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Technology Stocks : Semi Equipment Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Return to Sender who wrote (7022)	11/22/2002 1:06:12 AM
From: Cary Salsberg	Read Replies (1) \| Respond to of 95562

"Sharp declines in chipmakers’ profitability versus the prior industry recessions in 1996 and 1998 suggests a modest recovery in cap-ex investments. Return on capital across the spectrum of chipmakers is at ten year lows. The 15 chipmakers included in our study reported an average of 1.59% return on capital last quarter. Over the last seven years these companies averaged 17% return on capital. We think future returns on capital will fall more in the 10% range. ♦ The most obvious cause of to the decline in profitability is excess capacity. We estimate that fab utilization rates in the industry are at 65%. Leading edge manufacturing processes, both front-end and back-end, are much higher. The leading edge capacity will garner investment. But we don’t think it is strong enough to re-ignite the growth rates that the chip equipment industry enjoyed in the 1990s. ♦ The other major issue weighing on profitability is the collapse in pricing. We estimate that pricing has declined 20-30% across the chip industry. Maturing technology in major end markets, PC’s, cell phones and intranet infrastructure, suggest that the recovery in average selling prices (ASPs) will take time. ♦ Equipment industry fundamentals could bottom in the next quarter or two if 300mm projects planned for 2003 are real. But, we think the trajectory and size of the recovery will fall short of the cycles in the 1990s. If we are correct on our industry outlook then the current rally is discounting much of the potential good news of the next several years. ♦ High growth rates in the 1990s fueled 3-5 fold increases in the stock prices of the group. Without those growth rates we think the upsides in the stocks are limited. We think better buying opportunities will present themselves; we do not advocate chasing the current rally." "Sharp declines in chipmakers’ profitability versus the prior industry recessions in 1996 and 1998..." It is grossly absurd to compare this "bubble" aftermath to "industry recessions in 1996 and 1998." "But we don’t think it is strong enough to re-ignite the growth rates that the chip equipment industry enjoyed in the 1990s..." It is obviously not "strong enough", now. Advanced chips are 36%. The percentage will continue to rise. The rate will be a function of the rates of economic growth and new product innoation. "...suggest that the recovery in average selling prices (ASPs) will take time." Duh!? ASPs for chips DON'T recover! The beauty of the industry is that production costs (Moore's Law) for more capable chips fall faster than ASP