From Briefing.com: Week ending 21-Oct-05 : Weekly Recap - The stock market was very volatile this past week. It was buffeted by good earnings reports and concerns about the fourth quarter guidance. The S&P ended the week with a 0.6% decline, while the Nasdaq posted a 0.8% gain.
Earnings reports dominated the news. About one-third of the S&P 500 reported companies reported earnings this week. Overall, the earnings reports have been good.
To date, 37% of the S&P 500 has reported. Over 67% have reported earnings above expectations. About 18% have reported below expectations, with 15% reporting on target. These figures are about in line with the historical averages.
The total earnings gain is running about 3% ahead of expectations. That suggests that operating profits for the S&P 500 for the third quarter will end up about 18% higher than the same quarter last year. That is spectacular growth considering all the concern surrounding the economy.
The earnings growth is pushing down the valuation metrics. The price/earnings ratio on the S&P 500 for operating earnings after the third quarter numbers are incorporated will be down to about 15.8. Good earnings and good value helped the S&P post a 4 point gain on Monday, and led to an 18 point surge on Wednesday.
Yet, there were also lingering concerns.
On Tuesday, the September PPI was reported up a very large 1.9%. The core rate was up 0.3%. This raised inflation fears and slammed the market. The S&P lost 11 points.
Then on Thursday, the S&P dropped 18 points, reversing the gain from Wednesday. The reported concern was fourth quarter earnings warnings. The primary culprit was Pfizer, which warned of revenue and profit weakness. Yet, it is hard to understand why weakness at a drug company would signal broad earnings weakness.
Overall there were actually few major companies warning this week, and the projections for fourth quarter earnings growth remain at a very impressive 15%. The sell-off on Thursday was more reflective of the continuing underlying nervousness than a reaction to actual fourth quarter warnings. The level of warnings is consistent with historical patterns.
On Friday, the market stabilized and had a relatively tame day although Caterpillar reported earnings below expectations, and that took the Dow down while the Nasdaq and S&P were higher. Caterpillar's problem was actually too much demand - production bottlenecks slowed revenue growth.
Energy prices provided some good news this past week. The price of oil dropped below $60 a barrel before ticking up at the close on Friday to end at $60.63 a barrel. That is still down from $62.63 last week.
Gasoline futures also continued to trend lower. They closed the week at $1.67 a gallon, down from $1.75 last week. Prices at the pump have, with little fanfare, been easing lower. The downtrend is likely to continue.
Technology stocks were relatively strong this past week and helped the Nasdaq post its 1.0% gain. IBM, Google, and Intel had good reports. Energy stocks dropped significantly, as did building products stocks. Also lower were drugs on the sharp decline in Pfizer, and construction companies due to the weakness in Caterpillar noted above.
Market sentiment remains shaky because of concerns that consumer spending growth will slow in the fourth quarter. There are also concerns about just how high the Fed will push short-term interest rates. The bond market isn't quite as concerned. The yield on the 10-year note fell this week to 4.38% from 4.48% last week.
The fundamentals remain significantly better than generally recognized. Earnings growth of 18% in the third quarter and 15% in the fourth quarter is impressive. The recent economic data have been strong.
The data on inflation remains ambiguous, with energy prices pushing recent numbers up sharply. Recently, however, energy commodity prices have eased. The September core PPI was up 0.3% but the core CPI was up just 0.1%.
There is no doubt the Fed will continue to raise at least several more times. This and the inflationary concerns will prevent the market from making a major bull run. The bad news is generally built into the price structure, however, while the good earnings growth and valuation is not. A better foundation for a year-end mini-rally is forming. Last week we said the worst may be over. There was far more volatility than we expected this past week, but we still stand by that statement.
Index Started Week Ended Week Change %Change YTD
DJIA 10287.34 10215.22 -72.12 -0.7 % -5.3 %
Nasdaq 2064.83 2082.21 17.38 0.8 % -4.3 %
S&P 500 1186.57 1179.59 -6.98 -0.6 % -2.7 %
Russell 2000 633.15 632.73 -0.42 -0.1 % -2.9 %
10:06AM Rio Tinto PLC (RTP) Prudential downgrades Neutral to UNDERWEIGHT . Downgrade is based on: 1) firm believes other companies like PD have become better values at current P/E ratios, 2) steelmaking markets appear to be decelerating, and 3) slower cyclical growth rates could move other materials markets to oversupply as well.
10:05AM Genesis Microchip (GNSS) Oppenheimer downgrades Buy to NEUTRAL. Downgrade is following Q3 results that were well ahead of consensus and whisper numbers. Firm believes market share loss in the monitor segment and pricing pressures could intensify in the high-end monitor segment, limiting the price premium that GNSS enjoys. They also note channel checks concerning inventory of high-end 19" monitors.
10:05AM Ixia (XXIA) Needham & Co downgrades Strong Buy to BUY. Target $23 to $16. Downgrade is following Q3 results, firm citing the announced delay large ticket orders. Moreover, they say management conceded delays in their completion had increased its general level of caution, leading to the cautious guidance, yet they believe there still could be positive developments ahead.
10:04AM Jack Henry (JKHY) Wachovia upgrades Mkt Perform to OUTPERFORM. Firm is noting that the stock continued its recent slide yesterday, falling toward $17 due to weak license rev and backlog growth in its Sept qtr. Firm cites: 1) co's recurring rev streams are very strong; 2) their model is predicated on flat license rev Y/Y, so they see little risk; and 3) the stock trades at just 7x 2006 EBITDA and 15x FCF.
10:01AM Cephalon (CEPH) Lazard Freres initiates BUY. Target $57. Firm believes it offers investors one of the broadest, most advanced late-stage pipelines in the industry, with five new potential product launches over the next 15 months (Sparlon, Vivitrex, Nuvigil, OVF and Gabidril-GAD). Management will have to navigate patent expiries on Provigil and Actiq, roughly 85% of sales. In firm's view, the market is underestimating the Sparlon opportunity. Sparlon, approvable at the FDA, offers an entirely new product category (ADHD) for Cephalon.
10:01AM Nordson (NDSN) Harris Nesbitt downgrades Outperform to NEUTRAL. Target $45 to $41. Firm believes that while the co's underlying business remains healthy, the upside potential over the next 12 months has become less compelling owing to their lowered earnings expectations.
9:55AM Harmonic (HLIT) Lazard Freres downgrades Buy to HOLD. Target $8 to $6. Firm also lowers their 2006 EPS est to $0.18 from $0.20. They say in-line guidance for Q4 is not strong enough for the stock to garner a multiple as high as what they had been using in their valuation calculation; they think investors may sense hesitancy in mgmt commentary.
9:49AM Lexar Media (LEXR) WR Hambrecht upgrades Hold to BUY. Target $11. Firm believes the business model is improving more significantly than they previously forecasted earlier this month. Firm is confident that the co will strike a partnership in the near future with a major supplier to stand against the SanDisk-Toshiba team, and think that on top of potentially breaking even for Q3, Lexar Media may be significantly more profitable in Q4 than previously expected due to improving GM. With improving ASPs due to significant improvements in operations on lean inventory and better product mix, they believe the co is better positioned to have sustainable profits in the future, and say SNDK's Q3 results further strengthen their belief that Q3 has gone very well.
9:48AM Image Entertainment (DISK) Sanders Morris Harris downgrades Hold to SELL . Downgrade is following yesterday's press release announcing an "update" from the Special Committee of its board of directors on the proposal already made public by Lions Gate Entertainment back on September 13, in which LGF proposed to acquire DISK for a range of 0.38-0.42 shares for every DISK share. Firm believe the market is pricing in two distinct possibilities: 1) That LGF will come back at DISK with a higher bid at or near the October 31 deadline; and 2) That a "white knight" situation might develop in the form of another pure-play distributor who will seek to merge assets with DISK. Firm believes however, that both of those possibilities are flawed and represent market inefficiency.
9:47AM Convergys (CVG) Wedbush Morgan upgrades Sell to HOLD. Target $12.5 to $15. Upgrade is following better than expected Q3 EPS. Although they are still concerned with CVG's ability to grow revenue consistently, they consider the margin expansion success as the first half of the case for the co's long-term earnings growth.
9:47AM JLG Industries (JLG) Wedbush Morgan initiates BUY. Target $43. Firm is saying leading market positions in North America and Europe are offering innovative suite of products for the construction and agricultural industries. They believe an accretive acquisition is likely in the near-term which could provide visibility to $3.00 per share of earnings power.
2:16PM Scientific-Atlanta (SFA)
33.48 -0.96: The market was expecting a mildly weak quarter, but Scientific-Atlanta disappointed both on revenues and bookings for Q3. SFA earned $60.7 mln, or $0.39 per share, which included five cents related to stock option expenses. There was some confusion initially, but the result was actually a penny ahead of consensus. Regardless, the weakness in shares has been caused by the light revenue numbers. The top line suffered from a seasonal lull and a negative mix away from HD-DVRs, with revenues gaining 8.2% to $490 mln. Overall, it was a lackluster start with bookings, sales, and backlog all a bit lighter than forecasts. It's important to note the Lawrenceville, Georgia-based company suffers from lumpiness associated with seasonal factors and a high concentration of customers.
In the quarter total bookings were $457.2 mln, up 15% from the first quarter. This was a sequential decline of 4% that was due in part to de-booking backlog related to a Japanese customer. The company attributed the decline to timing adjustments, as its customers, which include Cablevision and TimeWarner, have not finalized capex plans ahead of the next fiscal year. Subscriber set-top bookings declined to $323 mln from $411 mln in the June quarter. Excluding de-booking, orders were down 10%. Transmission bookings grew to $135 mln from $120 mln in June largely due to SBC's "Project Lightspeed".
Three quarters of total revenues are derived from the Subscriber Product segment, which generated sales of $360.8 mln. Growth widened 8% from last year, but slipped 13% from last quarter. SFA sold 1.102 mln Explorer digital set-tops, rising 7% from last year. Total DVR shipments were 465,000, down 14% sequentially, which management attributed to seasonal weakness. Stand-alone high definition shipments decreased to 141,000, down from 154,000 in June. Sales of transmission products were $129.4 mln. International sales reached a record high of $134.5 mln. SFA signed an agreement with NTL for the supply of new DVR set-tops in the UK.
Gross margin improvement in DVRs and higher sales volumes expanded margins by 90 basis points to 37.5% of sales. There were some timing issues and product mix shift going on from last year, which pulled down gross margins compared to Q4. SFA's balance sheet remains quite strong, as the company ended the quarter with $1.549 bln in cash and short-term investments up $27.4 mln. The company hopes to begin buying back as much $1 bln worth of stock, roughly equal to 20% of its outstanding common stock. We remain positive on SFA due to the impending upgrade to HDTV, the ramp in the telco business, major international wins, strong gross margins, and attractive valuation. We chalk up the quarter to seasonal weakness and expect to see improved traction in Q2. The industry is only in the early stages of the migration towards HDTV and digital video recording (DVR), which will become the standard. SFA stands to benefit as its largest customers continue to ramp up a triple threat of digital video, higher speed Internet access, and VoIP services.
--Kimberly DuBord, Briefing.com
1:25PM RadioShack (RSH)
22.96 -0.68: RadioShack Corporation, the Fort Worth, Texas-based electronics retailer, reported third quarter net income of $108.5 mln, or $0.75 per share, versus net income of $69.7 mln, or $0.43 per share a year ago. However, after excluding the favorable impact of a non-recurring gain due to the reversal of a tax contingency reserve, Q3 earnings per share were $0.36 and missed the Reuters Estimates consensus by a penny for the second consecutive quarter.
On a positive note, revenues rose 8.5% year/year to $1.19 bln, above Wall Street expectations of $1.15 bln. Total wireless sales were up 15%, though much of that growth was derived through its channel of more than 700 wireless kiosks, which overshadowed a decline in wireless sales at its nearly 7,000 company and dealer stores. The latter business was adversely affected by lackluster subscriber additions amid a dearth of new cell phone technologies released during the quarter.
Concerns abound regarding the outlook for RadioShack's wireless category, especially amid the termination of its relationship with Verizon Communications (VZ) by year's end. Also, without any Cingular products in stores to offset limited supplies of popular Verizon models until after the peak of the holiday shopping season, the competitiveness of RadioShack's wireless business in Q4 could be in jeopardy. RadioShack's 10-year deal with Cingular officially begins in January 2006.
Gross margins, which fell 3 percentage points, may also be weighing on investors' minds, as costs surged 15% while aggressive clearance sales were employed to move excess inventory. The last straw breaking RadioShack's back was a revised fiscal 2005 outlook. The struggling retailer now sees FY05 EPS of $1.76-1.86, excluding a $0.38 non-recurring tax gain (consensus $1.85), versus prior guidance of $1.80-1.90. Of the 22 brokers that currently cover RadioShack, which is off 3.0% on the day and down 30% for the year, there are 18 Hold ratings versus 2 Strong Buy ratings, one Buy and one Sell.
--Brian Duhn, Briefing.com
1:02PM Broadcom (BRCM)
43.61 -0.69: Broadcom soared past Wall Street expectations as the communications-chip maker reported solid third quarter numbers on continued sales growth in its Bluetooth systems. The company, based in Irvine, California, said on Thursday it earned $148.0 million, or $0.39 per share, ex-items, on revenue of $695 million during the latest quarter. That compares with profits of $124.1 million, or $0.36 per share, and revenue of $604.9 million for the same period last year. Analysts on average were looking for EPS of $0.38 on revenue of $664.8 million.
The company noted that the stronger than expected revenue growth allowed it to aggressively focus on research and development during the quarter, as it increased spending nearly 28% year/year. Operating margin, though, declined to 21.5% from 23.4% in the prior year period. "Broadcom's revenue and net income reached record levels in the third quarter, driven by continued broad-based strength within our major target end markets," said Broadcom's President and CEO, Scott McGregor. "We are pleased to see the benefits in our results of Broadcom's recent investments in a number of new end markets such as Bluetooth technology, mobile multimedia applications, and satellite set-top boxes."
As Broadcom continues to grow its product portfolio and expand into new end markets, namely emerging wired and wireless, it anticipates further growth in the coming quarters. Accordingly, the company, which makes wireless chips for mobile phones, cable modems, and digital video recorders, predicted fourth-quarter revenue growth of 10% to 12%, equating to approximately $765 to $778 million. This compares with the consensus target of $699.23 million, according to Reuters Estimates.
Notwithstanding the strong quarterly performance, shares of Broadcom have traded relatively flat during the regular trading session. At the same time, however, the stock has gained more than 36% year-to-date. At the current price level, the company is trading at approximately 25.9x the FY06 EPS estimate of $1.61.
--Richard Jahnke, Briefing.com
12:03PM DeVry (DV)
20.99 +0.28: DeVry, which has been a turnaround story for several years now, has over 50,000 students at 78 different locations, and offers degrees in everything from business administration to biomedical informatics. After Thursday's close, the for-profit education provider announced that fiscal first quarter profits more than doubled from the year-ago period. Specifically, earnings were $0.07 per share, including the expense of share-based payments, compared to EPS of $0.03 a year ago (on a restated basis). The Reuters Estimates consensus was $0.05. Revenues rose 4.5% to $196.8 mln, exceeding the consensus estimate of $188.9 mln.
Contributing to DeVry's strong top line performance was a July tuition increase, record revenue in its CPA and CFA preparation segment (i.e. Becker Professional Review), and a better mix of part-time and full-time students. DeVry also enjoyed its first year/year operating margin improvement (from 2.8% to 5.5%) in three years.
So far, this all appears to be good news, especially after DeVry closed out fiscal 2005 in June with a 59% year/year decline in Q4 net income (to $6.4 mln from $15.7 mln) on lower than expected revenues. Further, top management, which remains "focused on solid execution" of its growth plan, expects improvement, particularly at Ross University, throughout fiscal 2006. Ross, a medical and veterinary school, reported 40.6% growth in new student enrollment (to 575 from 409) a promising sign for a division that suffered heavily last year amid increased admission criteria and academic progress requirements.
While DV shares were up as much as 2.0% in early trading, they remain a long way off from the $30 level that was last eclipsed in April 2004.
--Brian Duhn, Briefing.com
11:05AM AT&T (T)
19.04 +0.46: AT&T on Friday reported a sharp rise in third quarter profits, reversing a year-ago loss, and raised its sales forecast for the full year. The long-distance carrier, which is awaiting regulatory approval for its pending merger with SBC Communications (SBC), earned $520 million, or $0.64 per share, compared to a net loss of $7.1 billion, or $8.99 per share, in the same period a year earlier. The latest quarter includes a pre-tax charge of $92 million, or $0.06 per share, related to the company's aircraft lease investments. In 2004, AT&T recognized a write-down of $11.4 billion, or $8.86 per share. Excluding one-time items, the company would have earned $0.69 per share versus $0.33 per share a year ago - $0.19 better than the consensus EPS estimate.
Revenue for the period fell 13.3% to $6.6 billion, which includes $5.1 billion from AT&T Business and $1.5 billion from AT&T Consumer, driven by increased competition, ongoing price pressures, as well as customer migration to alternative technologies. The company's core business services continued to struggle, as lower volumes and pricing weakness in traditional voice and data services pushed sales 9.5% lower from a year ago. Consumer revenue fell 24.3% due to competitive customer losses and the continued impact of wireless and Internet substitution.
Despite the ongoing revenue declines, the company noted that efforts to reduce costs and improve productivity have helped reduce the rate of operating income decline. The company reported operating income of $1.0 billion in the latest quarter, yielding an operating margin of 14.4%, compared with operating income of $1.1 billion and margin of 15.0% in the year-ago period. AT&T Business posted operating margin of 10.0%, versus 13.5% last year, while the Consumer division expanded margin to 36.1% from 23.7%. The increase largely reflects the company's decision to stop marketing to residential customers, which has substantially decreased operating expenses.
The company said it expects revenue for the full year to be at or above $26.5 billion, up from its prior target of $25-26 billion and in line with the consensus estimate of $26.5 billion. Additionally, the company predicted operating margin, ex-items, to be in the low teens, outpacing its prior expectations.
Overall, AT&T's results demonstrated the company's progress in executing its strategies and improving its cost structure amid ongoing revenue declines. However, with the pending merger expected to be complete by year end, the focus will now be on SBC's ability to leverage its own operations to reverse the declines at the company.
--Richard Jahnke, Briefing.com
10:58AM Schlumberger (SLB)
78.88 -1.70: A ramp up in global exploration and production strengthened activity for Schlumberger in the third quarter. The strong market environment led to an 8% sequential increase in revenues to $3.70 bln, which were up 30% from last year. The oil services company earned $523 mln, or $0.86 per share, up 10% q/q and 65% y/y. CEO, Andrew Gould, stated the industry responded to the "current lack of an oil supply cushion and the long-term need to increase supplies in natural gas is underway, but is still far from reaching a peak." Stripping out one-time items, earnings were $0.86 per share. The result topped estimates by a penny, an impressive feat considering the $0.06 per share negative headwind from the hurricanes in the quarter.
Operating income of $744.3 mln yielded margins of 20.1%, a sequential rise of 40 basis points and a whopping 580 basis points improvement from a year ago. Oilfield Services revenue reached $3.26 bln, representing a 7% sequential gain and 25% jump compared to last year. Pretax segment operating income rose 64% to $722 mln. Particular areas of strength included Russia and deepwater activity in West Africa. WesternGeco revenues jumped 14% q/q and 45% y/y to $436 mln. Pretax operating income grew 48% q/q to $85 mln as margins expanded to 19.6%. Activity levels remained strong with the exception of the Gulf of Mexico. Activity in the Gulf was severely hampered by the hurricanes, resulting in a loss of 25 days of operating time. Damage sustained by production platforms and offshore drilling rigs means reduced activity levels throughout the fourth quarter, although SLB noted the degree should improve from Q3.
The company repurchased 1.73 mln shares during the quarter to the tune of $145 mln. The solid performance this quarter will likely result in upside estimate revisions by the street. One comment on the conference call was key with respect to the Drillers. Management indicated there will be a distinct shortage of offshore rigs in the next few years, which is certainly good news for companies like Transocean (RIG), Noble (NE), and GlobalSanteFe (GSF), which are already seeing rising dayrates and utilization levels due to the tight market environment.
Sentiment is ruling over the energy sector right now despite solid fundamentals. The S&P Energy Index has tumbled 20% since its high at the end of September in tandem with crude prices. We continue to feel the oil services group offers a compelling investment, as profit windfalls from soaring energy prices have resulted in a surge in exploration spending. Schlumberger is a high class name with broad global reach, dominant market presence, and leading technology prowess. Technology has become increasingly important as a means to add value through services, such as directional drilling, pressure pumping, and seismic services, and has improved efficiencies and lowered costs for oil and gas producers. SLB also has some of the strongest EBIT margins in the business. Projected earnings growth for this large cap is almost 30% next year. The stock trades with a forward multiple of 24.8x.
--Kimberly DuBord, Briefing.com
9:34AM Caterpillar (CAT)
48.46, -5.57: The Dow Industrial is feeling the sting of sellers after missing third quarter estimates and lowering its FY05 profit forecast. Third quarter earnings missed consensus by $0.12 with CAT reporting EPS of $0.94 per share. The considerable difference came as a surprise for us and the street, with the main culprit being a sizable ramp in costs. In July, the company forecasted core operating costs to be only $285.2 mln for the entire second half. In comparison, third quarter core operating costs, which include commodities, steel, freight, and expediting costs, hit $303 mln. Strip out a higher tax rate and share count, and the miss becomes eight cents. Regardless, clear cost headwinds, supply chain issues, and management commentary together challenge the popular belief in CAT's earnings power in this cycle.
Caterpillar generated a 34% rise in profits, earning $667 mln, or $0.94 per share, up from $498 mln, or $0.70 last year. Sales hit a new record of $8.98 bln - up 17% y/y. Machinery sales increased 20%, engines sales grew 11%, and financial product revenues rose 21%. This was the strongest third quarter for profits in the company's history. Gross margins widened 180 basis points year/year to 22%, but remained flat sequentially. Operating margins achieved similar gains to 10.6%. Improved price realizations increased operating margins by 260 basis points to 10.5% for Machinery and Engines, offset by variable manufacturing costs.
With regard to the tempered guidance, Caterpillar lowered full year earnings to $3.85-$4.00 per share from as high as $4.20, implying Q4 EPS of $1.09 versus the street at $1.20. For the full year it raised its guidance for core operating costs to $1.25-1.55 billion, modestly offset by pricing. For FY06 CAT forecasts sales of 10% and EPS to be 15-25% above the midpoint of its revised 2005 outlook, which implies earnings in the neighborhood of $4.71 per share - well below consensus at $4.83. The stock has pulled off its highs, a trend likely to continue following today's disappointing result and downtrodden guidance.
--Kimberly DuBord, Briefing.com
9:03AM Google (GOOG)
349.05 +45.85 Google saw its shares climb more than 15% in pre-market trading - reaching a new all-time high - as the Internet search giant, once again, surpassed the high expectations underlying its lofty stock price. The Mountain View-based company, whose stock has gained more than 60% year-to-date and is up approximately four-fold since its IPO at $85 per share, said Thursday that it earned $437 million, or $1.51 per share, for the third quarter - $0.16 better than the consensus estimate. Last year, Google reported profits of $0.70 per share on revenue of $805.9 million.
Revenue for the latest period totaled $1.58 billion, up about 96% from a year ago and 14% on a sequential basis, as continued expansion of Google's global advertising base and partner network more than offset the expected seasonal slowdown in traffic. After subtracting traffic acquisition costs of $530 million - the commission paid to other Web sites in Google's advertising network - revenue totaled $1.05 billion. The company had been expected to post revenue of $942.9 million, ex-TAC.
Revenue from Google's proprietary sites contributed $885 million, or 56% of total revenues, reflecting an increase of 20% increase over the second quarter. Partner sites, through the company's Ad Sense programs, generated $675 million, or 43% of total revenues, up about 7% sequentially. Meanwhile, sales from outside the U.S. contributed 39% of total revenue, compared to 35% last year and 39% in the previous quarter.
Per usual, Google did not offer guidance for the upcoming quarter or fiscal year. However, analysts expect the company to earn $5.64 per share on revenue of $5.79 billion for FY05, according to Reuters Estimates.
With a market value exceeding $90 billion, expectations for Google are remarkably high, to say the least. However, as more companies continue to spend their advertising dollars online, the company remains well positioned to leverage its strong brand name and innovative technologies to monetize Web site visitors and expand market share in the competitive Internet search market.
--Richard Jahnke, Briefing.com
8:59AM Page One - Market Overreacts Both Ways
All that the market had gained on Wednesday, it lost on Thursday. There was again little news to account for the extremely volatile action.
The earnings news is a steady parade of solid reports. It is a typical quarter. Yesterday, the press reports latched on to fourth quarter guidance as the reason that the market sold off. Pfizer was the main culprit in this scenario. And in fact, Pfizer did indicate that fourth quarter profits would be below expectations due to weak revenue.
But really -- why does revenue weakness in a drug company signal weakness for the economy and the broad market? Answer: it doesn't. The selling simply resumed and the journalists attached the largest piece of news as the reason.
Fourth quarter guidance is about normal. There are, of course, companies guiding lower. That always happens. And economic and earnings growth is indeed going to slow. Earnings growth can not continue at the pace of this year and last. But fourth quarter earnings still are headed for near double-digit growth. That is very good considering the circumstances and certainly better than the market seems to be pricing in.
This morning, blowout earnings from Google have the Nasdaq ready to open higher. This is another case of the market placing too much emphasis on a single company. Google beat revenue estimates by $117 million. That wouldn't even be noticed on most S&P 500 companies, but for Google it is sizable and the stock is up 10% pre-market.
Other reports fall into the traditional pattern of two-thirds beating estimates. The most noteworthy this morning, however, is a miss by Caterpillar.
Oil prices are down again after plunging below $60 a barrel yesterday. Gasoline futures are also lower. They dropped 6 cents yesterday to $1.64 a gallon. The price had spiked as high as $2.31 a gallon after Katrina and is down from $2.10 in late October. This will accelerate the downtrend in gas prices that has already started at the pump.
Strangely, there have been very few articles written about lower gas prices.
The market volatility is great for traders, but treacherous for investors. The earnings data are actually quite normal in that the vast majority of companies are beating estimates and some are warning for next quarter. The economic data have been just fine. The inflation data are ambiguous but the declines in energy prices will certainly help. The outlook has not changed. -- Dick Green, Briefing.com
8:53AM Robert Half Intl. (RHI)
32.41: With an overall shortage of skilled professionals in areas such as finance and accounting, Robert Half International (RHI) has again shown why its full suite of professional services ranks second to none, beating analysts' expectations for the eighth time in 10 tries.
Last night, the world's largest and first specialized staffing firm to be added to the S&P 500 reported a 50% increase in third-quarter net income to $64.4 mln, or $0.37 a share, $0.03 better than the Reuters Estimates consensus and well above the $0.24 per share earned a year ago. All seven of the company's divisions contributed to year-over-year growth rates of 22% and 52% in revenue and net income, respectively.
Total revenues reached a record $867 mln, compared to an expected $840.2 mln, and were complemented by another strong performance from RHI's Protiviti subsidiary. The internal audit and risk consulting division, which continues to benefit from demands created by Sarbanes-Oxley compliance efforts, grew revenue 28% year/year to $128.2 mln.
Since the Sarbanes-Oxley Act of 2002 was created to "protect investors" and the U.S. Dept of Labor predicts that personnel supply services (i.e. staffing) will be the fifth fastest-growing industry through 2010, it's no secret why owning equity in Robert Half International has provided added security to many an investor over the years. Since going public in 1992, RHI shares are up more than 2700%.
--Brian Duhn, Briefing.com
8:27AM SanDisk (SNDK)
54.18 +7.80: SanDisk, which specializes in data-storage cartridges, saw profits almost double in the third quarter driven by stronger than expected handset sales. This has been a recurring theme this week, as numerous companies from Motorola to Nokia to Broadcom have all benefited from upward momentum within the mobile phone industry. SNDK is the world's largest supplier of flash memory data storage card products sold through both retail and OEM channels. Flash is used in a bevy of digital products like digital cameras, multimedia mobile phones, and MP3 players. The benefits of flash are simple: it's a rewriteable memory chip that is able to retain content without the need of a power supply.
The Sunnyvale, California-based company earned $107.5 mln, or $0.55 per share - a whopping $0.19 ahead of consensus estimates. Revenue soared 45% year/year to $589.6 mln surpassing expectations by 12%. The market has responded in kind to the considerable upside beat, which was derived from robust revenue growth and higher profits. Gross margins improved greatly to 44%, up from 42% last quarter and 35% last year. Operating margins widened to 26.9% from 20.5% last year. CEO Eli Harai said, "Demand for NAND flash continues to grow globally and is currently outstripping industry wide supply," citing particular strength in demand for music-enabled mobile phones that require high capacity cards.
SNDK sold more than 5 mln cards into the handset market, up from 3 mln last quarter. Retail sales accounted for 15% of the top line, surpassing USB flash drives for the first time. Product sales set a new record for the company, growing 45% y/y and 17% sequentially. During the quarter, tight flash supply conditions kept ASPs stable, declining a benign 5%, as competitors were short capacity. Investors should be aware that this is a cyclical business. Demand is expected to outpace supply for the near-term driven by increasing demand for flash in multi-media handsets and consumer electronic devices. However, SNDK's main competitor, Samsung Electronics, is planning a major ramp up in capacity, which will negatively impact prices. SNDK is forecasting megabytes sold will increase 40-50% sequentially, up from 23% in Q3, in conjunction with a 15-20% drop in prices.
SanDisk is clearly firing on all transistors. The company also announced it has agreed to buy closely-held Matrix Semiconductor for $250 mln. Matrix, whose main customer is Nintendo, provides strength in the pre-recorded content market and access to 3-D memory. The deal includes $238 mln in SNDK shares and $12 mln in cash. This is a high beta stock. SanDisk is expected to generate 25% earnings growth this year and trades at 29.6x forward earnings.
--Kimberly DuBord, Briefing.com |
