From an article today at The Steet dot com:
>>>After Hard Knocks, the SOX
Rocks
By Marcy Burstiner
Staff Reporter
7/8/99 8:59 PM ET
SAN FRANCISCO -- Investors are loving semiconductor
stocks these days. No wonder, considering the
Philadelphia Semiconductor Index hit an all-time
high of 509.98 Thursday. That's a growth of 179% since
the index bottomed last October.
But is it headed for a fall? Chip stocks are, after all,
cyclical. Just look at the chart: The SOX -- which
measures the stocks of 16 leading chipmakers and
chip-equipment companies -- peaked in summer 1995,
bottomed summer 1996, peaked fall 1997 and bottomed
last fall. Follow that pattern, and the index should peak
sometime between now and October and not bottom
again until next summer.
Long-time SOX watchers say don't bet on it. "The last
few years have been a bit anomalous," says Goldman
Sachs analyst Gunnar Miller, who covers
chip-equipment stocks. "The reality is that they tend to
be three-year up, three-year down cycles if you go back
historically."
The health of chip-equipment makers is a key indicator
for the semiconductor industry. For a chipmaker like
Intel (INTC:Nasdaq) to profit, it has to sell the latest and
most expensive chips in large volume. It can't do that
without the latest manufacturing and testing equipment.
The last true boom cycle started in 1993, when Intel
introduced its first Pentium processor, and halted in
1995, says Banc of America Securities analyst Brett
Hodess, who was one of the first analysts to alert
investors that the cycle was hitting bottom back in
October.
Back in '93 and '94, Hodess says, chipmakers raced to
build plants to meet rising demand. But once they had
plenty of manufacturing capacity, excess equipment
flooded the market just as PC demand slowed in '95.
Demand for equipment wouldn't heat up again until the
plants reached the end of their technology cycle --
generally three years -- and had to be retooled.
In mid-1996, the SOX began to bounce back. But rather
than marking a broad-based recovery, the rise was
triggered when a changeover in technology from a 0.35
micron process to a 0.25 micron process forced
companies to buy lots of equipment, Hodess says.
Any impression that the industry was recovering from its
slump was false. The utilization rate at chip factories
was still a low 75%. So while chip companies like Intel
were buying equipment to produce chips on the new
process, consumers still weren't buying enough
computers to keep the plants running at full speed.
In reality, the slump wouldn't end until around the end of
1998. Now, strong chip demand is filling the plants.
Plant utilization rate is at about 90%. That compares
with 70% in July of last year.
Meanwhile, companies are just beginning to buy
equipment for another changeover in technology -- this
time from 0.25 microns to 0.18 microns. Yet equipment
orders are still low: Just $27 billion will likely be spent
worldwide this year on equipment, compared with $45
billion during the peak year of 1995. And that's a sign,
Miller says, that equipment orders have only started to
rise.
"Most U.S. chip companies are spending below their
depreciation levels," he says. "I'm a guy who, in '95 --
when we were at a peak -- felt it was time to sell the
stocks. This does not feel like that to me. This feels
more like something that's potentially sustainable."
There are other indicators of a continuing recovery.
Communications chip companies such as Semtech
(SMTC:Nasdaq) and TranSwitch (TXCC:Nasdaq) have
been seeing soaring demand for their products as
people worldwide load up on cell phones, network
computers and Internet gadgets.
Meanwhile, memory-chip prices are about as low as
they can get. They dropped to about $4.10 for a
64-megabit synchronous DRAM chip, and that
compares to $7.50 a year ago, when memory makers
fretted that prices were too low. "They are the lowest
they've ever been," says Steve Cullen, a memory
analyst at market research firm Cahner's In-Stat
Group. Memory makers tend to cut equipment
spending when memory prices are low, and to beef up
spending when the money pours in.
All that means the SOX stocks still have room to rise.
"This summer and the second half of the year you will
see improving fundamentals," Hodess says, adding that
supply won't outstrip demand again until 2001 or 2002. <<< |
