Wall Street: Powerful Semi Cycle Under Way
Second half sales to accelerate; all systems are go
From Electronic News--June 28, 1999
By Carol Haber
New York--All the pieces are in place: Communications chips are red hot, microprocessors and memories are rebounding and sales in every segment of the semiconductor market are expected to accelerate in the second half.
Let the boom begin.
Propelled by a combination of the Internet craze, the now-manifest economic recovery in Asia and the inevitable upturn in the business cycle, the chip market has entered a new multi-year growth cycle, analysts said. With capital spending in check, backlogs growing and lead times lengthening, this growth is expected to translate directly into renewed profitability for chip makers.
And when you're hot, you're hot: Even the Kosovo conflict may turn out to be a boon for electronics makers, as the United States and Europe increase defense spending to replenish depleted arsenals.
All of this may lead to a run-up in chip stocks, with communications-related firms leading the way, but with makers of other devices partaking in Wall Street's largesse as well. What could go wrong?
Not much, financial analysts said. However, when pressed, they point to weakness in PC sales and softness in DRAM prices.
Another potential downside is the wild card of Y2K, which could be either a boon or a bust for sales, analysts said. Analysts cited pressures on interest rates, which wreak havoc in the stock market. There's also always the looming specter of unchecked capital spending, which could send the industry into another downward spiral of over capacity.
Other than that, hold on to your hats. The semiconductor industry is in a major upturn, analysts unanimously agree. Moreover, companies are trimmed down to their core competencies and tougher for having navigated the global crises and stomach-churning industry downturn of recent years.
"We are heading up," said Jonathan Joseph, an analyst with Salomon Smith Barney. "There isn't much standing in our way for a full-blown recovery."
The Semiconductor Industry Association (SIA) recently estimated a 1999 growth rate of 12.1 percent, up three percentage points from the organization's 9.1 percent prediction in fall 1998. This will mark the fastest growth rate since the phenomenal rise of 41.7 percent in 1995.
The SIA predicts growth in the double digits through the year 2002. Financial analysts say the 1999 industry growth rate will be in the mid-teens, with the lowest estimate among analysts who were polled at 13 percent and the highest at 17 percent. Analysts said the SIA's current 12.1 percent figure will be upgraded as the year progresses.
"Markets will strengthen in the second half, year-over-year," said Jim Barlage, an analyst with Lehman Brothers. "Comparisons will continue to widen because they're getting easier, at least until you get into the fourth quarter. When the year is over, you'll see growth in the industry somewhere around 13 percent. Sequentially, the seasonal patterns will come into play and you'll see strengthening for the next month or two with a flattening out in the summer months and the resumption of momentum in the fall until December."
Analysts credited widespread strength in the chip industry for the accelerating growth.
"We're seeing a continued tightening of supply in component availability," said Charles Boucher, an analyst with Donaldson Lufkin & Jenrette. "It's still fairly gradual but it's happening. We're starting to see evidence such as extended lead times, bigger backlogs and more bookings for delivery two quarters out. Visibility is improving. Prices are broadly better with the exception of DRAM prices, which seem to have stabilized. Demand is up. There are recovering markets overseas and a very healthy U.S. economy, with a strong secular trend in communications."
Boucher expects 1999 industry revenues to grow 17 percent, perhaps reaching 20 percent.
The second half of 1999 and beyond is bringing a new wave of growth to the already hot communications sector. Design activity in telecom, wireless and networking which occurred over the last nine months will be manifesting itself in the marketplace over the next 12 to 18 months, according to Charlie Glavin, an analyst with Credit Suisse First Boston.
Bandwidth and convergence needs should fuel an industry growth rate in the mid-teens this year and 20 percent in 2000, Glavin said. He has his eyes on Applied Micro Circuits, Vitesse, PMC Sierra, and Broadcom.
"The big area is obviously communications, wireless and networking," said Salomon's Joseph. "Handset sales continue to grow faster than expected as does networking equipment."
Stocks of semiconductor firms focusing on communications, particularly the wireless area, are highly desirable, according to Bruce Walicek, an analyst with Deutsche Banc Alex Brown.
"Atmel is benefiting from strength in wireless handsets in terms of flash memory," Walicek said.
He noted that data networking is doing quite well, with the beneficiaries being PMC, Conexant and Broadcom. He also pointed to the programmable logic device (PLD) companies such as Altera and Xilinx.
"If you look at the PLD companies, about 60 percent of their revenues go into the communications market," Walicek added.
Microprocessor (MPU) manufacturers are expected to be strong in the second half, with Intel moving into a period of seasonal strength in the second quarter. The major play in the hot digital signal processing market for communications is Texas Instruments (TI) with ADI participating from an investment point of view, Lehman's Barlage said.
Meanwhile, programmable logic vendors like Altera, Xilinx and Lattice have regained almost their full momentum and are on a growth track that should double the industry's growth, Barlage noted. Barlage has strong recommendations on Intel, TI, Altera and STMicroelectronics. He has an "outperform" rating for Lattice.
Analysts said the analog area is soon-to-boom. Deutsche Banc's Walicek pointed to strong prospects for ADI, Linear Tech, and Maxim Integrated Products.
As the global situation improves, Larry Borgman of Josephthal & Co. is watching international companies like Hewlett-Packard. In fact, the Balkan War could turn out to be a plus for business.
"What we've just gone through seems to point out that we have shortages in defense weaponry," Borgman said.
Despite the jubilation over the communications-oriented companies, the best stock market returns over the next six months may not be from communications companies.
"They're a little tired," said Donaldson's Boucher. "At best, they'll be a little flat for a while until business catches up with the valuations." Meanwhile, commodities like power discrete and memory products, which have not yet participated in the recovery, could provide the best returns, Boucher added.
However, sounding a note of caution, analysts said the new semiconductor boom comes at a time of weakness in the historical engine of the chip industry: the PC market.
"We're not hitting on all cylinders in all places," Salomon's Joseph said. "The PC market is not growing as fast as it has in previous up cycles, and PCs absorb about 55 percent of total semiconductors."
Another chip industry staple, the DRAM market, is also struggling.
"The only sector that is still weak is DRAMs," said David Wu of ABN AMRO. "Other than that, every business I looked at in the first six months of this year is ahead of plan, linear, analog, DSP, programmable logic. MPUs are on plan, not ahead of it. Intel is on plan, the other two are not. Flash is getting better, SRAM looks like its firming."
Josephthal's Borgman said interest rates are a real concern.
"I would expect interest rates to ratchet up for the rest of the year, maybe not dramatically, and that could cause a problem for the stock market," Borgman said. "But semiconductor stocks should be one of the better performing groups in the second half."
No one knows better than the equipment side of the business how good business really is.
"I am very bullish on the second half," said Sue Billat of BancAmerica Robertson Stephens. "I was in Taiwan and Korea recently and business is booming for equipment companies because their customers there are out of capacity. They are cramming everything in that they can."
The overall growth of the semiconductor industry is expected to be 15.4 percent in the year 2000, reaching $162.5 billion, according to the SIA. The market is expected to continue its momentum in 2001 with sales of $191.0 billion, up 17.6 percent and ending the year 2002 with $215.7 billion of global sales, up 12.9 percent.
So far, so good. But on the other hand, "You always wonder if there is a little Y2K land mine out there," pondered Salomon's Joseph
|
