Archive for 2005

• Intel & Texas Instruments
  Eddy Elfenbein, September 9th, 2005 at 3:15 pm

  As I expected, Intel narrowed its sales forecast for this quarter. The chipmaker now sees revenue of $9.8 billion to $10 billion. Last year, it had sales of $8.47 billion so this will be a good quarter. The company’s CFO said that gross margins will top 60%. Wall Street expects earnings of 36 cents a share. Right now, Intel has dropped about 80 cents in today’s session. Texas Instruments raised its sales forecast to $3.48 billion to $3.62 billion. TXN is trading about 20 cents higher.

• American Technology Research on Dell
  Eddy Elfenbein, September 9th, 2005 at 3:04 pm

  Not everyone hates Dell. Shawn Wu of American Technology Research sees a bargain:

  We view the nearly 20% pullback in shares of Dell as overdone. We believe investors have turned overly bearish from overly bullish in an amazingly short period of time following Dell’s disappointing July quarter results and guidance and as a result we are upgrading the stock to Buy.
  We find the risk-reward ratio at current levels attractive trading at 18 times our 2006 earnings per share (EPS) of $1.90 (and 15x excluding $5.11 in net cash) and see more upside than downside.
  Our $43 price-target implies 24% upside and assumes a 20x multiple, which we believe is reasonable for a company with a long-term EPS growth rate of 15% to 17%.
  In our view, Dell’s fundamentals have not changed that materially over the past few weeks. Dell remains among the best-positioned in hardware with its direct model, world-class low-cost supply chain, and broad product line.
  Our checks with resellers/channel partners and Taiwanese motherboard manufacturers as well as recent commentary from PC food chain semiconductor suppliers give us confidence that the PC segment is positioned to grow at or above seasonal rates, particularly in mobile computing.
  While it is early with nearly seven weeks left, we remain comfortable with our above consensus October quarter forecast of $14.5 billion in revenue and $0.41 in EPS (consensus at $14.3 billion and $0.40). We believe January quarter consensus revenue estimates may prove a tad too high, but we believe this concern is reflected in the pullback in Dell shares.
  What could go wrong? On the macro level—if investors focus more on high energy and oil prices, Dell could fall with the broader market. At the company level if Dell may continue to not execute like in its July quarter.
  We are, however, giving management the benefit of the doubt due to its relatively strong track record over a long period of time. We believe management is focused on fixing its miscues. In addition, we believe investor expectations have been reset with the pullback in shares.

• Favorite and Least Favorite Stocks
  Eddy Elfenbein, September 9th, 2005 at 2:42 pm

  Mark Hulbert just came out with the September issue of the Hulbert Financial Digest. This is the newsletter that tracks other newsletters. My favorite part of each issue is where he lists the favorite and least favorite stock picks of newsletter editors. Usually, several stocks make both lists. This month is unusual because only three stocks are on both lists. The three stocks are Pfizer, ConocoPhillips and Toll Brothers.

  The #1 favorite stock is Pfizer. This isn’t much of a surprise. There’s a lot like about Pfizer and the stock is down. I would stay away from the stock for now. Here are the top 10 favorite stocks of newsletter advisors and how many newsletters recommend them:
  Pfizer 17
  Bank of America 12
  Johnson & Johnson 12
  Microsoft 12
  Newmont Mining 12
  Berkshire Hthawy“B” 11
  Citigroup 11
  Home Depot 11
  Intel 11
  Unitedhealth Group 11

  Here are some of the least favorite:
  Cisco Systems 5
  Nasdaq 100 5
  S&P Spyders 5
  Select Energy SPDR 5
  Toll Brothers 5
  Johnson & Johnson 4
  Pfizer 4
  Amerigroup 3
  Bard CR 3
  Conocophillips 3
  Infosys 3
  Ishares Biotech 3
  Ishares Russell 2000 3
  KB Home 3
  Nordstrom 3
  Nucor 3
  SS&C Technologies 3
  Seagate 3
  Starbucks 3
  Yellow Roadway 3

• S&P Nears Four-Year High
  Eddy Elfenbein, September 9th, 2005 at 1:14 pm

  The stock market is recovering quite nicely from last week. Last Tuesday, the S&P 500 came very close to going below 1,200. Now the index is above 1,240 and is close to its recent high. On August 3, the index reached an intra-day high of 1245.86 and a closing high of 1245.04. That was the highest mark since 9/11. The previous high was on June 12, 2001 when the S&P closed at 1254.39. Since then, corporate profits are much higher.

  Here’s a chart of the S&P over the past two weeks.
  View image
  And here’s the S&P 500 since June 2001. View image

• Brown & Brown
  Eddy Elfenbein, September 9th, 2005 at 12:50 pm

  One of my favorite insurance stocks, Brown & Brown, was recently upgraded by Legg Mason. I like the stock anyway, but I think it’s especially good right now.

  The company is extremely well run and has never had a lost in nearly 70 years of business. Operating margins are expanding, however legal expenses are weighing them down. Despite rising profits, the stock has been in a trading range for most of the past year.

  The company had two offices in New Orleans. Obviously, they expect too many claims and Brown said that the first estimates will be probably be low. He also said that it probably won’t impact rates nationwide, but it will have a major impact in the south. In fact, Brown said that there will be big problems in Florida in November and December due to a lack of capacity. Firms will simply not underwrite policies. If this is true, it will certainly impact the real estate market. Officials now estimate that the damages of Katrina at $125 billion.

  You can listen to J. Hyatt Brown at Keefe, Bruyette and Woods insurance conference. He’s a bit of a character. I could see him in talk radio. (Brown was actually speaker of Florida State House.) He said that his goal is to grow EPS by 15% ad infinitum. I was surprised to hear him say positive things about Sarbanes-Oxley.

  Here’s a transcript of an interview from a few years ago.

• Delphi Drops Dividend
  Eddy Elfenbein, September 9th, 2005 at 10:57 am

  Things are going from bad to worse for Delphi. The company has already slashed its dividend twice, now it’s getting rid of it all together. The company should never have been spun-off by General Motors. Delphi is still hanging on to GM which remains its largest customer. The company is threatening to declare bankruptcy if it doesn’t get more concessions from its unions. Despite cutting its dividend, the stock is down today. I don’t see this company lasting to the end of the year.

• Boom in Baton Rouge
  Eddy Elfenbein, September 9th, 2005 at 10:45 am

  One of the after effects of Hurricane Katrina is that it’s created a real estate boom in Baton Rouge. Local officials have estimated that the city’s population has doubled.

  Demand for residential and commercial property is so strong that rental vacancy is an oxymoron and buyers are bidding against each other for places to live. As available housing dwindles, buyers waive inspections and pay cash for properties they may not have even seen.
  “It’s crazy,” said Herb Gomez, executive vice president of the Greater Baton Rouge Association of Realtors. “(Realtors) are busier now then they have been in their entire careers.”
  Stephen Moret, chief executive of the Chamber of Greater Baton Rouge, said his members are running at full tilt. But it is an unexpected prosperity that he and other merchants are trying to keep in perspective.
  “Everything that’s happening here is against the backdrop of the terrible devastation in New Orleans,” Moret said. “I wouldn’t even call it bittersweet. Awkward is more like it. We’re trying to accommodate the needs of evacuees.”
  The real estate market is red hot, with both commercial and residential properties becoming increasingly scarce and valuable.
  A normal, active month in Baton Rouge would be marked by about 900 existing home sales. In the past 13 days, even the most conservative estimates say inventory has dropped from 3,600 homes to less than 2,500.

• All-Time High for the DJUA
  Eddy Elfenbein, September 9th, 2005 at 9:39 am

  A lot of market technicians are in a tizzy because the Dow Jones Utility Average just hit an all-time high. In fact, Richard Russell, who is a follower of the Dow Theory, has moved from the bearish camp to the neutral camp. That may not sound like a big deal, but to a loooong-time bear like Russell, it’s an act of major significance.

  Mark Hulbert notes the reason for Russell’s change in outlook.

  The first thing is the new all-time high in the Dow Jones Utility Average. According to Russell, “Normally, the Utility Average will hit its highs well before the final high in a bull market, although there have been times when the Utility Average topped out simultaneously with the bull market high.”

  I think the market may move higher, but it won’t have much to do with the Dow Utility Average. The problem is that many public utilities have been too boring for too long. When some companies tried to break into new businesses, the results were a disaster. The whole industry tanked a few years ago thanks to headlines from the likes of Calpine and Enron. At one point in 2002, the Dow Utility Average was just 36% above its September high—its September 1929 high.

  The good news is that many public utility are very sounds financially. They have strong balance sheet, and most importantly, lots of free cash flow. Since taxes were cut on dividends, utilities have become popular with income investors. Also, the recent Energy Bill loosens some of the heavy handed regulations. For example, the bill eliminates the Public Utility Holding Company Act of 1935 which makes mergers very difficult. The utilities sector has many good smaller companies that are being eyed by larger utes. Even Warren Buffett’s is getting in the act. I wouldn’t be surprised to see a large bank pick up a small utility.

  Except for AES, none of the 15 stocks in the Dow Utility Average is expected to grow faster than the market over the next five years. Here are all stocks in the Dow Utility Average and Wall Street’s estimate for earnings growth over the next five years.
  AES CP 18.0%
  CENTERPOINT ENERGY 9.0%
  TXU CORP 7.0%
  EDISON INTL 6.5%
  WILLIAMS COS 6.5%
  EXELON 5.5%
  DOMINION RES 5.0%
  DUKE ENERGY 5.0%
  PG&E 5.0%
  SOUTHERN CO 5.0%
  FIRSTENERGY 4.5%
  PUB ENTRPR GP 4.0%
  NISOURCE INC 3.5%
  AMER ELECTRIC POWER 3.0%
  CONS EDISON 3.0%

  Here’s a chart of the Dow Utility Average going back to 1970.
  

  You can see that the index is just above the high it hit four years ago. Although the index has grown steadily over the years, it has badly lagged the rest of the market, even adjusting for dividends. At some point, utilities may become attractive, but right now, I’d avoid the sector.

• Animal Rights Group Halts NYSE Listing
  Eddy Elfenbein, September 8th, 2005 at 5:58 pm

  Life Sciences Research Inc. was all set to begin trading today on the New York Stock Exchange. But less than an hour before the opening bell, NYSE officials told them that the listing was going to be postponed. No reason was given.

  LSR engages in animal testing, so the company is used to receiving hate mail and death threats. But the threat must have been very serious for the NYSE to halt a listing.

  On the Web site of the activist group Win Animal Rights, or W.A.R., a link off of the camouflage-pattern home page led to a page entitled “Puppy Killers on the New York Stock Exchange.” Readers are encouraged to write “polite letters and e-mails and make polite phone calls” to the exchange. The exchange’s address and phone numbers are listed, along with the names and work numbers of two members of the public relations department.
  W.A.R. founder Camille Hankins confirmed that an unknown number of W.A.R. supporters made calls to the exchange. Hankins said she does not advocate threats or violence, and she urged her members to be reasonable and make well-informed arguments against LSR. But she added that she had no control over what others might do.

  The NY Post has more.

• BW: Chipmakers Face a Chilly Fall
  Eddy Elfenbein, September 8th, 2005 at 12:09 pm

  Business Week takes a look at the chip sector and it doesn’t look so good. Intel and Texas Instruments will provide revenue guidance today. I’m guessing that Intel will tighten the high side of its guidance. TXN is at a 52-week high right now. However, Business Week has to take its mandatory shot at Dell.

  “Dell’s results demonstrated that the industry is in a phase of being unit-rich but revenue-poor,” says Ashok Kumar, an analyst at Raymond James & Associates. “This isn’t only specific to the PC industry but will also be apparent in handsets and in emerging markets as well. Price points will continue to drop.”
  Adding to Intel’s woes, rival Advanced Micro Devices is forcing Intel to push down prices on its Xeon chips for servers, the computers that run Web sites and corporate data networks, notes JPMorgan analyst Chris Danely. Intel may tighten its revenue forecast to between $9.8 billion and $10 billion for the fiscal third quarter and maintain its forecast for gross margin, a yardstick of profit, of about 60%, Danely says. Intel now expects revenue to come in between $9.6 billion and $10.2 billion.

  I think it’s a stretch to say that Dell is “revenue poor.” The company’s revenue shortfall could have been made up very easily last quarter. HP’s Douglas Hurd continues to be the media darling. WSJ has more on HP’s analyst meeting.