The analyst stands alone
upside.com
July 05, 2000
by Stefani Lako Baldwin
In Greek mythology Cassandra was doomed by the gods to speak the truth but never be believed.
Is Salomon Smith Barney shopping for a toga?
Salomon semiconductor analyst Jonathan Joseph downgraded the outlook for the industry from "buy" to "neutral" based on a slowdown he sees happening around January to April of next year. That prediction came from, what he termed, "'first mover' evidence of … decelerating industry unit shipments coupled with price declines."
Specifically, Joseph cut his ratings for Advanced Micro Devices Inc. (AMD), National Semiconductor (NSM), Silicon Storage Technology (SSTI)and Texas Instruments (TXN).
Begging to differ
To some analysts, however, Joseph seems more like Icarus flying to the sun with waxed wings than Cassandra.
"I have a lot of respect for [Joseph]," Banc of America analyst Richard Whittington told UpsideToday, "but this time he's wrong."
The three major components of Joseph's slowdown come in Flash technology, capacitors and cellular handsets. He said that for the first time in more than a year brokers are indicating lower prices for some Flash products and that some tantalum capacitor prices have been marked down from $1 to 65 cents in recent weeks. As to cellular handsets, Joseph argued that the expectations for growth in this sector "have gotten ahead of reality."
Joseph then proceeded to downgrade certain semiconductor companies that are heavily exposed to these components.
"The deployment of technology of infrastructure equipment is not slowing, it's accelerating," said Whittington. He said Joseph has his facts wrong. "Demand is vastly in excess of need."
Calling for a correction
Whittington added that along with biotech stocks, the semiconductor sector has been the best performing tech stock. Performing so well -- the industry had a huge rally in June -- that it was calling for a correction, according to some analysts.
"The [market] reaction today is more that valuation levels are high and need to be adjusted," Arun Veerappan, who follows the industry for Robertson Stephens, told UpsideToday.
He added that market fluctuation today signaled a seasonal slowdown, which happens every July and August, and not a down cycle. Veerappan said that a down cycle requires two things: excess capacity and excess inventory. He sees neither. In fact, he's looking forward to a great second half.
"At the end of the summer we should buy these stocks pretty aggressively," said Veerappan.
Whittington doesn't even think investors should wait.
"It's a great opportunity to buy the stock," he said.
So, Joseph is either Cassandra or Icarus. Toga-clad or fixed with waxed wings. Without the Delphi Oracle, only January will tell.
Right or wrong though, the Street reacted strongly today. At market close, Texas Instruments closed down 6 percent, to $65, AMD fell 11 percent, to $75, National Semiconductor dropped 14 percent, to $49.94 and Silicon Storage closed down 15 percent, to $83.94.
What Joseph wrote
Specifically, Joseph wrote the following in his July 5 Multi-Company Note:
Texas Instruments: Downgraded from "buy" to "outperform." Salomon trimmed its price target on TI from $93 (60 times its 2001 estimate) to $80, or about 50 times its 2001 estimate. TI, Joseph wrote, has a great exposure to a slowdown in the handset market with 25 percent of total sales going into wireless, 65 percent market share in DPS, and a share of analog parts. TI is holding to its forecast of about 435 million units for cellular handsets this year, though Joseph wrote, after speaking with TI management, that TI likely will "fine-tune" that estimate in a month.
The investment bank still considers TI a core semiconductor holding that will meet its current forecast of 24 percent earnings-per-share growth next year and it second-quarter earnings expectation.
Advanced Micro Devices Inc.: Downgraded from "buy" to "outperform." Target price for AMD was decreased from $135 to $100 or from 25 times this year's estimate to 20 times. Joseph based this call on the company's large exposure to Flash memory. Even though he believes any downside with Flash will likely be replaced with an upside in processor profits, "however, weaker Flash by year end would likely put a damper on further earnings-per-share increases." Salomon retained its 2000 earnings-per-share estimate of $5.45.
National Semiconductor: Downgraded from "buy" to "outperform." Based on NSM's 25 percent exposure to the cellular handset market and its exposure to commodity analog markets, Salomon reduced the company's price target from $120 to $80. Joseph said that NSM continues to see strong current business conditions. "Business continues to be solid," he wrote.
Silicon Storage Technology: Downgraded from "buy" to "neutral." SSTI's exposure to Flash industry weakening propelled Joseph to downgrade the stock. He wrote that SST has done an excellent job of taking advantage of the Flash memory boom. |
