This earnings season, the U.S. technology industry is in an unusual
position - dragging corporate America down, rather than lifting it up.
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.
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.
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.
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.
The bulk of technology companies do not start to report results until next week, but Intel is due out on Thursday.
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.
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.
© Thomson Reuters 2012