Stock Market Predictions

Knight Capital heads into make-or-break weekend

Stock Market Predictions

Knight was plunged into crisis on Wednesday when it lost $440 million, most of its capital, after a software glitch caused it to make thousands of unintended trades on about 140 stocks.

Knight said on Thursday it was actively pursuing strategic and financing alternatives.

Early on Friday unconfirmed reports that the company had received a line of credit led to a partial recovery in its stock price and helped persuade some major clients to resume trading with the firm.

At least one private equity firm, TA Associates, signed a non-disclosure agreement with the firm, a signal that it was looking at Knight's books for a potential acquisition or investment. TA Associates was not immediately available for comment. Knight did not respond to calls on Friday.

Sources familiar with the plans of some other private equity firms said they would be looking at Knight as well.

But sources at some other U.S. private equity firms that are active in the financial services sector said they had been approached by Knight's advisers Sandler O'Neill but decided not to pursue a deal with the firm.

"To go in fast and take a lot of risk - usually you do that when the terms and the price are safe," said a senior private equity executive whose firm was approached but decided not to pursue Knight.

One difficulty for bidders would be estimating the size of potential legal liability that the company could face in any shareholder lawsuits or enforcement action by regulators. With little time to investigate the reasons for the trading problems, it could be hard to assess the risks before making a deal.

A trader at Knight, asked if he knew who was responsible for the glitch, said: "Everyone was like, not to say pointing fingers at each other, but like 'Who's doing this?' kind of atmosphere. ‘It ain't me. I'm on the program desk. It's not me, I can assure you of that,'" the trader said.

The top U.S. securities regulator said government lawyers are trying to determine if Knight violated a new rule designed to protect the markets from rogue algorithmic computer trading programs.

The Securities and Exchange Commission's market access rule requires brokers to put in place risk control systems to prevent the execution of erroneous trades or orders that exceed pre-set credit or capital thresholds.

In particular, the SEC said it is looking at whether the software used by Knight was properly tested before it was put into use.

Shares of Knight, the nation's largest retail market maker of U.S. stocks, closed up 57 percent at $4.05 on Friday, still well below their $10.33 closing price on Tuesday, the day before the trading debacle occurred.

For a market already suspicious that the system might be fundamentally broken after 2010's "Flash Crash" and the botched Facebook IPO in May, the troubles at Knight have been another blow to investor confidence.

Other Wall Street banks and brokers are poring over their trading systems and rethinking the way they test software to make sure they don't become the next Knight.

Executives at the firms said it was a wake-up call that could prompt them to improve risk management controls. However, at a time when Wall Street is cutting costs, spending money on better systems to test software and manage risk could be an expensive proposition.

"We want to make sure that what happened to Knight doesn't happen to us," said the head of one investment bank.

In a letter to clients, Knight's futures division confirmed that customers' funds for commodity futures trading accounts "are segregated and kept separate from the funds of Knight" as required by regulators.

MOVING QUICKLY

Knight's predicament has become all-too familiar in recent years. During the financial crisis of 2008, several major financial services firms, including Bear Stearns and Lehman Brothers, fought for their survival over a weekend. Bear was rescued and Lehman went under by Monday morning.

More recently, MF Global frantically tried to find a white knight over a weekend and failed, filing for bankruptcy.

Knight faces some of the same challenges in finding a savior over a short period of time. Any buyer will need the ability to move quickly and put up enough capital to make sure that Knight remains a reliable counterparty to its trading partners, financial services bankers and private equity executives said.

A buyer would also have to get comfortable with Knight's financials, and perhaps more importantly its technology, and be sure that the glitch does not happen again, the bankers and executives said.

One private equity investor said he suspects that eventually Knight will get broken up. "Knight has many more businesses than just the equity market making business. Some are good and some are not," he said. "I'm not sure who would want them all."

The company was also in talks with potential buyers, including trading firm RJ O'Brien, to sell its futures brokerage unit, the New York Times reported on its website. RJ O'Brien declined to comment.

SOME RESPITE

Knight got some respite on Friday after the Wall Street Journal reported the company had told brokers it had obtained a line of credit. A line of credit could address concerns that have surfaced as to whether Knight has adequate capital to maintain its trading.

The company would not confirm that report, however. Sources at other firms said that they had heard that news only from reporters.

Then several major customers, including retail brokerages TD Ameritrade and Scottrade, said they had resumed routing trades to Knight, which in 2011 was the largest U.S. retail market maker.

"After considerable review and discussion, we are resuming our order routing relationship with Knight," TD Ameritrade said in a statement.

Earlier on Friday, mutual fund giant Vanguard Group said it was still not routing orders through Knight, and according to people familiar with the situation, Fidelity Investments' brokerage also was continuing to avoid routing customer orders to Knight. Knight's trading volumes remained below usual levels on Friday.

For example, through Tuesday of this year, Knight accounted for 20 percent of the market making activity in shares of Apple, one of the most actively traded stocks on a daily basis. By midday Friday, Knight was the market maker for just 2 percent of the share volume, according to data from Thomson Global Markets Autex, though market makers may not be reporting all trade data.

"A lot of buyside firms have got us on hold for now," said one Knight trader, who did not give his name because he is not authorized to speak to the press.

Market makers such as Knight buy and sell shares for clients and provide liquidity to the equity market by stepping in to buy and sell to insure orderly, smooth activity. The trading snafus have revived questions about the integrity of the equity markets.

'QUIET' ATMOSPHERE AT KNIGHT

Outside Knight Capital's Jersey City offices, security warned reporters not to harass employees. Police officers were also present, and reporters were told to stay off the company's property.

One staffer, toting a set of golf clubs, said, "I don't want to care," when asked how things were going.

Another called the atmosphere at work "quiet, very quiet."

One trader said staff had received no announcements from management as yet but described the atmosphere as "definitely better than yesterday," with people trying to carry on as usual.

But he noted the company's future remained in doubt.

"I thought by this morning we might have heard something. I think a lot of this stuff might get done over the weekend, maybe Monday the latest," he said.

(Additional reporting by Jed Horowitz, Jessica Toonkel Rodrigo Campos, Angela Moon, John McCrank, Hilary Russ, Greg Roumeliotis and Suzanne Barlyn in New York, Ann Saphir in Chicago and Sarah Lynch in Washington; Writing by David Gaffen, Ben Berkowitz and Paritosh Bansal in New York; Editing by Edward Tobin, Lisa Von Ahn, Steve Orlofsky, Leslie Adler, Martin Howell and Carol Bishopric)

Skullcandy shares up on quarterly results beat

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The company, known for headphones sporting bold color schemes and patterns, reported second-quarter net income of $6.8 million, or 24 cents per share. Analysts had expected earnings of 22 cents per share, according to Thomson Global Markets I/B/E/S.

"Topline trends were solid as the company benefited from higher average selling prices and growth at existing customers," Jefferies & Co analyst Randal Konik wrote in a research note to clients.

Skullcandy, which raised $188 million in an upsized IPO last year, sponsors athletes and musicians, including Snoop Dogg.

It competes with Sony Corp (SNE.N) (6758.T) and privately held Bose Corp.

Jefferies maintained its "buy" rating on the stock, but lowered its price target to $20 from $22, saying its expects lower margins in the back half of the year due the company's continued shift to lower-margin products.

The company said it plans to launch its new line of Astro and Skullcandy gaming products as well as new headphone styles in the second half of the year.

Shares of the Park City, Utah-based company traded at $15.22 before the bell on Friday.

(Reporting by Supantha Mukherjee in Bangalore; Editing by Don Sebastian)

Givaudan's H1 margin slip gives rise to dividend fear

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The Geneva-based company, which incurred huge debts with its 2006 acquisition of Quest International from ICI, has said it intends to return more than 60 percent of its free cashflow to shareholders once it reduces its debt ratio to 25 percent.

Though Chief Executive Gilles Andrier said on Friday that the debt target would be achieved early next year, the market was not impressed after the company reported first-half gross margin fell by 90 basis points year on year, to 42.1 percent, hit by costs related to pensions and a factory opening in Hungary.

Givaudan shares were down 5.2 percent by 5:00 a.m. EDT (0900 GMT), while the pan-European chemicals index .SX4P was up 0.7 percent.

Swiss broker Kepler said in a note to clients that the continued pressure on margins could "restart the discussion" about Givaudan's ability to increase its payout this year, adding that the dividend was a key reason for holding the shares.

Margins were also hit by Givaudan using up some of the raw materials purchased at the height of last year's price boom. The company's financial performance is strongly dependent on the prices of key raw materials such as citrus oils and crude oil-related products.

However, the wider picture looked considerably brighter as the company beat forecasts with a net profit of 201 million Swiss francs ($206 million), up 68 percent year on year, boosted by price increases, tight cost control and the absence of last year's one-off costs.

Sales rose to 2.1 billion francs, up 6.9 percent in local currencies, driven by strong demand from Asia and Latin America, with fragrances sales growing by 7 percent and flavors by 5 percent. The average forecast from analysts polled by Global Markets was for net profit of 198 million Swiss francs and sales of 2.1 billion francs.

The company also confirmed its other mid-term targets, saying that it expects to outgrow markets over the next five years. Givaudan is targeting sales growth of up to 5.5 percent, against expectations for broader market growth of 2 to 3 percent, and an industry-leading operating profit margin.

Andrier remained upbeat about business prospects despite stagnating sales in Western Europe. "People are still consuming their daily needs in terms of toothpaste, healthcare and food and beverages," he told Global Markets.

Slowing sales of luxury goods in China did not have any significant impact. "We have very little exposure. China is not yet a fine fragrance market, it is a cosmetics market," Andrier said.

U.S. rival International Flavours & Fragrances (IFF.N) is due to publish its second-quarter results on Wednesday, while Germany's Symrise (SY1G.DE) reports on Thursday.

(Editing by David Goodman)

Hopes dim for Sharp amid Japan's TV industry sunset

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A day after the century-old company warned of an operating loss of 100 billion yen ($1.28 billion) for this fiscal year, Moody's and Standard & Poor's cut their credit ratings and rival Fitch warned that Sharp could lose investment-grade status unless a planned restructuring succeeds.

Sharp's mounting losses, a symptom of Japanese TV makers' increasing uncompetitiveness against rivals from South Korea and elsewhere, leave it scrambling for a fresh cash injection.

Analysts say its future may hinge on whether Hon Hai Precision Industries, the flagship of Taiwan's Foxconn Group, is willing to increase its investment in the ailing firm. S&P in its report cited that relationship as one of the factors it will consider when deciding whether to cut its BBB rating another notch to the last rung of investment grade.

"Sharp has been helped by Hon Hai, they may need more help," said Yuuki Sakurai, CEO of Fukoku Capital Management, the asset management unit of Japan's Fukoku Mutual Life Insurance. "Japan's TV makers are just relying on their past legacies. As long as they depend on TV they will face tough competition."

Revealing expectations for an operating loss this business year of 100 billion yen and announcing 5,000 job cuts, its first in six decades, the maker of Aquos TVs on Thursday insisted it retained the backing of its main banks, Mizuho Financial Group and Mitsubishi UFJ Financial Group.

Investors were unconvinced and dumped the stock, which slid 28 percent on Friday to 192 yen, its lowest level in 36 years and cutting the company's market capitalization by more than $1 billion to $2.72 billion.

SHARE COLLAPSE

Sharp, which got its start 100 years ago making mechanical ever-sharp pencils from which it derived its name, declined to comment on the share collapse.

Adding to Sharp's woe and handicapping its ability to raise fresh funds, Moody's Investors Service on Friday cut the company's short-term debt rating from Prime-2 to Prime-3, the lowest investment grade.

Moody's cited "concern that the company's operating performance and additional restructuring costs will continue to pressure its cash flow downwards, thereby increasing its dependence on external sources for liquidity".

Those external sources so far include Hon Hai, which in March agreed to buy into the ailing TV maker.

S&P's decision to cut its rating came after the Japanese company on Thursday expanded its annual net loss forecast to 250 billion yen from 30 billion yen.

The net loss of 138 billion yen in the three months ended June 30 has already taken a big chunk out of Sharp's capital. Its shareholders' equity ratio slumped to 18.7 percent from 23.9 percent at the end of March, falling below the 20 percent threshold generally considered to be healthy.

"With Sharp's losses growing to this level, there's barely going to be any net capital left," said Makoto Kikuchi, CEO of Myojo Asset Management in Tokyo.

WANING DEMAND

Like rivals Sony Corp and Panasonic Corp, Sharp has been hammered by waning global TV demand and aggressive overseas competitors led by Samsung Electronics that are grabbing a bigger slice of a shrinking pie. Sony's stock fell 7 percent on Friday to 897 yen, its lowest since 1980, while Panasonic was off 3.8 percent.

Combined, the three Japanese TV makers this business year expect to sell around 10 million fewer TVs than they did the previous year.

While Sony has movie studios, an insurance business and a gaming unit, and Panasonic builds batteries and automotive devices that can offset TV losses, Sharp, which invented transistor calculators and pioneered LCD TVs, has fewer options to retool.

Underlining a looming cash crunch, Sharp's credit default swap spreads - the cost of insuring its debt against default - have been widening since February, with the 5-year contract currently at an all-time high of 833.3/1000.

In the past month the CDS curve has shown a dramatic inversion, which means it is now more expensive to buy insurance against default for shorter maturities than longer maturities.

Such an inversion is usually seen in small, fragile companies. (for CDS graphics, click on r.reuters.com/sys79s and link.reuters.com/xys79s)

"The availability and cost of credit will be affected if lenders continue to be concerned about the company's prospects," Fitch said in a report Friday.

Sharp's next financing hurdle is a 200 billion yen convertible bond that matures in September next year. It was issued in October 2006 when the stock was trading above 2,000 yen at a conversion price of 2,531 yen.

"They'll get support from the banks and get through their immediate funding concerns... but they're going to have to do some equity financing to strengthen their capital base," Myojo's Kikuchi said.

HON HAI HELP?

One option for Sharp could be to seek more investment from fellow Apple Inc supplier Hon Hai.

In March it agreed to buy a 46.48 percent stake in Sharp's LCD plant in Sakai in western Japan. Much of the company's losses stem from the underutilized facility.

Hon Hai also agreed to purchase new Sharp shares worth 66.9 billion yen, giving it an 11 percent stake in the Japanese company. Hon Hai has yet to stump up the money for that deal, in which it agreed to pay 550 yen for each new share.

Speculation has swirled that the Taiwanese company may renegotiate given the fall in Sharp's share price, and it said in a statement on Friday that Sharp had agreed it did not need to honor the deal.

"Due to the volatility of Sharp Corporation's share price, Sharp Corporation agrees our company does not need to honor the share purchase agreement signed on March 27, but Sharp Corporation will still reserve the right for our company to purchase the same percentage of shares," Hon Hai's statement said.

Sharp's president, Takashi Okuda, had said on Thursday that Hon Hai would honor the deal at the agreed price.

In June, when Sharp's shares were trading above 400 yen, Hon Hai Chairman Terry Gou told an annual general meeting the firm was in talks with Sharp about increasing its stake. Local media later reported that Hon Hai hoped to seek a board membership in Sharp.

Although saddle with ballooning losses, Sharp remains an attractive partner for Hon Hai because of its research into new technologies such as next generation ultra thin high definition screens and advanced manufacturing processes it has honed at Sakai, the world's most advanced LCD plant.

Sharp, however, may not be easy to woo despite its ballooning losses. Okuda told his company's shareholders at their annual gathering in June that there would be no more capital coming from Hon Hai and that there was no plan to invite Gou or any of his executives to join Sharp's board.

(Additional reporting by Reiji Murai, Mari Saito and Dominic Lau in Tokyo, Clare Jim in Taipei and Umesh Desai of IFR in Hong Kong; Editing by Edmund Klamann and Alex Richardson)

Health Net, WellCare warn on Medicaid squeeze

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The companies, which manage and deliver care for government-sponsored and private health insurance schemes, have been struggling with their Medicare and Medicaid plans as governments scale back reimbursements.

Medicaid, for the poor and the disabled, has been an especially sore point for almost all managed care providers due to high costs.

Health Net shares crashed as much as 27 percent on Friday after the company slashed its full-year earnings forecast in anticipation of higher-than-expected costs and Medicaid spending cuts.

Health Net, which operates mostly in the western United States, now expects per-share earnings of $1.45 to $1.55 for the year, down from its earlier forecast of $2.85 to $3.00.

"We identified specific commercial large group accounts that contributed to increased health care costs early enough this year," Health Net CEO Jay Gellert said.

"We are adjusting rates, modifying network configurations, and taking other actions to achieve substantial commercial improvement in 2013."

The company said much of the cut reflected problems at its western region operations and government contracts segments, where it was grappling with inadequate reimbursement rates for seniors and the disabled.

For the combined western region and government contracts segments, Health Net now expects full-year profit of $1.00 to $1.10 per share, down from the earlier estimate of $2.35 to $2.50 per share. Even the new numbers were too high for some.

"It feels like a bit of a stretch to get to the high end of guidance," Cowen and Co analyst Christine Arnold said in a note to clients.

Meanwhile, WellCare said on a post-earnings conference call that it expects Medicaid reimbursement rates to continue to be "challenging."

WellCare posted a better-than-expected quarterly profit on higher premium revenue, and raised its full-year adjusted earnings forecast to between $5.25 and $5.45 per share.

However, even with the new forecast, full-year numbers could miss analysts' average estimate of $5.41 by as much as 16 cents a share.

Shares of Woodland Hills, California-based Health Net were down about 18 percent at $18.68 on Friday on the New York Stock Exchange.

Tampa, Florida-based WellCare's shares were down 9 percent at $56.59 on the New York Stock Exchange.

(Reporting by Balaji Sridharan, Prateek Kumar in Bangalore; Editing by Don Sebastian, Sreejiraj Eluvangal)

Global Markets Pipes Output

Globus Medical shares rise in market debut

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Shares of the company closed up 13 percent at $13.50 on the New York Stock Exchange.

Earlier in the day, they rose as much as 22 percent to touch a high of $14.63.

The company sold 8.3 million Class A common shares at $12 per share.

The Audubon, Pennsylvania-based company cut both the number of shares it expected to sell and their expected price range on Thursday.

It had initially expected to sell 11.8 million shares for between $16 and $18 per share.

BofA Merrill Lynch, Goldman Sachs and Piper Jaffray are the underwriters to the offering.

(Reporting by Jochelle Mendonca and Ashutosh Pandey in Bangalore; Editing by Supriya Kurane, Sreejiraj Eluvangal)

Incyte shares fall on new revenue recognition model

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The company, which posted a quarterly profit for the first time in six quarters, reported strong sales of the drug Jakafi in the second quarter, but said it was adopting a sell-in method for revenue recognition.

With the sell-in method, the company will recognize revenue when its product is received by the pharmacy, as opposed to the sell-through method, where a sale is clocked only when the pharmacy fills a prescription for a patient.

The company now estimates full-year sales of between $120 million to $135 million for Jakafi.

ThinkEquity analyst Mani Mohindru said "the outlook was not very clear cut and this is getting reflected in the stock."

Incyte shares were trading 20 percent down at $19.87 afternoon on the Nasdaq. They had touched a low of $17.75 earlier in the day.

"There was a lot of confusion around the guidance and what was built in to the guidance, like what kind of growth to expect going forward, and what the growth trajectory for Jakafi would be like quarter-over-quarter," Mohindru said.

Jakafi, the first drug to specifically treat the rare bone marrow disease myelofibrosis, received U.S. regulatory approval last year.

For the second quarter ended June 30, the company earned $4.0 million, or 3 cents per share, compared with a loss of $51.9 million, or 41 cents per share, a year earlier.

Revenue rose more than 400 percent to $86.5 million.

Analysts on average were expecting the company to break even, on revenue of $84.6 million, according to Thomson Global Markets I/B/E/S.

(Reporting by Shailesh Kuber & Prateek Kumar in Bangalore; Editing by Saumyadeb Chakrabarty)

Two cheers from Vestas for U.S. wind tax credit shift

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Senate tax writers late on Thursday approved a $205 billion package of tax breaks in which the $12 billion production tax credit for wind energy was added back into the Senate Finance legislation.

The production tax credit for wind energy had been omitted from an earlier draft.

"I am positively surprised that they have revived this tax credit, but as far as I see it, there is still a long way to a final adaption," said Sydbank analyst Jacob Pedersen.

Vestas, the world's biggest wind turbine manufacturer, has repeatedly warned that failure to extend the Production Tax Credit (PTC), due to expire at the end of this year, could lead to a collapse of the U.S. wind turbine market and force it to cut 1,600 U.S. jobs.

Introduced in 1992, the PTC provides a tax credit of 2.2 cents per kilowatt-hour of electricity produced.

The last time politicians abolished PTC in 2002 led to a 75 percent collapse in the U.S. wind turbine market from one year to the next, according to the American Wind Energy Association.

Earlier this year, Vestas cited IHS Emerging Energy Research (EER) as saying there was a risk of the U.S. market dropping from about 11 gigawatts in 2012 to just over 2 gigawatts in 2013 if the PTC is abolished.

Shares in Vestas traded up 3.2 percent by 0717 GMT, against a 0.3 percent rise in the Copenhagen bourse's benchmark index .OMXC20 of the 20 most valuable and most traded Danish stocks.

Shares in the struggling turbine maker on Tuesday spiked over 20 percent and closed up 11.6 percent after it said it has agreed with its banks to delay a test of its borrowing rules and reported preliminary second quarter results.

(Reporting by Mette Fraende and Teis Jensen, editing by William Hardy)

Obagi Medical shares down as buyout chances recede

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Cantor Fitzgerald analyst Irina Rivkind said the Obagi stock has been driven primarily by deal speculation over the last few months and discouraged retail investors could pull out of the story. "Deal seems unlikely for some time."

The stock gained 30 percent since February 10 until Thursday's close, after Obagi's shareholder Voce Capital Management urged the company to evaluate strategic alternatives.

In response, the company adopted a poison pill, which was later voted down by its shareholders.

The company on Thursday posted quarterly results above analysts' estimates.

However, analysts were not enthused and said there was a lack of clarity on an on-going inquiry into the company's sale of hydroquinone products in California, and progress on its e-pharmacy initiative.

The company is facing an inquiry into the methods by which it sells hydroquinone products.

Obagi's key product line -- the Nu-Derm System -- offers treatments for anti-aging and contains 4 percent hydroquinone as its key ingredient.

The Nu-derm product brought in half of its second-quarter revenue of $30.5 million.

The company had faced a regulatory issue with hydroquinone products in Texas last year, after which it had ceased marketing these products in the state.

After an investigation the complaint was withdrawn, and Obagi reintroduced its products with hydroquinone into the Texas market after a gap of a little over a year.

Cantor analyst Rivkind said the company is still suffering from the marketing disruption in Texas.

The brokerage cut its rating on the company's stock to "hold" from "buy".

Canaccord Genuity cut its price target on the shares to $19 from $21.

"Given this uncertainty in California, the recent re-entry into the Texas market and spending initiatives, we believe 2012 will be a transitional year and expect investors to remain cautious," Canaccord analyst William Plovanic said.

Plovanic said Obagi's investments into its e-commerce initiative will depress near-term earnings.

Obagi's shares were down 22 percent at $11.64 in late-morning trading. The stock, which touched a six-month low of $10.70, was one of the top losers on the Nasdaq.

(Reporting by Shailesh Kuber in Bangalore; Editing by Maju Samuel)

Shares of Internet darling LinkedIn, media stalwart CBS jump

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LinkedIn reported that second-quarter revenue rose almost 90 percent and raised its full-year outlook on Thursday. Its shares were up 12.1 percent at $104.80 on Friday morning on the New York Stock Exchange.

"The company just appears to get better in what would otherwise seem to be a very tough environment," Evercore analyst Ken Sena wrote in a note.

Meanwhile, CBS posted a quarterly profit on Thursday that beat analysts' forecasts and signaled that its network will benefit from demand for political commercials before the November U.S. presidential election.

Shares of CBS were up 5.4 percent at $34.84 on Friday morning.

In a note to investors, UBS analyst John Janedis wrote that for CBS "the earnings momentum story of the past two years continues to play out."

(Reporting by Jennifer Saba in New York; editing by Matthew Lewis)