DJ THE SKEPTIC: ASML - Do You Want Chips With That?
18 Jul 07:31
By Robb M. Stewart
A DOW JONES NEWSWIRES COLUMN
LONDON (Dow Jones)--It would appear at long last that a semblance of realism
has crept into the boardrooms of Europe's technology companies.
And so it should. Executives need only look to the furor ahead of Marconi's
(MONI) annual meeting Wednesday to see how investors take to U-turns in a
company's outlook.
So it's oddly comforting to hear ASML (ASML) CEO Doug Dunn admit things are
bad.
Trouble is, while frankness of Dunn's sort may be appreciated, it will do
little for share prices - particularly in the much-battered semiconductor
industry in which ASML operates.
It's only to be expected that ASML is suffering. It supplies the equipment
which produces chips for mobile handsets and PCs - where demand has fallen off
a cliff and companies are still dealing with overcapacity.
So Dunn is forced to admit there's not likely to be a recovery in the chip
sector until the second half of next year. And that while ASML's order book
looks robust, it's based on orders unlikely to be filled until 2002. He isn't
even bothering to forecast 2001 earnings anymore.
The risk amid all this honesty is that it inspires a false dawn for
investors. Speak to fund managers and they point to investors eagerness to
bottom feed - that is, to pick up cheap stocks which should be among the first
to bounce back.
This approach is sound: look at ASML's share price chart and it's enticing to
see the rapid gains which have followed past turnarounds in the sector's cycle.
The trick is calling the bottom. And what a trick that would be.
It's quite possible that chip and other tech stocks aren't near their floor
yet. After all, as Dunn said, the severity of this decline in semiconductors is
unprecedented - so who's to say that, bad as it is, demand can't continue to
slide. Philips (PHG), which has a substantial chip-making business, said
Tuesday it expects to see a bottom to its earnings decline in the third quarter
- but even if this proves accurate, it doesn't necessarily presage a recovery
in spending. A long trough could beckon.
ASML is unlikely to see recovering sales until its customers utilize the
equipment they already have and see sustained growth in demand.
Philips cautions that capacity at its chip factories could drop to 35% this
quarter from 40% to 45% in the second quarter. It and others continue to rein
in investment in chip operations to fend off the impact of the downturn on
their own bottom line.
As it is, it may be touch and go whether ASML is able to ship enough of its
key lithography systems this year to break even on the product. Encouragingly,
it shipped 120 systems in the first half - pushing it towards the roughly 200
it has said means break even - but the company also saw 105 cancellations in
those six months.
One last caution: ASML's shares have fallen some 55% from highs in March last
year, but have recovered from January's lows when many were still
optimistically pointing to a second half recovery for the industry. Ahead of
Wednesday's news, ASML was trading on a 2002 P/E of 32.6X, according to
consensus figures from JCF Group - still well above the high-teens valuations
it traded on during the last trough of the cycle.
So while executives such as ASML's Dunn may be facing up to the tough times,
investors shouldn't necessarily treat the confession as a sign that visibility
has returned to the industry's near-term future.
-By Robb M. Stewart, Dow Jones Newswires; 44-20-7842-9294;
robb.stewart@dowjones.com
(END) DOW JONES NEWS 07-18-01
07:31 AM |
