This past issue of TWST featured a very special interview with Chris Evenden, the CEO of NVIDIA (NVDA). A semiconductor company, NVIDIA’s product is primarily graphics cards for the PC. We talked with Mr. Evenden a little bit about how that kind of product will do in the markets we’re facing currently:

Mr. Evenden: The nice thing about working in graphics is that software developers and consumers can always find a use for more graphics power. So we can always continue to differentiate ourselves from the competition. If the competition comes out with something, we can add extra functionality and come out with a better product. There’s always a way to advance and there are few markets in semiconductors that are actually like that…People want more resolution, people want stereo 3D, people want physics simulation, and there’s always an extra use for them.

 Given his rosy opinion of the current state of his particular market in the semiconductor space, we ask Mr. Evenden what he thought were some specific reasons long-term investors should take a look at NVIDIA:

Mr. Evenden: The best reason is that the computer market is leaning toward our area of expertise. Consumers care more about graphics and multimedia, and graphics and multimedia have become a more important part of the PC, the cell phone and even supercomputers. More and more applications are making use of them for things beyond graphics. In the short to medium term, you also have to look at the quality of the company, the fact that our balance sheet is very strong, and how tightly our competition is constrained by their own issues. We are maintaining our investments in R&D. We are being very careful about balancing the need to conserve cash with maintaining investment in areas that will allow us to grow after the recession ends. We’ve seen how the computing market is changing and are very focused on coming out of this recession strongly and using the recession to make NVIDIA a better company.

For the complete interview with Mr. Evenden, taking a closer look at NVIDIA, their focus and his personal expertise, click here.For the Wall Street Transcripts most recent Semiconductor report,click here.  

As in all areas of the market, the semiconductor space was and is being hit hard by the financial crisis. We put together a roundtable panel of analysts on this subject to talk to us a little bit about what companies in the semiconductor space are doing and what they will do to get through these tough times in the market:

• Patrick Ho; Stifel, Nicolaus & Co.: “I think that’s the immediate action that each of the companies is taking. Now some companies have been early to that action and others are playing a bit of catch up. I think you’re going to see two phases of cost cutting: one, which I characterize as structural or more permanent type of cost cutting and then for some companies you’re seeing the temporary cost-cutting measures of shutting down the plants in a weak period of time, taking temporary pay cuts; stuff that will come back eventually when the industry turns.”
• Ben Pang; Caris & Company: “I think until there is better visibility as to what a recovery looks like for this industry, you’re going to see the equipment companies basically buckle down and keep every dollar in their pocket that they possibly can. I would add one other thing. I don’t think that there’s as much fear in this cycle that you’re going to miss something if you really cut expenses back. In the past there was always the fear that a competitor might jump ahead of you by spending more on R&D. I’m getting the sense from most of these companies that they’re not concerned about that at all.”
• Mehdi Hosseini; Friedman, Billings, Ramsey & Co.: “In this environment I think what equipment companies would need to do is rethink and resize again. And all of the resizing that has been done so far may not be enough and they may have to lower their costs one more time so that they are better able to perform in an environment where the growth rate is significantly lowered compared to, say, 10 years ago or five years ago.”

For the complete semiconductor report, including a full overview of this sector with stock picks and an outlook for 2009 and beyond, click here.

One of our other focuses in the current issue of the Wall Street Transcript is on Computer Hardware. We spoke with analyst Yair Reiner about the current state of this space, given how the economic downturn is taking its toll on much of the technology sector. Mr. Reiner told us that despite the economic downturn, there are a few areas in Computer Hardware that may seem some innovation in the coming year:

1. LED Backlighting- “On the notebook side, we’ll see more models offering LED backlighting, building on the trend that was ignited by Apple’s (AAPL) MacBook Air. The advantage of LED backlighting is that it provides a thinner form factor and better energy efficiency than traditional fluorescent backlighting and is also greener when the notebook ultimately has to be disposed of. “
2. Notebook Displays- “We’ll see also more innovation in terms of the form factor of notebook displays, as more models transition to the 16:9 dimension, which is ideal for multimedia applications, such as watching movies.”
3. Touch Screens- “Another area of innovation will be touch screen technology. We’re hearing a lot about the fact that Windows 7 will be touch enabled. Turning the computer screen into a third input device, above and beyond the keyboard and mouse, could transform how and where computers are used both in the home and the enterprise.”

For the complete Computer Hardware report, including an full interview with Mr. Reiner, as well as interviews with additional analysts giving an overview of this space, and stock picks, click here.

Our Off the Record comments this week come from a variety of CEOs and analysts in the Telecommunications Equipment space. Heres what they had to say about their picks:

• AT&T (T): “I would say it’s probably AT&T. I think they have done a great job of going from the smallest of the seven regional Bell companies to becoming the largest. They have a culture of frugality and practicality of execution, and while they are a big company and they have some inherent challenges, I think they have done a very good job of really dominating their sector.”
• Verizon Communications (VZ): “I think you have to step back and look at Verizon and not lose sight of what they’ve accomplished. I think if you look at the last eight or nine years, they’ve assembled themselves into a national company with a national footprint. They organized it, they got it running efficiently, they focused the company on a large national market. So I think Verizon has done a good job.”
• Cbeyond (CBEY): “On the services side, one company that continues to impress me — I was impressed the first time I heard Jim Geiger speak — is Cbeyond. That’s a company that continues to execute despite the slowdowns as far as getting customers to sign up for new services. This is continually an impressive company to me.”

For the full Telecommunication Equipment report, including the complete Off the Record review of this space, as a roundtable discussion of the space and outlook for 2009, click here.

Our special focus this week is on telecommunications equipment. The most recent boom in this space has of course been for Smartphone technology. The question that arises is whether or not his boom will continue and act as a cushion for the telecom space in this bleak market. Here’s what analysts Pablo Perez-Fernandez of Global Crown Capital and Mark McKechnie of American Technology Research had to say:

Mr. Perez-Fernandez: To some extent it’s going to be less affected than other sectors mainly because the growth rate of smart phones has been so much bigger than almost everything else in telecom. Nonetheless, some of the data that came out in the last quarter said that the growth rate has collapsed below 20%. So that’s been affected.

Mr. McKechnie: Our overall industry forecast for handsets, we’re looking at units down 12% year over year in 2009. That’s going to be down 10% or 15%, it’s hard to say, but the overall industry is facing a headwind and clearly handsets are an economically sensitive item, like tennis shoes. ..Smartphones as a percentage of overall handsets are going to grow and so you could see some absolute growth, but there’s no question that that headwind is going to slow down the hyper growth that we’ve seen up until now.

For the complete Telecommunication Equipment issue, including a complete overview of this space and stock picks, click here. 

For our other special focus this week on Homeland Security, we spoke with analyst Brian Ruttenbur of Morgan Keegan & Co. about the state of this space. He told us of one area in Homeland Security that investors should look for opportunities: Asymmetric Warfare.

 TWST: Are there any other areas that are of interest at this point, Brian?

Mr. Ruttenbur: Asymmetric warfare — giving the tools to first responders or to the soldiers out in the field to make their intelligence quicker, smarter and bringing it all back into a central network. Predator drone is one example, but there are a lot of examples out there with night vision equipment and other things like that. Asymmetric warfare started with the Defense Department and is now overlapping into homeland security to make our border patrol and other law enforcement agencies leverage their time and their abilities just as soldiers do.

For the complete report on Homeland Security and Defense Technology, including a complete overview of both spaces and stock picks, click here. 

Despite the tough times ahead for Aerospace and Defense, some analysts are seeing opportunities to invest in high quality companies. Alex Hamilton of Jesup & Lamont still feels, despite the economic environment, the following are quality companies that will weather the storm:

1. Goodrich Corporation (GR)-  “I like Goodrich. They have a blue chip management team and an extraordinarily cheap valuation. They’re well exposed to the OE side and they’re well exposed to the aftermarket side.”
2. B/E Aerospace (BEAV)- “B/E Aerospace is a company that a few months ago made a $1 billion plus acquisition of Honeywell’s (HON) Consumables Solutions Distribution business, which is an aftermarket business. So I think this is a company that has come a long way. This is a company that has diversified themselves into business jets, into aftermarket, the A380, the 787, and I think they’re one of the best-positioned names in terms of diversity. They’ve done a really good job of managing their balance sheet up until this acquisition and they’ve been through downturns before. They’re a well seasoned management team and I think they’ll be able to navigate through it again.”
3. Rockwell Collins (COL)- “Rockwell Collins is an interesting model where half of their business is defense, with a concentration on avionics that benefits from government funded programs, and they leverage that onto the commercial side of their business. So as you can imagine, they have some of the highest margins in the business…I think that their leadership is fantastic and I think Collins’ margins are going to hold up in this downturn. They have very little debt, they have good cash flow generation, they’re profitable and have top leadership.”

For the complete Aerospace & Defense report, including a complete overview of the state of this sector in this tough economic time and more stock picks, click here. 

With President Elect Obama coming into office on January 20th, the stage has been set for the “change”. The only question now is: what will it look like? In our special focus on Aerospace and Defense this week, we spoke to Rick Whittington of JSA Research about what President Elect Obama’s priorities will be in terms of defense spending, and how it will effect companies in this space:

The new President-elect has been pretty clear and his policies and tenor of office I think are already pretty well sketched out. He wants to shift to domestic priorities and away from military.

We ask Mr. Whittington if there was anywhere to look in the military space. Are there any winners in there?

In the defense area, among the large pure plays, no. They’re all losers. We downgraded everything the day after the election and we had already downgraded some previously, but we finished that off and our message to investors is stay away from the military-exposed companies and focus on the commercial. There are going to be no winners in the short term.

That being said, this decrease in focus on military spending is not something that Mr. Whittington is unfamiliar with:

We’ve been here before, so it’s not new and in the past 50 years, we’ve had three instances where military spending was sharply curtailed after a significant upturn and so I think we know what to expect.

For the full Aerospace & Defense issue, including a complete overview of the sector, including interviews with CEOs of top companies and stock picks in the turbulent time, click here.

Our other special focus this week is on Internet Infrastructure. We spoke with analyst Rodney Ratliff of Stanford Group Company about his top picks in this space during this turbulent time for the markets:

1. Akamai Technologies (AKAM)- “ My favorite stock right now, the one I picked for our monthly focus list, is Akamai. You are talking about a company that is generating ridiculous amounts of free cash flow. In the most recent quarter, Akamai generated $70 million in cash flow from operations. In terms of free cash flow, in fiscal year 2008, I am projecting that they are going to generate about $158 million in free cash flow…So in terms of self-funded status and the ability to weather even a prolonged downturn, I think we are looking at a winner here, especially considering the stock’s trading now near a five-year low.”
2. Equinix (EQIX)- “The appeal there is simple. Content has gotten so dense, and so bandwidth intense, and is only going to get more so…Equinix can provide for customers a data center with a massive footprint that features the availability of 250 or so network providers in any given individual data center, 24/7 support and very effective ventilation and air conditioning to keep equipment running optimally. The biggest appeal is the availability of a wide selection of networks providers, which enable the client to bid network providers against each other which improves cost of operation. So it comes down to build versus buy.”

For the complete internet infrastructure report, including the full interview with Mr. Ratliff, and other analysts giving a fuller picture of investment opportunities in this space, click here.

Moving back to our focus this week on semiconductors, we asked the analysts on our roundtable to talk to us a little bit about what they hear from investors in this space. Here’s what they’re hearing about investor interest in semiconductors:

“I think that there is modest interest in this space. I don’t have people calling me and saying, “I have to get long in the semis right now because this is the best sector to be in since sliced bread.” I am certainly not getting that, but I do get people looking more at longs than at shorts.”

“In the communications space, and more specifically in small cap communications names, there has been very little appetite of late among investors. I think that in these kinds of markets where there is uncertainty, many of the investors that I talk with move toward larger and more defensive positions in companies that have less leverage, but a little more predictable earnings power.”

“My sense is that investors want to get more positive on semiconductors. They want to find reasons to start investing. If you think about it, valuations are pretty attractive and sentiment has been beaten down. These are good elements to the stock thesis now. The problem is demand and the health of the industry and of the end markets. The long-term investors that I talk to are looking for companies out there with compelling technologies that enable share gain and significant growth over time. That is what the longer-term guys are looking for.”

For the complete roundtable forum on semiconductors, including an outlook for this space and stock picks, click here.