Here is page 1 of a 9 page report issued yesterday by Jon Joseph of Salomon Smith Barney that started the semiconductor slide:Semiconductor Sector:
Trend Reversal in Commodity Components Semiconductor Sector
July 5, 2000
Jonathan Joseph
415-955-4998
jonathan.joseph@ssmb.com
Clark Westmont
415-955-4933
clark.westmont@ssmb.com
Edward Sun
415-951-1830
SUMMARY
➤ Given what we believe are slowly reversing industry fundamentals, we are
downgrading the semiconductor sector from Outperform to Neutral.
➤ Though a slowdown in the group may take 6-9 months, we see “first mover”
evidence of a trend reversal in decelerating industry unit shipments coupled
with price declines and contracting lead times in commodity memories and
passives—segments that were most severely impacted in the shortage.
➤ As a backdrop, the sector is likely to see peak capital spending growth rates
this year, which has closely correlated with cyclical shipment peaks in the past.
➤ We are also reducing our ratings on four stocks, taking Texas Instruments from
1M to 2M, Advanced Micro Devices from 1S to 2S, National Semi from 1H to
2H and Silicon Storage from 1S to 3S.
SUMMARY VALUATION AND RECOMMENDATION DATA
Earnings Per Share
Company (Ticker) Price FYE Rating Target LTGR Current Yr Next Yr
Advanced Micro Devic- $77.25 Dec Curr 2S $100.00 15% $5.50E $5.00E
es Inc (AMD#) Prev 1S $135.00 15% $5.50E $5.00E
National Semiconduct- $56.75 May Curr 2H $80.00 20% $2.90E $3.35E
or (NSM) Prev 1H $120.00 20% $2.90E $3.35E
Silicon Storage Tech- $88.31 Dec Curr 3S $105.00 25% $2.10E $3.50E
nology (SSTI#) Prev 1S $105.00 25% $2.10E $3.50E
Texas Instruments- $68.69 Dec Curr 2M $80.00 20% $1.25E $1.55E
(TXN) Prev 1M $93.00 20% $1.25E $1.55E
WATCH BOTH THE TOP-DOWN AND BOTTOMS-UP INDICATORS
In trying to understand the semiconductor cycle, we look at both top-down indicators,
mostly macroeconomic data like shipment growth rates and capital spending, and we also do
a reality check on bottoms-up indicators, microeconomic inputs like lead times, prices and
inventories. For most of this year, we have become increasingly concerned about the top-down
picture, but have been reassured the upcycle was intact as lead times continued to
extend, prices firmed, and inventories remained low. The bottoms-up picture, however, went
cautionary recently, apparently brought on by a slight slowing in cellular phone growth
expectations and the rapid increase in capacity. We do not believe normal summer slowing is
the culprit.
TOP DOWN STORY HAS BEEN WEAKENING IN THE LAST SEVERAL MONTHS
➤ Capital spending growth should set peak this year. Peak years in capital spending
closely correlate with peak years in semiconductor growth. We believe strongly that
semiconductor cycles are mostly defined by excess capacity rather than by a fall-off in
demand, particularly in economic boom of the 1990s. The only demand-induced
slowdowns in the last 20 years were in 1985 (declining PC market) and 1997 (Asian
financial crisis). the peak years in capital spending have correlated closely with |
