From Briefing.com: 6:31PM Wednesday After Hours prices levels vs. 4 pm ET: The first night of June quarter reports has not been kind to bullish-minded investors, as after hours trading has plunged on a number of disappointing results. Alcoa (AA) missed consensus estimates, Yahoo! (YHOO) fell short of whisper numbers, and Siebel Systems (SEBL) issued an earnings warning. Presently, the S&P futures, at 1112, are 5 points below fair value, and the Nasdaq 100 futures, at 1437, are 19 points below fair value.
The below table lists the evening's most notable developments: Company Stock Move Reason for Move
Alcoa (AA) 31.79 -0.98 (-3.0%) World's largest aluminum maker falls short of Wall Street's Q2 (June) estimates despite a large increase in aluminum prices - the second quarter in which this has happened; Alcoa reported a 70% increase in EPS, to $0.46 (consensus of $0.48), and an 11% rise in revenues, to $6.09 bln (consensus of $6.11 bln); Investors have taken profits from AA's 9% advance since early May as the company's miss suggests execution problems
Altria Group (MO) 49.65 +0.35 (+0.7%) A federal judge denies the tobacco industry's argument that it was shielded from federal racketeering charges by a 1998 settlement with US states; The US Justice Dept has accused companies like Altria of deliberately misleading the public about the risks of smoking and is seeking $280 bln in claims; In today's ruling, a federal court said Altria could not use the above settlement as a defense at a trial that is supposed to begin Sept 13
Genentech (DNA) 55.18 +1.28 (+2.4%) Biotech giant matches the Reuters Estimates EPS consensus of $0.19 on revenues that jumped 41% to $1.13 bln (consensus $1.065 bln) in its Q2 (June) report; Genentech goes on to top the Street's forecasts in 3 out of its 4 major drugs; Company now expects FY04 (Dec) EPS to rise 25-33% (versus 20-25% earlier) to $0.75-0.80 (consensus of $0.79); Briefing.com has recommended DNA as a play on the biotech space for over a year now - in response to its approval of colon cancer drug Avastin
Siebel Systems (SEBL) 7.77 -1.44 (-15.6%) Software maker warns for Q2 (June) - following in the footsteps of PeopleSoft (PSFT) today, and JDA Software (00C0) and Veritas (VRTS) yesterday; Siebel said the shortfall was due to delayed purchases on the part of several customers; Company now expects software license revenues to be about $95 mln, which it dubbed 'disappointing;' The entire software space is weak again tonight despite its pullback over the past 2 sessions
Yahoo! (YHOO) 28.73 -3.87 (-11.9%) Internet company defies the Street's whisper numbers that called for Q2 (June) upside, and instead merely meets profit expectations ($0.08) and misses sales expectations ($609.1 mln versus the consensus of $611.7 mln); Management's Q3 (Sept) and FY04 (Dec) revenues guidance was similarly lackluster (weighted towards the low-end of estimates); Outlook and report has raised concerns about Yahoo!'s position ahead of Google's IPO; Other internet portals (AMZN, MAMA, LOOK, EBAY) have taken a hit
Tomorrow, June same store sales will continue to roll in before the market opens (see tonight's In Play page for a list of early releases), along with one piece of economic data: weekly initial claims.
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 +20.95 at 10240.29, S&P +2.12 at 1118.33, Nasdaq +2.65 at 1966.08: The market held its head above water for most of the session, finishing with modest 0.1-0.2% gains... Today's move higher was largely a response to the last three sessions of straight losses - buyers re-emerged and targeted some of the hardest hit areas like technology... However, the conviction behind such efforts was weak - as evidenced by the split market internals at the NYSE and Nasdaq... As a result, the major indices were unable to put together a sustainable rally and the Nasdaq and S&P 500 alike finished below their 50-day simple moving averages... Selling in one notable area of tech - software - held the Composite back as the space suffered from warnings from JDA Software (JDAS 10.99 +0.86) and PeopleSoft (PSFT 17.10 +0.28)... Blue chip areas were largely mixed for the day - financials falling behind due to concentrated selling in brokerage, but materials, energy, and health care climbing higher...Tonight, after the close, Alcoa (AA 32.70 +0.72), Genentech (DNA 53.78 -0.88), and Yahoo! (YHOO 32.63 -0.59) will report their Q2 (June) numbers... SOX +1.1, NYSE Adv/Dec 2028/1248, Nasdaq Adv/Dec 1428/1632
2:28PM Genesis Microchip says ITC to conduct review in co's patent infringement case (GNSS) 12.99 +0.51: Co announced that the U.S. International Trade Commission (ITC) will review certain portions of its judge's initial determination regarding GNSS's patent infringement case against MStar Semiconductor, Media Reality Technologies, and Trumpion Microelectronics. The ITC judge previously issued initial determinations that MStar, MRT and Trumpion each infringe GNSS's U.S. Patent No. 5,739,867 ('867 patent), but that MStar and MRT do not infringe U.S. Patent No. 6,078,361 ('361 patent). The '361 patent was not asserted against Trumpion.
3:23PM Applebee's (APPB) 24.49 +1.70: The market is always a little fearful of large restaurant promotions - just look at Red Lobster's 'World of Crab' all-you-can-eat promotion which precipitated an earnings warning last summer - and Applebee's probably just wanted to put investors' fears to rest with its encouraging earnings update last night. Despite the higher costs associated with its Baby Back Ribs promotion, the casual diner said Q2 (June) EPS should rise 17-20%, to $0.35-0.36 (consensus of $0.35) and FY04 (Dec) EPS should increase 24-25% to $1.36-1.38 (consensus of $1.37) - both due to the strength of sales year-to-date.
In its press release, Applebee's announced that June system-wide comparable sales increased sequentially, to 6.8%, on top of a 7.1% gain last year. Q2 system-wide same store sales are now projected to come in at up 6.8% for their 24th consecutive quarter of comparable store sales growth. Applebee's strength - especially as other restaurant operators post slower rates of growth - indicates that it is stealing market share from competitors.
Applebee's has long been a leader in the dining industry, and its most recent strategic initiatives serve to underscore its level of innovation. The company has long re-vamped its product offerings, with its current menu only boasting 20% of the same offerings twenty years ago. Management's Curbside-To-Go program has been a success in boosting takeout entrees (which carry higher margins due to lower labor inputs) and it partnership with Weight Watchers (WTW) should pull in more of the health-conscious crowd. Just launched in May, the Weight Watchers menu is already emerging as a revenue driver.
Shares have received an impressive 8% bid off the business update - an impressive move, but one that also stems from APPB's 12% decline since April. Briefing.com has been positive on the stock for some time (with our last update April 29 on Story Stocks, ahead of its 3:2 stock split on June 16), and we would still encourage investors to maintain exposure to APPB. The stock trades a 17.9x estimated FY04 earnings - a slight premium to the S&P 500's forward P/E multiple (17.1x) but appropriate considering the company's faster rate of EPS growth (24-25%) as compared to the market's (21%). -- Heather Smith, Briefing.com
1:18PM Ascential Software (ASCL) 11.97 -2.05: Ascential Software lowered Q2 guidance. Pro-forma EPS is expected to be $0.04-0.05 on revenue of $63.5-64.5MM. Reuters Research prints consensus at $0.10 on $66.33MM. Q3 revenue is anticipated to be flat with Q2. Management forecast full year revenue at $255-265MM (+37.5-42.8% Y/Y) vs. consensus at $0.44 on $269.29MM.
The company did not close on six deals totaling approximately $4MM during the quarter. Two of the deals have since closed. License revenue is expected to be $24-25MM. Partners contributed approximately 50% of license revenue. Maintenance renewals are running in the 97-98% range. Service margins are tracking to recent performance.
The company is seeing lengthening sales cycles due to increased competition as customers spend more time evaluating products and assessing ROI, but average selling prices for new account licenses are beginning to trend higher, with Q2 ASPs up 5% Q/Q and 10% Y/Y.
The following table shows price multiples and Y/Y growth rates for ASCL compared against the software & programming and computer services groups. Company *P/SG Ratio **P/OPG Ratio P/S Y/Y Rev Growth (%) TTM 2004E 2005E TTM 2004E 2005E Ascential Software (ASCL) 1.5 (64.9) 3.9 3.1 2.7 65.9 45.2 15.2 Business Objects (BOBJ) 1.2 37.0 2.9 2.0 1.8 41.6 74.7 11.8 Cognos (COGN) 2.9 27.8 4.4 4.0 3.6 (14.6) 13.7 11.4 Group 1 Software (GSOF) 1.4 18.9 2.9 2.7 2.3 13.8 10.4 16.2 Informatica (INFA) 1.9 202.8 2.3 2.2 2.0 (27.9) 9.0 9.6 Microsoft (MSFT) 4.2 30.0 8.5 8.3 7.8 13.5 13.5 5.7 Oracle (ORCL) 3.1 10.6 5.7 5.3 4.9 7.2 7.3 8.6 Accenture (ACN) 0.8 17.8 1.9 1.8 1.6 9.2 2.6 11.6 Software & Programming 2.9 34.2 5.2 n/a 7.1 n/a Computer Services 1.0 17.8 1.3 4.1 Blended 1.7 23.9 2.6 5.2 *P/SG Ratio: Normalized trailing 12 month (Price / Sales) / Growth ratio as of July 2, 2004. **P/OPG Ratio: Normalized trailing 12 month (Price / Operating Income) / Growth ratio as of July 2, 2004.
ASCL shares trade in-line with direct peers and are priced for sustained upper teens revenue growth from C06 assuming 10% operating margin; implied growth falls to 10-11% assuming 15% operating margin. Second consecutive miss clouds outlook and dampens investor confidence near-term. Potential for moderate upside from current level provided management materially improves operating margin and accelerates sales growth.
Margin improvement is likely to be limited near-term as the company expands headcount in sales, services, product development and marketing to drive growth. But large market opportunity and high operating leverage suggest room for material improvement over the long-term.
Writing puts is a less risky strategy than buying the shares outright. If the shares are put to the writer, the writer buys the shares at the exercise price but the net cost of the stock is the exercise price less the premium income on the put options. For example, the Nov 12.50P are trading at $1.60. If the shares are put to the writer, the net cost is $10.90 ($12.50 - $1.60 = $10.90). ASCL shares would have to drop below $10.90 before the put writer begins to lose on the position. ASCL is trading at $11.97. Note that when writing puts, upside is limited to the premium income. Consult your advisor.--Ping Yu, Briefing.com
10:27AM JDA Software (JDAS) 10.80 -1.05: JDA Software posted preliminary Q2 results after the close on Tuesday. Pro-forma EPS is expected to be $0.03-0.04 on revenue of $54MM (+1.9% Y/Y). Reuters Research consensus is at $0.07 on $64.16MM.
Management attributed the shortfall to weakness across geographies. The company did not close any deals greater than $1MM. Software license revenue is expected to come in around $14MM (-9.7% Y/Y), with the Americas contributing $9.9MM (-10.8% Y/Y), EMEA $2.9MM (-27.5% Y/Y), and Asia/Pacific $1.3MM (+182.6% Y/Y).
The following table shows price multiples and Y/Y growth rates for JDAS compared against the software & programming and computer services groups. Company *P/SG Ratio **P/OPG Ratio P/S Y/Y Rev Growth (%) TTM 2004E 2005E TTM 2004E 2005E JDA Software (JDAS) 0.9 117.6 1.3 1.1 1.0 9.8 25.6 10.9 Retek (RETK) 1.1 (31.7) 1.6 1.5 1.4 1.4 13.8 11.3 MicroStrategy (MSTR) 1.5 193.3 3.7 3.3 2.7 25.1 17.1 12.2 i2 Technologies (ITWO) 1.2 (17.9) 1.2 n/a (51.3) n/a Manugistics (MANU) 0.8 (11.7) 1.0 1.1 1.0 (10.8) (9.6) 9.9 Accenture (ACN) 0.8 17.8 1.9 1.8 1.6 9.2 2.6 11.6 Software & Programming 2.9 34.2 5.2 n/a 7.1 n/a Computer Services 1.0 17.8 1.3 4.1 Blended 1.7 23.9 2.6 5.2 *P/SG Ratio: Normalized trailing 12 month (Price / Sales) / Growth ratio as of July 2, 2004. **P/OPG Ratio: Normalized trailing 12 month (Price / Operating Income) / Growth ratio as of July 2, 2004.
JDAS shares are off over 30% since the Q1 review, Story Stocks, April 20, 2004. We commented then that investor enthusiasm is likely to be tempered by limited visibility into sales trends near-term and operating margin over the long-term. We said there is potential for substantial upside provided management brings operating margin up to at least industry average. But we would wait until management delivers on sustained revenue growth at least in the upper teens and/or operating margin in the lower teens before revisiting name.
Pullback removes much of the downside risk. But the lack visibility into demand trends remains a cap to upside. Shares are now priced for sustained lower teens revenue growth from C06 assuming 13-14% operating margin. We would wait until management delivers on sustained revenue growth at least in the upper single digits and operating margin in the lower teens before revisiting name.--Ping Yu, Briefing.com
9:04AM Ratings Briefing - AKS : Merrill Lynch upgrades AK Steel (AKS 5.70) to Buy (volatility: high) from Neutral based on the improvement in company and industry fundamentals that have resulted in a turnaround from eight consecutive quarterly losses to an estimated profit in Q2. Company pre-announced profit for Q2 based on higher market prices and lower operating costs, and expects the favorable market outlook to improve profitability during 2H04. Firm expects prices to remain high during 2005. Target is $10.
What It Means:
At Merrill Lynch a Buy rating on a stock with a high volatility rating means expected total return (price appreciation plus yield) within the 12-month period from the date of the initial rating is 20% or more Why the Call Should Move the Stock Timing of upgrade is opportunistic as it follows on the heels of AKS raising its Q2 earnings outlook... ratings change will provide stock added support as it helps foster sense that company's turnaround is for real The upgrade by Merrill Lynch qualifies as a contrarian call as it is the only Buy rating on the stock according to Reuters Estimates, which shows the following ratings distribution: 1 Buy; 2 Hold; and 3 Sell... participants are often more motivated by contrarian calls than follow-the-leader calls Bullish backing from an influential firm that comes after company raised its earnings guidance creates potential short squeeze opportunity... as of June 7th, 7.93% of company's float was sold short and the short ratio stood at 10.5 days (short ratio is the number of days it would take to exhaust short position based on avg. daily volume) AKS is up 11.8% year-to-date, but firm's $10 price target implies that considerable upside potential remains in the stock Sidenote: Disappointing earnings news has cascaded from the technology sector of late... last night's positive pre-announcement from AKS - a steel company - will stand as a beacon of light that should attract buying interest Several other steel-related companies - ROCK, NUE, and OS - have also raised their Q2 outlook recently... separately, WOR reported a fiscal Q4 (May) profit on June 23 that was $0.08 ahead of the Reuters consensus estimate --Patrick J. O'Hare, Briefing.com
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