From Briefing.com: Tech investors greeted the week in a good mood, bidding shares higher from the open, lifting the Nasdaq up 1.9% by 11:00am ET vs. 1.2% for the Dow and S&P 500. Shares plateaued at this level before edging higher in the final hour of trading. At session's end, tech shares closed, on average, 1.8% higher with advancers gaining 3.7% and decliners losing 3.1%. Advancers led decliners 2.8:1 vs. 2.5:1 on the Nasdaq and 2.8:1 on the NYSE.
The broad-based strength is a response to last week's weakness and the absence of bad news rather based on incremental positive data points on the economy. It remains to be seen whether investors will follow through on this rally and drive shares higher. There are reasons to be bullish on tech shares over the long-term but near-term concerns regarding valuation are likely to limit any advance until fresh data point to an acceleration in growth and operating improvements. Until then, we remain cautiously bullish on tech, and we would protect gains as opportunities permit.--Ping Yu, Briefing.com
Performance by Group
Group % Change % Change Advancers % Change Decliners Ratio Advancers to Decliners
All Technology +1.8% 3.7% -3.1% 2.8:1
Audio & Video Equipment +0.7% 2.7% -3.1% 1.9:1
Communications Equipment +2.1% 4.1% -3.1% 2.7:1
Communications Services +1.5% 3.4%; -2.5% 2.3:1
Computer Services +1.5% 3.3%; -3.0% 3.0:1
Computer Sys & Peripherals +1.8% 4.0%; -2.8% 2.3:1
Electronic Instruments & Controls +1.3% 3.5%; -3.5% 2.4:1
Scientific & Technical Instruments +3.3% 4.3%; -1.6% 5.7:1
Semiconductors +2.6% 4.0%; -2.9% 4.7:1
Software & Programming +1.8% 3.8%; -3.3% 2.9:1
5:51PM Monday After Hours prices levels vs. 4 pm ET: Buyers have backed off their efforts in the regular session, where the major indices rallied 1.1-2.5% and sent the S&P 500 and Nasdaq above their 50-day simple moving averages. The evening has been relatively quiet, minus some earnings pronouncements from select technology companies. All of the aforementioned have been encouraging, and indicative of strengthening end market demand. Despite this, the S&P futures are at 1050, 2 points below fair value, and the Nasdaq 100 futures are at 1416, 4 points below fair value.
Semiconductor equipment maker Novellus (NVLS 44.11 +0.57) got the evening started with its mid-quarter conference call. After initially issuing in line Q4 (Dec) guidance on its Q3 (Sept) conference call, management narrowed its EPS outlook to $0.06 (previous guidance of $0.02-0.07) and revenue target to $220 mln (previous guidance of $210-220 mln). The company also said that orders should rise 25% sequentially, above 5-10% earlier. 'Business levels overall continue to improve,' CEO Hill said. He added that 'it doesn't feel like a head fake at this particular point in time... it's much more broad based.'
Stock of Semtech (SMTC 25.27 +0.81) has enjoyed a solid amount of buying interest off the company's better than expected Q3 (Oct) report and Q1 (Jan) guidance. Q3 net income jumped 33% to $0.12 per share and topped the Reuters Research consensus estimate by a penny. Management said 'as the end-markets have improved, our customer base has begun to give us more visibility.' The electronics manufacturing company now sees Q1 revenues growing 8-10% sequentially, to approximately $51.9-52.9 mln (consensus of $50.3 mln) and EPS coming in at $0.14 (consensus of $0.13) Competitors of SMTC include the likes of ADI, MCRL, MXIM, SLAB, and ZL.
Sellers have locked in some profits following Credence's (00C0 14.61 -0.67) Q4 (Oct) report - a move that Briefing.com alluded to in our Earnings Preview. The designer of engineering validation test and automatic test equipment reported a GAAP loss of $0.35 per share that may or may not be comparable to the Reuters Research estimate of a loss $0.34 (due to restructuring charges). Revenues rose 34% to $57.8 mln versus the consensus of $53.1 mln. The company said that it expects 1Q04 (Jan) revenues of $63-66 mln (consensus of $53.1 mln) and net bookings to increase approximately 15% from the $60.9 mln it recorded in Q3 (Aug).
UTStarcom (UTSI 37.62 +0.56) announced a $31 mln contract with China Netcom for new PAS (personal acess systems) handsets. Under the terms of the agreement, China Netcom will offer the complete line of UTStarcom's PAS handsets in the Liao Ning Province. Briefing.com first recommended purchase of UTSI on October 2 as an attractive play on both telecom equipment and developing markets.
Finally, Altria Group (MO 50.87 +0.28) announced that a New Hampshire jury concluded that Philip Morris USA should not be liable in a case brought by the wife of a man who smoked Marlboro cigarettes and died after developing lung cancer. It was the company's first smoking-and-health case tried in the state.
For complete coverage on these, and other developments, be sure to visit Briefing.com's In Play, Earnings Calendar, and Guidance pages. -- Heather Smith, Briefing.com
B. Riley (CTLM) 5.60 +0.51 : B. Riley & Co initiated coverage of CTLM with a Buy rating and a price target of $9.60. The firm notes Centillium's shares are currently trading with an `04 EV-to-sales ratio of .58, near a historical low. In addition, the co's shares trade at a substantial EV-to-sales, price-to-sales, and price-to-book discount to its peer group. B. Riley believes a strong replacement cycle will be a leading top-line driver for Centillium in Q1 and Q2 `04. In addition, the firm suggests the consolidation trend among access chip vendors will continue with the most probable suitor for Centillium being STMicro. The firm notes STMicro would gain traction with Japanese ADSL equipment vendors with little customer overlap in general.
OmniVision (OVTI) 64.35 +4.40 : Added to Top 3 List at JP Morgan; 6-month tgt $75.
Semtech (SMTC) 24.46 +0.08 : After the close, reported Q3 (Oct) earnings of $0.12 per share, $0.01 better than the Reuters Research consensus of $0.11; revenues rose 2.0% year/year to $48.1 mln vs the $47.3 mln consensus. Co. sees Q4 (Jan) revenues in the range of $51.9-52.9 mln, estimate is $50.32
Semi Equipment
Industry Members
Credence (CMOS) 15.27 +1.03 : After the close, reported Q4 (Oct) GAAP loss of $0.35 per share, which includes $7 mln in restructuring charges. After removing the $7 mln in restructuring charges we see the co. reporting a EPS loss of $0.24, which may not be comparable to the Reuters Research consensus of loss of $0.34; revenues rose 33.8% year/year to $57.8 mln vs the $53.1 mln consensus. Co. sees Q1 revenues in the range of $63-66 mln, estimate is $60 mln. Checking w/ Reuters for a comparable.
Kulicke & Soffa (KLIC) 16.17 +0.81 : Chairman and CEO, C. Scott Kulicke, has established a plan under Rule 10b5-1, to provide for pre-determined sales of a portion of his KLIC common stock. Under the plan, Mr. Kulicke will sell up to 20,000 shares per month over a one-year period beginning December 1. The maximum number of shares that may be sold during this period represents approximately 15% of Mr. Kulicke's current holdings.
Novellus (NVLS) 43.54 +1.00 : After the close, co indicated it sees Q4 (Dec) EPS of $0.06, previous guidance was $0.02-0.07, Reuters Research estimate is $0.05 and sees Q4 revenues of $220 mln, previous guidance was $210-220 mln, R.R. estimate is $217 mln.-- Reuters
Varian Semi (VSEA) 46.14 +3.00 : ThinkEquity upgraded Varian Semi to Overweight from Equal-Weight based on their belief that the recent pullback is a buying opportunity; firm believes that investor concerns about mkt share loss are unwarranted, as the bookings over the next several qtrs are likely to be driven by Taiwanese foundries and Korean DRAM suppliers, where VSEA dominates; also, firm believes that VSEA should gain substantial share in high current implanters, they expect pricing pressure in the implant segment to ease, and believes that the co should reach a key inflection point with the move to 90nm feature sizes in 2H04. Target is $60.
2:16PM Semtech (SMTC) 24.60 +0.22: Semtech is due to publish Q3 results after the close. Reuters Research pegs consensus Q3 EPS at $0.11 on revenue of $47.3MM (+0.2% Y/Y) and Q4 at $0.13 on $50.3MM (+13.0% Y/Y); F04 at $0.44 on $186.1MM (-3.6% Y/Y) and F05 at $0.61 on $225.3MM (+21.1% Y/Y).
We would look for strong growth in Wireless (24% of revenue), Laptop and PDA (23% of revenue) and Automated Test Equipment (12% of revenue), modest growth in Industrial (9% of revenue) and Gaming (6% of revenue) and continuing weakness with an improving demand picture for Wireline (12% of revenue).
Valuation
On an inverted DCF/EVA basis, assuming 1000 bps improvement in gross and operating margins, SMTC's valuation implies management needs to grow revenue in the mid- to high-30% range over the next 8 years beginning in F06 in order to support current valuation.
On a price multiples basis, SMTC trades at 9.7x F04 revenue of $178.3MM and 6.0x F04 revenue of $301.2MM; 55.9x F04 EPS of $0.44 and 40.3x F05 EPS of $0.61.
Summary
Improving sector fundamentals support investors' bullish expectations and, providing average selling prices remain stable, SMTC is likely to realize substantial gross and operating margins expansion as a natural function of increasing sales. But upside is capped at current level given SMTC's high valuation and the trend among electronics manufacturers to rationalize the number of components and component suppliers. We would hold off on initiating a new position until we see evidence of high-20% to low-30% top-line growth or a 20-25% pullback.--Ping Yu, Briefing.com
12:02PM Credence Systems (CMOS) 15.57 +1.32: Credence Systems is scheduled to report Q4 EPS after the close. Reuters Research prints consensus Q4 EPS at ($0.34) on revenue of $53.1MM (+22.9% Y/Y) and Q1 of ($0.22) on $60.5 (+64.9% Y/Y); F03 EPS of ($1.41) on revenue of $178.3MM (+8.6% Y/Y) and F04 EPS of ($0.25) on $301.2MM (+68.9% Y/Y).
We would look for modest upside and a bright demand picture, in light of recent order activity for test equipment, showing accelerating top-line growth beyond the 60-70% Y/Y growth projected for F04.
Valuation
On an inverted DCF/EVA basis, assuming aggressive balance sheet management and 20% operating margin (approximately 8000 bps improvement in gross and operating margins), CMOS' valuation implies management must still grow revenue in the low-30% range over the next 8 years beginning in F06 in order to support current valuation; an alternative scenario, also assuming aggressive balance sheet management and 20% operating margin, is revenue growth in excess of 100% over the next two years, followed by low-teens growth in the remaining out-years.
On a price multiples basis, CMOS trades at 5.5x F03 revenue of $178.3MM and 3.3x F04 revenue of $301.2MM.
Summary
CMOS shares are cruising ahead of fundamentals. Part of the gross and operating margins improvement, as implied in our model, will simply be a function of improved economies on strong industry top-line growth. Nevertheless, management will still need to aggressively a) grow CMOS' top-line significantly ahead of the industry average, b) manage the balance sheet and c) control operating expenses in order to grow cash flow to a level that justifies current valuation. To that end, before initiating a new position, we would look for confirmation that recent order activity supports an acceleration in top-line growth beyond the 60-70%+ Y/Y growth projected for F04, and that management has a firm timetable for margins improvement and a clear path to profitability, or until at least a 25-30% pullback.--Ping Yu, Briefing.com
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Don and all. I am actually on vacation now so sorry so much of this is getting posted so late but...
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