From Briefing.com: Close Dow -13.96 at 10609.11, S&P -0.86 at 2088.13, Nasdaq -1.98 at 1216.10: Stocks opened lower and closed just under the flat line, as investors weighed record highs in oil and worries about slowing profit growth against last week's strong market performance... Renewed buying interest late in the day sparked a modest rebound that lifted the major indices into positive territory; however, the recovery effort was short-lived, as the Dow closed lower for the first time in eight sessions and sector leadership was mixed...
While several economic reports last week helped investors shrug off an 8.4% increase in oil prices, the absence of notable economic data and a 1.5% surge in crude oil futures reinforced fears that high energy prices may curb economic growth and force economists to revise GDP forecasts lower... After closing above $59/bbl for the first time ever, the July contract, which expired this afternoon, closed at $59.37/bbl (+$0.90) while the August contract closed up $0.70 at $59.88/bbl... Crude oil surged amid concerns of inadequate refining capacity, reports of Nigerian oil workers being held hostage and a possible strike in Norway...
Also stalling follow-through buying interest after gains of more than 1.0% for the major averages last week was the possibility of further earnings warnings heading into the end of the quarter, as negative pre-announcements this quarter have been about twice as prevalent as positive announcements... On April 1, aggregate Q2 profit forecasts for the S&P 500 were about 9.0%; but a number of earnings warnings have since driven growth estimates lower - from about 8.0% on May 1 to roughly 7.0% today...
Meanwhile, the Materials sector - which was up 3.0% last week - was by far today's worst performing economic sector, as a strengthening dollar and reports that metal production in China surged last month prompted investors to lock in some profits... Also succumbing to broad-based consolidation was Technology, as gains in software (i.e. MSFT and ORCL) and Internet (i.e. GOOG and YHOO) were not enough to offset losses in Semiconductor, Hardware, Disk Drive and Networking... Industrials were also weak, dragged lower in large part due to reports that Air Canada canceled a $6.0 bln order for 32 Boeing (BA 63.67 -0.95) jets, while the more influential Financial sector posted a modest loss, as rising bond yields weighed on brokerage and bank stocks...
Treasurys extended a two-week slide amid rising rate hike expectations following comments from Minneapolis Fed President Stern and speculation the ECB may cut interest rates, which made European bonds more attractive... The benchmark 10-year note (-7/32) closed near session lows to yield 4.09%...
The interest-rate sensitive Utilities sector, however, was the best performer, benefiting from a 12.9% surge in shares of Calpine (CPN 3.50 +0.40) while Consumer Discretionary eked out a modest gain, due in large part to gains in Comcast Corp (CMCSA 32.06 +0.49) and Time Warner (TWX 17.13 +0.35) following reports that the Dolan family, which controls Cablevision Systems (CVC 32.00 +5.13), plans to take CVC private for about $7.9 bln... Also closing just above the unchanged mark was Energy, which found just enough buying interest amid suring oil prices to extend last week's 5.0% sector advance... Showing resilience in the face of record oil were Airline stocks (+1.2%), perhaps due to oversold conditions, as the group has failed to rally in sympathy with the major indices...
Separately, May leading indicators - which attempt to project economic performance over the next 3-6 months - fell 0.5%, below forecasts of -0.3% and recording the fifth consecutive monthly decline... However, since the index poorly assesses the economic outlook, due to its predictability as a compendium of previously announced indicators, the data had very little influence on the market...DJTA -0.6, DJUA +0.3, DOT +0.1, Nasdaq 100 -0.1, Russell 2000 -0.4, SOX -0.5, S&P Midcap 400 -0.3, XOI -0.2, NYSE Adv/Dec 1348/1943, Nasdaq Adv/Dec 1260/1775
5:30PM Merix preannounces below expectations; guides for Q1 (MERX) 6.87 -0.01:Co exects Q4 loss of $0.01-0.02 per share, ex items, down from previous guidance of $0.04-0.05 in earnings, vs Reuters consensus of $0.04; on revs of $51.6 mln, vs consensus of $51 mln. Co see Q1 loss of $0.02-0.05, ex itmems, vs consensus of $0.07, with sales comparable to that of Q4 (roughly $52 mln), vs consensus of $53.6 mln. Co states that compared to original expectations, approx $1.7 mln of the expected loss for Q4 is attributable to the combination of the following: (1) increased legal expenses related to the defense of the securities class action and derivative lawsuits, (2) overhead absorption expensed as a result of successful efforts to reduce inventory in the Oregon operations, (3) a severance charge associated with the departure of a senior executive, (4) expense for a workers' compensation retrospective plan adjustment related to prior periods, and (5) additional depreciation expense as a result of final purchase accounting adjustments related to the acquisition of Data Circuit Systems.
3:09PM SMTC Corp signs agreement with Leitch Technology (SMTX) 1.01 +0.17:Co today announced it has entered into an agreement with Leitch Technology International, a subsidiary of Leitch Technology Corp to provide certain manufacturing services. Leitch recently selected SMTX as its manufacturing partner by outsourcing the majority of its Toronto-based board manufacturing activities. The agreement is expected to achieve an estimated annualized run rate of $20 mln USD for SMTX.
3:07PM O2Micro granted significant selector circuit patent for power management in multiple battery systems (OIIM) 14.00 +0.33:-Update-
8:14AM Cisco Systems to hold press conference to announce new technology (CSCO) 19.53 :Company CTO Charles Giancarlo to host press conference tomorrow, June 21, to announce new technology that "adds new intelligence to communication networks". Press conference will follow CEO John Chamber's keynote presentation at annual networkers conference, keynote begins at noon eastern, press conference will follow at 13:30 eastern, webcast at http://event.on24.com/r.htm?e=13918&s=1&k=F2506CABEB38E5475AAF5D33BB75
8:14AM More On the Wires :RightNow Technologies (RNOW) announces Boxwood Technology has deployed RightNow CRM to support the next phase of its business growth... Semtech (SMTC) to buy Xemics, provider of ultra low-power RF, analog and digital chip designs; deal expected to be accretive to net income within two quarters
4:00PM Sprint (FON) 24.92 0.04: We added Sprint as a suggested holding in our Active Portfolio back on October 29th due to its combination of wireless and fixed-line assets. Since then, the stock has returned almost twenty percent following the news in December the company was merging with Nextel Communications (NXTL). We remain committed to the name as the merger creates and an even stronger earnings and growth profile looking ahead.
The telecom sector has performed quite well over the last two months after bottoming back in May. NXTL and FON alike have been top performers as their combined growth outlook strengthened. The merger, expected to close in September, will accelerate Sprint's plans to diversify away from the lower margin, lower growth long distance segment towards wireless. According to Sprint's website, this merger of equals will reduce capital spending in the deployment of its EV-DO technology, reduce network expenses by lowering the number of cell sites and networks, optimize customer care, reduce overall expenses and costs, and cut its network capital expenses by building a true IP-based multimedia network.
Even though it may seem like everyone has a cell phone these days, there is still considerable potential in terms of penetration in the US when compared to other developed nations. Roughly 60% of consumers owns handsets compared to Europe at 75% with Italy and Sweden approaching the 90% level. Sprint is the most leveraged to the wireless market as its main growth engine. Further, industry consolidation should lead to a more stable pricing environment reducing churn rates, therefore, growth should also become much more profitable.
Sprint should be also able to expand margins by driving its wireless data business, which skyrocketed 130% in 2004. With 7.7 mln wireless data subs and industry-leading APRUs, Sprint will be able to capitalize on consumer trends towards enhanced functionality for entertainment, information sharing, and personalization. By offering expanded applications from video streaming, gaming, picture sharing, to personalized ring tones, Sprint will not only be able to drive revenue per user, but reduce churn through product differentiation. Sprint has historically lagged leaders like Verizon in customer retention.
Financially speaking, Sprint has been able to pay down debt and generate strong free cash flows. According to Reuters Estimate consensus, earnings are expected to gain 15% next year on revenue growth of two percent. Sprint invested heavily over the last couple years in its wireless and IP platforms. Going forward, capex should decline coupled with further asset spin-offs should result in robust free cash flows over the next few years. The Street expects EBITDA growth in the 10% range, putting shares roughly at 6-7x. Several firms have raised earnings estimates over the last month on expectations that second quarter results, out on July 20th, will show stronger net adds and profits. The risks include regulatory changes, weaker demand for teleco services, regulatory delays with regard to its merger, and declining wholesale traffic. Looking ahead, a combined Sprint/Nextel will create a stronger, more versatile telecom service company enabling it to better compete with industry heavyweights like Verizon.----Kimberly DuBord, Briefing.com 12:55PM Dell Inc. (DELL) 40.33 -0.41: The notebook computer industry has come a long way from the launch of the first laptop computer in 1986 by Toshiba called the Dynabook. The market has expanded exponentially over the years as consumers became more mobile. Notebooks will continue to garner a greater percentage of the overall PC market as machines become lighter, faster, and offer a longer battery life. Notebooks currently make up 24% of the PC processors shipped, but are expected to rise to 40-50% over the next 3-5 years. Today, the list of notebook producers includes IBM (IBM), Compaq (HP), Apple (AAPL), Dell (00C0), Acer, Sony (SNE), Sharp, and Gateway (GTWY).
Monday, UBS raised its 2005 PC forecast anticipating unit growth of 10% up from its previous forecast of 9%. The revision was due to higher notebook growth of 23% up from 21% expected this year. UBS stated the revision was driven by attractive prices, which will continue to stimulate demand and drive about ten percent overall PC growth in the second half of the year.
The overall PC market has stagnated over the last few years with few catalysts to stimulate replacement demand, while notebooks continue to experience a growth environment. PCs have picked up last year up 14.7%, according to the IDC driven by small and medium businesses, but are expected to slow to 10% growth in 2005. Meanwhile, on-the-go computing trends will result in further growth within the notebook industry. The market is dividend into four distinct groups, starting with the Ultralights typically no more than four pounds mostly used by travelers. Yet, due to weight constraints typically come without features such as internal CD drives and network cards. Next come the notebooks or what we typically think of as a "regular laptop" roughly 4-6 pounds. Standards offer more functionality thus weigh more (6-8 pounds) but carry the best value per performance making them the most highly desired. Lastly, is the Extra Large segment weighing in at 8-10 pounds carrying a larger scale keyboards and LCD screens.
A way to determine end-market demand strength is by looking upstream...way upstream across the Taiwan Strait to where the vast majority of notebooks are produced. The two largest laptop manufacturers are Quanta (2382) and Compal (2324) both of which have raised shipment forecasts for the remainder of the year. The market leader, Quanta estimates shipments of 14-16 mln up from 11 mln in 2004. While its much smaller rival, Compal, anticipates 9.5 mln notebooks this year with third quarter shipments rising 10% from Q1. Compal estimates the industry's shipments will grow 22% y/y to 58 mln units. Both companies have suffered declining margins as they lowered price to order to maintain market share.
As mentioned above, there are a slew of companies with products in this space. Some of which include IBM's ThinkPad Series, Gateway's Solo Series, Apple's Powerbook and iBook families of products, HP's Pavilion, Sony's VAIO, Toshiba's Satellite and Portege. Looking for a direct play is difficult since the vast majority of these companies offer a range of products from desktops to printers. But, there is one standout for investors looking to capitalize on continuing strength in this market, Dell Computer. Notebooks make up a third of its topline including product lines Latitude targeted at the business segment, along with the all-purpose Inspiron. Dell continues to be the standout in the PC industry solidified by its ultra-successful direct model.
After all this talk about notebooks there is something else to consider. The PC industry may receive the impetus it's been seeking with several technology enhancements on the way possibly slowing the shift to laptops. These include dual-core chips, PC gaming, and the much anticipated release of Microsoft's (MSFT) Longhorn next year. Either way, Dell will be only an Internet connection away. The stock is trading at 25.1x forward earnings - a discount to its 5-year historical average of 35.5x.----Kimberly DuBord, Briefing.com
11:46AM CarMax Group (KMX) 26.65 +0.80: CarMax, the nation's largest specialty used car retailer, reported fiscal first quarter earnings ahead of analyst expectations. The company stated Q1 EPS of $0.37 on $1.58 billion in revenue versus the consensus estimate of $0.36 on $1.56 billion. Earnings grew 13% year/year from $0.33 per share, including a gain of $0.03 resulting from a favorable accounting adjustment, while revenues increased 19.1% from $1.33 billion. Considering continued softness in the used car marketplace, the company provided conservative guidance for the following quarter, with Q2 EPS expected to be in the range of $0.29-0.34 and same store sales growth between 3-9%. Additionally, the company forecasted sales to reach $10-12 billion by 2010.
CarMax operates in an extremely competitive environment. The company's sales, and those of its competitors, which include Autonation (AN) and United Auto Group (UAG), are contingent upon rising gasoline prices, wholesale auction costs, and the pricing and promotions of new cars by manufacturers. Historically, higher gasoline prices have not impacted sales of used cars to the extent of new cars, however, sustained record-level prices and continued geopolitical uncertainty have spurred caution for the used car market. While the purchase of a used car is typically non-discretionary, higher gas prices have encouraged consumers to focus on less costly and more fuel efficient models, subsequently affecting gross profit. General wholesale market trends have driven higher auction prices and has increased pressure on profit margins. Also, to the extent that new car incentives remain tempered, late model used car sales growth will be hampered, as consumers shift preference towards new vehicles.
Despite tepid conditions in the used car market, CarMax has "begun to take steps to counter the current challenges in the market," according to Austin Ligon, President and Chief Executive Officer. The company has taken stringent efforts to align retail pricing incentives for used cars with demand, and create attractive buying opportunities for consumers, relative to options in the new car marketplace. The company has also accelerated its growth initiatives, and expects to increase its store base by 15-20% annually. Additionally, CarMax's new partnership with sub-prime lender Drive has helped drive growth.
In reviewing CarMax's quarterly results, investors should be mindful of the advancing trends in the industry. While sales and profits were in-line with expectations, broad market conditions continue to cloud near-term prospects. Strategic initiatives and pricing flexibility should help support revenue growth, however stronger sales of cars to customers with sub-prime credit could impact profitability. As such, investors should be attentive to the current valuation multiple of 25.1x trailing earnings, relative to 12.4x for Autonation and 12.9x for United Auto Group. While more favorable market conditions should bode well for the company, current exposure in the stock is not justified by current valuation levels. ---Richard Jahnke, Briefing.com
8:45AM Page One - Momentum Shifts on Oil : Stock futures suggest a significantly lower open. Oil prices get the blame, but the causes are deeper.
Oil is up about $0.50 and trading just below $59.00 a barrel. That is obviously a bearish factor on stocks. It is also a catalyst for underlying concerns.
On Friday, the price of oil surged $1.89 a barrel. Yet, the S&P 500 index was up 6 points that day on little news. The market had good momentum and was able to ignore the price of oil. That isn't the case today.
There is once again very little news of broad significance to the stock market. Leading Indicators is the only economic report today, and there are no earnings reports of note. There is only one earnings warning (from IPSCO). There are no mergers or acquisitions, although there are reports that Ameritrade is close to a deal to merge with TD Waterhouse. The market is trading on sentiment and momentum.
Last week, those factors were bullish. The S&P was up 19 points (1.6%) last week. There was some good news from the PPI and CPI data, but otherwise it was a fairly slow week. The market may have gotten ahead of itself.
On Friday, we said we wouldn't be surprised to see the market retreat over the next two weeks as the market focus shifts to second quarter earnings reports. The second quarter earnings reports are discussed in further detail in Briefing.com's Big Picture column this morning titled, "The Thrill is Gone."
The market has had a good bounce from the lows of April as the excessive pessimism on the economic and inflation outlook has been driven out of the market. The elimination of a negative provides only a temporary boost, however. Trading range conditions persist. Dick Green, Briefing.com
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