From Briefing.com: 5:14PM Weekly Wrap: It was another roller coaster week for the stock market: Monday was up, Tuesday down, Wednesday up, Thursday down, and Friday back up. Strong first quarter earnings reports helped the S&P and Dow eke out a second straight week of gains, but the Nasdaq ended lower.
Almost 40% of the S&P 500 reported earnings this week. The numbers were good. It now appears that operating earnings for the S&P 500 in aggregate will be up about 13% for the quarter. That is above the 12% expected as of last week, and up from forecasts of just 8% at the start of the reporting season.
Good reports of note came from SBC, Lockheed Martin, Medco Health Solutions, US Steel, AFLAC, Ameranda Hess, ConocoPhillips, Verizon, Pulte Homes, Aetna, Dow Chemical, and Procter & Gamble, among many others. Technology firms were not as prominent, although Microsoft produced a good report on Thursday.
The economic data this week was important. On Thursday, first quarter real GDP was reported to have risen at a 3.1% annual rate. This is in line with long-term trends, but below the strong growth of 2004. It was generally viewed as disappointing, and raised concerns that economic growth will slow further through the year.
Other data were not any more encouraging. On Wednesday, March durable goods orders were reported to have dropped a surprising 2.8%. On Friday, March personal income and spending were up solidly, but the price deflator rose 0.3%. It has risen 0.3%, 0.2%, and 0.3% the past three months. Overall, the data did nothing to alleviate the fears that economic growth is slowing even while inflation is firming.
One piece of goods news was that oil ended the week at $49.72, down from $55.39 at the start of the week. If oil stays below $50 a barrel, it will help ease inflation concerns.
The 10-year note yield declined slightly from 4.23% to 4.19%.
Next week there are still a lot of earnings reports due. However, the trend for the first quarter is fairly clear and won't change. The economic calendar has the always-important employment report on Friday. The April data will be important in assessing whether the soft March data reflected temporary weakness or the start of a trend.
But the real focus is on the Federal Reserve policy announcement on Tuesday. Another hike in the fed funds rate is expected, but there are wide ranging expectations.
There is some concern that the Fed may pursue a more aggressive approach to raising rates to stomp inflationary pressures sooner rather than later. Others feel that the softness in the economy may cause the Fed to be more cautious. The policy announcement will be closely scrutinized for clues as to the Fed's thinking on inflation, the economy, and the prospects for interest rates.
The charts look slightly better with the S&P having risen a bit over the past two weeks. There are very few expectations of an imminent rally, however. The market needs to become convinced that inflation will be kept under control before it will respond well to good news such as was received in the earnings reports. There is also, of course, the fact that the dreaded summer months loom with their typical sluggish market conditions.
Index Started Week Ended Week Change %Change YTD
DJIA 10157.71 10192.51 34.80 0.3 % -5.5 %
Nasdaq 1932.19 1921.65 -10.54 -0.5 % -11.7 %
S&P 500 1152.12 1156.85 4.73 0.4 % -4.5 %
Russell 2000 589.53 579.38 -10.15 -1.7 % -11.1 %
6:32PM Swing Trader: CY : -Technical- The market continued its sideways trend of one day down, next day up today. After gapping higher off the opening the indices quickly sold off below yesterday's low only to stage a fairly impressive uptrend throughout the rest of the day. Market Breadth was mixed as Advancers outpaced Decliners about 1.7 to 1 and New Lows swelled over New Highs. Good news was volume was strong today which is something we haven't seen in a while for an up-day...(continued)
4:12PM Vishay Signs Memorandum of Understanding to Settle Delaware Action Challenging Siliconix Exchange Offer (VSH) 10.69 +0.14:
3:37PM ETF Winners/Losers : -Technical- ETF Winners: Materials (XLB +2.41%, VAW +2.06%, IYM +2.04%), Malaysia (EWM +2.22%), Emerging Mkts (EEM +1.93%), Belgium (EWK +1.84%), Hong Kong (EWH +1.69%).... ETF Losers: Consumer Discretionary (VCR -1.69%), Telecom Services (VOX -0.98%), Small Cap (VBR -0.76%), Mid-Growth (JKH -0.69%), Europe 50 (FEU -0.65%).
7:31AM BusinessWeek cover story: Why GM's Plan Won't Work (GM) 26.75 :BusinessWeek's May 9 cover story is: Why GM's Plan Won't Work. Make no mistake, GM is in a horrible bind. That $1.1 bln Q1 loss doesn't begin to tell the whole story. The carmaker is saddled with a $1,600-per-vehicle handicap in so-called legacy costs, mostly retiree health and pension benefits. Any day now, GM is likely to get slapped with a junk-bond rating. GM has lost a breathtaking 74% of its market value -- some $43 bln -- since spring of 2000. What really scares investors is that GM keeps losing ground in its core business of selling cars. Sales fell 5.2% on GM's home turf last qtr as Toyota, Nissan and other more nimble competitors ate GM's lunch. Worst of all, GM has reached the point at which it actually consumes more cash than it brings in making cars, for the first time since the early '90s. That's a game changer. Without growth, GM's strategy of simply trying to keep its factories humming and squeaking by until its legacy costs start to diminish is no longer tenable. If market share continues to slip, its losses will rapidly balloon. BusinessWeek's analysis is that within five years GM must become a much smaller company, with fewer brands, fewer models, and reduced legacy costs. The article makes it clear that GM is not in danger of going bankrupt while it still has a cash hoard of $19.8 bln. That doesn't count $8.3 bln available from bank lines. What would a healthy GM look like? It might have five fewer assembly plants, building around 4 mln vehicles a year instead of 5.1 mln. Factories would hum with real demand, stoked less by rebate giveaways and cheapo rental-car sales. Workers would have a cost-competitive health-care plan but would fall back on government unemployment benefits when hard times demanded layoffs. This new GM might make two-thirds as many models: Chevrolet handling trucks and mass-market cars; Saturn, behind its cool new Euro styling, selling more expensive cars with design flair. A resurgent Cadillac would parade advanced technology and luxury. Hummer would only last as long as brawny SUVs are hip. GMC, which is very profitable these days, would stick around if Chevy couldn't satisfy America's yen for trucks. Pontiac, Buick, and Saab would follow Oldsmobile to the scrap heap. As we learned a long time ago from outfits like AT&T, no company is too big to fail, or at least shrink dramatically. Not even mighty GM.
7:03AM Nanometrics misses by a penny (NANO) 11.11 :Reports Q1 (Mar) earnings of $0.19 per share, $0.01 worse than the Reuters Estimates consensus of $0.20; revenues rose 71.9% year/year to $23.5 mln vs the $20.4 mln consensus.
3:06PM Microsoft Corp (MSFT) 24.92 +0.46: It was Microsoft's uncharacteristically optimistic guidance which took the market by surprise diminishing concerns over slowing demand for its Windows products. The world's largest software company reported its third quarter results in-line with expectations despite a slightly weaker sale figure. Net income was $0.32 per share, excluding $0.05 in legal charges and $0.04 in stock based compensation charges. Revenues were a bit lighter than expected up 5% year/year to $9.62 bln, however, this does not indicate any waning in its fundamentals and Microsoft's strong operating leverage made up for any weakness.
With the market embroiled in concerns of slower economic growth and inflation, all eyes were fixed on the Redmond, Washington-based company's release Thursday after the close. It was Microsoft's guidance, which has subsequently created a positive tone for the broader market. For next quarter, it sees earnings of $0.27-0.28 per share, which includes stock based comp charges, as such not comparable to $0.31 consensus. On the top line, it forecasts a range of $10.1-10.2 bln slightly above $10.09 bln consensus. This implies an acceleration from this quarter of 5% to 9% growth.
It was the full year estimates that generated the most buzz. For FY05, it anticipates EPS of $1.05-1.06, again including stock based comp charges, up from its previous guidance of $1.09-1.11 on revenues of $39.7-$39.8 bln. It also introduced FY06 guidance, EPS in the range of $1.26-1.30 on revenues of $43.3-$44.1 bln vs. $43.33 bln consensus. This is the first time in three years that the company issued guidance above expectations. In the press release, the co said, "Given our optimism about the future with our strong product pipeline and the growth opportunities from our investments in innovative products and services, we expect increased revenue growth in fiscal 2006."
Now back to the quarter, its cash cows Windows and Office units generated modest growth. Client revenues rose 2% to $2.98 bln with profits up 2.8% to $2.34 bln, while Information Worker sales rose 2.3% to $2.76 bln generating profit growth of 2.4% to $2.0 bln. Within the Server & Tools segment, which makes up a quarter of total revenues, the top line expanded 12% driven by double-digit growth in SQL Server and the Exchange Server product line. Profits jumped 33% to $824 mln, as operating margins expanded five points.
It next largest businesses by revenues are MSN and Home & Entertainment, both making up roughly 6%. Profits were flat for MSN despite a drop of 4.5% on the top line. The competitive environment in this space remains a challenge from the likes of Yahoo and Google. The shortfall for the quarter was the result of programs it implemented that reduced advertising. Still, MSFT believes these programs will improve its customers' experience paying off over the long run. H&E continued to show solid revenue growth up 12% for the quarter due to strong Xbox sales. The next-generation Xbox will be released globally in two weeks (May 12th) and has garnered an enormous amount of interest by users, as well as the Street. MSFT has also hooked up with partners Verizon, BellSouth and Comcast for its TV initiatives, which are expected to generate high single-digits growth in Q4.
The H&E and Mobile units posted a profit loss, but net losses were smaller than in recent quarters. The Mobile & Embedded Devices unit generated record revenue growth of 31% y/y due to strong uptake with its Windows Mobile products as licensing sales for connected devices more than doubled. WMobile has over 18k applications with 40 partners in 48 countries. It also noted the Windows Mobile software platform also experienced strong momentum. Corporate vice president and corporate controller Scott De Valerio said, "Despite a mixed enterprise software environment, the quarter played out largely as we expected."
Overall, a solid quarter, despite a bit soft on revenues earnings came in-line. The PC market remains sluggish and the company experienced a mixed enterprise software environment. Microsoft returned value back to its shareholders buying back $2.4bln worth of stock in the quarter. The stock declined almost 2% in 2004 and its down over 8% so far in 2005. On a price to earnings multiple, shares are trading at 19.0x forward earnings vs. it's 5-year historical average of 28.7x.
Microsoft clearly challenging the perception that growth has slowed with its optimistic guidance. There are sure to be skeptics out there and only the numbers will eventually prove who was right. Leaning towards the bull case, Microsoft does have a strong schedule of new product launches, which should drive growth in FY06. These include Xbox2, SQL Server 05 (Oct), and Visual Studio .Net 2005. FY07 will benefit from the launch of Office 12 and more importantly, the long awaited launch of the 64 bit version of Windows XP (codename Longhorn) due out next year around the holidays. Beta testing will come out over the next few months. Management is also excited about its Tablet PC and media platforms, saying these products will continue to gain traction.
Ever wonder where the codename Longhorn originated? Well, Microsoft's programmers must be big ski buffs, as XP was codenamed Whistler and its previous next generation of Windows was named Blackcomb - both ski areas in British Columbia. At the foot of the Whistler Mountain there lies a saloon named....Longhorn.----Kimberly DuBord, Briefing.com
3:02PM ChevronTexaco Corp (CVX) 51.71 +0.56: This was the second disappointment from one of the super majors following Exxon's miss on Thursday. ChevronTexaco, the second largest US oil company, reported net profits grew modestly from last year, but still slid in below the Reuters consensus estimates. The integrated energy company reported earnings of $2.68 bln, or $1.28 per share up from $2.55 bln, or $1.20 last year - a dime short of consensus. Higher oil, natural gas, and refinery product prices generated revenue growth of 23.7% year/year to $41.61 bln. The miss was the result of a profit decline within its downstream business.
These operations reported net profits of $58 mln, down drastically from $276 mln last year as profit margins took a hit from down time at some of its refineries, mainly in California. CVX said the quarter was adversely impacted by "planned and unplanned downtime at several of our refineries depressing marketing margins in the West Coast." Chevron had indicated there may be some weakness in this area, but the opportunity costs was tremendous considering the strong profit environment in the refinery business right now. International refinery operations came in-line declining slightly to $351 mln due to margins and down time. Its Chemical unit continues to churn out record results with profits coming in at 137 mln up 85% y/y. The market is quite strong for commodity chemicals driving profit margins.
Operating profits with the upstream exploration and production business rose 20% to $2.37 bln again due to higher price realizations for oil and natural gas and lower expenses. Oil and gas production was 2,411 mln barrels per day down 7% y/y, or 195 mboe/d, but flat sequentially. Production declines were marginally impacted by asset sales, entitlements effects, and disposals otherwise affected by natural field declines. Overall, international production rose 3%, while the US fell 8%. Like the rest of the super majors, CVX's performance will in part be based on its upstream growth rate. The hope is the company can reverse the current trajectory generating positive production rates looking ahead to 2006. Similar to Exxon, Chevron did not increase its capital spending keeping it roughly flat y/y at $1.7 bln. Yet, on a percentage basis, it hiked up spending on upstream overseas projects.
The stock has suffered continuous selling pressure after hitting a high of $63 back at the end of February. Today's release was expected to further exaggerate that pressure, however, the buyers came in feeling the current levels offered a good entry point. CVX is trading well below its 200-day simple moving average, which can create a bounce effect as the market speculates selling is over done. CVX is also now the cheapest amongst the super majors increasing its attractiveness.
Think of it more as a blip then a trend. CVX clearly had a disappointing quarter, but nevertheless still offers growth opportunities ahead. The positive remain its long-term stable growth profile, substantial downstream presence in Asia, large oil reserve, economies of scale, lower costs, and most recently its recent merger with Unocal. Chevron is also quite price sensitive to changes in crude since a large percentage of its revenues comes from production. The company remains committed returning value back to its shareholders through share buybacks of $2.8 bln with an authorization plan up to $5 bln along with eighteen consecutive annual increases in its dividend. CVX's fundamentals continue to improve and we would suggest buyers take advantage of weakness to establish a longer-term position.----Kimberly DuBord, Briefing.com
11:09AM Dow Jones Average: End Of The Best Six Months (DJIA) 10,052.85 -17.52 (-0.2%) Today marks the end of the historical "best six months" of the market, according to the Stock Trader's Almanac. The data for the Dow Jones Industrial Average since 1950 is the basis for the old adage "Sell in May, then go away." The adage is also sometimes expressed as "The Dow from November to May, then go away."
The Stock Trader's Almanac calculates the hypothetical return that would have been achieved by investing $10,000 on November 1 each year and then selling on April 30, going to cash, and then reinvesting the entire principal amount on the next November 1. The investment is made in the Dow Jones Industrial Average and no accounting is made for taxes, dividends, or transaction costs. That strategy, if followed diligently for the past 54 years, would have turned the initial $10,000 into a $492,060 nest egg.
Alternatively, if the $10,000 were invested similarly, but from the May 1 to October 31 time period each year, the $10,000 initial investment would now be worth, after 54 years, just $9,682. In other words, the total return from the May to October strategy would be a loss.
Since today is the last trading day before April 30, that makes today the day that an investor following this "sell in May, then go away" strategy would be selling. What kind of return would this year have brought?
The Dow closed at 10,054.39 on November 1, 2004, although the low that day was almost 100 points below at 9,953. At today's mid-day level of 10,059.06, that means the November to April return would be essentially 0% and possibly negative, if the Dow closes below 10,054 today. What does the historical record indicate for the "November-til-May" trend, if the Nov-Apr period is a loss?
There have only been 12 down November to April time periods for the Dow in the past 54 years. Of those 12 down years, 10 of them were followed by May to October returns that failed to make up for the Nov-Apr declines. Five of those 10 double-down years had May to October declines that were larger than the November to April declines.
Although we aren't big fans of relying strongly on historical trends like the "Sell in May, then go away" as core principles of an investing style, it does always seem interesting to review them. Nevertheless, based on the data over the past 54 years, if the Dow closes below 10,054 today, it would seem to imply that the upcoming May to October time period won't be much fun either. - Robert V. Green
9:03AM Page One - Just Another Bounce : A good earnings report from Microsoft has the market set to open higher this morning. Still, it will require a rally of 9 points for the S&P to end the week with a gain.
Microsoft reported earnings of $0.32 a share, adjusted for charges and stock-based compensation charges. This is a penny above comparable analyst estimates. Revenue was up only 4.9% from last year, but the company gave upbeat outlooks for this year and next. It can't be called a blowout quarter, but it is better than expected from a huge, and now mature, company.
Other earnings reports from yesterday after the close leaned towards the upbeat side as well. Eastman Chemical, Ingram Micro, PacifiCare, and Pitney Bowes were the largest companies reporting, and all beat estimates. The big report this morning is from ChevronTexaco, which reported earnings below estimates.
The market is justifiably concerned about inflation trends and slower economic growth, but the surprisingly good first quarter earnings reports overall are quietly pulling up the valuation measures as well. Once the inflation trends stabilize, the value will become more apparent.
March personal income and spending data released this morning were of mixed implications. Spending and income was a bit higher than expected, but so also was the deflator (which measures inflation). The core personal consumption expenditure (PCE) deflator rose 0.3%. The past three months have been 0.3%, 0.2%, and 0.3%. This is well above the 1 1/2% trend prior to that. It reflects the increase in inflationary pressures of which the market is well aware.
Oil prices only briefly dropped below $50 a barrel yesterday, and then bounced back. The price is holding near $51.50 this morning, but we would not be surprised to see a break through $50 next week that would hold.
The intermediate term outlook for the market is mixed at best. There is value in blue chip stocks, but the market is placing a high risk premium on the stock market at this time due to uncertainty over the inflation and economic outlook. As soon as that stabilizes (which may not be for a number of months), the risk premium will decline and opportunities will arise. For now, it is still best to keep your powder dry.--Dick Green, Briefing.com
8:55AM Tweeter (TWTR) Sun Trust Rbsn Humphrey downgrades Buy to NEUTRAL. SunTrust downgrades TWTR as they do not believe the co will be able to sustain a stock price rally in the near-term without showing substantial improvement in top-line trends. They believe the co will have to achieve substantial improvement in sales productivity to return to profitability, and yet store closures suggest that steps thus far have been disappointing.
8:54AM Multimedia Games (MGAM) Susquehanna Financial upgrades Net Negative to NET NEUTRAL. Susquehanna upgrades MGAM following Q2 results. They continue to forecast a decline in EPS in FY06 as rev share in Oklahoma declines toward the 20% level, but they think at this point this is well understood by the Street. They say the co is still generating a fair amount of cash from operations, and to the extent that MGAM can continue to deploy its cash effectively and their forecasts for the business don't get worse from here, firm sees risk/reward as fairly weighted.
8:54AM AstraZeneca (AZN) Friedman Billings upgrades Underperform to MKT PERFORM. Target $34 to $42. Friedman Billings upgrades AZN following yesterday's earnings call. Firm believes many of the negatives for the business have played out, the co is executing on its cost-cutting plan, and they expect new data from 2 of the pipeline products, which could provide hope for a product pipeline revival.
8:54AM Avnet (AVT) Raymond James upgrades Mkt Perform to OUTPERFORM. Target $20. Raymond James upgrades AVT following Q3 results, based on improving returns on capital and free cash flow, and given a very modest valuation. With shares trading at just 11x their FY06 EPS est, and the Memec acquisition expected to be highly accretive, they think downside is likely limited.
8:52AM Equity Office (EOP) Legg Mason upgrades Hold to BUY. Target $34. Firm believes the magnitude of the ongoing asset disposition program and the earnings impact is misunderstood, and says investors will be forced to acknowledge a higher underlying asset value, about to be proven by selling EOP's worst assets at high prices. They say there will be wider recognition that the dividend not only will not be cut, but cannot be cut, and note that there is huge current short interest.
8:51AM PortalPlayer (PLAY) Kaufman Bros upgrades Sell to HOLD. Target $17 to $19. Following its Q1 report last night, although the stock is likely to be range bound for the foreseeable future. Firm expects investors will look at the PLAY results with a bit of skepticism, given the disconnect with PLAY's unit volume relative to Apple's iPod unit volume. The market is also clearly concerned in regard to inventory levels at OEMs which has been most noticeably reflected in shares of SGTL which is PLAY's closest comparable. Currently, SGTL trades at 8.25x 2006 EBIT estimate plus cash per share of $3.99. Firm believes this represents a baseline valuation for PLAY as well, which leads to $16.55 (00C0 has $5.48 per share in cash). However, firm says the stock could trade up to 12.5x 2006 EBIT plus cash, which represents a price of $22.25. Firm has chosen to split the difference and raises its price target to $19 from $17.
8:50AM Alliance Gaming (AGI) Merriman Curhan Ford upgrades Neutral to BUY. Firm comments that new company management continues to cut expenses to reasonable levels, its new Alpha game platform and M9000 box is receiving high marks via channel checks -- representing a replacement opportunity of its existing legacy games as well as potential new share -- and its systems backlog looks to be improving. Yesterday, the company reported operational EPS results of $0.07 in Q3-05, exceeding firm's estimates of $0.03 and consensus of $0.04. Merriman believes Alliance is a solid turnaround play in the gaming supplier space, an area where investors have reaped significant returns in recent years buying in timely fashion during the beginning of operational improvements. Believes shares would be appropriately valued at $15.00 -- which reflects a blended valuation 11.2x CY06 EV/EBITDA and 20.4x CY06 EPS. |
