M Update Hon Hai Precision | Asia Pacific December 2, 2024 03:46 AM GMT Our Take on the GB200 Server Rack Delivery and Order Trend What's new? Commercial Times reported today that Microsoft has cut its GB200 server rack orders by 40% and transferred part of the orders to GB300 server racks. This is because GB200 mass production will likely be delayed into March 2025 due to technological bottlenecks for cartridge connector design. Digitimes also reported today that xAI has placed an order for 1,600 GB200 ser ...

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Summary of Key Points from the Conference Call Industry Overview - **Industry**: Aerospace & Defense Electronics - **Date**: November 19, 2024 - **Focus**: IT Services and Federal Civil Exposure Core Insights and Arguments 1. **Impact of DOGE on IT Services**: IT services stocks have declined by 21% since the introduction of the Department of Government Efficiency (DOGE), reflecting uncertainty regarding efficiency measures and their implementation [2][2][2] 2. **Valuation Metrics**: The average IT services stock is trading at a premium of 8% on P/E and 3% on EV/EBITDA compared to the 3-year average, indicating that despite the selloff, stocks are not particularly cheap [2][2][2] 3. **Federal Civil Exposure**: The average civil exposure for companies in the sector is 30%, with a potential risk to revenue growth and margins due to DOGE initiatives [2][2][2] 4. **EPS Sensitivity**: A 1 percentage point change in Federal Civil revenue growth impacts EPS by approximately 0.4%, while a 50 basis point drop in margins affects EPS by 1.4% [2][2][2] 5. **Company-Specific Insights**: - **BAH**: Generates approximately $4 billion from Federal Civil, with a 34% sales contribution. The civil segment has shown a 14% organic CAGR over the past five years [11][11][11] - **CACI**: Federal Civil sales account for 21% of total sales, down from 26%. The company is focusing on higher-margin DoD contracts, which have grown to 74% of total sales [39][39][39] - **LDOS**: Similar sensitivity to civil pressures, with a notable impact on EPS from changes in civil revenue and margins [2][2][2] Additional Important Content 1. **Contract Obligations**: FY2023 contract obligations totaled $759 billion, with $456 billion for the DoD and $303 billion for civilian agencies, indicating a significant market size [2][2][2] 2. **Market Sentiment**: Negative sentiment could lead to an average 6% impact on shares if the group faces a 5-point discount to the S&P 500 [5][5][5] 3. **Long-Term Contracts**: The average contract duration for civil work is five years, which may provide some stability despite current uncertainties [2][2][2] 4. **Future Growth Projections**: Federal Civil revenue is expected to decelerate to 6% growth from a previous 14% CAGR, indicating a potential slowdown in this segment [15][15][15] 5. **Valuation Comparisons**: BAH is currently trading at a 21.4X FY2 P/E, which is in line with the market multiple of 21.5X, while CACI trades at a 17.5X FY2 P/E, reflecting a 19% discount to the market [44][44][44] This summary encapsulates the critical insights and data points from the conference call, providing a comprehensive overview of the current state and outlook of the Aerospace & Defense Electronics industry, particularly in relation to IT services and federal civil exposure.

Industry and Company Overview * **Industry**: The report focuses on the US equity market and provides outlook and investment recommendations for 2025. * **Key Companies**: The report highlights the "Magnificent 7" stocks (AMZN, AAPL, GOOGL, META, MSFT, NVDA, and TSLA) as significant contributors to the S&P 500 index's performance. * **M&A Candidates**: The report identifies a basket of 62 potential US M&A candidates with a meaningful probability of being acquired. * **SMB-Exposed Stocks**: The report recommends a basket of 60 stocks with revenue exposure to US small- and medium-sized businesses. * **AI Phase 3 Stocks**: The report identifies 30 stocks in "Phase 3" of the AI evolution with the potential to monetize AI by generating incremental revenues. Core Views and Evidence * **S&P 500 Index**: Goldman Sachs forecasts the S&P 500 index to rise to 6500 by year-end 2025, reflecting an 11% price gain and 12% total return with dividends. * **Earnings Growth**: The report expects earnings growth of 11% in 2025 and 7% in 2026. * **P/E Multiple**: The report projects a forward P/E multiple of 21.5x at the end of next year, a 1% compression from the current P/E of 21.7x. * **Magnificent 7**: The report expects the "Magnificent 7" stocks to outperform the S&P 500 index by approximately 7 pp in 2025, the slimmest margin in seven years. * **M&A Activity**: The report forecasts a 25% year/year increase in the number of completed mergers in 2025. * **SMB-Exposed Stocks**: The report expects an improving small business operating environment to lift the earnings and valuation of SMB-exposed stocks. * **AI Phase 3 Stocks**: The report expects investor interest to transition from AI infrastructure to broader AI "Phase 3" application rollout and monetization. Investment Recommendations 1. **Think Big**: Invest in the "Magnificent 7" stocks and seek opportunities in mid-cap equities. 2. **Maximize Your Options**: Invest in a basket of potential US M&A candidates. 3. **Low Rent, High Stakes**: Invest in a basket of stocks with revenue exposure to US small- and medium-sized businesses. 4. **Deliver the Goods**: Invest in stocks in "Phase 3" of the AI evolution with the potential to monetize AI. 5. **Protect the Downside and the Upside will take care of itself**: Overweight positions in Materials, Software & Services, and Utilities. Additional Key Points * The report emphasizes the importance of considering a diversified portfolio and taking advantage of periods of low volatility. * The report acknowledges the potential risks associated with high valuations and event risk. * The report provides a detailed analysis of the economic and earnings outlook for the US equity market.

_ Global FX Trader Election Detection Our thoughts on USD, EUR, CNY, JPY, GBP, NZD, CEE & NOK n USD: Is the elephant in the room already? The debate this week has ranged from whether markets are already almost fully pricing a Republican victory to whether all of the recent moves can be attributed to economic news. We think there is certainly some tariff premium in FX markets but acknowledge a mix of macro factors in the US and abroad can likely account for most of the Dollar's strength this month, with the ...

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