From Briefing.com: Investors continued taking profits in large cap tech on Wednesday but kept money in tech shares by rotating into smaller names. The Philadelphia Semiconductor Index (SOXX 541.92 -3.18) eased 0.58%. Decliners outnumbered advancers 1.3:1; decliners fell 1.4% and advancers edged up 0.8%. The Briefing.com Tech Index (BTI) rose 1.1%. Advancers outnumbered decliners 1.6:1 in a reversal of Tuesday's action; advancers rose 3.3% and decliners shed 1.9%. The Nasdaq Composite (IXIC 2111.13 +14.69) edged up 0.70%.
After the close, Apple Computer (AAPL 24.20 +0.08), Intel (INTC 33.39 -0.20), Teradyne (TER 26.62 -0.13) and Yahoo! (YHOO 48.80 -0.94) posted results above Reuters Research consensus estimates. Apple shipped a higher than expected number of iPods. Management guided for Q2 EPS of $0.08-0.10 on revenue of $1.8B vs. consensus at $0.07 on $1.690B. Intel experienced robust demand for laptop and server processors, and is seeing a pickup in enterprise spending. TER is seeing strong demand for test equipment and guided for GAAP EPS of $0.10-0.18 on $400-430MM vs. consensus at $0.05 on $361.53MM. QLogic (QLGC 50.36 -1.95) disappointed by coming in slightly below consensus.
Looking ahead, IBM (IBM 90.31 +1.44) moved up their earnings report by a week and will report before the open Thursday; Fairchild Semiconductor (FCS 25.86 +0.36), Juniper Networks (22.69 -0.32) and Sun Microsystems (SUNW 5.46 -0.04) report after the close on Thursday.
After hours trading in AAPL, INTC, QLGC, TER and YHOO shares underscore the high expectations priced into tech shares. We have frequently spoken to the need for selectivity because of the high valuations accorded tech companies. We remain moderately bullish on technology shares over the long-term as we think tech sector fundamentals offer some of the best opportunities for revenue growth and margins expansion. However, tech shares will exhibit above average volatility near-term given high valuations. In particular, investors need to closely monitor semiconductor capital equipment names, which often trade at unsustainable multiples given sector fundamentals. We would take advantage of the volatility to buy into quality, attractively priced names / sell richly priced shares into strength as part of a rebalancing of the tech portion of the portfolio to a neutral market weight. Please visit the Story Stocks and Daily Sector Wrap pages for the latest thinking on investment opportunities across market sectors, and the Page One, Looking Ahead and Economic Briefing pages for broad market perspective and outlook. For active investors and traders, visit the In Play, Swing Trader, and The Technical Take pages for actionable ideas.--Ping Yu, Briefing.com
6:56PM Wednesday After Hours : prices levels vs. 4 pm ET: Intel (INTC) was supposed to be the big story of the night, but JP Morgan (00C)/Bank One (ONE) stole the show with a Wall Street Journal article saying that the two would be merging. The deal would create the nation's second largest financial institition in terms of market-cap, and was actually anticipated by Lehman Brothers in a call Briefing.com profiled on January 9.
The other news items of the evening have been mostly upbeat, but have failed to live up to the market's expectations. Earnings were ahead of Street estimates, but in some companies' cases - Intel specifically - benefited from outlying events (such as a lower tax rate). As a result, the S&P futures, at 1127, are 2 points below fair value, and the Nasdaq 100 futures, at 1520, are 17 points below fair value.
The below table shows tonight's headliners, and the reasons behind the stock's resulting move:
After Hours Mover % Change Move Reason for Move
Apple Computer (AAPL) -5% Computer system maker tops Reuters Research Q1 (Dec) consensus EPS and revenue estimates handily and guides Q2 (Mar) higher; Shares 5% rally in the past 5 days leads some traders to sell into strength; Briefing.com recommended investors accumulate AAPL on pullbacks in our Story Stock this morning
Genentech (DNA) +1% Leading biotech company shows upside to Street estimates in Q4 (Dec) report; Genentech boasts one of the best pipelines in the sector with Avastin, its colorectal cancer drug, likely to receive FDA approval in Q1 (Mar)
IBM (IBM) +2% Computer hardware/services company moves up its Q4 (Dec) earnings release date to tomorrow before the open (from January 20 earlier); Stock gets a lift as traders wager IBM has something positive to announce; Reuters story also indicates the company is likely to beat the consensus due to favorable currency exchange
Intel (INTC) -3% World's largest semiconductor company tops the Q4 (Dec) consensus EPS expectation by $0.02 after sorting through multiple charges; Earnings also benefited from a tax rate of 15.8% (lower than its expectation of approximately 32%); Stock takes a hit from this, as well as the fact that INTC has run up 8% since mid-December
JP Morgan (JPM)/Bank One (ONE) JPM -5%; ONE +10% WSJ reports that JP Morgan will be acquiring Bank One in a deal valued at approximately $60 bln; Bank One CEO Jamie Dimon is rumored to assume the helm of the new company in two years; Deal follows Bank of America's (BAC) proposed acquisition of FleetBoston (FBF) in October and is indicative of further industry consolidation
Yahoo! (YHOO) -4% Internet company matches Q4 (Dec) consensus EPS forecast, and guides Q4 and FY04 revenues in-line; Trading at 88.9x estimated FY04 earnings, traders take profits off the in-line outlook
In addition to IBM, the market will have to sift through a number of earnings reports tomorrow before the open - most of them coming from financial companies like Bank of America (BAC) and FleetBoston (FBF). Economic reports are also aplenty, with Retail Sales, Intial Claims for the week of January 9, and the Philadelphia Fed Index (the latter due out at 12 ET) - be sure to visit Briefing.com's Economic Calendar for a preview of the data.
For more detail on these, and other developments, be sure to visit our Stock Market Update and Daily Sector Wrap. -- Heather Smith, Briefing.com
4:50PM Intel earnings clarification (INTC) 33.39 -0.20: -- Update -- Reuters Research is telling us that, as we suspected, the earnings actual that compares to their consensus is $0.27, beating by $0.02. This includes the previously announced $0.06 goodwill impairment charge, but excludes the $0.06 additional tax benefit.
4:40PM QLogic beats by $0.02, ex items, light on revs (QLGC) 50.36 0.00: Reports Q3 (Dec) pro forma earnings of $0.39 per share, $0.02 better than the Reuters Research consensus of $0.37; revenues rose 20.1% year/year to $137.1 mln vs the $137.6 mln consensus.
4:38PM QLGC falls 1.90 pts after revs come in under consensus:
4:38PM QLGC prelim $0.39, 2 cents ahead; revs $137.1 mln vs $137.57 mln consensus:
4:24PM Intel beats, guides in line (INTC) 33.39 -0.20: Reports Q4 (Dec) earnings of $0.33 per diluted share, including a $0.06 charge that analysts were also including in their estimates. However, the $0.33 includes a tax benefit that was $0.06 greater than anticipated. Reuters Research consensus is $0.25. In touch with Reuters for comparable actual. Revenues rose 22.1% year/year to $8.74 bln vs the $8.65 bln consensus. Revenue in the first quarter is expected to be between $7.9 bln and $8.5 bln, consensus $8.23 bln.
4:18PM INTC falls $0.85 in after hours; gross margins cited:
4:16PM INTC: EPS apparently lifted by large tax benefit; i.e., lower tax rate:
4:16PM INTC prelim revs $8.74 bln vs $8.647 bln consensus:
3:31PM QLogic Earnings Preview (QLGC) 50.76 +0.40: QLogic reports its Q4 after the close with Reuters Research earnings consensus earnings of $0.37 per share and revs of $137.6 mln. JP Morgan expects the co to meet or beat its December revenue and earnings estimates of $137.6 million and $0.38. In the firm's view, storage networking components vendors stand to benefit from accelerating networked storage demand. In addition, the firm believes that QLogic should benefit from continued recovery at key hard disk drive customer accounts. CSFB anticipates a solid quarter with revenues at the mid- to high-end of its 2-5% guided range for the December quarter, with results likely to benefit from seasonal strength at 17% customer SUNW benign HBA pricing, and the re-established competitive position of its largest customer Fujitsu in the enterprise hard disk drive market. The firm expects the co to offer its traditional 2-5% sequential growth guidance for the March quarter.
3:11PM Intel Earnings Preview (INTC) 33.58 -0.01: -- Update -- Intel (INTC) is scheduled to report Q4 results tonight after the close, with consensus standing at $0.25 in EPS and $8.65 bln in sales (note that on Dec 4 the co raised its rev guidance to $8.5-$8.7 bln and its gross margin guidance to 62%, plus or minus a point, and announced a $0.06 goodwill impairment charge). Goldman Sachs expects the co to report in-line or slightly better than their ests of $0.26 in EPS and $8.66 bln in sales, and expects the co to guide to at least a seasonal mid-single-digit Q1 rev decline in the range of $8.0-$8.6 bln (down 1-8%), citing a slow improvement in enterprise spending driven by an uptick in hiring and corporate PC upgrades to XP operating systems. In addition, First Albany expects the co will report in-line to slightly ahead of consensus, but do not think these quarterly results will be enough of a positive catalyst to move the stock higher, since there is little room for disappointment and the shares may experience a mid-cycle correction; firm also expects Intel's capital spending to increase slightly YoY to $4.0-$4.2 bln in 2004, up from $3.65 bln in 2003.
3:09PM AWE: AT&T Wireless hires Merrill Lynch to find a buyer - Bloomberg.com 9.65 +1.10: -- Update -- Bloomberg.com reports that AT&T Wireless has hired Merrill Lynch as an adviser, indicating it may seek offers from potential buyers other than Cingular Wireless LLC, people familiar with the matter said.
3:02PM Yahoo! Earnings Preview (YHOO) 48.28 -0.52: -- Update -- Yahoo (YHOO) is scheduled to report Q4 results tonight, with consensus standing at $0.11 in EPS (range of estimates $0.10 to $0.13) and $495.5 mln in sales. Piper Jaffray believes the co will deliver a very strong Q4, beating the consensus estimates and its guidance, and provide 2004 guidance that will be well above the current consensus. Firm says the source of strength continues to be the trio of advertising, search, and fee-based services, and they believe that Yahoo will revise upward its long-term goals for revenue per user and other metrics. JP Morgan believes that several positive trends have continued into YHOO's Q4, including stabilizing to slightly increasing CPMs, higher order sizes, a shift to higher CPM formats (i.e. rich media), and traditional advertisers moving online; however, firm believes high expectations are priced in at current levels, and they think 2004 guidance could be conservative and likely below street mean estimates.
1:01PM In Focus says 3M patent infringement lawsuit without merit (INFS) 11.44 -0.33: Co announces that it believes the lawsuit alleging patent infringement filed by 3M on Jan 5 in the U.S. District Court in Minnesota is without merit. Earlier this week, the co received a letter from 3M providing notification that the lawsuit had been filed, and INFS plans to meet with 3M in an effort to resolve the situation without litigation. The complaint alleges that the light engine sold by INFS for use in rear projection TVs infringes U.S. Patent 5,552,922 owned by 3M. The complaint seeks an injunction to prevent the INFS from continuing to sell its light engine and unspecified monetary damages.
3:13PM Yahoo! (YHOO) $48.15 -0.65: Yahoo! is scheduled to publish Q4 results after the close Wednesday. Reuters Research prints consensus Q4 EPS at $0.11 on $495.49MM and Q1 at $0.11 on $491.70MM.
Valuation
On an inverted DCF/EVA basis, assuming firm balance sheet management and steady Y/Y improvement to:
25% operating margin by C05, YHOO's valuation implies that the company must grow revenue in the low 50% range for the eight years beginning in C05 in order for investors to justify owning shares at current valuation.
30% operating margin by C05, YHOO's valuation implies that the company must grow revenue in the high 40% range for the eight years beginning in C05 in order for investors to justify owning shares at current valuation.
35% operating margin by C05, YHOO's valuation implies that the company must grow revenue in the mid 40% range for the eight years beginning in C05 in order for investors to justify owning shares at current valuation.
Consensus Y/Y growth for C03 and C04 is 53.1% and 49.4% respectively. On a price / sales basis, Yahoo! trades at 21.9x Reuters Research consensus C03E revenue of $1.459B (+53.1% Y/Y) and 14.6x C04E revenue of $2.180B (+49.4% Y/Y); 130.1x C03E EPS of $0.37 and 89.2x C04E EPS of $0.54.
Summary
Yahoo! shares have risen 24% since the Q3 review (Story Stock, Oct 09, 2003) and over 324% since October of 2002. We think the worldwide opportunties support investors' enthusiasm. First, Internet advertising continues to gain at the expense of traditional media; the worldwide advertising services market (Americas, Europe, Japan) total over $500B. Second, international markets offer high growth opportunities across all segments (marketings, fees, listings). Additionally, Yahoo! has the infrastructure to significantly broaden its revenue stream by offering additional services including enterpise level e-mail to businesses; a cost savings for enterprises as it obviates the need for dedicated e-mail servers and software, and enables mobility.
We note that it is difficult to forecast Internet growth and Internet advertising because so many different variables factor into the equation including device growth and penetration, line penetration and access, price paid per click, and how consumers allocate their time. Nevertheless, given the trends to digitize and make mobile everyday processess and data/content, we think the growth rates and margins implied by our model are possible and achievable. We continue to view Yahoo! as a bet on the continuing growth and transformational power of the Internet and management's ability to scale the business. We would take advantage of pull-backs and buy if management delivers and guides for growth within 500-800 bps, and margins within 300-500 bps of our model.--Ping Yu, Briefing.com
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