GS US Semi & SPE weekly - a look at
inventories post CQ4 earnings season
(1) Inventories increased at the EMS suppliers and the large semi companies in CQ4
which makes sense to us given how far semi units are above their historical trendline
levels. Semi unit production this far above the trendline has always led to an inventory
correction in the semi industry, and we do not expect this cycle to be any different. While
the CQ4 inventory data is likely to be dismissed by a very bullish stock market as the
absolute levels have not yet reached troublesome levels, we believe that the data warrants
attention over the coming quarters because this is precisely how the inventory corrections
of 2000 and 2004 began. (2) Applied?s facilities consolidation will result in some S,G&A
savings beginning in April, (3) A look at the short interest data that was released last
week, and (4) Weekly memory monitor and stock price performance data.
CQ4'05 INVENTORY WRAP-UP: INVENTORIES HAVE STARTED TO INCREASE
AT LARGE SEMI COMPANIES AND THE EMS SUPPLIERS. ABSOLUTE LEVELS
AREN'T PROBLEMATIC YET BUT WE WILL KEEP A CLOSE EYE ON
INVENTORY TRENDS AND, PARTICULARLY, ON THE SIA DATA OUT ON 2/1,
AS WE REMAIN CONCERNED ABOUT THE POSSIBILITY OF AN INVENTORY
CORRECTION IN THE COMING QUARTERS. As the majority of our covered semi
companies have reported CQ4 results, we have taken a look at inventory levels both in
semis and throughout the supply chain. As shown in Table 1, aggregate inventories for the
EMS and distributor companies have increased for two consecutive quarters after being
flat/declining for 5 consecutive quarters, as the inventory bubble of 2004 was unwound.
Note that most of these companies are guiding revenues down Q/Q for CQ1 even while
inventories are increasing.
Table 1. EMS and distributors' inventories are up Q/Q, though they are guiding revenues
down Q/Q in CQ1
EMS/Disti $ Q/Q % Q/Q ($M's) Inventories Change Change CQ1'04 5911 582 11%
CQ2'04 5927 16 0% CQ3'04 5822 -105 -2% CQ4'04 5629 -193 -3% CQ1'05 5284 -345
-6% CQ2'05 5193 -91 -2% CQ3'05 5336 142 3% CQ4'05 5595 259 5%
* Data includes EMS and distributor companies which have reported CQ4 results, which
include CLS, JBL, SANM, SLR, and AVT (all NC). ** CQ3'05 and CQ4'05 normalized
for the $273M in inventory Avnet acquired due to the Memec acquisition.
Source: Company data.
Moving to the semi companies themselves, as shown in Table 2, semi inventories are also
up Q/Q in CQ4 ahead of the typically seasonally down CQ1. We would note that Intel and
TI are responsible for the CQ4'05 semi inventory build; historically they have been
significant contributors to the ups and downs of the inventory cycle, as they were in late
2003/early 2004. Semi inventories ex. Intel and TI were essentially flat Q/Q. However,
Intel and TI did lead the inventory build of the last cycle, so they warrant close attention.
We believe that conclusions from the data will be drawn in one of two ways: (1) Some will likely
see this as inventory replenishment following a period of inventory draw-down and cite reasonable
absolute levels to dismiss any potential issues; and (2) others will be more concerned, as an
inventory build in a seasonally weaker period could portend a more significant build in 1H'06.
Furthermore, we believe that a potential inventory build in 2006 could be more problematic than the
inventory build in 2004, since an inventory build, combined with decelerating unit growth rates in
PCs and handsets and significant capacity adds coming on-line, particularly in memory and
microprocessors, could exacerbate the current weakening price environment that is evident in the
SIA data. We have been arguing for some time that we believe the industry will see an inventory
correction in 2006, as our analysis suggests that IC units are already ~11% above normalized levels
(based on our unit trendline analysis of SIA data). This analysis has historically been a good
indicator of inventory builds (see Exhibit 1). SIA data for December will be out on 2/1, and
members of our team will be meeting with the supply chain this week checking on this and other
topics.
APPLIED MATERIALS' SALE OF REAL ESTATE ASSETS LIKELY TO YIELD SG&A
SAVINGS BEGINNING IN THE APRIL-QUARTER. Applied Materials announced on Friday that
it plans to sell or dispose of facilities that it either owns or leases, which are located in California,
Oregon, Massachusetts, South Korea, and Japan. We understand that the facility located in Oregon
related to the company's Etec business (Applied's mask making tool business), and the facility
located in California relates to the company's SWIFT tool (a single wafer ion implant tool), both of
which appear to have been weaker business areas for the company over the past few years. The
disposal of these businesses will result in one-time charges of $212M in the January-quarter. We
would make two points regarding this announcement: (1) We expect it to yield approximately $7M
in quarterly SG&A savings beginning in the April-quarter, which we view as a positive especially
since our April-quarter EPS estimate is likely far too low to begin with given how strong other
companies have recently guided revenues and EPS, and (2) to that end, we do not believe the
sale/disposal of these facilities is related to any issues with the near-term business environment. We
expect that Applied is experiencing a robust CQ4 (ending January), similar to the rest of the SPE
companies (in line with recent reports from Lam, Novellus, and KLA).
AGGREGATE SHORT INTEREST IN INDIVIDUAL SEMI AND SPE STOCKS WAS
ESSENTIALLY FLAT M/M IN JANUARY WITH SHORT INTEREST IN THE SMH INDEX -3%
M/M. The Nasdaq released its monthly short interest data for the month of January last Thursday
after the market close (data are collected from mid-December to mid-January). Overall short
interest, for both the Semiconductor and the SPE names in our coverage universe was +1% M/M
after declining ~7% M/M in December. Specifically, aggregate short interest in the Semiconductor
names in our coverage universe increased ~2% M/M in January, while short interest levels in the
SPE stocks in our coverage universe declined ~1% M/M in January.
For the Semiconductor stocks, there were notable increases in short interest in AMD (+22% M/M),
ATYT (+17% M/M), NVDA (+37% M/M), SNDK (+50% M/M), NSM (+13% M/M), VLTR
(+19% M/M), and BRCM (+19%M/M). Notable short interest decreases in the semiconductor
stocks were in FSL (-12% M/M), LLTC (-20% M/M), MCRL, (-12% M/M), LSI (-16% M/M),
XLNX (-16% M/M), and ALTR (-13% M/M). On the semi equipment side, there were notable
increases in short interest levels in ATMI (+13% M/M), BRKS (+20% Q/Q), and CMOS (+21%
M/M). Notable short interest decreases in semi equipment stocks were evident in KLAC (-13%
Q/Q), LRCX (-13% Q/Q), NVLS (-16% Q/Q). With regards to Lam and Novellus, we would note
that short interest levels in both stocks are currently at 5-yr lows, and we would expect short interest
in both stocks to increase in the coming months, as we view current SPE order momentum to be
unsustainable, particularly in H2'06. We would also note that short interest in the SMH Index
decreased 3% M/M in January.
WEEKLY MEMORY MONITOR: NAND flash memory prices declined 3% W/W and 5% M/M,
with spot prices -3% W/W and -16% M/M. We continue to expect prices to come down in the
coming quarters, as incremental supply continues to come online. To that end we would note that
SanDisk had commented on its recent CQ4'05 earnings call that the company expects ASPs to
decline 25-30% in the March quarter.
Each of the analysts named below hereby certifies that, wi |
