Note the bold in the middle, Stan.
Is it time to place your capital in semiconductor capital equipment stocks?
Monday October 28, 11:05 am ET
The Wall Street Transcript Online
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67 WALL STREET, New York--October 28, 2002-- In an in-depth (4,000 words) Analyst Interview, Gregory P. Konezny, a Vice President and a Senior Research Analyst at U.S. Bancorp Piper Jaffray, examines the outlook for the sector and shares specific stock recommendations in this Special Report on Semiconductor Capital Equipment from The Wall Street Transcript. This Special Report is available by telephoning 212-952-7400 x1799 or through The Wall Street Transcript
TWST: What is the background for semiconductor capital equipment at this time?
Mr. Konezny: The capital equipment business for semiconductors is extremely cyclical. In the 1990s we saw some very good growth in this market, driven by things like IT spending, wireless handset growth, and Internet infrastructure being built out. So in the 1990s there was a compound annual growth of about 15% for semiconductor devices. The capital equipment market actually grew throughout the whole decade at about a 17% compound annual rate, which is very strong.
Now, as we're into the early 2000s and coming off very strong capacity expansion in the late 1990s, we've seen the semiconductor device market and the capital equipment market really struggle over the last couple of years. We've seen order rates and sales of equipment and overall capital spending for equipment decline from 2000. It declined over 30% in 2001. It's going to decline another 20% or so in 2002, and the current outlook for 2003 is maybe flat to up 10%, depending on what your expectations are for a recovery in the semiconductor device market. So there have been a tough couple of years, but we think things have started to stabilize overall and we think some growth could resume next year.
TWST: Which companies would you highlight as doing a good job of positioning themselves for the upturn when it comes?
Mr. Konezny: The two best companies, in our view, that I would highlight, in terms of positioning for the upturn, would be Applied Materials and KLA-Tencor. I would highlight Applied Materials largely because their market share in Asia is actually quite a bit higher than what it is in North America and Europe. They made investments early on in building infrastructure in Asia. That is helping them now, as Asia is expanding their manufacturing capacity in that region. So I think Applied Materials stands to grow faster than the overall semi equipment market. Given the size of the company - they're the largest semiconductor equipment company in the world - they can really do a good job and have a competitive advantage, relative to global sales and support, in comparison to smaller equipment companies. So we expect Applied Materials, over the next several years, to perform well on that basis.
KLA-Tencor is the other company that we think, longer term, is a very good company that is going to benefit from the trends that we're seeing in the market. KLA-Tencor focuses on process control solutions for semiconductor manufacturing. As technology becomes more and more challenging, in terms of manufacturing a chip and getting the appropriate manufacturing yield to turn a profit, you're seeing more and chip manufacturers investing in KLA-Tencor's tools and technology. I think as we progress over the next few years, that trend will continue. KLA is the largest supplier of process control solutions to the industry; it has a great global infrastructure to be able to serve the industry overall, and that also helps position them well.
TWST: Greg, is it too early to take positions? Are there any stocks that investors could buy or at least initiate a position in today? Are there any stocks on your buy list?
Mr. Konezny: I think it's a little bit early to be jumping into it yet. I think there is still some negative news to come out here before the year is over. For investors who are longer-term oriented, meaning over 12 months, I think it's okay to start possibly building a position in something like an Applied Materials or a Novellus or a KLA-Tencor. Those would be the three to which I would direct investors. But overall, we still think that you could probably buy these companies at prices lower than where they are today, as some of the negative news that we expect to come out in the coming weeks impacts the stocks.
We're currently thinking that the upturn will start in the first half of next year. We're not sure how strong the upturn is going to be and we're not sure of the exact timing, but we think that either toward the end of this year or the beginning of next year is when investors should be looking at positioning themselves for that coming upturn.
TWST: What about stocks that are on your watch list? Do you have any that you are watching, but not particularly recommending?
Mr. Konezny: I think there are some smaller cap names (some that we follow and some that we don't) that are interesting names, but they carry a high risk profile, just due to the size of the company and potential uncertainty or concentration of risk in a particular niche or area. For example, longer term, a company such as Asyst (ASYT), which focuses on fab automation solutions. As the market moves to larger wafer sizes, from 200mm to 300mm, there is going to be much more automation in 300mm fabs. So as that trend plays out and we see 300mm spending possibly accelerate next year, you could see a company like that experience some pretty rapid growth - when things do recover.
Another interesting company we think is Cymer Inc. (CYMI), which we do not currently cover. They make the lasers that go inside lithography tools. As lithography technology gets more and more complex, the cost for Cymer's lasers increases and the company has an extremely strong market share in that niche, with over 80% share of the lithography laser market. So as the market moves to the next generation of lithography technology, we think Cymer stands to grow faster than the overall industry and that that could provide some very interesting growth for investors.
TWST: What is your overall message to investors who are looking at the semiconductor equipment sector, wondering what to do and when to do it?
Mr. Konezny: My message would be that this is an interesting sector to play, in terms of growth of global demand for electronics, which currently looks more overall economically driven, as opposed to secularly driven, as it was in the 1990s from IT spending and a number of other issues. But with a global recovery in electronics demand, I think the semiconductor equipment companies are a great way to play that because you do not see increased competition coming from Asia for these companies and these companies are the key to the manufacturing technology that supports the electronics industry.
In terms of timing, when to invest in these names, typically, when things look the most bleak is when you want to start building a position in these names. I think we're getting close to that scenario, but we're still waiting for some negative news to come out here in the coming weeks. But later this year or early next year is when investors should be buying positions in some high-quality names, with the expectation that we see a recovery in electronics demand sometime in 2003. And again, those key large cap names would be Applied Materials, Novellus and KLA-Tencor.
This Special Report is available by telephoning 212-952-7400 x1799 or through The Wall Street Transcript .
The Wall Street Transcript does not endorse the views of any interviewees nor does it make stock recommendations.
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