The Semi Cap Equipment Train... All Aboard?
01-Aug-03 10:35 ET
Upgrade the sector! Upgrade the sector! Great! The Semiconductor Capital Equipment sector is upgraded because analysts believe the recovery is coming. The million dollar question is…when?
Go West and Prosper
Semi cap equipment names had quite a run during Semicon West and have maintained an upward trajectory. 52-week highs are becoming synonymous with any company making esoteric products that provide chemical vapor deposition or chemical mechanical planarization. However, reviewing current valuations for some of the marquee names in the sector gives one great pause as analysts continue to yell all aboard.”
Novellus (NVLS), for example, is trading at 201x trailing earnings, 52x forward earnings, 5.7x trailing sales and 5.8x forward sales. This valuation is fairly rich for a company that provided weaker than expected revenue guidance on its earnings call and no real indication of visibility. NVLS guided revenues to $220 mln, which was lower than the Reuters Research estimate of $232.9 mln. KLA-Tencor (KLAC) recently reported less than stellar guidance as well. Management stated orders will be up 5% quarter/quarter while EPS is expected to be $0.16-0.17 on revenues of $310-315 mln. Consensus estimates at the time called for EPS of $0.18 on revenues of $330 mln. KLA-Tencor is currently trading at 74.3x trailing earnings, 50.6x forward earnings, 7.7x trailing sales and 7.05x forward sales. Applied Materials (AMAT) is tentatively scheduled to reports its much anticipated Q3 on August 12.
Banking on Recovery
The street, however, believes incremental data points such as Capex estimates by companies such as Taiwan Semi (TSM), STMicroelectronics (STM) and Sony (SNE) augur well for the industry.
In Goldman Sachs's recent Semi Equipment Weekly, the firm noted the “glimmers of hope” mentioned in its previous reports suggest investors look for any “improving fundamental momentum” in any cyclical business during seasonally slower periods. The note mentions Sony increasing its capex forecasts slightly, TSMC narrowing its capex forecast range to $1.25 bln and the acknowledgment by STMicroelectronics at its recent analyst meeting that the company has spent half of its 2003 capex budget with 60% allocated to advanced technologies. While the advent of this information is encouraging, the stocks in the sector continue to run at a pace that suggests we are in a vortex of recovery. Book-to-bill ratios have yet to break 1.0 and chip demand has not been dramatic enough to signal an insatiable need for foundry expansion.
Not So Fast
As pointed out in a recent piece entitled “Thoughts on SEMI” by yours truly, “If one were to go back and look at the previous book-to-bill ratios since January of this year, one would notice the linearity can easily take a bad turn. The following data is from SEMI: Jan 03-0.94, Feb 03-0.98, Mar 03-0.91, Apr 03-0.90, May 03-0.90, Jun 03-0.93.” While glimmers of hope seem to abound and analysts continue to follow the Lehman train and yell out “choo! choo!” by upgrading the sector (even after weak guidance), the valuations associated with the sector continue to run ahead of fundamentals.
While this may not be new news and was predicted by Briefing.com’s coverage of the sector, the market doesn't seem to be interested in the total lack of inferential data points that are inconsistent with near-term recovery valuations. The semi cap equipment sector is in a cyclical “holding pattern” while the stocks in the space trade have already left the station with a full head of steam.
Briefing.com would recommend taking profits and staying on the sidelines with this sector until there is more visibility, instead of the continued cries of lowered revenue outlooks and push outs in orders that are made apparent in earnings announcements. Current expectations are for recovery in the late Q3/early Q4 timeframe. However, as visibility continues to be a confounding variable, recovery looks more likely in the 1H:04 timeframe.-- John Meza, Briefing.com
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