Through TheFLY's Eyes: Time Warner

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“Superman Returns” To Reinvigorate Time Warner’s Brand

In media and entertainment circles, they call it “reinvigorating the brand.”

Actor Charlton Heston accomplished it for motion picture studio 20th Century Fox in 1968 with a performance in a film that brought the company back from near-bankruptcy. The film: “Planet Of The Apes.”

Managing Editor Ben Bradlee accomplished it for the then-languishing Washington Post with his intelligence, tenacity, instincts, and commitment to two reporters named Woodward and Bernstein, who would change not only The Post’s reputation, but American history, itself.

And former NBC “Today” show host Katie Couric will try to achieve it for CBS when she takes over as anchor of the “CBS Evening News” in September 2006.

Moreover, Time Warner (TWX) is hoping for a similar reinvigoration of the brand with the launch of motion picture “Superman Returns” by unit Warner Bros.

Still, it’s fair to ask: can a motion picture boost a major multi-national corporation’s bottom line, as well as its stature and image? Indeed it can. A major success by a motion picture – called a “blockbuster” in the industry – can mean the difference between a profitable year or a yearly loss for a studio, and can add hundreds of millions of dollars to the bottom line of a conglomerate such as Time Warner.

Further, a blockbuster film can uplift or “reinvigorate” the company’s brand: it signals to the company’s media competitors and potential partners that the company is in-touch with the vast contemporary audience and that it’s a workplace where innovative ideas are being generated and implemented.

Warner Bros. spent $260M to produce “Superman Returns,” which means the film will have to gross about $550M to turn a profit. Generally, motion picture studios receive about 50% of gross ticket sales, and after factoring other costs, most films need to more than double their production costs to reach profitability. If “Superman Returns” grosses $550M, that would place it among the Top 50 films in worldwide grosses.

Further, given that films typically gross twice as much in international markets as they do in the United States, “Superman Returns” would probably need to gross about $175M in the United States [and, by extension, $375M internationally] to turn a profit.

Nevertheless, reinvigoration can not occur without a film’s success, and a film’s success is tied to the quality of its script, so how does the “Superman Returns” script fare? From initial reviews, very well. With an engaging story and intelligent dialogue, “Superman Returns” shows us the Man of Steel and his chief admirer Lois Lane both growing and adapting to the changing demands of the postmodern world, without altering the universal truth that through it all, what matters most is virtue. It’s a film that’s likely to reinvigorate Time Warner, and probably many others, as well.

Through TheFLY's Eyes: EMC Corp.

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EMC Acquires RSA Security

EMC (EMC) is down 7% to $10.47 at mid-day trading Friday after announcing Thursday night that it will acquire RSA Security (RSAS). This is another acquisition in which EMC is buying a quality company but in a relatively small revenue generating market. In a tech world where horizontally integrated companies tend to win, EMC appears to be becoming more and more vertically integrated.

Joe Tucci, EMC’s CEO, defined EMC as a company that is evolving from a storage company to an information infrastructure and life cycle management company. Therefore, the company is no longer a pure storage company.

EMC became a great stock during the 1990s by being focused on just the storage business. It appears that storage pricing pressure has been so great during the last five years that management is looking for ways to keep this a growth company. However, buying a bunch of niche companies in growth areas whose products can hopefully be cross-sold with EMC’s current product lines is not very much liked by the investment community.

EMC’s stock and strategy is appearing to be more and more like a tech company having trouble in the business that brought it to the top. EMC will have to register very large revenue growth to get investors interested in this stock again.

Through TheFLY's Eyes: Automotive Sector

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Rumored Joint-Venture at Ford

The Fly is hearing speculation that General Motors' (GM) activist investor Tracinda sent their open letter, which contained a joint venture proposal with Nissan (NSANY) and Renault, this morning after hearing that rival automaker Ford (F) was in talks over a possible joint venture with Toyota (TM) and DaimlerChrysler (DCX). We placed calls into Ford and General Motors for comment, but as of the time of writing, neither were returned.

Through TheFLY's Eyes: U.S. Federal Reserve

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Another Well Thought Out Statement By The Fed

The Fed statement focuses on important issues regarding the economy and inflation:

Positive Points For Halting Rate Increases:
- Growth moderating
- Housing weakening
- Productivity gains strong
- Inflation expectations contained

Negative Point For Raising Rates:
- Resource utilization still high (the Fed wants to see lower commodity prices)

The Fed mentioned future policy changes will remain data dependent, but the Fed has two months of data to digest before the next meeting. The positive points for a halting of rate increases outnumber the points for further interest rate increases. This clarity and a bias towards less tightening is driving stocks higher.

Through TheFLY's Eyes: General Mills

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General Mills Posts In-Line Q4 Results

General Mills (GIS) said Q4 EPS totaled $1.14, compared to 61c a year ago, and the Reuters consensus estimate of 61c. The company also Q4 said revenue totaled $2.85B, compared to the Reuters consensus estimate of $2.81B.

Prudential said the report confirms a 63c per share result, after adding-back restructuring expenses. The firm said it was stopping short of upgrading the company, which it currently rates a Neutral, but it called General Mills “one of the better-positioned” companies in its group and said it sees some upside to shares in the next 6-9 months. Prudential’s target for GIS is $55.

General Mills’ shares were down 27c to $51.19 in afternoon trading Thursday.

Through TheFLY's Eyes: Micron Technology

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On Micron, Are Sell-Side Analysts In Denial?

Nobody cares about Micron Technology (MU). The company reported a pretty good quarter yesterday and the stock is down about $1 to $14.96 at mid-day Thursday, as the market rallies. For the quarter the company was profitable, is generating some cash, shifting its product mix to higher-end products, and its inventories are pretty lean.

For example, Micron's EPS has grown during the last three years from $0.23 to $0.29 to $0.63 and is estimated to grow to $0.92 for fiscal year 2007. Four years of consistent growth. Yet investors will not embrace this stock.

The great irony is that the company's shift away from its PC DRAM driven business to higher-margin imaging sensors and NAND Flash memory might actually be good for the DRAM business. Vista, Microsoft's (MSFT) new OS, will require the usual big up-tick in memory usage. However, much of the DRAM business is increasingly focused on newer and higher-end products. This could mean a huge shortage of DRAMs in 2007 as Vista comes online with Intel (INTC) 64-bit processors.

Investors and sell-side analysts are afraid to get back into Micron, but the company's results are pretty solid: this stock should be put back on everyone's watch list.

Through TheFLY's Eyes: Nike

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Nike’s Silver Swoosh Lining

Nike's (NKE) shares dropped more than 4.5% or $3.90 to $79.74 by Wednesay at mid-day after the company reported its first earnings decline in three years.

Nike reported Q4 EPS of $1.39, excluding items, which was in-line with the Reuters consensus estimate of $1.39, but that could not stop the market from taking a bearish view of the report. Many analysts pointed to less-than-stellar, high-end shoe product performance, which undoubtedly contributed to Wednesday’s selling.

However, one investment bank of significance took a decidedly less-negative view of Nike’s report.

Goldman Sachs said there are several silver linings, in the report, including: strong U.S. future orders, up 9%, the prospect of improving revenue trends in Europe and Japan, expectations for improving gross margins in 2H 2007, and other positive factors. Goldman believes these positives will enable Nike to maintain mid-teens earnings growth moving forward, and the firm has a $102 target for the company.

Through TheFLY's Eyes: Research in Motion

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Notes from the C3 Expo

Jim Balsillie, the Co-CEO and chairman of Research in Motion (RIMM), gave the keynote speech to open the second day of the C3 Expo at the Jacob Javits Center in New York City today.

Using the aid of a slide show, he gave a presentation titled "The State of Wireless and The Opportunities Ahead." The focus of which was mainly on going "beyong push e-mail." He showed a slide to detail the idea, reading:

Apps Beyond Email

* Mobilizing field services and sales forces

* Mobilizing IT operations

* Mobilizing enterprise operations

* Mobilizing Industry professionals

Balsillie said, "The hottest emerging thing [is] enterprise instant messaging," adding that instant messaging "complements email, [which] wasn't meant to be a chat software." He believes instant messaging is being underestimated by "one order of magnitude."

The company is not focusing solely on instant messaging, though, as "any enterprise application can be extended to mobile users," as another slide read. Balsillie made sure to clarify that the mobilization of enterprise software was not about new applications.

He then discussed the expansion of the Blackberry due to wireless technology. A slide during this part of the presentation read:

Bluetooth connectivity provides opportunities to expand uses of Blackberry
* Barcode Scanners
* Printers
* GPS Pucks
* Digital Pen and Paper
* RFID
* Blackberry Smartcard Reader

Balsillie then discussed working with other companies, such as Motorola (MOT), Sony Ericcson (SNE/ERICY), Siemens (SI) and Nokia (NOK), saying there is "a tremendous amount going on with third party devices." He said there are about 20 devices out there, and 20 more coming, that are using Blackberry applications such as Blackberry Connect.

During the Q&A period of the keynote, I asked him about the market rumors that RIMM would buy Palm (PALM), he said he couldn't comment, but said "we don't have grand ambitions to consolidate the handheld business."

After the keynote, he was questioned further. When asked about acquisition strategy, he said, "We buy lots of enablers that strengthen our middleware, but not for applications... You can't suck and blow... the moment we cross over into applications, the middleware is lost."

Then, when asked what Blackberry device he uses personally, he answered, "It is a very personal decision... I use a global device, the 8700."

Before I left, I asked him, purely out of curiosity, what he thought of the "Crackberry" moniker, to which he replied, "It's all in good fun."

Through The FLY's Eyes: Prof. Jeremy Siegel

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Univ. of Penn Professor Offers A Long-Term Perspective

When markets are volatile, it is important to step away from the short-term emotional swings of the market and take a longer-term perspective. University of Penn Professor Jeremy Siegel's comments in his Yahoo editorial last month provide some comfort:

-The U.S. Federal Reserve wanted housing to cool off (which is happening)
-The Fed wanted to see gold and other commodity prices to correct (which is happening)
-With both housing and commodities beginning to correct, the Fed should be close to done.

Siegel predicts that with higher short-term rates and cooling consumer spending, investors should look at corporate capital spending for growth. U.S. companies are cash rich and will be less affected by rate increases and will be able to internally finance their own capex. In other words, this means technology. However, the focus should shift from consumer-driven tech companies like Apple (AAPL) to enterprise-oriented companies such as Oracle (ORCL).

Through TheFLY's Eyes: Newell Rubbermaid

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An Undervalued Consumer Staples Stock With Earnings Momentum

Newell Rubbermaid (NWL) has had a tough ten years.

However, this stock has gone through a multi-year restructuring process and the operating performance appears to be on an upswing.

Five years of ugly restructuring under former CEO Joe Galli, has substantially improved the company's productivity. New CEO Mark Ketchum, formerly a top exec at Procter & Gamble (PG), has taken the company reigns and can now focus on marketing. Newell's first quarter results were the best in years.

If the company can get top-line growth to match up with its lower cost structure, it could register the highest earnings growth rate in the consumer staples sector.

Through TheFLY's Eyes: New Media

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Keeping Up To Date With All The New Media Deals

The Mercury News' SiliconBeat published an excellent article today along with related links to get a quick review of all the deals between old media and new media:

* Guba.com announces deal with Time Warner's (TWX) Warner Brothers
* BitTorrent with Warner
* YouTube with General Electirc's (GE) NBC
* Cisco (CSCO) with Akimbo

It is unfortunate to see all the new entrepreneurial companies linking up with old media so early in their life cycle. However, the music industry got pretty ugly in the late 1990s and it looks like the video industry wants to try a different approach.

Through TheFLY's Eyes: Red Hat, Inc.

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Notes from the C3 Expo

Red Hat (RHAT) CEO, president and chairman Mark Szulik opened the C3 Corporate, Channel, and Computing Expo at the Jacob Javits Center this morning with a keynote speech. Although he did not comment on many specific financials, as the company is set to report its quarterly results after the close tomorrow, he did make a few interesting comments.

- He is convinced the world will turn to open-source software, citing the recent success of such programs as the open-source browser Firefox. He also noted that Red Hat had a "85%-90% penetration to Fortune 100 companies." The keynote opened with a very catchy video supporting his point of view, which can be found here under the title "Truth Happens."

- He believes the release of Microsoft's (MSFT) upcoming Windows Vista operating system will actually benefit Linux, because Vista will require new hardware including a new graphics processor, to work smoothly, and users will migrate to open-source alternatives.

- He added that there would be more opportunities in portable devices, as "Qualcomm (QCOM), LG, and Nokia (NOK) were all investing in Linux for small devices."

- He also, in the philanthropic spirit of Warren Buffett's donation to the Bill and Melinda Gates Foundation, talked about the One Laptop Per Child initiative, which has "no economic model." He said that 52% of a computer's price is sales and marketing, so a $100 laptop with a Linux kernel, browser and power supply, was possible. He mentioned Google (GOOG), News Corp (NWS) and Advanced Micro Devices (AMD) as others involved in the program.

- He mentioned to a reporter after the Q&A session, who asked about the possibilities of more acquisitions after the JBoss deal, that the company had $1.2B cash on its balance sheet and that it was "always looking for opportunities."

Through TheFLY's Eyes: U.S. Federal Reserve

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Wall Street’s Expectation Game vs. The Fed

The CBOT 30-Day Federal Funds futures currently shows a 100% probability of a rise in rates between now and the end of July. This suggests a near certainty that the market expects a rate hike this Thursday by the U.S. Federal Reserve, on June 29, 2006.

This breaks down to 88% expecting a 25-basis-point raise (a basis point is a 100th of a percent) with 12% expecting a 50-basis-point increase. That is up from 10% expecting a 50-basis-point rise just last week.

So what might this mean for the stock market? With the certainty that a rate hike is inevitable, the market should have discounted this probability already. If the language in the Fed’s statement accompanying the announcement is less bearish than expected or in-line with current views, there is a good chance of some form of rally. There may be room for one given the weakness in the markets of late and deteriorating investor and advisory sentiment. If the news is as expected or dovish, this would be an almost classic set-up for a summer rally.

The least probable event would be no rate hike at all since there is no indication of this in the futures market. A substantial rally would almost certainly take place if the markets were surprised by the Fed, since the market has in no way discounted this possibility. This would apply to the bond market as well (prices up, yield down).

The most bearish scenario would be an increase of 50 basis points with a hawkish tilt in the accompanying statement’s language. Although there has been a shift in those seeing this as a possibility, it is not seen as a high probability by market participants. It is doubtful anyone expects the action in one fell swoop, with the futures suggesting a 25-basis-point hike now and another sometime in July if the data supports it.

If the markets continue to rally into the announcement and are caught by surprise by a more hawkish Fed action and posture, there could be substantial market weakness. This would be especially the case in interest-rate-sensitive groups, such as banking - Bank of America (BAC), Citigroup (C), JP Morgan (JPM), American Express (AXP); Home Builders - Lennar (LEN), KB Home (KBH), Pulte Homes (PHM); Mortgage Lenders - Washington Mutual (WM), Golden West Financial (GDW); Reits - Equity Office Properties Trust (EOP), Vornado Realty Trust (VNO); and Utilities - Ameren (AEE), DPL (DPL), Southern Company (SO).

Through TheFly's Eyes: Playboy Enterprises

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"Lovely Assets" For Free

In Saturday's Barron's, Andrew Bary does an excellent job at presenting both the value and the contrarian perspective on Playboy (PLA). Here's some of the math:

Market cap: $313M
Net Cash: $67M
Enterprise value $246M

2007 Operating profit (Est.): $40M

Enterprise Value/2007 operating profit: 6.2x.

CEO Christie Hefner, who has managed Playboy for quite a while, sees operating profits jumping 50% in 2007. It appears that the opportunities are in place for Playboy to grow revenue and profits while still maintaining close control of the Playboy franchise. Hotels chains like the Palms and international opportunities are helping Playboy finally expand its reach.

Playboy's valuation at 6.2x cash flow is very cheap for high-profile media assets. The $246M enterprise value can be reduced even more by taking out $50M for the Playboy mansion and $20M of art that the company owns. Take those assets out and the enterprise value is $176M for $40M in operating profit (3.8x multiple).

Those "Lovely Assets" are cheap.

Through TheFLY's Eyes: Investor Sentiment

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How Do Investors Feel About Wall Street?

Sometimes the best indicator of a market bottom is to focus on what the media is saying and doing.

* Peqout Capital being looked at by SEC for insider trading
* Saturday's Barron's headline is "Is Your CEO Lying"
* CNBC's most noteworthy hire the last six months is Charlie Gasparino, a crime reporter

If any strategist argues that there is too much investor optimism, just look at the headlines. Media provides what the people want, and the people want negative stories on Wall Street. Even the great promoter of capitalism during the 1980s and 1990s, Lou Dobbs, is now a populist.

The best time to invest is when the view of the investment community is at its worst. It is pretty bad now. Do not be like the lemmings withdrawing their money from mutual fund during June. It is time to start buying. Step up to the plate when everyone is turning sour on the market.

Throught TheFLY's Eyes: Johnson & Johnson

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Johnson & Johnson Buys Pfizer’s Consumer Health Unit

Johnson & Johnson (JNJ) Monday agreed to buy Pfizer’s (PFE) consumer health products unit for $16.6B in an all cash transaction.

JNJ CEO William Weldon characterized the deal as an opportunity that rarely comes along, but at least one research firm begged to differ.

Commenting on the deal, Prudential Equity said it didn’t think JNJ was interested in Pfizer’s over-the-counter business, as it didn’t think the unit seemed to be the area of greatest need for JNJ. Further, Prudential said JNJ’s unit buy won’t accelerate top-line growth.

In additon, Prudential said JNJ is paying a high price for the unit, in the firm’s interpretation. Two recent consumer health spin-offs went for 2.25x-2.6x the previous year’s sales; JNJ is pay 4.3x the previous year’s sales.

JNJ’s shares were lower Monday in afternoon trading, down $1.44 to $59.87. PFE’s shares were up 40c to $23.04.

Through TheFLY's Eyes: Phelps Dodge Corporation

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Phelps Dodge To Acquire Inco, Falconbridge Ltd. For $40 Billion

Phelps Dodge (PD) announced this morning that it is acquiring Inco (N), Falconbridge (FAL) for $40 billion. To this Fly, this sounds like JDS Uniphase (JDSU) acquiring SDL, Inc. all over again.

In 2000, JDS Uniphase, the ultimate commodity stock of its time (optical components) agreed to buy another bubble stock, European-based SDL, Inc., for $41 billion. The combination of SDL and JDS Uniphase supported a market cap over $100 billion. What is the market cap of the combined company today? $4.5 billion. Now that's the way to create shareholder value!

The Quotes are Always the Same

"We believe that joining our two companies allows us to provide many benefits for our customers," added Don Scifres, CEO and President of SDL. "With our increased technological expertise and the economies of scale, we believe that we will now be able to offer our customers new innovative product offerings." - July 2000

J. Steven Whisler, chairman and chief executive officer of Phelps Dodge Corporation said: "The combined company has one of the industry's most exciting portfolios of development projects, and the scale and management expertise to pursue their development successfully." - June 2006

JDS Uniphase did the deal at a sector peak, just as Phelps Dodge is doing as copper prices come off historic highs.

The JDS Uniphase-SDL deal lost 95% of its value since consummation. Will the new Phelps Dodge Inco do the same? Most likely not. But looking at Phelps Dodge's insider transactions on Yahoo!, no insiders are buying. That says it all! These large deals at sector peaks always lose shareholders money. This is a classic sign of an industry top.

Through TheFLY's Eyes: Money Matters

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A new column by Theflyonthewall.com

Editor’s note: In our new “Money Matters” column, look for incisive commentary on this blog featuring a summary and analysis of the week’s most important issues affecting money, markets, and investing. It’s no-nonsense analysis timed to arrive when you have the time to read.



The Conundrum

Now that U.S. economic growth has started to slow, there hasn’t been much discussion about “the conundrum.”

For those of you who haven’t followed the markets and investing recently, “the conundrum” is a phrase made popular by former U.S. Federal Reserve Chairman Alan Greenspan and refers to the relatively low, long-term interest rates prevailing in the United States, particularly in the bond market.

As of June 16, 2006 at 11 a.m. EDT the interest rate for the 2-year U.S. Treasury Note stood at 5.12%. Extend the bond out 30 years and the rate doesn’t increase much: The 30-year U.S. Treasury Bond is hovering around 5.13% Economists call that a flat yield curve. During a typical economic expansion, the interest rate rises the longer you invest (or lend) money.

Further, in an environment of high U.S. government spending, and large budget deficits, this lack of a higher long-term interest rate has puzzled economists and market analysts alike – so much so that former Fed Chair Greenspan called it “A conundrum.” Even the venerable Greenspan couldn’t figure out why, despite considerable debt, the U.S. wasn’t paying a higher price with substantially higher long-term interest rates. In fact, up until recently, long-term interest rates had been at their lowest real levels in about 30 years.

Hence, the question remains, is today’s below-average interest rate environment a trick or an appropriate stance by the market? Since many economists and analysts on Wall Street have argued for the former we’ll present the case for the latter, or ‘Three Reasons For The Conundrum.’

1-Savings glut – Globally, there’s a surplus of savings. The world is awash in cash. That’s a somewhat paradoxical statement for U.S. readers, because the U.S.’s savings rate has been very low for several years, so there’s no savings surplus among U.S. citizens. But the world, as a result of strong economic growth in the developing world – China, India, Brazil, Russia – has ample savings – more savings than they can productively invest at home – and a considerable portion of that money is flowing into the U.S.

2-Institutional demand – Institutional demand, primarily pension funds and other payout-oriented institutions such as insurance companies, have and are likely to continue to create a strong demand for U.S. Bonds. These institutions will face increased payout demands as the Baby Boom generation starts to retire in 2010-2011. As a result, they require investments that have a stable, dependable payout – with U.S. Treasuries and other bonds being at the top of their list.

3-China – Finally, there’s the booming Chinese economy. As noted, the developing world is growing solidly, but no economy is growing like China’s. Mainland China has been growing at or near 10% for about 10 years – a phenomenal feat that’s created a vast amount of wealth in the country. Further, much of that wealth is being re-circulated to - you guessed it – the U.S. in the form of investments in U.S. Treasuries.

The net effect of the above? Above-average capital flows into the U.S. and above-average demand for U.S. bonds has depressed interest rates below what they would be in a typical economic expansion. In effect, foreign investors are helping to subsidize U.S. borrowing. They’re a major reason why the rate on 30-year U.S. Treasury notes is hovering around 5.10% and not 6.50%.

The impact on typical investors? Most analysts would argue that the savings glut and interest rate “conundrum” has lengthened the current economic expansion and/or delayed a recession. Further, since a growing economy is almost always good news for stocks, the savings glut has boosted stocks and investors’ portfolios. Hence, it’s not a stretch to state that the DJIA’s current 11,000 point value has been supported, to some degree, by “the conundrum.”

Still, the conundrum is not simply a win-win for U.S. investors, i.e. a one-sided development. There is a down side: many economists argue that the global savings glut is a temporary, not permanent economic condition, and that U.S. interest rates will rise when conditions shift from one of relative capital surplus to tighter capital conditions. Further, some economists argue that the U.S. risks incurring an abrupt, large increase in interest rates if, for example, a major bond holder such as China or Japan loses its appetite for U.S. Treasury investments.

And those last two points are items investors and traders should keep in mind. But that’s not to say that bond investment patterns will change anytime soon. To be sure, thus far there is little indication that foreign investors are losing their appetite for U.S. Treasuries, so at least for the time being, the conundrum continues.

Through TheFLY's Eyes: Mergers

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Mergers and their Impacts on Sectors

The moves in the companies that Anadarko Petroleum Inc (APC) has agreed to purchase, Western Gas Resources (WGR) and Kerr-McGee Co (KMG), have been spectacular by any measure. Given the premiums paid (49% and 40% respectively) it seems unlikely other bidders will emerge. The stocks reflect this as well as they are being traded at a discount to the offer (roughly 3-4% each) which reflects standard arbitrage (risk) activity as does the sharp discount that the acquiring firm now trades at (APC is down some 7-8%).

We probably can't say a lot that is illuminating about these companies now that the news is out other than the gap levels (difference between last night's close and the open today) are jaw dropping.

What we can see though is the leap both in price and volume interest for other energy companies that were trading for the most part in intermediate downtrends. Many of these downtrends were snapped today on smaller bullish gap ups in price at the open which seem to be holding.

It is clear that speculators are betting that there will be other firms that are takeover candidates. Here is a short list of names that have been drawn from the S&P Global Energy Sector Index Fund (IXC) which appear to reflect speculative action: EOG Resources (EOG) up +7.39%, Williams Cmps, Inc (WMB) up +6.83%, Murphy Oil (MUR) up +5.11%, Talisman Energy (TLM) up +5.16%, Chesapeake Energy (CHK) up +5.08%, Devon Energy (DVN) up +4.67%, El Paso (EP) up +4.44%, Apache (APA) up 4.05%., Canadian Natural (CNQ) up +4.21%, and Nexen (NXY) up +4.17%.

Through TheFLY's Eyes: Microsoft and Yahoo

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The Software, Internet Convergence Question

Is Microsoft (MSFT) eying Yahoo (YHOO)?

Merrill Lynch seems to think they may very well be. Merrill said that while a “go-big” investment by Microsoft in their own search engine is likely to delay an acquisition in the near term, Google’s (GOOG) share gains and increasing focus on building a competitive software platform make the case for an earlier-rather-than-later move by Microsoft.

Merrill says a potential Microsoft move would be consistent with what appears to be a changing competitive landscape and a possible shift in users' core experience from the personal computer to on-demand Internet, in the firm’s view.

In other words, the broadband trend that’s turning cable t.v. companies into phone companies, and phone companies into cable t.v. ...and maybe even Internet t.v. companies, may very well converge the Internet portal and software sectors.

Does Microsoft have the resources to make a big-league purchase? It does: Microsoft has a $34B cash balance and, equally significant, is producing about $12B per year in cash generation.

With cash not a primary concern, the crux of the decision would then hinge upon whether a buy represents the next-generation in service delivery or an imprudent purchase – a topic that’s, no doubt, getting a great deal of attention in Microsoft meeting rooms right now.

Through TheFLY's Eyes: Oracle Corp.

from Theflyonthewall.com




Blow Out Quarter, Acquisition Strategy Working

All products and all geographies results are very strong:

* Organic license revenue up 56%
* Siebel doubled what was expected
* Volume of deals over $1 million up 30%
* 1Q guidance of 18% to 25% growth is very high
* Oracle committed to $1 billion buyback per quarter for FY2007.

As institutions have been overly committed to commodities and capital goods, after Oracle's (ORCL) strong results, investors are going to have to start looking at technology and, more specifically, Oracle. The growth is simply too strong for investors to ignore.

Through TheFLY's Eyes: Six Flags

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Can You Spell R-E-C-A-P-I-T-A-L-I-Z-A-T-I-O-N?

Six Flags' (SIX) very new and very young CEO held a conference call to update analysts on his progress in remaking Six Flags. There was little positive to report.

As a reminder, Six Flags went through a hostile battle for most of 2005 in which Daniel Snyder, owner of the Washington Redskins, won board control and appointed Mark Shapiro, a marketing exec from ESPN, to run the company. Shapiro took charge of the company in December of 2005.

Shapiro has not been bashful about bashing previous management. Most of Shapiro's criticisms are with merit. The company targets a teenage market which requires high capital expenditure (roller coasters) but does not generate a very good return on a per customer basis. The parks are tremendously understaffed both in terms of quality and quantity and the image of many of its theme parks is simply not good.

However, from listening to last night's conference call, it is becoming increasingly apparent that the problem with Six Flags is not so much with previous management but with an overly leveraged balance sheet which was dumped on the company when it was spun off from Time Warner (TWX).

Six Flags was stuck with over $2 billion in debt when it was separated from the media giant and has been unable to both invest and repay debt. When it does invest in new projects, the returns do not generate the massive returns required to pay down the debt burden left on the company's balance sheet.

If Shapiro wants to implement his view of a family-oriented theme park, a serious recapitalization will be required. Six Flags will require higher-salaried employees, a movement away from roller coasters to a new generation of rides and a whole new marketing campaign. All of which will require a lot of money and a lot of time, both of which Six Flags shareholders do not have.

If new management wants to succeed, they are going to need a very considerate group of creditors.

Through TheFLY's Eyes: Phoenix Technologies

from Theflyonthewall.com







An Old Technology Food-Chain Stock Dies Off

Phoenix Technologies (PTEC) is down $1.77 today to $4.06, over a 30% drop in value. Phoenix was a great food-chain stock for bottom-up technology investors in the 1990s. Phoenix sells BIOS software that goes into almost every PC around the world. By understanding how business was at Phoenix, investors could get a sense of the well-being of the entire PC business.

Well those days are over. Around the time of the tech implosion, Phoenix made a CEO change who immediately took the company in a new direction. This was a bit bizarre considering the fundamentals for the company were not that bad. However, things were about to get worse.

The average selling price for Phoenix's BIOS software was about to be crushed and the outsourcing to Asia also seemed to disrupt the company's ability to maintain its market share. The new management team's mandate was to either develop enhancements to existing products or come up with new products that would improve Phoenix's revenue outlook.

The CEO brought in to change Phoenix's direction stepped down last month. This morning the company announced a massive revenue miss. Phoenix is a classic example of a single product technology company that is unable to come up with new products. The price compression that hits single product tech companies is brutal. And if you are a single product company, it is only a matter of time before Asian competitors introduce their own product.

Today, Phoenix joins the long list of single product, Silicon Valley companies unable to come up with a new product.

Through TheFLY's Eyes: Rite Aid

from Theflyonthewall.com









Dead Money Until The Second Half Of 2006

Rite Aid's (RAD) stock has been trading all over the place this morning as the company showed good sales growth but lower margins. Management cited the weakness in margins is due to the investment in new stores and the transition to Medicare Part D. It is apparent that margins will be weak again in the company's 2nd fiscal quarter.

To spur growth and earnings, Rite Aid management has begun a growth strategy to relocate underperforming stores and open new stores in better growth areas. These moves have increased expenses. In addition, as the company makes a transition to Medicare Part D, there is a ramp that has led to lower margins which should be offset by higher volumes. This also appears to be a 3rd quarter event.

Rite Aid will most likely be a "show me" stock until it reports improved margins in the second half of the year. Revenue growth without improved margins means no appreciation in stock price.

Through TheFLY's Eyes: FedEx

from Theflyonthewall.com












FedEx And The Economy

Wall Street and the financial world rely on a variety of standardized statistics to continually gauge the strength of the U.S. economy, including the consumer price index, monthly job creation, and unemployment claims.

But Wall Street also looks to informal statistics for economic clues, including orders for corrugated box orders and package deliveries. Box stats are followed because when they are trending up long-term, it’s usually a sign that orders for consumer and wholesale goods are increasing. Similarly, package deliveries are another barometer, for when package deliveries increase for months, it’s usually a sign that spending is solid.

Is a substantial economic slowdown underway? A FedEx (FDX) report suggests otherwise.

FedEx said that during the recently-completed fiscal year 2006, ground volume was up 11%, with overall shipments up 8% - stats that boosted FedEx’s fiscal 2006 profits by 27%.

Further, FedEx had kind remarks for the U.S. economy: the company expects calendar 2006 U.S. GDP growth of 3.0%-3.2%, believes the U.S. industrial sector is still in good health, and also has a positive outlook regarding the global economy.

“We remain optimistic about the global economic environment for fiscal 2007 and our ability to effectively manage our business," said Frederick Smith, FedEx’s CEO.

Those stats and comments don’t guarantee that the U.S. economy will continue to grow at a robust pace, but they do suggest that the much-feared substantial slowdown is perhaps not at hand.

Through TheFLY's Eyes: Morgan Stanley

from Theflyonthewall.com









Morgan Stanley Makes It 4 for 4

Make that 4 for 4 for Wall Street. On the heels of strong quarterly earnings reports from Goldman Sachs (GS), Bear Stearns (BSC), and Lehman Bros (LEH), Morgan Stanley (MS) Wednesday continued the trend and reported Q2 earnings that more than doubled from a year earlier, and that substantially exceeded analysts’ estimates.

Morgan Stanley said Q2 EPS increased to $1.86, compared to 86c a year ago and the Reuters consensus estimate of $1.44. The company said Q2 revenue increased to $8.9B, up 48% from a year ago, and well ahead of the Reuters consensus estimate of $7.9B.

Morgan registered impressive revenue results in every key division, including: fixed income, up nearly 100%; institution securities net revenue, up 71%; trading, up nearly 50%; and equity underwriting, up 40%.

Wall Street was pleased by the report Wednesday, as shares of Morgan Stanley surged $2.60 to $59.62 in mid-day trading.

Through TheFLY's Eyes: PolyOne

from Theflyonthewall.com






The Bottom Of The Food Chain

PolyOne (POL) announced Wednesday morning that June's results would be good, but warned that the second half of the year is looking weaker. Why does what PolyOne reports matter? PolyOne is at the bottom of the food chain for most industries: it makes polymers, colorant, and additive products that go into virtually everything we manufacture and consume.

The company mentioned that it is seeing the signs of a slowdown in housing and automotive businesses, which should be of no surprise, but it is our belief that the company might also be seeing weakness in other areas however it might be too early to quantify.

While PolyOne is not a household name in the investment community, it is a business whose broad footprint provides good insight into a slowing economy. This most likely means other basic material companies should be warning of a weaker second half of 2006 within the next month.

Through The FLY's Eyes: General Motors

from Theflyonthewall.com










Legendary Investor Buys Big Stake In General Motors

Southeastern Asset Management, led by hugely successful investor Mason Hawkins, has purchased a big stake in General Motors (GM). He is bellying-up to the table with Kirk Kerkorian on this turnaround stock.

Hawkins, who is often compared to Buffett, is stepping into an industry that Buffett openly trashed at his recent annual shareholders meeting. Now Kerkorian and Hawkins own big stakes in a stock that has done little to nothing for shareholders since the mid-1960s.

The big bet with GM is market share or the rate of decline in market share. If GM can just keep its market share, the company should be able to generate a ton of cash for shareholders. However, GM's management has run this company for employees and bondholders for decades, with little concern for shareholders and customers. Are they going to change this time? Most likely not, but a big rally for the stock could be ahead in the next few years as cost cuts take hold.

Through TheFLY's Eyes: Cypress Semiconductor

from Theflyonthewall.com












A Second Big Product

Cypress Semiconductor (CY) has been a long-time leading producer of system clocks and SRAM for the PC business. This has been an intensely competitive business with serious price compression for years, but Cypress has done a good job at keeping up with its Asian competitors. However, Cypress has been hard at work in its R&D labs and is coming up with some big-time, new products.

The first big new hit is its solar cells which were developed from Cypress's semiconductor technologies. Cypress sold shares of this company, SunPower (SPWR), to the public last fall, and again in June, but still retains a 75% interest in the publicly traded company. As the shift to alternative energy sources continues, SunPower's solar cells should be in increasing demand. Sales for this company are booming.

Cypress also has a second new technology, its PSoC business, or its system on a chip technology. This chip takes a series of technologies and places them on one compact chip to reduce the size and power consumption of the chip and improve the user's experience. The first big applications for this product have been for digital audio devices such as the IPOD. Cypress management suggests there are plenty more applications for this technology to come.

Cypress's stock has sold off along with most other tech stocks in this market correction. However, Cypress Semi is a lot different company today than in the past as its new products are not the same system clock and SRAM business of the past. This is a stock worth looking at as new products continue to ramp in a big way.

Through The FLY's Eyes: Univision

from Theflyonthewall.com














The Univision Network's Allure

Spanish-language broadcasting giant Univision (UVN) created a mild “chat” on Wall Street Tuesday with word that the company may soon receive buy offers.

Media companies Grupo Televisa SA of Mexico and Venevision of Venezuela are expected to submit initial bids.

The allure of Univision is obvious enough: about 98% of U.S. Hispanic households are viewers of the Univision Network - a remarkable market share statistic. Analysts surveyed in the Reuters estimate expect Univision to earn $1.08 per share in 2006 on revenue of $2.2B.

However, hurdles exist to potential deals, including possible bidder conflicts of interest, ownership concentration of media properties, and foreign ownership restrictions. Also, Univision’s CEO Jerrold Perenchio owns a class of supervoting shares that could thwart a shareholder vote to approve a buy-out.

Currently, Venevision holds a 14% stake in Univision and Televisa holds an 11% stake. Each equity stake could serve as a down-payment/equity chip for a potential buy-out offer.

The market was neutral Tuesday on word of possible offers for Univision, as the company's share traded virtually unchanged at mid-day, down just 5c to $35.65.

Through TheFLY's Eyes: Six Flags

from Theflyonthewall.com












Analysts Bringing Down The Numbers

Its appears that the bold forecast established by new CEO Mark Shapiro is coming up short. Mark Shapiro was appointed CEO of Six Flags (SIX) by Daniel Snyder, owner of the Washington Redskins this past December.

Six Flags spent most of 2005 in a hostile battle led by Snyder for control of the board. The premise behind Snyder's argument was that the company would be much better off if Shapiro ran the company rather than the current management team.

Shapiro had worked with Disney and the impression given to the investment community was that his career was filled with success at the media giant. While hosting his first Six Flags' conference call this past spring, he had little positive to say about past management. Shapiro criticized everything across a broad marketing spectrum from the marketing campaign to pricing to the middle class target market that Six Flags targets in its New Jersey market. Since becoming head of the company, Shapiro also meaningfully increased the forecast for the company's operating performance.

Well, it appears the company is going to miss its operating targets for the second quarter in a row. And the stock is down over 40% from its recent peak. Shapiro will host a conference call with the investment community on Thursday, June 22 to review the restructuring. We will see then if Shapiro's new strategies are taking hold. Stay away from this stock until Shapiro hits a number.

Through TheFLY's Eyes: Copper

from Theflyonthewall.com














A Technical View

There is an old adage on Wall Street that all Bull markets are topped with copper roofs. This may seem something like an antique way of thinking given that this suggests consumption (demand) in industrial metals peaked before the stock market and that declines in prices were therefore very bearish.

Copper is interesting from a number of perspectives beyond the recent drop in price (today's price is not reflected on the chart or the decline would be larger looking still). In a higher interest rate environment and with some concern about demand slacking the metal has nonetheless nearly doubled in price over the course of the prior four months. This is a spectacular move by any standard, and one that ought to have clear bearish implications in terms of potential inflation.
While producers of the metal may prosper in this sort of environment it is clear at these prices levels that "pass through" of inflation (higher producer and consumer prices) is inevitable if not yet felt.

We can also clearly see that the price for copper in the past has followed the course of bear markets. If we look at the 2000 copper peak in price (though small in terms of today's price) it then dropped some 30% and did not bottom until the markets began to turn up in late 2002/early 2003.

With the recent collapse in price, is it possible the same scenario is underway? We will have to watch the stocks of metal producers (Phelps Dodge Corp, PD - chart correlates highly to copper price) and consumers to get a better picture as well as keeping an eye on copper over the next few weeks. One group that is likely not to benefit from a decline in copper prices are hedge funds which have been long the universe when it comes to commodities of all kinds.

Chart created with Equis MetaStock

Through TheFLY's Eyes: Nokia & Siemens

from Theflyonthewall.com









Nokia, Siemens Announce Joint Venture

Nokia (NOK) and Siemens (SI) announced Monday that they will combine their phone equipment units.

The duo expects to realize annual cost savings of $1.9B or E1.5B by 2010, the companies said. Each telecom/mobile giant has come under pressure from increasing high-quality and lower-cost Asian competitors. Nokia and Siemens also face strong competition from duos Alcatel/Lucent and Ericsson/Marconi, as sector players world-wide team-up to achieve greater economies of scale and broader distribution networks, among other operational strengths.

The markets initial response Monday to the announcement was favorable as Siemens shares surged $4.92 to $84.72 and Nokia’s shares rose 26c to $20.23.

Analysts in the Reuters survey expect Nokia in 2006 to register EPS of $1.29 on revenue of $49.6B. They expect Siemens to earn $5.43 on revenue of $112.3B.

Through TheFLY's Eyes: Online Travel

from Theflyonthewall.com












Tough Year for Online Travel, But The Worst Might Be Behind It

As stock markets around the world get whacked, it is important for portfolio managers to stay focused on where the growth will come from in the future. One area to stay focused on is the online travel business.

The global travel market is approximately $900 billion, of which 5% to 10% is booked online. The gross bookings growth of the major online travel agencies has been 30% annually during the past three years. However, the market has hit a speed bump as a strong global economy has led to suppliers selling their own inventory rather than using this more efficient distribution platform. The online industry has reacted by beginning a broad restructuring process.

In response to tight inventory and a few too many online travel businesses, the industry has begun a restructuring process. Interactive Corp. (IACI) spun off Expedia (EXPE) last year and Cendant (CD) has put its Orbitz and other online travel assets up for sale. In addition, Sabre's (TSG) management is well aware that the industry's position needs to improve.

With smart management at Expedia, Cendant and Sabre, and as the online travel industry continues to improve its cost performance, profits should follow in 2007. The selloff in this sector is providing a good opportunity to get into a high growth business at a reasonable valuation.

Expedia and Sabre are both good ways to play this industry's turnaround.

Through TheFLY's Eyes: Yahoo! Inc.

from Theflyonthewall.com






Valuation Remains Cheap

Over a month ago, we did an asset break up value on Yahoo! (YHOO). Since that time, Yahoo's market cap has remained unchanged. Despite increased competition primarily from Google (GOOG), Yahoo has an important position as a lead portal and is too cheap to be ignored by investors.

Yahoo! Market Cap. = $ 49.0 Billion
Less: Yahoo! Japan Stake = $ 12.4 Billion
Less: Alibaba (Chinese Portal) = $ 1.4 Billion
Less: Cash - Debt = $ 2.0 Billion
Enterprise Value = $ 33.2 Billion

Yahoo is expected to generate EBITDA of $2.1 billion for FY 2006 and $2.6 billion in FY 2007, a 26% growth rate for a company trading at 16.6x and 12.7x multiples for the next two fiscal years. That is too cheap for investors ignore.

Leading growth companies almost always correct way before the rest of the market does. Yahoo and Google have been in correction mode for most of 2006. However, during the last few weeks, both stocks have been relatively stable while the broader market has been weak. This stable price performance is most likely a sign of better things to come.

Through TheFLY's Eyes: Fairchild Semiconductor

from Theflyonthewall.com









Old Stock Quietly Changing Its Stripes

The Fairchild Semiconductor (FCS) name has a storied history in Silicon Valley and Wall Street. The company became a stand-alone business about a decade ago again when it was spun off from National Semiconductor. For most of this time, Fairchild has been a commodity-focused semiconductor company that was an excellent free cash flow generator but had a tough time growing revenues organically.

Last year, Fairchild's long-time head retired and the board brought in a new head from Tyco's semi business. On June 28th, the company will host an analyst day to review its new path. The company is expected to say it is moving away from its acquisition strategy and will focus more on R&D and new products. In the past, price erosion on many of its products was so great that it had a tough time growing revenue without acquisitions.

Those days are supposedly gone. Now higher-end products with improved margins are the goals. This stock has been forgotten by many due to its revenue growth difficulties. It is time to start following this stock again and see if new management can spend their R&D dollars wisely and get some serious revenue and earnings growth back.

Through TheFLY's Eyes: Tribune Company

from Theflyonthewall.com




















An Update On The Tribune Company

Tribune (TRB) is down 54c to $31.97. John Madigan was CEO of TRB from 1995 to 2003, Chairman of TRB from 1996 to 2003. Madigan garnered the support of the Chandler Trust in 2000 enabling TRB to purchase Times Mirror for $8B. TRB's SEC Schedule 13D/A filed December 31, 2005 reported stock beneficially owned by Madigan was 1,975,391 shares. TRB has 303M outstanding shares.

Investors are curious if Madigan will become involved with the Chandlers or remain a quiet supporter of TRB management. TRB July call option implied volatility is 26, puts are at 33. TRB 26-week average option implied volatility is 25. Above average option implied volatility with puts more expensive than calls suggests options pricing in more down side risk than upside risk.

Through TheFLY's Eyes: KB Home

from Theflyonthewall.com













Another Sign Of A Slowing Housing Sector

The housing sector may be starting to cool.

KB Home (KBH), which reported Q2 EPS of $2.46, compared to $2.06 a year ago, and the Reuters consensus estimate of $2.42, also lowered its EPS estimate for the year. KB Home now expects to earn $10 in 2006, down from earlier guidance of $11.25, and the Reuters consensus estimate of $10.55.

KB Home's management called the current housing market “a more difficult market” and also cited the country’s likely, flat, current-year home sales and a surge in investor/speculator inventory as part of the reason for their guidance revision.

Analysts in the Reuters consensus expect KB Home to register revenue of $11.42B in 2006 and $11.40B in 2007.

Through TheFLY's Eyes: Oracle Corp.

from Theflyonthewall.com




A Good Sign for Oracle

Oracle (ORCL), after yesterday's close, announced stronger than expected results and it appears that the improvement is sustainable. The company announced 56% organic growth in applications revenue. Siebel license revenue also came in much better than expected.

Database growth was 18% in 4Q, the strongest showing in quite some time. For the fiscal year, the company showed 10% database revenue growth. Oracle has made a whole host of acquisitions in the post-bubble environment, from large enterprise software companies to smaller companies with quality software.

Oracle is selling for about 13x calendar year 2007 earnings. This stock is way too cheap with such strong top-line growth. Institutions will have to jump back into this stock with two feet.

Through TheFLY's Eyes: Microsoft Corporation

from Theflyonthewall.com












Gates Coming Off the Hinges

Two nights ago I caught a bit of Jim Cramer's "Mad Money." During the segment, Cramer told a viewer that had asked if Microsoft (MSFT) had bottomed that he was getting killed owning the stock in his charitable trust, and that he did not recommend buying it.

After the show, I planned to write a blog with a contrarian view, on my belief that the stock was on sale because it was out of style, not because it was of poor quality, and that Vista and the Xbox 360 would be the catalysts the stock needed to finally drive it up. I felt this was a great entry point. I almost made the mistake of writing the piece and predicting a bottom for a falling stock. Much to my good fortune, I did not have time to write this piece yesterday.

If I did have time to write that blog yesterday, I would be apologizing after two separate pieces of negative news came out. What a difference a day makes.

Last night, Bill Gates announced a two-year transition where he will focus on the Gates Foundation full-time and reduce his role at Microsoft to a part-time capacity, and this morning, as part of its continuing options backdating witch-hunt, "Page One" of the Wall Street Journal highlighted Microsoft's stock options practices from 1992 to 1999. Unlike the other companies being accused, however, Microsoft voluntarily stopped the practice and disclosed it back in 1999.

These two headlines will probably put a little more pressure on the software giant, but do not change my thesis that fundamentally the company is undervalued and just out of the Street's favor. I would not suggest buying the stock until after its possible reaction from these headlines, but do believe afterward, it will be oversold and a buying opportunity.

Through TheFLY's Eyes: Motorola, Inc.

from Theflyonthewall.com












Motorola Is Ready For The Next Big Thing: Q

After years of market share losses to Nokia (NOK) and Samsung, Motorola (MOT) finally got its groove thing back with the Razr. So what is next? According to the company, it will be Q. Q is the handheld internet device that will compete against Research in Motion (RIMM) and Palm's (PALM) Treo. Management indicates that the acceptance of this product surpasses that of other products in this space.

What's To Like?

Q is being launch on the CDMA platform (with more to come later) and will work using Microsoft's Mobile OS. Therefore, rather than shying away from the Microsoft (MSFT) giant (like Nokia has), Motorola is embracing it. The first big service provider to sell Q is Verizon which began selling the sleek product in June. It appears the timing is for Motorola and Verizon to really ramp sales and production going into the holiday season with a very attractive $199 price point.

According to Motorola, the ramp should mirror that of the Razr. If management is correct about the early acceptance of this product, this will be the second big hit for this company that got destroyed in the 1990s by Nokia and Samsung. Motorola's market share dropped throughout the 1990s before bottoming at 13 to 14% a few years ago. Management is on track to increase market share back up to 21%. A big rebound for this company.

While Nokia seeks ways to protect its turf by being slow to sign deals with Qualcomm (QCOM) and Microsoft, Motorola is flying along signing deals and regaining market share. If sales soar to the sky, so will Motorola's stock.

Through TheFLY's Eyes: Bear Stearns

from Theflyonthewall.com








Bear Shows That The Bull Run Is Not Done

Following on the heels of solid quarterly earnings reports from Goldman Sachs (GS) and Lehman Bros. (LEH), Bear Stearns (BSC) Thursday reported record earnings, with quarterly profits increasing 81% to $3.72 per share, compared to $2.09 per share a year ago, and the $3.11 Reuters consensus estimate.

Bear said quarterly revenue increased 33% to $2.5B compared to the $2.1B Reuters consensus estimate. Bear registered solid revenue gains in several key divisions, including the following: capital markets, up 40%; fixed income, up 45%; and trading, up 29%.

Bear said it was very pleased with report, and noted that the results demonstrate that the company has increased the depth and breadth of its businesses, both domestically and internationally.

Wall Street’s initial response Thursday to the report was favorable, as Bear Stearns’ shares advanced $4.11 to $128.35 in mid-day trading.

Through TheFLY's Eyes: KLA Tencor

from Theflyonthewall.com







Management's Confidence Is Building

For those not overly familiar with the details of semiconductor equipment business, KLA Tencor (KLAC) is a gem of a company in this space. The company makes equipment that makes sure that semiconductors are produced efficiently and profitably.

This week KLA Tencor's management indicated that it will host an analyst day on July 11th to provide a three year business plan for the company. This is the first time that this company has provided such a long-term outlook for an industry known for its cyclical nature. When asked why management is doing this? Management responded that our confidence is building up regarding our business prospects.

KLA Tencor stock is down from $54 in March and now trades around $40, a big decline for this very profitable company. As 64-bit processing continues to get greater traction, new equipment will be required which plays right into this company's strengths. This stock has gotten too cheap and has to be owned at current price levels.

Through TheFLY's Eyes: Qualcomm
from Theflyonthewall.com





Qualcomm Continues To Deliver

Amid concerns of an inventory build-up in handsets, Qualcomm (QCOM) increased guidance for the quarter yesterday. The reason for the strength is the success it is having with its 3G (W-CDMA) European adoption and CDMA2000.

Qualcomm increased its revenue and EPS estimates due to higher ASPs, which they expect to hit $213 up from $205. The willingness to pay higher prices for Qualcomm chips is due to the strong demand for multimedia applications such as games and mobile TV. In addition, the company is staying true to form, by developing leading edge chipsets that market needs.

Apparently, from looking at Qualcomm's results, the inventory glut might be more at the lower end, as the higher-end international market is moving to more expensive, higher bandwidth handsets.

Through TheFLY's Eyes: Bayer AG
from Theflyonthewall.com














Taking Two For Shareholder Value

Germany-based drugmaker Bayer AG (BAY) announced it has signed an agreement granting Pfizer (PFE) exclusive worldwide rights to a class of Bayer Pharmaceuticals compounds that could produce diabetes and obesity treatments.

Under the agreement, Bayer will receive an upfront fee, with milestone payments and royalties on sales of compounds that make it to market.

In addition, Bayer also announced that it had secured an agreement to buy rival German drugmaker Scherling AG (SHR). Bayer said U.S-based Merck (MRK) will sell its stake in Scherling to Bayer. Bayer also said it will withdraw its recently-filed lawsuit against Merck.

Wall Street Wednesday appeared to be impressed by both news items, as Bayer’s shares soared $3.13 to $41.34 at mid-day.

Analysts in the Reuters consensus expect Bayer to earn $3.41 on revenue of $41.3B in 2006 and $3.42 on revenue of $43.1B in 2007.

Through TheFLY's Eyes: Dell Inc.
from Theflyonthewall.com











Dell Appears Close To Getting Its Cost Structure In Place

As a follow up to our Dell-AMD blog yesterday, the Fly had the opportunity to hear Kevin Rollins, Dell's (DELL) CEO, speak yesterday at a large tech conference.

Dell's business model is built on the idea of dropping PC prices which leads to a pick up in demand. Rollin's suggested that Dell has not been able to lower prices at the rate it would like because of two cost problems: Intel (INTC) and Microsoft (MSFT). Ergo, two new deals. Dell's response has been to suggest using AMD's (AMD) chips in its server products, with the possibility of using them more broadly if Intel doesn't hit price points that allow Dell to maintain 75% of PC industry profits.

The other deal is between Dell and Google (GOOG), where Google will have the opportunity to get an increasing position on Dell's desktop. Obviously a slap at Microsoft.

Dell's success has been driven by using standardized parts to drive volume and lower costs. The two areas where it has had less success has been lowering the costs of microprocessors and software. With AMD and Google both in good financial shape, Dell now has some bargaining power with its largest suppliers.

Through TheFLY's Eyes: Gold
from Theflyonthewall.com













Gold Gets Crushed

Gold was down $44 yesterday, or over 7%. A good indicator that liquidity is being reduced in the global economy. Another very obvious sign that liquidity is being reduced is the awful performance of the world’s stock markets.

The chart of the Streettracks Gold ETF has dropped over 20% during the past month. Remember, many ETFs are required to actually buy gold. So this is the first time that gold has had a bull market and had ETF’s as an investment vehicle. If investors start selling their ETFs, the ETFs, in turn, have to dump gold. This could be ugly.

Through TheFLY's Eyes: The Boeing Company
from Theflyonthewall.com

















Airbus vs. Boeing: The Epic Battle Continues...

Boeing (BA) is up in early trading this morning after a 21% drop in Airbus owner EADS on the announcement that Airbus's A380 jet building program will be delayed. Additionally, Airbus partner BAE Systems has announced that it is looking to sell its 20% stake in EADS, but hasn't yet reached an agreement with EADS on price.

Boeing, meanwhile, keeps on rolling, agreeing to sell additional 747-400 freighters to Nippon Cargo last night for approximately $460M at list prices. It should be noted, however, that Boeing may face delays in its 787 jet program, if a Seattle Times report from 6/9 is any indication, so a drop like EADS just had is not out of the realm of possibility.