Mark Mowrey: The Prudent Speculator

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Top 1. Jul 26, 2004 11:09 AM

» Kirk - Tech Gems Dirt Cheap

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Has Target for LRCX of $51! (now at $22 and a favorite of mine.)

Kirk

Adviser Soapbox
Tech Gems Dirt Cheap
Mark Mowrey, The Prudent Speculator, 07.26.04, 1:15 PM ET
http://www.forbes.com/investmentnewslett...

With all the red we're seeing among our technology holdings, one would think that analysts had been measuring a broad shift back to paper and the post as the primary means for communication.

Alas, friends, such is certainly not the case. Last week, a host of tech firms that we follow turned in astounding earnings growth in their latest quarters.

Take wireless services provider Nextel Communications (nasdaq: NXTL - news - people ). Second-quarter revenue jumped 29% year-over-year to $3.29 billion, versus consensus estimates of $3.16 billion. Earnings results more than doubled and the company reaffirmed 2004 guidance. The stock fell 6% on the news, as investors chose to focus on Nextel's spectrum issues. Funny thing, nothing has changed on that front since July 8, when the U.S. Federal Communications Commission cleared a spectrum swap that would give Nextel frequencies that are located far from those within which it now operates. Nextel transmissions tend to interfere with those of public safety agencies, hence the need for the shift. Nextel's competitors, primarily Verizon Wireless, say the FCC is giving Nextel prized airwaves for a price that is a fraction of what they could go for at auction. Verizon Communications (nyse: VZ - news - people ) has offered to start the bidding at $5 billion. The FCC voted 5-0 in favor of the deal, and despite continued threats from Verizon of a lawsuit and potential intervention by Congress, we're favoring the idea that the deal will go through as now designed. We bumped up our goal prices a dollar each on the report, to a long-term goal (LG) of $52 and a fundamental goal (FG) of $42. We're now buyers of Nextel, which trades for just 11.6 times trailing-12-month earnings, up to $26.13.

Semiconductor manufacturer and recently added portfolio member Texas Instruments (nyse: TXN - news - people ) reported second-quarter earnings in line with analyst expectations of 25 cents per share, as revenue grew 10% sequentially and 39% from 2003 to $3.24 billion. Texas Instruments fell 5% on the report, though it's recovered a bit. Our LG price is $49 and our FG price is $39 and we're buyers up to $24.38.

Chief Executive Michael Marks of electronics manufacturing services provider Flextronics International (nasdaq: FLEX - news - people ) summed up the primary sources of investor angst on a conference call following his company's fiscal first-quarter earnings release. "Everybody is trying to hone in on 1 cent...and it's inappropriate to consider that we can forecast our business down to 1 cent in the next two quarters." But it has been those penny misses--either for this quarter or for the next--that have driven the Nasdaq down almost 10% since the end of June. Flextronics saw its revenue grow 25% year-over-year to $3.88 billion in the quarter ended June 30, while adjusted net income nearly quadrupled to $78.3 million. Importantly, gross and operating margins grew by 110 basis points each. The company expects this quarter's earnings per share to come in between 15 cents and 18 cents on revenue between $4.1 and $4.2 billion. Analysts were expecting 17 cents and because the outlook was a bit lower than expectations, the stock took a hit the next day, falling 7.7%. Prior to the earnings announcement, the stock was trading at about 20 times expectations for fiscal 2005 (ending March 2005) EPS of 71 cents.

That's not exactly cheap, but it's also not overly expensive for a high-growth tech name either, and we believe investors fled too quickly. Regarding ongoing growth Marks said, "We expect to grow this year and next at pretty substantial year-over-year percentages regardless of end market demand patterns because of the secular trend towards outsourcing and our competitive position. Our book of business is good. We have two more companies we expect to announce before this quarter is over--relationships which are in the hundreds and hundreds of millions of dollars of new business." Thursday, Flextronics said it would sell $300 million in stock to pay down debt and fund further acquisitions. That announcement drove the shares down another 6% and they now trade for 39% of revenue and less than 18 times expected 2004 earnings of 70 cents. Our new LG and FG prices are $28 and $23, respectively, creating a buy limit of $14.02 on the shares.

There were a few companies whose results investors both applauded and purchased. Lam Research (nasdaq: LRCX - news - people ) announced stellar fiscal fourth-quarter performance. Revenue hit $329.6 million, up 43% from the March quarter and up 77% year-over-year. Adjusted EPS came in at 38 cents, almost three times the March total and vastly exceeding the 3 cents generated in this quarter last year. Analysts had been looking for revenue of $301 million and EPS of 26 cents. The company also offered guidance that was markedly above expectations so the 20% gain in the shares was warranted. We upped our goal prices on the shares to an LG of $51 and an FG of $43. It's still on our "buy" list, though, as our purchase limit now stands at $25.50.

Semiconductor test-handling equipment, closed-circuit TV and metal detection and microwave radio equipment maker, Cohu (nasdaq: COHU - news - people )--trading at $17.51--followed Lam's lead with a blowout quarter of its own. Revenue rose 32% year-over-year to $47.3 million in its second quarter, while earnings more than tripled to 32 cents per share. Cohu shares rose 17% on the news, and we upped our LG and FG prices (which weren't all that aggressive) a bit higher to $36 and $38. With its $5.40 in cash, no debt and trailing-12-month price-to-sales ratio less cash of 1.7 and price to tangible book value of 1.4, Cohu shares remain on our "buy" list, with a limit of $17.90.

The big gains for Lam and Cohu are perfect examples of a big reason we like tech stocks over the long run--volatility. Because of the wild swings tech shares tend to make, they often present opportunities to create new and divest existing holdings. In the case of Lam, we originally recommended it at $14.25 in January of 1996. Between then and now, the shares have been trading for as little as $2.79 in October 1998 and for as much as $56.81 in January 2000, when we had a chance to unload two-thirds of our holdings. Over the past eight years, in fact, Lam shares have been on and off our "buy" list several times. Of course, Lam was trading at $26.84 at the end of June, so yesterday's spike is just the beginning of progress (hopefully) toward an eventual sale.

Excerpted from the July 23 hotline of The Prudent Speculator.

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Related quotes

COHU $17.61 - 0.23
FLEX $12.12 - 0.38
LRCX $22.30 - 0.34
NXTL $22.57 - 1.02
TXN $20.35 - 0.44
VZ $36.33 + 1.01
7/26/04 1:50:00 PM ET

Kirk's Newsletter (NL) performance


PERIOD Returns     Kirk’s  W5000  S&P 500     Nasdaq  
                    NL     VTSMX   VFINX   ^IXIC   QQQ
1 Year to 6/30/04   36%     21%     17%     26%    26%
3 Year to 6/30/04   25%      2%     (3%)   ( 5%)  (17%)
5 Year to 6/30/04   65%     (5%)   (11%)   (24%)  (34%) 
 Total Return: 
                      Kirk  Wil’   S&P    NASDAQ    
                            5000   500   Comp  QQQ 
5 Yrs 6/30/99–6/30/04  65%  (5%)  (11%) (23%) (35%)
Annualized Return      11%  (1%)  ( 2%) ( 5%) ( 8%)
 
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