Apple Computer (AAPL) #1 [10]

"One more thing...." This is Apple CEO Steve Jobs's famous trademark end to a press conference that is a lead-in to something important. Today, Jobs will utter those words in San Jose at an invitation-only event. The new "thing" must be something compelling in order to reverse the sell-off sparked overnight when Apple reported fourth quarter revenue and iPod sales that fell well short of expectations.

This was the first time in three years Apple has missed sales forecasts. While the company reported record sales of $3.68 bln, up an impressive 56.5% year/year, yet the figure was below the market's consensus estimate of $3.74 bln. Further, as the main driver of the stock's rise from $10 to $50 in two year's time, iPod sales missed the low end of expectations. Apple sold 6.45 mln units, well below the consensus estimate of 7.45 mln, and even the lowest end of the 6.7-8.5 mln range.

In the quarter, which ended on September 24th, Apple earned $430 mln, or $0.50 per share. There were numerous one-off items that skewed the results, including tax benefits and a lower tax rate. Excluding items, Apple earned $0.38 per share, narrowly surpassing expectations by a penny. The shortfall in revenues was the result of lower iPod shipments and sales. iPod revenues increased 126% y/y to $1.2 bln - up 220% y/y and 5% q/q. During the quarter, Apple transitioned from the popular Mini to the latest and smallest generation iPod, the Nano. The newest installment has been hugely successful with Apple shipping a whopping million units in just seventeen days. Apple continues to experience overwhelming demand for the product. The product transition and supply constraints for the Nano are likely causes for the shortfall in sales.

Apple shipped 1.24 mln units, or $1.6 bln worth of PCs in the quarter, up 47.8% y/y and over 3x the growth rate for the industry. Inventories for the Mac ranged from 3-4 weeks, in the comfort zone of where they should be after the key back-to-school season. This quarter Apple enjoyed strong notebook and vertical educational sales. It shipped 602k desktops (+56% y/y) and 634k notebooks - a new single quarter record. The trend towards a higher makeup of portables vs. desktops helped widen margins as portables carry a higher average selling price. The iPod "halo effect" is in full force, as the digital audio player draws in consumers to Apple's Mac suite of products, which represent 60% of total revenues. Management noted that new Mac customers improved by 50 basis points sequentially to 45% at retail. What this suggests is that Apple will continue to take a bigger bite out of the PC market as the conversion rate to Mac endures.

Gross margins of 28.1% beat guidance by 40 basis points due to an improved portable mix and component cost environment. Operating expenses declined 70 basis points to 16.8% of sales. The two cent upside in guidance for the first quarter will do little to quiet concerns of further erosion in iPod sales. Apple expects to earn $0.46 per share in the first quarter on $4.7 bln in sales versus the current consensus of $0.48 on $4.53 bln. The weak top line number reported after Tuesday's close spread like a virus through the technology stocks in Asia and in Europe, as it prompted concerns about a slowdown in consumer spending.

Apple is a victim of its own success, as the market is demanding more and more in terms of growth. Shares tumbled over 8% in pre-market action, but have been paring their losses in regular trading. The market will be waiting anxiously to see just what is Apple's next big thing. Many predict it will be a video iPod, which would bring on more licensing opportunities than the digital audio player and would link Apple into the digital home. Knowing Apple, it could be anything. We would argue investors take advantage of exaggerated weakness as the strength of Apple rests in its imagination and innovation. The company is entering a seasonally strong period with the holidays approaching, which will drive sales for all of its products, from the Nano to the Mac mini. Shares are trading at 34.2x trailing twelve month earnings vs. the 5-yr historical average of 60.0x.

KB Homes (KBH) #2 [7]

14:52 ET, 22 Sep 2005

73.07 +2.35: Bubble, no bubble? Increasing concern about a slowdown in the soaring housing market has weighed on the homebuilding group for the past several months - even as homebuilders continue to report solid growth. Anxiety over rising mortgage rates and surging energy costs have led to somewhat somber expectations for what has been one of Wall Street's best performing sectors during the past few years. Furthermore, waning consumer confidence -exacerbated by the impact and aftermath of Hurricane Katrina - have helped share prices retreat from their July highs.

Despite the market's apparent concern, and subsequent halt in the industry's broad-based rally, positive fundamentals for homebuilders remain mostly intact. With interest rates remaining at historically low levels, combined with strong employment and solid economic growth, the sector's stronger performers are well positioned to weather a slowdown and continue to deliver meaningful results.

To that end, KB Home, which on Thursday posted record third quarter results and raised its outlook for full-year profits, highlights the industry's situation. The Los Angeles-based builder said earnings increased 93% to $227.5 million, or $2.55 per share, during the quarter, compared with $117.9 million, or $1.42 per share, a year earlier. The results exceeded the consensus EPS estimate of $1.39, driven by strong revenue growth and improved operating margin (14.9% versus 11.0% in the year ago quarter).

Revenue rose 44% to $2.53 billion - ahead of the average analyst estimate of $2.50 billion - as housing revenue increased 45%. The company said homes closed in the third quarter increased 22% to 9,812 homes, while orders reached 10,467 homes, up 17% from 8,982 homes in the third quarter last year. KBH stated that "net orders continued to show strength within our operating regions, providing important evidence of the fundamental health of our business." It added, "we continue to see high levels of demand in each of our product offerings - first time, move-up, luxury, and active adult buyers - particularly in markets where housing supply remains constrained."

That, combined with a record third quarter backlog of $7.06 billion, or 27,744 homes - up 47% from $4.82 billion, or 21,928 homes, a year earlier - suggests KB Home is well positioned to deliver strong fiscal year results. Accordingly, the company raised its earnings expectations for FY05 to $9.30 per share, up from its previous guidance of $9.00. The new estimate represents a 63% increase from the same quarter last year and reflects the company's strong year-to-date results and robust backlog levels. On average, analysts had projected earnings of $9.14 per share for the fiscal year.

Given the strength of KB Home's results and relatively favorable near-term outlook for interest rates and operating conditions, continued strong demand is expected to drive growth. In addition, the company's completed formation of Countrywide KB Home Loans, a 50-50 joint venture with the nation's leading home loan lender, should offer homebuyers a broader range of products and help drive higher capture rates in its mortgage business. The new venture should also help increase efficiencies, which should lead to lower operating costs.

Although bubble fears have clouded prospects for the industry, KB Home continues to deliver solid results. Given that business conditions persist in its markets and the pricing environment remains strong, the company is well positioned to perform ahead of its peers. Currently, KBH trades at approximately 8x the FY05 EPS estimate of $9.14.

Bed Bath & Beyond (BBBY) #3 [9]

11:13 ET (22-Sep-05)

37.98 +0.56: Bed Bath & Beyond, which typically meets or exceeds earnings estimates, reported yet another meaningful quarter of growth - topping analyst expectations for the 15th straight quarter. The home-furnishings retailer on Wednesday said earnings for the period increased 17.8% to $141.4 million, or $0.47 per share, compared with $120 million, or $0.39 per share, a year earlier. The latest results were a penny better than the average analyst forecast, according to Reuters Estimates.

Net sales for the quarter jumped 12.3% to $1.43 billion - in-line with the consensus estimate of $1.44 billion - helped by a 4.5% gain in same store sales. The growth in same store sales comes on top of an increase of approximately 4.8% in the year ago period and amidst disappointing results at other home furnishings retailers, including Cost Plus (CPWM), Linens 'n Things (LIN), and Pier 1 Imports (PIR), over the past few quarters.

Separately, as a result of Hurricane Katrina, which struck the Gulf Coast at the beginning of the fiscal third quarter, and its aftermath, the company said that two Bed Bath & Beyond stores in the region have had to suspend operations. Although several other stores were affected by the storm as well, they have since resumed operations. Overall, the impact on operations is expected to be limited.

As evidenced by its solid second quarter performance, BBBY continues to demonstrate fundamental strength with gross margin up 30 basis points to 42.0%, operating margin up 40 basis points to 15.2%, and 10 basis points of SG&A leverage, as well as improving new store productivity. However, the stock, which is down nearly 20% from the 52-week high reached in July, continues to be unduly punished by investors. The decline arguably reflects the company's maturing growth prospects and the lack of upside surprises that BBBY has been accustomed to in the past. Although BBBY continues to generate consistent results, current growth prospects have seemingly been priced into the stock, effectively impeding price appreciation.

Nonetheless, BBBY remains the leader among home-furnishings retailers. Given its still meaningful growth potential, as well as significant opportunity to expand its Christmas Tree Stores concept, the company appears undervalued at the current price level. As such, the recent pullback in shares provides a compelling opportunity to capitalize on BBBY's market-leading position and attractive valuation. Currently, the stock trades at roughly 20x estimated FY06 earnings, a discount to its peers LIN and PIR.

Qualcomm (QCOM) #3 [9]

44.36 +0.94: Qualcomm on Wednesday increased its financial guidance for the fourth quarter and fiscal year ending September 25, 2005, citing strong market momentum for high-speed wireless chipsets. The company, which manufactures and licenses advanced wireless technologies, said it is seeing strength across many geographies in shipments of third-generation CDMA handsets. During the June quarter, both CDMA - the mobile standard in North America - and WCDMA handset shipments increased sequentially in most regions of the world.

Based on the current business outlook, Qualcomm expects to earn approximately $0.32 to $0.33 per share on revenue in the range of $1.48 to $1.58 billion, compared with its earlier estimate of $0.29 to $0.31 per share on $1.43 to $1.53 billion in sales. The revised forecast, which includes a $0.02 reduction for additional tax expenses and $0.01 for investment related income, represents an increase in earnings of around 7% to 10% year/year and sales growth of 8% to 15%. On average, analysts had projected EPS of $0.30 on revenue of $1.49 billion.

Conjointly, the company anticipates FY05 earnings of $1.16 to $1.17 per share with revenue between $5.6 and $5.7 billion, versus the consensus estimate for earnings of $1.15 per share and revenue of $5.61 billion. The latest estimate is based on shipments of roughly 40 million MSM, or Mobile Station Modem, chips during the current quarter. This is in comparison to approximately 39 million in the same period last year. Furthermore, the company estimates June quarter shipments of about 48 million CDMA and WCDMA units at an average selling price of $213, compared to its previous estimate of 43 to 45 million units at an average selling price of about $215.

The improvement in handset estimates, as compared to the prior guidance, was attributed to greater CDMA handset shipments in North America, Latin America, and the rest of the world. In addition, the company highlighted the degree of traction that WCDMA chipsets have received from mobile device manufacturers.

As a result of the healthy sales estimates for mobile chipsets, carried by strong momentum in third-generation wireless technology - which promises to provide consumers with many advanced features and new data services - Qualcomm is well positioned to accelerate earnings and drive multiple expansion. The company's demonstrated ability to respond to market trends, as well as improve its handset performance and pricing in an extremely competitive environment, continues to support growth prospects. As the company, and the industry, transitions to 3G technology, its competitive market position and strong fundamentals should afford it a bounty of opportunities looking ahead. At the current price level, Qualcomm trades at approximately 38x trailing earnings, an enticing valuation compared to the average level of 49x over the past five years.