GS US SEMI EQUIP WEEKLY: SURVIVING
TRADING RALLIES ON THE WAY TO THE
BOTTOM
Summary: (1) The major foundries are reporting earnings next week; we believe that
declining utilization rates put the Street's 2005 foundry capex estimates at risk. Recall that
AMAT's stock price most closely correlates with TSMC's utilization rate, (2) We believe
that there will be trading rallies on the way to the bottom (one of which we experienced
last week) but ultimately the stocks will trend lower as the market is likely to be
disappointed by the length and/or severity of the downturn, (3) We called ATMI's Q3
incorrectly as we thought that wafer-start weakness would hit the company in Q3 but it is
instead impacting ATMI's Q4. We have been wrong on the stock, and (4) News, events
and price performance.
THE MAJOR FOUNDRIES ARE REPORTING EARNINGS NEXT WEEK; WE
BELIEVE THAT DECLINING UTILIZATION RATES PUT THE STREET'S 2005
FOUNDRY CAPEX ESTIMATES AT RISK. RECALL THAT AMAT'S STOCK
PRICE MOST CLOSELY CORRELATES WITH TSMC'S UTILIZATION RATE.
Several major foundries are reporting earnings next week including TSMC (Tuesday the
26th at 8am Eastern), UMC (Wednesday the 27th at 8am Eastern), Chartered (Thursday
the 28th at 8:30pm Eastern), and SMIC (Thursday the 28th at 8am Eastern). Our foundry
analyst, Donald Lu, believes that there is still substantial downside risk to 4Q utilization
estimates at TSMC (95% current 4Q utilization estimate), UMC (80%), and Chartered
(78%) and that visibility is very low in Q1'05. We would concur, as our industry
supply-demand analysis suggests a decline in overall industry-wide utilization rates in
2005 to 86% from 93% in 2004 (utilization is likely to be much worse at the foundries)
driven by the significant excess manufacturing capacity that we believe continues to
come online. Recall that one of the methods by which we measure the excess supply in
the industry is how far front-end semiconductor equipment shipments are above their
normalized levels, with current tool shipments at the second highest level above their
trendline in fifteen years (with the exception of the 2000 bubble when shipments were
even further above the trendline). Our analysis highlights that, for the entire industry,
12% to 13% incremental capacity will come online in 2005 as tool shipments from 2004
begin to yield. Importantly, declines in foundry utilization rates have historically been an
excellent indicator of semi equipment stock price movements. Our analysis of Applied
Materials' stock price (from two quarters earlier) vs. changes in TSMC's capacity
utilization rate shows that stock price movements tend to mirror changes in utilizations
about two- quarters in advance of the change in rates. This analysis supports additional
downside to the semi equipment stocks given that we expect the foundries' utilization
rates to continue to decline over the next several quarters.
Given the anticipated decline in utilization rates at the leading foundries we believe that
there is also downside risk to our (we believe we are inline with the Street) 2005 capex
estimates for both TSMC and UMC. We are currently estimating TSMC 2004 capex of
$2.4 billion and 2005 capex of $2.0 billion (-17% year-over-year), but we believe that the
company could give initial indications on its earnings call for a more substantial decline
in capex in 2005. For UMC we are estimating 2004 capex of $2.15 billion and 2005
capex of $1.8 billion (-16% year-over-year) and we also believe that there is downside
risk to our 2005 capex estimate for the company. We met with SMIC back in September and the
company reiterated its plan to spend $1.95 billion in capex in 2004. Management also said that it
will spend about $1.37 billion in 2005 (-30% year-over-year), but that if business conditions
weaken it will consider cutting this budget (the company must spend at least $600 million to fund
its commitments to Texas Instruments and Infineon in 2005). Importantly, several weeks ago at a
competitor conference both TSMC and UMC commented that they will have 15% to 20%
incremental capacity growth in 2005 based on equipment they have already
ordered/received/installed in 2004 without spending any incremental capex. We believe this
commentary underscores the high volume of tool shipments that have been made in 2004 (which is
a driver of incremental capacity coming online in 2005 as those tools begin to yield) as well as each
company's ability and/or need to substantially reduce capex in 2005 from 2004 levels.
WE BELIEVE THAT THERE WILL BE TRADING RALLIES ON THE WAY TO THE
BOTTOM BUT ULTIMATELY THE STOCKS WILL TREND LOWER AS WE EXPECT
INVESTORS TO BE DISAPPOINTED BY THE LENGTH AND/OR SEVERITY OF THE
DOWNTURN. Several weeklies ago we offered some historical perspective on the price action of
the stocks during previous cyclical downturns and suggested that those who ignore history are
destined to repeat it. We are refreshing that analysis in this week's weekly. Our analysis begins with
the fact that the Philadelphia Semiconductor Index has troughed at approximately 200 in each of
the last three cyclical downturns and, while we believe cyclical investors shouldn't be overly
dogmatic about valuation, we find no good reason to believe that this cycle will be any different
given the slowing long-term growth rates in the semi equipment industry combined with our
analysis that shows the semi industry has added as much excess capacity in this cycle as any other
except for the 2000 "bubble." We believe the table below which lists the trading peaks and troughs
of the SOX index during the last downturn underscores the notion that there are likely to be
numerous stock rallies along the way to the cyclical bottom for the stocks as there are always
pockets of analysts/investors who want to believe that the downturn is priced in well in advance of
reality.
What this table shows is that investors increasingly gave up hope in the last cycle each time a stock
rally proved to be a headfake as each "trading trough" was lower than the previous one. We expect
a similar trading pattern this cycle as investors become increasingly disenchanted by losing money
chasing headfake rallies in the stocks and also become frustrated about the length and severity of
the fundamental cycle as we continue to believe (based on our supply/demand analyses) that this
will be a normal downturn vs. Street expectations for a short and shallow downturn. The same
short and shallow downturn calls that are being made today were just as prevalent at the beginning
of the last downturn.
Price of SOX Index Date
1305 3/27/00
915 5/24/00
1265 6/20/00
954 8/7/00
1144 8/25/00
648 10/17/00
722 1/24/01
488 4/6/01
660 5/23/01
362 10/1/01
623 3/11/02
214 10/9/02
Source: Bridgestation.
WE CALLED ATMI'S Q3 INCORRECTLY AS WE THOUGHT THAT WAFER-START
WEAKNESS WOULD HIT THE COMPANY IN Q3 BUT IT IS INSTEAD IMPACTING
ATMI'S Q4. WE HAVE BEEN WRONG ON THE STOCK. Since September when we heard
from several leading IDMs of wafer-start reductions, we have been highlighting our belief that
ATMI would report a worse than expected third-quarter. We were wrong. The company reported
solid Q3 results last week after executing very well in a softening environment so our expectations
2 Goldman Sachs Global Investment Research
October 24, 2004 Analyst Comment
were clearly wrong! As it turns out, the weakness in wafer-starts is impacting the company in the
fourth quarter with management projecting a 7% to 10% sequential decline in wafer- starts after
wafer-starts were flat sequentially in Q3 (remember that the company originally indicated on its Q2
call that it expected wafer-starts to be up 2% sequentially in each of Q3 and Q4). While we were
clearly wrong on ATMI's fundamentals and the stock in the third quarter we are still not
recommending that investors buy the stock as the company provided guidance for a 2% to 5%
increase in wafer-starts in Q1'05 and we find this guidance to be overly optimistic given: 1) the
projected fall-off in Q4'04 which would make it unusual for such a sharp rebound in the following
quarter, 2) our belief that the semiconductor industry continues to experience excess IC unit
inventories (as measured by IC units trending well above their normalized levels), and 3) given that
Q1 is typically a seasonally slower period. We would continue to wait to be more aggressive on the
name until the Street's expectations for 2005 wafer-start growth are re-adjusted.
News, Events and Price Performance
Last week
Monday 18 October (1) Brooks Software (a division of Brooks Automation) and Business Objects
announced the signing of a new worldwide OEM agreement to offer manufacturers a real-time
enterprise performance management solution. (2) Teradyne announced that STATS ChipPAC has
selected Teradyne's FLEX test system as a platform for testing communications, broadband and
other consumer electronics device applications.
Tuesday 19 October (1) TSMC presented Applied Materials with two "Best Product" awards for a
physical vapor deposition product and a rapid thermal annealing product. (2) Robotic Vision's WS-
3000 wafer inspection system was selected by a logic manufacturer for installation in a new
300mm wafer fab in Europe. (3) Teradyne (TER-$15.67; U/N) reported $0.21. GS $0.25; Street
$0.23. Please see our 10/20 note for additional details. (4) MKS Instruments (MKSI-$15.02; IL/N)
reported $0.29. GS $0.28; Street $0.26. Please see our 10/20 note for additional details. (4)
FormFactor (FORM- $21.48; OP/N) reported $0.22. GS $0.20; Street $0.19. Please see our 10/20
note for additional details. (5) Cymer (CYMI-$26.64; NC) reported $0.41. Street $0.39.
Wednesday 20 October (1) ATMI (ATMI; $22.18; IL/N) reported $0.20. GS $0.17; Street $0.19.
Please see our 10/20 note for additional details. (2) Amkor completed discussions with a group of
institutional lenders concerning a new $300 million term loan credit facility and has allocated all
$300 million to the lenders. (3) Mattson (MTSN-$7.72; NC) reported $0.20. Street $0.19. (4)
Helix declared a quarterly cash dividend of $0.08 per common share payable on November 11,
2004, to stockholders of record at the close of business on November 1, 2004.
Thursday 21 October (1) Ultratech (UTEK-$16.40 NC) reported $0.12. Street $0.13. (2) Ultratech
also received a safety recognition award from its workers' compensation carriers. (3) Electroglas
(EGLS-$3.08; NC) reported - $0.10. Street -$0.12. (4) KLA-Tencor (KLAC-$43.51; OP/N)
reported $0.58. GS $0.58; Street $0.57. Please see our 10/22 note for additional details. (4)
Advanced Energy (AEIS-$9.87; IL/N) reported -$0.03. GS and Street $0.00. Please see our 10/22
note for additional details.
Friday 22 October (1) Helix (HELX-$13.45; NC) reported $0.22. Street $0.24. (2) Robotic Vision
Systems shipped seven of its WS-series wafer inspection systems during Q3 to five customers. (3)
Varian's Board of Directors authorized the repurchase of up to 3.5 million shares of the company's
common stock.
This week's calendar:
Tuesday 26 October: (1) Therma-Wave (TWAV-$3.06; NC) reporting earnings. (2) Amkor
(AMKR-$4.83; NC) reporting earnings. Street -$0.13. (3) Varian (VSEA-$33.05; NC) reporting
earnings. Street $0.62. (4) Taiwan Semiconductor Manufacturing Corporation (TSM) earnings call.
Wednesday 27 October: (1) FEI (FEIC-$18.97; NC) reporting earnings. Street $0.15. (2) Photon
Dynamics (PHTN-$17.20; NC) reporting earnings. Street $0.18. (3) United Microelectronics
Corporation (UMC) earnings call.
Thursday 28 October: (1) Mykrolis (MYK-$9.70; NC) reporting earnings. Street $0.18. (2) MEMC
Electronic Materials (WFR-$8.73; NC) reporting earnings. Street $0.23. (3) Semiconductor
Manufacturing International Corporation (SMIC) reporting earnings. (4) Chartered Semiconductor
Manufacturing (CHRT) reporting earnings.
GS Universe Price Performance 10/22/04 Price performance
Ticker Company Name Rtg Close Week MTD QTD YTD Y-Y
Semiconductor Capital Equipment
AEIS Advanced Energy Industries IL/N 10 1% 6% 6% -62% -51%
AMAT Applied Materials IL/N 16 2% -3% -3% -29% -25%
ATMI ATMI Inc. IL/N 22 12% 8% 8% -4% -8%
ACLS Axcelis Technologies IL/N 8 2% -4% -4% -22% -14%
BRKS Brooks Automation IL/N 14 2% -3% -3% -42% -44%
CMOS Credence Systems U/N 8 8% 4% 4% -43% -51%
ENTG Entegris IL/N 9 5% 5% 5% -32% -27%
FORM FormFactor OP/N 21 7% 11% 11% 8% -10%
KLAC KLA-Tencor OP/N 44 8% 5% 5% -26% -25%
LRCX Lam Research IL/N 24 10% 9% 9% -26% -9%
MKSI MKS Instruments IL/N 15 2% -2% -2% -48% -32%
NVLS Novellus Systems IL/N 25 3% -6% -6% -41% -35%
TER Teradyne Inc. U/N 16 17% 17% 17% -38% -19%
Mean -- -- 6% 4% 4% -31% -27%
Median -- -- 5% 5% 5% -32% -25%
Source: Factset and Goldman Sachs.
I, Jim Covello, hereby certify that all of the views expressed in this report accurately reflect my
personal views about the subject company or |
