SSB semi beat here
08:29am EDT 23-Apr-01 Salomon Smith Barney (Jonathan Joseph 415-951-1887) INTC
The Semiconductor Beat
SALOMON SMITH BARNEY Industry Note
Semiconductors
The Semiconductor Beat
April 23, 2001 SUMMARY
* The historical record in recent cyclical upturns
Jonathan Joseph for Semiconductor stocks shows that Intel has led
415-951-1887 the group on a relative basis and that the
jonathan.joseph@ssmb.com Semiconductor group has led the Technology sector
Dunham Winoto following a bottom against the S. We expect
415-951-1875 this upturn to show a similar trend.
* Average discount to list price on Intel processors
Ramesh Misra narrowed from 17% to a 12% last week following
415-951-1883 Intel's price cut; AMD processor prices declined by
2%.
* DRAM prices bounced around on the week, with
128Mbs ending at about $4.22, down 7%; contract
prices appear firm on rising bit demand.
* Flash prices ended the week lower with 32Mbs down
7% from $11 to $10.25, and low density parts down
several percent. Only 16Mbs, popular in cell phones,
were flat at about $6.42.
* For the first time in 10 months, one major
distributor tells us lead times for resistors, used
in all electronic products, are stretching with
prices rising.
OPINION: INTEL LEADS THE SEMIS AND THE SEMIS LEAD TECHNOLOGY
"Be brave and powerful forces will come to your aid." Johann Wolfgang Goethe
(for 2-year old Annie who started chemotherapy for cancer last week).
We are projecting that the semiconductor sector will put in a fundamental
bottom over the next four months and begin to reaccelerate to a new peak over
the next couple of years. In our opinion, the most important call last week
came from Intel (INTC-$32, 1M), which reported slightly better than consensus
Q1 revenues and earnings, noted a slight upturn in March, and provided an
outlook that the June quarter would be the bottom, and that the second half of
the year would be seasonally stronger. The historical record over the past
several upturns shows that better relative performance by Intel has been an
early indicator that the Semiconductor sector was beginning to bottom and
poised for an upturn itself. For example, in 1996, Intel hit a low in January
and outperformed as the group declined until July, when the group began to rise
together. In 1998, Intel traded flat much of the year even as the sector
collapsed, it hit a low in June, and them moved up with the group in July. What
is good for Intel is good for the Semiconductor group.
We recently came across some data gathered by SSB's equity strategist, Tobias
Lekovich, regarding the performance of various sectors within Technology: once
Tech hit a relative trough to the S 500, it began to outperform. In reviewing
the segment data, it is clear Semiconductors are the clear performance winners
for at least the first 12 months out of the bottom. If you average the
performance over the last three cycles, the S Semiconductor Index generally
outperformed the broader Tech sector by a factor of 2 to 1 for the 1,3,6,9 and
12 month data. Over a 12 month period, the Semi's averaged +96.89% vs. 49.46%
for the broader Tech sector.
Following the 1992 relative trough, Semi's steadily outperformed for the entire
12 month period. In the early 1996 relative trough, Semi's underperformed the
first month and significantly outperformed for the rest of the 12 month period,
ending the period up 135.7%. In the late 1997 relative trough, Semi's had
strong one-month performance and then traded flat for 9 months but still ended
the year up 67% with a move of 50% in the last 3 months. The simple
conclusion: if you believe the Technology sector has hit a bottom relative to
the broader markets, and you have a 12 month horizon, the historical track
record of the Semis is extremely compelling (thanks also to Rob Clemens).
FIGURE 1. S SEMICONDUCTORS HAS OUTPERFORMED THE BROADER S TECH INDEX
Relative Trough of 10/92 and subsequent Absolute Price
Performance
1 month 3 months 6 months 9 months 12 months
S Semiconductors 5.63% 28.15% 42.01% 65.09% 87.68%
S Technology 4.09% 9.93% 10.74% 12.41% 22.01%
Relative Trough of 1/96 and subsequent Absolute Price
Performance
1 month 3 months 6 months 9 months 12 months
S Semiconductors 2.62% 16.86% 11.87% 58.36% 135.73%
S Technology 5.57% 10.62% 5.57% 22.53% 54.00%
Relative Trough of 12/97 and subsequent Absolute Price
Performance
1 month 3 months 6 months 9 months 12 months
S Semiconductors 16.55% 12.56% 6.47% 17.60% 67.27%
S Technology 7.89% 20.57% 30.58% 28.60% 72.38%
Average Absolute Price Performance after a Trough
1 month 3 months 6 months 9 months 12 months
S Semiconductors 8.27% 19.19% 20.12% 47.02% 96.89%
S Technology 5.85% 13.71% 15.63% 21.18% 49.46%
Source: Salomon Smith Barney
MICROPROCESSOR MARKET SLUGGISH IN SEASONALLY WEAK PERIOD
Following last Sunday's scheduled price cuts, gray market discount to list
prices on Intel's processors narrowed by 5 points from 17% to 12%. As has been
well discussed in the media, Intel will pull in price cuts previously scheduled
for June to April 29 in a bid to stimulate demand for the P4; it will also
introduce the 1.7GHz version of the P4 processor at that time. Given that the
P4 will amount to only about 15% of sales this year, and as such will not
materially impact our earnings estimates. The incentive to cut prices comes
from the unpopularity of the Rambus (RMBS-$20, NR) DRAM-based systems as well
as price/performance competition from AMD's Athlon. As AMD stated on last
week's earnings conference call, virtually all of its Athlon processor
shipments this quarter will be 1GHz or faster processors. AMD# (AMD-$29, 1S)
gray market processor prices fell a relatively mild 2% over the week following
AMD's own price cuts.
Until we hit the Back to School buying season in July, the microprocessor
market is entering its seasonally slowest period. At least one broker, however,
was talking last week about a 5% to 10% pickup from the week before. We will be
getting more market feedback in a week when Intel puts the new price cuts into
effect.
DRAM BOUNCING AROUND ON THE WEEK
The DRAM market should also remain seasonally slow over the next two months
before entering what has, for four out of the last five years, been a
seasonally strong period for the memory market. Last week DRAM brokers reported
prices were trading up and down about 3% a day before settling somewhat lower
on the week. By Friday, prices for mainstream 128Mbs stood at $4.22, down $0.32
(7%). Meanwhile, 64Mbs declined $0.17 to $2.07 (down 8%). "Non-branded" product
was trading between 10% to 25% lower.
On the contract side, manufacturers have seen firm prices for the last six
weeks. One top-four supplier told us March was a record and he ended the month
with virtually no inventory. He figures his primary U.S. customers have
increased DRAM bits/box by 40-50% per quarter over the last two quarters. This
sounds aggressive to us, but does indicate price elasticity for DRAM is now
kicking in. Supporting the notion that bits/box are likely to rise for the next
year, Microsoft (MSFT-$69, 1H) management last week suggested that users must
install at a minimum 128MBytes of memory in their PCs in order to run Windows
XP optimally. WinXP will be released this fall.
SLOW TRADING IN FLASH
Flash spot market brokers continued to describe a bleak landscape. It seems
that more and more parts are available in the channel, with prices selling for
a fraction of where they were last year, and yet buyers are still nowhere to be
seen. Spot prices in this market fell across the board last week with the
exception of 16Mbs. Higher-density configurations such as 8Mbs lost 3.6% from
$7 to $6.75, and 32Mbs fell 6.8% to $10.25 from $11. Among lower-density parts,
4Mbs fell 1.7% to $2.95, while 1Mbs declined 10% to $2.25. As mentioned, 16Mbs
(popular in many cellphone handsets) were flat at $6.42. It seems unlikely that
the Flash market will bottom before later this year as current excess capacity
is absorbed.
WATCH THAT RESISTOR MARKET: LEAD TIMES MAY BE STRETCHING
We were surveying a major U.S. distributor last week to find out if they had
seen any changes in commodity component prices or lead times recently. While
capacitor prices and lead times seemed to be stable, for the first time in 10
months, lead times on resistors have stretched out from being "in-stock" to a
couple of weeks. In addition, prices out of a Japanese supplier were up by
about 3%, which was probably not a function of exchange rates. This may not be
a big deal. Then again, it could be. Knat-sized resistors, along with
capacitors and transistors, are a ubiquitous building block of electronic
circuitry. They are typically used to ground circuits, form feedback loops, and
control other electronic functions. Last week we talked about how OC-192 PHYs,
at least in terms of the semiconductor cycle and supply and demand wavers, are
no different from tantalum capacitors. Well, they may not be much different
from resistors, either. |
