General Commentary
For the first time since late August, the Nasdaq closed above 1400. It did so by staging another rally into the close. Tech-heavy index didn't have to run far to end in positive territory, but mere fact that it did so shows that there's still a surprising degree of buying interest in a market/sector that has run very far, very fast.
Gains attributed to speculation that Republican Party just might succeed in capturing both chambers of Congress in yesterday's election. It's still to early to predict the outcome of the election, but early returns point to the status quo (a divided Congress) being maintained.
Indices also underpinned by the near universal belief that the Fed will cut rates by 25 basis points this afternoon. Speculation rising that cut could be as big as 50 basis points.
Problem from a trading standpoint is that the good news from these stories is already in the market. In fact, we would argue the market is overstating the potential impact of its preferred scenarios. This sets us up for a classic "buy the rumor, sell the fact" reaction to the election and the Fed. In particular, if Fed opts to cut the funds rate by only 25 basis points, there will be those on the street arguing that Greenspan & Co. are again behind the curve and that the move wasn't bold enough to get economy back on track.
Ultimately, with the election and Fed decision behind it, market will shift its focus back to the unknown issues: economic growth, timing of earnings recovery and threat of war with Iraq. Quite frankly, Briefing.com not terribly optimistic on any of these counts, which is why we contend that prudence dictates reducing exposure to the sector and the market.
Robert Walberg
Industry Briefs
Computer Systems & Peripherals | Networking | Internet | Semiconductor | Semi Equipment | Software | Telecom Equip | Telecom Services
Computer Systems & Peripherals
IBM (IBM) 81.68 -0.82: Traders scouring IBM's just released 10Q for anything new; only items noted thus far are IBM's acknowledgment of "some customer signing deferrals and a lengthening of the sales cycle", and share buybacks of just $400 mln, down from $1.5 bln in recent qtrs, perhaps due to increased pension funding needs.
Research In Motion (RIMM) 12.96 -0.57: Specific terms of the royalty-bearing license were not disclosed. RIM has agreed to dismiss its pending litigation against Handspring following the execution of a definitive agreement.
Soundview survey suggests 2003 will be inflection point in IT spending : Soundview says that their Gartner-SoundView IT spending survey showed a strong year-to-year improvement in intent-to-spend questions, suggesting pent-up demand and a high probability that 2003 will be a positive inflection point in IT spending; although top-down budget questions indicate a flat YoY growth in 2003, firm says their survey has rarely shown such a divergence between IT spending confidence and IT user wants. However, survey indicates that application software spending may lag broader infrastructure priorities, and security showed deceleration from last year. Highlighted co's include DELL, HPQ, CSCO, NTAP, and EMC.
Networking
Adv Fibre Comm (AFCI) 17.48 -0.54: At current levels, shares are trading almost 60% off their 52-week low levels and 6% higher than Banc of America's price target of $17. As a result, firm downgrades to MKT PERFORM from Buy rating and maintains price target based on valuation. Firm concerned that due to company having unwound its CSCO hedge, almost 63% of AFCI's Y03 earnings are expected to come from interest income, rather than operating income, compared to 37% in Y02.
Brocade (BRCD) 7.41 -0.06: Acquiring Rhapsody Networks.
Internet
priceline.com (PCLN) 2.31 +0.21: After close, reports Q3 (Sep) net of breakeven, $0.01 worse than the Multex consensus of $0.01; revenues fell 20.5% year/year to $240.0 mln vs the $259.9 mln consensus. Expects Q4 pro forma EPS of ($0.02)-$0.00 (consensus is $0.01), expects to return to profitability by Q2, and expects 2003 pro forma EPS to exceed 2002 pro forma EPS.
Register.com (RCOM) 4.06 +0.06: After close, posts a Q3 loss of $0.03 a share, $0.01 worse than the Multex consensus. Revs declined 13.5% to $25.5 mln (consensus $23.49 mln).
Yahoo! (YHOO) 17.03 +0.26: First Albany downgrades to BUY from Strong Buy after stock has risen more than 70% over the last four wks, eclipsing firm's FY02 yr-end price target of $16.
Semiconductor
Analog Devices (ADI) 29.10 -1.61: SG Cowen cuts 2003 est to $0.80 from $0.90 (consensus is $0.88) and expects the rest of the Street to trim numbers between now and when ADI reports on Nov 19; with the stock up roughly 65% in the last month (vs the SOX up roughly 55%), firm believes there is risk to near-term stock performance as numbers are cut.
PMC-Sierra (PMCS) 6.40 unch: Banc of America downgrades to MKT PERFORM from Buy. Firm views PMCS's 135% run up in recent weeks as unwarranted; although firm does not question company's "survivor" status, thinks near-term risk is too great due to weak end markets, lack of any tangible improvement in business, and potential for downward revisions; believes it is best to step to sidelines at current levels; expects more attractive long-term entry points will be found ahead.
Skyworks (SWKS) 7.90 -0.23: After close, company announces that it intends to issue $160 million aggregate principal amount of its convertible subordinated notes due 2007 in a private placement.
Semi Equipment
Entegris (ENTG) 8.21 -0.10: After close, company sees sales in low $50 million range -- expects Q1 restructuring charge of $1.5 million; will cut 121 jobs.
Kulicke & Soffa (KLIC) 3.75 -0.11: Announces that it is exploring options for certain of its non-core business units, including their potential sale; co has begun very preliminary discussions with potential buyers while concurrently exploring other alternatives.
Lehman: investors overlooking weak fundamentals in semi equipment shares : Lehman says that investors are overlooking weak fundamentals at semi equipment co's in favor of the prospect of stabilization in end mkts and the fear of missing the upturn in equipment shares; overall, shares trade well above historical trough levels, and the co's with the greatest discrepancy between price/book and tangible book include AEIS, BRKS, KLIC, MKSI, and PLAB; believes the most likely candidates for asset impairment charges are KLIC and BRKS.
Software
Adobe Systems (ADBE) 25.82 -1.56: Deutsche downgrades to SELL from Hold. Firm cites numerous risks, including post-settlement competition with Microsoft, Acrobat server strategy, sales transition, too high long-term guidance, and margin pressures. Firm's price target remains $20.
AmerisourceBergen (ABC) 68.81 -3.14: Bear Stearns is out defending ABC, saying the stock's weakness is due to rev guidance that is in-line with RX's data of 11-14%; says RX's growth levels have been decreasing due to increased presence of generics, yet this is actually good for ABC and other distributors because it helps their overall margins; firm believes that ABC will clarify this issue on their 11:00 AM ET conference call.
Citrix Systems (CTXS) 8.74 +0.49: Under the worldwide systems integration and cooperative support agreements with Citrix, HP plans to provide services for enterprise server-based computing solutions. In addition, HP intends to enhance its ability to resell Citrix solutions on a global basis.
Computer Sciences (CSC) 33.35 -0.86: After close, reports Q2 (Sep) earnings of $0.54 per share, in line with the Multex consensus of $0.54; revenues fell 1.2% year/year to $2.73 bln vs the $2.81 bln consensus; earnings per share for the fiscal year "are now anticipated to be in the low-to-mid $2.60 range" -- Multex consensus estimate is for earnings of $2.68 per share.
Group 1 Software (GSOF) 21.89 -0.11: After close, company declares 2-for-1 stock split.
Microsoft (MSFT) 56.68 +0.58: Company says "not yet" to dividends.
Quest Software (QSFT) 12.12 +0.22: Deutsche Securities initiates coverage with a Hold rating and $12 price target; firm does not believe that QSFT will be able to accelerate growth from organic sources, sees little to argue for multiple expansion relative to its peers, and believes mkt share gains will be difficult to achieve.
Synopsys (SNPS) 48.25 +6.64: Boosts Q3 outlook to $0.96-$0.98 vs current Multex consensus of $0.87. Puts Q3 revs at $307-$309 mln (consensus $306.9 mln). SNPS also reaffirms 2003 outlook of $3.25.
Telecom Equip
ADTRAN (ADTN) 27.00 -1.40: Despite company's solid foundation, analysts can no longer justify company's current valuation given weak end-market demand and cloudy visibility. Acknowledging ADTN's healthy balance sheet, solid management, ability to maintain profitability and gain market share, Banc of America downgrades to MKT PERFORM from Buy rating and price target of $24 due to high valuation. Kaufman Bros, likewise, downgrades to HOLD from Buy based on valuation, but believes company will continue gaining share and outperforming peers. Analysts' calls are not surprising given stock's 91% advance in last month.
Scientific-Atlanta (SFA) 12.99 -0.98: Deutsche Securities downgrades to Hold from Buy due to valuation and cautious outlook on Transmission spending and int'l growth. Price target is $13.
Tellabs (TLAB) 7.80 -0.80: Cut to Underperform from In-Line at Goldman Sachs.
Telecom Services
Nextel (NXTL) 12.54 -0.43: Bear Stearns downgrades to PEER PERFORM from Outperform based on valuation. In light of recent strength in share price, firm recommends that investors take some profits.
SBA Comm (SBAC) 0.50 -0.01: After the close, reports Q3 (Sep) loss of $0.60 per share, in line with the Multex consensus of ($0.60); revenues rose 6.3% year/year to $67.0 mln vs the $67.7 mln consensus; co now expects to produce approximately break-even free cash flow in the first quarter of 2003 but not attain sustained positive free cash flow until 2004.
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