DARBES, All - interesting
I am looking at block money flow charts right now and intel is down by
170M and amd is up by about 7M. I bet ML report got something to do
with it (below). Interesting mentioning that intel might need socket
7 version of pII. Slot 1 is not very hot nower days. And
overproduction on intel side must hurt.
Regards
-Albert
01:24pm EDT 21-Oct-97 Merrill Lynch (T.Kurlak (1) 212 449-2308) TXN INTC AMD LS
ELEC-SEMICONDUCTOR:Semiconductors: Review & Outlook
ML++ML++ML Merrill Lynch Global Securities Research ML++ML++ML
ELECTRONICS - SEMICONDUCTOR
Semiconductors: Review & Outlook
Thomas P. Kurlak (1) 212 449-2308
Reason for Report: Industry Update
Investment Highlights:
o Q3 slowdown hits stocks.
o Booked-to-Billed went under 1.0.
o Stocks expected to underperform.
Fundamental Highlights:
o Earnings outlook for Q4 weak.
o Overproduction requires cut backs.
o Capital spending likely to soften.
o Intel considers low end strategies.
o AMD could benefit.
Slowdown - Book to Bill Under 1.0
Major semiconductor producers, including Texas Instruments (TXN, B-3-1-7, $125
1/8) Intel (INTC, B-3-1-7, $85 9/16), Advanced Micro Devices (AMD, C-3-3-9, $28
3/4) and LSI Logic (LSI, C-3-3-9. $24 3/4) had booked to billed ratios below
1.0 in Q3 indicating an industry slowdown from Q2. During the quarter, an
inventory build up in distribution channels first revealed the slowdown which
we believe reflects push backs on the channel by OEMs because of ample supply
and weak prices as well as some softening of end markets. In addition, the PC
mix shift in retail toward under $1000 computers which use less memory and
cheaper processors has had an impact.
Inventory Reduction Stalls Upcycle - Production Cuts Needed
Availability of semiconductors is so good that customers see no reason to hold
much inventory and, as we indicated last August, without inventory rebuilding,
the upcycle has stalled and orders have slowed to the rate of growth of the end
markets.
As a result of the foregoing, we believe rising work-in-process inventories at
chip producers reveals overproduction and that a cut back is necessary in Q4.
Finished wafer inventories are valued very low relative to final value which
hides the amount of physical inventory increase. Most of Intel's $64 million
Q3 inventory rise over Q2 was work-in-process which could represent a rise of
10,000 wafers valued at about $5000 each or 1.5 - 2.0 million
microprocessors.
At LSI, inventories increased by $6.8 million, 7% over Q2 and management
expects flat sequential sales in Q4. At Texas Instruments, inventories rose by
$21 million or 3% while sales declined 2% from Q2. Inventories and sales were
about flat sequentially at Advanced Micro Devices. Inventory rose by $12.5
million at National Semiconductor (NSM, C-3-3-9, $36 7/8) in FQ1 (Aug) or by 7%
compared to a $20 million or 3.5% sequential sales gain. At Micron (MU, C-3-2-
9. $34), inventories jumped in FQ4 (Aug) by $77.6 million or 21% over FQ3 while
sales fell by $19 million or 2%.
Capital Spending Delays Expected
Our expectation is for a production cut back in Q4, possibly associated with
some inventory write downs, and accompanied by push backs on new capital
equipment installations. Intel has already pushed back bonder deliveries at
Kulicke and Soffa and LSI has indicated it is pushing back the start up of its
new Oregon fab to July 1998. Other such actions can be expected in coming
months.
This process of curtailing the overproduction of chips will serve to help
stabilize falling lead times and prices and set the stage for some inventory
rebuilding by OEMs in 1998.
End Markets
The end markets seem generally to be up but reports of slowing in telecom,
networking and high end computers continue to crop up at various chip producers
including Altera (ALTR, C-3-2-9, $49 3/4), Xilinx (XLNX, C-2-1-9, $39 7/8),
AMD, and LSI Logic. In addition, the oversupply condition that prevails in
most commodity products is creating a chronically weak pricing environment for
memories, logic and commodity ASIC.
The down shifting PC price points, especially in retail markets, is hurting
overall semiconductor demand because low end machines contain fewer memory and
logic transistors than the mid or high end. As price per transistor always
falls, the low end is reducing revenues to semiconductor suppliers across a
broad front.
Sub $1000 PC
Intel has partly created the low end PC take off by selling out its inventory
of an estimated 6-7 million classic Pentiums at very low prices in Q3. These
chips are no longer in production but Compaq and others have found a ready
market for 200 MHz PCs without MMX at $950. We expect that Intel may be
getting pressure to either re-start production or cut the price 50% on the 200
MHz MMX chip to replace the classic Pentium. On the former, Intel may have re-
tooled old production lines to 0.35 micron and may not be able to restart
production in big volume. On the latter, a 50% price cut to under $100 on the
200 MMX may not be very profitable given its larger die size.
A possible course is to cut prices and start development of a new low cost,
scaled down version of Pentium II. Some kind of Pentium II Jr. without cache
memory and in a socket 7 package that could sell for $75 would be very
attractive to PC makers, in our opinion.
In years past, Intel offered the DX and SX versions of X86 processors (with and
without floating point) at widely different prices.
Meanwhile, it seems likely that Intel will lower prices sufficiently to retain
market shares at all price points. However, we do not rule out a possible
opening for the AMD K-6 which is available for $75. A possible second source
arrangement, perhaps with a larger, unrelated chip producer, could provide PC
companies with confidence in K-6 availability.
Stock Outlook
The release of Q3 earnings and management projections for a soft Q4 hit the
stocks. The SOX Index is currently down 10% from October 13, the day before
Intel reported earnings and is down 12.5% from the August 21st high. At that
date, the Index stood 191% above its cycle low of July, 1996. We continue to
believe the recovery in the stocks is over for a while and that renewed
momentum in the shares requires a profit reacceleration that seems some
quarters away. |
