Here is another analyst's most recent comments on semi industry.
Another prediction of 2H98 recovery. As for ALSC, I'm happy to see
that a 120,000sh sell order finally brought ALSC into $2 range today.
Hopefully it will slide down a little further to mid-$2 level, so that
I will have a chance to grab truck loads of it.
--------------------------------
08:23am EDT 25-Jun-98 Credit Suisse First Boston (Geraghty, Jack (212) 325-308
AM Call: Electronics/Semiconductors: Conditions Should Improve In 2H98 FBC
Equity Research-Americas
Industry: Electronics/Semiconductors
John M. Geraghty, C.F.A. 212/325-3085 john.geraghty@csfb.com
Harry H. Sun 212/325-7891 harry.sun@csfb.com
Semiconductor Industry Update
The semiconductor and capital equipment groups have retreated
lately, after giving a good performance in the first quarter
of 1998. At the margin, semiconductor industry growth is
slowing, and may be down this year. Capacity is more than
adequate, lead times are short, and pricing is competitive.
Since final demand appears reasonably good and capital
spending may be down 20% this year, we look for conditions to
begin to improve in the second half of this year and into
1999. Consequently, we are maintaining our investment posture
as overweight in this segment and would continue to be buyers
on weakness.
Viewpoint
The months of May and early June have proven to be tough ones
for technology issues, as they have been in the past. The
semiconductor market has continued to slow as over-capacity
has lead to a "turns" business, with pricing very competitive
and lead times quite short. There continues to be inventory
in the pipelines of both semiconductors and PCs that is being
liquidated. Most OEMs are attempting to lower their inventory
levels to enhance their return on capital. This process
continues across a number of industry segments, not only PCs.
Asia/Pacific turmoil has not disappeared as a concern, and
will effect the industry negatively, but to a lesser degree
going forward. The major worry is that the inventory
correction could last past the second quarter and further
impact EPS results for 1998. Our belief continues to be that
PC companies will aggressively work to clear the retail
channel of any excesses, which will obviously help unit demand
for semiconductors. Capital spending plans are now being
revised downward, setting the stage for better pricing later
this year and into 1999. Since the semiconductor sector
slowed in May, and has been turbulent in June, we believe this
presents an excellent opportunity to add to positions in
anticipation of better second half results. Consequently, we
are continuing with our over weight investment posture.
Fundamentals
Demand-First quarter demand was generally weak relative to the
fourth quarter of 1997, but showed signs of bottoming. The
weakest area continues to be Japan, which is down about 13% in
the first quarter while Europe was up about 7%. The U.S.
market was up about 4% as was Asia/Pacific. Companies are
commenting that the inventory correction has continued
throughout the quarter. Units continue to do well, but
pricing is very competitive, especially in the DRAM segment.
There are now some thoughts that a bottoming in the June/July
timeframe may be too early, since the supply/demand balance
may not change in the near term. Our thoughts would be that
the first instance of lead times expanding will be enough to
cause the market to turn sharply some time in the second half
of this year. Overall, industry growth is now drifting
towards a flat to down year rather than the 4% we had
previously anticipated.
Inventories-Inventories continue to be the major concern
relative to final demand. Despite announcements that these
levels are being reduced, there is still probably some excess
in the channels. We believe most of the excess will be gone
by the second quarter and that the supply/demand balance will
be much improved in the second half of the year. Computer
peripherals, such as disk drives, have seen some improvement
in their inventory problems.
Pricing-Pricing continues to be generally aggressive across
the board. The DRAM segment, which did show some improvement
in the first quarter, has gotten more competitive in the
second quarter. Spot market pricing for some parts remains at
or below cost. Contract prices have also dipped again,
skirting very close to cost levels. We expect DRAM prices to
continue to move down, lead by the 64Mb part. The logic
market now has relatively stable pricing with low lead times.
Microprocessor pricing has generally followed Intel's price
cuts.
Seasonality-The first quarter was generally sluggish, but we
believe the second quarter will probably see a bottom in
revenue, on a monthly basis. The end markets continue to be
reasonably good, but the inventory overhang has distorted the
picture. Consequently, seasonality is now less of a positive
factor, and should continue to remain that way.
Distribution-Distributors continue to see a competitive market
across the board. Lead times are very short, and pricing is
tough. Many distributors are doing more contract
manufacturing work as customers seek to lower their
inventories. There is plenty of product available and lead
times are quite short. There is no near term worry about lead
times stretching out and the supply side should continue to
predominate for several more months.
Capital Spending-This segment continues to be weak. Overall,
worldwide capital spending could be down 20% this year. At
the margin, there continues to be cancellations and
reschedulings. Many companies are now reducing their spending
plans for 1998, and 1999 may also be under pressure. The
equipment book/bill ratio is now about 0.8 and should remain
so for several more months.
Buyer's Check-Off List (Table 6)-This list is now approaching
a more favorable position than it has been in several months.
The psychological profile of investors shows concern about
final demand in 1998 and the implications of an Asia/Pacific
slowdown. We believe investors are now attempting to gauge
the timing of the current slowdown and whether stocks will
discount a rebound either this year or in 1999. At this
point, we believe much of the negative news has been
discounted by stock prices, setting the table for improved
performance in the second half of this year.
Standard Semiconductor Cycle-We are still on the positive side
of the standard semiconductor cycle (Table 5). Specifically,
we believe we are at the bullet point that reads, "Inventory
runs out, lead times expand". This stage of the cycle can
last for several years and may not necessarily lead to panic
buying and overextended capacity. In the near term, it is now
slipping back to slight inventory corrections and over
capacity versus a sluggish first quarter. The exception
appears to be the DRAM market, where there appears to be
excess capacity and aggressive pricing, but lower capital
spending. Overall, this continues to be an optimistic
underpinning despite the recent inventory correction.
Conclusion
Our investment posture continues to be positive. In April and
May, some of the stocks suffered sharp declines because of
particular problems. We thought this could occur after a
strong first quarter, but were unwilling to trade out of the
group because we thought the second half would begin to show
better performance. Many companies have pre-released earning
in June, and more are expected, especially in the equipment
sector. We believe the overall demand scenario is reasonably
good and that the inventory situation is well along the way
towards solution. Investors who have not been exposed to the
semiconductor segment thus far may wish to reconsider this
thesis since some of the stocks have declined in the near
term. We continue to believe longer-term investors should be
establishing their positions in companies that will continue
to do well over a concerted period of time. We are not
recommending capital equipment stocks since we believe
cutbacks in capital spending are not finished.
Our major recommendations are as follows:
Table 1
Current Purchase Recommendations
Ticker Company Name
Strong Buy CREAF Creative
Technology
Strong Buy DS Dallas
Semiconductor
Buy INTC Intel, Inc.
Buy LSI LSI Logic
Buy MU Micron
Technology
Buy TXN Texas
Instruments
Buy NSM National
Semiconductor
Buy ALTR Altera, Inc.
Buy XLNX Xilinx, Inc.
CREDIT SUISSE FIRST BOSTON CORPORATION CREDIT SUISSE FIRST BOSTON CORPORATION
Analyst: Geraghty, J Telephone: (212) 325-3085
|
