From Briefing.com: Tech shares opened the day higher on Friday but gave ground almost immediately, entering negative territory within fifteen minutes of the opening bell. Investors tried to bid shares higher midway through the morning session but gave up after thirty minutes. The selling pressure steadily increased, peaking just before 3:00pm ET when buyers stepped in to erase half of the day's losses. At session's end, theBriefing.com Tech Index was down 0.1%. Decliners outnumbered advancers 1.3:1 with decliners shedding 2.1% and advancers gaining 2.6%. The Philadelphia Semiconductor Index (SOXX 489.84 -3.88) slipped 0.8%. Decliners outnumbered advancers 3.3:1 with decliners falling 1.2% and advancers rising 0.9%. For the week, tech shares ended lower despite the broad market finishing higher (see Weekly Wrap). The Briefing.com Tech Index was down 1.0% while the SOXX was lower by 1.3%.
Looking ahead, there are few scheduled items on the corporate calendar that will help drive shares higher. On Monday, Research In Motion (RIMM 44.77 -0.58) is due to report Q3 results after the close; on Tuesday, Micron Technology (MU 12.33 +0.27) is slated to publish Q1 results after the close. The schedule is a bit fuller on the economic calendar. Look for November Personal Income and Spending, GDP and the Michigan Revised Consumer Sentiment on Tuesday, and Durable Goods, Initial Unemployment Claims and New Home Sales on Wednesday.
Trading is likely to be thin, and as a result, volatile ahead of the Christmas and Hannukah holidays. Look for daily spreads to widen. We remain moderately bullish on technology shares over the long-term and would take advantage of the volatility to buy into quality, attractively priced names / sell richly priced shares into strength as part of a rebalancing of the tech portion of the portfolio to a neutral market weight (Please visit the Story Stocks page for the latest thinking on investment opportunities across market sectors, including tech).--Ping Yu, Briefing.com
Group % Change Avg % Change Advancers Avg % Change Decliners Ratio Advancers to Decliners *P/SG Ratio: Advancers *P/SG Ratio: Decliners
Philadelphia Semiconductor Index -0.8% 0.9% -1.2% 0.3:1 10.0 4.8
Briefing.com Tech Index(based on a composite of over 1000 tech companies) -0.1% 2.6% -2.1% 0.8:1 1.8 1.8
Audio & Video Equipment -0.5% 1.7% -2.0% 0.6:1 0.6 0.5
Communications Equipment -0.6% 3.0% -2.8% 0.6:1 1.9 2.0
Communications Services +0.1% 2.3% -1.6% 0.8:1 1.0 1.2
Computer Services +0.1% 2.4% -2.0% 0.9:1 2.0 1.9
Computer Sys & Peripherals +0.3% 2.9% -2.0% 0.9:1 1.6 1.5
Electronic Instruments & Controls +0.3% 2.7% -2.0% 1.0:1 1.4 1.4
Scientific & Technical Instruments +1.4% 4.6% -1.6% 1.2:1 1.7 1.3
Semiconductors -0.5% 1.7% -2.1% 0.7:1 2.9 2.9
Software & Programming -0.2% 2.8% -2.3% 0.7:1 1.7 1.9
6:00PM Weekly Wrap: The U.S. market added to its gains this week, which certainly makes sense when taking into account that Saddam Hussein was captured last weekend by U.S. troops. Believe it or not, though, his capture had little to do with the gains. In fact, the major indices, after shooting higher at the open on Monday, all ended the day in a spider hole. By week's end, however, they had all climbed out of that hole with the help of a batch of encouraging economic data and some inspiring earnings news.
Before going further, some explanation for the market's inability to sustain the Saddam rally on Monday is in order. Frankly, it made perfect sense that the market would rally at the open as Saddam's capture is undeniably good news. By the same token, it made sense that it didn't send U.S. investors into a buying frenzy. After all, the market had already run up in the wake of Saddam having rushed into hiding following the military assault on Baghdad; hence, the news of his actual capture ultimately provided an excuse to take some profits.
Moreover, it was clear on Monday that the market is focused on fundamentals as the Saddam euphoria was ultimately overshadowed by a disconcerting pronouncement from Wal-Mart (WMT) that its same-store sales for December were tracking toward the low end of its 3-5% forecast. This declaration generated concern that this holiday selling season, which has been obstructed by snowstorms in the northeast, isn't going to live up to the market's lofty expectations.
Be that as it may, the retail sector held its own this week as a relatively encouraging earnings report from Best Buy (BBY), coupled with a subsequent upgrade of Wal-Mart at UBS that was tied to a belief the company is re-thinking its aggressive deflationary pricing strategies, prompted renewed buying interest in retail stocks. The S&P 500 Retailing Index finished the week up 1.5%. That is a nice gain to be sure, but it pales in comparison to the 9.3% gain in the S&P 500 Steel Index, which led the broader market's gains.
As it so happens, the blue chip components outperformed their technology counterparts once again. A solid earnings report from Oracle (ORCL) limited the withdrawals from the technology sector, but a lackluster performance by the influential semiconductor stocks served as a restraining influence that kept tech gains in check.
Aside from steel, the aluminum, auto, machinery, and energy groups spearheaded the blue chip advance. Their leadership is consistent with Briefing.com's view that their relative return potential, vis-a-vis technology stocks, and the pickup on the industrial side of the economy (Industrial Production up 0.9% in Nov.), will see the blue chip averages garner an increased share of investment funds over the near-term. Financials contributed to the gains, too, as a drop in interest rates, increased EPS guidance from E*Trade (ET), and good earnings results from the investment banks, namely Bear Stearns (BSC), Lehman Bros. (LEH), Goldman Sachs (GS) and Morgan Stanley (MWD), kept a bid in the sector.
Beyond the encouraging industrial production report, stronger than expected results in the Empire State Index and Philly Fed Index provided reasonable proof that the manufacturing sector is on the rebound. In truth, there was little but good news in this week's data as Nov. Housing Starts hit a robust pace of 2.07 mln units, topping October's 17-yr high, while new claims fell 22K to 353K and CPI fell 0.2%, lending further credence to the view that the Fed will leave rates low for a considerable period.
The latter consideration played out well in the Treasury market as the 10-yr note shed 12 basis points on the week to end at 4.13%. In the currency market, the dollar made up some lost ground against the yen, but continued to fall against the euro with interest rate differentials remaining an underpinning factor. Speaking of which, a drop in crude inventories stoked buying efforts in the energy market throughout the week. Prices neared $34/bbl at one point, but February crude futures settled the week up $0.07 at $33.02/bbl.
The Dow and S&P both hit new 52-wk highs this week while the Nasdaq continued to tread water. All in all, we continue to be encouraged by the market's performance and remain rooted in our bullish posture that there is ample reason to be invested in the stock market given the persistence of the low interest rate environment, the strong profit growth, the favorable economic data, and the healthy sector rotation that has seen industrial names assume a leadership post. -- Patrick J. O'Hare, Briefing.com
YTD chart of major stock indexes
Index Started Week Ended Week Change % Change YTD
DJIA 10042.16 10278.22 236.06 2.4 % 23.2 %
Nasdaq 1949.00 1951.02 2.02 0.1 % 46.1 %
S&P 500 1074.14 1088.66 14.52 1.4 % 23.8 %
Russell 2000 547.59 546.87 -0.72 -0.1 % 42.8 %
12:08PM Semi book-to-bill color : American Technology Research reiterates their Buy rating on the semi equipment sector after the Nov book-to-bill ratio climbed to 1.04 from 1.01 sequentially; firm says improving end-mkt demand in notebook PCs and cell phones, and early signs of a recovery in the network and telecom sectors, are fueling demand for semi equipment orders; and although equipment orders have been improving since the summer, firm says orders are just beginning to outpace sales which we expect to continue through 2004 and beyond. In addition, firm notes that checks with Mattson (MTSN) and Asyst (ASYT) indicate the co's are seeing higher order growth rates than the larger semi equipment makers.
11:25AM Berean Capital on UTEK (UTEK) 26.23 -1.30: Berean Capital provides commentary after the co released an 8-k filing after the close yesterday. The firm suggests despite 4Q03 revenues expected to be flat due to pushouts, it should help 1Q04. The firm notes, as other recent pronouncements have shown, it expect strong orders in 1H04 into bump processing for LCD and Flat Panel Displays. Berean believes the Flat Panel Industry is growing at 40-50% every quarter, and increasing capacity requirements at the LCD packaging players such as Aptos, ChipMos, IST and other Taiwanese and Japanese packaging houses, will result in strong orders for bump lithography steppers. The firm believes the Taiwanese and Japanese manufacturers have been slow to increase capacity and as flate panel display prices rise and demand increases, there will be a pick up in orders for packaging equipment. Berean reiterates its BUY rating and price target of $40, as order momentum to the Asia-Pacific picks up.
10:57AM Nasdaq Composite index vacillating near unchanged (COMPX) 1956 +0.58: -- Technical -- The index quickly retreated after the opening burst of buying with it currently back vacillating near unchanged. Intraday, a continued posture above support at 1953/1950 keeps the door open to further upside probes. Resistance beyond the early high (1963) is at 1968/1970 with the Saddam related high from Monday at 1979.78. Secondary supports are at 1945 and 1939.
8:56AM MSFT started with an Overweight at JP Morgan 27.40: JP Morgan initiates coverage of Microsoft (MSFT) with an Overweight rating; firm says the co is in the middle of several major product cycles, including Office 2003, Windows Server 2003, and an invigorated push into the small business mkt; in combination with accelerating PC and Server shipments, these factors should enable the co to grow rev at 9-10% in FY04 and earnings at 8-9%.
SanDisk (SNDK) 60.99 +3.26 : Goldman Sachs upgraded SanDisk (SNDK) to Outperform from In-Line, citing the following factors: 1) Q1 ests are conservative, with the potential for upside due to very strong sell-through of Digital Cameras, 2) stock usually peaks 8-9 months before a cyclical earnings est and margin top (however, cyclical supply demand concerns for NAND flash won't materially affect the NAND pricing outlook until early 2005), 3) a deep Dec share price swoon has often been followed by a significant Jan rally, and 4) relative valuation is attractive at 23.4x their 2004 est vs the group at 33.3x.
2:06PM ATI Technologies (ATYT) 14.73 +0.03: Before the open, ATI Technologies published Q1 EPS of $0.19 on revenue of $469.7MM (+40.0% Y/Y) vs. guidance of $0.16-0.20 on $440-470MM and Reuters Research consensus of $0.18 on $457.3MM.
Guided for Q2 revenue of $430-470MM vs. consensus at $395.65-443.52MM, and gross margin at the high end of the targeted 32-35% range. Consensus is at $0.14 on $423.93MM.
ATYT experienced momentum across all product lines. Gross margin came in above expectations, driven by firmer pricing on desktops. Results came in as expected (Story Stock, Dec 16, 2003).
Performance
P&L Line Performance
Revenue Sales grew 40.0% Y/Y, aided by strong demand for major products; demand for desktop systems (55% of sales, 32% market share) grew 50% Q/Q.
Mixed Product performance.
Boards revenue (18% of sales) dropped 23.2% Y/Y.
Components revenue (80% of sales) rose 74.7% Y/Y.
Other revenue (2% of sales) fell 5.1% Y/Y.
Mixed Geographic performance.
Asia-Pacific revenue (80% of sales) jumped 62.6% Y/Y.
Canada revenue (1% of sales) dropped 6.3% Y/Y.
Europe revenue (9% of sales) rose 30.1% Y/Y.
United States revenue (10% of sales) fell 27.1% Y/Y.
Management expects Q2 to be stronger than typical seasonality based on ATYT's strong product line, improving PC market and increased SI channel penetration.
Gross Margin Gross margin improved 870 bps Y/Y to 35.9%, aided by firmer pricing within desktop segment.
Operating Margin Operating margin improved 1040 bps Y/Y to 12.8% on manufacturing and R&D efficiencies, and firm cost control.
Operating expense as a percent of sales improved 170 bps to 23.1%.
Selling and marketing expense as a percent of sales improved 10 bps Y/Y to 6.7%.
Administrative expense as a percent of sales improved 30 bps Y/Y to 2.5%.
R&D increased in absolute terms and decreased as a percent of sales by 80 bps Y/Y to 13.6%.
Valuation
On an inverted DCF/EVA basis, assuming low 30% operating margin, ATYT's valuation implies that the company must grow revenue in the mid- to high 20% range each year for the eight years beginning in F06 in order for investors to justify owning shares at current valuation. Consensus Y/Y growth for F04 and F05 is 71.7% and 11.0% respectively. On a price multiples basis, ATYT trades at 2.0x F04 revenue of $1.755B (71.7% Y/Y) and 1.8x F05 revenue of $1.948B (+11% Y/Y); 23.8x F04 EPS of $0.62 and 20.2x F05 EPS of $0.73.
Summary
With the recent pullback in tech, ATYT trades at a 40% premium to a broad group of computer systems comps. We think ATYT can sustain the premium valuation given the above average growth rate for the space, emerging product and geographic market opportunities, and the company's improving competitive position and above average margins. As we have noted on the Tech Stocks page over the past few weeks, investors are devaluing/revaluing tech shares in view of achieveable revenue growth and margin levels within the context of each company's addressable market oportunity, competitive position and operating model. We think this process is likely to persist for some time. We also think that secular trends, emerging product and geographic market opportunities and new product introductions support ATYT delivering sustainable revenue growth above the high 20% rate implied in our model.
Secular trends including the continuing development of personal computing, developments in digital electronics and the convergence of computing and communications systems into handheld devices is driving demand for ATYT's visual processor solutions. The company is extending its technology and product leadership with the latest additions to the RADEON family. ATYT is planning an entire new product lineup for 2004 which should help sustain sales momentum. The company's improving market position is reflected in recent operating performance. Further improvement in margins is possible and likely given company initiatives and positioning. For investment-minded individuals, we would consider a minor position at current level and would add on pullbacks.--Ping Yu, Briefing.com
10:49AM Solectron (SLR) 5.93 -0.09 After the close Thursday, Solectron printed Q1 EPS from continuing operations of ($0.03) on revenue of $2.696B (+1.1% Y/Y). Reuters Research consensus called for ($0.03) on $2.952B but consensus revenue includes contribution from discontinued operations. Pro-forma Q1 sales, which includes discontinued operations, came in at $3.077B.
Management is undertaking a strategic review of the business to deliver focused, integrated supply chain services to customers. This has and will result in asset divestitures that management deems are non-core to SLR's ongoing business. SLR's Q1:04 guidance was based on continuing operations at the end of Q4:03. During Q1:04, additional companies qualified as discontinued operations and were not included in GAAP revenue.
Guided for pro-forma Q2 EPS of ($0.03)-0.00 on GAAP revenue of $2.6-2.9B based on continuing operations.
Performance
P&L Line Performance
Revenue Sales grew 1.1% Y/Y, aided by strong demand for computing, consumer and semiconductors & test products.
Management is seeing demand stabilizing across segments; strength within consumer, mobile/wireless and semiconductor & test products; less volatility in customer demand; quote activity is increasing.
Sales Percentage by Market Segment
Automotive 3.2%
Communications 17.9%
Computing 36.6%
Consumer products 16.0%
Networking equipment 20.9%
Semiconductors & test 4.0%
Other 1.4%.
Operating Effectiveness Inventory turns improved Y/Y and Q/Q from 6.1x and 7.2x respectively to 7.8x.
DSOs (days sales outstanding) improved Y/Y and Q/Q from 52 and 50 respectively to 49 days.
Cash conversion cycle improved Y/Y and Q/Q from 68 and 59 respectively to 50 days.
Gross Margin Gross margin declined 150 bps Y/Y to 4.7%, reflecting mix shift to consumer and computing products.
Management is targeting gross margin of 5.5-6.0% near-term.
Operating Margin Operating margin excluding extraordinary items improved 30 bps Y/Y to 0.5%.
Operating loss including extraordinary items improved from ($88.4MM) to ($14.2MM), reflecting aggressive cost control on the SG&A line.
Operating expense, excluding extraordinary items, as a percent of sales improved 170 bps to 4.3%.
SG&A as a percent of sales improved 190 bps Y/Y to 4.1%.
R&D declined in absolute terms and as a percent of sales by 8 bps Y/Y to 0.17%.
Management is reviewing operating expense companywide. Expect changes to yield cost reductions that will accelerate into the end of the fiscal year.
Targeting operating margin of 1.3-2.2% near-term.
Valuation
On an inverted DCF/EVA basis, assuming steady Y/Y improvement to high single-digit operating margin on both manufacturing and SG&A efficiencies, SLR's valuation implies that the company must grow revenue by 10% each year for the ten years beginning in F05 in order for investors to justify owning shares at current valuation. Consensus Y/Y growth for F05 is 11.4%. On a price multiples basis, SLR trades at 0.42x F04 revenue of $11.901B and 0.38x F05 revenue of $13.252B (+11.4% Y/Y); 27.0x F05 EPS of $0.22.
Summary
SLR, like Jabil Circuit (JBL 29.32 +0.11), can be expected to trade well in the coming weeks based on the following: 1) Global recovery/expansion supports sustainable growth above the 10% rate implied in our model; 2) Gross margin improvement likely due to higher capacity utilization/ improving pricing environment; 3) Operating margin expansion likely due to continuing manufacturing and SG&A efficiency/high scalability of business model; 4) SLR is very moderately priced.
Results indicate management is making good progress in turning this giant ship around. Outlook is mixed compared to JBL but nevertheless is encouraging for SLR, the ECM (electronic contract manufacturing) group and should give investors confidence that the recovery in technology remains intact. As with JBL, outlook suggest accelerating growth for ECMs but does not point to acceleration in overall growth beyond the levels currently priced into tech shares. As a result, we think SLR offers significant long-term upside potential for investors; we would accumulate at this level. However, given the high valuations within technology, we would also take opportunities to selectively sell tech into strength to rebalance the tech portion of the portfolio to achieve a neutral market weight.--Ping Yu, Briefing.com
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