GS US SEMI EQUIPMENT WEEKLY: 2004
CAPEX 2ND HIGHEST ON RECORD
Summary: (1) 2004 will be the second highest year in absolute semi capital spending on
record, contrary to the thesis that spending is coming off such a low base that the industry
isn't adding significant capacity. (2) Intel and Texas Instruments are hosting analyst
meetings this week; expect little incremental news on capex but inventory comments may
be important to gauge direction of future capex plans. (3) Many investors looking to the
buy the stocks for a bounce after recent sell-off, but we prefer to wait for more
fundamental data. (4) News, events, and price performance.
2004 WILL BE THE SECOND HIGHEST YEAR IN ABSOLUTE CAPITAL
SPENDING ON RECORD, CONTRARY TO THE THESIS THAT SPENDING IS
COMING OFF SUCH A LOW BASE THAT THE INDUSTRY ISN'T ADDING
SIGNIFICANT CAPACITY. We continue to field arguments from clients that it is not
possible that the semi equipment cycle could be nearing an end because we aren't adding
enough semi capacity to throw the industry into a downturn. The argument follows that,
even though capex is likely to be up 60% y-o-y in 2004, we aren't facing a capacity glut
because we are coming off such a low base in capital spending. We believe the numbers
tell a different story. First, our bottom- up model indicates that 2004 capex will be over
$47 billion, the second highest capital spending year in the history of the semi equipment
industry. We find it difficult to believe the argument that the cycle is sustainable because
we are coming off such low levels of capex when the industry is already spending more
than it has in any other year in the last 30 (aside from 2000). Our second point is the
reiteration of the point we raised several weeks ago in our weekly note--that the 2004
spread between semi revenue growth and capex growth is the worst in the history of the
semi equipment industry. We find both of these facts rather compelling and believe that
investors who argue that this cycle must be sustainable because capex levels are still low
on an absolute basis should carefully consider these points.
To crystallize the issue, we recently built a model that measures whether the semi
industry is adding enough wafer start capacity to support the growth in semi units in 2004
and into 2005. The conclusion of this exercise is quite simple. If semi units grow more
than about 10% in 2005, then the semi industry will need to increase its capex spending
and 2005 will be another good year for the semi equipment industry. However, if semi
units grow less than about 10% in 2005, semi capex in 2005 can be flat and the semi
industry will still meet its capacity requirements. Please let us know if you would like to
chat about our wafer start model.
INTEL AND TEXAS INSTRUMENTS ARE HOSTING ANALYST MEETINGS THIS
WEEK; EXPECT LITTLE INCREMENTAL NEWS ON CAPEX BUT INVENTORY
COMMENTS MAY BE IMPORTANT TO GAUGE DIRECTION OF FUTURE
CAPEX PLANS. Both Intel (Thursday, May 13th) and Texas Instruments (Tuesday and
Wednesday May 11th and 12th) are hosting analyst meetings this week. We expect little
in the way of incremental capex news from either meeting. Recall that Texas Instruments
raised its 2004 capex budget to $1.3 billion on its most recent earnings call citing tight
back-end capacity as the driver behind the increase. At the analyst meeting, we will look
for incremental color on whether the tightness in the back-end is easing but we do not expect the
company to make additional comments on incremental 2004 capital spending.
Regarding Intel's capex, recall that Intel spent only $680 million in CQ1'04 capex, a run rate well
below the mid-point of its 2004 capex budget of $3.8 billion. Our recent checks indicate that Intel
will indeed spend its full 2004 budget, which implies sequential increases in capex as we move
throughout the year. We believe most of the remainder of Intel's 2004 budget is dedicated to
65-nanometer spending, which is likely less dependent on end-demand and therefore not likely to
change depending on end- market conditions.
In addition to details on capex during the meetings, we will be listening closely for any indications
of the direction of inventory levels and, in Texas Instruments' case, the extent to which it expects to
slow wafer orders to the foundries given its commentary on its recent call that it has built buffer
inventory of foundry wafers. Along with an increased level of foundry inventory at TI, our semi
analyst Andrew Root highlighted in a note last week that fabless semi customers significantly
increased their inventory levels in Q1'04 to 77 days from 53 days in Q4'03 (normal inventory
levels for Q1 have historically been 63 days). Our concern for the semi equipment cycle is that
fabless customers could choose to begin drawing down that inventory as we move through H2'04
right at the time when incremental capacity is coming online at the foundries. This scenario could
lead to lower utilization rates and, in turn, lower order patterns/2005 capex from the foundries.
INVESTORS LOOKING TO BUY THE STOCKS FOR A BOUNCE AFTER RECENT
SELL-OFF, BUT WE PREFER TO WAIT FOR MORE FUNDAMENTAL DATA. Most of our
incoming calls this week were regarding investors looking to buy the semi equipment stocks in
anticipation of a stock price bounce after the significant recent sell- off. We are not so anxious.
While valuations are now more in line with our normalized free cash flow-based intrinsic values,
we believe that fundamentals will be a more important intermediate-term driver of stock prices and
we therefore prefer to gauge forward-looking order patterns before deciding whether to be more
aggressive on the stocks. Specifically, based on our research we currently believe that third
calendar quarter orders will be flat to down slightly sequentially for most of the semi equipment
companies. Many investors seem anxious to anticipate a fourth calendar quarter re-acceleration in
sequential order patterns, but we do not believe that there is any concrete evidence of such a
re-acceleration at this point in time. We prefer waiting to collect more fundamental data over the
coming months before drawing a conclusion on fourth-quarter orders. We do believe that too many
investors are expecting fourth-quarter orders to reaccelerate based on hope alone, and given what
we believe to be an increasingly crowded "bounce trade" being espoused in the market, we are
reluctant to make any speculative group call for now.
News, Events and Price Performance
Last week
Monday 3 May (1) Brooks Automation announced that on April 28, 2004 it was notified by letter
that a legal settlement had been concluded against it in Israel in the amount of approximately
$700,000. The legal proceeding arose out of a dispute between PRI Automation (prior to the
acquisition of PRI by Brooks) and an Israeli engineering services firm. Brooks anticipates making
payment of the full amount of the settlement to the Israeli firm during May 2004. Because this
resolution provides additional evidence with respect to the expense associated with the previously
disclosed legal proceeding, Brooks will record the expense associated with the payment of this
settlement in the fiscal quarter ended March 31, 2004. The net impact of this settlement is that
GAAP EPS for the March quarter were revised to $0.14 from $0.15. (2) Axcelis Technologies
announced the appointment of Stephen Bassett as senior vice president and chief financial officer.
Bassett has served as the company's interim CFO since last year and has previously held positions
at Ezenia! and Ernst and Young. (3) Mykrolis said that the Massachusetts District Court ordered
Pall Corporation to stop selling its PhotoKleen EZD-2 Filter Assembly products to its customers.
Pall's PhotoKleen EZD-2 Filter Assembly products are the subject of a Mykrolis lawsuit charging
Pall with infringement of two US patents owned by Mykrolis. (4) Tessera Technologies and
NxGen Electronics (an electronic manufacturing services provider for the industrial, medical,
aerospace and defense industries) signed a new licensing agreement under which NxGen will
manufacture and make broadly available Tessera's microZ-Ball Stack Package. (5) Aehr Test
Systems received follow-on orders totaling over $5 million for its new MTX model Fp+ test during
burn-in systems from a memory chipmaker.
Tuesday 4 May (1) Trikon Technologies announced that Bill Elder was appointed as an
independent director of the company. Elder was a founder of Genus and currently serves as its Chairman, President and CEO. (2) Ultratech said that Chipmos Technologies
purchased Ultratech's Saturn Spectrum 3e advanced packaging lithography tool.
Wednesday 5 May (1) Therma-Wave received a multi-fab, multi-system follow- on order for its
Therma-Probe XP ion implant monitoring tools from a Korean DRAM producer. (2) Brooks
Automation announced a collaborative program with Applied Materials that leverages Applied's
global service infrastructure and capabilities to deliver support and spare parts management to
Brooks' factory automation hardware customers. Under the agreement, Applied Materials will
provide on-site service and parts for certain of Brooks' factory automation hardware products. (3)
Asyst Technologies (ASYT-$9; NC) reported -$0.11; Street -$0.18. (4) Asyst Technologies named
Warren Kocmond to the position of senior vice president, worldwide manufacturing operations.
Kocmond most recently served as a corporate vice president for Applied Materials and will replace
Fred Tiso, who is leaving the company to pursue other business interests.
Thursday 6 May (1) ATMI sold its life safety sensors business to City Technology, part of the First
Technologies Group of companies, for $11 million. ATMI has now completed the divestment of
two of the six units accounted for as ATMI's discontinued operations.
This week's calendar:
Tuesday 11 May: (1) Texas Instruments analyst meeting in Dallas, TX.
Wednesday 12 May: (1) Texas Instruments analyst meeting in Dallas, TX.
Thursday 13 May: (1) Intel analyst meeting in New York, NY. (2) LTX Corporation (LTXX-$11;
NC) reporting earnings. Street $0.07.
GS Universe Price Performance 5/7/04 Price performance
Ticker Company Name Rtg Close Week MTD QTD YTD Y-Y
Semiconductor Capital Equipment
AEIS Advanced Energy IL/N 14 4% 4% -37% -47% 29%
AMAT Applied Materials IL/N 19 2% 2% -12% -17% 23%
ATMI ATMI Inc. IL/N 25 13% 13% -8% 7% 18%
ACLS Axcelis Technologies IL/N 11 5% 5% -3% 8% 101%
BRKS Brooks Automation IL/N 17 2% 2% -20% -28% 85%
CMOS Credence Systems U/N 12 7% 7% 5% -10% 58%
ENTG Entegris IL/N 11 6% 6% -11% -16% -10%
FORM FormFactor OP/N 18 4% 4% -10% -8% N.A.
KLAC KLA-Tencor OP/N 43 3% 3% -18% -27% 2%
LRCX Lam Research IL/N 22 0% 0% -14% -32% 40%
MKSI MKS Instruments IL/N 20 3% 3% -19% -32% 31%
NVLS Novellus Systems IL/N 29 0% 0% -10% -31% 0%
TER Teradyne Inc. U/N 21 4% 4% -14% -17% 68%
Mean -- -- 4% 4% -13% -19% 37%
Median -- -- 4% 4% -12% -17% 30%
Source: Factset, Goldman Sachs Research estimates.
I, Jim Covello, hereby certify that all of the views expressed in this report accurately reflect my
personal views about the subject company or compan |
