From Briefing.com: 4:20 pm : The market opened sharply lower, as soaring oil prices weighed on sentiment, while traditional pre-earnings season uncertainty underpinned additional nervousness throughout the session, closing seven out of ten economic sectors in negative territory. The threat of possible UN sanctions on Iran regarding their nuclear ambitions coupled with more violence in Nigeria acted as the day's biggest distractions, reminding investors that the supply-demand balance for oil remains extremely tight as crude futures climbed to three-month highs at $66.30/bbl (+$2.38). While oil's 3.7% surge and gains across the energy complex were a windfall for Energy, helping extend its year-to-date gain to over 10% and playing into our Overweight rating on the sector, the absence of leadership from more influential sectors weighed on the proceedings from start to finish.
To wit, Technology was weak across the board as analyst downgrades on Advanced Micro Devices (AMD 32.86 -1.27) and Applied Materials (AMAT 19.76 -0.39) weighed heavily on chip stocks, clouding an upcoming Q4 report from Intel Corp (INTC 25.52 -0.27). Financial was another sore spot for the bulls after Q4 earnings disappointments from Fifth Third Bancorp (FITB 38.44 -0.49) and Wells Fargo (WFC 62.69 -0.56) kicked off the quarter's biggest reporting period for the banking group on a sour note. Health Care was also in focus after Boston Scientific (BSX 23.86 -1.34) sweetened its bid for Guidant (GDT 76.22 +5.38) to $27 bln, but BSX's latest amendment raised questions for shareholders over the value of GDT in the face of increasing legal scrutiny about its heart devices.
Even though manufacturing activity showed that the economy remains in good shape, as evidenced by a better than expected 0.6% rise in Dec. industrial production to a record level and a strong 20.1 read on the Jan. Empire State index, the Industrials sector failed to take notice. Analyst downgrades on Tyco International (TYC 26.19 -0.93), Ingersoll-Rand (IR 39.38 -0.99) and Robert Half International (RHI 37.58 -1.85) contributed to the bulk of sector-wide anxiety. United Parcel Service (UPS 74.98 +0.48) was one bright spot after being upgraded at CSFB but was the only transportation component to close higher.
Joining Energy in the plus column were Materials and Utilities. The latter benefited from an afternoon rebound in Treasuries, as speculation that tomorrow's CPI data will not surprise the market with inflation concerns helped knock the yield on the 10-yr note (+06/32) down to 4.32%. BTK -0.2% DJ30 -63.55 DJTA -1.4% DJUA +1.3% DOT -0.5% NASDAQ -14.35 NQ100 -0.6% R2K -0.7% SOX -1.6% SP400 -0.4% SP500 -4.68 XOI +1.8% NASDAQ Dec/Adv/Vol 1936/1163/1.72 bln NYSE Dec/Adv/Vol 2151/1186/1.60 bln
5:15PM Jabil Circuit announces acquisition of Celetronix (JBL) : Co announces it has exercised its purchase option to acquire all of the outstanding stock of Celetronix, a privately-held India-based manufacturer of electronic products. The incremental purchase price for the acquisition is expected to be approx $155 mln plus the assumption of approx $30 mln of net debt.
4:38PM Yahoo! misses by a penny; guides revs in-line (YHOO) : Reports Q4 (Dec) earnings of $0.16 per share, excluding non-recurring items, $0.01 worse than the Reuters Estimates consensus of $0.17; revenues ex-TAC rose 36.1% year/year to $1.07 bln vs the $1.07 bln consensus. Co reports OIBDA of $459 mln vs $452-$482 mln guidance. Co issues in-line guidance for Q1, sees Q1 revs ex-TAC of $1.040-$1.100 bln vs. $1.09 bln consensus; sees Q1 OIBDA of $410-440 mln. Co issues in-line guidance for FY06, sees FY06 revs ex-TAC of $4.6-$4.85 bln vs. $4.8 bln consensus; sees FY06 OIBDA of $1.915-$2.055 bln.
4:25PM Intel misses by $0.03, light on revs; provides Q1 and Y06 outlook (INTC) 25.54 -0.25 : Reports Q4 (Dec) earnings of $0.40 per share, $0.03 worse than the Reuters Estimates consensus of $0.43; revenues rose 6.3% year/year to $10.2 bln vs the $10.56 bln consensus. Co issues downside guidance for Q1, sees Q1 revs of $9.1-9.7 bln vs. $10.05 bln consensus. Co issues in-line guidance for FY06, sees FY06 revs of $41.1-42.3 bln vs. $42.33 bln consensus; co expects gross margins of 57% +/- a few points. Q4 gross margin was 61.8%, slightly below co's updated expectation of 63%, +/- 1 (Street Expectation was 61.1%), primarily due to lower than expected revenue, a slight shift in the overall product mix to non-microprocessor products, and some inventory valuation adjustments to reflect lower unit costs. The effective tax rate of 29.1% was below the expected rate of 31% primarily due to tax benefits for export sales and estimated R&D tax credits. Revenue in Asia Pacific region was essentially flat sequentially while revenue in the Americas region was sequentially lower; results primarily reflect lower than expected demand for desktop products among certain OEM customers.
4:23PM IBM beats on EPS, misses on revs (IBM) 83.00 : Reports Q4 (Dec) earnings of $2.11 per share, excluding a $0.10 charge, $0.17 better than the Reuters Estimates consensus of $1.94; revenues fell 11.7% year/year to $24.43 bln vs the $25.51 bln consensus. Co reports global service revs of $12 bln; reports gross margin of 44.1%; reports global service bookings of $11.5 bln.
4:02PM Emulex ships 10 millionth InSpeed Port (ELX) 21.15 -0.25 : Co announces that it has surpassed the 10 millionth shipped InSpeed embedded storage switch port. ELX products, which began shipping in May 2002, have secured embedded design wins with eight of the top ten storage providers, and is now shipping at over two times the rate of all Fibre Channel fabric switch ports from all vendors combined.
2:54 pm Fifth Third Bancorp. (FITB)
38.35 -0.58: For the fourth quarter, Fifth Third Bankcorp delivered $0.60 in earnings per share. Versus the year ago period, EPS nearly doubled and net income rose 89%. The company's return on average assets (ROA) and equity (ROE) also grew solidly on a year-over-year basis. The bank, however, fell three cents short of analysts' estimate for the first time in at least 26 quarters. On a sequential basis, net income, ROA, and ROE declined.
For the full year, EPS grew 3% to $2.77, four cents below the consensus estimate. Versus 2004, both ROA and ROE declined. Chief Executive George Schaefer, Jr. asserted that revenue and net income trends were significantly below expectations entering the year. Offsetting strong loan growth were disappointing deposits in the first half of the year; meanwhile, the flattening yield curve posed a particular challenge. Resulting declines in securities portfolio returns eclipsed the effects of growth in core banking activities. Spread-based revenues, which represent the largest portion of the company's income statement, were flat on a year-over-year basis. The bank attributed margin compression throughout 2005 to the decrease in the net interest rate spread.
With respect to deposits, Fifth Third saw a strengthening trend, credited to retail transaction account growth and commercial customer additions, during the back half of the year. The 1Q05 acquisition of First National was a beneficial factor and contributed to an 11% rise in total transaction deposits and a 12% increase in total core deposits, which include consumer time deposits. That merger similarly helped produce an 18% jump in total loan and lease balances.
Fifth Third's long-term focus rests upon improving the balance sheet's risk profile and delivering more consistent returns on invested capital. The company indicated that it believes 2006 will provide opportunities to optimize returns on recent investments and improve efficiency in light of current revenue trends.
According to Reuters Estimates, analysts expect the bank to deliver a Q1 (Mar) profit of $0.68 per share.
--Lisa Beilfuss, Briefing.com
2:16 pm Continental Airlines (CAL)
17.48 -1.99: Continental Airlines on Tuesday reported a fourth quarter loss of $1.58 per share. That figure excludes the net effect of about a dollar in special one-time items, and translates to a loss of $128 million on the company's bottom line. According to Reuters Estimates, analysts had expected the company to post a loss of $1.85 per share. Although Continental surpassed the consensus estimate by a large margin, its shares have dropped over 10% in the wake of its report.
As one can see, the airline remains highly unprofitable. That fact, and the realization that Continental faces ongoing competitive pressures, has rightfully overshadowed the better than expected quarterly report.
Rising fuel costs continue to plague bottom lines across the industry and high labor costs remain a burden. For Continental, a 57.6% jump in the cost of fuel and related taxes drove a 13% increase in operating expenses over the year-ago period.
In discussing competition-related issues, Chief Executive Larry Kellner pointed towards JetBlue's (JBLU) infiltration of its Newark hub. Also, he asserted that rivals Delta (DAL) and United Airlines (UAL) enjoy "bankruptcy advantages" that Continental does not. Wage and benefit reductions over the year allowed Continental to avoid bankruptcy and have helped fund the international expansion that is key to the company's recovery, but which is also seeing increased competition. Kellner stated that Delta is using its bankruptcy advantage to move into Continental's international markets. United, he said, is flush with exit financing cash and enjoys greatly reduced costs. Over the quarter, Continental's international markets accounted for one-third of total passenger revenue.
Continental did not issue specific profit/loss guidance, although CNBC reported that the airline's CEO said he expects a "significant" loss in the first quarter. According to Reuters Estimates, the Q1 (Mar.) consensus estimate is pegged at a loss of $0.48 per share.
Briefing.com has maintained an Overweight rating on the Industrials sector for over two years. Because of soaring costs for fuel and labor that plague the carriers, though, we view the airline industry as a dark patch. Our preference within the sector lies in the rail, aerospace and defense, and industrial equipment arenas.
--Lisa Beilfuss, Briefing.com
1:26 pm McDonald's (MCD)
34.59 +0.12: McDonald's checked in with another encouraging sales update that validated its position as a recommended holding in Briefing.com's Active Portfolio. Additionally, the Dow component provided fourth quarter earnings guidance that qualifies as a positive surprise versus the current consensus EPS estimate of $0.46.
Specifically, McDonald's reported that global comparable sales were up 5.0% in December, highlighted by comparable sales increases of 4.4%, 4.6%, and 5.9%, respectively, in the U.S., Europe, and Asia/Pacific, Middle East and Africa ("APMEA"). The Briefing.com Benchmark consensus estimate for global comparable sales was 3.6%. For the quarter, global comparable sales increased 4.2% on top of a 5.1% increase in the year-ago period.
The comparable sales increases in December were attributed to the popularity of its signature breakfast menu and premium chicken offerings in the U.S., its Monopoly promotion and everyday value menu and premium products in Germany, and initiatives to provide locally relevant menu options and everyday value in APMEA.
In conjunction with the sales update, McDonald's noted that its fourth quarter earnings are expected to be about $0.48 per share, including a combined $0.03 per share of negative impact from foreign currency exchange rates and expense related to asset impairment, primarily in South Korea. According to Reuters Estimates, the consensus figure of $0.46 included those charges, so the guidance from McDonald's equates to two cents of upside. That isn't a huge surprise, but to be sure, it falls on the right side of things and reflects the company's ongoing track record of operational success with its Plan to Win and reinforces our bullish view of McDonald's and its stock.
--Patrick J. O'Hare, Briefing.com
10:30 am Wells Fargo Corp. (WFC)
62.88 -0.37: Wells Fargo, the nation's fifth largest bank, on Tuesday said its fiscal fourth quarter earnings rose 10%, but missed Wall Street's target due to declining mortgage earnings and the impact of higher personal bankruptcies. For the latest quarter, the San Francisco-based company earned $1.93 billion, or $1.14 per share, compared with $1.79 billion, or $1.04 per share, a year earlier. Analysts, on average, were expecting the company to post earnings of $1.15 per share.
Revenue for the period increased 4.0% from a year ago to $8.49 billion versus the consensus estimate of $8.46 billion. Top-line growth was offset by a $77 million decline in equity gains and $127 million increase in losses on the sale of debt securities from the previous year, the company said. Furthermore, the impact of rising interest rates took its toll on the bank's mortgage portfolio, as home mortgage revenue declined $178 million to $1.15 billion. Excluding Home Mortgage, revenue of other remaining businesses grew 7% year/year.
As previously disclosed, the bank said that it recorded credit losses of $171 million, or $0.07 per share, during the quarter due to increased personal bankruptcy filings ahead of the new, more stringent laws that went into effect October 17, 2005. Although Wells Fargo, as well as other banks, were bruised by the surge in filings, the company believes the new law will be a net positive in the long-run as it will likely reduce the rate of consumer bankruptcy filings.
Despite the reduction in earnings from higher bankruptcies, the company still posted double-digit earnings growth during the period, reflecting the strength of its diversified business. Even though mortgage earnings were impacted by rising rates and a flattening yield curve, other businesses such as regional banking, commercial banking, corporate banking, and private client services continued to demonstrate solid growth. Average loans of $305.7 billion in the quarter increased 9% from last year, with average commercial and real estate loans up 13%. Although interest rates continued to trend upward during the period, net interest income increased 9% from year ago and net interest margin remained essentially flat, contracting by only 4 basis points to 4.84%.
Based on the lower than expected results, shares of Wells Fargo fell slightly in early morning trading. However, as noted in Briefing.com's Market Weight rating on the Financial sector, more diversified banks such as Wells Fargo continue to be better positioned than smaller, regional banks and thrifts and mortgage finance companies in the face of a near flat yield curve.
--Richard Jahnke, Briefing.com
09:16 am Boston Scientific (BSX)
25.20: The Guidant (GDT) bidding war continued on Tuesday as Boston Scientific Corp. increased its offer to acquire the embattled medical device maker. Boston Scientific's improved offer of $80 per share, or approximately $27 billion, comes after Guidant accepted an increased $24.2 billion offer from rival Johnson & Johnson (JNJ) last Friday. The announcement of Guidant's acceptance of JNJ's bid turned aside a larger bid of about $25 billion from BSX, in favor of a deal that has already cleared antitrust review.
The amended offer, which will expire at 5:00 pm on January 17, 2006, unless Guidant's board declares the improved offer superior to JNJ's, also includes a revised agreement between Abbott (ABT) and BSX for Guidant's vascular intervention and endovascular businesses. Abbott has agreed to pay BSX $4.1 billion for the businesses, up from $3.8 billion, and increased its loan from $700 million to $900 million.
Under the amended agreement, BSX will pay $42.00 in cash and $38.00 in Boston Scientific common stock, subject to a collar. The revised offer represents a significant premium of $3.3 billion, or $9 per share, over the latest purchase price proposed by JNJ, as well as JNJ's original bid of $25.4 billion which was lowered in November because of increasing safety concerns and litigation over Guidant's implantable heart devices.
In a statement, BSX said, "Our $80 per share offer for Guidant is compelling... We are providing Guidant shareholders with certainty of completion, significant upside potential and substantially more value today than the JNJ transaction. By any objective measure, our offer is clearly superior to Johnson & Johnson's."
As the bidding war between BSX and JNJ continues to heat up, it is clear that both companies are extremely interested in gaining access to the $10 billion market for pacemakers and defibrillators. However, while the ongoing battle continues to be favorable for Guidant shareholders who will benefit from the escalating purchase price, it has raised questions for shareholders in BSX and JNJ over the value of Guidant in the face of increasing legal scrutiny about its heart devices.
--Richard Jahnke, Briefing.com
08:50 am Freeport-McMoran (FCX)
60.75: Owner of the world's largest gold mine and the second biggest copper mine, Freeport-McMoran's fourth quarter profits surged on higher production and gold and copper prices. Net income more than doubled, rising to $478.3 mln from $227.6 mln in the prior year. On a per share basis, earnings were $2.22 - surpassing consensus by a whopping 46 cents. Total sales skyrocketed 61.1% to $1.49 bln, reflecting higher sales volumes and prices.
The company's Grasberg mine, operated by FCX's Indonesian mining unit, produced record sales of 468.4 mln pounds of copper and 1.1 mln ounces of gold, up 12% and 78%, respectively, over the prior year. Total cash flows were $669.5 mln in the quarter and $1.55 bln for the year. Capital expenditures totaled $143.0 mln. Freeport spread the wealth, spending over $500 mln in dividends and share repurchases, along with paying down debt by $700 mln. Average realized copper prices in the quarter were $2.02 per pound, up 41% year/year, while gold prices averaged $494.01 per pound, up 14% year/year.
Overall, the quarter looks quite strong at first glance. We continue to like the story due to Freeport's mix of assets and its strengthening balance sheet. The stock trades at 17.8x forward earnings and 2.6x price-to-net asset value.
--Kimberly DuBord, Briefing.com
08:39 am Boeing (BA)
69.48: The figures are in, and much to the market's surprise, Airbus beat out Boeing in total orders for the fifth straight year. Surging December orders closed what was a record year for the commercial aviation industry. Boeing was expected to beat out Airbus this year, propelled by the huge success of its 787 widebody, but to no avail. Total net orders for Airbus came in at 1,055 planes, compared to Boeing with 1,002. Airbus delivered 378 planes, 30% more than the Chicago-based company, along with record earnings and operating profits above its target of 10%.
2005 was a record year for the industry on surging orders for more fuel efficient planes from low-cost, and Asian, carriers, contending with record oil prices. The combined tally for both Airbus and Boeing come to 2,057 orders, beating the previous high of 1,631 in 1989. Due to the success of Boeing's widebody fuel-efficient 787 Dreamliner, most were expecting Boeing to pull ahead of Airbus. After the conglomerate reported 687 orders to date as of November, consensus estimates for the full year were roughly 900. The upside for Airbus, which sold 918 aircraft, came from its new A320 single-aisle family of planes, which hold 100 to 220 passengers and are used mostly by low-cost carriers.
According to the International Air Transport Association, airlines worldwide increased sales 10% in 2005, including a 7.1% jump in traffic. Airbus closed the year with a total backlog of 2,177 planes, while Boeing had 1,809 - enough to keep both companies busy for a while. With most thinking orders peaked in 2005, the question becomes, what will 2006 look like for the industry?
We remain onboard with Boeing on the basis of its raised delivery guidance, backlog strength, possible margin expansion, operational performance, and robust cash flow. The company is firing on all cylinders. In addition, under new leadership, we hope to see Boeing further leverage its strong market position in the midst of this bull cycle in commercial aviation.
--Kimberly DuBord, Briefing.com
08:28 am Alcoa (AA)
28.95: With pension plan liabilities being a major overhang for many companies these days, we're seeing an increase in the number of companies that are looking to stem that liability by freezing, or ending, their defined benefit pension plans altogether. Alcoa is the latest company to join those ranks, as the Dow component announced today it will eliminate its defined benefit pension plan for most new U.S. salaried employees effective March 1, 2006. The company noted, however, that the change will not affect current employees or retirees, who will continue to participate in their current defined benefit pension and defined contribution savings plans.
Not surprisingly, the retirement savings option Alcoa will offer new salaried employees is a defined contribution plan, otherwise known as a 401(k) plan. Under the Alcoa plan, the company will make a contribution of 3.0% of salary and bonus and match the first 6.0% an employee contributes to their plan.
A key difference between the two retirement plans is that, under a 401(k) plan, the employee is responsible for managing their own investment allocations. Moreover, employees must elect to set aside a specific percentage of their paycheck each period to build their savings. Such a plan sounds good in theory, but in practice, people find it harder to save for retirement when the money has to come directly out of their paycheck and they can see the difference between their take-home pay before the retirement contribution and after it.
If someone is disciplined enough, or capable enough, of contributing the maximum to a 401(k) plan, it can be a lucrative proposition - provided they also make the right investment decisions along the way. The latter is the other part of the equation that isn't easy either. From a corporate standpoint, when companies shift from a defined benefit plan to a defined contribution plan, it stems their liabilities and improves their long-term profit picture. However, the shift also increases the risk of a retirement savings shortfall for employees who may not be disciplined enough to save money for a 401(k) plan and/or savvy enough to make the right investment decisions.
--Patrick J. O'Hare, Briefing.com
10:39 am CV Therapeutics: Citigroup initiates Hold. Target $30. Firm believes investor expectations for Ranexa and ACEON should moderate downside pressure on the stock. They also do not expect significant near term appreciation since upside surprise to estimates is only possible if the ongoing MERLIN study shows positive data in late 06/early '07.
10:38 am Penn Natl Gaming: Nollenberger Capital upgrades Neutral to Buy. Target $37. Firm believes the primary growth driver for PENN over the next several years is the placement of gaming machines at its Penn National Racetrack in P.A., likely in late 2007. They believe their daily win expectations for machines in Pennsylvania may prove conservative.
10:37 am bebe stores: Brean Murray downgrades Hold to Sell . Downgrade follows what firm views as an unwarranted recent run-up based on hopes of an early turnaround. They are also reducing our estimates, driven by continued limited visibility, what they view as extremely difficult comparisons, a continued missing fashion sense and a market shift away from bebe's fashion focus.
10:36 am Natl Med Health: Sun Trust Rbsn Humphrey reiterates Buy. Target $33 to $33. Firm is also making NMHC their top mid/small cap pick for 2006 tied to what they view as building momentum in the core business, a meaningful cross-selling opportunity, solid balance sheet and cash flow characteristics, a strong management team and compelling valuation.
10:35 am Neustar: WR Hambrecht downgrades Buy to Hold. Downgrade is based on valuation, as they believe Street ests must go up considerably higher from here for multiples to expand further. However, they believe catalysts required to generate upward estimate revisions of this magnitude will be limited or pushed out until 2H06 or FY07 at the earliest.
10:34 am UNUMProvident: Banc of America Sec reiterates Buy. Target $23 to $23. BofA raises their tgt on UNM given the firm's increased confidence in sales and earnings growth, which is based, in part, on their most recent proprietary sales survey, showing sales improvement in 2Q05 and 3Q05 is likely to continue in 4Q05.
10:33 am McDonald's: Friedman Billings reiterates Outperform. Target $36 to $36. Firm ups price target following stronger than expected December same-store sales, with the U.S., Asia-Pacific, the Middle East, and Africa beating consensus estimates (consensus estimates are provided by Briefing.com). They say the biggest surprise for the month of December was Europe, which posted strong same-store sales in Germany, France, and Russia.
10:32 am Sepracor: Am Tech/JSA Research initiates Buy. Target $64. The firm is keen on the co and its business model long-term, and given the recent stock reprieve, believe that the current valuation continues to represent an attractive entry point for investors looking to capitalize on a specialty pharmaceutical name with stability in its current product offering and a relatively robust pipeline, including a new product launch in the coming years.
10:31 am Boston Scientific: Prudential reiterates Neutral. Target $30 to $30. Price target cut follows the co's bold new proposal of $80/share for GDT. Firm says the new BSX offer is higher than JNJ's original offer of $76/share. They also note that original JNJ offer has already been approved by GDT shareholders, and they would be surprised if JNJ raised its offer beyond its original $76/share offer. They believe the new offer is dilutive for BSX on a cash basis through at least 2010.
Thanks for the heads up on the yield curve G!
RtS |
