Guidance Is for Show, Cutting Capex Is for Dough
By Bill Fleckenstein
01/15/2003 17:54
As is always the case when a company like Intel INTC reports earnings, it was big news, and the mixed message therein caused not much of a ripple in our overnight futures markets and foreign markets. (Much more about Intel below.) The market opened in a bit of a giddy fashion, trying to focus on the "good" parts of Intel's news and ignore the bad parts, as well as the awful news from semiconductor-equipment maker Teradyne TER .
Risk Moves Back In With Aunt Fannie: In essence, the market opened down fractionally and within about two minutes was just squashed, such that about an hour into the day, all the averages were down 1%. The SOX was down 3%, led by semiconductor-equipment stocks. (More about that below, also.) The bank stock index was down 1.5% as well, perhaps on the back of Fannie Mae's FNM charge of $1.38 billion to reduce the value of certain derivatives. Whether that stirred people up, I don't know, but I did think it was rather interesting. In any case, the early morning initially saw "muscle" trying to buy equipment stocks right off the bat, but when that fizzled, the tech tape broke quickly.
Tool-and-Dyed Red Shops Sprout on Wall: After the early morning whoosh downward, the market continued to sag until about midday. From there, it made an attempt to grind higher, but that fell apart in the last hour, and we settled pretty near the lows of the day. Interestingly, volume was a fair bit chunkier today than yesterday, though it continues to remain on the subdued side of things. Basically, my screen was a sea of red today, though within that, I saw few outsized declines. In fact, it might be argued that the semiconductor-equipment stocks held up rather well, all things considered.
Meanwhile, the question now becomes whether guidance on the earnings front will turn the tape lower, as I expect, or whether there is enough money and optimism out there to power right through any negative news. Speaking of news, tonight's announcements from tech world will pale in significance, compared with what heavyweights like IBM IBM and Microsoft MSFT report tomorrow night.
Away from stocks, fixed income was slightly higher, while the dollar was lower once again. The metals were mixed, with silver up fractionally and gold down fractionally, apparently thanks to some central bank selling out of Portugal.
Forked-Tongue-and-Cheek Gazette: Turning to the news last night, I think we can ferret out what's really happening by taking a look at the results and comments from Teradyne and Linear Technology LLTC . But first, some thoughts on Intel's first-quarter guidance. Regular readers know my expectation has been for rather horrific Q1 guidance in general. That was really not the case with Intel, at least in terms of revenue guidance. Intel is trying to hold to a range of $6.5 billion to $7 billion, down about 6% sequentially. It formed that target on the basis of "historical seasonal patterns."
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10-year Treasury Bond 4.07% -0.013
I think those revenue estimates have almost a zero chance of being met, because this quarter is not going to be "seasonally typical." When one looks at what Intel has been doing, I think it doesn't really expect that either, since the company slashed capital spending plans to about $3.7 billion. It's one thing to try to hold your guidance for revenue in an optimistic fashion, and another thing to cut capex and lay off employees. Perhaps that accounts for Andy Bryant's less-than-spectacular verbiage when he acknowledged "no underlying economic growth" and said he didn't know if PC demand was recovering. For all the excitement around Intel's beating the number, it's worth noting that the stock closed on the low of the day, down 2.5%. At least today, "the market" voted my point of view.
Priced for Perfection, Worthy of Defection: It's interesting that last week so many in the dead-fish community were looking for Intel to increase capex plans. Why anyone would expect Intel to raise capex, given the state of the market it sellsinto, is beyond me. For that matter, why would anyone want to buy semiconductor-equipment stocks at a price-to-sales of over four times that of the "bottom" in 1990, when the companies themselves are announcing layoffs, when big discounting is ubiquitous to their business, when capacity utilization at many fabs is 40%, and fabs are being sold at dimes on the dollar? (For example, just today, Microchip MCHP put a fab up for sale.)
In essence, the securities in this business are almost priced for perfection when, in fact, the wheels may be coming off the bus. Let me quickly add that if all the foregoing were happening, and these stocks were statistically cheap, then one might be tempted to bottom-fish, on the assumption that the bad news was priced in and the risk had been squeezed out of the price. Now, however, the opposite seems true.
Intel Baloney vs. Twin Testimony: The sad state in which the industry finds itself was described by Teradyne's CEO, George Chamillard, as follows: "The combination of a weak economy, weak demand for technology products, and the uncertain world situation overwhelmed the recovery we had begun to see in the first half of 2002," adding, " Unfortunately, none of those negative factors has changed as we enter 2003 the emphasis is mine ." Parenthetically, I might note, due to a write-off, Teradyne wound up losing $423 million, which was more than the $333 million in revenue it reported.
I think that Mr. Chamillard's view, vs. whatever optimistic outlook people are choosing to read in Intel's guidance, is more aligned with the facts. My belief is that things are worsening in the technology sector, as well as in the economy at large. Consumers are paring back because they can see the massive fiscal dislocations occurring at the state and local levels. They note the cuts in services, the rise in taxes, and layoffs. Then there is whatever consternation and postponement of decisions that will be made as the apparent war with Iraq approaches. In any case, I believe that Q1 is liable to be worse than people think, and notwithstanding the companies that try to put on a brave face like Intel, I expect many of them to guide lower.
Turning to another company that's supremely expensive, Linear Technology echoed Teradyne's cautionary comments when it discussed guidance for this upcoming quarter: "Backlogs are low, and customers continue to order only to near-term demand. Therefore, confidently and currently forecasting short-term future results continues to be difficult." But then it speculated about happier times to come, adding "However, the March quarter is customarily the emphasis is mine stronger for us, and we expect some improvement in demand." Linear Technology beat the number, though in part because it slashed R&D sequentially.
The company also saw pretty severe pricing pressure as ASPs declined from $1.70 to $1.54. This is not supposed to happen to analog companies, because of their proprietary designs, and the level of pricing pressure just demonstrates how tough business is. Trading at 13 times sales, Linear Technology is a very dangerous stock to own. In any event, here is another example of a company trying to put on a brave face as it assumes this quarter will be historically similar, when the odds as I see them are that it will not be able to make the number.
"Beat the Overvaluation": However, even to discuss "making the number" indicates that we are still playing the ridiculous game called "beat the number." In all the Wall Street parlance, people lose sight of the real problem with these technology companies, which is that they are so expensive. For instance, I think Intel will be lucky to make 50 cents this year, so it's trading at 35 times earnings for basically a no-growth, saturated market. The semiconductor-equipment companies likely won't make any money, either, so their price-to-earnings are truly astronomical.
These very generous valuations imply stocks that, to repeat, are almost priced to perfection, at the same time that their company fundamentals are deteriorating due to a weak economy and saturation in the business. (The problems that I delineated for tech companies are also true for many other companies, but to a lesser extent.) Currently, there are no new drivers of technology, and yet there is no shortage of people who keep coming back to this sector. I think that disconnect demonstrates how speculatively oriented the tape in general continues to be. |
