Friday January 11 4:06 PM ET
Analysts Look to Small-Cap Chip Stocks for Value
dailynews.yahoo.com
By Duncan Martell
SAN FRANCISCO (Reuters) - For investors looking to profit from a cyclical recovery in semiconductor stocks this year, analysts and money managers have this advice: think small.
The rally that took hold late last year in anticipation of an upturn in chip demand has stretched valuations, particularly for the big name players, so investors looking to mark gains in 2002 might want to scour small- and mid-cap companies, analysts said.
The Philadelphia Semiconductor Index (^SOXX - news), which includes the best-known names in the chip and chipmaking-equipment industry such as Intel Corp. (Nasdaq:INTC - news) and Applied Materials Inc. (Nasdaq:AMAT - news), has already soared 62 percent from its Oct. 2 low.
Now, for investors insistent on buying into the semiconductor sector, which analysts and investors say is extremely overvalued given earnings prospects for this year, selectivity and focusing on smaller companies becomes paramount.
Take Intel. The world's biggest maker of semiconductors has a market capitalization of $237 billion and is trading at 56 times its projected 2002 earnings per share of 62 cents, according to Thomson Financial/First Call. Intel stock has surged 77 percent since Oct. 2.
``Most of the easy money has been made in the large-cap semiconductor and semiconductor-equipment companies,'' said Justin McNichols, portfolio manager with San Francisco-based Osborne Partners Capital Management.
In the fall, portfolio managers made a bet that chip stocks were the right place to be, reasoning that, because chips had been hardest hit of all the major technology industries in 2001, shares of chip companies couldn't really fall much farther. It turns out they were right.
Texas Instruments Inc. (NYSE:TXN - news), which ranks as the second most valuable company in terms of market capitalization in the Philadelphia Semiconductor Index, at $48.9 billion, is a similar story.
CHEAP A RELATIVE TERM
Shares of the biggest maker of digital signal processor chips used in cellular phones have risen only 19 percent since Oct. 2 lows, but are trading at a sobering 689 times projected 2002 earnings, though that ratio declines to 44 as a multiple of 2003 earnings estimates.
That kind of lofty valuation explains why analysts are looking to smaller chip companies in 2002 to recommend to clients. In the mid-cap arena, Pacific Growth Equities analyst Jim Liang likes Actel Corp. (Nasdaq:ACTL - news), a maker of field-programmable gate array chips that customers, often in the telecommunications industry, can program to fit their product needs.
``We believe this is a company that's well positioned to participate in the anticipated cyclical recovery in the communications semiconductor story,'' Liang said. Actel's market capitalization is $516 million.
It's also a lot cheaper on a price-to-earnings basis than its larger competitors Xilinx Inc. (Nasdaq:XLNX - news) and Altera Corp. (Nasdaq:ALTR - news). Actel's forecast 2002 price-to-earnings ratio is 100, compared with 210 for Xilinx and 108 for Altera. Actel stock has risen 36 percent since Oct. 2 while Xilinx' has jumped 93 percent and Altera's has gained 62 percent.
``To the extent the company can execute on its growth strategy and its new product roll-outs, it could close the gap on its valuation discount to its peers,'' Liang said.
Some analysts are also pointing to somewhat significant differences in performance between the large-cap companies they cover and the small- to mid-cap ones.
SMALL IS BEAUTIFUL
Sidestepping the issue of valuation, Needham & Co. analyst Dan Scovel said: ``For the big-cap guys, business now is pretty bad, but for the smaller-cap guys, their business is actually pretty good on a relative basis.''
Scovel, while noting that he believes chip stocks are overvalued, said he thinks Zoran Corp. (Nasdaq:ZRAN - news), a maker of chips used in DVD players, is positioned for a potentially strong year. Sales of DVDs and players are breaking records as the new technology's popularity is approaching that of videotapes.
``Eighty-five percent of their sales come from DVD players and that market has been very strong,'' Scovel said. Zoran's market capitalization is about $600 million, and, while its shares have gained 59 percent since Oct. 2, its forecast 2002 price-to-earnings ratio is a more reasonable 43.
The boom-and-bust chip industry has tended to run in up-and-down cycles of about four years and has rebounded from downturns quickly in the past. The Semiconductor Industry Association, the leading trade group, forecast a 6 percent gain in sales this year to $150 billion, but a sharper 21 percent gain in 2003.
``In semiconductor equipment we're looking more toward a particular niche as a strategy and in semiconductors we're concentrating on valuation and later recovery situations,'' McNichols said. |
