Tech market braces for more warnings
By Mike Tarsala & Rex Crum, CBS.MarketWatch.com
Last Update: 2:00 AM ET June 15, 2002
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SAN FRANCISCO (CBS.MW) - Investors looking for a bottom in technology stocks will awake Monday to a frightening new reality - second quarter earnings warning season officially begins.
Analysts and fund managers said that despite huge declines in tech stocks in the last two months, more market tremblors are possible in the next few weeks as the tech industry braces for the run-up to next month's performance results.
Several leading tech companies have already lowered their forward-looking targets in recent days, including Intel (INTC: news, chart, profile), Sprint PCS (PCS: news, chart, profile), Lucent (LU: news, chart, profile), Adobe (ADBE: news, chart, profile), Flextronics (FLEX: news, chart, profile), and Liberate Technologies (LBRT: news, chart, profile).
And even though the number of negative earnings pre-announcements is expected to be lower than in the first quarter, as well as the year-ago period, concern about who will warn next is weighing heavy on the tech-heavy Nasdaq Composite index, which at the 1,500 level is less than 90 points above September's lows.
"You either have to feel that we're at the end of a bear market, or this is the beginning of the third leg down, and this is when we really go into the abyss," said David Briggs, head equity trader with Federated Investors in Pittsburgh.
Some money managers believe that tech stocks have dropped to prices that accurately represent the amount of earnings and revenue that companies can produce. The Nasdaq has lost ground in six of the past eight weeks. A lot of the negatives for the second quarter are already priced into stocks, says Steve Salopek, fund manager with Banc One Investment Advisors.
But some of his peers still worry that a spate of second-quarter warnings might further hurt shares, jeopardizing a second-half revenue, earnings and stock recovery.
To many, the second-quarter pre-announcement season and the earnings reports that follow will determine the fate of the tech sector for the remainder of the year.
"If pre-announcements continue at the pace we're seeing, it's going to give us a poor picture going forward, said Barry Hyman, chief investment strategist at Ehrenkrantz King Nussbaum in New York. "I think it holds the key to whether you believe there's a second-half recovery in tech."
So far, there have been 102 negative tech pre-announcements in the quarter, down from 175 negative warnings a year-ago to this date, according to market research firm Thomson Financial/First Call. The number of tech warnings has continued to come down since the fourth quarter of 2001, said Chuck Hill, Thomson's research director. He says the number of warnings is significantly less than the record 518 negative warnings for the entire first quarter of 2001.
With the number of warnings actually lower than a year ago, some stock analysts believe there could be some positive news from tech companies in the coming weeks.
"I'm not expecting any warnings, but if they come, they should be on the positive side," said Mark FitzGerald, a managing director at Bank of America Securities in San Francisco who covers semiconductor equipment manufacturers. "These companies will likely wait until their reports to say anything, and then there will be some positive surprises."
FitzGerald's comments echo First Call's study of second-quarter pre-announcement results to date. About 59 percent of companies that have pre-announced for the June period said they are on track to meet or beat earnings, while only 41 percent expect to miss targets.
But many analysts remain skeptical about the warnings. First Call's Hill says that while the number of warnings is down, there have been more high-profile ones. He adds that he's uncertain whether the trend of fewer warnings will continue.
Current tech expectations imply 124 percent earnings growth in the third quarter, and 69 percent growth in the fourth quarter - numbers that seem unattainable, even taking into account weak year-ago comparisons.
"It's possible that it could start to swing back to a more negative bias than what we've seen lately," Hill said.
In addition, the current quarter's earnings may be only slightly better than the first quarter, according to Hill. He adds that many companies are telling shareholders that they aren't expecting higher sales and earnings until 2003.
"Most of 2002 is a write off," said Bruce Lupatkin, General Partner, North Bay Technology Partners in San Francisco. "If there is anything positive it is that companies are starting to get religion and realize they are not going to see growth levels like during the bubble. They realize they need to work within their current revenue levels to make money."
In the past few weeks, executives from major manufacturers, including Hewlett-Packard (HPQ: news, chart, profile) and Cisco Systems (CSCO: news, chart, profile) have made comments to shareholders that confirm fears that a second-half tech recovery seems shaky, at best.
H-P's CEO Carly Fiorina said, "We have seen no signs of encouragement yet. Cisco's John Chambers said, "... It is too early to call a possible turnaround."
As many major tech companies have given up on revenue improving in the second half of the year, cost-cutting measures remain en vogue as a means of improving corporate bottom lines.
H-P is among the companies that has made cost-cutting among its biggest issues. Earlier this month, at H-P's first analyst conference since completing its takeover of Compaq, company officials said they would cut costs by $3 billion by 2004. H-P officials also said they would consolidate their outsourced manufacturing in order to squeeze lower costs out of suppliers.
That means contract manufacturers such as Sanmina-SCI, (SANM: news, chart, profile) Flextronics (FLEX: news, chart, profile) and Solectron (SLR: news, chart, profile) could see greater lows and issue more warnings in the future.
On June 4, Flextronics cut its earnings estimates for the next two quarters, and on Friday, Credit Suisse First Boston analyst Kevin McCarthy downgraded his rating and reduced his 2002 revenue estimates on the Sanmina, in part because of the company's relationship with H-P and H-P's "critical need to squeeze its suppliers to realize cost synergies."
Such a forecast adds to the fact that no major tech recovery is on the horizon, more and more fund managers say.
"In addition to all the lousy earnings we've seen preceeding corporate pre-announcements, we've seen dramatic brokerage downgrades," said Hyman of Ehrenkrantz King Nussbaum. "We've seen no pick-up in IT spending. We've seen no top-line story developing. Telecom is a disaster. I don't think there's a second half recovery coming," Hyman said.
Negative market sentiment persists, says John Bichelmeyer, hedge fund manager for BPI Global Asset Management, who oversees about $1 billion in client funds. "
The bad news for the Nasdaq and other tech indices is that stock prices might not reflect the extent of the warnings yet to come, he says. He's among the managers who say it's possible that the Nasdaq could set new lows in the next few months - possibly during the warning period.
"People are still surprised when tech and telecom companies completely whiff," Bichelmeyer says. "The Street expectations aren't quite there yet. It's a combination of people seeing that the second quarter wasn't that great, and that the third quarter isn't going to ramp up."
Mike Tarsala is a San Francisco-based reporter for CBS.MarketWatch.com.
Rex Crum is a reporter for CBS.MarketWatch.com in San Francisco. |
