From Briefing.com: Close: Stocks opened sharply higher but closed lower as another record high in oil prices ignited widespread consolidation that left virtually every sector underwater... The market had traded to the upside all morning as further analysis of the Fed's optimistic economic outlook - "aggregate spending, despite high energy prices" - helped investors assess the longer-term fundamentals of owning stocks at current levels...
However, yesterday's reassurance about economic expansion amid "relatively low" inflation was eventually trumped by the same [high] energy prices that apparently were not much of a factor since the FOMC's previous meeting (June 29-30)... Crude oil futures ($64.90/bbl +$1.83), which at session lows following an unexpected 2.8 mln rise in weekly crude inventories (consensus -1.0 mln) had kept sellers on the sidelines, found more aggressive buying interest from traders eyeing the sixth consecutive weekly draw in gasoline inventories, which fell 2.1 mln barrels (consensus -2.0 mln)... Continued refinery problems, short-covering and remarks from Texas oilman T. Boone Pickens, who sees $75/bbl oil by year's end, may have also assisted in the commodity's 2.9% surge...
Pacing the way to the downside was the influential Technology sector, dragged lower after Cisco Systems (CSCO 18.25 -1.36) issued a disappointing Q1 (Oct) sales outlook... More consolidation in Semiconductor (i.e. AMAT, BRCM and LLTC), as well as weakness in Hardware (i.e. IBM, HPQ and NTAP) and Software (i.e. MSFT, ADBE and SYMC), also overshadowed an analyst upgrade on Qualcomm (QCOM 39.21 +0.44) and confirmation that Yahoo (YHOO 34.19 +0.13) will buy a 35% stake in China's Alibaba.com for $1.0 bln...
All American Semiconductor (SEMI) boosts credit facility from $85-$100 million, extends expiration date from May 14, 2006 to May 31, 2009
8:06AM Staktek Holdings reports in-line, ex items; guides above consensus (STAK) 3.48 :Reports Q2 (Jun) net of breakeven, excluding non-recurring items, in line with the Reuters Estimates consensus of ($0.00); revenues fell 39.9% year/year to $11.3 mln vs the $9.8 mln consensus. Co issues upside guidance for Q3, sees loss of $0.01 vs. $0.00 consensus; sees Q3 revs of $11.5-12.0 mln vs. $9.61 mln consensus.
OmniVision Technologies (OVTI) says it is collaborating with N.A.S.A. and the Jet Propulsion Laboratory to supply image sensors for the Picosat and Uninhabited Aerial Vehicle Systems Engineering Mars prototype aerobot project; co also is supporting the Angstrom Aerospace Corp. in Sweden with imagers for the first MEMS-enabled nanosatellite, the MicroLink Nanosatellite project....
9:30AM Ecost.com (ECST) Merriman Curhan Ford downgrades Buy to NEUTRAL. Merriman downgrades ECST as Q2 results showed another slowdown in rev growth and no improvement in gross margin. Firm says that operational issues related to the co's transition away from PC Mall continued to hamper its progress, and while mgmt believes that many of these issues were corrected existing Q2, firm says the co lost a lot of its momentum. 9:29AM Dawson Geophys. (DWSN) AG Edwards downgrades Buy to HOLD. AG Edwards downgrades DWSN to reflect a less attractive risk/reward profile after the recent stock price out performance. Firm is adjusting their 2005-2006 EPS estimates to reflect less aggressive gross margin assumptions (lowered by about 40 basis points in part to reflect the ever-present weather risk and other factors), higher SG&A and depreciation expenses, and a higher tax rate.
9:29AM Transmeta (TMTA) Piper Jaffray upgrades Underperform to MARKET PERFORM. Target $1. Firm notes that the co reported strong Q2 results, and the first profitable qtr in its history. Gross margins were an impressive 67%, boosted by the larger licensing mix and product sale of previously written-down inventory. Firm expect a strong Q3, but notes that royalty streams from these licensing deals will not show up until 2H06, and without additional wins licensing technology transfer fees could dry up in 1H06. Firm does note the high likelihood of an additional IP customer win for the co's LongRun-2 technology (possibly Toshiba) before the end of the year.
9:28AM Amer Italian Pasta (PLB) Legg Mason downgrades Hold to SELL . Legg Mason downgrades PLB after the co announced it is delaying reporting Q3 results and filing its Q3 10-Q. The press release further outlines challenges facing the co, including an Audit Committee internal investigation, significant financial statement charges, weak F3Q05 operating performance, and bank credit agreement covenant violations. Firm expects more bad news from the co as it works through the challenges outlined in its Aug 9 press release, and they believe a negative outcome on any of these challenges may drive the shares lower.
9:27AM EchoStar (DISH) Bear Stearns downgrades Outperform to PEER PERFORM. Target $38 to $33. Bear Stearns downgrades DISH saying while they remain positive on the D.B.S. business in the long term, they think that in the short term, the business model may be in a state of flux, creating an "investor chasm " which could cause the shares to languish. Firm notes that CEO Ergen's new hands-off approach and handing over reins to the recently hired senior executives suggests a sale may be contemplated. Given currently depressed share prices, while a transaction is possible, they think it is not highly probable.
9:25AM United Stationers (USTR) Bear Stearns downgrades Outperform to PEER PERFORM. While revs continue to track satisfactorily, margin pressures are mounting, and firm thus cuts their 2005-06 ests. Firm also notes that Project Vision, which involves a heavy infrastructure investment phase, will probably undermine earnings growth through 2006.
9:24AM 1-800-FLOWERS (FLWS) WR Hambrecht upgrades Sell to HOLD. Target $7.5. WR Hambrecht upgrades FLWS say that although they believe the stock is expensive, they are not comfortable combining their above consensus ests with a Sell rating. They view the co as a turnaround story, and say expectations are no longer declining.
3:22PM Walt Disney (DIS) 25.38 -0.76: Disney reported its third quarter results after Tuesday's close to little fanfare. The concern going into the report that DVD sales have peaked was related to the recent results from Pixar (PIXR) and DreamWorks Animation (DWA). Disney's results in the Studio segment echoed those trends, as the segment incurred its first loss in over four years with DVD sales tumbling. The magic for Disney, however, continues to emerge from its media assets as cable and broadcasting generated strong momentum that helped offset the weakness in its studio entertainment unit.
The entertainment giant's profits rose 41% y/y driven by ESPN. Net income came in at $851 mln, or 41 cents per share, up from $604 mln or 29 cents per share last year. Excluding non-recurring items, like the $24 mln gain on the sale of the Anaheim Mighty Ducks hockey team, earnings per share were $0.42, topping analysts' forecasts by four cents. However, the upside was due to non-operating items, namely a lower tax rate and share count.
The Media Networks segment, which includes ABC and ESPN, generated an impressive 48% rise in profits to $998 mln, well beyond the street's expectations, on revenue growth of 16% to $3.39 bln. Operating income at the Cable Networks grew 38% to $729 mln and made up the lion share of the segment's profits. Higher affiliate revenues resulting from increased contractual rates, and deferred revenues from subscriber growth and programming committed, attributed to the upside. ABC was the sole breadwinner within the broadcasting unit. Improved primetime ratings boosted advertising rates, and coupled with lower programming costs, spurred an 86% year-over-year increase in operating income. Disney is hoping to extend its success rate with its fall line up. The programming schedule, which has been well received, has generated a 30% increase in total upfront sales to $2.7 bln and has attracted 20 new advertisers.
The Film unit suffered from disappointing sales of "The Pacifier" and "National Treasure," as well as declines in animated film sales. Bob Iger, who will replace Michael Eisner next month, mentioned on the call that Disney, as well as the industry, suffered from a lack of blockbuster hits. Disney also faced a challenging yearly comparison. The Film unit reported an operating loss of $34 mln, as revenues tumbled 15% to $1.46 bln. Iger said Disney will issue more titles, including releases of TV hits "Desperate Housewives" and "Lost," to gain market share. Catalysts on the horizon include the sequel to "Pirates of the Caribbean" and "Chicken Little," along with the release of "The Lion, The Witch, and the Wardrobe" (Dec) and Pixar's release of "Cars" (summer) and the re-release of "Toy Story" 1 & 2.
The Parks & Resorts segment, excluding Euro Disney and Hong Kong Disney, reported its seventh consecutive quarter of accelerating profits following 9/11. Operating income rose 6% to $448 mln on revenue of $2.4 bln, which was up 7%. Higher ticket prices and increased attendance, due to the 50th Anniversary of Disneyland Resorts, helped spark the rise in revenues and offset increased marketing costs. In addition to the new Magic Your Own Way a la carte ticketing package, Disney has implemented a number of promotional offers to help drive park attendance. Operating income within the Consumer Products segment declined 20% to $61 mln as revenues fell 23% to $418 mln, reflecting the sale of the Disney stores in November.
We remain committed to Disney as a suggested holding in our Active Portfolio due to its mid double-digits operating growth, attractive multiple, and shareholder value. Notwithstanding the near-term weakness in DVD sales, Disney's fundamentals are quite good. The company is running on all cylinders, extracting value and driving growth across all of its businesses. The upcoming fourth quarter is typically Disney's finest hour. We expect accelerating revenue growth to be mainly advertising-driven from network and cable programming. Further, the schedule of seven releases by Miramax, and the continued improvement in traffic and margin expansion at its US parks, should provide strong momentum. Looking to fiscal 2006, these trends will continue to play out from the theme parks, to ESPN profitability, to ABC rating improvements. We feel Disney's discounted multiple is due in part to Media being out of favor in general, but feel Disney offers a compelling investment opportunity. Shares are trading at a forward P/E of 19.0x compared to its 10-year average of 31.1x. ---Kimberly DuBord, Briefing.com
3:01PM Jack in the Box (JBX)
37.91 +0.06: Jack in the Box, one of the nation's largest hamburger chains, reported sound results for the third quarter and raised its guidance for the full year. Although shares have come down slightly from their intraday peak of $39.00, the upside move is still reflective of the company's strong quarterly performance and continued operating momentum.
For the third quarter, revenue increased 9% year/year to $590 million, with same store sales up 2.8%, as new products and programs propelled overall growth. Distribution and convenience store sales for the quarter amounted to $81 million versus $50 million in the year ago period, while other revenue, which includes the sale of 20 Jack in the Box restaurants, increased to $7.2 million from $6.6 million last year. The increase in distribution and convenience store sales was largely due to additional Quick Stuff stores and higher fuel sales, as well as an increase in distribution sales to Qdoba and Jack in the Box franchised restaurants.
At the same time, the company posted net income of $23.9 million, or $0.66 per share, compared to the year ago figure of $20.7 million, or $0.56 per share. Excluding approximately $0.06 for a one-time tax benefit, the company earned $0.60 per share in the quarter - inline with the consensus estimate. Furthermore, SG&A expenses fell to 10.6% of sales from 11.3% in the prior year, but restaurant operating margin shrank to 17.2% of sales, compared to 17.7%, primarily due to higher beef and produce costs.
Following the momentum derived from its third quarter initiatives, JBX boosted its earnings guidance for the fiscal year to $2.52 per share versus its previous forecast of $2.46 per share - exceeding the consensus EPS estimate of $2.46. Full-year operating margin was further estimated to be 17.1% of sales versus 17.3% of sales forecasted earlier, as higher beef costs are expected to persist in the next quarter. The company also iterated that it expects to earn roughly $0.63 per share during the fourth quarter with an operating margin of 17.9%. This compares with EPS of $0.56 and an operating margin of 17.6% from the same period last year. Analysts had projected fourth quarter earnings of $0.62 per share.
JBX expects to open a total of 45-50 company and franchised Jack in the Box restaurants and 75-80 Qdoba Mexican Grills during the fiscal year. In addition, the company plans to extend its improvements beyond the menu and remodel existing restaurants to enhance its atmosphere and dining experience.
As the company continues to drive growth through a combination of new product introductions and concerted expansion efforts, investors should find value in improving operations and growing advancement opportunities. At the current price level, the stock is trading at 15.7x trailing earnings, compared to 16.4x and 20.8x for McDonald's (00C) and YUM Brands (YUM), respectively. The upside momentum in the company, whose stock has climbed over 30% in the past year, along with successful initiatives to strengthen its market presence, presents the basis for further multiple expansion and underscores the present investment opportunity. --Richard Jahnke, Briefing.com
11:31AM Atari (ATAR)
1.45 -0.75: Before there was Sony's PlayStation and Microsoft's X-box, Atari garnered the lion's share of the home video game market with the introduction of the Atari 2600 game console. The popularity of Atari's platform and memorable game titles, such as Pong, Asteroid, and Pac-Man, was undeniable and translated the success of arcade games to the home market. However, a failure to innovate and to obtain key strategic license agreements amid a flood of competitors, specifically Sega and Nintendo, led to its exit from the console market.
Although Atari's hardware legacy is continued by the Flashback, a portable device that plays basic games, its primary revenue source is on the software side. With a number of successful game franchises such as Rollercoaster Tycoon, Driver, and The Matrix, Atari has redefined itself as one of the leading software publishers in the industry.
While Atari has continued to focus on its business and strategies to position itself for the future, it has recently been beleaguered by management changes and operational problems. The recent departures of CEO Jim Caparro and Thomas Mitchell, a former partner with Ernst and Young who served on the company's board, highlight the host of problems facing the company. Atari has been increasingly consumed with eliminating non-essential assets and reducing costs, all while searching for a strong line-up of games to support it business. In the past year, the company has shut down three studios and replaced several key executives, including its CFO, in an attempt to reorganize and propel itself forward.
More interesting, however, is the company's weak operations and continued decline in revenue. For the fiscal first quarter, Atari saw sales fall 77.6% to $24.2 million from the year ago period and below the consensus estimate of $36.2 million. While the change in quarterly revenue was primarily attributed to the release of Driver 3 in the June quarter last year, it also speaks to the company's inability to leverage its strong franchises and introduce fresh titles to meet the demands of the market. Accordingly, publishing net revenue in the quarter, excluding discontinued operations, decreased to $12.8 million from $97.5 million a year earlier, partially offset by distribution revenue, which amounted to $11.4 million versus $10.6 million.
Meanwhile, the company recorded a net loss of $28.3 million, or $0.23 per share, excluding restructuring charges of $2.2 million and losses related to discontinued operations. This compares to net income of $12.1 million, or $0.10 per share, in the same quarter last year and the analyst estimate for a loss of $0.12 per share. The bottom-line was largely impacted by increasing costs associated with reorganizing efforts, as well as investment in new product releases. For the quarter, research and development costs rose to $16.8 million from $15.5 million last year, while general and administrative expenses climbed to $7.9 million from $7.5 million.
As a result of major changes in the company's operations and faltering sales, Atari has reported disappointing results in recent quarters. Furthermore, management turmoil has expounded on the challenges facing the company as it tries to correct its declining market position amid heavy competition, particularly from leading publishers Activision (ATVI), THQ (THQI), Electronic Arts (ERTS), and Take Two (TTWO). In order for the company to regain its footing and generate long-term value for shareholders, it must greatly improve its product line-up, reduce its dependence on legacy games, and provide greater stability and visibility into operations. As this does not appear to be a transformation that can take place overnight, investors should remain on the sidelines given the risks associated with the stock. --Richard Jahnke, Briefing.com
11:25AM Cisco (CSCO)
18.67 -0.94: Cisco is the premier player in the networking space and with telecom spending coming on strong, and one of its main competitors in the router space, Juniper, reporting strong growth, the market was revved up to hear a more bullish tone for growth. Instead, Cisco delivered an in-line profit result with a slight upside on revenues, but dampened expectations by forecasting growth to slow next quarter. As a result, its stock has languished in the wake of the report.
Cisco revenues rose 11% for the fourth quarter to $6.58 bln, but it expects the pace to slacken going into its fiscal year 2006 to 10% growth. During the quarter, Cisco reduced its backlog of orders, which supported revenue trends, but that may drag sales in Q1. CEO John Chambers noted spending by the US government, Japan, and China reduced demand for Internet phones and switches that direct traffic across the web. The company is attempting to shift the market's focus to a yearly comparison, rather than sequentially, to account for the seasonal impact on earnings. Listening to the call, it was difficult for analysts to nail down guidance for next quarter. Management attempted to shrug off near-term weakness, citing seasonality effects, and tried to get the market to focus on its long-term guidance, which has not changed at 10-15% growth.
A cautious-sounding near-term outlook, nonetheless, rained on Cisco's parade, which has been the case with four of the last five earnings releases. Expectations had definitely gotten ahead of themselves prior to the report, with most hoping to see a bit more on the top line. Shares are likely to suffer downside pressure until the market digests the Q2 weakness, but Cisco's outlook improves as its fiscal year unfolds. The second quarter is expected to be incrementally stronger, driven by the consumer and commercial segments, with some ramping up in Q3 and Q4 as the carriers and enterprise segments come on board.
Back to 4Q05, Cisco's profits rose 12% year over year to $1.54 bln, or $0.24 per share, excluding non-recurring items. This was dead on the Reuters Estimates consensus. Gross margins were of particular importance as management's cautious tone had led analysts to forecast declining profitability over the next few quarters. After three quarters of flat margins, Q4 gross margins slipped 50 basis points to 67.9% but were better than what the street had been expecting at 67%. Product margins remained relatively flat at 68.4%, but service margins fell 230 basis points from last year to 65.2%. Cisco expects gross margins will remain in the 67-68% range for the full year, which provides a floor of support for further margin erosion, but it will all depend on the product mix in the quarters ahead. Book to bill, which measures the value of incoming orders against products being shipped, was above 1 - a moderately bullish sign.
By product segment, Routers, accounting for almost a quarter of sales, rose 2.8% q/q to $1.48 bln. These intelligent products carry a higher margin, but account for less of total sales compared to Switches where profits have remained relatively flat. Sales of Switches (40% of revenues) grew 9.8% q/q and 10% y/y to $2.66 bln. The highlight of the quarter came from the Advanced Technologies segment (17% of revs), which includes home networking, IP telephony, optical networking, security, wireless, and storage area networking, as sales jumped 20% y/y and 2.6% q/q to $1.16 bln. Services accounted for the remaining 16% of revenues, with sales in that segment increasing 6.2% q/q and 15.3% y/y to $1.06 bln. By region, growth was relatively balanced with Asia performing slightly worse due to weakness in China. During the quarter, CSCO repurchased 130 mln shares of stock for $2.5 bln, bringing its buyback tally as of the end of July to $27.2 bln.
The bull case for Cisco is simple. It is the premier player in the networking space, leaving it well-positioned for the migration to an IP-based infrastructure. It has an impeccable balance sheet and adequate cash flows allowing the company to make numerous acquisitions (nine already this year) to extend its product and service lines. The bear case centers on the trajectory of growth, with many arguing Cisco needs to grow through acquisition, as it has just become too big to generate historical organic rates. Further, considering the telecom spending environment, a moderate top line may suggest it's losing share to the likes of Juniper. For now, clearly the bears are holding the cards. Shares trade at a forward price to earnings multiple of 17.7x, compared to other large cap tech names like IBM (IBM) at 16.8x and Microsoft (MSFT) at 19.0x. ---Kimberly DuBord, Briefing.com
8:52AM Polo Ralph Lauren (RL)
51.98: Polo Ralph Lauren reported Tuesday that fiscal first quarter profit increased four-fold from the year ago period, driven by strong sales and improved margins in both the wholesale and retail segments. Moreover, the New York-based company raised its forecast for the fiscal year, which helped to lift shares over 6% during intraday trading to an all time high of $53.25. The stock has gained nearly 50% over the past year, reflecting the company's momentum in operations and continued strong performance.
For the first quarter, Ralph Lauren earned $50.7 million, or $0.48 per share, well above the year ago figure of $12.7 million, or $0.12 per share, and the consensus estimate of $0.37 per share. At the same time, revenue climbed 24.1% to $751.9 million compared to $606.0 million in the same quarter last year. Along with strong earnings and sales, the company improved operating margin by 300 basis points to 55.1% of revenue compared to 52.1% last year.
The results largely reflect progress in the wholesale and retail businesses from "continued focus on inventory management, sourcing efficiencies, and better sell-through." Sales in wholesale increased 41% from last year to $337 million, driven by robust contributions from childrenswear, menswear, and expansion of the company's operations throughout Europe. The segment recorded operating profit of $46 million versus a loss of $2.6 million in the year ago period. Retail sales, accordingly, rose 15% to $357 million with same-stores sales climbing 7.3%. Operating profit advanced to $36 million, up 46% from $24 million last year, while operating margin for the division improved 210 basis points.
The strong quarterly performance, which firmly beat Wall Street estimates, prompted the company to raise its full year outlook above previous expectations. For the fiscal year, earnings are anticipated to be in the range of $2.85 and $2.92 per share with revenue growth in the high single digits, compared to the analyst forecast of $2.93 per share on revenue of $3.52 billion. Operating margin is further expected to widen by 400 to 450 basis points, reflecting expansion initiatives in the wholesale and retail businesses. For the second quarter, Ralph Lauren projected revenue growth to be in the low double digits and operating margin to increase by 150 to 200 basis points. Analysts are expecting Q2 EPS of $0.87 on $935.9 million in revenue.
With the stock climbing steadily for the past two years, investors have clearly been excited about the growth prospects of the company. According to Roger Farah, President and Chief Operating Officer, "there are four primary growth drivers in the business: expansion of specialty stores, international development, new merchandise opportunities and strong margin increases as a result of leveraging its global infrastructure." As the company continues to improve its operations and aggressively moves to expand its presence in Europe and Asia, it should realize strong revenue and earnings gains in the future.
As Ralph Lauren continues to leverage its strong brand name and growing appeal to drive growth, investors should see the growth story endure. At the current multiple of 18.9x trailing earnings, the company is trading above its historical average level of 16.5x over the past five years. However, given the company's strong operating momentum and favorable growth drivers, the premium valuation is justified. --Richard Jahnke, Briefing.com
8:46AM Page One - The Surprising Rally Continues
S&P futures suggest a significantly higher open. There is no particular news to account for this. The strength today is as surprising as the strong move yesterday.
The S&P gained 8 points yesterday. The Fed raised the fed funds target 1/4% and the policy statement made it clear that more rate hikes are coming. That shouldn't be a reason for a short-term rally. It was exactly as expected.
Oil prices were down yesterday, but are up again this morning. At $63 a barrel, it is hard to see how the daily fluctuations are all that significant. It is hard to justify stock market strength on this basis.
The earnings news overall is good, but the major reports of yesterday aren't boosting the market. Cisco reported earnings a penny ahead of expectations but guided revenue forecasts slightly lower. The stock was down 3% in after hours trading. Walt Disney reported earnings 4 cents better than expected but revenue was below Wall Street forecasts.
There are also no economic report this morning to account for the stock market strength.
Investors are apparently assessing the longer-term fundamentals and coming to the same conclusion we have - stocks are a good value right now. The down days in early August have apparently reignited demand. We had hoped that the market might dip even more in August. That would present better entry points. But that may not be the case. We won't argue with the rally as our Market View stance is moderately bullish. We are just surprised that the market action is so strong at this time. Dick Green, Briefing.com
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