From Briefing.com: 6:08PM Market Internals (MKTIN) : The Dow decreased 0.54% closing at 11126, the Nasdaq was down 1.41% to finish at 2062, and the S&P was down 0.45% to finish at 1271. Leading sectors included: commercial printing +5.8%, construction materials +5.2%, gold +2.1%, health care suppliers +1.5%, electric utilities +1.4%. Lagging sectors included: photo products -13.7%, trucking --3.1%, education services -2.9%, food retail -2.8%, steel --2.7%. Today's movement came from lower than avg. volume (NYSE 1658, vs. closing avg of 1704; Nasdaq 1722, vs. 2002), with decliners outpacing advancers (NYSE 1281/1985; Nasdaq 860/2145, and with new lows outpacing new highs (NYSE 79/90, Nasdaq 56/128).
4:20 pm : Not all that surprising, as the first trading day of August has resulted in declines for the Dow in 13 of the last 20 years, stocks closed lower across the board, as heightened inflation fears provided an excuse to question the possibility of a pause at the next FOMC meeting one week from today. According to The Stock Traders Almanac, August has been the worst month for stocks over the last 15 years.
Before the bell, the Commerce Dept. showed that the core-PCE deflator, an indicator of inflation tied to spending patterns, rose 0.2% in June. That matched expectations and was the third straight increase of that magnitude, reflective of a steadying trend and consistent with the Fed's view that inflation will ease in 2007. Be that as it may, the year-over-year increase of2.4% -- the largest such increase since a 2.5% rise in April 1995 and further above the Fed's comfort zone of 1.75-2.00% -- left investors wondering just how patient policy makers will be next Tuesday since it takes time for the previous rates hikes to impact the data.
Participants also didn't get much relief on the inflation front after the prices paid component in the 10:00 ET release of the ISM Index jumped from 76.5% to 78.5% -- the highest level this year.
With eight of the 10 worst performing S&P 500 constituents in July among the 85 components that make up Technology, the struggling sector didn't waste any time maintaining its underperformance on the first trading day of August as renewed fears that the Fed may go too far with its tightening weighed on everything from semiconductors to software. Aside from discouraging economic data, mixed earnings reports reminded investors that analysts' estimates for the second half of the year must come down since double-digit profit growth cannot continue in the face of an economic slowdown. Most notably was Dow component Verizon (VZ 33.35 -0.47), which beat expectations by two cents but posted Q2 revenues that fell short of estimates.
Consumer Discretionary was another influential leader to the downside. Disappointing auto sales figures gave investors little to cheer about. General Motors (GM 31.35 -0.88) reported a 19.5% drop in July sales while rival Ford Motor (F 6.58 -0.09) reported a larger than expected 34% decline in total vehicle sales. Starbucks (SBUX 32.96 -1.27) selling off ahead of its earnings report and Eastman Kodak (EK 19.20 -3.05) hitting its worst levels in more than 20 years after posting a seventh straight quarterly loss also took a toll on a sector also reeling from rising oil prices and today's consumer spending figure recording its smallest gain (0.4%) this year.
Industrials was also under pressure, as continued weakness in Transportation, this time on the heels of a Q2 earnings shortfall from Expeditors International (EXPD 40.56 -4.91), overshadowed a 38% year/year rise in Q2 profits at RR Donnelley & Sons (RRD 30.97 +1.78).
Utilities, however, posted a noticeable gain after FirstEnergy (FE 57.07 +1.07) beat forecasts and raised its full-year profit outlook and Public Service Enterprise Group (PEG 69.41 +1.98) swung to a profit in Q2. Natural gas futures giving back more than half of Monday's 14% surge amid eased concerns about Tropical Storm Chris in the Caribbean provided additional sector support since the commodity is used by utilities to generate electricity. BTK -1.5% DJ30 -59.95 DJTA -2.0% DJUA +1.1% DOT -1.2% NASDAQ -29.48 NQ100 -1.6% R2K -1.5% SOX -2.0% SP400 -0.8% SP500 -5.74 XOI +0.1% NASDAQ Dec/Adv/Vol 2146/861/1.69 bln NYSE Dec/Adv/Vol 1995/1263/1.66 bln
09:38 am Adobe Systems: Prudential initiates Overweight. Target $39. Firm initiates with an Overweight and $39 tgt, based on a major upgrade in Q107, the co's control of almost all the tools in the imaging software space after the Macromedia acquisition and valuation
09:38 am Microsoft: Prudential initiates Overweight. Target $34. Firm initiates with an Overweight and $34 tgt, as they think the co's investments in games and Internet based applications will pay off, margins will stay high, and that bookings and cash flow will grow at double digit growth rates
09:36 am Electronic Arts: Prudential initiates Underweight . Target $49. Firm initiates with an Underweight and $49 tgt. Although they think the co will likely take mkt share from smaller video game publishers, they think the stock's 75% premium to its historical avg and a 37% premium to peers are unjustified, since they do not think ERTS will be able to reach the 26% operating margins it achieved in FY04.
09:35 am Garmin: Am Tech/JSA Research initiates Sell . Target $75. Firm initiates with a Sell citing the following: 1) A cautious outlook for consumer spending; 2) GRMN has grown at the expense of struggling competitors, Magellan in particular - incremental share gains will be more difficult; 3) New competition is entering the market; 4) 28-30% net margin is very difficult for a hardware supplier to sustain; 5) They believe that longer term demand for navigation will shift away from PNDs to auto in-dash systems and cell phones; 6) All stocks with significant PND market exposure have recently blown up; 7) The stock has been a great performer, while the tech sector, retailers and most companies with consumer exposure have been weak. They note that GRMN reports tomorrow and upside is expected, benefiting from competitors' missteps this quarter and long history of "beat-and-raise quarters". They like the risk-reward for the stock to decline on good results, rather than extend to new all-time highs.
09:33 am Nautilus Grp: BB&T Capital Mkts downgrades Buy to Hold. Firm downgrades following earnings. The firm notes Q2 sales were below expectations due to a 13% decline in direct sales and flat retail orders in a weak consumer environment
09:30 am Enbridge Management: RBC Capital Mkts downgrades Sector Perform to Underperform . Target $48. The firm says they are lowering their rating due to limited visibililty of distribution growth over the next two years and the current unit price is close to their price target of $48. They note mgmt has continued to guide towards no distribution increases through 2007 as the partnership needs to finance several large projects that come online in 2007-2010. : Firm downgrades saying they are lowering their rating due to limited visibililty of distribution growth over the next two years and the current unit price is close to their price target of $48. They note mgmt has continued to guide towards no distribution increases through 2007 as the partnership needs to finance several large projects that come online in 2007-2010.
09:26 am Beckman Coulter: Miller Johnson reiterates Market Perform. Target $58 to $65. Firm raises price tgt saying the new Quest Diagnostics contract will likely be positive to Q3 results. The firm saysshare repurchases should help Q2 results.
09:19 am ASM Intl NV: Needham & Co upgrades Underperform to Hold. Firm upgrades saying although the quarter came in OK for ASMI, they are still somewhat concerned on several fronts. They say the front end business is still not profitable and it is unclear when, if ever, it will achieve profitability in the current cycle. However the firm feels downside is limited from here and thus a Hold rating is warranted.
09:17 am Nu Skin Enterpr: Stanford Research upgrades Hold to Buy. Target $18. Firm ups rating as the co announced they had gained its direct selling license in China and will initiate direct selling activities in Shanghai in 4Q06. In addition, the firm notes NUS reported 2Q06 EPS of $0.20 - $0.01 better than the firm's estimate and consensus of $0.19. THe firm notes total revs decreased 8% y/y and also came in slightly better than their estimate and consensus for revs to be down in the 11% range.
2:06 pm Molson Coors (TAP)
66.75 -4.70: Molson Coors thinks it brewed up a pretty good second quarter earnings result. The market thinks otherwise, as shares of TAP are down 7.0% in the wake of the company's report.
At first glance, it is difficult to determine the source of the market's disappointment. Net sales increased 2.3% to $1.58 billion, which was in line with expectations, sales volume grew 2.3%, and net income soared over 300% to $156.2 million or $1.81 per diluted share. The latter number, however, isn't comparable to the consensus estimate of $1.52.
According to Reuters Estimates, the comparable number is $1.42, which is the result of income from continuing operations, excluding non-recurring items and a $0.60 per share tax benefit related to a non-recurring reduction in the general corporate income tax rate in Canada. By this measure, Molson Coors fell ten cents shy of expectations. The earnings miss is the primary source of disappointment.
On a brighter note, Molson Coors did report sales volume increases in all three of its businesses, led by strength in its strategic brands that contributed to a 3.0% volume increase in the U.S. and a 5.1% jump in volume in Europe. Unfortunately, the positive effect of the volume increases was mitigated by commodity and energy-related cost inflation. Its U.S. business, in fact, suffered a 20.6% decline in pretax income, excluding special charges, as commodity, freight and energy inflation drove higher U.S. cost of goods per barrel and lower profit.
Molson does anticipate some moderation in commodity cost increases in the second half of the year, but it still anticipates a 3-5% increase in U.S. cost of goods sold per barrel for the full-year. Judging by the stock's reaction today, the market is anticipating continued difficulty for Molson Coors in living up to its earnings expectations in a challenging cost environment.
--Patrick J. O'Hare, Briefing.com
1:51 pm Verizon (VZ)
33.02 -0.80: Verizon Communications (VZ) is starting to look a lot like the proverbial turtle in the "turtle and the hare" story. The race in question is the one to capture the future of telecommunications, which is the true technical and functional integration of all modern telecom services into a single product. That convergence, once thought to be "right around the corner" at the very top of the internet bubble era in early 2000, is still not yet here. But slow and steady progress is being made. Verizon is still the leader in this buildout and rollout, although AT&T announced their first sales of their converged telecom product earlier this month. This race is still in the very early stages, but Verizon has a wide margin over AT&T, who is really the only other contender at this point.
Verizon's quarterly results, reported this morning, were very strong. The company beat earnings estimates by $0.02, reporting $0.64 per share versus estimates of $0.62. Like last quarter, revenues were below estimates, however, at $22.68 billion versus estimates of $22.82. The fact that Verizon is able to report stronger earnings while falling short of revenue estimates, seems to imply that analysts are not grasping the types of efficiency in operations that Verizon is working towards. This is not "your father's Ma Bell," with a snail's-pace growth mentality and a primary emphasis on just keeping the cash cow going.
Instead, Verizon is spending a fortune as fast as they can, in order to complete their buildout of a truly converged telecom infrastructure on a nationwide basis. This infrastructure, boringly named "FiOS," for Fiber Optic Service, is capable of providing integrated wireline and cellular phone service, internet access, and digital TV service all on a single fiber cable to the house. The digital TV service is almost identical in service and pricing to cable or satellite TV, but the internet access is far more competitive than alternatives, primarily cable modem access. For roughly the same price, a FiOS internet subscriber can have internet speeds five times faster than cable service. For a higher price, speeds of 10 times or more are available. The integration of "wireline" phones and cellular phones becomes possible when the "still-in-development" charger box is released. This box will allow you to put your Verizon cell phone into the "charger," but whenever a phone call comes to the house, every "landline" phone will ring. Technically, the term "wireline" becomes extinct, since the FiOS "landline" is carried over the fiber optic network, not the copper-wire infrastructure of the past.
The market is only just now beginning to look for progress with FiOS, however. Today's strong results, coupled with reiterated guidance for the full year, are being offset by other metrics. While Verizon did add 1.8 million new wireless customers, they are still trailing Cingular in total customer base. Broadband sales were modest, at 440,000 new subscribers, of which 110,000 were FiOS customers. However, most analysts expected higher growth in the broadband segment. The movement of VZ stock used to be driven almost entirely by how many new wireless customers the company could add each quarter. Now the market appears to be shifting from judging the company purely on its wireless segment and more on how well the company can shift toward the "new era" product line. Wireline margins worsened and the high margins in the FiOS and broadband segments are offset by the extremely large capital investments necessary.
It all adds up to portraying Verizon as an aggressive investor in the new era (at high cost), maturing in the previous era (wireless), and fading away in the old world business of analog phones. At some point, Verizon will have to show that the huge investment in the converged telecom products will pay off. We think that is inevitable, but still far in the future. While Verizon does look like the slow-and-steady turtle from the well-known fable, the fact that there is no rabbit in the race right now makes us still very positive about Verizon's growth prospects three to five years from now. The company's still incredibly high - and very secure - dividend yield of 4.8% makes it well worth waiting for that growth to finally arrive.
--Robert V. Green, Briefing.com
12:33 pm Pilgrim's Pride Corp. (PPC)
24.72 -0.84: Pilgrim's Pride Corp. delivered something of a turkey with its financials Tuesday, reporting a third quarter loss of $0.31 per share, $0.10 worse than Reuters Estimates consensus of ($0.21) after decreasing demand led to a glut of supply in the protein market. Revenues fell 10.6% year over year to $1.29 billion versus consensus of $1.3 billion.
The company, which has a market cap of about $1.65 billion, said that in the latest period pricing for leg quarter and breast meat increased, but were still lower than the year-ago period.
The results were a familiar story to those who have been following the industry. Rival poultry producers Sanderson Farms Inc. (SAFM) and Tyson Foods Inc. (TSN) have also been reporting declines in sales and margins as a result of a glut of animals, due in part to avian flu fears.
O.B. Goolsby, Jr., Pilgrim's Pride president and chief executive officer, said in a press release that the company is hopeful that the recent increases in price will continue as international demand for U.S. chicken products improves and the full effect of the recently announced industry production cutbacks are realized in the marketplace.
Unattractive fundamental factors, including almost a half billion in company debt in the most recent quarter and renewed fears of mad cow disease which led South Korea and Japan to close their borders to beef imports, make the stock an unattractive purchase at this time. At about 11x trailing 12-month earnings, the stock is just under the industry average.
--Christine Marie Nielsen, Briefing.com
12:11 pm IAC/InterActive (IACI)
24.72 +1.01: Shares of IAC/InterActive climbed more than 6% on Tuesday, after the New York-based Internet conglomerate reported second quarter results that topped analysts' expectations. The stock is down about 13% since the start of the year, and is trading at 17x this year's projected earnings.
For the latest quarter, IAC /InterActive, which spun off its travel business Expedia (EXPE) last year, said net income fell to $53.8 million, or $0.17 per share, from $618.1 million, or $1.77 per share, a year earlier. Last year's results included nearly $402 million in special after-tax gains related to the sale of certain equity stakes, the company said. Excluding one-time items, adjusted earnings were $0.32 per share, three cents better than the Reuters Estimates consensus.
Revenue for the quarter rose 17.5% year/year to $1.61 billion, slightly ahead of the consensus estimate of $1.6 billion, with retailing and service up 2% and 20%, respectively. The company said the increase was driven by strong online performance, including a slight contribution from Shoebuy.com, which was acquired in February.
By segment, retailing results reflect higher revenue from catalogs, partially offset by lower revenue at HSN. Services results reflect strength in the company's ticketing business, which includes Ticketmaster, and top-line growth in its lending business, which was offset by higher marketing and operating expenses and a declining mortgage market. The company's membership and subscriptions segment benefited from growth in subscribers and higher margins in personals, as well as higher revenue and profits from its vacation business.
--Richard Jahnke, Briefing.com
12:06 pm Whole Foods Market (WFMI)
51.06 -6.45: The stock of natural and organics food retailer Whole Foods Market is having a tough time today in the wake of the company's second quarter earnings report. Really, though, it has had a time time all year, as it is down 26% with growth concerns hastening its slide. Actually, make that 34% when you include today's loss.
All else equal, Whole Foods had a commendable showing in the second quarter. Sales increased 18% to $1.34 billion, comparable store sales were up 9.9% on top of a 15.2% comparison last year, and its net income surged 33% to $53.9 million. Excluding items, earnings of $0.35 per share were a penny ahead of the Reuters Estimates consensus estimate.
The hang-up for the market, though, is rooted in two items. The first is that the comparable store sales performance actually trailed the company's forecast for 10-12% growth and the second item is the company's guidance. Specifically, Whole Foods anticipates sales growth in the range of 18-21% for FY06 (Sept). The current consensus estimate of $5.68 billion equates to growth of approximately 21%. For FY07 sales growth on a comparable 52-week basis is projected to be 15-20%. That isn't bad, but it is clearly a deceleration that is feeding the market's growth concerns along with the added acknowledgment that diluted EPS growth will be impacted by materially higher pre-opening and relocation expenses year-over-year.
The Whole Foods Market is a great concept, and not surprisingly, its success has spawned increased competition in the natural and organic foods space with traditional grocers like Safeway (SWY), and retail behemoth Wal-Mart (WMT), working to increase their organic product offerings in a bid to win new business. Aside from the competition factor, Whole Foods is also battling concerns about a slowdown in discretionary spending, as the market is mindful that organic food doesn't typically come cheap.
At its current price, WFMI trades at 37.2x trailing twelve month earnings. That is a 12% discount to its 10-year historical average, suggesting there is a value argument to be made here. For the time being, though, we're inclined to remain neutral on the stock given the poor sentiment regarding the company's growth profile in what is becoming an increasingly competitive environment.
--Patrick J. O'Hare, Briefing.com
11:59 am Electronic Data Systems (EDS)
23.48 -0.42: Shares in the world's number two technology services provider Electronic Data Systems Corp. were down around 1% Tuesday after the company said it beat on earnings for the latest period , but saw earnings per share for the third quarter that were below some analysts' expectations.
The company, which has a market cap of about $12.17 billion, said it saw second quarter earnings of $0.20 per share, excluding non-recurring items, $0.04 better than the Reuters Estimates consensus of $0.16. Revenues rose 3.8% year over year to $5.19 billion versus consensus of $5.14 billion.
EDS signed $5.4 billion in contracts in the second quarter, up 103% from $2.6 billion in the year-ago quarter. Significant contracts for the quarter include Kraft Foods Inc., a $1.6 billion new logo, and wins with existing clients Bank of America for $700 million, and the Commonwealth Bank of Australia for $350 million.
EDS also completed the acquisition of a majority stake in MphasiS BFL Limited, a leading applications and business process outsourcing services company based in Bangalore, India.
Electronic Data Systems said it sees earnings per share for the third quarter of $0.16 to $0.21 versus a much stronger $0.29 consensus. The company said it sees third quarter revenue of $5.3 to $5.5 billion versus $5 billion consensus. However the company said its sees earnings per share of $0.83 to $0.93 versus consensus of $0.89 for the full year of 2006. Electronic Data anticipates full year revenue of $21 to $21.5 billion versus $20.46 billion consensus.
The company has identified additional cost reduction opportunities it expects to pursue in the second half of the year. These actions would result in approximately $0.15 per share of additional severance-related costs, which were not reflected in prior guidance.
While the company's latest financials continue to reflect progress in the company's turnaround plans and cost cutting initiatives, there's still more work to be done and investors should stay out of the construction area. At 74x trailing 12-month earnings, the stock is trading at a steep premium to its competitors.
--Christine Marie Nielsen, Briefing.com
11:01 am Vornado Realty Trust (VNO)
103.60 -0.95: Vornado Realty Trust, a real estate investment trust that concentrates primarily in Washington D.C. and New York City, reported an increase in funds from operations, and topped Wall Street's estimates. Specifically, funds from operations, a key operating measure for REITs that adds back depreciation and amortization back to earnings, totaled $230.4 million, or $1.46 per share, up from $215.8 million, or $1.51 per share, a year earlier. Revenue grew 12.1% to $663 million, from $591.5 million.
Analysts on average had expected funds from operations of $1.45 per share and revenue of $647 million, according to Reuters Estimates. Excluding certain items, the Paramus, New Jersey-based company, whose office holdings total more than 30 million sq. ft., said adjusted funds from operations rose to $190.5 million, or $1.23 per share, from $170.9 million, or $1.20 per share, a year earlier.
Given the weaker than expected top-line results, the company's shares edged slightly lower, losing approximately 1% during the regular trading session. The stock, which continues to soar despite rising interest rates, has gained more than 26% since the beginning of the year. At the current price, shares offer investors an attractive dividend yield of 3%.
--Richard Jahnke, Briefing.com
10:44 am Vonage Holdings Corp. (VG)
6.83 -0.26: In a recent Ahead of the Curve column, we argued that the Vonage IPO is quickly heading toward legendary status as one of the largest failures in history. The stock has lost nearly 60% of its value since its IPO in May, which certainly doesn't reflect well on lead managers Citigroup, Deutshe Bank and UBS. And it just keeps getting worse. The Internet phone company reported a wider net loss for the second quarter than expected on higher marketing costs and customer defections, sending shares down by over a dollar in early trading.
Vonage reported a net loss of $74.1 mln or $1.16 per share, including charges compared to $63.6 mln in the prior year. Excluding compensation charges, EPS of $1.09 was well outside consensus estimates of a loss of 47 cents. Sales more than doubled to $143.4 mln, but still missed estimates of $146.4 mln, on net additions and higher ARPUs. The company is shelling out nearly $18 mln to underwriters to compensate for investors who balked at paying for stock. It doesn't expect to post a profit until the first quarter of 2008.
Vonage is a commercial voice over IP network company, meaning it provides telephone service via broadband. In order to ramp up service and increase scope, the company is spending a hefty sum in marketing dollars. This quarter, these costs equated to $239 per gross subscriber line, up 1.2% q/q. Vonage added more than 1 mln net subscriber lines during the year, including 256,000 in Q2. It ended the quarter with more than 1.85 mln total subs, up 16% sequentially and 119% from the prior year.
Churn, however, remains a key concern. Customer turnover this quarter was the highest level in years at 2.3% vs. 2.1% in the prior quarter. During the company's conference call, it said that it expects churn to increase slightly before they see any improvement. Average revenue per user (ARPU) was $27.70, up 4% y/y.
Heightened competition will continue to intensify, only putting further pressure on subscriber acquisition costs and ARPUs. We think it's very possible that one of the cable providers, working to ramp up their VoIP portion of the Triple Play, could step in to buy Vonage. And while we'll keep enjoying those hilarious Vonage commercials, we think investors should steer clear of its shares as growth prevails over profitability.
--Kimberly DuBord, Briefing.com
10:24 am Chipotle Mexican Grill (CMG)
50.14 -0.17: Chipotle Mexican Grill said Monday that its second quarter profit fell 58% from a year ago, when results were boosted by a one-time tax benefit, but it topped Wall Street's estimates. The Denver-based restaurant chain, which was spun off from McDonald's Corp. (MCD) in January, also said it expects sales at restaurants open at least a year to increase at a slower rate in the second half of the year, sending shares more than 4% lower in early trading.
In the second quarter, Chipotle earned $10.8 million, or $0.33 per share, compared to $25.7 million, or $0.98 per share, in the year ago period. Analysts had expected earnings of $0.26 per share, according to Reuters Estimates. Chipotle attributed its strong performance to continuing strong comparable restaurant sales, successful new restaurant openings, and favorable commodity costs. Excluding a tax benefit, the company said its year ago profit was $5.4 million, or $0.21 per share.
Revenue for the quarter rose 31.1% year/year to $204.9 million, versus the consensus estimate of $199.6 million, as comparable restaurant sales rose 14.5%. Meanwhile, restaurant level operating margins improved to 21.7%, from 19.9% in the same quarter last year, helped by lower commodity costs, as well as menu price increases in certain markets.
The company raised its full-year sales outlook, saying comparable restaurant sales would increase in the low double digits, compared to its previous estimate for high single digit growth. At the same time, however, it said sales at restaurants open at least a year would continue to decline throughout the year as sequential comparisons become more difficult.
Although the company has withstood a slowdown in consumer spending, its stock, which has traded between $39.51 and $67.77 over the past 52 weeks, is down about 25% since reaching a high in May amid concerns of slowing growth. At the current price level, shares are trading at 54x forward earnings, a lofty valuation compared to 27x for Panera Bread Co. (PNRA). While we believe the stock deserves a premium valuation given its growth profile, the current multiple is too large and continues to support our bearish outlook on the stock.
--Richard Jahnke, Briefing.com
10:11 am Hilton Hotels Corp. (HLT)
23.54 -0.39: Hilton Hotels Corp. announced earnings for the latest period that could give some investors reservations. The company said it saw second quarter earnings of $0.32 per share, $0.02 worse than the Reuters Estimates consensus of $0.34. Revenues rose 87.4% year over year to $2.2 billion versus consensus of $2.19 billion.
The company, which has a market cap of about $9.20 billion, also issued in-line guidance for the full year of 2006, seeing earnings per share of $1.08 to $1.12 versus consensus of $1.11. Hilton also said that on a pro forma basis, worldwide revenue-per-available-room increased 9.6% in the latest period, driven by strong rate increases and high demand in most major markets.
Stephen Bollenbach, co-chairman and chief executive officer of Hilton Hotels Corp., said strong demand is expected to continue in the company's most important markets, due to limited new supply in urban centers and the ongoing rebound in the U.K., which is benefiting from the relaxation of a 37-year old law governing gambling. Renovation projects undertaken in New York and Hawaii - enhancing the guestrooms and improving the infrastructure of important properties - are nearing completion and will have a positive impact on results going forward, he said.
At about 19.5x trailing 12-month earnings, the stock looks to be a bit of a bargain compared to the industry average. However, Hilton stock may have yet to find a bottom. With a slowing economy likely to keep more Americans at home and hurt lodging industry profits overall, it's probably best to avoid visiting this stock for a bit longer.
--Christine Marie Nielsen, Briefing.com
09:50 am Valero Energy Corp. (VLO)
67.43: The bar was raised for Valero Energy on the heels of record profits from the Integrateds last week, and the largest US oil refiner came through in spades, reporting a record $1.9 bln in net income. Per share profits, after dividend payments to preferred shareholders, exceeded estimates by three cents, rising to $2.98 per share from $1.53 in the prior year on soaring refining margins despite heavy turnaround activity in the quarter. Production was assisted by the Premcor acquisition in September that added on four oil refineries. Sales rose 49% to $26.8 bln.
Profits for the "independent" refiners, those which don't produce the oil they refine, have soared over the past few years as economic growth increased demand for refined products from gasoline to diesel, further heightened by persistent tightness in the global refining system. This quarter, refining margins, known as crack spreads, widened to $15.77 a barrel, reflecting the difference between crude-oil prices and gasoline and diesel prices. Significantly elevated margins catapulted refining segment operating profits two-fold to $3 bln.
Soaring crude oil prices have led to higher prices at the pump as the geopolitical environment threatens supply disruptions. Gas prices are nearing highs reached after Katrina wreaked havoc on the energy complex in the Gulf, shutting down offshore production and damaging refineries and pipelines. Furthermore, the price premium for the reformulated gasoline blendstocks (aka RBOB), which account for 30% of production, was well above conventional gas. VLO anticipates the October 15th deadline for low sulfur on-road diesel at retail locations will further tighten supplies into the winter season. According to Valero's CEO Bill Kleese, the operating environment for the refiners remains "outstanding."
Valero has set the tone for the rest of the independents and integrateds that have yet to report. Record refining margins throughout the US, coupled with enduring global refining tightness, should culminate in record profits for the entire sector. For VLO, the stock has gained over 30% to date. Despite its premier status in terms of production output, VLO continues to trade at a substantial discount to its peers. No matter the reasoning, we think the valuation gap given the profit growth and operational execution is unwarranted. As such, we continue to suggest that investors add to positions. VLO trades at 7.9x forward earnings, compared to Sunoco (SUN) at 6 9.2x, Tesoro Corp (TSO) at 8.3x, Frontier Oil (FTO) 11.9x, Giant Industries (GI) 9.2x, and Holly Corp (HOC) at 14.4x.
--Kimberly DuBord, Briefing.com
09:32 am Coach (COH)
28.71: From the sound of it, business is booming for specialty retailer Coach. However, in looking at its stock lately, you wouldn't know the difference. After hitting $37.40 on March 31, shares of COH fell as much as 33% to a low of $25.18 on July 18. The catalyst for that sharp decline centered around growth concerns for the global economy and the company itself. With its year-end earnings report today, Coach did what it could to temper those concerns.
For its full fiscal year, Coach reported a 38% increase in net income to $494 million or $1.27 per diluted share (consensus $1.25). That robust bottom-line growth was fueled by a 23% jump in net sales, a 20.7% surge in North American comparable store sales, a 100 basis point improvement in gross margin, a 180 basis point decline in SG&A expense, and a 270 basis point expansion in its operating margin. The fourth quarter results were equally impressive, leading to a 31% increase in net income to $118 million or $0.31 per diluted share (consensus $0.29)
With such clear signs of operating strength, it leads one to wonder how the market could have ever let the company's stock go down as much as it did. The problem for Coach, however, seems to be a twofold one. First, it has become a victim of its own success, meaning it has done so well in the past that, against a backdrop of concerns about the pace of economic growth, investors are having misgivings about the company's ability to keep delivering such strong growth and surpassing the market's increasingly high expectations. Secondly, while Coach continues to bump up its sales and earnings expectations, corresponding growth rates versus the year-ago period imply that there is a deceleration taking place.
The latter, frankly, is a natural consequence for a company that has had tremendous success. Nonetheless, it tends to get the better of growth-oriented investors who cast their doubts about the changing growth profile and premium valuation by selling the stock.
To its credit Coach is still growing at a very nice clip. Its FY07 forecast for sales to be about $2.5 billion and EPS to rise to at least $1.55 translates to expected growth of 19% and 22%, respectively. As one can plainly see, though, that is a deceleration from the growth achieved in FY06. That understanding should help explain why there isn't a more enthusiastic response to the company's impressive year-end report. It was also a key factor for why we suggested taking some money off the table following Coach's fiscal third quarter report.
At its current level, COH trades at 18.5x estimated earnings. In light of the company's solid execution, strong financial condition, and projected long-term earnings growth rate of 20%, that strikes us a reasonable price to pay for growth and value investors alike.
--Patrick J. O'Hare, Briefing.com
09:11 am Sirius Satellite Radio (SIRI)
4.20: Sirius Satellite Radio said its second quarter loss widened on higher spending to sign up new users, but it raised its subscriber forecast for the year, sending its stock higher in pre-market activity. Sirius, which has yet to turn a profit, has seen its stock fall about 37% since the start of the year. With the company, along with competitor XM Satellite Radio (XMSR) continuing to spend heavily to build their subscriber base and programming content, we would not be chasing the stock right now.
For the latest quarter, the subscription radio service reported a net loss of $237.8 million, or ($0.17) per share, compared with a loss of $177.6 million, or ($0.13) per share, a year earlier. The latest loss included $0.01 per share in charges related to the write-down of satellite parts. Excluding that charge, the loss was a penny shy of the Reuters Estimates consensus. Revenue nearly tripled to $150.1 million from $52.2 million last year, as the company continued to build its subscriber base.
Sirius added 600,460 net subscribers in the second quarter, bringing its total to 4.7 million at the end of the period. That is 158% higher than the second quarter of 2005. The company said average revenue per subscriber totaled $11.16, up from $10.50 a year earlier, while subscriber acquisition costs fell to $131 from $160. Average monthly churn was 1.8%.
Based on its subscriber addition trends, Sirius said it expects to have 6.3 million subscribers by the end of the year, up slightly from its previous forecast of 6.2 million. It also projected higher revenue of $615 million, compared to its prior guidance of over $600 million and the consensus estimate of $627.72 million.
--Richard Jahnke, Briefing.com
08:57 am Eastman Kodak (EK)
22.25: Eastman Kodak Co. presented a rather disappointing picture of its finances Tuesday when it told investors that it saw a loss of $0.19 per share in the second quarter, excluding multiple charges and gains. Reuters Estimates tells us the figure may not be comparable to consensus of $0.22. Revenues fell 8.8% year over year to $3.36 billion versus consensus of $3.42 billion.
Kodak, which has a market cap of about $6.39 billion, reaffirmed its 2006 cash and digital earnings goals, seeing net cash provided by operating activities of $800 million to $1 billion. The127-year-old company said it sees digital earnings from operating activities of $350 million to $400 million. Kodak says its primary focus is on cash and expanding its digital margins. On Tuesday, Kodak said it had agreed to sell its digital camera manufacturing operations to outsourcer Flextronics (FLEX).
Kodak CEO Antonio Perez noted in a press release that the company achieved positive digital earnings two quarters ahead of last year's performance, ahead of the company's own prediction that it would occur in the third quarter.
Despite becoming a major player in recent years in the digital arena, Kodak has struggled to turn a profit. During the second quarter of 2006, the company eliminated 1,630 positions, bringing the program's total to more than 20,500 job cuts. Kodak now expects to cut 25,000 to 27,000 jobs, up from a previous target of 25,000. The company expects to spend $3 billion to $3.4 billion on the cutbacks, which are to be completed by the end of next year.
Briefing.com featured Kodak in a Mid Cap column in early March and took a bearish stance on the company. High restructuring costs and declining demand for film continue to overshadow earnings prospects. Negative earnings should serve as a big red flag to any investors who are thinking about framing Kodak in their portfolio.
--Christine Marie Nielsen, Briefing.com
08:30 am Archer-Daniels-Midland (ADM)
44.00: Under new leadership, Archer Daniels closed the books on the second consecutive year of record earnings. The world's largest grain processor and ethanol maker reported earnings more than doubled in the fourth quarter to $410 mln or $0.62 per share. Operating profits grew over 80% to $637 mln from $351 mln in the prior year on improved market conditions for Oilseeds Processing and higher prices and volumes of ethanol and sweetener.
There were a number of one-off items in the quarter, including Brazilian tax credits, gains from asset sales, and a bevy of charges, blurring the consensus comparison of 52 cents. Revenues rose 1.3% year/year to $9.55 bln vs. consensus of $9.78 bln. By segment, Oilseeds Processing operating profits increased $121 mln to $195 mln, as market conditions improved across all geographical areas. Corn Processing profits rose $169 mln to $286 mln, which included Sweeteners and Starches and Bioproducts units, that grew 22% to $112 mln and nearly 7x to $174 mln, respectively. Gross and operating margins widened materially due to higher starch, sweetener, and ethanol prices and reduced costs, helping to offset higher energy prices.
As one of the only large-cap ethanol stocks, ADM remains in the alternative-energy induced spotlight. The company plans to increase capital spending on energy-related projects from ethanol to biodegradable plastics. Shares have been trading in a five dollar range since the new CEO, Patricia Woertz, took the helm in May. The fundamentals remain strong across ADM's businesses, which are typically quite volatile. Ethanol profits are strong, but given the current hype, their longevity is a concern. And while we continue to hold a favorable view of the stock, valuation remains a concern. Shares are trading at 21.1x trailing and 17.9x forward earnings, compared to their 5-year average of 18.0x.
--Kimberly DuBord, Briefing.com |
