From Briefing.com: 6:17PM Wednesday After Hours prices levels vs. 4 pm ET: Market catches its breath after today's broad-based, late-day rally. Presently, the S&P futures, at 1144, are 2 points above fair value, and the Nasdaq 100 futures, at 1495, are 2 points below fair value. Tonight's extended session has been fairly busy - with a wide array of companies issuing earnings reports or guidance.
The below table lists the most influential developments of the evening.
Company Stock Move Reason for Move AT&T (T) 16.41 unch Long distance provider cuts its FY04 (Dec) revenue outlook citing ongoing pricing pressure, recent changes in FCC policies, and new product initiatives; Company now sees revenues of $29.5-30.5 bln versus $31-32 bln earlier; Adds that FY04 operating income should be $1.0-1.4 bln; Earlier today, AT&T said it would no longer seek new residential customers in 7 states after the Bush administration decided not to appeal a court decision that threw out steep discounts to long-distance carriers
Bed Bath & Beyond (BBBY) 36.65 -0.98 (-2.6%) Home-oriented retailer delivers its 48th straight quarter of earnings growth; Q1 (May) EPS surged 42% to $0.27 (consensus of $0.25) on revenues that climbed 23% to $1.1 bln (consensus of $1.1 bln); Same store sales rose 5.1% on top of a 4.4% increase last year; Briefing.com commented on BBBY's lackluster performance over the past year in today's Looking Ahead column and said that 'an in-line report without any upward revision to the full-year outlook isn't likely to be too inspiring for the market'
Gilead Sciences (00C0) 66.84 +1.69 (+2.6%) Anti-viral biotech company is added to the S&P 500, taking the place of Bank One (ONE), which is being acquired by JP Morgan (JPM) in a transaction that is expected to close around June 30; Last week, Morgan Stanley started coverage of GILD with an Overweight rating, saying that the Street had not focused on the Viread-Emtriva (2 HIV drugs) co-formulation potential; As a side note, the S&P also announced Dell (DELL) would take the place of ONE in the S&P 100 tonight
Micron (MU) 13.93 -0.53 (-3.7%) Semiconductor company reports a profit in 3Q04 (May) after delivering a $0.53 loss a year ago; EPS checked in at $0.13, $0.04 better than the Reuters estimate, due to improvements in selling prices for its semiconductor memory products; Revenues, however, missed the market's expectation of $1.14 bln at $1.12 bln; Traders have used the shortfall as a reason to take profits from today's +4% move
OmniVision (OVTI) 17.89 +1.83 (+11.4%) Mobile device chipmaker tops the Q4 (Apr) Street EPS estimate by $0.02 but misses on revenues - sales came in at $99.7 mln versus the $101.7 mln consensus; Company reaffirms the Q1 (July) guidance it issued on June 9 (EPS of $0.29-0.31) when it said it was considering restating financial results for certain quarters of FY04 (Apr) and, possibly, FY03; Stock pops tonight as management said - after an independent investigation - no evidence of wrongdoing was found Tomorrow, the market will finally have some economic data to contend with after a week of no reports. Weekly initial claims and May Durable Orders are some of the more notable reports on the agenda.
For more detail on these, and other developments, be sure to visit our Stock Market Update and Daily Sector Wrap. -- Heather Smith, Briefing.com
Close Dow +85.50 at 10479.57, S&P +9.63 at 1144.04, Nasdaq +26.83 at 2020.98: The market spent the better part of today's session bouncing around unchanged on light volume as a general lack of conviction kept trading range-bound... The market was really just looking for an excuse to trade sideways in front of next week's FOMC meeting...Tobacco stocks fared well, following an upgrade to R.J. Reynolds (RJR, +3.87%) this morning, while upgrades to Goldman Sachs (GS, +1.35%) and SouthTrust (SOTR, +1.53%) gave the banking industry a boost... Shares of FedEx (FDX, +2.22%) outperformed all session after revising guidance and posting earnings in-line with expectations and added support to the transportation sector...Crude oil prices shed -1.78%, as supply concerns eased due to the resumption of Iraqi exports and a rise in inventories...Overall, the market looked poised to close relatively flat...At least until the last hour of trading where the Nasdaq spearheaded the late-day advance as shares of computer-related stocks like Intel (INTC, +1.71%) and Cisco (CSCO, +3.23%) added to earlier gains...At the closing levels, the Nasdaq is at its highest closing level in 2-weeks while the Dow and S&P have jumped to levels not seen since April...
Tomorrow's durable goods data is the next hurdle for a market running on empty as Briefing.com expects a 2.0% increase against a consensus of 1.5%...Initial claims shouldn't carry too much weight now that chatter of a "jobless recovery" have died down...The Help-Wanted Index usually draws little attention while an expected jump in new home sales could give materials a boost tomorrow...NYSE Adv/Dec 2273/978, Nasdaq Adv/Dec 2059/1062
2:23PM intervoice (INTV) 11.05 -2.75: InterVoice published Q1 EPS of $0.08 on revenue of $41.916MM (+9.2% Y/Y) vs. Reuters Research consensus at $0.09 on $43.38MM.
Backlog increased 46.4% Y/Y to $43.2MM. Book-to-bill was 1.6.
The following table shows sales, gross margin and Y/Y variance by revenue segment. Segment Revenue ($ in MM) % Sales Y/Y Growth (%) Gross Margin (%) Y/Y Variance (bps) Solutions 21.145 50% 17.3 43.3 553 Services 20.771 50% 2.0 65.9 (105) Total 41.916 100% 9.2 54.5 125 Gross margin increased 125 bps Y/Y to 54.5%. Operating margin increased 372 bps Y/Y to 11.8%.
Guided for Q2 revenue of $41-47MM (-1.5% to +13.0% Y/Y) vs. Reuters Research consensus at $0.10 on $44.82MM.
The following table shows price multiples and Y/Y growth rates for INTV compared against industry comps within the communications equipment and software & programming groups. Company *P/SG **P/OPG P/S Y/Y Rev Growth (%) TTM 2004E 2005E TTM 2004E 2005E InterVoice (INTV) 1.8 22.2 2.9 2.7 2.4 5.8 10.1 12.6 Comverse Tech (CMVT) 2.5 n/a 4.7 3.9 3.5 14.4 20.4 11.6 Lucent (LU) 1.4 26.3 1.8 1.7 1.6 (13.0) 5.2 5.7 Nuance Comm (NUAN) 1.4 (15.3) 3.1 2.8 2.3 20.4 15.0 23.2 Communications Equipment 2.0 31.6 2.7 n/a (3.3) n/a Software & Programming 2.8 34.3 5.1 7.0 Blended 2.4 32.8 3.6 1.0 *P/SG Ratio: Normalized trailing 12 month (Price / Sales) / Growth ratio as of June 18, 2004. **P/OPG Ratio: Normalized trailing 12 month (Price / Operating Income) / Growth ratio as of June 18, 2004. INTV shares trade at a modest discount to in-line with peers and, based on our inverted EVA/DCF model, are priced for sustained lower 20% revenue growth from F07 assuming 15% operating margin; implied growth rate falls to upper teens assuming 19% operating margin.
As noted in Tech Stocks, service providers and enterprises are beginning to invest in network upgrades after a difficult three years, reflecting an improving global economy. Demand for voice automation solutions is expected to accelerate over the next few years. Speech is the natural user interface and speech-enabled applications is becoming an increasingly important and integral element to the way people access, manipulate and transmit information as companies and carriers migrate to converged networks and implement wireless/mobile applications. The market for voice automation solutions including IVR (interactive voice response) applications, speech recognition and voice authentication is expected to grow at a CAGR of approximately 30% through 2008 according to Datamonitor.
Demand for capital equipment is by its nature subject to volatility. As a result, as we commented in the Q3 review, Story Stocks, December 19, 2003, INTV shares are likely to be volatile over the near-term. Nevertheless, we think investors will be well rewarded because 1) INTV commands one of the best positions at the intersection where voice, data, fixed-line and wireless applications meet and will enjoy growing demand for it's solutions; 2) industry growth supports the revenue expectations priced into shares; and 3) management has made good progress in holding down costs, suggesting opportunities for substantial margins improvement as sales ramp.
INTV shares are up over 13% since the Q3 review despite today's 20% pullback. We would take advantage of today's weakness.--Ping Yu, Briefing.com
1:45PM Federal Express (FDX) 79.85 +1.42: Transportation stocks have been one of the strongest groups in the past 3 months - up more than 12% against a broader market gain of +4%. The sector's cyclical characteristics and the economy's improving stature have made for an attractive investment premise - leading traders to bet on the strong fundamental outlook. Federal Express (FDX) has probably been one of the best transportation wagers of this period as shares have surged 16% and the company has raised guidance on multiple occasions.
Management issued better than expected EPS forecasts for 4Q04 (May) three separate times. The below table sums up the revisions:
EPS Guidance Consensus Estimate (at the time) March 17 $1.15-1.25 $1.15 April 8 $1.20-1.30 $1.22 June 10 $1.33 $1.25 Each time Federal Express cited 'strong demand across [its] entire portfolio of services, both domestic and international.' The latter has been a true growth driver for the company, ramping steadily higher at the FedEx Express segment (66% of revenues). Its gains have fallen directly to the bottom-line, due to the higher margins international carries and the company's cost cutting efforts that began last year.
In Q4, FedEx Express posted a 38% rise in operating income, to $407 mln, and a 170 basis point increase in operating margins, to 8.6%. International Priority revenues climbed 22% as revenue per package, average weight per package, and average daily package volume all grew. Total revenues for the company jumped 21% - their strongest quarterly rate since September 1997 - to $7.04 bln (consensus of $6.80 bln) and EPS expanded 45% to $1.33 (consensus of $1.33).
Federal Express continues to see room for meaningful EPS growth as it anniversaries its headcount reductions, and pegged 1Q05 (Aug) earnings at $0.90-1.00 per share (year/year growth of 48-64%; consensus was set at $0.80). Its first forecast for FY05 (May) was similarly upbeat - EPS up 19-25% to $4.20-4.40 (consensus of $4.29).
Briefing.com recommended investors purchase FDX in our review of its 3Q04 (Feb) report (Story Stocks, March 17), and shares have advanced 11%. We would advise some profit-taking from this move, but would recommend investors retain an overweight position in their portfolios. The company is experiencing its best results in its largest segment (FedEx Express) and is also calling for an even better rate of EPS growth in Q1. The stock remains a solid play on the accelerating economy - benefiting from strong global demand that shows no signs of slowing down. -- Heather Smith, Briefing.com
11:52AM 3Com (COMS) 6.56 -0.30: 3Com published Q4 results after the close on Tuesday. EPS was ($0.05) on $183.345MM (+6.7% Y/Y) vs. Reuters Research consensus at ($0.10) on $174.18MM.
Enterprise networking products revenue increased 22% Y/Y but product revenue from the old connectivity business continues to decline. Wireless, voice, and security products revenue increased approximately 39% Q/Q but modular switches and routers sourced from the Joint Venture and sold under the 3Com brand declined approximately 15% Q/Q. Stackable switching products sold through volume channels to the small and medium business marketplace increased in Q4 and is expected to continue to pickup due to improved product competitiveness and enhanced channel terms and conditions.
Americas revenue increased approximately 35% Q/Q driven by connectivity, fixed configuration switching and voice products. EMEA revenue declined 6% Q/Q. Asia-Pacific revenue declined 12% Q/Q, due to a decline in Huawei/3Com joint venture and connectivity product sales.
Gross margin increased 517 bps Y/Y to 41.4% due to gains from outsourcing of manufacturing, improved product mix, higher volumes and a $3MM gain on the sale of manufacturing equipment. Operating margin improved to (2.8%).
Guided for Q1 revenue to be flat to up slightly Q/Q. Gross margin is forecast to be 40% in Q1. Operating expenses are expected to be approximately $90MM per quarter over the next few quarters. Reuters Research prints Q1 consensus at ($0.08) on $176.02MM; F05 at ($0.19) on $780.53MM (+13.1% Y/Y).
Management has made substantial progress in restructuring company but effort falls short of what is needed to reignite investor interest in shares. The company's cost structure is still high relative to sales level. Management needs to be more aggressive in taking out expenses and to accelerate sales momentum. Shares trade at a premium to peer group and, based on our inverted EVA/DCF model, are priced for sustained lower 40% revenue growth from F06 assuming 10% operating margin.--Ping Yu, Briefing.com
9:30AM FSI Int'l (FSII) 7.30: FSI Int'l reported Q3 results after the close. The designer and manufacturer of microelectronics fabrication equipment, including etching/surface conditioning and microlithography systems, printed EPS of $0.13 on $36.309MM (+86.7% Y/Y) vs. Reuters Research consensus at $0.00 on $29.70MM.
The company received orders totaling $32.3MM. International customers contributed approximately 58% of orders.
Gross margin increased 1,781 bps Y/Y to 53.5%, partly due to utilization of $1.8MM of previously written down inventory. Operating margin improved Y/Y from a loss to 4.9%.
Guided for Q4 EPS of $0.03-0.07 on $33-36MM (+48.9-62.4% Y/Y). Orders are expected to be $30-35MM, primarily for surface conditioning products. Upside to orders guidance if the company closes on all of the multi-system orders expected in August. Management also expects follow-on orders for POLARIS systems under the company's refresh program.
Gross margin is expected to decline to 43-46% due to lower utilization of previously written down inventory, change in the revenue mix, and the initial placement of MAGELLAN tools sold at discounts in order to obtain initial placement at strategic customers.
The following table shows price multiples and Y/Y growth rates for FSII compared against the semiconductor capital equipment group. Company *P/SG Ratio **P/OPG Ratio P/S Y/Y Rev Growth (%) TTM 2004E 2005E TTM 2004E 2005E FSI Int'l (FSII) 2.1 (15.1) 2.0 1.9 1.2 6.9 42.3 23.8 ASM International (ASMI) 0.7 10.0 1.2 0.9 0.8 23.1 47.6 16.8 Mattson Technology (MTSN) 2.7 (88.3) 2..8 1.8 1.5 (29.1) 41.6 25.3 Semitool (SMTL) 2.3 (22.0) 2.6 2.1 1.3 (13.1) 22.3 74.6 Semiconductor Capital Equipment 2.1 85.5 2.9 n/a (0.2) n/a *P/SG Ratio: Normalized Trailing 12 month (Price / Sales) / Growth ratio as of June 18, 2004. **P/OPG Ratio: Normalized Trailing 12 month (Price / Operating Income) / Growth ratio as of June 18, 2004.
Shares trade at a discount to peers and, based on our inverted EVA/DCF model, are priced for sustained lower 20% revenue growth from F06 assuming 15% operating margin. Short-term model calls for 45% gross margin, R&D at 15% of sales, SG&A at 20% and operating margin at 10%. Long-term goal is to get to 50%+ on blended gross margin. Surface conditioning product gross margin is already north of 50%, suggesting business is capable of getting to management's long-term target provided the company sustains surface conditioning revenue north of $25MM per quarter. Management pegs the immersion cleaning segment opportunity at approximately $1.6B. Incumbent competitors are strong. Limited upside unless management is able to materially accelerate sales and/or expand operating margin above the 15% rate reflected in our model.--Ping Yu, Briefing.com
8:59AM Ratings Briefing - GS : Wachovia Securities upgrades Goldman Sachs (GS 90.60) to Outperform from Market Perform to reflect a broader call on the brokers as well as Goldman specifically. Broadly, the firm believes M&A is beginning to pick up again, fixed income is stronger than initially thought, and GS shares are simply becoming more attractive. Wachovia has raised its 2004 and 2005 estimates to $8.90 and $8.56 to reflect better fixed income trading, security service revenue, and modestly lower costs. Firm's full-year 2004 and 2005 ROE estimates are now 20% and 16%, respectively. The valuation range is pegged from $103 to $108.
What It Means:
At Wachovia, an Outperform rating means the stock appears attractively valued - the total return will exceed that of the market over the next 12 months. Why the Call Should Move the Stock The upgrade is a bit of a contrarian call in the sense that the brokerages have been out of favor since March (GS itself has given back 15%). Conventional wisdom has been that the group will underperform in the rising interest rate environment. Wachovia's ratings change takes that into account (noting that shares have become more attractive as a result of the pullback) but notes that banking conditions have not become that bad. At most of the banks, fixed income trading has put up stronger than expected results, and capital markets have experienced solid deal flow. Goldman's Q2 (May) report yesterday serves to underscore those points. Fixed income revenues only dropped 10% from Q1's (Feb) record figure. Revenues from equities were unchanged despite the lackluster stock environment. Investment banking revenues jumped 25% sequentially as Goldman retained its number one position in M&A, and number two rank in worldwide equity offerings, public stock offerings, and IPOs. The stock opened slightly lower yesterday, but then staged a late-day reversal for a 2% advance - demonstrating relative strength to the market. GS is trading near the low-end of its 3-year historical P/E range (11.1x-23.5x) at 11.5x forward earnings. This is only a slight premium to its peer group average of 11.0x. GS also trades at a price-to-book multiple of 2.0x - again, only slightly above the industry average of 1.8x. GS generally trades at much higher multiples relative to the space given its clout and leadership. Sidenote: GS is a holding in our conservative portfolio based on our belief it is well-suited for a pick-up in M&A, equity issuance, and asset management income. Briefing.com wrote a Story Stock on Goldman's Q2 report yesterday, and also profiled GS as a bullish trade on our Swing Trader column (a service for Platinum subscribers). -- Heather Smith, Briefing.com
1:21PM Seagate Tech files patent infringement complaint against Cornice, Inc (STX) 13.98 +0.04: Co announced that it has filed a patent infringement lawsuit against Cornice, Inc. in the U.S. District Court for the District of Delaware. STX' lawsuit against Cornice asserts infringement of six U.S. patents that relate to several areas of disc drive technology. As part of this lawsuit, STX is seeking monetary damages and a permanent injunction that bars Cornice from making, using, importing, offering to sell, or selling the allegedly infringing products in the U.S..
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