Wachovia believes the semis are poised for a trading bounce. Firm notes the SOX was off 11.6% in Q2 2006, marking the worst performance for a Q2 in eight years outside of the market bottom in 2002. The index has declined another 6% since the end of Q2, reaching a new 52-week low of 413. The combination of very depressed investor sentiment and a benign negative preview season have set up a buying opportunity in the group ahead of earnings, in firm's view. They are also encouraged by the positive reaction in TSM (up 1.4% versus a 2.2% loss in the SOX) after the release of strong June monthly sales on July 10, 2006. Beyond a potential trading bounce in the next 2-3 weeks, they believe that increased visibility into the holiday build (August/September) and conviction of consumer spending will be required to drive a more sustainable rally.
Wachovia believes PCs are slightly below typical seasonality, but not as bad as the implications out of INTC and AMD. PC units declined 8.5% sequentially in Q1 and are expected to fall another 5.4% in Q2, according to Gartner Dataquest. (This is slightly below the three-year average of -6.8% in Q1 and -4.9% in Q2) However, on a year-over-year basis, units were up 13.9% in Q1 and are expected to rise 10.1% in Q2.
Short interest in firm's coverage universe has increased 24% over Q1 and 44% during the past year. VLTR, LLTC, IDTI, and MCRL have experienced the largest increase in short interest in Q2, up 82%, 71%, 50%, and 38%, respectively. They do not believe that industry conditions are nearly as bad as feared by investors or indicated by the dramatic increase in short sale activity. Accordingly, they believe the stage is set for a bounce on in-line results and a potentially bigger move for companies that come in ahead of expectations.
Also, the median forward P/E in coverage universe is 18x, or 13% below the level in the same point during the 2004 down cycle.
Top Picks Heading Into Earnings Are: ISIL, LLTC, CRUS, MCRL, IRF and IDTI. Firm sees the best trading opportunity in Micrel (NASDAQ:MCRL), which is 40% off its April 2006 high (versus a 20% drop in the SOX) and has short interest of 8.1 million shares (13% of its float, 6.7x average trading volume, and up 38% from Q1 and 48% in the last year). While Micrel's wireless handset business (19% of sales) has been negatively affected by customer mix (concentration at Samsung and LG), firm's checks suggest stronger trends in networking (27%) and industrial (33%). Wachovia believes Micrel's bookings held steady through Q2, with a book-to-bill likely in the 1.0-1.1 to 1 range. MCRL is trading at a 16x P/E on CY2006E and an EV/S of only 2.5x, representing a 40% discount to its historical average (excluding bubble).
Notablecalls: I have no opinion on the subject. I decided to highlight the call as Kla-Tencor (NASDAQ:KLAC) is on the wires saying they will beat their June qtr bookings target.
Wachovia believes PCs are slightly below typical seasonality, but not as bad as the implications out of INTC and AMD. PC units declined 8.5% sequentially in Q1 and are expected to fall another 5.4% in Q2, according to Gartner Dataquest. (This is slightly below the three-year average of -6.8% in Q1 and -4.9% in Q2) However, on a year-over-year basis, units were up 13.9% in Q1 and are expected to rise 10.1% in Q2.
Short interest in firm's coverage universe has increased 24% over Q1 and 44% during the past year. VLTR, LLTC, IDTI, and MCRL have experienced the largest increase in short interest in Q2, up 82%, 71%, 50%, and 38%, respectively. They do not believe that industry conditions are nearly as bad as feared by investors or indicated by the dramatic increase in short sale activity. Accordingly, they believe the stage is set for a bounce on in-line results and a potentially bigger move for companies that come in ahead of expectations.
Also, the median forward P/E in coverage universe is 18x, or 13% below the level in the same point during the 2004 down cycle.
Top Picks Heading Into Earnings Are: ISIL, LLTC, CRUS, MCRL, IRF and IDTI. Firm sees the best trading opportunity in Micrel (NASDAQ:MCRL), which is 40% off its April 2006 high (versus a 20% drop in the SOX) and has short interest of 8.1 million shares (13% of its float, 6.7x average trading volume, and up 38% from Q1 and 48% in the last year). While Micrel's wireless handset business (19% of sales) has been negatively affected by customer mix (concentration at Samsung and LG), firm's checks suggest stronger trends in networking (27%) and industrial (33%). Wachovia believes Micrel's bookings held steady through Q2, with a book-to-bill likely in the 1.0-1.1 to 1 range. MCRL is trading at a 16x P/E on CY2006E and an EV/S of only 2.5x, representing a 40% discount to its historical average (excluding bubble).
Notablecalls: I have no opinion on the subject. I decided to highlight the call as Kla-Tencor (NASDAQ:KLAC) is on the wires saying they will beat their June qtr bookings target.
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