And here is why:
ragingbull.altavista.com
Not Even a Summer Slowdown in Semis
S&P's Thomas Smith sees numerous strong buys among chip stocks, including Novellus,
Analog Devices, and even downtrodden LSI
NEW YORK, Aug. 07 (Business Week Online) - Thanks to the information revolution,
top-ranked stocks abound in the semiconductor world. And the correction in that market arena
is almost over. So says Thomas W. Smith, Standard & Poor's equity analyst covering stocks
of semiconductor and semiconductor-equipment companies.
Smith reports as one good sign the fact that the usual summer slowdown in demand did not
occur this year. Because of the cell-phone boom, in fact, there's a shortage of
capacitors, which leads to S&P giving its highest ranking (, under the Stock
Appreciation Ranking System ) to such companies as Vishay Intertechnology and
Kemet.
He also sticks to S&P's 5-Star ranking on LSI Logic, whose price has been knocked down by
investors because of a switch in revenue reporting. However, Smith considers LSI's
longer-term potential still worthy of the maximum rating.
These comments came in a chat presented Aug. 1 on America Online by Business Week
Online and personalwealth.com. Following are edited excerpts of Smith's responses to
questions from BW Online's Jack Dierdorff and from the online audience.
Q: First off, the market is being described as "mixed." What's your view of the broad scene?
A: The broad market is being held back by the fear of interest-rate increases. Earlier this year,
the market was highly valued, but some of the excesses have come out. Against the
background of a strong economy, relatively high valuations may be warranted. With good
productivity and low inflation, prospects could be pretty good going ahead.
Q: Turning to your sector, is the chip correction almost over?
A: That's the question of the hour. I think the near-term correction in chip stocks is almost over
in price -- maybe not in time. There's a lot of earnings power in the semiconductor stocks.
However, fear of the Fed raising interest rates and portfolio managers' fears of the traditional
slowdown in the summer months may be holding the stocks down. This year, actually, the
demand for chips is very strong, and there is no usual summer slowdown.
Q: You made news on the S&P screen today, Tom, by downgrading Synopsys Inc (SNPS) to
"avoid." What's up (or down) with SNPS?
A: The story on Synopsys is a past year of relatively slow earnings. The design cycle was
expected to pick up in 2001 -- and it may. However, SNPS's story was torpedoed by a switch
to a subscription-licensing model, which will smooth earnings in the long run and make
contract terms more attractive to customers.... However, in the short term, it kills earnings.... I
expect the stock to be depressed for months, if not quarters.
Q: What do you think about LSI Logic (LSI)?
A: I like LSI. It's a 5-Star [strong buy].... They have a lot of capacity at a time when capacity is in
shortage industrywide. They're well exposed to a number of end markets, especially in
communications and data-storage areas. They make ASIC (application-specific integrated
circuit) chips.... My earnings estimates haven't changed much since March. If anything, they've
gone up.
However, the stock price has fallen substantially in that period. With the fundamentals intact, I
think LSI is still worthy of our 5-Star recommendation. They did put $20 million of revenue from
the past quarter into the current quarter -- and therefore disappointed investors on revenues.
However, they made their EPS [earnings-per-share] target and guided revenue estimates
higher for the second half of 2000. We look for 2001 EPS of $1.80.
Q: What is the outlook for Novellus Systems (NVLS)?
A: We like Novellus. I have a 5-Star ranking on it. They should earn $2.25 in 2000 and $3 in
2001. They are leaders in advanced automated wafer-fabrication systems for the deposition of
thin films in making semiconductors. They excel in new copper-interconnect technology, which
will be used increasingly in the new 300-mm. wafer fabs....
Q: What's the lowdown on Microchip Technology (MCHP)?
A: MCHP is one of my favorite companies.... They've got a relatively steady performance
pattern compared to most other chipmakers on my list. We have a 5-Star ranking on MCHP. I
expect them to earn $2 in the fiscal year ending in March, 2001, rising to $2.75 in the fiscal
2002 year. Basically, MCHP makes small microcontrollers and some specialty memory chips
that together make embedded control systems for use in consumer appliances, in automotive
applications, and in communications and industrial markets....
Q: Thoughts on Texas Instruments (TXN)?
A: TXN has a 4-Star (accumulate) ranking with us. TXN has redesigned itself over the past
three years. They sold two memory-chip fabs to Micron Technology and turned their focus to
digital-signal processors, known as DSP chips. They are also leaders in analog integrated
circuits, which are often sold together with DSP chips for communications applications,
including wireless handsets. Since TXN reorganized, they've been proven right....
Q: Thoughts on Altera Corp (ALTR)?
A: Altera makes programmable logic devices, known as PLD chips.... They have been doing
very well in the first half of 2000 and show 25% quarter-over-quarter revenue growth, which
surpassed the 19% quarter-over-quarter growth of their rival Xilinx Inc (XLNX). We like Altera
and carry it with a 4-Star ranking. We also like Xilinx and rank it a 5-Star. We prefer Xilinx for its
larger size, but Altera has been doing very well.
Q: Long-term outlook for Applied Materials (AMAT)?
A: ...AMAT is a core holding in the semiconductor-equipment group and is a long-standing
5-Star. It's doing extremely well in the round of orders for the next generation of wafer fabs now
being built. AMAT consistently gains market share and enters new markets, sometimes by
acquisitions.... They are the 800-pound gorilla in this field.
Q: Does Atmel Corp (ATML) hit your radar screen?
A: Ah, yes. Atmel was recently upgraded from a 4-Star to a 5-Star because of the strong
outlook for its semiconductor products, including flash memory. Flash is in high demand,
thanks to the cell-phone boom.... They are developing smart-card chips, which could be just
the right product to go with cell phones.
Q: What about Vishay Intertechnology (VSH)?
A: We recently raised it to a 5-Star ranking. Alas, the stock has fallen in the one month since I
upgraded. The fundamental story at Vishay is very strong. They make electronic components,
including resistors and capacitors. Capacitors are in very short supply because of the
cell-phone boom. Vishay, therefore, can expect to have high revenue runs over the next six
quarters. That's because I don't think that the capacitor shortage will be relieved until then....
Another play on capacitors that we like is KEMET Corp (KEM), which we rank...4-Star.
Q: I have Integrated Device Tech (IDTI), and it has been beyond unbelievable. They don't just
beat earnings -- they demolish them. Comments?
A: Integrated Device Technology is a 4-Star with us. They make a broad range of
high-performance semiconductor products and are performing very well in the industry boom.
The stock chart shows one of the more solid advances since the industry bottom of any of the
stocks I follow....
Q: Tom, as our hour nears its close, sum up for us the 5-Star, or S&P strong buys, on your
stock list.
A: We have many 5-Stars on my semiconductor and semiconductor-equipment list. Among
the chipmakers, we have some analog companies, including Maxim Integrated Prod (MXIM),
Analog Devices (ADI), and Xilinx Inc (XLNX). We have the largest foundry company, Taiwan
Semiconductor Mfg ADS (TSM), and Atmel, as a play on flash memory. LSI Logic is our
offering in the ASIC area. Among the semiconductor equipment manufacturers, we carry
AMAT, NVLS, and Kulicke & Soffa Ind (KLIC). Two others, in electronic components: VSH is a
5-Star, and so is Amkor Technology (AMKR).
(Voluntary Disclosure: Position- Long; ST Rating- Strong Buy) |
