From Briefing.com: 8:07PM Swing Trader: Signs of a Bottom in Place? : -Technical- The markets gapped open high off Wednesday's low and after some bullish mid-day economic data, it continued to trend higher throughout the afternoon. Market Breadth was mixed as Advancers outpaced Decliners about 2.7 to 1 and New Lows continued to exceed New Highs. So are there signs of bottom in place?...(Continued)
5:08PM Silicon Image beats by a penny (SIMG) :Reports Q1 (Mar) earnings of $0.09 per share, excluding non-recurring items, $0.01 better than the Reuters Estimates consensus of $0.08; revenues rose 38.2% year/year to $44.3 mln vs the $43.8 mln consensus.
5:00PM Broadcom on Conference Call: sees Q2 revs of approx $572-577 mln; Reuters consensus is $569.2 mln (BRCM) 30.40 +0.95:
4:48PM Broadcom beats by a penny, beats on top line (BRCM) :Reports Q1 (Mar) earnings of $0.23 per share, $0.01 better than the Reuters Estimates consensus of $0.22; revenues fell 4.0% year/year to $550.3 mln vs the $542 mln consensus. "Looking forward, we are experiencing a strengthening in customer orders, leading us to believe that many of the customer inventory issues that affected our fourth and first quarter results are now behind us."
4:45PM Silicon Storage Q1 in line, co guidance is for wider Q2 net loss; co is looking for new CFO (SSTI) 3.35 +0.20:Reports Q1 (Mar) loss of $0.14 per share, in line with the Reuters Estimates consensus of ($0.14); both reported and consensus losses include a $9.7 mln inventory adjustment, primarily due to a decline in the pricing of several of SST's products. Revs fell 17.3% year/year to $86.3 mln vs the $85.9 mln consensus. Co issues mixed guidance for Q2, sees loss of $-0.20-0.28 vs. -$0.13 consensus; sees Q2 revs of $88-90 vs. $86.35 mln consensus. Co says on April 18, 2005, the board started to search for a new CFO; Jack K. Lai will continue to serve as SST's chief financial officer until his successor is retained, at which time SST expects that Lai will transition to a different role w/in the company.
4:30PM SanDisk beats Q1 consensus by $0.07, gross margin above Street expectations (SNDK) 27.88 +0.91:Reports Q1 (Mar) earnings of $0.39 per share, $0.07 better than the Reuters Estimates consensus of $0.32; revenues rose 16.6% year/year to $451 mln vs the $469.2 mln consensus. Product revs rose 18% and royalty revenue grew 7% vs. yr ago. SNDK reports gross margin 44.3% vs 38.6% Street expectation. Co says shipments from 90-nanometer chips rose to more than 80% of Q1's captive supply, as yields exeed expectations.
4:30PM Pericom Semi reports in line (PSEM) :Reports Q3 (Mar) earnings of $0.01 per share, excluding non-recurring items, in line with the Reuters Estimates consensus of $0.01; revenues rose 1.0% year/year to $19.4 mln vs the $19.2 mln consensus.
4:29PM Pericom Semi reports in-line; provides outlook for Q4 (PSEM) :Reports Q3 (Mar) earnings of $0.01 per share, in line with the Reuters Estimates consensus of $0.01; revenues rose 5.2% year/year to $19.4 mln vs the $19.2 mln consensus. For Q4, Co expects revenues to be up within a range of 6-10% from the prior quarter depending on the strength of turns orders
Close Dow +206.24 at 10218.60, S&P +22.45 at 1159.95, Nasdaq +48.65 at 1962.41: Robust earnings, optimistic economic data and promising M&A deals charged up the bulls, as huge gains across the board erased Wednesday's weakness and lifted each of the major indices at least 2.0%... Better than expected Q1 earnings from the majority S&P companies out with results today (28 of 42) was the driving force behind today's broad-based rally...
In addition to upbeat Q1 reports from Nokia (NOK 16.38 +1.04), Motorola (MOT 15.90 +0.97) and eBay (EBAY 32.96 -0.15) last night, strong reports from a multitude of blue chips this morning - from Merck (MRK 34.34 +0.27) to Marriott (MAR 63.35 +1.15) - further alleviated concerns that profit growth is not slowing... The notion that the market may be oversold, as the major averages have averaged an 8.4% loss so far in 2005, also created bargain hunting opportunities as the Dow bounced off the psychological 10,000 level and soared more than 175 points for the first time since Nov. 4, 2004... Uplifting economic data also helped underpin a bullish bias and diminish recent indications of economic softness...
Initial claims fell 36K to 296K (consensus 329K) - the largest decline in more than three years - during a key week in which the April employment survey was conducted... A stronger than expected jump in the April Philadelphia Fed's index, to 25.3 (consensus 10.0) - the highest level since December - countered the recent plunge in the April NY manufacturing index and also raised doubts about whether economic growth has actually slowed as much as the market has recently thought...
Meanwhile, a $17.6 bln cash and stock deal for bankrupt Adelphia, a $14.2 bln buyout of Allied Domecq (AED 50.93 +0.81) and the $3.5 bln merger between the NYSE and Archipelago (AX 27.15 +8.39) - which will take the Big Board public - also contributed to an improved sentiment that closed all 10 economic sectors in positive territory... Energy paced the way higher, helped in part by a rebound in oil prices, while Industrials and Consumer Discretionary also surged more than 2.0%... While crude oil futures ($54.20/bbl +$0.17) were under pressure most of the day, amid reports that OPEC will increase oil production capacity, the commodity closed modestly higher amid news that militants attacked a security checkpoint in Mecca, Saudi Arabia...
Technology (+3.2%) was strong across the board, as gains in excess of 2.0% in everything from Semiconductor to Software helped the Nasdaq soar 2.5% -- the Composite's best one-day gain since Dec. 1, 2004... Transportation (+3.5%) also soared - recording its best performance in nearly two years - aided by stronger than expected earnings from United Parcel Service (UPS 70.61 +3.35) and Union Pacific (UNP 64.92 +1.59) as well as bargain hunting in air carriers Northwest Airlines (NWAC 5.94 +0.54) and Delta Air Lines (DAL 3.90 +0.25), even though both posted wider than expected losses...
Health Care (+1.4%) was also strong, taking full advantage of strong Q1 earnings from the likes of ABC, GDT, ROH and BAX... Financial - the most influential of the 10 economic sectors - was the worst performer, in the face of rising bond yields as well as a 94% drop in Q1 profits and FY05 EPS warning from MBNA (KRB 19.28 -3.83), but still managed a solid gain... Treasurys, however, were weak all day long, as the benchmark 10-year note finished near session lows, down 29 ticks to yield 4.30%... Bonds initially lost ground after weekly jobless claims plunged to a 10-week low, but they fell even further following an unexpected jump in Philly Fed...
Fed Chief Greenspan testified before the Senate Banking Committee on deficits and budget reform, but his comments had almost no impact on the bond market... Separately, Mar. leading indicators fell 0.4% - its seventh decline over the last 10 months - but as a lagging indicator providing a very false read on the strong economic momentum, the data have had little impact on market activity...DJTA +3.5, DJUA +1.3, DOT +3.4, Nasdaq 100 +2.9, Russell 2000 +2.4, SOX +2.8, S&P Midcap 400 +1.8, XOI +2.3, NYSE Adv/Dec 2416/881, Nasdaq Adv/Dec 2219/845
3:10PM ATMI sells its minority interest in Emosyn to Silicon Storage Technology (ATMI) 23.09 -0.18:Co announces that it has sold its 16.4% minority interest in the Emosyn smart card business to SSTI for $3.1 mln. In Sept 2004, ATMI announced that it had sold its Emosyn smart card business to SSTI through a newly formed subsidiary, Emosyn Int'l. ATMI had retained a 16.4% ownership position in that original transaction. Effective with the consummation of this current transaction, ATMI is selling that remaining portion, whereby Emosyn will become a wholly-owned subsidiary of SSTI.
10:22AM Forward Industries reports Q2 results (FORD) 12.88 +2.14:Co reports Q2 EPS of $0.27, vs $0.08 in 2Q04. Revs rose 125% to 11.24 mln, vs $5.0 mln YoY. "Based on our expectation that the strong demand for our products being bundled with certain of Motorola's and Nokia's handsets will continue through our third quarter, with difficulty in assessing periods beyond that time, coupled with the overall strength of our other product lines, and our belief in the success of our longstanding relationships with our OEM customers, we remain very optimistic about Forward's prospects for the remainder of the year..."
9:21AM Merck earnings color, quarter was in line (MRK) 34.07 :-Update- There was some confusion earlier regarding the Q1 EPS consensus for MRK. Reuters consensus is $0.62, which has been updated to reflect company's April 13 guidance of EPS of at least $0.62, and therefore comparable to the $0.62 MRK reported today. The other consensus number of $0.59 being talked about in the market does not appear to reflect the updated guidance.
9:19AM Gapping Down :Gapping down on disappointing earnings/guidance: DECK -10%, OMCL -26%, BE -23% (also multiple downgrades), AGYS -15%, KRB -10.2%, ENDP -7.5%, EYET -5.2%, GSLI -4.5%, TSCO -4%, FFIV -3.6%, MTSN -3.2%, MERQ -3.1%, VLO -2.7%, CTXS -2.5%.
8:59AM Gapping Up :Gapping up on strong earnings/guidance: NOK +5.8% (also Pru upgrade; up in sympathy: ERICY +3.7%), MOT +5.5% (also Smith Barney upgrade), WHR +5.4%, GDT +5.4%, UPS +4.8%, SGP +4.6%, SAP +4.5% (also Smith Barney upgrade), EBAY +2.5%, VRSN +11%, VDSI +11%, AVCI +11%, FORM +8.3% (also upgrades from CIBC and Needham)... Other News: AX +38% (to merge with NYSE; up in sympathy: LAB +14%, INGP +5.3%), POZN +34% (Phase III trial data for Trexima), DCLK +16% (to be acquired by Hellman & Friedman -NY Post; up in sympathy: TFSM +14%), JMDT +10.8% (buys Tetris game; guides higher), TASR +8.4% (receives UK order), ARBA +7.4% (partners w/ Sabrix), MOBE +5.5% (Apple to sell adapter), BOOM +5.4%, TLAB +2.8% (Goldman upgrade).
9:41AM Agilysys (AGYS) Raymond James downgrades Mkt Perform to UNDERPERFORM . Raymond James downgrades AGYS following warning. Firm says given the severity of the miss, they believe AGYS should be a source of funds, as earnings visibility has taken a serious hit, calling into question the co's ability to grow revenue and EPS in FY06 barring restructuring actions. Also, they think that due to much lower sales volumes, gross margins are likely to be negatively impacted by at least 50 basis points, and are surprised that what appears to be a 4% YoY revenue decline that has translated into an EPS decline of more than 70%.
9:40AM FormFactor (FORM) Needham & Co upgrades Hold to BUY. CIBC upgrades FORM following Q1 report, based on higher 2005-06 sales estimates as demand and capacity constraints appear more significant than previously expected. They note that gross margin is also outperforming on better volume, favorable mix and superior yields in new facility. Firm says they would accumulate the shares through 2Q for upside to guidance once new facility ramps.
9:40AM Anteon (ANT) Raymond James upgrades Outperform to STRONG BUY. Target $43. Raymond James upgrades ANT given firm's view that recent award activity, coupled with several unannounced contract wins and other deals that allocate ANT a high probability of success of winning, will drive accelerating organic growth. At roughly 19x their 2005 EPS estimate and a slight discount to peers, they believe the story is extremely attractive from a risk/reward basis.
9:39AM Precision Drilling (PDS) Raymond James upgrades Mkt Perform to OUTPERFORM. Target $85. Raymond James upgrades PDS based on the recent correction in the Oilservice stocks coupled with their increasing expectations for 2006 Canadian oilfield service activity. Firm increases their 2006 industry forecast based on continuing strength in commodity prices, which they believe will translate into increased oil field spending.
9:38AM Nokia (NOK) Prudential upgrades Neutral to OVERWEIGHT. Target $19. Prudential upgrades NOK following strong Q1 report, based on an improving operating outlook for FY05 and the co's ability to benefit from the solid WCDMA growth opportunity in 2005. Firm thinks the co appears to be seeing improving handset momentum as they head further into 2005. As the wireless handset mkt leader, they expect the co to benefit from the global growth in wireless handset sales and the ramp in WCDMA services over the next year.
9:34AM Vertex Pharm (VRTX) Needham & Co initiates BUY. Target $13. Firm believes that the co is poised at an upward inflection point in 2005 based on: 1) co guidance exceeding projections for new collaborative rev and HIV product sales, and 2) the potential for a stock catalyst from progress in the hepatitis C franchise in 2Q05 with reporting of data from the Phase 1 trial of VX-950 as well as completion of enrollment of the Phase 2b trial of Merimopodib.
9:33AM Cincinnati Fincl (CINF) Legg Mason downgrades Buy to HOLD. Legg Mason downgrades CINF following Q1 report, saying that although they anticipate very little underwriting margin erosion in 2005, limited premium growth and fairly significant book value contraction suggest that the shares are appropriately valued considering the co's short-term prospects.
9:32AM Sterling Banc (SBIB) Piper Jaffray upgrades Underperform to MARKET PERFORM. Target $12 to $13. Piper Jaffray upgrades SBIB following Q1 report. Firm says while the co is facing a flattening yield curve and increasing competition in Texas, they believe the the co is facing those challenges well as evidenced by the Q1 results.
9:31AM Applix (APLX) Wedbush Morgan initiates BUY. Target $7.5. Firm expects the co's robust rev growth will continue, driven by active sales force hiring and a strong product cycle. They also believe the co's products for enterprise planning, and for financial consolidation and reporting, will help the co maintain its rev momentum.
9:24AM Allied Defense (ADG) Friedman Billings upgrades Mkt Perform to OUTPERFORM. Target $22 to $25. Friedman Billings upgrades ADG saying the catalyst is the award of a Battlefield Effect Simulator contract worth $11 mln. Although a modest contract, firm says it should be the first of many as ADG replaces Diehl as the preferred supplier of the U.S. Military.
9:24AM Orthovita (VITA) Brean Murray initiates BUY. Target $6. Firm believes VITA is a buy at current levels, based on the co's broad synthetic biomaterial platform, solid development pipeline, 17 consecutive quarters of revenue growth, expansion of the direct sales force, and the projected growth in the orthopedic market. They note that the co introduced 29 new products in 2004, and believe sales should benefit in 2005. In addition, they expect the co to introduce at least 6-8 new products each year through 2007.
9:23AM eBay (EBAY) Janco Partners reiterates MKT PERFORM. Target $45 to $35. Firm believes the deceleration in eBay's U.S. market and continued weaker than expected conditions in Germany suggest some degree of saturation in eBay's most established and traditional markets. They continue to have concerns as to whether growth in the eBay power seller community is sufficient to drive sustainable revenue growth in the current range for eBay. Maintains Mkt Perform.
3:29PM McDonald's Corp. (MCD) 29.75 -0.19: A plethora of successful menu additions and most recently its new i'm lovin' it campaign has resulted in the world's largest restaurant chain achieving two consecutive years of positive same-store growth. With fast food a part of the American culture, McDonald's is secure in its market position as the world's largest restaurant chain. But, the owner of the golden arches has not rested on its laurels, revitalizing its business by expanding its menu aimed at offering customers products for a healthier life-style.
Results for the first quarter came in-line with expectations with earnings of $0.43 per share, excluding a one-time $179 mln tax audit settlement, up 7.5% from last year. The company raised its estimates just last week. Sales of higher price products like premium salads helped to drive revenue growth in the US +5.2%. Total consolidated sales grew 6%, excluding currency gains of 3%, to $4.68 bln. Its European operations have been a challenge, which the company has blamed on slow economic growth and higher unemployment. For the quarter, comp sales rose 6.6% due to price discounts, new one-euro menu options, better service, and an expanded menu offering topping the consensus of +2-3%. This was a significant turnaround from last year's period, which declined by 2.9%.
Same-store sales in March rose 6.8% up from 5% last year, which includes worldwide stores open at least 13 months. This was a standout month due to the new chicken product offering and an early Easter. Comp sales in Asia, the Middle East, and Africa rose 7.3% above the Briefing.com consensus of 4-5% and up from 2.7% last year. February comps rose 1.6% (vs +0.6% Briefing.com consensus) and Jan comps rose 5.2% (vs +2.5% consensus).
McDonald's has gone through considerable turmoil over the last year with the sudden death of its former CEO Jim Cantalupo, followed by the stepping down of Charlie Bell who also passed. Its success at weathering these leadership challenges speaks to the strength of its culture and depth of its management talent. This Oak Brook, Illinois-based company continues to move forward revitalizing its business on the top and bottom line. The new product offering raises, even sometimes doubles the average ticket price for a meal. New products this year include espresso drinks, which will be tested in some of its stores this summer, and possible deli sandwiches.
Overall, this was a strong quarter as McDonald's was able to drive top as well as bottom line growth. The reversal of fortune in Europe is a positive sign, now it must sustain the pace. Concerns over the tempo of growth, multiple expansion, and increased competition have weighed on shares. This Dow Industrial component is down 7.3% vs. the S&P 500 -5% and the DJI -6%. Shares trading at 15x forward earnings below its 5-year historical average of 17.8x. With its defensive characteristics, current levels offer investors a reasonable entry point to ride out this volatile market. However, be mindful that shares are currently teetering on the 200-day moving average a significant technical level. Performance throughout the year will be driven by the sustainability and trajectory of comps, improved profitability, and managing higher food commodity and energy costs. ---Kimberly DuBord, Briefing.com
12:33PM SAP AG (SAP) $39.29 +1.80 (+4.8%) SAP 2005 Q1 results add up to a single conclusion: the application level of the enterprise software market is the segment with the greatest demand and pricing power - and SAP is the dominant vendor in the space. SAP beat revenue and earnings estimates slightly, although currency gains helped earnings somewhat. Revenue was $2.2 billion versus consensus estimates of $2.18 and earnings were $0.27 versus $0.26 estimates. Every product segment showed strong growth from the year prior (except PLM).
Particularly encouraging was the growth in the SAP NetWeaver product line, which saw sales almost 4 times higher than a year ago (26 million euros versus 7 million euros). The reason that sales of SAP NetWeaver are so meaningful is that there is only one reason to buy it: to link multiple SAP products together on a single network platform. That means SAP is doing a good job of cross-selling into their single-SAP product customers and making them SAP suite customers. Those customers were will extremely hard for a competitor like Oracle or Siebel.
Also encouraging is the fact that growth had a strong driver from the US, in contrast to almost all other data points that show the enterprise software market as fairly flat overall. In fact, the implication it that the overall enterprise software market must be clearly declining, since SAP is showing growth in the 17% range and has the largest market share. In fact, this quarter increases SAP's market share lead against its self-defined peers (MSFT, SEBL, and ORCL/PSFT) to 38% from the year ago 34% share. SAP seems to be just slowly and steadily increasing its dominant position in this market.
It is very clear from these strong results like this that SAP is bucking the trends that other enterprise software vendors are facing. Enterprise software companies, particularly those without application level products, are experiencing pricing pressure, declining sales, and trends of maintenance revenue as a increasing percentage of total revenue. All of those elements are signs of a software company that has saturated the market its products. SAP's last few quarters have shown exactly the opposite of these overall marketplace trends.
In fact, the trends are so clear, that on the conference call, one one analyst expressed difficulty "reconciling" this quarter's results against the much more moderate guidance SAP gave for the coming quarter. SAP's response was that Q1 just happened to have great execution and that market conditions are too risky to justify raising guidance for Q2. However, to us, it looks more like caution on SAP's part and a conscious attempt to avoid the backlash that would occur if they missed raised guidance. If you disregard all management comments and just focus on the revenue and earnings trends, SAP is likely to beat estimates again next quarter.
When you add it all up, SAP is the company to beat in the enterprise application space, but no one is currently presenting a serious challenge. Siebel used to be a "contender" against SAP, but the company seems deeply stalled in the conversion from the traditional Siebel product to the new On-Demand CRM product. Oracle acquired Peoplesoft specifically because the Oracle products that compete with SAP proved ineffective. But the Peoplesoft products haven't shown any lasting competitive ability against SAP either. At the moment, it looks like SAP is simply go to get incrementally bigger, quarter-by-quarter, and become an increasingly harder company to compete against. Robert V. Green
10:56AM eBay Inc. (EBAY) 32.54 -0.61: Stronger than expected results from eBay added to the positive tone in the market before the open. The online retailer posted its first quarter after Wed's close with earnings of $275.5 mln, or $0.20 per share, excluding items - up 25% year/year and two cents ahead of the consensus. Earnings were assisted by acquisitions and currency gains. On the top line, revenues rose 36.5% year/year to $1.03 bln on par with expectations. Yet despite the headline beat, by the time the market opened the tone around eBay's shares turned negative pushing the stock lower by 2%.
Nevertheless, eBay started the year off on the right foot posting a solid quarter. Consolidated net revenues hit a record of $1.032 bln - up 36% y/y. The US accounted for 39% of total sales at $404.8 mln - up 20% y/y. Growth within the international market place outpaced the US, accounting for 38% of total sales up 52% to $393.8 mln. This trend is likely to continue with international outweighing the US by the end of the year. Its PayPal division continues to show strong growth trends up 47% y/y to $233.1 mln in revenues, registering 71.6 mln total accounts - up almost sixty percent.
The challenge the online auctioneer faces is driving growth and penetration in the more mature markets like the US and Western Europe. CEO Meg Whitman addressed this issue saying eBay was looking into new marketing strategies including partnerships with mobile phone VoIP providers, along with promoting its "Buy It Now" feature, in the upcoming quarters to entice online consumers to buy.
Now onto the various metrics used to decipher the growth environment for the quarter. eBay ended Q1 with 147.1 mln cumulated confirmed registered users up 40% since last year. Active users increased 34% to 60.5 mln, roughly equivalent to the population of the United Kingdom. New listings rose 32% y/y to 431.8 mln, including 32 mln in new eBay Stores listings. Since eBay's revenues is derived in part from a percentage of the final auction price watching GMV (Gross Merchandise Volume), or the total value of all successfully closed listings, is meaningful. This figure rose 32% to $10.6 mln. Its "Buy It Now," or fixed priced listing, represented 30% of GMV. eBay has been able to drive growth by raising the average price of goods sold through various means including adding security for funds transfer by way of PayPal.
Proforma operating income gained 28% to $367 mln with operating margins of 35.6% down y/y, but above the Streets' expectation of 33%. Operating expenses outpaced revenues by a slight margin for the quarter with sales and marketing expenses up 40%. This jump was expected as company focuses on optimizing its marketing spending. Reaching and maintaining an optimal level of G&A expenses as a percentage of sales, while growing its user base, will be essential to long-term profitability.
eBay generates an substantial amount of cash totaling $3.4 bln in cash and investments at the end of the quarter. Unfortunately, the company did not announce any plans to buy back shares only noting it plans to return value to shareholders when the time is appropriate. With shares down 22% post split and a softer period ahead, we would think current levels would appear attractive.
The market was looking for some upside guidance as a catalyst for shares, however, this did not occur. For Q2 and Q3 numbers were in-line. But for Q4, which is seasonally a strong quarter with holiday shopping, estimates were slightly below. Yet, it's reasonable to expect management to be conservative considering the seasonally slow period ahead, the possibility of currency fluctuations, and the already heightened level of expectations. For full details see InPlay.
For short-term investors there is really no reason to hold shares right now as the company approaches seasonally softer periods, which is likely to cause further volatility. Yet, we would suggest longer-term investors take advantage of any exaggerated selling to establish a position. The San Jose-based company will be able to drive growth through category expansion (from collectibles to mainstream products), geographies, and pricing formats. Due to the complexity of the business, eBay enjoys high barriers to entry, along with virtually no inventory, a diversified revenue stream, and profit growth that could hit 40%. Adding new categories beyond collectibles, global expansion (i.e. China and India), and integration of PayPal platform will all drive up incremental revenue for the company. The key risks to watch are core US and international transaction revenue trends, competition, progress in China, fixed price vs. auction mix, technical outages, and seasonality of earnings. ---Kimberly DuBord, Briefing.com
9:57AM Page One - A Bounce that Might Hold, for a While : Stocks tanked again yesterday. The major problem was the Federal Reserve's Beige Book. It made fairly innocuous and unsurprising statements about inflation such as, upward price pressures have strengthened. It also said that high energy prices were damping consumer demand for other goods. Other data has already made this clear, but hearing it from the Fed fueled the macro fears that had been hitting the market lately.
Earnings reports continue to be very good. Yesterday after the close, eBay and Motorola had excellent reports that will boost the technology sector. Yum! Brands, Capital One, and Allstate also produced very good reports. This morning, AmerisourceBergen, Cummins, Danaher, HCA, Ingersoll Rand, Marriott, Novartis, Textron, and Union Pacific were among the companies reporting earnings above Wall Street expectations. Two major companies, McDonald's and Merck, both reported earnings in line with expectations and gave comforting guidance.
It thus bears repeating that, overall, the earnings reports in aggregated continue to be outstanding. The earnings slowdown that was widely expected as been far less severe than feared, for both the first quarter data and the second quarter guidance.
There is also some good economic news this morning. New claims for unemployment for the week ended April 16 plunged 36,000 to a very low 296,000. This is data for the week in which the April employment survey was conducted. The BLS noted seasonal adjustments overstaed the drop, but it neverthelees raises the prospect of a strong payroll gain for April. If an increase of 200,000 or more is reported, it would greatly temper perceptions of the degree to which economic growth is slowing.
The market is obsessed with the worst possible outlook - slower economic demand that doesn't even reduce rising inflationary pressures. It is the reverse of the Goldilocks condition. Right now, economic prospects are seen as too cool to boost earnings, and too hot to allow inflation to subside. The worst fears are overdone, but it will take some time to work this out, and we continue to recommend caution. Today's bounce might hold short-term as there is no release on the horizon to underline inflation fears. There might even be an earnings season rally of modest proportions this month, but a sustainable rally is not likely at this time.--Dick Green, Briefing.com
7:13AM The Information Technology Sector (OPENX) The Technology sector sank in the first quarter down over 7% with April tacking on another 5% in losses. The market continues to sit on the sidelines awaiting further evidence of a recovery. Standard & Poor's forecasts 17.2% in operating growth this year following a 56% rise in 2004. Even though there are some positive signs, we are maintaining our Market Weight on the sector.
As expected, Semiconductors had a rough start to the year with the Philadelphia Semi Index down 3.7% in the Q1 and over 9% year-to-date. Following Intel's Q1 better than expected results (April 19th), the market breathed a sigh of relief. Concerns over the possibility of slowing economic growth sent the Tech sector on its tail following the early and significant disappointment from bell whether IBM along with a profit miss by Samsung Electronics. Intel's 25% profit growth, coupled with its upward revised capex guidance, outlined positive growth assumptions within the computer-hardware space. Assisting the outlook were other positive reports from Texas Instruments and EMC.
The Semi stocks will continue to move with the ebb and flow of market expectations. Taking an optimistic view of the industry, lean channel inventories and seasonal demand patterns should support growth leading to a recovery in the second half of the year. The trajectory and sustainability of the recovery will continue to be highly debated. Intel's earnings set the tone for the PC industry as its chips run more than 80% of PCs worldwide. The extent of seasonal slowdown in the PC market is a main area of contention within the analyst community.
Intel is facing numerous challenges within this space including increased consumer bias towards lower priced PCs could impact margins. For the near-term, the launch of 64-bit Pentium 4 processors in Feb could provide upward support. Longer-term, a potential catalyst in the replacement cycle will be the highly anticipated launch of Microsoft's operating system, Longhorn, in mid-2006.
Looking downstream, Intel's report and guidance provides support for the component manufacturers. These include makers of disk drives (Seagate, Western Digital, Maxtor), computer-graphics chip makers (NVIDIA, ATI Technology), video-game consoles and mobile phone chip makers (Cypress Semi), and timing devices (Integrated Circuit Systems). On the equipment side, capital spending has remained steady to slightly ahead following Intel's raised plans, along with Samsung, outlining a possible recovery in the second half of the year. Tokyo Electron, the world's second largest equipment producer, recently announced sequential order growth supporting this view. The market typically anticipates the recovery; therefore stocks could see upward appreciation in Q1.
The consumer segment will remain one of the bright spots in the sector driven by migration to digital technology. These products, which include handhelds, MP3 players, PVR/DVR, digital video cameras, AIS systems, and handsets may support some of the expected weakness in the PC segment. The NAND flash market will be a direct benefactor of this migration as devices require more storage functionality driving demand for memory cards (SanDisk and Lexar Media) and computer storage technology (M-Systems). Other emerging and existing products that will offer strong growth opportunities over the short and long-term, include gaming, gigabit Ethernet, storage, set top boxes and information appliances. These markets carry high growth, as well as higher risk profiles driving growth for diversified IC manufactures (Broadcom).
There are also still significant growth opportunities within the handset market, which also experienced an inventory correction. Q1 earnings brought some anecdotal evidence that channel inventories have declined from Q4 levels, which is a good sign for the handset makers. Yet, Texas Instruments commented that 3G handset sales accounted for part of its decline in wireless-related semi revenues, which may be viewed as bad news for Nokia - its largest customer. Concerns magnified following negative reports from Sony/Ericsson and Samsung Electronics. Yet, with the highly competitive nature of this market with only a handful of companies vying for every point in share, bad news for one, may mean good news for another. ---Kimberly DuBord, Briefing.com |
