ML's Semiconductor Capital Equipment Weekly Update
Next Hurdle: Intel's Quarter
Merrill Lynch
Mark F. FitzGerald
Thomas R. Diffely
June 28, 1999
Investment Highlights:
· VECO's stock faltered last week on concerns over the next few quarters. We believe all of the potential bad news is in the stock and we would continue to add positions when the stock drops below $30.
· AMAT and PRIA should be two of the big winners as utilization rates at the Taiwan foundries continue to rise and new capacity is added.
· With Micron's quarter priced into the stocks and Greenspan's plans widely anticipated, the only issue on the horizon is Intel's quarter. Stocks could bounce on Tuesday and Wednesday if the rate hikes are in-line with expectations- a good assumption. Intel's announces on July 13. After that investors will begin to focus on SPE company quarterly announcements- mostly good news. We are looking for
sequential growth in June bookings to fall in the 10-20% range.
· The pivotal issue for the stocks still remains the 4th quarter PC demand. We would expect some firming in DRAM prices and strong PC seasonal demand. Stocks could break out to new highs as visibility firms.
Industry News
Taiwan Outlook-Sweet and Sour
Merrill's 2nd annual Asia Pacific Technology Conference was held last week. We caught up with the major semiconductor players from Taiwan- including Taiwan Semiconductor Manufacturing Company, a new private foundry Worldwide Semiconductor Manufacturing Corp, Rambus,
Winbond Electronics, Mosel Vitelic, ProMos Technologies and Macronix.
The foundry business is booming. Capacity utilization rates are high and are expected to tighten through the 4 th quarter. On the other hand the DRAM business remains in the doldrums and has forced some consolidation among the local players. TSMC, the largest foundry in the world, plans to increase capacity 25% per year. Management has taken equity stakes in some of the weaker players such as Acer and
Vanguard in order to ramp capacity even faster over the next 12 months. Some Acer capacity will be converted from DRAM production to logic wafer starts. TSMC will move its memory wafer starts to Vanguard to free up wafer starts its own fabs.
Micron and AMD Disappoint the Street but Remain Committed to
Spending Plans
It was a week of bad news for several chip makers. Micron failed to meet the streets expectation for a breakeven quarter and AMD pre-announced a worse than expected $200 million loss for the quarter. Despite these poor results both companies stated they were committed to maintaining their current capital spending plans. Micron reported a $0.10 loss for its third fiscal quarter due principally to a 27% decrease in the price of 64Mbit DRAM chips, the company's main product. The company had a 17% bit growth rate for production for the quarter but only an 8% bit growth rate for shipments. The company is still on schedule in its transition to 0.18 micron technology and confirmed it would spend between $1.0 and $1.1 billion in both 1999 and 2000 to retain its technology edge.
Meanwhile AMD claimed that the seasonally slow second quarter combined with 3 aggressive Intel price cuts will cause it to significantly miss the street's expectations. However, AMD is also committed to ramping its advanced technology and is scheduled to produce its 700 MHz
K-7 with 0.18 micron technology by the end of the year. The company also plans to introduce its first copper microprocessor in 1999. To achieve these goals AMD will maintain its capital spending level at an estimated $900 million this year.
These two stories underscore the ongoing need for
technology. Despite the near term issues that hamper the profitability of the chip makers most of the players in this arena realize that investing in advanced technology is crucial to their future. Therefore, the equipment companies that provide this enabling technology should continue to see sequential growth throughout the year.
Chart of the Week
This week's chart illustrates the lack of correlation between Micron's earnings and capital spending. The key point in this chart occurs in 1998 and 1999. Despite record losses in 1998 the company increased its capital spending plan for 1999 nearly 20% to an estimated $1.1 billion. This commitment to installing the advanced technology
will enable the company to reap the rewards of low cost production in the future. Therefore, when large device companies, like Micron, have a bad quarter their capital spending plans usually remain intact and business for the equipment companies continues to improve. |
