Analysis: Once reliable technology sector drags down earnings

NEW YORK Tue Jan 15, 2013 5:01pm EST

Traders work on the floor of the New York Stock Exchange, January 14, 2013. REUTERS/Brendan McDermid

Traders work on the floor of the New York Stock Exchange, January 14, 2013.

Credit: Reuters/Brendan McDermid

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NEW YORK (Reuters) - This earnings season, the U.S. technology industry is in an unusual position - dragging corporate America down, rather than lifting it up.

Wall Street expects the tech sector's fourth-quarter earnings to be down 1.1 percent from a year ago, the first drop since the third quarter of 2009, even though overall S&P 500 profits are still forecast to show growth, according to Thomson Reuters data.

Chip companies are expected to be among the worst performers because of softer-than-expected personal computer sales. Weak overseas demand and worries about the U.S. fiscal crisis have also likely caused corporations to put off IT spending.

"The lack of economic growth we've seen in Europe, the deceleration of emerging markets - that has put a significant amount of pressure, particularly on technology," said Omar Aguilar, chief investment officer for equities at Charles Schwab Corp, in San Francisco.

Tech stocks have struggled recently and further weakness could dent the bullish 2013 forecasts many strategists have for the U.S. stock market. But some investors and analysts say weak fourth-quarter numbers have already been baked into many tech stock prices and valuations are attractive.

Analysts at Bank of America Merrill Lynch wrote in a note this week that tech stocks are undervalued by about 32 percent, more than any other sector, based on current forward price-to-earnings ratios. Every tech industry except IT services is trading well below historical levels, the note said.

Within tech, "you're finding a lot of cash-rich companies trading at reasonably cheap multiples. So to value investors like us ... it starts to seem intriguing," said Eric Kuby, chief investment officer at North Star Investment Management Corp in Chicago, whose firm owns Microsoft Corp and Intel Corp.

It is unusual for tech, the largest of the Standard & Poor's 500 index's 10 industry sectors and accounting for nearly 23 percent of earnings, to underperform. Tech has been in the top half of S&P sectors for the last four earnings periods and it has posted stronger profit growth than the overall market 83 percent of the time in the last 10 years, according to Thomson Reuters.

Apple Inc usually provides one of the biggest boosts to U.S. corporate earnings, but this time its December quarter profit is forecast to fall 3.8 percent year on year, compared with the S&P 500's overall 1.8 percent profit growth, according to Thomson Reuters data.

Apple has only missed analyst earnings expectations four times in the last 10 years, two of those in the most recent reporting periods, Thomson Reuters data showed. Its shares are down again this week after reports the company is ordering fewer components because of lower-than-expected demand for its iPhone5.

But even Apple stock, which fell below $500 a share on Monday for the first time since February, is looking more attractive to value investors, Kuby said.

INTEL FIRST

The bulk of technology companies do not start to report results until next week, but Intel is due out on Thursday.

Among tech's sub-industries, 13 semiconductor companies are expected to report an aggregate 28.4 percent fall in quarterly profit and four semiconductor equipment makers are expected to see a 50.7 percent drop, Thomson Reuters data showed.

Texas Instruments Inc was among top chip companies that have warned on the fourth quarter, along with Applied Materials Inc. Texas Instruments, which last cut its profit target in December, cited restructuring charges. The stock closed on Tuesday at $32.28, off its $34.24 high in March.

Others warnings have come from Cisco Systems Inc, Hewlett Packard Co and Qualcomm Inc.

The S&P 500 tech sector rose 13.2 percent in 2012, about the same as the S&P 500's 13.4 percent gain, but tech stocks by at least one measure have been underperforming since September. The SPDR XLK technology fund ETF ended last quarter with a loss of 6.1 percent, while the S&P 500 was down just 1 percent.

"The S&P 500 peaked in mid-September, had a pullback and it's already pretty close to that September high. Contrasting that, the XLK hasn't even come close to getting back to where it was in September," said Chris Burba, co-founder and chief technical strategist at miAnalysis Inc in New York.

(Reporting by Caroline Valetkevitch; Editing by Tiffany Wu and Andre Grenon)

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Comments (2)
Bob9999 wrote:
As it was with machine tools, so it is with the “technology” sector. During the 19th century, machine tools were hot-hot-hot, because the technology was changing so rapidly that machine tools had to be constantly replaced. Then the technology reached a plateau and machine tools became very cyclical, more or a cash cow, and other industries (eventually, “technology”) started to attract the investment dollars. Of course, “technology” products have shorter life cycles than machinery, so the “technology” sector is probably where machine tools were during the mid-twentieth century.

Jan 15, 2013 5:56pm EST  --  Report as abuse
Azza9 wrote:
Perpetual growth is no more then an economist pipe dream. Even money which can be endlessly printed has it’s absolute limit. And that’s when the paper it needs to be printed on runs out. Same goes with electronic credit currency. Believe it or not but data takes up physical space even if it is just a sequence of electrons trapped in a semiconductor, it has it’s absolute limit even if that number is astronomical.

Even business has to answer to the laws of thermodynamics/ physics. Not even Apple can pull off increasingly growing profits indefinitely, one day they will plateau that’s if they don’t go bust before that (in like 1000 years lol).
There has to be an absolute limit to how much wealth is in a market, a maximum amount of potential money to be coaxed out of the markets wallet. People only have so much maney are willing to spend, even in a credit card spending era. Maybe they have reached their limit or are at least close to it.

Jan 15, 2013 11:41pm EST  --  Report as abuse
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