From Briefing.com: General Commentary - Tech shares began and traded through the morning session flat, headed south at 12:30pm ET, and reversed course at 2:30pm ET to recover half of their losses for the day to finally close the session down a modest 0.4%. Decliners led advancers 1.5:1 with decliners dropping 2.5% and advancers rising 2.6%.
Thursday's trading reflected the quest for certainty that investors have been seeking for the better part of two months. Optimistic on expansion, concerned with valuation, and unsure of the magnitude and duration of growth, investors have been wrestling with whether to hold or sell tech. In Wednesday's General Commentary, we noted that this process of devaluing/revaluing shares is taking place across tech. At least for Thursday's session, the consensus was in favor of discounting the latest round of industry forecasts, company earnings guidance and economic data as simply confirmatory evidence of expansion but not the higher growth needed to propel shares higher. Despite positive guidance and bullish comments on the wireless market from Qualcomm (QCOM 49.10 +4.63) and National Semiconductor (NSM 41.80 -1.70), wireless component and handset manufacturers lost ground. QCOM closed higher, but communications integrated circuit shares including RF Microdevices (RFMD 10.72 -0.08), NSM and Texas Instruments (TXN 29.14 -0.36) all lost ground.
After the close, Intel (INTC 33.54 +0.20) narrowed Q4 revenue guidance from $8.1B-8.7B to $8.5-8.7B and raised gross margin estimates from 60% +/- a few points to 62% +/- one point. Seeing general strength across all geographies and businesses. The WCCG (Wireless Communications and Computing Group) business (5.7% of revenue) is performing as expected but INTC is taking a $600MM goodwill impairment charge against the WCCG business due to lower than expected long-term returns for the flash memory and base-band chipsets business. Reduced expectations for the WCCG business and impairment charge notwithstanding, INTC's guidance provides evidence, as noted in the Q3 review, that the company's investments in process technologies and product development positions INTC to capture share across product and geographic markets, and will lead to substantial yield enhancements and efficiencies that will reflect on the gross and operating margin line. We would accumulate on weakness.
We remain modestly bullish on tech over the long-term but concerns regarding valuation will continue to limit advances in the broader market near-term. This market remains highly selective and we would protect gains as opportunities permit.--Ping Yu, Briefing.com
6:08PM Thursday After Hours prices levels vs. 4 pm ET: The extended session has taken a turn for the worst on the heels of some disappointment surrounding Intel's (INTC 32.55 -0.99) mid-quarter update. Although the company's adjustments to its financial outlook were in line with the market's expectation, stocks have taken a hit nonetheless. Presently, the S&P futures, at 1067, are 2 points below fair value, and the Nasdaq 100 futures, at 1423, are 10 points below fair value.
The world's largest semiconductor company narrowed its Q4 (Dec) revenue range to $8.5-8.7 bln from the $8.1-8.7 bln it offered following its Q3 (Sept) report. The Reuters Research consensus estimate was pegged at $8.55 bln, and Intel's lack of better than expected guidance has likely been the source of the stock's malaise. Wedbush Morgan noted that Wall Street analysts had moved their numbers higher going into tonight's mid-quarter update, and that has contributed to the company's lack of strong upside. Additionally, Intel announced that it would be taking a goodwill impairment charge of approximately $600 mln. Chip equipment makers such as AMAT, KLAC, and NVLS have also traded lower on the guidance.
Integrated Device (IDTI 17.46 -0.93) stock has also slumped following the communications IC company's mid-quarter update. Management said that Q3 (Dec) revenues should increase 1-5% sequentially, which equates to approximately $81.6-84.8 mln. The Reuters Research estimate was pegged near the high-end of the range, at $84.1 mln. Competitors of IDTI include the likes of CY, ICST, IFX, ISSI, and PMCS.
Elsewhere, shares of Jetblue Airways (00C0 29.00 -2.38) have lost ground after the low-cost carrier announced that its Q4 (Jan) operating margin would be 13-14%, down from 19.7% in 3Q03 and 16.8% in the prior year period. The company cited lower average fares, particularly in its western markets that were impacted by the southern California fires. Traders have used the news as a reason to take the high-flying stock lower in an extension of its recent bearish move.
Guitar Center (GTRC 31.00 +2.28) stock, however, has found a bid in the late session in response to the musical instruments retailer's encouraging FY04 (Dec) guidance. In its 8K filing, Guitar Center said it looked for EPS of $1.77-1.93 and revenues of $1.42-1.47 bln as compared to the consensus expectations of $1.79 and $1.44 bln, respectively. Shares have responded enthusiastically due in part to their sell-off on October 30 following the company's Q4 (Dec) warning.
Tomorrow, the market will pay close attention to the November employment report, which will be released at 8:30 ET. The consensus estimate calls for nonfarm payrolls to increase for a fourth consecutive month - by 150K - and for the unemployment rate to remain unchanged at 6.0%. For more perspective on what to expect, be sure to visit the Looking Ahead column.
For complete coverage on these, and other developments, be sure to visit Briefing.com's Stock Market Update and Daily Sector Wrap pages. -- Heather Smith, Briefing.com
2:12PM National Semiconductor (NSM) 42.75 +0.25 National Semiconductor published Q2 EPS of $0.34, including one-time charges of $6MM or $0.02, on revenue of $473.5MM (+12.1% Y/Y), ahead of Reuters Research consensus of $0.32 on $463.6MM.
Guided for Q3 revenue of $487.7-497.2MM (20.6-23.0% Y/Y) vs. consensus at $461MM. Q3 estimate is for 14 weeks vs. 13 weeks for the year-ago period. Raised return on investment target from 18% to over 20%.
Bookings jumped 36% Y/Y, driven by increased demand for notebooks and PCs (70% Y/Y), displays and wireless handsets (radio frequency products grew 60% Y/Y; amplifiers grew 40% Y/Y). Orders for audio and power management products grew substantially more than the company average with portable power management products doubling Y/Y. Orders from distributors increased more than 30% Q/Q.
Strength across geographies; significant gains in North America and Asia-Pacific. Turns business was stronger than expected, raising concerns whether results are sustainable.
Margins
Gross margin improved 720 bps Y/Y to 50.1% on higher capacity utilization (up from high 80% to 90%).
Operating margin, excluding one-time items, improved 1575 bps Y/Y to 17.1% as sales grew faster than expenses. SG&A as a percent of sales decreased 80 bps to 15.4%. R&D dropped 22.3% in absolute terms and, as a percent of sales, 760 bps to 17.8%.
Valuation
On a price multiples basis, shares trade at 4.5x F04E revenue of $1.8B (+7.6% Y/Y) and 3.9x F05E revenue of $2.1B (+16.7% Y/Y); 37.7x F04E EPS of $1.16 and 28.6x F05E EPS of $1.53.
On an inverted DCF/EVA basis, NSM's valuation implies management will need to deliver low 20% revenue growth over the 8 years beginning in F06 as well as 30% operating margin (over 500 bps above the level targeted by management given expected SG&A and R&D) for investors to justify owning shares at current valuation.
Summary
Upside is capped and we would hold off owning shares until a 20-25% pullback or until signs emerge that management can deliver sustainable growth beyond the low 20% range implied in our model or expand operating margin beyond 30%.
Industry prospects and new product introductions support the low 20% revenue growth implied by our model (reinforced by Qualcomm's (QCOM 48.65 +4.18) positive commentary this morning on the state of the wireless market).
NSM is making good progress on the margins front and is likely to achieve operating margin up to the mid- to high 20% range but would be challenged to expand operating margin beyond the 30% implied by our model despite the company's movement towards an asset-light/fab-light model. We would continue to focus on Texas Instruments (TXN 29.35 -0.15).--Ping Yu, Briefing.com
11:53AM Qualcomm (QCOM) 47.75 +3.28: Before the open, Qualcomm raised Q1 estimates (excluding QSI investment income) based on stronger than anticipated growth in CDMA markets.
Revenue: $1.01B-1.06B (+16%-22% Q/Q, -1-6% Y/Y) to $1.18-1.20B (+36-38% Q/Q, +11-12% Y/Y); consensus was at $0.38 on $1.04B (+19.5% Q/Q)
EPS: $0.37-$0.40 to $0.47-0.48
Phone chips: 27MM-28MM to 32-33MM
CDMA Phones: 106-108MM to 110-112MM
Management expects shipment of Q2 phone chips to total 26-30MM units vs. 28MM in the year-ago period.
Valuation
On a price multiples basis, shares trade at 9.3x F04E revenue of $4.1B and 8.7x F05E revenue of $4.4B (+7.3% Y/Y); 33.9x F04E EPS of $1.41 and 30.6x F05E EPS of $1.56. These multiples fully reflect QCOM's near monopoly position.
On an inverted DCF/EVA basis, QCOM's valuation implies management will need to deliver low 20% revenue growth over the 8 years beginning in F06 as well as operating margin substantially above 45% (over 1000 bps above last quarter) for investors to justify owning shares at current valuation.
Summary
Wireless / mobiliity remains one of the best secular growth trends within technology. We see room for further upward revisions based on a broadening global economic recovery / expansion and technological and product advances fueling demand for wireless and digital electronics, and helping to float QCOM shares near-term. However, we would hold off initiating a new position until we see signs of sustainable high-teens growth as QCOM's revised guidance falls short of the low 20% growth necessary to justify current valuation.
Investors looking at mobile phone components supplier RF Microdevices (RFMD 10.83 +0.03) as an ancillary play on growth in the wireless market should consider the fact that RFMD's valuation implies RFMD management will need to deliver low 40% revenue growth over the 8 years beginning in F06 as well as 30% operating margin (2000 bps above last quarter and 500 bps above peak of 25.3%) for investors to justify owning shares at current valuation. Low 40% growth is modestly north of last quarter's performance of 36.6% but would be difficult to sustain over an 8 year period, improbable in the context of the market opportunity for radio frequency integrated circuits and competition, and impossible unless growth within the wireless market accelerates. We would wait for a 20-30% pullback.
QCOM's revised guidance speaks to the strength underpinning the wireless market and increases our confidence that wireless integrated circuit leader Texas Instruments (TXN 29.91 +0.41) can, as noted in the Q4 review on Story Stock (Oct 21, 2003), achieve revenue growth and margins expansion beyond the 20% top-line growth and 2000 bps improvement in gross and operating margin implied in our model. Continue to accumulate shares.--Ping Yu, Briefing.com
9:02AM Ratings Briefing - CSCO : Merrill Lynch upgraded Cisco (CSCO) to Buy from Neutral and raised its FY04-05 estimates above consensus based on belief that demand within the US enterprise market will recover in 2004 and that management will keep operating expenses relatively flat as revenues grow. Raised FY04 estimate to $0.73 from $0.70 (consensus $0.70) and FY05 to $0.85 from $0.74 (consensus $0.80). Target is $29
What It Means:
At Merrill Lynch, a Buy rating means expected total return (price appreciation plus yield) within next 12-month period is 10% or more for Low and Medium Volatility Risk Securities and 20% or more for High Volatility Risk securities... CSCO's volatility risk is classified by firm as High
Neutral rating means expected total return (price appreciation plus yield) within next 12-month period is 0-10% for Low and Medium Volatility Risk securities and 0-20% for High Volatility Risk securities... Firm has maintained Neutral rating on CSCO since resumption of coverage on 01/06/03... since then, CSCO is up 68%
Sheepish endorsement of stock to this point should mitigate influence of Merrill Lynch's upgrade to Buy; nonetheless, ratings change is expected to incite some initial buying interest as it comes at opportune time (i.e. the increased guidance from Qualcomm (QCOM) this morning has set a positive tone for big-cap tech shares at the open)
Raising FY04 and FY05 estimates above consensus reflects upbeat assessment of CSCO's prospects and is consistent with upward revision to estimates for both periods made by a host of other firms
Sidenote: Merrill Lynch joining a growing list of CSCO proponents (last downgrade stock received was on Aug. 6 when Robert W. Baird cut its rating to Neutral from Outperform)... according to Reuters Research, current ratings distribution is as follows: 18 Buy; 12 Outperform; 14 Hold; 1 Sell -- Patrick J. O'Hare, Briefing.com
6:36PM Integrated Silicon files for 6 mln share follow-on offering (ISSI) 16.69 -0.60: All of the shares are being offered by the Company. Deutsche Bank and SG Cowen will serve as joint book-running managers for the offering, with ThinkEquity Partners serving as co-managing underwriter.
4:29PM INTC falls 1pt or 3% in after hours trading : Note that Wedbush Morgan removed INTC from its Focus List yesterday on view that Intel (INTC) was less likely to provide upside because Wall Street analysts had moved their numbers higher going into today's mid-qtr update.
4:26PM Intel to take charge (INTC) 33.54 +0.20: -- Update -- Company also announces it will take $600 mln, or $0.06 per share, Q4 goodwill impairment charge related to its Wireless Communications and Computing Group.
4:17PM Intel narrows Q4 rev range to $8.5-8.7 bln (INTC) 33.54 +0.20: Reuters consensus is $8.55 bln, previous guidance called for revenues of $8.1-8.7 bln. Company sees Y03 R&D spending of $4.4 bln, previous expectation was $4.3 bln. Expenses are expected to be approximately $2.3 bln, at high end of previous expectation of $2.2-2.3 bln.
4:15PM Integrated Device sees revs at high end of range (IDTI) : Co expects its rev to be at the high end of its previously forecasted range of a 1-5% sequential increase from the prior qtr's revs of $80.8 mln.
4:06PM Advanced Energy announces departure of COO (AEIS) 26.02 -0.39: Co announces that Dennis Faerber, exec VP and C.O.O., has left the company. The co's product and technology, manufacturing, global customer operations and quality groups will now report to Doug Schatz, chairman and CEO. The co will not seek a replacement for the position of C.O.O.
4:06PM Simple Tech settles lawsuit with Lexar Media (STEC) 5.75 -0.07: The two companies have agreed to a mutual dismissal of the lawsuit currently pending in Federal District Court of Central District of California. Additionally, SimpleTech has taken a royalty-bearing license under Lexar's (LEXR) patents for its past and future sales of Memory Stick products. "We are pleased to have settled this litigation in a fair and equitable manner," said Manouch Moshayedi, chairman and chief executive officer at SimpleTech.
12:26PM National Semi beats by 4 cents, guides Q3 rev above consensus (NSM) 43.47 -0.03: Reports Q2 (Nov) pro forma earnings of $0.36 per share, $0.04 better than the Reuters Research consensus of $0.32; revenues rose 12.1% year/year to $473.5 mln vs the $463.6 mln consensus. Gross margin improved to 50.1%, up from 47.2% in Q1. Co expects Q3 revs to grow 3-5% sequentially (about $487.7-$497.2 mln, vs consensus of $461.0 mln). Consistent with this growth, gross margins are expected to improve slightly.
12:25PM TXN: Hearing that Lehman's Dan Niles out positive on TXN in reaction to NSM report 29.86 +0.36:
12:17PM Susquehanna comments on NAND Flash : Susquehanna believes that strong demand for NAND flash memory continues while the supply remains tight. Contract pricing for Dec edged up slightly and firm continues to believe that Lexar (LEXR 17.05 -1.19, -6.5%) and SanDisk (SNDK 66.56 -5.34, -7.4%) are key beneficiaries. Notes that the spot market is not a good indicator of supply and demand trends. According to firm's sources, Samsung has forbidden sales of its NAND flash memory devices to the spot market. As a result, the spot market exists due to distributors/agents that are attempting to make short-term profits in an undersupplied market.
10:33AM SanDisk and Lexar extend declines on pricing concerns : Both SNDK (-3.8%) and LEXR (-7.3%) have rolled over this morning and are currently trading near their session lows. JMP Securities said in their morning note that the accelerating pace of capacity investments in NAND flash memory aimed at meeting the exploding demand for digital storage in cameras, MP3/digital media players, USB portable drives, etc will likely slow down the recent price increases in the NAND flash memory mkt, and potentially slow down the torrid rev and earnings growth rate of pure-play NAND flash memory players such as SNDK and LEXR. (Note that yesterday at 13:12 Briefing.com highlighted concerns in the group attributed to talk of rising flash card supply in the spot market and talk of aggressive retail rebates.)
10:25AM PWAV Chatter 7.31 +0.19: Strength in Powerwave (PWAV) today is tied to rumor that ALA and NOK may be kicking the tires for possible bid.
10:10AM CMOS reit Buy at Amtech 13.02 +0.17: American Technology Research says its checks at Credence (CMOS) indicate that engineering demo activity is nearly frantic on all 3 test platforms with notable strength for RF testers.
10:09AM ELX estimates raised above consenus at Amtech 28.79 +0.20: American Technology Research increases its Emulex (ELX) DecQ rev est to $93.5 mln from $88.6 mln (Reuters Research consensus $90.99 mln). For FY04, firm's new estimates are $375 million and $0.96 (from $359 million and $0.99) and for FY05, $442.6 million and $1.15 (up from $412 million and $1.08); consensus for FY04 is $371.3 mln/$0.96 and for FY05 $439.4 mln/$1.11. The est increases come as Amtech continues to see stronger RFP activity from multiple integrators. In addition, firm is seeing better deal closure rates and better than expected momentum in both its core business of HBAs and new business in embedded switches from its Vixel acquisition. Amtech reits its $35 tgt, as believes stock should trade at a higher multiple closer to its peers
9:56AM Veeco Instruments testing support at last wk's low of 28.09 (VECO) 28.13 -0.55: -- Technical -- Stock is probing last week's low of 28.09 with next support, if follow through develops, at the recent breakout point (Nov 13 high) and its 20 day exp mov avg between 27.94 and 27.89.
9:48AM Motorola seeing supply constraints for integrated-camera components (MOT) 13.53 -0.14: Co announces that while its new integrated-camera handsets are winning rave reviews with industry experts, mobile operators and consumers, supply constraints for integrated-camera components are posing a challenge to delivery efforts. The Motorola V300 and V500 began shipping earlier in the quarter and are available today, and the V600 will ship imminently," Lynch said. "Unit volumes, however, are lower than our customers are asking for due to supply constraints for the integrated-camera components... The supply constraint for integrated-camera components is an industry- wide problem... Motorola is feeling a larger impact because of the extremely limited supply of the smaller camera technology that we use for our handsets, which enables a compelling clamshell form factor and stylish design."
9:22AM QCOM upgraded at JP Morgan 44.47: -- Update -- JP Morgan upgrades Qualcomm (QCOM) to Overweight from Underweight after the co raised Q1 guidance (7:12); firm says CDMA1x and QCOM's chip share appears to have much stronger legs than earlier anticipated, meaning that there will likely be no gap between CDMA1x and 3G product cycles over 2004.
9:18AM Western Digital provides preview of CSFB presentation (WDC) 11.39: Co states in an 8-K filing that, in a meetings with analysts on Dec 4 and 5 at the CSFB 2003 Annual Technology Conference, it plans to provide an update on certain current conditions in the hard drive industry. This update will be consistent with the presentation which will be given at the conference on Dec 5. "Specifically, the company will indicate that for both the industry and for the company, overall demand across all geographies and channels is at a level expected in a seasonally strong December quarter. In addition, OEM demand has met expectations and distribution sell-through has improved from slower rates in October. Pricing has been consistent with a balanced supply and demand condition and the industry has not experienced allocation at this point in the quarter. The company will also indicate that December sell-through levels, demand and pricing will determine the outcome of the quarter, and typical seasonal improvement in sell-through is anticipated."
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But what does Kirk think? Dow 14,000 to 15000 in 2004? |
