Earnings Season Kicks Off
I would sum up my thoughts as follows: business is great with a few zigs and zags.
The market's surge will also be a bit self-fulfilling, drawing in some more money.
The big background spoilers are dollar weakness and the housing/construction market collapse.
Dollar weakness is both good and bad, actually. Bad for producers margins (raises costs of inputs) but very good for companies selling those commodities or selling products overseas (assuming priced in local currencies).
The housing/construction market collapse is affecting builders and builder suppliers (CAT is one visible example). Financial houses will be impacted next, but I doubt that this will slow down deal making
And of course I coninue to see reasonable P/E valuations. If anything, I think analysts have distinctively under predicted the global consumer growth and demand.
One market that ziggde instead of zagging is Semiconductors.
High tech's canary in the coal mine, semi chips are the raw materials for all high tech products. The big dogs in the house are DRAM and Flash. The big driver for them are iPods, cell phones (especially the new iPhone), and of course the PC. And of course Intel's PC chips.
So I see a few facts to connect:
1. Semiconductor equipment business went soft in June (according to SEMI). After 6 months of a B:B of 1 (meaning every sold $1 is met by a new order worth $1), the B:B slipped to 0.94. I was surprised and it explains the collapse of UCTT. Of course, UCTT did warn of short term weakness.
2. Semiconductor equipment business is strengthening. KLA Tencor and Novellus were bullish on the 2nd half of the year. The driver: Flash
3. Apple expects to ship ~3M+ iPhones. A lot of flash memory is about to be consumed.
4. Microsoft Vista is supposed to drive more DRAM consumption.
5. Solar continues to suck up silicon
6. INTC strong sales, but at low margins
My take:
Strong market with short term blips. Chip makers pull in or push out capital spending to maximize profitability. Recently, profits were under pressure from falling prices (DRAM, Flash, and INtel/AMD price wars). Some things could turn it around: Apple could force other cell phone makers to compete and that means more flash memory per phone, Vista could take off, and Chinese/Indian demand keeps surging.
I also think that the area is ready for a rally. Lets face it - high tech has been abandoned for some time.
Our exposure has been limited to TRID and UCTT.
TRID is not affected by the vagaries of chip prices - it makes specialty chips. It is affected however by vagaries of management hijinks. This week saw major volume in TRID and no continued decline in stock price.
That smells like some major sellers getting out and closing their position. The delisting threat isn't just about risk taking: there are rules that prevent funds from investing in delisted stocks. So, many institutions probably threw in the towel. That's actually good news: the selling is over. Also, the stock didn't budge much on options day - a strong indication that bulls are coming in.
I think a return to $20+ in 6 months is a foregone conclusion, even faster if they clean up their act. A look at the options spread shows that most investors are betting the same thing.
At this time, they are booking ~$300M in sales and have a market cap ~3X sales. Per last earnings release (which was ages ago), earnings was 15% of revenue. So I expect a trailing $45M and a forward $60M earnings. P/E ~20 and forward P/E 15. For a company growing at least 30%+.
Compare to BRCM, NVDA & MRVL.
P/S: 5, 5, 4.9
Forward P/E: 23, 21, 25,
So TRID is undervalued ~ 40% on a either a P/S basis or a forward P/E basis. That makes them a $30 stock today.
Apart from trading technicals, fundamentals look really strong. LG and Samsung reported very strong LCD TV sales and predictions are for 43% sales growth in 2007 versus 2006. That's much slower than the ~100% growth in 2006 but the volumes are huge: 73M units.
Much of the growth is coming from China (which furthers my belief in the emerging Chinese consumer market). So what if the US housing market drags down the TV market, China is stepping in to pick up the slack.
I bought a bunch of TRID at ~$18 and some Calls when it fell further.
UCTT is at the mercy of bigger companies. One order delay hits them hard. Since they subcontract to other companies like LAM, and since these companies are predicting some upswing, I wouldn't be surprised if UCTT gets some benefit. My goal with UCTT was to be in a company that is expanding market reach - growing faster than it's specific sector by expanding breadth and depth. I'll be a bagholder another quarter.
Titanium (aka TIE) had some news for me. I've been trying to figure out the lagging stock price. I expected dollar weakness to lead to some uptick in global prices (where TIE still plays). I saw that TIE price was smack dab between ATI (which has run higher) and RTI (which has lagged TIE).
One core issue is access to the key Ti ingrediant: sponge. TIE and ATI make much of their own sponge (TIE increased production last month in Henderson). RTI depends on imports - so they are getting squeezed by dollar weakness and supply challenges.
There are rumors of a sponge price drop. If so, this should benefit TIE because it lowers some of their costs without changing their contracted sales prices.
But TIE is lagging because it has lost the institutional attraction. Also, the mammoth upside ride is ending for now.
The market's surge will also be a bit self-fulfilling, drawing in some more money.
The big background spoilers are dollar weakness and the housing/construction market collapse.
Dollar weakness is both good and bad, actually. Bad for producers margins (raises costs of inputs) but very good for companies selling those commodities or selling products overseas (assuming priced in local currencies).
The housing/construction market collapse is affecting builders and builder suppliers (CAT is one visible example). Financial houses will be impacted next, but I doubt that this will slow down deal making
And of course I coninue to see reasonable P/E valuations. If anything, I think analysts have distinctively under predicted the global consumer growth and demand.
One market that ziggde instead of zagging is Semiconductors.
High tech's canary in the coal mine, semi chips are the raw materials for all high tech products. The big dogs in the house are DRAM and Flash. The big driver for them are iPods, cell phones (especially the new iPhone), and of course the PC. And of course Intel's PC chips.
So I see a few facts to connect:
1. Semiconductor equipment business went soft in June (according to SEMI). After 6 months of a B:B of 1 (meaning every sold $1 is met by a new order worth $1), the B:B slipped to 0.94. I was surprised and it explains the collapse of UCTT. Of course, UCTT did warn of short term weakness.
2. Semiconductor equipment business is strengthening. KLA Tencor and Novellus were bullish on the 2nd half of the year. The driver: Flash
3. Apple expects to ship ~3M+ iPhones. A lot of flash memory is about to be consumed.
4. Microsoft Vista is supposed to drive more DRAM consumption.
5. Solar continues to suck up silicon
6. INTC strong sales, but at low margins
My take:
Strong market with short term blips. Chip makers pull in or push out capital spending to maximize profitability. Recently, profits were under pressure from falling prices (DRAM, Flash, and INtel/AMD price wars). Some things could turn it around: Apple could force other cell phone makers to compete and that means more flash memory per phone, Vista could take off, and Chinese/Indian demand keeps surging.
I also think that the area is ready for a rally. Lets face it - high tech has been abandoned for some time.
Our exposure has been limited to TRID and UCTT.
TRID is not affected by the vagaries of chip prices - it makes specialty chips. It is affected however by vagaries of management hijinks. This week saw major volume in TRID and no continued decline in stock price.
That smells like some major sellers getting out and closing their position. The delisting threat isn't just about risk taking: there are rules that prevent funds from investing in delisted stocks. So, many institutions probably threw in the towel. That's actually good news: the selling is over. Also, the stock didn't budge much on options day - a strong indication that bulls are coming in.
I think a return to $20+ in 6 months is a foregone conclusion, even faster if they clean up their act. A look at the options spread shows that most investors are betting the same thing.
At this time, they are booking ~$300M in sales and have a market cap ~3X sales. Per last earnings release (which was ages ago), earnings was 15% of revenue. So I expect a trailing $45M and a forward $60M earnings. P/E ~20 and forward P/E 15. For a company growing at least 30%+.
Compare to BRCM, NVDA & MRVL.
P/S: 5, 5, 4.9
Forward P/E: 23, 21, 25,
So TRID is undervalued ~ 40% on a either a P/S basis or a forward P/E basis. That makes them a $30 stock today.
Apart from trading technicals, fundamentals look really strong. LG and Samsung reported very strong LCD TV sales and predictions are for 43% sales growth in 2007 versus 2006. That's much slower than the ~100% growth in 2006 but the volumes are huge: 73M units.
Much of the growth is coming from China (which furthers my belief in the emerging Chinese consumer market). So what if the US housing market drags down the TV market, China is stepping in to pick up the slack.
I bought a bunch of TRID at ~$18 and some Calls when it fell further.
UCTT is at the mercy of bigger companies. One order delay hits them hard. Since they subcontract to other companies like LAM, and since these companies are predicting some upswing, I wouldn't be surprised if UCTT gets some benefit. My goal with UCTT was to be in a company that is expanding market reach - growing faster than it's specific sector by expanding breadth and depth. I'll be a bagholder another quarter.
Titanium (aka TIE) had some news for me. I've been trying to figure out the lagging stock price. I expected dollar weakness to lead to some uptick in global prices (where TIE still plays). I saw that TIE price was smack dab between ATI (which has run higher) and RTI (which has lagged TIE).
One core issue is access to the key Ti ingrediant: sponge. TIE and ATI make much of their own sponge (TIE increased production last month in Henderson). RTI depends on imports - so they are getting squeezed by dollar weakness and supply challenges.
There are rumors of a sponge price drop. If so, this should benefit TIE because it lowers some of their costs without changing their contracted sales prices.
But TIE is lagging because it has lost the institutional attraction. Also, the mammoth upside ride is ending for now.
posted by Andrew at
1:02 PM
0 Comments
