Hello Cary,
We are at the bottom of the drop from July because when orders go to zero (almost) you can't go much lower - I agree with analysts here. I am not going to back away from my statement that "most of the equipment companies are going through very tough times right now". There are very few fab expansions occurring and as I explained in my last post, orders are "spotty, small and infrequent".
Is there a possibility of another downleg? I am going to try and describe this scenario in another manner but please, I am saying possibility and I think there is some potential this could occur. Most of the equipment companies are still eating backlogs that are barely growing but at least these backlogs are not shrinking at the same rate they were in the June-July-August-September period. During that time, there were no orders to support backlogs and future revenue growth. I say future and I mean "revenues for the next year". During the October - November period we saw orders emerge for AMAT and LRCX for the Hyundai plant in Oregon and quote activity appeared to increase for the overall industry. When I say "quote activity", I mean quotes and not hard PO's. It is important not to confuse these two. It is our belief that these fabs were filling holes in their production lines. If you needed an implanter you went and bought one. As these holes were filled it created a sense that business was rebounding and the market took the stocks higher. We also saw some increasing orders for back end equipment which really means semiconductor unit volumes are continuing to grow. Just so you know. KLIC is the story here and the initial boost in sales was instigated by Intel and then some additional business in Asia. The possibility of another downleg arises from the belief that this could turn out to be short term blip and orders will be very tough to come by as device manufacturers debate how to spend their next dollar during that critical period I mentioned in a recent Techweb article.
I want to say another thing about the market and the guidance from AMAT. First off, I look at the overall business through the eyes of people that consult and work in the industry everyday. Any guidance, from any company, is taken with a grain of salt. Taking issue with AMAT's guidance is not out of character for me and in my last post I gave you a good example of how guidance failed to predict future business and earnings trends. If you want to call it "taking issue" that is fine. I took issue with it in the early part of 1996 and I am taking issue with it here in January. I am not calling them liars or cheats, I just use a method that I feel more comfortable with to interpret the direction of the semiconductor equipment business. Applied (and almost every other company) releases guidance for the benefit of investors, analysts and money managers and I appreciate the fact that they provide this information. You do not agree with my method of interpreting guidance and business conditions and that is fine, everybody is entitled to an opinion.
Almost every analyst, money manager and semiconductor equipment executive I have spoken with agrees that the next six months are very questionable and when asked, they find it difficult to cite that "wonderful little (you call it unequivocal) piece of news in the AMAT call" that called the bottom of this cycle. It is great the market agreed with your interpretation Cary, I have no problems with people making money and my hat is off to you for the call. What happens if the recovery takes longer to materialize though? AMAT is trading at $38 7/8 today and those that purchased on the upgrade day are up a few bucks. It has been mentioned by several money managers and analysts that the upgrade of AMAT was merely driven by a need to find stocks to buy at lower prices. As you know, the semiconductor equipment stocks presented an opportunity because they were down and AMAT is a situation where a great deal of capital can be deployed like some of the bigger high tech names. Recommending it does make sense from that perspective but when one really studies the current environment for business, you have to question the rationale of "strong buy recommendations" from the analyst community.
Allow me to reiterate my very long term view: I will own AMAT and many more of the semiconductor equipment stocks when I see evidence suggesting a new round of capital expansion is about to begin. Until then, I will continue to focus on companies with specialized areas of expertise, companies that are growing during this downturn, and those have products used to improve the productivity and efficiency of existing semiconductor fabs.
Regards,
Carl
INFRASTRUCTURE
infras.com |
