From Briefing.com: 6:02PM Swing Trader: Sideways Action...Anything Goes From Here : -Technical- Yet another choppy trading session for the SPY making it the 4th day in a row of sideways/neutral trading. I can't really say anything positive or negative about this action. We're in a "Wait & See" mode. Ideally I'd like to...(continued)
Close Dow -46.51 at 10539.72, S&P -4.23 at 1218.59, Nasdaq -6.17 at 2172.07: Stocks closed lower across the board, as widespread profit-taking following four consecutive days of market gains was exacerbated by a warning from Toll Brothers (TOL 34.14 -5.27) that raised concerns about a possible end to the housing boom. Perhaps placing even more emphasis on TOL's disappointing FY06 guidance, which weighed heavily on everything from homebuilding and home improvement to construction materials and household appliances, was the absence of noteworthy economic data. To wit, Consumer Discretionary, which Briefing.com has had an Underweight rating on since April 2004, took the biggest hit. Despite a nine basis-point drop in the benchmark 10-yr note's yield, which benefited from strong anticipation for today's 3-yr note auction, the Financial sector went on the defensive. Freddie Mac's (FRE 60.72 -0.52) revised $220 mln profit reduction for the first half of 2005 coupled with consolidation in brokerage, bank and insurance stocks acted as the biggest restraining factors. Technology also languished as failed rebounds in the semiconductor and software groups left the sector struggling to remain break even for the year. On a positive note, Energy managed to recover some of Monday's 1.6% sell-off, taking advantage of strong Q3 earnings from Transocean (RIG 59.94 +1.22), one of Briefing.com's suggested holdings, and a rebound in oil prices. However, as one of only two sectors to close higher, an overall bearish sentiment echoed early concerns that the outlook for earnings growth may already be reflected in stock prices at current levels.DJTA -0.5, DJUA -0.2, DOT -0.2, Nasdaq 100 -0.1, Russell 2000 -0.8, SOX -0.2, S&P Midcap 400 -0.7, XOI +0.8, NYSE Adv/Dec 1247/2011, Nasdaq Adv/Dec 1157/1861
9:45AM ACE Cash Express (AACE) Jefferies & Co initiates BUY. Target $24. Jefferies initiates Ace Cash Express as they believe the co provides a unique opportunity to invest in a broad suite of financial service products that service the subprime market at an attractive valuation.
9:39AM Netease.com (NTES) Piper Jaffray downgrades Outperform to MARKET PERFORM. Target $90 to $72. Piper Jaffray downgrades NetEase and cuts their tgt to $72 from $90, saying growth is decelerating, Q4 guidance was tepid.
9:39AM Honeywell (HON) AG Edwards downgrades Buy to HOLD. AG Edwards downgrades Honeywell as they see a challenging 2006, not only due to higher than anticipated environmental and pension expense but also due to weak performance in the Turbo business.
9:38AM Guidant (GDT) Banc of America Sec upgrades Neutral to BUY. Target $69 to $66. Banc of America upgrades Guidant as they believe the risk/reward profile for GDT is now very attractive and believe many of the issues GDT faces are already priced into the stock.
9:34AM Gilead Sciences (GILD) Lazard Captial upgrades Hold to BUY. Target $44 to $63. Lazard upgrades GILD noting that Roche provided Tamiflu manufacturing guidance of 300 mln treatments by 2007 (translating into possibly $600 mln in royalty rev to GILD). Firm also says Tamiflu arbitration with Roche offers upside for GILD, their GILD HIV franchise sales growth ests appear conservative, and partnership or in-licensing of new product is likely and would offer upside to their ests.
9:33AM Secure Computing (SCUR) RBC Capital Mkts upgrades Sector Perform to OUTPERFORM. Target $14 to $17. RBC upgrades SCUR as they believe the current merger opportunity with CGFW and SCUR is undervalued. Also, as the coy is able to execute on integration goals, it is likely to trade closer to the group multiple, which may indicate further upside to their current target.
9:31AM Global Partners (GLP) Lehman Brothers initiates OVERWEIGHT. Target $24. Firm believes that the stock's steep discount valuation relative to index will subside as GLP builds a growth track record and investors gain a better understanding of its wholesale operations, which is a non-traditional MLP business.
9:30AM Powerwave (PWAV) Ferris Baker Watts downgrades Buy to NEUTRAL. Firm says their biggest fundamental concern is the longer-term potential for entry by Asian competitors and the effect they could have on PWAV's three- to five-year growth rate. This is not a new or incremental concern, and it is not one that they can quantify now, but they believe prices significantly above the current level imply either three-to-five year net income growth in excess of the 20% they currently forecast or a discount rate of less than the 15% they use in their DCF valuation.
2:08PM McDonald's (MCD)
33.88 +0.18: For the thirtieth consecutive month, McDonald's Corp. (MCD) reported an increase in worldwide comparative store sales Although the 3.4% rise in October global comparable sales fell short of the 3.6% Briefing.com Benchmark consensus, the company's results were impressive given the tough year-ago comparison. Systemwide sales, which include the performance of all worldwide McDonald's restaurants operated by the company, franchisees, and affiliates, rose 3.9%, or 4.4% in constant currencies, which was in line with the company's expectations for long-term top-line growth of 3.0-5.0%.
McDonald's posted comparable store sales growth across all geographic segments versus the October 2004 period. Driven by positive results in Australia and Japan, comparable sales in the Asia/Pacific, Middle East and Africa division (APMEA) rose 4.3%(consensus +1.8%) and reflected the best month-over-month improvement. Sales in the United States increased 3.0%, also improving over September but falling below the estimated 3.4% rise. The company highlighted the popularity of McDonald's Best Chance Monopoly Game, as well as extended hours and expanding menus, as contributing to U.S. sales growth.
The European market has posed a continuous challenge to the restaurant chain of late. The U.K. has been a particular area of weakness, but the company noted that it continues to strive to strike the right chord with British consumers by focusing upon the communication of product quality and its place within a balanced, active lifestyle. Sales in France and Germany fueled the better than expected 3.3% (consensus 2.6%) rise in European comparable sales, which came on top of a 2.0% increase last year.
McDonald's continues to emphasize its Plan to Win campaign, which was credited for sales increases across all segments, but CEO Jim Skinner acknowledged that "there is still more to do." The company's focus will continue to be on improving service, enhancing menu variety, and building brand relevance in an effort to drive sales and profits.
MCD shares trade at 16.7x expected FY05 (Dec.) earnings, in-line with its historical five-year average, and at a discount to Yum Brands' (YUM) multiple of 19.4x estimated FY05 (Dec.) earnings.
--Lisa Beilfuss, Briefing.com
1:50PM Caremark Rx (CMX)
50.96 -1.04: Prescription benefits manager Caremark Rx reported a 34% jump in third quarter earnings, driven by healthy mail order sales and generic drug penetration, but revenue fell short of expectations. In turn, shares of the company, which are up nearly 30% since the beginning of the year, have declined during the regular trading session.
For the third quarter, the Nashville, TN-based company said it earned $231.4 million, or $0.51 per share, excluding integration and other expenses, up from $177.6 million, or $0.38 per share, in the year-ago period. Revenue increased 8% to $8.1 billion from $7.5 billion last year, as growth in mail pharmacy revenue outpaced a decline in retail revenue During the latest period, mail pharmacy revenue increased 33% to $2.9 billion with mail claims up 23% to 14.6 million. Retail revenues totaled $5.1 billion and retail claims totaled 116.2 million, representing a decrease of 2% and and 12%, respectively.
Caremark expects full year earnings, ex-items, of $1.97, at the high end previous EPS guidance of $1.95 to $1.97. The revised forecast surpassed analysts' expectations for earnings of $1.96 per share, according to Reuters Estimates. For the fourth quarter, the company projected earnings of $0.55 per share - in line with the consensus estimate. The company also offered guidance for fiscal 2006 that matched expectations, with adjusted earnings of $2.30 to $2.38 per share versus the consensus estimate of $2.36.
The latest results were in line with the consensus earnings estimate of $0.51 per share, but came up short of analysts' estimate for revenue of $8.25 billion. Despite the slight top-line miss, the company, as well as other prescription benefit managers, are well positioned to benefit from favorable prescription cost trends, increased generic focus, and shifting demographics related to the aging of baby boomers. In addition, pending patent expirations for several key drugs and the potential impact of the new Medicare prescription drug benefit, formally know as Plan D, which will take place on January 1, 2006, are expected to foster top-line growth. Although Briefing.com holds a Market Weight rating on the Health Care sector, it is our view that prescription benefit managers will continue to retain a leadership position with Medicare Plan D being a positive catalyst.
--Richard Jahnke, Briefing.com
11:49AM Blockbuster (BBI)
4.24 -0.06: Dallas-based Blockbuster swung to a loss in the third quarter as it continues to struggle with challenging industry conditions and competition from online rival Netflix (NFLX). For the latest quarter, the nation's largest video rental chain reported a loss of $24.6 million, or ($0.13) per share, excluding asset impairment and other charges - a penny shy of analysts' expectations for a loss of ($0.12) per share. In the same period last year, the company posted adjusted earnings of $5.2 million, or $0.03 per share.
Blockbuster's revenue fell 1.7% from a year ago to $1.39 billion, reflecting the elimination of extended viewing fees under the company's "No Late Fees" program. Total worldwide same-store sales fell 3.8% as same-store retail sales declined 7.8% and same-store rental revenue declined 2.5%. Gross margin for the quarter decreased to 57% from 61.1% last year, due to lower rental margins generated by Blockbuster Online as well as the impact of the "No Late Fees" program. Consistent with its strategy to improve financial flexibility and reduce costs, selling, general and administrative expenses fell 5.6% to $735.0 million, largely as a result of lower advertising spending.
Meanwhile, the subscriber count for Blockbuster Online remained relatively flat at about one million subscribers, as compared to the previous quarter. For perspective, rival Netflix said last month it added 396,000 net subscribers during its fiscal third quarter, bringing its total subscriber base to 3.59 million. The Los Gatos, CA-based company also noted that few subscribers are canceling their monthly subscription service, even as Blockbuster transforms itself to compete more aggressively in the online DVD rental market.
Given the weakening of the in-store rental industry, Blockbuster continues to invest heavily in its online operations and is taking steps to improve its overall cost structure. The company said its intends to reduce its costs by over $100 million in 2006 and $50 million in 2007 by reducing overhead, lowering marketing spending, and divesting non-core assets. Additionally, the company expects capital spending to decrease by approximately $90 million in 2006 from $140 million in 2005 as a result of fewer new store openings.
While Blockbuster continues to contend with competition from the likes of Netflix , Wal-Mart, Best Buy and Circuit City, as well as initiatives to improve financial flexibility, prospects for growth remain unsettled. With waning online subscriber growth and tighter margins crimping the company's profit outlook, along with a deteriorating in-store business, Blockbuster has yet to show significant operational improvements and capitalize on the potential growth opportunities in the online rental market.
--Richard Jahnke, Briefing.com
11:02AM Six Flags (PKS)
7.31 -0.08: Following yesterday's close, Six Flags, Inc. (PKS) delivered third quarter net income of $195.7 million, or earnings of $1.29 per share. The results may not be comparable to the Reuters Estimates EPS consensus of $1.20, as they include the beneficial reversal of a tax valuation allowance that reduced the company's Q3 tax expense by $70.0 million. Adjusted EBITDA grew 13.0% to $277.3 million, while revenues rose 9.8% to $559.0 million. Attendance increased 4.0%.
In August, Six Flags announced that its Board had unanimously decided to pursue a sale of the company. While three dozen suitors have reportedly been studying Six Flags' books, no final bids have been extended. Chief Executive Kieran Burke asserted that the company is pleased with the progression of the sale process, and indicated that the company targets early December for the receipt of final offers. Six Flags' auction came after shareholder Dan Snyder, who owns 11.7% of PKS shares through his investment vehicle Red Zone, offered to more than triple his stake and simultaneously replace the company's management and Board of Directors.
Including the performance of AstroWorld, the Houston park permanently closed this year, the company expects adjusted EBITDA of at least $300 million for the full year. Management, in turn, forecasts full-year revenue growth at "virtually every park." Citing the debut of several new rides and the launch of a new indoor waterpark, Six Flags foresees $340 million in adjusted EBITDA in 2006, with revenue growth of 3.5-4.0% and a 6.5-7.0% rise in attendance. According to Reuters Estimates, analysts expect Six Flags to post a loss of $0.71 per share in Q4. For FY05, analysts estimate a loss of $0.45 per share.
--Lisa Beilfuss, Briefing.com
9:47AM Cablevision (CVC)
25.34 -0.22: Keeping in step with the rest of the media industry, Cablevision said its third quarter loss narrowed on strong growth for its video, voice, and Internet services. The net loss declined to $62.9 mln, or $0.22 per share compared to $63.2 mln, or $0.22 per share a year earlier. CVC dialed in revenue growth of 11% to $1.24 bln. The results may not be comparable to the $0.08 per share analysts were expecting. With Q3 in the bag, New York's largest cable-television provider reaffirmed its full year revenue guidance of "mid-teens" growth.
The triple play of voice, data, and Internet has now become a quadruple play after the company joined in a venture with Sprint Nextel (S) to offer co-branded wireless handsets integrating cable and wireless services on a single device. This bundled offering is driving growth for all of the cable providers. Cablevision signed up 122,851 customers for its VoIP services. Cablevision, whose assets also include Radio City Music Hall and the New York Knicks, is targeting Verizon (VZ) directly with its Internet-based phone services.
Shares dropped over four dollars on October 25th after the company said the controlling Dolan family withdrew its offer to take the company private. The offer was pulled off the table after the family failed to reach an accord with independent directors. Many industry analysts felt the family's $7.9 bln offer, including $21 per share in cash, was not enough. The Dolan family controls a 20% equity stake in the company and 71% of the voting rights. Some predict that the company will eventually sell itself to Time Warner. An announcement of a proposed $3 bln special dividend approved by the Board supported shares after the deal fell through.
--Kimberly DuBord, Briefing.com
9:39AM Midway Games (MWY)
19.15 +0.17: Midway Games on Monday reported a wider third quarter loss, due in part to accelerated amortization and the write-down of capitalized development costs related to games it released in the latest period and that it plans to release in the current, holiday quarter. In addition, the struggling video game publisher lowered its outlook for the full year on account of the delay of several unnamed titles into 2006, as well as lower-than-expected reorders by retailers for such titles as The Suffering: Ties That Bind and L.A. Rush.
For the third quarter, the Chicago-based company said that its quarterly loss widened to $29.1 million, or ($0.33) per share, from $16.1 million, or ($0.20) per share, last year. However, the results were a penny better than the consensus estimate of a loss of ($0.34) per share and in line with the company's revised expectations for a loss of $29 million, or ($0.33) per share, announced last week.
The sharp decline in profits came despite a 74% increase in revenue to $29.5 million, partially due to higher development cost write-downs. At the same time, research and development costs rose 44% to $8.8 million, while selling and marketing expenses rose 98% to $12.5 million as the company prepares for the launch of next-generation gaming systems by Microsoft, Nintendo, and Sony in the coming months. Microsoft's Xbox 360, scheduled to be released later this month, will be the first of the upcoming generation of consoles to make its debut, providing a needed catalyst for the crucial holiday season.
Amid higher prices at the pump, slower consumer spending, and transition-related issues, many video game publishers are expecting a tough holiday selling season. Just as Electronic Arts (ERTS) and Take-Two Interactive (TTWO) lowered their outlook for the current quarter, Midway Games revised its expectations to a loss of approximately $95 million, or ($1.09) per share, on revenues of $145 million. The company's previous forecast, given in August, was for a loss of $60 million, or ($0.69) per share, on revenue of $200 million. According to Reuters Estimates, analysts, on average, are expecting a loss of ($1.11) per share on $144.27 million in sales.
While it is typical for game publishers to see profits decline during transition periods, as investments made into games for next-generation systems exceed sales from those games, Midway Games has operated in the red for the past five years. However, the company has averted insolvency, thanks in large part to heavy insider buying led by Sumner Redstone, who owns nearly 90% of the company's shares. With a market cap of about $1.7 billion and a price-to-book ratio of 11.5, compared with 6.1 for ERTS and 1.9 for TTWO, Midway Games is seemingly overvalued, despite Mr. Redstone's increasing ownership in the company. In addition, given the rising short interest in the company, investors should remain cautious about a material draw back in the price of shares.
--Richard Jahnke, Briefing.com
9:23AM Toll Brothers (TOL)
39.41: Luxury home builder Toll Brothers announced its preliminary fiscal Q4 results this morning - and they were strong. Revenues of approximately $2.01 billion were the highest for any quarter in the company's history and its backlog grew 36% to $6.01 billion, which is a fiscal year-end record. Its stock is down 12% in pre-market trading, though, because the company validated the market's concerns about a housing slowdown with a cautious-sounding FY06 outlook.
Specifically, Toll Brothers cut its FY06 home delivery guidance to 9,500-10,200 from 10,200-10,600 on account of having fewer selling communities than previously anticipated. The latter condition was attributed to an increasingly complex regulatory process that is extending the time it takes for new communities to come to market. Toll Brothers didn't offer any earnings growth targets for FY06, but it did say the revised delivery guidance should reduce earnings growth projections for FY06.
According to Reuters Estimates, Toll Brothers is expected to earn $5.58 per share in FY06, which translates to 23% growth versus the FY05 consensus EPS estimate of $4.52. Toll Brothers will provide more guidance when it officially reports on December 8.
Fourth quarter contracts increased 4.0% to $1.59 billion. The company acknowledged, however, that its results were negatively impacted by the shortage in selling communities and (here's the kicker) some softening of demand in a number of markets. Additionally, it was noted that, ever since Hurricane Katrina, buyers are taking longer to make purchasing decisions - a pattern the company attributes to the significant decline in consumer confidence recently and to record gas prices.
Frankly, the gas price excuse is weak. Consumers shopping in the luxury home market aren't going to be fretting over making a mortgage payment because gas prices went from $2.50 to $3.00 at the pump. They might because mortgage rates increased 50 basis points, but not because gas prices are up $0.50. The fact that Toll Brothers would play up the gas price issue is irksome as we suspect it's a fallback excuse to deflect from its own operational shortcomings. Accordingly, with investor sentiment toward the homebuilding stocks already weakening and mortgage rates expected to move higher, we wouldn't rush to buy today's dip. The tempered guidance from Toll Brothers will weigh on other homebuilders and the Consumer Discretionary sector to which Briefing.com has assigned an Underweight rating.
--Patrick J. O'Hare, Briefing.com
9:07AM Transocean (RIG)
58.72: Bullish fundamentals in the offshore drilling market led to an exceptional quarter for Transocean. The owner of the world's premier fleet of offshore deepwater assets drilled right through estimates, earning $170.4 mln, or $0.50 per share, compared to $154.9 mln, or $0.47 per share last year. Stripping out a $129.4 mln, or $0.39 per share gain in the corresponding 2004 period, signals the strong profit growth RIG is enjoying. Revenues jumped 17% to $762.2 mln on high fleet activity and soaring dayrates. Average fleet utilization rose to 82% from 79% in Q2. CEO Robert Long stated, "The outlook for the offshore drilling industry remains exceptionally strong with both floating rigs and jackup units experiencing improving demand."
Today's results only accentuate our positive view on the industry and further underscore why we continue to favor Transocean as a suggested holding for active investors. The fundamentals for the industry support a prolonged drilling cycle, creating multiple expansion for the offshore drillers. We favor the deepwater segment mobilized by rising day rates and both near and long-term visibility. Transocean owns the largest and most complete fleet of mobile offshore rigs, operating in virtually every region and every rig type around the world. It operates the premier fleet of deepwater assets, owning 13 of the world's 26 fifth generation rigs.
In the quarter, dayrate levels reflected this tight supply and robust demand. RIG recently won a contract for a record high dayrate of $475,000. Multi-year contracts for high-spec floaters is a new, but welcomed trend for the drillers and demonstrates the tightening capacity well into 2007. Eight of these floaters are contracted through 2010. Utilization rates for this fleet are at 80% for 2006 and 92% for its Fifth-Generation Deepwater floaters. Jackup demand is also exceptionally strong, achieving utilization rates of 98% and multi-year contracts for dayrates of $85k to $130k. A key bit of news was that RIG will reactivate 3 of its 7 idled semis by the Q3FY06 and that it acquired a 3-year contract for its Sedco 700 series at a dayrate of $350,000.
Gulf hurricanes caused a bevy of challenges, including rig repairs, personnel shortages, and lengthening lead time of critical rig components that escalated operational costs at a time when the company is coping with an "unprecedented level of customer demand." Hurricane damage is expected to range between $40-$50 mln. Higher maintenance and operating costs as a result could overtake revenues in the fourth quarter. Gross margins widened to 42.3% from 33.6% last year. The Houston-based company enjoys significant operating leverage with earnings expected to outpace revenue growth over the next couple of years. Investors should ride out near-term volatility caused by the hurricanes' aftermath and fluctuations in crude prices. The market has yet to fully realize RIG's earnings potential and financial flexibility. With a significant cash position, the company can pursue a bevy of growth strategies both organic and through M&A, along with returning value to shareholders through continued share repurchases.
--Kimberly DuBord, Briefing.com
8:12AM Time Warner Telecom (TWTC)
8.30: Broad-based top line growth from the enterprise segment led to a smaller than expected net loss for Time Warner Telecom. The company, which is 43% owned by the media giant Time Warner (TWX), posted a loss of $23.4 mln, or $0.20 per share, up from a loss of $30.9 mln or $0.27 per share last year. TWTC, a leading provider of managed voice and data networking solutions for business customers, posted a solid quarterly result after Monday's close, generating $17.2 mln in revenues, an increase of 11% year/year and 2% quarter/quarter.
Enterprise revenues increased 19% from last year's period and 4% from last quarter to $15.8 mln, benefiting from growth in bundled voice products. Outpacing these gains, the data and Internet segment grew revenues by 31% to $9.8 mln. On a sequential basis, sales rose by 4% due to sales of Ethernet and IP-based products. The smallest contributor was the Carrier segment, gaining 2% to $1.1 mln. The top line was in line with consensus estimates, but earnings per share were ahead by three cents. Churn improved slightly over the last year to 1.1%. The company noted it continues to experience carrier disconnects related to wireless carriers' mergers and "network grooming" activities.
Reflecting the strong revenue growth, gross margins widened by 300 basis points from last year's period to 62%. CEO Larissa Herda highlighted the fact that the company achieved its fourth consecutive quarter of revenue growth and margin expansion. Modified EBITDA margins improved to 35% from 32% last year. The stock has gained over 90% to date despite estimations it will continue to lose money this year and next. Notwithstanding today's upside, consensus estimates for FY05 are for a loss of $0.94, narrowing to a loss of $0.59 in FY06.
--Kimberly DuBord, Briefing.com
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