Mr. Gumport Talks Again.
------------------------
10:42am EDT 25-Aug-98 Lehman Brothers (Michael A. Gumport, CFA 1(212)526-) ALSC
Semiconductors: Caution -- DRAM Prices Slip
Today's Date : 08/25/98
----------------------------------------------------------------------------
* DRAM prices slip.
* We still believe the industry is bottoming and fourth quarter will be
significantly better, but renewed downturn in commodity prices is a serious
short-term warning. Downward short-term stock price bias is now likely.
----------------------------------------------------------------------------
CAUTION: DRAM PRICES SLIP. Our survey of DRAM traders continues to show DRAM
price upticks, but our actual company sources now confirm that prices have
begun to slide about 5% during the past few days. In particular, OEM demand
appears stable or rising but sales to aftermarket vendors for PC upgrades has
moved markedly lower. Nobody likes the volatility of DRAM prices, but those
who ignore the swings do so at their peril. This key commodity indicator of
trends at the margin in the chip industry has changed direction.
WE STILL BELIEVE THE INDUSTRY IS BOTTOMING AND 4Q RESULTS WILL BE
SIGNIFICANTLY BETTER. HOWEVER, IT SEEMS CLEAR BUSINESS AFTER A GOOD JULY HAS
PAUSED IN AUGUST. In addition to the news in the memory sector (which is
causing management at Alliance Semiconductor -- ALSC - 2 5/32; rated 1 -- in
particular to turn more cautious), it appears August was less robust at Xilinx
(XLNX - 39; rated 1). With U.S. holidays about to begin, U.S. industrial
production in decline in recent months (the best chip order indicator),
European holidays not yet ended, and Japan in distress, it seems unlikely any
substantive positive news will emerge during the next few weeks. We see the
industry in a "pause" mode short term with a negative bias.
RECAP OF RECENT FUNDAMENTAL TRENDS. Big PC makers IBM and Compaq were back in
the market as processor buyers in July after an absence earlier in the year.
Low-end processors have been in short supply, and prices have moved up --
which should help processor margins and bolster sales, though September
remains a key month. In the power sector, Siliconix (SILI - 20 1/4; not
rated) sees sales flat this quarter and up next, a pattern reported by others.
Xilinx, Lattice (LSCC - 31 1/2; rated 2), and Altera (ALTR - 37 11/16; not
rated) in the advanced programmable logic device (APLD) sector all see flat
sales, but it appears that after a strong July trends turned softer at Xilinx,
most notably in Japan. C-Cube Microsystems (CUBE - 18 5/16; rated 1), a key
digital video play, sees up sales this quarter and an acceleration next
quarter. STMicroelectronics (STM - 62; rated 1) has not given up on the
possibility of delivering flat sales (though down slightly is more likely).
Texas Instruments' (TXN - 57 3/4; rated 1) chip sales still look down about
5%, but higher DRAM prices are mitigating the impact on profits. Advanced
Micro Devices (AMD - 17 5/16; rated 2) seems increasingly optimistic about
processor sales (3.7 million increasingly likely), and it appears our model's
estimated 7% decline in its other businesses is too pessimistic.
BOTTOM LINE: The decline in industrial production (the best indicator of chip
orders) and shortfall announced by early reporters is contributing to pressure
on the group; we still believe the group is "bottoming." Assuming resumed us
economic growth and a stable stock market, chip stocks should rebound sharply
in upcoming months as low priced PCs move into high volume for Christmas.
Notwithstanding that belief, it seems likely upcoming weeks will be rugged.
|
