From Briefing.com: 6:24PM Monday After Hours prices levels vs. 4 pm ET: Stocks have started to rebound from today's drubbing in the regular session, where the S&P futures, at 1085, are 2 points above fair value, and the Nasdaq 100 futures, at 1386, are 5 points above fair value. Tonights earnings pronouncements were encouraging, but probably cannot fully account for the shift in sentiment - buyers have simply picked up shares on weakness.
The below table lists the night's most important developments, as well as the stocks' reactions:
After Hours Mover % Change Move Reason for Move
Agilent (A) +3% Electronic instruments & controls company matches the Q2 (Apr) Reuters Research consensus EPS estimate of $0.24 on revenues that rose 25% year/year to $1.83 bln; Management noted 'virtually all of our major markets and all geographies [are] gaining momentum;' Agilent guided Q3 (July) earnings and sales to the high-end of analyst estimates
Computer Sciences (00C) +5% Computer services name turns in a 6% increase in Q4 (Mar) EPS to $1.01 (consensus of $0.99) and a 30% rise in revenues to $4.00 bln (consensus of $3.79 bln); Top-line increase came from its recent DynCorp acquisition, which helped drive US federal government sales up 65%; Management goes on to guide Q1 (Jun) EPS to $0.55-0.59 and FY05 EPS to $3.10-3.20, both in line with Street forecasts
EMC Corp (EMC) +1% After a two-week trial, a US District Court jury found that Hewlett-Packard's (HPQ) OpenView Continuous Access Storage Appliance (CASA) product infringes EMC's core patents related to the company's SRDF and TimeFinder software products; In addition, jurors also found that the 3 EMC patents in the suit to be valid over prior art cited by HPQ; EMC intends to seek an injunction based on the verdicts
JDS Uniphase (JDSU) +1% Fiber optic communications manufacturer announces the acquisition of privately held E2O Communications, which closed today for approximately $60 mln in cash; E2O develops and manufactures optical transceivers to support Fast Ethernet, Gigabit Ethernet, 10 Gigabit Ethernet,1X-4X Fibre Channel, 10 Gigabit Fibre Channel, ESCON, ATM and SONET; Sales in recent quarters have exceeded $5 mln; JDSU has over $1.6 bln in cash
Micromuse (MUSEE) -3% Software maker misses the revised Reuters Research top and bottom-line estimates in its Q2 (Mar) report after guiding higher on Feb 10; Company gives in line guidance for Q3 (June) EPS and revenues; Stock sells off tonight in a continuation of its slide in the regular session; MUSEE was down 5% off news it would have to restate results for FY01-02, and the quarters ending Dec 31, 2000 through June 30, 2003
Tomorrow looks to be another quiet day from an earnings and economic data perspective. Two economic reports are due out - April Housing Starts and Building Permits - and a handful of retail earnings reports are also slated to be released. Home Depot (HD) stands out as the most noteworthy.
For more detail on these, and other developments, be sure to visit our Stock Market Update and Daily Sector Wrap. -- Heather Smith, Briefing.com
4:30PM CNT misses by a penny, light on revs (CMNT) 5.39 +0.03: Reports Q1 (Apr) loss of $0.05 per share, $0.01 worse than the Reuters Research consensus of ($0.04); revenues rose 83.8% year/year to $96.2 mln vs the $97.8 mln consensus. Co states "Our results for the first quarter of 2004 were disappointing due to a combination of product mix, managed services orders and inventory lead times. Gross margins were lower than expected due to strong sales of third party products and some protracted customer decision making around large CNT product orders."
4:28PM CMNT prelim -$0.05 ex-items, penny below; revs $96.2 mln, vs $97.9 mln consensus :
4:05PM Millennium Pharm announces positive clinical data (MLNM) 13.62 +0.07: Co announces that in the final survival endpoint analysis in the phase III confirmatory APEX study comparing patients receiving Velcade to those receiving high-dose dexamethasone, it produced a statistically significant survival benefit. Both the interim data and the final survival analysis from the APEX study will be presented on Sunday, June 6 at the upcoming American Society of Clinical Oncology (ASCO) meeting in New Orleans, LA.
4:03PM Immunogen announces Shire Biochem to sell 4.1 mln shares of IMGN (IMGN) 8.57 +0.30:
4:01PM Teradyne and ASE announce agreement (TER) 20.36 -0.35: Co and Advanced Semiconductor Engineering (ASX) announced an agreement that integrates test system planning for all ASE sites and includes the volume purchase of over 90 Teradyne test systems. The order involves TER's Tiger and Catalyst test systems. The systems will be delivered to ASE's facilities over the next two years.
Close Dow -105.96 at 9,906.91, S&P -11.62 at 1,084.08, Nasdaq -27.61 at 1,876.64: The market spent the entirety of the session trading in negative territory, with sizeable losses, as numerous factors including the murder of the president of the Iraqi Governing Council, political turmoil in India, record-high oil prices, and sizeable losses in the European bourses pressured the trade... Despite all the negativity, the market was able to make some headway to the upside in the aftermath of a Reuters report indicating that the U.S. Military found an artillery round loaded with Sarin nerve agent in Iraq...
The move higher coincided and was supported by technical considerations, as the S&P 500 completed a successful test of its 200-day simple moving averages at 1080, which has acted as a formidable support for the market over the past 6 sessions... Despite the move off session lows, participants' conviction to the market was lacking, telling by anemic volume totals... Accordingly, the major averages spent the majority of the session trending sideways along its better levels of the session, which were still synonymous with notable losses...
The vast majority of the sectors spent the session trading in negative territory, with laggards of note including the hardware, internet, networking, semiconductor, software, telecom, biotech, banking, insurance, transportation, and broker/dealer groups, to name a few... Leadership to the upside was limited, although the REIT, gold, and oil services sectors closed the session with slight gains... Elsewhere, the bond market closed the session with gains across the yield curve and the 10-year note up 20/32, bringing its yield down to 4.69%... The NY Empire State report at 30.2 (consensus 34.0) demonstrated that the manufacturing sector continued to accelerate in the region in May...
Nevertheless, the report had little impact on the market, which continued to ignore upbeat economic, earnings, and corporate developments...NYSE Adv/Dec 1040/2287, Nasdaq Adv/Dec 750/2421
12:56PM Cisco Systems probing possible source code theft - Reuters (CSCO) 20.85 -0.39: -- Update -- Reuters reports that CSCO is investigating the possible theft of the source code that powers its networking equipment, the co said on Monday. The Russian Web site SecurityLab.ru reported on Saturday that the code was stolen from CSCO's corporate network, with some leaked onto the Internet, according to industry Web site LightReading.com. The Russian site estimated about 800 megabytes of source code was taken, LightReading said.
12:04PM Motorola appoints Michael Mayer as Chairman and CEO of Freescale Semi (MOT) 18.78 -0.11: Co announced that Michel Mayer has been appointed chairman and CEO of Freescale Semiconductor, a Motorola subsidiary that is expected to become a separate, publicly traded company later this year. Mayer's appointment is effective immediately. Mayer spent almost 20 years at IBM Corp, most recently as general manager of IBM Microelectronics, which develops and markets customized semiconductor products and services.
11:09AM McDATA says SVP of Marketing Gustafson will leave co (MCDTA) 4.81 -0.14: Co discloses in today's 8-K that Mike Gustafson, Senior Vice President of Marketing, will leave the co effective May 17, 2004, to pursue other opportunities. The co has initiated a search for candidates for the role of Vice President of Marketing, and individuals within the marketing team will be taking specific leadership roles until a suitable replacement is found.
10:11AM MIM Corp started with a Buy at Dougherty; tgt $12 (MIMS) 7.51 -0.14: Dougherty initiates coverage of MIMS with a Buy rating and $12 target; firm expects that a combination of rapid industry growth and continued consolidation activity will create a favorable environment in which MIMS can operate; and while the co has posted inconsistent operating results and suffered a series of setbacks over the years, they note that the stock has appreciated rapidly in the past when prospects brighten, and they believe that another turnaround is in the works. Firm also notes that MIMS trades at 7.7x trailing 12-month EBITDA, vs an avg of 12.8x for peers.
9:14AM Affiliated Computer and Gateway end relationship (ACS) 47.03: Co announces it will end its relationship with Gateway (GTW) due to Gateway's change of business strategy. The contract is being terminated following Gateway's March 2004 acquisition of eMachines, Inc., which has led to significant changes. As announced, Gateway has since closed its 188 retail outlets, which eliminated approximately 2,500 positions, and is instituting other efficiencies that will lead to the elimination of a further 1,500 positions. This has reduced its need for finance and accounting and human resources BPO services, as well as the need for outsourced IT infrastructure. These functions will, instead, be handled internally.
1:55PM Computer Network Tech (CMNT) 5.55 +0.19: Computer Network Technology is a provider of storage networking solutions. The company is scheduled to report Q1 results after the close. Management announced preliminary results on May 4. Pro-forma EPS is expected to be ($0.05)-($0.03) on revenue of $95-100MM vs. initial guidance of $0.02-0.05 on $95-100MM. Reuters Research consensus is at ($0.04) on $97.85MM.
Management attributed the projected shortfall in pro-forma earnings to lumpiness in demand, inventory lead times, orders for products with new features that weren't certified by quarter end, product mix, and managed service contracts to be recognized over the next few years.
GAAP EPS is expected to be approximately $0.10 lower than pro-forma results. Pro-forma results exclude amortization of intangibles, earn-out related to the BI-Tech acquisition and the sale of the ERP consulting business but includes income taxes at a 34% effective rate.
Port and unit shipments increased by over 70% Y/Y, excluding the acquisition of Inrange. Management sees continued strong demand for CMNT's FC/9000 Fibre Channel and FICON director products as enterprises increase capital spending in an improving economy.
The wide area networking and maintenance businesses are expected to grow in the single digits, and the large fiber channel directors business is expected to experience accelerated growth, driven by market share gains and new product introductions slated for later in the year. Third party revenue and consulting are also expected to be significant contributors to revenue growth.
CMNT shares are, based on our inverted EVA/DCF model, priced for sustained 5% revenue growth from F07 assuming 9% operating margin. Management's long-term target is for blended gross margin in the 45% range and operating margin in the 15% range. The company posted Q4 gross margin of 41.4%, +132 bps Y/Y, and operating margin of 5.4%, +394 bps Y/Y.
Relatively low expectations. Significant potential for upside to shares. Shares also attractively priced on a relative value basis. The following table shows price multiples and Y/Y growth rates for CMNT compared against industry comps. Company *P/SG **P/OPG P/S Y/Y Revenue Growth
TTM 2004E 2005E TTM 2004E 2005E
CNT (CMNT) 0.1 (3.2) 0.4 0.3 0.3 141.1% 20.5% 12.8%
Brocade Comm (BRCD) 1.6 (10.4) 2.4 2.2 2.0 (2.7%) 13.8% 12.6%
CIENA (CIEN) 5.1 17.5 6.4 5.1 3.7 3.5% 23.5% 39.7%
Cisco Systems (CSCO) 4.3 21.1 7.0 6.6 5.8 3.2% 16.6% 14.6%
EMC (EMC) 2.3 36.9 3.8 3.1 2.7 21.8% 29.3% 14.3%
Hewlett-Packard (HPQ) 0.6 15.6 0.8 0.8 0.7 18.4% 7.4% 6.2%
IBM (IBM) 1.1 11.7 1.6 1.5 1.4 9.7% 8.0% 6.1%
McData (MCDTA) 0.6 (51.7) 1.4 1.3 1.2 49.2% 3.7% 15.5%
QLogic (QLGC) 2.4 7.7 4.9 4.6 4.2 25.6% 4.9% 11.5%
Sun Microsystems (SUNW) 0.8 (18.2) 1.2 1.2 1.1 (6.9%) (4.1%) 1.6%
Veritas (VRTSE) 2.8 15.5 5.9 5.3 4.8 21.8% 16.4% 11.3%
Computer Sys & Peripherals 0.9 17.9 1.3 n/a 11.0% n/a
Software & Programming 2.8 35.7 4.9 6.7%
Blended 1.5 23.0 2.2 9.7%
*P/SG Ratio: Normalized Trailing 12 month (Price / Sales) / Growth ratio as of May 07, 2004.
**P/OPG Ratio: Normalized Trailing 12 month (Price / Operating Income) / Growth ratio as of May 07, 2004.--Ping Yu, Briefing.com
9:31AM Merix (MERX) 10.68: Merix lowered Q4 guidance last week. The manufacturer of printed circuit boards said Q4 EPS would come in at ($0.06)-($0.03) on revenue of $44.5-45.0MM (+45.0-46.6% Y/Y) vs. prior guidance of $0.19-0.22 on $46-48MM (+104.1-112.9% Y/Y) and Reuters Research consensus at $0.14 on $46.06MM. Gross margin is expected to be in the 9.50% +/- 25 bps vs. original expectations for 19%.
Management cited three reasons for the shortfall: 1) a lower level of premium services; 2) reduced orders and unit shipments to a major networking customer due to higher channel inventory levels; and 3) lower sales, and a loss on inventory due to a manufacturing process error.
The lower level of premium services accounted for approximately one-half of the impact on earnings; the manufacturing process error one-third; and lower unit volumes accounted for the balance.
MERX exited Q3 with utilization above 95%, compared with utilization rates in the 60-70% range at competitors. The company's book-to-bill has fallen from 1.05 at the end of Q3 to below 1.0 in May. It is only a matter of time before capacity utilization drops.
Management is proceeding with plans to double capacity. The initial phase of the expansion project is expected to increase capacity by 50% by December 2004; the final phase is expected to begin in H2:04 and will be completed in 12-18 months. This will put tremendous pressure on margins unless management is able to capture significant new business.
MERX shares have declined over 39% since the Q3 review, Story Stocks, March 25, 2004, when we suggested investors wait for a 20-30% pullback before revisiting name. We commented then that expectations were high, leaving little room for upside near-term; that the company's high capacity utilization suggested MERX had limited flexibility to grow volume though revenue, depending on ASPs (average selling prices), could trend higher. ASPs are declining but management noted that, pricing is up 1-2% after adjusting for product mix.
Shares continue to trade at a premium to peer group despite the pullback, and are, based on our inverted EVA / DCF model, priced for sustained mid to upper teens revenue growth from F06 assuming 18% operating margin. The following table shows price multiples and Y/Y growth rates for MERX compared against industry comps. Company *P/SG **P/OPG P/S Y/Y Revenue Growth
TTM 2004E 2005E TTM 2004E 2005E
Merix (MERX) 0.8 (39.8) 1.5 1.3 0.9 43.5% 65.3% 38.2%
DDi Corp (DDIC) 1.4 (7.3) 2.1 1.7 1.4 (3.3%) 31.4% 19.0%
Flextronics (FLEX) 0.5 (18.8) 0.6 0.5 0.4 8.6% 16.8% 11.8%
Sanmina-SCI (SANM) 0.4 (142.2) 0.4 0.4 0.4 9.9% 16.3% 13.0%
TTM Tech (TTMI) 0.9 9.2 2.1 1.7 1.4 89.0% 25.0% 22.2%
Electronic Instruments & Controls 0.7 241.2 0.9 n/a 7.4% n/a
*P/SG Ratio: Normalized Trailing 12 month (Price / Sales) / Growth ratio as of May 14, 2004.
**P/OPG Ratio: Normalized Trailing 12 month (Price / Operating Income) / Growth ratio as of May 14, 2004.
It is premature to buy into shares until there is clarity on the company's business trends and operating model. Management noted that the channel inventory build is for only one customer and overall demand remains on an uptrend. These issues are likely specific to MERX but evaluate the individual merit of each peer company.--Ping Yu, Briefing.com
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