Semiconductor Equipment . . . Cymer was upgraded at ML from a Sell to Neutral. Over the past few years Cymer has become one of the strongest advanced technology plays in the equipment group. The company is the dominant supplier (85%+ market share) of DUV lasers, one of the enabling technologies for today's advanced lithography tools. Previously, concern with the stock was a combination of product transition risk, and the potential for margin degradation along the way, and valuation. In recent weeks, however, the risks of the product transition have been greatly reduced with the announcement of the first XLA shipment. Over the next few quarters the company's margins will be negatively impacted by this transition, while the product moves down the manufacturing learning curve, but we believe our current model accurately reflects the appropriate margin impact. On the valuation front, as we shift focus from trough level price-to-book and price-to-sales ratios to forward earnings the stock now trades in-line with its peers at about 22x 2004 earnings.
ML is maintaining a neutral stance on Equipment Group. The essence of the global semiconductor upgrade today is a mixture of low inventory levels, increased leading-edge demand and reasonable valuations. While the low inventory levels and growing high-end demand will eventually translate into equipment sales we remain concerned with the longer than normal lag time expected during this cycle. A combination of low utilization rates and poor yields at the 0.13 micron technology node will likely delay the placement of significant equipment orders by several quarters when compared with previous cycles. Similarly, on the valuation front, the equipment companies are not as attractive as their semiconductor counterparts. The equipment group is currently trading at nearly 56x 2003 earnings and 22x 2004. Therefore, recommend only a small number of equipment companies that fits broader investment theme. At this point in the cycle continue to favor those companies that have either leverage to advanced technology (where utilization rates remain high) or a units driven business where sequential growth should be strong in 2003. Two Buy rated stocks that fall into advanced technology leverage category include Novellus leveraged to the industry transition to copper and Veeco everaged to advanced technologies in the semiconductor, data-storage and nano-technology industries. Our three Buy rated unit driven companies include MEMC, ChipPACC and Entegris.
Semiconductors . . . Merrill Lynch has changed its view on the semiconductor sector to "slightly positive" from "negative." The firm feels valuation is reasonable and that inventory levels and capital spending are low enough to increase the industry's sensitivity to any improvement in demand. Among individual stocks the firm upgraded Intel, Analog Devices and Broadcom were upgraded to "neutral" from "sell;" and Maxim Integrated, Agere, Marvell Tech, Intersil, Xilinx and Taiwan Semiconductor were upgraded to "buy" from "neutral."
Advanced Micro indicated it may not build a joint-venture plant with UMC in Singapore as planned; however, an official at UMC denied that there was any change in their relationship with AMD.
National Semi will cut 5% of workforce and selling information appliance unit.
WR Hambrecht initiated SanDisk with a Buy. Price Target is $20. The firm cited expectation that SNDK will be a strong player in the flash memory card market, and its ability to diversify into other markets such as handsets and Wi-Fi cards.
A rumor is floating that Rambus will be acquired by Infineon.
Salomon Smith Barney says that Intel discussed its plans for a potential replacement for Marvell Tech's Gig-E product at their developer forum; firm says this development could start to negatively impact MRVL by 2nd half 2003, and is not yet reflected in their model or consensus estimates. The firm remains cautious on MRVL's hard drive component biz for the April quarter due to seasonal and channel inventory factors.
Infineon Technologies may get a reimbursement from Ericsson because of the poor performance of the Microelectronics unit it purchased last year for 130 million euros, AFX said. An Infineon spokesman confirmed that it was in talks, the report said.
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