From Briefing.com: 4:12PM Weekly Wrap: It was a quiet week in terms of news events. It is often easiest to assess the underlying tone of the market when there are few outside influences. That was the case this week as the slightly bullish sentiment led to the third straight weekly gain for the S&P 500 index.
Earnings season is nearly over. There were only two major reports this week, and both were disappointing. Wednesday after the close Cisco reported earnings a penny ahead of expectations. However, they also warned that current quarter revenues would be a bit below Wall Street expectations. The same was true of Dell's report after the close on Thursday. They reported earnings as expected, but warned that current quarter revenues would be below expectations.
Each stock traded lower after their report, but the Nasdaq was up both days. The ability of the broad market to shrug off negative news from two such major companies reflects the upbeat underlying sentiment.
There were only a few other corporate announcements of note. Intel raised their dividend 25% and announced a $25 billion stock buyback program. General Motors announced they will have to restate 2001 earnings.
There were only a few economic releases this week and none had much market impact. Weekly new claims for unemployment stayed low, reflecting the strong job market. The trade balance hit a record. Less noticed was a further decline in the US treasury deficit. The October data cut the trailing twelve month deficit to $309 billion. That is well down from $413 billion for fiscal 2004, and at 2.5% of GDP is significantly below the levels of Germany, France, Italy, and Japan.
The quiet period was most apparent on Friday. It was a very light day of trading and the bond market was closed for the Veterans' Day holiday. The positive sentiment was clearly evident that day. The S&P inched slowly higher through the day.
One clear positive development this past week was a broad drop in energy prices. Oil closed the week at $57.53 a barrel, down from $60.58 last week. Gasoline futures and natural gas also declined significantly.
The economic data picks up next week. The PPI data on Tuesday and CPI on Wednesday may be the most influential. If core rates stay low, the recent inflation scare may be totally erased, particularly as gasoline prices have now dropped significantly. Retail sales, housing starts, and industrial production data will also be out. The economic data are expected to reflect slower but decent real GDP growth for the fourth quarter compared to recent quarters.
The earnings calendar is light but shows a number of retailers reporting, including Wal-Mart on Monday.
The stock market was up four out of five days this week. There was little news to account for this. The gains were largely a manifestation of the modestly bullish underlying sentiment. That sentiment may well continue, and lead to a classic year-end rally.
Index Started Week Ended Week Change %Change YTD
DJIA 10530.76 10686.04 155.28 1.5 % -0.9 %
Nasdaq 2169.43 2202.47 33.04 1.5 % 1.2 %
S&P 500 1220.14 1234.72 14.58 1.2 % 1.9 %
Russell 2000 658.16 666.66 8.50 1.3 % 2.3 %
Close Dow +45.94 at 10686.04, S&P +3.75 at 1234.72, Nasdaq +5.79 at 2202.47: Inching just out of the narrow range in which they spent the afternoon, the equity market's major averages closed the week at their best levels of the day and marked the third consecutive weekly gain. The streak continued today has been the market's best since July. Veterans' Day closed the Treasury market, and a dearth of data on either the economic or corporate fronts meant catalysts for buyers and sellers alike were limited. Dell's (DELL 29.37 +0.16) earnings report and accompanying guidance, delivered last night, stole the spotlight in the early going; however, the news had little effect upon the broader market. While in-line Q3 earnings and a somewhat soft Q4 revenue forecast sparked some initial selling, attention to the tech titan's valuation and upheld long-term outlook perhaps helped shares rebound after the bell and stand strong all day. Leadership took some time to emerge, but some broad-based afternoon buying sent Materials to a front-running 1.3% gain, Financials to a weighty 0.5% increase and Energy to a supportive 0.7% rise. While rocky crude action had kept the latter sector vacillating in and out of the red this morning, Energy ultimately bucked the effect of crude's lowest close in over three months. Today, the commodity shaved 0.5% from its price tag and closed at $57.53 per barrel. Continued vigor in banks and brokers paired with relative strength in thrift and mortgage issues in taking the Financials sector 0.5% higher, while a considerable rise in hardware helped offset struggling semiconductors to push Tech 0.2% upwards. Along with crude's decline, the auto group's performance supported the Discretionary sector (+0.3%). Following news that a Fitch downgrade of GM's debt was erroneously reported by the Associated Press, General Motors (GM 24.49 +0.98) jumped to a Dow-driving gain. DaimlerChrysler (DCX 50.15 +0.55), meanwhile, announced that it will sell its remaining stake in Mitsubishi. Consumer Staples (+0.1%), Healthcare (+0.2%), and Industrials (+0.3%) also finished on positive turf, while Telecom spent the session flat and continued profit-taking left Utilities (-1.0%) as the solo sector closing lower. A bullish bias dominated trading, but lighter-than-average holiday trading paired with anticipation of next week's heavy economic calendar in keeping buying somewhat in check. Most notably, investors await October PPI data on Tuesday and last month's CPI report on Wednesday.NYSE Adv/Dec 1775/1451, Nasdaq Adv/Dec 1619/1344
9:09AM Intersil ups Q4 revenue and EPS guidance (ISIL) 24.89 :Co issues upside guidance for Q4 (Dec), sees EPS of $0.24-0.25, up from previous guidance of $0.23-0.24 vs. $0.24 Reuters Estimates consensus; sees Q4 (Dec) sequnetial rev growth of 7-9%, which equates to $168.2-171.3 mln, up from previous 5-7% growth forecast, which equates to $165-168.2 mln, vs. $166.90 mln consensus. "Seasonal sales and order rates for the fourth quarter have been particularly robust".
7:53AM Court Enters Judgment That Monolithic Power Systems Does Not Infringe O2 Micro Patent (MPWR) 14.20 :Co announces judgment has been entered in its case with O2 Micro International (OIIM) in the United States District Court for the Northern District of California. The court entered judgment that the co does not infringe O2 Micro's '615 patent, confirming a prior summary judgment in favor of the co. In an opinion, the judge set aside the $12 mln jury verdict rendered July 18, 2005 on O2 Micro's trade secret claims, and instead awarded O2 Micro $2.7 mln, comprised of a royalty of $900,000 plus exemplary damages of $1.8 mln, plus costs. The judge also denied O2 Micro's requests for an injunction and attorneys' fees and ruled that the co did not act improperly in obtaining its patents. The co is reviewing the judge's opinion and considering its options, including post-trial motions and appeal.
12:02PM Kohl's (KSS)
50.62 +1.50: Kohl's Corp. on Thursday reported higher third quarter earnings on increased sales, reflecting its ongoing progress with turnaround efforts. The Menomonee, WI-based company, which was outlined as a Bargain Hunting candidate by Briefing.com in May 2004, posted net income of $155.1 million, or $0.45 per share, for the latest quarter, up from $134.6 million, or $0.39 per share, in the year-ago period. That matched analysts' expectations, according to Reuters Estimates.
Sales at the department store operator rose 13.7% to $3.1 billion from $2.7 billion a year earlier, helped by a 3.5% gain in sales for stores open at least a year. Meanwhile, gross margin improved 160 basis points to 36.3% as a result of continued focus on inventory management and expense control measures related to its restructuring plan.
After two years of waning sales and merchandising trends, Kohl's has regained favor as a growth company as it continues to reinvent itself through more exclusive merchandising offerings and new marketing initiatives. In recent months, the company has introduced such notable clothing brands as Chaps, Candies, and Daisy Fuentes, and has expanded offerings in jewelry, home furnishings, and cosmetics. Furthermore, the company has aimed to differentiate itself through increased advertising and an improved in-store experience to allow customers to better navigate its stores and allow it to more persuasively cross-sell items.
With the new initiatives gaining momentum, Kohl's said it is well positioned for the upcoming holiday season in terms of content and level of inventory, its in-store shopping environment, and its advertising calendar. For the fourth quarter, the company said it expects earnings of $1.10 to $1.14 per share, in line with the consensus EPS estimate of $1.12. At the same time, the company narrowed its full-year earnings outlook to the range of $2.45 to $2.50 per share, up from its previous guidance of $2.42 to $2.50 per share. Analysts, on average, had forecast EPS of $2.45.
Given Kohl's solid performance and updated forecast heading into the holiday season, we continue to be confident in the underlying growth story. Although concerns over a material slowdown in consumer spending may preclude some near-term performance, the company remains a favorable long-term investment play at the current price level. Shares of KSS are trading at 17.3x forward earnings.
--Richard Jahnke, Briefing.com
9:44AM GDP Growth Rises in Japan
The Nikkei reached a four and half year high, after Japan's economy grew faster than expected in the third quarter. The quarter represented the longest expansion in over eight years. We have long been believers in the recovery taking place in Japan and continue to think investors would be well served to have exposure to the market, as well as the rest of Asia. The second largest economy in the world grew at a pace of 1.7% led by both consumer and business demand.
The consensus estimate by economists was for 1.1% growth. This follows on the footsteps of GDP growth in the second quarter of 3.3% and 6.3% in the first. Growth slowed as capital spending eased, after averaging a strong pace over the past year. Imports have also surged as fuel costs rose. As a net importer of crude, the market moves in an inverse relationship to the price of oil. Last year, the economy fell into a recession in the second and third quarters. Economists now predict the economy could grow 2.7% for the year - the largest increase in ten years!
The Japanese market is currently in the midst of its earnings season, with the majority of companies showing better than expected profit growth. The domestic economy remains the driving force and continues to gain momentum, which has manifested itself in an improved outlook by corporations. The resurgence in business confidence is driving capital investment and higher wage increases are fueling consumer spending. This marks a significant turnaround after seven years of deflation, which could lead to an annualized growth rate of 2% in the fourth quarter. The government confirmed the economy may exceed its forecasts of 1.6% expansion.
The Nikkei closed up 0.5% to 14,1555 - the highest level since May 2001. Japan is now slightly below Mexico in year-to-date returns. The top five markets for the year are as follows: Switzerland +28.8%, Mexico Bolsa +25%, Nikkei 225 +23%, Stockholm +22.8%, and the Dax +19.3%. We expect fiscal policies to start reflecting the change from a deflationary-fighting approach. The sun is finally rising for Japan and we expect to see the equity markets reflect this resurgence.
--Kimberly DuBord, Briefing.com
9:29AM Pacific Sunwear (PSUN)
27.63: In spite of waning consumer confidence prompted by rising interest rates and persistently high energy prices, Pacific Sunwear posted higher third quarter earnings on improved sales and increased margins. For its latest quarter, the teen clothing retailer said it earned $40.5 million, or $0.54 per share, compared with $33.7 million, or $0.44 per share, a year earlier - in line with the average forecast by analysts, according to Reuters Estimates.
Net sales increased 13.6% from a year ago to $377.5 million, with same-store sales growth of 4.6%. Analysts had expected net sales of $377.3 million. Gross margin expanded 80 basis points to 38.3%, helping to offset higher SG&A expenses. Selling, general, and administrative costs during the quarter increased to $80.9 million from $70.7 million last year.
Although PSUN connoted cautious sentiment about the current retail environment, it still expects strong results for the remainder of the year. Looking to the fourth quarter, the company reaffirmed earnings of $0.62 to $0.63 per share. Analysts had projected earnings of $0.63 per share for the crucial holiday quarter.
While the retail group, as discussed in Briefing.com's Underweight rating on the Consumer Discretionary sector, continues to reel from concerns about consumer spending, PSUN represents a relative pocket of strength. In addition to its strong quarterly performance, the company posted a hefty same-store sales gain of 7.9% in October (versus consensus of 4.6%), on top of 5.3% in September. Both of its divisions - Pacific Sunwear and D.E.M.O - reported solid results in the month, benefiting from the arrival of cooler weather as well as unbridled demand for its iconic fashions. As the surf and skateboard-inspired clothing retailer continues to inspire its core teen customers, the company should remain a standout from its peers.
PSUN currently trades at 14.5x forward earnings, compared with 17.7x for Hot Topic (HOTT) and 15.2x for Abercrombie & Fitch (ANF). In addition, the company boasts a favorable PEG ratio of 0.77.
--Richard Jahnke, Briefing.com
9:03AM Dell, Inc. (DELL)
29.21: For a second straight quarter Dell's profit growth disappointed Wall Street, falling 28% in Q3 as consumers bought lower priced systems from its rivals. Net income declined to $606 mln, or $0.25 per share, from $846 mln, or $0.33 per share, in the year-ago period. The results were negatively impacted by $442 mln in charges the world's largest PC maker took in order to repair faulty components and to restructure. The market has severely punished the stock on concerns over slowing growth. To that end, sales in the quarter fell for the sixth consecutive quarter to $13.9 bln, up 11% year/year, but below Dell's original forecast range of $14.1-14.5 bln.
Dell has shifted gears recently, expanding its product line and focusing on the middle to higher-end market place. After slashing prices on PCs earlier in the year, Dell's decision to focus on profits over market share restrained sales growth. There is little doubt that Dell is feeling the sting of heightened competition. The successive quarters of declining sales have raised questions whether Dell will be able to meet its $80 bln sales goal in four years. To ring the $80 bln bell, Dell will have to ratchet up sales growth to 13-20%. Its confidence in achieving this goal reflects its growth strategy through new products and geographical mix. Holding 1/3 of the US market, which is maturing, Dell's brightest prospects lie in Europe, Latin America, and Asia. These regions produced just under 20% growth in the quarter.
Earnings, excluding the charges, were $0.39 per share, in line with estimates released on October 31st. Dell's largest money-maker, the desktop segment, slid 2% to $5.1 bln, while shipments grew by 6%. As expected, the notebook segment remained hot, with sales and shipments gaining 14% to $3.6 bln. Printers finally turned a profit in the quarter. With shares in the doldrums, Dell plans to accelerate its repurchases, buying back at least $1.7 bln in stock in Q4 after spending $1.4 bln this quarter. The company's PC shipments grew 17.6%, but for the first time in several years, that growth was essentially in line with the market's growth rate, as opposed to being well ahead of it. This compares to 18.5% shipment growth for Hewlett Packard (HPQ) and the market's growth rate of 17.2%, according to Gartner.
DELL has plummeted 30% YTD compared to the S&P 500, which is up 1.5%. We feel the stock does not deserve to be trading at such a discounted level, even though we agree growth is slowing. The Round Rock, Texas-based company's $80 bln target, no matter how you slice it, still depends on PC growth. Looking out three years, PCs will still account for half of Dell's top line. The company's projection is for an 8% revenue CAGR in the PC segment. In order to achieve this goal, Dell would have to grow at a premium to the industry - a difficult challenge considering that average selling prices will continue to decline.
Using the current consensus estimates, which are likely to be revised lower, earnings are expected to grow 21% in FY05 and 16% in FY06. In order to reach the FY05 estimate of $1.56 per share, Dell would have to generate $0.42 in earnings in the fourth quarter. It's currently targeting 40-42 cents. This would equate to sequential growth of 7.7% - a significant acceleration from the current levels of low single-digits. With its high returns on capital, double-digit earnings growth, and discounted valuation (18.7x forward earnings), this world-class company, with an unequaled business model, is a solid investment over the longer-term.
--Kimberly DuBord, Briefing.com
7:58AM Neurogen (NRGN) Merriman Curhan Ford initiates BUY. Firm believes the co is making the transition from an early-stage discovery co to a mid-stage drug development firm. They think the co can end 2006 with one internally developed program in phase II for insomnia, and possibly as many as two additional programs with IND applications for indications such as obesity, pain, and anxiety. They believe NRGN could trade toward $10.00 over the next 12 months.
7:50AM King Pharms (KG) JP Morgan downgrades Neutral to UNDERWEIGHT . Firm believes that although KG's Q3 numbers looked impressive, the upside is misleading and, firm is concerned about the lack of transparency on true "demand-based" sales for all its products.
7:48AM Elan (ELN) AG Edwards upgrades Sell to HOLD. Firm believes the odds favor Tysabri's return based on the combination of its superior efficacy and the proposed approach of "vigilance" as offered up by LN and Biogen (BIIB) as the principal tool for addressing the Progressive Multifocal Leukoencephalopathy.
7:47AM Critical Therapeutics (CRTX) Deutsche Securities initiates HOLD. Target $48. Firm believes the co's Zyflo has the potential to garner meaningful sales from a large underserved market of moderate/severe asthmatics failing inhaled corticosteroids and Xolair (for tx of moderate/severe persistent asthma) given its unique mechanism of action, but think could take several quarters for Zyflo to gain physician and patient mindshare.
7:46AM Gilead Sciences (GILD) Deutsche Securities initiates BUY. Target $62. Firm cites strengthening fundamentals derived from the HIV franchise and growing Tamiflu sales, and visibility fueled by intensifying concern for a potential avian flu pandemic, beyond which any favorable outcome from GILD's ongoing Tamiflu arbitration with Roche could represent major upside.
7:45AM Thomas & Betts (TNB) CIBC Wrld Mkts initiates SECTOR PERFORM. Firm believes the co should be able to exploit a strong utility outlook over the next two years as well as a potential nonresidential construction recovery, but see limited upside relative to other names with more nonresidential construction recovery.
7:45AM PortalPlayer (PLAY) Jefferies & Co upgrades Underperform to HOLD. Target $19 to $22. Firm cites the withdrawal of the follow on offering yesterday, notes that given the high short interest (23% of float), they expect to see a significant squeeze in the short-term that should cause the stock to move appreciably higher. Jefferies says that checks suggest the NAND flash market remains extremely tight with most customers on allocation. The firms believes top tier customers are currently unable to receive 30% or more of their forecasts. In addition to the NAND flash tightness, Jefferies believes Apple (AAPL) has experienced several other component related supply issues, and given these factors, they believe the risk that Apple disappoints in Q4 has increased. |
