S&P's analyst, "Semis will soon overcome inventory problems, BRCM to benefit"
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>>>Tuesday November 28, 2000 (08:57 am ET)
"A Fairly Long Up Cycle" for Chip Stocks
S&P's Thomas Smith says semiconductor makers will soon overcome inventory problems, and the wireless boom will stimulate demand
NEW YORK, Nov. 28 (Business Week Online) - Despite all the disappointments for investors in technology stocks, some bright spots remain in semiconductor and semiconductor-equipment companies. Thomas W. Smith, an equity analyst for Standard & Poor's who covers the area, reports that S&P's 5-STAR (strong buy) rankings include Intel, Microchip Technology, Vishay Intertechnology, and Xilink.
Smith thinks the selling in chip stocks has been OVERDONE and that company sales will be "pretty good" for the year ahead.
One recent problem has been an apparent slowdown in communications chips. But there are interesting new markets in chips for handheld wireless devices.
Among the stocks that might benefit, Smith says, are BROADCOM, Vitesse Semiconductor, Analog Devices, and giant Texas Instruments.
These were some of the highlights of a chat with Smith presented on Nov. 21 on America Online under the joint sponsorship of Business Week Online and Personal Wealth. He was responding to questions from the online audience and from Jack Dierdorff of BW Online. Edited excerpts from the chat follow.
Q: Tom, how does the market look overall? Is Florida hanging over Wall Street?
A: The market is being pressured by several factors, and the Presidential race is really a lesser factor than weak earnings reports from some leading tech companies and end markets such as the cell phone, PC, and communications markets.
Q: How's the chip sector holding up? I see both LSI Logic (LSI) and Xilinx Inc (XLNX) took a hit today.
A: The semiconductor sector, in particular among techs, is under a lot of pressure, and today we had particular pressure on Xilinx and LSI. The story at LSI was the departure of the CFO and the head operating officer for the communications division, which was really the heart of the company.... At Xilinx, the story was weakness based on the Avnet [report] that communications chips were not moving as fast through the distribution system as we had thought.
Q: How do you reconcile the dramatic drop in stock prices with the bullish SIA [Semiconductor Industry Assn.] market forecast?
A: I think that the selling has been overdone. I think sales will be pretty good for these companies for 2001 and probably 2002, making this a fairly long up cycle. However, investors have been very quick to discount the possibility of a downturn. Another problem with this investing cycle is that there was a lot of liquidity in the stock market and the economy through March, 2000, and then liquidity was drained out of the stock market, causing techs generally to fall.
Q: How would you rate Cypress Semiconductor (CY)? An unbelievable bargain at this price?
A: Cypress Semiconductor we maintain at an accumulate [4-STAR] ranking [in STARS, S&P's Stock Appreciation Ranking System], implying that we think it can moderately outperform the broader market over the next 6 to 12 months. It has been hit by this communications-chip inventory problem, along with some rival companies, and has indeed been pressed down to low-valuation levels.... The inventory overhang seems to be a one- or possibly a two-quarter problem, and once the market looks beyond that, Cypress Semiconductor and Integrated Device Tech (IDTI) should rebound. Xilinx and Altera Corp (ALTR) and even LSI would benefit in a similar manner, although the markets are not exactly the same.
Q: What is your opinion on Applied Materials (AMAT)?
A: Applied Materials is a leading maker of front-end semiconductor equipment, and we recently downgraded it from 4-STAR [accumulate] to 3-STAR [hold]. The basis for the change was a moderation in the rate of growth of orders. Applied's sales and operations look very good through the end of 2000, and actually 2001 should be a pretty good year for high levels of sales and pretty good profits. However, the rate of order growth will slow down, and investors have already begun to discount the end of the buying cycle for chipmaking equipment.
Q: Would you be a buyer of Intel Corp (INTC) now?
A: The short answer is yes. My colleague Megan Graham-Hackett covers Intel and maintains a strong buy [5-STAR] recommendation on the microprocessor maker. Intel has been pressured along with the rest of the group.... Intel, as always, has significant advantages of scale, production technology, and marketing. It remains dominant in the microprocessor field, despite periodic challenges from Advanced Micro Dev (AMD) and Transmeta Corp(IPO) (TMTA) and other small challengers.
Q: Earlier, we had a question about Palm Inc (PALM), which I wanted to ask partly because I'm curious about the impact of handheld wireless devices on traditional chipmakers.
A: Clearly, Palm is in an interesting area, making PDAs [personal digital assistants] and other wireless handheld products. This new product area does stimulate demand for chips generally, not only for the handheld devices but also for the base stations that receive the signals, and this would be one example of the kind of area that Intel would like to branch into. But some of the smaller players may have a better focus on some of these niche markets for chips than Intel.
Q: Who are some of these smaller players for niche markets you like?
A: On the broadband side, some interesting companies include some of the high-flying communications companies -- including Broadcom Corp'A' (BRCM), which is a 3-STAR [hold], largely on the high valuation on the shares. However, Broadcom is building chip solutions for getting broadband into the home and office environments and has some exciting opportunities there. But it's quite a volatile stock. It's down quite a bit from its highs.
If an aggressive investor wants to look at that area, Vitesse Semiconductor (VTSS)...is also an example of a company with a niche specialty, and that's compounds for wafers that permit higher-than-normal speed and conductivity.
One stock I like very much, with a 5-STAR [buy] recommendation, is Microchip Technology (MCHP), which concentrates on a lowly semiconductor known as a microcontroller, which is used along with special memory chips to create embedded control systems in a very wide variety of appliances and instruments, ranging from refrigerators to scientific instruments.
Q: How about Silicon Storage Tech (SSTI)?
A: They make flash-memory devices, and that is certainly a hot area to be in, so they picked a good niche in the semiconductor world. Demand for flash memory remains very strong, and this is one example of a kind of semiconductor that is in more demand because of the wireless revolution.
Also related to the wireless build-out is this notion of analog chips to surround a digital signal processor, and some of my favorites in the high-performance analog category are Analog Devices (ADI), a 4-STAR accumulate, and I should mention Texas Instruments (TXN), which recently purchased Burr-Brown Corp., which added significantly to Texas Instruments' high-performance analog portfolio.
Q: Taiwan Semiconductor Mfg ADS (TSM) -- you like?
A: I like Taiwan Semiconductor a lot. Every time I've looked at it this year, I've been able to inch up my earnings estimates for them. They execute their operations very well. It had been a 5-STAR, but alas, the stock has fallen since the spring, largely on a weak domestic stock market in Taiwan, which results from a weak political situation there...
Q: Do you have any strong buys besides Microchip Technology?
A: My other strong buys include Vishay Intertechnology (VSH) and Xilinx. Vishay has an attractive valuation. They are makers of passive and active electronic components, such as tantalum capacitors. They also make discrete semiconductors, which are relatively simple chips that do just one small task on a circuit board.
Xilinx makes programmable logic chips, which are chips that can receive final programming at the OEM [original equipment manufacturer] customer's factory. This creates substantial time-to-market advantages for the OEMs, and they pay a premium for PLC chips. Xilinx also announced a stock buyback, and Xilinx has some new products in their Virtex line that are doing surprisingly well. They have a somewhat high valuation. However, they have delivered strong growth all this year, and we expect this growth to continue next year with the caveat that there is a short-term bulge in inventories right now.<<< |
