From Briefing.com: 4:07PM Brooks Automation beats by $0.02, ex-items; guides revs below consensus (BRKS) :Reports Q3 (Jun) earnings of $0.06 per share, excluding non-recurring items, $0.02 better than the Reuters Estimates consensus of $0.04; revenues fell 26.0% year/year to $113.8 mln vs the $113 mln consensus. Co issues downside guidance for Q4, sees Q4 revs of $100-105 mln vs. $119.42 mln consensus. Also, company sees GAAP EPS at a loss of $0.07-0.13 for the September quarter.
Close Dow -17.76 at 10623.15, S&P +1.17 at 1235.35, Nasdaq +10.55 at 2195.38: The major averages closed in split fashion as investors' views varied about whether or not more encouraging economic data would be enough to carry July's momentum into August amid rising interest rates and record oil prices... While the Dow, S&P and Nasdaq turned in their best monthly performances in July, August has been the worst month for the broader market over the last 15 years... Since economic data had taken a backseat to a few weeks worth of better than expected earnings, which could result in Q2 operating EPS growth for the S&P 500 of about 12% (or about 4 1/2% above initial forecasts), the focus began shifting to economic data... Initially providing a floor of support for stocks were reports that several economists had raised Q3 GDP forecasts to between 4-5% after further analyzing the impact depleting inventories had on last week's Q2 GDP report... Just after the bell, July ISM index rose to 56.6 (consensus 54.5) - the highest reading since Dec. 2004 - from 53.8 in June, as the new orders component climbed to 60.6 from 57.2 and the prices paid index fell to 48.5 from 50.5 in June, showing inflation remains contained...
However, even though the bullish ISM figures validated the ongoing recovery in manufacturing, the data subsequently raised worries of further rate hikes, closing benchmark yields on the 10-year note (-9/32) above 4.3% for the first time since April 14th... And since higher rates invite concerns about the pace of economic growth and the stock market's return prospects, six out of ten economic sectors closed lower... To that end, the interest-rate sensitive Utilities sector paced the way to the downside, losing additional ground following a Q2 disappointment from Public Service Enterprise Group (PEG 62.50 -1.80)...
Consumer Staples also lost ground following a CSFB downgrade on Archer Daniels Midland (ADM 21.66 -1.28) and disappointing guidance from Procter & Gamble (PG 55.32 -0.31)... P&G beat analysts' Q4 forecasts by a penny but concerns of higher commodity prices weighing on future earnings pressured the stock all day... Despite dollar weakness, consolidation in paper and chemicals weighed on the Materials sector while profit-taking in Honeywell (HON 38.78 -0.50), a day after hitting a 52-week high, weighed on Industrials...
Energy, however, paced the way to the upside, benefiting from continued momentum in oil prices... Crude oil futures ($61.55/bbl +$0.98) extended last Friday's 1.1% surge amid potential supply disruptions in the Middle East following the death of Saudi Arabia King Fahd and refinery outages over the weekend... Health Care also finished on a strong note, getting a boost from the HMO, medical equipment, drug and biotech groups...
Shares of Humana (HUM 42.62 +2.77) soared 7% after issuing a strong outlook for FY05 and FY06 while Guidant (GDT 71.32 +2.52) climbed amid receiving FDA approval to re-enter the heart failure treatment market and Medtronic (MDT 54.03 +0.09) caught a bid after Deutsche Securities upgraded it to Buy from Hold... A 2.3% surge in shares of Amgen (AMGN 81.63 +1.86), following fast-track FDA approval for its co-developed cancer drug panitumumab, also provided support... Technology posted a modest gain, as strength in storage (i.e. EMC, NTAP) offset weakness in software and semiconductor... The latter was in focus amid an SIA report that showed worldwide chip sales grew 6.5% during the first six months of 2005 but declined slightly in June to $18 bln, eked out a modest gain...
Offsetting some of the sector's strength, however, was a 15% drubbing in shares of Symbol Technologies (SBL 9.89 -1.75), which merely matched analysts' Q2 forecasts and announced the defection of its CEO to NCR Corp (NCR 33.47 -1.24)... Consumer Discretionary eked out a slim gain, as a 4.4% surge in eBay (EBAY 43.61 +1.83) following a Smith Barney upgrade helped offset 1.5% decline in Home Depot (HD 42.86 -0.65) - the day's worst performing Dow component, which lost ground after receiving a grand jury subpoena related to hazardous waste handling...
Separately, June construction spending unexpectedly fell 0.3% (consensus +0.7%); however, the volatile report was basically overshadowed by the more influential ISM figures...DJTA +0.2, DJUA -1.2, DOT +0.5, Nasdaq 100 +0.3, Russell 2000 +0.5, S&P Midcap 400 +0.1, XOI +1.1, NYSE Adv/Dec 1746/1510, Nasdaq Adv/Dec 1717/1390
Microsemi (MSCC) says it takes actions to reduce future non-cash expense prior to adoption of F.A.S.B. Statement No. 123 R... IA Global (IAO) says its Global Hotline subsidiary receives $6.459 mln in advance quarterly payments from KDDI... Vishay Intertechnology (VSH) announces that it has signed a letter of intent regarding the acquisition of the assets of CyOptics Israel; co says the purchase price would not be material to VSH...
3:55PM Unocal Corp (UCL) The potential ownership of an US oil and gas company by China sent a shock wave through the halls of Washington. Unocal now sits in the middle of a political firestorm, with its fate resting in the hands of a few on either side of the Pacific Ocean. The ongoing saga between Chevron (CVX) and CNOOC (CEO) changes almost as rapidly as the price of a barrel of oil. Today, there was speculation CNOOC may step away from its bid, having clearly misjudged the political fallout. The Unocal shareholders will finally get to vote on the matter next week.
It seems due to the enormous hurdles CNOOC would have to cross to acquire Unocal, Chevron does appear to have the wind at its back, at least for the moment. Still the implications from this saga are far reaching, from national security issues, currency revaluation, to free trade. With a population 4x the size of the US and an economy growing at 3x the pace, China will continue to become a global force to be reckoned with. The question is whether the US is ready to adapt to the changing global landscape? We cannot expect free trade to be a one-way street. With more and more US companies expanding their presence in China and the US running a trade deficit of $160 bln last year, it's only a matter of time the tables will turn. Whether or not CNOOC walks away from Unocal, they and others will be back.
Unocal may have foreseen its own fate, highlighting on numerous occasions, the surging demand for oil and natural gas from Asia and the impact it would have on global prices. Unocal has transformed itself from a true integrated oil and gas company running operations through the entire oil supply chain, from upstream production, to refining, and finally to retail distribution. The Unocal of today is one the largest independent offshore crude and natural gas production companies with an impressive list of assets. The game in the oil patch is to drive proven reserves - basically replace and add to the oil and gas extracted and sold. This is the metric oil and gas producers are valued upon. This feat continues to prove more challenging every year, as oil and gas deposits are found in deeper, more remote areas around the globe.
What the Chinese are probably interested in is the 1.75 bln barrels of oil equivalent off the coast of Indonesia, Thailand, and in the Caspian Sea. Almost sixty percent of Unocal's proven reserves and production are in Asia. This compares to the US making up 26% of proven reserves and 33% of production. Further, two-thirds of its production is natural gas, a market not dictated, controlled (whatever you prefer) by OPEC. Unocal reported its second quarter earnings on Friday besting consensus estimates by a dime. UCL earned $1.77 per share on revenues growth of 20% year/year to $2.16 bln. Unlike some of its peers, UCL increased production by a resounding 15% y/y. The upside in earnings was driven by a 26% increase in price realizations and lower production costs. UCL ended the quarter with cash and marketable securities of $13 bln, up nearly $3 bln from the beginning of the year.
With the closing of the Energy Bill, this saga appears to be nearing its end. Congress enacted a law that would delay a CNOOC deal, which has all but sealed the deal for Chevron. The Chinese clearly did not anticipate the degree of political fallout and tactically seemed to be behind the curve at every turn. There is speculation China may change their approach next time perhaps using a joint venture, or with a strategic partner. While this is pure conjecture, one thing for certain, China's need for more oil and gas reserves will not be diminishing any time soon. CNOOC could raise its bid, but as it stand rights now, the differential between the two are not enough for Unocal's board to justify the increased risk. The UCL/CVX shareholder vote will take place on August 10th. ----Kimberly DuBord, Briefing.com
2:15PM Teva Pharmaceutical (TEVA)
31.96 +0.49: Shares in Teva Pharmaceutical, the world's second largest generic drug manufacturer, trended modestly higher on Monday after the company reported second quarter results in-line with Wall Street's expectations. Even though sales in the United States, the company's largest generic market, slipped on fewer product launches relative to the comparable quarter last year, strong performance across the company's operations helped to offset the weakness. Net sales for the quarter amounted to $1.23 billion, up 4% from $1.18 billion in the year ago period, with pharmaceutical sales accounting for 89% of the total. North American pharmaceutical sales, which accounted for 57% of total pharmaceutical sales, declined 8% to $624 million in the quarter, compared to $624 million last year. In contrast, pharmaceutical sales in Europe increased 28% to $349 million from $273.6 million, as the successful launch of new products such as Alendronate and Lamotrigine complemented continued strong sales of Copaxone. Worldwide sales of the brand-name multiple sclerosis drug rose 29% to $291 million.
Net income for the second quarter amounted to $241 million, or $0.36 per share, compared to $229.5 million, or $0.34 per share, last year. The results matched the consensus estimate for earnings, but slightly missed the analyst target of $1.28 billion in revenue. Further highlighting the company's performance, gross profit margin in the quarter expanded to 47.4% from 47.0% year/year. The improvement specifically resulted from higher sales in Copaxone and higher margins in Europe.
Despite the recent slump in U.S. sales, the company remains well positioned to capitalize on the strong trend within generic drugs in the U.S. and Europe. While there have been relatively few opportunities for the company in 2005, the next few years promise to be more robust as a number of patent expirations should effectively bolster new product launches. Moreover, Teva's strong product pipeline, global exposure, and demonstrated ability to introduce new innovative products should bode well in the face of increasing competitive pressures and high dependence on patent expirations.
In an effort to stave off competition and expand its market presence in the generic drug business, Teva announced last week that it agreed to buy Miami-based drug-maker Ivax Corp. (IVX) for $7.4 billion in cash and stock, creating the world's largest generic drug company. The deal, which is expected to close in late 2005 or early 2006, brings together two complementary businesses and produces better economies of scale and synergy effects to access more markets with a greater amount of innovative products. Further, the acquisition should greatly benefit Teva ahead of the unprecedented number of patent expirations slated for 2006 and 2007.
Ivax also reported its results for the second quarter before the open on Monday. Earnings fell below expectations, as higher income taxes partially offset a 24% year/year climb in revenues. While analysts were expecting earnings of $0.20 per share on revenues of $538.0 million, results for the quarter measured in at $0.17 per share on $577.3 million, respectively.
Through the addition of Ivax, Teva will regain its leadership position in the generic drug business from Novartis AG (00C) and further strengthen its strategic position in the competitive landscape. With continued stable growth in its current pipeline and considerable potential afforded by anticipated growth in the generic drugs market in the coming years, Teva presents a favorable investment case. The PEG ratio of 0.95 and PE multiple of 17.1x FY06 earnings, which exclude the benefits of the Ivax acquisition, helps to paint a clear picture for the company's growth prospects and investment value. --Richard Jahnke, Briefing.com
11:17AM Humana (HUM)
44.23 +4.38: Humana, a leading health benefits provider, reported fiscal second quarter earnings in-line with analysts' expectations, aided by increasing momentum in Medicare operations and cost containment. Net income grew to $84.1 million, or $0.51 per share, from $80.8 million, or $0.50 per share, last year. At the same time, revenue climbed 3.3% to $3.54 billion from $3.43 billion - just below the consensus estimate of $3.56 billion. The Louisville-based company reaffirmed its full-year earnings guidance of $2.23 to $2.25 per share and anticipates EPS for FY06 to grow at least 25%, which equates to roughly $2.80 per share.
For the Government segment, pretax earnings rose 22% to $104.1 million, compared to $85.4 million in the same quarter last year, primarily due to growth in Medicare membership and improvements in Tricare operations. Enrollment increased 24.4k members, or 5%, to $474.3 from the last quarter. The company anticipates continued strong enrollment growth for the full year, with total membership projected between 540k to 550k. Medicare Advantage premiums increased 41% to $1.09 billion year/year as result of the higher enrollment, as well as from higher per member premiums. The company expects full-year per member premiums to increase between 11% to 13%. Medical expenses were well contained, with the Government segment medical expense ratio (medical expenses divided by premium revenues) 40 basis points lower than the same quarter last year. As expected, Tricare membership remained relatively flat at 2.88 million, while premiums declined approximately 5% on account of the new south region contract with the Department of Defense, which reduced benefits and services provided under previous contracts.
For the Commercial segment, earnings declined 32% to $25.2 million from $36.9 million last year. The slip was attributed to lower commercial membership. Enrollment for the segment decreased about 1% to 3.19 million, while the medical expense ratio improved slightly to 83.8%, representing a decline of 80 basis points from 84.6% in the year ago period. For the fiscal year, the company projects commercial segment earnings to increase between 10% to 15% from last year, despite the expected rise in per member medical costs of 8% to 10%.
Overall, the increase in earnings was a result of improved performance in the Government segment, partially offset by weakness in the Commercial business. Humana's medical expense ratio declined by 60 basis points from last year, with improvements in both of its primary business segments. The company continues to anticipate substantial upside to its operations given the potential opportunities afforded by a new Medicare plan beginning in January 2006.
With increased funding as part of the Medicare Modernization Act enacted by Congress and the Bush Administration, the company's well established Medicare footprint and devoted resources creates a favorable position to capitalize on related growth opportunities. Humana has been offering Medicare services for over 20 years and possesses a solid infrastructure from which to expand its operations. In light of the respectable results for the second quarter and the substantial expansion opportunities that Medicare holds for Humana, the risk-reward proposition appears attractive. Coupled with the favorable secular trends, improving cost containment and continued revenue growth further supports the company's upside opportunity. The stock is currently trading at 24.3x trailing twelve month earnings, relative to an average level of 17.4x over the past five years. --Richard Jahnke, Briefing.com
10:29AM Procter & Gamble (PG)
The global consumer products company continues to deliver the goods, generating 10% sales growth in the fourth quarter, and surpassing EPS expectations by a penny despite a challenging environment. P&G earned $1.49 bln, or 56 cents per share in the fourth quarter, up 9% y/y on volume and pricing gains. Sales grew to $14.26 bln with broad-based growth across all of its businesses, including beauty, fabric, health, and home care. The developing markets remain a key growth area for P&G, particularly in the Beauty segment, which grew in the mid-teens in Q4. The caveat for growth in developing markets, however, is that gross margins tend to be lower. Organic volume growth, which excludes the impact for divestitures and acquisitions, rose an impressive 9% in Q4. Pricing added two percent to sales, with forex tacking on another 2% as the dollar gained against the euro.
Commodity and energy prices remain a challenging headwind for Procter & Gamble, as well as the entire consumer products industry. Producers have been raising prices to fend off raw material costs, but some have been more successful than others. P&G belongs to this camp as its balance, mix, scale, and flexibility have allowed it to maneuver through this environment and to deliver sustainable top and bottom line growth.
Yet, during the fourth quarter, these headwinds proved too strong, more than offsetting gains PG made through pricing, volume scale, and manufacturing cost savings. Gross margins dropped 110 basis points. In addition to commodity costs, product mix in developing markets and higher royalty expense rates for Prilosec OTC weighed on profitability. The laundry segment has proved quite challenging as competitors, particularly in W. Europe, have lowered prices despite costs to gain share. PG responded by reducing prices, hoping it can continue to grow business via volume gains. SG&A rose by 70 basis points on higher advertising spending.
PG has realigned it business over the last few years towards higher growth, higher margin Beauty and Health Care businesses. These businesses now account for almost half of total sales. The Beauty unit delivered a double-digit sales gain to $4.93 bln, propelled by its Olay brand and new products generating earnings growth of 27% to $644 mln. Earnings within the Family Health segment surged 42% to $182 mln on sales growth of 16% to $1.9bln. The upside was due to continued success with its Prilosec over-the-counter heartburn drug. Commodity costs pressured earnings within the Household Care segment to $458 mln despite a 10% rise in sales to $3.85 bln.
Looking ahead is challenging for P&G due to continued commodity and competitive pressures. In addition, the Gillette acquisition is expected to close in the fall of 2005, but the timing could impact earnings guidance. P&G chose to remain conservative with guidance, sayings it feels comfortable with the consensus guidance for Q1 of $0.78, and the full year 2006 of $2.90 on sales growth of 4-6%.
Overall, it was a solid close to the fiscal year with earnings surpassing expectations for the ninth consecutive quarter. P&G continues to impress with its ability to drive organic growth, demonstrating its marketing prowess, brand quality, superior distribution, and innovative products. Due to its size and scale, P&G can outspend it competitors. Colgate recently reported an 8% drop in profits after being forced to defend share by matching prices. If investors are looking for exposure in the consumer segment, PG offers a compelling long-term investment due to solid fundamentals, above industry growth, a strong pipeline of new products, and market position in Asia, Central and Eastern Europe. In addition, there is potential upside to be derived from Gillette and futher Wella integration . Shares are trading at 18.8x forward earnings, well below the stock's 5-year historical average of 22.9x. --Kimberly DuBord, Briefing.com
8:57AM Page One - Strong Profits, Strong Economy
Stock futures suggest an up open this morning. The good economic and profit numbers are providing a steady boost to stock prices.
The market reaction to the second quarter GDP numbers on Friday was tame. The headline report was that GDP rose at a 3.4% annual rate, which was a bit less than the expected 3.5% rate. The weakness was due to a drop in inventories, however, and it is now becoming recognized that the underlying numbers were extremely strong.
Final sales in the GDP data were up at a 5.8% annual rate. That is GDP excluding the change in inventories, and it reflects the true underlying demand in the economy. A reversal in inventories in the third quarter would produce a large GDP gain. Economic activity is actually picking up. That recognition this morning is providing underlying support to the market.
Earnings reports are also helping. It now appears as if the aggregate increase in second quarter operating earnings for the S&P 500 will be about 12%. That is 4 1/2% ahead of the 7 1/2% expected as the reports started coming out. More companies beat estimates than miss every quarter, so the final number typically exceeds the early estimates. But that usually amounts to close to 3%. This quarter the "beat" will be near 4 1/2%. Earnings growth is much better than expected.
The news this morning includes the death of King Fahd of Saudi Arabia. Oil prices are up about $0.45 to $61 a barrel. He has been ill for some time so this was not a total surprise. Procter & Gamble reported earnings a penny ahead of expectations. Humana reported in line, but guided above current Wall Street estimates for the year. The ISM index is due at 10:00 ET. It is expected to come in at 55.0, but watch for a surprise on the up side similar to the Chicago PMI on Friday.
Earnings season is now winding down. There are few reports this week of broad significance. The sector with the most large reports is the insurance industry.
Underlying sentiment is good. The market has solid momentum. The fundamentals are excellent. Investors should stay with this market. Dick Green, Briefing.com
9:42AM ViroPharma (VPHM) Lazard Freres initiates BUY. Target $15. Firm expects recent robust Vancocin sales trends to continue, driving earnings growth. Also, HCV-796 for hepatitis C and Maribavir for cytomegalovirus offer potential for further upside, and they note that substantial debt reduction during Q2 has reduced balance sheet risk. 9:34AM Lifeline Systems (LIFE) Adams Harkness initiates BUY. Target $38.75. Firm thinks the co is an excellent play on the aging of the population, with its tgt population expected to more than double over the next 25 years. They favor the co as a dominant mkt leader with approximately 60% mkt share and strategic partnerships with healthcare institutions nationwide that offer a barrier to entry and an effective referral source. Also, they think the co's recurring rev model that is highly leverageable, generates considerable free cash and attractive returns on invested capital.
9:34AM TiVo (TIVO) Sanders Morris Harris downgrades Hold to SELL . Firm cites valuation and 3 negatives: 1) TiVo has been running a special promotion for the last four weeks, offering its 40-hour owned-DVRs gratis, leading them to believe that TiVo is having problems meeting its quarterly guidance of 40,000 - 60,000 subs for the stand-alone business; 2) there still appears to be general murkiness surrounding the economics of the Comcast deal; and 3) co has always been able to promote itself as the higher quality, service-oriented, premium product focused on technology innovation and subsequent ease of use. However, that does not seem to be the case anymore, as other DVR service providers have begun to "raise the bar" in terms of technology innovation.
9:29AM AstraZeneca (AZN) Smith Barney Citigroup upgrades Hold to BUY. Target $45 to $55. Firm says while the late stage R&D pipeline remains weak, they think the mgmt team has at least 3 years of strong earnings. They say substantial cash returns to shareholders, which should allow time for the early stage pipeline to mature and for further in-licensing and acquisition, before the pipeline again becomes the dominant issue.
9:29AM VI Tech (VITX) Needham & Co initiates BUY. Target $11. Firm cites the following: 1) firm's review of promising preclinical and clinical data-to-date demonstrating reductions in HIV viral load, even in resistant strains, following single oral dosing of PA-457, a first in class HIV maturation inhibitor with Fast Track designation; and 2) anticipation of the reporting of results from the current Phase 2a trial in the fall, which firm believes will be positive (possibly at the ICACC meeting in Sept).
9:28AM Mentor Graphics (MENT) Needham & Co downgrades Buy to HOLD. Firm says the co has had two weak bookings quarters in a row which has set it up for another weak earnings quarter in 3Q05, and a surprisingly modest outlook for 2006 as it attempts to build backlog and de-risk its forecast. While firm appreciates the strength of some of the co's products, particularly its Caliber franchise and some new high growth areas such as Auto design and Test, they think the co's uneven operating results and modest profit projections for next year make valuation a challenge.
9:24AM RadioShack (RSH) CSFB upgrades Underperform to NEUTRAL. Target $24 to $26. Upgrade follows co's announcement that they have signed an 11-year agreement with Sprint and a 10-year deal with Cingular. Although the co will be losing Verizon (VZ), the fastest growing wireless carrier in the country, they believe the addition of both Cingular and the Nextel portion of Sprint to the Sprint brand should make this agreement accretive for the co.
9:15AM Empresas ICA (ICA) Bear Stearns downgrades Peer Perform to UNDERPERFORM . Firm cites the following: 1) unattractive valuation vs peers; 2) disappointing backlog; 3) potential dilution from the upcoming equity offering; 4) questionable investments in the airport segment; 5) potentially unfavorable contract terms/delays for La Parota; and 6) non-ownership of rev stream.
9:12AM Regal Entertainment (RGC) Janco Partners downgrades Accumulate to MKT PERFORM. Target $20.88 to $20.72. Firm notes that sales for the top 12 movies fell an estimated 21.3% for the weekend, which is the second down weekend (following a two weekend interruption) to a 19 down week losing streak. Firm continues to think that the exhibition industry is now in dire need of new technologies or features such as IMAX or 3-D digital to enhance the theatre experience relative to increasingly compelling consumer electronics alternatives.
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