From Briefing.com: Don't fight the tape... don't spit into the wind... don't stand in the way of a charging bull. These are just a few of the more popular adages that are meant to suggest a person should be buying and not selling stocks. Not since the late 1990s have they been heard with such frequency, but with the Nasdaq up 72% in the past eleven months, one would expect to hear nothing less.
On Thursday, they were applicable yet again as the Nasdaq and the broader market enjoyed another broad-based rally that left each of the major indices at new 52-wk highs. The tech sector's strength, frankly, was somewhat surprising considering investors were provided with reason to believe the tech stocks, and specifically the semiconductor stocks, have gotten ahead of themselves.
That reason was the SEMI Book-to-Bill report for August. In general, Wall Street was looking for a number in the neighborhood of 0.99, but the report registered a 0.91 reading and was accompanied by a downward revision to the July figure (to 0.90 from 0.97). Put another way, $91 worth of new orders were received for every $100 of product billed for the month, suggesting that orders are still falling relative to current business.
Dating back to March, here are the monthly book-to-bill results to present: 0.91, 0.90, 0.90, 0.93, 0.90, and 0.91. Although the book-to-bill report is a lagging indicator, the takeaway is that business hasn't picked up in any meaningful fashion (see for yourself sia-online.org. Be that as it may, the semiconductor stocks have acted as if the boom of the late-'90s is right around the corner. To wit, the SOX Index is up 66.0% from its March lows. While Briefing.com would concede that business conditions are improving, we would, in turn, argue that industry fundamentals don't support the massive run on the stocks.
Accordingly, we have been urging readers to take some profits and to lighten their holdings in the semiconductor stocks and other highflying technology names. That suggestion, of course, brings contempt from some readers, and primarily from those whose time horizon doesn't extend beyond tomorrow. Such is the nature of our business and the attitude of those who don't know Cisco (CSCO) from Sysco (SYY), but only care about which stock is in favor with the crowd and which one isn't.
Pleasing everybody, like calling the market's direction from one day to the next, is an impossible thing to do. We do know that bullish momentum rules right now, which is why we haven't suggested shorting technology stocks or even liquidating technology holdings altogether. By the same token, we also know that there was a palpable sense of invincibility in early-2000 and that momentum shifted in dramatic fashion in March 2000 and that a lot of paper profits eventually turned into realized losses.
With that in mind, the prudent course of action is to take some money off the table following the nearly year-long rally in the Nasdaq and a host of technology names. Our stance on the matter was solidified by a reader who sent an anonymous feedback to Briefing.com on Thursday to order us to "stifle it about tech." In his rant, he exclaimed, "since when was the market EVER about Fundamentals and stupid graphs." We need say no more, except that we've traced the respondent's e-mail address to GreaterFool@xxxxx.com. -- Patrick J. O'Hare, Briefing.com
6:00PM Thursday After-Hours price levels vs. 4pm ET: The advance in the equities market is being followed by lackluster trade in the after-hours session. Presently, the S&P 500 is trading 0.3 points below the fair value of 1038, while the Nasdaq is 1.5 points below the fair value of 1403.
The earnings reports tonight are mostly in-line to better-than-expected. World's leading designer, marketer and distributor of authentic athletic footwear, apparel, equipment and accessories, Nike (NKE 60.18 +2.93), blew out estimates with its Q1 (Aug) earnings of $0.98 per share, $0.10 above the Reuters Research consensus. Revenues rose 8.2% year/year to $3.02 bln, above the $2.92 bln consensus. The company cited global brand strength, superior products, and a favorable currency exchange environment for its record results. On the conference call, NKE reiterated its FY04 (May) expectations of high single digit revenue growth, mid-teens EPS growth, and accelerating gross margins. Management also noted that investors can expect mid-single digit revenue growth in Q2 (Nov) and Q4 (May), and mid-teens revenue growth in Q3 (Feb).
Also coming in with a better-than-expected report was Red Hat (RHAT 9.05 +0.65), an enterprise-operating platform provider. The company reported Q2 (Aug) EPS of $0.02, beating the consensus estimate and last year's EPS for the same time period by a penny. Total subscription and services revenue of $28.8 mln shaped up for a 35.8% increase year/year and was above the consensus of $28.1 mln. Gross margins increased to record levels, with blended gross margins at 72% and gross margins of Enterprise subscription technologies and services at 74%, reflecting the significant scalability of RHAT's subscription business model, according to CFO, Kevin Thomspon.
Another techie with above-consensus results was computer networks giant, 3Com (00C0 6.10 +0.10), which reported a non-GAAP Q1 (Aug) loss of $0.15 per share, excluding $52 mln in expenses related to restructuring efforts, amortization and write down of intangibles. This was $0.02 above the Reuters Research consensus of a loss of $0.17. While revenues of $161.9 mln were above the consensus of $153.8 mln, they added up for a 39.9% year/year decline.
Jabil Circuit (JBL 29.04 -0.41), a provider of electronic manufacturing services, checked in with earnings of $0.20 per share, in-line with the consensus, on revenues of $1.30 bln, which were above the consensus of $1.28 bln and up 31.1% year/year. Going forward, JBL said it sees Q1 (Nov) EPS of $0.22-0.24 (consensus is $0.23) and revenues in the range of $1.37-1.43 bln (consensus $1.38 bln). For FY04, the company expects EPS of $0.90-0.96 (consensus $0.93) and revenues of $5.6-5.8 bln (consensus $5.56 bln).
Speaking of guidance, it's certainly the right time of the year for it, as we're currently in the middle of the September warnings season. There is plenty of guidance to pick from, but the highlights are J. Jill Group (JILL 11.78 -3.55) and California Micro Devices (CAMD 6.58 +1.37). Specialty retailer of women's apparel, accessories and footwear, JILL is feeling the wrath of the market after slashing its Q3 (Sep) forecast to a loss of $0.13-0.15 (consensus loss of $0.01) on revenues of $80-83 mln (consensus $87.6 mln). The company cited a very challenging tone of business across all three of its distribution channels as reason for the lower guidance. The tone in CAMD's release, on the other hand, was much more upbeat, as the designer and retailer of application-specific analog semiconductor products said it now sees Q2 (Sep) EPS of breakeven to a profit of $0.03, above the consensus of a loss of $0.03. CAMD looks for revenues to be in the range of $13.8-14.5 mln (consensus $12.7 mln).
For more detail on these, and other developments, be sure to visit Briefing.com's In Play, Earnings Calendar, and Guidance pages.-- Victoria Glikin, Briefing.com
4:14PM Entegris guides lower for AugQ and NovQ (ENTG) 14.92 -0.48: Co now expects Q4 EPS of $0.02-$0.03 (which includes favorable tax benefits and other income) on sales of $71 mln, vs consensus EPS of $0.06 and $70.2 mln in sales. Co says its lower than nticipated Q4 earnings are primarily due to decreased gross profit margins, which are in the 33-35% range, and the main factors in the margin decline are aggressive efforts to reduce inventory while establishing tighter inventory controls and build-to-order manufacturing processes... Co expects Q1 (Nov) sales to be "slightly down" from Q4 vs R.R. consensus of $74.0 mln
4:12PM Solectron reaffirms Q4 guidance (SLR) 6.63 +0.03: Company reaffirms for Q4 (Aug), still sees a pro forma loss of $0.02-$0.06 cents, Reuters consensus is a loss of $0.05, on revenues of $2.6-3 bln vs consensus of $2.8 bln.
4:11PM Palm beats by $0.25, ex items (PALM) 22.46 +1.52: Reports Q1 (Aug) loss of $0.58 per share, excluding charges that totaled $0.16 per share, $0.25 better than the Reuters Research consensus of ($0.83); revenues rose 3.0% year/year to $177.4 mln vs the $182.2 mln consensus.
4:06PM California Micro guides higher (CAMD) 5.21 -0.09: Company issues upside preannouncement for Q2 (Sep), now sees EPS of breakeven to a $0.03 profit vs Reuters consensus of a $0.03 loss, revenues of $13.8-14.5 mln, consensus $12.7 mln
4:05PM Jabil Circuit reports in line; guides for Q1 & Y04 (JBL) 29.50 +0.30: Reports Q4 (Aug) earnings of $0.20 per share, in line with the Reuters Research consensus of $0.20; revenues rose 31.1% year/year to $1.30 bln vs the $1.28 bln consensus. Co. sees Q1 (Nov) EPS $0.22-0.24. R.R. consensus is $0.23 and revenues in the range of $1.37-1.43 bln, estimate $1.38 bln. Co. also sees Y04(Aug) EPS of $0.90-0.96, estimate$0.93 and revenues of $5.6-5.8 bln, estimate is $5.56 bln.
4:02PM Jabil Circuit reports Q4 EPS of $0.20, in line with consensus (JBL) 29.50 +0.30:
3:26PM Jabil Circuit tgt raised to $35 at Raymond James (JBL) 29.45 +0.25: Raymond James raises its price tgt to $35 from $29. Firm believes the higher multiple is warranted given the recent improvement of visibility into the channel along with increasing optimism across most segments of the electronic manufacturing supply chain regarding a pickup in end-market demand. (Note that co is scheduled to report earnings tonight).
Intersil (ISIL) 28.35 +0.18: Before the open, company said it expects to post Q3 earnings of $0.15 on revs of $129-132 mln (Reuters Research consensus $0.15, $130.85 mln). Due to co's healthy balance sheet and steady financial performance, ISIL has declared a quarterly cash dividend on its common stock of $0.03 per share.
3:30PM Nanogen (NGEN) 4.09 -0.70: Answer me this. How is it fair that an individual investor has to pay $4.79 for a share of stock in a certain company when an accredited investor only has to pay $3.30? That very question came into play today for shareholders in Nanogen who awoke to an announcement that the provider of molecular diagnostics had negotiated the sale of 2,121,211 mln shares in a private placement to several accredited investors. Doing the math, that translates into a 31.0% discount to yesterday's closing price for NGEN.
Naturally, the news has ruffled the feathers of some individual investors, because the discount at which the stock was acquired by the accredited investors is taken to mean that the stock was over-priced. After all, accredited investors are considered to be part of the smart money crowd and if they're not willing to pay the going price for the stock, why would you? The logical response, then, is to sell the stock, which is what is happening today.
The $3.30 price was determined based on a negotiated discount from the average of NGEN's closing prices for the five trading days ended Sept. 16. Aside from the newly issued 2.12 mln shares of common stock, the accredited investors received 5-yr warrants to purchase 424,243 shares of common stock at an exercise price of $4.75, 12-month warrants to purchase 530,305 shares of common stock at an exercise price of $4.75, and 6-month warrants to purchase 1,103,032 shares of common stock at an exercise price of $4.14. One thing to keep in mind with respect to the warrants is that the exercise of the warrants will be dilutive to earnings.
With the latter in mind, it is understandable for an individual investor to think that they have been short-changed by the private placement, especially when the stock drops 15% following the announcement. It is hard to argue anything other than that, but keep in mind that an infusion of capital that strengthens a balance sheet and provides an operating cushion can have profit-inducing advantages, too. Granted, the advantages come at a price initially to existing shareholders, but if the capital ultimately helps lead to successful product introductions, the company's revenues and earnings will grow, and the stock price will follow.
Perhaps the stock recovers today's losses in short order and perhaps it doesn't. Either way, there is legitimate reason for individual investors to be bothered by preferred pricing in private placements as it represents a glaring example of how the playing field isn't level for all investors. Individuals who bought at yesterday's high are staring at a 15% loss; meanwhile, the accredited investors are already looking at a paper profit of 23% based on current prices (note: the financing is scheduled to close on or about Friday, Sept. 19). The only fairness in that is if the infusion of capital serves its intended purpose of helping the company grow and prosper. -- Patrick J. O'Hare, Briefing.com
3:23PM Cintas Corp. (CTAS) 40.08 +0.06: Selling uniforms is not as good of a business as it used to be. At least, that's what Cintas's (CTAS 40.08 +0.06) management would tell you following this morning's 1Q04 (May) earnings report. Specifically, the company that used to deliver growth of 20% and beyond checked in with revenues of $678 mln, for a paltry 1.8% increase year/year, and was short of the Reuters Research consensus of $695.6 mln. Earnings per share were $0.37, in-line with the consensus and up just 2.8% year/year.
Not surprisingly, CEO Scott D. Farmer blamed the lackluster growth on the jobless recovery. With the employment market at contractionary levels, non-farm payrolls declining 93,000 in August, and the unemployment rate at 6.1%, the U.S. economy has yet to see a turning point for the employment market. As such, it should come as no surprise that a company, which designs, manufactures, and implements corporate identity uniform programs would be negatively impacted by the slumping hiring market.
Despite the challenging environment, however, CTAS did manage to score some brownie points with investors in the last quarter. First, the company reduced its long-term debt to total capitalization to 24% from 31% a year ago. Additionally, CTAS finished integrating Omni Services, the largest acquisition in its history, creating efficiencies that have boded well for margin improvements. As a result, gross margins increased to 42.4% from 41.3% sequentially and were flat year/year.
Looking to FY04, management reiterated its previous guidance for revenues of $2.75-2.95 bln (consensus $2.83 bln) and earnings of $1.52-1.64 per share (consensus $1.58). This reiteration of guidance has provided a certain degree of support to CTAS's stock in today's session. Note that the consensus estimates have been revised downward since the FY04 guidance was originally issued two months ago. At the time, the estimates called for FY04 revenues of $2.89 bln and earnings of $1.62 per share.
While CTAS, the company, has been struggling with the slow job market, its stock has been rolling with the wind as it is up 31% since the low of March 12. Interestingly, the S&P 500 is also up 31% from its March lows. Hence, CTAS has been trading in-line with the market over the past six months. It's likely that this trend will continue.
CTAS's ability to stay profitable in dire times is encouraging. Additionally, the economy is accelerating and the job market is expected to improve in the near-to-intermediate future. When that happens, CTAS is bound to see an increase in demand for its products and services. Nonetheless, considering the technology and efficiency improvements, as well as the company's likely desire to stay lean once things start getting better, there's nothing to say that employment growth will be as strong as in previous cycles relative to GDP growth. CTAS's glory days may, in fact, be behind it and investors may have to get used to the stock for its relatively safe value offering rather than its double-digit growth story. -- Victoria Glikin, Briefing.com
12:39PM Bear Stearns (BSC) 74.91 +2.44: Some people would argue that we are still in a bear market. Other people would argue that we are in a new bull market. Regardless of your stance, there is no denying that we are in a Bear Stearns market. How do we know? Well, the investment bank reported its Q3 (Aug) results this morning and they were nothing short of impressive.
For Q3, net income soared 90.6% to $313.4 mln, net revenues were up 28.6% to $1.49 bln, and diluted earnings per share increased 87.0% to $2.30, which was $0.65 ahead of the Reuters Research consensus estimate. Net revenue gains were achieved in each of its three major business segments, but it was the company's core Capital Markets segment that enjoyed the strongest growth (+42.0% to $1.2 bln).
Bear Stearns's fixed income division had another robust quarter, accounting for approximately 60.0% of net revenue in the Capital Markets segment. Specifically, net revenues climbed 76.8% to $720.1 mln as activity remained prosperous in the face of a steep yield curve, tightening corporate credit spreads, and the low interest rate environment. The recent sharp rise in yields, meanwhile, didn't impact business to any great degree as the firm noted that its mortgage-backed securities, high yield and interest rate product areas continued to perform exceptionally well.
The rally in the equity market buttressed Bear Stearns results even further as it led to a pickup in investment banking activity, a boost to total assets under management (to $25.7 bln from $23.2 bln), and higher net interest revenues, as margin debt balances and customer short balances increased.
On another level, Bear Stearns demonstrated how top-line growth, following an extended period of cost-cutting, can do wonders for bottom-line growth. In that regard, its pre-tax profit margin jumped to 32.5% from 21.2% in the yr-ago period as the significant increase in revenues was pitted against a stable cost base. As economic activity accelerates, and end demand increases, a number of other companies should also see top-line growth fall directly to the bottom-line. That consideration is why the market is apt to witness strong earnings gains in Q3 and Q4.
As for Bear Stearns, it may run into a perception hurdle in that the market might be inclined to think that its fixed income business won't remain as strong as it has been if interest rates continue to rise. At this juncture, though, Briefing.com doesn't expect there to be a sharp rise in Treasury yields given such low levels of inflation and a virtual promise from the FOMC that it won't raise rates anytime soon. That expectation, along with the reality that Bear Stearns is a very well-managed company that is reasonably priced at 1.65x book value, is why investors have ample reason to maintain exposure to the stock.-- Patrick J. O'Hare, Briefing.com
12:09PM Ratings Briefing - JCP : Eckerd has been a tough pill to swallow for J.C. Penney (JCP 22.55 +0.89) investors, as it has lagged the company's core operations and has acted as a major overhang on the stock. To wit, according to Smith Barney, since the beginning of 2002, JCP department stores have outperformed the department store industry average comp by 260 basis points. By contrast, Eckerd has underperformed the drugstore industry average comp by 220 basis points since the beginning of 2002.
This increasing divergence in the performance of the JCP department stores/catalog and Eckerd has led many analysts and investors to tie their view of JCP's stock directly to the outcome of the Eckerd saga and the resolution of its problems. As such, while JCP's core operations have been undergoing a successful turnaround, the stock is down 1.7% year-to-date versus a 25.2% year-to-date increase in the S&P 500 Department Store Index and a 17.4% year-to-date advance by the S&P 500.
Most analysts have chosen to keep their optimism in check with regard to JCP, as reflected by the current ratings distribution where 12 of 15 analysts covering the stock carry the equivalent of a Hold rating or lower. Nevertheless, one firm has stepped out from the pack this morning. Specifically, Smith Barney upgraded JCP to Buy from Hold based on three key factors: 1) heightened sense of urgency regarding Eckerd; 2) further improvement at department stores and catalog; and 3) compelling valuation.
The first factor for the ratings change is, arguably, the most influential of the three. According to Smith Barney, management and the board are currently evaluating strategic alternatives and there is likely to be an announcement by the end of this year with respect to the future of Eckerd. Potential scenarios include: 1) management change/addition; 2) divestiture; or 3) retention & refocus. Regardless of the plan chosen, Smith Barney thinks definitive action with regard to Eckerd would prove to be a significant catalyst for the stock.
Briefing.com couldn't agree more. After all, a mere hint of action with regard to Eckerd has resulted in an upgrade and a 4.1% uptick in the stock. Given the current ratings distribution, which leaves plenty of room for upgrades, as well as the fact that Eckerd is clearly a thorn in JCP's side, any action aimed at dealing with the Eckerd problem would bode well for JCP.
To that end, the market has been witness to retailers dropping non-core operations of late in favor of concentrating their efforts on their main business. For example, Sears (S 45.98 +0.68) sold its credit card operations, Best Buy (BBY 51.58 +0.10) got rid of the troubled Musicland business, and Circuit City (CC 11.14 +0.17) is planning to discard its bankcard operations. All of the above companies received the market's blessings when they announced their decisions and J.C. Penney shouldn't be any different. Add the potential of an Eckerd-free J.C. Penney to its improving operations, as well as the accelerating economy, the resilient consumer, and the kick-back of the recent tax cuts, and Smith Barney's Buy rating looks increasingly more justifiable. Note: Briefing.com upgraded the Broadline Retail Sector to Market Perform on 9/15. -- Victoria Glikin, Briefing.com
10:00AM Ahead of the Curve: Global Payment Systems (GPN) $38.90 (-0.05) GPN reported after the close yesterday, and as we predicted in yesterday's Story Stock, the actual earnings did exceed $16 million. Revenue was a disappointment, however, and defeated the short-term investment premise. The sharp increase in gross margin, however, strengthens a long-term investment premise, but makes revenue growth the key issue. The following table summarizes the report.Item Actual Q1 FY04 (8/31/03) Consensus Estimates Briefing.com Prediction
Revenue ($MM) $ 136.5 $ 139.4 Greater than $ 139
Gross Margin 54.4 % 50.5 % Greater than 51%
Net Income, excluding Extraordinary $ 17.4 $ 15.9 Greater than $ 16.5
Net Income, after Extraordinary $ 15.8 $ 15.9 Greater than $ 16.5
EPS, excluding Extraordinary 0.44 0.43 Above 0.43
EPS 0.41 NA NA
The bad news is the disappointing revenue numbers, which has been the track record for Global for a while. Although seasonality accounts for the overall non-sequential increases, the overall market for electronic transaction processing is growing nicely. Global should be growing their revenues better than they are currently, in our view. The disappointment of the revenues is the primary reason the stock was down by $1.31 after hours last night (to $37.63)
The good news, of course, is that the gross margin increased as much as it did. This is the real hidden value in Global, as we described yesterday. Recognition of this is the reason that the stock has gotten back what it lost last night. (There are a lot of "pull-the-trigger" types in after-hours; overnight, investors who dig deeper step forward - very common occurence.) The restructuring charge shows where some of these savings are coming from. The company is slimming down its facilities and employees. An additional $5 million over the coming quarters is expected as one-time charges as part of a larger initiative. More details will probably be available in the conference call, which starts at 10:30 EST and is available at: globalpaymentsinc.com. Although the short-term investment premise of "beating estimates" was foiled by the poor revenue numbers, the longer term investment premise of increased margins due to the scalable nature of the business is still valid. But to make that really work, and drive the stock price, the company has to drive revenues better. Scalable models have a simple, basic idea behind them: margins increase with scale.
Global is showing great progress on gross margin by trimming expenses. Next they need to demonstrate the ability to get scale, which would further increase gross margin. As a much smaller company than competitors First Data and Fiserv, a higher rate of revenue growth (the second derivative) should be possible, however, the company hasn't demonstrated much ability to grow above and beyond the seasonality of their business. If they could do that over the next year, the multiples on the stock would likely rise sharply. That should be the key issue to focus on in the conference call for long term investors: organic revenue growth. Acquisitions don't count, but management will probably talk a lot about the deal to acquire DolEx (foreign money transfers). If DolEx's organic growth is higher than the other lines, that's great, but all the lines need better growth. It's always nice when a single number becomes the test for an investment premise. - Robert V. Green, Briefing.com
9:21AM The Technical Take : The final tally shows that the all the major market averages declined on Wednesday with the Nasdaq volume actually increasing on the slide. While this fits the description of a distribution day, the overall action and the selling pressure was clearly reserved. The Nasdaq Comp established a new Sep/52-wk intraday high (1894.74) and faltered but while volume was higher, the advance/decline line was virtually flat and up volume actually outpaced down volume.
We monitor the market from a technical perspective and thus far we have not seen any significant selling pressure in terms of the market averages or slightly under the surface in the numerous sector indices. Does this mean we have no concerns about the weak seasonals, low volatility and top heavy technical indicators that have developed in the wake of the now 11 month advance? No, of course not but we continue to focus on the market action itself and the volume for the indications of the timing and extent of any pullbacks that develop.
Nasdaq Composite: This of course brings us to the charts and our personal favorites of closely watching the patterns that develop during moves, the moving averages (focus on 20 exp and 50 simple on intraday and daily charts) and Fibonacci relationships. Given that the pre-market bias is on the negative side, the levels of interest on a short term basis are at 1876 (yesterday's low) and 1872 (20 period exp on hourly chart) and 1870/1867 (congestion). Sustained follow through beyond the 50 period simple mov avg (1858) and the recent highs for move (1857 and 1852) would inflict move significant short term chart damage. The best case scenario would have the index hold above 1876 and take out 1885. This to me would raise the probability that the pullback off 1894 will be only a short lived corrective phase. A quick look at the upside puts initial resistances beyond the recent high at 1900/1902 (psych, Fibonacci extension target) and 1908 (also Fibonacci target).
To view the remainder of the Technical Take see the Stock Brief.
Send suggestions, comments or questions to -- Jim Schroeder, Briefing.com
finance.yahoo.com |
