From Briefing.com: 5:17 pm Weekly Wrap
The stock market was schizophrenic this week. It loved the Fed, it hated the Fed. It loved the earnings reports, it hated the earnings reports. Not surprisingly, the indices ended mixed for the week. Ultimately though, the fundamentals improved.
The market opened the week with a mixed day on Monday. The S&P lost 2 points, but the Nasdaq and Dow were up. The market was looking forward to the PPI and CPI data later in the week and the flood of earnings reports that would start after the close on Monday. Good earnings news before the open from Citigroup and Harley-Davidson had little broad impact.
Tuesday was another day of a holding pattern. The S&P regained the 2 points it had lost the day before. The June core PPI came in at a comfortable 0.2%. That was in line with expectations and did not cause concern. Earnings reports were generally good. Coca-Cola, Johnson & Johnson, and United Technologies in particular posted good numbers.
Wednesday the market busted loosed. Before the open, the June core CPI was reported to have jumped 0.3% for the fourth straight month. The year-over-year increase rose to 2.6%. The data raised inflation concerns and the S&P futures dropped sharply. The conclusion was that the Fed would probably have to raise rates again in August to counter building inflationary pressures. Fed funds futures priced in a high probability of a rate hike.
Then Bernanke testified before Congress at 10:00 ET. His testimony turned that logic on its head. Bernanke said that the core personal consumption (PCE) deflator, which does not include the rental equivalency measure for housing costs, was a better measure of inflation than the core CPI. It has been up 0.2% each of the past two months and the year-over-year gain is only at 1.9%.
Furthermore, Bernanke indicated that the Fed expects core inflation to ease in 2007. That implies the Fed might be willing to wait for the impact of the previous rate hikes to take effect, and not feel the need to raise rates right now. Fed funds futures plunged as expectations of an August rate hike dropped sharply.
Bernanke clearly indicated a more dovish stance towards policy and the 23 point surge in the S&P 500 index that day was justified on that basis.
Earnings reports also helped, as IBM, JP Morgan, Bank of America, and UnitedHealth Group posted good numbers. Yahoo, however, gave a soft outlook and the stock was hit.
Thursday, the market shifted personality again. The release of the June FOMC minutes did not reflect as dovish a stance as Bernanke had done the day before. The market became concerned that the Fed might indeed raise rates in August. It is not clear why the market would place so much emphasis on minutes that are now many weeks old when the Fed Chairman had spoken on policy the day before. Nevertheless, the market was near flat at mid-day but sold off after the release of the minutes to end with an 11 point loss on the S&P 500 index.
Also hurting the Nasdaq that day was a disappointing report and outlook from Intel. Apple and Motorola had excellent reports, but Intel's numbers were more influential.
Friday the S&P 500 lost another 9 points. A major factor was a warning from Dell that second quarter profits would be lower than expected. There was probably also some risk-event selling ahead of the weekend given the continuing conflict in the Middle East. As to the Fed outlook, fed funds futures ended the day with a 45% chance of a rate hike at the August meeting built into the price structure.
Earnings overall this week were good. The best numbers came from Dow firms such as Coca-Cola, Citigroup, Caterpillar, Honeywell, IBM, JP Morgan Chase, Johnson & Johnson, and United Technologies. Even Pfizer posted good numbers. As a result, the Dow had a strong week and advanced 1.2%.
There was far greater concern in the tech sector. Intel, Dell, and Yahoo gave cautious to poor outlooks. These key companies overrode the impact from good earnings from some companies such as Apple and Google. The broader technology picture is of concern, while some companies remain in growth mode. The Nasdaq took it on the chin again this week.
Overall, however, the market enters the latter stage of earnings season on a sounder footing. There is no reason to doubt the veracity of Bernanke's testimony. He clearly represented a less hawkish stance than the market had assumed at the start of the week. Earnings are coming in better than expected (as usual) and warnings are far less prevalent than feared. Economic growth is clearly slowing, so many companies will have trouble posting good earnings numbers the second half of the year. That should not be surprising.
The near-term outlook remains mixed, and perhaps even dicey for the tech sector, but the longer-term outlook is improving. The market is coming to grips with the reality that earnings growth will have to slow down in the quarters ahead. The end of the rate hike cycle is clearly nearing. And valuation measures have improved significantly.
The crisis in the Middle East remains an important wild card, but at least oil prices came off their highs to end near $74 a barrel. The market faces another week of heavy earnings reports, and individual companies that warn will get slammed. The foundations for a year-end rally, however, may be falling into place.
Index Started Week Ended Week Change % Change YTD
DJIA 10739.35 10868.38 129.03 1.2 % 1.4 %
Nasdaq 2037.35 2020.39 -16.96 -0.8 % -8.4 %
S&P 500 1236.20 1240.29 4.09 0.3 % -0.6 %
Russell 2000 681.24 671.94 -9.30 -1.4 % -0.2 %
5:17PM Market Internals (MKTIN) : The Dow decreased 0.55% closing at 10868, the Nasdaq was down 0.93% to finish at 2020, and the S&P was down 0.71% to finish at 1240. Leading sectors included: auto parts and equip +8.9%, trading companies and distributors +3.3%, systems software +3.1%, biotech +1.6%, auto manu +1.5%. Lagging sectors included: construction and engineering -5.0%, coal and consumable fuel -5.0%, steel -4.3%, consumer finance -3.6%, semiconductors -3.5%. Today's movement came from higher than avg. volume (NYSE 1920, vs. closing avg of 1722; Nasdaq 2409, vs. 2042), with lower advance/decline ratios (NYSE 1117/2142; Nasdaq 778/2220, and with new lows outpacing new highs (NYSE 43/167, Nasdaq 31/275).
4:20 pm : What was shaping up overnight to be a healthy rebound in the wake of Thursday's broad-based pullback never even got off the ground, as more disappointments in the struggling tech sector overshadowed a batch of earnings reports that on balance were better than analysts anticipated.
Early futures indications were pointing to a slightly higher open after tech bellwether Microsoft (MSFT 23.87 +1.02) closed its fiscal year last night by beating estimates by a penny, boosting its FY07 outlook and rewarding shareholders with a $20 bln buyback. Google (GOOG 390.10 +2.98) more than doubling Q2 profits, and countering Yahoo's (YHOO 25.89 +0.62) recent disappointment, also had many thinking that stocks were poised for a bounce following yesterday's sell-off.
Dell (DELL 19.91 -2.19), though, changed the mood in a hurry with a warning that it was going to miss Wall Street's second quarter estimates. Dell's stock plunged 13% to a five-year low, and merely made matters worse for a Tech sector already reeling from concerns about growth prospects that continue to force analysts to lower their estimates for the second half of the year. At its lows, Dell was down 18%, losing nearly $9 bln off its market cap and, despite being only one fifth the size of Microsoft, which provides the software for its PCs, had the last word in driving the market and contributing to the tech-heavy Nasdaq closing lower for a third straight week.
Not even Dow component Caterpillar (CAT 68.33 -0.75) posting record earnings on 41% year/year growth, and raising FY06 revenue forecasts minutes later, was enough to offset renewed worries about the pace of a slowdown in economic growth. Tech also took a hit from Advanced Micro Devices (AMD 18.31 -3.34), which plummeted 15% to a 52-week low after its Q2 earnings merely matched downwardly revised estimates and the market viewed its relatively rosy forecast with some skepticism. AMD's loss helped push the PHLX Semiconductor Sector Index to its lowest point in 14 months. Aside from weakness throughout Technology, the absence of leadership from influential sectors like Financials, Industrials, and Consumer Discretionary also left buyers on the sidelines waiting for a short-term bottom to form before getting back into a market focused more on the negatives (i.e. moderating economic growth) than the positives (i.e. possible pause in Fed tightening).
Health Care, however, traded higher for a fifth straight session, getting a boost after Amgen (AMGN 66.15 +2.23) topped estimates and raised its FY06 EPS forecasts. However, modest interest in a number of defensive-oriented areas like Biotech and Pharmaceuticals merely underscored the market's sense of reserve to own more non-cyclical names over the weekend.
Separately, fed funds futures early in the day were pricing in as little as a 35% chance of a hike on August 8th and are now pricing in a 45% likelihood, which is still significantly dismissing the possibility of more tightening. Nonetheless, the expectations that slowing economic growth -- a catalyst for selling stocks over the last two sessions -- will keep inflation contained, typically a positive for Treasuries, were not realized Friday, as bond traders looked past growing uncertainty in the Middle East and also took some profits. Two consecutive days of gains had pushed the 10-year yield to a six-week low Thursday. DJ30 -59.72 DJTA -0.8% DJUA +0.1% DOT -0.8% NASDAQ -19.03 NQ100 -1.0% R2K -1.6% SOX -4.8% SP400 -1.5% SP500 -8.84 XOI -1.0% NASDAQ Dec/Adv/Vol 2191/815/2.38 bln NYSE Dec/Adv/Vol 2129/1123/1.92 bln
3:12PM Bond Watch: Big Week, Little Day (BONDX) : Bond trade slipped into a stupor as the day plodded on, with profit-taking helping to pull the market off on the day, but unable to keep the 10-yrs from taking back over 13 basis points from the worst prices on the week while the 2-yrs grabbed back over 17 bps. The market had fought back after being battered early, grasping onto Fed-issues & geopolitical deterioration. The 2-10-yr yield spread had been reaching for the light earlier in the session as positions were unwound heading into the weekend. The curve spread is running inverted near -3, after making a mid-week push to positivity. The week ahead has a smattering of data &, curiously, no Federal Reserve speakers on the calendar as yet (that can change as keynote speakers sometimes change their mind where & to whom they speak). The market will still be pondering the likelihood of the FOMC going at the Aug meeting as the odds have fallen back to nearly 40% looking for a go after approaching 90% earlier in the week. Having the market on the fence could prove good for some interesting price action as more will likely slide over to the "no go" side as the data starts to hit. The dollar is rangy into the close with the euro slightly better on the day at 1.2690 (& weekly lows of 1.2458) & the yen weaker at 116.2100 (though better on the week from 117.8700 to the buck). The dollar index is down at 85.92 (-0.30), ending the week off its best level of 87.33. Spot gold is off at 620.32 (-7.83) while the crude is up marginally at 74.45 (0.18). Next week brings the first look at Q2 GDP & its inflation barometer, housing data & consumer confidence kicking it all off but not until Tues. The 10-yr is currently -03/32nds yielding 5.040% (for more bond commentary click here).
1:00 pm : Indices slip to afternoon lows, spearheaded by further deterioration in Semiconductors (-2.7%). The PHLX Semi Sector Index off 4.7% is at its worst levels of the day; 17 of its 19 components are trading lower, paced by a 13% sell-off in Advanced Micro Devices (AMD 18.80 -2.85) which said Q2 revenue surged 53% but fell short of sales targets due to aggressive price cuts from rival Intel (INTC 17.12 +0.01). Other notable chip stocks hitting 52-week lows are ALTR (-4.1%), AMAT (-0.5%), BRCM (-11.8%), KLAC (-3.6%), LLTC (-2.8%), MRVL (-7.0%), NSM (-5.5%), TXN (-4.1%) and XLNX (-5.6%). Teradyne (TER 12.26 +0.36), which swung to a profit in Q2, is the only component aside from Intel that is trading higher. DJ30 -82.56 NASDAQ -21.38 SOX -4.7% SP500 -9.80 NASDAQ Dec/Adv/Vol 2205/665/1.43 bln NYSE Dec/Adv/Vol 2103/1030/1.12 bln
12:17 pm Oakley (OO)
15.888 +0.588: Maker of sunglasses and other branded apparel, Oakley Inc. gave investors a limited rose-colored outlook when it said late Thursday that it saw second-quarter earnings of $0.29 per share, excluding non-recurring items, or $0.01 better than a Reuters Estimates consensus of $0.28, saying higher expenses and restructuring charges offset sales growth. Revenues rose 19.4% year over year to $203.6 million versus consensus of $189.9 million, driven by demand for optics.
Oakley, which has a market cap of about $1.10 billion, issued downside guidance for the full year of 2006, saying it sees earnings per share of $0.68 versus $0.69 consensus in the latest period.
Scott Olivet, chief executive officer of Oakley, Inc., said in a press release that the company's strong second quarter performance reflects early success against strategic initiatives articulated at the beginning of the year. The company also announced Thursday that it had signed a new, three-year contract with Luxottica Group S.p.A. (LUX), owner of the Sunglass Hut chain, establishing commercial terms retroactive to Jan.1, 2006 through Dec. 31, 2008, solidifying a long-standing relationship.
However, Briefing.com noted in a Zip America column in early February that following a strong 16% advance in 2005, much of the good news may already priced into the stock. At about 21x trailing 12-month earnings, the stock is at a considerable premium to its closest competitors.
--Christine Marie Nielsen, Briefing.com
11:25 am RadioShack (RSH)
15.36 -0.40: RadioShack, which we featured on our Stock Swap page last month, slid to a loss in the second quarter, as lower post-paid wireless sales and costs associated with its turnaround plan weighed on the bottom line. The latest results fell short of analysts' expectations, sending shares of the struggling consumer electronics chain lower in early trading.
Specifically for the period, RadioShack posted a loss of $3 million, or ($0.02) per share, down from a year ago profit of $52 million, or $0.33 per share. The company said the cost of its turnaround plan and related restructuring activities reduced earnings by $21 million. It also incurred a pretax expense of $8.5 million, due to the settlement of wage and hour class action lawsuits. Excluding those items, Radio Shack earned $0.09 per share, short of the Reuters Estimates consensus of $0.13 per share.
Quarterly revenue rose approximately 1% to $1.1 billion during the quarter, primarily due to a greater number of wireless kiosks in operation. However, same store sales slipped 3%, as post-paid wireless handset sales in RadioShack stores were down a double-digit percentage. The company attributed the weakness to the switch to selling Cingular products from selling Verizon products late last year, as well as changing competitive dynamics and maturing consumer demand.
Meanwhile, gross margin fell 351 basis points to 47.2%, driven by an unfavorable merchandise mix shift and more promotional activity, the company said. Selling, general, and administrative costs increased 12% versus the prior year, due to the preliminary settlement of certain class action suits, stock option expense, and more store labor hours.
Overall, things continue to look bleak for RadioShack as it struggles to restructure its stores and reinvigorate same store sales. Although some investors have been drawn to the company's low multiple of 13x trailing twelve month earnings, its declining fundamentals and lack of a sustainable competitive advantage offer no reasons to own the stock.
--Richard Jahnke, Briefing.com
11:12 am Schlumberger (SLB)
61.82 +0.16: Strong demand boosted by increased drilling activity, higher pricing, operating efficiencies, and robust demand for higher-margin technologies culminated in a record profitability for Schlumberger in the second quarter. This large cap oil services company reported a stalwart quarter with per share profits of $0.69, six cents ahead of expectations.
Oil services revenues grew 11% since last quarter and 36% over the previous year to $4.13 bln led by activity on land in the US, Gulf Coast, Mexico, North Sea, West Africa, Russia, and the Arabian Peninsula. Activity rates, pricing, demand, and high-margin seismic and reservoir characterization services produced record pre-tax operating margins of 27.2% up 160 basis points sequentially - a level not seen since the 1980s.
WesternGeco reported revenue of $562 mln, up 6% q/q and 47% y/y and operating income of $180 mln. Revenue backlog stands at an all time high of $1.2 bln, representing an increase of 35% over the previous quarter. The rising demand for reserve technologies underscores a trend in exploration, wherein producers are as concerned and preoccupied with reserves renewal as they are with short-term production output.
Overall, it was a strong showing from this industry leader characterized by broad-based growth and impressive operating leverage. Schlumberger anticipates the strong growth will continue for the remainder of 2006, particularly in the Eastern Hemisphere, although rates may slow from the second quarter. While the energy sector remains beholden to energy prices dictating daily price action, we think profit growth, shareholder returns, and attractive valuations support continued investment, not only in the oil service industry, but in the broader energy sector as well.
--Kimberly DuBord, Briefing.com
10:42 am Adv. Micro Devices (AMD)
19.20 -2.45: The second quarter earnings report from Advanced Micro Devices was largely an anti-climactic event considering the company warned on July 7 that revenues were going to be less than expected due to weakness in sales of chips used in mobile and desktop PCs. AMD quantified the warning, saying it expected revenues to be $1.22 billion, which is exactly what AMD reported after yesterday's close. The sales performance trickled down to a bottom-line result of $0.18 per share that was $0.01 ahead of the Reuters Estimates consensus estimate.
The trouble for AMD today is the credibility of its outlook for the second half of the year, which comes across as strikingly upbeat despite a warning from Dell today that commercial demand worldwide is slowing and Intel's impressive slate of new dual-core processors for servers, desktop PCs and notebooks that will create a tall competitive hurdle for AMD. Those issues aside, AMD said it expects demand for its products to be seasonally strong in the second half of 2006 and that it expects third quarter sales to increase sequentially.
Piquing further concerns about AMD's ability to live up to its own expectations was the acknowledgment on the conference call that it is planning on building inventory in the third quarter in anticipation of an even stronger fourth quarter. The chip maker's inventories increased 20% from the end of its first quarter to the end of its second quarter versus a 9.0% sequential decline in sales - a troublesome disparity that is expected to keep average selling prices under pressure, particularly since Intel also had a large inventory build in the second quarter and given that sales of its dual-core processors should really start to pick up in the fourth quarter.
AMD to its credit has made encouraging strides in taking share away from Intel in both the consumer and enterprise space. However, Intel is again armed with new, advanced technology that is going to make AMD's competitive life more difficult than it has been recently. In the market's mind, that realization has supplanted AMD's own rosy forecast as the main driver of its stock, which is down 55% from the 52-week high it hit just four months ago.
--Patrick J. O'Hare, Briefing.com
10:25 am Capital One Financial (COF)
80.88 -5.29: Shares of Capital One Financial Corp. were down over 6% early Friday after the company reported a miss in its earnings for the latest period due to charges to build reserves and write down expected income because of worsening credit in its British operations, and lower revenue from late fees as more customers paid their credit card bills in a timely fashion. The company also expressed some uncertainty in its guidance.
The McLean, Va.-based company said it saw second-quarter earnings of $1.78 per share, $0.30 worse than a Reuters Estimates consensus of $2.08. Revenues rose 18.4% year over year to $2.91 billion versus the $3.48 billion consensus.
The company also reaffirmed its guidance for the full year of 2006, saying it sees earnings per share of $7.40 to $7.80 versus $7.90 consensus. Company executives said there's significant uncertainty though over what impact Capital One's late 2006, $14.6 billion acquisition of North Fork Bancorp (NFB) will have on reported results.
Capital One, which just recently completed its acquisition of Hibernia Corp., has been working to expand its business beyond credit cards and is reducing funding costs by gaining a deposit base. The latest deal will nearly double Capital One's deposits and add 50 million additional customer accounts.
Briefing.com expects M&A activity will continue to be a main component of returns within the financial sector, which we feel is best played through the investment banks who benefit no matter what side of the bargaining table on which they sit.
--Christine Marie Nielsen, Briefing.com
10:12 am Amgen (AMGN)
65.65 +1.73: Amgen shares moved higher on Friday, gaining more than 3% in early trading, after the Thousand Oaks-based company reported second quarter results ahead of Wall Street's expectations, and raised its earnings forecast for the full year. Specifically, Amgen posted a profit of $14 million, or $0.01 per share, compared with $1 billion, or $0.82 per share, in the year ago period. However, excluding stock option expenses and acquisitions, it earned $1.05 per share, well above the Reuters Estimates consensus of $0.94 per share.
Second quarter revenue jumped 13.6% to $3.6 billion, from $3.17 billion last year. That also beat the consensus estimate of $3.47 billion. Total product sales increased 14% year/year to $3.49 billion, led by sales of the anemia-fighting drug Aranesp and rheumatoid arthritis drug Enbrel. Sales in the U.S. totaled $2.86 billion, up 13% from a year ago, while international sales grew 17% to $630 million.
Amgen said worldwide sales of Aranesp rose 26% during the quarter to $1.05 billion, compared to $837 million a year earlier. Sales of Epogen, which is used to treat anemia in chemotherapy patients, fell 5% to $613 million, while combined sales of Neulasta and Neupogen rose 12% to more than $1 billion. North American sales of Enbrel increased 13% to $724 million.
Based on the latest results, the company raised its full-year earnings outlook to between $3.75 and $3.85 per share, up from its previous forecast of $3.60 to $3.70 per share. At the same time, it held its top-line guidance steady, with revenues expected to be in the range of $14 to $14.3 billion. Analysts are expecting earnings of $3.67 per share on revenue of $13.93 billion, according to Reuters Estimates.
Briefing.com currently has a Market Weight rating on the Health Care sector, but remain cautious of pharmaceutical companies, which continue to face a host of patent expirations and increased competition. For Amgen, in particular, we remain concerned about its relatively weak pipeline of new drugs, as well as the ongoing litigation over Roche's Mircera.
--Richard Jahnke, Briefing.com
09:37 am NASDAQ Stock Market (NDAQ)
27.62: Nasdaq Stock Market, Inc. said late Thursday that it beat on the top and bottom line in the latest period, reporting second-quarter earnings of $0.22 per share, excluding two charges and two gains with an impact of $0.09 per share, $0.14 better than the Reuters Estimates consensus of $0.08. Revenues rose 3.7% year over year to $411 million versus the $401.8 million consensus.
The company, which has a market cap of about $3.08 billion, also raised its full-year 2006 guidance, seeing net income of $68 million to $78 million versus previous guidance of $63 million to $73 million, and gross margin of $645 million to $655 million versus $625 to $640 million previous guidance.
Chief executive of the Nasdaq Stock Market Inc., Bob Greifeld, said on a conference call with analysts that this is a transition year for the company as it integrates the Inet electronic trading platform and ponders a fresh takeover bid for the London Stock Exchange. The results for the period included one-time losses related to Nasdaq's acquisition of Inet, as well as debt retirement and its acquisition of a 25.3% stake in the London Stock Exchange, which was all at $13 million, or $0.09 per share. The losses were slightly offset by a $9.2 million dividend from its LSE stake.
Certainly the Nasdaq Stock Market has professed a desire to be a leading force in driving consolidation in the hot exchange space. Its ambition, combined with the fact that the stock is at about a fourth of trailing 12-month earnings of competitor NYSE Group, Inc. (NYX), make the stock a good buy at this time.
(Disclosure: Briefing.com has a business relationship with Nasdaq)
--Christine Marie Nielsen, Briefing.com
09:24 am Caterpillar (CAT)
69.08 Caterpillar continued to defy expectations in the second quarter. Increased price realizations and sales volumes culminated in impressive operating leverage, which has been a hallmark of this industrial giant. The Dow Industrial reported a record quarter including a 41% increase in profits to $1.04 bln with sales and revenues rising 15% to $10.6 bln. Back up the truck because the earnings revisions will be forthcoming from the street after earnings of $1.52 per share beat consensus estimates by ten cents.
Machinery sales this quarter rose 14%, while engines and financial products rose 12% and 13%, respectively. The real standout, however, was the 310 basis point expansion in machinery operating margins to 14.3%. With two quarters now in the bag, Caterpillar took the opportunity to raise the bar for the full year. It now sees earnings in a range of $5.25-$5.50 per share, up from $4.85-$5.20 vs. $5.30 consensus. On sales, it forecasts growth of 12-15%, up from previous guidance of 10%.
The upside and raised outlook underscores the enduring strength of the global industrial economy. And while there is no way to determine what the impact will be of rising interest rates globally, Caterpillar provided some reassurance, raising its outlook in terms of price and volume. Caterpillar is in the fourth year of a recovery that began in mid-2003 and historically global industrial recoveries have last six to eight years, according to the company.
The strongest areas remain infrastructure development, energy, and mining. The swelling balance sheets of the last two, driven by historically high energy and basic metal prices, have resulted in a resurgence of capital investment globally. And as the residential market cools, the non-residential and European markets are showing positive signs, enabling CAT to offset expected weakness in the housing market. Notwithstanding the multiple-year rise in shares, CAT remains a standout large cap growth stock and a favorite of ours given its financial performance, market position, and shareholder value.
--Kimberly DuBord, Briefing.com
09:09 am Google (GOOG)
387.12: Internet search giant Google said Thursday that its second quarter profit more than doubled, topping Wall Street's high expectations, as it continued to extend its lead in online search advertising. The announcement, which helped quell investors' concerns about slowing growth, sent shares of the company higher in pre-market activity.
Earlier this weak, rival Yahoo (YHOO) reported weaker than expected results and said it would delay the release of its new online advertising platform aimed at boosting revenue, sending its shares plunging.
For the latest quarter, Google said it earned $721.1 million, or $2.33 per share, up from a year ago profit of $342.8 million, or $1.19 per share. Excluding stock option expense and other one-time items, the Mountain View, California-based company earned $2.49 per share - $0.27 better than the Reuters Estimates consensus of $2.22 per share.
Revenue for the period, including traffic acquisition costs, grew 77.4% to $2.46 billion, just ahead of the consensus estimate of $2.4 billion. Traffic acquisition costs, or the commissions paid to other Web sites in Google's advertising network, totaled $785 million, or about 32% of advertising revenue. Meanwhile, Google.com revenues increased 94% year/year to $1.43 billion, or 58% of total revenues, as the company attracted more people to its site. Google's partner sites, through AdSense programs, generated revenues of $997 million, representing a 58% increase over the prior year period.
Given the company's strong second quarter performance, highlighted by robust growth and improved profitability, we remain positive on shares based on expectations that the company will continue to steal search engine market share from its rivals. Furthermore, Google's ability to attract unique visitors and monetize assets supports our positive view on the stock.
(Disclosure: Briefing.com has a business relationship with Yahoo!)
--Richard Jahnke, Briefing.com
08:54 am Eli Lilly (LLY)
56.26: Shares in Eli Lilly & Co. were poised to open near unchanged Friday after the company reported second-quarter earnings of $0.76 per share, $0.01 better than the Reuters Estimates consensus of $0.75. Revenues rose 5.4% year over year to $3.87 billion versus $3.87 billion consensus. The drug company also reiterated its full-year earnings outlook, although it said it now sees 2006 sales growth at the low end of prior guidance.
The company, which has a market cap of about $63.58 billion, said it sees in-line guidance for the third quarter, with earnings per share of $0.77 to $0.79 versus $0.79 consensus. It reaffirmed earnings per share of $3.10 to $3.20 versus $3.14 consensus for the full year of 2006. However, the company now sees 2006 revenue growth at the low end of 7% to 9% previous guidance, with revenues of $15.67 billion versus $15.5 billion consensus. The company also reaffirmed its 2006 capital expenses of $1.4 billion.
Shares in Eli Lilly gained in the latter part of this week as Alcon (ACL) and Eli Lilly announced they had signed a long-term agreement to co-promote Arxxant in the U.S. and Puerto Rico. Arxxant is an investigational oral drug for the treatment of moderate to severe nonproliferative diabetic retinopathy, a diabetic eye disease.
Briefing.com cast a positive eye on Eli Lilly in a Zip America column in mid-March, and given the company's growth outlook, its valuation continues to provide an attractive entry point.
Also noted in March was that Eli Lilly has raised its dividend for at least 25 consecutive years, putting it in the ranks of the companies that have been shown to maintain more sustainable payout ratios, better return on equity, higher quality ranks, and stronger credit ratings than typical yield-driven stocks. Eli Lilly currently offers investors a forward annual dividend yield of 2.9%.
--Christine Marie Nielsen, Briefing.com
08:19 am Dell, Inc. (DELL)
22.10: Dell's stock closed yesterday just above $22 per share or nearly 50% below where it was trading a year ago. The stock's fortune won't get any better today as shares of DELL are indicated 15% lower in pre-market action following an earnings warning from the once-impenetrable company for its fiscal second quarter.
Specifically, Dell expects second quarter revenue to be approximately $14 billion with EPS of approximately $0.21-0.23. Dell had said previously that it expected its second quarter results to be similar to the first quarter when it reported earnings of $0.33 per share on revenue of $14.22 billion. Accordingly, consensus EPS and revenue estimates were pegged at $0.32 and $14.24 billion. The revision was attributed primarily to aggressive pricing in a slowing commercial market worldwide.
Dell's warning took a toll on the futures market, which pared larger gains seen earlier. Nasdaq 100 futures, though, surrendered the entirety of their gain as the Dell warning is the latest blow to the embattled technology sector, which was reeling yesterday from Intel's (INTC) weak results and third quarter outlook. Dell, which recently said it would start using AMD processors, is a major customer of Intel and its warning goes to show that misery does indeed love company.
At its current level, Dell trades at close to 15.0x estimated earnings when taking into account today's downward revision. Dell has proven to be a value trap to this point, but given its solid financial condition and increased commitment to improving the customer experience, not to mention Michael Dell's vested interest in seeing this stock do well, its risk-reward profile at these levels favors the patient-minded investor. With earnings visibility looking cloudy, though, the market's lack of confidence in this year's earnings prospects should keep the stock under wraps for the time being.
--Patrick J. O'Hare, Briefing.com
08:14 am Broadcom (BRCM)
26.35 Once the darling of the tech sector, Broadcom has watched its shares lose half of their value over the last six months after the communications chipmaker became embroiled in an investigation of possible timed stock options granting. The company, which makes chips used in iPods and mobile devices, reported second quarter revenues of $941 mln, up 4.5% sequentially on target with expectations. However, it declined to report profit for the quarter, citing an ongoing probe into its stock options accounting.
Last week, Broadcom said an internal review did show that some options were "backdated," hence making them more valuable. It plans to restate previous financials and to take a $750 mln charge to reflect additional options expenses. In a press release the company said, "Given the pendency of that review, which is ongoing, the company has limited the scope of its second quarter financial information released today." Broadcom also provided a disappointing outlook, estimating a 4-5% sequential decline in revenues in the September quarter.
This is only one of many companies within the Technology sector that have come under investigation for its granting process, which has caught the attention of SEC regulators. Its main rival, Marvell (MRVL), has also come under fire but adamantly denies any wrongdoing. For now, these stocks remain the pariahs of the tech sector until a resolution is reached and visibility into the current semiconductor cycle becomes clear.
--Kimberly DuBord, Briefing.com
07:53 am Microsoft (MSFT)
22.85 Call it a relief rally. After warning investors of a sharp rise in spending last quarter, Microsoft closed its fiscal year by deploying some of its cash horde back to shareholders. The announced plans of a $20 bln share repurchase program, coupled with a penny upside in per share profits, sent shares up by over 5% in the after-market. The software giant earned $2.83 bln, or 28 cents per share, down from $3.7 bln or 34 cents in the prior year. The results included one-time legal charges of 3 cents vs. legal charges of 5 cents and a tax benefit of 9 cents in the prior year. The comparable figure of 31 cents per share topped analysts' expectations by a penny. Revenues in the fourth quarter grew by 16.1% to $11.8 mln just slightly ahead of forecasts.
Banco de Microsoft currently has $34.1 billion in cash and short-term investments as of the end of June. The company plans to repurchase $20 bln worth of shares by August 17th in a tender offer. In the dutch auction, MSFT will take offers to buy shares between $22.50 and $24.75. Based on the offers, it will come up with strike price to buy the full $20 bln worth of shares. The board has also authorized it to spend as much as $20 bln on traditional stock repurchases by June 2011, having now completed a previously announced $30 bln buyback program.
While Q1 guidance was in-line with consensus of $0.30-$0.32 per share, the company raised full year forecasts beyond what the market had been expecting. It now projects earnings of $1.43 to $1.47 per share from $1.36 to $1.41 per share vs. $1.39 consensus. It forecasts double-digit revenue growth with Vista arriving in the second half of the year culminating in full year revenues of $49.7-$50.7 bln vs. consensus of $49.76 bln.
While the buyback is welcome news for shareholders, it does little to shore up investor confidence over the company's competitive position, which has come increasingly under attack from rivals in every area of its business. On the conference call, CFO Chris Liddell also said a further delay in Vista wouldn't likely have a significant impact on revenues because of longer-term license and other factors. The new operating system has been delayed multiple times and is expected in January, and these comments certainly open the door for a further delay. It also plans a major marketing push to the tune of $450 mln for new software launches and a holiday ramp of its Xbox 360 console.
(Disclosure: Briefing.com has a business relationship with Microsoft.)
--Kimberly DuBord, Briefing.com
09:40 am Ford Motor: UBS reiterates Neutral. Target $7.5 to $7. Firm cuts price tgt saying they remain evermore confident that Ford's North American (N.A.) profitability is likely to remain under increased pressure throughout 2006.
09:38 am SAVVIS Comm: Janco Partners downgrades Accumulate to Mkt Perform. Target $29. Firm lowers rating due to the firm's concerns about execution risk at Savvis. The firm says with the stock at $30/share they are moving their rating to a Market Perform until they can gain more confidence in Savvis' ability to continue to deliver strong network and hosting performance without issues.
09:35 am F5 Networks: Kaufman Bros downgrades Buy to Hold. Firm lowers rating noting F5 announced fiscal 3Q06 revenue results, but did not release its full financial statements as its special committee reviewing its stock-option grant practices found at least one occasion that did not meet the correct accounting rules. The firm says they believe the uncertainty caused by the stock-option issue will limit stock price appreciation until resolved.
09:33 am Six Flags: Sanders Morris Harris upgrades Buy to Strong Buy. Target $9. Firm ups rating as they believe the post-June 22 fallout in shares of the stock as a massive overreaction.
09:32 am Sunpower: Needham & Co upgrades Buy to Strong Buy. Target $36 to $48. Firm ups rating and price tgt based on higher and increased certainty in their estimates. THe firm finds SPWR attractive for the following reasons: 1) It is addressing the solar cell & module market expected to grow in sales at a cagr 25%+; 2) They believe SPWR will gain market-share based on their very competitive photovoltaic (PV) cell with PV efficiency 50% above the industry average; 3) SPWR's access to polysilicon which is in short supply will cover 100% sales in 2006 and in 2007; 4) SPWR is a gross margin expansion story; and 5) Very experienced management team.
09:30 am Cognos: ICAP upgrades Sell to Buy. Target $25 to $35. Firm ups rating and price tgt following the co's announcement that the S.E.C has finished its investigation, finding no problems with the way it had been recognizing and booking revenue. The firm notes the news should come with a big sigh of relief from investors worried about restatements of previous financials.
09:28 am Ultratech: Brean Murray downgrades Accumulate to Hold. Target $22 to $16.5. Firm downgrades and cuts price tgt following earnings. The firm says input from Ultratech's customers indicates that technology and yield issues have pushed-out the estimated transition to the 65nm node by about six months to the middle or end of 2007.
09:25 am Sunpower: Thomas Weisel upgrades Peer Perform to Outperform. Firm upgrades and ups price tgt based on higher and increased certainty in their estimates. THe firm finds SPWR attractive for the following reasons: 1) It is addressing the solar cell & module market expected to grow in sales at a cagr 25%+; 2) They believe SPWR will gain market-share based on their very competitive photovoltaic (PV) cell with PV efficiency 50% above the industry average; 3) SPWR's access to polysilicon which is in short supply will cover 100% sales in 2006 and in 2007; 4) SPWR is a gross margin expansion story; and 5) Very experienced management team.
09:23 am PMC-Sierra: Stanford Research downgrades Hold to Sell . Target $5. Firm downgrades following Q2 results. Firm says that Passave was expected to provide the growth engine, but is now forecasted to decline. Firm also cites flattish revs in other product lines, as well as premium valuation.
09:19 am Thornburg Mortg: Credit Suisse downgrades Neutral to Underperform . Target $26 to $23. Firm downgrades and cuts price tgt noting the co reported Q2 EPS of $0.61, $0.03 below the firm's ests and consensus expectations. The firm says with the persistent flat yield curve and rising short-term interest rates impacting both portfolio returns, as well as spreads on new business purchases, TMA's business model has come under significant pressure. |
