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Thomas Weisel: Chip Equipment Ready for Spring
By Diane Hess
Staff Reporter
05/13/2002 05:26 PM EDT
Updated from 12:09 p.m. EDT
At a time when CEOs of technology companies are still telling Wall Street that they can't predict the future with any certainty, at least one analyst thinks a recovery is on the horizon.
"We recommend that investors return to tech," said David Readerman, an analyst at Thomas Weisel Partners, in a research report. "We believe the risk/reward is favoring a return to technology -- selectively, with a focus on sector leadership and sustainable, profitable growth at the right risk/reward trade-off."
Thomas Weisel says the spring is "loaded for a tech recovery." According to the firm, "U.S. investment in IT appears to have stabilized," since last quarter's GDP showed the first sequential upturn in technology spending. Second, it says, "evidence is mounting that recovery is under way" in chip and chip equipment-related sectors, where costs have been lowered in the name of profitable growth.
Out of 197 tech stocks under coverage, Thomas Weisel says its analysis indicates that the semiconductor and related capital equipment sector has the highest 2003 revenue growth forecast, at 23%.
The firm's top picks include Jabil Circuits (JBL:NYSE - news - commentary - research - analysis), KLA-Tencor (KLAC:Nasdaq - news - commentary - research - analysis), Taiwan Semiconductor Manufacturing (TSM:NYSE - news - commentary - research - analysis), and Vishay (VSH:NYSE - news - commentary - research - analysis).
Thomas Weisel's report comes when many businesses have been unable to forecast a recovery. The problems have been particularly acute for communications companies. Telecoms such as Worldcom (WCOM:Nasdaq - news - commentary - research - analysis), AT&T (T:NYSE - news - commentary - research - analysis) and Verizon (VZ:NYSE - news - commentary - research - analysis) have all recently cut spending.
Those cuts have imparted further doom on suppliers such as Lucent (NT:NYSE - news - commentary - research - analysis) and Ciena (CIEN:Nasdaq - news - commentary - research - analysis).
Though three of Weisel's four top picks are removed from the carnage in telecom, the firm's No. 1 recommendation, Jabil Circuits -- an electronic services manufacturer that makes circuits for communications companies -- depends on telecommunications customers for half of its total sales.
The other three picks -- which are chip equipment manufacturers -- are less dependent on telecom, and have lately seen some positive trends. In March, chip equipment manufacturers posted a book-to-bill ratio of 1.04, according to a recent report by Semiconductor Equipment and Materials International. That was the first time in 16 months that the ratio of bookings to billings went over 1.0, or above parity.
According to Thomas Weisel, the most positive "tech demand indicators" are found in the chip equipment group, because it is benefiting from three major technology transitions under way: the shrinking of chip sizes, a shift from aluminum-use to copper-use, and an increase in wafer size.
Weisel argues that the "current cyclical upturn in productivity" could correlate with a "pronounced ramp in business investment," which is by all means an aggressive bet. In the first quarter, business investment spending was down 5.7% after dropping 13.8% in the fourth quarter.
And even though each of the stocks has run up sharply since the fall, the bank says that its picks represent good values. Jabil trades at about 21 times 2003 earnings, which is one third of Thomas Weisel's estimated growth rate of 67% for that year. KLA-Tencor is valued at 31 times 2003 earnings, a multiple that is also one third of the bank's 100% estimated growth rate for the company.
Taiwan Semiconductor is valued at 20 times 2003 earnings, though it's doubled since September, ahead of a turn in its fundamentals. And Vishay Intertechnology has a multiple of 21 times 2003 earnings, which according to Thomas Weisel Partners is less than the value assigned to its competitors. |
