(LOGI) - (IFX) - Time for Caution Regarding EuroTech

With the markets continuing their upward swing in light of good early numbers this earnings season, it put us in mind of how markets may be progressing overseas. We recently met with senior European and Asian technology analyst Robert Perri, CFA to find out if the positive aspects of the U.S. markets are carrying over into the regions he covers. We’ve noticed a few downgrades for some of your EuroTech coverage lately. Why the bearishness? I haven’t been completely bearish on EuroTech, but I do believe two segments of the market have been ahead of themselves within the segment. My feeling is that the European Semiconductors and the IT Security firms are trading at valuations that are unjustified at this time, which has led me to downgrade a few of the companies in this segment. Our belief is that some areas of technology – including software and services – still have a lot of upside potential, but we are being cautious when we feel valuations get ahead of expectations. Do you find that lower oil prices and the continued economic growth across Europe thus far may be turning your outlook more positive for this group in the near term? These issues have given us a bit more hope for the second half of the year, but we remain cautious. Lower oil prices should help consumers relieve some of the inflationary pressures they have been experiencing recently in Europe, which should help with consumer spending which has been much weaker than in the U.S. Another positive sign for European Tech firms is the recent weakness in the Euro against the U.S. Dollar. The weak Euro and the lower oil prices should help boost European exports in the second half, which could bode well for the fourth quarter. How are stocks in Asia – particularly China and India – progressing? Are they becoming less volatile than they had been previously? Are their valuations still reasonable? For the past few years, stocks in India and China have been on a straight line upwards. During the summer, there was a slight pull-back in these stock markets that we felt was overly negative, although a pull-back now and then is a good thing. Investors became concerned that a global slowdown was on the way, and the markets suffered. Currently, investors are starting to believe there will be a soft landing across the global economic front and the markets have risen to previous levels. We believe that India and China still offer strong growth prospects and over the long term we believe that these valuations are justified, although now we are at the point where companies in China and India have to prove their valuations are justified by producing solid results. The volatility is still there, and the volatility may increase as an inevitable shake-out of the pretenders from the solid companies occurs, but this is a good thing in the long term. What are your top Buy and Sell recommendations at this time? I continue to be a believer in Logitech (LOGI), as I believe the stock is still not reflecting its true potential in the near-term. Logitech’s modestly priced offerings also should help the company maintain growth, and lower oil prices should lower its shipping costs as most of its products are produced in Asia and sold around the world. The company has introduced several new products, including wireless headphones for MP3 players and new controllers for the PS3 and Xbox 360 that should boost sales going into the Christmas selling season. The company is coming off a very solid fiscal first quarter, and we expect the second quarter to be strong in what is typically weak. We expect shares of LOGI to trade around 25x our 2007 EPADS estimate, or around $25 in the next six months. As I mentioned earlier, I also remain cautious on the European Semiconductor industry, specifically, Infineon (IFX). Infineon’s stock price has risen recently, as it sold off its memory business in an IPO, which raised only half the proceeds expected. The remaining company has two divisions: the Automotive, Industrial and Multi-Market (AIM) division and the Communications division. The AIM division is profitable and continues to perform well, although the recent weakness in the automotive sector doesn’t bode well for this quarter. The Communications division (COMs), on the other hand, has lost money for eight straight quarters, and we expect this to continue into next year. The results of the COMs division continually drag down the company’s overall results, and it is one of the primary reasons IFX has been losing money for six straight quarters, while most of the semiconductor industry has been strong. Additionally, we are now projecting a slowdown in the semiconductor industry in 2007, which should hinder any chances of a turn-around in the company’s profitability. We do expect Infineon to report a profit this quarter, as its gain from the IPO of Qimondo (Its Memory Division) should boost results, but management has missed many of its targets in the past, which doesn’t give us confidence it will be able to execute now. For investors looking to increase exposure to technology outside the U.S. at this time, what advice would you give them? My advice would be to be a bit more cautious now, if you already have money invested outside the U.S., I would maintain those positions, but I would be cautious about adding to those positions at this time. The European markets have had a great year in 2006, and most of the economies in Europe are finally starting to perform in-line with expectations. One other issue when investing abroad is currency, and right now we are in a period of a weakening Euro and a strengthening U.S. Dollar, so instead of having a tailwind helping your returns, there is currently a headwind when investing in Europe that could eat into returns at this time. If I did decide to add to my exposure outside the U.S., I would look for areas that have lagged in the previous year that may be poised for growth. Rob Perri, CFA is a senior analyst covering the European and Asian technology industries for Zacks Equity Research. About Zacks Analyst Interviews Zacks Equity Research employs 50 stock analysts who are experts in the industries they cover. In these articles you will discover our analyst's insights on key industries in the news along with their favorite stocks to buy and sell now. 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