From Briefing.com: Looking at the Philadelphia Semiconductor Index (SOXX 484.56 +5.82), which closed up 1.22%, one would not think the selling in tech shares continued on Wednesday. In fact, tech shares closed down, on average, 1.5%. Decliners outnumbered advancers 2.4:1, with decliners losing 3.4% and gainers adding 2.5%. This compares unfavorably against the SOXX where advancers led decliners 2:1, with advancers rising 1.8% and decliners shedding 1.4%.
Within the broader Briefing.com Tech Index, decliners sported higher P/SG (price-to-sales/sales growth) multiples than advancers, offering support for our thesis that there is a bifurcation taking place within the market, between the richly valued and the less richly valued names. Interestingly, the decliners in the SOXX were companies with weak competitive positions, suggesting a flight to quality. But these companies sported lower P/SG multiples than advancing stocks, suggesting investors are willing, at least for now, to trade into quality names regardless of price. This can only hold for so long.
Near-term, the direction of greatest resistance for tech shares is higher. Gains will be limited near-term by the growing fear of a rate increase and concerns over valuations that already price in growth and margins expectations that far exceed actual performance. While we remain modestly bullish on tech over the long-term, we stress the need to be highly selective and would continue to protect gains as opportunities permit.--Ping Yu, Briefing.com
Group % Change % Change Advancers % Change Decliners Ratio Advancers to Decliners P/SG Advancers P/SG Decliners
Philadelphia Semiconductor Index 1.2% 1.8% -1.4% 2.0:1 5.1 2.3
Briefing.com Tech Index(based on a composite of over 1000 tech companies) -1.5% 2.5% -3.4% 0.4:1 1.6 1.8
Audio & Video Equipment -1.1% 0.7% -2.5% 0.3:1 0.5 0.6
Communications Equipment -2.5% 2.3% -4.5% 0.4:1 1.9 2.0
Communications Services -1.1% 2.1% -2.7% 0.4:1 1.0 1.1
Computer Services -1.2% 2.9% -3.2% 0.4:1 1.8 1.9
Computer Sys & Peripherals -2.0% 2.8% -4.3% 0.4:1 1.5 1.6
Electronic Instruments & Controls -1.4% 2.1% -3.2% 0.5:1 1.3 1.4
Scientific & Technical Instruments -1.6% 3.1% -3.2% 0.3:1 1.1 1.5
Semiconductors -1.7% 3.1% -3.6% 0.4:1 3.4 2.8
Software & Programming -1.3% 2.4% -3.1% 0.4:1 1.8 1.8
6:08PM Wednesday After Hours prices levels vs. 4 pm ET: A few technology-related earnings announcements have predominated the after hours trade, but other than that, it has been a relatively quiet session that has been keeping with the recent slowdown in activity. Presently, the S&P futures, at 1061, are 2 points above fair value, and the Nasdaq 100 futures, at 1389, are flat with fair value.
Triquint Semiconductor (TQNT 7.30 +0.31) raised its Q4 (Dec) outlook citing strong booking and order trends. Having already issued better than expected earnings guidance at the time of its Q3 (Sept) report, the small-cap semiconductor company said that it expects to report revenues of $85-87 mln (consensus of $82.7 mln) and operating income at breakeven to a slight profit. Looking out to 1Q04 (Mar), management forecasted revenues at $77-80 mln - seasonally down from 4Q03's result due to the holiday selling season for wireless phones.
Atmel (ATML 5.90 +0.51) also increased its Q4 (Dec) forecast, which has sent the stock 9% higher in the extended session. The designer and seller of IC products now anticipates revenues rising 7-10% sequentially - versus earlier projections of 3-6% sequentially - that equates to roughly $358.7-368.7 mln (consensus of $347.9 mln). The company noted that gross margins are also on track to be stronger than expected thanks to increased utilization, richer product mix, and a stable pricing environment. Competitors of ATML include the likes of AMD, HIT, INTC, LSI, MCHP, and STM.
Altera (00C0 21.97 -0.92), however, just reaffirmed its Q4 (Dec) revenue guidance, and that lack of upside has contributed to the stock's 4% decline. Management said it still looked for revenues to rise 2-5% sequentially, to approximately $214-220 mln. The Reuters Research consensus estimate was set at the mid-point of the range, at $218.2 mln. ALTR's chief rival - XLNX - has also weakened tonight.
Turning to the biopharmaceutical space, Conceptus (CPTS 10.35 -0.51) stock has taken a hit following the company's Q4 (Dec) warning. Conceptus now expects to report revenues of $2.2-2.4 mln and a net loss of $0.39-0.42 as compared to the Street's expectation of $2.7 mln and a loss of $0.39, respectively. As a result of the Q4 shortfall, management also lowered its FY04 (Dec) forecasts below those of consensus estimates. Conceptus is the manufacturer of Essure, a proprietary, non-incisional, permanent birth control device for women
Finally, Caterpillar (CAT 76.02 +0.02) announced that its Chairman and CEO, Glen Barton, will retire on January 31, and be succeeded by James Owen. The company noted that Barton turns 65 in August 2004, which is Caterpillar's mandatory retirement age.
For complete coverage on these, and other developments, be sure to visit Briefing.com's Stock Market Update and Daily Sector Wrap pages. -- Heather Smith, Briefing.com
3:20PM Overland Storage (OVRL) 18.50 -0.24 Overland Storage is a play on the continuing growth of the data storage market. Would buy at current level with a 9-18 month horizon.
Market Opportunity
The volume of digital data created each year continues to grow in excess of 50% Y/Y, driven by the Internet, e-mail, graphics and multi-media applications. This growth places an enormous load on storage systems. Within data storage, the $3B tape automation market is forecast to grow in the mid- to high-teens through 2005, with mid-market solutions growing in the low-20% range.
Company Background
Overland Storage is one of the largest provider of mid-range automated tape storage solutions used by businesses for backup, archival and data exchange functions with a 57% share of the DLT-based segment and 45% of the 8mm-based segment (Freeman Reports data as of 2001). Solutions are designed around a modular, scalable architecture that enables customers to purchase, as needed, incremental 24/7 high availability storage that can be integrated into a single system. Products include automated tape libraries, powerloaders and loaders which combine electro-mechanical robotics, electronic hardware and firmware. OVRL also distributes products manufactured by other OEMs (original equipment manufacturers).
Competitive Position
Strategic. Marketing partnerships with Hewlett-Packard (HPQ 22.11 +0.15) and IBM (IBM 92.47 +1.84) provide OVRL with marketing and distribution reach even as the company expands its sales force and reseller network, and pursues opportunities globally. Solution partners include Brocade (BRCD 5.48 -0.01), Computer Associates (CA 23.08 -0.13), IBM and Veritas Software (VRTS 35.32 -0.79). Financial. Strong balance sheet: Quick Ratio of over 3:6. Management. Capable, aggressive team executing on business plan.
Technology / Product Innovation. Patented tape encoding technology (Variable Rate Randomizer or "VR 2") licensed to Imation Corp (IMN 33.67 +0.15), Quantum (DSS 2.91 -0.08), Seagate (STX 17.81 -0.89), Storage Technology (STK 23.90 +0.21) and Tandberg Data ASA. Large percent of products incorporate Quantum's DLTtape drives. ORVL does not have a long-term contract with Quantum; has not qualified Tandberg, a licensed manufacturer of Quantum DLTtape drives, as an alternative supplier.
Cost Competitiveness. Solutions are priced, on a per cartridge basis, at as much as one-half of competitors' offerings. Tape automation products compete against products from Advanced Digital Information (ADIC 12.53 -0.17), Quantum and Storage Technology. Disk-based and software products compete with products from Computer Associates, Hewlett-Packard, IBM, EMC Corp (EMC 12.31 +0.05), Network Appliance (19.73 +0.10), Quantum and Veritas Software, among others.
Customers. Concentrated customer base a minor risk in light of improving information technology spending environment and demand trajectory for data storage solutions. Hewlett-Packard accounts for over 60% of revenue.
Recent Performance
Revenue. Q1 (Sept) revenue grew 63.8% Y/Y to $56.6MM in what is normally a seasonally weak quarter. Customer: OEM (65% of sales) revenue grew 92% Y/Y as company expanded relationship with Hewlett-Packard and sales to new customer IBM grew 83% Y/Y. Overland Branded (35% of sales) revenue grew 32% Y/Y across all geographies. Geographic: U.S. sales (~57% of revenue) grew 30% Y/Y; Europe (~37% of revenue) increased 11% Y/Y (U.K. ~27%; Europe ~10%); Asia-Pacific (6%.of revenue) grew 3x Y/Y. Margins. Gross margin improved 140 bps Y/Y to 27.5% as a result of better economies of scale on higher sales. Management has not published margin guidance. We look for further gross margin expansion as OVRL achieves broader market acceptance and realizes unit volume manufacturing efficiencies off larger revenue base.
Operating margin improved by 850 bps Y/Y to 5.9% on firm cost control against rising sales. Sales and marketing, expense as a percent of sales, improved 360 bps Y/Y to 13.9%. General and administrative expense as a percent of sales improved 170 bps Y/Y to 3.2%. R&D as a percent of sales improved 160 bps Y/Y to 4.6%.
Valuation
On an inverted DCF/EVA basis, assuming steady Y/Y improvement in operating margin to 15% by F07, OVRL's valuation implies that management must grow revenue by 15% per year for the eight years beginning in F06 in order for investors to justify owning shares at current valuation.
On a price multiples basis, OVRL trades at 1.04x F04 revenue of $237.0MM (+21.0% Y/Y) and 0.9x F05 revenue of $261.5MM (+10.3% Y/Y); 21.5x F04 EPS of $0.86 and 18.9x F05 EPS of $0.98; reasonable multiples given operating performance and sector outlook.
Summary
Worldwide information technology spending and trends specific to the data storage market support revenue growth in the mid- to high-teens. OVRL is seeding the market for parts by aggressively pricing solutions. This strategy allows company to continue taking market share near-term, and helps drive revenue growth in excess of the low-20% range for the mid-market segment. Long-term, expect company to sell more parts and drives into a broader client base. We think management can sustain top-line growth of at least 20%, implying a 30% upside to current price. On a price multiples basis, shares are priced at a 45% discount to computer systems and peripherals comparables. We think the market will narrow this gap within 9-18 months. Would buy at current level.--Ping Yu, Briefing.com
4:07PM Atmel raises Q4 rev guidance above consensus (ATML) 5.39 -0.31: Company now sees Q4 revenues of approx $358.7-368.7 mln (up about 7-10% from Q3), vs the Reuters Research consensus of $347.9 mln, based on stronger-than-expected gross margins.
4:06PM TriQuint Semi raises Q4 guidance (TQNT) 6.99 -0.08: Co raises Q4 guidance to $0.03-$0.04 in GAAP EPS, 32-33% gross margins, and $85-$87 mln in sales; previous guidance was ($0.02-$0.04) in EPS, 30-32% gross margins, and $80-$83 mln in revs. "We are updating and raising our guidance for Q4 2003 because our shipments and bookings have been very strong so far this quarter. End market demand for our products for wireless phone applications has been extremely strong. We continue to gain share with our new products and continue to execute our plan to reduce costs and improve profitability."
11:57AM PLAB upgraded to Overweight at ThinkEquity; target $29 17.81 +1.03: -- Update -- ThinkEquity upgrades Photronics (PLAB) to Overweight from Equal Weight, as they believe the more stable pricing environment for photomasks and better yields at second tier foundries bode well for the co; although Q4 results and Q1 guidance are lackluster, firm believes Q2 (April) should represent an inflection point for PLAB; maintains $29 target. Firm also reiterates their Strong Buy on DPMI, which is a peer of PLAB and exposed to the same industry drivers.
11:02AM Intel to combine Communications groups (INTC) 30.02 -0.23: Co announces it is combining its communications-related businesses into a single organization: the Intel Communications Group (ICG). Separately, the company announced that Ron Smith, Intel senior vice president and general manager of Intel's WCCG unit, will retire early next year.
10:14AM ESST upped to Buy from Hold at Amtech 15.85 +2.06: American Technology Research upgrades ESS Tech (ESST) to Buy from Hold following this morning's upward guidance. With worldwide demand for digital entertainment products (VCDs, DVDs, DVRs) continuing to grow, firm believes that the current level represents an excellent entry point, and that there is significant upside in stock.
9:09AM Ratings Briefing - EMC : Goldman Sachs upgraded EMC Corp. (EMC 12.26) to Outperform from In-Line, as it believes the recent sell-off presents an attractive opportunity. Firm thinks their is a strong likelihood that its above-consensus estimates represent the base case for the company, and says that over the last 6 months its checks with users have increasingly named EMC as the vendor of choice in the storage space; target is $15.
What It Means:
Outperform at Goldman Sachs means stock is expected to outperform the median total return for the analyst's coverage universe over the next 12 months (that universe for analyst, Laura Conigliaro, includes HPQ, NTAP, IBM, DELL, STX, SUNW and STK [source: Bloomberg])
An impact call that will invite buying interest as Goldman Sachs has influence and expansive customer reach to move big-cap stocks like EMC
Firm's belief that recent sell-off presents attractive opportunity will pique interest, too, especially since EMC boosted its Q4 sales forecast this morning (after Goldman call hit wires) to $1.8-1.825 bln from $1.74-1.78 bln (consensus $1.747 bln)... revision includes $30-35 mln in sales from Documentum acquisition, which is expected to close Dec. 18
EMC getting pleny of bullish attention of late from analyst community as Briefing.com's Upgrade/Downgrade archive for EMC is littered with upgrades dating back to May 14, 2003... Still room for upgrades, too, as current ratings distribution is as follows: 9 Buy; 6 Outperform; 10 Hold [source: Reuters Research]
Sidenote: Firm also downgraded Brocade (BRCD) to In Line from Outperform, but raised its view of the IT Hardware sector to Attractive from Neutral, noting that 2004 budgets are firming at the same time that expectations are fast becoming more rational.-- Patrick J. O'Hare, Briefing.com
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I am open to suggestions on possible investments that have not really taken off yet myself.
RtS |
