TO ALL:TECH BLOODBATH: IS THE WORST OVER?
SEMICONDUCTOR-related stocks crumpled Friday as economic turmoil in Asia
and Intel's deferred opening of a new chip plant sent investors fleeing.
Shares of SmartMoney favorite Applied Materials (AMAT) were down 10% to
33 3/16 and Novellus Systems (NVLS), another magazine pick, declined 5%
to 48 11/16. Intel (INTC), meanwhile, lost 2.3% of its value, ending the
day at 80.
The question is, are there worse times ahead for the likes of Intel and
Applied Materials, or will their stock prices recover sooner rather than
later? UBS Securities analyst Mark FitzGerald downgraded the entire chip
equipment sector, including Applied Materials, Novellus, CFM
Technologies (CFMT) and Lam Research (LRCX) to Hold from Buy. FitzGerald
pointed to Asia's currency troubles as having a dampening affect on
capital spending programs at many of the leading Japanese, Korean and
Taiwanese chip making firms. "Combined, Japan and Asia/Pacific will
account for 54% of the total $35 billion in worldwide semiconductor
spending in 1997. Investment by these firms will decline year-over-year
causing worldwide spending to be flat or down," said FitzGerald.
These Asian manufacturers, who specialize in DRAM chips and account for
70% of the output, have been ramping up to make the next generation
64-bit DRAM chip. Despite the well documented overcapacity in DRAMs,
leading manufacturers in Korea, Japan and Taiwan have been investing
heavily in capital equipment to try to be the first to market the new
chips. "The DRAM market was responsible for 42% of 1997's total
semiconductor capital equipment expenditures," says FitzGerald. "And
spending there is going to slow down."
With real interest rates rising throughout Asia, the cost of financing
all that capital spending is bound to rise. "Are the local banks going
to change rules for financing the $1 billion-plus factories? No one
knows the answer right now, and that's what caused the selloff,"
explains Susan Billat, analyst with BancAmerica Robertson Stephens. The
combination of uncertainty about Asia and high valuations led Billat to
downgrade the sector on October 17. "The market had become addicted to
the steady stream of good news all year long, so any bad news would hurt
the stocks," she says.
Billat, who hasn't cut estimates for next year, says that the news in
the near term will be good as the chip equipment makers post robust
numbers. But she thinks that these companies will see a slowdown in the
second half of 1998. "The upside for the latter half of next year is not
there," she said. The 321% run that the semiconductor equipment sector
has had since its trough hit in the summer of 1996 is unlikely to be
matched, says Billat. She points out that bookings have grown only 125%
over the same period.
But not everyone believes that Asia's currency route is bad news for
companies there. Donaldson, Lufkin & Jenrette's Robert Maire points out
that the equipment to build chips, the factories and the chips
themselves, are all dollar denominated, making currency fluctuations a
nonissue. ABN/First Chicago analyst David Wu, a bull on the sector,
agrees. "If I was an international exporter, and I'm priced in dollars
and my cost is in Taiwanese money, my spread just improved," he says.
Maire, who also believes the semiconductor equipment sector is now
oversold, isn't too concerned with the Asian crisis. "Lots of
semiconductor devices are made in the Far East, but far less is consumed
there, making them net exporters of chips and the like," he says. He
believes that as long as PC demand remains strong, since 60% of chips
made go into computers, the market for semiconductors and related
businesses will be solid. According to Maire, only about 25% of all the
world's PCs are sold in Asia. Of that chunk, most are bought by
businesses that are less susceptible to marginal increases in cost. "If
the U.S. market started to slow, that would be much more worrisome," he
says.
Maire believes that 1998 will continue to be a good year for chip
equipment makers, as semiconductor companies will be gearing up for
64-bit DRAMs, which require plenty of capital expenditures. Another
positive factor will be Intel's next generation chip known as Merced,
which is scheduled for release in 1999. The company must begin
outfitting factories to produce the chip next year.
Even near-term bears like Billat acknowledge that for long-term
investors, the current turmoil should be of little consequence. The best
companies -- Applied Materials, Novellus, Intel -- have proven
themselves adept at managing through a cyclical business. Says Billat:
"Even during bad times they have done well, and this by no means is a
bad time."
-- By Pablo Galarza
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