From Briefing.com: Tech shares were buoyed on Thursday by positive economic data as well as bullish Q1 results and outlook from Jabil Circuit (JBL 29.21 +2.41). First, Initial Claims for unemployment for the week ended December 13 fell 22K W/W to 353K. Second, the December Philadelphia Fed Index came it at 32.1, above consensus of 25.0 and the 25.9 in November, suggesting the manufacturing sector continues on a strong upward trend. Lastly, Jabil Circuit indicated the company is seeing improving demand across all industries and geographies.
The Briefing.com Tech Index gained 1.5% after three losing sessions. Advancers led decliners 2.7:1 with advancers rising 3.2% and decliners falling 2.5%. Communications equipment was among the best performing sectors, aided by JBL management comments that telecom equipment is seeing its first increase in orders in over two years. The Philadelphia Semiconductor Index (SOXX 493.72 +18.93) snapped back 4% after four consecutive losing sessions. There were no decliners among the 18 share index.
Thursday's economic data is positive and points to a strong recovery but does not indicate an acceleration in growth above the rates already priced into many tech shares. The market gains are more technical rebounds rather than incremental gains supported by improving/accelerating fundamentals. As a result, we would continue to selectively sell tech shares into strength. Please visit the Story Stocks page for the latest thinking on investment opportunities across market sectors, including tech.
After the close, the SEMI (Semiconductor Equipment & Materials International) trade group reported that for the second month in a row the book-to-bill ratio came in above 1.0. The November book-to-bill ratio of 1:04 indicates that $104 of new orders were received for every $100 of product billed for the month. As with the October book-to-bill which came in at 1.1 (General Commentary, Nov 19, 2003), the SEMI survey data confirms demand is improving for semiconductor capital equipment but the rate of increase is below what the market has already priced into equipment shares. As a result, do not expect equipment shares to trade up on this news. Intervoice (INTV 9.66 -0.09) printed Q3 results ahead of consensus. Management indicated sales backlog and long-term outlook continues to improve. Solectron (SLR 6.02) published Q1 results. Company is experiencing improving demand across a number of market segments. Management guided Q2 essentially in-line with consensus and reiterated commitment to returning to profitability by Q4.--Ping Yu, Briefing.com
Group % Change Avg % Change Advancers Avg % Change Decliners Ratio Advancers to Decliners *P/SG Ratio: Advancers *P/SG Ratio: Decliners
Philadelphia Semiconductor Index +4.0% 4.0% -0.0% 18:1 4.0 0.0
Briefing.com Tech Index(based on a composite of over 1000 tech companies) +1.5% 3.2% -2.5% 2.7:1 1.7 1.6
Audio & Video Equipment +0.2% 1.0% -1.1% 1.8:1 0.6 0.4
Communications Equipment +1.4% 3.2% -2.3% 2.2:1 1.9 2.0
Communications Services +1.0% 2.1% -2.4% 3.3:1 1.0 1.4
Computer Services +1.0% 3.1% -2.3% 1.8:1 1.8 1.8
Computer Sys & Peripherals +0.8% 2.4% -2.8% 2.4:1 1.6 1.6
Electronic Instruments & Controls +1.7% 3.5% -2.5% 2.6:1 1.4 1.3
Scientific & Technical Instruments +0.4% 2.2% -2.8% 1.8:1 1.3 1.7
Semiconductors +2.9% 4.0% -2.3% 5.3:1 3.0 2.0
Software & Programming +1.9% 3.6% -2.8% 3.2:1 1.9 1.5
6:19PM Thursday After Hours prices levels vs. 4 pm ET: Buyers have taken a breather after the regular session's broad-based rally, and expressed interest in only a few key names. Presently, the S&P futures, at 1087, are flat with fair value, while the Nasdaq 100 futures, at 1430, are 5 points below fair value. A number of companies have issued press releases tonight, and the November Semiconductor Equipment Book-to-Bill ratio was also released. The figure fell to 1.04 and orders checked in at $930 mln.
The following table summarizes tonight's largest corporate stories, and the stocks' reactions to the news:
After Hours Mover % Change Move Reason for Move
Endo Pharmaceuticals (ENDP) +3% Specialty pharmaceutical company guides FY03 (Dec) and FY04 above Reuters Research EPS and revenues estimates; Expects revenues from Percocet to decline in FY04, but looks for significant growth from Lidoderm to help offset that decrease
Nike (NKE) -2% Leading athletic footwear maker beats Street's Q2 (Nov) EPS estimate by $0.05 on revenues that rose 13% to $2.84 bln; Stock had run up 6% over the past 3 days
Real Networks (00C0) +1% Provider of network-based media services files anti-trust lawsuit against Microsoft (MSFT); Expects cost of the litigation for 2004 to be approximately $12 mln and plans to take a 4Q03 (Dec) $1.5 mln charge relating to litigation; Sees Q4 outlook - net loss of $(0.02)-$(0.03) and revenues of $52-56 mln - in line with consensus estimates
Silicon Storage (SSTI) +8% Supplier of flash memory semi devices raises Q4 (Dec) outlook after issuing above consensus projections in late Oct; Now sees EPS at $0.05-0.07, revenues rising 22-25% sequentially, and gross margins between 29-32%
Solectron (SLR) -4% Supply chain solutions provider meets consensus forecast calling for a Q1 (Nov) net loss of $0.03, but gives revenue result that includes discontinued operations contribution; Stock sells off on confusion and Street talk of Solectron's prolonged turnaround strategy
Tomorrow marks a quadruple witching options expiration session that should bring a certain amount of volatility to the trading action. One technology company is scheduled to report, ATI Tech (ATYT), and there are no economic reports on the calendar.
For complete coverage on these, and other developments, be sure to visit our Stock Market Update and Daily Sector Wrap pages.
-- Heather Smith, Briefing.com
6:03PM Semi Equip Book-to-Bill falls to 1.04 : Semi equipment industry book-to-bill ratio fell to 1.04 in November, Moors and Cabot estimate for Nov was 1.06, so this report appears to be lower than expected. Bookings of $930 mln came in above revised Oct 2003 level of $871 mln and 20% above the $777 mln in orders reported in the year-ago period.
4:45PM Silicon Storage raises Q4 guidance (SSTI) 10.51 +1.14: Co sees Q4 (Dec) EPS of $0.05-0.07, previous guidance is between $0.01-0.03, Reuters Research consensus is $0.01 and sees revenues increasing 22-25% over Q3 level ($73.9 mln), previous guidance was an increase of 15-20%, Reuters estimate is $79 mln. The better than previously expected revenue is the result of average selling price improvement, increased product shipment and licensing income.
4:30PM FSI Intl beats by $0.12, guides Q2 revs below consensus (FSII) 7.20 +0.17: Reports Q1 (Nov) loss of $0.03 per diluted share, $0.12 better than the Reuters Research consensus of ($0.15); revenues fell 13.1% year/year to $22.5 mln vs the $21.9 mln consensus. Co also guides Q2, sees revenues of $20-23 mln vs an estimate $23.9 mln.
4:14PM Solectron reports in-line (SLR) 6.02 unch: Reports Q1 (Nov) loss of $0.03 per share, ex-items, in line with the Reuters Research consensus of ($0.03). Sales were $3.08 bln vs consensus of $2.95 bln... Note: Revenue includes discontinued ops. The company only recently announced discontinued ops and all estimates are prior to the information being released.
3:23PM ATI Tech Earnings Preview (ATYT) 14.71 +0.18: ATI Tech is scheduled to report Q1 (Nov) results tomorrow morning before the open, with consensus standing at $0.18 in EPS and $457.3 mln in sales. On Nov 17, the co guided EPS to $0.16-0.20 and revenues to $440-$470 mln, citing better than expected demand across all PC products and specifically desktops. UBS expects results at high end of the guided range. The firm's checks indicate the desktop standalone graphic chip market has surged in recent months from a disappointing Q3. Bear Stearns expects results at the high end of the range as well, and expects the co to attribute the strength in the qtr to strong consumer PC demand and resilient ASPs due to both a strong pricing environment as well as a richer product mix. Firm expects the co to issues Q2 guidance of $0.17 and $435 mln, vs consensus of $0.14 and $427 mln, and notes that ATYT has typically been conservative in its guidance (in all the 4 qtrs of FY03 the co beat expectations).
Broadcom (BRCM) 34.04 +1.711 : Banc of America Securities initiated coverage of BRCM with a Neutral rating. The firm believes that Broadcom continues to be one of the leading suppliers of semiconductors and solutions to the Communications market but cites concerns over valuations being high compared to their peer group. The firm notes its cautious stance with its Neutral rating is due primarily to concerns regarding price pressure and market share losses in the WLAN market in 2004 as well as concerns about the impact of INTC's competing server I/O product offering which will launch by mid 2004. BofA has a price target of $34, which reflects a 49x multiple (12% premium to its peer group) on preliminary CY04 EPS of $0.69.
Cypress Semi (CY) 20.80 +1.06 : Company raised Q4 guidance, now sees pro forma EPS of $0.14, vs the Reuters Research consensus of $0.12 and prior guidance of $0.12, and revenues of $235 mln, vs an estimate of $230.7 mln and previously guided revs of $230 mln. Co attributes improved outlook to increase in demand for memory in networking equipment and wireless handsets as well as higher-than-expected USB sales in consumer and computation systems.
Transmeta (TMTA) 3.27 -0.05 : Priced 25 mln share offering at $2.90. Needham & Company, Inc., A.G. Edwards & Sons, Inc. and U.S. Bancorp Piper Jaffray Inc. acted as managing underwriters for the offering.
Entegris (ENTG) 12.91 +0.53 : Before the open, reported Q1 (Nov) earnings of $0.02 per share, in line with the Reuters Research consensus of $0.02; revenues rose 26.8% year/year to $68.7 mln vs the $69.2 mln consensus. Company calls for Q2 sales to grow 5-10% over Q1, or $72.14-75.57 mln, consensus is $74.28 mln.
Therma-Wave (TWAV) 5.10 +0.45 : Co announced that it has won a multi-system, multi-million dollar order from Tokyo Electron. Under the terms of the order, TWAV's advanced INTEGRA CD metrology products will be used with TEL's CLEAN TRACK ACT and CLEAN TRACK LITHIUS series of coater/developer products.
Ultratech Stepper (UTEK) 27.53 +1.43 : Co announced it has received a multiple-system order for 200 mm bump tools from the world's largest merchant gold-bump foundry. Co plans to use the steppers to perform gold-bump processing on display driver IC's utilized in flat panel display applications.
10:19AM Jabil Circuit (JBL) 26.80: After the close Wednesday, Jabil Circuit printed Q1 core EPS of $0.25 on revenue of $1.509B (+41.3% Y/Y) ahead of Reuters Research consensus at $0.23 on $1.406B.
Guided for Q2 EPS of $0.20-0.22 on revenue of $1.35-1.40B (17.8-22.2% Y/Y), in-line with consensus at $0.21 on $1.349B.
Margins
Gross margin declined 30 bps Y/Y, reflecting pricing pressures due to low industry capacity utilization. Aggregate capacity utilization is low at around 65-67%, with U.S. at 50% and international at 70%, but seeing steady increase in production across all geographies.
Operating margin improved 80 bps Y/Y, reflecting the operating leverage inherent in the company's business model. Operating expense excluding extraordinary items, as a percent of sales, has steadily declined each quarter over the last year to 4.6% in Q1 (-90 bps Y/Y). SG&A as a percent of sales improved 90 bps Y/Y to 4.4%. R&D as a percent of sales was flat Y/Y at 0.2%.
Revenue Outlook
Management seeing improving demand across all industries and geographies. For Q2:
Autos expected to be down 15% Q/Q due to seasonality.
Computing and Storage is forecast to edge up 2%.
Consumer is expected to drop 35% due to seasonality.
Instrumentation and Medical is expected to be consistent/flat.
Peripherals is expected to rise 4%.
Networking is expected to increase 15-17%.
Telecom is expected to grow 5%.
Valuation
On an inverted DCF/EVA basis, assuming steady Y/Y improvement to low teens operating margin on SG&A efficiency, JBL's valuation implies that the company must grow revenue in the low teens each year for the ten years beginning in F05 in order for investors to justify owning shares at current valuation. Consensus Y/Y growth for F04 and F05 is 20.3% and 13.7% respectively.
On a price multiples basis, JBL trades at 0.9x F04 revenue of $5.69B (+20.3% Y/Y) and 0.8x F05 revenue of $6.412B (+13.7% Y/Y); 28.5x F04 EPS of $0.94 and 23.3x F05 EPS of $1.15.
Summary
JBL is likely to trade well in the coming weeks based on the following: 1) Global recovery/expansion supports sustainable growth above the low-teens rate implied in our model; 2) Gross margin improvement likely due to higher capacity utilization/ improving pricing environment; 3) Operating margin expansion likely due to continuing SG&A efficiency/high scalability of business model; 4) JBL is moderately priced.
Results and outlook are encouraging for JBL, the electronic contract manufacturing group and should give investors confidence that the recovery in technology remains intact but does not point to an acceleration in overall growth beyond the levels currently priced into tech shares. As a result, would buy JBL but would continue to take opportunity to selectively sell tech shares into strength. Solectron (SLR 6.02) reports Q1 after the close Thursday. Look for further confirmation of recovery within telecom market (JBL indicated seeing 5% Y/Y order growth, first increase in over two years).--Ping Yu, Briefing.com
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