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Old 12-12-2003, 10:16 AM
jjgold jjgold is offline
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Default Tech Report Friday

Tech shares closed Thursday's session decisely higher after more than a week of choppy trading that pressured the Philadelphia Semiconductor Index (SOXX 496.89 +12.33) down 9.0% from its Dec 1 close. The 18-company SOXX rose 2.5%; there were no decliners. The Briefing.com Tech Index, a composite of over 1000 tech companies, also closed the day up 2.5%. Advancers outnumbered decliners 3.5:1; advancers gained 4.1%, decliners fell 2.6%.

The change in sentiment came after investors got an adrenalin shot from an updated IDC forecast projecting strong consumer demand will continue to drive worldwide PC growth through 2004. IDC is forecasting 15.3% growth in Q4, pushing annual growth of worldwide PC shipments from 8.4% to 11.4%, or over 152MM units valued at over $175B. Unit shipments are expected to grow 11.4% (+4% in dollars) in 2004, up from prior forecast of 10.2%. Stronger than expected Nov Retail Sales data, which came in at 0.9% vs. 0.7% consensus, lent support to the IDC conclusions. Tech shares received yet another boost from CDW Corp (CDWC 57.87 +0.47), which reported that its Nov sales rose 22.9% Y/Y to $382.1MM, down from the 25.8% Y/Y growth in Oct to $490.4MM. The Nov sales data confirmed that the Oct strength within the enterprise market carried through into Nov. CDWC saw double-digit unit volume growth in most product categories, with notebook, server CPU, data storage and printer units jumping 25% Y/Y. Tech investors received a final booster shot in the afternoon in the form of the minutes from the October 28 FOMC meeting, which indicated the Fed did not see material risk of inflation for at least another year, tempering investor fears of a hike in rates.

Thursday's postive trading action and news notwithstanding, we again note that near-term, the direction of greatest resistance for tech shares is higher. Gains will be limited by lingering concerns over a rate increase as well as over valuations that already price in growth and margins expectations that far exceed actual performance. While we remain modestly bullish on tech over the long-term, we stress the need to be highly selective and would continue to protect gains as opportunities permit. Consistent with this view, Briefing.com lowered Technology from Overweight to Market Weight based on valuation. Please visit the Sector View page for the latest thinking on the different sectors. The Sector View for Technology is excerpted below for ease of reference.

The latest market data point to accelerating technology spending in 2004 and 2005, and strong growth in the out-years covering the next decade. On the consumer front, appetite for the latest in digital electronics remains un-satiated and is driving demand for semiconductors. This, in turn, is causing semiconductor fabs to run at high capacity utilization rates, resulting in a stabilization of average selling prices and a building backlog for semiconductor capital equipment. CIOs are warming to the idea of loosening the purse strings for capital expenditures. Industry participants and observers generally forecast enterprise spending on technology in the range of 5%-8% in 2004, accelerating to as high as the low teens in 2005, providing a firm foundation for continuing, accelerating growth. Telecom services carriers are also dialing in to the technology recovery as they migrate legacy to converged VoIP networks, signaling a new cycle in capital investment. This will further strain fab capacity and stands as yet another pillar for a sustained recovery in technology spending. The above three data points describe the developed markets. Globally, economies are improving. Factor in growth from developing Asia, developing EMEA (Europe, Middle East and Africa) and developing Americas, and the elements are in place for a sustained period of growth. In this context, technology companies remain among the best positioned to capitalize on global economic recovery/expansion and are primed to move higher. However, investors need to be highly selective since:

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Old 12-12-2003, 10:16 AM
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Computer Systems & Peripherals
Advanced Digital (ADIC) 13.16 +0.88: After the close, reported Q4 (Oct) earnings of $0.09 per share, $0.02 better than the Reuters Research consensus of $0.07; revenues rose 40.2% year/year to $118.0 mln vs the $117.6 mln consensus.

IBM (IBM) 92.40 +0.67: Signs 8-yr pact with Michelin valued at 1 bln euros. According to this 8-year agreement, IBM will take over the management and maintenance of Michelin's IT infrastructure in North America and Europe.

Mobility Elec (MOBE) 9.93 +0.70: Co selected by Dell Computer (DELL) to design and manufacture a custom combination AC/DC adapter for its notebook computers. After nine months of development, Mobility Electronics started shipping the new custom combination AC/DC power adapter to Dell this week.

Networking
Brocade (BRCD) 5.78 +0.26: Merrill Lynch upgraded Brocade (BRCD) to Neutral from Sell based on valuation, the potential for operating margin expansion next year, and the fact that Cisco is not being as successful as expected; firm remains concerned primarily about pricing due to Cisco's attempts to jump start its SAN biz with lower prices, McDATA's intense competition with Brocade, and their belief that OEMs (such as EMC) will increasingly attempt to extract lower switch prices as they play the 3 FY04-05 ests, and a $30 target; firm says the co is an outperformer under the radar, citing the following factors: 1) traffic mgmt mkt is expected to grow faster than other networking segments, 2) co's mkt share grew to 35% from 10% despite a 35% mkt contraction, and 3) strong earnings key SAN switch vendors off each other.

F5 Networks (FFIV) 23.90 +1.51: Merrill Lynch reinstated coverage of F5 Networks (FFIV) with a Buy rating, above-consensus FY04-05 ests, and a $30 target; firm says the co is an outperformer under the radar, citing the following factors: 1) traffic mgmt mkt is expected to grow faster than other networking segments, 2) co's mkt share grew to 35% from 10% despite a 35% mkt contraction, and 3) strong earnings leverage due to cost controls. Firm's FY04 est is $0.43 and its FY05 est is $0.75, which are well above consensus of $0.36 and $0.53, respectively.

Internet
Alloy Inc (ALOY) 5.07 +0.08: After the close, reported Q3 (Oct) loss of $0.05 per diluted share, excluding impact of a $5.2 mln non-cash valuation allowance for remaining net deferred tax asset, $0.04 better than the Reuters Research consensus of ($0.09); revenues rose 13.5% year/year to $105.8 mln vs the $111.3 mln consensus.

Apollo Group (APOL) 68.00 +1.27: Pacific Growth's recent channel checks indicate to firm that Apollo Group (APOL) and University of Phoenix Online (UOPX: Equal Weight) could deliver a strong NovQ when results are reported next week. Firm sees a near term opportunity for stock performance in both APOL and UOPX shares; notes that both APOL and UOPX have fallen with the rest of the industry on news of allegations that Career Education (Not Rated) could be inflating enrollment numbers. As firm believes this news is irrelevant to Apollo Group, it believes that a strong quarter from the co could act as a near-term catalyst for the stock price. However, in firm's opinion, over the longer term APOL and UOPX shares are likely to show limited upside; if the economy is truly in a recovery, firm believes that investors could favor rotating into higher beta names.

Autobytel (ABTL) 8.88 +0.91: Merriman Curhan initiated coverage of Autobytel (ABTL) with a Buy and a $14 price target. The firm believes the co's leading market share, strong online brand, sustainable competitive advantage, and high operating leverage deserve premium multiples to its peers in the online ad services group. The co has certain strategic assets that should give it a sustainable competitive advantage in the marketplace, including the industry's largest dealer network, a large affiliate network, brand recognition, and proprietary technology... The firm's $14 target is derived from a 10-year DCF model and implies a $573 mln market capitalization and P/Es of 47x and 29x our 2004 and 2005 EPS estimates of $0.30 and $0.49.

Chordiant Sftwr (CHRD) 4.30 +0.25: JMP Securities reiterated their Strong Buy rating and $6 target on Chordiant, saying reliable sources indicate that the co closed a significant deal in the last week with a Canadian diversified services institution, which they believe enabled the co to achieve their ests for the qtr; also, firm believes the co benefited this qtr from its enterprise agreement with Deutsche Bank, as well as from a number of smaller deals for enterprise and marketing director products.

Covad Comms (COVD) 3.50 +0.46: COVD announced the introduction of Covad's digital subscriber line (DSL) broadband service in AT&T's communications bundle for residential users in Illinois, Ohio and Wisconsin. Covad's DSL service is bundled with AT&T local and long distance services, offering consumers the advantage of a single, convenient telecommunications package.

MatrixOne (MONE) 6.45 +0.77: Friedman Billings Ramsey upgraded MatrixOne (MONE) to Outperform from Mkt Perform and raised their target to $8 from $5 based on four key factors: 1) firm believes the Dec qtr has been tracking well, 2) product lifecycle mgmt should be a major beneficiary of an uptick in IT spending, 3) co is focused on returning to profitability, and 4) compelling valuation
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Old 12-12-2003, 10:16 AM
jjgold jjgold is offline
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Semiconductor
Actel (ACTL) 24.82 +0.21: After the close, co released its business update for Q4, believes that revenues will grow sequentially in the 1-5% range, apprx $38-40 mln, Reuters estimate is $39 mln.

Semi Equipment
Brooks Automation (BRKS) 20.59 +1.03: Prices 6 mln share follow-on offering at $19.00.

Taiwan Semiconductor Manufacturing (TSM) 10.35 +0.50: Dow Jones reports that Taiwan Semiconductor Manufacturing (TSM 10.06 +0.21), the world's largest producer of made-to-order chips, Thursday said its fourth quarter "may be slightly better" than the firm advised during its October conference call... Moors and Cabot believes TSM positive preannouncement allays some investor concerns over Nov sales numbers. According to the firm, the best exposed companies in its universe includes the following: AMAT (+0.08), ASYT (-0.02), CYMI (+0.01) and VSEA (+0.31).

Software
Adobe Systems (ADBE) 39.78 +1.70: After the close, reported Q4 (Nov) earnings of $0.34 per diluted share, $0.02 better than the Reuters Research consensus of $0.32; revenues rose 21.7% year/year to $358.6 mln vs the $342.0 mln consensus. Co also guides, sees Q1 EPS of $0.33-0.36, vs the R.R. consensus of $0.32, and revenues of $360-380 mln vs an estimate of $348.8 mln; reaffirms Y04 revenues of $1.425 bln vs an estimate of $1.4 bln. Co's Board also declares this quarter's cash dividend of $0.0125 per share, payable on Jan. 23, 2004 to stockholders of record as of Jan. 9, 2004.

Computer Assoc (CA) 23.83 +0.77: Federal Court approved shareholder settlement; co to issue 5.7 mln shares (CA) 23.06:

Convera (CNVR) 4.00 +0.10: Co has been awarded a $5.2 million contract for RetrievalWare 8.0 by a U.S. Government Agency in support of U.S. national security objectives. The new agreement involves a license for the company's new search and categorization technology, RetrievalWare 8.0, which will provide the customer with unique dynamic classification capabilities and extensive foreign language support.

Electronic Arts (ERTS) 43.63 +2.28: JP Morgan upgraded Electronic Arts (ERTS) to Overweight from Neutral, citing valuation as well as checks that indicate the co's titles continue to sell well at retail; firm thinks concerns regarding mixed reviews the co's titles have received from some well-regarded industry websites, and concerns over retail sales, are overblown; according to their channel checks at Wal-Mart and EB Games, the co's games are among some of the best movers at retail, and firm also believes that solid Nov and Dec NPD numbers, the likelihood of a hardware price cut sometime in 1H04, and the launch of the PSP (not included in their ests) could be the key catalysts to the stock over the next 6-9 months.

Unisys (UIS) 14.44 -1.46: Soundview Technology downgraded Outperform to NEUTRAL. Target $20 to $16. Cites pension costs that are expected to be $85-$95 mln higher than their previous 2004 assumption.

Verisity (VRST) 12.50 -0.10: After the close, co announced definitive agreement to acquire Axis. Under the terms of the agreement, VRST will acquire Axis for apprx $80 mln in cash and stock, with the stock portion representing less than 20 % of VRST's outstanding shares. Co expects the transaction to close in the 1Q04.

Verity (VRTY) 14.29 +0.43: After the close, reported Q2 (Nov) earnings of $0.12 per share, ex items, $0.03 better than the Reuters Research consensus of $0.09; revenues rose 26.3% year/year to $28.9 mln vs the $27.9 mln consensus. Co. sees Q3 (Feb) EPS of $0.11-0.13, ex items, Reuters estimate is $0.10 and revenues in the range oof $29-31 mln, estimate is $29 mln.
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Old 12-12-2003, 10:16 AM
jjgold jjgold is offline
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Telecom Equip
Apogent Tech (AOT) 23.30 +0.36: After the close, announced $300 mln debt offering.

Arris Group (ARRS) 7.05 +0.82: Co reaffirmed Q4 outlook, excluding items related to adverse court ruling in Mezzalingua Associates patent infringement suit relating to certain models of ARRIS's Digicon "S" series and Digicon "T" Series model connectors. Sales of the Digicon "S" and "T" connectors accounted for approx $13 mln of annual revenues which the Company believes will be readily replaced by the sale of other products.

Ciena (CIEN) 6.18 -0.17: Reported Q4 (Oct) loss of $0.08 per share, ex items, $0.01 better than the Reuters Research consensus of ($0.09); revenues rose 14.1% year/year to $70.6 mln vs the $70.3 mln consensus. Company sees Q1 revs flat to up as much as 10% over Q4 revs.

ECI Telecom (ECIL) 6.59 +0.25: Co has entered into a strategic relationship with Nortel Networks to deliver broadband access networking solutions that will address the increasing global demand for multimedia and triple play services (voice, video and data).

TEKELEC (TKLC) 16.14 +1.46: Oppenheimer upgraded Neutral to BUY. Target $17. Believes trends in two of the co's segments (Network Signaling and Contact Center) are strengthening.

Telecom Services
AT&T (T) 19.62 -0.26: The Wall St Journal reported that AT&T will soon be offering Voice-over-IP service allowing customers to place phone calls over the Internet. The co says VoIP is the "most significant, fundamental new technology shift in telecommunications in decades, and will deliver tremendous value to all customers." The co plans to have the service available in 100 markets, starting with three on the East Coast, and also plans a major expansion of existing phone programs for businesses that rely on VoIP. The co is expected to announce the initiative today. Co announces major new initiative to deliver a full complement of Voice over Internet Protocol (VoIP) services to business customers and consumers in 2004. The company, which already serves hundreds of businesses with its managed VoIP services, said it will expand its VoIP portfolio and aggressively market a full suite of VoIP-enabled services to business customers worldwide. AT&T will also roll out a new VoIP consumer offer in major cities across the United States in 2004, beginning with select metropolitan markets in the first quarter of the year... see 07:17 update for related commentary. Co announced that consumers in Illinois can now add residential digital subscriber line (DSL) high speed Internet service to their AT&T bundle of local and long distance communications services. Co also announced that consumers in Ohio and Wisconsin can now have AT&T bundled DSL service. AT&T now offers DSL as part of its communications bundle in 11 states with plans to roll out the new service in all states in which it provides bundled local and long distance residential services. The offer, which utilizes a nationwide data network provided by Covad Communications, enables consumers to bundle AT&T's DSL service with other AT&T local and long distance services.
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