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Wednesday, June 11, 2003 6:31:42 PM
RobBlack.com MarketWrap:
http://www.robblack.com/rb_marketwrap.shtml
Overbought gets more overbought. The crowd is fixated on a second-half recovery, and is willing to let current bad news slide. Stocks rose on optimism the Federal Reserve will cut interest rates this month, providing more fuel for the rally that has lifted the Standard & Poor's 500 Index to the highest in almost a year. Negative guidance from Texas Instruments, further travail at Freddie Mac, and a bland Beige Book failed to halt the bull stampede. The S&P 500 gained 12 points (+1.3%) to 997, its highest since June 20. The DJIA added 128 points (+1.4%) to 9183. The Nasdaq advanced 18 points (+1.1%) to 1646. A Federal Reserve survey of regional economies that said the U.S. expanded at a “subpar” pace since April bolstered investor optimism the central bank would cut interest rates June 25. A cut would lower companies' borrowing costs, boosting profits.
Strong Sectors: homebuilder, airline, electronic manufacturing services, biotech, oil & gas drillers, managed healthcare, food retail, wireless services
Weak Sectors: semiconductor
Top Stories . . . U.S. Treasury notes rose, sending the 10-year yield to the lowest since 1958, as Federal Reserve officials keep the slowing of inflation their top concern, boosting speculation of an interest rate cut.
Freddie Mac, the second-biggest buyer of U.S. mortgages, is the subject of criminal and securities investigations after ousting its top three executives amid a restatement of earnings for the past three years.
J.P. Morgan Chase, the second- largest U.S. bank, said it combined its U.S. and Latin American equity research teams after moving Jose Linares, in charge of Latin American research, to head its Asian research unit.
Texas Instruments, the world's largest maker of mobile-telephone chips, fell as much as 9.9 percent and led stocks of rivals down after the company said second-quarter sales and profit will rise less than forecast.
The U.S. continued to expand at a ``subpar'' pace after end of the Iraq war lifted consumer and business sentiment, the Federal Reserve said in its latest survey of regional economies.
Fund Flow . . . According to Trim Tabs, U.S. equity mutual funds received $3.6-billion in new cash during the five-days ended Thursday, the highest in almost two-months. Stock funds attracted a net $14-billion in April, the biggest monthly inflow in a year.
Figuring Out Tech Valuations . . . Divide the S&P 500 universe into two groups: information tech and everything else. For each group, look at the median historical trailing and forward P/E ratios. Using P/Es instead of other valuation metrics because earlier work found that P/Es are more predictive once the trough is passed. Although tech is trading at a significant P/E premium, that premium is slightly smaller than during bear market rallies. For example, at the peaks of the April-June 2001 and September 2001-January 2002 rallies the median tech company traded at 2.3X the median non-tech S&P 500 name. As impressive as the current rally is, the forward P/E of the median tech company was 2.1X times that of the median non-tech S&P 500 company at the end of May.
Tech looks similar to prior peaks on trailing P/E. For example, at the prior two peaks the median tech company was trading in a range of 1.9-2.2X the median non-tech S&P 500 company on trailing P/E. The current rally reached 2.1X at the end of May. Of course, except for the bubble tech is more expensive than at any time in the 1990s.
The next issue is valuation in the context of expected growth. A study from two years ago found that the tech P/E-to-growth premium was gone as tech and non-tech names traded at similar multiples for similar growth. The PEG premium helps gauge how speculative the current market is since companies with similar growth prospects should trade at similar valuation levels (this oversimplifies since it doesn’t take into account return on capital—all growth is not equal). Selected the 39 S&P tech and 42 non-tech companies with greater than 15% long-term EPS growth estimates. The median growth rate for the tech group was 20.0% and for the non-tech group was 19.5%. This equals relative similar P/Es for these reasonably similar groups. The tech premium is back. While the premium disappeared in the first half of 2001, it has come back in both trailing and forward P/Es. The median trailing P/E for the tech group is about 1.5X the non-tech group, and the forward P/E for the tech group is about 1.3X the nontech group.
The 30% forward P/E premium is not yet a big concern in the sense that it’s within one standard deviation from its historical mean. It’s only a concern if one is worried that earnings estimates are too optimistic. This year’s estimates are reasonable, but long-term estimates near 20% are likely too high (though projections could be too high for the non-tech companies as well). The 50% premium on trailing P/E looks too rich; recall that our work has indicated that trailing P/E has more predictive power than forward P/E. The premium is more than one standard deviation from its historical mean, so significant relative upside seems unlikely.
Historically, tech has not always traded at a premium. Prior to 1999 tech was likely to trade at a discount to nontech companies with similar growth characteristics. Chief U.S. Equity Strategist Rich Bernstein has argued that tech should trade at a discount since its earnings volatility is higher. Given that tech has relatively short competitive advantage periods, perhaps tech should sell at a discount. On the other hand, there appears to be an option value special to tech—perhaps this company is another Microsoft. Or tech growth rates can be underestimated during the good times, but we doubt that’s the case today.
Deflation . . . During deflationary periods, the cost of debt is higher than you might think. That is, the true cost of debt is hidden from those who work with nominal interest rates, interest expense amounts, and debt balances. These data must be remeasured to reflect the fact that current borrowings must be repaid eventually using dollars with a higher purchasing power per dollar than those obtained from the borrowing. Again, the data must be remeasured to account for deflation. Remeasurement to a real basis is achieved by:
1) Adding the projected deflation rate to the nominal interest rate to obtain the real interest cost.
2)Adding to the nominal interest amount the increase during the period in the purchasing power required to repay the debt.
3)Adding the expected increase in the purchasing power required to repay the debt at maturity to the nominal maturity amount.
Of Note . . . Applications for mortgages fell about 9% last week, the Mortgage Bankers Association said Wednesday. Refinancing applications dropped about 9.3% while purchase applications fell 9% from the previous week's record high. The mortgage group said mortgage rates continued to set record lows. Thirty-year fixed mortgages averaged 5.06% vs. 5.13%. Fifteen-year loans were costing 4.49 percent. One-year adjustable rate loans fell to 3.02% "Refinancing activity remains very strong with borrowers still reacting to the headlines regarding record-low 30-year fixed rates," said Phil Colling, MBA economist.
Financials . . . Friedman Billings Ramsey downgraded Comerica to Market Perform from Outperform based on valuation. The stock now trades within 4% of their $52 target.
Oil & Gas . . . Bear Stearns upgraded Pride International to Outperform from Peer Perform based on their improving onshore and offshore drilling outlook; firm believes that PDE has substantially greater earnings power today than in the 2000-01 drilling upturn, and that the stock will surpass its $30 peak on a stronger and broader base of business. Year-end target is $25.
Metals . . . Alcan Aluminum filed a $1 billion mixed shelf.
Since March 28, 2003, North American gold stocks have posted a solid rally rising 15.5% (based on the XAU Gold Index). This rally has been propelled by bullion rising 10.0% from $331/oz (on March 28) to the current $363.50/oz level. Given the rising share prices, this is a good opportunity to review the industry valuations.
Historically gold equities have traded between one and three times estimated NAV (calculated using a 5% discount rate). The senior and mid-tier producers are now trading at 2.34 and 2.23 times estimated NAV (2.29 times on average), respectively. This is modestly below the 2.5 times level (for both groups combined) seen in early 2003 (when bullion raced to a six-year peak of $389/oz). Given the rising valuation for the industry, focus on the more undervalued companies (on a relative basis) in our universe. The top senior gold producer is Barrick Gold while a Wall Street favorite mid-tier producers includes Agnico-Eagle Mine, Glamis Gold, and IAMGOLD.
Homebuilders . . . Lennar reported 2nd quarter earnings of $2.05 per share, $0.35 better than the consensus of $1.70. Revenues rose 35.0% year/year to $2.12 billion versus the $1.95 billion consensus. According to Lennar's president and CEO, "The U.S. homebuilding market remains very strong as a result of favorable supply and demand trends." The company also issued new 2003 EPS guidance of $8.50, versus consensus of $7.97 and previous guidance of $7.73. The firm sees 2004 EPS of $9.50 versus estimate of $8.53 and previously guided earnings of $9.09 per share.
Defense & Aerospace . . . Banc of America Securities' Thomas McManus removed 3M from his model portfolio, adding fellow blue-chipper Boeing to take its place.
Titan Corp was awarded a contract by the Department of the Navy with a potential value of $194.8 million through March 2010. The contract provides support for the Navy's Information Technology Services needs.
Transports . . . Mesa Air announced a $75 million convertible note offering.
Fechtor Detwiler believes that Broadcom may soon be supplying Bluetooth components to Ford. According to firm, Johnson Controls is Daimler's lead provider for its Bluetooth based, in-vehicle phone system (which utilizes a BRCM Bluetooth chipset which gets somewhere in the range of $10 per unit). Firm's sources suggest that JCI has sealed a second major deal with Ford.
JetBlue announced an order of 100 Embraer 190 aircraft to be delivered beginning 2005, with options for an additional 100 new aircraft. Currently, 30 of the planes have lease financing in place. The new aircraft is targeted to service medium-sized markets, whereby JetBlue is hoping to stimulate these markets with a more appropriately sized plane. The Embraer 190 will have a CASM premium of one cent versus the A320. However, JetBlue is confident it would be able to make this up on the revenue side. While this may seem a deviation from the low cost carrier’s one-plane type model, this new aircraft type will actually offer further flexibility for JetBlue and offer further expansion opportunities for the carrier. Its new 8-year compound annual growth rate will be 24%.
Retail . . . Safeway is eliminating 940 of its 7,000 administrative jobs. Half of the positions will come from corporate offices in California and Arizona.
Medical Devices . . . St. Jude Medical upgraded by Deutsche to Buy from Hold and raised their target to $70 from $50. The firm says a new survey of U.S. electrophysiologists forecasts strong CRM growth, with STJ projected to garner almost 20% of CRT-D implants once its product is approved - well above their 6% forecast.
Drugs . . . Richard Evans at Sanford C. Bernstein cut his rating on Schering-Plough's stock to "underperform" from "market perform" and lowered his price target to $15 from $17. Evans cited looming generic competition for the drugmaker's hepatitis treatments.
Eli Lilly and expects second-quarter results to come in at the high end of its outlook for earnings of 59 to 61 cents per share. The company also reconfirmed its forecast before items for a profit of $2.50 to $2.60 per share for the full year 2003. Lilly also updated the situation of the Food and Drug Administration's reinspection of two of its Indianapolis facilities. The company said the FDA inspectors recently completed the reinspection of its dry products and injectable facilities in Indianapolis and issued a Form 483 as "a normal part of the inspection process." Now Lilly and the FDA are in the review process.
3M announced the submission to the U.S. Food and Drug Administration of a supplemental new drug application (sNDA) for Aldara Cream for the treatment of a form of non-melanoma skin cancer. The company said it remains "on track" to receive marketing approval for this indication in mid-2004. Aldara is currently being prescribed to treat external genital and perianal warts.
Merrill Lynch upgraded Barr Labs to Buy from Neutral and set a $72 target, which assumes that the stock can trade at 20x 2004 EPS estimates of $3.58. This multiple is consistent with Barr’s current 2003 multiple, which is approximately 10% below the group average. ML recently downgraded the stock primarily due to stronger than expected multiple expansion and price performance in a short amount of time. At that time, they reiterated that Barr should be viewed as a long-term core holding in the group. In addition to the stock’s underperformance relative to the generic group in recent months, two important things have happened since our downgrade. First, the stock has already taken the “hit” for the potential for new competition in the oral contraceptive space. We now believe that investors expect additional competition in the next 6-12 months. Second, Barr announced that it has closed on its proposed acquisition of four branded Wyeth products as well as a license to a branded oral contraceptive product in development. Recall that this deal was originally slated to close last quarter but had slipped a bit into this quarter. The closing of this deal firms up the earnings picture for next year and should provide some comfort for investors that may be concerned about additional competition to Barr’s base generic business.
Eli Lilly updated 2nd quarter EPS and reaffirmed 2003 in line with consensus. The company now expects 2nd quarter EPS to be at "high end" of previously guided range of $0.59-0.61, vs. Reuters Research consensus of $0.60, based on LLY's "continued intention to make significant investments in new product launches and key marketed products." The company also reaffirmed 3rd quarter EPS guidance of $2.50-$2.60 (excluding unusual items), in line with an estimate of $2.55. LLY says FDA concludes reinspection of Indy plant; this may be viewed as positive for ICOS
Biotech . . . Guilford Pharm announces $50 million convertible notes offering.
SuperGen said EuroGen Pharmaceuticals, its European affiliate, has been granted 'orphan medical product designation' for its Orathecin oncology drug by the European Agency for the Evaluation of Medicinal Products. SuperGen is developing Orathecin as a treatment of pancreatic cancer. The firm is currently in the latter stages of a fast-track new drug application for Orathecin in the U.S.
Medarex initiated Phase I trial of (HIV drug) MDX-010, a fully human anti-CTLA-4 antibody, for patients infected with HIV, the causative agent of AIDS.
Merrill Lynch says biotechs are poised to move higher. Merrill Lynch says the recent bout of profit-taking is probably over and biotechs are now likely to move higher. MLcites the following factors: 1) money flow into mutual funds has turned increasingly positive while new stock issuance has remained minimal, 2) the FDA has become more accommodating, 3) the recent spat of positive news flow should continue, 4) valuations remain well within the historical range, and 5) window dressing into the end of the qtr should bode well for the group.
CSFB raised their price targets on Amgen, IDEC Pharma, Genzyme, Biogen, Medimmune, Genentech, Human Genome, Millenium, Neurocrine, ICOS Pharma, Myriad Genetics, and Gilead.
Media . . . EW Scripps expects 2ndquarter earnings to be near higher end of previously guided EPS of $0.73-0.83 versus consensus of $0.82, based on April and May results and progress in advertising sales.
World Wrestling Entertainment bought back the 2 million shares, or 3 percent of the total shares outstanding, that were owned by Viacom. The price paid per share was not disclosed. "This transaction in no way affects our strategic alliance with Viacom, and we strongly believe our relationship with our valued partner will continue to be excellent," said CFO Linda McMahon.
Telecom . . . AT&T Chairman David Dorman said he expects the company to have less than $10 billion in net debt at the end of 2003, versus debt of $12 billion at the end of the first quarter. Dorman added that the company would set the standard in the telecommunications industry for customer service by expanding its consumer unit and investing in improving its business customers' experience. On June 3, the company said it would spend $500 million in planned process improvements.
EarthLink was upgraded to Buy from Neutral at First Albany. The firm has an $8 price target in light of encouraging traction with PeoplePC and Earthlink Plus. The analyst believes the stock's valuation reflects limited downside risk. In addition, success with new offerings could show flat to positive dial-up subscriber numbers by year end. The balance sheet remains healthy with $464 million in cash and virtually no debt.
Goldman Sachs downgraded Vodafone to In-Line from Outperform based on valuation. The firm believes that over the next 3−6 months its performance relative to the sector will be restrained by its strong recent run, worries over wireless rev growth, and the likelihood that some of the lagging stocks in the sector have some catching up to do.
Sprint said it will cut 500 jobs and subtract $400 million to $475 million from pretax profits in the second quarter to reflect the termination of the company's Web-hosting business. The charge amounts to 20 cents a share. In the 12 months ended March 31, the Web-hosting unit contributed barely $60 million in revenue and cost Sprint 10 cents a share in earnings. Web-hosting is a service that helps businesses to create and run their web sites and to ensure easy access by Internet users no matter where they are located.
Sprint PCS was cut to Outperform from Strong Buy at SG Cowen. The firm believes that limited additional appreciation and a rising likelihood of a recombination of the PCS/FON tracking stocks favor shifting investments to other wireless stocks. Firm favors AT&T Wireless and Nextel.
Nextel was upped to Strong Buy from Outperform at SG Cowen. The firm believes that additional debt and preferred retirements and a potential refinancing point to EPS upside of up to 23 cents to firm's 2004 estimate of $1.18. SG Cowen expects positive financial results to prevail over negative news flow. Notes that NXTL currently trades at only 15x this year's $0.98 est. Firm's discounted cash flow value on the name is $21.
In a comment this morning on Qualcomm, SG Cowen says it expects the SARS impact on wireless to be greater than other tech sectors, and likely more than a one-quarter issue. Says that inventory exiting 1st quarter is abnormally high and companies with longer lead-times (13 weeks for QCOM) will likely see impact in 3rd quarter instead of 2nd quarter. Firm expects 3rd quarter guidance for sector to be negative.
IT Services . . . IBM was added to Merrill Lynch's Focus List. The firm is saying they would use the weakness caused by the SEC investigation to add to positions. Although the SEC will likely look into revenue recognition practices outside POS terminals, the firm would be surprised if the findings have a significantly negative impact on the shares from here. Also, concerns about offshore services are overdone, and surveys indicate that IBM should gain share in most product areas. ML maintained $97 target.
Storage . . . At a recent conference, Seagate CEO Steve Luczo emphasized Seagate's long-term competitive advantage owing to its vertical integration and product breadth. While Seagate did not have any new financial outlook, CEO Luczo noted that channel inventories remain where they were at the beginning of the quarter and that "June is a tough quarter and it's not over yet."
The near-term outlook for desktop segment remains uncertain as channel inventories have not improved and inventory/pricing actions typically get more aggressive towards the end of the quarter. Seagate's comments on inventories (being where they were at the beginning of the quarter) and pricing conditions tracking as expected so far, were consistent with competitor Maxtor's. While inventory conditions remain fragile going in to the last month of the quarter, Seagate continues to see competitive strength in the enterprise market against Hitachi (which is currently integrating the Hitachi/IBM drive operations) and against Fujitsu (who's commitment to the drive business is still unclear). Seagate's laptop product and initial customer announcement are expected very soon. There was no new financial outlook from Seagate today. Analysts are maintaining our estimates for 2003 at $1.40 (versus $1.16) on revenues of $6.5 billion, up 7% Year/Year and for 2004 at $1.40 on revenues of $6.8 billion, up 5%. For 4th quarter 2003, analysts are forecasting $0.30 in EPS (vs. $0.25) on revenues of $1.56 billion, up 7% Year/Year and at the high-end of Seagate's guidance.
Sun Microsystems came across surprisingly optimistic at a recent Tech Conference. While there was no financial guidance, Paul Youngjohns, EVP, Global Sales, noted positive signs in demand from telecom, financial and government customers -- primarily in the US -- which are significant Sun vertical markets. He also noted that these signs have not turned into orders yet. As to the challenge from Linux, Sun indicated that it could counter with Solaris or Linux on Intel (as recently announced) -- although analysts are not convinced of Sun's commitment to non-Sparc/non-Solaris platforms. Youngjohns also noted that Sun had adopted a new solutions-oriented selling model, which has generated good results as it has been rolled out in different markets. However, while a turn in IT spending could result in a boost to results (a la the internet cycle), it may not address Sun’s challenges of standards-based platforms taking share from proprietary offerings and ease the burden of investing in SPARC microprocessor development. Further, it's hard to tell if Sun's more optimistic tone is above and beyond its typical 4th quarter pick-up in volumes. SUNW has given no guidance for 4th quarter 2003. Analysts are maintaining 2003 estimates of $0.01 (vs. loss of $0.08) on revenues of $11.5 billion (down 8% Year/Year) and 2004 estimates at $0.10 on revenues of $12.7 billion (up 10% Year/Year). 4th quarter 2003 (ended June) estimates are at $0.02 in EPS (vs. $0.01) on revenues of $3.1 billion (down 9% Year/Year).
Brocade CFO Tony Canova gave no new financial guidance but noted that pricing in the switch business remains competitive owing to McData's recent strength here. In a separate setting, EMC's CEO noted his goal is to drive down the cost of the SAN, which could imply continued competitive pricing. The larger issue in the storage/SAN market appears to be the intensifying competitive trends, owing to overlapping products and new entrants into a market/category, which raises questions on the sector's attractiveness for investors. Cisco's entry into the director market has led to lengthening sales cycles, Brocade noted. Looking ahead, competitive pressures may intensify, such as McData's greater thrust into the mid-range switch market.
Cisco has had little impact to date, its design wins at EMC, Hewlet Packard ,IBM and Hitachi Data Systems gives us a sense of deja vu of MCDT's entry into switches and the subsequent competitive pressures. Analysts are maintaining 2003 estimates of $0.02 (vs. $0.23) on revenues of $535 million (down 5% Year/Year) and 2004 estimates of $0.10 on revenues of $626 million (up 17% Year/Year). Analysts are also maintaining fiscal 3rd quarter 2003 estimates of $0.01 (versus $0.08 last year) in EPS on revenues of $137 million (vs. $151 million) -- management
guidance calls for EPS of $0.01 and a revenue range of $131-$137 million.
Network Equipment . . . Ericsson was cut to Sell at Fulcrum. The firm expects wireless operators to continue to reduce capital investment throughout 2003 and into 2004 resulting in a 24% decline in Ericsson's revenue in 2003 and an 11% decline in 2004. Fulcrum's $7 target is based on 0.9x revenue and would imply 38.9x consensus 2004 EPS.
Semiconductor Equipment . . . Cymer lowered 2nd quarter revenue guidance to $58-61 million (approx 12% lower than previously guided revenues of $67.6 million) versus consensus of $67.3 million due to ongoing slowness in semiconductor industry. According to CYMI CEO, "As a result of this revenue shortfall, we now expect gross margin to be in a range of 13 percent to 17 percent for the second quarter, in contrast to 17 percent to 22 percent in our April guidance." The company says visibility remains limited, and volatility remains high.
Taiwan Semi was downgraded at Merrill Lynch to Neutral from Buy based on valuation. The stock has exceed their $8.90 target. Also, the firm sees a lack of forecast upgrades from either fabless or OEMs raises the risk of a correction.
Semiconductors . . . Microchip reaffirmed 1st quarter revenues of $157-164 million versus consensus of $159.7 million.
Banc of America downgraded Texas Instruments to Neutral from Buy after company guided 2nd quarter sequential revenue growth to the 5% range from previous forecast of 7%. BofA is lowering its 2003 est. to $0.34 from $0.38 and 2004 to $0.75 from $0.80.
Texas Instruments sees sequential second-quarter sales growth of 5 percent instead of its target of 7 percent and earnings of 6 cents instead of a goal for earnings of 8 cents a share. This is based on lower revenue and higher charges related to restructuring of certain manufacturing facilities. The company sees an estimated sequential growth in its semiconductor segment of 2 percent versus previously anticipated 4%. TI blamed chip sales to wireless customers.
Microchip Technology still expects fiscal first-quarter sales between $157 million and $164 million. The maker of microcontrollers and analog chips kept its other financial targets the same, as well.
Semiconductor sector was cut to In-Line from Attractive at Morgan Stanley. While Morgan Stanley believes that industry's fundamentals are improving, the firm also thinks the sharp share price rise in recent months and the potential that near-term earnings risk may increase suggest the reward-to-risk relationship is becoming less favorable.
Texas Instruments was cut to Sell from Hold at Deutsche. Price target was cut to $16.
Micron indicated that its DRAM inventory continues to be at a low level, currently at 2-3 weeks, though slightly higher than its March level of below 2 weeks. Micron believes the inventory level in the industry is similar at 2-3 weeks. DRAM contract pricing has been flat to slightly up, with an upward bias for the month of June. Micron indicated that its 0.11-micron ramp is progressing well, with 25% of wafer starts at 0.11-micron process today. The percentage is expected to increase to over 50% by end-CY03. Micron is spending the incremental $100 million of its 2003 capex (at $1.1bn) on 0.11-micron process upgrades. The smooth 0.11-micron ramp will result in slightly higher bit shipments than we expected. Bit production growth in the May-Quarter was higher than the mid-teens growth previously guided for. Analysts are raising 2003 EPS estimate from $(2.73) to $(2.62), and 2004 EPS estimate from $(0.74) to $(0.60). The increase
reflects a rise in our bit shipment growth assumption from 44% to 47% for 2003. Analysts have left 2004 bit shipment growth estimate unchanged at 49%.
Nvidia’s new high-end chip, the GeForce FX 5900 (NV35), is currently in production and will be available in the retail market shortly, consistent with recent comments from the company. The company expects its share of the desktop discrete graphics market to stay flat at 65%, and expects continued share gain in the notebook discrete segment. Market share gain is also expected to continue in the integrated chipset market, as Nvidia's nForce2 chipset continues to increase its penetration. Nvidia indicated that whether it will be in the next-generation game console from Microsoft depends on the economics of any agreement, as well as a consideration of the opportunity costs. Nvidia noted that the development of the original Xbox led to significant diversion of resources from its core product development and negatively impacted the NV30.
Intel updated 2nd quarter 2003 guidance of $6.7 billion, up 6% Year over Year. On the flash side, it appears that Intel is more willing to cut prices to regain market share as it has excess capacity in flash. Intel mentioned Samsung is a formidable competitor on the flash side. Intel re-iterated that Prescott, the new desktop processor on 90nm, is on schedule for launch in 2nd half 2003. No launch date was specified. Intel emphasized the focus on ROIC. This could lead to tempered capex if the industry does not recover.
ATI Tech mentioned that talks on new game console contracts are going in the right direction, and the company is optimistic about the opportunity. Expect some new announcements in the August quarter. ATI specifically mentioned that details on the Nintendo agreement initially announced in February are forthcoming, which we think could be positive. For its new high-performance desktop discrete product, the company will use old R300 core architecture as it feels it has more legs. Plans to introduce a new architecture next year. ATI feels that IBM cannot compete with Taiwan Semi and United Micro on cost, service, and response. IBM is good at advanced technology and being ahead, but ATI has made a conscious decision to stick with TSMC and UMC. The company restated its May-quarter guidance of around $300mn in revenues, and a slight sequential improvement in adjusted net income and EPS. Our adjusted EPS estimate for the May quarter is flat at $0.04. ATI’s new desktop integrated product will be launched in the summer, as expected. The launch is clearly a positive development for ATI, which has focused on the much smaller notebook integrated market so far.
Boxmakers . . . Dell Computer COO Kevin Rollins backs guidance despite SARS impact on China. Overall, Rollins said that he does not see demand picking up, although he said that there is an improved sentiment about technology at the moment.
Software . . . The Wall Street Journal reported that SAP plans to embark on a global print-ad campaign to "woo" customers from PSFT and JDEC and capitalize on the uncertainty over the ORCL hostile bid for PSFT.
The Wall Street Journal reported the recent hostile bid by Oracle for Peoplesoft has caused confusion amongst users of business software, according to analysts and executives. The article suggests this development could "play into the hands" of ORCL Chief Executive Larry Ellison as uncertainty could cause customers to delay purchases of its products and effect revs for its 2nd quarter. This could possibly lower the company's stock price and make ORCL's bid more attractive.
WebEx and BEA Systems inked IM deals with Yahoo!. This is designed to stitch its popular instant messaging program into business applications and allow them to be shared. Yahoo said the next version of its corporate messaging system would allow users to launch conferences with WebEx's technology from within instant messaging sessions that would let them share programs. The separate deal with BEA will allow applications developers using BEA's WebLogic Workshop platform to build Yahoo Instant Messenger functions into their programs.
Discussions with BEA System’s VP of IR and proprietary checks reinforce belief that the company is making steady progress with both the performance and sales execution of its Integration server. Customer uncertainty over budgets, and a practice of not purchasing “initial releases” is making close rates unpredictable, and will probably mute integration revenue in the Near-Term. While early, believe the Quarter is tracking; the demand environment remains challenging, but is stable. There’s speculation that BEAS is next on Oracle’s hit list. Believe it would be a good fit, but nothing that leads us to believe it is imminent. Analysts are incrementally more positive on the stock but remain cautious given valuation, and continued weakness in overall IT demand. BEAS has an OEM agreement with Peoplesoft, which pays a fee to license BEA technology, principally Tuxedo. These fees are fixed and relatively small (low single digit % of license revs) – the loss of this revenue would not have a material impact on BEA’s revenues. Checks indicate price pressure has increased in the EAI market especially on Tibco. The competitive environment has stabilized; IBM’s WebSphere 5.0 has only improved incrementally, ORCL has yet to execute and worries over JBOSS are greatly exaggerated.
Tibco's 2nd quarter will come in line with consensus of $0.01 and $62 million, but may fall shy of $64 million revenue estimate. Channel checks reveal overall demand situation has not improved since the end of 1st quarter. Competition between pure-play vendors is intense and leading to further price discounting. This will be offset somewhat by solid sales with its new product BusinessFactor. While close rates remain hard to predict, signs are emerging that things should improve in 2nd half.
RealNetworks plans a $100 million convertible.
Oracle was upped to Buy from Hold at Wells Fargo based on fundamental changes and improvements in the company's competitive and strategic positioning. After many years and attempts, believes Oracle finally has effectively expanded its product story from largely a database and technology tools company to a highly integrated software solutions company. As a result, believes this change significantly enhances company's growth potential and competitive positioning versus IBM and Microsoft, measurably expands the overall market opportunity, and provides customers a compelling cost of ownership and ROI argument. Firm's new 18-month price target is $18.00.
WebEx was upped to Neutral from Sell at Fulcrum. The upgrade is based on channel checks indicating 2nd quarter is tracking to plan and view that Web conferencing will be boosted by the marriage of WebEx to Yahoo!. Firm notes that the prospect of WEBX being acquired is the main risk to the sell thesis.
http://www.robblack.com/rb_marketwrap.shtml
Overbought gets more overbought. The crowd is fixated on a second-half recovery, and is willing to let current bad news slide. Stocks rose on optimism the Federal Reserve will cut interest rates this month, providing more fuel for the rally that has lifted the Standard & Poor's 500 Index to the highest in almost a year. Negative guidance from Texas Instruments, further travail at Freddie Mac, and a bland Beige Book failed to halt the bull stampede. The S&P 500 gained 12 points (+1.3%) to 997, its highest since June 20. The DJIA added 128 points (+1.4%) to 9183. The Nasdaq advanced 18 points (+1.1%) to 1646. A Federal Reserve survey of regional economies that said the U.S. expanded at a “subpar” pace since April bolstered investor optimism the central bank would cut interest rates June 25. A cut would lower companies' borrowing costs, boosting profits.
Strong Sectors: homebuilder, airline, electronic manufacturing services, biotech, oil & gas drillers, managed healthcare, food retail, wireless services
Weak Sectors: semiconductor
Top Stories . . . U.S. Treasury notes rose, sending the 10-year yield to the lowest since 1958, as Federal Reserve officials keep the slowing of inflation their top concern, boosting speculation of an interest rate cut.
Freddie Mac, the second-biggest buyer of U.S. mortgages, is the subject of criminal and securities investigations after ousting its top three executives amid a restatement of earnings for the past three years.
J.P. Morgan Chase, the second- largest U.S. bank, said it combined its U.S. and Latin American equity research teams after moving Jose Linares, in charge of Latin American research, to head its Asian research unit.
Texas Instruments, the world's largest maker of mobile-telephone chips, fell as much as 9.9 percent and led stocks of rivals down after the company said second-quarter sales and profit will rise less than forecast.
The U.S. continued to expand at a ``subpar'' pace after end of the Iraq war lifted consumer and business sentiment, the Federal Reserve said in its latest survey of regional economies.
Fund Flow . . . According to Trim Tabs, U.S. equity mutual funds received $3.6-billion in new cash during the five-days ended Thursday, the highest in almost two-months. Stock funds attracted a net $14-billion in April, the biggest monthly inflow in a year.
Figuring Out Tech Valuations . . . Divide the S&P 500 universe into two groups: information tech and everything else. For each group, look at the median historical trailing and forward P/E ratios. Using P/Es instead of other valuation metrics because earlier work found that P/Es are more predictive once the trough is passed. Although tech is trading at a significant P/E premium, that premium is slightly smaller than during bear market rallies. For example, at the peaks of the April-June 2001 and September 2001-January 2002 rallies the median tech company traded at 2.3X the median non-tech S&P 500 name. As impressive as the current rally is, the forward P/E of the median tech company was 2.1X times that of the median non-tech S&P 500 company at the end of May.
Tech looks similar to prior peaks on trailing P/E. For example, at the prior two peaks the median tech company was trading in a range of 1.9-2.2X the median non-tech S&P 500 company on trailing P/E. The current rally reached 2.1X at the end of May. Of course, except for the bubble tech is more expensive than at any time in the 1990s.
The next issue is valuation in the context of expected growth. A study from two years ago found that the tech P/E-to-growth premium was gone as tech and non-tech names traded at similar multiples for similar growth. The PEG premium helps gauge how speculative the current market is since companies with similar growth prospects should trade at similar valuation levels (this oversimplifies since it doesn’t take into account return on capital—all growth is not equal). Selected the 39 S&P tech and 42 non-tech companies with greater than 15% long-term EPS growth estimates. The median growth rate for the tech group was 20.0% and for the non-tech group was 19.5%. This equals relative similar P/Es for these reasonably similar groups. The tech premium is back. While the premium disappeared in the first half of 2001, it has come back in both trailing and forward P/Es. The median trailing P/E for the tech group is about 1.5X the non-tech group, and the forward P/E for the tech group is about 1.3X the nontech group.
The 30% forward P/E premium is not yet a big concern in the sense that it’s within one standard deviation from its historical mean. It’s only a concern if one is worried that earnings estimates are too optimistic. This year’s estimates are reasonable, but long-term estimates near 20% are likely too high (though projections could be too high for the non-tech companies as well). The 50% premium on trailing P/E looks too rich; recall that our work has indicated that trailing P/E has more predictive power than forward P/E. The premium is more than one standard deviation from its historical mean, so significant relative upside seems unlikely.
Historically, tech has not always traded at a premium. Prior to 1999 tech was likely to trade at a discount to nontech companies with similar growth characteristics. Chief U.S. Equity Strategist Rich Bernstein has argued that tech should trade at a discount since its earnings volatility is higher. Given that tech has relatively short competitive advantage periods, perhaps tech should sell at a discount. On the other hand, there appears to be an option value special to tech—perhaps this company is another Microsoft. Or tech growth rates can be underestimated during the good times, but we doubt that’s the case today.
Deflation . . . During deflationary periods, the cost of debt is higher than you might think. That is, the true cost of debt is hidden from those who work with nominal interest rates, interest expense amounts, and debt balances. These data must be remeasured to reflect the fact that current borrowings must be repaid eventually using dollars with a higher purchasing power per dollar than those obtained from the borrowing. Again, the data must be remeasured to account for deflation. Remeasurement to a real basis is achieved by:
1) Adding the projected deflation rate to the nominal interest rate to obtain the real interest cost.
2)Adding to the nominal interest amount the increase during the period in the purchasing power required to repay the debt.
3)Adding the expected increase in the purchasing power required to repay the debt at maturity to the nominal maturity amount.
Of Note . . . Applications for mortgages fell about 9% last week, the Mortgage Bankers Association said Wednesday. Refinancing applications dropped about 9.3% while purchase applications fell 9% from the previous week's record high. The mortgage group said mortgage rates continued to set record lows. Thirty-year fixed mortgages averaged 5.06% vs. 5.13%. Fifteen-year loans were costing 4.49 percent. One-year adjustable rate loans fell to 3.02% "Refinancing activity remains very strong with borrowers still reacting to the headlines regarding record-low 30-year fixed rates," said Phil Colling, MBA economist.
Financials . . . Friedman Billings Ramsey downgraded Comerica to Market Perform from Outperform based on valuation. The stock now trades within 4% of their $52 target.
Oil & Gas . . . Bear Stearns upgraded Pride International to Outperform from Peer Perform based on their improving onshore and offshore drilling outlook; firm believes that PDE has substantially greater earnings power today than in the 2000-01 drilling upturn, and that the stock will surpass its $30 peak on a stronger and broader base of business. Year-end target is $25.
Metals . . . Alcan Aluminum filed a $1 billion mixed shelf.
Since March 28, 2003, North American gold stocks have posted a solid rally rising 15.5% (based on the XAU Gold Index). This rally has been propelled by bullion rising 10.0% from $331/oz (on March 28) to the current $363.50/oz level. Given the rising share prices, this is a good opportunity to review the industry valuations.
Historically gold equities have traded between one and three times estimated NAV (calculated using a 5% discount rate). The senior and mid-tier producers are now trading at 2.34 and 2.23 times estimated NAV (2.29 times on average), respectively. This is modestly below the 2.5 times level (for both groups combined) seen in early 2003 (when bullion raced to a six-year peak of $389/oz). Given the rising valuation for the industry, focus on the more undervalued companies (on a relative basis) in our universe. The top senior gold producer is Barrick Gold while a Wall Street favorite mid-tier producers includes Agnico-Eagle Mine, Glamis Gold, and IAMGOLD.
Homebuilders . . . Lennar reported 2nd quarter earnings of $2.05 per share, $0.35 better than the consensus of $1.70. Revenues rose 35.0% year/year to $2.12 billion versus the $1.95 billion consensus. According to Lennar's president and CEO, "The U.S. homebuilding market remains very strong as a result of favorable supply and demand trends." The company also issued new 2003 EPS guidance of $8.50, versus consensus of $7.97 and previous guidance of $7.73. The firm sees 2004 EPS of $9.50 versus estimate of $8.53 and previously guided earnings of $9.09 per share.
Defense & Aerospace . . . Banc of America Securities' Thomas McManus removed 3M from his model portfolio, adding fellow blue-chipper Boeing to take its place.
Titan Corp was awarded a contract by the Department of the Navy with a potential value of $194.8 million through March 2010. The contract provides support for the Navy's Information Technology Services needs.
Transports . . . Mesa Air announced a $75 million convertible note offering.
Fechtor Detwiler believes that Broadcom may soon be supplying Bluetooth components to Ford. According to firm, Johnson Controls is Daimler's lead provider for its Bluetooth based, in-vehicle phone system (which utilizes a BRCM Bluetooth chipset which gets somewhere in the range of $10 per unit). Firm's sources suggest that JCI has sealed a second major deal with Ford.
JetBlue announced an order of 100 Embraer 190 aircraft to be delivered beginning 2005, with options for an additional 100 new aircraft. Currently, 30 of the planes have lease financing in place. The new aircraft is targeted to service medium-sized markets, whereby JetBlue is hoping to stimulate these markets with a more appropriately sized plane. The Embraer 190 will have a CASM premium of one cent versus the A320. However, JetBlue is confident it would be able to make this up on the revenue side. While this may seem a deviation from the low cost carrier’s one-plane type model, this new aircraft type will actually offer further flexibility for JetBlue and offer further expansion opportunities for the carrier. Its new 8-year compound annual growth rate will be 24%.
Retail . . . Safeway is eliminating 940 of its 7,000 administrative jobs. Half of the positions will come from corporate offices in California and Arizona.
Medical Devices . . . St. Jude Medical upgraded by Deutsche to Buy from Hold and raised their target to $70 from $50. The firm says a new survey of U.S. electrophysiologists forecasts strong CRM growth, with STJ projected to garner almost 20% of CRT-D implants once its product is approved - well above their 6% forecast.
Drugs . . . Richard Evans at Sanford C. Bernstein cut his rating on Schering-Plough's stock to "underperform" from "market perform" and lowered his price target to $15 from $17. Evans cited looming generic competition for the drugmaker's hepatitis treatments.
Eli Lilly and expects second-quarter results to come in at the high end of its outlook for earnings of 59 to 61 cents per share. The company also reconfirmed its forecast before items for a profit of $2.50 to $2.60 per share for the full year 2003. Lilly also updated the situation of the Food and Drug Administration's reinspection of two of its Indianapolis facilities. The company said the FDA inspectors recently completed the reinspection of its dry products and injectable facilities in Indianapolis and issued a Form 483 as "a normal part of the inspection process." Now Lilly and the FDA are in the review process.
3M announced the submission to the U.S. Food and Drug Administration of a supplemental new drug application (sNDA) for Aldara Cream for the treatment of a form of non-melanoma skin cancer. The company said it remains "on track" to receive marketing approval for this indication in mid-2004. Aldara is currently being prescribed to treat external genital and perianal warts.
Merrill Lynch upgraded Barr Labs to Buy from Neutral and set a $72 target, which assumes that the stock can trade at 20x 2004 EPS estimates of $3.58. This multiple is consistent with Barr’s current 2003 multiple, which is approximately 10% below the group average. ML recently downgraded the stock primarily due to stronger than expected multiple expansion and price performance in a short amount of time. At that time, they reiterated that Barr should be viewed as a long-term core holding in the group. In addition to the stock’s underperformance relative to the generic group in recent months, two important things have happened since our downgrade. First, the stock has already taken the “hit” for the potential for new competition in the oral contraceptive space. We now believe that investors expect additional competition in the next 6-12 months. Second, Barr announced that it has closed on its proposed acquisition of four branded Wyeth products as well as a license to a branded oral contraceptive product in development. Recall that this deal was originally slated to close last quarter but had slipped a bit into this quarter. The closing of this deal firms up the earnings picture for next year and should provide some comfort for investors that may be concerned about additional competition to Barr’s base generic business.
Eli Lilly updated 2nd quarter EPS and reaffirmed 2003 in line with consensus. The company now expects 2nd quarter EPS to be at "high end" of previously guided range of $0.59-0.61, vs. Reuters Research consensus of $0.60, based on LLY's "continued intention to make significant investments in new product launches and key marketed products." The company also reaffirmed 3rd quarter EPS guidance of $2.50-$2.60 (excluding unusual items), in line with an estimate of $2.55. LLY says FDA concludes reinspection of Indy plant; this may be viewed as positive for ICOS
Biotech . . . Guilford Pharm announces $50 million convertible notes offering.
SuperGen said EuroGen Pharmaceuticals, its European affiliate, has been granted 'orphan medical product designation' for its Orathecin oncology drug by the European Agency for the Evaluation of Medicinal Products. SuperGen is developing Orathecin as a treatment of pancreatic cancer. The firm is currently in the latter stages of a fast-track new drug application for Orathecin in the U.S.
Medarex initiated Phase I trial of (HIV drug) MDX-010, a fully human anti-CTLA-4 antibody, for patients infected with HIV, the causative agent of AIDS.
Merrill Lynch says biotechs are poised to move higher. Merrill Lynch says the recent bout of profit-taking is probably over and biotechs are now likely to move higher. MLcites the following factors: 1) money flow into mutual funds has turned increasingly positive while new stock issuance has remained minimal, 2) the FDA has become more accommodating, 3) the recent spat of positive news flow should continue, 4) valuations remain well within the historical range, and 5) window dressing into the end of the qtr should bode well for the group.
CSFB raised their price targets on Amgen, IDEC Pharma, Genzyme, Biogen, Medimmune, Genentech, Human Genome, Millenium, Neurocrine, ICOS Pharma, Myriad Genetics, and Gilead.
Media . . . EW Scripps expects 2ndquarter earnings to be near higher end of previously guided EPS of $0.73-0.83 versus consensus of $0.82, based on April and May results and progress in advertising sales.
World Wrestling Entertainment bought back the 2 million shares, or 3 percent of the total shares outstanding, that were owned by Viacom. The price paid per share was not disclosed. "This transaction in no way affects our strategic alliance with Viacom, and we strongly believe our relationship with our valued partner will continue to be excellent," said CFO Linda McMahon.
Telecom . . . AT&T Chairman David Dorman said he expects the company to have less than $10 billion in net debt at the end of 2003, versus debt of $12 billion at the end of the first quarter. Dorman added that the company would set the standard in the telecommunications industry for customer service by expanding its consumer unit and investing in improving its business customers' experience. On June 3, the company said it would spend $500 million in planned process improvements.
EarthLink was upgraded to Buy from Neutral at First Albany. The firm has an $8 price target in light of encouraging traction with PeoplePC and Earthlink Plus. The analyst believes the stock's valuation reflects limited downside risk. In addition, success with new offerings could show flat to positive dial-up subscriber numbers by year end. The balance sheet remains healthy with $464 million in cash and virtually no debt.
Goldman Sachs downgraded Vodafone to In-Line from Outperform based on valuation. The firm believes that over the next 3−6 months its performance relative to the sector will be restrained by its strong recent run, worries over wireless rev growth, and the likelihood that some of the lagging stocks in the sector have some catching up to do.
Sprint said it will cut 500 jobs and subtract $400 million to $475 million from pretax profits in the second quarter to reflect the termination of the company's Web-hosting business. The charge amounts to 20 cents a share. In the 12 months ended March 31, the Web-hosting unit contributed barely $60 million in revenue and cost Sprint 10 cents a share in earnings. Web-hosting is a service that helps businesses to create and run their web sites and to ensure easy access by Internet users no matter where they are located.
Sprint PCS was cut to Outperform from Strong Buy at SG Cowen. The firm believes that limited additional appreciation and a rising likelihood of a recombination of the PCS/FON tracking stocks favor shifting investments to other wireless stocks. Firm favors AT&T Wireless and Nextel.
Nextel was upped to Strong Buy from Outperform at SG Cowen. The firm believes that additional debt and preferred retirements and a potential refinancing point to EPS upside of up to 23 cents to firm's 2004 estimate of $1.18. SG Cowen expects positive financial results to prevail over negative news flow. Notes that NXTL currently trades at only 15x this year's $0.98 est. Firm's discounted cash flow value on the name is $21.
In a comment this morning on Qualcomm, SG Cowen says it expects the SARS impact on wireless to be greater than other tech sectors, and likely more than a one-quarter issue. Says that inventory exiting 1st quarter is abnormally high and companies with longer lead-times (13 weeks for QCOM) will likely see impact in 3rd quarter instead of 2nd quarter. Firm expects 3rd quarter guidance for sector to be negative.
IT Services . . . IBM was added to Merrill Lynch's Focus List. The firm is saying they would use the weakness caused by the SEC investigation to add to positions. Although the SEC will likely look into revenue recognition practices outside POS terminals, the firm would be surprised if the findings have a significantly negative impact on the shares from here. Also, concerns about offshore services are overdone, and surveys indicate that IBM should gain share in most product areas. ML maintained $97 target.
Storage . . . At a recent conference, Seagate CEO Steve Luczo emphasized Seagate's long-term competitive advantage owing to its vertical integration and product breadth. While Seagate did not have any new financial outlook, CEO Luczo noted that channel inventories remain where they were at the beginning of the quarter and that "June is a tough quarter and it's not over yet."
The near-term outlook for desktop segment remains uncertain as channel inventories have not improved and inventory/pricing actions typically get more aggressive towards the end of the quarter. Seagate's comments on inventories (being where they were at the beginning of the quarter) and pricing conditions tracking as expected so far, were consistent with competitor Maxtor's. While inventory conditions remain fragile going in to the last month of the quarter, Seagate continues to see competitive strength in the enterprise market against Hitachi (which is currently integrating the Hitachi/IBM drive operations) and against Fujitsu (who's commitment to the drive business is still unclear). Seagate's laptop product and initial customer announcement are expected very soon. There was no new financial outlook from Seagate today. Analysts are maintaining our estimates for 2003 at $1.40 (versus $1.16) on revenues of $6.5 billion, up 7% Year/Year and for 2004 at $1.40 on revenues of $6.8 billion, up 5%. For 4th quarter 2003, analysts are forecasting $0.30 in EPS (vs. $0.25) on revenues of $1.56 billion, up 7% Year/Year and at the high-end of Seagate's guidance.
Sun Microsystems came across surprisingly optimistic at a recent Tech Conference. While there was no financial guidance, Paul Youngjohns, EVP, Global Sales, noted positive signs in demand from telecom, financial and government customers -- primarily in the US -- which are significant Sun vertical markets. He also noted that these signs have not turned into orders yet. As to the challenge from Linux, Sun indicated that it could counter with Solaris or Linux on Intel (as recently announced) -- although analysts are not convinced of Sun's commitment to non-Sparc/non-Solaris platforms. Youngjohns also noted that Sun had adopted a new solutions-oriented selling model, which has generated good results as it has been rolled out in different markets. However, while a turn in IT spending could result in a boost to results (a la the internet cycle), it may not address Sun’s challenges of standards-based platforms taking share from proprietary offerings and ease the burden of investing in SPARC microprocessor development. Further, it's hard to tell if Sun's more optimistic tone is above and beyond its typical 4th quarter pick-up in volumes. SUNW has given no guidance for 4th quarter 2003. Analysts are maintaining 2003 estimates of $0.01 (vs. loss of $0.08) on revenues of $11.5 billion (down 8% Year/Year) and 2004 estimates at $0.10 on revenues of $12.7 billion (up 10% Year/Year). 4th quarter 2003 (ended June) estimates are at $0.02 in EPS (vs. $0.01) on revenues of $3.1 billion (down 9% Year/Year).
Brocade CFO Tony Canova gave no new financial guidance but noted that pricing in the switch business remains competitive owing to McData's recent strength here. In a separate setting, EMC's CEO noted his goal is to drive down the cost of the SAN, which could imply continued competitive pricing. The larger issue in the storage/SAN market appears to be the intensifying competitive trends, owing to overlapping products and new entrants into a market/category, which raises questions on the sector's attractiveness for investors. Cisco's entry into the director market has led to lengthening sales cycles, Brocade noted. Looking ahead, competitive pressures may intensify, such as McData's greater thrust into the mid-range switch market.
Cisco has had little impact to date, its design wins at EMC, Hewlet Packard ,IBM and Hitachi Data Systems gives us a sense of deja vu of MCDT's entry into switches and the subsequent competitive pressures. Analysts are maintaining 2003 estimates of $0.02 (vs. $0.23) on revenues of $535 million (down 5% Year/Year) and 2004 estimates of $0.10 on revenues of $626 million (up 17% Year/Year). Analysts are also maintaining fiscal 3rd quarter 2003 estimates of $0.01 (versus $0.08 last year) in EPS on revenues of $137 million (vs. $151 million) -- management
guidance calls for EPS of $0.01 and a revenue range of $131-$137 million.
Network Equipment . . . Ericsson was cut to Sell at Fulcrum. The firm expects wireless operators to continue to reduce capital investment throughout 2003 and into 2004 resulting in a 24% decline in Ericsson's revenue in 2003 and an 11% decline in 2004. Fulcrum's $7 target is based on 0.9x revenue and would imply 38.9x consensus 2004 EPS.
Semiconductor Equipment . . . Cymer lowered 2nd quarter revenue guidance to $58-61 million (approx 12% lower than previously guided revenues of $67.6 million) versus consensus of $67.3 million due to ongoing slowness in semiconductor industry. According to CYMI CEO, "As a result of this revenue shortfall, we now expect gross margin to be in a range of 13 percent to 17 percent for the second quarter, in contrast to 17 percent to 22 percent in our April guidance." The company says visibility remains limited, and volatility remains high.
Taiwan Semi was downgraded at Merrill Lynch to Neutral from Buy based on valuation. The stock has exceed their $8.90 target. Also, the firm sees a lack of forecast upgrades from either fabless or OEMs raises the risk of a correction.
Semiconductors . . . Microchip reaffirmed 1st quarter revenues of $157-164 million versus consensus of $159.7 million.
Banc of America downgraded Texas Instruments to Neutral from Buy after company guided 2nd quarter sequential revenue growth to the 5% range from previous forecast of 7%. BofA is lowering its 2003 est. to $0.34 from $0.38 and 2004 to $0.75 from $0.80.
Texas Instruments sees sequential second-quarter sales growth of 5 percent instead of its target of 7 percent and earnings of 6 cents instead of a goal for earnings of 8 cents a share. This is based on lower revenue and higher charges related to restructuring of certain manufacturing facilities. The company sees an estimated sequential growth in its semiconductor segment of 2 percent versus previously anticipated 4%. TI blamed chip sales to wireless customers.
Microchip Technology still expects fiscal first-quarter sales between $157 million and $164 million. The maker of microcontrollers and analog chips kept its other financial targets the same, as well.
Semiconductor sector was cut to In-Line from Attractive at Morgan Stanley. While Morgan Stanley believes that industry's fundamentals are improving, the firm also thinks the sharp share price rise in recent months and the potential that near-term earnings risk may increase suggest the reward-to-risk relationship is becoming less favorable.
Texas Instruments was cut to Sell from Hold at Deutsche. Price target was cut to $16.
Micron indicated that its DRAM inventory continues to be at a low level, currently at 2-3 weeks, though slightly higher than its March level of below 2 weeks. Micron believes the inventory level in the industry is similar at 2-3 weeks. DRAM contract pricing has been flat to slightly up, with an upward bias for the month of June. Micron indicated that its 0.11-micron ramp is progressing well, with 25% of wafer starts at 0.11-micron process today. The percentage is expected to increase to over 50% by end-CY03. Micron is spending the incremental $100 million of its 2003 capex (at $1.1bn) on 0.11-micron process upgrades. The smooth 0.11-micron ramp will result in slightly higher bit shipments than we expected. Bit production growth in the May-Quarter was higher than the mid-teens growth previously guided for. Analysts are raising 2003 EPS estimate from $(2.73) to $(2.62), and 2004 EPS estimate from $(0.74) to $(0.60). The increase
reflects a rise in our bit shipment growth assumption from 44% to 47% for 2003. Analysts have left 2004 bit shipment growth estimate unchanged at 49%.
Nvidia’s new high-end chip, the GeForce FX 5900 (NV35), is currently in production and will be available in the retail market shortly, consistent with recent comments from the company. The company expects its share of the desktop discrete graphics market to stay flat at 65%, and expects continued share gain in the notebook discrete segment. Market share gain is also expected to continue in the integrated chipset market, as Nvidia's nForce2 chipset continues to increase its penetration. Nvidia indicated that whether it will be in the next-generation game console from Microsoft depends on the economics of any agreement, as well as a consideration of the opportunity costs. Nvidia noted that the development of the original Xbox led to significant diversion of resources from its core product development and negatively impacted the NV30.
Intel updated 2nd quarter 2003 guidance of $6.7 billion, up 6% Year over Year. On the flash side, it appears that Intel is more willing to cut prices to regain market share as it has excess capacity in flash. Intel mentioned Samsung is a formidable competitor on the flash side. Intel re-iterated that Prescott, the new desktop processor on 90nm, is on schedule for launch in 2nd half 2003. No launch date was specified. Intel emphasized the focus on ROIC. This could lead to tempered capex if the industry does not recover.
ATI Tech mentioned that talks on new game console contracts are going in the right direction, and the company is optimistic about the opportunity. Expect some new announcements in the August quarter. ATI specifically mentioned that details on the Nintendo agreement initially announced in February are forthcoming, which we think could be positive. For its new high-performance desktop discrete product, the company will use old R300 core architecture as it feels it has more legs. Plans to introduce a new architecture next year. ATI feels that IBM cannot compete with Taiwan Semi and United Micro on cost, service, and response. IBM is good at advanced technology and being ahead, but ATI has made a conscious decision to stick with TSMC and UMC. The company restated its May-quarter guidance of around $300mn in revenues, and a slight sequential improvement in adjusted net income and EPS. Our adjusted EPS estimate for the May quarter is flat at $0.04. ATI’s new desktop integrated product will be launched in the summer, as expected. The launch is clearly a positive development for ATI, which has focused on the much smaller notebook integrated market so far.
Boxmakers . . . Dell Computer COO Kevin Rollins backs guidance despite SARS impact on China. Overall, Rollins said that he does not see demand picking up, although he said that there is an improved sentiment about technology at the moment.
Software . . . The Wall Street Journal reported that SAP plans to embark on a global print-ad campaign to "woo" customers from PSFT and JDEC and capitalize on the uncertainty over the ORCL hostile bid for PSFT.
The Wall Street Journal reported the recent hostile bid by Oracle for Peoplesoft has caused confusion amongst users of business software, according to analysts and executives. The article suggests this development could "play into the hands" of ORCL Chief Executive Larry Ellison as uncertainty could cause customers to delay purchases of its products and effect revs for its 2nd quarter. This could possibly lower the company's stock price and make ORCL's bid more attractive.
WebEx and BEA Systems inked IM deals with Yahoo!. This is designed to stitch its popular instant messaging program into business applications and allow them to be shared. Yahoo said the next version of its corporate messaging system would allow users to launch conferences with WebEx's technology from within instant messaging sessions that would let them share programs. The separate deal with BEA will allow applications developers using BEA's WebLogic Workshop platform to build Yahoo Instant Messenger functions into their programs.
Discussions with BEA System’s VP of IR and proprietary checks reinforce belief that the company is making steady progress with both the performance and sales execution of its Integration server. Customer uncertainty over budgets, and a practice of not purchasing “initial releases” is making close rates unpredictable, and will probably mute integration revenue in the Near-Term. While early, believe the Quarter is tracking; the demand environment remains challenging, but is stable. There’s speculation that BEAS is next on Oracle’s hit list. Believe it would be a good fit, but nothing that leads us to believe it is imminent. Analysts are incrementally more positive on the stock but remain cautious given valuation, and continued weakness in overall IT demand. BEAS has an OEM agreement with Peoplesoft, which pays a fee to license BEA technology, principally Tuxedo. These fees are fixed and relatively small (low single digit % of license revs) – the loss of this revenue would not have a material impact on BEA’s revenues. Checks indicate price pressure has increased in the EAI market especially on Tibco. The competitive environment has stabilized; IBM’s WebSphere 5.0 has only improved incrementally, ORCL has yet to execute and worries over JBOSS are greatly exaggerated.
Tibco's 2nd quarter will come in line with consensus of $0.01 and $62 million, but may fall shy of $64 million revenue estimate. Channel checks reveal overall demand situation has not improved since the end of 1st quarter. Competition between pure-play vendors is intense and leading to further price discounting. This will be offset somewhat by solid sales with its new product BusinessFactor. While close rates remain hard to predict, signs are emerging that things should improve in 2nd half.
RealNetworks plans a $100 million convertible.
Oracle was upped to Buy from Hold at Wells Fargo based on fundamental changes and improvements in the company's competitive and strategic positioning. After many years and attempts, believes Oracle finally has effectively expanded its product story from largely a database and technology tools company to a highly integrated software solutions company. As a result, believes this change significantly enhances company's growth potential and competitive positioning versus IBM and Microsoft, measurably expands the overall market opportunity, and provides customers a compelling cost of ownership and ROI argument. Firm's new 18-month price target is $18.00.
WebEx was upped to Neutral from Sell at Fulcrum. The upgrade is based on channel checks indicating 2nd quarter is tracking to plan and view that Web conferencing will be boosted by the marriage of WebEx to Yahoo!. Firm notes that the prospect of WEBX being acquired is the main risk to the sell thesis.
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