US AIRWAYS GROUP INC [LCC] shot up 16.8% closing at $59.46 on news that it had made a hostile $8 billion bid for troubled DELTA AIR LINES INC [DALRQ.PK]. This news triggered a feeding frenzy for other potential targets in the Airlines sector. CONTINENTAL AIRLINES INC [CAL] was up 12.3% closing at $43.08, UAL CORP [UAUA] was up 9% closing at $39.99, AMR CORP [AMR] was up 5.4% closing at $32.33, JETBLUE AIRWAYS CORP [JBLU] was up 7.4% closing at $15.13 and NORTHWEST AIRLINES [NWACQ.PK] was up 93.3% closing at $0.84. However, the news was good for all airlines. Regional service providers, like MESA AIR GROUP INC [MESA], REPUBLIC AIRWAYS HOLDINGS INC [RJET] and SKYWEST INC [SKYW] were all down significantly on the assumption that the US AIRWAYS bid could interfere with contracts between DELTA and those regional providers.

EMBREX INC [EMBX] shot up 39.6% closing at $16.64 on the news that Pfizer Animal Health, a division of PFIZER INC [PFE] had agreed to acquire the company for a purchase price of approximately $155 million, or $17 per share in cash. Given PFIZER’s size, there does not appear to be an opportunity here.

RAILAMERICA INC [RRA] rocketed up 27.8% closing at $15.82 on the news that it had agreed to be bought by an affiliate of Fortress Investment Group LLC for about $1.1 billion, or $16.35 in cash per share of RRA. We were just a little tardy on this one, as it popped out on a screen yesterday suggesting it would be an interesting private-equity play.

DAKTRONICS INC [DAKT] jumped 26% closing at $33.60 after reporting very strong fiscal 2007 second quarter results. The company reported net sales of $123.5 million and earnings of $8.9 million, or $0.22 per share, compared with net sales of $75.8 million and earnings of $5.2 million, or $0.13 per share, for the same period last in fiscal 2005. The consensus estimate had been for net sales of $98.42 million and earnings of $0.15 per share. Given the company’s guidance of fiscal 2007 sales at $450 million, an increase of about 14% we find the current P/E ratio of 64 to be much too pricy.

AMERICAN ORIENTAL BIOENGINEERING INC [AOB] was up 17.3% closing at $9.89 after announcing great third quarter results. Both quarterly revenue and earnings more than doubled those of the third quarter 2005. The company expects fourth quarter revenue to be in the range of $37 to $39 million and earnings of at least $0.15 per share, easily topping the consensus estimates of $30.48 million and $0.12 per share, respectively. With a P/E ratio of only 29.17, and no significant debt, this still looks like it has a lot of upside potential.

ARVINMERITOR INC [ARM] advanced 9.1% closing at $17.68 after announcing fourth quarter (ended September 30^th) results that were basically in line with expectations but providing 2007 guidance that was better than expected. The company reported a loss of $261 million, or $3.76 per diluted share, with most of the loss due to a non-cash goodwill impairment charge. Income from continuing operations before special items was $28 million, or $0.40 per diluted share, matching the consensus estimate. The guidance for 2007 is for revenue to be in the range of $8.7 to $8.9 billion and earnings to be in the range of $1.15 to $1.25 per share. The current consensus estimate for 2007 is for revenue to be $8.58 billion and earnings to be $1.07 per share. The Balance Sheet is looking considerably better with a reduction in net debt by $103 million in the fourth quarter and by $501 million over the course of the fiscal year. With only 4% revenue growth over the past year, and a current P/E of about 15.6 it is hard to argue that this stock is undervalued. However, with $400 million in cash flow from operations in the fourth quarter and only $1.18 billion in long-term debt, this could be a private equity target as well.

CAREER EDUCATION CORP [CECO] climbed 7.9% to close at $26.02 on the news that it planned to sell some of its schools and campuses, including the 9 campuses that comprise the Gibbs division; McIntosh College; two campuses belonging to Brooks College; and Lehigh Valley College. The sale will enable CECO to concentrate on its core competencies where it has the greatest competitive advantages and the highest levels of expertise. From this perspective, we think it is a tad early to speculate on the strategy. Generally speaking it makes sense, but before passing judgment, it will be interesting to see how much money is raised by sales and how exactly it is put to use.

ARIAD PHARMACEUTICALS INC [ARIA] was up 7.4% closing at $5.40 on about 5 times the average daily volume with no really dramatic news. Looks like either a short squeeze or the impact of being featured as one of 7 bargain stocks in The Kiplinger Letter http://www.kiplinger.com/magazine/archives/2006/11/seven.html

Daily Sector Performance Chart

It was another strong day in the markets, thanks to encouraging comments following the FOMC meeting, speculation regarding more consolidation in Airlines, and better than expected manufacturing data thanks to the NY Empire State Index. The average gain in the SI universe was 0.79% with 66.7% of the 3,551 members posting positive returns for the day. The big outlier sectors were Airlines (up 4.2%), Alternative Energy (up 4.8%) and Railroads (up 3.9%). Alternative Energy’s big gains were probably due to a press release by PACIFIC ETHANOL INC [PEIX] indicating that it would be delayed in filing its 10-Q for the quarter, BUT that it would be reporting an actual profit for the first time!!! PEIX was up 10%, VERASUN ENERGY [VSE] was up 8.6% and MGP INGREDIENTS INC [MGPI] was up 8%.

The announcement that the GDP grew only 1.6% in the third quarter (versus 2.1% expected) brought the bears out of hibernation. Also, a Goldman Sachs report claiming motherboard demand was falling off a cliff hit the computer and semiconductor sectors pretty hard. This double whammy on Friday, definitely cooled off the markets. On balance, as the third quarter results roll in, they appear to be encouraging for the most part, and while I personally expect a rather harsh landing in the first half of 2007, most corporate balance sheets should be able to weather the storm. We may not appreciate the bump in the year ahead, but I do believe that the correction will be very much appreciated about 5 years from now.

VERTEX PHARMACEUTICALS INC [VRTX] vaulted up 17.6% closing at $40.66 when it announced some very encouraging results in the treatment of hepatitis C. VERTEX’s investigational hepatitis C virus (HCV) protease inhibitor in combination with pegylated interferon was reported to have reduced HCV RNA below detectable levels in 24 of 26 patients treated in early-stage clinical trials.

VISICU INC [EICU] rose on cue 16.4% closing at $8.75 following a strong third quarter. The company reported revenue of $8.2 million, up 68% over the same quarter last year. The company also reported a swing to profitability, with a GAAP operating income of $2.0 million, compared to an operating loss of $35,000 for the same period last year. Net income for the quarter was $0.07 per diluted share, versus a consensus estimate $0.04 per diluted share.

NETGEAR INC [NTGR] LANded up 16.2% closing at $27.48 following a great quarter. Earnings of $0.37 per share easily topped the consensus estimate of $0.32 per share and third quarter net revenue of $151.6 million beat the consensus estimate of $140.4 million. The company projects fourth quarter net revenue to be in the range of $153 to $160 million, compared to the current estimate of $148.27 million. With 22% quarterly growth (year-over-year) and a forward P/E of 19.4, this still looks like a buying opportunity. I’m probably somewhat influenced also by actual bad experiences with some competitive products.

XM SATELLITE RADIO HOLDINGS INC [XMSR] up a sparking 13% closing at $11.94 on a variety of rumors and speculation and a possible short squeeze. Fundamentals here are still not compelling from my perspective.

DECKERS OUTDOOR CORP [DECK] stepped up 9% closing at $53.87 with strong Q3 results and an upgrade by Cowen & Co. from “Neutral” to “Outperform.” Third quarter earnings of $0.83 per share easily topped the consensus estimate of $0.54 per share. UGG sales continued to outpace expectations. Simple and Teva brands are also showing solid growth. Believe the Piper Jaffray downgrade has not been digested yet, so some downside is likely on Monday. Some downward pressure already in after-hours trading.

INTERSIL CORP [ISIL] slipped 9.6% to close at $22.87, on news of the departure of President and COO, Lou DiNardo, who had just taken on the role of COO in January of 2006. While the public verbiage was polite and gracious, it provided little insight into the reason(s) behind the departure. More transparency is needed before considering this an opportunity in either direction.

SILICON IMAGE INC [SIMG] was battered down 17.1% to close at $11.77 after announcing earnings for the third quarter of $0.09 per diluted share on record revenue of $78.3 million, up 39.9% from the third quarter of 2005 and up 11% sequentially. The consensus estimate for earnings had been $0.21 per diluted share. If we add the stock-based compensation back into earnings but still exclude the other special charges, earnings would have come in at $0.19 per diluted share – still $0.02 below expectations, but not enough in our opinion to justify a 17.1% drop. The company also provided fourth quarter guidance that indicated revenue would decrease approximately 3% to 5% sequentially, due to normal seasonality for semiconductor sales. The company is now projecting that revenue growth for fiscal 2006 should come in at 32% to 34%, which is consistent with earlier guidance of 30% to 35%. Given the current P/E ratio of 32.6, this looks like an excellent buying opportunity.

NEXTEST SYSTEMS CORP [NEXT] tumbled 17.1% closing at $10.78 after announcing fiscal first quarter results that were not bad but providing guidance that failed to justify a high multiple. For the quarter ended September 23^rd, revenue was $26.859 million, up 3% sequentially and up 56% from the same period last year. Earnings for the quarter were $0.25 per diluted share versus a consensus estimate of $0.20 per diluted share. The major cause for concern would be new orders of $15.2 million, which the company interprets as being indicative of a slowing in the business environment. While the company should be able to ride through the slowdown, the dependence on relatively few customers is another cause for concern. About 29% of fiscal 2006 revenues came from a single customer (SANDISK). The new Magnum iCP test system for automated testing of CMOS image sensor devices was introduced earlier in the week and should extend the product line into a hot area, so that it is not so dependent on testing just flash memory. The stock was downgraded on Friday by Needham & Co. from “Buy” to “Hold.” Given the high multiple and customer concentration, this remains very speculative.

GEORGIA GULF CORP [GGC] plunged 18.5% to close at $21.93, hitting a 52-week low, after reporting disappointing earnings for the third quarter. Net sales for the quarter were $576.3 million, compared to $525.2 million for the third quarter of 2005, but well below the consensus estimate of $612.25 million. Earnings for the third quarter were $0.66 per diluted share, down from $0.82 per diluted share in Q3 2005, and once again well below the consensus estimate of $1.06 per share. Earnings shortfalls were attributed to higher raw materials costs and a loss of $0.08 per share attributed to a foreign exchange hedge related to the Royal Group acquisition, which was completed October 3^rd and therefore not yet a major factor in the financial results, except for the FX hedge. The stock was downgraded by BB&T Capital Markets from “Hold” to “Underweight” and by Citigroup from “Hold” to “Sell.”

The Daily Sector Performance Chart

With the wet blankets regarding GDP and motherboards, there was pretty much a 180 degree turnabout from yesterday. The average loss for the day was -0.89% with only 22.7% of the members of the SI Universe posting positive returns for the day. The big loser was Construction (down 1.9% on average). While not much to write home about, Mining was an outlier in the positive direction (up 0.3% on average).

It is interesting to examine the distribution of the lags between the end of the reporting period and the actual SEC filing date for publicly traded companies. As mandated by Sarbanes-Oxley, many large companies, defined as “accelerated filers” (those with a public float greater than $75 million, at least one previous 10-K filing and who have been subject to the Exchange Act’s reporting requirements for at least one year), currently have 40 days following the end of the quarter and 75 days following the end of the fiscal year to file their 10Q’s and 10K’s with the SEC. Non-accelerated filers have 45 days following the end of the quarter to file their 10-Q’s and 90 days following the end of the fiscal year to file their 10-K’s.

In December of 2005, the SEC adopted amendments that defined a new category of “large accelerated filers” which is defined as those publicly traded companies with a public float of $700 million or more. As of December 15, 2006, “large accelerated filers” will be required to file their 10-K’s within 60 days of the end of the fiscal year. There will be no change in the deadline for 10-Q’s for “large accelerated filers.”

One might assume that the 40 day grace period would be fully taken advantage of by most companies, especially in view of the penalties associated with errors in reporting financial results. So it is no surprise that as of August 29, 2006, about 35% (or about 1,264) of the top 3,589 publicly traded U.S. companies in market capitalization[1], had exactly a 40 day gap between the end of most recent reporting period date and the filing date with the SEC. So we might ask how the other 65% of the publicly traded companies are distributed.

The actual distribution of gaps between the end of the most recent reporting period and the filing date for a sample of the top 3,589 U.S. companies in market capitalization can be seen in the following chart. Several observations regarding this empirical distribution can be made.

First we observe that there is relatively little early reporting until about three weeks before the deadline. Then there is a very gradual pickup in reporting with obvious gaps for the weekends until we reach 570 filings on the day before the deadline and 1264 on the deadline itself. We should also note that there are non-accelerated filers in the sample which explains the peak at 45 days and presumably a distribution similar to that of the accelerated filer gaps, albeit much smaller.

About 98.1% of the companies in our sample have filed their 10-Q’s within 50 days of the end of the quarter. We publish a list of the really delinquent filers about once per month (the “White Rabbits”). It should also be noted that about 0.5% of the companies in our sample incorrectly specify the end date of the period for which they are reporting (confusing it with the filing date) and these errors had to be cleaned up manually.

The actual shape of the distribution leading up to the deadline is interesting. Since the log of the frequency counts is approximately linear in each of the two weeks preceding the deadline, we are inclined to label the pre-deadline distribution as being exponential and this would be consistent with the assumption that the pressure to complete the filing is inversely proportional to the number of days to the deadline.

Does size matter?

Of course the answer here is yes since non-accelerated filers are allowed 5 more days to file. However, without this effect, companies with a larger market capitalization generally have a tendency to file closer to the 40 day limit. This can be seen in the following scatter diagram of gaps versus market capitalization.

Notice that we use a logarithmic scale for market cap which reveals some rather striking behavior in the distribution. As we have observed above, companies with larger market caps tend to file closer to the deadline.

The Press Release Gap

Regulation FD also has an interesting impact on the distribution of Current Report (8-K) filings that announce quarterly earnings and provide early access to financial statements. Approximately 85% of the companies in our sample, have filed such reports between the end of the reporting period and the most recent 10-Q filing date. This is the same frequency we observed last year as well. The distribution of the gaps between the end of the reporting period and the press release date can be seen in the following chart.

What is striking about this distribution is a clear superposition of a weekly pattern that favors press releases on Tuesday, Wednesday or Thursday, over the course of the three to four weeks leading up to the Sarbanes-Oxley deadline for the quarterly filing.

What about Annual Reports?

The pre-deadline distribution for the gap between the end of the fiscal year and the current 10-K deadline for “accelerated filer” companies is quite similar to the distribution in the quarterly reports.

As in the case of the quarterly reports we see a gradual build-up for 3-4 weeks before the deadline.

We should also note the interesting spike at 90 days (the deadline for non-accelerated filers). Obviously, this spike, numbering 143 companies in our sample of 3,589 companies, corresponds to companies filing their first 10-K or those who have not been subject to filing requirements for a full year and therefore are not defined as “accelerated filers” or those with public floats below $75 million.

As we wrap up earnings season, it seems appropriate to update our list of “white rabbits,” defined as those companies in the SigmaInverse Universe that have not officially filed a 10-Q or 10-K at sec.gov, covering a period that intersects the past 160 days. We should point out that not all of the following companies are necessarily delinquent yet, depending on when their fiscal year ends and the size of the company. However, whatever the situation, the reality is that we don’t have good current visibility for the following companies.

It’s about time for an update on the companies we haven’t heard from in a while. The following companies have not filed a quarterly or annual report covering the last 160 days. Technically not all of these are late, since not all are classified as “accelerated filers.” (For example, NATIONAL BEVERAGE CORP has a fiscal year ending April 30th and is not an accelerated filer, so it has until July 31st to file its 10-K.) In some cases, the companies may have filed recent 8-K documents.