From Briefing.com: It was all downhill after a brief attempt at a rally during the first half hour of trading. With little news to drive Friday's action, investors were reluctant to add to positions ahead of week two of earnings season. The concern isn't so much one of companies having disappointed as it is of company valuations having risen faster than what company fundamentals support, as was so clearly reflected in this week's trading. Companies that delivered the combination of growth and margins necessary to support current valuation held up well while those who delivered otherwise stellar results but short of the requisite saw their shares cut post earnings release. We see this psychology governing the markets through the rest of October and earnings season. As investors prepare for the weeks ahead, we think it is a good time to review the names highlighted on this page over the past two weeks that are likely to deliver on growth and margins, and that offer investors a favorable risk/reward profile.
ASM International (ASMI, 17.35 -0.55; 10/14 at 17.13): ASM International boasts one of the broadest product portfolios covering both front- and back-end equipment. Trading at 1.4x Reuters Research consensus C03E revenues of $613.9 and 1.1x C04E revenue of $778.5. This compares favorably against an industry average, respectively, of 10.3x and 13.7x. Consensus EPS is at ($0.59) for C03 and $0.61 for C04.
ATI Technologies (ATYT, 15.27 -0.44; 10/01 at 15.82): New Radeon product introductions driving business momentum over rival NVDA. High operating leverage. Trading at: 30.5x Reuters Research consensus F04E of $0.50; and 24.2x F05E of $0.63.
CIBER (CBR, 8.84 +0.04; 10/08 at 8.08): CIBER provides systems implementation and integration consulting services, and software from vendors including Peoplesoft and SAP. Competition for engagements is strong and is putting pressure on pricing but see limited downside risk given flow of positive data and below average valuation. Trading at 0.8x Reuters Research consensus C03E sales of $696.5MM and 0.7x C04E sales of $751.1MM; 25.3x C03E EPS of $0.35 and 19.2x C04E EPS of $0.46.
City Telecom (CTEL, 8.65 -0.09; 10/02 at 6.82): Indirect play on developing Asia. Demand for IDD (international direct dial) and broadband services rising as Hong Kong dials into China and other markets. Recently launched pay-TV service represents large opportunity as penetration rate, at around 30%, is low relative to other markets. Above industry average margins trading at below average industry multiples. Limited float.
Comtech Telecommunications (CMTL, 28.75 -0.55; 10/16 at 29.30): Comtech Telecom provides point-to-point and point-to-multipoint equipment for transmitting voice, data and video applications. Improving revenue trend supported by a growing backlog and limited competition in select markets suggest opportunities for margin expansion. Trading at less than half industry multiples; at 2.1x Reuters Research consensus F04E revenue of $187.20MM and 1.9x F05E revenue of $212.0MM; 29.9x F04E EPS of $0.96 and 25.4x F05E EPS of $1.13.
Corrillian Corp (CORI, 6.85 +0.10; 10/03 at 3.64): Corrillian's software enable financial services firms to deliver services to clients across multiple product / business lines and delivery channels (e.g. private vs. commercial banking; and branch vs. Internet banking). Trading at one-half multiples for software comps; at 5.3x Reuters Research consensus C03E sales of $47.1MM and 4.6x '04E sales of $54.6MM; 62.3x C03E EPS of $0.11 and 40.3x C04E EPS of $0.17.
Open Text Corp (OTEX, 43.15 -0.48; 10/03 at 37.87): Open Text provides consulting and business process automation solutions to companies. Above average industry margins trading at less than half the multiples for software comps; at 4.0x Reuters Research consensus F04E revenue of $217.8MM and 3.4x F05E revenue of $255.3MM; 32.7x F04E EPS of $1.32 and 27.5x F05E EPS of $1.57.
Electronic Arts (ERTS, 103.14 -1.79; 10/01 at 94.89): Leader in software entertainment / gaming. Expect new consoles, developing formats and new games to continue driving sales. Trading at 5.2x F04E revenue of $2.9B and 4.6x F05E revenue of $3.3B; 30.3x F04E EPS of $3.40 and 26.9x F05E of $3.84.
Fiserve (FISV, 36.71 +1.37; 10/01 at 37.66): Play on general recovery and trend towards out-sourcing. Improvement in capital markets and acquisitions helping to drive top line and margins. Trading at 2.5x C03E revenue of $2.8 and 2.2x C04E revenue of $3.2B; 22.3x C03E EPS of $1.60; 19.7x C04E EPS of $1.86.
Overland Storage (OVRL, 18.25 -0.30; 10/02 at 15.30): Fast growing provider of hardware and software storage solutions for mid-range networks. Storage is one area where corporations and consumers alike will continue spending. Trading at one-half industry multiples, at 1.0x Reuters Research consensus F04E revenue of $237.2MM and 0.9x F05E revenue of $260.1MM; 21.7x F04E EPS of $0.84 and 19.4x F05E EPS of $0.94.
Trader Classified Media (TRDFF, 9.90; 10/09 at 9.25): Trader Classified Media publishes classifieds through over 60 web-sites and 350 print titles across 21 countries. The company is profitable, has a fair balance sheet, is cash flow positive and boasts over 5.6MM unique Internet visitors and 9MM readers each month. Expanding into developing Europe and South America. Has footprint in Asia. Signs of rebound in Europe have yet to emerge. Currency risk. Thinly traded. Trading at 1.9x TTM revenues of EUR442.9 and 72.4x TTM EPS of EUR0.12.
United Online (UNTD, 25.50 -1.11; 10/02 at 33.41): Realizing synergies from Juno acquisition. Value proposition vs. Time Warner (TWX, 15.58 -0.34) is attractive. Above average margins when compared against a broad group of computer services comps. Trading at 2.9x fiscal F04E revenue of $375.1MM and 2.5x F05E revenue of $444.9MM; 26.3x F04E EPS of $0.97 and 18.8x F05E EPS of $1.36.
UT Starcom (UTSI, 33.90 -1.58; 10/01 at 31.91): Approximately 80% of sales from the fast growing China wireless and network access market. Trading at 1.8x C03E revenue of $1.9B and 1.5x C04E revenue of $2.4B; 21.2x C03E of $1.60; 17.5x C04E of $1.94.
Vishay (VSH, 19.43 -0.47; 10/07 at 19.48): Vishay, with the broadest product portfolio of semiconductors and passive components in the industry, is well positioned for a recovery and to capture share in the event of a shake-out. Company is beginning to reap the benefits of cost rationalization initiatives undertaken over the past few quarters. Attractively valued at 1.4x Reuters Research consensus C03E sales of $2.2B and 1.3x C04E sales of $2.3B; 58.9x C03E EPS of $0.33 and 28.2x C04E EPS of $0.69.--Ping Yu, Briefing.com
4:12PM Weekly Wrap :
It started slowly, but the action picked up heavily as the week progressed. At the end, the indices were little changed for the week. That leaves one of two interpretations. Either the market showed great resilience, or it showed chinks in the armor as the first signs of "selling on good news" appeared. Take your pick. Our view is that the market showed good resilience and got through the week just fine.
The week started with a partial holiday on Monday. There were few earnings reports that day, but Motorola moved their report up in order to counter the negative impact from a debt downgrade on Monday. That was a smart move, as an excellent report boosted the stock, and the Dow gained 90 points. On Tuesday morning, Bank of America, Johnson & Johnson, and Merrill Lynch produced outstanding earnings reports, and the Dow gained 49 points that day.
The real news Tuesday, however, was Intel's very solid report after the close. They beat estimates and gave an upbeat outlook. Not surprisingly, the market opened sharply higher on Wednesday. Then came the first bout of selling on the news. The Dow ended down 10 points and the Nasdaq was off 4. Some traders felt this was a sign that the market may be topping.
Thursday's action was heavily impacted by a mediocre earnings report from IBM from after the close on Wednesday. IBM fell short on revenue expectations and expressed caution about the near-term outlook. After opening sharply lower, however, the indices rallied to close with only narrow losses. The next big earnings release was eBay after the close on Thursday. They basically reported in line for this quarter and their guidance for next quarter was as expected. The stock dropped $3 right away.
That and overall profit-taking took the market lower across the board on Friday, leaving the indices near unchanged for the week.
There were plenty of other earnings releases, of course, and they can be summarized as excellent. Earnings are coming in consistent with expectations of 18% profit growth for the S&P 500 aggregate. The economic numbers this week were also excellent. September Retail Sales were down 0.2% but that was due to a drop in auto sales from an August surge. July and August sales data were revised higher, and support forecasts of 5% real GDP growth in the third quarter. New Claims for unemployment dipped again, and September Industrial Production rose a solid 0.4%. September Housing Starts and Permits were very strong, and two surveys on regional manufacturing in October were extremely strong. October Consumer Confidence was reported to have notched higher as well.
So, the earnings and economic data this week by and large showed strong growth. The question is how much of the good news is already in the stock price. The drop in eBay on Friday suggests that some sectors that have seen big runs might be subject to profit-taking and selling on good news. However, with the 10-year note ending the week at a still very low yield of 4.39%, and with inflation still very low, there is little risk of a spike in interest rates. That means the strong earnings and economic growth is truly good news, and supportive to stocks. One of these weeks, the market just might take a serious dip. Over the long-term, however, the prospects remain good.
Next week is extremely heavy for earnings. Watch to see if there is significant selling on good news. With excellent fundamentals for blue chip stocks, however, the market is likely to remain resilient.
YTD chart of major stock indexes
Index Started Week Ended Week Change % Change YTD
DJIA 9674.68 9721.79 47.11 0.5 % 16.5 %
Nasdaq 1915.31 1912.36 -2.95 -0.2 % 43.2 %
S&P 500 1038.06 1039.32 1.26 0.1 % 18.2 %
Russell 2000 519.06 520.36 1.30 0.3 % 35.8 %
EMC Corp (EMC) 13.15 -0.21: Legg Mason upgraded to Buy from Hold and raised its FY03-05 estimates based on its belief that the probability of EMC beating expectations for coming quarters is increasing. With most signs pointing to a rising tide for storage in the near-term and some of the competition appearing to falter, the firm expects that EMC will benefit disproportionately in Q4. For the longer-term, firm believes that EMC is already beginning to leave its principal competition behind with its remarkably powerful push into ILM, which the firm expects to result in storage share gains and software mix growth by 2005. Price target was set at $16.
Lehman recommends a swap out of WDC and into MXO : Lehman Brothers downgraded Western Digital (WDC 13.80 -0.46) to Equal Weight from Overweight and recommended a swap into Maxtor (MXO 15.10 +0.15), which firm the upgraded to Overweight from Equal Weight. Firm believes that WDC has greater near-term execution risks versus MXO, which seems to have resolved its own execution issues and is a market leader in two of the fastest growing HDD segments. Lehman's price target on MXO went to $19 from $12.
MIPS Techs (MIPS) 4.71 -0.12: B. Riley upgraded to Buy from Neutral and raised its price target to $6.25 from $4.75 following the company's stronger than expected results. Firm cited the following factors: 1) the company's most recent restructuring initiatives allow the firm to lower its normalized R&D expense assumptions from the Dec quarter on, 2) the wave of licensing activity that MIPS experienced in 2000-02 is now starting to impact royalties, and 3) the firm expects licensing revenues to accelerate beginning in the September quarter driven by the general availability of the company's newly introduced MIPS32 24k processor core family.
Advanced Micro Devices (AMD) 13.99 +0.03: Following the company's much stronger than expected earnings, Soundview downgraded AMD to Neutral from Outperform, while Deutsche Securities upgraded it to Hold from Sell and raised its price target to $15 from $6. Soundview believes that now is the time to take profits, as the shares have enjoyed a great run in the past couple of months and they believe that AMD is reasonably priced in the mid-teens. While Deutsche remains deeply skeptical of AMD's ability to morph into a value-creator, they believe strong momentum and relatively low valuation multiples will provide sufficient near-term ammunition for the bulls.
Broadcom (BRCM) 29.84 -2.84: Smith Barney downgraded to Sell from Hold citing high valuation and an expected downshift in momentum. According to the firm, the key point is that BRCM's quarter/quarter sales growth momentum will likely be uneven and relatively low for most of 2004, which is a very different pattern than the strong double-digit quarter/quarter growth experienced for much of 2003. Firm maintained its $28 price target.
Fairchild Semi (FCS) 20.04 +0.80: Raymond James upgraded to Outperform from Market Perform following the company's earnings report last night. Firm believes that a number of positive trends will drive revenue and earnings growth into 2004. Further, the firm believes that FCS shares remain among the least expensive among comparable companies. Firm raised its FY03 estimate to $0.19 from $0.14 and FY04 to $0.61 from $0.49. Price target was set at $23.
Integrated Device (IDTI) 14.95 +2.29: CIBC upgraded to Sector Outperform from Sector Perform following the company's stronger than expected results. Firm cited the shares' discounted valuation versus peers, the company's healthy balance sheet, with $5.25 in net cash per share, traction at Cisco (CSCO), and stability outside of wireless infrastructure. Price target was set at $16.
Micron (MU) 12.85 +0.02: UBS downgraded to Neutral from Buy and cut its price target to $13 from $19 based on its belief that DRAM pricing has reached a seasonal peak and is not likely to increase further during the Dec quarter. Firm noted that MU stock is highly correlated with DRAM pricing, and thus believes that there is little upside potential in the near-term.
Xilinx (XLNX) 29.25 -0.90: Amiercan Technology Research characterized the company's Q3 (Sept) as an "ugly quarter." Firm believes that the bears are likely to prevail in near-term trading, as revenue weakness should overshadow any operating results strength. However, it retain its Buy rating and would be buyers in mid-$20s.
finance.yahoo.com
Thanks for the great tables Don!
RtS |
