From Briefing.com: Week ending 23-Dec-05 : Weekly Recap - It was a mixed week for the stock market. Downward momentum from late last week carried into early this week, but the market then stabilized and went into a holding pattern.
Two themes from the past week were good economic data and continued mergers and acquisitions.
On Monday, the S&P 500 lost 7 points. There was no major news to account for the loss, but the tone had worsened late in the prior week. Tuesday, the S&P was down a miniscule 0.30 for its fourth straight loss. That changed on Wednesday, as the S&P gained 3 points and kept up a modest increase through the end of the week.
The news was largely good. Inflation data were particularly comforting. On Tuesday, the core PPI for November was reported to be up just 0.1%. This follows a 0.3% drop and the net change over the past six months is a mere 0.2%. Not much inflation there.
On Thursday, the core Personal Consumption Deflator was released. This is one of the most accurate measures of consumer inflation. It was up just 0.1% for the second straight month after two 0.2% gains. The year-over-year increase is 1.8%. Not much inflation there either.
The economic news was also good. November housing starts showed a surprisingly strong increase. Third quarter real GDP growth was revised slightly lower to 4.1% from 4.3%, but that is still very strong. November durable goods new orders rose a very strong 4.4%, and December consumer confidence was revised higher. New home sales for November plunged 11.3% but that was after an aberrant surge in October.
Overall, the data suggest that GDP growth remains strong and inflation low.
The other theme this week was the continued heavy pace of mergers and acquisitions activity. In particular, private equity firms have been active in making bids for large companies. This week, there were fifteen deals announced. These included FPL Group buying Constellation Energy for $11 billion, Google taking a $1 billion stake in Time Warner's AOL, and General Electric buying Arden Realty for almost $5 billion.
The stock market enters the last trading week of the year with modest upward momentum. The S&P 500 index has averaged a 1.7% gain since 1969 over the last five trading days of the year and the first two of the new year. It will be a very slow week for news, so the focus will be on whether such a "Santa Claus" rally occurs again this year.
Index Started Week Ended Week Change %Change YTD
DJIA 10875.59 10883.27 7.68 0.1 % 0.9 %
Nasdaq 2252.48 2249.42 -3.06 -0.1 % 3.4 %
S&P 500 1267.32 1268.66 1.34 0.1 % 4.7 %
Russell 2000 683.08 686.44 3.36 0.5 % 5.4 %
10:37 am Best Buy (BBY)
43.09 -0.16: Best Buy announced late Thursday that it has agreed to acquire Pacific Sales Kitchen and Bath Centers, a privately held retailer of high-end home improvement products, for $410 million in cash. The Electronics retailer anticipates the transaction to close in the middle of January 2006 and be nominally accretive to the company in the second half of fiscal 2007. It plans to amortize the purchase price over 15 years, producing approximately $105 million in tax benefits.
Pacific Sales operates 14 showrooms in Southern California and specializes in the sale of premium kitchen appliances, including Viking, Sub-Zero, and Kitchen-Aid products. The company also sells plumbing fixtures, home entertainment and home furnishings. The company is expected to generate revenue of approximately $320 million for the current calendar year, according to Best Buy.
Best Buy said, "the acquisition enhances our ability to grow an attractive customer base and premium brands using a proven and successful showroom format." It added that it plans to use the format to expand the number of stores to "capitalize on the rapidly growing high-end segment of the U.S. appliance market."
Last quarter, Best Buy's appliances product group generated sales of approximately $122.3 million, representing 6% of total revenue. In addition, the product group reported a same-store sales gain of 7.3% as the company continued to benefit from an expanded product selection, increased focus on appliance sales, and increased sales on higher-ticket items and custom orders. Although consumer electronics and home office products remain the anchor of Best Buy's business, the pending acquisition of Pacific Sales should help bolster its relatively meager home appliances division.
--Richard Jahnke, Briefing.com
10:32 am An M&A Dossier
If you think there has been a lot of M&A activity recently, you're right. At the same time, there has also been a lot of speculation about proposed deals. We've seen this trend continue today with several companies being mentioned in the context of mergers and acquisition activity. Headlines of note in that respect include the following:
Texas Instruments (TXN) - The Wall Street Journal reports the company is in advanced talks to sell its sensors and controls business to Bain Capital for $2.5 billion
Affiliated Computer Services (ACS) - The New York Times reports that a consortium of investors, including Bain Capital again, is interested in purchasing ACS for approximately $8.0 billion
Tommy Hilfiger (TOM) - Announced a definitive agreement under which Funds advised by Apax Partners will acquire the company for $16.80 per share, which translates to a transaction value of approximately $1.6 billion
AstraZeneca (AZN) - Will be acquiring KuDOS Pharmaceutical for $210 million
Best Buy (BBY) - Has agreed to acquire Pacific Sales Kitchen and Bath Centers for $410 million
The top headline today on the M&A front, though, is that Albertson's (ABS) has terminated discussions regarding the potential sale of the entire company for $9.6 billion to a consortium that included CVS Corp. (CVS), Supervalu (SVU), and some private equity groups.
It is Briefing.com's belief that we'll see more companies taken private in 2006 as private equity groups are sitting on huge amounts of cash. In turn, we expect M&A activity to continue to run at a heady pace next year, possibly topping the $2.6 trillion worth of deals that have been recorded worldwide in 2005, given the strong balance sheets at corporations and the desire to increase efficiency and economies of scale to boost profitability and to compete more effectively on a global basis. The M&A surge is a key reason why we continue to favor the investment bank and brokerage group within the financial sector, which we currently rate at Market Weight.
--Patrick J. O'Hare, Briefing.com
09:56 am Ford (F)
7.96 +0.01: Less than a month after embarking on a fresh round of restructuring at its struggling Jaguar subsidiary, with plans to cut production by as much as 7% in 2006, Reuters reported that Ford Motor has injected another 1.2 bln pounds ($2.1 bln) into its British luxury brand to cover heavy losses and investment write downs.
This latest decision marks the second time within two years that the world's No. 3 auto maker has had to recapitalize Jaguar, which continues to lose market share. Jaguar's U.S. sales, which accounted for a large chunk of the $740 mln lost last year by Ford's Premier Automotive Group, have plummeted about 30% this year, due to relentless competition from luxury rivals Toyota Motor Corp. (TM), with its Lexus brand, and BMW AG.
According to Jaguar spokesman Don Hume, the recapitalization takes the form of preference shares issued to Ford Motor Co., underscoring the auto maker's ongoing commitment to Jaguar and the job security of the division's 8,500 employees. Researcher CSM Worldwide estimates that Jaguar is on track to build roughly 85,000 cars this year and about 80,000 next year.
--Brian Duhn, Briefing.com
09:16 am Solectron (SLR)
3.84: After the close Thursday, Solectron posted a decline in first quarter earnings and revenue, but beat analysts' top-line target. The contract electronics manufacturer also issued second quarter guidance in line with the consensus estimate.
For the period, Solectron said it earned $28.1 million, or $0.03 per share, excluding non-recurring items, compared with $51.4 million, or $0.05 per share, in the same quarter last year. Revenue fell 8.7% to $2.46 billion from $2.69 billion a year earlier. However, on a sequential basis, sales rose 2.4% from $2.40 billion in the fiscal fourth quarter. Despite the year/year decline in both profits and sales, the latest results were consistent with analysts' expectations. According to Reuters Estimates, the company was expected to post earnings of $0.03 per share on revenue of $2.40 billion.
Looking to the second quarter, the Milpitas, California-based company predicted EPS in the range of $0.02 to $0.04 per share on revenue between $2.3 and $2.5 billion. Although the forecast was in line with the consensus estimate for EPS of $0.04 and revenue of $2.46 billion, it suggests that results could fall short of current analyst estimates.
On account of the lackluster report, shares of Solectron are trading lower in pre-market action. Despite trading down more than 25% since the beginning of the year, the stock continues to trend downward as the company struggles to turn its business around. At the current price level, SLR trades at approximately 22.6x forward earnings.
--Richard Jahnke, Briefing.com
09:08 am Texas Instruments (TXN)
32.72: According to The Wall Street Journal, private buyout firm Bain Capital has been in advanced talks with Texas Instruments for some time about acquiring the company's sensors and controls business, which is expected to generate about $1.15 bln in sales this year, up slightly from $1.13 bln in 2004. The unit's operating margins of 25% are roughly double those of its bigger rivals.
While exact pricing terms were not specified, analysts have estimated that the business unit, which draws few parallels with the rest of TI's chip businesses, could fetch about $2.0-2.5 bln based on price-to-sales and P/E comparisons of the sensor-and-controls divisions of publicly held companies like Eaton Corp. (ETN), Johnson Controls (JCI) and Honeywell (HON). Over the last ten years or so, TI has divested itself of units that made PCs, memory chips and defense electronics to concentrate more on meeting end market demand for everything portable, everything digital, predominately within the consumer electronics market. That focus by TI, and other companies, will continue to drive growth and investment in fabrication capacity and has been the basis for our Overweight rating on the Technology sector.
If Bain completes the transaction, it will mark one of the largest technology-related buyouts of the year. On August 11, 2005, an investor group led by Silver Lake Partners, and which included Bain Capital, acquired software company SunGard Data Systems for $11.3 bln, making it the largest technology privatization ever and the second-largest buyout of any type of company by a private equity group.
--Brian Duhn, Briefing.com
06:46 am Albertson's (ABS)
23.28: It is now official. After a report yesterday in The New York Times suggested Albertson's had called off negotiations to sell the company, and a subsequent report from CNBC that suggested that might not necessarily be the case, the company itself issued a statement last night saying it has terminated all discussions regarding the potential sale of the entire company. Similarly, CVS Corp. (CVS) and Supervalu (SVU), which were part of the investor consortium looking to buy Albertson's for $9.6 billion, or $26 per share, also issued statements that indicated the negotiations have been terminated.
Albertson's did note in its press release, however, that it remains in discussions with several parties - presumably Cerberus Capital and Kimco Realty - that are interested in acquiring its underperforming assets. The company added that it was continuing such discussions in order to improve shareholder value. Beyond that, the company said nothing.
Sources informed The Wall Street Journal that antitrust concerns, as well as a request by Albertson's for Supervalu's board to provide more stringent guarantees that included recommending the deal to shareholders regardless of what happens until the actual closing of the deal, were among the main reasons the deal collapsed.
On Thursday ABS shares began the session on a particularly weak note before recovering a good portion of their losses as investors maintained hope the buyout would be completed. With the deal officially terminated now, ABS shares are expected to find the sledding tough in Friday's session. Although efforts remain underway to improve shareholder value, selling the entire company, as opposed to pieces of it, was considered to be the more attractive alternative.
--Patrick J. O'Hare, Briefing.com
09:16 am Albertson's downgraded to Sector Perform from Outperform at CIBC: BB&T Capital Mkts downgrades Buy to Hold. Following announcement that ABS has broken off talks to sell the company.
09:14 am Cabot downgraded to Sell at Matrix: Matrix Research downgrades Hold to Sell. Matrix downgrades CBT to Sell from Hold. The firm says that weak demand from its supermetals mkts, falling gross margins in chemicals and supermetals, rapidly escalating energy costs, rising raw materials costs, and rising overhead expenses are combining to propel sales and N.O.P.A.T downward.
09:14 am Zoran downgraded to Hold at Kaufman; tgt cut to $15: Kaufman Bros downgrades Buy to Hold. Target $17 to $17. Kaufman downgrades ZRAN to Hold from Buy based on near-term concerns over valuation and growing concern over the outlook for consumer-oriented stocks heading into 2006.
09:13 am Global Payment downgraded to Hold from Buy at Citigroup: Citigroup downgrades Buy to Hold.
09:12 am Lexmark started with a Hold at Moors & Cabot; tgt $52: Moors & Cabot initiates Hold. Target $52. Moors & Cabot initiates LXK with a Hold and $52 tgt, reflecting the following: 1) there is great uncertainty about future demand for LXK supplies, which they believe are its key source of profits; 2) their view that LXK needs to improve its hardware offerings in attractive market segments such as color laser and photo printing; and 3) their expectation that market growth will slow and competition will continue to increase, pressuring earnings growth for the industry.
09:12 am UTStarcom started with a Hold at Jefferies; tgt $8.25: Jefferies & Co initiates Hold. Target $8.25. Jefferies initiates UTSI with a Hold and $8.25 tgt. While firm is attracted by UTSI's valuation with the business trading at just 1.1x tangible book value, their view is tempered by forward-looking concerns on the P.A.S. and P.C.D. product areas.
09:11 am NASDAQ started with a Hold at Citigroup; tgt $39: Citigroup initiates Hold. Target $39. Citigroup initiates NDAQ with a Hold and $39 tgt, as they believe the co is positioned to gain notable market share in trading of NYSE listed stocks following regulatory changes targeted for mid-2006. However, firm believe the shares largely reflect this upside at current levels, saying their Hold rating is essentially a valuation call. |
