One more piece
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08:25am EDT 5-Oct-98 Prudential Securities (H.MOSESMANN 414-395-2627) INTC VTSS
SEMICONDUCTORS: EARNINGS PREVIEW FOR QUARTER ENDING SEPTEMBER 1998, PART 1 OF 2
INDUSTRY: EARNINGS PREVIEW FOR THE QUARTER ENDING SEPTEMBER 1998, PART I OF II
R E S E A R C H N O T E S October 5, 1998
Subject: Industry Earnings Preview
OPINION
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Analyst: Hans C. Mosesmann (415) 395-2627 Current: ACCUMULATE
Ali Far (415) 395-2626 Prior:
Alex Gauna (415) 395-2624 RISK: High
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While there is clear evidence of robust PC-related semiconductor component
demand, it is masking the sluggish demand picture for the rest of the industry.
To add insult to injury semiconductor manufacturing overcapacity is still
running at 30-40%. In general, we view a return to supply/demand balance in
semiconductors to be mid-1999 best case. A more likely scenario places this
balance at the end of 1999.
The September 1998 Quarter, Close To An Extended Bottom. We believe we are
relatively close to an extended bottom in the semiconductor industry given that
the "analog" companies are finally experiencing their fair share of bookings
deceleration. Analog pure-plays (which Prudential does not cover at this time)
are usually the last to slow down in semiconductor market cyclical downturns.
The "digital" companies felt the bookings impact earlier in the year. With the
analog and overcapacity picture understood (at least from a historical basis),
we must turn our attention to demand. Clearly, the revised growth estimates
from companies in the communications end market will play a key role in
"extending" the bottom for many semiconductor companies. With the exception of
Intel and AMD, all semiconductor companies have at least a 30% exposure to
communications.
A Surge In Bookings Activity For Electronics Brokers At Quarter End.
Electronics brokers (non-franchised distributors) are good leading indicators
for semiconductor business trends. Late in September, the electronic broker
channel experienced a significant across the board surge in orders. Orders this
year did not exhibit the traditional post-Labor day pick-up and had been
sluggish for most of the month While this is a good development, at this time
we believe this is no more than an inventory replenishment surge rather than a
fundamental shift in demand.
Our Favorites (Strong Buy): INTC (Select List), VTSS (SBI), CY
Our Strong Buy recommendations all have excellent upside earnings potential in
the near-term. Recently added to the Prudential Select List, we believe Intel
is the best way to play the strong PC market environment. Vitesse's exposure to
the very high-end fiber communications systems insulates the company from the
more mainstream slowdown pervading that market. Cypress streamlined
manufacturing infrastructure has significantly reduced the company's break even
level and new product momentum is excellent.
(VTSS - 19 3/4) $0.13 $0.20 $0.20 30 Mid Oct. Strong Buy(SBI)
Vitesse
We believe Vitesse will meet or exceed our September quarter 1998 earnings
estimate of $0.20 (Street consensus). The stock has been pummeled recently as a
result of the apparent slowdown in the telecommunications end market. In our
view, Vitesse is a play on the very high-speed high density IC communications
market place where its products are used exclusively in high end fiber
communications standards such as OC48 and OC192. Key issues include the
successful ramp of the Colorado Springs fab and the inevitable decline in the
book-to-bill ratio as this fab meets pent-up demand. We expect the automatic
test equipment (ATE) portion of the company's revenues to decline as a
percentage of revenues going forward. Vitesse is a bandwidth story.
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