Boy These Chips Are Salty
LOOKING FOR NEWS that the semiconductor industry is on the upswing? You may be waiting awhile.
It's no secret that most experts have been predicting gloom for the chip sector all year. But data released late Monday by the Semiconductor Industry Association, or SIA, show that the current slowdown is even worse than those dark forecasts.
The inventory overhang that has plagued the industry all winter combined with the general economic malaise that has been dragging down corporate earnings pushed February's world-wide chip sales down to $15.49 billion. That's 6.9% lower than the previous month. Making matters worse, the SIA also revised January's sales number downward by 1.4%. The result: The first two months of 2001 made for two of the biggest sequential sales declines the industry has seen in at least 10 years, according to Needham & Co. analyst Dan Scovel.
Wit SoundView analyst Scott Randall added this perspective: During the last big downturn, which began in 1995, it took 11 months to see the same magnitude of sales deterioration that we've seen from August of last year to February of this year — just six months.
Says Scovel: "I think it really confirms a lot of characterizations of the industry falling off a cliff in the last couple months. It's pretty nasty."
Of course, the SIA's monthly sales figures look backward rather than forward. They don't tell us much about where things are headed. But they sure don't inspire much optimism about the first quarter. Terry Ragsdale, a Wall Street Journal All-Star analyst who recently moved to Goldman Sachs, says he's now expecting first-quarter sales to fall in the 22% to 24% range sequentially — slightly worse than he previously thought. Before Monday's SIA numbers were released, Ragsdale was expecting a 15% sales decline for all of 2001; now, he says a 20% drop "looks like a minimum."
Given the sector's miserable performance during the past year, more than a few of the money managers we've been talking to lately have been saying there isn't much farther to fall for these stocks. But Tuesday's grim SIA data make calling a bottom more difficult. While most chip cycles are driven by overcapacity, this downturn has more to do with a sharp fall off in demand. And nobody's sure when that will end. Not only are economists debating whether to utter the "R" word, but there are concerns that a slowdown in the U.S. will infect overseas economies, slowing chip demand world-wide.
As depressing as all that is, however, there is reason for investors to stay alert for a turnaround in these stocks. First of all, no one envisions a future without semiconductors; demand will resume. And some analysts still think there's a chance that the industry's fundamentals will begin to recover in the second half of the year. Granted, with so many "ifs" (inventory levels, slowing economy), skepticism about that timetable is in order. But if the situation begins to turn, the stocks will recover quickly from these depressed levels. And it's worth noting that the market most often anticipates an economic upturn by several months.
Figure goes here!
Which are the most beaten-down chip stocks right now? It sure isn't Advanced Micro Devices (AMD1), General Semiconductor (SEM2) or National Semiconductor (NSM3), which have been the contrarian bets of the year. Coming off deeply depressed levels, they have managed year-to-date gains of 85%, 49% and 20%, respectively.
But they're the exceptions. So far this year, PMC-Sierra (PMCS4), Triquint Semiconductor (TQNT5) and Texas Instruments (TXN6) are down 71%, 69% and 40%, respectively, while the Philadelphia Semiconductor Index has fallen 15%. What's more, the 125 semiconductor stocks counted by Zacks Research Database are down an average of 19.6% year-to-date. And of that basket of stocks, 42 are still down at least 30% year-to-date.
Gauging value from price-to-earnings multiples is tricky at this point because the earnings numbers are so unreliable. Goldman's Ragsdale chooses to focus instead on trailing price-to-sales ratios, which can't be manipulated as easily as earnings. Using this metric, a lot of the sector's biggest names are nowhere near their previous trough levels. In fact, they're close to double those levels, according to Ragsdale.
Nevertheless, Ragsdale is optimistic. "I think it's a reasonable question to ask whether we're really going to go to those prior troughs," he says. "Everybody knows that these stocks are volatile not only to the downside but also to the upside, and I think you can expect investors to step in before they reach their prior bottoms."
That's not the best news we've ever heard — but at this point, we'll take it.
smartmoney.com |
