Market Risk: Why Upside Moves Will Not Be Easy

07/14/10 — Things are looking up in the technology industry, and one of the best companies to follow in the semiconductor industry isn’t Intel; it’s Novellus Systems, Inc. (NASDAQ/NVLS).

Novellus isn’t the biggest company in the world, but it does belong to the S&P 500 Index. Based in San Jose, CA, this company sells specialized equipment that is used in the fabrication of integrated circuits or semiconductors. These products are the brains of electronic devices. Novellus sells its products all over the world. What it says about its business reveals a telling sign about the health of the technology sector in general. One of the company’s principal competitors is Applied Materials, Inc. (NASDAQ/AMAT).

The company just reported revenues and earnings for the second quarter of 2010 that beat consensus estimates. It also made a solid forecast for the bottom half of the year.
According to Novellus, its second-quarter revenues grew 16% to 321.4 million dollars, up 45.1 million dollars from the first quarter of 2010 and up a whopping 170% from the comparable second quarter of 2009. Net income for the second quarter of 2010 was 63.3 million dollars, or $0.66 per diluted share, up substantially from the first quarter of 2010 and up from a net loss of 50.0 million dollars, or ($0.52) per diluted share, in the comparable quarter last year.

Bookings in the second quarter of 2010 were 384.9 million dollars, up 63.5 million dollars, or 20%, from the first quarter. Company management reported that the current upturn in semiconductor demand is being fueled by growth in worldwide communications. No doubt, all those smartphones are making a difference in the semiconductor industry.

Novellus expects that its third-quarter revenues will increase sequentially to between 335 million dollars and 365 million dollars with an improvement in gross margin and earnings per share.

We’re in the very early days, but a financial report like this is a definite positive sign, particularly as the company expects business to improve through the third and fourth quarters.

The technology industry is certainly one that’s going to be leading the economy. As soon as individuals have more income, they spend more on consumer electronics. As soon as corporations have more cash flow, they upgrade their information technology infrastructure.

What we need from the technology sector is confirmation of improved business conditions in other sub-sectors like software and services. So far, I’d say we’re off to a decent start. I hope it stays this way.