From Briefing.com: 4:41PM Texas Instruments beats by $0.01, issues in line guidance (TXN) 22.92 +0.16:Reports Q1 (Mar) earnings of $0.24 per share, $0.01 better than the Reuters Estimates consensus of $0.23; revenues rose 1.2% year/year to $2.97 bln vs the $2.99 bln consensus. TXN reports gross margin 44.9% vs 44.3% street expectations. Co issues in line guidance for Q2, sees EPS of $0.25-0.29 vs. $0.26 consensus; sees Q2 revs of $3.00-3.24 bln vs. 3.18 bln consensus. TI inventories declined slightly from Q4, a period in which they were significantly reduced by $100 mln. "The market environment is improving. We believe the inventory correction in TI's standard semiconductor products at distributors that began in the third quarter of 2004 is complete, as demonstrated by sequential growth in revenue and orders for these products. We expect that the inventory correction associated with our DLP products used in high-definition televisions and projectors will continue into the second quarter, although the rate of reductions should subside,"
4:13PM Novellus reports in line EPS, beats on top line (NVLS) 24.30 +0.52:Reports Q1 (Mar) earnings of $0.22 per share, in line with the Reuters Estimates consensus of $0.22; revenues rose 29.2% year/year to $339.7 mln vs the $335.8 mln consensus. NVLS reports gross margin 45.3% vs 47.2% Street expectations. "The business environment is challenging but we remain cautiously optimistic that capacity expansion will continue in a rational manner. We are comfortable with our product portfolio and continue to improve upon our position within the PVD product category."
4:11PM Sonus Networks guides Q1 below consensus (SONS) 3.67 -0.06:Co issues downside guidance for Q1 (Mar), sees revs of $30-$34 mln vs. $41.23 mln consensus. Co expects to report a net loss vs consensus of $0.01 profit. Co says "We are disappointed that our revenue is lower than anticipated. The revenue shortfall is due to schedule delays for the conversion of certain shipments to revenue and the late renewals of several annual maintenance contracts....While we expect to recognize revenue below our previous outlook, our business continues to be strong with robust order activity in the quarter that is expected to result in an order to revenue ratio that is modestly below 2. This follows our record order activity in Q4. I am pleased with the healthy demand for our next-generation packet voice solutions both in wireline and wireless networks, and the expanding number of service providers that have adopted Sonus solutions."
4:08PM Trident Microsystems reports in-line, ex items; revs below consensus (TRID) :Reports Q3 (Mar) earnings of $0.03 per share, excluding non-recurring items, in-line with the Reuters Estimates consensus of $0.03; revenues rose 4.9% year/year to $16.1 mln vs the $16.6 mln consensus.
Close Dow -16.26 at 10071.25, S&P +3.36 at 1145.98, Nasdaq +4.77 at 1912.92: Market closed in mixed fashion, as investors juggled economic concerns with mixed Q1 earnings reports and new M&A activity... Both the S&P and Nasdaq posted modest gains on the day, but not even strength from roughly two-thirds of the Dow's 30 components were enough to shrug off a thrashing in shares of 3M Company (MMM 75.90 -4.96)...
While the conglomerate actually beat analysts' Q1 forecasts by $0.02 and issued in-line FY05 guidance, lower than expected sales due to slowdowns in Europe and Japan - similar in scope to the reason IBM disappointed investors last Friday - as well as concerns about organic revenue guidance, kept the blue chip index under pressure throughout most of the day... However, today saw a slew of new deals hit the wires which helped lend some support to a market concerned about slowing economic growth... The two most notable deals of the day included Adobe Systems' (ADBE 54.77 -5.89) proposed $3.4 bln acquisition of Macromedia (MACR 36.72 +3.27) and GameStop's (GME 23.71 +2.10) plans to acquire Electronics Boutique (ELBO 55.21 +14.09) for $1.4 bln...
Meanwhile, better than expected results from the remainder of today's reports, coupled with the merger news, some notable rating changes and arguably oversold conditions following an average 3.8% trouncing for the major indices last week, helped eight out of ten economic sectors close to the upside... Pacing the way higher amid renewed buying interest after losses of 10.0% and 7.7% over the last three trading sessions, were Energy (+1.8%) and Materials (+1.5%), respectively...
The latter got a boost from huge gains in Steel (+5.7%), Gold (+2.7%) and Diversified Metals (+2.9%) while energy shrugged off a modest decline in crude oil prices ($50.37/bbl -$0.12) and benefited from strength in Oil & Gas Refineries (+2.9%)... Financial (+0.8%) was also an influential leader to the upside, following Banc of America's (BAC 44.70 +0.42) better than expected Q1 earnings and an upgrade on JP Morgan (JPM 34.45 +0.52)... Technology also traded higher, as a strong performance in Semiconductor (+0.8%) - following analyst upgrades on Applied Materials (AMAT 14.86 +0.36) and Intel (INTC 22.21 +0.09) - offset weakness in Software (-0.6%) and Hardware (-0.5%)...
Health Care (-0.8%) and Consumer Staples (-0.5%), however - two of the only sectors attracting buyers last week - became today's only notable laggards... Health Care succumbed to modest profit taking in everything from Health Care Facilities (-2.9%) and HMOs (-2.3%) to Drug Wholesalers (-2.3%) and Pharmaceutical (-0.7%)... Not even upbeat analyst comments and stronger than expected Q1 results from Eli Lilly (LLY 59.00 +0.93) were enough to lift Drug stocks...
Providing a modest boost to equities midday were comments from Fed Governor Bies, who said longer-term inflation expectations remain "well contained" and that consumer and business "confidence remains favorable" - remarks that improved overall sentiment in stocks but took some steam out of Treasurys... Following the news, the benchmark 10-year note (-4/32) gave up modest gains and eventually closed lower to yield 4.25%, even though traders had no notable economic data to sift through today...DJTA +0.7, DJUA +0.6, DOT +0.4, Nasdaq 100 +0.1, Russell 2000 +0.8, SOX +0.8, S&P Midcap 400 +0.6, XOI +1.5, NYSE Adv/Dec 1951/1342, Nasdaq Adv/Dec 1528/1543
11:36AM Floor Talk: Dividend Plays :In light of recent market weakness and coming seasonally slow period for the equity markets, talk of dividend paying stocks as a place to hold cash has been increasing. The following is a list of co.'s that may benefit as investors seek dividends/place holders: T, ABS, BBT, BNG, BMY, CG, CIN, C, CMA, ED, DCX, DD, FJC, KEY, MYG, MRK, NOK, NHY, POM, PTR, PCL, PGN, SBC, SNY, SLE, STO, UL, WM, BSET, FITB AND WDFC.
11:18AM Coca-Cola confirms settlement with SEC and decision by Dept of Justice to close its investigation (KO) 41.09 -0.19:Under the settlement, the co has agreed to maintain certain measures that the co implemented prior to or during the last two years and to undertake additional remedial actions in the areas of corporate compliance and disclosure. The settlement does not involve a monetary fine or penalty. In addition, the co was also informed that the Department of Justice has decided to close its investigation.
10:47AM Sirius Satellite confirms Martha Stewart agreement (SIRI) 5.28 +0.13:-Update- SIRI and MSO announce an exclusive 4-year agreement to create and launch a Martha Stewart-branded satellite radio channel. The channel will provide original programming specifically designed for women listeners and their families, 24-hours-a-day, seven days-a-week.
9:21AM Gapping Down :NRMX -21% (announces clinical results of Fibrillex), PRXL -20% (guides lower; Baird downgrade), INGP -12% (Nasdaq poised to purchase Instinet - FT), ADBE -6.8% (to buy MACR), BIOI -4.4%, BEAS -4% (Smith Barney downgrade), CHKP -3.7% (reports Q1, guides in-line), ANTP -3.1% (extension of Friday's 25% drop), GME -2.8% (to merge with ELBO), XRX -2.7%... Under $3: VNWI -9%, ATML -6% (guides lower).
9:05AM Gapping Up :CVTX +15% (meets primary endpoint in approval-enabling ERICA study; First Albany upgrade), PACT +12% (reports Q4), MACR +15% (to be acquired by ADBE), TIVO +7% (CNET reports that co in talks with GOOG and YHOO re possible merger), ONXX +6.7% (clinical data), CEGE +6.6% (clinical data; mentioned in Barron's), SANM +5.8% (Morgan Stanley upgrade), WGAT +5.5%, POTP +5.5% (positive clinical data), TZOO +4.2% (Legg Mason upgrade), GLW +4.1% (guides higher; up in sympathy: CIEN +3.1%, JDSU +2.7%)... Under $3: TMTA +21% (guides higher), PPHM +13% (clinical data), ACPW +12% (upgraded to Top Pick at RBC; tgt $6), ADSX +5.6%.
8:32AM Gamestop announces merger agreement with ELBO; expects to be 'significantly' accretive in 2H05 (GME) 21.60 :GameStop Corp. (GME) and Electronics Boutique Holdings Corp. (ELBO) announced that they have entered into a definitive agreement and plan of merger. The combined company, to be named GameStop Corp., will be a leading global video game retailer with annual revenues of approximately $3.8 bln. Under the terms of the agreement, ELBO shareholders will receive $38.15 in cash, plus the equivalent of 0.78795 shares of GME Class A common stock for each share of ELBO. Based on the closing price of GME's Class A common stock of $21.61 on Friday, 4/15, the stock component of the per share merger consideration is $17.03. The total merger consideration per share of $55.18 represents a 34.2% premium to the closing price of Electronics Boutique's stock as of Friday, April 15, 2005. The total transaction value is approx $1.44 bln with consideration consisting of approx 70% cash and 30% common stock. GME intends to fund the cash portion of the transaction through the issuance of $950 mln in senior bonds and excess cash. This transaction is expected to be significantly accretive to GameStop's fully diluted earnings per share in the second half of fiscal year 2005, and in fiscal years 2006 and beyond. The combined company expects to realize meaningful pre-tax synergies beginning in fiscal year 2006.
8:11AM Corning trades up 7.6% in pre-market on guidance (GLW) 11.10 :-Update-
1:07PM Bank of America (BAC) 44.60 +0.32: The third largest bank in the US reported earnings Monday before the open topping estimates through growth on the consumer banking side, along with its acquisition of FleetBoston Financial. Excluding merger and restructuring charges of $75 mln after tax, earnings were $1.16 per share up 18% from the fourth quarter and $0.19 better than the Reuters Estimates consensus.
The results were a bit lumpy with EPS including $659 mln in securities gains for what it called "repositioning for interest rate moves," tacking on an additional dime. In addition to another five cents added from loan loss reserve releases of $309 mln. Revenues soared 46.4% year/year to $14.2 bln vs the $13.8 bln consensus. Volume growth in loans and deposits generated a 1.5% rise in net interest income up 2% q/q. Core deposits rates were up less than its peers up 11 basis points.
Loans grew 2% q/q with BAC noting "equal strength in commercial and consumer," which is a good sign. On the consumer side, which makes up 63% of its total loan portfolio, home equity (+29%), and credit cards (+13%) made up the bulk in loan growth, although mortgages were roughly flat. Commercial activity was "broad-based" up 7% on an annualized basis from last quarter. Overall credit quality improved, albeit higher credit activity increased card losses.
Non interest income increased 3% q/q on higher trading profits and mortgage banking. On the downside were seasonal declines in consumer credit card income and services charges resulting from seasonal shopping patterns. Investment banking was a weak spot for the quarter, with IB-related assets up 3% on an average basis and fees falling 22% reflecting lower market activity. However, a volatile market helped with trading-related revenues, which were up 74%. While assets under management were $433 mln, down due to market declines and outflows.
On the expense side, non interest expenses, excluding merger and acquisitions, dropped 2%. Its efficiency ratio was 49%. BAC was able to reduce costs across the board with the exception of personnel (+5% q/q). With regard to its merger with Fleet, BAC stated its cost savings are on track reaching $43 mln in Q1 with a run rate of $437 mln.
Overall, it was another solid quarter from Bank of America. The upside was generated on the trading side, in addition to net interest income and continued expense controls. Loans, credit, and market-related activities were also better, offsetting weaker investment banking. Shares remain cheap as investors shy away from the Banks with interest rates on the rise. Performance will continue to be less about earnings and more about the markets' perceptions towards the Financial sector. We expect the group to regain some allure after rates steady. The stock is roughly flat since the beginning of the year after peaking last month now trading at 12x, vs. its peers at 13.2x. -----Kimberly DuBord, Briefing.com
1:02PM Trading Call of the Week -- W.R. Hambrecht's Hutchinson on FDRY ($8.68) and XXIA ($16)
A belated Trading Call of the Week goes to Ryan Hutchinson, analyst with W. R. Hambrecht, who demonstrated his knowledge of the networking industry with a fabulous note he put together on Foundry Networks.
Hutchinson went out on April 5, telling shareholders to beware of weakness in FDRY’s federal business, which makes up about a quarter of the company’s revenue. He noted that a preannouncement at Polycom, maker of videoconferencing devices, foretold of possible warning at FDRY for the same reason.
Sure enough, Foundry shares fell as much as 9% last Wednesday, following its profit warning, which the company attributed to weakness in both federal government orders and sales to North American business customers. Foundry’s stock has slipped more than 10% to-date since Hutchinson’s note.
Following his call, we wanted to know what other networking names Hutchinson was eyeing in the short-term. He told us he’s closely watching Ixia (XXIA), provider of high-speed performance testing and analysis systems for networking and communications equipment. Ixia’s products are used in the design, manufacturing and quality assurance stages of network equipment development.
Ixia has been a high-flier over the past eight months, rising to more than $19 a share in March, up from less than $6 a share in August. Yet the stock has sold off in recent weeks, and is now below $16 and under its 50-day moving average, due to worries about customer spending.
Recent warnings from Foundry and Extreme Networks (00C0), a customer and a past customer, respectively, seem to have reinforced shareholders’ worries about XXIA. Hutchinson says some shareholders are trying to “connect the dots,” thinking that the preannouncements mean XXIA’s revenue will be weak when it reports results on April 21.
Yet Hutchinson notes that XXIA’s revenue is dependent on the research and development budgets of networking-equipment customers, not their earnings. And he says that the R&D budgets of those customers have either stabilized on increased in recent quarters. He adds that new protocols in the industry (voice-over Internet protocol, a move from Internet protocol v. 4 to v. 6, and others) continues to drive a need for more testing equipment – and that XXIA remains the largest test and measurement provider.
Hutchison told us late last week that he expects XXIA to report another “record quarter”, and that subsequently, the stock should show upside from its current price, near $15.75.
We at Briefing.com think we would still only own XXIA with a stop-loss (perhaps somewhere around $15), just in case Hutchinson’s theory doesn’t play out. It’s not that we’re passing judgment on Hutchinson’s idea, it’s just that it can be more volatile than usual to trade stocks just ahead of earnings reports, and it's a good idea to take precautions – Mike Tarsala, mtarsala@briefing.com.
10:34AM Macromedia (MACR) $36.60 3.15 (9.42%) Adobe's (ADBE) acquisition of Macromedia is yet another strong confirmation that the enterprise software market is well into the consolidation phase. The acquisition premium for Macromedia could be viewed as "not all that high," particularly in light of the 60% premium that Computer Associates paid for Concord Communications just 10 days ago. Nevertheless, when a $13 billion company whose earnings growth forecast is 9% buys a $2.5 billion company whose earnings growth forecast is 27%, it is a pretty strong indicator of a consolidation phase.
At first glance, it seems like Macromedia's acquisition price is a little on the "cheap" side, given the small market premium. However, if the deal is deemed to be a tax-free stock swap (the announcement is mute on the subject), it provides an added benefit to MACR shareholders. In addition, considering that MACR traded at the $20 level just six months ago, this looks like a good exit plan.
Much is being made about how this combination might threaten Microsoft's dominance of the desktop document world. While that is possible, the bigger implication that investors should consider is how the entire landscape of the enterprise software world is changing. Although a lot of very large acquisitions have been made since the Oracle victory in court allowing them to have Peoplesoft, there are more to come. In fact, we are probably still in the first quarter of this major league game.
That means the more important forward looking issue is not how ADBE/MACR battles MSFT, but: who does this acquisition motivate to move faster? You can bet that at this very moment, there are a dozen or more conference tables crammed with management teams trying to figure out how to remain strong. There are also investment bankers on the phone trying to inject their own ideas into those discussions. A certain level of frenzy is now beginning and it is very possible that the best action in the market between now and August will be the enterprise software acquisition plays.
Here are just a couple of first thoughts on "who's next." At the tools level, Symantec/Veritas merger needs to add more muscle to their product suite, even though they haven't closed their own merger yet. Infosys (INFY) also needs to become stronger horizontally. Computer Associates' (CA) acquisition of Concord Communications is probably one a first step. IBM might even try to turbo-charge their stalled growth engine by more software acquisitions. Appetizing small fish for that crowd probably includes Mercury Interactive (MERQ), Citrix (CTXS), Compuware (CPWR), Tibco (TIBX), or Progress (PRGS).
At the application level, the acquirers are likely to be the large cap companies with minor presence in applications. Oracle (ORCL) is the best example, but they won't be the last tools company to buy their way into the more valuable application level. Our picks for the best targets at the application level were made in the Ahead of the Curve series of articles after the Q1 results reported in January/February. See the Briefing.com Ahead of the Curve column of 23-Feb-05 Ent. App. SW Acq. Candidates VIII: Update on Picks, for the details, including the methodology used to select them.
Two years from now, the enterprise software market will look completely different. Instead of the more than 200 companies of all sizes today, the remaining players will probably number around 50. Of those, only the top dozen or so will have meaningful market share. Now that this vision is sinking in, the possibility of a real frenzy developing between now and the fall is very high. Fortunately, there are still a lot of good acquisition candidates out there - we'll profile some more in upcoming articles. - Robert V. Green
8:51AM Page One - Bad, but not Horrible, as Economic Concerns Are Overdone : Stock futures were down sharply early this morning. They have come back as the open approaches. A near flat open seems likely.
Last week, concerns about a slowdown in economic growth intensified. Consumer spending, manufacturing output, and payroll growth all slowed in March. Yet, this doesn't mean the end of the world.
There are always bumps in any economic recovery, and the economy has been growing so strongly for so long now that investors are overreacting to any signs of weakness. Real GDP growth has averaged 3.1% since 1970. The economy probably slowed to a pace equivalent to that in the first quarter. Yet, that hardly means a recession is around the corner.
One month of sluggish consumer spending does not mean that the decades-long uptrend is suddenly over. A similar fear developed last summer, and the stock market dropped significantly. But consumer spending returned to a steady uptrend within a couple of months. There is no reason so suspect that consumer spending will suddenly stop in its tracks now.
Business investment will also support economic growth. Corporate cash flow is simply too strong. Real GDP growth will slow over time in response to higher rates, but the Fed will guide it towards its long-term trend rather than below it.
That will eventually lead to a market opportunity for investors. It may not be for a while, but with the price/earnings multiple on the S&P 500 at just 16.5 for operating earnings through the first quarter, a steadying in the economic outlook in a few months will make valuations appealing.
The news this morning shows that all is not bad. Earnings numbers from major companies such as 3M, Bank of America, Sun Trust, and Eli Lilly all beat expectations. Oil prices have dropped below $50 a barrel (good news no matter what some bears would have us believe). Briefing.com has advocated a defensive posture for months, and we still feel that way. The market could slide even further. But the bad news is overemphasized right now, and this too will eventually change.--Dick Green, Briefing.com
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