by David Aurelio.
As the S&P 500’s 19Q1 earnings season enters the final stretch, Broadcom Inc (AVGO.OQ) delivered a heavy blow to the Semiconductors and Semiconductor Equipment industry when they reported revenue below expectations and provided a cautionary warning related to U.S. China trade and OEM inventory levels.
Nearly all of the S&P 500 companies (496) have reported 19Q1 earnings and roughly three quarters (75.6%) have beat expectations. As a result, first quarter earnings are now expected to increase 1.6%. This is an improvement from the expected two percent decline and earnings recession that was expected at the beginning of the of earnings season back on Apr. 1, 2019. However, just as investors may have warmed up to the idea that an earnings recession isn’t expected, a report from semiconductor giant Broadcom has caused many to take note.
Broadcom’s conference call is significant due to the change in their outlook for a recovery in the second half, emphasis on the potential impact of the U.S.- China trade conflict, and highlights of OEMs risk reduction through decreased inventory.
During the earnings call, Hock E. Tan, Broadcom Inc. – CEO, President & Executive Director, said, “Let me address the current business environment and our outlook for the remainder of the year. We have, as I indicated, performed very much to plan in the first half of fiscal ’19. And in the second half, we had expected a recovery. However, while enterprise and mainframe software demand remained stable, particularly in North America and Europe, with respect to semiconductors, it is clear that the U.S.- China trade conflict, including the Huawei export ban, is creating economic and political uncertainty and reducing visibility for our global OEM customers. As a result, demand volatility has increased and our customers are actively reducing inventory levels to manage risks. This leads us to believe the second half of 2019 will be more in line with the first half as opposed to the previously expected recovery. We now anticipate fiscal 2019 semiconductor solutions segment revenue of $17.5 billion, which translates into a year-over-year decline in the high single digits.”
Exhibit 1: S&P 500 Inventory to Total Assets Ratios by Sub-Industry
Inventory to total assets for the technology hardware, storage & peripherals sub-industry is expected to decline to 3.7% in 19Q2 from 3.9% in 18Q2. Apple Inc (AAPL.OQ) is expected to see inventory to assets of 1.4% in 19Q2 vs. 1.7% in 18Q2 and HP Inc (HPQ.N) is expected to be 16.7% in 19Q2 vs. 17.8% in the prior year. Therefore, it appears that analysts are also expecting many OEMs will reduce risk through inventory management.