Did some research on published articles on the outlook for the semiconductor industry and here is a summary of what experts are saying.
Then again, many have not been real good at forecasting the industry in the last few years. The positive thing is that they have not changed their theme of why this sector and the semi equipment sector will do well longer term (smaller features, larger wafers, better economics of updated fabs, technical obsolescence).
Joe
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SEMICONDUCTOR INDUSTRY OUTLOOK: EXPLOSIVE REBOUND?
Experiencing one of the most severe downturns in history, the semiconductor industry has discovered how difficult it is to accurately forecast demand in this sector. None-the-less, Wilf Corrigan, founder and chief executive of LSI Logic Corp. and former CEO of Fairchild Semiconductor recently stated that he expects the industry to rebound explosively next year -- thanks to an increase in demand and a shortage of supply.
"This is the longest down cycle that we've had, and I've always felt you should look on these down cycles as the hangover before the party. I think the party will come sometime next year, maybe in the second or third quarter," he said.
* Inventory Squeeze "Spring-Loads" System
Corrigan noted that one of the recent developments that makes forecasting demand in this industry difficult is the so called "Dell effect." Companies in the electronics industry are reducing inventory, building equipment to order. Almost every part of the supply chain has been squeezed, spring-loading the whole system for the recovery when it comes. As a result the recovery will be very sharp according to Corrigan because there is no inventory cushion in the system.
As an example, Compaq started the year with 12 weeks' worth of inventory - now it is down to just over three weeks. With warehouse stock dwindling, manufacturers will begin to purchase more electronic components if product demand accelerates.
"There's no inventory in the system, and the Internet demand is doubling every 100 days" according to Corrigan. "The things that people want to do on the Internet is probably over time going to force them to get more and more sophisticated equipment (which will increase the demand for semiconductors)."
* Plant Shutdowns Reducing Supply
On top of the inventory squeeze, a number of plants are being shut down. Siemens is shutting down two plants. Texas Instruments is getting out of the DRAM business, taking capacity off-line. Fujitsu, Hitachi, Mitsubishi and Motorola are the latest in a long line of chip makers closing fabs or restructuring the semiconductor businesses. In South Korea Hyundai's and LG Semicon's chip operations will be merged as part of a broad restructuring.
"It's a growing perception that the cutbacks by semiconductor makers are starting to reduce overcapacity," NationsBanc Montgomery Securities Inc. analyst Brett Hodess said. "If the overcapacity comes to an end, then semiconductor makers will start to buy equipment again.
"DRAM pricing is marginally stronger right now than it has been for the last several months," Hodess said, noting that DRAM prices are commonly used as a barometer for by which to measure the semiconductor industry.
These factors, according to Lehman Brothers Inc. analyst Edward White, make the long-term outlook for the semiconductor industry and its equipment makers a little rosier. White stressed that these are long term trends, and "right now, we're not seeing much of a pickup at all in the equipment business."
On the other hand, some analysts said the retrenchments will do little to reduce the industry's overcapacity situation, since few leading-edge fabs are expected to close.
* Demand Increasing
The usage of most types of semiconductors, including DRAM, continues to rise through the present crisis. The problem is that prices, particularly of commodity chips like DRAM, are falling.
Michael Murphy points out that under Moore's law every 18 months you get a new generation of semiconductor technology. In three years, that is two generations, so many of the plants that were around in 1995 are now functionally obsolete.
Murphy believes the third and fourth quarters will be better than expected for tech stocks because of improving industry fundamentals. "PC sales picked up as soon as Windows 98 was available," he said, "and communications sales are strong. Inventory is low on finished goods, as it is for components, and business is better than everybody thought." As a result, analysts are raising their estimates for technology companies for this quarter and offering a rosy outlook through 1999 according to Murphy.
Murphy noted that semiconductor-equipment companies appear to offer a good long-term value. Equipment prices have fallen 50 to 70% as chip makers, struggling with overcapacity and pricing pressures, have put capital expenditures on hold. "The question," said Murphy, "is how long companies can go without buying equipment." He noted that the move to 0.18-micron geometries and 12-inch wafers will require equipment transitions. "Everything has to be replaced when wafer size changes, so we're up for some big equipment buys after 1998, although this year is pretty much shot."
Indeed, Intel recently announced that it plans to begin the commercial production of computer processors at 0.18 micron geometries in 1999. The smaller circuits will result in faster and lower-cost chips. NationsBanc's Hodess sees several top-tier chip makers, including Intel, IBM Corp. and Motorola Inc., upgrading production processes in the first half of 1999, with several smaller chip makers following suit later in the year.
* Model Portfolio - FSI International (FSII)
One of our Contributing Editors visited the Allen, Texas, FSI plant recently on a sales call. He met with a purchasing agent and a couple of engineers. He reported that they were generally upbeat longer term for the company, would buy the stock at these prices, think that their products are still technologically competitive, and think that once equipment upgrades begin it will be a "stampede." The big question they have is when will the stampede occur. Their most optimistic date was the middle of next year - but no-one knows. But they did note that once one party begins to the upgrade cycle it will be like yelling "free beer" at a campus party.
Also, Martin Whitman of the Third Avenue Value Fund noted in a recent CNN interview (9/8/98) that he is focusing on the semiconductor equipment sector - "well-capitalized companies where we're buying in now at far, far better prices than we could ever get when we first staged venture capitalists, financing startups."
Whitman noted that they are buying FSI International and others in the sector since "they all have cash well in-excess of book liabilities" - none of them sell above book value - and "when the depression is over, the next peak is going to be better than the last peak."
"It's not rocket science to know the whole world has gone digital and demand for chips is going to explode," Whitman said. |
