Rob Black's Marketwrap for Tuesday: IBM, Motorola, Johnson & Johnson in Focus

 |  Includes: GOOG, IBM, JNJ
by: Rob Black

Stocks staged their biggest rally in a year after the latest Federal Reserve minutes encouraged speculation that the 21-month-old policy of higher interest rates may be coming to an end. 

S&P 500 rose 22 points (+1.7%) to 1307
DJIA climbed 194 points (+1.8%) to 11268
Nasdaq increased 44 points (+2%) to 2356

U.S. wholesale prices rose in March as costs of crude oil and gasoline approached record highs, a government report showed. Prices excluding energy and food rose at the slowest pace in four months.

Housing starts in U.S. drop 7.8 Percent to 12-month low.  Builders started work last month on the smallest number of new houses in a year as rising mortgage rates and record inventories of unsold homes discouraged new projects.

International Business Machines (NYSE:IBM) , the world's biggest computer-services provider, said first-quarter profit gained 22 percent as the company cut jobs and sales in emerging markets advanced. 

Motorola (MOT) , the world's second- biggest mobile-telephone maker, said first-quarter profit fell on costs to expense stock options. The shares declined after profit margins shrank to the narrowest in two years.

Commodity prices rose to records as concern over Iran's nuclear program sent oil to an all-time high and speculation about rising demand in China stoked buying of metals by investment funds. 

Most Federal Reserve policy makers considered the end of their interest rate increases 'was likely to be near,' while also citing the need for vigilance against inflation, minutes of their March meeting showed. 

Wells Fargo, the fifth- biggest U.S. bank, said first-quarter profit rose 9 percent to a record on gains in business loans, service charges and money- management fees.

Johnson & Johnson (NYSE:JNJ), maker of thousands of products from shampoo to knee replacements, said first-quarter earnings rose 16 percent on medical device sales and a payment from its failed effort to buy Guidant Corp.

Microsoft's $1.2 billion order from China's Lenovo (China's largest personal computer maker) is suggesting progress in Microsoft Corp.'s efforts to curb piracy, Lenovo Chairman Yang Yuanqing said.

Interesting . . . The traditional auto states of Michigan, Indiana, and Ohio have lost 17% of their jobs in the motor vehicle and parts industries since 200.1

Bad Boys . . . The National Association of Securities Dealers has suspended a former stockbroker with GunnAllen Financial for two years and fined him $50,000 for threatening and intimidating Optelecom-NKF. The NASD had charged that broker Shawn Aaron engaged in a scheme to defraud and extort Optelecom by threatening to drive down the price of its stock to $6 a share from $13 a share unless it provided him with confidential business information. The hearing panel concluded that Aaron made material misrepresentations and threatened Optelecom.

Eco Speak . . .  Producer prices rose 0.5% in March as gasoline prices showed the biggest gain in 16 months. Outside of food and energy, however, seasonally adjusted finished goods prices showed little movement. The core producer price index increased 0.1% in March, the smallest gain since November. Economists were expecting the PPI to rise 0.4% and the core to rise 0.2%. The PPI is up 3.5% in the past year, the lowest year-over-year gain since September 2004. Core prices are up 1.7% in the past year, the same year-over-year gain as last month. Prices fell further back in the production pipeline.

Housing . . .  Builders started work last month on the smallest number of new houses in a year as rising mortgage rates and record inventories of unsold homes discouraged new projects.   Housing starts declined 7.8 percent. Starts fell in all regions of the country. They decreased 16 percent in the West, 8.2 percent in the Midwest, 4.8 percent in the South and  0.5 percent in the Northeast. Building permits, which are generally seen as a barometer of builder confidence in the market and are less affected by weather, also fell more than expected.   New home sales declined in three of the last four months, falling in February by the most in nine years.   Buyers are going to be in a sweet spot in about three to six months. The speculators who are still holding properties will be panicking by then as their carrying costs mount. It won't be a bloodbath, but that's when prices should be at their lowest.   Speculative purchases make up 20 percent of the housing market.

Financials . . .  Wells Fargo said net income rose 9% to $2.02 billion from $1.86 billion last year. Revenue rose 6% to $8.56 billion from $8.09 billion. The latest quarterly results include a charge of $52 million for a change in accounting for stock options paid to employees.

AmSouth Banc reported earnings of $181 million up from a year-ago profit of $178.6 million.

U.S. Bancorp earned $1.15 billion up from $1.07 billion a year ago. CEO Jerry Grundhofer said earnings were driven by gains in fee-based business and lower credit costs.

Jefferies Group declared a two-for-one split of its common stock. The company also approved an increase in its quarterly dividend of 67% to 12.5 cents a share on a post-split basis from 7.5 cents a share.

Wachovia earnings were noisy this quarter including a $100 million payment received related to its credit card business, a $33 million gain relating to the Archipelago/NYSE merger, and one month of results for Westcorp/WFS. The gains were offset by a $98 million pretax SFAS 123(NYSE:R) charge, and $64 million of discretionary losses in the investment portfolio. Wachovia trades at a 1% discount on 2006 cash EPS, which is less of a discount than Bank of America and Citigroup that trade at a 13.5% and 6% discount, respectively, and have growth opportunities that are clearly more understandable.

Mellon Financial reported earnings of $0.52 per share, excluding non-recurring items, $0.03 better than the consensus of $0.49; non-GAAP revenues rose 18.1% year/year to $1.27 billion versus the $1.22 billion consensus.

Brean Murray downgraded Macatawa Bank to Accumulate with a $40 price target.

China Life Insurance, the mainland's largest life underwriter, reported 2005 net profit rose 30%, with gains attributable to strong growth in net premiums and investment income. Analysts said investment returns have room to improve as China liberalizes the range of assets insurers can buy from.  Next month, insurers will be allowed to buy overseas fixed-income securities with yuan funds.

REITs . . .  UBS upgraded Federal Realty Investment Trust to neutral. The firm is saying that real estate investment trust shares have fallen 7% since the start of the month. The broker told clients that Federal deserves a premium given its high-visibility growth profile.

Homebuilders . . . D.R. Horton said income rose 20% to $353 million with revenue up 25% to $3.6 billion. Homes closed increased 19% to 12,570. Analysts were expecting revenue of $3.42 billion.

Metals . . . Stillwater Mining should benefit from surging prices in platinum and palladium markets. While the company does employ a hedging strategy for both metals, a relatively small amount of production is constrained by a ceiling price. Thus margins have improved with the run up in PGM prices. Management is aggressively enacting measures to change the company's high cost structure. Specifically management is attempting to increase production levels and employ selective mining in order contain costs and increase volumes.

Energy . . .  Transocean’s announcement yesterday of a $340K dayrate for the C. Kirk Rhein, Jr., a mid-water semisubmersible, provides further evidence of strength in the global rig market. This announcement suggests that the Other Floaters class of rigs in Transocean’s fleet is undervalued and will contribute significantly to EPS growth if expiring contracts are renewed at current market rates.

Peabody Energy reported income of $130.2 million compared with $51.9 million in the year-earlier period. Revenue in the quarter ended in March rose about 22% to $1.31 billion from $1.08 billion. Peabody affirmed a 2006 earnings forecast.

Bear Stearns downgraded Lukoil to Peer Perform.

Transports . . . Universal Truckload Services is an asset-light truckload provider that uses dedicated owner operators and brokered third-party trucking and rail capacity booked through a network of agents. It also provides intermodal drayage operations at several steamship and rail depots nationwide. Universal went public in February 2005 at a price of $22.50. Since that time the stock is up 8% compared to closest public comparables Landstar System and Hub Group up 19% and 46% and the S&P 500 up 7% during that period. Since going public a little over a year ago Universal has generally hit its stated goals for revenue and earnings growth and over the past six months has announced four modest sized tuck-in acquisitions. During 2005 EPS growth was flattish which was masked by the 50% IPO related increase in share count. Operating income during 2005 grew 49% up from 32% during 2004.

Food & Beverage . . . Pepsi Bottling reported income of $34 million compared to $39 million earned in the first three months of 2005. Pepsi Bottling also generated quarterly revenue of $2.37 billion, up from nearly $2.15 billion in the same period last year, as worldwide physical case volume jumped 6%. The company also affirmed its full-year financial outlook

Leisure . . . Travelzoo Inc reported earnings of $4.1 million up from a year-ago profit of $1.8 million, or 10 cents a share. Revenue rose 51% in the latest three months to $16.9 million from $11.2 million in the same period a year earlier. The company said it saw growth in online advertising sales during the quarter, and that results were also helped by a lower than anticipated loss from its Europe business and a decrease in its effective tax rate.

Media . . . Google has posted a job opening for a travel vertical based in Chicago on the job listings site of Mediabistro. GOOG may be planning such a service to rival Expedia, as well as Yahoo's relationship with Travelocity. has filed a countersuit against Apple claiming that the iTunes software, the iPod and the Quicktime streaming software all infringe on patents held by  Last year, Microsoft settled with Burst for $60 million and agreed to license the Burst technology.
Bear Stearns upgraded Activision to Outperform. They raised their target to $16 from $14 as they believe that above-average rev and earnings growth are achievable. The console transition will prove more challenging than many expect. Consumers are waiting for more Xbox 360 supply and
for the PS3 launch, hence the return on investment in new releases is low. After a brutal December quarter, ATVI's decision to scale back in FY07 appears to be the right one.

Bear Stearns downgrades Take-Two to Underperform. The firm is citing lack of execution as well as the lack of cash generation in the last two years, despite the launch of another Grand Theft Auto.

Healthcare . . . Human Genome Sciences is a late-stage drug development company with two promising products nearing Phase 3. The company's lead product, Albuferon (Hepatits C) has relatively low clinical risk, but higher commerical risk. Conversely, LymphStat (lupus) has high clinical risk but lower commerical risk.

ImQuest Pharmaceuticals said Isis Pharmaceuticals has granted it an exclusive worldwide license for the development and commercialization of ISIS 5320, a compound that has been shown to inhibit HIV.

BofA downgraded Sybron Dental to Neutra.

Boston Scientific said income was $332 million compared with $358 million, or 42 cents a share for the same period a year ago. The company said its earnings were adversely impacted by new accounting rules for stock-based compensation and a writedown for a gene therapy trial.

Johnson & Johnson reported earnings of $3.31 billion up from a year-ago profit of $2.84 billion. Sales rose 1.2% in the latest three months to $12.99 billion from $12.83 billion in the same period a year earlier. Worldwide medical devices and diagnostics sales totaled $5 billion, an increase of 4.5% from a year ago, while global pharmaceutical sales totaled $5.6 billion, a 2.2% decrease from last year.

Mylan Labs said the U.S. Food and Drug Administration has granted tentative approval for its abbreviated new drug application (NASDAQ:ANDA) for Finasteride Tablets USP, 5mg. These are the generic equivalent of Merck's Proscar tablets which had annual U.S. sales of about $390 million as of Dec. 31, 2005, according to IMS Health.

UnitedHealth Group reported income up 21% on 54% higher revenue. First-quarter net reached $899 million from $743 million in the year-earlier period.   Revenue reached $17.59 billion from $11.16 billion. UnitedHealth Group lifted its estimate of full-year earnings to an increase of 22% to 24% from 2005.

Retail . . .  Target expected April sales at stores open at least one year to rise 10%, helped by the Easter holiday. Its prior forecast had been for a 9% to 11% gain. For the combined March/April period it expects same-store sales to rise 5%.

Mattel said Barbie sales rose 1%, although international Barbie sales slipped 14%. Sales of Mattel's Barbie fashion doll brand have been struggling in the U.S. in recent quarters. The company cautioned that the brand "isn't out of the woods yet."

Berkshire Hathaway, the holding company run by billionaire investor Warren Buffett, announced plans  to buy athletic clothing maker Russell, in a deal that could be valued at as much as $600 million.

Clothing retailer Gap agreed with Dubai-based Al Tayer Group to open about 25 Gap stores and about 10 Banana Republic stores in the Middle East by 2010.  Gap will open the first franchised Gap stores in late 2006 and the first Banana Republic stores in 2007.

Telecom . . .  Vimpel Communications (wireless services in Russia and Kazakhstan) said income rose 81.2% to $151.7 million. Operating revenue for the quarter rose 45.7% to $910.4 million. The company said the fourth quarter of 2005 was considered the last quarter of rapid subscriber growth in Russia.

Technology . . . Unisys said its loss narrowed to $27.9 million from a loss of $45.5 million a year earlier. The results included a pre-tax charge of $145.9 million related to headcount reductions and one-off gains of about $195 million. Revenue rose 2% to $1.39 billion on good growth in services. However, the company said it saw a significant decline in technology revenue and margins this quarter due to weak demand for enterprise servers.

China’s Lenovo Group and Microsoft formally signed an agreement to pre-install the Windows on Lenovo's computers made in China. The agreement is expected crack down on piracy and to result in $1.2 billion in yearly sales of Microsoft's Windows operating system.

You think you have tax problems. Symantec received a Notice of Deficiency from the IRS claiming the co owes upwards of $1 billion in additional taxes due.  Symantec will fight the claim.  Symantec filed an 8K disclosing that it had received a "Notice of Deficiency" from the IRS seeking back taxes, interest and penalties in excess of $1 billion. Approximately $900 million primarily relates to the transfer pricing activities of VERITAS Software, acquired in July 2005, while another $100 million relates to transfer pricing matters with Symantec.  While disputes with the IRS are not uncommon, in our view the magnitude would imply that any settlement would still likely a meaningful amount. In gauging the timing of a potential settlement and payment, we would note that transfer pricing issues are often complex and can take many months, if not years, to resolve.

McAdams Wright Ragen added Intel to their Focus List with a one-year price target of $25.  The firm says a more thorough analysis of the company's pipeline of future microprocessors and recent up and down competitive history with AMD suggests that Intel will ultimately be able to pull out of its slump.

FBR downgraded NVIDIA to Underperform.  Price target is $24  due to fears of a slowing PC market.

Amdocs will acquire Qpass, a provider of digital co software and solutions for approximately $275 million in cash.
Brean Murray upgraded RSA Security to Hold.

Dell rolled out a new notebook PC aimed at the high-end gaming market. The XPS M1710 notebook comes in two versions, starting at $2,600 and $3,400, and runs on Intel's Duo Core microprocessors. The notebooks are capable of holding up to four gigabytes of memory and come with 17-inch screens.

J.P. Morgan upgraded Micron to neutral. The firm is saying its checks indicate DRAM memory pricing continues to improve in the second quarter. The broker told clients it believes stable pricing increases the potential for gross margin expansion, especially as the company continues to diversify its production to new higher margin areas such as images