No Rebound Yet

By: Chad Hudson | Wed, Aug 29, 2001
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Sun Microsystems just announced that it would not meet the $3.7 billion revenue target set last month. Sun also stated that it doubts it will break even in the current quarter. Sun's announcement might just kick off pre-announcement season for the third quarter. Already there have been more pre-announcements than FirstCall has ever recorded since it started tracking them in 1995, as several companies went ahead and pre-announced when they announced second quarter results. So far more than 350 companies have pre-announced. With the record number of pre-announcements it is likely that earnings will come in worse than the two previous quarters. Of course that depends on what earnings you look at. The use of pro-forma earnings has launched a battle between FirstCall and Standard & Poors. FirstCall is using more pro-forma results when computing earnings, while S&P is using more traditional GAAP earnings. The difference has grown quite large over the past couple years. FirstCall is reporting that S&P 500 earnings were $11.81 per share, down 17%. S&P, using GAAP earnings calculates earnings of $9.99 per share, down 33%. FirstCall has taken exception with S&P calling it the "earnings pope." S&P's editor of quantitative data services, Howard Silverblatt, has "no problem with being pope. It's our index and our name we are dealing with."

Pro forma earnings are getting further pressure, this time by FASB. There is considerable skepticism regarding just what FASB can do since its jurisdiction is limited to financial statements filled with the SEC. Additionally, FASB is know for loosening its stance after hearing from companies complaining that the new rules will "submarine our stock" as David Yucius, president of Aurora Investment Counsel, put it. The use of pro-forma results is growing faster than the earnings of any company. Over 300 companies are releasing pro-forma earnings.

The IPO window is starting to open up slightly. There are 16 companies slated to go public next month. That would be the most all year. So far this year there have been 66 IPO brought to market this year. This is the lowest total in at least 10-years, and way off the 354 deals done last year through August. It continues the declining trend since the peak in 1996 when almost 1,000 deals were done during the year. This year convertible bonds have taken the place of IPOs for Wall Street. But that could be about over as arbitrage opportunities are starting to get less attractive. CFO magazine reported that competition among banks is resulting in aggressive structures that are not as attractive to hedge funds that arbitrage the convertible by shorting the common stock.

The fallout from the dot-com bubble has still not totally blown up. So far more than 375 companies have been delisted from NASDAQ, a sum greater than the 337 delisted last year. It looks like there will be even more delisted during the rest of the year. There are almost 500 companies with stock price under $1. While some companies do manage to get resurrected, a large majority will face the same fate. The biggest problem these companies face is burning more cash than they even come close to generating. As Greg Roston, deputy director of the Institute for Economic Policy Research at Stanford University, explained, "There are a lot of money-losing companies that had said they were fully funded for a year, and now that year is coming to a close." The number of bankruptcies looks to beat the record set last year. There have been about 125 publicly traded companies that have filed for bankruptcy this year. That compares to 176 during all of 2000.

While there are a lot of people that hate Microsoft, the software company is quite popular among dead people. The Seattle Times reported this week that attorney general offices around the country were bombarded with letters supporting Microsoft and its long-standing legal troubles. The only problem is several of the letters were signed by individuals that are dead. As John Letttice wrote for The Register, "We're not sure which is worse for Microsoft - do you have to be dead to support them? Or maybe you die immediately after deciding to support them? Or maybe the Forces of Light just strike you down."

Taiwanese DRAM manufactures must like the control OPEC has on the oil market. It was reported this week that the Taiwanese manufactures are going to try and control price by controlling volume. This will prove interesting since cartels seldom work and any price increase will fuel other manufactures to fire up idled capacity. This curtailment will not help the struggling equipment makers. Semiconductor Equipment and Materials International (SEMI) reported that equipment sales fell 39.5% in the second quarter compared to the second quarter of 2000, and 37.2% from the previous quarter. The forecast for the rest of the year is not any rosier. SEMI expects sales of equipment to fall 35% this year. But, SEMI does see whopping 11% growth in 2002 followed by 22% growth in 2003 to $42.4 billion, which is still 11% below last year's peak. The semiconductor industry has truly collapsed, and has taken the semiconductor equipment makers down with it. Just last December the industry was calling for growth of 22% this year to$57.2 billion, and hitting $69.1 billion in 2003. If SEMI is correct with its existing estimate, 2001 equipment sales will be almost half the forecast made just nine months ago.

Another example detailing how exuberant telecom companies were, is the excess amount of "telecom hotels." Telecom hotels are the big data centers that house web servers and other online servers. The Boston Globe reported that 25% of Boston's data centers are leased, the lowest in the nation according to a joint study by Lehman Brothers and Cushman & Wakefield. But the rest of the nation is not much better. New York, Washington D.C., and Atlanta are all under 60% leased. And those do not even fall into the study's "serious overcapacity" category. Worldcom threw another blow to the already beleaguered telecom sector. It's cutting capital expenditures by $1.5 billion to $5.5 billion. This is the second cut in capx plans this year. Worldcom started the year planning to spend $8.5 billion. Last year it spent a record $9.9 billion. A report out of KMI Corp, a telecom research firm, indicates growth in fiber optics will be stagnant until 2004. KMI forecast about 21,750 miles of fiber being laid in 2003, compared to about 87,000 miles in 1999.

The incredible amount of capacity that was added during the last couple years will continue to plague technology companies a lot longer than the next couple quarters Wall Street is forecasting. Last year semiconductor equipment companies were planning on $57.2 billion in sales this year. Now the forecast is for just $42.4 billion in 2003, and that number is likely to prove too aggressive. It is truly amazing how investors think paying almost 30 times earnings on the S&P 500 resembles an "investment".


Chad Hudson

Author: Chad Hudson

Chad Hudson
Mid-Week Analysis

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