This one hurts.
regards
Updated: 12-Apr-99
Quotes at time of story, top stories today: (CPQ 08:40) (NVLS 09:15)
09:15 ET******
NOVELLUS (NVLS) 63 15/16. Where down 29% in revenue and 58% in profits is considered good news. Before the open Monday, semiconductor equipment maker Novellus (NVLS) reported first quarter profits of $0.25 per share, in line with Wall Street estimates, but down 58% from the $0.60 per share profit in the year-ago quarter. Revenue was down 29% from the year ago quarter, but that was also up 9% sequentially from the fourth quarter. Briefing.com has spent a lot of time wondering whether the much anticipated, huge rebound in profits expected for the semiconductor equipment firms will ever actually materialize. These stocks have been bid up sharply in the belief that computer sales are picking up, and that profits at semiconductor firms are on a sharp upturn. In fact, Intel is showing signs of strength, but other semiconductor companies are not having so much luck. AMD is a reminder that there are problems. Yet, NVLS stock up over 50% from the 40 level it was at a year ago, as are many of the major semiconductor equipment maker stocks. The market is clearly anticipating strong growth over the near term. Yet, over the past three quarters, NVLS operating profits are just $0.22, $0.23, and now $0.25 per share. Not great growth there. And if Compaq and Dell sales growth is less than the market had previously expected, maybe big profits aren't just around the corner. NVLS does show some signs of improved business conditions, as the book to bill ratio in the first quarter was 1.1. But the 10% growth implied in that still leaves NVLS with a long way to go to get revenue back to where they were a year ago. Yet, the market is pricing the stock considerably higher than a year ago. So, while Briefing.com does not argue that the worst may be over for NVLS and other semiconductor equipment makers, the question is still open as to whether the market has priced these stocks for better news later this year than they are capable of delivering. NVLS is not likely to be greatly affected by these numbers today, but may be influenced by an overall weak market. Still, the risk/reward ratio in this and other semiconductor equipment stocks strikes us as no better than the rest of the market, at best.
08:40 ET******
COMPAQ (CPQ) 30 15/16. This is a real problem for the entire tech sector Monday. After the close Friday, computer company Compaq (CPQ) warned that first quarter revenues and profits will be way below market expectations. CPQ said that revenue will be about $9.4 billion and profits $0.15 per share. Wall Street had been expecting about $9.8 billion in revenue and $0.31 per share in profits. CPQ blames the shortfall on "lower than anticipated market demand and increased competitive pricing in the commercial PC sector," according to CFO Mason. This adds to the concerns that have arisen over PC sales lately as Dell had lower than expected growth, and many semiconductor and equipment companies have not had the rebound in business widely anticipated. There have already been some opinions expressed in the market that CPQ is still strong long term, and that maybe the weakness is due to corporate Y2K concerns. Briefing.com would like to propose some additional explanations. First, we have long been skeptical of the Digital Equipment acquisition. Digital was supposed to provide sales channels into the corporate market. But Digital was struggling badly, and it wouldn't surprise us if this deal just hasn't worked out at all. Wall Street is always big on the concepts behind deals when they are announced, but making them happen, particularly when you are buying a faltering company that diverts your core focus, isn't easy. Second, maybe corporations are just flat out cutting back on capital expenditures, including computers. Amidst a strong stock market and a strong economy, traders often prefer to ignore the fact that corporate profits in 1998 were terrible. In fact, as measured by as-reported S&P 500 profits, the GDP corporate profits data, and BusinessWeek's 900 company calculation, profits were down. For anyone that has worked at a Fortune 500 company, as your current author has, the ramifications of this are well know. Companies hold back. Even just not increasing the capital budget means slower growth for their suppliers. When oil company profits are weak, no one is surprised that the oil drillers and other suppliers have problems. Is it really all that surprising that commercial computer purchases are weak now, after a year of lower profits for major corporations? Whatever the reason, CPQ is indicated 4 points or more lower, and Intel, Dell, and other major tech stocks are indicated sharply lower as well. Wall Street might come out with some comforting statements about CPQ today but some companies are going the other way. Salomon Smith Barney, for example, cut this year's earnings estimate from $1.93 per share to $1.14 and next year's from $2.50 to $1.47 and the price target from $60 to $25. Wow, talk about bailing. Briefing.com has also doubts about CPQ's prospects. This warning should be taken at face value. It also does have some legitimate implications for other tech companies, if only because so much confidence about strong profit growth is built into major tech stocks. This one hurts.
Copyright © 1999 E*TRADE Securities, Inc. All rights reserved. |
