Lehman's 97 10 28 outlook on Semi Equipment stocks.
See lehman.com for PDF version
Today's Date : 10/28/97
* We think the pressure in the overall market is creating unusual
investment opportunity in semiconductor production equipment. This may
be the buying window that many investors, wary of recent high
valuations, have been seeking.
* Our discussions with Asian chip manufacturers suggest that fears of
sharp cutbacks in capital investment are probably overdone. Most
companies plan to maintain their budgets, and a few may even benefit
from translation gains.
* Today's semiconductor equipment industry is still emerging from the
last recession, and the root causes that triggered that downturn (an
excess in both chip capacity and inventory) do not appear to have
resurfaced.
* The economic repercussions of the currency/market swings in Asia are
hard to predict, but accelerating technological accomplishments in
chip production are a powerful economic force, working to the favor of
equipment companies.
* We would buy shares in large companies with a proven ability to
strengthen their businesses during times of adversity and smaller
companies that are closely tied to the move to 0.25 micron linewidths.
Highlights:
General market meltdown has taken a heavy toll.
On stock screens searching for Asian exposure, semiconductor
production equipment shares are prominent. As a result, they are
sensitive to market declines motivated by developments in Asia.
Semiconductor equipment stocks were perceived as being overextended
prior to the current consolidation. This notion has encouraged profit
taking as the shares have come down.
A recovery in semiconductor equipment stocks will probably have to
wait until the overall market settles. However, we think some
outstanding values will emerge as it does.
Asian chip manufacturers are generally forging ahead with plans for
capital investment.
More than 75% of the dollar volume of chips produced by Asian chip
companies (excluding those in Japan) are exported outside of Asia
(excluding Japan). And a portion of the chips used locally go into
electronic equipment that is ultimately exported. Therefore, the
fortunes of chip manufacturers in South Korea and Taiwan are not
closely tied to local electronics consumption in the Pacific Rim. They
are linked to the global economy.
Most of the Asian chip manufacturers we have talked to have indicated
that they do not plan to reduce their 1998 semiconductor capital
budgets as a result of the currency swing. In particular, we still see
prospects for growth in capital investment by Samsung, Hyundai, TSMC,
UMC and ASE. LG Semiconductor has revised its budget projection to
flat for 1998, compared to an earlier estimate of a very modest
increase (this is due to the higher interest costs associated with
dollar denominated debt).
Industry recession fears loom, but ...
The semiconductor equipment business is just beginning to recover from
the 1996-1997 recession. The factors that led to that recession,
including excess chip inventory and excessive semiconductor capital
spending in the preceding years, are not present today. The recession
had the effect of wringing a lot of excess out of the system. While
excess capacity in older memories continues to linger, there are few
complaints of low overall chip capacity utilization, and there are
some areas where capacity is in short supply.
The semiconductor production equipment industry has proven that it has
a far better ability to weather a difficult business, economic or
industry climate than would have been expected. The shares are down a
lot.
We did an analysis to determine how much the semiconductor equipment
shares have come down from their recent high points, compared to the
drop that occurred from the Summer of 1995 through the Summer of 1996
(as a precursor to the 1996-1997 industry downturn). The shares price
declines so far are not as dramatic as the ones in the mid 1995-mid
1996 timeframe. But in many cases, equipment stocks have already
experienced half to two thirds of the percentage decline that they did
at the outset of the downturn. Since the 1995-1996 decline was
arguably an overreaction, this suggests that the steep recent slide in
equipment stocks may have limited duration from here.
Price Recent Prev. Recession
Decline Decline
Advanced Energy (A,C) 23 1/8 37.2% 61.9%
Applied Materials (A,C)31 42.6 59.8
Etec Systems (A,C) 41 1/2 38.2 44.1
Electroglas (A) 17 1/2 48.1 69.0
FSI Int'l. (A,C) 15 35.3 70.8
KLA-Tencor (A) 46 1/2 38.5 61.5
Kulicke & Soffa (A,C) 25 56.3 79.2
Novellus (A) 43 1/4 33.1 58.4
PRI Automation (A) 33 1/2 42.7 56.4
SpeedFam (A,C) 38 1/8 36.9 48.9
Silicon Valley Grp (A) 23 1/2 37.7 66.8
Teradyne 35 1/4 38.3 69.4
We recommend purchase of the shares of the following: Applied
Materials (AMAT, $31, Rated 1, Footnotes A,C), KLA-Tencor (KLAC, $46
1/2, Rated 2, Footnote C), SpeedFam International (SFAM, $38 1/8,
Rated 1, Footnotes A,C), PRI Automation (PRIA, $33 1/2, Rated 1,
Footnote C), and Etec Systems (ETEC, $41 1/2, Rated 1, Footnotes A,C) |
