From Briefing.com: It was another mellow day of trading on Thursday, but a bullish bias prevailed in the wake of another round of encouraging economic data. In particular, initial claims checked in below 400K for the fourth consecutive week, which is consistent with payroll gains; the June trade deficit fell to $39.5 bln from a prior assumption of $41.9 bln, implying that there will be a boost to Q2 GDP revisions; and core-PPI, up 0.2% in July, mitigated some of the concerns about deflation as the yr/yr core number shifted to positive (+0.2%) from negative (-0.3%).
The good economic news didn't sit well with the Treasury market, and as we have seen before, the buying interest in the stock market was bridled by the backup in rates. At one point, the yield on the 10-yr note climbed to 4.66% before the hemorrhaging stopped and a modest recovery effort was waged. It should be noted that, subsequent to the stock market's closure, the 10-yr was trading up 18 ticks, and its yield had fallen to 4.49%, in response to news of a major power outage that stemmed from natural occurrences affecting New York and several other cities.
The tech sector, for its part, retained its positive charge on Thursday, helped by the resilience of the semiconductor sector and gains in the telecom, software, biotech and Internet groups. True to recent form, tech buyers were undeterred by negative calls as they brushed aside CSFB's decision to lower its Technology Sector weighting to Market Weight from Overweight due, in part, to the sensitivity of tech stocks to discount rate changes.
How sensitive the sector is to Dell's (DELL 31.39 +0.08) Q2 earnings report on Friday is hard to say. Intuitively, Dell should have a favorable influence as it delivered another impressive quarter of growth and provided reassuring guidance for Q3 (Oct). Dell has shown for some time, though, that it is a cut above its competition, so when it reports good earnings news, the positive vibe doesn't always transfer over to the entire sector. At the time of this writing, it appears as if the market is pre-occupied more with the aforementioned power outage as the Nasdaq 100 futures, at 1239, are 14 points below fair value.-- Patrick J. O'Hare, Briefing.com
6:00PM Thursday After Hours price levels vs 4pm ET: It's no usual after-hours session as the futures market is entirely preoccupied with the power outage strike that has affected areas of NY, NJ, CT, Detroit, Toronto, and Ottawa. According to some sources, the power outage is being attributed to a fire in a NY electric plant. Another explanation for the event is the overloading of a Niagara Mohawk Power Grid. While the U.S. Intelligence officials have been quoted denying a link between the power outages and terrorist activity, the market is jittery in the face of public transportation and airport shutdowns. Currently, the S&P 500 futures are trading 8 points below the fair value of 990 and the Nasdaq futures are 14 points below the fair value of 1253.
The indubitable King in today's after-hours session is the computer hardware giant, Dell (DELL 30.94 -0.45). The company achieved best-ever quarterly operating results in the period ended August 1 and widened its overall global market-share lead. DELL reported Q2 (Jul) earnings of $0.24 per share, in line with the Reuters Research consensus and up 26% year/year. Revenues rose 15.6% year/year to $9.78 bln versus the $9.75 bln consensus. The company said it sees Q3 EPS of $0.26 (in-line with consensus) on revenues of $10.5 bln (consensus $10.3 bln).
Another in-line report came from the world's leading application infrastructure software company, BEA Systems (00C0 12.25 -0.39). BEAS posted record integration license revenue and improved operating income, operating margin and cash flow from operations compared to last year. Specifically, Q2 (Jul) earnings were in-line with the consensus at $0.07 per share, excluding acquisition-related expenses, net gains or losses on investments in equity securities, employer payroll taxes on stock options, and other non-recurring charges. Revenues of $245.0 mln were up 8.5% year/year and above the $243.4 mln consensus.
Semiconductor player, Analog Devices (ADI 36.85 -0.24), reported increased revenue and profits for its Q3 (Jul). Specifically, in-line earnings of $0.21 per share increased over 260% on a year/year basis and 10.5% sequentially. Revenues of $520.5 mln rose 16.8% year/year, but checked in below the consensus of $523.5 mln. According to CEO Jerald Fishman, the book-to-bill ratio was approximately one for the third quarter with strong order rates during July, the last month of Q3. Looking to Q4 (Oct), management expects EPS of $0.22-0.32 versus the consensus of $0.24.
Moving on to the non-tech names making headlines, family oriented, specialty department store operator Kohl's (KSS 61.04 -0.46) released its Q2 (Jul) results and shed more light on its turn-around story. Reported earnings came in a penny above the consensus at $0.32 per share. Revenues rose 14.9% year/year to $2.21 bln, above the $2.19 bln consensus. Comparable store sales for Q2 increased 1.1%. Disappointingly, gross margins shrank 240 basis points to 33.4%, while operating profit margins contracted by 190 basis points to 9.2%.
In more upbeat news, the Board of Directors of United Parcel Service (UPS 63.70 +0.35) approved the second increase in six months in the company's quarterly dividend, raising the cash payout from $0.21 to $0.25 per share (19% increase) on all outstanding Class A and Class B shares. According to CEO Mike Eskew, the 32% increase in UPS's dividend since the beginning of the year reflects the company's continuing strong cash flow, positive earnings growth outlook, and the recently enacted tax reform, which has made dividend payouts more attractive and tax efficient. The Board also raised its authorization for the repurchase of Class A and Class B shares to $1 bln, up from a roughly $500 mln balance from a previous authorization.
For more detail on these, and other after hours developments, be sure to visit Briefing.com's In Play, Earnings Calendar and Guidance pages. -- Victoria Glikin, Briefing.com
4:07PM Dell Computer reports, guides in line (DELL) 31.56 +0.25: Reports Q2 (Jul) earnings of $0.24 per share, in line with the Reuters Research consensus of $0.24; revenues rose 15.6% year/year to $9.78 bln vs the $9.75 bln consensus. Company sees Q3 EPS of $0.26, in line with consensus, on revenues of $10.5 bln, consensus estimate $10.3 bln.
4:03PM Analog Devices reports in line (ADI) 37.15 +0.09: Reports Q3 (Jul) earnings of $0.21 per share, in line with the Reuters Research consensus of $0.21; revenues rose 16.8% year/year to $520.5 mln vs the $523.5 mln consensus. Co. sees Q4 EPS of $0.22-0.32, R.R. consensus is $0.24.
3:38PM Dell Computer Earnings Preview (DELL) 31.4 +0.15: Dell reports its highly anticipated Q2 after the close today with Reuters Research earnings estimates of $0.24 per share and revenues of $9.75 bln. SG Cowen expects the computer behemoth to report in line with possible upside to its rev estimate. Firm notes the co likely to encounter tough comparison with y/y growth "moderating" into the mid/low digits. Prudential maintains a high degree of confidence in their earnings projections following a series of its channel checks. Firm believes the co would gladly sacrifice operating profitability if it could make the same operating margin dollars through market share gains, which would keep pressure on its rival HPQ.
3:04PM NVIDIA: Xbox rumors put to rest -- Pacific Growth (NVDA) 16.18 -0.60: -- Update -- Pacific Growth comments that ATI Tech (ATYT) development deal with Microsoft puts to rest rumors that have swirled for the last several months. According to firm, the current generation of Xbox contributed $445 mln to NVDA's top line in FY03 (its highest year); expects Xbox to contribute $292 mln in FY04 and $200 mln in FY05. Firm believes that much of the risk that NVIDIA would not win the next generation Xbox deal has already been built into its share price. Moreover, believes ICs going into the Xbox were being sold at lower than corporate gross margins for NVIDIA.
2:14PM Sizing up Semi Cap Equipment : The semiconductor sector had a nice run-up Wednesday after the earnings announcements from Applied Materials (AMAT) and Maxim (MXIM). The vanguard companies of the semiconductor capital equipment space either skirted 52-week highs or achieved some technical accolade in Wednesday's trading. In addition, we were also hearing positive comments coming from Novellus (NVLS) at the Soundview Conference yesterday as well. Our question is, did the market not listen to the Applied Materials call?
The salient point for recovery that most people are interested in for semi cap equipment earnings announcements during the "holding pattern" of the semi cycle is guidance. While AMAT expects its Q4 gross orders to grow to the tune of 10%, revenues are expected to remain flat to slightly up with its earnings in the range of $0.04-$0.05 per share, which was below the consensus estimate.
The other piece of information people look for is data that can give the street an idea of when orders will begin to return to the very specialized companies. Visibility continues to be an issue, as the need to expand capacity at fabs does not seem to be imminent.
Briefing.com's coverage of the semiconductor sector included a cautious piece on August 1, 2003, entitled "The Semi Cap Equipment Train…All Aboard?", that was written in the wake of some questionable analyst upgrades in the semi cap equipment sector. In that piece, we recommended investors either stay on the sidelines or take profits. The visibility question was addressed on Briefing.com on July 21 in a piece entitled "Thoughts on SEMI" regarding the implications of the Semiconductor Equipment and Materials International's book-to-bill number for June. Despite all of this information not auguring well for expectations of recovery, the semiconductor/capital equipment names continue to rise and their valuations continue to balloon with the air of hopeful thinking.
For more thoughts on why Briefing.com thinks it's time for the balloon to deflate on semi cap equipment stocks, be sure to visit our Stock Brief page.-- John Meza, Briefing.com
11:42AM Ultratech Stepper upped to Buy from Neutral at D.A. Davidson; target $37 (UTEK) 24.60 +0.25: According to firm, significant growth potential continues as 65 nm processes are adopted industry-wide in the 2006/2007 timeframe. Couple this with an attractive royalty arrangement for LTP tools with Applied Materials (AMAT) and the story becomes more compelling. Price target goes to $37 from $26.
11:36AM STX pressured by various rumors/concerns 20.56 -1.14: Seagate Technology (STX) is a notable laggard today. Hearing that behind the decline are rumors circulating of potential credit concerns with key STX distribution customer in conjunction with potential pricing pressure. We are hearing these rumors/concerns from the buyside community, as opposed to sell side analysts with coverage of the stock.
11:25AM Aeroflex cut at Roth Capital to Buy from Strong Buy on Valuation (ARXX) 8.24 +0.33: Despite upping estimates and its target price (to $10.20 from $9.60), Roth Capital is downgrading ARXX based on valuation. Roth still likes the way the company is positioning itself heading into calendar 2004 and it has a rock solid defense business. However, at current levels, there is only a 28% upside from current levels, so it warrants a Buy, not a Strong Buy.
9:57AM Texas Instruments outperforming (TXN) 19.85 +0.53: -- Update -- -- Technical -- The issue has advanced in the wake of an early upgrade (see 08:08 comment) and is outperforming the overall market as well as the semi sector. It has run 11% from low to high over the last several days and is now facing resistance at the top of its month long trading range at 19.86/19.98.
10:16AM Brocade (BRCD) 5.54 +0.03: Lehman Brothers upgrades Underweight to EQUAL-WEIGHT. Target $6 to $6. Believes the worst may be over short-term for BRCD following last night's earnings.
9:21AM The Technical Take : A minor extension of the recent advance for the market averages in early trade on Wednesday but the indices quickly lost steam. The end result was slightly negative ending the recent winning streak (5 days up for Dow/S&P 500; 2 days Nasdaq Comp) with volume slightly heavier than the previous session. The selling pressure was far from significant, however, as the trading pace remained below average while market internals were mixed. Overall the trading range environment remains intact as the summer doldrums continue to dominate.
From a sector perspective we had continued strength in cyclical and retail issues (both set new highs) and a strong performance in the semi sector (SOX) which underpinned the Nasdaq for much of the day. The SOX, however, failed at resistance at the top of the trading range from late July/early Aug near 398 and weakened into the close. Overall this key sector has rebounded aggressively off trendline support (also near 50 day averages) with no technical damage done while it maintains a posture above these supports.
Dow Industrial Avg: Taking a little more detailed look at this index today as there are a few more technical points of interest. The Dow has been the top overall performer over the last month or so but it has been far from exciting as it clearly remains trading range bound. While the focus for levels of interest is often on the intraday peaks or troughs, yesterday the Dow ran to its closing high established in June at 9323.02 during the opening upticks (hit 9322.11) and rotated lower. The next point of interest revolves around the solid push over the previous 5 days. Note from the daily chart below that the recent run began near the lower end of the range and its 50 day averages but the volume during the push off these key levels has actually declined. What you are looking for, particularly during potential breakout attempts are signs of accumulation which is noted through rising/above average volume. A continued posture above the averages and a pick up in volume, if a pullback develops, and a pick up in volume during subsequent rally attempts would better set the table for a bullish breakout.
Don, I thought you were humorous. I'm the one who isn't funny!
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