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Technology Stocks : Semi-Equips - Buy when BLOOD is running in the streets! -- Ignore unavailable to you. Want to Upgrade?

To: Jess Beltz who wrote (5831)	6/13/1998 6:30:00 AM
From: Justa Werkenstiff	Read Replies (2) \| Respond to of 10921

All: Lehman take on chip demand: lehman.com Headline: Semiconductors: Observations on 1.8% SIA 1998 Chip Growth Forecast Author: M. A. Gumport, CFA 1(212)526-5368 Company: AMD,CUBE,INTC,LSI,LSCC,NSM,STM,TXN,XLNX,VTSS Country: IND CUS Industry: SEMICO Today's Date : 06/04/98 ---------------------------------------------------------------------------- SIA FORECASTS 1.8% 1998 CHIP INDUSTRY GROWTH; NOT A SURPRISE. THE FORECAST EXPECTS SALES OF DRAMS TO DECLINE 27%, MICROPROCESSOR SALES TO BE FLAT, ANALOG SALES UP 8%, AND DSP CHIP SALES UP 23% IN 1998. WE ARE PARTICULARLY FOCUSED ON CHIP STOCKS WITH BUSINESS GEARED TOWARDS TELECOM, DATACOM, MOBILE COMMUNICATIONS, DIGITAL TRANSMISSION, DIGITAL IMAGING AND AWAY FROM THE INCREASINGLY COMMODITY PC SECTOR. ---------------------------------------------------------------------------- SEMICONDUCTOR INDUSTRY ASSOCIATION's (SIA's) CHIP INDUSTRY FORECAST. The new growth forecast for 1998 is 1.8% (old: +16.8%), 1999 +17.2% (old: +19.0%), 2000 +18.5% (old: +20.0%), and 2001 +18.9%. In 1998, the Americas are expected to be 4.1%, Japan 9.2%, Europe +5.0%, and Asia/Pac +2.8%. FORECAST NOT A SURPRISE; LOOKS SLIGHTLY OPTIMISTIC. We can say the SIA forecast makes odds 2 out of 3 that chip sales growth in 1998 will be between 11% and +6% (a mean SIA error 2.2% too low with the average absolute error 7.4% and the standard deviation 8.4%). We most recently have braced for 3% growth in 1998 (EPS estimates still in the process of downwards revisions to fully reflect that). So the SIA forecast is no surprise and actually a bit optimistic. We understand the report includes a slight increase in 2Q98 sales vs. 1Q98, an expectation which at this point appears improbable. SOME IMPORTANT COMPANY CONSIDERATIONS. DRAM sales are expected to decline 27% in 1998. News today of production cutbacks by Hyundai short term seem likely to be overshadowed by what now appears to be a more questionable demand situation, and we would remain cautious on memory stocks in general on a very short term basis. Microprocessor sales are expected to be flat in 1998. Our INTC ($67 5/8;3) estimates include 1% growth, but that appears slightly optimistic. The street has been speculating in recent weeks not on the likelihood but on the timing of an INTC 2Q EPS shortfall preannouncement. We believe this speculation on an INTC shortfall has merit even though INTC's guidance has been the most cautious in years. DSP (digital signal processors) chips are expected to grow 23% in 1998, a trend particularly favorable for TXN ($49 1/4;1) which will partially offset the very negative near term pressure of DRAM exposure. Analog sales will grow 8%, a trend favorable to both TXN and STM ($74 3/8;1). Of the major chip makers we cover, we note that STM is the only one in which we have confidence that 2Q98 sales will be above 1Q98. STILL BELIEVE IN PHASE 5. Our view has been that chip stocks are now in Phase 4 (Phase 1 bounceback; Phase 2 pause; Phase 3 strong Feb-Mar rally), a period of negative seasonality and reappraisal in industry trends. The trends are more negative than previously anticipated. But we still expect strong 4Q98 reacceleration based on a big increase in sales volumes of low priced PCs plus some impact from DVD, ADSL modems, cable data modems, and the start of digital broadcasting. We believe chip stock strength will resume in the July-Oct. timeframe and that the group is now priced at a level which will allow a substantial rally. We are particularly focused on chip stocks with business geared towards telecom, datacom, mobile com, digital transmission, digital imaging and away from the increasingly commodity PC sector. In addition to negative views on INTC, NSM ($15 5/8;3) and AMD ($18;3) and our positive views on TXN and STM, this is reflected in our focus among smaller issues particularly on VTSS ($28;1) but also XLNX ($37;1) and LSCC ($35;1), and we are increasingly comfortable with LSI ($22;2) and CUBE ($19;2). {Table here for LB Sales} ---------------------------------------------------------------------------- Disclosure Legend: A-Lehman Brothers Inc. managed or co-managed within the