Communications Chips May Lead Semiconductor Recovery in 1999
Bloomberg News
October 22, 1998, 10:59 a.m. PT
San Francisco, Oct. 22 (Bloomberg) -- Altera Corp., Linear
Technology Corp. and other makers of semiconductors used in
computer networking and telecommunications equipment are expected
to lead the chip industry's rebound next year.
Even if more countries follow Asian nations into recession,
analysts are counting on strong demand for chips used in
equipment that links computers. The number of Internet users is
doubling every year, and companies are keen to connect all their
employees and computers to boost productivity.
That means makers of communications chips may fare better
than industry bellwether Intel Corp., which relies on the
personal computer market for most of its sales. Some investors
and analysts believe the PC market is vulnerable, especially if
economic growth stalls in the U.S. and Europe.
''Communications are a better place to be,'' said Ken
Pearlman, an analyst at CIBC Oppenheimer in San Francisco.
Pearlman has a ''buy'' rating on Level One Communications Inc.,
which makes chips for corporate computer-network equipment.
Many experts are counting on a 1999 comeback for the chip
market, where sales are expected to fall 12.6 percent this year.
Meanwhile, sales are forecast to rise 11.3 percent to $133.5
billion in 1999, according to Pathfinder Research Inc. of San
Jose, California.
Of course, demand for Internet and communications equipment
has slowed along with the global economy, crimping sales of high-
performance chips. Telecommunications projects in Asia and Europe
have been put on hold, hurting networking companies such as
Northern Telecom Ltd. of Canada and Alcatel SA of France.
Finding a Niche
Yet, some makers of chips for networking equipment have
latched on to niches where demand is healthy.
Broadcom Corp., for example, makes chips that go into cable-
television modems, which handle the flow of Internet information
much faster than regular phone lines. The Irvine, California,
went public at $24 in April and now trades at about 73.
Even at that lofty level, six out of seven analysts tracking
the stock rate it a ''buy.'' Broadcom's sales jumped fourfold to
$52.5 million in the third quarter, while earnings checked in at
$8.2 million compared with a year-ago loss of $1.8 million.
Another favorite among analysts is Linear Technology, a
Milpitas, California, maker of chips for networking equipment,
mobile phones and computers. More than 90 percent of its products
are proprietary, meaning they have little or no competition,
according to analyst Dan Myers at Lehman Brothers Inc.
''These guys come up with new products everyday,'' said
Myers, who rates Linear shares ''buy,'' his highest rating.
Linear shares have fallen about 28 percent since hitting a
high of 81 3/8 on April 30. The slump may be overdone, Myers
said. Linear has posted sequential profit increases in 48 of the
last 50 quarters and 11 out of 16 analysts rate it a ''buy.''
Translating
Myers said he also likes Maxim Integrated Products Inc.,
which makes chips that translate temperature, pressure, sound or
light into information for use in a computer, camera or cellular
telephone. Shares of the Sunnyvale, California, company are down
about 6 percent so far this year.
Makers of programmable logic devices -- the powerful chips
that act as traffic cops for information moving through computer
networking equipment -- also get high marks from some analysts.
Altera Corp. and Xilinx Inc., both of San Jose, California,
control 60 percent of the $3 billion PLD market. Their chips are
selling well because they can be customized for different jobs,
avoiding the expense of making new chips from scratch. That's key
in networking, where technology changes rapidly.
Hans Mosesmann, a Prudential Securities Inc. analyst,
estimates that the PLD market is growing 15 percent a year, more
than the broader chip market.
Gambling on PCs
For investors intent on gambling on a resurgence in the PC
industry, some analysts recommend Micron Technology Inc. rather
than Intel. Micron bought Texas Instruments Inc.'s memory-chip
business earlier this month, making it the world's No. 2 producer
of dynamic random access memories, or DRAMs.
The market for DRAMs is forecast to rise 27 percent in 1999,
as computers require more memory to run new software. Sales in
2000 and 2001 are expected to rise 35 percent each year,
according to the Semiconductor Industry Association.
Micron has lost money for three consecutive quarters because
rivals, particularly in Asia, built too many DRAM plants as
prices soared in 1994 and 1995. Now, some of those plants are
being closed, most proposed plants are on hold, and memory-chip
prices are rising.
Because Boise, Idaho-based Micron has some of the lowest
manufacturing costs in the business, even a small price rise can
boost its earnings dramatically.
Analyst Claude Hazen at C.E. Unterberg, Towbin in San
Francisco estimates that a $1 increase in the price of 64-megabit
DRAM can boost Micron's earnings by 40 cents a share annually.
After months of falling prices, Micron in September raised the
price of 64 megabit DRAM to more than $8 for big computer makers
from $7.60. Micron posted a loss from operations of $234 million,
or $1.10 a share, in the fiscal year ended Sept. 3.
''There's so much capacity being taken out that if there's
any increase in demand you'll see firming in prices,'' said Phil
Schettewi, managing partner at Loomis, Sayles & Co. in
Washington. For Micron ''the leverage is huge.'' |
