From Briefing.com: Close Dow +28.18 at 10833.73, S&P +3.17 at 1262.79, Nasdaq +9.24 at 2231.66: Today marked the fifth consecutive day of a higher start that fizzled. The difference today, though, was that the market's majors clung to modest gains and finished the session on positive turf. A plethora of M&A activity, some strong reports on the earnings front, and good third quarter GDP data collectively catalyzed an bullish air that dominated, but faded, during the session's final hour.Wide-spread buying across the Materials sector (+1.6%) allowed it to occupy the driver's seat for the duration of trading. The soaring steel industry, following positive analyst comments on Nucor (NUE 67.84 +2.29), served as one of the broader market's best sources of support. Seven other sectors contributed upside. Mirroring the overall market, the influential Financial sector finished with well-pared 0.4%. While support came from several corners, multi-line insurers fared especially well as American International Group (AIG 66.44 +1.02) enjoyed extended buying following yesterday's report that it will purchase $3.5 billion worth of property in Japan. In spite of the Treasury market's submerged status, the sector held higher all day; Utilities, the other rate-sensitive sector, did not perform as well, though. Broad-based selling took that sector to a market-dragging -1.1%. As was the case with Financial, the Technology sector (+0.2%) erased much of its intra-day gain and thereby revoked some leadership. Today's host of merger activity mainly occurred within the Tech sector, and included Seagate Technology's (STX 20.20 +0.60) $1.9 billion bid for Maxtor (MXO 6.80 +2.28) - a move that will unite two of the largest disk-drive makers. Google (GOOG 426.25 -3.49), meanwhile, announced that it will pay $1 billion for a 5% stake in Time Warner's (TWX 17.62 -0.12) AOL, while IBM (IBM 83.12 +0.64) has proposed a purchase of Micromuse (MUSE 9.93 +2.72). With respect to the earnings front, ATI Technologies (ATYT 16.47 -0.03) beat analysts' profit expectations, and Blackberry-competitor Palm (PALM 31.93 +1.03) issued upside profit guidance for its fiscal Q2. However, relative weakness in semiconductors and declines in several tech bellwethers largely offset the gains that corporate news fostered. FedEx (FDX) topped the list of upside earners. The company's much better than expected report, and upped fiscal 2006 forecast, lifted Industrials (+0.5%) while also sparking wide-spread buying that's sent the Dow Jones Transportation Average 2.3% higher. Consumer Staples (+0.3%) also held steady today, but the Consumer Discretionary sector (+0.1%) wavered. Following reports that Kirk Kerkorian's Tracida sold more that 20% of its stake in General Motors (GM 19.10 -0.75) this month, the automaker again dragged the sector and the Dow. Nike (NKE 85.75 -2.73), despite beating earnings expectations, was another weak link due to the disappointing future orders it reported. Earnings-driven strength in Family Dollar (FDO 24.40 +1.32) and optimism ahead of Bed Bath & Beyond's (BBBY 41.26 +0.44) earnings report helped retailers counter the decliners; that industry demonstrated resilience in the face of crude futures' 0.9% rise. Conversely, that uptick was to the Energy sector's (+0.1%) benefit, and followed data that showed greater than expected drawdowns in gasoline and distillates (i.e., heating oil) last week. On the other hand, an unexpected build in crude supply paired with relative weakness in oil storage and transport in stifling the sector. With respect to the final Q3 GDP report, the data was marginally revised to reflect a 4.1% annual rate of increase - the strongest gain in a year and a half and the tenth consecutive quarter of economic growth above 3.0%. The inflation-gauging chain deflator, meanwhile, was revised slightly upward to 3.3%. While the reflection of solid growth alongside the chain deflator's rise somewhat disturbs inflation-flustered bond traders, the data was essentially "old news" that has be followed by more recent indications that growth remains solid amid contained inflation. As such, neither the bond nor stock markets overly reacted to the data. NYSE Adv/Dec 2068/1214, Nasdaq Adv/Dec 1842/1177
4:09PM On Semiconductor cuts interest expense guidance (ONNN) 5.57 +0.20:Co says with repayment of remaining 10% junior subordinated notes, co has eliminated all significant double-digit interest expense debt, should save the company about $7 mln of net interest expense in 2006. Co expects to reduce its annual 2006 net interest expense to about $49 mln.
9:16AM Metrologic Inst awarded $6.2 mln in additional funding from a proprietary customer for its advanced optical systems division (MTLG) 19.64 :Co announces the Advanced Optical Systems Division of its Adaptive Optics Associates subsidiary has received additional funding on a previously announced $25 mln subcontract. Funding for this subcontract has been increased to $15.9 mln from the previously announced $9.7 mln level with approx $7.8 mln of rev recognized through Oct 31, 2005. The period of performance for the entire contract is expected to last through the end of the first quarter of 2008. It will be incrementally funded through that period. Payments under the contract will be made to AOA on a cost-plus-fee basis.
UTStarcom (UTSI) announces a contract with MultiFon to expand the operator's IP-based Personal Access System networks in Honduras. MultiFon operates the second largest fixed-line telephone network in all of Honduras.
Seagate Technology (STX) agreed to purchase Maxtor (MXO) for $1.9 billion in stock -- a move that joins two of the largest disk-drive makers,
4:23 pm News Corp. (NWS.A)
15.49 -0.16: Shares in News Corp slipped on news the media giant will face trial over allegations that it broke promises made to investors over its poison pill practices, after a US judge denied its request for the suit to be dismissed. A group of 12 global pension and investment funds filed a suit in October, alleging News Corp. failed to honor a pledge made last year to allow a shareholder vote on changes in its poison pill strategy.
News Corp., a suggested holding in our Active Portfolio has stated that its poison pill strategy is used to ward off John Malone's Liberty Media Corp. from increasing its 18% stake in the company. Malone and Rupert Murdoch were longtime friends, but turned rivals over the issue. Malone is the second largest shareholder behind the controlling Murdoch Family.
Poison pill strategies have been used by the likes of Harley Davidson (HDI) to fend off hostile takeovers. Delaware Courts have ruled that such defenses are legal, unless they are used to restrict a board's power to consider a buyout offer, according to Bloomberg. The group isn't questioning the legality of the poison pill, only that NWS violated an agreement not to alter the defense without shareholder approval. The central issue concerns that News Corp., when reincorporating in the US, had agreed the current poison pill would expire after a year. But then in August, the company extended it by two years proving, the suit alleges, it wasn't planning on honoring the agreement.
We view the news as a minor distraction for News Corp. From a shareholder perspective, it's a positive development. Shareholder pressure on media conglomerates to unlock inherent value in these stocks has been rising, from Carl Icahn's stake in TimeWarner to Liberty's apparent unabated interest in News Corp. The news put the spotlight on management to respond on behalf of shareholders' interests by continuing buybacks, which is certainly viable considering it's holding $5 bln in cash. We continue to like the name due to its earnings growth, discounted valuation, and attractive shareholder value.
--Kimberly DuBord, Briefing.com
11:40 am Seagate Technology (STX)
19.79 +0.19: Already the world's largest maker of hard drives, it appears Seagate Technology's New Year's resolution is to get even bigger. Earlier, Seagate announced a definitive agreement to acquire Maxtor (MXO) for $1.9 bln in stock - a deal which plays into our Overweight rating on the Technology sector and Briefing.com's belief that strong balance sheets and reasonable valuations will result in 2006 being a banner year in terms of M&A activity.
According to market researcher iSuppli Corp., No. 1 Seagate accounted for about 30% of hard drive shipments in Q205 while Maxtor, which held onto the second place spot in Q105 with a 16.3% share of the market, relinquished its No. 2 ranking in Q2 (13.5% share) to competitor Western Digital Corp.'s (WDC), which had a 17.6% market share.
The combined entity is expected to generate significant synergies, achieving about $300 mln of annual operating cost savings. Additionally, the deal is expected to be at least 10-20% accretive to Seagate on a cash EPS basis after the first full year of integration. As with past acquisitions of hard drive manufacturers, revenue attrition is anticipated to result from this combination and it is estimated that incremental revenues will generate gross margins that are in line with the high end of Seagate's stand-alone model. Meanwhile, Seagate also reaffirmed its Q2 (Dec) forecast for earnings of $0.53-0.57 per share on revenue of $2.2 bln and still expects to earn $2.00 a share in fiscal 2006.
Even though the transaction has been unanimously approved by the boards at both companies, it is worth noting that such a large deal between two industry leaders could face some antitrust scrutiny. Should such conditions arise, Maxtor would be awarded a whopping $300 mln termination fee. Nonetheless, due to the huge cost efficiencies and financial benefits, as a combination of the two would be "better positioned to anticipate and serve the needs of the global customer base in the highly competitive data storage market" according to Seagate chairman Steve Luczo, achieving customary regulatory approval would complete the deal in the second half of calendar 2006. Maxtor shareholders will receive 0.37 shares of Seagate stock for each Maxtor share.
--Brian Duhn, Briefing.com
10:29 am General Motors (GM)
20.15 +0.30: As if potentially being dethroned as the king among car makers for more than 70 years by rival Toyota Motor (TM) wasn't bad enough, General Motors has received yet another piece of bad news. It has been reported that Kirk Kerkorian's Tracinda Corp., GM's third largest shareholder, sold 12 mln of GM shares, cutting its stake in the auto giant to 7.8% (or 44 mln shares) from 9.9%.
In a filing with the SEC, Kerkorian's Tracinda investment group said it sold part of its GM stake at a loss to offset gains on unrelated investments and cut its tax bill. The SEC filing said Tracinda, which acquired its shares in a number of transactions by paying an average of $26.33 for 22 mln shares and $31 for another 18 mln shares, sold 5 mln GM shares at $22.02 on Thursday and 7 mln shares at $20.21 on Monday.
While Tracinda's transactions don't necessarily mean that Kerkorian has lost interest in GM, the sale could echo some frustration over failing to win a seat on GM's Board of Directors for Jerome York, who has been Kerkorian's senior advisor throughout the process of hastening GM executives to turn around the company. The filing left open the possibility that Tracinda could sell (or even buy) more shares in the future.
After hitting an 18-year low yesterday, GM shares are down more than 50% on the year, leaving Kerkorian with a loss of about $500 mln on his GM investment. Further, the car maker's market cap has dwindled to around $11 bln, or roughly equal to the estimated book value of its GMAC consumer-finance unit, according to the Wall Street Journal. GM's plummeting valuation, which barely qualifies it as a large-cap stock, has even been eclipsed by motorcycle icon Harley-Davidson (HDI) and is now about one-fourteenth the size of Toyota in terms of market value.
--Brian Duhn, Briefing.com
10:21 am Calpine
0.198 -0.032: Calpine Corp., one of the nation's largest power merchants, on Tuesday filed for Chapter 11 bankruptcy protection as it struggles with more than $17 billion in debt. The company, whose power plants generate approximately 27,000 megawatts of capacity, announced its petition to restructure in order to continue normal operations and allow for a successful restructuring.
Concurrent with its filing, Calpine said it received commitments for up to $2 billion of secured debtor-in-possession financing from Deutche Bank and Credit Suisse First Boston, the company's joint lead arrangers and bookrunners. The financing includes a $1 billion revolving credit facility and a $1 billion term loan, according to the company.
"Our plan calls for power plants to remain available for operation to provide reliable supplies of electricity," noted Calpine's CEO Robert May. "We intend to move through this restructuring process as quickly as possible to regain our financial health and to take the necessary steps to become a stronger and more competitive energy provider. With our new financing we will have additional financial flexibility and sufficient liquidity to meet our obligations going forward." In addition, the company said it has petitioned the court to reject certain of its contracts, including power sales agreements in which the price paid to Calpine for electricity is significantly below its cost or market prices.
The bankruptcy announcement comes in the wake of the California power crisis and the collapse of Enron, which left power merchants struggling with declining electricity prices and rising debt costs. Although Calpine said it has taken numerous steps to reduce its debt and strengthen its balance sheet, its actions were not sufficient to offset the cost of its substantial debt obligations. In its petition, Calpine recorded $26.6 billion in assets and $22.5 billion in total debts.
--Richard Jahnke, Briefing.com
09:20 am Electronic Arts (ERTS)
53.11: After Tuesday's close, Electronic Arts warned Wall Street that it expects net revenue and earnings per share for Q3, Q4 and FY06 to be "well below" analysts' consensus estimates and prior guidance. According to Chief Executive Larry Probst, "Holiday sales are not meeting expectations." Probst further declared that it is likely the industry will be down double digits on a percentage basis for the important holiday quarter.
While management gave no specific details, unanticipated market declines in both North America and Europe amid lower demand for video games on the older consoles and even disappointing sales of next-generation technology like Microsoft's (MSFT) Xbox360 were cited as contributing factors. On Nov. 1 the world's largest publisher of video games said it expected EPS of $1.18-1.28, excluding items, on sales ranging from $1.48-1.58 bln in the holiday quarter, which accounts for roughly half of the company's total top line.
The warning from Electronic Arts comes less than a week after Activision (ATVI), the No. 2 video game publisher, said earnings over its next two quarters will miss expectations, noting an 18% year/year decline in game-software sales during the month of November.
In contrast, video game maker THQ Inc. (THQI) this morning reaffirmed its Q3 EPS and revenue forecasts of $0.65-0.68 and $320 mln, saying holiday sales so far are meeting expectations. Evidently, THQI's strategy of targeting the mass-market consumer this holiday and launching core gamer titles for the next-generation platforms next year, as the installed base ramps, continues to bode well for THQI. Nonetheless, the entertainment software industry is clearly feeling the effects of slower consumer spending and transition-related issues (i.e. consumers not buying new games until new consoles are released) related to the long lag time between the launch dates of next-generation machines. Shares of Electronic Arts are currently about 27% off an all-time high reached on March 9th.
--Brian Duhn, Briefing.com
09:08 am FedEx (FDX)
98.49: FedEx delivered a standout quarter by all measurers. Profits for the world's second largest package shipping company climbed 33% on robust international and US deliveries and impressive margin expansion. FedEx earned $471 mln, or $1.53 per share, in the second quarter, surpassing the consensus estimate by 11 cents. Its top line grew 10% to $8.09 bln as FedEx continues to benefit from global economic growth.
Our timing on FedEx has been on track, as we argued in June that investors should remain on the sidelines until they see operating margins improve. We shifted gears in September after the Express business gained a foothold, improving operating margins to 7% as the company headed into its strongest season. Since September, shares have gained 29% and are likely to continue to run given the impressive growth and operating leverage achieved this quarter.
Operating margins widened to 9.8% from 8.2% last year - within reach of management's goal of 10%. The Express unit jumped 200 basis points to 8.9% on International Priority revenues and productivity gains. The company attributed the sharp improvement to customer demand, disciplined pricing, and productivity gains.
Express and Ground revenues grew 11% to $5.37 bln and $1.31 bln, respectively. FedEx deliveries outside the US grew 8% led by continued growth in Asia and China. Freight revenues gained 14% to $932 mln, reflecting improving yield, incremental fuel surcharges, and higher rates. Kinko's cast the only shadow in the quarter. Sales for that line of business were basically flat and margins contracted 270 basis points to 3% due to declines in copy revenues and higher costs.
FedEx expects Q3 earnings to range between $1.15-1.30 per share, which is on target with the consensus estimate of $1.23. The market will react warmly to upside guidance for FY06. FedEx now sees earnings in a range of $5.60-5.85, ex items, from prior guidance of $5.40-5.65, ex items, and versus the $5.47 consensus estimate. Given global economic growth, our positive view on the transports remains a key factor for our Overweight rating on the Industrial sector.
--Kimberly DuBord, Briefing.com
09:00 am Palm, Inc. (PALM)
30.90: After the close Tuesday, Palm reported second quarter results that beat analysts' expectations, and provided positive guidance for the current holiday quarter. On account of the news, shares of the company are trading sharply higher in the pre-market. The stock is down slightly year-to-date, and is trading nearly 17% lower since late September when the company posted disappointing first quarter results.
During the latest quarter, the maker of the Treo smartphone posted net income of $260.9 million, or $5.02 per share, largely due to the effect of a partial reversal of a deferred tax asset valuation allowance of $226.3 million. However, excluding the charge and other non-recurring items, earnings totaled $24.4 million, or $0.47 per share, compared with $27.2 million, or $0.53 per share, in the year ago period. Revenue rose 18.2% to $444.6 million from $376.2 million a year earlier as the company added seven new carriers during the quarter to expand the geographic reach of its products. The latest results mark the eighth consecutive quarter of year/year double-digit revenue growth.
In September, following its first quarter earnings shortfall, Palm forecast second quarter EPS in the range of $0.39 to $0.43, with revenue between $435 to $440 million. Analysts, according to Reuters Estimates, were expecting earnings of $0.44 per share on revenue of $440.81 million.
Palm said it will introduce the Palm Treo 700w smartphone based on Microsoft's Windows Mobile and announce three additional new smartphones next year. Based on the current trends, the company issued better than expected guidance for the fiscal third quarter. Palm sees EPS between $0.31 and $0.33, ex-items, with revenue ranging from $370 to $375 million. It also expects gross margin between 33% and 33.5% for the current period. Analysts, on average, were expecting EPS of $0.29 on revenue of $365.7 million.
--Richard Jahnke, Briefing.com
08:54 am Nike (NKE)
88.48: As expected Nike reported a strong quarter, far outpacing earnings estimates, but weaker orders and margins sent shares running for the hills in after hours trading. The world's largest athletic shoe maker reported global orders for shoes and clothing for delivery between December and April rose 2.5% - less than the 7% analysts were expecting. Sales in the Americas were roughly in-line, but European future orders were quite disappointing and were magnified by lackluster Asian growth.
Cost inflation was also a key concern going into the quarter, apparently for good reason. Gross margins contracted 200 basis points (ex-currency) to 43.5% on rising oil and transportation expenses. Nike was able to stem some of the losses through reduced spending, but estimated marketing costs would outpace sales for the balance of the year. Shares fell 3.4% in Germany and are likely to see further losses in the US when the market opens. Second quarter net income rose 15% to $301.1 mln or $1.14 per share - 11 cents above consensus. Revenues grew 10% to $3.47 bln.
Given the loftiness in shares, the stock will likely trade down on the news. Nike will need to address European sales declines, which will be challenging given the macroeconomic conditions with high unemployment weighing on consumer demand, particularly in Germany.
As we recently stated for Nike, we remain bullish over the longer term, but feel shares have run ahead of fundamentals in anticipation of next year's lucrative global athletic schedule that includes the World Cup and the Winter Olympics. All told, the quarter wasn't as bad as the headlines indicate. We remain bullish over the longer term given Nike's market-leading innovation, multi-dimensional offering in both performance and lifestyle products, unequalled marketing prowess, and operational efficiencies all driving returns.
--Kimberly DuBord, Briefing.com
10:28 am Netflix (NFLX): Firm believes the investment case hinges on the co's ability to execute on: 1) Delivering superior entertainment value; 2) Leveraging the Long Tail or the co's ability to help subscribers find good titles that they might not have otherwise been aware of; and 3) Building a scale advantage that increases profitability and barriers to entry. Recent competitive threats have diminished with WMT exiting the business and BBI facing financial troubles.
10:27 am D & E Communications (DECC): The firm says the co's local phone service in Berks and Lancaster, are seeing accelerating housing development and new business activity. The firm says the co is one of the most aggressive marketers of broadband Internet services among its peer group with its DSL subscriber base growing 74% in the third quarter. The firm says due to the 2002 acquisition of Conestoga Telephone, D&E is among the most heavily leveraged companies in its peer group. Firm thinks that a potential de-leveraging equity offering could benefit shareholders by reducing risk and increasing visibility to investors.
10:27 am Integrated Device (IDTI): Firm believes the co has three traits they prefer most in semiconductor companies: 1) an increasing market share in target markets, 2) imminent new product cycles, which should drive revenue growth faster than its targeted end markets, and 3) the potential for significant operating leverage to propel earnings momentum faster than its peers.
10:26 am eResearchTech (ERES): Firm is citing the following reasons: 1) additional awards between now and quarter-end are likely, which will lead to additional positive news flow and ERES' attainment of another bookings record; 2) while Q4 2005 results will not be affected by the recent pickup in bookings, forward estimates (particularly Q2 2006) should be positively influenced; 3) the new year may bring new budget allocations for cardiac safety; and 4) industry momentum could well build on itself as drug sponsors realize that the time has come to begin to comply with the regulatory guidance.
10:25 am OYO Geospace (OYOG): Firm says this tgt reflects only the beginning of the growth potential in seabed seismic and other new products, and that with estimated incremental earnings potential of $6+/share from seabed alone, OYOG could see substantially higher appreciation when the business starts to accelerate.
10:21 am Yahoo! (YHOO): Firm is saying that they would like to see YHOO make the following changes to better position itself to be the future media mkt leader: 1) improvement in its core search tech; 2) increase in higher value, rich media advertising; and 3) increase in fee based revenue. Although the firm believes in the potential of YHOO's products, state of the art advertising tech, and other leading initiatives, they believe this is more or less reflected in the current price.
10:19 am IBM (IBM): Firm is citing valuation and saying as retirement expense headwinds abate, IBM's true earnings power could begin to show up in actual results. Firm says based on input from a pension actuary/consultant and their analysis, their forecast for retirement-related expenses is more negative than IBM's. The firm sees good potential for continued strong underlying earnings growth to drive upside to their estimates.
10:19 am 24/7 Media (TFSM): Dougherty & Co's checks indicate volume is up significantly and that the company is likely to outperform its Q4 guidance and street estimates. In addition, the firm believes the company is seeing stronger demand than it originally expected from its Joint Venture in Japan which could lead to FY06 outperformance. The firm is reiterating its buy rating and increasing price target to $8.50.
10:18 am Warnaco Group (WRNC): Upgrade follows the co's announcement to acquire long-term Calvin Klein licenses in Europe and Asia (see 17:17 comment yesterday). Firm says this transaction should be nicely accretive. While the co is not providing detailed guidance, the firm projects it will add $0.24 to 2006 EPS.
10:17 am Packeteer (PKTR): Firm also suspended their price tgt saying based on a recent set of checks with several of Packeteer's customers, partners, and industry contacts, have concluded that Packeteer has seen better days. Firm is lowering their estimates, and a floor valuation is close to $6.50/share, representing 2x cash/share. |
