EMS . . . The top-ten OEM customers of the EMS group are indicating a 2003 year-over-year revenue growth estimate of 3% (versus an 8% decline in full-year 2002) representing no change from last update. Current estimates have been updated for forecast changes from 18 OEM companies including, estimate revisions for Dell, Ericsson, Motorola, Nokia, Nortel, Cisco, EMC, IBM, Sun, Echostar, Xerox, Lucent, Avaya, Hughes, JCI, Honeywell, Emerson, and ADC Telecom. There were 14 downward revisions and 4 upward revisions for the March quarter.
Expect in-line results and cautious tone on poor end-market visibility offset by lean customer inventories and new outsourcing. There has only been one negative preannouncement in the EMS space (PLXS) which was due to inefficiency in executing restructuring activities more so than end-market weakness. However, networking and telecom end-markets began to get weaker in the month of February.
Storage . . . Brocade announced a 9% work force reduction (115 employees) to save $6-8 million quarterly beginning in July Quarter. Brings cost structure closer to pre-Rhapsody acquisition. Analysts raised 2003E (October) EPS from $0.02 to $0.04 on unchanged rev of $532 million. Analysts raised 2004E from $0.10 to $0.13. Revenue estimates unchanged at $532 million and $609million, respectively. Believe Cisco-driven news flow over next few months will weigh on stock and increasing reliance on OEMs to scale biz adds risk to L-T operating model.
Network Equipment . . . Merrill Lynch analyst Tal Liani commended Juniper Networks and Foundry Networks for their announcements, but remains cautious on both stocks due to valuation concerns. Liani rates Juniper a "sell," saying any "hiccup" in its business could bring the stock down to its fair value of $6. He has a "neutral" rating on Foundry, on the belief the stock has "limited upside potential."
Merrill Lynch maintains their Sell rating on Juniper despite better than expected earnings, citing: 1) book to bill was again greater than 1 but has not translated into rev growth, 2) the US market keeps shrinking, 3) accounts receivable grew 14% in past 2 quarters versus 3% revenue growth, 4) believes that demand for high-end core routers will remain weak, 5) believes edge routing rev will weaken, and most importantly 6) valuation, as stock trades at 4.3x their 2004 revenue estimate and 87x P/E. Firm thinks any hiccup in the business could bring down the shares to fair value of $6. (On the other hand, Deutsche Securities and WR Hambrecht both upgraded the stock to Hold this morning.)
Motorola estimates lowered at Bear Stearns. Although firm believes MOT will likely meet its previous 1st quarter revenue target of $6.1 billion, concerns over weaker U.S. handset trends, increased handset competition, and weaker wireless infrastructure trends lead firm to lower 2nd quarter and 2003 estimates. 2nd quarter revenue estimate goes to $6.5 billion from $6.8 billion and 2003 to $27 billion from $27.6 billion.
HC Wainwright believes that News Corp's purchase of DirecTV could have positive implications for Harmonic since it raises the prospect of heightened competition between satellite and cable operators in the US, and HLIT is uniquely positioned to benefit from increased spending by both camps. In addition, firm thinks that HLIT's order activity in video-on-demand will begin to accelerate later this year as Comcast begins to introduce VoD in former AT&T Broadband properties.
Foundry Networks expects 1st quarter revenue to be $89-91 million (+3-5% Quarter/Quarter) and EPS of $0.09-0.11, ahead of our $84 million and $0.08 EPS estimates. Government sales remain strong in defense and intelligence. Large deal could last until end of summer. Analysts are raising 2003E to $364 million from $349 million revenue and to $0.49 from $0.33 EPS. 2004E to $390 million from $384 million revenue and to $0.42 from $0.39 EPS. Maintain Market Perform ahead of new product cycles that could increase industry price pressure. Along w/FDRY, Enterasys, Extreme Networks and Nortel will have new Layer 2 and Layer 3 products at Networld+Interop show in late April.
Cisco recently introduced upgrades to the Catalyst 6500 line with aggressive pricing. Increases price competition w/ Foundry.
Juniper beat 1st quarter w/ revenue of $157 million (+1% Quarter/Quarter) and EPS of $0.02. B2B >1.0 and increased deferred rev point to continued modest growth in 2nd quarter. IP continues to buck the weak capex trend. Europe and Asia strong. US RFPs encouraging but carriers slow to pull trigger. Tweak 2004E EPS from $0.17 to $0.15 reflecting mix, interest expense and share count. JNPR committed to driving EPS thru revenue growth. Expenses remain high, as does valuation. Cisco is also beneficiary of strength in IP.
Semiconductor Equipment . . . RBC Capital downgrades Applied Materials and Lam Research to Sector Perform from Outperform based on recent revisions in their industry bookings model and outlook for the semi capital equipment sector. The firm cuts AMAT target to $18 from $25 and LRCX to $16 from $22.
Varian Semi upgraded at JP Morgan to Neutral from Underweight based on attractive valuation as well as limited downside risk. VSEA shares trade at 1.61x price/tangible book, well within firm's estimated trough range of 1.3-1.8x, and net cash of $9.27/share combined with positive estimated C2003 EPS and free cash flow should provide investors an additional margin of safety. The firm sees maximum downside to the mid-teens range and potential long-term upside to the low to mid $50s.
Semiconductors . . . Forbes (4/10) stated that DSP Group had a 40% gain in 2002 revenue and a 10% gain in income from continuing operations of $12.7 million. And, "When a charge to spin off its licensing division is counted, DSP's net fell 31% to $15.1 million." This statement is misleading because it cites revenue growth that is from the core product business, however the -31% fall in net income includes declining Year/Year net income from the licensing business (which was spun off). It is more useful to focus on the revenue and net income growth of the core product business. During 2002, revenue growth was 40% and net income was $12.7 million (including a $10.2 million marketable securities impairment charge) +10% Year/Year. Excluding the impairment charge, net income was up an impressive $19.9 million (+72% Year/Year). The article says the stock "seems overpriced trading at 40X trailing earnings". Typically base our valuation on forward earnings, DSPG is trading at 20X 2004E EPS. Excluding the impairment charge, DSPG trades at 26X 2002 EPS of $0.71.
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