Jerry, both you and I are eternal semi equipment bulls but this is a copy of a post on the IPEC thread from Jay Harris. . .Jay is a semi equip bear and his thory makes sense, it also parallels Tom Kulack's opinions on a conference call he had late Friday that Robert told me about. Your opinion is always welcome!
Hello to the CMP'ers, I'm back off a brief stint with whitetail deer hunting in central Pa.
Lets hope my investment advice is better than my hunting skills.. I actually got too close
to a nice buck's scrape line and blew any chance of having him for dinner. Maybe next
year.
In any event, I don't have a clew on what is taking place in semi land other than recent
price action. A while back I posted price to sales ratios(PSR's) on some of the
equipment guys with respective price targets. I commented that I gave the bulls the
benefit of the doubt by annualizing the latest quarters sales and holding flat sequential
quarters. Realistically, this is not a likely outcome. I expect modestly up sequential
sales during the next quarter or two. Then I expect rapid sequential declines in revenue
and earnings as memory market fundamentals "spill over" into equipment bookings and
billings. The stocks are currently in the process of discounting 6 months out. Hence, the
challenge in my mind is to determine an accurate annual revenue run rate from which to
apply PSRs and subsequent price targets. I will work on this when I get back to the
shop this week and post my best guess at particular entry points. Importantly, don't
consider earnings in your analysis on the way down, or on the way back up ,initially,
out of the trough. Remember, the best time to buy is when they are losing money. This
is why we use PSRs. Frankly, we don't care if the company is losing money in the
trough of the cycle! This is a natural event for any cyclical company. Sales are much
less volatile than earnings and the best guage to value companys in the trough. Earnings
are used to value the company at the peak of the cycle to determine peak cycle price
points.
Importantly, don't get distracted by all of the noise over Pacific Rim bail outs when
investing in this group! Keep a faithful eye on memory prices before attempting to
dollar cost average! This is the real problem and all of the capital in the world being
injected into Korean Fabs will only extend the duration of the fundamental problem
which is supply and demand and equilibrium price points for semi components.
During the last cycle the Koreans cut their production of chips, but didn't cut their
spending on equipment as a percent of semi revenue! This caused a temporary
increase in memory prices and saved many fabs from going out of business in the short
term. However, this also compounded the amount of excess supply relative to demand
as the equipment spending came into production 9 months later ,and this is why the
entire memory market is currently cash flow negative. I had a hunch this was going to
happen. However, I have never witnessed a prior cycle in my career. Consequently, I
did not want to disclose misinformation to members of the thread based on my
inexperience. In short, I didn't have the bal.. to speak my mind.
Well that was then, and this is now. Don't be in a hurry to invest in this group. This will
be at least a six month hick-up! Oddly, the sooner bookings and billings roll over for
the equipment group, the sooner true fundamentals will be restored to the memory
market. A good rule of thumb is to bring equipment spending down below 21% of
semi revenue until supply and demand come into balance. Equipment spending in the
pacific rim has been running at approximately 28%, well above rates that were
sustainable.
Not being an analyst, I very simply study Micron Technology. These guys know more
than the analysts, because they are the best in the world at making memory. This
market is 50% of targeted global equipment spending. This market leads the equipment
market by 6 months. When memory prices recover, equipment bookings and
sequential growth are restored. This process could take 12 months this time around,
because equipment managers are still bullish and fabs are really starting to lose money.
Remember, the valuation sucking sound looms large at this stage of the cycle. This is
because CEO's are bullish and tech stock inverstors love to use stock market volatility
to get into to good global companys that are currently "hitting their numbers". Don't
mistake an equipment selection for say a networker or a software company. Know the
beast!
Entirely different valuation metrics apply.
What is the only thing worse than a semi bear market? My wife dragging me kicking
and screaming to finish our Christmas shopping!
Gotta go, I'm off to spend like congress!
Hope this post helps,
Jay |
