Thu11272014

Business & Real Estate

Brace for quarterly earnings surprises

Starting this week, we are headed into the earnings season, which could bring some healthy – and unhealthy – surprises. The market remains bullish, and it would need to suffer a significant correction over the next three to 10 weeks to become bearish.

A surprisingly strong employment report July 3 pleased investors and lifted most major averages to all-time highs, reconfirming the bullish trend. Then the Federal Reserve indicated a potential end to its monthly asset purchase program and revealed plans to raise interest rates – and the market fell big-time.

Boasting a gain of 3.25 percent for the year, the Dow Jones industrial average remains the go-to measure for the market, and pundit and negative conversations will revolve around entering a correction or continued record highs.

The Dow hitting 17,000 has no fundamental importance, but the quarterly earnings reports released over the next two weeks will determine the market’s direction. While trading is likely to become more volatile – a 5-10 percent pullback could occur with little or no warning – I am still maintaining a nearly fully invested position.

Two Town Crier “50” stocks are in the news.

• Intel Corp (INTC; $31.37) increased its quarterly and yearly revenue forecasts last month in view of its upcoming battle with Cisco Systems Inc. over Internet standards. Second-quarter earnings were scheduled for announcement Tuesday, after the Town Crier’s press deadline.

Analysts estimate revenue for the second quarter to total $13.68 billion, with earnings per share at 52 cents – compared with first-quarter earnings of $12.8 billion and earnings per share at 38 cents.

Intel reports that it plans to partner with Samsung Electronics Co. Ltd., Dell Inc. and Broadcom Corp. to form the Open Interconnect Consortium to create standards for how devices will work together in the Internet of Things. The collaboration will rival another group, the AllSeen Alliance, which includes Cisco, Microsoft Corp. and Qualcomm Inc., with slightly different standards. Cisco has the most to lose, because it relies on other companies’ devices that are used in network, database and cloud services.

The technology industry is experiencing a surge from personal consumers, thanks to tablet sales, which should boost Intel.

The upgrade and downgrade history reveals that few analysts rate Intel a strong buy, and 24 suggest a hold. The median target price for stock is $30, with a high of $40.

• KLA-Tencor Corp. (KLAC; $74.70) last week declared its intent to hike its quarterly dividend by 5 cents to 50 cents per share. That translates to an 11 percent bump in August. The company will also increase its stock buy-back program by 13 million shares.

The Milpitas-based firm is the leading manufacturer of process control equipment and yield management solutions for the semiconductor and nanoelectronics industries worldwide.

The strength of KLA’s business model is reflected in its cash generation capabilities and commitment to returning value to shareholders. Bookings in the fiscal fourth quarter were close to $895 million, higher than expected because of demand from contract chip manufacturers.

KLA-Tencor expects bookings in the June quarter between $625 million and $825 million. The company will conduct a live audio webcast to review its fourth-quarter results 2 p.m. July 24.

The recent upgrade and downgrade history has been based on sector performance, with several analysts recommending a strong buy or a hold. The median target price for stock is $74, with a high of $86. The dividend yield is 2.6 percent.

Clyde Noel is a Los Altos Hills resident and longtime investor in stock. Disclosure: He has a small investment in both companies in his retirement fund.

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