From Briefing.com: 6:00PM Weekly Wrap: It was a short week of trading, but a disruptive one nonetheless for the market. Credit for that goes to the software industry, which checked in with multiple warnings, many of which were attributed to delays in purchasing decisions by enterprise customers, a batch of disappointing same-store sales results for June, oil prices climbing back above $40 per barrel, and concerns about terrorist activity that hit home on Thursday when Homeland Security Secretary Tom Ridge issued a warning that intelligence indicates terrorists are plotting to disrupt the presidential election.
In brief, buyers had ample reason to stick to the sidelines, and for the most part, that is exactly what they did. Having done so, the indices traded with a bearish bias with losses in the tech sector doing most of the damage. The Russell 2000 was the weakest of the bunch as warnings from the likes of Conexant Sytems (CNXT), Micromuse (MUSE), Ascential Software (ASCL), JDA Software (JDAS), Semitool (SMTL), Knight Trading (NITE), and Tweeter Home Entertainment (TWTR) prompted a wave of selling interest in the small-cap space.
In the large-cap arena, the IT Consulting & Services (-17.21%), Internet Software (-9.33%), Internet Retail (-6.74%), Health Care Distributors (-4.29%), Leisure Products (-3.99%), Employment Services (-3.59%), Environmental Services (-3.46%), Food Retail (-3.33%), Casino & Gaming (-3.26%) and Advertising (-3.10%) were the worst-performing S&P industry groups.
Yahoo! (YHOO) pretty much knocked the wind out of the Internet stocks after the online media company failed to impress the market with an in-line earnings report for Q2 (Jun). All things considered, YHOO posted some solid results, but in the end, it paid a price for falling short of the market's high expectations that were embedded in the so-called earnings whisper number (Disclosure: Briefing.com has a business relationship with Yahoo!).
Gold (+7.21%) and Diversified Metals (+7.15%) topped the list for the best-performing S&P industry groups as higher commodity prices, a weaker dollar, and the terror warnings fueled investor interest in the stocks. Separately, General Electric (GE), which was up 1.6% for the week, was an individual standout that reaped the rewards of delivering a reassuring earnings report.
The Treasury market played the role of understudy this week and received little attention from market participants. To that end, the closing yield on the 10-yr note fluctuated in a 2 basis point range before ending the week where it began (i.e. 4.46%).
Next week should bring back some needed energy to the market as there are a host of influential earnings and economic reports on the docket. Specifically, Bank of America (BAC), Citigroup (C), Intel (INTC), Johnson & Johnson (JNJ), Merrill Lynch (MER), and IBM (IBM) are slated to release their results while the Retail Sales, PPI, Industrial Production, Capacity Utilization, and CPI reports highlight the economic calendar. --Patrick J. O'Hare, Briefing.com
6:28PM Swing Trader : The overall technical picture remains the same as the indices trade inside of yesterday's range. Energy and Industrials strong....Technology and Financial weak. The SPY as indicated in the chart below, has struggled to close back above its 50-day simple moving average this week. That leaves about 4 or 5 weeks of overhead resistance. What would it take to become bullish again? First, a strong close back above Tuesday's bearish gap would imply a test of the June highs. Second, if the market heads lower, I want to see bulls "throw in the towel" and sell-off on high volume. This slow grind lower by the indices on mediocre volume is torture. Overall, the "fast money" is being made on the shorts, with little indication of that changing soon. Continue to keep an eye on rallies into clear reistance and stocks trading near their monthly support levels and moving averages for breakdowns....(continued)
3:45PM Events Calendar for week of Jul 12th-16th : Events for the week of July 12th-16th: Mon Jul 12th: SEMICON West 2004- Wafer Processing; FSI International Analyst Meeting; Applied Materials Analyst Meeting; Novellus Systems Analyst Meeting; Research in Motion Annual Meeting of Shareholders... Tue Jul 13th: CIBC's Annual Consumer Growth Conference; ASM International Analyst Meeting; KLA-Tencor Analyst Meeting; Advanced Energy Analyst Meeting... Wed Jul 14th: SEMICON West- Final Manufacturing; Oracle Analyst Meeting; SMSC Annual Meeting of Shareholders... Thu Jul 15th: Credence Systems Analyst Meeting; Belden Annual Meeting of Shareholders... Fri Jul 16th: Dell Annual Meeting of Shareholders... See Briefing.com's Events Calendar and Conference Schedule for more details.
9:36AM KongZhong IPO prices at low end of range (KONG) 10.00: KongZhong, a China-based wireless interactive services provider, prices its IPO at $10, at the low end of the expected $10-$12 range. The co is a provider of 2.5G wireless interactive entertainment (games, pictures, karaoke, electronic books), media (news, sports etc.) and community services (chat, message boards) to customers of China Mobile, which has the largest mobile subscriber base in the world. In addition, the co recently began to provide services for China Unicom.... The co is very small, but growing strongly. It posted sales of $7.8 mln in 2003, but posted $7.1 mln just in Q1 this year. The co is profitable with healthy net margins.... Recent China tech IPOs LinkTone (LTON) and Tom Online (TOMO) have not fared well, as both are now below their offering prices. However, Shanda (SNDA) has performed well. The timing was a bit unfortunate as rival NetEase.com (NTES) guided lower this week, spooking the China tech sector. Also, CHINA, SINA, SOHU are near new lows. These factors appear to have hurt the pricing of this 10 mln deal which is being led by BofA and will begin trading this morning. But add to your China tech watchlist.
9:26AM Unisys warns for Q2 (UIS) 12.86: Co expects Q2 EPS of $0.10-0.11 (previously $0.14-0.17) and revs in the $1.38-1.39 bln range, Reuters consensus is $0.13 and $1.50 bln, respectively. Co indicated that the lower-than-anticipated results were caused primarily by unexpected deferrals of certain enterprise server contracts and deferrals and delays on service projects late in the quarter. Co experienced the weakness primarily in the U.S. and in Latin America.
7:32AM UTSI cut to Hold at WR Hambrecht 27.02: WR Hambrecht downgrades UTStarcom (UTSI) to Hold from Buy. Earlier this quarter, the co announced its intention to acquire the Handset Division of Audiovox Communications for $165.1 mln in cash. The acquisition provides UTSI with an entree into the high-growth CDMA handset market in North and South America. However, the integration of ACC introduces significant incremental execution risk into the co's operating model, and severely limits visibility into intermediate-term margin performance. The firm expects the stock to remain in a trading range as investors gauge management's ability to enhance the margin profile of the CDMA handset business over the next few quarters.
7:32AM Immucor's Galileo licensed for use in Japan and Canada (BLUD) 31.96: Company announces that the Japanese Ministry of Health and Health Canada's Therapeutic Products Directorate have licensed Galileo, which offers customers significant labor reduction while increasing productivity and patient safety, for distribution in their respective jurisdictions. Co CEO said, "This is another milestone in the history of Immucor." There are approx 400-500 potential placements in Japan and approx 50 in Canada that could benefit from the increased productivity provided by Galileo, markets BLUD believes they have a major advantage in as it is not aware of any instrument that offers similar performance.
7:21AM Abbott Labs reports in line, ex items, light on revs, guides Q3 below consensus, Y04 in line (ABT) 40.28: Reports Q2 (Jun) earnings of $0.54 per share, excluding previously announced one-time charges related to acquisitions and the spin-off of Hospira, in line with the Reuters Estimates consensus of $0.55; revenues rose 14.0% year/year to $4.7 bln vs the $4.77 bln consensus. Co also tightens guidance for Q3 (Sep), now sees EPS of $0.51-0.53, vs. Reuters Estimates consensus of $0.55, and Y04 EPS of $2.25-2.30, vs the consensus of $2.28. Co also raising its full-year 2004 worldwide sales estimate for HUMIRA from more than $700 mln to more than $800 mln.
6:37AM General Electric beats by a penny; narrows Y04 EPS guidance (GE) 31.70: Reports Q2 (Jun) earnings of $0.38 per share, $0.01 better than the Reuters Estimates consensus of $0.37; revenues rose 11.0% year/year to $37.03 bln vs the $35.59 bln consensus. Company issues in-line guidance for Y04 (Dec), sees EPS of $1.55-1.60 vs. Reuters Estimates consensus of $1.57.
1:12PM Storage Technology (STK) 28.09 +2.82: Storage Technology announced preliminary Q2 results after the close on Thursday. The provider of enterprise storage and data management solutions said EPS is expected to be $0.29-0.33 on revenue of $510-520MM (-3.3 to -1.4% Y/Y). Prior guidance was for Y/Y revenue growth in the mid single digits. Reuters Research prints consensus at $0.32 on $551.47MM.
The company saw an unexpected drop in orders during the final two weeks of the quarter but expects to post both Q/Q and Y/Y earnings growth on firm cost control.
Management has previously commented that meetings with CIOs in North America and Europe point to flat to limited growth in IT budgets. But the company is pleased with the market's reception of the new SL8500 and SL500 modular libraries, which management believes are the most cost effective information life cycle management solutions for the enterprise and mid-range segments.
The following table shows price multiples and Y/Y growth rates for STK compared against storage peers within the computer systems & peripherals and software & programming groups. Company *P/SG Ratio **P/OPG Ratio P/S Y/Y Rev Growth (%) TTM 2004E 2005E TTM 2004E 2005E StorageTek (STK) 0.9 12.8 1.4 1.3 1.4 7.5 5.7 5.6 Advanced Digital Information (ADIC) 0.8 44.5 1.3 1.2 1.1 27.3 9.7 14.2 Dell (DELL 1.5 18.9 2.0 1.8 1.6 17.9 18.9 15.7 EMC (00C) 2.2 35.8 3.9 3.3 2.9 21.8 29.6 14.4 Hewlett-Packard (HPQ) 0.6 15.3 0.8 0.8 0.7 9.1 9.3 5.8 IBM (IBM) 1.1 11.6 1.6 1.5 1.4 9.7 8.1 6.3 Network Appliance (NTAP) 3.0 31.9 6.0 4.6 3.7 31.2 31.4 22.1 Overland Storage (OVRL) 0.4 6.9 0.8 0.8 0.7 37.5 21.1 3.7 Quantum (DSS) 0.5 (26.6) 0.6 0.6 0.6 (7.2) 0.9 0.6 Sun Microsystems (SUNW) 0.9 (20.8) 1.2 1.2 1.2 (6.9) (4.1) 1.8 Veritas (VRTS) 2.8 17.0 3.9 3.7 3.4 20.9 11.7 10.2 Computer Systems & Peripherals 1.0 17.3 1.5 n/a 9.7 n/a Software & Programming 2.9 34.2 5.2 7.1 Blended 1.6 22.6 2.5 8.9 *P/SG Ratio: Normalized trailing 12 month (Price / Sales) / Growth ratio as of July 02, 2004. **P/OPG Ratio: Normalized trailing 12 month (Price / Operating Income) / Growth ratio as of July 02, 2004.
STK trades at a modest discount to in line with peers but are fairly to slightly overvalued on a discounted cash flow basis. Shares, based on our inverted EVA/DCF model, are priced for sustained lower teens revenue growth from C06 assuming 15% operating margin. Implied growth rises to upper teens range assuming 13% operating margin.
Expectations are materially above current and historical performance. Eight year peak annual growth is 7% and peak operating margin is 13.9%. The company posted Q1 growth of 7.3% and operating margin of 5.2%; results were likely boosted by favorable currency.
Management is taking measures to improve operating performance. We would take profit on today's strength, and look for sustained growth and operating margin to accelerate into the lower teens and/or for a 15-20% pullback before revisiting name.--Ping Yu, Briefing.com
10:44AM Computer Associates (CA) 25.50 +0.96: Computer Associates affirmed Q1 EPS guidance and reduced revenue expectations after the close on Thursday. Pro-forma operating EPS is expected to be $0.17-0.19 (GAAP of $0.05-0.07) on $830-850MM (+5.6-8.1% Y/Y) vs. prior guidance for $0.17-0.19 on $865-885MM. Reuters Research pegs consensus at $0.18 on $876.97MM.
Shortfall is primarily due to revenue recognition. The company experienced a higher than expected mix of maintenance in the indirect business which is recorded on a prorated basis rather than during the quarter in which it is sold. CA's channel bookings, the total contract value sold to channel distributors, increased approximately 40% Y/Y on strength across all geographies.
Lower subscription revenue due to a slightly higher than anticipated mix of subscription contract renewals and weak performance in the services business also contributed to the shortfall. Foreign exchange had an unfavorable $15MM impact on a sequential basis. Management acknowledged that execution on signing new service engagements needs to be improved and noted that the company will make EPS guidance on firm expense control.
CA shares, based on our inverted EVA/DCF model, are priced for sustained upper teens revenue growth from F06 assuming 32-33% operating margin. As noted in the Q4 review, Story Stocks, May 26, 2004, Q4 operating margin improved 740 bps Y/Y to 14.2%. Management expects margins to continue to improve due to scale economies, firm cost control and as the company transitions remaining old business model customer contracts to the FlexSelect model. Shares are off modestly since the Q4 review but we would continue to hold off given that shares already factor in a sustained acceleration in sales growth and substantial improvement to operating margin.--Ping Yu, Briefing.com
9:06AM Rating Briefing : Bernstein upgrades STMicroelectronics (STM 20.88) to Outperform from Market Perform and raises its price target to $28 from $26 based on the following: 1) after a very poor performance this year, sentiment and expectations are sufficiently low that upside surprise or progress on margin expansion will likely fuel the stock; 2) several reasons to expect improving profitability, like better operating expense discipline, currency tailwind, improvement in product mix toward slightly higher margin areas, increased pricing in some commodity analog and logic products, and contributions from ongoing restructuring; 3) process technology improvements such as flash memory will be running on 90nm by Q4 (Dec); and 4) stronger second half due to seasonality. Firm raises its EPS estimates for 2Q04 (June) and FY05 to $0.17 and $1.35 from $0.14 and $1.11, respectively. The consensus estimates for 2Q04 and FY05 stand at $0.16 and $1.22.
Why the Call Should Move the Stock
Shares of the European chipmaker have been dead money for quite some time now: STM is down 30% from its highs in January following cautious comments on its Q1 (Mar) conference call. Management at the time said that gross margins could remain weak as its shifts to lower margin products. The stock is also among the least loved of the semiconductors: 12 out of the 20 analysts that cover STM rate it a 'Hold' or 'Sell' according to Thomson/First Call. Bernstein puts some muscle behind its upgrade - both its 2Q04 and FY05 EPS estimates are well above the Street's average, and its price target represents a 34% premium to current levels. The firm's call implies STM has reached a trough, and is ready to work its way upwards under the guise of improving fundamentals. Sidenote: The stock is currently in a bearish trading pattern - trading below both its 50 and 200-day simple moving averages. However, a strong move today could position STM above its 50-day (21.72). -- Heather Smith, Briefing.com
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