3/20/2003 - 12:00:00 AM - Industry Watch
Drab days for semiconductors
Numerous factors bode ill for a healthy recovery anytime soon
by Thomas J. Ryan
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tel.multexinvestor.com
After two years of declines, semiconductor sales finally started growing again this year, and that's a welcome development for semiconductor-device and -equipment manufacturers. However, many indicators suggest that the strong first quarter won't be enough to get stock prices moving.
Market stability remains elusive
The first problem is that the recent growth is fairly anemic at best, coming as it does off severely depressed prior-year levels. Secondly, with the drums of war pounding and the economy struggling to find its groove, capital-expenditure budgets seem to be retrenching once again, and many analysts expect management sales forecasts to be trimmed as well.
So, while there are signs that orders for the hard-hit industry are searching for a bottom, analysts no longer see a full-fledged turnaround coming this spring. Instead, most seem to be advancing the notion that the chip and chip-equipment industries will start to firm up in the second half of the year, once the economy finds its footing.
"While growth for semiconductors clearly lies ahead, we continue to believe that better macroeconomic and end-market stability will ultimately be necessary in order to fully restore and sustain investor sentiment within the overall industry going forward," says A.G. Edwards' Peter Andrew.
Drab business conditions
Lehman Brothers' Daniel Niles recently cut his 2003 growth rate for semiconductor revenues, from 13-15 percent to 10 percent. He believes the lingering threat of war will reduce orders from communications, computer, and electronics companies in the near term. "Currently, we believe the end-demand has been suffering as the uncertainty lingers," he says.
Another problem is that valuations for many still seem rich compared to current drab business conditions. "The current business environment is marked by a highly concentrated customer base, continued pricing pressure, and limited order visibility," says Edward White, who covers semiconductor-equipment stocks for Lehman Brothers. "We expect fundamentals to be weak at a time when valuations suggest a more optimistic view by investors."
Nonetheless, the group deserves watching. Occupying one of the first spots in the tech food chain, it should be one of the first to benefit from a renewed appetite for tech.
Waiting for clearer signs
Moreover, there's no denying that orders are on the upswing. January world semiconductor billings were up 22 percent, according to a report by WCTS (World Semiconductor Trade Statistics) released on March 7. Although those billings went up against easy comparisons, they represented the fifth consecutive month of 20-percent-plus year-over-year sales growth. On a unit basis, the 16.2 percent increase represented the ninth consecutive year-over-year gain.
But most analysts urge investors to be selective in their picks until even clearer signs of recovery appear. Somber comments by managements in 4Q02 conference calls, coupled with quick polls of end-users in key Asian markets, suggest that overall demand is iffy. Many analysts feel that any strength in the sector is waning.
Semiconductor-device makers, for instance, are expected to produce seasonally-normal-to-slightly-better first-quarter results, as players filled excessively lean inventories going into the period, according to First Albany's Auguste Richard. He also believes that, in the face of geopolitical uncertainly, some original equipment manufacturers (OEMs) even built up a small amount of buffer inventory to offset potential disruptions. However, falling consumer confidence, weakening corporate demand, and imminent war lead Richard to believe that end demand will be very weak in Q2. "The strength of Q1 is stealing demand from Q2," he says.
Likewise, Deutsche Bank Securities Timothy Arcuri believes first-quarter '03 results for semiconductor-processing-equipment manufacturers are coming in as planned, with orders looking to be up about 10 percent quarter-over-quarter. However, checks with Asian electronics companies lead him to believe that orders in the second quarter will come up short. "Near-term fundamentals are still very tough," he says.
Spotting the recovery
Sanford Bernstein's Adam Parker notes that it's tough capitalizing on semiconductor stocks in general because they typically trade six months in advance of the fundamental recovery, and spotting that recovery has been elusive.
Stocks rallied in October and November last year in anticipation of a spring rebound, but dropped in December and January as the economy failed to strengthen, Parker observes. Going forward, stocks will likely remain volatile as sober comments from Intel (INTC) CFO Andy Bryant and Texas Instrument (TXN) CEO Tom Engibous cast doubts on the prospects for recovery even in the second half of the year.
"We believe more starts and retreats are plausible, until investors are more comfortable that fundamentals indeed are improving," says Parker. He also believes the "prospect of war has spooked investors and cast a shadow of doubt over the potential of the 2003 economy."
Hunting down outperformers?
Still, analysts are recommending stocks they believe will outperform in the current climate. First Albany's Richard has a Strong Buy on Intel, and Buy ratings on PDF Solutions (PDFS), Photronics (PLAB), and Power Integrations (POWI). A.G. Edwards likes Broadcom (BRCM) and Texas Instruments among communications ICs (integrated circuits), Echelon (ELON) and Power Integrations among analog semiconductors, and Helix Technology (HELX) in the semi-equipment space.
Bernstein's favorite picks are Analog Devices (ADI) and STMicroelectronics (STM), while Deutsche recommends Lam Research (LRCX), LTX (LTXX), Novellus Systems (NVLS), and Teradyne (TER).
Banc of America Securities Mark Fitzgerald believes long-term investors should stick to large-cap names in the sector and strong small-cap names with intellectual property, while avoiding cash-burning companies. Banc of America has Buy ratings on KLA-Tencor (KLAC), Lam Research, Novellus Systems, Mykrolis (MYK), and Photronics.
Thomas J. Ryan is a veteran business writer.
Seems like stock prices have been moving nicely higher lately to me.
RtS |
