From Briefing.com: 4:20 pm : During a day which showed little promise early on in the way of extending a relief rally in stocks fueled by bonds a day earlier, investors on Wednesday seemed to disregard the renewed bearish tone in Treasuries altogether; that is, after the Fed's Beige Book provided just enough of an impetus to push the major averages through key technical levels. Eight out of ten economic sectors closed to the upside as follow-through buying efforts lifted the S&P 500 above 1,300 for the first time since May 2001.
Stocks opened with little fanfare and traded in a very narrow range most of the day until 2:00 ET, when the Fed showed that "labor cost pressures were little changed" and that "prices at the retail level increased at only a moderate rate," providing some evidence, albeit very minor, of less incentive to go beyond what is currently expected on rate hikes. More notably was the fact that the Dow, S&P and Nasdaq garnered enough support to push through initial resistance levels of 11,175, 1,300 and 2,300, respectively.
Bonds, meanwhile, consolidated some of the gains behind the 10-yr note's biggest one-day advance since December a day earlier. An unexpected rise in the NY Empire Manufacturing Index to a very strong 31.2 (consensus 19.0) stalled follow-through buying in bonds and left traders cautious ahead of tomorrow's closely-watched CPI report.
Among the eight sectors posting gains, Industrials paced the way higher. Upside EPS guidance from Union Pacific (UNP 90.42 +5.21), which plays into our Overweight rating on the sector and our bullish opinion on the railroads, provided the bulk of sector support. Materials also turned in strong performance, led by an optimistic outlook from DuPont (DD 42.80 +0.88). Technology was strong across the board, getting a lift from several analyst upgrades (e.g. SNDK, PMCS, LRCX, STX, and ATVI).
Consumer Discretionary was in focus after New York Attorney General Eliot Spitzer sued H&R Block (HRB 20.66 -1.34) for fraudulent marketing of IRAs, but the losses in specialized consulting services -- the day's worst performing industry group -- was offset set by strength in retail and autos. Blowout Q4 results from Sears Holdings (SHLD 132.29 +15.02) and reports that Kohlberg Kravis Roberts submitted a $12.5-13.0 bln nonbinding bid to purchase a majority stake in General Motors' (GM 21.50 +0.36) GMAC division were sources of support.
Financial was also a focal point after Lehman Brothers (LEH 144.12 -1.18) posted record results, which plays into our Market Weight rating on the sector. However, the stock, which was up 2% yesterday in sympathy with strong earnings from Goldman Sachs (GS 148.92 -0.50), coupled with rising bond yields, kept sector gains from the S&P's most influential sector in check. Even Energy, despite a 1.4% decline in crude futures which may have offered investors additional solace, attracted buyers and extended its year-to-date gain to nearly 7%.BTK +0.8% DJ30 +58.43 DJTA +2.2% DJUA +0.4% DOT +0.7% NASDAQ +15.94 NQ100 +0.8% R2K +0.9% SOX +0.3% SP400 +0.7% SP500 +5.54 XOI +0.7% NASDAQ Dec/Adv/Vol 1162/1881/2.12 bln NYSE Dec/Adv/Vol 1158/2104/1.63 bln
4:16PM Ultratech Stepper receives multiple Advanced-Packaging Lithography system orders from SPIL (UTEK) 23.45 +0.35 : Co announced that Siliconware Precision Industries (SPIL) has ordered several Ultratech Unity AP200 advanced-packaging lithography systems. Slated for 200-mm devices, the tools will be delivered to SPIL's Taiwan headquarters over the next few quarters.
4:07PM Genesis Microchip selected by MiTac for co's FLI8532 " Cortez" video controller (GNSS) 19.91 +0.03 : Co announces that MiTAC Technology Corporation has designed GNSS's FLI8532 video controller into its new premium LCD TV platforms that are being manufactured for some of the world's leading consumer electronics companies.
2:31PM Sentiment indicators at mid-day : Market volatility, as measured by options market prices, is mixed today with the VIX (CBOE Volatility Index) up 4.1% to 11.19, while the VXN (NASDAQ Volatility Index) is down 4.1% to 15.08. The CBOE put/call ratio is currently at 0.68, indicating more active call than put trading.
10:28AM APA Optics sells MOCVD operations and licenses its Gallium Nitride based HFET patents and technology (APAT) 1.88 +0.16 : Co announces that it has sold its multi-wafer Metal Organic Chemical Vapor Deposition (MOCVD) operations and related intellectual property and entered into a revenue sharing licensing agreement for total consideration of $1.9 mln in cash. The transaction includes sale of its multi-wafer MOCVD system and technical know-how associated with the growth of state-of- the-art epi-layers: two heterojunction field effect transistor patents, a pending patent application, and associated intellectual property. The operations were located in an off-site leased facility. Terms of the transaction allow APA to market and sell products for applications greater than 1 GHz and provide revenue sharing based on future licensing agreements regarding these patents. The asset purchase agreement includes an additional consulting agreement for up to $100,000 over the course of one year.
3:24 pm H&R Block (HRB)
20.93 -1.07: New York Attorney General Eliot Spitzer today sued H&R Block for fraudulent marketing of individual retirement accounts. The suit follows an investigation that began last year after Spitzer received information from an H&R Block employee. Last month, the tax prep company received a Notice of Intent to Sue. The Kansas City-based company allegedly steered hundreds of thousands of clients, including about 30,000 New Yorkers, into IRAs that were virtually guaranteed to lose money due to a combination of hidden fees and low interest rates. Spitzer called the conduct described in his latest suit "particularly appalling" because lower-income clientele had been particularly targeted with the product.
The lawsuit specifically alleges misleading and incomplete disclosure. Over the past four years, H&R Block opened more than 500,000 "Express IRA" accounts for its tax preparation clients. The press release issued by the Attorney General's office contends that the company touted "great rates," but H&R Block did not disclose the fact that the interest paid on the accounts would not cover the fees assessed in certain instances, and that the "great rate" was sometimes less than 1% annually. According to the suit, 85% of Express IRA account openers paid more in fees than they earned in interest.
Spitzer's complaint indicates that the company's senior management was aware of the fact that many clients were losing money on their Express IRAs. The Attorney General office's press release cites a district manager's assertion, via an email to CEO Mark Ernst, that maintenance fees should not exceed the amount of interest paid on the accounts. Ernst forwarded the email to the Express IRA product manager, noting that the product "is the right thing for our clients, but [it] is designed to nickel and dime clients ..." The allegation indicates that some employees, including the person that invoked Spitzer, actually refused to promote the Express IRA.
The Wall Street Journal reported that advocates of lower-income consumers are praising the lawsuit. The investigation was led by Assistant Attorney General James Park, and was supervised by David Brown, Chief of the Investment Protection Bureau. Spitzer's office is seeking $250 million in fines - plus restitution.
H&R Block, for its part, issued a rebuttal and pledged to defend the product and "fight vigorously" should the matter end up in court. The company claims that, out of all the Express IRAs opened between 2001 and 2005, 78% have experienced net tax savings benefits and interest earnings. As The Journal noted, the news is the latest setback for H&R Block. The company recently announced that it understated its 2004 state taxes by $10 million and found its tax liability for another period increased by $17.5 million. Additionally, the company said its third quarter filing with the SEC would be late because of restatements needed to correct errors in prior periods. In February, H&R Block said it would restate results for the two fiscal years ended April 30, 2005, and subsequent quarters to correct those mistakes. On the latest development, HRB shares have lost more than 4%. Over the course of the past twelve months, the stock has dropped more than 59%.
--Lisa Beilfuss, Briefing.com
1:36 pm CVS Corp. (CVS)
29.57 -1.00: In its 10K filing, drugstore operator CVS Corp. disclosed that it's the subject of an informal SEC probe. The Securities and Exchange Commission is looking into a transaction booked in 2000, which relates to accounting entries regarding the transfer of excess plush toy inventory to a third party. Under the transaction, CVS received $42.5 million in barter credits for the excess inventory, and made a $12.5 million cash payment to the same third party.
Last December, CVS launched an internal review of the matter. The review ended this month, at which point the audit committee concluded that various aspects of its accounting for the transaction were incorrect. The company's controller and treasurer have since resigned. The internal investigation has not led to any adjustments to CVS's financial statements.
CVS asserted that it is responding to the SEC's requests, and also said that it does not expect the probe to have a material impact on its financial condition.
--Lisa Beilfuss, Briefing.com
1:25 pm Sears Holdings (SHLD)
131.00 +13.73: Shares of Sears Holdings are up big following the retailer's fourth quarter earnings report that was highlighted by a positive surprise on the bottom-line. Specifically, Sears posted a profit of $4.03 per share that was $0.41 ahead of the Reuters Estimates consensus estimate. The $16.09 billion registered on the top line, though, was a bit less than expected. Its earnings result includes the net effect of a gain on sales of assets and restructuring charges related to the Sears-Kmart merger.
Because the prior year period did not include Sears' results, the consolidated statements of operations for the quarter and the year are not comparable. On a pro-forma basis, which summarizes results as if the merger was completed at the beginning of FY04, it was shown that the combined company's profit per share in the fourth quarter increased 11% while revenues slipped 4.5%.
During the quarter, comparable store sales in the Kmart segment rose 0.9%, marking the first same-store sales gain since the second quarter of 2001. Increased apparel and home products sales drove the increase. Domestic same-store sales at Sears, meanwhile, declined 12.2%. Management said that that result reflects efforts initiated in 2005 to improve gross margin by reducing its reliance on promotional events. Weak apparel sales were also a factor. Strong home service sales and an increase in the total number of Sears stores helped offset the comparable store sales decline.
According to Reuters Estimates, analysts expect the retailer to book $0.80 in earnings per share for the current quarter. For the full-year, analysts are anticipating EPS of $7.71. Currently, SHLD shares are trading at 17.0x estimated full-year earnings. That price places it at a premium to the market, as well as to retail rival Wal-Mart (WMT) and department store competitor J.C. Penney (JCP). Those stocks are trading at 15.5x and 14.6x forward earnings, respectively.
With respect to Sears' bid for the 46% stake in Sears Canada that it does not already own, management noted that its $720 million offer is open for acceptance until March 17. The company believes that full ownership of Sears Canada would allow that unit to be able to compete with other Canadian retailers and the Canadian operations of major U.S. retailers. Separately, Sears today announced that two of its board members will not run for re-election at its 2006 annual meeting on April 12. Sears does not intend to replace those members.
--Lisa Beilfuss, Briefing.com
10:18 am DuPont (DD)
43.27 +1.35: Shares of DuPont traded higher after the Dow Industrial announced plans to restructure its performance coatings business to improve profitability and competitiveness. Additionally, the company raised its earnings guidance for the current quarter and fiscal year, reflecting improved operating performance in many of its businesses, offset in part by softer market conditions in Europe and unfavorable currency trends.
Under the restructuring, the Wilmington, Delaware-based company said it plans to shutter facilities, primarily in Europe, and eliminate approximately 1,500 positions. The company also said it plans to consolidate manufacturing and technical assets and tailor marketing strategies to key customers and segments to help reposition it for growth. The plan follows an announcement by DuPont in February that it will cut 200 positions in association with the closing of its Troy, Michigan, laboratory.
DuPont expects the announced plan to reduce annual costs by approximately $165 million and result in a pre-tax charge of up to $165 million in the current quarter, as well as costs of up to $55 million over the next year. It plans to implement the plan within the next 18 months.
In terms of guidance, DuPont estimated first quarter earnings of $0.80 per share, up from its previous forecast of $0.70 per share. For 2006, the company sees earnings per share between $2.60 and $2.70. It had originally projected earnings of $2.60 per share. Analysts, according to Reuters Estimates, are expecting earnings per share of $0.71 and $2.64 for the first quarter and fiscal 2006, respectively. Though there remain few catalysts for shares at this time, the raised guidance, as well as lower natural gas prices, a key feedstock in chemicals, supports the near-term outlook.
--Richard Jahnke, Briefing.com
09:33 am Lehman Brothers (LEH)
145.30: Lehman certainly had a tough act to follow after Goldman Sachs (GS) reported the highest quarterly profit ever in the first quarter. Lehman followed suit, though, reporting a record quarter on equity trading, underwriting, and money management revenues, with profits rising 24% to $1.09 bln. Excluding a gain from an accounting change, per share profits were $3.50 or 36 cents above what the market was expecting. Revenues in the quarter grew 21% to $4.46 bln. The report from Lehman Brothers represents another blowout quarterly result in what could be another record profit year for the brokerage industry.
Like Goldman, Lehman reported record results in every segment and in every market. Lehman's investment in diversifying its business away from being just a fixed income house by broadening its M&A and equity businesses is clearly paying off. In the quarter, Investment Banking revenues grew 22% to $835 mln driven by debt and equity origination and strong advisory revenues. Capital Markets rose 13% to $3.0 bln led by a 52% increase in equity capital market revenues to $944 mln, as Fixed Income rose modestly by 2% to $2.1 bln. Investment Management revenues grew 33% to $580 mln led by robust inflows in private asset management and institutional accounts.
Return on common stockholders equity rose to 26.7%, compared to 24.5% in last year's period. Compensation and benefits rose 60 basis points sequentially to 49.3% of total revenues. Pre-tax margins widened 180 basis points to 34.8%. The entire group saw a flood of buyers step in Tuesday following Goldman's golden result. We continue to suggest investors buy on dips as the outlook for these stocks remains quite strong. Lehman trades at 12.5, compared to GS at 12.4, Merrill (MER) at 13.1, and Morgan Stanley (MS) at 11.8x.
--Kimberly DuBord, Briefing.com
09:24 am Sony (SNE)
46.51: Sony Corp. has postponed the release of its upcoming PlayStation 3 until November due to delays in finalizing its next-generation disk technology, according to The Wall Street Journal. The PlayStation 3, which was originally set to launch this spring, is crucial for the company's health after it posted a loss for two consecutive quarters in 2005 amid declining electronics prices. The PlayStation is currently the dominant brand for game consoles and controls about 60% of the global market. As such, the delay is perceived as a significant setback for the company, especially with competition from Microsoft (MSFT) and Nintendo heating up.
The delay seemingly gives Sony's rivals a head start in the rapidly growing game console market. Microsoft released its Xbox 360 in November 2005 while Nintendo is slated to launch its new machine, the Nintendo Revolution, later this year. Both companies, and Microsoft in particular, should be able to use the delay to their advantage by focusing on production and building their user base.
Furthermore, the delay will also impact video game publishers, which have struggled with the transition to new gaming technology. Video game software sales faltered last year as consumers delayed purchasing games ahead of the launch of new game consoles. Publishers such as Electronic Arts (ERTS), Take Two Interactive (TTWO), and Activision (ATVI), in turn, reported disappointing results. Although the postponed release of the PlayStation 3 will push back potential software sales, it is not seen as a significant setback for publishers, who still stand to capitalize on its eventual release.
--Richard Jahnke, Briefing.com
09:17 am Union Pacific (UNP)
85.21: Union Pacific raised its first quarter earnings guidance to a range of $1.00-1.10 per share. That forecast is up from the previously guided range of $0.80-0.90 and compares to the $0.89 Reuters Estimates consensus. The company's updated guidance reflects expectations for roughly 119% year-over-year earnings growth. Due to heightened first quarter estimates, management raised its full-year EPS outlook to $4.80-5.00 from $4.60-4.80 (consensus $4.79). Chief Executive Jim Young noted that Union Pacific is optimistic about the strength of the economy in 2006, but remains mindful of the challenges associated with moving record volume across its system.
The company indicated that stronger than anticipated commodity revenue growth and greater than expected operating improvement were the drivers behind the increased projections. Q1 carload volume expectations have been upped one percentage point to 4%, and total commodity revenue is now expected to grow approximately 17% versus the originally expected 15%. Strong demand for Intermodal, Industrial Products, and Agricultural Products is fueling the revenue upside. Union Pacific mentioned that lower than anticipated coal volumes due to ongoing mine production issues are a partially offsetting factor. Mild winter weather, network management initiatives, and capacity improvements are factors behind the margin improvement.
According to Thomson Financial, profits across the rail industry are expected to rise 20% this year on strong demand and higher prices - on the heels of a 35% gain in 2005. Pricing remains the basis for our bullish outlook on the industry, which we believe is a multi-year growth story on the basis of solid demand, limited trucking and rail capacity, a favorable regulatory environment, a growing acceptance of the fuel surcharges, and continued strength in coal demand. Currently, UNP shares are trading at 17.8x estimated full-year earnings, a premium to its peer group's average 15.2x forward multiple. The rail group is one of the reasons for our Overweight rating on the Industrials sector, as it's currently trading at a discount to the sector's 16.3x forward multiple.
--Lisa Beilfuss, Briefing.com
08:45 am ExxonMobil (XOM)
60.81: ExxonMobil and PT Pertamina, the Indonesian state oil and gas company, signed a deal bringing an end to a long-running dispute and clearing the way for a $2 bln development of the key Java oil block. The Indonesian government stepped in to resolve a 4-year old deadlock in lease negations with Exxon, which ended up in a reshuffling of the board of directors of Pertamina that entailed the appointment of Ari Soemarno as the new president. Indonesia is hard-pressed to stem declines in oil production that threaten its membership in OPEC. A deal with Exxon was signed days later over a 45% stake in the Cepu oil block located in East and Central Java - Indonesia's biggest discovery in decades. The deal is expected to generate $3.3 bln per year in revenues.
Cepu is expected to produce some 170,000 barrels of oil per day (bopd) compared to Indonesia's entire output of just over a 1 million bopd, according to Rigzone. The block's five oil fields are estimated to hold oil reserves of 600 mln barrels and gas reserves of 1.7 trillion cubic feet. Pertamina's president said the development requires an investment of $2.5-$2.6 bln over a 3-year period. The government hopes the development of this field will reduce the country's dependence on imported oil. An Exxon spokesman, Maman Budiman, said the signing will likely take place on Wednesday after Pertamina agreed to a draft deal over the weekend. He anticipates production at Cepu may start 31 months after the signing. The deal underscores the global demand to drive energy production as well as Exxon's long-term growth investment approach.
--Kimberly DuBord, Briefing.com
08:43 am Shanda Interactive: Piper Jaffray downgrades Market Perform to Underperform . Firm believes that 2006 will be a major transition year for SNDA, and as such, it will lack any catalyst, at least until the second half. SNDA's core MMORPGs are showing signs of age and losing players, and new games are still unproven in China, and visibility on the EZ product line is limited.
08:42 am Smart Modular Tech: JP Morgan initiates Overweight. Firm is saying they feel SMOD has managed to bring a unique strategy not only to the memory module market, but is leveraging that strength into new markets. The firm says with a focus on value-add modules for OEMs, plus vertically integrating into packaging / logistics, and new markets, they feel these factors should allow SMOD to grow revs and margins above the sector norm.
08:40 am Matria Healthcare: Piper Jaffray upgrades Market Perform to Outperform. Target $47. As mentioned at 6:24, Piper Jaffray transferred coverage and upgraded MATR to Outperform from Mkt Perform and maintained their $47 tgt. Firm notes that MATR is down nearly 20% since the beginning of the month over a number of what they believe are unwarranted concerns raised in an investor newsletter. They say mgmt addressed the issues on a conference call and has reiterated financial guidance. Firm believes growth outlook remains strong in disease management, and they say three key concerns were addressed during the call. They believe the current price represents an attractive entry point for investors.
08:13 am Energy Transfer Equity: Credit Suisse initiates Outperform. Target $29. Firm cites the turbo-charged growth characteristics of the general partnership side of the cash flow stream, ETE units offer higher growth potential, offset to a degree with a lower current yield.
08:12 am Healthspring: CIBC Wrld Mkts initiates Sector Perform. Target $21. Firm is saying the co's outlook has changed significantly over the past 40 days (since its IPO), and at first glance, its downwardly revised Medicare enrollment guidance appears aggressive.
08:12 am Linear Tech: HSBC Securities downgrades Neutral to Underweight . Target $38 to $33. Firm is saying they believe stagnant revenue contribution, coupled with significant margin improvement and ASP decline for the analog universe, is a recipe for heightened competition in this space.
08:11 am Pioneer Natural: Credit Suisse downgrades Neutral to Underperform . Target $47 to $34. Firm downgrades stock based on a net reflection of recent asset sales, rising capital costs (for undeveloped reserves) and higher unit operating costs.
08:09 am Palm: JP Morgan downgrades Overweight to Neutral. Downgrade reflects firm's view that the stock is approaching appropriate value with a near-term risk that consensus expectations for Palm's F4Q are too high. They believe that: 1) RIMM's tussle with NTP did not lead to major defections to PALM, 2) PALM's expansion of the Treo line-up takes place in late CY06, and 3) PALM's 2-for-1 split (scheduled for 3/15) does not signal strong near-term upside, but reflects the board's view of appropriate liquidity for a stock of this market cap. F4Q expectations may be too aggressive - carriers may hold off on Treo orders, reducing channel inventory ahead of the C2H product intros.
08:00 am Eclipsys: Jefferies & Co upgrades Hold to Buy. Firm upgrades in light of the recent pullback (~11% from high). With 88% of '06 under contract, lower risk profile exists. The firm's discussions with other market participants have reiterated the positive purchasing environment. ECLP should benefit, especially considering the management restructuring that has occurred. The firm was hesitant to "chase" shares following the bullish guidance provided on February 23rd. The firm notes the 11% price pullback provides an opportunity to be more aggressive on shares of ECLP. At 23.5x their '07 EPS, ECLP is trading at a 10% and 30% discount to peers on P/E and PEG.
07:59 am Lions Gate Entain: Oppenheimer reiterates Buy. Target $10.75 to $11.5. Firm ups target to reflect 1) higher revenue and cash flow from F2006 theatrical releases, and 2) higher expected profitability for F2007 theatrical releases. |
