John, FYI
Chip Investors Turn Blind Eye To Asia
Fri., Mar. 20, 1998
Markets that willfully discount near term business conditions can prompt investors to do some pretty crazy things. Today's action in the semiconductor/semiconductor equipment sector provides us with a case in point - the stocks are holding up despite a rapid deterioration in business conditions. We don_t have to tell you the gory details because you_ve seen the wire stories. Companies in the equipment arena are falling on tough times - layoffs and cutbacks are the buzzwords of the day.
Many investors will focus on the book-to-bill ratios SEMI releases in their "Express Report." While the book-to-bill ratios are very important, we believe a study of the raw numbers states a lot more about the trend of current business conditions. After all, to post a positive book-to-bill ratio all companies have to do is ship less than they book.
In the January Issue of our Monthly Letter we mentioned to our readers that an "inflection point" was reached in equipment bookings and shipments. Prior to reaching this turning point, shipments and bookings jumped up and down because of the crisis in Southeast Asia. The end of 1997 brought a flurry of activity. If you will recall, November and December saw the Koreans scrambling to raise cash - a deluge of memory products hit the market. Following December_s blip, shipments and orders for front and back end semiconductor equipment have been pressured to the downside.
On today's wires we read some speculation that Southeast Asia has bottomed. This is the exact opposite of what we heard in a recent visit with executives from Southeast Asian semiconductor and semiconductor equipment companies. Basically, these industry players told us the same thing we have been hearing for the last few months - Korea is on hold until they get their financial situation straightened out - Japan is at a standstill. INFRASTRUCTURE_s "Fab Rat", who happens to consult with a few Japanese companies, told us in a call today that for at least the next six months, capital spending in Japan is in jeopardy. Yesterday, at a SEMI luncheon in Austin, Texas, Jim Morgan, the Chairman of Applied Materials, told a packed house that Japan was the wildcard for 1998. Again, we have to agree. These inputs leave us with a feeling this downturn is nowhere close to the bottom.
Other factors (yes, there are other factors beside the implosion of Southeast Asia) that will weigh heavily on capital spending have been obvious for quite some time. By most counts, there is sufficient memory capacity in place to handle demand through the end of the century. While we were in Austin earlier this week we spent time talking with a few of Wall Street_s finest. These analysts candidly expressed a belief that North American logic manufacturers will be announcing capital spending cutbacks. If these expectations become reality will the other shoe drop? The consensus seemed to suggest we will have another, more painful, down leg in the stocks. It is for this reason we suggest investors hold some cash for the coming buying opportunity.
Some will argue that leading edge manufacturing capacity will still be purchased by major players in the industry. We agree - how much is a whole different issue. If the industry moves through a normal semiconductor cycle, unlike the one we witnessed in the fall of 1996, we will see weakness in semiconductor equipment investment and unit volume growth. The cycle of 1996 was primarily caused by a weak pricing environment and not weakness in final demand. We expect the coming quarters to bring more bad news from the PC industry. In tandem, one would have to say the semiconductor industry faces a very long summer. Combine these issues with the financial dislocations in SEA, which will probably be with us longer than originally anticipated, and the you have a scenario that makes the '96 correction look like a stroll in the park. Hold some cash and tread carefully |
