Paul Engle,
With respect to your <That's the term puny players use to make them sound big.>
You sound a little out of sorts tonight.
Perhaps some data from your old friend Tom Kurlak to soothe your nerves!(I would hope that you don't think that ML is puny also)
07:18am EST 10-Dec-98 Merrill Lynch (T.Kurlak (1) 212 449-2308) INTC AMD INTC.O
ELEC-SEMICONDUCTOR:Irrational Exuberance
ML++ML++ML Merrill Lynch Global Securities Research ML++ML++ML
ELECTRONICS - SEMICONDUCTOR
Irrational Exuberance
Thomas P. Kurlak (1) 212 449-2308
10 December 1998
Reason for Report: Update
Investment Highlights:
o Despite popular opinion, we see no evidence of a broad-based industry
recovery.
Fundamental Highlights:
o PC seasonal pick up driven by retail sub $1000 models.
o Corporate PC demand not materially affected by Y2K.
o PCs not enough to drive overall industry recovery - only affects 36% of
market.
What Has Changed - Irrational Exuberance
Yesterday's New York Times market page stated that semiconductor stocks rose
amid optimism that the "recent boom in chip sales" will continue. However,
there is no evidence of a broad-based chip industry recovery, let alone a boom.
As we recently reported, the industry's own October trade data shows this.
Actual sales fell 11.4% in October from September. The three-month rolling
average increased 6% because of dropping off the vacation month of July and
adding October. The October three month average is always up from September
for this reason. The actual always falls because September is a five-week
month. Year over year, sales fell 2%. Compared to average monthly sales for
all of 1998, October was up a little vs. down a little last year, but hardly a
boom. And, that modest increase is due entirely to higher microprocessor sales
for the seasonal PC pick up.
What has whipped the overall semiconductor group into such a sharp price
recovery in such a short time? With industry sales still very weak and SIA
data yet to reveal any growth over 1997, what is the group's appeal to
investors now?
So far, there is no question that PC sales are up from the first half, which is
producing a recovery for microprocessors. But what is behind this PC pick up?
Is it sustainable? Is another inventory correction coming? And what about
corporate buying and Y2K? Answers to these questions help with analyzing PC
driven Intel (INTC, B-3-3-7, $119) and Advance Micro Devices (AMD, C-2-2-9,
$31), but what about the other 80% of the chip industry?
First, on PC demand, Merrill Lynch believes 1999 can be a reasonably healthy
year in units (up 15%) but average prices will continue to decline as the low
end mix rises. So downward price pressure on PC chips should continue. In Q4
of this year it appears that sub $1000 PCs will comprise 41% of total PCs or 13
million (8 million Celeron, 5 million AMD K-6) out of 31 million. This is way
above the 1998 average of 25% for sub $1000 PCs implying that a major part of
the Q4 PC sales pick up is seasonal retail buying. This can go away in Q1.
Also, corporations are spending their PC budgets before they are cut in 1999
due to lower profits and industry consolidation. Profits are down or looking
weaker in 1999 in finance, banking, consumer products, drugs, manufacturing,
oil, chemicals and many other large PC markets.
Will the Y2K issue increase PC buying dramatically to offset down corporate
profits? It is not clear, but we see companies such as Merrill Lynch solving
Y2K without much change in PC buying by simply testing existing equipment,
which overwhelmingly passes. Practically all leading Pentium, Pentium II and
AMD K-6 PCs are Y2K compliant. If more horsepower is not needed then why
replace a perfectly good PC in 1999? It appears that software fixes in
mainframes to deal with Y2K are taking up a lot of the IT budget. We would not
be surprised if corporate PC buys are flat or fall off in 1999.
What about the other 80% of the semiconductor industry not directly tied to PCs
where no broad recovery is apparent? About 20% of that 80% is helped
indirectly by the seasonal PC recovery in Q4. Therefore, some fraction of most
major chip houses sees some Q4 pick up. But not enough to make an attractive
earnings recovery out of. Indeed, many companies still see enough weakness in
the rest of their business to make a forecast of general recovery hard to
support.
We believe earnings prospects for 1999 still look lackluster for most
semiconductor companies. We also believe the stock prices of most of these
companies are inflated by expectations of a new up cycle that does not appear
to be developing. Yes, pricing has stabilized due to cut backs in production
and capital spending but this has no impact on demand. And while production is
down, capacity is not. Unused capacity is sufficient to allow for an estimated
45% increase in semiconductor production. Indeed, Intel is cutting its
spending sharply now due to excess capacity and smaller die sizes and this is
being repeated around the world. Ample chip capacity exists. Spot chip
shortages are not amounting to anything because factories can just raise
output. This has already become evident in DRAMs with the Korean production
increase.
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May your trading be profitable,
tgptndr |
