Story Stock – 08/20/2001

Barrick Gold (ABX) 16.52 -0.28: While much of the market has been slumping, gold and gold stocks have been on the rise over the past couple of weeks… Why?

• The drop in the dollar v. the yen, as yen often considered a proxy for gold given the huge demand for the metal in Asia.
• Fed attempts to reflate the economy.
• Technical bounce from low-end of recent range.
• Low murmur in nation’s capitol and other places about reconnecting dollar to gold (never going to happen but talk is real)
• Anxiety over the direction of global equity markets which plays to gold’s reputation as a safe haven.

The BISYS Group (BSYS) 54.55 +1.40: Among today’s point gainers on the Nasdaq, shares of The BISYS Group are making a move that could be fairly characterized as a technical breakout. The company provides outsourcing solutions to more than 11,000 financial institutions and corporate clients. Put another way, it does work financial institutions and other businesses don’t want to bother with themselves — services include check imaging, retirement plan record keeping and administration of more than 80 families of mutual funds. Part of the BSYS strategy is to grow through acquisition. In fact, over the past five fiscal years the company has folded in more than 15 separate entities. A quick look at the four-year chart on BSYS shows the strategy has been working well for both the company and its shareholders. Yet it isn’t just the four-year chart that looks promising. Today’s move higher marks a potential break from a relatively tight trading range that goes back as far as 18 sessions — a period of consolidation the one-month chart illustrates (chart excludes today’s break above 54.50). Today’s move is occurring on solid relative volume which should eclipse its average volume for a session — not all bad considering the Nasdaq is poised to put up its lightest volume session of the year. While it’s possible today’s break is an aberration and the shares will return to their prior trading pattern, it’s also possible the move represents the beginning of another leg higher for BSYS. The uninteresting straight line BSYS has drawn over the past month becomes somewhat more palatable considering the Nasdaq has lost 10.5% of its value over just the last twelve sessions. Further, today’s break of its trading range to the upside with the Nasdaq testing lows not seen since April is also favorable for its near-term outlook. Both the ten and the twenty-day Bollinger bands have tightened considerably as a result of the recent BSYS holding pattern. The shares are currently working on a break of those levels (54.45 and 54.90), and when or if the break occurs, it has the potential to be reasonably powerful. On a break above 54.90, BSYS faces potential secondary resistance around 56.50 — this approximates its 100-day simple moving average in conjunction with a 38% retracement of its July sell wave. After that, the chart would target 58.00 which constitutes a 50% retracement of the July sell wave. To the downside, we would like to see the shares maintain a posture above 53.50. That level represents an area of congestion towards the upper end of its trading range, and a break below may mean more consolidation is needed before it’s to see a meaningful move to the upside.— Michael Ashbaugh, Briefing.com

Airlines : High fuel prices, labor strife, and a dramatic cutback in business travel would be at the top of a list of reasons for why the airline industry has been struggling this year. Following closely behind would be other factors like excess capacity, increased regulatory scrutiny, poor weather, and competitive pricing. Suffice it to say, the airlines are facing one difficult operating environment at this time. For the June quarter, in fact, AMR, DAL, UAL, NWAC and U all reported quarterly losses (a combined total of $600 mln) and none held out much hope for a near-term improvement. As one might expect, analysts have ratcheted down earnings estimates in aggressive fashion. To wit, the consensus FY01 EPS estimate for industry leaders, AMR and UAL, stood at ($0.48) and ($11.81), respectively, just 30 days ago. The consensus estimate for those carriers is now ($1.51) and ($18.37). It’s a similar story of significant earnings revisions for many of the other airlines, too, as it is becoming apparent that profitability in 2001 will be regarded more as the exception rather than the norm. Glenn Engel, the analyst at Goldman Sachs, provided the latest reminder of the industry’s depressed state today when he cut earnings estimates on ten carriers (ALK, AMR, AWA, CAL, DAL, LUV, MEH, NWAC, U and UAL), citing stubbornly high fuel prices and a recovery that is happening slower than expected. Of the ten, Engel expects only CAL and LUV to be profitable this year. His sizeable revisions notwithstanding, the airline stocks are holding up relatively well today as they have been underpinned by a couple of factors. First, Engel’s revisions aren’t that much of a surprise given that estimates have been falling sharply for several months now; and secondly, his revisions haven’t significantly lowered the bar in terms of earnings expectations. For instance, Engel cut his forecast for U from ($4.50) to ($6.35), yet the consensus estimate was already at ($6.20). Admittedly, that realization isn’t much to hang your hat on, but it does raise some hope that the worst of the industry’s news has been accounted for in stock prices already. Even so, until the economy and corporate profits show more meaningful signs of rebounding, Briefing.com thinks it will be difficult for the airline stocks to make much headway. For additional insight, be sure to visit Briefing.com’s Sector Ratings page.– Patrick J. O’Hare, Briefing.com

Extreme Networks (EXTR) 17.42 -5.03: This networking gear maker is taking it on the chin today from a downgrade to Neutral by Morgan Stanley. The firm’s view is that analyst assumptions for Layer 3 switching growth are too aggressive. However, Morgan does expect EXTR to meet SepQ estimates and views the current level of inventory (4 weeks) as very reasonable. There have so many downgrades in the space already. So why is EXTR down so sharply? Because companies with exposure to the enterprise side of the networking business have been viewed in a much more positive light than those that primarily sell to carriers/service providers. It’s no bed of roses for the enterprise side of the market, but there are signs that demand has held up better and the timetable for a meaningful turnaround is shorter. Helping the enterprise side is customer diversification as enterprises are from a variety of industries On the other hand, carriers are carriers and they have been cutting back sharply on cap-ex plans. This is a theme Briefing.com has been covering for some time. This downgrade does not change our thesis that the enterprise companies are still better off on a relative basis than the suppliers to the carrier/service provider side of the business. Briefing.com has been on a bunch of conference calls over the last couple of quarters. The enterprise suppliers have more visibility and are more confident than their carrier peers. In fact, Extreme upped guidance on its most recent call. Based on the size of today’s decline, clearly much of the optimism had been priced into the shares. We are surprised by the size of the slide today, as it now appears an expectation for EXTR to guide lower is being priced into the shares. Others on the enterprise side to watch: Foundry (FDRY 13.94 -1.32), f5 Networks (FFIV 14.35 -0.24). We are still positive on EXTR, but a stop loss at $15 is a good idea. — Robert J. Reid, Briefing.com

Callaway Golf (ELY) 16.19 -0.10: From an earnings warning in June to the death of founder, Ely Callaway, in July, it has been a difficult summer for Callaway Golf. Its stock perhaps tells that tale better than anything else as it is down 32% since Memorial Day. The bulk of that decline followed on the heels of the aforementioned earnings warning, which turned out to be as big as a Big Bertha driver. Expected to make $0.70 per share in the June quarter, ELY warned Q2 earnings would fall in the range of $0.35-$0.38 per share due to to bad weather, the slowing economy, and the United States Golf Association’s ban on the company’s Big Bertha ERC II driver. Fortunately, not all is lost with respect to the ERC II as it has been approved for use in key golfing regions like Europe and Japan. By the same token, not all is lost with respect to ELY. The company has a grounded leader in newly-appointed CEO, Ron Drapeau, who plans on maintaining Ely Callaway’s successful strategy of preserving the integrity of the Callaway brand and developing products that help the average golfer enjoy the game. The company has shown some encouraging momentum with its golf ball business, too, where sales in 1H01 nearly equalled sales for all of 2000, and it boosted its apparel sales prospects with the signing of an exclusive licensing agreement with Ashworth, Inc. (ASHW), the leading golf apparel designer and manufacturer in the industry. Aside from those considerations, ELY’s appeal is heightened by its solid balance sheet, an attractive valuation, and a high degree of negativity surrounding the stock (6 of 8 analysts have a HOLD recommendation). Presently, ELY trades at 15.7x est. FY01 earnings and 12.8x est. FY02 earnings. Corresponding PEG rates (p/e to long-term growth rate) are 0.79 and 0.64, respectively. Interestingly enough, ELY’s Board of Directors authorized a stock repurchase program today of up to $100 mln, which speaks to the value ELY represents at these levels. Like all other companies, ELY will remain challenged by the difficult economic backdrop; however, the stock’s substantive decline this summer combined with ELY’s industry-leading position, capable management team, and sound balance sheet augur well for long-term capital appreciation. Briefing.com’s 9-12 month price target is $20.– Patrick J. O’Hare, Briefing.com

Lowe’s Companies (LOW) 36.20 +1.16: Despite less than favorable weather and a soft domestic economy, this hardline retailer managed to edge out consensus estimates in its second quarter report issued this morning. Specifically, Lowe’s second quarter earnings came in at $0.42 per share, exceeding consensus estimates by a penny. On the topline, sales for the quarter came in at $6.13 billion which represented annualized growth of 16.4%. The company’s comparable store sales increased by 1.7%. In terms of the forward outlook, Lowe’s essentially reiterated prior projections — it expects third quarter earnings in the range of $0.30-$0.32 per share versus the current consensus estimate of $0.31. Full-year results are expected at $1.23-$1.25 per share which brackets the current mean estimate of $1.24. The company also expects third quarter comparable store sales to increase on the order of 2%-4% — on its conference call, management stated the first two weeks of its third quarter were tracking “at the high end of that range.” In terms of new store growth, Lowe’s expects to open 35 to 38 stores in its fiscal third quarter which is consistent with its plans to open 115 new stores for fiscal 2001. Though the pace isn’t quite as torrid as market leader and competitor Home Depot (HD +0.33), Lowe’s expects to open a new store nearly every 2.5 days. Among the more interesting aspects of its report was the reported increase in gross margins. Businesses have essentially three methods of achieving margin expansion: 1) raise prices — difficult in a soft economy 2) lower its costs, and 3) improve its product mix. Lowe’s is focusing on the latter strategy by shifting its mix away from opening price point and towards the middle or high end of the line. LOW’s has had limited success with this strategy which is a departure from other retailers which have seen sales scale towards the opening price point rather than away from it. Management says it continues to see migration to quality with its average unit selling prices increasing in a number of key categories. From a fundamental perspective, with trailing twelve month earnings of $1.17 per share, LOW carries a trailing Price/Earnings multiple of 29.9x. Its five-year valuation bands range from a low multiple of roughly 19x back in 1997 to a high multiple of 50x in 1998. This means the shares approximate equilibrium in terms of upside/downside based on multiple expansion/contraction. Put another way, it looks like a market performer at its current level. From a technical perspective, LOW is set up nicely for the pop that is already in progress this morning. Look for resistance in the area of 37.25-37.50 which approximates the upper end of its 10-day Bollinger bands in conjunction with straight-line resistance covering the month of August. To the downside, watch for support around 35.00 which approximates its open/closing low for the current month. — Michael Ashbaugh, Briefing.com

Stocks to Watch : Analyst ratings changes are dominating the markets this pre-market….Morgan Stanley is downgrading Layer 3 networking companies Extreme (EXTR 22.45) and Enterasys (ETS 13.05) to Neutral from Outperform. The firm is says Layer 3 switching forecasts are too aggressive on EXTR. This is an important call because companies with exposure to enterprise customers have been seen as safer plays relative to companies with heavy carrier/service provider exposure. So it’s not surprising to see EXTR down $2 in the pre-market. Others to watch in sympathy are Foundry (FDRY 15.26) and f5 Networks (FFIV 14.59); Finally, firm is also trimming FY02 estimates on Cisco (CSCO 16.61)….Optical equipment maker Ciena (CIEN 18.78) is being downgraded two notches by Lehman to Mkt Perform from Strong Buy. Firm says that even after precipitous decline, it does not see any reasonable return for at least six months and believes additional downside is possible…Ford Motor (F 21.70) is getting yet another downgrade this morning from Merrill Lynch which now rates Ford as a near-term Neutral as company’s reduced earnings outlook is a signal that its problems are mounting, and that the deterioration in industry fundamentals is accelerating….Imclone Sys (IMCL 45.50) is up $2 as CNBC reported that there has been very heavy insider buying at the biopharmaceutical company among company executives…..TriQuint Semi (TQNT 20.46) is being called SG Cowen’s bottom line action idea of the week. as company has received a large number of new receiver design wins for CDMA handsets…The pre-market tone is slightly positive but little changed from earlier levels with the S&P futures +1.7 pts above fair value while Nasdaq 100 Pre-Market Indicator is +1.5. — Robert J. Reid, Briefing.com