From Briefing.com: 6:28PM Weekly Wrap: For the third week in a row the major indices closed the week with a loss. As was the case in the prior two weeks, the negative disposition was a by-product of concerns surrounding rising interest rates, higher inflation, escalating energy prices, and developments in Iraq that hit an an appalling low this week with the videotaped beheading of an American man at the hands of an al-Qaeda operative.
Against such a backdrop, who can blame investors for sitting on the sidelines? Certainly not us; in fact, we suggested last Friday that the sidelines were the safest place to be. For the most part, we still think that's the case, but there were some signs this week that participants were beginning to wade back into the investment waters.
To that effect, the market looked rather ugly on Wednesday with the Dow, Nasdaq, and S&P down 167, 52, and 19 points, respectively, at their worst levels of the session. An afternoon rally, however, kicked into gear, and by the closing bell, the Dow and S&P were showing slight gains while the Nasdaq pared its loss to just 6 points.
Additionally, it wasn't lost on technicians that the S&P 500 closed the week on an upbeat note after finding support at its 200-day simple moving average during the early sell-off on Wednesday. That key support level is currently 1079.28, and at the moment, the S&P 500 is the only one of the three major indices to remain above its 200-day moving average. As such, traders will be keeping a close eye on that line in the sand. The successful defense of that floor this week, though, could prompt some follow-through activity on Monday barring any surprises over the weekend.
Another development that may very well foster some dip buying activity was the performance of the 10-yr note on Friday. Struck by a slightly higher than expected print in core-CPI (+0.3% vs +0.2% consensus), the yield on the 10-yr note hit its highest level (4.90%) in nearly two years soon after the release. Its fortunes turned on a dime, though, with a short-covering rally that drove the yield back down to 4.77%. The striking reversal could foster a sense that the Treasury market is coming around to the idea that the Fed's expected tightening has been priced in already. Suffice it to say, if there is some stability, or some recovery, in the Treasury market, the stock market's fortunes should improve.
That consideration showed up in some of the leadership groups this week as a number of them were the same rate-sensitive groups that have been undercut during the 10-yr note's trek from 3.88% to 4.90%. Those groups included, but were not limited to, thrifts & mortgage, apparel, investment banking, aluminum, paper products, building products, REITs, banks, and homebuilding. There wasn't any discernible pattern among the laggards, but several defensive-oriented groups like drugs, drug store, soft drinks, distillers, and tobacco underperformed the market.
Tobacco (-9.72%) got smoked in a manner of speaking after the Florida Supreme Court ruled that it would review an Appeals Court decision to throw out the $145 bln verdict in the Engle class action case. The next worst-performing S&P industry group for the week was Computer Storage & Peripherals (-3.25%). Tech groups, in general, failed to provide much inspiration as neither Cisco (CSCO) nor Dell's (DELL) solid earnings reports, nor increased guidance from Qualcomm (QCOM), provided the sector with much of a spark.
Sparks were flying in the energy pits, though, as ongoing concerns about supply shortages/disruptions entering the busy summer driving season in the U.S. sent oil prices to a record high. Crude oil for June delivery ended the week at $41.38/bbl. Rising energy prices also upset international markets, particularly Japan, which is also battling concerns about a slowdown in China. The Nikkei dropped 5.2% for the week, with the yen falling 1.8% against the dollar.
On the economic front, worries about inflation were stoked with the PPI and CPI reports, but overall, the data continued to point to an improving economy. Industrial Production for April increased 0.8% (consensus +0.5%) while Capacity Utilization was 76.9% (consensus 76.7%). A rate closer to 80.0% is consistent with inflation in the industrial sector.
Next week, economic data should fade into the background as there are only a handful of releases. As for earnings reports, they have grown progressively lighter since their peak a few weeks ago. Nonetheless, there will be some reports of interest out of the retail and technology sectors, as Applied Materials (AMAT), Hewlett-Packard (HPQ), Home Depot (HD), JC Penney (JCP), and Gap, Inc. (GPS) are among the companies on the docket. --Patrick J. O'Hare, Briefing.com
Index Started Week Ended Week Change % Change YTD
DJIA 10117.34 10012.87 -104.47 -1.0 % -4.2 %
Nasdaq 1917.96 1904.25 -13.71 -0.7 % -4.9 %
S&P 500 1098.69 1095.70 -2.99 -0.3 % -1.5 %
Russell 2000 548.56 543.76 -4.80 -0.9 % -2.4 %
12:38PM INTC: Color on analyst meeting 27.10 -0.34: Bernstein gives an update on their conversation with INTC CEO Craig Barrett; in response to the most frequently asked question since the Q1 call on April 13, Barrett said that he was comfortable with inventories at Intel and in the channel, and said that an inventory write-down was the "farthest thing from my mind" since it was due to better than expected yields, not worse than expected demand. Firm says he was very disdainful of this question, and their conclusion is that he thinks there is zero chance of a microprocessor inventory write-off. Regarding the cancellation of its next-generation "Tejas" and "Jayhawk" processors due to head dissipation, firm believes that the cancellations and difficulty Intel is having with power dissipation at 90nm make it likely that AMD will have a harder time with its R&D budget, which is one fifth as large as Intel's. Maintains Outperform rating.
7:21AM Semi equipment sector initiated at Schwab Soundview : SoundView initiates the semiconductor equipment and manufacturing sector. The firm's analysis suggests that despite a 45% yr-over-yr equipment spending growth in 2004, aggregate wafer capacity growth remains about in-line with end-market unit growth at 15%. Overcapacity is unlikely if 2005 capital spending growth remains at 25% yoy. Front end equipment picks are LRCX and NVLS, its top back end equipment pick is TER and its top foundry pick is TSM. See up/downgrades page for full list of initiations.
6:25AM Cisco Systems authorizes $5 bln in additional stock repurchases (CSCO) 21.76: Co authorizes up to $5 bln in additional repurchases of its common stock. Cisco's board had previously authorized up to $20 bln in stock repurchases. There is no fixed termination date for the repurchase program.
12:37PM Analog Devices (ADI) 46.67 +0.62: Analog Devices posted Q2 EPS after the close on Thursday. EPS came in at $0.39 on $678.53MM (+35.2% Y/Y) vs. consensus at $0.35 on $664.06MM.
The company saw growth across all major market segments, particularly from the consumer electronics and industrial markets. The company is increasing content per system in digital cameras, digital TVs, projectors and other audio/video products. The following table shows sequential revenue growth by market segment. Market Segment % of Sales Q/Q Growth
Industrials 35-40% 15%
Communications 35-40% 10%
Computers 15-20% 5%
Consumer 10-11% 21%
Analog revenue (80% of sales) increased 40% Y/Y, driven by converters (+40% Y/Y; 40% of analog sales) and high-performance amplifiers (+29% Y/Y; 20% of analog sales). DSP revenue increased 20% Y/Y, driven by wireless and general-purpose DSPs, offset by a decline in DSL due to supply constraints.
Asia/Pacific accounted for 37% of sales; North America 24% of sales; Japan 20%; Europe 19%.
Backlog increased 20% Q/Q to $571MM. Turns business accounted for approximately 40% of sales.
Gross margin increased 469 bps Y/Y to 59.2%. Operating margin increased 984 bps Y/Y 28.0%. Improvement reflects scale efficiencies as ADI ramps internal fabs, product mix shift and cost containment. Pricing was stable. Capacity utilization is in the 70-75% range.
The following table shows price multiples and Y/Y growth rates for ADI compared against industry comps within the semiconductor group. Company *P/SG **P/OPG P/S Y/Y Revenue Growth
TTM 2004E 2005E TTM 2004E 2005E
Analog Devices (ADI) 6.0 20.2 11.4 10.6 8.3 10.7% 22.9% 27.1%
Cirrus Logic (CRUS) 2.9 (19.6) 2.9 2.3 1.9 (32.3%) 27.0% 19.9%
Linear Tech (LLTC) 7.1 15.6 16.1 15.3 11.2 26.4 27.2% 36.5%
Maxim Integrated Circuits (MXIM) 6.1 17.7 11.8 10.8 8.0 15.4% 24.8% 35.2%
National Semiconductor (NSM) 2.5 29.0 4.1 3.8 3.1 10.2% 17.5% 22.0%
STMicroelectronics (STM) 1.5 59.2 2.5 2.1 1.9 16.2% 22.9% 13.8%
Texas Instruments (TXN) 2.5 26.2 4.2 3.4 3.0 20.9% 32.1% 15.5%
Semiconductors 2.5 31.0 4.2 n/a 18.1% n/a
*Normalized P/SG Ratio: Trailing 12 month (Price / Sales) / Growth ratio as of May 7, 2004.
**Normalized P/OPG Ratio: Trailing 12 month (Price / Operating Income) / Growth ratio as of May 7, 2004.
Management's goal is to grow revenue at 2x the industry average while constraining operating expense growth below revenue growth. Operating model calls for gross margin in the 60% range, operating expenses in the 25% range, and operating margin in the lower to mid 30% range.
The company is seeing strong demand for broadband access products, cellular phones and wireless base stations. Blackfin is expected to be a major contributor to revenue. Company continues to make progress in developing Blackfin and TigerSHARC in wireless and across a broad range of general-purpose applications. Blackfin secured several design wins during the quarter for EDGE-based handsets slated for market in late 2004 through 2005, as well as in IP set-top boxes where Blackfin replaces several ASICs for decoding multiple video algorithms. There are approximately 5K customers evaluating and over 1K active design ins. TigerSHARC is designed into Ericsson's new 3G wireless basestation.
Guided for Q3 EPS of $0.43-0.45 on $725-745MM (+39.3-43.2% Y/Y) vs. consensus at $0.39 on $700.54MM. The company is 78% booked to the mid-point of guidance for the quarter based on current backlog.
ADI shares are, based on our inverted EVA/DCF model, priced for sustained upper 20% revenue growth from F06 assuming 34% operating margin.--Ping Yu, Briefing.com
9:22AM LTX Corp (LTXX) 10.14: LTX Corp designs, manufactures, markets and services semiconductor test solutions. The company reported Q3 EPS of $0.07 on revenue of $70.333MM (+144.4% Y/Y) vs. Reuters Research consensus at $0.07 on $70.25MM.
IDMs accounted for 74% of bookings and 81% of revenue; contract tests and fabless companies accounted for the balance. Products accounted for 91% of bookings and 87% of revenue; services accounted for the balance.
Gross margin increased 2,315 bps Y/Y to 41.6% due to higher volumes and shift to new products. Operating margin improved Y/Y from a loss to 7.2%.
The following table shows price multiples and Y/Y growth rates for LTXX compared against industry comps within the semiconductor capital equipment and electronic instruments & controls groups. Company *P/SG **P/OPG P/S Revenue Growth
TTM 2005E 2005E TTM 2004E 2005E
LTX (LTXX) 2.4 (10.6) 3.0 2.4 1.5 76.5% 113.0% 63.1%
Agilent (A) 1.4 (32.9) 2.0 1.8 1.6 4.9% 13.7% 11.8%
Credence Systems (CMOS) 2.1 (11.3) 3.4 2.0 1.5 28.6% 102.1% 34.6%
Teradyne (TER) 1.9 (64.3) 2.8 2.0 1.7 10.7% 52.5% 14.7%
Semiconductor Capital Eqpt 2.4 532.4 3.0 n/a (3.7%) n/a
Electronic Instruments & Controls 0.7 265.8 0.9 7.2%
Blended 1.0 312.2 1.2 5.1%
*P/SG Ratio: Normalized Trailing 12 month (Price / Sales) / Growth ratio as of May 7, 2004.
**P/OPG Ratio: Normalized Trailing 12 month (Price / Operating Income) / Growth ratio as of May 7, 2004.
Management believes recent performance reflects a strong start to a sustained up cycle. The company exited the quarter with a book-to-bill of 1.1. Guided for Q4 EPS of $0.12-0.14 on $77-80MM (+128.5-137.4% Y/Y) vs. consensus at $0.15 on $81.58MM.
LTXX trades in line with industry comps after pulling back over 38% since April and 48% since January. Shares are, based on our inverted EVA/DCF model, priced for sustained lower 20% revenue growth from F06 assuming 15% operating margin. Implied growth rate drops to lower teens range assuming 20% operating margin (eight year peak is ~18%). Expectations priced into shares remain high despite sharp devaluation. Shares may track higher on a short-term rebound but upside is unsustainable.--Ping Yu, Briefing.com
9:06AM DELL (Dell) 35.87: Dell reported Q1 results after the close on Thursday. EPS came in at $0.28 on revenue of $11.540B (+21.1% Y/Y) vs. Reuters Research consensus at $0.28 on $11.350B.
The following table shows Y/Y unit and revenue growth by geography. Geographic Market Y/Y Growth Revenue $ in B % of Sales
Unit Revenue
Americas Business 18% 16% 5.758 50%
U.S. Consumer 22% 18% 1.738 15%
EMEA 37% 31% 2.653 23%
Asia/Pacific/Japan 38% 31% 1.391 12%
Total 25% 21% 11.540 100%
Management estimates the company widened its worldwide market share by 260 bps to 18.6%, 3.1 points ahead of closest competitor.
The following table shows Y/Y unit and revenue growth by product segment. Software & Peripherals revenue increased 39% Y/Y. Services revenue increased 41% Y/Y; $3.0B annual run-rate. Product Segment Y/Y Growth
Unit Revenue
Desktop 21% 13%
Notebook 39% 24%
Enterprise 22% 19%
Total 25% 21%
Gross margin declined 37 bps Y/Y to 18.0%. Operating margin declined 14 bps Y/Y 8.4%. Gross margin compression due to component pricing pressures was partially offset by focus on growing unit revenue and controlling operating expenses.
Guided for Q2 EPS of $0.29 on revenue of $11.7B (+19.7% Y/Y) vs. consensus at $0.29 on $11.562B. Unit shipments expected to increase 24% Y/Y. Operating income to grow in line w/ revs.
The following table shows price multiples and Y/Y growth rates for DELL compared against peers in the computer systems & peripherals and computer services groups. Company *P/SG **P/OPG P/S Y/Y Revenue Growth
TTM 2004E 2005E TTM 2004E 2005E
Dell (DELL) 1.6 20.3 2.1 1.9 1.6 22.7% 17.9% 15.5%
Apple (AAPL) 0.9 46.5 1.4 1.3 1.2 23.3% 27.7% 1.1%
Gateway (GTW) 0.4 (4.1) 0.4 0.4 0.4 (14.8%) 2.3% 7.3%
Hewlett Packard (HPQ) 0.6 15.6 0.8 0.8 0.7 18.4% 7.4% 6.2%
IBM (IBM) 1.1 11.7 1.6 1.5 1.4 9.7% 8.0% 6.1%
Sun Microsystems (SUNW) 0.8 (18.2) 1.2 1.2 1.2 (6.9%) (4.1%) 1.6%
Computer Systems & Peripherals 0.9 17.9 1.3 n/a 11.0% n/a
Computer Services 1.1 18.3 1.5 5.0%
Blended 1.0 18.1 1.3 8.8%
*Normalized P/SG Ratio: Trailing 12 month (Price / Sales) / Growth ratio as of May 7, 2004.
**Normalized P/OPG Ratio: Trailing 12 month (Price / Operating Income) / Growth ratio as of May 7, 2004.
As we commented in the Q4 review, Story Stocks, February 12, 2004, DELL trades at a premium to direct comps and to peer groups, reflecting stable operating model, and market share and revenue momentum. Shares are, based on our inverted EVA/DCF model, priced for sustained upper 20% revenue growth from F07 assuming 8.5% operating margin. Implied growth rate drops to lower to mid 20% revenue growth assuming 10% operating margin. Revenue momentum improving but downside risk still greater than upside until company demonstrates even greater revenue momentum or traction towards 10% operating margin. We would wait for a 10-15% pullback.--Ping Yu, Briefing.com
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