05:12pm EDT 8-Apr-02 Salomon Smith Barney (Jonathan Joseph +1-415-951-1887) AM
1Q02 Semiconductor Earnings Preview (Part 1 of 2)
SALOMON SMITH BARNEY Industry Note
Semiconductors
1Q02 Semiconductor Earnings Preview
April 5, 2002 SUMMARY
* All signs point toward a continuing recovery in
Jonathan Joseph the semiconductor sector in coming quarters.
+1-415-951-1887 Broadline is strengthening, and will generally guide
jonathan.joseph@ssmb.com up for Q2, while PC components will likely be
Clark Westmont seasonally weaker this quarter. We are also
+1-415-951-1886 encouraged by strong order rates in outsourcing,
clark.westmont@ssmb.com both front-end foundry and back-end packaging.
* Industry data supports our view, with DoC order
data showing a recovery in orders, from a bottom of
--42% in July 2001 to --14% in February 2002;
compares could turn positive in Q2.
* The "hand-off" from inventory restocking to
growing IT capital spending will require greater
S&P500 corporate profits, which should begin
improving in 2H '02 and into 2003.
* Continued
OPINION (SUMMARY -- CONTINUED)
* We favor the broadline component suppliers (ADI, TXN, NSM, IRF), and believe
the computer components (INTC, MU) will see weakness for the next quarter,
before picking up in the third quarter.
* Please turn to the next page for more information.
FIGURE 1. SSB SEMICONDUCTOR REPORTING SCHEDULE
Source: Salomon Smith Barney
FIGURE 2. SSB SEMICONDUCTOR EPS EXPECTATIONS
Source: Salomon Smith Barney
OVERVIEW: RECOVERY PICKS UP THE PACE
We continue to believe the semiconductor sector is in the early stages of a
rather classical upturn. Both SIA (Semiconductor Industry Assoc.) and
Department of Commerce data released last week provided strong new support to
that view. According to the SIA (who consolidates the Worldwide Semiconductor
Trade Statistics), semiconductor shipments in February improved by 5 pts. from
-40% in January to -35% in February, while units accelerated from -25% to -20%.
According to the statistics, microprocessors continued to improve from --15%
yoy to --12% in February, while DRAM moved from --52% to --29%, driven by much
higher prices during the month. DRAM bits were unchanged at 92% yoy growth, and
are still well above the long-term growth rate of 75%.
Wireless components, mainly DSPs (-25% yoy) and flash (-54% yoy), were flat but
declined on a monthly basis --8% and --5%, respectively. Wireline
communications components generally showed a slight recovery. Overall MOS Logic
narrowed from --41% yoy to --31% in February, while PLD sales showed a modest
improvement from --77% yoy to --72%. Multi-market products continued to
strengthen modestly. General analog ticked up from --35% yoy in January to --
33% in February, while discretes gained an impressive 5 pts. from --41% yoy in
January to --36% in February. Analog did decline slightly on a month-over-month
basis, while discretes were flat after declining 4% mom in January.
Regionally, Asia Pacific (-6% yoy, up from --13%) remained the star performer,
followed by the Americas (-47% yoy, up from --52%), Europe (-37% yoy, up from -
-40%), and Japan (-47% yoy, up from --50%). Both Japan and Europe declined
slightly on a mom basis.
Figure 1. SIA February Semiconductor Shipments (3-month rolling average)
Source: Salomon Smith Barney and the Semiconductor Industry Association
DOC ORDERS ALSO CONTINUE TO REBOUND TOWARD POSITIVE TERRITORY
Department of Commerce data, released late last week, was no less encouraging.
On a rolling three-month average, the DoC semiconductor order data has risen to
dollar levels not seen since the early 2001. In February, orders rose to $6.8
billion, the best since April 2001's $7.1 billion. Orders rose 12% mom, and
declined only 14% yoy, compared to --22% in January and a low of --51% in July
'01. Given the lag time in an improvement in shipments, the B2B (book to bill)
ratio has turned positive, reading 1.12, its highest level since July '00,
which was very close to the cyclical peak. Backlog grew by 5% in the month,
while inventories fell 1% to $7.1 billion.
Endmarkets showed mixed results, with communications equipment shipments
falling 3% from January, though improved from --34% yoy to --31% in February.
Orders were pretty flat mom, but declined by only 29% yoy, compared to a
decline of 35% in January. Communication equipment B2B was 1.04, compared to
1.01 in January, and suggesting the beginning of a bottom setting-process.
Computer and electronic product shipments meanwhile declined slightly falling
18% yoy in February vs. 17%.
INVENTORY BUILD TO END MARKET PULL-THROUGH: A TIMELY HAND-OFF IS CRITICAL
Like most sell-side analysts, we have been doing quite a bit of marketing in
recent weeks. The number one question we hear in every meeting is this: How can
semiconductors continue their outperformance, when the rest of technology is
doing so poorly? There are two points we want to make. 1) The U.S. is no longer
the most important market for many of our key semiconductor companies. That
market has become Asia-Pacific. 2) The boom in information technology capital
spending in the past decade, in many ways, has less to do with a "gee-whiz" new
technology, and more with positive cash flows from corporate American. When
they ain't got it, they do not spend it. When they got it, they do.
In the last couple of weeks, we have written a fair amount on Asia-Pacific and
China. The bottom line is China is now Intel's second most important national
market, having recently displaced Japan (last quarter, 7% of sales), and Asia-
Pac the primary geography. Last quarter, for the first time, the Asia-Pacific
"geo" (35% of sales) surpassed the Americas (33%). In fact, as Figure 1 below
shows, there has been very little growth in the microprocessor market outside
of Asia---a pretty stunning conclusion. We often think of China as a
manufacturing threat, and the next "spoiler" of the semiconductor market, just
as the Japanese, Koreans and to some degree, the Taiwanese have become in their
turns. It is important to note, however, that China will be far more important
as a consumer in the next several years, at least for U.S. interests, than as a
producer. By official Chinese figures, in the year 2004, domestic production
will equal about 3% of total worldwide output, but consumption will equal about
6% of total worldwide purchases.
Figure 2. Microprocessor Sales Growth in Asia-Pacific Outstrips Rest of the
World
Source: Salomon Smith Barney and the Semiconductor Industry Association
As important as ongoing strength in the Asian markets may be, a recovery in
U.S. information technology capital spending will be critical in sustaining the
current semiconductor recovery. Below is a pretty important slide. What it
correlates is growth in U.S. IT capital spending (collected by the Bureau of
Economic Analysis), and growth in S&P 500 earnings. The correlation between the
two series, before "lagging" capital spending to get a higher correlation, is
0.51, which is significant. Lagged, it would be even higher. We point out that,
at least in this series of data, there was no 1999-2000 "boom" in capital
spending to match the stratospheric valuations the technology sector enjoyed.
Rather than forming a spending bubble over a couple of years, IT capital
spending growth averaged about 10% through most of the late 1980s and 1990s.
Over those 15 years, S&P 500 earnings have also growth by about 10%. When
corporate profits fell in the 1990 recession, IT capital spending fell. When
corporate profits fell in 2001, IT capital spending fell. We are forecasting a
recovery in corporate profits beginning in 2H this year. That should result,
with some lag time, in higher capital spending by corporate America.
Figure 3. IT Capex: Should Rebound with Profits
Source: Bureau of Economic Analysis and Salomon Smith Barney
PERSONAL COMPUTER AND BROADLINE COMPONENTS OUTLOOK
About six weeks ago, we joined the camp that began to recognize the slowdown in
the personal computer market. The reasons were several. 1) Double booking. We
estimate Intel's order book going into the quarter pointed toward a few percent
increase in revenues. Management did not guide to that, however. They guided
toward "the seasonal norm", which for them, was down slightly. And that was a
good thing, given that we figure the company lost several hundred millions in
orders in February alone do to a reversal in double booking. 2) Price cuts.
Intel is taking some heft price cuts in mid-April, but mostly in May, which
amount to about 35% on average. Intel's strategy is to push the P4 2GHz and
2.2GHz processors, which will see price cuts greater than 45%, into the
mainstream business desktop market. In addition, it will be cutting mobile
prices by about that amount in an effort to take some market share back from
AMD in the desktop consumer segment. We have heard from numerous sources that
Taiwanese motherboard makers are withholding orders in wait for the price cuts,
before instituting what they believe will be some pretty solid growth expected
in 2H. 3) Normal seasonal weakness. Over the last five years, Intel's sales
have fallen on average about 3% qoq in Q2. Clearly, Q2 has become its weakest
quarter on a seasonal basis, and the current recovery is not sufficiently
strong to burn through the weaker seasonal effects.
The story is somewhat similar in the DRAM market. Several companies cut back
production in late 2001 because the market price had fallen below variable
cost. In its fQ2 (February), Micron (MU-$31,1S) reported it reduced production
wafer starts by some 30%, which was as phenomenal cutback, and shows how
concerned Micron was about maintaining its cash horde. In addition, HSA (Hynix
Semiconductor America), shut their Eugene, Oregon fab for retooling,
essentially taking about 15-20% of the company's production off line. Both
Micron and Hynix (660KS-W1370,2S) will be ramping output in the next quarter.
And this at a time when demand is slowing. Partly as a result of the slower
demand, spot market prices for bellwether 128Mb DRAMs have fallen from over
$4.00 to the low-$3.00 range. As a result, contract prices have begun to trend
down from the $5.00-5.50 range to the $4.50 range, and will probably fall to
the $3.50 range by the end of the quarter. We expect prices to stabilize in the
low-$3.00 range going forward, which is essentially all-in breakeven for most
of our DRAM companies.
Though the computer component companies are sounding newly cautious, the
broadline semiconductor companies are sounding great. Multi-market component
suppliers---including Texas Instruments, National Semiconductor (NSM-$32,1H),
International Rectifier, among a few---are virtually all seeing double digit
order gains in the quarter, which should translate into double digit revenue
gains in Q2. Importantly, the front-end foundries, including Taiwan Semi (TSM-
$20,1M), UMC (UMC-$10,1M), and Chartered, are seeing a solid pickup in demand.
That demand is expanding to include more and more companies. Amkor Technology,
with about 300 customers and a 30% share of the worldwide packaging market, is
seeing business running 25% ahead of customer forecasts for Q1, which should
have very positive implication for guidance in Q2.
PLD AND COMM ICS
Jonathan Joseph +1-415-951-1887
-> End of Note <- |
