Hi Jer.. from Infrastructure, current.
"
Carl Johnson,
director and
co-founder of
Infrastructure
Johnson's Bio
Archive of
Johnson's Columns
Semiconductor Market Focus
Investors Are Getting Interested In
Chip Equipment Stocks
Thur., Mar. 5, 1998
After two full weeks of travel, we have arrived
back at the desk with a pile of research and
notes from the semiconductor equipment front.
At SEMInvest 98, we saw quite a few new
faces from the investment community. A number
of people attending the conference represented
the growth and value sectors of the mutual fund
industry.
With the market touching new highs and many
consumer growth stocks priced higher than
Jack's beanstalk, semiconductor equipment
stocks have been popping up on many radar
screens. While many of these investors hold only
a peripheral interest in the equipment industry,
they have cash to apply to the market. In the
search for value, they have decided to allocate
assets to the sector in anticipation of the next
upturn. Without a doubt, we are a bit nervous
about these new participants. Will they have the
patience to hang tight during the difficult quarters
that lie ahead?
The long-term picture can always be called
"rosy" because semiconductor content continues
to rise. Profitability is another issue. The
No-Limit Poker Game will take a toll on many
semiconductor companies this year. Like the
equipment industry, those with the strongest
financial positions will be able to make
investments and move forward along the
Semiconductor Industry Association's road map.
Short term, we have been expecting another
correction in the group. The industry is still
saddled with overcapacity in commodity parts
(memory) and the financial implosion of
Southeast Asia. We have also seen some
indications of weakening unit volumes. If the
recent trend in unit volumes continues, one can
expect much lower earnings for the sector.
In our previous article, we wrote a bit about the
discounting process -- the race to get invested
before the next upturn. Since that time, we have
received data from the Semiconductor Equipment
and Materials International's most recent
Express Report. The report showed (after
factoring out the revisions) a rather dramatic
decline in equipment bookings and shipments. On
the heels of this news, several companies
announced production-line shutdowns and
head-count reductions. Most of this decline is
related to a collapse in purchases by Southeast
Asia device manufacturers. Late last night, we
received a phone call from one of our Japanese
counterparts who said its projects were grinding
to a complete standstill. In upcoming reports, we
would not be surprised to hear about slower
business conditions in Taiwan and North
America.
Despite the coming weakness, we feel it is
foolish to blanket the sector with a negative
recommendation. Clearly, most of the equipment
sector will be affected by this decline, but there
are segments of the business with bright futures
-- the photomask industry strikes us as one of the
more visible examples. We would also suggest
investors keep a finger on the pulse of front- and
back-end equipment vendors that have
experienced and survived industry downturns.
Larger players such as Applied Materials
[AMAT], KLA-Tencor [KLAC], and Teradyne
[TER] should remain on everyone's shopping list.
In our view, the positive tone presented by the
photomask manufacturers continues to support
the commitment of investment dollars. Today,
one can hardly discuss the photomask industry
without mentioning the breakthrough
announcement that hit the wires last week. A
University of Texas research team printed
0.08-micron feature sizes using a stepper made
by Integrated Solutions and photomasks
manufactured by Dupont Photomasks [DPMI].
Yes, this is a wonderful announcement, great for
optical lithography fans, but application in a mass
production environment is years away. The major
hurdle, in our view, is developing the materials to
produce suitable optics.
The photomask industry has been growing more
than 20 percent per year, and was one of the
strongest segments during the 1996 downturn.
The industry is divided between captive and
merchant manufacturers. Captive manufacturers
can be defined as in-house operations maintained
by semiconductor companies, and merchants are
independently owned and operated. Members of
the merchant market generate 58 percent of all
photomask revenues. The merchant segment is
dominated by Dupont Photomask, Photronics
[PLAB], and Toppan.
Low-end and midrange photomask prices have
risen at a 10 percent compound annual growth
rate, from $2,750 to $4,500, over the past five
years. It is worthwhile to note that photomask
prices rise in parallel with device complexity.
Each masking step requires a different
photomask, so these prices multiply by the
number of layers. A single photomask used to
manufacture a device with 0.25-micron feature
sizes has a price tag approaching $21,000. A
photomask used to manufacture devices with
0.18- micron feature sizes sports a price of
$47,000. Which company would we buy? If one
were to visit Photronics or Dupont Photomask,
one would see a number of similarities. At this
time, we feel both companies present excellent
opportunities.
At SEMInvest 98, a panel of Wall Street
semiconductor equipment analysts covered some
of the critical issues confronting the front-end
segment of the industry. Subjects such as
photomasks, lithography, etch, dual damascene,
and copper interconnects were highlighted during
the discussion. In terms of 300 millimeters, the
panel agreed that pilot lines will be equipped this
year, but they will be small and not a big driver
for equipment company growth.
Even though there is a delay in 300 mm,
equipment companies must make investments to
position themselves for the coming transition.
Milind Bedekar, Prudential's semiconductor
equipment analyst, says, "I view the delay of 300
mm as very big negative for the whole industry.
Smaller equipment companies, especially those
who tried to gain an edge on the competition by
quickly developing 300-mm tools, will be forced
to maintain their investments throughout this
delay. The slowdown of 200-mm sales will
cramp their ability to spend and their profitability
will be negatively impacted."
No doubt, the large companies in the equipment
industry have the advantage with a 300-mm
delay. How can a small player compete with the
output from Applied's R&D budget? Hmmm --
perhaps some consolidation is in order.
We invite you to visit our website to sample our
publication for a two-week free trial. We send
out two to four Daily Notes each week.
Infrastructure delivers a monthly letter in the
middle of each month and provides access to
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