GS WEEKLY: WHERE DO WE GO FROM HERE POST LAST WEEK`S
SELL-OFF?
SUMMARY: (1) Stocks gave back some of their recent gains late last week as bullish
sentiment ahead of Semicon West was trumped by concerns upstream in the supply chain.
Where do we go from here? (2) We believe investors are focused only on the seasonal
improvement in demand and not on the cyclical increase in supply in H2'04, (3) Short
interest data ticked up in June off of four-year lows, likely explaining the surge in the
stocks before last week, and (4) News, events and price performance.
STOCKS GAVE BACK SOME OF THEIR RECENT GAINS LATE LAST WEEK AS
BULLISH SENTIMENT AHEAD OF SEMICON WEST WAS TRUMPED BY
CONCERNS UPSTREAM IN THE SUPPLY CHAIN. WHERE DO WE GO FROM
HERE? Stocks gave back some of their recent gains last week as the average stock in our
universe fell 7% last Thursday and Friday. Stocks had rallied 10-15% before that
weakness as investors put long trades on ahead of the Semicon West trade show which
takes place from July 12th to the 16th. What remains to be seen this week is whether or
not the bullish sentiment ahead of Semicon West was wiped out by a plethora of negative
preannouncements from semi/end-market companies or if investors are still hoping that
weaker news upstream in the chain won't impact semi equipment management
commentary during the show. One way we will gauge that is if stocks re-rally this week
ahead of the show. Our take is that sentiment is still pretty frothy ahead of the show and if
managements aren't as bullish as the recent round of Street chatter, then stocks are likely
to see another leg down during the show and/or during earnings season (which begins
during the show). We published a detailed quarterly and Semicon West preview last
Thursday evening in which we highlighted that we don't expect the semi equipment
companies to offer anything substantive to support the Street's more bullish recent view.
While we do expect management tone to be extremely bullish, as it has been for the last
several quarters, we don't believe that the supply chain is as clean as it was last quarter
(i.e., inventory build and select negative preannouncements) and we believe that is likely
to be reflected in the hard number guidance provided by the equipment management
teams. Perhaps more importantly, the semi companies themselves will start reporting
during Semicon West and, as our semi analyst Andrew Root has highlighted, we would
expect there to be pockets of weakness from semi companies during reporting season
which will likely dampen enthusiasm for stocks downstream in the supply chain.
WE BELIEVE INVESTORS ARE FOCUSED ONLY ON THE SEASONAL
IMPROVEMENT IN DEMAND AND NOT ON THE CYCLICAL INCREASE IN
SUPPLY IN H2'04. Demand should improve seasonally in H2'04...it always does!
However, we believe that the worldwide semiconductor equipment data provided by
Semiconductor Equipment and Materials International (SEMI) suggests the supply is
going outpace seasonal improvement in demand in H2'04. We believe that investors are
ignoring the supply side of the supply demand equation as they attempt to establish long
positions ahead of the seasonally stronger H2'04. Total worldwide semi equipment
shipments (from SEMI) increased 42% sequentially in the first quarter of 2004 to $9.1
billion, thus creating a substantial amount of incremental capacity in H2'04 as those
shipments are installed and begin to yield. A brief glimpse at first-quarter shipment data
(or estimates) for the large front-end equipment suppliers supports the idea that a significant
amount of manufacturing capacity was shipped in Q1'04 and will come online in H2'04. We
estimate that in Q1 Applied's shipments increased about 35% sequentially, KLA's shipments
increased 25% sequentially, Lam's shipments increased 65% sequentially, and Novellus's
shipments increased about 35% sequentially. Annualizing first-quarter worldwide semi equipment
shipments for all of 2004 implies total worldwide semi equipment shipments of about $36.6 billion,
or an increase of about 65% year over year. We believe that it is feasible that shipments increase
65% year over year given that our bottom-up capex model projects about 58% year- over-year
capex growth and given that some of the pick-up in orders that occurred in late 2003 likely added
to shipment growth in early 2004 (recall that there is a lag between when an order is placed and
when a tool is shipped). Importantly, our assumption of 65% shipment growth in 2004 (based on
taking the Q1 shipment data and multiplying it by 4 to get the full year projection) implies flat
shipments in each of the second, third, and fourth quarters. Therefore, even with shipments
flattening out over the next several quarters (which would likely create some downside risk to
H2'04 estimates) the semiconductor industry is adding an extraordinary amount of capacity in
2004.
Importantly, when we adjust our wafer capacity supply/demand model for the higher than expected
shipments in the first quarter, we now project that capacity utilization exiting 2004 and into 2005 is
likely to decline from current levels of about 94%, even assuming flat y-o-y capex in 2005. Again,
we highlight that declining capacity utilization makes it less likely that chipmakers will makes the
"panic" orders that many semi equipment companies expect to see before they will acknowledge
that the cycle is in its later stages.
SHORT INTEREST DATA TICKED UP IN JUNE, LIKELY EXPLAINING THE SURGE IN
THE STOCKS BEFORE LAST WEEK. In this space a few weeks back, we highlighted that short
interest was at a four-year low for many of the names in our coverage universe as of May 15th,
highlighting what we continue to believe to be surprisingly bullish sentiment toward the semi
equipment stocks in anticipation of a seasonally stronger H2'04 upstream in the electronics supply
chain. Between May 15th and June 15th, short interest increased meaningfully for some of the
names in our universe. Short interest data for the month of June (calculated from May 15th to June
15th) highlighted that the average short interest for the stocks in our coverage universe increased
9% month over month. Notable increases in short interest occurred with AMAT (short interest was
up 26% month-over-month in June off of a 4- year low in May), ACLS (short interest was up 21%
month over month in June), and TER (short interest was up 26% month over onth in June also off
of a 4-year low in May). Notable declines in short interest occurred with CMOS (short interest
declined 24% month over month in June - likely related to the closure of the NPTest acquisition)
and AEIS (short interest declined 21% month over month in June). We believe that the overall
increase in short interest may have been one of the drivers of better stock performance during the
last week of June, as shorts may have covered positions in response to heightened Street
expectations heading into SEMICON West and earnings season. We continue to believe that
investor sentiment remains bullish on semi equipment and we would expect short interest to decline
as of the July 15th data as most investors seem uncomfortable shorting the stocks ahead of
Semicon West.
News, Events and Price Performance
Last week
Monday 28 June (1) LTX Corporation announced that Silicon Turnkey Solutions ordered Fusion
HFi to deliver test and characterization services for its customers' advanced system-on-a-chip
devices. (2) Brooks Software, a division of Brooks Automation, announced a solution agreement
with HP under which Brooks will work as an applications solutions provider with HP to provide
manufacturing and enterprise performance management solutions. (3) Asyst Technologies is
extending its service capabilities in Asia through the establishment of a new repair center in
Singapore. (4) Advantest Corporation announced that its T2000 Series has been certified by the
Semiconductor Test Consortium (STC) as the industry's first system to meet the Open
Semiconductor Test Architecture standard. (5) Mattson Technology signed a definitive agreement
to acquire Vortek Industries, a privately held developer of millisecond flash annealing technology
based in Vancouver, Canada. The terms of the transaction were not disclosed.
Tuesday 29 June (1) Advanced Energy Industries introduced the Ovation very- high frequency
power delivery system. The Ovation system is designed for such applications as
sub-90nm and sub-65nm etch applications. (2) Applied Materials introduced the Quantum X ion
implanter, a high-tilt single-wafer high-current system. (3) Therma-Wave received multiple orders
for its 300mm metrology tools from a Taiwanese foundry. The multi-million dollar order includes
follow-on purchases of multiple Opti-Probe thin-film measurement systems as well as a
Therma-Probe ion implant monitoring tool. (4) ATMI entered into a definitive agreement to sell its
specialty silicon epitaxial services business located in Mesa, Arizona, to International Rectifier
Corporation, subject to customary closing conditions. Specific terms of the cash deal were not
disclosed.
Wednesday 30 June (1) Mykrolis Corporation released its new Planarcore polyvinyl acetal (PVA)
brushes. The Planarcore PVA brushes will be used in post-CMP cleaning and polishing
applications. (2) Mykrolis Corporation said that it will introduce its new Chemlock Polypropylene
Cartridge Filter Housing at SEMICON West in San Francisco during the second week of July. (3)
Entegris announced that the President of the company's Fuel Cell business, John Goodman, was
elected to a one-year term as the United States Fuel Cell Council Policy Committee Chair.
Thursday 1 July (1) ATMI announced that it had sold its semi fabrication plant parts cleaning
services business (called "fab services") to Materials Support Resources. The company said it
expects to recognize a gain slightly above book value. (2) Amkor Technology negatively
preannounced its earnings, indicating that revenues for the second quarter are expected to be
approximately 6% higher than the first quarter, compared with prior guidance of 5% to 8% growth.
The company expects gross margin for the second quarter to be around 19% compared with prior
guidance of around 24% and EPS is expected to be about $0.06 versus earlier guidance of $0.17 to
$0.22. (3) Veeco Instruments launched an advanced engineering program to develop a
next-generation data storage thin film head sensor deposition tool. (4) Ultratech named Rick
Friedman Senior Vice President of Worldwide Sales and Marketing. Friedman will report to John
Denzel, President and Chief Operating Officer.
GS Universe Price Performance 7/2/04 Price performance
Ticker Company Name Rtg Close Week MTD QTD YTD Y-Y
Semiconductor Capital Equipment
AEIS Advanced Energy IL/N 15 1% -4% -4% -42% -1%
AMAT Applied Materials IL/N 19 -4% -6% -6% -18% 14%
ATMI ATMI Inc. IL/N 26 0% -6% -6% 11% 0%
ACLS Axcelis Technologies IL/N 11 -4% -9% -9% 11% 79%
BRKS Brooks Automation IL/N 18 -3% -8% -8% -22% 49%
CMOS Credence Systems U/N 14 2% -1% -1% 4% 53%
ENTG Entegris IL/N 11 -2% -8% -8% -17% -21%
FORM FormFactor OP/N 20 -5% -9% -9% 3% 11%
KLAC KLA-Tencor OP/N 46 -3% -6% -6% -21% -2%
LRCX Lam Research IL/N 24 -6% -9% -9% -24% 29%
MKSI MKS Instruments IL/N 21 -4% -7% -7% -27% 12%
NVLS Novellus Systems IL/N 30 -3% -5% -5% -29% -17%
TER Teradyne Inc. U/N 21 -4% -8% -8% -18% 17%
Mean -- -- -3% -7% -7% -15% 17%
Median -- -- -3% -7% -7% -18% 12%
Source: Factset.
I, Jim Covello, hereby certify that all of the views expressed in t |
