Wall Street Breakfast

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MACRO AND HOUSING

KB Home's Q1 Net Income Plummets 84%

Number-five U.S. homebuilder KB Home has suffered an 84% plunge in fiscal Q1 net income to $27.5 million ($0.34/share) from $173.3 million ($2.01) a year ago. Revenue fell 19% to $1.78 billion. The results came in ahead of analyst expectations of about $0.25 EPS on revenue of $1.67 billion. New-home orders dropped 12%, with the Southwest and Central regions particularly hard-hit. CEO Jeffrey Mezger says he does not expect the housing slump to reverse this year, in part because the continued rise in defaults among subprime borrowers will likely increase the supply of homes on the market, maintaining pressure on prices. The tightening of credit requirements is also "exacerbat[ing] the already-difficult conditions in the home-building industry." Mezger forecasts 2007 revenue and profit to underperform the results of 2006. The report did show several bright spots: the company's cancellation rate fell to 31% from 48% in fiscal Q4, and the backlog of 18,406 houses worth $4.8 billion was down 31% and 34%, respectively. Shares dropped 1.1% to $47.25 Thursday, and another 1.1% to $46.75 in after-hours trading.
Sources: Bloomberg, Reuters, MarketWatch, Wall Street Journal
Commentary: KB Home Reports Quarterly Loss, Warns of Challenges • A Play on Subprime Woes and Homebuilders: TOL vs. KBH - Barron's • KB Homes: What Happened To Bonuses Linked To Creating Stockholder Value?
Stocks/ETFs to watch: KB Home (KBH). Competitors: DR Horton Inc. (DHI), Lennar Corp. (LEN), Pulte Homes Inc. (PHM). ETFs: streetTRACKS SPDR Homebuilders ETF (XHB), iShares Dow Jones US Home Construction (ITB)
Conference call transcripts: F1Q07 (Qtr End 2/28/07)

TECHNOLOGY

Oracle Sues SAP for Corporate Theft

Oracle Corp. has sued rival SAP AG for "corporate theft on a grand scale," accusing it of stealing copyrighted software through unauthorized use of customer access codes. SAP has allegedly used stolen copies of thousands of Oracle products and confidential materials to compile an illegal library of Oracle's proprietary code. SAP has not yet commented on the charges. Oracle has spent $20 billion over the past three years acquiring software companies that it hopes will enable it to move past its core database business and onto SAP's corporate applications turf. SAP is the world leader in accounting, human resources and inventory management solutions. Oracle's lawsuit charges that a "storehouse of stolen Oracle intellectual property" has enabled SAP to doubly undercut Oracle, both by supplying Oracle's customers with support services at cheap rates and by luring them toward SAP products. The illegal downloads of Oracle software allegedly originated from a Texas Internet address registered to TomorrowNow, a wholly owned subsidiary of SAP.
Sources: Wall Street Journal, Reuters, Information Week, New York Times
Commentary: Oracle Sues SAP For 'Corporate Theft On A Grand Scale' • Oracle Sues SAP: Below the Belt With a 2x4
Stocks/ETFs to watch: Oracle Corp. (ORCL), SAP AG [ADR] (SAP). Competitors: Microsoft Corp. (MSFT), International Business Machines Corp. (IBM). ETFs: Software HOLDRs (SWH), Vanguard Information Technology ETF (VGT), iShares MSCI Germany Index (EWG)
Conference call transcripts: Oracle F3Q07 (Qtr End 2/28/07)
Related: The lawsuit [Wall Street Journal]

Palm Posts 61% Drop in Q3 Profit, Beating Expectations

Palm Inc. yesterday posted a 61% drop in Q3 profit amid increasing speculation that the company is about to be bought out. The Treo smart-phone manufacturer earned $11.8 million ($0.11/share) on revenue of $410.5 million against earnings of $29.9 million ($0.28/share) on sales of $388.5 million a year ago. Excluding one-time items, the company would have earned $16.5 million ($0.16/share) versus $19.8 million ($0.19/share) in the year-ago period. On that basis, analysts were expecting $0.12 EPS on sales of $403.6 million. Palm is forecasting $0.10-0.13 Q4 EPS, or $0.13-0.16 excluding one-time items. Q4 revenue is projected in the range of $400-410 million. The company's shares have risen 32% on takeover speculation since reaching a 52-week low in December. Its shares lost almost 9% to close at $17.74 yesterday as speculation that Motorola might make an immediate play for Palm was dampened by Motorola's poor earnings report, but they regained 1.3% to reach $17.97 in AH trading on Palm's better-than-expected quarterly results.
Sources: Palm F3Q07 (Qtr End 3/2/07) Earnings Call Transcript, Business Week, Wall Street Journal, News.com, Forbes, MarketWatch
Commentary: Palm's Earnings: Very Few Positives in the Mix • Palm Buyout Likely This Week - Sources • iPhone Versus the Rest: More Evidence Smartphone Makers Are in Trouble
Stocks/ETFs to watch: Palm Inc. (PALM). Competitors: Motorola (MOT), Nokia (NOK), Research In Motion Ltd. (RIMM), Apple Computer Inc. (AAPL). ETFs: streetTRACKS Morgan Stanley Technology Index Fund (MTK), HOLDRS Wireless (WMH), HOLDRS Broadband (BDH)

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Jabil Circuit Slips On Soft Guidance

Jabil Circuit Inc. shares fell as the company offered soft earnings and revenue guidance for its next two quarters. Jabil posted a revenue gain of 27% in 2Q07 to $2.9 billion, surpassing analyst expectations of $2.83 billion. Full financial reporting for the recent quarter are not yet available as the company concludes an investigation and possible restatement of past earnings. Looking ahead, Jabil is predicting EPS in 3Q07 of between -$0.08 and +$0.04, excluding one-time expenses, or $0.17-$0.23 before expenses on revenue of $2.9 billion to $3 billion. Thomson consensus estimates were for EPS before expenses of $0.44 on $3.04 billion revenue. In 4Q07, the company projects EPS before expenses of $0.29-$0.34 on sequentially flat revenue of $2.9 billion to $3 billion. Analysts were looking for EPS of $0.50 on $3.18 billion revenue. Jabil said it expects to complete its buyout of Taiwan Green Point Enterprises during the last week of April. Shares fell $1.43, or 5.74%, to $23.50 - just above their 52-week low - in after hours action, compounding a loss of $1.07, or 4.12% during regular trading yesterday.
Sources: Jabil Circuit F2Q07 (Qtr End 2/28/07) Earnings Call Transcript, Press Release, Reuters, Forbes, emsnow.com
Commentary: Jabil Circuit Sinking On Weak Outlook • Jabil Stock Drops Hard on Restatement
Stocks/ETFs to watch: Jabil Circuit Inc. (JBL). Competitors: Solectron Corporation (SLR), Flextronics International (FLEX), Sanmina-SCI Corporation (SANM)

3Com Narrows Loss on Strong H3C Integration

Computer-networking equipment maker 3Com Corp. reported Thursday afternoon a FQ3 loss that was narrower than previous losses. The company reported a $5 million loss ($0.01/share), versus a year-ago loss of $33 million ($0.05/share). Revenue surged 82% to $323 million against $178 million in Q3 2006. Analyst estimates were expecting a $0.01 gain (Reuters) or a $0.03 loss (Bloomberg) on revenue of $329 million. Last November 3Com agreed to buy Huawei Technologies' 49% stake in their joint H3C for $882 million, with an implied value of $1.8 billion. Analysts were mixed on the deal; many saw it as a risk. 3Com said Thursday its robust sales increase came primarily from its consolidation of H3C; 3Com is now the #2 network equipment maker in Asia, behind Cisco. CEO Edgar Masri said he feels very good about the H3C integration. The company has now lost money in 28 consecutive quarters. The company forecast Q4 H3C sales of $180 million and 'sequential' growth in the rest of its business, suggesting that revenue for Q4 will come in higher than $337 million, exceeding analyst forecasts of $331 million. In after-hours trading following the report, shares were up 3.7% to $3.79.
Sources: 3Com F3Q07 Earnings Call Transcript, AP I, II, Bloomberg, Reuters
Commentary: 3Com: Turnaround Depends on IBM Deal • 3Com Ready For Technical and Value Investors • 3Com's Shares Hammered After Huawei JV Buyout
Stocks/ETFs to watch: 3Com Corp. (COMS). Competitors: Cisco Systems Inc. (CSCO), Netgear Inc. (NTGR), Nortel Networks Corp. (NT), Hewlett-Packard Co. (HPQ), Avaya Inc. (AV). ETFs: HOLDRS Internet Infrastructure (IIH)

INTERNET

NBC and News Corp. Take On YouTube with Online Video Venture

NBC Universal and News Corp. have challenged Google's YouTube by setting up an online video JV. The site, which will launch this summer, will offer full-length movies and TV shows for free. Google's three biggest competitors, Yahoo, Microsoft and Time Warner's AOL, have signed on as distributors. Content will include such popular offerings as The Simpsons and 24. News Corp. COO Peter Chernin: "This is a game changer for Internet video...We'll have access to just about the entire U.S. Internet audience at launch." The JV was announced a week after Viacom sued Google for $1 billion for copyright infringement. "A new online video distribution platform that respects copyrights is a welcome addition to the industry," Viacom said in a statement. Chernin and NBC Universal CEO Jeff Zucker are playing down the image of the new site as a potential "YouTube killer." Zucker: "We are...willing to sit down and talk to anybody who wants to distribute this...We have had a conversation with [Google CEO] Eric Schmidt this morning and they are considering this." Google, too, is taking a friendly approach to the threat: "We value our relationships with NBC and Fox as they continue to upload content...and look forward to working with them in the future."
Sources: Wall Street Journal, CNN.com, Bloomberg, Reuters
Commentary: Internet Video: The Evolution From a Push to Pull Economic Model • Google Leads Internet Video Market, Smaller Sites Have Remarkable Showing • Viacom Hits Google with $1 Billion Lawsuit over YouTube Copyright Infringement
Stocks/ETFs to watch: News Corp. (NWS). Competitors: Google (GOOG). ETFs: PowerShares Dynamic Large Cap Growth (PWB), First Trust Dow Jones Internet Index (FDN)
Conference call transcripts: News Corporation F2Q07 (Qtr End 12/31/06)
Related: Video

MEDIA

Music Publishers Sue XM Satellite for Unlawful Distribution

Several members of the National Music Publishers Association have sued XM Satellite Radio for the unlawful reproduction and distribution of copyrighted music. The suit derives from the ability of XM subscribers to capture and save any track they hear on their XM receivers. The suit, which is demanding damages of up to $150,000 per song and per infringement, is expected to become a tool for local broadcasters opposed to XM's hoped-for merger with Sirius Satellite Radio. The suit "is a negotiating tactic," XM said in a statement. "XM pays royalties to writers and composers, who are also compensated by our device manufacturers." The suit echoes another action filed last year by members of the Recording Industry Association of America over XM's royalty payments to music labels. Regarding the NMPA allegations, XM says the recording of songs on XM receivers is analagous to the taping of songs from radio onto cassettes, which is legal. They also point out that a customer cannot move a song onto a computer or other device until it has been purchased digitally from partner Napster. David Israelite, President and CEO of the NMPA, counters that XM's devices "replace the need to buy music."
Sources: Wall Street Journal
Commentary: FCC Chief Questions XM/Sirius Deal Terms • Sirius and XM Satellite to Merge - If They Can Clear Regulatory Hurdles
Stocks/ETFs to watch: XM Satellite Radio Holdings Inc. (XMSR), Sirius Satellite Radio Inc. (SIRI), Napster, Inc. (NAPS). Competitors: Clear Channel Communications Inc. (CCU), Cumulus Media Inc. (CMLS)
Conference call transcripts: XM Satellite Radio Q4 2006

RETAIL

Nike: Q3 Earnings Led by Overseas Growth; Shares Drop in After-hours

Nike reported Q3 net income increased 8% to $350.8 million, or $1.37/share, on 9% revenue growth to $3.93b, compared to analysts' average estimate of $1.33/share on sales of $3.92b. Gross margins improved to 44.2% (+0.6% y-o-y), but Nike warned Q4 margins could be hurt by price discounts due to accelerated inventory closeout. Nike said futures orders for footwear and apparel scheduled for delivery from March through July increased 9% to $6b, compared to analyst estimates of 4.0% - 7.5%. Sales growth on the quarter was strongest in Europe, up 15% to $1.1b, followed by Asia +11% $589.9m, the Americas +5% to $212.5m and +2% in the U.S. to $1.5b. Newratings.com reports Lehman Brothers reiterated its "overweight" rating and raised its target price to $120, from $110. Nike's shares fell 0.2% to $108.60 in normal trading yesterday and dropped another 2.7% to $105.69 in after-hours activity following its earnings release, on volume of just over 800,000.
Sources: Nike F3Q07 Earnings Call Transcript, Press release, Bloomberg, MarketWatch, newratings.com
Commentary: Nike Earnings and Stock Movement, • Nike Execs Discuss China Expansion and Challenges • Nike Aims for 50% Revenue Growth Over Next Five Years
Stocks/ETFs to watch: Nike (NKE). Athletic footwear retailers: Foot Locker (FL), Finish Line (FINL). Competitors: Adidas (ADDYY.PK), Under Armour (UA)

TRANSPORT AND AEROSPACE

Boeing and Airbus Elevate WTO Subsidies Dispute

The tit-for-tat battle between Boeing and Airbus continues as both air complaints with the WTO regarding receipt of illegal subsidies. The U.S. claims Airbus has received as much as $100 billion in illegal government aid, while the EU cites $24b of illegal aid received by Boeing. Naturally, both sides are dismissing the respective claims. The WTO is expected to issue a preliminary ruling on the U.S. suit against Airbus in September. There will be a hearing for the EU's suit against Boeing in July, with a decision not seen coming until 2008. A U.S. representative argued, "Launch aid has enabled Airbus to launch a series of large commercial aircraft models at a scale and a pace that would have been impossible without subsidies." The BBC notes EU officials call the $100b figure a "smoke screen." The U.S. is seeking an immediate return of $4.5b if it wins the case. EU officials argue Airbus' aid must be repaid, unlike Boeing's.
Sources: Associated Press, BBC, Reuters [I, II]
Commentary: Bearish Analysts Expect Boeing Shares To Rally, Leave Targets Below Current Price • China to Build State Owned Competition for Boeing, Airbus • Boeing Capitalizes on Global Defense
Stocks/ETFs to watch: Boeing (BA), EADS (Paris: 005730). Competitors: Lockheed Martin (LMT), Northrop Grumman (NOC), General Dynamics (GD). ETFs: iShares Dow Jones US Aerospace & Defense (ITA), PowerShares Aerospace & Defense (PPA)

FINANCIAL

Citigroup Said to be Considering Rival Bid for ABN Amro

The Wall Street Journal reports that a faction within Citigroup is urging Chairman and CEO Charles Prince to make a rival bid for Dutch bank ABN Amro, which is in merger talks with Barclays. The Barclays transaction would value ABN at approximately $80 billion, which would make it the biggest banking deal in history. Because ABN has announced that its negotiations with Barclays are exclusive, a move by Citigroup might be considered a hostile bid. Citigroup is said to be exploring the fit despite the notorious failure rate of hostile bids in the banking industry. The regulatory environment in the Netherlands is problematic, too, insofar as it places more roadblocks in the path of hostile takeovers than do other countries. An acquisition by Citigroup, if successful, would give it a greater presence in continental Europe and enhance its U.S. retail franchise through the accompanying acquisition of ABN's Chicago-based LaSalle Bank holding.
Sources: Wall Street Journal
Commentary: ABN Amro, Barclays Agree to Several Merger Issues • Barclays To Acquire ABN: Long-term Investor Horizon Required • ABN AMRO: Children's Investment Fund Urges Break-Up or Sale
Stocks/ETFs to watch: Citigroup Inc. (C), ABN Amro Holding N.V. [ADR] (ABN), Barclays PLC [ADR] (BCS). Competitors: Bank of America Corp. (BAC), Deutsche Bank AG (DB), JP Morgan Chase & Co. (JPM). ETFs: iShares MSCI Netherlands Index (EWN), WisdomTree High-Yielding Equity (DHS), First Trust Morningstar Div Leaders Index (FDL)
Conference call transcripts: Citigroup Q4 2006

HEALTHCARE/BIOTECH

Amgen Shares Fall On Disappointing Vectibix Clinical Results

Shares of leading biotech company Amgen Inc. fell nearly 4% in after hours trading after the company announced it was discontinuing, effective immediately, a clinical trial which was evaluating the combination of its cancer drug Vectibix with chemotherapy and Avastin. An evaluation of the trial showed a significant difference in mortality rates among metastatic colorectal cancer patients taking Vectibix versus those in the control group (receiving just Chemo and Avastin). The company is continuing to test the drug, which received FDA approval in September, for patients who were not improving with chemo alone, without combining it with Avastin. The company released a statement saying, "adding Vectibix to Avastin, when used in combination with oxaliplatin- or irinotecan-based chemotherapy, increased toxicity without improving efficacy." Avastin is made by Amgen competitor Genentech. Amgen shares are down roughly 25% since hitting 52-week highs of $77 in October; shares are currently trading at $58.15 in pre-market action.
Sources: Wall Street Journal, MarketWatch, Reuters
Commentary: Amgen, Dell: Large-Cap Stock Picks for the Resurgence in Growth • Amgen Shares Continue To Plummet • SEC Queries Amgen on Aranesp Anemia Medication
Stocks/ETFs to watch: Amgen Inc. (AMGN), Genentech (DNA). Competitors: Baxter International Inc. (BAX), Johnson & Johnson (JNJ). ETFs: Biotech HOLDRs (BBH), PowerShares Dynamic Biotech & Genome (PBE), Vanguard Health Care ETF (VHT)

MUST-READS ON SEEKING ALPHA TODAY

U.S. Market:	Are Companies Scared of Transparency?
Housing:	Home Depot: Will Its Real Estate Value Ever Be Priced In?
Long Idea:	Trading Idea: My Four-Way Intel Play
Short Idea:	Intuit's Implausible Guidance Explanation Isn't Fooling the Street
Internet:	GooTube vs. NewTube: What Took So Long?
Telecom:	AT&T: iPhone Driving Store Traffic Ahead of June Launch
Networking:	3Com: Turnaround Depends on IBM Deal
Chips:	Scores of Centillium Suitors
Software:	Adobe: All Street Eyes Trained On Creative Suite 3
Consumer Electronics:	Motorola Downgraded By a Slew of Sell-Side Analysts
Media:	Apple TV: Arriving Just in Time to Give Consumers What They Want
Healthcare:	USANA Health Sciences: A Bad Case of MLM?
Biotech:	Keeping An Eye On Metabolix
Retail:	Rex Stores: Electronics, Ethanol and Real Estate
Transport:	Asbury Automotive Turns Five on the NYSE: Best of Times, Worst of Times
Gold:	Investing in Venezuelan Mining: Risk or Reward?
Energy:	Cameco Updates Cigar Lake Remediation: New Production Target 2010
Financial:	Keep Vornado Realty Trust On Your Radar
Asia:	Comparing India Funds: INP is Clearly the Best Option
ETFs:	Commodities ETFs: Take Advantage of Domestic and Global Growth
Hedge Funds:	IndexIQ To Release 'Hedge Fund Replicator' ETFs At Fraction of Cost
Small-Caps:	CMGI Continues To Fly
IPO Analysis:	Blackstone S-1 Filing: That's a Lot of Money
Sound Money Tips:	Get Publicized for Free
Jim Cramer:	Latest stock picks
Conference Call Transcripts:	Barnes & Noble F4Q06 • KB Home F1Q07 • Palm F3Q07 • Nike F3Q07 • Jabil Circuit F2Q07 • 3Com F3Q07 • Ninetowns Internet Q4 2006

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