From Wit Soundview this morning:
Wit SoundView Morning Research Highlights July 30, 2001
Semiconductor Update
S Randall
We believe that the June earnings season - and view toward September - has effectively brought estimates and investor expectations down to reasonable levels. With both sequential and year-over-year compares becoming easier as we move into 4Q01 and 1Q02, company reports will finally begin to show signs of improvement rather than further signs of deterioration. Our forward look at inventory and consumption levels suggests that even the beleaguered communications companies should begin to see improving results as we move into 4Q. Wireless is perhaps the most visible sub-sector that is beginning to drive both better company commentary, if not actual results. From a sub-sector perspective, we believe that communications-centric semiconductor companies offer some of the most compelling stories followed by companies focused on consumer electronics. We are still cautious on PC centric companies, believing that any growth in PC units will continue to be offset by a continued aggressive pricing environment. We believe its time for investors to take an overweight position in the semiconductor device sector. Although improvement in fundamentals over the next several quarters will be slow at first, we believe that by 4Q for many companies, and 1Q02 for the majority, investors will begin to see improvements in sequential revenues and profitability. We are reiterating our strong buy rating on Texas Instruments and PMC-Sierra, and we are upgrading Vitesse, AMCC, TriQuint, Pericom and LSI Logic to strong buys. We are recommending that investors take an overweight position in the group.
AMCC (AMCC)
Price: $16.58
Strong Buy
F01E: $0.48
F02E: ($0.15)
S Randall
We are raising our rating to a strong buy. Our price target is unchanged at $27. With AMCC's just reported quarter showing a 66% Q-Q and 44.5% Y-Y decline in revenues, we believe that street estimates are coming in line with market realities. With cancellations having slowed as the Company's 90-day backlog has decreased to $42 million, we believe that the September quarter should show flat to slightly higher revenues. Our aggregate analysis of inventory and consumption levels for key communications end customers including Cisco, Nortel and Lucent suggest that AMCC should begin to see meaningful sequential revenue growth beginning in the December quarter. Despite continuing weak demand, we believe that a combination of more targeted carrier spending, a continued move from customer designed ASIC's to standard products and good design win momentum should allow AMCC to have a meaningfully stronger December quarter and calendar 02. We believe that with early signs of re-ordering already being seen on a very limited basis from communications OEM's, investors will find commentary during the October reporting seasons that much more compelling.
LSI Logic (LSI)
Price: $19.15
Strong Buy
F01E: ($0.52)
F02E: ($0.20)
S Randall
We are raising our rating to a strong buy while maintaining $25 price target. With street estimates having moved down sharply, we believe that expectations now more closely approximate actual results. Recall that entering the June report, our estimates had been markedly lower than the street (we were at a loss of $0.12 vs. the street at a loss of $0.07) and for F02 we were at $0.10 vs. the street, which was at $0.34. Going forward, although September could be down by another 10% to 15%, we believe the September quarter is likely to mark the low watermark for revenue. With LSI participating in both the communications and consumer segment, we believe the company is targeting some of the highest-growth end markets. With Sony still representing over 10% of revenue, and with Sony having just reaffirmed its production plans for PlayStation despite caution on a wide range of other products, we believe LSI is likely to benefit from the seasonal increase in game box shipments. We continue to believe that while the near-term results will continue to be impacted by relatively high fixed costs, a combination of a richer product portfolio and the slow migration to a hybrid manufacturing strategy represents an interesting long-term story for investors.
PMC Sierra (PMCS)
Price: $31.00
Strong Buy
F01E: ($0.31)
F02E: $0.05
S Randall
Although near-term business for PMC-Sierra will continue to be challenging with September looking to be down another 30% q/q, we believe the September quarter is likely to be the bottom. Our aggregate analysis of inventory and consumption levels for key communications end customers including Cisco Systems, Nortel Networks, and Lucent Technologies suggests PMCS should begin to see sequential revenue growth beginning in Q4. Although near-term business will continue to be weaker than we had expected, design-win metrics and revenue traction from more recently introduced products continues to suggest that the company is suffering overall market dynamics rather than positioning or competitive issues. We continue to believe investors will be well served to own PMC-Sierra before the October conference call season, at which point we believe more concrete signs of stability will be accruing. We reiterate our strong buy rating and $48 price target.
Texas Instruments (TXN)
Price: $34.85
Strong Buy
F01E: $0.16
F02E: $0.34
S Randall
Although September will be another "down" quarter, we believe the latest round of estimate reductions will result in favorable sequential compares as we move into December. We believe Texas Instruments is one of the best-positioned companies to benefit from emerging trends in both communications and consumer electronics.
In communications, the long-term growth in handsets, inventory reductions that have already occurred, and the migration to more data-centric handsets bodes well for the revenue opportunity afforded TXN. TXN's OMAP strategy, a combination of hardware and software, is emerging as a standard next-generation handset enabler by industry leaders including Nokia, Ericsson and Sony. With increasing signs of stability, and with our view that TXN continues to be exceptionally well positioned for growth and DSP-centered applications, we are reiterating our strong buy rating and $46 price target.
TriQuint Semiconductor (TQNT)
Price: $2307
Strong Buy
F01E: $0.27
F02E: $0.31
J Lau
We believe the majority of the bad news for 2HC01 is now in the numbers. Wireless is relatively stable, with bookings of almost 1:1. Inventory in absolute dollars continues to decline. TriQuint has a strong portfolio of proprietary products. Strong design-win activity ahead of a recovery; TQNT had 117 design wins for the June quarter. Strong cash position to invest into a recovery. We are upgrading TQNT to a strong buy and raising our price target to $30.
Pericom Semiconductor (PSEM)
Price: $14.40
Strong Buy
F01E: $0.64
F02E: $0.10
J Lau
We are upgrading PSEM to a strong buy and raising our price target to $20. We believe the majority of the bad news for 2HC01 is now in the numbers. Net bookings have been improving for the last three months. Inventory in absolute dollars continues to decline. Pericom has a strong portfolio of proprietary products - 14 new products introduced in the June quarter, 10 were proprietary. Strong design-win activity ahead of a recovery. Strong cash position to invest into a recovery.
Vitesse Semiconductor (VTSS)
Price: $19.32
Strong Buy
F02E: ($0.14)
J Lau
We are upgrading VTSS to a strong buy and raising our price target to $28. We believe the majority of the bad news for 2HC01 is now in the numbers. Orders for new products are accelerating for the September quarter. Inventory in absolute dollars continues to decline. There is a strong portfolio of proprietary products - end-to-end solutions for high-speed communications applications. Strong design-win activity ahead of a recovery; Vitesse had 66 design wins for the June quarter. VTSS has a strong cash position to invest into a recovery.
Technology Focus
A Berman
While technology sector fundamentals remain unhealthy, the list of encouraging data points that hint at recovery is now far longer than at the beginning of the June-quarter reporting season. In the seesaw technology tape of 2001, we believe these glimmers of improvement are crucial. Investor psychology is no longer ravenously bearish. But most technology investors appear to be resigned, lacking in conviction, and without a strong point of view. Only rarely does psychology lag news flow as much as it appears to in the last few weeks. Usually tech stocks are so "smart" that they move sharply before investors can figure out why. Now investors have a rare opportunity to act on a growing store of positives without fretting that the developments have already been discounted into share prices. We believe chip stocks will lead in coming months, in part because the bulk of encouraging news at the margin is emerging from this sector.
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