From Briefing.com: 4:20 pm : For most of the day, the stock market traded in mixed fashion and within a relatively narrow range. The Dow managed to close with a modest gain, but the S&P and Nasdaq did not fare as well.
There were two primary factors behind today's bearish bias. First, interest rates are rising on a number of fronts, and they are raising a host of concerns. As it's creating anxiety over higher mortgage rates causing a deceleration in consumer spending, the benchmark 10-year note has occupied the spotlight. Yesterday, the market dropped as that note jumped to a 4.74% yield. Bond sellers took somewhat of a breather and Treasuries recovered some ground today, but the fact that the 10-year's yield is still at a 20-month high remains. Due to our expectation that rising interest rates will keep the stock market's upward momentum in-check, we modified our market view to Neutral last month. Interest rates are likely to head higher, and the market now foresees two - and possibly three - more hikes to the Fed funds rate.
Texas Instruments (TXN 31.28 -1.05) was the second factor. With its mid-quarter update, the chip bellwether disappointed the market. TI narrowed its guidance with an upward bias, and its EPS and revenue estimates were in-line with current consensus estimates. But with shares gaining almost 9.0% over the last week, expectations had been running high. Its disappointment relative to expectations gave investors a reason to take profits across the tech board. Semiconductors weighed particularly heavily on the sector and on the Nasdaq. TI's update, in our view, evidenced healthy industry trends, and we feel that the company is well-positioned to benefit from growth trends in key product areas. Our Overweight rating on the Tech sector is predicated on a theme of "everything digital, everything portable," and Qualcomm (QCOM 47.86 +0.62) further validated that today. Crediting better than expected demand, the company upped its guidance. Qualcomm also hiked its quarterly dividend 33%. On a related note, Sprint Nextel (S 24.89 -0.41) reaffirmed its 2006 financial targets. That news appeared to be largely overlooked, however, as traders focused on securing some of the Telecom sector's (-1.6%) recent, sizeable gains.
In anticipation of what is expected to be OPEC's decision tomorrow to maintain current levels of production, crude extended its decline and dropped 1.5%. Prices across the energy complex were lower. On a side note, natural gas did recover from its nine-month low. As a result of supply expectations and energy price action, the Energy sector took a hit. Its 1.2% loss weighed heavily upon the broader market. Chevron's (CVX 55.32 -0.53) comments during its analyst day were generally bullish for the oil services industry, but were overshadowed by the impending OPEC meeting and weekly crude inventory report. A UBS downgrade on the oil tanker industry did not help Energy's situation today. Commodities across the board were weak, and also sparked selling across the Materials sector (-0.9%).
A jump in General Motors (GM 20.28 +0.47) helped take the Dow higher this afternoon. The company announced a restructured employee benefits plan that is expected to reduce its pre-tax pension expense by about $420 million in 2007. Despite the bearish bias, there were some other pockets of relative strength. More defensive areas of the market received some added attention. Managed care stocks helped the Healthcare sector (+0.2%) stay positive, and the Consumer Staples sector (+0.4%) also advanced. Ultimately, however, the equity market continues to struggle with sustaining upward momentum amid the current interest rate environment.DJ30 +22.10 NASDAQ -17.65 SP500 -2.38 NASDAQ Dec/Adv/Vol 2123/903/1.94 bln NYSE Dec/Adv/Vol 2378/878/1.66 bln
1:10PM Semiconductors Hldrs Trust slips under Feb low at 36.81 (SMH) 36.67 -0.78 : Initial levels of interest are at 36.60 (50% retrace of Oct/Jan rally) and 36.51/36.46 Dec/Jan lows. Note that its 200 day sma/ema are in the same area at 36.49/36.45.
11:09AM Isonics expects revenue growth in Semiconductor segment to exceed 45% (ISON) 1.68 +0.11 : Co anticipates reporting greater than 45% quarterly rev growth for Q3 (Jan) as compared to Q2. Rev from Q3 has now increased by 110% over the past two quarters. The increase in rev and the change in product mix to more 300mm and silicon-on-insulator wafers, which have higher gross margins, are expected to result in significantly improved operating results for the co's Q3, which will shortly be released. Co further announced that it has successfully completed the first phase of qualification for the supply of 300mm wafers to two leading global semiconductor industry participants.
Latest Updates All times are Eastern Time
2:48 pm Intel (INTC)
19.98 -0.32: Intel has generated its share of headlines lately, with none more prominent than the warning last Friday that first quarter revenues will be well below prior expectations due to weaker than expected demand. Today, at the Intel Developer Forum, the semiconductor giant discussed a product roadmap that is based on its next-generation microarchitecture, which places a commitment on superior computing performance and energy efficiency. In other words, products that will reduce power consumption and increase speed while lowering the total cost of IT ownership.
The company's "Core" microarchitecture is expected to be at the heart of PC and server platforms by the end of 2006. Beginning next week, Intel will begin shipping Sossaman, and ultra-low-power processor for server blades, storage devices and telecommunications equipment. Its Dempsey processor, which is the first processor for a new Intel Xeon-based platform, codenamed Bensley, will ship by the end of the month. In the third quarter, the Bensley platform will be updated with the Woodcrest processor that will reduce power consumption by 35% and deliver a greater than 80% improvement in computing performance.
Additionally, Intel provided the first public viewing of a running quad-core processor, codenamed Clovertown, for dual-processor servers that is slated to ship in early 2007 and announced that it also plans to ship a quad-core processor, codenamed Kentsfield, for high-end desktop PCs in early 2007 as well.
Looking at Intel's stock today, it would appear that the market is unimpressed with Intel's product update. That, however, has more to do with what it knows now about Intel, which is that it is losing market share to AMD and that it is seeing weaker than expected demand. While Intel's products certainly sound promising in terms of their ability to meet the needs of IT managers, Intel is now in the position of being a show-me story. Accordingly, the market won't get keyed up about product announcements such as the one Intel made today until there is clear evidence the products are being greeted by customers with the same level of enthusiasm that Intel is expressing in marketing them. That point notwithstanding, we stand by our assertion that Intel is a stock we'd want to own at these levels based on the ramp of dual core processors throughout the year and its discounted valuation.
--Patrick J. O'Hare, Briefing.com
11:52 am Chevron Corp. (CVX)
55.45 -0.40: There are a slew of headlines coming out of the Chevron analyst meeting today, the most notable of which revolve around production and capex plans that have implications across the energy patch. The company forecasted modest production growth of 3% for 2005-2010. There have been long-term concerns that the upstream production rates for the super-majors are slowing, sparking a rise in M&A activity as growth via the drill bit becomes more challenging. We anticipate similar headlines out of the Exxon (XOM) analyst meeting that will take place Wednesday.
Producers are ramping capital spending to drive production growth, which is fueling demand for rigs, particularly offshore, and oil services. Chevron plans to raise its capex budget 8% to $16 bln next year from a planned $14.8 bln in FY06 - up from $11.1 bln in FY05. This is certainly good news for the likes of Transocean (RIG), which just recently won a major contract from CVX and is a suggested holding in our Active Portfolio.
The headlines from Chevron are being overshadowed by the impending OPEC meeting and weekly inventory data, which are weighing on crude prices and keeping the energy sector well in the red. Seasonal factors remain the key driver, but we continue to suggest longer-term investors able to withstand near-term volatility buy on pullbacks as the fundamentals remain intact for the oil services companies.
--Kimberly DuBord, Briefing.com
10:40 am Qualcomm (QCOM)
47.95 +0.71: When Qualcomm reported its fiscal first quarter results in January, the market didn't show much enthusiasm as the company's full-year outlook failed to live up to expectations. Specifically, Qualcomm said then that it expected full-year EPS to be in a range of $1.43-1.47 versus Wall Street's target of $1.50. Based on today's update regarding its second quarter performance, however, the market's prior, full-year earnings target looks again to be achievable.
With respect to the latter point, Qualcomm is boosting its second quarter pro forma diluted EPS guidance to $0.40-0.41 from $0.35-0.37. In other words, there will be additional upside of $0.03-0.06 per share that, all else equal, should enable Qualcomm to post full-year EPS in the range of $1.46-1.53. According to Reuters Estimates, the current consensus EPS estimates for the quarter and full-year are $0.37 and $1.49, respectively.
Driving the earnings revision is better than expected demand, which is reflected in the company changing its guidance as well for revenues and Mobile Station Modem (MSM) chip shipments. Second quarter revenues are now anticipated to be $1.75-1.82 billion while MSM chip shipments should be approximately 47-48 million. Previously, Qualcomm was expecting revenues of $1.63-1.73 billion and chip shipments of approximately 44-46 million. The company added that it expects December quarter shipments of approximately 67 million CDMA units, versus a prior estimate of 59-61 million units, on higher than expected average selling prices (~$209 vs ~$207).
Separately, Qualcomm gave its investors more reason to cheer with an announcement that its board approved a 33% increase in the quarterly dividend to $0.12 per share. Qualcomm's news hasn't done much to help the broader market, which is pre-occupied with interest rate concerns, but it is a reassuring update that validates our overweight rating on the Technology sector, which is predicated on a theme of "everything digital, everything portable" that is a boon for the consumer and communication end markets.
--Patrick J. O'Hare, Briefing.com
10:16 am Kroger (KR)
20.30 +0.42: Surpassing analysts' expectations by three cents, The Kroger Co. reported Q4 (Jan) net earnings of $0.39 per share. Total sales rose 7.5% year/year to $14.7 bln (consensus $14.6 bln) as identical supermarket sales increased 6.2% including fuel -- the highest such sales growth since the merger with Fred Meyer in 1999. Excluding the effect of retail fuel operations, which helped improve FIFO gross margin by 32 basis points, identical supermarket sales rose 4.7%, representing Kroger's tenth consecutive quarter of positive sales growth.
According to Chairman and CEO David B. Dillon, "Sustainable identical sales growth is a key driver of Kroger's financial objective to increase earnings and generate value for our shareholders." The nation's largest grocery chain announced, too, that its Board of Directors has adopted a dividend policy, declaring the payment of a quarterly dividend of $0.065 per share. Further underscoring management's confidence in Kroger's strategic plan - an initiative that requires a balance among several elements including sales, earnings, and capital investment - the Cincinnati-based company reiterated its commitment to a long-term financial strategy of using one-third of free cash flow for debt reduction and two-thirds for dividend payments and share repurchases.
Total debt was reduced by $738 mln to $7.2 bln in Q4 while net total debt was $6.9 bln at year's end, a reduction of $801 mln from a year ago and a reduction of $1.9 bln since January 2000. With regard to share repurchases, there is only $114 mln remaining under its existing $500 mln buyback program, as Kroger spent $49 mln repurchasing 2.6 mln shares in Q4. Since January 2000, Kroger has invested $3.0 bln buying back 156 mln shares at an average price of $19.13.
As a result of its transitioning business model, Kroger expects to deliver EPS growth of 6-8% per year in fiscal 2006 and 2007. Even though competitor Supervalu (SVU) will close the gap between itself and No. 1 Kroger after SVU takes over 1,124 stores under several Albertson's banners (e.g. Acme Markets, Bristol Farms, and Jewel-Osco), Kroger will remain well positioned as a leader in the grocery space. Given management's disciplined use of cash to pay down debt, fund a new dividend policy, and repurchase stock, along with operating cost reductions and productivity improvements, Kroger is beginning to look better as an investment option for patient-minded investors. However, fierce competition in the industry, with Wal-Mart at the helm, is reason alone to refrain from taking anything more than a minor position at this time.
--Brian Duhn, Briefing.com
09:58 am FuelCell Energy (FCEL)
10.78 -0.66: It has almost become a paired trade: when oil prices move higher, so too do shares in alternative energy stocks. Alternative energy has become part of the national discourse following President Bush's state of the union address outlining the need to reduce dependence on Middle Eastern oil, which added fuel to the fire so to speak for these stocks. We would caution investors, however, that many of these stocks are quite small in terms of market cap and float. Hence, they are typically quite volatile. With emerging technologies, companies typically are high risk, running in the red and burning cash due to high costs, particularly in R&D. Cash flow and access to necessary funding channels are essential in evaluating investments, as the US is probably a decade away from material penetration.
This brings us to FuelCell Energy, a Danbury Connecticut-based company, which manufacturers high temperature hydrogen fuel cells for electric power generation. The company reported a net loss of $16.7 mln, or 34 cents per share, for its fiscal second quarter, which actually topped consensus by two cents despite a yearly decline in revenues. There were some timing and product mix issues impacting the top line which contracted to $5.9 mln from $7.6 mln. Cost ratios eroded slightly to 3.12 to 1 due to higher spending on power purchase agreements, higher component costs, and inventory shifts. Capital spending totaled $3.6 mln, which will continue to build up manufacturing capabilities. The company's backlog grew 7% totaling $24.5 mln versus $22.9 mln in January 2005.
Even though natural gas prices have fallen off historic levels due to warmer winter weather, prices remain above recent norms. Electric utilities are seeking rate hikes to accommodate the rising cost of power production. FuelCell, which recently hosted US Treasury Secretary John Snow, stated in its press release that this environment makes its DFC (direct fuel cell) power plants economically viable as an alternative power source. The company is making progress in terms of penetration for power generation. It is taking advantage of state and federal initiatives with notable progress in Japan in response to the Kyoto initiatives, but prices still need to come down further to spark adoption. FCEL remains a speculative play, driven by oil prices, as sales and profitability most likely won't come to fruition until the end of the decade.
--Kimberly DuBord, Briefing.com
09:03 am Albertson's (ABS)
25.44: Albertson's said that fourth quarter earnings from continuing operations fell 12% year/year to $164 mln, or $0.44 per share. After adjusting for unusual items totaling $0.09 per share, Q4 net earnings at the nation's second-largest supermarket chain were $200 mln, or $0.54 per share, which may not be comparable to the Reuters Estimates consensus of $0.44. Earnings were negatively impacted by $0.03 for expenses associated with management's exploration of strategic alternatives and $0.06 for a change in method for reflecting early payment discounts related to merchandise purchases.
Total sales declined 8% year/year to $10.2 bln, versus the $10.5 bln consensus, as total comparable store sales fell 0.3% and identical store sales fell 0.4% for the quarter. Gross margins increased 10 basis points to 27.92% due primarily to improvements in the grocery and pharmacy departments, while operating margins held relatively firm at a razor-thin 3.8%. During the quarter, the Boise, Idaho-based grocer opened 13 stores, shuttered 18 and remodeled 37 locations, operating a total of 2,471 stores at year's end.
As a reminder, Albertson's said in January that it had entered into definitive agreements to sell itself to a consortium of investors including Supervalu Inc. (SVU), CVS Corp. (CVS) and an investor group led by Cerberus Capital Management, L.P. for a total transaction value of approximately $17.4 bln in cash, stock and assumed debt. The value of the transaction to ABS shareholders is about $26.29/share, representing a premium of approx 27% based on a closing price of $20.73 on Sept 1, 2005, the day before ABS announced it would explore strategic alternatives.
Immediately preceding the planned merger of Albertson's and Supervalu around mid-year, CVS will acquire approximately 700 standalone Osco and Sav-On drugstores from ABS for $2.93 bln in cash that it will finance through a combination of short- and long-term debt, increasing their drug store base to about 6,100. Rival Walgreen (WAG), which we recently highlighted in a Bargain Hunting column as being reasonably priced for the conservative investor based on its superior execution and solid financial condition, operates 5,122 stores in 45 states and has expansion plans of its own with the anticipated opening of 475 new stores (390 net) in fiscal 2006.
--Brian Duhn, Briefing.com
08:52 am Texas Instruments (TXN)
32.33: With shares gaining almost 9.0% over the last week, expectations were running high in anticipation of Texas Instruments' mid quarter update. While the company narrowed guidance with an upward bias, it was less than the market was hoping. There has been a run in large cap technology stocks of late, sparked in part by a jump in Cisco (CSCO). As such, TXN may be due for some profit taking, which it appears is already taking place in pre-market action.
We would point towards the fact that TXN's update indicates continued healthy industry trends and would suggest investors take advantage of exaggerated selling induced by overly optimistic expectations. Texas Instruments is well-positioned to benefit from growth trends in key product areas within the wireless market, from 3G to broadband and digital television, supporting higher prices, which coupled with continued cost controls, will likely produce healthy profit growth. We have argued for an Overweight rating in Technology since September based on the migration towards "everything portable, everything digital" which supports our positive view on communication IC manufacturers like Broadcom and Texas Instruments.
The Dallas-based company expects total revenues to be within a range from $3.22-$3.35 bln, versus its prior guidance of $3.11-$3.38 bln. This equates to a yearly and sequential decline of 10% and 7%, respectively. Even though the high end was reduced minimally, the mid-point of guidance of $3.285 is slightly higher. At this point, though, we are splitting hairs. Interestingly, the company noted the main growth drivers are handsets and infrastructure, which typically exhibit seasonal weakness in this quarter. Lastly, the company lifted the lower end of its EPS projection to 31-33 cents per share from 29 cents.
--Kimberly DuBord, Briefing.com
09:38 am Penn Natl Gaming: Brean Murray reiterates Strong Buy. Target $42 to $44. Firm is saying that the Illinois Gaming Board's decisions to allow PENN to keep Argosy Alton and delay the requirement of an agreement to divest Joliet Empress are significant positives. Firm believes the risk of selling Joliet at a lower-than-optimal price is significantly reduced, as PENN is likely to increase the EBITDA of the property; in addition, the political environment in Illinois could improve while operating for this longer period. Also, over time firm would not rule out a weakening of the economic concentration issue forcing PENN to sell Joliet, especially if the 10th license in Illinois is ever permitted to operate.
09:37 am Western Digital: Kaufman Bros downgrades Hold to Sell . Target $20. Firm is saying their channel checks suggest that starting in early Feb, a major price battle began as the various H.D.D players, especially WDC, started aggressively pursuing Maxtor's H.D.D business in anticipation of major revenue attrition expected at Maxtor as Seagate (STX) acquires Maxtor. The firm says both our back-end (supplier) and front-end (distributor) checks expect Western Digital's unit sales in the March quarter to be consistent with the Dec quarter. However, they are hearing that the price battle, which began in early February, has resulted in price declines of approx 10%-12%.
09:36 am Multi-Fineline: Morgan Stanley reiterates Overweight. Target $50 to $68. Firm also raises their above-consensus 2006 estimates, as they believe MFLX's Motorola market share and pricing have stabilized so the co should begin to benefit from Motorola's high-end momentum again in C2Q06. However, firm also sees the potential for a better entry point near-term as it becomes clear that MFLX has not won Nokia orders.
09:34 am Calumet Specialty Products: Deutsche Securities initiates Buy. Target $26. Firm is saying specialized high margin products differentiate Calumet from more commoditized MLPs. The firm says partly as a function of its uniqueness, growth opportunities offered through organic projects and a wide open acquisition field are the key attractions.
09:33 am BellSouth: UBS upgrades Neutral to Buy. Firm is saying the merger announcement is expected to generate up to $3 bln in annual synergies primarily through cost reduction. They believe that the improved asset mix and growth profile of T makes it an attractive long-term investment.
09:32 am WebEx: Nollenberger Capital reiterates Buy. Target $30 to $40. Firm ups target based on their view that the co's competitors are pulling back from the market and that it could be executing better in the market place than they had previously believed. They believe that Microsoft, WEBX's primary competitor, has made significant reductions to its LiveMeeting sales force in recent weeks and that it is reorganizing the way it sells its collaboration solutions. Firm believes MSFT will offer LiveMeeting functionality but not support it with direct sales or support staff. They think these moves signify poor results for MSFT. Firm also suspects WebEx shares have been affected by investor speculation of WebEx as a takeover candidate as interest in on-demand software grows. They think BOBJ or CRM could be potential suitors.
09:32 am Public Service NM: Jefferies & Co downgrades Buy to Hold. Target $28 to $25. Firm is saying that uncertainty with respect to the operations of Palo Verde Unit 1 could result in an extended shut down of the unit, which could impair PNM earnings over the next several years. They believe investors should move to the sidelines until there is greater certainty surrounding the operation of Palo Verde.
09:31 am KCS Energy: Ferris Baker Watts downgrades Buy to Neutral. Firm is saying lower production outlook, rising unit costs, and a less than favorable near-term outlook for the natural gas industry.
09:28 am DSW: Susquehanna Financial initiates Neutral. Firm is saying the co is a unique retail chain in the family footwear sector that they consider to be attractive for both its long-term growth prospects and enhanced earnings capacity. In addition, they say the co clearly has numerous opportunities to grow its store base over the next several years.
09:27 am Urban Outfitters: Sanders Morris Harris downgrades Strong Buy to Buy. Target $30. Firm believes that Fall/Winter carryover inventory levels are still too high at co's divisions, and are concerned about current fashion trends being widely adopted at Anthropologie. |
