From Briefing.com: General Commentary
Friday's trading, like that of the preceding week, lacked conviction. Tech shares ended the session on a mixed note with advancers marginally outnumbering decliners by 1.2:1; enough to swing the average to a 0.1% gain despite decliners shedding 2.5% vs. gainers adding 2.3% but with no groups exhibiting real leadership.
Performance by Group
Group % Change % Change Advancers % Change Decliners Ratio Advancers to Decliners
Audio & Video Equipment -0.2% 1.4% -3.1% 1.8:1
Communications Equipment +0.8% 3.0% -2.3% 1.5:1
Communications Services +0.5% 1.9%;-1.9% 1.8:1
Computer Services +0.1% 2.5%; -2.6% 1.0:1
Computer Sys & Peripherals -0.2% 1.8%; -2.7% 1.2:1
Electronic Instruments & Controls +0.1% 2.5%; -2.6% 1.1:1
Scientific & Technical Instruments-0.4% 1.3%; -2.2% 0.9:1
Semiconductors +0.2% 2.1%; -2.2% 1.3:1
Software & Programming -0.1% 2.6%; -3.0% 1.0:1
Trading action has been shifting with the buzz of the moment: a tapped out consumer sector, looming inflationary pressures, rising oil prices, protectionist trade policies, threats of new terrorism, a weakening dollar...the list goes on. There is not much on the horizon to shape conviction with the holidays ahead and the next batch of earnings reports several weeks away. Expect daily spreads to widen on lighter volume this holiday-shortened week, and this seesawing action, with a bias to protecting gains, to continue into the new year. Have a great weekend and a profitable trading week.--Ping Yu, Briefing.com
5:34PM Weekly Wrap :
Good earnings news, good economic data, but another lackluster showing from the stock market... that is a synopsis of the past week as buyers, for the most part, kept their wallets in their pockets and their eyes fixed on rising energy prices, a weakening dollar, and reports of terrorist bombings abroad.
Laggards of note included the airline, railroad, oil drilling, pharmaceutical, brokerage, steel, aluminum, and restaurant groups. They had plenty of company, though, as most groups traded with a negative bias as the week was accented by a penchant to do more profit taking than risk taking as the end of the year approaches.
Accordingly, participants seemed to be looking for more excuses to sell than to buy. Their search was not in vain as there were numerous excuses that included, but were not limited to: terrorist bombings in Istanbul, the U.S.'s imposition of quotas on selected textile imports from China, the threats/fear of retaliatory action from trade partners, crude futures topping $33/bbl, the ongoing investigation of improper trading by mutual funds, the arrest of 47 currency traders who were allegedly rigging trades, and the major indices slipping below a notable support level at their 50-day simple moving averages.
To be sure, it wasn't all bad; it was just that good news, having been discounted to a large extent already, took a backseat this week. In that vein, the market didn't get any distance out of the reassuring earnings reports from Dow components Hewlett-Packard (HPQ) and Home Depot (HD) or from another batch of encouraging economic data that was highlighted by the NY Empire State Index, the Consumer Price Index (core-CPI at a 38-yr low), Housing Starts (at a 17-yr high), the Philadelphia Fed Index, and weekly Initial Claims.
Once again, commentary from Fed officials touched on the prospect for solid economic growth, the lack of inflationary pressure, and the willingness to maintain an accommodative stance on monetary policy. Armed with that understanding, and supported by the terrorist bombings and the stock market's languor, the Treasury market turned in a winning performance with the yield on the 10-yr note dropping 7 basis points to 4.15%.
The drop in rates, the surge in Housing Starts, and the 5.6% increase in the Mortgage Bankers Association report all underpinned the homebuilding stocks, which comprised one of the best-performing S&P groups for the week. Other standouts in that regard included the gold, footwear, grocer, managed care and biotech groups.
Throughout the week, Briefing.com reiterated on Page One that we remain short-term neutral, and long-term moderately bullish on the stock market. The tepid near-term stance is predicated on the market's inability to rally in the wake of good news; meanwhile, the upbeat long-term assessment is based on the favorable underpinnings of low interest rates, strong earnings growth, stimulative fiscal policy, the increase in business investment, and an expected pickup in hiring activity. We carry these same views into next week, which will be an abbreviated week due to the Thanksgiving holiday. -- Patrick J. O'Hare, Briefing.com
YTD chart of major stock indexes
Index Started Week Ended Week Change % Change YTD
DJIA 9768.68 9628.53 -140.15 -1.4 % 15.4 %
Nasdaq 1930.26 1893.88 -36.38 -1.9 % 41.8 %
S&P 500 1050.35 1035.28 -15.07 -1.4 % 17.8 %
Russell 2000 532.96 525.93 -7.03 -1.3 % 37.3 %
4:31PM Brocade (BRCD) 5.98 -1.17 After the close Thursday, Brocade recorded pro-forma Q4 EPS of $0.02 (GAAP of $0.06) on revenue of $137.8MM (-10.0% Y/Y) vs. Reuters Research consensus of $0.02 on $137.7MM.
Guided for Q1 EPS of $0.02-0.03 on revenue of $140-145MM (+13.7-17.8% Y/Y) vs. Reuters Research consensus of $0.02 on $141.9MM.
Margins
Gross margin declined 390 bps Y/Y to 54.6%.
Operating margin declined by 420 bps to 4.0% as tight control of Sales and Marketing expenses partially mitigated the impact of the lower gross margin, and increases in General and Administrative expense and R&D. Sales and Marketing expense dropped by 30.4% to $24.6MM, or as a percent of sales, by 520 bps Y/Y to 17.9%. General and Administrative expense rose 17.2% Y/Y to $5.5MM, or as a percent of sales, by 90 bps Y/Y to 4.0%. R&D increased by 7.7% Y/Y to $39.5MM and increased as a percent of sales by 470 bps to 28.7%.
Management is targeting gross margin of 53-55% and operating margin of 15-20%.
Valuation and Summary
On a price multiples basis, Brocade shares trade at 2.6x Reuters Research consensus F04 revenue of $595.7MM (+13.4% Y/Y) and 2.3x F05 revenue of $680.6MM (+14.3% Y/Y); 59.7x F04 EPS of $0.10 and 24.9x F05 EPS of $0.24.
On an inverted DCF/EVA basis, assuming 20% operating margins, Brocade's valuation implies management must grow revenue by 20% over the next 8 years beginning in F06 just to support current valuation.
The decline in revenue is masking the operating leverage gained through cost reductions on both the manufacturing and operating levels. Brocade should realize substantial gross and operating margin expansion as revenue resumes an upward trajectory. However, for shares to move higher, management will have to accelerate revenue growth into the high-teens and achieve rapid operating margin expansion beyond the targeted 15-20%. The market for storage networking solutions is highly competitive. It remains to be seen whether Brocade management will rise to the challenge and accelerate revenue growth beyond the low-teens. Until it is clear management is delivering in that respect, we would wait for at least another 20% pullback in shares before stepping in to take a modest position.--Ping Yu, Briefing.com
Microsemi (MSCC) 21.70 +0.35 : Tgt raised to $25 from $20 at CIBC. Despite being up 240% YTD, CIBC believe shares remain attractive trading at 25x its new $0.84 CY05E EPS; firm recommends investors take advantage of the inherent leverage in the MSCC model and build positions in this emerging growth story.
Novellus (NVLS) 42.54 +0.72 : Recent checks indicate bookings outlook remains strong -- Amtech (NVLS) 41.77 -0.05: American Technology Research says recent checks indicate Novellus' bookings outlook remains strong. Firm suspects management will likely guide towards the high-end of the 5-10% prior order growth guidance for the DecQ during the mid-quarter update next Monday (Nov. 24).
11:58AM Autodesk (ADSK) 22.77 +3.37: After the close Thursday, Autodesk published Q3 EPS of $0.20 on revenue of $233.9MM (+23.9% Y/Y) vs. Reuters Research consensus of $0.14 on $218.6MM.
Guided for Q4 EPS of $0.27-0.32 on revenue of $245-255MM (+25.3-30.4% Y/Y); Q1 EPS of $0.08-0.13 on $215-225MM (+2.0-6.7% Y/Y) and F05 EPS of $0.90-1.10 on $940-975MM (+3.1-8.2% Y/Y) vs. consensus of $0.81 on $931.6MM.
Revenue BreakdownSegment Result
Design Solutions Group DSG revenue grew 26.7% Y/Y to $200.4MM (86% of revenue): Platform Technology unit revenue +26.5% Y/Y to $117.4MM (50% of revenue); Manufacturing Solutions unit revenue +35.4% Y/Y to $33.3MM (14% of revenue); Infrastructure Solutions unit revenue +20.9% Y/Y at $28.9MM (12% of revenue); Building Solutions unit revenue +23.0% Y/Y to $20.8MM (9% of revenue).
Discreet Solutions Discreet revenue grew 10% Y/Y to $33.5MM (14% of revenue).
Geographic Region Result
Americas Americas revenue grew 20.0% Y/Y to $104.9MM (45% of revenue). New seats up 13% Q/Q. Upgrade revenue up 130%+ Q/Q.
EMEA EMEA (Europe, Middle East, Africa) revenue increased 33.3% Y/Y to $77.6MM (33% of revenue). New seats up 13% Q/Q. Upgrade revenue up 200%+ Q/Q.
Asia-Pacific Asia-Pacific revenue increased 23.2% Y/Y to $51.3MM (22% of revenue). New seats grew 40% Q/Q.
Margins
Gross margin improved 180 bps Y/Y to 84.9%.
Operating margin improved from (4.2%) to 11.9% on higher gross margin and aggressive expense control. Sales and marketing expense, as a percent of sales, improved by 510 bps Y/Y to 38.4%. General and administrative expense, as a percent of sales, improved by 120 bps Y/Y to 13.7%. R&D, increased in absolute terms by 17.9% Y/Y to $48.6MM and declined as a percent of sales by 100 bps to 20.8%.
Current restructuring initiatives will yield further efficiencies and improved profitability. Management is targeting gross margin of 82-85% and operating margin of 18-20%.
Valuation and Summary
Autodesk shares are running ahead of fundamentals. On an inverted DCF/EVA basis, assuming over 900 bps improvement in gross and operating margins, yielding operating margin of 21-22%, Autodesk's valuation implies management must still grow revenue in the low-20% range over the next 8 years beginning in F06 in order to support current valuation.
On a price multiples basis, Autodesk shares trade at 2.8x management's F04 revenue of $901.3-911.3MM and 2.6-2.7x F05 revenue of $940-975MM; 32-35x F04 EPS of $0.66-0.71 and 21-25x F05 EPS of $0.90-1.10.
Solid quarter and positive outlook may sustain investor interest near-term but for shares to move higher, ADSK will have to achieve consistent 20% growth and operating margin above management's target of 18-20%. We would wait for evidence of sustainable high-teens growth or until at least a 20% pullback before initiating a new position.--Ping Yu, Briefing.com
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