Briefing.com has a couple of write-ups on the semi-equip universe as follows:
<Sizing up Semi Cap Equipment : The semiconductor sector had a nice run-up Wednesday after the earnings announcements from Applied Materials (AMAT) and Maxim (MXIM). The vanguard companies of the semiconductor capital equipment space either skirted 52-week highs or achieved some technical accolade in Wednesday's trading. In addition, we were also hearing positive comments coming from Novellus (NVLS) at the Soundview Conference yesterday as well. Our question is, did the market not listen to the Applied Materials call?
The salient point for recovery that most people are interested in for semi cap equipment earnings announcements during the "holding pattern" of the semi cycle is guidance. While AMAT expects its Q4 gross orders to grow to the tune of 10%, revenues are expected to remain flat to slightly up with its earnings in the range of $0.04-$0.05 per share, which was below the consensus estimate.
The other piece of information people look for is data that can give the street an idea of when orders will begin to return to the very specialized companies. Visibility continues to be an issue, as the need to expand capacity at fabs does not seem to be imminent.
Briefing.com's coverage of the semiconductor sector included a cautious piece on August 1, 2003, entitled "The Semi Cap Equipment Train…All Aboard?", that was written in the wake of some questionable analyst upgrades in the semi cap equipment sector. In that piece, we recommended investors either stay on the sidelines or take profits. The visibility question was addressed on Briefing.com on July 21 in a piece entitled "Thoughts on SEMI" regarding the implications of the Semiconductor Equipment and Materials International's book-to-bill number for June. Despite all of this information not auguring well for expectations of recovery, the semiconductor/capital equipment names continue to rise and their valuations continue to balloon with the air of hopeful thinking.
For more thoughts on why Briefing.com thinks it's time for the balloon to deflate on semi cap equipment stocks, be sure to visit our Stock Brief page.-- John Meza, Briefing.com>
Stock Brief Page:
Applied Materials Material Announcement
[BRIEFING.COM - John Meza] The semiconductor sector had a nice run-up Wednesday after the earnings announcements from Applied Materials (AMAT) and Maxim (MXIM). The vanguard companies of the semiconductor capital equipment space either skirted 52-week highs or achieved some technical accolade in Wednesday's trading. In addition, we were also hearing positive comments coming from Novellus (NVLS) at the Soundview Conference yesterday as well. Our question is, did the market not listen to the Applied Materials call?
And Your Point Is?
Well, the salient point for recovery that most people are interested in for semi cap equipment earnings announcements during the "holding pattern" of the semi cycle is guidance. While AMAT expects its Q4 gross orders to grow to the tune of 10%, revenues are expected to remain flat to slightly up with its earnings in the range of $0.04-$0.05 per share, which was below the consensus estimate at the time.
The other piece of information people look for is data that can give the street an idea of when orders will begin to return to the very specialized companies. Visibility continues to be an issue, as the need to expand capacity at fabs does not seem to be imminent.
Briefing.com's coverage of the semiconductor sector included a cautious piece on August 1, 2003, entitled "The Semi Cap Equipment Train…All Aboard?", that was written in the wake of some questionable analyst upgrades in the semi cap equipment sector. In that piece, we recommended investors either stay on the sidelines or take profits. The visibility question was addressed on Briefing.com on July 21 in a piece entitled "Thoughts on SEMI" regarding the implications of the Semiconductor Equipment and Materials International's book-to-bill number for June. Despite all of this information not auguring well for expectations of recovery, the semiconductor/capital equipment names continue to rise and their valuations continue to balloon with the air of hopeful thinking.
Good, but Not Convincing
While AMAT continues to weather the storm and performed in line with consensus expectations, there are still some points from the call that only push out the notion of recovery and make valuations exceedingly unnerving. DRAM represented 47% of revenues for the quarter as opposed to 25% in the previous quarter. While management's guidance is probably fairly conservative (the co beat by a penny in Q3, Q2 and Q4), the DRAM revenue figure was fairly significant this quarter and will return to normal levels next quarter. However, street expectations of DRAM demand are reflective of a general weakening in the DRAM market as spot prices are expected to decline as fall approaches.
Another interesting point is flat "tape outs" from the previous quarter. According to SierraTech Research's semiconductor analyst, Greg McClenon, "tape-outs are the tapes that are used to generate the photomasks. The significance of this data point suggests a general anemic state of new design activity by semiconductor companies for the purpose of product innovation. The flatness of tape-outs signifies a lack of interest in designing new products given the lack of demand associated with the lackadaisical semiconductor environment." Mr. McClenon also notes, "the leading indicator is subject to statistical error if the sample size is too long. One set of photomask tooling may run many more devices than another. However, on the aggregate, with a sufficiently large sample size, the indicator should reflect the trend."
Still Lacking Visibility
AMAT did shed some light on its opinion of the semiconductor industry by stating it believes it has bottomed out. The company believes aggregate demand is increasing and said IT spending appears to be rising. While this information is encouraging, the company is still experiencing cancellations and adjustments with no real visibility as to when the recovery begins to ensue in the sector. Despite all of the upgrades by bulge bracket analysts, there is one particular firm that shares our contention on the space. Fahnestock semi cap equipment analyst Gerald Fleming has a Sell rating on Applied Materials and trimmed his estimates Wednesday in light of sluggish Q3 orders. Briefing.com continues to believe semi cap equipment stocks are overbought and that valuations continue to be too high.
AMAT is trading at 147.0x forward FY03 and 7.2x forward sales FY03. By including data from 08/96 to the present, further valuation analysis illustrates the stock has traded as high as 205.3x earnings on 5/31/02 and at an average 49.7x earnings. In addition, AMAT has traded as high as 15.0x sales on 4/28/00 with an average of 4.9x sales. The stock typically trades higher as inferential data points are disseminated suggesting recovery from the bottom of a semiconductor cycle. However, history can repeat itself. To wit, the stock's valuations surged last year on expectations of a return to meaningful order growth that, ultimately, failed to come to fruition. The sector, from our vantage point, should continue to experience pressure given the current environment where there is no visibility on the timing of the much anticipated recovery.
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