From Briefing.com: 4:45 pm Weekly Wrap
It was a modestly upbeat week for the stock market. The S&P 500 index gained 2 points on the week, all on Friday. The Dow ended with a loss. That wasn't a bad performance considering the news leaned bearish.
Inflation was a focus. On Tuesday, the Federal Reserve released the FOMC policy minutes from the January 31 meeting. The minutes said that inflation had been "somewhat higher" than what was acceptable. That suggests that the Fed will raise interest rates further until it is no longer the case. The S&P lost 4 points that day.
On Wednesday, the inflation news didn't improve. The January CPI showed a 0.2% increase in the core rate, and a 0.7% total increase. The core increase translates into a 2.4% annual rate, and is above the 2.1% year-over-year gain as well as the Fed's 1 3/4% to 2% forecast. It is just one number and certainly not a cause for great concern, but it doesn't reflect an improvement either.
Surprisingly, the market seemed unconcerned and the S&P gained 10 points on Wednesday.
Rising oil prices were also an inflation concern this past week. Oil rose from $61 a barrel at the end of last week to almost $63 at the close this week. Geopolitical concerns increased. There was an attempted raid on a Saudi oil facility on Friday, and oil output was threatened by increased tensions from insurgents in Nigeria. Oil prices surged over $2 that day. Yet, the S&P was up 2 points on Friday after a 5 points Thursday loss.
There were few earnings reports this past week, and the negative ones drew the most attention. Wal-Mart warned of lower than expected profits this year. Homebuilder Toll Brothers did the same, suggesting that speculative activity was slowing down.
The economic calendar was also light. CPI, as noted above, was the most important. New claims for unemployment were very low and below 300,000 for the sixth week in a row. This reflects strong labor market conditions. January durable goods new orders plunged 10%, but that was after a spike the past three months on the back of strong aircraft orders. Excluding transportation, orders were up 0.6%. The plunge made good headlines but didn't reflect the start of a new trend.
The market managed to hold recent gains this past week despite news that leaned bearish. This occurred on a light news week. This suggests that the underlying tone is optimistic. We continue to believe that an aggressive Fed stance that brings at least two more rate hikes is more negative for stocks than is generally perceived, but investors have shrugged that thought off for now.
Index Started Week Ended Week Change %Change YTD
DJIA 11115.32 11061.85 -53.47 -0.5 % 3.2 %
Nasdaq 2282.36 2287.04 4.68 0.2 % 3.7 %
S&P 500 1287.24 1289.43 2.19 0.2 % 3.3 %
Russell 2000 730.94 736.60 5.66 0.8 % 9.4 %
4:20 pm : On Friday, the major averages finished near the unchanged mark. In the face of fresh geopolitical developments and a subsequent surge in the price of crude, the market demonstrated resilience. Ultimately, though, those factors underpinned the prevailing sense of uncertainty that continues to hinder a sustainable advance.
The market became reacquainted with the fact that geopolitical concerns still have the potential to affect the energy market. Supply concerns related to pledged militant attacks in Nigeria sent the price of crude oil considerably higher during early trade, and it spiked further following reports of an explosion at a Saudi Arabian oil facility. The incident was later revealed to be a foiled suicide bomb attack. That country is OPEC's largest producer, and two-thirds of its oil comes from the region in which that particular oil center is located. The development exacerbates worries that have been lately focused on Nigeria and Iran. Crude gained 3.9% today, and closed at $62.91 per barrel. Not surprisingly, the Energy sector benefited. As today's market action evidenced, the sector will continue to benefit from geopolitics and related supply concerns. Gold futures (+1.8%) also ran today. The yellow metal benefited from inflation fears that rising energy prices fan, and continues to attract buyers on account of geopolitical and economic uncertainty.
Energy price action sparked some broad-based selling, but some late-day buying helped to lift the market back to unchanged territory. That was particularly evidenced in the Consumer Discretionary sector's improvement. Because of higher energy costs' impact on consumer spending, that area of the market had been hardest hit by crude's rise. Disappointing guidance from Gap (GPS 18.40 -0.70) and Nordstrom (JWN 38.27 1.74) further contributed to the sector's weakness. As a side note, those reports and the selling that ensued reflect the fact that the market needs to adjust its earnings expectations for the quarters ahead. Kohl's (KSS 46.89 +2.38) was a bright spot in the retail space, following its solid results. By the bell, the sector had pared its intraday loss to 0.2%. The Staples sector booked a matching loss. A sore spot there was Wal-Mart (WMT 45.45 -0.25), which announced plans to expand its healthcare benefits program. Telecom (-0.5%) experienced some profit-taking and also closed lower.
The Energy sector (+1.2%) led Friday's trade, and an advance in the Financial sector, albeit a modest one, lent some muscle. Relative strength in banks and brokers helped the latter remain positive. In light of the inverted yield curve and lingering uncertainty about when the Fed's tightening activity will end, the recent outperformance of the Financial sector is peculiar to say the least. Nonetheless, its positive stance has been a supportive factor. Technology wavered today and closed on the flat line. On a related note, the Nasdaq outperformed. Research in Motion (RIMM 74.05 +4.52) was one of its drivers. Regarding its ongoing dispute with NTP, a U.S. Judge concluded that the company's patents were invalid, but stopped short of ordering an injunction. The announcement seemed to allay near-term concerns, but the outcome for RIMM remains unclear.
Separately, Durable Goods Orders plunged a much more than expected 10.2% last month (consensus -2.0%), largely due to a sharp drop in transportation orders. We do not view the number as a cause for concern, though. Excluding transportation, orders were up 0.6%, and year-over-year total durable orders are up 6.5%. That data did not appear to have much effect upon trade today.DJ30 -7.37 NASDAQ +7.72 SP500 +1.64 NASDAQ Dec/Adv/Vol 1271/1748/1.56 bln NYSE Dec/Adv/Vol 1289/1942/1.44 bln
1:52 pm Research In Motion (RIMM)
75.16 +5.63: In the ongoing patent battle between NTP and BlackBerry maker Research In Motion, U.S. District Judge James Spencer on Friday concluded that Research In Motion's patents were invalid, but stopped short of ordering an injunction against the company, which would have left millions of BlackBerry users without service and cost the company billions of dollars. Accordingly, investors found relief in the decision and lifted RIMM shares more than 6% during the regular trading session.
Although the announcement has seemingly quelled near-term concerns over any potential disruption to BlackBerry's service, in spite of the company's workaround plans, overarching legal issues remain a significant overhang on the stock. After stumbling through various courts and appeals, and an injunction request still under advisement, the prospects for the company remain uncertain. Until a settlement is reached and the legal overhang removed, the current investment proposition remains unclear.
In 2002, patent holding firm NTP successfully sued RIMM over the intellectual property rights for its BlackBerry email device. Although the two companies subsequently reached an agreement to settle the dispute, whereby RIMM would pay NTP $450 million for past damages related to the technology infringement and a license to continue selling the handheld device, an impasse was reached last June when NTP failed to uphold the terms of the agreement. RIMM, in turn, looked for a federal appeals court to enforce the agreement; however, the lower court concluded that RIMM infringed on NTP's patents and that the companies did not have a valid enforceable settlement.
--Richard Jahnke, Briefing.com
12:05 pm Wynn Resorts (WYNN)
66.21 -0.29: Wynn Resorts on Thursday reported a fourth quarter profit, reversing a year-ago loss, as business continued to grow at its new Las Vegas resort, which opened last April. Specifically, the company posted a profit of $5.0 million, or $0.05 per share, excluding one-time items, on revenue of $269.4 million. That fell short of analysts' expectations for earnings of $0.07 per share and revenue of $271.7 million, according to Reuters Estimates..
For the quarter, Wynn said net gaming revenue totaled $131.9 million, while revenue from non-gaming sources such as hotel, retail, entertainment, and food and beverage totaled $177.2 million. That included approximately $64.3 million in room revenues from Wynn Las Vegas. The resort's average daily rate was $278 and occupancy was 92.7%, generating revenue per available room, or REVPAR, of $258.
Wynn also noted that the construction of its resort in Macau is progressing on time and within budget, with the first phase expected to be open to the public in the third quarter of 2006. Furthermore, the company broke ground on the second phase of Wynn Macau during the quarter and expects to add an additional 150 table games to the overall facility as demand for gaming continues to advance.
Even though the company missed expectations, it still demonstrated strong progress in building its key Las Vegas business. The latest results, which follow solid reports from other casino operators, including MGM Mirage (MGM) and Harrah's Entertainment (HET), reflects strong industry demand and supports potential for future growth. Though we continue to hold an Underweight rating on the Consumer Discretionary stocks, we see the gaming industry as a bright spot within the sector.
--Richard Jahnke, Briefing.com
10:31 am Mohawk Industries (MHK)
88.60 +4.20: In accordance with GAAP, Mohawk Industries reported fourth-quarter net earnings of $1.26 per share. However, after backing out charges related to its October acquisition of laminate manufacturer Unilin, the maker of commercial carpets reported EPS of $1.59. That was nine cents better than the Reuters Estimates consensus and above company guidance of $1.49 to $1.58, excluding the adjustment. According to management, Unilin positively impacted quarterly results due to strong margins and lower operating costs; earnings were also positively affected by better leveraging of SG&A costs and sales growth.
Revenues rose 22.3% year/year to $1.8 bln compared to the $1.73 bln consensus estimate. Mohawk segment net sales grew 8% year/year to $1.2 bln due primarily to price increases which will be fully implemented during the second quarter. Dal-Tile segment net sales rose 19% year/year to $444 mln due to volume growth, price increases and a small stone products acquisition, while the Unilin segment had net sales of $169 mln. The Calhoun, Georgia-based company's carpet and rug business experienced significant disruption and higher costs in the raw material supply chain as Gulf Coast oil refineries struggled to recover lost capacity following the worst hurricane season on record. While management was able to work through the disruption with minimal impact to its service, the substantial increase in raw material and energy costs prompted management to increase selling prices twice during the fourth quarter.
Looking ahead, management guided first quarter EPS to a range of $1.21 to $1.30, which excludes stock option expensing to the tune of $0.04; the Reuters Estimates consensus is $1.29. While shares were down 3.0% as of last night's close, the stock has regained its upward momentum. Questions remain, however, whether the move can be sustained as management continues to grapple with margin uncertainty due to the difference in timing between rising costs and the implementation of passing price increases through to the customer. Of the 11 analysts currently covering MHK, nine of them maintain a Hold rating on the stock while the remaining two analysts are split between a Strong Buy and Buy.
--Brian Duhn, Briefing.com
10:24 am Midway Games (MWY)
10.20 -0.67: Midway Games, maker of video games such as Mortal Kombat and Blitz: The League, swung to a fourth quarter loss amid a transition to next generation gaming technology, extending a losing streak that dates back to the first quarter of 1999. Moreover, the Chicago-based software publisher provided a somber outlook for the current quarter and fiscal year as it continues to grapple with restructuring efforts and a challenging industry environment.
Midway reported a loss of $37.8 million, or ($0.42) per share, for the quarter, compared with a profit of $17.6 million, or $0.19 per share, a year earlier. Excluding restructuring charges, the company's loss was ($0.30) per share. That compares with analysts' expectations for a loss of ($0.24) per share, according to Reuters Estimates. Meanwhile, revenues slipped 9.6% year/year to $69.8 million due to lower demand for existing titles, as consumers wait for the release of new game consoles.
For the current quarter, the company said it sees revenues of about $13 million, with a net loss of $22 million. In addition, the company expects full-year revenues to grow approximately 3% to $155 million with a reduction in net loss to approximately $66 million, including stock option expense. That compares with analysts' forecast for first quarter and full-year revenue of $21.4 million and $199.6 million, respectively.
Based on the latest results and downside guidance, shares of the company are down sharply. With losses predicted through 2006 amid overarching restructuring and transition issues, we would continue to refrain from buying the stock at current levels.
--Richard Jahnke, Briefing.com
09:23 am Nordstrom (JWN)
40.12: For the 12th time in 13 quarters, Nordstrom, Inc., beat analysts' expectations. The high-end retailer reported a 36% increase in Q4 (Jan) profits, as earnings of $0.69 per share checked in two cents better than the Reuters Estimates consensus, reflecting continued operating improvements and strong sales momentum.
Net sales rose 9.3% year/year to $2.3 bln versus the $2.28 bln consensus estimate, while gross margins increased 81 basis points as a result of sales leverage on buying and occupancy costs. Same-store sales in the quarter rose 5.8%, higher than the company's guidance of 1-3%, driven by improved sales of regular-price items and a successful Men's Half-Yearly clearance sale. Like so many other retailers that kicked off the holiday season in sluggish fashion, as evidenced by JWN's 2.8% same-store sales increase for November that fell short of the Briefing.com consensus of 4.8%, things picked up for Nordstrom over the next two months. Comparable sales in December and January grew 7.7% and 6.0%, respectively, exceeding our consensus estimates of 4.0% and 4.7%.
Excluding stock-based compensation expenses of $0.06, the company expects to earn between $2.21 and $2.29 per share in fiscal 2007, which is in line with the Reuters Estimates consensus of $2.21 and only represents year/year growth of 12-16%. Fiscal 2006 earnings of $1.98 per share were up more than 40% from a year ago. For the first quarter, the company expects low single digit same-store sales growth and EPS in the range of $0.39 to $0.44 compared to a more optimistic range on Wall Street of $0.43 to $0.48. Nordstrom shares, which hit a historic high of $42.90 on January 30 heading into the release of its same-store sales report, are up 7.3% for the year but are relinquishing about half of those gains in pre-market trading.
--Brian Duhn, Briefing.com
09:15 am H&R Block (HRB)
25.19: H&R Block on Thursday reported lower than expected third quarter profits and cut its earnings guidance for the full year, citing a slower start to the tax filing season and increased competitive pressures in the industry. Ironically, the tax services provider also said it had underestimated its own state income tax liability by approximately $32 million and would restate results for fiscal 2005 and 2004, as well as previously reported quarterly results for fiscal 2006. Given the disappointing outlook heading into the company's seasonally strongest period, we continue to favor rival Intuit (INTU) in the tax preparation and services space.
For the latest quarter, H&R Block posted net earnings of $28.8 million, or $0.09 per share, down from $92.3 million, or $0.28 per share, a year earlier. Excluding the effect of a proposed litigation settlement and associated legal costs, the company earned $0.19 per share - seven cents below the Reuters Estimates consensus of $0.26 per share. Revenues rose 11.6% in the quarter to $1.16 billion, as lower revenues in mortgage services were offset by higher revenues in all other segments.
Tax services earnings improved 3% from a year ago, ex-items, driven by higher pricing. Mortgage services earnings increased 46% from the previous quarter, but fell 42% over last year's quarter. Revenues for the segment slipped 4% to $296.5 million despite a higher contribution from loan servicing. At the same time, business services posted a net loss of $1 million, compared with earnings of $5.9 million in the prior year, while investment services posted a loss of $7.7 million, a 61% increase over a year ago loss of $19.8 million.
In terms of guidance, H&R Block expects fiscal 2006 earnings to be between $1.65 and $1.85 per share. That is down from its previously stated range of $1.90 to $2.15 per share and below the consensus estimate of $1.88 per share, according to Reuters Estimates.
--Richard Jahnke, Briefing.com
08:52 am Wal-Mart (WMT)
45.70: On Sunday, Wal-Mart Stores CEO Lee Scott is expected to address the National Governors Association's Winter Meeting in Washington, D.C., highlighting some of the major health benefits improvements planned for implementation. In a written preview of his scheduled speech, Scott reiterated that employers cannot continue to meet America's soaring health care costs over the long term and that leaders in government and business need to find a solution. Among some of the changes, the company said it will expand the availability of its lowest cost, $11 monthly premium health-coverage plan to at least half of all associates by next year. Wal-Mart also said it would designate the children of part-time associates eligible for health coverage as soon as their parent becomes eligible and contract with outside firms to build and operate more than 50 new health clinics in Wal-Mart stores nationwide this year.
The company's announcement came after a labor-backed group called WakeUpWalMart.com released a report Thursday that claimed health care issues at Wal-Mart continue to worsen. According to the report, Wal-Mart failed to provide health coverage to over 57% of its employees last year, up from 52% the previous year. Wal-Mart, however, has dismissed the figure as a comparison of disparate timeframes, noting that from January 2005 to last month, its coverage ratio remained flat at about 46%. During Wal-Mart's most recent open enrollment period, it signed up more than 70,000 associates who didn't previously have health insurance. And that, according to Scott, "is just a start."
While the retailing giant did not spell out exactly when the changes would be put into effect nor disclose by how much it will reduce the current 24-month waiting period for part-time employees, Scott said Wal-Mart is going to take significant steps in the weeks ahead to make its health benefits even more affordable and accessible to its working families.
-- Brian Duhn, Briefing.com
07:53 am Gap, Inc. (GPS)
19.10: The largest retail chain in the US reported its first drop in annual profits in four years. Gap's struggles are well known and despite an in-line report for the fourth quarter, downside guidance for the year is weighing heavily on shares. Additionally, there is a New York Post story circulating Friday morning that three more senior executives are fleeing the retailer. Clearly recognizing its need to return value to shareholders, as growth remains nonexistent, the company announced plans to boost its cash dividend by 78% to 32 cents per share in addition to a $500 mln buyback program.
The San Francisco-based apparel company reported fourth quarter earnings declined to $337 mln, or $0.39 per share, from $378 mln, $0.40 per share, in the prior year. Net sales fell 2% to $2.82 bln, with comps down 6% versus a 3% drop last year. The company is in the midst of trying to right the ship by remodeling stores and refocusing product lines, but the timing of its turnaround is in question. The company forecasted earnings per share in a range of $1.26-$1.30, well below the market's expectation of $1.35. Management cited continued poor traffic trends, which fell 13% in February, and negative same-store sales for the first half of the year.
Shares had been moving higher after the company reported a 1% comp in January, but the momentum has been extinguished by its guidance. We wouldn't be surprised to hear that another retailer, or perhaps a private equity firm, is stepping in to take over the company, but this is only speculation. For those contrarians out there, GPS may be worth a look for those willing to wait it out until the second half of the year. Shares are trading at 16x - a premium multiple, which shows the market is anticipating the internal initiatives will revive this American classic.
--Kimberly DuBord, Briefing.com
07:43 am Marvell Technology (MRVL)
62.83: The band plays on for Marvell Technology. The company, which sells digital and mixed-signal processing chips, reported a 77% increase in fourth quarter profits and raised its annual revenue and long-term margin projections. The chipmaker continues to benefit from increased spending for high-speed networking and storage equipment, which are driving revenues and margin expansion for this Santa Clara-based company. The company earned $97.5 mln, or 42 cents per share in earnings, excluding acquisition-related charges and amortization of stock-based compensation, topping consensus by a penny.
Revenues grew 43.7% year/year to $489 mln. Gross margins rose 120 basis points sequentially to 54.9% assisted by its acquisition of Q-Logic HDD controllers. Despite seasonal weakness, Marvell guided revenues to grow 5-6% sequentially in the first quarter. For the year, it forecasts revenues will grow 36% to $2.25-$2.3 bln year/year, the bulk of which is organic, and gross and operating margins of 54% and 29%, respectively, which is on target with consensus. The board has also approved a 2-for-1 stock split. Overall, it was a solid quarter for Marvell, which not only is taking market share, but continues to produce strong top and bottom line growth. Shares are trading at a hefty 34.9x forward earnings versus its closest competitor, Broadcom (BRCM), at 18.9x.
--Kimberly DuBord, Briefing.com
09:55 am Stereotaxis: HSBC Securities upgrades Neutral to Overweight. Target $14.5 to $16. Firm expects the stock to trade below $12 as short-term investors hoping for near-term upside may be disappointed with the one Niobe system sale in 4Q05 and 2006 revenue guidance that was "heavily back end loaded." However, they believe STXS is well positioned to recognize at least 20 Niobe system sales in 2006; increasing their annual estimates for recurring revenue per installed Niobe system for 2006 to 2009.
09:55 am Sunoco: Bear Stearns upgrades Peer Perform to Outperform. Target $95. Firm expects refining margins to strengthen from current levels as refinery maintenance and new fuel regs are implemented in the coming weeks.
09:52 am ICT Group: Canaccord Adams reiterates Buy. Target $20 to $29. Firm is saying the following: outsourced customer management with leadership position in financial services, healthcare and wireless telecom verticals, growing B.P.O and data analytics business, and build-out of offshore component drive margin expansion.
09:50 am IHOP Corp: Morgan Joseph initiates Buy. Target $60. Firm is saying that in Jan 2003, IHOP changed its business model from one of company-financed restaurant development, to one in which the franchisees finance, develop and operate their new restaurants. The firm said financially, the change in business model made the co cash flow positive, providing for dividend payments, and stock buybacks.
09:49 am Orient-Express: Deutsche Securities initiates Buy. Target $42. Firm is saying that, in addition to operating leverage, they believe OEH has attractive organic growth prospects. Firm says the co is pursuing residential developments in Mexico and the Caribbean, which they believe could contribute $5-$10 mln of EBITDA in '06 (in 4Q) and at least $10-$15 mln in '07; OEH has reported strong pricing and volumes on pre-sales.
09:49 am Sypris Solutions: Needham & Co reiterates Buy. Target $10.5 to $13. Firm is saying that, having generated record free cash flow in its two most recent quarters and with healthy bookings and backlog, SYPR appears to be entering CY06 with solid momentum, following a disappointing CY05. The firm says by nearly every measure, SYPR's shares are inexpensive.
09:47 am Mohawk: Avondale Partners upgrades Mkt Perform to Mkt Outperform. Target $100. Firm upgrades followng Q4 results, saying they now have a greater comfort level with the integration of Unilin, and earnings now appear to be accelerating.
09:46 am Linn Energy: KeyBanc Capital Mkts / McDonald initiates Buy. Target $23. Firm is saying they would expect substantive growth in distributed cash flows to emanate from acquisitions. They say principal Mike Linn and financial sponsor Quantum Energy Partners have created this co almost solely by acquisition over the past three years, and the LLC structure, sans GP-owned IDRs, should afford it a relatively low cost of equity capital.
09:46 am Bioenvision: UBS reiterates Buy. Target $11 to $13. Firm raises target following positive opinion from C.H.M.P. on the marketing authorization application for clofarabine for the treatment of relapsed or refractory pediatric acute lymphoblastic leukemia. Firm says formal adoption of the recommendation was slightly ahead of schedule, previously expected at the March C.H.M.P. meeting.
09:39 am Marvell: Am Tech/JSA Research reiterates Buy. Target $76 to $80. Firm ups target following strong January quarter results at the high-end of its guidance range. They say demand was balanced with particular strength in 1.8-inch microdrives (vPods and navigation systems) and GigE switches. Firm notes that four customers were over 10% including WDC, Toshiba, Samsung, and Fujitsu. Firm raises their ests, and is assuming slightly higher 35x multiple on their raised CY07 EPS est. |
