Wall Street Breakfast Pre-Market Snapshot]
Fed Holds 5.25% Target, Statement Upbeat, Markets Rally
The Federal Reserve held its benchmark overnight interest rate at 5.25% for the fifth straight month yesterday, encouraged by a strengthening economy and gradually declining inflation. "Overall, the economy seems likely to expand at a moderate pace over coming quarters... some tentative signs of stabilization have appeared in the housing market." Previous statements observed "substantial cooling" in the housing market. Its reference to "somewhat firmer economic growth" was an upbeat change to previous statements noting growth had "slowed." On inflation, it said: "Core inflation [has] improved modestly in recent months, and inflation pressures seem likely to moderate over time." Noting that both equities and bonds rallied on the announcement, Barry Hyman of EKN Financial called the outlook "Goldilocks Plus." Economists are divided in predicting the Fed's next move (up/down), and when that may come (March/no hurry/hold all year).
Sources: FOMC Statement, MarketWatch, Wall Street Journal
Commentary: Economists React [WSJ] • Fed Statement: Watch Out For Goldilocks' Three Bears • GDP Jumps to 3.5% on Strong Consumer Spending
ETFs to watch: S&P 500 Index (SPY), NASDAQ 100 Trust Shares ETF (QQQQ), Diamonds Trust Series 1 ETF (DIA), iShares Russell 2000 Index ETF (IWM), iShares Lehman 1-3 Year Treasury Bond ETF (SHY), iShares Lehman 7-10 Yr Treasury Bond ETF (IEF), iShares Lehman 20+ Year Treasury Bond ETF (TLT)
Pulte Homes Falls to #4 Homebuilder on Weak Earnings
Pulte Homes posted weak Q4 results all around: A loss of $0.03 per share or $34 million pretax, versus $0.10 forecasts, including $350 million in land writedowns. Revenues were down 15% to $4.39 billion, vs. $5b in '05. Gross margins fell to 11% from 22.3% last year. New home orders declined 34% to 6,446. Full year earnings fell to $14.3b ($2.67/share), compared with $5.47 in 2005. Some silver linings -- a 7% average selling price increase to $337,000; a slight decline in cancellations from Q3 (35.8%) to Q4 (34.7%); and PHM's improved financial services revenues -- $59.7 million in Q4'06, up from $52.5 million in Q4'05. Which prompted CEO Richard Dugas to note, "promising signs of stabilization… although it's too early to tell how strong and sustainable this may be." PHM withheld 2007 guidance, but sees Q1 EPS of breakeven to a loss of $0.10.
Sources: Press Release, The Street, Chron.com, Trading Markets,Bloomberg, MSN, Market Watch
Commentary: Homebuilder Stocks: Is the Worst Over? • The Real Reason to Avoid Homebuilders • Assessing the Homebuilder Stocks
Stocks/ETFs to watch: Pulte Homes Inc. (PHM). Competitors: Centex Corp. (CTX), D.R. Horton Inc. (DHI), Lennar Corp. (LEN), Toll Brothers Inc. (TOL). ETFs: iShares Dow Jones U.S. Home Construction (ITB), PowerShares Dynamic Building & Construction (PKB), SPDR Homebuilders (XHB)
He's Baaack! Michael Dell Again CEO of Company He Founded
After a three year absence in which the company he founded out of his college dorm room lost significant market share to competitors, Michael Dell has reclaimed his spot as Dell CEO from Kevin Rollins. A brief statement by Dell yesterday offered no explanation for why Rollins was resigning and said Dell will take over as CEO "effective immediately." The company has suffered since Rollins took over in 2004. As buying habits have changed in the PC market, Dell's direct company to client model has been undercut by a pairing of discount retailers like Circuit City and Best Buy and discount manufacturers like Lenovo and Acer. While it is unclear whether Dell can successfully help the company to reverse its course and regain lost market share, he certainly inspires faith in Dell shareholders: shares have risen $1.33 (5.49%) to $25.55 in pre-market trading.
Sources: Dell Announcement,Bloomberg, MarketWatch, Wall Street Journal
Commentary: Michael Dell Is Back: Was Rollins Pushed Out? • With Michael Dell As CEO Again, Can Dell Regroup? • Michael Dell Has His Work Cut Out
Stocks/ETFs to watch: Dell Inc. (DELL). Competitors: Hewlett-Packard Co. (HPQ), International Business Machines Corp. (IBM), Gateway Inc. (GTW), Apple Inc. (AAPL), Lenovo Group Ltd. (OTCPK:LNVGY), Toshiba Corp. (OTCPK:TOSBF). ETFs: Internet Architecture HOLDRs (IAH), iShares Dow Jones US Technology (IYW), Fidelity NASDAQ Comp. Index Trk Stk (ONEQ), iShares Goldman Sachs Technology Indx (IGM)
AMD Gains Market Share in Q4, But Intel Strengthens in Servers
AMD gained control of over 25% of the microprocessor market for the first time ever in Q4, according to preliminary data from Mercury Research. Its 25.3% share is a 2% quarter-over-quarter increase. Intel's share slipped to 74.4% from 76% -- its lowest share in over a decade. In the servers segment however, Intel added 1.4% to increase its share to 77.7%, while AMD fell by the same amount to 22.3%. Intel looks poised to take more market share based on a recent deal announced with Sun Microsystems. Note the much talked about price war between the duopoly is obvious when looking at AMD's gains in desktop and notebook PC market share, compared to its Q4 margin to sales which dropped to 40%, from 57% last Q4. AMD gained 2.5% in the desktop segment to 29.1%, versus Intel's 2% fall to 70.4%. In the notebook segment AMD increased its share by 2.6%, to 19.4%, compared to Intel's decline by the same amount to 80.6%.
Sources: MarketWatch, Reuters
Commentary: AMD, Intel Price War Revisited • Intel, IBM Take Moore's Law to the Next Level • Sun Set to Announce Deal to Use Intel Chips in Servers
Stocks/ETFs to watch: Advanced Micro Devices (AMD), Intel (INTC). ETFs: Semiconductor HOLDRs (SMH), iShares Goldman Sachs Semiconductor (IGW), SPDR Semiconductor (XSD), Technology Select Sector SPDR (XLK)
Google Posts Near-Tripling of Profit; Revenues In Line
Google reported last night that Q4 profit almost tripled and sales jumped 67% to $3.2 billion. Net income ballooned to $1.03 billion, or $3.29/share, from $372 million, or $1.22, a year ago. The Street had forecast EPS of $2.92. Excluding ad partner payments, sales grew about 73% to $2.23 billion, in line with expectations of $2.2 billion. Revenues were driven by Google's practice of placing text-based ads next to its search results. Shares rose across the Internet sector yesterday on expectations of a good report from Google and on the news that the Fed has not changed interest rates. Google shares gained $7.18 to close at $501.50, but then lost $3.76 in AH trading after the report, settling at $497.50. Google's ad strategies appear to have paid off: the company bought YouTube in November to gain access to the video-ad market, and its free services, like maps and email, drive users toward its search engine and accompanying ad links. Ad clicks rose 61% from the previous year. International sales were 44% of revenue versus 38% a year ago. Google's share of U.S. Internet searches reached 47% in Q4 from 40% in Q4 2005, while Yahoo's share declined to 28% from 29% and Microsoft's to 11% from 14%. As is its custom, Google declined to provide earnings forecasts.
Sources: MarketWatch (I, II), Wall Street Journal, Bloomberg. Conference call transcript: Q4 2006
Commentary: Google: Still Time To Make Serious Money • A Historical Look At Google's Post Earnings Performance • Google/YouTube Strategy Highlights Why Video Advertising Might Falter
Stocks/ETFs to watch: Google, Inc. (GOOG). Competitors: Yahoo! Inc. (YHOO), Microsoft Corp. (MSFT). ETFs: First Trust Dow Jones Internet Index (FDN), First Trust IPOX-100 Index (FPX), iShares Dow Jones US Technology (IYW)
NY Times Reports First Quarterly Loss In 10 Years - Shares Rise
The New York Times Co. my have just posted its first loss in 10 years, mainly due to a one-time write-down charge for New England Media Group (read: the Boston Globe), but investors saw reason to be optimistic and traded the stock up by $0.19 (0.83%) to $23.09. The $739 million write-down meant the Times reported a net loss of $648 million, or $4.50 a share, compared with a gain of $63.2 million, good for EPS of $0.44 during the year earlier period. Without the one-time costs, Revenue rose 4.3 percent to $931.5 million. Excluding the charge, earnings rose 39% to $87.9 million, (EPS of $0.61). Analysts polled by Thomson Financial projected earnings of 46 cents a share (Bloomberg analysts predicted $0.47); revenue estimates were for $899 million. Benchmark analyst Edward Atorino was impressed with the results with one exception: "Besides [the] Boston [Globe], the results really are quite good," he said.
Sources: New York Times Q4 2006 Earnings Call Transcript, Press Release, TheStreet.com, Bloomberg, MarketWatch
Commentary: Citi: New York Times Headed Downhill Due To Internet • Fewer Newspapers With Lower Circulation Is the Way of the Future • Ochs-Sulzberger Family Won't Yield Control Over Times Board
Stocks/ETFs to watch: The New York Times Company (NYT).Competitors: The Washington Post Co. (WPO), Gannett (GCI), Tribune Co (TRB), The McClatchy Company (MNI)
Starbucks Q1 Earnings In-Line; Global Store Expansion Continues
Starbucks reported Q1 net income of $205 million, or $0.26/share, in-line with analysts' average estimate, topping the $174m ($0.22/share) it earned in 2005. Revenue totaled $2.4b (+22%), a new record. Starbucks said it opened a record 728 stores on the quarter and plans to open 2,400 stores during this fiscal year on a global basis. Same-store-sales were 6%. Starbucks forecast EPS of $0.87 - $0.89 for the year on revenue growth of 20%, with comparable sales growth maintained at 3% to 7%. Analysts were expecting EPS of $0.89. Reuters reports Starbucks' forward P/E ratio of 39 is nearly 2x the average of Dow Jones U.S. Restaurants & Bars Index components. Starbucks opened its first stores in Brazil and Egypt and is planning expansion into India and Russia. Chairman Howard Schultz said China remains a priority and can "ultimately be one of our largest markets." Starbucks gained 1.10% in normal trading to close at $34.94 and added 0.89% to $35.25 in extended trading.
Sources: Starbucks F1Q07 (Qtr End 12/31/06) Earnings Call Transcript, Earnings release, MarketWatch, Reuters
Commentary: Starbucks Chairman Discusses China Visit • Starbucks: Capitalizing on College Age Consumers • Starbucks Taking Trans-Fats Off the Menu
Stocks/ETFs to watch: Starbucks (SBUX). Competitors: Tim Horton's (THI), Peet's Coffee & Tea (PEET), Krispy Kreme Doughnuts (KKD), Caribou Coffee (CBOU), McDonald's (MCD). ETFs: Consumer Discretionary SPDR (XLY), NASDAQ 100 Trust Shares (QQQQ)
Altria Earnings Beat Estimates; Company To Spin Off 89% Kraft Stake
Altria Group's diluted EPS was up 28.4% in 4Q06, the company reported mid-day Wednesday By the numbers, earnings came in at $2.96 billion, good for EPS of $1.40 versus earnings of $2.29 billion, (EPS of $1.09) in year-ago quarter. On a diluted basis, EPS was up 8.5% compared the prior-year period ($1.27 vs. $1.17). Revenue rose 3.7% to $25.4 billion from $24.59 billion in the year earlier period. Thomson Financial estimates were for EPS of just $1.22. For the year (2006), diluted EPS was up 4.9% to $5.35 versus $5.10 in 2005. Looking ahead to 2007, Altria projects full-year diluted earnings to come in between $4.15-$4.20, excluding Kraft Foods, whose 89% stake Altria will be spinning off to shareholders on March 30, the company announced this morning prior to releasing earnings. For the year, analysts had been forecasting EPS of $5.62 before the Kraft spin off was announced. Altria shares are currently trading even.
• Sources: Altria Earnings Press Release, Kraft Spin off Press Release, Reuters, MarketWatch
• Commentary: Wall Street Dream Comes True: Altria to Split into Three - Barron's • Warning: Cigarettes May Be Good For Your Financial Health • Nicotine Study Re-ignites Call for FDA Regulation of Cigarettes
• Stocks and ETFs to watch: Altria Group Inc. (MO), Kraft Foods (KFT). Competitors: Gallaher Group Plc (GLH), Carolina Group (CG), British American Tobacco (BTI), Reynolds American Inc. (RAI), Vector Group Ltd. (VGR). ETFs: Vanguard Consumer Staples (VDC), First Tr Morningstar Div Leaders (FDL)
TRANSPORT AND AEROSPACE
Northrop/EADS Win $560 Million German Defense Contract
EADS, Europe's biggest aerospace company, and Northrop Grumman, the #3 U.S. defense contractor, reported this morning they won a €430m ($559m) German Ministry of Defense contract to develop and test their jointly-produced Euro Hawk pilotless aviation system (see image). The Euro Hawk, which can fly 30 hours straight, will serve as the German Air Force's high-altitude long-distance reconnaissance system. EADS and Northrop Grumman began joint work on the project in 2000. Delivery of the first demonstrator is scheduled for 2010, with another four systems scheduled between 2011 and 2014.
Sources: Press Release, MarketWatch, Bloomberg, Air-Attack
Commentary: Northrop Threats to Abandon Bidding Jeopardize Critical Air Force Program • Defense Sector Bests the S&P 500 for a Seventh Consecutive Year • A Quick Technical Look at Northrop Grumman
Stocks/ETFs to watch: Northrop Grumman Corp. (NOC). Competitors: Boeing Co. (BA), Lockheed Martin Corp. (LMT), General Dynamics Corp. (GD). ETFs: iShares Dow Jones US Aerospace & Defense (ITA), PowerShares Aerospace & Defense (PPA)
US Airways Retracts Bid; Delta Reaches Deal with Creditors
US Airways withdrew its $9.8 billion hostile bid to take over Delta Airlines when the bankrupt takeover target reached a deal with its creditors yesterday. A February 7 bankruptcy hearing on Delta's proposed stand-alone reorganization plan will now take place as planned. US Airways had wanted the hearing postponed because the cost of a merger will become prohibitively expensive once Delta emerges from bankruptcy protection. The withdrawal of US Airways' offer scuppers the creation of what would have been the world's biggest airline. Delta's creditors' committee decided to go with the Delta plan because of "valuation..., timing and the risks associated with, and the likelihood of, a successful consummation of the U.S. Airways proposal." US Airways proved unable to convince Delta's creditors to open the airline's books by yesterday's deadline. A miffed Doug Parker, CEO of US Airways, said, "Our proposal would have provided substantially more value to Delta's unsecured creditors than the Delta stand-alone plan," and asserted that the creditors' committee was "ignoring its fiduciary obligation" to the people it represents. U.S. Airways' bid would have provided Delta's unsecured creditors with $12.7-15.4 billion in value, while Delta's stand-alone plan values the company at $9.4-12 billion.
Sources: Wall Street Journal, MarketWatch (I, II), New York Times
Commentary: Deal or No Deal? US Airways Reportedly Sweetens Offer by $1B for Delta • Delta Faces Congressional Scrutiny and Impatient Debtors • There's a Reason There Is No Airline ETF
Stocks/ETFs to watch: US Airways Group, Inc. (LCC), Delta Air Lines, Inc. (DALRQ.PK). Competitors: AMR Corporation (AMR), Southwest Airlines Co. (LUV), UAL Corp. (UAUA). ETFs: streetTRACKS DJ Wilshire Small Cp Growth (DSG)
Bank of America CEO Quashes Buyout Rumors
Speaking at a financial services conference on Wednesday, Bank of America CEO Ken Lewis quashed rumors that BAC was in buyout/merger negotiations with Countrywide Financial. Speculation had mounted last week after Financial Times reported that BofA was in discussions with the Californian mortgage lender for either a deal or joint venture. Lewis called it "unlikely" that BofA would acquire any rivals this year, since federal law precludes U.S. banks from owning more than 10% of the country's deposits, and it already has about 9%. He also said that while BofA would gladly sell more mortgages, it doesn't like the industry's model: "We like the product, but we don't like the business," preferring organic growth to buyouts. Countrywide stock fell over 3% during the speech, but rebounded to $42.88 (-1.5%); its shares remain up 8% since the original news on Friday. BAC shares were up $0.46 to $52.58, putting them slightly above Friday's level.
Sources: MarketWatch, TheStreet
Commentary: Bank of America and Countrywide Financial Discuss Alliance • Bank of America's Mildly Deteriorating Credit Quality
Stocks/ETFs to watch: Bank of America Corp. (BAC), Countrywide Financial Corp. (CFC)
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