interesting comments...towards the bottom...
Thursday July 27, 20000
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SPECIAL TPS HOTLINE FOR THURSDAY JULY 27, 2000
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This is John Buckingham with our stock commentary. Because
we had no interest in holding shares of Palm Computing
(PALM), given our value-seeking investment approach, we
decided to sell our entire position in 3Com (COMS) today at
prices between $66.38 and $66.50, rather than wait for the
distribution of 1.48 PALM shares after the close of trading
today. As most are aware, 3Com held approximately 532
million PALM shares, representing ownership of 95% of the
leading provider of handheld computers. Given that there are
more than 560 million PALM shares outstanding, the market
capitalization of the company is a staggering $20 billion,
kind of expensive for a company with $1 billion in sales and
$57 million in operating net income during fiscal 2000
(ended 6/00). When one considers that Palm faces difficulty
in obtaining parts due to industrywide component shortages
and it faces stiff competition from rival Handspring, it
should not be a surprise that we find PALM overvalued. For
those who still own COMS, we would look to sell ASAP the
PALM shares that will show up in accounts tomorrow.
Having said that we do not like PALM, we do favor the 3Com
shares that had been trading sans Palm under the ticker
symbol COMSV at a price near $14. Palm-less 3Com will begin
trading tomorrow under the original COMS symbol. Although it
sounds confusing, we are contemplating buying back 3Com, so
to speak, tomorrow, as the company sports a debt-free
balance sheet with around $10 a share in cash, not to
mention a computer networking business that has been quite
profitable in the past. We did not execute this trade today
because 3Com could fall in the next few days as it is being
evicted from the S&P 500 index, having ironically been
replaced by Palm. While Palm could benefit from its
inclusion in the S&P 500, we would expect the stock to
decline given the enormous number of shares coming to
market.
If the classic definition of a "Bear Market" is a 20% or
greater decline in a major index, then we have just lived
through one doozy of a bear mauling in the semiconductor
sector as the Philadelphia Semiconductor Index has plummeted
25% over the last nine trading days, tumbling from a reading
of 1266.39 on 7/14 to 949.90 tonight. Of course, most of the
chip stocks remain far above their 52-week lows, but the
carnage has been painful nonetheless. Especially frustrating
is that conditions in the semiconductor industry remain
extremely favorable with most analysts forecasting several
more years of impressive growth. Yes, it is true that the
media could have portrayed the recent book-to-bill ratio
announcement in a more positive light considering that a
measure of 1.26 indicates a market that is showing excellent
growth even if the reading had been higher in the previous
three months. It is also a fact that there have been some
high profile earnings and revenues disappointments with an
unimpressive profit report from integrated circuit maker LSI
Logic (LSI) after the close of trading on Tuesday
contributing mightily to the chip sector massacre of the
last two days. Finally, we can not deny that flash memory
and other cellular telephone component makers could be
impacted in the shortterm by the disclosure today from cell
phone giant Nokia that its third quarter results will be
weaker than hoped due to the timing of product introductions
and seasonality.
While it is clear that market sentiment has shifted with
investors now viewing the proverbial technology glass as
half-empty, rather than overflowing as had been the case for
the last several years, we continue to believe that we
remain in the early stages of a massive upcycle in the
semiconductor industry. We understand that the chip business
has always been highly cyclical, but the preponderance of
evidence seems to support our bullish position on
semiconductor growth and profitability. For example, this
week Texas Instruments disclosed that it is boosting capital
spending for the second time this year with CFO Bill
Aylesworth saying, "We see continued strong demand for our
products. We think we have enough visibility out through
2001 to have confidence." Even though second quarter
revenues came in $20 million below plan, Wilfred J.
Corrigan, CEO of LSI asserted, "With communications chips
leading the way, LSI Logic is poised for accelerated growth
in the second half of the year." Nokia CEO Jorma Ollila
stated, "Overall growth prospects in the later part of the
year as well as for the longterm remain unchanged,
stimulated by the strong mobile communications market."
Nokia also indicated that they estimate that there will be
one billion mobile phone subscribers globally before the end
of 2002, up from 570 million at the end of June. Today,
Advanced Micro Devices (AMD) VP Benjamin M. Anixter
reiterated, "Demand for AMD flash memory devices continues
to exceed supply. We are ramping the production capacity of
our flash memory manufacturing joint venture as rapidly as
possible to support our customers. Our increased output is
committed through the remainder of the year. With good
visibility into future demand through the end of 2001, we
continue to expect strong growth in sales of flash memory
products."
Obviously, we remain extremely upbeat on the near and
longterm prospects of our chip stocks, especially as we have
captured a portion of our outsized profits over the last
year or so on most of our semiconductor recommendations.
Despite our optimism, we have decided to cut our high
valuations for the remaining shares of five of our semis,
all of which we had the foresight or good fortune to
partially sell at significantly higher prices than where
they are presently trading. We have pared our high goal
price for LSI to $63; Lam Research (LRCX) to $54; Atmel
(ATML) to $58; National Semiconductor (NSM) to $81 and
Siliconix (SILI) to $158. While the first two now trade
slightly above our buy limits, we note that ATML, NSM and
SILI all reside on tonight's recommended list. Siliconix
remains one of our favorite stocks, especially after the
maker of power MOSFETs and power integrated circuits posted
this morning second quarter profits of $0.93 per share,
compared to $0.44 in the year ago period, on a 33% jump in
revenues. Dr. King Owyang, SILI President and CEO, said,
"The outlook for 2000 remains strong. We achieved record
bookings in the second quarter, with a book-to-bill ratio of
1.28 to 1 and a sequential increase of 21% over our then
record first quarter bookings. We continue the
implementation of our strategy to increase capacity for both
front-end and back-end manufacturing. We are on track to
achieve significant increase in capacity in the second half
of 2000 and plan to continue this into 2001." Because the
rapidly growing company can be had for only 16 times
trailing earnings, we would look to buy volatile SILI up to
$78.75.
On Tuesday's Hotline, we commented extensively on tonight's
Hotline Special, Kemet (KEM - $24.63). Since then, the maker
of solid tantalum and multi-layer ceramic capacitors
announced the addition of more than 85,000 square feet of
manufacturing floor space dedicated to the production of
solid tantalum and conductive polymer capacitors in
Matamoros, Mexico, and Mauldin, Greenwood and Simpsonville,
South Carolina. KEM CEO David Maguire said, "Customer demand
for high-value, high-frequency capacitors has exploded,
especially for broadband Internet infrastructure build-out.
These capacity expansions will ensure that we will be able
to provide high-value tantalum and high-frequency organic
tantalum capacitors to meet our customers' needs, now and in
the future." Because it trades for just six times estimated
earnings, we would buy KEM up to $31.50. We note that Al
Frank bought 300 shares of Kemet for TPS Portfolio yesterday
at $25.63. We will have another update tomorrow. Thank you. |
