A message from another thread
siliconinvestor.com
It doesn't talk about WRS, but it talks about communication IC, which serves the telecom/networking market that WRS plays in. For all the different flavors of Tornados out there, TMS probably means more to revenue than all the rest combined. At least, TMS is the largest.
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Comm ICs : Comm IC is street shorthand for communications integrated circuits, which is
techno-babble for the component suppliers to telecom equipment cos such as NT, LU, and
CSCO. The companies in this group include PMC Sierra (PMCS), Applied Micro (AMCC),
Broadcom (BRCM), and Vitesse (VTSS), and they are all trading up today thanks to PMC's
comment that it sees improving demand in the second half of the year and resulting upgrades of
these stocks from several brokerage firms.
The case for comm IC cos:
PMCS was the first to be honest about the downturn (see yesterday's 18:51 ET comment
below) so it has more credibility in projecting a second half upturn.
Inventories at the equipment companies will be aggressively reduced, leaving the door
open for a second half increase in orders.
The case against comm IC cos:
Every company that we know of in the telecom equipment sector expects flat to lower
revenues in Q2; all talk of a rebound is only talk; no one is seeing a rebound yet.
Though equipment cos want to bring down inventories, they have made no progress yet.
Cisco's inventories skyrocketed to $4.1 bln from $2.5 bln (on paper, they'll be $1.6 bln
after the writedown, but they still have those inventories and will use them if demand picks
up again). Nortel's total inventories fell, but component inventories rose $400 mln. As with
the H2 rebound in orders, the decline in inventories is still a hope, not a reality.
The focus on inventory levels obscures the real issue: end-user demand. Nortel tried to be
optimistic by noting that network capacity would be fully utilized in about four months,
but also noted that a "rationalization" is taking place in the industry. First, full capacity
will necessitate some orders, but not necessarily increasing orders. Second, rationalization
is a euphemism for industry shrinkage due to failures and consolidation. There are too
many players chasing too little business. Demand will not grow significantly until this
rationalization is completed, and industry rationalizations don't happen quickly.
Valuation: among the comm ICs noted above, the lowest forward P/E is 48. An H2
recovery and 50% long term growth rate is pretty much assumed for this industry. Those
are dangerous assumptions that leave very little room for upside surprises.
Bottom line: Companies in this industry and analysts following them are living on hope rather
than reality. Demand is still falling, inventories are still rising, and the end-user customer base --
telecom service providers -- will be shrinking over the coming year. - Greg Jones, Briefing.com |
