From Briefing.com: 4:20 pm : Two factors to which the stock market turned a blind eye yesterday came back into focus today. A re-acknowledgement of rising yields and rising energy prices gave buyers reasons to break this morning. As Treasuries came under increased pressure and crude hurdled $67 per barrel, investors began to sell. By the close of trade, each of the indices had recovered from their lows. Still, a lack of leadership left the Dow and Nasdaq with losses.
Due to conflicting views over the Fed's tightening cycle, action within the stock and bond markets had been divergent over the last few sessions. Whereas equity traders espoused a more hopeful view that the end is near, Treasury traders have concentrated on the fact that interest rate uncertainty persists. The lack of language modification in the FOMC's policy directive set the bearish tone for bonds this week, and the lack of a positive catalyst has left that market with little distraction. Although the stock market has lately demonstrated resilience to rate concerns, and while it opted to shrug off rising yields yesterday, it could not continue to overlook the fact that rates are rising. Higher interest rates undermine valuation models as well as produce slower economic and earnings growth, and higher market rates serve as a bearish backdrop for the equity market.
The FOMC event remained the bond market's focal point, but two other factors fed the flames today. First, the core deflator, which was embedded in the Q4 GDP report, rose 2.4%. Second, comments that the pension reform bill will be sidelined while congress goes on recess added to the long end of the curve's troubles. Intra-day, the benchmark 10-year note's yield was near a four-year high. By the close of equity trade, it had settled to 4.86%. The improvement helped the major indices recover from their lows, but the fact remains that the 10-year is at a level not seen since June of 2004. Accordingly, rate-sensitive areas felt the heat. The Financial sector, which accounts for more than a fifth of the S&P 500, weighed heavily. Industries from banks to REITs to insurance to mortgage suffered. A notable bright spot was Bank of New York (BK 35.92 +1.50), though, which rose upon reports that it's close to selling $4 billion in branches to JP Morgan (JPM 41.53 -0.15). The market's other particularly rate-sensitive areas, like the Utilities (-1.0%) sector and homebuilding industry, also fell.
Energy prices also went under the market's radar yesterday. A reminder of ongoing geopolitical tensions and more data from the Energy Department helped them continue their streak - and brought them back into focus. Specifically, The UN Security Council approved a statement demanding Iran halt its uranium enrichment. The OPEC producing country has 30 days to freeze its enrichment. Concerns over Iran, especially as the weekend approaches, and data reflecting a more than expected drop in natural gas supply sent crude to $67.20 per barrel. In the early going, the bright side to that action had been a supportive gain in the Energy sector. That was fleeting, though, and the sector closed 0.1% lower. Facing both rising energy prices and interest rates, the Discretionary sector (-0.3%) also closed lower. A separate factor behind its decline was GM (21.06 -1.09). Afternoon reports indicated that Delphi is expected to ask a federal judge to cancel its union contracts Friday. A potential strike is more bad news for the struggling auto maker, it fears of it overshadowed news that it's closer to selling a controlling stake in GMAC.
There were some areas of the market that survived today's selling. Several metal commodities remained at or near historic highs. Silver surged 5%. Gold gained close to 3% at hit a 25-year high. Platinum and copper are also did well. Speaking of copper, Phelps Dodge (PD 81.48 +4.46) was upgraded at Morgan Stanley to Overweight from Equal Weight. The firm has a $100 price target on the stock, which is one of our recommended holdings. It and many other metal-related issues attract solid buying interest. The diversified metals and minerals industry led the S&P's 139 groups and lifting the Materials sector 0.3%. Morgan Stanley also raised its target on General Electric (GE 34.65 +0.72). That stock supported the Dow, and it helped keep the Industrials sector (+0.2%) on positive ground.
As a result of strength in its software and communication equipment industries, Tech sustained a modest (+0.3%) gain. Microsoft (MSFT 27.23 +0.21), which received U.S. government backing in an EU antitrust dispute, drove the former group. Upped handset guidance from Nokia (NOK 21.28 +1.06) and Bank of America's target increase on Cisco (CSCO 21.97 +0.40) were factors behind the latter area's advance. Early on, the Tech sector had been the market's best source of support. Semiconductors were its muscle. Better than expected earnings results from ATI Tech (ATYT 17.05 +1.32) had helped spark some follow-through buying interest, but the influential industry could not sustain gains today. Its return to the red took the steam out of the sector and contributed to the broader market's decline. Separately, Google (GOOG 388.44 -6.54) received some added attention today, after the company filed to sell 5.3 million new shares. That stock declined, but the Nasdaq still managed to (modestly) build off of the five-year high it hit yesterday.DJ30 -65.00 NASDAQ +3.04 SP500 -2.65 NASDAQ Dec/Adv/Vol 1516/1519/1.86 bln NYSE Dec/Adv/Vol 1844/1399/1.60 bln
4:10PM Merix beats by $0.12, ex items; guides above consensus (MERX) : Reports Q3 (Feb) earnings of $0.14 per share, excluding non-recurring items, $0.12 better than the Reuters Estimates consensus of $0.02; revenues rose 90.3% year/year to $95.1 mln vs the $89.2 mln consensus. Co issues upside guidance for Q4, sees EPS of $0.11-0.15, ex items vs. $0.02 consensus; sees Q4 revs of $91.0-95.0 mln vs. $88.79 mln consensus.
4:06PM Interlink Electronics announces delay in filing its annual report (LINK) 3.50 +0.02 : Co announces it will be unable to file its annual report on Form 10-K by March 31, 2006 as previously expected. In the course of preparing its 2005 year end audit, LINK discovered two discrepancies in its historical financial statements. The first of these discrepancies involved accounting for stock options and resulted in an unrecorded, non-cash expense of approximately $100,000 in 2005, $200,000 in 2004, and $2,400,000 in 2001. This issue has been resolved and is awaiting final audit approval. The second discrepancy involves the valuation of certain inventory in transit between the parent co and LINK's Hong Kong subsidiary as of Dec 31, 2004. Interlink is continuing to investigate this matter, which must be resolved in order to finalize the required restatements of Interlink's historical financial statements and to permit the filing of LINK's report on Form 10-Q for the third qtr of 2005 and its 2005 Annual Report. LINK currently expects to complete its examination of this matter and to file all required reports and restatements as quickly as possible.
12:01PM Photronics restructures North American manufacturing network (PLAB) 17.50 +0.01 : Co announces its plans to streamline its operating infrastructure in North America by ceasing the manufacture of photomasks at its Austin, Texas facility. In connection with the announced restructuring plans, PLAB expects to record in fiscal 2006 a total after tax charge of approximately $15.0 mln to $18.0 mln. The co expects to record approximately $10.0 mln to $12.0 mln, or an estimated $0.24 to $0.29 per basic and diluted share, of this charge during the fiscal quarter ending April 30, 2006.
11:43 am Google (GOOG)
385.33 -9.65: Internet search giant Google said it plans to issue an additional 5.3 million shares, partially to meet the needs of index funds to purchase the stock when it joins the S&P 500 index after the close on Friday. The offering would raise its cash balance by approximately $2.09 billion, based on Wednesday's closing price of $394.98. Goldman Sachs (GS) will act as the sole underwriter for the offering, which is expected to take place sometime next month.
In a statement, Google said it intends to use the proceeds from the offering for general corporate purposes, including working capital and capital expenditures, and possible acquisitions of complementary businesses or technologies. While many analysts believe Google may be looking to build its e-commerce infrastructure and expand its presence in Asia through acquisition or strategic investment, the company noted that there were "no current agreements or commitments with respect to any material acquisitions."
Based on the announcement, Google shares have slipped during the regular trading session due to the potential dilution impact on the company's earnings per share, a key measure for valuing companies. By issuing more stock, Google will have to generate greater profits just to match current analysts' estimates. That has exacerbated investors' worries amid an already uncertain earnings outlook for the company. One can't help but wonder either if Google's desire to sell stock here has been motivated by concern that its ability to raise money at these inflated prices won't be as easy in future periods.
-Richard Jahnke, Briefing.com
11:29 am Bank of New York (BK)
35.88 +1.46: According to CNBC, Bank of New York is close to working out a deal to sell approximately 300 of its bank branches to J.P. Morgan Chase (JPM 41.33 -0.35). If the transaction were to happen - and the market seems to think it will based on how shares of BK are trading - it is expected to come at a price of roughly $4.0 billion for J.P. Morgan.
Various press reports indicate that analysts favor such a transaction as it would enable Bank of New York to focus on its core securities processing business and allow J.P. Morgan to expand its retail branch network while achieving cost savings as it eliminates branch overlap in certain markets.
Both companies have denied comment on the speculation which, when there are specifics like the ones mentioned on CNBC, typically means they are in the midst of getting things worked out. After all, if there was no merit to the report, they would have come out and quickly denied it, particularly J.P. Morgan given the negative impact on its stock price.
--Patrick J. O'Hare, Briefing.com
10:44 am Best Buy (BBY)
54.64 +0.12: Best Buy shares traded higher on Thursday, after the consumer electronics retailer reported fourth quarter profits rose 13%, helped by higher sales for bigger-ticket items, such as flat-panel televisions, laptop computers, and MP3 players, as well as growth in higher-margin services. Since we highlighted Best Buy on our Stock Swap page in December, the stock is up nearly 25% and appears poised for further gains given the company's strong underlying fundamentals and attractive growth profile.
For the latest quarter, Best Buy earned $644 million, or $1.29 per share, compared with $572 million, or $1.13 per share, in the year ago period. That matched analysts' expectations, according to Reuters Estimates. Sales increased 15.9% to $10.7 billion, driven by new store growth and a comparable store sales gain of 7.3%. Consumer electronics, which accounted for 45% of total revenues, posted a 17.7% increase in comparable store sales as strong demand for flat-panel televisions and MP3 players offset declines in tube and projection TVs. Home office products, representing 30% of total revenues, had a comparable store sales increase of 2.5%. Within the segment, laptop computers enjoyed strong double-digit growth, partially offset by lower sales of printers and telephones.
Further highlighting Best Buy's performance, gross margin in the quarter improved 150 basis points to 25.0%, fueled by more cost-effective promotional strategies and growth in higher-margin services and accessories. The increase was also attributed to progress in the company's supply chain transformation, improvements in price optimization, as well as higher sales of private-label products. Due to the improvement in the gross profit rate, operating margin increased 70 basis points to 8.9%.
Looking ahead, Best Buy said it expects to benefit from further expansion of its services business and anticipates high-double digit Geek Squad revenue growth in fiscal 2007. The company also expects to benefit from a strong product cycle for consumer electronics and continued new store expansion. Accordingly, the company forecast fiscal year earnings of $2.68 to $2.85 per share, ex-items, on sales between $34 and $35 billion. That compares with analysts' expectations for earnings of $2.64 per share and sales of $34.17 billion, according to Reuters Estimates.
--Richard Jahnke, Briefing.com
10:32 am Nasdaq Stock Market, Inc. (NDAQ)
40.42 -1.43: Earlier this month Nasdaq Stock Market, Inc., made a surprising offer to acquire the London Stock Exchange for $4.1 billion. The market reacted favorably to the news, sending NDAQ 10% higher, as it recognized the competitive advantage Nasdaq would gain with such a merger. Since Nasdaq also communicated at the time that it would be willing to discuss a revised proposal and that it was confident it could announce a transaction in the near-term, it didn't seem to matter that the LSE summarily rejected the original offer as being inadequate.
Today, without any detailed explanation, Nasdaq announced that it no longer intends to make an offer for the LSE.
Presumably, the abrupt turn of events is a telltale sign that Nasdaq determined it wasn't going to put itself in a position where it would have to overpay for the LSE which, in the past, has also shot down offers from Deutsche Bourse and Australia's Macquarie Bank. It is a decision that should be respected by shareholders; however, it's a decision that also raises speculation as to whether Nasdaq knows something the rest of us don't (i.e. that there is another player in the game whose presence could result in a bidding war it wouldn't win).
One name that instantly comes to mind is NYSE Group, Inc. (NYX 79.50 -0.50), which has professed a desire to be a leading force in driving consolidation in the exchange space. With its market cap of $12.6 billion, it dwarfs that of Nasdaq, which sports a market cap of just $3.8 billion. Said another way, NYSE Group holds the currency in its stock, not to mention the currency of its brand, to make a deal happen at more attractive terms for the LSE. That's not to say there is a guarantee that such a deal will come to fruition, but we think Nasdaq rescinding its offer says there is more to this story than is currently being told. On that note, Nasdaq did note that it essentially reserved the right to come back to the bidding table if it so chooses.
(Disclosure: Briefing.com has a business relationship with Nasdaq)
--Patrick J. O'Hare, Briefing.com
09:40 am Nokia (NOK)
21.30 +1.08: Shares in handset manufacturers and related component companies are rising after Nokia raised its 2006 forecast for handset market growth. The world's largest maker of mobile phones dialed up its growth estimate for the global handset market to 15% or more, from 10%. The revision came from CEO Jorma Ollila who was speaking at the company's annual shareholders meeting in Helsinki today.
Economic development is accelerating in the emerging markets and generating demand for handsets. Penetration rates remain well below global averages, offering a considerable growth opportunity for mobile phone manufacturers. According to Ollila, half of the mobile phones sold this year will come from developing countries. NOK predicts 80% of the next billion mobile subscribers will come from markets like India and China.
Motorola's (MOT) CEO Edward Zander has relayed a similar message, stating that emerging market growth rates will surprise to the upside. The general concern, however, has been that accelerating demand of lower priced phones will weigh on margins. To date Motorola, in particular, has been able to balance this volume-based market opportunity with higher-priced, multi-functional, and addictively stylish thin line phones, including the widely successful RAZR.
The handset manufacturers are coming off a strong 2005 and Nokia's announcement today sets up growth expectations for 2006. Nokia recently unveiled several new phones in China which cost as little as $54.00 (45 euros) targeted at first-time users, according to the company. This most likely will not be the last time we hear good news coming out of the handset industry. We currently have an Overweight rating on technology, which includes a positive outlook on the communication-related markets.
Separately, we maintain our positive view on Motorola due to its continued market share gains, rising ASPs, margin expansion, and accelerating earnings. The stock is trading at a forward multiple of 17.5x, on par with Nokia at 17.6x, but well below its 5-year historical average of 34.7x.
--Kimberly DuBord, Briefing.com
09:12 am Las Vegas Sands (LVS)
55.33: Las Vegas Sands Corp. said Thursday that it has formally submitted a bid to build an integrated resort at Marina Bay in Singapore. The Marina Bay Sands project is valued at $3.6 billion, making it possibly the most expensive integrated resort ever proposed, and the first casino resort at Marina Bay. The winner is expected to be announced in mid-2006, according to authorities.
Las Vegas Sands, which also owns The Venetian Resort Hotel Casino and The Sands Expo in Las Vegas and The Sands Macao Casino in Macao, the People's Republic of China, said its proposal includes plans for 2,500 hotel rooms, as well as space for conventions and exhibitions, retail space, fine dining restaurants, and an array of entertainment offerings. If selected, the company said it is committed to opening the casino resort in 2009.
After the Singapore government lifted its ban on casino gambling last year to help boost tourism and economic growth, many international casino operators have been eager to invest in the rapidly growing region. Other companies to bid on the project include the team of MGM Mirage (MGM) and CapitaLand Ltd., the largest developer in Southeast Asia, the team of Harrah's Entertainment (HET) and Singapore's Keppel Land Ltd., as well as a group consisting of Genting International and cruise ship operator Star Cruises Ltd.
With both MGM and Harrah's tied to Singapore government-linked firms, Las Vegas Sand's solo bid is seemingly at a disadvantage. Nevertheless, continued growth in the gaming industry, particularly in Asia, supports a positive outlook on gaming stocks in general, in spite of our Underweight rating on the Consumer Discretionary sector.
--Richard Jahnke, Briefing.com
08:56 am General Motors (GM)
22.15: The saga at General Motors continues as speculation heightens to a frenzy over the possible sale of GMAC. And with the real possibility of a Delphi strike that would essentially halt GM's operations within days, the automaker desperately needs some good news. Following this week's release of its 10k filing, conjecture that GM may not be as close as the market suspects in selling a controlling stake in GMAC increased. A Wall Street Journal article refutes that premise, reporting that GM is moving closer to striking a deal with Cerberus Capital Management.
A GMAC deal at this juncture is a must for GM, whose debt rating was cut once again by Moody's Investors Service to B3 - six notches below investment grade. The downgrade came after GM said it may have to repay $3 bln of lease obligations earlier than expected. The acceleration in lease payments were caused by GM's restatement of earnings from 2002-2004. GM did not state when the payment is due.
Separately, in an attempt to raise cash, General Motors is paring investments in Japanese automakers. The company confirmed it's in talks to sell its stake in Japan's Isuzu Motors Ltd. GM has approached Itochu Corp, Mitsubishi Corp, and Mizuho Financial to buy its 7.9% stake, valued at 40 billion yen or about $340 mln. GM stated a sale would not halt its joint development with Isuzu, Japan's biggest truck maker. GM raised $2.7 bln from selling its stakes in Fuji Heavy and Suzuki Motors.
--Kimberly DuBord, Briefing.com
08:04 am Boeing (BA)
79.18: Ending almost a year of wrangling and delays, Boeing and Lockheed Martin (LMT) will receive authorization from US antitrust regulators to merge their government rocket units, according to a Wall Street Journal story. People familiar with the deal expect a consent degree should be signed within the next few weeks between both companies and the US Federal Trade Commission. Boeing and Lockheed have agreed to provide other satellite manufacturers, like Northrop Grumman (NOC), access to their launchers. The Pentagon has agreed to increase spending on launch and related services to $6 bln by 2012, according to the article. The merged unit is expected to launch government military communication, surveillance, and weather satellites.
There has been a stream of news coming from the Defense and Aerospace group this week extending the upward climb in shares of the defense contractors. We currently have an Overweight rating on the Industrial sector, which includes a positive view on these stocks underscored by the bull cycle in commercial aviation and continued defense spending. Boeing continues its ascent with shares tripling in value since the bottom in 2003. Notwithstanding the appreciation in the stock, we remain committed to shares as the upcycle in commercial aviation continues to gain altitude. The stock trades at 23.0x FY06 and 18.2x FY07 consensus estimates.
--Kimberly DuBord, Briefing.com
10:01 am Hana Biosciences: RBC Capital Mkts initiates Outperform. Target $15. Firm is saying the co is only months away from filing a New Drug Application for Zensana; its novel, oral spray formulation of the market-leading anti-nausea pill Zofran. They believe Zensana could be preferred over current oral anti-nausea drugs because it is more convenient to take and delivers more drug faster. The firm says the initial market for Zensana is expected to be patients with chemotherapy-induced nausea and vomiting, a billion dollar plus market. They estimate peak sales for Zensana at $150-$200 mln. They say if Zensana can reach $100 mln in sales in 2009 as they predict, then they believe HBX shares could appreciate by about 50%.
09:59 am Brightpoint: CIBC Wrld Mkts reiterates Sector Outperform. Target $24 to $35. Firm also raises their Q1 ests, as their checks suggest lower than expected seasonality in handset demand, the launch of several MVNOs (mobile virtual network operators), and a strong showing in India could drive upside to estimates in 1Q06. They believe our revised estimates also leave room for upside. Firm raises their Q1 EPS est to $0.19 from $0.16 ($0.17 consensus) and their rev est to $572 mln from $545 mln (consensus $556.2 mln).
09:58 am Durect: WR Hambrecht reiterates Buy. Target $8 to $10. Firm ups target following their visit to DURECT last week in Cupertino, they conclude that 2006 should be the year that SABER-bupivicaine becomes higher on investors' radar screens. The firm says while they have yet to conclude what the real potential of this novel product for surgical pain mgmt might be, at a minimum, it is clear to them that DURECT has identified a substantial market opportunity of 37 mln procedures in the U.S. alone that even with only a 10% penetration could result in annual sales in excess of $1 bln.
09:58 am Ultimate Software: WR Hambrecht reiterates Buy. Target $26 to $30. Firm is saying that after a round of channel checks they believe that business activity remains healthy and they are excited about the co's new product offerings that were recently introduced. While they don't believe that these new products will provide material upside to their 2006 published estimates, they believe that they could start to the move the needle in 2007.
09:57 am E*TRADE: Sanders Morris Harris reiterates Strong Buy. Target $27.5 to $32.5. Firm is saying that they believe the co remains at least 21% undervalued relative to the median valuation multiples awarded to its peer group of online financial institutions. Firm also believes that share price has yet to fully reflect many of the operating improvements and future growth prospects the company should soon realize.
09:57 am Patterson-UTI: Morgan Keegan upgrades Mkt Perform to Outperform. Firm upgrades following positive quarterly results. Firm believes the negative overhang from the embezzlement has been alleviated due in part to the completion of the co's recent restatement of financials. In light of the co's strong operational performance and stock price correction, they believe that the co has an attractive valuation with near-term upside potential on the order of 10%.
09:55 am Charlotte Russe: Sanders Morris Harris reiterates Buy. Target $25 to $27. Firm also raises their Q3, Q4 and Y07 EPS estimates based on better than expected pre-announced results. Firm believes that trend right fashions, great value, and the earlier receipt of Spring merchandise drove the stronger-than-expected results at the Charlotte Russe division. Firm believe these results are particularly impressive given that FQ2 is historically the company's lowest-volume month, and that this year's FQ2 was further disadvantaged by a late Easter.
09:54 am SigmaTel: Wedbush Morgan downgrades Hold to Sell . Target $5. Firm downgrades following the co's Q1 rev miss with new rev guidance of $30-35 mln versus prior guidance of $52-60 mln. The firm says execution issues continue with mgmt citing product transition challenges, a soft end-market, and market share losses to Actions Semi as primary factors. The firm says the co could face a cash crunch as soon as Q3, and say they do not think mgmt sufficiently appreciates the magnitude of financial peril that the firm now faces given its likely continued operating losses, its expected Q1 cash balance of only $50 mln, and prospects for continued MP3 chip commoditization.
09:54 am Staples: Bear Stearns reiterates Outperform. Target $28 to $30. Firm is saying they believe the small business customer, which accounts for more than 70% of sales at office superstores, provides one of the strongest demand backdrops in 2006 in their hardlines coverage universe driven by solid macroeconomic trends. Moreover, the firm says demand by these customers will be less impacted by changes in the housing market and fluctuations in consumer spending overall.
09:53 am Lamar Advertising: Bear Stearns reiterates Outperform. Target $54 to $57.5. Firm continues to like the outdoor industry as outdoor faces fewer competitive threats and technology is not a threat but an opportunity. They note that at a media conference yesterday, LAMR's CEO stated that they are buying back shares because 1) over the next 5 years they see outdoor as a "safe haven", and that 2) they can invest in the business and generate superior returns. |
