*AV*--I receive a good deal of private mail and try to answer them in a timely manner. On occasion I receive a message worthy of reposting here for general consumption. So, here goes.
Specialty IC companies do not seem to have declined as much as the equipment companies, mask/reticle suppliers, etc. I'm wondering if
we are in a predicament where the specialty IC's may recover faster but may still have further to fall before they rally. Even with their superior near term earnings prospects I'm concerned that they may have much more downside vulnerability than some of the semi equip companies. Do you think the specialty IC companies like XIRC, AMCC, VTSS etc represent attractive buys compared with say CYMI or ASYT or DPMI?
Yes I do, for the time being. Today ERICY uposided their forecast for Asia and LAtin America. Even though XIRC has retreated in this debacle, most of it was profit taking. It rose real well in a shjort time period. A period where everything else was not doing as well. Funds got switched to more depresssed issues. These companies are fundamentally sound and need not be compared with the semi equipment guys but rather the GMs, MCDs, DIS, EK, etc. as kinda mainstays. If you think cell phones and modems are as impervious to declines like MacDonald's Value Meals or buying cars this September, then you understand where I am coming from.
I have been lightening up on many of my long positions on rallies, but I've remained in a quandry about whether at this point the better
risk/reward situation might not be with the semi equipment companies rather than chipmakers simply because the equipment companies have been so thoroughly hammered.
They got hammered more yesterday. If you wanted to get in now and hunker down, I couldn't give you a good argument against it. Over time they will look like extremely attractive propositions. But I do think the will lag other parts of this sector. The equipment buainess will not pick up until the IC manufacturing business picks up first. Of course, the DPMI's and PLAB's will tell us when the recovery starts to occur and new technologies are implemented. They will see an increase in new design orders for those new technologies. They should turn first.
Following the recent AMAT announcements, I think there is a good likelihood of further downward revisions and earnings disappointments in the equipment sector. How much confidence do you have in the
specialty IC earnings? Since they are generally trading at higher multiples, the impact of downward earnings revisions or missing consensus estimates would be presumably greater.
I feel more comfortable with the specialty IC guys than with the equipment guys. The equipment guys have absolutely NO VISIBILITY going forward. the Specialy IC guys have backlog, leadtime, orders, and a working knowledge of "designs in progress". That accounts for a better visibility going forward. the key here is the design activity and their knowledge of what the end product is that uses their ICs. They can anticipate things much better, in my opinion. I would think they have 3-6 months visibility at a minimum and know how well certain customer programs are rolling out. Remember, they have to make prototypes and initial runs for the end user which is usually a prelude to a ramp up in product thereby a ramp in the ICs required for the product.
I'm also a bit unclear about your distinction of "enabling technology" companies contrasted with "equipment" companies. Would CYMI, ASYT, ATMI, CFMT and perhaps ETEC represent enabling technology compared with AMAT, NVLS, LRCX, KLAC, KLIC, ASMLF as representatives of semi equipment companies?
To me, "Enabling Technologies" are those that are required to enter into the next device technology, like going to copper or going from 0.25u to 0.18u processes. Therefore, the defect reduction capabilities of ASYT make it an enabling company for new facilities and for retrofitting existing fabs to advance their techology possibly one generation. True there could be some pure retrofits for more cost effective manufacturing but the majority of ASYT's work both at the end customer and OEM levels seem geared to next generation equipment and technology. CYMI is an enabler because it is a pure DUV play while ASMLF is an equipment company since a majority of its business is not dedicated to DUV steppers. CFMT is an enabler since its novel cleaning process is virtually required for more advanced process technologies. It is known that the standard cleaning processes today have limitations as your feature sizes get increasingly smaller. CFMT is not needed as muxh today as it would be down the road, if other cleaning processes are not developed along the way. SFAM and IPEC are enablers since the CMP process almost most certainly may have to be implemented in the 0.18u-0.25u regime. Unless some new trick is developed or we reduce the number of inter-metal and dielectric interconnect levels, some sort of planarization will be required. No lithography process can handle the topographies created by these interconnects. Step coverage would be horrendous and functional reliability of the devices that yield would be abysmal. ATMI may not belong in the enabler group because it supplies a broad base of chemicals to the industry as well as some mission critical hardware. However, their involvement in the advanced processes being developed will result in high margins and profitability when they are implemented.
AMAT, NVLS, LRCX, KLAC, KLIC, ASMLF all are considered equipment companies because only a small segment of each of their businesses will provide equipment and processes for the advanced technologies. Their core business today and going forward will be for the mainstream manufacturing which will be above the 0.25u level. Also, their product base is broad enough that only a fraction of their equipment is specific to the advanced technologies.
Also, are you familiar with either CKFR or CKEYF? I've only begun to look at them, but both seem to have considerable potential while their stock prices are trading down in the sewer.
With the recent IBM announcement, I would want to see how it will facotr in with these companies. I know that CYCH is involved somehow but I am still not happy about the previously reported capabilities for a $250,000 computer being able to crack the most sophisticated DES codes in 57 hours. I think the drops in price for these stocks may have something to do with this but no one is fessing up to it.
Andrew |
