Wall Street Breakfast

by: SA Editors
SA Editors
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TECHNOLOGY

iPhone: A Look Inside

Analysts at RBC Capital Markets and Portelligent research broke open the iPhone and got an unprecedented peek at its bowels. Their findings are sure to be of great interest to chip, memory and display technology investors. Here's what they found: (1) No Intel inside. No surprise here; investors had been warned in advance that iPhone's main processor would not be made by Intel. Samsung got the nod on the core chip; its design is owned and licensed by ARM Holdings. (2) Intel does make the iPhone's 32-megabit flash memory. (3) I/O chip: Broadcom. (4) Power management: Texas Instruments, Linear Technology and Philips. (5) WiFi: Marvell. (6) Camera sensor: Micron. (7) Front-end power amplifier: Skyworks. (8) Display driver: National Semiconductor may be its supplier. (8) Touch screen: German manufacturer iPhone take apart 02 07 2007Balda. (9) Wireless components: Infineon, RF Micro Devices. (10) Orientation sensor: ST Microelectronics. Portelligent research's David Carey estimates the cost of the iPhone's materials is about $200 for the 4-gigabyte version ($499) and $220 for the 8-gigabyte model ($599); his estimates exclude final assembly costs.
Sources: TheStreet.com, Business Week
Commentary: That $599 iPhone Costs $220 To Make [TechCrunch] • iPhone Consumers Prepare For TeardowniPhone Plays holdings [Stockpickr] • iPhone Disassembly (picture gallery) [Ifixit]
Stocks/ETFs to watch: Apple Computer Inc. (NASDAQ:AAPL), Intel Corp. (NASDAQ:INTC), Broadcom Corp. (BRCM), Texas Instruments Inc. (NYSE:TXN), Marvell Technology Group (NASDAQ:MRVL), Micron Technology Inc. (NASDAQ:MU), Skyworks Solutions Inc. (NASDAQ:SWKS), National Semiconductor Corp. (NYSE:NSM), ARM Holdings plc (ARMHY), Koninklijke Philips Electronics N.V. (NYSE:PHG), Linear Technology Corp. (NASDAQ:LLTC), Infineon Technologies AG (IFX), RF Micro Devices Inc. (RFMD), ST Microelectronics N.V. (NYSE:STM)

Global Semiconductor Sales Bounced Back in May -- SIA

The Semiconductor Industry Association [SIA] reported worldwide chip sales rose 2.4% y/y to $20.3 billion in May (+1.2% sequentially). "Sales of microprocessors and NAND flash memory saw the largest sales increases, indicating continued strength in end markets for personal computers and cell phones," said President George Scalise. However, according to Semiconductor Fabtech, the 1.2% sequential rise was 'anemic' considering April is typically the worst month of the year for semiconductor sales. "The low growth level coming off April's figures reflects the continued over-capacity in memory markets leading to below-cost ASPs and continued pricing competition in Semiconductor-HLDRs-SMH-chart-07-02-07 the microprocessor market rather than a lack of real end-demand," said Fabtech. On a more positive note, SIA reported unit sales of digital signal processors [DSPs] increased more than 5% sequentially, "indicating that cell phone inventory issues have been resolved." Year-to-date through May, total sales of semiconductors have increased 3.1% despite "severe price pressures" on DRAM and NAND flash chips.
Sources: SIA press release, Semiconductor Fabtech, Wall Street Journal
Commentary: iPhone: A Look InsideFour Reasons Why Lehman Is Bullish On The PC Processor SectorSemi Equipment Order Downturn Unlikely To Be Just One Month
Stocks/ETFs to watch: Advanced Micro Devices (NYSE:AMD), Analog Devices (NYSE:ADI), Infineon (IFX), Intel (INTC), Macronix Int'l (MXIC), Micron (MU), NVIDIA (NASDAQ:NVDA), Qimonda (QI), SanDisk (SNDK), STMicroelectronics (STM), Texas Instruments (TXN). ETFs: iShares Goldman Sachs Semiconductor (IGW), Semiconductor HOLDRs (NYSEARCA:SMH), SPDR Semiconductor (NYSEARCA:XSD)
Related: SIA May '07 sales data table and chart [pdf]

BCE Buyout Not Over Yet -- Report

The $48.8 billion takeover of Canadian telecom BCE announced Monday -- the biggest LBO in history -- may not be a done deal: speculation is swirling that two of the losing bidders might put forward rival offers. BCE 03 July 2007The BCE board advised shareholders to accept a C$42.75 (US$40.52) per share offer from a consortium consisting of the Ontario Teachers Pension Plan, Providence Equity Partners and Madison Dearborn Partners. According to the Globe and Mail, private equity firm Cerberus Capital Management -- which sweetened its offer twice on Friday before losing to the consortium -- is not ready to concede the field. "It's not over until we say it's over," said a source close to Cerberus. In addition, BCE's rival Telus, which left the bidding prematurely, is reportedly still interested. "It's been a hallmark of our company that we do not close doors," said Telus CEO Darren Entwistle. Telus itself is the subject of buyout speculation, a prospect about which Entwistle declined comment. The winning bid for BCE is "certainly a very generous offer," said Guardian Group chief investment officer Gavin Graham. "It's difficult to see any other private equity bidder being able to match that with a straight face." BCE CEO Michael Sabia called the consortium's bid "a great win for shareholders," but also said BCE's board "has a fiduciary obligation to continue to be open to superior proposals."
Sources: Globe and Mail, Reuters, Sign On San Diego
Commentary: BCE Agrees to $48.8 Billion BuyoutOntario Teachers' Pension Plan Buys BCEIs Telus Done Bidding For Bell Or Itself A Target For Onex?Cerberus, Telus Still Bidding For BCE?
Stocks/ETFs to watch: BCE Inc. (NYSE:BCE). Competitors: Rogers Communications Inc. (NYSE:RCI), Telus Corp. (NYSE:TU). ETFs: iShares Dow Jones U.S. Telecom Sector Index ETF (NYSEARCA:IYZ), Telecom HOLDRS ETF (NYSEARCA:TTH), Vanguard Telecom Services ETF (NYSEARCA:VOX)

MEDIA

Trump Entertainment Can't Find a Buyer; Shares Plummet

Shares of Trump Entertainment Resorts plummeted 16.6% to $10.49, losing as much as 20% intra-day, on news the company's Board of Directors concluded a review of strategic options after consulting with financial advisor Merrill Lynch, resulting in no acquisition of the company and no current ongoing discussions with any previously interested parties. Trump-Ent-TRMP-chart-07-02-07 Trump Entertainment said it will "continue to review other strategic corporate options while implementing its strategic operating plan," which includes targeting improved margins through cost cutting, investing in property upgrades and emphasizing better customer service to help build market share. A Goldman Sachs analyst lowered his rating of Trump to "Neutral" from "Buy," saying, "Although we continue to believe that the turnaround strategy is in place, the potential for a transaction was boosting our expectations for the stock." A Bear Stearns analyst focused on the company's inability to complete a deal despite its stock falling 30% since it hired Merrill Lynch in early March. A Nollenberger Capital analyst was most critical, calling the assets "old and tired" and being the source of the "problem."
Sources: Press release, Bloomberg, MarketWatch, TheStreet.com, Wall Street Journal
Commentary: Smoking Ban Should Cut into Trump's A.C. Gaming RevenueJim Cramer's Take on Trump Entertainment ResortsTrump Entertainment: Board Needs to Boot 'The Donald'
Stocks/ETFs to watch: Trump Entertainment Resorts Inc. (TRMP). Competitors: Boyd Gaming Corp. (NYSE:BYD), Harrah's Entertainment Inc. (HET), MGM Mirage (NYSE:MGM)

RETAIL

Kraft Offers $7.2 Billion for Danone Cookie Unit

Kraft Foods said Tuesday it has made a €5.3 billion ($7.2 billion) offer for the cookies division of Danone Group SA. The acquisition would position Kraft as the world's leading cookie manufacturer. The Danone division, which produces Petit Ecolier and Crème Roulee cookies, posted sales of €2 billion in 2006. Danone will retain its stakes in biscuit businesses in Latin America and India. Some analysts believe Danone, which also produces Dannon yogurt and Evian bottled water, will become an appealing takeover target if the sale is completed. The offer follows Kraft's agreement a year ago to buy a unit of U.K. food company United Biscuits Ltd. According to the WSJ, the acquisition of Danone's cookie business would "nicely fill" a "hole in [Kraft's] European biscuits portfolio." KFT 03 July 2007 DA 03 July 2007"Kraft wants to become the indisputable leader in the biscuit market," said fund manager Alain Crouzat. "They need the operations in Europe, where they are weak now." There is some speculation that activist investor Nelson Peltz, who holds a 3% stake in Kraft, has been agitating for the company to make acquisitions. Update: Danone said Tuesday it has accepted Kraft's offer. The companies expect the deal to close by year-end.
Sources: Bloomberg, Reuters, Wall Street Journal, MarketWatch
Commentary: Kraft Is In Talks to Buy Danone's Biscuit and Cereal Unit -- FTKraft Foods May Go On a Value-Creating Acquisition SpreeKraft Foods Jumps On Reports of Peltz's 3% Stake
Stocks/ETFs to watch: Kraft Foods Inc. (KFT), Groupe Danone [ADR] (DA). Competitors: General Mills Inc. (NYSE:GIS), Del Monte Foods Company (DLM), Kellogg Company (NYSE:K). ETFs: PowerShares Consumer Goods ETF (PRFG), Consumer Staples Select Sector SPDR (NYSEARCA:XLP), Ultra Consumer Goods ProShares (NYSEARCA:UGE)

Reddy Ice to Go Private for $1.1 Billion

Reddy Ice Holdings said Monday its has agreed to be acquired by GSO Capital Partners LP for about $1.1 billion. Shareholders will receive $31.25 a share -- a 9.6% premium over Friday's $28.52 close. Reddy Ice, the largest U.S. packaged ice maker and distributor, may solicit alternative proposals for 45 days. The deal is expected to close in Q4. Reddy Ice also lowered its 2007 guidance due to heavy rains in several key markets including Texas and Oklahoma; it now forecasts revenue of $350-360 million and earnings of $16.3-20.4 million ($0.74-0.93/share). The company previously forecast EPS of $0.87-1.06 and revenue of $360-370 million. Analysts had been expecting EPS of Reddy Ice 02 07 2007 Chart$0.94 and revenue of $365 million. Reddy Ice normally reports losses in Q1 and Q4, when people buy less ice. It manufactures and distributes approximately 1.9 million tons of ice a year.
Sources: Press release, Dow Jones, MarketWatch
Commentary: Reddy Ice: Aging Company Could Be Headed for the Deep FreezeReddy Ice Leaves Me Cold
Stocks/ETFs to watch: Reddy Ice Holdings Inc. (FRZ)
Related: Reddy Ice has scheduled a conference call for 9:00 a.m. ET; dial 888-321-8161, confirmation code 6146181. A replay can be heard at 800-642-1687 using the above confirmation code, or on the company's website, www.reddyice.com

FINANCIAL

Schwab Announces $3.5 Billion Capital Restructuring

Shares of The Charles Schwab Corp. rose 7.2% Monday to close at $22.00, their strongest gain in a year, on news the company will pay out a special $1 cash dividend and buy back a record $2.3 billion in stock. SCHW 03 July 2007The news accompanied Schwab's recording of a $2.7 billion after-tax gain from the sale of U.S. Trust to Bank of America. The dividend will return $1.2 billion to shareholders of record as of July 24, who will receive it on August 24. The buyback -- the company's largest since it went public in 1987 -- will constitute up to 84 million shares, or a 7% stake. Shareholders will be able to sell their stakes within a range of $19.50-22.50. Though founder Charles Schwab said in December the proceeds of the U.S. Trust sale might go toward acquisitions, the company has so far purchased only The 401(k) Company Inc. for $115 million. It has rejected the idea of acquiring rival online broker TD Ameritrade, despite the importuning of hedge funds Jana Partners and SAC Capital Advisors. "We applaud [the capital restructuring] because it quickly deploys U.S. Trust proceeds instead of having return on equity dragged down over the course of one to two years," wrote Fox-Pitt Kelton analyst David Trone Monday.
Sources: MarketWatch, Wall Street Journal, Bloomberg
Commentary: Jana, SAC Suggest TD Ameritrade Merge With E*Trade, Charles SchwabOnline Brokers Will Be Acquired By Banks and Brokerages Says optionsXpress FounderSchwab Heads List of Top Notch Stock Pickers
Stocks/ETFs to watch: The Charles Schwab Corp. (NYSE:SCHW), TD Ameritrade Holding Corp. (NASDAQ:AMTD). Competitors: E*TRADE Financial Corp. (NASDAQ:ETFC). ETFs: iShares Dow Jones US Broker-Dealers (NYSEARCA:IAI), KBW Capital Markets ETF (NYSEARCA:KCE)

Och-Ziff Hedge Fund Files for IPO

Hedge fund manager Och-Ziff Capital Management Group has submitted a filing with the SEC for a $2 billion IPO. The stock to be sold will be Class A shares, which will have limited influence on the running of the company. The more powerful Class B shares will be controlled entirely by founder Daniel Och. The firm manages $26.8 billion, a fourfold increase since 2002. Last year, its earnings more than doubled to $588 million. In a move that differentiates this IPO from June's $4.75 billion IPO of private equity firm Blackstone Group, Och-Ziff's partners will reinvest the proceeds into the company for five years. Blackstone CEO Stephen Schwarzman was criticized for using his company's IPO to cash in personally. The reinvestment might also shield Och-Ziff from a threat from bills currently before Congress designed to raise the taxes of investment firms that become publicly traded partnerships. "Och-Ziff could argue for capital-gains treatment because they've got their own money at risk," said hedge fund lawyer Steven Howard. In February, Fortress Investment Group became the first hedge fund manager to go public. The burgeoning interest among hedge funds and private equity firms in IPOs "may be a market top," according to hedge fund advisor Michael Napoli. "Why not realize some value when the flows from investors continue."
Sources: Och-Ziff's filing with the SEC, TheStreet.com I, II [video], Wall Street Journal, MarketWatch, Bloomberg
Commentary: Senate Legislation Takes Aim at Blackstone, FortressBlackstone Closing Below IPO: More Signs of Market Weakness?Four Ways To Gain Hedge Fund Exposure On The Public Market
Stocks/ETFs to watch: Blackstone Group LP (NYSE:BX), Fortress Investment Group LLC (NYSE:FIG). ETFs: streetTRACKS KBW Capital markets (KCE)
Conference call transcripts: Fortress Investment Group Q1 2007

HEALTHCARE/BIOTECH

New Study Suggests Vioxx's Ill-Effects Were Immediate -- WSJ

Results from an unpublished study suggest increased heart risks associated with Merck's Vioxx began immediately, and not after 18 months as the company has suggested -- a discovery which could bode ill for its ongoing litigation. Merck was hit with about 28,000 lawsuits after pulling the drug in September 2004 over concerns about increased risk of heart attack and stroke. Of the 15 cases already judged, Merck has won 10 and lost five. Merck has argued the higher risks were only experienced by patients on long-term treatments of 18 months or more. The present study, known as Victor, was conducted by Oxford University scientists and has been accepted for publication by the New England Journal of Medicine. According to a manuscript reviewed by the Wall Street Journal, half of the Merck 03 07 2007 Chartcardiovascular incidents associated with Vioxx occurred in patients taking the drug for less than 12 months. Elevated risks went away within 14 days of cessation. In a statement, Merck's outside counsel Ted Mayer said, "The reported findings with respect to confirmed thrombotic events in short-term use are not supported by the data found in the other available large placebo studies with Vioxx, including Alzheimer's studies, ViP and Approve."
Sources: Wall Street Journal
Commentary: The Lessons of Vioxx — Drug Safety and Sales [NEJM] • Merck: Making a Big Pharma ComebackMerck Loses Vioxx Retrial to the Tune of $47.5 Million
Stocks/ETFs to watch: Merck & Co. Inc. (NYSE:MRK). Competitors: Bristol-Myers Squibb Co. (NYSE:BMY), Pfizer Inc. (NYSE:PFE), Sanofi-Aventis (NYSE:SNY). ETFs: Pharmaceutical HOLDRs (NYSEARCA:PPH), iShares Dow Jones US Pharmaceuticals (NYSEARCA:IHE), Health Care Select Sector SPDR (NYSEARCA:XLV)
Related: March 2005 Vioxx study, Wikipedia on Rofecoxib, Court TV's full coverage of the Vioxx civil trials, Merck website on Vioxx litigation

Carlyle Group Buys Nursing Home Operator Manor Care for $6.3 Billion

Private Equity firm Carlyle Group is taking Manor Care Inc. private for $6.3 billion, including debt assumption. The buyout price of $67/share is a 20% premium to Manor's stock price in April, when it announced it was exploring a sale. Manor operates more than 500 nursing homes, and also provides home care, predominantly for the elderly.hcr The Wall Street Journal believes Carlyle's primary motivation in buying Manor Care was its large scale and real estate investment potential, meaning that while other nursing home operator buyout deals are possible, the remaining candidates lack Manor Care's advantages. Including after hours trading, Manor Care shares were at breakeven, having shed $1.19 during regular trading, only to gain it back afterwards.
Sources: Press Release, Wall Street Journal, TheStreet.com, Bloomberg, Financial Times, MarketWatch
Commentary: Manor Care: Solid Growth Alternative To Nursing Homes - Barron'sCold Feet Aside, The Buyout Boom Has Legs
Stocks/ETFs to watch: Manor Care, Inc. (HCR). Competitors: Sun Healthcare Group (NASDAQ:SUNH), Genesis HealthCare Corporation (GHCI), Kindred Healthcare (NYSE:KND). ETFs: PowerShares Dynamic Healthcare Services (PTJ)

Walgreen Strengthens Its Specialty Healthcare Offerings With Option Care Purchase

In a move that will further transform it from a conventional drugstore chain into a home and specialty healthcare provider, Walgreen announced Monday it is buying Option Care Inc. for $850 million -- $760 million in cash and $90 million in debt. The largest U.S. drugstore chain by sales is paying $19.50/share -- a 27% premium over Friday's closing price -- for Option Care, a provider of specialty pharmacy services and home infusion pharmacy care, whose headquarters is just five minutes from Walgreen's. Option Care shares traded higher by 25% to $19.24. Infusion care involves the administration of complex medications, unable to be administered by the individual patient, in such areas as oncology and immunodeficiency. Option Care provides services from more than 100 pharmacies in 34 states. Walgreen believes the specialty pharmacy and home infusion market is worth as much as $60 billion a year, with an annual growth rate of 20%. The buyout follows several smaller specialty pharma acquisitions by Walgreen, including Take Care Health Systems, Medmark Specialty Pharmacy Solutions, SeniorMed Pharmacy and Schraft's A Specialty Pharmacy. According to Walgreen CEO Jeffrey Rein, "This acquisition clearly establishes us as a national player in specialty pharmacy optnand home infusion services. Option Care offered the best opportunity for strengthening our position as a full-service specialty pharmacy provider, especially in areas such as hemophilia, immune deficiency and oncology."
Sources: Press Release, Wall Street Journal, AP, TheStreet.com
Commentary: Walgreen Posts Solid Q3 Gain, Pushes Ahead With New Store OpeningsOption Care: Leveraged to Biotech GrowthHome Healthcare Company Option Care Making the Right Moves
Stocks/ETFs to watch: Wallgreen Co. (WAG), Option Care, Inc. (OPTN). Competitors: Apria Healthcare Group (AHG), CVS Caremark Corporation (NYSE:CVS). ETFs: iShares Dow Jones US Healthcare Provider (NYSEARCA:IHF), Vanguard Health Care ETF (NYSEARCA:VHT), Health Care Select Sector SPDR (XLV)
Earnings call transcripts: Walgreen F3Q07

MACRO AND HOUSING

ISM Index: Factory Sector Posts Strong June

In an indicator that the factory sector continues to hold up despite the housing slump, manufacturing growth in June unexpectedly reached its fastest pace in over a year, according to the Institute for Supply Management's manufacturing index. SPY 03 July 2007The rise was attributable to production increases and new orders. The June index figure was 56.0 versus 55.0 in May, beating economists' forecasts of no change. A figure over 50 is considered an indicator of growth in the sector. The result appears to confirm the belief of some analysts that broader economic growth is picking up speed after grinding to a near-halt in Q1. "The softness we saw in the first quarter of this year was concentrated in the manufacturing sector," said Daiwa economist Michael Moran, "but this measure tells us activity has bounced back." In an encouraging inflation note, the ISM's prices paid index dropped to 68.0 from 71.0, but employment moved down to 51.1 from 51.9.
Sources: MarketWatch, Wall Street Journal, Bloomberg I, II, Reuters I, II [video]
Commentary: Economic Report Summary: Manufacturing Rebound, Steep Losses in Retail JobsISM Index Rise [in April] Means Current Rally Can ContinueManufacturing Bounces Back [in April]; Pending Home Sales Decline
Stocks/ETFs to watch: S&P 500 Index (NYSEARCA:SPY), Diamonds Trust Series 1 ETF (NYSEARCA:DIA), iShares Lehman Aggregate Bond (NYSEARCA:AGG)

INTERNATIONAL

BoJ's Nishimura Warns Against Pausing for Too Long

Bank of Japan Policy Board member Kiyohiko Nishimura spoke Monday at The Brookings Institution. He urged more flexibility in monetary policy, while still embracing the Bank's "gradualist" strategy. Swap contracts on the BoJ's target rate, show a 74% chance of a rate hike in August, with only a 12.5% chance of a hike at its meeting next Wed./Thurs. CS-Japan-Yen-ETF-FXY-chart-07-02-07 Instead of pre-scheduled or fixed rate hikes, Nishimura said rates "should be adjusted gradually to the trend of general economic conditions." He warned against holding rates for too long (currently 0.5%), since accelerated growth may require a large adjustment to rates in the future, causing unnecessary volatility. Regarding foreign currency trading, Nishimura said, "We do not know how far the contrarian strategies of Japanese retail investors can go. A sudden change in their behavior is likely to shift the direction and the magnitude of trading in many foreign-exchange markets." He also commented that "The gnomes of Zurich were accused in their day of destabilizing markets." However, "The housewives of Tokyo are apparently acting to stabilize them." The dollar/yen was last trading near 122.50.
Sources: Bloomberg, Reuters
Commentary: US Subprime Concerns Help Stir Yen RallyBIS Report Calls Recent Yen Depreciation 'Anomalous'Yen Gains Against Dollar on Minister's Warning, But Carry Trade Intact
Stocks/ETFs to watch: Mitsubishi UFJ FG (NYSE:MTU), Mizuho FG (NYSE:MFG), ORIX (NYSE:IX). ETFs: iShares MSCI Japan Index (NYSEARCA:EWJ), CurrencyShares Japanese Yen Trust (NYSEARCA:FXY)
Related: BoJ transcript of Nishimura's speech

MUST-READS ON SEEKING ALPHA TODAY

U.S. Market: The Smell of Contagion Hits Wall Street
Housing: Stocks Trading Just Above Their 50-Day Moving Averages
Long Idea: Interoil Corp.: Massive Drop Presents Huge Buying Opporunity
Short Idea: What's Behind the Coming Market Crash?
Internet: Google's YouTube Equals 10% Of Internet Traffic? I Think Not
Telecom: Electro Optical Engineering Should Ride Bandwith Wave
Networking: General Cable: Anything But Generic
Hardware: iPhone ‘Halo Effect’ Set to Drive Mac Sales Higher
Chips: NVE Corp.: The Good Times Are Back
Software: Eye on Opsware
Gadgets: Syntax-Brillian: The Short Squeeze That Never Was
Media: On Disney's Pixar Acquisition: Pricey, But Worth It
Healthcare: ThermoGenesis Cool-Off Should Be Short-Lived
Transport: General Motors: This Stock is Out of Gas
Gold: Kinross Gold Corporation: Buy on Pullback
Energy: Interoil Corp.: Massive Drop Presents Huge Buying Opporunity
Financial: Bear Stearns Investors Learn Just How Volatile Illiquid Assets Can Be
Asia: Down About the Dollar? The Yen is Worse
ETFs: Country ETFs' 2Q Performance: China Leads, Japan Lags
Hedge Funds: 3Com Corp.: Citadel Raises Stake to 9.8%, Updates on Meetings With Company
Small-Caps: Local.com: Operations Are Key, Not Patents
IPO Analysis: Making Sense of Och-Ziff's IPO
Sound Money Tips: Create Effective Advertising
Jim Cramer: Latest stock picks
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