From Briefing.com: Stocks opened higher but could not hold onto gains on Thursday despite favorable initial jobless claims data and strong earnings reports from a number of companies including Applied Materials (AMAT 22.13 -0.18), Broadcom (BRCM 41.56 -0.90), OmniVision (OVTI 29.45 +3.82) and Wal-Mart Stores(WMT 58.38 +1.18). The Philadelphia Fed Index came in below expectations but did not have an immediate dampening effect on equity markets.
The Dow (DJI 10664.73 -7.26) eased 0.07% after being up as much as 0.76%. The S&P (SPX 1147.06 -4.76) slipped 0.41% after rising as much as 0.59%. The Nasdaq Composite (IXIC 2045.96 -30.51) dropped 1.47% after climbing as much as 0.89% as tech shares dragged the index lower.
The Philadelphia Semiconductor Index (SOXX 514.73 -7.73) fell 1.48% after rising as much as 4.0% intra-day. Decliners outnumbered advancers 5.0:1 with decliners falling 1.8% and advancers edging up 0.8%. The Briefing.com Tech Index (BTI) declined 1.2%. Decliners outnumbered advancers 2.3:1, with decliners falling 3.0% and advancers rising 2.8%.
Today's movers: OmniVision (OVTI 29.45 +3.82) jumped 14.9% after posting stronger than expected Q3 results; Stratasys (SSYS 18.40 -2.66) fell 12.6% after reporting Q4 results; and Camtek (CAMT 6.18 -1.07) dropped 14.8% after posting Q4 results and announcing a secondary offering
After the close, BEA Systems (BEAS 12.93 -0.02) and SERENA Software (SRNA 21.60 -0.79) posted results ahead of consensus, Hewlett-Packard (HPQ 23.86 +0.35) posted results in-line with revised guidance and consensus, and Wireless Facilities (WFII 16.03 +1.02) reported in-line but guided below consensus and named a new CEO.--Ping Yu, Briefing.com
1:43PM Applied Materials (AMAT) 23.75 +1.44: Applied Materials published Q1 results after the close on Wednesday. The world's largest supplier of equipment and services to the semiconductor industry printed EPS of $0.12 on revenue of $1.555B (+47.5% Y/Y) vs. consensus at $0.08 on revenue of $1.321B.
Management seeing broad-based strength across geographies, particularly Asia (71% of sales): SE Asia / China accounted for 25% of orders; Taiwan 18%; North America 17%; Japan 17%; Europe 12%; and Korea 11%.
New orders increased 31.9% Y/Y to $1.683B, driven by demand from logic/other customers. The table below shows Q1 bookings by customer application and linewidth:Application Linewidth
Logic / Other 39% >0.10µ, <=0.15µ 56%
Foundry 35% <=0.10µ 32%
DRAM 26% >0.15µ 12%
Gross margin improved 644 bps Y/Y to 43.5% as AMAT continued to realize scale efficiencies on 300mm production at the company's Austin manufacturing facility.
Operating margin, excluding extraordinary items, improved Y/Y from a loss to 17.0% on firm expense control.
Guided for new orders in Q2 to grow by approximately 30% Q/Q and revenue by 20% Q/Q. EPS is expected to come in at $0.17-$0.19 on $1.867B vs. consensus at $0.11 on $1.481B.
AMAT shares, based on our inverted EVA / DCF model which assumes steady Y/Y improvement to 55% gross margin and 35% operating margin, are priced for sustained high 20% revenue growth. The unfolding industry recovery, market share gains and firm expense control are helping the company meet market expectations near-term but the company will be challenged to deliver on these expectations over the long-term.
First, the 55% gross margin reflected in our model is above management's target of 50% gross margin on $2B in quarterly revenue.
Second, industry fundamentals supports AMAT posting 20%-40% Y/Y growth over one to two years but not beyond. Semiconductor equipment manufacturers are forecasting 39% Y/Y revenue growth for 2004 but growth is expected to moderate to 18% in 2005 and to contract by 6.6% in 2006 (Tech Stocks page, December 02, 2003). In dollar terms, revenue for the group is expected to grow to $29.6B in 2004, $35B in 2005 and to drop to $32.7B in 2006, suggesting that AMAT will capture over 700 bps in market share by 2006 and completely dominate the industry over the next decade (AMAT is a $10-11B annual revenue company in 2006 and a $64-65B annual revenue company by the end of the forecast period).
AMAT is the industry leader and double-digit bookings growth may temper immediate valuation concerns but we caution that there are instances where the premium for perceived industry leadership is simply not worth its value in psychological or real currency. The company will have to capture significant market share just to meet investors' expectations. Note that the valuation for most companies within the semiconductor equipment space already price in growth expectations that far exceed what industry fundamentals can sustain, implying almost every company is gaining market share (an impossibility) or industry growth is set to accelerate (contrary to current industry expectations and long-term fundamentals). We would swap into leading semiconductor component names, including Agere Systems(AGRA 3.94 +0.01), Analog Devices (00C 51.64 +0.25), Intel (INTC 30.51 -0.09) and Intersil (ISIL 25.88 +0.28) as we like the way semis are expected to build over the next decade.
We would continue to focus on ASM International (ASMI, 24.45 -0.15) for investors seeking a semiconductor capital equipment play. But note that ASMI has risen over 42% since we first commented on the company on the Tech Stocks page (October 14, 2003).--Ping Yu, Briefing.com
6:04PM Semi Book-to-Bill : Semi equipment industry book-to-bill ratio fell to 1.18 in January versus Moors and Cabot's estimate of 1.20 (front end 1.26 and back end was 1.17). Bookings of $1.22 bln came in 3.6% above December's level of $1.18 bln and 65.6% above the $739 mln in orders posted in the same time a year ago
5:28PM NTOP mentioned favorably in Business Week 6.96 +0.15: Business Week mentions that Net2Phone (NTOP) looks to be a big player in the Internet phone hookups arena. Eric Buck of Janco Partners, who rates the stock a buy, says it is working toward becoming an outsourcer to cable operators of Voice Over Internet Protocol (VOIP) services. Co has an existing VOIP business that he expects to bring in $118 mln in 2005, up from an estimated $83 mln in 2004. Now, he says, it is offering a VOIP system to cable operators that lets them provide such services to their customers. Based on cash flow and buyout multiples, Buck sees the stock, now trading at $6.96, hitting $11 in a year.
4:59PM LSI Logic subsidiary files S-1 registration statement (LSI) 10.46 -0.18: Co's subsidiary, LSI Logic StorageSystems, filed a Form S-1 Registration Statement with the SEC. The filing provides for an offering by the storage systems subsidiary of up to $250 mln of common stock. In the S-1 filing, co reaffirmed its intention to pursue the separation of its subsidiary into an independent public company.
4:49PM Texas Instruments to repurchase up to 21.0 mln shares (TXN) 30.90 -0.54: The repurchases are intended to neutralize the potential dilutive effect of shares expected to be issued upon the exercise of stock options under the company's stock option and employee stock purchase plans.
4:18PM Wireless Facilities reports in line, files shelf, new C.E.O., guides below consensus (WFII) 16.03 +1.02: Reports Q4 (Dec) earnings of $0.11 per share, in line with the Reuters Research consensus of $0.11; revenues rose 62.5% year/year to $82.9 mln vs the $84.7 mln consensus. Company sees Q1 EPS of $0.07-0.08 vs Reuters consensus of $0.10, First Call consensus is $0.09 on revenues of $76-83 mln, consensus $88.9 mln. Company also announces announced that effective April 1, Eric M. DeMarco will be assuming the role of CEO and Masood Tayebi will become Executive Chairman. WFII also files $200 mln shelf.
4:04PM Hewlett-Packard reports, guides in line (HPQ) 23.86 +0.35: Reports Q1 (Jan) earnings of $0.35 per share, in line with the Reuters Research consensus of $0.35; revenues rose 9.2% year/year to $19.51 bln vs the $19.38 bln consensus. Company sees Q1 EPS of $0.34 vs consensus of $0.34 on revenues of $19.2-19.6 mln, consensus $19.22 bln; HPQ also reaffirms Y04 EPS view of $1.43, in line with consensus of $1.43.
3:13PM Hewlett-Packard Earnings Preview (HPQ) 24.06 +0.55: Hewlett-Packard is scheduled to release Q1 (Jan) results after the close today, with consensus standing at $0.35 in EPS and $19.4 bln in sales (note that the co reaffirmed its $0.35 and $19.5 bln guidance on Feb 11). First Albany expects an in-line qtr, and says the Personal Systems Group is key; firm sees that unit's operating margins +1.5%, up from +0.4% in the prior qtr and +0.6% YoY, and says P.S.G. profitability remains a top priority, although their est could prove too high in light of HPQ's continued price aggression during the qtr.
3:03PM 50 Day-Alert -- Applied Materials (AMAT) 22.49 +0.18: -- Update -- -- Technical -- Stock moved aggressively higher off the open in the wake of last night's earnings report, but has pushed steadily lower thereafter with it sliding 5.8% off the morning peak. Currently it is back vacillating near its 50 day simple (22.51).
9:43AM Broadcom (BRCM) 44.00 +1.54: Broadcom raised Q1 revenue guidance last night. Management is forecasting revenue growth of 16-18% Q/Q, up from prior guidance of 10% Q/Q provided on January 27, 2004. Management is continuing to see stronger than expected demand on relatively broad-based strength within the broadband communications group and the mobile and wireless group.
Revenue is expected to total $555.8-565.4MM vs. Reuters Research consensus at $524.77MM. Management sees gross margin improvement of as much as 100 bps, driven by the transition to 300mm production processes, a favorable mix shift and scale efficiencies.
Q2 revenue is expected to be above Q1 but management has little visibility into the rate of growth and the sustainability of demand trends. That said, the company has a number of design wins that have yet to be announced but we would expect that these are at least partially factored into guidance.
BRCM competes in some of the fastest growing segments within the consumer broadband, wireless and networking markets and is executing to plan. Investors have taken notice and have accorded BRCM a premium market valuation. Shares are, based on our inverted EVA / DCF model, priced for sustained high 30% growth assuming 50% gross margin and 20% operating margin.
BRCM may be able to sustain the expected level of growth short-term given the company's targeted markets are in the early stage of recovery/growth and BRCM is beginning to harvest its investments in the 14 companies it acquired for $6.3B between 2000 and 2003, but it would be a challenge over the long-term on a purely organic basis. The expected growth rate exceeds the level which current industry fundamentals can support over the long term; BRCM is already growing at a faster rate than its customer end markets.
The implied gross and operating margin are in-line with management's long-term targets. BRCM will be hard pressed to make headway in gaining pricing leverage and materially improving gross margin given that foundry capacity is at or above 100%. But modest upside to the target 20% operating margin may be possible as management remains focused on containing operating expenses and BRCM has little variable compensation tied to sales.
As noted on Tech Stocks (January 28, 2004), BRCM filed a S4 acquisition registration to issue up to 30MM shares for potential acquisitions and a S3 shelf registration to issue securities valued at up to $750MM. Management has stated that the company has no immediate plans to draw down the shelf registrations.
Management does not normally provide mid-quarter updates. Management's decision to revise guidance for Q1 despite the lack of visibility into the rate of growth and the sustainability of demand trends for the balance of the year raises the question to what end?
Given the steep valuation, high expectations and the potential for dilution, we would take profits and wait for at least a 25-30% pull-back or until management delivers low 20% operating margin before initiating a new position.--Ping Yu, Briefing.com
8:55AM Upgrade/Downgrade Briefing : Prudential upgrades KLA-Tencor (KLAC 55.43) to Overweight from Neutral based on valuation as well as its increasing confidence regarding the sustainability of equipment orders growth beyond the March quarter; firm believes that KLAC still has further EPS and revenue potential due to large deferred revenue, and believes the company is likely to significantly exceed its peak cycle earnings estimates in the current cycle given its significantly larger dollar opportunity per fab as evident by recent order trends. Price target is $65.
What It Means:
- Prudential's upgrade comes after direct competitor Applied Materials (AMAT) turned in an impressive Q1 (Jan) report that spoke to strengthening end market demand. New orders increased 32% sequentially and 66% year/year, and backlog at the end of Q1 was $2.63 bln compared to $2.50 bln in Q4. The company also guided for Q2 (Apr) EPS of $0.17-0.19 (consensus of $0.11), revenues rising 20% sequentially to $1.87 bln (consensus of $1.48 bln), and orders increasing 30% sequentially.
- KLA-Tencor has also seen a noticeable uptick in capital spending on the part of semiconductor companies: on its Q2 (Dec) call, the company issued Q3 (Mar) EPS and sales forecasts that were well above the Reuters Research consensus estimates. Management recently reaffirmed that outlook (February 3) at the Thomas Weisel Tech 2004 Conference.
- KLAC has had a remarkable run over the past year, but has come under selling pressure in the past month. Like the other chip makers, KLAC has given back a noticeable amount of its gains (13%) and fallen below its 50-day simple moving average (at 57.45).
- Prudential's upgrade is certainly nothing new (since late November, the stock has received 4 upgrades), but the stock should still get a pop at the open owing in part to its recent weakness and the enthusiasm over Applied Materials's report. The pre-market trade has KLAC at +1.90 to 57.33 - approaching its 50-day moving average. -- Heather Smith, Briefing.com
Advanced Micro (AMD) 14.97 -0.33 : Reuters reported that world's No. 2 personal computer maker, said on Wednesday it had no plans to use AMD's chips in its products as corporate customers are not asking for that. "If you look at the corporate market, which is where 85 percent of our business is today, the corporate user has not yet found confidence in AMD and so most of the corporations use Intel," said Dell's Chief Operating Officer Kevin Rollins, speaking to students at the University of Chicago's Graduate School of Business.
Broadcom (BRCM) 41.56 -0.90 : Broadcom (BRCM 41.56 -0.90): Thomas Weisel raised Broadcom estimated following co's increased guidance; firm takes MarQ EPS est to $0.27 from $0.22 (revs to $560 mln from $525 mln), FY04 to $1.12 from $0.92 (revs to $2.36 bln from $2.18 bln), FY05 to $1.30 from $1.08 (revs to $2.8 bln from $2.5 bln). Given firm's new estimates, stock currently trading at an EV to CY05E sales multiple of 4.9x, a discount to Comm IC peers such as PMCS (9.7x), VTSS (6.4x) and AMCC (5.6x). Broadcom's business trends have been consistently improving, estimates have been consistently been going up, and shares appear attractively valued, in firm's view.
Integrated Device (IDTI 17.39 -0.23): CIBC says its checks following the Intel Developer Forum indicate that Integrated Device has won key OEM designs for Grantsdale PC clock. Firm believes co is taking share primarily from CY, displacing it as the second source at several OEMs. ICST remains the primary source, firm believes. While CIBC is growing more confident that co can achieve EPS targets, firm continues to believe the stock deserves at-best an in-line multiple with comm IC peer group.
OmniVision Technologies (OVTI 29.45 +3.82): Needham upgraded OmniVision to Strong Buy from Buy, raised their FY05 (April) rev/EPS ests to $476 mln/$1.53 from $363 mln/$1.04, and raises their target to $50 from $35 following stronger than expected Q3 results; firm remains bullish on the longer-term potential for significant growth of CMOS image sensors across a variety of end-mkts, and they continue to believe the co possesses significant competitive advantages due to its highly integrated offerings, use of customized test equipment, and very experienced mgmt team.
OmniVision Technologies (OVTI 29.45 +3.82): Wells Fargo Sec raised its OmniVision Technologies price tgt to $40 from $35 and increases FY04 est to $0.89 from $0.73 and FY05 to $1.39 from $0.95.
Texas Instruments (TXN) 30.90 -0.54 : After the close, announced co will repurchase 21MM shares. Repurchase intended to neutralize the potential dilutive effect of shares expected to be issued upon the exercise of stock options under the company's stock option and employee stock purchase plans.
Credence (CMOS) 13.07 +0.09 : Before the open, reported Q1 (Jan) loss of $0.17 per share, ex items, $0.07 better than the Reuters Research consensus of ($0.24); revenues rose 85.8% year/year to $68.1 mln vs the $65.4 mln consensus. Co sees Q2 revs of $84-87 mln vs Reuters Research consensus of $76.7 mln. Co sees GAAP EPS of $0.00-0.02 vs consensus of loss of $0.09.
KLA-Tencor (KLAC) 55.58 +0.15 : Prudential upgraded KLA-Tencor to Overweight from Neutral-weight based on valuation as well as their increasing confidence regarding sustainability of equipment orders growth beyond the March qtr; firm believes that KLAC still has further EPS and rev potential due to large deferred rev, and believes the co is likely to significantly exceed its peak cycle earnings ests in the current cycle given its significantly larger dollar opportunity per fab as evident by recent order trends. Target is $65.
Applied Materials (AMAT) 22.13 -0.18 : UBS raised Applied Materials EPS estimates to reflect mgmt guidance as follows: FY04 to $0.76 from $0.45; FY05 to $0.99 from $0.92. Firm thinks co could outgrow peers in the near term. However, cuts price tgt to $29 from $32 as firm reduces its target PE multiple to 32x from 35x (consistent with patterns of prior cycles, firm is lowering its target multiple as we progress into the upcycle)... BofA Sec says that even with the more aggressive assumption and higher EPS estimates, firm views the stock as fully valued and thinks investors should use the strength to move to a market weighting in the sector. Firm says that historically Applied Materials has strung together 3-4 qtrs of sharp growth before momentum stalled (the only periods where order momentum lasted longer was the PC boom in 1993-95 and the communication bubble in 1999-2000).
Rudolph Tech (RTEC) 22.45 +1.12 : Unterberg upgraded Rudolph Tech to short-term Buy from Mkt Perform to reflect increasing product momentum, robust market share dominance in the expanding copper market, strong business fundamentals and moot competition.
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