"Dream if u can a courtyard
An ocean of violets in bloom
Animals strike curious poses
They feel the heat
The heat between me and u" - Prince
Buzz about a well known dove being elevated into a prominent position at the Federal Reserve had tongues wagging this morning. There is no doubt that equity players are striking curious poses over the thought of low rates into perpetuity. Janet Yellen is apparently President Obama's choice for Vice Chairman at the Fed. This is the same Janet Yellen who recently said that the economy still needs support from extraordinarily low interest rates. The market might be considered a forward-looking mechanism but the fact is that it trades on minute to minute circumstances and could care less if faulty Fed policy sends the economy over a waterfall in a wooden barrel.
Speaking of things going over a waterfall, consumer sentiment continues to dive. For me, the expectations component is the one we are really weary of as it reflects declining hope and belief in a rebound.
Tidbits
By: Brian Sozzi, Research Analyst
Broad Retail Thoughts
I am starting to see many a retail analyst pontificate that retail stocks, well, have significant room to run. These analysts believe that the U.S. consumer is back and poised to consume like yesteryear, essentially reversing over a year of savings rebuilding and balance sheet de-levering. I have made a litany of significant winning calls from the retail sector since the market bottom last year. I say this not to toot my own horn, but to bring perspective to the fact that these stocks have run meaningfully already. For example, shares of Saks (SKS) are up over 300% from March 2009! When the crowd starts to get bullish, I tend to become skeptical.
I have many companies in my coverage universe trading at premium valuations relative to the broad market and their own historical averages, so in other words the market has priced in a certain amount of the top line recovery that analysts are cheering will spring earnings upside. While I indeed have a handful of compelling investment opportunities in the sector, the attractiveness of the sector from a valuation standpoint is much lower than in recent months in my view. I have been wrestling with the following thought process…is the retail sales numbers we are currently experiencing a reflection of pent up demand being released and now that consumer confidence has softened, are we headed to a letdown in 2H10 or 1H11 financial results from retailers? Moreover, these companies have very little room to reduce working capital and pare variable expenses; these were two areas that drove earnings upside in 2009, and in a way trained analysts to expect earnings beats for the foreseeable future. Cost increases, in terms of transportation and sourcing are real, and for some retailers will be matched with a continued competitive pricing environment. Much to consolidate…
Store Walk Observations
In my store walk of the Abercrombie & Fitch (ANF) 5th Avenue flagship yesterday, aside from me being perhaps the only non-tourist in the store, it was apparent to me quality has been removed from the product. Management has stressed that quality has been maintained, but I know better having worn the product religiously (outside of work of course) since my teenage years. The company has no other choice but to reduce quality slightly; it's lowering prices to compete and is unwilling to take a material margin hit from using suppliers that focus on superior quality as opposed to a blend of price and quality.
Analyst Event
* Product lines being expanded for men's, accessories, and apparel.
* No quality has been removed from the product.
* Still seeing issues with how to sell products in spring/summer.
* I don't think there is enough differentiation in the women's product y/y to drive meaningful earnings and sales upside in holiday 2010. If we receive tons of snow and consumers start charging stuff, my thought could be tossed aside. There weren't any major must have products, just nice updates to the classics.
* New lines being expanded into are very, very pricey and lacking that fashion component that I think the boots encompass.
Semis "going and going and going"
By: Carlos Guillen, Research Analyst
Now that virtually all major semiconductor players have reported earnings, we believe that its all systems "go" for the semiconductor industry. So far all signs are indicating that the business will continue recovering, particularly in the short-run, and we believe growth in this industry may top the 20% mark this year.
So far all of the main analog semiconductor players that reported quarterly financial results during this most recent earnings season have reported revenue growth. Not only that, but they have also forecasted revenue growth for their respective adjacent quarters. In looking at the revenue growth guidance for these main players, we observed that Texas Instruments (TXN) provided the most conservative revenue growth forecast of approximately 2% at the midpoint of the guided range, while Linear Technology (LNTC) provided the strongest revenue growth rate of approximately 8.5% at the midpoint of the guided range. However, just earlier this week, Texas Instruments raised and narrowed its revenue guidance range. Texas Instruments expects revenue to sequentially increase by 2% to 6% during the March quarter, compared to the company's prior guidance of -2% to 6%. In essence, the midpoint of the new guidance has increased to growth of 4% from 2%.
Last night, National Semiconductor (NSM) also provided positive news for the industry as its revenues and guidance were better than expected. National reported February quarter revenue of $362 million, growing by 5.0% sequentially and by 23.8% year over year. The result landed above the Street's $348 million consensus estimate, above management's guidance of roughly $345 million, and slightly above our more bullish $358 million estimate. Even more encouraging was that management said it expected revenue to be in the range of $375 million to $390 million, which was nicely higher than the Street's estimate calling for $360 million.
All in all, I believe 2010 will be a good year for the semiconductor industry as demand for PCs and handhelds will continue to boost revenues. Moreover, improving technologies are allowing the development of new products that are creating new markets. Some of these new market makers include devices such as net-books and tablets.
Disclosure: none