From Briefing.com: The third quarter came to an end on Tuesday, and frankly, it did so in bittersweet fashion for investors with a bullish disposition as the technology sector got undercut by a disappointing pronouncement from Sun Microsystems (SUNW) and a batch of weaker than expected economic data.
Sun's troubles, which were detailed in a Story Stock on Tuesday, cast a pall on the proceedings from the get-go as there was a tendency to think that its warning implied there would be similar warnings of consequence from other large technology companies. It remains arguable, though, that Sun's problems are company-specific when taking into account its proprietary technology and the fact that there has been a dearth of warnings from peer companies during the proverbial earnings warning period.
That consideration may have curtailed selling efforts, but it certainly didn't stop them. The idea that selling efforts were curtailed is rooted in the observation that volume at the Nasdaq totalled 1.89 bln shares and that SUNW accounted for 163.7 mln shares of that total. The takeaway then is that Sun's difficulties were really treated as an opportunity take some profits. Had there been genuine concern that its problems were systemic in nature, volume would have at least topped 2.0 bln shares.
If there was any real hang-up, it had to do with the disappointing Consumer Confidence and Chicago PMI reports. Both were much weaker than expected and were down noticeably from the prior month. That fostered concerns about the strength and sustainability of the economic pick up, and we would contend that they had more to do with Tuesday's losses than Sun's announcement. Their impact, however, was mitigated by the realization that the ISM Index (on Wednesday) and the September Employment Report (on Friday) will be the more telling economic indicators. So, while Tuesday's reports acted as a catalyst for the selling interest, their less influential status tempered the conviction of sellers who drove the Nasdaq to the precipice of re-testing support at its 50-day simple moving average (i.e. 1779.64).
Separately, with the end of the third quarter comes the end of my time writing the general commentary for this page. Beginning Wednesday, October 1, Briefing.com will be introducing the newest member of our analytical team who will be covering the technology sector exclusively. His name is Ping Yu.
Mr. Yu joins us with a good deal of industry experience that encompasses positions as a Financial Control Analyst at the Bank of New York, a Sr. Budget Analyst in the New York City Mayor's Office of Management and Budget, an Assistant Portfolio Manager for Capital Formation Companies, and most recently, as an Associate Research Analyst at SG Cowen where he published Tech Radar, one of the most widely read and respected research dailies on Wall Street. Mr. Yu received his undergraduate degree from New York University and his MBA at Babson.-- Patrick J. O'Hare, Briefing.com
6:12PM Tuesday After Hours price levels vs. 4pm ET: The extended session has not been able to bounce back from the Nasdaq's extensive pullback in the late-afternoon trade. At 995, the S&P futures are currently flat with fair value, and at 1305, the Nasdaq 100 futures are one point below fair value. A round of disappointing coporate news announcements has contributed to the market's malaise.
Following the signing of new four-year labor contracts with the United Auto Workers (UAW) earlier this month, Ford (F 10.76 -0.01) and DaimlerChrysler (00C 35.18 +0.12) announced plans to make further job cuts. Ford is planning to eliminate a total of about 12,000 jobs world-wide, while DaimlerChrysler AG's Chrysler unit is preparing to cut several thousand jobs. The UAW agreements will allow the Big Three to eliminate as many as 50,000 jobs through a combination of buyouts and normal attrition over the next four years. Ford, specifically, said it will slash as many as 3,000 salaried positions in North America by laying off contractors, eliminating currently vacant positions and laying off about 50 people.
Microsoft (MSFT 27.79 -0.01) is another Fortune 500 company making waves tonight. The software giant announced that is has reached a settlement agreement resolving antitrust litigation on the part of a class of direct purchasers of certain Windows® software. By the terms of the settlement, the claims of the class will be dismissed, and Microsoft will pay each purchaser a portion of the price paid for the software. The parties estimate that the total to be paid by Microsoft to the class will be $10.5 mln.
Among the few companies to release quarterly numbers has been EXFO (EXFO 3.57 +0.07). The provider of fiber-optic test solutions topped the Q4 (Aug) Reuters Research bottom-line estimate, but warned for Q1 (Nov). EXFO forecasted sales of $13-16 mln and a net loss, excluding a $0.01 charge, of $0.10-0.07 per share, both of which were below the consensus expectation of $16.3 mln and a net loss of $0.03 per share, respectively.
Conversely, Resources Connect (RECN 22.80 -1.29) is a company whose stock has taken a hit as a result of an earnings announcement. The international professional services firm fell short of the Q1 (Aug) consensus EPS estimate of $0.16 by a penny, on revenues that rose 37% to $59.5 mln (consensus of $63.5 mln).
Finally, brewer Constellation Brands (STZ 30.06 -0.43) matched the consensus Q2 (Aug) estimates and guided Q3 (Nov) and FY04 (Feb) in line with Wall Street's forecasts, but that has not been enough to elicit buying interest in the stock. The company reported an EPS increase of 21%, to $0.64, and a revenue rise of 32%, to $908.8 mln. Looking ahead, Constellation Brands said it saw Q3 EPS of $0.76-0.80 (consensus of $0.80) and FY04 EPS of $2.44-2.51 (consensus of $2.47). Related companies of STZ include the likes of BUD, DEO, and RKY.
For more detail on these, and other developments, be sure to visit Briefing.com's In Play, Earnings Calendar, and Guidance pages.-- Heather Smith, Briefing.com
LSI Logic (LSI) 8.99 -0.87: Banc of America Sec reduced its Q4 estimate to $0.03 from $0.04 and noted that its estimate is significantly below the $0.06 consensus. After getting off to a robust start this quarter, firm believes that order trends at LSI have weakened recently. In particular, firm's checks suggest that the company's communications (21% of revenues) and storage components (37%) segments are witnessing some softness. Firm rates the stock a Sell with a $6 price target.
OmniVision (OVTI) 42.21 -0.57: JP Morgan initiated coverage with an Overweight rating. Firm said that the camera chip market is large and growing rapidly, and believes that OVTI can sustain its leading position as a provider of C.M.O.S. camera chips, with over 20% share of the total DSC market but about 70% share of the C.M.O.S. subset. Also, OVTI is trading at 24.2x their FY05 est, a 55.8% discount to their 4-year EPS growth rate forecast, a 10.6% discount to its broad peer group mean P/E multiple, and a 31.7% discount to its premium-valuation peers.
STMicroelectronics (STM) 24.05 -0.91: Company released the details of an advanced research program that it hopes will substantially reduce the cost of generating electricity from solar power. The research team, based in Italy, is focusing on applying ST's expertise in nanotechnology to the development of new solar cell technologies that will eventually be able to compete commercially with conventional electricity generation methods such as burning fossil fuels or nuclear reactors.
4:28PM Medtronic (MDT) 46.97 -0.18: Analyst meetings are held, in part, to raise the profile of the company's story, but it is safe to assume that Medtronic's (MDT) management was banking on universal accolades from Wall Street to reverse the stock's bearish trend. Shares have dropped 12% since mid-July versus a relative flat performance from the S&P 500 as investors have questioned the sustainability of the company's growth rate.
The company has expanded to dominate most areas in the high-technology segments of medical devices. Medtronic claims more than a 50% market share in major areas such as stents, spinal, neurology, and cardiac surgery. The latter, in fact, represents the stronghold of the company's business and accounted for 47% of total revenues in FY03 (Apr). Continued acceptance of the Marquis DR implantable defibrillator and strong uptakes rates of the InSync device for heart failure patients at high risk of sudden cardiac arrest has kept quarterly sales increases around 20%.
The current fiscal year, however, looks to be more challenging with the anniversary of the highly successful InSync device starting in Q2 (Oct). Medtronic's sheer size in the implantable cardioverter defibrillator (ICD) market may mute the impact of new technological roll-outs - such as the InSync II Marquis - and make generating the same robust sales increases more difficult. As such, management's reiteration of its expectation of Q2 revenue growth of 13-16% - below that of its recent quarters - has fallen on deaf ears. MDT stock fell nearly 1% in today's session.
Consequently, we expect enthusiasm for Medtronic to remain tepid. The company remains a bellwether name in medical technology, and its recent weakness does not negate its appeal as a long-term holding for investors. Its Endeavor drug-eluting stent - which has shown a restenosis rate of 2.1% in Australian trials (better than Boston Scientific's Taxus and Johnson & Johnson's Cypher) - should provide an important boost to shares as Medtronic approaches the (likely) late 2005 FDA approval date. However, in light of the stock's still lofty P/E multiple of 29x estimated FY04 earnings and underlying concerns about the company's slower pace of sales in Q2, we believe that better entry points will present themselves following Medtronic's report in November. -- Heather Smith, Briefing.com
3:48PM Pepsi Bottling Company (PBG) 20.64 -0.35: Sometimes delivering above-consensus earnings and revenues is just not good enough. This is certainly proving to be the case for Pepsi Bottling Company (PBG), which is trading down despite reporting 3Q03 earnings of $0.67 per share, up 9.8% year/year and a penny ahead of the Reuters Research. PBG's revenues of $2.81 bln also came in above the consensus of $2.79 bln and marked a 14.5% year/year increase.
While the headline makes PBG's earnings seem commendable, the quality of earnings isn't above reproach. First, EPS was at the lower end of guidance provided on July 8, which called for earnings of $0.66-0.70 (consensus at the time was $0.75). Second, earnings growth was largely driven by PBG's share buyback program in which the company repurchased 9 mln shares in Q3. Year-to-date, the company has repurchased 20 mln shares.
While CEO John Cahill mentioned that U.S. business improved substantially over the first half of FY03, volume trends remained sluggish in Q3. To wit, volume was flat worldwide and in the U.S.. Although volume growth in European territories was up a strong 7% for the quarter, it was offset by weak volume in Mexico, which was down 5% due to increased competitive activity.
The company gained some pricing power in the quarter and exercised it in targeted price increases in select markets. These initiatives led to U.S. pricing growth of 2% for the quarter. Nevertheless, this growth was offset by negative soft cold drink mix, as well as PBG's adoption of FASB's EITF Issue No. 02-16 (an accounting principle that reclassifies the majority of the bottler incentives PBG receives from PepsiCo and other brand owners from net revenues and selling, delivery and administrative expenses to cost of sales). These effects lowered PBG's reported net revenue per case by 4% in the U.S. and 6% worldwide.
PBG reiterated its September 3 guidance of $1.55-1.57 (consensus $1.55) per share for FY03 and stated that worldwide constant territory volume is expected to be about flat. Keep in mind, however, that the guidance of September 3 was lowered from the company's previous guidance, which called for FY03 EPS of $1.61-1.67 on July 8 and $1.68-1.74 on January 28.
It is encouraging to see PBG gain some pricing power, and for the most part, Briefing.com thinks most of the concerns surrounding its growth prospects are already priced into PBG's shares. Although we'd like to see stronger earnings growth without the benefit of share repurchases, PBG is an interesting value play for patient-minded investors. The company generates a healthy amount of cash from operations, and at 13.5x est FY03 earnings, its stock is trading at a 26% discount to the S&P 500. -- Victoria Glikin, Briefing.com
12:17PM Ratings Briefing - Gold stocks : The rising price of gold has gotten plenty of coverage of late as it reached its highest level since the end of 1991 for the biggest quarterly gain in four years. Just like in 2002, investors have been fleeing to this safe-haven metal throughout 2003 as underlying economic and political factors, including the war with Iraq, weakness in business confidence, a poor job market, and the threats associated with SARS and terrorism have kept investors' insecurity at high levels.
While a number of the factors that caused investors plenty of discomfort in the beginning of the year have dissipated, , many remain intact. Prudential confirmed this notion with its morning note, which acknowledges that uncertainties over the war on terrorism, the twin $0.5 trillion budget and trade deficits, weak dollar, 2004 electoral uncertainty and ongoing chart uptrend are likely to keep the price of gold strong. As such, the firm raised its long-term gold price outlook to $425 from $375 for 2004, to $400 from $375 for 2005, to $375 for 2006-7, to $350 for 2008, and $325 for 2009 onwards as more larger mines enter output.
The firm also re-examined its ratings and changed estimates on several of the gold industry players. For more information regarding the changes, please refer to the table below.
Company New Rating Old Rating New FY03 Estimate/ Consensus Old FY03 Estimate New FY04 Estimate/ Consensus Old FY04 Estimate
Barrick Gold (ABX) Neutral Neutral $0.42 / $0.24 $0.37 $0.76 / $0.31 $0.39
Placer Dome (PDG) Neutral Neutral $0.43 / 0.34 $0.41 $0.56 / $0.42 $0.32
Goldcorp (GG) Neutral --- $0.36 / $0.38 -- $0.48 / $0.41 --
AngloGold (AU) Underweight --- $1.16 / $1.20 -- $2.15 / $1.49 --
Newmont Mining (NEM) Underweight Neutral $1.18 / $0.86 $1.10 $1.61 / $1.05 $0.96
The last two ratings changes, which have been prompted by Newmont Mining's (NEM 39.52 +0.39) and AngloGold's (AU 38.31 +0.57) high estimated net present value relative to competitors, are the most interesting since it's not often that the Underweight rating is shelled out by an analyst, especially when the stock is initiated. Therefore, a downgrade or an initiation with an Underweight rating is more often than not viewed as an impact call. This is especially true when, as in the case with NEM, the current ratings distribution is skewed to the favorable side. Presently, 19 of 23 analysts consider the stock worthy of then equivalent of a Hold rating or higher. So, why a lack of a negative reaction?
First, some of the negative impact has been dampened by the fact that Prudential placed its FY04 EPS estimates for NEM and AU well-above the consensus, reflecting the firm's favorable view of the companies relative to the rest of the analyst community. Additionally, to truly understand what's going on with NEM and AU in today's session, one must keep in mind the current state of the market. With the major averages down 1.1-1.6% and valuation concerns on the rise, gold's safe-haven appeal has been markedly increased, driving the price of the precious metal up by $3.90 to $387.10/oz. Additionally, today's tumble in the dollar against the euro to a 3-month low and the yen to a 33-month low has also played a big part in increasing the demand for gold since the dollar-priced precious metal is now cheaper for overseas buyers. As a result, gold stocks are benefiting and the market is largely ignoring Prudential's ratings call on NEM and AU. -- Victoria Glikin, Briefing.com
12:04PM Ahead of the Curve: Sun Microsystems (SUNW) 3.28 -0.58 (-15%): There is a "small picture story" and a "big picture story" in today's announcement by Sun Microsystems of a $1.05 billion charge. The small story is the charge itself, and the revision of the 2003 fiscal year's total financial picture (fiscal year ended June 30, 2003.) The small story is being argued as "ignore non-cash charges" by most of the financial analysts on Wall Streets. The big story is the implication of the write-off for Sun's own assessment of its position in the industry and its future growth. For investors who still have not accepted the idea that the enterprise IT market has matured, the write-off should be a huge "shot-across-the-bow." (Frequent readers of Ahead of the Curve at Briefing.com have probably accepted the maturation thesis long ago.)
The concept of "deferred tax credits" is simple, but rarely explained clearly. The concept arises because "taxable income" and "accounting income" often differ. Accounting income is what you, the investor see, as Income Statements, and EPS. Taxable income is what shows up on the company's tax report, which you do not see (but discrepancies are listed in the notes section of financial reports). When taxable income is higher than accounting income, it means the "actual tax paid" is higher than the "taxes paid" amounts shown on the income statement. This is because income statements are accrual based devices, and not cash based concepts. The difference between "tax paid" and "tax reported on the income statement" is a "deferred tax credit." This credit is carried as an asset on the balance sheet. When (if) the situation reverses, and a company pays less actual taxes than it shows on the income statement, the "balance sheet credit" is depleted by that amount in the quarter when it happens. Conceptually, over the long run, the two tax accounts (actual and income statement) should equal out. Public corporations are required to reconcile the two accounts once per year, when the 10-K is filed based on whether they feel it is "more likely than not" that the credits will be used (no adjustment needed) or unused (adjustment needed.)
What Sun is doing is stating that actual taxes paid (and expected to be paid over the next 12 months) now exceed the amount of taxes that have shown up on the income statement by more than $1 billion. It boils down to this: Sun has decided it is "more likely than not" that the two tax accounts (actual paid and income statement taxes) will not reconcile within the coming year. In fact, they now expect the deferred tax credit to expand by more than $1 billion. What it really means is this: Sun does not expect earnings to be strong enough in the coming year for accounting income to be higher than taxable income. In short, business is going to continue to stink.
The big story is that Sun appears to be admitting that the technology markets are not growth markets. At least, not for Sun products. The small story is the one most in the media are proclaiming today, as in, "it is a non-cash charge, so it does not mean anything." But it does mean something that not all investors have recognized, even with the 15% decline today. Sun's own expectations for explosive growth to take them out of their current growth quagmire is much diminished from a year ago. If you haven't yet diminished your own expectations for Sun's growth potential, it is time for you to reconcile your own "growth expectations" to more closely align with Sun's. Sun took a loss when it made its reconciliation. It is likely that you may have to, as well, if you have not embraced the technology maturation thesis we first promoted two years ago. - Robert V. Green, Briefing.com
11:46AM Tractor Supply (TSCO) 33.18 -1.97: Generally companies that announce upside to the consensus revenue estimate also announce upside to the consensus EPS estimate. Those that fail to do so implicitly imply one of two things: either costs rose at a greater rate than sales, or margins that accompanied those sales were slim.
The latter instance seems to apply to Tractor Supply (TSCO), which blamed its roughly in line Q3 (Sept) EPS forecast on aggressive pricing during the quarter. Same store sales in Q2 (June) were softer than expected, and management slashed prices in Q3 in order to regain sales momentum. The end result was stronger revenue growth - same store sales rose 14% and boosted total revenues higher by 22%, to $361.2 mln, versus the Reuters Research consensus estimate of $326.9 mln - that came without the subsequent upward revision to EPS. Management said it looks for the bottom-line figure to be $0.28, as compared to the Reuters Research estimate of $0.29.
Investors have caught on to Tractor Supply's situation, and taken the stock lower by 6%. Double-digit sales growth doesn't mean much if it took drastically reduced prices to spur interest in the product. In fact, the downward shift in margins suggests that demand for the company's maintenance, hardware, and seasonal offerings is weak, and could remain that way for the intermediate-term. Customers accustomed to Tractor Supply's promotional activity could delay purchases indefinitely - a fact that is particularly relevant for one-time purchases of expensive, capital-intensive products.
Consequently, Briefing.com would agree with the inclination to sell, and would advise investors to take profits at these levels. Prior to today's activity, TSCO shares were near 52-week highs and trading at P/E multiples that were nearly twice that of their five year average. The fact that the company was forced to cut average selling points to push sales higher and (effectively) dodge an EPS warning does not bode well for the current health of the company. Tractor Supply will find it increasingly difficult to raise prices, and this, in turn, will keep gross margin expansion under wraps. As such, we would view management's new FY03 revenue (Dec) outlook of $1.415-1.445 bln (consensus of $1.404 bln) with a grain of salt. -- Heather Smith, Briefing.com
11:35AM Looking Ahead : The ISM Index is on tap for Wednesday. The consensus estimate for the report, which will be released at 10:00 ET, stands at 55.0. That is up slightly from 54.7 in the prior month and it is in-line with the Briefing.com forecast.
A total reading above 50 denotes expansion in the manufacturing sector, but large downward swings from the prior month aren't what the market wants to see as it calls into question the strength, and sustainability, of a manufacturing rebound. Accordingly, there has been a knee-jerk sell-off in the wake of the Chicago report, which logged a 51.2 reading, but was well shy of the 57.0 consensus estimate and the prior month's reading of 58.9.
With respect to the Chicago PMI, Briefing.com's Chief Economist, Tim Rogers, offered this summary: the key component of new orders fell 7.3 points to 53.2 -- still well in the expansion territory but the weakest since it turned higher from the negative read (sub 50) in April. After moving in to the expansion range in August, the employment index fell 6 points to 45.3. The 50.7 level of order backlogs suggests continued demand, as do the 53+ levels of new orders and production, but the strong decline steals plenty of the enthusiasm for the reviving manufacturing sector (and tomorrow's ISM index) given Chicago's better read on industrial demand than the East coast indicators of NY and Philly.
So, there you have it. There is little question that expectations are low going into tomorrow's national report on manufacturing activity. Those expectations, to a certain extent, are being priced in today as the Chicago PMI's substantive deviation from the consensus estimate has the market anticipating a disappointing read for the ISM Index.
With the latter in mind, it should take a much weaker than expected reading in the ISM Index to produce a trading response similar to the one seen today. Conversely, a reading that is better than expected has the capability of producing an outsized response considering that the ISM Index is a national report and that the expectations bar has been set low following today's disappointing Chicago PMI and Consumer Confidence reports.-- Patrick J. O'Hare, Briefing.com
9:29AM The Technical Take : The last week hasn't been particularly kind for the market as a whole with the Dow and S&P 500 down more than 4% from high to low, the Nasdaq Comp fell roughly 6.7% while the small caps (S&P 600) declined more than 7%. However, a bit of improvement was noted on Monday which wasn't too surprising considered the extent of the recent downdraft and the fact that the averages slipped back near there intermediate term trending indicating 50 day averages. Unfortunately, the rebound did not come as bulls like see as volume declined.
Sectors are obviously taking some heat but the chart damage has remained contained thus far with a number of the sector indices holding at their 50 day averages or recent trading range floors (semi, computer-hardware, bank, oil, natural gas, software, telecom, health provider, cyclical, retail, insurance, HMO). Groups that have underperformed of late and have already staged minor penetrations their 50 day average include: defense, chemical, biotech, oil service, consumer, drug.
Nasdaq Composite: We are looking at a market that has put together a quick and sizeable retreat, the third move of this magnitude since the market bottomed in March. During the previous to declines, as the daily chart below shows, the index stabilized near its 50 day averages which are kept track of by many in the market that do not delve deeply into technical analysis. So in other words it is so far so good in this regard. Concerns that remain include the fact that volume did not cooperate yesterday, the rapid pace and aggressive pattern of the test of support and the extent of the advance off the March low (better than 50%) with only relatively minor and short lived corrections.
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