From Briefing.com: 4:57PM Weekly Wrap: This week's market was essentially about two things: oil and jobs. When the latter started climbing higher (setting 4 all-time records in the process), investors looked to the July employment report for signs the economy was not buckling under the weight of steep gas prices. The jobs data, unfortunately for the bulls, did not placate those concerns, and if anything, reinforced fears about the consumer first raised by last week's Advanced Q2 GDP, and this week's June Personal Income and Spending report and July same store sales results.
In those two, the consumer came across as a weakened force in comparison to previous reports that showed it as the linchpin of the expanding economy. June Personal Spending declined 0.7% (consensus of -0.1%) for its worse drop since the 9/11 attacks, and July chain store sales only seemed to reinforce the softness seen in June. Some retailers like Nordstrom (JWN) managed to top analyst estimates, but most - like Gap (GPS) - fell short of market expectations. As a result, retail (apparel, department store, drug store) was one of the worst groups this week.
The July nonfarm payroll number (+32K; below even the lowest economist forecast - +170K - contained in the consensus estimate) didn't give a lot of hope the consumer would be bouncing back soon. June and May were both revised lower (by 34K and 27K) and July represented the worst reading in 8 months. Curiously, the unemployment rate dropped 0.1% to 5.5% (consensus of 5.6%), but that was more a function of discrepancies between the two surveys (household and establishment). As the establishment survey is considered more accurate, traders focused on the nonfarm payrolls number and took the major indices significantly lower (1.5-2.5%) Friday for their 5th week of losses in the past 6 weeks.
The employment report, however, was welcomed with open arms by the treasury market. The fed funds futures signaled a lowered probability of a Fed tightening in August (89% from 100%) and September (12% from 75%), and sent the bond market into a buying frenzy. The yield on the 10-year note plunged from its level last week (4.48%) to its lowest reading (4.21%) since mid-April. Gold also did quite well, moving to its best levels since late July, as the dollar suffered its biggest one-day drop against the euro since January.
The equity market itself had its second largest decline of the year on Thursday, when crude oil spiked 4% and hit $44.41/bbl. The catalyst for this was Russia's decision to revoke permission for Yukos (its largest oil exporter) to use previously frozen bank accounts for payment of crude oil production and transport. The company first started making headlines last week and stayed in the news as its closure would send huge supply shockwaves through the market. Stocks should continue to trade in lockstep fashion with the price of crude oil, as concerns about Nigeria, Venezuela, the Mideast, terrorist attacks, and Yukos signal that oil prices should remain fairly elevated.
Despite the huge spike in crude oil (eventually hitting $44.60/bbl on Friday), energy joined retail as one of the weakest sectors of the week. Internet, transportation, drug, aerospace, basic material, biotech, defense, and semiconductor (the latter more due to Nvidia's $0.12 Q2 earnings miss) also joined their ranks, although it was frankly very hard to find a group that did not trade lower. Interest rate sensitive shares, like homebuilding, REIT, and utility, were the only areas to find buying interest in the downtrodden market.
Next week will bring a number of events that ought to keep the market fairly on edge: the aforementioned FOMC meeting on Tuesday, Ciscos's (CSCO) Q4 (July) earnings report on Thursday, and the start of the Summer Olympics on Friday. The latter has been cited as a potential target by several terrorist organizations, and a homemade bomb that exploded near Athens on Wednesday probably has not helped matters.
Those points aside, Briefing.com would not rule out a relief bounce next week. The Dow, S&P 500, and Nasdaq each finished at fresh lows for the year with Friday's meltdown, and some traders might be willing to step in and play the short-term bounce. Still, we would continue to maintain a conservative investing strategy that gives ample exposure to companies with reliable earnings growth. CVS Corp (CVS), Tyco (TYC), and Clorox (CLX) - all names recommended by our Active Portfolio or recent columns - all reported this week and gave encouraging updates. The economy has not rolled over (as evidenced by such reports as the July ISM Index) and the market should begin to pick up as we exit this hectic summer period. -- Heather Smith, Briefing.com
Index Started Week Ended Week Change % Change YTD
DJIA 10139.71 9815.33 -324.38 -3.2 % -6.1 %
Nasdaq 1887.36 1776.89 -110.47 -5.9 % -11.3 %
S&P 500 1101.72 1063.97 -37.75 -3.4 % -4.3 %
Russell 2000 551.29 519.65 -31.64 -5.7 % -6.7 %
6:56PM Technical College: Understanding Trading Cycles : A cycle is defined as recognizable price action that occurs with some degree of regularity in a specific time period. A basic cycle is represented by at least two clearly definable lows or troughs, separated by a high point or peak. Recognizing stages of a cyclical swing can help one position themselves on the correct side of a market. For shorter-term investors/traders, weekly cycles of 20, 40 and 80 have become dominate cycles over the last few years to aid in determining market direction and corrections. Currently, the market is in the latest stages of its 20, 40, and 80 week cycles with the 20-week cycle expected to hit a low somewhere in early/mid August, followed by a significant low made by all 3 around late-August/mid-September. (continued)
5:13PM Daily Sector Wrap : In Friday's Daily Sector Wrap we take a closer look at the PEG ratio, as a method of identifying undervalued stocks. Stocks mentioned include COF, NXTL, GPS, AMAT, AMZN, CAT, MCHP, and XLNX...cont.
4:29PM MXIM trades up 0.90 pts in after hours following in line earnings report : -- Update --
4:06PM Maxim Integrated reports in line; gross margins increased to 70.2% (MXIM) 44.22 -2.36: Reports Q4 (Jun) earnings of $0.36 per share, in line with the Reuters Estimates consensus of $0.36; revenues rose 42.7% year/year to $421 mln vs the $420.6 mln consensus. Gross margin for Q4 increased to 70.2% from the prior quarter's level of 69.8%, after inventory reserves were increased by $2.8 million. Co also declares a quarterly dividend for $0.08.
3:32PM Treasury market ends week well bid, look to Tuesday FOMC : The market backed off of its highs and churned around for the latter half of the session into the close, remaining strong even as large players sold. The initial shock of the jobs report blindsided the market and knocked yields off to levels not seen since April, and also saw the largest price jump since back in June of 1995. The 32K non-farm payroll number was combined with downward revisions for both May and June all of which served to propel prices higher as what had been assumed to be a momentary slow down had to be considered in light of the new data. With this broader view the fed fund futures took out much of the certainty previously priced in, with the expectations for Tuesday's understood 25 basis point hike dropping to 90% with an anticipated added 25 in September slipping to 36%. "Are we headed into stagnation?" asked one trade-lifer, "is this going to be a do-over of the 1970's, with soaring energy prices and costs and low employment," before saying "I don't know, but it sure is something to think about." Far a field as that view may be, players had reason to consider that data and revise expectations on how the Federal Reserve will tinker with rates down the road. "They can't hold on Tuesday," is a general feeling, with one dealer noting, "they have to move in August, now September meeting...maybe they don't go [raise rates]." The deteriorating dollar and continued pump up in crude prices were merely added drivers to the day's action. The 10-years are currently +1 16/32nds yielding 4.214%; 2-years are +16/32nds yielding 2.375%; 3-years are +19/32nds yielding 2.705%; 5-years are +1 01/32nds yielding 3.379%; 30-years are +1 25/32nds yielding 5.033%.
2:31PM Rudolph Tech and AUGT announce litigation settlement (RTEC) 14.71 -0.57: Rudolph Technologies (RTEC) and August Technology Corp (AUGT) announced that they have fully settled the commercial litigation between the companies originally filed on 9/23/03. The dispute arose from a 12/24/97 Development Agreement between ISOA, Inc., which was acquired by RTEC in Sept '02, and STI, Inc., a company acquired by AUGT from ASTI Holdings, Ltd. in Apr '03. Under the terms of the settlement, both companies and their subsidiaries have agreed to dismiss with prejudice all claims against each other that arose out of the Development Agreement. RTEC will receive a one-time payment of $502,500 from ASTI Holdings, Ltd. All parties involved have denied liability to opposing parties.
2:29PM O2Micro International (OIIM) 10.25 - 0.44: O2Micro published Q2 EPS of $0.10 on revenue of $24.065MM (+15.2% Y/Y) vs. Reuters Research consensus at $0.10 on $24MM. Gross margin increased 373 bps Y/Y to 59.6%. Operating margin increased 742 bps Y/Y to 19.4%.
Management said end-market sales improved in Q2 but June was slower than expected, and industry wafer fab utilization appears to be trending lower, suggesting some markets will remain slow. Sales into the LCD market decelerated due to end-market oversupply; market is beginning to correct and is expected to fully correct by the end of the quarter. Management does not see a significant upturn in notebook sales near-term.
The consumer segment accounted for approximately 33% of revenue, computer lower 16% range, communications lower single digits range, and industrial lower single digits range.
Guided for Q2 revenue of $24.306-25.268MM (+4.8-8.9% Y/Y) vs. Reuters Research consensus at $0.13 on $26.58MM. Gross margin is expected to be at the upper end of the company's long term model of 55-60%. R&D is expected to be in the middle of the target range of 18-23% range. SG&A is expected to be slightly above the high end of the target range of 13-18%.
Management remains focused on extending the company's power management solutions across end-markets. The company's newly developed video products for use in digital cameras and other video applications are expected to contribute to revenue in the first half of next year. Additionally, products for LCD monitor and server applications for the commercial and industrial markets are under evaluation.
The following table shows price multiples and Y/Y growth rates for OIIM compared against the semiconductor group. Company *P/SG **P/OPG P/S Y/Y Rev Growth (%)
TTM 2004E 2005E TTM 2004E 2005E
O2Micro International (OIIM) 2.8 21.5 4.4 4.3 3.7 23.6 9.7 15.8
Linear Tech (00C0) 6.4 13.5 14.7 10.8 9.3 33.1 36.7 15.3
Maxim Integrated Products (MXIM) 6.1 17.8 11.4 10.4 7.6 15.4 24.8 37.3
Texas Instruments (TXN) 1.8 14.6 3.0 2.7 2.4 28.6 31.8 13.1
Semiconductors 2.0 18.7 3.5 n/a 24.0 n/a
*P/SG Ratio: Normalized Trailing 12 month (Price / Sales) / Growth ratio as of July 30, 2004.
**P/OPG Ratio: Normalized Trailing 12 month (Price / Operating Income) / Growth ratio as of July 30, 2004.
OIIM has declined over 30% since the Q1 review, Story Stocks, May 6, 2004, when we suggested investors wait for a pullback or until the company accelerates revenue growth into the lower 20% range. The market continues to price in material operational improvements and an acceleration in sustained top-line momentum. Shares are at fair value assuming sustained lower teens revenue growth from C06 and 30% operating margin. We would continue to hold off.--Ping Yu, Briefing.com
10:06AM NVIDIA (NVDA) 9.74 -4.82: NVIDIA reported Q2 EPS of $0.03 on revenue of $456.061MM (-0.8% Y/Y) vs. Reuters Research consensus at $0.15 on $502.79MM. Gross margin increased 245 bps Y/Y to 30.7%. Operating margin declined 452 bps Y/Y to 0.8%.
Management attributed the shortfall to a greater than expected 17% Q/Q decline in desktop GPU unit shipments due to aggressive pricing of integrated graphics chips, Intel's delay of PCI Express, which stalled customer ramp of the company's GeForce PCX GPUs, and modest market share lost early in the quarter in the low end DX family due to aggressive pricing.
Commented that the outlook for the PC market remains uncertain but that new GeForce products are being well received, the Xbox business is on solid footing, and wireless products look highly promising as company enters full production with cell phone customers. Guided for Q3 revenue of approximately $469.743-501.667MM (-3.4 to +3.2% Y/Y; +3-10% Q/Q) vs. consensus at $0.23 on $551.95MM. Gross margin is expected to improve by 100-200 bps, and operating expenses are expected to increase by 5-10%.
The following table shows price multiples and Y/Y growth rates for NVDA compared against direct comps within the semiconductor group. Company *P/SG **P/OPG P/S Y/Y Rev Growth (%)
TTM 2004E 2005E TTM 2004E 2005E
NVIDIA (NVDA) 1.0 30.3 0.9 0.9 0.8 6.9 12.8 6.6
ATI Technologies (ATYT) 1.1 12.1 2.2 2.0 1.7 47.1 36.4 16.2
Creative Tech (CREAF) 0.8 18.2 1.1 n/a 3.8 n/a
Intel (INTC) 2.5 10.4 5.4 4.9 4.4 20.1 13.9 11.2
Trident Micro (TRID) 4.0 n/a 5.5 5.5 3.8 (8.0) 2.6 47.3
Semiconductors 2.0 18.7 3.5 n/a 24.0 n/a
*P/SG Ratio: Normalized Trailing 12 month (Price / Sales) / Growth ratio as of April 30, 2004.
**P/OPG Ratio: Normalized Trailing 12 month (Price / Operating Income) / Growth ratio as of April 30, 2004.
NVDA shares have pulled back approximately 57% since the Q4 and Q1 reviews, Story Stocks, February 12, 2004 and April 7, 2004, when we said that concerns over eroding market share are likely to weigh on shares. We suggested investors hold off until the company accelerates sustainable growth into the lower teens range.
Shares currently trade at a discount to peers and are at fair value assuming sustained lower teens revenue growth from F07 and 12-13% operating margin; implied growth rate falls to upper single digits assuming 15% operating margin. Six-year peak annual operating margin is 17.4%.
Q2 results impacted by one-time events and some significant but not insurmountable competitive challenges. Expect sales momentum to accelerate on new product ramps, including GeForce 6 family and wireless, and as the market transitions to PCI Express. We would write puts and/or begin accumulating shares.---Ping Yu, Briefing.com |
