From Briefing.com: 4:20 pm: 4:47 pm Weekly Wrap
The stock market gave a resounding vote of support to new Fed Chairman Bernanke this past week.
On Wednesday, Federal Reserve Chairman Bernanke testified before Congress on monetary policy. The market rallied that day, and was up on Thursday as well. Bernanke presented a strong anti-inflationary front, and that appeared to console the stock market.
His testimony wasn't all favorable to the outlook, however. He also said, "the risk exists that, with aggregate demand exhibiting considerable momentum, output could overshoot its sustainable path, leading ultimately -- in the absence of countervailing monetary policy action -- to further upward pressure on inflation." That implies that the Fed will perceive strong economic data, as well as higher inflation, as a reason to keep raising interest rates. The market got some of both this week.
The economic data this past week was very strong. January retail sales surged 2.3%. January housing starts jumped 14.5%. Both of these gains were in part due to warm weather but are nevertheless very impressive. The weather also impacted the industrial production data. Utility output plunged due to the warm conditions, but the manufacturing component was up 0.7% for the month. The economic data was strong on all fronts.
Inflation may be firming as well. January PPI was reported up 0.3% on Friday. More troubling was that fact the core rate was up 0.4%. This was the largest gain in a year. It follows a net decline over the prior three months. If it signals a firming trend in core inflation, the Fed is likely to keep raising interest rates.
In fact, the financial markets are now assuming that the Fed will not only raise interest rates at the March 28 meeting, but will do so at the May 10 meeting as well. The fed funds futures imply no subsequent rate hikes.
That is presumptuous, in our opinion. The economic data shows great momentum. Inflation may be picking up a bit. Rate hikes are certainly likely at the next two Fed meetings, but it is not at all clear why two more rate hikes are the precise prescription for controlling inflation.
Fourth quarter earnings are wrapping up. Over 86% of the S&P 500 companies have reported. The aggregate operating earnings gain is coming in at an impressive 15%. This past week, Hewlett-Packard, Deere, and Target were headliners with good reports. Dell had a mixed report.
Further declines in energy prices supported stocks this past week. Oil dipped below $60 a barrel before bouncing up on Friday. It still closed near $61, and other energy prices were lower this week as well.
The market appears comfortable with the Fed policy outlook. We are less confident that the Bernanke Fed will be conducive to stock market gains. Two more rate hikes will take the fed funds rate to 5%, and will probably raise long-term rates as well. There is no guarantee that the Fed will stop at that point. Higher rates will slow economic growth, and make bonds more attractive relative to stocks. The market's bullish reaction this week could prove overly optimistic.
Index Started Week Ended Week Change %Change YTD
DJIA 10919.05 11115.32 196.27 1.8 % 3.7 %
Nasdaq 2261.88 2282.36 20.48 0.9 % 3.5 %
S&P 500 1266.99 1287.24 20.25 1.6 % 3.1 %
Russell 2000 717.13 730.94 13.81 1.9 % 8.6 %
On Friday, the market's major averages traded within a relatively narrow range that was modestly below the flat line. Several factors stunted the market's progress. They included a higher than expected PPI read, disappointing guidance from Dell (DELL 30.38 -1.58), and a rebound in prices across the energy complex.
The core (which excludes food and energy) Producer Price Index rose 0.4% in January. That was double the anticipated increase, and it breaks the trend of low figures. Following Fed Chairman Bernanke's assertion that monetary policy decisions will be increasingly dependent on incoming data, the sense that the PPI pop may signal a firming trend raises interest rate concerns. The read may prove an aberration, and it is not a number to panic over. The market did not, but it nonetheless feeds the argument for further rate hikes. Investors await the January CPI report, due Wednesday, which now takes on added importance.
Dell was also a primary factor behind today's bias. Like many of its peers, the company delivered a better than expected fourth quarter profit report but issued downside guidance. Intuit (INTU 49.25 -5.55) did the same thing. On its conference call, Dell said that it had nothing to add with respect to the potential use of AMD chips in its computers. As a result, Advanced Micro (AMD 40.40 -1.34) shares slid. Due to those three companies, the computer hardware, application software, and semiconductor industries suffered. NVIDIA (NVDA 47.47 +0.27) lent some support following its upside earnings results and better than expected revenue guidance, but the Tech sector still fell 1.1%. That area of the market weighed heaviest today.
Amid what are arguably oversold conditions, prices across the energy complex took back some ground. Geopolitical issues continue to raise supply concerns, and reports today that Nigerian militants threatened to wage war on foreign oil interests helped send prices higher. That price action contributed to the Discretionary sector's (-0.6%) weakness. Time Warner (TWX 17.78 -0.19), due to reports that Carl Icahn has abandoned his takeover plans, and Radio Shack (RSH 19.05 -1.70), following its disappointing earnings report, also weighed heavily. While we aren't proponents of the idea that a strong correlation between confidence and spending exists, the fact that the University of Michigan's read on February consumer sentiment checked in below expectations did not help that sector.
The Energy sector (+0.7%) led the session, but its rise was somewhat tempered by the fact that oil prices remained below $60 per barrel. The Utilities sector (+1.0%) contributed the strongest gain. KeySpan (KSE 40.40 +4.22) was the driver, due to its confirmation that it is discussing potential strategic combinations with various parties. Solid earnings from PG&E (PCG 37.68 +0.52) further aided its advance. Led by Honeywell (HON 42.11 +0.53), Industrials (+0.4%) lent support. That stock enjoyed follow through buying interest after yesterday's upgrade, and was the Dow's best performer.DJ30 -5.36 NASDAQ -12.27 SP500 -2.14 NASDAQ Dec/Adv/Vol 1628/1399/1.93 bln NYSE Dec/Adv/Vol 1423/1851/1.57 bln
4:06PM Zilog: Micron Technology purchases fabrication facility from ZiLOG (ZILG) 2.21 -0.04 : Micron Technology (MU) announces it has purchased a fabrication facility in Nampa, Idaho, from the co. Micron plans to use the facility for the final stages of image sensor production and other fabrication processes. Micron purchased the 8-inch wafer fabrication facility and surrounding land from the co for a total consideration of $5 mln. The co received about $3.9 mln for the facility and 19 acres of the surrounding land, and the co received $1 mln for its vacant 19 acres at the site. The transaction costs will be apportioned on a prorated basis to the parties. Micron plans to invest in facility improvements and expects to bring the facility online by the end of the year. Micron also expects to hire operators, technicians and support staff at the facility.
2:00PM Texas Instruments adopts majority voting for Director Elections (TXN) 31.59 -0.16 :
09:33 am Advanced Energy: Needham & Co upgrades Hold to Buy. Target $29. The firm notes that AEIS reported not only a good qtr but more importantly a strongly improving outlook. Given the recent very positive report by AMAT and the fact that AMAT was 24% of AE's business it is clear they will benefit from the strong up trend. They also added that AEIS is their top pick in the sub supplier market as they feel they have the most upside.
09:29 am MKS Instruments: Needham & Co upgrades Hold to Buy. Target $31. The firm notes that MKSI reported a good fourth quarter with excellent results. Early in the fourth quarter, the Co had expected customer order patterns to remain stable, but bookings from semiconductor OEMs, contract manufacturers and semiconductor fabs picked up as the quarter unfolded.
09:27 am NICOR: BB&T Capital Mkts initiates Buy. Target $46. Firm expects a recent utility rate increase, lower operation and maintenance expense growth, and continued volume growth at Tropical Shipping to drive their above-consensus EPS ests for 2005-07.
09:27 am Audible: Kaufman Bros reiterates Hold. Target $8 to $8. Firm cuts target following Q4 results that were slightly below their estimates. Firm says the ADBL story continues to be complicated - the early stage of the industry is seeing growing pains; marketing and technological missteps at ADBL have further muddied the waters; a significant amount of expenditure is being capitalized; and the lack of guidance provides no insight into the business. Until they can get further clarity on the underlying dynamics of the business, they would recommend investors to stay on the sidelines.
09:26 am Chicago Mercantile: Banc of America Sec reiterates Neutral. Target $391 to $391. Firm is saying their hosting mgt meetings reaffirms their confidence in fundamentals, including: CME is rolling out MSCI EAFE (Europe, Africa, Far East) contract in March; with est. 7% mkt. share of the spot market, CME has meaningful opportunity to gain share in FX markets; they say CME is rolling out MSCI EAFE contract in March. Firm thinks with $1.2 trillion A.U.M. indexed against the index, there could be meaningful demand for this product; CME rolling out housing futures in 2Q06 and they expect an energy offering over the summer.
09:25 am Dell: Banc of America Sec downgrades Buy to Neutral. Firm downgrades following Q4 results. They are adding their view of #s and guidance last night, they think trends are likely to continue: 1) weak operating income growth, 2) margins particularly in the in the consumer business (~<4% operating profits), 3) slowing US PC unit growth rate, and 4) slowing growth rates in enterprise servers due to greater competition, esp. from HPQ. They're watching on progress from several things that could help get them more bullish again (aside from U.S. PC industry growth).
09:24 am UAL Corp.: Prudential upgrades Underweight to Overweight. Firm upgrades based on its current valuation relative to CAL and AMR. Firm believes that UAUA should generate margins and income on par with AMR. The firm says that shares of UAUA are currently more in-line with AMR's valuation. They now see UAUA shares moving up with those of AMR and CAL, benefiting from reduced industry capacity and firmer ticket prices. Their tgt moves to $43 from $25, which is comparable to their tgt valuation for CAL and AMR.
09:23 am MarkWest Energy: Sanders Morris Harris initiates Buy. Firm is saying over the past year or so, the units have traded flat, plagued by accounting issues that appear to be a thing of the past, as well as an anticipated unit offering that may be depressing the unit price. The firm says the Partnership has a number of growth projects in Texas and Oklahoma that they believe can provide unitholders with a meaningful ongoing increase in their distribution. They feel short-term pressures will remain, but they believe once the Partnership puts together some solid quarters of performance, it can win back some of the ground it has lost.
11:59 am PG&E Corp. (PCG)
37.66 +0.50: For the fourth quarter of fiscal 2005, PG&E Corp reported non-GAAP earnings of $0.49 per share. That was six cents more than the Reuters Estimates consensus, keeping its streak intact of eight straight quarters posting better than expected earnings. Operating revenues rose 25% year/year to $3.73 bln, well above the $3.1 bln consensus estimate, as Electric revenue accounted for 64% of its total line.
According to Chairman and CEO Peter A. Darbee, the parent of California's largest utility executed its 2005 plan to completely restore PG&E's financial health by restarting and increasing the dividend, repurchasing stock and announcing plans for utility infrastructure investments -- all of which play into why we maintain a Market Weight rating on Utilitis. Darbee added, "As we begin 2006, we're focused on transforming our business so that we can provide our customers with faster, better and more cost-efficient services while delivering value to our shareholders."
The San Francisco-based company also raised its previously issued FY06 EPS outlook by a nickel, to a range of $2.40 to $2.50 (consensus $2.44), reflecting the positive impact of share repurchases and the substantial annual capital investment forecast for the utility. This guidance is in line with PG&E's recently announced target average annual EPS growth rate of about 7.5% for the period 2006-2010. Shares of PCG currently trade at 16.2x forward earnings, a slight premium to the S&P Utilities sector's forward P/E multiple of 14.3x.
--Brian Duhn, Briefing.com
10:38 am Sirius Satellite Radio (SIRI)
5.47 -0.18: Sirius Satellite Radio's loss widened in the fourth quarter, driven by higher subscriber acquisition costs and increased programming and content expenses. The company, which added "shock jock" Howard Stern to it programming line-up in January, said it lost $311.4 million, or ($0.23) per share, compared with a loss of $261.9 million, or ($0.21) per share, in the year ago period. Revenue more than tripled to $80 million during the period from $25.2 million a year earlier. According to Reuters Estimates, analysts were expecting a loss of ($0.22) per share on revenue of $74.07 million.
The wider loss for the quarter was driven by a 124% jump in subscriber acquisition costs, as well as a 36% increase in programming and content expenses, to support a 143% increase in gross subscriber additions. Sirius said it added a total of 1.27 million subscribers during the fourth quarter and ended the year with approximately 3.32 million subscribers. That is a 190% increase in total subscribers from a year earlier. Average monthly churn, or the number of subscribers who cancelled their service, was consistent with a year ago at 1.5%.
Sirius said it expects to have over 6 million subscribers by the end of the year, and a monthly churn rate of approximately 1.8% for 2006. It also expects subscriber acquisition costs to come in near $110 for the full year 2006, compared with $113 in 2005, and to decline further in 2007. Full-year revenues are anticipated to be about $600 million.
In similar fashion, rival XM Satellite Radio (XMSR) reported a wider than expected fourth quarter loss earlier this week on higher costs for acquiring new subscribers. Both Sirius and XM Satellite have been aggressively investing in new programming and marketing and promotion to bolster their subscriber base and expand their business. However, those investments have largely curtailed expectations for future profit growth. Despite solid subscriber growth, we continue to believe the lack of earnings visibility hinders the current investment prospects and would remain on the sidelines with both stocks.
--Richard Jahnke, Briefing.com
10:31 am Campbell Soup (CPB)
30.71 +0.21: Surpassing Wall Street's expectations for a fourth consecutive quarter, Campbell Soup reported Q2 (Jan) EPS of $0.61, which was two cents better than the Reuters Estimates consensus. The company continued to improve its profit margins through pricing and productivity, which more than offset cost inflation and enabled CPB to drive strong earnings growth in a challenging environment.
Net sales rose 3% year/year to $2.28 bln, matching analysts' forecasts. Sales for U.S. Soup, Sauces and Beverages grew 6% year/year to $1.02 bln, as higher prices and improved productivity partially offset cost increases of 4-5%. Top-line growth was driven largely by strong increases across its U.S. soup division, especially in its condensed portfolio -- the company's highest-margin segment and biggest profit contributor. Campbell's condensed soup business, which competes against Heinz's (HNZ) popular Condensed Tomato brand, grew sales 6% from a year ago. Ready-to-serve soup sales, which compete with General Mills' (GIS) Progresso brand, showed significant improvement following a weak first quarter, growing 9% from a year ago.
For fiscal 2006, Campbell's reaffirmed earnings growth guidance of 5-7%, which equates to FY06 EPS of $1.72-1.75 (consensus $1.75). While we still favor more growth-oriented groups within Technology, Energy, and Industrials, the non-cyclical nature of the Consumer Staples sector affords it added appeal in uncertain environments. The fact that CPB also provides an income component, with a dividend yield of 2.4%, provides an added source of appeal for defensive-oriented investors.
-- Brian Duhn, Briefing.com
09:21 am Intuit (INTU)
54.80: Amid the 2005 tax season, Intuit reported a 26% rise in second quarter earnings on strong sales of QuickBooks accounting software and TurboTax tax-preparation products and services. To reflect the strength of the first-half performance, the Mountain View, California-based company also raised its guidance for the full year, but offered a disappointing forecast for the current quarter. Though the revised outlook fell short of analysts expectations, sending shares lower in pre-market action, the long-term outlook for the company and continued positive momentum remains intact.
For the most recent quarter, Intuit said net income climbed to $184.9 million, or $1.02 per share, from $147.3 million, or $0.77 per share, a year earlier. Excluding one-time items, the company earned $176.5 million, or $0.97 per share. That topped the Reuters Estimates consensus of $0.95. Revenue for the period grew 15% year/year to $742.7 million, exceeding expectations for $733.58 million.
The company said that revenue benefited from changes in the TurboTax offering and pricing, which shifted approximately $35 million of revenue into the second quarter that in prior years would have been booked in the third quarter. Meanwhile, QuickenBooks-related revenue rose 16% from a year ago to $259.0 million due to strong demand for small business accounting software. Consumer tax revenue of $190.3 million was up 35% year/year, while professional tax revenue of $150.5 million was flat with the prior year period.
Given the strength in the second quarter, a seasonally strong period for the software maker, Intuit raised its full-year earnings guidance to $2.27 to $2.32 per share, ex-items, up from the previously stated range of $2.23 to $2.31 per share. That compares with the Reuters Estimates consensus of $2.32 per share. Revenue for the year is expected to be between $2.22 and $2.26 billion, representing annual growth of 9% to 11%, versus the consensus estimate of $2.25 billion. For the third quarter, the company forecasted earnings of $1.62 to $1.66 per share, ex-items, on revenue of $860 to $880 million. That was below analysts' expectations for earnings of $1.74 per share on revenue of $892.87 million.
--Richard Jahnke, Briefing.com
09:15 am Isle of Capri Casinos (ISLE)
29.28: On November 18, 2005, Isle of Capri Casinos said it expected to report a one-cent loss in the third quarter due primarily to the effect on its gaming business following the worst hurricane season on record. However, shareholders took solace in late January when the Biloxi, Mississippi-based company revised its previous outlook, issuing guidance that far exceeded initial expectations and lifted ISLE shares 11%. The company guided for Q3 earnings of $0.09-0.13 per share due to the reopening of its casino in Biloxi, as well as continued positive trends at its southern region properties.
Last night, ISLE said third quarter profits rose 17% as it continues to recover from hurricane-related issues. In December, the company reopened its Isle-Biloxi casino, which was shut down because of damage from Hurricane Katrina, and reopened its Pompano Park Harness Track in Florida, which was damaged by Hurricane Wilma. ISLE reported Q3 (Jan) earnings of $0.23 per share, which excludes charges of $0.10, but may not be comparable to the Reuters Estimates consensus of $0.11.
Total revenues rose 1.7% year/year to $270 mln, slightly better than the $265 mln consensus estimate. The company's four operations in Mississippi accounted for 24% of its total top line. Isle-Biloxi's net revenues were down from the prior year period, principally because the casino was closed for the first two months of the quarter, but adjusted EBITDA at the property was up significantly over the same quarter in fiscal 2005 due to reduced competition in the market. The company's two properties in Louisiana contributed 26% of its net revenues.
While ISLE did not offer any financial guidance, CEO Bernard Goldstein believes the company is well positioned, with continued rebuilding in Mississippi, further expansion work with new development opportunities in Florida and Pennsylvania, and projects in Iowa and Missouri, which will be partly funded by proceeds from a recent transaction. Three days ago ISLE agreed to sell two gaming properties, one in Bossier City (Louisiana) and the other in Vicksburg (Mississippi), to privately-owned Legends Gaming, LLC for $240 mln in cash.
--Brian Duhn, Briefing.com
09:02 am Weight Watchers (WTW)
49.66: Weight Watchers squeezed by consensus estimates by a penny, earning 38 cents per share in the fourth quarter, yet its net profit was down from the year-ago period. The weight loss center reported net income of $38.9 mln, down from $43.2 mln in the prior year, which was assisted by a one-time tax benefit. Led by North American attendance, revenues grew 8% year/year to $251.2 mln, roughly in-line with last quarter's figures. For the full year, sales rose 12% to $1.15 bln but net income declined 5% from the year prior to $174.4 mln.
The quarter was driven by North American attendance, which was up 6.5%, while the UK market remained weak weighing on overall international growth rates. Gross margins increased slightly to 51.9%, up 20 basis points year/year. Weight Watchers, which has company-owned and franchise operated weight-loss centers in 30 countries, forecasted full year earnings in a range of $2.18-2.28, excluding stock based compensation expense. The estimates are right on target with consensus expectations. The company did announce it will begin paying a quarterly dividend of $0.175 per share payable on April 7th, which equates to a current dividend yield of 1.4%.
--Kimberly DuBord, Briefing.com
08:52 am NVIDIA Corp. (NVDA)
53.45: Quarterly profits doubled for the computer graphics card maker, Nvidia Corp., on robust sales of chipsets. Higher than expected revenues and optimistic guidance sent shares soaring in the after-market more than ten percent. Nvidia expects 2006 to be a stellar year with the roll out of Microsoft's (MSFT) Vista - a highly graphic-intensive operating system. Moreover, the company also produces the graphic chips for Sony's (SNE) PlayStation 3 that launches later this year.
In what is seasonally a weak quarter in terms of sales, the company guided revenues up 3-6%, which is ahead of expectations. The clear strength in the fourth quarter came from its chipsets business, which grew 27% sequentially. Overall revenues were up 12% to $633.6 bln, but it wasn't just about the top line. Gross margins continue to improve, expanding 110 basis points to 40.2%. Management forecasted gross margins will widen an additional 50-100 basis points and is aiming to hit their mid 40's target. Earnings of $0.53 per share surpassed expectations by four cents. While the company's operating performance is commendable, its fortunes are well-priced in at this point with shares trading in-line with the company's peers.
--Kimberly DuBord, Briefing.com
08:20 am Japan's Resurgence
Japan's economy grew at a much faster pace than the first three months of the year on a booming domestic economy, as well as rising exports, solidifying the country's economic resurgence. This was a strong end to what has been a turnaround year for the Japanese economy, after being marred by deflation for a over a decade.
We have long been bulls on the Japanese recovery, suggesting investors gain exposure to the market. The call has been the right one, with the Nikkei soaring to new highs and ending 2005 as one of the best performing in the world. We continue to think investors will be well served holding Japanese equities as it's clear the economy is running on all cylinders. We would prefer domestic-driven stocks, which trade at a lower multiple to the tech-heavy exporters.
What has been the secret to Japan's rebirth this time, after many false starts, is that the recovery has been driven by strong domestic demand. Prior cycles of export-driven growth have not been sustainable. Gross domestic product grew 1.4% in the last quarter of the year, according to the government, exceeding economists' prediction of 1.2% expansion. On an annualized basis, this translates into 5.5% growth, outpacing forecasts and the US growth of 1.1%. The strong growth readily indicates a greater possibility the Bank of Japan tightens its ultra loose monetary policy.
--Kimberly DuBord, Briefing.com
08:18 am Dell Computer (DELL)
31.96: On the footsteps of a strong quarterly result from rival Hewlett-Packard (HPQ), Dell also reported an upside in earnings, but the overall quality of the quarter shone less bright. Pro forma earnings of 43 cents per share topped estimates by two cents, but the upside was assisted by a lower tax rate and share count. Revenues of $15.2 bln beat consensus estimates of $14.88 bln and the company's guidance, but an extra week added 2-3 points.
The upside in earnings wasn't top-line driven as gross margins contracted 80 basis points sequentially to 17.8% - the lowest level in more than a year. With Dell competing on price, the concern is the company will suffer further margin pressure. The bright spot was the strong top line growth, up 9% sequentially and 13% yearly, with broad-based growth across all categories and regions, with desktops being the exception, basically flat year/year. Revenues outside the US jumped 21%, contributing to 43% of overall sales.
Unlike HPQ, the guidance left the market wanting more. Dell forecasted Q1 revenue growth of 6-9% to $14.2-$14.6, below the consensus estimate for 10% growth, or $14.7 bln. The company is clearly being conservative, which is prudent as it enters its most difficult quarter of the year. The quarter poses more questions than it answers, with the biggest concern being further margin deterioration. Having said that, the stock remains undervalued, trading at a forward multiple of 17.5x - well below its historical average of 27x. Given the company's superior business model and operating excellence, we think the stock offers a strong risk/reward argument at these levels.
--Kimberly DuBord, Briefing.com |
