Laggards No More
By Monica Rivituso Published: November 18, 2005
smartmoney.com
<<YOU'VE GOT TO love weeks like this. Google (GOOG: 400.21, -3.24, -0.8%) and Yahoo (YHOO: 41.54, -0.69, -1.6%) are on a tear, the former topping $400 a share. Network Appliance (NTAP: 28.86, -0.75, -2.5%) was cheered after beating fiscal second-quarter expectations Wednesday. And Microsemi's (MSCC: 28.04, +2.89, +11.5%) report late Thursday dazzled, resulting in an 12% gain on Friday. In all, the Nasdaq gained a juicy 2% on the week.
But it's what we heard from Applied Materials (AMAT: 17.24, -0.10, -0.6%) and Hewlett-Packard (HPQ: 29.40, +0.40, +1.4%) that really piqued my interest.
Let's be clear: I nailed the call on H-P. As I predicted on Wednesday, Chief Executive Mark Hurd showed investors he's making some of the tough decisions needed to turn the venerable tech company around. H-P's enterprise-computing division, which includes storage and servers, was a standout, and PCs performed well. Yes, the company's restructuring has required a massive charge to earnings, but the efforts are producing good results. H-P not only topped fiscal fourth-quarter earnings by a nickel a share, but it also boosted first-quarter and fiscal 2006 estimates.
"We continue to like what our industry sources say about H-P's new leadership," wrote Cindy Shaw, analyst at Moors & Cabot Capital Markets, a Boston-based financial-services firm, in a note to clients Friday. "Our contacts are seeing a new focus on accountability and the basic blocking and tackling of the business." (Shaw doesn't own shares of H-P; Moors & Cabot doesn't have an investment-banking relationship with the company.)
On Tuesday I said that Hurd has just begun to have an impact on H-P. The stock is up 3% this week and 30% since May. It looks like the market agrees.
Applied Materials is a stock that requires a little more faith. But I think faith will be rewarded in time.
Investors obviously didn't like what Applied's management had to say on Wednesday, having punished the stock 3% since. But I think they're missing the bigger picture. One of the reasons I wrote favorably about Applied in May and again on Tuesday is that this company will benefit most from the industry's eventual upturn. When you're the world's largest maker of chip equipment, are well managed and have exposure to just about every chip-making segment (as well as some other areas, such as flat panel displays), you're going to fare well in an industry upswing.
Applied beat fiscal-fourth-quarter expectations for earnings, revenue and new orders. But executives said new orders would rise 7% to 10% in its fiscal first quarter, somewhat shy of the 10% analysts expected, while profits would be flat with the fiscal fourth-quarter, about a penny per share less than the consensus estimate. I think management is being cautious here — and why not? You can't turn on a financial news network without hearing someone chirping away about the shakiness of holiday season sales. The fears are overblown. Wal-Mart Stores (WMT: 49.50, +0.26, +0.5%) just announced that its holiday prospects are encouraging, while recent economic indicators showed that inflation hasn't run amok.
Moreover, the Semiconductor Industry Association, a chip trade group, just released a forecast calling for chip sales to grow at a compound annual rate of 10% through 2008. And Mike Splinter, president and chief executive of Applied Materials, told me after the company's conference call on Wednesday that customers are more positive about making capital-equipment purchases than they were three months ago. That's a trend he expects will continue.
There's also the matter of chip foundries, which historically account for around 30% of Applied's sales. Sales to such chip-making giants as Taiwan Semiconductor Manufacturing (TSM: 9.12, +0.11, +1.2%) and United Microelectronics (UMC: 3.05, -0.01, -0.3%) have lagged this year. In its fiscal third quarter, foundry sales accounted for less than 10% of Applied's new orders. But in its latest quarter, foundry sales jumped to 17%. Not only is the trend moving in the right direction, but Splinter points out the obvious: In order for foundries to grow their business, they must have capacity — and that requires new equipment.
If nothing else, you have to pay attention when the largest chip-equipment maker says its clients are going to spend up next year. It's like Cisco Systems (CSCO: 17.02, -0.35, -2.0%) saying that 2006 will be a boom year for telecom spending. Or Sirius Satellite Radio (SIRI: 7.28, -0.05, -0.7%) saying it will be profitable in a matter of months (relax, Sirians, that's not the case).
"We think capital spending is going to be up next year in the 5% to 10% range," Splinter says. "We think foundries are going to go up by more than that. Flash memory is going to go up [as well]. Those things put Applied Materials especially in a good position." I have to agree.>> |
