From Merrill Lynch Private Client:
SEMICONDUCTORS/COMM IC'S BULLETIN
We attended the Supercomm Industry Conference in Atlanta this week. In walking the floor at the show, we picked up a couple of themes that we believe are worth noting:
1. Demand Still Weak. Our checks with comm-IC and comm-equipment vendors indicate that demand still remains weak, and will likely remain weak for several quarters. We also heard some OEMs were canceling orders for some prototype programs. Indications of continued weak demand is consistent with our channel checks last week, which suggested that OEMs are trying to return component inventory.
2.. Pricing Pressure More Likely. Most comm-IC vendors deny that they are cutting prices on existing contracts, however, they also agree that there are no major orders on which they could give price concessions. We got the sense that some vendors would be willing to give discounts on large orders. We also understand that equipment pricing is getting more aggressive, and expect component vendors will ultimately have to "share the pain". As a result we are cutting our 2001 and 2002 numbers for the comm-IC sector.
NEGATIVE CATALYSTS?
We continue to like the group long-term, but are concerned about several potential negative catalysts which may not yet be priced into the stocks:
End of (fiscal) Year Selling Pressure? As we approach the end of the fiscal year for bench marking mutual fund performance, and end of the year "tax- loss" selling season, we believe that investors will start trimming holdings of high multiple/low visibility names.
Pricing Shoe Could Drop. Most comm-IC vendors disagree with our price pressure thesis. However, as equipment vendor witness their gross margin erode at a rapid clip, we believe they will ask their suppliers to "share the pain" and cut prices.
As a result, we are reiterating our intermediate-term Neutral ratings on the high-multiple names in the group: PMCS, AMCC, BRCM, CNXT, and VTSS. |
