| | | HI Kirk,
Just wanted to let you know that the market has gone down big these last several days (you wouldn't know it if you had fnsr).LOL
Here's good read from JPM: (Bold is my work - it is an interesting observation that we've held for years - apparently our favorite sector is drawing attention with its maturity and morphing into a cashflow dividend play). Which by the way is an indication we're not those high risk young investors any more either.<smile>
We remain positive on semiconductor/semiconductor-capital stocks over the next 12-18 months but believe the second half could see stocks performing more in line with broader markets given the The PHLX Semiconductor Sector Index outperformance year-to-date -- up 17% versus the S&P 500 up 5% -- and considering market expectations that are more in line with fundamentals, in our view.
We see a tug of war between some investors who are locking in gains (and trimming positions) against long-term investors who are holding/adding to core semi positions as the industry has become more stable/less cyclical, leading to consolidation and companies focusing on end-market diversification and growing earnings/free cash flow. We believe fundamentals are tracking closer with expectations as, coming out of calendar-second-quarter earnings season, only 10% of our companies guided below expectations on the out-quarter outlook (while other companies guided in line or above) compared to 30%-50% of companies under coverage missing guidance expectations over the prior three quarters.
Based on calendar-second-quarter earnings results and recent market-data points, we believe companies are shipping to end-market consumption after a three- to four-quarter drawdown in the distribution channel through the first quarter of this year. With supply-side indicators appearing lean and most semiconductor companies describing the demand environment as “OK”/“stable,” (with improved visibility and book-to-bill ratio of about 1), we believe the overall fundamental environment is in decent shape and, as such, we expect performance/shipments to be in line with seasonal trends.
End-market fundamentals appear to be in line with expectations. For smartphones, we are in the seasonally strong second half and component shipments are reflecting that, despite concerns throughout the year on smartphone growth in calendar 2016. We see signs of stabilization/normal seasonal trends in hard disk drive (HDD), PC and enterprise ( Advanced Micro Devices (AMD), Intel (INTC), Marvell Technology Group (MRVL)), while automotive continues to chug along nicely ( NXP Semiconductors (NXPI), Texas Instruments (TXN), Maxim Integrated Products (MXIM)).
The data-center market continues to exhibit strength as numerous suppliers continue to see strong demand (even outstripping supply in certain cases), and it remains our end-market of choice this year as large data-center build-outs driven by large hyperscalers continue. In addition to a stable macro environment and end-markets performing in line with expectations, we believe the consolidation trend has not abated, with recent landmark deals such as Analog Devices (ADI) for Linear Technology (LLTC), as industry players continue to seek diversification and profitability/free-cash-flow expansion in a slowing environment (mid/high-single-digit year-over-year unit growth). Additionally, serial acquirers that are digesting recent deals continue to report in-line or better than expected progress, suggesting true value to this playbook.
Taking all these themes into consideration, we favor companies that have good data-center leadership, including Broadcom (AVGO), Intel, Cavium (CAVM), Mellanox Technologies (MLNX) and Inph i (IPHI), and companies with solid end-market diversification and opportunities to drive free-cash-flow expansion such as Maxim Integrated and Microchip Technology (MCHP). In semiconductor-capital equipment, we favor Lam Research (LRCX) and KLA-Tencor (KLAC).
-- Harlan Sur
-- Bill Peterson
-- Andrew K Lee
-- Grace Chuang
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