01.08.07 TVR Hotline: Still searching...Day 3

In tonight's Hotline:
Walked in wonderment at all there was to put in my ear
S and TLAB fall flat

First day among the booths today, and what sights to behold! I have never, ever seen so many obviously similar handset earpieces and headsets in my life. So much product overlap there was among the various vendors of Bluetooth-enabled headgear that I stopped looking for anything new altogether. Call it the "Bud Bubble".

Still, in my search for relevant innovation (I'll keep using that...Thank's, Philips!), I stumbled upon some interesting developments in GPS-enabled navigation and the many great tangential technologies one can include in nav devices, like on-the-road messaging, family locators and - the easiest - great music and video.

I wasn't wowed by Mowrey Portfolio Compiler (MPC) member Hewlett Packard's (HPQ-$41.97) booth, though I had not expected to be. Not the most adventurous company, HP is, and that's how I like them. Buckingham TechValue Portfolio (BTVP) member Nokia (NOK-$19.64) showed phones more cool and sleek (yes, I did say that), and showcased the new handheld Internet tablet that I demoed last evening, substantiating the wireless gear maker's current residence on our recommended stock list.

I had a nice long chat with the new CFO at SigmaTel (SGTL-$3.79), which eased my concerns about the recent management transitions, the Q4 stall, the company's product roadmap and our continued interest in the shares. Loving the cash on the balance sheet, we're still buyers as of today's close.

MPC member Seagate Technology (STX-$25.86) displayed some interesting ways to keep storage relevant in a commoditized world, showcasing a host of different drive form factors with various software implementations intended for use in different roles. There was the plain vanilla network attached backup systems from the acquired Maxtor lines. And then there was the Mirra server, intended for folks who really need online access to critical files stored elsewhere. Both, we've seen before. They were accompanied by the new FreeAgent drives. One is intended for "moving" data from place to place - from the home PC to an online backup service or a photo printing site, for example. Another is for folks who want to take their data and their computing environments with them on the road. I went away impressed, if not overwhelmed. We are talking about a storage company after all.

Other takeaways today:
* LCD picture frames are standard issue for the imaging folks and a host of others - Kodak had seemingly zillions of them all over the place in their booth.
* HP showed a cool picture printing station, something I might use if one were to show up at a store near me.
* LCDs were everywhere, though they weren't the show this year like they were last year, instead they played a more supportive role (Of course, I haven't yet made it over to the Philips, Samsung, Sharp and Sony booths yet.)
* Lots more folks getting into the video processing chip business - may get even uglier there.
* When we come out of the housing slump, builders will have lots of cool stuff to fab into homes - including that giant Sharp 108-inch LCD of which I wrote yesterday and all sorts of funky speaker and display systems.
* SanDisk's flash drive is interesting, but only the flash folks and the uber-mobile think such drives will change the way we compute any time soon.
* I need to walk faster tomorrow to make sure I get it all in. In fact, I'm staying another day, now, reversing an earlier departure I set up right before I left.

While I'm writing, there were a few notable non-CES events to discuss this past week. You all know that saying - "things'll probably get worse before they get better"? Such was the case with telecom focused Network Equipment Technologies (NWK-$7.42), a stock I purchased at $5.37 in April 2005, only to see the shares plunge to $2.65 before new management was able to bring order to the operations, trim costs and redirect the company on a path to growth. The shares have rebounded 180 percent since that low.

Knock on wood, of course, as the tide certainly can turn against us again. But my experience with NWK is another great example of why patience is for sure a virtue when it comes to investing in general, and seemingly in particular within the world of tech stocks.

That patience I tapped into again this week in response to two notable guidance downgrades from MPC members. Way late last Friday evening, Tellabs (TLAB-$10.25) dropped a Q4 preliminary estimate bomb, offering guidance for adjusted EPS of $0.10 to $0.12 on revenue of $455 million to $470 million. At the time, analysts polled by Reuters Estimates had been modeling EPS of $0.14 on revenue of $534 million. Management blamed the shortfall on industry consolidation (that excuse is aging...poorly), with specific causes of lower than expected North American revenue, an unfavorable shift in product mix and revenue deferrals related to a new product launch, offset by a lower effective tax rate.

The stock wasn't off today as much as one might have expected, about 4.4 percent, with the company's still strong balance sheet, attractive customer base, strong technology foundation and higher than average rank on the prospective consolidation targets list probably serving as support. Those characteristics keep us buyers of the stock as of today's close, even though we trimmed our target prices to reflect the quarter's weakness.

Still, no fun being down so much in one stock. Happily, the rest of the portfolio has held up pretty well in the still young New Year. All except for shares of relatively recent addition Sprint Nextel (S-$19.64). Readers will note that they're still up for the year. But they likely won't be by tomorrow's close. The wireless carrier warned after the bell today that revenue would likely be flat to modestly higher this year, coming in between $41 billion and $42 billion, while investments in WiMax and other infrastructure-related efforts will hinder profitability. Operating income is expected to range between $11.0 billion and $11.5 billion, versus an average analyst expectation for around $2 billion more. Capital expenditures are expected to total $8.5 billion in 2007, with $7.1 billion going to core wireless networks and spectrum re-banding efforts, $600 million for wireline networks and up to $800 million for the company's WiMAX initiative.

The effects of higher capex already began to show up in the fourth quarter, during which operating income came in well below consensus. A greater than expected defection of users who get monthly bills (postpaid, as opposed to the prepaid set) also worries many that the company is losing share to other players as the percentage of folks currently without wireless phones in the U.S. narrows.

Investor reaction was sharply and immediately negative. The shares dropped more than 8 percent in the after hours.

Despite a very annoying (customer service related) start to my marriage to Sprint, I still very much like the company and its accelerated path up the wireless technology curve, an attraction that, coupled with the stock's reasonable valuation metrics, makes us buyer as of today's close.

I do wish they'd be more focused on the now, with earlier launches of important phones, though I like the company's relatively robust service range. Still, we cut our target prices to reflect the declining profitability.

Hopefully more to share tomorrow evening, when I'll have visited the Intel (INTC-$21.01), Microsoft (MSFT-$29.93), Texas Instruments (TXN-$28.90) booths. Off to another meeting...

M.M.

Al Frank Asset Management, Inc.
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