ML research notes: Semiconductor Industry Upturn Becoming Apparent
– Raising Growth Estimate, Price Objective
15 June 1999
Joseph A. Osha, CFA
Vice President
Mark Lipacis
Industry Analyst
Highlights:
· As a result of increasing unit volumes and continued firm pricing across the industry, we are raising our estimate for 1999 global semiconductor revenue growth from 12% to 15.5%. The Semiconductor Industry Association upgraded its 1999 growth estimate to 12% last week. We have been at 12% for several months, and believe that number is too conservative.
· Demand from both the wireless and wireline communications industries
continues to exceed our expectations, and is the driving force behind our improved numbers.
· The upside to our numbers has come largely from analog ICs, digital signal processors, field programmable gate arrays, and special-purpose
microprocessors. Each of those product areas has high exposure to
communications and information appliance end markets.
· As industry growth accelerates, stock prices have performed well, in many cases nearing or exceeding price objectives that we have only recently established. However, we note that stock price performance in the semiconductor sector has tended to track revenue growth in the past revenue growth is accelerating now, which implies further upside to stock prices even from current levels.
· We are therefore raising stock price objectives for seven of the analog and communications-oriented semiconductor names under our coverage, as indicated below:
Table 1: Current prices and new 12-month objectives
Current Price Price Objective Opinion
Analog Devices (Nov) $44.00 $52 C-2-1-9
Broadcom $101.00 $150 C-1-1-9
Conexant (Sept) $54.63 $66 C-2-1-9
Galileo Tech. $35.56 $42 C-2-2-9
PMC-Sierra $56.00 $70 C-1-1-9
Texas Instruments $129.25 $155 B-2-1-7
Vitesse Semiconductor (Sep) $61.56 $74 C-2-1-9
Vitesse Semiconductor:
After languishing for several months because of concerns over declining visibility, Vitesse's stock price has begun to perform once again as investors realize that the company's earlier book-to-bill was unrealistically inflated. Vitesse continues to be the industry's premier manufacturer of physical-layer interfaces in gallium arsenide, and the company's recent acquisition of XaQti demonstrates its
commitment to CMOS manufacturing as well. At $74, the stock would be trading at 15x year-forward revenues and 60x earnings, about in line with our price objective for PMC Sierra and reasonable given the company's sustainable 38% to 40% earnings growth outlook.
Merrill Lynch is currently acting as financial advisor to XaQti Corp. in connection with its acquisition by Vitesse Semiconductor Corp.,
announced on May 24, 1999. XaQti Corp. has agreed to pay a fee to
Merrill Lynch for its financial advisory services, a portion of which is contingent upon the consummation of the proposed transaction. |
