This column was originally published on RealMoney on July 25 at 10:52 a.m. EDT. It's being republished as a bonus for TheStreet.com readers.
After last week's slightly ambivalent comments from
, investors were relieved to see
nail both revenue and earnings numbers cleanly.
Monday evening, TI reported EPS at 47 cents, meeting estimates, and revenue at $3.7 billion vs. a $3.68-billion consensus. The results were enough to trigger a short-covering rally on Tuesday; TI shares were recently up 5% to $29.24.
But is it enough to carry the stock anywhere close to its spring heights? I don't believe so. Telecom investors looking for an inflection point may have found it. The handset guidance landscape is muted, and the emergence of certain pockets of weakness in the mobile network market does not seem to be a coincidence.
Note of Caution
The two giants of the mobile chip market are Qualcomm and Texas Instruments. Qualcomm dominates the CDMA phone market and acts as a proxy for W-CDMA phone growth via its licensing streams. Texas Instruments dominates the GSM-GPRS-EDGE track and acts as a proxy for developing market phone explosion, thanks to its new lines of ultracheap chips.
Both Qualcomm and Texas Instruments are coming off a streak of beating revenue and EPS estimates; both spent last winter racing ahead with guidance hikes.
After the first quarter, TI's revenue guidance midpoint was $3.61 billion vs. the analyst consensus of $3.48 billion. The EPS range midpoint was 40.5 cents vs. the analyst consensus of 36 cents. Clear guidance upside like this was the trend in the telecom component market last winter.
But Qualcomm's guidance for the ongoing quarter did not follow that trend: The revenue estimate fell just a tad short of analyst expectations. That placed a great burden on Texas Instruments, and investors basically priced in the worst-case scenario of a third-quarter warning.
Now, the Texas Instruments guidance cuts the middle of the consensus range with a surgical precision. The midpoint of the revenue guidance range is $3.79 billion vs. the $3.82 billion analyst consensus. The midpoint of the EPS guidance is 45 cents vs. the analyst consensus of 45 cents. At 67 days, inventory level stayed flat with the end of the previous quarter -- this was a genuine relief after inventory worries roiled the markets over the past month.
But no matter how relieved investors will be on Tuesday, the Texas Instruments guidance was clearly closer to the tepid Qualcomm guidance issued last week than the jubilant optimism both mobile chip giants offered three months earlier.
There is no sign of inventory buildup at either Qualcomm or Texas Instruments. But the guidance coming from both of these bellwethers is far more cautious than it was after the first quarter. Neither raised the revenue guidance even a touch above analyst consensus -- an unusual situation, since neither is a shrinking violet when it comes to guiding up.
In the background, we have Nokia's comment about industry volumes -- third-quarter sequential growth seen as slower than second-quarter sequential growth. During the swinging handset boom of 2003 and 2004, it was a given that the third-quarter sequential growth was above second-quarter sequential growth. In the second quarter of 2003, for example, global volume grew by less than 5 million units; in the third quarter of 2003, unit volume was up by more than 20 million.
Why should the third-quarter 2006 sequential growth be below the pace of the second quarter? And why are Qualcomm and Texas Instruments simultaneously discovering the spirit of guidance modesty?
The markets in general are addicted to inflection points, but no sector more so than the handset industry. When the real evidence of a turning point in the handset cycle arrives, key stocks have already moved by 20% to 50%.
We are now in the phantom zone where investors make up their minds about the handset cycle based on rumors, anecdotes and certain carefully turned phrases in company guidance commentary.
I will go out on a limb here and predict phone market volume growth will begin to decelerate faster than modeled during the third quarter. Companies like Texas Instruments, Qualcomm and Nokia are detecting early signs of this, and it is having an impact on their forward-looking commentary.
We all know that the pace of the unit growth is set to decelerate over the second half of 2006 -- that's priced in.
The issue is whether the growth slows down faster than anticipated. Actual unit contraction is not likely to happen before spring of 2007, if even then.
But share prices will make the big cycle moves before growth dips anywhere near zero -- that's the tough part. Just look at the PC market, devastated even while PC unit sales growth remains above 10% year over year.
We are probably already in a telecom bear market, and I expect the short-covering rallies to be violent and brief. This handset sector earnings season was strong enough to trigger short covering, but not strong enough to offer a base for a confident rally to challenge the spring highs.
is now down from $3 to $2 in just a few months, and this company has been the canary in the telecom mineshaft before; it led the sector up during the slowly building telecom stealth rally at the end of 2002. I believe the mobile telecom sector overall is going to face some stiff challenges in the second half of 2006.
Tero Kuittinen is a senior product specialist for Nordic Partners, Inc., a pan-Nordic brokerage firm. Although Kuittinen is an employee of Nordic Partners, Inc., the statements above are being made in Kuittinen's personal capacity and are in no way are the statements of Nordic Partners, Inc., nor attributable to the company. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Kuittinen appreciates your feedback;
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