Daily Archives: December 5, 2006

Gambling Drug Fails Trials; Somaxon Shares Lower

Somaxon Pharmaceuticals (SOMX-NASDAQ) has announced essentially failed results from the company’s Phase 2/3 clinical trial evaluating 20 mg and 40 mg of oral nalmefene hydrochloride, an opiate antagonist, in patients with a diagnosis of pathological gambling.

Nalmefene is an "opiate antagonist class" that did not demonstrate a statistically significant difference compared to placebo on the primary endpoint for Pathological Gambling.  Neither dose achieved statistical significance on the secondary endpoints in the trial. The most frequently reported adverse events were insomnia, nausea and dizziness. Elevation in liver enzymes was observed in some nalmefene-treated patients.

Somaxon intends to further assess the results and intends to assess the previously-reported results from its Phase 2 clinical trial evaluating nalmefene for smoking cessation before any program determination.

The company will now focus on completing and reporting the results from final Phase 3 trial for SILENOR(TM) for the treatment of insomnia, with results expected later this month.  Prior Phase 3 clinical trials evaluating SILENOR(TM) for the treatment of insomnia were positive and if all data is as prior stated Somaxon expects to file a New Drug Application (NDA) with the FDA in the third quarter of 2007.  The company has submitted the results of the genotoxicity studies to the FDA and is awaiting a response.

SOMX shares are down about 7% pre-market at $13.05, but shares were down 10% right afterthe news came out.  The 52-week trading range for SOMX is $9.69 to $21.24, and SOMX has an implied market cap of about $230 million after the 7% pre-market drop.  As of last quarter it had about $58 million in net liquid assets after liabilities and items were removed from the balance sheet.  Its only revenues are generated from partner and grant payments and it has a cash burn rate of $11M to $15M per quarter.

While the company isn’t going to be happy, gambling addicts with insomnia is something the casinos can’t hate too much.

Jon C. Ogg
December 5, 2006

Posted on: December 5, 2006 – 8:50 am in Pharmaceuticals

Vista On Steroids (MSFT)

Late word is out the Microsoft’s CFO sees great things ahead. Revenue growth for fiscal 2007 will be as high as 15%. And, the new Vista OS. He also said look for Xbox sales to hit 10 million before Christmas.

Sales in emerging markets such as India and China will help push MSFT revenue up (provided Vista is not boarded by cyber-pirates).

As Microsoft confirms it targets, as Xbox sales rise, and as the company renews its commitment to increasing revenue at its online business (even if it has to spend to get there), for the first time in a long time, the company is setting our ambitious goals–and achieving them.

Even through the stock is up to $30 now, a great run, it is still down from $35 five years ago.

But, that could change

Douglas A. McIntyre can be reached at douglasamcintyre@247wallst.com. He does not own securities in companies that he writes about.

Posted on: December 5, 2006 – 8:43 am in Large Cap Stocks

Pre-Market Stock Notes (DEC 5, 2006)

(AZO) Auton Zone $1.73 EPS vs $1.68e.
(BA) Boeing may have new orders from Kuwait Airlines.
(BEAS) BEA Systems said it will have material non-cash charges against priior earnings because of stock options issues.
(BRLC) Syntax Brillian raised guidance.
(CENT) Central Garden & Pet to replace JLG in S&P Small Cap 600 Index.
(EMR) Emerson Electric up after being a feature buy on Cramer’s MAD MONEY.
(GMRK) Gulfmark has a 2M share secondary.
(HBC) HSBC may have slower revenue growth according to overseas reports.
(HSIC( Henry Schein lowered guidance.
(HT) Hersha has a 7M share secondary coming.
(ISCA) International Speedway is looking to open a track in Staten Island.
(LUX) Luxottica signed a new 10-year eyewear agreement.
(MSFT) Microsoft still sees 13-15% revenue growth.
(NSTK) Nastech payment from P&G deferred in study.
(NT) Nortel still on profit track for 2008 but 2007 will still be disappointing to many.
(PCLN) Priceline.com selling 3.8 million shares.
(PVG) Penn Virginia 6.3M share IPO priced at $18.50.
(SAFM) Sanderson Farms $0.39 EPS vs $0.28e; unsure if comparable.
(SCMR) Sycamore trading up 20% after significantly exceeding revenue targets.
(SIRI) Sirius trading down 7% after lowerinng subscriber forecasts.
(SNE) Sony launching blue-ray DVD sooner than expected.
(SNY) Sonofi’s Accomplia gets positive comments that have the stock up 1%.
(TOL) Toll Brothers profits down 44%, lowered 2007 profits; says worst of housing may be behind.
(TWX) Time Warner’s cable unit entered new $6B commercial paper program.
(UARM) Under Armour up after Cramer said its is a "buy to the ninth power" on MAD MONEY.
(WLT) Walter Ind. lowered guidance.
(XMSR) XM Satellite trading down 3.5% after SIRI lowered subscriber targets.
(YUM) YUM’s Taco Bell is responsible for several e.coli cases.

Posted on: December 5, 2006 – 8:19 am in Pre-Market Activity

Select Analyst Calls (DEC 5, 2006)

AAPL reitr Outperform at Piper Jaffray; reitr Buy at UBS.
ACI & BTU started as Overweight at HSBC.
ASH cut to Neutral at JPMorgan.
AXP cut to Hold at AGEdwards.
CFR started as Overweight at Lehman.
CLRK started as Buy at Deutsche Bank.
CNC cut to Sell at Goldman Sachs.
COGN cut to Neutral at Cowen.
CTB raised to Buy at Deutsche Bank.
CVX cut to Neutral at B of A.
DV cut to Underweight at Morgan Stanley.
EXLS started as Underweight at Lehman.
GNTX cut to reduce at UBS.
HSY cut to Neutral at UBS.
IDTI started as Buy at UBS.
NETL cut to Neutral at UBS.
NILE raised to Outperform at RBC.
NSTK cut to Outperform at FBR.
PSEC started as Buy at Oppenheimer.
RDS raised to Buy at ABNAMRO(overseas).
SBUX raised to Buy at UBS.
SIRI cut to Underperform at Bear Stearns.
SLB cut to Mkt Perform at Wachovia.
THC cut to Neutral at Prudential.
ULTR started as Buy at UBS.
VNO raised to Outperform at Wachovia.
VOD raised to Buy at Goldman Sachs.
ZUMZ started as Outperform at CIBC.

Posted on: December 5, 2006 – 8:16 am in Uncategorized

Japan Launch Of Nintendo Wii Puts It In The Xbox, Playstation Mix

IStocks:  (SNE)(MSFT)

f there was any question about whether the Nintendo Wii would be a worthy competitor to the Microsoft Xbox 360 or Sony Playstation 3, the Japanese launch of the game console may answer them. The Wii sold 372,000 units in its first two days at retail.

Sony’s sales of PlayStation will end up below where the company initially forecast due to product development delays.

For Sony, the Wii news is not so good.

Douglas A. McIntyre can be reached at douglasamcintyre@247wallst.com. He does not own securities in companies that he writes about.

Posted on: December 5, 2006 – 6:15 am in Consumer Electronics

Asian IPTV Points The Way For Verizon And AT&T

Stocks:  (FTE)(VZ)(T)

Several internet TV initiatives in Asia and Europe plot a difficult path for telecom IPTV. That being said, some of the initial installations do hold out the promise of robust growth.

Hong Kong based PCCW is that largest IPTV operation in the world with 700,000 subscribers. The PCCW project has a distirbution that is close to parity with cable. However, the reasons for fixed-line PCCW to introduce IPTV is to keep subsribers from migrating to wireless, a situation no replicated in the US.

KT of Korea, China Netcom, and France Telecom have also deployed IPTV but have found that the start-up costs can be so high that they may push profitability out several years.

Industry research group iSuppli forecasts that IPTV could have 63 million subcribers worldwide by 2010 driving revenue to $27 billion. But, those forecasts may turn out to be fantastic. Problems with software like the Microsoft internet TV product and long installation times for new fiber could push those forecasts out several years. Content piracy is also an issue Or, it may be that for some telecom operators you can’t get there from here.

Programming costs are also a hurdle. In the US, large content providers already get fees from cable operators and have significant program distribution. They do not need the telecom companies to get eyeballs. That gives them some real advantage in negotiations with new outlets like fiber-to-the-home.

Although fixed line telephone companies can increase their yield by 20% to 40% according to UBS, cable is hampering distribution of programming by telecom operators. In Korea, cable VOD has an 80% penetration of households. That stronghold will be hard to breach.

Based on an interview with Reuters, one analyst was especially pessimistic: "There is no immediate profitability in IPTV, and no quick fix in intensive fiber rollout," said Shirley Tse, a Hong Kong-based analyst at UBS. "IPTV on a standalone basis does not justify the economics."

Well, AT&T and Verizon should hope that is not true.

Douglas A. McIntyre canbe reached at douglasamcintyre@247wallst.com. He does not own securities in companies that he writes about.

Posted on: December 5, 2006 – 6:04 am in Telecom

As Airbus Falls Apart, Boeing’s Future Brightens (BA)

Even after a stong run-up that began in 2003 and several product delays and run-ins with the Federal government, Boeing’s shares have risen from $70 at the beginning of the year to $90.

And, Boeing shares could go higher.

The turmoil at competitor Airbus gets more wild by the day. Airbus parent EADS has given the airframe manufacturer the go ahead to sell its A350 jetliner that competes with Boeing’s new 787. Fundng for the Airbus project will come from cost cuts, current cash flow and supplier financing. The company may also have to request capital from its goverment shareholders.

In other words, Airbus plans to herd cats to get its new plane financed

The Airbus funding situation is so complex and relies on several factors, none of which is guaranteed to stay in place. Boeing could not hope for better.

Douglas A. McIntyre can be reached at douglasamcintyre@247wallst.com. He does not own securities in companies that he writes about.

Posted on: December 5, 2006 – 5:43 am in Transports

As Sirius Warns, Satellite Radio Continues Spiral Down

Stocks:  (SIRI)(XMSR)

After months of indicating that it was growing rapidly and its rival XM was not, Sirius has revised its year-end subscriber projections down from 6.3 million to a range of 5.9 million to 6.1 million.

The disclosure comes at an ugly time for the satellite radio busines which is hoping to show that both XM and Sirius may be cash-flow positive for the fourth quarter.

The two satellite radio firms are already battling low stock prices and the perception that a come-back in over-the-air radio and competition from products like the iPod have permanently slowed their growth.Sirius is trading at $4.17, and the news could move it closer to it 52-week low of $3.60.

Whatever the cause, and it may be that there are several, it is not clear that satellite radio is unlikely to fulfill its initial promise of being a technology that will eventuall be in tens of millions of cars.

The companies, and their investors, will have to settle for much less.

Douglas A. McIntyre can be reached at douglasamcintyre@247wallst.com. He does not own securities in companies that he writes about.

Posted on: December 5, 2006 – 5:26 am in Satellite

Europe Markets 12/5/2006 Vodafone, SAP Up

Stocks:  (BCS)(BP)(BAB)(BT)(PUK)(GSK)(RTRSY)(UL)(VOD)(BAY)(DCX)(DB)(DT)(SAP)(SI)(ALA)(AXA)(FTE)(V)

Markets in Europe are up modestly at 5.15 AM New York time.

The FTSE is up .4% to 6,076. Barclays is up .4% to 679. BP is up 1.1% to 573.5. BT is flat at 289.75. British Air is up 1% to 497.5. GlaxoSmithKline is down .3% to 1346. Prudential is up .4% to 665.5. Reuters is up .4% to 451.5. Unilever is up .4% to 1363. Vodafone is up 1.9% to 137.5.

The DAXX is up .5% to 6,327. Bayer is up .9% to 39.62 DaimlerChrysler is up .3% to 44.08. DeutscheBank is up .5% to 97.74. Deutsche Telekom is up .8% to 13.3.SAP is up 1.1% to 157.03. Siemens is up .7% to 71.84.

The CAC 40 is up .6% to 5,325. Alcatel is flat at 10.12. AXA is up a fraction at 28.81. France Telecom is up .1% to 19.42. ST Micro is down .1% to 13.6. Vivendi is up .5% to 29.25.

Data from Reuters.

Douglas A. McIntyre

Posted on: December 5, 2006 – 5:15 am in International Markets

Media Digest: FT, Reuters, WSJ, NY Times

Stocks:  (SNE)(DIS)(SIRI)(PFE)

According to Reuters, US arms sales overseas will total about $20 billion for the year ending October 1, 2006, about even with last year’s record total.

Reuters writes that, based on consumer acitivity in China and Korea, internet TV is a financial risk of telecom companies, but one that may be very profitable in years to come.

Reuters says that Sony has announced that its holiday sales should be better than expected due to succes with digital cameras and flat panel TVs.

The Wall Street Journal writes that companies with online retail units like Gap and Federated are cutting back on free online shipping to improve margins.

The Wall Street Journal writes that Disney has decided to buy NASN, a London based cable TV group that has rights to MLB and NFL programming.

The Wall Street Journal also writes that Mellon and Bank of New York are merging in a deal worth $15.5 billion.

The Wall Street Journal writes that LSI has agreed to buy Agere for $4 billion in stock.

EADS says that the success of its A350 launch depends on a vast restructuring of the company. Suppliers will be expected to provide some financing and the company will have to cut costs sharply.

The Wall Street Journal writes that Sirius has cut its year=end forecast of subscribers from 6.3 million to a range of 5.9 million to 6.1 million.

The NY Times writes that Carl Icahn’s second bid for realty firm Reckson was rejected.

The NY Times also reports that Medtronic will spin off its defribillator unit.

The FT reports that Pfizer is putting more effort into stategic acquistions after the failure of a major drug trial.

Douglas A. McIntyre

Posted on: December 5, 2006 – 5:02 am in Press Digest

Asia Markets 12/5/2006 Cathay Pacific, China Unicom Up, Softbank Down

Stocks: (CAJ)(FUJ)(HIT)(HMC)(NIPNY)(NTT)(DCM)(SNE)(TM)((CHL)CU)(PCW)(HBC)

Markets in Asia were mixed with the Hang Seng up sharply,

The Nikkei was down .2% to 16,266. Bridgestone was down .8% to 2465. Canon was up ,5% to 6040. Daiwa Securities was down .8% to 1305. Fuji Film was up .9% to 4730. Hitachi was down 1% to 675. Honda was down .3% to 3980. NEC was down .5% to 548. NTT was down .7% to 583000. NTT Docomo was down .6% to 179000. Sharp was down .9% to 1910. Softbank was down 1.6% to 2445. Sony was down .9% to 4510. Toshiba was down .1% to 743. Toyota was down .7% to 6910. Yahoo Japan was flat at 46850.

The Hang Seng was up 1.3% to 18,944. Cathay Pacific was up 3.3% to 18.84. China Mobile was up .7% to 63.75. China Unicom was up 6.5% to 9.14. HSBC was up .6% to 144.6. PCCW was up .2% to 4.81.

The KOSPI was down .4% to 1,420.

The Straits Times was up 1.8% to 2,902.

The Shanghai Composite was up .5% to 2,173.

Data from Reuters

Douglas A. McIntyre

Posted on: December 5, 2006 – 4:41 am in International Markets

Pfizer Setback Disappointing, Not Catastrophic

By Chad Brand of Peridot Capitalist

I was actually planning a broader pharmaceutical post , but in light of the Pfizer (PFE) news over the weekend, I just wanted to talk about them a bit first. Peridot has a small holding in PFE, and will not be selling into today’s weakness. My bias would be to buy more, not sell. The news that the company is abandoning its lead cholesterol-fighting compound is obviously hardly a positive development. However, despite losing a key drug in its pipeline, the reasons I like Pfizer have not changed dramatically with this news.

Pfizer still trades at the lowest multiple in the big pharma group. Investors can certainly argue that such a price is warranted given the issues with their development pipeline, coupled with the fact that they are projecting flat revenues for 2007 and 2008. That said, once growth resumes in 2009 and beyond there will be outsized upside potential with such a depressed stock price. The bar will be set quite low when business begins to turn.

The stock is down more than 10 percent today to $24 per share. The current $0.96 annual dividend puts the stock’s yield at around 4 percent. I would expect a dividend increase to be forthcoming. A boost of 15% or more (to at least $1.10 per share) equates to a 4.6% yield, which is more than that of a 30-year U.S. treasury bond.

A floor on the stock due to the large dividend is not the only reason the shares are attractive at $24 each. Investors should expect accelerated cost cutting measures by management, increased share buybacks to appease upset investors, as well as an increased focus on M&A to boost their product pipeline. These moves will be largely received well on Wall Street, as they will allow the company’s earnings per share to hold up well (and even grow) for the next couple of years until new products can fuel larger growth in the drug business.

With the stock yielding 4 percent and trading at 12 times earnings, the downside for PFE is limited. Don’t get me wrong, this is a longer term play. The stock is not going to $30 overnight. However, the stock will pay you like a long-term bond while you wait for the picture to improve, and if some new blockbuster drugs do come to market over the next several years, there is no reason to think the stock could not reach the 40’s again. Add in the dividend payments and this defensive healthcare play could meaningfully boost portfolio returns over that time.

http://www.peridotcapitalist.com/

Posted on: December 5, 2006 – 4:24 am in Pharmaceuticals

Onyx Pharma Tumbles As Skin Cancer Drug Fails Phase III

From BioHealth Investor

Shares of Onyx Pharmaceuticals (ONXX) dropped more than 30% on Monday after the company announced at a teleconference that its phase III clinical trial evaluating its cancer drug Nexavar failed to treat advanced skin cancer in patients in combination with chemotherapy.

Nexavar, which is co-developed with Bayer (BAY), is already approved to treat kidney cancer.

Both companies are still intent on broadening the potential uses of Nexavar. A late stage trial evaluating its use alone in non-small cell lung cancer was initiated earlier this year, and enrollment for a another late stage study in lung cancer in combination with chemotherapy.

Bayer was very optimistic about Nexavar’s sales potential for the upcoming year as it announced back on November 27 that it expects the drug to reach blockbuster status. In pharma jargon that means it could reach $1 billion in annual sales.

It is not clear how this latest setback will affect that goal.

Shares of Onyx ended trading at $12.18. The stock reached a new 52-week low during the day’s trading.

http://www.biohealthinvestor.com/

Posted on: December 5, 2006 – 4:15 am in Pharmaceuticals

Analyzing Bank of America (BAC)

By Yaser Anwar, CSC of Equity Investment Ideas

  • BAC is doing quite well lately evident by the fact that BAC has had the greatest improvement on a sequential basis of around eight points. The 3rd Q demonstrated the progress that it has made in executing cost saves from the MBNA acquisition. As of September 30, cost savings were $795 million, well above the full year goal of $675 million, and imply a full-year savings of well over $1 billion (the acquisition is accretive in 07).
  • Investors should anticipate the non-mortgage consumer, commercial lending and market sensitive fee-based businesses to drive revenue growth in 2007 as they did in 06.
  • I believe that continued solid credit quality and efficiency improvements are likely to make a positive contribution to the company’s earnings growth. The acquisition of MBNA was an opportunity for BAC to add higher returning loans to its portfolio and help mitigate the effects of a challenging interest rate environment.
  • BAC management needs to show that they can improve the value in having a national franchise and can sustain some meaningful organic revenue growth. The downside to BAC is limited by the ongoing share buybacks and the attractive 4+% dividend yield alongside the low multiple it is trading at.
  • Also- recently BAC mentioned they will be having a new CFO. Joe Price’s circle of competence lies in in finance, auditing and, in particular, risk management make him a solid choice for the position.

Update 1:35 AM- My investment club owns BAC (forgot to include earlier!)

http://www.equityinvestmentideas.blogspot.com/

Posted on: December 5, 2006 – 4:09 am in Financial Stocks

Catalysts That Make Altria (MO) A Buy

By Yaser Anwar, CSC of Equity Investment Ideas

  • With the BOD meeting coming up in January I believe the time to get in MO would be right now. Why? Because MO’s valuation will go up as the timing for the Kraft spin off becomes clear after the Board meeting in January 2007. I also believe the risk reward ratio is favorable- where there is 6 to the downside and 10+ to the upside.
  • Kraft Foods is the largest packaged food company in North America, accounting for 24% of total company sales and 23% of operating profits in 05.
  • Tobacco fundamentals have improved over recent years as deep discounters brought their prices up in response to increased costs and generally in line with premium cigarette price increases. Another positive for the industry is that the proposed cigarette excise tax increases were defeated in CA, MO, and SD.
  • Louis Camilleri, CEO, reiterated on November 16 that MO is committed to providing the details about the spin off on January 31, 2007. Altria shares continue to trade at a discount because some investors remain skeptical that the spin off announcement will occur and are concerned that a spin off will not be allowed by the court.
  • In 04, Kraft announced a three year restructuring program to leverage its global scale, realign and lower its cost structure, and optimize its capacity utilization. The program was expected to cost about $1.2 billion, and Mo projected cost savings of about $400 million by 2006.
  • The main hurdle clouding the prospects of the spin-off near-term is the pending Schwab case, a nationwide class-action suit certified on September 25. The certification was a surprise to investors and the company following the oral argument hearing because many believed the arguments of the plaintiffs lacked the standard to warrant class certification.
  • This Schwab case’s hold back currently reflected in the stock price, which I believe is the main reason the shares have not seen further upside. A successful injunction could result in a significant delay in the breakup of the company as it could be in place until the final resolve in the Schwab case which could take many years as it progresses through the inevitably lengthy appellate process. That being said I do not believe the injunction will be likely.
  • Investors should note that following the class certification, Altria announced that it would postpone its spin off of Kraft until the case was potentially decertified by the 2nd Circuit Court of Appeals. Then one month later reversed its prior decision to postpone the spin off and announced the January 31, 2007 board meeting to finalize the details of the spinoff.
  • According to Goldman Sachs- Altria is the second most important stock for many fundamental hedge funds. Thirty hedge funds hold Altria among their 10 largest single stock positions with an average portfolio weight of 7%. Only Microsoft (MSFT, Buy) is held more frequently by hedge funds among their top 10 holdings. Thirty-seven hedge funds own Microsoft among their 10 largest holdings with an average portfolio weight of 5%.
  • In my view the fundamentals have meant little with respect to the stock price up until this point as litigation and breakup speculation are the primary drivers of the stock. While the fundamentals adequately support the Street’s estimates of a breakup value of $95-$100 per share.
  • I expect improving conditions from PMI in 2007, resulting from higher minimum excise taxes, increasing market share, new products, geographical expansion opportunities and increased pricing opportunities in Western Europe. Considering the challenges for PM USA and improved outlook for PMI alongside the aforementioned analysis I believe the time to buy Altria is before December ends (not to forget the 4+% dividend).

Disclosure: I own Altria shares

http://www.equityinvestmentideas.blogspot.com/

Posted on: December 5, 2006 – 4:08 am in Large Cap Stocks

The Going Out on a Limb Award Goes To…

By William Trent, CFA of Stock Market Beat

Semiconductor Equipment and Materials, International (SEMI) the trade group that brings us the monthly equipment sales statistics.

Chip Equipment Sales Seen Spiking in ‘06: Financial News – Yahoo! Finance

Semiconductor equipment sales are expected to climb to $40.64 billion in 2006, according to a report from an industry trade group.The study, based on survey results from trade group SEMI, projects that after a 12 percent dip in semiconductor equipment sales in 2005, the market is poised to increase 24 percent in 2006, up from $32.88 billion last year.

The survey also forecast the market will grow in the single digits in 2007, and in the double digits in 2008. In 2009, growth is anticipated to be in the single digits with sales expected to hit $50.42 billion.

With the year 11 months over, it is hard to fathom what the forecast adds to what is already known. As for next year, you know where we stand.

The author may hold a position in the securities discussed. The author’s current holdings are as follows: Long: FedEx (FDX) put options; Intuit (INTU) put options; Nasdaq 100 (QQQQ) put options; Bookham (BKHM; Ballard Power (BLDP); Syntax Brillian (BRLC); CMGI (CMGI); Genentech (DNA); Ion Media Networks (ION); Lion’s Gate (LGF); Three Five Systems (TFS); Adobe Systems (ADBE) call options; IShares Japan (EWJ); StreetTracks Gold (GLD); Starbucks (SBUX); U.S. Oil Fund (USO); Plantronics (PLT) call options; Short: Ceradyne (CRDN) put options; Lion’s Gate (LGF) call options; Dell (DELL) put options; Plantronics (PLT) put options

http://stockmarketbeat.com/blog1/

Posted on: December 5, 2006 – 4:06 am in Semiconductor

Landstar cuts profit forecast

By William Tret, CFA of Stock Market Beat

We have written several times about asset-light trucking company Landstar (LSTR.) Today, Landstar lowered its profit forecast.
Landstar cuts profit forecast, cites weak economy | Reuters.com

Trucking company Landstar System Inc. (LSTR.O: Quote, Profile , Research) lowered its fourth-quarter earnings forecast on Monday, citing signs of a slowing U.S. economy and the absence of the usual surge in business at this time of year.In a conference call with investors, Landstar lowered its forecast for the fourth quarter to a range of 44 cents to 49 cents a share, down from a forecast of 47 cents to 53 cents issued Oct. 19.

In the second half of October and the first half of November in particular, “we saw abnormally lower demand than we have historically experienced in this time frame,” Chief Executive Officer Henry Gerkens told investors.

However, demand has recently shown signs of recovering, he added.Gerkens attributed the lower demand to a slowdown in the construction and automotive sectors and, to a lesser extent, in the manufacturing sector.

As we said in other posts, the reason we like Landstar is that trucks are expensive. When they sit idle, the owner still has to make payments on it (even if only in the form of non-cash depreciation expense.) Maintenance costs also don’t entirely go away, though they are reduced some. When revenue slows down or drops, the fixed portion of maintaining a vehicle fleet weighs on earnings.

For the non-asset based transportation providers like Landstar or CH Robinson, these expenses fall to the independent contractors. So while there may be less profit due to less revenue it will still be more profit than there would have been if they had to maintain a fleet.

Today’s news doesn’t change our opinion much. Although Landstar will earn less it is unlikely they will report a loss. The same cannot be said for other trucking companies that own large fleets. Those are the names we would worry about.

Disclosure: We bought put options on FedEx (FDX).

The author may hold a position in the securities discussed. The author’s current holdings are as follows: Long: FedEx (FDX) put options; Intuit (INTU) put options; Nasdaq 100 (QQQQ) put options; Bookham (BKHM; Ballard Power (BLDP); Syntax Brillian (BRLC); CMGI (CMGI); Genentech (DNA); Ion Media Networks (ION); Lion’s Gate (LGF); Three Five Systems (TFS); Adobe Systems (ADBE) call options; IShares Japan (EWJ); StreetTracks Gold (GLD); Starbucks (SBUX); U.S. Oil Fund (USO); Plantronics (PLT) call options; Short: Ceradyne (CRDN) put options; Lion’s Gate (LGF) call options; Dell (DELL) put options; Plantronics (PLT) put options

http://stockmarketbeat.com/blog1/

Posted on: December 5, 2006 – 4:04 am in Uncategorized