From Briefing.com: In our previous update on this page, we suggested in a tongue-and-cheek way that there might be suggestions on Wednesday that the tech sector traded higher because of the better than expected earnings report from aluminum company, Alcoa (AA 25.47 -0.34). As it so happens, the tech sector traded higher, but in proper fashion, it traded higher in spite of Alcoa, not because of it.
Alcoa's Q2 report, frankly, was decent relative to what was expected of the company, but overall, it came up short in delivering on the market's bullish expectations given the company's acknowledgment that it hasn't seen signs of market improvements. Recall that Briefing.com has suggested that the guidance from corporate America needs to validate that the scope of the rally off the March lows was warranted. Alcoa didn't deliver in that regard, and hence, the cyclical shares fell prone to profit taking activity on Wednesday.
The tech sector, for its part, continued its winning ways as the lack of disappointing news in that arena, coupled with the drab market commentary from Alcoa, enabled the sector to avoid a negative outing. To be sure, a one-point gain by the Nasdaq doesn't look like much, but given that it was up 84 points, or 5.0%, in the preceding two sessions, it qualifies as a definite victory for the bulls.
The sector's relative strength was tied to a report in a Dutch newspaper that quoted Cisco's (CSCO 18.80 +0.07) CEO, John Chambers, as saying that spending on IT products will recover in the next 2-4 months. Later in the day, however, the company clarified that Chambers had been misquoted, noting that he hadn't said anything new and that, in fact, he said companies will start spending on IT products 2-4 months after their business turns up. An interesting sidenote to all of this is that the Nasdaq, which was in negative territory before the clarification, traded higher after it. Once again, we were reminded of the bullish sentiment that has prevailed in the tech sector.
On Thursday, that sentiment is expected to be tested. Following Wednesday's close, Yahoo! (YHOO 35.29 +0.19) reported its Q2 results, which were solid by just about any measure, with the exception of living up to the market's aberrantly high expectations. The company's profit of $0.08 per share was in-line with the Reuters Research consensus estimate, revenue of $321.4 mln was slightly ahead of expectations, and YHOO offered Q3 and FY03 revenue guidance that bracketed current consensus estimates. In after hours action, however, YHOO was down more than $2 as the lack of an upside surprise in its guidance prompted some selling on the news. Keep in mind, though, that YHOO is up 116% year-to-date and up nearly 300% since it bottomed last September.
Accordingly, look for YHOO's report to serve as a reality check in early trading on Thursday that tech companies may have a hard time living up to the bullish expectations embedded in their rising stock prices. YHOO's report was a good one, though, especially when taking into account that consensus estimates were revised upward. Thus, it wouldn't be any surprise to see the tech sector show some resolve and bounce back from opening losses. At this juncture, though, Briefing.com is still skeptical that the market will experience an earnings season rally given the market's high expectations and the fact that it never really sold off during the earnings warning period.-- Patrick J. O'Hare, Briefing.com
6:01PM Wednesday After Hours Price levels are as of 4 pm EST: After seesaw day, the market closed lower as it awaited the earnings release from Yahoo (YHOO) and Genetech (00C). YHOO might very well push the market lower tomorrow as the Company reported EPS in line with estimates. There were several reports that suggested that YHOO would beat estimates. The Dow closed lower by more than 66 points and stands at 9142, the S&P 500 added 11 points and closed at 993. S&P 500 futures were at 998, three points below fair value. NASDAQ 100 futures were down nine points from fair value at 1288.
Yahoo! (YHOO 33.20 -2.09), The online search enginer reported Q2 (Jun) earnings of $0.08 per share, in line with the Reuters Research consensus. Revenues rose 42.3% yr/yr to $321.4 mln and ahead of the $313.3 mln consensus. YHOO sees Q3 revenues of $318-338 mln vs current consensus of $325.5 mln, for Y03 sees revs of $1.26-1.31 bln, consensus is $1.28 bln.
Genentech (DNA 76.51 -0.87) Reported Q2 (Jun) earnings of $0.31 per share, $0.05 better than the Reuters Research consensus of $0.26. Revenues rose 28.5% yr/yr to $799.7 mln vs the $755.6 mln consensus. DNA is a biotechnology company using human genetic information to develop drugs.
Nautilus Group (NLS 10.80 -2.24) Co. sees Q2 EPS in the range of $0.13-0.15, below Reuters Research consensus of $0.26 and Q2 revenues of $95-100 mln vs. R.R. consensus of $112 mln. NLS also sees Y03 EPS of $1.00-1.10, also below R.R. consensus of $1.59 and Y03 revenues of $450-470 mln, vs. R.R. consensus of $527 mln. Co cites "A challenging business environment, Bowflex product line competition, and lackluster consumer spending" to be the major reasons for their shortfalls
American Eagle (AEOS 18.83 -0.82) Company reports same store sales down 5.3% vs. consensus of -2.5%, sees Q2 EPS of $0.10-0.12 vs R.R. consensus of $0.09. New guidance is based on July same store sales decrease in the "mid-to-low single digits"
Galyan's Trading (GYLN 15.06 +0.00) Company sees Q2 EPS as a loss of $0.01 to a gain of $0.03, ex items, vs. Reuters Research consensus of a $0.21 gain. Company also sees Q2 revenues in the range of $160-164 mln vs. R.R. consensus of $174 mln. Company is also expecting to report a same store sales decline of 8-10 %. Company cites the poor economy and the unfavorable weather for shortfall.
Brown and Brown (BRO 32.67 +0.00) Reported Q2 (Jun) earnings of $0.41 per share, $0.02 better than the Reuters Research consensus of $0.39. Revenues rose 20.0% yr/yr to $137.9 mln vs the $142.1 mln consensus.
Tomorrow looks to be a light way of earnings announcement, of note, Abbott Labs (ABT) and Pepsi (PEP) and the first of the banks comes out, as Sun Trust (STI) reports tomorrow before the bell. . For more detail on these, and other after hours developments, be sure to visit Briefing.com's In Play, Earnings Calendar and Guidance pages..--Brian Bolan, Briefing.com
3:16PM Kulicke & Soffa signs volume purchase agreement with National Semi (KLIC) 7.60 +0.46: Co and National Semiconductor (NSM) sign a volume purchase agreement for Maxum wire bonders. KLIC will be the exclusive supplier of wire bonders over the next 12 months.
3:00PM Yahoo! Earnings Preview (YHOO) 35.27 +0.17: -- Update -- Yahoo reports its Q2 after the close with Reuters Research consensus estimates of $0.08 per share and revenues of $313.3 mln. Credit Suisse First Boston believes the co will beat both its published and consensus estimates. Despite its lofty valuations, the analyst believes the stock could still have upside given the current market environment and analyst earnings revisions reflecting potentially higher guidance for the year. Deutsche Bank also shares some of the same sentiment on estimates with the analyst believing most of the revenue upside should be coming from the marketing services business. In addition, upside is suggested to come from improved pricing from the paid search segment along with a marked improvement in branded advertising segment.
1:37PM Microsoft (MSFT) 27.33 -0.37: First, Microsoft issued a dividend; now, it says that it will no longer issue stock options. What will the company think of next? Speculation has it that Microsoft is entertaining the thought of issuing a special dividend of $10 bln. Management downplayed such talk, but whatever the case may be, Microsoft seems to be forging a path these days that would force one to re-consider the tendency to think of Microsoft as a growth company.
The market, in Briefing.com's estimation, has caught on to the software giant's changing investment complexion. After all, with investors growing less risk averse since March, and the tech stocks rebounding in intrepid fashion, it is reasonable to think MSFT would have been at the head of the recent rally. On the contrary, it was a notable laggard. At the end of June, MSFT was up 12.5% from its March 11 lows versus the Nasdaq Composite, which was up 27.6%. To be fair, a 12.5% gain in roughly three months is a solid investment return, but when pitted against the performance of other growth stocks, it qualifies as disappointing.
As for last night's announcement that Microsoft will no longer issue stock options, but instead, will start granting Stock Awards -or restricted stock - Briefing.com is not disappointed. Rather, we are encouraged by the move. Starting with its 2004 fiscal year (i.e. now), Microsoft will begin expensing all equity-based compensation, including previously granted stock options. That decision, understandably, has created concern about lower levels of profitability, which is why MSFT is on the defensive today. However, the new approach is a prudent one, as it should produce greater transparency in the company's results, increase the likelihood of a dividend boost, and enhance the appeal of working for Microsoft .
Expensing stock options, of course, has been a hot button issue, particularly for technology companies that have come to rely on them as a key incentive for attracting top talent. Options, to say the least, were seen as manna from heaven during the heyday of the tech bubble, but the popping of that bubble and the scourge of the alternative minimum tax, have created plenty of angst, and have bred plenty of ill-will, for recipients of stock options.
Hoping to correct that situation, and with an eye toward attracting, and retaining, top talent, Microsoft reshaped its compensation philosophy. Now, Microsoft employees will be a direct owner of the company through these Stock Awards and won't be disillusioned by the thought of holding stock options that are underwater, and frankly, may never prove to be of any value.
Loyalists, we suspect, would decry the re-classification of Microsoft as a mature company and the labeling of its stock as a value-oriented investment. That's fine, but let's face it, the payment of a dividend, the abandonment of stock options, and the expensing of equity-based compensation, are aberrations for most technology companies, and certainly for most growth companies. The latest move by Microsoft reinforces our recent decision to add its stock to our Value Core, but more importantly, it reinforces our view that MSFT represents an attractive investment idea at current levels.-- Patrick J. O'Hare, Briefing.com
12:07PM RJ Reynolds (RJR) 36.87 -1.26: Speculators are seeing a merger between the number two and number three sellers of tobacco, but this may only come on the heels of a sudden burst in M&A throughout the market. A story in The Wall Street Journal has RJ Reynolds (RJR 36.49 -1.64) and British American Tobacco (BTI 21.60 -0.14 ) in talks to do a deal, but the article mentions that the two are unlikely to consummate the transaction.
RJR, the maker of Camel and Winston cigarettes, is the No. 2 U.S. cigarette maker behind Altria Group Inc.'s (MO 42.83 -3.94) Phillip Morris division. Several possible deal scenarios have been discussed, including the Brown and Williams division being sold to RJR. At the other end of the spectrum is a possible BTI buyout of RJR. Whatever the rumor, neither company will comment on any specifics.
The same litany of excuses are present for not owning a tobacco stock - the increased competition from discount brands, the higher taxes from a number of states, and the continued threat of litigation. RJR, though, has more than just those excuses against it.
One sign that doesn't bode well for either RJR, or a potential deal, is that the Company's CFO resigned back in early June. The resignation of a CFO is a major red flag, and gets a lot of short sellers interested in a stock. The CFO tends to have the best idea of where sales and expenses are headed, and a resignation after only a year on the job is not a positive signal.
Back in June, when the same rumor (BTI and RJR merging) ran its course, RJR was said to have hired Booz Allen Hamilton, a consulting firm, with the express interest of exploring the opportunity to sell the Company. Since then, both good and bad news has circulated around RJR. The company has witnessed the litigation risk being slightly reduced, as profiled in a Story Stock, and also has seen its credit problems persist. Standard & Poor's recently lowered RJR's corporate credit and senior unsecured rating to below investment grade. About $2.5 billion of RJR debt was outstanding at the end of March. This sets the stage for a White Knight with a solid balance sheet and a plan to cut costs to come to the rescue.
The only problem is that no White Knight wants to buy that much trouble; and chances are the White Knight would have already ridden up and defended its "prize." Lots of debt, coupled with a junk rating from two of the three rating agencies, and a tough market doesn't really bring a lot of White Knights out of hiding. Whether RJR does a full scale sale, or lets go, or sells, parts of the Company remains to be seen. What is certain is that RJR is the laggard of the group, and is not benefitting as much from the recent upturn in the market. Briefing.com sees a lot potential for the industry as a whole, but certainly regards RJR as the black sheep of the sector.--Brian Bolan, Briefing.com
11:37AM Ratings Briefing - HAL : Halliburton (HAL 23.68 +0.85) has drawn fire on several fronts over the past two years - SEC probes into the company's accounting practices and grand jury investigations into charges of overbilling the government - but undoubtedly its largest issue has been the enormous number of asbestos claims stemming from its 1998 purchase of Dresser Industries. At the time, HAL believed that the accrued liability would not exceed its set-aside reserve of $24 mln, and as of late last year, settlements had totaled approximately $2.8 bln.
HAL's fortunes, however, have taken a turn for the better as analysts have suggested that the company's asbestos turmoil has subsided. An asbestos bill proposed by Senators Feinstein and Kohl that would replace the current tort system used to resolve asbestos claims has provided investors relief, and in turn, has helped lift the stock to a new 52-week high (on June 12).
The bill would eliminate some of the uncertainty for companies confronted with thousands of asbestos suits by creating a $108-153 bln trust fund that would distribute set payouts for particular ailments. Members of the Senate Judiciary Committee remain divided over how much should be paid for specific claims; and Chairman Hatch has pushed out a vote to approximately two weeks from now. Goldman Sachs noted today that the bill will most likely pass the committee - as only a simple majority is needed - but stipulated that support from Senator Leahy and other influential Democrats is needed for enactment. As it stands now, Goldman rates the chance of passage at no more than 50-50.
Regardless of the outcome of the proposed bill, JP Morgan re-examined today what closure to HAL's asbestos travails would mean for the stock. Its scenario analysis suggested that, in a flat Oil Services Index (i.e. OSX), moving beyond the asbestos issue would create potential upside of 61% versus downside potential of just 5% for HAL. If investor sentiment deteriorates to the point at which the current oil services cycle is viewed as being "over," however, the aforementioned risk-reward range would need to be shifted lower. The latter declaration aside, JP Morgan upgraded HAL to Overweight from Neutral, noting that current supply constraints for both oil and natural gas, and upstream investment trends, are inconsistent with a cyclical downturn.
Although Briefing.com would refrain from issuing such a strong opinion on HAL, we do agree that a resolution to the asbestos matter - particularly the pending legislation in the Senate - would remove a tremendous overhang from the stock and enable it to trade at P/E multiples more on par with sector peers. We recommend investors watch the Congressional proceedings closely as a sizable cap to asbestos payouts would most likely incite a bounce in HAL, as well as other companies burdened with asbestos liability. -- Heather Smith, Briefing.com
11:03AM Ahead of the Curve: Tenet Healthcare (THC) 11.98 -0.17 (-1.4%) Now the SEC investigates. It was inevitable, frankly, given the prior Department of Justice investigation into outlier Medicare payments to Tenet hospitals. Back in January, Tenet announced that it would revise its policy for how outlier payments are received at Tenet owned hospitals - and the result would be a drop from $65 million per month to closer to $8 million per month. This represents approximately $57 million per month or $680 million per year. That is almost three-quarters of a billion. Tenet's entire revenue is in the $16 billion range, so this would represent only about 5%, at most, of their total revenue. Nevertheless, the SEC investigation, which apparently stretches all the way back to 1997, is probably looking at what role the outlier payments represented in Tenet's revenue stream over this time period.
There is simply no way that any of this news can be viewed as positive for Tenet Healthcare. There are undoubtedly some looking to take positions when they feel the market has over-discounted the stock. That approach might work, because Tenet can probably pay any fine that gets imposed. But it is not a strong investment premise, in our opinion, for those wanting healthcare stocks. In the last of our Stock Brief series on the entire Healthcare Sector, published today on the Stock Brief page, we outlined the facilities industry, of which Tenet is the fourth largest company (out of 88). In the entire healthcare facilities industry, we have no individual stock pick, largely because the services model does not provide the opportunity for improved margins with scale. However, we do have several strong picks in the other industries of the healthcare sector: 1) major drugs (ABT); 2) biotechnology and drugs (TEVA); 3) healthcare equipment and supplies (BLUD), (STE), (AMI). For details on why, see the Stock Brief page. Each article's title starts with: Ahead of the Curve: Healthcare.
The real concern on our part, is whether the investigation stays limited to Tenet, from the DOJ perspective. This is an industry where the primary customer is the government and insurance companies. Insurance companies have already managed to find a way to exert some cost controls, but they primarily rely on passing on costs to the payer - corporate HR departments. The government, on the other hand, has not shown much real strength in policing the Medicare and Medicaid systems. If real abuses, particularly if they are in the "grey area" rather than clearly illegal activities, turn up, it might actually lead to a much more focused review of the entire system. That won't happen in the near future, as no politician is willing to pick up that flag for the parade, but as a distant spectre looming on the horizon, it should be of concern for every investor in the healthcare sector. For that reason, we think it is worth following the Tenet story closely, even though we don't have a pick in the entire facilities industry. The other sectors are all driven by the public/private system we have built in this country. Miracle drugs are invented that will cost $10,000 and prolong life for six months. Most of patients that will use them will not be able to buy them if they are not covered by government or private insurance programs. The role of the government in this sector is extremely important - and the Tenet case - which now includes the DOJ and the SEC - may give some guidance as to how government will view their role in the industry over the coming years. - Robert V. Green, Briefing.com
9:24AM The Technical Take : Gains across the board for the market averages amid improved volume which is exactly the type of action that bulls are looking for. The overall focus remains more so on Nasdaq related stocks as the Composite index easily outperformed the other large cap averages in terms of percentage gain, volume and breadth while also establishing a new 52-wk high. Although the Dow and S&P 500 have yet to take out their respective highs from June, small-cap (Russell 2000, S&P 600) and mid-cap (S&P 400) averages have joined the Nasdaq at fresh yearly highs. The inability of the larger cap "blue chip" averages to join in the upside extension is not considered a negative divergence but rather merely a period of underperformance. This is based on the continued favorable chart action in the Dow and S&P 500, bullish internals and the impressive technical performance of the majority of the sector indices (see below for details).
Nasdaq Composite: We highlighted the 50 period simple mov avg on a 5 minute bar chart yesterday as a good indicator of the very short term bias. The Nasdaq Comp tested this area in the first 10 minutes of action and rebounded aggressively falling a few points shy of a short term resistance near 1751. Based in the pre-market readings the market is set up for a minor pullback off the open. For the early action will be watching 1735 which marks this average as well as an intraday range (green line) in the chart below. A secondary short term floor is in the 1725/1720 area.
Beyond any early consolidation, both the short and intermediate term bull trend remain intact. To see the remainder of The Technical Take on the Nasdaq Comp and a similar take on the S&P 500 along with levels for the Dow Industrial Avg see the Stock Brief.
Send suggestions, comments or questions to -- Jim Schroeder, Briefing.com
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