Barron's: Cap Equip stocks "Raging Buy"
Excerpts from Dec. 15 Issue:
Asia phobia has knocked key segments of the tech sector to bargain-basement levels. Consider, for instance, makers of semiconductors and semiconductor equipment, which have been absolutely battered, despite widespread forecasts that both will see solid growth in 1998. (And despite optimism about their prospects previously expressed in this column.) To consider just how panicked the Street has become about the semiconductor equipment stocks, in particular,
consider a few facts.
Since peaking in August a notch above $54, shares of Applied Materials have been cut in half. The company in the latest year received 42% of its revenues from Asia, about a third of that from Japan, a third from Korea and the rest from other countries. The market seems to have concluded that all of that will disappear permanently.
The pattern is similar at other equipment makers. KLA-Tencor, which gets just over half of its revenues from Asia, evenly split between Japan and the rest of the region, is off more than 53%. Novellus, down 55% from its peak, gets 54% of revenues from Asia. Lam Research, off 60%, relies on non-U.S. customers for 68% of its sales. Kulicke & Soffa, which gets a whopping 72% of its business from Asia, is down 65%. Kulicke, by the way, contributed to last week's tech selloff, warning that weak sales in South Korea would mean weaker-than-expected results for the December 31 quarter.
Can the outlook be as grim as all that? To get a fresh reading, we
checked in with Moshe Handelsman, president of Advanced Forecasting, a
Cupertino, California, firm with a remarkable record of predicting major turns in chip demand. Every month, Handelsman updates a proprietary econometric model of the chip and equipment industries, using a set of 30 economic indicators. Handelsman, who's been operating his forecasting service for a decade, sells his research to chip manufacturers, equipment companies, distributors, investors and others with a keen interest in the status of integrated circuit demand. Handelsman's outlook for 1998 remains the same: healthy sales growth for both chips and equipment.
The situation, Handelsman cautions, is complicated. Korea, he notes, has structural problems and can't afford to build new chip plants. He wonders if the country might face the same problem Japan did in 1991 and 1992, when it slowed spending on new equipment and then lost considerable market share. He notes that many of Korea's chip producers are buried inside large, troubled conglomerates, which could slow spending across the board, without regard for the long-term consequences. On the other hand, Handelsman notes, Korea accounted for less than 9% of total semiconductor equipment sales in the first nine months of 1997. "If spending drops to half of the current level, or even just a third, there will be an impact on equipment sales, but it won't be huge," he comments. "And if unit demand for chips remains strong, someone else could increase capacity and make up some of the difference."
At the moment, Handelsman points out, there's alarming overcapacity in
the DRAM market, pushing prices lower at frightening speed. He figures that few, if any, companies are now making a profit on 16 MB memories. Some, he says, have reacted by shifting capacity away from memories to other parts, spreading the pain to other segments of the industry. So for the DRAM market, he observes, a slowdown in spending by the Koreans could be a blessing. Handelsman figures that DRAM pricing next year should return to more normalized behavior, dropping at a 30% annualized rate, rather than the much faster declines suffered in recent months.
Handelsman's model typically calls turns in the semiconductor market
three months before they happen. At the moment, he contends, there are no signs of a semiconductor recession ahead. Depending on how pricing trends fall out, he says, chip industry revenues next year should grow 15%-25% a year. Equipment industry sales, he adds, will rise 15%-20%. If he's right, the stocks are raging bargains. |
