Archive: May, 2007

Dell Pleasantly Surprises

Dell (DELL) reported preliminary results for the first quarter of fiscal year 2008, with revenue of $14.6 billion, operating income of $947 million and earnings per share of $0.34. Analysts were only expecting the company to earn $0.26 on $14.0 billion in revenue.

The company took deliberate actions to concentrate on solutions sales, realign pricing and drive a better mix of products and services in the quarter. While these actions slowed overall unit growth, a 14 percent year-on-year improvement in average selling prices contributed to improved gross margins, revenue growth of three percent and operating margins of 6.5 percent.

Three percent top line growth still pales compared to  Hewlett Packard’s (HPQ - Annual Report) results, but given the weak overall corporate spending on tech equipment isn’t too shabby.

In the quarter, gross and operating income margins were positively affected by a favorable decline in component costs.

Nothing like having your suppliers be in worse shape than you are to improve profitability, eh?

The company noted, of course, that not only this year’s numbers but last years are subject to revision based on the ongoing investigation into the company’s accounting practices. Investors must hope they can put the issue behind them once and for all, and sooner rather than later. For myself, not being able to trust the numbers is keeping me on the sidelines.

Topics: Dell (DELL), Hewlett Packard (HPQ), Micron Technology (MU), Stock Market | 1 Comment

GDP Data Looks Gloomy

First-quarter growth weakest in over 4 years – Yahoo! News

U.S. economic growth in the opening quarter this year was the weakest in more than four years as businesses sold off inventories and Americans imported more foreign goods, the government reported on Thursday.

Tell me about it. There wasn’t much to like in the report.

Growth in corporate profits is evaporating. Given that the reasonableness of current P/E valuations is dependent on the historically high “E” this should concern stock market participants.

corporateprofits1.jpg
Corporate profits also, not surprisingly, tend to be correlated with business spending on technology. Hopes for a Microsoft (MSFT - Annual Report) Vista-inspired tech spending resurgence appear to have been dashed. While bulls argue that lower profits will require tech investments to spur productivity, the recent trend is for companies to do more with less. Therefore, I’d argue that there will be a smaller share of the smaller profit pie going to tech.
techspending.jpg

While consumption spending did rise as a contributor to GDP, the drag on profits may mean more layoffs are in the pipeline, which in turn could put pressure on that consumption.

gdpcomponents.jpg

I’ve said before that betting against the American consumer is always a long-shot. At the same time, though, I’d be inclined to at least hedge any bet on continued strength.

Topics: Economy, P/E Waves, S&P 500 (SPY), Stock Market | 2 Comments

NIHD: I Was Too Quick To Criticize NII’s Convertible Note Offering

When Large Cap Watch List (Track at Marketocracy) member NII Holdings (NIHD) announced a convertible note offering my initial reaction was that it would probably benefit the bankers and noteholders more than the shareholders. Now that the details have been released, I think I spoke too soon.

NII Holdings, Inc. (Nasdaq: NIHD) today announced the pricing of its offering of $1,000.0 million principal amount of 3.125% Convertible Notes due 2012. The notes were privately placed with qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The sale of the notes is expected to close on June 5, 2007. NII has granted the initial purchaser of the notes a 13 day option to purchase up to an additional $200.0 million principal amount of notes.

The notes are convertible under certain circumstances into NII common stock at a conversion rate of 8.4517 shares per $1,000 principal amount of notes (equal to an initial conversion price of approximately $118.32 per share), subject to adjustment in certain circumstances. Upon a surrender of notes for conversion, NII will have the right to deliver, in lieu of shares of its common stock, cash or a combination of cash and shares of its common stock.

That conversion rate means the stock will have to return an average of 7.85% annually for the conversion option to be in the money at expiration. Although shareholders are likely hoping for far higher returns than 7.85%, that rate does provide an acceptable hurdle. Compared to Xilinx’ (XLNX) offering, which paid a higher interest rate and a conversion price that required just 0.7% growth per year it seems downright stingy.

NII intends to use up to $250 million of the net proceeds from the notes offering to purchase shares of its common stock contemporaneously with the sale of the notes as part of a $500.0 million stock repurchase program authorized by its board on May 29, 2007.

At current prices, the $250 million buyback would soak up 3.1 million shares, but over time the notes can convert into at least 8.45 million shares (depending on whether the overallotment is exercised.) In order to buy back the full potential dilution of the bonds, the company would have to shell out $686 million of the proceeds. The remaining $314 million, along with the 3.125% paid on the entire principal, means the effective interest rate assuming a full offsetting buyback would be 9.95%. This, in effect, is a most-conservative way of looking at the issue. While a bit high (again, this is the most-conservative estimate), 9.95% doesn’t seem exorbitant for a company with NII’s credit rating.

All in all, it looks to me now like NII negotiated an agreement that is fair to both noteholders and shareholders.

Topics: NII Holdings (NIHD), Stock Market, Xilinx (XLNX) | 2 Comments

Semiconductor Inventory Levels

Update: The original post contained a data error.
In the interest of digging deeper into the semiconductor oversupply issues, this post will begin a series of data gathering on important ratios for companies in the industry. Hopefully the process will provide insight toward the companies better (or worse) positioned to take advantage of the next upturn or weather the downturn.

Today I used Zacks Research Wizard to get the recent Cost of Goods Sold (COGS) and Inventory levels for semiconductor industry participants over the last several quarters. I made some modest limitations on the share volume and market cap, but still ended up with more than 50 names. I used trailing twelve month COGS and the average of the last five quarters (for a beginning, ending and average) of inventory to calculate Days Sales in Inventory.

The higher the inventory levels, the more likely the company will need to reduce prices, reduce production or take a write-off, all of which would reduce gross profit margin. This first pass looks merely at inventory levels and does not consider strategy or other factors. For example, a fabless company would likely own less inventory than a company that produces chips at its own facilities. In a later post I will consider the trends in inventory (although the historic data I provide below gives some of it away) to determine the companies for which inventory levels are higher than the historic norm for that particular company.

The five companies with the highest levels of inventory relative to their recent sales levels are: Microsemi (MSCC), Lattice (LSCC), Analog Devices (ADI), Micrel (MCRL) and Intersil (ISIL).

The five with the lowest levels of inventory relative to recent sales are: Amkor Tech (AMKR); Smart Modular (SMOD), Large Cap Watch List (Track at Marketocracy) member MEMC Electronics (WFR); Actions (ACTS) and Sirf Technology (SIRF).

The complete list follows.

semiinventorydays.jpg

Disclosure: William Trent has a long position in SMH.

Topics: Actions Semiconductor (ACTS), Amkor Technology (AMKR), Analog Devices (ADI), Broadcom (BRCM), Cirrus Logic (CRUS), Formfactor (FORM), Intersil (ISIL), Lattice Semiconductor (LSCC), MCHP, MCRL, MEMC Electronic Materials (WFR), MicroSemi (MSCC), Netlogic Microsystems (NETL), SMART Modular Technologies (SMOD), Semiconductor HOLDRS (SMH), Semiconductors, SiRF Technology (SIRF), Standard Microsystems (SMSC), Stock Market | 2 Comments

NIHD: NII Holdings Using Stock to Buy Back Stock

Note: This article was submitted to the IBN Festival but has subsequently been updated. Please see the new article for a revised opinion.
Large Cap Watch List (Track at Marketocracy) member NII Holdings, Inc. (NIHD) announced its intention to sell approximately $1 billion principal amount of convertible notes due 2012. In addition, NII is expected to grant the initial purchaser a 13 day option to purchase up to an additional $200 million principal amount of the notes. NII intends to use a portion of the net proceeds from the notes offering to purchase up to 4 million shares of its common stock contemporaneously with the sale of the notes as part of a $500.0 million stock repurchase program authorized by its board on May 29, 2007.

I’ve commented in the past that I think these financing deals appear to benefit the bankers and buyers of the convertible notes more than they help shareholders. If the goal is to repurchase shares, why issue a security that can be exchanged for shares? What good is buying back shares if the company will then turn around and issue them again? Wouldn’t a straight bond do a better job of altering the capital structure?
For example, assuming NII can buy back 4 million shares at the current price, it would shell out $315 million of the proceeds from this financing. I haven’t seen the details, but I’d bet that that 4 million share number is about the number that these notes can eventually be converted into. If that is the case, the company is really only issuing $685-$885 million (depending on whether the overallotment is exercised) in equivalent non-convertible notes.

Rounding off to assume that 1/3 of the proceeds from the financing are designed to offset the imbedded option in the notes, investors can then extrapolate that stated rate into the implied interest rate being paid by multiplying the stated rate by 3/2. If that implied rate is higher than the rate the company could get by issuing a straight bond, it would seem that noteholders are getting a better deal than they otherwise would, courtesy of the shareholders.

Topics: NII Holdings (NIHD), Stock Market | 2 Comments

STLD: Steel Dynamics Sales a Bit Less Dynamic than Planned

Mid Cap Watch List (Track at Marketocracy) and Large Cap Watch List (Track at Marketocracy) member Steel Dynamics, Inc. (STLD - Annual Report) reiterated its guidance for second quarter earnings in the range of $0.95 to $1.00 per diluted share.

“Shipping volume and pricing of flat-rolled steels thus far in the second quarter have been somewhat weaker than initially expected. Therefore, earnings could end up at the low end of the range due to continued softness in the flat-rolled steel marketplace,” said Keith Busse, Chairman and CEO of Steel Dynamics. “However, while weakness in the flat-rolled steel market has been prolonged due to a slower reduction in steel service center inventories than originally expected, we currently are seeing a slight strengthening and stabilization in pricing. We expect this pricing trend to continue and to improve into the third quarter.”

The earnings figure includes charges related to a debt restructuring, which will reduce EPS by $0.08.  Given the pricing power in overall steel products the issues around flat-rolled steel are disappointing. On the other hand, though, the support from the PPI statistics makes me much more willing to believe management’s third-quarter recovery forecast.

Topics: Steel Dynamics (STLD), Stock Market | 1 Comment

Memory Pricing Updates

DRAMeXchange wonders if DRAM prices will bottom out soon:

Current market observations show the DDR2 chip price possibly bottoming out. If this occurs, it should drive up the chip demand, and spur a rebound in the spot price.

Memory chips were the last domino to fall, so to speak, to the oversupply situation.  As such, I would expect them to be the last to recover. The quote above, that demand will rise because prices stop falling, appears counterintuitive at first. Perhaps the suggestion is that buyers were putting off purchases on the expectation that prices would be lower if they waited. I can’t really buy that argument, though, because I don’t think PC makers and other DRAM users would worry about the price if they had their own end demand – they would just buy what they needed and pass along the higher price to whatever extent possible.

In fact, quite the opposite likely occurred. For example, for several quarters Hewlett Packard (HPQ - Annual Report) has been making “strategic buys” of inventory they already thought was excessively cheap.

So while the “bottoming out” is not likely to spur demand, it may well spur a reduction in supply.  The same DRAMeXchange report hints at that as well:

Despite the fact that Taiwan DRAM makers posted a gross profit of nearly 50% in 4Q06, and 30% in 1Q07, DRAMeXchange believes the persisting DRAM price declines in May will cause them to post a loss in 2Q07.

Although DRAM makers must still ship their chips in May, they indicated no additional price cuts would be made, due to the continuing losses. Prices have thus started to increase for last week. Yet, the end market demand is not expected to pick up in May and June, and PC shipments have been performing worse than expected in May, in the wake of a weak seasonality. Furthermore, PC OEMs, major spot market buyers, and module houses still have inventory levels lasting for more than a month. DRAMeXchange believes that by only relying on buyers in purchasing cheaper chips, the DRAM price increase will be limited at least before June.

With prices already dangerously low, Hynix has already started to switch some of its DRAM production to NAND Flash instead.

With capacity being shifted to other products, and the profitability issues impacting the ability to invest in more capacity (as long as the companies heed the signs) the lower supply is what will allow demand to catch up and restore equilibrium to the market.

Topics: Hewlett Packard (HPQ), Intel (INTC), Micron Technology (MU), STMicroelectronics (STM), Semiconductor HOLDRS (SMH), Semiconductors, Spansion (SPSN), Stock Market | 2 Comments

CDWC: CDW Buyout For Real

Yesterday, when the CDW buyout talks were still just a rumor, I said “with the stock now trading with a 19x FY2008 P/E multiple and a 12x EV/trailing EBITDA, I wonder how much more a buyer would be willing to pay. I wish I had bought this one earlier, but it’s looking way too late now.”
CDW to be bought by Madison Dearborn for $7.3 bln – Yahoo! News

CDW in a statement late on Tuesday said its board had held an auction for various potential bidders before it approved the Madison Dearborn deal, under which CDW shareholders will get $87.75 in cash for each share of CDW common stock.

I was wrong. The one-day gain should still be about 4-5% from when I made that comment, which makes for an annualized rate I don’t want to figure out. Still, had the deal fallen through the downside was probably greater than the 4-5% so I don’t think I was too wrong.

Truth be told, more than missing the trade opportunity I regret losing such a useful read into channel sales for tech equipment. I don’t have the resources to conduct channel checks, so such proxies are my next-best chance.  Without CDW’s monthly sales reports it will be more difficult to get a handle on tech demand.

Topics: CDW Corp (CDWC), Stock Market | 1 Comment

CDWC: Buyout Talk Lifts CDW Stock, But Where to From Here?

When CDW Corp. (CDWC) announced earnings for the first quarter, I described the results as solid. The 8.0% growth was above average for the computer-related industries though below the “double-digit” growth investors typically (and quite arbitrarily) expect from tech-related firms.

Then, they achieved that double-digit growth rate in the second quarter, though there were some questions about the quality of the sales. Still, investors have been pleased by the results, and given CDW’s size and position in the channel I’m not surprised that there are talks to take the company private.

That said, with the stock now trading with a 19x FY2008 P/E multiple and a 12x EV/trailing EBITDA, I wonder how much more a buyer would be willing to pay. I wish I had bought this one earlier, but it’s looking way too late now.

Topics: CDW Corp (CDWC), Stock Market | 3 Comments

More on the Semi Equipment Consensus

Panel Of Analysts Bearish On The Chip Gear Industry:

Three well-known market watchers, speaking on a Silicon Valley panel Wednesday night, said the chip gear industry is headed for a downturn that could be steep.”I think we’re heading to the worst semiconductor equipment downturn — perhaps ever,” said James Covello, a Goldman Sachs analyst. “We’re starting to see the first signs of that.”

Actually, as my readers well know, the “first signs” that there would be a severe downturn were clearly visible a year ago. At the time, orders for semiconductor manufacturing equipment had grown faster than sales of semiconductors for three consecutive months. Those first few months were about making up for a year of under-investment in 2005. But as I predicted at the time, and as should be obvious from the history, semiconductor demand and semiconductor equipment demand are rarely at equilibrium.

semisupplydemand1.jpg

I am working on an update to my semiconductor supply/demand model, including some refinements that will hopefully help better identify entry and exit points.  It will obviously continue to be art as much as science, but one thing seems sure – waiting for the sell siders to identify it is likely waiting too long. Applied Materials (AMAT - Annual Report) topped out in January 2006 – (coincidentally?) the first month that would indicate future oversupply. It still hasn’t broken above the January 2006 high. I’ll admit I might have missed the bottom last year – but to “forecast” the decline now seems particularly late unless last year’s rally was really just a head-fake.

We’ll know the answer to that soon enough.

Disclosure: William Trent has a long position in SMH.

Topics: Applied Materials (AMAT), KLA-Tencor (KLAC), Lam Research (LRCX), MEMC Electronic Materials (WFR), Semiconductor HOLDRS (SMH), Semiconductors, Stock Market | No Comments