Friday, August 22, 2008


Sysco Sings a Sweet Q4 Tune

On August 11, before the market open, Sysco Corp. reported Q4 earnings of $0.55 per share or $334.1 million vs. $303.4 million ($0.49 per share) a year ago, an increase of 10%. Revenue increased to $9.73 billion or 5.4% vs. $9.2 billion a year ago. Analysts expected $0.52 per share, beating estimates by $0.03 per share. Analysts also expected revenue of $9.87 billion, missing revenue forecasts. SYY spiked in the morning and maintained momentum throughout the day to close at $31.15, up $1.28 or 4.3% on 9.91 million shares traded (highest daily volume in four years).

SYY estimated that in FY 2008, they experienced a 6% inflation rate in the cost of goods sold. However, in Q4 SYY was able to increase productivity and control expenses which helped to offset higher commodity costs. Revenue growth should continue to slow down as restaurants, SYY’s important end market, get a grip on higher food and energy costs. The benefit for SYY is that they do not fully rely on dining establishments and have a diverse customer base with no single customer accounting for more than 10% of sales. Weak consumer spending, inflation, particularly fuel costs, and a continued slow down in restaurant sales and the overall difficult economic environment will have an impact on SYY’s operating margins going forward.

Fundamental highlights include SYY’s ROI (17.4%, trailing 12-months [TTM] vs. industry avg. 14.7%), ROE (33.1%, TTM vs. industry avg. 20.9%), ROA (11.3%, TTM vs. 10.9%) and positive earnings growth (13.3%, TTM vs. industry avg. 5.5%). However, concern must be noted in SYY’s gross margins (19.2%, TTM vs. industry avg. 25.6%).

There are currently 8 analysts that cover SYY, but there have not been any recent revisions. The current rating consensus is 2 “Buy”, 6 “Hold”, and 0 “Sell” ratings. Expect analyst recommendations to come out in the near future that may move the stock in the short-term.

In FY 2008 until March of this year, SYY has repurchased 17 million shares at a total cost of $536 million. As for insiders, in the past 12 months, there were 0 purchases and 66,872 shares sales. Institutions, in the past 12 months, have sold 20.8 million shares or a net -4.7% change in ownership. However, in the past 3 months, institutions have purchased 15.4 million shares or a net change of +3.3%.

On the day of earnings, SYY broke out of several resistance levels including the 50-day, 200-day, and previous congestion areas. SYY formed an ascending triangle since June and has broken out to the upside on massive volume. SYY may find support at the $30-$31 as it has several times this year. SYY is a possible long candidate if general market conditions improve.

Full Disclosure: None

Thursday, August 21, 2008


Fluor Fires Up, Doubles Net Income

On Monday, August 11 after-hours, Fluor Corp. reported $209.3 million or $1.13 per share, an increase of 119%. A year earlier,
FLR reported net income of $95.6 million or $0.53 per share. These results included a gain of $79 million or $0.26 per share from the sale of its joint interest in the Greater Gabbard Offshore Wind Farm. Every unit posted positive growth, while operating margins rose 6.8%. Analysts were expecting $0.82 per share, effectively beating estimates. After-hours, shares rose 6% to $81. However, on Tuesday, August 12, shares of FLR gapped up to $80.74, sold off strongly hitting a low of $67.10 before slightly recovering to close at $71.64. Shares fell $4.54 or 6%.

Operating profit doubled to $392 million, compared to $187 million in Q2 07. Revenue rose 37% to $5.77 billion up from $4.2 billion in Q2 ‘07, primarily in its oil and gas unit whose operating profit jumped 68%. Profit for the power unit jumped to $25 million and earnings rose 18% in the government segment.

New projects awarded increased by 10% to $6.4 billion. New awards in Q2 by unit: 47% - oil and gas, 38% - industrial, 11% - global services, 3% - power, and 1% - government. There continues to be strong global demand for FLR’s oil and gas projects, mining and transportation, power generation, and alternative energy. I expect further strength in the energy sector, mainly for power generation, coal plants, oil and gas, and nuclear energy. The obvious risks for FLR include, but are not limited to, a continuous drop in oil prices, labor and credit issues, and possible project delays. The recent correction in oil prices should not deter capital investment into oil and gas projects for the long-term.

On July 3, Fitch revised their long-term issuer default rating to “A-“ and giving FLR a “Positive” outlook rating from a “Stable” rating as a result of FLR’s operating performance, low leverage and improving liquidity, and a growing backlog in its oil and gas unit. FLR’s short-term issuer default rating is affirmed at “F2”. 54% of FLR’s backlog is international, with 43% coming from EAME. (Europe, Africa, Middle East), giving FLR a strong global presence.

FLR raised their full-year’s earnings forecast by $.035 to $3.65 - $3.80 per share up from $3.30 - $3.45 per share. Analysts expected earnings of $3.29 per share for the year.

Currently 16 analysts publish reports on FLR. To date, nine analysts rate FLR as a “Buy”, five rate as “Hold”, and one rates as “Sell”. There is a lot of variance between analysts, but the general consensus is “Buy/Hold” with price targets ranging from $85 to $111.

  • August 8 - Morgan Joseph upgraded FLR to “Buy” from “Hold” and raised their target price to $97 from $94. The firm noted that as long as oil stays above $70, energy projects can move forward.
  • August 8 - Morgan Keegan also upgraded FLR to “Buy” from “Hold” while setting their price target to $94.
  • August 11 - D.A. Davidson & Co. remained “Neutral” on FLR, reducing their price target from $95 to $85.
  • August 12 - Citigroup downgraded FLR to “Hold” from “Buy”.
  • August 12 - FBR reiterated their “Outperform” rating and raise their price target to $111 from $103.
  • August 12 - Lehman raised their price target to $103 from $98 noting that FLR is the only engineering & construction company that provides enough diversity across the sector’s end markets.
  • August 13 - UBS maintained their “Buy” rating, but reduced their price target from $107.5 to $103.
  • August 18 - Stanford Research upgraded FLR to “Hold” from “Buy”.

In light of positive earnings, in the past 6 months, insiders made 0 purchases and made 49 sales totaling 198,000 shares. Consider this: Alan Boeckmann, Chairman & CEO of Flour Corp., has sold approximately 127,530 shares so far in the past 6 months. Insiders may sell for a variety of reasons, business-related or not, but sales must be taken into consideration in evaluating management.

On a technical level, the response to the positive earnings report is less than appealing. The massive intra-day sell off shows that investors could not maintain the same enthusiasm as they did after-hours the day before. This is hard to believe, but the market is always right in determining price. 14.54 million shares traded on the day after earnings, its highest daily volume since May 13. The volume pattern indicates that the stock is indeed under distribution. Having broken through the 200-day MA, I expect consolidation around the $70 - $77 range. I also expect a pullback from extremely oversold levels soon. I would also watch for a 50-day/200-day MA crossover which is bearish. FLR is in a strong downtrend and the MACD & RSI also indicate a bearish trend. I suggest no trades, long or short at this level, since the risk/reward is not favorable for either.

Full Disclosure: None

Wednesday, August 20, 2008





Bob Evans: Chewing On Revenue Drop

On August 12 after-hours, Bob Evans Farms, Inc. (BOBE) reported Q1 earnings of $0.45 per share on $13.8 million in net income and $440.3 million in revenue. Analysts’ expected earnings of $0.44 per share, beating earnings estimates. Net income grew 3.6% primarily on sausage sales. Revenue increased by 4% to $440.3 million which slightly missed analysts’ expectations of $443.2 million. This is primarily due to the Mimi’s Café chain, whose same-store sales fell 6.5%. Including both chains, total same-store sales dropped 0.2%. The result: Shares dropped nearly 14% intra-day and closed around 10% on Wednesday on 1.07 million shares traded, double the average daily volume of 565,711 shares.

BOBE runs 571 Bob Evans restaurants in 18 states and also owns 135 Mimi’s Cafés in 22 states. Bob Evans stores are primarily located in the mid-Atlantic, Midwest, and Southeast, while Mimi’s Cafés are primarily located in the West. Issues such as the national slowdown, sub-prime mortgage crisis, declining property values, and a decrease in disposable income are leaving struggling consumers no choice but to dine out conservatively. It is no surprise that Mimi’s Café sales fell 6.5% given the fact that 56 out of 135 (or 41%) of their restaurants are located in the hard hit sub-prime capital of the US, California.

In addition, increasing development costs in the western states for proposed new Mimi’s restaurants and the recently amended federal and state minimum wage laws will also weaken future earnings growth. Now at the 2nd stage of the phase-in, the federal minimum wage will be increased to $7.25 per hour in the 3rd phase-in on July 2009 from the current $6.55 per hour.

The only way casual and fine dining restaurants are going to improve is if the overall housing market improves. Data from numerous sources suggest that a recovery will not come anytime soon. Discretionary spending will continue to be hit by rising energy and food costs. Chicken and Pork prices should affect next quarter’s earnings due to agricultural commodities still sitting close to all-time highs.

Even though BOBE increased prices by 2.9%, same-store sales for Bob Evans restaurants rose only 2%. As more customers decide to eat in instead of dine out, it will be more and more difficult for restaurant chains to pass along industry average 3-4% price increases without deterring additional customer traffic. Full service restaurants will continue to feel pressure on operating margins going forward into 2009.

CL King initiated coverage on August 14 with a “Neutral” rating and the average opinion is “Hold” among 7 analysts. KeyBanc Capital Markets, Stephens, Inc. and MKM Partners have all reiterated their “Hold” ratings. As for insiders, there has been only one insider purchase in the past 12 months, and that was for only 665 shares. I would like to see more confidence from management by purchasing a bit more than 665 shares.

Technically, BOBE is neutral, given that the stock has been trading in a range for several months and is currently consolidating between the 50-day MA and the 200-day MA after a negative earnings report. I suggest no trade, long or short, at this time.

(click on chart to enlarge)

Disclosure: no position in BOBE

Tuesday, August 19, 2008


McDermott's Wild Week: What's Next?

On Monday, August 11 after-hours, McDermott (MDR) reported earnings of $0.77 per share on $1.79 billion in revenue. Analysts' average expectation was for EPS of $0.772 per share on $1.85 billion in revenue, meaning MDR's reported a slight miss. Shares dropped nearly 14%. Revenue did increase 26% from a year earlier, but that wasn’t enough.

Two areas of focus are the operating margins (12%, trailing 12-months) which are currently underperforming industry and sector peers, and EPS growth (11.5%, trailing 12-months). Both need to significantly improve for shares to see their highs ever again. Additionally, in the past 6 months, insiders have sold around 906,000 shares and made no purchases, another possible cause for concern.

Last Thursday, August 14, Citigroup Global Markets downgraded MDR from a “Buy” to a “Hold” and cut their price target to $42 from $77! Shares fell 8%. Two things wrong: 1) The target of $77 was never hit and doesn’t look like it will hit that, at a minimum of several months, and 2) $42 was hit 5 days before the report.

On the day of the report, MDR was trading below $36 and when the analyst report came out, the price dropped close to $35. A little too late? What’s interesting is that there have been a total of 10 “Buy” or “Hold“ sell-side ratings and no “Sell” ratings in the past 3 months. That should change in the coming months.

Also, KeyBanc Capital Markets noted that J. Ray McDermott, MDR’s offshore oil and gas construction unit, was a particular source of weakness. This may be the reason why MDR named a new COO to take over global operations. This analyst, along with other optimists, has kept a “Buy” rating and a $70 price target, which is completely different from the analyst at Citigroup. This should tell you not to rely on analyst recommendations for MDR - things are already confusing enough without them.

That wasn’t the only change in management. Last Friday, MDR announced that they named a new CEO to succeed the current CEO & Chairman Bruce Wilkinson on Oct. 1, who will retire on Sept. 30. The man is 63 years old, so I believe that, but MDR’s shares have fallen over 40% this year. That “may” have had a tiny influence.

Technically, MDR is in a terribly bearish position, and it’s a perfect short candidate for the intermediate term. For the short-term, I expect MDR to drop further but anticipate a pullback from extremely oversold levels into the $38 resistance area soon. The volume on the day after earnings hit a capitulatory 14.3 million shares traded. Keep in mind that the average daily volume is 2.8 million. For the long-term, the trend is broken and MDR is in a primary leg down, having broken through numerous support levels. The next major support level is at around $26, as can be seen below.

(Click on chart to enlarge)

Could the devastating earnings report have been avoided? Absolutely! Before a stock melts down, it flashes several warning signs on the way that traders should not ignore. For example, take a look below...

Warning Signs to Sell (Opportunity Signs to Short)

- Stalling at the 50-day MA

- Break in the 50-day MA

-Break in the 200-day MA

- 4 weak rallies forming flags

(Click on chart to enlarge)

Full Disclosure: No position in MDR

Monday, August 18, 2008


WB – Wachovia Corp. (Short), $15.06

Why: WB’s rally has faded on weak and weaker volume for the past month. The stock has broken back down below the 50-day MA. Yesterday was a reversal day, and today is a confirmation day.

JPM – J.P. Morgan Chase & Co. (Short), $36.80

Why: After consolidating for a month, a doji appeared yesterday and JPM broke through the 50-day MA again today, confirming an evening star pattern with a high likelihood of a continuation down. Numerous failures at the 200-day is also a bearish signal.

MS – Morgan Stanley (Short), $39.61

Why: MS broke its trend today after failing the 200-day MA. I expect some consolidating at the 50-day MA level, but otherwise, today’s weakness shows a high likelihood of a downtrend.

BAC – Bank of America Corp. (Short), $29.42

Why: BAC traded in a range, but was unable to make a new high. Instead, BAC broke down, rallied for 2-days before dropping again today. I expect support at the 50-day, but it looks like BAC uptrend is over in the short-term.

All Charts Courtesy of Copyright ©1999-2008 by Inc., Redmont Washington. All Rights Reserved.


Auto Desk Surges 12% On Earnings, Outlook Neutral

On Thursday, August 14 after-hours, Autodesk, Inc. (ADSK) reported $0.39 per share, and excluding charges, would have earned $0.56 per share, beating analyst expectations. Analysts were expecting $0.52 per share. ADSK also upped revenue guidance as they expect revenue to come in between $625 - $635 million, up from $623.1 expected by analysts.

Even though ADSK faces increased risk from their exposure to cyclical spending and competition, ADSK’s size (market cap: $8.593 B) and tough market position is helping the company tread through the US economic slowdown. Revenue growth in 3D technology solutions increased revenue by 36% and favorable foreign exchange rates boosted revenue growth by about 7%.

Since 2004, net revenue increased at a compounded annual growth rate of about 23%. Operating income increased 21% so far in 2008 as compared to 11% in 2004 (income as a percentage of total revenues). In addition, gross margins increased 6% due to fixed expenses and better management of distribution networks.

I believe that the larger customers of ADSK are conservative toward allocating capital to software purchases. In addition, the US slowdown, intense industry competition, and the vigorous pricing battle occurring between these software vendors will hurt ADSK. However, this is offset by ADSK’s rapid expansion into emerging markets such as China and India. This has led to 40% revenue growth for ADSK.

For Q3, ADSK expects to earn $0.40 - $0.42 per share and excluding items, they expect to earn $0.54 - $0.56 per share on revenue ranging from $625 - $635 million. Currently, 20 analysts give recommendations on ADSK and currently there are 9 ‘Buy’ ratings, 10 ‘Hold’ ratings, and 1’Sell’ rating. Even from 6 months until now, only 1 firm has issued a ‘Sell’ rating on ADSK even though ADSK gapped down and traded in the $30-34 range, shot back up trading in the $37-42 range, and fell back down into a $32-$36 range. The stock is almost exactly back to where it was 6 months ago.

On Friday, ADSK gapped up nearly 12% and maintained momentum throughout the day, trading nearly 13.4 million shares. The average daily volume is 3.66 million. The MACD and RSI both indicate a bullish trend divergent from price action. ADSK hit an intra-day high at the 200-day MA before giving back some gains. This is a technical breakaway gap and I expect ADSK to either consolidate or trend higher in the short-term and remain neutral for the intermediate-term given the weaken volume in the NASDAQ rally.

Full Disclosure: No position in ADSK

Also available on:

Sunday, August 17, 2008


MARKET COMMENTS -- INDU 11,659.90, COMP 2,452.52, SPX 1,298.20, RUT 753.37

The major indices are still moving in a secondary reaction rally. The volume is even weaker than the previous week for all indices. Notice should be made that the volume on down days is either greater than or equal to the volume on up days. The price-volume divergence confirms that the rally is due to end. Unless there is greater volume on the up days vs. the down days, the trend will continue to weaken. The volume in the INDU and the SPX both continue to sink, while volume for the COMP has tapered off considerably last week. The INDU and SPX are both consolidating at the 50-day MA, while the COMP is consolidating at the 200-day MA and any breakouts should be noted. The RUT is testing its June high.

The stochastics indicates a divergence with the INDU. The rally continues, yet the stochastics trend indicates waning momentum. The stochastics remain at the 80 level for the COMP and the RUT. (click on chart to enlarge)

All Charts Courtesy of Copyright ©1999-2008 by Inc., Redmond Washington. All rights reserved.

We ultimately expect the rally to continue, but not for long. The INDU and the SPX should be able to test the 200-day MA again, while the COMP and RUT test their previous highs. The overall volume during these rallies remains unconvincing and poses as a threat to buyers. When new short-term highs are made in an established uptrend (rally), the volume must support the price action. Therefore, if weaker volume is present, the trend is close to a reversal. As the divergence becomes more and more aware, buyers will start to question the rally, and the resulting fear and supply will fuel the reversal. Volume always confirms price action.


(click on chart to enlarge)

All Charts Courtesy of
. Copyright ©1999-2008 by Inc., Redmond Washington. All rights reserved.

The US Dollar continues its powerful rally without resistance. I expect a pullback, soon, due to the fact that the pattern’s spike demonstrates a parabolic run happening too fast in too short of a time period. For the Euro, I expect a pullback close to the high of the breakaway gap down. The 2-year chart is in focus to show the island reversal and the ensuing, precipitous decline in relation to the long-term trend. It is obvious that the trend is completely broken and that a long-term downtrend is most probable.

Gold (AMEX: IAU) is sitting at the 77.5 support level; however the uptrend is completely broken on a technical level for the short and intermediate term. Silver (AMEX: SLV) also resembles the same pattern, both commodities ETFs having gapped down three times. We expect a pullback soon for both commodities as they have reached excessive oversold levels.

The important technical aspect of oil (AMEX: USO) is to pay attention to its response to the 200-day MA. The last time the USO found support at the 200-day MA was in August 2007, one year ago. We expect either a bounce from oversold levels to around $97 or a major one-day drop in oil cutting through the 200-day MA past $87 very soon. Natural Gas’ (AMEX: UNG) steep trajectory shows the initial stages of leveling off. The UNG is still in a parabolic downtrend having broken numerous support levels.


(click on chart to enlarge)

All Charts Courtesy of
. Copyright ©1999-2008 by Inc., Redmond Washington. All rights reserved.

FLR - Reported $0.87 per share beating analyst expectations of $0.80 per share. They also lifted their full-year forecast to $3.65-$3.80 per share up from $3.30-$3.45 per share. FLR gapped up and sold off throughout the day, hitting an intra-day low near $67.50. Even as earnings expectations were exceeded, FLR remains in a downtrend and has failed the 200-day MA. Consider this: Alan Boeckmann, Chairman & CEO of Fluor Corp., has been selling his shares all year. In August alone, he sold over 1.5 million shares.

SYY – Reported $0.55 per share beating analyst expectations of $0.52 per share. Total sales rose 5.4%, gross profit rose 5.6%, and operating income rose 10%. SYY gapped up, fill the gap intra-day while finding support at the 200-day MA and lifted higher past $31. The following day demonstrated buying leadership as SYY continued its momentum higher.

CPN – Reported $0.41 per share beating analyst expectations of $0.10 per share. Operating revenue rose 37% to $2.8 billion. CPN gapped up about 6% and sold off throughout the day, forming a bearish gap up. Bearish gap ups have a very high likelihood of declining the next day. CPN did so, but is supported at around the $15.75 level forming what may be a short-term double bottom.

BOBE – Reported $0.45 per share beating analyst expectations of $0.44 per share. However, BOBE missed analysts’ revenue target of $443.2 million by reporting $440.3 million. The Mimi’s Café chain is mostly to blame. BOBE dropped close to $28 before recovering near the open, forming a long-legged doji.

(click on chart to enlarge)

All Charts Courtesy of Copyright ©1999-2008 by Inc., Redmond Washington. All rights reserved.

MDR – Reported $0.77 per share on $1.79 billion, missing analyst expectations of $0.78. The miss was due to coming short of analysts’ sales target of $1.85 billion. MDR fell as low as 15.5% to $35.37 before rising just above $36. MDR continues its sharp downtrend into oversold territory. We expect a bounce in the near future as capitulatory volume has already been hit.

NUAN – Reported $0.22 per share, excluding items, beating analyst expectations of $0.23 per share. Including charges, however, NUAN actually reported a loss of $0.05 per share. NUAN also gave Q4 guidance and expected a loss of around $0.02 - $0.03. NUAN gapped down and lost 9%, but found support at the 50-day MA. The one-day reversal, resistance at the 200-day MA, and the rally on weaker volume after the reporting day should signal caution.

EL – Reported $0.61 per share beating analyst expectations of $0.56. Sales grew 14%, but 5% of the growth was attributed to the favorable foreign exchange rate. EL gapped up to $48 on heavy volume and buyers maintained momentum by bringing EL to close near its intra-day high around $51. This is a perfect example of a power spike and the follow-through day confirms that buyers are still coming into EL. The only possible resistance level for EL is April 2007’s high (not shown).

ADSK – Reported $0.39 per share, and excluding charges, would have earned $0.56 per share, beating expectations. Analysts were expecting $0.52 per share. ADSK also upped revenue guidance as they expect revenue to come in between $625 - $635 million, up from $623.1 expected by analysts. The stock gapped up nearly 12% and maintained buying throughout the day. ADSK hit an intra-day high at the 200-day MA before giving back some gains. This is a breakaway gap and I expect ADSK to either consolidate or trend higher in the short-term.


(click on chart to enlarge)

All Charts Courtesy of
. Copyright ©1999-2008 by Inc., Redmond Washington. All rights reserved.

This Week’s Watch:
  • The DJIA and SPX will continue to test the 50-day MA, the COMP will continue to test the 200-day MA. The RUT will test its June high. Note any increases in volume (if any) on positive days during the current rally.
  • Numerous retailers will report earnings. Make note of positive/negative surprises.
  • The US Dollar may pullback into support and the Euro, Gold, and Silver may pullback into resistance.

Economic Reports of interest: Mon. (NAHB Housing Market Index), Tues. (Building Permits, Weekly Retail Sales, Core PPI, Housing Starts, PPI), Wed. (Crude Inventories, Weekly MBA Applications), Thurs. (Initial Claims, Leading Indicators, Philadelphia Fed), Fri (Cattle on Feed/Cold Storage Stocks)

Noteworthy Earnings Reports: Mon. (LOW, PRGO), Tues. (ADI, FMD, HPQ, HD, LZB, MDT, NVTL, OTEX, RAVN, SKS, TGT), Wed. (BYI, BJ, CTRN, EV, HOTT, JDSU, LTD, PVH, CRM), Thurs. (ARO, BKS, BEBE, BCSI, BKC, PLCE, DKS, DRYS, FL, GME), Fri. (ANN, PERY).

Contact: John C. Lee // E-mail:

*For fundamental-related articles, please visit: