Chip companies forecast slow, uneven recovery
By Duncan Martell
Reuters
July 25, 2002 (6:41 a.m. EST)
SAN FRANCISCO — The good news is that while the chips are still down, they're coming back up — just not as quickly as many had earlier projected.
Quarterly results from the semiconductor industry have largely confirmed what investors have suspected for months: the second-half recovery in sales and profits will be a slow and uneven one at best.
The biggest chip companies, such as Intel Corp. and Texas Instruments Inc., remain tied to the downturn in corporate spending and computer sales, as well as to the overall economy.
And while some chip designers that serve hot markets, such as those making components that go into DVD players, haven't been hit as hard, other such niche suppliers are in a downturn of their own, analysts and investors said.
"Guidance has been a little weaker than expected but the stocks have priced that in over the last few months," said Justin McNichols, portfolio manager at San Francisco-based Osborne Partners Capital Management, which owns semiconductor stocks including Intel. "Overall this will be a little weaker period seasonally than we usually see."
Both Intel and its rival Advanced Micro Devices Inc., which reported its biggest loss since the second quarter of 1999 on flagging PC sales and stiff competition from Intel, forecast rising second-half sales.
But Intel, which derives roughly 80 percent of its revenue from the personal computer industry, also took steps to trim its work force again, this time by about 4,000, mainly through attrition. It said it hasn't yet seen any signs of a corporate PC upgrade yet as overall IT spending remains in the doldrums.
Infineon Technologies AG, a large maker of computer memory chips and other types of semiconductors, also forecast a moderate improvement in demand for the last half of the year, in line with muted expectations from other chip makers.
Some bright spots
Even so, there have been some bright spots.
Texas Instruments, the biggest maker of chips for cellular phones, posted net income of $95 million against a year-ago net loss. It also forecast third-quarter revenue would rise about 5 percent from the second quarter's $2.16 billion.
"The company saw a pretty impressive snap to business here in the second quarter and things have returned to perhaps a slightly more normal pace in the third quarter," said Joe Osha, an analyst at Merrill Lynch.
Even some of the battered communications semiconductor companies said they had turned the corner.
PMC-Sierra Inc. reported a narrower second-quarter loss and forecast sales would rise in the third quarter from the second quarter. Chairman and chief executive Bob Bailey told analysts that it was "reasonable" to expect the company to pull itself to break even in the first quarter of 2003.
PMC-Sierra, along with Applied Micro Circuits Corp., Broadcom Corp. and Vitesse Semiconductor Corp., sells chips to data-networking company Cisco Systems Inc. and Lucent Technologies Inc., a supplier of telecommunications equipment that has foundered along with the rest of its industry.
Valuation key
The prospect for a recovery in chip companies' markets must be weighed against the valuation of the companies' shares, analysts said. If the industry heads into a deeper downcycle, valuations on chip stocks have yet to hit bottom, McNichols cautioned.
"I think the big issue now is just valuation," he said. "Whether it's semiconductors or capital equipment, the companies for the most part are inexpensive on 1998 or 1996 trough valuations, but if this turns into a deeper downcycle the stocks are definitely not at their lows," he said.
For instance, Broadcom still trades at a steep 65 times projected 2003 earnings per share, and Maxim Integrated Products Inc. trades at 35 times projected 2003 earnings.
Some niche players to prosper
"In general I'd say the larger companies, those with a billion a year in revenues or more, they're subject to the overall business environment and there's no way to escape that," said Dan Scovel, an analyst at Needham & Co. "There are some exceptions in niche markets."
He pointed to Zoran Corp., which reported a 55 percent increase in second-quarter revenue to $34 million from the same period a year ago, and forecast that third-quarter revenues would rise by up to 28 percent.
But the niche strategy has risks, too. Cirrus Logic Inc., which makes components used in Microsoft Corp.'s Xbox video game console, on Monday (July 22) reported a fiscal first-quarter loss, citing lower demand for components used in the Xbox, and said it would cut 155 jobs, or 13 percent of its work force. |
