A Dim Glimmer of Hope for Chips
businessweek.com
In the slow recovery, wireless and PC chipmakers should fare the best, but expect the wireline outfits to face a continuing struggle
"Dim earnings visibility" is still the common phrase used by semiconductor makers when discussing their outlook. Most companies have been reluctant to discuss revenues and earnings beyond the present quarter ever since a nasty industry downturn hit in late 2000. The revenue low for the chip industry came in the second half of 2001. Since then, business has been improving -- but at a slow, sometimes stop-and-go pace. This keeps companies guessing about how to find the proper balance between manufacturing costs and modest revenue levels, and keeping enough plant active to be ready to capture sales whenever the upturn accelerates.
The quarterly capacity utilization rates from the Semiconductor Industry Assn. show how volatile recent times have been for chipmakers (see table). Clearly, 2000 was a hot year for the industry, as wafer fabrication-plant usage hovered above 92% and hit a strong cycle peak of 96.4% in the third quarter.
The race downward was fast, as the move from peak to trough took just four quarters. The third quarter of 2001 marked the bottom the fab-utilization cycle. And by SIA's count, the global chip industry's revenue hit a low of $30.54 billion in the fourth quarter of 2001.
Integrated Circuit Capacity Utilization (%)
2000 2001 2002
Q1 94.6 83.9 77.3
Q2 95 73.2 87
Q3 96.4 64.2 86.3
Q4 92.8 65.9 81.5
Source: Semiconductor Industry Association
NO RISE IN SPENDING. From the cycle's low point in the second half of 2001, the industry began to come back, with some inventory replenishment and improvements in demand for tech goods in the first half of 2002. However, the pace slackened in the latter half of 2002. Fab utilization drifted down from 87% in the second quarter of 2002 to 81.5% in the fourth. This relapse indicated a longer recovery than some chipmakers had planned, and led to another round of layoffs and restructurings in late 2002.
It now looks like chipmakers may dwell in a period of only modestly improving demand for several more quarters, possibly more than a year, before demand and chip pricing really look strong again. Historically, the industry has moved in roughly four-year cycles, give or take a year. This would indicate that the peak in 2000, followed by a prolonged downturn, should lead to the next cycle peak in 2004-05. With the slow recovery so far, we at S&P think the next top will more likely come in 2005, possibly even 2006.
Another way to check the cycle's progress, or lack thereof, is the amount companies spend on capital equipment. At this point, most companies are not opening their wallets. "Bookings of new semiconductor-manufacturing equipment have remained essentially flat for the last six months," said Stanley Myers, president and CEO of the semiconductor equipment trade association, Semiconductor Equipment and Materials International, on Mar. 18.
The preliminary book-to-bill figure for February was 0.99, indicating that $99 of new orders were received for every $100 of product billed in the month. A book-to-bill ratio near 1.0 indicates flat industry growth, above 1.0 shows expansion, and below 1.0 signals contraction.
GLIMMERS OF HOPE. Although the book-to-bill ratio for February was the highest since August, 2002, it's not impressive. The telling fact for this part of the chip world was the Mar. 17 announcement from Applied Materials (AMAT ), the biggest semi-equipment maker, that it would cut 2,000 jobs, or 14% of its workforce. This confirms that the fog enveloping the semiconductor industry's comeback is still pretty thick.
Amidst the gloom, there have been bright spots for some chipmakers. S&P analysts in Asia report a pickup in activity at the semiconductor foundries over recent weeks. This seems to be corroborated by bullish midquarter updates from programmable logic device (PLD) makers Xilinx (XLNX ) and Altera (ALTR ). These two PLD makers -- both of which are ranked 4 S&P STARS (accumulate) -- are "fabless," and thus rely on foundries for chip production.
Among others with positive recent order trends, Cypress (CY ; ranked 2 S&P STARS, avoid) and Fairchild (FCS ; ranked 4 STARS) have raised their revenue estimates. However, keep in mind that Cypress is one of many communications chipmakers working its way through staff cutbacks, and, while the company has provided a glimmer of good revenue news, it's not racing ahead.
INTEL'S SLOWDOWN. On Mar. 6, leading processor maker Intel (INTC ) narrowed the top end of its estimated revenue range for the first quarter (ending Mar. 31) to between $6.6 billion and $6.8 billion, from its prior forecast of $6.5 billion to $7.0 billion. The company had raised prices on its flash-memory products in January, but apparently lost some market share as customers tried to dodge the price hikes.
On the brighter side, Intel's microprocessor business was running better than expected in a seasonally slow quarter. Also, the company has stirred up some excitement for its wireless products with the Mar. 12 launch of its Centrino chips for wireless laptop connectivity to the Internet.
Overall, we think Intel is surviving a seasonally weak period reasonably well, but the meat of sales for 2003 will likely come from PC sales during the second half of the year. We at S&P think Intel's sales might improve only moderately until the second half of 2004. Thus, we have a ranking of 3 STARS (hold) on Intel shares.
From a technical standpoint, chip stocks have shown more vigor over the last six weeks. From yearend through Mar. 27, the S&P Semiconductors Index jumped 13.7%, vs. a decline of 1.3% in the broader S&P 500-stock index. We expect semiconductor stocks to move roughly in line with the broader market in the next year. That said, the group is quite volatile and can move in strong spurts over short periods of time. We think the wireline-communications chipmakers face tougher end markets and are not apt to do as well as chipmakers serving the wireless and PC markets.
Analyst Smith follows semiconductor stocks for Standard & Poor's
Edited by Karyn McCormack
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The futures don't look so good Dick. We could be breaking through the support that held all last week as early as tomorrow morning.
www2.barchart.com
Many thanks to Les Horowitz for the great work he does on the News and Charts Links thread. He found the article above.
RtS |
