Tech Takes from Fed's Industrial Production Report (DELL, HPQ, CDWC)

 |  Includes: CDWC, DELL, HPQ
by: William Trent, CFA

The Federal Reserve released its monthly industrial production report on Tuesday. Although the headline number is widely reported, the release contains a treasure trove of information on a number of industries.

Our only beef with the report is that, since we prefer to view data on an unadjusted, year/year basis, the frequent revisions to the benchmark and limited year/year data make this a difficult task. So for now we have the year/year data for this month’s report, and we will start following the trends as we get enough future reports to do so. And without further ado, here is our take on this morning’s numbers.

First, the year/year change in industrial production in April, 2006 for the tech industries: Overall tech was up 22.3 per cent; computers up 10.5 per cent; communications up 35.5 per cent; and semiconductors up 20.0 per cent. These compare favorably to the increase in IP of 4.8 per cent for non-tech industries.

At first glance these seem to be solid numbers, but we have some concerns. First, the 10.5 per cent increase in computers is below the typical price declines for that industry. This could indicate that overall revenues (units x price) may in fact be declining. In fact, the chart below, from today’s PPI report, shows that computer prices were down 12.4 per cent in April, which is at the moderate end of the normal range of declines.

So we take that as more bad news for Dell (NASDAQ:DELL) and H-P (NYSE:HPQ).

Next we turn to the capacity utilization numbers, which do not require the year/year comparison and can therefore be compared over several months. For our high-tech industries, the recent numbers look like this:

We see a steady decline in capacity utilization for semiconductor manufacturers (that has only recently begun to be reflected in share prices) and a dramatic rise in utilization rates and IP for communications equipment.

The major telcos are keeping capex reined in, and although networking was a strong area for tech reseller CDW Corp. (CDWC), it only grew 12.2 per cent year/year in the first quarter. If their numbers are representative of what businesses are spending (they usually are close) then we’ve got a serious inventory issue for communications equipment looming.