Crunching the Numbers on the Chip Stocks, Frederic Ruffy, Optionetics.com
biz.yahoo.com
When it comes to determining the future direction of chip stocks, investors are getting little help from Wall Street. Over the past few weeks, a number of analysts have stepped forward to give their views regarding the state of the semiconductor industry. Unfortunately, not all share the same outlook and the conflicting messages sent stocks within the sector on a roller coaster ride. For investors, the mixed messages can be both frustrating and confusing. In situations such as this, it can be helpful to turn to independent and objective sources of information.
Chip stocks have been on a roller coaster ride during the month of August. On the first day of the month, the PHLX
Semiconductor Index (^SOXX) moved higher after a Merrill Lynch analyst raised his rating on chip and chip equipment stocks. Analyst Andrew Griffith told investors that demand for chips has, “hit a trough, and global supply is stabilizing after strong growth.” That news triggered a 5.1% advance in SOX on August 1.
The next day, semiconductor stocks enjoyed another batch of upbeat news. On August 2, chip stocks extended their gains after a chief executive at the world’s largest chipmaker, Intel Corp. (INTC), told investors that the chip-making giant expects a return to growth at some time in 2002. On that same day, the Semiconductor Industry Association [SIA] said that it sees the possibility of a turnaround in the industry. SIA President George Scalise said that semiconductor sales could pick up during the st Jonathan Joseph echoed those statements. The prominent Salomon Smith Barney analyst wrote in a report, “While the magnitude of the trough is slightly greater than we had originally anticipated, we continue to believe that the timing of the bottom of this cyclical downturn will occur in the next few months.”
The bullish comments from two Wall Street analysts coupled with the statements from SIA President and Intel CEO provided enough incentive to drive semiconductor stocks higher on August 2. For the week ended August 3, the semiconductor index rose more than 7%.
The gains proved short-lived, however. On August 7, chip stocks faced selling pressure after a CS First Boston analyst made cautious comments. The CSFB analyst told investors that chip sales are likely to fall 30% this year and much more than earlier estimates, which called for a 14% slump. In addition, according to the analyst, orders for semiconductor equipment might not recover until the second half of 2002. The CSFB comments come one day after a Lehman Brothers analyst said that an impending price war between Advance Micro Devices (AMD) and Intel was likely to “detonate a price bomb.” The firm recommended that investors avoid shares of the world’s largest chipmaker, Intel.
The comments from CSFB and Lehman Brothers were in stark contrast to those made by Merrill Lynch and Salomon Smith Barney. Consequently, during the week ended August 10, the semiconductor index headed south and effectively erased all of gains registered in the prior week. In other words, the lack of consensus from chip sector analysts sent stocks on a roller coaster ride. Investors acting on the bullish recommendations from the comments early in the month were surely disheartened by the turnaroun essages from the major Wall Street houses are assorted to the point that they become utterly useless, it can be helpful to filter it all out and do a little independent analysis. With respect to chip stocks, there are at least three sources of objective and worthwhile information that are readily available to anyone within Internet access.
First, the Semiconductor Industry Association releases reports on worldwide chip sales monthly. It is a three-month average of global semiconductor sales. On August 1, SIA reported that sales for the month of June fell 31% from the previous year and totaled $11.6 billion. Compared to the previous month, June experienced a 9% drop. That marked the eighth consecutive monthly decline in worldwide chip sales and a 38% drop from the October 2000 highs of $18.7 billion.
Each month, the Semiconductor Equipment and Materials International [SEMI] reports the Book-to-Bill ratio, which is a ratio of new orders to actual shipments of chip-making equipment. It is based on a three-month average. In the month of June, the three-month moving average of shipments totaled $1.3 billion while the number of new orders, or bookings, equaled roughly $700 million. The book-to-bill ratio was therefore .54. More troubling, however, was the pace of new orders, which totaled only $704 million and were a whopping 75% below June 2000 levels.
A final indicator concerning the health of the chip sector is the price of semiconductors on the spot market. Dynamic Random Access Memory, or DRAM, is often used as a proxy for chip prices. Smith & Associates makes markets in DRAM and other chips. Spot prices can be found on their web site. Over the past year, the spot price for 64 MB DRAM (16 X 14 PC-100) has fallen from $8.40 to $1.00 and 128 MB DRAM (32 X 14 PC-100) is down to $3.00 from $17.50. Three months ago, the 64 a ed for $2.25 and $4.00 respectively. In short, chip companies appear to have no pricing power.
In conclusion, using the three sources of information discussed above, there is little in the way of tangible evidence supporting the notion that the chip sector is recovering. Both worldwide chip sales and semiconductor capital equipment orders are falling. At the same time, semiconductor makers are seeing weak demand and no pricing power. According to analyst estimates, the chip sector is expected to grow earnings by 27% next year, but the chip equipment makers are likely to see earnings fall by 3%. Given that the average component of the semiconductor index trades at over 40 times earnings, until there is tangible evidence that the situation within the industry is improving, the high valuations and low projected growth rates provide little fodder for the chip sector bulls.
Yes my stop was real tight. I'm a bottom fisher. VTSS had what I thought was tremendous support at 15.125. That support did not hold. I believe that the semiconductors may be headed lower still. There are safer bets in the sector in my opinion.
RtS |
