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Posted at 6:08 a.m. PDT Monday, June 8, 1998
Analysts divided on future of battered chip stocks
New York Times
When bad things happen to good companies, many investors start looking for buying opportunities.
Such is the case with semiconductor stocks, which have been battered this year as one formerly stellar company after another has reported earnings disappointments, layoffs and product delays. Chip industry analysts agree that the group may be reaching a bottom, but they differ on when to start buying chip stocks again.
For now, the bad news just keeps on coming. Intel Corp. is expected to be served with an antitrust suit Monday by the Federal Trade Commission; late last month the company announced that its Merced chip would be delayed. Motorola announced last week that it would cut 15,000 jobs, citing weak demand for cellular phones, pagers and other products using its semiconductors. And National Semiconductor warned that revenue would fall below analysts' estimates, and that it expected to report a loss for its fiscal fourth quarter, ending May 31, and possibly for the first quarter of the new year as well.
While some companies face problems of their own making, like Motorola missing the shift from analog to digital cellular phones, there are two bigger forces depressing the group as a whole.
First is a glut of personal computers being sold in the United States, created largely by Compaq Computer Corp.'s need to reduce inventory as it moves to a build-to-order business model.
Second is the financial and economic crisis in Asia, which has weakened demand both for personal computers and for all kinds of devices that use chips.
Because no one in the industry saw either the glut of PCs or the Asian trouble coming, chip makers kept building production well into 1997. With supply exceeding demand, prices have plummeted for semiconductor products from microprocessors to memory chips.
The personal computer oversupply and the Asia crisis are presumably temporary, but deciding whether and when to invest in chip stocks is difficult without a clearer end in sight.
Mark Edelstone, an analyst with Morgan Stanley, said that chip makers had already cut back substantially on new production, particularly in Asia, and that the PC inventory problems were well past the halfway point.
''You will actually see the demand rate for semiconductors bounce back,'' he said. ''I think that will begin to happen in the next 60 days.''
Still, many semiconductor stocks are trading at or near their 52-week lows, Edelstone said, because the companies' first-quarter earnings were a ''disaster, with two-thirds of companies below estimates,'' and their financial performances are likely to be the same in the second quarter.
''You've got stocks that are pretty beaten up, and from a long-term point of view, attractive at current valuations,'' he said. ''Investors should be getting their shopping lists together.''
Edelstone is currently recommending Neomagic, a maker of graphics-control chips for notebook computers; Rambus, a maker of fast memory devices; Xilinx Inc., a maker of programmable logic devices, and Intel, which he believes will be little affected by the FTC suit or the Merced delay.
''We expect them to be strong in the second half,'' he said.
Drew Peck, an analyst with Cowen & Co., said that it was too early to begin buying most chip stocks -- that Asia remained an open-ended situation and that the oversupply of PCs was still a problem.
''It would be very easy to say it's got to get better pretty soon, but so far the data that would support such a conclusion are scarce,'' he said. ''I believe it will happen, but that's only blind faith. Having said all that, I think we're going to get a rash of pre-announcements like Motorola's, if not as big, over the next few weeks. At that point most of the bad news will be discounted, and even if it takes a year to get a recovery, most of the risk will be removed.''
Even now, Peck said he recommended some chip stocks that he thought had been unfairly battered. Among them, he likes Analog Devices, which makes chips for processing graphics, sound and other nondigital signals, and Amcor, which makes semiconductor packaging material. For the bulk of the semiconductor stocks, Peck said the time to buy had not yet arrived.
But, of course, by the time it becomes apparent that the worst is over, prices will most likely have gone up. Michael Murphy, editor of the California Technology Stock Letter, said he started buying chip stocks last week. ''I think we're going to go into a pretty different environment in the second half of the year, where prices will firm up,'' he said. ''We started buying Intel when it went below $75 and took it to 5 percent of our portfolio when it went below $70.''
Murphy is also recommending LSI Logic, Integrated Device Technology, Altera, Atmel and Xilinx. ''I think you can pretty much buy anything in the semiconductor area,'' he said.
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