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Technology Stocks : Cymer (CYMI) -- Ignore unavailable to you. Want to Upgrade?

To: ItsAllCyclical who wrote (14642)	2/12/1998 6:48:00 PM
From: TideGlider	Respond to of 25960

Here is some news from the Fool. I like it. One industry that seems to revel in this kind of activity is the semiconductor business. Today Sanford C. Bernstein & Co. analyst Vadim Zlotnikov raised KLA-Tencor (Nasdaq:KLAC - news) , Lam Research Corp. (Nasdaq:LRCX - news) , and Novellus Systems (Nasdaq:NVLS - news) all to "outperform" from "market perform." Bloomberg News provided the context for the move, "He said the stocks were at historically low levels and that it's best to buy them while they're still cheap before the Asian recovery in 1999 when they go back to historical valuation." Sidestepping the issue of the questionable value of this information, yesterday influential Merrill Lynch analyst Tom Kurlak sent shares of LSI Logic (NYSE:LSI - news) and Motorola (NYSE:MOT - news) into a spin. This came after he issued a report stating that the expected earnings recovery for semiconductor stocks is not going to materialize and that share prices will decline due to slowing worldwide sales growth and too much production capacity. To the individual investor these comments appearing in various news reports all end up sounding like so many pronouncements -- devoid of context and ultimately useless. Hopefully this column, thanks to a certain degree of access and time, can shed some light on where "the experts" are coming from. Overall, the manufacture of semiconductors is probably one of the most difficult manufacturing tasks imaginable. The typical chip requires more than 100 steps and a dozen process tools, piling microscopic layers of circuitry onto a substrate of silicon all to produce the modern electronic miracle we call an integrated circuit. A fellow by the name of Paul Buddendorff (also referred to at Infrastructure as the Fab Rat) characterized the business as a "no-limit poker game" in which: (1) players must play every hand or drop out of the game, and (2) there are no betting limits at the table. This combined with "high growth, capital intensity, and cyclical markets" is the essence of the business. It also highlights the reason why there are extreme periods of excess supply and excess demand in the segment, and also why a sense of the macro scene is necessary. Unfortunately for the semiconductor manufacturers, the question is not whether to purchase process-improving capital equipment, but when. A succinct summary is provided by J. Fisher (also an www.infras.com contributor), "In order for a semiconductor company to do well financially, they need to simultaneously do three things well: create and market the right product, at the right time, and have the right size of facilities to build the product in the quantities required -- no more, no less." Semiconductor manufacturers need to buy semiconductor capital equipment to upgrade their existing wafer fabrication plants and build new ones because new equipment is built every 18 months that enables manufacturers to halve their per-chip cost while doubling performance (Moore's Law). A 4-year-old facility is already past its prime and can be upgraded twice (on average), leaving a total life span of about 12 years. The commodity-like dynamics stemming from this calculus lead to periods of oversupply and undersupply. In a traditional commodity business, the low-cost producer (which is also the cutting edge technology producer in the semiconductor arena, thanks to Moore's law and the doubling of transistor capacity) can afford to reduce prices and grab market share at the expense of other, less efficiently run players. Normally those competitors quickly make similar capital expenditures to cut their costs and remove that advantage. They match the lower prices, and then the whole cycle begins again. In the chip business, companies must make improvements in their manufacturing processes to keep costs low and maximize profitability. Which brings us to sundry analyst reports released this week. Kurlak notes that, "Investors have become convinced that sales declines are due to falling prices only, while units remain strong." He goes on to upset this conclusion by citing year-over-year unit shipments of integrated circuits, which show rapid deceleration since last summer, from plus 35% in July to plus 21% in November. In addition, Kurlak notes that the worldwide semiconductor market contracted 5% in December from November and slowed to a 4.4% annual growth rate from 16% last August. Other industry commentators have begun to advocate a cautionary stance in recent weeks as well. This week DataQuest announced a cut in its 1998 estimates for capital equipment sales from a gain of 7% (over 1997) to a gain of 3%. In the most recent issue of Infrastructure, Carl Johnson notes that "...it appears we have crossed an inflection point in the last month of 1997. At the very least, this turn indicates a couple of weak quarters for new orders and shipments should be expected." The Foolish take on these rumblings from intelligent industry watchers is that investors should be cognizant of these factors -- but only as they affect the possible purchase of a long-term stake in a quality business at a good price.