S&P 500: +10.56 (+1.25%)
Companies’ unwillingness to provide earnings forecasts is a result of uncertainty, but it allows more wiggle room and protects against major disappointments. This uncertainty is a reminder of the challenges we still face, even if the worst is in fact behind us. Seeing an increase in earnings visibility would certainly be a positive going forward.
Intel (INTC) -2.44%
Intel’s revenues and profits dropped less than expected, but investors were far more interested in the company’s outlook for the future.
On the bright side, Intel believes the PC market reached a cyclical bottom in the first quarter, in terms of inventory correction and demand level adjustment. However, investors were disappointed that Intel could not provide any growth projections due to economic uncertainty and “limited visibility.” Intel did say that gross margins and revenues will remain basically flat – both projections have widely been considered conservative estimates meant purely for internal purposes.
Intel’s closely watched gross margin (the difference between revenue and cost of goods sold, divided by revenue) fell to 46 percent in the first quarter from 53.8 percent a year earlier, a smaller decline than was predicted. Regarding product-mix, there are still cannibalization concerns with the lower-margin Atom chips, but strong sales from the new high-end Nehalem as well as ULV chips for ultra-light laptops should keep margins from narrowing in the short-run and potentially widening in the long-run.
The light revenue and profit guidance caused investors to pull back today on Intel shares – plus, the valuation has run-up rather quickly in the past few months. But longer-term investors should be focusing on Intel calling a bottom for PC sales and their growing share of the microprocessor market. If that doesn’t excite you, consider that a growing number of analysts expect Intel’s earnings power to surpass their 2000 peak for the first time once the economy recovers.
Peabody Energy (BTU) -11.52%
Peabody said first-quarter profit that nearly tripled on higher contracted prices, but trimmed 2009 production estimates and declined to issue forecasts for the full year because “full-year global and U.S. delivery levels remain uncertain.”
Prices for Peabody’s coal in the U.S. rose 16 percent from a year earlier and prices for their Australian coal climbed 50 percent. Still, weakening demand is requiring production cuts. Global steel production decreased 23 percent year-over-year, and U.S. steelmakers are operating at as low as 40 percent of capacity. In addition, Peabody projects that worldwide electricity demand will decline 1 to 2 percent this year.
The coal industry faces several challenges in the near-term including lower production, historically high inventories at electric utilities (coal’s largest customer) and lower natural gas prices – this list may eventually include cap-and-trade legislation.
Coal mining is a notoriously cyclical business, but Peabody stands to benefit in the long run from its scale, geographic diversity, and leading position in Wyoming’s Powder River Basin.
Rival coal mining company Arch Coal (ACI) declined 5.13 percent today.
Raymond James Financial (RJF) -13.48%
Raymond James announced today that results for its second fiscal quarter ended March 31 will be well below the current consensus analysts’ estimates of $0.37 per share.
The company’s press release said the company has tripled loan-loss reserves due to a “dramatic deterioration” of commercial real estate values, as well as consumer and business loans.
The disappointing forecast is yet another sign that banks’ problems are far from over. Banking analysts have been worrying about this exact scenario in which rising revenues are not enough to offset loan losses, which will continue to increase so long as consumers and businesses face economic hardships.
Cisco Systems (CSCO) -2.06%
After IBM withdrew its offer to Sun Microsystems, investors looked to Cisco as a potential suitor for the networking and storage company. Cisco CEO John Chambers, however, made it very clear that they are not interested in Sun, but expects they will continue making acquisition as the market presents intriguing values.
Cisco is expected to make a bigger push into systems for data centers, which makes companies such as EMC or NetApp potential targets. EMC has a dominant position in the highly attractive networked storage segment as well as an 85% stake in VMware, the current leader in the server virtualization market. EMC’s assets would provide a critical upgrade for Cisco. NetApp would be a much smaller acquisition, but would provide Cisco with a strong position in the network-attached and networked storage segments. Hewlett-Packard or IBM could be potential suitors for EMC and NetApp as well.
This Bloomberg suggests Dell as a potential suitor for Sun. By acquiring Sun, Dell could gain a valuable traction in the high-end enterprise hardware market, plus give the company much needed diversification away from commodity hardware. However, I think a takeover becomes less likely if Dell’s valuation falls further.
Quick Hits
Peter Lazaroff, Junior Analyst
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