Ibexx, Paul & all, PART (II)
Like the Merrill Lynch analysts, however, Cowen
semiconductor equipment analyst Tai-min Pang believes
it is not. Instead, the faux rebound was due to a
quirk in the market caused by the Asian economic
crisis.
Here's what happened. Around the end of last year,
says Pang, many chip makers in Korea had trouble
getting credit to buy raw materials. The result: firms
like LG and Hyundai had to close down production. And
to make up for the lack of credit, they dumped their
DRAM inventory on the spot market to raise cash.
At the same time, explains Pang, many personal
computer makers, uncertain about the future, also
cleared out their DRAM inventory and sold it in the
spot market, without ordering more. Both events drove
down the cost of DRAM, pulling the chip stocks down as
well.
By January, the DRAM producers had stopped clearing
out their inventory. "And all of the sudden PC makers
realized they did not have enough so they had to go to
the spot market," says Pang.
That raised DRAM spot prices short-term, giving the
false impression of a turnaround off the lows of the
cycle for the sector. But it wasn't, analysts say.
"You want to be careful not to mistake an increase in
orders in January from December as a pick up in the
sector," warns Kurlak.
Why isn't it a genuine upturn? The Korean producers
who had to sell inventory to raise cash are now
producing again. Their DRAM should hit the market in
March. And that will send DRAM prices back down again.
"I would be surprised if the price of DRAM did not
start to fall again at the beginning of March," says
Pang. And the prices of chip stocks, which track the
price of DRAM, will follow.
"In the next quarter or two we could actually see the
bottom," says Pang. After that, the stock prices of
chip and chip equipment maker stocks should start to
recover. "In six months time most of these stocks will
be priced on 1999 earnings. And I am fairly confident
that 1999 will be an up year from 1998."
The upcoming dip in chip equipment stocks that should
occur may present a good buying opportunity for the
long term investor, Pang thinks. He recommends buying
chip equipment stocks when they hit their "trough
valuation." That is the level at which a stock's price
to sales ratio (market capitalization divided by
trailing twelve month's sales) is as low as it was the
last time the overall sector was in the bottom of its
cycle. |
