research.soundview.com
Looking for the next catalyst:
Industry Net: Stocks in our coverage universe have risen substantially over
the last several weeks. A pullback after this run up is possible in our view, but
we believe that those that need to build substantial positions would be well
served to use that time to accumulate appropriately. Our favorite names
include KLA−Tencor, Applied Materials, Rudolph Technologies and Teradyne.
• Although semiconductor equipment stocks have risen substantially over
the last several weeks, we believe that we are closing in on the turn in the
cycle.
• We could see a pullback after the run up, but we believe that those that
need to build substantial positions would be well served to use that time
to accumulate appropriately.
• We believe that more evidence is mounting that the first calendar quarter
could be the turn in the order picture for the semiconductor capital
equipment industry.
• Our favorites include KLA−Tencor, Applied Materials, Rudolph
Technologies and Teradyne.
Semiconductor Manufacturing Stocks Have Risen Steeply in Recent Weeks
Over the last several weeks, the semiconductor equipment and manufacturing stocks have risen dramatically,
with our overall universe’s market capitalization up 50% vs. a rise of 46% for the SOX and the COMP up 23%. In
addition, stock prices in our universe are up 82% on average over that same time. Given the higher beta to our
group, this is not unexpected.
Optimism On a Turn Is Growing, but Could It Just Be Yet Another Head Fake?
We have long preached our belief for a turn in orders to the upside in the first calendar quarter of 2003.
Recently, we believe that more people on the Street are beginning to agree with us. However, the skepticism is
still quite high; could this just be another head fake? There is always this possibility, but we believe that the
trend of capital spending to semiconductor revenue is moving to a point below the 20%−25% "equilibrium"
level. Thus, a return to positive growth in the electronics end markets could quickly turn into a strong
investment scenario for semiconductor capital equipment.
Under−Investment Appears More Pervasive in the Back End
As we look at the bookings trends for both front− and back−end equipment, we are starting to see evidence
that the back−end could be in a higher under−investment pattern than the front−end companies. Figure 2
shows actual three−month average bookings from January 1991 through September of this year. We have also
drawn what a straight line model of 10% and 15% growth would be for both front−end and back−end bookings.
Notice that the back end is well below both the 10% and 15% growth scenarios. Additionally, utilization rates
(for both leading−edge test equipment and wirebonding) have remained above 60%. Thus, we would expect
that, as things turn, a more aggressive snapback could occur for test and packaging equipment orders.
We Look for 2003 Capital Spending to Increase 8%−12%, but Early Bottoms Up May Be More
Pessimistic
Our latest forecast for capital spending in 2003 is for 10% growth. As we migrate into the early part of 2003, we
would not be surprised to see a bottoms−up roll up of the announced capital spending plans by the chip
manufacturers yield a flat to slightly down number. However, as we look for the industry to turn next year, we believe that forecasts will ultimately prove to be too pessimistic. We could just match the roll up, but we think
that this would not be a worthwhile exercise. Rather, we are showing what we believe will be closer to reality.
There are still a tremendous amount of semiconductor investment projects out there that can easily be turned
on. Most of the facilities and infrastructure for the first wave of 300mm production fabs have already been put
in place; so further investment will be primarily for equipment.
End Market Demand Is a Key Driver for Growth
In the near term, we continue to look for what will be the next catalyst. The stocks have had an impressive run,
and we need to look at what gives us the next leg upward. To us, the next big catalyst will be the electronics
end market showing improvement.
As our semiconductor device team pointed out in a recent note, inventory levels are not excessive and, in some
cases, are quite low. Wireless inventories do not look excessive and, thus, we believe that wafer starts could
begin to uptick again if sell−through proves to be reasonable over the next month or so. Next−generation
phones are obviously a big part of the deployment.
When Will the PC Replacement Cycle Be Five Months Out and Not the Perpetual Six Months Away?
When we analyze semiconductor drivers, it is easily apparent that PCs still matter. PCs consume about 25% of
chips in dollar terms (total data processing consumes about 40%−45%). Therefore, the need for a replacement
cycle for the PC industry is an important tenet for the next semiconductor cycle to really get underway. There
has been a common opinion expressed by the Street that "the PC cycle is six months away." Unfortunately, to
date, it has never gotten to be five months away. When will it become reality? Well, we were certainly
encouraged by the results of the Gartner−SoundView survey at Symposium. PCs had the best showing in four
years, suggesting that a replacement cycle might actually take hold in 2003. Thus, we believe that this bodes
well for the semiconductor manufacturing stocks.
Our Favorite Stocks Now and for the Cycle
Front−End Semiconductor Manufacturing Space: In our view, with the stocks having had a strong run,
there could be a pause or a pullback near−term. However, we would use that as a catalyst for getting sufficient
ownership positions built for the upcycle.
We continue to like KLA−Tencor at these levels, as we believe it will continue to show superior fundamental
performance to the group. Yield management continues to be a growing piece of the capital spending pie. We
are raising our price target to $45 from $35, as we believe we need to more accurately reflect the leverage once
the cycle begins. We believe that the company is at least still on target to meet its guidance of flat orders for the
December quarter, and an upside to orders is an increasing possibility.
Applied Materials is also a focus of ours, as we believe that it has some market share gain opportunities that should at least offset any loss in share as the industry moves from aluminum to copper. In our view, the
company can still at least grow with the overall market, although its size may preclude it from growing
substantially faster than the overall equipment market. Our price target remains at $20.
With the move to copper, we continue to believe that Rudolph Technologies has a tremendous opportunity for
growth. In our view, the company is still in a strong position to take much of the copper metrology
opportunity. We believe that KLA−Tencor and others have not made substantial headway, and it is still
Rudolph’s battle to lose. Thus, we reiterate our Outperform rating and $25 price target.
Back−End Semiconductor Manufacturing Space: Teradyne remains our favorite name in the back−end
group. Consistent with our favorite names from the front−end, Teradyne has had a good run in the past month.
We would, therefore, use any pullback in the near term as a catalyst to build long−term positions for the next
upcycle. We are also using this occasion to raise our price target from $12 to $20 in order to reflect the current
troughing in orders and to better reflect the leverage that Teradyne has once both IDMs and subcontractors
begin to order in earnest again. We remind investors that utilization rates (particularly for leading−edge SoC
testers) have remained above the 65% level, and it would only take a marginal increase in chip consumption in
our view to prompt customers to rush back to Teradyne with orders. |
