From Briefing.com: Investors opened the second full week of trading by once again buying large cap tech. The Philadelphia Semiconductor Index (SOXX 560.65 +17.34) jumped 3.19% on Monday for a total of 11.05% since January 02. Advancers outnumbered decliners 8.0:1, with advancers rising 3.3% and decliners slipping 1.0%. This compares against the Nasdaq Composite (IXIC 2111.78 +24.86), which gained 1.19% and is up 5.24% since January 02. The broader Briefing.com Tech Index (BTI), closed up 1.6%. Advancers outnumbered decliners 2.4:1, with advancers rising 3.4% and decliners sliding 2.4%
Friday's jobs report reinforced the sentiment that growth may be moderating, causing investors to buy growth through tech. While we remain moderately bullish on technology shares over the long-term, we once again note that tech valuations quite frequently price in growth and operating margin expectations that significantly exceed recent company performance and industry averages. As a result, tech shares are likely to be volatile near-term. We would take advantage of the volatility to buy into quality, attractively priced names / sell richly priced shares into strength as part of a rebalancing of the tech portion of the portfolio to a neutral market weight. Please visit the Story Stocks and Daily Sector Wrap pages for the latest thinking on investment opportunities across market sectors, and the Page One, Looking Ahead and Economic Briefing pages for broad market perspective and outlook. For active investors and traders, visit the In Play, Swing Trader, and The Technical Take pages for actionable ideas.
After the close, Integrated Silicon Solution (ISSI 19.75 +1.65) reported Q1 EPS of $0.03 on revenue of $40.255MM vs. Reuters Research consensus at ($0.03) on revenue of $37.21MM.
Looking ahead, Linear Technology (LLTC 44.95 +1.25) reports Q2 results after the close on Tuesday, Apple Computer (AAPL 23.73 +0.73), Intel (INTC 34.15 +0.18), Teradyne (TER 27.74 +0.18) and Yahoo! (YHOO 49.74 +1.62) report after the close on Wednesday, and Juniper Networks (23.72 +1.72) and Sun Microsystems (SUNW 5.45 +0.14) report after the close on Thursday.--Ping Yu, Briefing.com
5:58PM Monday After Hours prices levels vs. 4 pm ET: The stock market's stealth rally today - which culminated in the Nasdaq's close at its highest level in two and a half years - has carried over into the extended session, where the S&P futures, at 1129, are 3 points above fair value, and the Nasdaq 100 futures, at 1546, are 4 points above fair value. With the thrust of December quarter earnings just around the corner, a number of companies have preannounced tonight.
The following is a list of companies making headlines, and the reasons behind the stock's resulting move:
After Hours Mover % Change Move Reason for Move
Applebee's (APPB) -3% Casual restaurant operator reports Q4 (Dec) system-wide Q4 comp store sales rising 4.6%, but G&A expenses increasing more than expected (due to an increase in stock-based compensation expense); Q4 and FY04 EPS should now be $0.41 and $1.74 (respectively) as a result, both a penny shy of the Reuters Research consensus estimates
AstraZeneca (AZN) +2% UK drug marker announces the FDA's approval of Seroquel for bipolar disorder, Shares have been down 3% since Barron's ran a piece on Jan 5 highlighting problems with two of the company's new drugs
Integrated Silicon (00C0) -4% Fabless semiconductor company handily exceeds Q1 (Dec) consensus EPS estimate by $0.06 on revenues that surged 92% to $40.3 mln; Traders instead sell on the news with ISSI trading at 3.1x estimated FY04 (Sept) revenue as pointed out in today's Story Stock
MDC Holdings (MDC) unch Small-cap homebuilder beats Street's EPS and revenue estimates handily in Q4 (Dec) report; Management, though, announced earlier today that maintaining or increasing profit margins may be "challenging" in FY04; Stock tumbled 5% immediately following and took the shaky homebuilding sector with it
Storage Tech (STK) +15% Storage solutions company sees Q4 (Dec) EPS and sales above the consensus expectation citing strength in storage products and solutions; Rivals of STK include the likes of EMC, HIT, HPQ, and IBM
Transkaryotic (TKTX) -11% Biotech company that treats rare genetic disorders caused by protein deficiencies says it will end efforts to seek FDA approval for Replagal (therapy for Fabry disease); Transkaryotic is projected to lose $1.40 per share in FY04 (Dec)
Tomorrow, the Economic Calendar is farely barren, but the Earnings Calendar is somewhat heavy. Accenture (ACN) is the largest name on the list, and should provide a snapshot of the IT consulting space. The JP Morgan Healthcare Conference will also be going on, and companies such as Baxter (BAX), Boston Scientific (BSX), and Chiron (CHIR) will be presenting.
For more detail on these, and other developments, be sure to visit our Stock Market Update and Daily Sector Wrap. -- Heather Smith, Briefing.com
4:28PM Linear Technology (LLTC) 44.95 +1.25: Linear Technology is scheduled to report Q2 results after the close Tuesday. Reuters Research prints consensus EPS at $0.23 on revenue of $183.75MM and Q3 at $0.24 on $194.40MM.
Recent Performance
Q1 sales grew 22.6% Y/Y on strong demand for portable electronics across all geographies. U.S. comprised approximately 27% of sales; Europe ~19%; Japan ~16%; Asia-Pacific ~38%. Expect demand trends to continue.
Q1 gross margin improved 200 bps Y/Y to 76.2% manufacturing efficiencies. LLTC has substantial unused capacity; expect further gross margin improvement as company realizes efficiencies on higher capacity utilization.
Operating margin improved 600 bps Y/Y to 52.1% on tight expense control. Expect further operating margin improvement as sales continue to grow faster than expenses, aided by strong end market demand for portable electronics.
Competitive Position
Technology. 240 U.S. patents; 95 patent applications. Strong IP (intellectual property) position.
Cost Competitiveness. Generally price/performance competitive.
Customer Base. Diverse customer base. LLTC sells to over 15K OEMs (original equipment manufacturers) directly and/or through distributors. Arrow Electronics, LLTC's primary domestic distributor, accounts for approximately 15% of sales.
Financial. Strong balance sheet. Over $1.6B in cash and securities; no debt. Quick ratio of 11.0:1. Current ratio of 11.6:1.
Valuation
On an inverted DCF/EVA basis, assuming firm balance sheet management and:
static operating margin at 51-52%, LLTC's valuation implies that the company must grow revenue in the high 30% range for the eight years beginning in F06 in order for investors to justify owning shares at current valuation.
steady Y/Y improvement to 55% operating margin by F06, LLTC's valuation implies that the company must grow revenue by 35% for the eight years beginning in F06 in order for investors to justify owning shares at current valuation.
steady Y/Y improvement to 60% operating margin by F06, LLTC's valuation implies that the company must grow revenue in the low 30% range for the eight years beginning in F06 in order for investors to justify owning shares at current valuation.
Consensus Y/Y growth for F04 and F05 is 25.1% and 21.8% respectively. On a price multiples basis, LLTC trades at 18.5x F04 revenue of $758.62MM (+25.1% Y/Y) and 15.2x F05 revenue of $924.33MM (+21.8% Y/Y); 47.8x F04 EPS of $0.94 and 39.1x F05 EPS of $1.15.
Summary
Shares are priced at a high premium, reflecting LLTC's strong technology and financial position, solid execution and relatively stable operating history, and above average gross and operating margins. However, management will need to achieve revenue growth and operating margin expansion significantly above the industry average and recent performance for investors to justify owning shares at current valuation. Given current end market growth expectations, this will be difficult to sustain over the long-term even with market share gains. As a result, we would wait for a 35-40% pullback before initiating a minor position.--Ping Yu, Briefing.com
4:12PM Integrated Silicon beats by $0.06 (ISSI) 19.50 +1.40: Reports Q1 (Dec) earnings of $0.03 per share, $0.06 better than the Reuters Research consensus of ($0.03); revenues rose 91.9% year/year to $40.3 mln vs the $37.2 mln consensus.
4:11PM ISSI prelim $0.03 vs -$0.03 consensus; revs $40.3 mln vs $37.21 mln consensus :
4:07PM Storage Tech guides higher (STK) 27.80 +0.13: Company sees Q4 EPS in excess of $0.55, Reuters consensus is $0.50, sees revenues in excess of $650 mln, consensus $604 mln. Company cites strength in Automated Tape Solutions.
2:29PM TMTA rev estimate cut below consensus at Pacific Growth 4.09 +0.11: Pacific Growth reduces its 2004 revenue estimate on Equal Weight rated Transmetta (TMTA) to $55 mln from $70 mln (Reuters consensus $71.56 mln) as firm believes early design wins for co's Efficeon processor have been relatively slow to materialize. Additionally, firm believes opportunities for the Crusoe chip have been picking up, but that Transmeta receives only ~$25-$35 per Crusoe chip for a majority of these wins. As a result, firm is pushing out its revenue ramp forecast. Firm remains cautiously optimistic on the story.
1:47PM Broadcom momentum fueled by sellside commmentary 39.52 +2.74: Broadcom (BRCM) exhibiting strength in today's trading on the heels of 1) CIBC's raising of estimates this morning on increased optimism for Q1, and 2) similar comments this morning made by Prudential following the CES show in Vegas suggesting BRCM is well positioned. CIBC's comments this morning indicates that sales to CSCO are ramping as that company prepares for a further recovery in IT spending. DSL, Wi-Fi, Bluetooth, GPRS, and SiByte also appear strong. The firm believes there may be some slight upside to Q403 guidance of 7%-9% sequential growth. Traders currently speculating CSCO indications bode well for the sector and peer competitors such as MRVL.
1:39PM UTSI spikes on reports Chinese co's to sign $200 mln contracts : Reuters is running headlines that Chinese co's are set to sign $2 bln worth of contracts, that UTStarcom (UTSI) will announce a contract worth $200 mln, and that Motorola will announce two contracts worth more than $1 bln.
12:50PM TINY backs off from session high on cautious newsletter 19.67 +1.09: The stock has backed off from its session high after traders started circulating a newsletter released today questioning the stock's valuation; according to the author, Harris & Harris Group (TINY) now trades at 9.7x its Net Asset Value of $2.11, which exceeds its most stratospheric levels during the Internet Bubble, when it peaked at 7x N.A.V. of $5.08 in March 2000.
12:53PM Integrated Silicon Solution (ISSI) 18.90 +0.90: Integrated Silicon Solution is scheduled to report Q1 results after the close Monday. Reuters Research prints consensus EPS at ($0.03) on revenue of $37.21MM and Q2 at $0.01 on $41.36MM.
Recent Performance
Management has increased sales each quarter for the past six quarters while keeping firm control over operating expenses. As a result, gross and operting operating margin have steadily improved over the same time frame. Gross margin improved from a loss to 17.5% (excluding sale of previously written down inventory) in Q4; management guided for 18-19% gross margin for Q1.
Expect ISSI to continue posting high double digit top-line growth, aided by the general recovery in the semiconductor market and new product introductions (SRAM products for wireless applications as well as pseudo SRAM products). Company's fabless operating model and tight control of operating expenses positions company to realize additional gross margin/operating margin expansion. Table 1 shows ISSI's revenue breakdown, applications and key competitions by product segment. Table 1. Revenue, Applications and Competitors by Product Segment.Product Segment % of Revenue Applications Primary Competitors
DRAM ~65% Audio equipment, automotive electronics, digital cameras, DVD players, DSL modems, flat panel TVs, HDTVs, LCD TVs, printers, set-top boxes and other applications ESMT, Etron, G-Link, Hynix, ICSI, Micron, Mosel-Vitelic, Nanya, Samsung, Oki and Winbond
SRAM ~30% Audio and video equipment, base stations, cell phones, copiers, DSL modems, engine control systems, fax machines, GPS systems, instrumentation, LCD TVs, networking switches and routers, POS terminals, set-top boxes, satellite radio, tape drives, telematics, WLANs and other applications Alliance Semiconductor, Cypress, Etron, Giga Semiconductor, ICSI, Integrated Device Technology, NEC, Renesas Technology, Samsung and Sony
Other ~5% AMD, Atmel, Catalyst, Cypress, Fujitsu, Intel, Samsung, STMicroelectronics and Toshiba
Source: Company Reports.
Market Opportunity
Gartner Group estimates the total market for DRAM (dynamic random access memory) at 128 Mb and below to be $4.4B in 2003. ISSI's DRAM strategy is to be a supplier of low and medium density DRAM solutions targeted for applications outside of the main DRAM memory market (PCs and workstations).
Gartner Group estimates the market for SRAM (synchronous RAM) at $3.1B in 2003. ISSI's SRAM strategy is to offer a broad selection of asynchronous and synchronous SRAM solutions based on advanced, leading-edge processes.
Competitive Position
Memory suppliers compete on cost, density, power consumption, reliability and speed, all of which are functions of chip design and process technology.
Technology. 71 U.S. patents; 12 patent applications. Relatively strong IP (intellectual property) position.
Cost Competitiveness. Fabless model provides ISSI access to flexible manufacturing and leading edge processes while keeping manufacturing costs and capital investments low.
Customer Base. Diverse customer base. No single customer accounts for more than 10% of sales. Table 2 shows ISSI's key customers and applications by market segment. Table 2. Customers and Application by Market Segment.Market Segment Applications Key Customers
Digital Consumer Electronics DVD players, digital still cameras, digital Televisions, RW CD players, set-top boxes and other applications Apex, ChangHong, D-Link, LG Electronics, Lexmark, NEC, Samsung, Sharp, Sony
Networking and Broadband Base stations, DSL modems, networking switches and routers, WLANs and other applications 3Com, Alcatel, Ambit, Askey, Cisco, Huawei, Nortel, Yahoo! Japan, ZTE
Mobile Communications Base stations, cell phones, PDAs and other applications Bird, Ericsson, LG Electronics, Motorola, Nokia, UTStarcom
Automotive Electronics Audio equipment, engine control systems, GPS systems, telematics and other applications Bose, Delphi, Philips, Siemens, Temic
Source: Company Reports. Financial. Small but strong balance sheet. Management expects to achieve cash flow breakeven as early as Q2. Quick ratio of 2.7:1. Current ratio of 3.4:1.
Valuation
On an inverted DCF/EVA basis, assuming firm balance sheet management and steady Y/Y improvement to:
20% operating margin by F07, ISSI's valuation implies that the company must grow revenue in the high 40% range for the eight years beginning in F06 in order for investors to justify owning shares at current valuation.
25% operating margin by F07, ISSI's valuation implies that the company must grow revenue in the low 30% range for the eight years beginning in F06 in order for investors to justify owning shares at current valuation.
30% operating margin by F07, ISSI's valuation implies that the company must grow revenue in the low 20% range for the eight years beginning in F06 in order for investors to justify owning shares at current valuation.
Consensus Y/Y growth for F04 and F05 is 81.6% and 57.3% respectively. On a price multiples basis, ISSI trades at 3.1x F04 revenue of $177.39MM (+81.6% Y/Y) and 2.0x F05 revenue of $279.07MM (+57.3% Y/Y); 105.0x F04 EPS of $0.18 and 18.5x F05 EPS of $1.02.
Summary
Shares already price in aggressive growth and margins expectations. Would wait for a 20-25% pullback before initiating a minor position, or unless growth materially accelerates above the 82% and 57% Y/Y growth expected for F04 and F05 respectively, and/or company achieves significant gross margin expansion above management's 18-19% guidance for Q1 (operating margin towards the high end of the range as implied by our model).--Ping Yu, Briefing.com
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