From Briefing.com: Investors responded with muted enthusiasm towards tech following strong earnings reports from Microsoft (MSFT 28.48 +0.47) Storage Technology (STK 29.95 +0.70) and UTStarcom (UTSI 36.32 +0.39) by bidding tech shares modestly higher at the open. The buying momentum did not last long as sellers took took advantage of the strength to swap out of large cap semiconductors into smaller tech.
The Philadelphia Semiconductor Index (SOXX 527.03 -5.82) dropped 1.09% while the Briefing.com Tech Index (BTI) inched up 0.4%. Among BTI companies, advancers marginally outpaced decliners 1.1:1, with advancers moving up 3.2% and decliners slipping 2.4%. On the SOXX, decliners outnumbered advancers 2.0:1. Decliners fell 2.0% and advancers edged up 0.5%. The Nasdaq Composite (IXIC 2123.87 +4.86) closed up 0.23% after being higher by almost 1% before the weakness in large cap semis pulled the index down towards the flat line.
Earnings reports to date are encouraging and point to sustained revenue growth and margin expansion opportunities that are being supported on the macro level by a global economic recovery (both a resurgence in consumer and corporate spending as well as country infrastructure development within emerging economies) and on the micro level by strong company fundamentals (new product introductions as well as leaner, more efficient operating models, and stronger balance sheets). These factors combine to form a favorable environment in which companies can expand. Microsoft and UTStarcom are two companies that we think have the management depth and resources to shape and capitalize on the global opportunities within their respective markets. We would accumulate both companies at current levels. Microsoft is a component in Briefing.com's Conservative Portfolio. Please visit the Story Stocks page for additional investment ideas.
The week ahead is heavy with earnings and economic data releases. Please visit the Earnings Calendar and Economic Calendar for details. Within tech, on Monday, Energizer Holdings (ENR 38.52 +0.51), Lexmark (LXK 78.84 +2.52) and L-3 Communications (LLL 53.27 +0.46) report before the open, and Novellus (NVLS 39.89 -0.87) and Texas Instruments (TXN 30.97 -0.76) report after the close. Have a great weekend and a profitable week.--Ping Yu, Briefing.com
5:25PM Weekly Wrap :
When a short week feels like a long week, you know you are in earnings season. Alas, there were a bevy of earnings reports this week spanning a wide array of industry groups. Some companies disappointed with either their actual results or guidance, but for all intents and purposes, most companies met or beat expectations and provided reassuring guidance.
Microsoft (MSFT), Citigroup (C), and J.P. Morgan Chase (JPM) were among the most notable in that respect, but nonetheless, the market appeared disinterested in capitalizing on the earnings news. Be that as it may, the S&P 500 still eked out a gain and kept its weekly winning streak alive at nine. The fact that it did was all the more remarkable when taking into account that the technology sector bowed to selling pressure this week along with a number of basic materials groups like aluminum, paper, chemical, and steel.
Where the aforementioned groups faltered, though, other industry groups rallied and propped up the broader market. In particular, the homebuilding, thrift, oil service, airline, gaming, retail, drug, tobacco, and financial stocks played a supportive role and ended up as primary beneficiaries of the sector rotation. The latter provided a telltale sign that underlying sentiment remains tilted to the bullish side of things as capital moved between sectors rather than exiting the market altogether. A good deal of that capital, apparently, made its way to the small-cap arena as evidenced by the outperformance of the Russell 2000, which added 1.0% to bring its year-to-date gain to 7.0%.
After 8 consecutive weeks of gains, though, the market has certainly earned the right to take a breather. Hence, we wouldn't have been convinced that there was a seminal shift in sentiment even if there were losses across-the-board for the indices. Briefing.com made its case this week on our Market View page for why we remain moderately bullish on the stock market's prospects. In a nutshell, our optimism boils down to the persistence of the low interest rate environment, which is mitigating concerns about the market being over-valued.
Even so, valuation concerns did take root in some areas of the market this week, and primarily in the technology sector where the semiconductor and telecom equipment groups - two of the best-performing in 2004 - led the losses.
In other developments, the Treasury market had a bit of a roller coaster week, or perhaps we should say a roller coaster Friday. At one point, the yield on the 10-yr note hit 3.92% on Friday, but due to a late flurry of selling interest that was attributed to technical issues and reports that euro-zone officials would be open to cutting interest rates, it ended the day at 4.07%, down 4 basis points for the week. The chatter about euro-zone rate cuts weakened the euro a bit on Friday, but for the week, it still strengthened vis-a-vis the dollar.
Next week there will be an FOMC meeting on Wednesday, and rest assured, there won't be any rate cuts that are announced. For that matter, there isn't expected to be any rate hikes either as there is a near-universal belief the FOMC will leave the fed funds rate at 1.00% and maintain its view that accommodative policy can be maintained for a considerable period. Thus, there is apt to be an anti-climactic feel going into the FOMC meeting, which means earnings news and economic data should serve as the main catalysts for trading/investing decisions.
In terms of earnings, the market will be hit with another barrage of results. Underscoring the wide cross section of industries that will be represented, there will be 11 Dow components - AXP, MCD, CAT, DD, MRK, SBC, MO, PG, BA, XOM and HON - sharing their results for the December quarter. As was the case this week, the earnings news should be good, but don't be surprised if the market fails to respond as there is a growing sense that a period of consolidation is in order. -- Patrick J. O'Hare, Briefing.com
YTD chart of major stock indexes
Index Started Week Ended Week Change % Change YTD
DJIA 10600.51 10568.29 -32.22 -0.3 % 1.1 %
Nasdaq 2140.46 2123.87 -16.59 -0.8 % 6.0 %
S&P 500 1139.82 1141.55 1.73 0.2 % 2.7 %
Russell 2000 590.41 596.14 5.73 1.0 % 7.0 %
3:52PM UTStarcom (UTSI) $36.37 +0.44: After the close Thursday, UTStarcom published Q4 EPS of $0.52 on revenue of $643.596MM (+113.8% Y/Y) vs. Reuters Research consensus at $0.51 on $646.26MM.
Guidance
Guided for Q1 EPS of $0.38 on revenue of $570-580MM (+72.5-75.5% Y/Y) vs. consensus EPS at $0.37 on $583.19MM.
Guided for C04 EPS of $1.90-1.94 on revenue of $2.5-2.55B (+27.3-29.8% Y/Y) vs. consensus EPS at $1.91 on $2.551B.
Performance
P&L Line Result
Revenue Revenue increased 113.8% Y/Y to $643.596MM.
China PAS (Personal Access Systems) subscribers grew by 4.3MM to 21MM (60% market share; approximately 35MM PAS subscribers in the China market).
Yahoo! BB in Japan closed the quarter with over 3.8MM subscribers for broadband service and 3.3MM for the BB Phone service.
Gross Margin Gross profit increased 97.7% Y/Y to $199.877MM. Gross margin declined 250 bps Y/Y to 31.1%.
Operating Margin Operating profit increased 86.5% Y/Y to $92.039MM. Operating margin declined 210 bps Y/Y to 14.3% as sales outgrew operating expenses.
SG&A expense increased 100.9% Y/Y to $57.211MM, and decreased as a percent of sales by 60 bps to 8.9%.
R&D increased 110.3% Y/Y to $47.639MM, and decreased as a percent of sales by 10 bps to 7.4%.
Cash Flow Operating cash flow increased 126.1% Y/Y to $47.4MM.
Valuation
Table I (Revenue Growth and Operating Margin Matrix) shows, on an inverted DCF/EVA basis, the revenue growth and corresponding operating margin the company must achieve each year for the eight years beginning in C06 in order for investors to justify owning shares at current valuation. Table I: Revenue Growth and Operating Margin Matrix.Revenue Growth* Operating Margin*
Low 30% 11-12%
Low 20% 16-17%
Low Teens 21-22%
* Assumes firm balance sheet management and steady Y/Y improvement. On a price multiples basis, UTSI trades at 1.5x C04E revenue of $2.556B (+30.1% Y/Y) and 1.2x Reuters Research consensus C05E revenue of $3.072B (+20.2% Y/Y), and 19.0x C04E EPS of $1.91 and 15.7x C05E EPS of $2.32.
Summary
Solid quarter. Management is targeting $10B in revenue in 5 years, the equivalent of 40%+ compound annual growth through 2008, significantly above the required growth rate implied by our inverted DCF/EVA model. We think the opportunities ahead support management's goal. First, the China market for PAS equipment and services continue to grow at double-digit rates. Second, UTSI is actively developing opportunities in other rapidly growing countries, including within Africa, Asia-Pacific and South America, where teledensity rates are significantly lower than developed economies (Table II shows teledensity for selected countries / regions). Lastly, UTSI is pursuing other high growth product areas including DSLAM (digital subcriber line access multiplexer). These efforts are paying dividends, diversifying UTSI's revenue base beyond PAS and China. During the quarter, UTSI:
Signed $40MM expansion contract with Yahoo! BB for IP-DSLAM equipment.
Expanded contract with FITEL to offer PAS services in southern Taiwan.
Contracted with Multifon to offer PAS service in Honduras.
Table II: Fixed and Mobile Phone Lines per 1,000 Inhabitants by Country / Region as of 2002.Country / Region Fixed Line Mobile Phones Population (in millions)
China 137 110 1,281.0
France 573 605 59.4
Germany 634 682 82.5
Japan 597 588 288.4
South Africa 112 252 43.6
U.K. 588 770 58.9
U.S. 667 451 288.4
Vietnam 38 15 80.5
Fixed Lines and Mobile Phones
East Asia & Pacific 207 1,800.0
Europe & Central Asia 376 475.9
Latin America & Caribbean 323 519.2
Middle East & North Africa 152 300.2
South Asia 38 1,400.0
Sub-Saharan Africa 41 673.1
World 329 6,100.0
European Monetary Union 1,252 305.1
Japan 1,185 127.1
U.S. 1,118 288.4
High Income 1,200 960.1
High Income--OECD 1,195 909.0
High Income--non-OECD 1,267 55.7
Source: World Bank. World Development Indicators Database, August 2003. We think UTStarcom will be able to translate the company's success in China to other countries because the company's PAS technology is a cost effective solution that delivers today what 3G promises tomorrow. It lowers the cost of ownership for carriers and allows carriers to realize a faster return on investment by enabling migration from wireline to wireless and integration with broadband technologies and 3G. We think UTSI will be one of the main vendors as other emerging economies develop infrastructure. Shares have risen almost 17% since October; we think there is more upside to shares and would continue to accumulate at this level.--Ping Yu, Briefing.com
11:38AM Microsoft (MSFT) $28.54 +0.53: After the close Thursday, Microsoft published Q2 EPS of $0.14 on revenue of $10.153B (+18.9% Y/Y) vs. Reuters Research consensus at $0.30 on $9.743B. PC demand stronger than expected, particularly in the U.S. and Europe. Enterprise demand improving and also stronger than expected but companies remain focused on containing costs.
Guidance
Guided for Q3 EPS of $0.25-0.29 ($0.23-0.24, including stock based compensation expense of $0.05) on operating income of $3.0-3.1B (-19.2% to -16.6% Y/Y) and revenue of $8.6-8.7B (+9.8-11.0% Y/Y) vs. consensus EPS at $0.27 on revenue of $8.556B.
Guided for F04 EPS of $1.17-1.18 ($0.82-0.83, including stock based compensation expense of $0.35) on operating income of $10.3-10.6B (-22.1% to -19.8%Y/Y) and revenue of $35.6-35.9B (+10.6-11.5% Y/Y) vs. consensus at $1.14 on revenue of $35.278.
Performance
P&L Line Result
Revenue Revenue increased 18.9% Y/Y to $10.153B on stronger than expected demand for PCs. Favorable currency accounted for $312MM of the revenue upside.
Client revenue increased 20.7% Y/Y to $3.059B (30.1% of sales) on a 12% increase in PC unit growth. The U.S., EMEA (Europe/Middle East/Africa) and Asia-Pacific grew in the low to mid double digits; Japan and Latin America grew in the low to mid single digits. Forecasting Q3 unit growth at 10% and F04 at 9-10%.
Server and Tools revenue increased 21.0% Y/Y to $2.134B (21.0% of sales) on a 13% increase in server unit growth, with Windows servers growing 19%. Forecasting Q3 unit growth at 13-15% and F04 at 16% vs. prior forecast for 12-14%.
Information Worker revenue increased 26.7% Y/Y to $2.895B (28.5% of sales). Forecasting Q3 unit growth at 10-11% and F04 at 13% vs. prior forecast for 10%.
Microsoft Business Solutions revenue increased 40.7% Y/Y to $0.190B (1.9% of sales). Forecasting Q3 revenue of $150MM and F04 at $700MM.
MSN revenue increased 20.0% Y/Y to $0.546B (5.4% of sales). Forecasting Q3 revenue of $150MM and F04 at $2B (+5% Y/Y).
Mobile and Embedded Devices revenue increased 65.8% Y/Y to $0.063B (0.6% of sales). Forecasting Q3 revenue of $50MM (+40% Y/Y) and F04 at $220MM.
Home and Entertainment revenue declined 4.6% Y/Y to $1.266B (12.5% of sales). Forecasting Q3 revenue of $430MM and F04 to be flat vs. last year.
Gross Margin Gross profit increased 25.5% Y/Y to $7.809B. Gross margin improved 400 bps Y/Y to 76.9%.
Operating Margin Operating profit declined 33.9% Y/Y to $1.475B on higher R&D. Operating margin declined 1160 bps Y/Y to 14.5%.
Sales and marketing expense increased 14.3% Y/Y to $2.467B, and as a percent of sales decreased by 100 bps to 24.3%. Guided for S&M expense as a percent of sales at 6% for Q3 and 7% for F04.
General and administrative expense increased 80.3% Y/Y to $0.896B, and as a percent of sales increased by 300 bps to 8.8%. Guided for G&A expense as a percent of sales at 22-23% for Q3 and 23% for F04.
R&D increased 96.1% Y/Y to $2.971B, and as a percent of sales increased by 1160 bps to 29.3%. Guided for R&D expense as a percent of sales at 20% for Q3 and 22-23% for F04.
Cash Flow Operating cash flow increased 65.3% Y/Y to $4.574B.
Valuation
Table I (Revenue Growth and Operating Margin Matrix) shows, on an inverted DCF/EVA basis, the revenue growth and corresponding operating margin the company must achieve each year for the eight years beginning in F06 in order for investors to justify owning shares at current valuation. Table I: Revenue Growth and Operating Margin Matrix.Revenue Growth* Operating Margin*
Low 20% 45%
20% 50%
High Teens 55%
* Assumes firm balance sheet management and steady Y/Y improvement. On a price multiples basis, MSFT trades at 8.7x F04E revenue of $35.278B (+9.6% Y/Y) and 8.1x Reuters Research consensus F05E revenue of $38.039B (+7.8% Y/Y), and 25.0x F04E EPS of $1.14 and 23.0x F05E EPS of $1.24.
Summary
Q2 results reflect MSFT's strong market position and pricing power (20%+ revenue growth on low to mid teens unit growth across segments). The improving demand picture within the U.S. and Europe markets suggest that there are still ample opportunities for growth within the PC and server markets, and confirm our assessment (Q1 preview and review, Story Stocks, October 23-24, 2003) that Microsoft will deliver growth above our model; that estimates will be revised higher as demand for enterprise products as well as home entertainment and mobility products accelerate.
We wrote in October that visionary, not mature, is perhaps the single word that most precisely captures the essence of Microsoft, citing the company's heavy investments in R&D, and providng as an example, Microsoft's vision of the personal computer, as embodied in Athens and One Note. We are now beginning to see the early return on investments MSFT made across its businesses, even as the company continues to invest heavily in product development.
The market oportunities are just as attractive and larger thirty years following the introduction of the first desktop computer to run Microsoft, as the company expands across product and geographic markets. Athens, which integrates all communications media, including voice, messaging, e-mail, video and wireless onto one device, and One Note, which allows users to capture and collate notes, including handwritten notes and multimedia files, on a single form, are but two of the innovations that will drive sales. The proliferation of form factors, from basic desktops to tablet-PCs to mobile devices to user interfaces for the networked home, all require operating systems, middleware, applications, and developer support. Microsoft stands at the forefront of this revolution in personal computing. We think the patient investor will be rewarded and would accumulate at current level. Microsoft is a component in Briefing.com's Conservative Portfolio.--Ping Yu, Briefing.com
3:18PM LXK: Lexmark Earnings Preview 78.43 +2.11: Lexmark is scheduled to report Q4 results before the open Monday morning, with consensus standing at $0.92 in EPS and $1.32 bln in sales. Bernstein believes that the co will beat consensus (they expect $0.94 and $1.34 bln), saying First Call ests for Q4 reflect weaker than historical seasonality despite robust PC sales, overall consumer strength, and a currency boost; firm also notes that LXK is historically very conservative with guidance, and has exceeded the high end of its EPS guidance (currently $0.85-$0.95) in 6 out of the last 7 qtrs. On the other hand, JP Morgan expects the co to report in-line results, as they believe demand was strong in both consumer and low-end commercial printing; however, firm believes that HPQ could use its strong profitability to partially subsidize aggressive hardware pricing in Q1, and as a result they expect LXK's guidance to remain relatively conservative (firm sees $0.83 and $1.21 bln, vs consensus of $0.84 and $1.22 bln).
3:07PM Intel holds near support (INTC) 31.60 -0.03: -- Technical -- It has been a steady march lower over the last two weeks (down roughly 9%) for INTC with the stock attempting to stabilize today near support in the 31.54/31.53 area (session low 31.48). This marks the 62% retrace of the run over the last month and the initial recovery high off the Dec low. While the bounce is positive need to see sustained follow through beyond trendline resistance (32) and its 50 day averages (exp 32.11, simple 32.33) to improve the recent bias. Failure leaves the door open to next supports at 31.30 (100 day simple mov avg-- held near in Dec) and 31.14/31.10 (congestion).
1:58PM JNPR: EVP sells 250,000 shares 28.39 -0.78: According to a filing with the SEC, Juniper Networks' (JNPR) EVP of Worldwide Field Operations sold 250,000 shares on Jan 21 at $29.60 per share. The shares were exercised at a price of $5.65.
11:33AM BRCM Follow-up 39.44 +0.62: Hearing that stock came under pressure intraday due to rehashed speculation regarding co's WiFi business and potential declines in Serverworks. Our checks with institutional contacts suggest that there is nothing of substance here, as these very issues have been discussed in great detail by the analysts following the stock, and that this appears to be just another attempted raid on the name.
9:29AM CCMP Color : Cabot Micro (CCMP): UBS lowers tgt to $56 from $58; says EPS topped consensus and revenue was stronger than expected; however, gross margins were off a bit, likely temporary, but enough to concern investors. Firm sees some multiple erosion here from concerns about longer term share loss, though more psychological than hurting near term earnings... ThinkEquity says the 14% pullback in Cabot yesterday is a compelling buying opportunity. Many investors are overlooking the strong uptick from 130nm likely to occur over the next few years due to concerns about 90nm, in which decisions are still in a state of flux and unlikely to become mainstream in this cycle.
9:24AM UTSI: Growth continues, still undervalued -- CIBC 35.93: CIBC comments that UTStarcom shares remain undervalued. Firm believes that its estimates remain conservative. Notes that co improved its balance sheet in the Q with inventory turns improving to 2.2 from 1.6, DSOs of 52 days, and positive cash flow of $47.4 mln.
9:17AM POWI upgraded at Needham 31.06: -- Update -- Needham upgrades Power Integrations (POWI) to Buy from Hold despite weaker than expected results; firm believes that the stock carries healthy appreciation potential over the coming year while more than adequately discounting the risks of a potential intensification in the competitive environment or a slower than expected recovery in the electronics industry. Target is $34.
9:04AM KLAC upped to Sector Perform at CIBC; tgt $85 60.81: CIBC upgrades KLA-Tencor (KLAC) to Sector Perform from Sector Underperform based upon strong leverage in 2Q/Dec results and 3Q/March guidance. Firm raising CY04 est to $1.70 from $1.30, and initiating CY05 with $2.56 est. While long-term competitive pressures remain, near-term urgency to add high-end capacity with high yields increases the appeal of co's proven offerings, and firm believes is providing with robust pricing power into a bookings ramp-up 50% Q/Q to 1.50 Btb. With visibility now extended into 3Q:C04, firm expects multiple expansion as investors gain confidence to the magnitude and potential duration of this cycle. Price tgt goes to $85 from $54.
8:49AM KLAC target raised to $74 at Lehman 60.81: Lehman maintains their Overweight rating on KLA-Tencor and raises their target to $74 from $68 following stronger than expected Q2 results; firm says exceptionally strong Dec orders are likely to fuel a large increase in shipments in the March qtr as well as a large increase in revs in the June qtr.
Analog Devices (ADI) 48.65 +0.19 : Barron's Online highlighted ADI due to "hot" sales of handsets to robotic arms on factory floors possibly signaling better days ahead for the co. Its shares of have more than doubled from their lows last January, hitting a 52-week high last week after the company announced plans for a two-for-one stock split. Obviously, the rebound in computer sales and the boom in consumer electronics have helped drive the shares higher. According to article, the stock may not fully reflect either the strength of that move or the potential growth in Analog's industrial business and in margins and earnings as the economy recovers. "Investors haven't seen this [semiconductor] cycle's earnings yet," says analyst Rick Whittington of American Technology Research. "Someone buying [Analog Devices stock] now still has earnings [growth] ahead." As demand picks up across ADI's broad customer base, "it's a double bang of growing revenues and margins," says William C. Conroy, analyst at Sanders Morris Harris. Financially the company seems to be on firm ground, with little debt and $2 billion in cash. It also began paying a dividend last quarter.
Lattice Semi (LSCC) 11.73 -0.63 : Co will delay results until the second half of February after recently becoming aware of a possible overstatement of the Company's Deferred Income account. At this time it is too early to determine if any adjustments to previously reported financial statements will be required and whether such adjustments, if needed, would be material.
Vitesse (VTSS) 8.78 +0.96 : CIBC upgraded Vitesse Semi to Outperform from Sector Perform following stronger than expected results; firm believes that investors should begin to appreciate VTSS in the near-term due to the stock's attractive valuation vs other wireline comm-IC vendors, as well as their belief that the co is well-positioned to be a solid third player in the GigE switch mkt and continues to be strong in SAN ICs; firm also notes that Enterprise/storage growth should be supplemented by good growth in metro products. Target is $10.
PMC-Sierra (PMCS) 22.53 -0.62 : Lightreading reported PMCS still likes its storage exposure two years after deciding to move into storage, PMCS still doesn't have any high-profile acquisitions to point to. However, the article suggests the company is finding its way into some storage customers and appears to have laid the groundwork for a good run at this market. Like fellow telecom-chip vendors AMCC and VTSS, PMC entered 2003 citing storage as a growth vector to compensate for lagging telecom revenues. Vitesse pegged its restructuring on storage, and storage products such as Fibre Channel serializer-deserializers (SerDes) now make up half the company's revenues. AMCC declared its interest with the October acquisition of JNI Corp., which was the kind of acquisition AMCC investors had been waiting for and is now ready to flesh out its relatively new storage division. The article notes PMC's efforts have been less dramatic, although the company has been pumping out products. The company also sells general-purpose products, such as microprocessors, into the storage area. So far, though, the company hasn't been swayed by any JNI-sized deals. "Our efforts to date have been internal," CFO Alan Krock told Light Reading, noting that at "a couple million dollars" in quarterly revenues, storage remains a small slice of PMC's world. "We would like to participate [in storage] in a meaningful way. We haven't found the ideal partner to get us into that," Krock says.
Tower Semi (TSEM) 6.99 -0.90 : Priced 11MM shares at $7.00.
KLA-Tencor (KLAC) 58.60 -2.21 : CIBC upgraded KLA-Tencor to Sector Perform from Sector Underperform based upon strong leverage in 2Q/Dec results and 3Q/March guidance. Firm raised CY04 est to $1.70 from $1.30, and initiated CY05 with $2.56 est. While long-term competitive pressures remain, near-term urgency to add high-end capacity with high yields increases the appeal of co's proven offerings, and firm believes is providing with robust pricing power into a bookings ramp-up 50% Q/Q to 1.50 Btb. With visibility now extended into 3Q:C04, firm expects multiple expansion as investors gain confidence to the magnitude and potential duration of this cycle. Price tgt goes to $85 from $54.
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Have a great time Don! |
