Semiconductor Summer Looking Bright
Salomon Smith Barney
Friday, June 18, 1999
--SUMMARY:----Semiconductors
*A survey of distributors and discussions with a great number of
managements suggests to us order rates remain strong and that the outlook for the summer months will likely be more positive than the seasonal norm.
*We also believe most of the companies in our coverage will beat analysts estimates for June, particularly the broad-based and communications device names and that analysts have yet to significantly raise estimates on multi-market suppliers.
--OPINION:-------------------------------------------------------
Continuing up cyclical curve. The semiconductor industry continues to
accelerate upward in a classically cyclical fashion. Industry data is
showing that. SIA semiconductor shipments grew 7% year over year in April (the latest data available), with forecasts for growth this year being revised upward. But we are also seeing the impact on the company level: order rates are rising, which is putting a pinch on capacity and availability, resulting in stretching lead times.
Distributors also seeing pickup. Checks with a half dozen North American component distributors and independent sales reps reveal the following data points:
1. Component bookings are quite strong, and the current backlog trends
are leading most salespeople to expect a better-than-normal summer season.
2. Lead times on selected devices (e.g., analog 'Op Amps', tantalum
capacitors, sole-sourced communications ICs) have been lengthening, and we have isolated reports of delivery lead times jumping to 16-20 or even 30 weeks.
3. Pricing in general is firmer (excluding DRAM), and prices are rising in selected segments such as SRAMs, EPROM, Flash and commodity analog chips.
4. We believe the direct (i.e., not distribution) channel is more robust than distribution, although some distributors are stronger than others. Thus, mixed reports from suppliers like Marshall Industries are not necessarily representative of the larger trends.
5. Meanwhile, DRAM price declines have accelerated over the last several days, after several weeks of relative stability. Pricing for bellwether 64Mb components fell into the $4.40-4.60 range yesterday, down from $4.90 at the end of last week, a hefty 10% week-over-week decline. One broker even relayed a story of being undercut in a sale of a substantial amount of product which he was offering for $4.35. Pricing for 128Mb product has also trended down of late landing in the $18-20 range, down from $22-23 of two weeks ago. We remain cautious on the DRAM environment and Micron Technology.
Strong summer ahead. These data points plus commentary from the component suppliers themselves lead us to believe that the June quarter results will be above expectations, and that published estimates for the second half of 1999 and 2000 will be raised. We believe the summer will be stronger than the seasonal norm.
We believe non-PC component companies are the main beneficiary of these trends, including broad-based and communications-focused component suppliers.
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