From Briefing.com: 5:33PM Monday After Hours prices levels vs. 4 pm ET: The market's late-day rally has come to an end in the after hours trade, where the S&P futures, at 1147, are 2 points below fair value and the Nasdaq 100 futures, at 1508, are 3 points below fair value. A handful of earnings warnings ahead of the March quarter reporting season have spooked investors.
The below table lists tonight's most notable news items, and the stocks' reactions:
After Hours Mover % Change Move Reason for Move
Bank of America (BAC) +1% Financial giant announces it plans to cut 12,500 jobs as a result of its $48 bln purchase of FleetBoston which closed last Thursday; The cuts will take place over the next 2 years, and about 30% of them will come through attrition; Bank of America has said it is targeting $1.6 bln in cost savings from the merger
Boston Scientific (BSX) +1% Medical device company says that sales of its drug-eluting stent, Taxus, were ~ $98 mln for Mar 8-31 versus expectations of $54-75 mln for Mar 1-31; Adds that worldwide revenues of all coronary stent systems were ~ $283 mln in Q1 (Mar) (guidance was $210-240 mln); Briefing.com has been positive on BSX in Story Stocks since the FDA advisory panel unanimously approved BSX on Nov 20
Brooktrout Tech (00C0) -20% Small-cap communications equipment company warns for Q1 (Mar), putting revenues at $18.1-18.3 mln versus its earlier range of $21-22.5 mln; Notes that it should achieve breakeven or a small profit as compared to previous guidance of net income of $500K-1.0 mln; Stock has more than quadrupled in the past year
E.piphany (EPNY) -18% Developer of customer relationship management products guides lower for Q1's (Mar) top and bottom-lines; Management attributed the shortfall to 'a number of large transactions delayed this quarter;' Related companies CHRD, ORCL, PSFT, and SAP are all down in sympathy tonight
Kellogg (K) unch Food manufacturer raises its Q1 (Mar) and FY04 (Dec) EPS forecasts citing 'far stronger than expected sales growth' and better than expected foreign currency translation; Briefing.com has recommended K as a conservative play in Story Stocks since April 24, and the stock has appreciated 24%; Note the annual dividend yield of 2.6%
Tomorrow looks to be the 'calm before the storm' with Alcoa (AA) ready to kick things off after the close. There are very few companies on the earnings calendar and no reports on the economic calendar. There are, however, several analyst/shareholder meetings on the events calendar with Brocade (BRCD), DaimlerChrysler (DCX), Dell (DELL), and Federal Express (FDX) hosting meetings.
For more detail on these, and other developments, be sure to visit our Stock Market Update and Daily Sector Wrap.Heather Smith, Briefing.com
9:41AM ZL upped to Overweight from Equal Weight at Pacific Growth 4.05 +0.11: Pacific Growth upgrades Zarlink Semiconductor (ZL) to Overweight from Equal Weight to reflect the positive momentum in all three of the co's business segments enjoyed during the MarQ. The firm believes that bookings were solid throughout the qrtr and expects ZL to enter the June qrtr with a level of backlog soundly above the $32 mln level it had entering the MarQ. The firm raises MarQ rev est to $51.0 mln from $50.5mln or to the high-end of the targeted range to reflect seasonal strength and continued strong demand in the communications end markets and also raising FY04 and FY05 to $198.3 and $221.5 mln from $197.8 and $220 mln, respectively. Analyst believes that valuation is attractive at these levels from both a relative as well as an absolute basis with favorable risk/reward ratio for the near term.
4:23PM Tech Relative Value Ideas--New focus List Relative value is one way of identifying companies with potential for above average returns. It is based on the idea that company price multiples revert to the mean over time; i.e., companies trading at a discount to industry peers will move higher towards the average and companies trading at a premium will move lower.
The table below shows companies with improving operating performance that are attractively priced vs. industry comparables on a price multiples-to-growth basis. We would also continue to focus on previously highlighted names that continue to trade at a discount to peers (refer to Relative Value Ideas Performance Update, Story Stocks, April 01, 2004).Company Ticker Sector *P/SG Ratio Ind Avg P/SG Ratio **P/OIG Ratio Ind Avg P/OIG Ratio Sales Growth Ind Avg Sales Growth
Adobe Systems ADBE Software & Programming 3.0 3.0 13.4 34.8 19.0 5.9
AML Communications AMLJ Communications Equipment 1.2 2.0 25.6 41.1 15.1 (4.8)
California Microdevices CAMD Semiconductors 2.7 3.0 n/a 55.0 37.5 14.7
Computer Services CSVI Computer Services 0.8 1.3 7.7 19.6 6.5 5.8
Danaher Corp DHR Scientific & Technical Instr 1.7 1.0 12.8 17.0 15.7 2.6
Electronic Arts ERTS Software & Programming 3.1 3.0 16.6 34.8 13.4 5.9
iPass IPAS Software & Programming 2.1 3.0 18.2 34.8 46.7 5.9
Lifeline Systems LIFE Communications Equipment 1.4 2.0 12.2 41.1 10.7 (4.8)
Plantronics PLT Communications Equipment 2.5 2.0 16.7 41.1 17.1 (4.8)
Sonic Solutions SNIC Computer Services 2.8 1.3 26.4 19.6 62.8 5.8
Taiwan Semiconductor TSM Semiconductors 4.1 3.0 17.6 55.0 25.1 14.7
Tektronix TEK Electronic Instr & Controls 1.9 0.9 20.3 (108.0) 10.3 3.9
Texas Instruments TXN Semiconductors 3.2 3.0 43.4 55.0 17.3 14.7
*P/SG Ratio: Trailing 12 month (Price / Sales) / Growth ratio as of April 02, 2004.
**P/OPG Ratio: Trailing 12 month (Price / Operating Income) / Growth ratio as of April 02, 2004.
Adobe Systems (ADBE 41.35 +0.45): Trading at 6.4x F04 revenue of $1.513B (+16.9% Y/Y) and 5.9 F05 of $1.648B (+8.9% Y/Y); 27.9x F04 EPS of $1.48 and 25.5x F05 of $1.62.
AML Communications (AMLJ 1.60): No estimates available.
California Microdevices (CAMD 13.69 -0.03): Trading at 4.5x F04 revenue of $58.98MM (+39.8% Y/Y) and 3.7x F05 of $71.47MM (+21.2% Y/Y); 85.4x F04 EPS of $0.16 and 32.5x F05 of $0.42.
Computer Services (CSVI 33.00 +0.45): No estimates available.
Danaher (DHR 95.18 +0.70): Trading at 2.4x C04 revenue of $6.088B (+15.0% Y/Y) and 2.3x C05 of $6.462B (+6.1% Y/Y); 23.2x C04 EPS of $4.10 and 20.8x C05 of $4.58.
Electronic Arts (ERTS 55.36 +1.18): Trading at 5.6x F04 revenue of $2.972B (+19.7% Y/Y) and 5.0x F05 of $3.269B (+10.0% Y/Y); 31.0x F04 EPS of $1.78 and 27.5x F05 of $2.01.
iPass (IPAS 12.06 +0.26): Trading at 4.1x C04 revenue of $182.56MM (+34.2% Y/Y) and 3.1x C05 of $238.23MM (+30.5% Y/Y); 2.7x C04 EPS of $0.37 and 22.1x C05 of $0.55.
Lifeline Systems (LIFE 19.81 +0.09): No estimates available.
Plantronics (PLT 37.89 +0.68): Trading at 4.3x F04 revenue of $402.04MM (+19.1% Y/Y) and 3.9x F05 of $440.66MM (+9.6% Y/Y); 30.9x F04 EPS of $1.22 and 27.9x F05 of $1.35.
Sonic Solutions (SNIC 19.70 +0.28): Trading at 7.5x F04 revenue of $56.36MM (+195.0% Y/Y) and 5.2x F05 of $81.30MM (+44.3% Y/Y); 42.6x F04 EPS of $0.46 and 26.5x F05 of $0.74.
Taiwan Semiconductor (TSM 10.82 +0.29): Trading at 5.4x C04 revenue of $8.063B (+33.7% Y/Y) and 4.6x C05 of $9.581B (+18.8% Y/Y); 18.9x C04 EPS of $0.57 and 15.4x C05 of $0.70.
Tektronix (TEK 34.13 +0.19): Trading at 3.2x F04 revenue of $894.20MM (+13.0% Y/Y) and 3.0x F05 of $950.48MM (+6.3% Y/Y); 33.3x F04 EPS of $1.02 and 26.6x F05 of $1.28.
Texas Instruments (TXN 30.94 +0.53): Trading at 4.2x C04 revenue of $12.559B (+27.7% Y/Y) and 3.7x C05 of $14.400B (+14.7% Y/Y); 30.8x C04 EPS of $1.00 and 23.3x C05 of $1.32.
Buying companies that trade at a discount to peers on a multiples basis, factoring in growth and margin rates, can help reduce portfolio volatility while offering the potential for above average returns when judiciously applied as part of a comprehensive research and analysis framework for assessing company competitiveness, operating performance and investment potential. But keep in mind that a company trading at a discount to peers is not necessarily undervalued and may trade lower.
As an example, given our assessment of industry dynamics, we advised investors to hold off buying SI International (SINT 27.96 +1.70) until a 10-15% pull-back or the company achieves 10% operating margin (Story Stocks, February 17, 2004) even though SINT shares are attractively priced vs. industry peers on a relative value basis (March 2004 Relative Value Ideas Focus List).
We revised our investment posture on SINT from cautious to positive after SINT shares declined over 19% in an overall difficult market for tech shares (Story Stocks, March 16, 2004). SINT shares have since rebounded over 50% on improving revenue momentum (Story Stocks, March 26, 2004).
We'll track returns for this group over the next 12 months and post monthly performance updates on both the Story Stocks and the Tech Stocks pages.
Look for an updated list of names that we think are attractively priced on a relative value basis at the beginning of each month. We will also continue to highlight relative value ideas on the Story Stocks and Tech Stocks pages on a regular basis.
E-mail if you wish to receive notification when we post an updated list.--Ping Yu, Briefing.com
Close Dow +87.78 at 10,558.37, S&P +8.73 at 1,150.54, Nasdaq +21.95 at 2,079.12: After spending much of the session vacillating in positive territory with only slight gains, buyers stepped out of the woodwork driving the market to another rally with the major averages closing up 0.8-1.1%... Although the rally in the last hour of trading was rooted in a buy program, the tone of today's trade was favorable even before that, with the major averages trading in positive territory through the entirety of the session despite last week's sweeping gains...
The positive sentiment resulted from the market's anticipation ahead of the upcoming Q1 earnings season, which gets kicked off tomorrow after the close with AA's report... Analysts are expecting year/year growth of 17% in the S&P 500, but Briefing.com thinks the number could be as high as 20% given the favorable preannouncement season and the analysts' tendency to keep near-term estimates on the conservative side of things... Supporting the market's advance was the better than expected ISM Services report, which checked in at 65.8 (consensus 61.0)...
While laggards of note were limited, interest-rate-sensitive groups including homebuilding, S&L/savings banks, money center banks, and real estate operators pulled back due to participants' view that interest rates have bottomed on the heels of Friday's strong Employment report... To that effect, the 10-year note was down 17/32, bringing its yield up to 4.21%... Other lagging groups included the computer storage and gold sectors... Among the leaders to the upside were the internet, semiconductor, software, telecom, biotech, coal, airline, iron & steel, and metal mining groups...NYSE Adv/Dec 1538/1832, Nasdaq Adv/Dec 2001/1226
3:38PM WellChoice/Oxford Deal? : The Wall Street Journal has spilled the beans on two Northeast-based managed care companies that are in talks to join hands. WellChoice (WC 37.03 -0.42) is apparently considering buying Oxford Health (OHP 58.01 +7.69) in an all-stock deal and the two companies are in intense negotiations now. Neither company has commented on the story, but this has not prevented Oxford Health's stock from running up 24% since the rumor began floating last week. As it stands now, OHP is almost on par with the 25% premium WellChoice is reportedly considering paying.
The managed care sector has been awash in M&A deals recently, with Anthem's (ATH) takeover of WellPoint Health (WLP) and UnitedHealth Group's (UNH) acquisition of Mid-Atlantic Medical (MME). Medical costs have been on a steady rise, and industry players have needed more leverage to demand better terms from health-care providers. The top-line has also been a source of angst for some companies as slow hiring and reduced employee benefits have cut into enrollment trends. Strategic acquisitions have been a natural answer to both problems.
In WellChoice-Oxford Health's case, the acquisition makes sense from a financial and logistics standpoint. Both companies dominate the metropolitan New York City area, with NY-based WellChoice operating Empire Blue Cross Blue Shield health plans for 4.8 mln members throughout New York and New Jersey, and Connecticut-based Oxford boasting about 1.5 mln members scattered through these two states plus Connecticut (according to the Wall Street Journal). The close proximity of both company's operations would make combining the entities - and achieving greater operating efficiencies via cost cutting efforts - fairly simple.
The other attractive aspect of the WellChoice-Oxford deal is the immediate impact to the bottom-line. According to UBS, the deal could be accretive to Wellchoice as early as FY04 (Dec). From Briefing.com's own calculations, Wellchoice's operating and net margins should both expand greatly due in part to Oxford Health's more streamlined business model. Both companies sport about the same revenue base ($5.38 bln for WC and $5.45 bln for OHP), but Oxford's SG&A costs are a much smaller percentage of total revenues. This should translate into much stronger profitability for the newly-joined company without even taking into account the benefit of consolidating operations.
It remains to be seen if regulators will even approve such a transaction in light of both companies' large presence in New York. Additionally, OHP's huge spike in share price might put the brakes on a deal right now. Still, WellChoice's pursuit of Oxford is a smart move as it would result in a more competitive company on stronger financial footing. WellChoice would see its cash position greatly enhanced by Oxford's $1.9 bln nest egg, and the former's roughly 6% operating margin would noticeably improve upon completion. Market participants will want to follow this development closely, and consider buying shares of the combined company (if it does happen) considering the inherent synergies. Heather Smith, Briefing.com
12:01PM Siebel Systems (SEBL) 12.50 +0.21: Siebel Systems narrowed Q1 forecast to the high end of initial guidance. EPS is expected to come in at $0.05-0.06 on revenue of $329MM (-1.1% Y/Y) vs. guidance for $0.04-0.05 on $315-335MM and Reuters Research consensus at $0.05 on $330.08MM. Operating margin is expected to be in the 9-10% range.
License revenue is expected to come in at $127MM (+13% Y/Y) vs. guidance for $110-125MM. The U.S. accounts for 55% of license revenue, and International 45%. Maintenance revenue is expected to come in at $115MM (+6% Y/Y) vs. guidance for $110-115MM. Service revenue is expected to come in at $87MM (-22.5% Y/Y), below guidance.
The following table shows sales, gross margin and Y/Y change in gross margin by revenue segment for Q4.Segment Revenue
($ in MM) % Sales Y/Y Growth Gross Margin Y/Y bps change in GM
License 150.285 41% (4.5%) 97.8% 94
Maintenance & Services 216.457 59% (8.8%) 46.5% 569
Total 366.742 100% (7.1%) 67.4% 420
SEBL shares are, based on our inverted EVA / DCF model, priced for sustained lower to mid 20% revenue growth from C06 assuming steady Y/Y improvement to 20% operating margin.
Revised Q1 forecast shows enterprise spending continues to firm but expectations priced into shares leave little room for upside. Revenue growth expectations are significantly above consensus estimates while operating margin expectations are at high end of historical range. Q4 operating margin, excluding extraordinary items, was 7.2%.
The following table shows price multiples and Y/Y growth rates for SEBL compared against peers in the software & programming group.Company *P/SG Ratio **P/OPG Ratio P/S Y/Y Revenue Growth
TTM 2004E 2005E TTM 2004E 2005E
Siebel Systems (SEBL) 3.3 (171.6) 4.5 4.4 4.1 (17.2%) 5.5% 10.4%E
Oracle (ORCL) 3.6 12.2 6.6 6.5 6.1 5.2% 7.1% 7.2%
PeopleSoft (PSFT) 1.6 48.5 3.1 2.5 3.0 16.3% 25.3% 9.5%
Amdocs (DOX) 2.8 21.9 3.9 3.5 3.2 2.7% 18.7% 9.1%
Chordiant (CHRD) 3.2 (28.2) 5.5 4.5 3.9 (7.6%) 22.6% 16.2%
Dendrite Int'l (DRTE) 1.0 12.6 2.2 1.8 1.6 42.3% 21.4% 11.4%
E.piphany (EPNY) 3.1 (24.3) 5.9 5.3 4.7 12.5% 12.5% 12.5%
Kana Software (KANA) 1.3 (9.9) 1.9 1.6 1.3 (22.8%) 16.7% 24.5%
Software & Programming 3.0 34.8 5.2 5.9%
*P/SG Ratio: Trailing 12 month (Price / Sales) / Growth ratio as of April 02, 2004.
**P/OPG Ratio: Trailing 12 month (Price / Operating Income) / Growth ratio as of April 02, 2004.
We would wait for sustained sales growth to accelerate into the upper teens and continued improvement in operating margin to the 20% level reflected in our model or for at least a 20-30% pullback before buying SEBL.
We would consider DRTE on a relative value basis for investors seeking a CRM / enterprise applications play.--Ping Yu, Briefing.com
11:43AM CVS Corp (CVS) 37.02 +2.04: You can safely gauge the sentiment on a deal by watching the price action in the stock. Using that criteria, CVS Corp's (CVS) purchase of 1,260 Eckerd stores from JC Penney (JCP) must be universally embraced by Wall Street.
In all fairness, CVS's acquisition of a portion of Eckerd (45% of the total store base) was not a surprise to most observers. Management had said in the past it was 'open to buying the right geographies at the right price,' and JC Penney's announced plan to divest the drugstore chain on December 5 seemed to fit that bill. CVS submitted a bid in early February, and for mostly anti-trust reasons, JC Penney decided to split up the sale into two halves - the Northeastern part of the US to Jean Coutu (a Canadian drug store chain) for $2.375 bln and the Southern part of the US - as well as the pharmacy benefits management and mail order businesses - to CVS for $2.15 bln.
CVS won a new presence in states - primarily Florida (622 stores) and Texas (437 stores) - that possess a favorable growth profile. Florida, the retirement destination of many, should benefit from the aging baby boom generation, and Texas, a large and fast growing state, should gain from the migration from Rust Belt states. The acquisition also makes CVS the nation's largest drug store chain in terms of number of stores (more than 5,000), leaping over Walgreen (WAG).
With respect to the latter, CVS will be effectively going head-to-head with the juggernaut in its strongest territories. Walgreen boasts a wider selection of front-end pharmacy items and a larger number of 24-hour stores, and CVS's planned renovation of Eckerd's stores must address such discrepancies. Nonetheless, Briefing.com believes CVS's move into Walgreen's stronghold is a smart one as the sheer size and market potential of the area should support two major competitors.
As for the immediate financial effect, the transaction should be dilutive to CVS's FY04 (Dec) EPS by $0.12-0.15 (company recent raised its year-end target to $2.18-2.22), and should by accretive to both FY05 and FY06 EPS by $0.15-0.20 and $0.25-0.30, respectively. The Reuters Research consensus estimate for FY05 stood at $2.43 prior to the announcement.
The stock has popped 6% on the news and come within 2% of its 52-week highs. Briefing.com would continue to advise investors to hold CVS as its defensive attributes should enable it to outperform in this choppy trading environment. CVS is taking advantage of growth opportunities like Eckerd, and decisions such as that should keep CVS's solid earnings track record in track. Heather Smith, Briefing.com
9:14AM Ratings Briefing - ORCL : CIBC upgrades Oracle (ORCL 12.58) to Sector Outperformer from Sector Perform, citing the company's leveragable maintenance model, margin expansion, and the database upgrade cycle. As a result of its maintenance model and the sheer inertia of the installed base, firm thinks ORCL should be able to grow its maintenance revenue in the high single digits and post meaningful margin expansion, even if the company cannot expand license revenue. Firm also expects the company's new RAC product to reinvigorate the database business as customers embrace the "grid" concept of computing due to its superior operating performance and potentially lower costs. Target is $15.
What It Means:
At CIBC a Sector Outperformer rating means stock is expected to outperform the sector over the next 12-18 months... price target of $15 implies potential upside of 19.0% from current levels
Relatively light day in terms of ratings changes, so the CIBC upgrade to ORCL is apt to stand out in the small crowd since the stock is (A) widely-held and (B) valuation is a driving factor behind the upgrade
Good timing should give ratings change added impact, as the upgrade follows on the heels of industry peer Siebel Systems (SEBL 12.29) raising its EPS and license revenue guidance for Q1 after Friday's close
CIBC getting in a long line of analysts who are bullish on ORCL's prospects... to wit, since the start of the year ORCL has been upgraded four times, has seen multiple reiterations of Buy ratings or better, and has had a few firms initiate coverage with Outperform and Overweight ratings, respectively
Ratings distribution denotes bullish bias in analyst community: 16 Buy; 10 Outperform; 9 Hold; and 1 Sell [source: Reuters Research]
Sidenote: after reporting fiscal Q3 (Feb) results in March, ORCL guided for a 5-15% increase y/y in license revenues and EPS of $0.17-0.18 for Q4 (May) -- Patrick J. O'Hare, Briefing.com
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