Semis: Lots Of Hand-Wringing On The Street
By Tiernan Ray
September 6, 2011, 5:52 PM ET
Several semiconductor think pieces came out this morning, ahead of mid-quarter updates expected this week.
The first update has already come in, from programmable chip maker Altera ( ALTR), with the company this afternoon cutting the current quarter’s revenue growth outlook on broad-based weakness in end markets.
Texas Instruments ( TXN) will be next, on Thursday, and as I noted earlier today, there’s an expectation TI will also cut.
Uche Orji, UBS: The Altera and TI reports will be “crucial” in an environment of weak macroeconomic trends and what is looking like a “back-end-loaded quarter,” writes Orji. Orji thinks TI will lower its forecast from a current estimate of 2.5% revenue growth, at the midpoint. Data such as the Purchasing Manager’s Index have not been encouraging, he notes. “Our companies reporting June/July quarter-end results and feedback from our recent bus tour confirm broader macro weakness [...] July semi industry revenues of -3.8% y/y dipped into negative territory for the first time since Sep-09 and are +3% YTD, below our +4% 2011 forecast; [...] the y/y manufacturing ISM PMI, which leads y/y semi industry revenues, suggested continued 3Q weakness (90% R2, pg 5); [...] July US durable goods revenue for US-made computer & electronics products sold in the US, which directionally lags semi industry growth, declined 3.1% y/y in July from +3.2% y/y in 2Q, with 39.5% inventory/backlog, the highest since late 2006.”
Daniel Berenbaum, MKM Partners: He’s “cautious,” he writes, about the last third of the year. It’s tough to be negative on the group, with the Philadelphia Semiconductor Index off 30% from its February highs, and 15% so far this quarter. Still, consensus estimates have got to come down, he argues. “We are concerned that consensus is still looking at the situation through rose-colored lenses – it seems to be generally accepted that the stocks are appropriately discounting the coming round of estimate cuts, and our sense is that investors are broadly looking to buy stocks rather than protect against potential downside. We are at best ambivalent – our framework suggests that consensus estimates remain far too optimistic, and our checks suggest that the food chain outlook for 4Q continues to worsen. For now, we see consensus CY12/13 semi revenue estimates as nearly 20% too high, which means EPS estimates are likely closer to 40% too high.
Craig Ellis, Caris & Co.: He follows up on his Silicon Valley chip tour from last week, which seemed to show a mixed picture of both steady chip orders but also a lack of “acceleration” of chip orders. Today he writes, “A cyclical check suggests another leg down in 2H11 chip estimates is needed, albeit against relatively healthy tech supply chain inventories and already muted chip sector enterprise value-to-sales valuations since a normal inventory correction was nearly discounted in mid-August. Our biggest concern currently resides outside the Tech Sector in the form of developed country (US/Europe) recession – which if occurring could trigger SOX 225-270. Absent such a negative, a bounce into YE11 is possible as/if est’s are cut again.”
Srini Pajjuri, CLSA: Chip stocks are “not quite at the bottom,” he thinks, with an average forward P/E multiple of the 12 times, even though that is well below the five-year average multiple of 21 times. Again, the industry has yet to really come forward with all the bad news, he thinks: “we do not expect estimates to bottom until early Q1. Our recent checks point to only a slight deterioration in Q3 order patterns. Most distributors and OEM customers appear to be taking a wait and see approach, which we believe will only prolong the correction and keep the stocks in a trading range. As such, we think it’s too early to call for sustained outperformance despite attractive valuations, and are sticking to our selective stance.
Craig Berger, FBR Capital: He actually sees positive data in that recent checks of semiconductor wafer starts have shown no deterioration since his last check four weeks ago. Despite global growth worries hitting the stocks hard — or perhaps given that — he sees “many extraordinary values in the sector.” The stocks could have a traditional year-end rally if the broader economic worries abate. Berger especially recommends Maxim Integrated Products ( MXIM), Atmel ( ATML), ON Semiconductor ( ONNN), Fairchild Semiconductor ( FCS), International Rectifier ( IRF), and Microsemi ( MSCC).
Some other lackluster data points were offered up as well today. Keith Bachman with BMO Capital Markets, for example, writes that PC sales so far this quarter are not encouraging:
For 3Q11, we continue to expect shipments to be well below seasonal for both notebooks and motherboards, despite in-line shipments in the month of August. We expect shipments from the top five notebook ODMs to be up 5% quarter over quarter for 3Q11, below the five- and ten-year medians of up 22% in 3Q11. Our initial forecast for 4Q11 is flat to down slightly quarter over quarter.
Likewise, David Wong of Wells Fargo offers up some data points showing deterioration in the notebook business:
Quanta guided notebook shipments to show flat sequential trends in the September quarter, with 5% second half growth compared to the first half of 2011. Compal forecasts flat sequential notebook unit shipments for the September quarter. Compal reduced its notebook shipment forecast for 2011 from 48 million units to 42 million units.
http://blogs.barrons.com/techtraderdaily/2011/09/06/semis-lots-of-hand-wringing-on-the-street/
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