While investors in the U.S. consider looking abroad for strong investments and diversification, we are fortunate to be able to speak with Zacks senior foreign technology analyst
Robert Perri, CFA about how the technology sector in Europe and elsewhere is progressing nowadays.
Has the sell-off in major markets, in the U.S. especially, been negatively affecting companies in your coverage?
Yes it has. Actually, a lot of the European companies have been down as well; many stocks have been battered with the recent sell-off. The European markets are also down, as well. But you have to be selective. Some stocks that have gone down were selling at lofty valuations to begin with, and while they were knocked down by the weakness in the markets, sometimes it's better that they stay there. While other companies that have been beaten up have been for no reason. So it's good to be selective in what you're looking at.
Is this creating some buying opportunities?
Yes it is. One of my primary Buy stocks is NDS Group (NNDS). They actually reported a great quarter and the stock went up on the day they reported, but then they also reported the day before the market tanked, and it got taken down with the rest of the companies. And it was knocked down more than it went up after great earnings results.
The company NDS is based in the U.K., but they sell throughout the world. They make the smart cards for cable set-top boxes, and they are I think 70% owned by News Corp. (NWS). They have a lot of clients that they get through News Corp., and they're selling at, I think, 18 ½-times earnings. And they've been growing at 15% per year, and we expect that to continue in the near term, at least through 2008, 2009.
So it's even a stronger Buy now that it went down along with the rest of the market, then?
Yes. It's come back a little bit, so it's about where it was after they reported, but it's still only selling at 18.5x our 2008 earnings estimate of $2.58 per share. So we think it could go at least to 20-25x earnings. Around $58 per share is our price target.
In general, how has this earnings season gone for foreign technology companies?
This earnings season has actually been a lot like the first quarter in that a lot of the companies reported solid results, but they've been very cautious about what they expect in the second half [of the year]. Only a select few companies have raised their guidance. In fact, many companies have maintained their guidance after beating estimates in the second quarter. So they're actually effectively lowering guidance for the second half of the year, despite strong results in the second quarter.
Are there any specific success stories that you've seen in Q2?
NDS did well, as I mentioned. They report in U.S. dollars even though they're based in Europe, so the dollar helped their revenues a bit, but it also hindered their margins. But they were still able to cut costs strong enough that it didn't affect their margins so well.
I think 60-70% of their expenses are based in the euro or British pounds - and much less than that of their revenues are derived in those regions. So they overcame that hit to margins, and still reported a great quarter.
Another company that actually did pretty well was SAP (SAP), despite the weakness of the dollar. SAP reported a pretty solid quarter, despite the fact that they had the currency smacking them in the face.
Would you say in general the weak U.S. dollar has helped or hindered your companies more?
A combination of both. Some companies, such as Greenfield Online (SRVY), Business Objects (BOBJ), Turkcell (TKC) and Siliconware Precision Instruments (SPIL), that report in U.S. dollars but are based overseas - Greenfield Online is actually based in the U.S., but a lot of their sales come from overseas, and the same thing for Business Objects - saw the weak dollar actually help them because they have a lot of sales in euros and British pounds and other foreign currencies.
Whereas some companies - as I mentioned, SAP, and some of the Indian outsourcers I follow, Siemens (SI), Phillips (PHG), and actually pretty much the whole, entire European semiconductor industry - have been hit pretty hard by the weak dollar. Because most of those companies derive their revenues in dollars, but most of their expenses are in the euro.
What does the rest of 2007 have in store, from your perspective?
We expect it to be pretty subdued, as opposed to the first half. We expect currency to stay where it is; it might move upwards or downwards in the short term, but we expect it to be around these rates where they are now. If they move either way, it could be good or bad for our companies, but we expect them to stay the same.
And also, there's some interest rate issues with some companies that are a little more debt-laden. So in general, we expect it to be a little more subdued in the second half. Maybe not as strong results in a lot of the companies, as we've seen in the first half of the year.
Robert Perri, CFA is a senior analyst covering the foreign technology markets for Zacks Equity Research.
