S&P, IC Knowledge: "Is the current semiconductor industry growth rate sustainable?"
icknowledge.com <---charts
"Revenue trends" - updated 4/23/02
icknowledge.com
"Handicapping the Tech Turnaround", 5/7/02
businessweek.com
"Integrating Chips into Your Portfolio", 5/10/02
businessweek.com
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Selected highlights, rearranged some.
>>>05/05/2002
Is the current semiconductor industry growth rate sustainable?
The discussion that follows is taken from the IC Knowledge - 2002 IC Economics report.
The relative size and growth rates of worldwide GDP, electronic systems and semiconductors are illustrated in figure 1. At the top level is world-wide Gross Domestic Product (GDP) of $46.8 trillion dollars. The next level down is world-wide electronic systems production of $879 billion dollars. At the bottom level there is $139.5 billion dollars in world-wide semiconductor revenue [1].
From 1980 to 2000, the world-wide GDP, electronic systems and semiconductor outputs grew at 3.2%, 7.1% and 14.1% respectively, see figure 1. Prior to 1980, electronic systems were growing at a faster rate but since 1980 the growth rate has been slower. From the difference in growth rates it can be seen that electronic systems have increased as a percent of GDP from approximately 0.8% to 1.6%, and semiconductors as a percentage of electronic systems from approximately 5.4% to 19.0%. If current growth rate trends continue until 2010, electronics systems will represent 2.6% of GDP and semiconductors will represent 25.8% of electronic systems on a world-wide basis - see figure 2. If these market penetration percentages are not achievable at the GDP and electronic systems level, then the growth rates at the semiconductor level will slow.
The key question becomes, is 2.6% of GDP achievable for electronic systems, and is 35.8% of electronic systems achievable for semiconductors.
At IC Knowledge we believe that 2.6% of GDP is a reasonable level for electronic systems. Electronics systems continue to become increasingly important in our daily lives, and electronics have already become the largest industrial segment in the US.
Many observers believe that 30% is an upper limit for semiconductor content in electronic systems. At IC Knowledge we believe that in the short term 30% is too aggressive. Although there are some newer electronic systems such as digital cameras, set top boxes, internet game consoles and internet access devices that have semiconductor content between 30% and 35%, the vast majority of systems fall in the 15% to 25% range, and some older electronic systems such as color televisions, car radios and video cameras have semiconductor content <10%. The higher semiconductor content products are certainly in the hot growth markets, but it will take time to bring the average up.
IC Insights is forecasting that
... semiconductor content in electronic systems will not exceed 20% through 2006 and
........ will then begin growing again at an average of approximately one percentage point per year.
In fact the last two peak years for the semiconductor industry have produced peak semiconductor content in electronic systems of 21.6% and 21.0% before falling back [1].
This analysis suggests
... average semiconductor growth over the next few years of 8% to 9% in-line with electronic systems growth,
........ followed by a period of 10% to 11% growth as semiconductors pick up more share in electronic systems again.
The years of 15.1% per year semiconductor growth may be coming to an end.
References
[1] "The McLean Report 2002 Edition: An In-Depth Analysis and Forecast of the Integrated Circuit Industry," IC Insights (2002).<<<
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>>>MAY 7, 2002
SAM STOVALL'S SECTOR WATCH
By Sam Stovall
Handicapping the Tech Turnaround
At S&P,
... we see the semiconductors and semiconductor-equipment industries coming back first.
... The outlook is hazier for hardware, software, and networking.
... However, we expect improvement in these areas as the economic recovery accelerates late in the year.
... The laggard of the group should be the telecommunications-equipment industry.
Tom Smith,
... who heads technology equity research for S&P, for some guidance.
... He says S&P has been positive on the semiconductor and semiconductor-equipment industries for several months.
...Orders, and therefore earnings, are expected to improve early for the chipmakers since they serve the widest range of end markets and thus have the greatest chance of being in the right spot at the right time.
Industry Early Mid Late
Semiconductor Equipment X
Semiconductors X
Application Software X
Systems Software X
Computer Hardware X
Networking Equipment X
Computer Storage & Peripherals X
Telecommunications Equipment X
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>>>MAY 10, 2002
TECH KNOWLEDGE • From S&P
By Thomas Smith
Integrating Chips into Your Portfolio
It'll be a far cry from the '90s boom, but investors may well see two or three years of expansion in semiconductor makers.
After hitting a cyclical low in the second half of 2001, semiconductor sales are beginning to climb. Worldwide data from the Semiconductor Industry Assn. show that third-quarter 2001 marked the low point for integrated-circuit sales. Sales inched up 1.5% in the fourth quarter of 2001, vs. the previous quarter. Then they jumped 5.7% in the first quarter of 2002, vs. the last quarter of 2001.
In the much smaller categories of less complex chips known as discretes, optoelectronics, and sensors, sales bottomed in the final quarter of 2001. Growth in first-quarter 2002 compared with fourth-quarter 2001 was a healthy 5.2%.
UNEVEN REBOUND.
The semiconductor industry has run in cycles of approximately four years, with the last peak in 2000.
We at Standard & Poor's expect two years to three years of expansion before the next high, so now seems a good time to invest in terms of industry fundamentals.
...The caveat always remains, however, that valuations might be high enough to warrant caution, even if the fundamentals are good.
Certain end markets are coming back sooner than others.
S&P believes
... demand for wireline telecommunications equipment is likely to remain weak into 2003.
... But sales of PCs and laptops are likely to be up by around 3% in 2002 -- and 2003 could see growth of 10%.
While such increases aren't nearly as impressive as they were during the PC group's peak years of the '90s, they remain respectable for a maturing market.
The situation may look much the same for wireless handsets,
... with flat to modest growth in 2002, and
... better prospects down the road as fancier, next-generation phones are offered in 2003 and 2004.
5-STAR STOCKS.
Some markets held up during the downturn and continue to offer more stable growth prospects.
...These include consumer and automotive electronics, as well as industrial equipment.
... Accordingly, it may make sense to aim some semiconductor-sector investment toward chipmakers serving these broader areas, rather than trying to pick the next killer application -- or waiting until a particular market revives.
S&P has four chipmakers ranked 5 STARS (buy) that serve very broad markets. One is my Power Pick for 2002, Microchip Technology (MCHP ). It concentrates on the unglamorous 8-bit microcontroller market, relatively inexpensive and simple chips for embedded control systems used in devices ranging from refrigerators to automobile airbags to remote controls.
Microchip returned to quarterly sequential revenue growth beginning in September, 2001. During the 2001 downturn, its operating margin never fell below 20%. The book-to-bill ratio moved above 1.0 in 2002's first quarter, indicating that orders are above shipments and business is expanding.
ENERGY REFINER.
Another chipmaker serving broad markets is International Rectifier (IRF ), which focuses on MOSFETs (metal oxide semiconductor field-effect transistors) and other power semiconductors that "refine" electricity from wall outlets or batteries into more usable forms. These chips are used in "smart" washing machines, cars, and jet aircraft, as well as in communications and other devices.
The era of portable electronics and the critical need for efficient battery power should be big factors driving IRF's sales over the next several years. Another potential plus: Its products are used in the electronics systems that make cars more energy-efficient, which makes the stock something of a conservation play. Also, IRF's products are being used increasingly in PCs, so with each microprocessor upgrade, such as Intel's move from Pentium III to Pentium IV, is a boost for IRF.
Fairchild Semiconductor (FCS ) is another top pick for its broad array of chips used in a wide variety of applications. Only 20% of Fairchild's 2001 sales came from North America, and this geographic diversification helps cushion sales as global recessions roll from one continent to the next. Fairchild announced a surprisingly high book-to-bill ratio of 1.3 in its March, 2002, quarter. More surprisingly, in the face of widespread tech-sector layoffs, Fairchild is hiring.
CUSTOM CHIPS.
Linear Technology (LLTC ), which works with more complex, high-performance analog chips, also supplies products for a wide variety of end uses. Communications, encompassing a broad range of applications, is a major category. Other applications include networking, satellite systems, PCs, computer peripherals, video/multimedia, cell phones, and industrial instrumentation. High-end analog chips like Linear's contain considerable proprietary design content and are less prone to commodity pricing pressures.
Linear's record of unusually wide gross margins and consistent profitability is impressive: Its return on equity (ROE) has never fallen below 23% in the past decade. We estimate that for fiscal 2002, which ends June 30 -- a period that includes the toughest-ever industry recession -- ROE will be in the range of 10% to 12%. Net margins fell to just below 40% only in 2001's third quarter, which marked the bottom of Linear's cycle.
Linear dared to raise quarterly dividends heading into, and exiting, the downturn. Although valuation levels typically run high, Linear's performance justifies the premium.<<< |
