Quake May Shake Earnings
(10/11/99, 2:30 p.m. ET)
By Bolaji Ojo and Bettyann Liotta, Electronic Buyers' News
It's earnings season again, time for electronics companies to justify the high valuations investors gave them in the latest quarter, when the EBN/Thomas Weisel Supply Chain Stock Index rose 18 percent, to a high of 1667.5.
Indications are that many will meet or exceed consensus analysts' estimates, packing little surprise. Still, industry execs will be grilled on events occurring thousands of miles away, analysts said.
Taiwan's recent earthquake looms large on the minds of investors, whose companies have major exposure to the island. And even as the final quarter of the year unfolds, there are signs many electronics companies have yet to get a firm grip on how the natural disaster will immpact their earnings.
"The biggest unknown that we have to deal with is the lingering effects of the Taiwan earthquake," said Steve Milunovich, an analyst at Merrill Lynch & Co., in New York. "We'll be watching for Y2K and Taiwan as potential disruptions in the fourth quarter."
Many suppliers and OEM are keeping quiet about the earthquake's potential impact and waiting for detailed feedback from Taiwanese companies. The uncertainty is a major headache for analysts, economists, and company officials alike. While some semiconductor companies, particularly those in the wireless industry, will quickly determine the likely impact on their earnings since they are already operating on long lead times, analysts said assessment will be more difficult for PC chip makers.
"Companies such as Broadcom and PMC-Sierra should be able to accurately quantify the impact of the Taiwan quake by this October earnings season," said Eric Rothdeutsch, a Merrill Lynch analyst. "For the PC semiconductor companies, it will be harder. We do not expect Intel, for example, to offer much by way of feedback regarding Taiwan, and expect a full impact not to be known until late October."
By then, the earnings season should be in full swing. Advanced Micro Devices fired the first salvo in the semiconductor industry last week when it announced results that it beat analysts' expectations by as much as 25 cents per share. AMD's nemesis, Intel, is set to follow on Tuesday with its own results, followed by Motorola on Wednesday and PMC-Sierra on Thursday.
Despite the uncertainty, the semiconductor industry is still riding a strong recovery with supply side constraints. Analysts said they expect third-quarter results to reflect firmer ASPs, particularly in the DRAM industry.
"Pricing was the problem this industry had from 1996 to 1998, and good pricing will be the factor that holds the semiconductor industry together at least until the end of 2000," Rothdeutsch said.
The PC Industry
PC makers will be relying on a different formula when they announce their third-quarter results. By diversifying their revenue flow to focus on value-added Internet services, some PC makers appear to have neutralized the negative effect low-cost PCs had on earnings in the second quarter.
"The Internet is the most significant factor driving the computer industry because it is reshaping the computer companies, their sources of revenues, and their customer and vendor relationships," said Andrew Neff, an analyst at Bear, Stearns & Co., in New York.
In addition to concluding the year with strong second-half results, PC hardware companies will continue to shift their sales strategy, which is being increasingly weighted toward Internet-based systems and solutions.
"Some have already made the transition, such as IBM with its services and e-business initiative, and Sun Microsystems with its multiple Internet forays," Neff said. "Others, such as Hewlett-Packard with its e- services approaches, and Dell with its second-stage Internet initiatives, are in the process of making the transition."
And passives? The outlook for passives companies, especially capacitor makers, is better than it's been for a long time, according to analysts.
Earlier this year, the tide turned for capacitor makers AVX, Kemet Electronics, and Vishay Intertechnology, with explosive cell-phone demand causing lead times to lengthen. Deliveries for small tantalum capacitors are as long as six months, and about 18 to 20 weeks for small-case-size multilayer ceramic chip capacitors, manufacturers said.
As a result, prices are firming after a few years of severe, double-digit price declines. And, to date, manufacturers have not added new capacity, which is exacerbating the situation, said Merrill Lynch in a research report.
Consequently, Merrill Lynch is expecting these companies' stock prices and earnings to soar to new "all-time highs over the next 12 to 18 months."
Merrill Lynch is forecasting a second quarter EPS of 26 cents for AVX, more than double the 12 cents per share results in the year-ago period, while Kemet will see an EPS of 20 cents, vs. 1 cent a year ago, and Vishay will ring up 27 cents, vs. 14 cents last year
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