The case for signs of topping in the semi sector.
Chip Stocks Rally Tiring On Fears Of Slowing Industry Growth
05/20 09:13 AM
NEW YORK (Dow Jones)--The semiconductor sector is showing signs that its fast rebound may be nearing an end.
After a first quarter of record profits, chip makers are encountering the traditional indications of a coming slowdown: gross margins reaching new highs, inventories increasing and chip makers filling orders more quickly, indicating sufficient supply. Those signs usually suggest a slowdown in growth may be ahead, likely leaving chip stocks treading water after the big rally last year.
"The upturn that began on November 2008 is likely coming to an end," Roth Capital analyst Arnab Chanda said. Over the past 18 months, the Philadelphia Semiconductor Index, or SOX, has nearly doubled, compared to a 40% gain in the Standard & Poor's 500 index and a 30% gain in the Dow Jones Industrial Average.
The semiconductor business is notoriously cyclical. In boon times, chip makers post growing revenue and high profit margins when customers are clamoring for parts. But eventually, customers buy too much and chip makers add manufacturing capacity to keep up. Profits and stocks then decline as demand stagnates and customers work through inventories, until it all begins again.
In the last quarter, chip makers booked record profits and posted sales that returned to pre-recession levels. The SOX rose above 400 in April, its highest point since early 2008.
Chip giant Intel Corp. (INTC:$20.82,00$-0.78,00-3.61%) posted one of the most profitable first quarters in its history. Gross margins of 63% was slightly below the nearly 65% in the fourth quarter of 2009 but still significantly about the company's average in the low-to-mid 50% range over the past few years.
Others, including Texas Instruments Inc. (TXN:$24.15,00$-0.50,00-2.03%) and Analog Devices Inc. (ADI:$27.95,00$-0.82,00-2.85%) , posted revenues for the opening months of 2010 that reached highs set before the recession. SanDisk Corp. (SNDK:$39.32,00$-1.10,00-2.72%) reported more than $1 billion in first-quarter revenue for the first time.
While chip stocks have fallen during the past two earnings seasons on concerns that the industry had experienced its fastest-growing period, in each instance, those worries eventually melted and the stocks rallied strongly before the next set of earnings. This time, though, any upcoming run-up may be muted as indications increase about slowing semiconductor growth.
Inventory levels in the chip supply-chain were low for several quarters because customers had to start buying after depleting their own inventories. Storerooms are still understocked, but that's changing.
"In the same way that the electronic components business fell faster than the end market in the downturn as inventories in the supply chain were depleted, it's now rising faster than the end markets that it serves as inventories in this supply chain are being replenished," said Roy Vallee, chief executive of Avnet Inc. (AVT:$27.1000,$-1.2700,-4.48%) , a distributor of semiconductors and other electronic products.
Meanwhile, lead times, or the time it takes for chip makers to produce chips for customers, have shortened. For instance, TI, the world's largest analog-chip maker, said chips that were taking 12 weeks to produce are now taking around eight to 10 weeks. Chips that take 16 weeks are taking 12 to 14 weeks.
Analysts consider these shorter turnaround periods a leading indicator that the top of the cycle is approaching.
Investors are already growing weary. Since Intel (INTC:$20.82,00$-0.78,00-3.61%) reported earnings in mid- April, the SOX has fallen more than 11%, compared to a less than 5% drop on the broader DJIA.
"Most of the reasons from one year ago to buy semiconductor stocks have reversed," J.P. Morgan analyst Chris Danely wrote. He said lead times, orders and other indicators are at levels not seen since 2000. "We struggle to believe demand is back to 2000 levels," he said.
Of course, the potential for a long period of high profits and growing revenue still exists. Second-quarter estimates suggest a slowdown won't hit until later in 2010. And chip makers traditionally grab the majority of their sales in the second-half of the year, as customers build more PCs and gadgets ahead of the back-to-school and holiday shopping season.
Executives at Analog Devices (ADI:$27.95,00$-0.82,00-2.85%) , which topped its earlier outlook when reporting quarterly results this week, remain optimistic on continued demand. But like other chip makers, they can't see terribly far into the future. Investors are looking farther.
"At the end of the day, we really don't know," Analog Devices (ADI:$27.95,00$-0.82,00-2.85%) Chief Financial Officer David Zinsner said. "We get great visibility into the next few months...and what happens after that is difficult to predict."
-By Jerry A. DiColo, Dow Jones Newswires; 212-416-2155; jerry.dicolo@ dowjones.com |
