From Briefing.com: Stocks extended their gains for a fourth day as investors maintained a bullish posture on light volume ahead of Q3 earnings. The major indices weakened in the first half hour of trading before moving higher, peaked between 12:00pm and 3:00pm ET and backed off towards the close on higher volume. The Dow flirted with 9600 before pulling back to close the session at 9594.98 (+ 22.67), the S&P moved higher to finish at 1034.35 (+ 4.50), and the Nasdaq edged up in steady trading, ending at 1893.46 (+12.89). Tech shares generally held up well but for a warning from ATMI which pressured the semiconductor capital equipment group.
Four days of gains have taken the indices just shy of their mid-September peaks, and the Dow up 3.4%, the S&P up 3.9% and the Nasdaq up 6%. This fact, plus a generally light day, an increase in volume at day's end along with a slight pullback in prices, suggest stocks are due for a breather as investors take some time to digest Q3 earnings.
Some names that we think valuations and pricing have outpaced fundamentals include:
Adtran Inc (ADTN, 74.96 -2.32): Trading at 7.4x Reuters Research consensus C03E sales of $391MM and 6.5x C04E sales of $445.6MM; 52.8x C03E EPS of $1.42 and 43.6x C04E EPS of $1.72.
Cisco Systems (CSCO, 20.80 +0.04): Trading at 7.1x Reuters Research consensus F04E sales of $20.3B and 6.4x F05E sales of $22.7B; 32.5x F04E EPS of $0.64 and 28.1x F05E EPS of $0.74.
EMC Corp (EMC, 13.65 +0.24): Trading at 5.0x Reuters Research consensus C03E sales of $6.0B and 4.3x C04E sales of $6.9B; 85.3x C03E EPS of $0.16 and 47.1x C04E EPS of $0.29.
Garmin Ltd (GRMN, 43.44 +0.10): Trading at 8.7x Reuters Research consensus C03E sales of $541.0MM and 7.6x C04E sales of $621.7MM; 26.0x C03E EPS of $1.62 and 23.6x C04E EPS of $1.84.
Juniper Networks (JNPR, 17.29 +0.66): Trading at 10.0x Reuters Research consensus C03E sales of $662.3MM and 8.8x C04E sales of $746.7MM; 157.2x C03E EPS of $0.11 and 101.7x C04E EPS of $0.17.
KLA Tencor (KLAC, 55.70 -0.28): Trading at 7.4x Reuters Research consensus F04E sales of $1.46B and 5.9x F05E sales of $1.84B; 54.1x F04E EPS of $1.03 and 30.1x F05E EPS of $1.85.
Linear Technology (LLTC, 39.27 -0.12): Trading at 16.6x Reuters Research consensus F04E sales of $739.2MM and 13.8x F05E sales of $893.1MM; 43.2x F04E EPS of $0.91 and 35.7x F05E EPS of $1.10.
New Focus (NUFO, 4.95 +0.11): No sales estimates available. Trading at 11.9x TTM sales of $26.6MM.--Ping Yu, Briefing.com
6:08PM Monday After Hours price levels vs. 4pm ET: The after hours trade has shown more vigor than the sluggish regular session, where the S&P futures, at 1035, are 2 points above fair value, and the Nasdaq 100 futures, at 1387, are 3 points above fair value. Expectations for a stronger Q3 (Sept) reporting period, which will commence tomorrow after the close with Dow component Alcoa's (AA) report, have put a mild bid in the extended session.
As for the news flow, that factor is relatively light and features mostly preannouncements. Storage company Quantum DLT (DSS 3.26 -0.19) was one of the few names to announced weaker than expected results. Quantum said that, primarily due to continued pressure on media cartridge pricing, it now expects Q2 (Sept) total revenues to be $190-200 mln with a non-GAAP loss of approximately $0.04. The Reuters Research consensus estimates calls for revenues of $202.6 mln and a net loss of $0.02 per share, respectively. As a result, shares of DSS are 6% lower.
Conversely, Silicon Graphics (00C 1.30 +0.35) said that revenues should be higher than expected, and the stock has taken off 37%. The computer hardware company that it anticipates Q1 (Sept) revenues to be $215-220 mln, up from its forecast of $200-210 million provided by the company on its July 24 conference call. Competitors of SGI include the likes of CRAY, IBM, HPQ, and SUNW.
Also issuing an earnings pronouncement was Ruby Tuesday (RI 24.24 -0.09), which released its numbers for Q1 (Aug). Diluted EPS increased 19% to $0.37 (consensus of $0.36), and revenues rose 12% to $249.9 mln. The restaurant operator also confirmed its projections of 17-18% earnings growth in FY04 (May) and EPS of $0.32 in Q2 (Nov). The Reuters Research consensus estimate was set at $0.33, and thus RI has traded slightly lower.
On a different note, Tenet Healthcare (THC 15.21 +0.25) announced that a 50-percent-owned affiliate in New Orleans received a subpoena from the U.S. Attorney's Office. The office requested documents about People's Health Network and related materials about several New Orleans-area independent physician associations that are part owners of the health plan management services provider. Earlier today, Tenet announced that it is selling one of its four Houston facilities to help fund its operations, which have been damaged by government probes and the company's dwindling cash flow.
Finally, Looksmart (LOOK 1.29 -1.73) stock has been slammed and tumbled 57% after Microsoft (MSFT) announced that it will not renew its distribution and licensing agreement with the company after the current (extended) agreement expires on January 15, 2004. LookSmart admitted that its financial results will be materially and adversely affected, and said that Microsoft accounted for approximately 65% of listings revenues, and all of LookSmart's licensing revenue in the second quarter of 2003.
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
6:08PM Monday After Hours price levels vs. 4pm ET: The after hours trade has shown more vigor than the sluggish regular session, where the S&P futures, at 1035, are 2 points above fair value, and the Nasdaq 100 futures, at 1387, are 3 points above fair value. Expectations for a stronger Q3 (Sept) reporting period, which will commence tomorrow after the close with Dow component Alcoa's (AA) report, have put a mild bid in the extended session.
As for the news flow, that factor is relatively light and features mostly preannouncements. Storage company Quantum DLT (DSS 3.26 -0.19) was one of the few names to announced weaker than expected results. Quantum said that, primarily due to continued pressure on media cartridge pricing, it now expects Q2 (Sept) total revenues to be $190-200 mln with a non-GAAP loss of approximately $0.04. The Reuters Research consensus estimates calls for revenues of $202.6 mln and a net loss of $0.02 per share, respectively. As a result, shares of DSS are 6% lower.
Conversely, Silicon Graphics (00C 1.30 +0.35) said that revenues should be higher than expected, and the stock has taken off 37%. The computer hardware company that it anticipates Q1 (Sept) revenues to be $215-220 mln, up from its forecast of $200-210 million provided by the company on its July 24 conference call. Competitors of SGI include the likes of CRAY, IBM, HPQ, and SUNW.
Also issuing an earnings pronouncement was Ruby Tuesday (RI 24.24 -0.09), which released its numbers for Q1 (Aug). Diluted EPS increased 19% to $0.37 (consensus of $0.36), and revenues rose 12% to $249.9 mln. The restaurant operator also confirmed its projections of 17-18% earnings growth in FY04 (May) and EPS of $0.32 in Q2 (Nov). The Reuters Research consensus estimate was set at $0.33, and thus RI has traded slightly lower.
On a different note, Tenet Healthcare (THC 15.21 +0.25) announced that a 50-percent-owned affiliate in New Orleans received a subpoena from the U.S. Attorney's Office. The office requested documents about People's Health Network and related materials about several New Orleans-area independent physician associations that are part owners of the health plan management services provider. Earlier today, Tenet announced that it is selling one of its four Houston facilities to help fund its operations, which have been damaged by government probes and the company's dwindling cash flow.
Finally, Looksmart (LOOK 1.29 -1.73) stock has been slammed and tumbled 57% after Microsoft (MSFT) announced that it will not renew its distribution and licensing agreement with the company after the current (extended) agreement expires on January 15, 2004. LookSmart admitted that its financial results will be materially and adversely affected, and said that Microsoft accounted for approximately 65% of listings revenues, and all of LookSmart's licensing revenue in the second quarter of 2003.
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
LTX Corp (LTXX) 12.50 +0.26: Moors & Cabot upgraded to Sector Outperform from Sector Perform based on recent channel checks as well as continued positive sentiment towards the semi test group; firm believes that LTXX represents the best-leveraged play in the semi test space, and that the recovery in the industry will allow the co to reap the benefits from the increased order flow and allow it to return to profitability sooner than anticipated; target is $18.
3:37PM Looking Ahead : "While we have not seen signs of market improvements, we are well-positioned to reap the benefits of any upturn." That was the declaration from Dow component, Alcoa (AA 28.50 +0.35), on July 8 when it reported its Q2 earnings results. It is a statement that we thought was worth repeating for two reasons. First, Alcoa will be reporting its Q3 (Sep) results after the close on Tuesday; and second, AA is up 10.0% since the acknowledgment was made that it has not seen signs of market improvements.
Being the anticipatory entity that it is, though, and reading between the lines of accomodative fiscal and monetary policy, corporate cost cutting, and the pickup in industrial production, the market has been quick to give Alcoa the benefit of the doubt that it will have better things to say about business conditions when it reports on Tuesday. If it doesn't, then it will set a bad tone for the industrial stocks and invite added concern that Alcoa - and other basic materials stocks - have gotten ahead of themselves in discounting the pace of the recovery in their respective markets.
We say added concerns, because there have been murmurings already that Alcoa is over-valued. On Sept. 30, UBS threw its hat into the ring on the matter, saying that it believes investors are being excessively pre-emptive towards a meaningful recovery in aluminum and downstream markets. Additionally, UBS said Alcoa's quarter could come in light and that it was forecasting EPS of $0.25 versus the consensus estimate of $0.30. On Aug. 25, Prudential cited valuation among other things for downgrading AA to Hold from Buy.
As for the Q3 consensus estimate, we should point out that it has been revised higher. Ninety days ago it stood at $0.27, and thirty days ago, it was at $0.29. Upward revisions have been documented for Q4, FY03 and FY04 as well. Ninety days ago the Q4 consensus estimate (now $0.34) was at $0.31, and thirty days ago, it was at $0.33. The FY03 estimate (now $1.12) was $1.08 ninety days ago and $1.11 only 30 days ago. The FY04 consensus number, which stood at $1.64 ninety days ago and then dipped to $1.61 thirty days ago, is now back to $1.64. Thus, it can be argued that expectations are high going into Alcoa's report and that there is little room for disappointment.
According to Reuters Research, the consensus revenue figures for Q3, Q4, FY03, and FY04 stand at $5.545 bln, $5.730 bln, $21.663 bln, and $22.506 bln, respectively. In Q2 (Jun), the company delivered its strongest quarter of revenue growth since 2Q01 with revenues increasing 5.9% to $5.46 bln. The market will be looking for signs of continued top-line improvement as it should fall directly to the bottom-line given Alcoa's cost-cutting focus. Separately, the table below provides a snapshot of Alcoa's main business segments and a recap of relevant commentary for each as communicated in Alcoa's 10-Q filing for the second quarter:
Segment Comment Going in to Q3
Alumina & Chemicals Alumina demand is anticipated to remain at current levels in Q3. Recent LME trends would indicate flat pricing
Primary Metals Alcoa has approx. 505,000 mt per year (mtpy) of idle capacity on a base capacity of 3,948,000 mtpy
Flat-rolled Products Seasonal strength is expected to continue in rigid container sheet. Other markets are projected to be flat with some seasonal softening in Europe.
Engineered Products Demand is expected to decrease in 3Q03 due to lower military and commercial aerospace volume, automotive model year changeovers, and projected declines in new car demand. Industrial gas turbine demand is expected to remain weak. Seasonal strengthening is expected in the building and construction market.
Packaging and Consumer Seasonal increases are projected for consumer products within North America. Seasonal demand within Latin America is expected to decline.
Other Overall third-party sales in 3Q03 are expected to be lower due to automotive model year changeovers and projected declines in new car demand. Some seasonal increase is anticipated in the residential building and construction market. Continued depressed business conditions are expected to persist in the telecommunications market.
-- Patrick J. O'Hare, Briefing.com
1:39PM Peoplesoft (PSFT) Peoplesoft guided Q3 revenue and EPS estimates higher before the open. The guidance revision was likely in response to Siebel's comments last week that they were seeing signs of desperation pricing from Peoplesoft, and to reaffirm Peoplesoft's position that the Oracle offer undervalues the company. On a multiples basis, the Oracle offer understates Peoplesoft's value by at least 50% providing Peoplesoft management continues to take costs out of the combined Peoplesoft / J.D. Edwards, as we believe they will, to achieve margin levels comparable to Oracle.
Gross margin for Peoplesoft / J.D. Edwards is around 62% vs. 75% for Oracle, with operating profit margins coming in at 10% vs. 36%. Peoplesoft trades at 3.0x Reuters Research consensus C04E sales of $2,795.3MM and 24.1x C04E EPS of $0.85. This compares favorably against Oracle at 6.0x F05E (May) sales of $10,626.8MM and 23.6x F05E EPS of $0.52.
Momentum is on the side of Peoplesoft as management takes costs out of the company and brings to bear the force of the combined Peoplesoft / J.D. Edwards. In the event of a nod from the Justice department on an Oracle / Peoplesoft combination, Oracle will have to raise its offer to consummate a deal. In either case, we think Peoplesoft shares will trade well near-term.--Ping Yu, Briefing.com
12:44PM Duane Reade (DRD) 13.90 -3.21: It is said that the three most important things in real estate are location, location, and location. Drug store operator Duane Reade is finding that out firsthand as its presence in the metro New York City area is hurting the company in more ways than one. That was the message we received anyway upon hearing this morning that Duane Reade was lowering its Q3 and FY03 sales and earnings guidance due to various factors that included the August 14 power outage and the region's weak economy. Aside from those issues, Duane Reade also noted in its press release that it has been impacted by a slowing growth rate in prescription sales.
Due to the aforementioned factors, Duane Reade is going to come up short of the current Reuters Research consensus estimates for both Q3 and FY03. Specifically, the company indicated that Q3 net sales were $338.6 mln (consensus $342.6 mln), or $11.4 mln below its prior guidance, and that diluted EPS will range between $0.08 and $0.09 (consensus $0.18). For the year, sales are projected to be $1.389-1.394 bln (consensus $1.396 bln) while diluted EPS should be $0.55-0.61 (consensus $0.79).
This news clearly hasn't pleased investors as DRD is down 19% on volume that is 10x its 3-month average daily levels - and there is still plenty of time left in the trading day. Like the various issues impacting the company's performance, the concerns surrounding the update are varied as well.
First, it is always unsettling to hear that a company is going to come up short of consensus EPS estimates by a wide margin. That often suggests that there are deeper-seated problems from an operating/management perspective and it creates a good deal of uncertainty as to the company's ability to meet expectations in coming quarters. Second, the power outage impact wasn't material enough to be considered a root cause of the company's shortcomings since it only accounted for approximately $3.3 mln in lost sales. While Duane Reade had to mention it, there is apt to be some frustration over the thought that the company was unable to make up the difference so to speak through increased sales of batteries and other pertinent supplies. Third, commentary on industry trends from peer companies like Walgreen (WAG) and CVS Corp. (CVS) doesn't sound as dour as that heard from Duane Reade.
For instance, in its fiscal year-end report on Sept. 29 Walgreen said that, while industry watchers are concerned about a slowdown in prescriptions, it sees no evidence that there is a trend. Walgreen added that it sees nothing to suggest that prescription usage will be anything but robust in the coming decade. CVS, for its part, conceded in an August sales update that the blackout, which affected 730 of its stores (DRD operates 239 stores), impacted total same-store sales by about 20 basis points but it didn't lower its guidance.
In short, Duane Reade is a name we would suggest investors take a pass on as it has given the market reason to believe that its problems are more company-specific than anything else. Such a consideration often leads to a period of underperformance for a stock versus its peer group until the company provides the market with reason(s) to believe otherwise.-- Patrick J. O'Hare, Briefing.com
11:11AM Motorola (MOT) Motorola announced, before the open, a positive and long-awaited strategic move--a separation of its semiconductors business as part of a plan to focus on the company's communications and integrated electronics businesses. While a good step forward, this restructuring will take several quarters to produce tangible results. The stock remains a better trading vehicle than a long-term investment.
The company is considering a possible initial public offering of a portion of the semiconductor business followed by a tax-free spin-off of the remaining shares. Following the spin-off, the remaining businesses will include: 1) Personal Communications--cellular handsets; 2) Global Telecom Solutions--cellular network infrastructure; 3) Commercial, Government and Industrial Solutions--integrated radio communications solutions for government and enterprise; 4) Broadband Communications--cable and broadband communications devices; and 5) Integrated Electronic Systems--automotive electronics, embedded computing.
The semiconductor business, which accounts for 18%-19% of sales, is highly capital intensive and consumes a disproportionate share of the firm's capital expenditures. Concerns over Motorola's ability to maintain its competitive position, particularly in the core communications (73%-74% of sales) and integrated electronics businesses (8% of sales) have increased over the past few years. With each foundry costing in excess of $1B, and demand for smaller and more powerful electronic devices as well as advances in process technologies driving the move to smaller geometries in chip design, rapid product development cycles in consumer electronics and more focused competitors out-spending the company as much as 2:1 in research and product development (by product segment), the company could not possibly continue independently funding research and development into chips while maintaining market leadership in communications.
A spin-off of the semiconductor business allows the semiconductor business to independently tap into financial markets and focus on product development for a broader market rather than serve as what is largely an in-house design team for the communications businesses. More importantly, it allows management to focus critical resources on the company's core communications businesses. This restructuring will take several quarters to produce tangible results. Although positive and a necessary move, it remains to be seen whether this will enable the company to recapture lost ground. In the interim, the stock is a better trading vehicle than a long-term investment.--Ping Yu, Briefing.com
9:29AM Ratings Briefing - TLB : Prudential downgraded Talbots (TLB 36.80) to Underweight from Neutral-Weight this morning, saying it thinks Sept comps will be below plan (of slightly positive), that expectations for better full-priced selling are overdone, and that the company's decision to postpone its sale by a week may have had something to do with low clearance inventory rather than just to better full-priced selling. Believes recent upward revisions in Q3 earnings estimates by some firms look aggressive; target is $33.
Handicapping the News:
A notable call as it runs counter to recent analyst commentary that has been positive in tone and which has made note of better demand for full-priced merchandise and improved earnings prospects; moreover, Prudential's analyst, Stacy Pak, has one of the better track records on TLB in terms of her EPS estimate accuracy [source: StarMine]
Sanders Morris Harris initiated coverage with a Buy rating on Oct. 2; SG Cowen upgraded to Outperform from Market Perform on Sept. 30; Merrill Lynch upgraded to Buy from Neutral on Sept. 17; and First Albany reiterated its Buy rating on Aug. 20
TLB will be reporting Sept. comps on Thursday... Prudential's cautious commentary just ahead of the report is apt to keep the stock under wraps near-term... Disappointing news on Thursday will validate the Prudential call, but conversely, an encouraging same-store sales report will override any anxiety surrounding today's downgrade and keep TLB's rebound story intact (up approx. 60% since its March 11 lows).-- Patrick J. O'Hare, Briefing.com
9:25AM The Technical Take : An impressive turnaround for the market averages last week. It began on a negative note as the retreat off of the Sep high continued into Tuesday. The indices stabilized near important support zones (Nasdaq Comp at 50 day avg; S&P 500 at retrace and trendline) on Tuesday and recovered but the move came amid weaker volume. However, the jobs data on Friday inspired an impressive percentage advance, a strong increase in volume with both the Dow and S&P 500 flirting with resistance at their closing recovery highs before slipping in late trade.
Given the impressive performance at the end last week and the anticipated early strength today, based on the pre-market indicators, the question is whether the market has enough underlying strength to continue the push to the Sep highs today. Clearly the momentum is on the side of the bulls with some favorable news for LXK, PSFT, MOT (see In Play). Arguing against such a development is the limited calls from the Street, no data, the already extensive run and late pullback Friday along with the fact that lower volume is expected due to Yom Kippur.
Nasdaq Composite: The early futures readings suggest potential for the tech dominated index to stage a run at initial resistance in the 1882/1884 area with Friday's high at 1891.62. The Semi (MOT) and software (PSFT) sectors key. The recent high matched up with the congestion zone mentioned Friday in the 1892/1894 area (also, 1890 marks 200 wk exp move avg). The next short term resistances of interest are at 1902/1904 with the closing high for Sep at 1909 in front of the intraday high at 1913.74..
10:33AM Zoran downgraded at CE Unterberg (ZRAN) 20.49 -0.45: CE Unterberg Towbin downgrades to Long-Term Mkt Perform from Buy, saying their visit to Asia reveals quick commoditization of the DVD player supply chain; considering the near-term risk of lower avg selling prices and some mkt share loss, firm cuts their already Street-low CY04 ests and believes that consensus ests don't seem achievable at this point.
10:03AM Rambus: U.S. Top Court rejects Infineon appeal vs Rambus over computer chip patents -- Reuters (RMBS) 20.97 +2.24: -- Update --
10:00AM Credence price tgt raised to $18 at Moors & Cabot (CMOS) 12.59 -0.16: Based on recent channel checks, firm believes that Credence Systems is tracking ahead of quarterly expectations. According to firm, recent checks suggest that orders are tracking ahead of plan, driven by its flash memory tester product, Kalos, and potential new bookings for Octet that are also in the pipeline. Firm also believes the co continues to gain positive acceptance of its ASL 3000RF product, targeting the wireless market, though that market is becoming more intense with an increasing presence of LTX Corp.'s Fusion CX product. At the current rate, firm feels that CMOS will exceed its guidance of a 10% sequential uptick in bookings and actually come in between 15-20% for the quarter.
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