11:27AM Ratings Review - Semiconductors : Few groups have been as hot as the semiconductor group during the market rally, but increasingly, analysts are starting to throw some cold water on the fire. Today, Morgan Stanley is doing its part to cool the group down with a downgrade of the sector to In-Line from Attractive.
The firm shifted to a more cautious sector stance due to a belief that the risk-to-reward relationship is becoming less favorable given the sharp stock price increases in recent months and the potential that near-term earnings risk may increase. We should add, however, that Morgan Stanley did acknowledge that it thinks industry fundamentals are improving.
The latter contention aside, Morgan Stanley's reservations about the existing risk-reward relationship have stymied a number of semiconductor stocks today for a couple of reasons. First, it follows in the wake of some disappointing guidance from Texas Instruments (TXN 18.46 -1.93), which fits with the firm's concerns about near-term earnings risk. Secondly, it comes from Mark Edelstone, one of the more widely-followed, and respected, analysts covering the semiconductor sector.
Briefing.com is in agreement that the semiconductor stocks are over-extended, and with earnings warning season about to heat up, we would suggest using the latest rally effort as an opportunity to take some profits considering the stocks have been driven to a point where there is little room for disappointment.-- Patrick J. O'Hare, Briefing.com
10:29AM Texas Instruments (TXN) 18.51 -1.88: After the bell last night, Texas Instruments (00C), the designer and manufacturer of semiconductor products, announced that sales in 2Q03 were tracking to the lower end of previous guidance. The shortfall in sales is primarily due to reduced sales of semiconductors to its wireless customers. As a result of this, the Company lowered its sequential revenue growth estimate from 7% to 5% and lowered its projected EPS to $0.06 from $0.08 per share. Both EPS estimates are "plus or minus a few cents."
Current consensus estimates, which Briefing.com expects to come down in the near future, have the Company earning $0.08 per share and posting revenues of $2.33 bln in the coming quarter. Analysts had expected sequential revenue growth of 6.5% for 2Q03.
Another reason for the shortfall in earnings stems from restructuring charges for an operating facility in Japan. TXN stated that there was a reduction of about 250 jobs at that plant, which ended up boosting restructuring charges to $55 mln from the previous projection of $40 mln. Management stated that TXN's other business segments, sensors & controls and educational & productivity solutions remain on track to meet original expectations.
With three weeks left in the quarter, the Company is hoping for a pickup in business, yet management had enough visibility at this juncture to state that it expected lower gross margins in the quarter. TXN went on to state that 3Q (Sep) is historically the best quarter for gross margins, and it expects that trend to continue. At the same time, the Company did not want to estimate if the excess inventory would produce a large hit to 3Q revenue. The inventory issue also provided an interesting question of whether analysts should build in deferred revenue or expect a charge or a loss. It was a question that management didn't answer.
Analysts noted that with Motorola (MOT) and Nokia (NOK) lowering estimates, SARS was to blame. TXN stated that SARS did play a role in the slowdown in sales and noted that China represents about 15% of its Asian market. In trying to get a handle of possible 3Q effects, analysts questioned the amount of inventory that had backed up, but TXN noted that its distributors would have that number and it didn't have that kind of visibility.
On the heels of this announcement, several brokerages downgraded the stock this morning, as prospects for the third quarter remain unclear. The lack of visibility in the business and the decline in wireless revenue seems to be outpacing the decline in shipments. This generally leads Briefing.com to believe that ASPs and/or margins will come under pressure in this quarter, and likely, the next as well. This negative outlook is something that investors should be cognizant of when looking to make an investment, especially when the stock already carries a lofty 28x PE for the next fiscal year. --Brian Bolan, Briefing.com
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