From Briefing.com: 4:20 pm : Stocks plummeted Wednesday as earnings jitters and geopolitical concerns, which pushed oil prices toward record highs, weighed heavily on trading and closed all three major averages down at least 1.0% and near session lows.
Weakness across the board in Technology was the biggest impediment on overall sentiment as cautious investors questioned the validity of yesterday's late-day heroics that were fueled largely by upbeat comments from chip equipment makers. Aside from an understandable 2.7% pullback in the PHLX Semiconductor Sector Index following Tuesday's surprising 3.3% surge, there was further deterioration in Computer Hardware. International Business Machines (IBM 75.46 -1.01) hit an intraday 52-week low after JP Morgan lowered its revenue estimates.
Further playing into our concerns that Wall Street earnings forecasts for the second half of the year are still too high was Dell (DELL 22.38 -1.04), which fell to another new multi-year low after UBS lowered its EPS estimates. Apple Computer (AAPL 52.96 -2.69) plunged 4.8% after Credit Suisse said it expects AAPL to guide revenue below consensus. Software, as reflected in the GSTI Software Index (-1.4%) extending its year-to-date decline to 10.8%, was another sore spot for investors. The European Commission fining Microsoft (MSFT 22.64 -0.46) $357 mln for not complying with a previous antitrust ruling sent shares of the Dow component and third most influential component on the SnP 500 down 2.0%.
Of the other nine economic sectors losing ground, the Financials sector's inability to take advantage of Treasuries paring a day of selling late in the session to finish relatively unchanged was also discouraging. Even though the 10-yr note shaved about 4 basis points off its yield from session lows, the spread between it and the 2-yr becoming more inverted raised worries about the pace of economic growth since profit margins for companies like banks and brokers, which borrow cash at short-term rates and lend it at long-term rates, might fall.
Consumer Discretionary was another notable sector losing at least 1.0%. The Computer and Electronics Retail group turned in the worst performance while Home Depot (HD 33.63 -0.75) and Lowes Cos. (LOW 27.45 -1.08) hitting new 52-week lows also acted as sector constraints. Aside from rising oil prices adding to spending concerns, especially with the Fed eyeing elevated energy prices and their potential to sustain inflation pressures, Brunswick (BC 29.60 -2.23) plunged to a multi-year low after slashing its FY06 EPS guidance and blaming consumer concerns about the economy for a "double-digit" drop in boat sales.
Adding insult to injury before the market even opened was Genentech (DNA 80.98 -3.08), which posted a 79% rise in profits and raised its full-year EPS growth outlook last night. However, lower than expected Avastin sales prompted some analysts to question the biotech giant's growth prospects and to downgrade the stock, suggesting things may get worse before they get better. DJ30 -121.59 NASDAQ -38.62 SP500 -13.92 NASDAQ Dec/Adv/Vol 2258/775/1.81 bln NYSE Dec/Adv/Vol 2280/1009/1.48 bln
3:59PM Market View: Disappointing trade (TECHX) : The market opened the day on the defensive and extended the slide into late morning action. A pullback in the wake of yesterday's solid upside reversal was not too surprising but the best the indices could do was form midday bear flags. The subsequent breakdown saw only minor rebound attempts this afternoon with the market averages ending just slightly above the worst levels of the day after wiping out all of Tuesday's recovery (new 52-wk low for Nasdaq 100). Yesterday's leader Semi (-2.5%) has helped pace the way lower today along with Home Construction -2.9%, Railroad -2.8%, Disk Drive -2.8%, Computer-Hardware -2.7%, Retail -2.4%, Restaurant -2.4%, Networking -2.4% and Broker/Dealer -2.3%. Little was on the plus side other than REIT +0.4% and Oil HOLDRs +0.03%.
10:30 am Fastenal (FAST)
36.75 -1.80: Fastenal Co., which sells industrial and construction supplies through a network of nearly 1,800 retail outlets, said second quarter earnings rose 15% on higher revenue, but fell short of analysts' expectations, as higher fuel costs and expanded store openings weighed on results. Investors, in turn, pressured shares of the company, which are down more than 8% in early trading.
The stock is down about 6% since the beginning of the year, and is off 19% since we profiled the company on our Mid Cap page in March. Given the negative reaction to the latest results, we would refrain from committing new money to the stock. However, we would continue to hold shares as the company continues to benefit from a strong Industrials sector and operating progress.
Fastenal said net income for the quarter ended June 30 increased to $51,513, or $0.34 per share, from $44,647, or $0.30 per share, a year earlier. That was below the Reuters Estimates consensus of $0.36 per share. Sales climbed nearly 20% to $458,817, versus the consensus estimate of $457.6 million.
The company said rising fuel prices took a toll on the quarter. Vehicle fuel costs averaged approximately $2,096 per month during the period, up from $1,500 per month a year earlier, due to higher gas prices and an increase in sales and store locations. Fastenal added 132 new stores since the start of the year, representing a 7.5% increase.
Gross margins, meanwhile, expanded 10 basis points to 49.9%, driven by the company's freight initiatives and improvements in its direct sourcing operations. At the same time, however, operating and administrative expenses climbed 31.8%, and outpaced sales growth during the quarter. Operating margin slipped 70 basis points to 18%.
--Richard Jahnke, Briefing.com
10:11 am Gannett Co. Inc. (GCI)
56.62 -0.29: Gannett Co. Inc. delivered somewhat positive news Wednesday when it said its earnings for the latest period were slightly better than expectations.
The company, which has a market cap of about $13.53 billion, said it saw earnings of $1.31 per share in the second quarter, or $0.01 better than Reuters Estimates consensus of $1.30. Revenues rose 6.1% year over year to $2.03 billion versus $2.02 billion consensus.
But despite the headlines out of Gannett Wednesday, the company's stock has a lot to overcome, and it isn't a good buy at this time. Shares in the company, like stocks in other newspaper publishers, have been trending downward for over two years thanks to slowing advertising growth, rising costs, and the migration of consumers over to the Internet.
Gannett, which publishes 90 daily newspapers including USA Today, said that in the latest period softness in the British market and higher costs for newsprint and interest payments also served as a drag on its financials. Investor concern about the issues is reflected in the fact that at 11.3x trailing 12-month earnings, the stock is trading at a considerable discount even to its competitors.
The majority of Wall Street players who watch the sector will be more focused on the release of the Tribune Company (TRB) earnings Thursday, however, as that company has undergone a good deal of turmoil in recent days.
--Christine Marie Nielsen, Briefing.com
09:47 am Halliburton (HAL)
75.58: A cloud has hung over Halliburton's KBR unit, which provides logistical services to US armed forces around the globe, over billing disputes for its work in the Middle East. Today, The Washington Post reported that KBR will have its multi-billion dollar contract with the Army discontinued and divided into smaller jobs after government auditors found more than a billion dollars in questionable costs.
Halliburton, which has exclusive rights to shelter, feed, and provide communications systems for troops, was paid more than $7 bln last year through its subsidiary KBR. The unit, formerly known as Kellogg Brown & Root Services, parleyed its oil services business into a leading defense contracting unit. In April, KBR filed an initial public offering on the NYSE under stock symbol "KBR."
The contract will now be performed by three firms, with a fourth overseeing the operations. The contract awards will be announced in November, according to the article. Halliburton is able to bid for the contract. The Post outlined instances where KBR doubled-billed meals, charged $45 for a case of soda, and allowed soldiers to bathe in contaminated water. Halliburton said the billing disputes were resolved last year and that its logistic achievements in Iraq, Kuwait and Afghanistan were "amazing." In 2005, the government and infrastructure unit within the KBR division accounted for 39% of Halliburton's total revenues.
We continue to recommend investors gain exposure to the Oil Service group on rising rig counts worldwide (up 6.6% sequentially in June) as a wave of E&P capacity expansion drives global drilling activity. Our preference remains with the industry leader Schlumberger (SLB) and pressure pumping service company, BJ Services (BJS), a suggested holding in our Active Portfolio, over HAL given the risks associated with its KBR unit.
--Kimberly DuBord, Briefing.com
09:13 am Genentech (DNA)
84.06: Genentech handily beat Wall Street's expectations for the second quarter, with earnings up nearly 80% on strong demand for its cancer-fighting drugs. The South San Francisco, California-based biotechnology company also raised its financial outlook for the year. Shares, however, traded lower in pre-market activity as investors were disappointed by sales of colon cancer drug Avastin.
For the latest quarter, Genentech said earnings rose to $531 million, or $0.49 per share, up from $296.2 million, or $0.27 per share, a year ago. Excluding special items, earnings were $0.56 per share. Revenue grew 44% year/year to $2.2 billion, helped by a 41% increase in U.S. product sales to $1.7 billion. According to Reuters Estimates, analysts on average were looking for the company to post earnings of $0.44 per share, ex-items, on revenue of $2.12 billion.
On the top line, Avastin sales in the U.S. increased 72% to $423 million, but fell short of analysts' estimates of $441.8 million. Meanwhile, U.S. sales of the company's non-Hodgkin's lymphoma drug Rituxan rose 17% to $526 million, and sales of breast cancer drug Herceptin increased 111% to $320 million. Sales of Lucentis, which received FDA approval in the second quarter for the treatment of macular degeneration, a leading cause of blindness in the elderly, totaled $10 million.
Genentech also boosted its outlook for the year, with earnings expected to grow between 55% and 60% compared to 2005. The company had previously forecast earnings growth of 45% to 55%.
Despite Genentech's overall strong results, investors have pressured shares of the company in reaction to the lower than expected sales of Avastin. Last year, the stock gained roughly 70% due to strong sales of its cancer medicines. However, shares are down about 9% so far this year, despite continued strong top line growth.
--Richard Jahnke, Briefing.com
08:59 am Campbell Soup Co. (CPB)
37.91: The world's largest soup maker Campbell Soup Co. said Wednesday that it's agreed to sell its British and Irish businesses to Premier Foods PLC for cash proceeds of about $845 million, locking in a deal that had been largely priced into the stock in recent days.
Campbell has said it expects to complete the sale of the units, which have annual sales of approximately $480 million, in the next few months. The deal is subject to approval by Premier's shareholders. The sale includes three manufacturing plants in Britain and one manufacturing site in Ireland.
Camden, N.J.-based Campbell, which has a market cap of about $13.37 billion, said in March that it was exploring strategic alternatives, including divestiture, for its British and Irish businesses.While the company has made its name from old standby products, new offerings like premium soups in cartons and microwaveable versions of older varieties helped to boost sales in the latest quarter. Low-sodium and organic soups are the next big avenue for the company.
With an adjusted beta of about 0.77, Campbell fits the profile of a typical consumer goods company that is rather risk averse. We expect its shares to continue to move higher. The company has raised guidance for 2006, anticipating earnings per share growth of 9% to 10% from 5% to 7% growth, or $1.79 to $1.80, versus $1.76 consensus. At about 19.1x trailing 12-month earnings, the stock is still a good value as it is at comparable levels to competitor companies.
--Christine Marie Nielsen, Briefing.com
08:38 am Microsoft (MSFT)
22.90: The legal battle between Microsoft and the European Union has reached a crescendo. European regulators have imposed an astounding fine of 280.5 mln euros (USD 357.3 mln) on the software giant for defying a 2004 antitrust ruling and warned the company it could face more fines. The unprecedented sum equates to almost $6,000 for every employee around the globe, but still a drop in the bucket compared to Banco de Microsoft's near $37.7 bln in cash and short-term investments.
The antitrust issues involve interoperability and the bundling of Media Player into Windows. Ninety percent of the world's PCs run on the Windows operating system, which controls the basic functions of the computer, and therefore other software makers need to ensure that their programs run smoothly on the Windows platform. The EU found that Microsoft failed to provide adequate technical data to rivals, and therefore rival programs did not work as well as Microsoft's own.
For its part, the Redmond-based company has argued that it did provide enough information and offering any additional information would infringe on its intellectual property rights. The EU disagreed and found that MSFT had not provided technical information, called network protocols, to rival server software makers, and thus squeezed out competitors through its monopolistic status. Regulators computed the sum by multiplying 187 days of violations at 1.5 mln euros/day - falling short of the maximum 2 mln euros/day penalty. The figure falls short of the record 497 mln euro fine in the landmark 2004 antitrust decision.
Microsoft says it's committed to complying with the decision in good faith. Microsoft has already shelled out the original fine and begun shipping Windows without Media Player. But companies like IBM (IBM) and Red Hat (RHAT) say the company hasn't done enough. Microsoft said it will of course appeal the decision. The stock has recovered from multi-year lows, now trading at 17.9x trailing earnings vs. its 5-year average of 26.6x.
(Disclosure: Briefing.com has a business relationship with Microsoft)
--Kimberly DuBord, Briefing.com
09:48 am Secure Computing: Wedbush Morgan reiterates Hold. Target $12 to $5. Firm cuts price tgt following co's pre-announcement significantly lower than expected Q2 revenue and EPS. Firm says that while slipped deals were cited for the 2nd quarterly miss in a row, broad geographic weakness points to larger problems and what firm believes is a slowdown in CyberGuard product sales. Firm says to expect lack of details regarding the acquisition, weak business fundamentals and the magnitude of earnings dilution from the acquisition to act as an overhang on the stock in the short-term.
09:45 am Dell: UBS reiterates Neutral. Target $26 to $24. Firm cuts price tgt as they believe the co continues to be impacted by the issues that have adversely impacted sales and profits over the last year. They say checks indicate that sales may be slowing further given weakness in Europe as well as slower demand in corporate PCs and servers near-term. Firm's lowers their Q2 estimate to $0.31 from $0.33 (consensus $0.32) and lowers their rev estimate to $14 bln from $14.2 bln (consensus $14.26 bln). They believe DELL continues to be impacted by competition and adverse mix shifts within the PC market.
09:42 am eBay: RBC Capital Mkts reiterates Sector Perform. Target $42 to $32. Firm cuts price tgt saying they have tweaked their 2007 estimates to reflect lower growth expectations, partially offset by contribution from advertising. The firm says there is clearly a strategy in place to diversify away from the core transactional operations. Further, the firm says the introduction of Google Checkout has materially impacted sentiment.
09:40 am Community Health: Stifel Nicolaus initiates Buy. Target $42. Firm initiates saying the co has the most disciplined operating model and has carefully cultivated a culture and standardized system to acquire underperforming non-urban hospitals and turn them into star performers after a few years under its management. The firm believes hospital stocks may trade off after 2Q06 earnings and multiples may compress further, providing a more attractive entry point for investors, all else being equal. The firm also initiates HCA (HCA) and Health Management (HMA) with Holds and tgts of $50 and $21 respectively.
09:40 am Lifepoint Hospitals: Stifel Nicolaus initiates Hold. Firm initiates saying they would likely become more constructive on the stock if the co and its new CEO can demonstrate the ability to show progress from the restructuring against the backdrop of the industry downturn over the next few quarters.
09:38 am Traffic.com: Nollenberger Capital initiates Neutral. Firm initiates saying they forecast continued EPS losses over the next seven to eight quarters and expect the co to raise more funds through an equity offering in 2007. The firm believes that shares of Traffic.com are fairly valued at current levels given the near-term outlook for rev and EPS. However, the also say that the co warrants their coverage and investors' attention because, the long-term potential for the co is sizable and the potential for improvement to their current view is possible.
09:30 am Perficient: Roth Capital downgrades Buy to Hold. Target $14. Firm downgrades following the raising of 2Q06 guidance. Firm says that the current valuation accurately reflects the near term growth prospects of the co. Firm notes that demand remains strong for PRFT services as indicated by higher 2Q06 rev guidance. Firm believes the strength in 2Q06 rev is likely the result of high utilization rates and strong market demand for e-business infrastructure, business integration and enterprise application integration consulting services.
09:29 am Oplink Comms: Roth Capital upgrades Hold to Buy. Firm ups rating based on recent weakness of the stock. The firm believes the demand picture remains robust. The firm notes Alliance Fiber Optic, OPLK's most comparable co, recently raised its rev forecast -- a positive indicator for OPLK.
09:26 am USG Corp: CL King upgrades Accumulate to Strong Buy. Target $67. Firm ups rating and cuts price tgt noting USG emerged from bankruptcy on June 29. On July 3, shareholders of record received a right to buy a second share at $40.00 per share and the rights start trading separately. The firm notes once exercised by the end of July, the rights offering will double USG's share count. The firm says since closing at a right-adjusted $56.47 per share on June 30, the share price has fallen 13% for no fundamental reason. Especially after July's sell off, the firm thinks the underlying shares are undervalued. |
