After six straight years of subpar returns, the cycle for high-tech stocks may finally be turning.
One sure sign of this is that up to 70 tech firms are expected to complete an initial public offering sometime this year on U.S. exchanges.
If the 70 companies follow through with their plans, this would represent a doubling over the number of IPOs issued in 2006 — although it would still be considerably short of the 170 IPOs filed at the peak of the boom in 2000.
The anticipated increase in IPO activity reflects analysts’ confidence that high tech will outperform all other sectors in 2007. A Business Week survey of 80 equity strategists, published Jan. 1, determined that high tech was the most heavily recommended sector for 2007, with 28 strategists giving it the nod. Health care was a distant second, with 14 strategists’ support.
The average prediction holds that the tech-heavy Nasdaq composite index will jump 9.6% this year to reach 2647 — although the range in estimates is vast, from a gain of 24% to a decline of 27%. Consensus projections for the Standard & Poor’s 500 composite index suggest gains of less than 6% in 2007. Here again, the range in projections is large, from a gain of 15.6% to a loss of 22.9%. These extremes reflect strategists’ differing views on the strength of the economy and the question of whether stock markets are generally overvalued following four straight years of solid gains.
There is also surprisingly little agreement on precisely which high-tech stocks constitute a smart investment this year. For example, each of the Business Week strategists was asked to cite a top pick — and no stock was selected by more than two analysts.
An Investment Executive analysis of more than 100 tech stocks — roughly half from Canada and half from the U.S. — suggests most tech plays have significant numbers of supporters and detractors. With the help of Bloomberg LP, IE narrowed the field to 18 stocks considered a “buy” by a strong majority of analysts — and 10 stocks investors should probably avoid.
The best bets involve three main themes: intellectual property, turnarounds and dominant players.
Within the Canadian contingent, Mosaid Technologies Inc. and Wi-Lan Inc. , both based in Ottawa, are the clear favourites. All eight Mosaid-supporting analysts and all four Wi-Lan supporters have “buy” ratings.
In Mosaid’s case, the unanimity survived despite weaker sales and revenue guidance offered by the company in late November, following publication of its second-quarter results. Mosaid, a specialist in memory chip design, has successfully sued a series of semiconductor giants for patent infringement. The result is that Mosaid now generates the vast majority of its revenue from licensing its intellectual property rather than through sales of chip design services and memory test equipment.
Mosaid warned analysts on Nov. 30, 2006, that the company’s revenue would come in about $3 million less than expected in the fiscal year ending April 30, 2007, thanks in part to slow sales affecting one of its customers’ pro-duct lines.
Despite the reduced outlook, Greg Reid, an analyst with Wellington West Capital Markets Inc. in Toronto, predicted in a Dec. 1, 2006, research note that Mosaid’s earnings will jump 23% to $1.64 a share in fiscal 2007 from $1.33 a share in fiscal 2006. He also expects that revenue will increase 29% to $82.1 million from $63.8 million a year earlier. The outlook for Mosaid in fiscal 2008 remains bright, he notes, with earnings and sales projected to jump 37% and 17%, respectively.
Four days after Mosaid lowered its guidance for fiscal 2007, another intellectual property specialist, Wi-Lan, did the opposite — in very emphatic terms. Wi-Lan’s new CEO, James Skippen, a former Mosaid executive, revealed his company had secured a significant licensing deal with wireless equipment giant Nokia Corp. of Finland.
Under the terms of the $49.2-million arrangement, Nokia acquired a licence for Wi-Lan’s extensive portfolio of wireless patents. In exchange, Nokia paid $15.2 million in cash and transferred some of its own patents — involving wireline technologies — valued at $34 million.
The Nokia pact lit a fire under Wi-Lan’s stock, which closed Dec. 29, 2006 at $4.65 a share, up 520% for the year. And analysts believe there is plenty of momentum left. Barry Richards, an analyst with Toronto-based Paradigm Capital Inc. , pointed out in a Dec. 5, 2006, research note that the Nokia licensing coup, combined with an earlier one involving Cisco Systems Inc. of San Jose, Calif., “profoundly increases the probability of a large number of additional licensing deals.”
@page_break@Richards has a 12-month price target of $7 a share, based on his estimate that sales will reach $55.5 million in the fiscal year ending Oct. 31, 2007, in contrast with just $2.2 million in fiscal 2006. Over the next year, Richards expects earnings will jump to 77¢ a share from 20¢ in fiscal 2006.
Wi-Lan is a textbook turnaround company. It was founded in 1992 and was a early player in wireless technologies such as orthogonal frequency-division multiplexing and WiMax. Its shares soared during the late 1990s’ tech boom, but Wi-Lan was not able to transform its wireless products units into a successful business. More recently, the company has been trying to squeeze value out of its dozens of wireless technology patents. Skippen, the former head of Mosaid’s patent licensing efforts, was hired last June to accelerate this process.
An even more dramatic transformation is underway at Thermo Fisher Scientific Inc. of Waltham, Mass., the top-ranked “buy” among U.S. technology stocks.
The product of a US$11-billion merger in November between Thermo Electron Corp. and Hampton, N.H.-based Fisher Scientific International Inc., the new entity is expected to generate significant cost savings as well as new market opportunities, as each of the formerly separate companies sells into the other’s base of customers.
Thermo Fisher Scientific will operate two main divisions, analytical technologies (high-tech lab equipment) and laboratory products and services (basic lab equipment and health-care services).
Ross Muken, an analyst for Deutsche Bank Securities Inc. in New York, expects Thermo Fisher Scientific’s combined revenue will increase 7.2% annually from 2007 through to 2009, while net income per share will jump 17.5% annually.
Muken’s research note, published Dec. 14, 2006, contained a price target of US$58 a share. This corresponds to a price/earnings multiple of 24 times Thermo Fisher Scientific’s 2007 earnings of US$2.42 a share.
The research note was published following Thermo Fisher Scientific’s analyst day in New York, during which senior executives expressed confidence in their ability to derive savings from the merger. Thermo Fisher Scientific executives expect the company will achieve organic revenue growth of 6% annually — excluding the impact of acquisitions — and added that the company is marketing heavily in India and China.
There are relatively few surprises among the other U.S. tech stocks that analysts favour. Search engine software provider Google Inc.of Mountain View, Calif., iPod portable media device maker Apple Inc. of Cupertino, Calif., and Internet networking gear producer Cisco Systems are each leading in their respective niches. They have made the list of top picks for several years running, for the simple reason that they are still experiencing healthy growth.
Apple, for instance, is expected to generate sales growth of slightly more than 20% in each of the next two years, reaching US$28 billion in the fiscal year ending Sept. 20, 2008, according to consensus estimates compiled by Reuters Ltd. In fiscal 2006, Apple reported sales of US$19 billion. Earnings are expected to jump 21% this year and 18% in fiscal 2008 to reach US$3.25 a share.
For clients who like to go against the flow, it’s possible to find potential gems among the tech stocks that are not currently favoured by a strong majority of analysts.
One such stock is computer maker Dell Inc. of Round Rock, Tex. Charlie Wolf, an analyst with New York-based Needham & Co. LLC, changed his recommendation on Dell to a “buy” from a “hold” in late November, when he saw what he believes may be a crucial turning point in Dell’s third-quarter earnings report.
Wolf focused on a 1.4% rise in Dell’s operating margin to 5.7%, concluding in his Nov. 22, 2006, research report that “Dell may have abandoned its obsessive focus on market share gains and revenue growth at any cost.”
As a result, Wolf boosted his earnings estimate for Dell to US$1.55 a share in 2008 from the current US$1.40, which prompted him to boost his 12-month share price target to US$35. That’s considerably higher than Dell’s 2006 closing price of US$25.09 a share.
However, Wolf concedes an obvious point in his report: there is the risk that Dell’s third-quarter margin improvement was a one-time blip. If this is the case, then “the stock could linger in the low US$20s indefinitely,” he adds.
Finally, if investors needed a reminder of high tech’s volatility, they surely found it in the shares of Motorola Inc. of Schaumburg, Ill. Although this telecom equipment maker was favoured by 72% of the analysts who covered it at yearend 2006, Motorola shocked them on Jan. 5 by revealing it would report weaker than expected earnings and revenue for the fourth quarter ended Dec. 31.
Perhaps there is a turnaround in the making here. But, for the moment, Motorola is not likely to last long on the list of analysts’ favourite tech stocks. IE
Increase in IPO activity sets stage for tech comeback
Analysts are confident the high-tech sector will outperform all others in 2007, but they’re not sure which companies will do best
- By: James Bagnall
- January 22, 2007 October 31, 2019
- 14:14