From Briefing.com: 4:20 pm : Trading was choppy Friday. Futures trade had indicated an upside open, but a revenue warning from Intel (INTC 20.28 -0.04) just before the bell catalyzed selling. Some broad-based afternoon buying took the indices well above the unchanged mark, but gains were well-pared by the time the closing bell rang. Interest rate uncertainty continues to trouble the market, making gains hard to sustain, and rising Treasury yields helped temper sentiment.
With respect to Intel, the company cut its first quarter revenue outlook to $8.7-9.1 billion, which is below the $9.39 billion consensus estimate. The chip maker cited weaker than expected demand and a slight market segment share loss. Because of the change in revenue expectations, gross margins will be adversely impacted. Reading between the lines, it is clear that Intel is still losing share to Advanced Micro Devices (AMD 39.54 +0.04) - a development we think that has a lot to do with capacity limitations that should ease in the second half of the year. The news was a bearish factor, but its effect lessened over the course of the day. Essentially, it came as not much of a surprise, and it was interpreted as company-specific. The semiconductor companies are in the midst of a cycle upturn, which Novellus (NVLS 26.35 -0.02) underscored with its mid-quarter update last night. The Technology sector (-0.4%), the Nasdaq, and the Philadelphia Semiconductor Index each closed lower, but still showed resilience. We continue to like Intel, which is a suggested holding in our Active Portfolio.
The Industrial sector (+0.4%) fared best today. Transportation was a pocket of relative strength, and General Electric (GE 33.06 +0.21) lent muscle following its reaffirmed Q1 and FY06 guidance. Continued geopolitical tensions, an OPEC minister's comments, and the cartel's upcoming meeting fed supply fears that helped crude rise for its fourth straight session. Along with Industrials, the Energy sector (+0.1%) led trading, but both faced some late-day selling and leadership faded. With the rise in crude, the Discretionary sector (-0.2%) declined. Autos also weighed heavily. A bright spot there was Starbucks (SBUX 35.58 +0.18), which reported better than expected February same-store sales.
Due to profit-taking, Telecommunications closed 0.9% lower. The Financials sector fell to a 0.3% loss that was a big factor behind the market's late-day decline. Interest rate uncertainty continues to plague the market, and affected rate-sensitive areas. Rising bond yields and the yield curve's continued inversion were additional factors that weighed on trade today. The benchmark 10-year declined 13 ticks, and rose to a 4.68% yield.
Separately, the economic front was also a light one. The University of Michigan's revised Consumer Sentiment report for February checked in at 86.7, versus the 87.5 consensus estimate. The February ISM Services Index, meanwhile, jumped to 60.1 from 56.8 in January. Neither data had much effect on trading.DJ30 -3.92 NASDAQ -8.51 SP500 -1.91 NASDAQ Dec/Adv/Vol 1764/1237/2.43 bln NYSE Dec/Adv/Vol 1906/1134/1.57 bln
4:08 pm Weekly Wrap
This week was similar to last week. The tone was modestly upbeat and resilient. The news was mixed and so were the major indices.
The big market moving event this week was what seemed to be an innocuous comment from the finance chief at Google. He said the company "was getting to a point where the law of large numbers starts to take root...at the end of the day, growth will slow." That is rather obvious. Yet, the S&P plunged 13 points on Tuesday when that comment was made. It appeared to show the fragile side of the market.
On Wednesday, however, Google made some more positive comments to temper the impact, and the S&P rebounded 11 points. The strange part about all this is that Google's growth trend would impact the broad market so much. It is by no means clear why the value of General Electric and Johnson & Johnson should be dependent on the fluctuations in Google's stock price, but that is what happened.
The action the rest of the week was fairly tame, and volume on the light side. There wasn't much news.
The economic data were mixed. Fourth quarter real GDP was revised upward, as was expected, to a 1.6% growth rate from an originally reported 1.1%. January new home sales were down 5.0% while existing home sales fell 2.8%. It is not surprising that home sales are starting to ease. February auto sales were down from a strong January, but above the fourth quarter levels. Claims for unemployment remained low while surveys suggested that manufacturing grew at a solid clip in February.
The most important release may have been the core PCE deflator. This inflation measure is closely watched by the Fed. It rose 0.2% for January, and is up 1.8% for the past year. That was as expected, and leaves it pushing the upper end of the Fed's range. Overall, there was nothing dramatic in the data.
Retailers were about the only noteworthy firms on the earnings calendar. Lowe's, Staples, American Eagle, Costco, and Talbots all had good reports, but the broader market did not react.
The biggest news on the earnings front was a warning from Intel Friday morning. The company said that revenue and profits for the current quarter would be less than Wall Street expected. The market opened lower on the report, but Intel closed down only 18 cents, and the S&P came back to end with only a 2 point loss.
That reflected the main theme of the week, which was resilience. The market has inched higher in recent weeks despite the likelihood of further Fed tightening. The 10-year bond yield backed up this week to 4.68% from 4.57% the week before. The European Central Bank also raised rates and the Japanese bank is expected to soon. The stock market has brushed such factors aside for now.
Oil prices were up slightly this week amidst persistent geopolitical concerns. Oil closed at $63.60 a barrel, up about $1.
The market has held up very well the past few weeks but rising interest rates restrain the upside. In addition, earnings expectations for the remainder of the year continue to drift lower. The outlook is as mixed as the news was this past week.
Index Started Week Ended Week Change %Change YTD
DJIA 11061.85 11021.59 -40.26 -0.4 % 2.8 %
Nasdaq 2287.04 2302.60 15.56 0.7 % 4.4 %
S&P 500 1289.43 1287.23 -2.20 -0.2 % 3.1 %
Russell 2000 736.60 738.44 1.84 0.2 % 9.7 %
10:20 am Pep Boys (PBY)
15.36 -0.02: Auto parts retailer Pep Boys on Thursday reported a wider than expected loss as sales remained essentially flat from last year. The company, which has been working to re-invigorate its stores amid rising competitive pressures, posted a net loss of $9.7 million, or ($0.18) per share, versus a loss of $22.7 million, or ($0.42) per share, in the year ago period. Before an accounting adjustment and one-time items, net loss from continuing operations totaled $13.2 million, ($0.24) per share. That was six-cents below the Reuters Estimates consensus of a loss of ($0.18) per share.
Sales for the quarter were down about 0.7% to $549.8 million, from $553.4 million last year. Comparable merchandise sales increased a slight 0.7% year/year, while comparable service revenue declined 4.3%. As a result of lower service revenue, gross profits fell significantly to 20.4% of revenue, from a rate of 26.3% a year earlier.
Pep Boys chief Larry Stevenson noted, "For Q4, comparable service center revenue accelerated from recent quarters...we have been emphasizing the stability and training of our re-invigorated store and field team, and that is starting to show results with customer volumes." Looking to 2006, the company said it plans to shift focus from sales growth to increasing labor productivity and gross margin, while maintaining sales momentum.
Elsewhere in the sector, rival AutoZone (AZO), the nation's largest auto parts retailer, on Wednesday posted a 4% increase in quarterly profits, as new initiatives aimed at deepening customer relationships and revitalizing its stores boosted sales. On the top line, sales rose 4% to $1.25 billion, with comparable store sales up 0.4%.
--Richard Jahnke, Briefing.com
10:07 am Intel (INTC)
20.11 -0.38: Intel dropped the bomb today that many pundits had expected them to drop. Specifically, the world's largest chip maker cut its first quarter revenue outlook to $8.7-9.1 billion from a prior forecasted range of $9.1-9.7 billion. The reasons cited were weaker than expected demand and a slight market segment share loss. Because of the change in revenue expectations, gross margins will be adversely impacted.
Reading between the lines, it is clear that Intel is still losing share to Advanced Micro Devices (AMD) - a development we think that has a lot to do with capacity limitations that should ease in the second half of the year. In terms of Intel's comment about demand, it is sure to stir ongoing concerns about Dell's (DELL) business and average selling prices for microprocessors as Intel manages its inventory growth.
The news from Intel can't be labeled anything other than bad, but we're not expecting a Google-like fallout for several reasons. First, as noted above, it isn't entirely a surprise. In the past few weeks, a cadre of analysts have issued notes expressing the likelihood that Intel will cut its guidance. Just yesterday, in fact, we heard that Merrill Lynch was cutting its estimates for Intel on the basis of concerns about a pre-announcement. On Wednesday Bear Stearns cut its estimates following channel checks while Stifel Nicolaus cut its price target for Intel (to $30 from $35), saying it believed Intel suffered through a much weaker than expected January and that it was likely to come in at the low end of prior guidance at best (Intel's revised guidance is spot-on with Stifel's view).
Secondly, Intel's stock has come down hard already, with the catalyst being an earnings miss for the fourth quarter, first quarter guidance that was also below the consensus estimate at the time, a concession that it lost share to AMD, and news that it will no longer provide mid-quarter updates. Since that report in January, shares of INTC have dropped 20%. Consensus EPS estimates have also been dropping. According to Thomson Financial, the first quarter consensus EPS estimate has come down ten cents in the past 30 days to $0.27 while the FY06 consensus EPS estimate has been revised to $1.23 from $1.63 in the same period.
At its current price, Intel trades at approximately 14x trailing twelve month earnings, which is a 53% discount to its 10-yr historical average of 30x. Granted it's a hard sell pushing Intel these days, but for the long-term investor, it is times like these that afford them an opportunity to pick up an industry leader at a discounted price. Owning Intel may not produce big returns over the near-term, but with the ramp of its dual core processors throughout the year, its financial strength, its technological leadership, and its brand equity, Intel is a name we'd want to own at these levels, which is why we have it as a suggested holding in our Active Portfolio.
--Patrick J. O'Hare, Briefing.com
10:05 am Univision Communications (UVN)
33.50: Shares in Univision Communications have been on the rise after the number one US Spanish-language network put itself up for sale. Its ranking behind News Corp's (NWS/A) Fox channel for younger viewers has sparked speculation that Rupert Murdoch may be an interested buyer. A recent Wall Street Journal article indicated concerns, which we share, over the possibility News Corp may do another expensive purchase. Other names floating around include, Grupo Televisa SA, which owns 13% of the company and has said it was considering a bid but wasn't in negotiations, according to Bloomberg.
Univision's fourth quarter pro forma earnings of 25 cents per share checked in two cents ahead of expectations. Revenues rose 11.3% year/year to $513.5 mln vs. the consensus of $497.7 mln. Looking ahead, the company expects first quarter sales will rise in the mid-single digits with EPS in a range of 14-16 cents - on target with consensus. Univision continues to be plagued by higher costs. In the quarter, it wrote down the value of its Entravision network resulting in a $33.6 mln expense. Our preference in the media sector remains with the content providers over the distributors, the basis for our suggested holdings of Disney (DIS) and News Corp (NWS/A) in our Active Portfolio.
--Kimberly DuBord, Briefing.com
09:12 am Novell Inc. (NOVL)
9.53: Shares of Novell traded sharply lower in pre-market action, after the networking software maker reported first quarter earnings plunged from a year ago, when results were boosted by a large settlement with Microsoft (MSFT). For the quarter, the Waltham, Massachusetts-based company posted net income of $2 million, or break-even per share. That compares with $392 million, or $0.90 per share, for the same quarter last year, which included a $448 million gain from the legal settlement with Microsoft. Excluding restructuring charges and other one-time items, earnings were $18 million, or $0.04 per share - a penny better than the Reuters Estimates consensus.
Top-line growth continued to founder during the quarter. Revenues fell 5.4% year/year and 14.3% quarter/quarter to $274.4 million, but topped the consensus estimate of $269.4 million. Licensing revenues were $42.1 million, down 5.0% year/year, while service revenues were $232.3 million, down 5.5% year/year. Novell said it recognized total Open Platform Solutions revenue of $56 million, which included $43 million from sales of Open Enterprise Server and $13 million from other Linux-based products. It also recognized approximately $63 million of Systems, Security, and Identity Management revenue, up 20% year/year. Revenue from OES and Netware-related products, however, slipped 11% from a year ago.
For the fiscal second quarter, Novell expects to earn between $0.02 and $0.03 per share, excluding stock option expense, on revenue of $272 to $282 million. That was below analysts' estimates, which called for earnings of $0.04 per share on revenue of $282.59 million, according to Reuters Estimates. Although shares of Novell have recently climbed higher, gaining about 8% since the beginning of the year, there are no meaningful catalysts on the horizon to support further gains. As top-line growth remains anemic, we would continue to refrain from owing the stock.
--Richard Jahnke, Briefing.com
08:53 am Novellus Systems (NVLS)
27.42: The Philadelphia Semiconductor Index has been making a run recently, sparked by numerous factors from a jump in shares of Cisco (CSCO), to continued strength in Broadcom (BRCM), along with technical indicators. Capacity expansion by the semiconductor manufacturers is the fundamental factor generating interest in stocks up and down the entire food chain. The semi equipment companies are in the midst of an cycle upturn, which Novellus underscored with its mid-quarter update after Thursday's close.
The semiconductor equipment maker gave no indication of any "chinks in the armor" so to speak even raising the booking guidance to the high-end of the range. It forecasts $400-$420 mln vs. its previous guidance of $385-$420 mln indicating sequential growth of 14-20%. Demand for consumer ICs, NAND flash, and DRAM, particularly out of Asia, is driving growth. Novellus is benefiting from a ramp in spending by Hynix, a Korean DRAM manufacturer.
Forecasts for revenues, margins, and earnings were all left unchanged. We continue to recommend investors have exposure to the semi equipment industry, favoring Applied Materials (AMAT), which are capitalizing on the cyclical upturn, not to mention semi equipment sector is a classic late-cycle industry.
--Kimberly DuBord, Briefing.com
07:40 am Yen Weakens on BOJ Policy-Shift Concerns
It may seem strange to hope for a rise in core consumer prices, but that is exactly what is happening in Japan. After years of deflation, core CPI rates are starting to gain traction. In January, consumer prices rose at the fastest pace in eight years. Core prices, which exclude fresh food, climbed 0.5% from a year earlier, following a reading of 0.1% over the two previous months. Nonetheless, the Nikkei and the yen declined after policy makers indicated they would be patient in raising interest rates, thus keeping the differential between Japan and the US and Europe.
The yen fell by the largest margin in over a month after the Japan's Prime Minister Junichiro Koizumi said it is too early for the Bank of Japan (BOJ) to end its five-year zero interest rate policy. Finance Ministers echoed the statement, indicating that even though deflation appears to be ending, restraint is needed to avoid past mistakes wherein rates were raised prematurely. The yen had been gaining strength on speculation the BOJ would end its deflation-fighting policy. With interest rates rising in the US, coupled with the prospects of a hike in Japan may still be many months away, the outlook for the yen is negative for the near-term. We have been long-term bulls on the economic recovery happening in Japan and suggest investors continue to add to positions on pullbacks.
--Kimberly DuBord, Briefing.com
09:41 am Brown & Brown: BB&T Capital Mkts initiates Hold. With their expectation of a softening market going forward, firm believes that valuation multiples will not remain at current levels. Applying BRO's five-year average P/E multiple of 26x to their estimated Q1'07 TTM operating EPS of $1.28, firm generates a valuation estimate of approximately $33.
09:41 am Central Garden: Banc of America Sec reiterates Buy. Target $54 to $60. Firm is saying that the positive direction of the shares appears sustainable. The firm notes the new $650 mln credit facility and 1.97 mln share offering should improve capital structure and maintain net debt to EBITDA in the 3.5x range.
09:40 am Aztar: Banc of America Sec reiterates Buy. Target $31 to $28. Firm is saying that ROIC on the Las Vegas redevelopment is likely to be sub par for an extended period of time. The firm also says leverage ratios will peak at north of 8x adjusted debt / EBITDA, and EPS growth on a CAGR basis will likely be flattish over the next four years, as AZR absorbs this significant development relative to the size of the co.
09:39 am Bank of NY: Banc of America Sec reiterates Buy. Target $35 to $38. Firm ups target as they roll-forward valuation to their '07 estimate, and after their additional scrutiny of Wednesday morning's 10-K, which broke out more segment detail, and gives them a cleaner look into the value of its Retail banking business (15% of BK pre-tax income, 342 branches) and therefore the rest of BK as well.
09:39 am Boston Prpts: Banc of America Sec reiterates Neutral. Target $83 to $88. Firm is saying they hosted a conference call with Scott Latham, Executive Director of Cushman & Wakefield who provided additional data supporting estimated replacement cost values for Midtown commercial space at $850-1,000 psf. In addition, the firm says there is the potential for three Midtown office buildings to sell this year at values of $900 psf (vs market expectations closer to $700-800 psf they believe) and 5% or lower cap rates.
09:31 am Dana Corp: UBS reiterates Neutral. Target $6 to $1. Firm is saying Dana appeared to have sufficient liquidity exiting Q3. The firm says DCN will not achieve significant pension or labor savings by filing given its largely non- union workforce and modestly underfunded pension. The firm says a filling would enable DCN to renegotiate contracts, reduce O.P.E.B liabilities, and restructure its debt in 2007. The firm says DCN will contend with the commercial truck downturn.
09:27 am Tanger Factory: Stifel Nicolaus reiterates Buy. Target $31 to $35. Firm ups target following Q4 results, as they believe fundamentals continue to benefit both from solid shopper traffic, company leasing efforts and the effects of Simon's entry as the big gorilla in the outlet center industry - pushing rents.
09:26 am Stericycle: William Blair upgrades Mkt Perform to Outperform. Firm upgrades based on based on recently strong results and encouraging 2006 guidance, as well as a meaningful acquisition that should boost earnings growth over the next couple of years.
09:24 am Pall Corp: Longbow downgrades Buy to Neutral. Firm is saying that with PLL failing to turn top line growth into profit growth despite the best operating environment in several years and with margin recovery not expected until the end of FY07 and more likely FY08, lower profit growth assumptions underlying their cash flow expectations have resulted in lower fair value of PLL stock in the $25-$28 range.
09:22 am Finisar: Sanders Morris Harris upgrades Hold to Buy. Firm upgrades following earnings. The firm notes all segments in optical communications grew sequentially, indicating broad-based strength, with applications such as 10 GigE and 4 Gig FC driving growth. |
