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Friday, February 27, 2009

Dell (DELL) 4Q:2009 results

Dell reported revenue of 13.4 billion, well below consensus of 14.2 – 14.4 billion.  Some revenue whipsers were as low as 13 billion.  The shortfall was mostly due to a miss in notebooks, which came in down 17% y/y.  PC shipments overall dropped 12% y/y – last quarter they grew 2% y/y.  Average selling prices dropped yet again.

The company managed to put up good EPS numbers due to aggressive expense controls.  They pushed their cost control targets up to 4 billion in savings from 3 billion for next year.  Some analysts are disturbed by this move, as it indicates Dell believes business has much further to fall.  Revenue forecasts for 2010 seem to be dropping to down 20%ish.

While I don’t see a near-term turn in their business any time soon, the stock looks cheap on some metrics, and they do have $9 bil in cash – roughly half their market capitalization.  Even on reduced numbers, with the cost targets they have, estimates for 2010 will remain north of $1 a share.  It’s real tough to sell it here.  The stock probably won’t start to work in any kind of significant way until they’re set to show some sequential revenue improvement which probably won’t be until Q3, but the valuation should definitely attract longer-term investors.  Gross margins are at high levels considering the pressure on the model and its unlikely component costs are going to rise without demand rising -- that’s probably good for them either way.

With Dell trading at 7.5* estimates, its telling you the company will shrink 25% y/y.  At the least, it’s fairly valued on present metrics.  I like the setup here for Q3.  I don’t love the idea of holding onto anything in an economic freefall.  I’ve been saying for several months to sell this stock due to their market share losses.  Their expense controls are extremely impressive and they’re navigating disaster very well so far.

Long a little Dell.

First Solar (FSLR) reminds me of Cisco (CSCO) in 2000

You may have to bear with me a minute.

Many people remember the great NASDAQ crash of 2000.  It happened in March.  Internet stocks in particular were hit very hard – there had been a speculative bubble in the area – many companies went public with significantly unprofitable business models and promises of exponential growth in the future.  Cisco was riding high, hitting a peak of 81.  Though the stock took somewhat of a hit in March of 2000, it didn’t fall off a cliff – after dipping to below 50 briefly, it recovered to 69.  Business was still strong, according to Cisco.  Customers were taking all of the product they could manufacture.  In fact, reporting their fourth quarter results in August of 2000, John Chambers said, "We see no indications in the marketplace that the radical Internet business transformation in practices like customer service, supply-chain management, employee training, empowerment, and e-commerce that is taking place around the world today is slowing -- in fact, we believe it is accelerating globally.”  Reporting first quarter 2001 results in November, Chambers indicated weakness in the domestic CLEC market and expressed a more somber tone – visibility was becoming more difficult.  Lucent had revealed some customer default issues and the company was dogged with questions about their customer base’s ability to pay.  Though Cisco wasn’t having the same issues as Lucent, they were watching their receivables carefully.  The stock dipped into the mid-40s and then traded back to the mid-50s over the next couple of weeks.

In December of 2000, Cisco revealed in their 10K that they were setting aside 275 million as loss provisions.  A very small portion of it was to cover doubtful accounts.  A larger part was to cover potential losses from investments.  Half was to cover inventory reserves – they had extra parts on hand to fill excess customer demand.  This was really the first indication of potential problems in their base and it was a pretty innocuous number relative to Cisco’s 25 billion dollar annual revenue run-rate at the time.  The stock was 51 the day of the filing, but the spectre had been released – the stock became haunted by the notion that business was slowing and that their sales figures were likely bloated by sales to shakily-financed customers.  By the time they were due to report in January of 2001, the stock was 34.  Then came the big reset of expectations that ultimately took the stock to 16 by March.  Between December, 2000 and March, 2001, Cisco stock was down 68%.

First Solar is in the vibrant solar power market and a lot of solar companies went public in the last year.  They’ve been saying for several quarters that they can’t keep up with demand.  They guided their sales down on a sequential basis after a particularly strong quarter.  And now, they’re starting to talk about viability issues in their customer base – that 15% of their customers are at risk of default.  This is likely the beginning of a problem for the company and not the end of one.  Though the stock has retreated quite a bit from its highs, that doesn’t mean it has found its lows.

First Solar continues to throttle business as if it’s not slowing down – they’re saying they’re going to keep producing as quickly as they can and they will vigilantly watch for potential problems and scale back if they need to.  This is ballsy.  The proper thing to do is scale back and miss a little demand in order to avoid potential catastrophe.  I think I have seen this movie before and it ends pretty badly.  As financing problems are crippling all industries, I would submit that solar is not immune, despite government stimulus to promote alternative energy infrastructure.  The internet infrastructure business was similarly strong in the face of a massive downturn in the IT space for a while… but not forever.  It would not surprise me if First Solar is seeing the early stages of what will prove to be a significant slowdown.

Staying short FSLR.

Thursday, February 26, 2009

First Solar (FSLR) 4Q:2008 results and a spooky chart

The company reported better revenue and earnings but indicated 10-15% of their base could default.  They’re very aggressively continuing to run the business as if there weren’t credit problems in the marketplace – in fact, they’ve loosened their payment terms to 45 days from the prior 10 days.  It’s very likely this company will show deteriorating balance sheet statistics over the coming quarters.  The stock is perceived as a prime beneficiary of the Obama administration’s well-known green-lean.  Guidance was lowered to 1.8 – 1.9 billion from the prior 2.0 – 2.1 billion.  I should have written this up yesterday but I was lazy and I don’t get paid to do this so there.

I expected to post a series of charts on the solar stocks suggesting that ENER, SPWRA and FSLR are all trading on the brink of important technical levels that must not be violated.  The set of lines in this chart surprised me and point to the low 40s.  Fundamental valuation would dictate that to be pretty much impossible unless something changes dramatically in their business or perceived accounting controls.


Intel @ GS conference

Speaking at the Goldman conference, CEO Paul Ottelini indicated business has found a near-term baseline – orders have reached a level where they’re predictable, though still not particularly strong.  He believes inventory is low in the channel and that customers are ordering exactly what they need, therefore any incremental demand shifts either positive or negative will influence Intel’s results – there’s no cushion at all.

The presentation focused on the impact of netbooks.  Investors are concerned about the cannibalization of the higher end processor business by the low cost, low power Atom processor.  According to Intel, only 20% of netbooks purchased are being bought instead of low end notebooks – the rest are either first time PC owners or incremental units to users that wouldn’t have otherwise bought another PC.  Furthermore, Intel makes more gross margin dollars on an Atom processor than they do on a Celeron.  He downplayed the processor power of the Atom, saying the lower performance would keep the Atom from taking significant share from the higher end of Intel’s line.  Otellini’s comments positioned Intel’s atom processor squarely in the mobile processor market – Intel sees the Atom as a logical smartphone building block.  Qualcomm too is pitching investors on the smartphone brain story with their Snapdragon platform.  Clearly they’ll be duking it out over the next couple of years.

Otellini pointed to the decrepit PC base as a source of stability in sales.  300 million units of the installed base are 4 years old and much of the installed base has been shifting to notebooks over the last few years – notebooks just don’t live as long due to their portable and therefore vulnerable form factor.  The PC has become an essential information tool.  He does not believe people will simply forgo a PC purchase if theirs isn’t working.

The Skew:  Predictable demand and low channel inventories are clearly positive.  Netbooks are cannibalizing sales – those customers would have bought a cheap notebook otherwise – they needed to have a computer to take with them.  My netbook seems able to handle quite a bit of load – if anything, I’ve been pleasantly surprised by how much it can do, not disappointed by how little it can do.  I agree that notebooks don’t last as long – I go through one every couple of years.  Intel trades at roughly 16* 2010 estimates of 80 cents, which makes it cheap historically but expensive absolutely.  This company has not grown for several years and I would argue it deserves a multiple closer to 10-12* earnings, which would put it at $8-10.  Despite this longer-term valuation concern, I was long the stock into the presentation on the hopes they would indicate some better volumes in February versus January, which I believe to be the case.

Wednesday, February 25, 2009

Goldman Sachs Internet and Technology Conference

Starts today.

Webcast here.

Today’s schedule:

8:45 AM PT Cisco Systems

9:40 AM PT 3Com Corporation

9:40 AM PT WebMD


10:20 AM PT

10:20 AM PT Lam Research Corporation

10:20 AM PT Parametric Technology Corporation

11:00 AM PT Amdocs

11:00 AM PT Netflix

11:00 AM PT Xilinx, Inc.

11:00 AM PT FormFactor

11:40 AM PT KLA-Tencor

11:40 AM PT Intuit

11:40 AM PT GSI Commerce, Inc.

12:20 PM PT Intel Corporation

1:10 PM PT Yahoo!

2:00 PM PT Affiliated Computer Services Inc.

2:00 PM PT Brocade

2:00 PM PT Intersil

2:40 PM PT SuccessFactors

2:00 PM PT Taleo

2:40 PM PT Silicon Image

3:20 PM PT Varian Semiconductor


4:00 PM PT Kenexa


4:00 PM PT Atmel Corp.

5:20 PM PT Google

4:40 PM PT Logitech

Obama tries to soothe the collective concern

Is it just me or is he a little overly ambitious?  I don’t mean to stick pins in the guy.  He’s got a nightmare of a job and I’m grateful to have an intelligent man at the helm of this careening ride we call America.  I’m having some trouble with the breadth of his promises.  He’s going to cut the deficit in half?  We’re going to fix the banks? We’re going to cure cancer?  I love the confidence… I wish I had it.  I guess that’s why he’s the president and I’m writing a blog in my sweatpants.  I’m a bit skeptical that he’s going to be able to accomplish as much as his ambition suggests, but if he gets even a fraction of his plans accomplished we’ll be better off.

Holding Wall Street accountable for the nation’s woes and exonerating the imprudent speculation in the housing market is probably inaccurate.  It was a mutually beneficial deception at the time.  I’m not trying to play the blame game.  I don’t frankly care who got us into this mess.  I do, however, want the people trying to fix the problem motivated to do so.  If I worked at a bank and I heard Obama talking about what a scumbag I am and how I shouldn’t be paid a red cent, I suspect I wouldn’t be trying all that hard.  Ironically, quite a few of the unemployed who can’t pay their mortgages worked for those banks just a few short weeks ago.  Many that still hold jobs at these financial institutions are extremely concerned they’re next.  Compensation is down significantly at banks and much of it is in equity, which is being significantly diluted through these capital injections.  We’re all paying for the excess.  It’s unproductive of the administration to have policies that suggest that we trust these institutions to extricate us from these financial debacles and then to throw stones and hurl epitaphs at them.  Inspiring despair among the rescue workers is not going to achieve the desired result.

Though the market rallied sharply yesterday, this will remain a challenging week… month…. year.  Citigroup still requires a bailout package.  The stress tests are due to begin today, I believe.  AIG is apparently set to report a 60 billion dollar loss on Monday and will file for bankruptcy if they don’t get a new lifeline, according to press reports.  The automobile companies need another ~15 billion or they’re going under.  Share prices of reits are showing significant distress.  Many, many issues still to sort through.

Monday, February 23, 2009

New low in the DJIA Friday

Though tech has remained stronger than the rest of the market, the Dow Jones Industrials put in a new low on Friday, closing below the prior low established in November of 2008.  This sell off has been much more consistent, measured, restrained, almost… the kind that hasn’t hit its feverish selling pitch yet.  I assume we are headed meaningfully lower.  The Fed and Treasury cannot expect to jawbone the banks higher – the jawbone is perhaps the weakest and most overly worn tool in their arsenal.

Taiwan Semiconductor seems to be improving

According to this report from Friday morning, executives at Taiwan Semiconductor (TSM) believe the semiconductor industry will have a “u-shaped” recovery.  They believe Q1 represents the low-point for the year.  Taiwan Semiconductor utilization is expected to be in the mid 40s for the quarter.  Rush orders have been reported in the Taiwanese press from Qualcomm (QCOM), Xilinx (XLNX), Altera (ALTR) and Mediatek to name a few.  Industry caution has been very high as customers have been running down their inventories to better align with a slowing environment for electronics of all shapes and sizes.  Citigroup is reiterating their buy rating on TSM, saying they’re likely to get back to break even sooner than expected.  They say the company likely overcut guidance and should beat their lowered guidance.

Selective nationalization

Citigroup will apparently receive the latest in a series of rescue packages from the government.  In October, they received $25 billion.  Around Thanksgiving, another $20 billion.  This time the government will up their stake to 25-40% by converting their preferred shares of the company to equity and injecting them with new capital, according to press reports describing the latest rescue plan.

Friday, officials were denying a plan to nationalize the banks.  When the government steps in and buys 40% of Citigroup, while the majority of ownership does still reside among public shareholders, it certainly does smack of nationalization.  Semantics aren’t the point here, though.  Call it what you want, they’re saving Citigroup by taking a significantly larger stake.

Good for Citigroup… I guess.  The stock is up but massive equity dilution isn’t typically positive for stock price.  Since the risk here is insolvency, maybe diluted and alive is better.  Citigroup was significantly underwater by the tangible equity ratio and was sure to fail the “stress tests” planned this week by the Fed.  Frankly, the fact that they couldn’t wait till the stress test at Citigroup before injecting them is pretty ominous.  It suggests Citi was going under today or tomorrow if they didn’t do something immediately.

What about Wells Fargo (WFC), Bank of America (BAC) and Capital One Financial (COF)?  Are they planning to save them too?  They’re probably going to need to as every time they’ve selected an institution to save, it’s increased the pressure on the unsaved.  When the Fed backstops institutions they theoretically removing the trading risk for counterparties.  Why trade with a bank with a spiraling stock price and no government backing when you can trade with one that’s protected?  And there’s the rub.  Saving one highlights the risk of the others.  The pressure will resume somewhere else.

Selective nationalization creates a list of broken banks on life support – comatose, breathing, but struggling to hold on.  By omission, though, it also creates a list of sick banks still to be broken.  Plug one hole and you increase pressure on the rest of the structure.  Any relief from the Citigroup action is likely to be short-term.  This will be a very tense week for financials, despite the government’s attempts to stabilize the system, as the stress tests are likely to point to weakness in financial controls at the banks – the problem all the way down has been an underestimation of portfolio risk.  With these institutions able to rely on the government to step in and save them, its likely that portfolio risk still exists as unwinding positions is likely near impossible.  Prior plans floated have included the government overpaying for underwater assets – why would you sell an underwater asset if you knew the government might pay you more than its worth?  You wouldn’t.  They didn’t.

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