MarketView for April 23

MarketView

 

Events defining the day's trading activity on Wall Street

 

Lauren Rudd

 

Wednesday, April 23, 2008

 

 

 

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Summary

 

Stock prices moved somewhat higher on Wednesday as several technology companies posted results indicating unexpected resiliency within the sector despite the ongoing economic slowdown. As a result, the NASDAQ gained one percent after Broadcom, a top chip manufacturer for cell phones, released a quarterly revenue target that surprised the Street on the upside. The results fueled a 4.1 percent jump in an index of semiconductor stocks and set a positive tone for the entire sector. Broadcom ended the day up $3.84, or 16.31 percent, to close at $27.39.

 

Apple saw its share price rise $2.69, or 1.68 percent, to close at $162.89, as the share benefited from optimism over the possibility that Apple’s earnings would exceed Wall Street's expectations when the iPod maker posted its quarterly results after the bell. Apple did crush Street estimates, however the company’s projected outlook going forward sank the stock in after-hours trading.

 

Boeing helped to send the Dow Jones industrial average higher on news that strong deliveries of commercial aircraft increased its earnings. It should come as no surprise that companies, such as Boeing, that have a significant part of their earnings and profits coming from abroad are doing better than those with a more domestic focus. The reason, in part, is the rapidly declining dollar and the profit that occurs when foreign currency profits are translated into dollars. Boeing ended the regular trading day up $3.53, or 4.49 percent, to close at $82.09.

 

Safeco saw its share price jump 45.8 percent to $65.94 and top the list of biggest percentage gainers on the Big Board after diversified insurer Liberty Mutual group said it agreed to buy the insurance company for $6.2 billion in cash.

 

The Dow and S&P briefly turned lower around midday as shares of Ambac Financial slid on worries about the bond insurer's outlook and Wall Street once again grew worried about the impact of the subprime mortgage fallout. Early in the day, Ambac posted a wider-than-expected first-quarter loss, falling $2.57, or 42.62 percent, to close at $3.46 in its worst share price decline in more than three months.

 

Also on the up side was Philip Morris International, which raised its full-year earnings forecast, as a result of the benefits from the falling dollar. Philip Morris ended the day up $1.93, or 3.85 percent, to close at $52.00.

 

Oil Up Again

 

Oil prices were higher again on Wednesday after government data showed a larger-than-expected decline in gasoline stocks ahead of the summer driving season, offsetting a build in crude inventories.

 

Domestic sweet crude for June delivery settled up 23 cents per barrel at $118.30. Supply concerns sent the May contract to a record high $119.90 before it expired on Tuesday. London Brent crude settled up 51 cents per barrel at $116.46, after reaching a record $116.75 per barrel price on Tuesday.

 

Gasoline futures hit a new record on as a result of government data indicating a 3.2 million barrel decline in inventories last week as the country enters the summer holiday driving season.

 

Distillate stocks fell 1.4 million barrels, despite a 4.2 percentage point rise in refinery runs. Crude oil stocks showed a 2.4 million barrel build, a considerably higher number than had bee previously forecast by the Street.

 

Rebel attacks on oil pipelines in Nigeria helped push markets to fresh highs this week, forcing Royal Dutch Shell to declare force majeure on Bonny Light exports after 169,000 barrels per day of oil was shuttered.

 

Further support came from potential disruptions stemming from a strike at the Grangemouth refinery in Scotland. Union and management representatives are in talks to avoid the two-day stoppage, scheduled to start on Sunday, which could cause a reduction in flows of North Sea oil and natural gas production.

 

Amazon Reports Higher Earnings and Lower Margins Going Forward

 

Amazon.com warned on Wednesday that its profit margin would narrow in 2008 as it kept prices in check, sending its shares down 5 percent, even as its quarterly results exceeded targets and the Web retailer raised its 2008 sales forecast.

 

To Wall Street this is one more indicator of a weak economy and one that is forcing Amazon to keep prices low, a strategy that depresses profit margins. Amazon’s gross margins, which fell below where it was a year ago, has been a recurring source of concern to Amazon investors as capital investments, competition and now the threat of recession continue to pressure the company7’s profitability picture.

 

"We think in this type of environment, externally, customers want value. That's in down times and up times," Amazon Chief Financial Officer Tom Szkutak told analysts during a conference call. "So we're going to make sure we have the right prices for customers."

 

Concerns over weaker U.S. spending have unnerved investors of consumer companies in recent quarters and shares of Amazon, the most popular Web e-commerce site behind eBay, are down 13 percent since January 1.

 

Szkutak dodged questions on whether the company was seeing any impact from a possible U.S. recession, simply repeating that pricing, selection and keeping items in stock were behind a broad-based, 37 percent rise in global sales.

 

Net income rose 30 percent to $143 million, or 34 cents per share, from $111 million, or 26 cents per share, a year earlier. Revenue rose to $4.13 billion from $3.02 billion. Operating income rose 36 percent to $198 million, on the high side of Amazon's own forecast.

 

But as in prior quarters, impressive sales growth has come amid declining profit margins. In the first quarter, gross margins as a percentage of sales, which have declined over the previous two quarters, were 23.1 percent. That was slightly lower than the 23.8 percent a year earlier, but improved from the 20.6 percent in the fourth quarter.

 

Amazon has been expanding its traditional business of books and CDs with electronic media, from music downloads to the recently-launched book reader, The Kindle. Moreover, it is likely that Amazon has been poaching third-party sellers from eBay.

 

Amazon said sales for the second quarter would increase to between $3.88 billion and $4.08 billion with operating income between $120 million and $160 million.

 

For 2008, Amazon said it now forecasts net sales between $19.1 billion and $20 billion, with operating income between $740 million and $940 million.

 

The company's previously-held 2008 forecast was for net sales of $18.75 billion to $19.75 billion and operating income between $785 million to $985 million.

 

The discrepancy in operating income was due to stock-based compensation, intangibles and acquisitions, including its recent purchase of Audible Inc, Szkutak said.

 

As of Tuesday's close, Amazon shares traded at 53 multiple of projected 2008 earnings. EBay and Wal-Mart are valued at 18 and 16.5 times forward-looking earnings. Amazon closed at $77.10 in after hours trading. It had ended the regular trading day up $$1.40, or 1.76 percent, to close at $81.00.

 

Qualcomm Reports Higher Earnings but Lowers Outlook

 

Qualcomm posted higher earnings for the quarter on Wednesday, the result of increased demand for chips in advanced cell phones. Nonetheless, its forecast for the rest of the year fell short of Street expectations.

 

Shares of Qualcomm fell 3 percent in extended trading after it said fiscal third-quarter earnings would drop from a year ago, raising concerns that cheaper cell phones with less profitable chips would sell better than expected.

 

Qualcomm Chief Financial Officer Bill Keitel said growth in demand for low-end phones was as expected. But he was upbeat on the growth for advanced phones with high-speed data links.

 

Qualcomm's net profit increased to $766 million or 47 cents a share, for the second quarter ended March 30, from $726 million, or 43 cents a share, in the year-ago quarter. Revenue grew to $2.6 billion from $2.22 billion.

 

Excluding its investment arm and other items, the company earned 54 cents per share, below analysts' average estimate of 52 cents a share, according to Reuters Estimates.

 

Qualcomm executives said that despite concerns over a weaker U.S. economy, the company was benefiting from growth in both the United States and other parts of the world.

 

"We're pleased with how the business is running and how it's diversified geographically," Chief Executive Paul Jacobs said on a call with analysts.

 

For the third quarter, Qualcomm expects earnings of 50 to 52 cents, before items, down from 55 cents in the year-earlier quarter and below the average analyst forecast of 52 cents as compiled by Reuters Estimates.

 

The company raised its forecast for full-year earnings before items to $2.04 to $2.09 per share, from its earlier target of $2.01 to $2.07. But the midpoint of that range was below the expected $2.09 number.

 

Qualcomm estimated lower earnings from cash and marketable securities for the full year, but said that would be more than offset by better-than-expected growth in its wireless chip and technology licensing businesses.

 

Qualcomm is embroiled in legal battles with rival Broadcom and Nokia. It said it would need a "business defense" budget for fiscal 2008 of $300 million, mostly for legal costs.

 

In guidance going forward, Qualcomm projected 2008 revenue of $10 to $10.4 billion, up from its earlier projection of $9.6 to $10 billion target. Qualcomm shares fell to $41 in after-hours trading from its regular trading close of $41.89.