NG
below is newcrest take on intel
Regards
-Albert
09:55am EDT 22-Aug-01 TD Newcrest (Dutton, Chris) INTC DELL INTC.N
Momentum Weekly
Chris Dutton, CFA (Quantitative Analysis)
416-308-1554
chris.dutton@tdsecurities.com
Thomas Akin (Associate)
416 308-3403
thomas.akin@tdsecurities.com
Momentum Weekly
Quantitative Analysis
For the week ended August 17, 2001
NOTE: This is a summary from Chris Dutton's 'Momentum Weekly' dated August 17,
2001
Technology
We believe technology stocks remain at risk over the near term for three
reasons. To illustrate our concerns we will analyze industry bellwether Intel
Corp. (INTC-Q). (Note: Last June we conducted a similar analysis; see Momentum
Weekly dated June 1, 2001). The first and most important reason for our
concern about INTC and technology stocks (indeed for the market as a whole) is
lack of earnings momentum. Second quarter results for INTC ($0.12 versus
$0.50) and the vast majority of tech stocks represented a further
deterioration in trailing earnings momentum. The trend in earnings continues
to worsen and has yet to show any signs of a recovery. We saw further evidence
of this negative trend last week with Dell Computer Corp. (DELL-Q). DELL's
fiscal Q2 ($0.16 versus $0.22) represented a further decline of its negative
earnings growth (Exhibit 4). Based on current consensus estimates, trailing
momentum will not turn positive (i.e., less negative) for DELL until fiscal
Q4. Not surprisingly DELL's consensus estimates for both fiscal 2002 ($0.69 to
$0.65) and 2003 ($0.87 to $0.79) were both lowered since its earnings release.
INTC's declining trend coupled with the expectation of a significant recovery
in earnings in 2002 (earnings are expected to recover by 33% for INTC from
$0.51 to $0.68 in 2002) continue to put INTC and other technology stocks at
risk of potential earnings disappointments and/or negative revision momentum.
This would most likely occur as we enter the next earnings warning period in
September. This brings to our second concern: seasonality.
Not only have technology stocks shown a recent tendency to underperform during
the earnings warning period, but September has traditionally been the worst
month for technology stocks' performance (and the market as a whole). See
Exhibit 1. While it is difficult to explain the existence of this tendency,
one potential reason may be the increased focus on the next fiscal year
estimates (in today's case 2002). With earnings trending lower, we would
expect to see 2002 estimates lowered even further. This in turn could put
increased pressure on stocks.
Our third concern-valuations-is perhaps the most worrisome. Despite the
significant sell-off from its high, INTC and most technology stocks are still
considerably overvalued based on traditional value models (P/E and P/S)
relative to historical precedents. During INTC's last earnings cycle, trailing
earnings troughed at $0.85 in 1998 when the market was willing to pay $18 for
INTC, creating a trough P/E of 21 times. Today, trailing earnings are expected
to trough at $0.50 in Q1/02, which at current prices translates into a P/E of
58 times-more than twice the equivalent multiple in 1998. In the 1997 cycle
INTC's trailing earnings peaked at $1.00 with a peak price of $25 for a
25-times P/E (we believe the 2000 peak price to peak earnings of 45 times
should not be considered normal). For INTC to trade at 25 times would require
earnings of $1.20 which will not be seen until at least 2003 as the 2002
estimate is only at $0.68 (Exhibit 2). Price to sales tells a similar story.
With a current trailing ratio of 7 times P/S, INTC would appear to be
overvalued relative to the 1998 low of 5 times P/S. Furthermore, INTC's sales
are expected to decline by 12% over the next four quarters (from $30.5 billion
to $27 billion). See Exhibit 3.
INTC's current valuations imply two possible outcomes. Either INTC's stock
price will come under pressure to reflect the lowered earnings and sales; or
INTC's share price will not respond to the eventual recovery in earnings. In
theory, based on consensus estimates, we could see earnings momentum bottom in
Q3 (the rate of decline slows) thereby creating a buy signal for INTC.
However, after an initial upside response, the price of INTC may stall in
allowing the earnings recovery to compress the current multiple. In short, it
would appear that the downside risk in technology continues to outweigh the
upside potential.
Given our negative outlook over the next several weeks and the reduced market
weight of technology (only 10% of the TSE 300), we have further reduced the
technology component of our Quantitative Model Portfolio. Effective today we
have removed Celestica Inc. (CLS, portfolio weight 2.2%), C-MAC Industries
Inc. (CMS, portfolio weight 1.3%) and Nortel Networks Corp. (NT, portfolio
weight 0.7%). We will continue to keep some technology exposure through stocks
that meet our criterion of positive earnings acceleration. This involves
holding our positions in earnings recovery stocks CGI Group Inc. (GIB.A,
portfolio weight 3.3%) and ATI Technologies Inc. (ATY, portfolio weight 2.7%).
If trailing earnings momentum does bottom in Q3 for technology stocks such as
INTC and consensus estimates are not reduced further (a big 'if'), we might
consider increasing our technology exposure. This would most likely occur in
the second half of October and would coincide with the traditionally strong
seasonal period for technology from November through to January.
Consumers
We have increased our weight in Canadian Tire Corp. Ltd. (CTR.A) from 3% to 7%
which we recently added to our portfolio (see Momentum Weekly dated August 3,
2001).
We continue to find some of the best relative earnings momentum in the
consumer staples sector, and last week was no exception with the release of Q3
results from Metro Inc. (MRU.A). Not only did the latest earnings from MRU.A
($0.76 versus $0.58) allow it to maintain its positive growth, but they
further accelerated its trend, which in today's market is becoming
increasingly rare. Not surprisingly, earnings were also revised higher last
week with September 2 up to $2.53 from $2.43. Despite the significant price
appreciation, MRU.A's multiple, while by no means cheap, is not overly
expensive relative to other food stores or its past history. At 13.5 times
12-month forward earnings, MRU.A trades at a significant discount to Loblaw
Companies Ltd. (23 times) despite its superior relative earnings momentum.
Historically, during the last earnings slowdown in 1998, the market was
willing to pay a peak of 15 times forward earnings for MRU.A. In a market
where positive earnings momentum is so scarce, stocks like MRU.A with
consistent growth should continue to trade at historical premiums.
Last week, Q2 earnings from Four Seasons Hotels Inc. (FSH, $0.80 versus $0.78)
represented a further deceleration in its trailing growth. The decline in
momentum is also being reflected in consensus earnings revisions as FSH has
seen its 2001 and 2002 lowered significantly over the past several weeks
(since June 2001 has been lowered to $2.83 from $3.00 and 2002 has been
lowered from $3.70 to $3.32). The decline in earnings has kept FSH's forward
P/E at an expensive 27 times. As a comparison, U.S. hotel stocks trade in a
range of 17 times (Hilton Hotel Corp.) to 22 times (Marriott International
Inc.). While perhaps an extreme circumstance during the 1998 Asian financial
crisis, FSH traded as low as 10 times forward earnings.
We have seen considerable earnings recovery and subsequent price appreciation
among the small cap retailers. Some of the best performances over the past
year have come from stocks such as Forzani Group Inc. (FGL), Reitman's Canada
Ltd. (RET.A), Leon's Furniture Ltd. (LNF), etc. However, the latest quarterly
results for stocks like LNF (reported last week $0.31 versus $0.33) and FGL
suggests that the upside is most likely limited as earnings momentum has begun
to slow (Exhibit 7). Given the limited liquidity of such stocks, we would
suggest investors begin to reduce their exposure this group.
Industrials
After a terrible 1999-2000, we are seeing a significant earnings recovery with
Zenon Environmental Inc. (water filtration, market capitalization of $225
million). After ZEN based in late 2000, the last two quarters have shown a
positive acceleration in growth, giving ZEN one of the higher trailing
earnings momentum scores in our model (96). Given its high multiple of 45
times 12-month forward consensus EPS, high expectations for continued growth
and volatile earnings history, ZEN should be considered a speculative buy.
Utilities
With the recent decline in interest rates (10-year Canadas are down almost 50
bps to 5.47% from their early July peak), lacklustre performance and most
importantly steady earnings (no down revisions), pipeline stock Enbridge Inc.
(ENB) has become relatively inexpensive. ENB's ratio of 12-month forward
earnings yield relative to bond yields (10-year Canadas) has increased from a
recent low of 1.05 times to a current 1.20 times. Both Westcoast Energy Inc.
and TransCanada PipeLines Ltd. are trading close to their respective lows on
the same measure. Given its defensive qualities of consistent earnings growth,
reasonable expectations and high dividend yield (3.5%), ENB could be a
worthwhile investment if the market comes under further pressure entering the
next earnings warning period. |
