July 2011 Tech Earnings 1.3: CAPEX Thoughts
I just spent some time reading through ERIC and T notes, but before I detail some thoughts on CAPEX a quick comment on FFIV which I wrote about on June 23. To me it looks like an EPS beat on tax and the growth rate is contracting ~400-500bps Q/Q. That is not a good trend for a high multiple stock. FFIV is a great company, but going forward they will have a lower multiple. It is not the end of the world, just the way things work.
On to ATT CAPEX and I have already seen five notes telling me about a lagging indicator which is the Q2 CAPEX number from ATT. All of these notes took the ATT CAPEX number as positive indicator for several networking infrastructure stocks. A few months back we had CIEN report and then comments from the JNPR CEO and today we had no information from ERIC which always makes investors happier so what should a person make out of the big quarterly CAPEX print of $5.35B from ATT – yet the less than bullish comments from optical and routing/switching companies?
Here is a chart that shows the quarterly CAPEX profile for T from 2007 through the end of 2011 and I estimated 2011 Q3/Q4 CAPEX based on commentary from the CFO that T would spend closer to $20B in CAPEX for 2011.
T is an important indicator for the health of the economy as well as tech in general; just as WMT and FDX are important indicators for the US and global economies. On the surface the CAPEX print today combined with guidance seems bullish. However, look at this second chart that I marked. Does 2011 look like 2008? As I stated before, I am not a big history repeats itself person, but there are some similarities between 2011 and 2008. 2008 was BSC then LEH, mortgage crisis and credit crisis meltdown. 2011 is Greece, Ireland, Spain, Portugal, Italy and the US debt ceiling talks. I am not worried about a US default. If that happens we have bigger problems, but I am concerned with Europe and the slowness of the US economy and the overnight numbers from China were not great. In August, we are going to hear from CSCO who will be the first big tech company to tell us about July.
In September, we should hear from CIEN and they will tell us about their views for the 2H of 2011. On September 4 2008, despite the run in T CAPEX, CIEN was one of the first companies to lower expectations based on a contraction of CAPEX. LEH declared bankruptcy ten days later. CAPEX for T in 2009 and 2010 both started from lower Q1 bases and built through the year. These were also the years of QE1 and QE2 and what I had termed the spending catch-up cycle which I now think is at a close as evidence by FFIV, STX, RVBD, etc. The red dot at the bottom right of the chart, that is where I would expect T CAPEX to start in 2012 if 2011 is a repeat of 2008 CAPEX spend. If that is the case, then forward expectations in the market are too high and CxOs have been telling us that for a few months. I still believe in product cycles and this is merely a hypothesis by me and I could easily be wrong.
* It is all about the network stupid, because it is all about compute. *
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