By Eric Martin and Michael Tsang
April 27 (Bloomberg) -- Technology companies are piling up cash and cutting debt faster than any other industry, a signal to investors that they will rally even as evidence mounts that the stock market’s fastest advance since 1938 is in jeopardy.
Cisco Systems Inc., Salesforce.com Inc. and Cognizant Technology Solutions Corp. have driven technology shares in the Standard & Poor’s 500 Index to a 16 percent gain in 2009, the best start since 1998 and the most among the 10 industries in the measure. Money managers are betting the cash reserves, rising profits and cheapest valuations on record will send U.S. technology stocks up 24 percent this year, compared with an increase of less than 1 percent for the S&P 500, according to analyst price forecasts and data compiled by Bloomberg.
The S&P 500 fell 0.4 percent last week, the first drop since early March, after bank losses increased and the International Monetary Fund said world economies may contract for another year. MFS Investment Management, Harris Private Bank and Huntington Bancshares Inc. say computer and software makers may climb even as the rest of the market retreats.
“If you are putting money into the market, that’s the first place to look,” said James Swanson, Boston-based chief investment strategist at MFS, which oversees $134 billion. “They have cash on their balance sheets, they don’t have a lot of requirements to pay back debt, and valuations on the stocks are amazingly low. It’s a winner.”
Futures on the S&P 500 slipped 1.6 percent at 11:35 a.m. in London today as the swine flu outbreak spread and Lawrence Summers said the U.S. economy will keep contracting.
Most in Cash
Technology companies in the S&P 500 hold 19 percent of their assets in cash on average and have the least debt relative to overall value at 17 percent, according to data compiled by Bloomberg. Of the 75 companies in the S&P 500 Information Technology Index, 18 have no borrowings, including Cupertino, California-based Apple Inc., Mountain View, California-based Google Inc. and Qualcomm Inc. in San Diego. Among the remaining 425 companies in the index, only 12 have no debt, data show.
Corporate budgets for technology spending will increase in 2010 as equipment updates spur a 5.5 percent rise in computer shipments and a recovery in server sales, UBS AG said in a report to clients dated April 8. The Zurich-based firm’s survey of chief information officers in the U.S. and Europe showed they expect spending to climb after dropping 5.1 percent this year.
Global Recession
Prospects the first global recession since World War II would halt business upgrades and reduce consumer spending sent the technology index down as much as 55 percent from its October 2007 high. The gauge fetched 7.2 times its companies’ average cash flow last month, the lowest level in at least 16 years.
Even as Microsoft Corp. reported its first revenue decline since the company went public in 1986 last week, technology earnings held up better than other industries whose profits rely on economic growth.
Unlike banks, energy producers, retailers, mining companies and phone providers, computer makers in the S&P 500 haven’t lost money on a combined basis in any quarter since the bear market began, according to data compiled by Bloomberg. Industrial companies, makers of consumer staples, utilities and health-care providers also haven’t posted deficits.
A prolonged recession may delay a recovery in consumer and business spending and cause the rally in technology stocks to unravel, according to Stephanie Giroux, chief investment strategist for TD Ameritrade Holding Corp., an Omaha, Nebraska- based online brokerage with $225 billion in client assets.
IMF Forecast
The Washington-based IMF said in a forecast released April 22 that the world economy will shrink 1.3 percent this year, compared with its January projection of 0.5 percent growth. The lender predicted expansion of 1.9 percent next year instead of its earlier 3 percent estimate.
The contraction, which has already thrown 5.1 million Americans out of work, will push the U.S. jobless rate to 9.5 percent by year-end, economists surveyed by Bloomberg predict. Analysts who say corporate America will halt nine quarters of profit declines by the end of the year have proven to be too optimistic in every period since the third quarter of 2007, data compiled by Bloomberg show.
“The rally is reflecting a more bullish economic recovery than is likely to pan out,” said TD Ameritrade’s Giroux. “You have to be careful about some of these sectors that have run too far, too fast.”
Technology companies will benefit more as the economy emerges from $1.34 trillion in global bank losses and the highest unemployment rate in 25 years when businesses spend on equipment to make up for fired workers, according to Genesis Asset Management’s Michael Williams.
‘At The Dock’
Companies excluding banks, brokerages and insurers in the Russell 3000, which represents 98 percent of the value of U.S. stocks, have a combined $787 billion of cash, according to data compiled by Bloomberg. That’s twice the level at the end of the last bear market in 2002. They will use some of it to buy computers and make acquisitions, Williams said.
“We believe tech is leaving everybody at the dock,” said Williams, who oversees about $880 million as chief executive officer of Genesis Asset in New York. “We were aggressive, aggressive buyers. No one has liked technology for so long you’d be hard-pressed to remember there was a bubble 10 years ago.”
Williams said the firm owns shares of Cisco, the world’s biggest maker of networking equipment.
Cisco Shares
Shares of San Jose, California-based Cisco climbed 15 percent in March, when it traded at 6.4 times cash flow. That was the lowest valuation ever and 59 percent less than the five- year average, data compiled by Bloomberg show.
Salesforce.com added 25 percent this year as the world’s largest seller of Internet-based customer-management software said fourth-quarter earnings rose 86 percent and predicted full- year profit growth that beat analysts’ estimates.
The San Francisco-based company, which delivers its programs to subscribers online, has no debt and cash reserves that account for 33 percent of its assets. That’s the second- highest ratio among S&P 500 software suppliers.
“As companies need to economize and improve their operations, technology is a logical choice,” said Jack Ablin, chief investment officer at Chicago-based Harris Private Bank, which oversees $60 billion. “They view that they’ll get a return from their investment.”
Cognizant’s Cash
Cognizant is the only S&P 500 company that has at least 30 percent of its assets in cash, a stock price that’s less than 15 times estimated 2009 profit and is expected to earn more this year than it did in the previous 12 months, according to data compiled by Bloomberg.
The company, which sells on-site computer support, hasn’t had a decline in quarterly earnings since going public in 1998. First-quarter profit will rise 14 percent when it reports next month, analysts’ estimates show.
While shares of Teaneck, New Jersey-based Cognizant have climbed 27 percent this year, the average price forecast from analysts shows the stock will rise 19 percent in the next 12 months.
Technology makers are using cash to fund acquisitions and expand into new businesses. Cisco CEO John Chambers said in February he plans to use the company’s $29.5 billion in cash, the most of any U.S. technology company, to add product lines. He’s pushing into the market for data centers, the rooms of computers that store information and files, to boost sales.
Technology Takeovers
Sun Microsystems Inc., located in Santa Clara, California, has more than doubled this year after Redwood City, California- based Oracle Corp. agreed to buy the server maker for $7.4 billion. Sun shares dropped 79 percent in 2008.
Debt-free Broadcom Corp., a maker of semiconductors for headsets and televisions, offered $764 million for Emulex Corp., a provider of chips for data centers.
That raised the odds Cisco or Sunnyvale, California-based Juniper Networks Inc. will bid for QLogic Corp., a rival of Emulex, Morgan Keegan Inc. said. Costa Mesa, California-based Emulex gained 47 percent on April 21 following the offer. QLogic, located in Aliso Viejo, California, added 19 percent.
“The values are certainly there,” said Randy Bateman, chief investment officer at the asset management unit of Huntington Bancshares, which oversees $13 billion. “The more cash you’ve got on hand, the better off you will be.”
Bateman’s firm bought Cisco and Armonk, New York-based International Business Machines Corp. because they may benefit from acquiring smaller companies at bargain prices.
Hedge Funds
Some of the world’s biggest hedge funds have taken notice. Westport, Connecticut-based Bridgewater Associates Inc. bought a stake in Cisco. Steven Cohen’s Stamford, Connecticut-based SAC Capital Advisors LLC bought more Salesforce.com stock. Lee Ainslie’s Maverick Capital Ltd. in New York lifted shareholdings in Cognizant at the end of 2008, SEC filings show. The three hedge funds manage more than $50 billion.
The last time the technology index started a year with a bigger rally, it continued. The measure rose 29 percent in 1998 through April 24 and went on to climb another 38 percent. The gauge surged 16-fold during the 1990s before peaking in March 2000 and then plunging 83 percent through October 2002.
The advance a decade ago was spurred by the likes of Pets.com Inc., which closed after burning through cash raised in its 2000 initial public offering in less than a year, and GeoCities, a Web-site hosting company that Yahoo! Inc. bought in 1999 and said last week it would shut. Investors say the current rise is different because it’s being driven by mature businesses with little or no debt.
“Technology has come to the forefront, and we believe the answer is low leverage,” said Richard Weiss, who oversees about $50 billion as chief investment officer at City National Bank in Beverly Hills, California. “The lack of debt problems, liquidity problems is allowing them to do things that other companies and industries may not be able to do.”
To contact the reporters on this story: Eric Martin in New York at emartin21@bloomberg.net; Michael Tsang in New York at mtsang1@bloomberg.net.
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