past year. The company's loan portfolio grew at a 23% annualized rate during the month, in line with growth in the first quarter, but slightly below the rate forecasted for the balance of the year. For 2005, analysts continue to estimate loan growth of 20%. The net interest margin narrowed by 3 bp during the month as the yield on earning assets fell by 4bp and funding costs fell by 1 bp. Continue to forecast margin compression over the course of the year (about 26 bp), but
expect loan growth to more than offset it. NPAs declined during April to 45 bp from 48 bp at the end of March, indicating credit quality remains very good with little need to build reserves. Analysts are maintaining 2004 estimate of $8.08 and our 2005 estimate of $9.16. Year-end 2004 price target remains $122, equivalent to about 2.6x estimated year-end 2004 book value and 13.3x estimated 2005 EPS.
Homebuilders . . . CSFB upgrades Hovanian to Neutral from Underperform, and downgrades M/I Homes to Neutral from Outperform, both based on valuation. Firm sees a higher degree of risk to valuation due to rising rates, and they expect order growth to decelerate in 2nd half 2004 and through 2005 (assuming the Fed continues to raise rates as projected) and this deceleration in volume would likely cause pricing power to decline to a more normalized level, potentially exacerbating the impact of higher raw material costs. Firm also cuts their targets on a number of stocks in the group.
Oil Inventories . . . This Week’s Inventory Report: For the week ended May 14, 2004, U.S. inventories increased 3.9 million barrels (mb). Commercial inventories increased 3.6 mb and the Strategic Petroleum Reserve (SPR) rose 0.3 mb
Compared with this time last year, total inventories (commercial plus SPR) are 83.1 mb, or about 5.5%, higher than last year. Commercial inventories are up 24.9 mb, and the SPR is up 58.2 mb. Although U.S. commercial inventories are still in the bottom quartile of their five-year range, total U.S. inventories (commercial plus SPR) are comfortably within the top half of their five-year range.
Crude oil inventories decreased 1.1 mb to 298.9 mb. Crude inventories have risen 29.9 mb, or 11.1%, so far this year and are now just below a 21-month high.
Gasoline inventories increased 1.2 mb versus last week and decreased 4.1 mb versus last year. However, the recent gasoline formulation changes in CA, CT, and NY (essentially substituting ethanol for MTBE) make comparing current gasoline inventories with prior years difficult, as ethanol is excluded from gasoline inventories while MTBE was included. When adjusted for this, we believe that gasoline inventories are only about 2.1 mb, or 1.0%, below last year's levels. Refinery utilization decreased 0.7 percentage points to 95.3% and we continue to believe that there will be adequate gasoline supplies for the summer driving season.
Gasoline production reached an all-time high for April at almost 8.69 million barrels per day, according to a monthly report from the American Petroleum Institute released Wednesday morning. That's an increase of 2.8 percent from a year ago. At the same time, petroleum deliveries -- a key measure of demand that includes gasoline and distillate fuel oil -- rose 4.8 percent last month from a year earlier, the report said. Meanwhile, the average price for a gallon of regular unleaded gasoline stood at $2.009, up from Tuesday's $1.999, according to the AAA's daily fuel gauge report. June unleaded gasoline is down 1.99 cents at $1.367 a gallon ahead of key supply data.
An oil price forecast for 2004 and 2005 is $30/bbl and $25/bbl, respectively. Analysts forecast that annual demand growth of about 1.6 million b/d over the 2004-2005 period will be broadly offset by a combination of higher non-OPEC production and a continued recovery in Iraqi
production. Analyst forecast that the "Call on OPEC ex Iraq" will average about 23.6 mbd in 2004-2005. This is about 2.0 mbd less than its recent production! The model assumes that OPEC ex Iraq cuts production about 1.0 mbd over the course of 2004 and averages about 24.5 mbd this year and next. Given these assumptions, worldwide commercial inventories are forecast to recover to the 60 days of forward sales range by late 2005, a level historically associated with about $20/bbl oil.
Oil & Gas . . . UBS upgrades Parker-Hannifin to Neutral from Reduce based on valuation; given that the Machinery stocks have receded over the last few weeks to more attractive valuations. The firm now believes that a market-weight position on the group is warranted, as more attractive valuations offset their expectation of earnings deceleration and weaker incremental margins this cycle.
Goldman Sachs upgrades PetroChina to Outperform from In-Line based on attractive valuation, a high dividend yield, and potential further upside from any additional disruptions that may lead to higher crude oil prices.
The WSJ's "Ahead of the Tape" column suggests that the rise in oil prices seems to be mostly a demand phenomenon, as the U.S. imports more oil than expected, thanks to increased economic activity. Global demand should grow 2.3%, or 1.9 million barrels daily, this year, estimates Dan Pickering of research firm Pickering Energy Partners. Along with strong global demand, there also are supply issues at work. Speculators in oil are demanding a terrorism and global-insecurity premium. At around about $40 a barrel now, investors are demanding compensation for the possibility that a terrorist attack could disrupt supply out of Saudi Arabia. Iraqi production could fall off even more if the situation deteriorates further. Mr. Pickering estimates that on a fundamental basis, oil is worth about $30 a barrel today. As demand rises, that fundamental value will rise over the next year to around $35 a barrel, he predicts. Meanwhile, inventories in the States are low ahead of the summer driving season. And the estimated excess supply of oil, around 2 to 3 million barrels a day in the ground in Saudi Arabia, can't be extracted immediately or cheaply. According to the article, this means energy stocks remain good buys. Shares of independent exploration and production company's are expensive, Mr. Pickering argues. But the integrated majors, such as BP and Exxon Mobil, are relatively attractive. And he says that the oft-predicted investment boom is finally coming and will help energy-services company's.
Metals . . . Smith Barney downgrades Alcan Aluminium to Hold from Buy and cuts their target to $45 from $54. The firm says the spin-off of the company's rolled products assets into a separate co creates considerable uncertainty, due to: 1) continued regulatory uncertainty, 2) duplicate overheads if it does not work, 3) initial lower returns on capital, 4) implication of a lack of real buyers for the assets, 5) questioning the logic of the original Pechiney merger, and 6) the likely loss of market share following a year executing the Pechiney deal, 4 months of integration, and now spin-off.
Food & Beverage . . . Anheuser Busch’s valuation is at its most compelling level in several years. Despite Anheuser-Busch’s (A-B’s) consistent earnings, BUD shares have underperformed beverage and consumer staples stocks over the past two years. BUD currently trades at an 18.5x forward P/E, approaching its lowest multiple in nearly a decade. Expect A-B to meet its 12% EPS growth targets for 2004 and 2005. Although some concerns exist about beer industry volumes and A-B’s competitive positioning versus Miller, A-B has many ways to achieve its earnings growth algorithm, including strong growth from A-B’s stake in Grupo Modelo and a potential launch of a low-carb line extension to its flagship Budweiser brand. Asset allocation issues are positive for beverages and Bud. We believe the beverage sector – especially consistent earnings growth stocks such as BUD – will benefit from the search for defensive investments during a time of market uncertainty. Reiterate an Outperform rating and $58 price target. Price target assumes that BUD trades at a FY05E P/E of 18.8x, barely above its current depressed FY04E multiple. Risks to our price target include failure to gain U.S. pricing, loss of U.S. market share, and underperformance at Mexican partner Grupo Modelo.
Retail . . . Moody's upgrade moves Gap one step closer to investment grade. While still below investment grade, upgrade by 1 notch to Ba2 highlights operational improvements and significant enhanced financial disciplines and signals opportunity for further upgrades should improvements prove sustainable. With shares trading only 11% above trough valuation levels (15.4x vs. low of 13.8x following 9/11), firm recommends purchase. While GPS' interest expense is reduced by 0.25%, the reduction is too small to change current EPS. However, firm continues to believe GPS could have roughly $0.01 positive impact on EPS should ratings agencies announce further upgrades.
Prudential downgrades Barnes & Noble and Borders to Neutral-Weight from Overweight; despite strong results from both company's over the past 12 months. The firm is concerned that the next 12 months will be more challenging. The firm notes that the company's face difficult Year over Year comps, they expect the Olympics and the presidential election to monopolize media time (thereby reducing traffic-driving book publicity), and they believe that weaker same-store-sales results will lead to reduced leverage, lessening the likelihood of earnings outperformance.
Piper Jaffray upgrades JC Penney to Outperform from Market Perform after the co's Apil Quarter report yesterday was significantly ahead guidance. Improvements were evident in all areas of the business. The improving trends in the apparel industry (pricing power AND higher demand) and the potential productivity gains in several merchandising departments warrant an upgrade at this time. Valuation is now attractive, with JCP trading in-line with its department store peer group.
Drugs . . . JP Morgan upgrades Pharmion to Overweight from Neutral, citing valuation as well as their expection of the FDA approval of Vidaza. The firm says that raised guidance of $51-$56 million still seems conservative, and they note that the co signed a distribution deal with Lipomed for thalidomide in Switzerland and Austria, which helps remove a potential competitor in other markets. Also, firm thinks the fact that the co is hiring sales reps for Vidaza before any formal notification from the FDA is a very strong signal the co thinks final approval (or at least a simple approvable letter) is likely before the PDUFA date of June 29, and since there will not be an FDA advisory panel for Vidaza, firm says this is another strong signal that the FDA has no issues.
Media . . . Rodman and Renshaw had noted that shares of TIVO have decreased by 23% during the last month. Firm states that given its brand, enhanced services/features suite, and strong subscriber growth. They believe this current weakness offers a buying opportunity (firms current target is $18). Firm expects co to beat their 1st quarter estimates (company scheduled to report 5/25) as channel checks show that DIRECTV has already reported 185K net adds in quarter. Firm had previously forecasted that TIVO would add 185K net new subscribers during the quarter, with DIRECTV accounting for 125K of those and TIVO stand-alone units accounting for the remaining 60k. Firm now believes Q1 net adds could equal 245K. As firm previously noted, DIRECTV will likely bring on an NDS DVR during 2005 - either as a replacement, or as second source. However, firm is inclined to believe that TIVO is likely to remain as a second source vendor.
Pacific Growth says Blockbuster quietly launched a UK-based online subscription service, potentially pressuring Netflix's shares short-term. According to firm, this news does not yet appear to have been widely disseminated to, or acknowledged by, the Street. Outweighing this launch. In the firm's view, are several pieces of very encouraging data about Netflix and its outlook that point to continued healthy demand for its offering and the possibility for modest upside to our 2nd quarter 2004 estimates. Accordingly, firm reiterates its Over Weight rating on NFLX and encourages investors to use any weakness created by the Blockbuster news as a buying opportunity.
Jefferies initiates coverage of Ask Jeeves with a Hold rating and a $39 price target based on DCF and relative valuation methodologies. With nearly 70% of revenues derived from Google, the stock is likely to be viewed as a proxy for a publicly traded Google. Risks include heightened competition for traffic, revenue concentration with Google, integration risk from ISH and a stock overhang.
The New York Times reports that Google is planning to release a file and text software search tool for finding information stored on a computer. Google's software, which several people with knowledge of the company's plans told the Times is expected to be introduced soon, will allow the co to offer tools to search the desktop, a domain now controlled by Microsoft. Upgraded technology for searching stored information on a PC will be part of Microsoft's upcoming version of its Windows operating system called Longhorn, the article said.
Soundview upgrades Fox Entertainment to Outperform from Neutral and raises their target to $33 from $30. The firm notes that the stock has approached trough levels, despite fundamentals that are not only strong but are gaining momentum in 2005. Moreover, while it is difficult to predict, firm believes that shareholders are likely to benefit if FOX is reabsorbed into NWS after the latter changes its domicile to the U.S.
Telecom . . . The WSJ reports that Verizon is expected today to announce plans to offer super-high-speed fiber connections to consumers in a fast-growing Texas community. The move marks the beginning of a multibillion-dollar technology rollout that could turn Verizon into a de facto cable company as it tries to better compete against cable companies. Starting this summer, the company will start offering local, long-distance and data services over a new fiber network in Keller, Texas. Verizon is expected to add video programming, though it hasn't decided which content provider it will choose. A 15-megabits-a-second service will be geared to heavy home-computer users such as video gamers, as well as small businesses. A 30-megabits-a-second service would be aimed only at businesses.
The WSJ reports that SBC faces a possible strike of 102K workers represented by the Communications Workers of America Union as soon as today. The union yesterday afternoon gave SBC a 24-hour notice of its plans to terminate its existing contract with SBC starting today at 1 p.m. EDT, after which its members can go on strike at will. SBC has been in talks with the union to sign a new labor contract since Feb. The two sides have been bickering over salary levels, health-care costs and pensions. In past telecom strikes, consumers still could make and receive phone calls, but billing or technical problems or installation of new services would run into delays. A strike at SBC could include all of the company's nonmanagement employees, including technicians, telephone operators, and sales reps. Talks continued early yesterday evening.
IT Services . . . Soundview upgrades Unisys to Outperform from Neutral and raises their target to $17 from $16. The firm believes there is an upward bias to estimates entering 2nd half 2004, as the co is involved in numerous service opportunities over the next 12 months, including the Homeland Security US-VISIT program, Check 21 legislation, Medicare/Medicaid, and follow-on work with the TSA.
EMS . . . Barron's Online highlights Jabil Circuit, which shares have outperformed Nasdaq by 21% since May 2003. And according to the article, Jabil may keep investors smiling: The continued recovery in electronics demand should keep its manufacturing facilities busy and its profits rising, and it's expanding in areas like medical devices, too. Chief information officers from Fortune 1000 company's polled by Goldman Sachs in April expect tech spending to rise by 2.4% this year. That's prompting company's like Cisco, whose inventory rose by 20% over the past three months, to boost their orders to Jabil. Cisco's stocking up "tells me that Cisco and Cisco's customers are comfortable with spending," says Kevin Wagner, an analyst at Banc One Investment Advisors. Royal Philips Electronics announced last month that sales for the year were improving, and Hewlett-Packard has reported a recovery in demand, as its printer business remains strong. Philips, H-P and Cisco comprised 42% of Jabil's sales. Deutsche Bank expects Jabil to add 22 new customers and $1 billion in revenue in 2004, more than a 20% increase in sales. Jabil also is winning more profitable jobs, such as making and assembling industrial and medical products and plans to expand its operations this year in low-cost areas like China and India, where it already has about 70% of its manufacturing facilities. Needham expects Jabil's operating margins to rise to 4.5% in F05, from 3.8% in F03. In addition, Jabil's already healthy balance sheet is improving as it cut its debt-to-capital ratio to 15% from 28% by calling some of its debt in April. Jabil now has modest debt and $900 million in cash. And the stock fetches a moderate discount to Jabil's historic 5-year median P/E of 31.4x projected earnings.
Storage . . . Network Appliance is upped to Buy from Hold at Needham. The firm believes that NTAP is executing very well and prospects remain positive; co is evolving beyond its NAS focus with value added software, services, SAN support, near-line storage and IP-based storage. Needham's industry checks regarding its performance and prospects have been virtually all positive. Management appears particularly strong. Investors should monitor possible longer-term competitive pressure that could increase from Microsoft (W2003) related products at the low-end and EMC from above. NTAP remains expensive but recent tech pull back provides some room for appreciation. Price target of $25 is based on 38x firm's 2006 estimate.
ThinkEquity upgrades Network Appliance to Overweight from Equal-Weight following 4th quarter results. The firm anticipates that the stock will face some pressure due to investor concerns over earnings leverage, but says they would be buyers on weakness, citing the company's: 1) strong position in ATA-based storage, 2) channel expansion execution, and 3) potential for operating leverage; firm believes the company's top-line momentum, coupled with the discretionary nature of the spending at the source of these concerns, sets the stage for both near-term upside and longer-term earnings acceleration. Target is $24-$26.
Network Equipment . . . Bank of America expects Ciena to make April Quarter numbers when it reports tomorrow morning, but the stock may be pressured by management transitions and hints of lost optical sales. The optical market remains hyper-competitive and marginally profitable. Industry contacts indicate that senior level sales employees will be released/leave the co, which would be a negative for the stock. Firm maintains its Neutral rating.
Pacific Growth comments that the CWA Union has given SBC 24-hour notice of a possible walkout. The union could strike as early as Wednesday morning. Within firm's telecom group, ADTRAN has the highest revenue exposure to SBC at approx 22% of last quarter's revenue. Considering ADTN's products are used to support very high margin data services, firm expects any disruption to be minimal.
Ciena has selected Digital Lightwave test instruments in support of next-generation SONET and SDH research and development. Co says this sale marks a milestone for the Digital Lightwave NIC product. Continuing development has enabled the NIC to achieve acceptance in R&D and manufacturing applications.
Legg Mason initiates Research in Motion with a Buy and $124 target. Recent results indicate a strong upturn in the business with subscriber momentum building as a result of the company's success in building reseller relationships with major wireless service providers worldwide. The company enjoys a healthy first-mover advantage, a strong IP portfolio, and valuable brand name recognition in the marketplace. The firm believes the company has at least two years of dramatic top-line growth as the market leader before any of its competition can equal its subscriber net add rate.
.Legg Mason initiates Ericsson with a Buy and $31 target and Nokia with a Hold.
Semiconductor Equipment . . . UBS downgrades Applied Materials, ATMI, Novellus, Veeco, and Varian Semi to Neutral from Buy, as they are lowering their view of the Semi Production Equip group to Neutral. The firm says the stocks remain primarily trading vehicles with waning sentiment and momentum, and also notes that: 1) the maximum Year over Year growth in S.P.E. industry orders will occur in the June quarter (and was a March quarter event for some company's), 2) the summer will show lackluster order growth, 3) momentum in upwards revisions to consensus EPS estimates likely peaked in January, and 4) the remaining margin expansion for most company's is less than what they have already seen to date.
Analysts are mostly positive on Applied Materials following strong results that beat consensus and met the more aggressive upper end of estimates. Several firms pointing out the fact that six customers placed orders for over $100mm vs. 2 in the previous quarter and 20 customers placed orders for $10-50mm vs. 13 in the previous quarter. This highlights the breadth of the recovery and validates the participation by mid-size and smaller players in capacity expansion. Lehman out noting that this was the first time in quite a while in which there were that many large orders in one quarter. The anxiously awaited July quarter order guidance came in at 5-10% ($2.320-$2.430 billion), which was pretty much in-line with consensus estimates and higher than the 0-5% estimate of more bearish analysts. JP Morgan out positive saying they expect incremental 300mm tool demand to drive bookings growth rate re-acceleration in upcoming quarters with a bias to Japan, and thus their 4th quarter 2004 bookings estimate is $2.790 billion (up 15%) and our 1st quarter 2005 estimate is $3.210 billion (up 15%). On a more negative note UBS is downgrading the SFE Sector view to Neutral: Applied Materials, ATMI, Novellus, Veeco and Varian Semi all go to Neutral from Buy as they believe that the maximum Year/Year growth in SPE industry orders will occur in the June quarter (and was a March quarter event for some companies), and that summer will evidence lackluster order growth; earnings momentum also appears to have slowed.
Semiconductors . . . Digitimes reports spot prices for DDR DRAM continued eroding as buyers stuck to the sidelines. According to the article, DDR has been under severe selling pressure over the past month due to concerns over seasonal pricing downtrend and sluggish demand. Trading volume has been lackluster, suggesting traders' lack of confidence toward pricing. The market has not shown any signals that spot prices may rebound soon. Chipmakers have reduced allocation to the spot market and traders have sold off inventory they piled on speculation during the previous pricing upswing. DRAMeXchange remains cautious with a negative bias on the near-term spot pricing. 256Mbit (32Mbitx8) DDR should slide to US$4.5 and reach bottom in June.
Boxmakers . . . Hewlett-Packard reported strong revenue and in-line EPS for its 2nd quarter after the market close yesterday. $20.1 billion (3% Quarter/Quarter, 12% Year/Year) in sales was $900 million ahead of estimates and $800 million better than consensus, while EPS of $0.34 was $0.01 better than $0.33 estimate and in-line with the Street. Currency added 8 pts. of growth Year/Year. Revenue upside was balanced across divisions, though IPG (10.5% Year/Year) and Services (15% Year/Year) struck us as most impressive relative to our expectations. Cash flow from operations of $2.6 billion was also stellar, exceeding net income by $1.6B and up ~$2.5 billion Quarter/Quarter. Op ex control was impressive at 18.5% of sales, 60 bps better than we had modeled. All divisions operated in the black, though PSG made a modest 0.75% margin. While better than a loss, we question where the leverage is to drive the business to target rates of 3-4%. Management boosted its second half revenue outlook to a range of $39.7-40.7 billion, while blessing $0.74 in EPS; analysts are holding 3rd quarter EPS est. of $0.30 and boosting revenue $500 million to $19.1 billion. Analyst continue to believe the shares represent good value in the low-$20 range, particularly given the company's improvement in operating consistency. Still, IPG bears an inordinate burden and we believe Neutral Weight is the right rating at this time.
CIBC upgrades Hewlett-Packard to Outperform from Sector Perform after "stellar" Q2 results. The firm says that the company is one step ahead of expectations: it has secured balanced mix, is displaying supply chain expertise, and is up-selling despite rising component costs and the lull in retail market in 1st half 2004. Also, firm says the reversal of the 1st quarter dip in services margins augurs 2nd half 2004 upside. In addition, assuming that HPQ continues to execute at least in-line with expectations, firm believes the stock's valuation gap is overly harsh and likely to close, moving through a long-term cyclical tech upswing from which the co remains a primary beneficiary as a market share consolidator. Target is $30.
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